UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
 FORM 20-F

 (Mark One)

☐FORM 20-F


☐Registration statement pursuant to section 12(b) or (g) of the Securities Exchange Act of 1934

or
☒Annual report pursuant to section 13 or 15(d) of the Securities Exchange Act of 1934
For the 12 months ended October 31, 2020

or
☐ Annual report pursuant to section 13 or 15(d) of the Securities Exchange Act of 1934
☐Transition report pursuant to section 13 or 15(d) of the Securities Exchange Act of 1934

or
☒  Transition report pursuant to section 13 or 15(d) of the Securities Exchange Act of 1934
       For the transition period from May 1, 2017 to October 31, 2017
☐Shell company report pursuant to section 13 or 15(d) of the Securities Exchange Act of 1934

or
☐ Shell company report pursuant to section 13 or 15(d) of the Securities Exchange Act of 1934

Date of event requiring shell company report _____________
Commission file number 001-38187


Micro Focus International plc
(Exact Name of Registrant as specified in its charter)

 The Lawn
 22-30 Old Bath Road
 Newbury
 Berkshire RG14 1QN
United KingdomUnited Kingdom
(Jurisdiction of Incorporation or Organization)(Address of Principal Executive Offices)

Tim Brill
Director of Investor Relations and Corporate Communications
c/o Micro Focus International plc
    The Lawn, 20-30 Old Bath Road
    Newbury, Berkshire RG14 1QN
    United Kingdom
    Tel: +44 (0) 1635 32646
    Email: investors@microfocus.com
 (Name, Telephone, E-mail and/or facsimile number and Address of Company Contact Person)
Suzanne Chase
Group Company Secretary & Head of Assurance
c/o Micro Focus International plc
The Lawn, 20-30 Old Bath Road
Newbury, Berkshire RG14 1QN
United Kingdom
Tel: +44 1635 565 200
Email: company.secretary@microfocus.com

Securities registered or to be registered pursuant to Section 12(b) of the Act.

Title of each class:Trading Symbol(s):Name of each exchange on which registered:
Ordinary Shares and* American Depository Shares, each representing one ordinary share of Micro Focus International plc
MFGP
New York Stock Exchange
(Title of each class)(Name of exchange on which registered)

*Not for trading, but only in connection with the registration of American Depositary Shares, pursuant to the requirements of the Securities and Exchange Commission.

Securities registered or to be registered pursuant to Section 12(g) of the Act.
None
(Title of Class)

Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act.
None
(Title of Class)
Indicate the number of outstanding shares of each of the issuer’s classes of capital or common stock as of the close of the period covered by the annual report.

As of October 31, 2017, 152,775,7262020 93,019,616 American Depository Shares were issued and outstanding.outstanding.

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.

Yes ☐☒   No ☒☐

If this report is an annual or transition report, indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.

Yes ☐    No ☒

Note – Checking the box above will not relieve any registrant required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 from their obligations under those Sections.

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes ☒No ☐

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

Yes ☐☒    No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer.filer, or an emerging growth company. See the definitions of “accelerated filerfiler”, “large accelerated filer” and large accelerated filer”“emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer
☒
Accelerated filer
☐		Non-accelerated filer ☐Emerging growth company  ☐
Large accelerated filer  ☐Accelerated filer  ☐          Non-accelerated filer ☒          Emerging growth company ☐

If an emerging growth company that prepares its financial statements in accordance with U.S. GAAP, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards† provided pursuant to Section 13(a) of the Exchange Act. ☐

†The term “new or revised financial accounting standard” refers to any update issued by the Financial Accounting Standards Board to its Accounting Standards Codification after April 5, 2012.

Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C 7262(b)) by the registered public accounting firm that prepared or issued its audit report.

☒

Indicate by check mark which basis of accounting the registrant has used to prepare the financial statements included in this filing:

US GAAP   ☐
International Financial Reporting Standards as issued by the International Accounting Standards Board  ☒
Other ☐

If “Other” has been checked in the previous question, indicate by check mark which financial statement item the registrant has elected to follow.   Item 17 ☐    Item 18 ☐

If this is an annual report, indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Securities Exchange Act of 1934).  Yes ☐    No ☐
☒

2

TABLE OF CONTENTSTable of Contents

FORWARD-LOOKING STATEMENTSIntroduction
5
1Cautionary statement on forward looking statements
5
PART I
7
Item 1. Identity of Directors, Senior Management and Advisers
7
Item 2. Offer Statistics and Expected Timetable
7
Item 3. Key Information
7
Item 3. A.    Selected financial data.
7
Item 3. B.    Capitalization and indebtedness.
9
Item 3. C.    Reasons for the offer and use of proceeds.
9
Item 3. D.    Risk factors.
10
Item 4. Information on the Company
17
Item 4. A.    History and development of the company.
17
Item 4. B.    Business overview.
18
Item 4. C.    Organizational structure
23
Item 4. D.    Property, plants and equipment.
23
Item 4A.      Unresolved Staff Comments
23
Item 5. Operating and Financial Review and Prospects
2
5.A Operating Results
2
5.B Liquidity and Capital Resources
19
5.C Research & Development, Patents and Licences
20
5.D Trend Information
21
5.E Off-Balance Sheet Arrangements
21
5.F Tabular Disclosure of Contractual Obligations
22
5.G Safe Harbor
22
24
  
Item 8.A.7 Financial Information – Legal Proceedings5. A.    Operating results.
23
24
  
Item 5. B.    Liquidity and capital resources.
35
Item 5. C.    Research and development, patents and licenses, etc.
40
Item 5. D.    Trend information.
41
Item 5. E.    Off-balance sheet arrangements.
42
Item 5. F.     Tabular disclosure of contractual obligations.
43
Item 5. G.    Safe harbor.
43
Item 6. Directors, Senior Management and Employees
44
Item 6. A.    Directors and senior management.
44
Item 6. B.    Compensation
50
Item 6. C.    Board practices.
57
Item 6. D.    Employees.
62
Item 6. E.    Share ownership.
62
Item 7. Major Shareholders and Related Party Transactions
64
Item 7. A.    Major shareholders.
64
Item 7. B.    Related party transactions.
64
Item 7. C.    Interests of experts and counsel.
64
Item 8. Financial Information
65
Item 8. A.    Consolidated Statements and Other Financial Information.
65
Item 8.A.7   Litigation, Proceedings and Investigations
65
Item 8. B.    Significant Changes.
67
Item 9. The Offer and Listing.
68
Item 9. A.    Offer and listing details.
68
Item 9. B.    Plan of distribution.
68
Item 9. C.    Markets.
68
Item 9. D.    Selling shareholders
68
Item 9. E.    Dilution.
68
Item 9. F.     Expenses of the issue.
68
Item 10. Additional Information.
69
Item 10. A.  Share capital.
69
Item 10. B.  Memorandum and articles of association.
69

3
69
69
70
73
73
73
74
75
80
82
25
82
 
82
83
  83
83
84
86
87
87
87
87
87
88
88
89
90
90
90
90

Explanatory Notes
4
Introduction

Audited financial information presented in this Annual Report on Form 20-F is for the 12-month period ended October 31, 2020 and the comparative 12-month period ended October 31, 2019 and the 18-month period ended October 31, 2018.

In connection with the completion (“Closing”) in the 18-month period ended October 31, 2018 of the merger between Micro Focus International plc (the “Company”)(“the Company” LSE: MCRO.L, NYSE: MFGP) and HPE Software’s business segment (“HPE Software”Software business”), together the “Enlarged Group”“Group” or “Enlarged Company”, the Board of Directors authorized a change of fiscal year end from April 30, 2018 to October 31, 2018 to allow the Company to launch the Enlarged Company’s financial year with effect from November 1, 2017.2018. As a result, the Company iswas required to file this transition reporta previous Annual Report on Form 20-F for the transition period of May 1, 2017 to October 31, 2017.2018.

After filingExhibit 15.4 in our Annual Report and Accounts Form 20-F filed with the transition reportUnited States Securities and Exchange Commission on 21 February 2020, further presented the Company’s next annual report will beunaudited financial information presented for the 18 month12-month period ending October 31, 2018. A comparison of our operating results for the 6-month periods ended October 31, 20172018 and 2016 has been included within Item 5.A.

Financial information presented in this Form 20-F is for the 6-month period ended October 31, 2017 and October 31, 2016. The Company notes that this transition report on Form 20-F is filed pursuant to Rule 13a-10(g)(4) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), which permits the Company to respond to only Items 5, 8.A.7., 13, 14 and 18 of Form 20-F.2017.


SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

Cautionary statement on forward looking statements
The Securities and Exchange Commission, or the SEC, encourages companies to disclose forward-looking information so that investors can better understand a company’s future prospects and make informed investment decisions. Except for the historical information contained in this transition reportAnnual Report on Form 20-F, the statements contained in this transition reportAnnual Report are “forward-looking statements” which reflect our current view with respect to future events and financial results.

Words such as “may,” “anticipate,” “estimate,” “expects,” “projects,” “intends,” “plans,” “believes” and words and terms of similar substance used in connection with any discussion of future operating or financial performance, identify forward looking statements. Forward-looking statements represent management’s present judgment regarding future events and are subject to a number of risks and uncertainties that could cause actual results to differ materially from those described in the forward-looking statements.

These risks include, but are not limited to, risks and uncertainties regarding:

·our ability to attract and retain sufficiently qualified management and key employees;
our ability to develop products and services that satisfy the needs of our customers;
·restrictions on our ability to secure additional financing or refinance our existing financing;

·the ongoing integration of HPE Software into the Company, which may impede the ability of the Enlarged Group to obtain the same types and levels of benefits, services and resources that have historically been provided to HPE Software by HPE, which could lead to a failure to realize the anticipated benefits of the Merger;
the effectiveness of our sales force and distribution channels;
·the implementation of the U.S. Tax Cuts and Jobs Act and any impact to our earnings;

·our exposure to fluctuations in interest rates, which could affect our variable rate indebtedness and currency exchange rates;
competition in the markets in which we operate;
·the covenants under the New Facilities;

·our dependence on intellectual property, our ability to protect intellectual property and third party claims of infringement on intellectual property;
our ability to attract and retain sufficiently qualified management and key employees;
·our ability to develop products and services that satisfy the needs of our customers;

·competition in the markets in which we operate;
the ongoing integration of HPE Software business into the Company, which may impede the ability of the Group to obtain the same types and levels of benefits, services and resources that have historically been provided to HPE Software business by HPE, which could lead to a failure to realize the anticipated benefits of the merger;
·the availability, integrity and security of our IT systems;

·our ability to protect the personal information of our customers;
our ability to identify, manage, complete and integrate acquisitions, divestitures and other significant transactions successfully;
·the effectiveness of our sales force and distribution channels;

·our potential liability or lost business opportunities related to defective products;
the availability, integrity and security of our IT systems;
·decisions to discontinue or restrict development expenditures;

·our exposure to tax liabilities and indemnification in certain circumstances; and
our ability to comply with national and regional laws and regulations across the various jurisdictions in which the Group operates;
·our ability to manage the risks involved in the foregoing.

our dependence on intellectual property, our ability to protect intellectual property and third-party claims of infringement on intellectual property;

our ability to comply with the covenants under our Credit Facilities (see note 18 “Borrowings” of the Consolidated financial statements in Item 18);

restrictions on our ability to secure additional financing or refinance our existing financing;

our exposure to fluctuations in currency exchange rates and interest rates, which could affect our variable rate indebtedness;

the possibility of being required, in certain circumstances, to make tax indemnification payments to the former owner of the HPE Software business;

the impact of future changes to, or interpretations of, US and non-US tax laws;

our exposure to political developments in the United Kingdom, including political, legal and economic uncertainties in connection with the future of the UK and its relationship with the EU following its departure from the EU on January 31, 2020 and the end of the transition period on December 31, 2020;

Our exposure to prevailing macro-economic trends;

Our exposure to the practical and macro-economic impacts of COVID-19;

our ability to protect the personal information of our customers;

our ability to discover and address any material weaknesses or deficiencies in the Group’s internal controls over financial reporting; and

our ability to manage the risks involved in the foregoing.

In light of these assumptions, risks and uncertainties, the results and events discussed in the forward-looking statements contained in this transition reportAnnual Report might not occur. Investors are cautioned not to place undue reliance on the forward lookingforward-looking statements, which speak only as of the date of this transition report.Annual Report. We are not under any obligation, and we expressly disclaim any obligation, to update or alter any forward-lookingforward- looking statements, whether as a result of new information, future events or otherwise. All subsequent forward-looking statements attributable to us or to any person acting on our behalf are expressly qualified in their entirety by the cautionary statements contained or referred to in this document.

PART I

Item 1.Identity of Directors, Senior Management and Advisers
Not applicable.

Item 2.Offer Statistics and Expected Timetable
Not applicable.

Item 3.Key Information

Item 3. A.Selected financial data.

Selected consolidated financial data

The table below shows the Group’s selected consolidated financial data prepared under International Financial Reporting Standards (“IFRS”) as issued by the International Accounting Standards Board (“IASB”).

The selected Consolidated income statement data for the 12-months ended October 31, 2020, the 12-months ended October 31, 2019, and the 18-months ended October 31, 2018 and the selected Consolidated balance sheet data as at October 31, 2020 and October 31, 2019 have been derived from our audited Consolidated financial statements included in “Item 18. Consolidated financial statements” in this Annual Report on Form 20-F. The selected consolidated income statement data for the 12-months ended April 30, 2017 and April 30, 2016 and the selected consolidated balance sheet data as at April 30, 2018, 2017 and 2016 have been derived from our consolidated financial statements not included in this Annual Report on Form 20-F.

The Group’s financial statements reflect the trading performance of the continuing and discontinuing operations for the 12-months ended October 31, 2020 compared to the 12-months ended October 31, 2019 and the 18-months ended October 31, 2018.

Within the 12-months ended October 31, 2020, the Group has not undertaken any corporate development activity that would have a material impact on the Group’s reported results.

ITEMThe selected consolidated financial information should be read in conjunction with “Item 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS Operating and Financial Review and Prospects” and our consolidated financial statements and the related notes appearing elsewhere in this Annual Report on Form 20-F. The information provided below is not necessarily indicative of the results that may be expected from future operations.

Summarized Group consolidated statement of comprehensive income:

  
12 months
ended
October 31,
2020
  
12 months
ended
October 31,
2019
  
18 months
ended
October 31,
2018
  
12 months
ended
April 30,
2017
  
12 months
ended
April 30,
2016
 
  
$m
 
$m

 
$m

 
$m

 

$m

Revenue  3,001.0   
3,348.4
   
4,754.4
   
1,077.3
   
991.2
 
Cost of sales  (702.7)  
(789.9
)
  
(1,302.7
)
  
(216.4
)
  
(202.5
)
Gross Profit  2,298.3   
2,558.5
   
3,451.7
   
860.9
   
788.7
 
Selling and distribution costs  (1,112.1)  
(1,224.8
)
  
(1,764.2
)
  
(363.1
)
  
(312.6
)
Research and development expenses  (513.6)  
(491.2
)
  
(680.8
)
  
(122.8
)
  
(117.4
)
Administrative expenses  (3,334.0)  
(620.8
)
  
(629.9
)
  
(147.6
)
  
(111.5
)
Operating (loss)/profit  (2,661.4)  
221.7
   
376.8
   
227.4
   
247.2
 
Finance costs  (281.6)  
(282.4
)
  
(350.4
)
  
(96.8
)
  
(98.4
)
Finance income  2.6   
26.6
   
7.7
   
1.0
   
1.0
 
(Loss)/profit before tax  (2,940.4)  
(34.1
)
  
34.1
   
131.6
   
149.8
 
Taxation  (34.2)  
16.0
   
673.1
   
(7.5
)
  
(13.9
)
(Loss)/profit from continuing operations  (2,974.6)  
(18.1
)
  
707.2
   
124.1
   
135.9
 
Profit from discontinued operation (attributable to equity shareholders of the Company)  
5.1
   
1,487.2
   
76.9
   
33.7
   
27.0
 
(Loss)/profit after tax  (2,969.5)  
1,469.1
   
784.1
   
157.8
   
162.9
 
Other comprehensive (expense)/income  (103.1)  
(306.0
)
  
29.3
   
(5.7
)
  
0.6
 
Total comprehensive (expense)/income for the period  (3,072.6)  
1,163.1
   
813.4
   
152.1
   
163.5
 
                     
Attributable to:                    
Equity shareholders of the Company  (3,072.6)  
1,162.8
   
813.3
   
152.2
   
163.4
 
Non-controlling interest  -   0.3   
0.1
   
(0.1
)
  
0.1
 
Total comprehensive (expense)/income for the period  (3,072.6)  
1,163.1
   
813.4
   
152.1
   
163.5
 
                     
Continuing and Discontinued Operations                    
Earnings per share                    
Basic (cents)  (884.63)  388.50   
201.70
   
68.88
   
74.50
 
Diluted (cents)  (884.63)  
384.35
   
196.17
   
66.51
   
71.61
 
                     
Continuing Operations                    
Earnings per share                    
Basic (cents)  (886.15)  (4.87)  
181.91
   
54.17
   
62.40
 
Diluted (cents)  (886.15)  (4.87)  
176.92
   
52.31
   
59.97
 

Summarized Group consolidated statement of financial position:

  
October 31,
2020
  
October 31,
2019
  
October 31,
2018
  
April 30,
2017
  
April 30,
2016
 
  
$m
 
$m

 

$m

 
$m

 
$m

Non-current assets  9,605.0   
12,846.7
   
13,720.5
   
3,995.5
   
3,482.6
 
Current assets  1,541.8   
1,448.1
   
1,917.6
   
442.2
   
954.4
 
Current assets classified as held for sale  -   
-
   
1,142.5
   
-
   
-
 
Total assets  11,146.8   
14,294.8
   
16,780.6
   
4,437.7
   
4,437.0
 
                     
Current liabilities  1,788.3   
1,802.0
   
2,010.4
   
944.7
   
1,061.8
 
Current liabilities classified as held for sale  -   
-
   
437.7
   
-
   
-
 
Non-current liabilities  6,143.4   
6,216.5
   
6,540.5
   
1,879.5
   
1,781.4
 
Total liabilities  7,931.7   
8,018.5
   
8,988.6
   
2,824.2
   
2,843.2
 
                     
Net Assets  3,215.1   
6,276.3
   
7,792.0
   
1,613.5
   
1,593.8
 
                     
Share Capital  47.3   
47.2
   
65.8
   
39.7
   
39.6
 
Number of shares  364,545,377   
363,583,328
   
436,800,513
   
229,674,479
   
228,706,210
 

  
12 months
ended
October 31,
2020
  
12 months
ended
October 31,
20191
  
18 months
ended
October 31,
2018
  
12 months
ended
April 30,
2017
  
12 months
ended
April 30,
2016
 
Interim dividend 1  -   
58.33
   
34.60
   
29.73
   
16.94
 
Interim dividend 2  -   
-
   
58.33
   
-
   
-
 
Final dividend  15.50   
-
   
58.33
   
58.33
   
49.74
 
Dividend declared per share (cents)  15.50   
58.33
   
151.26
   
88.06
   
66.68
 

1 The directors initially declared a dividend of 58.33 cents per ordinary share but this was cancelled subsequent to the year end due to the impact of COVID-19.

Item 3. B.Capitalization and indebtedness.

Not applicable.

Item 3. C.Reasons for the offer and use of proceeds.

Not applicable.

Item 3. D.Risk factors.

There are risks associated with owning Micro Focus ADSs. In addition to the other information included elsewhere in this Annual Report on Form 20-F, including in the section entitled ‘‘Cautionary Statement on Forward-Looking Statements,’’ you should carefully consider the following discussion of what we believe to be the most important risk factors applicable to the Group. The risks and uncertainties described below are not the only risks and uncertainties that the Group and holders of Micro Focus ADSs may face. In addition, it is not possible to predict or identify all such factors and additional risks and uncertainties not presently known to the Company, or that the Company currently considers immaterial, which could also materially adversely affect the business, results of operation, financial condition and prospects of the Group, as well as the value of Micro Focus ADSs.

The order in which the following risk factors are presented does not necessarily reflect the likelihood of their occurrence or the relative magnitude of their potential material adverse effect on the business, financial condition, results of operation or prospects of the Group or the market price of the Micro Focus Shares or Micro Focus ADSs.

The information given is as of the date of this Annual Report on Form 20-F, and any forward-looking statements are made subject to the reservations specified under the section entitled ‘‘Cautionary Statement on Forward-Looking Statements”.

Principal risks and uncertainties
In common with all businesses, the Group could be affected by risks and uncertainties that may have a material adverse effect on its business operations and achieving its strategic objectives including its business model, future performance, solvency, liquidity and/or reputation. This includes any new, emerging or continuing direct or indirect risks posed by COVID-19. These risks could cause actual results to differ materially from forecasts or historic results. Accepting that risk is an inherent part of doing business, the board is mindful of the interdependencies of some risks. Where possible, the Group seeks to mitigate risks through its RMF (“Risk Management Framework”), internal controls and insurance, but this can only provide reasonable assurance and not absolute assurance against material losses. In particular, insurance policies may not fully cover all of the consequences of any event, including damage to persons or property, business interruptions, failure of counterparties to conform to the terms of an agreement or other liabilities. The following are the principal risks and uncertainties and potential impacts that are relevant to the Group as a provider of software products and associated services at this time. They do not comprise all of the risks associated with the Group and are not set out in priority order. Additional risks not presently known to management, or currently deemed to be less material, may also have an adverse effect on the Group.

Products
Principal risk description
To remain successful, the Group must ensure that its products continue to meet the requirements of customers and investment must be effectively balanced between growth and mature products. Investment in research and innovation in product development is essential to meet customer and partner requirements in order to maximize customer value, revenues and corporate performance. The Group has a large number of products, at differing stages of their life cycle. The extent of investment in each product set needs to be managed and prioritized considering the expected future prospects and market demand.
Potential impact
If products do not meet the requirements of customers, they will seek alternative solutions, resulting in the loss of existing maintenance and new revenue opportunities and the cancellation of existing contracts. Insufficient focus on key research and development projects may damage the long-term growth prospects of the Group. The Group’s business and reputation may be harmed by innovation that falls behind competitors, or by errors or defects in its products.


Sales / Go-To-Market (“GTM”) models
Principal risk description
For the Group to succeed in meeting sales revenue and growth targets, it requires successful GTM models across the full Product Portfolio, with effective strategies and plans to exploit all routes to market, including direct and channel/partner led sales. In addition, the Group must focus the sales force on targeted customer segments and ensure appropriate responses to the market dynamics related to changes in customer buying behaviors. Effective GTM models may be more successful if accompanied by compelling Micro Focus brand awareness programs. The Group is dependent upon the effectiveness of its sales force and distribution channels to drive licence and maintenance sales and a reference-based selling model. This risk was increased given the COVID-19 restrictions across various regions, from time to time in the period.

Potential impact
Poor design and/or execution of GTM plans may limit the success of the Group by targeting the wrong customers through the wrong channels and positioning the wrong product or solution offerings, reducing the value that customers receive from Micro Focus.

Competition
Principal risk description
Comprehensive information about the markets in which Micro Focus operates is required for the Group to assess competitive risks effectively and to perform successfully. The Group operates in a number of competitive markets and success in those markets depends on a variety of factors. This risk increased in the period due to the ongoing pace and scale of change across the IT competitive landscape.

Potential impact
Failure to understand the competitive landscape adequately and thereby identify where competitive threats exist may damage the successful sales of the Group’s products. If the Group is not able to compete effectively against its competitors, it is likely to lose customers and suffer a decrease in sales, which may result in lost market share and weaker financial performance.


Employees and culture
Principal risk description
The recruitment and retention of highly skilled and motivated employees at all levels of the Group, is critical to the success and future growth of the Group in all countries in which it operates. Employees require clear business objectives and a well communicated vision and set of values for the Group to achieve high levels of employee engagement and a common sense of corporate purpose among the workforce. This risk was increased given the COVID-19 restrictions across various regions, from time to time in the period.

Potential impact
Failure to attract, develop and retain skill sets, particularly in sales and research & development, may hinder the Group’s sales and development plans. Weak employee engagement, organizational alignment and inadequate incentivization may lead to poor performance and instability. It could also have an adverse impact on the realization of strategic plans.

IT systems and information
Principal risk description
The Group’s operations, as with most businesses, are dependent on maintaining and protecting the integrity and security of the IT systems and management of information. Following the integration of the HPE Software business the Group continues to operate on two IT architectures with the attendant complexity to business operations and the control environment. As set out in Item 5.D, work continues to transition the Group to a simplified IT systems architecture. The transition may be more time consuming and costly than anticipated, given the amount of change management that is involved. This risk was increased given the COVID-19 restrictions across various regions, from time to time in the period.
Potential impact
Disruption to the IT systems could adversely affect business and Group operations in a variety of ways, which may result in an adverse impact on business operations, revenues, customer relations, supplier relations, and reputational damage. Dependency on IT providers could have an adverse impact on revenue and compliance in the event that they cannot resume business operations.

Business strategy and change management
Principal risk description
The Group is engaged in a number of major change projects, including acquisitions and divestments, to shape and grow the business by strengthening the portfolio of products and capabilities and IT projects to standardize systems and processes. The continued integration of the HPE Software business is complex, with a range of integration and transformation risks. The integration of the HPE Software business with the existing businesses carried on by the Group may be more time consuming and costly than anticipated.
The Group is also executing a series of operational transformation initiatives. These projects expose the Group to significant transformation risks. The Group’s strategy may involve the making of further acquisitions or divestments to protect or enhance its competitive position and failure to identify, manage, complete and integrate acquisitions, divestments and other significant transactions successfully could have a material adverse effect on the Group’s business.
Further, the Group is progressing with a number of initiatives stemming from the Strategic & Operational Review carried out in the previous financial year, which may further increase disruption to “business as usual” activities across the Group. This risk was increased given the COVID-19 restrictions across various regions, from time to time in the period.

Potential impact
Failure to successfully analyze, execute and coordinate the implementation and delivery of the core systems and associated business processes with the various integration, divestment and transformation programs may result in the disruption of the on-going business without delivering the anticipated strategic and operational benefits of such transactions and/or initiatives. In addition, this may affect the ability to execute strategic plans for growth.

Legal and regulatory compliance
Principal risk description
The Group operates across a number of jurisdictions and two regulated exchanges. Compliance with national and regional laws and regulations, including those that relate to ESG matters, such as Task Force on Climate-related Disclosure (“TCFD”) requirements, is essential to successful business operations. The Group may be involved in legal and other proceedings from time to time, and as a result may face damage to its reputation or legal liability. The Group has entered into various acquisitions and disposals over recent years and may be subject to, or have the benefit of, certain residual representations, warranties, indemnities, covenants or other liabilities, obligations or rights. The Group has a variety of customer contracts in a variety of sectors, including Government clients. This risk was increased in the period due to the variety COVID-19 restrictions in place across regions in which the Group operates and the heightened complexity this posed to securing personal and/or sensitive information, particularly in work-from-home settings.

Potential impact
Failure to comply could result in civil or criminal sanctions (including personal liability for directors), as well as possible claims, legal proceedings, fines, loss of revenue and reputational damage.


Intellectual property (“IP”)
Principal risk description
The Group is dependent upon its IP and its rights to such IP may be challenged or infringed by others or otherwise prove insufficient to protect its business. The Group’s products and services depend in part on IP and technology licensed from third parties. Third party claims of IP infringement against the Group may disrupt its ability to sell its products and services.
Potential impact
This IP risk could adversely affect the ability of the Group to compete in the market place and affect the Group’s revenue and reputation.

Treasury
Principal risk description

The Group’s operational and financial flexibility may be restricted by its level of liquidity, indebtedness and covenants. Financing costs could increase or financing could cease to be available in the long-term. The Group may incur materially significant costs if it breaches its covenants under its banking arrangements.
The Group targets a Net debt1 to Adjusted EBITDA2 ratio of 2.7 times and may require additional debt funding in order to execute its strategy. The Group is exposed to interest rate risk related to its variable rate indebtedness, which could cause its indebtedness service obligations to increase significantly.
The Group operates across a number of jurisdictions and so is exposed to currency fluctuations.
1 Net Debt is defined as cash and cash equivalents less borrowings and lease obligations.
2 Adjusted EBITDA is defined as net earnings before finance costs, finance income, taxation, share of results of associates, depreciation of property, plant and equipment, depreciation of right-of-use assets, amortization of intangible assets, exceptional items including the gain on disposal of discontinued operation, share-based compensation, product development intangible costs capitalized and foreign exchange (gains)/losses.
Potential impact

Insufficient access to funding could limit the Group’s ability to achieve its desired capital structure or to complete acquisitions. An increase in interest rates could have a significant impact on business results.
The relative values of currencies can fluctuate and may have a significant impact on business results.

Tax
Principal risk description
The tax treatment of the Group’s operations is subject to the risk of challenge by tax authorities in all territories in which it operates. Cross-border transactions may be challenged under tax rules and initiatives targeting multinationals’ tax arrangements.
International tax rules continue to develop at each of the OECD, EU and national levels and the pace of change may increase in the short-term as a result of the US election and the COVID-19 pandemic. Future changes to tax laws could adversely affect the Group across the territories in which it operates.
As a result of the HPE Software business merger, the Group may be required under the Tax Matters Agreement entered into with HPE (the “TMA”) to indemnify HPE, if actions undertaken by the Group affect the tax treatment of the separation of the HPE Software business from HPE.

Potential impact
Tax liabilities in the territories in which the Group operates could increase as a result of either challenges of existing positions by tax authorities or future changes in tax law. Specifically, given the substantial operations in the US any changes in tax policy that might arise from the results of the US election could have a significant impact on the Group. Furthermore, if the Group is required to make indemnification payments to HPE under the TMA, these could be substantial.


Macro-economic environment, Pandemic and Brexit
Principal risk description
The Group’s businesses may be subject to inherent risks arising from the general and sector specific economic, public health, pandemics and political conditions, including as a result of any pandemics or natural disasters, in one or more of the markets in which the Group operates. This is heightened by the fact the Group sells and distributes its software products globally. Exposure to political developments in the United Kingdom, including the terms and manner of the UK’s withdrawal from the EU, could have an adverse effect on the Group. Further deterioration of the macro environment could result in more conservatism and longer decision-making cycles within the Group’s customer base. This risk was increased given the COVID-19 restrictions across various regions, from time to time in the period.

Potential impact
Adverse economic conditions could affect sales, and other external economic or political matters, such as price controls, could affect the business and revenues.

COVID-19
Principal risk description
The Group, like all businesses, is navigating through a period of disruption, as it has responded to the practical and macro-economic impacts of COVID-19. COVID-19 still presents fast moving, and in some areas unpredictable, direct and indirect risks to the Group’s businesses. The Group may be subject to inherent risks arising from the continuation of the on-going COVID-19 pandemic. Further deterioration of the macro environment could result in more conservatism and longer decision-making cycles within the Group’s customer base.
Potential impact
Adverse economic conditions arising as a result of the continuation of the COVID-19 pandemic could affect sales performance and business operations.

Cyber security

Principal risk description
There could be a data security breach (Micro Focus data or customer data) involving personal, commercial or product data, either directly from Micro Focus or a third party. This could occur as a result of a malicious or criminal act, or an inadvertent system error. This risk was increased in the period due to the general increased threat of cybercrime and sudden increase of work-from-home employees caused by COVID-19 restrictions across various regions, from time to time in the period.

Potential impact
Data loss, which could harm client and customer relationships, compliance and/or perception of the effectiveness of the Group’s products.

Internal controls over financial reporting
Principal risk description
Internal controls over financial reporting may not prevent or detect an error, fraud, financial misstatement or other financial loss, leading to a material misstatement in the Group’s financial statements.
Potential impact
Failure to discover and address any material weaknesses or deficiencies in the Group’s internal controls over financial reporting could result in material misstatement in the Group’s financial statements and impair the Group’s ability to comply with applicable financial reporting requirements and related regulatory filings on a timely basis. Based on the assessment as at October 31, 2020, management identified a material weakness in the Group’s internal controls over financial reporting, relating to inadequate controls surrounding existing IT applications, in particular regarding change management and access controls. As a result of those deficiencies, automated controls and controls over information produced by the entity related to those applications could not be relied upon. Please refer to the FY20 Annual Report on SOX compliance in Item 15.A to D. Although the Group continues to implement measures to address and remediate this material weakness, failure to do so, and the risk that other deficiencies may be identified, could also result in an adverse reaction in the financial markets due to a loss of confidence in the reliability of the Group’s financial statements and could have a material adverse effect on the Group’s business, financial condition, results of operation and prospects.


Item 4.Information on the Company

Item 4. A.History and development of the company.

Overview

Micro Focus International plc (“Micro Focus”) is a global enterprise software business delivering value to approximately 40,000 customers. Micro Focus helps organizations run and transform their business. Driven by customer-centric innovation, Micro Focus software provides the critical tools customers need to build, operate, secure and analyze the enterprise.

The Company is subject to the information requirements of the US Securities Exchange Act of 1934 applicable to foreign private issuers. In accordance with these requirements, the company files its Annual Report on Form 20-F and other documents with the SEC. The Company’s SEC filings are available to the public at the SEC’s website, www.sec.gov.

Access comprehensive information about the Company and download shareholder publications at the corporate website; visit the Investor Relations section for the latest company news, dividend and share price data.

Our website – www.microfocus.com

The Micro Focus Group, headquartered in Newbury, U.K., is a global enterprise software company supporting the technology needs and challenges for our 40,000 customers. The registered office of the Company is The Lawn, 22-30 Old Bath Road, Newbury, Berkshire, RG14 1QN, United Kingdom (Tel: +44 1635 565200). Its solutions help organizations leverage existing IT investments, enterprise applications and emerging technologies to address complex, rapidly evolving business requirements while protecting corporate information at all times.

Micro Focus was founded in 1976 and in 1981 it became the first company to win the Queen’s Award for Industry purely for developing a software product. The product was CIS COBOL, a standard-compliant COBOL implementation for microcomputers.  Micro Focus’ COBOL products remain important components of the Micro Focus Product Portfolio, which now extends to more than 300 products.

Micro Focus International plc is listed on the London Stock Exchange and is a member of the FTSE 250 index. The Company’s American Depositary Shares (the “ADSs”) are listed on the New York Stock Exchange.

As of February 22, 2021 (the latest practicable date prior to the date of this Annual Report on Form 20-F), Micro Focus had a market capitalization of £1.4 billion ($2.0 billion).

Micro Focus has more than 40 years of experience in delivering proven, scalable and robust solutions.

Acquisitions and Investments

This Annual Report covers the 12-months ended October 31, 2020 with the comparative periods being the 12-months ended October 31, 2019 and the18-months ended October 31, 2018.

Within the 12-months ended October 31, 2020, the Group has not undertaken any corporate development activity that would have a material impact on the Group’s reported results.

Details of business combinations including the transaction to acquire ATAR Labs for the 12-months ended October 31, 2020 and additional transactions in the 12-months ended October 31, 2019 and the 18-months ended October 31, 2018 can be found in note 33 “Acquisitions” of the Consolidated financial statements in Item 18.

Item 4. B.Business overview.

Item 4.B.1.

Who we are
We deliver mission critical technology that serves a central role in thousands of core strategic and operational functions such as testing, monitoring, delivery, analysis, engagement, security and compliance for our 40,000 customers.

With a large software portfolio, backed by a deep inventory of advanced analytics that delivers insights, efficiencies, and automation, we help customers bridge existing and emerging technologies to adapt and succeed in the evolving economy. We call that Smart Digital Transformation.

We aim to have an unwavering focus on pragmatism, discipline, and customer-centric innovation. This helps our customers balance short-term business resiliency with long-term transformation, attain a high level of flexibility, future-proof investments in IT and related processes, and rest assured that they will be supported over time.

What we do
We help organizations find a balance between safeguarding existing revenue models and taking the necessary steps to compete in an evolving marketplace over the long run. By delivering software that is open, flexible, and backwards compatible, we help bridge the existing and the emerging so customers can ultimately run and transform their business at the same time.

The rules of business are quickly being rewritten as new technologies, engagement models, and customer expectations force organizations to rethink their IT strategies. Those who can quickly transform and expose new business opportunities are most likely to achieve long-term success. However, speed must be balanced with pragmatism as organizations grapple with changes to how and where we do business, which can pose organizational uncertainty and risk.

Our portfolio, backed by a deep inventory of advanced analytics and on-going innovations, helps deliver the four key outcomes required to succeed in the digital economy:

Accelerate Application Delivery
Reliably scale Agile and DevOps across all environments, from mainframe to cloud—quickly bringing innovative ideas to life at the pace of business demands.

Simplify IT Transformation
Simplify the complexity of hybrid IT and transform into an agile, services-driven organization.

Strengthen Cyber Resilience
Intelligently adapt security to respond to an ever-evolving threat landscape and protect the company’s most important assets.

Analyze in Time to Act
Leverage machine learning to transform unlimited volumes of data into accurate, actionable, and automated insights.

Our portfolio and product groups
The Micro Focus Product Portfolio contains over 300 products; both long-standing and deeply embedded software products and high growth offerings that are designed to support customers across the four outcomes set out above. These products are grouped into five groups:

Application Modernization & Connectivity (AMC)
AMC solutions help customers unlock the value from core business applications and support a transformational journey to create greater value from longstanding IT investments, on or off the mainframe.

Application Delivery Management (ADM)
ADM solutions help customers increase velocity, remove bottlenecks and deliver high-performing applications to better support their digital business. Combined, these solutions increase stakeholder alignment and the delivery of value, while liberating resources to release faster without compromising quality.

IT Operations Management (ITOM)
ITOM Solutions simplify the complexity of managing hybrid IT environments. Powered by analytics, they accelerate the service fulfilment life cycle, strengthen IT service assurance and governance, and help business users easily engage with IT.

Security
Security provides enterprises with intelligent solutions to create cyber resilience through detecting threats, securing data and applications, and protecting identities – enabling customers to adapt and evolve for the future.

Information Management & Governance (IM&G)
IM&G solutions help customers analyze, understand, and control data – to derive value and manage enterprise risk. Efficient compliance, governance, customer behavior, and IOT analytics are representative use cases.

During the prior year the Group completed the separation and sale of the SUSE business. SUSE provided and supported enterprise-grade Open Source software defined infrastructure solutions and Linux. SUSE is presented as a discontinued operation in all periods reported elsewhere in this Annual Report on Form 20-F. Commentary in this Annual Report on Form 20-F is in relation to the Micro Focus Product Portfolio, and does not include SUSE.

Product developments
In FY20 we continued to invest significantly in our products delivering key enhancements and major new releases across every portfolio. In total we delivered over 500 enhancements or new releases with notable developments including:

–      Information, Management & Governance: major releases of our leading Compliance & Archiving and Big Data solutions to deliver expanded cloud capabilities and coverage and support new cross-industry use cases;

–      IT Operations & Management: delivery of a new architecture and Artificial Intelligence capabilities to enable the rapidly increasing levels of operational data to be collected, analyzed and actioned more effectively;

–      Application Delivery Management: new SaaS capabilities and advancements in support of modern quality management practices;

–      Application Modernization and Connectivity: major enhancements to support customers in modernizing mainframe workload with expanded cloud capability further consolidating our leadership position in this increasingly important area; and

–      Security: new Artificial Intelligence and Machine Learning capabilities, expanded multi-cloud support and enhanced capabilities to support customers in their key data privacy initiatives.

Adapting to market changes: transition to SaaS and Subscription
In FY20 we also began to take a more definitive approach to delivering Subscription and SaaS-based offerings as a key part of our strategy and to accelerate the transition to these models where appropriate within our portfolios. The transition is being managed over multiple financial periods with initial focus on products where this model is the emerging or de-facto market standard.

In FY20, accomplishments included:
–      Investment in infrastructure to improve service levels and scale with our customer demands;
–      The realignment of compensation plans to deliver this strategy; and
–      The release of multiple Security and Big Data offerings in SaaS and Subscription form delivering year-on-year growth in bookings and new logos in both portfolios.

In FY21, we plan to continue to invest in improving our SaaS infrastructure and develop existing and new offerings. In FY21 we plan to lead with SaaS or Subscription in targeted areas of our portfolio and expect, by FY22, SaaS or Subscription to be the only offerings available in these targeted areas.

Item 4.B. 2Principal markets

Details of the principal markets in which the Group operates including a breakdown of revenue by activity and geographic market is disclosed in note 2 “Supplementary Information” of the Consolidated financial statements in Item 18.

Our markets
Technology trends

Digital transformation
Digital transformation has been at the top of virtually every organization’s list of objectives and concerns for several years.

Digital transformation also plays a major role in enabling our customers to respond to the societal changes that we see at play in the global economy - from Big Data solutions ensuring logistic companies maximize routing efficiencies whilst minimizing carbon emissions, to embedding the latest cyber resilience in smart cities to support rapid urbanization.

A combination of technology advancements, evolving customer expectations, process enhancements (e.g. digitalization), and new business models are forcing executives to rethink prior IT strategies, and digitally transforming the organization represents an opportunity to meet these changing requirements.

There are several advantages to pursuing a transformation strategy, which can help our customers drive revenue (top-line benefits) or help organizations better manage risk and cost (bottom-line benefits) as outlined below:

Boost and sustain revenue
Access to increasing amounts of data and new ways to bridge formerly distinct data silos now enable organizations to achieve actionable insights. As a result, organizations can more effectively act on unmet customer needs, underfunded parts of the business, emerging business models, and more.

Drive customer engagement
Organizations are constantly looking for new and better ways to engage customers. With the right investments, they can eliminate intermediaries and employ digital platforms to reach and serve customers directly, closing the loop between data and action, and truly understand their customers and better satisfy their needs.

Deliver with greater speed
Customer expectations are constantly advancing, especially when it comes to accessing new and emerging benefits. With cognitive search, employees are able to perform knowledge discovery more efficiently; and with smarter functional testing, organizations can deliver innovation at lower risk than ever before.

Improve quality and delivery
Gaining access to AIOps (“Artificial Intelligence for IT Operations”) helps organizations reduce event volumes and get to root cause faster, and emerging service assurance technology combines data from hundreds of tools into a single pane of glass to discover IT resources and dependencies and fast-track problem resolution.

Streamline and enhance processes
Organizations that digitally transform can better streamline the back office with Robotics Process Automation (“RPA”), drive intelligent manufacturing with IOT analytics, and automate planning monitoring and scheduling.

Detect and prevent risk
Evolving IT and processes help organizations efficiently manage policies and privileges, identify insider threats, better lock down mainframe access, comply with regulations, and protect consumer privacy.

With so many benefits, it is understandable why “transform” is a critical-path strategy for virtually every organization on the planet.

In responding to the COVID-19 pandemic, IT executives across the world have had to make rapid changes to their working processes – rolling out capacity for remote work, online collaboration, and access to essential data and tools to whole workforces. The desire to “keep the lights on” soon became critical, and organizations started prioritizing investments that were optimized to “run” the business instead of “transform” it.

As time went on, what was once considered a short-term anomaly, quickly became the ‘new normal’ for business. Organizations thus had to take immediate action and show customers that they could continue delivering value. The pendulum thus began to swing again, and organizations sought out an IT strategy that balances short-term business resiliency with long-term value capture.

Today, the market for digital transformation remains robust. External forecasts predict that spending on solutions in this space will continue at a solid pace despite the challenges presented by the pandemic – with global spending projected to reach $2.1 trillion by 2023, growing at 15.5% CAGR over that time. This is consistent with our own primary research, which suggests that organizations are not just maintaining a high level of spend for digital transformation, but in fact they are accelerating projects due to the benefits realized during the pandemic by organizations that proactively pursued these initiatives and adapted more quickly to evolving market conditions.

In helping organizations to bridge the gap between existing and emerging technologies our customers are able to balance the need to both run and transform their business at the same time – which we believe are key elements of a successful digital transformation program.

With new expectations being placed on IT, and as organizations are finding new and better ways to bridge formerly distinct data silos, artificial intelligence/machine learning is quickly becoming a critical element of the digital transformation landscape. The advanced analytics can improve service management, streamline fulfilment, automate the data center, expedite data classification, automate processes, and expedite analysis and action. With a strong set of artificial intelligence/machine learning intellectual property (e.g. Vertica, IDOL, Interset), which is integrated across the portfolio, Micro Focus can deliver the insights, efficiencies, and automation necessary to succeed in today’s rapidly evolving marketplace.

Item 4.B. 3Seasonality
Micro Focus’ quarterly revenues have historically been affected by a variety of factors typical of the seasonality of an enterprise software business with a licence fee model and the industry in which it operates.

The operating margins of the Group are generally affected by seasonal factors in a similar manner because the Group has a largely fixed costs which remains consistent throughout the year. Micro Focus believes that this trend will continue in the future and that its total revenue will continue to peak in the fourth fiscal quarter of each year. The Group changed its financial year end to October 31 in 2018. As a result the fourth quarter licence fee peak moved from April 30, in periods before 2018, to October 31, in periods after, and including, 2018. Maintenance and SaaS and other recurring fee renewals are spread throughout the financial year, however, there is a seasonal peak in the quarter ending January 31 as a result of the calendar year end, which coincides with the financial year-end of a large number of other companies.

Item 4.B.4Raw Material
Not applicable

Item 4.B.5Product groups
Our sales organization operates with a single global strategic plan and execution model. Sales teams are organized by geography with product specialists in larger jurisdictions. We also have a broad network of more than 7,500 partners to supplement customers’ in-house resources and help them adapt to evolving market demands.

Following the Strategic & Operational review carried out in the previous period the Group has been focused implementing a number of initiatives to deliver operational excellence. The two key operational excellence initiatives are described below.

Security and Big Data
In FY20 we began to take a differentiated approach to investment and operational management in Security and Big Data, in order to better position ourselves to address growth opportunities. The priorities remain: delivering new innovation in response to rapidly changing market opportunities, expanded cloud and cross-industry use case support and further developing existing and new SaaS and subscription offerings.

In Security we also completed a small acquisition to deliver native Security, Orchestration and Remediation (S.O.A.R) capabilities, which removed a gap in our offering. Our Security portfolio is broad and our experience and expertise is deep. From this foundation we plan to continue to focus on delivering comprehensive solutions and thought leadership around Cyber Resilience as customers seek to protect their businesses from new and increasingly sophisticated threats.

Changes in operational management have focused on improving speed and agility through better end-to-end organizational alignment. This has been supported by more targeted customer coverage underpinned by the addition of dedicated and improved leadership capacity and talent, and specialist sales resources.

In FY21 we plan to consolidate improvements made and seek to accelerate in key areas of application security, data privacy and next generation security incident and event management. In addition to delivering on our product innovation commitments, progress is intended to be underpinned by ongoing investment in specialist sales capability and the development of improved indirect channels to market.

Go-To-Market
Our goal is delivering consistent, sustained improvement to our revenue performance through increases in sales productivity and the more effective alignment of our resources to opportunity. Our sales processes have been overly complex in part because acquisitions have not been fully integrated.

Notable achievements include:
–      A single methodology deployed globally to enable more consistent execution;
–      A new planning process to drive more effective deployment of resources to the right opportunities within our customer base and specialization by Product Portfolio to better pursue market opportunities;
–      Improvements to the leadership team through internal moves and significant levels of external recruitment; and
–      Improved enablement training and the implementation of new support tools.

In the second half of the year, these changes led to better predictability and improved performance across key sales metrics and over time we expect them to deliver better revenue performance for the Group.

The objective for FY21 is to ensure these changes are fully embedded in the organization and accelerate initiatives aimed at improving performance in maintenance and delivering new capabilities in both SaaS and Subscription to capture new opportunities and further improve the mix of recurring revenue within the Group.

Item 4.B.6Patents, licenses, industrial, commercial or financial contracts

The Group has over 300 products in its portfolio and has released over 500 enhancements or new releases in relation to these products during FY20. These products are protected by patents. Our patent portfolio is one of the ten largest in the pure-play enterprise software market.
Details of the Groups key financial contracts are included in Items 5.B and 10.C.

Item 4.B.7
Not applicable

Item 4.B.8
Not applicable

Item 4. C.Organizational structure.

The Group’s parent company is Micro Focus International Plc.

A full list of the Group’s subsidiaries can be found in note 35 “Related undertakings” of the Consolidated financial statement in Item 18.

Item 4. D.Property, plants and equipment.

The Group owns or leases a large number of properties, in over 40 countries worldwide. The Group’s headquarters are located at premises in Newbury, England and are owned by the Group. The Group has two individual leased properties which are material to the Group. One is located in Provo, Utah, where the Group currently leases approximately 405,700 square feet of office space. The lease on this facility expires in 2024, with an option to extend for a further three, five-year periods. The Group’s current annual rent under this lease is $8.4 million. Since March 1, 2019, part of the property has been sublet. Current annual sub-lease income is $1.1 million. The other property is located in Santa Clara, California, where the Group currently leases approximately 635,000 square feet of office space. The lease on this facility expires in 2029, with an option to extend for one further five-year period. The Group’s current annual rent under this lease is $4.7 million. The Group is currently not utilizing one floor of this facility and the related right-of-use assets has been tested for impairment with a partial impairment recorded.

Further information on property, plant and equipment and leases is included under the headings:

“Property, plant and equipment” in note 12 of the Consolidated financial statements in Item 18;

“Leases” in note 19 of the Consolidated financial statements in Item 18.

Item 4A.
Unresolved Staff Comments

There are no unresolved written comments from the SEC staff regarding its periodic reports under the Exchange Act received more than 180 days before October 31, 2020.

Item 5.Operating and Financial Review and Prospects

The following discussion and analysis is intended to provide investors with an understanding of the historical performance of Micro Focus International plc (“the Company” or “the Group”, LSE: MCRO.L, NYSE: MFGP)Company and its financial condition. This discussion and analysis presents the factors that had a material effect on the results of operations of Micro Focus for the interimGroup for:

the 12-month period from May 1, 2017 toended October 31, 2017. The following should be read in conjunction with2020, as compared to the Group’s unaudited consolidated financial statements12-month period ended October 31, 2019, and
the notes thereto included elsewhere in this transition report. 12-month period ended October 31, 2019, as compared to the 18-month period ended October 31, 2018.

The following discussion and analysis contains forward-looking statements. See ‘‘Special Note Regarding“Risk Factors” in Item 3D on page 10  and “Cautionary Statement on Forward-Looking Statements’’ on page 5 in this Annual Report on Form 20-F and “Risk Factors in our Form F-4 filed with the Securities and Exchange Commission on August 3, 2017 for a discussion of the uncertainties, risks and assumptions associated with these statements. The following should be read in conjunction with the Group’s Consolidated financial statements and the notes thereto included in Item 18.

5.A Operating results
Item 5. A.Operating results

Business Overview

Micro Focus International plc is listed onThis Annual Report covers the London Stock Exchange12-months ended October 31, 2020 with the comparative periods being the 12-months ended October 31, 2019 and is a member of the FTSE 100 index.  The Company’s American Depositary Receipts (the “ADRs”) are listed on the New York Stock Exchange.18-months ended October 31, 2018.

The Group is a global enterprise software provider supportingdiscussions for the technology needs and challenges of the Forbes Global 2000. The Group’s solutions help organizations leverage existing IT investments, enterprise applications and emerging technologies to address complex, rapidly evolving business requirements, including the protection of corporate information at all times. The Group has more than 16,000 employees in 49 countries worldwide and has over 20,000 customers, including 91 of the Fortune 100 companies.

On September 1, 2017, the Company announced the completion of the merger (the “Transaction” or the “Merger”) of its wholly owned subsidiary, with and into Seattle SpinCo, Inc. (“Completion”), which held the software business segment (HPE Software) of Hewlett Packard Enterprise Company (“HPE”).  As such, the period under review has seen the completion of the combination of Micro Focus with HPE Software to create one of the world’s largest pure play software companies.  This was a complex transaction with 12 months between announcement and completion. We are now fully engaged in the integration of the combined businesses.

The combination with HPE Software has clear business logic to extend Micro Focus’ market presence in mature infrastructure software segments:

·to increase operational efficiency of the Enlarged Group;
·to deliver effective product management focused on customer centered innovation; and
·to improve sales productivity.

The Group has two operating segments: Micro Focus Product Portfolio and SUSE Product Portfolio.

Micro Focus Product Portfolio

Following Completion of the Transaction we continued to run the HPE Software business separately within the Micro Focus Product Portfolio during the interim12-month period ended October 31, 2017 to avoid disruption.

Existing Micro Focus Product Portfolio. The Existing Micro Focus Product Portfolio contains our mature infrastructure software products that are managed on a portfolio basis akin to a “fund of funds” investment portfolio. This portfolio is being managed through the 4 BOX Model underpinned by consistent end to end processes to make and maintain the software, whilst the software is sold and supported through a geographic Go-to-Market (“GTM”) organization. Products are organized into five sub-portfolios based on industrial logic:  COBOL Development & Mainframe Solutions (“CDMS”), Host Connectivity, Identity & Access Security (“IAS”), Development & IT Operations Management Tools (“ITOM”), and Collaboration & Networking.

HPE Software. Within HPE Software our solution portfolios are IT Operation Management, Application Delivery Management, Enterprise Security Product, Platform, and Information Management Business.

SUSE Product Portfolio

SUSE’s characteristics are different due2019 as compared to the Open Source nature and the growth profile of its offerings. Through SUSE, a pioneer in Open Source software, we provide reliable, interoperable Linux, cloud infrastructure and storage solutions. The SUSE Product Portfolio comprises SUSE Linux Enterprise Server and Extensions, SUSE OpenStack Cloud, SUSE Enterprise Storage, SUSE Manager, and SUSE Linux Enterprise Desktop and Workstation Extension.

With effect from November 1, 2017, the Micro Focus Product Portfolio will be managed as one consolidated portfolio, with five sub-portfolios (Security, IT Operations Management, Application Delivery Management, Information Management & Governance and Application Modernization & Connectivity) based on industrial logic. From that date we have operated two product portfolios, Micro Focus and SUSE, consistent with how the Company has operated since May 1, 2015. We have aligned our financial year end to October 31, and will report an 18-month financial period endingended October 31, 2018 with interim results statementscan be found in Items 5.A of the Group’s Annual Report on Form 20-F for the six month periods12-months ended October 31, 20172019 which is available at https://www.microfocus.com/en-us/investors/investor-download-centre and April 30, 2018.has been filed with the SEC.

2
Within the 12-months, the Group has not undertaken any corporate development activity that would have a material impact on the Group’s reported results

We set out a new four phase plan below for the combination of the Micro Focus and HPE Software businesses whilst continuing to deliver sustainable shareholder returns.


Financial Year/Period endingOctober 31, 2017October 31, 2018October 31, 2019October 31, 2020
PhaseAssessmentIntegrationStabilizationGrowth
Action·Deliver plans for FY17·Standardize systems·Stabilize top line·Top line growth
·Detailed review of combined businesses·Rationalize properties·Improve GTM·Click and repeat!
·Invigorate product management·New Go to Market (“GTM”) model·Growth from new areas
·Maintain/improve cash conversion·Improved profitability
·Rationalize underperforming elements·Standardize systems
·New market initiatives·Rationalize legal entities

The Group has a clear strategy and business model that has been in place since 2011. This strategy and business model are focused on the way in which we believe that mature infrastructure software businesses should be managed and that the market for these businesses is going to consolidate. We believe that the consolidator in this market place needs to have scale and needs to operate efficiently. The Group has set out to be an effective company at managing a portfolio of mature infrastructure software assets. We believe that our proven ability to execute not only delivers significant amounts of cash and consequently great flexibility, but also a competitive advantage in the acquisition of other similar assets.

Our focused strategic priorities are:

·Integrate the companies seamlessly;
·Strengthen the GTM engine;
·Drive customer-centred innovation in everything we do;
·Capture value from the Transaction;
·Build a combined company that employees want to be part of and that customers value as a strategic partner; and
·Execute value creating mergers and acquisitions

The Group is affected by many challenges and risks which are continuously monitored by its executives. The Group operates a global business and is exposed to a variety of external economic and political risks which may affect the Group’s business operations and execution of the Group’s strategy. The Group’s executives focus on the following areas when managing the business:

·Ensuring the Group’s products continue to meet the requirements of its customers. The Group has a large number of products, at differing stages of their life cycle, and each requiring varying levels of investment and a tailored strategic approach. The extent of investment in each product set needs to be managed and prioritized considering expected future prospects, to ensure an effective balance between growth and legacy products.

·The adoption of an effective GTM model. For the Group to succeed in meeting revenue and growth targets it requires successful GTM models across the full product portfolio, with effective strategies and plans to exploit channel opportunities and focus the sales force on all types of customer categories.

·
Changes in the competitive landscape. The Group’s major competitors are expanding their product and service offerings with integrated products and solutions. Comprehensive information about the markets in which the Group operates is required for it to assess competitive risks effectively and to perform successfully.

·Challenges in relation to the retention of key employees. The retention and recruitment of highly skilled and motivated employees, at all levels of the Group, is critical to the success and future growth of the Group in all countries in which it operates. Employees require clear business objectives, and a well communicated vision and values, for the Group to achieve alignment and a common sense of corporate purpose among the workforce.

·A number of major change projects including acquisitions to grow the business by strengthening the Group’s portfolio of products and capabilities, and projects to standardize systems and processes. The successful integration of acquired businesses will build a solid base for further expansion.

·The Group’s operations, as is the case with most businesses, are dependent on maintaining and protecting the integrity and security of the IT systems and management of information. The Group may experience a major breach of its system security or cyber-attack.

3

Results of Operations

The following discussion provides an analysis of our  results of operations and should be read in conjunction with the condensed consolidated interimConsolidated financial statements included under Item 18 in this Annual Report on Form 20-F. The condensed consolidated interimConsolidated financial statements have been prepared in accordance with International Financial Reporting StandardsIFRS as issued by the International Accounting Standards Board (“IFRS”) applicable to interim reporting, International Accounting Standard 34 (“IAS 34”), “Interim Financial Reporting”.IASB.

We include certain non-IFRSAll narrative within this report focuses on the continuing operations unless otherwise stated.

The results of the discontinued operation are shown as a single amount on the face of the Consolidated statement of comprehensive income in Item 18 comprising the post-tax profit or loss of the discontinued operations and the post-tax gain or loss recognized either on measurement to fair value less costs to sell or on the disposal of the discontinued operation. The Consolidated statement of cash flows has been presented in Item 18 including the discontinued operation. Results and cash flows of the discontinued operation for the two reported periods are shown in note 32 “Discontinued operation” of the Consolidated financial measures which assist managementstatements in comparing our performanceItem 18.

The comparative amounts for the 12-months ended October 31, 2019 and the 18-months ended October 31, 2018 reflect the following events:

The Group changed accounting year-end in a period ended October 31, 2018 from April 30, 2018 to October 31, 2018 as a result a comparative period for the 18-month period ended on a consistent basis for purposesOctober 31, 2018 is presented;

The amounts presented exclude the discontinued SUSE business, disposed of business decision-making by removing the impact of certain items that management believes do not directly reflect our underlying operations. Included in the following discussion is Adjusted Operating Profit, Adjusted Profit before tax and Adjusted EBITDA, all of which are non-IFRS financial measures. For additional information on Adjusted Operating Profit, Adjusted Profit before tax and Adjusted EBITDA see “Non-IFRS Measures”.

In addition,12-month period ended October 31, 2019, from individual line items presented for the following discussion also provides a supplemental analysis of revenue and our non-IFRS financial measures, prepared on a constant currency (“CCY”) basis, where management believes that discussing CCY results provides a better understanding of the Group’s performance and trends because it allows for more meaningful comparisons of current period to that of prior periods. For additional information on CCY and our non-IFRS financial measures see “Non-IFRS Measures.”

Following Completion, we reviewed the measures that we use to assess the financial performance of the business and concluded that, in order to simplify reporting on the Enlarged Group, we would cease using the non-IFRS measures previously reported as “Facility EBITDA” and “Adjusted EBITDA”. We will continue to use and report the non-IFRS measure previously reported as “Underlying Adjusted EBITDA”, now renamed “Adjusted EBITDA”. In addition, we have begun reporting “Adjusted Profit before tax” to supplement our analysis of results of operations relating to taxation.

Six12 months ended October 31, 2017 compared to2019 and the six months18-months ended October 31, 20162018; and

The following table sets forth the components of profit for the six months18-month period ended October 31, 2017 and 2016.2018 only includes 14 months of results for the HPE Software business acquired during that period.

  Six months ended October 31, 2017  Six months ended October 31, 2016 *    
  
Before
exceptional
items
  
Exceptional
items
  Total  
Before
exceptional
items
  
Exceptional
items
  Total  
Total
(Decline)
/ Growth
 
  (dollars in millions)  % 
Revenue  1,234.5   -   1,234.5   684.7   -   684.7   80.3%
Cost of sales  (270.8)  (3.1)  (273.9)  (122.2)  (1.3)  (123.5)  121.9%
Gross Profit  963.7   (3.1)  960.6   562.5   (1.3)  561.2   71.1%
Selling and distribution costs  (390.1)  (8.6)  (398.7)  (216.5)  (2.0)  (218.5)  82.4%
Research and development expenses  (166.2)  (7.4)  (173.6)  (84.2)  (2.2)  (86.4)  101.0%
Administrative expenses  (89.0)  (79.4)  (168.4)  (57.5)  (35.6)  (93.1)  80.9%
Operating Profit  318.4   (98.5)  219.9   204.3   (41.1)  163.2   34.7%
Share of results of associates  (0.4)  -   (0.4)  (1.1)  -   (1.1)  61.1%
Finance costs  (69.2)  (6.3)  (75.5)  (49.5)  -   (49.5)  52.6%
Finance income  1.2   0.6   1.8   0.5   -   0.5   238.4%
Profit before tax  250.0   (104.2)  145.8   154.2   (41.1)  113.1   28.7%
Taxation  (64.7)  25.5   (39.2)  (28.1)  5.6   (22.5)  73.2%
Profit for the period  185.3   (78.7)  106.6   126.1   (35.5)  90.6   17.6%
24
  
12 months
ended
October 31,
2020
  
12 months
ended
October 31,
2019
  
Period-
on-
period
change
  
18 months
ended
October 31,
2018
  
Period-
on-
period
change
 
Continuing operations 
$m
 

$m

 %  
$m

 % 
Revenue  3,001.0   
3,348.4
   
(10.4
)%
  
4,754.4
   
(29.6
)%
Operating profit (before exceptional items)  350.2   
515.9
   
(32.1
)%
  
915.0
   
(43.6
)%
Exceptional items  (3,011.6)  
(294.2
)
  
(923.7
)%
  
(538.2
)
  
45.3
%
Operating (loss)/profit  (2,661.4)  
221.7
   
(1,300.5
)%
  
376.8
   
(41.2
)%
Net finance costs (excluding exceptional items)  (279.0)  
(255.8
)
  
(9.1
)%
  
(336.9
)
  
(24.1
)%
Exceptional finance costs  -   
-
   
n/a
   
(5.8
)
  
n/a
 
(Loss)/profit before tax  (2,940.4)  
(34.1
)
  
(8,522.9
)%
  
34.1
   
(200.0
)%
Taxation  (34.2)  
16.0
   
(313.8
)%
  
673.1
   
(97.6
)%
(Loss)/profit from continuing operations  (2,974.6)  
(18.1
)
  
(16,334.3
)%
  
707.2
   
(102.6
)%
Profit from discontinued operation  5.1   
1,487.2
   
(99.7
)%
  
76.9
   
1,833.9
%
(Loss)/profit for the period  (2,969.5)  
1,469.1
   
(302.1
)%
  
784.1
   
87.4
%

*Revenue
In the year ended April 30, 2017, the Company reviewed its consolidated statement of comprehensive income presentation and as a result re-classified both “Amortization of product development costs” and “Amortization of acquired technology intangibles” from Research and Development Expenses to Costs of Sales. The six months12-months ended October 31, 2016 comparatives have been reclassified accordingly. Also refer to Consolidated Statement2020, the Group generated revenue of Comprehensive Income.

The Group acquired HPE Software$3,001.0 million, which represents a decrease of $347.4 million (10.4%) on September 1, 2017. The Group results for the six months$3,348.4 million in 12-months ended October 31, 2017 contain the results for HPE Software from September 1, 2017 to October 31, 2017, while the Group results for the six months ended October 31, 2016 do not contain any results for HPE Software.2019.

4

Revenues

Revenues grew by $549.8 million, or 80.3%, ($551.5 million, or 80.7% on a CCY basis) to $1,234.5 million in the six months ended October 31, 2017 as compared to $684.7 million ($683.0 million on a CCY basis) in the six months ended October 31, 2016. The increase in revenues was primarily driven by the acquisition of HPE Software, contributing an additional $569.8 million of revenues and growth in revenues in the SUSE Product Portfolio where reported revenues grew by $17.0 million or 11.5% in line with the Infrastructure Linux market offset by anticipated declines in the existing Micro Focus Product Portfolio which declined by $37.0 million or 6.9%.

The breakdown in revenue of our two operating segments, Micro Focus and SUSE, by revenue type in the six months ended October 31, 2017 compared to the six months ended October 31, 2016 and CCY revenues in the six months ended October 31, 2016 is shown in the table below:

  
Six months
ended
October 31,
2017
Actual
  
Six months
ended
October 31,
2016
Actual
  
Six months
ended
October 31,
2017
Actual
(Decline)/
Growth
  
Six months
ended
October 31,
2017
Actual
(Decline)/
Growth
  
Six months
ended
October 31,
2016
CCY
  
Six months
ended
October 31,
2017
CCY
(Decline)/
Growth
  
Six months
ended
October 31,
2017
CCY
(Decline)/
Growth
 
  (dollars in millions)  %  (dollars in millions)  % 
Existing Micro Focus Product Portfolio                     
Licence  122.9   146.9   (24.0)  (16.3%)  148.1   (25.2)  (17.0%)
Maintenance  354.1   364.2   (10.1)  (2.8%)  363.2   (9.1)  (2.5%)
Consultancy  23.3   26.2   (2.9)  (11.1%)  26.4   (3.1)  (11.7%)
   500.3   537.3   (37.0)  (6.9%)  537.7   (37.4)  (7.0%)
HPE Software                            
Licence  204.8   -   204.8   -   -   204.8   - 
Maintenance  257.4   -   257.4   -   -   257.4   - 
Consultancy  55.2   -   55.2   -   -   55.2   - 
Software as a Service (‘‘SaaS”)  52.4   -   52.4   -   -   52.4   - 
   569.8   -   569.8   -   -   569.8   - 
Total Micro Focus Product Portfolio                            
Licence  327.7   146.9   180.8   123.1%  148.1   179.6   121.3%
Maintenance  611.5   364.2   247.3   67.9%  363.2   248.3   68.4%
Consultancy  78.5   26.2   52.3   199.6%  26.4   52.1   197.3%
SaaS  52.4   -   52.4   -   -   52.4   - 
   1,070.1   537.3   532.8   99.2%  537.7   532.4   99.0%
SUSE Product Portfolio                            
Subscription  162.6   144.9   17.7   12.2%  142.7   19.9   13.9%
Consultancy  1.8   2.5   (0.7)  (28.0%)  2.6   (0.8)  (30.8%)
   164.4   147.4   17.0   11.5%  145.3   19.1   13.1%
Total Revenue                            
Licence  327.7   146.9   180.8   123.1%  148.1   179.6   121.3%
Maintenance  611.5   364.2   247.3   67.9%  363.2   248.3   68.4%
Subscription  162.6   144.9   17.7   12.2%  142.7   19.9   13.9%
Consultancy  80.3   28.7   51.6   179.8%  29.0   51.3   176.9%
SaaS  52.4   -   52.4   -   -   52.4   - 
   1,234.5   684.7   549.8   80.3%  683.0   551.5   80.7%

5

Micro Focus Product Portfolio
  
12 months
ended
October 31,
2020
  
12 months
ended
October 31,
2019
  
Period-
on-
period
change
  
18 months
ended
October 31,
2018
  
Period-
on –
period
change
 
Continuing operations 
$m
 

$m

 %  
$m

 % 
Licence  646.5   
800.0
   
(19.2
)%
  
1,213.7
   
(34.1
)%
Maintenance  1,921.2   
2,057.6
   
(6.6
)%
  
2,861.6
   
(28.1
)%
SaaS & other recurring  245.5   
279.7
   
(12.2
)%
  
373.9
   
(25.2
)%
Consulting  188.4   
217.9
   
(13.5
)%
  
366.3
   
(40.5
)%
Revenue before haircut  3,001.6   
3,355.2
   
(10.5
)%
  
4,814.5
   
(30.3
)%
Deferred revenue haircut  (0.6)  
(6.8
)
  
91.2
%
  
(61.1
)
  
(88.9
)%
Total Revenue  3,001.0   
3,348.4
   
(10.4
)%
  
4,754.4
   
(29.6
)%

Revenue for the Micro Focus Product Portfolio grew by 99.0% on a CCY basis as a result of the inclusion of two months of HPE Software partially offset by a decline in the existing Micro Focus Product Portfolio. The contribution of HPE Software to each of the revenue categories is shown in the table above forand the period from completion to October 31, 2017. Without HPE Software, revenue forsubsequent trends in this section are presented before the existing Micro Focus Product Portfolio declined by 7.0% on CCY basis, primarily due to weakness in the Host Connectivity portfolio, particularly in North America, where there has been a continued impact of the lossdeferred revenue haircut, which represents the unwinding of a sales team in this areafair value adjustment to acquired deferred revenue.

Revenue by stream performance

Licence revenue decreased by $153.5 million (19.2%) to $646.5 million in the second half of last year. The category movements are explained below.

Licence revenue

Licence revenue for the existing Micro Focus Product Portfolio declined by 17.0% on a CCY basis. There was year-on-year licence revenue growth in IAS, ITOM and Collaboration & Networking offset by declines in CDMS and, primarily, Host Connectivity.

Maintenance revenue

Maintenance revenues for the existing Micro Focus Product Portfolio declined by only 2.5% on a CCY basis. Growth in CDMS was offset by declines12-months ended October 31, 2020 compared with $800.0 million in the other sub-portfolios.

Consultancy revenue

Consultancy revenues for the existing Micro Focus Product Portfolio declined by 11.7% on a CCY basis as we completed the implementation of the established Micro Focus policy of focusing only on consulting business that supports our licence business.

SUSE Product Portfolio12-months ended October 31, 2019.

The SUSE Product PortfolioGroup’s Licence revenue increased by 13.1% to $164.4 million compared with the CCY revenues for the comparative period of $145.3 million, with the Subscription revenue increasing by 13.9% to $162.6 million compared to $142.7 million for the comparative period on a CCY basis.

6

Regional Revenue

Regional revenue performance for the Group

The breakdown in revenue of our two operating segments, Micro Focus Product Portfolio and SUSE Product Portfolio, by region for the six months ended October 31, 2017 compared to the six months ended October 31, 2016 and CCY revenues for the six months ended October 31, 2016 is shown in the table below:

  
Six months
ended
October 31,
2017
Actual
  
Six months
ended
October 31,
2016
Actual
  
Six months
ended
October 31,
2017
Actual
(Decline)/
Growth
  
Six months
ended
October 31,
2017
Actual
(Decline)/
Growth
  
Six months
ended
October 31,
2016
CCY
  
Six months
ended
October 31,
2017
CCY
(Decline)/
Growth
  
Six months
ended
October 31,
2017
CCY (Decline)/
Growth
 
  (dollars in millions)  %  (dollars in millions)  % 
Micro Focus Product Portfolio                     
North America  267.9   299.8   (31.9)  (10.6%)  300.2   (32.3)  (10.8%)
International  188.2   187.7   0.5   0.3%  189.0   (0.8)  (0.4%)
Asia Pacific & Japan  44.2   49.8   (5.6)  (11.2%)  48.5   (4.3)  (8.9%)
   500.3   537.3   (37.0)  (6.9%)  537.7   (37.4)  (7.0%)
HPE Software acquisition  569.8   -   569.8   -   -   569.8   - 
Total  1,070.1   537.3   532.8   99.2%  537.7   532.4   99.0%
SUSE Product Portfolio                            
North America  65.1   59.9   5.2   8.7%  59.9   5.2   8.7%
International  76.0   70.0   6.0   8.6%  68.2   7.8   11.4%
Asia Pacific & Japan  23.3   17.5   5.8   33.1%  17.2   6.1   35.5%
Total  164.4   147.4   17.0   11.5%  145.3   19.1   13.1%
 
Total Group
                            
Existing Micro Focus                            
North America  333.0   359.7   (26.7)  (7.4%)  360.1   (27.1)  (7.5%)
International  264.2   257.7   6.5   2.5%  257.2   7.0   2.7%
Asia Pacific & Japan  67.5   67.3   0.2   0.3%  65.7   1.8   2.7%
   664.7   684.7   (20.0)  (2.9%)  683.0   (18.3)  (2.7%)
HPE Software acquisition *  569.8   -   569.8   -   -   569.8   - 
Total revenue  1,234.5   684.7   549.8   80.3%  683.0   551.5   80.7%

* The HPE Software acquisition has not been split by region here as the regions were not consistent with the existing Micro Focus regions. The HPE Software regions split is provided below.

7

HPE Software regional revenue performance

Six months
ended
October 31,
2017
Actual
(dollars in millions)
Americas
Licence119.4
Maintenance150.9
Consultancy22.7
SaaS39.5
332.5
EMEA
Licence58.6
Maintenance80.4
Consultancy24.9
SaaS9.7
173.6
Asia Pacific & Japan
Licence26.8
Maintenance26.1
Consultancy7.6
SaaS3.2
63.7
Total
Licence204.8
Maintenance257.4
Consultancy55.2
SaaS52.4
569.8

Micro Focus Product Portfolio regional revenue performance

North America had a disappointing performance in the six months ended October 31, 2017 with licence revenue down 31.3% on a CCY basis compared to the six months to October 31, 2016. Growth in IAS, Collaboration & Networking and ITOM were more than offset by declines in CDMS and Host Connectivity. The latter continued to beperiod was impacted by the lossGo-To-Market transformation activities undertaken during the period, which are designed to moderate the rate of revenue decline over the next three years. In the first quarter, a new global sales model was launched and a number of sales leadership changes were made as part of this transformation which has resulted in an entireimprovement in the underlying sales teamoperating metrics. This gives the board confidence that the changes are beginning to a competitorhave an impact and in the second half of the year ended April 30, 2017financial period, the rate of Licence revenue decline moderated.

The stabilization of Licence revenue remains a key objective of the Group and the subsequent disruptionsteps outlined within Item 4.B of this document are the focus areas required to customer engagement and flow.  Maintenance revenue declined as expected and overall revenues were down 10.8% on a CCY basis.
International’s revenues were broadly flat year over year with growthimprove the performance in licence more than offsetting the decline in Maintenance and Consultancy. Licence growth in CDMS, IAS and ITOM more than offset the decline in IAS and Collaboration & Networking. Maintenance and Consultancy declines were in line with expectations.future periods.

Asia Pacific
In particular (page 27):
Licence revenue in Application Modernization & Japan saw an 8.9%Connectivity (“AMC”) declined by 18.9% in the 12-months ended October 31, 2020. Period-to-period volatility is not unusual in AMC driven by the timing of large scale modernization projects. In the current period, the Group witnessed increasing demand for such projects; however the initiation of new modernization projects has been impacted by COVID-19, with customers electing to defer such projects to future accounting periods.
Licence revenue in Application Delivery Management (“ADM”) declined by 21.7% in the 12-months ended October 31, 2020. The Group’s ADM product group has performed below expectation in the current financial period. In addition to the actions within the overall Go-To-Market transformation, which are designed to improve sales execution, we have undertaken a number of corrective actions specific to ADM. These actions are focused on product positioning, maintenance renewals and SaaS offerings. The combination of the Go-To-Market transformation actions and portfolio specific actions are aimed at driving improvement in performance within the portfolio.

25
Licence revenue in IT Operations Management (“ITOM”) declined by 26.3% in the 12-months ended October 31, 2020. This performance is below our expectations and significant focus is being applied to correct the trajectory. In addition to the actions with the overall Go-To-Market transformation, the Group is undertaking structural changes to products in order to re-position the core proposition within this product group and achieve defensible core stable recurring revenue.

Licence revenue in Security declined by 12.4% in the 12-months ended October 31, 2020. In the period, the Group has released a number of new capabilities and enhancements to existing products following investments outlined with the Strategic & Operational Review. As a result, the Group is seeing moderation in the rate of decline in a number of sub-portfolios with some products returning to period-over-period licence growth.

Maintenance revenue decreased by $136.4 million (6.6%) to $1,921.2 million in the six months to12-months ended October 31, 20172020 compared with $2,057.6 million in the 12-months ended October 31, 2019.

The maintenance trends and renewal rates vary at a product group level with different growth profiles witnessed at a portfolio level.

The main movements at a portfolio level were (page 27):

Maintenance revenue in Application Modernization & Connectivity (“AMC”) declined by 1.4% in the 12-months October 31, 2020. This tracked historical rates;

Maintenance revenue in Application Delivery Management (“ADM”) declined by 9.5% in the 12-months ended October 31, 2020. As discussed in licence revenue above this was below expectation in the current financial period;

Maintenance revenue in IT Operations Management (“ITOM”) declined by 13.4% in the 12-months ended October 31, 2020. As discussed in licence revenue above this was below expectation in the current financial period;

Maintenance revenue in Security was flat in the 12-months ended October 31, 2020. This performance was driven by a change in mix at sub-portfolio level and an improvement in renewal rates in our core propositions.

Maintenance revenue in Information Management & Governance (“IM&G”) increased by 0.3% in the 12-months ended October 31, 2020. The increase is primarily driven by growth in Vertica, the Group’s Big Data offering. In the period, the Group launched Vertica EON Mode. This revenue is recorded as revenue from a term licence with associated maintenance, the impact of which being a greater portion of the revenue is deferred over the life of the contract when compared to a traditional perpetual model. In the period, the Group has made encouraging progress with this transition to subscriptions, both bookings and new logos up substantially period-on-period.

 The change in product mix combined with corrective actions in underperforming areas of the portfolio are intended to drive a gradual moderation in the rate of maintenance decline as part of the overall revenue stabilization plans.

SaaS and other recurring revenue decreased by $34.2 million (12.2%) to $245.5 million in the 12-months ended October 31, 2020 compared with $279.7 million in the 12-months ended October 31, 2019.

In February 2020, the board outlined the intention to transition certain areas of the business to subscription or SaaS revenue models. The current financial period is the first year of this multi-period transition and the focus has been on extending the capabilities within the Security and Big Data product offerings.

In addition, the Group also took deliberate actions to further rationalize unprofitable operations and practices and refocused resources and investments to deliver the product enhancements required for long-term success. As a CCY basis. Licence revenues were down in all portfolios except Collaboration & Networking whilst maintenance revenuesresult, SaaS and other recurring revenue declined in line with expectations.our expectations during the current financial year.

HPE SoftwareConsulting revenue contribution for decreased by $29.5 million (13.5%) to $188.4 million in the period12-months ended October 31, 2020 compared with $217.9 million in the 12-months ended October 31, 2019.

The work to re-position our Consulting revenue stream to focus on projects related to the sale of new licences and retention of the installed base is broadly complete and it is anticipated that this revenue stream will stabilise in future financial periods subject to the impact of COVID-19.

26
Revenue by product group performance

The Group has more than 300 products reported under five product groups. Investment decisions are made at a granular level by product depending on their growth trajectories and the profile of markets they participate in and are intended to deliver the greatest return on investment. The nature of the software order cycle means that when considering underlying revenue trends, year-on-year growth rates by product group are not always indicative of an underlying trend and will be impacted by the timing of customer projects.

The table below presents the revenue performance by product group and revenue stream. The main movements in licence and maintenance revenue by product group are discussed in the Licence and Maintenance commentary above.

12 months ended October 31, 2020:

  
Licence
  
Maintenance
  
SaaS &
other
recurring
  
Consulting
  
Total
 
Continuing operations 
$m
 
$m
 
$m
 
$m
 
$m
Application Modernization & Connectivity (“AMC”)  138.6   321.6   -   10.1   470.3 
Application Delivery Management (“ADM”)  102.0   439.2   73.9   15.9   631.0 
IT Operations Management (“ITOM”)  175.1   559.4   4.6   113.9   853.0 
Security  162.6   416.8   33.6   33.1   646.1 
Information Management & Governance (“IM&G”)  68.2   184.2   133.4   15.4   401.2 
Subtotal  646.5   1,921.2   245.5   188.4   3,001.6 
Deferred revenue haircut  -   (0.4)  (0.2)  -   (0.6)
Total Revenue  646.5   1,920.8   245.3   188.4   3,001.0 

12 months ended October 31, 2019:

  
Licence
  
Maintenance
  
SaaS &
other
recurring
  
Consulting
  
Total
 
Continuing operations 
$m

 
$m

 
$m

 

$m

 

$m

Application Modernization & Connectivity (“AMC”)  
170.9
   
326.1
   
-
   
11.7
   
508.7
 
Application Delivery Management (“ADM”)  
130.3
   
485.4
   
87.8
   
18.2
   
721.7
 
IT Operations Management (“ITOM”)  
237.5
   
645.8
   
11.0
   
127.5
   
1,021.8
 
Security  
185.7
   
416.7
   
35.0
   
43.9
   
681.3
 
Information Management & Governance (“IM&G”)  
75.6
   
183.6
   
145.9
   
16.6
   
421.7
 
Subtotal  
800.0
   
2,057.6
   
279.7
   
217.9
   
3,355.2
 
Deferred revenue haircut  
-
   
(6.0
)
  
(0.8
)
  
-
   
(6.8
)
Total Revenue  
800.0
   
2,051.6
   
278.9
   
217.9
   
3,348.4
 

Percentage change from completionOctober 31, 2019 to October 31, 2017 was $569.8 million.  There2020:
  
Licence
  
Maintenance
  
SaaS &
other
recurring
  
Consulting
  
Total
 
Continuing operations %  %  %  %  % 
Application Modernization & Connectivity (“AMC”)  
(18.9
)%
  
(1.4
)%
  
-
   
(13.7
)%
  
(7.5
)%
Application Delivery Management (“ADM”)  
(21.7
)%
  
(9.5
)%
  
(15.8
)%
  
(12.6
)%
  
(12.6
)%
IT Operations Management (“ITOM”)  
(26.3
)%
  
(13.4
)%
  
(58.2
)%
  
(10.7
)%
  
(16.5
)%
Security  
(12.4
)%
  
0.2
%
  
(4.0
)%
  
(24.6
)%
  
(5.2
)%
Information Management & Governance (“IM&G”)  
(9.8
)%
  
0.3
%
  
(8.6
)%
  
(7.2
)%
  
(4.9
)%
Subtotal  
(19.2
)%
  
(6.6
)%
  
(12.2
)%
  
(13.5
)%
  
(10.5
)%
Deferred revenue haircut  
-
   
93.3
%
  
(75.0
)%
  
-
   
(91.2
)%
Total Revenue  
(19.2
)%
  
(6.4
)%
  
(12.0
)%
  
(13.5
)%
  
(10.4
)%

Revenue by geography
The Group is no comparative information by region for the HPE Software business because the comparative period is before Completion. The delivered revenuedomiciled in the two months brought theUK. The Group’s total segmental revenue for the HPE Software business in the year to October 31, 2017 to the bottom of the range of guidance we gave after Completion.
On a go-forward basis, the Enlarged Group’s revenue regions will be organized in to the Americas (consisting of North America and Latin America), EMEA, and Asia Pacific & Japan.from external customers by geographical location is detailed below:

SUSE Product Portfolio regional revenue performance

North America, International and Asia Pacific & Japan regions have shown growth in revenue on a CCY basis of 8.7%, 11.4% and 35.5% respectively. Growth in these regions was derived across all routes to market, coming into the period with a strong deferred income roll out together with securing new business with large enterprise accounts directly and through the various alliances and channel partners.

We are pleased to note that the change to specializing and aligning the field sales and marketing resources to SUSE in the Asia Pacific & Japan has continued to result in sustained recurring profitable revenue growth.

We made changes to the sales leadership in North America in the June to September timeframe and are rebuilding the sales team there. This contributed to the lower than expected revenue growth in North America in the period.
  
12 months
ended
October 31,
2020
  
12 months
ended
October 31,
2019
  
Period-
on-
period
change
  
18 months
ended
October 31,
2018
  
Period-
on –
period
change
 
  
$m
 
$m

 %  

$m

 % 
UK
  173.0   
206.9
   
(16.4
)%
  
299.6
   
(30.9
)%
USA
  1,289.8   
1,523.0
   
(15.3
)%
  
2,279.8
   
(33.2
)%
Germany
  218.7   
220.7
   
(0.9
)%
  
309.5
   
(28.7
)%
Canada
  108.0   
115.9
   
(6.8
)%
  
178.4
   
(35.0
)%
France
  101.4   
123.3
   
(17.8
)%
  
195.5
   
(36.9
)%
Japan
  96.9   
108.6
   
(10.8
)%
  
145.8
   
(25.5
)%
Other
  1,013.2   
1,050.0
   
(3.5
)%
  
1,345.9
   
(22.0
)%
Total Revenue  3,001.0   
3,348.4
   
(10.4
)%
  
4,754.4
   
(29.6
)%

827
Operating costs

Operating Costs
  
12 months
ended
October 31,
2020
  
12 months
ended
October 31,
2019
  
Period-
on-
period
change
  
18 months
ended
October 31,
2018
  
Period-
on-
period
change
 
Continuing operations 
$m
 
$m

 %  
$m

 % 
Cost of sales  702.7   
789.9
   
(11.0
)%
  
1,302.7
   
(39.4
)%
Selling and distribution costs  1,112.1   
1,224.8
   
(9.2
)%
  
1,764.2
   
(30.6
)%
Research and development expenses  513.6   
491.2
   
4.6
%
  
680.8
   
(27.8
)%
Administrative expenses  3,334.0   
620.8
   
437.0
%
  
629.9
   
(1.4
)%
Total operating costs  5,662.4   
3,126.7
   
81.1
%
  
4,377.6
   
(28.6
)%

  
Six months
ended
October 31,
2017
Actual
  
Six months
ended
October 31,
2016
Actual
  
Six months
ended
October 31,
2017
Actual
(Decline)/
Growth
  
Six months
ended
October 31,
2017
Actual
(Decline)/
Growth
  
Six months
ended
October 31,
2016
CCY
  
Six months
ended
October 31,
2017
CCY
(Decline)/
Growth
  
Six months
ended
October 31,
2017
CCY (Decline)/
Growth
 
  (dollars in millions)  %  (dollars in millions)  % 
Cost of goods sold  273.9   123.4   150.5   122.0%  123.8   150.1   121.2%
Selling and distribution costs  398.6   218.5   180.1   82.4%  219.4   179.2   81.7%
Research and development expenses  173.6   86.4   87.2   100.9%  87.4   86.2   98.6%
Administrative expenses  168.4   93.1   75.3   80.9%  93.3   75.1   80.5%
Total Operating Costs  1,014.5   521.4   493.1   94.6%  523.9   490.6   93.6%

Total operating costs. costs
Total operating costs for the period increased by $493.1$2,535.7 million, or 94.6% ($490.6 million, or 93.6% on a CCY basis)81.1% to $1,014.5$5,662.4 million in the six months12-months ended October 31, 20172020 as compared to $521.4$3,126.7 million in the six months12-months ended October 31, 2016 (2016: $523.92019.

The single largest component of operating costs increase in the year ended October 31, 2020 related to a goodwill impairment charge of $2,799.2 million. Excluding this charge operating expenses decrease by $263.5 million period-on-period. This is included as exceptional costs within administrative expenses.

Goodwill impairment
Impairment of goodwill is tested annually, or more frequently where there is an indication of impairment. The Group has recognised an impairment charge of $2,799.2 million in the period. This impairment charge reflects our trading performance and the macro-environment when compared to the original projections produced at the time of the HPE Software business acquisition, which was exacerbated by the impact of COVID-19. This charge is a non-cash item and does not impact the cash generated by the business in the period which has remained strong.

IFRS 16 “Leases”
The Group adopted IFRS 16 “Leases” on November 1, 2019 on a CCY basis)modified retrospective basis. As a result the 12-months ended October 31, 2019 and 18-months ended October 31, 2018 continue to be reported under the previous accounting standard IAS 17 “Leases”. As described belowUnder IAS 17 the cost of leasing assets depended on whether a lease was classified as an operating lease or a finance lease. For operating leases the cost was recorded as a rental expense in operating costs and for finance leases the cost was recognised as depreciation and interest in operating costs. Under IFRS 16 all leases are treated in the individual cost categories,manner of IAS 17 finance leases. As a result the increasedepreciation and interest expense for leases is primarilysignificantly higher in relationthe 12-months ended October 31, 2020 than in the comparative periods, with a similar reduction in rental expenses.

Cost of sales
Cost of sales decreased by $87.2 million, or 11.0% to $702.7 million in the acquisition12-months ended October 31, 2020 as compared to $789.9 million in the 12-months ended October 31, 2019.

The costs in this category predominantly relate to our consulting and helpline support operations and amortization of HPE Software, increasing total operatingacquired technology intangibles.

The amortization of intangible purchased technology costs decreased by $457.7 million. Excluding HPE Software, total operating costs increased by $35.4$9.9 million from $200.1 million in the 12-months ended October 31, 2019 to $190.2 million in the 12-months ended October 31, 2020 primarily due to an increasethe amortization of certain intangibles, acquired with The Attachmate Group acquisition in exceptional items of $37.3 million.2015, ending in the period.

Cost of sales. Cost of sales increasedExceptional items decreased by $150.5$8.6 million or 122.0% ($150.1 million, or 121.2% on a CCY basis) to $273.9from $12.6 million in the six months12-months ended October 31, 2017 as compared2019 to $123.4$4.0 million in the six months12-months ended October 31, 2016. The acquisition of HPE Software increased cost of sales by $159.3 million. Cost of sales excluding HPE Software decreased by $8.8 million to $114.6 million. There was a decrease in the amortization of purchased intangibles of $3.0 million to $34.0 million as compared to $37.0 million in the six months ended October 31, 2016, a reduction in staff-related costs of $2.3 million and a reduction in travel costs of $0.5 million. Exceptional items included in cost of sales increased $1.9 million to $3.1 million.2020. Exceptional items are discussed later in this section.

After excluding the above, the remaining reduction in costs of sales relates primarily to reduced consultancy costs in line with revenue fall ($19.6 million), IT costs fall ($14.5 million), employee related costs fall in line with revenue fall ($9.6 million) and lower travel costs due to COVID-19 restrictions ($7.6 million).

Selling and distribution costs.
Selling and distribution costs increased $180.1decreased $112.7 million, or 82.4% ($179.2 million, or 81.7% on a CCY basis)9.2% to $398.6$1,112.1 million in the six12-months ended October 31, 2020 as compared to $1,224.8 million in the 12-months ended October 31, 2019.

28
The amortization of intangible trade names and customer relationships decreased by $41.7 million from $455.6 million in the 12-months ended October 31, 2019 to $413.9 million in the 12-months ended October 31, 2020, primarily due to the amortization of certain intangibles, acquired with The Attachmate Group acquisition in 2015, ending in the period.

Bad debt expense decreased by $20.8 million from $16.0 million in the 12 months ended October 31, 2017 as compared2019 to $218.5a credit of $4.8 million in the six months12-months ended October 31, 2016. The acquisition of HPE Software increased selling and distribution costs by $171.3 million. Selling and distribution costs excluding HPE Software2020, primarily due to debt collection work in the period.

Exceptional items increased by $8.8 million. This increase in selling and distribution costs includes an increase in exceptional items of $6.6$4.5 million to $8.6from $8.4 million and an increase in the amortization of purchased intangibles of $1.512-months ended October 31, 2019 to $12.9 million to $70.9 million.in the 12-months ended October 31, 2020. Exceptional items are discussed later in this section.

After excluding the above, the remaining reduction in selling and distribution costs relates primarily to lower travel costs due to COVID-19 restrictions ($23.7 million), employee related costs reduction ($6.8 million) and a reduction in the use of consultants mainly in licence verification activities ($9.5 million).

Research and development expenses.
Research and development expenses increased by $87.2$22.4 million, or 100.9% ($86.2 million, or 98.6% on a CCY basis)4.6% to $173.6$513.6 million in the six months12-months ended October 31, 20172020 as compared to $86.4$491.2 million in the six months12-months ended October 31, 2016. The acquisition of HPE Software increased research and development by $70.3 million.  Research and development expenses excluding HPE Software2019.

Exceptional items increased by $16.9 million. This increase$1.4 million from a credit of $0.5 million in research and development costs includes an increasethe 12-months ended October 31, 2019 to a charge of $0.9 million in exceptional items of $5.2 million to $7.4 million and an increase in staff-related costs of $14.2 million.the 12-months ended October 31, 2020. Exceptional items are discussed later in this section.

The remaining increase in research and development expenses relates primarily to an increase in IT costs of $13.7 million and to the impact of IFRS16 which increased the depreciation charge recognised in the year ended October 31, 2020 by $3.1 million compared to the rental expensed recognised in the year ended October 31, 2019.

Administrative expenses.
Administrative expenses increased by $75.3$2,713.2 million, or 80.9% ($75.1 million, or 80.5% on a CCY basis)437.0% to $168.4$3,334.0 million in the six months12-months ended October 31, 20172020 as compared to $93.1$620.8 million in the six months12-months ended October 31, 2016. 2019.

The acquisitionprimary driver of HPE Software increased administrative expenses by $56.8 million. Administrative expensesthis increase is the goodwill impairment of $2,799.2 million discussed above. After excluding HPE Software increased by $18.5 million. Exceptional items included in administrative expenses increased $43.8 million to $79.4 million, share-based payments increased by $2.8 million to $18.3 million and exchange gains increased by $1.9 million to $9.0 million. Excluding acquisitions in the year, exceptional items, share-based payments and exchange gains,this, administrative expenses decreased by $5.5$86.0 million period-on-period.

Exceptional items, excluding the goodwill impairment, decreased by $79.1 million from $273.7 million in the 12-months ended October 31, 2019 to $43.5 million. The decrease relates primarily to a reduction$194.6 million in staff-related costs of $13.5 million.the 12-months ended October 31, 2020. Exceptional items are discussed later in this section.

The amortization of intangible purchased software increased by $12.4 million from $34.1 million in the 12-months ended October 31, 2019 to $46.5 million in the 12-months ended October 31, 2020, primarily due to the accelerated amortization of certain legacy software that will be replaced by the single IT platform (“Stack C”).

Share-based compensation costs decreased by $51.8 million from $68.8 million in the 12-months ended October 31, 2019 to $17.0 million in the 12-months ended October 31, 2020 due to vesting of certain ASG share options in the previous period.

Foreign exchange movements relating to derivative financial instruments have decreased by $28.7 million from a gain of $6.9 million in the 12-months ended October 31, 2019 to loss of $21.8 million in the 12-months ended October 31, 2020. Other foreign exchange movements have increased by $10.3 million from a loss of $18.2 million in the 12-months ended October 31, 2019 to loss of $7.9 million in the 12-months ended October 31, 2020.

Operating (loss)/profit
In the 12-months ended October 31, 2020, the Group generated an operating loss of $2,661.4 million, which represents a decrease of 1,300.5%, $2,883.1 million on the $221.7 million for the 12-months ended October 31, 2019. The single largest component of the operating loss decrease in the 12-months ended October 31, 2020 related to a goodwill impairment charge of $2,799.2 million. This is included within exceptional costs, which is discussed further below. Explanations of the remaining major underlying movements in the reported operating profit decline have been included in the revenue and cost discussions above.

In addition, the amortization of intangible assets decreased from $716.5 million in the 12-months ended October 31, 2019, to $674.1 million in the 12-months ended October 31, 2020, related primarily to the amortization of certain intangibles, acquired with The Attachmate Group acquisition in 2015, ending in the period. The main components of this reduction are included in the discussion on cost by category above.

929
Exceptional items (included within operating profit)

  
12 months
ended
October 31,
2020
  
12 months
ended
October 31,
2019
  
18 months
ended
October 31,
2018
 
Exceptional items 
$m
 

$m

 
$m

MF/ HPE Software business integration related:            
System and IT infrastructure costs  100.6   
126.3
   
114.4
 
Integration costs  52.0   
119.6
   
147.6
 
Severance  28.3   
32.1
   
129.1
 
Property costs  3.6   
16.3
   
29.9
 
MF/ HPE Software business integration-related costs
  184.5   
294.3
   
421.0
 
HPE Software business acquisition / pre-acquisition costs  -   
(3.9
)
  
70.1
 
Integration in respect of previous acquisitions  -   
-
   
17.0
 
Other acquisition costs  0.2   
5.4
   
-
 
Property costs relating to previous acquisitions  -   
-
   
8.2
 
Divestiture gain on Atalla  -   
(3.7
)
  
-
 
Severance costs relating to previous acquisitions  -   
-
   
0.6
 
Pre-disposal costs in relation to SUSE  -   
-
   
21.3
 
Restructuring property costs  11.6   
-
   
-
 
Restructuring severance  5.4   
-
   
-
 
Other costs  10.7   
2.1
   
-
 
   212.4   
294.2
   
538.2
 
Goodwill impairment  2,799.2   
-
   
-
 
Total exceptional costs (reported in Operating (loss)/profit)
  3,011.6   
294.2
   
538.2
 

In the 12-month period ended October 31, 2020, exceptional costs totaled $3,011.6 million, of which $2,799.2 million related to impairment of goodwill. Excluding this impairment charge, exceptional costs predominantly relate to the integration of the HPE Software business. The costs incurred in the year include:

-
System and IT infrastructure costs of $100.6 million principally reflect the IT migration of the Micro Focus business onto a single IT platform, (“Stack C”);
-
Integration costs of $52.0 million across a wide range of projects undertaken to conform, simplify and increase efficiency across the two businesses;
-
Severance costs of $28.3 million in relation to on-going headcount reductions as we continue to remove duplication and streamline the continuing operations; and
-
Property costs of $3.6 million as the Group continues the process of simplifying the real estate footprint.

The remaining costs of the HPE business integration primarily relate to the Stack C program. In the year, we have made good progress in delivering this program despite the substantial impact COVID-19 has had on the delivery of this project. At the date of this report, a substantial number of the workforce have transitioned to the new stack with the remaining employees transferring later in FY21. The remaining cost of the program is estimated to be circa $80 million and will be incurred in FY21.

ShareIn addition, the Group incurred costs of results$10.7 million associated with the Strategic & Operational Review, included in other costs. These costs reflect third party advisor fees in relation to the review of associates. Sharethe business, potential strategic options available and implementation of results of associates decreased by $0.7 million with a loss of $0.4these initiatives.

Net finance costs
Net finance costs were $279.0 million in the six months12-month period ended October 31, 2017 as2020, compared to a loss of $1.1$255.8 million in the six months12-month period ended October 31, 2016. This decrease2019. Finance costs predominantly relate to interest on the term loans put in place as part of the transaction to acquire the HPE Software business. In addition, included within the net finance costs is driven$58.0 million in relation to the amortisation of facility costs and original issue discounts, which were paid on initiation of the term loan.

30
The majority of the increase in net finance costs was caused by the dilution of investmentbank interest received reducing by $13.9 million period-on-period. Interest income in the associate from 14.3% to 12.5% in the six months to April 30, 2016.

Finance costs. Finance costs increased by $20.0 million, or 40.4%, to $75.5 million in the six months12-month period ended October 31, 2017 as compared2019 was earned in respect of cash held following the $2.53 billion disposal of SUSE, prior to $49.5 millionreturns to shareholders. The remainder of the increase reflects the change in the six months ended October 31, 2016. This decrease in finance costs is primarily attributable to the increased loan interest and commitment fees of $17.9 million and an increase in the amortization of prepaid facility arrangements, original issue discounts and facility fees of $6.1 millionrates as a result of the increasedrefinancing activities undertaken by the Group borrowings resulting fromin the acquisition of HPE Software.current financial period.

Finance income. Finance income increased by $1.2 million, or 238.4%, to $1.7 millionIn May 2020, the Group successfully refinanced its $1.4 billion term loan due for repayment in November 2021. The successful completion of this refinancing was particularly pleasing given the strong demand for the Group’s debt, at a time of significant macro-economic uncertainty. The offering was substantially oversubscribed with approximately $2.5 billion in the six months ended October 31, 2017 as comparedorder book at closing. As part of the refinancing the Group also elected to $0.5repay $143.0 million inof the six months ended October 31, 2016. This is primarily due to interest income of $0.6 million earned on additionaloriginal term loan facilities drawn down in relation tofacility, which partially offset the acquisition, between the date the facilities were drawn into escrow and the acquisition date of HPE Software, and additionalincreased interest earned on increased cash balances asexpense.

As a result of the acquisitionrefinancing initiatives, there are no maturity dates on Group facilities prior to June 2024. Following the adoption of HPE Software.

Exceptional items: Exceptional items increased by $63.3 million, or 154.4% to $104.3 million in the six months ended October 31, 2017 as compared to $41.0 million in the six months ended October 31, 2016.

The increase in exceptional items in the six months ended October 31, 2017 was as a result of an increase in pre-acquisition costs of $23.3 million relating to the acquisition of HPE Software, an increase in integration costs of $6.6 million in bringing acquired businesses together with the existing Micro Focus business, an increase in severance and legal costs of $5.8 million (primarily relating to staff reductions in HPE Software), an increase in acquisition costs of $24.4 million, and a reduction of property provisions of $2.6 million.

The pre-acquisition costs relate to the acquisition of HPE Software which was announced in September 2016 and completedIFRS 16 on SeptemberNovember 1, 2017. These costs related to accounting, legal and commercial due diligence work, legal work on the various agreements, professional advisors’ fees and pre-integration costs relating to activities in readiness for the HPE Software acquisition across all functions of the existing Micro Focus business.

Included within acquisition costs is $7.7 million in respect of US excise tax payable on the award of Long Term Incentives and Additional Share Grants to four senior employees.

Exceptional2019, finance costs incurred in escrow periodalso include a modest amount of $6.3 million relates to interest charges on additional term loan facilities drawn down in relation to the acquisition, between the date the facilities were drawn into escrow and the acquisition date of HPE Software.

Exceptional finance income earned in escrow period of $0.6 million relates to interest income earned on additional term loan facilities drawn down in relation to the acquisition, between the date the facilities were drawn into escrow and the acquisition date of HPE Software.

Profit before tax:Profit before tax increased by $32.5 million, or 28.7%, to $145.7 million in the six months ended October 31, 2017 as compared to $113.2 million in the six months ended October 31, 2016 as a result of an increase in operating profit before exceptional items of $114.1 million and an increase in $0.7 million from share of results in associates, offset by an increase in net finance costs before exceptional items of $19.1 million and an increase in exceptional items of $63.3 million.

Currency impact: During the six months ended October 31, 2017, 62.3% of our revenues were contracted in US dollars, 20.2% in Euros, 4.5% in Sterling, 2.8% in CAD dollars and 10.2% in other currencies. In comparison, 50.5% of our costs are US dollar denominated, 16.8% in Euros, 9.7% in Sterling, 1.6% in CAD dollars and 21.4% in other currencies.

This weighting of revenue and costs means that if the US dollars-to-Euro or US dollar-to-CAD dollar exchange rates move during the period, the revenue impact is greater than the cost impact and whilst if US dollar-to-Sterling rate moves during the period the cost impact exceeds the revenue impact. Consequently, actual US dollars EBITDA can be impacted by significant movements in US dollar to Euro, CAD dollars and Sterling exchange rates.

The currency movement for the US dollar against Sterling, Euro and CAD dollar was a strengthening of 2.9% and a weakening of 3.3% and 1.5% respectively when looking at the average exchange rates in the six months ended October 31, 2017 compared to those in the six months ended October 31, 2016.

In order to provide CCY comparatives, we have restated the results of the Group for the six months ended October 31, 2016 at the same average exchange rates as those used in reported results for the six months ended October 31, 2017. Consequently, CCY revenues reduce to $683.0 million from $684.7 million reported, a reduction of 0.2%, and CCY Adjusted EBITDA reduces to $316.1 million from $320.3 million reported, a reduction of 1.3%.

Intercompany loan arrangements within the Group are typically denominated in the local currency of the overseas affiliate.  Consequently, any movement in the respective local currency and US dollar will have an impact on the converted US dollars value of the loans. This foreign exchange movement is taken to the consolidated statement of comprehensive income. The Group’s UK Corporation Tax liability is denominated in Sterling and any movement of the US dollar: Sterling rate will give rise to a foreign exchange gain or loss which is also taken to the consolidated statement of comprehensive income. The foreign exchange gain for the period is approximately $4.7 million.capitalized leases.

10

Taxation. The tax charge increased by $16.5 million, or 73.2%, to $39.1 million in the six months ended October 31, 2017 as compared to $22.6 million in the six months ended October 31, 2016. The impact of exceptional items on the tax charge increased by $20.0 million to a credit of $25.5 million in the six months ended October 31, 2017 compared to a credit of $5.5 million in the six months ended October 31, 215%016. Excluding exceptional items, the tax charge increased by $36.5 million to $64.7 million (reflecting a marginal tax rate of 25.9%) for the six months ended October 31, 2017 as compared to $28.2 million (tax rate of 18.2%) for the six months ended October 31, 2016. This increase in the tax rate is primarily due to the inclusion of HPE Software profits, which are subject to tax at a higher rate than existing Micro Focus profits, and restrictions on the deductibility of interest expenses under new UK tax rules.

On December 22, 2017, the U.S. President signed into law federal tax legislation commonly referred to as the Tax Cuts and Jobs Act. The Tax Cuts and Jobs Act provides for significant and wide-ranging changes to the U.S. Internal Revenue Code. The reforms are complex, and it will take some time to assess the implications thoroughly. Broadly, the implications most relevant to the Enlarged Group include: a) a reduction in the U.S. federal corporate income tax rate from 35% to 21%, with various “base erosion” rules that may effectively limit the tax deductibility of certain payments made by U.S. entities to non-U.S. affiliates and additional limitations on deductions attributable to interest expense; and b) adopting elements of a territorial tax system. To transition into this system, the Tax Cuts and Jobs Act includes a one-time tax on cumulative retained earnings of U.S.-owned foreign subsidiaries, at a rate of 15.5% for earnings represented by cash or cash equivalents and 8.0% for the balance of such earnings. Taxpayers may make an election to pay this tax over eight years.

These tax reforms will give rise to significant consequences, both immediately in terms of one-off impacts relating to the transition tax and the measurement of deferred tax assets and liabilities and going forward in terms of the Group’s taxation expense. An initial review and estimate has been undertaken, which will be updated over the coming weeks and months as the Group works through these complex changes with its advisors. Based on the Group’s initial estimate, the transition tax and re-measurement of deferred tax balances are estimated to give rise to a one-off credit to the income statement in the period to April 30, 2018 in the range of $600 million to $700 million. The Tax Cuts and Jobs Act could be subject to potential amendments and technical corrections, any of which could lessen or increase adverse impacts of the law.

Going forward, in the medium-term, these tax reforms are estimated to reduce the Group’s taxation expense as a percentage of Adjusted Profit before tax to 25% from the previous medium term guidance of 33%.

Also refer to Notes to the Consolidated Financial Statements- Note 12. Taxation for further discussion of taxation.

Adjusted EBITDA. Adjusted EBITDA increased by $209.7 million, or 65.5%, to $530.1 million in the six months ended October 31, 2017 as compared to $320.3 million in the six months ended October 31, 2016.

On a CCY basis, Adjusted EBITDA increased by $214.0 million, to $530.1 million as compared to $316.1 million in the six months ended October 31, 2016. This increase in Adjusted EBITDA was primarily driven by an increase of $226.9 million due to the HPE Software acquisition. Excluding the impact of HPE Software, Adjusted EBITDA on a CCY basis for the Group decreased by $12.9 million to $303.2 million as compared to $316.1 million in the six months ended October 31, 2016, due to a a $4.4 million increase from the SUSE Product Portfolio and a $17.3 million decline from the Micro Focus Product Portfolio where operational efficiencies were put on hold pending the completion of the HPE Software transaction.

Adjusted Operating Profit. Adjusted Operating Profit increased by $193.9 million, or 59.4% to $520.2 million in the six months ended October 31, 2017 as compared to $326.3 million in the six months ended October 31, 2016.  On a CCY basis, Adjusted Operating Profit increased $197.9 million, or 61.4% to $520.2 million in the six months ended October 31, 2017 as compared to $322.3 million in the six months ended October 31, 2016.

The Micro Focus Product Portfolio Adjusted Operating Profit in the six months ended October 31, 2017 was $470.4 million, delivering a margin of 44.0% which compares with the margin on a reported basis of 50.8% and a margin of 50.6% on a CCY basis in the six months ended October 31, 2016. The decrease in margin arose mainly due to the effect of lower margins in the newly acquired HPE Software business.

The SUSE Product Portfolio Adjusted Operating Profit in the six months ended October 31, 2017 was $49.8 million delivering a margin of 30.3%. Compared to the reported Adjusted Operating Profit in the six months ended October 31, 2016, this is a decrease of $3.7 million and a profit margin decrease of 6.0%. Compared to the CCY Adjusted Operating Profit in the six months ended October 31, 2016, this is a decrease of $0.6 million (1.2%) and a profit margin decrease of 4.4%.
We have seen a significant increase in directly managed costs in SUSE that is consistent with the investment being made to deliver the SUSE growth charter.

11

Critical Accounting Estimates and Policies

The condensed consolidated interim financial statements of the Group included at Item 18 have been prepared in accordance with IFRS applicable to interim reporting, IAS 34. The preparation of financial statements in conformity with IFRS requires the use of certain critical accounting estimates. It also requires management to exercise its judgment in the process of applying the Group’s accounting policies. The areas involving a higher degree of judgment or complexity, or areas where assumptions and estimates are significant to the financial statements are disclosed below.

In preparing the condensed consolidated interim financial statements, the Group has made its best estimates and judgments of certain amounts included in the financial statements, giving due consideration to materiality. The Group regularly reviews these estimates and updates them as required. Actual results could differ from these estimates. Unless otherwise indicated, the Group does not believe that it is likely that materially different amounts would be reported related to the accounting estimates and assumptions described below. The Group considers the following to be a description of the most significant estimates, which require the Group to make subjective and complex judgments, and matters that are inherently uncertain.

Revenue recognition

The Group recognizes revenues from sales of software Licences (including Intellectual Property and Patent rights, to end-users, resellers and Independent Software Vendors (“ISV”)), software maintenance, subscription, SaaS, technical support, training and professional services, upon firm evidence of an arrangement, delivery of the software and determination that collection of a fixed or determinable fee is reasonably assured. ISV revenue includes fees based on end usage of ISV applications that have our software embedded in their applications. When the fees for software upgrades and enhancements, maintenance, consulting and training are bundled with the Licence fee, they are unbundled using the Group’s objective evidence of the fair value of the elements represented by the Group’s customary pricing for each element in separate transactions. If evidence of fair value exists for all undelivered elements and there is no such evidence of fair value established for delivered elements, revenue is first allocated to the elements where fair value has been established and the residual amount is allocated to the delivered elements. If evidence of fair value for any undelivered element of the arrangement does not exist, all revenue from the arrangement is deferred until such time that there is evidence of delivery.

If the arrangement includes acceptance criteria, revenue is not recognized until the Group can objectively demonstrate that the acceptance criteria have been met, or the acceptance period lapses, whichever is earlier.

The Group recognizes Licence revenue derived from sales to resellers upon delivery to resellers, provided that all other revenue recognition criteria are met; otherwise revenue is deferred and recognized upon delivery of the product to the end-user. Where the Group sells access to a Licence for a specified period of time and collection of a fixed or determinable fee is reasonably assured, Licence revenue is recognized upon delivery, except in instances where future substantive upgrades or similar performance obligations are committed to. Where these future performance obligations are specified in the Licence agreement, and fair value can be attributed to those upgrades, revenue for the future performance obligations is deferred and recognized on the basis of the fair value of the upgrades in relation to the total estimated sales value of all items covered by the Licence agreement. Where the future performance obligations are unspecified in the Licence agreement, revenue is deferred and recognized ratably over the specified period.

For Subscription revenue where access and performance obligations are provided evenly over a defined term, the revenue is deferred and recognized ratably over the specified period.

The Group recognizes revenue for SaaS arrangements as the service is delivered, generally on a straight-line basis, over the contractual period of performance. In SaaS arrangements, the Group considers the rights provided to the customer (e.g. whether the customer has the contractual right to take possession of the software at any time during the contractual period without significant penalty, and the feasibility of the customer to operate or contract with another vendor to operate the software) in determining whether the arrangement includes the sale of a software licence. In SaaS arrangements where software licences are sold, licence revenue is generally recognized according to whether perpetual or term licences are sold, when all other revenue recognition criteria are satisfied.

Maintenance revenue is recognized on a straight-line basis over the term of the contract, which in most cases is one year. For time and material-based professional services contracts, The Group recognizes revenue as services are rendered and recognizes costs as they are incurred. The Group recognizes revenue from fixed-price professional services contracts as work progresses over the contract period on a proportional performance basis, as determined by the percentage of labor costs incurred to date compared to the total estimated labor costs of a contract. Estimates of total project costs for fixed-price contracts are regularly reassessed during the life of a contract. Amounts collected prior to satisfying the above revenue recognition criteria are included in deferred income.

Rebates paid to partners as part of a contracted program are netted against revenue where the rebate paid is based on the achievement of sales targets made by the partner, unless the Company receives an identifiable good or service from the partner that is separable from the sales transaction and for which the Group can reasonably estimate fair value.

12

Exceptional Items and Integration / Restructuring Provisions

Exceptional items are those significant items which are separately disclosed by virtue of their size, nature or incidence to enable a full understanding of the Group’s financial performance. Management of the Group first evaluates group strategic projects such as acquisitions, divestitures and integration activities, company tax restructuring and other one off events such as restructuring programs. In determining whether an event or transaction is exceptional, management of the Group considers quantitative and qualitative factors such as its expected size, precedent for similar items and the commercial context for the particular transaction, while ensuring consistent treatment between favorable and unfavorable transactions impacting revenue, income and expense for all periods presented. Examples of transactions which may be considered of an exceptional nature include major restructuring programmes, cost of acquisitions or the cost of integrating acquired businesses.

The classification of these items as exceptional is a matter of judgment . This judgment is made by management after evaluating each item deemed to be exceptional against the criteria set out within the defined accounting policy.

Business Combinations
When making acquisitions, the Group has to make judgments and best estimates about the fair value allocation of the purchase price. Where acquisitions are significant, appropriate advice is sought from professional advisors before making such allocations, otherwise valuations are done by management using consistent methodology used on prior year acquisitions where appropriate professional advice was sought. The valuation of goodwill and other intangibles is tested annually or whenever there are changes in circumstances indicating that the carrying amounts may not be recoverable. These tests require the use of estimates.

There was judgment used in identifying who the accounting acquirer was in the acquisition of HPE Software, as the resulting shareholdings were not definitive to identify the entity which obtains control in the Transaction.  As such, the Group considered the other factors laid down in IFRS, such as the composition of the governing body of the combined entity, composition of senior management of the combined entity, the entity that issued the equity interest, terms of exchange of equity interests, the entity which initiated the combination, relative size of each entity, the existence of a large minority voting interest in the combined entity and other factors (e.g. location of headquarters of the combined entity and entity name). The conclusion of this assessment is that the Company is the accounting acquirer of HPE Software, and the acquisition accounting as set out in Notes to the Consolidated Financial Statements—Note 28. Business Combinations have been performed on this basis.

The purchase method of accounting is used to account for the acquisition of subsidiaries by the Group. The cost of acquisition is measured as the fair value of the assets given, equity instruments issued and liabilities incurred or assumed at the date of exchange, with costs directly attributable to the acquisition being expensed. Identifiable assets acquired and liabilities and contingent liabilities assumed in a business combination are measured initially at their fair values at the acquisition date, irrespective of the extent of any non-controlling interest. The fair value measurement for intangible assets and deferred revenue requires the use of assumptions including the expected future cash flows, discount rates, and estimated economic lives. The excess of the cost of acquisition over the fair value of the Group’s share of the identifiable net assets acquired is recorded as goodwill.

Where new information is obtained within the “measurement period” (defined as the earlier of the period until which the Group receives the information it was seeking about facts and circumstances that existed as of the acquisition date or learns that more information is not obtainable, or one year from the acquisition date) about facts and circumstances that existed as at the acquisition date and, if known, would have affected the measurement of the amounts recognized as of that date, the Group recognizes these adjustments to the acquisition balance sheet with an equivalent offsetting adjustment to goodwill. Where new information is obtained after this measurement period has closed, this is reflected in the post-acquisition period.

Foreign currency translation

Functional and presentation currency

The presentation currency of the Group is US dollars. Items included in the financial statements of each of the Group’s entities are measured in the functional currency of each entity. The Group uses the local currency as the functional currency, except for two entities based in Ireland (Novell Ireland Software Limited and Novell Ireland Real Estate Limited), the parent company, and the HPE Software entities, where the functional currency is the US dollar Certain HPE Software entities moved to local functional currencies from November 1. 2017, reflecting changes in their underlying business model and transactional conditions.

Transactions and balances

Foreign currency transactions are translated into the functional currency using the exchange rates prevailing at the dates of the transactions. Foreign exchange gains and losses resulting from the settlement of such transactions and from the translation at year end exchange rates of monetary assets and liabilities denominated in foreign currencies are recognized in the consolidated statement of comprehensive income.

13

Group companies

The results and financial position of all the Group entities that have a functional currency different from the presentation currency are translated into the presentation currency as follows:

·Assets and liabilities for each consolidated statement of financial position presented are translated at the closing rate at the date of that consolidated statement of financial position;
·Income and expenses for each consolidated statement of comprehensive income item are translated at average exchange rates (unless this average is not a reasonable approximation of the cumulative effect of the rates prevailing on the transaction dates, in which case income and expenses are translated at the dates of the transactions); and
·All resulting exchange differences are recognized as a separate component of equity.

On consolidation, exchange differences arising from the translation of the net investment in foreign entities are taken to other comprehensive income.

Goodwill

Goodwill represents the excess of the cost of an acquisition over the fair value of the net identifiable assets of the acquired subsidiary at the date of acquisition. Goodwill on acquisitions of subsidiaries is included in intangible assets. Goodwill is tested annually for impairment and carried at cost less accumulated impairment losses. Gains and losses on the disposal of an entity include the carrying amount of goodwill relating to the entity sold. Goodwill is allocated to cash-generating units for the purpose of impairment testing. Each of those cash-generating units represents the Group’s investment in each area of operation by each primary reporting segment.

The Group tests annually whether goodwill has suffered any impairment. The recoverable amounts of cash-generating units are determined based on value-in-use calculations. These calculations require the use of estimates such as the discount rate applied to each cash generating unit, operating margin, and the long term growth rate of net operating cash flows.

Impairment of non-financial assets

Assets that have an indefinite useful life are not subject to amortization and are tested annually for impairment. Assets that are subject to amortization are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. An impairment loss is recognized for the amount by which the asset’s carrying amount exceeds its recoverable amount. The recoverable amount is the higher of an asset’s fair value less costs to sell and value in use. For the purposes of assessing impairment, assets are grouped at the lowest levels for which there are separately identifiable cash flows being cash-generating units. Any non-financial assets other than goodwill which have suffered an impairment are reviewed for possible reversal of the impairment at each reporting date. Assets that are subject to amortization and depreciation are also reviewed for any possible impairment at each reporting date.

Development expenditure

The Group invests in the development of future products. The assessment as to whether this expenditure will achieve a complete product for which the technical feasibility is assured is a matter of judgment, as is the forecasting of how the product will generate future economic benefit. Finally, the period of time over which the economic benefit associated with the expenditure occurred will arise is also a matter of judgment. These judgments are made by evaluating the development plan prepared by the research and development department and approved by management, regularly monitoring progress by using an established set of criteria for assessing technical feasibility and benchmarking to other products.

Taxation

The Group is subject to income taxes in numerous jurisdictions. Significant judgment is required in determining the worldwide provision for income taxes. There are many transactions and calculations for which the ultimate tax determination is uncertain during the ordinary course of business. The Group recognizes liabilities for anticipated settlement of tax issues based on estimates of whether additional taxes will be due. Where the final tax outcome of these matters is different from the amounts that were initially recorded, such differences will impact the income tax and deferred tax provisions in the period in which such determination is made.

The Group carries appropriate provision, based on best estimates, until tax computations are agreed with the taxation authorities.

Current and deferred tax are recognized in the consolidated statement of comprehensive income, except when the tax relates to items charged or credited directly to equity, in which case the tax is also dealt with directly in equity.

14

Deferred income tax is provided in full, using the liability method, on temporary differences arising between the tax bases of assets and liabilities and their carrying amounts in the consolidated financial statements. However, if the deferred income tax arises from initial recognition of an asset or liability in a transaction other than a business combination that at the time of the transaction affects neither accounting nor taxable profit or loss, it is not accounted for. Deferred income tax is determined using tax rates (and laws) that have been enacted or substantially enacted by the consolidated statement of financial position date and are expected to apply when the related deferred income tax asset is realized or the deferred income tax liability is settled. Deferred income tax assets are recognized to the extent that it is probable that future taxable profit will be available against which the temporary differences can be utilized.

Deferred income tax is provided on temporary differences arising on investments in subsidiaries, except where the timing of the reversal of the temporary difference is controlled by the Group and it is probable that the temporary difference will not reverse in the foreseeable future.

Current tax is recognized based on the amounts expected to be paid or recovered under the tax rates and laws that have been enacted or substantively enacted at the consolidated statement of financial position date.

Loss Contingencies

Loss contingencies for onerous leases, restructuring costs and legal claims are recognized when the Group has a present legal or constructive obligation as a result of past events; it is probable that an outflow of resources will be required to settle the obligation; and the amount has been reliably estimated. Restructuring contingencies comprise lease termination penalties and employee termination payments. Contingencies are not recognized for future operating losses.

Where there are a number of similar obligations, the likelihood that an outflow will be required in settlement is determined by considering the class of obligations as a whole. A loss contingency is recognized even if the likelihood of an outflow with respect to any one item included in the same class of obligations may be small.

Loss contingencies are measured at the present value of the expenditures expected to be required to settle the obligation using a pre-tax rate that reflects current market assessments of the time value of money and the risks specific to the obligation. The increase in the loss contingency due to the passage of time is recognized as an interest expense.

New Accounting Standards

For discussion of the impact and adoption of accounting standards, see Notes to the Consolidated Financial Statements—Note 3. Accounting policies.

Quantitative and Qualitative Disclosures about Market Risk

Financial risk factors

Micro Focus Group’s multi-national operations expose it to a variety of financial risks that include the effects of changes in credit risk, foreign currency risk, interest rate risk and liquidity risk. Risk management is carried out by a central treasury department under policies approved by the board of directors. Group treasury identifies and evaluates financial risks alongside the Group’s operating units. The board provides written principles for risk management together with specific policies covering areas such as foreign currency risk, interest rate risk, credit risk and liquidity risk, use of derivative financial instruments and non-derivative financial instruments as appropriate, and investment of excess funds.

Credit risk

Financial instruments which potentially expose the Group to a concentration of credit risk consist primarily of cash and cash equivalents and accounts receivable. Cash equivalents are deposited with predominately high-credit quality financial institutions. The Group provides credit to customers in the normal course of business. Collateral is not required for those receivables, but on-going credit evaluations of customers’ financial conditions are performed. The Group maintains a provision for impairment based upon the expected collectability of accounts receivable. The Group sells products and services to a wide range of customers around the world and therefore believes there is no material concentration of credit risk.

Foreign currency risk

The Group operates internationally and is exposed to foreign exchange risk arising from various currency exposures, primarily with respect to UK Sterling, Candadian Dollar and the Euro. Foreign exchange risk arises from future commercial transactions, recognized assets and liabilities and net investments in foreign operations. Foreign exchange risk arises when future commercial transactions, recognized assets and liabilities are denominated in a currency that is not the entity’s functional currency. There were no hedging transactions in place at October 31, 2017 and October 31, 2016 for foreign currency risk. The Group has certain investments in foreign operations, whose net assets are exposed to foreign currency translation risk.

15

Interest rate risk

The Group’s income and cash generated from operations are substantially independent of changes in market interest rates. The Group’s interest rate risk arises from short-term and long-term borrowings. Borrowings issued at variable rates expose the Group to cash flow interest rate risk.

The Group entered intoholds interest rate swaps in the six months to October 31, 2017, to hedge against the cash flow risk in the LIBOR rate charged on $2,250$2,250.0 million of the debt issued by Seattle Spinco, Inc. (the investment company used to acquire the HPE Software business) from October 19, 2017 to September 30, 2022. Under the terms of the interest rate swaps, the Group pays a fixed rate of 1.94%1.95% and receives 1 month USDone-month US dollar LIBOR.

Liquidity riskTaxation
The Group’s reported a tax charge for the 12-months ended October 31, 2020 of $34.2 million (12-months ended October 31, 2019: credit of $16.0 million). The difference between the actual tax charge and the expected tax charge at the statutory rate is primarily due to the impairment of goodwill, which is, in the majority, non-taxable.

Central treasury carries(Loss)/profit after tax from continuing operations
The loss after tax from continuing operations was $2,974.6 million in the 12-months ended October 31, 2020, compared to a loss after tax from continuing operations of $18.1 million in the 12-months ended October 31, 2019.

Profit from discontinued operation
The profit from discontinued operation of $5.1 million related to conclusion of the working capital settlement and adjustments in respect of income tax balances owed in respect of pre-transaction periods on the disposal of the SUSE business. The profit from discontinued operation of $1,487.2 million in the 12-months ended October 31, 2019, reflected the profits generated from the SUSE portfolio of $28.7 million in the period to March 15, 2019 together with the profit on the sale of SUSE of $1,458.5 million when sold on March 15, 2019.

Earnings per share
The table below sets out cash flow forecastingthe Earnings per Share (“EPS”). The Group is also required to present EPS for both the continuing and discontinued operations.

  
12 months
ended
October 31, 2020
  
12 months
ended
October 31, 2019
  
18 months
ended
October 31, 2018
 
  
Basic
Cents
  
Diluted1
Cents
  
Basic
Cents
  
Diluted 1
Cents
  
Basic
Cents
  
Diluted
Cents
 
Continuing operations  (886.15)  (886.15)  
(4.87
)
  
(4.87
)
  
181.91
   
176.92
 
Discontinued operation  1.52   1.52   
393.37
   
389.16
   
19.79
   
19.25
 
Total EPS  (884.63)  (884.63)  
388.50
   
384.35
   
201.70
   
196.17
 

1 As there is a loss from continuing operations attributable to the ordinary equity shareholders of the Company for the Group12-months ended October 31, 2020 ($2,974.6 million) and 2019 ($18.4 million), the Diluted EPS is reported as equal to ensure that it has sufficient cash to meet operational requirements and to allow the repaymentBasic EPS, as no account can be taken of the bank facility. Surplus casheffect of dilutive securities under IAS 33.

In the 12-months ended October 31, 2020, the Group generated a Basic EPS from continuing operations of (886.15) cents. This compares to (4.87) cents in the operating units over and above what is required for working capital needs is transferred to Group treasury. These funds are used to repay bank borrowings or invested in interest bearing current accounts, time deposits or money market deposits of the appropriate maturity period determined by consolidated cash forecasts. Trade payables arise in the normal course of business and are all current. Onerous lease provisions are expected to mature between less than 12 months and nine years.

At October 31, 2017 gross borrowings of $5,047.7 million (compared to $1,775.9 million on October 31, 2016) related to our secured debt facilities. $37.9 million (compared to $307.8 million on October 31, 2016) is current of which none (compared to $245.0 million on October 31, 2016) is the revolving credit facility. The borrowings disclosed in the balance sheet are net of pre-paid facility costs. See Notes to the Consolidated Financial Statements—Note 19. Borrowings.

Non-IFRS measures

The Group uses certain measures to assess the financial performance of its business. Certain of these measures are termed “non-IFRS measures” because they exclude amounts that are included in, or include amounts that are excluded from, the most directly comparable measure calculated and presented in accordance with IFRS, or are calculated using financial measures that are not calculated in accordance with IFRS.

The Group uses such measures to measure operating performance and liquidity, in presentations to the Board and as a basis for strategic planning and forecasting, as well as monitoring certain aspects of its operating cash flow and liquidity. The Group believes that these and similar measures are used widely by certain investors, securities analysts and other interested parties as supplemental measures of performance and liquidity.

Following Completion, we reviewed the measures that we use to assess the financial performance of the business and concluded that, in order to simplify reporting on the Enlarged Group, we would cease using the non-IFRS measures previously reported as “Facility EBITDA” and “Adjusted EBITDA”. We will continue to use and report the non-IFRS measure previously reported as “Underlying Adjusted EBITDA”, now renamed “Adjusted EBITDA”. In addition, we have begun reporting “Adjusted Profit before tax” to supplement our analysis of results of operations relating to taxation.

The non-IFRS measures may not be comparable to other similarly titled measures used by other companies and have limitations as analytical tools and should not be considered in isolation or as a substitute for analysis of the Group’s operating results as reported under IFRS.

An explanation of the relevance of each of the non-IFRS measures, a reconciliation of the non-IFRS measures to the most directly comparable measures calculated and presented in accordance with IFRS and a discussion of their limitations is set out below. The Group does not regard these non-IFRS measures as a substitute for, or superior to, the equivalent measures calculated and presented in accordance with IFRS or those calculated using financial measures that are calculated in accordance with IFRS.

EBITDA and Adjusted EBITDA

EBITDA is defined as net earnings before finance costs, finance income, share of results of associates, taxation, depreciation of property, plant and equipment, and amortization of intangible assets. The Group presents EBITDA because it is widely used by securities analysts, investors and other interested parties to evaluate the profitability of companies. EBITDA eliminates potential differences in performance caused by variations in capital structures (affecting net finance costs), tax positions (such as the availability of net operating losses against which to relieve taxable profits), the cost and age of tangible assets (affecting relative depreciation expense) and the extent to which intangible assets are identifiable (affecting relative amortization expense).

During the six months ended October 31, 2017,2019. The decrease was primarily driven by the Group has redefined its Adjusted EBITDA definitionlower overall continuing earnings as previously explained.

31
Table of Contents
Consolidated statement of financial position as at October 31, 2020 and this is now the only adjusted EBITDA measureOctober 31, 2019

Summarized Consolidated statement of financial position

The Group’s Consolidated statements of financial position are presented in the Consolidated financial statements in item 18. Summarized versions are presented below.

  October 31, 2020  October 31, 2019 
  
$m
 
$m

Non-current assets  9,605.0   
12,846.7
 
Current assets  1,541.8   
1,448.1
 
Total assets  11,146.8   
14,294.8
 
         
Current liabilities  1,788.3   
1,802.0
 
Non-current liabilities  6,143.4   
6,216.5
 
Total liabilities  7,931.7   
8,018.5
 
Net assets  3,215.1   
6,276.3
 
         
Capital and reserves        
Total equity attributable to owners of the parent  3,215.1   
6,275.0
 
Non-controlling interests  -   
1.3
 
Total equity  3,215.1   
6,276.3
 

The discussions for the Consolidated statement of financial position as at October 31, 2019 as compared to the October 31, 2018 can be found in Items 5.A of the Group’s Annual Report on Form 20-F for the 12-months ended October 31, 2019 which is available at https://www.microfocus.com/en-us/investors/investor-download-centre and has been filed with the SEC.

The net assets of the Group results.have decreased by $3,061.2 million from $6,276.3 million to $3,215.1 million between October 31, 2019 and October 31, 2020.  In the period, the key movements were as follows:

•          Non-current assets decreased by $3,241.7 million to $9,605.0 million primarily due the impairment of the Group’s goodwill of $2,799.2 million recognised in the period, as well as $674.1 million resulting from the annual amortisation charge on intangible assets. These reductions are partially offset by the recognition of $207.2 million of right-of-use assets as a result of the adoption of IFRS 16 ‘Leases’ during the period. (see note 10 “Goodwill” of the Consolidated financial statements” in Item 18)

•          Current assets increased by $93.7 million to $1,541.8 million driven by an increase in cash and cash equivalents of $381.5 million, which was offset by a reduction in trade and other receivables of $301.5 million. Trade and other receivables decreased due to a reduction of aged receivables of $225.0 million. The new “Adjusted EBITDA” definition was previously reportedreduction in aged receivables has been a continuing key focus of the finance team in the financial year. The increase in cash and cash equivalents is the result of the cash collected from trade and other receivables and actions taken during the period to retain cash so as “Underlying Adjusted EBITDA”.to maximize the Group’s resilience to any financial risks resulting from the on-going COVID-19 pandemic including the cancellation of the 12-month period ended October 31, 2019 final dividend and the decision to not pay an interim dividend for the current period.

•          Current liabilities decreased by $13.7 million to $1,788.3 million, primarily due to a $107.5 million reduction in trade and other payables, offset by an increase in lease obligations of $70.4 million as a result of the adoption of IFRS 16 and an increase of $21.4 million in short-term borrowings; and

•          Non-current liabilities decreased by $73.1million to $6,143.4 million, primarily due to a $146.0 million reduction in current and deferred tax liabilities, a decrease in borrowings of $51.8 million, and a decrease of $32.7 million of contract liabilities, offset by an increase in lease obligations of $156.5 million as a result of the adoption of IFRS 16 and a $41.4 million increase in the derivative liability.

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Table of Contents

Adjusted EBITDA is comprised of EBITDA (as defined above), adjusted for, exceptional items (integration costs, acquisition costs, pre-acquisition costs, property costs, severance costs, royalty provision release, impairment of intangible assets, and impairment of prepayments), share based compensation, amortization and impairment of development costs, foreign exchange gains/losses and net capitalization/amortization of development costs.

These items are excluded from Adjusted EBITDA because they are individually or collectively material items that are not considered•              Total equity attributable to be representativethe owners of the trading performanceparent decreased by $3,059.9 million from $6,275.0 million to $3,215.1 million, driven primarily by the $2,969.5 million of the Group. Management believes that Adjusted EBITDA should, therefore, be made available to securities analysts, investors and other interested parties to assist in their assessment of the trading performance of our business.

Adjusted EBITDA Margin refers to each measure defined above as a percentage of actual revenue recorded in accordance with IFRS for the period.

EBITDA and Adjusted EBITDA have limitations as analytical tools. Some of these limitations are:

·
they do not reflect the Group’s cash expenditures or future requirements for capital expenditure or contractual commitments;
·they do not reflect changes in, or cash requirements for, the Group’s working capital needs;
·they do not reflect the significant interest expense, or the cash requirements necessary to service interest or principal payments, on the Group’s debt;
·they are not adjusted for all non-cash income or expense items that are reflected in the Group’s statements of cash flows;
·the further adjustments made in calculating Adjusted EBITDA are those that management consider are not representative of the underlying operations of the Group and therefore are subjective in nature; and
·although depreciation and amortization are non-cash charges, the assets being depreciated and amortized will often have to be replaced in the future, and EBITDA and Adjusted EBITDA do not reflect any cash requirements for such replacements.

The following table is a reconciliation from profitloss for the period, to EBITDA and Adjusted EBITDA:including the $2,799.2 million impairment of goodwill.

  
Six months ended
31 October 2017
  
Six months ended
31 October 2016
 
  (dollars in thousands) 
       
Profit for the period  106,605   90,617 
Finance costs  75,487   49,455 
Finance income  (1,699)  (502)
Taxation  39,129   22,589 
Share of results of associates  438   1,127 
Depreciation of property, plant and equipment  16,289   5,712 
Amortization of intangible assets  198,606   119,085 
EBITDA  434,855   288,083 
Exceptional items (reported in Operating profit)  98,480   41,048 
Share-based compensation charge  18,302   15,521 
Amortization of and impairment of product development costs  (12,375)  (12,117)
Foreign exchange gain  (4,699)  (9,270)
Net capitalization of product development costs  (4,503)  (2,931)
Adjusted EBITDA  530,060   320,334 
         
Revenue  1,234,520   684,743 
Adjusted EBITDA Margin  42.9%  46.8%
Foreign currency fluctuations

Exceptional items are those significant items which are separately disclosed by virtue of their size, nature or incidence to enable a full understanding of the Group’s financial performance. These items are collectively totaled and identified as “exceptional items”, as set out in Notes to the Consolidated Financial Statements- Note 7. Exceptional Items.

17

Adjusted Operating Profit

Adjusted Operating Profit is defined as operating profit before share-based compensation, the amortization of purchased intangible assets, and exceptional items. Adjusted Operating Profit is also the measure used by the Executive Committee to assess the trading performance of our business and is therefore the measure of segment profit that the Group presents under IFRS. Adjusted Operating Profit is also presented on a consolidated basis because management believes it is important to consider our profitability on a basis consistent with that of our operating segments. When presented on a consolidated basis, Adjusted Operating Profit is a non-IFRS measure. The following table is a reconciliation from operating profit for the period excluding exceptional items to Adjusted Operating Profit:

  
Six months ended
October 31, 2017
  
Six months ended
October 31, 2016
 
  (dollars in thousands) 
Operating profit  219,960   163,286 
Exceptional items (reported in Operating Profit)  98,480   41,048 
Share-based compensation charge  18,302   15,521 
Amortization of purchased intangible assets  183,478   106,394 
Adjusted Operating Profit  520,220   326,249 

Exceptional items are those significant items which are separately disclosed by virtue of their size, nature or incidence to enable a full understanding of the Group’s financial performance. These items are collectively totaled and identified as “exceptional items”, as set out in Notes to the Consolidated Financial Statements—Note 7. Exceptional Items).

Adjusted Profit before tax

Adjusted Profit before tax is defined as profit before tax excluding the effects of share-based compensation, the amortization of purchased intangible assets, and all exceptional items. Adjusted Profit before tax is presented to supplement our analysis of results of operations relating to taxation. When presented on a consolidated basis, Adjusted Profit before tax is a non-IFRS measure.

The following table is a reconciliation from profit before tax for the year to Adjusted Profit before Tax:

  
Six months ended
31 October 2017
(unaudited)
  
Six months ended
31 October 2016
(unaudited)
 
  (dollars in thousands) 
Profit before tax  145,734   113,206 
Share-based compensation charge  18,302   15,521 
Amortization of purchased intangibles  183,478   106,394 
Exceptional items  104,253   41,048 
Adjusted Profit before tax  451,767   276,169 

Constant Currency (CCY)

The Group’s reporting currency is the U.S.US dollar however, the Group’s significant international operations give rise to fluctuations in foreign exchange rates. To neutralize foreign exchange impact and to better illustrate the underlying change in revenue and profitresults from one yearperiod to the next, the Group has adopted the practice of discussinganalyzing results on an as reported basis and in both reportable currency (local currency results translated into US dollars at the prevailing foreign exchange rate) and constant currency.

The Group uses US dollar-baseddollar based constant currency models to measure performance. These are calculated by restating the results of the Group for the six months ended October 31, 2016comparable period at the same average exchange rates as those used in reported results for the six months ended October 31, 2017.current period. This gives a US-dollarUS dollar denominated income statement, which excludes any variances attributable to foreign exchange rate movements.

18
The table below has been presented on a constant currency basis and is for continuing operations only to show the impact of currency fluctuations on the revenue of the Group:

  
12 months
ended
October 31,
2020
  
12 months
ended
October 31,
2019
  
Period-on-
period change
constant
currency
  
Period-on-
period change
actual
currency
 
  
$m
 
$m

 %  % 
Constant currency revenue:              
Licence  646.5   
799.2
   
(19.1
)%
  
(19.2
)%
Maintenance  1,921.2   
2,050.0
   
(6.3
)%
  
(6.6
)%
SaaS & other recurring  245.5   
278.4
   
(11.8
)%
  
(12.2
)%
Consulting  188.4   
215.3
   
(12.5
)%
  
(13.5
)%
Constant currency revenue before haircut  3,001.6   
3,342.9
   
(10.2
)%
  
(10.5
)%
Deferred revenue haircut  (0.6)  
(6.8
)
  
(91.2
)%
  
(91.2
)%
Constant currency revenue  3,001.0   
3,336.1
   
(10.0
)%
  
(10.4
)%
Currency impact  -   
12.3

  
n/a
   
n/a
 
Total Revenue  3,001.0   
3,348.4
   
(10.4
)%
  
(10.4
)%

As shown in the table the impact of currency fluctuations in the 12-months ended October 31, 2020 was limited.

The most important foreign currencies, other than the US dollar for the Group are: Pounds Sterling, the Euro, Canadian Dollar, Israeli Shekel and Canadian dollar.Japanese Yen and in the 12-month period ended October 31, 2020 also the Indian Rupee and Chinese Yuan. The exchange rates used and movements in these rates period-on-period are as follows:

  
12 months
ended
October 31,
2020
  
12 months
ended
October 31,
2019
  
Period-
on-
period
change
  
31 October
2020
  
31 October
2019
  
Period-
on-
period
change
 
  Average  Average  %  Closing  Closing  % 
£1 = $  1.28   
1.27
   0.8%  1.30   
1.29
   0.8%
€1 = $  1.13   
1.12
   0.9%  1.17   
1.12
   4.5%
C$ = $  0.74   
0.75
   (1.3)%  0.75   
0.76
   (1.3)%
ILS = $  0.29   
0.28
   3.6%  0.29   
0.28
   3.6%
INR = $  0.01   
n/a
   -   0.01   
n/a
   - 
CNY = $  0.14   
n/a
   -   0.15   
n/a
   - 
100 JYP = $  0.93   
1.10
   (15.5)%  0.96   
1.08
   (11.1)%

  
Six months ended
October 31, 2017
  
Six months ended
October 31, 2016
 
  Average  Closing  Average  Closing 
£1 = $  1.30   1.33   1.35   1.22 
€1 = $  1.14   1.16   1.12   1.10 
CAD$ 1 = $  0.78   0.78   0.76   0.75 
Sensitivity analysis relating to foreign exchange can be found in note 24 “Financial Instruments” of the Consolidated financial statements in Item 18.

5. B
The Group is subject to exposure on the translation of the net assets of foreign currency subsidiaries into its reporting currency, US Dollar. The Group’s primary balance sheet translation exposures are noted in the Exposure analysis below. These exposures are kept under regular review with the Group treasury function providing reporting to the Treasury Risk committee and the Audit committee.

Group borrowings are denominated in US dollars and Euros. The Group seeks to match the currency profile of borrowings to the cash flows arising from the Groups operations used to service those borrowings. The May 2020 debt refinancing included an additional proportion of Euro debt and a reduction in US dollar debt which is intended to better match the currency profile of the groups debt with the cash flows used to service that debt (note 18 “Borrowings” of the Consolidated financial statements in Item 18).

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Table of Contents
The Group has certain investments in foreign operations, whose net assets are exposed to foreign currency translation risk. The Group faces currency exposures arising from the translation of profits earned in foreign currency subsidiaries into the Group’s reporting currency of US dollars. As at October 31, 2020 two net investment hedges totaling €1.05 billion have been designated using non-derivative Euro debt instruments to minimize the volatility in shareholder’s equity arising from foreign currency translation (there were no net investment hedges as at October 31, 2019). As a result of the Group’s net investment hedging foreign exchange losses of $58.7 million have been recognised in equity in the 12-months ended October 31, 2020 (12-months ended October 31, 2019: nil). Further details on the Group’s net investment hedging is included in note 24 “Financial Instruments” of the Consolidated financial statements in Item 18.

34
Table of Contents
Item 5. B.Liquidity and capital resources

Item 5. B. 1.Information regarding the Group’s liquidity

Our principal ongoing uses of cash are to meet working capital requirements, to fund debt obligations, and to finance our capital expenditures and acquisitions.acquisitions and to pay dividends to shareholders. The board continues to target a modest levelleverage1 of leverage for a company with the cash generating qualities of Micro Focus with a target net debt (defined as the total of borrowings and finance lease obligations less cash and cash equivalents) to2.7x Adjusted EBITDA multiple of 2.7 times. We are confident that2. The current leverage1 remains above this level, ofdue to on-going investments we are making in the business. The Group intends to reduce leverage1 back to this level in the medium term and will balance debt will not reduce our abilityrepayments and equity returns in the short term to deliver our strategy, invest in products and/or make appropriate acquisitions. As the integration of the businesses continues the board will keep the appropriate level of debt under review.on this.

The Group’s operations are diversified across a number of currencies. Changes in foreign exchange rates are monitored and exposures regularly reviewed and actions taken to review exposures where necessary. The Group has significant committed facilities in place, the earliest of which matures in November 2021June 2024 and sufficient headroom to meet its operational requirements. The Group seeks to maintain strong relationships with its key banking partners and lenders and to proactively monitor the loan markets. The Group also has strong engagement with the providers of equity capital, which represents an alternative source of capital.

In March 2020, given the increased macro-economic uncertainty as a result of the COVID-19 pandemic, as a precautionary measure, the directors withdrew their recommendation for the payment of a final dividend of 58.33 cents per share in respect of the 12-month period ended October 31, 2019.  Similarly, no dividend was paid in respect of the six months to April 30, 2020. The decision to not pay these dividends has resulted in an increase in available liquidity compared to the payments that would otherwise have been made under the Group’s existing dividend policy.

As at October 31, 2017, we had2020, cash and cash equivalents of $730.3 million, which includes net cash and working capital adjustments to be paid to HPE of $289.0 million and other amounts due to HPE of $72.2 million, and excludes amounts due from HPE of $103.2were $737.2 million. The company also has a $500.0$350.0 million Revolving Credit Facility (which is undrawn as at October 31, 2017)2020). In addition, as a public listed company Micro Focus has access to equity capital markets for fund raising if required. There are no current plans to issue additional equity.

We
The directors believe that the Company’s current available working capital is adequate to sustain its operations at current levels through at least the next twelve12 months.

The discussions for the Group’s liquidity and capital resources for the 12-months ended October 31, 2019 compared to the 18-months ended October 31, 2018 can be found in Items 5.B of the Group’s Annual Report on Form 20-F for the 12-months ended October 31, 2019 which is available at https://www.microfocus.com/en-us/investors/investor-download-centre and has been filed with the SEC.

1Leverage is defined as the ratio of Net debt to Adjusted EBITDA. Net debt is defined in Item 3.D.
2Adjusted EBITDA is defined in Item 3.D.

12 months-ended October 31, 2020 compared to the 12-months ended October 31, 2019

Cash flows from operating activities

Six months ended October 31, 2017 compared to the six months ended October 31, 2016

Net cash generated from operating activities decreasedincreased by $61.0$16.4 million, or 45.2%2.5%, to $74.0$678.2 million in the six months12-months ended October 31, 20172020 as compared to $135.0$661.8 million in the six months12-months ended October 31, 2016. 2019.

This increase period-on-period is primarily due to an increase of $39.5$26.5 million in interest paid, $84.5cash generated from operations, a reduction of $20.0 million of bank loan costsinterest payments and an outflowa reduction of working capital$17.8 million of $142.2 million, which is partiallytax payments, offset by an increase in operating profit after adding back the effectbank loan costs of non-cash items of $207.5$47.9 million.

The acquisitionincrease period-on-period of HPE Software contributed $207.9$26.5 million to the increasein cash generated from operations arises primarily from a $121.6 million decrease in operating profit, after adding backexcluding the effect$2,799.2 million goodwill impairment charge, offset by a period-on-period movement in working capital inflow of non-cash items$153.8 million.

The period-on-period movement in cash flows from working capital of $153.8 million result from the working capital inflow in the 12-months ended October 31, 2020 being $32.6 million, compared with a $121.2 million outflow in the 12-months ended October 31, 2019. This was primarily caused by a period-on-period increase in working capital of $79.0 million in trade and $133.5other receivables, $45.0 million tofrom a reduction in the outflowoutflows from trade and other payables and $21.1 million from the utilization of working capital.provisions. The trade receivables inflow was as a result of reduced trading and improvements in the collection of trade receivables. During the period overdue and current trade receivables reduced by $93.2 million and $131.8 million respectively.

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Table of Contents
Cash flows from investing activities

Six monthsNet cash from investing activities decreased by $2,171.3 million to an outflow of $89.2 million in the 12-months ended October 31, 2017 compared to the six months ended October 31, 2016

Net cash generated from investing activities increased by $842.7 million, or 148.9%, to $276.9 million in the six months ended October 31, 20172020 as compared to net cash used ininflow from investing activities of $565.8$2,082.1 million in the six months12-months ended October 31, 2016. This increase in2019.

Excluding the net cash generatedreceived from investing activities is primarily due to an increase in net cash acquired with acquisitionsthe disposal of $252.6the SUSE business of $2,473.5 million, a decreasetax paid on the divestiture gain of repayment of bank borrowings on acquisitions of $316.7$264.6 million and a decrease in net cash divested of $18.7 million in the 12-months ended October 31, 2019 the net cash outflow from investing activities decreased by $56.3 million. This was due to a decrease of $81.8 million of payments for acquisitions which offset a decrease of subsidiaries of $293.8 million, partially offset by an increase of $18.1$24.2 million in payments for intangible assets.interest received.

Cash flows fromused in financing activities

Six monthsNet cash used in financing activities decreased by $2,809.1 million to $198.2 million in the 12-months ended October 31, 20172020 as compared to $3,007.3 million in the six months12-months ended October 31, 20162019.

Net cash generated from financing activities increased by $318.0 million, or 260.8%, to $196.1 millionThis decrease in the six months ended October 31, 2017 as compared to net cash used in financing activities of $121.9$2,809.1 million is primarily due to:

Returns of Value to shareholders of $1,800.0 million, associated expenses of $1.0 million, share buy-backs and related expenses of $544.7 million and dividend payments of $439.2 million in the six months12-months ended October 31, 2016. This increase2019 were not repeated in the 12-months ended October 31, 2020. There were no dividend payments in the 12-months ended October 31, 2020;

a net cash generated from financing activities is primarily due to an increasedecrease in bank borrowing repayments of $928.8$113.7 million, being a net repayment of $98.9 million in the 12-months ended October 31, 2020 and net repayments of $212.6 million in the 12-months ended October 31, 2019;

payments for leases increased by $67.2 million from $12.9 million in the 12-months ended October 31, 2019 to $80.1 million in the 12-months ended October 31, 2020 as a consequence of the adoption of IFRS 16.

in the 12-months ended October 31, 2020 these was a payment of $21.8 million relating to the settlement of a foreign exchange rate derivative taken out to satisfy the final October 31, 2019 dividend proposed that was subsequently cancelled.

Contractual Commitments

Bank Borrowings

  October 31, 2020  October 31, 2019  October 31, 2018 
  
$m
 
$m

 
$m

Bank loan secured  4,733.2   
4,775.0
   
4,996.9
 
Unamortized prepaid facility arrangement fees and original issue discounts  (92.9)  
(104.3
)
  
(151.0
)
   4,640.3   
4,670.7
   
4,845.9
 

The carrying value for borrowings are stated after deducting unamortized prepaid facility fees and original issue discounts. Facility arrangement costs and original issue discounts are amortized between three and six years. The remaining unamortized fees of $92.9 million have a remaining period of amortisation of three years.  Long-term borrowings have a drawn value of $4,733.2 million before unamortized prepaid facility fees (2019: $4,775.0 million).

Short-term borrowing of $34.2 million represents capital repayments falling due on the Group borrowings within one year less unamortized prepaid facility arrangement fees and original issue discounts of $12.8 million.

On May 29, 2020, the Group announced that it had successfully priced and allocated a €600.0 million and a $650 million senior secured term loan. The new five-year facilities, along with $143.0 million of existing cash inflowsreserves, were used by the Group to fully refinance its existing senior secured term loan B due November 2021 and pay associated fees and expenses.

On September 3, 2020, the Group announced that it had successfully extended its revolving credit facility and reduced the size from $500.0 million to $350.0 million. The Group also confirmed that it had repaid the $175.0 million previously drawn during the year as a precautionary measure in response to the COVID-19 outbreak, resulting in a balance outstanding of $nil. These actions resulted in a reduction in the Group’s gross debt and the borrowing costs associated with the proceeds from bank borrowings offset by cash outflowsrevolving credit facility. The remaining prepaid facility fees of $500.0$4.5 million to be amortized were expensed in relation to the returnperiod and new fees of value, increase in repayment of bank borrowings of $88.6$1.8 million and an increase in dividends paid to shareholders of $22.9 million.were capitalized for the new arrangement.

Borrowings
The Company announced on April 21, 2017Following these refinancing activities, the successful syndication of the new credit facilities (the “New Facilities”) on behalf of both MA FinanceCo, LLC, a wholly owned subsidiary of Micro Focus, and Seattle SpinCo. Inc., the subsidiary that holds HPE Software which merged with a wholly owned subsidiary of Micro Focus at Completion.Group’s earliest debt maturity is in June 2024.

36
Table of Contents
The New Facilities comprisefollowing facilities were drawn as at October 31, 2020:

The €600 million (equivalent to $700.3 million) senior secured five-year term loan B-1 issued by MA FinanceCo., LLC., maturing in June 2025, is priced at EURIBOR plus 4.5% (subject to a $500.0EURIBOR floor of 0.00%) with an original issue discount of 3.0%;

The $368.2 million Revolving Credit Facilitysenior secured seven-year term loan B-3 issued by MA FinanceCo., LLC., maturing in June 2024, is priced at LIBOR plus 3.50%2.75% (subject to a LIBOR floor of 0.00%) placed with an original issue discount of 0.25%;

The $650.0 million senior secured five-year term loan B-4 issued by MA FinanceCo., LLC., , maturing in June 2025, is priced at LIBOR plus 4.25% (subject to a numberLIBOR floor of financial institutions, $2,600.01.00%) with an original issue discount of 2.5%;

The $2,486.3 million senior secured seven-year term loan B issued by Seattle SpinCo, Inc., $385.0 million term loan B issued by MA FinanceCo LLC, and Eur 470.0 million (valuedmaturing in June 2024, is priced at $547.5 million as at October 31, 2017) issued by MA FinanceCo LLC.

New Facilities drawn as at April 30, 2017:

In relation to the existing senior secured term loans issued by MA FinanceCo, LLC the lenders in the Term Loan C of $412.5 million due November 2019 were offered a cashless roll of their investment into the existing Term Loan B, becoming Term Loan B-2, due November 2021 and this loan was re-priced to LIBOR plus 2.50%2.75% (subject to a LIBOR floor of 0.00%) and as a resultwith an original issue discount of the cashless rollover increased in size from $1,102.7 million to $1,515.2 million, effective from April 28, 2017.0.25%; and

19The €452.8 million (equivalent to $528.4 million) senior secured seven-year term loan B issued by MA FinanceCo., LLC., maturing in June 2024, is priced at EURIBOR plus 3.00% (subject to a EURIBOR floor of 0.00%) with an original issue discount of 0.25%.

The following facilities were undrawn at October 31, 2020:

A senior secured revolving credit facility of $350.0 million ($nil drawn), (“Revolving Facility”), with an interest rate of 3.50% above LIBOR on amounts drawn (and 0.5% on amounts undrawn) thereunder (subject to a LIBOR floor of 0.00%).

During the current period toAt October 31, 2017 the following New Facilities were drawn down:

HPE Software Facilities:

·The new $2,600.0 million senior secured seven year term loan B issued by Seattle SpinCo. Inc. is priced at LIBOR plus 2.75% (subject to a LIBOR floor2020, $nil of 0.00%) with an original issue discount of 0.25%;
Micro Focus Facilities:
·The new $385.0 million senior secured seven year term loan B issued by MA FinanceCo LLC is also priced at LIBOR plus 2.75% (subject to a LIBOR floor of 0.00%) with an original issue discount of 0.25%; and
·The new Euro 470.0 million (equivalent to $547.5 million as at October 31, 2017) senior secured seven year term loan B issued by MA FinanceCo LLC is priced at EURIBOR plus 3.00% (subject to a EURIBOR floor of 0.00%) with an original issue discount of 0.25%.

As part of the HPE Software transaction, the New Facilities were used to:

i.Fund the pre-Completion cash payment by Seattle SpinCo. Inc. to HPE of $2,500.0 million (subject to certain adjustments in limited circumstances);
ii.Fund the Return of Value to Micro Focus’ existing Shareholders of $500.0 million; and
iii.Pay transaction costs relating to the acquisition of HPE Software.

The balance will be used for general corporate and working capital purposes.

The only financial covenant attaching to these facilities relates to the Revolving Facility whichwas drawn (31 October 2019: $nil), together with $4,733.2 million of term loans giving gross debt of $4,733.2 million drawn.

There are no financial covenants on the Group’s term-loan borrowing facilities. The Revolving Facility is subject to a single financial covenant, being an aggregate net leverage1 covenant only in circumstances where more than 35% of the Revolving Facility is outstanding at a fiscal quarter end.  Throughout the year the applicable covenant threshold was 4.35x, however no test was applicable at October 31, 2020 or any previous test date, as the facility was not drawn in excess of the 35% threshold. This covenant is not expected to inhibit the Group’s future operations or funding plans.

At October 31, 2017,The Group’s borrowing arrangements include annual repayments of 1% of the Revolving Facility was undrawninitial par value for the B-3, Seattle Spinco and $5,047.7 million Term Loan B-2 giving grossEuro term B loans and 2.5% of the initial par value for the B-1 and B4 loans with the amount paid in four equal quarterly instalments and then a final balloon payment on maturity. In addition, the borrowing arrangements require additional debt repayments where the Group’s net leverage1 exceeds 3.00x, when 25% of $5,047.7 million drawn.excess cash flow for the prior year is required to be paid, and 3.30x, when 50% of excess cash flow for the prior year is required to be paid.

1See Item 5.B.1 for definition of leverage.

37
Table of Contents
The movements on the Group loans in the year were as follows:

  
term
loan
B-1 EUR
  
term
loan
B-2 USD
  
term
loan
B-3 USD
  
term
loan
B-4 USD
  
Seattle
Spinco
term loan B
  
Euro
term
loan B
  
Revolving
Facility
  
Total
 
  
$m
 
$m
 
$m
 
$m
 
$m
 
$m
 
$m
 
$m
At November 1, 2018  
-
   
1,503.8
   
382.1
   
-
   
2,580.5
   
530.5
   
-
   
4,996.9
 
Repayments  
-
   
(89.1
)
  
(13.9
)
  
-
   
(94.2
)
  
(15.4
)
  
-
   
(212.6
)
Foreign exchange  
-
   
-
   
-
   
-
   
-
   
(9.3
)
  
-
   
(9.3
)
At October 31, 2019  
-
   
1,414.7
   
368.2
   
-
   
2,486.3
   
505.8
   
-
   
4,775.0
 
                                 
At November 1, 2019  
-
   1,414.7   368.2   -   2,486.3   505.8   -   4,775.0 
Draw downs  665.8   -   -   650.0   -   -   175.0   1,490.8 
Repayments  -   (1,414.7)  -   -   -   -   (175.0)  (1,589.7)
Foreign exchange  34.5   -   -   -   -   22.6   -   57.1 
At October 31, 2020  700.3   -   368.2   650.0   2,486.3   528.4   -   4,733.2 

Maturity of borrowings

The maturity profile of the anticipated future cash flows including interest in relation to the Group’s borrowings on an undiscounted basis, which therefore, differs from both the carrying value and fair value, is as follows:

As a covenant test is only applicable when the Revolving Facility is drawn down by 35% or more, and Revolving Facility was undrawn at October 31, 2017,2020:

  
term
loan
B-1 EUR
  
term
loan
B-3 USD
  
term
loan
B-4 USD
  
Seattle
Spinco
term loan
B
  
Euro
term
loan B
  
Revolving
Facility
  
Total
 
  
$m
 
$m
 
$m
 
$m
 
$m
 
$m
 
$m
Within one year  49.0   11.0   50.3   74.6   16.9   1.8   203.6 
In one to two years  52.6   12.4   53.5   82.7   21.5   1.5   224.2 
In two to three years  47.4   14.6   48.6   98.4   21.3   -   230.3 
In three to four years  46.6   369.7   47.8   2,496.5   527.1   -   3,487.7 
In four to five years  642.8   -   599.2   -   -   -   1,242.0 
At October 31, 2020  838.4   407.7   799.4   2,752.2   586.8   3.3   5,387.8 

  
Less than 1
year
  1-3 years  3-5 years  
Total
 
  
$m
 
$m
 
$m
 
$m
Debt principal repayment  34.2   128.2   4,570.8   4,733.2 
Interest payment on debt  169.4   326.3   158.9   654.6 
At October 31, 2020  203.6   454.5   4,729.7   5,387.8 

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As at October 31, 2019:
  
term
loan B-2
  
term
loan B-3
  
Seattle Spinco
term loan B
  
Euro term
loan B
  
Revolving
Facility
  
Total
 
  

$m

 
$m


$m


$m


$m


$m
Within one year  
61.6
   
17.0
   
114.6
   
14.1
   
1.9
   
209.2
 
In one to two years  
61.5
   
16.9
   
114.3
   
14.6
   
1.9
   
209.2
 
In two to three years  
1,419.8
   
18.5
   
124.1
   
19.3
   
1.6
   
1,583.3
 
In three to four years  
-
   
20.6
   
139.4
   
19.1
   
-
   
179.1
 
In four to five years  
-
   
373.5
   
2,522.6
   
503.6
   
-
   
3,399.7
 
At October 31, 2019  
1,542.9
   
446.5
   
3,015.0
   
570.7
   
5.4
   
5,580.5
 

  
Less than 1
year
  1-3 years  3-5 years  
After
5 years
  
Total
 
  
$m


$m


$m


$m


$m
Debt principal repayment  
-
   
1,431.7
   
3,343.3
   
-
   
4,775.0
 
Interest payment on debt  
209.2
   
360.8
   
235.5
   
-
   
805.5
 
At October 31, 2019  
209.2
   
1,792.5
   
3,578.8
   
-
   
5,580.5
 

Leases
The Group has additional contractual commitments for capital expenditure in the form of leases which are disclosed in Item 5.F of this Annual Report on Form 20-F, no covenant testadditional financing is applicable.anticipated to be required to meet these commitments.

Interest
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Item 5. B. 2.Derivative financial instruments.

Information on the type of financial instruments used and the Group’s treasury policies and objectives in terms of the manner in which treasury activities are controlled are included in note 24 “Financial Instruments” of the Consolidated financial statements included in item 18.

Information on the currency and interest rate swapsstructure and maturity profile of debt are included in Item 5.B.1 above.

The Group’s cash and cash equivalents was held in the following currencies as at October 31, 2020:


$m
US dollar
529.5
Euro49.6
British Pound36.4
Indian Rupee26.4
Japanese Yen14.3
Russian Rouble13.1
Canadian Dollar10.3
Australian Dollar9.0
South African Rand6.9
Other41.7
737.2

Item 5. B. 3.Material capital expenditure commitments.

The Group entered into interest rate swaps in the six months tohas no material capital expenditure commitments at October 31, 2017, to hedge against the cash flow risk in the LIBOR rate charged on $2,250.0 million of the debt issued by Seattle Spinco, Inc. from October 19. 2017 to September 30, 2022, consistent with the Group’s strategy to hedge the risk of cash flow fluctuations due to fluctuations in the LIBOR rate for up to half of the Group’s US Dollar denominated borrowings. Under the terms of the interest rate swaps, the Group pays a fixed rate of 1.94% and receive 1 month USD LIBOR.2020.

5.C Research and development
Item 5. C.Research and development, patents and licenses, etc.

The Micro Focus Group invests heavily in product developmentresearch and has seen significant enhancements to existing products and has accelerated the development of new products. New versions of products have been released in each sub-portfolio in the past year.development. Through its market knowledge and close contact with customers, Micro Focus has sought to refine products to respond to the changing needs of the Micro Focus Group’sGroup’s customers.

During the financial periods ended October 31, 2017, October 31, 2016, and October 31, 2015, an aggregate of $173.6 million, $86.4 million, and $76.3 million, respectively, were charged to the consolidated statement of comprehensive income of the Micro Focus Group in respect of research and development expenditure. The Micro Focus Board intends to continue to focus investment in growth and core products and does not intend to dispose of declining products unless such products can achieve greater than the discounted cash flow they would generate in the ownership of the Enlarged Group.

Research expenditure is recognized as an expense as incurred in the consolidatedConsolidated statement of comprehensive income in research and development expenses. Costs incurred on product development projects relating to the developing of new computer software programmesprograms and significant enhancement of existing computer software programmesprograms are recognized as intangible assets when it is probable that the project will generate future economic benefits, considering its commercial and technological feasibility, and costs can be measured reliably. Only direct costs are capitalized which are the software development employee costs and third partythird-party contractor costs. Product development costs previously recognized as an expense are not recognized as an asset in a subsequent period.

The assessment as to whether product development expenditure will achieve a complete product for which the technical feasibility is assured is a matter of judgment, as is the forecasting of how the product will generate future economic benefit. Finally, the period of time over which the economic benefit associated with the expenditure occurred will arise is also a matter of judgment. These judgments are made by evaluating the development plan prepared by the research and development department and approved by management, regularly monitoring progress by using an established set of criteria for assessing technical feasibility and benchmarking to other products.

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Item 5. D.Trend information.

5.D Trend information

Factors and Trends that affect our Results of Operations

A discussion on the technology trends which are impacting the Group’s operations is included in Item 4.B.2 under the heading technology trends.

The underlying premise behindmain changes in the Group’s products and services expected in the coming year are described in Item 4.B.1 under the heading “Transition to SaaS and Subscription” and in Item 4.B.5 under the heading “Capturing Growth: Security and Big Data”.

The main trends in the Group revenues and costs in the 12-months ended October 31, 2020 and actions taken in relation to these trends are discussed in the revenue commentary in Item 5.A.

Update on our businessthree-year plan

The Group’s strategy is that the Group should consistently and over the long-termto deliver shareholder returns through sustainable free cash flow generation. As part of our Strategic  & Operational Review performed in the range12-month period ended October 31, 2019 we announced our strategic initiatives which, combined with existing programs, are designed to deliver on our strategic vision for the 12-months ended October 31, 2023  and create a business which is more efficient, agile and better aligned to our customers’ value proposition. Our strategic vision was set in the months preceding the COVID-19 pandemic and as a result the execution of 15%these initiatives is now being balanced with the new risks and opportunities which have arisen due to 20% per annum. ToCOVID-19 such that we adapt our approach as required to deliver this objectiveagainst our goals.

The three-year ambition we set was to deliver stable revenues, Adjusted EBITDA1,2 margins towards the Group has adopted an operationalmid-40s percent, and financial strategy underpinned by consistentbe able to generate at least $700m of free cash flow3 annually.

These targets were set prior to COVID-19 and effective managementgiven the on-going situation and reward systems. This strategy is capable of execution overassociated uncertainty we remain unable to predict the long-term. When considering investment priorities, both organicmagnitude and inorganic, we evaluate our options against a set of characteristics enabling the categorization of our products into oneduration of the following:impact COVID-19 will have. The resulting macro-economic impacts are likely to delay the achievement of these specific objectives, but the principles of revenue stabilization and margin expansion, in order to deliver strong and sustainable levels of free cash flow, remain the aim for FY23 and beyond.

In pursuit of this plan, our main initiatives are focused on two key objectives. Firstly, evolving our business model to ensure we continually assess and address customer needs and adapt to changes in the market to deliver value and capture growth opportunities, these are discussed in Items 4.B.1 and 4.B.5 as referenced above. Secondly, delivering operational excellence through business process and infrastructure simplification with a relentless focus on improving levels and consistency of execution.

Overall, there was solid progress made in the period.

New Models – Products or consumption models (cloudThe Group’s strategic initiatives to deliver this are:

Evolving our business model
We deliver mission critical technology that helps power the digital economy. This means we serve a central role in thousands of core strategic and subscription)operational functions within our customers’ business operations.

In doing this we take a differentiated approach focused on supporting our customers’ need to both run and transform their businesses simultaneously in support of their digital transformation programs. This means delivering innovation that openenables customers to leverage existing investments to exploit new opportunities that could become growth drivers or represent emerging use cases that we need to be able to embrace;or address new threats.

Our pragmatic approach supports customers in balancing agility, cost and risk by bridging their existing investments with the
newest technology and helping ensure resources are deployed against the areas of highest return.

The key initiatives in evolving our business model are:

Growth Drivers – Products
Delivering innovation: We need to invest more in our growth. Evolve the operating model to improve the visibility of our product strategies and drive more differentiation with consistent growth performanceincreased investment in Security and market opportunity to build the future revenue foundations of the Group;Big Data, (see Item 4.B.5.)

Optimize – Products with declining revenue performance driven by
SaaS and Subscription:  We need to accelerate the transition to SaaS and Subscription to better align to the market or executionopportunity where these models are becoming the trajectory must be correctedde facto standard, (see Item 4.B.1.)

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Operational excellence:

Go-To-Market: Transform our Go-To-Market function in order to move back to the core category or investments focused to optimize long-term returns; andimprove our sales effectiveness, (see Item 4.B.5.)

Core – Products that have maintained broadly flat revenue performance but represent
Complete core systems: Complete the current foundationscore systems and operational simplification work to deliver a robust and efficient operating platform. (see Improving infrastructure: completion of the Group and must be protected and extended.simplification programs below).

Within this overall portfolio we have some products that are growing significantly and others that are stable or in decline. Our business model means the way we manage the portfolio is analogous to a ‘‘fundImproving infrastructure: completion of funds’’ with the objective of generating modest revenue growth over the medium-term, delivering high levels of profitability and strong cash generation and cash conversion ratio with a balanced portfolio approach. simplification programs

We will continue to focus investmentexecute multiple programs to deliver improved operational effectiveness and agility. These programs are advanced and the key project to complete remains the migration to one set of core IT systems.

Digital transformation programs on this scale are inherently complex, in growththis instance made even more by COVID-19 presenting the unique challenge of having to execute the program with fully remote internal and system integration partner teams.

On January 13, 2021, we began to transition employees to our new IT infrastructure which is an important milestone for the Group, but the work ahead remains significant, impacting every employee and our core productsbusiness processes. This migration will happen in two phases, one now and will not dispose of declining products unless we can achieve greater than the discounted cash flow they would generate in our ownership.  Within the Enlarged Group we have also discovered areassecond in the portfolio with similar researchsummer, followed by the period of familiarization and development efforts where a shared set of technologies and architectures (e.g. data ingestion, visualization, container platform, application programming interfaces) enable more innovation with less “duplicated” investment further contributing to our ability to drive higher efficiency without compromising innovation.stabilization typical in any global IT project.

The combinationpriority for FY21 is to complete this transition as effectively as possible with HPE Software may delayminimum disruption to day to day operations. When complete and embedded this will provide the return to revenue growth as the HPE Software products are integrated. We expect HPE Software’s revenue trend to continue its historical decline until the transformation has been fully executedfoundation for capturing operational improvements and the benefits take hold. This integration will be delivered by the four-year planefficiencies evident and the six key strategic priorities that will consolidate and strengthen the combined business, with the goal of delivering modest revenue growthachievable in the medium-termbusiness. The completion will also be an important step culturally, facilitating closer alignment of our operations, regardless of heritage company, enabling our people to work more effectively and productively as well as underpinningone team focused on improving our margin improvement objectives.business and delivering a much smoother and richer experience for our customers.

The Enlarged Group is a strong platformimpact of COVID-19 has also presented opportunities for us to re-evaluate how and oncewhere we achievework. Not only the dynamic of home working versus office working, but also how and where key business processes are executed. This, combined with our target cash conversion ratio of 90%systems work outlined above, presents additional opportunities to 95%further improve efficiencies into the future. We will carefully consider each opportunity, in particular whether the future efficiencies and benefits outweigh the additional one-off costs in the short-term and will proceed where we believe we willsee the opportunity to generate significant free cash flows from which we can deliver returns of value to our shareholders and/or further highly accretive acquisitions.longer-term value.

Also referThe principal risks in relation to these strategic initiatives are discussed in Item 5.A of this Form 20-F for further discussion of trend information.3.D.

5.E Off balance sheet arrangements1 See definition of Adjusted EBITDA in Item 3.D

There are
2 Adjusted EBITDA margin is Adjusted EBITDA as a percentage of actual revenue recorded in accordance with IFRS for the period.

3 Free Cash Flow is defined as cash generated from operations less interest payments, bank loan costs, tax payments, purchase of intangible assets, purchase of property, plant and equipment and interest and capital payments in relation to leases. This is presented as management believe it is important to the understanding of the Group’s Cash flow.

Item 5. E.Off-balance sheet arrangements.

The Group has no off-balance sheet arrangements, aside from those outlined in the contractual cash obligations table in Item 5.F of this Form 20-F, that have, or are reasonably likely to have, a current or future material effect on the Group’s financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources.arrangements.

2142

5.F Tabular disclosureTable of contractual obligationsContents
Item 5. F.Tabular disclosure of contractual obligations.

The following table summarizes ourthe Group’s contractual obligations and other commercial commitments at October 31, 2017,2020, as well as the effect these obligations and commitments, specifically long-term debt and lease obligations, are expected to have on ourthe Group’s liquidity and cash flow in future periods:

  Payment due by period 
  
Less than
1 year
  
1-3
years
  
3-5
years
  
After
5 years
  Total 
  
$m
 
$m


$m


$m


$m
Debt principal repayment  
34.2
   
128.2
   
4,570.8
   
-
   
4,733.2
 
Interest payments on debt  
169.4
   
326.3
   
158.9
   
-
   
654.6
 
   
203.6
   
454.5
   
4,729.7
   
-
   
5,387.8
 
Lease obligations  
82.2
   
112.8
   
49.3
   
36.3
   
280.6
 
Purchase obligations  
39.0
   
52.9
   
39.6
   
12.5
   
144.0
 
   
324.8
   
620.2
   
4,818.6
   
48.8
   
5,812.4
 
  Payments due by Period 
  
Less than
1 year
  1 - 3 years  3 -5 years  
After
5 years
  Total 
  (dollars in thousands) 
Contractual cash obligations:               
Long-term debt  37,858   100,954   1,544,170   3,364,711   5,047,693 
Finance leases  14,306   16,817   1,426   -   32,549 
Operating leases  80,573   129,887   101,087   39,537   351,084 
Interest payments  194,391   383,707   323,523   213,102   1,114,723 
Total  327,128   631,365   1,970,206   3,617,350   6,546,049 

The interest payments within the above table are presented based on the prevailing one-month LIBOR and foreign exchange rates as of October 31, 2017.2020.

5. G.Purchase obligations primarily include commitments for software licences. Purchase orders for the purchase of other goods and services are not included in the table, as the Group’s operating subsidiaries are not able to determine the aggregate amount of such purchase orders that represent contractual obligations, as purchase orders typically represent authorizations to purchase rather than binding agreements.

The table above does not include any amounts that the Group may pay to fund its retirement benefit plans as the timing and amount of any such future funding are unknown and dependent on, among other things, the future performance of defined benefit pension plan assets, interest rate assumptions and other factors. The net retirement benefit scheme liabilities totaled $155.0 million as of October 31, 2020, which is net of pension assets of $148.3 million. The Group expects to be required to contribute approximately $3.0 million to its defined benefits plans during 2021. See note 22 “Pensions” of the Consolidated financial statements in Item 18.

Safe harbor
Item 5. G.Safe harbor.

Refer to the information set forth under the heading “Forward Looking Statements” on page 1..

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Item 6.Directors, Senior Management and Employees

Item 6. A.Directors and senior management.

During the 12-month period ended October 31, 2020 our directors and senior management comprised the board of directors, and the following members of key management bodies who are not on the board of directors. Details of the membership of the board and the related board committees they were involved in are disclosed below.

ITEM 8. FINANCIAL INFORMATION- LEGAL PROCEEDINGSDirectors

8.A.7Directors as at October 31, 2020 and committee membership:

NameRoleCommittee Membership
Greg Lock
Non-Executive Chairman
Nomination committee and Remuneration committee
Stephen Murdoch
Chief Executive Officer
Executive committee
Brian McArthur-Muscroft*
Chief Financial Officer
Executive committee
Karen Slatford
Senior Independent Director
Audit committee and Nomination committee
Richard Atkins
Independent non-executive director
Audit committee, Nomination committee and Remuneration committee
Amanda Brown
Independent non-executive director
Audit committee, Nomination committee and Remuneration committee
Lawton Fitt
Independent non-executive director
Audit committee, Nomination committee and Remuneration committee
Sander van ’t Noordende
Independent non-executive director
Nomination committee and Remuneration committee
Robert Youngjohns
Independent non-executive director
Audit committee, Nomination committee and Remuneration committee
*As announced on January 8, 2021, Brian has notified the board of his intention to leave the Company.

Greg Lock - Chairman

Chairman since February 2020.

Before embarking on his adventures as a PLC Chairman Greg enjoyed 30 years at the IBM Corporation. There he served, inter alia, as assistant to the Chairman, a member of the IBM Worldwide Management Council, Governor of the IBM Academy of Technology and Global General Manager for Industrial Sector. In that role he had P&L responsibility for a $12 billion unit representing about 15% of the Corporation’s revenues.

In his second career he has been Chairman of FTSE listed Companies Orchestream, SurfControl, Kofax, UBM, Computacenter, and Deputy Chairman of Informa.

Greg holds an MA in Natural Sciences from Churchill College, Cambridge, where he is a Fellow and member of the Development Board. Greg, together with his wife, Rosie, have established a charitable foundation aimed, inter alia, at supporting education for the less privileged. Through the foundation they have endowed Lock Bursaries at Churchill aimed at supporting less financially advantaged state school pupils to pursue STEM subjects.

Stephen Murdoch – Chief Executive Officer

Stephen is our Chief Executive Officer and a member of the Micro Focus board, positions he has held since March 19, 2018. Stephen joined Micro Focus in 2012, first serving as General Manager of the Product Group and Chief Marketing Officer, responsible for all software product and services offerings development, customer services, corporate marketing and strategy. In 2014, he was appointed as Chief Operating Officer and Executive Director, having responsibility for sales and marketing, product strategy, development and management, services and business operations.

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Prior to Micro Focus, Stephen spent seven years at Dell, first building Dell’s Global Infrastructure Consulting Services organization, and then leading its business in Europe, Middle East and Africa. Before Dell, Stephen had 17 years’ experience at IBM, latterly serving as Vice President, Communications Sector with responsibility for the entire telco, media, and utilities industry portfolio. During his IBM career, Stephen held a number of Global, EMEA and UK senior management roles with experience spanning software and services, storage, and enterprise systems.

Brian McArthur-Muscroft – Chief Financial Officer*

Brian is our Chief Financial Officer and a member of the Micro Focus board, positions he has held since February 21, 2019.

Prior to joining Micro Focus Brian held a variety of senior management positions, including the role of Chief Financial Officer at TeleCity Group plc and most recently as Chief Financial Officer of Paysafe Group plc.

Also a restructuring specialist, Brian was the Interim CFO on the successful turnaround of MCI Worldcom EMEA.

He is a non-executive director and the senior independent director at Robert Walters plc, where he has been chair of the audit committee since 2013. In addition, Brian serves as the Responsible Officer for Hockerill Anglo-European College, a leading international secondary school in Hertfordshire.

Brian was named as Business Week’s Finance Director of the Year in both 2013 and 2017, and the CBI’s FTSE 250 Finance Director of the Year in 2012. Brian holds a Law degree and qualified as a chartered accountant with PricewaterhouseCoopers in London.

* As announced on January 8, 2021, Brian has notified the board of his intention to leave the Company.

Karen Slatford - Senior Independent Director

Karen is a non-executive director of Softcat plc, Chair of AIM-listed Draper Esprit plc and a non- executive director at Accesso Technology Group plc. Prior to her current responsibilities, she held various roles at the board level since 2001 at a range of technology companies. Karen began her career at ICL before spending 20 years in Hewlett-Packard, where she headed up worldwide sales and marketing. Karen holds a BA Joint Honours degree in European Studies, French and Spanish from Bath University.

Richard Atkins - Independent non-executive director

Richard is Chairman of Acora, an IT Services outsourcing company and YSC, an international Leadership Development company. He has spent the majority of his career within the IT industry.

Previously, he was a director at Data Sciences where he led its MBO from Thorn EMI in 1991 and then managed its successful sale to IBM in 1996. His final role at IBM was as General Manager for IBM Global Services Northern Europe where he was also a member of the IBM worldwide senior leadership team. Since leaving IBM in 2005 he has acted as a non-executive director for several companies including Aon, Compel, Message Labs, Global Crossing, Morse and Easynet. Richard qualified as a Chartered Accountant with EY.

Amanda Brown - Independent non-executive director

Amanda is the Chief Human Resources Officer at Hiscox Ltd, a FTSE 250 business and specialist insurer with offices in 14 countries.

Amanda has more than 20 years of international HR experience in a variety of industries, including consumer goods, leisure, hospitality, and financial services. Prior to Hiscox, Amanda held a number of leadership roles with Mars, PepsiCo, and Whitbread plc. She has expertise in human resources, remuneration strategy, and managing organizations through periods of significant change.

Lawton Fitt - Independent non-executive director

Lawton is an investment banker and a highly experienced corporate director. She currently serves on the boards of Ciena Corporation, The Progressive Corporation and The Carlyle Group, and was previously a non-executive director at ARM plc and Thomson Reuters. Lawton worked at Goldman Sachs for over 23 years in investment banking, equities and asset management, and for more than a decade she led the equity capital markets team, focused on technology companies. She was elected a Partner in 1994 and worked in the London and New York offices.

From 2002 to 2005 Lawton was the Secretary (Chief Executive Officer) of the Royal Academy of Arts in London and has served as a trustee for a number of not-for-profit organizations and foundations, including the Goldman Sachs Foundation and the Thomson Reuters Foundation. She received her undergraduate degree in European History from Brown University and her MBA from the Darden School of the University of Virginia.

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Sander van ’t Noordende - Independent non-executive director

Sander joined the Micro Focus board in June 2020. He has had a 32-year career in Technology and Professional Services at Accenture, where he was a member of the Global Management Committee from 2006 to 2019. His last role in Accenture was Group Chief Executive of the Products Operating Group which serves clients in the consumer goods, retail, travel, life sciences and industrial & automotive industries. Before that he looked after Management Consulting, the Resources Operating Group and The Netherlands. He also served on the board of Avanade (an Accenture JV with Microsoft).

Sander is passionate about equality and belonging in the workplace, especially the LGBTI agenda. He has been recognised several times by the FT as one of the top 100 global LGBT+ Executives. He currently serves on the Board of Out & Equal (the world’s premier LGBT workplace equality organization).

He holds a Master’s degree in Industrial Engineering and Management Science from the Eindhoven University of Technology.

Robert Youngjohns - Independent non-executive director

Robert is a board member at a small number of growth companies in the technology sector and an operating executive at Marlin Equity Partners. Robert previously served as Executive Vice President and General Manager of HP Software at Hewlett Packard Enterprises (“HPE”). During his tenure at Hewlett Packard, Robert was a member of HP’s Executive Council, as well as a Senior Vice President.

Prior to his work at HPE, Robert was a Senior Vice-President of Microsoft and President of Microsoft North America. He has held senior leadership positions at Sun Microsystems and IBM. Robert holds a Master’s degree with honors in physics and philosophy from Oxford University.

Board members’ external commitments
Each of the non-executive directors confirms on appointment that they will devote sufficient time to meet what is expected of them in their role. They have each disclosed their other significant commitments and the time involved in these and advise the board of any changes.

One executive director has an external role.
Brian McArthur-Muscroft is a non-executive director of Robert Walters plc.

Senior Management

Senior Management as at October 31, 2020:

NameRole
Paul Rodgers
Chief Operating Officer
Chris Livesey
Senior Vice President, Revenue Growth and Strategy
John Delk
Senior Vice President and General Manager of the Security Product Group
Raffi Margaliot
Senior Vice President and General Manager, Application Delivery Management Product Group
Genefa Murphy*
Chief Marketing Officer
Jane Smithard
Chief Legal Officer and Group General Counsel
Susan Ferguson
Chief Human Resources Officer & Senior Vice President Business Operations
Tom Goguen
Chief Product Officer and General Manager, IT Operations Management Product Group
Colin Mahony
Senior Vice President and General Manager, Vertica Product Group
Neil Fowler
Vice President and General Manager, AMC Product Group
Scott Richards
Vice President and General Manager of the Information Management & Governance (IM&G) Product Group
Suzanne Chase
Group Company Secretary and Head of Assurance
Nick Wilson
Worldwide President of Sales

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Paul Rodgers - Chief Operating Officer

Paul Rodgers is the Chief Operating Officer for Micro Focus and has a proven track record of success with pioneering board-level strategies that facilitate transformations across complex business landscapes. Paul supports the businesses by identifying areas for innovation and guiding strategic changes that improve efficiencies, reduce cost and deliver large-scale growth.

Prior to this role, Paul served as the Business Operations and Integration lead for Micro Focus, where he was responsible for overseeing the successful integrations resulting from the company’s merger and acquisition activity. Paul joined Micro Focus in April 2008 as the Group HR Director, and prior to joining Micro Focus, Paul spent 17 years with IBM and four years as Managing Director of a successful Executive HR consultancy business with clients such as Dell, Unilever, Yahoo and Sainsbury’s.

Chris Livesey - Senior Vice President, Revenue Growth and Strategy

Chris Livesey is the Senior Vice President of Revenue Growth & Strategy, responsible for how we strengthen and innovate our engagement with customers, to enable their success and maximum return on investment.

Chris has over 25 years of experience in the technology industry, holding a number of executive leadership positions including sales, marketing, product development, and consulting. He holds a BSc (Hons) in Mathematics and Statistics and a Master’s degree in Software Engineering, both from the University of Glasgow.

John Delk - Senior Vice President and General Manager of the Security Product Group

John Delk is the Senior Vice President and General Manager of the Security Product Group at Micro Focus. Prior to this role, he served as Chief Marketing Officer and Chief Product Officer. John joined Micro Focus in 2014 as part of the acquisition of the Attachmate Group where he had served as Vice President of Product Management and Marketing for NetIQ. Prior to that, he spent seven years in various leadership positions at Novell in product management, sales, and services.

John has over 35 years of experience in the IT industry working for numerous other companies holding roles including Managing Partner at BearingPoint/KPMG Consulting and a Vice President at EDS. He holds a master’s degree in Computer Science from Georgia Institute of Technology and a bachelor’s degree from Furman University with a double major in Mathematics and Computer Science.

Raffi Margaliot - Senior Vice President and General Manager, Application Delivery Management Product Group

Raffi leads the Application Delivery Management product group within Micro Focus and has over two decades of experience driving business strategy, product development and delivering innovative technology solutions that solve customer problems.

Raffi was a founding engineer for what is now the Application Lifecycle Management platform and joined the company through the acquisitions of HPE Software business and HP’s acquisition of Mercury Interactive.

While at HPE, he held a number of general manager roles, including leading both the Enterprise Mobility and IT Management- as-a-Service business units. He holds both a bachelor’s and master’s degree in computer science from the Hebrew University of Jerusalem in Israel.

Genefa Murphy - Chief Marketing Officer*

Genefa Murphy is the Chief Marketing Officer for Micro Focus. Under Genefa’s leadership, the marketing and enablement teams drive global and regional programs across all Micro Focus product groups, support, and services. They ensure that customers, partners, and employees understand the value that the Micro Focus portfolio can bring to Digital Transformation. Her team is also responsible for developing positive momentum with analysts and media, contributing thought leadership within the enterprise technology domain, and helping solidify critical relationships with customers, partners, and prospects.

Genefa has more than 10 years’ experience across various disciplines in the field of technology from consulting, to product management and strategy. Previously, Genefa was the Global Vice President of Corporate Marketing and Enablement. Genefa holds a BSc in Business IT and a PhD in New Technology Adoption.

* Genefa left the business in January 2021

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Jane Smithard - Chief Legal Officer and Group General Counsel

Jane has more than 25 years’ experience as a lawyer in the IT industry and software sector. She has worked with Micro Focus for over 20 years providing a wide range of commercial and corporate legal services, from leading the efforts through the 2005 IPO to driving the legal aspects of the group’s mergers, acquisitions and divestitures strategy including the acquisition of HPE Software business and divestiture of SUSE. Jane leads a team of approximately 60 lawyers and other professionals worldwide, the majority of whom are focused directly on supporting the Company’s commercial teams and business.

Jane qualified as a Barrister and was called to the Bar of England and Wales in 1982. She has a BA (Hons) in Law, a postgraduate diploma in European Law from King’s College, London, and is a Fellow of the Chartered Institute of Arbitrators.

Susan Ferguson - Chief Human Resources Officer and SVP Business Operations

Susan is our Chief Human Resources Officer & SVP Business Operations. She is responsible for leading the HR organization in addition to managing business operations across the organization including driving strategic initiatives.

Susan joined Micro Focus from Hewlett Packard Enterprise (HPE) Software in 2017 where she held the position of Vice President, Worldwide Indirect Sales. Previously Susan held the role of Vice President, Strategy & Planning, Chief of Staff to the EVP of HPE Software business and prior to that was Vice President Worldwide Alliances & Channels, Big Data. Susan was recognised among CRN’s Power 100 Women of the Channel during her tenure.

Before joining HPE, Susan was Vice President at Oracle Corporation and earlier at Sun Microsystems, where she led regional and global services, indirect sales and functional organizations. At Sun, Susan previously led global legal teams with responsibility for sales, marketing, channel, supply chain and anti-trust matters. Susan graduated with a LL.B Honours degree and is a qualified attorney and mediator.

Tom Goguen - Chief Product Officer and General Manager, IT Operations Management Product Group

Tom Goguen is currently the Chief Product Officer and General Manager of the IT Operations Management (ITOM) Product Group. Tom joined Micro Focus as part of the merger with the Software division of HPE. He joined HPE in 2016, and was responsible for developing and delivering the industry’s broadest set of IT operations management solutions for traditional IT, private, public, and hybrid cloud environments, including data center automation, network operations management, IT service management automation, hybrid cloud management, and automated monitoring, analysis, and remediation for IT operations.

Tom has more than 20 years of experience in product-line management and executive roles spanning engineering, product management, and marketing functions at Sun Microsystems, Apple, and BlackBerry.

Colin Mahony - Senior Vice President and General Manager, Vertica Product Group

Colin Mahony leads the Vertica Product Group for Micro Focus, spanning global GTM, Product Strategy, R&D, Professional Services and Support. Colin has led his team to deliver industry leading in-database machine learning capabilities and advanced analytics with the performance and scale needed to power the world’s most data driven enterprises. Colin is known for his industry thought leadership, technical expertise and business acumen.

In 2011, Colin joined HP through the Vertica acquisition and has since led the business. Prior to Vertica, Colin was a Vice President at Bessemer Venture Partners and before that he worked at Lazard Technology Partners. Earlier in his career, Colin was a Senior Analyst at the Yankee Group, serving as an industry analyst and consultant covering databases, BI, middleware, application servers, and ERP systems. Colin earned an MBA from Harvard Business School and a bachelor’s degree in Economics with a minor in Computer Science from Georgetown University.

Neil Fowler - Vice President and General Manager, AMC Product Group

Neil Fowler leads the Application Modernization and Connectivity (AMC) Product Group for Micro Focus. Neil joined Micro Focus in 1991 and played a key role in R&D as a technical architect in Enterprise Solutions. With significant experience of helping hundreds of customers deliver modernization projects he has been at the forefront of product architecture and strategy across COBOL, Mainframe Solutions, CORBA and Host Connectivity.

Over the past 25 years Neil has held a number of different leadership roles responsible for strategy, acquisition integration and product design and delivery. Prior to his current role, Neil was Vice President for Engineering in AMC. He has a degree in Physics and Computer Science from Brunel University.

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Scott Richards - Vice President and General Manager of the Information Management & Governance (IM&G) Product Group

Scott Richards is the Vice President and General Manager of the Information Management & Governance (IM&G) product group at Micro Focus. Prior to this role, he served as the Vice President of Worldwide Engineering for the IM&G product group.

Scott joined Micro Focus in 2014 as part of the acquisition of the Attachmate Group where he served as Senior Director of Engineering as well as in several other leadership roles.

Scott has over 25 years of experience in the high-tech industry working for both startups and large corporations including leadership roles at 3Com and VP of Product Development and Marketing at Senforce Technologies. Scott holds a master’s degree in International Management from Thunderbird School of International Management at Arizona State University and a bachelor’s degree from Utah State University with a major in Marketing and a minor in Japanese.

Suzanne Chase – Group Company Secretary and Head of Assurance

Suzanne is Group Company Secretary and Head of Assurance. She is a solicitor with over 30 years expertise in M&A, governance, compliance, risk and assurance. Previous positions held have been Group General Counsel at Wickes plc, Group General Counsel and Company Secretary at The Big Food Group plc, General Counsel and Company Secretary at Morse plc, General Counsel and Company Secretary at Parity Group plc and Compliance Partner at King Sturge LLP (now part of JLL). She is a member of The Law Society of England and Wales. Suzanne is also a Fellow of the Royal Society of Arts, Manufactures and Commerce.

Nick Wilson - Worldwide President of Sales

Nick Wilson is the Worldwide President of Sales for Micro Focus. Nick leads our Sales, Services, Support and Customer Success teams worldwide and is responsible for delivering on our commitment to our customers’ success. Through his leadership the teams at Micro Focus are jointly focused on offering effective solutions that drive value, and delivering a positive, seamless, end-to-end customer experience.

Nick has spent more than 30 years in the IT industry, having held several senior leadership roles, including Managing Director for UK and South Pacific for HP/HPE, President & CEO of EMEA Outsourcing (the UK & Nordics business for CSC), Managing Director at UNISYS UK, and General Manager of IBM’s Global Services business in the UK, Ireland and South Africa. Through this broad experience across sales, services, support, education and software development, Nick understands the complexities and challenges companies face in the ever-changing and evolving business where technology is critical.

In addition to his corporate contributions, Nick is a passionate STEM ambassador and vocational education advocate and has worked with various institutions to develop programs to support science, engineering and technology careers.

Any arrangement or understanding with major shareholders, customers, suppliers or others, pursuant to which any person referred to above was selected as a director or member of senior management can be found in note 31 “Related party transactions” of the Consolidated financial statements in Item 18 .

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Item 6. B.Compensation.

Aggregate compensation paid to the Group’s directors and members of key management bodies are disclosed below. In addition, further information on the compensation of the Group’s directors is disclosed. This is based upon information extracted from the Remuneration report in the UK Annual Report and Accounts prepared in line with the recommendations of the UK Corporate Governance Code.

12-months ended
October 31, 2020
Aggregate compensation including fees paid to non-executive directors
$m
Short-term benefits
12.4
Share based payments
2.2
Total compensation14.6

Single figure for total remuneration of executive directors
The table below shows the single figure for total remuneration for executive directors for the financial year ended October 31, 2020, together with their respective figures for the year months ended October 31, 2019 as shown in last year’s report.

  
( a)
Base
Salary1
  
( b)
Benefits
in kind2
  
( c )
Annual
bonus3
  
( d )
LTIP4
  
( e )
Pension5
  
( f )
Total
  
Total Fixed Remuneration
(Total of ( a),
( b ) and ( e ) )
  
Total Variable Remuneration
(Total of ( c )
and ( d ) )
 
Executive Directors 
£’000  
£’000  
£’000  
£’000  
£’000  
£’000  
£’000  
£’000 
Stephen Murdoch
2020  850   24   283   -   127   1,284   1,002   283 
2019
  
850
   
23
   
-
   
565
   
128
   
1,566
   
1,001
   
565
 
Brian McArthur-Muscroft
2020  600   25   199   -   90   914   715   199 
2019
  
600
   
21
   
-
   
-
   
90
   
711
   
711
   
-
 
Kevin Loosemore 6
2020  216   12   44   -   43   315   271   44 
2019
  
750
   
38
   
-
   
1,205
   
150
   
2,143
   
938
   
1,205
 

1
Base salary is the amount earned during the period in respect of service as a director.

2Benefits include car allowance, private medical/dental insurance, group income protection and life assurance. Last year’s benefits numbers have been revised to include the value of the life assurance benefit provided. There has been no change in the benefits offered to directors in FY20 versus FY19. Increases in the benefits numbers from FY19 to FY20 reflect increases in employer premiums for medical insurance and life assurance and, for the CFO, the full level of coverage for life assurance and group income protection being provided following completion of the underwriting process.

3Annual bonus reflects payment for performance during the year in respect of service as a director. One-third of the annual bonus amount included in the table above for Stephen Murdoch and Brian McArthur-Muscroft is deferred into an award over shares which vests after three years. Dividend equivalents accrue on the deferred share awards.

4The zero amount for LTIP for 2020 reflects the lapse of the 2017 LTIP award on July 7, 2020 due to the performance conditions not being met. The 2019 figures reflect the 2016 LTIP which vested on July 26, 2019 at a vesting share price of £17.418. The amount for 2019 that directly relates to share price appreciation is zero. No discretion was applied by the remuneration committee in determining the vesting outcomes in 2019 or in 2020.

5All pension amounts paid by the Company in the 2020 financial year are cash in lieu of pension allowances. The current executive directors will transition from their current contribution rates (15% of base salary) to the new hire pension maximum applicable to employees generally by the end of 2022 in one step.

6Kevin Loosemore stepped down from the board on February 14, 2020. All amounts in the table above reflect the period of service as a director.

Annual bonus for the financial year ended October 31, 2020

The target bonus opportunity for executive directors is 75% of base salary (maximum 150% of base salary). Set out below is a summary of performance against each financial measure and the personal achievement component and the resulting payout for the 12-month period ended October 31, 2020.

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Financial target ($m)1
           Weighted payout % 
Performance measure Weighting  
Threshold2
(0%)
  
Target
(50%)
  
Maximum
(100%)
  Achievement  
Achievement
vs target
  Payout%  
Stephen
Murdoch
  
Brian
McArthur-
Muscroft
  
Kevin
Loosemore
 
Adjusted EBITDA  
60
%
 

$1,165
  

$1,226
  

$1,288
  

$1,174
   
95.7
%
  
6.9
%
  
4.2
%
  
4.2
%
  
4.2
%
Revenue  
20
%
 
$3,095
  

$3,158
  

$3,221
  

$3.027
   
95.8
%
  
0.0
%
  
0.0
%
  
0.0
%
  
0.0
%
Key Personal Objectives (KPOs)  
20
%
 
A description of the KPOs for the CEO and CFO is set out below. There were no KPOs for the prior Executive Chairman.
   
18.0
%
  
18.0
%
  
1.0
%
Total  
100
%
 Payout % (of maximum bonus)   
22.2
%
  
22.2
%
  
5.2
%
   
  Payout % (of FY20 salary)   
33.2
%
  
33.2
%
  
7.8
%

1
Financial targets are on a post-IFRS16 basis and performance is measured based on constant rates of currency exchange.

2
Payouts under the financial measures are 0% for threshold performance, 50% for target performance and 100% for achieving the maximum level of performance. Payouts are on a straight-line basis between threshold and target and between target and maximum.

3
Amounts disclosed for Kevin Loosemore reflect time served as a director, i.e. up to February 14, 2020. As disclosed in last year’s report, given the announcement about Kevin Loosemore stepping down from the board, the committee determined that Kevin Loosemore would not have specific key deliverables under the KPO element for the 2020 bonus. Instead, the outcome under this element is determined by reference to the weighted average performance outcome under the financial measures.

This results in overall bonus payouts of £282,515 for the CEO and £199,422 for the CFO. Two-thirds of the overall amount (£188,343 for the CEO and £132,948 for the CFO) will be paid in cash in March 2021 and the remaining one-third is subject to deferral into an award over shares. Deferred share awards (with a current face value of £94,172 for the CEO and £66,474 for the CFO) will vest after three years, i.e. in Q2 FY24. The deferred share awards are not subject to any further performance conditions, but they are subject to malus and clawback and they include a right to dividend equivalents over the three-year vesting period. The bonus payout of £43,854 for the prior Executive Chairman will be paid in cash in March 2021.

KPO
Relative
weighting
Achievement vs KPO
Weighted
payout %
CEO and CFO
React to prevailing circumstances and build a plan to allow the Company to deal with the employee, customer and environmental disruption caused by the COVID-19 crisis, while preserving the ambitions outlined in February 2020 when announcing the result of the Strategic & Operational Review.10% (for both CFO and CEO)
Trading suffered during the first half of the year and stabilized in the second half as a direct consequence of the actions taken by the CEO and CFO. Some examples of achievements are set out below:

Leading the response to COVID-19 through a Steering Group ensuring employees were safe, supported and engaged and that we fully supported our customers and partners throughout. Employee support and communications were greatly enhanced overall and focused on the actions and support needed by our people to cope. The most recent employee opinion survey saw an improvement in overall employee engagement of 11% and a 30 point improvement in Employee Net Promoter Score.

The Revenue Growth Office was established to drive transformation of Go-To-Market and delivery of more effective end-to-end alignment by Product Portfolio. We simplified core operations and sharpened our focus on delivering product innovation in support of our customers’ digital transformation programs.

–    Improvements were made to the sales processes (such as single sales methodology, standard management systems and tools) as an important foundation for future revenue improvement.
–    Progress was made in setting up Security and Big Data for more autonomous operation. For example, we made changes in operational management, improved end-to-end organizational alignment and added specialist sales resources.
–     Preparations were completed for the recent cutover for a significant proportion of the company to comprehensive new systems and processes (referred to as ‘Stack C‘).

The committee judged the plan and its implementation to have successfully achieved its objective of dealing with crisis and getting the best possible outcome for all stakeholders.

9% (for CEO and CFO)

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CEO     
      
Build a leadership team capable of delivering our ambition of a company with stable revenues, capable of delivering AEBITDA1 in the mid-forties percent and free cash flow2 between of at least $700 million per annum. To support this objective, demonstrate an effective succession planning process supported by Company-wide talent identification and development.
 
10% 
In relation to this KPO, the following was achieved:

–    Comprehensive development and talent reviews were undertaken, resulting in a significant number of changes in management responsibilities and personnel in the executive leadership team, particularly in the HR and sales functions. These changes have led to improvements in the short-term and, more importantly, form a base for future development and identification of our leadership gaps and opportunities and the development plans needed to support our future ambitions.
–    In the broader senior leadership, particularly in the sales function, there have been key hires made through a combination of internal and external talent.
–   “Academies” have been established with the aim of infusing talent in AMC and inside sales and there has been additional investment in training, development and career planning.

The committee considers the Company to be much better placed to enable changes where needed in identifying and developing leadership internally and recruiting externally where necessary.
 9%
      
CFO
 
     
Manage the Company’s response to COVID-19 from an overall finance perspective with particular focus on business continuity, cash management, overall balance sheet management and the interactions and messaging required externally to support the above.10% 
In relation to this KPO, the following was achieved:

–   The refinancing of longer-term debt, including restructuring the ‘revolver’ facility, has put us in a strong position with no obligations now falling due until 2024 and repaying a portion of our debt early and has given the Board the ability to reinstate a dividend.
–     Driving stable cash conversion during COVID-19, including resolution of aged debt, rationalizing and consolidating vendors as well as optimizing cash pooling to maximize liquidity.
–     Effectively navigated the Company during COVID-19 from a financial perspective ensuring that the Company came through the period with a strong balance sheet and employees’ roles were protected.

The committee considered the significant overachievement of our cash targets and management of working capital to have been exemplary.
 9%
1Adjusted EBITDA is defined in Item 3.D.
2 Free cash flow is defined in Item 5.D.

This results in a KPO payout of 18% out of a possible 20% or 27% of salary for the personal objectives for each of the two executive directors. For completeness, this, together with the low payout for their other financial targets, made a total of 22% of maximum bonus (which equates to 33% of salary) for each of them.

Share Awards

The Group’s directors and members of key management bodies participate in the Group’s Long-term Incentive Plan, Additional Share Grants and Deferred Share Bonus Plan. Descriptions of these plans including the vesting criteria and specific awards under each plan for the Group’s executive directors are included below.

Aggregate information in relation to each plan for the directors and members of key management bodies:

Number of awards
Range of exercise
prices (pence)
Range of expiry dates
Long-term Incentive Plan
4,228,738
nil to 10 penceApril 18, 2021 to December 3, 2099
Additional Share Grant
405,917
nilNovember 20, 2024
Deferred Share Bonus Plan
10,013
nilFebruary 28, 2099

In addition, the directors and senior management are eligible to participate in the Sharesave and Employee Stock Purchase Plan. Descriptions of these plans are included in note 29 “Employees and directors” of the Consolidated financial statements in Item 18. Aggregate information in relation to these schemes for the directors and members of key management bodies:

Number of
options
Exercise prices (pence)
Range of expiry dates
Aggregate Sharesave options
11,831
241.28 to 617.68 penceOctober 1, 2023 to April 1, 2024

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Executive Directors

Lapse of LTIP awards
The LTIP awards granted on September 6, 2017 as nil-cost options to Stephen Murdoch and Kevin Loosemore lapsed on July 7, 2020. These awards were granted under the Directors’ Remuneration Policy in effect before the approval of the current Remuneration Policy at the Annual General Meeting in March 2020.

The performance condition for these awards was based on average aggregate EPS growth in excess of RPI over the three years ended April 30, 2019, as set out in the table below:

Average aggregate EPS
growth of the Company in
excess of RPI over the
performance period
Vesting percentage of the
shares subject to an award
Achievement against the
percentage range
Resulting vesting percentage
Less than 3% p.a.
0%
Less than 3% p.a.
0%
Equal to 3% p.a.
25%
  
Between 3% and 9% p.a.
Between 25% and 100% on a straight-line basis
  
Equal to or above 9% p.a.
100%
  

The aggregate Diluted Adjusted EPS over the performance period of 579.94 cents was below the minimum threshold aggregate EPS of 592.01 cents required for the minimum level of vesting at 3% per annum above RPI from the base year figure of 270.60 cents. As     a result, there was 0% vesting for these awards and they lapsed in full on July 7, 2020 (36,664 awards for Stephen Murdoch and   67,965 awards for Kevin Loosemore).

Scheme interests awarded during the financial year ended October 31, 2020
LTIP – nil cost options

Executive director
Date of
grant
Basis on which award is
 made
Face value
of award
at grant
Percentage of
maximum which
would be received if
threshold
performance
achieved
End of
performance
period
Stephen Murdoch
April 23, 2020Grant of award over 250,000 shares (117% of salary)£994,250
Adjusted Free Cash
Flow: October 31,
2022
Brian McArthur-Muscroft
April 23, 2020Grant of awards over 300,000 shares (199% of salary)£1,193,1000%
Relative TSR:
April 22, 2023


1
The grant face value of the LTIP awards granted on April 23, 2020 was calculated based on the closing mid-market share price on the business day before grant of £3.977. As published on the Company’s website on April 22, 2020 in the statement called “Terms of 2020 LTIP grants to Executive Directors”, the basis of grant for these awards was a fixed number of shares. The grant level for Stephen Murdoch was significantly lower than the maximum 200% to reflect the share price decrease since the time of the previous grant in 2019.

2
The 2020 LTIP award to Brian McArthur-Muscroft lapsed with effect from his resignation on January 8, 2021.

The LTIP awards granted in the 2020 financial year have the following performance conditions based on Cumulative Adjusted Free Cash Flow (80% weighting) and Relative Total Shareholder Return (20% weighting) over a three-year period. The performance measures, targets and payout percentages are set out below:

Cumulative Adjusted Free Cash
Flow (80% weighting)
Company TSR relative to FTSE
250 (excluding Investment
Trusts) Index (20% weighting)
Payout %
for this
element
Threshold
$100m below TargetIn line with Index0%
Target
Commercially sensitiveExceed Index by 20%50%
Maximum
$200m above TargetExceed Index by 40%100%

Vesting is on a straight-line basis between Threshold and Target, and between Target and Maximum.

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Adjusted Free Cash Flow means cash generated from operations adjusted for interest payments, bank loan costs, tax payments, capital expenditure and finance lease payments and excludes the cash impact of exceptional items. For the 2020 LTIP awards, Adjusted Free Cash Flow will be measured on a cumulative basis over the three financial years ending October 31, 2020, October 31, 2021 and October 31, 2022.

The Adjusted Free Cash Flow Target is considered commercially sensitive and will be disclosed at the end of the performance period.

Relative TSR is measured over a three-year period from grant. The awards will vest three years from grant, subject to achievement of the performance measures. A two-year holding period will apply post-vesting, during which time executive directors are required to retain any net (after tax) vested shares. Executive directors will be entitled to dividend equivalents in accordance with the rules of the LTIP and the approved Directors’ Remuneration Policy.

Outstanding share-based awards

The tables below set out vested but unexercised nil-cost options, unvested nil-cost options and unvested deferred bonus shares held by executive directors who served on the board during the 2020 financial year, including details of awards granted, nil-cost options exercised and awards vested and lapsed during the year of reporting.

All outstanding unvested nil-cost options are subject to performance conditions. Deferred bonus shares are not subject to performance conditions. As a result of the announcement on January 8, 2021 that Brian McArthur-Muscroft would be leaving the Company, the outstanding unvested awards over a total of 460,964 shares held by him lapsed with effect from January 8, 2021. Between October 31, 2020 and the date of this report, there have been no other changes in the nil-cost options or awards held by the executive directors as set out below.

Micro Focus International plc Incentive Plan 2005 (“LTIP”) – nil-cost options


Grant date 
Number at
November
1, 2019
  
Number
granted
in the
financial
year
  
Number
exercised
in the
financial
year
  
Number
lapsed
in the
financial
year
  
Number
at
October
31, 2020
  
Dates for exercise
 
Stephen MurdochSeptember 13, 2016  
39,640
   
-
   
-
   
-
   
39,640
  July 26, 2019 to July 25, 2026 
Stephen Murdoch1
September 6, 2017  
36,664
   
-
   
-
   
36,664
   
-
   
n/a
 
Stephen Murdoch3
September 20, 2018  
67,537
   
-
   
-
   
-
   
67,537
  
September 20, 2021 to
September 19, 2028
 
Stephen Murdoch2
February 18, 2019  
101,190
   
-
   
-
   
-
   
101,190
  
February 18, 2022 to
February 17, 2029
 
Stephen Murdoch5
April 23, 2020  
-
   
250,000
   
-
   
-
   
250,000
  April 23, 2023 to April 22, 2030 
Brian McArthur-Muscroft2
November 22, 2018  
80,482
   
-
   
-
   
-
   
80,482
  
November 22, 2021 to
November 21, 2028
 
Brian McArthur-Muscroft4
November 22, 2018  
80,482
   
-
   
-
   
-
   
80,482
  
November 22, 2022 to
November 21, 2028
 
Brian McArthur-Muscroft5
April 23, 2020  
-
   
300,000
   
-
   
-
   
300,000
  
April 23, 2023 to
April 22, 2030
 
Kevin Loosemore6
September 13, 2016  
69,156
   
-
   
69,156
   
-
   
-
   
n/a
 
Kevin Loosemore1
September 6, 2017  
67,965
   
-
   
-
   
67,965
   
-
   
n/a
 
Kevin Loosemore2
February 18, 2019  
89,285
   
-
   
-
   
37,202
   
52,083
  
February 18, 2022 to
February17, 2029
 

1
Performance condition required that cumulative EPS growth over a three-year performance period starting on May 1, preceding the date of grant is at least equal to RPI plus 3% per annum (at which point 25% of awards will vest) and for full vesting the aggregate EPS growth will be required to be RPI plus 9% per annum.
Straight-line vesting applied between these points. These awards lapsed in full on July 7, 2020 as the minimum performance threshold was not met.

2
Performance condition requires that cumulative EPS growth over a three-year performance period starting on November 1, preceding the date of grant is at least equal to RPI plus 3% per annum (at which point 25% of awards will vest) and for full vesting the aggregate EPS growth will be required to be RPI plus 9% per annum. Straight-line vesting will apply between these points. Kevin Loosemore’s award of 89,285 nil-cost options was pro-rated on leaving the Company to reflect time served to August 13, 2020. The performance condition will be tested after the performance period ends on October 31, 2021.

3
Performance condition requires that cumulative EPS growth over a three-year performance period starting on May 1, preceding the date of grant is at least equal to RPI plus 3% per annum (at which point 25% of awards will vest) and for full vesting the aggregate EPS growth will be required to be RPI plus 9% per annum.
Straight-line vesting applied between these points. The performance condition will be tested after the performance period ends on April 30, 2021.

4
Performance condition requires that cumulative EPS growth over a four-year performance period starting on the November 1, preceding the date of grant is at least equal to RPI plus 3% per annum (at which point 25% of awards will vest) and for full vesting the aggregate EPS growth will be required to be RPI plus 9% per annum. Straight-line vesting will apply between these points. The performance condition will be tested after the performance period ends on October 31, 2022. This performance condition is unique to Brian McArthur-Muscroft’s award and this award, along with his other awards, lapsed on January 8, 2021.

5
The performance condition for this award is disclosed above.

6
Kevin Loosemore exercised these nil-cost options on July 9, 2020 (i.e. after he had stepped down from the board but whilst he was still an employee) at a share price of £3.35, which was the closing mid-market quotation price on the day of exercise.

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In considering the likely vesting level of the outstanding unvested LTIP awards granted before 2020 noted in the table above (i.e. awards to which footnotes 2 and 3 apply), due regard should be given to the performance conditions specified in footnotes 2 and 3 as well as performance to date and broker forecasts.

The aggregate amount of gains made by directors on the exercise of options during the financial year was zero. The exercise of options during the financial year by Kevin Loosemore was at a time when he was no longer a director of the Company.

Deferred Share Bonus Plan (“DSBP”) – conditional awards

 
 
 
Executive
director
 
 
 
 
Date of grant
 
Number
at
November
1, 2019
  
Number
granted in
the
financial
year
  
Number
vested in
the
financial
year
  
Number
lapsed in
the
financial
year
  
Number
at
October
31, 2020
 
 
 
 
 
Date of release
Stephen Murdoch1
July 25, 2017  
5,051
   
-
   
5,051
   
-
   
-
 July 25, 2020
Stephen MurdochFebruary 28, 2019  
10,013
   
-
   
-
   
-
   
10,013
 February 28, 2022

1 The deferred bonus shares which were released on July 25, 2020 related to the one-third deferral of the annual bonus earned for financial year ending April 30, 2017.  The awards were granted with the right to a dividend equivalent, so 3,501 additional shares were released to reflect the dividends paid between the date of grant and the date of vesting. The vesting share price was £2.82 (calculated based on the sale price for tax shares sold on July 27, 2020). The price which was used to determine the number of deferred bonus share awards granted in 2017 was £22.27.

Non-executive directors

Aggregate compensation including fees paid to non-executive directors
12 months
ended
October 31, 2020

$m
Short-term benefits0.9
Share based payments-
Total compensation0.9

Single figure for total remuneration of non-executive directors
No changes were made to the fee structure for non-executive directors. The following table sets out the single figure for total remuneration of non-executive directors for the 12-months ended October 31, 2020, together with their respective figures for the 12-month period ended October 31, 2019 as shown in last year’s report.

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  Fees 
 
Non-executive directors
 
2020
(12 months)
  
2019
(12 months)
 
  
£’000  

£’000
 
Greg Lock1
  284   
n/a
 
Karen Slatford  120   
120
 
Richard Atkins  90   
90
 
Amanda Brown2
  90   
90
 
Lawton Fitt3
  80   
80
 
Robert Youngjohns4
  38   
n/a
 
Sander van ’t Noordende5
  29   
n/a
 
Silke Scheiber6
  18   
70
 


1
Greg Lock joined the board on February 14, 2020. Greg Lock received private medical and dental cover (single person coverage) with effect from April 2020 following approval of the current Directors’ Remuneration Policy at the AGM on March 25, 2020.


2
Prior to January 1, 2019, Amanda Brown’s fees were paid direct to her employer.


3
Lawton Fitt receives an additional fee of £10,000 per annum due to her SEC and SOX experience.


4
Robert Youngjohns joined the board on April 16, 2020.


5
Sander van ‘t Noordende joined the board on June 2, 2020. His GBP fee is paid to him in US dollar (converted based on the average monthly FX rate in the month prior to payment).


6
Silke Scheiber left the board on February 4, 2020.

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Item 6. C.Board practices.

Role of the board

The board leads and controls the Company and has collective responsibility for promoting the long-term success of the Group. While the board delegates some responsibilities to its committees or, through the Chief Executive Officer, to management, it has agreed a formal schedule of matters that   are specifically reserved for its consideration and are publicly available on the investor relations section of the Company’s website. These include key areas such as:


-
Strategy and Management – including the Group’s purpose, values and strategy, annual operating and capex budget approval, oversight of operations ensuring maintenance of sound management and internal control systems, reviewing performance in light of the Group’s strategy and objectives, extension of activities into new business or geographical areas and any decisions to cease any material part of the Group’s business;


-
Structure and Capital – including changes to the Group’s capital structure such as share issues and buybacks or reduction in capital, major changes to the Group’s corporate structure including material acquisitions and disposals and changes to the Group’s management and control structure;

-
Financial reporting and Controls – including results announcements, dividend policy and declarations, significant changes in accounting policies or practices, treasury policies and the Annual Report;


-
Internal Controls – including monitoring the effectiveness of the Group’s risk management and internal controls processes; and

-
Material Contracts Approvals; Communications with Shareholders; Board membership (following recommendations from the Nomination committee); Approval of Remuneration Policy and Delegations of Authority.

At each meeting, the board reviews progress of the Group towards its objectives and receives papers on key subjects in advance of each board meeting. These typically cover:


–
Strategy and budgets;

–
Business and financial performance;

–
Product plans and development;

–
Corporate activities;

–
Human resources;

–
CSR activities;

–
Investor relations; and

–
Corporate governance.

While the board retains overall accountability for and control of the Company, the executive directors are responsible for conducting the day-to-day management of the business. The review of the Group’s principal business activities is the responsibility of the Operating Committee. The Operating committee comprises the Chief Executive Officer, the Chief Financial Officer, the Chief Operating Officer, Chief Human Resources Officer and Vice President of Business Operations and the Chief Legal ProceedingsOfficer, and is chaired by the Chief Executive Officer, Stephen Murdoch.

Roles of board members
The non-executive Chairman has responsibility for leading the board, including setting the agenda (in conjunction with the Senior Independent Director and the Company Secretary), style and tone of board discussions to promote effective decision making and constructive debate and for shaping the culture of the boardroom. He is also responsible for shareholder and stakeholder engagement, including listening to the views of the workforce, customers and other stakeholders and ensuring that their views are conveyed to the board as a whole. He chairs board meetings, facilitating the effective contribution of non-executive directors by drawing on their skills, experience and knowledge and ensuring that the board is effective in all aspects of its role, and for upholding the highest standards of integrity and probity. He also chairs shareholder meetings and is responsible for ensuring effective communication with shareholders.

Prior to the appointment of the non-executive Chairman, the Senior Independent Director, Karen Slatford, chaired the nomination committee and was therefore responsible for succession planning; and also led on governance issues, including the annual review of overall board effectiveness. These responsibilities have now passed to the non-executive Chairman. During the year, Karen took up the role of non-executive director responsible for workforce engagement in accordance with the Code.

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The Senior Independent Director meets or speaks with the Chairman regularly, and will work with the Chairman and other directors to resolve any significant issues which may arise, acting as an intermediary for other non-executive directors if necessary; and is also available to shareholders if they have concerns in circumstance where contact through the normal channels of Chairman, CEO or CFO has either failed to resolve or is inappropriate. Each of the non-executive directors has been appointed for a specific term, subject to annual re-election by shareholders. The independent non-executive directors comprise a majority of the board.

The executive directors are responsible for developing the Group’s strategy and proposing the budget for board approval and are accountable to the board through the Chief Executive Officer. They are also responsible for the financial and operational performance of the Group and, in conjunction with the operating committee, they are collectively responsible for the day-to-day running of the business. There is a clear and documented division of responsibilities between the non-executive Chairman, who is responsible for running the board, shareholder and stakeholder engagement, and the Chief Executive Officer, who is responsible for strategy, investment and financing, risk management and the day-to-day operation of the business. The role of the Senior Independent Director is also documented. During the year, these responsibilities have been reviewed, updated and considered by the board, to reflect the changes resulting from the appointment of the non-executive Chairman during the year.

The role of the non-executive directors is to ensure that independent judgement is brought to board deliberations and decisions and to provide constructive challenge as appropriate. They promote the highest standards of integrity, probity and corporate governance throughout the Company. The non-executive directors possess a wide range of skills and experience, relevant to the development of the Company, which complement those of the executive directors.

The non-executive directors, led by the Senior Independent Director, met regularly throughout the year in private session without executive directors in attendance.

The Company Secretary is accountable to the board through the Chief Financial Officer, to whom she reports. It is the responsibility of the Company Secretary to ensure that agreed board procedures are followed and all rules and regulations are complied with. The Company Secretary’s responsibilities include facilitating the induction and professional development of directors and ensuring the smooth flow of information between board members, between the board and its committees and between non-executive directors and senior management. In addition, all directors have direct access to the advice and services of the Company Secretary. Appointment of the Company Secretary is a matter for the whole board and the appointment of Suzanne Chase, our Head of Assurance, to this role in June 2020 signals the Board’s recognition of good governance as a key mitigator of risk.

The responsibilities of the Chairman, Chief Executive, Senior Independent Director, board and committees have been clearly defined and set out in writing and are available to download from the investor relations section of our website.

Executive directors’ service agreements

Executive directors’ service agreements at October 31, 2020:

Executive directorDate of service contractNotice period
Stephen Murdoch
April 16, 2014The agreement is terminable by either party on six months’ notice
Brian McArthur-Muscroft 1
November 4, 2018The agreement is terminable by either party on six months’ notice

1.
As announced on January 8, 2021, Brian McArthur-Muscroft has notified the board of his intention to leave the Company. Brian continues in his role as CFO, whilst the board conducts a formal process to identify a new CFO to help drive the Group forward through the second half of its three-year plan and beyond.

Non-executive directors’ terms of appointment
The non-executive directors’ terms of appointment are recorded in letters of appointment. The required notice from the Company and the non-executive director is 90 days in all cases. The non-executive directors are not entitled to any compensation for loss of office and stand for election or re-election as appropriate at each AGM.

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Details of the letters of appointment of each non- executive director who has served as a director of the Company at any time during the financial year ended October 31, 2020 are set out below:

Non-executive directorAppointment dateExpiration date
Greg Lock
February 14, 2020February 14, 2023
Karen Slatford
July 5, 2010July 5, 2022
Richard Atkins
April 16, 2014April 16, 2023
Amanda Brown
July 1, 2016July 1, 2022
Lawton Fitt
October 17, 2017October 17, 2023
Sander van ’t Noordende
June 2, 2020June 2, 2023
Robert Youngjohns
April 16, 2020April 16, 2023

All appointments of non-executive directors are subject to election by shareholders at the first AGM of the Company after appointment and to re-election on an annual basis thereafter.

Remuneration committee

Remuneration committee membership during the year ended October 31, 2020
During the financial year ended October 31, 2020, the committee comprised only of independent non-executive directors. The committee met seven times during the period under review. The number of committee meetings attended by each director in the period was as follows:

Committee memberHeldNumber of meetings attended
Amanda Brown (Chair)
1010
Richard Atkins
1010
Lawton Fitt
1010
Silke Scheiber1
44
Greg Lock2
66
Robert Youngjohns3
54
Sander van ’t Noordende33

1.
Silke Scheiber left the board and the committee on February 4, 2020.
2.
Greg Lock joined the board and the committee on February 14, 2020.
3.
Robert Youngjohns joined the board and the committee on April 16, 2020.
4.
Sander van ’t Noordende joined the board and the committee on June 2, 2020.

The committee invited members of management to provide views and give advice on specific topics. Management did not participate in discussions relating to their own remuneration. The Group Company Secretary attended each meeting as secretary to the committee.

Terms of reference

The committee is responsible for the remuneration arrangements for executive directors and members of the executive management team, and for providing general guidance on aspects of remuneration policy throughout the Group. The terms of reference reflect the 2018 Corporate Governance Code issued in June 2018. The key aspects of the updated terms of reference are as follows:

-Determine the remuneration policy for the Company’s Non-Executive Chairman and the executive directors and review its on-going appropriateness and relevance;

-Determine the total individual remuneration packages of the executive directors and the executive management team, including salary, bonuses, incentive payments, share awards, pensions and other benefits;

-Review the terms of executive service contracts for executive directors and the executive management team;

-Review any material changes to pension and benefit arrangements for executive directors and the executive management team;

-Agree the expenses policy for the Company’s Non-Executive Chairman and executive directors;

-Develop the formal shareholding requirement policy, including post cessation, encompassing both vested and unvested shares;

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-
Oversee the operation of the Company’s annual bonus plans, deferred bonus plans and long-term incentives as applied to executive directors and the executive management team, including award levels, performance conditions, payouts, and application of malus and claw-back where appropriate;


-
Review the design of all share incentive plans for approval by the board and shareholders;


-
Review the remuneration policies and practices across the Group and the alignment of workforce remuneration with culture; and


-
Produce the annual Directors’ Remuneration report.

The full terms of reference of the committee are available from the Company Secretary and are on the Company’s website https://www.microfocus.com/en-us/governance-policies/committees-of-the-board

Audit committee

Attendance at committee meetings
During the 12-months ended October 31, 2020, the committee comprised only of independent non-executive directors. The committee met eight times during the period under review. The number of committee meetings attended by each non-executive director was relative to their time in office in the period and was as follows:

DirectorHeldAttended
Richard Atkins
88
Amanda Brown
88
Lawton Fitt
88
Silke Scheiber1
33
Karen Slatford
88
Robert Youngjohns2
33

1Silke Scheiber ceased to serve as a director and member of the Audit committee on February 4, 2020.
2Robert Youngjohns served as a director and member of the Audit committee from April 16, 2020.

Composition of the committee

The Audit committee comprises Richard Atkins (who serves as its chair), Amanda Brown, Lawton Fitt, Karen Slatford and Robert Youngjohns who joined the committee on April 16, 2020. Silke Scheiber also served on the Audit committee until February 4, 2020. All members of the committee are independent non- executive directors. The board considers that:

-
for UK purposes, the committee chair, as a chartered accountant, has recent and relevant financial experience by virtue of  previous executive and current non-executive responsibilities (details of which can be found in his biography) and that the audit committee as a whole has competence relative to the sector in which the Company operates; and

-
for US purposes, each of the Audit committee members is independent under the SEC and NYSE definitions of that term; that the committee chair is an Audit committee financial expert, an independent of management, and has accounting or related financial management expertise; and that all of the Audit committee members are financially literate.

Executive directors and senior executives (most often the  Director of Finance, Director of Group Finance, the joint Heads of Tax, Head of Treasury, Head of Investor Relations and the Group Company Secretary and Head of Assurance) attend meetings by invitation as required, but do not do so as of right. Representatives of KPMG LLP (external auditor), PricewaterhouseCoopers LLP (internal auditor) and Deloitte LLP (external tax advisors) also attend the committee meetings and meet privately with committee members, in the absence of executive management, prior to each committee meeting.

The committee normally meets at least four times during each financial year and more frequently as required.

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Role and responsibilities of the committee

The committee’s principal responsibilities are to:


-
monitor the integrity of the financial statements of the Company and any formal announcements relating to the Company’s financial performance, reviewing significant financial reporting judgements contained in them. The committee also reviews the Group’s Annual Report and Accounts and Interim Report prior to submission to the full board for approval;


-
monitor the Group’s accounting policies and review the Company’s internal financial controls and financial reporting procedures and, on behalf of the board, the Company’s internal control and risk management systems;


-
monitor the adequacy and effectiveness of the Company’s internal controls and internal financial controls, risk management systems and insurance arrangements;


-
ensure that a robust assessment of  the  principal  and emerging risks facing the Company, including those that would threaten the business model, future performance, solvency or liquidity and reputation is undertaken at least once a year;


-
monitor and review the effectiveness of the Company’s internal audit function, including agreeing and approving the annual internal audit plan;


-
make recommendations to the board, for it to put to the shareholders for their approval  in general meeting,  in relation to the appointment, reappointment and removal of the  external auditor and to approve the remuneration and terms of engagement of the external auditor;


-
oversee the relationship with the external auditors and review and monitor their independence and objectivity and the effectiveness of the audit process, taking into consideration relevant UK and US professional and regulatory requirements;


-
develop and implement policy on the engagement of the external auditor to supply non-audit services, taking into account relevant ethical guidance regarding the provision of non-audit services by the external audit firm; and to report to the board, identifying any matters in respect of which it considers that action or improvement is needed and making recommendations as to the steps to be taken;


-
provide a forum through which the Group’s external and internal auditors and external tax advisors report to the board; and


-
report to the board on how it has discharged its responsibilities.

The committee’s terms of reference are published on the Company’s website, https://www.microfocus.com/en-us/governance-policies/committees-of-the-board

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Item 6. D.Employees.

The average monthly number of people employed by the Group (including executive directors for the 12-months ended October 31, 2020, the 12-months ended October 31, 2019 and 18-months ended October 31, 2018 was as follows:

  
12 months
ended
October 31, 2020
  
12 months
ended
October 31, 2019
  
18 months
ended
October 31, 2018
 
  Number  Number  Number 
Average monthly number of people         
(including executive directors) employed by the Group:         
          
Continuing Operations         
Sales and distribution  5,066   
5,413
   
5,860
 
Research and development  5,091   
5,056
   
4,323
 
General and administration  1,937   
1,991
   
1,378
 
   12,094   
12,460
   
11,561
 
Discontinued Operation            
Sales and distribution  -   
164
   
515
 
Research and development  -   
170
   
629
 
General and administration  -   
3
   
8
 
   -   
337
   
1,152
 
Total            
Sales and distribution  5,066   
5,577
   
6,375
 
Research and development  5,091   
5,226
   
4,952
 
General and administration  1,937   
1,994
   
1,386
 
   12,094   
12,797
   
12,713
 

Item 6. E.
Share ownership.

Directors’ shareholdings and share interests as at October 31, 2020

Director
Shares held (owned outright)1
Stephen Murdoch
280,669
Brian McArthur-Muscroft
-
Greg Lock (from February 14, 2020)
535,000
Karen Slatford
14,687
Richard Atkins
13,862
Amanda Brown
3,841
Lawton Fitt
-
Robert Youngjohns (from April 16, 2020)
-
Sander van ’t Noordende (from June 2, 2020)
45,000
Silke Scheiber (until February 4, 2020)
-

1Shares held (owned outright), includes any Micro Focus securities of which the director, their spouse, civil partner or dependent child has beneficial ownership. Each represents less than one per cent of the outstanding shares.

All other persons listed in Item 6.B. each beneficially owns less than one per cent of the securities issued and, as their share ownerships have not previously been made public, these are not disclosed.

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There were no other changes to the above interests between November 1, 2020 and February 23, 2020.

The directors remain committed to the principle of employee share ownership throughout the company. Employees globally are able to participate in one of the Group’s all-employee share plans (a Sharesave plan and an Employee Stock Purchase Plan), which are intended to encourage employee share ownership and involvement in the Company’s performance. For more senior employees who are better placed to contribute to the development and performance of the Group, the Group operates a discretionary long-term incentive plan (LTIP). Details of all the Group’s share-based plans, whether operating on an all- employee or discretionary basis, are given in note 29 “Employee and directors” of the Consolidated financial statements in Item 18.

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Item 7.Major Shareholders and Related Party Transactions

Item 7. A. 1. Major shareholders.

At February 12, 2021, being the most recent practicable date, the following percentage interests in the ordinary share capital of the Company:

  
As at
February 12,
20211
  
As at
January 27,
2020

  
As at
February 20,
2019

 
  
Ordinary
shares of
10 pence
each
  
Percentage
of issued
share
capital
%
  
Ordinary
shares of
10 pence
each
  
Percentage
of issued
share
capital
%
  
Ordinary
shares of
10 pence
each
  
Percentage
of issued
share
capital
%
 
Dodge & Cox  57,130,923   17.01%  59,948,603   
17.98
%
  
63,751,164
   
15.01
%
BlackRock Inc.  26,546,176   7.93%  25,467,989   
7.64
%
  
24,999,040
   
6.02
%
M&G Plc  16,912,423   5.05%  n/a   
n/a
   
n/a
   
n/a
 
Causeway Capital Management LLC  16,322,007   4.88%  28,237,993   
8.47
%
  
22,050,026
   
5.05
%
FMR LLC  n/a   n/a   n/a   
n/a
   
29,062,788
   
7.00
%

1 Information reflects shareholdings and percentage of issued share capital at date of last filed SC 13G/A.

Item 7. A. 2.Shareholders information

As at February 12 2021, the proportion of Ordinary Shares represented by ADSs with a registered address in the United States was 25.99% of the total issued share capital of the Company. The proportion of Ordinary shares with a registered address in the United States was 0.03% of the total issued share capital of the Company. As at February 12 2021, there were 1,138 registered holders of Ordinary Shares, of which 24 were based in the USA and there were 40,762 record holders of the ADSs, of which 34,893 were based in the USA.

Item 7. B.Related party transactions.

This is set out in note 31 “Related party transactions” of the Consolidated financial statements in Item 18.

Item 7. C.Interests of experts and counsel.

Not applicable.

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Item 8.Financial Information

Item 8. A.Consolidated Statements and Other Financial Information.

The Consolidated financial statements filed as part of this Annual Report on Form 20-F are included in Item 18.

Item 8.A.7Litigation, Proceedings and Investigations.

The Group is involved in various lawsuits, claims, investigations, and proceedings including those consisting of IP, commercial, employment, employee benefits, and environmental matters, which arise in the ordinary course of business. The Separation and Distribution Agreement, dated as of September 7, 2016, between Seattle SpinCo, Inc. and HPE (the “SDA”) includes provisions that allocate potential financial responsibility for litigation involving the parties, as well as provide for cross-indemnification of the parties against potential liabilities to one party arising out of potential liabilities allocated to the other party.  In addition, as part of the SDA, HPE and Seattle have agreed to cooperate with each other in managing litigation that relates to both parties’ businesses. The Group records a liability when it believes that it is both probable that a liability has been incurred and the amount of loss can be reasonably estimated. Significant judgment is required to determine both the probability of having incurred a liability and the estimated amount of the liability. Litigation is inherently unpredictable. However, the Group believes it has valid defenses with respect to legal matters pending against it. Nevertheless, cash flows or results of operations could be materiallysignificantly affected in any particular period by the resolution of one or more of these contingencies. The Group believes it has recorded adequate provisions for any such matters and, as of October 31, 2017,2020, it was not reasonably possible that a material loss had been incurred in connection with such matters in excess of the amounts recognized in its financial statements.

Litigation, Proceedings and Investigations

Forsyth, et al. vs. HP Inc. and HPE:
This purported class and collective action was filed on August 18, 2016 and an amendeda Fourth Amended (and operative) complaintComplaint was filed on December 19, 2016July 9, 2020,  in the United States District Court for the Northern District of California, against HP Inc. and HPE alleging defendants violated the Federal Age Discrimination in Employment Act (“ADEA”(“ADEA”), the California Fair Employment and Housing Act, California public policy and the California Business and Professions Code by terminating older workers and replacing them with younger workers. Plaintiffs seek to certify a nationwide collective action under the ADEA comprised of all individuals aged 40 and older who had their employment terminated by an Hewlett-Packard Company (“HP entityCo.”) or HP Inc. pursuant to a work force reduction (“WFR”(“WFR”) plan on or after December 9, 2014 for individuals terminated in deferral states and on or after April 8, 2015 in non-deferral states. Plaintiffs also seek to certify a Rule 23 class under California law comprised of all persons 40 years of age or older employed by defendants in the state of California and terminated by HP Co. or HP Inc. pursuant to a WFR plan on or after August 18, 2012. Plaintiffs seek to certify a similar purported ADEA collective and Rule 23 California state law class against HPE, but the time period for that collective and class begin on November 1, 2015.  Excluded from the putative collectives and classes are those who (a) signed a Waiver and General Release Agreement at termination, or (b) signed an Agreement to Arbitration Claims.  On January 30,December 22, 2017, Defendantsdefendants filed a partial motion to dismiss Plaintiff’s First Amended Complaint and motions to compel the claims of those three named Plaintiffs to individual arbitrations.  On March 20, 2017, the Defendants filed additional motions to compel a number of the opt-in plaintiffs to individual arbitrations.  On September 20, 2017, the Court granted the motions to compel arbitration, denied the motion to dismiss without prejudice, stayed the action and administratively closedstay the case pending the completionarbitration proceedings of the compelled arbitrations. Plaintiffs moved for reconsiderationcertain named and opt-in plaintiffs, which was granted on October 18, 2017,February 6, 2018.

Araiza vs. HP Inc. and alsoHPE:
On December 29, 2015, former PPS (HP Inc.) employee Daniel Araiza filed a notice of appeal on October 20, 2017.  Defendants’ opposition to Plaintiffs’ motion for reconsideration was filed on October 31, 2017.  On December 6, 2017, the Court entered an Order that requested further briefing on the limited issue of whether the claims of plaintiffs not subject to arbitration should be stayed.  As a result of the court ordered stay, no further activities will occur in the case until the Court rules on Plaintiffs’ Motion for Reconsideration and Defendants’ Motion to Stay.

Wall vs. HPE and HP Inc.: This certified California class action and Private Attorney General Act action was filed against Hewlett-Packard Company on January17, 2012 and the fifth (and operative) amended complaint was filed against HP Inc. and HPE in Santa Clara County Superior Court.  Plaintiff alleges failure to (a) compensate Field Technical Support Representatives with minimum and overtime wages for all hours worked, (b) failure to pay exempt and non-exempt employees all accrued vacation and/or floating holidays upon separation of employment, (c) to provide meal breaks, and (d) derivate claims for inaccurate wage statements, waiting time penalties, unfair business practices, and Private Attorneys General Act (“PAGA”) penalties. Plaintiff sought to certify three groups of California employees from December 29, 2011 to the present.  The parties participated in settlement discussions and settled the lawsuit on June 28, 2016.March 19, 2019, subject to court approval.  On July 30, 2020, the Court preliminarily approved the settlement and set the final approval hearing. The deadline to object to the settlement was October 19, 2020; no objections were filed.   On January 27, 2021, the court issued its Final Approval Order and set the Compliance hearing for September 23, 2021.A provision is in place to cover Micro Focus’ share of the settlement.

Ross and Rogus vs HPE:
On November 8, 2018, a putative class action complaint was filed in the Superior Court of California, County of Santa Clara alleging that HPE pays its California-based female employees “systemically lower compensation” than HPE pays male employees performing substantially similar work.  The complaint alleges that the defendants paid earned incentive compensation latevarious California state law claims, including California’s Equal Pay Act, Fair Employment and failed to timely pay final wages. On August 9, 2016, the court ordered theHousing Act, and Unfair Competition Law, and seeks certification of a California-only class certified without prejudice to a future motion to amend or modify the class certification order or to decertify. On December 20, 2017, the parties filed a Notice of Provisional Settlementfemale employees employed in certain “Covered Positions.”  The complaint seeks damages, statutory and Joint Stipulation to Vacate the Trial Date notifying the Court that Plaintiffscivil penalties, attorneys’ fees and Defendants have reached a settlement in principle in this matter and requesting that the Court vacate the January 22, 2018 trial while the parties work toward finalizing a settlement.  On December 28, 2017, the Court vacated the trial date.costs.

Realtime Data LLC65: Realtime Data LLC (
“Table of ContentsRealtime”
Wapp Tech Limited Partnership et al. v. Micro Focus International plc:
On July 2, 2018, Wapp Tech Limited Partnership and Wapp Tech Corp. (collectively, “Wapp”) filed three patent infringement actionssued Micro Focus International plc in the Eastern District of Texas, accusing it of infringing claims of three patents in connection with Micro Focus International plc’s purported manufacture and sale of certain products in the ADM product line, including LoadRunner and Performance Center. Wapp also sued HPE, Wells Fargo & Company, and Bank of America Corporation for their alleged use of the same accused products. On August 13, 2019, the Texas court dismissed Micro Focus International plc for lack of personal jurisdiction, but granted Wapp’s request to amend its complaint to name Micro Focus International plc subsidiaries Seattle SpinCo, Inc., EntIT Software LLC, EntCo Interactive (Israel) Ltd., EntCo Government Software LLC, and Micro Focus (US) Inc. (collectively, the “Subsidiary Defendants”) as defendants. On August 20, 2019, Wapp filed an amended (and operative) complaint in that case naming the Subsidiary Defendants as defendants. The Court stayed the cases against HPE.HPE, Bank of America, and Wells Fargo. On December 11, 2020, Micro Focus filed a motion for summary judgment, which the Court denied on January 14, 2021.  On December 18, 2020, the case was mediated but did not settle.  The first wasFinal Pretrial Conference is scheduled for February 2021, and the Micro Focus trial is set for March 1, 2021. Micro Focus’ defenses against liability include that the patent claims are not infringed, and that the patent claims are invalid. These infringement and invalidity claims will be contested on their merits at trial. Due to the Group’s assessment that the asserted patent claims are not infringed and/or are invalid, no provision is recorded for this matter.

Securities Litigation:
Micro Focus is involved in two lawsuits in which plaintiffs are seeking damages for alleged violations of the Securities Act of 1933 and the Exchange Act of 1934 based upon purportedly false and misleading statements or omissions in offering documents issued in connection with the HPE Software business merger and issuance of Micro Focus American Depository Shares (“ADS”) as merger consideration and based upon other purportedly false and misleading statements. Those matters are as follows:

•          In re Micro Focus International plc Securities Litigation is a putative class action on behalf of holders of Micro Focus filed on March 28, 2018, in the Superior Court of California, County of San Mateo against Micro Focus International plc and certain current and former directors and officers, among others. Six additional purported holders of Micro Focus ADS filed putative class actions in the same court, and the court consolidated all cases.  The lawsuit alleges violations of the Securities Act.  The defendants filed a motion to dismiss based on the forum-selection clause in the Deposit Agreement, which is pending before the court.

•          In re Micro Focus International plc Securities Litigation is another putative class action on behalf of holders of Micro Focus ADS filed on May 23, 2018 in the United States District Court for the Northern District of California against Micro Focus and certain current and former directors and officers, among others.  On July 26, 2018, the court transferred the case to the United States District Court for the Southern District of New York. The lawsuit alleges violations of the Securities Act and of the Exchange Act.  On September 30, 2019, the lead plaintiff filed a second amended complaint. On November 4, 2019, Micro Focus and other defendants filed a motion to dismiss the second amended complaint. On September 30, 2020, the court granted the motions dismiss and dismissed the second amended complaint in its entirety. The lead plaintiff has appealed from the dismissal, and the appeal remains pending.

Item 8.A.8Policy on dividend distributions

Dividends
In March 2020, given the increased macro-economic uncertainty as a result of the COVID-19 pandemic, as a precautionary measure, the directors withdrew their recommendation for the payment of a final dividend of 58.33 cents per share in respect of the 12-month period ended October 31, 2019.  Similarly, no dividend was paid in respect of the six months to April 30, 2020. The decision to not pay these dividends has resulted in an increase in available liquidity compared to the payments that would otherwise have been made under the Group’s existing dividend policy. The Group has concluded it is now appropriate to re-instate the Group’s dividend.

In terms of dividend policy, the Group initially aims to pay a dividend which is approximately 5x covered by the Adjusted earning of the Group in each financial period (defined as profit after tax excluding the effects of share-based compensation, amortization of purchased intangible assets and exceptional items including gain on disposal of discontinued operation). The Group’s aim is then to increase the percentage of profits distributed to shareholders as the Group executes its strategy of stabilizing the business.

The directors announced a final dividend of 15.50 cents per share on February 9, 2021. The total dividend per share in the 12-month period was 15.50 cents.

The dividend will be paid in Sterling equivalent to 11.31 pence per share, based on an exchange rate of £1 =1.37 being the rate applicable on February 9, 2021, the date on which the board resolved to propose the dividend. The dividend will be paid on April 15, 2021 to shareholders on the register at March 12, 2021.

This total dividend is 15.50 cents per share, which is a decline of 73.4% on the 12-months ended October 31, 2019 of 58.33 cents per share.

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For further information on dividends please refer to note 8 2015 against Hewlett-Packard“Dividends” of the Consolidated financial statements in Item 18.

Item 8. B.Significant Changes.

There has been no significant change to our financial conditions or results of operations since October 31, 2020.

See “Item 8.A.7. Information on the Company HP Enterprise Services— Legal Proceedings” for information with respect to legal proceedings to which we may be subject from time to time.

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Item 9.The Offer and Listing.

Item 9. A.Offer and listing details.

The principal trading market for our ordinary shares is the London Stock Exchange. Our ordinary shares also trade in the United States in the form of ADSs evidenced by American Depositary Receipts (“ADR”) under a sponsored ADR facility with Deutsche Bank, as depositary. We established this facility in March 2017. Each ADS represents one ordinary share.

Ordinary shares are traded on the London Stock Exchange under the symbol “”MCRO.L”. The ADSs trade on the New York Stock Exchange under the symbol “MFGP”.

Item 9. B.Plan of distribution.

Not applicable

Item 9. C.Markets.

Micro Focus International plc is listed on the London Stock Exchange. The Company’s American Depositary Shares (the “ADSs”) are listed on the New York Stock Exchange.

Item 9. D.Selling shareholders.

Not applicable.

Item 9. E.Dilution.

Not applicable.

Item 9. F.Expenses of the issue.

Not applicable.

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Item 10.Additional Information.

Item 10. A.Share capital.

Not applicable.

Item 10. B.Memorandum and articles of association.

The Articles of association were included in Item 10 B. in the Annual Report on Form 20-F for the year ended October 31, 2019 on pages 107 to 110. There were no changes in the year to October 31, 2020.

Item 10. C.Material contracts.

SUSE Disposal

Refer to Item 10 C. in the Annual Report on Form 20-F for the year ended October 31, 2019 on page 111.

Bank borrowings

Changes in the year ended October 31, 2019

Refer to Item 10 C. in the Annual Report on Form 20-F for the year ended October 31, 2019 on page 111.

Changes in the year ended October 31, 2020

On May 29, 2020, the Group announced that it had successfully priced and Oracle (“Oracle matter”)allocated a €600.0 million and accuses HP’s Proliant servers running Oracle’s Solaris, HPE’s StoreOnce,a $650 million senior secured term loan. The new five-year facilities, along with $143.0 million of existing cash reserves, were used by the Group to fully refinance its existing senior secured term loan B due November 2021 and HPE’s Vertica. Oracle has agreedpay associated fees and expenses.

On September 3, 2020, the Group announced that it had successfully extended its revolving credit facility and reduced the size from $500.0 million to indemnify HPE for all claims against HPE related$350.0 million. The Group also confirmed that it had repaid the $175.0 million previously drawn during the year as a precautionary measure in response to Oracle’s Solaris, including databases running Solaristhe COVID-19 outbreak, resulting in a balance outstanding of $nil. These actions resulted in a reduction in the Group’s gross debt and the borrowing costs associated with the ZFS file systemrevolving credit facility.

Following these refinancing activities, the Group’s earliest debt maturity is in June 2024.

Please refer to Exhibit 4.1 “Credit Agreement, among Micro Focus International plc, Micro Focus Group Limited, MA FinanceCo., LLC, the Lenders party thereto and JPMorgan Chase Bank, N.A., as Administrative Agent and Collateral Agent.”

Item 10. D.Exchange controls.

There are currently no UK foreign exchange controls or restrictions on HP ProLiant servers. Following a March 23, 2017 mediation, Oracleremittance of dividends on the ordinary shares or on the conduct of the Company’s operations, other than restrictions applicable to ‘certain countries and Realtime reached a settlement. The second lawsuit was filed on May 8, 2015 against Hewlett-Packard Company, HP Enterprise Services, and SAP America Inc., Sybase Inc. (“SAP matter”) and accuses HP’s Converged Systems running SAP Hana. SAP agreedpersons subject to indemnify HPE and HPES for the SAP related products. On June 16, 2016, SAP reached a settlement agreement with Realtime, which ledsanctions pursuant to the dismissalUK Sanctions and Anti-Money Laundering Act 2018or those sanctions adopted by the UK Government which implement resolutions of the Security Council of the United Nations.

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Item 10. E.Taxation.

The following discussion summarizes certain material US federal income tax consequences and UK taxation consequences to US holders (as defined below) of owning and disposing of Micro Focus ordinary shares or ADSs. This discussion does not address any tax consequences arising under the laws of any state, local or non-US or non-UK jurisdiction, or under any US federal or UK laws other than those pertaining to income taxation.

Material US Federal Income Tax Consequences of Owning and Disposing of Micro Focus Ordinary Shares or ADSs

The following discussion summarizes certain material US federal income tax consequences to US holders (as defined below) of owning and disposing of Micro Focus ordinary shares or ADSs. This discussion is based upon the US Internal Revenue Code of 1986, as amended (the “US Tax Code”), the Treasury regulations promulgated under the US Tax Code and judicial and administrative rulings and decisions, all as in effect on the date hereof. These laws are subject to differing interpretations and may change, possibly retroactively, and any change could affect the accuracy of the statements and conclusions set forth in this discussion. No ruling has been sought from the US Internal Revenue Service (“IRS”) with respect to any US federal income tax consequences described below, and there can be no assurance that the IRS or a court will not take a contrary position.

This discussion does not constitute tax advice or an opinion, is for general information only and does not purport to consider all aspects of US federal income taxation that might be relevant to US holders in light of their personal investment or tax circumstances. This discussion does not apply to US holders who acquired ordinary shares or ADSs pursuant to the exercise of options or warrants or otherwise as compensation, or to US holders subject to special tax rules, including, without limitation, banks, insurance companies, tax-exempt entities, financial institutions, regulated investment companies, partnerships, S-corporations or other pass-through entities, broker-dealers, persons holding ordinary shares or ADSs as part of a hedging, conversion, or constructive sale transaction or as part of a “straddle,” US expatriates, persons subject to the alternative minimum tax, persons holding 10 per cent. or more of the voting power or value of Micro Focus’s stock, persons subject to “mark to market” accounting, persons holding ordinary shares or ADSs through a non-US account or financial institution and entities subject to the anti-inversion rules of Section 7874 of the US Tax Code. This discussion does not discuss US tax consequences to any person that is not a US holder or to any US holder having a functional currency other than the US dollar. Furthermore, this discussion does not discuss the so-called Medicare tax on net investment income, any US federal estate or gift tax laws or tax consequences under the laws of any state, local or non-US jurisdiction. Each holder of Micro Focus ordinary shares or ADSs is urged to consult its own tax advisor regarding the US federal, state, local and non-US income and other tax considerations of an investment in Micro Focus ordinary shares or ADSs.

As used in this discussion, a “US holder” means a beneficial owner  of ordinary shares or ADSs that holds such ordinary shares or ADSs as capital assets within the meaning of  the US Tax Code (generally, property held for investment) and is for US federal income tax purposes (i) an individual who is a citizen or resident of the United States, (ii) a corporation or other entity taxable as a corporation organized under the laws of the United States, any State thereof or the District of Columbia, (iii) a trust, if (a) a court within the United States is able to exercise primary jurisdiction over administration of the trust and one or more US persons have authority to control all substantial decisions of the trust or (b) a valid election is in place to treat such trust as a domestic trust, or (iv) an estate the income of which is subject to US federal income taxation regardless of its source.

In the case of a beneficial owner of ordinary shares or ADSs that is classified as a partnership for US federal income tax purposes, the tax treatment to a partner in the partnership generally will depend upon the tax status of the partner and the activities of the partner and the partnership. Partnerships and partners of partnerships holding Micro Focus ordinary shares and ADSs are urged to consult their independent professional tax advisors regarding an investment in such ordinary shares and ADSs.

The Company believes, and this discussion assumes, that it is not a passive foreign investment company (a “PFIC”) for US federal income tax purposes, although the inquiry is fact specific and no assurance is being given in that regard. A non-US corporation generally will be considered a PFIC for any taxable year in which (i) 75 per cent. or more of its gross income is passive income (e.g., certain dividends, interest, rents and royalties, and gain from the sale of property producing such income), or (ii) 50 per cent. or more of the average value of its assets are considered “passive assets” (generally, assets that generate passive income). For this purpose, the Company will be treated as owning its proportionate share of the assets and earning its proportionate share of the income of any other non-U.S. corporation in which it owns, directly or indirectly, stock representing more than 25% (by value) of all of HPE’s products indemnified by SAP.the stock of such corporation. The third lawsuit was filedCompany’s possible status as a PFIC is based on February 26, 2016 (amendedan annual determinations that cannot be made until the close of a taxable year, involves extensive factual investigation, including ascertaining the fair market value of all of the Company’s assets on August 15, 2016) against HPE, HP Enterprise Services, and Silver Peak Systems, Inc. (“Silver Peak”), and accuses HPE’s StoreOnce, 3Par StoreServe, Connected MX, Connected Backup, and LiveVault. On November 17, 2016, the Magistrate Judge granted HPE and Realtime’s joint motion to sever and consolidate the Oracle and Silver Peak matters. There are seven patents asserted in the remaining lawsuit. The patents generally relate to data compression techniques used to conserve storage space. HPEa periodic basis and the joint defense group have filedcharacter of each item of income that the Company earns, and is subject to uncertainty in several inter partes review petitions withrespects. Therefore, the Patent Trial and Appeal Board (“PTAB”) on all seven asserted patents. On February 3, 2017,Company cannot assure US holders that it will not be treated as a PFIC for its current taxable year or for any future taxable year or that the Magistrate Judge granted HPE’s Motion to Stay Pending Inter Partes Review.  In September and October, 2017,IRS will not take a contrary position. If the PTAB found 3 patents (U.S. Patent Nos. 6,597,812; 7,378,992; and 8,643,513)Company were to be unpatentable.classified as a PFIC for any year during which a US holder held its ordinary shares or ADSs, the Company generally would continue to be treated as a PFIC for all succeeding years during which such US holder held ordinary shares or ADSs. In addition, special, possibly materially adverse, consequences would result for US holders and certain reporting requirements might apply to US holders. US holders should consult their own independent professional tax advisers regarding the potential application of the PFIC rules to their ownership and disposition of ordinary shares or ADSs.


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Ownership of ADSs in General

Realtime appealed these decisionsFor US federal income tax purposes, a US holder of Micro Focus ADSs generally will be treated as the owner of the Micro Focus ordinary shares represented by the ADSs.

The US Treasury Department has expressed concern that depositaries for American Depositary Shares, or other intermediaries between the holders of shares of an issuer and the issuer, may be taking actions that are inconsistent with the claiming of US foreign tax credits by US holders of those receipts or shares. Accordingly, the analysis regarding the availability of a US foreign tax credit for UK taxes and sourcing rules described below could be affected by future actions that may be taken by the US Treasury Department.

Dividends Paid on Ordinary Shares or ADSs

The gross amount of any cash distribution (including the amount of any tax withheld, as discussed below) paid to a US holder by Micro Focus out of its current or accumulated earnings and profits (as determined for US federal income tax  purposes) is subject to US federal income taxation as a dividend. For certain non-corporate US holders, including individuals, dividends that constitute “qualified dividend income” will be taxable to such US holder at the preferential rates applicable to long-term capital gains, provided that the US holder holds the ordinary shares or ADSs on which the dividends are paid for more than 60 days during the 121-day period beginning 60 days before the ex-dividend date and meets other holding period requirements. Dividends Micro Focus pays with respect to its ordinary shares or ADSs generally will be qualified dividend income if Micro Focus is eligible for benefits of the United States income tax treaty with the United Kingdom.  Although Micro Focus believes that it is currently eligible for such treaty benefits, there can be no assurance that this will be the case for any taxable year or that such position would not be challenged by the IRS or sustained by a court.  Dividends received by a corporate US holder generally will not be eligible for the dividends-received deduction that is allowed to US corporations in respect of dividends received from other US corporations. However, a corporate US holder that owns 10 per cent or more of Micro Focus’s stock may, in certain circumstances, be entitled to a deduction in respect of a dividend received from Micro Focus pursuant to Section 245A of the US Tax Code.

A dividend is taxable to a US holder when the US holder receives the dividend, actually or constructively. The amount of the dividend that a US holder must include in its income will be the US dollar value of the payments made (including any withholding tax imposed thereon), determined at the spot Sterling/US dollar rate on the date the dividend is includible in the US holder’s income, regardless of whether the payment is in fact converted into US dollars at such time.  Generally, any gain or loss resulting from currency exchange fluctuations during the period from the date a US holder includes the dividend payment in income to the Federal Circuit.  On October 31, 2017,date a US holder converts the PTAB found U.S. Patent No. 9,116,908payment into US dollars will be treated as ordinary income or loss and will not be eligible for the special tax rate applicable to qualified dividend income. Such foreign exchange gain or loss generally will be patentable;income or loss from sources within the petitioners filed an appeal on December 29, 2017 at the PTAB.  The PTAB’s final decisions on the remaining three patents (U.S. Patent Nos. 7,161,506; 7,415,530; and 9,054,728) are due in May 2018.United States for foreign tax credit limitation purposes.

Turnkey Solutions Corporation vs. HPE: Turnkey Solutions Corporation (“TurnKey”) filed an actionThe portion of any cash distribution received by a US holder that is in excess of Micro Focus’s current and accumulated earnings and profits, as determined for US federal income tax purposes, will be treated as a non-taxable return of capital to the extent of the US holder’s basis in the Districtordinary shares or ADSs on which such payment is received, and thereafter as capital gain. However, Micro Focus does not expect to calculate its earnings and profits in accordance with US federal income tax principles.  Accordingly, a US holder should expect to generally treat cash distributions paid by Micro Focus as taxable dividends for US federal income tax purposes.

A US holder must include any foreign tax withheld from a cash distribution on its ordinary shares or ADSs in the gross amount included in income, even though the US holder does not in fact receive such withheld amount. Subject to certain limitations, UK tax withheld, if any, in accordance with the United Kingdom-United States Income Tax Convention (1975), as amended (the “Treaty”), and paid over to the United Kingdom will be deductible or creditable against a US holder’s US federal income tax liability. Special rules apply in determining the foreign tax credit limitation with respect to dividends that are subject to the preferential tax rates. To the extent a refund of Coloradothe tax withheld is available to a US holder under UK law or under the Treaty, the amount of tax withheld that is refundable will not be eligible for credit against HPEa US holder’s US federal income tax liability.

Dividends paid by Micro Focus on July 21, 2015.its ordinary shares or ADSs generally will be income from sources outside the United States and will, depending on a US holder’s circumstances, be either “passive” or “general” income for purposes of computing the foreign tax credit allowable to the US holder. The complaint alleged misappropriationrules governing the foreign tax credit are complex and involve the application of trade secrets, breachrules that depend upon a US holder’s particular circumstances. Accordingly, US holders are urged to consult their own tax advisors regarding the availability of contract, and fraud. HPE answered the complaint and asserted counterclaims against TurnKey on March 31, 2016. HPE voluntarily dismissed its counterclaims against TurnKey on December 20, 2017. A 9-day jury trial between HPE and Turnkey is scheduled to begin February 12, 2018.foreign tax credit under their particular circumstances.

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Sale or Disposition of Ordinary Shares or ADSs

ITEM 13. DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIESIf a US holder sells or otherwise disposes of its ordinary shares or ADSs in a taxable sale or other disposition, such US holder will generally recognize capital gain or loss for US federal income tax purposes equal to the difference between the US dollar value of the amount that the US holder realizes in such disposition and the US holder’s tax basis, determined in US dollars, in the US holder’s Micro Focus ordinary shares or ADSs. Capital gain of certain non-corporate US holders, including individuals, is generally taxed at preferential rates where the property disposed of is held for more than one year. Gain or loss recognized by a US holder on the sale or other disposition of ordinary shares or ADSs will generally be income or loss from sources within the United States for foreign tax credit limitation purposes. The deductibility of a capital loss may be subject to limitations under the US Tax Code.

None.Information with Respect to Foreign Financial Assets

US holders that are owners of “specified foreign financial assets” with an aggregate value in excess of $50,000 (and in some circumstances, a higher threshold) may be required to file an information report with respect to such assets with their tax returns and may be subject to penalties if they fail to file such information report. “Specified foreign financial assets” include financial accounts maintained by foreign financial institutions, as well as the following, but only if they are held for investment and not held in accounts maintained by financial institutions: (i) stocks and securities issued by non-U.S. persons, (ii) financial instruments and contracts that have non-U.S. issuers or counterparties, and (iii) interests in foreign entities.  US holders are urged to consult their own tax advisors regarding the application of this reporting requirement to their ownership of ordinary shares or ADSs.

Backup Withholding and Information Reporting

In general, dividend payments with respect to ordinary shares and ADSs and proceeds from the sale or other disposition of ordinary shares or ADSs made (or deemed made) within the United States may be subject to information reporting to the IRS and US backup withholding currently at a rate of 24 per cent. Backup withholding will generally not apply to a US holder who:

•          Furnishes a correct taxpayer identification number and certifies, under penalties of perjury, that such US holder is not subject to backup withholding on an IRS Form W-9, and otherwise complies with applicable requirements of the backup withholding rules; or

•          Is a corporation or otherwise exempt from backup withholding and, when required, demonstrates this fact in accordance with applicable Treasury regulations.

Backup withholding is not an additional tax. Amounts withheld under the backup withholding rules may be allowed as a credit against a holder’s US federal income tax liability and may entitle the holder to a refund, provided the holder timely furnishes the required information to the IRS.

US holders should consult their own independent professional tax adviser regarding the application of the information reporting and backup withholding rules.

Credits or deductions for UK taxes

As indicated under ‘Material UK Tax Consequences’ below, distributions in respect of, and gains on the disposition of, ordinary shares or ADSs, may be subject to UK taxation in certain circumstances. A US holder may be eligible to claim a credit or deduction in respect of UK taxes attributable to such income or gain for purposes of computing the US holder’s US federal income tax liability, subject to certain limitations. The US foreign tax credit rules are complex, and US holders should consult their own tax advisors regarding the availability of US foreign tax credits and the application of the US foreign tax credit rules to their particular situation.

The summary set forth above is included for general information only. US holders are urged to consult their own tax advisors to determine the particular tax consequences to them of the ownership and disposition of ordinary shares and ADSs, including the applicability and effect of U.S. state, local and non-U.S. tax laws.

Material UK Tax Consequences of Owning and Disposing of Micro Focus Ordinary Shares or ADSs

The following paragraphs set out below summarize material aspects of the UK tax treatment of US holders of ordinary shares or ADSs and do not purport to be either a complete analysis of all tax considerations relating to holding ordinary shares or ADSs or an analysis of the tax position of Micro Focus. They are based on current UK legislation and what is understood to be current HM Revenue & Customs practice, both of which are subject to change, possibly with retrospective effect.

The comments are intended as a general guide and (otherwise than where expressly stated to the contrary) apply only to US holders of ordinary shares or ADSs (other than under a personal equity plan or individual savings account) and who are the absolute beneficial owners of such shares.

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These comments do not deal with certain types of shareholders such as charities, dealers in securities, persons holding or acquiring shares in the course of a trade, persons who have or could be treated for tax purposes as having acquired their ordinary shares or ADSs by reason of their employment, collective investment schemes, persons subject to UK tax on the remittance basis and insurance companies. You are encouraged to consult an appropriate independent professional tax advisor with respect to your tax position.

ITEM 14. MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDSTax on chargeable gains as a result of disposals of ordinary shares or ADSs

None.Subject to the below, US holders will not generally be subject to UK tax on chargeable gains on a disposal of ordinary shares or ADSs provided that they do not carry on a trade, profession or vocation in the United Kingdom through a branch, agency or permanent establishment in connection with which the ordinary shares or ADSs are held.

A US holder who is an individual, who has ceased to be resident for tax purposes in the United Kingdom for a period of less than five years and who disposes of ordinary shares or ADSs during that period may be liable for UK tax on capital gains (in the absence of any available exemptions or reliefs). If applicable, the tax charge will arise in the tax year that the individual returns to the United Kingdom.

Tax on dividends

Micro Focus is not required to withhold UK tax at source from dividends paid on ordinary shares or ADSs.

US holders will not generally be subject to UK tax on dividends received from Micro Focus provided that they do not carry on a trade, profession or vocation in the United Kingdom through a branch, agency or permanent establishment in connection with which the ordinary shares or ADSs are held.

Stamp duty and stamp duty reserve tax, referred to as SDRT

Based on current published HM Revenue & Customs practice and recent case law, transfers of ADSs should not be subject to SDRT or stamp duty provided that any instrument of transfer is executed and remains outside the UK and the transfer of an underlying ordinary share to the ADS holder in exchange for the cancellation of an ADS should also not give rise to a stamp duty or SDRT charge.

Transfers of ordinary shares outside of the depositary bank, including the repurchase of ordinary shares by Micro Focus, will generally be subject to stamp duty or SDRT at the rate of 0.5% of the amount or value of the consideration given, except as described above in connection with the cancellation of an ADS. If ordinary shares are redeposited into a clearance service or depositary system, the redeposit will attract stamp duty or SDRT at the higher rate of 1.5%.

The purchaser or the transferee of the ordinary shares or ADSs will generally be responsible for paying any stamp duty or SDRT payable. Where stamp duty or SDRT is payable, it is payable regardless of the residence position of the purchaser.

Inheritance tax

A gift or settlement of ordinary shares or ADSs by, or on the death of, an individual shareholder may give rise to a liability to UK inheritance tax even if the shareholder is not a resident of or domiciled in the United Kingdom.

A charge to inheritance tax may arise in certain circumstances where ordinary shares or ADSs are held by close companies and trustees of settlements.

However, pursuant to the Estate and Gift Tax Treaty 1980, referred to as the Treaty, entered into between the United Kingdom and the United States, a gift or settlement of ordinary shares or ADSs by shareholders who are domiciled in the United States for the purposes of the Treaty may be exempt from any liability to UK inheritance tax.

Item 10. F.Dividends and paying agents.

Not applicable.

Item 10. G.Statement by experts.

Not applicable.

Item 10. H.Documents on display.

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Copies of our Memorandum and Articles of Association are filed as exhibits to this Annual Report on Form 20-F and certain other documents referred to in this Annual Report on Form 20-F are available for inspection at our registered office at The Lawn, 22-30 Old Bath Road, Newbury, Berkshire, RG14 1QN, United Kingdom (c/o the Company Secretary) during usual business hours upon reasonable prior request.

Item 10. I.Subsidiary Information.

Not applicable.

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Item 11.Quantitative and Qualitative Disclosures About Market Risk.

The following discussion and analysis contains forward-looking statements. See “Risk Factors” in Item 3D and “Cautionary Statement on Forward-Looking Statements’’ in this Annual Report on Form 20-F for a discussion of the uncertainties, risks and assumptions associated with these statements.

ITEM 18. FINANCIAL STATEMENTSFinancial risk factors

Following CompletionThe Group’s treasury function aims to reduce exposures to interest rate, foreign exchange and other financial risks, to ensure liquidity is available as and when required, and to invest cash assets safely and profitably. The Group does not engage in speculative trading in financial instruments so the analysis in this section can be categorized as non-trading. The treasury function’s policies and procedures are reviewed and monitored by the Audit Committee and are subject to internal audit review.

The Group’s multi-national operations expose it to a variety of financial risks that include the effects of changes in credit risk, foreign currency risk, interest rate risk and liquidity/capital risk. Treasury risk management is carried out by a central treasury department under policies approved by the board of directors.

Group treasury identifies and evaluates financial risks alongside business management. The board provides written principles for risk management together with specific policies covering areas such as foreign currency risk, interest rate risk, credit risk and liquidity risk, the use of derivative and non-derivative financial instruments as appropriate, and investment of excess funds.

Financial Instruments sensitive to market risk

The carrying values and fair values for the borrowings and derivative financial instruments are included within the overall financial instruments table. Further information on borrowings showing the maturity profile of the mergeranticipated cash flows in relation to the Group’s borrowing including principal repayments and interest payments can be found in section 5.B.1 along with the contracted interest rates and drawn/undrawn facilities.

Derivative and non-derivative financial instruments used for hedging purposes are further discussed below.

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Financial Instruments

The tables below sets out the measurement categories and carrying values of financial assets and liabilities with fair value inputs where relevant.

Measurement
category
 
Carrying value
October 31,
2020
  
Fair value
2020
  
Fair value
Hierarchy
2020/2019
  
Carrying
value
October 31, 2019
 
    
$m

       
$m

Financial assets:               
Non-current               
 
Long-term pension asset
 
FV OCI
  
18.2
  
Fair value insurance
based input
  
Level 3
   
17.1
 
Current               
Cash and cash equivalentAmortised cost  
737.2
   
-
   
-
   
355.7
 
Trade and other receivablesAmortised cost  
648.6
   
-
   
-
   
922.7
 
Contract assetsAmortised cost  
33.7
   
-
   
-
   
56.3
 
    
1,437.7
           
1,351.8
 
                  
Financial liabilities:                 
Non-current                 
Derivative financial instruments – interest rate swaps1
 
FV OCI
  
77.9
  
Fair value Bank
Institutions
  
Level 2
   
36.5
 
Borrowings (gross)2
Amortised cost  
4,699.0
   
4,535.1
   
-
   
4,775.0
 
Lease obligationsAmortised cost  
82.2
   
-
   
-
   
11.7
 
ProvisionsAmortised cost  
22.5
   
-
   
-
   
49.1
 
Current                 
Borrowings (gross)2
Amortised cost  
34.2
   
-
   
-
   
-
 
Lease obligationsAmortised cost  
168.2
   
-
   
-
   
11.8
 
ProvisionsAmortised cost  
49.7
   
-
   
-
   
29.3
 
Trade and other payables – accrualsAmortised cost  
419.2
   
-
   
-
   
530.3
 
    
5,552.9
           
5,443.7
 

1 Derivative interest rate swaps are measured at FV OCI as a result of hedge accounting. All interest rate swaps are in designated hedge relationships and there are no other derivative financial instruments held as FVTPL.
2 Borrowings have a carrying value (net of unamortised prepaid facility arrangement fees and original issue discount) of $4,640.4 million (2019: $4,670.7 million). Total borrowings (gross) are shown in this table as $4,733.2 million (2019: $4,775.0 million) for the fair value comparison.

For trade and other receivables, cash and cash equivalents, provisions, trade and other payables, fair values approximate to book values due to the short maturity periods of these financial instruments. For trade receivables, allowances are made for credit risk.

Long-term borrowings with a carrying value of $4,640.3 million (2019: $4,670.7 million) (note 18 “Borrowings of the Consolidated financial statements in Item 18) including unamortised prepaid facility fees and discounts, have a fair value estimate of $4,535.1 million (2019: $4,686.0 million) based on trading prices obtained from external banking providers as at 31 October 2020.

Derivative financial instruments measured at fair value are classified as Level 2 in the fair value measurement hierarchy as they have been determined using significant inputs based on observable market data. The fair values of interest rate derivatives are derived from forward interest rates based on yield curves observable at the balance sheet date together with the contractual interest rates. Valuations are updated by the counter-party banks on a monthly basis.

This section will cover the primary market risk exposures regarding interest rates and foreign currencies. The Group’s principal exposures in relation to market risks are the changes in the exchange rates between the CompanyUS Dollar and HPE Software,transactions made in other currencies as well as changes in interest rates from US and Euro capital markets.

Interest rate risk

The Group’s income and cash generated from operations are substantially independent of changes in market interest rates. The Group’s interest rate risk arises from short-term and long-term borrowings. Borrowings issued at variable rates expose the BoardGroup to cash flow interest rate risk. The Group currently uses four interest rate swaps to manage its cash flow interest rate risk arising from potential increases in the LIBOR interest rate.

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The objective of the Group’s interest rate risk management policy is to manage the uncertainty and adverse impact on the Group’s net interest charge due to changes in interest rates to an acceptable level. In doing so, the Group seeks to minimize the cost of hedging and the level of associated counterparty risk.

The Group has set a changetarget of fiscalapproximately half its borrowings being subject to fixed interest rates in order to minimize its exposure to changes in interest rates. This is achieved through four USD interest swaps for a total notional value of $2.25 billion, with a maturity date of September 2022. The hedge accounting is discussed further later in the note.

The Group’s borrowing facilities do not contain any covenants with respect to interest cover ratios.

  October 31, 2020  October 31, 2019 
Interest rate risk $m  $m 
Interest rate swaps (receive variable, pay fixed)      
       
Fair value of Derivative liability (total of 4 swaps)  (77.9)  
(36.5
)
Notional amount (4 x $562.5 million)  2,250.0   
2,250.0
 
Maturity date September 30, 2022  September 30, 2022 
Change in fair value of outstanding hedging instruments (OCI hedging reserve excluding deferred tax)  (41.3)  
(122.9
)
Change in value of hedging instruments (as above adjusted for impact of credit risk)  (39.9)  
(121.9
)
Hedging ratio  1.1   
1.1
 

The Group has four interest rate swaps, which are designated in a hedge relationship.

The Group’s approved strategy in accordance with our risk management policies is to minimize the risk of cash flow fluctuations due to interest rate changes in relation to the 1M-USD LIBOR rate for up to half of the Group’s external borrowings for the period October 19, 2017 to September 30, 2022.

The specific risk management objective is to hedge the interest rate risk (cash flow risk) due to changes in the 1M-USD LIBOR rate charged on $2,250.0 million of the debt issued by Seattle Spin Co Inc. between October 19, 2017 and September 30, 2022.

Derivatives are only used for economic hedging purposes and not as speculative investments.

The swap contracts require settlement of net interest receivable or payable on a monthly basis. The fixed interest rate for each swap is 1.949% and the Group receives a variable rate in line with LIBOR. The Seattle loan is priced at LIBOR (with a 0% floor) plus a current margin of 2.75% with the swaps aimed at addressing the risk of a rising LIBOR element. As such, the total interest cost of the hedged element of the Seattle loan is 4.699%. For the year end to October 31, 20182020, net interest (finance cost) paid for the swaps amounted to $23.7 million. For the life of the swap, net interest paid to date amounted to $17.2 million.

Non-Derivative financial instruments – Designated Euro borrowings

October 31, 2020October 31, 2019
Foreign exchange risk$m$m
Notional amounts for Designated Euro borrowing
Euro B-1 2020 tranche €600 million (Borrowings maturity date: June 2025)
665.8
-
Foreign exchange (loss) on revaluation transferred to OCI-CTA
No sources of ineffectiveness  observed  in review
(34.5)
-
Euro 2017 tranche €453 million (Borrowings maturity date: June 2024)
528.5
-
Foreign exchange (loss) on revaluation transferred to OCI-CTA
No sources of  ineffectiveness observed in review
(24.2)
-
Hedge ratio for each of the 2 Net investment hedges1.1
-

The Group has designated two tranches of non-derivative Euro borrowings in two hedge relationships The borrowings in place have a designated initial carrying value of approx. €1.05 billion (note 18 “Borrowings” of the Consolidated financial statements in Item 18.) hedged against Euro designated net investments in foreign operations.

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The specific risk management objective is to carry out a net investment hedge in the consolidated financial statements of the Group, to reduce the foreign currency translation exposure arising from the Group’s investments in foreign entities with Euro functional currency through the use of Euro currency borrowings as hedging instruments as permitted by the Group’s Treasury policy.

Foreign exchange risk

The Group operates internationally and is exposed to foreign exchange risk arising from various currency exposures, primarily with respect to the Euro, UK Pound Sterling, Indian Rupee, Israeli Shekel, Japanese Yen and the Chinese Yuan. Foreign exchange risk arises from future commercial transactions, recognised assets and liabilities and net investments in foreign operations where the transactions are denominated in a currency that is not the entity’s functional currency.

The Group is subject to exposure on the translation of the net assets of foreign currency subsidiaries into its reporting currency, US Dollar. The Group’s primary balance sheet translation exposures are noted in the Exposure analysis below. These exposures are kept under regular review with the Group treasury function providing reporting to the Treasury Risk committee and the Audit committee.

Group borrowings are denominated in US Dollars and Euros. The Group seeks to match the currency profile of borrowings to the cash flows arising from the Groups operations used to service those borrowings. The May 2020 debt refinancing included an additional proportion of Euro debt and a reduction in US Dollar debt which is intended to better match the currency profile of the Group’s debt with the cash flows used to service that debt (note 18 “Borrowings” of the Consolidated financial statements in Item 18.).

The Group has certain investments in foreign operations, whose net assets are exposed to foreign currency translation risk. The Group faces currency exposures arising from the translation of profits earned in foreign currency subsidiaries into the Group’s reporting currency of US Dollars. As at October 31, 2020 two net investment hedges totaling €1.05 billion have been designated using non-derivative Euro debt instruments to minimize the volatility in shareholder’s equity arising from foreign currency translation (there were no net investment hedges as at October 31, 2019).

Exposures also arise from foreign currency denominated trading transactions undertaken by subsidiaries and exposures here are not hedged.

The Group’s currency exposures comprise those that give rise to net currency gains and losses to be recognised in the Consolidated statement of comprehensive income as well as gains and losses on consolidation, which go to reserves. Such exposures reflect the monetary assets and liabilities of the Group that are not denominated in the operating or functional currency of the operating unit involved and the Group’s investment in net assets in currencies other than US dollar.

The impact on the Consolidated statement of comprehensive income of foreign exchange losses in the 12-month period ended 31 October 2020 of $29.7 million (2019: $11.3 million loss). The foreign exchange loss in the 12-month period includes the loss of $21.8 million due to the settlement of the foreign exchange contract regarding the cancelled dividend.

Exposure report analysis

The Group’s principal exposures in relation to market risks are the changes in the exchange rates between the US dollar and transactions made in other currencies as well as changes in interest rates from US and Euro capital markets. Foreign exchange exposures for all re-measuring balances are tracked and reported to management

The key drivers for foreign exchange exposure are cash, borrowings and inter-company positions with trade receivables and trade payables having less relative aggregate exposure. The table below represents a key currency extract from the Group exposures to movements in currency presenting exposures in excess of $10 million equivalent. The key exposure relates to the increased Euro debt profile since the May refinancing. The Indian Rupee and Israeli Shekel had key inter-company positions during the year.

Foreign exchange analysis is shown as for reporting to the Treasury Risk committee. Please note that aggregate Foreign exchange exposures for the Euro below do not consider the impact of the net investment hedges. However, the impact can be seen in the hedging table above.
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Group
exposure
   
+/- 5%


  
+/- 10%


Key aggregate currency exposures* $m   $m   $m 
Euro  (1,280.1)  64.0   128.0 
Indian Rupee (INR)  (42.4)  2.1   4.2 
Israeli Shekel (ILS)  (29.2)  1.4   2.9 
Chinese Yuan (CNY)  (25.6)  1.3   2.6 
Australian Dollar (AUD)  (15.7)  0.8   1.6 
             
Japanese Yen (JPY)  55.1   2.8   5.5 
Swedish Krona (SEK)  23.5   1.2   2.4 
Swiss Franc (CHF)  18.9   0.9   1.9 
Danish Krone (DKK)  17.1   0.9   1.7 
Canadian Dollar (CAD)  15.9   0.8   1.6 
Mexican Peso (MXN)  14.6   0.7   1.5 
United Arab Emirates Dirham (AED)  13.7   0.7   1.4 
Czech Koruna (CZK)  10.3   0.5   1.0 

  * Presenting aggregate foreign exchange exposures in excess of $10 million equivalent.

Interest rate exposure

Borrowings exposures to variable interest rate changes
 (based on gross debt excluding the effects of hedging)
 
Group exposure
  
LIBOR,
EURIBOS +1%
 
  
$m
 
$m
Euro  1,228.7   12.3 
US dollar
  3,504.5   35.0 
Total Gross Debt  4,733.2   47.3 

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Item 12.Description of Securities Other than Equity Securities.

Item 12. A.Debt Securities.

Not applicable

Item 12. B.Warrants and rights.

Not applicable

Item 12. C.Other Securities

Not applicable.

Item 12. D.American Depositary Shares.

Fees and charges payable by ADS holders

Deutsche Bank Trust Company Americas (Deutsche Bank) was appointed as the depositary bank (the Depositary) for Micro Focus’s ADS program pursuant to the Deposit Agreement dated August 11, 2017 between Micro Focus, the Depositary and the owners and holders of ADSs (the Deposit Agreement).

The Deposit Agreement provides that ADS holders may be required to pay various fees to the Depositary, and the Depositary may refuse to provide any service for which a fee is assessed until the applicable fee has been paid.

During the year, as a result of the Group’s decision to withdraw the FY19 final dividend and not pay a FY20 interim dividend, the Depositary did not charge the fee related to distributions of cash dividends. In the place of this fee the Depositary has charged a fee for the operation and maintenance of administering the ADSs. It is expected that fees will continue to be charged for the operating and maintenance of ADS rather than on distribution of dividends even though it is the Group’s policy to recommence dividends, see Item 8A. The total fees charged by the Depositary are unchanged at $0.02 per ADS charged twice per year.

ServiceFees
Issuance of ADSs including issuance from a distribution of shares and distribution of ADSs pursuant to bonus distributions, stock splits or other distributions.$5.00 (or less) per 100 ADSs (or portion of 100 ADSs).
Distribution of cash dividends. This fee is not currently charged.$5.00 (or less) per 100 ADSs (or portion of 100 ADSs).
An annual fee for operation and maintenance of administering the ADSs.$5.00 (or less) per 100 ADSs (or portion of 100 ADSs). The current per ADS fee to be charged for the operation and maintenance of administering pf the ADS is $0.02 per ADS twice per year.
Transfer and registration of shares on share register to or from the name of the depositary or its agent when you deposit or withdraw sharesRegistration or transfer fees

In addition, ADS holders may be required under the Deposit Agreement to pay the Depositary: (a) taxes (including applicable interest and penalties) and other governmental charges; (b) registration fees; (c) certain cable, telex and facsimile transmission and delivery expenses; (d) the expenses and charges incurred by the Depositary in the conversion of foreign currency; (e) such fees and expenses as are incurred by the Depositary in connection with compliance with applicable exchange control regulations and other regulatory requirements; and (f) the fees and expenses incurred by the Depositary, the custodian or any nominee in connection with the servicing or delivery of deposited securities. The Depositary may: (a) withhold dividends or other distributions or sell for the account of any ADS holder any or all of the shares underlying the ADSs in order to satisfy any tax or governmental charge; and (b) deduct from any cash distribution the applicable fees and charges of, and expenses incurred by, the Depositary and any taxes, duties or other governmental charges on account.

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Fees and payments made by the Depositary to Micro Focus
Under the terms of the contractual arrangements set out in the separate agreement between Micro Focus and the Depositary referred to above, Micro Focus received a total of approximately US$1.9 million from the Depositary, comprising fees charged in respect of the operation and maintenance of administering the ADSs during the year ended October 31, 2020.

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PART II

Item 13.Defaults, Dividend Arrearages and Delinquencies.

Not applicable.

Item 14.Material Modifications to the Rights of Security Holders and Use of Proceeds.

Not applicable.

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Item 15.Controls and Procedures.

Item 15. A.Disclosure Controls and Procedures.

Disclosure controls and procedures (as defined in Rule 13a-15(e) promulgated under the Securities Exchange Act of 1934 (the “Exchange Act”)) are designed to provide reasonable assurance that the information required to be (i) recorded, processed, summarized and reported within the time periods specified in  the SEC’s rules and forms and (ii) accumulated and communicated to management, including our Chief Executive Officer and Chief Financial Officer, to allow timely decisions regarding required disclosure. Management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives, and management necessarily applies its judgement in evaluating the cost benefit relationship of possible controls and procedures.

Based on their most recent evaluation, our Chief Executive Officer and Chief Financial Officer concluded that, as of October 31, 2020, the Company’s disclosure controls and procedures were not effective as a result of the material weakness in our internal control over financial reporting described below. Notwithstanding the material weakness described below, our management, including our Chief Executive Officer and Chief Financial Officer, believes that the audited consolidated financial statements contained in this Annual Report fairly present, in all material respects, our financial condition, results of operations and cash flows for the fiscal  years presented in conformity with IFRS. In addition, the material weaknesses described below did not result in a misstatement to the financial statements.

Please see Exhibits 12.1 and 12.2 for the certifications required by this Item.

Item 15. B.
Management’s annual report on internal control over financial reporting

As a foreign issuer with American Depositary Shares listed on the New York Stock Exchange (“NYSE”) the Group, as part of its disclosure and reporting obligations in the United States, is required to furnish this Annual Report by its management on its internal controls over financial reporting, including an attestation report issued by its independent registered public accounting firm pursuant to Section 404 of the Sarbanes-Oxley Act of 2002 (“SOX”) as at October 31, 2020.

Management is responsible for establishing and maintaining adequate internal controls over financial reporting for the Group. Internal control over financial reporting is defined in Rules 13a-15(f) and 15d-15(f) promulgated under the Exchange Act. The Group’s internal controls over financial reporting include policies and procedures which:


-
are designed to give reasonable assurance that the transactions are recorded as necessary to permit the preparation of financial statements in accordance with IFRS as adopted by the EU and IFRS as issued by the IASB, and that receipts and expenditures are being made only in accordance with authorization of management and the directors;


-
relate to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and disposal of assets; and


-
give reasonable assurance regarding the prevention or timely detection of unauthorized use, acquisition or disposal of the Group’s assets that could have a material impact on the financial statements.

Any internal control network will have inherent limitations, such that the possibility of human error and circumvention or overriding of controls and procedures may not prevent or detect misstatements. In addition, the projection of any controls to future periods are subject to the risk that controls may become inadequate due to changes in conditions or because the degree of compliance with policies and procedures may deteriorate.

Management assessed the effectiveness of internal controls over financial reporting as at October 31, 2020 based on the Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission 2013. Based on the assessment, management concluded that its internal control over financial reporting was not effective due to the following material weakness: the Company to launch the Enlarged Group’s financial year with effect from November 1, 2017.did not have adequate controls surrounding existing IT applications in particular regarding change management and access controls. As a result of those deficiencies, automated controls and controls over information produced by the entity related to those IT applications could not be relied upon. In aggregate, these control deficiencies impact all financial reporting processes and constitute a material weakness. This material weakness did not result in misstatement to the financial statements.

Our Consolidated financial statements have been audited by KPMG LLP, an independent registered public accounting firm, which has issued an attestation report on the Company’s internal control over financial reporting as at October 31, 2020 in this Annual Report on Form 20-F.

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Item 15. C.
Attestation report of the registered public accounting firm

Report of Independent Registered Public Accounting Firm
To the Shareholders and Board of Directors
Micro Focus International plc.:

Opinion on Internal Control Over Financial Reporting

We have audited Micro Focus International plc and subsidiaries’ (the Company) internal control over financial reporting as of October 31, 2020, based on Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission”. In our opinion, because of the effect of the material weakness, described below, on the achievement of the objectives of the control criteria, the Company has not maintained effective internal control over financial reporting as of October 31, 2020, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Consolidated statements of financial position of the Company as of October 31, 2020 and 2019, the related Consolidated statements of comprehensive income, changes in equity, and cash flows for the twelve month periods ended October 31, 2020 and 2019, and the 18 month period ended October 31, 2018, and the related notes (collectively, the Consolidated financial statements), and our report dated February 22, 2021 expressed an unqualified opinion on those Consolidated financial statements.
A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the Company’s annual or interim financial statements will not be prevented or detected on a timely basis. A material weakness has been identified and included in management’s assessment relating to deficient controls surrounding existing IT applications in particular regarding change management and access controls.  As a result of those deficiencies, automated controls and controls over information produced by the entity related to those IT applications could not be relied upon. In aggregate, these deficiencies impact all financial reporting processes and constitute a material weakness. The material weakness was considered in determining the nature, timing, and extent of audit tests applied in our audit of the October 31, 2020 Consolidated financial statements, and this report does not affect our report on those Consolidated financial statements.

Basis for Opinion

The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Annual Report on Internal Control over Financial Reporting.  Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

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Definition and Limitations of Internal Control Over Financial Reporting

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

/s/ KPMG LLP
London, United Kingdom
February 22, 2021

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Item 15. D.Changes in internal control over financial reporting.

In the period, following the first full year of SOX implementation in FY19, the Group continued to embed and refine the framework of SOX compliant internal controls under its central SOX Compliance Programme (“SCP”), together with a specialist team from its outsourced internal audit partner, PwC.   Governance for the SCP included a cross-functional SOX   steering group (“SSG”) chaired by the Group’s Chief Financial Officer reporting to the audit committee. In addition, the disclosure committee, also chaired by the Chief Financial Officer, continued to meet to assist the Chief Executive Officer and Chief Financial Officer in fulfilling their responsibilities in connection with the accuracy of financial reporting. The Group strengthened internal compliance by the appointment of a new SOX Assurance Director, increasing the internal compliance teams for Finance and IT, enhancing the Finance function Finance Processes and Compliance committee. The SCP continued to operate during a period of significant change across the organization as well as within the requirements of remote working under COVID-19 restrictions. Change activities include embedding the phased finance transformation program and the continuing work on preparation of the new   IT stack including associated internal controls over financial reporting for launch in FY21, as set out in Item 5.D. Trend Information. As part of the governance, the SSG monitors potential adverse impacts of organizational change to the SCP.

The SCP included reviews of the end-to-end process mapping, walkthroughs, test of design and test of effectiveness across the Group’s main processes, Hire to Retire, Quote to Cash, Procurement to Pay and Record to Report, as well as IT general controls (“ITGC”), leading to the  refinement  of  documented controls for each process. A global process owner owns each process and its associated controls. In the period, the Group has also reviewed its entity level controls and continued with the implementation of a SOX training plan across relevant parts of the Group. A key work stream of the SCP related to continuing to improve the adequacy of ITGCs. The challenges with the IT systems, including controls acquired with the HPE Software business, were disclosed in our Annual Report and Accounts for 2018 and 2019, and the 2018 and 2019 Form 20-F. Consequently, the business remained on its legacy IT systems, necessitating business process controls and ITGCs across both systems with the attendant complexity to the control environment. The work undertaken as part of the SCP identified a number of areas for improvement in the Group’s ITGCs. A remediation plan was agreed, which formed part of the SCP. Additionally, an in-house team was on boarded to Micro Focus to ensure continuity for future years. Work in this area was carried out under an IT SOX Compliance Group chaired by the Chief Information Security Officer (CISO) reporting to the main SSG.

In the Annual Report and Accounts 2019 and the 2019 Form 20-F the Group reported certain weaknesses in its internal control over financial reporting, which under Public Company Accounting Oversight Board auditing standards were considered to be a material weakness. The material weakness related to the fact that the Group did not have adequate controls surrounding existing IT applications, in particular regarding change management and access controls. As a result of those deficiencies, automated controls and controls over information produced by the entity could not be relied upon. During the year, under the SCP, management, where possible, put in place a number of actions to remediate these weaknesses and strengthen internal controls. The actions included, but were not limited to, implementing new controls both preventative and detective in nature, increasing the precision with which controls operate, ensuring clear ownership of every control, and implementing checks on the completeness and accuracy of reports that are relied upon as part of key control operations. Within the IT environment, and where technical limitations allowed, improvements included enhanced cross-functional change management controls and oversight board, clear definition of access control parameters and monitoring of IT applications, reviewing IT applications in scope and working with vendors on the timely provision of SOC1 reports. As a result of the work undertaken under the SCP, there was a significant reduction in the number of control deficiencies identified in the year, including the remediation of controls for a number of IT applications, evidencing the strengthening in internal control over financial reporting.

Remediation

The Group continues its work under the SCP to remediate the material weakness and other control deficiencies, and any other matters, which arise during its progress towards SOX compliance. As set out in Item 5.D. Trend Information the Group has a project underway to move to a simplified systems architecture enabling further automation of improved processes and controls. To maintain the required control environment the Group relies upon automated, semi- automated and manual controls together with a combination of preventative and detective controls. The material weakness, control deficiencies and other matters may not be able to be remediated by October 31, 2021, and there is a risk that other deficiencies for the purposes of SOX may be identified. Failure to correct the material weakness, or our failure to discover and address any other material weakness or control deficiencies, could result in inaccuracies in our financial statements, and  impair our ability to comply with applicable financial reporting requirements and related regulatory filings on a timely basis. It could also result in an adverse reaction in the financial markets due to a loss of confidence in the reliability of the Group’s financial statements, and could have a material adverse effect on the Group’s business, financial condition, results of operation and prospects.

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Item 16. A.Audit committee audit report expert

The Audit Committee includes Richard Atkins who, in the opinion of the Board, is an ‘audit committee financial expert’ and is independent (as defined for this purpose in 17 CFR 240.10A-3).  The board considered that the Committee’s members have broad commercial knowledge and extensive business leadership experience, having held between them various roles in major business, financial management, and finance function supervision and that this constitutes a broad suitable mix of business and financial experience on the committee.

Item 16. B.
Code of ethics

Micro Focus has adopted a code of ethics (the Micro Focus Code of Conduct) which applies to all employees including the Chief Executive Officer and Chief Financial Officer and other senior financial management. This code of ethics is available on our website (https://www.microfocus.com/media/guide/micro_focus_code_of_conduct_guide.pdf). The information on our website is not incorporated by reference into this report.

The Code of Ethics was included as Exhibit 11.1 MF Code of Conduct Guide in the Annual Report on the 20-F for the year ended October 31, 2019.

Item 16. C.Principal accountant fees and services

During the 12-months ended October 31, 2020, the 12-months ended October 31, 2019 and the 18-months ended October 31, 2018, the Group obtained the following services from the Group’s auditors as detailed below:

  
12 months
ended
October 31,2020
  
12 months
ended
October 31, 2019
  
18 months
ended
October 31, 2018
 
  
$m
 

$m

 

$m

Audit of Company
  7.2   
12.8
   
12.2
 
ICOFR
  2.7   
3.0
   
-
 
Audit of subsidiaries
  2.9   
3.9
   
1.9
 
Total audit  12.8   
19.7
   
14.1
 
             
Audit-related assurance fees
  0.6   
0.6
   
0.9
 
Other assurance services
  -   
-
   
0.7
 
Total assurance services  0.6   
0.6
   
1.6
 
             
Tax compliance services
  -   
-
   
0.2
 
Tax advisory services
  -   
0.1
   
0.2
 
Services relating to taxation  -   
0.1
   
0.4
 
             
All non-audit services  -   
-
   
0.1
 
             
Total  13.4   
20.4
   
16.2
 

The fees represent fees paid to KPMG LLP, as the current auditor.

There were no other fees in the 12-months ended October 31, 2020 and the 12-months ended October 31, 2019. Other fees in the 18-months ended October 31, 2018 relate primarily to the auditor’s assurance work in relation to the SUSE divestiture and licence verification compliance work.

Independence and objectivity of the external auditors
The Audit Committee approves all non-audit work commissioned from the external auditors. The committee is responsible for safeguarding the independence and objectivity of the external auditors and has developed a robust policy designed to ensure that this is not compromised. As explained above, the committee manages the risks that the external auditors undertake inappropriate non- audit work, or earn material levels of fees for non-audit services. It also considers the standing and experience of the external audit partner and takes comfort from the fact that KPMG took office relatively recently and from the external auditors’ confirmation that they have complied with relevant UK and US independence standards.

The committee is satisfied that the independence and objectivity of the external auditors has been maintained throughout the year ended October 31, 2020 and to the date of this report.

Item 16. D.Exemptions from the listing standards for audit committees

Not applicable.

Item 16. E.Purchase of equity securities by the issuer and affiliated purchases

Not applicable.

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Item 16. F.Change in Registrant’s certifying accountant

Not applicable.

Item 16. G.Corporate Governance

Principles

Micro Focus International plc (the “Company”) has a primary listing on the London Stock Exchange. As such, it is required to comply with the UK Corporate Governance Code (the “Code”). For the year ended October 31, 2020 this was the edition of the Code published by the UK’s Financial Reporting Council in July 2018.

The Company’s ADSs are listed on the NYSE. As a Foreign Private Issuer, we are required to comply with some, but not all, of the NYSE’s corporate governance rules, and are required to disclose any significant ways in which the UK corporate governance practices employed by the Company differ from those followed by US companies under the NYSE Listed Company Manual.

The directors are committed to ensuring that the Company operates in compliance with the main principles of the Code, as this provides a robust governance framework in support of the delivery of value to shareholders.

Compliance with the Code

UK listed companies are required to include in their Annual Report a narrative statement of (i) how they have applied the principles of the Code and (ii) whether or not they have complied with each of the provisions of the Code.

Throughout the year ended October 31, 2020 and to the date of this report, the Board considers that the Company has been in full compliance with the principles of the Code, and with each of its provisions, save for Provision 9 (being that the role of chair and chief executive should not be exercised by the same individual) and Provision 19 (being that the chair should not remain in post beyond nine years from the date of their first appointment to the board).  Prior to the appointment of Greg Lock as non-executive Chairman on February 14, 2020, the Company was not compliant as a result of Kevin Loosemore holding the role of Executive Chairman and his service beyond nine years. The appointment of Greg Lock as an independent non-executive Chairman results in a clear division of responsibilities between the leadership of the Board and the executive leadership of the Company’s business in accordance with the Code.

For the period prior to Greg Lock’s appointment, in order to mitigate any potential concerns around the concentration of decision making power within the role of the Executive Chairman, the senior independent non-executive director, Karen Slatford, had separate and defined responsibilities, including leading the Board’s consideration of and deliberations on governance issues. In the year under review, this included overseeing the annual review of board effectiveness. The division of responsibilities were reviewed following the appointment of Greg Lock as Non-Executive Chairman and the roles of the Non-Executive Chairman, Chief Executive Office and Senior Independent Director were clearly defined, reviewed and approved by the Board.

Non-executive directors’ Independence

Each of the non-executive directors who served during the period November 1, 2019 to October 31, 2020, was considered by the Board to be independent. The non-executive Chairman was independent on appointment when assessed against the Provisions of the Code. Karen Slatford was appointed to the Board in July 2010 and has now served for more than nine years. The Board has specifically considered whether this was likely to affect, or could appear to affect, her independence and concluded that she continued to demonstrate independence in thought and judgement, noting that there were no other relationships or circumstances that could affect her independence. The independent non-executive directors comprise a majority of the Board. The Board also has formal procedures for managing conflicts of interest.

The non-executive directors meet together regularly without the presence of executive directors.  In addition, the Senior Independent Director meets with the non-executive and executive directors at least once a year to review the performance of the Non-Executive Chairman and to consider whether to recommend his re-election, providing feedback directly to the Chairman.

88
Table of Contents
Committees of the board of directors

The Company has three principal Board committees that are broadly comparable in purpose and composition to those required by NYSE rules for domestic US companies. For instance, the Company has a Nomination (rather than nominating/corporate governance) Committee and a Remuneration (rather than compensation) Committee. The Company also has an Audit Committee, which NYSE rules require for both US companies and foreign private issuers. All the committees are comprised of non-executive directors only and none of the functions of these committees has been delegated to another committee.

Each Board Committee has clearly defined terms of reference approved by the Board setting out their respective authority and duties.  The terms of reference for each committee can be found on the Company’s website at https://www.microfocus.com/en-us/governance-policies/committees-of-the-board

Under the US Securities Exchange Act of 1934 and the NYSE Listed Company Manual, the Company is required to filehave an audit committee that is comprised of at least three members from the independent non-executive directors of the Company’s Board. Our Audit Committee complies, and during the year ended October 31, 2020 has complied, with these requirements. As stated in Item 16.A. above, the Board has determined that Richard Atkins possesses ‘accounting or related financial management expertise’, as required by section 303A.07 (a) of the NYSE Listed Company Manual. Richard Atkins also possesses the financial and audit committee experience set forth in the Code.

The Company’s Audit Committee does not have direct responsibility for the appointment, reappointment or removal of the independent auditors. Instead, it follows the UK Companies Act 2006 by making recommendations to the Board on these matters for it to put forward for shareholder approval at the AGM.

Shareholder approval of equity compensation plans

Under NYSE listing rules, shareholders must be given the opportunity to vote on all equity-compensation plans and material revisions thereto, except for employment inducement awards, certain grants, plans and amendments in the context of mergers and acquisitions, and certain specific types of plans. The Company complies with corresponding UK requirements in the Listing Rules, requiring the Company to seek shareholder approval for employee share schemes and significant changes to existing schemes, save in circumstances permitted by the Listing Rules (Listing Rule 9.4.1). The Board, however, does not explicitly take into consideration the NYSE’s detailed definition of what are considered ‘material revisions’.

Corporate Governance Guidelines

Section 303A.09 of the NYSE Listed Company Manual requires listed companies to adopt and disclose corporate governance guidelines. As noted above, in line with its obligations under the UK’s Listing Rules the Company applies the UK Corporate Governance Code and, as required by the Listing Rules, the Annual Report contains an explanation of (i) how it has applied the principles of the Code, and (ii) whether it complies in full with the Code’s provisions, or, where it does not, providing an explanation of any non-compliance and the reasons for this transition report(LR 9.8.6).

In addition, the Company is required to make certain mandatory corporate governance statements in accordance with the UK Listing Authority’s Disclosure Guidance and Transparency Rules, DTR 7, which are also included in the Annual Report.

Code of Business Conduct and Ethics
The Micro Focus Code of Conduct is available on the Company’s website at www.microfocus.com.

Item 16. H.Mine Safe Disclosure

Not applicable.

89
Table of Contents
PART III

Item 17.Financial Statements

Not applicable.

Item 18.Financial Statements

The financial statements filed as part of this Annual Report on Form 20-F for the transition period of May 1, 2017 to October 31, 2017.are included in Item 18 on pages F-1 through F-105 hereof.

Item 19.Exhibits

The following unaudited condensed consolidated financial statementsexhibits are filed as part of this transition report:

Consolidated statement of comprehensive income (unaudited)
2.1
Description of the rights of each class of securities registered under Section 12 of the Exchange Act
4.1
Credit Agreement amendments, among Micro Focus International plc, Micro Focus Group Limited, MA FinanceCo., LLC, the Lenders party thereto and JPMorgan Chase Bank, N.A., as Administrative Agent and Collateral Agent.
Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
Certification of Stephen Murdoch under Section 906 of the Sarbanes-Oxley Act of 2002
Certification of Brian McArthur-Muscroft under Section 906 of the Sarbanes-Oxley Act of 2002
Consent of KPMG LLP.

Consolidated statement of financial position (unaudited)

Consolidated statement of changes in equity (unaudited)

Consolidated statement of cash flow (unaudited)

Notes to the consolidated interim financial statements (unaudited)
101.INSXBRL Instance Document
101.SCHXBRL Taxonomy Extension Schema Document
101.CALXBRL Taxonomy Extension Calculation Linkbase Document
101.DEFXBRL Taxonomy Extension Definition Linkbase Document
101.LABXBRL Taxonomy Extension Label Linkbase Document
101.PREXBRL Taxonomy Extension Presentation Linkbase Document

2790
Signature

SIGNATURES

The registrant hereby certifies that it meets all of the requirements for filing on Form 20-F and that it has duly caused and authorizedautho-rized the undersigned to sign this transitionannual report on its behalf:behalf.

Micro Focus International plc
By:/s/ Chris Hsu
Name:Chris Hsu
Title:Chief Executive Officer

By:/s/ Mike Phillips
Name:Mike Phillips
Title:Director of Mergers & Acquisitions
/s/ Stephen Murdoch

Stephen Murdoch

Chief Executive Officer

Date:  February 22, 2021

2891
Consolidated financial statements and notes

TABLE OF CONTENTS

Index to unaudited Consolidated Financial StatementsF-2
Reports of Independent Registered Public Accounting Firms
F-4
Consolidated statement of comprehensive income (unaudited)
F-2
F-10
Consolidated statement of financial position (unaudited)
F-4
F-12
Consolidated statement of changes in equity (unaudited)
F-5
F-15
Consolidated statement of cash flows (unaudited)
F-6
F-16
Summary of significant accounting policies
F-35
Notes to the consolidated interim financial statements (unaudited)
F-7

Report of Independent Registered Public Accounting Firm

To the Stockholders and Board of Directors

Micro Focus International plcplc:

Opinion on the Consolidated statementFinancial Statements


We have audited the accompanying Consolidated statements of financial position of Micro Focus International plc. and subsidiaries (the Company) as of October 31, 2020 and 2019, the related Consolidated statements of comprehensive income, (unaudited)
Forchanges in equity, and cash flows for the six monthstwelve month periods ended October 31, 2017

     
Six months ended
October 31, 2017
  
Six months ended
October 31, 2016*
 
     (unaudited)  (unaudited) 
  Note  
Before
exceptional
items
  
Exceptional
items
(note 7)
  Total  
Before
exceptional
items
  
Exceptional
items
(note 7)
  Total 
      $’000   $’000   $’000   $’000   $’000   $’000 
Revenue  5,6   1,234,520   -   1,234,520   684,743   -   684,743 
Cost of sales comprising:                            
Cost of sales (excluding amortization of product development costs and acquired  technology intangibles)      (195,291)  (3,126)  (198,417)  (73,031)  (1,265)  (74,296)
-  Amortization of product development costs  14   (12,375)  -   (12,375)  (12,117)  -   (12,117)
-  Amortization of acquired technology intangibles  14   (63,101)  -   (63,101)  (37,027)  -   (37,027)
Cost of sales      (270,767)  (3,126)  (273,893)  (122,175)  (1,265)  (123,440)
                             
Gross profit      963,753   (3,126)  960,627   562,568   (1,265)  561,303 
                             
Selling and distribution costs      (390,085)  (8,553)  (398,638)  (216,526)  (2,002)  (218,528)
                             
Research and development expenses comprising:                            
- Expenditure incurred in the period      (183,115)  (7,402)  (190,517)  (99,263)  (2,175)  (101,438)
- Capitalization of product development costs  14   16,878   -   16,878   15,048   -   15,048 
Research and development expenses      (166,237)  (7,402)  (173,639)  (84,215)  (2,175)  (86,390)
                             
Administrative expenses      (88,991)  (79,399)  (168,390)  (57,493)  (35,606)  (93,099)
Operating profit      318,440   (98,480)  219,960   204,334   (41,048)  163,286 
                             
Share of results of associates  16   (438)  -   (438)  (1,127)  -   (1,127)
                             
Finance costs  11   (69,161)  (6,326)  (75,487)  (49,455)  -   (49,455)
Finance income  11   1,146   553   1,699   502   -   502 
Net finance costs  11   (68,015)  (5,773)  (73,788)  (48,953)  -   (48,953)
                             
Profit before tax      249,987   (104,253)  145,734   154,254   (41,048)  113,206 
Taxation  12   (64,659)  25,530   (39,129)  (28,140)  5,551   (22,589)
Profit for the period      185,328   (78,723)  106,605   126,114   (35,497)  90,617 
                             
Attributable to:                            
Equity shareholders of the parent      185,024   (78,723)  106,301   126,135   (35,497)  90,638 
Non-controlling interests      304   -   304   (21)  -   (21)
Profit for the period      185,328   (78,723)  106,605   126,114   (35,497)  90,617 

*In2020 and 2019 and the year ended April 30, 2017, the Company reviewed its consolidated statement of comprehensive income presentation and decided to re-classify both amortization of product development costs and amortization of acquired technology intangibles from research and development expenses to cost of sales. The six monthseighteen month period ended  October 31, 2016 comparative includes2018, and the related notes (collectively, the Consolidated financial statements). In our opinion, the Consolidated financial statements present fairly, in all material respects, the financial position of the Company as of October 31, 2020 and 2019, and the results of its operations and its cash flows for the twelve month periods ended October 31, 2020 and 2019 and the eighteen month period ended October 31, 2018, in conformity with International Financial Reporting Standards (“IFRS”) as issued by the International Accounting Standards Board (“IASB”).
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company’s internal control over financial reporting as of October 31, 2020, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission, and our report dated February 22, 2021 expressed an adverse opinion on the effectiveness of the Company’s internal control over financial reporting.
Change in Accounting Principle
As discussed in note I.W, the Company changed its method of accounting for leases as of November 1, 2019 due to the adoption of IFRS 16, Leases.
Basis for Opinion
These Consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these Consolidated financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the Consolidated financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the Consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the Consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the Consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matters
The critical audit matters communicated below are matters arising from the current period audit of the Consolidated financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the Consolidated financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the Consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.
Evaluation of goodwill impairment analysis

As discussed in Note 10 to the Consolidated financial statements, the goodwill balance as of October 31, 2020 was $3,835.4 million, which related to the Company’s single cash generating unit (“CGU”) and an impairment of $2,799.2 million was recognized in the period. The Company performs goodwill impairment testing on an annual basis and whenever events or changes in circumstances indicate that the carrying amounts may not be recoverable.

We identified the evaluation of the goodwill impairment analysis as a critical audit matter. The estimated recoverable amount of the CGU uses forward-looking estimates that involved a high degree of subjective auditor judgement, in addition to specialized skills and knowledge to evaluate. Specifically, the key assumptions of the discount rate and annual revenue growth rate by product group in the initial five-year forecast (revenue growth rates) were challenging to test as reasonably possible changes to those assumptions had a significant effect on the Company’s assessment of the recoverable amount of the CGU and the impairment recognized in the period

The following are the primary procedures we performed to address this reclassification (see accounting policies note 2).critical audit matter.

We compared the Company’s historical revenue growth rates to actual results to assess the Company’s ability to accurately forecast future revenue growth.

We evaluated the reasonableness of the Company’s forecasted revenue growth rates by comparing them to previous projections, relevant industry trends and current market indices.

We involved valuation professionals with specialized skills and knowledge, who assisted in comparing the discount rate used in the valuation against a discount rate range that was independently developed using publicly available market data for comparable companies.

Micro Focus International plcIdentification of performance obligations in certain multi-element customer contracts containing licences

As discussed in Note 2 to the Consolidated statement of comprehensive income (unaudited)
Forfinancial statements, the six monthsCompany’s total licence revenue recognized in the year ended October 31, 20172020 was $646.5 million, a portion of which related to licence revenue from certain multi-element customer contracts. As discussed in Note II.C to the Consolidated financial statements, in such certain multi-element contracts, the Company makes significant judgements to identify each separate performance obligation in multi-element contracts (for example granting of licences, maintenance, SaaS & other recurring and consulting services) which may impact the timing of revenue recognition.
We determined the identification of performance obligations in certain multi-element customer contracts containing licences to be a critical audit matter. Subjective and complex auditor judgement was required to evaluate the Company’s identification of each performance obligation within these contracts.

     
Six months ended
October 31, 2017
  
Six months ended
October 31, 2016*
    
     (unaudited)  (unaudited)    
  Note  
Before
exceptional
items
  
Exceptional
items
(note 7)
  Total  
Before
exceptional
items
  
Exceptional
items
(note 7)
  Total 
      $’000   $’000   $’000   $’000   $’000   $’000 
Profit for the period     185,328   (78,723)  106,605   126,114   (35,497)  90,617 
Other comprehensive income:                           
Items that will not be reclassified to profit or loss                           
Actuarial gain/(loss) on pension schemes liabilities  22   6,859   -   6,859   (3,521)  -   (3,521)
Actuarial (loss)/gain on non-plan pension assets  22   (350)  -   (350)  2,482   -   2,482 
Deferred tax movement      (655)  -   (655)  326   -   326 
Items that may be subsequently reclassified to profit or loss                            
Cash flow hedge movements  24   1,763   -   1,763   -   -   - 
Currency translation differences      2,742   -   2,742   (5,708)  -   (5,708)
Other comprehensive income/(expense) for the period      10,359   -   10,359   (6,421)  -   (6,421)
Total comprehensive income for the period      195,687   (78,723)  116,964   119,693   (35,497)  84,196 
Attributable to:                            
Equity shareholders of the parent      195,383   (78,723)  116,660   119,714   (35,497)  84,217 
Non-controlling interests      304   -   304   (21)  -   (21)
Total comprehensive income for the period      195,687   (78,723)�� 116,964   119,693   (35,497)  84,196 
                             
Earnings per share expressed in cents per share             cents          cents 
- basic  10           35.83           39.57 
- diluted  10           34.64           38.12 
Earnings per share expressed in pence per share             pence          pence 
- basic  10           27.50           29.49 
- diluted  10           26.58           28.41 

The accompanying notes arefollowing is the primary procedure we performed to address this critical audit matter. We selected certain multi-element customer contracts containing licences and performed an integral partindependent analysis of these unaudited Consolidated Financial Statements.the performance obligations and compared our judgements and conclusions to those made by the Company.


/s/ KPMG LLP
We have served as the Company’s auditor since 2017.

London, United Kingdom
February 22, 2021

F-3

Micro Focus International plc
Consolidated statement of financial position (unaudited)comprehensive income
for the 12 months ended October 31, 2020

  Note  
October 31, 2017
(unaudited)
$’000
  
October 31, 2016
(unaudited)
$’000
 
Non-current assets         
Goodwill  13   7,934,076   2,827,825 
Other intangible assets  14   7,199,606   1,186,184 
Property, plant and equipment  15   200,326   40,537 
Investments in associates  16   11,019   11,584 
Derivative asset  20   1,307   - 
Long term pension assets  22   23,650   24,120 
Other non-current assets      45,348   3,230 
Deferred tax assets      209,992   208,230 
       15,625,324   4,301,710 
Current assets            
Inventories      465   63 
Trade and other receivables  17   1,251,582   277,958 
Current tax receivables      -   3,432 
Cash and cash equivalents      730,372   122,970 
Assets classified as held for sale      -   888 
       1,982,419   405,311 
Total assets      17,607,743   4,707,021 
             
Current liabilities            
Trade and other payables  18   934,749   151,163 
Borrowings  19   17,727   294,192 
Finance leases      14,481   - 
Provisions  21   55,678   15,420 
Current tax liabilities      102,709   29,583 
Deferred income      1,312,635   582,412 
       2,437,979   1,072,770 
Non-current liabilities            
Deferred income      335,463   204,342 
Borrowings  19   4,831,489   1,441,337 
Finance leases      18,413   - 
Retirement benefit obligations  22   97,647   34,599 
Long-term provisions  21   26,666   11,729 
Other non-current liabilities      67,586   11,021 
Deferred tax liabilities      2,166,639   349,464 
       7,543,903   2,052,492 
Total liabilities      9,981,882   3,125,262 
Net assets      7,625,861   1,581,759 
Capital and reserves            
Share capital  23   65,590   39,650 
Share premium account      36,422   190,727 
Merger reserve  24   5,780,184   988,104 
Capital redemption reserve  24   666,289   163,363 
Hedging reserve      1,089   - 
Retained earnings      1,095,246   221,593 
Foreign currency translation deficit      (20,217)  (22,714)
Total equity attributable to owners of the parent      7,624,603   1,580,723 
Non-controlling interests  25   1,258   1,036 
Total equity      7,625,861   1,581,759 
     
Before
exceptional
items
  
Exceptional
items
(note 4)
  Total 
Continuing operations Note  
$m
 
$m

 
$m

Revenue  1,2   3,001.0   -   3,001.0 
Cost of sales      (698.7)  (4.0)  (702.7)
Gross profit      2,302.3   (4.0)  2,298.3 
Selling and distribution expenses      (1,099.2)  (12.9)  (1,112.1)
Research and development expenses      (512.7)  (0.9)  (513.6)
Administrative expenses      (340.2)  (2,993.8)  (3,334.0)
Operating profit/(loss)      350.2   (3,011.6)  (2,661.4)
                 
Finance costs  6   (281.6)  -   (281.6)
Finance income  6   2.6   -   2.6 
Net finance costs  6   (279.0)  -   (279.0)
                 
Profit/(Loss) before tax      71.2   (3,011.6)  (2,940.4)
Taxation  7   (72.9)  38.7   (34.2)
Loss from continuing operations      (1.7)  (2,972.9)  (2,974.6)
Profit/(loss) from discontinued operation (attributable to equity shareholders of the Company)  32   7.3   (2.2)  5.1 
Profit/(loss) for the period      5.6   (2,975.1)  (2,969.5)
                 
Attributable to:                
Equity shareholders of the Company      5.6   (2,975.1)  (2,969.5)
Non-controlling interests      -   -   - 
Profit/(loss) for the period      5.6   (2,975.1)  (2,969.5)

The accompanying notes are an integralform part of these unaudited Consolidated Financial Statements.the financial statements.

Consolidated statement of comprehensive income continued
for the 12 months ended October 31, 2020

     
Before
exceptional
items
  
Exceptional
items
(note 4)
  Total 
  Note  
$m

 
$m



$m

Profit/(loss) for the period     5.6   (2,975.1)  (2,969.5)
Other comprehensive (expense)/income for the period:               
Items that will not be reclassified to profit or loss               
Continuing operations:               
Actuarial loss on pension schemes liabilities  22   (0.4)  -   (0.4)
Actuarial gain on non-plan pension assets  22   0.4   -   0.4 
Deferred tax movement on pension schemes      (5.0)  -   (5.0)
Continuing operations: Items that may be subsequently reclassified to profit or loss                
Cash flow hedge movements  27   (41.3)  -   (41.3)
Deferred tax movement on cash flow hedge movements  27   7.8   -   7.8 
Deferred tax movement on currency translation differences      (8.7)  -   (8.7)
Deferred tax movement on Euro loan foreign exchange hedging      11.1   -   11.1 
Currency translation differences      (67.0)  -   (67.0)
Other comprehensive expense for the period      (103.1)  -   (103.1)
Total comprehensive expense for the period      (97.5)  (2,975.1)  (3,072.6)
Attributable to:                
Equity shareholders of the Company      (97.5)  (2,975.1)  (3,072.6)
Non-controlling interests      -   -   - 
Total comprehensive expense for the period      (97.5)  (2,975.1)  (3,072.6)
                 
Total comprehensive (expense)/income attributable to the equity shareholders of the Company arises from:                
Continuing operations      (104.8)  (2,972.9)  (3,077.7)
Discontinued operation      7.3   (2.2)  5.1 
       (97.5)  (2,975.1)  (3,072.6)
Earnings per share (cents)                
From continuing  and discontinued operations             cents 
- basic and diluted  9           (884.63)
From continuing operations                
- basic and diluted  9           (886.15)
Earnings per share (pence)                
From continuing and discontinued operations             pence 
- basic and diluted  9           (692.26)
From continuing operations                
- basic and diluted  9           (693.45)

The accompanying notes form part of the financial statements.

Micro Focus International plc
F-5
Consolidated statement of comprehensive income
for the 12 months ended October 31, 2019

     
Before
exceptional
items
  
Exceptional
items
(note 4)
  
Total1
 
Continuing operations Note  
$m

 
$m

 
$m

Revenue  1,2   3,348.4   -   3,348.4 
Cost of sales      (777.3)  (12.6)  (789.9)
Gross profit      2,571.1   (12.6)  2,558.5 
Selling and distribution expenses      (1,216.4)  (8.4)  (1,224.8)
Research and development expenses      (491.7)  0.5   (491.2)
Administrative expenses      (347.1)  (273.7)  (620.8)
Operating profit/(loss)      515.9   (294.2)  221.7 
                 
Finance costs  6   (282.4)  -   (282.4)
Finance income  6   26.6   -   26.6 
Net finance costs  6   (255.8)  -   (255.8)
                 
Profit/(loss) before tax      260.1   (294.2)  (34.1)
Taxation  7   (38.3)  54.3   16.0 
Profit/(loss) from continuing operations      221.8   (239.9)  (18.1)
Profit from discontinued operation (attributable to equity shareholders of the Company)  32   28.7   1,458.5   1,487.2 
Profit for the period      250.5   1,218.6   1,469.1 
                 
Attributable to:                
Equity shareholders of the Company      250.2   1,218.6   1,468.8 
Non-controlling interests      0.3   -   0.3 
Profit for the period      250.5   1,218.6   1,469.1 

1 In accordance with the requirements of IFRS 16 “Leases” the results for the 12 months ended October 31, 2019 have not been restated.

The accompanying notes form part of the financial statements.

Consolidated statement of comprehensive income continued
for the 12 months ended October 31, 2019

     
Before
exceptional
items
  
Exceptional
items
(note 4)
  
Total1
 
  Note  
$m
 
$m
 
$m
Profit for the period     250.5   1,218.6   1,469.1 
Other comprehensive (expense)/income for the period:               
Items that will not be reclassified to profit or loss               
Continuing operations:               
Actuarial loss on pension schemes liabilities  22   (26.2)  -   (26.2)
Actuarial gain on non-plan pension assets  22   0.3   -   0.3 
Deferred tax movement      13.0   -   13.0 
Discontinued operation:                
Actuarial gain on pension schemes liabilities  22   0.1   -   0.1 
Actuarial gain on non-plan pension assets  22   0.1   -   0.1 
Currency translation differences - discontinued operation      -   (1.5)  (1.5)
Continuing operations: Items that may be subsequently reclassified to profit or loss                
Cash flow hedge movements  27   (122.9)  -   (122.9)
Current tax movement on cash flow hedge movements  27   23.3   -   23.3 
Deferred tax movement on currency translation differences      14.0   -   14.0 
Currency translation differences      (206.2)  -   (206.2)
Other comprehensive expense for the period      (304.5)  (1.5)  (306.0)
Total comprehensive (expense)/income for the period      (54.0)  1,217.1   1,163.1 
Attributable to:                
Equity shareholders of the Company      (54.3)  1,217.1   1,162.8 
Non-controlling interests      0.3   -   0.3 
Total comprehensive (expense)/income for the period      (54.0)  1,217.1   1,163.1 
                 
Total comprehensive (expense)/income attributable to the equity shareholders of the Company arises from:                
Continuing operations      (82.9)  (239.9)  (322.8)
Discontinued operation      28.9   1,457.0   1,485.9 
       (54.0)  1,217.1   1,163.1 
Earnings per share (cents)                
From continuing  and discontinued operations             cents 
- basic  9           388.50 
- diluted  9           384.35 
From continuing operations                
- basic  9           (4.87)
- diluted  9           (4.87)
Earnings per share (pence)                
From continuing and discontinued operations             pence 
- basic  9           305.07 
- diluted  9           301.81 
From continuing operations                
- basic  9           (3.82)
- diluted  9           (3.82)

1 In accordance with the requirements of IFRS 16 “Leases” the results for the 12 months ended October 31, 2019 have not been restated.

The accompanying notes form part of the financial statements.

Consolidated statement of comprehensive income
for the 18 months ended October 31, 2018

     
Before
exceptional
items
  
Exceptional
items
(note 4)
  
Total1
 
Continuing operations Note  
$m

 
$m

 

$m

Revenue  1,2   
4,754.4
   
-
   
4,754.4
 
Cost of sales      
(1,237.3
)
  
(65.4
)
  
(1,302.7
)
Gross profit      
3,517.1
   
(65.4
)
  
3,451.7
 
Selling and distribution costs      
(1,725.0
)
  
(39.2
)
  
(1,764.2
)
Research and development expenses      
(663.4
)
  
(17.4
)
  
(680.8
)
Administrative expenses      
(213.7
)
  
(416.2
)
  
(629.9
)
Operating profit/(loss)      
915.0
   
(538.2
)
  
376.8
 
                 
Finance costs  6   
(344.0
)
  
(6.4
)
  
(350.4
)
Finance income  6   
7.1
   
0.6
   
7.7
 
Net finance costs  6   
(336.9
)
  
(5.8
)
  
(342.7
)
                 
Profit/(loss) before tax      
578.1
   
(544.0
)
  
34.1
 
Taxation  7   
(125.1
)
  
798.2
   
673.1
 
Profit from continuing operations      
453.0
   
254.2
   
707.2
 
Profit from discontinued operation (attributable to equity shareholders of the Company)  32   
76.9
   
-
   
76.9
 
Profit for the period      
529.9
   
254.2
   
784.1
 
                 
Attributable to:                
Equity shareholders of the Company      
529.8
   
254.2
   
784.0
 
Non-controlling interests      
0.1
   
-
   
0.1
 
Profit for the period      
529.9
   
254.2
   
784.1
 

1 In accordance with the requirements of IFRS 16 “Leases” the results for the 18 months ended October 31, 2018 have not been restated.

The accompanying notes form part of these financial statements.

Consolidated statement of comprehensive income continued
for the 18 months ended October 31, 2018

     
Before exceptional
items
  
Exceptional
items
(note 4)
  
Total1
 
  Note  

$m

 
$m

 
$m

Profit for the period     
529.9
   
254.2
   
784.1
 
Other comprehensive (expense)/income:               
Items that will not be reclassified to profit or loss               
Continuing operations:               
Actuarial loss on pension schemes liabilities  22   
(8.9
)
  
-
   
(8.9
)
Actuarial loss on non-plan pension assets  22   
(5.3
)
  
-
   
(5.3
)
Deferred tax movement      
3.8
   
-
   
3.8
 
Discontinued operation:                
Actuarial loss on pension schemes liabilities  22   
(1.5
)
  
-
   
(1.5
)
Actuarial loss on non-plan pension assets  22   
(0.5
)
  
-
   
(0.5
)
Deferred tax movement      
0.5
   
-
   
0.5
 
Items that may be subsequently reclassified to profit or loss                
Cash flow hedge movements  27   
86.4
   
-
   
86.4
 
Current tax movement  27   
(16.4
)
  
-
   
(16.4
)
Currency translation differences - continuing operations      
(29.5
)
  
-
   
(29.5
)
Currency translation differences - discontinued operation      
0.7
   
-
   
0.7
 
Other comprehensive income for the period      
29.3
   
-
   
29.3
 
Total comprehensive income for the period      
559.2
   
254.2
   
813.4
 
Attributable to:                
Equity shareholders of the Company      
559.1
   
254.2
   
813.3
 
Non-controlling interests      
0.1
   
-
   
0.1
 
Total comprehensive income for the period      
559.2
   
254.2
   
813.4
 
                 
Total comprehensive income attributable to the equity shareholders of the Company arises from:                
Continuing operations      
483.1
   
254.2
   
737.3
 
Discontinued operation      
76.1
   
-
   
76.1
 
       
559.2
   
254.2
   
813.4
 
Earnings per share (cents)                
From continuing  and discontinued operations             cents 
- basic  9           
201.70
 
- diluted  9           
196.17
 
From continuing operations                
- basic  9           
181.91
 
- diluted  9           
176.92
 
Earnings per share (pence)                
From continuing and discontinued operations             pence 
- basic  9           
151.61
 
- diluted  9           
147.45
 
From continuing operations                
- basic  9           
136.73
 
- diluted  9           
132.98
 

1 In accordance with the requirements of IFRS 16 “Leases” the results for the 18 months ended October 31, 2018 have not been restated.
The accompanying notes form part of these financial statements.

Consolidated statement of financial position


 Note  
October 31, 2020
$m
  
October 31, 2019
$m1
 
Non-current assets         
Goodwill  10   3,835.4   
6,671.3
 
Other intangible assets  11   5,383.0   
5,942.3
 
Property, plant and equipment  12   93.7   
140.5
 
Right-of-use assets  19   207.2   
-
 
Long-term pension assets  22   18.2   
17.1
 
Contract-related costs  15   35.7   
31.5
 
Other non-current assets  13   31.8   
44.0
 
       9,605.0   
12,846.7
 
Current assets            
Inventories      -   
0.1
 
Trade and other receivables  14   731.4   
1,032.9
 
Contract-related costs  15   27.9   
19.3
 
Current tax receivables  7   45.3   
40.1
 
Cash and cash equivalents  16   737.2   
355.7
 
       1,541.8   
1,448.1
 
Total assets      11,146.8   
14,294.8
 
             
Current liabilities            
Trade and other payables  17   503.5   
611.0
 
Borrowings  18   21.4   
-
 
Lease obligations (2019: Finance leases)  19   82.2   
11.8
 
Provisions  21   49.7   
29.3
 
Current tax liabilities  7   150.1   
104.0
 
Contract liabilities  20   981.4   
1,045.9
 
       1,788.3   
1,802.0
 
             
Non-current liabilities            
Contract liabilities  20   117.2   
149.9
 
Borrowings  18   4,618.9   
4,670.7
 
Lease obligations (2019: Finance leases)  19   168.2   
11.7
 
Derivative liability  24   77.9   
36.5
 
Retirement benefit obligations  22   155.0   
141.4
 
Provisions  21   22.5   
49.1
 
Other non-current liabilities  23   39.9   
50.4
 
Current tax liabilities  7   102.7   
119.7
 
Deferred tax liabilities  7   841.1   
987.1
 
       6,143.4   
6,216.5
 
Total liabilities      7,931.7   
8,018.5
 
Net assets      3,215.1   
6,276.3
 

1 In accordance with the requirements of IFRS 16 “Leases” the comparative amounts have not been restated.

Consolidated statement of financial position continued

     October 31, 2020  
October 31, 20191
 
  Note  
$m

 
$m

Capital and reserves           
Share capital  25   47.3   
47.2
 
Share premium account  26   46.5   
44.0
 
Merger reserve  27   1,767.4   
1,739.8
 
Capital redemption reserve  27   2,485.0   
2,485.0
 
Hedging reserve  27   (63.1)  
(29.6
)
Retained earnings      (741.3)  
2,250.7
 
Foreign currency translation reserve      (326.7)  
(262.1
)
Total equity attributable to owners of the parent      3,215.1   
6,275.0
 
Non-controlling interests  28   -   
1.3
 
Total equity      3,215.1   
6,276.3
 

1 In accordance with the requirements of IFRS 16 “Leases” the comparative amounts have not been restated.

The accompanying notes form part of the financial statements.

Consolidated statement of changes in equity
For the 18 months ended October 31, 20181

     
Share
capital
  
Share
premium
account
  
Retained
earnings
  
Foreign
currency
translation
reserve
  
Capital redemption
reserves
  
Hedging
reserve
  
Merger
reserve
  
Total equity
attributable
to owners of
the parent
  
Non-
controlling
interests
  
Total
equity
 
  Note  
$m

 
$m

 
$m

 
$m

 
$m

 
$m

 
$m

 
$m

 
$m

 
$m

Balance as at May 1, 2017     
39.7
   
192.1
   
902.2
   
(22.9
)
  
163.4
   
-
   
338.1
   
1,612.6
   
0.9
   
1,613.5
 
                                            
Profit for the financial period     
-
   
-
   
784.0
   
-
   
-
   
-
   
-
   
784.0
   
0.1
   
784.1
 
Other comprehensive income for the period     
-
   
-
   
(11.9
)
  
(28.8
)
  
-
   
70.0
   
-
   
29.3
   
-
   
29.3
 
Total comprehensive income/(expense) for the period     
-
   
-
   
772.1
   
(28.8
)
  
-
   
70.0
   
-
   
813.3
   
0.1
   
813.4
 
Transactions with owners:                                           
Dividends  8   
-
   
-
   
(542.2
)
  
-
   
-
   
-
   
-
   
(542.2
)
  
-
   
(542.2
)
Share options:                                            
Issue of share capital – share options  25,26   
0.2
   
5.6
   
-
   
-
   
-
   
-
   
-
   
5.8
   
-
   
5.8
 
Share-based payment charge  29   
-
   
-
   
78.6
   
-
   
-
   
-
   
-
   
78.6
   
-
   
78.6
 
Current tax on share options  7   
-
   
-
   
4.1
   
-
   
-
   
-
   
-
   
4.1
   
-
   
4.1
 
Deferred tax on share options  7   
-
   
-
   
(23.7
)
  
-
   
-
   
-
   
-
   
(23.7
)
  
-
   
(23.7
)
Acquisitions:                                            
Shares issued to acquire the HPE Software business  25   
28.8
   
-
   
-
   
-
   
-
   
-
   
6,485.4
   
6,514.2
   
-
   
6,514.2
 
Share reorganization and buy-back:                                            
Return of Value – share consolidation  29,31   
(2.9
)
  
-
   
-
   
-
   
2.9
   
-
   
-
   
-
   
-
   
-
 
Issue and redemption of B shares  25   
-
   
(156.7
)
  
(500.0
)
  
-
   
500.0
   
-
   
(343.3
)
  
(500.0
)
  
-
   
(500.0
)
Share buy-back  25   
-
   
-
   
(171.7
)
  
-
   
-
   
-
   
-
   
(171.7
)
  
-
   
(171.7
)
Reallocation of merger reserve  27   
-
   
-
   
2,755.8
   
-
   
-
   
-
   
(2,755.8
)
  
-
   
-
   
-
 
Total movements for the period      
26.1
   
(151.1
)
  
2,373.0
   
(28.8
)
  
502.9
   
70.0
   
3,386.3
   
6,178.4
   
0.1
   
6,178.5
 
Balance as at October 31, 2018      
65.8
   
41.0
   
3,275.2
   
(51.7
)
  
666.3
   
70.0
   
3,724.4
   
7,791.0
   
1.0
   
7,792.0
 

1 In accordance with the requirements of IFRS 16 “Leases” the results for the 18 months ended October 31, 2018 have not been restated.

The accompanying notes form part of the financial statements.

Consolidated statement of changes in equity (unaudited)
For the 12 months ended October 31, 20191

     
Share
capital
  
Share
premium account
  Retained earnings  Foreign currency translation reserve  Capital redemption reserves  Hedging reserve  
Merger
reserve
  
Total equity
attributable
to owners of
the parent
  
Non-
controlling interests
  
Total
equity
 
  Note  
$m

 
$m

 
$m

 
$m

 
$m

 
$m

 
$m

 
$m

 
$m

 
$m

Balance as at November 1, 2018     65.8   41.0   3,275.2   (51.7)  666.3   70.0   3,724.4   7,791.0   1.0   7,792.0 
Impact of adoption of IFRS 15     -   -   52.4   -   -   -   -   52.4   -   52.4 
Impact of adoption of IFRS 9     -   -   (15.6)  -   -   -   -   (15.6)  -   (15.6)
Revised balance at November 1, 2018     65.8   41.0   3,312.0   (51.7)  666.3   70.0   3,724.4   7,827.8   1.0   7,828.8 
Profit for the financial period     -   -   1,468.8   -   -   -   -   1,468.8   0.3   1,469.1 
Other comprehensive income/(expense) for the period     -   -   4.0   (210.4)  -   (99.6)  -   (306.0)  -   (306.0)
Total comprehensive income/(expense) for the period     -   -   1,472.8   (210.4)  -   (99.6)  -   1,162.8   0.3   1,163.1 
                                            
Transactions with owners:                                           
Dividends  8   -   -   (439.2)  -   -   -   -   (439.2)  -   (439.2)
Share options:                                            
Issue of share capital – share options  25,26   0.1   3.0   (3.8)  -   -   -   -   (0.7)  -   (0.7)
Share-based payment charge  29   -   -   64.5   -   -   -   -   64.5   -   64.5 
Current tax on share options  7   -   -   13.1   -   -   -   -   13.1   -   13.1 
Deferred tax on share options  7   -   -   (7.6)  -   -   -   -   (7.6)  -   (7.6)
Share reorganization and buy-back:                                            
Return of Value – share consolidation  29,31   (18.7)  -   -   -   18.7   -   -   -   -   - 
Expenses relating to Return of Value  27   -   -   (1.0)  -   -   -   -   (1.0)  -   (1.0)
Issue and redemption of B shares  25   -   -   (1,800.0)  -   1,800.0   -   (1,800.0)  (1,800.0)  -   (1,800.0)
Share buy-back  25   -   -   (544.7)  -   -   -   -   (544.7)  -   (544.7)
Reallocation of merger reserve  27   -   -   184.6   -   -   -   (184.6)  -   -   - 
Total movements for the period      (18.6)  3.0   (1,061.3)  (210.4)  1,818.7   (99.6)  (1,984.6)  (1,552.8)  0.3   (1,552.5)
Balance as at October 31, 2019      47.2   44.0   2,250.7   (262.1)  2,485.0   (29.6)  1,739.8   6,275.0   1.3   6,276.3 

     
Share
capital
  
Share
premium
account
  
Retained
earnings/
(deficit)
  
Foreign
currency
translation
reserve
(deficit)
  
Capital
redemption
reserves
  
Hedging
reserve
  
Merger
reserve
  
Equity /
(deficit)
attributable
to the
parent
  
Non-
controlling
interests
  
Total
equity /
(deficit)
 
  Note   $’000   $’000   $’000   $’000   $’000   $’000   $’000   $’000   $’000   $’000 
Balance as at May 1, 2016     39,573   190,293   228,344   (17,006)  163,363   -   988,104   1,592,671   1,057   1,593,728 
Currency translation differences     -   -   -   (5,708)  -   -   -   (5,708)  -   (5,708)
Profit for the period     -   -   90,638   -   -   -   -   90,638   (21)  90,617 
Re-measurement on defined benefit pension schemes  22   -   -   (3,521)  -   -   -   -   (3,521)  -   (3,521)
Re-measurement on long-term pension assets  22   -   -   2,482   -   -   -   -   2,482   -   2,482 
Deferred tax movement pensions      -   -   326   -   -   -   -   326   -   326 
Total comprehensive income      -   -   89,925   (5,708)  -   -   -   84,217   (21)  84,196 
Transactions with owners:                                            
Dividends  9   -   -   (111,023)  -   -   -   -   (111,023)  -   (111,023)
Movement in relation to share options      77   434   11,266   -   -   -   -   11,777   -   11,777 
Deferred tax on share options      -   -   3,081   -   -   -   -   3,081   -   3,081 
Balance as at October 31, 2016      39,650   190,727   221,593   (22,714)  163,363   -   988,104   1,580,723   1,036   1,581,759 
                                             
Balance at May 1, 2017      39,700   192,145   902,183   (22,959)  163,363   -   338,104   1,612,536   954   1,613,490 
Currency translation differences      -   -   -   2,742   -   -   -   2,742   -   2,742 
Profit for the period      -   -   106,301   -   -   -   -   106,301   304   106,605 
Re-measurement on defined benefit pension schemes  22   -   -   6,859   -   -   -   -   6,859   -   6,859 
Re-measurement on long-term pension assets  22   -   -   (350)  -   -   -   -   (350)  -   (350)
Deferred tax movement pensions      -   -   19   -   -   -   -   19   -   19 
Deferred tax movement on hedging  24   -   -   -   -   -   (674)  -   (674)  -   (674)
Cash flow hedge movement  24                       1,763       1,763       1,763 
Total comprehensive income      -   -   112,829   2,742   -   1,089   -   116,660   304   116,964 
Transactions with owners:                                            
Dividends  9   -   -   (133,889)  -   -   -   -   (133,889)  -   (133,889)
Share options:                                            
Movement in relation to share options  23   43   960   15,015   -   -   -   -   16,018   -   16,018 
Corporation tax on share options      -   -   931   -   -   -   -   931   -   931 
Deferred tax on share options      -   -   (1,823)  -   -   -   -   (1,823)  -   (1,823)
Acquisitions:                                            
Shares issued to acquire HPE Software  23,24   28,773   -   -   -       -   6,485,397   6,514,170   -   6,514,170 
Share  reorganization and buy-back:                                            
Return of Value – share consolidation  23,24   (2,926)  -   -   -   2,926   -   -   -   -   - 
Issue and redemption of B shares  23,24   -   (156,683)  (500,000)  -   500,000   -   (343,317)  (500,000)  -   (500,000)
Reallocation of merger reserve  24           700,000               (700,000)            
Balance as at October 31, 2017      65,590   36,422   1,095,246   (20,217)  666,289   1,089   5,780,184   7,624,603   1,258   7,625,861 
1 In accordance with the requirements of IFRS 16 “Leases” the results for the 12 months ended October 31, 2019 have not been restated.

The accompanying notes are an integralform part of these unaudited Consolidated Financial Statements.financial statements.

F-5F-13

Micro Focus International plc
Consolidated statement of cash flows (unaudited)changes in equity
For the 12 months ended October 31, 2020

     
Share
capital
  
Share
premium account
  Retained earnings  Foreign currency translation reserve  Capital redemption reserves  Hedging reserve  Merger
reserve		  Total equity attributable to owners of the parent  
Non-
controlling interests
  
Total
equity
 
  Note  
$m

 
$m

 
$m

 
$m

 
$m

 
$m

 
$m

 
$m

 
$m

 
$m

Balance as at November 1, 2019     47.2   44.0   2,250.7   (262.1)  2,485.0   (29.6)  1,739.8   6,275.0   1.3   6,276.3 
Impact of adoption of IFRS 16     -   -   (8.4)  -   -   -   -   (8.4)  -   (8.4)
Revised balance at November 1, 2019     47.2   44.0   2,242.3   (262.1)  2,485.0   (29.6)  1,739.8   6,266.6   1.3   6,267.9 
Loss for the financial period     -   -   (2,969.5)  -   -   -   -   (2,969.5)  -   (2,969.5)
Other comprehensive expense for the period     -   -   (5.0)  (64.6)  -   (33.5)  -   (103.1)  -   (103.1)
Total comprehensive expense for the period     -   -   (2,974.5)  (64.6)  -   (33.5)  -   (3,072.6)  -   (3,072.6)
                                            
Share options:                                           
Issue of share capital – share options  25,26   0.1   2.5   0.3   -   -   -   -   2.9   -   2.9 
Share-based payment charge  29   -   -   18.3   -   -   -   -   18.3   -   18.3 
Current tax on share options  7   -   -   0.1   -   -   -   -   0.1   -   0.1 
Deferred tax on share options  7   -   -   (1.5)  -   -   -   -   (1.5)  -   (1.5)
                                             
Purchase of remaining non-controlling interest  28   -   -   1.3   -   -   -   -   1.3   (1.3)  - 
Reallocation of merger reserve  27   -   -   (27.6)  -   -   -   27.6   -   -   - 
Total movements for the period      0.1   2.5   (2,983.6)  (64.6)  -   (33.5)  27.6   (3,051.5)  (1.3)  (3,052.8)
Balance as at October 31, 2020      47.3   46.5   (741.3)  (326.7)  2,485.0   (63.1)  1,767.4   3,215.1   -   3,215.1 

The accompanying notes form part of the financial statements.

  Note  
Six months
ended
October 31, 2017
$’000
  
Six months
ended
October 31, 2016
$’000
 
Cash flows from operating activities         
Net profit for the period     106,605   90,617 
Adjustments for:           
Net interest  11   73,788   48,953 
Taxation  12   39,129   22,589 
Share of results of associates  16   438   1,127 
Operating profit      219,960   163,286 
Research and development tax credits      (2,185)  (936)
Depreciation  15   16,289   5,712 
Loss on disposal of property, plant and equipment      427   484 
Amortization of intangibles  14   198,606   119,085 
Share-based compensation  8   18,302   15,521 
 Exchange movements      (4,699)  (9,270)
Provisions movements  21   73,433   18,788 
Changes in working capital:            
Inventories      (216)  30 
Trade and other receivables      (231,762)  21,073 
Payables and other liabilities      15,490   (50,118)
Provision utilization  21   (55,489)  (18,581)
Deferred income      15,868   (62,308)
Pension funding in excess of charge to operating profit      3,129   (856)
Cash generated from operations      267,153   201,910 
Interest paid      (82,341)  (42,879)
Bank loan costs      (90,319)  (5,864)
Tax paid      (20,472)  (18,183)
Net cash generated from operating activities      74,021   134,984 
Cash flows from investing activities            
Payments for intangible assets  14   (35,650)  (17,571)
Purchase of property, plant and equipment  15   (9,845)  (6,454)
Interest received      1,699   502 
Payment for acquisition of subsidiaries  28   -   (293,797)
Repayment of bank borrowings on acquisitions  28   -   (316,650)
Net cash acquired with acquisitions  28   320,729   68,173 
Net cash generated from/(used in) investing activities      276,933   (565,797)
Cash flows from financing activities            
Proceeds from issue of ordinary share capital      1,161   467 
Purchase of treasury shares      -   - 
Return of value paid to shareholders  27   (500,000)  - 
Repayment of bank borrowings  19   (215,000)  (126,375)
Proceeds from bank borrowings  19   1,043,815   115,000 
Dividends paid to owners  9   (133,889)  (111,023)
Net cash generated from/(used in) financing activities      196,087   (121,931)
Effects of exchange rate changes      32,348   8,536 
Net increase/(decrease) in cash and cash equivalents      579,389   (544,208)
Cash and cash equivalents at beginning of period      150,983   667,178 
Cash and cash equivalents at end of period      730,372   122,970 
F-14
Consolidated statements of cash flows

     
12 months
ended
October 31,
2020
  
12 months
ended
October 31,
20191
  
18 months
ended
October 31,
20181
 
  Note  
$m

 

$m

 

$m

Cash flows from operating activities               
Cash generated from operations  34   1,082.8   
1,056.3
   
1,424.3
 
Interest paid      (207.1)  
(227.1
)
  
(301.8
)
Bank loan costs      (47.9)  
-
   
(101.2
)
Tax paid      (149.6)  
(167.4
)
  
(99.5
)
Net cash generated from operating activities      678.2   
661.8
   
921.8
 
Cash flows from/(used in) investing activities                
Payments for intangible assets  11   (60.6)  
(29.3
)
  
(92.1
)
Purchase of property, plant and equipment  12   (26.3)  
(56.3
)
  
(40.1
)
Finance leases      -   
-
   
(0.7
)
Interest received      2.4   
26.6
   
9.2
 
Payment for acquisition of business  33   (6.0)  
(89.0
)
  
(19.2
)
Net cash acquired with acquisitions  33   -   
1.2
   
321.7
 
Investing cash flows generated from disposals  32   1.3   
20.0
   
-
 
Investing cash flows generated from discontinued operation, net of cash disposed  32   -   
2,473.5
   
-
 
Tax paid on divestiture gain      -   
(264.6
)
  
-
 
Net cash (used in)/from investing activities      (89.2)  
2,082.1
   
178.8
 
Cash flows used in financing activities                
Investment in non-controlling interest      -   
-
   
(0.1
)
Proceeds from issue of ordinary share capital  25,26   2.6   
3.1
   
5.8
 
Purchase of treasury shares and related expenses  25   -   
(544.7
)
  
(171.7
)
Return of Value paid to shareholders  25,27   -   
(1,800.0
)
  
(500.0
)
Expenses relating to Return of Value  25   -   
(1.0
)
  
-
 
Repayment of working capital in respect of the HPE Software business acquisition      -   
-
   
(225.8
)
Payment for lease liabilities (2019: payment for finance lease liabilities)  19   (80.1)  
(12.9
)
  
-
 
Settlement if foreign exchange derivative  24   (21.8)  
-
   
-
 
Repayment of bank borrowings  18   (1,589.7)  
(212.6
)
  
(252.9
)
Proceeds from bank borrowings  18   1,490.8   
-
   
1,043.8
 
Dividends paid to owners  8   -   
(439.2
)
  
(542.2
)
Net cash used in financing activities      (198.2)  
(3,007.3
)
  
(643.1
)
Effects of exchange rate changes      (9.3)  
(1.8
)
  
15.3
 
Net increase/(decrease) in cash and cash equivalents      381.5   
(265.2
)
  
472.8
 
Cash and cash equivalents at beginning of period      355.7   
620.9
   
151.0
 
   16   737.2   
355.7
   
623.8
 
Reclassification to current assets classified as held for sale      -   
-
   
(2.9
)
Cash and cash equivalents at end of period  16   737.2   
355.7
   
620.9
 

1 In accordance with the requirements of IFRS 16 “Leases” the comparative amounts have not been restated.

The accompanying notes are an integralform part of these unaudited Consolidated Financial Statements.

The principal non-cash transaction in the six months ended October 31, 2017 was the issuance of shares as purchase consideration for the HPE Software acquisition (note 28).financial statements.

Consolidated financial statements and notes
Summary of significant accounting policies

Micro Focus International plc

Notes to the consolidated interim financial statements (unaudited)

1.General information

Micro Focus International plc (“the Company”) is a public limited Companycompany incorporated and domiciled in the UK. The address of its registered office is, The Lawn, 22-30 Old Bath Road, Newbury, RG14 1QN, UK.

Micro Focus International plc and its subsidiaries (together “the Group”“Group”) provide innovative software to clients around the world enabling them to dramatically improve the business value of their enterprise applications. As at October 31, 2017,2020, the Group hashad a presence in 4948 countries (October 31, 2019: 48; October 31, 2018: 49) worldwide and employsemployed approximately 16,100 people.

On September 1, 2017, Micro focus International plc successfully completed the merger of its wholly owned subsidiary with Seattle SpinCo, Inc., which holds the software business segment (“HPE Software”) of Hewlett Packard Enterprise Company (“HPE”)11,900 people (October 31, 2019; 12,100; October 31, 2018: 14,800 including 1,200 SUSE employees).

The Company is listed on the London Stock Exchange and its American Depositary ReceiptsShares are listed on the New York Stock Exchange.

Micro Focus hasIn 2018, the Company changed its financial year endyear-end from April 30 to October 31 and will reportreported 18-month financial statements running from May 1, 2017 to October 31, 2018. In addition to these interim financial statements, Micro Focus will report interim results for the six months and 12 months to April 30, 2018 and results for the 18-month period to October 31, 2018.

These unaudited consolidated interimThe Group Consolidated financial statements were authorized for issuance by the board of directors on January 26, 2018.February 8, 2021.

2.I Significant Accounting policies

A Basis of preparation

These condensed consolidated interimThe Consolidated financial statements forof the six months ended October 31, 2017 have been prepared in accordance with IAS 34, “Interim Financial Reporting”. The condensed consolidated interim financial statements should be read in conjunction with the Annual Report and Accounts for the year ended April 30, 2017 (which is accessible on the Company’s website), whichCompany have been prepared in accordance with International Financial Reporting Standards as issued by the International Accounting Standards Board (“IASB”) and, in accordance with international accounting standards in conformity with International Financial Reporting Standardsthe requirements of the Companies Act and in accordance with international financial reporting standards adopted pursuant to Regulation (EC) No 1606/2002 as it applies in the European Union (“IFRSs as adopted by the European Union (collectively ‘’IFRS’’EU”).

Re-classificationThe Consolidated financial statements have been prepared on a going concern basis under the historical cost convention. These financial statements have been prepared for a 12-month period as compared with a prior 12-month and 18-month reporting periods and therefore are not entirely comparable. The use of costs for Consolidated Statement of Comprehensive Income Presentationan 18-month reporting period is permitted under the UK Companies Act 2006.

As partThe preparation of financial statements in conformity with IFRS requires the completionuse of certain critical accounting estimates. It also requires management to exercise its judgement in the HPE Software transaction,process of applying the Company’s sharesGroup’s accounting policies. The areas involving a higher degree of judgement or complexity, or areas where assumptions and ADRs were listed onestimates are significant to the LSEconsolidated financial statements are disclosed below in II, “Critical accounting estimates, assumptions and NYSE respectively.  Injudgements”.

The principal accounting policies adopted by the Group in the preparation of the Group’s April 2017 Annual Report and Accounts and as part of the regulatory filing process in the United States the Group has reviewed its consolidated statement of comprehensive income presentation and decided to re-classify both amortization of product development costs and amortization of acquired technology intangibles from research and development expenses to cost of sales. This presentation complies with IFRS and, in the view of the Company’s Audit Committee, provides investors with a consolidated statement of comprehensive income presentation that is more comparable with other software companies listed on both markets. The six months ended October 31, 2016 comparative has also been re-classified and additional detail is provided on the face of the consolidated statement of comprehensive income in the period.

3. Accounting policiesfinancial statements are set out below.

Other than as described below and income tax expense which is recognized using an estimate of the weighted average effective annual income tax rate for the full year; theThe accounting policies adopted are consistent with those of the Annual Report and Accountson Form 20-F for the 12 months ended October 31, 2019 apart from standards, amendments to or interpretations of published standards adopted during the year, ended April 30, 2017, as describedset out in those financial statements, which is accessible on the Company’s website.Accounting Policy W “Adoption of new and revised IFRS”.

(a)The following standards, interpretations and amendments to existing standards are now effective and have been adopted by the Group:
Going concern

·Amendments to IAS 7, “StatementIn line with IAS 1 ‘Presentation of financial statements’ and the FRC guidance on “risk management, internal control and related financial and business reporting”, management has taken into account available information about the future for a period of at least, but not limited to, 12 months from the date of approval of cash flows” on disclosure initiative are effective on periods beginning on or after January 1, 2017 (not yet endorsed by the EU). This amendment introduces an additional disclosure that will enable users of financial statements to evaluate changes in liabilities arising from financing activities and is part of the IASB’s Disclosure Initiative, which continues to explore how financial statement disclosure can be improved.

·Amendments to IAS 12, ‘Income taxes’ on recognition of deferred tax assets for unrealized losses are effective on periods beginning on or after January 1, 2017 (not yet endorsed by the EU). These amendments clarify how to account for deferred tax assets originated from unrealized loss in debt instruments measured at fair value.

The disclosure requirements of Amendments to IAS 7, ‘Statement of cash flows’ have been included in the consolidated interim financial statements. The Amendments to IAS 12, ‘Income taxes’ do not have a material impact to the consolidated interim financial statements.

F-7

Notes to the consolidated interim financial statements (unaudited)

3. Accounting policies (continued)

(b)The following standards, interpretations and amendments to existing standards are not yet effective and have not been adopted early by the Group:

·IFRS 15 ‘Revenue from contracts with customers’ establishes the principles that an entity shall apply to report useful information to users of financial statements about the nature, amount, timing, and uncertainty of revenue and cash flows arising from a contract with a customer. Application of the standard is mandatory for annual reporting periods starting from January 1, 2018 onwards. Earlier application is permitted. The standard replaces IAS 18 ‘Revenue’ and IAS 11 ‘Construction contracts’ and related interpretations.

·IFRS 9 ‘Financial instruments’. This standard replaces the guidance in IAS 39 and applies to periods beginning on or after January 1, 2018. It includes requirements on the classification and measurement of financial assets and liabilities; it also includes an expected credit losses model that replaces the current incurred loss impairment model.

·Amendment to IFRS 15, ‘Revenue from contracts with customers’. These amendments comprise guidance on performance obligations, accounting for licences of intellectual property and the principal versus agent assessment on periods beginning on or after January 1, 2018.

·Amendments to IFRS 2, ‘Share based payments’ on clarifying how to account for certain types of share based payment transactions are effective on periods beginning on or after January 1, 2018 (not yet endorsed by the EU). These amendments clarify the measurement basis for cash-settled share-based payments and the accounting for modifications that change an award from cash-settled to equity-settled. It also introduces an exception to the principles in IFRS 2 that will require an award to be treated as if it was wholly equity-settled, where an employer is obliged to withhold an amount for the employee’s tax obligation associated with a share based payment and pay that amount to the tax authority.

·IFRS 16, ‘Leases’ addresses the definition of a lease, recognition and measurement of leases and establishes principles for reporting useful information to users of financial statements about the leasing activities of both lessees and lessors. A key change arising from IFRS 16 is that most operating leases will be accounted for on balance sheet for lessees. The standard replaces IAS 17 ‘Leases’, and related interpretations. The standard is effective for annual periods beginning on or after January 1, 2019 (not yet endorsed by the EU) and earlier application is permitted if the entity is adopting IFRS 15 ‘Revenue from contracts with customers’ at the same time.

·Annual improvements 2014–2016, relating to amendments to IFRS 1, ‘First-time adoption of IFRS’ and IAS 28, ’Investments in associates and joint ventures’ regarding measuring an associate or joint venture at fair value applies for periods beginning on or after January 1, 2018 (not yet endorsed by the EU).

·IFRIC 22, ‘Foreign currency transactions and advance consideration’ addresses foreign currency transactions or parts of transactions where there is consideration that is denominated or priced in a foreign currency. The interpretation provides guidance for when a single payment/receipt is made as well as for situations where multiple payments/receipts are made, effective for annual periods beginning on or after January 1, 2018 (not yet endorsed by the EU).

·IFRIC 23, ‘Uncertainty over Income Tax Treatments’ clarifies how to apply the recognition and measurement requirements in IAS 12 when there is uncertainty over income tax treatments. In such a circumstance, an entity shall recognize and measure its current or deferred tax asset or liability applying IAS 12 based on taxable profit (tax loss), tax bases, unused tax losses, unused tax credits, and tax rates determined applying this interpretation. This interpretation is effective for annual periods beginning on or after January 1, 2019, subject to EU endorsement.

For IFRS 9, IFRS 16, IFRIC 22 and IFRIC 23, it is too early to determine how significant the effect on reported results and financial position will be. For IFRS 9 and IFRS 16, the Group is in the process of assessing the impact that the application of these standards will have on the Group’s financial statements. The impact of IFRS 15 is discussed below. The impact of the other standards, amendments and interpretations listed above will not have a material impact on the consolidated financial statements.

Impact of IFRS 15 ‘Revenue from contracts with customers’

On May 28, 2014, the IASB issued IFRS 15 ‘Revenue from Contracts with Customers’. The new revenue recognition standard will be effective for the Group starting November 1, 2018, following the announcement of the new year-end date. We do not plan to adopt IFRS 15 early. The standard permits two possible transition methods for the adoption of the new guidance:

·Retrospectively to each prior reporting period presented in accordance with IAS 8 “Accounting Policies, Changes in Accounting Estimates and Errors”, or

·Retrospectively with the cumulative effect of initially applying the standard recognized on the date of the initial application (cumulative catch-up approach).

F-8

Notes to the consolidated interim financial statements (unaudited)

3. Accounting policies (continued)

We currently plan to adopt the new standard using the cumulative catch-up approach. We are in the process of assessing the impact developing our future IFRS 15 revenue recognition policies and adjusting the relevant business processes to adopt these new policies. We have established a project across Micro Focus’ business to review the impacts of IFRS 15 and as part of this effort, the most notable difference to date is in relation to certain incremental costs of obtaining a contract. IFRS 15 requires the capitalization and amortization of certain in-scope sales commissions and third party costs over the estimated customer life. An evaluation study is underway to determine the potential impact on the consolidated financial statements inwhen assessing the year of adoption. There will be no impactGroup’s ability to cash flows.continue as a going concern. This assessment covers the period to February 2022, which is consistent with the FRC guidance.

IFRS 15 may also changeItem 5.A and Item 5.B includes information on our Group financial results, cash flow and net debt, and the way we allocate a transaction price to individual performance obligations which can impact the classification and timing of revenues. Further analysis of the requirements is currently being undertaken to understand the possible impact, if any.balance sheet position.

In additionmaking this assessment, the directors considered the Group’s liquidity and solvency position. Whilst the Group has quarterly instalment payments due and, dependent on leverage, may be subject to an excess cash sweep against its external borrowing in the period to February 2022 the Group has no term loans maturing until June 2024 (see note 8 “Borrowings” for an analysis of borrowing maturity and additional details on repayment requirements). The Revolving Facility was undrawn at October 31, 2020 and the Group had $737.2 million of cash balances at October 31, 2020 providing total liquidity of $1,087.2 million. The Group’s Revolving Facility is subject to a net leverage covenant when it is more than 35% drawn at the quarter end (see note 10 “Financial risk management and instruments” for additional details). Under the Group’s forecasts the Revolving Facility is not forecast to be drawn in the period to February 2022 and therefore no covenant tests are expected to apply.

Consolidated financial statements and notes
Summary of significant accounting policies continued

The Group manages solvency and liquidity as part of its budgeting and performance management. The Group’s forecasting and planning cycle consists of a budget and a long-range plan which are used to generate income statement and cash flow projections. The cash flow projections also forecast the headroom on the Group’s undrawn Revolving Facility and expected net leverage. Actual and forecast liquidity are reviewed at least weekly by the Group’s working capital management group which reports to the effectsChief Financial Officer.

Also in assessing liquidity, the board considered the reported net current liability position of $246.5 million at October 31, 2020. This is the result of $981.4 million of advance billing for services which is required to be recognised as a contract liability. The cost of delivering these services is fully included in the Group’s forecasting and sensitivities.

COVID-19 and sensitivity
In assessing going concern the Group has estimated the financial impact of severe but plausible scenarios, which take into account the Group’s principal risks, impacting both revenue and Adjusted EBITDA, including a greater than forecast level of exceptional expenditure to complete the Group’s IT implementation being incurred. The impact of COVID-19 on ourGroup’s cash flow in the current year has been limited however the severe but plausible scenarios reflect a wider macro-economic impact from COVID-19 continuing for the entire 12-month going concern assessment period to February 2022. This stress testing confirmed that existing projected cash flows and cash management activities provide us with significant headroom over the going concern assessment period. In addition under the severe but plausible scenarios, there is no point at which the Group would likely need to draw upon the Revolving Facility in the period to February 2022 and therefore no covenant test would be expected to apply.

Conclusion
Having performed the assessments discussed above, the directors considered it appropriate to adopt the going concern basis of accounting when preparing the Consolidated financial statements. This assessment covers the period to February 2022, which is consistent with the FRC guidance.

B Consolidation
The financial statements of the Group comprise the financial statements of the Company and entities controlled by the Company and its subsidiaries prepared at the consolidated statement of financial position date.

Subsidiaries
Subsidiaries are entities controlled by the Group. The Group has control over an entity where the Group is exposed to, or has rights to, variable returns from its involvement within the entity and it has the power over the entity to effect those returns. The existence and effect of potential voting rights that are currently exercisable or convertible are considered when assessing control. Control is presumed to exist when the Group owns more than half of the voting rights (which does not always equal percentage ownership) unless it can be demonstrated that ownership does not constitute control. The results of subsidiaries are consolidated from the date on which control passes to the Group. The results of disposed subsidiaries are consolidated up to the date on which control passes from the Group.

The purchase method of accounting is used to account for the acquisition of subsidiaries by the Group. The cost of acquisition is measured as the fair value of the assets given, equity instruments issued and liabilities incurred or assumed at the date of exchange, with costs directly attributable to the acquisition being expensed. Identifiable assets acquired and liabilities and contingent liabilities assumed in a business combination are measured initially at their fair values at the acquisition date, irrespective of the extent of any non-controlling interest. The excess of the cost of acquisition over the fair value of the Group’s share of the identifiable net assets acquired is recorded as goodwill.

Where new information is obtained within the “measurement period” (defined as the earlier of the period until which the Group receives the information it was seeking about facts and circumstances that existed as of the acquisition date or learns that more information is not obtainable, or one year from the acquisition date) about facts and circumstances that existed as at the acquisition date and, if known, would have affected the measurement of the amounts recognized as of that date, the Group recognizes these adjustments to the acquisition balance sheet with an equivalent offsetting adjustment to goodwill. Where new information is obtained after this measurement period has closed, this is reflected in the post-acquisition period.

For partly owned subsidiaries, the allocation of net assets and net earnings to outside shareholders is shown in the line “Attributable to non-controlling interests” on the face of the consolidated statement of comprehensive income we expect changesand the consolidated statement of financial position.

Inter-company transactions, balances and unrealised gains on transactions between Group companies are eliminated. Accounting policies of subsidiaries have been changed where necessary to ensure consistency with the policies adopted by the Group.

Consolidated financial statements and notes
Summary of significant accounting policies continued

B Consolidation continued
During the 12-month period ended October 31, 2020, the Group acquired the minority interest remaining in Novell Japan Ltd and as a result held a 100% interest at October 31, 2020. At October 31, 2019 the Group had an 84.24% (2018: 81.05%) interest in Novell Japan Ltd which gave rise to the minority interest reported in these financial statements (note 28 “Non-controlling interests”).

C Assets held for sale and discontinued operations
A Non-current asset (or disposal group) is classified as held for sale if the Group will recover the carrying amount principally through a sale transaction rather than through continuing use. A Non-current asset (or disposal group) classified as held for sale is measured at the lower of its carrying amount and fair value less costs to sell. If the asset (or disposal group) is acquired as part of a business combination it is initially measured at fair value less costs to sell. Assets and liabilities of disposal groups classified as held for sale are shown separately on the face of the balance sheet.

The results of discontinued operations are shown as a single amount on the face of the Consolidated statement of comprehensive income comprising the post-tax profit or loss of discontinued operations and the post-tax gain or loss recognized either on measurement to fair value less costs to sell or on the disposal of the discontinued operation. The Consolidated statement of cash flows has been presented including the discontinued operations.

D Revenue recognition
The Group follows the principle-based five-step model in IFRS 15 and recognizes revenue on transfer of control of promised goods or services to customer when, or as the performance obligation is satisfied at an amount that reflects the consideration, which the Group expects to be entitled in exchange for those goods, or services. Customer contracts can include combinations of goods and services, which are generally capable of being distinct and accounted for as separate performance obligations. Typically, a license deal includes support, a separate performance obligation consisting of: call in assistance and when-and-if available updates. The right to get assistance and updates is not mandatory to use the license. Contracts may also include professional services, which primarily comprise installation, implementation, configuration, advisory services and staff augmentation; these services are available both from the Group and other external service providers. All software is considered off-the-shelf and most services make use of existing configuration functionality and do not modify or customize the source code within the products, nor do they create custom software. The professional service personalize the software to the customer’s requirements and preferences. Customers can benefit from both the software on its own and the subsequent services, individually and together. On this basis, the Group concludes that services are typically distinct from licenses and constitute a separate performance obligation, although this is also assessed on an individual contract basis.

Revenue is allocated to the various performance obligations on a relative stand-alone selling price (“SSP”) basis.

On an on-going basis, the Group utilizes available data points based on relevant historical transactions, to establish the observable stand-alone selling prices to be used in allocating transaction consideration. For observable stand-alone sales a reasonable range of prices will be determined to represent the stand-alone selling price of that performance obligation. Given the highly variable selling price of licenses, the Group has not established SSP for licenses. When SSP is established for the undelivered performance obligations (typically maintenance and professional services), the residual approach is used to allocate the transaction price to the delivered licenses.

For performance obligations where observable stand-alone sales are not available, SSP will be estimated using the following methods in the order set out below:

- Market price
- Expected cost plus a margin
- Residual approach

The Group recognizes revenues from sales of software licences (including Intellectual Property and Patent rights) to end-users, resellers and Independent Software Vendors (“ISV”), software maintenance,  Software as a Service (“SaaS”), technical support, training and professional services. ISV revenue includes fees based on end usage of ISV applications that have our software embedded in their applications.

Consolidated financial statements and notes
Summary of significant accounting policies continued

D Revenue recognition continued

Software licence revenue is the sale of right to use the software on customer premises and is recognized at a point in time when the software is made available to the customer and/or reseller (i.e. when control of the asset is transferred and the performance obligation is satisfied). Licence revenue is considered right to use as the customer receives the right to download and use the software. The Group enters into licence verification arrangements, for customers who are not in compliance with their contractual licence and/or maintenance terms, by agreeing a one-off settlement fee. If more than one performance obligation can be identified in the contract, revenue is allocated to each performance obligation, otherwise the Group policy is to recognize as licence revenue. The allocation of revenue does not impact the timing of revenue recognition in these deals, given the performance obligation(s) have already been fulfilled, but will impact the presentation of revenue recognized during the period, (as licence or licence and maintenance).

For SaaS arrangements where customers access the functionality of a hosted software over the contract period without taking possession of the software, and performance obligations are provided evenly over a defined term, the Group recognizes revenue over the period in which the subscriptions are provided as the service is delivered, generally on a straight-line basis.

In SaaS arrangements where the customer has the contractual right to take possession of the software at any time during the contractual period without significant penalty and the customer can operate, or contract with another vendor to operate the software, the Group evaluates whether the arrangement includes the sale of a software licence. In SaaS arrangements where software licences are sold, licence revenue is generally recognized at a point in time when control of the software is transferred to the customer.

Maintenance revenue is recognized on a straight-line basis over the term of the contract, which in most cases is one year.

For time and material-based professional services contracts, the Group recognizes revenue as services are rendered. The Group recognizes revenue from fixed-price professional services contracts as work progresses over the contract period on a percentage of completion basis, as determined by the percentage of labor costs incurred to date compared to the total estimated labor costs of a contract. Estimates of total project costs for fixed-price contracts are regularly reassessed during the life of a contract. Service costs are expensed as incurred; amounts collected prior to satisfying the above conditions are shown as contract liabilities.

Where consideration is received in advance of satisfying the performance obligation and the performance obligation will be satisfied within one year of receipt of the consideration no significant financing component is recognized. The majority of the Group’s SaaS and maintenance contracts are for periods of one year. In addition, for multi-year contracts where consideration is received in advance, the purpose of the upfront billing is not for the Group to obtain financing, rather to avoid the administrative tasks of subsequent invoicing, cash collection and risk of cancellation.

Rebates paid to resellers as part of a contracted program are accounted for as a reduction of the transaction price and netted against revenue where the rebate paid is based on the achievement of sales targets made by the partner. If the Group receives an identifiable good or service from the reseller that is separable from the sales transaction and for which fair value can be reasonably estimated, the Group accounts for the purchase of the good or service in the same way that it accounts for other purchases from suppliers.

Revenue recognition policy in the 18-month period ended October 31, 2018
The Group recognized revenues from sales of software Licences (including Intellectual Property and Patent rights), to end-users, resellers and Independent Software Vendors (“ISV”), software maintenance, subscription, Software as a Service (“SaaS”), technical support, training and professional services, upon firm evidence of an arrangement, delivery of the software and determination that collection of a fixed or determinable fee is reasonably assured. ISV revenue included fees based on end usage of ISV applications that have our software embedded in their applications. When the fees for software upgrades and enhancements, maintenance, consulting and training were bundled with the Licence fee, they were unbundled using the Group’s objective evidence of the fair value of the elements represented by the Group’s customary pricing for each element in separate transactions. If evidence of fair value existed for all undelivered elements and there was no such evidence of fair value established for delivered elements, revenue was first allocated to the elements where fair value has been established and the residual amount was allocated to the delivered elements. If evidence of fair value for any undelivered element of the arrangement did not exist, all revenue from the arrangement was deferred until such time that there was evidence of delivery.

If the arrangement included acceptance criteria, revenue was not recognized until the Group could objectively demonstrate that the acceptance criteria have been met, or the acceptance period lapses, whichever was earlier.

Consolidated financial statements and notes
Summary of significant accounting policies continued

D Revenue recognition continued
The Group recognized Licence revenue derived from sales to resellers upon delivery to resellers, provided that all other revenue recognition criteria was met; otherwise revenue was deferred and recognized upon delivery of the product to the end-user. Where the Group sold access to a Licence for a specified period of time and collection of a fixed or determinable fee was reasonably assured, Licence revenue was recognized upon delivery, except in instances where future substantive upgrades or similar performance obligations were committed to. Where future performance obligations were specified in the Licence agreement, and fair value could be attributed to those upgrades, revenue for the future performance obligations was deferred and recognized on the basis of the fair value of the upgrades in relation to the total estimated sales value of all items covered by the Licence agreement. Where the future performance obligations were unspecified in the Licence agreement, revenue was deferred and recognized rateably over the specified period.

For Subscription revenue where access and performance obligations were provided evenly over a defined term, the revenue was deferred and recognized rateably over the specified period.

The Group recognized revenue for SaaS arrangements as the service was delivered, generally on a straight-line basis, over the contractual period of performance. In SaaS arrangements, the Group considered the rights provided to the customer (e.g. whether the customer has the contractual right to take possession of the software at any time during the contractual period without significant penalty, and the feasibility of the customer to operate or contract with another vendor to operate the software) in determining whether the arrangement included the sale of a software licence. In SaaS arrangements where software licences were sold, licence revenue was generally recognized according to whether perpetual or term licences are sold, when all other revenue recognition criteria was satisfied.

Maintenance revenue was recognized on a straight-line basis over the term of the contract, which in most cases was one year.

For time and material-based professional services contracts, the Group recognized revenue as services are rendered and recognized costs as they were incurred. The Group recognized revenue from fixed-price professional services contracts as work progressed over the contract period on a proportional performance basis, as determined by the percentage of labour costs incurred to date compared to the total estimated labour costs of a contract. Estimates of total project costs for fixed-price contracts were regularly reassessed during the life of a contract. Amounts collected prior to satisfying the above revenue recognition criteria were included in deferred income.

Rebates paid to partners as part of a contracted program were netted against revenue where the rebate paid was based on the achievement of sales targets made by the partner, unless the Company received an identifiable good or service from the partner that was separable from the sales transaction and for which the Group could reasonably estimate fair value.

E Contract-related costs
The Group capitalizes the costs of obtaining a customer contract when they are incremental and, if expected to be recovered, they are amortized over the customer life or pattern of revenue for the related contract.

Normally sales commissions paid for customer contract renewals are not commensurate with the commissions paid for new contracts.  It follows that the commissions paid for new contracts also relate to expected future renewals of these contracts. Accordingly, the Group amortizes sales commissions paid for new customer contracts on a straight-line basis over the expected customer life, based on expected renewal frequency. The current average customer life is five years. If the expected amortization period is one year or less the costs are expensed when incurred.

Amortization of the capitalized costs of obtaining customer contracts is classified as sales and marketing expense. Capitalized costs from customer contracts are classified as non-financial assets in our statement of financial position.

F Cost of sales
Cost of sales includes costs related to the amortization of product development costs, amortization of acquired technology intangibles, costs of the consulting business and helpline support and royalties payable to third parties.

G Segment reporting
In accordance with IFRS 8, “Operating Segments”, the Group has derived the information for its segmental reporting using the information used by the Chief Operating Decision Maker (“CODM”), defined as the Operating Committee. The segmental reporting is consistent with those used in internal management reporting and the measure used by the Operating Committee is Adjusted EBITDA as set out in note 1 “Segmental reporting”.

Consolidated financial statements and notes
Summary of significant accounting policies continued

H Exceptional items
Exceptional items are those significant items, which are separately disclosed by virtue of their size, nature or incidence to enable a full understanding of the Group’s financial performance. In setting the policy for exceptional items, judgement is required to determine what the Group defines as “exceptional”. The Group considers whether an item is exceptional in nature if it is material or non-recurring or does not reflect the underlying performance of the business. Exceptional items are allocated to the financial statement lines (for example: cost of sales) in the Consolidated statement of comprehensive income based on the nature and function of the costs, for example restructuring costs related to employees are classified where their original employment costs are recorded.

Management of the Group first evaluates Group strategic projects such as acquisitions, divestitures and integration activities, Group restructuring and other one-off events such as restructuring programmes. In determining whether an event or transaction is exceptional, management of the Group considers quantitative and qualitative factors such as its expected size, precedent for similar items and the commercial context for the particular transaction, while ensuring consistent treatment between favourable and unfavourable transactions impacting revenue, income and expense. Examples of transactions which may be considered of an exceptional nature include major restructuring programmes, cost of acquisitions, the cost of integrating acquired businesses, gains on the disposal of discontinued operations or impairment charges recognized against goodwill.

I Employee benefit costs

a) Pension obligations and long-term pension assets
The Group operates various pension schemes, including both defined contribution and defined benefit pension plans. A defined contribution plan is a pension plan under which the Group pays fixed contributions into a separate entity. The Group has no legal or constructive obligations to pay further contributions if the fund does not hold sufficient assets to pay all employees the benefits relating to employee service in the current and prior periods. A defined benefit plan is a pension plan that is not a defined contribution plan.

For defined contribution plans, the Group pays contributions to publicly or privately administered pension insurance plans on a mandatory, contractual or voluntary basis. The Group has no further payment obligations once the contributions have been paid. The contributions are recognized as an employee benefit expense when they are due. Prepaid contributions are recognized as an asset to the extent that a cash refund or a reduction in the future payments is available.

Typically, defined benefit plans define an amount of pension benefit that an employee will receive on retirement or termination. This is usually dependent on one or more factors such as age, years of service and compensation

The liability recognized in the consolidated statement of financial position (in particular duein respect of defined benefit pension plans is the present value of the defined benefit obligation at the end of the reporting period less the fair value of plan assets. Certain long-term pension assets do not meet the definition of plan assets as they have not been pledged to the recognitionplan and are subject to the creditors of contract assets/contract liabilities, the differentiation between contractGroup. Such assets are recorded separately in the consolidated statement of financial position as long-term pension assets. The defined benefit obligation is calculated annually by independent actuaries using the projected unit credit method. The present value of the defined benefit obligation is determined by discounting the estimated future cash outflows using interest rates of high-quality corporate bonds that have terms to mature approximating to the terms of the related pension obligation.

Actuarial gains and trade receivables, the capitalization and amortization of costs of obtaining a contract and an impact in retained earningslosses arising from the initial adoption of IFRS 15)experience adjustments and changes in actuarial assumptions are charged or credited to the quantitative and qualitative disclosure included.

We will continue to assess all of the impacts that the application of IFRS 15 will have on our consolidated financial statementsequity in other comprehensive income in the period in which they arise. Past-service costs are recognized immediately in income.

The current service cost of initial application, which will also significantly depend on our business and GTM strategythe defined benefit plan, recognized in the 18- month period ended October 31, 2018. Consolidated statement of comprehensive income in employee benefit expense, except where included in the cost of an asset, reflects the increase in the defined benefit obligation resulting from employee service in the current year, benefit changes, curtailments and settlements.

The impacts, if material, will be disclosed, including statements on if and how we apply anynet interest cost is calculated by applying the discount rate to the net balance of the practical expedients availabledefined benefit obligation and the fair value of plan assets. This cost is included in finance costs in the standard.Consolidated statement of comprehensive income.

4.Long-term pension assets relate to the reimbursement right under insurance policies held in the Group with guaranteed interest rates that do not meet the definition of a qualifying insurance policy as they have not been pledged to the plan and are subject to the creditors of the Group. Such reimbursement rights assets are recorded in the Consolidated statement of financial position as long-term pension assets. These contractual arrangements are treated as financial assets measured at fair value through other comprehensive income. Gains and losses on long-term pension assets are charged or credited to equity in other comprehensive income in the period in which they arise.

Consolidated financial statements and notes
Summary of significant accounting policies continued

b) Share-based compensation
The Group operated various equity-settled, share-based compensation plans during the period.

The fair value of the employee services received in exchange for the grant of the shares or options is recognized as an expense. The total amount to be expensed over the vesting period is determined by reference to the fair value of the shares or options granted. Non-market vesting conditions are included in assumptions about the number of options that are expected to become exercisable. Market vesting conditions are taken into account when determining the fair value of the options at grant date. At each Consolidated statement of financial position date, the Group revises its estimates of the number of options that are expected to become exercisable. It recognizes the impact of the revision of original estimates, if any, in the Consolidated statement of comprehensive income, and a corresponding adjustment to equity over the current reporting period.

The shares are recognized when the options are exercised and the proceeds received allocated between ordinary shares and share premium account. Fair value is measured using the Black-Scholes pricing model. The expected life used in the model has been adjusted, based on management’s best estimate for the effects of non-transferability, exercise restrictions and behavioural considerations. The Additional Share Grants have been valued using the Monte-Carlo simulation pricing model.

When the terms of an equity-settled award are modified, the minimum expense recognized is the grant date fair value of the unmodified award, provided the original terms of the award are met. An additional expense, measured as at the date of modification, is recognized for any modification that increases the total fair value of the share-based payment transaction, or is otherwise beneficial to the employee.

The social security contributions payable in connection with the grant of the share options is considered an integral part of the grant itself, and the charge is treated as a cash-settled transaction.

J Foreign currency translation

a) Functional and presentationalpresentation currency

The presentation currency of the Group is US dollars. Items included in the financial statements of each of the Group’s entities are measured in the functional currency of each entity.

b) Transactions and balances
Foreign currency transactions are translated into the functional currency using the exchange rates prevailing at the dates of the transactions. Foreign exchange gains and losses resulting from the settlement of such transactions and from the translation at year-end exchange rates of monetary assets and liabilities denominated in foreign currencies are recognized in the Consolidated statement of comprehensive income within administrative expenses.

Non-monetary items that are measured in terms of historical costs in a foreign currency are translated using the exchange rates as at the dates of the initial transactions. Any goodwill arising on the acquisition of a foreign operation and any fair value adjustments (including purchased intangible assets) to the carrying amounts of assets and liabilities arising on the acquisition are treated as assets and liabilities of the foreign operation and translated at the closing rate.

On consolidation, the results and financial position of all the Group entities that have a functional currency different from the presentation currency are translated into the presentation currency as follows:


i)
Assets and liabilities for each Consolidated statement of financial position presented are translated at the closing rate at the date of that Consolidated statement of financial position;

ii)
Income and expenses for each Consolidated statement of comprehensive income item are translated at average exchange rates (unless this average is not a reasonable approximation of the cumulative effect of the rates prevailing on the transaction dates, in which case income and expenses are translated at the dates of the transactions); and

iii)
All resulting exchange differences are recognized as a separate component of equity.

On consolidation, exchange differences arising from the translation of the net investment in foreign entities are taken to other comprehensive income.

Goodwill arising before 1 May 2004 is treated as an asset of the Company and expressed in the Company’s functional currency.

Consolidated financial statements and notes
Summary of significant accounting policies continued

c) Exchange rates
The most important foreign currencies for the Group are: Pounds Sterling, the Euro, Canadian Dollar, Israeli Shekel and Japanese Yen and in the 12 months ended October 31, 2020 also the Indian Rupee and Chinese Yuan. The exchange rates used are as follows:

  
12 months ended
October 31, 2020
  
12 months ended
October 31, 2019
  
18 months ended
October 31, 2018
 
  Average  Closing  Average  Closing  Average  Closing 
£1 = $  1.28   1.30   
1.27
   
1.29
   
1.33
   
1.27
 
€1 = $  1.13   1.17   
1.12
   
1.12
   
1.18
   
1.14
 
C$ = $  0.74   0.75   
0.75
   
0.76
   
0.78
   
0.76
 
ILS = $  0.29   0.29   
0.28
   
0.28
   
0.28
   
0.27
 
INR = $  0.01   0.01   
n/a
   
n/a
   
n/a
   
n/a
 
CNY = $  0.14   0.15   
n/a
   
n/a
   
n/a
   
n/a
 
100 JPY = $  0.93   0.96   
1.10
   
1.08
   
0.90
   
0.92
 

K Intangible assets

a) Goodwill
Goodwill represents the excess of the cost of an acquisition over the fair value of the net identifiable assets of the acquired subsidiary at the date of acquisition. Goodwill on acquisitions of subsidiaries is included in intangible assets. Goodwill is tested annually for impairment or whenever there is an indication that the asset may be impaired. Goodwill is carried at cost less accumulated impairment losses. Gains and losses on the disposal of an entity include the carrying amount of goodwill relating to the entity sold. Goodwill is allocated to cash-generating units for the purpose of impairment testing. Each of those cash-generating units represents the Group’s investment in each area of operation by each primary reporting segment.

Where goodwill has been allocated to a cash-generating unit (CGU) and part of the operation within that unit is classified as held for sale, the goodwill associated with the held-for-sale operation is measured based on the relative values of the held-for-sale operation and the portion of the cash-generating unit retained.

b) Computer software
Computer software licenses are capitalized on the basis of the costs incurred to acquire and bring into use the specific software. These costs are amortized using the straight-line method over their estimated useful lives of three to seven years for perpetual license or based on the agreement for term license.

c) Research and development
Research expenditure is recognized as an expense as incurred in the Consolidated statement of comprehensive income in research and development expenses. Costs incurred on product development projects relating to the developing of new computer software programmes and significant enhancement of existing computer software programmes are recognized as intangible assets when it is probable that the project will be a success, considering its commercial and technological feasibility, and costs can be measured reliably. Only direct costs are capitalized which are the software development employee costs and third-party contractor costs. Product development costs previously recognized as an expense are not recognized as an asset in a subsequent period.

Product development costs are amortized from the commencement of the commercial production of the product on a straight-line basis over the period of its expected benefit, typically being three years, and are included in costs of sales in the consolidated statement of comprehensive income.

Consolidated financial statements and notes
Summary of significant accounting policies continued

K Intangible assets continued

d) Intangible assets – arising on business combinations
Other intangible assets that are acquired by the Group as part of a business combination are recognized at their fair value at the date of acquisition, and are subsequently amortized. Amortization is charged to the Consolidated statement of comprehensive income on a straight-line basis over the estimated useful life of each intangible asset. Intangible assets are amortized from the date they are available for use. The estimated useful lives, determined at the acquisition date, will vary for each category of asset acquired and to date are as follows:

Purchased software
Term licence agreement based, generally three to seven years
Technology
Three to 12 years
Trade names
Three to 20 years
Customer relationships
Two to 15 years

Amortization of purchased software intangibles is included in administrative expenses, amortization of purchased technology intangibles is included in cost of sales and amortization of acquired purchased trade names and customer relationships are included in selling and distribution costs in the Consolidated statement of comprehensive income.

L Property, plant and equipment
All property, plant and equipment is stated at historical cost less accumulated depreciation and impairment. Historical cost includes expenditure that is directly attributable to the acquisition of the items. Subsequent costs are included in the asset’s carrying amount or recognized as a separate asset, as appropriate, only when it is probable that future economic benefits associated with the item will flow to the Group and the cost of the item can be measured reliably. All other repairs and maintenance expenditures are charged to the consolidated statement of comprehensive income during the financial year in which they are incurred. Depreciation is calculated using the straight-line method to write off the cost of each asset to its residual value over its estimated useful life as follows:

Buildings
30 years
Leasehold improvements
Three to 10 years (not exceeding the remaining lease period)
Fixtures and fittings
Two to seven years
Computer equipment
One to five years

Freehold land is not depreciated. The assets’ residual values and useful lives are reviewed, and adjusted if appropriate, at each Consolidated statement of financial position date. An asset’s carrying amount is written down immediately to its recoverable amount if the asset’s carrying amount is greater than its estimated recoverable amount. Gains and losses on disposals are determined by comparing the disposal proceeds with the carrying amount and are included in the Consolidated statement of comprehensive income.

Property held for sale is measured at the lower of its carrying amount or estimated fair value less costs to sell.

M Impairment of non-financial assets
Assets that have an indefinite useful life are not subject to amortization and are tested annually for impairment or whenever there is an indication that the asset may be impaired. Assets that are subject to amortization are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. An impairment loss is recognized for the amount by which the asset’s carrying amount exceeds its recoverable amount. The recoverable amount is the higher of an asset’s fair value less costs of disposal and value in use. For the purposes of assessing impairment, assets are grouped at the lowest levels for which there are separately identifiable cash flows being cash-generating units. Any non-financial assets other than goodwill which have suffered impairment are reviewed for possible reversal of the impairment at each reporting date. Assets that are subject to amortization and depreciation are also reviewed for any possible impairment at each reporting date.

N Trade receivables
Trade receivables are initially recognized at fair value and subsequently measured at amortized cost less provisions for impairment based upon an expected credit loss methodology. The Group applies the IFRS 9 simplified approach to measuring expected credit losses which uses a lifetime expected loss allowance for all trade receivables. A provision of the lifetime expected credit loss is established upon initial recognition of the underlying asset and are calculated using historical account payment profiles along with historical credit losses experienced. The loss allowance is adjusted for forward-looking factors specific to the debtor and the economic environment. The amount of the provision is the difference between the asset’s carrying amount and the present value of the probability weighted estimated future cash flows, discounted at the effective interest rate. The amount of the provision is recognized in the Consolidated statement of comprehensive income.

Consolidated financial statements and notes
Summary of significant accounting policies continued

O Cash and cash equivalents
Cash and cash equivalents includes cash in hand, deposits held at call with banks, other short-term highly liquid investments with original maturities of three months or less, and bank overdrafts. Bank overdrafts are shown within borrowings in current liabilities on the Consolidated statement of financial position.

P Borrowings
Borrowings are recognized initially at fair value, net of transaction costs incurred. Subsequent to initial recognition, interest bearing borrowings are stated at amortized cost with any difference between cost and redemption value being recognized in the Consolidated statement of comprehensive income over the period of borrowing on an effective interest basis.

Q Leases
As disclosed in W ‘Adoption of new and revised International Financial Reporting Standards’ below, the Group applied IFRS 16 “Leases” using the modified retrospective approach for the 12 months ended October 31, 2020 and therefore the comparative information has not been restated and continues to be reported under IAS 17 and IFRIC 4. The detailed accounting policies under IAS 17 and IFRIC 4 are disclosed separately; key differences between IFRS 16 and IAS 17 and IFRIC 4 are described in W ‘Adoption of new and revised International Financial Reporting Standards’.

Lease accounting policy under IFRS 16

As a lessee
When the Group leases an asset a ‘right-of-use asset’ is recognized for the leased item and a lease liability is recognized for any lease payments due over the lease term at the lease commencement date. The right-of-use asset is initially measured at cost, being the present value of the lease payments paid or payable, plus any initial direct costs incurred in entering the lease and less any lease incentives received.

Right-of-use assets are depreciated on a straight-line basis from the commencement date to the earlier of the end of the asset’s useful life or the end of the lease term. The lease term is the non-cancellable period of the lease plus any periods for which the Group is ‘reasonably certain’ to exercise any extension options (note 19 “Leases”). The useful life of the asset is determined in a manner consistent to that for owned property, plant and equipment described in L above. If right-of-use assets are considered to be impaired, the carrying value is reduced accordingly.

Lease liabilities are initially measured at the value of the lease payments that are not paid at the commencement date and are usually discounted using the incremental borrowing rates of the Group for the relevant portfolio (the rate implicit in the lease is used if it is readily determinable). Lease payments included in the lease liability include both fixed payments and in-substance fixed payments during the term of the lease.

After initial recognition, the lease liability is recorded at amortized cost using the effective interest method. It is re-measured when there is a change in future lease payments arising from a change in an index or rate (e.g. an inflation related increase) or if the Group’s assessment of the lease term changes; any change in the lease liability as a result of these changes also results in a corresponding change in the recorded right-of-use asset.

As a lessor
Where the Group is a lessor, it determines at inception whether the lease is a finance or an operating lease. When a lease transfers substantially all the risks and rewards of ownership of the underlying asset then the lease is a finance lease; otherwise, the lease is an operating lease.

Where the Group is an intermediate lessor, the interest in the head lease and the sub-lease is accounted for separately and the lease classification of a sub-lease is determined by reference to the right-of-use asset arising from the head lease.

Income from operating leases is recognized on a straight-line basis over the lease term. Income from finance leases is recognized in full at lease commencement.

Consolidated financial statements and notes
Summary of significant accounting policies continued

Lease policy in the prior periods under IAS 17 and IFRIC 4
A lease is classified at the inception date as a finance lease or an operating lease. A lease that transfers substantially all the risks and rewards incidental to ownership to the Group is classified as a finance lease.

Finance leases are capitalized at the commencement of the lease at the inception date fair value of the leased property or, if lower, at the present value of the minimum lease payments. Lease payments are apportioned between finance charges and reduction of the lease liability so as to achieve a constant rate of interest on the remaining balance of the liability. Finance charges are recognized in finance costs in the Consolidated statement of comprehensive income.

A leased asset is depreciated over the useful life of the asset. However, if there is no reasonable certainty that the Group will obtain ownership by the end of the lease term, the asset is depreciated over the shorter of the estimated useful life of the asset and the lease term.

An operating lease is a lease other than a finance lease. Operating lease payments are recognized as an operating expense in the statement of profit or loss on a straight-line basis over the lease term.

Operating sub-lease income is recorded as operating income on a straight-line basis over the sub-lease term.

R Taxation
Current and deferred tax are recognized in the Consolidated statement of comprehensive income, except when the tax relates to items charged or credited directly to equity, in which case the tax is also dealt with directly in equity.

Deferred income tax is provided in full, using the liability method, on temporary differences arising between the tax bases of assets and liabilities and their carrying amounts in the consolidated financial statements. However, if the deferred income tax arises from initial recognition of an asset or liability in a transaction other than a business combination that at the time of the transaction affects neither accounting nor taxable profit nor loss, it is not accounted for. Deferred tax liabilities are not recognized if they arise from the initial recognition of goodwill. Deferred income tax is determined using tax rates (and laws) that have been enacted or substantially enacted by the Consolidated statement of financial position date and are expected to apply when the related deferred income tax asset is realised, or the deferred income tax liability is settled. Deferred income tax assets are recognized to the extent that it is probable that future taxable profit will be available against which the temporary differences can be utilized.

Deferred income tax is provided on temporary differences arising on investments in subsidiaries, except where the timing of the reversal of the temporary difference is controlled by the Group and it is probable that the temporary difference will not reverse in the foreseeable future.

Deferred tax assets and liabilities are offset where there is a legally enforceable right to set off current tax assets against current tax liabilities and when they relate to income taxes levied by the same taxation authority and the Group intends to settle its current tax assets and liabilities on a net basis.

Current tax is recognized based on the amounts expected to be paid or recovered under the tax rates and laws that have been enacted or substantively enacted at the Consolidated statement of financial position date.

S Ordinary shares, share premium and dividend distribution
Incremental costs directly attributable to the issue of new shares or options are shown in equity as a deduction, net of tax, from the proceeds. Dividend distributions to the Company’s shareholders are recognized as a liability in the Group’s financial statements in the period in which the dividends are approved by the Company’s shareholders. Interim dividends are recognized when they are paid.

Consolidated financial statements and notes
Summary of significant accounting policies continued

T Derivative financial instruments and hedge accounting
Financial assets and liabilities are recognized in the Group’s Consolidated statement of financial position when the Group becomes a party to the contractual provision of the instrument. Trade receivables are non-interest bearing and are initially recognized at fair value and subsequently measured at amortized cost less provisions for impairment based upon an expected credit loss methodology. Trade payables are non-interest bearing and are stated at their fair value. Derivative financial instruments are only used for economic hedging purposes and not as speculative investments.

The Group uses derivative financial instruments, such as interest rate swaps, to hedge its interest rate risks. Such derivative financial instruments are initially recognized at fair value on the local currencydate on which the contract is entered into and are subsequently re-measured at fair value. Derivatives are carried as financial assets when the fair value is positive and as financial liabilities when the fair value is negative.

Non-derivative financial instruments, such as Euro borrowings, have also been designated as hedges for Net investments in foreign operations. Hedges of a net investment in a foreign operation are accounted for similarly to cash flow hedges.

Hedge accounting is permitted under certain circumstances provided the following criteria are met:

At inception of the hedge, the documentation must include the risk management objective and strategy for undertaking the hedge, identification of the hedging instrument, the hedged item, the nature of the risk being hedged and how the entity will assess the hedging instrument’s effectiveness. Such hedges are expected to be effective in achieving offsetting changes in cash flows and are assessed on an on-going basis to determine the level of effectiveness.

The measurement of effectiveness determines the accounting treatment. For effective results, changes in the fair value of the hedging instrument should be recognized in other comprehensive income, while any material ineffectiveness should be recognized in the statement of comprehensive income. If effectiveness testing is not satisfactorily completed, all fair value movements on the hedging instrument should be recorded in the Consolidated statement of comprehensive income. The IFRS 9 hedge accounting requirements are applicable to the interest swaps and net investment hedges that have been designated for hedge accounting.

Hedge accounting is ceased prospectively if the instrument expires or is sold, terminated or exercised; the hedge criteria are no longer met or the forecast transaction is no longer expected to occur.

U Provisions
Provisions for onerous contracts, property restoration costs, restructuring costs and legal claims are recognized when the Group has a present legal or constructive obligation as a result of past events; it is probable that an outflow of resources will be required to settle the obligation; and the amount has been reliably estimated. Provisions are not recognized for future operating losses.

Where there are a number of similar obligations, the likelihood that an outflow will be required in settlement is determined by considering the class of obligations as a whole. A provision is recognized even if the likelihood of an outflow with respect to any one item included in the same class of obligations may be small.

Provisions are measured at the present value of the expenditures expected to be required to settle the obligation using a pre-tax rate that reflects current market assessments of the time value of money and the risks specific to the obligation. The increase in the provision due to the passage of time is recognized as an interest expense.

V Contingent liabilities
Contingent liabilities are possible obligations that arise from past events and whose existence will be confirmed only by uncertain future events or present obligations that arise from past events where the transfer of economic resources is uncertain or cannot be reliability estimated. Contingent liabilities are not recognized in the consolidated financial statements, except if they arise from a business combination; they are disclosed in the notes to the consolidated financial statements unless the likelihood of an outflow of economic resources is remote.

Consolidated financial statements and notes
Summary of significant accounting policies continued

W Adoption of new and revised International Financial Reporting Standards

Other than as described below, the accounting policies, presentation and methods of calculation adopted are consistent with those of the Annual Report and Accounts for the 12 months ended October 31, 2019, apart from standards, amendments to or interpretations of published standards adopted during the period.

The following standards, interpretations and amendments to existing standards are now effective and have been adopted by the Group. The impacts of applying these policies, except for IFRS 16 “Leases”, which is covered in further detail below, are not considered material:


-
IFRIC 23, “Uncertainty over Income Tax Treatments”.


-
Amendments to IAS 28 “Investments in Associates and Joint Ventures – Long-term Interests in Associates and Joint Ventures”, clarifies that IFRS 9 “Financial instruments” applies.


-
Amendments to IAS 19 “Employee Benefits”.


-
Annual Improvements 2017 includes amendments to IFRS 3, “Business combinations”, IFRS 11 “Joint arrangements” and IAS 12 “Income taxes”.

IFRS 16 “Leases”
IFRS 16 “Leases” establishes the principles that an entity should apply to report useful information to the uses of the financial statements about the nature, amount, timing and uncertainty of leases and cash flows associated with leases. Application of this standard was mandatory for annual reporting periods starting from 1 January 2019 onwards and was adopted by the Group on November 1, 2019. The standard replaced IAS 17 “Leases” and IFRIC 4 “Determining whether an Arrangement contains a lease”. Key changes to the accounting policy previously applied and the impact of adoption this on the financial statement at November 1, 2019 are described below. The Group’s new IFRS 16 accounting policy and previous lease accounting policy under IAS 17 “Leases” are disclosed in Q above.

IFRS 16 “Leases” was adopted with the cumulative retrospective impact reflected as an adjustment to equity on the date of adoption and therefore the comparative information has not been restated and continues to be reported under IAS 17 and IFRIC 4. The Group has applied the following expedients in relation to the adoption of IFRS 16:

Arrangements were not reassessed to determine whether they are, or contained, a lease at November 1, 2019. Instead, the Group has applied IFRS 16 to leases that had previously been identified as leases under IAS 17 “Leases” and IFRIC 4 “Determining whether an arrangement contains a lease”;

Where there is a group of leases with reasonably similar characteristics, a single discount rate has been applied to each lease portfolio;

The Group impaired the right-of-use asset recognized on adoption by the value of the provisions for onerous leases held under IAS 37 “Provisions, Contingent Liabilities and Contingent Assets” at October 31, 2019 instead of performing a new impairment review for those leases at November 1, 2019;

The Group excluded initial direct costs from the measurement of the right-of-use asset at November 1, 2019;

Where the Group measured right-of-use asset as if IFRS 16 had been applied since the inception of the lease, the Group applied hindsight in assessing extension or termination options; and

Where the Group measured the right-of-use asset at an amount equal to the lease liability at November 1, 2019 lease prepayments and accruals previously recognized under IAS 17 at October 31, 2019 were added to and deducted from, respectively, the value of the right-of-use assets on adoption.

Consolidated financial statements and notes
Summary of significant accounting policies continued

W Adoption of new and revised International Financial Reporting Standards continued
The key differences between the Group’s IAS 17 accounting policy (the ‘previous policy’ which is disclosed in Q above) and the Group’s IFRS 16 accounting policy (which is also provided in Q above), as well as the functional currency, except for two entities basedprimary impacts of applying IFRS 16 in Ireland (Novell Ireland Software Limited and Novell Ireland Real Estate Limited), the parent company,current financial period are disclosed on below.

Primary impacts of applying the IFRS 16 accounting policy
The primary impacts on the Group’s financial statements, and the HPE Software entities,key causes of the movements recorded in the consolidated statement of financial position on November 1, 2019 (see page F-31), as a result of applying the IFRS 16 (‘current’) accounting policy in place of the previous policy are:

Under IAS 17, lessees were classified leases as either operating or finance leases. Operating lease costs were expensed on a straight-line basis over the period of the lease. Finance leases resulted in the recognition, in the statement of financial position, of an asset and a corresponding liability for lease payments, at present value. Under IFRS 16 all lease agreements give rise to the recognition of a ‘right-of-use asset’ representing the right to use the leased item and a liability for any future lease payments (page F-31 and note 19 “Leases”) over the ‘reasonably certain’ period of the lease, which may include future lease periods for which the Group has extension options;

Lessee accounting under IFRS 16 is similar to finance lease accounting for lessees under IAS 17; lease costs are recognized in the form of depreciation of the right-of-use asset and interest on the lease liability. The incremental borrowing rate of the Group for that lease portfolio is generally used for discounting, although the interest rate implicit in the lease is used when it is readily determinable. Interest charges will typically be higher in the early stages of a lease and will reduce over the term. Lease interest costs are recorded in financing costs and associated cash payments are classified as financing cash flows in the Group’s cash flow statement;

•          Under IFRS 16 cash inflows from operating activities and payments classified within cash flow from financing activities both increase, as payments made at both lease inception and subsequently are characterized as repayments of lease liabilities and interest. Under IAS 17 operating lease payments were treated as an operating cash outflows. Net cash flow is not impacted by the change in policy; lessor accounting under IFRS 16 is similar to IAS 17. The only substantive change is that when the Group sub-leases right-of-use assets it classifies the lease out as either operating or finance leases by reference to the terms of head lease contract whereas under IAS 17 the classification was determined by reference to the underlying asset leased out. This has resulted in additional finance leases (‘net investment in leases’) being recognized under IFRS 16 (see page F-31 and net investment in leases in note 14 “Trade and other receivables”) as the Group only acts as a lessor in relation to under-utilized property leases;

The expedients applied at adoption noted above have resulted in the following changes (page F-31);

reclassifications of lease-related prepayments and accruals at 1 November 2019 to the right-of-use assets where the functional currency isGroup has measured the US dollar. Certain HPE Software entities movedright-of-use at an amount equal to local functional currencies fromthe liability.

release of lease-related prepayments and accruals at November 1, 2017, reflecting2019 against retained earnings where the Group has measured the right-of-use asset as if IFRS 16 had been applied since inception of the lease.

re-classification of onerous leases provisions at November 1, 2019 to the right-of-use assets. Provisions remain for any onerous non-rental contracts related to these properties.

During the 12 months ended October 31, 2019, a rental expense of $65.9 million was charged for operating leases and depreciation and interest of $15.9 million was charged for finance leases. During the 12 months ended October 31, 2020, depreciation of $76.9 million and interest of $13.2 million has been charged in relation to all leases.

Adoption judgements
In adopting, and in the on-going application of, IFRS 16 judgements and estimates were made in relation to the grouping of leases for the purpose of assigning a discount rate and in calculating the discount rates. These judgements and estimates were significant for the Group’s IFRS 16 adoption activities but are not considered critical accounting estimates or judgements for the Group as they are not considered to have a significant effect on the amounts recognized in the Group’s financial statements.

Consolidated financial statements and notes
Summary of significant accounting policies continued

Transition disclosures
The weighted average incremental borrowing rate applied to the Group’s lease liabilities recognized in the balance sheet at November 1, 2019 is 4.7%.
The Group’s undiscounted operating lease commitments at October 31, 2019 were $301.2 million; the most significant differences between the IAS 17 lease commitments and the lease liabilities recognized on transition to IFRS 16 are set out below:


$m
Operating lease commitments under IAS 17
301.2
Committed leases not commenced1
(0.3)
Cost of reasonably certain extensions1
1.3
Subtotal302.2
Effect of discounting on payments included in the calculation of the lease liability (excluding finance lease balances)
(32.4)
Subtotal269.8
Other2
23.5
Lease liability opening balance to be reported as at November 1, 2019 (IFRS 16)293.3

1.
Undiscounted.
2.
Includes Finance lease liabilities already reported under IAS 17.

Consolidated financial statements and notes
Summary of significant accounting policies continued

W Adoption of new and revised International Financial Reporting Standards continued
The impact of the adoption of IFRS 16 on the consolidated statement of financial position at November 1, 2019 is set out below.

  October 31, 2019  Impact of adoption of IFRS 16  November 1, 2019 
  
$m

 
$m

 
$m

Non-current assets            
Goodwill  6,671.3   -   6,671.3 
Other intangible assets  5,942.3   (1.8)  5,940.5 
Property, plant and equipment  140.5   (25.4)  115.1 
Right-of-use assets  -   253.4   253.4 
Long-term pension assets  17.1   -   17.1 
Contract-related costs  31.5   -   31.5 
Other non-current assets  44.0   7.7   51.7 
   12,846.7   233.9   13,080.6 
Current assets            
Inventories  0.1   -   0.1 
Trade and other receivables  1,032.9   0.3   1,033.2 
Contract-related costs  19.3   -   19.3 
Current tax receivables  40.1   -   40.1 
Cash and cash equivalents  355.7   -   355.7 
   1,448.1   0.3   1,448.4 
Total assets  14,294.8   234.2   14,529.0 
             
Current liabilities            
Trade and other payables  611.0   1.4   612.4 
Lease obligations  11.8   74.7   86.5 
Provisions  29.3   (4.3)  25.0 
Current tax liabilities  104.0   -   104.0 
Contract liabilities  1,045.9   -   1,045.9 
   1,802.0   71.8   1,873.8 
Non-current liabilities            
Contract liabilities  149.9   -   149.9 
Borrowings  4,670.7   -   4,670.7 
Lease obligations  11.7   195.1   206.8 
Derivative liability  36.5   -   36.5 
Retirement benefit obligations  141.4   -   141.4 
Provisions  49.1   (12.4)  36.7 
Other non-current liabilities  50.4   (10.1)  40.3 
Current tax liabilities  119.7   -   119.7 
Deferred tax liabilities  987.1   (1.8)  985.3 
   6,216.5   170.8   6,387.3 
Total liabilities  8,018.5   242.6   8,261.1 
Net assets  6,276.3   (8.4)  6,267.9 
Capital and reserves            
Share capital  47.2   -   47.2 
Share premium account  44.0   -   44.0 
Merger reserve  1,739.8   -   1,739.8 
Capital redemption reserve  2,485.0   -   2,485.0 
Hedging reserve  (29.6)  -   (29.6)
Retained earnings  2,250.7   (8.4)  2,242.3 
Foreign currency translation deficit  (262.1)  -   (262.1)
Total equity attributable to owners of the parent  6,275.0   (8.4)  6,266.6 
Non-controlling interests  1.3   -   1.3 
Total equity  6,276.3   (8.4)  6,267.9 

Consolidated financial statements and notes
Summary of significant accounting policies continued

W Adoption of new and revised International Financial Reporting Standards continued

Interpretations and amendments
The following interpretations and amendments to existing standards are not yet effective and have not been adopted early by the Group:

Effective for periods commencing after January 1, 2020/2021:


-
Amendments to References to the Conceptual Framework in IFRS Standards - Amendments to IFRS 2, IFRS 3, IFRS 6, IFRS 14, IAS 1, IAS 8, IAS 34, IAS 37, IAS 38, IFRIC 12, IFRIC 19, IFRIC 20, IFRIC 22, and SIC-32 to update those pronouncements with regard to the revised the Conceptual Framework, effective for accounting periods beginning after January 1, 2020. EU endorsed November 29, 2019.


-
Amendments to IFRS 3 Business Combinations, effective January 1, 2020 clarify the definition of a business in acquisitions. EU endorsed January 15, 2020.


-
Amendments to IAS1 and IAS 8: guidance on the definition of material, effective January 1, 2020 and endorsed by the EU on November 29, 2019.


-
Amendments to IFRS9, IAS 39, IFRS 7, IFRS 16 and IFRS 4: Interest rate benchmark reforms. Phase 1 effective January 1, 2020 and EU endorsed covers hedge accounting impacts and discontinuance exemptions, while Phase 2 effective January 2021 covers further disclosures on transition to a new benchmark, EU endorsed January 14, 2021.

Effective for periods commencing after January 1, 2022:


-
Annual Improvements cycle 2018-2020 includes relevant amendments clarifying capitalization of transaction fees/ inclusion of specific fees in modification/extinguishment test within IFRS 9 Financial Instruments, subject to EU endorsement. Other included improvement in IFRS 1 (First time adoption) and IAS 41 (agriculture) are not applicable to the Group.


-
Amendments to IFRS 3 Business combinations, IAS 16 “Property, plant and equipment” and IAS 37 “Provisions, Contingent assets and Contingent liabilities” are all subject to EU endorsement.


-
Amendments to IAS 37 “Provisions, Contingent assets and liabilities” – guidance on costs in fulfilling onerous contracts, subject to EU endorsement

Effective for periods commencing after January 1, 2023, all subject to EU endorsement:


-
Amendments to IAS 1 “Presentation of financial statements”. Amendment is presentational relates to the classification of liabilities current and non-current.


-
Amendments to IFRS 17 “Insurance contracts”. Rent concessions is not relevant for the Group.

The impact of the amendments and interpretations listed above are not expected to have a material impact on the consolidated financial statements.

Consolidated financial statements and notes
Summary of significant accounting policies continued

II Critical accounting estimates, assumptions and judgements
In preparing these consolidated financial statements, the Group has made its best estimates and judgements of certain amounts included in the financial statements, giving due consideration to materiality. The Group regularly reviews these estimates and updates them as required. The Group has reviewed its critical accounting estimates, assumptions and judgements considering the impact of COVID-19 and no new critical accounting estimates, assumptions and judgements were identified. COVID-19 has increased the level of uncertainty in making the estimations required in relation to the potential impairment of goodwill and other intangible assets and retirement benefit obligations. Sensitivity analysis of these estimates, including the impact of COVID-19, are included in note 10 “Goodwill” and note 22 “Pension commitments”. COVID-19 has been assessed as having no material impact on the remaining critical estimates, assumptions and judgements disclosed below. Following the adoption of IFRS 16 “Leases” in the current year lease term has been determined as being a critical accounting judgement.

Actual results could differ from these estimates. Unless otherwise indicated, the Group does not believe that there is a significant risk of a material change to the carrying value of assets and liabilities within the next financial year related to the accounting estimates and assumptions described below. The Group considers the following to be a description of the most significant estimates and judgements, which require the Group to make subjective and complex judgements and matters that are inherently uncertain.

Critical accounting estimates

A Potential impairment of goodwill and other intangible assets
Each year, or whenever there are changes in their underlying business modelcircumstances indicating that the carrying amounts may not be recoverable, the Group carries out impairment tests of goodwill and transactional conditions.other assets which require estimates to be made of the value in use of its CGUs. These value in use calculations are dependent on estimates of future cash flows including long-term growth rates, the average annual revenue growth rate by product group and an appropriate discount rate to be applied to future cash flows. Further details on these estimates and sensitivity of the carrying value of goodwill to the discount rate, the average annual revenue growth rate by product group and the long-term growth rate are provided in note 10 “Goodwill”.

5.B Retirement benefit obligations
The valuation of retirement benefit obligations is dependent upon a number of assumptions that are estimated at the year end date, including estimates of mortality rates, inflation, salary growth rates and the rate at which scheme liabilities are discounted. Further detail on these estimates and the sensitivity of the carrying value of the defined benefit obligation to these is provided in note 22 “Pension commitments”.

Critical accounting judgements

C Revenue recognition
Revenue recognition requires significant use of management judgement to produce financial information. The most significant accounting judgement in applying IFRS 15 are the identification of performance obligations and the determination of the transaction price when the contract contains variable considerations.

Judgement is required to (i) identify each distinct performance obligation requiring separate recognition in a multi element contract (e.g. licence, maintenance, material rights for option to acquire additional products or services at discounted prices), and (ii) allocate the transaction price to the various performance obligations. This judgment impacts the timing of revenue recognition, as certain performance obligations are recognized at a point in time and others are recognized over the life of the contract, as explained in Accounting Policy D “Revenue recognition”, and therefore the judgement impacts the quantum of revenue and profit recognized in a period.

D Exceptional item classification
The Group classifies items as exceptional in line with Accounting Policy H “Exceptional items”. The classification of these items as an exceptional is a matter of judgement. This judgement is made by management after evaluating each item deemed to be exceptional against the criteria set out within the defined accounting policy.

Consolidated financial statements and notes
Summary of significant accounting policies continued

II Critical accounting estimates, assumptions and judgements continued

E Provision for income taxes
The Group is subject to income taxes in numerous jurisdictions. Significant judgement is required in determining the worldwide provision for income taxes including structuring activities undertaken by the Group and the application of complex transfer pricing rules. The Group recognizes liabilities for anticipated settlement of tax issues based on judgements of whether additional taxes will be due. Significant issues may take several periods to resolve. In making judgements on the probability and amount of any tax charge, management takes into account:

Status of the unresolved matter;
Strength of technical argument and clarity of legislation;
External advice;
Resolution process, past experience and precedents set with the particular taxing authority;
Agreements previously reached in other jurisdictions on comparable issues; and
Statute of limitations

Key judgements in the year were related to the EU state aid and UK tax authority challenge in respect of prior periods. Based on their assessment, the directors have concluded that no additional material tax provisions are required with regards to these matters (note 7 “Taxation”).

The ultimate tax liability may differ from the amount provided depending on interpretations of tax law, settlement negotiations or changes in legislation.  Where the final tax outcome of these matters is different from the amounts that were initially recorded, such differences will impact the income tax and deferred tax provisions in the year in which such determination is made. There is not a significant risk that any estimate associated with the provision for income taxes will result in a material change within the next 12 months.

F Lease term
Where leases include additional optional periods after an initial lease term, significant judgement is required in determining whether these optional periods should be included when determining the lease term. As a lessee, optional periods are included in the lease term if the Group is reasonably certain it will exercise an extension option or will not exercise a termination option; this depends on an analysis by management of all relevant facts and circumstances including the leased asset’s nature and purpose, the economic and practical potential for replacing the asset and any plans that the Group has in place for the future use of the asset. Where it is impractical or uneconomic to replace then the Group is more likely to judge that lease extension options are reasonably certain to be exercised.

Where extension options are included in the lease term the greater will be the value of the right-of-use asset and lease liability recognized. The normal approach adopted for lease term by asset class is described below.

The lease terms can vary significantly by type and use of asset and geography. In addition, the exact lease term is subject to the non-cancellable period and rights and options in each contract. Generally, lease terms are judged to be the longer of the minimum lease term and:

Up to five years for offices, unless the non-cancellable period exceeds this, with optional extension periods only included in leases expiring in the earlier part of this period and where clear plans to extend the leases are already in place; and

Up to three years for data centres with optional extensions periods, where they exist, included for leases expiring in the next year and for which relocation of the assets located in the data centre is considered uneconomic.

For vehicle leases the minimum lease term, typically three to four years, is judged to be the lease term. Extension options for vehicles are not considered reasonably certain as the assets are not highly customized or difficult to replace.

Consolidated financial statements and notes
Notes to the consolidated financial statements

1 Segmental reporting

In accordance with IFRS 8 “Operating Segments”, the Group has derived the information for its operating segmentssegmental reporting using the information used by the Chief Operating Decision Maker (“CODM”) for the purposes of resource allocation and assessment of segment performance. The Chief Operating Decision Maker (“CODM”) is defined as the Operating Committee.

On July 2, 2018, the Group announced the proposed sale of SUSE, one of the Group’s two historical operating segments, approved by the shareholders on August 21, 2018. As a result, for management purposes, following the agreement to dispose of the SUSE business, which is presented as a discontinued operation, the Group is organized into a single reporting segment comprising the Micro Focus Product Portfolio. Consistent with this the Chief Executive Officer of SUSE, Nils Brauckmann, stepped down from the Board on July 11, 2018 to concentrate on the sale. As such, the CODM from July 11, 2018 consisted of the Executive Chairman, the Chief Executive Officer and the Chief Financial Officer.

For the six12 months to October 31, 2017,2019, the CODM for existing Micro Focus and SUSE is defined as the Executive Committee, which consistsconsisted of the Chief Executive Chairman,Officer, Chief Financial Officer, Chief Operating Officer, Vice President Strategy and Planning and the Chief Executive OfficersHR Officer. With the disposal of Micro Focus and SUSE. The CODM for HPE Software in the 2-month post acquisition period toSUSE business completed, the Group is organized into a single reporting segment.

For the 12 months ended October 31, 2017 is Chris Hsu.

On a go-forward basis the CODM for the Enlarged Group will be2020, the Operating Committee consistingconsisted of the Chief Executive Officer, the Chief Financial Officer, the Chief Operating Officer, Chief HR Officer and Vice President Business Operations and the Chief Human Resources Officer and the Head of Strategy, Operations, & Pricing. Legal Officer. The Group is organised into a single reporting segment.

The Group’s reportable segmentssegment under IFRS 8 are as follows:is:

Micro Focus Product Portfolio – The Micro Focus Product Portfolio segment contains mature infrastructure software products that are managed on a portfolio basis akin to a “fund of funds” investment portfolio. This portfolio is managed with a single product group that makes and maintains the software, whilst the software is sold and supported through a geographic Go to MarketGo-to-Market organization. The products within the existing Micro Focus Product Portfolio are grouped together into tenfive sub-portfolios based on industrial logic and management of the Micro Focus sub-portfolios: CDMS, HostApplication Modernization & Connectivity, IAS, Development & ITOM and Collaboration & Network and the newly acquired HPE Software sub-portfolios: IP Operation Management, Application Delivery Management, EnterpriseIT Operations Management, Security Product, Platform and Information Management Business.& Governance.

SUSE – The characteristics of the SUSE product portfolio segment are different from the Micro Focus product portfolio due to the Open Source nature of its offerings and the growth profile of those offerings. SUSE provides and supports enterprise-grade Linux and Open Source Software Defined Infrastructure and Application Delivery solutions. The SUSE product portfolio comprises: SUSE Linux Enterprise Server and Extensions, SUSE OpenStack Cloud, SUSE Enterprise Storage, SUSE Container as a Service Platform  SUSE Manager, and SUSE Linux Enterprise Desktop and Workstation Extension.

Operating segments aresegmental reporting is consistent with thosethat used in internal management reporting and the profit measuresmeasure used by the CODMOperating Committee is the Adjusted Operating Profit and Adjusted EBITDA. Centrally managed costs are allocated between the Micro Focus and SUSE segments based on identifiable segment specific costs with the remainder allocated based on other criteria including revenue and headcount.

F-9
     
12 months ended
October 31, 2020
  
12 months ended
October 31, 2019
  
18 months ended
October 31, 2018
 
  Note  
$m

 
$m

 

$m

Reconciliation to Adjusted EBITDA:               
(Loss)/profit before tax     (2,940.4)  
(34.1
)
  
34.1
 
Finance costs  6   281.6   
282.4
   
350.4
 
Finance income  6   (2.6)  
(26.6
)
  
(7.7
)
Depreciation of property, plant and equipment  12   42.0   
66.5
   
88.6
 
Right-of-use asset depreciation      76.9   
-
   
-
 
Amortization of intangible assets  11   674.1   
716.5
   
903.1
 
Exceptional items (reported in Operating (loss)/profit)  4   3,011.6   
294.2
   
538.2
 
Share-based compensation charge  29   17.0   
68.8
   
64.3
 
Product development intangible costs capitalized  11   (16.2)  
(16.5
)
  
(44.4
)
Foreign exchange credit  3   29.7   
11.3
   
(37.4
)
Adjusted EBITDA      1,173.7   
1,362.5
   
1,889.2
 

Notes toFor the consolidated interim financial statements (unaudited)

5. Segmental reporting (continued)

Operating segments forreportable segment, the six months endedtotal assets were $11,146.8 million (2019: $14,294.8 million) and the total liabilities were $7,931.7 million (2019: $8,018.5 million) as at October 31, 2017:

     Micro Focus     
  Note  
Existing
Micro
Focus
  
HPE
Software
  
Micro
Focus
Total
  SUSE  Total 
      $’000   $’000   $’000   $’000   $’000 
Revenue before fair value adjustment to acquired deferred revenue     501,286   595,071   1,096,357   165,263   1,261,620 
Unwinding of fair value adjustment to acquired deferred revenue     (948)  (25,329)  (26,277)  (823)  (27,100)
Segment revenue     500,338   569,742   1,070,080   164,440   1,234,520 
Directly managed costs     (262,936)  (352,750)  (615,686)  (98,614)  (714,300)
Allocation of centrally managed costs     19,751   (3,800)  15,951   (15,951)  - 
Total segment costs     (243,185)  (356,550)  (599,735)  (114,565)  (714,300)
Adjusted Operating Profit     257,153   213,192   470,345   49,875   520,220 
Exceptional items  7                   (98,480)
Share based compensation charge  8               ��   (18,302)
Amortization of purchased intangibles  14                   (183,478)
Operating profit                      219,960 
Share of results of associates  16                   (438)
Net finance costs  11                   (73,788)
Profit before tax                      145,734 
                         
Adjusted Operating Profit      257,153   213,192   470,345   49,875   520,220 
Depreciation of property, plant and equipment  15   4,605   10,385   14,990   1,299   16,289 
Amortization of purchased software intangibles  14   994   942   1,936   817   2,753 
Foreign exchange (credit)/debit      (9,511)  2,331   (7,180)  2,481   (4,699)
Net capitalization of product development costs  14   (4,503)  -   (4,503)  -   (4,503)
Adjusted EBITDA      248,738   226,850   475,588   54,472   530,060 
                         
Total assets                      17,607,743 
Total liabilities                      (9,981,882)

F-10

Notes to the consolidated interim financial statements (unaudited)

5. Segmental reporting (continued)

Operating segments for the six months ended October 31, 2016:

     Micro Focus     
  Note  
Existing
Micro
Focus
  
HPE
Software
  
Micro
Focus
Total
  SUSE  Total 
      $’000   $’000   $’000   $’000   $’000 
Revenue before fair value adjustment to acquired deferred revenue     541,829   -   541,829   149,318   691,147 
Unwinding of fair value adjustment to acquired deferred revenue     (4,518)  -   (4,518)  (1,886)  (6,404)
Segment revenue     537,311   -   537,311   147,432   684,743 
Directly managed costs     (277,297)  -   (277,297)  (81,197)  (358,494)
Allocation of centrally managed costs     12,651   -   12,651   (12,651)  - 
Total segment costs     (264,646)  -   (264,646)  (93,848)  (358,494)
Adjusted Operating Profit     272,665   -   272,665   53,584   326,249 
Exceptional items  7                   (41,048)
Share based compensation charge  8                   (15,521)
Amortization of purchased intangibles  14                   (106,394)
Operating profit                      163,286 
Share of results of associates  16                   (1,127)
Net finance costs  11                   (48,953)
Profit before tax                      113,206 
                         
Adjusted Operating Profit      272,665   -   272,665   53,584   326,249 
Depreciation of property, plant and equipment  15   4,759   -   4,759   953   5,712 
Amortization of purchased software intangibles  14   529   -   529   45   574 
Foreign exchange credit      (7,981)  -   (7,981)  (1,289)  (9,270)
Net capitalization of product development costs  14   (2,931)  -   (2,931)  -   (2,931)
Adjusted EBITDA      267,041   -   267,041   53,293   320,334 
                         
Total assets                      4,707,021 
Total liabilities                      3,125,262 

2020. No measure of total assets and total liabilities for each reportable segment has been reported for the 18 months ended October 31, 2018 as such amounts arethese were not regularly provided to the CODM.


Consolidated financial statements and notes
Notes to the consolidated interimfinancial statements

2 Supplementary information

Analysis by geography
The Group is domiciled in the UK. The Group’s total segmental revenue from external customers by geographical location is detailed below:

  
12 months ended
October 31, 2020
  
12 months ended
October 31, 2019
  
18 months ended
October 31, 2018
 
  
$m

 
$m

 

$m

UK  173.0   
206.9
   
299.6
 
USA  1,289.8   
1,523.0
   
2,279.8
 
Germany  218.7   
220.7
   
309.5
 
Canada  108.0   
115.9
   
178.4
 
France  101.4   
123.3
   
195.5
 
Japan  96.9   
108.6
   
145.8
 
Other  1,013.2   
1,050.0
   
1,345.9
 
Total  3,001.0   
3,348.4
   
4,754.4
 

The total of non-current assets other than financial instruments and deferred tax assets as at October 31, 2020 located in the USA is $3,301.0 million (October 31, 2019: $4,623.0 million ; October 31, 2018: $5,145.8 million) the total in the non-USA is $6,304.0 million (October 31, 2019: $8,192.2 million ; October 31, 2018: $8,488.3 million). They exclude trade and other receivables, derivative financial instruments and deferred tax.

Analysis of revenue from contracts with customers

  
12 months ended
October 31, 2020
  
12 months ended
October 31, 2019
  
18 months ended
October 31, 2018
 
  
$m

 

$m

 
$m

Revenue from contracts with customers  3,001.0   
3,348.4
   
4,754.4
 
             
Being:            
Recognized over time:            
Maintenance revenue  1,920.8   
2,051.6
   
2,818.9
 
SaaS & other recurring revenue  245.3   
278.9
   
365.1
 
   2,166.1   
2,330.5
   
3,184.0
 
Recognized at point in time:            
Licence revenue  646.5   
800.0
   
1,206.1
 
Consulting revenue  188.4   
217.9
   
364.3
 
   834.9   
1,017.9
   
1,570.4
 
             
Total Revenue  3,001.0   
3,348.4
   
4,754.4
 

Consolidated financial statements (unaudited)and notes
Notes to the consolidated financial statements

6. 2 Supplementary information continued

Analysis of revenue by product

Set out below is an analysis of revenue recognized between the principal product portfoliosProduct Portfolios for the six12 months ended October 31 2017 and six2020 with comparatives:

12 months ended October 31, 2016:2020:

  
Licence
  
Maintenance
  
SaaS & other
recurring
  
Consulting
  
Total
 
  
$m

 
$m

 
$m

 
$m

 
$m

Application Modernization & Connectivity  138.6   321.6   -   10.1   470.3 
Application Delivery Management  102.0   439.2   73.9   15.9   631.0 
IT Operations Management  175.1   559.4   4.6   113.9   853.0 
Security  162.6   416.8   33.6   33.1   646.1 
Information Management & Governance  68.2   184.2   133.4   15.4   401.2 
Subtotal  646.5   1,921.2   245.5   188.4   3,001.6 
Deferred revenue haircut  -   (0.4)  (0.2)  -   (0.6)
Total Revenue  646.5   1,920.8   245.3   188.4   3,001.0 
 
Six months ended October 31, 2017:
 
Licence
$’000
  
Maintenance
$’000
  
Subscription
$’000
  
Consulting
$’000
  
SaaS
$’000
  
Total
$’000
 
Existing Micro Focus:                  
COBOL Development & Mainframe Solutions  43,534   77,753   -   4,771   -   126,058 
Host Connectivity  15,116   50,879   -   539   -   66,534 
Identity, Access & Security  23,153   68,164   -   9,041   -   100,358 
Development & IT Operations Management Tools  27,534   105,391   -   7,290   -   140,215 
Collaboration & Networking  13,523   52,895   -   1,703   -   68,121 
Subtotal existing Micro Focus  122,860   355,082   -   23,344   -   501,286 
Unwinding of fair value adjustment to acquired deferred revenue  -   (948)  -   -   -   (948)
Total existing Micro Focus  122,860   354,134   -   23,344   -   500,338 
                         
HPE Software Acquisition:                        
IT Operation Management  95,717   84,345   -   31,835   1,582   213,479 
Application Delivery Management  40,278   99,619   -   7,229   16,667   163,793 
Enterprise Security Product  42,897   46,294   -   9,287   5,981   104,459 
Platform  18,655   10,905   -   2,909   95   32,564 
Information Management Business  14,866   30,002   -   4,562   31,346   80,776 
Subtotal HPE Software Acquisition  212,413   271,165   -   55,822   55,671   595,071 
Unwinding of fair value adjustment to acquired deferred revenue  (7,592)  (13,751)  -   (682)  (3,304)  (25,329)
Total HPE Software Acquisition  204,821   257,414   -   55,140   52,367   569,742 
                         
Total Micro Focus Product Portfolio  327,681   611,548   -   78,484   52,367   1,070,080 
                         
SUSE Product Portfolio  -   -   163,455   1,808   -   165,263 
Unwinding of fair value adjustment to acquired deferred revenue  -   -   (823)  -   -   (823)
Total SUSE Product Portfolio  -   -   162,632   1,808   -   164,440 
                         
Total  327,681   611,548   162,632   80,292   52,367   1,234,520 
                         
Six months ended October 31, 2016:                        
Micro Focus Product Portfolio:                        
COBOL Development & Mainframe Solutions  52,447   75,320   -   5,433   -   133,200 
Host Connectivity  38,898   52,998   -   935   -   92,831 
Identity, Access & Security  19,845   71,078   -   10,211   -   101,134 
Development & IT Operations Management Tools  24,509   111,974   -   7,336   -   143,819 
Collaboration & Networking  11,174   57,379   -   2,292   -   70,845 
Total Micro Focus Product Portfolio  146,873   368,749   -   26,207   -   541,829 
Unwinding of fair value adjustment to acquired deferred revenue  -   (4,518)  -   -   -   (4,518)
Total Micro Focus Product Portfolio  146,873   364,231   -   26,207   -   537,311 
                         
SUSE Product Portfolio  -   -   146,811   2,507   -   149,318 
Unwinding of fair value adjustment to acquired deferred revenue  -   -   (1,886)  -   -   (1,886)
Total SUSE Product Portfolio  -   -   144,925   2,507   -   147,432 
                         
Total  146,873   364,231   144,925   28,714   -   684,743 

12 months ended October 31, 2019:

  
Licence
  
Maintenance
  
SaaS & other
recurring
  
Consulting
  
Total
 
  
$m

 
$m

 
$m

 
$m

 
$m

Application Modernization & Connectivity  
170.9
   
326.1
   
-
   
11.7
   
508.7
 
Application Delivery Management  
130.3
   
485.4
   
87.8
   
18.2
   
721.7
 
IT Operations Management  
237.5
   
645.8
   
11.0
   
127.5
   
1,021.8
 
Security  
185.7
   
416.7
   
35.0
   
43.9
   
681.3
 
Information Management & Governance  
75.6
   
183.6
   
145.9
   
16.6
   
421.7
 
Subtotal  
800.0
   
2,057.6
   
279.7
   
217.9
   
3,355.2
 
Deferred revenue haircut  
-
   
(6.0
)
  
(0.8
)
  
-
   
(6.8
)
Total Revenue  
800.0
   
2,051.6
   
278.9
   
217.9
   
3,348.4
 

18 months ended October 31, 2018:

  
Licence
  
Maintenance
  
SaaS & other
recurring
  
Consulting
  
Total
 
  
$m

 

$m

 
$m

 
$m

 
$m

Application Modernization & Connectivity  
256.3
   
497.6
   
-
   
17.9
   
771.8
 
Application Delivery Management  
185.5
   
646.7
   
114.1
   
41.6
   
987.9
 
IT Operations Management  
363.1
   
869.9
   
15.1
   
192.8
   
1,440.9
 
Security  
291.6
   
580.2
   
41.6
   
81.4
   
994.8
 
Information Management & Governance  
117.2
   
267.2
   
203.1
   
32.6
   
620.1
 
Subtotal  
1,213.7
   
2,861.6
 �� 
373.9
   
366.3
   
4,815.5
 
Deferred revenue haircut  
(7.6
)
  
(42.7
)
  
(8.8
)
  
(2.0
)
  
(61.1
)
Total Revenue  
1,206.1
   
2,818.9
   
365.1
   
364.3
   
4,754.4
 


Consolidated financial statements and notes
Notes to the consolidated interimfinancial statements

3 Profit/(loss)before tax

The (loss)/profit before tax is stated after charging/(crediting) the following operating costs/(gains) classified by the nature of the costs/(gains):

     
12 months ended
October 31, 2020
  
12 months ended
October 31, 2019
  
18 months ended
October 31, 2018
 
  Note  
$m

 
$m

 

$m

Staff costs  29   1,344.4   
1,409.0
   
2,095.0
 
Depreciation of property, plant and equipment:  12   42.0   
52.6
   
71.2
 
Depreciation of right-of-use assets (2019 and 2018: finance lease depreciation)1
  19   76.9   
13.9
   
17.4
 
Loss on disposal of property, plant and equipment  12   5.6   
3.6
   
4.7
 
Amortization of intangibles  11   674.1   
716.5
   
903.1
 
Operating lease rentals payable1:
                
-  plant and machinery      -   
7.0
   
8.8
 
-  property      -   
58.9
   
85.3
 
Provision for receivables impairment (release)/charge  14   (4.8)  
16.0
   
40.0
 
Foreign exchange loss/(gain) on derivative financial instruments      21.8   
(6.9
)
  
-
 
Foreign exchange loss/(gain)      7.9   
18.2
   
(37.4
)

1 $13.9 million and $17.4 million of depreciation on leased assets was included in depreciation of property, plant and equipment in the 12 months ended October 31, 2019 and the 18-months ended October 31, 2018 respectively. No depreciation in relation to leased assets is included in depreciation of property, plant and equipment in the period as all leased assets are classified as right-of-use assets following the adoption of IFRS 16.

4 Exceptional items

    
12 months ended
October 31, 2020
  
12 months ended
October 31, 2019
  
18 months ended
October 31, 2018
 
Reported within Operating (loss)/profit:Note 
$m

 
$m

 
$m

Integration costs   152.6   
245.9
   
279.0
 
Pre-acquisition costs   -   
-
   
43.0
 
Acquisition costs   0.2   
1.5
   
27.1
 
Property-related costs   15.2   
16.3
   
38.1
 
Severance and legal costs   33.7   
32.1
   
129.7
 
Other restructuring costs   10.7   
-
   
-
 
Divestiture   -   
2.1
   
21.3
 
Goodwill impairment   2,799.2   
-
   
-
 
Gain on disposal of Atalla   -   
(3.7
)
  
-
 
    3,011.6   
294.2
   
538.2
 
Reported within finance costs:             
Finance costs incurred in escrow period   -   
-
   
6.4
 
Reported within finance income:             
Finance income earned in escrow period   -   
-
   
(0.6
)
    -   
-
   
5.8
 
              
Exceptional costs before tax   3,011.6   
294.2
   
544.0
 
              
Tax:             
Tax effect of exceptional items   (38.7)  
(54.3
)
  
(105.9
)
Tax exceptional item   -   
-
   
(692.3
)
    (38.7)  
(54.3
)
  
(798.2
)
Reported within profit from discontinued operation (attributable to equity shareholders of the Company):             
 
Loss/(gain) on disposal of discontinued operation
 
32
  2.2   
(1,458.5
)
  
-
 
              
Exceptional costs/(profit) after tax   2,975.1   
(1,218.6
)
  
(254.2
)

Consolidated financial statements (unaudited)and notes
Notes to the consolidated financial statements

7.4 Exceptional itemscontinued


  
Six months
ended
October 31, 2017
  
Six months
ended
October 31, 2016
 
Reported within Operating profit:  $’000   $’000 
Integration costs  20,029   13,432 
Pre-acquisition costs  43,025   19,669 
Acquisition costs  25,820   1,468 
Property related (release)/ costs  (196)  2,521 
Severance and legal costs  9,802   3,958 
   98,480   41,048 
         
Reported within finance costs:        
Finance costs incurred in escrow period (note 11)  6,326   - 
Reported within finance income:        
Finance income earned in escrow period (note 11)  (553)  - 
   5,773   - 
         
Total exceptional costs  104,253   41,048 
Exceptional items are allocated to the financial statement lines (for example: cost of sales) in the Consolidated statement of comprehensive income based on the nature and function of the costs; for example restructuring costs related to employees are classified where their original employment costs are recorded.

Integration costs
Integration costs of $20.0$152.6 million for the six12 months ended October 31, 2017 (2016: $13.4m)2020 (2019: $245.9 million) reflect the IT design, build and migration onto a single IT platform and a wide range of projects undertaken to conform, simplify and increase efficiency across the business. Integration costs of $279.0 million in the 18 months ended October 31, 2018 arose mainly from the work being done in integratingto integrate Serena, GWAVA and the HPE Software organizationsbusiness into the Micro Focus Product Portfolio. Other activities include; development of a new Group intranet and website and system integration costs.business.

ThePre-acquisition costs
There were no pre-acquisition costs for the 12 months to October 31, 2020. Pre-acquisition costs of $43.0 million for the six18 months ended October 31, 2017 (2016: $19.7m) relate2018 related to the evaluation of the acquisition of HPE Software (note 28),business which was announced in SeptemberOctober 2016 and was completed on September 1, September 2017. The costs relaterelated to due diligence work, legal work on the acquisition agreements, professional advisors on the transaction and pre-integration costs relating to activities in readiness for the HPE Software acquisition across all functions of the existing Micro Focus business.costs.

Acquisition costs
Acquisition costs of $0.2 million in the 12 months ended October 31, 2020 relate to the acquisition of Atar Labs. The acquisition costs of $25.8$1.5 million for the six12 months ended October 31, 2017 include2019 related to the acquisition of Interset Software Inc (note 33). The acquisition costs in the 18 months ended October 31, 2018 of $27.1 million included external costs in evaluating and completing the acquisition of HPE Software in August 2017 and includes $7.7 million in respect of US excise tax payable on the award of Long Term Incentives and Additional Share Grants to four senior employees arising as a result of the HPE Software acquisition (2016: $1.5 million relatedbusiness and costs relating to the acquisitionsacquisition of Serena in May 2016 and GWAVA in September 2016).COBOL-IT SAS. The external costs mostlymainly relate to due diligence work, legal work on the acquisition agreements and professional advisors on the transaction.

The net release to exceptional itemsProperty-related costs
Property-related costs of $0.2$15.2 million in relation to property related items for the six12 months ended October 31, 2017 (2016:2020 (2019: $16.3 million; 2018: $38.1 million) relate to the impairment or amendment to the impairments of right-of-use assets for empty or sublet properties held by the Group, any related onerous non-rental costs and the cost of $2.5m) mainly relates tosite consolidations as the releaseGroup simplifies its real estate footprint as a result of a provisionthe acquisition of $1.0 million following the renegotiation of a lease in North America.HPE Software or other significant restructuring projects.

Severance and legal costs
Severance and legal costs of $9.8$33.7 million for the six12 months ended October 31, 2017 (2016: $4.0m)2020 (2019: $32.1 million; 2018: $129.7 million) and relate mostly to termination costs for employees as the Group continues to remove duplication and simplify the continuing operations as a result of the acquisition of HPE Software employees after acquisition. 2016Software.

Other restructuring costs relate
Other restructuring costs of $10.7 million for the 12 months ended October 31, 2020 (2019: $nil; 2018: $nil) relates to terminationthe costs of implementing the initiatives included in the Strategic & Operational Review.

Divestiture
Divestiture costs of $2.1 million for senior Serena executives after acquisition.the 12 months ended October 31, 2019 related mostly to employee activities (2018: $21.3 million) involved in the disposal of the SUSE business completed in 2019.

Goodwill impairment
A goodwill impairment charge of $2,799.2 million was made in the 12 months ended October 31, 2020 (2019: $nil), see note 10 for additional information.

Gain on disposal of Atalla
The non-recurring gain on disposal of $3.7 million for the 12 months ended October 31, 2019 (2018: $nil) related to Atalla business disposal.

Finance income and finance costs
Finance costs incurred in escrow period of $6.3$6.4 million relatesand finance income of $0.6 million for the 18 months ended October 31, 2018 related to interest charges(charged and gained) on additional term loan facilities drawn down in relation to the acquisition of the HPE Software business, between the date the facilities were drawn into escrow and the acquisition date of HPE Software.date. No such income or costs arose in the 12 months ended October 31, 2019 or 12 months ended October 31, 2020.

Consolidated financial statements and notes
Notes to the acquisition between the date the facilities were drawn into escrow and the acquisition date of HPE Software.consolidated financial statements

4 Exceptional items continued

Tax effect of exceptional items
The estimated total tax effect of exceptional items on the income statement is a credit to the income statement of $25.5$38.7 million for the six12 months ended October 31, 2017 (2016: $5.6m)2020 (2019: $54.3 million credit; 2018: $798.2 million credit).

8. Share-based payments

The share-based compensation charge forexceptional tax credit of $692.3 million in the six18 months ended October 31, 2017 was $18.3 million (2016: $15.5 million) including $3.0 million (2016: $4.3 million) relating2018 related to employer taxes. As at October 31, 2017, accumulated employer taxesthe impact of $18.9 US tax reforms, comprised of a credit of $930.6 million (2016: $7.6 million) is included in traderespect of the re-measurement of deferred tax liabilities and other payables and $1.0 a transition tax charge of $238.3 million ($5.2 million) is included in other non-current liabilities. payable over eight years.

9. DividendsLoss/(gain) on disposal of discontinued operation

A dividendThe loss on the disposal of $134.0discontinued operation of $2.2 million was paid during(2019: gain $1,458.5 million) in the six12 months ended October 31, 20172020 related to conclusion of the working capital settlement on the disposal of the SUSE business and adjustments in respect of income tax balances owed in respect of pre-transaction periods.

5 Services provided by the Group’s auditors and network of firms

During the 12 months ended October 31, 2020, the Group obtained the following services from the Group’s auditors as detailed below:

  
12 months ended
October 31, 2020
  
12 months ended
October 31, 2019
  
18 months ended
October 31, 2018
 
  
$m

 
$m

 
$m

             
Audit of Company
  7.2   
12.8
   
12.2
 
ICOFR audit
  2.7   
3.0
   
-
 
Audit of subsidiaries
  2.9   
3.9
   
1.9
 
Total audit  12.8   
19.7
   
14.1
 
             
Audit-related assurance services
  0.6   
0.6
   
0.9
 
Other assurance services
  -   
-
   
0.7
 
Total assurance services  0.6   
0.6
   
1.6
 
             
Tax compliance services
  -   
-
   
0.2
 
Tax advisory services
  -   
0.1
   
0.2
 
Services relating to taxation  -   
0.1
   
0.4
 
             
Other non-audit services  -   
-
   
0.1
 
             
Total  13.4   
20.4
   
16.2
 

Of the audit-related assurance services engagements undertaken in the 12 months ended October 31, 2020 none (2019: none) were considered to be significant.

Audit related assurance services in the 18 months ended October 31, 2018 relate primarily to the additional audit procedures  performed on the Micro Focus International plc financial statements that are included in US filings and two interim reviews.

Other assurance services in the 18 months ended October 31, 2018 relate primarily to the auditor’s assurance work in relation to the SUSE divestiture and licence verification compliance work.

The remaining non-audit services in the period included a limited amount of tax compliance and tax advice.

Consolidated financial statements and notes
Notes to the consolidated financial statements

6 Finance income and finance costs

     
12 months ended
October 31, 2020
  
12 months ended
October 31, 2019
  
18 months ended
October 31, 2018
 
  Note  
$m

 

$m

 

$m

Finance costs               
Interest on bank borrowings     176.1   
225.4
   
276.5
 
Commitment fees     1.7   
1.9
   
3.3
 
Amortization of facility costs and original issue discounts     58.0   
46.7
   
60.4
 
Finance costs on bank borrowings     235.8   
274.0
   
340.2
 
                
Net interest expense on retirement obligations  22   1.8   
2.4
   
2.8
 
Interest on lease liabilities  19   13.2   
2.0
   
2.7
 
Interest rate swaps: cash flow hedges      23.7   
-
   
3.4
 
Other      7.1   
4.0
   
1.3
 
Total      281.6   
282.4
   
350.4
 

     
12 months ended
October 31, 2020
  
12 months ended
October 31, 2019
  
18 months ended
October 31, 2018
 
     
$m

 
$m

 

$m

Finance income               
Bank interest     2.4   
16.3
   
3.6
 
Interest on non-plan pension assets  22   0.2   
0.3
   
0.6
 
Interest rate swaps: cash flow hedges      -   
9.9
   
-
 
Other      -   
0.1
   
3.5
 
Total      2.6   
26.6
   
7.7
 
                 
Net finance cost      279.0   
255.8
   
342.7
 
                 
Included within exceptional items                
Finance costs incurred in escrow period      -   
-
   
6.4
 
Finance income earned in escrow period      -   
-
   
(0.6
)
       -   
-
   
5.8
 

7 Taxation

A Taxation in the Consolidated statement of comprehensive income

  
12 months ended
October 31, 2020
  
12 months ended
October 31, 2019
  
18 months ended
October 31, 2018
 
  
$m

 
$m

 

$m

Current tax            
Current year  175.4   
163.9
   
245.8
 
Adjustments to tax in respect of previous periods  7.8   
(35.3
)
  
(14.7
)
   183.2   
128.6
   
231.1
 
Deferred tax            
Origination and reversal of temporary differences  (195.3)  
(139.7
)
  
26.4
 
Adjustments to tax in respect of previous periods  10.7   
24.5
   
1.2
 
Previously unrecognized temporary differences  -   
(29.4
)
  
-
 
Impact of changes in tax rates  35.6   
-
   
(931.8
)
   (149.0)  
(144.6
)
  
(904.2
)
             
Total tax charge/(credit)  34.2   
(16.0
)
  
(673.1
)

Consolidated financial statements and notes
Notes to the consolidated financial statements

7 Taxation continued

For the 12 months ended October 31, 2020, a deferred tax charge of $1.5 million (2019: $7.6 million debit; 18 months ended October 31, 2018: $23.7 million debit) and $0.1 million current tax credit (2019: $13.1 million credit; 18 months ended October 31, 2018: $4.1 million credit) have been recognized in equity in relation to share options.

A deferred tax credit of $1.8 million has been booked on initial adoption of IFRS 16 “Leases” in retained earnings. A current tax credit of $7.8 million (2019: $23.3 million credit; 18 months ended October 31, 2018: $16.4 million debit) has been recognized in the hedging reserve (note 27). There is also a deferred tax credit of $11.1 million in relation to the currency translation differences. In addition, a deferred tax charge of $5.0 million (2019: $13.0 million credit; 18 months ended October 31, 2018: $4.3 million credit) has been recognized in the Consolidated statement of comprehensive income in relation to defined benefit pension schemes and a deferred tax charge of $8.7 million (2019: $14.0 million; 18 months ended October 31, 2018: $nil) in relation to foreign exchange movements on intangibles.

The tax charge for the 12 months ended October 31, 2020 is higher than the standard rate of corporation tax in the UK of 19.00% (12 months ended October 31, 2019: 19.00%; 18 months ended October 31, 2018: 19.00%). The differences are explained below:

  
12 months ended
October 31, 2020
  
12 months ended
October 31, 2019
  
18 months ended
October 31, 2018
 
  
$m

 

$m

 

$m

(Loss)/profit before taxation  (2,940.4)  
(34.1
)
  
34.1
 
             
Tax at UK corporation tax rate 19.00% (2019: 19.00% , 2018: 19.00%)  (558.7)  
(6.5
)
  
6.5
 
Effects of:            
Tax rates other than the UK standard rate  (78.0)  
(4.4
)
  
17.8
 
Intra-Group financing  (21.0)  
(42.8
)
  
(52.5
)
Innovation tax credit benefits  (31.8)  
(13.5
)
  
(21.4
)
Interest restrictions  -   
-
   
31.8
 
US foreign inclusion income  20.4   
43.7
   
39.0
 
Share options  4.1   
7.1
   
10.2
 
US transition tax  -   
-
   
238.3
 
Movement in deferred tax not recognized  11.1   
14.4
   
7.3
 
Previously unrecognized temporary differences  -   
(29.4
)
  
-
 
Impact of rate changes  35.6   
-
   
(931.9
)
Goodwill impairment  592.8   
-
   
-
 
Expenses not deductible and other permanent differences  41.2   
26.2
   
(4.7
)
   15.7   
(5.2
)
  
(659.6
)
Adjustments to tax in respect of previous periods:            
Current tax  7.8   
(35.3
)
  
(14.7
)
Deferred tax  10.7   
24.5
   
1.2
 
   18.5   
(10.8
)
  
(13.5
)
             
Total taxation  34.2   
(16.0
)
  
(673.1
)

A change to the main UK corporation tax rate, announced in the Budget on March 11, 2020, was substantively enacted for IFRS purposes on March 17, 2020. Hence, the rate applicable from April 1, 2020 now remains at 19% rather than the previously enacted reduction to 17%. The Group has remeasured its UK deferred tax assets and liabilities at the end of the reporting period at the rate of 19%. The impact of this and other changes in rate across the Group has resulted in the recognition of a deferred tax credit of $35.6 million in the income statement.

The Group continues to benefit from the UK’s Patent Box regime, US R&D tax credits and other innovation-based tax credits offered by certain jurisdictions, the benefit for the 12 months ended October 31, 2020 being $31.8 million (2019: $13.5 million; 18 months ended October 31, 2018: $21.4 million). The Group realized benefits in relation to intra-Group financing of $21.0 million for the 12 months ended October 31, 2020 (2019: $42.8.million; the 18 months ended October 31, 2018: $52.5 million). The benefits mostly relate to arrangements put in place to facilitate the acquisition of the HPE Software business.

Consolidated financial statements and notes
Notes to the consolidated financial statements

7 Taxation continued

US foreign inclusion income of $20.4 million arising in the 12 months ended October 31, 2020 (2019: $43.7 million; 18 months ended October 31, 2018: $39.0 million) is largely driven by new US tax legislation introduced as part of US tax reforms in 2018.

The Group recognized a net overall charge in respect of share options due to deferred tax credits arising on options held at the balance sheet date being lower than the current tax charge because of the terms of the options.

The expenses not deductible and other permanent differences charge of $41.2 million (2019: $26.2 million charge; 18 months ended October 31, 2018: $4.8 million credit) included $4.6 million in relation to uncertain tax positions and $6.5 million related to irrecoverable withholding tax.

The Group realized a net charge in relation to the true-up of prior period, current and deferred tax estimates of $18.5 million for the 12 months ended October 31, 2020 (2019: $10.8 million credit; 18 months ended October 31, 2018: $13.5 million).

The Group’s tax charge is subject to various factors, many of which are outside the control of the Group, including changes in local tax legislation, and specifically changes President Biden will seek to introduce and global tax reform as governments respond to COVID-19, the OECD’s Base Erosion and Profit Shifting project and the consequences of Brexit.
In April 2019, the European Commission published its final decision on its state aid investigation into the UK’s ‘Financing Company Partial Exemption’ legislation and concluded that part of the legislation is in breach of EU State Aid rules. Similar to other UK based international groups that have acted in accordance with the UK legislation in force at the time, the Group may be affected by the finding and is monitoring developments. The UK government and UK-based international companies, including the Group, have appealed to the General Court of the European Union against the decision. The UK government is required to start collection proceedings and on February 5, 2021, State Aid charging notices (excluding interest) were received from HM Revenue and Customs totaling $45.2 million. In addition, there has been a challenge from the UK Tax Authorities into the historic financing arrangements of the Group. Based on its current assessment and supported by external professional advice, the Group consider that the maximum liability of both of these items to be $60 million. Based on its current assessment and also supported by external professional advice, the Group believes that no provision is required in respect of these issues. No additional liability should accrue in future periods in respect of these matters, following (i) an amendment of the UK legislation affected by the EU Commission finding on January 1, 2019, to be compliant with EU law, and (ii) the unwind of the financing company arrangements in question.

BCurrent tax receivables

  October 31, 2020  October 31, 2019 
  
$m

 

$m

Corporation tax  45.3   
40.1
 

The current tax receivable at October 31, 2020 is $45.3 million (2019: $40.1 million).

CCurrent tax liabilities

  October 31, 2020  October 31, 2019 
  
$m

 
$m

Corporation tax  150.1   
104.0
 

The current tax creditor at October 31, 2020 is $150.1 million (2019: $104.0 million). The current tax creditor includes liabilities in respect of uncertain tax positions, net of overpayments.

Within current tax liabilities is $84.8 million (2019: $78.3 million) in respect of the Group income tax reserve, the majority of which relates to the risk of challenge from the local tax authorities. Aside from the impact of any change in judgement as the State Aid and UK tax authority challenges progress, which is discussed above, the Group does not anticipate that there will be any material change to these provisions in the next 12 months. Due to the uncertainty associated with such tax items, it is possible that at a future date, on conclusion of open tax matters, the final outcome may vary significantly.

Consolidated financial statements and notes
Notes to the consolidated financial statements

7 Taxation continued

DNon-current tax liabilities

  October 31, 2020  October 31, 2019 
  
$m

 
$m

Corporation tax
  102.7   
119.7
 

The non-current tax creditor is $102.7 million (2019: $119.7 million). The non-current creditor reflects the US transition tax payable more than 12 months after the balance sheet date.

EDeferred tax

     
12 months ended
October 31, 2020
  
12 months ended
October 31, 2019
 
Net Deferred tax liability Note  
$m

 
$m

At November 1     (987.1)  
(1,170.5
)
            
Credited to consolidated statement of comprehensive income:
     147.9   
188.7
 
-          Continuing operations  7A
  149.0   
156.4
 
-          Discontinued operation      (1.1)  
32.3
 
             
Debited directly to equity in relation to share options
      (1.5)  
(7.6
)
             
(Debited)/credited to other comprehensive income:
      (2.5)  
27.0
 
             
             
Impact of adoption of IFRS 9
      -   
4.4
 
Impact of adoption of IFRS 15
      -   
(17.3
)
Impact of adoption of IFRS 16
      1.8   
-
 
Foreign exchange adjustment
      0.3   
(11.8
)
At October 31      (841.1)  
(987.1
)

Deferred tax assets and liabilities below are presented net where there is a legally enforceable right to offset and the intention to settle on a net basis.

Deferred tax assets

  
Tax losses
and interest
restrictions
  
Share
based
payments
  
Deferred
revenue
  
Tax
credits
  
Intangible
fixed
assets
  
Other
temporary
differences
  
Research
and
Development
  
Total
 
  
$m

 
$m

 
$m

 
$m

 
$m

 
$m

 
$m

 
$m

At November 1, 2019  100.5   5.0   108.6   6.8   -   88.6   -   309.5 
Transferred from deferred tax liabilities
  -   -   -   -   -   -   13.6   13.6 
Credited/(charged) to consolidated statement of   comprehensive income – continuing operations
  33.0   (2.7)  (18.1)  9.5   0.2   (24.4)  72.9   70.4 
Credited to consolidated statement of comprehensive income – discontinued operation
  -   -   -   -   -   (1.1)  -   (1.1)
Credited directly to equity
  -   (1.5)  -   -   -   -   -   (1.5)
Debited to other comprehensive income
  -   -   -   -   -   6.2   -   6.2 
Foreign exchange adjustment
  -   -   -   -   (0.2)  0.4   -   0.2 
Subtotal  133.5   0.8   90.5   16.3   -   69.7   86.5   397.3 
Jurisdictional offsetting                              (397.3)
At October 31, 2020                              - 

Consolidated financial statements and notes
Notes to the consolidated financial statements

7 Taxation continued

E
Deferred tax continued

  
Tax losses and interest
restrictions
  
Share
based
payments
  
Deferred
revenue
  
Prepaid
royalty
  
Tax
credits
  
Intangible
fixed
assets
  
Other
temporary differences
  
Total
 
  
$m

 
$m

 
$m

 
$m

 
$m

 
$m

 
$m

  
$m

At November 1, 2018  26.6   17.4   119.9   41.9   29.7   3.0   70.8   309.3 
Credited/(charged) to consolidated statement of comprehensive income – continuing operations
  73.9   (5.1)  (12.0)  (41.9)  (22.9)  (3.0)  12.7   1.7 
Credited/(charged) to consolidated statement of comprehensive income – discontinued operation
  -   -   0.7   -   -   -   (12.3)  (11.6)
Credited directly to equity
  -   (7.6)  -   -   -   -   -   (7.6)
Debited to other comprehensive income
  -   -   -   -   -   -   13.0   13.0 
Foreign exchange adjustment
  -   0.3   -   -   -   -   -   0.3 
Impact of adoption of IFRS 9
  -   -   -   -   -   -   4.4   4.4 
Subtotal  100.5   5.0   108.6   -   6.8   -   88.6   309.5 
Jurisdictional offsetting                              (309.5)
At October 31, 2019                              - 

A deferred tax charge to equity of $1.5 million (2019: $7.6 million) arises during the period in relation to share-based payments. The change is primarily due to the decrease in the Group’s share price during the 12 months ended October 31, 2020.

The deferred tax asset relating to other temporary differences of $69.7 million as at October 31, 2020 (2019: $88.6 million) has decreased during the year primarily due to the reversal of various short-term temporary timing differences. Deferred tax assets are recognized in respect of tax losses carried forward to the extent that the realization of the related tax benefit through the utilization of future taxable profits is probable.

Deferred tax assets
The Group did not recognize deferred tax assets in relation to the following gross temporary differences, the expiration of which is determined by the tax law of each jurisdiction:

  Expiration: 
  2021  2022  2023  2024  2025  Thereafter  No expiry  Total 
  
$m

 
$m
 
$m

 
$m

 
$m

 
$m

 
$m

 
$m

At October 31, 2020                                
Type of temporary difference:                                
Losses  5.0   11.9   23.7   43.4   13.3   2,226.7   50.7   2,374.7 
Credits  3.5   3.1   1.8   1.4   0.7   5.5   45.4   61.4 
Other  -   -   -   -   -   88.4   23.9   112.3 
Total  8.5   15.0   25.5   44.8   14.0   2,320.6   120.0   2,548.4 

  Expiration: 
  2020  2021  2022  2023  2024  Thereafter  No expiry  Total 
  

$m

 

$m

 

$m

 
$m

 
$m

 

$m

 

$m

 

$m

At October 31, 2019                                
Type of temporary difference:                                
Losses  
56.3
   
99.2
   
40.1
   
33.6
   
41.8
   
2,191.6
   
50.7
   
2,513.3
 
Credits  
3.5
   
3.6
   
2.1
   
1.3
   
0.7
   
1.7
   
28.9
   
41.8
 
Other  
-
   
-
   
-
   
-
   
-
   
-
   
23.9
   
23.9
 
Total  
59.8
   
102.8
   
42.2
   
34.9
   
42.5
   
2,193.3
   
103.5
   
2,579.0
 

Consolidated financial statements and notes
Notes to the consolidated financial statements

7 Taxation continued

E
Deferred tax continued

Deferred tax liabilities

  
Intangible
fixed
assets
  
Research
and
development
  
Other
temporary differences
  
Total
 
  
$m

 $m  
$m

 
$m

At November 1, 2019  (1,257.1)  13.6   (53.1)  (1,296.6)
Transferred to deferred tax assets  -   (13.6)  -   (13.6)
Charged to Consolidated statement of comprehensive income – continuing operations  85.4   -   (6.8)  78.6 
Credited to other comprehensive income – continuing operations  (8.7)  -   -   (8.7)
Credited to equity - impact of adoption of IFRS 16  -   -   1.8   1.8 
Foreign exchange adjustment  (0.1)  -   0.2   0.1 
Subtotal  (1,180.5)  -   (57.9)  (1,238.4)
Jurisdictional offsetting              397.3 
At October 31, 2020              (841.1)

  
Intangible
fixed
assets
  
Other
Temporary
differences
  
Total
 
  
$m

 

$m

 
$m

At November 1, 2018  
(1,448.5
)
  
(31.3
)
  
(1,479.8
)
Charged to Consolidated statement of comprehensive income – continuing operations  
155.5
   
(0.8
)
  
154.7
 
Charged to Consolidated statement of comprehensive income – discontinued operation  
34.0
   
9.9
   
43.9
 
Credited to other comprehensive income – continuing operations  
14.0
   
-
   
14.0
 
Impact of adoption of IFRS 15  
-
   
(17.3
)
  
(17.3
)
Foreign exchange adjustment  
(12.1
)
  
-
   
(12.1
)
Subtotal  
(1,257.1
)
  
(39.5
)
  
(1,296.6
)
Jurisdictional offsetting          
309.5
 
At October 31, 2019          
(987.1
)

No deferred tax liability is recognized in respect of temporary differences associated with investments in subsidiaries and branches because the Group is in a position to control the timing of the reversal of the temporary differences and none are expected to reverse in the foreseeable future.

8 Dividends

  
12 months ended
October 31, 2020
  
12 months ended
October 31, 2019
  
18 months ended
October 31, 2018
 
Equity - ordinary 
$m

 
$m

 
$m

Final paid nil cents (2019: 58.33 cents, 2018: 58.33 cents) per ordinary share  -   
240.7
   
133.9
 
First Interim paid nil cents (2019: 58.33 cents, 2018: 34.60 cents) per ordinary share  -   
198.5
   
156.2
 
Second Interim paid nil cents (2019: nil cents, 2018: 58.33 cents) per ordinary share  -   
-
   
252.1
 
   -   
439.2
   
542.2
 

On March 18, 2020, given the increased macro-economic uncertainty as a result of the COVID-19 pandemic, as a precautionary measure, the directors withdrew their recommendation for the payment of a final dividend of 58.33 cents per share (2016: $111.0 million or 49.74 cents per share).in respect of the 12 months ended October 31, 2019.  Similarly, no dividend was paid in respect of the six months to April 30, 2020.

The directors announce an interimannounced a final dividend of 34.6015.5 cents per share (2016: 29.73 cents per share) payable on February 9, 2018April 15, 2021 to shareholders who are registered at January 19, 2018.March 12,  2021. This interimfinal dividend, amounting to $150.6 million (2016: $66.5 million)$51.9 milion, has not been recognized as a liability as at October 31, 2017.2020.


Consolidated financial statements and notes
Notes to the consolidated interim financial statements (unaudited)

10.9 Earnings per share

The calculation of the basic earnings per share has been based on the earnings attributable to owners of the parent and the weighted average number of shares for each period.

Reconciliation of the earnings and weighted average number of shares:

  Six months ended October 31, 2017  Six months ended October 31, 2016 
  
Total
earnings
  
Weighted
average
number
of shares
  
Per share
amount
  
Per share
amount
  
Total
earnings
  
Weighted
average
number
of shares
  
Per share
amount
  
Per share
amount
 
   $’000   ‘000  Cents  Pence   $’000   ‘000  Cents  Pence 
Basic EPS                            
Earnings attributable to ordinary shareholders 1
  106,301   296,698   35.83   27.50   90,638   229,067   39.57   29.49 
Effect of dilutive securities                                
Options      10,207               8,689         
Diluted EPS                                
Earnings attributable to ordinary shareholders  106,301   306,905   34.64   26.58   90,638   237,756   38.12   28.41 
  
12 months ended
October 31, 2020
  
12 months ended
October 31, 2019
  
18 months ended
October 31, 2018
 
Earnings ($m)         
(Loss)/profit for the period from continuing operations  (2,974.6)  
(18.1
)
  
707.2
 
Profit for the period from discontinued operation  5.1   
1,487.2
   
76.9
 
   (2,969.5)  
1,469.1
   
784.1
 
             
Number of shares (m)            
Weighted average number of shares  335.7   
378.1
   
388.7
 
Dilutive effects of shares  -   
4.1
   
11.0
 
   335.7   
382.2
   
399.7
 
             
Earnings per share            
Basic earnings per share (cents)            
Continuing operations  (886.15)  
(4.87
)
  
181.91
 
Discontinued operation  1.52   
393.37
   
19.79
 
Total Basic earnings per share  (884.63)  
388.50
   
201.70
 
             
Diluted earnings per share (cents)            
Continuing operations 1
  (886.15)  
(4.87
)
  
176.92
 
Discontinued operation  1.52   
389.16
   
19.25
 
Total Diluted earnings per share 1
  (884.63)  
384.35
   
196.17
 
             
Basic earnings per share (pence)            
Continuing operations  (693.45)  
(3.82
)
  
136.73
 
Discontinued operation  1.19   
308.89
   
14.88
 
Total Basic earnings per share  (692.26)  
305.07
   
151.61
 
             
Diluted earnings per share (pence)            
Continuing operations 1
  (693.45)  
(3.82
)
  
132.98
 
Discontinued operation  1.19   
305.59
   
14.47
 
Total Diluted earnings per share 1
  (692.26)  
301.81
   
147.45
 
             
Earnings attributable to ordinary shareholders            
From continuing operations  (2,974.6)  
(18.1
)
  
707.2
 
Excluding non-controlling interests  -   
(0.3
)
  
(0.1
)
(Loss)/profit for the period from continuing operations  (2,974.6)  
(18.4
)
  
707.1
 
From discontinued operation  5.1   
1,487.2
   
76.9
 
   (2,969.5)  
1,468.8
   
784.0
 
Average exchange rate 
$1.28/1  

$1.27/1
  

$1.33/1
 

1Earnings The Group reported a loss from continuing and discontinued operations attributable to the ordinary equity shareholders isof the profitCompany for the six12 months ended October 31, 20172020. The Diluted EPS is reported as equal to Basic EPS, as no account can be taken of $106.6 million (2016: $90.6 million), excluding amounts attributable to non-controlling intereststhe effect of $0.3 million (2016: $nil).dilutive securities under IAS 33.

The weighted average number of shares excludes treasury shares that do not have dividend rights. Earnings per share, expressed in pence, has used the average exchange rate for the six months ended October 31, 2017 of $1.30 to £1 (2016: $1.34 to £1)rights (note 25).

11. Finance income and finance costs


  
Six months
ended
October 31, 2017
  
Six months
ended
October 31, 2016
 
   $’000   $’000 
Finance costs        
Interest on bank borrowings  59,540   41,627 
Amortization of facility costs and original issue discounts  13,448   7,302 
Finance costs on bank borrowings  72,988   48,929 
Net interest expense on retirement obligations (note 22)  579   262 
Finance lease expense  1,161   - 
Interest rate swaps: cash flow hedges, transfer from equity  456   - 
Other  303   264 
Total  75,487   49,455 
         
Finance income        
Bank interest  1,030   315 
Interest on non-plan pension assets (note 22)  231   187 
Other  438   - 
Total  1,699   502 
         
Net finance cost  73,788   48,953 
         
Included within exceptional items (note 7)        
Finance costs incurred in escrow period  6,326   - 
Finance income earned in escrow period  (553)  - 
   5,773   - 

12. Taxation

The tax charge for the six months ended October 31, 2017 was $39.1 million (2016: $22.6 million) with the Group’s effective tax rate (“ETR”) being 26.8% (2016: 20.0%).

The Group’s ETR for the six months ended October 31, 2017 (26.8%) is higher than the previous year (20.0%) mainly due to the inclusion of HPE Software results, which are subject to tax at a higher rate than the existing Micro Focus group entities and restrictions to the deductibility of interest expenses under new UK tax rules.

The Group continues to benefit from the UK’s Patent Box regime. Benefits during the six months ended October 31, 2017 were $5.5 million (2016: $4.3 million). The Group realized benefits in relation to intra-Group financing in the six months ended October 31, 2017 of $4.6 million (2016: $8.4 million).

The Group’s cash taxes paid in the period were $20.5 million, compared to $18.2 million in the six months ended October 31, 2016.


Consolidated financial statements and notes
Notes to the consolidated interim financial statements (unaudited)

13.10 Goodwill

     October 31, 2020  October 31, 2019 
  Note  
$m

 

$m

Cost           
At November 1     6,671.3   
6,805.0
 
Acquisitions  33   1.4   
26.8
 
Effects of movements in exchange rates      (38.1)  
(160.5
)
At October 31      6,634.6   
6,671.3
 
             
Impairment losses            
At November 1      -   
-
 
Impairment charge for the period      (2,799.2)  
-
 
At October 31      (2,799.2)  
-
 
             
Net book value      3,835.4   
6,671.3
 
             
A segment-level summary of the goodwill allocation is presented below:            
Micro Focus      3,835.4   
6,671.3
 
  October 31, 2017  October 31, 2016 
Cost and Net book value  $’000   $’000 
At May 1,  2,828,604   2,436,168 
Acquisition (note 28)  5,105,472   391,657 
At October 31  7,934,076   2,827,825 
         
A segment-level summary of the goodwill allocation is presented below:        
Micro Focus  7,074,510   1,968,259 
SUSE  859,566   859,566 
   7,934,076   2,827,825 

Goodwill acquired through business combinations has been allocated to a cash-generating unit (“CGU”) for the purpose of impairment testing.

The additions to goodwill arising in the six12 months ended October 31, 2017 relate2020, related to the acquisition of HPE SoftwareAtar Labs of $5,105.5 $1.4 million (note 28).33) has been allocated to the Micro Focus CGU as this is consistent with the segment reporting that is used in internal management reporting. Of the additionsaddition to goodwill, there is no amount that isall amounts are expected to be deductible for tax purposes.

14.The goodwill arising in the 12 months ended October 31, 2019, related to the acquisition of Interset Software Inc. of $26.8 million (note 33), has been allocated to the Micro Focus CGU as this is consistent with the segment reporting that is used in internal management reporting. Of the addition to goodwill, all amounts are expected to be deductible for tax purposes.

Impairment test

Impairment of goodwill is tested annually, or more frequently where there is an indication of impairment. An impairment test is a comparison of the carrying value of the assets of the CGU with their recoverable amount. Where the recoverable amount is less than the carrying value, an impairment results. The Group’s annual test is performed at October 31. It was determined that the adverse impact of COVID-19 on the global economy and the challenging trading environment that is likely to result from this was an indicator of potential impairment as at April 30, 2020. Therefore, an additional impairment test was performed at this date. As a result, for the six months ended April 30, 2020, the Group recorded an impairment charge of $0.9 billion (2019: $nil). The impairment charge related solely to goodwill and was recognized in administrative expenses as an exceptional cost in the Consolidated Statement of Comprehensive Income.

The Group then performed the impairment test at October 31, 2020 incorporating its knowledge of the business into that testing and noting at that date the market capitalization was less than the net assets of the Group, which was taken into account during the impairment test. An additional impairment charge of $1.9 billion has been recognized resulting from the year end impairment test. The total impairment charge recorded in the 12 months ended October 31, 2020 was $2.8 billion and has been recognized in administrative expenses as an exceptional cost in the Consolidated Statement of Comprehensive Income. The recoverable amount of the Micro Focus CGU is $9.3 billion, based on value in use calculations. The impairment charge relates solely to goodwill.

The recoverable amount of the Micro Focus CGU is determined based on its Value In Use (“VIU”). The VIU includes estimates about the future financial performance of the CGU and is based on five-year projections and then a terminal value calculation. It utilizes discounted board approved forecasts for the five years. The cash flow projections and inputs combine past performance with adjustments as appropriate where the directors believe that past performance and rates are not indicative of future performance and rates.

Consolidated financial statements and notes
Notes to the consolidated financial statements

10 Goodwill continued

Impairment test continued

Impairment reviews under IAS 36 are required to exclude the estimated cash inflow and outflows arising from improving or enhancing the performance of existing assets until the cash flow is incurred. Therefore, the VIU calculation excludes the cash outflows and resulting cash inflow arising from certain investment decisions made in the Strategic Review which are included within the board approved forecasts. In addition, the VIU calculation excludes the cost saving impacts, which are included in the board approved forecasts, resulting from restructuring activities which have not commenced.

The impairment charge recognized in the Micro Focus CGU primarily reflects our trading performance and the macro-economic environment when compared to the original projections produced at the time of the HPE Software acquisition, which was exacerbated by the impacts of the COVID-19 pandemic. Our assumption of a moderation in the revenue decline and delivery of flat to low single digit growth from the Strategic & Operational Review of February 2020 remains valid in the board approved five year forecasts; although as the VIU calculation excludes the cash inflows resulting from a number of the investment decisions made in the Strategic review the VIU calculation has a delay in the achievement of flat growth versus the board approved five year forecasts. Therefore as disclosed below, over the five year forecast period, this has resulted in a reduction in the range of average annual revenue growth rates by product group.

Key assumptions
Key assumptions in the VIU are considered to be the discount rate, average annual revenue growth rate by product group and the long-term cash flow growth rate. These have been assessed taking into consideration the current economic climate and the resulting impact on expected growth and discount rates.

The average annual revenue growth rate by product group, long-term cash flow growth rate and discount rate used in the VIU calculation are:
  October 31, 2020  October 31, 2019 
Long-term cash flow growth rate for terminal value  1.0%  
1.0
%
Pre-tax discount rate1
  10.9%  
10.3
%
Average annual revenue growth rate by product group2
 (8.1)% to 2.2%  (2.4)% to 0.8% 

1 This equates to a post-tax discount rate of 8.2% (2019: 8.0%).
2 Medium-term annual revenue growth rate by product group was considered the key assumption in 2019 with a range of (2.0)% to 2.1% disclosed. Given the future macro-economic uncertainty caused by the on-going pandemic at the April 30, 2020 impairment test the Group extended the key assumption going forward to cover the five years forecasts used for impairment testing. The key assumption for 2019 has been revised to be presented on a consistent basis with 2020.

Sensitivity analysis
In undertaking this analysis, the directors have considered reasonably possible changes in the key assumptions, taking into consideration that the Group is insulated from some significant adverse impacts by its geographical spread and that the Group’s cost base is flexible and could quickly respond to market changes as shown by our responses to the COVID-19 pandemic where margins have been largely maintained during the year. The sensitivities are prepared on the basis that the reasonably possible change in each key assumption would not have a consequential impact on other key assumptions used in the impairment review and therefore leave all other assumptions unchanged. The headroom and impairments disclosed below are on the VIU calculation, which, as explained above, excludes the cash inflow and outflow assumptions arising from the investment decisions made in the Strategic Review where these have not been fully implemented. The directors considered whether the range of reasonably possible changes in key assumptions should be widened as a result of the increased uncertainty resulting from the COVID-19 outbreak. However, the directors concluded this was unnecessary as the assumptions are either long-term (i.e. five year revenue growth and long-term growth) and therefore exceed the period expected to be impacted by COVID-19 or in the case of the discount rate, have not seen significant volatility due to COVID-19.

The directors have assessed that a reasonably possible change in the discount rate is an absolute movement of 1.0% (2019: 2.0%). The directors have considered the sensitivity of the discount rate in light of the impact of the significant economic uncertainty resulting from COVID-19 has had on the financial inputs used in determining the discount rate and have concluded that reducing the reasonably possible change from 2% to 1% is appropriate in light of the limited volatility seen since 2018. An increase in the discount rate of 1% to 11.9% would increase the impairment recognized at October 31, 2020 by $0.8 billion. A decrease in the discount rate of 1% to 9.9% would decrease the impairment recognized at October 31, 2020 by $1.0 billion.

Consolidated financial statements and notes
Notes to the consolidated financial statements

10 Goodwill continued

The directors have assessed that a reasonably possible change in the average annual revenue growth rate by product group is an absolute reduction of 2.0%. A decrease in the average annual revenue growth rate by product group of 2% would increase the impairment recognized at October 31, 2020 by $2.0 billion. This sensitivity has been presented exclusive of mitigating actions, such as cost saving, that would be taken in such a scenario and which would at least be partially offset such a reduction in cash flows.

The directors have assessed that a reasonably possible change in the long-term growth rate is an increase or decrease of 0.5% to 1.5% or 0.5% respectively (2019: not reasonably possible). An increase of 0.5% would decrease the impairment recognized at October 31, 2020 by $0.3 billion. A decrease of 0.5% would increase the impairment recognized at October 31, 2020 by $0.3 billion.

11 Other intangible assets

           Purchased intangibles    
     
Purchased
software
  
Product development
costs
  
Technology
  
Trade
names
  
Customer relationships
  
Lease
contracts
  
Total
 
  Note  
$m

 
$m

 
$m

 
$m

 
$m

 
$m

 
$m

Cost                               
At October 31, 2019     146.7   257.0   2,178.6   267.3   5,323.3   14.9   8,187.8 
Transfers to right-of-use assets1
     -   -   -   -   -   (14.9)  (14.9)
At November 1, 2019     146.7   257.0   2,178.6   267.3   5,323.3   -   8,172.9 
Acquisitions – Atar Labs  33   -   -   6.6   -   -   -   6.6 
Additions      55.5   16.2   -   -   -   -   71.7 
Additions – external consultants      -   0.8   -   -   -   -   0.8 
Disposals      (11.2)  -   -   -   -   -   (11.2)
Effects of movements in exchange rates      0.5   -   16.0   1.9   40.7   -   59.1 
At October 31, 2020      191.5   274.0   2,201.2   269.2   5,364.0   -   8,299.9 
                                 
Accumulated amortization                                
At October 31, 2019      76.9   214.3   668.9   68.0   1,204.3   13.1   2,245.5 
Transfers to right-of-use assets1
      -   -   -   -   -   (13.1)  (13.1)
At November 1, 2019      76.9   214.3   668.9   68.0   1,204.3   -   2,232.4 
Amortization charge for the period      46.5   23.5   190.2   19.1   394.8   -   674.1 
Disposals      (10.6)  -   -   -   -   -   (10.6)
Effects of movements in exchange rates      0.7   0.1   6.6   0.8   12.8   -   21.0 
At October 31, 2020      113.5   237.9   865.7   87.9   1,611.9   -   2,916.9 
                                 
Net book amount at October 31, 2020      78.0   36.1   1,335.5   181.3   3,752.1   -   5,383.0 
Net book amount at October 31, 2019      69.8   42.7   1,509.7   199.3   4,119.0   1.8   5,942.3 
          
        Purchased intangibles 
  
Purchased
software
  
Product
Development
costs
  Technology  
Trade
names
  
Customer
relationships
  
Lease
contracts
  Total 
   $’000   $’000   $’000   $’000   $’000   $’000   $’000 
Net book value                            
At May 1, 2016  1,967   43,249   149,784   194,656   576,899   -   966,555 
Acquisitions  79   -   90,175   22,111   210,744   -   323,109 
Additions  2,226   15,048   -   -   -   -   17,274 
Additions – external consultants  -   297   -   -   -   -   297 
Charge for the period  (574)  (12,117)  (37,027)  (5,501)  (63,866)  -   (119,085)
Exchange adjustments  (1,966)  -   -   -   -   -   (1,966)
At October 31, 2016  1,732   46,477   202,932   211,266   723,777   -   1,186,184 
                             
Net book value                            
At May 1, 2017  3,665   49,127   175,931   200,772   659,875   -   1,089,370 
Acquisition (note 28)  72,825   -   1,775,000   188,000   4,222,000   15,000   6,272,825 
Additions  18,266   16,878   -   -   -   -   35,144 
Additions- external consultants  -   506   -   -   -   -   506 
Charge for the period  (2,753)  (12,375)  (63,101)  (10,109)  (109,820)  (448)  (198,606)
Exchange adjustments  433   (66)  -   -   -   -   367 
At October 31, 2017  92,436   54,070   1,887,830   378,663   4,772,055   14,552   7,199,606 

1 Lease contracts have been reclassified to right-of-use assets following the adoption of IFRS 16 on November 1, 2019.

Consolidated financial statements and notes
Notes to the consolidated financial statements

11 Other intangible assets continued

           Purchased intangibles    
     
Purchased
software
  
Product
development
costs
  
Technology
  
Trade
names
  
Customer relationships
  
Lease
contracts
  
Total
 
  Note  
$m

 
$m

 

$m

 
$m

 
$m

 

$m

 
$m

Cost                               
At November 1, 2018     
141.1
   
259.1
   
2,158.5
   
267.7
   
5,377.2
   
15.0
   
8,218.6
 
Acquisitions – Interset Software Inc  
33
   
-
   
-
   
44.5
   
4.2
   
12.5
   
-
   
61.2
 
Additions      
12.3
   
16.5
   
-
   
-
   
-
   
-
   
28.8
 
Additions – external consultants      
-
   
0.5
   
-
   
-
   
-
   
-
   
0.5
 
Disposals      
(7.4
)
  
(19.1
)
  
-
   
-
   
-
   
-
   
(26.5
)
Effects of movements in exchange rates      
0.7
   
-
   
(24.4
)
  
(4.6
)
  
(66.4
)
  
(0.1
)
  
(94.8
)
At October 31, 2019      
146.7
   
257.0
   
2,178.6
   
267.3
   
5,323.3
   
14.9
   
8,187.8
 
                                 
Accumulated amortization                                
At November 1, 2018      
50.1
   
206.7
   
478.9
   
48.9
   
801.5
   
3.2
   
1,589.3
 
Amortization charge for the period      
34.1
   
26.7
   
200.1
   
20.9
   
424.8
   
9.9
   
716.5
 
Disposals      
(7.4
)
  
(19.1
)
  
-
   
-
   
-
   
-
   
(26.5
)
Effects of movements in exchange rates      
0.1
   
-
   
(10.1
)
  
(1.8
)
  
(22.0
)
  
-
   
(33.8
)
At October 31, 2019      
76.9
   
214.3
   
668.9
   
68.0
   
1,204.3
   
13.1
   
2,245.5
 
                                 
Net book amount at October 31, 2019      
69.8
   
42.7
   
1,509.7
   
199.3
   
4,119.0
   
1.8
   
5,942.3
 
Net book amount at October 31, 2018      
91.0
   
52.4
   
1,679.6
   
218.8
   
4,575.7
   
11.8
   
6,629.3
 

Intangible assets, with the exception of purchased software and internally generated product development costs, relate to identifiable assets purchased as part of the Group’s business combinations. Intangible assets are amortized on a straight-line basis over their expected useful economic life - see Accounting Policy K.

Expenditure totaling $35.7 $72.5 million (2016: $17.6 million) (2019: $29.3 million) was made in the six12 months ended October 31, 2017,2020, including $17.4 $17.0 million in respect of development costs and $18.3 $55.5 million of purchased software. software primarily related to the development of the Group’s single IT platform.

The acquisition of HPE SoftwareAtar Labs in the 12 months ended October 31, 2020 gave rise to thean addition of $6,272.8 $6.6 million to purchased intangibles (note 28)33). The acquisition of Interset Software Inc. in the 12 months ended October 31, 2019 gave rise to an addition of $61.2 million to purchased intangibles (note 33).

Of the $17.4 $17.0 million of additions to product development costs, in the six months ended October 31, 2017 (2016: $15.3m), $16.9m (2016: $15.0m)$16.2 million (2019: $16.5m) relates to internal product development costs and $0.8 million (2019: $0.5 million (2016: $0.3 million)million) to external consultants’ product development costs.

At October 31, 2017,2020, the unamortized lives of technology assets were in the range of threetwo to 15nine years, customer relationships in the range of twoone to 1512 years and trade names in the range of threefour to 2016 years. The HPE Software business acquired purchased intangibles, the largest component of the Group, have another nine years life remaining for technology (carrying value $1.2 billion) and up to 12 years’ life remaining for customer relationships purchased intangibles (carrying value $3.5 billion).

Amortization
F-51
Consolidated financial statements and notes
Notes to the consolidated financial statements

11 Other intangible assets continued

Included in the consolidated statement of comprehensive income was:

  
12 months ended
October 31, 2020
  
12 months ended
October 31, 2019
 
For continuing operations: 
$m

 
$m

Cost of sales:        
-         amortization of product development costs  23.5   
26.7
 
-         amortization of acquired purchased technology  190.2   
200.1
 
Selling and distribution:        
-         amortization of acquired purchased trade names and customer relationships (2019:  amortization of acquired purchased trade names, customer relationships and lease contracts)  413.9   
455.6
 
Administrative expenses:        
-         amortization of purchased software  46.5   
34.1
 
Total amortization charge for the period  674.1   
716.5
 
         
Research and development:        
-         capitalization of product development costs  16.2   
16.5
 

12 Property, plant and equipment

  
Freehold land
and buildings
  
Leasehold
improvements
  
Computer
equipment
  
Fixtures and
fittings
  
Total
 
  
$m

 
$m

 
$m

 
$m

 
$m

Cost                    
At October 31, 2019  14.0   113.5   144.4   13.2   285.1 
Transfers to right-of-use assets1
  -   (9.8)  (50.6)  -   (60.4)
At November 1, 2019  14.0   103.7   93.8   13.2   224.7 
Additions  -   4.8   28.4   2.9   36.1 
Other2
  -   (9.8)  -   -   (9.8)
Disposals  -   (15.3)  (14.1)  (8.5)  (37.9)
Effects of movements in exchange rates  -   0.2   (0.2)  0.2   0.2 
At October 31, 2020  14.0   83.6   107.9   7.8   213.3 
                     
Accumulated depreciation                    
At October 31, 2019  2.2   51.7   85.1   5.6   144.6 
Transfers to right-of-use assets1
  -   (5.2)  (29.7)  -   (34.9)
At November 1, 2019  2.2   46.5   55.4   5.6   109.7 
Disposals  -   (11.0)  (13.5)  (7.8)  (32.3)
Charge for the period  0.3   11.9   27.6   2.2   42.0 
Effects of movements in exchange rates  -   (0.1)  -   0.3   0.2 
At October 31, 2020  2.5   47.3   69.5   0.3   119.6 
Net book amount at October 31, 2020  11.5   36.3   38.4   7.5   93.7 
                     
Net book amount at October 31, 2019  11.8   61.8   59.3   7.6   140.5 
Transfers to right-of-use assets1
  -   (4.6)  (20.9)  -   (25.5)
Net book amount at November 1, 2019  11.8   57.2   38.4   7.6   115.0 

1 Property, plant and equipment held under finance leases and hire purchase contracts under IAS 17 and assets recognized in relation to asset retirement obligations on leased asset have been reclassified to right-of-use assets following the adoption of IFRS 16 on November 1, 2019.

2 Other movements of $9.8 million (2019: $nil) relates to amounts received in relation to the reimbursement of leasehold improvement costs.

Consolidated financial statements and notes
Notes to the consolidated financial statements

12 Property, plant and equipment continued

     
Freehold land
and buildings
  
Leasehold
improvements
  
Computer
equipment
  
Fixtures and
fittings
  
Total
 
  Note  
$m

 

$m

 
$m

 
$m

 

$m

Cost                       
At November 1, 2018     
14.3
   
79.2
   
103.3
   
29.1
   
225.9
 
Acquisition – Interset Software Inc.  
33
   
-
   
-
   
0.2
   
0.1
   
0.3
 
Additions      
-
   
37.7
   
24.6
   
3.0
   
65.3
 
Disposals      
-
   
(3.6
)
  
(3.0
)
  
-
   
(6.6
)
Reclassification      
-
   
-
   
19.8
   
(19.8
)
  
-
 
Effects of movements in exchange rates      
(0.3
)
  
0.2
   
(0.5
)
  
0.8
   
0.2
 
At October 31, 2019      
14.0
   
113.5
   
144.4
   
13.2
   
285.1
 
                         
Accumulated depreciation                        
At November 1, 2018      
2.2
   
34.3
   
36.6
   
8.5
   
81.6
 
Charge for the period      
0.3
   
18.8
   
46.1
   
1.3
   
66.5
 
Disposals      
-
   
(1.7
)
  
(1.3
)
  
-
   
(3.0
)
Reclassification      
-
   
-
   
4.6
   
(4.6
)
  
-
 
Effects of movements in exchange rates      
(0.3
)
  
0.3
   
(0.9
)
  
0.4
   
(0.5
)
At October 31, 2019      
2.2
   
51.7
   
85.1
   
5.6
   
144.6
 
Net book amount at October 31, 2019      
11.8
   
61.8
   
59.3
   
7.6
   
140.5
 
Net book amount at November 1, 2018      
12.1
   
44.9
   
66.7
   
20.6
   
144.3
 

Depreciation for the six12 months ended October 31, 20172020 of $75.5 $42.0 million (2019: $66.5 million, including $13.9 million of right-of-use asset depreciation) is included inwithin administrative expenses and cost of sales (2016: $49.1m)in the Consolidated statement of comprehensive income.

13 Other non-current assets

  October 31, 2020  October 31, 2019 
  
$m

 

$m

Employee benefit deposit  17.9   
33.4
 
Long-term rent deposits  5.3   
4.9
 
Long-term prepaid expenses  2.3   
4.5
 
Net investment in finance sub-leases  5.5   
-
 
Other  0.8   
1.2
 
   31.8   
44.0
 

Employee benefit deposits are held in Israel ($12.8 million), $119.9m (2016: $69.4m)Italy ($2.4 million) and the Netherlands ($2.7 million) (2019: Germany $16.4 million, Israel $11.9 million, Italy $2.4 million, and the Netherlands $2.7 million). Employers in Italy and Israel are required by law to maintain funds to satisfy certain employee benefit liabilities, including free time off and compensation for involuntary termination of employment. These investment-based deposits are managed by third parties and the carrying values are marked-to-market based on third party investment reports. In addition, a cash deposit was held in the Netherlands on behalf of certain employees to cover legacy employment subsistence benefits. Certain employee benefit liabilities in Germany and the related benefit deposits were transferred to defined benefit obligations in the year (note 22).

Consolidated financial statements and notes
Notes to the consolidated financial statements

14 Trade and other receivables

  October 31, 2020  October 31, 2019 
  
$m

 

$m

Trade receivables  628.4   
877.9
 
Loss allowance  (17.9)  
(42.4
)
Trade receivables net  610.5   
835.5
 
Prepayments  49.1   
53.9
 
Other receivables  38.1   
87.2
 
Contract assets  33.7   
56.3
 
   731.4   
1,032.9
 

Concentrations of credit risk with respect to trade receivables are limited due to the Group’s customer base being large and unrelated. The Group considers the credit quality of trade and other receivables on a customer-by-customer basis. The Group considers that the carrying value of the trade and other receivables that is disclosed below gives a fair presentation of the credit quality of the assets. This is considered to be the case as there is a low risk of default due to the high number of recurring customers and credit control policies. In determining the recoverability of a trade receivable, the Group considers the ageing of each debtor and any change in the circumstances of the individual receivable. Other than ageing (included below), no other credit rating grades are assessed. Due to this, management believes there is no further credit risk provision required in excess of the normal provision determined by the expected credit loss methodology applied.

At October 31, 2020 and October 31, 2019, the carrying amount approximates the fair value of the instrument due to the short-term nature of the instrument. As at October 31, 2020, a loss allowance of $17.9 million (2019: $42.4 million) was recognized for trade receivables.

The ageing of these receivables is as follows:

  
Current
  
Up to three
months
  
Three to four
months
  
Over four
months
  
Total
 
  
$m

 
$m

 
$m

 
$m

 
$m

October 31, 2020:                    
Gross trade receivables  561.4   42.3   4.3   20.4   628.4 
Loss allowance  (6.1)  (0.9)  (0.4)  (10.5)  (17.9)
Net trade receivables  555.3   41.4   3.9   9.9   610.5 
                     
October 31, 2019:                    
Gross trade receivables  
696.0
   
110.1
   
8.9
   
62.9
   
877.9
 
Loss allowance  
(8.9
)
  
(3.8
)
  
(1.5
)
  
(28.2
)
  
(42.4
)
Net trade receivables  
687.1
   
106.3
   
7.4
   
34.7
   
835.5
 

Movements in the Group provision for impairment of trade receivables were as follows:

  October 31, 2020  October 31, 2019 
  
$m

 
$m

At November 1 (calculated under IAS 39)  42.4   
41.9
 
Accounting policy change (IFRS 9 - recognized against retained earnings on November 1, 2018)  -   
20.0
 
Revised November 1  42.4   
61.9
 
Loss allowance (releases)/provided in the year  (4.8)  
16.0
 
Receivables written off as uncollectable  (19.7)  
(35.5
)
At October 31  17.9   
42.4
 

The creation and release of the loss allowance for receivables have been included in selling and distribution costs and $3.2 million (2016: $0.6 million) is included in administrative expenses in the consolidatedConsolidated statement of comprehensive income. Amounts charged in the allowance account are generally written off when there is no expectation of recovering additional cash. The Group does not hold any collateral as security. The loss allowance for trade receivables is measured at an amount equal to the life-time expected credit losses as allowed for under IFRS 9.


Consolidated financial statements and notes
Notes to the consolidated interimfinancial statements

14 Trade and other receivables continued

Contract assets relate to amounts not yet billed and so not yet due from customers and which are expected to be invoiced to customers. The movement in contract assets in the year is primarily the result of the billing of one contract for $20 million on which revenue had been recognized in the 12 months ended October 31, 2019 but invoicing occurred in the 12 months ended October 31, 2020. Excluding this contract, the level of new contract assets that have arisen during the year is consistent with the level of billings on existing contract assets. The Group considers the credit quality of contract assets on a customer-by-customer basis. As with trade receivables, which contract assets convert to upon invoicing, there is considered to be a low risk of default due to the high number of recurring customers. In determining the recoverability of a contract asset, the Group considers the specific circumstances of each contract asset and any change in the circumstances of the balance. Due to this management believes significant provision is not required.

15 Contract-related costs

  October 31, 2020  October 31, 2019 
  
$m

 

$m

Current  27.9   
19.3
 
Non-current  35.7   
31.5
 
   63.6   
50.8
 

The Group capitalizes the costs of obtaining a customer contract when they are incremental and, if expected to be recovered, they are amortized over the customer life or pattern of revenue for the related contract. All amounts capitalized relate to commission costs.

Normally sales commissions paid for customer contract renewals are not commensurate with the commissions paid for new contracts.  It follows that the commissions paid for new contracts also relate to expected future renewals of these contracts. Accordingly, we amortize sales commissions paid for new customer contracts on a straight-line basis over the expected customer life, based on expected renewal frequency. The current average customer life is five years. If the expected amortization period is one year or less the Group expenses the costs when incurred.

The amortization expenses in the year for the costs of obtaining customer contracts were $16.1 million (2019: $10.2 million).

Amortization of the capitalized costs of obtaining customer contracts is classified as sales and marketing expense.  Capitalized costs from customer contracts are classified as non-financial assets in our statement of financial position.

  October 31, 2020  October 31, 2019 
  
$m

 

$m

Asset recognized from costs incurred to acquire a contract
  29.1   
31.4
 
Amortization and impairment loss recognized as cost of providing services during the year
  (16.1)  
(10.2
)

Consolidated financial statements (unaudited)and notes
Notes to the consolidated financial statements

15. Property, plant16 Cash and equipmentcash equivalents


  Freehold land  Leasehold  Computer  Fixtures    
  and buildings  improvements  equipment  and fittings  Total 
   $’000   $’000   $’000   $’000   $’000 
Net book value                    
At May 1, 2016  13,612   14,604   8,714   3,937   40,867 
Acquisitions  -   1,057   770   295   2,122 
Additions  18   2,329   3,926   181   6,454 
Disposals  -   (286)  (79)  (119)  (484)
Charge for the period  (182)  (2,060)  (2,919)  (551)  (5,712)
Exchange adjustments  (2,057)  (209)  (366)  (78)  (2,710)
At October 31, 2016  11,391   15,435   10,046   3,665   40,537 
                     
Net book value                    
At May 1, 2017  12,512   14,518   10,552   3,374   40,956 
Acquisitions (note 28)  20,044   41,041   80,775   23,804   165,664 
Additions  206   966   6,287   2,386   9,845 
Disposals  -   (176)  (20)  (231)  (427)
Charge for the period  (296)  (3,648)  (10,296)  (2,049)  (16,289)
Exchange adjustments  229   247   40   61   577 
At October 31, 2017  32,695   52,948   87,338   27,345   200,326 

16. Investments in associates

Open Invention Network LLC (“OIN”), a strategic partnership for the Group, licences its global defensive patent pool in exchange for a pledge of non-aggression which encourages freedom of action in Linux and the sharing of new ideas and inventions. There are no significant restrictions on the ability of associated undertakings to transfer funds to the parent. There are no contingent liabilities to the Group’s interest in associates.
  October 31, 2020  October 31, 2019 
  
$m

 

$m

Cash at bank and in hand
  374.3   
292.2
 
Short-term bank deposits
  362.9   
63.5
 
Cash and cash equivalents  737.2   
355.7
 

At October 31, 2017 the Group had a 12.5% interest ($11.0m) (2016: 14.3%, $12.7m) investment in OIN. There are 8 (2016: 7) equal shareholders of OIN, all holding 12.5% (2016: 14.3%) interest, and each shareholder has one board member and one alternative board member. The Group exercises significant influence over OIN’s operation and therefore accounts for its investment in OIN as an associate.

The Group uses the equity method of accounting for its interest in associates.  The following table shows the aggregate movement in the Group’s investment in associates:

$’000
At May 1, 201612,711
Share of post-tax loss of associates(1,127)
At October 31, 201611,584
At May 1, 201711,457
Share of post-tax loss of associates(438)
At October 31, 201711,019

Details of the Group’s principal associates are provided below.


Company name
Country of incorporation and
principal place of business
Proportion heldPrincipal activities
Open Invention Network LLCUSA12.5%Sale and support of software


The accounting year end date of the associate consolidated within the Group’s financial statements is December 31, and we obtain its results on a quarterly basis. The Group records an adjustment within the consolidated financial statements to align the reporting period of the associate and the Group. The assets, liabilities, and equity of the Group’s associate as at September 30, and the revenue and loss of the Group’s associate for the six months ended September 30, with the corresponding adjustment to align the reporting period was as follows:
  September 30, 2017  September 30, 2016 
   $’000   $’000 
Non-current assets  39,201   39,879 
Current assets  51,044   61,684 
Current liabilities  (695)  (541)
Non-current liabilities  (656)  (367)
Equity  88,894   100,655 

F-16

Notes to the consolidated interim financial statements (unaudited)

16. Investments in associates (continued)

  September 30, 2017  September 30, 2016 
   $’000   $’000 
Revenue  -   - 
Net loss  (3,760)  (8,217)

  2017  2016 
   $’000   $’000 
Loss attributable to the Group for the six months ended September 30,  (470)  (1,027)
Adjustment on estimated October result attributable to the Group  32   (100)
Loss attributable to the Group for the six months ended October 31,  (438)  (1,127)

17. Trade and other receivables

  October 31, 2017  October 31, 2016 
   $’000   $’000 
Trade receivables  1,057,150   257,486 
Less: provision for impairment of trade receivables  (51,318)  (3,768)
Trade receivables net  1,005,832   253,718 
Prepayments  51,733   21,353 
Other receivables  193,175   2,436 
Accrued income  842   451 
Total  1,251,582   277,958 

At October 31, 20172020 and October 31, 2016,2019, the carrying amount approximates to the fair value. The Group’s credit risk on cash and cash equivalents is limited as the counterparties are well established banks with generally high credit ratings. The credit quality of cash and cash equivalents is as follows:

  October 31, 2020  October 31, 2019 
  $m
 $m

S&P/Moody’s/Fitch rating:
        
AAA
  358.4   
69.8
 
AA-
  27.2   
87.6
 
A+
  318.6   
144.4
 
A
  9.9   
23.4
 
A-
  9.1   
14.4
 
BBB+
  2.4   
1.7
 
BBB
  2.7   
4.5
 
BBB-
  0.4   
0.8
 
BB+
  0.6   
0.8
 
BB
  1.1   
0.3
 
BB-
  4.3   
6.3
 
B+
  0.2   
0.2
 
CCC+
  1.1   
-
 
C-
  1.2   
-
 
Not Rated
  -   
1.5
 
   737.2   
355.7
 

Where the opinions of the rating agencies differ, the lowest applicable rating has been assigned to the counterparty.

18.17 Trade and other payables – current

 October 31, 2020  October 31, 2019 
 
October 31, 2017
$’000
  
October 31, 2016
$’000
  
$m

 
$m

Trade payables  89,143   14,301  71.5  
105.0
 
Tax and social security  95,018   9,250 
Trade and social security
 84.3  
80.7
 
Accruals  750,588   127,612  347.7  
425.3
 
Total  934,749   151,163 
 503.5  
611.0
 

At October 31, 20172020 and at October 31, 2016,2019, the carrying amount approximates to the fair value.

Accruals At October 31, 2020 accruals include estimates of amounts payable to HPE Software, employee taxes on share-based payments, vacation and payroll accruals including– $82.8 million (2019: $88.4 million), commission and employee bonuses - $90.5 million (2019: $74.9 million), integration and commissions.

19. Borrowings

  October 31, 2017  October 31, 2016 
  $’000  $’000 
Bank loans secured  5,047,692   1,775,875 
Unamortized prepaid  facility arrangement fees and original issue discounts  (198,476)  (40,346)
   4,849,216   1,735,529 

  October 31, 2017  October 31, 2016 
  Bank loan secured  
Unamortized
prepaid facility
arrangement
fees and original
issue discounts
  Total  Bank loan secured  
Unamortized
prepaid facility
arrangement
fees and original
issue discounts
  Total 
Reported within:  $’000   $’000   $’000   $’000   $’000   $’000 
Current liabilities  37,858   (20,131)  17,727   307,750   (13,558)  294,192 
Non-current liabilities  5,009,834   (178,345)  4,831,489   1,468,125   (26,788)  1,441,337 
   5,047,692   (198,476)  4,849,216   1,775,875   (40,346)  1,735,529 
divestiture expenses - $30.1 million (2019: $26.4 million) and consulting and audit fees - $23.8 million (2019: $36.9 million).


Consolidated financial statements and notes
Notes to the consolidated interim financial statements (unaudited)

19.18 Borrowings (continued)

  October 31, 2020  October 31, 2019 
  
$m

 
$m

Bank loan secured  4,733.2   
4,775.0
 
Unamortized prepaid facility arrangement fees and original issue discounts  (92.9)  
(104.3
)
Carrying value  4,640.3   
4,670.7
 

  October 31, 2020  October 31, 2019 
  
Bank loan
secured
  
Unamortized prepaid facility arrangement
fees and original issue discounts
  Total  
Bank loan
secured
  
Unamortized prepaid facility arrangement fees and original issue
discounts
  
Total
 
Reported within: 
$m

 
$m

 
$m

 
$m

 
$m

 
$m

Current liabilities  34.2   (12.8)  21.4   
-
   
-
   
-
 
Non-current liabilities  4,699.0   (80.1)  4,618.9   
4,775.0
   
(104.3
)
  
4,670.7
 
   4,733.2   (92.9)  4,640.3   
4,775.0
   
(104.3
)
  
4,670.7
 

The Company announced on April 21, 2017 the successful syndication of the new credit facilities (the “New Facilities”) on behalf of both MA FinanceCo, LLC, a wholly owned subsidiary of Micro Focus, and Seattle SpinCo. Inc., the subsidiary that holds HPE Software which merged with a wholly owned subsidiary of Micro Focus at Completion.

The New Facilities comprise a $500.0 million Revolving Credit Facility at LIBOR plus 3.50% (subject to a LIBOR floor of 0.00%) placed with a number of financial institutions, $2,600.0 million term loan B issued by Seattle SpinCo, Inc., $385 million term loan B issued by MA FinanceCo LLC, and Eur 470.0 million (valued at $547.5 million as at October 31, 2017) issued by MA FinanceCo LLC.

New Facilities drawn as at April 30, 2017:

·
In relation to the existing senior secured term loans issued by MA FinanceCo, LLC the lenders in the Term Loan C of $412.5 million due November 2019 were offered a cashless roll of their investment into the existing Term Loan B, becoming Term Loan B-2, due November 2021 and this loan was re-priced to LIBOR plus 2.50% (subject to a LIBOR floor of 0.00%) and as a result of the cashless rollover increased in size from $1,102.7 million to $1,515.2 million, effective from April 28, 2017.

During the current period to October 31, 2017 the following New Facilities were drawn down:

HPE Software Facilities:

·
The new $2,600.0 million senior secured seven-year term loan B issued by Seattle SpinCo. Inc. is priced at LIBOR plus 2.75% (subject to a LIBOR floor of 0.00%) with an original issue discount of 0.25%;

Micro Focus Facilities:

·
The new $385.0 million senior secured seven-year term loan B issued by MA FinanceCo LLC is also priced at LIBOR plus 2.75% (subject to a LIBOR floor of 0.00%) with an original issue discount of 0.25%; and
·
The new Euro 470.0 million (equivalent to $547.5 million) senior secured seven-year term loan B issued by MA FinanceCo LLC is priced at EURIBOR plus 3.00% (subject to a EURIBOR floor of 0.00%) with an original issue discount of 0.25%.

As part of the HPE Software transaction, the New Facilities were used to:

·
Fund the pre-Completion cash payment by Seattle SpinCo. Inc. to HPE of $2,500.0 million (subject to certain adjustments in limited circumstances);
·Fund the Return of Value to Micro Focus’ existing Shareholders of $500.0m; and
·Pay transaction costs relating to the acquisition of HPE Software.

The balance will be usedcarrying value for general corporate and working capital purposes.

The only financial covenant attaching to these facilities relates to the Revolving Facility, which is subject to an aggregate net leverage covenant only in circumstances where more than 35% of the Revolving Facility is outstanding at a fiscal quarter end.

At October 31, 2017, $nil of the Revolving Facility was drawn together with $5,047.7 million Term Loan B-2 giving gross debt of $5,047.7 million drawn.

As a covenant test is only applicable when the Revolving Facility is drawn down by 35% or more, and $nil of Revolving Facility was drawn at October 31, 2017, no covenant test is applicable.

The movements on the Group loans in the period were as follows:


  
Term
Loan B-2
  
Term
Loan B
  
Term
Loan C
  
Term
Loan B-3
  
HPE Software
Term Loan
  
Euro
Loan
  
Revolving Facility
  
Total
 
   $’000   $’000   $’000   $’000   $’000   $’000   $’000   $’000 
At May 1,2017  1,515,188   -   -   -   -   -   80,000   1,595,188 
Acquisitions  -   -   -   -   2,600,000   -   -   2,600,000 
Repayments  -   -   -   -   -   -   (215,000)  (215,000)
Draw downs  -   -   -   385,000   -   523,815   135,000   1,043,815 
Foreign exchange      -   -   -   -   23,689   -   23,689 
At October 31, 2017  1,515,188   -   -   385,000   2,600,000   547,504   -   5,047,692 

F-18

Notes to the consolidated interim financial statements (unaudited)

19. Borrowings (continued)

Borrowingsborrowings are stated after deducting unamortized prepaid facility fees and original issue discounts. Facility arrangement costs and original issue discounts are amortized between three and six years. The remaining unamortized fees of $92.9 million have a remaining period of amortization of three years.  Long-term borrowings with a drawn value of $4,733.2 million before unamortized prepaid facility fees, have a fair value estimate of borrowings equals their carrying amount.$4,535.1 million based on trading prices as at October 31, 2020 (2019: $4,686.0 million).

Short-term borrowing of $34.2 million represents capital repayments falling due on the group borrowings within the one year less unamortized prepaid facility arrangement fees and original issue discounts of $12.8 million.

On May 29, 2020, the Group announced that it had successfully priced and allocated a €600.0 million and a $650 million senior secured term loan. The new five-year facilities, along with $143.0 million of existing cash reserves, were used by the Group to fully refinance its existing senior secured term loan B due November 2021 and pay associated fees and expenses.

Prepaid facility fees of $12.2 million, which were still to be amortized, in relation to the senior secured term loan B due November 2021 were fully expensed in June 2020 with the cost recorded within finance costs in the Consolidated statement of comprehensive income. Fees of $44.0 million relating to the new senior secured term loans were capitalized in June 2020.

On September 3, 2020, the Group announced that it had successfully extended its revolving credit facility and reduced the size from $500.0 million to $350.0 million.  The Group also confirmed that it had repaid the $175.0 million previously drawn during the year as a precautionary measure in response to the COVID-19 outbreak, resulting in a balance outstanding of $nil. These actions resulted in a reduction in the Group’s gross debt and the borrowing costs associated with the revolving credit facility. The remaining prepaid facility fees of $4.5 million to be amortized were expensed in the period and new fees of $1.8 million were capitalized for the new arrangement.

Following these refinancing activities, the Group’s earliest debt maturity is in June 2024.

The following facilities were drawn as at October 31, 2020:

The €600 million (equivalent to $700.3 million) senior secured five-year term loan B-1 issued by MA FinanceCo., LLC, maturing in June 2025, is priced at EURIBOR plus 4.5% (subject to a EURIBOR floor of 0.00%) with an original issue discount of 3.0%;

The $368.2 million senior secured seven-year term loan B-3 issued by MA FinanceCo., LLC, maturing in June 2024, is priced at LIBOR plus 2.75% (subject to a LIBOR floor of 0.00%) with an original issue discount of 0.25%;

Consolidated financial statements and notes
Notes to the consolidated financial statements

18 Borrowings continued

The $650.0 million senior secured five-year term loan B-4 issued by MA FinanceCo., LLC, maturing in June 2025, is priced at LIBOR plus 4.25% (subject to a LIBOR floor of 1.00%) with an original issue discount of 2.5%;

The $2,486.3 million senior secured seven-year term loan B issued by Seattle SpinCo, Inc. , maturing in June 2024, is priced at LIBOR plus 2.75% (subject to a LIBOR floor of 0.00%) with an original issue discount of 0.25%; and

The €452.8 million (equivalent to $528.4 million) senior secured seven-year term loan B issued by MA FinanceCo., LLC, maturing in June 2024, is priced at EURIBOR plus 3.00% (subject to a EURIBOR floor of 0.00%) with an original issue discount of 0.25%.

The following facilities were undrawn at October 31, 2020:

A senior secured revolving credit facility of $350.0 million ($nil drawn), (“Revolving Facility”), with an interest rate of 3.50% above LIBOR on amounts drawn (and 0.5% on amounts undrawn) thereunder (subject to a LIBOR floor of 0.00%).

At October 31, 2020, $nil of the Revolving Facility was drawn (October 31, 2019: $nil), together with $4,733.2 million of term loans giving gross debt of $4,733.2 million drawn.

There are no financial covenants on the Group’s term loan borrowing facilities. The Revolving Facility is subject to a single financial covenant, being an aggregate net leverage covenant only in circumstances where more than 35% of the Revolving Facility is outstanding at a fiscal quarter end.  Throughout the year the applicable covenant threshold was 4.35x, however no test was applicable at October 31, 2020 or any previous test date, as the facility was not drawn in excess of the 35% threshold. This covenant is not expected to inhibit the Group’s future operations or funding plans.

The Group’s borrowing arrangements include annual repayments of 1% of the initial par value for the B-3, Seattle Spinco and Euro term B loans and 2.5% of the initial par value for the B-1 and B4 loans with the amount paid in four equal quarterly instalments and then a final balloon payment on maturity. In addition, the borrowing arrangements require additional debt repayments where the Group’s net leverage exceeds 3.00x, when 25% of excess cash flow for the prior year is required to be paid, and 3.30x, when 50% of excess cash flow for the prior year is required to be paid.

The movements on the Group loans in the year were as follows:

  
term
loan
B-1
EUR
  
term
loan
B-2
USD
  
term
loan
B-3
USD
  
term
loan
B-4
USD
  
Seattle
Spinco
term loan
B
  
Euro
term
loan
B
  
Revolving
Facility
  
Total
 
  
$m

 
$m

 
$m

 
$m

 
$m

 
$m

 
$m

 
$m

At November 1, 2018  
-
   
1,503.8
   
382.1
   
-
   
2,580.5
   
530.5
   
-
   
4,996.9
 
Repayments  
-
   
(89.1
)
  
(13.9
)
  
-
   
(94.2
)
  
(15.4
)
  
-
   
(212.6
)
Foreign exchange  
-
   
-
   
-
   
-
   
-
   
(9.3
)
  
-
   
(9.3
)
At October 31, 2019  
-
   
1,414.7
   
368.2
   
-
   
2,486.3
   
505.8
   
-
   
4,775.0
 
                                 
At November 1, 2019  -   1,414.7   368.2   -   2,486.3   505.8   -   4,775.0 
Draw downs  665.8   -   -   650.0   -   -   175.0   1,490.8 
Repayments  -   (1,414.7)  -   -   -   -   (175.0)  (1,589.7)
Foreign exchange  34.5   -   -   -   -   22.6   -   57.1 
At October 31, 2020  700.3   -   368.2   650.0   2,486.3   528.4   -   4,733.2 

Consolidated financial statements and notes
Notes to the consolidated financial statements

18 Borrowings continued
Maturity of borrowings

The maturity profile of the anticipated future cash flows including interest in relation to the Group’s borrowings on an undiscounted basis, which therefore, differs from both the carrying value and fair value, is as follows:
As at October 31, 2020:

  
term
loan
B-1
EUR
  
term
loan
B-3
USD
  
term
loan
B-4
USD
  
Seattle
Spinco
term loan
B
  
Euro
term
loan
B
  
Revolving
Facility
  
Total
 
  
$m

 
$m

 
$m

 
$m

 
$m

 
$m

 
$m

Within one year  49.0   11.0   50.3   74.6   16.9   1.8   203.6 
In one to two years  52.6   12.4   53.5   82.7   21.5   1.5   224.2 
In two to three years  47.4   14.6   48.6   98.4   21.3   -   230.3 
In three to four years  46.6   369.7   47.8   2,496.5   527.1   -   3,487.7 
In four to five years  642.8   -   599.2   -   -   -   1,242.0 
At October 31, 2020  838.4   407.7   799.4   2,752.2   586.8   3.3   5,387.8 

  
Less than 1
year
  
1-3
years
  
3-5
years
  
Total
 
  
$m

 
$m

 
$m

 
$m

Debt principal repayment  34.2   128.2   4,570.8   4,733.2 
Interest payment on debt  169.4   326.3   158.9   654.6 
At October 31, 2020  203.6   454.5   4,729.7   5,387.8 

As at October 31, 2017:2019:
 
Term
Loan B-2
  
Term
Loan B-3
  
HPE Software
Term Loan
  
Euro
Loan
  Revolving Facility  
Total
  
term
loan B-2
  
term
loan B-3
  
Seattle Spinco
term loan B
  
Euro term
loan B
  
Revolving
Facility
  
Total
 
  $’000   $’000   $’000   $’000   $’000   $’000  
$m

 
$m

 
$m

 

$m

 

$m

 

$m

Within one year  68,675   18,424   124,421   20,728   -   232,248  
61.6
  
17.0
  
114.6
  
14.1
  
1.9
  
209.2
 
In one to two years  71,925   19,241   129,937   21,941   -   243,044  
61.5
  
16.9
  
114.3
  
14.6
  
1.9
  
209.2
 
In two to three years  71,505   19,127   129,168   21,819   -   241,619  
1,419.8
  
18.5
  
124.1
  
19.3
  
1.6
  
1,583.3
 
In three to four years  70,777   18,929   127,834   21,608   -   239,148  
-
  
20.6
  
139.4
  
19.1
  
-
  
179.1
 
In four to five years  1,461,548   18,774   126,783   21,441   -   1,628,546  
-
  
373.5
  
2,522.6
  
503.6
  
-
  
3,399.7
 
In more than five years  -   390,865   2,639,609   547,338   -   3,577,812 
  1,744,430   485,360   3,277,752   654,875   -   6,162,417 
Unamortized prepaid facility arrangement fees and original issue discounts  (66,387)  (12,257)  (84,469)  (16,690)  (18,673)  (198,476)
At October 31, 2017  1,678,043   473,103   3,193,283   638,185   (18,673)  5,963,941 
At October 31, 2019 
1,542.9
  
446.5
  
3,015.0
  
570.7
  
5.4
  
5,580.5
 

  
Less than 1
year
  
1-3
years
  
3-5
years
  
Total
 
  
$m

 

$m

 
$m

 

$m

Debt principal repayment  
-
   
1,431.7
   
3,343.3
   
4,775.0
 
Interest payment on debt  
209.2
   
360.8
   
235.5
   
805.5
 
At October 31, 2019  
209.2
   
1,792.5
   
3,578.8
   
5,580.5
 

Assets pledged as collateral

As part of the new facilities above that became available on April 28, 2017, the assets pledged as collateral was changed. An all assets security has been granted in the US and England & Wales by certain members of the Micro Focus Group organized in such jurisdictions, including security over intellectual property rights and shareholdings of such members of the Micro Focus Group.

20. Financial instruments- Fair value measurement

For trade and other receivables, cash and cash equivalents, trade and other payables, obligations under finance leases and provisions, fair values approximate to book values due to the short maturity periods of these financial instruments. For trade and other receivables, allowances are made within book value for credit risk.

October 31, 2017October 31, 2016
$’000$’000
Derivative financial instruments-non-current asset1,307-


Derivative financial instruments measured at fair value, are classified as level 2 in the fair value measurement hierarchy, as they have been determined using significant inputs based on observable market data. The fair values of interest rate derivatives have been derived from forward interest rates based on yield curves observable at the balance sheet date together with the contractual interest rates.

The derivative financial instruments relate to hedging transactions entered into in the period ended October 31, 2017 (note 24). There were no transfers of assets or liabilities between levels of the fair value hierarchy during the period.


Consolidated financial statements and notes
Notes to the consolidated interim financial statements (unaudited)

21. Provisions19 Leases

  October 31, 2017  October 31, 2016 
   $’000   $’000 
Onerous leases and dilapidations  24,932   16,687 
Restructuring and integration  53,771   7,340 
Legal  3,541   3,022 
Other  100   100 
Total  82,344   27,149 
         
Current  55,678   15,420 
Non-current  26,666   11,729 
Total  82,344   27,149 
As disclosed in I “Significant Accounting policies”, W “Adoption of new and revised International Financial Reporting Standards” the Group applied IFRS 16 “Leases” using the modified retrospective approach and therefore comparative information has not been restated and continues to be reported under IAS 17 and IFRIC 14. The details of accounting policies under IAS 17 and IFRIC 4 are disclosed alongside the IFRS 16 in I “Significant Accounting policies”, R “Leases”; key differences between IFRS 16 and IAS 17 and IFRIC 4 are described in I “Significant Accounting policies”, W “Adoption of new and revised International Financial Reporting Standards”.

  
Onerous leases and
dilapidations
  
Restructuring and
integration
  
Legal
  
Other
  
Total
 
   $’000   $’000   $’000   $’000   $’000 
At May 1, 2017  16,243   12,132   3,220   484   32,079 
Acquisitions - HPE Software (note 28)  11,321   21,398   -   -   32,719 
Additional provision in the period  547   74,202   809   -   75,558 
Released  (1,006)  (325)  (410)  (384)  (2,125)
Utilization of provision  (2,255)  (53,162)  (72)  -   (55,489)
Exchange adjustments  82   (474)  (6)  -   (398)
At October 31, 2017  24,932   53,771   3,541   100   82,344 
                     
Current  3,338   48,799   3,541   -   55,678 
Non-current  21,594   4,972   -   100   26,666 
Total  24,932   53,771   3,541   100   82,344 
The Group enters into leasing arrangements in the normal course of its business including:
Office space (included in “Leasehold land and buildings”);
Data centers (included in “Leasehold land and buildings”);
Vehicles (included in “Other”); and
Computer equipment.

Computer equipment leases were previously classified as finance leases under IAS 17, all other leases were previously categorized as operating leases under IAS 17.

  
Onerous leases
and dilapidations
  
Restructuring and
integration
  
Legal
  
Other
  
Total
 
   $’000   $’000   $’000   $’000   $’000 
At May 1, 2016  18,176   3,523   1,920   1,280   24,899 
Acquisitions – Serena  -   1,201   1,344   -   2,545 
Additional provision in the period  2,128   20,358   -   -   22,486 
Released  (344)  (2,077)  (97)  (1,180)  (3,698)
Utilization of provision  (3,151)  (15,311)  (119)  -   (18,581)
Exchange adjustments  (122)  (354)  (26)  -   (502)
 At October 31, 2016  16,687   7,340   3,022   100   27,149 
                     
Current  5,120   7,278   3,022   -   15,420 
Non-current  11,567   62   -   100   11,729 
Total  16,687   7,340   3,022   100   27,149 
The Group’s lease arrangements can contain a number of features including some or all of:
Extension and break options;
Variable lease payments;
Annual or periodic set rental increases; and
Indexed or market-based rental increases.

Consistent with the requirements of IFRS, 16 extension options are only included in the lease liability where they are considered reasonably certain, see below, and only fixed rental increases are included in the lease liability. Indexed or market based rental increases are only included in the lease liability once the indexation or rent review date has passed. Variable lease payments are expensed as incurred.

Two individual leased properties are material to the Group. One is located in Provo, Utah, where the Group currently leases approximately 405,700 square feet of office space. The lease on this facility expires in 2024, with an option to extend for a further three, five-year periods. The Group’s current annual rent under this lease is $8.4 million. Since March 1, 2019, part of the property has been sublet. Current annual sub-lease income is $1.1 million. The other property is located in Santa Clara, California, where the Group currently leases approximately 635,000 square feet of office space. The lease on this facility expires in 2029, with an option to extend for one further five-year period. The Group’s current annual rent under this lease is $4.7 million. The Group is currently not utilizing one floor of this facility and the related right-of-use assets has been tested for impairment with a partial impairment recorded.

Right-of-use assets

During the year the Group entered into new leasing arrangements, extended existing leasing agreements and was party to rent reviews and therefore recognized additions to right-of-use assets of $42.0 million.

  Leasehold land and buildings  
Computer
equipment
  
Other
  
Total
 
  
$m

 
$m

 
$m

 
$m
Net book value at October 31, 2020  180.1   20.4   6.7   207.2 
Net book value at November 1, 2019  
223.6
   
20.8
   
9.0
   
253.4
 
                 
Depreciation charge for the 12 months ended October 31, 2020  60.3   11.2   5.4   76.9 


Consolidated financial statements and notes
Notes to the consolidated interim financial statements (unaudited)

21. Provisions (continued)19 Leases continued

 
Amounts recognized in the statement of comprehensive income:
    
12 months ended
October 31, 2020
  
12 months ended
October 31, 2019
 
     Under IFRS 16  Under IAS 17 
  Note  
$m

 

$m

Under IFRS 16:           
Interest on lease liabilities  6   13.2   
-
 
Depreciation of right-of-use assets      76.9   
-
 
Impairment of right-of-use assets*      5.9   
-
 
Income from sub-leasing right-of-use assets      0.4   
-
 
             
Under IAS 17:            
Interest on lease liabilities  6   -   
2.0
 
Depreciation of lease assets      -   
13.9
 
Lease expense      -   
65.9
 
Income from sub-leasing right-of-use assets      -   
1.0
 

* The Group assessed right-of-use assets for indicators of impairment during the year in particular leases, which have become vacant or part vacant or changes in sub-lease expectations on existing vacant properties. As a result, an additional impairment of $5.9 million was recognized in the year. The impairment against the right-of-use asset carrying value reflects any expected sub lease-income over the remainder of the lease.

Amounts recognized in statement of cash flows:

    
12 months ended
October 31, 2020
Under IFRS 16
    
12 months ended
October 31, 2019
Under IAS 17
  
  
$m

 

$m

Interest payments on lease liabilities  13.2   
2.0
 
Payment for lease liabilities (2019: payment for finance lease liabilities)  80.1   
12.9
 
Total cash outflow for leases  93.3   
14.9
 

Extension options
Some property leases contain extension options exercisable by the Group before the end of the non-cancellable contract period. Where practicable, the Group seeks to include extension options in new leases to provide operational flexibility. The extension options held are exercisable only by the Group and not by the lessors. The Group policy on assessing and reassessing whether it is reasonably certain that the optional period will be included in the lease term is described in “II Critical accounting estimates, assumptions and judgements”.

The Group reassesses whether it is reasonably certain to exercise the options if there is a significant event or significant changes in circumstances within its control. Significant changes in assumptions or activities e.g. such as an acquisition or disposal, would impact the expected future cash outflows related to leasing activities. Where a significant event or change in circumstances does not occur, the lease term and therefore the lease liability and right-of-use asset, will decline over time.

The Group’s cash outflow for leases in the 12 months ended October 31, 2020 was $93.3 million. Leases with annual cash outflows during the 12 months ended October 31, 2020 of $8.9 million ended and were not renewed or replaced. Considering the impact of these terminations and absent significant future changes in the volume of the Group’s activities or strategic changes to lease fewer assets the Group’s cash outflow would be expected to continue for future periods at a consistent level, subject to any contractual price increases. The maturity analysis of the Group’s lease liability, below, only includes the reasonably certain payments to be made; cash outflows in these future periods will likely exceed these amounts as payments will be made on optional periods not considered reasonably certain at present and on new leases entered into in future periods.

Consolidated financial statements and notes
Notes to the consolidated financial statements

19 Leases continued

Lease obligations:
Under IFRS 16 “Leases”, the Group recognizes the discounted future lease payments over the reasonably certain lease term as a liability along with an associated right-of-use asset, see above.

The movement on the Group lease obligations in the year were as follows:

  Note  
$m

IFRS 16 adoption     269.8 
Transfer from Finance lease liability     23.5 
Balance at November 1, 2019     293.3 
Additions     41.6 
Disposals     (0.2)
Payments     (93.3)
Interest  
6
   13.2 
Foreign exchange      (4.2)
Balance at October 31, 2020      250.4 
         
Included within:        
Current liabilities      82.2 
Non-current liabilities      168.2 
Total      250.4 

The maturity profile of the Group’s lease obligations is as follows:


$m

Within one year82.2
In one to two years69.5
In two to three years43.3
In three to five years49.3
In more than five years36.3
At October 31, 2020280.6
Impact of discounting(30.2)
Total lease obligations250.4

Leases as lessor
The Group acts as a lessor where it is able to sub-lease vacant property space. Sub-leases are classified as either finance leases or operating leases dependent upon the transfers of substantially all of the risk and rewards associated with the head lease to the lessee in the sub-lease agreement.

Finance leases
The Group has six lease arrangements classified as finance leases. The long-term element of net investment in leases of $5.5 million as at October 31, 2020 is included in note 13 “Other non-current assets”. The short-term element of net investments in leases of $2.1 million as at October 31, 2020 is included in other receivables in note 14 “Trade and other receivables”. Under IAS 17, the Group did not recognize any net investment in leases.

Operating leases
The Group has six lease arrangements classified as operating leases. Rental income recognized by the Group for the 12 months ended October 31, 2020 was $0.4 million (2019: $1.0 million).

Consolidated financial statements and notes
Notes to the consolidated financial statements

20 Contract liabilities

  October 31, 2020  October 31, 2019 
  
$m

 

$m

Current  981.4   
1,045.9
 
Non-current  117.2   
149.9
 
   1,098.6   
1,195.8
 

Revenue billed but not recognized in the Consolidated statement of comprehensive income under the Group’s accounting policy for revenue recognition is classified as contract liabilities in the Consolidated statement of financial position and recognized over the period of the contract in future years. Contract liabilities primarily relates to undelivered maintenance and subscription services on billed contracts.

Contract liabilities as at October 31, 2020 were $1,098.6 million (2019: $1,195.8 million). The movement in contract liabilities in the year mainly results from new amounts being deferred, where the billing is advance of satisfaction of the related performance obligation, and amounts being recognized as revenue, where performance obligations have been satisfied. The amount of revenue recognized in the reporting year that was included in the contract liability balance as at November 1, 2019 was $1,045.9 million (2019: $1,134.7 million).

Remaining performance obligations
Revenue allocated to remaining performance obligations represents contracted revenue that has not yet been recognized which includes unearned revenue and amounts that will be invoiced and recognized as revenue in future years. The remaining revenue allocated to future performance obligations was $1,598.1 million as at October 31, 2020 (2019: $1,468.9 million), of which approximately 77% (2019: 80%) of the revenue is expected to be recognized over the next 12 months and the remainder thereafter.

This amount mostly comprises obligations to provide maintenance and SaaS subscriptions as the contracts have durations of one or multiple years.

21 Provisions

  October 31, 2020  October 31, 2019 
  
$m

 

$m

Onerous leases and dilapidations  16.9   
34.2
 
Restructuring  30.8   
36.4
 
Legal  9.7   
5.7
 
Other  14.8   
2.1
 
Total  72.2   
78.4
 
         
Current  49.7   
29.3
 
Non-current  22.5   
49.1
 
Total  72.2   
78.4
 

Consolidated financial statements and notes
Notes to the consolidated financial statements

21 Provisions continued

     
Onerous
contracts and dilapidations
  
Restructuring
  
Legal
  
Other
  
Total
 
  Note  
$m

 
$m

 
$m

 
$m

 
$m

At October 31, 2019     34.2   36.4   5.7   2.1   78.4 
Adoption of IFRS 161
     (16.7)  -   -   -   (16.7)
At November 1, 2019     17.5   36.4   5.7   2.1   61.7 
Acquisitions – ATAR Labs  33   -   0.4   -   -   0.4 
Additional provision in the period      3.2   34.7   5.4   12.7   56.0 
Released      (3.1)  (5.9)  (0.7)  -   (9.7)
Utilization of provision      (1.0)  (35.7)  (0.8)  -   (37.5)
Effects of movements in exchange rates      0.3   0.9   0.1   -   1.3 
At October 31, 2020      16.9   30.8   9.7   14.8   72.2 
                         
Current      5.0   20.2   9.7   14.8   49.7 
Non-current      11.9   10.6   -   -   22.5 
Total      16.9   30.8   9.7   14.8   72.2 

1As described in I Significant Accounting Policies W “Adoption of new and revised International Financial Reporting Standards” onerous lease provisions recognized at October 31, 2019 have been recorded as an impairment against the right-of-use assets recognized on adoption of IFRS 16.

     
Onerous
contracts and
dilapidations
  
Restructuring
  
Legal
  
Other
  
Total
 
  
Note
  

$m

 

$m

 
$m

 
$m

 

$m

At November 1, 2018     
35.1
   
50.7
   
7.0
   
-
   
92.8
 
Acquisitions – Interset Software Inc.  
33
   
-
   
-
   
-
   
0.7
   
0.7
 
Additional provision in the period      
19.2
   
49.4
   
5.4
   
2.1
   
76.1
 
Released      
(7.4
)
  
(19.8
)
  
(6.2
)
  
-
   
(33.4
)
Utilization of provision      
(13.9
)
  
(43.5
)
  
(0.5
)
  
(0.7
)
  
(58.6
)
Unwinding of discount      
1.1
   
-
   
-
   
-
   
1.1
 
Effects of movements in exchange rates      
0.1
   
(0.4
)
  
-
   
-
   
(0.3
)
At October 31, 2019      
34.2
   
36.4
   
5.7
   
2.1
   
78.4
 
                         
Current      
9.5
   
12.0
   
5.7
   
2.1
   
29.3
 
Non-current      
24.7
   
24.4
   
-
   
-
   
49.1
 
Total      
34.2
   
36.4
   
5.7
   
2.1
   
78.4
 

Onerous contracts and dilapidations provisions
The onerous contracts relate to onerous non-rental related property costs and dilapidations provision relates to obligations to restore leased Group properties and this position isproperties. These positions are expected to be fully utilized within nineeight years. TheAn additional provision of $3.2 million was increased by $11.9 millionrecorded in the six12 months ended October 31, 2017, mostly due to2020 (2019: $19.2 million), mainly across European and US sites, as the acquisitionproperty portfolio was reassessed, including planned site vacations and a review of HPE Software relating to legal obligations to restore leased propertiesproperty at the end of the lease period. A provision

F-64
Table of $1.0 million Contentswas released following
Consolidated financial statements and notes
Notes to the renegotiation of the lease of a North American property.consolidated financial statements

21 Provisions continued

Restructuring and integrationprovisions
Restructuring provisions relate to activities undertaken in readiness for bringing together the Micro Focus and HPE Software organization into one organization across all functions of the existing business and provisions for severance resulting from headcount reductions in the HPE Software business.reductions. The majority of provisions are expected to be fully utilized within 1224 months. Restructuring costs are reported within exceptional costs (note 4).

Legal provisions
Legal provisions include management’sthe directors’ best estimate of the likely outflow of economic benefits associated with ongoingon-going legal matters. Further information on legal matters can be found in note 30, contingent liabilities.

Releases of otherOther provisions during the period ended
Other provisions at October 31, 20172020 relate to future fees no longer considered likelyinterest on uncertain tax provisions of $7.6 million (2019: $2.1 million), a $2.8 million sales tax provision (2019: $nil) and a provision for estimated unclaimed property exposure pertaining to be incurred.accounts payable of $4.4 million (2019: $nil).

22. 22 Pension commitments

  October 31, 2017  October 31, 2016 
   $’000   $’000 
Within Non-current assets :        
Long term pension assets  23,650   24,120 
Within Non-current liabilities:        
Retirement benefit obligations  (97,647)  (34,599)
Defined contribution
The Group has established a number of pension schemes around the world covering many of its employees. The principal funds are those in the US, UK and Germany. These were funded schemes of the defined contribution type.

The acquisitionPension costs for defined contributions schemes are as follows:

     
12 months ended
October 31, 2020
  
12 months ended
October 31, 2019
  
18 months ended
October 31, 2018
 
Continuing operations Note  
$m

 
$m

 

$m

Defined contribution schemes  29   31.2   
32.7
   
43.3
 

b) Defined benefit
  October 31, 2020  October 31, 2019 
  
$m

 

$m

Within non-current assets:        
Long-term pension assets
  18.2   
17.1
 
         
Within non-current liabilities:        
Retirement benefit obligations
  (155.0)  
(141.4
)

As of the HPE Software on September 1, 2017 addedOctober 31, 2020, there are a total of 33 defined benefit plans primarily in France, Germany and Switzerland. After the acquisition there are 37 (October 2016: three, April 2017: four) defined benefit plans in ten10 countries around the world. Someworld (2019: 30). The highest concentration of the planspension schemes are in Germany, where the Group sponsors 12 separate schemes that comprise over 83% of the total net retirement benefit obligation recorded in the Group’s consolidated statement of financial position. The Group’s German schemes are primarily final salary pension plans, which provide benefits to members in the form of a guaranteed level of pension payable for life in the case of retirement, disability and death. The level of benefits provided depends not only on the final salary but also on member’s length of service, social security ceiling and other factors. Although most of these schemes in Germany are funded at some level, there are typically no funding requirements in Germany. There are no requirements for the appointment of independent trustees in Germany, and all of these schemes are administered locally with the assistance of German pension experts. Final pension entitlements, including benefits for death in service and disability amounts, are calculated by these experts. Plan assets for three of our German schemes include re-insurance contracts with guaranteed interest rates, while the majority of the schemes invest in a funds focusing on equities and debt instruments. Most of the Group’s German schemes are closed to new entrants, however, three of the schemes are open to new members.

Consolidated financial statements and notes
Notes to the consolidated financial statements

22 Pension commitments continued

The remainder of the Group’s defined benefit schemes are comprised of a mix of final salary plans, termination or retirement indemnity plans and other types of statutory plans that provide a one-time benefit at termination. Final pension entitlements are calculated by local actuariesadministrators in the applicable country. They also complete calculations for cases of death in service and disability. Other plans include termination or retirement indemnity plans or other types of statutory plans that provide a one-time benefit at termination. Where required by local or statutory requirements, some of the schemes are governed by an independent Board of Trustees that is responsible for the investment strategies with regard to the assets of the funds,funds; however, other schemes are administered locally with the assistance of local pension experts. Many of the Group’s plans outside of Germany are funded and the Group makes at least the minimum contributions required by local government, funding and taxing authorities. Plan assets for these schemes include a range of assets including investment funds or re-insurance contracts. Not all of ourthese plans are closed to new members. The Group sponsors 12 plans outside of Germany that are open to new members, most of which are termination or retirement indemnity plans or statutory plans providing a one-time benefit at termination, retirement, death or disability. The Group participates in multi-employer plans in Switzerland and Japan. These plans are accounted for new membership.as defined benefit plans and the Group’s obligations are limited to the liabilities of our employees.

There were three plans reclassified to the net retirement obligation during the 12 months ended October 31, 2020. None of the plans are final salary plans and none are material.

Long-term pension assets

Long-term pension assets relate to the reimbursement rightcontractual arrangement under insurance policies held by the CompanyGroup with guaranteed interest rates that do not meet the definition of a qualifying insurance policy, as they have not been pledged to the plan or beneficiaries and are subject to the creditors of the Group. Such reimbursement rights assetsarrangements are recorded in the consolidated statement of financial position as long-term pension assets. Fair valueDuring the 12 months ended October 31, 2020, some of the reimbursement right asset is deemed to be the present value of the related obligation because the right to reimbursement under the insurance policies exactly matchespreviously unpledged were pledged to the amountpension plans and timingtransferred to plan assets. These contractual arrangements are treated as financial assets measured at fair value through other comprehensive income. Movement in the fair value of some or all of the benefits payable under the defined benefit plan.long-term pension assets is included in other comprehensive income. All non-plan assets are held in Germany.

The movement on the long-term pension assetassets is as follows:

     October 31, 2020  October 31, 2019 
  Note  
$m

 

$m

As at November 1     17.1   
16.7
 
Reclassification to assets held for sale     -   
0.1
 
Transfer to plan assets     (0.4)  
-
 
Interest on non-plan assets  6   0.2   
0.3
 
Benefits paid      (0.1)  
(0.1
)
Contributions      0.3   
0.3
 
             
Included within other comprehensive income:            
-          Change in fair value assessment      0.4   
0.4
 
       0.4   
0.4
 
             
Effects of movements in exchange rates      0.7   
(0.6
)
As at October 31      18.2   
17.1
 
             
Included within other comprehensive income:            
Continuing operations      0.4   
0.3
 
Discontinued operation      -   
0.1
 
       0.4   
0.4
 
  October 31, 2017  October 31, 2016 
   $’000   $’000 
As at May 1,  22,031   22,272 
Return on non-plan assets (note 11)  231   187 
Benefits paid  (58)  (44)
Contributions  235   - 
Included within other comprehensive income:        
-          Actuarial (loss)/gain on non-plan assets  (350)  2,482 
-          Reclassification from defined contribution scheme to defined benefit scheme  
-
   
-
 
   (350)  2,482 
         
Foreign currency exchange gain/(loss)  1,561   (777)
At October 31  23,650   24,120 

The non-plan assets are considered to be Level 3 asset under the fair value hierarchy as of October 31, 2020. These assets have been valued by an external insurance expert by applying a discount rate to the future cash flows and taking into account the fixed interest rate, mortality rates and term of the insurance contract. There have been no transfers between levels for the 12 months ended October 31, 2020 (2019: none).

Consolidated financial statements and notes
Notes to the consolidated financial statements

22 Pension commitments continued

Retirement benefit obligations

For the six months ended October 31, 2017 $2.5 million (2016: $0.7 million) isThe following amounts have been included in the consolidated statement of comprehensive income in respect of thefor defined benefit pension arrangements being a current service charge of $1.9 million (2016: $0.4 million) and a net finance charge of $0.6 million (2016: $0.3 million).arrangements:

     
12 months ended
October 31, 2020
  
12 months ended
October 31, 2019
  
18 months ended
October 31, 2018
 
  Note  
$m
 
$m

 

$m
Current service charge     10.4   
9.0
   
12.6
 
Past service charge     -   
-
   
(5.5
)
Charge to operating (loss)/profit  29   10.4   
9.0
   
7.1
 
                 
Current service charge – discontinued operations      -   
0.1
   
0.3
 
                 
Interest on pension scheme liabilities      3.1   
4.2
   
5.2
 
Interest on pension scheme assets      (1.3)  
(1.8
)
  
(2.4
)
Charge to finance costs  6   1.8   
2.4
   
2.8
 
                 
Total continuing charge to (loss)/profit for the period      12.2   
11.5
   
10.2
 

The contributions for the year12 months ended October 31, 20182021 are expected to be broadly in line with the current year.12 months ended October 31, 2020. The Group funds the schemes so that it makes at least the minimum contributions required by local government, funding and taxing authorities. There are no funding requirements in Germany.

F-21
The following amounts have been recognized as movements in the statement of other comprehensive income:

Notes to the consolidated interim financial statements (unaudited)

22. Pension commitments (continued)
  
12 months ended
October 31, 2020
  
12 months ended
October 31, 2019
  
18 months ended
October 31,2018
 
  
$m
 

$m

 

$m

Actuarial return on assets excluding amounts included in interest income  1.8   
5.9
   
0.6
 
             
Re-measurements – actuarial gains/(losses):            
-      Demographic  -   
(1.6
)
  
0.3
 
-      Financial  (0.6)  
(38.8
)
  
(11.1
)
-     Experience  3.0   
8.4
   
1.9
 
   2.4   
(32.0
)
  
(8.9
)
             
Reclassification from defined contribution scheme or other assets and liabilities to defined benefit scheme  (4.6)  
-
   
(2.1
)
Movement in the period  (0.4)  
(26.1
)
  
(10.4
)
             
Continuing operations  (0.4)  
(26.2
)
  
(8.9
)
Discontinued operation  -   
0.1
   
(1.5
)
   (0.4)  
(26.1
)
  
(10.4
)

The weighted average key assumptions used for the pensionvaluation of the schemes were:

  October 31, 2020  October 31, 2019 
  Germany  
Rest of
World
  Total  
Germany
  
Rest of
World
  
Total
 
Rate of increase in final pensionable salary  2.50%  3.09%  2.64%  
2.50
%
  
3.09
%
  
2.65
%
Rate of increase in pension payments  1.50%  1.50%  1.50%  
1.75
%
  
1.50
%
  
1.75
%
Discount rate  0.79%  1.41%  0.90%  
1.09
%
  
1.71
%
  
1.20
%
Inflation  1.50%  1.25%  1.47%  
1.75
%
  
1.16
%
  
1.69
%
  
October 31, 2017
$’000
  
October 31, 2016
$’000
 
Rate of increase in final pensionable salary  2.27%  2.60%
Rate of increase in pension payments  1.81%  2.00%
Discount rate  1.99%  1.30%
Inflation  2.00%  2.00%

Consolidated financial statements and notes
Notes to the consolidated financial statements

22 Pension commitments continued

During the 12 months ended October 31, 2019, the model used to derive our discount rates was updated to better reflect yields on corporate bonds over the life of our schemes. The key difference in the revised model lies in the extrapolation of yields in the outlying years of the curve and uses AA government bond rates to determine these yields. This change resulted in a decrease in our defined benefit obligation of approximately $14.0 million in the 12 months ended October 31, 2019. The old and revised models are both considered standard models devised by our external consolidating actuary.

The mortality assumptions for the pensionGerman schemes are set based on the ‘Richttafeln 2018 G’ by Prof. Dr. Klaus Heubeck. The mortality assumptions for the remaining schemes are set based on actuarial advice in accordance with published statistics and experience in theeach territory.

These assumptions translate into a weighted average life expectancy in years for a pensioner retiring at age 65:

  October 31, 2020  October 31, 2019 
  
Germany
  
Rest of
World
  
Total
  
Germany
  
Rest of
World
  
Total
 
Retiring at age 65 at the end of the reporting year:                  
Male  20   22   20   
20
   
20
   
20
 
Female  24   25   24   
23
   
23
   
23
 
                         
Retiring 15 years after the end of the reporting year:                        
Male  22   23   22   
22
   
23
   
22
 
Female  26   26   25   
25
   
26
   
25
 

The net liability included in the consolidated statement of financial position arising from obligations in respect of defined benefit schemes is as follows:
  October 31, 2017  October 31, 2016 
  Germany  France  Switzerland  Rest of World  Total  Germany 
   $’000   $’000   $’000   $’000   $’000   $’000 
Present value of defined benefit obligation  159,865   9,159   21,330   23,797   214,151   40,120 
Fair value of plan assets  (84,035)  (2,066)  (16,490)  (13,913)  (116,504)  (5,521)
   75,830   7,093   4,840   9,884   97,647   (34,599)

  October 31, 2020  October 31, 2019 
  
Germany
  
Rest of
World
  
Total
  
Germany
  
Rest of
World
  
Total
 
Present value of defined benefit obligations  248.4   54.9   303.3   
213.5
   
48.0
   
261.5
 
Fair values of plan assets  (119.1)  (29.2)  (148.3)  
(92.0
)
  
(28.1
)
  
(120.1
)
   129.3   25.7   155.0   
121.5
   
19.9
   
141.4
 

Consolidated financial statements and notes
Notes to the consolidated financial statements

22 Pension commitments continued

The retirementdefined benefit obligation has moved as follows:

  October 31, 2020 
  Germany  Rest of World  Total 
 
Defined benefit obligations
 
Defined
benefit
obligations
  
Scheme
assets
  
Retirement
benefit
obligations
  
Defined
benefit
obligations
  
Scheme
assets
  
Retirement
benefit
obligations
  
Defined
benefit
obligations
  
Scheme
assets
  
Retirement
benefit
obligations
 
  
$m

 
$m

 
$m

 
$m

 
$m

 
$m

 
$m

 
$m

 
$m

At November 1, 2019  213.5   (92.0)  121.5   48.0   (28.1)  19.9   261.5   (120.1)  141.4 
Current service cost  6.9   -   6.9   3.5   -   3.5   10.4   -   10.4 
Reclassification from other liabilities/assets  14.7   (17.8)  (3.1)  1.5   -   1.5   16.2   (17.8)  (1.6)
Transfer from long-term pension assets  -   (0.4)  (0.4)  -   -   -   -   (0.4)  (0.4)
Benefits paid  (0.6)  0.6   -   (2.9)  2.9   -   (3.5)  3.5   - 
Contributions by plan participants  1.1   (1.1)  -   0.6   (0.6)  -   1.7   (1.7)  - 
Contribution by employer  -   (0.7)  (0.7)  -   (2.3)  (2.3)  -   (3.0)  (3.0)
Interest cost/(income) (note 6)  2.3   (1.0)  1.3   0.8   (0.3)  0.5   3.1   (1.3)  1.8 
                                     
Included within other comprehensive income:                                    
Re-measurements - actuarial (gains) and losses:                                    
-          Demographic  -   -   -   -   -   -   -   -   - 
-          Financial  (0.4)  -   (0.4)  1.0   -   1.0   0.6   -   0.6 
-          Experience  (2.0)  -   (2.0)  (1.0)  -   (1.0)  (3.0)  -   (3.0)
                                     
Actuarial return on assets excluding amounts included in interest income  -   (2.4)  (2.4)  -   0.6   0.6   -   (1.8)  (1.8)
 
Reclassification to defined benefit scheme
  3.1   -   3.1   1.5   -   1.5   4.6   -   4.6 
   0.7   (2.4)  (1.7)  1.5   0.6   2.1   2.2   (1.8)  0.4 
Effects of movements in exchange rates  9.8   (4.3)  5.5   1.9   (1.4)  0.5   11.7   (5.7)  6.0 
                                     
 
At October 31, 2020
  248.4   (119.1)  129.3   54.9   (29.2)  25.7   303.3   (148.3)  155.0 
  October 31, 2017  October 31, 2016 
  
Defined
benefit
obligations
  
Scheme
assets
  
Retirement
benefit
obligations
  
Defined
benefit
obligations
  
Scheme
assets
  
Retirement
benefit
obligations
 
   $’000   $’000   $’000   $’000   $’000   $’000 
At May 1,  36,480   (5,707)  30,773   37,524   (5,855)  31,669 
HPE Software acquisition  181,456   (110,011)  71,445   -   -   - 
Current service cost  1,929   -   1,929   424   -   424 
Benefits paid  (989)  940   (49)  (145)  43   (102)
Contributions by plan participants  
1,826
   (1,826)  
-
   -   (13)  (13)
Contribution by employer  -   (743)  (743)  -   -   - 
Interest cost/(income) (note 11)  941   (362)  579   311   (49)  262 
                         
Included within other comprehensive income:                        
Re-measurements - actuarial losses:                        
-          Demographic  -   -   -   -   -   - 
-          Financial  (1,058)  -   (1,058)  3,521   -   3,521 
-          Experience  (4,505)  -   (4,505)  (117)  -   (117)
Actuarial return on assets excluding amounts included in interest income  
-
   (1,296)  (1,296)  
-
   
117
   
117
 
Reclassification from defined contribution scheme to defined benefit scheme  
-
   
-
   
-
   
-
   
-
   
-
 
   (5,563)  (1,296)  (6,859)  3,404   117   3,521 
Foreign currency exchange changes  (1,929)  2,501   572   (1,398)  236   (1,162)
At October 31  214,151   (116,504)  97,647   40,120   (5,521)  34,599 

Consolidated financial statements and notes
Notes to the consolidated financial statements

23.22 Pension commitments continued

  
October 31, 2019
 
  Germany  Rest of World  Total 
Defined benefit
obligations
 
Defined
benefit
obligations
  
Scheme
assets
  
Retirement
benefit
obligations
  
Defined
benefit
obligations
  
Scheme
assets
  
Retirement
benefit
obligations
  
Defined
benefit
obligations
  
Scheme
assets
  
Retirement
benefit
obligations
 
  
$m

 
$m
 

$m

 
$m

 
$m
 
$m

 
$m

 

$m

 

$m

At November 1, 2018  
173.8
   
(82.1
)
  
91.7
   
47.4
   
(28.7
)
  
18.7
   
221.2
   
(110.8
)
  
110.4
 
Reclassification to assets held for sale  
0.3
   
-
   
0.3
   
0.2
   
(0.2
)
  
-
   
0.5
   
(0.2
)
  
0.3
 
Current service cost  
6.0
   
-
   
6.0
   
3.1
   
-
   
3.1
   
9.1
   
-
   
9.1
 
Benefits paid  
(0.4
)
  
0.3
   
(0.1
)
  
(4.2
)
  
4.1
   
(0.1
)
  
(4.6
)
  
4.4
   
(0.2
)
Contributions by plan participants  
1.5
   
(1.5
)
  
-
   
0.3
   
(0.3
)
  
-
   
1.8
   
(1.8
)
  
-
 
Contribution by employer  
-
   
(0.3
)
  
(0.3
)
  
-
   
(4.2
)
  
(4.2
)
  
-
   
(4.5
)
  
(4.5
)
Interest cost/(income) (note 6)  
3.1
   
(1.5
)
  
1.6
   
1.1
   
(0.3
)
  
0.8
   
4.2
   
(1.8
)
  
2.4
 
                                     
Included within other comprehensive income:                                    
Re-measurements - actuarial (gains) and losses:                                    
-          Demographic  
1.6
   
-
   
1.6
   
-
   
-
   
-
   
1.6
   
-
   
1.6
 
-          Financial  
34.0
   
-
   
34.0
   
4.8
   
-
   
4.8
   
38.8
   
-
   
38.8
 
-          Experience  
(3.2
)
  
-
   
(3.2
)
  
(5.2
)
  
-
   
(5.2
)
  
(8.4
)
  
-
   
(8.4
)
                                     
Actuarial return on assets excluding amounts included in interest income  
-
   
(8.0
)
  
(8.0
)
  
-
   
2.1
   
2.1
   
-
   
(5.9
)
  
(5.9
)
   
32.4
   
(8.0
)
  
24.4
   
(0.4
)
  
2.1
   
1.7
   
32.0
   
(5.9
)
  
26.1
 
Effects of movements in exchange rates  
(3.2
)
  
1.1
   
(2.1
)
  
0.5
   
(0.6
)
  
(0.1
)
  
(2.7
)
  
0.5
   
(2.2
)
                                     
At October 31, 2019  
213.5
   
(92.0
)
  
121.5
   
48.0
   
(28.1
)
  
19.9
   
261.5
   
(120.1
)
  
141.4
 

Consolidated financial statements and notes
Notes to the consolidated financial statements

22 Pension commitments continued

None of the plan assets are represented by financial instruments of the Group. None of the plan assets are occupied or used by the Group. The major categories of the plan assets are as follows:

  
October 31, 2020
 
  Germany  Rest of World  Total 
  Quoted  Unquoted  Total  Quoted  Unquoted  Total  Quoted  Unquoted  Total 
  
$m
 
$m
 
$m
 
$m
 
$m
 
$m
 
$m
 
$m
 
$m
Funds that invest in:                                    
- Equity instruments  49.3   -   49.3   -   6.4   6.4   49.3   6.4   55.7 
- Debt instruments  63.3   -   63.3   2.6   4.9   7.5   65.9   4.9   70.8 
- Real estate  -   -   -   -   2.9   2.9   -   2.9   2.9 
Cash and cash equivalents  -   -   -   -   2.6   2.6   -   2.6   2.6 
Re-insurance contracts with guaranteed interest rates *  -   6.5   6.5   -   -   -   -   6.5   6.5 
Other  -   -   -   -   9.8   9.8   -   9.8   9.8 
Total  112.6   6.5   119.1   2.6   26.6   29.2   115.2   33.1   148.3 

  
October 31, 2019
 
  Germany  Rest of World  Total 
  Quoted  Unquoted  Total  Quoted  Unquoted  Total  Quoted  Unquoted  Total 
  
$m

 

$m

 
$m

 

$m
 

$m

 
$m

 
$m
 

$m

 
$m

Funds that invest in:                                    
- Equity instruments  
39.8
   
-
   
39.8
   
-
   
5.5
   
5.5
   
39.8
   
5.5
   
45.3
 
- Debt instruments  
46.6
   
-
   
46.6
   
3.0
   
6.0
   
9.0
   
49.6
   
6.0
   
55.6
 
- Real estate  
-
   
-
   
-
   
-
   
3.1
   
3.1
   
-
   
3.1
   
3.1
 
Cash and cash equivalents  
-
   
-
   
-
   
-
   
1.7
   
1.7
   
-
   
1.7
   
1.7
 
Re-insurance contracts with guaranteed interest rates *  
-
   
5.6
   
5.6
   
-
   
-
   
-
   
-
   
5.6
   
5.6
 
Other  
-
   
-
   
-
   
-
   
8.8
   
8.8
   
-
   
8.8
   
8.8
 
Total  
86.4
   
5.6
   
92.0
   
3.0
   
25.1
   
28.1
   
89.4
   
30.7
   
120.1
 

* The majority of the re-insurance contracts have guaranteed interest rates of 4.0%, with the remaining at 3.25% or 2.75%.

Risk Management
Through its defined benefit schemes the Group is exposed to a number of risks, the most significant of which are detailed below:

– Changes in bond yields – A decrease in corporate bond yields will increase the Group’s IAS 19 plan liabilities, although this will be partially offset by increases in the value of scheme assets.

– Inflation – Some of the Group pension obligations are linked to inflation, and higher inflation will lead to higher liabilities.

– Life expectancy – The majority of the plan obligations are to provide benefits over the life of the member, so increases in life expectancy will result in an increase in the plan liabilities as benefits would be paid over a longer period.

– Asset returns – Returns on plan assets are subject to volatility and may not move in line with plan liabilities. The Group ensures that the investment positions are managed within an asset liability matching (“ALM”) to achieve long-term investments that are in line with the obligations under the pension schemes. Within this framework the Group’s objective is to match assets to the pension obligations by investing in assets that match the benefit payments as they fall due and in the appropriate currency.

Consolidated financial statements and notes
Notes to the consolidated financial statements

22 Pension commitments continued

Sensitivities
The table below provides information on the sensitivity of the defined benefit obligation to changes to the most significant actuarial assumptions. The table shows the impact of changes to each assumption in isolation, although, in practice, changes to assumptions may occur at the same time and can either offset or compound the overall impact on the defined benefit obligation.

These sensitivities have been calculated using the same methodology as used for the main calculations. The weighted average duration of the defined benefit obligation is 23 years for Germany and 14 years for all other schemes.

  
Germany
  
Rest of World
 
  
Increase
in
assumption
  
Change in
defined
benefit
obligation
  
Decrease
in
assumption
  
Change in
defined
benefit
obligation
  
Increase
in
assumption
  
Change in
defined
benefit
obligation
  
Decrease
in
assumption
  
Change in
defined
benefit
obligation
 
Discount rate for scheme liabilities  0.50%  (10.5%)  0.50%  12.1%  0.50%  (6.5%)  0.50%  7.3%
                                 
Price inflation/rate of increase in pension payments*  0.25%  3.4%  0.25%  (3.2)%  0.25%  0.9%  0.25%  (0.9)%
                                 
Salary growth rate  0.50%  1.1%  0.50%  (1.1)%  0.50%  2.7%  0.50%  (2.8)%
                                 
 
Life expectancy
 
1 year
   3.9%  -   -  
1 year
   2.0%  -   - 

* For the German schemes the same values are used for both the inflation assumption and the rate of increase in pension payments.

23 Other non-current liabilities

  October 31, 2020  October 31, 2019 
  
$m

 
$m

Accruals  39.9   
50.4
 
   39.9   
50.4
 

Accruals includes employee benefit liability $30.6 million (2019: $33.3 million) that relates to employee obligations in certain countries and an IT contractual liability $5.9 million (2019: $6.6 million). Certain employee benefit liabilities in Germany and the related benefit deposits were transferred to defined benefit obligations in the year (note 22).

24 Financial risk management and financial instruments

Risk factors and treasury risk management
The Group’s treasury function aims to reduce exposures to interest rate, foreign exchange and other financial risks, to ensure liquidity is available as and when required, and to invest cash assets safely and profitably. The Group does not engage in speculative trading in financial instruments. The treasury function’s policies and procedures are reviewed and monitored by the Audit committee and are subject to internal audit review.

The Group’s multi-national operations expose it to a variety of financial risks that include the effects of changes in credit risk, foreign currency risk, interest rate risk and liquidity/capital risk. Treasury risk management is carried out by a central treasury department under policies approved by the board of directors.

Group treasury identifies and evaluates financial risks alongside business management. The board provides written principles for risk management together with specific policies covering areas such as foreign currency risk, interest rate risk, credit risk and liquidity risk, the use of derivative and non-derivative financial instruments as appropriate, and investment of excess funds.

Consolidated financial statements and notes
Notes to the consolidated financial statements

24 Financial risk management and financial instruments continued

Risk Factors and Treasury risk management continued

Liquidity and capital risk
Central treasury carries out cash flow forecasting for the Group to ensure that it has sufficient cash to meet operational requirements and to allow the repayment of the bank facility. Surplus cash in the operating units over and above what is required for working capital needs is transferred to Group treasury. These funds are used to repay bank borrowings or are invested in interest bearing current accounts, time deposits or money market deposits of the appropriate maturity period determined by consolidated cash forecasts.

The Group seeks to maximize financial flexibility and minimize refinancing risk by issuing debt from a variety of sources and with a range of maturities.  The level of facilities required are determined through the preparation of cash flow forecasts which consider a range of business performance scenarios. Borrowings are refinanced substantially prior to falling current to minimize refinancing risk.

The Group’s objective when managing its capital structures is to minimize the cost of capital while maintaining adequate capital to protect against volatility in earnings and net asset values. The strategy is designed to maximize shareholder return over the long-term.

In March 2020, given the increased macro-economic uncertainty as a result of the COVID-19 pandemic, as a precautionary measure, the directors withdrew their recommendation for the payment of a final dividend of 58.33 cents per share in respect of the 12 months ended October 31, 2019. Similarly, no dividend was paid in respect of the six months to April 30, 2020. The decision to not pay these dividends has resulted in an increase in available liquidity compared to the payments that would otherwise have been made under the Group’s existing dividend policy.

In May 2020, the Group refinanced its $1,415m term loans maturing in November 2021 and made a voluntary debt repayment of $143m. In September 2020, the Group refinanced its revolving credit facility and reduced its size from $500.0m to $350.0m. Following these refinancing activities the Group’s earliest debt maturity is in June 2024.  The repayment of debt and reduction in size of the revolving credit facility were made following an assessment of potential future performance scenarios, taking into account the current additional macro-economic uncertainties as a result of COVID-19.

The only financial covenant attaching to the Group’s borrowing facilities relates to the revolving credit facility, which is subject to an aggregate net leverage covenant only in circumstances where more than 35% of the revolving credit facility is outstanding at a fiscal quarter end. Throughout the year the applicable covenant threshold was 4.35x; however no test was applicable at October 31,2020 or any previous test date, as the facility was not drawn in excess of the 35% threshold. This covenant is not expected to inhibit the Group’s future operations or funding plans.

The Group uses cash pooling structures and intercompany loans to mobilize cash efficiently within the Group.  The key objectives of the treasury function with respect to cash and cash equivalents are to protect their principal value, concentrate cash centrally, minimize the requirements for external borrowing and optimize yield.

As part of its short-term cash management the Group invests in a range of cash and cash equivalents, including money market funds, which are considered to be highly liquid and not exposed to significant changes in fair value.

Subsidiary companies are funded through share capital, retained earnings and loans from central finance companies on commercial terms.  Subsidiary companies do not enter into local borrowings with external counterparties.

Consolidated financial statements and notes
Notes to the consolidated financial statements

24 Financial risk management and financial instruments continued

Interest rate risk

The Group’s income and cash generated from operations are substantially independent of changes in market interest rates. The Group’s interest rate risk arises from short-term and long-term borrowings. Borrowings issued at variable rates expose the Group to cash flow interest rate risk. The Group currently uses four interest rate swaps to manage its cash flow interest rate risk arising from potential increases in the LIBOR interest rate.

The objective of the Group’s interest rate risk management policy is to manage the uncertainty and adverse impact on the Group’s net interest charge due to changes in interest rates to an acceptable level. In doing so, the Group seeks to minimize the cost of hedging and the level of associated counterparty risk.

The Group has set a target of approximately half its borrowings being subject to fixed interest rates in order to minimize its exposure to changes in interest rates. This is achieved through four US dollar interest swaps for a total notional value of $2.25 billion, with a maturity date of September 2022. The hedge accounting is discussed further later in the note.

The Group’s borrowing facilities do not contain any covenants with respect to interest cover ratios.

Foreign exchange risk

The Group operates internationally and is exposed to foreign exchange risk arising from various currency exposures, primarily with respect to the Euro, UK Pound Sterling, Indian Rupee, Israeli Shekel, Japanese Yen and the Chinese Yuan. Foreign exchange risk arises from future commercial transactions, recognized assets and liabilities and net investments in foreign operations where the transactions are denominated in a currency that is not the entity’s functional currency.

The Group is subject to exposure on the translation of the net assets of foreign currency subsidiaries into its reporting currency, US dollar. The Group’s primary balance sheet translation exposures are noted in the exposure analysis below. These exposures are kept under regular review with the Group treasury function providing reporting to the Treasury Risk committee and the Audit committee.

Group borrowings are denominated in US dollars and Euros. The Group seeks to match the currency profile of borrowings to the cash flows arising from the Groups operations used to service those borrowings. The May 2020 debt refinancing included an additional proportion of Euro debt and a reduction in US dollar debt which is intended to better match the currency profile of the Group’s debt with the cash flows used to service that debt (note 18 “Borrowings”).

The Group has certain investments in foreign operations, whose net assets are exposed to foreign currency translation risk. The Group faces currency exposures arising from the translation of profits earned in foreign currency subsidiaries into the Group’s reporting currency of US dollars. As at October 31, 2020 two net investment hedges totalling €1.05 billion have been designated using non-derivative Euro debt instruments to minimize the volatility in shareholder’s equity arising from foreign currency translation (there were no net investment hedges as at October 31, 2019).

Exposures also arise from foreign currency denominated trading transactions undertaken by subsidiaries and exposures here are not hedged. The Group utilizes constant currency reporting to enable management and investors to understand the underlying performance of the Group excluding exchange rate impacts.

Credit risk

The Group provides credit to customers in the normal course of business. Collateral is not required for those receivables but the Group has policies in place requiring appropriate credit checks on potential customers before sales commence and a monitoring process for assessing overdue receivables and customer payment behavior post sale. These policies and procedures include assessing customer credit limits and the use of third party financial and risk reporting to control our exposure and credit risk.

Financial instruments which potentially expose the Group to a concentration of credit risk consist primarily of cash and cash equivalents and accounts receivable.

The Group maintains a provision for impairment based upon the measurement of lifetime expected credit losses for all trade receivables using the IFRS 9 simplified approach.

Consolidated financial statements and notes
Notes to the consolidated financial statements

24 Financial risk management and financial instruments continued

Credit risk continued

The risk management practices noted above provide the historical customer payment profiles and a view on customer behaviour with any historical credit losses experienced. The loss allowance is adjusted for forward-looking factors specific to the debtor and the economic environment resulting in an overall assessment of any provision required.

The Group sells products and services to a wide range of customers around the world and therefore believes there is no significant concentration of customer credit risk.

The Group’s credit risk on cash and cash equivalents is limited as the counterparties are generally well established financial institutions with generally high credit ratings.

Cash deposits and other financial instruments give rise to credit risk on the amounts due from the related counterparties. Generally, the Group aims to transact with counterparties with strong investment grade credit ratings. However, the Group recognizes that due to the need to operate over a large geographic footprint, this will not always be possible. Counterparty credit risk is managed on a global basis by limiting the aggregate amount of exposure to any one counterparty, taking into account its credit rating. The credit ratings of all counterparties are reviewed regularly.  All derivatives are subject to ISDA agreements or equivalent documentation.

The maximum exposure to the credit risk of financial assets at the balance sheet date is reflected by the carrying values included in the Group’s balance sheet. Please refer to the credit risk table further below. The credit quality of cash and cash equivalents is listed in note 16 “Cash and cash equivalents” with over 95% rated from A+ to AAA.

Financial instruments

The tables below sets out the measurement categories and carrying values of financial assets and liabilities with fair value inputs where relevant.

    
 
Measurement
category
 
Carrying value
October 31, 2020
  
Fair value
2020
  
Fair value
Hierarchy
2020/2019
  
Carrying value
October 31, 2019
 
  Note 
 
$m

       

$m

Financial assets                  
                   
Non-current                  
 
Long-term pension assets
  22 
 
FV OCI
  18.2  
Fair value insurance
based input
  
Level 3
   
17.1
 
                    
Current                   
Cash and cash equivalent  16 Amortized cost  737.2   
-
   
-
   
355.7
 
Trade and other receivables  14 Amortized cost  648.6   
-
   
-
   
922.7
 
Contract assets  14 Amortized cost  33.7   
-
   
-
   
56.3
 
        1,437.7           
1,351.8
 
                      
Financial liabilities                     
                      
Non-current                     
Derivative financial instruments – interest rate swaps1
  24 
 
 
FV OCI
  77.9  
Fair value
Bank
Institutions
  
Level 2
   
36.5
 
Borrowings (gross)2
  18 Amortized cost  4,699.0   
4,535.1
   
-
   
4,775.0
 
Lease obligations  19 Amortized cost  82.2   
-
   
-
   
11.7
 
Provisions  21 Amortized cost  22.5   
-
   
-
   
49.1
 
                      
Current                     
Borrowings (gross)2
  18 Amortized cost  34.2   
-
   
-
   
-
 
Lease obligations  19 Amortized cost  168.2   
-
   
-
   
11.8
 
Provisions  21 Amortized cost  49.7   
-
   
-
   
29.3
 
Trade and other payables – accruals  17 
 
Amortized cost
  419.2   
-
   
-
   
530.3
 
        5,552.9           
5,443.7
 

1 Derivative interest rate swaps are measured at FV OCI as a result of hedge accounting. All interest rate swaps are in designated hedge relationships and there are no other derivative financial instruments held as FVTPL.
2 Borrowings have a carrying value (net of unamortized prepaid facility arrangement fees and original issue discount) of $4,640.3 million (2019: $4,670.7 million). Total borrowings (gross) are shown in this table as $4,733.2 million (2019: $4,775.0 million) for the fair value comparison.

Consolidated financial statements and notes
Notes to the consolidated financial statements
24 Financial risk management and financial instruments continued
Fair value measurement

For trade and other receivables, cash and cash equivalents, provisions, trade and other payables, fair values approximate to book values due to the short maturity periods of these financial instruments. For trade receivables, allowances are made for credit risk.

Long-term borrowings with a carrying value of $4,640.3 million (2019: $4,670.7 million) (note 18 “Borrowings”) including unamortized prepaid facility fees and discounts, have a fair value estimate of $4,535.1 million (2019: $4,686.0 million) based on trading prices obtained from external banking providers as at October 31, 2020.

Derivative financial instruments measured at fair value are classified as Level 2 in the fair value measurement hierarchy as they have been determined using significant inputs based on observable market data. The fair values of interest rate derivatives are derived from forward interest rates based on yield curves observable at the balance sheet date together with the contractual interest rates. Valuations are updated by the counter-party banks on a monthly basis.

The long-term pension assets are considered to be Level 3 assets under the fair value hierarchy as of October 31, 2020. These assets have been valued by an external insurance expert, by applying a discount rate to the future cash flows and taking into account the fixed interest rate, mortality rates and term of the insurance contract. The movement in the long-term pension assets is disclosed in note 22 “Pension commitments”.

For derivatives and long-term pension assets there were no transfers of assets or liabilities between levels of the fair value hierarchy during the year.

  October 31, 2020  October 31, 2019 
Interest rate risk 
$m

 
$m

Interest rate swaps (receive variable, pay fixed)        
         
Fair value of Derivative liability (total of 4 swaps)  (77.9)  (36.5)
Notional amount (4 x $562.5 million)  2,250.0   2,250.0 
Maturity date September 30, 2022  September 30, 2022 
Change in fair value of outstanding hedging instruments (OCI hedging reserve excluding deferred tax) (note 27)  (41.3)  (122.9)
Change in value of hedging instruments (as above adjusted for impact of credit risk)  (39.9)  (121.9)
Hedging ratio  1.1   1.1 

The Group has four interest rate swaps, which are designated in a hedge relationship.

The Group’s approved strategy in accordance with our risk management policies is to minimize the risk of cash flow fluctuations due to interest rate changes in relation to the 1M-USD LIBOR rate for up to half of the Group’s external borrowings for the period 19 October 2017 to 30 September 2022.

The specific risk management objective is to hedge the interest rate risk (cash flow risk) due to changes in the 1M-USD LIBOR rate charged on $2,250.0 million of the debt issued by Seattle Spin Co Inc. between October 19, 2017 and September 30, 2022.

Derivatives are only used for economic hedging purposes and not as speculative investments.

The swap contracts require settlement of net interest receivable or payable on a monthly basis. The fixed interest rate for each swap is 1.949% and the Group receives a variable rate in line with LIBOR. The Seattle loan is priced at LIBOR (with a 0% floor) plus a current margin of 2.75% with the swaps aimed at addressing the risk of a rising LIBOR element. As such, the total interest cost of the hedged element of the Seattle loan is 4.699%. For the year to October 31, 2020, net interest (finance cost) paid for the swaps amounted to $23.7 million. For the life of the swap, net interest paid to date amounted to $17.2 million.

Consolidated financial statements and notes
Notes to the consolidated financial statements
24 Financial risk management and financial instruments continued
Non-Derivative financial instruments – Designated Euro borrowings

October 31, 2020October 31, 2019
Foreign exchange risk
$m



$m

Notional amounts for Designated Euro borrowing
Euro B-1 2020 tranche €600 million (Borrowings maturity date: June 2025)665.8-
Foreign exchange (loss) on revaluation transferred to OCI-CTA
No sources of ineffectiveness  observed  in review
(34.5)-
Euro 2017 tranche €453 million  (Borrowings maturity date: June 2024)528.5-
Foreign exchange (loss) on revaluation transferred to OCI-CTA
No sources of  ineffectiveness observed in review
(24.2)-
Hedge ratio for each of the two Net investment hedges1.1-

The Group has designated two tranches of non-derivative Euro borrowings in two hedge relationships The borrowings in place have a designated initial carrying value of approximately €1.05 billion (note 18 “Borrowings”) hedged against Euro designated net investments in foreign operations.

The specific risk management objective is to carry out a net investment hedge in the consolidated financial statements of the Group, to reduce the foreign currency translation exposure arising from the Group’s investments in foreign entities with Euro functional currency through the use of Euro currency borrowings as hedging instruments as permitted by the Group’s Treasury policy.

Hedge effectiveness

Hedge effectiveness is determined at the inception of the hedge relationship, and through periodic effectiveness assessments to ensure that an economic relationship exists between the hedged item and the hedging instrument. The testing determined that the hedges met the IFRS 9 requirements for the financial reporting year. The IFRS 9 hedging requirements apply to both the interest swaps and the net investment hedges.

The impact of changes in the fair value of interest rate swaps in the 12 months ended October 31, 2020 is shown in the Consolidated statement of comprehensive income. The foreign exchange gains/losses for the revaluation of the net investment hedging instruments are compared against the translation of goodwill and intangibles affecting the cumulative translation reserve on consolidation. No amounts have been reclassified from the hedging reserve to the loss for the year.

Hedge effectiveness may be affected by credit risk (in the case of the interest rate swaps) and the net investment hedged items may be affected by events impacting the carrying value of goodwill and intangible assets such as asset disposals or impairment reviews.

The Group also utilized a forward exchange contract to fix the Sterling equivalent (£150.0 million) on the cancelled May 2020 dividend payment. The forward contract was not designated for formal hedge accounting and was settled early for $21.8 million within the reporting year as the proposed dividend was cancelled. The charge was made to foreign exchange losses in the Consolidated statement of comprehensive income.

Credit risk

The carrying amount of financial assets represents the maximum credit exposure. The maximum exposure to credit risk at October 31, 2020 was:

     October 31, 2020  October 31, 2019 
  Note  
$m



$m

Trade receivables (gross)  14   628.4   877.9 
Cash and cash equivalents  16   737.2   355.7 
       1,365.6   1.233.6 

The Group applies the IFRS 9 expedited approach to measuring expected credit losses, which uses a lifetime expected credit loss allowance for all trade receivables.

Consolidated financial statements and notes
Notes to the consolidated financial statements
24 Financial risk management and financial instruments continued
Credit risk continued

A provision of the lifetime expected credit loss is established upon initial recognition of the underlying asset by predicting the future cash flows based upon the days past due status of an invoice and other relevant information. The model uses historical collection data along with historical credit losses experienced. The loss allowance is adjusted for forward-looking factors specific to the receivable and the economic environment.

Trade receivables are written off when there is no reasonable expectation of recovery.  Impairment losses on trade receivables are presented as net impairment losses within operating profit. Subsequent recoveries of amounts previously written off are credited against the same line item.

On that basis, the loss allowance as at October 31, 2020 and 2019 and movements in the loss allowance during each year were determined as follows for trade receivables (note 14 “Trade and other receivables”):

  October 31, 2020  October 31, 2019 
  
$m



$m

At November 1 – calculated under IAS 39      41.9 
Accounting policy change – IFRS 9 (recognized against retained earnings on November 1, 2018)      20.0 
At November 1 – calculated under IFRS 9  42.4   61.9 
Loss allowance provided in the period  (4.8)  16.0 
Receivables written off as uncollectable  (19.7)  (35.5)
At October 31  17.9   42.4 

Ageing is the main internal rating assessment around credit quality for trade receivables:  the ageing of gross trade receivables and associated loss allowances can be found in note 14. Contract assets relate to amounts not yet due from customers and contain no amounts past due.

Foreign exchange risk

The Group’s currency exposures comprise those that give rise to net currency gains and losses to be recognized in the Consolidated statement of comprehensive income as well as gains and losses on consolidation, which go to reserves. Such exposures reflect the monetary assets and liabilities of the Group that are not denominated in the operating or functional currency of the operating unit involved and the Group’s investment in net assets in currencies other than US dollar.

Note 3 “Loss before tax” shows the impact on the Consolidated statement of comprehensive income of foreign exchange losses in the 12 months ended October 31, 2020 of $29.7 million (2019: $11.3 million loss). The foreign exchange loss in the year includes the loss of $21.8 million due to the settlement of the foreign exchange contract regarding the cancelled dividend.

Consolidated financial statements and notes
Notes to the consolidated financial statements
24 Financial risk management and financial instruments continued
Exposure report analysis

The Group’s principal exposures in relation to market risks are the changes in the exchange rates between the US dollar and transactions made in other currencies as well as changes in interest rates from US and Euro capital markets. Foreign exchange exposures for all re-measuring balances are tracked and reported to management

The key drivers for foreign exchange exposure are cash, borrowings and inter-company positions with trade receivables and trade payables having less relative aggregate exposure. The table below represents a key currency extract from the Group exposures to movements in currency presenting exposures in excess of $10 million equivalent. The key exposure relates to the increased Euro debt profile since the May refinancing. The Indian Rupee and Israeli Shekel had key inter-company positions during the year.

Foreign exchange analysis is shown as for reporting to the Treasury Risk committee. Please note that aggregate foreign exchange exposures for the Euro below do not consider the impact of the net investment hedges. However, the impact can be seen in the hedging table above.

  Group exposure   +/- 5%  +/- 10%
Key aggregate currency exposures* 
$m



$m



$m

Euro  (1,280.1)  64.0   128.0 
Indian Rupee (INR)  (42.4)  2.1   4.2 
Israeli Shekel (ILS)  (29.2)  1.4   2.9 
Chinese Yuan (CNY)  (25.6)  1.3   2.6 
Australian Dollar (AUD)  (15.7)  0.8   1.6 
             
Japanese Yen (JPY)  55.1   2.8   5.5 
Swedish Krona (SEK)  23.5   1.2   2.4 
Swiss Franc (CHF)  18.9   0.9   1.9 
Danish Krone (DKK)  17.1   0.9   1.7 
Canadian Dollar (CAD)  15.9   0.8   1.6 
Mexican Peso (MXN)  14.6   0.7   1.5 
United Arab Emirates Dirham (AED)  13.7   0.7   1.4 
Czech Koruna (CZK)  10.3   0.5   1.0 

  * Presenting aggregate foreign exchange exposures in excess of $10 million equivalent.

Interest rate exposure

Borrowings exposures to variable interest rate changes
(based on gross debt excluding the effects of hedging)
 Group exposure  LIBOR, EURIBOS
+1%		 



$m



$m

Euro  1,228.7   12.3 
US dollar
  3,504.5   35.0 
Total gross debt (note 18)  4,733.2   47.3 

Net debt

The net debt of the Group at the Consolidated statement of financial position date is as follows:

     October 31, 2020  October 31, 2019 
  Note  
$m



$m

Borrowings  18   (4,640.3)  (4,670.7)
Cash and cash equivalents  16   737.2   355.7 
Lease obligations (2019: Finance lease obligations)  19   (250.4)  (23.5)
Net debt      (4,153.5)  (4,338.5)

Borrowings are shown net of unamortized prepaid facility arrangement fees of $92.9 million (2019: $104.3 million). Gross borrowings are $4,733.2 million (2019: $4,775.0 million).

Consolidated financial statements and notes
Notes to the consolidated financial statements
24 Financial risk management and financial instruments continued
Exposure report analysis continued

Change in liabilities arising from financing activities for interest bearing loans (note 18 “Borrowings”) and lease obligations (note 19 “Leases”) were as follows:

  Interest bearing loans  
Lease
obligations
  Total 
 

$m



$m



$m

At November 1, 2019  4,775.0   23.5   4,798.5 
Adoption of IFRS16  -   269.8   269.8 
   4,775.0   293.3   5,068.3 
Draw down/new leases  1,490.8   41.6   1,532.4 
Repayments  (1,589.7)  (93.3)  (1,683.0)
Disposals  -   (0.2)  (0.2)
Interest  -   13.2   13.2 
Foreign exchange  57.1   (4.2)  52.9 
At October 31, 2020  4,733.2   250.4   4,983.6 

25 Share capital

Ordinary shares at 10 pence each as at October 31, 2017 (2016:2020 (2019: 10 pence each)

  October 31, 2017  October 31, 2016 
  Shares   $’000  Shares   $’000 
Issued and fully paid              
At  May 1,  229,674,479   39,700   228,706,210   39,573 
Shares issued to satisfy option awards  331,418   43   584,289   77 
Share reorganization  (16,935,536)  (2,926)  -   - 
Shares issued relating to acquisition of HPE Software (note 28)  
222,166,897
   
28,773
   -   - 
At October 31  435,237,258   65,590   229,290,499   39,650 

F-22

Notes to the consolidated interim financial statements (unaudited)

23. Share capital continued
  October 31, 2020  October 31, 2019  October 31, 2018 
  Shares  
$m

 Shares 

$m

 Shares  
$m

Issued and fully paid                     
At November 1  363,583,328   47.2   436,800,513   65.8   229,674,479   39.7 
Shares issued to satisfy option awards  1,518,327   0.1   6,109,091   0.1   1,894,673   0.2 
Shares utilized to satisfy option awards  (556,278)  -   (4,804,817)  -   -   - 
Share reorganisation  -   -   (74,521,459)  (18.7)  (16,935,536)  (2.9)
Shares issued relating to acquisition of  the HPE Software business  -   -   -   -   222,166,897   28.8 
At October 31  364,545,377   47.3   363,583,328   47.2   436,800,513   65.8 

“B” shares at 168335.859391 pence each (2019: 335.859391 pence each)

  October 31, 2020  October 31, 2019  October 31, 2018 
  Shares  
$m

 Shares  
$m

 Shares  
$m

Issued and fully paid                     
At November 1  -   -   -   -   -   - 
Issue of B shares  -   -   413,784,754   1,800.0   229,799,802   500.0 
Redemption of B shares  -   -   (413,784,754)  (1,800.0)  (229,799,802)  (500.0)
At October 31  -   -   -   -   -   - 

Deferred D shares at 10 pence each

October 31, 2020October 31, 2019October 31, 2018
Shares
$m

Shares

$m

Shares
$m

Issued and fully paid
At November 1------
Issue of Deferred shares--74,521,459---
Redemption of Deferred shares--(74,521,459)---
At October 31------

  October 31, 2017  October 31, 2016 
  Shares   $’000  Shares   $’000 
Issued and fully paid              
At May 1  -   -   -   - 
Issue of B shares  229,799,802   500,000   -   - 
Redemption of B shares  (229,799,802)  (500,000)  -   - 
   -   -   -   - 
F-80
Consolidated financial statements and notes
Notes to the consolidated financial statements
25 Share capital continued

Share issuances during the six12 months ended to October 31, 20172020

331,418In the 12 months ended October 31, 2020, 1,518,327 ordinary shares of 10 pence each (2016: 584,289 ordinary(2019: 6,109,091; 2018: 1,894,673) were issued and 556,278 treasury shares of 10 pence) were issuedutilized by the Company to settle exercised share options.options (2019: 4,804,817). The gross consideration received in the 12 months ended to October 31, 2020 was $1.2$2.6 million (2016: $0.5 (2019: $3.1 million,). 222,166,897 ordinary shares of 10pence each were issued by the Company as consideration for the acquisition of HPE Software (note 28) 2018: $5.8 million).

In relation to the return of value to shareholders (note 24), on AugustAt October 31, 2017 229,799,802 “B”2020, 29,644,627 treasury shares were issued at 168 pence each, resulting in a total $500.0 million being credited toheld (2019: 30,200,905, 2018: 9,858,205) such that the “B” share liability account. Subsequently and on the same date, 229,799,802 “B”number of ordinary shares were redeemed at 168 pence each and an amount of $500.0 million was debited from the “B share liability account.

Thewith voting rights was 334,900,750 (2019: 333,382,423) and the number of listed shares at October 31, 2017 were 435,237,258 (2016: 229,290,499)2020 was 364,545,377 (2019: 363,583,328; 2018: 436,800,513).

Potential issues of shares

Certain employees hold options to subscribe for shares in the Company at prices ranging from nil pence to 1,875.581,963.00 pence under the following share option schemes approved by shareholders in 2005 and 2006: The Long-Term Incentive Plan 2005, the Additional Share Grants, the Sharesave Plan 2006 and the Employee Stock Purchase Plan 2006.

The number of shares subject to options at October 31, 20172020 was 17,724,174 (2016: 9,271,150)18,856,680 (2019: 14,533,973; 2018: 18,156,060).

24. Other reservesShare buy-back
On 29 August 2018, the Company announced the start of a share buy-back program for an initial tranche of up to $200m, which was extended on 5 November 2018 to a total value of $400 million (including the initial tranche). On 14 February 2019, the buy-back program was extended into a third tranche of up to $110 million up until the day before the AGM which took place on 29 March 2019 when the current buy-back authority approved by shareholders at the 2017 AGM to make market purchases of up to 65,211,171 ordinary shares expired.

On 17 July 2019, the Company announced a new share buy-back program with an initial tranche of up to $200 million. The program was affected in accordance with the terms of the authority granted by shareholders at the 2019 AGM and the Listing Rules. On 3 October 2019, the Company completed the $200 million share buy-back program. The total amount bought back under share buy-back programs was $710.0 million, excluding expenses.

In addition to purchasing ordinary shares on the London Stock Exchange, Citi acquired American Depository Receipts representing ordinary shares (“ADRs”) listed on the New York Stock Exchange which it cancelled for the underlying shares and then sold such shares to the Company.

Shares bought back under these programmes are held as treasury shares. Treasury share movements and share buy-back costs are shown below:

12 months ended
October 31, 2020
12 months ended
October 31, 2019
Treasury sharesNumberNumber
Share buy-backs-29,160,054
Shares issued to satisfy option awards-(4,804,817)
Share reorganisation-(4,012,537)
-20,342,700
Share buy-backs numbers:
Ordinary shares bought on the London Stock Exchange-25,766,919
ADRs purchased on the New York Stock Exchange-3,393,135
-29,160,054
Share buy-back cost:
$m



$m

Share buy-back cost-538.8
Expenses-5.9
-544.7
The weighted average price of shares bought back in the 12 months ended October 31, 2019 was £14.61 per share.
 
  
Capital redemption
reserve
  
Merger
reserve
  
Hedging
reserve
  Total 
   $’000   $’000   $’000   $’000 
As at May 1, 2016 and October 31, 2016  163,363   988,104   -   1,151,467 
                 
As at May 1, 2017  163,363   338,104   -   501,467 
Return of Value- share consolidation 1
  2,926   -   -   2,926 
Return of Value-  issue and redemption of B shares 1
  500,000   (343,317)  -   156,683 
Hedge accounting 2
  -   -   1,763   1,763 
Deferred tax movement on hedging          (674)  (674)
Acquisition of HPE Software 3
  -   6,485,397   -   6,485,397 
Reallocation of merger reserve 4
  -   (700,000)  -   (700,000)
As at October 31, 2017  666,289   5,780,184   1,089   6,447,562 
F-81
Consolidated financial statements and notes
Notes to the consolidated financial statements
25 Share capital continued

1Return of Value
On August 31, 2017April 29, 2019, a Return of Value was made to shareholders amounting to $500.0$1,800.0 million (note 27)(£1,389.7m) in cash (335.89 pence per existing Ordinary Share and American Depositary Shares (“ADS”) held at the Record Time of 6.00 pm on 29 April 2019). The Return of Value was approved by shareholders on 29 April 2019. The Return of Value was effected through an issue and redemption of B shares and resulted in a $500.0$1,800.0 million increase in the capital redemption reserve and a $343.3$1,800.0 million reduction in the merger reservereserve. 413,784,754 “B” shares were issued at 335.859391 pence each, resulting in a total $1,800.0 million being credited to the “B” share liability account. Subsequently and on the same date, 413,784,754 “B” shares were redeemed at 335.859391pence each and an amount of $1,800.0 million was debited from the “B share liability account. The Group entered into a $156.7forward exchange contract to protect the Company from any foreign exchange movement and the resulting payment to shareholders of $1,800.0 million reduction in share premium.incurred net transaction costs of $1.0 million. The returnReturn of valueValue was accompanied by a 0.92630.8296 share consolidation and the share consolidation resulted in the issue of D deferred shares which were subsequently bought back for 1 pence, resulting in a transfer of $2.9$18.7 million to the capital redemption reserve. The settlement date was 13 May 2019 for the Ordinary Shares.

26 Share premium account

     October 31, 2020  October 31, 2019  October 31, 2018 
  Note  
$m



$m



$m

At November 1     44.0   
41.0
   192.1 
Issue and redemption of B shares     -   
-
   (156.7)
Movement in relation to share options exercised  29   2.5   
3.0
   5.6 
At October 31      46.5   
44.0
   41.0 

27 Other reserves

     
Capital
redemption
reserve 1
  
Merger
reserve 2
  
Hedging
reserve 3
  Total 
  Note  
$m



$m



$m



$m

As at November 1, 2018     666.3   3,724.4   70.0   4,460.7 
Return of Value - share consolidation  25   18.7   -   -   18.7 
Return of Value - issue and redemption of B shares  25   1,800.0   (1,800.0)  -   - 
Hedge accounting  24   -   -   (122.9)  (122.9)
Current tax movement on hedging      -   -   23.3   23.3 
Reallocation of merger reserve      -
   (184.6)
  -

  (184.6)
As at October 31, 2019      2,485.0   1,739.8   (29.6)  4,195.2 

As at November 1, 2019     2,485.0   1,739.8   (29.6)  4,195.2 
Hedge accounting  24   -   -   (41.3)  (41.3)
Current tax movement on hedging      -   -   7.8   7.8 
Reallocation of merger reserve      -   27.6   -   27.6 
As at October 31, 2020      2,485.0   1,767.4   (63.1)  4,189.3 

1 Capital redemption reserve
The capital redemption reserve, a non-distributable reserve, was created as a result of Returns of Value in prior periods (note 26).

2 $1.1 Reallocation of merger reserve
The merger reserve is an unrealized profit until it can be realized by the settlement of the intercompany loan by qualifying consideration.

In the 12 months ended October 31, 2019, it was disclosed that $400.0 million of the merger reserve would be settled in the year. However, as at October 31, 2020, only $35.4 million of the balance was settled and the balance of $364.6 million was recognisedno longer required. However, $337.0 million is expected to be settled in qualifying consideration during the year ended October 31, 2021 and as such an equivalent proportion of the merger reserve of $27.6 million is considered unrealized, in accordance with section 3.11(d) of Tech 02/17 and therefore has been transferred from retained earnings.

Consolidated financial statements and notes
Notes to the consolidated financial statements
27 Other reserves continued

3Hedging reserve
A debit of $33.5 million was recognized in the hedging reserve in relation to hedging transactions entered into in the six12 months ended October 31, 2017.

3 On September 1, 2017 the acquisition of HPE Software was completed (note 28). As a result of this a merger reserve was created of $6,485.4m. The acquisition was structured by way of equity consideration; this transaction fell within the provisions of section 612 of the Companies Act 2006 (merger relief) such that no share premium was recorded in respect of the shares issued. The parent company chose to record its investment in HPE Software at fair value and therefore recorded a merger reserve equal to the value of the share premium which would have been recorded had section 612 of the Companies Act 2006 not been applicable (i.e. equal to the difference between the fair value of HPE Software and the aggregate nominal value of the shares issued)2020 (2019: $99.6 million debit).

428 Non-controlling interests
At October 31, 2019, the Group had minority shareholders in one subsidiary, Novell Japan Ltd. On June 10, 2020, a payment of 2,526,000 JPY ($23,570) was made to acquire 842,000 ordinary 1 JYP shares held. This payment increased the Group’s shareholding from 84.24% to 100%. The Company has transferred an amount from the merger reserve to retained earnings pursuant to the UK company law. The parent company previously transferred the investment in TAG to a wholly owned subsidiary for an intercompany receivable in the amount of $1,373m and the investment to HPE Software to a wholly owned subsidiary for an intercompany receivable in the amount of $6,485.4m. To the extent the loan is settled in qualifying consideration, an amount of $700.0 million from the merger reserve is transferred to retained earnings (2016: $180.0m) that is available for dividend distribution to the parent company shareholders.Group will therefore no longer have any non-controlling interests.

F-23

Notes to the consolidated interim financial statements (unaudited)

25. Non-controlling interest

$’000
At May 1, 20161,057
Share of loss after tax(21)
At October 31, 20161,036
At May 1, 2017954
Share of profit after tax304
At October 31, 20171,258
  October 31, 2020  October 31, 2019  October 31, 2018 
  
$m



$m



$m

At November 1  1.3   
1.0
   0.9 
Share of profit after tax  -   
0.3
   0.1 
Purchase of non-controlling interests  (1.3)  
-
   - 
At October 31  -   
1.3
   1.0 

Non-controlling interests relate to the companies detailed below:

 
Company name
Country of incorporation and
principal place of business
 
October 31, 2020
Proportion held
  
October 31, 2019
Proportion held
 
Novell Japan LtdJapan  100%  84.24%

Company name
Country of
incorporation and
principal place of
business
 
October 31,
2017
Proportion
held
  
October 31,
2016
Proportion
held
 
Novell Japan LtdJapan  74.7%  71.5%
29 Employees and directors

OnStaff costs

  
12 months ended
October 31, 2020
  
12 months ended
October 31, 2019
  
18 months ended
October 31, 2018
 



$m



$m



$m

Staff costs            
Wages and salaries  1,187.3   1,204.4   1,819.2 
Redundancy and termination costs (non-exceptional)  1.0   0.5   2.1 
Social security costs  97.5   93.6   159.0 
Other pension costs  41.6   41.7   50.4 
   1,327.4   1,340.2   2,030.7 
Cost of employee share schemes (Share-based payments section below)  17.0   68.8   64.3 
Total  1,344.4   1,409.0   2,095.0 

     
12 months ended
October 31, 2020
  
12 months ended
October 31, 2019
  
18 months ended
October 31, 2018
 
  Note  
$m



$m



$m

Pension costs comprise:               
Defined benefit schemes  22   10.4   9.0   7.1 
Defined contribution schemes  22   31.2   32.7   43.3 
Total      41.6   41.7   50.4 

Consolidated financial statements and notes
Notes to the November 20, 2017 the proportion held by the Group in Novell Japan Ltd increased to 77.9%.consolidated financial statements
29 Employees and directors continued

26. Related party transactionsStaff numbers

  
12 months ended
October 31, 2020
  
12 months ended
October 31, 2019
  
18 months ended
October 31, 2018
 
  Number  Number  Number 
Average monthly number of people         
(including executive directors) employed by the Group:         
          
Continuing operations         
Sales and distribution  5,066   5,413   5,860 
Research and development  5,091   5,056   4,323 
General and administration  1,937   1,991   1,378 
   12,094   12,460   11,561 
             
Discontinued operation            
Sales and distribution  -   164   515 
Research and development  -   170   629 
General and administration  -   3   8 
   -   337   1,152 
             
Total            
Sales and distribution  5,066   5,577   6,375 
Research and development  5,091   5,226   4,952 
General and administration  1,937   1,994   1,386 
Total  12,094   12,797   12,713 
The Group’s related parties are its subsidiary undertakings
Directors and Executive Committee members. The Group has taken advantage of the exemption available under IAS 24, “Related Party Disclosures”, not to disclose details of transactions with its subsidiary undertakings.key management

  
12 months ended
October 31, 2020
  
12 months ended
October 31, 2019
  
18 months ended
October 31, 2018
 



$m



$m



$m

Directors            
Aggregate emoluments  4.1   3.7   14.6 
Aggregate gains made on the exercise of share options  0.3   79.7   77.7 
Company contributions to money purchase pension scheme  -   -   0.7 
Total  4.4   83.4   93.0 
Key management compensation

 
6 months ended
October 31,
2017
  
6 months ended
October 31,
2016
  
12 months ended
October 31, 2020
  
12 months ended
October 31, 2019
  
18 months ended
October 31, 2018
 
  $’000   $’000 
$m


$m


$m

Key management compensation         
Short-term employee benefits  9,997   4,749  12.4  9.5  25.9 
Share-based payments  9,271   6,326 
  19,268   11,075 
Share based payments 2.2  25.3  44.5 
Total 14.6  34.8  70.4 

The key management figures above include the executive management team and directors. There are no post-employment benefits.

Consolidated financial statements and notes
Notes to shareholdersthe consolidated financial statements
29 Employees and directors continued

On AugustShare-based payments

The amount charged to the Consolidated statement of comprehensive income in respect of share-based payments was $17.0 million for the 12 months ended October 31, 20172020 (2019: $71.3 million).

  
12 months ended
October 31, 2020
  
12 months ended
October 31, 2019
  
18 months ended
October 31, 2018
 



$m



$m



$m

Share-based compensation – IFRS 2 charge  18.3   62.0   70.9 
Employer taxes  (1.3)  6.8   (6.6)
Continuing operations  17.0   68.8   64.3 
Discontinued operation  -   2.5   - 
Total  17.0   71.3   64.3 

As at October 31, 2020, accumulated employer taxes of $0.6 million (2019: $1.9 million; 2018: $20.6 million) are included in trade and other payables and $nil (2019: $nil; 2018: $0.5 million) is included in other non-current liabilities.

The Group has various share-based plans details of which are provided below.

a)Incentive Plan 2005
The Micro Focus International plc Incentive Plan 2005 (“LTIP”) permits the granting of share awards to executive directors and selected employees on a Returndiscretionary basis. Awards can be granted as conditional awards of Valueshares or as nil-cost options.

  
12 months ended
October 31, 2020
  
12 months ended
October 31, 2019
 
  
Number of
awards
  


Weighted average
exercise price of
awards
  
Number of
awards
  
Weighted average
exercise price of
awards
 
   ‘000  pence   ‘000  pence 
Outstanding at November 1  9,227   6   5,620   14 
Exercised  (734)  1   (3,410)  17 
Forfeited/lapsed  (2,100)  22   (545)  27 
Granted  7,829   -   7,562   - 
Outstanding at October 31  14,222   -   9,227   6 
Exercisable at October 31  938   4   1,416   34 

The weighted average share price for awards on the date of exercise was made526 pence for the 12 months ended October 31, 2020 (2019: 1,707 pence).

The amount charged to shareholders amountingthe Consolidated statement of comprehensive income in respect of the LTIP scheme was $9.3 million for the 12 months ended October 31, 2020 (2019: $31.1 million). In addition to $500.0 this $1.3 million (£386.1 (2019: $8.5 million) charge) was credited to the Consolidated statement of comprehensive income in cash (168 pence per existing Ordinary Share heldrespect of National Insurance on these share awards.

   October 31, 2020  October 31, 2019 
   
Weighted
average
exercise price
  
Number of
awards
  
Weighted
average
remaining
contractual life
  
Weighted
average
exercise price
  
Number of
awards
  
Weighted
average
remaining
contractual life
 
Range of exercise prices  pence   ‘000  years  pence   ‘000  years 
£0.10 or less   -   14,104   17.2   1   8,982   3.4 
£0.11 – £1.00   13   118   2.8   13   137   3.7 
£1.01 – £2.00   -   -   -   -   -   - 
£2.01 – £3.00   -   -   -   -   -   - 
£3.01 - £4.00   -   -   -   -   -   - 
More than £4.00   -   -   -   402   108   0.7 
    -   14,222   17.1   6   9,227   3.4 

Consolidated financial statements and notes
Notes to the consolidated financial statements
29 Employees and directors continued

Share-based payments continued

Unvested awards granted are subject to the following vesting conditions of either:

Performance criteria
Unvested
options
Number ‘000
Description
Free cash flow/ Relative TSR growth4,601Awards made with a free cash flow target and relative TSR target over a three-year period.
Continued employment3,528Awards under a continuing employment criteria over a two or three-year period.
Adjusted EBITDA growth2,609Awards made with Adjusted EBITDA growth targets over a two-year period.
Cumulative Earnings per share (“EPS”) growth1,862EPS for these awards is defined as Diluted Adjusted EPS. Where the cumulative EPS growth over a three or four-year period is at least equal to RPI plus 3% per annum 25% of awards will vest, with full vesting achieved when the cumulative EPS growth is RPI plus 9% per annum. Straight-line vesting will apply between these points.
Other684Various other vesting conditions
13,284
The weighted average fair value of awards granted during the 12 months ended October 31, 2020 determined using the Black-Scholes valuation model was £2.01 (2019: £14.54). The significant inputs into the model for the 12 months ended October 31, 2020 were:
12 months ended
October 31, 2020
12 months ended
October 31, 2019
Weighted average share price at the grant date£2.50£16.44
Expected volatility72.85%between 48.91% and 49.68%
Expected dividend yield23.76%between 4.78% and 5.87%
Expected option life2 years0.76 to four years
Annual risk-free interest rate0.17%between 0.49% and 1.38%
The volatility measured at the Record Timestandard deviation of 6.00pmcontinuously compounded share returns is based on Auguststatistical daily share prices over the last three years.
The fair value of awards granted in the 12 months ended October 31, 2017. The Return2020, as determined using the Monte Carlo simulation was $2.67 and the fair value of Value was effected through an issue and redemption of B shares, and was accompanied by a 0.9263 share consolidation to maintain broad comparability ofawards granted using the share price at the date of grant was $4.65.
b)Additional Share grants

  
12 months ended
October 31, 2020
  
12 months ended
October 31, 2019
 
  Number of Options     Number of Options    
  
TAG
ASGs
  
HPE Software
ASGs
  Total  
Weighted average exercise
price
  
TAG
ASGs
  HPE Software ASGs  Total  
Weighted average
exercise
price
 
   ‘000   ‘000   ‘000  pence   ‘000   ‘000   ‘000  pence 
                                 
Outstanding at November 1  461   3,215   3,676   -   3,062   7,427   10,489   - 
Granted  -   -   -   -   -   458   458   - 
Exercised  (15)  -   (15)  -   (2,601)  -   (2,601)  - 
Surrendered  -   (2,385)  (2,385)  -   -   -   -   - 
Lapsed  -   (830)  (830)  -   -   (4,670)  (4,670)  - 
Outstanding at October 31  446   -   446   -   461   3,215   3,676   - 
Exercisable at October 31  446   -   446   -   461   -   461   - 

Consolidated financial statements and return per sharenotes
Notes to the consolidated financial statements
29 Employees and directors continued

Share-based payments continued

Additional Share Grants – The Attachmate Group (“TAG”) acquisition
The Remuneration Committee awarded Additional Share Grants (“ASGs”) to a number of senior managers and executives, critical to delivering the anticipated results of the ordinary shares before and after the creationacquisition of the B Shares.The Attachmate Group, which completed on November 20, 2014. These TAG ASG options vested in full.

As at October 31, 2017 this was2020, 445,917 (2019: 460,917) of these options were vested but not yet exercised.

Additional Share Grants – The HPE Software business acquisition
The Remuneration Committee awarded a number of Additional Share Grants (“ASGs”) to a number of senior managers and executives, critical to delivering the Group’s 5th Return of Value to shareholders and this brings the total amount returned to shareholders since March 25, 2011 through share buy-backs, Returns of Value and ordinary dividends to £1,255.0 million which represents 197.63%anticipated results of the Market Capitalizationacquisition of the HPE Software business, which completed on September 1, 2017.

2,385,000 awards were surrendered by the Executive Directors in the year. The remaining HPE ASG awards lapsed in full on July 7, 2020 due to the performance conditions not being met.

The amount charged to the Consolidated statement of comprehensive income in respect of the ASGs was $3.9 million for the 12 months ended October 31, 2020 (2019: $30.6 million). In addition to this $nil (2019: $1.7 million charge) was credited to the consolidated statement of comprehensive income in respect of National Insurance on these share options in the 12 months ended October 31, 2020.

 October 31, 2020October 31, 2019
    Range of exercise prices
Weighted
average
exercise
price
pence
 
Number
of
options
‘000
Weighted
average
remaining
contractual
life (years)
Weighted
average
exercise
price
pence
 
Number
of
options
‘000
Weighted
average
remaining
contractual
life (years)
£0.00-
446
4.1-3,676
7.3
 -4464.1-3,6767.3

c) Sharesave and Employee Stock Purchase Plan 2006
In August 2006, the Company introduced the Micro Focus Employee Stock Purchase Plan 2006 and the Micro Focus Sharesave Plan 2006, approved by members on 25 July 2006. The Group operates two all-employee plans are the Micro Focus Sharesave Plan 2006 (“Sharesave”) for UK and Ireland based employees and the Micro Focus Employee Stock Purchase Plan 2006 (“ESPP”) for employees in all other locations. The Sharesave and ESPP provide for an annual award of options at that time.a discount to the market price and are open to all eligible Group employees. Under these plans employees make monthly savings over a period (Sharesave three years, ESPP two years) linked to the grant of an option with an option price which can be at a discount (for Sharesave this can be up to 20% of the market value of the shares on grant and for ESPP, this can be up to 15% of the market value of the shares on grant or maturity, whichever is lower). The option grants are subject to employment conditions and continuous savings.


Consolidated financial statements and notes
Notes to the consolidated interimfinancial statements
29 Employees and directors continued

Share-based payments continued

Further Sharesave and ESPP grants were made during the 12 months to October 31, 2020.

Sharesave

  
12 months ended
October 31, 2020
  
12 months ended
October 31, 2019
 
  Number  Weighted  Number  Weighted 
  of  average  of  average 
  options  exercise price  options  exercise price 
   ‘000  pence   ‘000  pence 
Outstanding at November 1  438   1,221   496   1,185 
Exercised  -   1,023   (81)  1,171 
Forfeited  (912)  855   (102)  1,297 
Granted  2,409   338   125   1,374 
Outstanding at October 31  1,935   293   438   1,221 
Exercisable at October 31  -   -   62   1,461 

Number
of
options
‘000
 Date of grant 
Exercise price
per share
pence
 Exercise period
8 February 23, 2018  1,720.0 April 1, 2021 – September 30, 2021
1 February 23, 2018  1,963.0 April 1, 2021 – September 30, 2021
33 August 3, 2018  1,023.0 October 1, 2021 – March 31, 2022
1 August 3, 2018  1,159.0 October 1, 2021 – March 31, 2022
10 March 7, 2019  1,344.0 April 1, 2022 – September 30, 2022
1 March 7, 2019  1,533.0 April 1, 2022 – September 30, 2022
2 August 5, 2019  1,411.0 October 1, 2021 – March 31, 2023
7 August 5, 2019  1,574.3 October 1, 2021 – August 4, 2022
83 March 5, 2020  617.7 April 1, 2023 – September 30, 2023
8 March 5, 2020  728.2 April 1, 2023 – September 30, 2023
1,680 August 21, 2020  241.3 October 1, 2023 – March 31, 2024
101 August 21, 2020  241.1 October 1, 2023 – March 31, 2024
1,935         

 c) Sharesave and Employee Stock Purchase Plan 2006

ESPP
  
12 months ended
October 31, 2020
  
12 months ended
October 31, 2019
 
      
Number
of
options
      
Weighted
average
exercise price
      
Number
of
options
      
Weighted
average
exercise price
   
   ‘000   ‘000   ‘000  pence 
Outstanding at November 1  1,192   1,182   800   1,047 
Exercised  (1,472)  1,027   (17)  1,114 
Forfeited  (423)  1,082   (44)  1,440 
Granted  2,958   660   453   1,444 
Outstanding at October 31  2,255   617   1,192   1,182 
Exercisable at October 31  -   -   -   - 

Consolidated financial statements (unaudited)and notes
Notes to the consolidated financial statements
29 Employees and directors continued

28.Share-based payments continued

Number
of
options
‘000
Date of grant
Exercise price
per
share
pence
Exercise period
244March 1, 20191,428.0March 1, 2021 – May 31, 2021
209October 1, 20191,462.8October 1, 2021 – December 31, 2021
689March 1, 2020635.9March 1, 2022 – May 31, 2022
1,113October 1, 2020270.2October 1, 2022 – December 31, 2022
2,255   

The amount charged to the Consolidated statement of comprehensive income in respect of the Sharesave and ESPP was $5.1 million for the 12 months ended October 31, 2020 (2019: $2.8 million).

The weighted average fair value of options granted under Sharesave and ESPP during the 12 months ended October 31, 2020 determined using the Black-Scholes valuation model was £1.27 (2019: £5.93).

The significant inputs into the model for the 12 months ended October 31, 2020 were:

12 months ended
October 31, 2020
12 months ended
October 31, 2019
Weighted average share price at the grant date£4.38£17.56
Expected volatilitybetween 57.72% and 72.37%between 49.06% and 49.68%
Expected dividend yieldbetween 8.22% and 16.11%between 4.63% and 5.87%
Expected option lifetwo or three yearstwo or three years
Annual risk-free interest ratebetween 0.20% and 0.52%between 0.49% and 1.16%

The volatility measured at the standard deviation of continuously compounded share returns is based on statistical daily share prices over the last three years.

30 Contingent liabilities

The Company and several of its subsidiaries are, from time to time, parties to legal proceedings and claims which arise in the ordinary course of business. The directors do not anticipate that the outcome of these proceedings, actions and claims, either individually or in aggregate, will have a material adverse effect upon the Group’s financial position.

Shareholder litigation
Micro Focus International plc and certain current and former directors and officers are involved in two consolidated class action lawsuits in which plaintiffs are seeking damages for alleged violations of the Securities Act of 1933 and the Exchange Act of 1934.  Plaintiffs allege false and misleading statements or omissions in offering documents issued in connection with the Hewlett Packard Enterprise software business merger and issuance of Micro Focus American Depository Shares (“ADS”) as merger consideration, and other purportedly false and misleading statements. No liability has been recognized in either case as the complaint in one lawsuit has been dismissed and plaintiffs are now seeking an appeal, and the other lawsuit is still at an early stage in proceedings and it is too soon to estimate whether there will be any financial impact.

Consolidated financial statements and notes
Notes to the consolidated financial statements
30 Contingent liabilities continued

Patent litigation
On July 2, 2018, Wapp Tech Limited Partnership and Wapp Tech Corp. (collectively, “Wapp”) sued Micro Focus International plc in the Eastern District of Texas, accusing it of infringing claims of three patents in connection with Micro Focus International plc’s purported manufacture and sale of certain products in the ADM product line, including LoadRunner and Performance Center. Wapp also sued HPE, Wells Fargo & Company, and Bank of America Corporation for their alleged use of the same accused products. On August 13, 2019, the Texas court dismissed Micro Focus International plc for lack of personal jurisdiction, but granted Wapp’s request to amend its complaint to name Micro Focus International plc subsidiaries Seattle SpinCo, Inc., EntIT Software LLC, EntCo Interactive (Israel) Ltd., EntCo Government Software LLC, and Micro Focus (US) Inc. (collectively, the “Subsidiary Defendants”) as defendants. On August 20, 2019, Wapp filed an amended (and operative) complaint in that case naming the Subsidiary Defendants as defendants. The Court stayed the cases against HPE, Bank of America, and Wells Fargo. On December 11, 2020, Micro Focus filed a motion for summary judgment, which the Court denied on January 14, 2021.  On December 18, 2020, the case was mediated but did not settle.  The Final Pretrial Conference is scheduled for February 2021, and the Micro Focus trial is set for March 1, 2021. Micro Focus’ defences against liability include that the patent claims are not infringed, and that the patent claims are invalid. These infringement and invalidity claims will be contested on their merits at trial. Due to the Group’s assessment that the asserted patent claims are not infringed and/or are invalid, no provision is recorded for this matter, however as the outcome of the trial is uncertain we have disclosed this potential obligation.

31 Related party transactions
The Group’s related parties are its subsidiary undertakings, key management personnel and post-employment benefit plans.

Subsidiaries
Transactions between the Company and its subsidiaries have been eliminated on consolidation.

Remuneration of key management personnel
The remuneration of key management personnel of the Group (which is defined as members of the executive committee including executive directors) is set out in note 29. There are no loans between the Group and the key management personnel.

Transactions with other related parties
The following transactions occurred with other related parties:


-Contributions made to pension plans by the Group on behalf of employees are set out in note 22.

-Sales and purchases of goods and services between related parties are not considered material.

Consolidated financial statements and notes
Notes to the consolidated financial statements
32 Discontinued operation

A.          SUSE business
On July 2, 2018, the Group announced the proposed sale of the SUSE business segment to Blitz 18-679 GmbH (subsequently renamed to Marcel Bidco GmbH), a newly incorporated directly wholly owned subsidiary of EQTVIII SCSp, which is advised by EQT Partners. The total cash consideration of $2.5 billion was on a cash and debt free basis and subject to normalization of working capital.

On August 21, 2018, Shareholders voted to approve the proposed transaction whereby the Company agreed to sell its SUSE business segment to Marcel Bidco GmbH, for a total cash consideration of approximately $2.5 billion, subject to customary closing adjustments. Following this vote, all applicable antitrust, competition, merger control and governmental clearances was obtained. The sale was completed in the prior year (March 15, 2019) and the SUSE business segment was treated as discontinued in the prior year financial statements and in the comparatives of these financial statements.

Discontinued operation – Financial performance

  
12 months ended
October 31, 2020
  
12 months ended
October 31, 2019
 
  
Before
Exceptional
Items
  
Exceptional
Items
  Total  
Before
Exceptional
Items
  
Exceptional
Items
  Total 
  
$m



$m



$m



$m



$m



$m

Revenue  -   -   -   127.0   -   127.0 
Operating costs  -   -   -   (89.3)  -   (89.3)
Operating profit  -   -   -   37.7   -   37.7 
Share of results of associate  -   -   -   (0.3)  -   (0.3)
(Loss)/profit on disposal of the SUSE business  -   (3.0)  (3.0)  -   1,767.9   1,767.9 
(Loss)/profit before taxation  -   (3.0)  (3.0)  37.4   1,767.9   1,805.3 
Taxation  7.3   0.8   8.1   (8.7)  (309.4)  (318.1)
Profit for the year from discontinued operation  7.3   (2.2)  5.1   28.7   1,458.5   1,487.2 

The profit on disposal of the SUSE business for the 12 months ended October 31, 2020 related to conclusion of the working capital settlement and adjustments in respect of income tax balances owed in respect of pre-transaction periods.

The cash flow statement shows amounts related to the discontinued operations:

12 months ended
October 31, 2020
12 months ended
October 31, 2019

$m



$m

Net cash inflows from operating activities-18.6
Net cash outflows from investing activities1.3-
Net cash flows from financing activities--

In the prior year, on March 15, 2019, the Group disposed of the SUSE business for $2,540.3 million. Details of net assets disposed of and the profit on disposal are as follows:
Carrying value pre-disposal

$m

Non-current assets classified as held for sale989.8
Current assets classified as held for sale127.3
Current liabilities classified as held for sale(288.5)
Non-current liabilities classified as held for sale(177.3)
Net assets disposed651.3

Consolidated financial statements and notes
Notes to the consolidated financial statements
32 Discontinued operation continued

A.SUSE Business combinationscontinued
The profit on disposal was calculated as follows:



$m

Disposal proceeds2,540.3
Costs to sell recognized in the year(45.3)
Disposal proceeds, less costs to sell recognized in the year2,495.0
Net assets disposed(651.3)
Profit on disposal1,843.7
Cumulative exchange gain in respect of the net assets of the subsidiaries, reclassified from equity on disposal(75.8)
Profit on disposal1,767.9
The profit on disposal is reflected in the prior year in profit for the year from discontinued operations in the Consolidated statement of comprehensive income. All cash flows occurred in the prior year.
The inflow of cash and cash equivalents on the disposal of the SUSE business is calculated as follows:


$m

Disposal proceeds, less total costs to sell2,495.0
Cash disposed(21.5)
Investing cash flows generated from discontinued operations, net of cash disposed2,473.5
B.          Atalla
On May 18, 2018 the Company entered into an agreement with Utimaco Inc. (“Utimaco”), under which Utimaco would acquire Atalla for $20 million in cash. The deal was subject to regulatory approval by the Committee on Foreign Investment in the United States (“CFUIS”). CFIUS placed the deal into investigation in September and final approval was received October 10, 2018. The deal closed on November 5, 2018 and Utimaco acquired the Atalla HSM product line, the Enterprise Security Manager (“ESKM”) product line, and related supporting assets, including applicable patents and other IP.
In the prior year, on November 5, 2018, the Group disposed of the Atalla business for a net cash consideration of $20.0 million. Details of net assets disposed of and the profit on disposal are as follows:
Carrying value pre-disposal



$m

Goodwill28.0
Property, plant and equipment0.3
Non-current assets28.3
Deferred income(12.0)
Current liabilities(12.0)
Net assets disposed16.3

The profit on disposal was recorded as exceptional (note 4) in the prior year and in the comparatives of these financial statements was calculated as follows:
$m
Disposal proceeds20.0
Net assets disposed(16.3)
Profit on disposal3.7

Consolidated financial statements and notes
Notes to the consolidated financial statements
33 Acquisitions

Summary of acquisitions for

           Consideration 
  
Carrying
value at
acquisition
  
Fair value
adjustments
  Goodwill  Shares  Cash  Total 



$m



$m



$m



$m



$m



$m

                         
Acquisitions in the 12 months ended October 31, 2020:                        
ATAR Labs  0.9   5.0   1.4   -   7.3   7.3 
   0.9   5.0   1.4   -   7.3   7.3 
 
Acquisitions in the 12 months ended October 31, 2019:
                        
Interset Software Inc.  0.9   61.3   26.8   -   89.0   89.0 
   0.9   61.3   26.8   -   89.0   89.0 
                         
Acquisitions in the 18 months ended October 31, 2018:                        
HPE Software business  (2,487.8)  4,143.7   4,858.3   6,514.2   -   6,514.2 
COBOL-IT  (3.0)  14.0   5.6   -   16.7   16.7 
   (2,490.8)  4,157.7   4,863.9   6,514.2   16.7   6,530.9 

Acquisitions in the six12 months ended October 31, 2017 and 2016:2020:

           Consideration 
  
Carrying
value at
acquisition
  
Fair value
adjustments
  
Hindsight
adjustments
  Goodwill  
Shares
  Cash  Payable  
Total
 
   $’000   $’000   $’000   $’000   $’000   $’000   $’000   $’000 
Acquisitions in the six months ended October 31, 2016:                                
Serena Software Inc.  147,260   (249,306)  -   379,669   -   277,623       277,623 
GWAVA Inc.  618   3,062   -   12,767   -   16,447       16,447 
   147,878   (246,244)      392,436       294,070       294,070 
Acquisitions in the six months ended October 31, 2017:                                
HPE Software (provisional)  (2,277,193)  3,974,891   -   5,105,472   6,514,170       289,000   6,803,170 
1          ATAR Labs
On July 7, 2020, the Group completed the acquisition of ATAR Labs (“ATAR Labs”). ATAR Labs integrates into the ArcSight portfolio to create a fast-acting environment against threats with top-of-the-line capabilities.

Total consideration of $7.3 million consists of initial consideration of $6.0 million with a further deferred consideration payment of $1.3 million to be paid in two yearly instalments. The Group has not presented the full IFRS 3 “Business Combinations” disclosures as this acquisition is not material to the Group, given that it was an acquisition of a business with a carrying value of $1.7 million of assets and $0.8 million of liabilities.

A fair value review was carried out on the assets and liabilities of the acquired business, resulting in the identification of intangible assets.

     
Carrying value
at acquisition
  
Fair value
adjustments
  Fair value 
             
  Note  
$m



$m



$m

Intangible assets – purchased1
  11   1.6   5.0   6.6 
Other current assets      0.1   -   0.1 
Borrowings      (0.1)  -   (0.1)
Provisions – short-term  21   (0.4)  -   (0.4)
Deferred income – short-term      (0.3)  -   (0.3)
Net assets      0.9   5.0   5.9 
Goodwill (note 10)              1.4 
Consideration              7.3 
                 
Consideration satisfied by:                
Cash              6.0 
Deferred consideration to be settled in cash              1.3 
               7.3 

The fair value adjustments relate to:
1 Purchased intangible assets of $6.6 million have been valued based on a market participant point of view and the fair value has been based on various characteristics of the product lines and intangible assets of ArcSight.

Consolidated financial statements and notes
Notes to the consolidated financial statements
33 Acquisitions continued

Acquisitions in the six12 months ended October 31, 2017:2019:

1.1          Acquisition of Interset Software Inc.
On February 15, 2019, the Group completed the acquisition of Interset Software Inc. (“Interset”), a worldwide leader in security analytics software that provides highly intelligent and accurate cyber-threat protection. The addition of this predictive analytics technology adds depth to Micro Focus’ Security, Risk & Governance portfolio, and aligns with the Company’s strategy to help customers quickly and accurately validate and assess risk as they digitally transform their businesses.

Consideration of $89.0m consists of completion payment of $85.0 million, working capital adjustments and net cash adjustments. The Group did not presented the full IFRS 3 “Business Combinations” disclosures as this acquisition is not material to the Group, given that it was an acquisition of a business with a carrying value of $5.5 million of assets and $4.6 million of liabilities.

A fair value review was carried out on the assets and liabilities of the acquired business, resulting in the identification of intangible assets. The fair value review was finalised in the 12-month period following completion, which ended on February 15, 2020. No adjustments were identified

     Carrying value at acquisition  Fair value adjustments  Fair value 
             
  Note  
$m



$m



$m

Intangible assets – purchased 1
  11   -   61.2   61.2 
Property, plant and equipment  12   0.3   -   0.3 
Other non-current assets      0.2   -   0.2 
Trade and other receivables      3.8   -   3.8 
Cash and cash equivalent      1.2   -   1.2 
Trade and other payables      (1.5)  -   (1.5)
Finance leases obligations – short term      (0.1)  -   (0.1)
Provisions – short-term  21   (0.7)  -   (0.7)
Deferred income – short-term 2
      (2.1)  0.1   (2.0)
Deferred income – long-term 2
      (0.2)  -   (0.2)
Net assets      0.9   61.3   62.2 
Goodwill (note 10)              26.8 
Consideration              89.0 
                 
Consideration satisfied by:                
Cash              89.0 

The fair value adjustments relate to:
1Purchased intangible assets of $61.2 million ($44.5 million Technology, $4.2 million Trade names, $12.5 million Customer Relationships) have been valued based on a market participant point of view and the fair value has been based on various characteristics of the product lines and intangible assets of Interset.
2
Deferred income has been valued taking account of the remaining performance obligations.

The value of the goodwill represents the value of the assembled workforce at the time of the acquisition with specific knowledge and technical skills. It also represents the prospective future economic benefits that are expected to accrue from enhancing the portfolio of products available to the Company’s existing customer

Consolidated financial statements and notes
Notes to the consolidated financial statements
33 Acquisitions continued

Acquisitions in the year ended October 31, 2018:

1          Acquisition of the HPE Software

business
On September 1, 2017, the Company completed the acquisition of HPE’s software business segment (“HPE Software”) by way of merger with a wholly owned subsidiary of HPE incorporated to hold the business of HPE Software in accordance with the terms of the previously announced Mergermerger agreement (“Completion”). Accordingly, on Admission, ADRsAmerican Depositary Shares representing 222,166,897 Consideration Shares were issued to HPE Shareholders, representing 50.1% of the fully diluted share capital of the Company. This has created a global infrastructure software business with pro-forma revenues inThe fair value of the 12 months to Octoberordinary shares issued was based on the listed share price of the Company as of August 31, 2017 of approximately $4.2 billion$6.5 billion. The costs of acquiring the HPE Software business of $70.1 million are included in exceptional items (note 4) and Underlying Adjusted EBITDA of approximately $1.4 billion making it the seventh largest pure play software company in the world by revenue and a leading technology stockinclude costs relating to due diligence work, legal work on the LSE.acquisition agreement and professional advisors on the transaction.

There was judgment used in identifying who the accounting acquirer was in the acquisition of the HPE Software business, as the resulting shareholdings were not definitive to identify the entity, which obtains control in the Transaction.  As such, thetransaction. The Group considered the other factors laid down in IFRS, such as the composition of the governing body of the combined entity, composition of senior management of the combined entity, the entity that issued equity interest, terms of exchange of equity interests, the entity which initiated the combination, relative size of each entity, the existence of a large minority voting interest in the combined entity and other factors (e.g. location of headquarters of the combined entity and entity name). The conclusion of this assessment is that the Company is the accounting acquirer of the HPE Software business, and the acquisition accounting, as set out below, havehas been performed on this basis.

F-25

Notes to the consolidated interim financial statements (unaudited)

28. Business combinations (continued)

1. Acquisition of HPE Software (continued)

Details of the net assets acquired and goodwill are as follows:

  
Carrying value
at acquisition
  
Fair value
adjustments
  Fair value 



$m



$m



$m

Intangible assets  72.8   6,467.0   6,539.8 
Property, plant and equipment  160.1   -   160.1 
Other non-current assets  41.9   -   41.9 
Inventories  0.2   -   0.2 
Trade and other receivables  721.2   -   721.2 
Current tax recoverable  0.5   -   0.5 
Cash and cash equivalents  320.7   -   320.7 
Trade and other payables  (686.8)  1.6   (685.2)
Current tax liabilities  (9.9)  -   (9.9)
Borrowings  (2,547.6)  -   (2,547.6)
Short-term provisions  (30.2)  -   (30.2)
Short-term deferred income 2
  (701.2)  58.0   (643.2)
Long-term deferred income 2
  (116.9)  8.7   (108.2)
Long-term provisions  (39.0)  -   (39.0)
Retirement benefit obligations  (71.5)  -   (71.5)
Other non-current liabilities  (52.3)  12.1   (40.2)
Deferred tax assets/(liabilities) 3
  450.2   (2,403.7)  (1,953.5)
Net (liabilities)/assets  (2,487.8)  4,143.7   1,655.9 
Goodwill  -       4,858.3 
Consideration          6,514.2 
             
Consideration satisfied by:            
Shares          6,514.2 
  
Carrying value at
acquisition
  
Fair value
Adjustments
(Provisional)
  
Fair value
(Provisional)
 
   $’000   $’000   $’000 
Intangible assets1
  72,825   6,200,000   6,272,825 
Property, plant and equipment  165,664   -   165,664 
Other non-current assets  41,929   -   41,929 
Deferred tax assets  428,624   (423,663)  4,961 
Inventories  185   -   185 
Trade and other receivables  726,149   -   726,149 
Current tax recoverable  736   -   736 
Cash and cash equivalents  320,729   -   320,729 
Trade and other payables  (468,850)  1,616   (467,234)
Current tax liabilities  (9,942)  -   (9,942)
Borrowings  (2,568,270)  -   (2,568,270)
Short-term provisions  (16,425)  -   (16,425)
Short-term deferred income 2
  (707,688)  58,004   (649,684)
Long-term deferred income 2
  (121,617)  8,652   (112,965)
Long-term provisions  (16,294)  -   (16,294)
Retirement benefit obligations  (71,445)  -   (71,445)
Other non-current liabilities  (53,503)  12,145   (41,358)
Deferred tax liabilities 3
  -   (1,881,863)  (1,881,863)
Net (liabilities)/assets  (2,277,193)  3,974,891   1,697,698 
Goodwill (note 13)  -       5,105,472 
Consideration          6,803,170 
Consideration satisfied by :            
Shares          6,514,170 
Cash payable net of pensions and other balance sheet adjustments (provisional)          289,000 
           6,803,170 

The Group has used acquisition accounting for the purchase and the goodwill arising on consolidation of $4,858.3 million has been capitalized. The Group made a repayment of working capital in respect of the HPE Software business acquisition of $225.8 million in the period.

Trade and other receivables are net of a bad debt provision for impairment of $42.8m.trade receivables of $21.5 million.

Consolidated financial statements and notes
Notes to the consolidated financial statements
33 Acquisitions continued

Acquisitions in the year ended October 31, 2018 continued:

1
Acquisition of the HPE Software business continued

A provisional fair value review washas been carried out on the assets and liabilities of the acquired business, resulting in the identification of intangible assets. The fair value review, pending finalisation of the cash payable net of pensions and other balance sheet adjustments and other management estimates, will be finalized in the measurement period following completion which ends on August 31, 2018.

The fair value adjustments relate to:include:

1Purchased intangible assets have been valued based on a market participant point of view and the fair value has been based on various characteristics of the product lines and intangible assets of the HPE Software;Software business;
2          Deferred income has been valued taking account of the remaining performance obligations; and
3          A deferred tax liability has been established relating to the purchase of intangibles.

The provisional purchased intangible assets acquired as part of the acquisition can be analyzed as follows (note 13):follows:

  Fair value 
 

$’000m

Technology  1,775,0001,809.0 
Customer relationships  4,222,0004,480.0 
Trade names  188,000163.0 
Leases  15,00015.0 
   6,200,0006,467.0 


The value of the goodwill represents the value of the assembled workforce at the time of the acquisition with specific knowledge and technical skills. It also represents the prospective future economic benefits that are expected to accrue from enhancing the portfolio of products available to the Company’s existing customer base with those of the acquired business.

As a consequence of the HPE Software business transaction, the Group is subject to potentially significant restrictions relating to tax issues that could limit the Group’s ability to undertake certain corporate actions (such as the issuance of Micro Focus shares or Micro Focus ADSs or the undertaking of a merger or consolidation) that otherwise could be advantageous to the Group. The Group is obliged to indemnify HPE for tax liabilities relating to the separation of the HPE Software business from HPE if such liabilities are triggered by actions taken by the Group. The Group has used acquisition accounting for the purchase and the goodwill arising on consolidation of $5,105.5 million has been capitalized.robust procedures in place, including on-going consultation with its tax advisors, to ensure no such triggering actions are taken.

F-26

Notes to the consolidated interim financial statements (unaudited)

28. Business combinations (continued)

1.2Acquisition of HPE Software (continued)COBOL-IT, SAS

From the date of acquisition September 1, 2017 to October 31, 2017, the acquisition contributed $569.8 million to revenue, after adjusting for the unwinding of fair value adjustment to acquired deferred revenue (note 2) and $132.7 million to profit for the period.

The estimated results of HPE Software if it had been made at the beginning of the accounting period May 1, 2017 to October 31, 2017 would have been as follows:

Pro-forma$m 
Revenue1,464.5
Profit for the period331.8

The estimated results of the Group if the acquisition had been made at the beginning of the accounting period May 1, 2017 to October 31, 2017 would have been as follows:

Pro-forma$m 
Revenue2,129.2
Profit for the period305.7

The above figures are based on information provided to Micro Focus by HPE Software and the results since acquisition.

Acquisitions in the six months ended October 31, 2016

1. Acquisition of Serena Software Inc.

On May 2, 2016,December 1, 2017, the Group acquiredcompleted on the entire shareacquisition of COBOL-IT SAS (“COBOL-IT”). COBOL-IT is in the business of designing, editing and commercialization of software, IT devices and related services.

Consideration of $16.7 million consists of a completion payment of Euro 11.3 million, retention amounts of Euro 2.7 million payable at a later date, working capital of Spartacus Acquisition Holdings Corp. the holding company of Serena Software Inc. (“Serena”)adjustments and its subsidiaries for $277.6m, payable innet cash at completion.adjustments. The Group then repaiddid not present the outstanding Serena bank borrowings of $316.7 millionfull IFRS 3 “Business Combinations” disclosures as at May 2, 2016, makingthis acquisition was not material to the total cash outflow for the Group of $528.5m, net of cash acquired of $65.8m. The transaction costs for the Serena acquisition were $0.9m.

The acquisition is highly consistent with the Group’s established acquisition strategy and focus on the efficient management of mature infrastructure software products.

Serena is a leading provider of enterprise software focused on providing Application Lifecycle Management products for both mainframe and distributed systems. Whilst Serena is headquartered in San Mateo, California the operations are effectively managed from offices in Hillsboro, Oregon and St. Albans in the United Kingdom. It operates in a further 10 countries. The Serena Group’s customers are typically highly regulated large enterprises, across a variety of sectors including banking, insurance, telco, manufacturing and retail, healthcare and government.

Serena was integrated into the Micro Focus Product Portfolio and the revenues reported in the ITOM sub-portfolio.

The transaction was funded through the Group’s existing cash resources together with additional debt and equity finance arranged through Barclays, HSBC, the Royal Bank of Scotland and Numis Securities. On May 2, 2016, the Group’s existing revolving credit facility was extended from $225.0 million to $375.0 million and the Group raised approximately £158.2 million (approximately $225.7m) through a Placing underwritten by Numis Securities incurring $3.0 million of costs associated with the Placing in March 2016.Group.

A fair value review was carried out and finalized on the assets and liabilities of the acquired business, resulting in the identification of intangible assets.

F-27

Notes to the consolidated interim financial statements (unaudited)

28. Business combinations (continued)

1. Acquisition of Serena Software Inc. (continued)

Details of the net assets acquired and goodwill are as follows:

  
Carrying value at
acquisition
  
Fair value
adjustments
  Fair value 
   $’000   $’000   $’000 
Goodwill  462,400   (462,400)  - 
Intangible assets - purchased 1
  -   317,700   317,700 
Intangible assets - other  79   -   79 
Property, plant and equipment  1,927   -   1,927 
Other non-current assets  167   -   167 
Deferred tax asset  15,347   -   15,347 
Trade and other receivables  27,362   -   27,362 
Cash and cash equivalent  65,784   -   65,784 
Borrowings – short-term  (27,712)  -   (27,712)
Trade and other payables  (11,766)  -   (11,766)
Provisions – short-term  (4,045)  -   (4,045)
Current tax liabilities  (3,173)  -   (3,173)
Deferred income – short-term 2
  (72,217)  3,761   (68,456)
Deferred income – long-term 2
  (14,853)  798   (14,055)
Borrowings – long-term  (288,938)  -   (288,938)
Other non-current liabilities  (717)  -   (717)
Deferred tax liabilities 3
  (2,385)  (109,165)  (111,550)
Net assets /(liabilities)  147,260   (249,306)  (102,046)
Goodwill (note 9)          379,669 
Consideration          277,623 
             
Consideration satisfied by :            
Cash          277,623 

The fair value adjustments relate to:

1Purchased intangible assets have been valued based on a market participant point of view and the fair value has been based on various characteristics of the product lines and intangible assets of Serena;
2Deferred income has been valued taking account of the remaining performance obligations; and
3A deferred tax liability has been established relating to the purchase of intangibles.

The purchased intangible assets acquired as part of the acquisition can be analyzed as follows:

Fair value
$’000
Technology86,100
Customer relationships210,200
Trade names21,400
317,700

The value of the goodwill represents the value of the assembled workforce at the time of the acquisition with specific knowledge and technical skills. It also represents the prospective future economic benefits that are expected to accrue from enhancing the portfolio of products available to the Company’s existing customer base with those of the acquired business.

The Group has used acquisition accounting for the purchase and the goodwill arising on consolidation of $379.7 million has been capitalized.

2. Acquisition of GWAVA Inc.

On September 30, 2016, the Group acquired the entire share capital of GWAVA Inc. (“GWAVA”) and its subsidiaries for $16.4m, payable in cash at completion. The transaction costs for the GWAVA acquisition were $1.5m.

The acquisition is highly consistent with the Group’s established acquisition strategy and focus on the efficient management of mature infrastructure software products.

GWAVA is a leading company in email security and enterprise information archiving (“EIA”). GWAVA has approximately 90 employees, based in the US, Canada and Germany. More than a million users across 60 countries rely on its products in over 3,000 customer organizations, supported by GWAVA’s global team, with a further 1,000 GWAVA business partners collaborating closely to ensure successful customer solutions. In addition to GWAVA’s award winning EIA product Retain, GWAVA has a full suite of products to protect, optimize, secure and ensure compliance for customers running Micro Focus GroupWise.

F-28

Notes to the consolidated interim financial statements (unaudited)

28. Business combinations (continued)

2. Acquisition of GWAVA Inc. (continued)

A finalized fair value review was carried out on the assets and liabilities of the acquired business, resulting in the identification of intangible assets.

Details of the net assets acquired and goodwill are as follows:

  
Carrying value at
acquisition
  
Fair value
adjustments
  
Fair value
 
   $’000   $’000   $’000 
Intangible assets - purchased 1
  -   5,330   5,330 
Intangible assets - other  2
  1,180   (1,180)  - 
Property, plant and equipment  195   -   195 
Trade and other receivables  3,096   -   3,096 
Cash and cash equivalent  2,389   -   2,389 
Trade and other payables  (1,331)  -   (1,331)
Deferred income – short-term 3
  (4,094)  324   (3,770)
Deferred income – long-term  (817)  -   (817)
Deferred tax liabilities 4
  -   (1,412)  (1,412)
Net assets  618   3,062   3,680 
Goodwill          12,767 
Consideration          16,447 
             
Consideration satisfied by :            
Cash          16,447 

The fair value adjustments relate to:

1Purchased intangible assets have been valued based on a market participant point of view and the fair value has been based on various characteristics of the product lines and intangible assets of GWAVA Inc.;
2Other intangible assets relating to historic IP has been written down to nil;
3Deferred income has been valued taking account of the remaining performance obligations; and
4A deferred tax liability has been established relating to the purchase of intangibles.

Thereview was finalised in the 12-month period following completion, which ended on November 30, 2018. Goodwill of $5.6 million, deferred tax liabilities of $3.9 million, purchased intangible assets acquiredintangibles of $14.0 million (Purchased Technology $1.5 million, Customer relationships $12.3 million and Trade names $0.2 million) and cash of $1.0 million were recorded as parta result of the COBOL-IT acquisition can be analyzed as follows:

Fair value
$’000
Technology4,075
Customer relationships544
Trade names711
5,330


The value of the goodwill represents the value of the assembled workforce at the time of the acquisition with specific knowledge and technical skills. It also represents the prospective future economic benefits that are expected to accrue from enhancing the portfolio of products available to the Company’s existing customer base with those of the acquired business.

The Group has used acquisition accounting for the purchase and the goodwill arising on consolidation of $12.8 million has been capitalized.

29. Post balance sheet events

1Acquisition of COBOL-IT, SAS

On December 1, 2017, the Group completed on the acquisition of COBOL-IT, SAS. COBOL-IT, SAS is in the business of designing, editing and commercialization of software, IT devices and related services; technical support, training, consulting, and more generally any related missions; modification, migration and adaptation of IT systems from a technical environment to another; and advisory in IT system, and in particular strategy, management, commercial development, partnership or strategic alliances in IT sector.

Consideration consists of completion payment of Euro 11.3m, retention amounts of Euro 2.7 million payable at a later date, working capitalno adjustments and net cash adjustments. The Group has not yet presented the full IFRS 3 “Business Combinations” disclosures as the initial accounting for the business combination is incomplete at the time these interim financial statements were authorised for issue.identified.


Consolidated financial statements and notes
Notes to the consolidated interim financial statements (unaudited)
33 Acquisitions continued

29. Post balance sheet events (continued)Acquisitions in the year ended October 31, 2018 continued:

32TaxationAcquisition of Covertix

On December 22, 2017,May 15, 2018, the U.S. President signedGroup entered into law federal tax legislation commonly referredan Asset Purchase Agreement (“the agreement”) to acquire certain assets of Covertix, an Israeli company that had entered voluntary liquidation in April 2018. Covertix used their patented solutions to develop and sell security products that offered control and protection of confidential files when shared with both internal and external parties. Prior to entering liquidation Covertix had offices in Israel and the US, with partners in the Netherlands and Singapore.

Under the agreement, the Group paid $2.5 million in cash to acquire certain equipment, patents, and licence rights under certain agreements, and seven employees all involved in R&D activities. The purchase completed on July 26, 2018.

Under IFRS 3, the Covertix Ltd. acquisition was considered to be a business combination, however due to the immaterial amount of the transaction, the assets acquired have been recorded at cost and are being amortized over their useful lives within the ledgers of the acquiring entities. The Company did not create a new subsidiary for Covertix and no goodwill has been recorded.

Consolidated financial statements and notes
Notes to the consolidated financial statements
34. Cash flow statement

     
12 months ended
October 31, 2020
  
12 months ended
October 31, 2019
  
18 months ended
October 31, 2018
 
  Note  
$m



$m



$m

Cash flows from operating activities               
(Loss)/profit from continuing operations     (2,974.6)  (18.1)  707.2 
Profit from discontinued operation     5.1   1,487.2   76.9 
(Loss)/profit for the year     (2,969.5)  1,469.1   784.1 
Adjustments for:               
Loss/(gain) on disposal of discontinued operation  32   3.0   (1,767.9)  - 
Net finance costs  6   279.0   255.8   342.7 
Taxation – continuing operations  7   34.2   (16.0)  (673.1)
Taxation – discontinued operation  32   (8.1)  318.1   34.2 
Share of results of associates  28   -   0.3   1.8 
Operating (loss)/profit (attributable to continuing and discontinued operations)      (2,661.4)  259.4   489.7 
                 
-          continuing operations      (2,661.4)  221.7   376.8 
-          discontinued operation  32   -   37.7   112.9 
       (2,661.4)  259.4   489.7 
                 
Goodwill impairment charge  10   2,799.2   -   - 
Research and development tax credits      (1.8)  (1.2)  (2.0)
Depreciation of property, plant and equipment1
  12   42.0   
52.6
   71.2 
Depreciation of right-of-use asset (2019 and 2018: finance lease depreciation)1
  19   76.9   
13.9
   17.4 
Loss on disposal of property, plant and equipment  12   5.6   3.6   4.7 
Loss on disposal of intangible assets  11   0.6   -   - 
Gain on disposal of Atalla  32,4   -   (3.7)  - 
Amortization of intangible assets  11   674.1   716.5   943.3 
Amortization of contract-related costs      16.1   10.2   - 
Leases impairment  19   5.9   -   - 
Share-based compensation charge  29   17.0   71.3   72.2 
Foreign exchange movements  3   29.7   11.1   (34.6)
Provisions movements  21   46.3   43.8   142.8 
Changes in working capital :
                
Inventories      0.1   -   0.1 
Trade and other receivables      262.0   183.0   (408.8)
Increase in contract-related costs      (26.5)  (36.7)  - 
Payables and other liabilities      (69.8)  (114.8)  131.3 
Provision utilization  21   (37.5)  (58.6)  (145.0)
Contract liabilities - deferred income      (103.1)  (98.5)  131.4 
Pension funding difference to operating profit charge      7.4   4.4   4.0 
Cash generated from operations      1,082.8   1,056.3   1,424.3 

1 As a result of the adoption of IFRS 16, depreciation in the 12 months ended October 31, 2019 of $66.5 million has been represented as property, plant and equipment depreciation of $52.6 million and right-of-use asset depreciation of $13.9 million. The comparative of $13.9 million in the 12 months ended October 31, 2019 and $17.4m in the 18 months ended October 31, 2018 relates to assets classified as property, plant and equipment that were held under a finance lease.

Consolidated financial statements and notes
Notes to the consolidated financial statements
35 Related undertakings

In accordance with section 409 of the UK Companies Act 2006 (the “Act”), information on all related undertakings of the Group is set out below. Related undertakings are categorized in the Act as being “subsidiaries”, “associated undertakings” and “significant holdings in undertakings other than subsidiary companies”. The information below is stated as at October 31, 2020.

The definition of a subsidiary undertaking in the Act is different from the definition of that term under IFRS. As a result, related undertakings included within this list may not be the same as the Tax Cutsrelated undertakings consolidated in the Group IFRS financial statements.  As disclosed in note 28 the Group owns 100% of all subsidiary undertakings.

 Company nameCountry of incorporation
Class(es) of shares held1,2
Principal activities
Key to
Registered
office address
 Subsidiaries    
1Attachmate Australasia Pty LimitedAustralia
Ordinary Shares AU$1.00
 
In liquidation1
2
Attachmate Group Australia Pty Limited
 
AustraliaOrdinary Shares
Sale and support of software
 
1
3Autonomy Australia Pty LimitedAustralia
Ordinary Shares AU$1.00
 
In liquidation1
4Autonomy Systems Australia Pty LimitedAustralia
Ordinary Shares AU$1.00
 
In liquidation1
5Borland Australia Pty LimitedAustralia
Ordinary Shares AU$1.00
 
In liquidation1
6Entco Australia Pty LimitedAustralia
Ordinary Shares AU$1.00
 
In liquidation1
7Micro Focus Australia Pty LtdAustraliaOrdinary Shares AU$1.00Sale and support of software1
8Micro Focus Pty LimitedAustralia
Ordinary Shares AU$1.00
 
Sale and support of software1
9Serena Software Pty LimitedAustralia
Ordinary Shares AU$1.00
 
In liquidation1
10
Micro Focus Austria GmbH (formerly Borland Entwicklung GmbH)
 
Austria
Registered capital
 
Development of software2
11
Autonomy Belgium BVBA
 
BelgiumOrdinary Shares
Sale and support of software
 
3
12
Micro Focus Belgium BV
 
BelgiumOrdinary SharesSale and support of software3
13
Micro Focus Srl
 
BelgiumOrdinary Shares
Sale and support of software
 
4
14
Borland Latin America Ltda
 
BrazilQuota RS$1.00
Sale and support of software
 
5
15
Cambridge Technology Partners do Brasil s.c. Ltda
 
BrazilQuota RS$1.00Dormant5
16
Micro Focus Brasil Serviços de Tecnologia Ltda
 
BrazilQuota RS$1.00Sale and support of software5
17
Micro Focus Programmeação de Computadores Ltda
 
BrazilQuota RS$1.00
Sale and support of software
 
5
18
Peregrinne Systems do Brasil Ltda
 
BrazilQuota RS$1.00
Sale and support of software
 
6
19
Serena Software Do Brasil Ltda
 
BrazilQuota RS$1.00
Sale and support of software
 
5
20Verity Worldwide LimitedBritish Virgin IslandsOrdinary shares US$50,000.00Sale and support of software7
21Micro Focus APM Solutions Limited (EOOD)Bulgaria
Ordinary Shares BGN1,000.00
 
Development of software8
22
Micro Focus Bulgaria EOOD
 
BulgariaOrdinary Shares BGN1.00Sale and support of software8
23Autonomy Systems (Canada) LimitedCanada
Class A Common Stock
 
Sale and support of software9
24
GWAVA ULC
 
CanadaCommon StockHolding Company10

Consolidated financial statements and Jobs Act.  The Tax Cuts and Jobs Act provides for significant and wide-ranging changesnotes
Notes to the U.S. Internal Revenue Code. The reforms are complex,consolidated financial statements
35 Related undertakings continued

 Company nameCountry of incorporation
Class(es) of shares held1,2
Principal activities
Key to
Registered
office address
 Subsidiaries    
25Micro Focus (Canada) ULCCanadaCommon Shares
Development, sale and support of software
 
10
26
Interset Software ULC
 
CanadaCommon SharesHolding Company11
27Micro Focus Software (Canada), ULCCanadaCommon Shares
Sale and support of software
 
12
28
Micro Focus Software Solutions Canada Co. / Solutions Logiciels Micro Focus Canada Cie.
 
CanadaCommon SharesSale and support of software13
29
NetManage Canada ULC
 
CanadaCommon SharesDormant10
30
Entco Capital Co
 
Cayman Islands
Ordinary Shares US$1.00
 
Sale and support of software
14
 
31Entco Investment CoCayman Islands
Ordinary Shares US$1.00
 
Sale and support of software14
32Micro Focus International LimitedCayman Islands
Class A Ordinary Shares US$0.00001
Class B Ordinary Shares US$0.00001
Class C Ordinary Shares US$0.00001
Class L Ordinary Shares US$0.00001
 
Dormant14
33Micro Focus IP LimitedCayman Islands
Class A Ordinary Shares €0.01
Class B Preferred Redeemable Shares €0.01
 
Holding Company14
34Entco Marigalante LimitedCayman IslandsOrdinary Shares US$1.00Sale and support of software14
35Autonomy Systems (Beijing) Limited CompanyChinaRegistered Capital
Sale and support of software
 
15
36
Shanghai Micro Focus Software Technology Co. Limited (formerly Shanghai Entco Software Technology Co., Limited)
 
China
Registered Capital
 
Sale and support of software16
37
Shanghai Micro Focus Software Technology Co. Limited (formerly Shanghai Entco Software Technology Co., Limited), Beijing Branch
 
ChinaBranchSale and support of software17
38
Shanghai Micro Focus Software Technology Co. Limited (formerly Shanghai Entco Software Technology Co., Limited), Chongqing Branch
 
ChinaBranchSale and support of software18
39
Shanghai Micro Focus Software Technology Co. Limited ( formerly Shanghai Entco Software Technology Co., Limited), Shenzhen Branch
 
ChinaBranchSale and support of software19
40
Shanghai Micro Focus Software Technology Co. Limited ( formerly Shanghai Entco Software Technology Co., Limited), Shangdong Branch
 
ChinaBranchSales and support of software20
41
Singapore Micro Focus Pte Ltd Shanghai Representative Office
 
ChinaBranchSale and support of software21
42
UK Micro Focus Limited Beijing Representative Office
 
ChinaBranchSale and support of software22
43
Micro Focus CentroAmerica CAC Limiteda
 
Costa RicaQuota CRC1,000.00Sale and support of software23
44
Micro Focus Costa Rica Limiteda
 
Costa RicaQuota CRC1,000.00Sale and support of software23
45NetIQ Software International LimitedCyprus
Ordinary Shares of C£1.00
 
Dormant24
46
Micro Focus Czechia s.r.o
 
Czech RepublicRegistered CapitalSale and support of software25
47
Micro Focus Denmark, filial af Micro Focus AS, Norge (Branch)
 
DenmarkBranchSale and support of software26
48Micro Focus Software Denmark ApSDenmark
Ordinary Shares DKK1.00
 
Sale and support of software26

Consolidated financial statements and it will take some time to assess the implications thoroughly. Broadly, the implications most relevantnotes
Notes to the consolidated financial statements
35 Related undertakings continued

 Company nameCountry of incorporation
Class(es) of shares held1,2
Principal activities
Key to
Registered
office address
 Subsidiaries    
49Micro Focus AS, Filial i Finland (Branch)FinlandBranch
Sale and support of software
 
27
50Borland (France) SarlFranceOrdinary Shares €15.25
Sale and support of software
 
28
51Cobol-IT, SASFrance
Ordinary Shares €1.00
 
Sale and support of software
 
28
52Micro Focus France SASFrance
Ordinary Shares €1.00
 
Sale and support of software
 
29
53Micro Focus SASFrance
Ordinary Shares €10.00
 
Sale and support of software
 
28
54
Attachmate Group Germany GmbH
 
Germany
Ordinary Shares €191,000.00
 
Sale and support of software
 
30
55
Borland GmbH
 
Germany
Ordinary Shares
€49,500.00
Ordinary Shares
€450,000.00
Ordinary Shares
€100,000.00
Ordinary Shares
€500.00
 
Dormant30
56
GWAVA EMEA GmbH
 
GermanyRegistered Capital
Sale and support of software
 
31
57Micro Focus Deutschland GmbHGermanyRegistered Capital
Sale and support of software
 
30
58
Micro Focus GmbH
 
GermanyRegistered Capital
Sale and support of software
 
30
59
Novell Holdings Deutschland GmbH
 
GermanyRegistered CapitalHolding Company30
60
Serena Software GmbH
 
GermanyRegistered Capital
Sale and support of software
 
32
61
Attachmate (Hong Kong) Limited
 
Hong Kong
Ordinary Shares HK$1.00
 
In liquidation33
62
Borland (H.K.) Limited
 
Hong Kong
Ordinary Shares HK$1.00
 
In liquidation33
63
EntCorp Hong Kong Limited
 
Hong Kong
Ordinary Shares HK$1.00
 
Sale and support of software
 
34
64
Micro Focus Limited Hong Kong (Branch)
 
Hong KongBranch
Sale and support of software
 
33
65Micro Focus Software HK LimitedHong Kong
Ordinary Shares HK$10.00
 
Sale and support of software
 
33
66
NetIQ Asia Ltd.
 
Hong Kong
Ordinary Shares HK$1.00
 
In liquidation33
67
Autonomy Software Asia Private Limited
 
India
Equity Shares INR10.00
 
Sale and support of software
 
35
68
Borland Software India Private Limited
 
India
Equity Shares INR10.00
 
Dormant36
69
Entco IT Services Private Limited
 
India
Equity Shares INR10.00
 
Sale and support of software
 
37
70
Interwoven, Inc., India Branch
 
IndiaBranch
Sale and support of software
 
38
71
Micro Focus India Private Limited
 
India
Equity Shares INR10.00
 
In liquidation36
72
Micro Focus Software India Private Limited
 
India
Equity Shares INR10.00
 
Development, sale and support of software
 
36
73
Micro Focus Software Solutions India Private Limited
 
India
Equity Shares INR10.00
 
Sale and support of software
 
39

Consolidated financial statements and notes
Notes to the consolidated financial statements
35 Related undertakings continued

 Company nameCountry of incorporation
Class(es) of shares held1,2
Principal activities
Key to
Registered
office address
 Subsidiaries    
74
Novell India Private Ltd.
 
India
Equity Shares INR10.00
 
In liquidation40
75
Relativity Technologies Private Limited
 
India
Equity Shares INR10.00

In liquidation36
76
Attachmate Ireland Limited
 
IrelandOrdinary Shares €1.27

Sale and support of software41
77
Entsoft Holding Ireland Unlimited Company
 
Ireland
Ordinary Shares US$1.00
 
Holding Company41
78
Micro Focus (IP) Ireland Limited
 
Ireland
Ordinary Shares US$1.00
 
Dormant42
79Micro Focus (Ireland 1) LimitedIreland
Ordinary Shares US$1.00
 
In liquidation42
80Micro Focus (Ireland 2) LimitedIreland
Ordinary Shares US$1.00
 
In liquidation42
81
Micro Focus Finance Ireland Limited
 
Ireland
Ordinary Shares US$1.00
 
In liquidation42
82Micro Focus Galway LimitedIreland
Ordinary Shares €1.00
 
Sale and support of software
 
41
83
Micro Focus Group Holdings Unlimited Company
 
Ireland
Ordinary Shares €1.00
 
Holding Company42
84
Micro Focus International Holdings Limited
 
IrelandOrdinary Shares €1.00Holding Company42
85
Micro Focus Ireland Limited
 
Ireland
Ordinary Shares €1.00
 
Development, sale and support of software
 
42
86
Micro Focus Software (Ireland) Limited
 
Ireland
Ordinary Shares €1.25
Ordinary Shares US$1.00
 
Development, sale and support of software
 
43
87Micro Focus Software Solutions Ireland LimitedIreland
Ordinary Shares €1.00
 
Sale and support of software
 
41
88
NetIQ Europe Limited
 
Ireland
Ordinary Shares €1.00
 
Sale and support of software
 
41
89
NetIQ Ireland Limited
 
Ireland
Ordinary Shares €1.00
 
Holding Company42
90
Novell Cayman Software International Unlimited Company
 
Ireland
Ordinary Shares US$1.00
 
Holding Company42
91
Novell Cayman Software Unlimited Company
 
Ireland
Ordinary Shares US$1.00
 
Holding Company42
92
Novell Ireland Real Estate Unlimited Company
 
Ireland
Ordinary Shares €1.25
A Ordinary Shares €1.25
 
In liquidation42
93
Novell Software International Limited
 
Ireland
Ordinary Shares US$1.00
 
Holding Company42
94Micro Focus Interactive Israel LtdIsraelOrdinary Shares of NIS1.00
Sale and support of software
 
44
95
Micro Focus Israel Limited
 
Israel
Ordinary Shares NIS1.00
 
Development and support of software
 
45
96Micro Focus Software Israel LtdIsraelOrdinary Shares NIS1.00Sale and support of software44
97
N.Y. NetManage (Yerushalayim) Ltd
 
Israel
Ordinary Shares NIS1.00
 
Dormant46
98Novell Israel Software International LimitedIsraelOrdinary Shares NIS1.00Dormant47
99
Enterprise Corp Italiana S.r.l.
 
ItalyQuota €10,000.00
Sale and support of software
 
48
100
Micro Focus Italiana S.r.l.
 
Italy
Quota €1,000,000.00

Sale and support of software
 
49
101
Micro Focus Srl
 
ItalyQuota €1200,000.00
Sale and support of software
 
49
102
Serena Software Europe Limited - Italy Branch
 
ItalyBranch
Sale and support of software
 
49

Consolidated financial statements and notes
Notes to the consolidated financial statements
35 Related undertakings continued

 Company nameCountry of incorporation
Class(es) of shares held1,2
Principal activities
Key to
Registered
office address
 Subsidiaries    
103
Verity Italia S.r.l.
 
Italy
Quota €25,000.00
 
Sale and support of software
 
50
104
Entcorp Japan K.K.
 
JapanOrdinary Shares
Sale and support of software
 
51
105
Micro Focus Enterprise Ltd
 
JapanOrdinary Shares
Sale and support of software
 
52
106Micro Focus LLCJapanInterest in Capital
Sale and support of software
 
52
107
Novell Japan, Ltd
 
JapanCommon Stock
Sale and support of software
 
52
108Serena Software Japan LLCJapanInterest in Capital
Sale and support of software
 
52
109Micro Focus Luxembourg S.à r.l.LuxembourgOrdinary Shares
Sale and support of software
 
53
110
Verity Luxembourg S.à r.l.
 
Luxembourg
Ordinary Shares €25.00
 
Sale and support of software
 
54
111
Micro Focus Malaysia Sdn. Bhd.
 
Malaysia
Ordinary Shares RM1,000.00
 
Sale and support of software
 
55
112
Novell Corporation (Malaysia) Sdn. Bhd.
 
Malaysia
Ordinary Shares RM1.00
 
Sale and support of software
 
56
113Micro Focus International Mexico, S. de R.L. de C.V.Mexico
Equity Interest Quota MXN1.00
 
Sale and support of software
 
57
114
Micro Focus Limited Mexico (Branch)
 
MexicoBranch
Sale and support of software
 
57
115Micro Focus Software Mexico, S. De R.L. De C.V.Mexico
Equity Interest Quota MXN1.00
 
Sale and support of software
 
57
116Micro Focus Software Solutions Mexico, S. de R.L. de C.V.Mexico
Equity Interest Quota MXN1.00
 
Sale and support of software
 
57
117
Authasas B.V
 
Netherlands
Ordinary Shares A €1.00
Ordinary Shares B €1.00
 
Sale and support of software
 
58
118
Autonomy HoldCo B.V.
 
Netherlands
Ordinary Shares US$100.00
 
Sale and support of software
 
58
119
Autonomy Netherlands BV
 
Netherlands
Common Shares €100.00
 
Sale and support of software
 
58
120
Borland BV
 
Netherlands
Ordinary Shares €5.00
 
Sale and support of software
 
58
121
Entco Eastern Holding B.V.
 
Netherlands
Ordinary Shares US$100.00
 
Holding Company
 
58
122Entco Gatriam Holding B.V.Netherlands
Ordinary Shares US$100.00

Holding company58

Consolidated financial statements and notes
Notes to the consolidated financial statements
35 Related undertakings continued

 Company nameCountry of incorporation
Class(es) of shares held1,2
Principal activities
Key to
Registered
office address
 Subsidiaries    
123
Entco Holding Berlin B.V.
 
Netherlands
Ordinary Shares US$100.00
 
Holding company58
124
Entco Holding Hague II B.V.
 
Netherlands
Ordinary Shares US$100.00
 
Holding company58
125
Entco Sinope Holding B.V.
 
Netherlands
Ordinary Shares US$100.00
 
Holding company58
126
Entcorp Nederland B.V.
 
Netherlands
Ordinary Shares €100.00
 
Sale and support of software
 
58
127
Micro Focus B.V.
 
Netherlands
Common Shares €100.00
 
Sale and support of software
 
58
128Micro Focus Caribe Holding B.V.Netherlands
Ordinary Shares US$100.00
 
Sale and support of software
 
58
129Micro Focus Eastern Holding II B.V.Netherlands
Ordinary Shares US$100.00
 
Holding Company58
130Micro Focus Enterprise B.V.Netherlands
Ordinary Shares US$100.00
 
Sale and support of software
 
58
131Micro Focus HoldCo B.V.Netherlands
Ordinary Shares US$100.00
 
Holding Company58
132Micro Focus Holding Finance B.V.Netherlands
Ordinary Shares US$100.00
 
Holding Company58
133Micro Focus Holding Hague B.V.Netherlands
Ordinary Shares US$100.00
 
Holding Company58
134Micro Focus Holding PR B.V.Netherlands
Ordinary Shares US$100.00
 
Sale and support of software
 
58
135Micro Focus International Trade B.V.Netherlands
Ordinary Shares US$100.00
 
Sale and support of software
 
58
136Micro Focus Nederland B.V.Netherlands
Ordinary Shares US$100.00
 
Sale and support of software58
137
Verity Benelux B.V.
 
Netherlands
Common Shares of €500.00
 
Sale and support of software
 
58
138
Micro Focus Software (New Zealand) Unlimited
 
New Zealand
 
Ordinary Shares
Sale and support of software
 
59
139
Micro Focus AS
 
Norway
Ordinary Shares NOK1,602.00
 
Sale and support of software
 
60
140
Entcorp Philippines, Inc.
 
Philippines
Common Stock PHP1.00
 
Sale and support of software
 
61
141Micro Focus Polska sp. z.o.o.Poland
Ordinary Shares PLN500.00
 
Sale and support of software
 
62
142
Micro Focus S.L. - Sucursal Em Portugal (Branch)
 
PortugalBranch
Sale and support of software
 
63
143
Novell Portugal - Informática Lda
 
Portugal
Ordinary Shares €14,864.18
Ordinary Shares €99.76
 
Sale and support of software
 
63
144Micro Focus Caribe Holding B.V. LLC BranchPuerto RicoBranch
Sale and support of software
 
64
145Micro Focus Holding PR B.V. LLC BranchPuerto RicoBranch
Sale and support of software
 
65
146Micro Focus Software Romania SRLRomania
Ordinary Shares RON10.00
 
Sale and support of software
 
66
147Limited Liability Company Micro FocusRussian FederationInterest in Capital
Sale and support of software
 
67
148
Micro Focus LLC
 
Saudi ArabiaOrdinary Shares SAR50
Sale and support of software
 
68
149
Autonomy Systems Singapore Pte. Ltd.
 
SingaporeOrdinary Shares
Sale and support of software
 
69
150
Borland (Singapore) Pte. Ltd.
 
SingaporeOrdinary Shares
Sale and support of software
 
69
151
Entco Software Pte. Ltd.
 
SingaporeOrdinary Shares
Sale and support of software
 
69

Consolidated financial statements and notes
Notes to the consolidated financial statements
35 Related undertakings continued

 Company nameCountry of incorporation
Class(es) of shares held1,2
Principal activities
Key to
Registered
office address
 Subsidiaries    
152
Mercury Interactive (Singapore) Pte Ltd
 
SingaporeOrdinary SharesIn liquidation70
153
Micro Focus Pte. Ltd.
 
SingaporeOrdinary Shares
Sale and support of software
 
69
154
Micro Focus Software Pte. Ltd.
 
SingaporeOrdinary Shares
Sale and support of software
 
69
155
Autonomy Systems Software South Africa Pty Ltd
 
South Africa
Ordinary Shares ZAR1.00
 
Sale and support of software
 
71
156Micro Focus Software South Africa (Pty) LtdSouth Africa
Ordinary Shares ZAR1.00
 
Sale and support of software
 
72
157
Micro Focus South Africa (Pty) Ltd
 
South Africa
Ordinary Shares ZAR1.00
 
Sale and support of software
 
72
158
Micro Focus Korea Limited
 
South KoreaUnits KRW 5,000Sale and support of software73
159Micro Focus Field Delivery Spain, S.L.U.Spain
Ordinary Shares €1.00
 
Sale and support of software
 
74
160
Micro Focus S.L.U.
 
Spain
Registered Shares €9.00
 
Sale and support of software
 
74
161Micro Focus Software Spain S.L.U.Spain
Ordinary Shares €1.00
 
Sale and support of software
 
74
162
Micro Focus AS, Norge, filial i Sverige (Branch)
 
SwedenBranch
Sale and support of software
 
75
163Micro Focus Sverige ABSwedenQuota SEK1.00
Sale and support of software
 
75
164
Micro Focus Enterprise B.V., Amstelveen, Versoix Branch
 
SwitzerlandBranch
Sale and support of software
 
76
165
Micro Focus GmbH
 
Switzerland
Quotas CHF100.00
 
Sale and support of software
 
77
166Micro Focus International Suisse SàrlSwitzerland
Ordinary Shares CHF1,000.00
 
Sale and support of software
 
76
167Micro Focus Schweiz GmbHSwitzerland
Ordinary Shares CHF100.00
 
Sale and support of software
 
77
168
Trilead GmbH
 
Switzerland
Ordinary Shares CHF100.00
 
Sale and support of software78
169
Interwoven, Inc., Taiwan Branch
 
TaiwanBranch
Sale and support of software
 
79
170
Micro Focus Taiwan Co. Ltd (formerly Novell (Taiwan) Co., Ltd.)
 
TaiwanOrdinary Shares NT$10.00
Sale and support of software
 
80
171
Micro Focus Enterprise Tunisia SARL
 
Tunisia
Ordinary Shares TND10.00
 
Sale and support of software81
172Atarlabs Bilişim Anonim ŞirketiTurkeyGroup A Shares TRY1.0Development and support of software82
173Micro Focus Teknoloji Çözümleri Limited ŞirketiTurkey
Ordinary Shares TRY25.00
 
Sale and support of software83
174
Micro Focus Ukraine, LLC (formerly Serena Software Ukraine LLC)
 
UkraineInterest in Capital
Sale and support of software
 
84
175
Entco International SARL-Abu Dhabi - Branch
 
United Arab EmiratesBranch
Sale and support of software
 
85
176
Entco International SARL-Jebel Ali Free Zone - Branch
 
United Arab EmiratesBranchSale and support of software86
177
Entco Software Services Middle East FZ-LLC
 
United Arab Emirates
Ordinary Shares AED1,000.00
 
Sale and support of software87
178
Attachmate Sales UK Limited
 
United Kingdom
Ordinary Shares £1.00

Sale and support of software88
179
Autonomy Systems Limited
 
United Kingdom
Ordinary Shares £1.00
 
Sale and support of software89
180
Borland (Holding) UK Ltd
 
United Kingdom
Ordinary Shares £1.00
 
Dormant88
181
Borland (UK) Limited
 
United Kingdom
Ordinary Shares £1.00
 
Dormant88
182
Entcorp Marigalante UK Limited
 
United Kingdom
Ordinary Shares £1.00
 
In liquidation89

Consolidated financial statements and notes
Notes to the consolidated financial statements
35 Related undertakings continued

 Company nameCountry of incorporation
Class(es) of shares held1,2
Principal activities
Key to
Registered
office address
 Subsidiaries    
183
Longsand Limited
 
United Kingdom
Ordinary Shares £1.00
 
Sale and support of software89
184
Merant Holdings
 
United Kingdom
Ordinary Shares £1.00
 
Holding Company88
185
Micro Focus (IP) Holdings Limited
 
United Kingdom
Ordinary Shares US$1.00
 
Dormant88
186
Micro Focus (IP) Ltd
 
United Kingdom
Ordinary Shares £1.00
 
Holding Company88
187
Micro Focus (US) Holdings
 
United Kingdom
Ordinary Shares US$1.00
 
Holding Company88
188
Micro Focus CHC Limited
 
United Kingdom
Ordinary Shares US$0.01
Redeemable Preference Shares
US$1.00
C Preference Shares
US$1.00
 
Holding Company88
189Micro Focus Foreign HoldCo LtdUnited Kingdom
Ordinary Shares £1.00
 
Holding Company89
190
Micro Focus Global Limited
 
United Kingdom
Ordinary Shares £1.00
 
Sale and support of software88
191
Micro Focus Group Limited
 
United Kingdom
Ordinary Shares £1.00
 
Holding Company88
192
Micro Focus Holdings Unlimited
 
United Kingdom
Ordinary Shares £0.01
 
Holding Company88
193
Micro Focus Integration Holdings Limited
 
United Kingdom
Ordinary Shares US$1.00
 
In liquidation88
194
Micro Focus Integration Limited
 
United Kingdom
Ordinary Shares US$1.00
 
Sale and support of software88
195
Micro Focus IP Development Limited
 
United Kingdom
Ordinary Shares US$1.00
 
Development and support of software
 
88
196
Micro Focus Limited
 
United Kingdom
Ordinary Shares £1.00
 
Sale and support of software88
197
Micro Focus MHC Limited
 
United Kingdom
A Ordinary Shares
 £0.00001
B Ordinary Shares
£0.00001
 
Holding Company88
198
Micro Focus Midco Holdings Limited
 
United Kingdom
Ordinary Shares US$0.01
 
Holding Company88
199
Micro Focus Midco Limited
 
United Kingdom
 
Ordinary Shares US$0.0001
 
Holding Company88
200Micro Focus Situla Holding LtdUnited Kingdom
Ordinary Shares £1.00
 
Holding Company89
201
Micro Focus Software (IP) Holdings Limited
 
United Kingdom
Ordinary Shares US$0.01
Preferred Shares US$1.00
 
Holding Company88
202Micro Focus Software Holdings LtdUnited Kingdom
Ordinary Shares £1.00
 
Sale and support of software88
203Micro Focus Software UK LtdUnited Kingdom
Ordinary Shares £1.00
 
Sale and support of software89

Consolidated financial statements and notes
Notes to the consolidated financial statements
35 Related undertakings continued

 Company nameCountry of incorporation
Class(es) of shares held1,2
Principal activities
Key to
Registered
office address
 Subsidiaries    
204
Micro Focus UK Limited
 
United Kingdom
Ordinary Shares £1.00
 
Dormant88
205
NetIQ Limited
 
United Kingdom
Ordinary Shares £1.00
 
In liquidation88
206
Serena Holdings
 
United Kingdom
Ordinary Shares US$1.00
 
Holding Company88
207
Serena Software Europe Limited
 
United Kingdom
Ordinary Shares £1.00
 
Sale and support of software88
208
Attachmate Corporation
 
United States
Common Stock US$0.01
 
Development and support of software
 
90
209
Borland Corporation
 
United States
Common Stock US$0.01
 
Holding Company91
210
Borland Software Corporation
 
United States
Common Stock US$0.01
 
Development and support of software
 
91
211Borland Technology CorporationUnited States
Common Stock US$0.01
 
Dormant91
212
Entco Delaware LLC
 
United States
Interest in Capital
 
Sale and support of software91
213
Entco, LLC
 
United States
Interest in Capital
 
Sale and support of software91
214
GWAVA Technologies Inc.
 
United States
Common Stock of US$1.00

Sale and support of software91
215
MA FinanceCo., LLC
 
United States
Membership Units
 
Holding Company91
216
Marcel Holdings LLC
 
United States
Limited Liability Company Interest US$1.00
 
Sale and support of software91
217
Micro Focus (US) Group, Inc
 
United States
Common Stock US$0.01
 
Holding Company91
218
Micro Focus (US) International Holdings, Inc.
 
United States
Common Stock US$0.01
 
Holding Company91
219
Micro Focus (US), Inc.
 
United States
Common Stock US$0.01
 
Development and support of software
 
91
220Micro Focus Brazil Holdings LLCUnited States
Interest in Capital
 
Holding Company91
221Micro Focus Government Solutions LLCUnited States
Interest in Capital
 
Sale and support of software91
222Micro Focus LLCUnited States
Limited Liability Company Interests
 
Sale and support of software91
223
Micro Focus Software Inc.
 
United States
Voting Common Stock
US$0.01
Non-voting Common Stock US$0.01
 
Development and support of software
 
91
224
NetIQ Corporation
 
United States
Common Stock US$0.001
 
Development and support of software
 
91

Consolidated financial statements and notes
Notes to the consolidated financial statements
35 Related undertakings continued

 Company nameCountry of incorporation
Class(es) of shares held1,2
Principal activities
Key to
Registered
office address
 Subsidiaries    
225
Novell Holdings, Inc.
 
United States
Common Stock US$0.01
 
Holding Company91
226
Novell International Holdings, Inc.
 
United States
Common Stock US$0.01
 
Holding Company91
227
Seattle SpinCo, Inc.
 
United States
Class A Common Stock US$0.01
Class B Common Stock US$0.01
 
Holding Company91
228Serena Software, Inc.United States
Common Stock US$0.01
 
Holding Company91
229
Stratify, Inc.
 
United States
Common Stock US$0.001
 
Sale and support of software
 
91
230
The Attachmate Group, Inc.
 
United States
Common Stock US$0.001
 
Holding Company91
231
Vertica Systems, LLC
 
United States
Limited Liability Company Interests
 
Sale and support of software
 
91

1 The Group include: a)has a reduction100% equity ownership interest in each of the subsidiary undertakings.

2. The ultimate parent company is Micro Focus International plc (the “Company”). The Company has a direct interest in Micro Focus Midco Holdings Limited and an indirect interest in all of the other related undertakings. The Company has an effective interest of 100% in all of the related undertakings listed in the U.S. federal corporate income tax rate from 35%table.

The financial results of all of the related undertakings listed above are included in the Group’s consolidated financial statements. None of the related undertakings holds any shares in the Company.

For each of the subsidiaries listed above, the registered office or, in the case of undertakings other than subsidiaries, the principal place of business is as follows:

Registered office addresses:

NumberAddress
1Level 8, 76 Berry Street, North Sydney, NSW 2060, Australia
2Donau Centre, Hauptstrasse 4-10, Linz, 4040, Austria
3Officenter, Luchthavenlaan 27, 1800 Vilvoorde, Belgium
4EU Parliament, 4th Floor, 37 De Meeussquare, Brussels, 1000, Belgium
5Rua Joaquim Floriano, 466-12 Andar, Saõ Paulo, CEP 04534-002, Brazil
6Avenida das Nações Unidas, nº 12.901, conjunto 2302, sala 72, Itaim Bibi, São Paulo, CEP 04578-000, Brazil
7Estera Corporate Services (BVI) Limited, Jayla Place Wickhams Cay 1, Road Town, Tortola, Virgin Islands, British
876A James Bourchier Blvd, Lozenetz, Sofia, 1407, Bulgaria
9200-204 Lambert Street, Whitehorse, Y1A 3T2, Canada
10250 Howe Street, Suite 1400-C, Vancouver, BC V6C 3S7, Canada
11Suite 1700, Park Place, 666 Burrard Street, Vancouver BC V6C 2X8, Canada
124300 Bankers Hall West, 888 - 3rd Street S.W., Calgary, Alberta T2P 5C5, Canada
13Cogswell Tower, 2000 Barrington Street, Suite 1101-C., Halifax NS B3J 3K1, Canada
14Estera Trust (Cayman) Limited, PO Box 1350, Clifton House, 75 Fort Street, Grand Cayman, KY1-1108, Cayman Islands
15Unit 601, Block A, Yuanyang International Center, Building 56, Dong Si Huan Zhong Dong Road, Beijing, Chaoyang District, China
16Floor 2, Building 1, No. 799 Naxian Road, Pilot Free Trade Zone, Shanghai, China
178 Guangshun Avenue South, B01, 3F, Building 1, Chaoyang District, China
18No. 209, Chuangxin Plaza, No. 5 Keyuanyi Road, Jiulongpo District, Chongqing, China
1914/F, Office 1436, Times Financial Center, 4001 Shennan Avenue, Futian District, Shenzhen, Guangdong, 518046, China
201807-1811, 18th Floor, Kechuang Building, interchange of Yingxiong Mountain Road and 2nd Ring South Rd, Shizhong District, Jinan, Shangdong, China
21Room 810, 8 /F, Tower B, No.8 Century Avenue, Shanghai Pilot Free Trade Zone, China
22Unit 04, B01, 3rd Floor, 101 1st Floor, No.1 building, No.8 Yard Guangshun South Avenue, Chaoyang District, Beijing, China
23San José, Cantón Montes de Oca, Distrito San Pedro, cincuenta metros al sur del Restaurante Le Chandelier, Edificio Blanco, Costa Rica
2454 Digeni Akrita, Akritas 2nd Floor, Office 201-202, PC 1061, Nicosia, Cyprus
25Za Brumlovkou 1559/5, Michle, Prague, 140 00, Czech Republic
26Borupvang 3, 2750, Ballerup, Denmark
27Accountor Turku Oy, Yliopistonkatu 34,5 krs, Turku FI-20100
28Tour Atlantique, La Défense 9, 1 Place de la Pyramide, La Défense, Cedex, Paris, 92911, France

Consolidated financial statements and notes
Notes to 21%, with various “base erosion” rules that may effectively limit the tax deductibility of certain payments made by U.S. entities to non-U.S. affiliates and additional limitations on deductions attributable to interest expense; and b) adopting elements of a territorial tax system. To transition into this system, the Tax Cuts and Jobs Act includes a one-time tax on cumulative retained earnings of U.S.-owned foreign subsidiaries, at a rate of 15.5% for earnings represented by cash or cash equivalents and 8.0% for the balance of such earnings. Taxpayers may make an election to pay this tax over eight years.consolidated financial statements
 
These tax reforms will give rise to significant consequences, both immediately in terms of one-off impacts relating to the transition tax and the measurement of deferred tax assets and liabilities and going forward in terms of the Group’s taxation expense. An initial review and estimate has been undertaken, which will be updated over the coming weeks and months as the Group works through these complex changes with its advisors. Based on the Group’s initial estimate, the transition tax and re-measurement of deferred tax balances are estimated to give rise to a one-off credit to the income statement in the period to April 30, 2018 in the range of $600 million to $700 million. The Tax Cuts and Jobs Act could be subject to potential amendments and technical corrections, any of which could lessen or increase adverse impacts of the law.35 Related undertakings continued

Registered office addresses continued

NumberAddress
29Tour Carpe Diem, 31 Place des Corolles, 92400, Courbevoie, France
30Herrenberger Strasse 140, 71034, Böblinge, Germany
31Von-Braun-Strabe 38a, 48683 Ahaus, Germany
32Nöerdlicher Zubringer 9-11, 40470 Düsseldorf, Germany
3321st floor, Henley Building, 5 Queen’s Road Central, Hong Kong
3419th Floor, Cityplaza One, 1111 King’s Road, Taikoo Shing, Hong Kong
354th Floor, Laurel Building “A” Block, Bagmane Tech Park, Survey no.65/2, C.V.Raman Nagar, Byrasandra Village, KR Pura Hobli, Bangalore South Taluk, Bengaluru-560093, India
36Laurel, Block D, 65/2, Bagmane Tech Park, C.V. Raman Nagar, Byrasasdraa Post, Bangalore 560093, India
374th Floor, Bagmane Tech Park, Olympia Building Survey Nos. 66/1, 66/66-1 & 66/1-3, CV Raman Nagar, Bangalore, 560093, India
38602 MMTC House C-22 Bandra Kurla Complex Bandra East, Mumbai, MH 400051, India
3966/1, 6th Floor, Olympia Building, Bagmane Tech Park, Byrasandra, C V Raman Nagar, Bangalore, Karnataka, 560093, India
40Leela Galleria, 1st Floor, Andheri Kurla Road, Andheri(East), Mumbai - 400059, Maharashtra, India
41Block A, Ballybrit Business Park, Ballybane Road, Galway, H01 WP08, Ireland
42One Spencer Dock, North Wall Quay, Dublin 1, Ireland
43Corrig Court, Corrig Road, Sandyford Industrial Estate, Sandyford, Dublin 18, Ireland
445 Altalef St., Yahud, Israel
45Matam Advanced Tech Center, Building 5/1, Haifa, 31 905, Israel
46Scientific Industries Center, Haifa, 33263, Israel
4717 Hatidhar St., Raannana, 43665, Israel
48Via Filippo Turati 8, 20121, Milan, Italy
49Viale Sarca 235, 20126, Milan, Italy
50Via Santa - Maria alla Porta n.9, 20123, Milan, Italy
51No. 8 Center Plaza Bldg, 5F, 1-10-16 Horidomecho Nihonbashi, Chuo-ku, Tokyo 103-0012, Japan
52Midtown Tower 19F, 9-7-1 Akasaka, Minato-ku, Tokyo, 107-6219, Japan
5320, rue des Peupliers, L-2328 Luxembourg, Luxembourg
5415, Boulevard F.W. Raiffeisen, L - 2411, Luxembourg
55Level 11 , 1 Sentral, Jalan Rakyat, Kuala Lumpur Sentral, 50470 59200 Kuala Lumpur, Malaysia
56Unit 501 Level 5 Uptown 1, 1 Jalan SS2, Selangor Darul Ehsan, Malaysia
57Av. Periférico Sur 6751, Col. Toluquilla, Municipio Tlaquepaque, Jalisco, CP 45610, Mexico
58Van Deventerlaan 31-51, 3528 AG Utrecht, The Netherlands
59Level 26, PWC Tower, 15 Customs Street West, Auckland, 1010, New Zealand
607th Floor, Dronning Eufemias Gate 16, 0191 Oslo, Norway
612/F Three World Square, Upper Mckinley Road, Taguig City, Philippines
62Centrum Biurowe Globis, Powstańców Śląskich 7A, 53-332, Wrocław, Poland
63Centro Empresarial Torres de Lisboa, Rua Tomás da Fonseca, Torre G, 1.º, 1600-209 Lisbon, Portugal
64110 Highway North Km. 28, Bldg. #1, Aguadilla, 00603, Puerto Rico
65350 Chardon Avenue, Chardon Tower, Suite 801, San Juan, 00918, Puerto Rico
662nd District, 3 George Constantinescu Street, BOC Office Building, Bucharest, Romania
67Leningradskoye shosse 16 A, Building 3, floor 10, premise XV, room 16, 125171, Moscow, Russian Federation
68Regus Al-Nakheel Centre, Nimr Building A (1st Floor), 5176 Al-Imam Saud Ibn Abdul Aziz Road, Al Nakheel District, Saudi Arabia
69#12-04/06, 1 Harbourfront Place, Harbourfront Tower 1, 098633, Singapore
70450 Alexandra Road, Singapore 119960, Singapore
7178 Sophia Street, Fairland, 2195, South Africa
72Morning View Office Park 255 Rivonia Road, Morningside, South Africa
73Yeoidodong, SK Building, 15F, 31 Gukjegeumyung-ro 8-gil, Yeongdeungpo-gu, Seoul, Korea
74Torre Espacio, Planta 16, Paseo de la Castellana, 259D, 28046 Madrid, Spain
75Kronborgsgränd 1, 164 46 Kista, Stockholm, Sweden
76Chemin Jean-Baptiste Vandelle 3A, 1290 Versoix, Switzerland
77Wallisellen Business Park, Offices 201-204, Richtistrasse 7, 8304, Wallisellen, Switzerland
78C/O Centralis Switzerland GmbH, Bahnhofstrasse 10, 6300 Zug, Switzerland
7910F.-1 No.66, Jing Mao 2nd Road, Nangang Distric, Taipei City, 115, Taiwan
809F No 200, Sec. 1, Keelung Road, Xinyl Dist, Taipei City 110, Taiwan
81ZI Chotrana, Technopole El Ghazala, Lot No 45, Ariana, 2088, Tunisia
82Üniversiteler Mahallesi 1605 Cad. No: 3A, Çankaya, Ankara, Turkey
83AND Plaza Kozyatağa İçerenköy Mahallesi Umut Sk. 10/12, Kat: 16 34752 Ataşehir/İstanbul, Turkey
8413 Pimonenko str., building 1, Office 1B/22, Kiev 04050, Ukraine
85Al Hilal Building, Al Falah Road, Office 318, Abu Dhabi, United Arab Emirates
86JAFZA One building, Unit No. AB 1005, Jebel Ali Free Zone, Dubai, United Arab Emirates
871204 - 1205, Floor 12 Al Shatha Tower, Dubai, United Arab Emirates
88The Lawn, 22-30 Old Bath Road, Newbury, Berkshire, RG14 1QN, United Kingdom
89Cain Road, Amen Corner, Bracknell, Berkshire, RG12 1HN, United Kingdom
90C T Corporation System, 711 Capitol Way S, Suite 204, Olympia 98501, United States
91The Corporation Trust Company, Corporation Trust Center, 1209 Orange Street, Wilmington, DE19801, USA


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