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Document
















ICON plc and Subsidiaries


Consolidated Financial Statements


Year ended 31 December 2018



Registered number    145835




Directors’ Report and Consolidated Financial Statements


Contents
Page
 
 
Directors' and Other Information
 
 
Directors’ Report
 
 
Statement of Directors’ Responsibilities in respect of the Directors’ report and the financial statements
 
 
Independent Auditor’s Report to the members of ICON plc
 
 
Consolidated Statement of Profit and Loss
 
 
Consolidated Statement of Comprehensive Income
 
 
Consolidated Statement of Financial Position
 
 
Consolidated Statement of Changes in Equity
 
 
Consolidated Statement of Cash Flows
 
 
Notes to Consolidated Financial Statements
 
 
Company Statement of Financial Position
 
 
Company Statement of Changes in Equity
 
 
Company Statement of Cash Flows
 
 
Notes to Company Financial Statements
 
 
Reconciliation from IFRS to US Accounting Polices
 
 
Appendix A: Risk Factors


1






Directors’ and Other Information

Directors
Ciaran Murray (Irish – Non-Executive Chairman)
 
Dr. Steve Cutler (Australian – Chief Executive Officer)
 
Prof. Hugh Brady (Irish – Non-Executive)
 
Dr. John Climax (Irish – Non-Executive)
 
Joan Garahy (Irish – Non-Executive)
 
Prof. William Hall (Irish – Non-Executive)
 
Prof. Dermot Kelleher (Irish – Non-Executive)
 
Eugene McCague (Irish – Non-Executive)
 
Declan McKeon (Irish – Non-Executive)
 
Ronan Murphy (Irish – Non-Executive)
 
Mary Pendergast (American – Non-Executive)
 
 
Company secretary
Diarmaid Cunningham
 
 
Registered office
South County Business Park
 
Leopardstown
 
Dublin 18
 
 
Auditor    
KPMG
 
Chartered Accountants
 
1 Stokes Place
 
St. Stephen’s Green
 
Dublin 2
 
 
Solicitors
A & L Goodbody
 
International Financial Services Centre
 
North Wall Quay
 
Dublin 1
 
 
 
Cahill Gordon Reindel LLP
 
80 Pine Street
 
NY 10005
 
USA
 
 
Registrars
Computershare Investor Services (Ireland) Limited
 
3100 Lake Drive
 
Citywest Business Campus
 
Dublin 24
 
 
Bankers    
Citibank
 
Canada Square Canary Warf
 
London E14 5LB
 
United Kingdom
 
 
 
JP Morgan Chase Bank N.A.
 
4 New York Plaza
 
New York
 
NY 10004
 
USA

2







Directors’ Report

The Directors present their report and audited Consolidated and Company Financial Statements of ICON plc (“the Company” or “ICON”), a public limited company incorporated in the Republic of Ireland, and its subsidiary undertakings (“the Subsidiaries”, with the Company and the Subsidiaries being together “the Group”) for the year ended 31 December 2018.

The Company’s ordinary shares are traded on the NASDAQ market. The Company is considered a foreign private issuer in the US and accordingly it is not subject to the same ongoing regulatory requirements as a US registered company with a primary listing on the NASDAQ market.

These Consolidated and Company Financial Statements (together “the financial statements”) for the year ended 31 December 2018 are prepared in accordance with IFRS as adopted by the EU and meet the reporting requirements pursuant to Irish Company Law. In addition to the Consolidated Financial Statements contained in this annual report, we also prepare separate consolidated financial statements on Form 20-F pursuant to the rules and regulations of the U.S. Securities and Exchange Commission ("SEC") and in accordance with accounting principles generally accepted in the United States (U.S. GAAP). The Form 20-F (under U.S. GAAP) is a separate document, a copy of which may be obtained from the Company’s website www.iconplc.com. IFRS differs in certain respects from U.S. GAAP, details of which are set out on pages 139 to 141 of this annual report.

Principal activities, business review and future developments

The Group is a clinical research organisation (“CRO”), providing outsourced development services on a global basis to the pharmaceutical, biotechnology and medical device industries. The Group specialises in the strategic development, management and analysis of programmes that support all stages of the clinical development process - from compound selection to Phase I-IV clinical studies. The Group’s mission is to accelerate the development of drugs and devices that save lives and improve the quality of life. Our vision is to be the Global CRO partner of choice in drug development by delivering best in class information, solutions and performance in clinical and outcomes research.

Headquartered in Dublin, Ireland, the Group began operations in 1990 and has expanded the business predominately through internal growth, together with a number of strategic acquisitions to enhance its capabilities and expertise in certain areas of the clinical development process. Its principal executive office is located at: South County Business Park, Leopardstown, Dublin 18, Republic of Ireland. The contact telephone number of this office is +353 1 291 2000.

The Group believes that it is one of a select number of CROs with the expertise and capability to conduct clinical trials in most major therapeutic areas on a global basis and has the operational flexibility to provide development services on a stand alone basis or as part of an integrated “full service” solution. At 31 December 2018, the Group had approximately 13,670 employees, in 89 locations in 37 countries. During the year ended 31 December 2018, the Group derived approximately 34.5%, 55.7% and 9.8% of its revenue in the United States, Europe and Rest of World, respectively.

To meet the evolving needs of our clients we continue to enhance our capabilities through both organic service development and targeted acquisitions. During 2018, we continued to enhance our scientific and therapeutic expertise to support our customers in specific areas including Oncology, Orphan and Rare Diseases, CNS, Dermatology, Infectious Disease and Womens' Health.

We have continued to invest in building our capabilities in the gathering, analysis and application of real world patient data within both the clinical trial and post-trial observational study environments. Alongside expanding internal capabilities, we continue to develop innovative partnerships with providers of real world data including EHR4CR and Trinetx. During 2018, we signed an agreement with Intel to deploy the Intel® Pharma Analytics Platform for use in clinical trials. The Intel platform is an artificial intelligence solution that enables remote monitoring and continuous capture of clinical data from study subjects using sensors and wearable devices and can apply machine learning techniques to objectively measure symptoms and quantify the impact of new therapies.

We also continued to enhance our site and patient recruitment capabilities during 2018 with the expansion of the PMG Research network through a partnership with the Du Page Medical Group. DuPage is the largest independent, multi-specialty physician group in the Chicagoland area with access to more than 700 physicians in over 50 clinical specialties ranging from primary to speciality care in areas such as cardiology and oncology. Through this agreement PMG assumed the research infrastructure

3







Directors’ Report (continued)

at DuPage providing expanded investigator and patient access and bringing clinical research as a care option to the communities served.

During 2018 we further developed the CNS Rating Scale Analytics leveraging our ICONIK platform. This is enabling a data-driven approach to rating surveillance that increases the consistency of both Clinicial and Patient Reported Outcomes in CNS studies. We  have also grown our global network of investigative sites that have the capabilities and expertise to conduct biosimilar trials and we further strengthened our relationships with specialised Oncology sites whilst also extending our internal oncology expertise within our consulting and project management groups.

We also continue to build our positions in emerging markets and to expand our presence in regions such as Asia-Pacific, in particular in China and Japan, building on our acquisition of Niphix, the Japanese subsidiary of Aptiv Solutions. We also added scale and capabilities to our commercialisation and outcomes service offering in the US through the acquisition of Medimedia Pharma Solutions.

Principal activities of the Company

The principal activity of ICON plc ("the Company") is to act as a holding Company. The Company also operates branch offices, ICON Italy in Milan, ICON Poland in Warsaw, ICON Latvia in Riga and ICON Lithuania in Vilnius. These branches provide contract research services to the pharmaceutical industry.

Acquisition activity

On 27 July 2017, a subsidiary of the Company, ICON Clinicial Research Limited acquired Mapi Development SAS ('Mapi') and its subsidaries ("Mapi Group"). Mapi Group has over 40 years of experience supporting Life-Science companies as the world leading Patient-Centered Research Company in commercialising novel treatments through Real-World Evidence, Strategic Regulatory Services, Pharmacovigilance, Market Access and Language Services. Mapi Group is the premier provider of Health Research and Commercialisation services to Life-Science companies enabling Market Authorisation, Market Access and Market Adoption of novel therapeutics. Cash outflows on acquisition were $145.8 million. The acquisition of Mapi Group strengthens ICON’s existing commercialisation and outcomes research business adding significant commercialisation presence, analytics, real world evidence generation and strategic regulatory services.

On 15 September 2016, a subsidiary of the Company, ICON US Holdings Inc. acquired ICON Government & Public Health Solutions, Inc. (''GPHS'') (formerly Clinical Research Management, Inc. ("ClinicalRM")) which resulted in initial net cash outflows of $52.4 million (including certain payments made on behalf of GPHS totalling $9.2 million). GPHS is a full-service CRO specialising in preclinical through Phase IV support of clinical research and clinical trial services for biologics, drugs and devices. The organisation helps customers progress their products to market faster, with a wide array of research, regulatory and sponsor services within the U.S. and around the globe. GPHS provide full service and functional research solutions to a broad range of US government agencies and commercial customers. Their extensive expertise extends across basic and applied research, infectious diseases, vaccines development and testing and the response to bio-threats. They have worked in collaboration with government and commercial customers to respond to the threat of global viral epidemics.

Share repurchase programme

On 3 October 2016, the Company commenced a previously announced share buyback programme of up to $400 million. The Company can acquire up to 10% of its outstanding ordinary shares (by way of redemption), in accordance with Irish law, the United States securities laws and the Company’s constitutional documents through open market share acquisitions. During the year ended 31 December 2018, the Company redeemed a total of 1,008,162 ordinary shares under this program for total consideration of $129.0 million. At 31 December 2018 a total of 4,026,576 ordinary shares were redeemed by the Company under this buyback programme for a total consideration of $372.1 million

All ordinary shares that were redeemed under the buyback programme were cancelled in accordance with the constitutional documents of the Company and the nominal value of these shares transferred to other undenominated capital as required under Irish Company Law.


4







Directors’ Report (continued)

Financing

On 15 December 2015, the Company issued through its subsidiary ICON Investments Five Unlimited Company (the "Issuer") Senior Notes for aggregate gross proceeds of $350 million through a private placement. The Senior Notes mature on 15 December 2020. Interest payable is fixed at 3.64% and is payable semi-annually on the Senior Notes. The Senior Notes are guaranteed by ICON plc. The Senior Notes may be redeemed, at the Issuer's option, at any time prior to maturity, at par plus a make whole premium, together with accrued and unpaid interest, if any, to the redemption date. The terms of the notes are set forth in the Note Purchase and Guarantee Agreement, dated as of 15 December 2015, by and among the Issuer, ICON plc and the purchasers named therein (“Note Purchase and Guarantee Agreement”). The Notes have not been, and will not be, registered under the Securities Act of 1933, as amended, and may not be offered or sold in the United States absent registration or an applicable exemption from registration requirements.

The Company entered into an interest rate hedge in respect of the planned issuance of the Senior Notes in December 2015. The interest rate hedge matured in November 2015 when the interest rate on the Senior Notes was fixed. During the year ended 31 December 2015, cash proceeds of $4.6 million representing the realised gain on the interest rate hedge was received on maturity in November 2015 and recorded within Other Comprehensive Income. The realised gain is amortised to the Consolidated Statement of Profit and Loss over the term of the hedge.

Future developments

Please see note 31 Subsequent events for details of events in the period from year-end to the approval of the financial statements.

In 2019, the Group looks forward to continuing to expand through organic growth, together with strategic acquisitions to enhance its expertise and capabilities in certain areas of the clinical development process and to continue to deliver on the Company’s mission to accelerate the development of drugs and devices that save lives and improve the quality of life.

Results and dividends

The results for the year are as shown on page 23 of these financial statements. The Directors do not propose the payment of a dividend for the year ended 31 December 2018.

The following table sets forth for the periods indicated certain financial data as a percentage of revenue and the percentage change in these items compared to the prior period, being the key performance indicators used by management. The trends illustrated in the following table may not be indicative of future results.

The Company adopted IFRS 15 'Revenue from Contracts with Customers' with a date of initial application of 1 January 2018. The new revenue recognition policies were applied in the preparation and presentation of the results for the twelve months ended 31 December 2018. As ICON adopted the standard using the cumulative effect transition method, there is no restatement of comparative amounts. The results for the year ended 31 December 2017 and previously therefore reflect the provisions of the previous accounting standard. The most significant impact of application of the new standard reflects the measurement of a clinical trial service as a single performance obligation recognised over time. We concluded that ICON is the contract principal in respect of both direct services and in the use of third parties (principally investigator services) that support the clinical trial. The progress towards completion for clinical service contracts is measured based on total project costs (direct costs are therefore inclusive of third party costs). Revenue is our primary measure of performance on adoption of IFRS 15. In common with others in the sector, our results previously separately identified that revenue stream which related to services provided by third parties. Those services were previously separately identified as reimbursable expenses and presented separately in our Statement of Operations. Reimbursable expenses are included within direct costs on adoption of IFRS 15. Throughout the document revenue as reported on adoption of IFRS 15 is referred to as revenue. Revenue as reported for the years ended 31 December 2017 and previously are gross revenues (inclusive of revenue from reimbursable expenses) or net revenues (excluding revenue from reimbursable expenses). This treatment is consistent with the adoption of IFRS 15 from 1 January 2018, without restatement of comparatives. See note 34 for impact of new accounting policy.



5







Directors’ Report (continued)

 
Year ended
31 December
2018

Year ended
31 December
2017

Percentage change
 in period

 
As a percentage of revenue
 
 
Revenue**
100
%
100
%
8.1
 %
 
 
 
 
Direct costs (excluding exceptional items)**
70.0
%
42.7
%
76.9
 %
 
 
 
 
Other operating expenses (excluding exceptional items)
15.0
%
16.3
%
(0.6
)%
 
 
 
 
Operating profit (excluding exceptional items)
15.0
%
14.2
%**
14.7
 %
 
 
 
 
Exceptional items (before taxation)
0.5
%
0.3
%
61.1
 %
 
 
 
 
Operating profit (including exceptional items)
14.5
%
13.9
%
13.6
 %
**Reimbursable expenses were $643.9 million for the year-ended 31 December 2017 or 26.8% of revenue.

Twelve months ended 31 December 2018 compared to twelve months ended 31 December 2017

Revenue for the year increased by $193.5 million, or 8.1%, from $2,402.3 million (revenue including reimbursable expenses for the year ended 31 December 2017 to $2,595.8 million for the year ended 31 December 2018). For the year ended 31 December 2018 we derived approximately 34.5%, 55.7% and 9.8% of our revenue in the United States, Europe and Rest of World, respectively.

Direct costs for the year ended 31 December 2018 increased by $789.9 million, or 76.9%, from $1,026.4 million for the year ended 31 December 2017 to $1,816.3 million for the year ended 31 December 2018 (excluding exceptional items). Direct costs for the year ended 31 December 2018 include reimbursable expenses of $702.8 million. Other direct costs increased by $87.1 million, from $1,026.4 million for the year ended 31 December 2017 to $1,113.5 million for the year ended 31 December 2018 (excluding exceptional items). Other direct costs consist primarily of compensation, associated fringe benefits and share-based compensation expense for project-related employees and other direct project driven costs. The increase in direct costs during the period arose due to an increase in headcount and a corresponding increase in personnel related expenditure of $81.3 million combined with an increase in other direct project related costs of $1.5 million, increases in laboratory costs of $4.3 million and an increase in travel related costs of $1.0 million. As a percentage of gross revenue, direct costs have increased from 42.7% for the year ended 31 December 2017 to 70.0% for the year ended 31 December 2018 (excluding exceptional items).

Other operating expenses for the year ended 31 December 2018 decreased by $2.4 million, or 0.6%, from $392.3 million for the year ended 31 December 2017 to $389.9 million for the year ended 31 December 2018 (excluding exceptional items). Other operating costs are primarily comprised of compensation, related fringe benefits, share compensation for non project related employees, recruitment expenses, professional service costs and advertising costs. Personnel related costs increased by $2.7 million in the year, facilities related costs increased by $4.3 million, general overhead costs net of foreign exchange costs decreased by $13.9 million and depreciation and amortisation costs increased by $4.6 million. As a percentage of gross revenue, other operating expenses, decreased from 16.3% for the year ended 31 December 2017 to 15.0% for the year ended 31 December 2018 (excluding exceptional items).

During the year ended 31 December 2018 the Company implemented a restructuring plan to improve operating efficiencies resulting in recognition of a restructuring charge of $12.5 million during 2018. The restructuring plan includes the cost of resource rationalisations in certain areas of the business to improve utilisation.

Operating profit increased by $45.2 million, or 13.6%, from $331.9 million for the year ended 31 December 2017 ($339.7 million excluding exceptional items) to $377.1 million for the year ended 31 December 2018 ($389.6 million, or 14.7% excluding exceptional items). As a percentage of revenue, operating profit increased from 13.9% of gross revenues for year ended 31 December 2017 (14.2% excluding exceptional items) to 14.5% of revenues for year ended 31 December 2018 (15.0% excluding exceptional items).

6







Directors’ Report (continued)


Financing expense for the period increased from $12.6 million for the year ended 31 December 2017 to $13.5 million for the year ended 31 December 2018. Financing income for the year decreased from $8.3 million for the year ended 31 December 2017 to $4.8 million for the year ended 31 December 2018. During the year ended 31 December 2017, a credit of $6.0 million was recorded being the reduction in the assessment of the fair value of contingent consideration liability relating to the acquisition of ICON Government & Public Health Solutions, Inc. (''GPHS'') (formerly Clinical Research Management, Inc. ("ClinicalRM")) (see note 14 of the Financial Statements).

Income tax expense for the period decreased to $45.6 million for the year ended 31 December 2018 from $54.7 million for the year ended 31 December 2017. The Group’s effective tax rate for the year ended 31 December 2018 was 12.4% (12.3% excluding the effect of exceptional items) compared with 16.7% (16.6% excluding the effect of exceptional items) for the year ended 31 December 2017. The Group’s effective tax rate is principally a function of the distribution of pre-tax profits in the territories in which it operates.

Risks and uncertainties

Under Irish Company Law (Section 327 of the Companies Act 2014 ‘the Companies Act’), the Directors are required to give a description of the principal risks and uncertainties which it faces. Details of the principal risks and uncertainties facing the Group are set out in Appendix A of this annual report and form an integral part of the Directors’ Report.

Financial risk management

Group financial risk management is governed by policies and guidelines which are reviewed and approved annually by the Board of Directors. These policies and guidelines primarily cover foreign exchange risk, credit risk, liquidity risk and interest rate risk. The principal objective of these policies and guidelines is the minimisation of financial risk at reasonable cost. The Group’s financial instruments comprise cash and cash equivalents, current asset investments, finance lease obligations and negotiated debt facilities. The main purpose of these financial instruments is to fund the working capital requirements of the Group, the cost of new acquisitions and continued growth. The Group also uses derivative financial instruments to reduce exposure to fluctuations in foreign exchange rates. The principal financial risk facing the Group is currency rate risk. Other financial risks include interest rate risk, credit risk and liquidity risk. Further details of which are set out in note 26 to the Consolidated Financial Statements and note 11 to the Company Financial Statements. The Group does not undertake any trading activity in financial instruments nor does it enter into any leveraged derivative transactions. The Group treasury function centrally manages the Group’s funding and liquidity requirements.

The Group maintains both committed and uncommitted credit lines with its relationship banks. On 15 December 2015, the Group entered into a Note Purchase Agreement in respect of aggregate gross proceeds of $350 million. The interest rate on the Senior Notes was fixed at 3.64%. The Group entered into an interest rate hedge in anticipation of the drawdown of the Senior Notes the proceeds of which were received in November 2015. This interest rate hedge qualified for hedge accounting under IAS 39. The gain on the hedge is being amortised to the Consolidated Statement of Profit and Loss over the term of the Senior Notes, resulting in an offset to the interest payable expense on the notes. The effective rate on the 5 year Senior Notes is fixed at 3.37%.

Subsequent events

Details of subsequent events are set out in note 31 to the Consolidated Financial Statements.

Directors and Secretary

The members of the Board of Directors during the year are included in note 9 to the Consolidated Financial Statements.






7







Directors’ Report (continued)

The following table sets forth information concerning the composition of the Company’s Board committees as of 31 December 2018:
Name
Position
Ciaran Murray
Non Executive Chairman and Director
Dr. Steve Cutler (1)(5)
Chief Executive Officer and Director
Professor Hugh Brady (3)
Director
Dr. John Climax
Director
Joan Garahy (2)(4)
Director
Professor William Hall (2)(4)
Director
Professor Dermot Kelleher
Director
Eugene McCague (3)
Director
Declan McKeon (3)(4)(5)
Lead Independent Director
Ronan Murphy (2)(3)
Director
Mary Pendergast (2)
Director
(1)
Executive Officer of the Company.
(2)
Member of Compensation and Organisation Committee.
(3)
Member of Audit Committee.
(4)
Member of Nominating and Governance Committee.
(5)
Member of Execution Committee.

Details required by Companies Act 2014, section 329, of Directors’ interests in the Group’s shares are set out in note 9 to the Consolidated Financial Statements. Dr. Ronan Lambe resigned as a director on 24 July 2018. All other Directors served for the entire year.

Directors’ remuneration

Details of the Directors’ remuneration and interests are set out in notes 3 and 9 to the Consolidated Financial Statements.

Directors’ power to purchase and allot company shares

Subject to the provisions of the Companies Act 2014, the Company may purchase any of its own shares. Every contract for the purchase of shares, or under which the Company may become entitled or obliged to purchase shares in the Company shall be authorised by a special resolution of the Company. The Company may cancel any shares so purchased or may hold them as treasury shares or re-issue them.

On 3 October 2016, the Company commenced a previously announced share buyback programme of up to $400 million. The Company can acquire up to 10% of its outstanding ordinary shares (by way of redemption), in accordance with Irish law, the United States securities laws and the Company’s constitutional documents through open market share acquisitions. Further details of the share repurchase programmes are included in note 24 to the Consolidated Financial Statements.

On 8 January 2019, the Company announced a share buyback program of up to 1 million shares to be executed opportunistically during 2019 depending on cash commitments. All ordinary shares that are redeemed under the buyback program will be cancelled in accordance with the constitutional documents of the Company and the nominal value of these shares transferred to an undenominated capital fund as required under Irish Company law.
 
Rights and Obligations attaching to the Company’s shares

The authorised share capital of the Company is €6,000,000 divided into 100,000,000 ordinary shares of €0.06 at December 31, 2018. Holders of ordinary shares will be entitled to receive such dividends as may be recommended by the Board of Directors of the Company and approved by the shareholders and/or such interim dividends as the Board of Directors of the Company may decide. On liquidation or a winding up of the Company, the par value of the ordinary shares will be repaid out of the assets available for distribution among the holders of the Company's ordinary shares. Holders of ordinary shares have no conversion or redemption rights. On a show of hands, every holder of an ordinary share present in person or proxy at a general meeting of shareholders shall have one vote with no individual having more than one vote.



8







Directors’ Report (continued)

Change of control

Certain of the Group’s customer contracts allow the customer to terminate the contract in the event of a change in control of the Company.
 
The Group has negotiated a banking facility with a number of financial institutions, details of which are set out in note 23 to the Consolidated Financial Statements. This facility requires repayment in the event that the Company becomes controlled by any person or persons acting in concert by whom it was not controlled at the date the facility was entered into.

Furthermore certain Group companies have entered capital grant agreements with the Irish government agency, Enterprise Ireland, whereby the Group covenants that the controlling interest in the Company will not change without Enterprise Ireland’s prior written consent, which will not be unreasonably withheld.

Additionally, the Company's share option and restricted share unit plans contain change in control provisions which provide for the acceleration of the vesting and exercisability of outstanding options and awards of restricted share units in the event that a change in control occurs with respect to the Company.

Corporate Governance

The Company is listed on the NASDAQ Global Select Market. The Company complies with the corporate governance listing requirements under the NASDAQ marketplace rules. NASDAQ may provide exemptions from certain NASDAQ corporate governance standards to a foreign private issuer in certain circumstances provided that the foreign private issuer properly notifies NASDAQ and makes the required disclosure except to the extent that such exemptions would be contrary to United States federal securities laws.

The exemptions that the Company relies on, and the practices the Company adheres to, are as follows:

The Company is exempt from provisions set forth in NASDAQ Rule 5620(c), which requires each issuer (other than limited partnerships) to provide for a quorum in its by-laws for any meeting of the holders of common stock, which shall in no case be less than 33.33% of the outstanding shares of the issuer’s common voting stock.  The Company’s Constitution requires that only 3 members be present, in person or by proxy, at a shareholder meeting to constitute a quorum.  This quorum requirement is in accordance with Irish law and generally accepted business practices in Ireland.

The Company is exempt from provisions set forth in NASDAQ Rule 5635(c) which requires (other than for certain specified exceptions) shareholder approval prior to the establishment or material amendment of a stock option or purchase plan or other equity compensation arrangement made or materially amended, pursuant to which stock may be acquired by officers, directors, employees or consultants.  Irish law does not require shareholder approval with respect to equity compensation arrangements.  Accordingly, the 2013 Employees Restricted Share Unit Plan and the amendments to the Employee Share Option Plan 2008 and Consultants Share Option Plan 2008 were adopted by the Board of Directors without shareholder approval.

The Company is exempt from provisions set forth in NASDAQ Rule 5605(b)(2), which requires independent Directors to hold regularly scheduled meetings at which only independent Directors are present.  Irish law does not require independent directors to hold regularly scheduled meetings at which only independent Directors are present.  The Company holds regularly scheduled meetings which all of the Directors may attend and the Lead Independent Director may call meetings of the independent directors and non-employee directors of the Board, as appropriate, in accordance with the Lead Independent Director Charter. 

The Company's practices with regard to these requirements are not prohibited by Irish law.






9







Directors’ Report (continued)

Audit Committee

The Audit Committee meets a minimum of four times a year. It reviews the quarterly and annual financial statements, the effectiveness of the system of internal control (including the arrangement for the Company’s employees to raise concerns in confidence about financial inappropriateness) and recommends the appointment and removal of the external auditors. It monitors the adequacy of internal accounting practices and addresses all issues raised and recommendations made by the external auditors. The Audit Committee pre-approves all audit and non-audit services provided to the Company by its external auditors on a quarterly basis. The Audit Committee, on a case by case basis, may approve additional services not covered by the quarterly pre-approval, as the need for such services arises. The Audit Committee reviews all services which are provided by the external auditor to review the independence and objectivity of the external auditor, taking into consideration relevant professional and regulatory requirements. The Chief Financial Officer, the Head of Internal Audit, the General Counsel and the external auditors normally attend all meetings of the Audit Committee and have direct access to the Committee Chairman at all times. At 31 December 2018, the Audit Committee was comprised of four independent Directors: Declan McKeon (Chairperson), Ronan Murphy, Professor Hugh Brady and Eugene McCague. Professor Dermot Kelleher and Professor William Hall served as members of the Committee during 2018 and stepped down on 1 May 2018. Professor Hugh Brady and Eugene McCague joined the Committee on 1 May 2018. Mr Declan McKeon acted as Audit Committee Chairperson until February 2019 when Mr Ronan Murphy was appointed Chairperson.

Significant shareholdings

The Company has been notified of the following shareholdings in excess of 3% of the issued share capital of the Company as at 31 December 2018:
Name
%
Number of Shares
 
 
 
WCM Investment Management
9.77
5,272,086
Wellington Management Company LLP
6.91
3,728,130
AllianceBernstein LP
4.35
2,348,321
ClearBridge Investments, LLC
4.12
2,222,081
Acadian Asset Management LLC
4.01
2,165,463
EARNEST Partners LLC
3.94
2,126,617
Renaissance Technologies LLC
3.51
1,895,300
All Directors and Officers as a group (1)
2.93
1,578,677


(1)
Includes 633,915 ordinary shares issuable upon the exercise of stock options granted by the Company, 40,172 restricted stock units (“RSUs”) awarded by the Company to directors, officers and other key employees and 169,956 performance share units (“PSUs”) awarded by the Company to Directors, officers and other key employees. Of the issued PSUs, performance conditions will determine how many of them vest and, if performance targets are exceeded, additional PSUs will be issued and vest in accordance with the terms of the relevant PSU award. 

Subsidiary undertakings

The information required by the Companies Act in relation to subsidiary undertakings is presented in note 32 to the Consolidated Financial Statements.

Political donations

The Group made no disclosable political donations in the period.

Going concern

The Directors have a reasonable expectation that the Group has adequate resources to continue in operation for the foreseeable future. For this reason, the Group continues to adopt the going concern basis in preparing the financial statements.



10







Directors’ Report (continued)

Accounting records

The Directors are responsible for ensuring that adequate accounting records as outlined in Section 281-285 of the Companies Act, are kept by the Company. The Directors are also responsible for the preparation of the Annual Report. The Directors have appointed professionally qualified accounting personnel with appropriate expertise and have provided adequate resources to the finance function in order to ensure that those requirements are met. The accounting records of the Company are maintained at the Group’s principal executive offices at its registered office at Leopardstown, Dublin 18.

Statement of relevant audit information

The Directors believe that they have taken all steps necessary to make themselves aware of any relevant audit information and have established that the Company's statutory auditors are aware of that information. In so far as they are aware, there is no relevant audit information of which the Company's statutory auditors are unaware.

Disclosure of non-financial information
The European Union (Disclosure of Non-Financial and Diversity Information by certain large undertakings and groups) Regulations 2017 require disclosure of certain non-financial information by certain large undertakings and groups.
We have sought to address the requirements of the legislation in the sections following.
Business Model
Our mission is to help our customers accelerate the development of drugs and devices that save lives and improve the quality of life. We help our customers deliver life-changing medicines by being innovative in our solutions, collaborative in how we work as teams, accountable for the results we achieve and committed to doing the right thing for our customers and the patients they serve.
Our business model is described in the ‘Principal activities, business review and future developments’ section of the Directors’ Report.
Our core values underpin our mission and drive a culture and mind-set of ownership at ICON. “Own it @ ICON” is how we define our culture. Our culture of ownership connects us to the core values at the heart of the Company and helps us differentiate how we work with our customers to achieve their goals.
Our values are:
Accountability & delivery: We take pride in what we do
Collaboration: We are one team
Partnership: We partner with our customers
Integrity: We do the right thing

Our values underpin how we work together to deliver on our mission to help our customers accelerate the development of drugs and devices that save lives and improve the quality of life. These values and our Code of Ethical Conduct, which underpins these values, form the core of everything we do. It applies to all officers, directors, employees, consultants and agents globally. All employees and temporary workers are mandated to complete global ethics training.
1.    Environmental matters

ICON is committed to delivering excellence and care to the communities in which we operate.
This includes conducting our business in an environmentally sustainable manner as set out in our Global Code of Ethical Conduct. We achieve this by managing and improving our environmental performance across all business activities. Our employees, directors, officers, contractors, and temporary workers are expected to support our sustainability objectives.


11







Directors’ Report (continued)

As a Clinical Research Organisation, we recognise the impact of how we operate on the environment in the following key areas:
energy use;
waste generation;
emissions to air/water;
water use;
transport; and
procurement.

Our Global Environmental Management Policy and Environmental Management Plan were approved during 2018.
Our Environmental Management Plan and Performance Statement sets out the environmental actions and targets we will carry out to ensure compliance with our Global Environmental Management Policy and to engage our employees in supporting our objectives for continued improvement. Our Environmental Performance Statement is available to employees and our customers. The plan sets out our commitment to conducting our business in an environmentally sustainable manner by managing and improving our environmental performance across all business activities. Our plan sets out our initiatives and goals for the next four years.
Responsibilities for the implementation of our objectives and co-ordination of our sustainability efforts and reporting on progress to the executive leadership is led by our facilities team, reporting to our Global Chief Administrative Officer and General Counsel, with input from our procurement, global legal, corporate communications and human resources teams.
We track, calculate and report our carbon footprint and use the information available to continue to improve our processes and reduce our impact. We follow the Greenhouse Gas (GHG) Protocol Corporate Standard, which is the global corporate accounting and reporting standard for calculating carbon emissions. We have more than 80 facilities globally which operate in office buildings, where the primary energy consumption is electricity for light and heating, ventilation and air conditioning systems. Our central laboratories also operate laboratory instruments.
Where we have direct control over the buildings we operate, we ensure energy efficient lighting solutions. Where we do not have direct control over our facilities, we work with our landlords and other stakeholders to encourage energy efficient lighting solutions. We also work hard to extend the useful life of our equipment and ensure appropriate disposal of assets when decommissioned.
Our people are expected to support our waste management and disposal programs and one of the goals of our environmental management policy is to reduce our impact. During 2018 we commenced the development of a global waste management system.
Reflecting our continued commitment to sustainable practices, we have included an annual 'sustainability month' in our calendar since 2017. The focus of the month is to promote best practices and highlight sustainable activities across all of our offices and locations. This focus together with the introduction of increased recycling facilities at our key sites contributed to our objectives to reduce waste during 2018. We continue to work to increase the number of our offices engaging in waste reduction strategies in all areas. We have replaced disposable coffee cups with reusable alternatives and developed objectives relating to reduced paper consumption through the use of electronic documents and signatures.
We actively promote the use of technology and teleconferencing facilities in our efforts to reduce travel and commuting activities. During sustainability month, our people were encouraged to car share and utilize public transport. We include air travel miles in our carbon footprint monitoring.
Our internal portals include a MyICON page on Environment and Sustainability which reflects policy, practice, promotions and updates on our commitment to sustainability.
We also require our suppliers to abide by our Global Supplier Code of Conduct which includes a commitment to comply with applicable environmental laws and regulations, our expectations around waste management and sustainable use of resources.



12







Directors’ Report (continued)

Principal risks
Although the risks associated with environmental matters are actively monitored, ICON does not believe these risks meet the threshold of a principal risk for our business.

2.    Social and Employee matters

Our Corporate Social Responsibility ('CSR') initiatives are aligned with ICON’s values
ICON supports a variety of CSR programmes. Our programmes aim to make a positive difference to the communities in which we work and live and also recognise the enthusiasm and creativity of our people in their efforts to give something back to their communities.

Our CSR activities are focused on two core areas:
Supporting education & building closer ties between industry & academia; and
Improving the welfare of people in the communities in which we live.

Supporting education & building closer ties between industry & academia
ICON is a strong supporter of bridging the ties between industry and academia and inspiring the next generation of business and scientific leaders.
Strategic Partnership with University College Dublin. ICON has been engaged in a strategic partnership with UCD since 2012, which has been heralded as a model for industry-academia collaboration. ICON was a lead benefactor of UCD’s new Science Centre, which is home to over 5,200 science students. ICON’s partnership also includes the ICON Chair of Business Analytics as well as scholarships for Masters and Doctorate degrees to attract science graduates into careers in clinical research. In addition, ICON and UCD developed an industry-tailored Graduate Certificate in Clinical Research in UCD’s School of Medicine and Medical Science in 2013.

Scholarships supporting female GAA players. ICON has a partnership with the Women’s Gaelic Players Association, whereby we provide ICON-GPA Life Sciences Scholarships to inter-county football and camogie players engaged in undergraduate and post-graduate life sciences courses. ICON also provides mentoring to players to help them on their career journeys.

Partnership with Junior Achievement to inspire schoolchildren. ICON supports our people who take time out of their working day over a period of 5 weeks to deliver Junior Achievement educational programmes. Junior Achievement encourages young people to remain in education and teaches them the skills they need to succeed in a changing world. Our volunteers teach primary and secondary level students valuable business, STEM and entrepreneurship skills that will stand them in good stead as they progress through education and beyond.

Science Gallery Founding Partner. ICON has been a lead corporate supporter of the Science Gallery at Trinity College Dublin since its inception in 2008. Science Gallery aims to inspire and transform curious minds through engagement with science.

Improving the welfare of people in the communities in which we live
ICON employees across the world are making a positive difference to their communities. We support causes that are important to our employees and have a number of programmes that support the welfare of people in our local communities. These include:
Corporate donations to employee-nominated charities. In 2018, ICON supported over 20 charities across the world which are supporting people living in poverty, who are suffering from a variety of diseases, are the victims of domestic violence, or natural disasters.

13







Directors’ Report (continued)


Donations in support of employee fundraising. ICON employees raise significant amounts for a variety of charities each year through in-house fundraising events. ICON recognises the enormous effort and creativity of our employees who fundraise for causes that are important to them by supplementing monies raised through ICON’s Charitable Donation Programme.

Corporate philanthropic partnership with the Ireland Funds. Over the past 3 years, ICON has partnered with the Ireland Funds, a global philanthropic network that has benefited more than 3,200 different charitable organisations.

At the core of our strategy is our people
Within ICON we have highly qualified and experienced teams, the majority of whom have third level educational qualifications. The need to develop and retain this expertise and talent within the organisation is fundamental in enabling us to be the global CRO partner of choice for our customers.
The training and development of our staff is a key focus for us
We have a comprehensive curriculum in place to support our people in their roles. We have invested in creating an innovative learning environment delivered through ICON’s training and development group.
All of our people are required to complete mandatory training in key areas which support our values and our way of working. They include (but are not limited to) the following areas:
Global ethics compliance;
Data protection and procedures;
IT security;
Confidentiality and maintaining communications; and
Social media usage.

We have a well-established Graduate Development Programme for our clinical teams, which now runs in the US, China, Japan, Korea and also Australia where we take recent graduates and prepare them for careers in clinical monitoring and data management.
We also have formed collaboration with University College Dublin which enables ICON to provide customised management and development programmes for global employees. These programmes are focused on leadership development for those people in management roles and specific technical training in competencies that are core to our business, such as project and programme management and clinical research associate development.
We have also created a Clinical Research Academy and a unique Graduate Certificate in Clinical Trial Management which is enhancing the quality of graduate training in clinical research and increasing the pool of talent available to ICON that can support our customers’ drug development programmes.
Our learning and development programmes are complemented by advanced people development practices which incorporate rigorous analytics based screening in the hiring process, global career frameworks, pay for performance aligned to our strategy, and on-going talent review and succession planning.
Our leadership and talent programmes contribute to the enhanced retention of our employees, better project deliverables for our customers and the enhanced financial performance of the business.
Individual development is supported through formal learning with our personal effectiveness series and via access to our Career Hub portal. Our people can access a wealth of learning materials including courses, resources, toolkits, library items and blogs to support the development of key competencies and improving their eligibility for future roles through these tools. Career Hub also allows employees to understand and explore possible career paths and career opportunities available to them across the organization and provides full transparency to all levels, skills and capabilities required for every role in ICON.
ICON is proud of this investment in our people. This investment translated to approximately four days training for each person during 2018.

14







Directors’ Report (continued)

We are also committed to supporting the career aspirations of our people. Approximately 25% of all roles are filled internally.
As an organisation we are keen to hear directly from our employees
Bi-annually we conduct a global employee engagement survey. Our most recent survey was conducted in October 2018 and had an 88% response rate. There are two key measures which we track closely. The first is Employee Engagement which scored well at 70%, and was on par with the General Industry benchmark. The second is Employee Enablement, which also scored at 70%, 3% above the General Industry benchmark. After each survey we engage in action planning with our people to address areas they have highlighted as important for improvement. The last five years have shown a positive trend for both our engagement and enablement scores.
Difference drives innovative thinking and is critical to our success
We believe difference drives innovative thinking, which is critical to our customers, and as a global company with almost 14,000 employees in 40 countries, we encourage diversity of all kinds. We have grown rapidly, almost doubling our headcount globally over the past 7 years. As a truly global operation, we are deliberately structured as international teams so that we can support the delivery of our customers' clinical development programmes across multiple geographies. Recruitment, selection and promotion decisions are merit-based and in line with the principles of reaching a wider talent pool and equal opportunity.
We have made significant investment in organisation design structures, tools and communications which ensures that we have a gender neutral approach to pay decisions. We pay male and female employees equally for the same or equivalent work. We have worked hard to structure our pay principles to ensure that gender is not a factor in how we deliver rewards.
The information relating to pay decisions is hosted through core technology, enabling our people leaders and employees direct access to information which informs and supports equitable and consistent decision making.
Our immediate areas of focus around driving inclusion and diversity include:
Training and Development - Under our Diversity and Inclusion Program, we will be training all our people leaders to understand unconscious bias and similarity bias and also how to encourage diversity of thought and foster inclusion in their teams. These fundamentals will be embedded into all people leader programmes, and reflect the values upon which we assess performance behaviours.

Talent - We recognise that more diversity in senior leadership increases organisational performance. In 2019 we are launching our global NextGen Leadership programme for those who have been identified as a High Performing & High Potential Leader. This programme will focus on core organisational skills that will enable these individuals to increase their readiness for promotion, as well as create a strong internal network of senior leaders who feel empowered to take hold of their careers and aim for the top. This programme will help build and support our development of future leaders from within and complements existing senior level High Potential programmes already inexistence in the organisation.

Recruitment - We continue to strive to source the best talent in our industry from across the world to fill the highly specialised roles required to help bring new drugs to market. Our most senior roles are truly global in nature. In 2018, we mandated gender balanced short lists for senior leadership appointments across the organisation in all markets in which we are located.

Retention - we offer flexible working arrangements that help our people achieve balance. Approximately 45% of our employees work remotely. We also support and facilitate part time working arrangements. Approximately 16% of our people work part-time. We have a bonus programme for all employees linked to individual and company performance and also operate a global recognition programme where peer to peer recognition and awards take place for employees who go the extra mile. We also recognise and reward employees who reach significant service milestones within the company

Principal risks
For further details on risks relating to employee matters refer to Appendix A: Risk Factors.

15







Directors’ Report (continued)

3.    Human rights

ICON is committed to acting ethically and with integrity in all our business dealings.
We are committed to human rights and the adoption and pursuit of compliance with the United Nations Guiding Principles on Human Rights. Our business model and our policies are intended to fully comply with applicable human rights legislation in the countries in which we operate. ICON’s Global Supplier Code of Conduct also addresses our zero tolerance stance to slavery and human trafficking. ICON is completely opposed to slavery and human trafficking and will not knowingly support or conduct business with any organisation involved in such activities. ICON does not employ anyone below the minimum employment age in the jurisdictions in which we operate.
In our Anti-Slavery and Human Trafficking Statement, we set out the measures we are taking to prevent modern slavery in our supply chains, in addition to our own operations. A copy of our Anti-Slavery and Human Trafficking Statement is available on our website at https://investor.iconplc.com.
Principal Risks
Although the risks associated with human rights abuses are actively monitored, ICON does not believe these risks meet the threshold of a principal risk for our business.
4.    Anti-bribery and Corruption

Our anti-bribery/anti-corruption programme ('ABAC Programme') is a key element of our compliance policy framework, with principles and requirements based on the underlying principal that we do not tolerate bribery or any other form of corruption or fraud. ICON and all ICON directors, employees, consultants and agents (“Covered Persons”) must act in compliance with international laws and regulations relating to bribery, corruption and illicit payments including, the US Foreign Corrupt Practices Act and the UK Bribery Act 2010.
In April 2018, ICON was awarded the ISO 37001:2016 certification for its Anti-Bribery Management System having established, implemented, maintained, reviewed and improved an Anti-Bribery Management System that can prevent, detect and mitigate the risk of bribery. Our programme is designed to ensure our compliance with anti-corruption laws, including due diligence, training, policies, procedures, and internal controls.
There are a number of policies and codes that make up the ABAC Management system including the Global Code of Ethical Conduct, the Global Anti Corruption Compliance Policy, the Ethics Line Charter and the Global Supplier Code of Conduct (together “the Codes”). The Codes are available on our website at https://investor.iconplc.com. All ICON employees are required to complete ICON’s annual Ethics online training, which incorporates the key principles of each of the Codes. The Global Code of Ethical Conduct addresses the core principles underpinning the behaviour required of all Covered Persons in our internal interactions with each other and our external dealings with patients, clients, health care professionals, regulators, investors, vendors and other third parties. Violations of the Codes may result in a variety of corrective actions and in some cases may result in disciplinary action up to and including termination of employment.
Bribery and corruption remains a business risk as we conduct our business across the globe and enter into partnerships and collaborations. There is no certainty that all employees and third party business partners (including our vendors, suppliers, agents, contractors, and other partners) will comply with anti-bribery laws. When working with third parties, we are committed to working with only those who embrace high standards of ethical behaviour consistent with our own. Bribery and corruption risks are a focus of our third-party diligence and management process. We hold our suppliers accountable for meeting their contractual obligations with ICON, including commitments that are made with regard to our Global Supplier Code of Conduct and regulatory compliance. Contract non-compliance can result in termination of the business relationship with the supplier and exclusion from future business with ICON.
Suspected violations of the Codes may be reported on a confidential (or anonymous, where permitted) basis in accordance with our Ethics Line Charter through ICON’s Ethics Line. ICON has open door, anti-retaliation policies in place to encourage and protect individuals who raise a concern. Ethics line reports are reported to the Board of ICON plc as appropriate. The Internal Audit team conducts ABAC programme audits. Internal Audits focus on testing for compliance and design effectiveness of the overall ABAC programme, Internal Audit incorporates an assessment of ABAC measures in all audits, as appropriate. In this approach, bribery and corruption risks are incorporated into the risk assessment and scoping process of each audit.

16







Directors’ Report (continued)

Principal risks
For further details on risks relating to anti-corruption refer to Appendix A: Risk Factors.
Directors’ compliance statement

The Directors, in accordance with Section 225(2) of the Companies Act 2014, acknowledge that they are responsible for securing the Company’s compliance with its relevant obligations as defined within the Companies Act, 2014 (hereinafter called the relevant obligations).

The Directors confirm that:

a compliance policy statement has been drawn up setting out the Company’s policies with regard to such compliance;
appropriate arrangements and structures that, in their opinion, are designed to secure material compliance with the Company’s relevant obligations, have been put in place; and
a review has been conducted, during the financial year, of the arrangements and structures that have been put in place to secure the Company’s compliance with the relevant obligations.

Auditor

In accordance with Section 383(2) of the Companies Act 2014, KPMG, Chartered Accountants, will continue in office.

On behalf of the Board

Steve Cutler
Ronan Murphy
30 April 2019
Chief Executive Officer
Director
 

17





Statement of Directors’ Responsibilities in respect of the Directors' report and the financial statements

The directors are responsible for preparing the Directors’ report and the Group and Company Financial Statements in accordance with applicable law and regulations.

Company law requires the directors to prepare Group and Company Financial Statements for each financial year. The directors have elected to prepare the Company Financial Statements in accordance with IFRS as adopted by the EU and as applied in accordance with the Companies Act 2014.

Under company law the directors must not approve the Group and Company Financial Statements unless they are satisfied that they give a true and fair view of the assets, liabilities and financial position of the Group and Company and of the Group’s profit or loss for that year. In preparing the Group and Company Financial Statements, the directors are required to:

select suitable accounting policies and then apply them consistently;
make judgements and estimates that are reasonable and prudent;
state whether they have been prepared in accordance with IFRS as adopted by the EU; and
prepare the financial statements on the going concern basis unless it is inappropriate to presume that the Company will continue in business.

The directors are responsible for keeping adequate accounting records which disclose with reasonable accuracy at any time the assets, liabilities, financial position and profit or loss of the Company and which enable them to ensure that the financial statements comply with the provision of the Companies Act 2014. They are also responsible for safeguarding the assets of the Group and Company, and hence for taking reasonable steps for the prevention and detection of fraud and other irregularities. The directors are also responsible for preparing a directors’ report that complies with the requirements of the Companies Act 2014.

The directors are responsible for the maintenance and integrity of the corporate and financial information included on the Company's website. Legislation in the Republic of Ireland governing the preparation and dissemination of financial statements may differ from legislation in other jurisdictions.


On behalf of the Board



Steve Cutler
Ronan Murphy
 
Chief Executive Officer
Director
 


18







Independent Auditor’s Report to the members of ICON plc

Opinion
We have audited the financial statements of ICON plc (“the Company”) and subsidiaries (together, “the Group”) for the year ended 31 December 2018, which comprise the Consolidated Statement of Profit and Loss, Consolidated Statement of Comprehensive Income, Consolidated and Company Statements of Financial Position, Consolidated and Company Statements of Changes in Equity, Consolidated and Company Statements of Cash Flows, and related notes, including the summary of significant accounting policies set out in note 1. The financial reporting framework that has been applied in their preparation is Irish Law and International Financial Reporting Standards (“IFRS”) as adopted by the European Union.
In our opinion:
the Consolidated Financial Statements give a true and fair view of the assets, liabilities and financial position of the Group as at 31 December 2018 and of the Group’s profit for the year then ended;

the Company Statement of Financial Position gives a true and fair view of the assets, liabilities and financial position of the Company as at 31 December 2018;

the Consolidated Financial Statements have been properly prepared in accordance with IFRS as adopted by the European Union;

the Company Financial Statements have been properly prepared in accordance with IFRS as adopted by the European Union, as applied in accordance with the provisions of the Companies Act 2014; and

the Consolidated Financial Statements and Company Financial Statements have been properly prepared in accordance with the requirements of the Companies Act 2014 and, as regards the Group financial statements, Article 4 of the IAS Regulation.

Basis for opinion
We conducted our audit in accordance with International Standards on Auditing (Ireland) (ISAs (Ireland)) and applicable law. Our responsibilities under those standards are further described in the auditor's responsibilities for the audit of the financial statements section of our report. We have fulfilled our ethical responsibilities under, and we remained independent of the Company in accordance with ethical requirements that are relevant to our audit of financial statements in Ireland, including the Ethical Standard issued by the Irish Auditing and Accounting Supervisory Authority (IAASA), as applied to listed entities.
We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion.

Key audit matters: our assessment of risks of material misstatement
Key audit matters are those matters that, in our professional judgement, were of most significance in the audit of the financial statements and include the most significant assessed risks of material misstatement (whether or not due to fraud) identified by us, including those which had the greatest effect on: the overall audit strategy; the allocation of resources in the audit; and directing the efforts of the engagement team. These matters were addressed in the context of our audit of the financial statements as a whole, and in forming our opinion thereon, and we do not provide a separate opinion on these matters.






19







Independent Auditor’s Report to the members of ICON plc

In arriving at our audit opinion above, the key audit matter, in decreasing order of audit significance, was as follows:
Revenue Recognition
As described in note 1, significant accounting policies, and in note 2, segmental information, the Group’s revenues were US$2,596 million for the year ended 31 December 2018 (2017: US$2,402 million).
The key audit matter
How the matter was addressed in our audit
Significant management judgements and estimates are made in connection with the recognition of revenue, in particular clinical trial service revenue, in any accounting period. A clinical trial service contract, including services performed by third parties, represents a single performance obligation, satisfied over time. Clinical trial service revenue is recognised on a percentage of completion basis, as the single performance obligation is satisfied. The progress towards completion is measured based on an input measure, being total project costs (inclusive of third party costs) incurred at each reporting period as a percentage of total estimated project costs to completion.

We focussed on this area because measurement of the progress towards completion involves judgement and estimation. Assessment of completion requires an evaluation of labour and related time cost incurred, and third party costs incurred, at the reporting date. Given the typically long-term nature and complexity of clinical trials, the forecast costs to complete (being internal direct costs and costs that will be incurred by third parties (principally investigators)) is judgemental. Furthermore, judgement and estimation is involved in determining the transaction price, which is based on the total contract or change order value, adjusted to reflect the realisable contract value.

The Group adopted IFRS 15 Revenue from Contracts with Customers effective 1 January 2018. The most significant impact of the application of the new standard was on clinical trial service revenue.
Our audit procedures included, amongst others, testing the design and operating effectiveness of management’s key controls over the revenue recognition process, including, in particular, those controls over the measurement of the percentage of completion on clinical trials contracts and realisable contract values.
On a sample basis, we performed tests of detail over revenue recognised. We considered the terms of the applicable contracts and change orders. We recalculated the amounts and validated inputs to the revenue calculation including time, cost, estimated costs to complete and realisable contract values.
We enquired of key personnel, independent of the revenue team, to understand the stage of completion, time incurred and forecast time to complete studies, on sampled contracts, and we independently confirmed contractual terms and accounts receivable balances with a sample of customers.
We performed tests of detail over third party costs incurred by vouching to invoices, on a sample basis, as well as determining the completeness of the year-end accrual for third party (principally investigator) costs.
Our procedures in respect of this risk were performed as planned. We found that the estimates and judgements used in the recognition of revenue were appropriate.

Parent Company key audit matters
Due to the nature of the Parent Company’s activities, there are no key audit matters that we are required to communicate in accordance with ISAs (Ireland).
Our application of materiality and an overview of the scope of our audit
Materiality for the Group Financial Statements as a whole was set at US$17.5 million (2017: US$15.5 million). Materiality for the Company Financial Statements was set at US$8.0 million (2017: US$7.3 million).








20







Independent Auditor’s Report to the members of ICON plc

Our application of materiality and an overview of the scope of our audit (continued)
For the Group, materiality has been calculated as 5% of the benchmark of expected Group profit before tax (this estimated amount was based on earnings guidance available at the planning stage of the audit), which we have determined in our professional judgement, to be one of the principal benchmarks within the financial statements relevant to members of the Company in assessing the financial performance of the Group. For the Parent Company, materiality has been calculated based on 1% of the benchmark of total assets.
We report to the Audit Committee all corrected and uncorrected audit misstatements we identified through our audit in excess of US$875,000 (Group) and US$400,000 (Company), in addition to other audit misstatements below that threshold that we believe warranted reporting on qualitative grounds.
The structure of the Group’s finance function is such that the majority of transactions and balances are accounted for by the central Group finance team. We performed comprehensive audit procedures, including those in relation to the significant risk set out above, on those transactions accounted for at Group level. Our audit covered 98% of total Group revenue and 98% of total Group assets, including 100% of the Parent Company’s revenue and total assets.
All audit procedures were undertaken by the Group audit team.

We have nothing to report on going concern
We are required to report to you if we have concluded that the use of the going concern basis of accounting is inappropriate or there is an undisclosed material uncertainty that may cast significant doubt over the use of that basis for a period of at least twelve months from the date of approval of the financial statements. We have nothing to report in these respects.

Other information
The directors are responsible for the other information presented in the Annual Report together with the financial statements. The other information comprises the information included in the directors’ report. The financial statements and our auditor’s report thereon do not comprise part of the other information. Our opinion on the financial statements does not cover the other information and, accordingly, we do not express an audit opinion or, except as explicitly stated below, any form of assurance conclusion thereon.
Our responsibility is to read the other information and, in doing so, consider whether, based on our financial statements audit work, the information therein is materially misstated or inconsistent with the financial statements or our audit knowledge. Based solely on that work we have not identified material misstatements in the other information.
Based solely on our work on the other information, we report that, in those parts of the directors’ report specified for our consideration:
we have not identified material misstatements in the directors’ report;

in our opinion, the information given in the directors’ report is consistent with the financial statements;

in our opinion, the directors’ report has been prepared in accordance with the Companies Act 2014.

Our opinions on other matters prescribed by the Companies Act 2014 are unmodified
We have obtained all the information and explanations which we consider necessary for the purpose of our audit.
In our opinion, the accounting records of the Company were sufficient to permit the financial statements to be readily and properly audited and the Company’s financial statements are in agreement with the accounting records.



21







Independent Auditor’s Report to the members of ICON plc

We have nothing to report on other matters on which we are required to report by exception
The Companies Act 2014 requires us to report to you if, in our opinion, the disclosures of directors’ remuneration and transactions required by Sections 305 to 312 of the Act are not made.
The Companies Act 2014 also requires us to report to you if, in our opinion, the Company has not provided the information required by section 5(2) to (7) of the European Union (Disclosure of Non-Financial and Diversity Information by certain large undertakings and groups) Regulations 2017 for the year ended 31 December 2018 as required by the European Union (Disclosure of Non-Financial and Diversity Information by certain large undertakings and groups) (amendment) Regulations 2018.

Respective responsibilities and restrictions on use

Directors’ responsibilities
As explained more fully in their statement set out on page 18, the directors are responsible for: the preparation of the financial statements including being satisfied that they give a true and fair view; such internal control as they determine is necessary to enable the preparation of financial statements that are free from material misstatement, whether due to fraud or error; assessing the Company’s ability to continue as a going concern, disclosing, as applicable, matters related to going concern; and using the going concern basis of accounting unless they either intend to liquidate the Company or to cease operations, or have no realistic alternative but to do so.

Auditor’s responsibilities for the audit of the financial statements
Our objectives are to obtain reasonable assurance about whether the financial statements as a whole are free from material misstatement, whether due to fraud or error, and to issue an auditor’s report that includes our opinion. Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with ISAs (Ireland) will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of these financial statements.
A fuller description of our responsibilities is provided on IAASA’s website at https://www.iaasa.ie/getmedia/b2389013-1cf6-458b-9b8f-a98202dc9c3a/Description_of_auditors_responsiblities_for_audit.pdf.

The purpose of our audit work and to whom we owe our responsibilities
Our report is made solely to the Company’s members, as a body, in accordance with Section 391 of the Companies Act 2014. Our audit work has been undertaken so that we might state to the Company’s members those matters we are required to state to them in an auditor’s report and for no other purpose. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the Company and the Company’s members, as a body, for our audit work, for our report, or for the opinions we have formed.


Emer McGrath                                            30 April 2019
for and on behalf of
KPMG
Chartered Accountants, Statutory Audit Firm
1 Stokes Place
St. Stephen’s Green
Dublin 2
Ireland


22





Consolidated Statement of Profit and Loss
for the year ended 31 December 2018

 
 
31 December
2018

31 December
2018

31 December
2018

31 December
2017

31 December
2017

31 December
2017

 
 
Excluding
Exceptional items

(Note 8)
Exceptional items

Including
Exceptional items

Excluding
Exceptional items

(Note 8)
Exceptional items

Including
Exceptional items

Continuing Operations
Note

$’000

$’000

$’000

$’000

$’000

$’000

 
 
 
 
 
 
 
 
Revenue/Gross revenue
2

2,595,777


2,595,777

2,402,321


2,402,321

Reimbursable expenses
 



(643,882
)

(643,882
)
 
 
2,595,777


2,595,777

1,758,439


1,758,439

 
 
 
 
 
 
 
 
Direct costs
 
(1,816,270
)
(10,017
)
(1,826,287
)
(1,026,438
)
(5,038
)
(1,031,476
)
Other operating expenses



(389,899
)
(2,473
)
(392,372
)
(392,302
)
(2,715
)
(395,017
)
Operating profit



389,608

(12,490
)
377,118

339,699

(7,753
)
331,946

 
 
 
 
 
 
 
 
Financing income
4

4,759


4,759

8,346


8,346

Financing expense
5

(13,502
)

(13,502
)
(12,627
)

(12,627
)
 
 
 
 
 
 
 
 
Profit before taxation
3

380,865

(12,490
)
368,375

335,418

(7,753
)
327,665

Income tax expense
6

(47,011
)
1,453

(45,558
)
(55,690
)
969

(54,721
)
 
 
 
 
 
 
 
 
Profit for the financial year
 
333,854

(11,037
)
322,817

279,728

(6,784
)
272,944

 
 
 
 
 
 
 
 
Attributable to:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Owners of the Company

25

333,854

(11,037
)
322,817

279,728

(6,784
)
272,944

 
 
 
 
 
 
 
 
Earnings per ordinary share
 
 
 
 
 
 
 
Basic
7





5.96

 
 
5.04

 
 
 
 
 
 
 
 
Diluted
7





5.90

 
 
4.98


On behalf of the Board


Steve Cutler
Ronan Murphy
 
Chief Executive Officer
Director
 


23





Consolidated Statement of Comprehensive Income
for the year ended 31 December 2018

 
Note
31 December
2018

31 December
2017

 
 
$’000

$’000

 
 
 
 
Other Comprehensive Income
 
 
 
 
 
 
 
Items that will not be reclassified to profit or loss:
 
 
 
Re-measurement of defined benefit liability
10
2,640

(105
)
Tax benefit on defined benefit pension contributions
25

754

 
 
 
 
Total items that will not be reclassified to profit or loss
 
2,640

649

 
 
 
 
Items that are or may be reclassified subsequently to profit or loss, net of tax:
 
 
 
 
 
 
 
Currency translation differences
25
(26,522
)
33,966

 
 



Currency impact on long-term funding
25
(4,834
)
13,730

 
 




Unrealised capital loss on investments
25
(155
)
(272
)
 
 




Amortisation of interest rate hedge
25
(923
)
(923
)
 
 
 
 
Cash flow hedges - effective portion of changes in fair value
25
(1,036
)
1,036

 
 
 
 
 
 
 
 
Total items that are or may be reclassified to profit or loss
 
(33,470
)
47,537

 
 
 
 
Other comprehensive (loss)/gain for the year, net of tax
 
(30,830
)
48,186

 
 
 
 
Profit for the financial year
 
322,817

272,944

 
 
 
 
Total comprehensive income for the financial year
 
291,987

321,130

 
 
 
 
Attributable to:
 
 
 
Equity holders of the Company
 
291,987

321,130

 
 
 
 
Total comprehensive income for the financial year
 
291,987

321,130


On behalf of the Board

Steve Cutler
Ronan Murphy
 
Chief Executive Officer
Director
 

24





Consolidated Statement of Financial Position
as at 31 December 2018

 
Note

31 December
2018

31 December
2017

ASSETS
 
$’000

$’000

Non-current assets
 
 
 
Property, plant and equipment
12

103,710

105,100

Intangible assets – goodwill and other
13

879,283

912,646

Other non-current assets
17

20,778

22,364

Financial assets
18

6,963


Deferred tax assets
6

31,665

33,332

Total non-current assets
 
1,042,399

1,073,442

Current assets
 
 
 
Inventories
15

2,274

2,236

Accounts receivable
16

414,791

379,501

Unbilled revenue
 
362,926

268,509

Other current assets
17

68,734

58,957

Current taxes receivable
 
39,468

42,781

Current asset investments
18

59,910

77,589

Cash and cash equivalents
19

395,851

282,859

Total current assets
 
1,343,954

1,112,432

 
 
 
 
Total assets
 
2,386,353

2,185,874

 
 
 
 
EQUITY
 
 
 
Share capital
24

4,658

4,664

Share premium
 
283,629

266,852

Other undenominated capital
25

983

912

Share-based payment reserve
25

173,326

187,840

Other reserves
25

11,868

11,029

Foreign currency translation reserve
25

(67,469
)
(35,077
)
Current asset investments - fair value reserve
25

(450
)
(295
)
Retained earnings
25

979,834

794,331

Total equity attributable to the owners of the company
 
1,386,379

1,230,256

LIABILITIES
 
 
 
Non-current liabilities
 
 
 
Non-current bank credit lines and loan facilities
23

349,264

348,888

Non-current other liabilities
20

13,022

17,645

Non-current provisions
21

1,301

432

Deferred tax liabilities
6

8,213

7,716

Total non-current liabilities
 
371,800

374,681

Current liabilities
 
 
 
Accounts payable
 
13,288

18,590

Payments on account
 
274,468

298,992

Accrued and other liabilities
20

309,943

230,321

Provisions
21

7,200

3,182

Current tax payable
 
23,275

29,852

Total current liabilities
 
628,174

580,937

 
 
 
 
Total liabilities
 
999,974

955,618

 
 
 
 
Total equity and liabilities
 
2,386,353

2,185,874


On behalf of the Board
Steve Cutler
Ronan Murphy
 
Chief Executive Officer
Director
 

25





Consolidated Statement of Changes in Equity
for the year ended 31 December 2018

 
 
Number
of shares

Share
Capital

Share
Premium

Other
Undenominated
Capital

Share-based
Payment Reserve

Other
Reserves

Currency
Reserve

Financial assets at fair value through other comprehensive income reserve


Retained
Earnings

Total

 
 
 
$’000

$’000

$’000

$’000

$’000

$’000

$’000

$’000

$’000

 
Balance at 31 December 2017
54,081,601

4,664

266,852

912

187,840

11,029

(35,077
)
(295
)
794,331

1,230,256

 
 
Cumulative effect adjustment from adoption of IFRS 15








(48,104
)
(48,104
)
 
Balance at 1 January 2018
54,081,601

4,664

266,852

912

187,840

11,029

(35,077
)
(295
)
746,227

1,182,152

 
Profit for the year








322,817

322,817

 
Other Comprehensive Income:
 
 
 
 
 
 
 
 
 


 
Foreign currency translation






(26,522
)


(26,522
)
 
Currency impact on long-term funding






(4,834
)


(4,834
)
 
Cash flow hedge






(1,036
)


(1,036
)
 
Unrealised fair value movements on investments







(155
)

(155
)
 
Re-measurement of defined benefit liability








2,640

2,640

 
Tax benefit on defined benefit pension contributions










 
Amortisation of interest rate hedge





(923
)



(923
)
 
Total other comprehensive income





(923
)
(32,392
)
(155
)
2,640

(30,830
)
 
Total comprehensive income for the year





(923
)
(32,392
)
(155
)
325,457

291,987

 
Transactions with owners, recorded directly in equity
 
 
 
 
 
 
 
 
 
 
 
Share-based payment




28,009





28,009

 
Exercise of share options
408,699

29

16,777







16,806

 
Transfer of exercised and expired  share–based awards  




(38,954
)



38,954


 
Issue of restricted share units/ performance share units
489,568

36








36

 
Share issue costs








(16
)
(16
)
 
Repurchase of ordinary shares
(1,008,162
)
(71
)

71





(128,960
)
(128,960
)
 
Share repurchase costs








(66
)
(66
)
 
Tax benefit excess on exercise of options




4,626





4,626

 
Deferred tax movement on unexercised options




(8,195
)




(8,195
)
 
Non-distributable reserves





1,762



(1,762
)

 
Total contributions by and distributions to owners
(109,895
)
(6
)
16,777

71

(14,514
)
1,762



(91,850
)
(87,760
)
 
Balance at 31 December 2018
53,971,706

4,658

283,629

983

173,326

11,868

(67,469
)
(450
)
979,834

1,386,379


26





Consolidated Statement of Changes in Equity
for the year ended 31 December 2017

 
Number
of shares

Share
Capital

Share
Premium

Other
Undenominated
Capital

Share-based
Payment Reserve

Other
Reserves

Currency
Reserve

Current Asset Investment
Fair value
Reserve

Retained
Earnings

Total

 
 
$’000

$’000

$’000

$’000

$’000

$’000

$’000

$’000

$’000

Balance at 1 January 2017
54,530,843

4,692

252,977

809

141,890

10,348

(83,809
)
(23
)
650,583

977,467

Total comprehensive income for the year:
 
 
 
 
 
 
 
 
 
 
Profit for the year








272,944

272,944

Other Comprehensive Income:
 
 
 
 
 
 
 
 
 
 
Foreign currency translation







33,966



33,966

Currency impact on long-term funding






13,730



13,730

Cash flow hedge






1,036



1,036

Unrealised fair value movements on investments







(272
)

(272
)
Re-measurement of defined benefit liability








(105
)
(105
)
Tax Benefit on defined benefit pension contributions





754




754

Amortisation of interest rate hedge





(923
)



(923
)
Total other comprehensive income





(169
)
48,732

(272
)
(105
)
48,186

Total comprehensive income for the year





(169
)
48,732

(272
)
272,839

321,130

Transactions with owners, recorded directly in equity
 
 
 
 
 
 
 
 
 
 
Share-based payment




29,898





29,898

Exercise of share options
458,243

31

13,875







13,906

Transfer of exercised and expired  share–based awards




(4,986
)



4,986


Issue of restricted share units/ performance share units
681,742

44








44

Share issue costs








(15
)
(15
)
Repurchase of ordinary shares
(1,589,227
)
(103
)

103





(133,106
)
(133,106
)
Share repurchase costs








(106
)
(106
)
Tax benefit excess on exercise of options




14,196





14,196

Deferred tax movement on unexercised options




6,842





6,842

Non-distributable reserves





850



(850
)

Total contributions by and distributions to owners
(449,242
)
(28
)
13,875

103

45,950

850



(129,091
)
(68,341
)
Balance at 31 December 2017
54,081,601

4,664

266,852

912

187,840

11,029

(35,077
)
(295
)
794,331

1,230,256

Further details of the reserves above are detailed in note 25

27





Consolidated Statement of Cash Flows
for the year ended 31 December 2018

 
Note
Year ended
31 December
2018

Year ended
31 December
2017

 
 
$’000

$’000

Profit for the financial year
 
322,817

272,944

Adjustments to reconcile net income to net cash generated from operating activities
 




Loss on disposal of property, plant and equipment
 
70

228

Depreciation
12
19,996

19,876

Amortisation of intangible assets
13
45,920

41,421

Amortisation of grants
22
(47
)
(44
)
Interest on short term investments
18
(1,329
)
(1,088
)
Realised gain on sale of current asset investments
18
(56
)
(112
)
Gain on re-measurement of long-term financial assets
18
(800
)

Amortisation of gain on interest rate hedge
5
(923
)
(923
)
Amortisation of deferred financing costs
5
812

556

Share based payment
11
28,059

31,120

Financing income
4
(4,759
)
(2,346
)
Financing expense
5
13,613

12,627

Defined benefit pension service costs
10
263

355

Defined benefit pension finance costs
10
137

181

Defined benefit past service cost
10
(8
)

Defined benefit expenses
10

(8
)
Income tax expense
6
45,558

54,721

Operating cash inflow before changes in working capital
 
469,323

429,508

(Increase)/decrease in accounts receivable
 
(37,557
)
57,747

Increase in unbilled revenue
 
(98,510
)
(62,491
)
Decrease in other current assets
 
342

5,947

Decrease/(increase) in other non current assets
 
856

(1,524
)
(Increase)/decrease in inventory
 
(38
)
183

(Decrease)/increase in accounts payable
 
(5,067
)
7,014

Decrease in payments on account
 
(6,253
)
(7,174
)
Decrease in accrued and other liabilities and provisions
 
(29,613
)
(21,169
)
Decrease in non current other liabilities and provisions
 
(1,813
)
(4,657
)
Cash provided by operations
 
291,670

403,384

Income taxes paid
 
(18,558
)
(12,305
)
Employer contribution defined benefit pension scheme
10
(263
)
(4,165
)
Interest received
 
4,224

1,743

Interest paid
 
(13,060
)
(13,094
)
Net cash inflow from operating activities
 
264,013

375,563

Investing activities
 




Purchase of property, plant and equipment
 
(20,760
)
(19,798
)
Purchase of intangible assets
 
(27,637
)
(24,919
)
Purchase of subsidiary undertakings
 
(1,645
)
(144,131
)
Cash acquired with subsidiary undertakings
 

19,649

Sale/maturity of current asset investments
 
99,865

33,086

Purchase of current asset investments
 
(80,956
)
(41,701
)
Purchase of investments in equity - long term

(6,163
)

Net cash used in investing activities
 
(37,296
)
(177,814
)
Financing activities
 




Financing costs
 
(823
)

Tax benefit from the exercise of share options
 
4,626

7,519

Proceeds from exercise of share options, RSUs and PSUs
 
16,842

13,950

Share issuance costs
 
(16
)
(15
)
Repurchase of ordinary shares
 
(128,960
)
(133,106
)
Share repurchase costs
 
(66
)
(106
)
Net cash used in financing activities
 
(108,397
)
(111,758
)
Net increase in cash and cash equivalents
 
118,320

85,991

Effect of exchange rate changes
 
(5,328
)
4,327

Cash and cash equivalents at start of year
 
282,859

192,541

Cash and cash equivalents at end of year
 
395,851

282,859


28






Notes to Consolidated Financial Statements
for the year ended 31 December 2018



1.
Basis of preparation and statement of accounting policies

Statement of compliance

The Group Financial Statements have been prepared in accordance with International Financial Reporting Standards ("IFRS") issued by the International Accounting Standards Board (“IASB”) as adopted by the European Union ("EU") that are effective for financial year ending 31 December 2018. The Company Financial Statements have been prepared in accordance with IFRS as adopted by the EU and those parts of the Companies Act 2014 applicable to companies reporting under IFRS. IFRS adopted by the EU differs in certain respects from IFRS issued by the IASB. Reference to the IFRS hereafter refers to IFRS adopted by the EU. A Company that publishes its Group and Company Financial Statements together, can take advantage of the exemption in Section 304 of the Companies Act 2014 from presenting to its members a Company Statement of Profit and Loss and Company Statement of Comprehensive Income and related notes.
 
Basis of preparation

The Group and Company Financial Statements are presented in United States dollars ("U.S. dollars") and all values are rounded to the nearest thousand ($‘000), except where otherwise indicated. They are prepared on the historical cost basis, except for the measurement at fair value on date of grant of share options, the pension plan assets, other investments and financial assets. Other than the new and amended standard adopted by the group, accounting policies are applied consistently with the prior year.

New and amended standards adopted by the group

The Group has applied the following standards and amendments for the first time for the annual reporting period commencing 1 January 2018:

IFRS 9 Financial instruments
IFRS 15 Revenue from Contracts with Customers
Classification and Measurement of Share-based Payment Transactions - Amendments to IFRS 2
Annual improvements 2014-2016 cycle
Interpretation 22 Foreign Currency Transactions and Advance Consideration.

The Group changed its accounting policies following the adoption of IFRS 9 and IFRS 15. Certain adjustments were made following the adoption of IFRS 15. The impact of these changes are disclosed in note 34 Impact of New Accounting Policy. The other amendments (including IFRS 9) listed did not have any impact on the amounts recognised in prior periods or the current period. See the section following for accounting policies applied for these areas in the year ended 31 December 2018 (IFRS 15 and IFRS 9) and accounting policies applied in the years ended 31 December 2017 and previously.

Key accounting policies which involve significant estimates and judgements

The preparation of Consolidated Financial Statements requires management to make estimates and judgements that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reported period.

Estimates and judgements are based on historical experience and on other factors that are reasonable under current circumstances. Actual results may differ from these estimates if these assumptions prove to be incorrect or if conditions develop other than as assumed for the purposes of such estimates. The following are the critical areas requiring estimates and judgements by management.

Revenue Recognition

The Company primarily earns revenues by providing a number of different services to its customers. These services, which are integral elements of the clinical development process, include clinical trials management, consulting, contract staffing, and laboratory services. Contracts range in duration from a number of months to several years.

29




Notes to Consolidated Financial Statements (continued)
for the year ended 31 December 2018

1.
Basis of preparation and statement of accounting policies (continued)



IFRS 15 - Revenue from Contracts with Customers (year-ended December 31, 2018)

ICON adopted IFRS 15 using the cumulative effect transition method. Under this transition method, ICON has applied the new standard as at the date of initial application (i.e. 1 January 2018), without restatement of comparative amounts. The cumulative effect of initially applying the new standard (to revenue, costs and tax) is recorded as an adjustment to the opening balance of equity at the date of initial application. The comparative information has not been adjusted and therefore continues to be reported in accordance with previous accounting policies. See note 34 Impact of change in accounting policies for details of the impact of adoption of the new accounting policy. The new standard requires application of five steps: (1) identify the contract(s) with a customer; (2) identify the performance obligation in the contract; (3) determine the transaction price; (4) allocate the transaction price to the performance obligations in the contract; and (5) recognise revenue when (or as) the entity satisfies the performance obligation.
Clinical trial service revenue
The most significant impact of application of the standard relates to our assessment of performance obligations and percentage of completion in respect of our clinical trial service revenue. Prior to application of IFRS 15, the revenue attributable to performance was determined based on both input and output methods of measurement on a percentage of completion basis. We have concluded that under the new standard, a clinical trial service is a single performance obligation satisfied over time i.e. the full service obligation in respect of a clinical trial (including those services performed by investigators and other parties) is considered a single performance obligation. Promises offered to the customer are not distinct within the context of the contract. We have concluded that ICON is the contract principal in respect of both direct services and in the use of third parties (principally investigator services) that support the clinical research project. The transaction price is determined by reference to the contract or change order value (total service revenue and pass-through/reimbursable expenses) adjusted downwards to reflect a realisable contract value. Revenue is recognised as the single performance obligation is satisfied. The progress towards completion for clinical service contracts is measured based on an input measure being project costs incurred as a proportion of total project costs (inclusive of third party costs) at each reporting period.
Contracting services revenue

On evaluation of the principles at (1) - (5) set-out above in respect of IFRS 15, the Company has availed of the practical expedient which results in recognition of revenue on a right to invoice basis. Application of the practical expedient reflects the right to consideration from the customer in an amount that corresponds directly with the value to the customer of the performance completion to date. This reflects hours performed by contract staff.

Consulting services revenue

On application of the IFRS 15 principles at (1) - (5) set-out above, we have concluded that our consulting services contracts represent a single performance obligation satisfied over time. The transaction price is determined by reference to contract or change order value. Revenue is recognised as the performance obligation is satisfied. The progress towards completion for consulting contracts is measured based on total project inputs (time) at each reporting period.

Laboratory services revenue

Revenue is recognised when, or as, obligations under the terms of a contract are satisfied, which occurs when control of the products or services are transferred to the customer. Revenue for laboratory services is measured as the amount of consideration we expect to receive in exchange for transferring products or services. Where contracts with customers contain multiple performance obligations, the transaction price is allocated to each performance obligation based on the estimated relative selling price of the promised good or service. Service revenue is recognised over time as the services are delivered to the customer based on the extent of progress towards completion of the performance obligation. The determination of the methodology to measure progress requires judgement and is based on the nature of services provided. This requires an assessment of the transfer of value to the customer. The right to invoice measure of progress is generally related to rate per unit contracts, as the extent of progress towards completion is measured based on discrete service or time-based increments, such as samples tested or labour hours incurred. Revenue is recorded in the amount invoiced since that amounts corresponds to the value of the Company's performance and the transfer of value to the customer.


30




Notes to Consolidated Financial Statements (continued)
for the year ended 31 December 2018

1.
Basis of preparation and statement of accounting policies (continued)


Revenue recognition (years ended 31 December 2017 and previously)
Revenue for services, as rendered, is recognised only after persuasive evidence of an arrangement exists, the sales price is fixed or determinable and collectability is reasonably assured.

Clinical trials management revenue is recognised on a proportional performance method. Depending on the contractual terms revenue is either recognised on the percentage of completion method based on the relationship between hours incurred and the total estimated hours of the trial or on the unit of delivery method. Contract costs equate to the product of labour hours incurred and compensation rates. For the percentage of completion method, the input (effort expended) method has been used to measure progress towards completion as there is a direct relationship between input and productivity. Contract revenue is the product of the aggregated labour hours required to complete the specified contract tasks at the agreed contract rates. The Company regularly reviews the estimate of total contract time to ensure such estimates remain appropriate taking into account actual contract stage of completion, remaining time to complete and any identified changes to the contract scope. Remaining time to complete depends on the specific contract tasks, the complexity of the contract and can include geographical site selection and initiation, patient enrolment, patient testing and level of results analysis required. While the Company may routinely adjust time estimates, the Company's estimates and assumptions historically have been accurate in all material respects in the aggregate. Where revenue is recognised on the unit of delivery method, the basis applied is the number of units completed as a percentage of the total number of contractual units.

Consulting revenue is recognised on a fee-for-service basis as each hour of the related service is performed.

Contract staffing revenue is recognised on a fee-for-service basis, over the time the related service is performed, or in the case of permanent placement, once the candidate has been placed with the client.

Laboratory service revenue is recognised on a fee-for-service basis. The Company accounts for laboratory service contracts as multiple element arrangements, with contractual elements comprising laboratory kits and laboratory testing, each of which can be sold separately. Sales prices for contractual elements are determined by reference to objective and reliable evidence of their sales price. Revenues for contractual elements are recognised on the basis of the number of deliverable units completed in the period.

Informatics revenue is recognised on a fee-for-service basis. Informatics contracts are treated as multiple element arrangements, with contractual elements comprising license fee revenue, support fee revenue and revenue from software services, each of which can be sold separately. Sales prices for contractual elements are determined by reference to objective and reliable evidence of their sales price.

License and support fee revenues are recognised rateably over the period of the related agreement. Revenue from software services is recognised using the percentage of completion method based on the relationship between hours incurred and the total estimated hours required to perform the service.

Contracts generally contain provisions for renegotiation in the event of changes in the scope, nature, duration, or volume of services of the contract. Renegotiated amounts are recognised as revenue by revision to the total contract value arising as a result of an authorised customer change order.


Third party costs (Reimbursable expenses)

Reimbursable expenses comprise investigator payments and certain other costs which are reimbursed by clients under terms specific to each contract to the investigators. Third party costs (reimbursable expenses) and the related revenue were separately presented on the face of the Consolidated Statement of Operations for periods up to and including the year-ended 31 December 2017.

IFRS 9 (year-ended 31 December 2018)

IFRS 9 - Financial Instruments replaces IAS 39 Financial instruments: Recognition and Measurement effective from 1 January 2018. It addresses the classification, measurement and de-recognition of financial assets and financial liabilities, introduces

31




Notes to Consolidated Financial Statements (continued)
for the year ended 31 December 2018

1.
Basis of preparation and statement of accounting policies (continued)


a new impairment model for financial assets and new rules for hedge accounting. Adoption of IFRS 9 did not have any impact on the amounts recognised in prior periods or the current period. See note 34 Impact of change in accounting policies.

The Group assessed the business models and contractual cash flows which apply to its financial assets and classified the assets into the appropriate IFRS 9 categories accordingly.

Financial asset category
Classification and measurement under IAS 39
Classification and measurement under IFRS 9
Classification test outcomes
Cash and cash equivalents
Loans and receivables at fair value (initial recognition) followed by amortised cost (subsequent measurement).
Financial assets at fair value (initial recognition) followed by amortised cost net of impairments (subsequent measurement).
Business model test result: hold to collect contractual cash flows. Cash flow characteristics test result: solely payments of principal and interest.
Trade receivables
 
Current asset investments
Short-term financial investments at fair value through OCI
Short-term financial assets at fair value (initial recognition) either through OCI or profit or loss
 
Non-current financial assets
Long-term financial assets at fair value through profit or loss
Long-term financial assets at fair value through profit or loss
 
Contingent consideration
Fair value through profit or loss.
Fair value through profit or loss.
Business model test result: hold to collect contractual cash flows. Cash flow characteristics test result: potential variability in future payments results in changes to fair value.

As outlined above, the classification requirements under IFRS 9 did not impact the measurement or carrying amount of financial assets at 1 January 2018. See note 34 Impact of change in accounting policies.

(a)    Cash and cash equivalents (IFRS 9 - year ended 31 December 2018, IAS 39 - years ended 31 December 2017 and previously )

Cash and cash equivalents include cash and highly liquid investments with original maturities of three months or less and are stated at fair value on initial recognition followed by amortised cost, which approximates fair value. This classification is applied under both IFRS 9 and IAS 39.

(b)    Trade receivables

IFRS 9 - year ended 31 December 2018

The Group's financial assets measured at amortised cost, the most significant of which are trade receivables and unbilled receivables, are subject to IFRS 9's new expected credit loss model. The Group's impairment methodology has been revised in line with the requirements of IFRS 9.

32




Notes to Consolidated Financial Statements (continued)
for the year ended 31 December 2018

1.
Basis of preparation and statement of accounting policies (continued)



For trade receivables and unbilled revenue, the Group applies the simplified approach permitted by IFRS 9, which requires expected lifetime losses to be recognised from initial recognition of the receivables. See notes 16, 26 and 34 for further details. As part of the IFRS 9 transition, the Group assessed its existing trade and unbilled receivables for impairment, using reasonable and supportable information that is available without undue cost or effort, to determine the credit risk of the receivables at the date on which they were initially recognised and compared that to the credit risk as at 1 January 2018. This assessment has not resulted in a material adjustment to trade and unbilled receivables. See note 34 Impact of change in accounting policies.
 
IAS 39 - years ended 31 December 2017 and previously

Under IAS 39, impairment of trade receivables was assessed based on the incurred loss model. Individual receivables which were known to be uncollectible were written off by reducing the carrying amount directly. The other receivables were assessed collectively to determine whether there was objective evidence that an impairment had been incurred but not yet identified. The estimated impairment losses were recognised as a provision for impairment. Receivables were written off against the provision when there was no expectation of recovering cash.

(c)    Current asset investments and non-current financial assets

IFRS 9 - year ended 31 December 2018

From 1 January 2018, the Group classifies its financial assets in the following measurement categories:
those to be measured subsequently at fair value through OCI
those to be measured subsequently at fair value through profit or loss and
those to be measured at amortised cost.

The classification depends on the entity's business model for managing financial assets and the contractual terms of the cash flows.

At initial recognition, the Group measures a financial asset at its fair value plus, in the case of a financial asset not at fair value through profit or loss (FVPL), transaction costs that are directly attributable to the acquisition of the financial asset. Transaction costs of financial assets carried at FVPL are expensed in profit or loss.

For assets measured at fair value, gains and losses will either be recorded in profit or loss or OCI. For investments in equity instruments that are not held for trading, this will depend on whether the Group has made an irrevocable election at the time of initial recognition to account for the equity investment at fair value through other comprehensive income (FVOCI). The Group reclassifies debt investments when and only when its business model for managing those assets changes.

Purchases or sales of financial assets are recognised on trade date, the date the Group commits to purchase or sell the asset. Financial assets are de-recognised when the rights to receive cash flows from the financial assets have expired or have been transferred and the group has transferred substantially all the risks and rewards of ownership.

Subsequent measurement of debt instruments depends on the Group's business model for managing the asset and the cash flow characteristics of the asset.

There are three measurement categories into which the Group classifies its financial instruments:

Amortised cost: Assets that are held for collection of contractual cash flows where those cash flows represent solely payments of principal and interest are measured at amortised cost. Interest income from these financial assets is included in finance income using the effective interest rate method. Any gain or loss arising on derecognition is recognised directly in profit or loss and presented in other gains/(losses) together with foreign exchange gains and losses.

FVOCI: Assets that are held for collection of contractual cash flows and for selling the financial assets, where the assets' cash flows represent solely payments of principal and interest, are measured at FVOCI. Movements in the

33




Notes to Consolidated Financial Statements (continued)
for the year ended 31 December 2018

1.
Basis of preparation and statement of accounting policies (continued)


carrying amount are taken through OCI, except for the recognition of impairment gains or loss. When the financial asset is derecognised, the cumulative gain or loss previously recognised in OCI is reclassified from equity to profit or loss and recognised in other gains/(losses). Interest income from these financial assets is included in finance income using the effective interest rate method.

FVPL: Assets that do not meet the criteria for amortised cost or FVOCI are measured at FVPL. A gain or loss on a debt investment that is subsequently measured at FPL is recognised in profit or loss.

From 1 January 2018, the Group assesses on a forward looking basis the expected credit losses associated with its debt instruments carried at amortised cost and FVOCI. The impairment methodology applied depends on whether there has been a significant increase in credit risk.

IAS 39 - years ended 31 December 2017 and previously

Until 31 December 2017, the Group classified financial assets in the following categories;

financial assets at fair value through profit or loss, (none existed at 31 December 2017)
loans and receivables,
held-to-maturity investments, and
available-for-sale financial assets (current asset investments) .

The classification depended on the purpose for which the investments were acquired. The Group determined the classification of its investments at initial recognition and, in the case of assets classified as held-to-maturity, re-evaluated this designation at the end of each reporting period.

The measurement at initial recognition did not change on adoption of IFRS 9, see description above. Subsequent to the initial recognition, loans and receivables were carried at amortised cost.

(d)    Interest bearing loans and borrowings

IFRS 9 - year ended 31 December 2018

Borrowings are initially recognised at fair value, net of transaction costs incurred. Borrowings are subsequently measured at amortised costs. Subsequent to initial recognition, current and non-current interest bearing loans and borrowings are measured at amortised cost with any difference between cost and redemption value being recognised in the Consolidated Statement of Profit and Loss over the period of the borrowings on an effective interest basis. Fees paid on the establishment of loan facilities are recognised as transaction costs of the loan to the extent that it is probable that some or all of the facility will be drawn down. In this case, the fee is deferred until draw down will occur. Where there is no evidence that it is probable that some or all of the facility will be drawn down, the fee is capitalised as a prepayment and amortised over the period of the facility to which it relates.

Borrowings are classified as current liabilities unless the Group has an unconditional right to defer settlement of the liability for at least 12 months after the reporting date.

Borrowings are removed from the balance sheet when the obligation specified in the contract is discharged, cancelled or expired. The difference between the carrying amount of a financial liability that has been extinguished or transferred to another party and the consideration paid, including any non-cash assets transferred or liabilities assumed, is recognised in profit or loss as other income or finance costs.

(e)    Hedge accounting

IFRS 9 - year ended 31 December 2018

The Group's hedge relationships at 1 January 2018 qualify as continuing hedges on the adoption of IFRS 9. As a result, there has not been an impact to the financial position of the Group as a result of adopting IFRS 9.

34




Notes to Consolidated Financial Statements (continued)
for the year ended 31 December 2018

1.
Basis of preparation and statement of accounting policies (continued)


Derivative financial instruments and hedging

Derivatives are initially recognised at fair value on the date a derivative contract is entered into and are subsequently remeasured to their fair value at the end of each reporting period. The accounting for subsequent changes in fair value depends on whether the derivative is designated as a hedging instrument, and if so, the nature of the item being hedged. The Group designates certain derivatives as either:

hedges of the fair value of recognised assets or liabilities or a firm commitment (fair value hedges)
hedges of a particular risk associated with the cash flows of recognised assets and liabilities and highly probable forecast transactions (cash flow hedges), or
hedges of a net investment in a foreign operation (net investment hedges).

At inception of the hedge relationship, the Group documents the economic relationship between hedging instruments and hedged items including whether changes in the cash flows of the hedging instruments are expected to offset changes in the cash flows of hedged items. The Group documents its risk management objective and strategy for undertaking its hedge transactions.

The fair value of derivative financial instruments designated in hedge relationships are disclosed in note 26. Movements in the hedging reserve in shareholders' equity are shown in shareholders' equity. The full fair value of a hedging derivative is classified as a non-current asset or liability when the remaining maturity of the hedged item is more than 12 months. It is classified as a current asset or liability when the remaining maturity of the hedged item is less than 12 months.

Cash flow hedges that qualify for hedge accounting

The effective portion of changes in the fair value of derivatives that are designated and qualify as cash flow hedges is recognised in the cash flow hedge reserve within equity. The gain or loss relating to the ineffective portion is recognised immediately in profit or loss, within other gains/(losses).

Gains or losses relating to the effective portion of the change in intrinsic value of the options are recognised in the cash flow hedge reserve within equity. The changes in the time value of the options that relate to the hedged item are recognised within OCI in the costs of hedging reserve within equity.

When a hedging instrument expires or is sold or terminated, or when a hedge no longer meets the criteria for hedge accounting, any cumulative deferred gain or loss and deferred costs of hedging in equity at that time remains in equity until the forecast transaction occurs.

Changes in the fair value of any derivative instrument that does not qualify for hedge accounting are recognised immediately in profit or loss.

There were no open derivative transactions at 31 December 2018.

In October 2015, the Group entered into an interest rate hedge in respect of the planned issuance of the Senior Notes in December 2015. The interest rate hedge matured in November 2015 when the interest rate on the Senior Notes was fixed. The interest rate hedge was considered an effective hedge on application of the provisions of IAS 39 and continues to be considered effective on application of the provisions of IFRS 9. The cash proceeds, representing the realised gain on the interest rate hedge were received on maturity in November 2015. The gain, representing the instrument’s fair value at maturity was recorded in Other Comprehensive Income and is being amortised to the Consolidated Statement of Profit and Loss over the term of the Senior Notes.





35




Notes to Consolidated Financial Statements (continued)
for the year ended 31 December 2018

1.
Basis of preparation and statement of accounting policies (continued)


IAS 39 - years ended 31 December 2017 and previously

For the purposes of hedge accounting, hedges are designated either as fair value hedges (which hedge the exposure to movements in the fair value of recognised assets or liabilities or firm commitments that are attributable to hedge risks) or cash flow hedges (which hedge exposures to fluctuations in future cash flows derived from a particular risk associated with recognised assets or liabilities or highly probable forecast transactions).

On entering into a hedging instrument, the Group documents, at inception of the transaction, the relationship between the hedging instrument and the hedged item, as well as its risk management objectives and strategy for undertaking the hedging transaction.

The Group also documents its assessment, at the inception of the hedge transaction, whether the derivative used is highly effective in offsetting the change in fair value or cash flows of the hedged item.

Derivative financial instruments are recognised at fair value. Where a derivative financial instrument is designated as a hedge of a highly probable forecasted transaction, the effective part of changes in the fair value of the derivative financial instrument is recognised directly in the Consolidated Statement of Comprehensive Income. The associated cumulative gain or loss is removed from other comprehensive income and recognised in the Consolidated Statement of Profit and Loss in the same period or periods during which the hedged item affects profit or loss. The ineffective part of any gain or loss is recognised immediately in the Consolidated Statement of Profit and Loss.

Some of the Group's operational costs are settled in foreign currencies. In order to manage its exposure to changes in Euro exchange rates, the Group hedges part of its monthly forecasted Euro denominated cash outflows for operating costs using foreign currency forward contracts. During the years ended 31 December 2017 and 31 December 2018, the Group entered into forward currency contracts in respect of identified exposure arising from euro payments. All contracts expired during the year ended 31 December 2018.

(f)    Investments in subsidiaries - Company

IFRS 9 - year ended 31 December 2018

Investments in subsidiary undertakings are stated at cost less any accumulated impairment and are reviewed for impairment if there are indicators that the carrying value may not be recoverable.

Intercompany loans receivable and payable are initially recognised at fair value. These are subsequently measured at amortised cost, less any loss allowance.


IAS 39 - years ended 31 December 2017 and previously
 
Investments in subsidiary undertakings are stated at cost less provision for impairment in the Company’s Statement of Financial Position. Loans to subsidiary undertakings which are deemed long term investments in nature are initially recorded at fair value in the Company Statement of Financial Position and subsequently at amortised cost using an effective interest rate methodology.

New and amended standards and interpretations effective after 2018

Certain new accounting standards and interpretations have been published that are not mandatory for 31 December 2018 reporting periods and have not been early adopted by the Group. The Group's assessment of the impact of these new standards and interpretations is set out below.






36




Notes to Consolidated Financial Statements (continued)
for the year ended 31 December 2018

1.
Basis of preparation and statement of accounting policies (continued)


Leases

IFRS 16, Leases issued in January 2018 by the IASB replaces IAS 17 Leases and related interpretations. IFRS 16 sets out the principles for the recognition, measurement, presentation and disclosure of leases for both the lessee and the lessor. For lessees, IFRS 16 eliminates the classification of leases as either operating leases or finance leases and introduces a single lessee accounting model whereby all leases are accounted for as finance leases, with some exemptions. For lessors, IFRS 16 substantially carried forward the accounting requirement in IAS 17. IFRS 16 is effective for annual periods beginning on or after 1 January 2019. The Group will apply IFRS 16 from the effective date. See note 28 Commitments and contingencies for details of operating leases held during year ended 31 December 2018. A lease liability and right-of-use asset will be recorded on the Consolidated Statement of Financial Position at 1 January 2019. We estimate the impact of adoption of IFRS 16 will be the recognition of a right-of-use asset and of lease liabilities in the range of $100 million to $110 million. Under the new standard we expect an insignificant change in net result due to the replacement of operating leases expenses with amortisation of the lease asset and the interest expense.

Other changes to IFRS have been issued; however, they are either not expected to have a material effect on the Consolidated Financial Statements or they are not currently relevant for the Group.

Accounting policies

The following accounting policies have been applied consistently in dealing with items which are considered material in relation to the Group’s Financial Statements.

Basis of consolidation

The Group Financial Statements consolidate the financial statements of ICON plc and its subsidiaries. Subsidiaries are consolidated from the date on which control is transferred to the Group and cease to be consolidated from the date on which control is transferred out of the Group. The Group controls an entity when it is exposed to, or has rights to, variable returns from its involvement with the entity and has the ability to affect those returns through its power over the entity. Financial statements of subsidiaries are prepared for the same reporting year as the Company and where necessary, adjustments are made to the results of subsidiaries to bring their accounting policies into line with those used by the Group. The Group will continue to prepare the individual statutory financial statements of subsidiary companies under GAAP applicable in their country of incorporation but adjustments have been made to the results and financial position of such companies to bring their accounting policies into line with those of the Group.

All intercompany balances and transactions, including unrealised profits arising from inter-group transactions, have been eliminated in full. Unrealised losses are eliminated in the same manner as unrealised gains except to the extent that there is evidence of impairment.

Foreign currency translation

The presentation and functional currency of the Group and Company is US dollars ($). The determination of the USD as the functional currency of the Company reflects consideration of the primary and secondary indicators as set out in IAS 21.  The directors considered in particular the currency in which funds from financing activities are generated (debt and equity) and the currency in which receipts from operating activities are usually retained. This assessment is consistent with the assessment that the functional currencies of the main subsidiary trading entities are USD. The change in functional currency was accounted for prospectively from the date of change.  All items were translated using the exchange rate at the date of change and the resulting translated amounts for non-monetary items were recorded at their historical cost from 1 August 2015. The Company Financial Statements continue to be presented in US dollars.  Results and cash flows of non-dollar denominated undertakings are translated into dollars at the actual exchange rates at the transaction dates or average exchange rates for the year where this is a reasonable approximation.

The related statements of financial position are translated at the rates of exchange ruling at the reporting date. Goodwill and fair value adjustments arising on acquisition of a foreign operation are regarded as assets and liabilities of the foreign operation, are expressed in the functional currency of the foreign operation and are recorded at the exchange rate at the date of the transaction, and subsequently retranslated at the applicable closing rates. Adjustments arising on translation of the results of

37




Notes to Consolidated Financial Statements (continued)
for the year ended 31 December 2018

1.
Basis of preparation and statement of accounting policies (continued)


non-dollar undertakings at average rates, and on the restatement of the opening net assets at closing rates, are dealt with in a separate translation reserve within equity.

Transactions in currencies different to the functional currencies of operations are recorded at the rate of exchange ruling at the date of the transaction. Monetary assets and liabilities denominated in foreign currencies are retranslated into the functional currency at the rate of exchange at the reporting date. All translation differences, with the exception of translation differences on long term intercompany balances in the Consolidated Financial Statements where repayment is not foreseen, are taken to the Consolidated Statement of Profit and Loss. Translation differences on long term intercompany balances, in the Consolidated Financial Statements, where repayment is not foreseen are treated as other comprehensive income in the Statement of Comprehensive Income.


The principal exchange rates used for the translation of results, cash flows and statements of financial position into US dollars were as follows:
 
Average
Year end
 
31 December 2018
31 December 2017
31 December 2018
31 December 2017
 
 
 
 
 
Euro 1:$
1.1846
1.1229
1.1467
1.2005
 
 
 
 
 
Pound Sterling 1:$
1.3401
1.2883
1.2754
1.3513

On disposal of a foreign operation, accumulated currency translation differences, together with any exchange differences on foreign currency borrowings that provide a hedge of the net investment are recognised in the Consolidated Statement of Profit and Loss as part of the overall gain or loss on disposal; the cumulative currency translation differences arising prior to the transition date to IFRS have been set to zero for the purposes of ascertaining the gain or loss on disposal of a foreign operation subsequent to 1 June 2004.

Property, plant and equipment

Items of property, plant and equipment are stated at cost less accumulated depreciation and any provisions for impairment losses.

Depreciation is calculated to write off the original cost of property, plant and equipment less its estimated residual value over its expected useful life on a straight line basis. Residual values and useful lives of property, plant and equipment are reviewed and adjusted if appropriate at each reporting date. At present it is estimated that all items of property, plant and equipment have no residual value. The estimated useful lives applied in determining the charge to depreciation are as follows:


 
Years
Buildings
40
Computer equipment
2-8
Office furniture and fixtures
8
Laboratory equipment
5
Motor vehicles
5

Leasehold improvements are amortised using the straight-line method over the estimated useful life of the asset or the lease term, whichever is shorter.

On disposal of property, plant and equipment the cost and related accumulated depreciation and impairments are removed from the financial statements and the net amount, less any proceeds, is taken to the Consolidated Statement of Profit and Loss.


38




Notes to Consolidated Financial Statements (continued)
for the year ended 31 December 2018

1.
Basis of preparation and statement of accounting policies (continued)


The carrying amounts of the Group’s property, plant and equipment are reviewed at each reporting date to determine whether there is any indication of impairment. Where such an indication exists an impairment review is carried out. An impairment loss is recognised whenever the carrying amount of an asset or its cash generation unit exceeds its recoverable amount. Impairment losses are recognised in the Consolidated Statement of Profit and Loss unless the asset is recorded at a revalued amount in which case it is firstly dealt with through the revaluation reserve with any residual amount being transferred to the Consolidated Statement of Profit and Loss.

Subsequent costs are included in an asset’s carrying amount or recognised 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 replaced item can be measured reliably. All other repair and maintenance costs are charged to the Consolidated Statement of Profit and Loss during the financial period in which they are incurred.

Leased assets – as lessee

Leases where the lessor retains substantially all the risks and benefits of ownership of the assets are classified as operating leases. Operating lease payments are recognised as an expense in the Consolidated Statement of Profit and Loss on a straight line basis over the lease term. Lease incentives are recognised over the term of the lease as an integral part of the total lease expense.

Finance leases, where the Group has substantially all the risks and benefits of ownership of the leased asset, are capitalised at the inception of the lease at the lower of the fair value of the leased asset or the present value of the minimum lease payments. The corresponding liability to the lessor is included in the Consolidated Statement of Financial Position as a finance lease obligation. Lease payments are allocated between the lease obligation and the finance charges resulting in a reduction of the lease obligation to ensure a constant rate of interest on the remaining balance of the liability. Finance charges are charged to the Consolidated Statement of Profit and Loss as part of finance costs.

Capitalised leased assets are depreciated over the shorter of the estimated useful life of the asset or the lease term.

Business combinations

Business combinations are accounted for using the acquisition method when control is transferred to the Group. The consideration transferred is measured at fair value, as are the identifiable assets acquired and liabilities assumed. Where a business combination agreement provides for an adjustment to the cost of the acquisition which is contingent upon future events, the amount of the estimated adjustment is recognised on the acquisition date at the acquisition date fair value of this contingent consideration. The accounting treatment of any changes to this estimate in subsequent periods will depend on the classification of the contingent consideration. If the contingent consideration is classified as equity it shall not be re-measured and the settlement shall be accounted for within equity. If the contingent consideration is classified as a liability any adjustments to the assessment of contingent consideration determined as at acquisition date will be accounted for through the Consolidated Statement of Profit and Loss, as the liability is measured at fair value at each reporting date.

The assets, liabilities and contingent liabilities of businesses acquired are measured at their fair values at the date of acquisition. In the case of a business combination which is completed in stages, the fair values of the identifiable assets, liabilities and contingent liabilities are re-determined at the date of each transaction until control is obtained. When the initial accounting for a business combination is determined provisionally, any subsequent adjustments to the provisional values allocated to the identifiable assets, liabilities and contingent liabilities are made within twelve months of the acquisition date and presented as adjustments to the original acquisition accounting. Acquisition costs are expensed as incurred.

Goodwill

The Group measures goodwill at the acquisition date as the fair value of the consideration transferred plus the recognised amount of any non-controlling interests in the acquiree, if the business combination is achieved in stages, the fair value of the pre-existing equity interest in the acquiree, less the net recognised amount (generally fair value) of the identifiable assets acquired and liabilities assumed. Goodwill on the acquisition of subsidiaries is included in ‘intangible assets – goodwill and other’.


39




Notes to Consolidated Financial Statements (continued)
for the year ended 31 December 2018

1.
Basis of preparation and statement of accounting policies (continued)


At the acquisition date, any goodwill acquired is allocated to the cash-generating units expected to benefit from the combination's synergies. Impairment is determined by assessing the recoverable amount of the cash-generating unit to which the goodwill relates. Where goodwill forms part of a cash-generating unit and part of the operation within that unit is disposed of, the goodwill associated with the operation disposed of is included in the carrying amount of the operation when determining the gain or loss on disposal of the operation. Goodwill disposed of in this circumstance is measured on the basis of the relative values of the operation disposed of and the proportion of the cash-generating unit retained.

Following initial recognition, goodwill is measured at cost less any accumulated impairment losses. Goodwill is reviewed for impairment annually or more frequently if events or changes in circumstances indicate that the carrying value may be impaired.

Intangible assets

Other intangible assets are stated at cost less accumulated amortisation and impairment losses. Useful lives of intangibles are reviewed and adjusted if appropriate at each reporting date. Amortisation is charged to the Consolidated Statement of Profit and Loss on a straight line basis over the estimated useful lives of intangible assets, currently estimated as follows:
 
Years
Computer software
2-8
Customer relationships
7-11
Order backlog
2-9
Brand
5
Technology Asset    
8
Non-compete arrangements
5

Impairment
The Group previously assessed at the end of each reporting period whether there was objective evidence that a financial asset or group of financial assets was impaired. A financial asset or a group of financial assets was impaired and impairment losses were incurred only if there was objective evidence of impairment as a result of one or more events that occurred after the initial recognition of the asset (a 'loss event') and that loss event (or events) had an impact on the estimated future cash flows of the financial asset or group of financial assets that could be reliably estimated.

Impairment losses in respect of other non-financial assets, other than goodwill, are reversed if there has been a change in the estimates used to determine recoverable amount. Impairment losses are reversed only to the extent that the carrying amount of the asset does not exceed the carrying value that would have been determined, net of depreciation or amortisation, if no impairment loss had been recognised. Impairment losses in respect of goodwill are not reversed.

Inventories

Inventories, which comprise laboratory inventories, are stated at the lower of cost and net realisable value. Cost is based on the first-in, first-out principle and includes all expenditure incurred in acquiring the inventories and bringing them to their present location and condition. Cost in the case of raw materials comprises the purchase price and attributable costs, less trade discounts. Net realisable value is the estimated selling price in the ordinary course of business, less selling expenses.


Accounts payable

Trade and other payables are presented as current liabilities unless payment is not due within 12 months after the reporting period. They are recognised initially at fair value and subsequently measured at amortised cost using the effective interest rate method.


40




Notes to Consolidated Financial Statements (continued)
for the year ended 31 December 2018

1.
Basis of preparation and statement of accounting policies (continued)


Government grants

Government grants received that compensate the Group for the cost of an asset are recognised in the Consolidated Statement of Financial Position initially as deferred income when there is reasonable assurance that it will be received and that the Group will comply with the conditions attaching to it. Such grants are recognised in the Consolidated Statement of Profit and Loss over the useful economic life of the asset which is consistent with the depreciation policy of the relevant asset.

Grants that compensate the Group for expenses incurred are recognised in the Consolidated Statement of Profit and Loss in the same periods in which the expenditure to which they relate is charged.

Under grant agreements amounts received may become repayable in full or in part should certain circumstances specified within the grant agreements occur, including downsizing by the Group, disposing of the related assets, ceasing to carry on its business or the appointment of a receiver over any of its assets. The Group has not recognised any such loss contingency having assessed as remote the likelihood of these events arising.

Provisions

A provision is recognised in the Consolidated Statement of Financial Position when the Group has a present or legal or constructive obligation as a result of a past event, and it is probable that an outflow of economic benefits will be required to settle the obligation. If the effect of the time value of money is material, provisions are determined by discounting the expected future cash flows at a pre-tax rate that reflects the time value of money and, where appropriate, the risks specific to the liability. Where discounting is used, the increase in the provision due to the passage of time is recognised as a finance cost.

A provision for restructuring is recognised when the Group has approved a detailed and formal restructuring plan, and the restructuring has either commenced or has been announced publicly. Future operating costs are not provided for.

A provision for onerous contracts is recognised when the expected benefits to be derived by the Group from a contract are lower than the unavoidable cost of meeting its obligations under the contract.

Share capital

Ordinary shares are classified as equity. 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.

Where ordinary shares are re-purchased by the Company they are cancelled and the nominal value of the shares is transferred to other un-denominated capital within equity.

Employee benefits

(a) Pension and other post-employment benefits
Certain companies within the Group operate defined contribution 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. Contributions to defined contribution pension plans are expensed as incurred.

The Group operates defined benefit pension plans for certain of its United Kingdom and Swiss employees through subsidiary companies. A defined benefit plan is a pension plan that is not a defined contribution plan. Typically defined benefit plans define the amount of pension benefit that an employee will receive on retirement, usually dependent on one or more factors such as age, years of service and compensation. Obligations for contributions to defined benefit contribution pension plans are recognised as an expense in the Consolidated Statement of Profit and Loss as service is received from the relevant employees.

The Group’s net obligation in respect of the defined benefit pension plans is calculated separately by estimating the amount of future benefit that employees have earned in return for their service in the current and prior periods. This benefit is discounted to determine its present value, and the fair value of plan assets deducted. The discount rate used in respect of the UK scheme

41




Notes to Consolidated Financial Statements (continued)
for the year ended 31 December 2018

1.
Basis of preparation and statement of accounting policies (continued)


is the yield at the reporting date on the iboxx corporate bond over 15 years plus 10 basis points. The discount rate used in respect of the Swiss scheme is determined by the Swiss corporate bond yields at the reporting date. The calculation is performed by a qualified actuary using the projected unit credit method. The net finance income/cost are recorded in operating costs in the Consolidated Statement of Profit and Loss. When benefits of a plan are improved, the portion of the increased benefit relating to the past service by employees is recognised as an expense in the Consolidated Statement of Profit and Loss on a straight line basis over the average period until the benefits become vested. To the extent that the benefits vest immediately, the expense is recognised immediately in the Consolidated Statement of Profit and Loss.

(b) Share-based payments
Share-based payments comprise options to acquire ordinary shares in the Company, RSUs and PSUs in the form of ordinary share entitlements after a certain period of time. These are awarded to certain key employees and Directors of the Group based on service conditions such as term of employment and individual performance. The fair value of options, RSUs and PSUs granted is recognised as an employee expense with a corresponding increase in equity. The fair value is measured at grant date and spread over the period during which the Directors and other employees become unconditionally entitled to the options, RSUs or PSUs. The fair value of options granted is measured using a binomial lattice model, taking into account the terms and conditions upon which the options were granted. The fair value of RSUs and PSUs is equal to the market price of a share at date of grant. The total amount to be expensed is determined by reference to the fair value of the options, RSUs or PSUs granted, excluding the impact of any non-market service and performance vesting conditions (for example profitability, sales growth targets). There are no such non-market vesting conditions during the year ended 31 December 2018 in relation to options, RSUs or PSUs that are expected to vest. The amount recognised as an expense is adjusted to reflect the actual number of share options, RSUs or PSUs that vest.

Forfeitures are estimated on the date of grant and revised if actual or expected forfeiture activity differs materially from original estimates.

Share-based payment expense is recognised over the requisite service period for awards of equity instruments to employees based on the grant date fair value of those awards expected to ultimately vest.

Share-based payments – Company

The Company operates a number of share-based payment plans the details of which are presented in note 11 Share-based Payments to the Consolidated Financial Statements. The share-based payment expense associated with the share-based payment plans is recognised by the entity which receives services in exchange for the share-based compensation.

The Statement of Profit and Loss of the Company is charged with the expense related to the services received by the Company. The remaining portions of the share-based payments represent a contribution to Company’s subsidiaries and are added to the carrying amount of those investments. Under an agreement, the subsidiaries pay on date of exercise to the Company an amount equal to the fair value of the ordinary shares issued that is in excess of the award exercise price with such amount reducing the Company’s investment in its subsidiaries. The net effect of the grant date fair value of the Company’s share-based compensation to employees of the Company’s subsidiaries and recharges received from those subsidiaries is presented as a movement in financial fixed assets (see note 3 Investment in subsidiaries, to the Company only financial statements).

Direct costs

Direct costs consist of compensation, associated employee benefits and share-based payments for project-related employees and other direct project-related costs. Reimbursable expenses are included within direct costs on adoption of IFRS 15.

Other operating expenses

Other operating expenses consist of compensation, associated employee benefits and share-based payments for non-project-related employees and other indirect costs associated with the business. Other operating expenses also include depreciation expense and the amortisation of intangible assets.




42




Notes to Consolidated Financial Statements (continued)
for the year ended 31 December 2018

1.
Basis of preparation and statement of accounting policies (continued)


Exceptional items

The Company has used the term “exceptional” to describe certain items which, in management’s view, warrant separate disclosure by virtue of their size or incidence, or due to the fact that certain gains or losses are determined to be non-recurring in nature. Exceptional items may include restructuring, significant impairments, and material changes in estimates.

Research and development credits

Research and development credits that are provided under the income tax law of the jurisdictions in which the Group operates generally are recognised as a reduction of income tax expense. However, certain tax jurisdictions provide refundable credits that are not dependent on the Group’s ongoing tax status or tax position. In these circumstances the credits are recognised in the Consolidated Statement of Profit and Loss in the same periods in which the expenditure to which they relate to is charged as a deduction against the related expense.

Financing income

Interest income is recognised in the Consolidated Statement of Profit and Loss as it accrues using the effective interest rate method and includes interest receivable on investments.
 
Financing expense

Financing expense comprises interest payable on borrowings calculated using the effective interest rate method, finance charges on finance leases, foreign exchange gains and losses on bank loans, non-cash finance charges in respect of contingent consideration and gains and losses on hedging instruments that are recognised in the Consolidated Statement of Profit and Loss.

Financing expense also includes fees paid on the establishment of loan facilities which are recognised as transaction costs of the loan to the extent that it is probable that some or all of the facility will be drawn down. These fees are deferred and recognised in the Statement of Financial Position and are then amortised to the Consolidated Statement of Profit and Loss over the term the facility is available to the Group.

Income tax

Income tax expense in the Consolidated Statement of Profit and Loss represents the sum of income tax currently payable and deferred income tax.

Income tax currently payable is based on taxable profit for the year. Taxable profit differs from net profit as reported in the Consolidated Statement of Profit and Loss because it excludes items of income or expense that are taxable or deductible in other years and further excludes items that are not taxable or deductible. The Group’s liability for income tax is calculated using rates that have been enacted or substantively enacted at the reporting date. Income tax is recognised in the Consolidated Statement of Profit and Loss except to the extent that it relates to items recognised directly in equity.

Deferred income tax is provided, using the liability method, on all differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for taxation purposes except those arising from non-deductible goodwill or on initial recognition of an asset or liability which affects neither accounting nor taxable profit.

Deferred income tax assets and liabilities are measured at the tax rates that are expected to apply in the year when the asset is expected to be realised or the liability to be settled.

Deferred tax assets are recognised for all deductible differences, carry forward of unused tax credits and unused tax losses, to the extent that it is probable that taxable profit will be available against which the deductible temporary differences and the carry forward of unused tax credits and unused tax losses can be utilised. The carrying amount of deferred income tax assets is reviewed at each reporting date and reduced to the extent that it is no longer probable that sufficient taxable profit would be available to allow all or part of the deferred income tax asset to be utilised.


43




Notes to Consolidated Financial Statements (continued)
for the year ended 31 December 2018

1.
Basis of preparation and statement of accounting policies (continued)


Earnings per ordinary share

Basic earnings per share is computed by dividing the profit for the financial year attributable to ordinary shareholders of the Company by the weighted average number of ordinary shares outstanding during the financial period.

Diluted earnings per share is computed by dividing the profit for the financial year attributable to ordinary shareholders of the Company by the weighted average number of ordinary shares in issue after adjusting for the effects of all potential dilutive ordinary shares that were outstanding during the financial period.

Segment reporting

An operating segment is a component of the Group that engages in business activities from which it may earn revenues and incur expenses, including revenues and expenses that relate to transactions with any of the Group’s other components. The Group determines and presents operating segments based on the information that internally is provided to the Chief Executive Officer (CEO), Chief Financial Officer (CFO) and Chief Operating Officer (COO) who together are considered the Group’s chief operating decision makers, the ‘CODM’ in the period up to and including 1 March 2017. On 1 March 2017, Mr Ciaran Murray transitioned from his role as Chief Executive Officer to the role of Executive Chairman of the Board of Directors and Dr. Steve Cutler was appointed as Chief Executive Officer. As of 1 March 2017, the Company determined that the CODM was comprised of the Chief Executive Officer and the Chief Financial Officer. An operating segment’s operating results are reviewed regularly by the CODM to make decisions about resources to be allocated to the segment and assess its performance, and for which discrete financial information is available.

Segment results that are reported to the CODM include items directly attributable to a segment as well as those that can be allocated on a reasonable basis. Segment capital expenditure is the total cost incurred during the period to acquire property, plant and equipment and intangible assets other than goodwill.

2.
Segmental information

The Group is a clinical research organisation (“CRO”), providing outsourced development services on a global basis to the pharmaceutical, biotechnology and medical device industries. It specialises in the strategic development, management and analysis of programmes that support all stages of the clinical development process - from compound selection to Phase I-IV clinical studies. The Group has expanded predominately through internal growth, together with a number of strategic acquisitions to enhance its expertise and capabilities in certain areas of the clinical development process. The Group has the expertise and capability to conduct clinical trials in most major therapeutic areas on a global basis and has the operational flexibility to provide development services on a stand-alone basis or as part of an integrated “full service” solution. These services, which are integral elements of the clinical development process, include clinical trials management, biometric activities, consulting, imaging, contract staffing, informatics and laboratory services.

The Company determines and presents operating segments based on the information that is internally provided to the chief operating decision maker, together the ('CODM') in accordance with IFRS 8 Operating Segments. The Chief Executive Officer, Chief Financial Officer and Chief Operating Officer, were together considered the Company's CODM in the period up to and including 1 March 2017. On 1 March 2017, Mr Ciaran Murray transitioned from his role as Chief Executive Officer to the role of Executive Chairman of the Board of Directors and Dr. Steve Cutler was appointed as Chief Executive Officer. As of 1 March 2017, the Company determined that the CODM was comprised of the Chief Executive Officer and the Chief Financial Officer in accordance with the requirements of IFRS 8 Operating Segments.

The Company operates as one business segment, which is the provision of outsourced development services on a global basis to the pharmaceutical, biotechnology and medical devices industries.

The Group’s listing for its shares is the NASDAQ market in the United States. Consequently, information reviewed by the chief operating decision makers is prepared in accordance with US generally accepted accounting principles (“US GAAP”) however the information presented below is prepared in accordance with IFRS reporting standards. Reconciliations of the Group’s profit for the financial year and shareholders’ equity from US GAAP to IFRS are set out on pages 139 to 141 of this report. The Company's areas of operation outside of Ireland include the United States, United Kingdom, Belgium, France, Germany, Italy, Spain, The Netherlands, Sweden, Turkey, Poland, Czech Republic, Latvia, Russia, Ukraine, Hungary, Israel,

44




Notes to Consolidated Financial Statements (continued)
for the year ended 31 December 2018

2. Segmental information (continued)

Romania, Canada, Mexico, Brazil, Colombia, Argentina, Chile, Peru, India, China (including Hong Kong), South Korea, Japan, Thailand, Taiwan, Singapore, The Philippines, Australia, New Zealand, and South Africa.

Geographical segment information
 
Year ended
31 December
2018

Year ended
31 December
2017*

 
$’000

$’000

External revenue
 
 
Ireland (1)**
1,066,200

944,130

Rest of Europe (17)**
379,883

355,552

United States (1)**
894,978

881,829

Rest of World (18)**
254,716

220,810

 
 
 
Total
2,595,777

2,402,321


* 2017 restated to reflect gross revenue.
**denotes number of countries

 
Year ended
31 December
2018

Year ended
31 December
2017

 
$’000

$’000

Non-current assets
 
 
Ireland
241,309

244,964

Europe
305,786

315,944

United States
445,569

463,957

Rest of World
49,735

48,577

 
 
 
Total
1,042,399

1,073,442


Major customers
During the year ended 31 December 2018, 14% (2017: 21%) of the Group’s revenues were derived from its top customer which is the only customer which represents in excess of 10% of the Group’s revenue.


















45





Notes to Consolidated Financial Statements (continued)
for the year ended 31 December 2018



3.
Profit before taxation

Profit before taxation is stated after charging the following:
 
Year ended 31 December 2018
Year ended 31 December 2017
 
Statutory auditor

Affiliated firms

Total

Statutory auditor

Affiliated firms

Total

 
$’000

$’000

$’000

$’000

$’000

$’000

Auditor's remuneration: