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Equinix: ManagementS Responsibility For The Consolidated Financial Statements

The following excerpt is from the company's SEC filing.

Management is responsible for the preparation and fair presentation of the consolidated financial statements in accordance with the International Financial Reporting Standards as issued by the International Accounting Standards Board; this includes the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of consolidated financial statements that are free from material misstatement, whether due to fraud or error.

Auditors Responsibility

Our responsibility is to express an opinion on the consolidated financial statements based on our audits. W e conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free from material misstatement.

An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated financial statements. The procedures selected depend on our judgment, including the assessment of the risks of material misstatement of the consolidated financial statements, whether due to fraud or error. In making those risk assessments, we consider internal control relevant to the Companys preparation and fair presentation of the consolidated financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Companys internal control. Accordingly, we express no such opinion.

An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.

Opinion

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Telecity Group plc and its subsidiaries as of 31 December 2014 and 2013, and the results of its operations and its cash flows for each of the three years in the period ended 31 December 2014 in accordance with International Financial Reporting Standards as issued by the International Accounting Standards Board.

PricewaterhouseCoopers LLP

London, United Kingdom

Telecity Group plc

Consolidated statements of income

Year ended

31 December

Revenue

348,695

325,550

282,950

Cost of sales

(146,604

(138,899

(120,199

Gross profit

202,091

186,651

162,751

Sales and marketing costs

(13,470

(11,964

(10,894

Administrative costs analysed:

Depreciation charges

(49,976

(45,761

(38,416

Amortisation charges

(5,234

(4,950

(3,746

Operating exceptional items

(18,502

(5,175

(3,072

Other administrative costs

(24,895

(21,448

(22,395

(98,607

(77,334

(67,629

Operating profit

90,014

97,353

84,228

Finance income

Finance costs

(8,960

(9,069

(7,695

Other financing items

Profit on ordinary activities before taxation

81,022

88,440

76,146

Income tax charge

(21,292

(23,222

(18,038

Profit for the year

59,730

65,218

58,108

Earnings per share: basic (pence)

diluted (pence)

The accompanying notes form an integral part of these consolidated financial statements.

Consolidated statement of comprehensive income

Other comprehensive income:

Currency translation differences on foreign currency net investments

(20,082

(1,193

(3,398

Fair value movement on cash flow hedges

(1,944

(2,550

Tax on fair value movement on cash flow hedges

Other comprehensive (expense)/ income for the year net of tax

(21,648

(5,388

Total comprehensive income recognised in the year attributable to owners of the parent

38,082

66,110

52,720

The components of other comprehensive income may subsequently be reclassified to the income statement.

Consolidated statements of changes in equity

capital

premium

Retained

profits

shares

Cumulative

reserve

At 1 January 2012

75,852

221,713

(2,160

298,027

Total comprehensive income/(expense) for the year ended 31 December 2012

56,118

Transactions with owners:

Credit to equity for share-based payments

Tax on share-based payments

Purchase of own shares

Issue of shares

Dividends paid to owners of the parent

(5,007

At 31 December 2012 and 1 January 2013

78,038

280,138

(1,174

356,958

Consolidated statements of changes in equity (continued)

At 1 January 2013

Total comprehensive income/(expense) for the year ended 31 December 2013

67,303

(17,168

(14,250

(13,805

At 31 December 2013 and 1 January 2014

78,453

333,191

(2,367

409,263

Total comprehensive income/(expense) for the year ended 31 December 2014

58,164

(23,302

(20,631

(19,702

At 31 December 2014

79,013

370,724

(22,449

427,643

A description of each of the reserves is given in note 28.

Consolidated balance sheets

Assets

Non-current assets

Intangible assets

157,819

179,098

Property, plant and equipment

703,955

661,917

Deferred income taxes

Trade and other receivables

863,828

845,063

Current assets

43,628

40,604

Cash and cash equivalents

27,228

23,244

70,856

63,848

Total assets

934,684

908,911

Equity

Share capital

Share premium account

Retained profits

Own shares

Cumulative translation reserve

Total equity

Consolidated balance sheets (continued)

Liabilities

Non-current liabilities

19,270

18,712

Borrowings

339,027

322,858

Derivative financial instruments

Provisions for other liabilities and charges

30,115

29,394

396,006

374,723

Current liabilities

Trade and other payables

50,898

61,490

43,439

45,373

Current income tax liabilities

111,035

124,925

Total liabilities

507,041

499,648

Total liabilities and equity

Consolidated statements of cash flows

Cash inflow from operating activities

148,988

145,904

135,538

Interest received

Interest paid

(6,687

(5,743

(4,025

Interest element of finance lease payments

Taxation paid

(16,720

(10,908

(14,602

Purchase of operational, plant and equipment

(32,223

(25,341

(22,791

92,671

103,220

93,734

Cash flows from investing activities

Acquisition of subsidiaries, net of cash acquired

(39,447

(25,716

Costs associated with acquisition of subsidiaries

(3,157

(2,641

Proceeds from sale of property, plant and equipment

Purchase of investment related property, plant and equipment

(97,046

(91,968

(131,531

Purchase of freehold land

(4,864

Purchase of landlord furnished leasehold improvements

(15,000

Cash used in investing activities

(97,037

(134,526

(179,752

Cash flows from financing activities

Net proceeds from borrowings

30,655

42,680

88,467

Proceeds from sale and leaseback arrangements

12,639

Repayment of finance leases

(4,902

(3,969

(1,875

Costs relating to refinancing

(2,038

(1,935

Net proceeds on issue of ordinary share capital

Net cash inflow from financing activities

32,298

86,510

Net increase in cash and cash equivalents

Effects of foreign exchange rate change

(1,554

Cash and cash equivalents at beginning of year

20,971

22,033

Cash and cash equivalents at end of year

Notes to the consolidated financial statements

General information

Telecity Group plc (the Company) is a company incorporated and domiciled in the United Kingdom and has Sterling as its presentation and functional currency. Telecity Group plc and its subsidiaries (together the Group) operate in the internet infrastructure facilities and associated services industry within Europe. The operating companies of the Group are disclosed within note 16.

The Company is a public limited company which is listed on the London Stock Exchange.

Significant accounting policies

The significant accounting policies adopted in the preparation of these consolidated financial statements have been incorporated into the relevant notes where possible. For example, the accounting policy for depreciation is contained in the property, plant and equipment note. General accounting policies which are not specific to a particular note, for example foreign exchange, are set out below.

Basis of preparation

The consolidated financial statements of the Group have been prepared in accordance with International Financial Reporting Standards (IFRS) as issued by the International Accounting Standards Board (IASB) and International Financial Reporting Interpretations Committee (IFRIC) interpretations, collectively IFRS. The consolidated financial statements have been prepared under the historical cost convention, with the exception of the Groups interest rate swap contracts (note 23) which are recorded at fair value and the share-based payment expense (note 27) which is based on fair value at date of option grant.

Going concern

The Group generates operating cash flows which are invested in organic and inorganic investment activities. To the extent investment expenditure exceeds the operating cash flows of the business, the additional expenditure is funded by the Groups borrowing facilities (note 22).

The Groups forecasts and projections, taking account of reasonably possible changes in trading performance, show that the Group will be able to operate within the level of its current facilities. After making enquiries, the Directors have a reasonable expectation that the Group has adequate resources to continue in operational existence for the foreseeable future. The Group therefore continues to adopt the going concern basis in preparing its consolidated financial statements.

Accounting developments and changes

No new standards have been adopted by the Group for the first time in the year ended 31 December 2014.

A number of new standards, amendments and interpretations have been issued but are not effective for the financial year beginning 1 January 2014 and have not been early adopted. To the extent they are not relevant to the Group, they have been excluded from the following summary:

IFRS 9, Financial instruments addresses the classification, measurement and derecognition of financial assets and financial liabilities. When adopted, the standard is not expected to have a material effect on the Groups results.

IFRS 15, Revenue from contracts with customers establishes principles for reporting information to users of financial statements about the nature, amount, timing and uncertainty about revenue and cash flows arising from the entitys contracts with customers. When adopted, the standard is not expected to have a material effect on the Groups results.

Notes to the consolidated financial statements (continued)

Significant accounting policy judgments

IFRS requires management to exercise its judgment in the process of determining and applying the Groups accounting policies. A summary of the Groups key accounting policy judgments is given below:

Accounting for fair value movements of interest rate swap contracts the Group holds several interest rate swap contracts (note 23). The Group has taken the decision to record fair value movements of such instruments in the statement of comprehensive income, rather than the income statement, where the conditions necessary for this have been met.

Disclosure of segmental information IFRS 8 allows the aggregation of operating segments provided that certain criteria are met. The Group considers that the aggregation of operating segments into the UK and the Rest of Europe is appropriate.

Commencement of depreciation on new build data centres when a new build data center is constructed in zones, then depreciation is calculated on a zone-by-zone basis and commences when a zone becomes operational.

Significant accounting estimates and judgments

The preparation of financial statements in conformity with IFRS requires the use of estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of income and expenses during the reporting period. Although these estimates are made by management based on the best available evidence, due to events or actions, actual results ultimately may differ from those estimates. The estimates and assumptions that have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial year are discussed below:

Property, plant and equipment depreciation estimated remaining useful lives and residual values are reviewed annually. The carrying value of property, plant and equipment is also reviewed for impairment triggers and, where there has been a trigger event, the present value of estimated future cash flows from these assets through use against the net book value is assessed. The calculation of estimated future cash flows and residual values is based on the Directors best estimates of future prices, output and costs and is therefore subjective.

Intangible assets amortisation estimated remaining useful lives are reviewed annually. The carrying values of intangible assets are also reviewed for impairment where there has been a trigger event by assessing the present value of estimated future cash flows through use compared with net book value. The calculation of estimated future cash flows and residual values is based on the Directors best estimates of future income from customer contracts and is therefore subjective.

Estimated impairment of goodwill the Group tests annually whether goodwill has suffered any impairment, in accordance with the accounting policy stated in note 14. The recoverable amounts of cash-generating units have been determined based on value-in-use calculations. These calculations require the use of estimates (note 14), particularly around future cash flows, discount rate and long term growth assumptions. During the year an indicator of impairment was identified in the Turkish subsidiary. Subsequent testing identified that the carrying value of the Turkish cash generating unit exceeded its value in use resulting in goodwill being written down. The impairment charge was disclosed as an exceptional item.

Dilapidations provisions due to the significant investment the Group makes in its data centres along with the long property leases it has in place, when assessing dilapidation provisions it is generally expected that the Group shall continue to operate its data centres for the foreseeable future. As such, there is a low probability that any dilapidation amounts will become due. A site by site review is performed every six months and if any site specific circumstances arise that changes this assessment, a dilapidations provision is accounted for.

Onerous lease provisions liabilities in respect of onerous leases are reviewed and updated, where necessary, to reflect current conditions and intentions. The actual cost of these may be different depending upon whether the Group is successful in terminating or assigning the lease.

Deferred taxation full provision is made for deferred taxation at the rates of tax prevailing at the period end dates unless different future rates have been substantively enacted. Deferred tax assets are recognised where it is considered probable by the Directors that they will be recovered and, as such, are subjective.

Interest rate swap contracts IAS 39 requires interest rate swap contracts to be recorded on the balance sheet at their fair value. The fair values of derivative instruments include estimates of future interest rates and therefore are subjective.

Share-based payments the Group issues equity-settled share-based payments to certain employees under the terms of the long-term incentive plans. Equity-settled share-based payments are measured at fair value at the date of grant. The fair value at the grant date is determined using either the Black Scholes or the Monte Carlo models and is expensed over the vesting period. The value of the expense is dependent upon certain key assumptions including the expected future volatility of the Groups share price at the date of grant.

Foreign exchange

Monetary assets and liabilities denominated in foreign currencies at the balance sheet date are retranslated at the rates ruling at that date. These translation differences are disclosed in the income statement.

The balance sheets of foreign subsidiaries are translated from their functional currency into Sterling at the closing rates of exchange. The results are translated at an average rate, recalculated for the year on a daily basis.

Foreign exchange differences arising from the translation of opening net investments in foreign subsidiaries at the closing rate, including long-term inter-company loans, are taken directly to reserves. In addition, foreign exchange differences arising from retranslation of the foreign subsidiaries results from average rate to closing rate are also taken directly to the Groups cumulative translation reserve. Such translation differences are recognised in the income statement in the financial year in which the operations are disposed of.

The results and year-end balance sheets of the Groups foreign currency denominated companies have been translated into Sterling using the respective average and closing exchange rates for the year in the table below:

Average

Closing

Bulgarian Lev

Polish Zloty

Swedish Krona

11.293

12.120

10.193

10.685

10.739

10.525

Turkish Lira

A 2% movement in the foreign exchange rates above would have impacted the profit for the year ended 31 December 2014 and year end net assets by £0.9 million and £4.5 million respectively (2013:£0.8 million and £4.1 million respectively, 2012: £0.7 million and £3.4 million respectively).

Basis of consolidation

Subsidiaries are all entities over which the group has control. The group controls an entity when the group is exposed to, or has rights to, variable returns from its involvement with the entity and has the ability to affect those returns through its power over the entity. Subsidiaries are fully consolidated from the date on which control is transferred to the group. They are deconsolidated from the date that control ceases.

The Group uses the acquisition method of accounting to account for business combinations. The consideration transferred for the acquisition of a subsidiary is the fair value of the assets transferred, the liabilities incurred and the equity interests issued by the Group.

The consideration transferred includes the fair value of any asset or liability resulting from a contingent consideration agreement. Acquisition-related costs are expensed as incurred. Identifiable assets acquired and liabilities and contingent liabilities assumed on a business combination are measured initially at their fair values at the acquisition date.

On an acquisition by acquisition basis, the Group recognises any non-controlling interest in the acquiree either at fair value or at the non-controlling interests proportionate share of the acquirees net assets.

Investments in subsidiaries are accounted for at cost less impairment. Cost also includes directly attributable costs of investments.

The excess of the consideration over the fair value of the Groups share of the identifiable net assets of the subsidiary acquired is recorded in goodwill. If this is less than the fair value of the net assets of the subsidiary acquired in the case of a bargain purchase, the difference is recognised directly in the statement of comprehensive income.

Inter-company transactions, balances and unrealised gains on transactions between Group companies are eliminated. Unrealised losses are also eliminated but considered an impairment indicator of the asset transferred. Accounting policies of subsidiaries have been changed where necessary to ensure consistency with the policies adopted by the Group.

Revenue represents the value of goods and services supplied to customers during the year, excluding value added tax and other sales related taxes. Where invoices are raised in advance for contracted services, the revenue is spread over the period of the service and deferred income is recognised on the balance sheet.

Colocation revenues arise from the Groups infrastructure assets and are recognised on a straight-line basis over the period of the contract.

Generally, revenue from services, including engineering support, connectivity and other IT services, is recognised when the service is provided. When services are required before related colocation services can be provided, revenue from service contracts is bundled with the related colocation revenues and the entire amount recognised over the course of the contracts as the services are provided.

Segmental information

Reportable segments are presented in a manner consistent with the internal reporting provided to the chief operating decision-maker. The chief operating decision-maker, who is responsible for allocating resources and assessing performance of the segments, has been identified as the Board of Directors.

The Group is organised on a geographical basis and derives its revenue from the provision of colocation and related services in Bulgaria, Finland, France, Germany, Ireland, Italy, the Netherlands, Poland, Sweden, Turkey and the United Kingdom. These geographical locations comprise the Groups segments.

Due to similarities in services, customers, regulatory environment and economic characteristics across the countries in which the Group operates, the Group aggregates these operating segments into the UK and the Rest of Europe.

The Board reviews the Groups internal reporting in order to assess performance and allocate resources. The internal reporting principally analyses the performance of the UK and the Rest of Europe. When further detail is required the results of individual countries are reviewed. The Board has therefore determined the reportable segments to be the UK and the Rest of Europe.

Sales between segments are made at market rates and accounted for in the same way as external transactions.

The Groups income statement split by segment is shown below. Treasury and financing is managed on a Group-wide basis, as such it is not practical to allocate costs below operating profit to an individual reporting segment.

Year ended 31 December 2014

Rest of Europe

146,931

201,764

(64,339

(82,265

82,592

119,499

(18,203

(31,773

(2,108

(3,126

Operating expenses

(13,215

(25,150

(38,365

Exceptional items (note 6)

(1,088

(17,414

Total operating costs

(34,614

(77,463

(112,077

47,978

42,036

Profit before tax

The above segmental results are shown after eliminating inter-segment trading of £1,972,000 for the year ended 31 December 2014. The Group had no customers from which greater than 10% of revenue was derived during 2014.

Year ended 31 December 2013

143,901

181,649

(63,710

(75,189

80,191

106,460

(17,243

(28,518

(2,107

(2,843

(11,087

(22,325

(33,412

(1,616

(3,559

(32,053

(57,245

(89,298

48,138

49,215

The above segmental results are shown after eliminating inter-segment trading of £1,932,000 for the year ended 31 December 2013. The Group had no customers from which greater than 10% of revenue was derived during 2013.

Year ended 31 December 2012

137,487

145,463

(61,682

(58,517

75,805

86,946

(15,806

(22,610

(1,638

(13,449

(19,840

(33,289

(31,363

(47,160

(78,523

44,442

39,786

The above segmental results are shown after eliminating inter-segment trading of £1,628,000 for the year ended 31 December 2012. The Group had no customers from which greater than 10% of revenue was derived during 2012.

The following table shows the Groups assets and liabilities by reporting segment. Segment assets consist primarily of property, plant and equipment, intangible assets, trade and other receivables, and cash and cash equivalents. Segment liabilities principally comprise trade and other payables, deferred income and provisions for other liabilities and charges. Certain assets and liabilities, for example Group treasury cash balances and bank borrowings, are managed on a central basis and as such have not been allocated to individual segments.

354,838

560,348

915,186

Unallocated assets

19,498

(110,194

(56,295

(166,489

Unallocated liabilities

(340,552

(507,041

Additions to intangible assets

Additions to property, plant and equipment

30,890

91,034

121,924

Additions to non-current assets

91,671

122,561

342,382

547,370

889,752

19,159

(107,508

(65,115

(172,623

(327,025

(499,648

35,969

30,566

85,026

115,592

120,995

151,561

332,989

449,372

782,361

18,792

801,153

(101,526

(66,233

(167,759

(276,436

(444,195

20,097

89,334

102,520

191,854

122,617

211,951

Directors emoluments and key management compensation

Key management compensation, which includes that of the executive and non-executive Directors, is as follows:

Salaries and other short-term employee benefits

Pension payments defined contribution plans

Share-based payment charges

Termination benefits

The share-based payment charge is measured in line with IFRS2 expense charged to the income statement during the year.

Employee information

The average monthly number of persons employed by the Group, including Directors with service contracts, during the year was:

By activity

Operations

Administration

Remuneration costs for these persons

Wages and salaries

38,655

34,565

30,754

Social security costs

Other post-employment benefits

Share-based payments charges (note 27)

48,887

44,421

41,941

Exceptional items are disclosed separately in the financial statements where it is necessary to do so to provide further understanding of the financial performance of the Group. They are material items of income or expense that have been shown separately due to the significance of their nature or amount.

The exceptional items are summarized in the table below:

Transaction-related expenses

Increase in onerous leases provision

Business review fees

Impairment of Turkish business and associated items

11,963

Departure of Chief Executive Officer

Departure of Group Finance Director

Transaction-related expenses relate to the business combinations described in note 17, comprising professional fees, stamp duty and restructuring costs.

During 2014 the Group commissioned certain external advisors to assist with a detailed business review. The associated fees of £1.8 million were assessed to be exceptional on grounds of their size and non-recurring nature.

The impairment of Turkish business and associated items relates to SadeceHosting acquired in 2013 (note 17). The Group believes that potential exists within the Turkish colocation market. Turkey is a fast developing market, with the prospect of becoming a major internet hub, due to both its large and rapidly growing domestic digital economy and its strategic locations between Europe and Asia. The current business has yet to capture this demand and whilst progress has been made, the Group is focused on improving performance further. Following the production of a revised business plan, the discounted cash flows of this plan indicate the need for a reduction in the carrying value of this business, resulting in an impairment of goodwill of £9.6 million (note 14) and other associated costs of £2.4 million.

Exceptional items relating to the departure of the Chief Executive Officer and Group Finance Director include costs in excess of those that would have ordinarily been incurred during their employment, including any directly attributable incremental costs, for example, recruitment fees.

The above exceptional items resulted in a tax credit of £2,143,000 (2013: £619,000 credit), which is included within the tax charge on adjusting items.

In addition to the above operating exceptional items, in 2013 there was an exceptional tax charge of £1,663,000 (2012: £nil) relating to outstanding tax disputes.

Auditors remuneration

Amounts paid and payable to the Auditors are shown below:

Audit of the Company and the consolidated financial statements

Audit of the Companys subsidiaries

Total audit services

Audit-related assurance services, including interim review

Total audit and assurance services

Tax advisory services

Other non-audit services

Total fees

Expenses

The Group classifies its expenses by nature into the following categories. Power costs represent the total cost of power to the Group including environmental taxes. Property costs include rent payments, service charge and taxes in addition to ancillary property costs such as insurance. Staff and staff-related costs include expenses such as training and recruitment in addition to the staff remuneration costs disclosed in note 4. Other costs comprise operational maintenance costs, sales and administrative costs and cost of sales of services.

50,581

47,162

40,517

51,461

47,249

43,390

44,362

41,500

37,335

47,467

41,575

35,318

193,871

177,486

156,560

Intangible asset charges

14,834

258,681

228,197

198,722

Finance income

Finance income arising from bank deposits is recognized in the income statement on an accruals basis.

Bank and other interest

Finance costs

Finance costs are recognised in the income statement over the term of such...


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