AVJennings
Annual Report 2017

Plain-text annual report

Housing matters. Community matters. Annual Report 2017 AVJennings Limited ABN 44 004 327 771 Contents Chairman’s Report FY17 Highlights Chief Executive Officer’s Report Community Property Portfolio Project Pipeline Directors’ Report Consolidated Statement of Comprehensive Income Consolidated Statement of Financial Position Consolidated Statement of Changes in Equity Consolidated Statement of Cash Flows Notes to the Consolidated Financial Statements Directors’ Declaration Independent Auditor’s Report to the Members of AVJennings Limited Shareholder Information Company Particulars 1 2 4 6 8 9 12 27 28 29 30 31 73 74 78 81 AVJENNINGS LIMITED · ANNUAL REPORT 2017 | 1 valuable commercial, industry and financial expertise to the Company. His joining couldn’t be more timely especially in the current dynamic market environment. Additionally, we thank Mr David Tsang who left us during the year for his service and contributions to the Company. Last year, we welcomed many new shareholders and I am delighted to be able to do the same this year. AVJennings has been an integral part of Australian housing for 85 years and as the current custodians of this great Company, with much pride and pleasure, we will continue to strengthen the platform and build on strategies and initiatives to take the Company to greater heights. Thank you again for your continued support. Simon Cheong Chairman Chairman’s Report Dear Fellow Shareholders, On behalf of the Board of Directors I am pleased to present our 2017 Annual Report. Our Company is entering one of the most exciting periods in its 85 year history. The Board envisions that recent decisions by the Board and Management will set the Company up for sustainable growth in the coming years. The Company has delivered considerable growth in both revenue and profits since FY13. This was achieved whilst maintaining a sound balance sheet and a landbank of around 10,000 lots. Gearing continues at a conservative level of approximately 23%. In FY14, profit before tax was up 216%, in FY15, it was up 78.3% and for FY16 it was up 22%. This year, our Company reported profit before tax at $51.0 million, in line with market expectation though lower than the prior year $58.8 million. This strong performance has enabled us to declare a final dividend of 3.5 cents, bringing total dividends declared for the year to 5.0 cents per share. Entering the financial year just ended, we knew it would be a year of considerable activity and momentum, driven by a number of new projects that were about to commence or reach new milestones. Two of these, Waterline Place at Williamstown and Lyndarum North at Wollert, both in Victoria, are amongst the largest projects of their type the Company has ever undertaken. Both will provide excellent opportunities for the years to come, though the benefits to FY17 reported results were limited due to timing aspects. During the calendar year, the Company continued with its active acquisition strategy which included development sites in Kogarah, Sydney, Rochedale, Brisbane and also taking up a 50% joint venture in ‘Riverton’, Jimboomba, Queensland, yielding a total of 1,300 land lots and apartments approximately. We remain confident conditions will remain positive for the foreseeable future. This confidence is based on both internal factors specific to the Company and external market fundamentals including population growth, a low interest rate and stable employment environment. AVJennings’ 85-year brand is based upon building great but affordable housing and communities. This has allowed us to attract, retain and develop the highest calibre people who have the same values for which we are known (value, integrity and reliability). The above factors will continue to underpin and support the future growth of the Company. My fellow Directors and I acknowledge and appreciate the work of our highly motivated staff and thank them for their efforts and achievements. This could only be possible under the leadership of our CEO, Peter Summers. As Chairman, I would also like to thank my fellow Directors for their continued guidance and support. They have balanced oversight and guidance in the interests of all stakeholders and I am grateful for the commitment of all of the Directors who served the Company with distinction. I also want to take this opportunity to introduce our newest Board member, Mr Boon Leong Tan who brings 2 | AVJENNINGS LIMITED · ABN 44 004 327 771 FY17 Highlights Solid financial outcomes and shareholder returns considering the timing of new projects and planned changes to our production mix STRENGTHENING THE BUSINESS • Revenue $401.6 million (-4.8%) • Profit before Tax $51 million (-13.2%) • Earnings per share 9.3 cents (-13.1%) • • • • • • • • Maintaining total dividends of 5 cents fully franked (1.5 cents interim and 3.5 cents final) Debt gearing at 23% of total assets remains comfortably in the middle of the targeted 15% to 35% range Increase in net tangible assets per share to 99 cents (+4.3%) Contract signings increased to 1,843 (+0.7%) WIP lots 2,161 (+28.6%) BUILDING MOMENTUM STRONGER OUTLOOK FY18 contract signings expected to be within the range of 1,900 to 2,100 lots 9 new projects commencing across calendar year 2017 Positive earnings momentum expected FY17 FY16 % change FY15 FY14 Revenue $401.6m $421.9m (4.8%) $317.9m $250.6m Statutory Profit before Tax Statutory Profit after Tax Gross Margins Inventory Provision Write Back (After tax) $51.0m $35.7m 24.0% $3.5m $58.8m $40.9m 25.2% $2.6m Net tangible assets (NTA) $378.2m $361.1m NTA per share EPS (cents per share) Dividend fully franked (CPS) $0.99 9.3 5 $0.95 10.7 5 (13.2%) (12.7%) (1.2pp) +38% +4.7% +4.3% (13.1%) – $48.2m $34.4m 26.8% $2.6m $27.0m $18.8m 21.9% $3.6m $334.5m $313.0m $0.88 $0.81 9 4 4.9 2 AVJENNINGS LIMITED · ANNUAL REPORT 2017 | 3 FY17 Highlights Momentum continues Work in progress (lots) Contract signings (lots) 2,161 2,161 1,681 1,681 1,512 1,512 1,264 1,264 2,500 2,500 2,000 2,000 1,500 1,500 1,000 1,000 500 500 0 0 715 715 2,000 2,000 1,600 1,600 1,200 1,200 800 800 400 400 0 0 832 832 865 865 1,113 1,113 551 551 458 458 361 361 864 864 872 872 999 999 730 730 FY13 FY13 FY14 FY14 FY15 FY15 FY16 FY16 FY17 FY17 FY13 FY13 FY14 FY14 FY15 FY15 FY16 FY16 FY17 FY17 H1 H1 H2 H2 - 2 - - 2 - A proven track record Revenue ($M) Earnings and dividend growth (CPS) 421.9 421.9 401.6 401.6 DPS DPS EPS EPS 10.7 10.7 9 9 9.3 9.3 317.9 317.9 250.6 250.6 4.9 4.9 4 4 2 2 5 5 5 5 FY14 FY14 FY15 FY15 FY16 FY16 FY17 FY17 FY14 FY14 FY15 FY15 FY16 FY16 FY17 FY17 Revenue linear trend Revenue linear trend EPS linear trend EPS linear trend 4 | AVJENNINGS LIMITED · ABN 44 004 327 771 Chief Executive Officer’s Report government policies impacting on availability of land, the timing of provision of relevant infrastructure and costs to develop inventory, especially in relation to tax imposts on property by all levels of government. On the demand side, cycles do occur as fundamentals around population growth, job creation, interest rates and overall consumer confidence impact on the level of demand both short and long term. All this might sound too hard or too risky. But that would ignore or discount the one major positive about residential property – housing is vital to not only a vibrant economy but to everyone. So whilst there are challenges operating within residential property development, there are enormous rewards as well. Those rewards are both financial and satisfying. But to make the most of this you need to be passionate about what you do, you need to be strategic and disciplined and you need to ensure you are personally and organisationally resilient. So whilst I encourage you to read all of the information in this Annual Report, I would ask you to do so against this background. It all starts with our passion that housing matters and community matters to all. That is supported by our values and culture and our desire to be the best we can be. It is documented through our strategies and is executed through the commitment to our vision, adherence to strategy and through our skilled staff. This is all done with a sense of legacy. This year we turned 85! That is an enormous legacy and one to be proud and respectful of. As well as feeling a responsibility to that history, we also know that our actions today as custodians will impact the future of the Company, its future employees and customers as well as those of key partners. In writing this Chief Executive Officer’s Report for the Annual Report, I am proud to be doing so as a CEO of a Company which I believe is committed to our vision of why we exist. More importantly, I am proud to do so on behalf of a group of employees who are talented and passionate about what they do. To my Chairman, Simon Cheong, and all the Directors who have provided support and guidance during the year, may I offer my thanks. To my Executive Team, your courage to lead has been vital to what we have achieved to date and will be just as vital to our future. And to all the wonderful AVJennings staff thank you for the belief you have shown and the efforts you have made. To our shareholders and other key business partners I thank you for your continued support, without which we cannot achieve our goals. And finally to all our very valued customers thank you for handing us your trust in one of the most important decisions you will make in life. Peter Summers Chief Executive Officer Set out in the Chairman’s Report, the Review of Operations in the Directors’ Report and elsewhere in this Annual Report is considerable detail. This detail significantly relates to the 2017 financial year results but it also covers some issues and opportunities, both in that year and in previous years. It also talks to the future in terms of market conditions and how we believe we are placed relative to those conditions. I believe this information gives the readers of this Annual Report a great understanding of the overall picture. So, my intention is not to repeat that information here, other than to say I agree with our Chairman’s confidence in the future of AVJennings Limited and I too am proud of the results we have achieved. Residential property is a unique business to operate in. Our “factories” are outdoors and subject to the elements. These “factories” have a finite life and we are constantly searching for new projects to grow the business and replace those that are completing. These opportunities can’t be found in a shop or acquired online. They are sourced through devoting capable resources to this vital part of the business. The supply side is significantly influenced by AVJENNINGS LIMITED · ANNUAL REPORT 2017 | 5 6 | AVJENNINGS LIMITED · ABN 44 004 327 771 Committed to Creating & Supporting Communities As we celebrate our 85th year as a developer of communities, we are proud of the inclusive, diverse business AVJennings has grown to become. Community of course means all of us, regardless of gender, ability, age, sexuality and culture. That’s just one reason we’re excited to continue our support for women’s sport by joining the netball community and becoming a proud sponsor of the popular Queensland Firebirds. We are also delighted to announce that netball legend and current Firebirds player Laura Geitz has joined our team as an AVJennings ambassador alongside Steve Waugh, AO. The Firebirds join other celebrated sporting teams in the AVJennings family, including the St Kilda Football Club in the AFL and the Melbourne Boomers in the WNBL. One aspect of our partnership with the Melbourne Boomers we are especially proud of is our sponsorship of their Volunteer award. So many communities around Australia and New Zealand rely on volunteers and we are delighted to play a small part in ensuring generous and caring people are recognised. We also like to lend a hand to people in our community who really need it. AVJennings is a major partner of the Steve Waugh Foundation, which supports children and young people with diseases so rare they do not qualify for help from anyone else. These associations are important to us because they help to show the kind of company we are; a company that is genuinely committed to supporting and growing active and healthy communities. As important as these partnerships with these organisations are, it is what we do everyday in terms of community that matters. It is why we have appointed a dedicated Community Relations manager; it is why every project has separate community plans. Because we know that “Housing Matters, Community Matters” to all. It is why at our very heart is our purpose to create great neighbourhoods and places to live. Proud sponsors of AVJENNINGS LIMITED · ANNUAL REPORT 2017 | 7 8 | AVJENNINGS LIMITED · ABN 44 004 327 771 Property Portfolio AVJennings continues to be one of the most recognised residential property development companies in Australia Number of lots at 30 June 2017 9,654 QLD No. of lots: 1,802 NSW No. of lots: 2,345 WA No. of lots: 346 SA No. of lots: 2,348 VIC No. of lots: 2,563 NZ No. of lots: 250 Number of Lots by NFE 17% 29% 34% 15% 1% 4% QLD VIC NSW SA WA NZ AVJENNINGS LIMITED · ANNUAL REPORT 2017 | 9 Project Pipeline As at 30 June 2017 Project Name Halpine Lake, Mango Hill Creekwood, Caloundra Glenrowan, Mackay Essington Rise, Leichhardt Villaggio, Richlands Bethania Big Sky, Coomera Bridgeman Downs Kenmore Bridgeman Downs 2 Jimboomba Argyle, Elderslie Magnolia, Hamlyn Terrace Evergreen, Spring Farm (South) Evergreen, Spring Farm (East) Ravensworth Heights, Goulburn Seacrest, Sandy Beach Arcadian Hills, Cobbitty Stages 1–8 Arcadian Hills, Cobbitty Stages 9&10 Cobbitty Road, Cobbitty Boundary Road, Schofields Warnervale Evergreen, Spring Farm PDA Lyndarum, Wollert Lyndarum North, Wollert JV (Options) Arlington Rise, Portarlington Hazelcroft, Doreen Waterline, Williamstown D N A L S N E E U Q S E L A W H T U O S W E N I A R O T C V I A Pathways, Murray Bridge H T U O S I L A R T S U A River Breeze, Goolwa North St Clair Eyre at Penfield Z N Hobsonville Point, Buckley B N R E T S E W A I L A R T S U A Indigo China Green, Subiaco Viridian China Green, Subiaco The Heights Kardinya Viveash Parkview, Ferndale TOTAL NO. OF REMAINING LOTS • NSW includes 5 remnant lots and SA 10 remnant lots. Remaining # of Lots Pre FY 2018 FY 2019 FY 2020 FY 2021 FY 2022 Post 14 129 177 43 21 106 5 63 32 16 1,196 196 207 213 540 26 123 174 119 57 11 595 79 51 1,820 136 109 447 53 80 527 1,678 250 124 18 107 58 39 9,654 10 | AVJENNINGS LIMITED · ABN 44 004 327 771 Queensland MACKAY CALOUNDRA MANGO HILL BRIDGEMAN DOWNS BRISBANE KENMORE RICHLANDS LEICHHARDT JIMBOOMBA BETHANIA COOMERA Images: Creekwood at Caloundra New South Wales WARNERVALE HAMLYN TERRACE SANDY BEACH CENTRAL COAST SCHOFIELDS COBBITTY ELDERSLIE SPRING FARM SYDNEY GOULBURN WOLLONGONG Images: Argyle at Elderslie Victoria WOLLERT DOREEN WILLIAMSTOWN MELBOURNE PORTARLINGTON Artist Impression: Lysander Townhomes, Waterline Place, Williamstown AVJENNINGS LIMITED · ANNUAL REPORT 2017 | 11 South Australia PENFIELD ST CLAIR ADELAIDE MURRAY BRIDGE GOOLWA NORTH Artist Impression: Swan Townhomes, St Clair Western Australia VIVEASH SUBIACO PERTH FERNDALE KARDINYA Artist Impression: The Heights, Kardinya New Zealand HOBSONVILLE POINT AUCKLAND Image: Hobsonville Point, Ferry Wharf 12 | AVJENNINGS LIMITED · ABN 44 004 327 771 The Directors of AVJennings Limited present their report together with the Financial Report of the Group (referred to hereafter as “AVJennings” or “Group”) and the Auditor’s Report thereon for the year ended 30 June 2017. The Group comprises AVJennings Limited (“Company” or “Parent”) and its controlled entities. DIRECTORS The Directors of AVJennings Limited during the financial year and up until the date of this Report are as follows. Directors were in office for the entire period unless otherwise stated. S Cheong RJ Rowley Non-Executive Chairman Non-Executive Deputy Chairman PK Summers Managing Director and Chief Executive Officer E Sam B Chin Non-Executive Director Non-Executive Director BG Hayman Non-Executive Director TP Lai D Tsang BL Tan Non-Executive Director Non-Executive Director (resigned 9 June 2017) Non-Executive Director (appointed 9 June 2017) PRINCIPAL ACTIVITY The principal activity of the Group during the year was Residential Development. OPERATING RESULTS The consolidated profit after tax for the financial year was $35.7 million (2016: $40.9 million). DIVIDENDS Dividends paid to members during the financial year were as follows: Cash dividends declared and paid 2015 final dividend of 3.0 cents per share, paid 23 September 2015. Fully franked @ 30% tax 2016 interim dividend of 1.5 cent per share, paid 15 April 2015. Fully franked @ 30% tax 2016 final dividend of 3.5 cents per share, paid 23 September 2016. Fully franked @ 30% tax 2017 interim dividend of 1.5 cents per share, paid 7 April 2017. Fully franked @ 30% tax 2017 $’000 2016 $’000 – – 13,454 5,767 11,532 5,767 – – Total cash dividends declared and paid 19,221 17,299 In addition to the above, subsequent to the end of the financial year, the Directors have declared a fully franked final dividend of 3.5 cents per share to be paid on 19 September 2017 (2016: 3.5 cents). The Dividend Reinvestment Plan remains suspended. Directors’ ReportAVJENNINGS LIMITED · ANNUAL REPORT 2017 | 13 per share fully franked. Profit before tax was 2.7% below consensus earnings guidance of $52.4 million. Contract signings of 1,843 lots were on par with last year (1,832 lots), while settlements were moderately lower at 1,509 lots (30 June 2016: 1,596 lots). Full year revenue decreased 4.8% to $401.6 million (30 June 2016: $421.9 million) due largely to production and lot titling delays in part occasioned by protracted adverse weather events that affected the eastern seaboard of Australia in the second half. Approximately 98 lot equivalent settlements were delayed across the June balance date into 1H-FY18. Business Overview Maturing levels of production and sales together with good gross margins in New South Wales, Queensland and New Zealand contributed to a good result for the year. Active project and product mix changes continued to allow the Company to capitalise on the differing strengths of each location, although revenue recognition in New South Wales and Queensland was held back by adverse weather-driven production and titling delays. The impact of this is most evident in a year-on-year comparison of settlement lots statistics, which should be contrasted with the leading indicator contract signing statistic in each period. The overall result was also constrained by the South Australian business, which performed below expectations due to slow sales and margin erosion at the St Clair project. Corrective action including further streamlining of overheads was taken and management believes that the South Australian business’s performance has bottomed, subject of course to the Adelaide market not declining materially from its current subdued level. Particularly good contributions were made by the ‘Arcadian Hills’, ‘Evergreen’ and ‘Argyle’ (land only and built form) projects in Sydney and ‘Magnolia’ (land only) on the Central Coast of New South Wales. ‘Parkside’ (land only) in Brisbane and ‘Big Sky’ (land only and built form) in Coomera performed well for Queensland. The ‘Rosny’ apartments at ‘Waterline Place’ Williamstown demonstrated the ongoing strength of the boutique, middle ring, medium density market in Melbourne Victoria, while the Hobsonville Auckland project continued its excellent performance in line with expectations. Work in progress was up 28.6% year-on-year to 2,161 lots (30 June 2016: 1,681 lots). The level of completed unsold stock remained insignificant at only 6.1% by value of total lots under control (30 June 2016: 2.8%). Controlled land inventory fell moderately to 9,654 lots (30 June 2016: 10,048 lots) with strong sales outstripping acquisitions consummated during the year, which included the purchase of a 50% share in the ‘Riverton’, Jimboomba Queensland joint venture (approximately – 1,200 lots). Post-balance date the Company announced the acquisition of development sites in Kogarah, Sydney and Rochedale, Brisbane that are anticipated to yield 67 apartments and 81 land only lots and townhouses, respectively. These acquisitions further diversify the Company’s portfolio, with additional purchases expected to be announced in the second half of calendar 2017. OPERATING AND FINANCIAL REVIEW Summary In recent years, the Company has seen its operations expand in many key areas. Most directly, an increase in work in progress levels saw profits rise substantially. In FY15 profit was up 78.3% and in FY16 it was up 22.0%. During the 2017 financial year, the Company continued to increase activity levels, partly in response to continuing sound market conditions but also in reflection of changing dynamics within the business. Essentially, the business entered a phase where there were two significant influences on its operations: firstly, the increased momentum generated in prior years that underpinned profit growth from existing or older projects reached maturity, and secondly the focus shifted to the next stage of the Company’s development, which involved the commencement of a number of new projects, many of significant scale. While similar levels of activity were generated in FY17 by those older projects their contribution will progressively diminish, although this will be more than offset as new projects gradually reach the profit recognition stage. The nature of residential land development is that new projects take time to ramp up. Additionally, some of these projects necessarily have a greater built form component that will ultimately generate greater profitability due to the higher value-capture from the work completed, albeit it takes longer to achieve. Pleasingly, the business made substantial progress in this second phase of its evolution while at the same time generating good results for FY17. Underlying contract signings were approximately the same as last year. As explained further below, bad weather on the eastern seaboard during the months of March and April did create some additional delays in getting contracts to profit recognition stage. This affected around 98 contracts which, had they settled in FY17, would have meant the result for FY17 would have been similar to that for the previous year. This, coupled with the value creation that occurred during the year that has not yet flowed through to profit have enabled the Directors to decide to declare a final dividend in respect of FY17 at the same level as the prior year. At a wider level, the Company continues to search for improvement in all aspects of its business, investing in product, people and brand and reviewing management structures and costs. We also continue to monitor emerging issues, trends and opportunities, both short and long term. Financial Results The Company recorded profit before tax of $51.0 million for the year ended 30 June 2017, down 13.2% on the previous year (30 June 2016: $58.8 million) and profit after tax of $35.7 million (30 June 2016: $40.9 million). Good contract signings in the second half of FY2017, substantial post balance date cash inflows from the collection of receivables and confidence in the outlook for FY2018 enabled the Directors to declare that a fully franked final dividend of 3.5 cents per share be paid in September 2017, taking total dividends declared for FY2017 to 5.0 cents Directors’ Report14 | AVJENNINGS LIMITED · ABN 44 004 327 771 OPERATING AND FINANCIAL REVIEW (continued) Business Overview (continued) Gearing remained low with net debt/total assets of only 23.0% (30 June 2016: 17.9%), given the component of debt committed to work in progress, which will turn to cash quickly once stock is completed. The Company extended the termination date of its core $250 million ‘Club’ banking facility by a further 12 months from 30 September 2018 to 30 September 2019. Outlook Over the past four years the Company has generated solid growth in revenue and profitability and improved the quality of its inventory, management and production processes, enabling it to create substantial shareholder value through payment of fully franked dividends, share price and NTA growth. Fiscal 2017-18 is something of a transition period as management focuses on closing out and optimising the performance of a number of older projects, while simultaneously working to ramp up exciting new, higher margin projects that will help underpin the Company’s performance for years to come. This activity occurs against the backdrop of strong demand drivers for residential property in the Company’s key markets. Low interest rate and inflationary expectations combined with positive population growth and continuing shortages of detached and semi-detached houses and low rise apartments in Sydney, Melbourne and Auckland will continue to stoke demand from the owner-occupiers and local investors targeted by the Company. While price growth is still occurring at some estates in these markets, it is likely to continue to be offset to a degree by competition, trade cost increases and active product mix decisions, although the moderate reduction in the Company’s margins year-on-year was more heavily influenced by the adverse impact of the South Australian business in fiscal 2017. Sydney and the Central Coast of New South Wales continue to experience strong demand driven by positive migration and inadequate dwelling supply, which is largely a function of lagging State and local government land release policy and planning decisions, together with building delivery constraints. Having said that, the Company believes that sale rates are showing signs of reducing to more sustainable levels as affordability declines further and bank credit appetite tightens. Auckland is a strong market and the high quality, master- planned Hobsonville project continues to experience significant demand with good sales and margins being generated. The Company is actively exploring other suitable opportunities in Auckland. Activity continues at a steady pace in Brisbane, Caloundra and Coomera in Queensland and the Company looks forward to commencing construction at its newest project ‘Riverton’, Jimboomba, late in calendar 2017. The residential markets in Adelaide, South Australia and Perth, Western Australia continue to experience challenges. The outer Melbourne residential land market remains unequivocally buoyant with the Company all but selling out the first five stages at its new ‘Lyndarum North’ estate. Sales in each of these stages were largely initiated through online purchaser enquiry within hours of release of the stage. Development of the first stage of Lyndarum North remains on schedule to commence prior to Christmas and some settlements are expected during 1H-2018. ‘Waterline Place’ Williamstown contributed strongly to the Victorian result with the bulk of apartments in the ‘Rosny’ building settling in the last week of June as expected. Remaining Rosny contracts together with those for the ‘Ellery’ townhouses are expected to settle in the second half of calendar 2017. Work on the next phase of Waterline, which showcases the ‘Gem’ apartment building is well underway and it should contribute positively to results in FY2019. The Company is confident that demand for its products is sustainable given its focus on delivering traditional housing solutions at affordable prices in well-planned communities rather than participating in more volatile market segments. The Company will continue to capitalise on the opportunities presented by its diversified land portfolio by actively managing product mix to best advantage. As one of the few larger-scale integrated developer-builder groups operating in Australia, AVJennings is extremely well-placed to quickly respond to changes in local market conditions by varying the rate and type of product that it chooses to deliver. The Board and management of AVJennings look forward with confidence. The Company expects to commence nine new projects in key locations in Sydney and the central coast of New South Wales, in Brisbane and Melbourne this calendar year, which are anticipated to contribute to progressively stronger results over the 2018-21 period. The usual bias of results towards the second half of the financial year will remain and contract signings in FY2018 are expected to range from 1,900 to 2,100 lots. SIGNIFICANT EVENTS AFTER THE BALANCE SHEET DATE No matter or circumstance has arisen since 30 June 2017 that has significantly affected, or may significantly affect: a) the Group’s operations in future financial years; or b) the results of those operations in future financial years; or c) the Group’s state of affairs in future financial years. FUTURE DEVELOPMENTS, PROSPECTS AND BUSINESS STRATEGIES The prospects and business strategies of the Group are discussed on page 13 and 14 of this Report. ENVIRONMENTAL REGULATION The Group’s operations are subject to various environmental regulations under both Commonwealth and State legislation, particularly in relation to its property development activities. The Group’s practice is to ensure that where operations are subject to environmental regulations, those obligations are identified and appropriately addressed. This includes the obtaining of approvals, consents and requisite licences from the relevant authorities and complying with their requirements. To the best of the Directors’ knowledge, property development activities have and are being undertaken in compliance with these requirements. Directors’ ReportAVJENNINGS LIMITED · ANNUAL REPORT 2017 | 15 INFORMATION ON THE DIRECTORS Peter K Summers B.Ec. CA Simon Cheong B.Civ.Eng. MBA Director since 20 September 2001. Mr Cheong has over 34 years experience in real estate, banking and international finance. He currently serves as Chairman and Chief Executive Officer of SC Global Developments Pte Ltd. Mr Cheong has formerly held positions with Citibank (Singapore) as their Head of Real Estate Finance for Singapore as well as with Credit Suisse First Boston as a Director and Regional Real Estate Head for Asia (excluding Japan). In 1996, Mr Cheong established his own firm, SC Global Pte Ltd, a real estate and hotel advisory and direct investment group specialising in structuring large and complex transactions worldwide. He was twice elected President of the prestigious Real Estate Developers’ Association of Singapore (REDAS) for 2 terms from 2007 until 2010. He served on the Board of the Institute of Real Estate Studies, National University of Singapore from 2008 to 2011 and was a board member of the Republic Polytechnic Board of Governors from 2008 to 2011. He was also a Council Member of the Singapore Business Federation, a position he held from 2007 to 2010. On 1 June 2017, Mr Cheong was appointed a non-executive Director of Singapore Airlines Limited. Resident of Singapore. Responsibilities: Chairman of the Board, Non-Executive Director, Chairman of Investments Committee, Member of Remuneration Committee, Member of Nominations Committee. Directorships held in other listed entities: Singapore Airlines Limited from 1 June 2017. Director since 27 August 1998. Mr Summers is a Chartered Accountant and has been employed with the Company and its related corporations since 1984, when he joined the Jack Chia Australia Ltd Group from Price Waterhouse (now PricewaterhouseCoopers). During Mr Summers’ early period with the Group, he held various management and directorship roles within the Group. Following the acquisition of the AVJennings residential business in September 1995, Mr Summers was appointed Chief Financial Officer, becoming Finance Director of AVJennings in August 1998. He was appointed Managing Director and Chief Executive Officer of the Company on 19 February 2009. Mr Summers has extensive experience in general and financial management as well as mergers and acquisitions. Resident of Melbourne. Responsibilities: Managing Director and Chief Executive Officer. Directorships held in other listed entities: None. Elizabeth Sam B.A. Hons. (Economics) Director since 20 September 2001. Mrs Sam has over 40 years experience in international banking and finance. She has served on numerous high level Singaporean government financial and banking review committees and was the Chairman of the International Monetary Exchange from 1987-1990 and 1993-1996. Mrs Sam is a Director of SC Global Developments Pte Ltd, the Company’s major shareholder. Resident of Singapore. Jerome Rowley SF Fin, FAICD Responsibilities: Director since 22 March 2007. Mr Rowley has been a career banker since the early 1970s with Citigroup, Morgan Grenfell and ABN Amro. From 1992 until 2002, he served as Managing Director and CEO of ABN Amro Australia and Head of Relationship Management and Structured Finance for ABN Amro, Asia Pacific. He has been active in both wholesale and investment banking domestically and internationally. During his career, Mr Rowley devoted considerable effort towards the recognition, understanding and management of risk as a means of profit optimization. Of particular significance was his involvement in advising and funding including debt, equity and hybrids, of infrastructure projects in both Australia and Asia Pacific. Resident of Sydney. Responsibilities: Deputy Chairman of the Board, Non-Executive Director, Chairman of Risk Management Committee, Member of Audit Committee, Member of Investments Committee, Member of Nominations Committee. Directorships held in other listed entities: None. Non-Executive Director, Chairman of Nominations Committee, Chairman of Remuneration Committee. Directorships held in other listed entities: Banyan Tree Holdings Limited, since 23 March 2004. Bobby Chin CA (ICAEW) B.Acc. Director since 18 October 2005. Mr Chin is currently the Chairman of NTUC Fairprice Co-operative Limited, NTUC Fairprice Foundation Limited and the Housing & Development Board. He is the Deputy Chairman of NTUC Enterprise Co-operative Limited and a Director of Singapore Labour Foundation. He serves as a member of the Singapore Council of Presidential Advisers. Mr Chin served 31 years with KPMG Singapore and was its Managing Partner from 1992 until September 2005. He is an Associate Member of the Institute of Chartered Accountants in England and Wales. Resident of Singapore. Responsibilities: Non-Executive Director, Chairman of Audit Committee. Directorships held in other listed entities: Yeo Hiap Seng Limited, since 15 May 2006. Ho Bee Investment Limited, since 29 November 2006. Singapore Telecommunications Limited, since 1 May 2012. Other Directorships: Temasek Holdings (Private) Limited, since 10 June 2014. Directors’ Report16 | AVJENNINGS LIMITED · ABN 44 004 327 771 INFORMATION ON THE DIRECTORS (continued) Boon Leong Tan DipUrbVal (Auckland University, NZ) Director since 9 June 2017. Mr Tan has over 35 years of experience in real estate investment and asset management. He is a non-executive Director of SC Global Developments Pte Ltd, the Company’s major shareholder. Mr Tan last held the position of Group Chief Operating Officer cum Chief Executive Officer (Singapore Investments) in Mapletree Investments Pte Ltd, a real estate company wholly-owned by Temasek Holdings (Private) Limited. During his service in Mapletree Investments from 2003 to 2010, the company’s assets under management grew from US$2 billion to US$10 billion with no equity injections from shareholders. Prior to his career in Mapletree Investments, Mr Tan served in Temasek Holdings (Private) Limited from 1995 to 2003 and held the position of Managing Director (Strategic Investments). His portfolio included Temasek Holdings’ investments in real estate in Asia and Australia. His eight year career in Temasek Holdings included stints in venture capital investments in the IT sector, infrastructure investments in the energy and transportation sectors, and investments in financial services. Mr Tan had also served in the Inland Revenue Authority of Singapore (IRAS) from 1975 to 1995 where he last held the position of Tax Director in the Superscale grade. In IRAS, he handled property taxation, real estate valuation and government land policy formulation & implementation. Resident of Singapore. Responsibilities: Non-Executive Director, Member of Investments Committee. Directorships held in other listed entities: None. INFORMATION ON THE COMPANY SECRETARY Carl D Thompson LLB B. Comm Company Secretary since 12 January 2009. Mr Thompson previously held the company secretary and general counsel role at Downer EDI Limited. Prior to that he was a partner at national law firm Corrs Chambers Westgarth, practising in corporate and commercial work. Resident of Melbourne. Bruce G Hayman Director since 18 October 2005. Mr Hayman has many years commercial management experience with over 20 of those at operational Chief Executive or General Manager level. He is currently Chairman of Chartwell Management Services where he brings his very wide business experience to clients by way of the leadership, marketing, business performance and coaching programs he offers. He has fulfilled senior management roles both in Australia and overseas for companies such as Nicholas Pharmaceutical Group, Dairy Farm Group, Hong Kong Land and Seagram Corporation. During his time in Singapore, he held the position of Foundation President of the Singapore Australia Business Council now known as AUSTCHAM Singapore. He has also served as CEO of the Australian Rugby Union and as Chairman of the Board of the Rugby Club Ltd. He is Chairman of the Ella Foundation and a Director of Diabetes NSW. Resident of Sydney. Responsibilities: Non-Executive Director, Member of Remuneration Committee, Member of Nominations Committee, Member of Investments Committee, Member of Risk Management Committee. Directorships held in other listed entities: None. Teck Poh Lai B.A. Hons. (Economics) Director since 18 November 2011. Mr Lai has been a career banker since the late 1960s. He joined Citibank Singapore in April 1968, rising through the ranks to become Vice President and Head of the Corporate Banking Division. During his time with Citibank, Mr Lai undertook international assignments with Citibank in Jakarta, New York and London. His last position with Citigroup was as Managing Director of Citicorp Investment Banking Singapore Ltd (Corporate Finance and Capital Market Activities) from 1986 to 1987. Mr Lai joined Oversea-Chinese Banking Corporation (OCBC) in January 1988 as Executive Vice President and Division Head of Corporate Banking. He moved on to various other senior management positions in OCBC, such as Head of Information Technology and Central Operations and Risk Management. He was head of Group Audit prior to retiring in April 2010. Resident of Singapore. Responsibilities: Non-Executive Director, Member of Audit Committee, Member of Remuneration Committee, Member of Investments Committee. Directorships held in other listed entities: PT Bank OCBC NISP Tbk (Commissioner) since 4 September 2008. Oversea-Chinese Banking Corporation since 1 June 2010. Directors’ ReportREMUNERATION REPORT (Audited) This Remuneration Report is provided in accordance with the requirements of the Corporations Act 2001 (the Act) and has been audited as required by section 308(3C) of the Act. 1. Key Management Personnel (KMP) defined The name and position of each KMP whose remuneration is disclosed in this report are set out below: (i) Directors S Cheong RJ Rowley PK Summers Non-Executive Chairman Non-Executive Deputy Chairman Managing Director and Chief Executive Officer E Sam B Chin Non-Executive Director Non-Executive Director BG Hayman Non-Executive Director TP Lai D Tsang BL Tan (ii) Executives CD Thompson L Mahaffy SC Orlandi L Hunt Non-Executive Director Non-Executive Director (resigned 9 June 2017) Non-Executive Director (appointed 9 June 2017) Company Secretary/ General Counsel Chief Financial Officer Chief Strategy Officer General Manager, Human Resources 2. Remuneration Framework 2.1 Remuneration Governance The Board has established a Remuneration Committee which comprises four Non-Executive Directors and is responsible for determining and reviewing remuneration arrangements for KMP and other senior management personnel. The Committee is responsible for providing a remuneration structure that attracts, retains and motivates staff, which is aligned with shareholder interests and addresses market and other stakeholder views. 2.2 External Advisers No remuneration consultant made any remuneration recommendation as defined in Section 9B of the Corporations Act 2001 during the year ended 30 June 2017. AVJENNINGS LIMITED · ANNUAL REPORT 2017 | 17 2.3 Non-Executive Director (NED) Remuneration Arrangements At the Annual General Meeting (AGM) in the year 2000, shareholders approved a maximum annual aggregate fee pool of $400,000 for NEDs. The allocation to individual NEDs is determined after considering factors such as time commitment, the size and scale of the Company’s operations, skill sets, participation in committee work, in particular chairmanship of committees and fees paid to directors of comparable companies. NEDs do not receive any retirement benefits or performance-based remuneration. Three NEDs, Mr S Cheong, Mrs E Sam and Mr BL Tan do not receive fees. However, AVJennings pays a consulting fee to the Ultimate Parent Entity, SC Global Developments Pte Ltd. The fees are paid pursuant to a consultancy and advisory agreement for the provision of the following: • Services of at least two directors on the Board; • Assistance in sourcing and facilitating financial and banking requirements particularly from Asian- based and other institutions; • Assistance in secretarial and administrative matters in connection with the Company’s Singapore listing; • Sourcing and facilitating business, commercial and investment opportunities; and • Ancillary advice. The appropriateness of the agreement and the reasonableness of the fees is assessed annually by the Australian-based independent NEDs taking into account the actual services provided, comparable market data for similar services, the benefits to the Company and the likely cost of replacement of the services provided. This review has been undertaken annually over the past few years and the Australian-based NEDs have, on each occasion, concluded that the fee is appropriate in all the circumstances. The annual fees payable are $600,000. The agreement may be terminated by either party giving six months’ notice or by the Company on 30 days’ notice for cause. The remuneration of NEDs is detailed on page 23. 2.4 Executive Remuneration Arrangements Executive remuneration includes a mix of fixed and variable remuneration. Variable remuneration includes short term incentives, long term incentives and retention components. i) Fixed Remuneration Fixed Remuneration is represented by Total Employment Cost (TEC) which comprises base remuneration and superannuation contributions. TEC is reviewed annually or on promotion/appointment to the role. TEC is benchmarked against market data for comparable roles in the market. The Company sets TEC based on relevant market analysis, the scope and nature of the role and the individual’s performance, skills and responsibilities. The fixed component of remuneration of other KMP’s is detailed on page 24. Directors’ Report18 | AVJENNINGS LIMITED · ABN 44 004 327 771 REMUNERATION REPORT (Audited) (continued) 2.4 Executive Remuneration Arrangements (continued) ii) Variable Remuneration A) Short Term Incentive (STI) Executives participate in a STI plan which assesses achievement against Key Performance Measures (KPM). Each executive has KPMs that are aligned to company, business unit and individual performance. An STI payment is awarded to the extent performance is achieved against the KPMs set at the beginning of the financial year, as appropriate, and with regards to relevant business unit and company performance. STI awards for the executive team in the 2017 financial year were based on the scorecard measures and weightings disclosed below. These targets were set by the Remuneration Committee and align with the Group’s strategic and business objectives. They are reviewed annually. The CEO has a target STI opportunity of 35% of TEC and other Executives have a STI opportunity of 17% to 30% of TEC. The variable “at risk” component of executive remuneration ensures that a proportion of remuneration varies with performance (both of the individual and, as appropriate, the business unit and the Company as a whole). Allocation of Overall Performance Incentive between Components (shown as % of TEC) Position CEO Senior Executives State General Managers Total At Risk (%) STI (%) LTI (%) Retention (%) 100 33 50 35 17 30 40 8 10 25 8 10 The proportions of STI, LTI and retention components take into account: • Market practice; • • The objectives that the Board seeks to achieve and the behaviours which support that outcome; The desire for Senior Executives to have a shareholding as a proportion of remuneration in the event that equity rewards have vested; and The service period before executives can receive equity rewards. • The table below provides an overview of the STI against key financial and non-financial performance measures. Financial and Business Performance Underlying Profit Performance • Group profit before tax. • Return on NFE (Net Funds Employed). • Cost to income ratio. • Appropriate and efficient capital management. • Alignment of priorities and allocation of resources. • Market conditions, in particular performance in the Business Performance prevailing market. • Implementation of Company strategy and improvement in underlying health of the Company. • Increase in the Group’s market share of residential CEO Senior Executives State General Managers 70% 30% to 40% 50% Non-Financial Customer and Stakeholder Performance People Safety and Environment property sector. • Risk management. • Customer Advocacy. • Employee retention and engagement. • Leadership. • Providing a safe work environment. • Minimise the impact of our activities on the environment. 30% 60% to 70% 50% Directors’ ReportAVJENNINGS LIMITED · ANNUAL REPORT 2017 | 19 REMUNERATION REPORT (Audited) (continued) 2.4 Executive Remuneration Arrangements (continued) The Remuneration Committee determines the STI to be paid based on an assessment of the extent to which the KPMs are met. The STI payment is made within two months of the year end. The Committee has the discretion to adjust STIs upwards or downwards in light of unexpected or unintended circumstances. Based on achievements of the Group in the 2017 financial year and performance against individual KPMs, the Remuneration Committee determined that Executives achieved between 85% and 100% of their target opportunity (average 92%). In making this assessment, the Committee considered the following factors: • Performance in implementing Company strategy. • Performance in the prevailing market. • • • • Performance against individual KPMs. The financial result. The level of contract signings. The underlying health of the Company. B) Long Term Incentive (LTI) LTI awards are only made to executives who are in a position to have an impact on the Group’s performance and the creation of shareholder value over the longer term. (i) LTI and Retention (FY15 and subsequent years) With effect from FY15, LTI arrangements were varied and remuneration is provided by the Issue of Rights (instead of shares) and includes a retention component. The use of Rights as an incentive reduces the upfront cash requirements of the Company (as shares do not need to be acquired for allocations) and because participants do not receive dividends on Rights (as distinct from shares). The Total Shareholder Return (TSR) hurdle of the LTI component was replaced by a Return on Equity (ROE) hurdle which uses market capitalisation as a proxy for equity, and is more appropriate from a shareholders’ perspective as the required rates of return do not vary with “market” performance. The ROE hurdle operates such that 50% vesting occurs at an average annual return of 12% with 100% vesting at an average annual return of 18%. The Earnings Per Share (EPS) hurdle remains unchanged and is consistent with the FY14 and prior years’ LTI structure explained under LTI (FY14 and prior years) below. The performance conditions will be tested at the end of the three year vesting period and the number of rights that may vest will depend on the level of average annual returns achieved over that three year period. The service rights are split into three tranches that progressively vest each year subject to satisfaction of the service condition. The CEO’s participation was determined as 40% (LTI) and 25% (Retention component) of TEC respectively. The operation of the EPS, ROE and Retention hurdles are set out below. AVJennings’ EPS growth rate over the three year performance period < 5% 5% 5% –10% >=10% Percentage of rights vesting Nil 50% of the allocation for the hurdle Pro-rata between 50% and 100% 100% of the allocation for the hurdle AVJennings’ ROE over the three year performance period Percentage of rights vesting <12% 12% 15% >=18% Nil 50% 75% 100% (Straight line interpolation between 12% and 18%) Retention component – years of service Percentage of rights vesting one year two years three years 33.33% 33.33% 33.34% Rights have been granted to KMP as detailed in the table on page 21. The May 2015 Grant was delayed from 2014 whilst the Remuneration Committee considered the changes to the plan resulting in the Rights plan. The May 2015 Grant was made for the FY15 year (with LTI testing in September 2018). The September 2015 Grant was made in the FY16 year with LTI testing in September 2018. The September 2016 Grant was made in the FY17 year with LTI testing in September 2019. The fair value of the rights at the date of the grant is determined using an appropriate valuation model. The fair value is expensed over the period in which the performance and/or service conditions are fulfilled with a corresponding increase in share-based payment reserve in equity. The cumulative expense recognised for equity-settled transactions at each reporting date until the vesting date reflects the extent to which the vesting period has expired and the Group’s best estimate of the number of equity instruments that will ultimately vest. The expense or credit in the Consolidated Statement of Comprehensive Income represents the movement in cumulative expense recognised between the beginning and end of that period. Directors’ Report20 | AVJENNINGS LIMITED · ABN 44 004 327 771 REMUNERATION REPORT (Audited) (continued) 2.4 Executive Remuneration Arrangements (continued) AVJennings’ EPS growth rate over the performance period Percentage vesting < 5% 5% 5% – 10% >=10% Nil 50% of the allocation for the hurdle Pro-rata between 50% and 100% 100% of the allocation for the hurdle The original cost of equity-settled transactions was treated as a reduction in share capital and the underlying shares identified separately as treasury shares. The fair value at the date when the grant was made was determined using an appropriate valuation model. That fair value was expensed over the period in which the performance and/or service conditions were fulfilled with a corresponding increase in share-based payment reserve in equity. The cumulative expense recognised for equity-settled transactions at each reporting date until the vesting date reflected the extent to which the vesting period had expired and the Group’s best estimate of the number of equity instruments that would ultimately vest. The expense or credit in the Consolidated Statement of Comprehensive Income represents the movement in cumulative expense recognised between the beginning and end of that period. In respect of shares forfeited, no further amounts were expensed. The cumulative amounts relating to non- market based measures expensed to the date of forfeiture were reversed. There is no non-recourse financing provided to executives in relation to any share-based payments. (ii) LTI (FY 14 and prior years) The AVJ Deferred Employee Share Plan (the LTI Plan) administers employee share schemes under which shares were purchased on-market by the LTI Plan Trustee on behalf of employees. These shares vest to employees for no cash consideration subject to certain conditions being satisfied. Shares held by the LTI Plan’s trust and not yet allocated to employees are shown as treasury shares in the Financial Statements. Vesting is subject to both service and performance conditions. The service condition requires the executive to be employed by the Company as at 30 September in the third year after the grant date for each grant. The performance conditions apply to each grant – as to 50% as measured by the TSR hurdle and as to 50% by the EPS hurdle. The two performance hurdles are tested differently. The EPS hurdle is tested as at 30 June in the test year (three years after grant). The TSR hurdle is tested at 30 September of the third year after grant. The following is the status of allocations made to KMP under the LTI Plan: FY14 Grant On 25 September 2013, shares were granted to KMP. As detailed in the table on page 21, all unvested shares vested or were forfeited during the year. The service vesting condition was that the employee must be employed by AVJennings at 30 September 2016. In the event of death, permanent disablement or retrenchment, the shares may vest to the estate at the Board’s discretion. If the employee resigned (in certain circumstances) or was terminated, the unvested shares would be forfeited. The performance vesting conditions were: • TSR performance measured against the ASX Small Industrials Index; and • EPS growth. AVJennings’ EPS growth must meet or exceed 10% p.a. for the three financial years to 30 June 2017. Half of the allocation was assessed against each performance condition. The vesting schedule for the TSR and EPS performance conditions are set out in the tables below. The holder of the shares was entitled to receive all dividends paid between grant and vesting dates. AVJennings’ TSR rank against companies in the Index at 30 September Percentage vesting < median At the median Nil 50% > median but < 75th percentile Pro-rata between 50th and 75th percentiles >=75th percentile 100% Directors’ ReportAVJENNINGS LIMITED · ANNUAL REPORT 2017 | 21 REMUNERATION REPORT (Audited) (continued) 2.4 Executive Remuneration Arrangements (continued) The following is the status of shares granted to KMP under the FY14 LTI Plan: KMP Year of Grant PK Summers CD Thompson L Mahaffy SC Orlandi L Hunt Total FY14 FY14 FY14 FY14 FY14 Fair Value at grant date $351,499 $62,286 $56,947 $50,407 $38,493 Shares at beginning of the year 666,349 118,078 107,957 95,558 72,973 Forfeited (27,586) (4,888) (4,469) (3,956) (3,021) Vested (638,763) (113,190) (103,488) (91,602) (69,952) $559,632 1,060,915 (43,920) (1,016,995) Shares at end of the year – – – – – – The following is the status of rights granted to KMP under the FY15 and subsequent year LTI Plans: KMP PK Summers PK Summers PK Summers CD Thompson CD Thompson CD Thompson L Mahaffy L Mahaffy L Mahaffy SC Orlandi SC Orlandi SC Orlandi L Hunt L Hunt L Hunt Total Year of Grant Fair Value at grant date FY15 FY16 FY17 FY15 FY16 FY17 FY15 FY16 FY17 FY15 FY16 FY17 FY15 FY16 FY17 $386,528 $341,129 $372,970 $51,035 $59,904 $65,649 $46,660 $54,769 $60,022 $41,301 $48,479 $53,129 $31,538 $37,021 $40,571 Rights at beginning of the year 582,414 564,868 – 73,111 94,343 – 66,843 86,256 – 59,166 76,350 – 45,180 58,304 – Rights granted – – 721,355 – – 125,641 – – 114,872 – – 101,680 – – 77,646 Rights vested (82,654) (78,996) – (14,185) (18,076) – (12,969) (16,527) – (11,480) (14,629) – (8,766) (11,171) – Rights at end of the year 499,760 485,872 721,355 58,926 76,267 125,641 53,874 69,729 114,872 47,686 61,721 101,680 36,414 47,133 77,646 $1,690,705 1,706,835 1,141,194 (269,453) 2,578,576 AVJennings prohibits executives from entering into arrangements to protect the value of unvested LTI awards. This prohibition includes entering into hedging arrangements in relation to AVJennings shares. 3. Group Performance The table below shows the Group’s earnings performance as well as the movement in the Group’s Earnings per Share (EPS), Total Shareholder Return (TSR) and Market Capitalisation over the last 5 years. Financial Report Date 30 June 2013 30 June 2014 30 June 2015 30 June 2016 30 June 2017 Profit/(Loss) After Tax $’000 (15,266) 18,782 34,385 40,912 35,717 Basic EPS Cents (5.46) 4.94 9.03 10.71 9.31 TSR* Cents 14.0 13.0 10.5 (4.0) 15.0 Market Capitalisation $’000 Return on Market Capitalisation % 167,666 216,715 245,694 213,968 253,164 (9.11) 8.67 14.00 19.12 14.11 * TSR is the aggregate of the movement in the share price and dividends paid during the year ended 30 June. Directors’ Report22 | AVJENNINGS LIMITED · ABN 44 004 327 771 REMUNERATION REPORT (Audited) (continued) 5. Remuneration of KMP 4. Employment Contracts i) Chief Executive Officer Mr Summers’ employment contract does not have a termination date and does not stipulate a termination payment. However, it specifies a six month notice period. Details regarding the remuneration paid to Mr Summers are contained in the table on page 24. ii) Other Executives The other executives are full time permanent employees with employment contracts. The employment contracts do not have termination dates or termination payments. However, they specify a notice period of three months. Details of the nature and amount of each element of remuneration of Directors and executives are set out in the tables on pages 23 and 24. The Directors are the same as those identified in the Directors’ Report. 6. Remuneration Options: Granted and Vested During the Year No options were either granted or exercised during the year. There are currently no unexercised or outstanding options. None of the Directors or executives hold any options. 7. Shareholdings of KMP The number of shares in the Company held during the financial year by each KMP of the Group, including their related parties, are set out below. Opening Balance Vested as Remuneration On market Purchase Other (1) Closing Balance For the year ended 30 June 2017 Directors S Cheong E Sam PK Summers RJ Rowley D Tsang (1) Executives CD Thompson L Mahaffy SC Orlandi L Hunt 192,318,030 209,349 3,119,775 252,000 837,396 1,227,106 49,463 249,720 149,186 – – 800,413 – – 145,451 132,984 117,711 89,889 11,500,000 – – – – – – – – – – – – (837,396) 203,818,030 209,349 3,920,188 252,000 – – – – – 1,372,557 182,447 367,431 239,075 Total 198,412,025 1,286,448 11,500,000 (837,396) 210,361,077 For the year ended 30 June 2016 Directors S Cheong E Sam PK Summers RJ Rowley D Tsang (1) Executives CD Thompson L Mahaffy SC Orlandi L Hunt 192,318,030 209,349 2,815,505 252,000 837,396 884,448 19,967 202,483 87,082 – – 304,270 – – 54,158 29,496 47,237 36,071 – – – – – 288,500 – – 26,033 Total (1) Resigned 9 June 2017. 197,626,260 471,232 314,533 – – – – – – – – – – 192,318,030 209,349 3,119,775 252,000 837,396 1,227,106 49,463 249,720 149,186 198,412,025 Directors’ ReportAVJENNINGS LIMITED · ANNUAL REPORT 2017 | 23 REMUNERATION REPORT (Audited) (continued) 8. Remuneration Tables i) Non-Executive Directors S Cheong(1) RJ Rowley E Sam(1) B Chin BG Hayman TP Lai D Tsang (1) BL Tan (1) Total Total Year 2017 2016 2017 2016 2017 2016 2017 2016 2017 2016 2017 2016 2017 2016 2017 2016 2017 2016 Short-Term Fees $ – – 58,219 77,626 – – 60,000 60,000 45,662 45,662 50,000 50,000 – – – – Post Employment Superannuation(2) $ – – 26,781 7,374 – – – – 4,338 4,338 – – – – – – Total $ – – 85,000 85,000 – – 60,000 60,000 50,000 50,000 50,000 50,000 – – – – 213,881 233,288 31,119 11,712 245,000 245,000 (1) These Directors were not paid fees. A consulting fee of $50,000 per month was paid to the ultimate parent entity SC Global Developments Pte Ltd which covers the services of these Directors. International airfares to attend meetings are paid for by a related entity. (2) Payments to Defined Contribution Plans consist of Superannuation Guarantee Contribution payments as well as employee voluntary contributions. (a) Directors are also reimbursed for airfares (other than the international airfares for those Directors referred to in (1) above), and other expenses relating to the provision of their services. Directors’ Report 24 | AVJENNINGS LIMITED · ABN 44 004 327 771 e c n a m r o f r e P d e t a e R l l a t o T d e s a b - e r a h S m r e T - g n o L t n e m y o p m E l r e h t O t s o P s e d u c n i ( l e c i v r e S g n o L I T L d e u r c c A ) n o i t n e t e R e v a e L ) 1 ( n o i t a u n n a r e p u S ) 2 ( r e h t O % 7 1 5 3 . 5 7 5 3 . 1 9 7 1 . . 1 7 8 1 1 6 6 1 . . 2 5 6 1 6 5 6 1 . 2 2 7. 1 9 2 6 1 . . 9 1 6 1 $ $ 5 8 0 , 8 0 2 , 1 3 1 5 , 6 8 3 , 6 4 1 9 1 2 1 , 3 6 0 , 7 3 5 4 2 1 1 3 5 , 0 9 1 , 5 7 4 0 3 7 1 6 4 , 6 8 8 , 7 3 4 2 2 2 7 3 4 , 7 3 5 , 7 2 3 0 9 5 8 1 3 , 4 3 6 1 2 4 , 7 8 4 , 5 6 5 6 7 0 7 , 4 7 8 , 9 5 3 2 2 3 6 , 8 9 9 , 2 5 0 2 5 7 5 , 1 7 4 , 0 4 4 2 9 3 4 , $ 2 7 9 , 7 2 6 1 4 8 2 , 6 7 7 , 8 1 6 1 6 8 1 , 3 0 5 , 8 0 6 4 7 , 8 0 6 , 1 1 2 8 5 2 1 , 4 5 5 , 0 1 7 3 3 0 1 , $ 6 1 6 , 9 1 8 0 3 9 1 , 6 1 6 , 9 1 8 0 3 9 1 , 6 1 6 , 9 1 8 0 3 9 1 , 7 8 6 , 9 1 8 0 3 9 1 , 9 6 6 , 9 1 8 0 3 9 1 , $ 9 0 3 , 0 7 3 4 3 1 6 , – – – – – – – – I T S $ 0 4 8 , 0 0 2 , 0 9 9 4 9 1 3 5 6 , 5 6 1 4 7 3 6 , 2 2 0 , 1 5 8 0 7 3 4 , 9 1 8 , 7 4 6 2 4 6 4 , 8 8 4 , 4 3 4 4 5 9 2 , m r e T - t r o h S d e u r c c A e v a e L l a u n n A y r a a S l $ 3 3 9 , 1 2 2 9 9 9 1 , ) 2 7 7 , 6 ( ) 4 4 4 4 ( , ) 4 6 3 , 4 ( ) 6 2 3 2 ( , 7 9 5 , 6 6 8 1 1 1 , 9 2 7 , 3 ) 7 6 3 ( $ 2 0 9 , 0 8 4 3 6 4 3 7 4 , 3 0 3 , 4 7 3 8 3 1 3 6 3 , 9 3 5 , 0 4 3 7 5 3 0 3 3 , 7 7 1 , 9 9 2 0 0 2 0 9 2 , 6 2 6 , 8 1 2 4 4 8 5 1 2 , r a e Y 7 1 0 2 6 1 0 2 7 1 0 2 6 1 0 2 7 1 0 2 6 1 0 2 7 1 0 2 6 1 0 2 7 1 0 2 6 1 0 2 s r e m m u S K P n o s p m o h T D C y ff a h a M L i d n a l r O C S t n u H L l a t o T l a t o T ) d e u n i t n o c ( ) d e t i d u A ( T R O P E R N O I T A R E N U M E R l e n n o s r e P t n e m e g a n a M y e K f o n o i t a s n e p m o C ) i i i ( l ) d e u n i t n o c ( s e b a T n o i t a r e n u m e R . 8 P M K r e h t O ) i i 1 6 7 , 5 8 9 , 2 3 4 3 , 5 0 6 3 1 4 , 7 7 4 0 2 , 8 9 9 0 3 , 0 7 2 2 8 , 9 9 3 3 2 1 , 1 2 7 4 5 , 3 1 7 , 1 7 1 0 2 , 2 1 8 7 6 9 2 , 6 6 0 7 5 6 , 1 1 4 7 7 , 0 4 5 6 9 , 3 4 3 1 6 , 9 0 4 8 7 3 , 1 4 0 4 2 , , 2 0 0 3 7 6 1 , 6 1 0 2 . s n o i t u b i r t n o c y r a t n u o v e e y o p m e s a l l l l e w s a s t n e m y a p n o i t u b i r t n o C e e t n a r a u G n o i t a u n n a r e p u S f o t s i s n o c s n a P n o i t u b i r t n o C d e n fi e D o t l s t n e m y a P ) 1 ( . s t fi e n e b e c h e v i l r o t o m l f o e u a v e h t o t s e t a e r l ’ r e h t O ‘ ) 2 ( Directors’ Report AVJENNINGS LIMITED · ANNUAL REPORT 2017 | 25 MEETINGS OF DIRECTORS AND DIRECTORS’ COMMITTEES The number of meetings of Directors and Directors’ committees held during the year, for the period the Director was a Member of the Board or a Committee, and the number of meetings attended by each Director are detailed below. Full Meetings of Directors Audit Held 6 6 6 6 6 6 6 5 1 Attended 6 6 6 5 5 6 6 5 1 Held – 3 – – 3 – 3 3 – Attended – 3 – – 3 – 3 3 – Meetings of Committees Remuneration Held 1 – – 1 – 1 1 – – Attended 1 – – 1 – 1 1 – – Nominations Held 1 1 – 1 – 1 – – – Attended 1 1 – 1 – 1 – – – Risk Management Attended – 1 – – – 1 – – – Held – 1 – – – 1 – – – S Cheong RJ Rowley PK Summers E Sam B Chin BG Hayman TP Lai D Tsang(1) BL Tan(2) (1) Resigned 9 June 2017. (2) Appointed 9 June 2017. Investments Committee The Investments Committee does not formally meet in person. It conducts physical inspections of certain major development sites and receives detailed briefings from management on all major development sites prior to consideration of formal acquisition proposals which are dealt with by way of circular resolution. DIRECTORS’ INTERESTS ROUNDING The relevant interests of the Directors in the shares of the Company at the date of this Report are: Director S Cheong E Sam PK Summers RJ Rowley Number 203,818,030 209,349 3,920,188 252,000 INDEMNIFYING OFFICERS During the year, the Group paid a premium in respect of a contract insuring its Directors and employees against liabilities that may be incurred in defending civil or criminal proceedings that may be brought against the Officers in their capacity as Officers of entities in the Group. In accordance with common practice, the insurance policy prohibits disclosure of the nature of the liability insured against and the amount of the premium. INDEMNIFICATION OF AUDITORS To the extent permitted by law, the Company has agreed to indemnify its auditors, Ernst & Young, as part of the terms of its audit engagement agreement against claims by third parties arising from the audit (for an unspecified amount). No payment has been made to indemnify Ernst & Young during or since the financial year. ASIC Corporations (Rounding in Financial/Directors’ Reports) Instrument 2016/191 is applicable to the Group and in accordance with that Instrument, amounts in the Financial Report and the Directors’ Report are rounded to the nearest thousand dollars, unless otherwise indicated. EXTENSION OF ELIGIBILITY TERM OF AUDIT PARTNER In accordance with section 324DAA of the Act, and in accordance with a recommendation of the Audit Committee, the Directors granted approval for the Group’s audit partner to play a significant role in the audit of the Group for a further two successive financial years in addition to his original five successive financial years, such that his term will expire on 30 June 2018. The Directors noted that the Committee was satisfied that the extension would maintain the quality of the audit and would not give rise to any conflicts of interest for the following reasons: • the existing audit effectiveness protocols within the Committee’s charter are sufficient to ensure that auditor independence would not be diminished by such an extension; • extending the engagement period of the incumbent audit partner would ensure the preservation of knowledge in circumstance where the Company is both diversifying its project mix (particularly with the introduction of the Waterline project) and bringing a large number of new projects to production; and the Directors of the Group have the option to reassess the auditor appointment at any time. • Directors’ Report26 | AVJENNINGS LIMITED · ABN 44 004 327 771 AUDITOR’S INDEPENDENCE DECLARATION We have obtained the following Independence Declaration from our auditors, Ernst & Young: AUDITOR’S INDEPENDENCE DECLARATION TO THE DIRECTORS OF AVJENNINGS LIMITED As lead auditor for the audit of AVJennings Limited for the financial year ended 30 June 2017, I declare to the best of my knowledge and belief, there have been: a) no contraventions of the auditor independence requirements of the Corporations Act 2001 in relation to the audit ; and b) no contraventions of any applicable code of professional conduct in relation to the audit. This declaration is in respect of AVJennings Limited and the entities it controlled during the financial year. Ernst & Young 4 September 2017 Mark Conroy Partner A member firm of Ernst & Young Global Limited Liability limited by a scheme approved under Professional Standards Legislation NON-AUDIT SERVICES The Group’s auditor, Ernst & Young, has not provided any non-audit services during the year. Signed in accordance with a resolution of the Directors. Simon Cheong Director 4 September 2017 Peter Summers Director Directors’ Report Consolidated Statement of Comprehensive Income AVJENNINGS LIMITED · ANNUAL REPORT 2017 | 27 Revenues Cost of sales Gross profit Share of losses of associates and joint venture entities accounted for using the equity method Change in inventory loss provisions Selling and marketing expenses Employee expenses Other operational expenses Management and administration expenses Depreciation expense Finance costs Profit before income tax Income tax Profit after income tax Other comprehensive income (OCI) Foreign currency translation Other comprehensive (loss)/income for the year Total comprehensive (loss)/income for the year Profit for the year attributable to owners of the Company Total comprehensive income for the year attributable to owners of the Company Earnings per share (cents per share): Basic earnings per share Diluted earnings per share Note 2 22 2 2 2 3 2017 $’000 2016 $’000 401,632 (305,053) 96,579 421,884 (315,731) 106,153 (28) 5,057 (10,297) (24,600) (7,069) (8,120) (298) (195) 51,029 (15,312) 35,717 (583) 3,665 (11,002) (24,797) (5,479) (8,373) (275) (526) 58,783 (17,871) 40,912 (109) (109) 2,042 2,042 35,608 42,954 35,717 40,912 35,608 42,954 30 30 9.31 9.31 10.71 10.71 28 | AVJENNINGS LIMITED · ABN 44 004 327 771 Consolidated Statement of Financial Position CURRENT ASSETS Cash and cash equivalents Trade and other receivables Inventories Other assets Total current assets NON-CURRENT ASSETS Trade and other receivables Inventories Equity accounted investments Available-for-sale financial asset Plant and equipment Intangible assets Total non-current assets Total assets CURRENT LIABILITIES Trade and other payables Interest-bearing loans and borrowings Tax payable Provisions Total current liabilities NON-CURRENT LIABILITIES Trade and other payables Interest-bearing loans and borrowings Deferred tax liabilities Provisions Total non-current liabilities Total liabilities Net assets EQUITY Contributed equity Reserves Retained earnings Total equity Note 2017 $’000 2016 $’000 4 5 6 7 5 6 22 8 9 10 11 12 3(c) 13 11 12 3(d) 13 15,562 121,872 211,073 3,073 43,086 106,060 209,939 2,140 351,580 361,225 38,131 21,694 308,133 343,098 8,449 2,880 792 2,816 8,684 2,880 985 2,816 361,201 380,157 712,781 741,382 75,553 117,633 2,607 5,257 5,607 10,057 10,494 6,261 89,024 144,445 37,449 43,333 177,016 165,466 27,422 867 23,437 794 242,754 233,030 331,778 377,475 381,003 363,907 14 15(a) 15(c) 160,436 160,436 6,622 6,022 213,945 197,449 381,003 363,907 Consolidated Statement of Changes in Equity AVJENNINGS LIMITED · ANNUAL REPORT 2017 | 29 Attributable to equity holders of AVJennings Limited Total equity Foreign Currency Translation Reserve Share-based Payment Reserve Retained Earnings Contributed Equity Note $’000 $’000 $’000 $’000 $’000 At 1 July 2015 160,436 1,791 1,283 173,836 337,346 Comprehensive income: Profit for the year Other comprehensive income for the year Total comprehensive income for the year Transactions with owners in their capacity as owners - Share-based payment expense reversed (forfeited shares) - Share-based payment expense - Dividends paid Total transactions with owners in their capacity as owners 28(a) 28(a) 16 – – – – – – – 2,042 2,042 – – – 40,912 40,912 – 2,042 40,912 42,954 – – – (19) 925 – – – (19) 925 (17,299) (17,299) – – 906 (17,299) (16,393) At 30 June 2016 160,436 3,833 2,189 197,449 363,907 At 1 July 2016 Comprehensive income: Profit for the year Other comprehensive loss for the year 160,436 3,833 2,189 197,449 363,907 – – – (109) – – 35,717 35,717 – (109) Total comprehensive income for the year – (109) – 35,717 35,608 Transactions with owners in their capacity as owners - Share-based payment expense reversed (forfeited shares) - Share-based payment expense - Dividends paid Total transactions with owners in their capacity as owners 28(a) 28(a) 16 – – – – – – – (110) 819 – – (110) 819 – (19,221) (19,221) – 709 (19,221) (18,512) At 30 June 2017 160,436 3,724 2,898 213,945 381,003 30 | AVJENNINGS LIMITED · ABN 44 004 327 771 Consolidated Statement of Cash Flows CASH FLOW FROM OPERATING ACTIVITIES Receipts from customers Payments to suppliers and employees Finance costs including interest paid Income tax paid Net cash used in operating activities CASH FLOW FROM INVESTING ACTIVITIES Proceeds from sale of plant and equipment Payments for plant and equipment Interest received Dividends received from joint venture entity Net cash from investing activities CASH FLOW FROM FINANCING ACTIVITIES Proceeds from borrowings Repayment of borrowings Dividends paid Net cash (used in)/from financing activities NET (DECREASE)/INCREASE IN CASH AND CASH EQUIVALENTS Cash and cash equivalents at beginning of year Effects of exchange rate changes on cash and cash equivalents Note 2017 $’000 2016 $’000 2 3(c) 17 9 2 22 16 408,600 417,922 (394,782) (10,544) (16,501) (432,880) (12,566) (786) (13,227) (28,310) – (119) 860 208 949 2 (735) 526 1,400 1,193 230,975 454,482 (226,875) (19,221) (405,683) (17,299) (15,121) 31,500 (27,399) 43,086 (125) 4,383 37,812 891 CASH AND CASH EQUIVALENTS AT END OF YEAR 4 15,562 43,086 AVJENNINGS LIMITED · ANNUAL REPORT 2017 | 31 Section A – How the numbers are calculated Section A1 Segment information 1. OPERATING SEGMENTS AVJennings operates primarily in residential development. The Group determines segments based on information that is provided to the Managing Director who is the chief operating decision maker (CODM). The CODM assesses the performance and makes decisions about the resources to be allocated to the segment. Each segment prepares a detailed finance report on a monthly basis which summaries the following: • Historic results of the segment; and • Forecast of the segment for the remainder of the year. Reportable segments Jurisdictions: Include activities relating to Land Development, Integrated Housing and Apartments Development. Other: Include numerous low value items, amongst the most significant of which is interest. Notes to the Consolidated Financial Statements32 | AVJENNINGS LIMITED · ABN 44 004 327 771 l a t o T r e h t O Z N A S D L Q C V I W S N 6 1 0 2 0 0 0 $ ’ 7 1 0 2 0 0 0 $ ’ 6 1 0 2 0 0 0 $ ’ 7 1 0 2 0 0 0 $ ’ 6 1 0 2 0 0 0 $ ’ 7 1 0 2 0 0 0 $ ’ 6 1 0 2 0 0 0 $ ’ 7 1 0 2 0 0 0 $ ’ 6 1 0 2 0 0 0 $ ’ 7 1 0 2 0 0 0 $ ’ 6 1 0 2 0 0 0 $ ’ 7 1 0 2 0 0 0 $ ’ 6 1 0 2 0 0 0 $ ’ 7 1 0 2 0 0 0 $ ’ : s t n e m g e s g n i t a r e p o g n d r a g e r n o i t a m r o f n i i s t l u s e r d n a s e u n e v e r e h t s t n e s e r p e b a t g n w o i l l l o f e h T s t n e m g e s g n i t a r e p O s e u n e v e R ) d e u n i t n o c ( S T N E M G E S G N I T A R E P O . 1 5 8 7 6 9 8 3 0 2 0 2 4 , 0 5 4 9 9 3 , 4 8 0 1 , – – – – 8 9 0 1 , 6 9 8 8 9 0 1 , 3 5 2 4 4 , 3 8 8 7 4 , 6 4 2 1 4 , 8 6 7 7 2 , 2 4 0 9 9 , 1 4 5 2 8 , 2 1 9 8 6 , 0 3 2 3 7 , 0 5 7 6 6 1 , 8 2 0 8 6 1 , l s e a s l a n r e t x E 3 – – – 2 2 – 3 2 – – – – – – 5 1 2 0 1 7 6 4 8 0 5 – – – s e e f t n e m e g a n a M e u n e v e r r e h t O 4 8 8 , 1 2 4 2 3 6 , 1 0 4 6 9 8 8 9 0 , 1 6 5 2 , 4 4 3 8 8 , 7 4 8 6 2 , 1 4 1 9 7 , 7 2 2 4 0 , 9 9 6 5 7 , 2 8 2 2 6 , 9 6 6 7 0 , 4 7 0 0 8 , 6 6 1 8 2 0 , 8 6 1 s e u n e v e r t n e m g e s l a t o T 5 2 4 4 7 , 2 9 4 3 6 , 4 6 0 1 , 7 7 1 2 , 3 0 3 3 1 , 4 2 9 9 , 5 1 5 4 , ) 6 8 2 1 ( , 3 6 1 4 1 , 1 5 0 8 , 7 8 7 2 , 9 2 2 2 , 3 9 5 8 3 , 7 9 3 2 4 , s t l u s e r t n e m g e S s t l u s e R ) 3 8 5 ( ) 8 2 ( ) 5 9 5 ( ) 3 6 ( 5 6 6 3 , 7 5 0 5 , ) 5 7 2 ( ) 8 9 2 ( ) 3 2 9 7 1 ( , ) 9 9 9 6 1 ( , ) 6 2 5 ( ) 5 9 1 ( 3 8 7 8 5 , 9 2 0 1 5 , ) 1 7 8 7 1 ( , ) 2 1 3 5 1 ( , 2 1 9 , 0 4 7 1 7 , 5 3 – – – – – – – – – – – – – – – – – – ) 5 ( ) 7 ( – – – – – ) 8 1 7 ( 6 1 7 – – – – – – – – – – – – – – – – – – – – – 7 1 2 4 d o h t e m y t i u q e e h t g n i s u r o f d e t n u o c c a s V J d n a s e t a c o s s a i f o ) s e s s o l ( / s t fi o r p f o e r a h S – – – – – – 9 4 9 2 , 5 7 7 5 , s s o l y r o t n e v n i n i e g n a h C s n o i s i v o r p i n o i t a c e r p e d d e t a c o l l a n U n o i t a s i t r o m a d n a s e s n e p x e d e t a c o l l a n U e s n e p x e t s e r e t n i d e t a c o l l a n U x a t e m o c n i e r o f e b t fi o r P x a t e m o c n i r e t f a t fi o r P x a t e m o c n I Notes to the Consolidated Financial Statements AVJENNINGS LIMITED · ANNUAL REPORT 2017 | 33 l a t o T r e h t O Z N A S D L Q C V I W S N 6 1 0 2 0 0 0 $ ’ 7 1 0 2 0 0 0 $ ’ 6 1 0 2 0 0 0 $ ’ 7 1 0 2 0 0 0 $ ’ 6 1 0 2 0 0 0 $ ’ 7 1 0 2 0 0 0 $ ’ 6 1 0 2 0 0 0 $ ’ 7 1 0 2 0 0 0 $ ’ 6 1 0 2 0 0 0 $ ’ 7 1 0 2 0 0 0 $ ’ 6 1 0 2 0 0 0 $ ’ 7 1 0 2 0 0 0 $ ’ 6 1 0 2 0 0 0 $ ’ 7 1 0 2 0 0 0 $ ’ s t n e m g e s g n i t a r e p O s t e s s A 2 8 3 1 4 7 , 1 8 7 2 1 7 , 9 4 4 7 5 , 6 8 4 6 2 , 2 2 4 4 8 , 4 2 1 6 6 , 8 8 1 5 9 , 5 1 6 2 9 , 4 7 2 9 9 , 1 9 6 2 2 1 , , 6 5 2 8 8 1 , 6 4 4 4 8 1 3 9 7 6 1 2 , 9 1 4 0 2 2 , s t e s s a t n e m g e S 2 8 3 , 1 4 7 1 8 7 , 2 1 7 9 4 4 , 7 5 6 8 4 , 6 2 2 2 4 , 4 8 4 2 1 , 6 6 8 8 1 , 5 9 5 1 6 , 2 9 4 7 2 , 9 9 1 9 6 , 2 2 1 6 5 2 , 8 8 1 6 4 4 , 4 8 1 3 9 7 , 6 1 2 9 1 4 , 0 2 2 s t e s s a l a t o T 5 7 4 7 7 3 , 8 7 7 1 3 3 , 1 3 6 0 7 1 , 2 9 2 8 6 1 , 6 8 5 2 6 , 2 6 6 5 4 , 8 8 0 6 , 1 3 2 5 , 0 3 5 4 1 , 5 0 4 6 2 , 7 2 5 0 7 , 5 8 6 8 5 , 3 1 1 3 5 , 3 0 5 7 2 , s e i t i l i b a i l t n e m g e S 5 7 4 , 7 7 3 8 7 7 , 1 3 3 1 3 6 , 0 7 1 2 9 2 , 8 6 1 6 8 5 , 2 6 2 6 6 , 5 4 8 8 0 , 6 1 3 2 , 5 0 3 5 , 4 1 5 0 4 , 6 2 7 2 5 , 0 7 5 8 6 , 8 5 3 1 1 , 3 5 3 0 5 , 7 2 s e i t i l i b a i l l a t o T s e i t i l i b a i L : s t n e m g e s g n i t a r e p o g n d r a g e r n o i t a m r o f n i i s e i t i l i b a i l d n a s t e s s a e h t s t n e s e r p e b a t g n w o i l l l o f e h T ) d e u n i t n o c ( S T N E M G E S G N I T A R E P O . 1 Notes to the Consolidated Financial Statements 34 | AVJENNINGS LIMITED · ABN 44 004 327 771 Section A2 Profit and loss information 2. REVENUES AND EXPENSES Revenues Sales of land and built form Interest received Management fees received/receivable Other Total revenues Revenue recognition 2017 $’000 2016 $’000 399,450 420,203 860 1,084 238 526 785 370 401,632 421,884 Revenue is measured at the fair value of the consideration received or receivable. Revenue is recognised for the major business activities as follows: Development projects and land sales Revenue from the sale of land, houses and apartments is recognised when the significant risks, rewards of ownership and effective control have been transferred to the buyer. This has been determined to generally occur on settlement. Revenue from land sales is recognised prior to settlement when a signed unconditional contract for sale exists, the significant risks, rewards of ownership and effective control have been transferred to the buyer, and there is no management involvement to the degree usually associated with ownership. Interest revenue Revenue is recognised as interest accrues using the effective interest rate method. Management fees Revenue is recognised upon performance of the services. Dividends Dividends are recognised as revenue when the right to receive payment is established. Notes to the Consolidated Financial Statements2. REVENUES AND EXPENSES (continued) Expenses AVJENNINGS LIMITED · ANNUAL REPORT 2017 | 35 Note 2017 $’000 2016 $’000 Cost of sales include: Amortisation of finance costs capitalised to inventories 12,898 15,454 Depreciation expense Leasehold improvements Plant, equipment and motor vehicles Total depreciation expense Finance costs Bank loans and overdraft Less: Amount capitalised to inventories Finance costs expensed Impairment of assets Net decrease in inventory loss provisions Total net impairment reversed 9 9 29 269 298 8 267 275 10,544 (10,349) 12,566 (12,040) 195 526 5,057 3,665 5,057 3,665 For the year ended 30 June 2017, the movement in inventory loss provisions resulted from a realignment of future assumptions with current market conditions predominantly driven by projects in New South Wales and South Australia. Notes to the Consolidated Financial Statements36 | AVJENNINGS LIMITED · ABN 44 004 327 771 3. INCOME TAX (a) Income tax expense The major components of income tax are: Current income tax Current income tax charge Adjustment for prior year Deferred income tax Current year temporary differences Adjustment for prior year Income tax reported in the Consolidated Statement of Comprehensive Income 2017 $’000 2016 $’000 11,332 11,442 (7) 10 3,977 10 6,425 (6) 15,312 17,871 (b) Numerical reconciliation between aggregate tax recognised in the Consolidated Statement of Comprehensive Income and tax calculated per the statutory income tax rate Accounting profit before income tax Tax at Australian income tax rate of 30% (2016 – 30%) Non-deductible share of equity accounted Joint Venture losses Other non-deductible items Assessable foreign jurisdiction gains Unused tax losses recognised and utilised Effect of lower tax rate in foreign jurisdictions Adjustment for prior year Income tax expense Effective tax rate (c) Numerical reconciliation from income tax expense to income taxes paid Income tax expense Timing differences recognised in deferred tax Adjustment for prior year Exchange rate translation difference Current year tax payable at year end Prior year tax paid/(refunded) in current year 51,029 58,783 15,309 17,635 8 144 2 – (154) 3 175 148 345 (193) (243) 4 15,312 17,871 30% 30% 15,312 17,871 (3,987) (6,419) 7 (45) (5,257) 10,471 (10) (19) (10,494) (143) Cash taxes paid per Consolidated Statement of Cash Flows 16,501 786 Notes to the Consolidated Financial Statements AVJENNINGS LIMITED · ANNUAL REPORT 2017 | 37 3. INCOME TAX (continued) (d) Recognised deferred tax assets and liabilities Opening balance Expense /(benefit) Recognised on acquisition Foreign exchange variance Closing balance $’000 $’000 $’000 $’000 $’000 Deferred income tax movement for the year ended 30 June 2017: Deferred tax assets – inventories – prepayments and accruals – provisions on employee entitlement – other Deferred tax assets Deferred tax liabilities – inventories – unearned revenue – prepayments and accruals – provisions on employee entitlement – brand name – other 6,769 1,344 1,446 288 (2,518) (180) 72 (74) 9,847 (2,700) (22,190) (9,954) (135) (152) (845) (8) 339 (1,507) (233) 152 – (38) Deferred tax liabilities (33,284) (1,287) Net deferred tax liabilities (23,437) (3,987) Deferred income tax movement for the year ended 30 June 2016: Deferred tax assets – inventories – prepayments and accruals – provisions on employee entitlement – losses available for offsetting against future taxable income – other Deferred tax assets Deferred tax liabilities – inventories – unearned revenue – prepayments and accruals – provisions on employee entitlement – brand name – other 9,588 (2,819) 909 1,363 434 82 2,506 (2,699) 240 48 14,606 (4,954) (23,371) (6,639) (80) (423) (845) (23) 1,181 (3,070) (55) 271 – 15 Deferred tax liabilities (31,381) (1,658) – – – – – – – – – – – – – – – – 193 – 193 – – – – – – – – – – – – – 2 – – – – 2 2 – 1 1 – – 2 – (245) – – – – 4,251 1,164 1,518 214 7,147 (21,851) (11,459) (368) – (845) (46) (34,569) (27,422) 6,769 1,344 1,446 – 288 9,847 (22,190) (9,954) (135) (152) (845) (8) (245) (33,284) Net deferred tax liabilities (16,775) (6,612) 193 (243) (23,437) Notes to the Consolidated Financial Statements38 | AVJENNINGS LIMITED · ABN 44 004 327 771 3. INCOME TAX (continued) (f) Accounting (e) Tax consolidation legislation AVJennings Limited and its wholly owned Australian controlled entities are in a tax consolidated group. The entities in the tax consolidated group have entered into a tax sharing agreement which limits the joint and several liabilities of the wholly owned entities in the case of a default by the head entity, AVJennings Limited. The entities in the tax consolidated group have also entered into a tax funding agreement to fully compensate/be compensated by AVJennings Limited for current tax balances and deferred tax assets or unused tax losses and credits transferred. Income tax expense is calculated at the applicable tax rate and recognised in the profit and loss for the year, unless it relates to other comprehensive income or transactions recognised directly in equity. The tax expense comprises current and deferred tax. Broadly, current tax represents the tax expense paid or payable for the current year. Deferred tax accounts for tax on temporary differences. Temporary differences generally occur when income and expenses are recognised by tax authorities and for accounting purposes in different periods. Deferred tax assets, including those arising from tax losses, are only recognised to the extent it is probable that sufficient taxable profits will be available to utilise the losses in the foreseeable future. Section A3 Balance Sheet information 4. CASH AND CASH EQUIVALENTS Cash at bank and in hand Accounting 2017 $’000 2016 $’000 15,562 43,086 Cash and cash equivalents in the Consolidated Statement of Financial Position comprise cash at bank and in hand and short term deposits with a maturity of three months or less, which are subject to an insignificant risk of changes in value. Notes to the Consolidated Financial Statements5. TRADE AND OTHER RECEIVABLES Current Trade receivables Related party receivables Funds held in trust accounts Other receivables Total current trade and other receivables Non-current Trade receivables Related party receivables Other receivables Total non-current trade and other receivables (i) Accounting Receivables are recognised at fair value less provision for impairment. AVJENNINGS LIMITED · ANNUAL REPORT 2017 | 39 2017 $’000 2016 $’000 113,999 102,910 3,580 – 4,293 1,600 657 893 121,872 106,060 32,583 15,063 1,096 4,452 1,601 5,030 38,131 21,694 Individual receivables that are known to be uncollectible are written-off when identified. A provision for impairment is recognised when there is objective evidence that the collection of the receivable is doubtful. The provision is calculated as the difference between the carrying amount of the receivable and the present value of estimated future cash flows, discounted at the effective interest rate. (ii) Allowance for impairment loss No impairment loss (2016: $Nil) has been recognised by the Group in the current year. At 30 June, the ageing analysis of trade receivables is as follows: Number of days outstanding Total $’000 0-30 $’000 31-60 $’000 61-90 $’000 + 91 $’000 + 91# $’000 146,582 146,570 117,973 117,962 6 6 3 – 3 5 – – 2017 2016 # Considered impaired. The carrying value of receivables is assumed to approximate their fair value. The Group does not have any significant credit risk exposure to a single customer. Receivables in respect of land and built form require to be fully settled prior to passing of title. Notes to the Consolidated Financial Statements 40 | AVJENNINGS LIMITED · ABN 44 004 327 771 6. INVENTORIES Current Broadacres Land to be subdivided – at cost Borrowing and holding costs capitalised Impairment provision Total broadacres Work–in–progress Land subdivided or in the course of being subdivided – at cost Development costs capitalised Houses and apartments under construction – at cost Borrowing and holding costs capitalised Impairment provision Total work–in–progress Completed inventory Completed houses and apartments – at cost Completed residential land lots – at cost Borrowing and holding costs capitalised Impairment provision Total completed inventory Total current inventories Non–current Broadacres Land to be subdivided – at cost Borrowing and holding costs capitalised Impairment provision Total broadacres Work–in–progress Land subdivided or in the course of being subdivided – at cost Development costs capitalised Houses and apartments under construction – at cost Borrowing and holding costs capitalised Impairment provision Total work–in–progress Completed inventory Completed residential land lots – at cost Borrowing and holding costs capitalised Impairment provision Total completed inventory Total non–current inventories Total inventories Note 2017 $’000 2016 $’000 6(a) 6(a) 6(a) 6(a) 6(a) 6(a) 8,980 3,894 (480) 49,237 9,873 (3,133) 12,394 55,977 61,529 45,796 19,033 15,563 (1,838) 61,590 26,025 22,799 11,105 (2,390) 140,083 119,129 45,980 10,974 2,757 (1,115) 14,742 18,138 2,833 (880) 58,596 34,833 211,073 209,939 202,243 278,176 24,319 (10,000) 29,182 (14,076) 216,562 293,282 39,102 32,629 9,722 9,958 – 32,382 14,757 1,231 1,805 (519) 91,411 49,656 178 11 (29) 160 178 11 (29) 160 308,133 343,098 519,206 553,037 Notes to the Consolidated Financial StatementsAVJENNINGS LIMITED · ANNUAL REPORT 2017 | 41 6. INVENTORIES (continued) (a) Borrowing costs attributable to qualifying assets are capitalised. These include interest, fees and costs associated with interest rate derivatives and have been capitalised at a weighted average rate of 6.12% (2016: 6.18%). (b) Inventory with a carrying value of $110,034,000 (2016: $98,405,000) was pledged as security for project specific borrowings (refer to note 12(b)). The Group’s remaining inventory has been pledged as security for the main banking facility (refer to note 12(a)). Accounting Inventories are carried at the lower of cost and net realisable value. Costs include cost of acquisition, development, borrowings and all other costs directly related to specific projects. Borrowing and holding costs such as rates and taxes incurred after completion of development and construction are expensed. Costs expected to be incurred under penalty clauses and rectification provisions are also included. Net realisable value is determined based on the estimated sales in the ordinary course of business less estimated costs of completion and the estimated costs necessary to make the sale. Estimates of net realisable value are based on the most recent evidence available at the time the estimates are made. Movement in impairment provisions At beginning of year Amounts utilised Amounts reversed At end of year 7. OTHER ASSETS Prepayments Deposits Total other current assets 2017 $’000 21,027 (2,508) (5,057) 2016 $’000 30,216 (5,524) (3,665) 13,462 21,027 2017 $’000 2,971 102 2016 $’000 2,052 88 3,073 2,140 Notes to the Consolidated Financial Statements42 | AVJENNINGS LIMITED · ABN 44 004 327 771 8. AVAILABLE-FOR-SALE FINANCIAL ASSET Property Fund Units 2017 $’000 2016 $’000 2,880 2,880 These comprise units in unlisted property funds which don’t have an active market. As the range of reasonable fair values can be significant and estimates cannot be made reliably, the units are measured at cost less impairment. The Company intends to hold the property fund units until development activity is completed, and all product sold. Impairment and risk exposure At each reporting date, the Group assesses whether there is objective evidence of impairment. A financial asset is impaired if there is objective evidence of impairment as a result of one or more events and the loss event (or events) has an impact on the estimated future cash flows of the financial asset that can be reliably estimated. In the case of equity investments classified as available-for-sale, a significant or prolonged decline in the fair value of the security below the cost is considered an indicator that the assets are impaired. If there is objective evidence of impairment for an available-for-sale financial asset, the cumulative loss, measured as the difference between the acquisition cost and the current fair value, less any impairment loss on that financial asset previously recognised in profit and loss, is taken to profit and loss. None of the financial assets are either past due or impaired. All available-for-sale investments are denominated in Australian currency. As a result, there is no exposure to foreign currency risk. There is also no exposure to price risk as the intention is to hold the investments to maturity. Notes to the Consolidated Financial Statements9. PLANT AND EQUIPMENT Leasehold improvements At cost Less: accumulated depreciation Total leasehold improvements Plant and equipment At cost Less: accumulated depreciation Total plant and equipment Total plant and equipment (i) Reconciliations AVJENNINGS LIMITED · ANNUAL REPORT 2017 | 43 2017 $’000 376 (286) 90 6,711 (6,009) 702 792 2016 $’000 379 (259) 120 6,631 (5,766) 865 985 Reconciliations of the carrying amounts of each class of plant and equipment at the beginning and end of the year are set out below: For the year ended 30 June 2016 Note Carrying amount at 1 July 2015 Additions Disposals Depreciation charge Carrying amount at 30 June 2016 For the year ended 30 June 2017 Carrying amount at 1 July 2016 Additions Disposals Depreciation charge Carrying amount at 30 June 2017 (ii) Accounting 2 2 Leasehold improve- ments $’000 Plant and equipment $’000 63 91 (26) (8) 120 120 2 (3) (29) 90 542 644 (54) (267) 865 865 117 (11) (269) 702 Total $’000 605 735 (80) (275) 985 985 119 (14) (298) 792 Plant and equipment is stated at historical cost less accumulated depreciation and impairment. Depreciation is calculated on a straight-line basis using the following rates which are consistent with the prior year: Plant and equipment Leasehold improvements 3-7 years 3-10 years Notes to the Consolidated Financial Statements44 | AVJENNINGS LIMITED · ABN 44 004 327 771 10. INTANGIBLE ASSETS Brand name at cost Less: accumulated amortisation Total intangible assets 2017 $’000 9,868 (7,052) 2,816 2016 $’000 9,868 (7,052) 2,816 The intangible asset relates to the value of the “AVJennings” brand name which was acquired as part of a business combination in 1995. On recognition, the asset was determined to have a finite life of 20 years and was amortised over the expected useful life. In accordance with the accounting policy discussed below, the amortisation period and the amortisation method for an intangible asset are reviewed at least each financial year-end. A review carried out at 31 December 2009 determined that the brand name has indefinite useful life. This change in accounting estimate has been applied prospectively with amortisation ceasing as of 31 December 2009. The brand name is tested for impairment annually, or more frequently if there are indicators of impairment. At 30 June 2017, there were no indicators of impairment. Accounting Intangible assets acquired separately are measured at cost on initial recognition. The cost of intangible assets acquired in a business combination is their fair value as at the date of the acquisition. Following initial recognition, intangible assets are carried at cost less any accumulated amortisation and accumulated impairment losses. The Group does not capitalise any expenditure resulting in the creation of internally generated intangible assets. The useful lives of intangible assets are assessed as either finite or indefinite. Intangible assets with finite lives are amortised over the useful economic life and assessed for impairment whenever there is an indication that the asset may be impaired. The amortisation period and the amortisation method for an intangible asset with a finite useful life are reviewed at least at the end of each reporting period. Changes in the expected useful life or the expected pattern of consumption of future economic benefits embodied in the asset are considered to modify the amortisation period or method, as appropriate, and are treated as changes in accounting estimates and adjusted on a prospective basis. The amortisation expense on intangible assets with finite lives is recognised in the Consolidated Statement of Comprehensive Income in the expense category that is consistent with the function of the intangible assets. Intangible assets with indefinite useful lives are not amortised, but are tested for impairment annually. The assessment of indefinite life is reviewed annually to determine whether the indefinite life continues to be supportable. If not, the change in useful life from indefinite to finite is made on a prospective basis. Notes to the Consolidated Financial Statements11. TRADE AND OTHER PAYABLES Current Secured Land creditors Unsecured Land creditors Trade creditors Related party payables Other creditors and accruals Total current payables Non-Current Unsecured Land creditors Related party payables Other creditors and accruals Total non-current payables Accounting AVJENNINGS LIMITED · ANNUAL REPORT 2017 | 45 2017 $’000 2016 $’000 – 4,350 43,332 9,766 1,179 21,276 75,553 74,904 14,306 150 23,923 113,283 75,553 117,633 32,742 4,707 – 39,571 2,978 784 37,449 43,333 Trade and other payables are carried at an amortised cost and represent liabilities for goods and services provided to the Group prior to the end of the financial year which are unpaid. Due to the short term nature of current payables, their carrying amount is assumed to approximate their fair value. Non-current land creditors have been discounted using a rate of 6.01% (2016: 5.65%). Notes to the Consolidated Financial Statements46 | AVJENNINGS LIMITED · ABN 44 004 327 771 12. INTEREST-BEARING LOANS AND BORROWINGS Current Bank overdraft Bank loans Total current interest-bearing liabilities Non-current Bank loans Total non-current interest-bearing liabilities Accounting Borrowing costs 2017 $’000 2016 $’000 3 – 2,604 10,057 2,607 10,057 177,016 165,466 177,016 165,466 Borrowing costs directly attributable to the acquisition, construction or production of an asset that necessarily takes a substantial period of time to get ready for its intended use or sale are capitalised as part of the cost of the asset. All other borrowing costs are expensed. Borrowing costs consist of interest and other costs incurred in connection with the borrowing of funds. Interest income on borrowed funds pending their expenditure, is deducted from borrowing costs eligible for capitalisation. Interest-bearing loans and borrowings Loans and borrowings are initially recognised at the fair value of the consideration received less directly attributable transaction costs. Subsequently, interest-bearing loans and borrowings are measured at amortised cost using the effective interest method. Fees paid on establishment of loan facilities are capitalised as a prepayment and amortised over the period of the facility. Borrowings are classified as current liabilities unless there is an unconditional right to defer repayment for at least 12 months after the reporting date. Notes to the Consolidated Financial StatementsAVJENNINGS LIMITED · ANNUAL REPORT 2017 | 47 12. INTEREST-BEARING LOANS AND BORROWINGS (continued) Financing arrangements The Group has access to the following lines of credit: 30 June 2017 Main banking facilities – bank overdraft – bank loans – performance bonds Project funding facilities – bank loans Contract performance bond facilities – performance bonds 30 June 2016 Main banking facilities – bank overdraft – bank loans – performance bonds Other non-cash facilities Project funding facilities – bank loans Contract performance bond facilities – performance bonds Note 12(a) 12(b) 12(c) 12(a) 12(b) 12(c) Available $’000 Utilised $’000 Unutilised $’000 5,000 3 225,000 139,000 20,000 9,931 4,997 86,000 10,069 250,000 148,934 101,066 92,000 40,620 51,380 35,000 26,936 8,064 5,000 225,000 20,000 250,000 220 – 143,243 14,317 157,560 – 5,000 81,757 5,683 92,440 220 92,000 32,280 59,720 35,000 22,239 12,761 At 30 June 2017 main banking facilities are interchangeable up to $47 million (2016: $47 million) between the bank loans and performance bonds. During the current and prior year, there were no defaults or breaches of any covenants relating to the facilities. Notes to the Consolidated Financial Statements 48 | AVJENNINGS LIMITED · ABN 44 004 327 771 12. INTEREST-BEARING LOANS AND BORROWINGS (continued) Significant terms and conditions (a) Main banking facilities The Group’s main banking facilities mature on 30 September 2019. These facilities are secured by a fixed and floating charge over all the assets and undertakings of the entities within the Group that are obligors under the main banking facilities, and by first registered mortgages over various real estate inventories other than those controlled by the Group under project development agreements and those assets pledged as security for project funding (see note 12(b)). The Parent Entity has entered into a cross deed of covenant with various controlled entities to guarantee obligations of those entities in relation to the main banking facilities (see note 21). The weighted average interest rate including margin on the main banking facilities at 30 June 2017 was 3.00% (2016: 3.21%). (b) Project funding facilities Project funding facilities are secured by: • a fixed and floating charge over the assets of the entity involved in the relevant project, namely, AVJennings Waterline Pty Ltd; and • a first registered mortgage over certain real estate inventories of the entity involved in the relevant project, namely, AVJennings Waterline Pty Ltd. The lines of credit shown are maximum limits which are available progressively as projects are developed. The expiry date for the facility at the reporting date was November 2019. The project funding facilities are to reduce to $50 million in December 2017. The outstanding amounts are expected to be repaid or refinanced prior to expiry of the facility. As at 30 June 2017, the balance outstanding on the bank loan facilities was $40,620,000 (2016: $32,280,000). The carrying amounts of the pledged assets are as follows: Waterline, Victoria 2017 $’000 2016 $’000 111,021 98,905 The weighted average interest rate including margin on the project funding loans at 30 June 2017 was 3.17% (2016: 3.40%). (c) Contract performance bond facilities The Group has entered into Contract performance bond facilities of $35,000,000 (2016: $35,000,000) which are subject to review annually. The facilities expire on 31 December 2017 and management expects the annual review which is underway, to be completed shortly and the facilities extended for a further 12 months. The performance bond facilities are secured by Deeds of Indemnity between the Parent Entity and various controlled entities. Details of the controlled entities, included in the Deeds of Indemnity are set out in note 21. 13. PROVISIONS Current Employee benefits Total current provisions Non-current Employee benefits Total non-current provisions Accounting Provisions 2017 $’000 2016 $’000 5,607 6,261 5,607 6,261 867 867 794 794 A provision is recognised when there is a present obligation (legal or constructive) as a result of a past event, it is probable that an outflow of resources will be required to settle the obligation and a reliable estimate can be made of the obligation. Provisions are measured at the present value of management’s best estimate of the expenditure required to settle the present obligation at the reporting date. The non-current portion is discounted using corporate bond rates. Notes to the Consolidated Financial Statements14. CONTRIBUTED EQUITY Share capital (a) Issued shares Ordinary shares Treasury shares Total issued shares (b) Movement in treasury shares At beginning of year Employee share scheme issue At end of year AVJENNINGS LIMITED · ANNUAL REPORT 2017 | 49 Note 2017 $’000 2016 $’000 160,436 160,436 2017 Number 2016 Number 384,423,851 384,423,851 14(b) (842,089) (2,338,154) 383,581,762 382,085,697 (2,338,154) (3,502,401) 1,496,065 1,164,247 (842,089) (2,338,154) Holders of ordinary shares are entitled to dividends and to one vote per share at shareholders’ meetings. Accounting Incremental costs directly attributable to the issue of ordinary shares are shown in equity as a deduction, net of tax, from the proceeds. Shares held by the AVJ Deferred Employee Share Plan are disclosed as treasury shares and deducted from contributed equity. 15. RESERVES AND RETAINED EARNINGS (a) Reserves At 1 July 2015 Foreign currency translation Share-based payment expense At 30 June 2016 Foreign currency translation Share-based payment expense At 30 June 2017 (b) Nature and purpose of reserves Foreign currency translation reserve Foreign Currency Translation Reserve $’000 Share-based Payment Reserve $’000 Total $’000 1,791 1,283 3,074 2,042 – – 906 2,042 906 3,833 2,189 6,022 (109) – – 709 (109) 709 3,724 2,898 6,622 Note 28(a) 28(a) Exchange differences arising on translation foreign operations are recognised in other comprehensive income as explained in note 36(e) and accumulated in a separate reserve within equity. The cumulative amount is reclassified to the Consolidated Statement of Comprehensive Income when the net investment is disposed of. Share-based payment reserve The share-based payment reserve is used to recognise the fair value of shares issued to employees, with a corresponding increase in employee expense in the Statement of Comprehensive Income. Notes to the Consolidated Financial Statements 50 | AVJENNINGS LIMITED · ABN 44 004 327 771 15. RESERVES AND RETAINED EARNINGS (continued) (c) Retained earnings Movements in retained earnings were as follows: At beginning of year Profit after income tax Dividends declared and paid At end of year 16. DIVIDENDS Cash dividends declared and paid 2015 final dividend of 3.0 cents per share, paid 23 September 2015. Fully franked @ 30% tax 2016 interim dividend of 1.5 cents per share, paid 15 April 2016. Fully franked @ 30% tax 2016 final dividend of 3.5 cents per share, paid 23 September 2016. Fully franked @ 30% tax 2017 interim dividend of 1.5 cents per share, paid 7 April 2017. Fully franked @ 30% tax 2017 $’000 2016 $’000 197,449 173,836 35,717 (19,221) 40,912 (17,299) 213,945 197,449 2017 $’000 2016 $’000 – – 11,532 5,767 13,454 5,767 – – Total cash dividends declared and paid 19,221 17,299 Dividends proposed 2016 final dividend of 3.5 cents per share, paid 23 September 2016. Fully franked @ 30% tax 2017 final dividend of 3.5 cents per share, to be paid 19 September 2017. Fully franked @ 30% tax Total dividends proposed The Company’s Dividend Reinvestment Plan remains suspended. Dividend franking account – 13,454 13,454 – 13,454 13,454 Franking credits available for subsequent financial years based on a tax rate of 30% 15,652 15,162 The above balance is based on the balance of the dividend franking account at the year-end adjusted for: • • franking credits that will arise from the payment of the amount provided for income tax; and franking debits that will arise from the payment of dividends proposed at the year-end. Notes to the Consolidated Financial StatementsSection A4 Cash Flows information 17. CASH FLOW STATEMENT RECONCILIATION Reconciliation of profit after tax to net cash flow used in operating activities Profit after tax Adjustments for non-cash items: Depreciation Net loss on disposal of plant and equipment Interest revenue classified as investing cash flow Share of losses of associates and joint venture entities Change in inventory loss provisions Share-based payments expense Change in operating assets and liabilities: Decrease/(increase) in inventories Increase in trade and other receivables Increase in other current assets Decrease in current tax receivables Increase in deferred tax liability (Decrease)/increase in current tax liability Decrease in trade and other payables (Decrease)/increase in provisions AVJENNINGS LIMITED · ANNUAL REPORT 2017 | 51 2017 $’000 2016 $’000 35,717 40,912 298 14 (860) 28 (7,565) 709 41,396 (32,249) (933) – 3,985 (5,237) (47,949) (581) 275 80 (526) 583 (9,189) 906 (26,899) (45,572) (80) 143 6,662 10,494 (6,902) 803 Net cash used in operating activities (13,227) (28,310) Notes to the Consolidated Financial Statements52 | AVJENNINGS LIMITED · ABN 44 004 327 771 Section B – Risk 18. JUDGEMENTS, ESTIMATES AND ASSUMPTIONS The preparation of financial statements involves the use of certain critical accounting estimates and requires management to exercise judgement. These estimates and judgements are continually reviewed based on historical experience, current and expected market conditions as well as other relevant factors. (i) Judgements In applying the Group’s accounting policies, management makes judgements, which can significantly affect the amounts recognised in the Consolidated Financial Statements. This includes the determination of whether revenue recognition criteria has been satisfied on sales of land lots with deferred settlement terms. (ii) Estimates and assumptions Estimates and assumptions that have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial year include: Estimates of net realisable value of inventories: Estimates of net realisable value are based on the most reliable evidence available at the time the estimates are made of the net amount expected to be realised from the sale of inventories, and the estimated costs to complete. Profit recognised on developments: The calculation of profit for land lots and built form is based on actual costs to date and estimates of costs to complete. 19. FINANCIAL RISK MANAGEMENT The Group’s principal financial instruments comprise receivables, payables, loans and borrowings, financial guarantee contracts, cash and short-term deposits. The Group’s treasury department focuses on the following main financial risks: interest rate risk, foreign currency risk, credit risk and liquidity risk. It provides assurance to the Group’s senior management that financial risk activities are governed by appropriate policies and procedures and that financial risks are identified, measured and managed in accordance with policies and risk objectives. Responsibility for the monitoring of financial risk exposure and the formulation of appropriate responses rests with the Chief Financial Officer. The Board reviews and approves policies, discusses their appropriateness with senior management and varies them as necessary. (i) Interest rate risk Interest rate risk is the risk that the fair value of a financial instrument or future cash flows associated with it will fluctuate because of changes in market interest rates. The exposure to market interest rates primarily relates to interest- bearing loans and borrowings issued at variable rates. In assessing interest rate risk, the Group considers its loan maturity and cash flow profile and the outlook for interest rates over the medium term. To manage this, the Group may enter into hedging strategies that combine interest rate caps and floors, as well as floating-to-fixed interest rate swap contracts. However, the forecast cash position together with the current benign outlook for medium term interest rates has resulted in the Group retaining all of the drawn debt at variable rates of interest. Notes to the Consolidated Financial StatementsAVJENNINGS LIMITED · ANNUAL REPORT 2017 | 53 19. FINANCIAL RISK MANAGEMENT (continued) (i) Interest rate risk (continued) The Group uses various techniques, including interest rate swaps, caps and collars to hedge the risk associated with interest rate fluctuations. These derivatives do not qualify for hedge accounting and changes in fair value are recognised in profit and loss. Derivative financial instruments are initially recognised at fair value on the date a derivative contract is entered into and their fair value is reassessed at the end of each reporting period. Derivative financial instruments are not held for trading purposes. At balance date, the following variable rate borrowings were outstanding: Cash Bank overdrafts Bank loans Net financial liabilities Borrowings not hedged 2017 2016 Weighted average interest rate % 1.48 5.50 3.03 Balance $‘000 (15,562) 3 179,620 164,061 164,061 Weighted average interest rate % 1.73 – 3.24 Balance $‘000 (43,086) – 175,523 132,437 132,437 The Group analyses its interest rate exposure on an ongoing basis. Within this analysis, consideration is given to potential renewals of existing positions, alternative financing, alternative hedging positions and the mix of fixed and variable interest rates. The following table shows the impact on profit after tax if interest rates changed by 50 basis points. The calculation is based on borrowings and cash held at year-end. It assumes that interest is capitalised to qualifying assets as shown in note 2: +50 basis points – 50 basis points Profit After Tax Higher/(Lower) 2017 $’000 (108) 108 2016 $’000 (138) 138 Notes to the Consolidated Financial Statements54 | AVJENNINGS LIMITED · ABN 44 004 327 771 19. FINANCIAL RISK MANAGEMENT (continued) (ii) Foreign currency risk Foreign currency risk arises as a result of having assets denominated in a currency that is not the Group’s functional currency (balance sheet risk) or from transactions or cash flows denominated in a foreign currency (cash flow risk). Balance sheet risk can affect net tangible assets whereas cash flow risk is more likely to affect potential equity distributions and repayment of debt. The following table demonstrates the sensitivity to a change in AUD/NZD exchange rates on exposures existing at balance date. With all other variables held constant, profit after tax and equity would have been affected as follows: AUD/NZD +10% AUD/NZD – 10% (iii) Credit risk Profit After Tax Higher/(Lower) Equity Higher/(Lower) 2017 $’000 (413) 413 2016 $’000 (649) 649 2017 $’000 (402) 402 2016 $’000 (853) 853 Credit risk is the risk that a counterparty will not meet its contractual obligations under a financial instrument, leading to a financial loss. Credit risk arises from cash and cash equivalents, trade and other receivables, available-for-financial asset, financial instruments and from granting of financial guarantees. Contracts for Land, Integrated Housing and Apartments usually require payment in full prior to passing of title to customers and collateral is therefore unnecessary. In the event that title is to pass prior to full payment being received, appropriate credit verification procedures are performed before contract execution. Credit risk from balances with banks and financial institutions is managed by the Group’s treasury department in accordance with Group policy. Surplus funds are invested in high quality and low risk short-term money market instruments to ensure preservation of capital. Counterparties are limited to financial institutions approved by the Board. The granting of financial guarantees also exposes the Group to credit risk, being the maximum amount that would have to be paid if the guarantee is called on. As the amounts payable under the guarantees are not significantly greater than the original liabilities, this risk in not material. See note 33 for details regarding financial guarantees. The Group has no significant concentrations of credit risk. (iv) Liquidity risk Liquidity risk is the risk that the Group will not be able to meet its financial obligations as they fall due. The Group manages its liquidity risk by monitoring forecast cash flows on a fortnightly basis and matching the maturity profiles of financial assets and liabilities. These are reviewed by the Chief Financial Officer and presented to the Board as appropriate. The objective is to maintain a balance between continuity of funding and flexibility through the use of bank loans and committed available credit facilities. The current main banking facilities are due to mature on 30 September 2019 and are therefore non-current. In addition, the Group operates certain project funding facilities which are discussed in note 12(b). The maturity profile of all debt facilities is monitored on a regular basis by the Chief Financial Officer and ongoing financing plans presented to the Board for approval well in advance of maturity. At 30 June 2017, 1.5% (2016: 5.7%) of the Group’s interest-bearing loans and borrowings will mature in less than one year. Notes to the Consolidated Financial StatementsAVJENNINGS LIMITED · ANNUAL REPORT 2017 | 55 19. FINANCIAL RISK MANAGEMENT (continued) (iv) Liquidity risk (continued) The table below summarises the maturity profile of the Group’s financial assets and liabilities based on contractual undiscounted payments. Year ended 30 June 2017 Financial Assets Cash and cash equivalents Trade and other receivables Financial Liabilities Trade and other payables Interest-bearing loans and borrowings* Financial Guarantees < 6 months $’000 6–12 months $’000 > 1–5 years $’000 Total $’000 15,562 100,505 – – 21,367 38,131 15,562 160,003 116,067 21,367 38,131 175,565 61,881 2,701 2,135 13,672 5,280 37,449 183,923 – – 113,002 191,904 2,135 66,717 18,952 221,372 307,041 Net maturity 49,350 2,415 (183,241) (131,476) Year ended 30 June 2016 Financial Assets Cash and cash equivalents Trade and other receivables Financial Liabilities Trade and other payables Interest-bearing loans and borrowings* Financial Guarantees < 6 months $’000 6–12 months $’000 > 1–5 years $’000 Total $’000 43,086 91,922 135,008 103,714 2,868 5,593 – 14,138 14,138 16,897 12,892 – – 21,694 43,086 127,754 21,694 170,840 40,355 168,420 – 160,966 184,180 5,593 112,175 29,789 208,775 350,739 Net maturity 22,833 (15,651) (187,081) (179,899) * Expected settlement amounts of interest-bearing loans and borrowings include an estimate of the interest payable to the date of expiry of the facilities. In addition to maintaining sufficient short term assets to meet short term payments, at reporting date, the Group has approximately $161 million (2016: $165 million) of unused credit facilities available for its immediate use. Please refer to note 12. Notes to the Consolidated Financial Statements56 | AVJENNINGS LIMITED · ABN 44 004 327 771 19. FINANCIAL RISK MANAGEMENT (continued) (v) Fair value The following table provides the fair value measurement hierarchy of the Group’s financial assets and financial liabilities: Year ended 30 June 2017 Year ended 30 June 2016 Quoted prices in active markets (Level 1) $’000 Significant observable inputs Significant unobservable inputs Total (Level 2) $’000 (Level 3) $’000 $’000 Quoted prices in active markets (Level 1) $’000 Significant observable inputs Significant unobservable inputs Total (Level 2) $’000 (Level 3) $’000 $’000 Financial liabilities Interest-bearing loans and borrowings – – 179,623 179,623 – – 179,623 179,623 – – 175,523 175,523 – – 175,523 175,523 Management assessed that the fair values of cash and short-term deposits, trade receivables, trade payables, bank overdrafts and other current liabilities approximate their carrying amounts largely due to the short-term maturities of these instruments. 20. CAPITAL MANAGEMENT When managing capital, management’s objective is to ensure that returns to shareholders are optimised by using a mix of funding options. The aim is to achieve the lowest possible weighted average cost of capital. In order to maintain or adjust the capital structure, management may change the amount of dividends, offer a dividend reinvestment plan, return capital to shareholders, issue new shares or sell assets to reduce debt. During the year ended 30 June 2017, a total dividend of $19,221,000 was paid (2016: $17,299,000). Management monitors capital mix through the debt to equity ratio (net debt/total equity) and the debt to total assets ratio (net debt/total assets) calculated below: Interest-bearing loans and borrowings Less: cash and cash equivalents Net debt Total equity Total assets Net debt to equity ratio Net debt to total assets ratio Consolidated 2017 $’000 179,623 (15,562) 2016 $’000 175,523 (43,086) 164,061 132,437 381,003 363,907 712,781 741,382 43.1% 23.0% 36.4% 17.9% Notes to the Consolidated Financial Statements AVJENNINGS LIMITED · ANNUAL REPORT 2017 | 57 Section C – Group Structure 21. CONTROLLED ENTITIES (a) Investment in controlled entities The following economic entities are the controlled entities of AVJennings Limited: ECONOMIC ENTITY (1) 2017 2016 2017 2016 % Equity Interest Included in Banking Cross Deed of Covenant (2) Entities included in the Closed Group A.V. Jennings Real Estate Pty Limited AVJennings Real Estate (VIC) Pty Limited AVJennings Holdings Limited(3) AVJennings Properties Limited(3) Jennings Sinnamon Park Pty Limited Long Corporation Limited(3) Orlit Pty Limited(3) Sundell Pty Limited(3) AVJennings Housing Pty Limited(3) AVJennings Home Improvements S.A. Pty Limited(3) AVJennings Mackay Pty Limited(3) Entities excluded from the Closed Group Crebb No 12 Pty Limited Dunby Pty Limited Epping Developments Limited Montpellier Gardens Pty Limited AVJ ODP Pty Limited AVJennings (Cammeray) Pty Limited AVJennings Syndicate No 3 Limited AVJennings Syndicate No 4 Limited(3) AVJennings Officer Syndicate Limited(3) AVJennings Properties SPV No 1 Pty Limited AVJennings Properties SPV No 2 Pty Limited AVJennings Properties SPV No 4 Pty Limited AVJennings Properties Elderslie No 2 Pty Limited(4) AVJennings Wollert Pty Limited AVJ Erskineville Pty Limited AVJ Hobsonville Pty Limited AVJennings Properties SPV No 9 Pty Limited AVJennings SPV No 10 Pty Limited AVJennings SPV No 19 Pty Limited AVJennings SPV No 20 Pty Limited Cusack Lane Nominees Pty Ltd(5) AVJennings SPV No 22 Pty Limited AVJennings SPV No 23 Pty Limited AVJennings SPV No 24 Pty Limited AVJBOS Nominees Pty Limited(6) AVJBOS Eastwood Developments Pty Limited(6) AVJBOS Eastwood Finance Pty Limited(6) 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 – 100 100 100 100 100 100 100 – 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 – – – – – – No No Yes Yes No Yes Yes Yes Yes Yes Yes Yes Yes No Yes No Yes No Yes Yes No Yes Yes N/A Yes Yes Yes Yes No No No N/A No No No No No No No No Yes Yes No Yes Yes Yes Yes Yes Yes Yes Yes No Yes No Yes No Yes Yes No Yes Yes No Yes Yes Yes Yes No No No No N/A N/A N/A N/A N/A N/A Notes to the Consolidated Financial Statements58 | AVJENNINGS LIMITED · ABN 44 004 327 771 21. CONTROLLED ENTITIES (continued) (a) Investment in controlled entities (continued) ECONOMIC ENTITY (1) 2017 2016 2017 2016 % Equity Interest Included in Banking Cross Deed of Covenant (2) Entities excluded from the Closed Group (continued) Creekwood Developments Pty Limited(3) Portarlington Nominees Pty Limited AVJennings St Clair Pty Limited St Clair JV Nominee Pty Limited AVJennings Properties Wollert SPV Pty Limited AVJennings Waterline Pty Limited 100 100 100 100 100 100 100 100 100 100 100 100 Yes Yes Yes Yes No No Yes Yes Yes Yes No No (1) All entities are incorporated in Australia. With the exception of AVJ Hobsonville Pty Limited which has a branch in New Zealand, all entities operate within Australia. These entities, including AVJennings Limited, are included under the Banking Cross Deed of Covenant referred to in note 12(a). These entities, including AVJennings Limited, are included in the Deeds of Indemnity for performance bond facilities referred to in note 12(c). (2) (3) (4) Deregistered on 20 March 2017. (5) Ceased to be a controlled entity on 28 November 2016 and its previous name was AVJennings SPV No 21 Pty Limited. (6) Acquired on 22 February 2017. Refer to note 22. (b) Ultimate parent AVJennings Limited is the ultimate Australian parent entity. SC Global Developments Pte Ltd is the ultimate parent entity. (c) Deeds of cross guarantee Certain entities within the Group are parties to deeds of cross guarantee under which each controlled entity guarantees the debts of the others. By entering into these deeds, the controlled entities are relieved from the requirement to prepare Financial Statements and Directors’ Reports under Corporations Instrument 2016/785 issued by the Australian Securities and Investments Commission (ASIC). Those entities included in the Closed Group are listed in note 21(a). These entities represent a “Closed Group” for the purposes of the Corporations Instrument, and as there are no other parties to the deeds of cross guarantee that are controlled by AVJennings Limited, they also represent the “Extended Closed Group”. (d) Class order closed group Certain controlled entities were granted relief by ASIC (under provisions of Corporations Instrument) from the requirement to prepare separate audited financial statements, where deeds of indemnity have been entered into between the Parent Entity and the Controlled Entities to meet their liabilities as required (refer to note 21(c)). The Extended Closed Group referred to in the Directors’ Declaration therefore comprises all of the entities within the Class Order. Certain entities falling outside of the Extended Closed Group are listed in note 21(a), and are therefore required to prepare separate annual financial statements. The Consolidated Statement of Comprehensive Income for those controlled entities which are party to the deed is as follows: Revenues Cost of property development sold Other expenses Profit before income tax Income tax Profit after income tax Closed Group 2017 $’000 2016 $’000 209,949 200,591 (144,675) (39,220) (139,923) (40,587) 26,054 20,081 (8,079) (6,057) 17,975 14,024 Notes to the Consolidated Financial StatementsAVJENNINGS LIMITED · ANNUAL REPORT 2017 | 59 21. CONTROLLED ENTITIES (continued) (d) Class order closed group (continued) The Consolidated Statement of Financial Position for those controlled entities which are party to the deed is as follows: CURRENT ASSETS Cash and cash equivalents Trade and other receivables Inventories Other assets Total current assets NON-CURRENT ASSETS Trade and other receivables Inventories Equity accounted investments Available-for-sale financial asset Plant and equipment Intangible assets Total non-current assets Total assets CURRENT LIABILITIES Trade and other payables Tax payable Provisions Total current liabilities NON-CURRENT LIABILITIES Trade and other payables Interest-bearing loans and borrowings Deferred tax liabilities Provisions Total non-current liabilities Total liabilities Net assets EQUITY Contributed equity Reserves Retained earnings Total equity 2017 $’000 2016 $’000 15,035 221,428 110,102 2,504 41,265 182,747 104,115 644 349,069 328,771 5,548 6,631 112,828 148,976 5,431 2,880 792 2,816 5,495 2,880 985 2,816 130,295 167,783 479,364 496,554 30,483 64,512 4,307 5,491 9,146 6,136 40,281 79,794 18,167 139,000 23,482 867 784 138,000 19,078 794 181,516 158,656 221,797 238,450 257,567 258,104 160,436 160,436 2,898 94,233 2,188 95,480 257,567 258,104 Notes to the Consolidated Financial Statements60 | AVJENNINGS LIMITED · ABN 44 004 327 771 21. CONTROLLED ENTITIES (continued) (d) Class order closed group (continued) The Consolidated Statement of Changes in Equity for those controlled entities which are party to the deed is as follows: At beginning of year Comprehensive income: Profit for the year Total comprehensive income for the year Transactions with owners in their capacity as owners – Share-based payment expense – Dividends paid Total transactions with owners in their capacity as owners Closed Group 2017 $’000 2016 $’000 258,104 260,473 17,975 17,975 709 (19,221) (18,512) 14,024 14,024 906 (17,299) (16,393) At end of year 257,567 258,104 22. EQUITY ACCOUNTED INVESTMENTS Associate Joint Ventures Total equity accounted investments Accounting 2017 $’000 5 8,444 2016 $’000 4 8,680 8,449 8,684 An associate is an entity over which the Group has significant influence. Significant influence is the power to participate in the financial and operating policy decisions of the investee, but is not control or joint control over those policies. A joint venture is a type of joint arrangement whereby the parties that have joint control of the arrangement have rights to the net assets of the joint venture. Joint control is the contractually agreed sharing of control of an arrangement, which exists only when decisions about the relevant activities require unanimous consent of the parties sharing control. Investments in associate and joint ventures are accounted for using the equity method. Under the equity method, investments in these entities are carried at cost plus post acquisition changes in the Group’s share of net assets of these entities. The aggregate of the Group’s share of profit or loss after tax of associate and joint ventures is shown separately on the face of the Consolidated Statement of Comprehensive Income. The Group’s share of movements in reserves is recognised in reserves. Dividends received from an associate or a joint venture are recognised as a reduction in the carrying amount of the investment. Unrealised gains and losses resulting from transactions between the Group and the associate or joint venture are eliminated to the extent of the interest in the associate or joint venture, until the underlying assets are realised by the associate or joint venture on consumption or sale. After application of the equity method, the Group determines whether it is necessary to recognise an additional impairment loss on its equity accounted investments. If there is objective evidence that the investment in the associate or joint venture is impaired, the Group calculates the amount of impairment as the difference between the recoverable amount of the investment and its carrying value and recognises it in the Consolidated Statement of Comprehensive Income. Notes to the Consolidated Financial Statements22. EQUITY ACCOUNTED INVESTMENTS (continued) Interest in Joint Ventures Joint Venture and principal activities Eastwood – Land Development and Building Construction Woodville – Land Development and Building Construction Pindan Capital Group Dwelling Trust – Building Construction Movements in carrying amount At beginning of year Dividends received Share of loss At end of year AVJENNINGS LIMITED · ANNUAL REPORT 2017 | 61 Interest held 2017 2016 – 50.0% 33.3% 2017 $’000 50.0% 50.0% 33.3% 2016 $’000 8,680 10,663 (208) (28) (1,400) (583) 8,444 8,680 The Group’s share of the individually immaterial Joint Ventures’ assets, liabilities, revenues and expenses are as follows: Share of assets and liabilities Current assets Non-current assets Total assets Current liabilities Non-current liabilities Total liabilities Net assets Share of revenues and expenses Revenues Expenses Loss before income tax Income tax Loss after income tax 2017 $’000 2016 $’000 3,495 11,947 15,442 4,580 2,418 6,998 3,778 10,868 14,646 4,093 1,873 5,966 8,444 8,680 869 (882) (13) (15) (28) 43 (621) (578) (5) (583) On 22 February 2017, the Group purchased the equity held by the joint venture partner in AVJBOS Nominees Pty Ltd, the holding company for the Eastwood project. The Eastwood project does not constitute a business and has been accounted for as an asset acquisition. AVJBOS Nominees Pty Ltd and its wholly owned subsidiaries, AVJBOS Eastwood Developments Pty Ltd and AVJBOS Eastwood Finance Pty Ltd are now wholly owned by the Group. Notes to the Consolidated Financial Statements62 | AVJENNINGS LIMITED · ABN 44 004 327 771 23. INTEREST IN JOINT OPERATIONS A number of controlled entities have entered into joint operations. Information relating to the Joint Operations is set out below: Interest Held 2017 2016 Joint Operation name, principal place of business and principal activities Wollert Joint Venture (Victoria) – Land Development and Building Construction Cusack Lane Development Joint Venture (Queensland) – Land Development 49% 50% 49% – On 2 December 2016, the Group entered into a joint venture agreement to develop land at Cusack Lane, Jimboomba in Queensland. Accounting A joint operation is a type of joint arrangement whereby the parties that have joint control of the arrangement have rights to the assets and obligations for the liabilities of the joint operation. Joint control is the contractually agreed sharing of control of an arrangement, which exists only when decisions about the relevant activities require unanimous consent of the parties sharing control. The proportionate interests in the assets, liabilities, revenues and expenses of joint operations have been recognised in the Financial Statements under the appropriate headings. The Group’s interest in the profits and losses of the individually immaterial Joint Operations are included in the Consolidated Statement of Comprehensive Income, under the following classifications: Revenues Cost of property developments sold Other expenses (Loss)/profit before income tax Income tax (Loss)/profit after income tax Total comprehensive (loss)/income for the year 2017 $’000 9 – (511) (502) 151 (351) (351) 2016 $’000 3,088 (2,695) (188) 205 (62) 143 143 Notes to the Consolidated Financial StatementsAVJENNINGS LIMITED · ANNUAL REPORT 2017 | 63 23. INTEREST IN JOINT OPERATIONS (continued) The Group’s interest in the assets and liabilities of individually immaterial Joint Operations are included in the Consolidated Statement of Financial Position, under the following classifications: CURRENT ASSETS Cash and cash equivalents Trade and other receivables Inventories Total current assets NON-CURRENT ASSETS Inventories Total non-current assets Total assets CURRENT LIABILITIES Trade and other payables Total current liabilities NON-CURRENT LIABILITIES Trade and other payables Total non-current liabilities Total liabilities Net assets 2017 $’000 – 60 7,335 7,395 2016 $’000 947 12 730 1,689 51,387 22,315 51,387 22,315 58,782 24,004 2,581 2,581 259 259 10,077 1,028 10,077 12,658 1,028 1,287 46,124 22,717 Notes to the Consolidated Financial Statements64 | AVJENNINGS LIMITED · ABN 44 004 327 771 Section D – Other information 25. STATEMENT OF COMPLIANCE 24. CORPORATE INFORMATION The Consolidated Financial Statements of AVJennings Limited for the year ended 30 June 2017 were authorised for issue in accordance with a resolution of the Directors on 4 September 2017. AVJennings Limited (the Parent) is a for-profit Company limited by shares domiciled and incorporated in Australia whose shares are publicly traded on the Australian Securities Exchange and the Singapore Exchange through SGX Globalquote. The ultimate parent is SC Global Developments Pte Ltd, a company incorporated in Singapore which owns 53.02% of the ordinary shares in AVJennings Limited. The Group (“AVJennings” or “Group”) consists of AVJennings Limited (“Company” or “Parent”) and its controlled entities. The nature of the operations and principal activities of the Group are provided in the Directors’ Report. These consolidated financial statements are general purpose financial reports. They have been prepared in accordance with Australian Accounting Standards and other authoritative pronouncements of the Australian Accounting Standards Board, the Corporations Act 2001 and International Financial Reporting Standards (IFRS) as issued by the International Accounting Standards Board (IASB). 26. BASIS OF PREPARATION These financial statements have been prepared on a going concern basis, using historical cost convention. All figures in the financial statements are presented in Australian dollars and have been rounded to the nearest thousand dollars in accordance with ASIC Corporations Instrument 2016/191, unless otherwise indicated. Where necessary, comparative information has been restated to conform to the current year’s disclosures. 27. RELATED PARTY DISCLOSURES (a) Ultimate parent AVJennings Limited is the ultimate Australian parent entity. SC Global Developments Pte Ltd (incorporated in Singapore) is the ultimate parent entity. (b) Share and share option transactions with Directors and Director-related entitiess The aggregate number of shares and options held at the reporting date either directly or indirectly or beneficially by the Directors or by an entity related to those Directors of AVJennings Limited are as follows: Fully paid ordinary shares Owned by Directors directly, or indirectly or beneficially 2017 Number 2016 Number 208,199,567 196,736,550 (c) Entity with significant influence over AVJennings Limited 203,818,030 ordinary shares equating to 53.02% of the total ordinary shares on issue (2016: 192,318,030 and 50.03% respectively) were held by SC Global Developments Pte Ltd and its subsidiaries in the Parent Entity at 30 June 2017. Certain Directors of SC Global Developments Pte Ltd are also Directors of AVJennings Limited. Details of Directors’ interests in the shares of the Parent Entity are set out in the Directors’ Report. (d) Parent Entity amounts receivable from and payable to controlled entities An impairment assessment is undertaken each reporting period to determine whether there is objective evidence that a related party receivable is impaired. At 30 June 2017, there is no evidence of impairment and recoverability is considered probable (2016: Nil). Notes to the Consolidated Financial Statements 27. RELATED PARTY DISCLOSURES (continued) (e) Transactions with related parties Entity with significant influence over the Group: SC Global Developments Pte Ltd Consultancy fee paid/payable Joint Ventures: Eastwood JV Management fee received/receivable Accounting services fee received/receivable Dividends received Woodville JV AVJENNINGS LIMITED · ANNUAL REPORT 2017 | 65 Note 2017 $ 2016 $ (i) 600,000 600,000 (ii) – – 49,684 12,500 207,500 1,400,000 Accounting services fee received/receivable 19,500 16,500 Joint Operations: Wollert JV Management fee received/receivable Accounting services fee received/receivable Cusack Lane Development JV Management fee received/receivable Accounting services fee received/receivable 1,832,847 1,935,132 50,000 50,000 198,290 33,881 – – (i) Consultancy fees paid to SC Global Developments Pte Ltd of $600,000 (2016: $600,000). (ii) Ceased to be a joint venture on 22 February 2017. Refer to note 22. (f) Joint ventures and Joint operations in which related entities in the Group are venturers Joint arrangements in which the Group has an interest are set out in notes 22 and 23. (g) Outstanding balances arising from provision of services The following balances are outstanding at the end of the reporting period in relation to transactions with related parties. Current receivables Joint Ventures Non-current receivables Joint Ventures (h) Loans to and from related parties Loan advanced Joint Ventures Loan received Joint Ventures 2017 $’000 2016 $’000 973 481 1,096 1,601 2,607 1,119 2,978 2,978 Notes to the Consolidated Financial Statements 66 | AVJENNINGS LIMITED · ABN 44 004 327 771 27. RELATED PARTY DISCLOSURES (continued) (i) Remuneration of Key Management Personnel Short-term – Salary/Fees – Accrued annual leave – STI – Other (1) Post employment – Superannuation (2) Long-term – Accrued Long service leave Share-based payment 2017 $ 2016 $ 1,927,428 1,906,290 21,123 399,822 70,309 24,041 378,409 61,343 129,323 108,252 77,413 605,343 77,411 657,066 3,230,761 3,212,812 (1) (2) ‘Other’ represents the value of motor vehicle benefits. Payments to Defined Contribution Plans consist of Superannuation Guarantee Contribution payments as well as employee voluntary contributions. (j) Terms and conditions of transactions with related parties Transactions with related parties are made at arm’s length both at normal market prices and on normal commercial terms. Outstanding balances at year-end are unsecured, interest free, at call and settlement occurs in cash. 28. SHARE-BASED PAYMENT PLANS (a) Recognised share-based payment expenses Total expenses arising from share-based payment transactions and disclosed as part of employee benefit expenses are shown in the table below: Expense arising from equity-settled share-based payment transactions Expense reversed on forfeiture of shares Total expense arising from share-based payment transactions The share-based payment plan is described in note 28(b). 2017 $’000 819 (110) 709 2016 $’000 925 (19) 906 (b) Type of share-based payment plan LTI awards are only made to executives who are in a position to have an impact on the Group’s performance and the creation of shareholder value over the long term. (i) LTI and retention (FY15 and subsequent years) With effect from FY15, LTI arrangements were varied and remuneration is provided by the Issue of Rights (instead of shares) and includes a retention component. The use of Rights as an incentive reduces the upfront cash requirements of the Company (as shares do not need to be acquired for allocations) and because participants do not receive dividends on Rights (as distinct from shares). The Total Shareholder Return (TSR) hurdle of the LTI component was replaced by a Return on Equity (ROE) hurdle which uses market capitalisation as a proxy for equity, and is more appropriate from a shareholders’ perspective as the required rates of return do not vary with “market” performance. The ROE hurdle operates such that 50% vesting occurs at an average annual return of 12% with 100% vesting at an average annual return of 18%. The EPS hurdle remains unchanged and is consistent with the FY14 and prior years’ LTI structure explained under LTI (FY14 and prior years) below. The performance conditions will be tested at the end of the three year vesting period and the number of rights that may vest will depend on the level of average annual returns achieved over that three year period. The service rights are split into three tranches that progressively vest each year subject to satisfaction of the service condition. The CEO’s participation was determined as 40% (LTI) and 25% (Retention component) of TEC respectively. Notes to the Consolidated Financial StatementsAVJENNINGS LIMITED · ANNUAL REPORT 2017 | 67 28. SHARE-BASED PAYMENT PLANS (continued) (ii) LTI Awards (FY14 and prior years) (b) Type of share-based payment plan (continued) The operation of the EPS, ROE and Retention hurdles are set out below. AVJennings’ EPS growth rate over the three year performance period < 5% 5% 5% –10% >=10% Percentage of rights vesting Nil 50% of the allocation for the hurdle Pro-rata between 50% and 100% 100% of the allocation for the hurdle AVJennings’ ROE over the three year performance period Percentage of rights vesting <12% 12% 15% >=18% Nil 50% 75% 100% (Straight line interpolation between 12% and 18%) Retention component – years of service Percentage of rights vesting one year two years three years Accounting 33.33% 33.33% 33.34% The fair value of the rights at the date of the grant is determined using an appropriate valuation model. The fair value is expensed over the period in which the performance and/or service conditions are fulfilled with a corresponding increase in share-based payment reserve in equity. The cumulative expense recognised for equity-settled transactions at each reporting date until the vesting date reflects the extent to which the vesting period has expired and the Group’s best estimate of the number of equity instruments that will ultimately vest. The expense or credit in the Consolidated Statement of Comprehensive Income represents the movement in cumulative expense recognised between the beginning and end of that period. No expense is recognised for awards that do not ultimately vest because non-market performance and/or service conditions have not been met. Where awards include a market or non-vesting condition, the transactions are treated as vested irrespective of whether the market or non-vesting condition is satisfied, provided that all other performance and/or service conditions are satisfied. The AVJ Deferred Employee Share Plan (the LTI Plan) administers employee share schemes under which shares were purchased on-market by the LTI Plan Trustee on behalf of employees. These shares vest to employees for no cash consideration subject to certain conditions being satisfied. Shares held by the LTI Plan’s trust and not yet allocated to employees are shown as treasury shares in the Financial Statements. Vesting is subject to both service and performance conditions. The service condition requires the executive to be employed by the Company as at 30 September in the third year after the grant date for each grant. The performance conditions apply to each grant – as to 50% as measured by the TSR hurdle and as to 50% by the EPS hurdle. The two performance hurdles are tested differently. The EPS hurdle is tested as at 30 June in the test year (three years after grant). The TSR hurdle is tested at 30 September of the third year after grant. The service vesting condition was that the employee must be employed by AVJennings at 30 September 2016. In the event of death, permanent disablement or retrenchment, the shares may vest to the estate at the Board’s discretion. If the employee resigned (in certain circumstances) or was terminated, the unvested shares would be forfeited. The performance vesting conditions were: • TSR performance measured against the ASX Small Industrials Index; and • EPS growth. AVJennings’ EPS growth must meet or exceed 10% p.a. for the three financial years to 30 June 2017. Half of the allocation was assessed against each performance condition. The vesting schedule for the TSR and EPS performance conditions are set out in the tables below. The holder of the shares was entitled to receive all dividends paid between grant and vesting dates. AVJennings’ TSR rank against companies in the Index at 30 September Percentage vesting < median At the median Nil 50% > median but < 75th percentile Pro-rata between 50th and 75th percentiles >=75th percentile 100% AVJennings’ EPS growth rate over the performance period Percentage vesting < 5% 5% 5% – 10% >=10% Nil 50% of the allocation for the hurdle Pro-rata between 50% and 100% 100% of the allocation for the hurdle Notes to the Consolidated Financial Statements68 | AVJENNINGS LIMITED · ABN 44 004 327 771 28. SHARE-BASED PAYMENT PLANS (continued) (b) Type of share-based payment plan (continued) Accounting The original cost of equity-settled transactions is treated as a reduction in share capital and the underlying shares identified separately as treasury shares. The fair value at the date when the grant is made is determined using an appropriate valuation model. That fair value is expensed over the period in which the performance and/or service conditions are fulfilled with a corresponding increase in share-based payment reserve in equity. The cumulative expense recognised for equity-settled transactions at each reporting date until the vesting date reflects the extent to which the vesting period has expired and the Group’s best estimate of the number of equity instruments that will ultimately vest. The expense or credit in the Consolidated Statement of Comprehensive Income represents the movement in cumulative expense recognised between the beginning and end of that period. In respect of shares forfeited, no further amounts are expensed. The cumulative amounts relating to non- market based measures expensed to the date of forfeiture are reversed. There is no non-recourse financing provided to executives in relation to any share-based payments. (c) Summary of treasury shares The following summarises the movement of the number of shares (both KMP and other executives) under the LTI Plan: FY2011 Grant FY2012 Grant FY2013 Grant FY2014 Grant FY2015 Rights Grant FY2016 Rights Grant Holding Account Issued from holding account Forfeited and transferred to holding account Shares vested Unvested shares Purchased on market 1,375,452 1,695,735 – (1,375,452) – – (1,240,047) (455,688) 293,913 219,255 – (513,168) 856,505 753,591 (418,783) (1,191,313) – – 321,780 403,193 – – (321,780) (403,193) – (2,224,846) 3,066,935 – 842,089 – – – – – – – FY2013 Delayed Grant – 527,027 (32,653) (494,374) Total 4,221,605 – – (3,379,516) 842,089 (d) Summary of rights granted The following is the status of rights granted (both KMP and other executives) from FY15 onwards under the restructured share-based remuneration: FY2015 Grant FY2016 Grant FY2017 Grant Total Rights granted Rights vested Rights forfeited Unvested rights 1,363,583 1,587,251 1,859,171 (321,780) (403,193) (252,408) (232,816) 789,395 951,242 – (97,085) 1,762,086 4,810,005 (724,973) (582,309) 3,502,723 Notes to the Consolidated Financial Statements29. AUDITOR’S REMUNERATION Ernst & Young Audit and assurance services AVJENNINGS LIMITED · ANNUAL REPORT 2017 | 69 2017 $ 2016 $ – Audit and review of the financial reports of the Group 303,974 282,014 – Share of audit and review costs of the financial reports of the Group’s joint ventures 3,901 2,624 Total auditor’s remuneration 307,875 284,638 30. EARNINGS PER SHARE Basic EPS is calculated by dividing the profit for the year attributable to ordinary equity holders of the Parent by the weighted average number of ordinary shares outstanding during the year. Diluted EPS amounts are calculated by dividing the profit attributable to ordinary equity holders of the Parent by the sum of the weighted average number of ordinary shares outstanding during the year (adjusted for treasury shares) and the weighted average number of ordinary shares, if any, that would be issued on conversion of all the dilutive potential ordinary shares into ordinary shares. The following reflects the income and share data used in the basic and diluted EPS computations: Profit attributable to ordinary equity holders of the Parent 35,717 40,912 2017 $’000 2016 $’000 Weighted average number of ordinary shares Treasury shares 2017 Number 2016 Number 384,423,851 384,423,851 (842,089) (2,338,154) Weighted average number of ordinary shares for EPS 383,581,762 382,085,697 Notes to the Consolidated Financial Statements70 | AVJENNINGS LIMITED · ABN 44 004 327 771 31. PARENT ENTITY FINANCIAL INFORMATION (a) Summary financial information The individual financial statements for the Parent Entity show the following aggregate amounts:: Balance Sheet Current assets Total assets Current liabilities Total liabilities Shareholders' equity Contributed equity Reserves Share-based payment reserve Retained earnings Total equity Profit for the year Total comprehensive income for the year 2017 $’000 53,454 216,740 6 6 2016 $’000 52,745 216,031 6 6 160,436 160,436 2,898 53,400 2,189 53,400 216,734 216,025 – – – – (b) Guarantees entered into by the Parent Entity The Parent Entity has not provided any financial guarantees other than those mentioned in notes 12(a), 12(c) 21(c) and 33. (c) Contingent liabilities of the Parent Entity Please refer to note 33 for details of the Parent Entity’s contingent liabilities. 32. COMMITMENTS Operating lease commitments – Group as lessee Operating leases include property, display homes, computer equipment leases and leases for motor vehicles provided under novated leases. Certain property leases include inflation escalation and market review clauses. No renewal or purchase options exist in relation to operating leases, and no operating leases contain restrictions on financing or other leasing activities. Future minimum rentals payable under non-cancellable operating leases are as follows: Operating leases Commitments in relation to leases contracted for at the reporting date but not recognised as liabilities: Within one year After one year, but not more than five years Total operating leases Represented by: Non-cancellable operating leases Cancellable operating leases Total operating leases 2017 $’000 2016 $’000 2,143 3,144 2,080 2,382 5,287 4,462 5,271 16 4,210 252 5,287 4,462 Notes to the Consolidated Financial Statements33. CONTINGENCIES Unsecured Cross guarantees The Parent Entity has entered into deeds of cross guarantee in respect of the debts of certain of its controlled entities as described in note 21(c). Contract performance bond facilities The Parent Entity has entered into Deeds of Indemnity with various controlled entities to indemnify the obligation of those entities in relation to the Contract performance bond facilities. Details of these entities are set out in note 21. Contingent liabilities in respect of certain performance bonds, granted by the Group’s financiers, in the normal course of business as at 30 June 2017 amounted to $26,936,000 (2016: $22,239,000). No liability is expected to arise. Legal issues From time to time a controlled entity defends actions served on it in respect of rectification of building faults and other issues. It is not practicable to estimate the amount, if any, which the entity could be liable for in this respect. The Directors anticipate that the resolution of any such matters currently outstanding will not have a material effect on the Group’s results. Secured Banking facilities The Parent Entity has entered into a cross deed of covenant with various controlled entities to guarantee the obligations of those entities in relation to the banking facilities. Details of these entities are set out in note 21. Performance guarantees Contingent liabilities in respect of certain performance guarantees, granted by the Group bankers in the normal course of business to unrelated parties, at 30 June 2017, amounted to $7,796,000 (2016: $8,724,000). No liability is expected to arise. Financial guarantees Financial guarantees granted by the Group’s bankers to unrelated parties in the normal course of business at 30 June 2017, amounted to $2,135,000 (2016: $5,593,000). No liability is expected to arise. 34. SIGNIFICANT EVENTS AFTER THE BALANCE SHEET DATE No matter or circumstance has arisen since 30 June 2017 that has significantly affected, or may significantly affect: a) the Group’s operations in future financial years; or b) the results of those operations in future financial years; or c) the Group’s state of affairs in future financial years. AVJENNINGS LIMITED · ANNUAL REPORT 2017 | 71 35. NEW ACCOUNTING STANDARDS AND INTERPRETATIONS The new and amended standards adopted by the Group for the year ended 30 June 2017 have not had a significant impact on the current period or any prior period and are not likely to have a significant impact on future periods. Certain new accounting standards have been published that are not mandatory for the year ended 30 June 2017 and have not been adopted early by the Group. The Group’s assessment of the impact of these new standards is set out below: AASB 9 Financial Instruments (effective 1 January 2018 / applicable for the Group 1 July 2018 with early adoption permitted) AASB 9 addresses the classification, measurement and derecognition of financial assets and financial liabilities. It sets out new rules for hedge accounting. The Group does not expect a material impact to the Group’s accounting for financial instruments. AASB 15 Revenue from Contracts with Customers: (effective 1 January 2018 / applicable for the Group 1 July 2018 with early adoption permitted) AASB 15 establishes a comprehensive framework for determining whether, how much and when revenue is recognised. It replaces existing revenue recognition guidance, including AASB 118 Revenue and AASB 111 Construction Contracts. The new standard is unlikely to have a material impact on land and built form revenue recognised on settlement, however, the Company continues to consider the implications for revenue currently recognised prior to settlement. AASB 16 Leases: (effective 1 January 2019 / applicable for the Group 1 July 2019 with early adoption permitted if AASB 15 is also adopted) AASB 16 sets out the principles for the recognition, measurement, presentation and disclosure of leases. This standard will predominantly affect lessees, bringing all major leases on balance sheet. Whilst the total amount of expense recorded in the income statement is expected to remain unchanged over the full lease term, the timing of expense recognition could accelerate. The expense would be re- characterised as interest expense and amortisation expense instead of rent. Assets and liabilities will increase as “right to use assets” and “leasing liabilities” are recorded for operating leases. AVJennings has performed a high-level assessment of AASB 16 on its existing operating lease arrangements as a lessee. Based on the preliminary assessment and using a discount rate of approximately 6.01%, the Group would recognise right of use assets approximating 1% of total assets and lease liabilities approximating 2% of total liabilities if the Standard were to be implemented at 30 June 2017. Assuming there are no major structural changes to the business, AVJennings expects the percentage of right of use assets and lease liabilities to remain at similar levels. The Group has not yet decided when to adopt AASB 16. Notes to the Consolidated Financial Statements 72 | AVJENNINGS LIMITED · ABN 44 004 327 771 36. OTHER ACCOUNTING POLICIES d) Goods and services tax (GST) Significant accounting policies relating to particular items are set out in the relevant notes. Other significant accounting policies adopted in the preparation of the financial report are set out below. a) Basis of consolidation The Consolidated Financial Statements comprise the financial statements of AVJennings Limited and its subsidiaries as at 30 June 2017. Subsidiaries are entities over which the Group has control. Control is achieved when the Group is exposed to, or has rights to variable returns from its involvement with the entity and has the ability to affect those returns through its power to direct the activities of the entity. Subsidiaries are consolidated from the date on which control is transferred to the Group and deconsolidated from the date control ceases. The financial statements of subsidiaries are prepared for the same period as the Parent, adopting consistent accounting policies. All intra-group assets and liabilities, equity, income, expenses and cash flows are fully eliminated in preparing the consolidated financial statements. The AVJ Deferred Employee Share Plan Trust was formed to administer the Group’s employee share scheme. This Trust is consolidated, as the substance of the relationship is that the Trust is controlled by the Group. Shares held by the Trust are disclosed as treasury shares and deducted from contributed equity. b) Business combinations Business combinations are accounted for using the acquisition method. This involves recognising at acquisition date, separately from goodwill, the identifiable assets acquired, the liabilities assumed and any non-controlling interest in the acquiree. The identifiable assets acquired and the liabilities assumed are measured at their acquisition date fair values. Acquisition-related costs are expensed as incurred. c) Leases Leases where the Group, as lessee, has substantially all the risks and rewards of ownership are classified as finance leases. The Group did not have any finance leases at the year end. Leases in which a significant portion of the risks and rewards of ownership are not transferred to the Group as lessee, are classified as operating leases. Payments made under operating leases (net of any incentives received from the lessor) are recognised as an expense on a straight-line basis over the period of the lease. Lease income from operating leases where the Group is a lessor is recognised in income on a straight-line basis over the lease term. The respective leased assets are included in the Consolidated Statement of Financial Position based on their nature. Revenues, expenses and assets are recognised net of the amount of GST except: • when the GST incurred on a sale or purchase of assets or services is not payable to or recoverable from the taxation authority, in which case the GST is recognised as part of the revenue or as part of the cost of acquisition of the asset or the expense item as applicable receivables and payables, which are stated with the amount of GST included. • The net amount of GST recoverable from, or payable to, the taxation authority is included as part of receivables or payables in the Consolidated Statement of Financial Position. Commitments and contingencies are disclosed net of the amount of GST recoverable from, or payable to, the taxation authority. Cash flows are included in the Consolidated Statement of Cash Flows on a gross basis and the GST component of cash flows arising from investing and financing activities, which is recoverable from, or payable to, the taxation authority is classified as part of operating cash flows. e) Foreign currency translation (i) Functional and presentation currency The Group’s functional and presentation currency is Australian Dollars. (ii) Translation of Group Companies’ functional currency to presentation currency The results and financial positions of foreign operations that have a functional currency different from the presentation currency are translated into the presentation currency as follows: • assets and liabilities for each Statement of Financial Position presented are translated at the closing rate at the date of that Statement of Financial Position; income and expenses for each Statement of Comprehensive Income are translated at average exchange rates; and • • all resulting exchange differences are recognised in other comprehensive income. On consolidation, exchange differences arising from the translation of any net investment in foreign entities are recognised in other comprehensive income. When a foreign operation is sold or any borrowings forming part of the net investment are repaid, the associated exchange differences are reclassified to profit or loss, as part of the gain or loss on sale. Notes to the Consolidated Financial StatementsDirectors’ Declaration AVJENNINGS LIMITED · ANNUAL REPORT 2017 | 73 In accordance with a resolution of the Directors of AVJennings Limited, we state that: 1) In the opinion of the Directors: i) the Consolidated Financial Statements and Notes are in accordance with the Corporations Act 2001, including; a) giving a true and fair view of the Group’s financial position as at 30 June 2017 and of their performance for the year ended on that date; and b) complying with Australian Accounting Standards (including the Australian Accounting Interpretations) and Corporations Regulations 2001; ii) the Consolidated Financial Statements and Notes also comply with International Financial Reporting Standards as disclosed in note 25; and iii) there are reasonable grounds to believe that the Company will be able to pay its debts as and when they become due and payable. 2) This declaration has been made after receiving the declarations required to be made to the Directors in accordance with section 295A of the Corporations Act 2001 for the financial year ended 30 June 2017. 3) In the opinion of the Directors, as at the date of this declaration, there are reasonable grounds to believe that the members of the Closed Group identified in note 21 will be able to meet any obligations or liabilities to which they are or may become subject, by virtue of the Deed of Cross Guarantee. On behalf of the Board Simon Cheong Director 4 September 2017 Peter Summers Director 74 | AVJENNINGS LIMITED · ABN 44 004 327 771 Independent Auditor’s Report to the Members of AVJennings Limited Report on the Audit of the Financial Report Opinion We have audited the financial report of AVJennings Limited (the Company) and its subsidiaries (collectively the Group), which comprises the consolidated statement of financial position as at 30 June 2017, the consolidated statement of comprehensive income, the consolidated statement of changes in equity and the consolidated statement of cash flows for the year then ended, notes comprising a summary of significant accounting policies and the directors’ declaration. In our opinion, the accompanying financial report of the Group is in accordance with the Corporations Act 2001, including: (i) giving a true and fair view of the consolidated financial position of the Group as at 30 June 2017 and of its consolidated financial performance for the year ended on that date; and (ii) complying with Australian Accounting Standards and the Corporations Regulations 2001. Basis for Opinion We conducted our audit in accordance with Australian Auditing Standards. Our responsibilities under those standards are further described in the Auditor’s Responsibilities for the Audit of the Financial Report section of our report. We are independent of the Group in accordance with the Corporations Act 2001 and the ethical requirements of the Accounting Professional and Ethical Standards Board’s APES110 Code of Ethics for Professional Accountants (the Code) that are relevant to our audit of the financial report in Australia; and we have fulfilled our other ethical responsibilities in accordance with the Code. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion. Key Audit Matters Key audit matters are those matters that, in our professional judgment, were of most significance in our audit of the financial report of the current year. These matters were addressed in the context of our audit of the financial report as a whole, and in forming our opinion thereon, but we do not provide a separate opinion on these matters. For each matter below, our description of how our audit addressed the matter is provided in that context. We have fulfilled the responsibilities described in the Auditor’s Responsibilities for the Audit of the Financial Report section of our report, including in relation to these matters. Accordingly, our audit included the performance of procedures designed to respond to our assessment of the risks of material misstatement of the financial report. The results of our audit procedures, including the procedures performed to address the matters below, provide the basis for our audit opinion on the accompanying financial report. A member firm of Ernst & Young Global Limited Liability limited by a scheme approved under Professional Standards Legislation AVJENNINGS LIMITED · ANNUAL REPORT 2017 | 75 Independent Auditor’s Report to the Members of AVJennings Limited (continued) 1. Net realisable value (NRV) of inventories Why significant How our audit addressed the key audit matter Approximately 74% of the Group’s total assets comprise development inventories. Inventories are carried at the lower of cost and net realisable value and the directors assess this with reference to the following key data inputs: Inventory costs incurred to date Capitalised costs to date Forecast costs to complete Average historic and forecast selling price and sales rate per project This is considered a key audit matter as it involves a significant degree of judgment and can present a range of alternative outcomes. The NRV analysis performed is based on a combination of the current project feasibility models and an overlay analysis that takes into account changes to the underlying assumptions based on the impact of changing market conditions and changes to strategy. There is judgment involved in determining the appropriate allocation of cost of sales on realisation of inventories. Disclosure of inventories is included in note 6 of the financial report. Disclosure of significant judgments is included in note 18 of the financial report. 2. Revenue recognition Why significant The Group’s policy is to recognise revenue when the significant risks, rewards and ownership and effective control has been transferred to the buyer. This is generally once settlement has occurred; however, revenue may be recognised prior to settlement when a signed unconditional contract for sale exists, and the significant risks and rewards of ownership and effective control have been transferred to the buyer, and there is no ongoing management involvement to the degree usually associated with ownership. The Group recognised $138.3million in sales revenue prior to settlement for the year ended 30 June 2017. Revenue recognition for unsettled sales is considered an area of judgment. The gross margin recognised on development sales is based upon the costs attributed to the inventory asset prior to sale and which can be subject to judgment. Disclosure of revenue is included in note 2 of the financial report. Disclosure of significant judgments is included in note 18 of the financial report. Our audit procedures focused on assessing the judgments and assumptions made by the Group in the feasibilities underpinning the net realisable assessments. We achieved this by performing the following procedures: We assessed and tested the design and operating effectiveness of relevant controls over cost accumulation; We met with the project managers to understand the status and progress of a sample of developments; We assessed the Group’s impairment methodology, project margin analysis and feasibility models prepared by the Group for a sample of developments currently in progress; Identified higher risk projects, based on our judgment, and evaluated the assumptions adopted. In doing so, we: Compared the forecast sales revenue assumed to the most recent historical or comparable sales and external market data where available; Corroborated the costs projected to signed contracts or actual costs incurred for current or comparable projects; and Assessed contingency estimates for remaining development risks. Performed sensitivity analyses in relation to the key forward looking assumptions including sales price achieved, cost per lot and escalation rates; and Tested the mathematical accuracy of the feasibilities tested. How our audit addressed the key audit matter In obtaining sufficient audit evidence: We assessed the accounting policies and judgments applied by the Group on the recognition of revenue and cost of sales for appropriateness. To evaluate the adherence to the Group’s policy, on a sample basis, we assessed the recognition of revenue for unsettled sales with reference to the following supporting evidence (where applicable): Underlying sales contracts, Title registration certificates, and/or Sub-contractor completion certificates. We performed cut-off testing around year-end sales to assess whether revenue and cost of sales was recognised in the correct period. Assessed the appropriate release of cost of sales for the contracts selected. A member firm of Ernst & Young Global Limited Liability limited by a scheme approved under Professional Standards Legislation 76 | AVJENNINGS LIMITED · ABN 44 004 327 771 Independent Auditor’s Report to the Members of AVJennings Limited (continued) Information Other than the Financial Report and Auditor’s Report The directors are responsible for the other information. The other information comprises the information in the Company’s Annual Report for the year ended 30 June 2017, but does not include the financial report and the auditor’s report thereon. Our opinion on the financial report does not cover the other information and we do not express any form of assurance conclusion thereon. In connection with our audit of the financial report, our responsibility is to read the other information and, in doing so, consider whether the other information is materially inconsistent with the financial report or our knowledge obtained in the audit or otherwise appears to be materially misstated. If, based upon the work we have performed, we conclude that there is a material misstatement of this other information, we are required to report that fact. We have nothing to report in this regard. Responsibilities of the Directors for the Financial Report The directors of the Company are responsible for the preparation of the financial report that gives a true and fair view in accordance with Australian Accounting Standards and the Corporations Act 2001 and for such internal control as the Directors determine is necessary to enable the preparation of the financial report that gives a true and fair view and is free from material misstatement, whether due to fraud or error. In preparing the financial report, the Directors are responsible for assessing the Group’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 the Directors either intend to liquidate the Group or cease operations, or have no realistic alternative but to do so. Auditor’s Responsibilities for the Audit of the Financial Report Our objectives are to obtain reasonable assurance about whether the financial report as a whole is 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 Australian Auditing Standards 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 this financial report. As part of an audit in accordance with Australian Auditing Standards, we exercise professional judgment and maintain professional scepticism throughout the audit. We also: • Identify and assess the risks of material misstatement of the financial report, whether due to fraud or error, design and perform audit procedures responsive to those risks, and obtain audit evidence that is sufficient and appropriate to provide a basis for our opinion. The risk of not detecting a material misstatement resulting from fraud is higher than for one resulting from error, as fraud may involve collusion, forgery, intentional omissions, misrepresentations, or the override of internal control. • Obtain an understanding of internal control relevant to the audit in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal control. • Evaluate the appropriateness of accounting policies used and the reasonableness of accounting estimates and related disclosures made by the Directors. • Conclude on the appropriateness of the Directors’ use of the going concern basis of accounting in the preparation of the financial report. We also conclude, based on the audit evidence obtained, whether a material uncertainty exists related to events and conditions that may cast significant doubt on the entity’s ability to continue as a going concern. If we conclude that a material uncertainty exists, we are required to draw attention in the auditor’s report to the disclosures in the financial report about the material uncertainty or, if such disclosures are inadequate, to modify the opinion on the financial report. However, future events or conditions may cause an entity to cease to continue as a going concern. • Evaluate the overall presentation, structure and content of the financial report, including the disclosures, and whether the consolidated financial statements represent the underlying transactions and events in a manner that achieves fair presentation. A member firm of Ernst & Young Global Limited Liability limited by a scheme approved under Professional Standards Legislation AVJENNINGS LIMITED · ANNUAL REPORT 2017 | 77 Independent Auditor’s Report to the Members of AVJennings Limited (continued) We communicate with the Directors regarding, among other matters, the planned scope and timing of the audit and significant audit findings, including any significant deficiencies in internal control that we identify during our audit. We also provide the Directors with a statement that we have complied with relevant ethical requirements regarding independence, and to communicate with them all relationships and other matters that may reasonably be thought to bear on our independence, and where applicable, related safeguards. From the matters communicated to the Directors, we determine those matters that were of most significance in the audit of the financial report of the current year and are therefore the key audit matters. We describe these matters in our auditor’s report unless law or regulation precludes public disclosure about the matter or when, in extremely rare circumstances, we determine that a matter should not be communicated in our report because the adverse consequences of doing so would reasonably be expected to outweigh the public interest benefits of such communication. Report on the Remuneration Report Opinion on the Remuneration Report We have audited the Remuneration Report included in pages 17 to 24 of the Directors’ Report for the year ended 30 June 2017. In our opinion, the Remuneration Report of AVJennings Limited for the year ended 30 June 2017, complies with section 300A of the Corporations Act 2001. Responsibilities The Directors of the Company are responsible for the preparation and presentation of the Remuneration Report in accordance with section 300A of the Corporations Act 2001. Our responsibility is to express an opinion on the Remuneration Report, based on our audit conducted in accordance with Australian Auditing Standards. Ernst & Young Mark Conroy Partner Sydney 4 September 2017 A member firm of Ernst & Young Global Limited Liability limited by a scheme approved under Professional Standards Legislation 78 | AVJENNINGS LIMITED · ABN 44 004 327 771 Shareholder Information As at 12 September 2017 1. NUMBER OF SHAREHOLDERS AND DISTRIBUTION OF EQUITY SECURITIES Range of Holdings of Ordinary Shares 1 – 1,000 1,001 – 5,000 5,001 – 10,000 10,001 – 100,000 100,001 – and over Total number of holders Number of holders of less than a marketable parcel 2. SUBSTANTIAL SHAREHOLDERS As disclosed by latest notices received by the Company: Name SC Global Developments Pte Ltd Australian Securities Exchange Singapore Exchange Total 624 898 362 827 166 2,877 345 265 615 184 216 25 1,305 121 889 1,513 546 1,043 191 4,182 466 Ordinary Shares % 203,818,030 53.02 AVJENNINGS LIMITED · ANNUAL REPORT 2017 | 79 Shareholder Information As at 12 September 2017 3. TWENTY LARGEST SHAREHOLDERS ON THE AUSTRALIAN REGISTER Name The Central Depository (Pte) Ltd BNP Paribas Nominees Pty Ltd HSBC Custody Nominees (Australia) Ltd Citicorp Nominees Pty Ltd JP Morgan Nominees Australia Ltd Brazil Farming Pty Ltd John E Gill Trading Pty Ltd John E Gill Operations Pty Ltd Gillcorp Pty Limited Pacific Custodians Pty Ltd Horrie Pty Ltd Luton Pty Ltd RBC Investor Services Australia Nominees Pty Ltd Mr Bradley John Newcombe Ago Pty Ltd Jilliby Pty Ltd Mr D R M Gill and Mrs J M Gill Gillcorp Pty Limited National Nominees Ltd Di Iulio Homes Pty Ltd Ordinary Shares % 211,469,136 55.01 15,210,279 14,412,889 10,676,961 8,340,545 5,771,016 5,598,712 5,459,927 4,738,416 4,541,091 3,250,000 2,700,000 1,941,915 1,600,000 1,560,000 1,500,000 1,492,832 1,475,123 1,421,973 1,178,700 3.96 3.75 2.78 2.17 1.50 1.46 1.42 1.23 1.18 0.85 0.70 0.51 0.42 0.41 0.39 0.39 0.38 0.37 0.31 Total 304,339,515 79.17 80 | AVJENNINGS LIMITED · ABN 44 004 327 771 Shareholder Information As at 12 September 2017 4. TWENTY LARGEST SHAREHOLDERS ON THE SINGAPOREAN REGISTER Name UOB Nominees (2006) Pte Ltd United Overseas Bank Nominees Pte Ltd Trimount Pte Ltd Oei Hong Leong Foundation Pte Ltd Lim Chin Tiong Raffles Nominees (Pte) Ltd Tsang Sze Hang DBS Nominees Pte Ltd Rowland Wong Kwok Ho Vesmith Investments Pte Ltd Pansbury Investments Pte Ltd Hexacon Construction Pte Ltd UOB Kay Hian Pte Ltd Chng Bee Suan OCBC Nominees Singapore Pte Ltd Teo Chiang Long Ng Poh Cheng Wee Kim Choo @ Elizabeth Sam Lim Kong Wee Tan Hak Jin Total Ordinary Shares % 179,219,468 46.62 11,302,571 1,659,940 1,462,112 1,351,920 1,287,132 837,396 823,496 748,833 634,876 496,160 368,480 343,459 332,320 287,156 250,648 214,760 209,349 200,974 188,000 2.94 0.43 0.38 0.35 0.33 0.22 0.21 0.19 0.17 0.05 0.10 0.09 0.09 0.07 0.07 0.06 0.05 0.05 0.05 202,219,050 52.60 Percentages are calculated on the total number of shares on issue. 5. VOTING RIGHTS Ordinary Shareholder On a show of hands, every member present in person or by representative, proxy or attorney shall have one vote, and on a poll each fully paid share shall have one vote. 6. TOTAL NUMBER OF SHARES The total number of shares on issue and listed on the Australian Securities Exchange is 384,423,851. Company Particulars AVJENNINGS LIMITED · ANNUAL REPORT 2017 | 81 DIRECTORS Mr Simon Cheong Mr Jerome Rowley Mrs Elizabeth Sam Mr Bobby Chin Mr Teck Poh Lai Mr Bruce Hayman Mr Boon Leong Tan Mr Peter Summers COMPANY SECRETARY Mr Carl Thompson PRINCIPAL REGISTERED OFFICE IN AUSTRALIA Level 4, 108 Power Street Hawthorn Vic 3122 Telephone +61 3 8888 4800 AUDITORS Ernst & Young 680 George Street Sydney NSW 2000 BANKERS SHARE REGISTRY Australia Link Market Services Ltd Tower 4 727 Collins Street, Docklands Vic 3008 Telephone: +61 1300 554 474 Singapore The Central Depository (Pte) Ltd 11 North Buona Vista Drive #06-07 The Metropolis Tower 2 Singapore 138589 Telephone +65 6535 7511 ANNUAL GENERAL MEETING The Annual General Meeting of the Company will be held at: Metropol Meeting Room 4 Crown Metropol Melbourne 8 Whiteman Street Southbank Vic 3006. Wednesday, 22 November 2017 at 10.00 a.m. DIVIDENDS Commonwealth Bank of Australia Ltd (Bankwest Division) DBS Bank HSBC Bank Australia Ltd United Overseas Bank Ltd Dividends paid in the year under review: Final Dividend of $0.035 for FY16 paid on 23 September 2016 Interim Dividend of $0.015 for FY17 paid on 7 April 2017 STOCK EXCHANGE LISTINGS Australia The Company is listed on: The Australian Securities Exchange Level 4, 525 Collins Street Melbourne Vic 3000 Singapore The Company’s shares are also quoted and traded on: The Singapore Exchange 11 North Buona Vista Drive #06-07 The Metropolis Tower 2 Singapore 138589 through SGX Globalquote. 

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