Notes to the Financial Statements continued for the year ended 31 May 2021
12 Goodwill and intangible assets continued Pre-tax cash flow projections
Pre-tax cash flow projections are based on the Group’s budget for the forthcoming financial year and longer-term three year strategic plans to 2024. The budget and three year strategic plan are compiled by the business unit management teams using a detailed, bottom-up process with respect to revenue, margin and overheads, taking into account factors specific to that business unit as well as wider economic factors such as industry growth expectations and the impact of Covid-19. The Group’s revenue forecasts are developed using the most reliable data available, such as the size of the existing contract base and details of confirmed orders, as well as assumptions over key operational inputs to underpin the forecast for each revenue stream. The combined effect of these individual assumptions on the overall growth rate assumed for each area of the business is then compared to management’s experience of growth and the industry’s expected growth rate. For cost forecasts, the majority of which are people related, headcount changes are forecast for delivery and sales staff in order that there are sufficient resources to support the forecasted required revenue delivery capacity as well as to deliver against sales targets, whilst also factoring in payroll inflation expectations. Overhead costs are also forecast using a bottom-up process. Forecasts go through a detailed review process and are subject to challenge at each stage of review, including by the Executive Committee. Ultimately the forecasts are approved by the Board. Assumptions have then been applied for expected revenue, margin growth, overheads and Adjusted EBITDA ¹ for the subsequent two years from the end of 2024. Adjusted EBITDA ¹ is considered a proxy for operating cash flow before changes in working capital. Pre-tax cash flow projections also include assumptions on working capital and capital expenditure requirements for each CGU. These assumptions are based on management’s experience of growth and knowledge of the industry sectors, markets and the Group’s internal opportunities for growth and margin enhancement. The projections beyond five years into perpetuity use an estimated long-term growth rate. Management has taken into account the impact of Covid-19 in formulating the above assumptions, and the underlying uncertainty of Covid-19 has been reflected in the assumptions underpinning the cash flow forecasts for each CGU rather than the pre-tax discount rates used in the impairment test. Forecast working capital and capital expenditure included within the pre-tax cash flow projections are based on management’s expectations of future expenditure required to support the Group and current run rate requirements. The revenue growth rate is considered a critical estimate by management. Revenue growth is considered to be the most critical estimate, rather than Adjusted EBITDA 1 growth which was used in the prior year, due to the Group’s relatively stable overhead base and high operating leverage. The table below summarises the cumulative average growth rate (CAGR) assumed for revenue over the five year forecast period to 2026 for each CGU:
Revenue CAGR (%) 2021
Revenue CAGR (%) 2020
5.8
UK Software Resilience
5.5 1.2 5.1 8.3 8.3
12.3 11.4
North America Software Resilience
Europe Software Resilience UK and APAC Assurance North America Assurance
9.0
10.4 11.7
Europe Assurance
13.1
The revenue % growth for Europe Assurance is considered by management to be appropriate for the specific industry to which the CGU operates. Management has considered available external market data in determining the revenue growth rates over the five year forecast period. Long-term growth rates To forecast growth beyond the detailed cash flows into perpetuity, a long-term average growth rate ranging between 1.5 and 1.7% (2020: between 1.9 and 2.5%) has been used based on the specific geography of the CGU, as shown in the table below. This range represents management’s best estimate of a long-term annual growth rate aligned to an assessment of long-term GDP growth rates. A higher sector-specific growth rate would be a valid alternative estimate. A different set of assumptions may be more appropriate in future years dependent on changes in the macro-economic environment. These rates are not greater than the published International Monetary Fund average growth rates in gross domestic product for the next five year period in each relevant territory in which the CGUs operate.
Growth rate (%) 2021
Growth rate (%) 2020
1.7 1.6 1.5 1.7 1.6 1.5
UK Software Resilience
1.9 2.5 1.9 1.9 2.5 1.9
North America Software Resilience
Europe Software Resilience UK and APAC Assurance North America Assurance
Europe Assurance
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NCC Group plc — Annual report and accounts for the year ended 31 May 2021
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