Thomas Cook Group plc - parliament.uk · The management letter is given an overall grading based on...

The better the question. The better the answer�.The better the world works.

Management letterYear ended 30 September 2018

Thomas Cook Group plc

PageSection 1 Introduction 2Section 2 Scope and definitions 3Section 3 Current year Group management letter comments 4Section 4 Update on prior year Group management letter comments 11Appendix I Grade 1 management letter comments from components 15Appendix II Update on FY17 grade 1 comments from components 24

Thomas Cook Group plc – 2018 Management Letter 1

Key EY contacts

Richard Wilson James GolderLead Audit Partner Audit Director+44(0) 207 951 4990 +44(0) 777 152 [email protected] [email protected]

Contents

The contents of this report are subject to the terms and conditions of our appointment as set out in our engagement letter of 1 May 2018.

This report is made solely to the Audit Committee, Board of Directors and management of Thomas Cook Group plc in accordance with our engagementletter. Our work has been undertaken so that we might state to the Audit Committee, Board of Directors and management of Thomas Cook Group plc thosematters we are required to state to them in this report and for no other purpose. To the fullest extent permitted by law we do not accept or assumeresponsibility to anyone other than the Audit Committee, Board of Directors and management of Thomas Cook Group plc for this report or for the opinionswe have formed. It should not be provided to any third-party without our prior written consent.

Thomas Cook Group plc – 2018 Group Management Letter 2

1 | IntroductionSummaryWe enclose the management letter observations from our audit of the ThomasCook Group plc for the year ended 30 September 2018 (“FY18”). Overall we ratethe whole group report as Grade 1 as we have observations which give rise to arisk of a significant financial impact on the business that must be addressedimmediately

We have expanded the scope of the current year management letter to include anoverall assessment which encompasses the whole group. The 30 September 2017(“FY17”) management letter grading of 2 was given in respect of Group, ThomasCook Group plc the entity (“PLC”) and Treasury only.

1Group Finance category now includes both Group Finance and PLC.2No formal management letter issued in component. Grading assessed from componentaudit reporting and closing presentation.3Page 2 includes the scope of our letter and related definitions.

Our audit findings have increased during FY18, making apparent controlweaknesses which are likely present in previous years.

We plan to work with management to assess responses and continue monitorprogress throughout the audit. The following are considered to be the top fourmatters which may have a significant financial impact and in our view, must beaddressed immediately:

1) SDIs - Group assessment, supporting evidence review and approval prior tobooking in components, including appropriate evidence of internal labour costs

2) Onerous lease provisioning – across the group build a policy and standardisedmodel for onerous lease provision which takes into account the observations inthe period and is recorded timely (no backdating, lowest committed cost,discounting).

3) Asset recognition, reconciliation, release and provisioning policy – across anumber of observations the application of prudency in asset recognition,deferred cost release and provisioning policy needs to be improved to avoid one-off adjustments and/or restatements that arose in the period.

4) FY17 management letter comments – a significant number of management letterpoints raised in FY17 have not been addressed / fully addressed including 5from the UK Tour Operator and 2 from the Continental Europe Tour Operator.

In addition, a significant number of points were raised by our EY Russia team in thecurrent period relating to the high level of adjustments being required in thecomponent. Whilst mainly classification items, the magnitude and quantity ofadjustments is large relative to the size of the business.

Please do not hesitate to contact me if you have any questions about this report.

Richard WilsonPartnerLondon

All open items(including FY17open points)

Grade3

1Grade3

2Grade3

3FY18Total

Grade3

1Grade3

2Grade3

3FY17Total

Group Finance1 2 8 2 12 0 6 0 6

Group Treasury 1 1 0 2 0 1 0 1

Group Tax 0 0 0 0 0 0 0 0

United Kingdom 16 25 11 52 7 12 6 25

ContinentalEurope

6 18 14 38 2 9 8 19

Northern Europe 1 4 9 14 0 6 3 9

TCI2 0 0 1 1 NOT RATED

UK Airline2 0 0 3 3 NOT RATED

Condor2 0 0 6 6 NOT RATED

TCAS2 0 0 0 0 NOT RATED

Total 28 52 45 125 9 34 17 60

Thomas Cook Group plc – 2018 Group Management Letter 3

2 | Scope and definitionsScopeAs part of our audit of the financial statements, we obtained an understanding ofinternal control sufficient to plan our audit and determine the nature, timing andextent of testing performed. Although the purpose of our audit was to express anopinion on the financial statements and not to express an opinion on theeffectiveness of internal control we are required to communicate to you significantdeficiencies in internal control.

The matters included in this report are limited to those deficiencies that weidentified during the audit and that we concluded are of sufficient importance tomerit being reported to you. They also include useful recommendations that mayhelp improve performance and avoid weaknesses that could lead to material loss ormisstatement. It is your obligation to take the actions needed to remedy thoseweaknesses and should management fail to do so we shall not be held responsibleif loss or misstatement occurs as a result.

The report is set out in four sections:

► The first section details our observations from this year’s Group audit and ourrecommendations in each area. These matters have been discussed with thefinance team and we have included their responses and agreed actions whereappropriate.

► The second section is a summary of the matters previously raised in our prioryear Group management letter that have not yet been resolved and their currentstatus.

► The third is observations Grade 1 management letter observations from themanagement letters reported by component teams.

► The fourth is an update on Grade 1 management letter observations fromcomponents what were raised in the prior year and are still open.

Grading definitionsWe have graded our management letter observations:

► Grade 1 observations - are defined as observations where there is a risk of asignificant financial impact on the business that must be addressed immediately;

► Grade 2 observations - are defined as observations where there is a risk ofmoderate financial impact on the business, for example a control failure or theabsence of a control in an area of moderate risk; and

► Grade 3 observations - are defined as observations relating to minor controldeficiencies or enhancements in control efficiency.

Overall grading assessmentThe management letter is given an overall grading based on the following criteria:

► A Grade 1 - letter is any letter that contains grade 1 observations. In addition, if aletter contains a number of grade 2 observations (and no grade 1 observations)which taken together indicate significant weaknesses in the control environment,it will be graded 1.

► A Grade 2 - letter is any letter containing grade 2 observations.

► A Grade 3 - letter is any letter containing only grade 3 observations.

4

3 | Current year Group management letter commentsLocation Grade Observation and implication Recommendation and management’s agreed

actionsResponsibility Implementation

deadline

GroupFinance

1l

Separately Disclosed ItemsObservation

In our view the process for obtaining, assessing and approvingseparately disclosed items at the group level is not operatingeffectively, and given the number and quantum of audit differences inour view represents a significant deficiency in internal control.

In addition, there are several “common theme” areas where separatelydisclosed items were inappropriately identified:

1) Internal labour cost not directly attributable to non-recurringprojects or where the individual will not leave the business (e.g.senior management positions in components).

2) Onerous lease provision “backdating”

3) Items where linkage to projects such as NUMO cannot be clearlyevidenced

4) Items outside the £1m threshold of the group policy

5) Judgemental trading related items

6) Small asset write offs which form part of routine fixed assetregister reviews

7) Intercompany costs

We also identified late posting of SDIs in components (significantamount in P12) which results in a limitation of Group Finance’s abilityto provide timely challenge.

The group accounting policy on SDIs also provides in our view toomuch scope for interpretation and potential manipulation.

Implication

Financial statement impact on Underlying profit due to auditdifferences. Reduced ability to forecast, hold to account and measurecomponent performance and return from start up and restructuringproject costs.

Recommendation

We recommend that the Group Finance team:

1) Develop a progress for timely reporting,assessment and approval of SDI items beforethey are recorded in the financial statements, withsufficient evidence and support to allow GroupFinance to make an appropriate assessment (i.e.not solely relying on accounting memorandum).

2) Obtain and approve multi-year budgets andinvestment appraisals for restructuring and start-up projects which include sufficient detail andtimeline to ensure costs are fully understood,plans provide a return, and demonstrate costs arenot recurring.

3) Rigorous challenge of internal labour time,including assessment of sufficient evidence.

4) Re-visit the group accounting policy to providestricter guidance to component teams.

Management response:We agree with the need to enhance the process inrelation to SDIs. In the first half of FY 19, we havedeveloped an enhanced policy and approval processin respect of SDI's and have issued updated guidanceto component teams. This includes a forward lookingelement to the reporting so future costs can be fullyunderstood as well as ensuring any restructuringprojects & costs have a process owner. Some of the"common theme" areas in respect of small asset writeoffs and intercompany costs were one-off items in FY18. For others, we have ensured these have beenaddressed through the enhanced policy & approvalprocess and have reinforced the need for detailedtimesheets for any internal labour time to be retained.

Rosie Cooper,Group FinancialController

31/03/2019

Thomas Cook Group plc – 2018 Group Management Letter

5

Location Grade Observation and implication Recommendation and management’s agreed actions Responsibility Implementationdeadline

GroupFinance

1l

Definition of cash, and cash and cash equivalents inthe GAPMObservation

Changes were made to the GAPM definition of cash andcash equivalents in the period.

Errors were identified in the UK and Germany in respect ofrecognising in cash Direct Debits before they are received.Amounts receivable from credit card companies had beenclassified as cash.

Implication

Cash and cash equivalents is an important input to theleverage covenant calculations and therefore the guidanceand oversight of recognition and classification of cashamounts is quantitatively and qualitatively important to thefinancial statements.

Recommendation

We recommend that management issues clarificationguidance to all components with regards the recognitionpoint for cash. In addition, continued assessment ofamounts due from credit card companies will be required inlight of regulator guidance and industry practice.

Management response:During the first half of FY19, updated guidance has beenissued to all components over what is to be reported as cashwithin component reporting. We continue to monitor thecontent of all items classified as cash to ensure consistencywith the disclosures made within the FY 18 Annual Report.

Rosie Cooper, GroupFinancial Controller

31/03/2019

GroupFinance

2l

UK CGU discount rate risk and forecast accuracyObservation

Or assessment of the ‘base’ discount rate for all CGUswas that it was within the acceptable range, albeit it was atthe lower end of our the acceptable range.

We sensitised the bottom end of the range by 2% to factorin that the UK Tour Operator and TC Money business unitsforecast an improvement in EBIT. This did not give rise toan impairment.

However, the ability to meet forecast will impact the levelof risk sensitisation which we would expect in a discountrate.

Implication

Risk in the effectiveness of start up and NUMO plans mayimpact the reliability of forecasts and therefore the level ofrisk adjustment required in the discount rate. Withoutmanagement’s assessment of this risk adjustment andforecast reliability, there is a higher risk of audit findings onimpairment.

Recommendation

We recommend that management include a “riskadjustment” factor in base discount rates to compensate forthe impact of risk in the forecasts.

We also recommend management assess historical forecastaccuracy (long term and short term) to guide the level of riskin current year forecasts and hence the discount rate riskadjustment applied.

Management response:We continue to apply consistent methodology to theassessment of the carrying value of goodwill and havealways reflected latest performance and up to date forecastsin the impairment tests performed, including that at the FY18year end in revising budgets for future years when there wasa downturn in performance. We believe that this is areasonable methodology which, alongside the sensitivityanalysis conducted, adequately captures and addresses therisk.


31/03/2019

3 | Current year Group management letter comments


6


GroupFinance

2l

Group delegated authority, ownership andaccountabilityObservation

During the FY18 audit, a significant number of auditissues were deferred from component financeteams to the group finance team. This meant thatmatters were not concluded locally, andadjustments were not made in the local reportingpackage.

In addition, issues raised in component locationswere not always communicated by the local financeteam to Group finance, relying instead on the EYgroup team to communicate.

Implication

This resulted in an overload of issues to deal with atthe Group finance level and a significant amount oflate adjustments posted at the group level. This inturn results in a higher risk of error and late updatesto the board and the market on results.

Recommendation

Whilst maintaining oversight, we recommend Group Finance ensurelocal teams have a target of ‘no audit issues’, but where raised, issuesare concluded and (as appropriate) adjusted for locally before reportingresults to Group.

A Group finance communicated policy of early consultation with local EYaudit teams on matters of judgment will also ensure this is achieved.

We note that it is the Group audit team’s responsibility to assess thejudgements and conclusions made by local teams and whilst we plan tohave a consistent approach to judgements there may be occasionswhere the group audit team overrides the local audit team.

Management response:The target of "no audit issues" is something that Group Finance has heldfor a number of years. As part of the audit process in relation to SDI's,there were a number of issues raised during the year end by bothcomponent TC and local EY teams that required resolution at Grouplevel. This was a shared view by EY & TC, not solely driven by GroupFinance. We believe that steps taken in relation to the SDI commentraised by EY should ensure this volume of deferrals at year end doesnot recur in the future. Better planning and co-operation between TCand EY over the timing and efficiency of the audit process should alsoassist with a reduction in the volume of issues to deal with at the Grouplevel at year end.

When late adjustments arise in the process, we are of the view thatposting these at the Group level allows more control over the processand consolidation. Adjustments are subsequently pushed down to thelocal segments. Given the dynamic of our Group, we encourage mattersto be resolved locally and to consult early when the need arises (such ashappened in the FY18 audit with the matters in Delveaux & Pegasus inBelgium). However, co-operation with EY is key here so that decisionsagreed during the year / at the local level are not revisited at year end /by Group EY.

Rosie Cooper,GroupFinancialController

31/03/2019



7


GroupFinance

2

l

Capitalisation of internally developed softwareObservation

We observed instances in PLC the company wheresupporting evidence was not readily available as back-up for journals posted as asset additions. This includedwhere the SAP journal voucher was not populated withthe invoice or hours incurred support.

In discussing projects with management, it wasexplained that the finance team meets with projectmanagers monthly to discuss status of the project butno formal record of this is kept. These meetingsrepresent an important part of the audit trail in relationto evidencing the costs incurred, the completion anddate projects are brought into use and whether newassets supersede old ones for impairment.

Implication

Issues in tracking costs and retaining support couldresult in inappropriate costs being recorded, projectsnot appropriately depreciated or impaired and errors inclassification.

The inappropriate capitalization of overheads will resultin assets being overstated.

Recommendation

We recommend that formal minutes of meetings with projectmanagers are kept and that these follow a certain proforma fordiscussion. These should be reviewed and approved by bothfinance and project managers to evidence the discussions held.Additionally, journals should not be posted to the ledger unlessthe appropriate evidence (eg. invoices, timesheets) is includedalong with journal.

We would also suggest that a full analysis of the types of costscapitalised is completed to assess that these are in line with therequirements of IAS 38.

Management response:We have developed an IT capitalisation policy in the first half ofFY 19 and have issued this to component teams so as to providegreater guidance as to what can be capitalised under IAS 38.The documented evidence over the assessment of capitalisedcosts within the plc. is made via the documented business casefor each project.

We acknowledge formal minutes of follow up meetings whilstprojects are on-going could be retained to enhance the processbut the documented business case captures considerations overwhat is being capitalised to sufficiently mitigate the associatedrisk.

We also acknowledge that back up support is not attached toevery journal but we always retain back up (including timesheetsfor personnel costs, invoices for 3rd parties etc.) to support anycapitalised costs.

We are not aware of any instances where journals have beenposted without the relevant supporting evidence existing.

MathanThevakulasingam,Head Office & ITBusiness Partner

31/03/2019



8


GroupFinance

2l

PLC balance sheet rec.sObservation

In our audit of the Plc, we observedbalance sheet reconciliations thatconstituted the movements in andout during the year rather than theclosing position at year end. Anexample of this was the SBP NIaccrual and subsidies accounts.

Implication

This could lead to an inability toappropriately track the constituentsof the balance sheet andappropriately release items in atimely manner.

Recommendation

We recommend that management ensures balance sheet reconciliations are prepared andreviewed on a monthly or quarterly basis.

Management response:We prepare and review balance sheet reconciliations in line with the frequency and guidancecontained in the Group's internal control policy, including ensuring these are on a monthlybasis for any critical accounts.

On the specific examples, the calculation for subsidies is made by Group Finance andjournaled by the plc. team which provides a secondary layer of review over the content of suchaccounts. The NI accrual is made to an estimate on a monthly basis and is trued up at eachreporting date as it can only be finalised when the closing share price is known after monthend. We do not view these accounts as being improperly prepared or reconciled based ontheir use and activity.


31/03/2019

GroupFinance

2l

Impairment considerationsObservation

Due to the complexity of the groupand historical practices, detailedimpairment assessment ofintercompany assets andinvestments in subsidiaries has notbeen formally assessed anddocumented. Reliance has beenplaced on the group support letter tosubsidiaries for intercompanyrecoverability, however there maybe circumstances where thissupport cannot be practicallyprovided or risk is moved to otherentities in the group.

Implication

High risk of single entity financialstatement asset impairments andrestatements

Recommendation

We understand a process is under away in respect of IFRS9 in respect of intercompany assetscredit risk and recovery.

We recommend that management annually performs and documents intercompany andinvestment in subsidiary impairment tests for all entities across the group.

Management response:We confirm that a detailed process is underway within the Group Finance team to assesscredit risk and recovery in respect of intercompany loans given the applicability of IFRS 9 tothe Group for FY19.

Impairments tests for intercompany and investment balances are performed when a triggerevent is identified and such assessments are generally, directly or indirectly, dependent uponthe value in use assessment performed as part of the annual impairment test for goodwill.Given the complexity of the TC Group (with over 200 legal entities and use of diverse financialreporting systems), formally documented assessments for each entity every year is difficultbecause of the number of interdependencies across jurisdictions and lack of immediatevisibility. In the past we have been advised that the parent company letter of support wassufficient to provide comfort. In response to EY's change in approach, as part of our FY18legal entity statutory accounts process, we have started work documenting these recoverabilityassessments more formally and will be considering whether loan restructuring and/orimpairment charges are required.

Rosie Cooper,Group FinancialControllerJason Steward,Group FinancialControl Director

31/08/2019



9

Location Grade Observation and implication Recommendation and management’s agreedactions

Responsibility Implementationdeadline

GroupFinance

3l

Inter-segment rechargesObservation

In the process of our FY18 audit we identified a significantnumber of recharges and invoices between component forSDIs and capitalizable amounts, where the local componentdid not receive supporting evidence for amounts and no clearindividual ownership for the amount posted.

Implication

Such intergroup recharges inherently have a higher risk oferror and susceptibility to manipulation therefore a clear audittrail and accountability is an important part of the controlframework. In addition, maintaining books and records in eachcomponents will be an important part the company’s legalobligations.

Recommendation

A clear audit trail is kept for intergroup rechargesand invoices as well as individual accountability onsuch items.

Management response:Group Finance does not initiate all intercompanytransactions. Although we aspire to ensure clearaudit trails are maintained at all times, we will lookto provide guidance to local components to ensurethey seek to follow best practice across the Groupwhich has inherent complexity given its size andgeographic spread.

Rosie Cooper, GroupFinancial ControllerJason Steward, GroupFinancial ControlDirector

31/08/2019

GroupFinance

3l

Defined benefit pension assumptionsObservation

For the proposes of setting the discount rate and inflationassumptions for the UK schemes, the consolidating actuary atAON has used a liability-weighted average duration for all fourschemes of 22 years.

The AT Mays Scheme has a shorter duration than the otherthree schemes and as such, the use of a single averageduration to determine the discount rate and RPI inflationassumptions resulted in rates that are optimistic for a schemewith a 12 year duration.

Implication

In FY18 there were sufficient flexibility in the other assumptionsto conclude that the overall assumptions basis was acceptablefor IAS19 purposes however future calculations could give riseto a misstatement which would require reporting to the AuditCommittee.

Recommendation

The discount rate and RPI inflation assumptionsshould be set on a scheme-by-scheme basis takinginto account the profile, size and duration of eachscheme.

Management response:We acknowledge the best practicerecommendation. However, given the AT MaysScheme has liabilities at 30 September 2018 of£28M compared to £1.12BN for the entire Group,we view the risk as being extremely remote givenmateriality considerations. We remain alert to anychanges and environment surrounding theassumptions used in the accounting for suchschemes.


31/03/2019



10

Location Grade Observation and implication Recommendation and management’s agreedactions


GroupTreasury

1l

Valuation of fuel optionsObservation

When executing our audit procedures over the valuation of fueloptions (new for FY18), methods used to value theseinstruments were found to be incorrectly applied, includingtreasury system limitations, specifically:

1) No accounting of deferred premium as a liability at theinception of the contract.

2) Using 10-day historical volatility curves rather than impliedvolatility curves

3) City financials (treasury valuation system) is valuing Asianoption as European option (system limitation)

Implication

Financial statement misstatement.

Recommendation

We recommend that management ensures thesevaluation methodology errors are fixed. In addition,we recommend ensuring internal specialist reviewis carried out and seek concurrence on thevaluation methodology of any new instrumentsgoing forward.

Management response:We acknowledge this point and have adjusted theaccounting to ensure the deferred premium on fueloptions is made in FY 19. Due to system limitations,we are seeking to source 3rd party valuations atkey reporting dates, as well as sourcing impliedvolatility curves, to ensure this feeds into thecalculation to arrive at a more accurate fuel optionvaluation.

Farzana Ahmed 31/03/2019



11

4 | Update on prior year Group management letter commentsLocation Grade Year

raisedObservation and implication FY18 update and management response Responsibility Implementation

deadline

GroupFinance

2l

FY17 Group oversight of componentsObservation

The Group team exercise oversight over thefinancial reporting from the segmentshowever there is not a detailedunderstanding over the individual reportingentities in the segment. The control andoversight of individual reporting entities in thesegment is performed by the segmentfinance teams.

We observed that the Group finance teamresponsible for the consolidation of theresults of the Group did not have a detailedunderstanding of the numbers reported fromthe segments that were being consolidated.

Implication

As a result, we identified instances wherequeries were deferred to us to resolve withthe EY segment teams. An exampleincludes, the understanding of materialhistoric differences between TC AirlinesScandinavia group reported numbers andlocal books.

Further, we noted examples where the Groupfinance team concluded on the accountingtreatment of certain transactions / itemshowever the recording of the accountingentries in local books are the responsibility ofthe component teams. However, it was notevident that the Group finance team performa review to ensure that the accountingentries were appropriately recorded.Examples included the application ofaccounting entries for Sunhotels contractwhere we identified an error during the halfyear review.

FY18 update

Management acknowledged this management letter point in theprior year, agreeing with the comment on the level of oversightof the consolidation that we have at Group and that it is one ofthe aims through Fit for Growth, whereby segments will reportdirectly into cognos, rather than sub-consol at segment level,which would provide Group with this additional oversight atgroup and a greater level of financial control.

However, our overall assessment is that the management letterpoint from FY17 is still present. We acknowledge the increasedinvestment required to resolve this management letter comment.

Specific examples in the current year include:

1) Impact of Airline aircraft lease renewal impact on provisionreleases

2) OTS and Webhelp contract accounting

Oversight of unusual or significant new contracts and othermatters of judgment (not only in the area of SDIs) isrecommended.

Management response:As noted in the response in FY17, we agree with the commenton the level of oversight of the consolidation we have at Group.However, during FY18 we conducted an appraisal of thecost/benefit of implementing a single Group tool and weconcluded that the necessary spend was not justifiable (c.£2m).As a mitigation, to assist with the oversight at a Group level inrespect of new contracts or other matters of judgment, the CFOhas bi-weekly calls with local FDs where a forum exists whereGroup Finance can reinforce requirements & the local FDs canraise any matters to the attention of Group Finance. Wecontinue to utilize and rely on the segment level function reviewsto assist in the Group oversight of components given thestructure via our delegation of authority within the TC Group.

Rosie Cooper,GroupFinancialController

N/A

Whilst a continuingobservation, this

management lettercomment will be

removed from theFY19 managementletter to the extentthere are not auditobservations whichwould have been

prevented ordetected andcorrected by

increased groupoversight.


12

Location Grade Firstraised

Observation and implication FY18 update and management response Responsibility Implementationdeadline

GroupFinance

2l

FY17 Complexity of consolidation systemsObservation

The Group consolidates reported numbers withinthe Cognos consolidation system. As part of theconsolidation process a number of sub-consolidations are performed across a variety of ITapplications. Sub-consolidations are performed inthe UK, Northern Europe, Continental Europe andCondor. As a result the numbers reported inCognos include the reported sub-consolidatedresult and not the granularity of the individualreporting units within each sub-consolidation.

In addition, we observed reliance on the ITfunctionality in Cognos for example in,recalculation for FX and the elimination ofintercompany balances.

Implication

As a result, the Group finance team do not havevisibility of the reported results at the individualcountry / reporting unit level as the data is notreported within Cognos and the detailed sub-consolidations are not submitted to the Groupteam. This reduces the visibility of Group financeover the performance of the group and as noted inour management letter comments regarding‘oversight of components’, limits the ability of theteam to perform effective oversight and review.

Whilst the system functionality exists, in theabsence of detailed testing of the IT GeneralControls in Cognos, management could placeundue reliance on the system functionality.

FY18 update

We continue to highlight this management letterpoint in FY17.

We would highlight the component that is highestpriority is the Continental Europe Tour Operator.

In addition, in the current year, management in theUK did not retain cash flow information whichresulted in a lack of audit trail on the systemgenerated cash flow generated at the group level.

Management response:As noted in the response in FY17, we agree withthe comment on the sub-consolidation process. Weutilize the TM1 system to provide insight and thegranularity of the individual reporting units ratherthan Cognos.

During FY18, we conducted a review to assesswhether a single consolidation system could beimplemented but concluded it was not cost effective.We inherently rely on certain elements of Cognosincluding the FX translation and intercompanyelimination rules given that is an expected part ofsuch a consolidation tool and we have set the rulesup ourselves and tested them so are comfortablethey are working as intended.

In respect of an audit trail on the cash flow, we havecreated an automated cash flow fed from everyaccount in the TB, so when the TB is updated, achange would arise and are of the view this does notrepresent a loss of control, more a lack ofunderstanding as to how the that process operates.

Rosie Cooper,Group FinancialController

N/A

Whilst a continuingobservation, this

management lettercomment will be


prevented ordetected andcorrected by a

centralisedconsolidation.


4 | Update on prior year Group management letter comments

13

Location Grade Observation and implication FY18 update and management response Responsibility Implementationdeadline

GroupFinance

2l

Differences between Plc SAP ledger and CognosObservation

In executing our audit procedures over the Plc Company trialbalance we noted a number of material differences betweenthe underlying SAP ledgers and Cognos reported balances.The Cognos reported balances were correctly stated.

These were explained as having arisen as a result of thechange in functional currency of Plc from Euro to GBP duringFY16. This resulted in historic FX differences remaining in theunderlying SAP ledgers. Whilst we understood the basis forthe differences, detailed reconciliations were not readilyavailable to support the historic variances.

Furthermore, in mapping the trail balance from SAP toCognos chart of accounts we identified certain SAP codeshad to be split in order to accurately map to Cognos. Anexample includes a loan balance recorded on a separateSAP code which is split between two separate Cognos codesfor the loan principal and interest.

Implication

The lack of reconciliations which clearly document how thereconciling differences have arisen results in the loss ofdetailed understanding from members of the Plc team,particularly as a key team member was on maternity leave atthe year end.

FY18 update

Our FY17 recommendations stand, that thereconciliation of the historic differences isdocumented and this evidence is retained toensure that going forward the differences areunderstood and clearly evidenced and theunderstanding is not lost with future teammember changes.

Furthermore, we recommend that steps are takento appropriately eliminate the need for historicdifferences to continue to be rolled forward andappropriate entries are recorded to align the SAPledgers with the Cognos balances. As SAPledgers should form the primary accountingrecords for the entity, we recommend that top-side journals are appropriately pushed down.

We recommend that new SAP codes are createdto allow for a one to one mapping to the Cognoschart of accounts.

Management response:As noted in FY 17, control was maintained overthe reported Cognos accounts and areconciliation was carried out upon transition toGBP from EUR and this was talked through indetail and agreed with PwC during their FY 16audit. There is no exposure or financial risk giventhe previous assessments undertaken andassurance received. The tidy up exercise to forcebalances through SAP so that it reconciles toCognos is still being worked through into FY 19 (itwas postponed whilst we looked at the potentialreplacements under the Fit For Growth initiative).


31/08/2019



14

Location Grade Observation and implication FY18 update and management response Responsibility Implementationdeadline

GroupTreasury

2l

Hedge documentation and credit risk impacton effectivenessObservation

In respect to FX Derivatives, IRS andCommodity swaps: the hedge documentationdoes not include the credit risk as a possiblesource of ineffectiveness, as credit risk shouldbe included in the valuation of the hedginginstrument but not in the valuation of the hedgeditem.

The calculation of credit risk is performed on asample of derivatives instead of the wholepopulation and based on the samplemanagement concludes credit risk is immaterial.

Implication

Best practice is to calculate credit risk on thewhole portfolio.

FY18 update

In FY18 management have remediated our observationon hedge documentation – this element is now cleared.

Our recommendation that the calculation of credit risk isperformed on the whole portfolio in line with bestpractice and not on a sample basis remains amanagement letter observation in the current year.

Management response:We acknowledge the suggested best practice tocalculate credit risk on the whole portfolio. Should thecredit risk increase, we will extend the extent of thesampling of our derivative contracts as it is not feasibleor possible to extend testing to the full portfolio havingundertaken a cost benefit analysis on implementingsuch a change to systems in FY18 and that anypotential adjustment will remain immaterial.

Farzana Ahmed N/AWhilst a continuing

observation, thismanagement lettercomment will be


prevented ordetected and

corrected by anenhanced creditrisk calculation.



15

Component Grade Observation and implication Recommendation and management’s agreedactions


UK TourOperator

1l

Balance sheet reconciliationsObservation

During the audit we identified a number of balance sheet accountsfor which thorough reconciliations were not prepared. In manyinstances the reconciliations were not appropriate or fullyunderstood, and represented transaction dumps with little qualitativeinformation.

Implication

Improper reconciliations do not enable management to perform athorough review and challenge of balances. This could result inmisstatement of the accounts if unusual and aged items are notidentified on a timely basis.

Recommendation

We recommend that the quality of balance sheetreconciliations is improved such that managementfully understand the account balances and theirageing.

Management response:This is a specific deliverable for the Balance Sheet /control project being led by Kevin Baulk.

Kevin Baulk,Head of Finance,UK FinanceProject

Group finance

Sep 19

UK TourOperator

1l

UK finance teamObservation

Throughout the audit we identified that the UK finance team wasresource constrained, and a number of key people had left thefinance team and not been replaced. This resulted in some keyindividuals being subject to a large amount of pressure and a heavyworkload.

Implication

This could result in human error due to people performing roles notsuitable to them, or having too heavy a workload and therefore nothaving sufficient time to appropriately review and challengebalances.

Recommendation

Given the recent changes in the business werecommend that UK and group finance undertake afull root and branch review of the UK finance team.This should cover the number of staff, their roles,skills required, and the reporting lines needed toensure efficient and effective performance of the UKfinance function. This should enhance the quality ofexternal and internal reporting.

Management response:A recent reorganisation has just been undertakenwithin Finance and this combined with the merger ofTC Money (TCM) and Retail teams has given theFinance team the following benefits: 1. A dedicatedteam of 6 FTE to work on process / controlimprovements and 2. Further resource from the TCMteam to support key judgement and control areas inRetail (eg Onerous Lease).

Alan Donald, UKFinance Director

Nick Willott, TCMoney FinanceDirector

Group finance

Sep 19


Appendix I – Grade 1 management letter comments from components

16

Component Grade Observation and implication Recommendation and management’sagreed actions


UK TourOperator

1l

Prior year management letter points not appropriately addressedObservation

During the year the UK Tour Operator audit team met with management todiscuss the status of management letter points raised in the prior year. Wewere advised that in most cases the necessary actions have been taken toaddress these points, however during our year-end audit we discovered thatmany of these points had either not been addressed or there had been nofollow up to ensure that the processes implemented sufficiently addressedthe risk.

Implication

A number of audit adjustments raised in prior year recurred in current yearand there remains a deficiency in internal control.

Recommendation

We recommend that a robust process isput in place to address findings andcontrol observations, and that a taskforce is established to ensure thateffective processes are implementedand follow up reviews and testing ofthese processes are performed.Additionally the execution of such animplementation plan should be tested byinternal audit and the results should bereviewed by senior management in theUK finance function.

Management response:Significant progress has been made onthe major MLP raised last year. Some ofthe items have, to our knowledge, beenclosed but due to the focus / timeconstraints in the FY18 audit EY havenot had time to review the update. Fullresponse by MLP have been made onthe relevant pages later in the letter.

Alan Donald, UKFinance Director

Mar 19

UK TourOperator

1l

Reconciliation of trade creditor balances to supplier statementsObservation

Within TCCT Retail, the reconciliation process for supplier statements is notclear and does not accurately check all invoices on a line by line basis,resulting in unrecorded differences.

Implication

This historically led to a build-up of legacy payables and overpaymentswhich became hard to reconcile over time. An audit difference was raised inrelation to this as part of the wider prior year adjustment.

Recommendation

We recommend that supplierstatements are reconciled on a line byline basis regularly and thesereconciliations are reviewed thoroughly.

Management response:This is a specific deliverable for theBalance Sheet / control project beingled by Kevin Baulk

Kevin Baulk,Head of Finance,UK FinanceProject

Sep 19



17

Component Grade Observation and implication Recommendation andmanagement’s agreed actions


UK TourOperator

1l

Impairment of assets in onerous storesObservation

All assets in onerous stores should be impaired. In current yearmanagement did not impair any assets which were added to storesalready in the onerous lease provision.

Implication

This resulted in a material misstatement in FY18 of £2.4m.

Recommendation

Management should review thenet book value for all stores inthe onerous lease provision ateach reporting period and ensurethat these assets are impaired asappropriate.

Management response:Agreed – adjustment was postedand business informed that allfuture capital spend for storesclassified as onerous will beimpaired immediately. Proposeaction is closed.

Paul Wilkes, TCM &Retail FinancialController

Mar 19

UK TourOperator

1l

Backdating of the onerous lease provisionObservation

During our audit of the onerous lease provision in TCCT Retail, weidentified that management effectively backdates the provision to thebeginning of the year when a store is first added to the provision. Thisresults in underlying profit being distorted since the new store provision ischarged to Separately Disclosed Items whilst the utilisation of theprovision is credited to underlying profit.

Impact of backdating in FY17 was not identified as it was not material.

Implication

This results in overstatement of profit in the income statement . Theimpact of this in current year was £3.9m which was raised as an auditdifference.

Recommendation

The provision should becalculated at each formalreporting period, being half yearand year-end, and the provisionrecorded prospectively at thatpoint.

Management response:This error was raised for the firsttime at the year end audit FY18,despite the business makingsimilar adjustments in previousaccounting periods audited byEY and PWC. The businessagreed to accountingprospectively going forward andbooked an adjustment at yearend. We no consider this pointclosed.

Paul Wilkes, TCM &Retail FinancialController

Emily Sharpe(Finance Manager,Sales & DistributionCosts)

Immediate



18



UK TourOperator

1l

Information utilised in calculation of customer legal provisionObservation

In TCTO, when performing our year end testing over claims >£100k, wenoted that some reserve levels differed from the most recent advice fromlegal experts.

In addition, at the half year we identified a claim which was known aboutin prior year however the claim was not included within the reserve listingper the third party and therefore was also not included in the provisioncalculation.

Implication

Although the differences in reserve levels were immaterial from an auditperspective in current year, this could result in a material misstatement ofthe results.

The missing claim was material and resulted in a £1m audit differencebeing raised.

Recommendation

A monthly process should beimplemented to compare thereserves used in the provisioncalculation to the reserves perthe third party legal counsel.

In addition management shouldimplement completeness checksto ensure that all material claimswhich are known about areincluded within the provisioncalculation.

Management response:This missing claim was picked upat the interim audit andmeasures put in place to stop arepetition. No material issueswere found at year end sopropose action closed,

Michelle Grant(Finance Manager,Reporting)

Immediate

UK TourOperator

1l

Maintenance of Thomas Cook Sport ledgers in TCTOObservation

Sub-ledgers are not reconciled for Thomas Cook Sport on a monthlybasis. Reliance is placed on a manual tracker file which is not subject toreconciliation and balances were not appropriately reviewed at the year-end.

As a result management had to recreate the trial balance for ThomasCook Sport as part of the year-end audit process.

Implication

The lack of reconciliations and management review significantlyincreases the risk that balances reflected in the trial balance are notmaterially stated in respect of both their value and classification.

As a result an audit difference was raised impacting assets by £0.9m,liabilities by £1.2m and the P&L by £0.3m.

Recommendation

Management should performmonthly reconciliations of thegeneral ledger balances to subledgers for all TB codes.

Sub ledgers should bemaintained and should reflect theinformation currently onlymaintained in manual trackerfiles allowing for managementreview to occur at a period end.

Management response:This is a specific deliverable forthe Balance Sheet / controlproject being led by Kevin Baulk.

Kevin Baulk, Head ofFinance, UK FinanceProject

Sep 19



19


Responsibility

Implementationdeadline

UK TourOperator

1l

Regular review and challenge of balance sheetObservation

During the current year £25.1m of aged debits on the balance sheet were identifiedand written off as a prior year adjustment. This indicates that sufficient review andchallenge (particularly around ageing) was not taking place previously.

In addition the adjustment identified by management did not take into account aCondor airline credit of £3.1m.

Implication

As evidenced by the current year adjustment this could result in material misstatementin the accounts.

Recommendation

We recommend managementimplement a more thorough androbust review process on a monthlybasis. In addition managementshould ensure consistency oftreatment of debits and credits in theaccounts.

Management response:Management can evidence theconsistent treatment of debits andcredits FY18 for example a £3mcharge was left in underlying tocontra the £3m Condor creditmentioned.

This is a specific deliverable for theBalance Sheet / control project beingled by Kevin Baulk.

Kevin Baulk,Head ofFinance, UKFinanceProject

Sept 19

UK TourOperator

1l

Capitalisation of general overheads within intangiblesObservation

During our audit of intangibles in TCUK, we noted that management have capitalisedindirect and general overheads such as the audit fee into intangibles, by way of usinga higher day rate when capitalising internal labour.

Implication

This results in overstatement of assets since costs which should have been charged tothe P&L have been capitalised on the balance sheet. An audit difference of £1.4m wasidentified in relation to such costs.

Recommendation

Management should ensure all suchcosts are charged to the incomestatement and should review the dayrate on a regular basis to ensure itremains appropriate.

Management response:This was adjusted as part of the yearend audit and a new “day rate” forcapitalising intangibles has beenagreed with Group to excludegeneral overheads. Therefore wenow consider this point closed.

Emma Mace,Head ofFinance,FunctionalCosts

Immediate



20

Component Grade Observation and implication Recommendation and management’s agreedactions


UK TourOperator

1l

Collapse processObservation

TCTO management perform a collapse of the sales ledger.This is done by collapsing all holidays where the flightdeparture date is post year-end rather than on an individualbooking level, and the collapse process does not undergo athorough review.

Implication

This could result in material misstatement as evidenced by2 audit differences in FY18. Following the collapse of thesales ledger, £21.6m remained in deferred income relatingto commission on future departures, with £3.9m of thisamount relating to third party commission which does noteliminate on consolidation. As such £3.9m was raised as anaudit difference. We also identified an audit difference of£1m relating to the VAT on agents’ commission which hadnot been collapsed.

Recommendation

We recommend that management perform thecollapse on a booking level as well as a high level toensure that the data included in the collapse iscorrect. In addition a thorough review processshould be implemented.

Management response:This observation is around grossing up the balancesheet between prepayments and deferred income,not review of the collapse process.

The process was designed from a pragmaticperspective, given the 2+million lines of data eachmonth and the focus on the booking total (not itscomponent parts).

However, given the desire by EY to gross up thebalance sheet we will investigate the feasibility ofgenerating the correct classifications.

Nadeem Younas(Senior FinanceManager TourOperations)

Sep 19

UK TourOperator

1l

Information utilised to track hotel prepayments andcalculate the related provisionObservation

TCTO management use reports designed for businessreporting to track utilisation of hotel deposits. There weredifferences identified between the deposits tracked on thebusiness report, and the deposits reported in the financialstatements. In addition the utilisation of deposits is nottracked by hotel, rather an estimate is used based onoverall non-guaranteed hotel costs incurred for the year todate.

Implication

This could result in the hotel prepayments provision beingmisstated as evidenced by the £2.2m audit differenceraised at half year for Nautica Blue. This hotel did notappear on the business report and therefore was notidentified as irrecoverable by management.

Recommendation

We recommend that the finance team use thebooking and forecast data from the yield team totrack recovery and utilisation of the depositsreported in the financial statements, and that theprovision is calculated based on this data.

Management response:Business reports are already used in the calculationof the provision.

It is acknowledged that the utilisation of the depositsis an estimate, but this was not a factor in theNautica Blue adjustment, which was down tocontracting’s view of recoverability.

The reporting of deposits balances will be reviewedin H2.

Alexa Armstrong(Finance Manager,Reporting)

Sep 19



21



ContinentalEurope TourOperator

1l

Separately disclosed Items – Personnelexpenses

Project hours worked and disclosed as SDI’s arenot documented/tracked on a hourly basis.Based on SDI policy, the personnel will eitherleave the business or be redeployed once theirrole is completed.

Recommendation

We recommend to use timesheets to track allhours/personnel expense disclosed as SDI’s.

We recommend to adjust contracts onceemployees will be redeployed and agree withworks council.

Management response:We concur with the recommendation to localmanagement. This is being addressed inconjunction with the response contained to theGroup observation on SDI’s.

Markus Röhricht(Head of Controlling)

30/09/19


1l

Finals upload - flight expenses and liabilities

During our audit procedures of Thomas CookTouristik GmbH we have noticed that control forcomplete and correct upload of finals data (flightexpenses and liabilities) in finance accounting(SAP) is missing. In FY 17/18 there was onecase the finals data were uploaded twice.

Recommendation

We recommend to implement control over finalupload (“4 eyes” principle) and include it inRACM.

Management response:We concur with the recommendation andacknowledge local management are takingsteps to address this matter.

Christian Bopp 30/09/19



22




1l

Russia account classificationsThe Russia audit team raised five managementletter observations that we have combined into asingle grate 1 observation. These observationswere in respect of classification differences on:

1) Foreign exchange adjustments £10.8m

2) Flight volume rebates £9.3m Intercompanysales £1.6m

3) Commission income from Global net off£1.5m

4) Royalty receivable £1.6m

Further detail is given in the Continental Europemanagement letter.

The size and quantity of adjustments is highrelative to the size of the component andindicative a weakening in financial control.

Recommendation

We recommend further enhancement ofcontrol within the aforementioned accountingissue, such as an implementation of areconciliation between disaggregatedintercompany revenue types in master-touraccounting system and transformation file.

Management response:[pending]

SvetlanaRyazantseva

[management tospecify date]



23

Component Grade Observation and implication Recommendation and management’s agreed actions Responsibility Implementationdeadline


1l

Unused user accountremoval

A periodic check for unuseduser accounts is not performedat application and domainlevel.

Systems: NURVIS, RESY,FINALS, TC-FLUG, SAP ERP

Recommendation

In all IT systems and applications, the user accounts should be checkedregularly. We recommend the implementation of a procedure (for example,by using a running slip), which ensures that user rights are adjusted atdislocation.

Management response:We acknowledge the risk that exists but appropriate measures are in placelocally to address the risk and local management are working to address theissue. TC have not identified any instances of inappropriate access and noinstances of such access were communicated to us as part of the auditfindings in FY18.

IT Department Sep 2019

NorthernEurope TourOperator

l Navision: Restore testsprocess not formalizedDatabase backups are taken ata regular intervals and thereare informal guidelines on howto perform restore tests ofthese backups. However noone is responsible for ensuringthat the guideline has beenfollowed and that restore testshave been performed.

When restore tests are notperformed the risk increasesthat backups are not restorableleading to loss or unavailabilityof financial data.

Recommendation

Define a process for how and when to perform restore tests. This processshould describe responsibilities and ownership in order to ensure that restoretests of backups are performed within set intervals. Completed restore testsshould be documented (e.g. a service ticket).

How often restore tests should be performed and what backups to restoreshould be based on your risk assessment and tied to business continuitymanagement.

Management response:We asked for further information about the missing samples, as it was notclear which they were, to understand why they were missing and improve theprocess that might have failed due to sick-leave. We confirm that we willfollow the current process and pay extra attention to store all documentation.

Sami Breinholt September2019



24

Appendix II – Update on FY17 grade 1 comments from componentsComponent Grade First

raisedObservation and implication FY18 update and management response Responsibility Implementation

deadline

UK TourOperator

1l

FY17 Classification of costs as SeparatelyDisclosed Items (SDIs) and associatedapproval from group teamObservation

A significant number and quantum of costshave been included within SDIs in thecurrent year.

During the audit we had a robust debaterelating to these costs and whether theymet the definition of SDIs per the GAPM. Asa result of the audit adjustments posted itwas clear that inadequate considerationhad been given to the GAPM when postingthese costs to SDIs.

In addition formal documentationevidencing the approval from the groupfinance team was not maintained.

Implication

Incorrectly recognising expenses withinSDIs rather than underlying profit or lossprovides an inflated earnings before interestand taxes (EBIT) figure, which is thebusiness’ main key performance indicator.This would result in improper presentationof the results to shareholders, and alsodoes would result in management makingbusiness decisions based on incorrectinformation.

FY18 update

Management has implemented a more stringent approach toSDIs in current year to ensure they meet the recognitioncriteria in the GAPM. This has been initiated through thepreparation of management papers for any significant SDIspresented to the UKMT as part of monthly meetings.

The group team are now engaged in the classification ofunderlying expenses as SDIs and the local TCUK segmentare challenged on a monthly basis on the difference betweenactuals and forecast, and are challenged on significant SDIs.

Whilst there has been significant improvement in theclassification of costs as SDIs in FY18 there is stillconsiderable work to be completed to ensure only costsmeeting the GAPM definition and ESMA guidelines of SDIsare included, as evidenced by the £15.5m audit differenceraised as part of the year-end audit.

Management response:As mentioned above significant improvement vs prior year.New Group wide SDI policy now in place with increased rigorand control on SDI classification.

Emma Davenport(Head of Financial &ManagementReporting)

Daniel Ong (GroupFinance)

Mar 19


25

Component Grade Firstraised


UK TourOperator

1l

FY17 Recognition of hotel recoveries and otherassetsObservation

During our audit of hotel recoveries EY identifiedthat the documentation provided to supportmanagement’s position was inadequate.Management obtained further documentationfrom suppliers during the audit to support theasset, however this was not always in place atthe time of recognition.

A SAD was raised for recoveries not consideredto be virtually certain and we concluded thatcontrols were not sufficient to prevent recoveriesbeing inappropriately recognised.

Furthermore the GAPM is not precise anddetailed enough to reflect the underlyingchallenges that the TCUK business faces inaccounting for recoveries from suppliers. Thekey challenges include country risk, time risk andcontract risk, among others.

Implication

Early recognition of items not yet virtually certainwithin the financial statements results inoverstatement of assets at the year-end andresults in income being recognised in theincorrect period.

FY18 update

Management updated the definition of virtuallycertain in the revised GAPM in March 2018.Whilst this provides greater clarity to TCUK, alarge write-off was processed in P12 followingEY’s P11 review of hotel recoveries and afurther £1.4m was raised as a SAD by EY atP12, evidencing that further challenge andreview of hotel recoveries is required on amonthly basis to ensure they are recoverable.

In addition SADs for £1.9m and £0.8m wereraised relating to VAT and TOMS receivablesrespectively, evidencing that assets continueto be recognised when not virtually certain.

Management response:Post year end audit the position on therecognition of assets and hotel recoveries ismuch improved with recoveries only held if“virtually certain” ie an indemnification oragreed to pay from the hotel. Finance are nowclear on this threshold and will not book furtherreceivables unless confident this can be met.

Emma Davenport (Headof Financial &Management Reporting)

Daniel Ong (GroupFinance)

Mar 19

Appendix II – Update on FY17 grade 1 comments from components


26



UK TourOperator

1l

FY17 Costs deferred rather than recognised in the P&L inline with the GAPMObservation

TCCT Retail estimates that cash passports are usuallyutilised by customers 2-2.5 months after purchase andtherefore deferred the service fees from Mastercardrelating to the cash passports in line with that period.However, any income or share in breakage thatMastercard owe to TCCT per the Mastercard invoice isrecognised on receipt of the invoice, and EY consider theservice fees to be sunk costs which should be taken tothe P&L as incurred.

Similarly transaction fees charged by Mastercard fordebit and credit card payments have also been deferred.Although the cost is only incurred as a result of makingthe sale, this cannot be considered to be a direct costand be deferred until the point at which the sale isrecognised. This cost is not refundable and will becharged regardless of any cancellation made thereforethere is no future benefit relating to this cost.

As stated within the group accounting policy manual,assets are resources controlled by the entity as a resultof past events from which future economic benefits areexpected to flow. The deferral of these costs does nothave any expected economic benefit as these are coststhat have already been incurred.

The GAPM treatment of such items is not considered tobe in line with IFRS.

Implication

This would result in improper presentation of results.

FY18 update

There has been no change in the accountingtreatment of MasterCard fees and thus thisremains as an open MLP for the FY18 audit.

The following SADs were raised in FY18relating to the late release of prepayments tothe P&L:

1) TCCT Mastercard £2.3m

2) TC Retail advertising and credit card fees£0.9m

3) TCTO Big Reunion £0.5m

Management response:The treatment of the credit card fees remainsconsistent with agreed GAPM. This will beupdated in line with IFRS15

Paul Wilkes, FinancialController, TC Money

Emma Davenport,Head of FinancialReporting

Mar 19



27



UK TourOperator

1l

â

2

l

InFY18

FY17 Accuracy of monthly reportingObservation

During our testing (particularly in relation to SDIs), weidentified a number of items relating to 2016 which had beenposted into the 2016 statutory accounts but into the 2017group reporting pack and as such were recorded in theincorrect accounting period.

Furthermore we identified a number of items recorded in adifferent period of current year to which they related such asSDIs recorded in H2 but relating to H1.

Implication

This leads to inaccurate monthly and year-end financialreporting.

FY18 update

Management has implemented a more stringentapproach to SDIs to ensure they meet the recognitioncriteria in the GAPM. In addition management check thecompleteness of expenses recorded by analysingmonth on month and year on year movement in keyaccounts to ensure no costs are excluded.

However in current year we identified a SAD for £2mrelating to the new Webhelp agreement which has beenrecognised in the incorrect period. This income hadbeen taken to the P&L but should be deferred on thebalance sheet.

While we have noted improvement in this area therehas been material prior year adjustments noted as partof the FY18 group audit, and therefore maintain this asan open point.

This has been down graded to a grade 2 risk in FY19.

Management response:The Finance team worked hard in FY18 to improve theaccuracy of the reporting. Whilst we acknowledge thedown grading to a grade 2 I feel this point is duplicatingthe SDI point on page 16.

Emma Davenport(Head of Financial& ManagementReporting)

Mar 19



28



UK TourOperator

1l

FY17 Items recognised as cash but not yet received atthe balance sheet dateObservation

In TCTO, as part of the audit of bank reconciliationswe have identified reconciling items relating to cashreceived post balance sheet date which wasrecognised as cash at the year-end. Controls inplace did not identify that these items did not meetthe definition of cash per the GAPM as at 30/9/17.

Implication

Inappropriate recognition of cash balances whichwould lead to incorrect presentation of cash (whichis a key metric for the business) in the financialstatements.

FY18 update

At the year-end the segment has £28.9m ofreconciling items between the bank statement andtrial balance which EY do not consider to meet thedefinition of cash and therefore raised as a SAD.These items relate to credit card receivables anddirect debit receipts from customers which have notcleared in the bank as at year-end. At the year-endthe business does not control this cash and thereforeEY do not consider this to meet the GAPM definitionof “short-term, highly liquid investments that arereadily convertible to known amounts of cash”. Wehave therefore raised a reclassification SAD as weconsider recognition as a debtor to be moreappropriate and thus this MLP remains open.

Management response:An update to the GAPM has been made to reviseThomas Cook’s definition of cash / cash equivalents.The UK will be following this revised definition goingforward.

Simon Retchless(Head of Reporting& Cash Forecasting)

Mar 19



29




1l

FY17 Intercompany OverviewAn overview of intercompany agreements includinghorizontal recharges is not available. Furthermore,intercompany contracts could not be provided. Themanagement informed us that the contracts arecurrently only completed in oral form. Oral form ofcontracts is not sufficient especially tax wise andbear a high risk of not being tax deductible.

FY18 update

We recommend to improve documentation regardingintercompany agreements and guaranteecompleteness.

This was discussed with local management whichhas agreed that there is room for improvement butthe final decision will be up to group management.

Management response:We acknowledge the recommendation.Improvements in inter-company documentation arepart of a wider enhancement to the inter-company &transfer pricing project across the Group

Christian Bopp(FinanceDirector)

Sep 19


1l

FY17 SDI Monthly templateAccording to Group Accounting Policy Manual (SDI)“All potential separately disclosed items need to beapproved via the template issued by Group Financeby the Financial Director of Tour Operators andFinancial Director of Airlines. This should then besubmitted to Head of Group Financial Reporting forfinal approval, in advance of being recognized.”(29.2 Responsibilities)

Actually Continental Europe reported the templateevery month but they don’t received any writtenresponse back from the Head of Group FinancialReporting.

FY18 update

We advise to follow accounting manual and receivewritten approval for all exceptional items booked on alocal level and correspondingly presented in SDItemplate.

Management response:The compliance with the SDI process bereinforced.This matter has also been addressed inconjunction with the response contained to the Groupobservation on SDI’s above.

Markus Röhricht(Head ofControlling)

Mar 19



EY | Assurance | Tax | Transactions | Advisory

About EYEY is a global leader in assurance, tax, transaction and advisory services. The insights andquality services we deliver help build trust and confidence in the capital markets and ineconomies the worldover. We develop outstanding leaders who team to deliver on our promises to all of ourstakeholders. In so doing, we play a critical role in building a better working world for ourpeople, for our clients and for our communities.

EY refers to the global organisation, and may refer to one or more, of the member firms ofErnst & Young Global Limited, each of which is a separate legal entity. Ernst & Young GlobalLimited, a UK company limited by guarantee, does not provide services to clients. For moreinformation about our organisation, please visit ey.com.

Ernst & Young LLPThe UK firm Ernst & Young LLP is a limited liability partnership registered in England and Wales with registered numberOC300001 and is a member firm of Ernst & Young Global Limited.

Ernst & Young LLP, 1 More London Place, London, SE1 2AF.

© 2017 Ernst & Young LLP. Published in the UK.All Rights Reserved.

ey.com

Thomas Cook Group plc - parliament.uk · The management letter is given an overall grading based on...

Documents

Transcript of Thomas Cook Group plc - parliament.uk · The management letter is given an overall grading based on...