M&C Saatchi : 2019 Annual report- December 7, 2020PDF 3.7MB

M&C SAATCHI

ANNUAL REPORT 2019

M&C SAATCHI PLC  COMPANY NUMBER 05114893

KEY DEFINITIONS

Annual Report and Accounts

The annual report of M&C Saatchi plc and its consolidated financial statements in relation to the year ended 31 December 2019.

Billings

Billings comprise all gross amounts billed, or billable to clients in respect of commission-based and fee-based income, whether acting as agent or principal, together with the total of other fees earned, in addition to those instances where the Group has made payments on behalf of customers to third parties and is stated exclusive of VAT and sales taxes. This is a non-statutory number and is unaudited.

Company

M&C Saatchi Plc, a company incorporated in England, listed on the AIM Market of the London Stock Exchange plc.

Headline

The Directors believe that the headline results and headline earnings per share provide additional useful information on the underlying performance. The headline result is used for internal performance management, calculating the value of subsidiary convertible shares and minority interest put options. The term headline is not a defined term in IFRS.

Headline results represent the underlying trading profitability of the Group, excluding all accounting charges related to equity and investments. The specific items that are excluded from headline results (note 1 of the financial statements) are the amortisation or impairment of intangible assets (including goodwill and acquired intangibles, but excluding software) acquired in business combinations; changes to deferred and contingent consideration and other acquisition related charges taken to the income statement; impairment of investments in associates; profit and loss on disposal of associates; revaluation of acquired investments and their related costs; and the income statement impact of put option accounting and share-based payment charges.

Minority interests and non-controlling interest

Within the Group, there are 62 subsidiary companies and partnerships in which employees hold a direct interest in the equity of those companies. These employees are referred to as minority shareholders. Of these 62 subsidiary companies and partnerships, 55 companies account for the shareholding of their minority shareholders as a management incentive (through the award of conditional shares) and are 100% consolidated in the Group's financial statements. The remaining seven subsidiary companies (including one without a put option) account for their minority shareholders as non-controlling interests, a defined IFRS term, with their share of the Group's profits being shown separately on the Income Statement.

Group

The Company and its subsidiaries.

Net revenue

Net revenue is equal to revenue less project cost / direct cost. It is not an IFRS defined term. It is, however, used as a key performance indicator by the Group.

Restatement

2018 profits have been restated for historic accounting errors described in the Annual Report and Accounts and note 2 of the financial statements. The 2017 and 2018 balance sheets have also been restated. The adjustments made in respect of 2017 and 2018 accounting periods are management's best estimates using the available evidence.

INDEX

STRATEGIC REPORT		GOVERNANCE
CHAIRMAN'S REVIEW	1	GOVERNANCE REVIEW	26
CHIEF EXECUTIVE'S REVIEW	3	THE BOARD	36
FINANCE DIRECTOR'S REVIEW	9	AUDIT COMMITTEE REPORT	40
PRINCIPAL RISKS	20	DIRECTORS' REMUNERATION
		REPORT	50
		DIRECTORS' REPORT	55
		DIRECTORS' RESPONSIBILITIES	63

FINANCIAL

STATEMENTS

PREPARATION	66
INCOME STATEMENT	71
BALANCE SHEET	73
CASH FLOW	77
HEADLINE RESULTS AND EPS	78
NOTES	78
COMPANY ACCOUNTS	144
INDEPENDENT
AUDITORS' REPORT	152

CHAIRMAN'S REVIEW

This has been the worst year since we floated as a public company 15 years ago, or indeed the worst since we created M&C Saatchi in 1995.

The discovery of the 2018 accounting errors threatened the Company's reputation and its standing in the industry. Our aim had always been to be as financially conservative, but as creatively adventurous, as possible.

To all investors, the three founders and Executive Directors, Bill Muirhead, David Kershaw and I profoundly apologise. We feel your pain, having suffered enormously along with all shareholders.

Following the discovery, by our newly appointed Finance Director, Mickey Kalifa, in August 2019, we resolved to carry out the following actions:

• Commission PricewaterhouseCoopers LLP to conduct a forensic independent inquiry.
• Appoint new Company auditors.
• Strengthen the finance department.
• Achieve the highest levels of governance with a newly formed Board.
• Plan for our succession.

All five actions are either completed or well in hand.

We are grateful that four new independent Non-Executive Directors of the calibre of Gareth Davis, Colin Jones, Lisa Gordan and Louise Jackson have shown faith in the Company and can see its future beyond the immediate challenges. Their experience as directors of substantial public companies is already serving the Company well.

After 25 years at the helm, this year's annual general meeting is the last which I will chair. Subject to shareholder approval, the current Non-Executive Director Deputy Chairman, Gareth Davis, will replace me as Chairman. Lisa Gordon will continue as the Senior Independent Non-Executive Director. Colin Jones will continue to chair the Audit Committee. Louise Jackson will continue to chair the Remuneration Committee. I intend to serve until the forthcoming annual general meeting to ensure a smooth handover.

Like every company on the planet the Group is affected by the Covid-19 pandemic. It has made the future harder to see, hence our decision to halt dividend payments and withdraw previous forecasts put out by our brokers.

However, as we announced at the end of July 2020, we are encouraged that our net revenue performance was particularly resilient in the second quarter of 2020, driven by continued growth in the M&C Saatchi World Services division and robust new business performance across many sectors and geographies. Although net revenue declined overall in the first half of 2020 compared to the first half of 2019, swift and decisive actions taken to reduce costs resulted in a relatively stable first half year performance, certainly stronger than was anticipated at the start of the Covid-19 pandemic.

The Board is determined to do everything to ensure that the Company emerges from these challenges, hungrier, leaner and stronger.

In these uncertain times, we are certain that those companies with less debt will be happier and stronger than those which have gone down the debt fuelled expansion route. At the end of the first half of 2020, our total cash was £61.1m, less debt of £38.7m, leaving the Group with net cash of £22.4m.

M&C Saatchi Plc

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CHAIRMAN'S REVIEW

Since we began in 1995, we have started 95 new companies. We have closed 29. Our enthusiasm for harnessing the potential of entrepreneurial talent in a creative world is undiminished. The idea is to attract people who want to join in rather than get out; to build rather than maintain.

There will be some good changes coming out of this crisis, companies will need less central office space, child rearing responsibilities will be split more equitably between parents, clients will be less governed by procurement, more by results, and having tasted the freedom of self-discipline, the younger generation will be less keen on returning to the traditional desk chained economic model.

Retail too, will never be the same. In the UK, digital platforms now account for 14% of grocery sales, up from 7% before the Covid-19 pandemic. The Covid-19 pandemic has brought the future closer.

In times like these, winning new business never fails to cheer. In the last few months, the Group has won assignments from the Iceland Government, the UK Government and the Australian State Government of Victoria.

More and more, governments are relying on communications to help govern their countries.

The Board, together with senior managers, recently began a review of the Group's strategy, and, importantly, its implementation. The outline will be presented to investors early next year.

We are encouraging every single Group company, every single M&C Saatchi person round the world to fear no change. Change is the unchanging constant.

Finally, a few words on some outstanding creative work our teams are producing. Two examples spring to mind, both from overseas:

In Australia, the Australian Tourism campaign, usually aimed at persuading foreigners to taste the wonders of Australia became the campaign aimed at persuading Australians to taste the wonders of Australia, with the Holiday Here campaign. I suspect this will be a model followed the world over. Domestic tourism will lead the hospitality sector to recovery.

The South African team won the TikTok business. The world's video sharing social network wanted to expand its audience. Despite the national lockdown restrictions, the agency managed to produce an award-winning film cut entirely from users' short- form mobile videos, all asking one question: What makes you Tic?

Doing work like this makes us Tic.

This is not the 25th M&C Saatchi anniversary we had planned or hoped for, but its lessons will not go unheeded.

Jeremy Sinclair

Chairman

7 December 2020

2	M&C Saatchi plc

CHIEF EXECUTIVE'S REVIEW

Summary of results

2019 was the unhappiest year in the Company's 25 year history. It would be a glaring oversight not to mention the accounting misstatements at the outset. These sent a tremendous shockwave throughout the market and the Group itself, impacting the Group's valuation and reputation amongst the investor community. We have left no stone unturned in ensuring that the Group is back on a firm financial footing and never finds itself in this position again. PricewaterhouseCoopers LLP was appointed to conduct a full-scope forensic investigation and has subsequently spent eleven months on the 2019 audit. We have significantly strengthened our governance practices and expertise with the appointment of four new independent Non-Executive Directors who, within the first few months of their arrival, have ably demonstrated the value of having an effective, challenging and independent Board. I would also like to take this opportunity to acknowledge the enormous contribution made by Mickey Kalifa, our new Finance Director, who has managed a superhuman workload over the last 12 months with diligence and professionalism.

The 2018 financial statements have been adjusted to reflect the accounting errors. 2019 highlights (compared to 2018 restated as detailed in the Finance Director's Report on page 9) include:

• Net revenue grew by 2% to £256m.
• Headline profit before tax reduced by 22% to £18m and headline earnings reduced by 28%.
• Loss before tax reduced by 9% to £(12)m.
• Net cash increased by £19m.

In spite of the shock revelation of the accounting misstatements first brought to light in August 2019, there were some good operational performances around the Group, both on a geographical and discipline basis.

M&C Saatchi World Services and M&C Saatchi Performance continued their successful record in terms of both net revenue and margin. M&C Saatchi Sport & Entertainment and M&C Saatchi Talent also made significant contributions.

Following the half year 2020 results, we intend to report not only by geographies, but also by disciplines.

The regions performed as follows (all comparisons are with restated 2018 numbers).

The UK

Net revenue in the UK increased by 12%, with M&C Saatchi World Services showing the largest growth, and M&C Saatchi Performance and M&C Saatchi Sport & Entertainment each also making a significant contribution to revenue. The UK's headline operating profit in 2019 increased by 54%.

M&C Saatchi World Services, our specialist public sector and social impact division, continues to show strong financial and market sector growth. It uses the best of Saatchi talent and technologies to tackle complex social and behavioural issues. In 2019 significant new projects were won from a broad range of existing and new clients, including the World Health Organization, the United Nations, the Foreign & Commonwealth Office, the United States Agency for International Development and the Qatar Investment Authority.

Elsewhere in the UK new business wins included OPPO, Dreams and JD Sports.

The UK headline operating profit margin increased to 14% (2018: 10%).

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CHIEF EXECUTIVE'S REVIEW

Europe

Net revenue in Europe decreased by 11% with the largest declines arising in Germany. Headline operating profit was reduced by 44%, with the headline operating profit margin decreasing to 10% (2018: 16%).

Our Berlin office lost Ferrero Rocher as a client, but retained DeLonghi and Lidl. Our Milan office had a successful year having won new client assignments with DeLonghi and OVS.

In a highly competitive market, Paris strengthened its key client accounts. Client wins of Lindt, Club Med and the Agence Française de Développement are the outcome of its strategy of expanding into new digital centric markets.

Our Madrid office won client assignments from EuromillonEs, Union Pay and Mattel.

Middle East and Africa

Net revenue in the Middle East and Africa was up 5% with good new business performance across the region.

South Africa had great success in winning Standard Bank.

Our UAE office had another strong year, picking up assignments for Pizza Hut and Nespresso. Notable other new business wins included the Saudi Arabian telecoms provider Mobily, the mobile phone manufacturer OPPO, and another PepsiCo brand Poppables.

The headline operating profit in the region was up 29%, with the headline operating profit margin increasing to 9% (2018: 7%).

Asia and Australia

In Asia and Australia, net revenue was flat.

Our Australian offices performed well. The M&C Saatchi Sydney agency was a key performer within the region; strengthening its business with impressive work on new clients TAB, and Tourism Australia, while at the same time consolidating long-established relationships with Commonwealth Bank Australia, Big W, and BWS, amongst others. The Sydney agency saw significant growth in delivering bespoke agency models for Optus in Yes Agency, extending its relationship with the Woolworths Group by opening Greenhouse New Zealand in January 2019, and bringing its media and creative offering even closer together through integrated new business wins in News.com and Plush.

In Asia, the Kuala Lumpur office retained Celcom gained the bank, CIMB, and launched The Source, the UK-basedone-stop research agency, in the region. Singapore won Telekom Brunei and Singapore Turf Club, Hong Kong won Smartone, Indonesia won Axiata and Redbus, China retained American Standard and won Jaguar Land Rover, and Mumbai won projects with Reliance and Swisse.

The headline operating profit in the region was up by 9%, with the headline regional operating profit margin increasing to 9% (2018: 8%),

4	M&C Saatchi plc

CHIEF EXECUTIVE'S REVIEW

Americas

Net revenue was down 5%. Headline operating profit in the region was down 41% with the headline operating profit margin decreasing to 7% (2018: 12%), due principally to losses in our agency in Los Angeles, which has since been closed in 2020.

Elsewhere in the Americas region, M&C Saatchi Performance continues to perform well, as does M&C Saatchi Sports & Entertainment.

SS+K, our New York agency, grew during 2019, while increasing profitability and margins. Key clients included Commonwealth Bank, WhatsApp, Microsoft, Wells Fargo and Mount Sinai Hospital.

M&C Saatchi Plc

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CHIEF EXECUTIVE'S REVIEW

NEW BUSINESS

BEKO

CELIO CHRISTIE'S DREAMS DRIVE SHACK

DUBAI ASSET

MANAGEMENT DURASEIN EBAY EUROMILLONES FRUIT OF THE LOOM IBIS

JACKSON INSURANCE JD SPORTS

LIDL GERMANY

LINDT MASERATI MATTEL MTV NESPRESSO OPPO PIZZA HUT SKADDEN SOUTHAMPTON FC STANDARD BANK SUPERSPORT THRIFTY CAR HIRE TOURISM AUSTRALIA UNIONPAY WHATSAPP

WORLD HEALTH ORGANIZATION

ZOUND INDUSTRIES

6	M&C Saatchi plc

CHIEF EXECUTIVE'S REVIEW

Revenue by discipline

The Group continues to report its results segmentally by geography. The results can also be analysed by discipline - i.e. product/service type. We will adopt a dual (geographic and discipline) approach to analysing the business in the future. The largest and most strategically important disciplines are detailed below, together with charts showing revenue by discipline:

• Advertising
• Media
• Global and Social Issues
• Sports and Entertainment, Culture, Activation
• Talent and Influencer

The charts below identify revenue in each of the financial years 2018 and 2019 by these disciplines.

Revenue 2019			Revenue 2018
Talent and				Talent and
Influencer, 1%			Sport,	Influencer	Global and Social
			1%
			Entertainment,
				Issues
Global and Social			Culture,
			11%
Issues, 17%			Activation
Sport,			5%
Entertainment,				Media
Culture,
			11%
Activation, 9%
Advertising, 54%
Media, 19%					Advertising
					72%

Total revenue decreased by 8.7% in 2019, the decrease occurring within the Advertising discipline. Other disciplines have, however, grown in 2019 and we expect this growth in the non-Advertising disciplines to continue in the future.

M&C Saatchi Plc

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CHIEF EXECUTIVE'S REVIEW

Outlook

2019 proved to be a very difficult year for the Group as a result of the historical accounting errors. It forced the Company to re-evaluate, rethink and fine-tune many aspects of its business and operations, including its corporate governance and strategic direction.

There has been a wholesale change of Non-Executive Directors and a concerted effort to substantially reduce costs and take painful, yet necessary, action in closing and restructuring loss-making and poorly performing operations. The Board has also undertaken a comprehensive review of the Group's strategy and taken steps to enhance the Company's governance structure.

A major internal project was commissioned in April 2020 by the new Board to review and make recommendations on the future strategy of the Group. This project is well underway and already extensive work has been undertaken in the following areas: firstly, in redefining our corporate vision, business and brand strategy; secondly, in analysing and making recommendations as to where the Group can best focus in terms of both geographies and disciplines. This will be dependent on where we believe client demand is heading and where we are best placed to enjoy competitive advantage. We will then be able to decide which businesses we should invest in, which new business areas we should enter and those areas from which we should divest.

These strategic conclusions naturally dictate an equally fundamental review of the Group's operating structure. The Group originally expanded and was, and still is, managed on a geographical basis. However, the founding and growth of other disciplines has become the driving dynamic and therefore merits the Board's review of how the Group should be structured. We have already decided that we need a much-simplified structure with clarity on what should be done by the operating companies and those support functions which can best be centralised. This will not only result in more consistent controls, but also cost reductions.

The Board will, with the guidance of the newly constituted Remuneration Committee, seek to review and revise the winning principle of establishing businesses with minority-owning founders. We believe this entrepreneurial model remains key to the future success of the Group, but that it must be reconfigured to protect the value to the Company's shareholders.

Trading in 2020 promised to be good. However, the Covid-19 pandemic has affected the entire Group. We have acted very quickly to mitigate the effects of the Covid-19 pandemic. The efforts undertaken to reorganise and restructure the Group's operations during 2019 which have continued into 2020 have meant that when the Covid-19 pandemic struck, we were in a far stronger position to cope with its effects than we would otherwise have been.

Our cost base in 2020 is substantially lower than it was in 2019. Although headline profit before tax will be lower in 2020 than 2019, the balance sheet and, in particular, net cash position remain fundamentally strong. The recent transformation of the Group's cash management systems and processes means we do not anticipate any scenario where we will face a liquidity shortfall. Furthermore, our base case models and performance so far through the Covid-19 pandemic indicate we will be able to manage the business within the existing financial covenants under our third-party financing arrangements.

Looking forward, with a fresh strategy, structure and controls harnessed to the core M&C Saatchi spirit of creativity and entrepreneurial energy, we are very confident of a successful next chapter.

8	M&C Saatchi plc

FINANCE DIRECTOR'S REVIEW

Financial key performance indicators

The Group manages its operational performance through a number of financial key performance indicators. These are stated below with the comparative key performance indicators for 2018 adjusted to reflect the prior period accounting errors which were identified in 2019.

• Net revenue, up 2.4%;
• Headline operating margins, down from 8.6% to 8.0%;
• Headline profit before tax was down from £23.5m to £18.3m;
• Statutory loss per share reduced by 2.4p and still remains negative;
• Headline earnings per share decreased by 32.9%; and
• Increase in net cash, up £19.0m year on year.

Summary of results

	Statutory			Headline2
£m	2019	20181	Movement	2019	20181	Movement
Billings3	561.4	603.7	-7.0%	561.4	603.7	-7.0%
Revenue4	381.0	417.4	-8.7%	381.0	417.4	-8.7%
Net revenue5	256.4	250.3	2.4%	256.4	250.3	2.4%
Operating (loss)/profit	-11.0	-3.3	227.9%	20.6	21.5	-4.3%
(Loss)/profit before taxation	-8.6	-5.4	59.1%	18.3	23.5	-22.1%
(Loss)/profit for the year	-11.8	-13.0	-8.8%	13.0	15.2	-14.3%
Earnings	-11.8	-13.1	-9.9%	8.1	11.3	-28.3%
(Loss)/earnings per share	(13.1)p	(15.5)p	-15.5%	8.9p	13.3p	-32.9%
Tax rate	-38.0%	-140.8%	+102.8pts	29.0%	35.4%	-6.4pts

1. Restated see note 2 of the financial statements.
2. The items that are excluded from headline results are the amortisation and impairment of intangible assets (including goodwill and acquired intangibles, but excluding software) acquired in business combinations; changes to deferred and contingent consideration and other acquisition related charges taken to the income statement; impairment of investment in associates; profit and loss on disposal of associates; revaluation of acquired investments and their related costs; and the income statement impact of put option accounting and share-based payment charges.
3. Billings comprise the total of all gross amounts billed, or billable to clients in respect of commission-based,fee-based and any other income, whether acting as agent or principal.
4. Revenue, comprises the total of all gross amounts billed, or billable to clients in respect of commission-based,fee-based and any other income where we act as principal and our share of income where we act as an agent.
5. Net revenue is equal to revenue less project cost / direct cost.

Headline results

The Group's "headline" measures are used by the Board to assess the underlying profitability of the Group. This is done by excluding all accounting charges related to acquired equity, put options and passive investments. These headline figures are alternative performance measures that the Board considers provide an appropriate basis to assess the results of each region and provide the basis on which the business is managed and monitored on a day-to-day basis.

M&C Saatchi Plc

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FINANCE DIRECTOR'S REVIEW

Historical accounting issues and restatement of prior period financials

Following last year's audit and my appointment, we initiated an internal review of the Group's financial and accounting systems and an assessment of the balance sheet, with particular focus on the Group's UK companies which had undergone a difficult audit in 2018. The initial findings indicated that certain balance sheet items had been very materially misstated. The findings were immediately announced to the market and at the same time the Board initiated an independent accountant's review to be conducted by PricewaterhouseCoopers LLP's forensic group.

The scope of this review comprised:

1. Understanding how the issues identified through the Group's internal review materialised;
2. Undertaking a targeted, risk-based analytical review of the rest of the Group to assess whether these same issues may exist in other areas of the financial statements of the Group; and
3. Making recommendations concerning the control environment to prevent similar issues from happening again.

Following the completion of the independent accountant's review in December 2019, the Company announced it had identified £11.6m of adjustments to headline profit before tax, the precise amount of the adjustment to be determined on completion of the audit of 2019. Following the conclusion of the audit of 2019, we can now confirm that the total adjustment to historical (2018 and prior years) headline profit before tax is £14.0m, the adjustment to statutory profit before tax is £28.1m (note 2(c) of the financial statements), with net assets reduced by £20.0m (note 2(d) of the financial statements). Given the scale of the accounting issues identified last year, the Company's new auditors, PricewaterhouseCoopers LLP, have conducted an extensive and detailed audit of 2019. Following the completion of the audit of 2019 and having now identified the material historical accounting errors, the Company is finally able to draw a line underneath these events and move forward with confidence.

We faced a number of difficult challenges in finalising the 2019 financial statements, most of which are directly attributable to the historic accounting misstatements. The delay in publication of the 2019 financial statements is, in part, due to the difficulties we faced fully validating the 2018 closing balance sheet. The combination of relatively poor accounting records coupled with the departure of senior finance personnel has made this exercise and the 2019 audit all the more difficult and time consuming. Based on all the available evidence and accounting records, the Group has now restated its 2018 income statement, opening balance sheet and closing balance sheet.

The adjustments are split between the two following periods, resulting in the restatement or 2018 income statement:

1. Items which arose in 2018 and which, therefore, require the 2018 closing balance sheet to be adjusted; and
2. Items which are considered to have occurred in the period or periods before 2018 and so require the 2018 opening balance sheet to be adjusted.

10	M&C Saatchi plc

FINANCE DIRECTOR'S REVIEW

These are categorised in the table below:

		Pre-2018	During 2018	Total
		£000	£000	£000
Trading	(1,799)	(3,859)	(5,658)
Non-trading	(463)	(1,179)	(1,642)
Non-current assets impairment	(2,441)	(2,307)	(4,748)
Financial reporting	(505)	(1,483)	(1,988)
Headline PBT impact	(5,208)	(8,828)	(14,036)
Financial reporting	(2,790)	-	(2,790)
Put options	6,536	(15,084)	(8,548)
Goodwill	(3,696)	926	(2,770)
Statutory PBT impact	(5,158)	(22,986)	(28,144)
Tax	475	(952)	(477)
PAT impact		(4,683)	(23,938)	(28,621)

The nature and description of these adjustments is described in note 2 of the financial statements.

Effects of accounting standard changes

From 1 January 2020, the Group adopted the latest accounting standard for leases, IFRS 16, which in essence aims to recognise the assets and liabilities of virtually all leases on the balance sheet. The impact upon the financial statements of this new accounting standard is presented in notes 4 and 19 of the financial statements. Overall, this change in accounting policy has resulted in an increase in earnings of £0.6m. At the same time, it has a significant effect on the balance sheet, increasing non-current assets by £35.4m, net current assets by £2.8m and non-current liabilities by £43.6m.

Net revenue and operating profit margin

Group net revenue increased by 2.4%. Constant currency net revenue growth was 2.3%.

Group statutory operating loss increased from £(3.3)m to £(11.0)m, largely as a result of £6.2m of exceptional items in 2019 (2018: Nil).

Based on the Group statutory operating profit, the margin has decreased to (4.3)% (2018: (1.7)%). Group headline operating profit margin

decreased to 8.0% (2018: 8.6%).

M&C Saatchi Plc

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FINANCE DIRECTOR'S REVIEW

The key movements between statutory to headline results

			Statutory										Headline
						Dividends	Adjustments				Sale
2019		After	Exceptional	Before	Conditional			Amortisation of
	related to	to put	Impairment		24.9% of
		exceptiona	exceptional	share	Revaluations	acquired	Total
		items	conditional	option	charges	Walker
£'m	l items	items	awards		intangibles
	shares	liabilities			Media
Net revenue	256.4	-	256.4	-	-	-	-	-	-	-	256.4
Operating (loss)/profit	-11.0	6.2	-4.8	10.6	5.8	-	5.9	0.6	2.5	-	20.6
(Loss)/profit before taxation	-8.6	6.2	-2.4	10.6	5.8	2.8	11.1	0.8	2.6	-13.0		18.3
(Loss)/profit for the year	-11.8	5.2	-6.6	10.6	5.8	2.8	11.1	0.7	1.9	-13.3		13.0
(Loss)/earnings	-11.8	5.2	-6.6	10.6	1.1	2.8	11.1	0.8	1.6	-13.3		8.1
			Statutory										Headline
						Dividends	Adjustments
2018 restated	After	Exceptional	Before	Conditional			Amortisation	Capital
related to	to put	Impairment		gains tax
		exceptional	exceptional	share	Revaluation	of acquired	Total
		items	conditional	option	charges	on share
£'m	items	items	awards		intangibles
	shares	liabilities			issue
Net revenue	250.3	-	250.3	-	-	-	-	-	-	-	250.3
Operating (loss)/profit	-3.3	-	-3.3	17.2	3.1	-	1.3	-1.1	4.5	-	21.7
(Loss)/profit before taxation	-5.4	-	-5.4	17.2	3.1	3.1	1.9	-0.9	4.5	-	23.5
(Loss)/profit for the year	-13.0	-	-13.0	16.8	3.1	3.1	1.9	-0.7	3.5	0.5		15.2
(Loss)/earnings	-13.1	-	-13.1	16.8	0.3	3.1	1.9	-0.7	2.5	0.5		11.3

Full reconciliation can be found in note 1 of the financial statements.

Restatement of 2018 numbers can be found in note 2 of the financial statements.

Regional split and constant currencies in note 5 of the financial statements.

Conditional share awards, dividends related to conditional shares and adjustments to put option liabilities all relate to transactions with minority interests. Headline profit shows the minority interest share of profit, rather than these accounting effects. Capital gains tax on share issues relates to a sale of shares in 2018 to minorities that caused a capital gains tax charge in local books. Impairment charges, amortisation of acquired intangibles, revaluation of investment and profit on the sale of 24.9% of Walker Media, all relate to the Group's corporate investing activities, rather than the trading activities reflected in headline results.

12	M&C Saatchi plc

FINANCE DIRECTOR'S REVIEW

Exceptional costs, including restructuring

The Group incurred substantial exceptional costs in 2019 of £6.2m before tax (2018: £nil). These comprised costs associated with restructuring the Group, including staff redundancy costs, and professional fees relating to the accounting misstatements identified in 2019.

Redundancies took place globally, predominantly involving companies in the UK, Brazil, Malaysia and Los Angeles. Total restructuring costs were £4.2m. The restructuring of operations continued throughout 2020.

Exceptional professional fees of £2.0m comprise the costs of the independent forensic accounting review of the Group carried out by PricewaterhouseCoopers LLP's forensic group following the discovery of the accounting errors identified in 2019 and the legal advice taken by the Board on the disclosures required and legal consequences of the accounting errors and other costs associated with the accounting errors.

Associates

The Group made an after-tax profit from associates of £0.2m (2018: £2.8m). The material reduction in income from associates arose from the

disposal of the investment in Walker Media which was sold in January 2019. It made no contribution to the 2019 profits (2018: £2.4m).

The post-tax profit on the disposal of Walker Media was £13.3m and the net proceeds after costs were £23.3m. The difference represents the book cost of Walker Media, net of dividends received in the year.

Financial income and expense

The Group's finance income and expenses includes bank interest, lease interest and fair value adjustments to minority shareholder put option liabilities (IFRS 9).

Bank interest payable for the year was £1.3m (2018: £1.2m). Overall borrowings increased slightly in 2019 compared to the prior year. A reduction in borrowings in the first half of the year due to the proceeds from the sale of Walker Media was offset by increased borrowings in the second half of the year, as cash was returned to shareholders through dividends.

Interest on leases increased to £1.8m (2018: Nil) with the implementation of IFRS 16.

Fair value of put option liabilities created a charge of £2.8m (2018: £3.1m). The charge arose from an increase in future profitability estimates of our business unit, SS+K, offset by a reduction in the Company's share price. Further details can be found in note 27 of the financial statements.

M&C Saatchi Plc

13

FINANCE DIRECTOR'S REVIEW

Tax Headline Tax

The headline tax rate is a function of the Group's tax charges globally. The headline tax rate has reduced from 35.4% in 2018 to 29.0% in 2019. The restated 2018 profits reflect disallowable cost and asset impairments, offset by a reduction in low tax UK profits after exceptional costs, and an increase in income from higher tax locations.

Statutory Tax

There continue to be large swings in the statutory tax rate caused by the significant level of accounting charges which are capital in nature. Such accounting charges relate to put options, contingent payments, goodwill impairments, and un-taxed disposals which are all capital items from a tax point of view. Furthermore, the £13.0m profit on the disposal (before tax) of the Group's 24.9% shareholding in Walker Media received no tax charge (due to utilising exemptions under the UK substantial shareholding exemption (SSE)), which had the effect of reducing the statutory tax rate in 2019.

The Group's headline tax rate is different to the UK's corporate tax rate:

	2019	2019	20181	2018
	£m	%	£m	%
Headline profits at UK corporation tax rate	(3.5)	19.0%	(4.5)	19.0%
Headline adjustments:
Group tax rate mix	(1.5)	8.1%	(1.6)	6.7%
Expenses not deductible for tax	(0.4)	2.3%	(2.3)	9.8%
Other	0.1	(0.4)%	0.1	(0.1)%
Headline tax and its tax rate	(5.3)	29.0%	(8.3)	35.4%

12018 numbers have been restated.

Non-controlling interests (minority interests)

On a headline reporting basis, the share of profits from non-controlling interests increased to £4.9m (2018: £3.9m) as a result of an increase in the share of profits derived from subsidiaries with the highest minority shareholdings.

However, for statutory reporting, certain costs that were charged to non-controlling interests in headline reporting are required (under IFRS 2) to be accounted for as staff costs, as the share option charge is accrued and subsidiary dividend is paid. As part of the extensive audit review, along with a change to accounting practices for limited liability partnerships, most of the minorities' share and rewards from local equity have been redefined as staff costs. The effect of this has been to decrease the non-controlling interest charge from £2.7m in 2018 to £0.1m after adjustment in 2018, with a contribution of £0.1m in 2019.

14	M&C Saatchi plc

FINANCE DIRECTOR'S REVIEW

Dividend

During 2019, the Company paid £9.8m in dividends to its shareholders (2018: £8.4m). The Board is not proposing to pay a final dividend for the year

ended 2019 (2018: 8.51p per share), leaving the total dividend for the year ended 2019 at 2.45p per share (2018: 10.96p).

Cash flow and banking arrangements

The table below outlines the movement in cash during the year.

Total cash as at 31 December 2019 was £52.7m (2018: £38.3m). Cash net of bank borrowings as at 31 December 2019 was a net surplus of £16.6m compared to net deficit of £(2.5m) in 2018.

M&C Saatchi Plc

15

FINANCE DIRECTOR'S REVIEW

The Group's net cash flow from operating activities was £33.6m. In February 2019, we received £23.3m from the sale of the Group's remaining 24.9% shareholding in Walker Media. Out of these proceeds, £8.9m was used to settle management options which as an exception were paid in cash that would otherwise have been settled through issuing shares in the Company. In addition, part of the proceeds were used to pay Company dividends of £9.8m. The Group's improved cash collection procedures helped drive the improvement to working capital in 2019.

The Group extended its revolving credit facility (RCF) with National Westminster Bank plc (NatWest) in April 2020. The RCF was reduced from £36.0m to £33.0m from 1 December 2020 and matures on 30 June 2021. As at 31 December 2019, the full amount of the RCF was drawn.

In addition to the RCF, the Group has a £5m overdraft facility with NatWest, which remained un-utilised as at 31 December 2019.

The primary purpose of both the RCF and the overdraft facility is to support the Group's working capital requirements which are capable of significant movement within any given month and from one month to the next.

In addition to the RCF and the overdraft facility, the Company recently received approval for £7m of funding through the UK Government's Coronavirus Large Business Interruption Loan Scheme (CLBILS). Given the current cash balance and existing headroom, securing this additional funding is an entirely precautionary measure aimed at ensuring the Company has sufficient cash balances to continue to operate under any plausible trading scenario. The additional headroom from the CLBILS facility is not expected to be drawn.

As a prudent and precautionary measure, in August 2020, the Company amended its financial covenants under the RCF which provide for a relaxation of the financial covenants for the final quarter of 2020 to the maturity of the RCF thereby mitigating potential risks that could arise under an extremely severe scenario. The RCF does provide that where the auditors qualify the audited annual consolidated financial statements of the Company in a material way there is an event of default. However, the bank has confirmed that it has no intention of giving notice to the Company of an event of default nor taking any action as a result of such qualification and therefore the Company does not consider this to be a risk.

The Group has made good progress in improving its cash management function. We appointed a Group Treasurer in January 2020 and are in the process of deploying a global cash management platform to enable global cash pooling with the aim of reducing net borrowings.

Key balance sheet movements

The identification of the historic accounting misstatements and the change in key judgements has resulted in a number of material changes to the way we account for certain key items and the way we now present the balance sheet compared to previous years. Key areas driving the change in presentation include how the Group accounts for subsidiary minority holdings, the Group's accounting policy for revenue recognition and the implementation of the new leasing standard IFRS 16.

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FINANCE DIRECTOR'S REVIEW

Summary Balance sheet
movements		Accounting	2018	1 Jan 19 IFRS16		Other
£m	2018	errors	Restated	Adjustment	Bank loan	movements	2019
Non-current assets	95.4	-6.2	89.2	35.4	-	-2.6	122.0
Current assets	215.1	0.4	215.5	1.5	-	-28.9	188.1
Current liabilities	-173.1	-16.4	-189.5	1.3	-35.6	13.2	-210.6
Net current assets	42.0	-16.0	26.0	2.8	-35.6	-15.7	-22.5
Non-current liabilities	-48.5	2.2	-46.3	-43.6	35.6	4.4	-49.9
Net assets	88.9	-20.0	68.9	-5.4	-	-13.9	49.6

The accounting errors identified in the income statement total profit after tax £28.6m, but this reduces to £20.0m in the balance sheet with the difference a consequence of a change in the method of calculating put option adjustments (IFRS 2).

Adoption of the new leasing standard, IFRS 16, changes the look of the balance sheet by increasing both non-current assets and liabilities.

As at 31 December 2019, the RCF had a maturity date of 30 April 2020, requiring it to be classified as short term. The RCF has since been extended to 30 June 2021.

The net asset reduction in other movements reflect the following outflows: the distribution of £(9.8)m to shareholders by way of a dividend, £(8.9)m of cash used to settle put option obligations, our loss net of £(11.8)m, and £(0.4)m of other items offset by £10.3m of share option charges, and our issue of £6.7m of equity to fulfil put option liability.

Capital expenditure

Total capital expenditure in 2019 (including software acquired) increased to £5.8m (2018: £5.6m). Capex includes £1.5m on computer equipment and £1.7m on software and film rights. The remaining £2.6m was incurred on leasehold improvements and furniture and fittings, most of which was incurred in the refurbishment of the Group's London headquarters.

M&C Saatchi Plc

17

FINANCE DIRECTOR'S REVIEW

Share-based payments

The Group's business model is founded on entrepreneurialism. A key component of that has been ownership by senior management in the subsidiary companies they operate, through share-based incentive arrangements. Accounting for share-based payments is a complex area, with different accounting treatments applicable depending on the nature of the share scheme in place. To increase clarity in this area we have indicated the potential dilutive effect in note 26 of the financial statements, providing an estimate of the total number of shares issuable in each of the next five years through the various share-based payments schemes.

This is summarised in the table below:

Shares issued and % dilution at different share prices

		2020	2021	2022	2023	2024
Shares total by year	'000	'000	'000	'000	'000
At 62p (-50%)	26,973	5,580	16,981	6,319	8,263
At 124p	(unadjusted)	15,349	3,607	9,870	3,755	4,405
At 186p	(+50%)	11,445	2,949	7,505	2,973	3,250
Dilution of 31 December
2019 shareholders	2020	2021	2022	2023	2024
At 62p (-50%)	29%	6%	18%	7%	9%
At 124p	(unadjusted)	16%	4%	11%	4%	5%
At 186p	(+50%)	12%	3%	8%	3%	3%

This analysis has been calculated using budgets and valuations which were determined before the start of the Covid-19 pandemic. Current valuations may now be lower with the result that the number of shares to be issued and the dilutive impact may be lower than stated above.

The Company has experienced a significant decline in its share price over the last 12 months, from a peak of 394p per share in March 2019. In many of the share schemes, the consideration is calculated at a fixed multiple of the relevant subsidiary company's profits. The consideration is typically paid in shares of the Company, with the result that as the Company's share price has fallen a greater number of shares are needed to be issued as consideration under the schemes. This has a very significant dilutive effect.

A number of share schemes which will shortly fall due to be exercised are now being renegotiated with the intention of reducing the number of shares in the Company to be issued during 2020. The discussion with the share option holders is ongoing, but we anticipate that as a result of these negotiations, dilution will be significantly lower than the 29% referred to in the table above.

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FINANCE DIRECTOR'S REVIEW

Global accounting function, controls and systems

The historical accounting issues identified in 2019 brought to light fundamental organisational and control weaknesses within the Group's finance and accounting functions. The Group has historically operated a decentralised accounting function. It has become apparent, however, that the increased size and complexity of the Group now necessitates the Group's accounting systems to be standardised and enhanced. Consequently, all Group companies are moving to a single financial accounting and project management platform, NetSuite, which is to be integrated with a new consolidation, business forecasting and budgeting platform, Adaptive Insights. We will also be deploying a global cash management and cash forecasting platform, Kyriba, providing real-time data and access to all bank accounts across the Group. We expect all three systems to be live across the largest entities in the Group by the end of the first quarter in 2021.

There have been a number of changes in key personnel in the Group's finance function during 2019 and continuing into 2020. We have appointed a Group Commercial Director, new Group Financial Controller, Group Treasurer and new UK Group Finance Director, to create a more integrated and orthodox Group finance organisation structure. During 2020, the Finance Director has introduced and is continuing to introduce a standard set of accounting policies to be applied Group-wide, formalising accounting treatments to be followed by all Group companies. The list of accounting policies will be reviewed annually, at a minimum, and expanded as required.

As we implement the new systems, policies and personnel across the finance organisation, we are at the same time introducing changes to the financial controls which will be mandated and enforced across the Group. All senior management within the Group are aware of the changes and of their responsibility to operate within the framework of the new systems and processes.

Conclusion

The combination of the arrival of the new Finance Director and the magnitude of the accounting misstatements uncovered last year has been a catalyst for wide-ranging changes and improvements in the Group's financial management. It has been a very challenging year for the Group, evidenced by the duration of the audit and the auditor's opinion in the auditor's report. Fundamental structural changes are required. The arrival (and departure) of senior finance personnel, the overhaul in the Group's financial and accounting software platforms, the renewed focus on cash and cash management, the strict adoption of clear finance and accounting policies, the appointment of four new independent Non-Executive Directors and the appointment of PricewaterhouseCoopers LLP as the Company's auditors will ensure the Company can move on from its historical accounting failures and can be confident that it has implemented and will continue to implement strong financial controls and financial management.

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19

RISK REVIEW

Risks and uncertainties

The Board has overall responsibility for the Group's risk management and system of internal controls, and for reviewing their effectiveness. It operates a policy of continuous identification and robust assessment of principal and emerging business risks. This includes identifying principal and other emerging risks, determining risk control strategies and considering how those risks may affect the achievement of business objectives, taking into account risk appetite.

The principal risks are:

Risk

Loss of clients

Loss of clients and reductions in expected revenue from clients. Given the size of the Group, we expect to lose some clients over time. Our aim is always to minimise these losses. We lose clients for a number of reasons, including: negative global or local economic conditions directly impacting clients' businesses; clients running out of funding after they have commissioned with us; clients redirecting their marketing and other budgeted expenditure elsewhere.

Mitigation

We continue to develop our offerings to reflect clients' changing marketing requirements and actively seek cross selling opportunities with those clients. In particular, we are conducting a client-focused strategic review to enable us to deliver what our clients need in the future. Providing we get our offerings right, we will continue to convert new clients on the basis of our creative excellence, our strategic wisdom, the commitment and brilliance of our staff and our diverse portfolio of services.

Change In Risk

No change pre Covid-19:There was a continuous change in client needs.

Increased post Covid-19:The sudden economic impact of the Covid-19pandemic has meant some of our clients have either delayed, reduced or pulled their marketing spend. The Covid-19pandemic has also increased the pace of change in service delivery and clients' needs.

20	M&C Saatchi plc

RISK REVIEW

Staff

Our staff are critical to our future, which can be categorised as below:

Loss of staff - Staff remain our greatest asset and losing them is one of our principal risks.

Our business model of shared ownership and share option plans, shared objectives and shared ambitions, empowers, motivates and rewards managers of each of our subsidiary businesses, gives them autonomy to develop the Group's offering, and in turn drives them to nurture local staff working and thus create business continuity, and reduce the risk of losing future stars.

Increased

The decline in our share price, caused by our accounting errors and misstatements, as well as the post-year end effects of the Covid-19 pandemic has exacerbated the dilutive effect of some of our option plans. In many cases, the reduction in share price has also reduced the motivational value of such incentives.

Balance between staff and shareholders - The risk exists that our business model, of shared ownership and share option plans has not, in some cases, balanced the reward to local employee shareholders with the benefit to the Group, resulting in a significant dilution of the Group's equity at the expense of the Company's shareholders.

As set out in the Directors' Remuneration Report and Governance Report, a full review of such plans and the model going forward is taking place.

Following the fall in the Company's share price, there is an increased dilutive impact on the Company's shareholders. This risk will be managed in the future by the Company not putting in place any new plans without the approval of the Board and by renegotiating existing plans.

Staff skills and welfare - Highly skilled employees are vital to our success in building and maintaining client relationships and winning new work. Without the continuous development of our staff they will become demotivated, and our clients' service offering will not develop with clients' needs.

Best practices from each office are shared, via our intranet, bi-annual worldwide meetings and on an ad hoc basis through local and global working groups. Local businesses focus on their staff development to create the leaders of tomorrow.

The Covid-19 pandemic has enhanced inter-office sharing, as the need to social- distance our staff has broken the natural barriers between our offices, and in some cases staff and management. At the same time, it has refocused our efforts and increased the availability to our staff of programmes focused on their mental wellbeing, and work-life balance.

Social isolation caused by the Covid-19 pandemic, and lack of peer monitoring may affect the mental wellbeing of our staff. However, we have mitigated this risk by offering additional training and hosting virtual socials.

System access and security

As our product range expands and becomes more data and technology dependent, so too does the risk of cyber-attacks.

The Group continues to monitor, update and globalise computer systems, uses training programmes to improve data protection and seeks to employ staff with relevant expertise. So that our security is regularly audited, critical areas of our technology infrastructure come under the ISO27001 regime, and we strive to increase its coverage. Cyber risk is regularly discussed at Board meetings and we learn from the cyber events of others.

No change

Remote working required as a result of the Covid-19 pandemic has changed the nature of the risk, but not the mitigation nor increased the risk.

M&C Saatchi Plc

21

RISK REVIEW

Internal controls

The risk that our multiple accounting platforms, lack of common financial control policies, reliance on manual processes, the ability for controls to be overridden without knowledge or review by others, and cultural and historical habits do not reflect the Board's direction.

As set out in the Audit Committee Report and Governance Review, we are reorganising the Group's finance function, creating standard Group accounting policies and procedures, implementing a cloud-based accounting and forecasting system to be deployed across the Group, as well as performing a governance review, improving whistle-blowing systems and identifying any cultural changes needed.

Increased: Accounting errors and misstatements have highlighted this as a key area of concern.

Central control

Due to the large number of businesses in the Group and the relatively decentralised management of those businesses and complexity of the Group structure, the risk exists that significant business decisions that should be decided and/or approved centrally are made locally without central oversight.

As part of the strategy and governance review, the Group is reviewing those areas of the Group that may require greater central control, including finance, legal, HR and IT, as well as simplifying the Group's structure and reinforcing and enhancing existing governance rules.

Increased: Accounting errors and misstatements have highlighted this as a key area of concern and resulted in an acceleration of the mitigating actions.

Reputation risk

Our name has brand value and recognition and helps our pitch and win clients. As our name is well known, our actions are subject to public scrutiny, despite our relatively small size. Many of the risks identified in this risk review section may damage our brand and reputation.

We accept reputation risk management is at the heart of managing all the other risks set out here. We accept its importance and actively engage in due diligence and effective communications to manage this risk.

Increased: The accounting errors identified have increased the scrutiny on the Group.

Funding

The Company could experience a breach of its financial covenants under its revolving credit facility agreement with National Westminster Bank plc leading to cash restrictions, loss of shareholder confidence and less favourable terms when refinancing in the future.

We closely monitor and forward test to ensure compliance with the financial covenants in the facility agreement. We nurture the long-term relationships we have with our current bank and have strong relationships with other banks. We perform forward covenant testing on a monthly basis which applies sensitivity and stress modelling

Increased: We have relaxed our financial covenants under our existing facility agreement to allow for any decrease in revenue.

22	M&C Saatchi plc

RISK REVIEW

The Group also faces a number of other risks, including:

Risk

Global footprint

Risks arising from operating in certain geographic regions which potentially endanger our staff or restrict our ability to trade.

Mitigation

We monitor our global footprint, insurances and travel plans, have invested in technology to allow us to work remotely from these regions, and continue to review and update our business contingency plans. Such investments in technology have been used to maintain our cohesion and client delivery despite the difficulties imposed by the social-distancing rules imposed as a result of the Covid-19 pandemic.

Change In Risk

No change pre Covid-19:This risk varied with each of the projects carried out.

No change post Covid-19:This risk has reduced our travel and therefore this risk has decreased, although in some cases, it remains a local risk.

.

Association risk

The risk that suppliers, clients, or staff transgress our corporate and brand values, with resulting damage to our reputation and credibility. This can potentially impact our ability to win new client business, result in the departure of existing clients, hamper our ability to retain or hire talent or result in fines.

We have policies and training programmes for staff to vet and monitor clients and suppliers at all levels and take any relevant action. We have advisors who help us, and in some cases insurance to allow us to access experts if a situation arises.

No change: The accounting errors have damaged us, and increased scrutiny on us, but there is no change to the risk.

Regulation and legal

Regulatory and legal rule changes can affect our trading, ownership structures or interpretation of our financial data. This risk is illustrated by the changes to accounting standards (as set out in note 2 of the financial statements) and future impact of Brexit. We are exposed to multiple regulators in various countries, covering such things as trading in our shares, health and safety of our staff, data protection, advertising standards, accountancy and tax authorities.

We continuously monitor and plan for proposed and actual regulatory and legislative changes and interpretations. Where we can, we actively and positively engage with regulators.

Increased: The undecided nature of the Brexit negotiations has affected some of our offices' ability to pitch for clients. The accounting errors and misstatements have increased regulators' scrutiny in the UK.

Economic

Our clients' spend varies with local economic situation.

We operate in a range of geographies, helping us to naturally 'hedge' against country specific risks and economic downturns, however, we remain exposed to a global recession. Our larger clients and the range of services we supply reduces such exposure, and in some offerings creates a counter cyclical effect.

Increased: The Covid-19 pandemic created an economic shock that is causing a global recession leading to a reduction in client spend.

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23

RISK REVIEW

Financial

Changes to exchange rates, interest rates and the Company's share price can affect our profitability, cash flows and future liquidity

.

We monitor and model likely and actual changes. The global implementation of a cloud-based accounting and forecasting system will improve our decision making as well as enabling the better utilisation of locally held cash. We maintain close relationships in the banking sector and the wider capital markets to enable us to access future liquidity.

Increased: Brexit, the Covid-19 pandemic, and our accounting errors and misstatements have increased our volatility in markets and potentially the cost of capital and may impact our cash flows.

Investment

The risk that businesses that the Group acquires or invests in as start-ups fail to deliver their anticipated results.

Litigation risk

We monitor our businesses' performance regularly and give them assistance where required. Where acquisitions or start-ups have not performed as well as expected, we act quickly in either fixing the problem, divesting or terminating the business.

Increased: The effects of accounting errors and misstatements, as well as the Covid-19 pandemic have reduced the Group's ability to support underperforming offices, that may under improved market conditions have a long- term future. Conversely these circumstances have also meant that there have been no acquisitions or investments made during the year.

As a services business that continuously interacts with all its stakeholders and clients, there is a residual risk of litigation.

The Group reviews and updates its quality control process, employs staff with knowledge and expertise and seeks legal advice where necessary. The Group, where it can, insures against this risk, and regularly engages with its insurer via its broker.

No change: The accounting errors, and the potential future consequences of regulatory investigation increases this risk.

In other areas this risk has remained the same.

24	M&C Saatchi plc

STRATEGIC REPORT

Section 172 of the UK Companies Act 2006

The governance report (including Section 172 of the UK Companies Act 2006 and compliance with the UK Corporate Governance Code 2018) explains our governance arrangements and how we engage with stakeholders and considered them during the year, further information can be found on page 29 and also can also be found at www.mcsaatchiplc.com/governance.

Strategic Report

The Chief Executive's Review (page 3), Finance Director's Review (page 9), Risk Review (page 20) and Busines Model (page 55) together form the Strategic Report.

Strategic Report approval

By order of the Board

David Kershaw

Chief Executive

7 December 2020

M&C Saatchi Plc

25

GOVERNANCE REVIEW

At the Board meeting held on 18 September 2018, the Board formally adopted the principles of the UK Corporate Governance Code 2018 (the Code), with the agreement that we would not comply due to our size and history in those areas set out in the compliance table within this governance review. Previous to this, as a company listed on the AIM Market of the London Stock Exchange, the Quoted Companies Alliance had been the guiding code in respect of the Company's corporate governance standards.

Given the Company's decentralised business model, the journey in adopting the principles of the Code has taken some time and the international spread of the business has provided some problems that are still in the process of being resolved. However, to reassure our stakeholders, the Board fully understands and believes that good corporate governance is an essential element in helping to build a successful business in a sustainable manner. The Board is reviewing the effectiveness of the Company's governance framework and the Board is fully committed to achieving full compliance with the Code during 2020.

The accounting errors and misstatements announced to the market in 2019 were discovered by our own staff after the departure of some key members of the finance team in early 2019. As soon as the errors were discovered, the Company appointed PricewaterhouseCoopers LLP's Forensic Services Group to conduct a full scope forensic investigation. The report ensuing from that investigation produced by PricewaterhouseCoopers LLP set out the steps that the Audit Committee and the newly appointed Finance Director needed to take to eradicate the control risk that led to those errors.

Following the resignations of one Executive Director and three Non-Executive Directors, the remainder of the Board then initiated the process of recruiting new Non-Executive Directors who the Board would consider to be independent and who could assist with the changes required to corporate governance, serving the needs of all stakeholders and thereby allowing the business to grow.

As mentioned in the Chief Executive's Review (page 3) alongside the strategic review, the Group is reviewing its governance standards and remuneration policy, which will result in the evolution of the business model described in the Directors' Report (page 55).

We have set out the steps and measures below that, at the time of writing, have already been taken or are a work in progress with expected completion by the end of 2020, despite the difficulties in working patterns posed by the Covid-19 pandemic. The Board, of course, accepts and believes there is more to do.

The new finance systems and policies introduced across the Group, as mentioned in the Finance Director's Report on page 9, will allow the management and the Board to monitor the effectiveness of internal controls, risk management policies and ensure compliance with statutory and regulatory obligations across the Group.

Further we have set out how we have applied the principles of the Code with additional detail found in the Directors' Report, and elsewhere in the Annual Report and Accounts.

1) Board Leadership and Company Purpose

The Code provides that a Board should establish a company's purpose and values as well as its strategy and that its directors should lead by example and promote the desired culture.

26	M&C Saatchi plc

GOVERNANCE REVIEW

The Company is a diversified group of specialist marketing companies with 141 subsidiaries in 29 international markets. It is a creative business with a purpose, that develops ideas and creates solutions that change fortunes of its clients. The culture is highly entrepreneurial and decentralised, with local ownership being highly valued. The Company's principles are "Simplicity of Thought, Diversity of Thought and Ownership" set against its values of "Respect, Responsibility and Freedom".

Given the difficulties of 2019, and the subsequent Covid-19 pandemic in 2020, the Board has commissioned several work groups to review the Company's purpose and values led by our senior management and entrepreneurs to more closely define and refresh our purpose, values and strategy. There have been regular presentations and updates to the Board and we will present this work at a capital markets day in January 2021. This will serve to:

• Connect purpose and strategy to culture.
• Align values and incentives.
• Assess, measure and report on the Company's culture and how it benefits all stakeholders.

The general direction of travel will result in a much simplified Group structure and enhanced governance, where there will still be the entrepreneurial approach to commercial creativity for our clients around the world, but this will be set in a framework of stronger and more prescriptive central control in terms of finance, legal, HR and IT functions. The alignment of values is expected and designed to result in greater cross-business collaboration and revenue synergy.

2) Division of Responsibilities, 3) Board Composition, Succession and Evaluation and 4) Nomination Committee

The Code requires the Board and its committees to have an appropriate balance of skills, experience, independence and knowledge of the company, to enable them to discharge their duties and responsibilities effectively and in line with the corporate strategy.

The Executive Chairman of the Company is Jeremy Sinclair, who has been Chairman since the Company listed on the AIM Market of the London Stock Exchange plc in 2004. To strengthen governance, Gareth Davis joined the Board on 3 February 2020 as the Non-Executive Deputy Chairman, with the responsibility of conducting a governance review. It is the intention of the Board that Gareth will be appointed as Non-Executive Chairman, replacing Jeremy, following the close of the Company's annual general meeting to be held in 2020, and the Board considers that Gareth will be independent upon his appointment.

Provision 11 of the Code states that at least half of the Board excluding the chairman, should be non-executive directors who the Board considers to be independent. During the year, up to 10 December 2019, when one Executive Director and three Non-Executive Directors resigned, the Board consisted of the Chairman, four Executive Directors and three Non-Executive Directors who the Board considered to be independent. Until their resignations, the diversity of skills and experience which the Directors brought to the Board was felt to be more valuable at that stage of the business's development than having Non-Executive Directors who the Board considered to be independent comprising at least half of the Board. However, in rebuilding the Board following the resignations, the Company has fulfilled the provisions of the Code with the Board now comprising three Executive Directors and four Non-Executive Directors who the Board considers independent. When the Executive Chairman, Jeremy Sinclair, leaves the Board, the Non-Executive Directors will be in the majority on the Board. It is the intention of the Board to appoint an additional Non- Executive Director, who will also be considered independent with a skill set that the Board believes will enhance the composition of the Board and the need of the reviews it is presently conducting.

M&C Saatchi Plc

27

GOVERNANCE REVIEW

The Non-Executive Directors now comprise: Gareth Davis, Deputy Chairman; Lisa Gordon, Senior Independent Non-Executive Director; Colin Jones, Chair of the Audit Committee and Louise Jackson, Chair of the Remuneration Committee. Each of these Non-Executive Directors are considered by the Board to be independent, none of whom have any connection or previous relationship with the Company having not been employees or shareholders or had material business relationships with the Company amongst other things. Each Director has the necessary time, skills and resources to discharge their Board responsibilities.

The Board engaged Inzito Partnership Limited (Inzito), an external search consultancy practice, to find the new Non-Executive Directors. The Board informed Inzito of the skills and experience required for each of the positions and instructed them to put forward a range of candidates with a focus on skill set and diversity. Inzito led an extensive search process, with a number of very high quality candidates shortlisted and then interviewed by the Board, resulting in the various appointments.

All Directors have access to the advice and services of the Company Secretary and are able to gain access to external independent professional advice at the Company's expense should they wish to do so in the furtherance of their duties.

It is the intention of the Board to conduct a formal and vigorous evaluation of the performance of the Board and its committees. In 2021, it is the Board's intention to commission an external Board evaluation exercise conducted by a leading board evaluation expert. The 2019 evaluation did not happen due to the resignation of half of the previous Board at the end of 2019.

The Nomination Committee did not meet between January and December 2019. Following the resignation of half of the previous Board on 10 December 2019, the Nomination Committee was reconstituted and consisted of all members of the Board of the Company at the time. The Nomination Committee then consisted of the Chairman, the Chief Executive and all of the Non-Executive Directors. From May 2020, the Nomination Committee has been chaired by the Deputy Independent Non-Executive Chairman and it is responsible for all executive and non-executive appointments and has oversight of the executive committee that reports to the Chief Executive. The Nomination Committee has used and continues to use independent search consultancies for all of its appointments.

5) Audit, Risk and Internal Control

During 2019 (until his resignation on 10 December 2019) the Audit Committee Chair was Sir Michael Peat, who had recent and relevant financial experience as required by the Code.

As of 3 February 2020, Colin Jones was appointed as Audit Committee Chair - see his biography on page 39. With Colin's appointment, the Board was further strengthened with financial and accounting acumen. As a result, the Board considers that he has recent and relevant financial experience as required by the Code.

The report of the Audit Committee describing the issues considered in the year under review, as well as how the new Audit Committee has educated itself on the issues, is on page 40.

To improve internal controls and financial risk management we are reorganising the Group's finance function, creating standard Group accounting policies and procedures, implementing a cloud-based accounting and forecasting system to be deployed across the Group, as well as performing a governance review, improving whistle-blowing systems and identifying any cultural changes needed.

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6) Remuneration

On 26 March 2019, Lorna Tilbian was appointed Chair of the Remuneration Committee, a role she held until her resignation on 10 December 2019. In May 2020, Louise Jackson was appointed Chair of the Remuneration Committee - see her biography on page 39. The newly constituted Remuneration Committee is made up entirely of Non-Executives Directors with executives invited to attend as appropriate.

The Remuneration Committee has recently engaged the services of a leading independent external remuneration advisor to assist in a comprehensive review of current remuneration practices and to ensure that remuneration, strategy and culture are fully aligned.

The Directors' Remuneration Report which describes the work of the Remuneration Committee and describes the Company's remuneration policy is on page 50.

Engagement with shareholders

The Directors value the views of the Company's shareholders and recognise their interests in the Group's strategy and performance, Board membership and quality of management. They hold regular meetings with and give presentations to the Company's institutional shareholders, discussing the Group's results and objectives. These meetings are attended by the Chief Executive and the Finance Director. Feedback from these meetings is shared with the wider Board and the executive committee and taken account of in those committee's decision making. It is also the intention that when appointed, the new Non-Executive Chairman will make himself available to major shareholders to discuss issues of governance and strategy.

The Company has recently retained an investor relations advisory practice to facilitate clear and productive exchanges with its shareholders.

The Company's annual general meeting is used to communicate with all investors and they are encouraged to participate in such meeting. The Chairman and other members of the Board attend the annual general meeting and are available to answer any questions. Unfortunately, due to social distancing requirements, as a result of the Covid-19 pandemic, shareholders will not be able to attend the annual general meeting to be held in 2020.

Engagement with employees

The Group is currently organised on a very decentralised basis. However, within the Group there are various committees (diversity committee, family committee and working groups) which operate as platforms for workforce engagement and help to reinforce our culture and have an impact on our strategic direction. Our employees are key stakeholders and a strategic asset to our business and it is the intention of the Board that, going forward, one of the Non-Executive Directors will become the representative of the employees on the Board and will be charged with ensuring active and regular engagement and understanding of employees' concerns.

Gender balance

It has been the intention of the Board to fulfil the recommendations set out in Lord Davies' report of having at least 33% female representation on the Board by 2020. As at the date of the Annual Report and Accounts, 25% of the Board is female and the Board recognises that this is an area for improvement. All future appointments and re-appointments shall be taken with due regard to the benefits of diversity and the needs of the Board.

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GOVERNANCE REVIEW

Diversity and employees

The Board is committed to promoting diversity. The Board has a diversity of relevant skill sets with varied and balanced experience, knowledge and skills that are highly relevant to the Company's needs and challenges. The Company is committed to a merit based system for both its Board composition as well as talent recruitment for the Group within a diverse and inclusive culture which seeks outward multiple perspectives and views and is free of conscious or unconscious bias and discrimination.

The diversity and inclusivity of our entire team are important for us to bring out the best in our business and understand and reflect the needs of our clients and other key stakeholders. We are fully committed to respect and deliver fair treatment for everyone whatever their background, race, ethnicity, gender or other protected characteristics (as defined within the Equality Act 2010) and deliver opportunity and development for all of our clients, team members and stakeholders.

The Group's equal opportunities policy is not to discriminate on any grounds other than someone's ability to work effectively. To deliver this we continually review our application process, make reasonable adjustments to working arrangements and to the physical aspects of the workplaces, as well as offering any necessary training.

The Company has recently developed a new diversity and inclusion strategy incorporating the above aims and commitments with a view to rolling it out Group wide.

Under the strategy, the key aims for diversity and inclusion are:

• To ensure our business is representative of the countries in which we operate.
• To champion representation of under-represented groups at Board and management level (as well as throughout the business).
• To ensure all our people are treated with equity and respect.
• To support all our staff (particularly those from under-represented groups) and to prevent anyone feeling isolated or excluded.
• To connect to and support the communities and networks around us, working with businesses and suppliers led by under-represented groups.
• To be transparent about what we need to do and hold ourselves accountable for change.

Our commitment is to:

• Increase the diversity in our workforce particularly at senior level.
• Challenge our culture, insisting on inclusivity and more equitable leadership identifying and tackling unconscious bias.
• Create an inclusive workspace which includes a safe space for all employees to feel comfortable and valued.
• Open our doors to other cultures and use our power and influence for good.

Diversity of thought is important to the Group and its clients. The Group is working globally and locally to improve its future talent pool and to enhance our ability to attract and nurture the best talent regardless of background, ethnicity or any disabilities. We recognise there is a lot to be done; however, we are committed to take action to ensure we are a fair and equitable organisation, representative of the global societies in which we operate by prioritising our commitment to create a more diverse and inclusive workplace and to be intentional in our actions. From the lived experience of our employees, to the commitments we make to discriminated communities as well as the influence we have on culture through our

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communications, we must serve as leaders, allies and advocates, driving change through our actions and not just words. Where possible, we actively support events in our community that celebrate diversity and inclusion.

The Group recognises that its principal asset is its employees and their commitment to the Group's service, standards and customers. Decisions are made wherever possible in consultation with local management, with succession planning performed on a regular basis at all levels. Communication with employees varies according to need and local business size.

Attendance at Board and committee meetings during the year

Eleven scheduled meetings of the Board were held during the year ended 31 December 2019. The Nomination Committee met on an unscheduled basis to deal with the matters at hand, in particular, the appointment of the new Non-Executive Directors. The Remuneration Committee met twice. The attendance record of the Directors at the meetings of the Board and of the Board's committees is shown in the table below.

		Audit	Remuneration	Nominations
	Board Meetings	Committee	Committee	Committee
		meetings	meetings	meetings
Chairman
Jeremy Sinclair	11/11	-	-	as needed
Executive Directors
David Kershaw	11/11	-	1/2	as needed
Maurice Saatchi***	10/11	-	-	-
Bill Muirhead	11/11	-	-	as needed
Mickey Kalifa	11/11	6/6	1/2	as needed
Jamie Hewitt**	2/2	3/3	-	-
Non-Executive Directors
Michael Peat***	11/11	6/6	2/2	-
Michael Dobbs***	11/11	6/6	2/2	-
Lorna Tilbian* & ***	11/11	6/6	2/2	-

• Senior Independent Non-Executive Director (On his appointment on 3 February 2020, Gareth Davis became the Senior Independent Non-Executive Director, subsequently Lisa Gordon on her appointment on 17 March 2020 became the Senior Independent Non-Executive Director).
• Left Board on 29 March 2019.
• Left Board on 10 December 2019.

The Non-Executive Directors are the members of the Audit Committee and the Remuneration Committee, with the Chief Executive and the Finance Director attending as needed.

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GOVERNANCE REVIEW

Compliance with the UK Corporate Governance Code 2018 (the Code)

The table below sets out those areas of the Code that the Company has not complied with during the relevant period. Items marked with an X demonstrate non-compliance with the Code. This table is reflective of the resignation of all of the Non-Executive Directors on 10 December 2019, the appointment of two new Non-Executive Directors on 3 February 2020, and the appointment of two further Non-Executive Directors on 17 March 2020. On 6 May 2020, the Company's Renumeration Committee and its Nominations Committee were reconstituted with the Non-Executive Directors. Following the annual general meeting to be held in 2020, the Chairman will be a Non-Executive Director and the Non-Executive Directors will form a majority on the Board.

Provision of the Code	1 Jan	10		Departure from the Code	Future Compliance with the Code
	2019 - 10	December
	December	2019 - 3
	2019	February
		2020
5) Engagement with workforce	X	X		The Company did not have a director appointed from the	The intention is that one of the Non-Executive Directors
using one of the prescribed				workforce, a formal workforce advisory panel nor a	will represent the employees on the Board.
methods.				designated non-executive director. There was no formal
				mechanism for engagement with the workforce save for	The Company will comply with the Code by 2021.
				non-formal engagement.
9) The Chairman should be	X	X		The Company departs from this provision, the Chairman	Gareth Davis is a Non-Executive Director and will replace
independent on appointment.				being an Executive Director and, therefore, not	Jeremy Sinclair as Chairman. He will be independent
				independent. Upon the Company's listing to the AIM market	upon his appointment.
				of the London Stock Exchange, the Chairman was appointed
				for an indefinite term subject to re-election. The Board	From Gareth Davis' appointment at the annual general
				considered the depth of knowledge that the Chairman brings	meeting in 2020, the Company will comply with the Code.
				to the Board to be of significant value for a creative
				business.
11) At least half the Board,	X	X		The Company departed from this provision as during the	Upon Jeremy Sinclair's departure and excluding the
excluding the Chairman, should be				year the Board comprised the Chairman, four Executive	Chairman, the Board will have an equal number of Non-
Non-Executive Directors whom the				Directors and three independent Non-Executive Directors.	Executive Directors who the Board considers to be
Board considers to be independent.				The Board believed that the diversity of skills and	independent.
				experience which the Executive Directors brought to the	Following the annual general meeting in 2020, the
				Board was more valuable to the business's development	Company will comply with the Code.
				than having Non-Executive Directors comprising at least
				half the Board.
12) Senior Non-Executive Director	√	X		During the period 10 December 2019 to 3 February 2020,	Gareth Davis became the Senior Independent Non-
to be appointed who acts as an				there was no Senior Non-Executive Director of the	Executive Director on 3 February 2020 and subsequently
intermediary for other Board				Company.	Lisa Gordon on her appointment on 17 March 2020
members and annually appraises					became the Senior Independent Non-Executive Director.
the Chairman's performance.
					The Company now complies with the Code.

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Provision of the Code	1 Jan	10	Departure from the Code	Future Compliance with the Code
	2019 - 10	December
	December	2019 - 3
	2019	February
		2020
17) Nomination committee	X	X	The previous Nomination Committee was created on an ad	From 6 May 2020, the Nomination Committee was
appointed, with the majority of			hoc basis and was not formerly constituted and did not	properly constituted as required under the Code.
members being independent Non-			have a majority of independent Non-Executive Directors.
Executive Directors.				The Company now complies with the Code.
18) All Board members subject to	X	X	The Company departed from the Code as the Board	As from the annual general meeting to be held in 2021,
annual re-election.			members were elected on a three year rotation.	each of the Directors will stand for annual re-election.
				The Company's articles of association will be amended to
				allow for annual re-elections of the Directors.
				As from the annual general meeting to be held in 2021,
				the Company will comply with the Code.
19) Maximum tenure of Chairman is	X	X	The Company departs from the Code under this provision.	The Company will comply with this provision following the
nine years.			Upon the Company's listing to the AIM market of the London	appointment of Gareth Davis as Chairman.
			Stock Exchange, the Chairman was appointed for an
			indefinite term subject to re-election. The Board considered	From Gareth Davis' appointment at the annual general
			the depth of knowledge that the Chairman brings to the	meeting in 2020, the Company will comply with the Code.
			Board to be of significant value for a creative business.
21) Formal rigorous annual	X	X	No Board review occurred during the year due to the	A formal and vigorous evaluation of the effectiveness of
evaluation of Board performance.			departure of half of the previous Board.	the Board and its committees will be conducted within
				the next year.
				By the annual general meeting to be held in 2021, the
				Company will comply with the Code.
22) Results of annual evaluation of	X	X	No Board review occurred during the year due to the	A formal and vigorous evaluation of the effectiveness of
Board performance should be			departure of half of the previous Board.	the Board and its committees will be conducted within
acted on.				the next year and the results will be given due
			Following the resignation of all the Non-Executive Directors	consideration and acted upon.
			in December 2019, the Board concluded that a review of
			the Board would not be a worthwhile exercise until such	By the annual general meeting to be held in 2021, the
			time as new Directors were appointed.	Company will comply with the Code.
32) Remuneration committee	X	X	The Board did not consider this provision in the formation	As of 6 May 2020, the Renumeration Committee was
should be properly formed with a			of the previous Remuneration Committee.	properly constituted as required under the Code and
Chairman who, prior to				chaired by an individual with the requisite skill and who,
appointment, has served on a				prior to appointment, had served on a remuneration
remuneration committee for at				committee for at least 12 months.
least 12 months.
				The Company now complies with the Code.
36) Share schemes should give	X	X	The Company's old share schemes do not comply with the
awards on a phased basis and have			Code.
a holding period of five years or				Future schemes will comply with the Code.
more.

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GOVERNANCE REVIEW

Provision of the Code	1 Jan	10	Departure from the Code	Future Compliance with the Code
	2019 - 10	December
	December	2019 - 3
	2019	February
		2020
40) and 41) Remuneration policy	X	X	The Company intends to formulate a new remuneration	The revised policy will be put to shareholders for
and disclosures aligned with the			policy for the remuneration of the Executive Directors	approval at the annual general meeting to be held in
Code			which will reflect the Code. The policies and practices	2021, which will allow more full disclosure in next year's
			indicated in Provision 40 of the Code (which underpins the	annual report.
			disclosures recommended in Provision 41) were not
			previously formally considered

Section 172 of the UK Companies Act 2006

In accordance with the Code which incorporates section 172 of the UK Companies Act 2006, and as a matter of good governance, in our decision making, the Board considers the interests of the Group's employees and other stakeholders and understands the importance of taking into account their views. We regularly engage with our employees and shareholders. The Board is accountable to the Company's shareholders. It is important for the Board to appreciate the aspirations of the shareholders and equally that the shareholders understand how the actions of the Board and the short-term financial performance of the Company relate to the achievement of the Company's longer term goals. The Board reports to the shareholders on its stewardship of the Company through the publication of interim and final results each year. Press releases are issued throughout the year and the Company maintains a website (mcsaatchiplc.com) on which press releases and the Annual Report and Accounts are available to view. Additionally, this Annual Report and Accounts contains extensive information about the Company's activities. The annual general meeting provides an opportunity for communication with all shareholders and the Board encourages shareholders to attend and welcomes their participation. Directors attend the annual general meeting and are available to answer questions.

Our key creditor is National Westminster Bank plc with whom we actively engage. Our client needs are at the heart of all our decisions, and they are the centrepiece of our strategic review and commitment to good governance. A large proportion of our work for clients is helping them with their impact of their operations on community and environment; this creates a drive in our own decision making and ways of working in these areas. With regulators, where there is a direct engagement, we aim to work with them in a positive and helpful manner, often allowing our staff to sit on their committees.

Our business model creates a flat, delegated organisation structure that allows its core concept of shared ownership, shared objectives and shared ambitions and enables engagement with stakeholders across the entire Group. The delegated structure has meant that most operational decisions are taken by local management at a local subsidiary level, rather than centrally from head office and has enabled the business to get closer and have greater engagement with its stakeholders. Whilst this delegated structure has the benefit of enabling the business to be more closely engaged with stakeholders, it results in reduced control and oversight from the Group. As part of the ongoing strategic review, we will be examining the balance between local stakeholder management and Group stakeholder management, with the objective of improving controls, becoming more efficient and reducing risk. The strategic review will take account of all stakeholders in accordance with section 172 of the UK Companies Act 2006.

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It is noted that in making decisions the Board takes account of, amongst other matters, the:

• Likely consequence of any decisions in the long term;
• Interests of the Company's employees;
• Ability of the Company to attract, grow and retain a diverse and inclusive talent pool;
• Need to foster the Company's business relationships with suppliers, customers and others;
• Impact of the Company's operations on the community and environment;
• Company's reputation for high standards of business conduct; and
• Need to act fairly as between members of the Company.

By Order of the Board

Andy Blackstone

Company Secretary

7 December 2020

M&C Saatchi Plc

35

THE BOARD

JEREMY SINCLAIR		DAVID KERSHAW
CHAIRMAN		CHIEF EXECUTIVE AND EXECUTIVE DIRECTOR
Jeremy Sinclair is a founding director of the Company.		David Kershaw is a founding director of the Company.
He was one of the founders of Saatchi & Saatchi in		He joined Saatchi & Saatchi in 1982 after obtaining an
1970, became Chairman of the UK agency in 1982 and		MBA at London Business School. He became Managing
was appointed Chairman of Saatchi and Saatchi		Director in 1990 and was made Chairman and Chief
International in 1986. He later became Executive		Executive of the UK agency in 1994.
Creative Director of Saatchi & Saatchi Advertising
Worldwide and Chairman of Saatchi & Saatchi plc.

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THE BOARD

BILL MUIRHEAD		MICKEY KALIFA
EXECUTIVE DIRECTOR		FINANCE DIRECTOR* AND EXECUTIVE
		DIRECTOR
Bill Muirhead is a founding director of the Company. In		Mickey Kalifa joined the Board on 29 March 2019, he
1971 he was one of the first account handlers at		was formerly Chief Financial Officer of Sportech PLC,
Saatchi & Saatchi. He became Group Account Director		where he worked from 2008 to 2017 and is currently
and was subsequently appointed Chairman of Saatchi		Non-Executive Director of Zoo Digital Group PLC. He is
& Saatchi Europe with additional responsibility for the		a chartered accountant, having qualified with
London agency. In February 1994, he moved to New		PricewaterhouseCoopers LLP and has a strong
York as Chief Executive and President of Saatchi &		background in the media, technology and sports
Saatchi Advertising Worldwide.		industry. Mickey has also held executive roles across a
		number of leading organisations in the UK and USA,
		including Liberty Global, Sky and Disney.
		*Mickey Kalifa was appointed as a Director on 29 March 2019.

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37

THE BOARD

GARETH DAVIS		LISA GORDON
NON-EXECUTIVE DIRECTOR**		NON-EXECUTIVE DIRECTOR***
Gareth Davis joined the Board on 3 February 2020.		Lisa Gordon joined the Board on 17 March 2020. She
He has been Chairman of DS Smith Plc, a FTSE 100		has almost 25 years' board experience, in both
packaging business, since 2012, having joined the		Executive and Non-Executive roles, with specialisms in
company's board in 2010. Gareth is also a Non-		TMT and finance. She is currently a Non-Executive
Executive Director of Gresham House Plc, the asset		Director of Alpha FX Group Plc, a listed foreign
manager. Previously, Gareth sat on the board of		exchange specialist, and Magic Light Pictures, a
Ferguson Plc, the FTSE 100 building materials		children's film and television production company. She
business, between 2003 and 2019, spending the last		was recently appointed as Chairman of Cenkos
nine years as Chairman. He was Chairman of William		Securities Plc, a securities firm focused on growth
Hill Plc, the FTSE 250 betting and gaming company,		companies. Until recently, Lisa was Non-Executive
between 2010 and 2018. Gareth was Chief Executive		Chairman of Albert Technologies Plc, an online
of Imperial Tobacco Group Plc (now Imperial Brands		advertising software business. She was also a founding
plc), between 1996 and 2010, having joined the		Director of Local World Plc, which was acquired by
business in 1972.		Trinity Mirror in 2015. Prior to this, Lisa was Chief
		Operating Officer of Yattendon Group, a private
**Gareth Davis was appointed as a Director on 3 February 2020.		conglomerate, for six years and Corporate
		Development Director at the media group Chrysalis
		Group Plc for ten years. Previously, Lisa has also
		served as a Non-Executive Director of Future Plc, the
		magazine group.
		***Lisa Gordon was appointed as a Director on 17 March 2020.

38	M&C Saatchi plc

THE BOARD

LOUISE JACKSON		COLIN JONES
NON-EXECUTIVE DIRECTOR***		NON-EXECUTIVE DIRECTOR**
Louise Jackson joined the Board on 17 March 2020. She has		Colin Jones joined the Board on 3 February 2020. He
significant experience of consumer-facing businesses,		is currently Non-Executive Chairman of Centaur
particularly in human resources, board advisory and change		Media Plc, the market intelligence company, having
leadership. She is currently Group Director of Talent and		joined in 2018 as a Non-Executive Director. Colin is
Leadership at Selfridges Group Ltd, the global luxury		also a Non-Executive Director of The City Literary
retailer, where she also sits on the Remuneration Board.		Institute, the adult education college. Colin previously
Previously, Louise was Human Resource Director of the		spent over 20 years as Finance Director of
Japanese pharmaceutical company, Kyowa Hakko Kirin Co		Euromoney Institutional Investor PLC, the FTSE 250-
Ltd and Senior Partner in Leadership and Talent Consulting		listed media company, until he retired in 2018. Colin
at Korn Ferry International Ltd. Prior to this, Louise was Chief		began his career at PricewaterhouseCoopers LLP
Executive and co-founder of change consultancy firm 7days		where he qualified as a chartered accountant.
Ltd for 10 years. Louise has held a number of Group HRD
roles and spent her early career at Coopers & Lybrand LLP		**Colin Jones was appointed as a Director on 3 February 2020.
and TUI Thomson Travel Group.
***Louise Jackson was appointed as a Director on 17 March 2020.

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39

AUDIT COMMITTEE REPORT

Overview

This report covers the activities of the two Audit Committees which served the Board during the period covering the audit of the 2019 financial statements. The former Audit Committee, which comprised the then three independent Non-Executive Directors, chaired by Sir Michael Peat, served until 10 December 2019 when all members of the committee resigned as directors of the Company. The principal activities of the former Audit Committee were the oversight of the 2018 audit and the initial investigation into the accounting misstatements identified during 2019.

A new Audit Committee was formed on 3 February 2020 when Gareth Davies and I were appointed to the Board as independent Non-Executive Directors. Lisa Gordon and Louise Jackson, who were appointed as independent Non-Executive Directors on 17 March 2020, joined the new Audit Committee on 6 May 2020. The Board asked me to chair the new Audit Committee on the basis of my recent and relevant financial experience. The principal activity of the new Audit Committee has been the oversight of the 2019 audit including the adjustments required to the 2018 financial statements as a result of the prior year accounting misstatements.

The Audit Committee's mandate is to provide effective governance over the appropriateness of the Group's financial reporting and the performance of both the internal and external audit functions. The Audit Committee also oversees the Group's internal control systems, business risks management and related compliance activities. Committee meetings are attended by the Finance Director and the Company Secretary, and by the external auditors, the internal auditors and key members of the Group's UK based central finance team as required. The committee also meets with the external auditor and the internal auditor without the Executive Directors present.

The key responsibilities of the Audit Committee are set out in the 2018 Board Responsibilities document published at: www.mcsaatchiplc.com/governance and reflect the requirements of the UK Corporate Governance Code 2018 (the Code).

The Audit Committee works to a programme aligned to key events in the financial reporting cycle. Agendas also include key audit, accounting and reporting issues as well as standing items required by the Audit Committee's terms of reference.

Activities of the former Audit Committee

The former Audit Committee met six times during 2019 and the principal matters considered in these meetings were:

• Completion of the 2018 audit
  The key considerations in preparing the 2018 financial statements are set out in the 2018 Audit Committee Report and included going concern; revenue recognition; put option accounting; 'headline' earnings; goodwill carrying value; acquisition accounting; and recommendations for improvements in the Group's accounting systems and internal controls. Following completion of the 2018 audit, the committee also reviewed the effectiveness of the external audit and the need for the audit to be put out to tender.
• Audit tender
  Prior to the discovery of the accounting misstatements, the committee decided to hold an open tender for its audit services. KPMG, as the incumbent auditor, was invited to participate in the tender, but declined and resigned as auditor in September 2019 on the grounds that it had been unable to agree a satisfactory commercial outcome for the additional audit work required to complete the 2018 audit.

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AUDIT COMMITTEE REPORT

As part of the audit tender process, each participating firm was given access to a data room and to management. After considering the quality of the submissions from each participating firm and, in particular, the complexities and international spread of the Group, as well as the reasonableness of the proposed fees, the former Audit Committee unanimously agreed to recommend to the Board that PricewaterhouseCoopers LLP be appointed as the Group's auditor for the 2019 financial statements. PricewaterhouseCoopers LLP were duly appointed as auditors on 16 September 2019.

• Independent accounting review
  PricewaterhouseCoopers LLP's Forensic Services Group completed their independent review in December 2019. The scope of the review and its findings are covered in the Finance Director's Review on page 10.
• Changes agreed following the independent accounting review
  Led by the new Finance Director and overseen by the Audit Committee (with oversight of the Board), the Company is taking action to prevent the incidents that resulted in the accounting misstatements from re-occurring. These measures include:
• • Reorganising the Group's central finance function to include Group financial control, financial analysis, treasury, company secretarial and legal, and internal audit;
  • Empowering the central finance function with more authority over local finance functions;
  • Creating standard accounting policies and procedures to be applied consistently across all companies in the Group;
  • Introducing tighter control and greater focus on cash management; and
  • Implementing a unified accounting and forecasting platform to be deployed across the Group, replacing the many different accounting systems currently in use across the Group. The platform is operational in the UK and is expected to be live in all major markets by the end of the first quarter of 2021.
• 2019 audit planning
  Following the appointment of PricewaterhouseCoopers LLP as the Company's auditor, the Audit Committee met with PricewaterhouseCoopers LLP and agreed the plan for the 2019 audit.
• UK Bribery Act 2010
  In view of the Group's global footprint and the work undertaken for national governments, the Audit Committee paid particular attention to compliance with the UK Bribery Act 2010. Further strengthening in this area has been implemented in 2019.
• Changes of accounting policy
  The implications of adopting IFRS16 Leases were considered and are addressed on page 47 of this report.

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41

AUDIT COMMITTEE REPORT

Activities of the new Audit Committee

I was appointed Audit Committee Chair on 3 February 2020. Since then, the newly constituted Audit Committee has held nine meetings to address:

• Significant accounting matters and judgements, including prior year adjustments, going concern, revenue recognition, put option accounting assessment of goodwill, valuation of investments in associates and unlisted equity investments lease accounting, and alternative performance measures (see below);
• The progress of the 2019 audit and amendments to the audit plan; and
• Approval and signing of the Annual Report and Accounts.

These meetings were also attended by the Chief Executive, the Finance Director, the Company Secretary and PricewaterhouseCoopers LLP.

Completion of 2019 audit

The 2019 audit has been conducted against a background of significant accounting misstatements identified by management earlier in 2019 and has taken significantly longer than expected to complete. This reflects a number of factors including:

• Additional audit work to verify the prior year misstatements and determine the period to which they relate;
• Challenges for the auditors with obtaining sufficient appropriate audit evidence for the restated 2019 opening balances because of an absence of, or poor, underlying documentation and an inability to obtain explanations from the former Finance Director and other members of the finance team who are no longer employed by the Group (which has led to a disclaimer of audit opinion on the profit and cash flows for the year and a qualified audit opinion on the comparability of the state of affairs with the 2018 year-end);
• Additional audit work around going concern as a result of the uncertainty over future forecasts created by the Covid-19 pandemic;
• Significant additional audit work on revenue recognition as a result of poor documentation and inconsistent application of the Group's accounting policy under IFRS 15;
• A reassessment of the accounting treatment of the many share-based incentive schemes and deferred consideration arrangements in operation across the Group, and poor documentation of these schemes;
• The need for the Board to address improvements in corporate governance and the disclosure of the many instances of non-compliance with the Code;
• Significant structural, control and reporting issues across the Group's finance function, exacerbated by excessive decentralisation to, and autonomy of, local and overseas finance teams.

All of these issues have been discussed at length with the auditors. All of the issues are in the process of being addressed including significant investment in new people and systems. Monitoring these improvements will continue to be a focus of the Audit Committee through the rest of 2020 and into 2021.

The most significant accounting issues and judgements considered by the new Audit Committee, and discussed with the external auditor, are set out below.

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Significant accounting issues and judgements

Prior year adjustments

Accounting misstatements relating to 2018 and prior years of £6.4m were first identified by management in August 2019 following an internal review by the new Finance Director. At this point the Board decided to appoint PricewaterhouseCoopers LLP's Forensic Services Group to undertake an independent review to determine, among other things, the full extent of these misstatements. This review was completed in December 2019 and identified £11.6m of reductions in headline profit before tax for 2018 and prior years, with all numbers still subject to audit. During the audit, a further £2.4m of adjustments to prior year headline profits were identified, bringing the total to £14.0m (of which £8.8m relates to 2018 and £5.2m to earlier periods). The discovery of these accounting misstatements has provided a number of challenges for the Audit Committee and the external auditors, including:

1. The existence of material accounting misstatements increased the risk and scope of the audit, including the need to carry out additional audit testing in respect of 2018 and prior years. The Audit Committee fully endorsed the additional audit work required in this area;
2. Poor accounting records and changes in finance staff, particularly at a senior level, meant that in many cases it was difficult for management to provide sufficient audit evidence to support the prior year adjustments and identify the precise period to which the adjustments relate;
3. The lack of standard accounting policies and decentralisation of finance responsibilities has meant that the discovery of a misstatement in one entity has required significant and time consuming additional work by management to determine whether the error was replicated in other parts of the business;
4. The fact that IFRS 15 was only adopted at a group level in 2018, combined with the failure of local management to consider the key judgements of IFRS at a detailed level, and poor basic accounting practices in this area, created significant additional challenges to ensuring local accounts correctly reflected the application of IFRS 15 in both 2018 and 2019.

While the Audit Committee is satisfied that management have now undertaken sufficient work to identify all prior period accounting misstatements, it was concluded that it was not in the interests of shareholders to incur the significant additional time and cost required to allocate the misstatements to the correct year and therefore achieve a clean audit opinion on the 2019 opening balance sheet. As a result, the Board has accepted that the auditors must disclaim their opinion on the 2019 opening balance sheet, and therefore also disclaim their opinion on the profit and cash flows for 2019. This in turn leads to a qualified opinion on the comparability of the 2019 closing balance sheet with the opening balance sheet. The adjustments made in these financial statements in respect of the 2018 and 2017 accounting periods are therefore management's best estimates using all available evidence. The Audit Committee endorses this pragmatic approach.

In addition to the accounting misstatements noted above, management have also undertaken a comprehensive review of the many put option agreements in place and the appropriateness of the accounting for these arrangements (see below). This has led to a further prior year adjustment which reduces 2018 statutory profit before tax by £15.0m but has no impact on 2018 headline profit before tax. A further £2.8m prior year adjustment relating to the incorrect accounting of dividends paid to members of the Group's LLP entities from 2017 and earlier has been made to statutory profit before tax. This adjustment has no impact on 2018 headline profit before tax.

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AUDIT COMMITTEE REPORT

Going concern

As explained on pages 56 to 57 and page 63, the financial statements have been prepared on the going concern basis. In this context the Board and Audit Committee considered the Group's ability to meet its obligations as they fall due for the foreseeable future, with particular reference to the economic downturn caused by the Covid-19 pandemic, the support of its lenders, and the credit which it extends to some of its clients. Management prepared a set of cash flow forecasts, assessing different scenarios, covering the period to the end of 2021. The Board and Audit Committee reviewed these forecasts under each scenario and the key assumptions on which they were based and are satisfied that they are appropriate.

The Board concluded that under all scenarios the Company will continue to have sufficient liquidity to operate. However, under a severe but plausible scenario there is a risk of breaching the Company's financial covenants under its revolving credit facility agreement with National Westminster Bank plc (NatWest), unless a further waiver agreement is reached within the going concern period. There are also further mitigating actions the Company could take to eliminate any risk of the Company breaching its financial covenants, should these be required. It is also noted that the revolving credit facility is due to expire on 30 June 2021 and, the Company is in discussions with NatWest to extend the term and/or refinance the facility.

Under the terms of the revolving credit facility agreement the bank could give the Company notice of an event of default given that where the auditors qualify the audited annual consolidated financial statements of the Company in a material way an event of default arises. However, the bank has confirmed that it has no intention of giving notice to the Company of an event of default nor taking any action as a result of such qualification and therefore the Board does not consider this to be a risk.

Based on these forecasts and assumptions, the Board and the Audit Committee believe that it remains appropriate to prepare the financial statements on a going concern basis. Only the severe but plausible downside scenario and the two areas mentioned above would indicate the existence of a material uncertainty which may cast significant doubt about the Group's ability to continue as a going concern without any mitigating action. The financial statements do not include the adjustments that would result if the Group was unable to continue as a going concern.

Revenue recognition

Revenue recognition is a key accounting and risk area for the Group. The Group adopted IFRS 15 from 1 January 2018, but only at a Group level. Local subsidiaries did not apply IFRS 15 until 2019, and even then, not on a consistent basis. A significant amount of time has therefore been required for management to get all subsidiaries accounting correctly under IFRS 15 for 2019, particularly around the key judgements of:

1. The number of performance obligations within a contract;
2. Determining whether the contract was entered as a principal or agent;
3. Calculating the percentage of contract completion at the period end.

The Audit Committee has devoted considerable time to reviewing these matters. It is satisfied that the Group's revenue is not materially misstated. The Audit Committee has requested that revenue accounting should be a particular area of focus for the ongoing developments of the Group's accounting systems and future internal audit work.

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Share-based payments and put option accounting

The business model section of the Directors' Report sets out the Company's successful strategy for growing organically rather than by acquisition. This has traditionally been achieved by launching new businesses in partnership with local entrepreneurs. These entrepreneurs receive an equity interest in the start-up at launch and have the option to sell their equity to the Company at a future date based on certain performance and valuation criteria as set out in a put option agreement.

The accounting for these put options is a complex area and depends on the substance and detailed terms of the underlying arrangement. There are close to 100 of these agreements, and many have been poorly documented over the years. There is no template or standard terms, so each agreement is different. This complicates the recording of these arrangements and also makes the audit of them challenging.

This year management have undertaken a comprehensive review of every put option agreement. In many cases the underlying documentation was poor and open to interpretation. Working closely with the auditors, management concluded that a number of prior year adjustments were required in respect of these put option schemes to reflect:

1. Reclassification of a number of the schemes, previously accounted for under IFRS 9, as management incentives and therefore accountable under IFRS 2;
2. Identification of non-market performance conditions which mean that the IFRS 2 charge under certain equity-settled schemes should have been revalued at the end of each period;
3. Identification of previously unrecorded (and documented) equity-settled schemes;
4. Identification of previously unrecorded (and undocumented) cash-settled schemes;
5. A change to guidance relating to the accounting for limited liability partnerships which needed to be applied retrospectively.

The overall effect of these prior period adjustments was £8.5m, comprising an additional charge to the 2018 income statement of £15.0m, mostly as increased staff costs, a credit to earlier periods of £6.5m, and an increase in net assets as at 1 January 2018 of £14.9m.

Many of the put option schemes are satisfied using Company shares and the final number of shares is determined by the share price at the date of vesting. Historically, a rising share price has helped to minimise the dilutive impact of these schemes as they vest. However, the Company's share price fell sharply in 2019, following the announcement of the accounting misstatements, from a peak of 356p in July to 124p at the end of the year. The share price has fallen further since the start of 2020, largely as a result of the impact of the Covid-19 pandemic, broadly trading in the range of 50p-70p since May 2020. This has significantly increased the dilutive impact of put options vesting in 2020 and beyond, although where possible management have been renegotiating these arrangements to reduce or defer the dilution. As a result, additional disclosures have been made in these financial statements to enable users to appreciate the potential future dilution at different share prices.

The new Audit Committee has considered the key judgements made by management in respect of these put options, in particular, the justification for classification under IFRS 2 or IFRS 9 and the assessment of non-market performance conditions. It has also reviewed the nature and calculation of the prior period adjustments with the auditors. In addition, the committee has encouraged fuller disclosure of the liabilities under these schemes and the potential dilutive impact on the Company's shareholders. The committee concluded that the revised presentation and valuation of the put options is appropriate. A further £2.8m prior year adjustment relating to the incorrect

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AUDIT COMMITTEE REPORT

accounting of dividends paid to members of the Group's LLP entities from 2017 and earlier has been made to statutory profit before tax. This adjustment has no impact on 2018 headline profit before tax.

Goodwill carrying value and impairment

The carrying value of goodwill as at 31 December 2019 was £33.6m, full details of which are set out in note 16 to the financial statements. The recoverable amount of goodwill is determined by management by reference to a value-in-use calculation for each cash generating unit (CGU), based on the Board's forecasts for 2020 and 2021 and a long-term growth rate of 1.5% for all material CGUs. Management also prepare sensitivity analyses for each CGU, for which the key variables are the forecast profits for 2020 the expected future growth rates, and the discount rate used to measure the present value of the forecast cash flows. This exercise has identified the need for an impairment charge of £5.9m across a number of CGUs as well as a prior year adjustment of £2.7m for goodwill impairment which should have been charged in 2017.

The Audit Committee has reviewed management's assessment of the recoverability of this goodwill and the potential for any impairment, taking into account the key judgements and sensitivity analyses, particularly in view of the uncertainty over net revenue and cash flow forecasts arising from the Covid-19 pandemic. The committee has also reviewed the disclosures relating to goodwill carrying values and impairment in note 16 to the financial statements. The committee is satisfied with the impairment conclusions reached and the presentation in the financial statements.

Investments in associates and unlisted equity investments

The Group has traditionally held a number of investments in entities where it holds significant influence, where an initial interest is taken with a view to serving a strategic market or obtaining critical mass in a larger organisation. These investments are treated as associates and are set out in note 17 to the financial statements.

Management assess the carrying value of these investments at the balance sheet date, including the need for any impairment. During 2019, the largest of these investments, a 24.9% interest in Walker Media Limited in the UK, was sold, generating a pre-tax profit on disposal of £13.0m (see note 35 to the financial statements). The carrying value of the other significant investment, a 40% interest in M&C Saatchi (Hong Kong) Limited, has been impaired by £5.2m to reflect the significant reduction in its activities. As a result, the carrying value of the investments in associates has fallen to £3.8m (2018: £22.6m).

The Audit Committee has reviewed the accounting for the disposal, the impairment calculation for the Hong Kong investment, and management's assessment of the carrying value of the remaining investments in associates, and is satisfied that these have been appropriately treated and disclosed in the financial statements.

The Group also invests in early stage, unlisted businesses for the purposes of gaining access to new technologies and digital media trends. The portfolio of more than 20 investments is managed independently by experienced investment managers who are remunerated based on the performance of the investments. During the year the Group invested a further £1.2m in new and existing businesses and the net revaluation adjustment at the end of the year was a decrease of £0.3m, giving a portfolio value of £15.6m (see note 20(a) to the financial statements). Because most of the investments are small (the biggest accounts for just 11% of the portfolio) and early stage, valuations are inherently judgemental, other than when there have been recent funding rounds.

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AUDIT COMMITTEE REPORT

The Board receives regular investment proposals and portfolio valuations from the investment managers. The Audit Committee has reviewed the year end valuation of the portfolio: No single investment provides a material risk and the Audit Committee is satisfied that the judgements made in valuing the portfolio at 31 December 2019 are reasonable.

IFRS 16 Leases

The new accounting standard IFRS 16 Leases was adopted from 1 January 2019. The Group's activities are supported from offices around the world, usually in prime central locations, under leases for varying periods. IFRS 16 requires the recognition of a right-of-use asset for these leases, with a corresponding finance lease liability. Adoption of IFRS 16 has had a material impact on the Group's balance sheet, with an increase in total assets of £36.9m and an increase in total liabilities of £42.3m as at 1 January 2019. Full details of the impact of adopting IFRS 16 are set out in notes 4 and 19 to the financial statements.

The Audit Committee has considered management's treatment of these leases, and the related estimates around the interest rate used for discounting future cash flows and the length of the lease term. Additional work has also been undertaken to obtain evidence for each lease and to test management's calculation of the related asset and liability. The committee is satisfied that IFRS 16 has been adopted appropriately.

Alternative performance measures

The Audit Committee has paid particular attention to the alternative performance measures included in the Annual Report and Accounts. The Group uses "headline" numbers to report its underlying results as well as for internal reporting purposes. The headline numbers strip out the accounting impact of equity transactions, including put options, and investments. They also exclude the impact of exceptional items. The Group has this year introduced a new accounting policy for exceptional items after incurring significant one-off costs in respect of the accounting misstatements and strategic restructuring (see note 3 of the financial statements).

The committee has reviewed the Group's policy for the exclusion of certain items when presenting headline earnings and confirmed the consistent application and appropriateness of this policy from year to year. It has also confirmed that the costs treated as exceptional are in accordance with the Group's accounting policy.

Internal audit

The former Audit Committee considered whether the internal auditor's reviews, over their three-year cycle, were sufficient and determined that the number of internal audit hours needed to be increased. The internal audit cycle was due to start following completion of the 2018 audit. However, following the discovery by management of the accounting misstatements in August 2019, the work of the internal auditor was put on hold. As a result, no internal audit work has been undertaken in the period.

The historic control weaknesses, the de-centralised and complex structure of the Group, the significant number of small, overseas operations and an entrepreneurial culture including management ownership of equity in Group companies, are all factors that suggest a more robust internal audit function is required. One of the priorities for the new Audit Committee after completion of the 2019 audit is therefore to re-assess the role and responsibilities of the internal audit, and how this is managed and resourced.

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AUDIT COMMITTEE REPORT

External auditor

PricewaterhouseCoopers LLP were appointed auditors of the Group and Company in September 2019, following a competitive tender process. The PricewaterhouseCoopers LLP partner responsible for the audit is Nigel Reynolds (Senior Statutory Auditor).

The Audit Committee is responsible for monitoring the external audit process to ensure high standards of quality and effectiveness. Since its appointment, the new committee has assessed the effectiveness of the external audit process using a number of measures, including:

• Revisiting the audit plan, scope and materiality, approved by the former Audit Committee, in view of the discovery of further accounting misstatements;
• Monitoring the independence and transparency of the audit (see below);
• Obtaining feedback from the Finance Director and his team on the quality of the audit team, their business understanding and audit approach;
• As Chair of the Audit Committee, I have had weekly calls with the PricewaterhouseCoopers LLP audit partner since the audit began, in particular, to discuss the audit challenges arising from poor accounting processes and documentation, and to understand the reasons for delays to the audit completion timetable and the resulting increase in audit fees. Feedback from these calls has been provided to the Audit Committee and the Board as appropriate.

These measures have enabled the committee to be satisfied with the effectiveness of the external audit.

PricewaterhouseCoopers LLP confirmed their independence in accordance with auditing standards at the time of their appointment. PricewaterhouseCoopers LLP 's report to the Directors and to the Audit Committee has confirmed that they continue to remain independent throughout the 2019 audit, and the committee concurs with this view.

To help safeguard the external auditor's objectivity and independence, it is excluded from providing any non-audit services that individually, or in aggregate, could impair its independence. Prior approval from the Audit Committee is required for any audit-related or other services permitted in accordance with the auditing regulations.

During the year, the only significant non-audit service provided by PricewaterhouseCoopers LLP was the independent review by its Forensic Services Group of the accounting misstatements and misapplication of accounting policies first identified by management. This forensic work commenced before the audit tender process had been concluded and, as part of the process for engaging PricewaterhouseCoopers LLP, the former Audit Committee confirmed that the forensic work would be undertaken by an entirely separate PricewaterhouseCoopers LLP team, and that the PricewaterhouseCoopers LLP audit team would remain independent for audit tender purposes. This forensic work did not include anything in the nature of an audit and the results of the work have not been relied on for the purposes of the 2019 audit. The fees paid to PricewaterhouseCoopers LLP in respect of non-audit services are shown in note 8 of the financial statements.

The fee for the 2019 audit of the Group and its subsidiaries is £3.2m (2018: £0.8m). The significant increase in the fee from the previous year reflects the complexities of conducting the audit following the identification of the prior year accounting misstatements and the challenges for the auditors in obtaining adequate audit evidence. One of the Audit Committee's objectives for the 2020 audit is a significant reduction in the audit fee as a result of improvements in financial controls, processes and reporting.

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AUDIT COMMITTEE REPORT

A resolution for the reappointment of PricewaterhouseCoopers LLP as auditor of the Group and Company will be proposed at the Company's annual general meeting.

Review the effectiveness of the Group's system of internal controls and risks

The Audit Committee is responsible for reviewing the adequacy and effectiveness of the Group's systems and processes for internal financial control and risk management. The discovery by management, during 2019, of material accounting misstatements in respect of previous years, clearly demonstrates that a number of key financial controls had not been operating effectively. As part of the changes agreed by the committee following the forensic review carried out by PricewaterhouseCoopers LLP (as detailed in this report on page 41), there is an ongoing review of the effectiveness of the Company's financial controls and risk management systems. Significant improvements have been made in many areas during 2020, and the new finance systems, policies and changes in personnel introduced across the Group (including those outlined in the Finance Directors' Report on page 19) will be monitored and reviewed by the Audit Committee for effectiveness. The Audit Committee will also review the internal control, process and reporting recommendations made by the external auditors as part of the post audit review, and ensure that remedial action is taken to address any identified weaknesses. As noted above, another priority for the Audit Committee this year is a reassessment of the role and responsibilities of internal audit with a view to improving its effectiveness. The Audit Committee also continues to review and update the principal risks schedule.

Audit Committee effectiveness

Following the resignation of all the Non-Executive Directors in December 2019, the Board concluded that a review of the Audit Committee's effectiveness would not be a worthwhile exercise. The Board recognises that this is contrary to the Code and, following the appointment of the four new independent Non-Executive Directors, it intends to conduct a formal and vigorous evaluation of the effectiveness of the Board and its committees concluding early 2021.

Colin Jones

Chair of the Audit Committee

7 December 2020

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DIRECTORS' REMUNERATION REPORT

Remuneration Committee Report

Under its terms of reference, the Remuneration Committee advises the Board on an overall remuneration policy and meets as and when required. The Remuneration Committee also determines, on behalf of the Board, the remuneration packages of the Executive Directors. The Board as a whole determines the remuneration of the Non-Executive Directors.

Throughout the period covered by this report, the overall remuneration policy was to attract and retain high calibre executives whilst seeking to reward them in a way that encourages the creation of value for shareholders, through long term incentive plans and the issue of share awards in the Company thereby aligning executive pay with the strategy and the long-term sustainable success of the Company.

Up and until the resignation of one Executive Director and three Non-Executive Directors on 10 December 2019, the Board had established a Remuneration Committee composed of the three Non-Executive Directors which was chaired by Lorna Tilbian. The Remuneration Committee met twice in the year, once to discuss the departing Finance Director's long-term incentive plan, and once to discuss the new Finance Director's bonus and long-term incentive plan.

At the Board meeting held on 6 May 2020, the Board re-established the Remuneration Committee, consisting of all four of the Non-Executive Directors, with Louise Jackson appointed as Chair.

The Executive Directors' salaries are on average 6 (2018: 6) times the average Group salary, which is commensurate with their experience, contacts and responsibilities. Variable consideration for three (and while Maurice Saatchi was a member of the Board, four) of the Executive Directors is by way of the dividends they receive from their shareholdings in the Company and in the case of the Finance Director, the long term incentive plan, further detailed below.

None of the previous Directors received any payments from the Company and/or the Group as a result of their loss of office.

The newly appointed Remuneration Committee has initiated a full review of the incentive arrangements of the Executive Directors and the share- based incentive arrangements in operation throughout the Group. The Company has appointed Korn Ferry as an independent external remuneration advisor (which has no connection to the Company nor to any Director). The Company intends to formulate a new remuneration policy for the remuneration of the Executive Directors which will integrate the principles of the Code and which will be put to shareholders for approval at the annual general meeting to be held in 2021. The new policy will include equity linkage and performance conditions for the third and fourth years (2021 and 2022) of the long-term incentive plan for the new Finance Director, Mickey Kalifa.

No member of the Remuneration Committee has any personal financial interest in the matters to be decided by the committee or involvement in the day-to-day management of the business of the Company.

Annual Report on Remuneration (unaudited)

Directors' pension arrangements

The pension contributions, if made, are to the Directors' money purchase pension schemes.

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DIRECTORS' REMUNERATION REPORT

Directors' contracts (audited)

All Executive Directors had/have a contract which could/may be terminated on 12-months' notice by the Company or the Executive Director save for Jamie Hewitt who had a six-month notice period.

All of the Non-Executive Directors had/have a contract which could/may be terminated on three months' notice by the Company or the Non- Executive Director save for Gareth Davis who has a six-month notice period.

Directors' options, conditional share awards (unaudited)

In 2016, Jeremy Sinclair, David Kershaw, Bill Muirhead and Maurice Saatchi paid (by way of a combination of payroll taxes and subscription price) £100,727 each for the conditional share awards. This payment amount is not refundable if the vesting conditions are not met.

In addition, the previous Finance Director, Jamie Hewitt, paid £2,055 and was due to pay a further £49,212 for his share award. On his departure, the award was instead purchased by the Group on 29 March 2019 for £49,212 which was believed to be the fair value of the shares at the time of purchase.

Based on the 2018 financial statements and providing the Company's share price is above £5.00 per share at a point during the period between 1 January 2019 and 31 December 2022, Jeremy Sinclair, David Kershaw, Bill Muirhead and Maurice Saatchi were each due to receive 160,562 shares in the Company. However, due to the accounting errors identified in 2019, and the restated 2018 accounts, it has been determined that nothing will vest in this award.

The award caused an accounting charge of £Nil in the year (2018: £401k).

None of the Directors hold any other options in the Company or shares in any companies within the Group. Shares in the Company held by Directors can be found in the Directors' Report on page 61.

Long-term incentive plan awards (audited)

The Remuneration Committee confirmed at a meeting held on 6 November 2019 to issue the new Finance Director, Mickey Kalifa, with a long-term incentive plan (LTIP) as part of his reward package. The LTIP has a maximum amount payable of 200% of salary per annum for each of the four years 2019 to 2022 inclusive. The award will vest on 31 December 2022, or such later date as the Remuneration Committee determines. Providing he remains employed, the award will be payable as follows:

• 1/3 of the vested award as soon as reasonably practicable following 31 December 2022;
• 1/3 of the vested award, as soon as reasonably practicable following 31 December 2023; and
• 1/3 of the vested award, as soon as reasonably practicable following 31 December 2024,

The award caused an accounting charge of £400k in the year (2018: £Nil).

There are no LTIPs in place for any of the other Directors.

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DIRECTORS' REMUNERATION REPORT

Non-Executive Directors (unaudited)

The remuneration of the Non-Executive Directors is determined by the Board. Fees paid to the Non-Executive Directors are reflective of skills and experience and the time required to undertake the role. No element of pay is performance related.

Other benefits (unaudited)

No Director has received or become entitled to receive a benefit (other than a fixed salary as an employee of the Company, the options indicated in the Annual Report and Accounts, or a benefit included in the aggregate amount of remuneration shown in the financial statements) by reason of a contract made by the Company or a related corporation of which the Director is a member or with a company in which the Director has a substantial financial interest.

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DIRECTORS' REMUNERATION REPORT

	Basic salary	Bonus	Benefits in kind5	Pension	Total
2019 (audited)	£000	£000	£000	£000	£000
Directors
David Kershaw	374	-	46	-	420
Bill Muirhead	374	-	48	-	422
Maurice Saatchi2	355	-	42	-	397
Jeremy Sinclair	374	-	47	-	421
Mickey Kalifa4	243	225	4	-	472
Jamie Hewitt3	77	-	7	4	88
Total	1,797	225	194	4	2,220
Non-Executive Directors
Michael Dobbs2	40	-	-	-	40
Michael Peat2	40	-	-	-	40
Lorna Tilbian2	40	-	-	-	40
Total	120	-	-	-	120
Total Rewards	1,917	225	194	4	2,340
	Basic salary	Bonus	Benefits in kind5	Pension	Total
2018 (unaudited)	£000	£000	£000	£000	£000
Directors
David Kershaw	374	-	47	-	421
Bill Muirhead	374	-	47	-	421
Maurice Saatchi	374	-	42	-	416
Jeremy Sinclair	374	-	46	-	420
Jamie Hewitt	250	125	5	15	395
Total	1,746	125	187	15	2,073
Non-Executive Directors
Jonathan Goldstein1	40	-	-	-	40
Michael Dobbs	40	-	-	-	40
Michael Peat	40	-	-	-	40
Lorna Tilbian6	39	-	-	-	39
Total	159	-	-	-	159
Total Rewards	1,905	125	187	15	2,232

1. Jonathan Goldstein announced as resigning on 31 December 2018.
2. Maurice Saatchi, Michael Dobbs, Michael Peat and Lorna Tilbian resigned on 10 December 2019.
3. Jamie Hewitt announced as resigning on 28 March 2019.
4. Mickey Kalifa appointed to the Board on 29 March 2019.
5. Benefits in kind include car allowances and permanent health insurance benefit.
6. Lorna Tilbian served on the Board for only part of the year.

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DIRECTORS' REMUNERATION REPORT

By order of the Board

Louise Jackson

Chair of the Remuneration Committee

7 December 2020

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DIRECTORS' REPORT

The Directors present their report together with the audited financial statements of the Group and Company for the year ended 31 December 2019.

Strategic Report

A review of the Group's business during the year, the principal risks and uncertainties facing the Group and future prospects and developments are included in the Strategic Report on pages 3 to 25 which should be read in conjunction with this report.

Results and dividends

The consolidated income statement on page 71 shows the results for the year. The Directors approved an interim dividend of 2.45p totalling £2,246,973 (2018: 2.45p £2,116,521) and in light of the economic effects of the Covid-19 pandemic and a desire to preserve cash, do not recommend a final dividend to be paid (2018: 8.51p £7,565,655). Further information is in note 12 of the financial statements.

Principal activity, trading review and future developments

The principal activity of the Group during the year was the provision of marketing services. The review of trading, future developments and key performance indicators can be found in the Strategic Report.

Business model

We are a global marketing services company built on a strategy of winning new business by starting new businesses. Occasionally we have acquired businesses where critical mass and/or a track record is needed to break into a market place.

The conventional model of network creation is by acquisition, but we believe this turns entrepreneurs into employees, diluting the imperative that drove their initial growth and success.

Our network growth comes from attracting people who can build businesses. Our focus is to expand organically, buying stakes in companies where strategic mass is the only way to enter a market or accelerate growth.

We then back our winners, by using the network to allow them to expand globally.

At the core of the Group's business model is the concept of shared ownership, shared objectives and shared ambitions.

We take a majority share in a business start-up, providing such business with cash and the benefit of our reach, brains and reputation. The entrepreneurs have shares in their subsidiary companies, which at some agreed point, can be converted into more tradeable shares in the Company. They can only sell (or put) all their shares when succession criteria have been fulfilled. This aligns their business success with the success of the Group as a whole. The better the Group does, the more their shares are worth. Typically, many of our local partners do not exchange their subsidiary company shares at the first opportunity; instead, they benefit from dividends which they continue to receive from their subsidiary company. However, the recent steep drop in the Company's share price caused by the accounting misstatements and the economic shock of the Covid-19 pandemic has resulted in some put options failing to create shareholder value, or delivering the growth intended.

The Remuneration Committee is revisiting the business model as part of the strategic review and increased governance, with a view to protecting the core principles of the model but refining how it is implemented to ensure the Company delivers value for all its shareholders.

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DIRECTORS' REPORT

Going Concern

The Directors have adopted the going concern basis in preparing the financial statements after assessing the principal risks and having considered the impact of several different downside scenarios including a severe but plausible downside scenario arising from the Covid-19 pandemic. The Directors have formed their opinion after evaluating these different scenarios for the remaining months of 2020 and for 2021 and have based their opinion on a downside scenario which assumes net revenue falling substantially below 2019 levels.

The major variables are the depth and the duration of the Covid-19 pandemic. The Directors considered the impact of the current Covid-19 pandemic on the Group's business for the period up and until the end of 2021, taking into consideration the Group's forecast cash flows, liquidity, the revolving credit facility agreement (RCF) with National Westminster Bank plc and the recently relaxed financial covenants under it. The models do not factor in the existing £5m overdraft facility as it is a repayable on demand facility or the newly approved additional £7m Coronavirus Large Business Interruption Loan Scheme (CLBILS) given that the Company is in the process of agreeing terms. Both forms of financing would substantially increase the liquidity of the Group. It is also noted that the revolving credit facility is due to expire on 30 June 2021, however, the Company is in discussions to extend the term and/or refinance the facility. The RCF does provide that where the auditors qualify the audited annual consolidated financial statements of the Company in a material way there is an event of default. However, the bank has confirmed that it has no intention of giving notice to the Company of an event of default nor taking any action as a result of such qualification and therefore the Company does not consider this to be a risk.

We have considered numerous impacts on net revenue, profits and cash flows. The models all assume that the Group will continue to operate and service clients, albeit at substantially reduced levels to those forecast at the start of the year. We have assumed in the models that the Covid-19 pandemic will result in reductions in net revenue and so will require us to take action in reducing operational cost in addition to the actions already taken.

Overall, we scenario planned several outturns, modelling three specific scenarios: a base case scenario, downside scenario and a severe but plausible scenario. In all three scenarios, the models indicate the Company will continue to have sufficient cash to continue to operate. It is only in the severe but plausible scenario where there is a risk of breaching the Company's financial covenants under the RCF.

In our downside scenario, net revenue is assumed to fall by 19% against the previous year, with the impact lasting the entirety of 2020, with a partial recovery in 2021 (but net revenue still being 12% down against 2019). The net revenue and operational leverage impact of such a net revenue drop would have a major negative impact on the Group's profitability and cash. However, the scenario modelling would indicate that despite this, the Group would remain profitable and cash generative over the next 18 months and we would anticipate a recovery in the following years.

Throughout this downside scenario, the Group continues to have headroom on its RCF and continues to operate within the boundaries of its financial covenants under the RCF. To the extent, there is further downside beyond this scenario, the Group can continue to manage its financing and other business risks satisfactorily, but in a severe but plausible scenario would need to take mitigating action to remain within the boundaries of its financial covenants under the RCF.

56	M&C Saatchi plc

DIRECTORS' REPORT

During this current period and indeed since the first quarter of 2020, the Group's business has taken extensive action to preserve liquidity. The following mitigating actions have been built into our base case and downside financial models:

• The Group has drawn down fully on its RCF which was reduced from £36m to £33m; £3m was repaid on 30 November 2020 in accordance with the terms of the facility agreement. The overdraft facility of £5m has not been used and remains available. Net cash as at 30 November 2020 was approximately £28m.
• A very significant proportion of the Group's cost base relates to salaries. The Group has substantially reduced its staff costs through furlough programmes across the world (including the UK, US and Australia), by voluntary pay reductions, particularly amongst senior employees and also, unfortunately, from staff redundancies in virtually all our markets worldwide.
• The Group has reduced, suspended or delayed capital expenditure including building works at its London headquarters, as well as some IT expenditure globally.
• The Company has agreed rent deferrals and rent-free periods with its landlords in the UK.
• The Group is taking advantage of concessions and deferrals of tax payments (including PAYE and VAT) as well as availing ourselves of government grants in various countries.
• Other variable expenditure has also been reduced where possible.
• We secured a relaxation of the Company's financial covenants under the RCF for the final quarter of 2020 up and until the RCF's maturity on 30 June 2021.
• We received approval for £7m in funding through the UK Government's Coronavirus Large Business Interruption Loan Scheme ('CLBILS') and the Company is in the process of agreeing the legal documentation.

Severe but plausible scenario

It is currently very difficult to assess how the Covid-19 pandemic will evolve and, in particular, the speed and scale of the expected recovery in 2021. Although most of our offices around the world have now re-opened (and even before the re-opening our staff have continued to work productively on a remote basis), it is conceivable the economic downturn may continue for a longer period, and/or that the recovery profile is slower than in the downside case. The Directors have, therefore, prepared a severe but plausible scenario that models a material reduction in net revenue and consequently a greater net revenue deterioration in 2021 than modelled in the downside scenario. In this scenario, there is no recovery in 2021, with net revenue remaining 20% below the 2019 level.

Based on the most current information and our recent performance, the impact of the Covid-19 pandemic is somewhat less severe than we had originally expected at the commencement of the Covid-19 pandemic, and therefore, this severe but plausible scenario is considered unlikely. However, even in this severe but plausible scenario, the Company will continue to have sufficient cash to operate. However, under this same scenario there is a risk of breaching the Company's financial covenants under the RCF, unless a further relaxation of the financial covenants or a waiver of any such breach is agreed within the going concern period. There are further mitigating actions the Company could take to eliminate any risk of the Company breaching its financial covenants under the RCF, should these be required.

Based on these forecasts the Directors believe that it remains appropriate to prepare the financial statements on a going concern basis. Only the severe but plausible downside scenario, the refinancing of the RCF and the event of default (as detailed above) would indicate the existence of a material uncertainty which may cast significant doubt about the Group's ability to continue as a going concern without any mitigating action. The financial statements do not include the adjustments that would result if the Group was unable to continue as a going concern.

M&C Saatchi Plc

57

DIRECTORS' REPORT

Viability

The Directors assess the prospects of the Group and appropriateness of the period used for the assessment by taking into account various factors, including the Group's current position, the nature of its business, its business model and strategy, its principal risks, its liquidity and its expected performance all of which have been considered in the going concern review.

Time horizon

The Directors have reviewed the period used for the assessment and determined in light of the Covid-19 pandemic that a two-year period (from 31 December 2019) remained suitable and such two year period was also adopted in the going concern review. Given the risks that the Group faces and the need for continuous change and investment in our client offerings, a two-year time horizon is the maximum length of time the Directors can reasonably be expected to assess the Group's viability at the present time. The specific risks in this time horizon are economic impacts of the Covid-19 pandemic; regulatory risk, including Brexit; the historic accounting misstatements reducing the validity of historic trend analysis; and the Group's ongoing governance and strategic reviews.

The Group is currently in the process of developing a new long-term strategic plan, the output of which will include a five-year financial plan. The financial plan will be used to manage and assess the Group's business and its risks into the future.

Stress test

As per the going concern statement set out on pages 56 and 57, we scenario planned several outturns, including a severe but plausible case where net revenue drops significantly (in the range of 20%) and the impact lasts the whole of 2020 and into 2021. We have assumed that we will be able to refinance the revolving credit facility along with the overdraft facility prior to their expiry on 30 June 2021.

Statement

Based on the assessment explained above, the Directors confirm that they have a reasonable expectation that the Group will continue to operate and meet its liabilities, as they fall due, until at least 31 December 2021.

However, the impacts of a new or recurring pandemic; regulatory risk, including Brexit; the historic accounting misstatements, any additional unforeseen risks, such as policies on data handling or staff welfare not being followed; a banking crisis; or a major client suddenly and unexpectedly failing, which results in additional financial burdens on the Group, may change the Board's expectation of the Group's viability.

Principal risks and uncertainties

On pages 20 and 22 we describe the Group's principal risks and uncertainties. We provide information on the nature of the risk, actions to mitigate risk exposure and an indication of the significance of the risk by reference to its potential impact on the Group's business, financial condition and results of operation and/or the likelihood of the risk materialising. Not all potential risks are listed on pages 20 to 24. Some risks are excluded because the Board considers them not to be material to the Group as a whole. Additionally, there may be risks and uncertainties not presently known to the Directors, or which the Directors currently deem immaterial, that may also have an adverse effect upon the Group.

Financial instruments

Details of the use of financial instruments by the Group and their risks are contained in the financial risk management note 31 of the financial statements.

58	M&C Saatchi plc

DIRECTORS' REPORT

Political contributions

During the year, the Group made no political donations (2018: nil).

Directors

The names of the Directors and their biographies are set out on pages 36 to 39. Details relating to Board meeting attendance and composition of the Board committees are shown in the Governance Review on pages 26 to 35.

The following have been directors since start of 2019:

Executive Directors	Joined board	Left board
David Kershaw	-	-
Bill Muirhead	-	-
Maurice Saatchi	-	10 December 2019
Jeremy Sinclair	-	-
Jamie Hewitt	-	29 March 2019
Mickey Kalifa	29 March 2019	-
Non-Executive Directors
Michael Dobbs	-	10 December 2019
Michael Peat	-	10 December 2019
Lorna Tilbian	-	10 December 2019
Gareth Davis	3 February 2020	-
Lisa Gordon	17 March 2020	-
Louise Jackson	17 March 2020	-
Colin Jones	3 February 2020	-

Social responsibility

The Group follows the guidance in the International (Social Responsibility) Standard ISO 26000 and is accredited for BS OHSAS 18001, ISO 14001 and is registered with CIPS Sustainability Index.

In addition, the Group is involved with many campaigns (including paid, low bono and pro bono) that help create a socially responsible world.

Anti-bribery and corruption

The Group has well-establishedanti-bribery and anti-corruption policies (including management of conflicts of interest) aimed at ensuring adherence to associated legal and regulatory requirements.

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59

DIRECTORS' REPORT

Whistle-blowing

Employees are encouraged to report any potential, or apparent, malpractice or misconduct in confidence, in accordance with the Group's internal whistle-blowing policy. We continue to look at innovative ways to allow our employees to report any potential, or apparent, malpractice or misconduct in confidence. We have introduced a new mobile app, Vault Platform, that gives employees a safe space to report any form of misconduct in the workplace, including but not limited to harassment, bullying, discrimination, and racism, through to fraud and corruption. This has been launched in the UK during 2020 and we are monitoring its usage and effectiveness and will make any necessary amendments prior to rolling it out to the Group. This is one of the new system enhancements and will aid with the overhaul of governance.

Engagement with employees and other stakeholder engagement

Ensuring that we create close collaborative and mutually beneficial relationships with suppliers who adopt standards consistent with our own helps us to streamline processes, increase savings and protect our reputation. Information about our engagement with our employees can be found at pages 29, 30, 31, 34 and 35 whilst the consideration of other stakeholders' views by the Company can be found at page 29 and pages 34 to 35.

Governance

The governance review (including Section 172 of the UK Companies Act 2006 and compliance with the UK Corporate Governance Code 2018) explains our governance arrangements further details can be found www.mcsaatchiplc.com/governance.

Slavery and human trafficking statement

The Group continually monitors its supply chains and operates a zero-tolerance policy to slavery and human trafficking as reflected in its Modern Slavery Statement. (www.mcsaatchiplc.com/governance)

Directors' conflict of interest

Under the UK Companies Act 2006, Directors are subject to a statutory duty to avoid a situation where they have, or can have, a direct or indirect interest that conflicts, or may conflict, with the interests of the Company. Directors are required to notify the Company of any conflict or potential conflict of interest under an established procedure and any conflicts or potential conflicts are noted at each Board meeting.

Directors' liability Insurance and indemnity

The Company purchases insurance to cover its Directors and officers against costs they may incur in defending themselves in legal proceedings instigated against them as a direct result of duties carried out on behalf of the Company.

Change of control

Depending on the circumstance, some of the put option agreements with subsidiary companies vest on change of control.

60	M&C Saatchi plc

DIRECTORS' REPORT

Directors and substantial shareholdings

As at 4 December 2020, the Company has been notified by shareholders representing 3% or more of issued share capital of the following interests:

	Shares held	%
Vinodka (Vin) Murria and family	15,245,267	13.2%
Invesco Perpetual	13,957,945	12.1%
Octopus Investments	10,194,941	8.8%
Paradice Investment Management	9,284,810	8.0%
Fidelity International	8,622,673	7.5%
Herald Investment Management	5,336,433	4.6%
David Kershaw*	4,579,697	4.0%
Bill Muirhead*	4,579,697	4.0%
Jeremy Sinclair*	4,579,697	4.0%
Maurice Saatchi	4,124,882	3.6%
Aviva Investors	4,094,159	3.6%
Stonehage Fleming	4,080,215	3.5%

* During the year the above Directors purchased 415,323 shares each. Mickey Kalifa, the new Finance Director acquired 27,985 shares during the year.

Regularly updated details of the Directors' shareholdings and substantial shareholding can be found on the corporate website www.mcsaatchiplc.com.

Events since the end of the financial year

On 30 April 2020, the term of the £36m revolving credit facility agreement and the £5m overdraft facility agreement with National Westminster Bank plc was extended to 30 June 2021. The interest margin on the revolving facility agreement was increased to 3.00% above LIBOR from 1.75% above LIBOR. The overdraft facility has a floating rate of interest set at 3.25% above the Bank of England base rate. Additional Group companies in the US and Australia were brought into the facility as guarantors.

Following the announcement of the accounting misstatements, the Financial Conduct Authority opened an investigation with which the Company is assisting.

In part due to the accounting misstatements and the Covid-19 pandemic, the Company's annual audit lasted longer than originally planned and went over budget.

Following the year end, the Board appointed four Non-Executive Directors who the Board considered independent and reconstituted its committees.

The economic downturn caused by the Covid-19 pandemic has affected the revenue of most Group companies. However, the Group's business continuity plans worked and we continue to service clients and win clients. The Group has cut costs to reduce the long-term economic effects of the Covid-19 pandemic; however, the effects on associates and cash generating units are different. This along with our strategic plan and other

M&C Saatchi Plc

61

DIRECTORS' REPORT

local opportunities and threats will result in the carrying values of our investments and goodwill potentially being different as at the year ended 31 December 2020 from those as at the year ended 31 December 2019.

We have undertaken a restructuring programme across the entire Group which will result in the closure of a number of businesses in 2020.

As part of our restructuring programme in the second quarter of 2020 the Group closed its Los Angeles subsidiary due to a deterioration in that subsidiary's business in 2019 which worsened in 2020. The estimated Group revenue deriving from the Los Angeles subsidiary declined from 2.8% in 2018 to 1.9% in 2019 whilst the share of Group net revenue deriving from the Los Angeles subsidiary declined from 2.4% in 2018 to 1.4% in 2019. During this same period, there was substantial turnover of finance staff based in such subsidiary which resulted in poor record keeping and a lack of financial information for 2019. The Group finance team has adequate information to confirm the 2019 closing balance sheet for the Los Angeles subsidiary, including revenue cut-off between 2019 and 2020, but is unable to confirm the opening balance sheet for 2019 given the lack of financial records.

The Company's shares were temporarily suspended from trading at 7.30am on 1 October 2020 as the Company did not publish the Annual Report and Accounts by 30 September 2020 which was the last day permitted for publication of the audited results under the AIM Rules (as modified by the three month extension granted in connection with the Covid-19 pandemic pursuant to the Inside AIM Guidance of 26 March 2020). Upon publication of the Annual Report and Accounts, the Company expects the suspension to be lifted, and the Company's shares to be reinstated to trading.

The Directors are not aware of any other events since the end of the financial year that have had, or may have, a significant impact on the Group's operations, the results of those operations, or the state of affairs of the Group in future years.

Treasury shares

At the annual general meeting held in 2019, the Directors were given the authority to purchase up to 8,930,000 of the Company's ordinary shares. At the date of signing of this report this authority had expired and the Directors will seek to renew this authority at the next annual general meeting. At the year end, the Company held 485,970 of its ordinary shares as treasury shares. The Directors will use them to fulfil option obligations.

Directors' power to issue shares

At the annual general meeting held in 2019, the Directors were given the authority to issue up to 59,400,000 of the Company's ordinary shares of which 4,480,000 were approved to be issued for cash. During the year, the Company issued 5,993,207 shares to fulfil options and to acquire equity (see note 29 of the financial statements). The Company did not issue any shares for cash. At the date of signing of this report this authority had expired and the Directors will seek to renew this authority at the next annual general meeting.

Auditor

The current Directors have taken all the steps that they ought to have taken to make themselves aware of any information needed by the Company's auditor for the purposes of their audit and to establish that the auditor is aware of that information. The Directors are not aware of any relevant audit information of which the auditor is unaware.

A resolution proposing re-appointment PricewaterhouseCoopers LLP as auditor of the Company will be put to the shareholders at the annual general meeting to be held in 2020.

62	M&C Saatchi plc

DIRECTORS' RESPONSIBILITIES

The Directors are responsible for preparing the Annual Report and Accounts in accordance with applicable law and regulations.

Company law requires the Directors to prepare group and parent company financial statements for each financial year. As required by the AIM Rules of the London Stock Exchange plc (and UK law), they are required to prepare the Group financial statements in accordance with International Financial Reporting Standards as adopted by the European Union (IFRS as adopted by the EU) and applicable law and have elected to prepare the Company's financial statements in accordance with UK accounting standards and applicable law (UK Generally Accepted Accounting Practice), including FRS 101 Reduced Disclosure Framework. For a full Group accounting year following Brexit, IFRS as adopted by the EU will be replaced by UK adopted IFRS. The first such accounting period that could be affected by this change is the year ended 31 December 2020.

Under UK company law, the Directors must not approve the financial statements unless they are satisfied that they give a true and fair view of the state of affairs of the Group and the Company and of their profit or loss for that period. In preparing each of the Group and the Company financial statements, the Directors are required to:

• Select suitable accounting policies and then apply them consistently;
• Make judgements and estimates that are reasonable, relevant, reliable and prudent;
• For the Group financial statements, state whether they have been prepared in accordance with IFRSs as adopted by the EU;
• For the Company financial statements, state whether applicable UK accounting standards have been followed, subject to any material departures disclosed and explained in the financial statements;
• Assess the Group and the Company's ability to continue as a going concern, disclosing, as applicable, matters related to going concern; and
• Use the going concern basis of accounting unless they either intend to liquidate the Group or the Company or to cease operations, or have no realistic alternative but to do so.

The Directors are responsible for keeping adequate accounting records that are sufficient to show and explain the Company's transactions and disclose with reasonable accuracy at any time the financial position of the Company and enable them to ensure that its financial statements comply with the UK Companies Act 2006. They are responsible for such internal control as they determine is necessary to enable the preparation of the financial statements that are free from material misstatement, whether due to fraud or error, and have general responsibility for taking such steps as are reasonably open to them to safeguard the assets of the Group and to prevent and detect fraud and other irregularities.

Under applicable law and regulations, the Directors are also responsible for preparing a Strategic Report and a Directors' Report that comply with that law and those regulations.

In accordance with the principles of the UK Corporate Governance Code 2018, the Board has established arrangements to evaluate whether the information presented in the Annual Report and Accounts is fair, balanced and understandable.

The Board considers the Annual Report and Accounts, taken as a whole, is fair, balanced and understandable and provides the information necessary for shareholders to assess the Company's position, performance, business model and strategy.

Website publication

The Directors are responsible for the maintenance and integrity of the corporate and financial information included on the company's website (www.mcsaatchiplc.com). Legislation in the UK governing the preparation and dissemination of financial statements may differ from legislation in other jurisdictions.

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63

DIRECTORS' REPORT AND DIRECTORS' RESPONSIBILITIES

The directors' report and directors' responsibility statement has been signed by order of the Board by:

Andy Blackstone

Company Secretary

7 December 2020

64	M&C Saatchi plc

FINANCIAL STATEMENTS INDEX

Preparation	66
Consolidated income statement	71
Consolidated statement of comprehensive	72
income
Consolidated balance sheet	73
Consolidated statement of changes in	75
equity
Consolidated cash flow statements and	77
analysis of net debt
1.	Headline results and earnings per share	78
2.	Prior year misstatements	82
3.	Exceptional items	93
4.	Changes in accounting policies	94
5.	Segmental information	95
6.	Revenue from contracts with customers	100
7.	Staff costs	103
8.	Auditors' remuneration	104
9.	Net finance income / (costs)	104
10. Taxation	105
11. Deferred taxation	107
12. Dividends	108
13. Acquisitions	109
14. Cash consumed by acquisitions	109
15. Deferred and contingent consideration	110
16. Intangible assets	110
17. Investments in associates and joint ventures	113
18. Plant and equipment	115

19. Leases	116
20.	Other non-current assets	118
20a. Financial assets at fair value through profit and loss
	(FVTPL)	119
21.	Trade and other receivables	119
22. Trade and other payables	120
23.	Provisions	121
24. Borrowings	121
25.	Other non-current liabilities	123
26.	Potentially issuable shares	123
27.	Minority shareholder put option liabilities	124
28. Share-based payments	125
29.	Share capital	130
30.	Fair value measurement	130
31.	Financial risk management	133
32. Group companies	136
33.	Related party transactions	141
34. Commitments	141
35.	Assets held for sale and disposals	141
36.	Post balance sheet events	142
37.	Other accounting policies	143
38.	New and revised standards issued but not yet effective	143
Company accounts	144
Independent Auditors' Report	152
Additional information	167

M&C Saatchi plc

65

PREPARATION Continued

Preparation

Basis of preparation

The Group's consolidated financial statements have been prepared on a going concern basis, as discussed in the Directors' report on page 56, and in accordance with EU-endorsed International Financial Reporting Standards (IFRS) and the Companies Act 2006 applicable to companies reporting under IFRS.

Going concern

These financial statements have been prepared on the going concern basis.

The Board have concluded that under the most likely going concern scenarios which have been modelled and they have reviewed, the Company will have sufficient liquidity to continue to operate.

Given the uncertainty over the duration and economic consequences of the Covid-19 pandemic and the risk that the economic downturn may continue for a longer period, and/or that the recovery profile is slower than is considered likely, the Directors have prepared a severe but plausible scenario that models a material reduction in revenue. In this scenario, there is no recovery in 2021, with revenue remaining 20% below the 2019 level.

Under this severe but plausible scenario, there is a risk of breaching the Company's financial covenants under its revolving credit facility (RCF) agreement with National Westminster Bank plc (NatWest), unless the terms of the RCF are amended or a further waiver agreement is reached within the going concern period. There are further mitigating actions the Company could take to eliminate any risk of the Company breaching its financial covenants, should these be required. Furthermore, the RCF provides that where the auditors qualify the audited annual consolidated financial statements of the Company in a material way, there is an event of default. However, NatWest has confirmed that it has no intention of giving notice to the Company of an event of default nor taking any action as a result of such qualification and, therefore, the Company does not consider this to be a risk. It is also noted that the RCF is due to expire on 30 June 2021 and, the Company is in discussions with NatWest to extend the term and/or refinance the facility.

Based on the above, the Board, therefore, believes that it remains appropriate to prepare the financial statements on a going concern basis. The Board acknowledges that there is a material uncertainty which may cast significant doubt about the Group's ability to continue as a going concern without any mitigating action being taken. This material uncertainty arises in a severe but plausible downside scenario where the covenants could be breached within 12 months of the date signing this report, due to the refinancing requirement of the RCF prior to 30 June 2021 and a qualification leading to an event of default albeit that the Company is in discussions with NatWest to extend the term and/or refinance the facility and NatWest has confirmed that it has no intention of giving notice to the Company of an event of default nor taking any action as a result of such qualification.

The financial statements do not include the adjustments that would result if the Group was unable to continue as a going concern.

Further details are discussed in the Finance Directors review (page 15,16), Audit Committee Report (page 44) and Directors Report (page 56,57)

Foreign exchange

The consolidated financial statements are presented in pounds sterling and, unless stated otherwise, rounded to the nearest thousand. They have been prepared under the historical cost convention, except for the revaluation of certain financial instruments.

Transactions in foreign currencies are translated at the exchange rate ruling at the dates of the transactions. Monetary assets and liabilities denominated in foreign currencies are retranslated at the exchange rates ruling at the balance sheet date, with the resulting exchange differences recognised in the income statement.

Change in presentation of the consolidated income statement

In this year's Annual Report the presentation of the income statement has been amended such that, in the mind of the Directors, it more appropriately reflects the manner in which the business operates. This revised format has been applied to both the current year result and the comparative outturn for 2018.This new format in no way changes the Group's result for either the current or prior year when compared to the previous form of presentation.

Consolidation

The financial statements of the Group consolidates the results of the Company and its subsidiary entities, and includes the share of its joint ventures' and associates' results accounted for under the equity method.

A subsidiary is an entity controlled by the Group. The Group controls a subsidiary when it is exposed, or has the rights, to variable returns from its involvement with the subsidiary and has the ability to affect those returns through its power over the subsidiary.

The results of subsidiaries are included from the date of acquisition. Where necessary, adjustments are made to the financial statements of subsidiaries to bring their accounting policies into line with those of the Group. Intra Group transactions, balances, income and expenses are eliminated on consolidation.

Where a consolidated company is less than 100% owned by the Group, the treatment of the non- controlling interest share of the results and net assets is dependent on how the equity award is accounted for. Where the equity is accounted for as a share-based payment award under IFRS 2, all dividend outflow is taken to staff cost, and there is no non-controlling interest charge. In all other cases, the non-controlling interest share of the results and net assets is recognised at each reporting date in equity separately from the equity attributable to the shareholders of the company.

The assets and liabilities of overseas subsidiaries (which comprise the Group's net investment in foreign operations) are translated at the exchange rate ruling at the balance sheet date. The resulting exchange differences are recognised in other comprehensive income and accumulated in equity within the foreign exchange reserve.

66	M&C Saatchi plc

PREPARATION

Significant accounting policies

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

A fundamental change in our accounting policies for the year ended 31 December 2019 is the adoption of IFRS 16 Leases. Details surrounding the transition accounting applied to this adoption is included in note 4 and details surrounding recurring disclosures with regards to leases are provided in note 19. The adoption of IFRS 16 has also led to the identification of two further significant estimates (below).

Critical accounting policies

Certain of the Group's significant accounting policies are considered by the Directors to be critical due to the level of complexity, judgement, or estimation involved in their application and potential impact on the consolidated financial statements. The critical accounting policies are listed below and explained in more detail in the relevant notes to the Group financial statements.

Revenue recognition

The Group applied IFRS 15 Revenue from contracts with customers from the start of 2018.

The Group's revenue is earned from the provision of advertising and marketing services. Revenue from contracts with customers is recognised as, or when, the performance obligations present within the contractual agreements are satisfied. Dependent on the arrangement with the client, the Group may act as principal or as agent in the provision of these services.

See note 6 for a full listing of the Group's revenue accounting policies.

Put option accounting (IFRS 2 and IFRS 9)

It is common for equity partners in the Group's subsidiaries to hold put options over their equity such that they can require the Group to purchase their non-controlling interest for either a variable number of M&C Saatchi plc shares or cash. Dependent on the terms and substance of the underlying agreement, these options are either recognised as a put option liability under IFRS 9 (note 27) or as a conditional share award in the scope of IFRS 2 (note 28).

Under the IFRS 9 approach, a put option liability is recognised in terms of the expected future issue of a variable number of shares. This liability is held at amortised cost at inception of the agreement and remeasured at the end of each reporting period. Both the amortisation of these instruments and any change in the underlying valuation of the amortised cost (driven by changes in either Company's quoted share price or underlying business performance) is recognised in the income statement as profit or loss.

Typically, the terms of instruments accounted for under IFRS 2 are such that they have the cost of the transaction measured at fair value on the grant date. The majority of these instruments have non-market conditions and have the fair value of the award re measured annually. The cost is recognised over the vesting period of the award and accumulated within equity.

Headline results

As reflected in our business model (page 55), the Directors believe that the headline results and headline earnings per share (see note 1) provide additional useful information on the underlying performance of the business. The headline results reflect the underlying profitability of the business units by excluding all effects of buying and selling equity by the Group; and the accounting effects of the entrepreneurs' holding equity in the businesses they run. This results in accounting charges and credits to the income statement for the Group's fair value liability of its local entrepreneurs' equity conversion rights, but does not account for the increase in value of the businesses.

In addition, the headline results are used for internal performance management and to calculate minority shareholder put option liabilities. The term 'headline' is not a defined term in IFRS. Note 1 reconciles reported to headline results.

The segmental reporting (note 5) reflects headline results in accordance with IFRS 8.

The items that are excluded from headline results are the amortisation or impairment of intangible assets (including goodwill and acquired intangibles, but excluding software) acquired in business combinations, changes to deferred and contingent consideration and other acquisition related charges taken to the income statement; impairment of investments in associates; profit or loss on disposal of associates; revaluation of investments and their related costs; and the income statement impact of put option accounting and share-based payment charges. Note 1 shows a reconciliation between the Group's statutory results and the headline results.

M&C Saatchi plc

67

PREPARATION Continued

Significant accounting judgements and key sources of estimation uncertainty

In the course of preparing financial statements, management necessarily makes judgements and estimates that can have a significant impact on the financial statements. Estimates and judgements made are continually evaluated based on historical experience and other factors, including expectations of future events that are believed to be reasonable under the circumstances. The estimates and judgements that have a significant risk of causing a material adjustment to the financial statements in next financial year are outlined below.

Significant accounting judgements

Management has made the following judgements, which have the most significant effect in terms of the amounts recognised, and their presentation, in the consolidated financial statements.

Leasing judgements

There are no significant judgements made relating to leases. This is reflective of the straight forward nature of the leasing arrangements entered into by the Group, being principally leasehold property rentals for a fixed period of time.

Revenue recognition judgements

The Group recognises three critical judgements in terms of revenue which relate to (i) agent versus principal considerations;

1. the impact on the number of performance obligations in a contract which has integrated services; and
2. recognition of supplier discounts and rebates as revenue from contracts with customers.

Agent versus principal considerations

The Group enters into contracts with customers which include arrangements where it purchases services or goods from third parties on behalf of the client. In these instances, the Group considers the substance of the overall contract in order to assess whether such arrangements constitute the Group acting as either an Agent or as Principal.

The key judgement the Group makes when assessing whether it is acting as an Agent in a contractual relationship relates to whether it controls either the goods or the service prior to transfer to the customer. This assessment includes consideration of the following indicators of control:

• Is the Group responsible for fulfilling the promise to provide the goods or services in an acceptable format or to a satisfactory quality to meet the customer requirements?
• Does the Group direct the activity of the other party performing the service?
• Does the Group provide a service of integrating or combining the third-party goods or services with other goods or services?

In addition, certain of the Group's contractual arrangements where the Group is acting as Agent (specifically for Talent) have a significant time lag between the Group's involvement in arranging for services to be provided by a third party to a client, and the actual point at which these services are provided by the third party. In these instances, it has been concluded that the performance obligation related to arranging the services to be provided is completed once the services have been performed (as opposed to when they have been arranged to be performed).

Where the Group does not treat the income as an Agent it is treated as a Principal.

Identification of performance obligations for integrated services and their recognition as revenue The Group often enters into contracts with customers which include the provision of an array of services which are judged as representing a single performance obligation. Such instances arise where the overarching objective of the contract comprises a number of discrete activities which are integrated into the provision of a wider overall service. An example would be where the Group has been engaged to produce a client's media strategy. The formulation and delivery of this strategy is comprised of a number of individual services, but the delivery of the strategy is assessed as being the only performance obligation resident in the contract as the discrete services being supplied are not distinct in the context of the contract as a whole.

Management consider the following features of contractual arrangements entered into with customers when assessing whether a contract has a number of services which are not distinct and is thus comprised of a combined performance obligation:

• Can the client benefit from the individual goods or services promised in the contract on their own (or in combination with resources readily available to the client)?
• Can a single method of measuring progress of satisfaction of the combined performance obligation be applied which faithfully depicts the economics of the arrangement?
• Is there a single payment mechanism for the combined performance obligation?
• Does the Group perform a significant service of integrating the services provided and are these promised services highly interdependent?

68	M&C Saatchi plc

PREPARATION

Recognition of supplier discounts and rebates as revenue from contracts with customers

The Group receives discounts and rebates from certain suppliers for transactions entered into on behalf of clients, which the clients have agreed we can retain. When the contractual terms of the agreements entered into are such that the Group acts as Agent in these instances, then such rebates are recognised as revenue from contracts with customers. By contrast, when the contractual terms of the agreements are such that the Group is acting as principal then such rebates are recognised as a reduction in direct costs. Certain of the Group's clients, however, have contractual terms such that the pricing of their contracts is structured with the rebate being passed through to them. As such, the timing of recognition, the categorisation within the income statement and the valuation of this income is subject to judgement in terms of the amounts which are to be retained by the Group and amounts which are to be provided for in lieu of their pass through to clients.

Certain of the Group's clients, however, have contractual terms such that the pricing of their contracts is structured with the rebate being passed through to them. As such, the timing of recognition, the categorisation within the income statement and the valuation of the discount and rebates is subject to judgement in terms of the amounts which are to be retained by the Group and amounts which are to be provided for in lieu of their pass through to clients.

Other significant judgements

Minority interest put option accounting - IFRS 2 or IFRS 9

As noted on page 67 accounting for Minority Interest (MI) put options is a critical accounting policy. Ascertaining whether such put options should be accounted for under IFRS 9 or whether the awards fall within the scope of IFRS 2 is a key management judgement. We have revised our judgements in 2019 compared to prior years and per note 2 we have restated our historic financial statements in accordance with the new judgement.

The key feature of the awards made to MI (who hold an equity share in subsidiary enterprises) is whether the awards are given beneficially as a result of employment. Where there is an explicit service condition, if the award is given to an existing employee, or, if the employee is being paid below market value or other indicators that the award is a reward for employment, then the awards are accounted for as an equity-settledshare-based payment in exchange for employment services under IFRS 2 if these schemes are to be settled in equity. If the scheme is intended to be settled in cash, then the award is accounted for as a cash-settled share based payment and a liability is recognised to reflect the future cash efflux from the business. Otherwise, where the holder held shares prior to us acquiring the subsidiary or gained the equity to start a subsidiary using their unique skills, and there is no indicators it should be accounted for under IFRS 2, then the award is recognised as a liability held at amortised cost under IFRS 9.

The valuation of these awards represents sources of estimation uncertainty which are discussed below.

Impairment - assessment of CGUs and assessment of indicators of impairment

Where possible, impairment is assessed at the level of individual assets. When, however, this is not possible, then the Cash Generating Unit ('CGU') level is used. A CGU is the smallest identifiable asset or group of assets that generates independent cash flows. Judgement is applied to identify the Group's CGUs; however, they are typically comprised of the underlying entities (both trading subsidiaries and associates) which comprise the Group. This is on the basis that each of these entities represents a stand-alone operating business, none of which holds a cluster of assets which could constitute a CGU in their own right. Goodwill is always allocated to a CGU and never considered in isolation.

External and internal factors are monitored for indicators of impairment. In terms of such indicators, management typically consider adverse changes in the economy or political situation of the geographic locale in which the underlying entity operates in addition to risk of client loss or gain and internal reporting being indicative that an entity's future economic performance is better or worse than expected.

Where management have concluded that such an indication of impairment exists then the recoverable amount of the asset is assessed (see significant estimates).

Significant estimates and assumptions

Those areas of the Group's financial statements subject to key assumptions and other significant sources of estimation uncertainty at the reporting date that have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial year are described below. The Group has based its assumptions and estimates on parameters available when the financial statements were prepared.

Impairment

Management's approach for determining the recoverable amount of an individual asset or CGU is based on their value in use. Value in use calculations are compared with the carrying value of the CGU assets. The carrying value of the CGU's also include the Right of Use Assets under IFRS 16 (note 4). Generally, discounted cash flow models, based on 2020 budgets and a growth rate, are used to determine the recoverable amount of CGUs. The appropriate estimates and assumptions used require judgement and there is significant estimation uncertainty. The results of impairment reviews conducted at the end of the year are held in note 16 for those relating to Goodwill and note 17 for those relating to Associates. The variables used in the assessment of the recoverable amount include:

• budgets and estimated growth rate;
• discount rate used to calculate present value of future cash flows.

M&C Saatchi plc

69

PREPARATION Continued

Fair value measurement of financial instruments

The Group holds certain financial instruments which are recorded on the balance sheet at fair value at point of recognition and remeasured at the end of each reporting period. At the year end these relate to:

1. Equity investments at FVTPL in non-listed limited companies (note 20); and
2. and certain contingent consideration (note 15).

The equity investments include, but are not restricted to, small equity holdings in particular clients in exchange for services rendered in lieu of monetary based remuneration.

No formal market exists to trade these financial instruments and, therefore, their fair value is measured by the most appropriate valuation techniques available, which vary based on the nature of the instruments. The inputs to the valuation models are taken from observable markets where possible, but where this is not feasible, judgement is required in establishing fair values.

The basis of calculation of the estimated fair value of these financial instruments in addition to sensitivity analyses on the estimates salient inputs are detailed in note 30.

Share-based incentive arrangements

Share-based incentives are valued at the date of the grant using stochastic Monte Carlo pricing models with non-market vesting conditions. Typically, the value of these awards is directly related to performance of a particular entity of the Group in which the employee holds a minority interest in the equity. The key inputs to the pricing model are interest rates, share price volatility and expected future performance of the entity to which the award relates. Management apply judgement to these inputs used various sources of information, including the Group's share price, experience of past performance and published data on risk-free interest rates (government gilts).

Details of awards made in the year are held at note 28.

Leasing estimates

The adoption of IFRS 16 Leases creates a significant change to our balance sheet. Within IFRS 16 there are two estimates with regards to leases, such items are significant this year as it is the first time these estimates have been made. These relate to (i) determining the interest rate used for discounting of future cash flows, and (ii) the length of lease term.

Derivation of the interest rate used for discounting future cash flows

The discount rate used in the calculation of the lease liability involves estimation. Discount rates are calculated on a lease by lease basis. This involves estimate of incremental borrowing costs. These will depend on the territory of the relevant lease and hence territory risk (which comprises both the currency used and the risk free rates of that country); the date of lease inception; and the lease term. The spread of interest rates used to derive the appropriate quantum of asset and liability to be recognised at the inception of each lease is reflective of the diversity of the Group's lease portfolios.

Anticipated length of lease term

IFRS 16 defines the lease term as the non-cancellable period of a lease together with the options to extend or terminate a lease, if the lessee is reasonably certain to exercise that option. Where a lease includes the option for the Group to extend the lease term, the Group takes a view at inception as to whether it is reasonably certain that the option will be taken. This will take into account the length of time remaining before the option is exercisable; current trading; future trading forecasts as to the ongoing profitability of that aspect of the business; and the level and type of any planned capital investment. This view of if the option will be taken is reassessed at each reporting period. A reassessment of the remaining life of the lease could result in a recalculation of the lease liability and a material adjustment to the associated balances.

70	M&C Saatchi plc

CONSOLIDATED INCOME STATEMENT

		Year ended 31 December 2019			31 December 2018#
		Before	Exceptional
		exceptional	Total		Total
		items (note 3)
		items
Year ended 31 December	Note	£000	£000	£000	£000
Billings (unaudited)	1	561,426	-	561,426	603,652
Revenue	1, 6	381,025	-	381,025	417,366
Project cost / direct cost		(124,590)	-	(124,590)	(167,062)
Net revenue		256,435	-	256,435	250,304
Staff costs	7	(189,783)	(4,211)	(193,994)	(196,068)
Depreciation	18	(12,449)	-	(12,449)	(3,037)
Amortisation	16	(2,865)	-	(2,865)	(4,730)
Impairment charges	16	(5,874)	-	(5,874)	(4,167)
Other operating charges		(50,155)	(1,955)	(52,110)	(47,226)
Other gains / losses		(96)	-	(96)	1,584
Operating profit / (loss)	1	(4,787)	(6,166)	(10,953)	(3,340)
Share of result of and gain on disposal of Associates and Joint Ventures	17	13,210	-	13,210	2,825
Impairment of associate investment	17	(5,210)	-	(5,210)	(674)
Finance income	9	613	-	613	273
Finance expense	9	(6,233)	-	(6,233)	(4,472)
Loss before taxation	1	(2,407)	(6,166)	(8,573)	(5,388)
Taxation	10	(4,268)	1,012	(3,256)	(7,587)
Loss for the year		(6,675)	(5,154)	(11,829)	(12,975)
Attributable to:
Equity shareholders of the Group	1	(6,642)	(5,154)	(11,796)	(13,096)
Non-controlling interests	1	(33)	-	(33)	121
Loss for the year	1	(6,675)	(5,154)	(11,829)	(12,975)
Earnings per share
Basic (pence)	1	(7.36)p		(13.06)p		(15.52)p
Diluted (pence)	1	(7.36)p		(13.06)p		(15.52)p
Headline results
Operating profit	1			20,572	21,500
Profit before taxation	1			18,282	23,470
Profit after tax attributable to equity shareholders of the Group	1			8,073	11,256
Basic earnings per share (pence)	1			8.95p		13.34p
Diluted earnings per share (pence)	1			8.37p		12.37p

# Restated see note 2.

The notes on pages 66 to 70 and 78 to 143 form part of these consolidated financial statements.

M&C Saatchi plc

71

CONSOLIDATED STATEMENT OF OTHER COMPREHENSIVE INCOME

	2019	2018#
Year ended 31 December	£000	£000
Loss for the year	(11,829)	(12,975)
Other comprehensive income*
Exchange differences on translating foreign operations	(3,281)	869
Other comprehensive (loss) / income for the year net of tax	(3,281)	869
Total comprehensive loss for the year	(15,110)	(12,106)
Total comprehensive income attributable to:
Equity shareholders of the Group	(15,077)	(12,227)
Non-controlling interests	(33)	121
Total comprehensive loss for the year	(15,110)	(12,106)

# Result for the year ended 31 December 2018 has been restated, see note 2.

*All items in the consolidated statement of comprehensive income will be reclassified to the income statement The notes on pages 66 to 70 and 78 to 143 form part of these consolidated financial statements.

72	M&C Saatchi plc

CONSOLIDATED BALANCE SHEET

		2019	2018#	2017#
At 31 December	Note	£000	£000	£000
Non-current assets
Intangible assets	16	38,207	46,472	44,819
Investments in associates and JV	17	3,780	9,483	19,725
Plant and equipment	18	9,455	9,064	9,828
Right-of-use assets	19	46,542	-	-
Other non-current assets	20	3,923	4,248	9,325
Deferred tax assets	11	5,285	5,868	5,040
Financial assets at fair value through profit or loss	20a	14,851	14,041	-
		122,043	89,176	88,737
Current assets
Trade and other receivables	21	113,163	151,987	114,630
Current tax assets		5,956	313	945
Cash and cash equivalents		68,981	50,065	48,957
Non-current assets classified as held-for-sale	35	-	13,106	-
		188,100	215,471	164,532
Current liabilities
Trade and other payables	22	(140,035)	(161,267)	(131,996)
Provisions	23	(2,989)	-	-
Current tax liabilities		(1,014)	(3,444)	(989)
Borrowings	24	(52,212)	(14,060)	(3,731)
Lease liabilities	19	(10,770)	-	-
Deferred and contingent consideration	15	(445)	(752)	(377)
Minority shareholder put option liabilities	27	(3,183)	(9,947)	(5,979)
		(210,648)	(189,470)	(143,072)
Net current (liabilities) / assets		(22,548)	26,001	21,460
Total assets less current liabilities		99,495	115,177	110,197
Non-current liabilities
Deferred tax liabilities	11	(371)	(1,444)	(761)
Borrowings	24	(162)	(38,541)	(37,764)
Lease liabilities	19	(44,000)	-	-
Contingent consideration	15	(313)	(514)	(833)
Minority shareholder put option liabilities	27	(3,918)	(3,817)	(7,202)
Other non-current liabilities	25	(1,130)	(1,944)	(2,487)
		(49,894)	(46,260)	(49,047)
Total net assets		49,601	68,917	61,150

# Restated, see note 2.

The notes on pages 66 to 70 and 78 to 143 form part of these consolidated financial statements.

M&C Saatchi plc

73

CONSOLIDATED BALANCE SHEET

		2019	2018#	2017#
At 31 December	Note	£000	£000	£000
Equity
Share capital	29	936	876	813
Share premium		44,607	41,734	32,095
Merger reserve		33,400	30,150	30,150
Treasury reserve		(550)	(792)	(792)
Minority interest put option reserve		(4,953)	(15,082)	(15,661)
Non-controlling interest acquired		(32,239)	(22,081)	(21,040)
Foreign exchange reserve		1,181	4,462	3,593
Retained earnings		6,854	28,718	30,383
Equity attributable to shareholders of the Group		49,236	67,985	59,541
Non-controlling interest		365	932	1,609
Total equity		49,601	68,917	61,150

# Restated, see note 2. Reserves are defined in note 37.

These consolidated financial statements pages 66 to 143 were approved and authorised for issue by the Board of Directors on 7 December 2020 and signed on its behalf by:

Mickey Kalifa

Finance Director

M&C Saatchi plc

Company Number 05114893

The notes on pages 66 to 70 and 78 to 143 form part of these consolidated financial statements.

74	M&C Saatchi plc

CONSOLIDATED STATEMENT OF CHANGES IN EQUITY Continued

						MI put	Non-	Foreign			Non-
		Share	Share	Merger	Treasury	controlling	Retained	Subtotal	controlling	Total
		option	exchange
		capital	premium	reserve	reserve	interest	earnings	interest in
		reserve	reserves
						acquired			equity
	Note	£000	£000	£000	£000	£000	£000	£000	£000	£000	£000	£000
At 31 December 2018		876	46,667	31,592	(792)	(12,954)	(22,464)	4,593	34,195	81,713	7,207	88,920
Restated	2	-	(4,933)	(1,442)	-	(2,128)	383	(131)	(5,477)	(13,728)	(6,275)	(20,003)
At 31 December 2018#		876	41,734	30,150	(792)	(15,082)	(22,081)	4,462	28,718	67,985	932	68,917
Adjustment on initial application	4	-	-	-	-	-	-	-	(5,364)	(5,364)	-	(5,364)
of IFRS 16
Adjusted balance at 1 January		876	41,734	30,150	(792)	(15,082)	(22,081)	4,462	23,354	62,621	932	63,553
2019
Acquisitions of minority interest		-	-	-	-	-	(44)	-	-	(44)	-	(44)
Exercise of minority interest put	27	26	2,873	3,766	-	10,114	(10,114)	-	-	6,665	-	6,665
options
Exercise of share-based	28	34	-	-	242	-	-	-	(5,881)	(5,605)	-	(5,605)
payment schemes
Exchange rate movements		-	-	-	-	15	-	-	-	15	(5)	10
Issue of shares to minorities		-	-	-	-	-	-	-	-	-	309	309
Tax credit on fully charged		-	-	-	-	-	-	-	208	208	-	208
options
Reserve transfer following		-	-	(516)	-	-	-	-	516	-	-	-
impairment of goodwill
Share option charge	28	-	-	-	-	-	-	-	10,266	10,266	-	10,266
Dividends	12	-	-	-	-	-	-	-	(9,813)	(9,813)	(838)	(10,651)
Total transactions with owners		60	2,873	3,250	242	10,129	(10,158)	-	(4,704)	1,692	(534)	1,158
Total comprehensive loss for		-	-	-	-	-	-	(3,281)	(11,796)	(15,077)	(33)	(15,110)
the year
At 31 December 2019		936	44,607	33,400	(550)	(4,953)	(32,239)	1,181	6,854	49,236	365	49,601

# Restated, see note 2.

M&C Saatchi plc

75

CONSOLIDATED STATEMENT OF CHANGES IN EQUITY

						MI put	Non-	Foreign			Non-
		Share	Share	Merger	Treasury	controlling	Retained	Subtotal	controlling	Total
		option	exchange
		capital	premium	reserve	reserve	interest	earnings	interest in
		reserve	reserves
						acquired			equity
	Note	£000	£000	£000	£000	£000	£000	£000	£000	£000	£000	£000
At 31 December 2017		813	32,095	31,592	(792)	(13,958)	(21,040)	3,593	25,235	57,538	6,532	64,070
Restatement	2	-	-	(1,442)	-	(1,703)	-	-	5,148	2,003	(4,923)	(2,920)
At 31 December 2017#		813	32,095	30,150	(792)	(15,661)	(21,040)	3,593	30,383	59,541	1,609	61,150
Adjustment on initial application		-	-	-	-	-	-	-	28	28	-	28
of IFRS 15
Adjustment on initial application		-	-	-	-	-	-	-	2,971	2,971	-	2,971
of IFRS 9
At 1 January 2018#		813	32,095	30,150	(792)	(15,661)	(21,040)	3,593	33,382	62,540	1,609	64,149
Acquisitions		18	6,484	-	-	-	-	-	-	6,502	-	6,502
Acquisitions of minority interest		-	-	-	-	-	(319)	-	-	(319)	-	(319)
Exercise of minority interest put	27	11	2,697	-	-	722	(722)	-	-	2,708	-	2,708
options
Exercise of share-based	28	33	-	-	-	-	-	-	(141)	(108)	-	(108)
payment schemes
Exchange rate movements		-	-	-	-	31	-	-	-	31	24	55
Deferred consideration		1	458	-	-	-	-	-	-	459	-	459
Issue of shares to minorities		-	-	-	-	(174)	-	-	87	(87)	5	(82)
Share option charge	28	-	-	-	-	-	-	-	16,864	16,864	-	16,864
Dividends	12	-	-	-	-	-	-	-	(8,378)	(8,378)	(827)	(9,205)
Total transactions with owners		63	9,639	-	-	579	(1,041)	-	8,432	17,672	(798)	16,874
Total comprehensive loss for		-	-	-	-	-	-	869	(13,096)	(12,227)	121	(12,106)
the year
At 31 December 2018#		876	41,734	30,150	(792)	(15,082)	(22,081)	4,462	28,718	67,985	932	68,917

# Restated, see note 2.

The notes on pages 66 to 70 and 78 to 143 form part of these consolidated financial statements.

76	M&C Saatchi plc

CONSOLIDATED CASH FLOW STATEMENT AND ANALYSIS OF NET DEBT

		2019	2018#
Year ended 31 December	Note	£000	£000
Operating loss		(10,953)	(3,340)
Adjustments for:
Non-cash consideration for services rendered
Depreciation of plant and equipment	18	3,390	3,037
Depreciation of right-of-use assets	19	9,059	-
Loss on sale of plant and equipment		122	81
Impairment of plant and equipment		-	2,289
Loss on sale of software intangibles	16	266	9
Increase in financial assets at FVTPL	20a	346	(1,584)
Amortisation of acquired intangible assets	16	2,471	4,427
Impairment of goodwill and other intangibles	16	5,874	1,878
Amortisation of capitalised software intangible assets	16	394	303
Exercise of share-based payment schemes with cash		(5,605)	(108)
Equity settled share-based payment expenses	28	10,266	16,864
Operating cash before movements in working capital		15,630	23,856
Decrease / (Increase) in trade and other receivables		45,434	(48,386)
(Increase) / Decrease in contract assets		(5,560)	13,471
(Decrease) / Increase in trade and other payables		(18,514)	25,340
Increase in provisions		2,989	-
Decrease in contract liabilities		(4,219)	(1,158)
Cash generated from operations		35,760	13,123
Tax paid		(7,767)	(6,018)
Net cash from operating activities		27,993	7,105
Investing activities
Acquisitions of subsidiaries net of cash acquired	14	(635)	953
Disposal of associate (net of costs)	35	23,264	-
Acquisitions of associates	17	-	(904)
Acquisitions of unlisted investments	20a	(964)	(780)
Proceeds from sale of plant and equipment		30	77
Purchase of plant and equipment	18	(4,091)	(4,597)
Purchase of capitalised software	16	(1,710)	(1,046)
Dividends received from associates	17	2,928	428
Interest received		632	273
Net cash consumed investing activities		19,454	(5,596)
Net cash from operating and investing activities		47,447	1,509

		2019	2018#
Year ended 31 December	Note	£000	£000
Net cash from operating and investing activities		47,447	1,509
Financing activities
Dividends paid to equity holders of the Company	12	(9,813)	(8,378)
Dividends paid to non-controlling interest		(838)	(827)
Proceeds from issue of shares to non-controlling		9	85
interests
Cash consideration for non-controlling interest acquired	14	(3,269)	(404)
Repayment of finance leases		-	(45)
Payment of lease liabilities	19	(10,638)	-
Repayment of invoice discounting (net)		(2,001)	(914)
Proceeds from bank loans		15,038	9,100
Repayment of bank loans		(17,318)	(9,462)
Interest paid	9	(1,485)	(1,355)
Interest paid on leases	19	(1,837)	-
Net cash consumed by financing activities		(32,152)	(12,200)
Net increase / (decrease) in cash and cash		15,295	(10,691)
equivalents
Effect of exchange rate fluctuations on cash held		(857)	45
Cash and cash equivalents at the beginning of the year		38,311	48,957
Total cash and cash equivalents at the end of the		52,749	38,311
year
Cash and cash equivalents**		68,981	50,065
Bank overdrafts*	24	(16,232)	(11,754)
Total cash and cash equivalents at the end of the		52,749	38,311
year
Bank loans and borrowings***	24	(36,179)	(40,819)
Net cash / (debt)		16,570	(2,508)

# Restated, see note 2.

• These overdrafts are legally offset against balances in held in the UK; however, they have not been netted off in accordance with the requirements of IAS32.42.
• Cash and cash equivalents of £1,657k is held in a country with restrictions on remittances, but where the balances could be used to repay subsidiaries' expected future third party liabilities.
• Bank loans and borrowings are defined in note 24, they exclude our lease liability of £54,770k (1 January 2019 £43,739k) (note 19)

The notes on pages 66 to 70 and 78 to 143 form part of these consolidated financial statements.

M&C Saatchi plc

77

NOTES

1. Headline results and earnings per share

The analysis below provides a reconciliation between the Group's statutory results and the headline results.

		Statutory			Impairment
			Amortisation	of non-	Gain on	FVTPL	Revaluation	Dividends	Put option
			Exceptional
			of acquired	current	disposal of	investments	of contingent	paid to IFRS2	accounting	Headline
			items (note
		2019	intangibles	assets	associates	under IFRS	consideration	put holders	(note 27	results
		3)
			(note 16)	(note 16	(note 35)	9 (note 20a)	(note 15)	(note 7)*	and 28)
					and 17)
Year ended 31 December 2019	Note	£000	£000	£000	£000	£000	£000	£000	£000	£000	£000
Billings (unaudited)		561,426	-	-	-	-	-	-	-	-	561,426
Revenue		381,025	-	-	-	-	-	-	-	-	381,025
Net revenue		256,435	-	-	-	-	-	-	-	-	256,435
Staff costs	7	(193,994)	4,211	-	-	-	-	-	5,841	10,608	(173,334)
Depreciation - non lease**	18	(3,390)	-	-	-	-	-	-	-	-	(3,390)
Depreciation - lease**	19	(9,059)	-	-	-	-	-	-	-	-	(9,059)
Amortisation	16	(2,865)	-	2,471	-	-	-	-	-	-	(394)
Impairments	16	(5,874)	-	-	5,874	-	-	-	-	-	-
Other operating charges		(52,110)	1,955	-	-	-	92	127	-	-	(49,936)
Other gains/losses		(96)	-	-	-	-	346	-	-	-	250
Operating (loss) / profit		(10,953)	6,166	2,471	5,874	-	438	127	5,841	10,608	20,572
Share of results of associates and JV	17	13,210	-	-	-	(12,980)	-	-	-	-	230
Impairment of associate investment	17	(5,210)	-	-	5,210	-	-	-	-	-	-
Finance income - non lease**	9	522	-	-	-	-	-	-	-	-	522
Finance income - lease**	9	91	-	-	-	-	-	-	-	-	91
Finance expense - non lease**	9	(4,396)	-	-	-	-	279	-	-	2,821	(1,296)
Finance expense - lease**	9	(1,837)	-	-	-	-	-	-	-	-	(1,837)
(Loss) / profit before taxation		(8,573)	6,166	2,471	11,084	(12,980)	717	127	5,841	13,429	18,282
Taxation	10	(3,256)	(1,012)	(620)	-	(281)	(139)	-	-	6	(5,302)
(Loss) / profit for the year		(11,829)	5,154	1,851	11,084	(13,261)	578	127	5,841	13,435	12,980
Non-controlling interests		33	-	(247)	-	-	-	-	(4,693)	-	(4,907)
(Loss) / profit attributable to equity		(11,796)	5,154	1,604	11,084	(13,261)	578	127	1,148	13,435	8,073
holders of the Group***

• Details of this breakdown can be found in note 7, Staff costs. The non-controlling interest charge is moved to operating profit due to underlying equity being defined as a conditional share award.
• The impact of the adoption of IFRS 16 (note 4) with regards to additional depreciation and interest charges relating to leases is shown by separate line items in order to improve comparability to the 2018 result presented overleaf.
• Headline earnings are profit attributable to equity holders of the Group after adding back the adjustments noted above. The increase is calculated as the difference between 2019 and 2018 measures. Headline operating margin is

calculated as: Headline operating profit divided by net revenue.

78	M&C Saatchi plc

NOTES Continued

1. Headline results and earnings per share continued

The analysis below provides a reconciliation between the Group's statutory results and the headline results.

			Amortisation	Impairment	Impairment	FVTPL	Revaluation	Capital		Put option
			gain tax	Dividends paid to
		Statutory	of acquired	of acquired	of	Investments	of contingent	accounting	Headline
		on issue	IFRS2 put holders
		2018#	intangibles	intangibles	associates	under IFRS 9	consideration	(note 27	results
		of put	(note 7)**
			(note 16)	(note 16)	(note 17)	(note 20a)	(note 15)	and 28)***
			options*
Year ended 31 December 2018#	Note	£000	£000	£000	£000	£000	£000	£000	£000	£000	£000
Billings (unaudited)		603,652	-	-	-	-	-	-	-		603,652
Revenue		417,366	-	-	-	-	-	-	-		417,366
Net revenue		250,304	-	-	-	-	-	-	-	-	250,304
Staff costs	7	(196,068)	-	-	-	-	-	-	3,106	17,178	(175,784)
Depreciation	18	(3,037)	-	-	-	-	-	-	-	-	(3,037)
Amortisation	16	(4,730)	4,427	-	-	-	-	-	-	-	(303)
Impairments	16	(4,167)	-	1,269	-	-	-	-	-	-	(2,898)
Other operating charges		(47,226)	-	-	-	-	-	-	-	-	(47,226)
Other gains/losses		1,584	-	-	-	(1,177)	37	-	-	-	444
Operating (loss) / profit		(3,340)	4,427	1,269	-	(1,177)	37	0	3,106	17,178	21,500
Share of results of associates and JV	17	2,825	-	-	-	-	-	-	-	-	2,825
Impairment of associate investment	17	(674)	-	-	674	-	-	-	-	-	-
Finance income	9	273	-	-	-	-	-	-	-	-	273
Finance cost	9	(4,472)	-	-	-	229	-	-	-	3,115	(1,128)
(Loss) / profit before taxation		(5,388)	4,427	1,269	674	(948)	37	-	3,106	20,293	23,470
Taxation	10	(7,587)	(1,021)	-	-	179	-	517	-	(403)	(8,315)
(Loss) / profit for the year		(12,975)	3,406	1,269	674	(769)	37	517	3,106	19,890	15,155
Non-controlling interests		(121)	(937)	-	-	-	-	-	(2,841)	-	(3,899)
(Loss) / profit attributable to equity		(13,096)	2,469	1,269	674	(769)	37	517	265	19,890	11,256
holders of the Group****

# The statutory result for year ended 31 December 2018 has been restated in addition to the add back of intangible impairments reducing by £0.9million from £2.2million to £1.3million. Detailed in note 2.

• As part of setting up equity schemes in Australia, subsidiary equity was disposed of which created a local profit on disposal. On consolidation the profit on disposal has been eliminated (IFRS 10.23); however, the capital gains tax and non-controlling interest effect has not been so removed.
• Details of this breakdown can be found in note 7. The non-controlling interest charge is moved to operating profit due to underlying equity being defined as a conditional share award.
• These values represent put options accounted for as conditional share awards (£17,097k) (note 28) and fair value adjustments to minority put option liabilities (£3,115k) (note 27).
• Headline earnings are profit attributable to equity holders of the Group after adding back the adjustments noted above. The increase is calculated as the difference between 2019 and 2018 measures. Headline operating margin is calculated as: Headline operating profit divided by net revenue.

M&C Saatchi plc

79

NOTES Continued

1. Headline results and earnings per share continued

Policy

Basic and diluted earnings per share are calculated by dividing appropriate earnings metrics of the Group by the weighted average number of shares in issue during the year.

Diluted earnings per share is calculated by adjusting the weighted average number of ordinary shares in issue on the assumption of conversion of all potentially dilutive ordinary shares. Anti-dilutive potential ordinary shares are excluded. The dilutive effect of unvested outstanding options is calculated based on the number that would vest had the balance sheet date been the vesting date.

	Before		Headline
	exceptionals	2019
		2019
	2019
Year ended 31 December 2019	£000	£000	£000
(Loss) / profit attributable to equity shareholders of the Group	(6,642)	(11,796)	8,073
Basic earnings per share
Weighted average number of shares (thousands)	90,253	90,253	90,253
Basic EPS	(7.36)p	(13.06)p	8.95p
Diluted earnings per share
Weighted average number of shares (thousands) as above	90,253	90,253	90,253
Add
- Conditional shares	-	-	3,650
- Put option	-	-	2,316
- Contingent consideration	-	-	281
Total	90,253	95,253	96,500
Diluted earnings per share	(7.36)p	(13.06)p	8.37p

80	M&C Saatchi plc

NOTES Continued

1. Headline results and earnings per share continued

	2018#	Headline
	2018#
Year ended 31 December 2018	£000	£000
(Loss) / profit attributable to equity shareholders of the	(13,096)	11,256
Group
Basic earnings per share
Weighted average number of shares (thousands)	84,360	84,360
Basic EPS	(15.52)p	13.34p
Diluted earnings per share
Weighted average number of shares (thousands) as above	84,360	84,360
Add
- Conditional shares	-	6,361
- Put option	-	-
- Contingent consideration	-	308
Total	84,360	91,029
Diluted earnings per share	(15.52)p	12.37p

# Statutory profit and diluted number of shares for the year ended 31 December 2018 has been restated, see note 2.

M&C Saatchi plc

81

NOTES Continued

2. Prior year misstatements

As explained in the Finance Director's Review, the Company experienced significant difficulty in validating some of its accounting records for periods prior to 2019. The combination of relatively poor accounting records for the period prior to 2019, coupled with the departure of senior finance personnel made this exercise and the audit all the more difficult and time consuming. As such, the adjustments made in respect of earlier accounting periods must be taken as management's best estimates using the available evidence.

As detailed on page 10 of the Strategic Report, the Group has identified accounting errors relating to transactions recognised in periods prior to 2019. Subsequent to an independent forensic review carried out by PwC and a further internal review performed during the last quarter of 2019, we have identified £14.0m of adjustments impacting the headline profit before tax for the year ended 31 December 2018 and earlier periods. Had such headline contributions to specific businesses performance been known at the time there would also have been £2.8m impairment of goodwill at the end of 2017. Accordingly, this has been adjusted for as at 1 January 2018 (note 2a) to reflect the actual state of these businesses in contrast to their inflated profitability. Separately, a review of put option accounting, and a change to accounting practice relating to LLPs resulted in a further total profit reduction of £8.5m. An important distinction which requires highlighting is that these additional adjustments to put option accounting are as a result of a review of significant judgements to be made regarding accounting as opposed to the erroneous accounting which triggered the £14.0million headline profitability overstatement.

The misstatements have been corrected in accordance with the requirements of IAS 8 as follows:

• Where a misstatement has been attributed to the financial year ended 31 December 2018, the comparative amounts related to the error have been restated in the 2019 Annual Report.
• Where a misstatement is known to relate to periods prior to 2018 it has been recognised by adjusting the most recent comparative position presented - being the balance sheet as at 1 January 2018.
• Where it has been impracticable to accurately attribute a misstatement to a specific accounting period then the earliest comparative period presented has been adjusted - being by adjustments to the assets, liabilities and equity as at 1 January 2018 (i.e. the identical balance sheet to that described in the second bullet point above). We provide commentary on these items below.

The accounting misstatements have been classified by separation into the following categories:

• Trading adjustments - Adjustments principally arising from misstatements of accrued income and amounts receivable which would have arisen as a result of services provided to our clients but for which no provision of such service is believed to have been performed. Thus such receivables required elimination from the financial statements.
• Non-tradingadjustments - Adjustments arising from misstatements in terms of not recognising certain staff and operating costs which are not directly related to the servicing of our clients.
• Non-currentasset adjustments - Adjustments arising from overstatement in the value of plant and equipment or intangible assets (both Goodwill and capitalised software costs). For example, fixed assets which ceased to exist following office refurbishment

works of previous years but which were continued to be held on the fixed asset register and instances where intangible assets had been capitalised inappropriately due to the absence of their having future economic benefit to the Group.

• Put option accounting adjustments - Adjustments arising from a full internal review by management as to the appropriateness of management judgements required when determining the requisite accounting for put option incentive schemes. Such review facilitated by the latest interpretations of IFRS and events having occurred which were not previously available, such as the views of the new Audit Committee.
• Financial reporting adjustments - Adjustments arising from incorrect and unsubstantiated journal entries made in the 2018 year-end consolidation process or in relation to misclassification of balances (such as holding an investment as an other receivable).

Commentary relating to those adjustments which were impracticable to identify to the specific accounting period to which they relate

All adjustments relating to put options and financial reporting adjustments were able to be accurately attributed to the correct financial period.

Adjustments relating to non-current assets (fixed assets, software and Goodwill) were able to be attributed to the correct reporting period, with the exception of certain of the fixed assets. This was as a result of a material number of fixed assets having inadequate descriptions to be able to identify what they relate to.

There are also a material number of items relating to trading and non-trading activities which were unable to be attributed to a specific reporting period. This was as a result of a lack of records, inadequate descriptions and the departure from the business of management who were involved in the accounting across a number of years.

Index of misstatement tables

The effect of these misstatements on the statements previously presented in the 2018 Annual Report are presented separately in the following tables:

• Note 2(a) - Effect on Balance sheet and reserves as at 1 January 2018.
• Note 2(b) - Impact on income statement for year ended 31 December 2018.
• Note 2(c) - Tabular presentation of Income statement adjustments to clarify overall impact upon profit before and after tax with explanations as to component elements.
• Note 2(d) - Effect on Balance sheet and reserves as at 31 December 2018.
• Note 2(e) - Explanatory note of the composition of the put option accounting adjustments.
• Note 2(f) - Sundry other relevant matters required to be mentioned as a result of the identified accounting misstatements.

82	M&C Saatchi plc

NOTES Continued

2(a) Impact of misstatements on consolidated balance sheet as at 1 January 2018

Consolidated balance sheet - as at 1 January 2018

	As			Non-		Financial
	Trading	Non-trading	current	Put option	Total	As
	previously	reporting
	adjustments	adjustments	asset	adjustments	adjustments	restated
	reported	adjustments
			adjustments
	£000	£000	£000	£000	£000	£000	£000	£000
Non-current assets
Intangible assets	48,515	-	-	(3,696)	-	-	(3,696)	44,819
Investments in associates	19,725	-	-	-	-	-	-	19,725
Plant and equipment	12,269	-	-	(2,441)	-	-	(2,441)	9,828
Other non-current assets	9,325	-	-	-	-	-	-	9,325
Deferred tax assets	4,797	-	-	-	243	-	243	5,040
Financial assets at FVTPL	-	-	-	-	-	-	-	-
	94,631	-	-	(6,137)	243	-	(5,894)	88,737
Current assets
Trade and other receivables	120,096	(1,799)	(372)	-	-	(3,295)	(5,466)	114,630
Current tax assets	945	-	-	-	-	-	-	945
Cash and cash equivalents	48,957	-	-	-	-	-	-	48,957
Non-current assets Held-for-sale	-	-	-	-	-	-	-	-
	169,998	(1,799)	(372)	-	-	(3,295)	(5,466)	164,532
Current liabilities
Trade and other payables	(128,256)	-	(350)	-	(3,390)	-	(3,740)	(131,996)
Current tax liabilities	(1,221)	335	82	(185)	-	-	232	(989)
Minority shareholder put option liabilities	(14,813)	-	-	-	11,312	(2,478)	8,834	(5,979)
Other current liabilities	(4,108)	-	-	-	-	-	-	(4,108)
	(148,398)	335	(268)	(185)	7,922	(2,478)	5,326	(143,072)
Net current assets	21,600	(1,464)	(640)	(185)	7,922	(5,773)	(140)	21,460
Total assets less current	116,231	(1,464)	(640)	(6,322)	8,165	(5,773)	(6,034)	110,197
liabilities
Non-current liabilities
Minority shareholder put option liabilities	(10,316)	-	-	-	6,758	(3,644)	3,114	(7,202)
Other non-current liabilities	(41,845)	-	-	-	-	-	-	(41,845)
Total non-current liabilities	(52,161)	-	-	-	6,758	(3,644)	3,114	(49,047)
Total net assets	64,070	(1,464)	(640)	(6,322)	14,923	(9,417)	(2,920)	61,150

M&C Saatchi plc

83

NOTES Continued

Total adjustment to equity:

Consolidated balance sheet - as at 1 January 2018

	As			Non-		Financial
	Trading	Non-trading	current	Put option	Total	As
	previously	reporting
	adjustments	adjustments	asset	adjustments	adjustments	restated
	reported	adjustments
			adjustments
	£000	£000	£000	£000	£000	£000	£000	£000
Minority interest put option	(13,958)							(15,661)
reserve	-	-	-	4,419	(6,122)	(1,703)
Non-controlling interest	(21,040)							(21,040)
acquired	-	-	-	-	-	-
Non-controlling interest	6,532	-	-	-	(4,923)	-	(4,923)	1,609
Retained earnings	25,235	(1,464)	(640)	(4,880)	15,427	(3,295)	5,148	30,383
Merger reserve	31,592	-	-	(1,442)	-	-	(1,442)	30,150
Other reserves	35,709	-	-	-	-	-	-	35,709
	64,070	(1,464)	(640)	(6,322)	14,923	(9,417)	(2,920)	61,150

84	M&C Saatchi plc

NOTES Continued

2(b) Impact of misstatements on consolidated income statement for year ended 31 December 2018

	As	Trading	Non-trading	Non-current	Put option	Financial	Total
	previously	asset	reporting	As restated
	adjustments	adjustments	adjustments	adjustments
	reported	adjustments	adjustments
	£000	£000	£000	£000	£000	£000	£000	£000
Billings (unaudited)	609,610	(4,789)	-	-	-	(1,169)	(5,958)	603,652
Revenue	422,404	(3,869)	-	-	-	(1,169)	(5,038)	417,366
Project cost / direct cost	(167,031)	10	-	-	-	(41)	(31)	(167,062)
Net revenue	255,373	(3,859)	-	-	-	(1,210)	(5,069)	250,304
Staff costs	(182,536)	-	(379)	-	(12,880)	(273)	(13,532)	(196,068)
Depreciation	(3,558)	-	-	521	-	-	521	(3,037)
Amortisation	(4,730)	-	-	-	-	-	-	(4,730)
Impairment charges	(2,869)	(70)	-	(1,902)	-	674	(1,298)	(4,167)
Other operating charges	(46,496)	70	(800)	-	-	-	(730)	(47,226)
Other gains / losses	1,584	-		-	-	-	-	1,584
Operating profit	16,768	(3,859)	(1,179)	(1,381)	(12,880)	(809)	(20,108)	(3,340)
Share of results of	2,825	-	-	-	-	(674)	(674)	2,151
associates
Finance income	273	-	-	-	-	-	-	273
Finance costs	(2,268)	-	-	-	(2,204)	-	(2,204)	(4,472)
Profit before taxation	17,598	(3,859)	(1,179)	(1,381)	(15,084)	(1,483)	(22,986)	(5,388)
Taxation	(6,635)	(127)	158	(1,149)	61	105	(952)	(7,587)
Profit for the year	10,963	(3,986)	(1,021)	(2,530)	(15,023)	(1,378)	(23,938)	(12,975)
Attributable to:
Equity shareholders of the	8,255	(3,986)	(1,021)	(2,530)	(12,436)	(1,378)	(21,351)	(13,096)
Group
Non-controlling interests	2,708	-	-	-	(2,587)	-	(2,587)	121
Profit for the year	10,963	(3,986)	(1,021)	(2,530)	(15,023)	(1,378)	(23,938)	(12,975)
Earnings per share
Basic (pence)	9.79p							(15.52)p
Diluted (pence)	9.15p							(15.52)p

The nature and composition of the categories of misstatements presented above is explained below in section 2(c).

M&C Saatchi plc

85

86

NOTES Continued

2(c) - All Income statement adjustments to clarify overall impact upon Profit before tax

In aggregate the prior years' adjustments identified as being required are split between 2018 and prior to 2018 as follows:

Total	PBT £'000	Tax £'000	PAT £'000
Pre 2018 Adjustments	(5,158)	475	(4,683)
In year 2018 Adjustments	(22,986)	(952)	(23,938)
Total profit impact	(28,144)	(477)	(28,621)

The aggregate of the prior year adjustments in terms of categories presented are as follows:

				During
			Pre-2018	2018	Total
			£000	£000	£000
Trading			(1,799)	(3,859)	(5,658)
Non-trading			(463)	(1,179)	(1,642)
Non-current assets impairment			(2,441)	(2,307)	(4,748)
Financial reporting			(505)	(1,483)	(1,988)
Headline PBT impact			(5,208)	(8,828)	(14,036)
Financial reporting			(2,790)	-	(2,790)
Put options			6,536	(15,084)	(8,548)
Goodwill and intangible			(3,696)	926	(2,770)
Statutory PBT impact			(5,158)	(22,986)	(28,144)
Tax			475	(952)	(477)
PAT impact			(4,683)	(23,938)	(28,621)
Pre-2018 adjustments
Pre 2018 Adjustments
Item	£'000		Description
Revenue	(1,989)		Revenue recognised with no support
Project cost	(313)		Costs not recognised
Staff costs	305		Add back of 2017 staff bonus expense
Staff costs	(2,790)		Incorrect accounting of LLP dividends
Other operating charges	(770)		Operating costs not recognised
Impairments - tangible fixed assets	(2,441)		Impairment of non-current assets identified as not existing
Impairments - intangible assets	(3,696)		Goodwill impairments and other intangibles
Put option adjustments	6,536		Judgement change relating to put options accounting
PBT effect	(5,158)
Tax - add back	475
PAT effect	(4,683)

The difference between the pre 2018 profit adjustments above and the increase in retained earnings of £5,148k is largely due to put option adjustments i.e. the release of share option charges to retained earnings.

Profit impacting adjustments

Revenue adjustments relate to instances where a number of UK businesses had recognised revenue which had no support as to its validity to be so recognised.

Project cost and operating charge adjustments relate to expenses and their corresponding liabilities which had not been recognised during the course of normal business which should have been so recognised.

The add back of staff costs arises as a result of a timing issue relating to the recognition of a 2017 bonus expense in 2018 (and consequently requires reversal).

The incorrect accounting of LLP dividends relates to the incorrect accounting of dividends paid to members of the Group's LLP entities from 2017 and earlier has been made to statutory profit before tax. This adjustment has no impact on 2018 headline profit before tax.

The additional impairments (exclusive of goodwill) relate to both plant and equipment and intangible assets. A total net book value of £2.4m plant and equipment was identified as not existing as at 1 January 2018 and £0.1m of intangibles was identified as having been inappropriately capitalised due to the lack of future economic benefits arising at the point of capitalisation.

The Goodwill impairments relate to write downs of goodwill attached to the PR and LIDA UK businesses. A CGU reallocation was not performed when the UK business was reorganised in 2016. If this had been carried out at the time these impairments would have been recognised at the end of 2017. Note, £926k impairment of Goodwill ascribed to LIDA was originally recognised during 2018. As this has now been taken as a pre-2018 charge it is consequently added back to the 2018 Income Statement (described below).

The add back of put option charges relates to changes in the interpretation of judgements originally made at the point of inception of the awards.

Balance sheet only adjustment

One significant non-profit impacting adjustment is also relevant to the understanding of a user of the financial statements. This item relates to a put option award made to senior management of an Australian subsidiary. This is considered a financial reporting adjustment due to its manifestation as not relating to judgements around put option accounting and in fact being a result of it never having been previously accounted for.

The adjustment requires recognition of a minority shareholder put options liability of £6.1m, with the corresponding entry being taken to reserves. This has been recognised due to a significant management incentive scheme awarded in 2017 having not been previously included within the Annual Report.

M&C Saatchi plc

NOTES Continued

2018 Adjustments

The adjustments relating to the year ended 31 December 2018 are as described below.

Trading adjustments

Item	£000	Description
Revenue	(3,869)	Inappropriate recognition of revenue
Project cost	10	Inappropriate recognition of costs
PBT effect	(3,859)
Tax - add back	(127)
PAT effect	(3,986)

An overstatement of revenue by £3.7million was identified, with a corresponding overstatement of accrued income, across a number of businesses. One UK business accounted for £1.6million of this error, the LA business contributed £0.5million and the balance of £1.6million related a number to of smaller errors amongst a number of other UK businesses.

In addition, another UK business had not appropriately applied IFRS 15 on transition, with the result that revenue had been understated by approximately £1.0million. This was, however, offset by £1.2million of inter-company trading costs incurred during 2018, but which had not been accounted for.

Non-trading adjustments

Item	£000
Staff costs	(379)	Staff bonuses not accrued in correct period
Other operating charges	(800)	Operating costs not recognised
PBT effect	(1,179)
Tax - add back	158
PAT effect	(1,021)

Adjustments made to staff costs were comprised of two principal items:

• Failure to accrue for Australian staff bonuses at the end of 2018 totalling £0.2m; and
• No accounting entries made for freelance staff employed at one UK business from September 2018 until the end of the year.

The increase in other operating charges of £0.8m relates to a number of instances where known and predictable costs (such as rates) had not been accrued in the period to which such expense related.

Non-current asset adjustments

Item	£'000	Description
Impairment	(2,828)	Non-current assets identified as not existing
Reversal of impairment	926
Depreciation (add back)	521	Resultant reduction in depreciation charge
PBT effect	(1,381)
Tax - additional	(1,149)
PAT effect	(2,530)

Non-current assets which should have been impaired during 2018 include both tangible fixed assets and intangible assets (software).

Fixed assets were concluded as not existing. In total a net book value of £2.3m of fixed assets required elimination. The specific categories of fixed asset to which these items relate is detailed in note 18.

Further, as a result of the fixed asset impairments described above for 2018 and 2017 the depreciation charge for 2018 reduced by £0.5m.

Adjustments required to be made to software intangible assets total £0.5m. These relate to an instance at one UK business unit where, based on the reviews conducted during 2019, intangible assets had been recognised during 2018 which were not capital in nature (as there was no future economic benefits due to be generated from the related cost) and should have been treated as an expense in their year of occurrence.

There were no adjustments relating to impairment of Goodwill identified for 2018 other than the LIDA impairment of £0.9million now recognised during 2017, as opposed to 2018, described above in the pre-2018 adjustment commentary.

Put option adjustments

Item	£000	Description
Staff costs	(12,880)	Change in judgement affecting the fundamental basis for the
Finance costs	(2,204)	accounting of put options awarded by the Group
PBT effect	(15,084)
Tax - additional	61
PAT effect	(15,023)

Adjustments arising through put options are explained in detail at note 2(e). These adjustments principally arise as a result of a reassessment of judgements surrounding the Company's share schemes, such as the South African items. This updated view of the judgments has changed the fundamental basis of the accounting of put options and the application of the relevant elements of IFRS.

M&C Saatchi plc

87

NOTES Continued

Financial reporting adjustments

Item	£000	Description
Revenue	(1,169)	UK sub-group consolidation journals with no support
Project cost	(41)	Prior year audit unadjusted error
Staff costs	(273)	Prior year audit unadjusted error
PBT effect	(1,483)
Tax - add back	105
PAT effect	(1,378)

These items principally relate to two types of profit-impacting identified accounting errors:

• Those relating to a number of adjustments which were posted to a subsidiary consolidation of a number of UK corporate entities. Due to the poor quality of accounting records available for subsequent review in the latter part of 2019 these consolidation adjusting journals have been concluded as incorrect and thus eliminated. This correction has resulted in a £1.2m charge to the income statement for the year ended 31 December 2018.
• Also included are the prior year unadjusted audit misstatements identified by the previous auditors which were concluded as not being material to the 2018 Annual Report, and accordingly not adjusted for as permitted under International Standards of Auditing. These unadjusted items represented a £0.3m charge to the income statement and was not previously recognised subsequent to discussions between the then incumbent auditors and the then Audit Committee. These items have now been adjusted due to the material nature of the other adjustments described within this note.

Finally, £1.1m of trade and other receivables have been redefined on balance sheet as financial assets at FVTPL, as these relate to equity received in return for services supplied and £0.7m of impairments relating to the Group's Asian Associates have been reanalysed to share of results of associates. The balance sheet has been grossed up to reconcile other debtors and accruals of £12.9m in relation to third party media spend where the Group is an agent. These adjustments are not profit impacting.

88	M&C Saatchi plc

NOTES Continued

2(d) Impact of misstatements on consolidated balance sheet as 31 December 2018

Consolidated balance sheet - for the year ended 31 December 2018

	As	Pre 2018			Non-	Put option	Financial
	Trading	Non-trading	current	Total	As
	previously	adjustments	adjustments	reporting
	adjustments	adjustments	asset	adjustments	restated
	reported	(Note 2a)	(note 2e)	adjustments
			adjustments
	£000	£000	£000	£000	£000	£000	£000	£000	£000
Non-current assets
Intangible assets	49,780	(3,696)	-	-	388	-	-	(3,308)	46,472
Investments in associates	9,483	-	-	-	-	-	-	-	9,483
Plant and equipment	13,274	(2,441)	-	-	(1,769)	-	-	(4,210)	9,064
Other non-current assets	4,248	-	-	-	-	-	-	-	4,248
Deferred tax assets	5,687	243	-	-	-	(62)	-	181	5,868
Financial assets at FVTPL	12,958	-	-	-	-	-	1,083	1,083	14,041
	95,430	(5,894)	-	-	(1,381)	(62)	1,083	(6,254)	89,176
Current assets
Trade and other receivables	150,941	(5,466)	(3,714)	(239)	-	(459)	10,924	1,046	151,987
Current tax assets	968	-	(105)	-	(550)	-	-	(655)	313
Cash and cash equivalents	50,065	-	-	-	-	-	-	-	50,065
Non-current assets Held-for-sale	13,106	-	-	-	-	-	-	-	13,106
	215,080	(5,466)	(3,819)	(239)	(550)	(459)	10,924	391	215,471
Current liabilities
Trade and other payables	(142,627)	(3,740)	(145)	(940)	-	(325)	(13,490)	(18,640)	(161,267)
Current tax liabilities	(3,318)	232	(22)	158	(599)	-	105	(126)	(3,444)
Minority shareholder put option	(12,327)	8,834	-	-	-	(6,454)	-	2,380	(9,947)
liabilities
Other current liabilities	(14,812)	-	-	-	-	-	-	-	(14,812)
	(173,084)	5,326	(167)	(782)	(599)	(6,779)	(13,385)	(16,386)	(189,470)
Net current assets	41,996	(140)	(3,986)	(1,021)	(1,149)	(7,238)	(2,461)	(15,995)	26,001
Total assets less current	137,426	(6,034)	(3,986)	(1,021)	(2,530)	(7,300)	(1,378)	(22,249)	115,177
liabilities
Non-current liabilities
Minority shareholder put option	(6,063)	3,114	-	-	-	(695)	(173)	2,246	(3,817)
liabilities
Other non-current liabilities	(42,443)	-	-	-	-	-	-	-	(42,443)
Total non-current liabilities	(48,506)	3,114	-	-	-	(695)	(173)	2,246	(46,260)
Total net assets	88,920	(2,920)	(3,986)	(1,021)	(2,530)	(7,995)	(1,551)	(20,003)	68,917

M&C Saatchi plc

89

NOTES Continued

Consolidated balance sheet - for the year ended 31 December 2018

	As	Pre 2018			Non-	Put option	Financial
	Trading	Non-trading	current	Total	As
	previously	adjustments	adjustments	reporting
	adjustments	adjustments	asset	adjustments	restated
	reported	(Note 2a)	(Note 2e)	adjustments
			adjustments
Total adjustment to equity:	£000	£000	£000	£000	£000	£000	£000	£000	£000
Share Premium	46,667	-	-	-	-	(4,933)	-	(4,933)	41,734
Minority interest put option	(12,954)	(1,703)	-	-	-	(252)	(173)	(2,128)	(15,082)
reserve
Non-controlling interest	(22,464)	-	-	-	-	252	131	383	(22,081)
acquired
Non-controlling interest	7,207	(4,923)	-	-	-	(1,352)	-	(6,275)	932
Retained earnings	34,195	5,148	(3,986)	(1,021)	(2,530)	(1,710)	(1,378)	(5,477)	28,718
Other reserves	36,269	(1,442)	-	-	-	-	(131)	(1,573)	34,696
	88,920	(2,920)	(3,986)	(1,021)	(2,530)	(7,995)	(1,551)	(20,003)	68,917

The greater impact of the prior year adjustments on the income statement than on the balance sheet is due in most part to the change in valuation of variable share-based payment charges (IFRS 2), that have no effect on the balance sheet.

90	M&C Saatchi plc

NOTES Continued

2(e) Put option accounting adjustments

The accounting for put options is set out on page 67 and the significant judgements on page 68. We have fully reassessed the judgement as to whether the put options constitute conditional shares (IFRS 2) or minority interest put options (IFRS 9); at the same time we have examined the judgements surrounding market and non-market conditions embedded in conditional shares (IFRS 2). The impact of these adjustments relating to the reporting period ended 31 December 2018 is presented below and the nature of the adjustments explained overleaf.

Income statement adjustments for the year ended 31 December 2018

	Change in	Variable	Cash-settled	Change in	Total	Relating to	Relating to
	category	share based	share based	1 January	year ended 31
	accounting	adjustment
	(IFRS 2 or	payment	payments	2018 (note	December
	practice	(note 2b)
	IFRS 9)	charges	(SA)	2a)	2018
	£000	£000	£000	£000	£000	£000	£000
Staff costs	(114)	(10,760)	(233)	(1,773)	(12,880)	-	(12,880)
Tax expense	-	-	61	-	61	-	61
Finance income	-	-	-	-	-	-	-
Finance costs	(2,204)	-	-	-	(2,204)	-	(2,204)
Total income statement effect	(2,318)	(10,760)	(172)	(1,773)	(15,023)	-	(15,023)
Attributable to equity shareholders	(1,504)	(10,760)	(172)		(12,436)	-	(12,436)
Attributable to Non-controlling interest	(814)	-	-	(1,773)	(2,587)	-	(2,587)
	(2,318)	(10,760)	(172)	(1,773)	(15,023)	-	(15,023)
Balance sheet adjustments as at 31 December 2018
	£000	£000	£000	£000	£000	£000	£000
Non-current assets
Deferred tax assets	-	-	181	-	181	243	(62)
Current assets
Trade and other receivables	(459)	-	-	-	(459)	-	(459)
Current liabilities
Trade and other payables	-	-	(1,086)	(2,629)	(3,715)	(3,390)	(325)
Minority shareholder put option liabilities	4,858	-	-	-	4,858	11,312	(6,454)
Non-current liabilities
Minority shareholder put option liabilities	6,063	-	-	-	6,063	6,758	(695)
Total net asset effect	10,462	-	(905)	(2,629)	6,928	14,923	(7,995)
Equity adjustments as at 31 December 2018
	£000	£000	£000	£000	£000	£000	£000
Share premium	(4,933)	-	-	-	(4,933)	-	(4,933)
Minority interest put option reserve	4,167	-	-	-	4,167	4,419	(252)
Non-controlling interest acquired	252	-	-	-	252	-	252
Non-controlling interest	(3,646)	-	-	(2,629)	(6,275)	(4,923)	(1,352)
Retained earnings	14,622	-	(905)	-	13,717	15,427	(1,710)
Total reserves effect	10,462	-	(905)	(2,629)	6,928	14,923	(7,995)

M&C Saatchi plc

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NOTES Continued

The adjustments required to be made to the Group's put option accounting can be categorised as follows:

• Change in classification of the schemes as representing from as future obligations held on the Balance sheet as liabilities (IFRS 9) to share-based payments recognised in the Income statement (IFRS 2)).
• Identification of certain share-based payment schemes as requiring revaluation at the end of each reporting period due to the presence of non-market performance conditions.
• Identification of certain put option schemes as being in substance cash-settled share- based payments.
• Mandatory change to the approach for accounting for LLPs share of profits.

The Group's put option accounting is dependent on each award.

Reclassification from change in category (IFRS 2 or to IFRS 9) - As noted above, schemes may be accounted for under either IFRS 2 (recognition of an expense each period) or as a liability held at the fair value of the future expected reward in line with IFRS 9.

We have reviewed the method of application of our significant judgements in categorising between IFRS 2 and IFRS9. This new method of application of the judgement has resulted in many of the awards that had been classified historically as IFRS 9 being re classified as IFRS 2. The change to IFRS 2 has had a positive impact on reserves, however, it has also had the impact on additional finance costs (IFRS 9) of £2.2m in the 2018 income statement.

In some cases where there was an IFRS 9 scheme directly funded by loans to equity holders, with the equal investment value in NCI reserve, on reclassification to IFRS 2 the two values have been netted off removing the debit, disclosed in trade and other receivables, from our consolidated accounts.

Additional charge for non-market conditions - Each scheme has performance conditions attached to it. The final outturn of these performance conditions impacts the final value of a scheme at the point of exercise. Where a scheme is accounted for as a share-basedpayment (IFRS 2), management are required to identify whether these performance conditions are market based or no market based conditions.

Where a scheme is comprised of only market-based performance conditions then the fair value of the award is defined at inception of the agreement and not revisited. Where, however, a scheme is considered to have performance conditions which are not market based then there is a requirement for the quantum of the share-based payment to be revisited each period end. We have now concluded that the correct application of IFRS 2 means that certain of the Group's schemes have performance conditions which are not market based. We had previously concluded that application of IFRS 2 meant that these performance conditions were market based.

As a result, the Group has identified put option schemes accounted for as share-based payments which require reassessment of the expected future award value at the end of each reporting period.

Unrecorded cash-settled share-basedpayments - The Group's South African operations have in the past acquired the shares from its departing employee's, despite there being no agreement to do so. On review, this practice has now been interpreted as an unwritten put option (IFRS 2).

The accounting for such schemes requires that the future expected reward value is held as a liability at the end of each reporting period. Any movement in the fair value of these awards is recognised within staff costs.

Change in accounting practice - The accounting for certain dividend payments made in line with the terms of members agreements of some of the Group's Limited Liability Partnerships (LLPs) has been changed. This change in accounting resulted from a change in judgement that arose subsequent to recent discussions at the Consultative Committee for Accountancy Bodies. In past unallocated profits has been treated as non-controlling interests. The new judgement states that were where there is no discretion the profits on consolidation are treated as allocated in the year they are made otherwise they are treated as non controlling interests. All our LLP's are affected by this change.

2(f) Other restatement matters

The prior year Annual Report for the year ended 31 December 2018 stated that total operating lease commitments were £42.0m as at 31 December 2018. During the course of the Group's application of IFRS 16 (note 4) it was identified that in fact these commitments totalled £50.2m. This incorrect disclosure arose as a result of weaknesses in the financial controls in the reporting of certain overseas Group entities.

In the prior year put option liabilities which pay a variable number of equity instruments or a variable amount of cash at a point in time in the future (note 27) were considered to be derivative instruments and consequently described as being held at fair value through profit or loss. These items have now been identified as representing financial liabilities held at amortised cost. Whilst this has no impact upon the quantum of liabilities due to be held at the end of each reporting period the notes to the accounts have had the 2018 comparatives descriptions amended to reflect this fact. This is in contrast to the IFRS 2 schemes whose recognition within the financial statements continues to be based on the fair value of the award at the date of inception, and, for a subset of schemes, reassessed at the end of each reporting period.

92	M&C Saatchi plc

NOTES Continued

The changes required to be made to the 2018 Cash-flow statement are as presented below:

	Change
	£000
Operating loss	(20,108)
Adjustments for:
Depreciation of plant and equipment	(521)
Loss on sale of plant and equipment	6
Impairment of plant and equipment	2,289
Impairment of associates	(674)
Impairment of goodwill and other intangibles	(317)
Exercise of share-based payment schemes with cash	(108)
Equity settled share based payment expenses	10,760
Operating cash before movements in working capital	(8,673)
Decrease / (increase) in trade and other receivables	(23,155)
(Increase) / decrease in contract assets	14,150
(Decrease) / increase in trade and other payables	25,187
(Decrease) / increase in contract liabilities	(9,398)
Cash generated from operations	(1,889)
Net cash from operating activities	(1,889)
Investing activities
Acquisitions of subsidiaries net of cash acquired	512
Net cash consumed investing activities	512
Financing activities
Dividends paid to non-controlling interest	1,781
Cash consideration for non-controlling interest acquired	(404)
Net cash consumed by financing activities	1,377
Net Increase / (decrease) in cash and cash equivalents	-

3. Exceptional items Policy

Exceptional items relate to the strategic review and restructuring and costs relating to the accounting misstatements. These are shown separately and added back from headline profit to give a better understanding as to the underlying results of the group.

Exceptional items for the year ended 31 December 2019 comprise the following:

	Operating	Staff		After tax
	costs	cost	Taxation	total
	£000	£000	£000	£000
Strategic review and restructuring	-	4,211	(783)	3,428
PwC forensic fees	710	-	(135)	575
Legal fees	147	-	-	147
Professional fees	798	-	(94)	704
Other costs relating to misstatements	300	-	-	300
Total exceptional items	1,955	4,211	(1,012)	5,154

No exceptional costs were included within the results for the year ended 31 December 2018.

Strategic review and restructuring

As explained on page 8 and 13 of the Strategic Report during 2019 the Board commenced a strategic realignment of the Group to improve the long-term profitability of the business.

The year ended 31 December 2019 is the Group's first year of conducting the strategic review and associated restructuring. The restructuring of operations has continued into the current year, the cost of which, at the time of signing of the Annual Report, is expected to be approximately £2.0m. The costs incurred principally relate to those of staff redundancy.

PwC forensic fees

As announced on 12 August 2019 and as explained on page 13 of the Strategic Report the Group engaged PwC to perform a forensic review to provide assistance in terms of attempting to swiftly resolve the prior period accounting errors described in note 2 which management had identified in 2019. This process has continued into 2020 and further costs incurred as a result are described below.

Legal fees and other costs relating to misstatements

Legal advice and other professional costs relating to misstatements have been incurred. Costs include assistance provided in terms of public disclosure, the legal consequences of the accounting errors and increases in fees payable to the Group's Auditor during 2019 (disclosed in note 8).

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93

NOTES Continued

4. Changes in accounting policies and disclosures

New and amended standards and interpretations

The Group has applied IFRS 16 Leases for the first time. The nature and effect of the changes arising through the adoption of this new accounting standard are described below.

Several other amendments and interpretations apply for the first time in 2019, but do not impact preparation of the consolidated financial statements of the Group. The Group has not early adopted any accounting standards, interpretations or amendments which have been issued, but are not yet effective.

The new and revised standards effective 1 January 2019 with no impact on the Annual Report are as follows:

Approach to transition

As a lessee, the Group previously classified leases as operating or finance leases based on an assessment of whether the lease transferred significantly all of the risks and rewards incidental to ownership of the underlying asset to the Group. Any prepaid rent and accrued rent were recognised under Prepayments and Trade and other payables, respectively. Under IFRS 16, the Group recognises right-of-use assets and lease liabilities for all leases (unless exempt from applying IFRS 16) on its balance sheet. The Group used the following practical expedients when applying IFRS 16 to leases previously classified as operating leases:

	applied the exemption not to recognise right-of-use assets and liabilities for leases of
	low value or for which the lease term ends within 12 months of the date of initial
	application, on a lease-by lease basis;
	relied on previous assessments on whether leases are onerous for impairment of
	right-of-use assets;
	excluded initial direct costs from the measurement of the right-of-use asset at the date

Amendments to IFRS 9

Amendments to IAS 28

Annual Improvements to IFRS Standards 2015 - 2017 Cycle Amendments to IAS 19 Employee Benefits

IFRS 10 Consolidated Financial Statements and IAS 28 (amendments)

IFRIC 23

Prepayment Features with Negative Compensation

Long-term Interests in Associates and Joint Ventures Amendments to IFRS 3 Business Combinations, IFRS 11 Joint Arrangements, IAS 12 Income taxes and IAS 23 Borrowing costs

Plan Amendment, Curtailment or Settlement

Sale or Contribution of Assets between an Investor and its Associate or Joint Venture

Uncertainty over Income Tax Treatments

	of initial application;
	used hindsight when determining the lease term if the contract contains options to
	extend or terminate the lease;
	applied the exemption not to separate non-lease components such as service charges
	from lease rental charges;
	used a single discount rate to a portfolio of leases with reasonably similar
	characteristics.

Leases previously accounted for as operating leases

Under the transition rules for leases classified as operating leases, lease liabilities were measured at the present value of the remaining lease payments, discounted at the relevant (i.e. specific to each member of the Group) incremental borrowing rate as at 1 January 2019. Right-of- use assets are measured at cost. In the majority of instances this comprised the initial amount of

IFRS 16 Leases

IFRS 16 supersedes IAS 17 Leases, IFRIC 4 Determining whether an Arrangement contains a Lease, SIC-15 Operating Leases-Incentives and SIC-27 Evaluating the Substance of Transactions Involving the Legal Form of a Lease. The standard 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.

Adoption method

The Group has adopted IFRS 16 using the modified retrospective method of adoption with the date of initial application being 1 January 2019. Under this method, the standard is applied retrospectively with the cumulative effect of initially applying the standard recognised within equity at the date of initial application. Accordingly, there is no restatement of the comparative period financial information. On adoption of IFRS 16 the Group has elected to grandfather the assessment of which arrangements are leases. Contracts not identified as leases under Legacy IFRS were not reassessed for whether there is a lease under IFRS 16. The Group also elected to use the recognition exemptions for lease contracts that, at the application date of IFRS 16, 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 lease liability adjusted for any lease payments made at or before the adoption date and less any lease incentives received at or before the adoption date. For a selection of material long- term leases, the Group has, however, assessed the cost of the Right-of-use asset as if IFRS 16 had always been applied from the original inception date of the lease using the incremental borrowing rate at the date of initial application. Under this method, the difference between the right-of-use asset and lease liability is taken to retained earnings as at 1 January 2019.

Leases previously classified as finance leases

The Group did not change the initial carrying amounts of recognised assets and liabilities at the date of initial application for leases previously classified as finance leases. The requirements of IFRS 16 were applied to the leases from 1 January 2019.

Subleases

Where a head lease has been sublet such that the Group acts as an intermediate lessor then the two legal contracts are accounted for separately. The liability relating to the head lease is retained whilst the portion of the Right-of-use asset sublet is derecognised and replaced with a lease receivable where the sublease is considered to be a finance lease. Upon transition to IFRS 16 the difference in the carrying amounts of the Right-of-use asset relating to a sublease and the corresponding finance lease receivable is recognised within reserves.

The accounting for recognition of a sublease at transition is the same as that described in note 19.

94	M&C Saatchi plc

NOTES Continued

As a result of subleases held by the Group at the start of 2019 a finance lease receivable of £2.1million has been duly recognised as shown below in the tabular presentation of the impact of adoption.

Impact of adoption of IFRS 16

As stated in the Finance Director's Report on page 11, adopting IFRS 16 has resulted in an increase in earnings for the year ended 31 December 2019 of £0.6m compared to that which would have been recognised under Legacy IFRS.

The effect of adoption IFRS 16 as at 1 January 2019 (increase/(decrease)) upon the balance sheet is as follows:

	Increase /
	(decrease)
	£000
Assets
Right-of-use assets	33,952
Deferred tax assets	1,495
Prepayments	(585)
Finance lease receivable	2,069
Total assets	36,931
Liabilities
Lease liabilities	43,739
Trade and other payables	(1,286)
Borrowings	(158)
Total liabilities	42,295
Total adjustment to equity
Retained earnings	(5,364)
Non-controlling interests	-
	(5,364)

The following table reconciles the opening balance for the lease liabilities as at 1 January 2019 based upon the operating lease commitments as at 31 December 2018:

	£000
Operating lease commitments as at 1 January 2019	42,006
Short term / low value leases not included in lease liabilities	(1,567)
Leases not previously reported as operating lease commitments*	8,269
Gross lease liabilities at 1 January 2019	48,708
Effect of discounting	(5,127)
Additional lease liabilities at 1 January 2019	43,581
HP included in borrowings at 1 January 2019	158
Lease liabilities 1 January 2019	43,739

• These items had been included for the purposes of recognition of expense in the 2018 income statement but were omitted for the purposes of disclosure of future operating lease commitments within the 2018 Annual Report. See note 2 for detail.

The weighted average incremental borrowing rate as at 1 January 2019 was 4.2%.

5. Segmental information

Headline segmental income statement

Segmental results are reconciled to the income statement in note 1. The Board review headline results.

The Group's operating segments are aligned to those business units that are evaluated regularly by the chief operating decision maker ("CODM"), namely, the Board, in making strategic decisions, assessing performance and allocating resources. The operating segments comprise individual country entities, the financial information of which is provided to the CODM and is aggregated into specific geographic regions on a headline basis, with each geographic region considered a reportable segment. Each country included in that region has similar economic and operating characteristics and those products and services provided by entities in a geographic region are all related to marketing communication services and which generally offer complementary products and services to their customers

From 2020, as part of the Group's ongoing strategic review, we are evaluating alternative ways of analysing and presenting financial information to the CODM, over and above the geographic segmentation.

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95