2019 Annual Report 2019 Highlights We are a proudly Australian company producing the BISALLOY® range of quenched and tempered performance steels across three main product areas of high wear, structural and armour grade specialty steels. EBITDA of $9.2m (FY2018 – $8.5m) Final dividend for the FY2019 year of 4.0cps fully franked Net debt of $9.4m (FY2018 – $5.9m) Revenue increased by 10.8% Annual General Meeting The Group will hold its 2019 Annual General Meeting in the Sir James Fairfax Room at the Radisson Blu Plaza Hotel located at 27 O’Connell Street, Sydney NSW at 11:00am on Thursday, 28 November 2019. EBITDA $m Debt $’000s FY15 FY16 FY17 FY18 FY19 3.9 5.5 5.6 FY15 FY16 FY17 FY18 8.5 3,161 7,704 4,705 5,918 9.2 FY19 9,422 Bisalloy Steel Group Limited 2019 Annual Report Gearing % FY15 FY16 FY17 FY18 FY19 12% 15% 16% 23% 21% Contents Chairman and Managing Director’s Review Review of Operations and Safety ii iv 1 Financial Report 73 Directors’ Declaration 74 Independent Auditor’s Report 79 Additional Information 81 Corporate Directory Bisalloy Steel Group Limited 2019 Annual Report | i Chairman & Managing Director’s Review of high strength steels Bisalloy is positioning itself to be the clear “ As the only Australian producer home market leader. ” Demand in Australia was good in all our major segments, including resources, energy, construction, earth moving equipment, heavy transport and defence. The partnership strategy with key companies in these industries, the continual improvement programme to our operations and the investment in our people has positioned us well to better service the Australian market. As a group, we are all working hard to further develop the business. In Australia, we launched the “BisEnergy” programme that is designed to bring a culture of continuous improvement across all parts of the business. This enables us to present Bisalloy as a high quality company and supplier to our key customers. We have actively been working on expanding into markets that we have traditionally not serviced which opens new opportunities for us. We have heavily invested in the Australian Government’s future defence projects and overcame many hurdles and challenges required for Bisalloy to be considered a supplier for these significant projects. This includes the Land 400 vehicles and future submarine programme, where we continue to work towards securing these long-term supply contracts. Bisalloy Steel Group reported continued growth in FY19. Our growth initiatives are progressing to plan which has strengthened our Australian business and resulted in volume and profit growth in our international businesses. Dividend 4.0¢ (FY2018 – 4.0¢) A Growth Story Bisalloy Steel Group reported continued growth in FY19. Our growth initiatives are progressing to plan which has strengthened our Australian business and resulted in volume and profit growth in our international businesses. Throughout FY19, the business was also able to further develop significant opportunities across each product segment. With leading positions attained across our focus markets and with a solid order book, Bisalloy is well equipped to maintain this momentum into FY20. For Australia, the demand and market were as per our expectations, however margin was impacted by the level of price competition. This was offset by higher than expected international sales, and very strong results from our distribution joint venture in Indonesia and our manufacturing and distribution joint venture in China. Our high-strength steels enable our customers to design products that would not have otherwise been possible and during the year we have worked collaboratively with key strategic customers. We did this in Australia, throughout South Asia and in the growing Chinese domestic market. This is positioning Bisalloy as a premium brand and supplier to key companies and industries. ii | Bisalloy Steel Group Limited 2019 Annual Report Mr Phil Cave, AM Chairman Mr Greg Albert Managing Director and CEO With the profitability of the business continuing to grow, we are well equipped to continue to develop the company in line with our strategy and to capitalise on the opportunities for our company where there is strong long-term demand for the increased use of high-strength steels. In closing, we would like to thank our employees, customers and shareholders. Bisalloy is now well placed to further create value for all our stakeholders. Mr Phillip Cave, AM Chairman Mr Greg Albert Managing Director and CEO In February 2019, our Chinese co-operative joint venture (CJV) partner, Shandong Steel, began commissioning of its newly completed state of the art steel making plant at Rizhao, Shandong province. This will, when fully operational, produce 20 million tonnes of steel and will have a QT capacity of up to 250,000 tonnes. This will enable the CJV to significantly grow in the Chinese domestic market with a full range of high-quality products, with the aim to be the leading premium brand in China. This will also allow the Bisalloy Steel Group to supply to select international markets, in line with our growth strategy. “ Our overseas distribution operations in Indonesia and Thailand continued to be profitable with a very strong year in Indonesia, following the strategy of supplying to major manufacturers. Bisalloy is now the leading QT brand in the Indonesian marketplace. ” Our Armour business continues to be of significant strategic importance both domestically and internationally. In FY19 we successfully developed alternate supply of specialised greenfeed from targeted partner mills overseas to allow Bisalloy to grow the volumes of Armour in line with our strategic targets. We expect this product segment to continue to grow during FY20. The realisation of a number of key defence projects has opened up opportunities for significant development of Bisalloy Armour products internationally. Bisalloy Steel Group Limited 2019 Annual Report | iii Review of Operations and Safety All injuries down by 60% Care for our people – an impressive safety record continues Health and Safety was at the front of mind as Bisalloy’s operations continued to care for the people who care for our customers. We are pleased to see that our excellent safety record continues while new initiatives and measures were introduced across the Unanderra site to continue to improve the safety culture. The engagement of all our employees in improving safety is one of our core values which has also delivered high productivity, high quality and customer satisfaction improvements throughout the year. Our operations in Indonesia and Thailand maintain their highly impressive commitment to safety. They have now delivered fourteen years without a lost time injury with the Chinese Joint venture, passing eight years lost time injury-free. Productivity Improvement The Unanderra team have continued to increase the plant capacity through very modest investments and a focus on processing cycle time reduction. One investment in our Hardening furnace yielded an additional month of processing capacity with a payback of 20 days. As with all domestic manufacturing industries exposed to natural gas pricing, energy efficiency and unit pricing remains a high priority. The operation was able to secure medium term supply contracts for both electricity and gas to manage this exposure. Feed Security Bisalloy, with the cooperation of our joint venture partners in Shandong Steel, have further strengthened an alternative feed supply with a modern state-of-the-art production facility in China. This has come as a result of years of technical cooperation. Bisalloy also remain committed to our long-term partners at BlueScope Steel who will continue to supply the majority of our Unanderra steel feed. Our supply chain department improved worked cooperatively with BlueScope to make a major improvement in delivery performance to our plant. Further work continues with overseas mills to support the development of new products and markets. Grade Development The exacting requirements of our defence armour customers have continued to drive the development of our plant and new steels, which have also benefitted some of our wear market customers with the release of new products. Caring for our Assets Our sustaining capital program which includes re-roofing No.2 Building, new laboratory and equipment, upgrading our central control system, modernisation of our finishing end, and modifications to our crane lifting beams continues to invest in the key production assets, ensuring their longevity and future performance. Bisalloy Steel Group Limited will hold its 2019 Annual General Meeting in the Sir James Fairfax Room at the Radisson Plaza Hotel located at 27 O’Connell Street, Sydney, NSW at 11:00am on Thursday, 28th November 2019. We look forward to welcoming you then. iv | Bisalloy Steel Group Limited 2019 Annual Report 2019 Financial Report Bisalloy Steel Group Limited 2019 Annual Report | 1 Bisalloy Steel Group Limited 2019 Annual Report | 1 Directors’ Report Your directors submit their report for the year ended 30 June 2019. Directors The names and details of the Company’s directors in office during the financial year and until the date of this report are as follows. Directors were in office for this entire period unless otherwise stated. Mr Phillip Cave Skills & Experience: AM, B.BUS, FCPA CHAIRMAN Mr Cave is an experienced director, Chairman and Chief Executive Officer with a career in major corporate turnaround projects, structured finance and corporate advisory service. Over a 36 year career, Mr Cave’s experience has combined a mixture of operational management expertise across a wide variety of industries with an in depth knowledge of finance and banking. Term of office: A founding director of the Company and Chairman since appointed in November 2001. Last re-elected in November 2016. Board Committees: • Chairman of the Nominations & Remuneration Committee • Audit & Risk Committee Other directorships: • Chairman, Anchorage Capital Partners • Chairman, Excelsia College • Chairman, Ability First Australia • Chairman, Solgen Energy Group • Director, Contract Resources Mr Greg Albert Skills & Experience: MBA MANAGING DIRECTOR AND CHIEF EXECUTIVE OFFICER Mr Albert has professional qualifications in Mechanical Engineering, Marketing and has an MBA. Mr Albert brings a wealth of experience in the steel, mining and construction industries, as well as solid knowledge of international markets, having held postings in Asia and Europe. Mr Albert is a Director of Bisalloy Steel Group’s majority owned businesses – PT Bima Bisalloy and Bisalloy Thailand. Mr Albert is also Vice-chairman of the Group’s Co-operative Joint Venture, Bisalloy Shangang (Shandong) Steel Plate Co., Limited. Term of office: Appointed in January 2016. As the managing director he is not subject to re-election by rotation. Board Committees: Nil Other directorships: Nil 2 | Bisalloy Steel Group Limited 2019 Annual Report Directors’ Reportcontinued Mr Kym Godson Skills & Experience: DIP TECH (BUS ADMIN), FAICD, FAIM NON-EXECUTIVE DIRECTOR Mr Godson is an experienced public company director and has extensive experience in the management of industrial businesses, particularly within the steel industry. He is a former Managing Director and CEO of the Company having retired from the position in November 2008. Term of office: A founding director of the Company appointed in November 2001. Last re-elected in November 2018. Board Committees: • Audit & Risk Committee • Nominations & Remuneration Committee Other directorships: The House of M&K Pty. Ltd Mr Richard Grellman Skills & Experience: AM, FCA NON-EXECUTIVE DIRECTOR Mr Grellman brings significant accounting and finance skills to the Company, having had over 33 years experience in the accounting profession. He was a partner at KPMG from 1982 to 2000 and a member of KPMG’s National Board from 1995 to 1997 and National Executive from 1997 to 2000. Term of office: Appointed in February 2003 and was re-elected in November 2017. Board Committees: • Chairman of the Audit & Risk Committee • Nominations & Remuneration Committee Other public company directorships during past three years: Current • Chairman, IPH Ltd from September 2014 • Chairman, FBR Ltd from July 2018 Former • Chairman, Genworth Mortgage Insurance Ltd (2012-2016) Other directorships: • Lead Independent Director, The Salvation Army Australia from May 2018 Bisalloy Steel Group Limited 2019 Annual Report | 3 Mr Dario Pong Skills & Experience: AB in Economics FORMER NON-EXECUTIVE DIRECTOR (RESIGNED SEPTEMBER 2018) Mr Pong is based in Hong Kong and has lived for extended periods in Shanghai and Beijing, with wide ranging experience in the steel industry in the People’s Republic of China. Mr Pong provided valuable experience and insight to Bisalloy as it developed its Asian growth strategy, including its Chinese Joint Venture. Mr Pong is also a Board member of the Group’s Co-operative Joint Venture, Bisalloy Shangang (Shandong) Steel Plate Co., Limited. Term of office: Appointed in September 2013 and was re-elected in November 2017. Resigned from office in September 2018. Remains a Board member of Bisalloy Shangang (Shandong) Steel Plate Co., Limited. Board Committees: • Audit & Risk Committee • Nominations & Remuneration Committee Other directorships: • Ferro Resources Ltd • Shiu Wing Steel Ltd Company Secretary Mr Luke Beale Skills & Experience: B COMM, MBA, ACA COMPANY SECRETARY AND CHIEF FINANCIAL OFFICER Appointed in April 2018. Mr Beale is a Chartered Accountant with 19 years professional experience working in senior financial positions with listed companies in Australia, New Zealand and Asia. Mr Beale is a Director of Bisalloy Steel Group’s majority owned businesses – PT Bima Bisalloy and Bisalloy Thailand. Mr Beale is also Financial Supervisor of the Group’s Co-operative Joint Venture, Bisalloy Shangang (Shandong) Steel Plate Co., Limited. Interests in shares of the company and related bodies corporate As at the date of this report, the interests of the directors in the shares of Bisalloy Steel Group Limited were: Number of ordinary shares 7,622,776 – 1,344,766 41,693 Cents 4.0 4.0 $’000 1,790 1,775 P J Cave G Albert K Godson R Grellman Dividends Final dividend recommended on ordinary shares (fully franked) Dividends paid in the year 4 | Bisalloy Steel Group Limited 2019 Annual Report Directors’ Reportcontinued Principal activities The principal activity of the Group during the financial year was the processing and sale of quenched and tempered, high-tensile, and abrasion resistant steel plates (“Q&T plate”). Operating and Financial Review Operations Group Bisalloy Steel Group comprises Bisalloy Steels Pty Ltd in Australia, the majority owned distribution businesses in Indonesia (PT Bima Bisalloy) and Thailand (Bisalloy Thailand) and the investment in the Chinese Co-Operative Joint Venture (CJV) – Bisalloy Shangang (Shandong) Steel Plate Co, Ltd. Safety is a key commitment of the Group with a continued focus on zero harm to all employees, contractors and visitors. Our previous record of 1500+ days Lost Time Injury Free ended this year with the reclassification of a manual handling related injury from a prior year. Despite this, the Group experienced a significant (60%) reduction in all injuries year on year. Bisalloy Steels is Australia’s only processor of quenched and tempered high strength, abrasion resistant and armour grade alloyed steel plates. Bisalloy distributes wear and structural grade plates through both distributors and directly to select manufacturers and end users in Australia and internationally. For defence grade steels Bisalloy exclusively deals directly to select companies. Bisalloy’s unique stand-alone heat treatment facility at Unanderra near Wollongong, is a highly automated and efficient operation providing a relatively low cost base, allowing it to compete with a variety of imported products. During the year Bisalloy utilised greenfeed steel supply mainly from neighbouring BlueScope Steel in Wollongong, complimented with selected supply from international greenfeed suppliers. Financial review Operating Results The Group’s net profit for the year after income tax was $4,431,000 (2018: $3,850,000). The profit increase was driven by an increase in sales volume of higher-margin defence grade steels, an increase in sales volume of Australian exports, strong performance from the Group’s overseas distribution operation in Indonesia and a significant increase to both volumes and profit from the Chinese CJV. Operating results are summarised as follows: Operating Segments Australia Overseas Consolidated entity adjustments Consolidated entity revenue and profit after tax for the year 2019 Revenue $’000s Profit after tax $’000s 82,388 23,485 105,873 (7,749) 98,124 1,753 2,678 4,431 – 4,431 Bisalloy Steel Group Limited 2019 Annual Report | 5 Shareholder Returns The Board has decided to pay a dividend of 4.0 cents per share for the year ended 30 June 2019. Basic earnings / (loss) per share (cents) Net profit / (loss) attributable to members ($’000) Return on equity (reported PAT/equity) (%) Gearing (net debt / net debt + equity) (%) Dividends paid (cents) Dividend franking Liquidity and Capital resources The consolidated statement of cash flows details a decrease in cash and cash equivalents before exchange rate differences for the year ended 30 June 2019 of $714,000 (2018: decrease of $1,465,000). Operating activities resulted in a net cash outflow of $1,128,000 (2018: inflow of $1,413,000) due to an increase in working capital. Investing activities required $950,000 (2018: $1,392,000) of net cash outflows for investment in operating plant and equipment. Net cash inflows from financing activities were $1,364,000 (2018: outflow of $1,486,000), including the dividend paid in cash to shareholders in November 2019 totalling $1,495,000 (2018: $960,000). Funding The Group’s net debt increased to $9.4m at 30 June 2019, up from $5.9m at 30 June 2018, with an increase in gearing to 21%, up from 16% at the end of last year. On 24 October 2018 Bisalloy Steel Group Limited and Bisalloy Steels Pty Limited re-negotiated the existing trade finance agreement with Westpac Banking Corporation, increasing this from $2 million to $6 million. This is one of three facilities operating under a common structure, with the other two facilities being an ongoing invoice finance facility and a three year bank bill business loan. The total limit of these facilities is $22 million, up from $19 million in 2018. Business strategy and outlook Strategy Armour Plate Growth of Bisalloy’s armour product business continued both with the Australian Federal Government’s various projects as well as select international defence companies. Bisalloy continue to work with Naval Group as part of the future submarine program in Australia. In FY19, Bisalloy successfully completed the supply for the first trial and the first qualification heat, which continues to be tested by Naval Group and the Department of Defence. Bisalloy expects to supply two further qualification heats in the near term. 6 | Bisalloy Steel Group Limited 2019 Annual Report 2019 8.3c 3,682 12.8% 21% 4.0c 100% 2018 8.2c 3,636 12.6% 16% 2.5c 100% 2017 3.4c 1,509 6.6% 15% 2.5c 100% 2016 3.5c 1,541 6.8% 23% 4.0c 100% 2015 5.7c 2,490 11.9% 12% – – Bisalloy continue to work with Rheinmetall Germany on testing ahead of acceptance for the LAND400 Phase 2 program. Bisalloy continues to support key Australian defence projects including the Thales Hawkei and Bushmaster vehicles. Co-Operative Joint Venture in China In FY19 Bisalloy’s CJV partner, Shandong Steel, commissioned their new state of the art steel mill in Rizhao. This facility has added 20 million tonnes of capacity, making them the second biggest steel company in China. The CJV volumes and profits increased in FY19 with Bisalloy’s share of the CJV EBITDA increasing to $2.2m (FY2018 $1.5m). Targets for FY20 and beyond represent a continuation of this trend. Due to the substantial growth of the CJV, both parties in the joint venture agreed in Q4 FY18 to increase their registered capital of the CJV, with Bisalloy’s contribution increasing from US$1.0m to US$2.5m in FY19. The increase was funded through distributable profits from 2017 and 2018 calendar years that would have otherwise been fully paid to Bisalloy as a dividend in November 2018 and November 2019. Overseas Distribution The Group’s overseas distribution operations in Indonesia and Thailand continue to be profitable. Priorities for FY20 Bisalloy is forecasting increased profitability in FY20. To achieve this, Bisalloy is continuing with its growth strategy in a shift towards focusing on the premium grades of QT steels from its Unanderra plant, including armour grade steels. Bisalloy’s wear products are primarily sold in the traditional resources segment. This segment remained stable in FY19, however sales to this segment now represent only half of Bisalloy’s sales. Bisalloy enters FY20 with a strong order book and growth in armour grade steels remains a major focus for Bisalloy. Business risk management The Group takes a proactive approach to risk management. The Board is responsible for ensuring that risks, and also opportunities, are identified on a timely basis and that the Directors’ Reportcontinued Group’s objectives and activities are aligned with the risks and opportunities identified by the Board. The Board has established an Audit and Risk Committee comprising non-executive directors, whose meetings are also attended by the executive director. In addition, sub-committees are convened as appropriate in response to issues and risks identified by the Board, and the sub-committee further examines the issue and reports back to the Board. The Board has a number of mechanisms in place to ensure that management’s objectives and activities are aligned with the risks identified by the Board. These include the following: • Board approval of a strategic plan, which encompasses the Group’s vision, mission and strategy statements, designed to meet stakeholders’ needs and manage business risk. • Implementation of Board approved operating plans and budgets and Board monitoring of progress against these budgets, including the establishment and monitoring of KPIs of both a financial and non-financial nature. • Establishment of committees to report on specific business risks, including for example, such matters as environmental issues and concerns and occupational health and safety. • Board review of financial risks such as the Group’s liquidity, currency, interest rate and credit policies and exposures and monitors management’s actions to ensure they are in line with Group policy. The major high level business risk with the greatest potential to materially impact on the financial outlook for the Group is continued upward pressure in energy prices. Both electricity, and natural gas in particular, are integral inputs into the Group’s manufacturing process, and affordable energy resources are critical if the Group is to maintain its competitive advantage. Furthermore supply constraints, market dysfunction and higher gas prices may impact many sectors of the economy including the mining and agricultural sectors on the demand side and the Group’s ability to source competitively priced raw material on the supply side. Bisalloy Australia currently has retail contacts in place for electricity supply through to the end of December 2022 and gas supply through to the end of December 2020. Significant changes in the state of affairs Total equity increased from $30,538,000 to $35,190,000, an increase of $4,652,000. In addition to the net profit for the year, the Group recorded a revaluation of land and buildings ($91,000 net of tax), partially offset by a final dividend totalling $1,775,000 in respect of the year ended 30 June 2018 which was paid to shareholders in November 2018, together with foreign currency translation gain of $1,908,000 relating to the overseas subsidiaries as a result of the depreciation of the Australian dollar in comparison to the Indonesian Rupiah and Thai Baht. Significant events after the balance date There have been no significant events after the balance date. Indemnification and insurance of directors and officers The Group must, subject to certain exceptions set out in the constitution, indemnify each of its officers on a full indemnity basis and to the full extent permitted by law against all losses, liabilities, costs, charges and expenses incurred by the officer, as an officer of the Group (including all liabilities incurred where the officer acts as an officer of any other body corporate at the request of the Group) including any liability for negligence and for reasonable legal costs. During the year or since the end of the year, the Group has paid premiums in respect of a directors and officers liability insurance policy. Details of the nature of the liabilities covered or the amount of the premium paid in respect of the policy have not been disclosed, as such disclosure is prohibited under the terms of the contract. Environmental regulation The Group’s activities are governed by a range of environmental legislation and regulations. The Group utilises both internal and external environmental assessments to verify its compliance with applicable environmental legislation and regulations. The Group is registered under National Greenhouse and Energy Reporting Act 2007 under which it is required to report energy consumption and greenhouse gas emissions for its Australian facilities. The Group has implemented systems and processes for the collection and calculation of the data to meet its reporting requirements. The Board believes that the consolidated entity has adequate systems in place for the management of its environmental requirements and is not aware of any breach of those environmental requirements as they apply to the consolidated entity. Rounding The amounts contained in this report and in the financial report have been rounded to the nearest $1,000 (where rounding is applicable) under the option available to the company under ASIC Corporations Instrument 2016/191. The company is an entity to which the Class Order applies. Auditor independence The directors received the declaration on page 21 from the auditor of Bisalloy Steel Group Limited which forms part of this report. 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. Bisalloy Steel Group Limited 2019 Annual Report | 7 Non-audit services No non audit services were provided by the Company’s auditor, Ernst & Young in relation to the year ended 30 June 2019. Likely developments and expected results Bisalloy is forecasting increased profitability in FY20. To achieve this, Bisalloy is continuing with its growth strategy in a shift towards focusing on the premium grades of QT steels from its Unanderra plant, including armour grade steels. Bisalloy enters FY20 with a strong order book and growth in armour grade steels remains a major focus for Bisalloy. Directors’ meetings The number of directors meetings and number of meetings attended by each of the directors of the Company during the financial year are: Committee meetings Directors’ meetings Audit & risk Nominations & remuneration 10 10 10 10 10 1 4 4 4 4 4 1 3 3 3 3 3 – 2. Align executive rewards with creation of shareholder value. 3. Ensure a significant component of executive remuneration is ‘at risk’ dependent upon meeting pre-determined performance hurdles. 4. Establish appropriately demanding performance hurdles in relation to variable executive remuneration. 5. Provide the opportunity for non-executive directors to sacrifice a portion of their fees to acquire shares in the Company at market price. Nominations and Remuneration Committee The Nominations and Remuneration Committee is responsible for determining and reviewing compensation arrangements for the directors, the Managing Director and other senior executives, and the review and recommendation of general remuneration principles. Remuneration structure The structure of non-executive director and executive remuneration is separate and distinct, in accordance with good corporate governance principles. Non-executive director remuneration Objective The Board sets aggregate remuneration at a level which is intended to provide the Company with the ability to attract and Number of Meetings Held Number of Meetings Attended P Cave G Albert K Godson R Grellman D Pong1 1 D Pong resigned on 11 September 2018. Remuneration report (audited) This remuneration report for the year ended 30 June 2019 outlines the remuneration arrangements of the Company and the Group in accordance with the requirements of the Corporations Act 2001 (the Act) and its regulations. This information has been audited as required by section 308(3C) of the Act The remuneration report details the remuneration arrangements for key management personnel (KMP) who are defined as those persons having authority and responsibility for planning, directing and controlling the major activities of the Company and the Group, directly or indirectly, including any director (whether executive or otherwise) of the parent company, and includes the five executives in the Group receiving the highest remuneration. Remuneration policy The remuneration policy is set in recognition that the performance of the Group depends upon the quality of its directors and executives. In order to perform, the Group must be successful in attracting, motivating and retaining directors and executives of the highest quality. To assist in achieving this objective, the remuneration policy embodies the following principles: 1. Provide competitive remuneration to attract high calibre directors and executives. 8 | Bisalloy Steel Group Limited 2019 Annual Report Directors’ Reportcontinued retain non-executive directors of the highest calibre, whilst incurring a cost which is acceptable to shareholders. – Short Term Incentive (STI); and – Long Term Incentive (LTI) Structure The Company’s constitution and the ASX listing rules specify that the non-executive director fee pool shall be determined from time to time by a general meeting. The non-executive director fee pool is currently set at $489,000. The Board will not seek any increase for the fee pool at the 2019 AGM. The remuneration of non-executive directors must not include a commission on, or a percentage of, profits or operating revenue but non-executive directors are entitled to be reimbursed for travelling and other expenses incurred in attending to the Company’s affairs. Each non-executive director receives a fee for being a non-executive director of the Company and an additional fee for each Board Committee on which a non-executive director sits. The payment of additional fees for serving on a committee recognises the additional time commitment required by non-executive directors who serve on one or more sub committees. Non-executive directors are encouraged by the Board to hold shares in the Company and are able to participate in the Non-executive Director (“NED”) Share Plan. Under the NED Share Plan a non-executive director can choose to sacrifice up to 100% of their annual director’s fee and instead be allocated shares up to the equivalent value. The value of the allocated shares is determined by reference to the market value on the day they are acquired on market. The remuneration of non-executive directors for the period ended 30 June 2019 is detailed in the table on page 11 of this report. Executive director and executive manager remuneration Objective The Group aims to reward executives with a level and mix of remuneration commensurate with their duties and responsibilities within the Group and to: • • reward executives for Group, business unit and individual performance measured against targets set by reference to appropriate benchmarks; link reward with the achievement of the Group’s strategic goals; • align the interests of executives with those of shareholders; and • ensure total remuneration is competitive. Structure Executive director and executive manager remuneration consists of the following key components: 1. Fixed Remuneration 2. Variable Remuneration made up of: The proportion of total remuneration that is fixed or variable (either short term or long term incentives) is determined for each individual executive by the Nominations & Remuneration Committee. The remuneration of members of management who have the authority and responsibility for planning, directing and controlling the activities of the Group for the year ended 30 June 2019 is detailed in the table on page 11 of this report. Fixed remuneration Objective The level of fixed remuneration is set so as to provide a base level of remuneration which is both commensurate with the individual’s duties and responsibilities within the Group and competitive in the market. Fixed remuneration is reviewed annually by the Nominations and Remuneration Committee utilising a process of reviewing group-wide, business unit and individual performance, relevant comparative remuneration in the market and internal and external advice on policies and practice. Structure Executive directors and executive managers are provided with the opportunity to receive their fixed remuneration in a variety of forms, including cash, additional superannuation contributions and fringe benefits such as motor vehicles. The aim is to provide payments in a form that is both optimal for the recipient and cost efficient for the Group. The fixed remuneration component of executive directors and members of management who have the authority and responsibility for planning, directing and controlling the activities of the Group for the year ended 30 June 2019 is detailed in the table on page 11 of this report. Variable remuneration – short term incentives (STI) Objective The STI program has been designed to align the remuneration received by executive directors and executive managers with the achievement of the Group’s operational and financial targets. The total potential STI available for payment is determined so as to provide sufficient incentive to executive directors and executive managers to achieve the targets and so that the cost to the Group is reasonable in the circumstances. Structure The actual STI payments granted to each executive director and executive manager depends upon the extent to which specific operational and financial targets set at the beginning of the financial year are met. The targets consist of a number of both financial and non-financial Key Performance Indicators (KPIs). Bisalloy Steel Group Limited 2019 Annual Report | 9 Group performance The Board has determined that whilst the Group did achieve its budgeted ROE for the year, 0% of the performance components of the 2019 share rights have vested. For further detail of historical performance, refer to the shareholder returns section earlier in this Directors’ report. Details of key management personnel of the Company and Group (i) Directors P Cave Non-executive Chairman R Grellman Non-executive Director K Godson Non- executive Director D Pong G Albert Non-executive Director (resigned 11 September 2018) Managing Director and Chief Executive Officer (ii) Executives L Beale Chief Financial Officer and Company Secretary S Gleeson General Manager Sales & Marketing M Enbom General Manager Operations (appointed 5 November 2018) A Huckstepp Head of Export, Sourcing and Logistics (changed role on 5 November 2018 from Operations Manager) Executive contracts Remuneration arrangements for the key management personnel are formalised in employment contracts. Details of these contracts are provided below. G Albert – Managing Director and Chief Executive Officer • Regular employment contract without fixed term • Participation in STI and LTI schemes • 6 months notice required for termination of employment by employee • 12 months notice required for termination by company After the end of each financial year, consideration is given to performance against each of these KPIs to determine the extent of any payment to an individual executive director or executive manager. The aggregate of STI payments and STI payments to individuals is subject to the approval of the Nominations & Remuneration Committee. Payments made are normally paid as cash but the recipient is also able to elect to receive payment in alternative forms. Variable remuneration – long term incentives (LTI) Objective The LTI program has been designed to align the remuneration received by executive directors and executive managers with the creation of shareholder wealth. Consequently LTI grants are only made to executives who are in a position to influence shareholder wealth and thus have the opportunity to influence the company’s performance against the relevant long term performance hurdles. Structure At the 2015 Annual General Meeting, a LTI plan was renewed for LTI grants to executives in the form of share rights. These rights are granted in two equal parts. The first part is based on retention and requires the holder remain an employee for three years from grant date. The second part is based on delivering superior long-term performance as measured by Return on Equity (“ROE”), with each grant of rights divided into three equal tranches. For each tranche, actual ROE is measured against a budget ROE and a stretch ROE as determined annually by the Board in respect of the forthcoming year. The proportion of the rights which vest depend on where within this range the Group performs, with 100% vesting on achieving the stretch ROE and no rights vesting if actual ROE is less than 90% of the budgeted ROE. For the 2019 year, the stretch ROE was set at 115% of the budget ROE. Any rights to which the employee may become entitled on achieving the performance criteria, are still subject to the three year retention criteria before they can vest. Any share rights which do not vest, as a result of the relevant performance condition not being satisfied, lapse. If the holder leaves the business, the unvested rights lapse on the leaving date unless the Board determines otherwise. In the event of a change in control of the Group, the vesting date will generally be brought forward to the date of change of control and share rights will vest subject to performance over this shortened period, subject to ultimate Board discretion. Once vested a holder may exercise his share rights and be allocated a fully paid ordinary share of Bisalloy Steel Group Ltd at no cost to the employee. A total of 1,200,000 share rights (2018: 500,000) were granted under this scheme during the year. 1,000,000 of these share rights are subject to shareholder approval which will be sought at the Annual General Meeting on 28 November 2019. 10 | Bisalloy Steel Group Limited 2019 Annual Report Directors’ Reportcontinued L Beale – Chief Financial Officer & Company Secretary M Enbom – General Manager Operations • Regular employment contract without fixed term • Regular employment contract without fixed term • Participation in STI and LTI schemes • Participation in STI and LTI schemes • 3 months notice required for termination of employment • 3 months notice required for termination of employment by employee • 3 months notice required for termination by company S Gleeson – General Manager Sales & Marketing • Regular employment contract without fixed term • Participation in STI and LTI schemes • 3 months notice required for termination of employment A Huckstepp – Head of Export, Sourcing and Logistics • Regular employment contract without fixed term • Participation in STI and LTI schemes • 3 months notice required for termination of employment Remuneration of key management personnel of the Company and Group Year ended 30 June 2019 Short- term Salary and fees Long-term Post employment Cash bonus $ Long service leave $ Super- annuation $ Retire- ment benefits $ Termin- ation benefits $ Share- based payments Share rights $ Perf- ormance related % Total $ Non-Executive Directors P Cave R Grellman K Godson D Pong1 Sub-total Non-Executive Directors Executive Directors 150,000 100,000 100,000 30,000 380,000 – – – – – – – – – – – 9,500 9,500 – 19,000 G Albert 575,000 118,250 18,766 25,000 Sub-total Executive Directors 575,000 118,250 18,766 25,000 Other key management personnel L Beale S Gleeson M Enbom2 303,500 50,000 272,052 37,204 148,557 – A Huckstepp 179,239 20,484 6,545 6,138 2,924 5,289 25,000 25,000 14,113 24,954 Sub-total executive KMP 903,348 107,688 20,896 89,066 Totals 1,858,348 225,938 39,663 133,067 – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – 150,000 109,500 109,500 30,000 – 399,000 – – – – – 308,253 1,045,269 41% 308,253 1,045,269 41% 54,667 439,711 39,635 380,029 17,099 182,693 9,045 239,010 120,445 1,241,444 428,698 2,685,714 24% 20% – 12% 18% 24% 1 Mr Pong resigned as Director on 11 September 2018. He has continued in his other role as CJV Board member. 2 Mr Enbom was appointed on 5 November 2018. Bisalloy Steel Group Limited 2019 Annual Report | 11 Year ended 30 June 2018 (restated) Short- term Salary and fees Long-term Post employment Cash bonus $ Long service leave $ Super- annuation $ Retire- ment benefits $ Termin- ation benefits $ Share- based payments Share rights $ Perf- ormance related % Total $ Non-Executive Directors P Cave R Grellman K Godson D Pong Sub-total Non-Executive Directors Executive Directors 150,000 100,000 100,000 120,000 470,000 – – – – – – – – – – – 9,500 9,500 – 19,000 G Albert 525,000 217,500 10,800 25,000 Sub-total Executive Directors 525,000 217,500 10,800 25,000 Other key management personnel D Collins2 S Gleeson3 151,237 126,150 – 17,683 263,400 73,080 A Huckstepp3 174,018 40,238 L Beale4 B Morris5 63,423 76,500 – – 5,564 5,008 1,236 – 25,000 24,911 5,386 – Sub-total executive KMP 728,579 239,468 11,807 72,981 Totals 1,723,579 456,968 22,607 116,980 – – – – – – – – – – – – – – – – – – – – – – – – – 150,000 109,500 109,500 120,000 – 489,000 – – – – – 347,561 1,125,861 50% 347,561 1,125,861 50% 53,765 (31,712) 317,124 – – – – 27,349 394,392 8,945 253,119 11,233 81,279 – 76,500 53,765 15,815 1,122,414 53,765 363,376 2,737,275 30% 25% 19% 14% – 23% 30% 1 Mr Albert’s share-based payments expense has been restated to correct an error in the determination of the fair value. 2 Mr Collins resigned on 19 January 2018. 3 Mr Gleeson and Mr Huckstepp’s share-based payments expense has been restated to correct an error in the determination of the lapsed rights. 4 Mr Beale was appointed on 16 April 2018. 5 Mr Morris was appointed on 19 January 2018 and resigned 16 April 2018. Share rights Share rights holders do not have any entitlement, by virtue of the rights, to participate in any share issue of the Company or any related body corporate or in the interest issue of any other registered scheme. 12 | Bisalloy Steel Group Limited 2019 Annual Report Directors’ Reportcontinued Performance rights holdings of key management personnel of the Company and Group Balance at 1 July 2018 Granted during the year Rights exercised during the year Forfeited or lapsed Balance at 30 June 2019 Vested and exercisable Unvested Executives G Albert1 L Beale S Gleeson M Enbom 822,465 1,000,000 (327,905) (333,334) 1,161,226 400,000 346,739 – – – 200,000 – – – – (66,667) 333,333 (66,667) (33,333) (16,667) 280,072 166,667 65,579 1,651,450 1,200,000 (327,905) (516,668) 2,008,877 1,161,226 333,333 280,072 166,667 65.579 2,006,877 – – – – – A Huckstepp 82,246 – 1 655,809 of Mr Albert’s rights vested on 25 February 2019. The Board elected to provide a cash payment for 50% of these, with the remaining 50% to be exercised as shares on approval by the shareholders. This, along with a new issue of 1,000,000 share rights, will be raised for shareholder approval at the AGM on 28 November 2019. G Albert1 S Gleeson #1 A Huckstepp L Beale S Gleeson #2 M Embon2 G Albert3 Total Grant date 26-Feb-16 19-Oct-16 19-Oct-16 16-Apr-18 15-Jun-18 5-Nov-18 26-Feb-19 Vesting date 25-Feb-19 18-Oct-19 18-Oct-19 15-Apr-21 14-Jun-21 4-Nov-21 25-Feb-22 Fair value at grant date Balance at 1 July 2018 New grants in the year Exercised in the year Lapsed during the year Balance at 30 June 2019 Vested and exercisable at 30 June 2019 $0.42 $0.39 $0.39 $0.82 $0.75 $0.79 $1.00 822,465 246,739 82,246 400,000 100,000 – – 1,651,450 – (327,905) – – – – – – – – 200,000 1,000,000 1,200,000 – – (327,905) (166,667) (50,000) (16,667) (66,667) (16,667) (33,333) (166,667) (516,668) 327,893 196,739 65,579 333,333 83,333 166,667 833,333 2,006,877 – – – – – – – – 1 Mr Albert’s grant date shown is the date of the initial award. The fair value at this time was $0.42. The $372,893 balance at 30 June 2019 remains subject to shareholder approval at the upcoming AGM and the fair value as at 30 June 2019 was $1.00. 2 Mr Enbom was appointed on 5 November 2018. 3 Mr Albert’s 1,000,000 share rights awarded on the 26th February 2019 are subject to shareholder approval at the AGM. The budget ROE as set by the Board for the 2019 financial year was achieved, however the Board has determined that 0% of the performance portion of the LTI vested for 2019. Final vesting of the share rights are subject to each executive remaining employed by the Group until the vesting date. Bisalloy Steel Group Limited 2019 Annual Report | 13 Shareholdings of key management personnel Shareholdings include shares held personally and through related parties. Directors P J Cave K Godson R Grelman G Albert Executives L Beale S Gleeson M Enbom A Huckstepp Audit Balance at 30-Jun-18 Performance rights exercised Other Balance at 30-Jun-19 7,592,718 1,344,766 41,693 – – – – – 8,979,177 – – – – – – – – – 30,058 7,622,776 – – – – – – – 1,344,766 41,693 – – – – – 30,058 9,009,235 The information contained in the Remuneration Report has been audited. Signed in accordance with a resolution of the directors. The directors have received the Auditors independence declaration which is included on page 21 of the annual report. Greg Albert Managing Director 27 August 2019 14 | Bisalloy Steel Group Limited 2019 Annual Report Directors’ Reportcontinued Corporate Governance Statement 2019 The Board of Directors of Bisalloy Steel Group Limited is responsible for establishing the corporate governance framework of the Group having regard to the ASX Corporate Governance Council (CGC) published guidelines as well as its corporate governance principles and recommendations. The Board guides and monitors the business and affairs of Bisalloy on behalf of the shareholders by whom they are elected and to whom they are accountable. The tables below summarise the Group’s compliance with the CGC’s recommendations. Recommendation Comply Yes/No Reference / explanation Principle 1 – Lay solid foundations for management and oversight 1.1 Companies should establish the Yes functions reserved to the Board and those delegated to senior executives and disclose those functions. The Board has a formal Corporate Governance Code which sets out the respective roles and responsibilities of the Board and management. In addition, the Board committees have specific Charters which provide further details on the matters reserved for the Board or its committees. 1.2 Companies should disclose the Yes process for evaluating the performance of senior executives. A formal structured review is undertaken each year for each employee. Senior executives are reviewed by the CEO and input provided by the Chair. This process generally takes place in May each year. 1.3 Additional information. The Corporate Governance Code and other relevant charters are available on the Company’s website. Principle 2 – Structure the Board to add value 2.1 A majority of the Board should be Yes independent Directors. The Board currently has four Directors, two of whom are considered independent. The Board has adopted the CGC’s guidelines as the basis for determining whether a Director can be considered independent and has set relevant thresholds for materiality. Whether or not a Director meets the CGC guidelines for independence, each Director is expected to exercise unfettered and independent judgement. The following Directors are considered independent: • Mr Grellman • Mr Godson 2.2 The Chair should be an independent No Director. The Board believes that while the Chairman is not independent, the current composition of the Board with its combined skills and capability, best serves the interests of the shareholders. 2.3 The roles of Chair and Chief Executive Officer should not be exercised by the same individual. 2.4 The Board should establish a nomination committee. Yes Yes The roles of Chair and Chief Executive Officer are not exercised by the same individual. The Company has a combined Remuneration & Nominations Committee. The charter can be reviewed on the Company’s website. Bisalloy Steel Group Limited 2019 Annual Report | 15 Recommendation Comply Yes/No Reference / explanation 2.5 Companies should disclose the Yes process for evaluating the performance of the Board, its committees and individual Directors. 2.6 Additional information The Chair monitors the performance of the Board and conducts informal meetings with the other Directors during the year. The Board undertakes a formal review every 12 to 18 months. The review includes: • examination of the effectiveness and composition of the Board, including the required mix of skills, experience and other qualities which the non-executive Directors should bring to the Board for it to function competently and efficiently; • review of Bisalloy’s strategic direction and objectives; • assessment of the Managing Director’s performance by the non- executive Directors; • assessment of whether corporate governance practices are appropriate and reflect “good practice”; and • assessment of whether the expectations of differing stakeholders have been met. As part of this process the Chairman also: • meets with the senior executives to discuss with them their views of the Board’s performance and level of involvement; • discusses each individual Director’s contributions face-to-face as appropriate; and • meets with the other non-executive Directors without any management present (this is in addition to the consideration of the Managing Director’s performance and remuneration which is conducted in the absence of the Managing Director). Details of the composition, skills, experience, term in office, attendance at meetings of the members of the Board at the date of this statement are set out in the Directors’ Report. 16 | Bisalloy Steel Group Limited 2019 Annual Report Corporate Governance Statement 2019continued Recommendation Comply Yes/No Reference / explanation Principle 3 – Promote ethical and responsible decision-making 3.1 Companies should establish a code Yes of conduct and disclose the code or a summary of the code as to: • • • the practices necessary to maintain confidence in the company’s integrity the practices necessary to take into account their legal obligations and the reasonable expectations of their stakeholders the responsibility and accountability of individuals for reporting and investigating reports of unethical practices. No 3.2 Companies should establish a policy concerning diversity and disclose the policy or a summary of that policy. The policy should include requirements for the Board to establish measurable objectives for achieving gender diversity for the Board to assess annually both the objectives and progress in achieving them. 3.3 Companies should disclose in each No annual report the measurable objectives for achieving gender diversity set by the Board in accordance with the diversity policy and progress toward achieving them. 3.4 Companies should disclose in each Yes annual report the proportion of women employees in the whole organisation, women in senior executive positions and women on the Board. The Group has an established Code of Conduct which applies to all employees, officers and Directors of the Group. An annual adherence declaration is required of each employee as part of their performance appraisal discussed at Principle 1.2. The Code of Conduct has four key principles as follows: 1. We respect each other and treat all people fairly 2. We respect the law and act accordingly 3. We act honestly and fairly in all our business activities and relationships 4. We use Bisalloy’s property responsibly and in the best interests of Bisalloy The Group also has a number of other policies and standards which underpin the Code of Conduct including policies on Appropriate Workplace Behaviour, Equal Employment Opportunity, Safety, Fitness for Work, Workplace Harassment and Discrimination. Together these form a framework for ethical and responsible decision making and proscribe how the individuals of the Group behave internally and externally. In addition, the Board has an established Corporate Governance Code as discussed under Recommendation 1. The Company has an Equal Employment Opportunity Policy under which it commits to ensuring applicants for employment are drawn from a full cross section of the community and that the merit principle forms the basis of recruitment and promotion. In light of the total number of employees and low turnover levels in all management levels of the Group, the Board believes that little effective benefit would be achieved from the setting of measurable objectives for achieving gender diversity and that the interests of the Group are best served in this case by rigorous application of the merit principle in all recruitment and promotion decisions. Measurable objectives for achieving gender diversity are not set by the Board as discussed under Principle 3.2. 10% of employees across the organisation are women and there are no women in senior executive positions or on the Board. 3.5 Additional information The Equal Employment Opportunity Policy is available on the Company website. Bisalloy Steel Group Limited 2019 Annual Report | 17 Recommendation Comply Yes/No Reference / explanation Principle 4 – Safeguard integrity in financial reporting 4.1 The Board should establish an audit Yes The Company has an Audit & Risk Committee. committee. 4.2 The audit committee should be Yes At the date of this report the Company’s Audit and Risk Committee was: structured so that it: • comprised of non-executive Directors being Mr Grellman, Mr Cave • consists only of non-executive and Mr Godson. Directors • consists of a majority of independent Directors • is Chaired by an independent Chair, who is not Chair of the Board • has at least three members • Chaired by Mr Grellman • governed by a Charter approved by the Board • sufficiently autonomous to be able to discharge its duties and responsibilities including the authority to select, retain and terminate external advisers as the Committee considers necessary without seeking approval of the Board or management. 4.3 The audit committee should have a Yes formal charter. 4.4 Additional information. The Audit & Risk Committee is governed by a formal Charter and is responsible for ensuring that an effective internal control framework exists within the Group. This includes internal controls for effective reporting of financial information, the appropriate application and amendment of accounting policies and the identification and management of risk. Full details in relation to names, skills, term of office and attendance at meetings for each member of the Committee are set out in the Directors’ Report. The Audit & Risk Committee Charter is available on the Company’s website. Principle 5 – Make timely and balanced disclosure 5.1 Establish written policies designed to Yes ensure compliance with ASX Listing Rule disclosure requirements and to ensure accountability at a senior executive level for that compliance and disclose those policies or a summary of those policies. The Group has a formal Continuous Disclosure Policy. The policy aims to ensure that once management becomes aware of any information concerning the Group that a reasonable person would expect to have a material effect on the price or value of the Company’s shares (subject to the relevant exceptions), that such information is released to the market. The Board is committed to ensuring all investors have equal and timely access to material information concerning the Group and that the Group’s announcements are factual and presented in a clear and balanced way. The Company Secretary is the person responsible for continuous disclosure and communicating with the ASX. This role includes responsibility for ensuring compliance with the continuous disclosure requirements under the ASX Listing Rules and overseeing and co-ordinating information disclosed to the ASX, market participants and the public. 5.2 Additional information The Company’s Continuous Disclosure Policy is available on the Company’s website. 18 | Bisalloy Steel Group Limited 2019 Annual Report Corporate Governance Statement 2019continued Recommendation Comply Yes/No Reference / explanation Principle 6 – Respect the rights of shareholders 6.1 Design a communications policy for Yes promoting effective communication with shareholders and encouraging their participation at general meetings and disclose their policy or a summary of that policy. In order to facilitate shareholders accessing information about the Group, all Group announcements, briefings, presentations and reports are posted on the Company’s website after release. The website includes additional news items about the activities of the Group which are not market sensitive. Shareholders are entitled to receive a copy of the Annual Report and can elect the method by which it is delivered. The Group encourages shareholders to elect to receive the Annual Report and other correspondence from the Company electronically and requires shareholders to ‘opt in’ if they wish to receive a hard copy of the report. Shareholders are encouraged to attend for the Annual General Meeting as full use is made of the occasion to inform shareholders of current developments through presentations and the opportunity to ask questions of management and the Group’s external auditors. Principle 7 – Recognise and manage risk 7.1 Companies should establish policies for the oversight and management of material business risks and disclose a summary of those policies. Yes The Board has allocated responsibility to the Audit & Risk Committee to ensure there are adequate polices, procedures and control systems in relation to risk management and compliance. The Committee reviews and approves polices pertaining to material business risks to ensure they are current and adequately address the necessary aspects of risk management. 7.2 The Board should require management Yes to design and implement the risk management and internal control system to manage the company’s material business risks and report to it on whether those risks are being managed effectively. The Board should disclose that management has reported to it as to the effectiveness of the company’s management of its material business risks. The Company has developed and implemented a risk management process to ensure that there are up-to-date risk management policies and procedures which reflect the Board’s appetite for risk and which are consistently applied across the Group. Conformance with policies and procedures is the responsibility of management and compliance reviewed on a periodic basis. The Company has an Audit & Risk Committee which meets regularly during the year. At the meetings the Committee receives explanations from management on any breakdowns in internal controls identified and the actions proposed to resolve them. Items remain open and are reviewed at following committee meetings until resolved to the Committee’s satisfaction. 7.3 The Board should disclose whether it Yes has received assurance from the Chief Executive Officer and the chief financial officer that the declaration provided in accordance with section 295A of the Corporations Act is founded on a sound system of risk management and internal control and that the system is operating effectively in all material respects in relation to financial reporting risks. In accordance with section 295A of the Corporations Act, the CEO and CFO have provided a written statement to the Board that: • their view provided on the Group’s financial report is founded on a sound system of risk management and internal compliance and control which implements the financial policies adopted by the Board. • the Company’s risk management and internal compliance and control system is operating effectively in all material respects. Bisalloy Steel Group Limited 2019 Annual Report | 19 Recommendation 7.4 Additional information. Comply Yes/No Reference / explanation The risk management process, discussed at Principle 7.3, includes a wide range of proprietary policies and procedures which have been developed specifically for the Company and its business. The Company believes it would be unreasonably prejudicial to its interests and inappropriate to disclose this information publicly. Principle 8 – Remunerate fairly and responsibly 8.1 The Board should establish a remuneration committee. Yes The Company has a Nominations and Remuneration Committee which meets as required each year. 8.2 The remuneration committee should be Yes At the date of this report the Company’s Remuneration Committee was: structured so that it: • Consists of a majority of independent Directors • Is Chaired by an independent Chair • Has at least three members 8.3 Companies should clearly distinguish Yes the structure of non-executive Directors’ remuneration from that of executive Directors and senior executives. 8.4 Additional information • comprised of non-executive Directors being Mr Cave, Mr Grellman and Mr Godson. • Chaired by Mr Cave, with two independent Directors. • governed by a Charter approved by the Board sufficiently autonomous to be able to discharge its duties and responsibilities including the authority to select, retain and terminate external advisers as the Committee considers necessary without seeking approval of the Board or management. Full details of the Company’s remuneration policy are set out in the Remuneration Report. Full details in relation to names, skills, term of office and attendance at meetings for each member of the Committee are set out in the Directors’ Report. The Nominations and Remuneration Committee Charter is available on the Company’s website. 20 | Bisalloy Steel Group Limited 2019 Annual Report Corporate Governance Statement 2019continued Auditor’s Independence Declaration Ernst & Young 200 George Street Sydney NSW 2000 Australia GPO Box 2646 Sydney NSW 2001 Tel: +61 2 9248 5555 Fax: +61 2 9248 5959 ey.com/au Auditor’s Independence Declaration to the Directors of Bisalloy Steel Group Limited As lead auditor for the audit of the financial report of Bisalloy Steel Group Limited for the financial year ended 30 June 2019, 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 Bisalloy Steel Group Limited and the entities it controlled during the financial year. Ernst & Young Glenn Maris Partner 27 August 2019 A member firm of Ernst & Young Global Limited Liability limited by a scheme approved under Professional Standards Legislation 21 Bisalloy Steel Group Limited 2019 Annual Report | 21 Consolidated Statement of Profit or Loss and other Comprehensive Income For the year ended 30 June 2019 Continuing operations Revenue from contracts with customers Sales of goods Revenue Cost of goods sold Gross profit Other income/ (expenses) Gain on sale of fixed assets Distribution expenses Marketing expenses Occupancy expenses Administrative expenses Operating profit Finance costs Finance income Share of profit of joint venture Profit before income tax Income tax expense Profit after income tax Attributable to: Non–controlling interest Owners of the parent Profit for the year Other comprehensive income Items that may be reclassified subsequently to profit or loss: Fair value revaluation of land and buildings Fair value gain on cash flow hedges Foreign currency translation Actuarial gains/(losses) Income tax effect on items in other comprehensive income Other comprehensive income for the period, net of tax Total comprehensive income for the period, net of tax Attributable to: Non–controlling interest Owners of the parent Earnings per share for profit attributable to ordinary equity holders of the parent – Basic earnings per share (cents) – Diluted earnings per share (cents) 22 | Bisalloy Steel Group Limited 2019 Annual Report Consolidated Year ended 30 June 2019 $’000 Year ended 30 June 2018 $’000 Notes 3 98,124 – 98,124 – 88,586 88,586 (80,232) (71,206) 17,892 17,380 5(a) 5(b) 5(b) 6 7(a) 20(d) 8 8 97 6 (1,865) (3,424) (712) (6,749) 5,245 (1,191) 16 1,607 5,677 (1,246) 4,431 749 3,682 4,431 121 – 1,908 10 (30) 2,009 6,440 1,094 5,346 6,440 8.3 7.9 (406) 18 (1,602) (3,397) (683) (6,352) 4,958 (880) 52 1,403 5,533 (1,683) 3,850 214 3,636 3,850 366 4 190 (47) (92) 421 4,271 307 3,964 4,271 8.2 7.9 Consolidated Statement of Financial Position As at 30 June 2019 ASSETS Current assets Cash and cash equivalents Trade and other receivables Inventories Other current assets Contract Assets Total current assets Non-current assets Investment in joint venture Property, plant and equipment Total non-current assets Total assets LIABILITIES Current liabilities Trade and other payables Interest bearing loans and borrowings Income tax payable Employee Benefit Liabilities Contract Liabilities Total current liabilities Non-current liabilities Interest bearing loans and borrowings Employee Benefit Liabilities Deferred tax liabilities Total non-current liabilities Total liabilities NET ASSETS EQUITY Equity attributable to equity holders of the parent Contributed equity Accumulated profits Other reserves Parent interests Non-controlling interests TOTAL EQUITY Consolidated 30 June 2019 $’000 30 June 2018 $’000 Notes 10(a) 11 12 13 3.2 6 14 17 18.2 7(e) 19 3.2 18.2 19 7(d) 20(a) 20(e) 20(f) 20(d) 2,043 17,803 31,990 1,357 303 2,585 19,394 24,352 758 – 53,496 47,089 4,982 18,144 23,126 76,622 25,114 11,462 17 2,038 353 2,720 18,684 21,404 68,493 24,163 2,434 577 2,307 – 38,984 29,481 – 1,040 1,408 2,448 41,432 35,190 12,000 13,536 5,505 31,041 4,149 35,190 6,068 921 1,485 8,474 37,955 30,538 11,720 11,783 3,854 27,357 3,181 30,538 Bisalloy Steel Group Limited 2019 Annual Report | 23 Consolidated Year ended 30 June 2019 $’000 Year ended 30 June 2018 $’000 Notes 104,010 90,069 (102,076) (86,839) 16 (1,191) (1,887) (1,128) 6 (956) – (950) 2,960 (101) (1,495) 1,364 (714) 172 2,585 2,043 52 (880) (989) 1,413 16 (2,201) 793 (1,392) (187) (339) (960) (1,486) (1,465) 66 3,984 2,585 Consolidated Statement of Cash Flows For the year ended 30 June 2019 Cash flows from operating activities Receipts from customers (inclusive of GST) Payments to suppliers and employees (inclusive of GST) Interest received Borrowing costs Income tax paid Net cash (outflow) / inflow from operating activities 10(b) Cash flows from investing activities Proceeds from sale of fixed assets Payments for property, plant and equipment Dividends received from investments Net cash outflow from investing activities Cash flows from financing activities Increase / (decrease) in borrowings Dividends paid to non-controlling interests Dividends paid to shareholders of the parent Net cash inflow / (outflow) from financing activities Net decrease in cash held Net foreign exchange differences Cash at the beginning of the financial year Cash at the end of the financial year 10(d) 10(a) 24 | Bisalloy Steel Group Limited 2019 Annual Report Consolidated Statement of Cash Flows For the year ended 30 June 2019 Consolidated Statement of Changes in Equity For the year ended 30 June 2019 l a t o T y t i u q e 0 0 0 ’ $ g n i l l - n o N - o r t n o c 0 0 0 ’ $ t s e r e t n i l a t o T 0 0 0 ’ $ 0 0 0 ’ $ 0 0 0 ’ $ 0 0 0 ’ $ 0 0 0 ’ $ 0 0 0 ’ $ 0 0 0 ’ $ 0 0 0 ’ $ i s g n n r a e s e v r e s e r e v r e s e r e v r e s e r e v r e s e r s e g d e h e v r e s e r i d e n a t e R r e h t O y t i u q E - e l t t e s t n e m t e s s A - l a v e r n o i t a u i n g e r o F - l p m E y c n e r r u c i / n a g t e N e e y o - s n a r t n o i t a l n o ) s s o l ( y t i u q e w o fl h s a c s t fi e n e b y n a p m o C e h t l f o s r e d o h y t i u q e o t l e b a t u b i r t t A 3 7 9 , 3 ) 0 2 7 ( ) 4 ( 0 6 1 d e u s s I l a t i p a c 0 0 0 ’ $ 5 7 5 , 1 1 – 1 2 4 – 3 9 – 8 2 3 – 8 3 7 1 4 , 7 2 3 1 2 , 3 4 0 2 , 4 2 4 1 2 , 9 0 5 8 , 3 4 1 2 6 3 6 , 3 6 3 6 , 3 – – ) 7 4 ( – 1 7 2 , 4 7 0 3 4 6 9 , 3 4 7 6 , 3 ) 7 4 ( ) 5 0 1 , 1 ( 5 4 1 ) 9 3 3 ( 9 4 1 – – – ) 9 3 3 ( ) 6 0 2 , 1 7 ( ) 2 3 2 , 0 8 ( 5 4 1 – 9 4 1 – – – ) 5 0 1 , 1 ( ) 5 0 1 , 1 ( 8 3 5 , 0 3 1 8 1 , 3 7 5 3 , 7 2 3 8 7 , 1 1 8 3 5 , 0 3 1 8 1 , 3 7 5 3 , 7 2 3 8 7 , 1 1 ) 1 3 2 ( ) 5 2 ( ) 6 0 2 ( ) 6 0 2 ( – – – – ) 7 4 ( ) 7 4 ( – 7 0 3 , 0 3 6 5 1 , 3 1 5 1 , 7 2 7 7 5 , 1 1 ) 7 4 ( – 1 3 4 , 4 9 0 0 , 2 9 4 7 5 4 3 – – 2 8 6 , 3 4 6 6 , 1 – 2 5 2 8 6 , 3 0 4 4 , 6 4 9 0 , 1 6 4 3 , 5 4 3 7 , 3 0 8 2 ) 5 7 7 , 1 ( – – 4 1 2 9 4 7 ) 1 0 1 ( ) 1 0 1 ( ) 0 9 3 ( 9 2 4 – – – 0 8 2 ) 0 9 3 ( 9 2 4 – – – – ) 5 7 7 , 1 ( ) 5 7 7 , 1 ( – 0 1 – 0 1 – – – – – 0 9 1 , 5 3 9 4 1 , 4 1 4 0 , 1 3 6 3 5 , 3 1 ) 7 3 ( 6 – – – – – – – – 6 6 – 6 – – – – – – – – – 6 – 5 6 1 ) 8 3 ( 7 2 1 – – – – – – 6 0 2 6 0 2 – – – – – 0 0 1 , 4 0 0 1 , 4 – ) 4 1 5 ( ) 4 1 5 ( 0 0 1 , 4 ) 4 1 5 ( – 5 5 ) 2 5 ( 3 – – – – – – – 9 9 5 , 1 9 9 5 , 1 – – – – – 3 0 1 , 4 5 8 0 , 1 – 4 – 4 – – – – – – – – – – – – – – – – – – – – – – – – – 9 4 1 9 0 3 9 0 3 – – – – – – – – ) 0 9 3 ( 9 2 4 8 4 3 – – – – – – – – – – – – 5 4 1 – 0 2 7 , 1 1 0 2 7 , 1 1 * s d r a d n a t s g n i t n u o c c a w e n f o n o i t p o d a f o t c e f f E ) 5 1 e t o N ( s t n e m y a p d e s a b e r a h S 8 1 0 2 e n u J 0 3 t A 8 1 0 2 e n u J 0 3 t A s t s e r e t n i g n i l l o r t n o c - n o n i o t d a p s d n e d v D i i ) ) b ( 0 2 e t o N ( n a P l i t n e m t s e v n e R d n e d v D i i : s r e n w o s a y t i c a p a c r i e h t n i s r e n w o h t i w s n o i t c a s n a r T ) 9 e t o N ( l s r e d o h e r a h s i o t d a p s d n e d v d y r a n d r O i i i n o i t a u a v e r l g n d i l i u b r o f r e f s n a r t i n o i t a c e r p e D e m o c n i e v i s n e h e r p m o c l a t o T e m o c n i i e v s n e h e r p m o c r e h t O d o i r e p e h t r o f t fi o r P 7 1 0 2 e n u J 0 3 t A 9 0 3 0 2 7 , 1 1 e h t f o i i g n n n g e b e h t t a y t i u q e l a t o t d e t a t s e R r a e y l i a c n a n fi d o i r e p e h t r o f t fi o r P : s r e n w o s a y t i c a p a c r i e h t n i s r e n w o h t i w s n o i t c a s n a r T n o i t a u a v e r l g n d i l i u b r o f r e f s n a r t i n o i t a c e r p e D e m o c n i e v i s n e h e r p m o c l a t o T e m o c n i i e v s n e h e r p m o c r e h t O ) 9 e t o N ( l s r e d o h e r a h s i o t d a p s d n e d v d y r a n d r O i i i – – – 0 8 2 0 0 0 , 2 1 s t s e r e t n i g n i l l o r t n o c - n o n i o t d a p s d n e d v D i i ) ) b ( 0 2 e t o N ( n a P l i t n e m t s e v n e R d n e d v D i i s t h g i r e c n a m r o f r e p f o t n e m e l t t e S ) 5 1 e t o N ( s t n e m y a p d e s a b e r a h S 9 1 0 2 e n u J 0 3 t A Bisalloy Steel Group Limited 2019 Annual Report | 25 Notes to the Consolidated Financial Statements 1. Corporate information The financial report of Bisalloy Steel Group Limited and its subsidiaries (“the Group”) for the year ended 30 June 2019 was authorised for issue in accordance with a resolution of the directors on 27 August 2019. Bisalloy Steel Group Limited is a for profit company limited by shares incorporated and domiciled in Australia whose shares are publicly traded on the Australian Stock Exchange. The nature of the operations and principal activities of the Group are described in the Directors’ Report. 2. Summary of significant accounting policies Table of Contents a) Basis of preparation b) Statement of compliance c) Basis of consolidation and investments in joint venture d) Significant accounting judgements, estimates and assumptions e) Operating segments f) Taxation g) Cash and cash equivalents h) Trade and other receivables i) Inventories j) Property, plant and equipment k) Trade and other payables l) Contributed equity m) Employee benefits n) Share-based payment transactions o) Provisions p) Financial Instruments q) Goods and services tax r) Revenue from contracts with customers s) Other income t) Borrowing costs u) Leases v) Foreign currency translation w) Earnings per share (EPS) x) Derivative financial instruments and hedging y) Fair value measurement z) Changes in accounting standards aa) Standards issued but not yet effective 26 | Bisalloy Steel Group Limited 2019 Annual Report a) Basis of preparation The financial report is a general purpose financial report, which has been prepared in accordance with the requirements of the Corporations Act 2001, Australian Accounting Standards and other authoritative pronouncements of the Australian Accounting Standards Board. The financial report has also been prepared on a historical cost basis, except for land and buildings classified as property, plant and equipment and derivative financial instruments, which are measured at fair value. The Company is of a kind referred to in ASIC Corporations (Rounding in Financial/Directors’ Reports) Instrument 2016/191 and in accordance with that Instrument, all financial information presented in Australian Dollars has been rounded to the nearest thousand unless otherwise stated. The consolidated financial statements provide comparative information in respect of the previous period. Comparative information Certain comparative information was amended in these financial statements to conform to the current year presentation. These amendments do not impact the group’s financial result and do not have any significant impact on the Group’s balance sheet. b) Statement of compliance The financial report complies with Australian Accounting Standards as issued by the Australian Accounting Standards Board and International Financial Reporting Standards as issued by the International Accounting Standards Board. c) Basis of consolidation and investments in joint venture The consolidated financial statements comprise the financial statements of the Company, being Bisalloy Steel Group Limited, and its subsidiaries (“the Group”) as at the reporting date. Control is achieved when the Group is exposed, or has rights, to variable returns from its involvement with the investee and has the ability to affect those returns through its power over the investee. Specifically, the Group controls an investee if and only if the Group has: • Power over the investee (i.e. existing rights that give it the current ability to direct the relevant activities of the investee) • Exposure, or rights, to variable returns from its involvement with the investee, and • The ability to use its power over the investee to affect its returns. The Group re-assesses whether or not it controls an investee if facts and circumstances indicate that there are changes to one or more of the three elements of control. Consolidation of a subsidiary begins when the Group obtains control over the subsidiary and ceases when the Group loses control of the subsidiary. The financial statements of the subsidiaries are prepared for the same reporting period as the parent company, using consistent Notes to the Consolidated Financial Statements accounting policies. Adjustments are made to bring into line any dissimilar accounting policies that may exist. All intercompany balances and transactions, including unrealised profits arising from intra-group transactions, have been eliminated in full. Unrealised losses are eliminated unless costs cannot be recovered. Non-controlling interests represent the portion of profit or loss and net assets in subsidiaries not held by the Group, and are presented separately in the consolidated statement of comprehensive income and within equity in the consolidated statement of financial position, separately from the equity of the owners of the parent. The Group has an interest in a joint venture, which is a jointly controlled entity, whereby the venturers have a contractual arrangement that establishes joint control over the economic activities of the entity. The Group’s investment in the joint venture is accounted for using the equity method and is not part of the consolidated Group. Under the equity method, the investment in the joint venture is initially recognised at cost. The carrying amount of the investment is adjusted to recognise changes in the Group’s share of net assets of the joint venture since the acquisition date. Goodwill relating to the joint venture is included in the carrying amount of the investment and is neither amortised nor individually tested for impairment. The statement of profit or loss and other comprehensive income reflects the Group’s share of the results of operations of the joint venture. When there has been a change recognised directly in the equity of the joint venture, the Group recognises its share of any changes, when applicable, in the statement of changes in equity. Unrealised gains and losses resulting from transactions between the Group and the joint venture are eliminated to the extent of the interest in the joint venture. The Group’s share of profit of the joint venture is shown on the face of the statement of profit or loss and other comprehensive income outside operating profit or loss after tax and non- controlling interests in the subsidiaries of the joint venture. The financial statements of the joint venture are prepared for the same reporting period as the Group. When necessary, adjustments are made to bring the accounting policies in line with those of the Group. d) Significant accounting judgements, estimates and assumptions In the application of the Group’s accounting policies as described below, management is required to make judgements, estimates and assumptions about carrying values of assets and liabilities that are not readily apparent from other sources. The estimates and associated assumptions are based on historical experience and various other factors that are believed to be reasonable under the circumstances. These estimates and underlying assumptions are reviewed on an ongoing basis. Significant accounting judgements In applying the Group’s accounting policies, management have not made any significant accounting judgements which affect the amounts recognised in the financial statements. Significant accounting estimates and assumptions The carrying amounts of certain assets and liabilities are often determined based on estimates and assumptions of future events. The key estimates and assumptions that have a significant risk of causing material adjustment to the carrying amounts of certain assets and liabilities within the next annual reporting period are: Net realisable value of inventory The Group undertakes a detailed review of its inventory by major product category to ensure its provisions reflect inventory at the lower of cost and net realisable value. This review takes into consideration management’s assessment of current and forecast market conditions, including drivers of the price of quenched and tempered steel and alloyed steel plate. Impairment of other non-financial assets Non-financial assets other than goodwill and indefinite life intangibles are tested for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. The Group conducts an annual review of asset values, which is used as a source of information to assess for any indicators of impairment. External factors, such as changes in expected future processes, technology and economic conditions, are also monitored to assess for indicators of impairment. If any indication of impairment exists, an estimate of the asset’s recoverable amount is calculated. An impairment loss is recognised for the amount by which the asset’s carrying amount exceeds its recoverable amount. Recoverable amount is the higher of an asset’s fair value less costs to sell and value in use. For the purposes of assessing impairment, assets are grouped at the lowest levels for which there are separately identifiable cash inflows that are largely independent of the cash inflows from other assets or group of assets (cash-generating units). Non-financial assets other than goodwill that suffered an impairment are tested for possible reversal of the impairment whenever events or changes in circumstances indicate that the impairment may have been reversed. Provision for expected credit losses of trade receivables and contract assets The Group uses a provision matrix to calculate ECLs for trade receivables and contract assets. The provision rates are based on days past due for groupings of various customer segments that have similar loss patterns (i.e., by geography, product type, customer type and rating, and coverage by letters of credit and other forms of credit insurance). The provision matrix is initially based on the Group’s historical observed default rates. The Group will calibrate the matrix to Bisalloy Steel Group Limited 2019 Annual Report | 27 2. Summary of significant accounting policies (continued) adjust the historical credit loss experience with forward-looking information. For instance, if forecast economic conditions are expected to deteriorate over the next year which can lead to an increased number of defaults in the manufacturing sector, the historical default rates are adjusted. At every reporting date, the historical observed default rates are updated and changes in the forward-looking estimates are analysed. The assessment of the correlation between historical observed default rates, forecast economic conditions and ECLs is a significant estimate. The amount of ECLs is sensitive to changes in circumstances and of forecast economic conditions. The Group’s historical credit loss experience and forecast of economic conditions may also not be representative of customer’s actual default in the future. The information about the ECLs on the Group’s trade receivables and contract assets is disclosed in note 18. Share-based payment transactions The Group measures the cost of equity-settled transactions with employees (including directors and other senior executives) by reference to the fair value at the date on which they are granted. The fair value is determined by an external valuer using discounted cash flow models using the assumptions dealt with in note 2(n). e) Operating segments An operating segment is a component of an entity that engages in business activities from which it may earn revenues and incur expenses (including revenues and expenses relating to transactions with other components of the same entity), whose operating results are regularly reviewed by the entity’s chief operating decision maker to make decisions about resources to be allocated to the segment and assess its performance and for which discrete financial information is available. This includes start-up operations which are yet to earn revenues. Management will also consider other factors in determining operating segments such as the existence of a line manager and the level of segment information presented to the Board of directors. Operating segments have been identified and based on the information provided to the chief operating decision makers – being the executive management team. The Group aggregates two or more operating segments when they have similar economic characteristics, and the segments are similar in each of the following respects: • nature of the products and services, • nature of production processes, • type or class of customer for their products and services, • methods use to distribute their products or provide their services, and if applicable • nature of the regulatory environment. 28 | Bisalloy Steel Group Limited 2019 Annual Report Operating segments that meet the quantitative criteria as prescribed by AASB 8 are reported separately. However, an operating segment that does not meet the quantitative criteria is still reported separately where information about the segment would be useful to users of the financial statements. f) Taxation Current income tax Current income tax assets and liabilities are measured at the amount expected to be recovered from or paid to the taxation authorities. The tax rates and tax laws used to compute the amount are those that are enacted or substantively enacted by the reporting date in the countries where the Group operates and generates taxable income. Current income tax relating to items recognised directly in equity is recognised in equity and not in the statement of profit or loss. Management periodically evaluates positions taken in the tax returns with respect to situations in which applicable tax regulations are subject to interpretation and establishes provisions where appropriate. Deferred tax Deferred tax is provided using the liability method on temporary differences between the tax bases of assets and liabilities and their carrying amounts for financial reporting purposes at the reporting date. Deferred tax liabilities are recognised for all taxable temporary differences except: • when the deferred income tax liability arises from the initial recognition of goodwill or an asset or liability in a transaction that is not a business combination and, at the time of the transaction, affects neither the accounting profit nor taxable profit or loss; or • in respect of taxable temporary differences associated with investments in subsidiaries, associates or interests in joint ventures, when the timing of the reversal of the temporary difference can be controlled and it is probable that the temporary difference will not reverse in the foreseeable future. Deferred tax assets are recognised for all deductible temporary differences, the carry-forward of unused tax credits and any unused tax losses. Deferred tax assets are recognised to the extent that it is probable that taxable profit will be available against which the deductible temporary differences, and the carry-forward of unused tax credits and unused tax losses can be utilised, except: • when the deferred tax asset relating to the deductible temporary difference arises from the initial recognition of an asset or liability in a transaction that is not a business combination and, at the time of the transaction, affects neither the accounting profit nor taxable profit or loss; or • in respect of deductible temporary difference is associated with investments in subsidiaries, associates or interests in Notes to the Consolidated Financial Statementscontinued joint ventures, deferred tax asset are recognised only to the extent that it is probable that the temporary difference will reverse in the foreseeable future and taxable profit will be available against which the temporary difference can be utilised. The carrying amount of deferred tax assets is reviewed at each reporting date and reduced to the extent that it is no longer probable that sufficient taxable profit will be available to allow all or part of the deferred tax asset to be utilised. Unrecognised deferred tax assets are reassessed at each reporting date and are recognised to the extent that it has become probable that future taxable profit will allow the deferred tax asset to be recovered. Deferred tax assets and liabilities are measured at the tax rates that are expected to apply to the year when the asset is realised or the liability is settled, based on tax rates (and tax laws) that have been enacted or substantively enacted at the reporting date. Deferred tax relating to items recognised outside profit or loss is recognised outside profit or loss. Deferred tax items are recognised in correlation to the underlying transaction either in other comprehensive income or directly in equity. Deferred tax assets and deferred tax liabilities are offset if a legally enforceable right exists to set off current tax assets against current tax liabilities and the deferred tax assets and liabilities relate to the same taxable entity and the same taxation authority. Bisalloy Steel Group Limited and its wholly-owned Australian controlled entities implemented the tax consolidation legislation as of 1 July 2005. The head entity, Bisalloy Steel Group Limited and the controlled entities in the tax consolidated group continue to account for their own current and deferred tax amounts. The Group has applied the Group allocation approach in determining the appropriate amount of current taxes and deferred taxes to allocate to members of the tax consolidated group. In addition to its own current and deferred tax amounts, Bisalloy Steel Group Limited also recognises the current tax liabilities (or assets) and the deferred tax assets arising from unused losses. Assets or liabilities under tax funding arrangements with the tax consolidation entities are recognised as amounts receivable form or payable to other entities in the Group. Any difference between the amounts assumed and amounts receivable or payable under the tax funding agreement are recognised as a contribution to (or distribution from) wholly-owned tax consolidated entities. g) Cash and cash equivalents Cash and short term deposits in the statement of financial position and the cash flow statement is comprised of cash at bank and on hand and short-term deposits with a maturity of three months or less, which are subject to an insignificant risk of changes in value. h) Trade and other receivables A receivable represents the Group’s right to an amount of consideration that is unconditional (i.e., only the passage of time is required before payment of the consideration is due). Refer to accounting policies of financial assets in section p) Financial instruments. i) Inventories Raw materials, work in progress and finished goods are valued at the lower of cost and net realisable value. Costs incurred in bringing each product to its present location and condition are accounted for as follows: Raw materials • Purchase cost is on a weighted average cost basis. Work in progress and finished goods • Cost of direct materials, labour and an appropriate proportion of manufacturing overheads is based on normal operating capacity, but excluding borrowing costs. Net realisable value is the estimated selling price in the ordinary course of business, less estimated costs of completion and the estimated costs necessary to make the sale. j) Property, plant and equipment Plant and equipment is stated at historical cost, net of accumulated depreciation and accumulated impairment losses, if any. Such cost includes the cost of replacing parts that are eligible for capitalisation when the cost of replacing the parts is incurred. Similarly, when each major inspection is performed, its cost is recognised in the carrying amount of the plant and equipment as a replacement only if the recognition criteria are satisfied. All other repairs and maintenance are recognised in the profit or loss as incurred. Land and buildings are measured at fair value using the revaluation model, less accumulated depreciation on buildings and any impairment losses recognised after the date of the revaluation. Valuations are performed every three years, or sooner should there be a significant change in market conditions or other market requirements such as in Indonesia where land and buildings are revalued every 12 months as a result of lending requirements, to ensure that the fair value of a revalued asset does not differ materially from its carrying amount. Depreciation is calculated on a straight-line basis over the estimated useful life of the specific assets as follows: • Land • Buildings not depreciated 50 years • Plant and equipment 5 – 10 years • Leasehold improvements 5 – 10 years or lease life if shorter The assets’ residual values, useful lives and amortisation methods are reviewed, and adjusted prospectively if appropriate, at each financial year end. Bisalloy Steel Group Limited 2019 Annual Report | 29 2. Summary of significant accounting policies (continued) Revaluations of land and buildings Any revaluation increment is credited to the asset revaluation reserve in equity, except to the extent that it reverses a revaluation decrement for the same asset previously recognised in profit or loss, in which case the increment is recognised in profit or loss. Any revaluation decrement is recognised in profit or loss, except to the extent that it offsets a previous revaluation increment for the same asset, in which case the decrement is debited directly to the asset revaluation reserve to the extent of the credit balance existing in the revaluation reserve for that asset. Any accumulated depreciation as at the revaluation date is eliminated against the gross carrying amounts of the assets and the net amounts are restated to the revalued amounts of the assets. Gains and losses on disposals are determined by comparing proceeds with the carrying amount. These are included in the profit or loss. Upon disposal or derecognition, any revaluation reserve relating to the particular asset being sold is transferred to retained earnings. Derecognition An item of property, plant and equipment is derecognised upon disposal or when no future economic benefits are expected from its use or disposal. Any gain or loss arising on derecognition of the asset (calculated as the difference between the net disposal proceeds and the carrying amount of the asset) is included in the profit and loss in the period the item is derecognised. k) Trade and other payables Trade and other payables are carried at amortised cost and represent liabilities for goods and services provided to the Group prior to the end of the financial year that are unpaid and arise when the Group becomes obliged to make future payments in respect of the purchase of these goods and services. l) Contributed equity Ordinary share capital is recognised at the fair value of the consideration received by the Company. Any transaction costs arising on the issue of ordinary shares are recognised directly in equity, net of tax, as a reduction of the share proceeds received. m) Employee benefits Liabilities arising in respect of short-term employee benefits such as wages, salaries, annual leave and sick leave represent the amount which the entity has a present obligation to pay resulting from employees’ services provided up to the balance date. Liabilities in respect of short-term employee benefits are measured at their nominal amounts. Long-term employee benefit liabilities such as long service leave represent the present value of the estimated future cash outflows to be made by the employer resulting from employees’ services provided up to the balance date. Long-term employee benefit liabilities are measured at their present values using corporate bond rates which most closely match the terms of maturity of the related liabilities. In determining the employee benefit liabilities, consideration has been given to future increases in wage and salary rates, and the consolidated entity’s experience with staff departures. Related on-costs have also been included in the liability. The Group contributes to defined contribution superannuation plans, as well as an unfunded defined benefit plan in Indonesia and a defined benefit plan in Thailand. n) Share-based payment transactions Employees (including directors and other senior executives) of the Group receive remuneration in the form of a grant of Rights, whereby employees render services as consideration for equity instruments (‘equity-settled transactions’). There is currently a Share Rights Plan in place to provide these benefits. The cost of equity-settled transactions with employees is measured by reference to the fair value at the date on which they are granted. The fair value is determined by an external valuer using a discounted cash flow methodology. In valuing equity-settled transactions, no account is taken of any performance conditions, other than conditions linked to the price of the shares of the issuer (‘market conditions’), if applicable. The cost of equity-settled transactions is recognised, together with a corresponding increase in equity, over the period in which the performance and/or service conditions are fulfilled, ending on the date on which the relevant employees become fully entitled to the award (‘vesting date’). The cumulative expense recognised for equity-settled transactions at each reporting date until 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. This opinion is formed based on the best available information at balance date. The statement of comprehensive income charge or credit for a period represents the movement in cumulative expense recognised as at the beginning and end of that period. No expense is recognised for Rights that do not ultimately vest. Any Rights that do not become vested Rights, lapse. The dilutive effect, if any, of outstanding Rights is reflected as additional share dilution in the computation of diluted earnings per share. o) Provisions Provisions are recognised when the Group has a present obligation (legal or constructive) as a result of a past event, it is probable that an outflow of resources embodying economic benefits will be required to settle the obligation and a reliable 30 | Bisalloy Steel Group Limited 2019 Annual Report Notes to the Consolidated Financial Statementscontinued estimate can be made of the amount of the obligation. Where the Group expects some or all of a provision to be reimbursed, for example under an insurance contract, the reimbursement is recognised as a separate asset but only when the reimbursement is virtually certain. The expense related to any provision is presented in the statement of comprehensive income net of any reimbursement. If the effect of the time value of money is material, provisions are discounted using a current pre-tax rate that reflects, where appropriate, the risks specific to the liability. Where discounting is used, the increase in the provision due to the passage of time is recognised as a borrowing cost. p) Financial instruments • Financial assets at amortised cost (debt instruments) • Financial assets at fair value through OCI with recycling of cumulative gains and losses (debt instruments) • Financial assets designated at fair value through OCI with no recycling of cumulative gains and losses upon derecognition (equity instruments) • Financial assets at fair value through profit or loss Financial assets at amortised cost (debt instruments) This category is the most relevant to the Group. The Group measures financial assets at amortised cost if both of the following conditions are met: A financial instrument is any contract that gives rise to a financial asset of one entity and a financial liability or equity instrument of another entity. • The financial asset is held within a business model with the objective to hold financial assets in order to collect contractual cash flows; and Financial assets Initial recognition and measurement • The contractual terms of the financial asset give rise on specified dates to cash flows that are solely payments of principal and interest on the principal amount outstanding. Financial assets are classified, at initial recognition, as subsequently measured at amortised cost, fair value through other comprehensive income (OCI), and fair value through profit or loss. Financial assets at amortised cost are subsequently measured using the effective interest (EIR) method and are subject to impairment. Gains and losses are recognised in profit or loss when the asset is derecognised, modified or impaired. The classification of financial assets at initial recognition depends on the financial asset’s contractual cash flow characteristics and the Group’s business model for managing them. With the exception of trade receivables that do not contain a significant financing component or for which the Group has applied the practical expedient, the Group initially measures a financial asset at its fair value plus, in the case of a financial asset not at fair value through profit or loss, transaction costs. Trade receivables that do not contain a significant financing component or for which the Group has applied the practical expedient are measured at the transaction price determined under IFRS 15. Refer to the accounting policies in section (r) Revenue from contracts with customers. In order for a financial asset to be classified and measured at amortised cost or fair value through OCI, it needs to give rise to cash flows that are ‘solely payments of principal and interest (SPPI)’ on the principal amount outstanding. This assessment is referred to as the SPPI test and is performed at an instrument level. The Group’s business model for managing financial assets refers to how it manages its financial assets in order to generate cash flows. The business model determines whether cash flows will result from collecting contractual cash flows, selling the financial assets, or both. Purchases or sales of financial assets that require delivery of assets within a time frame established by regulation or convention in the market place (regular way trades) are recognised on the trade date, i.e., the date that the Group commits to purchase or sell the asset. Subsequent measurement For purposes of subsequent measurement, financial assets are classified in four categories: The Group’s financial assets at amortised cost include trade receivables. Derecognition A financial asset (or, where applicable, a part of a financial asset or part of a group of similar financial assets) is primarily derecognised (i.e., removed from the Group’s consolidated statement of financial position) when the rights to receive cash flows from the asset have expired. Impairment Further disclosures relating to impairment of financial assets are also provided in the following notes: • Disclosures of significant assumption Note 2(d) • Trade receivables and contract assets Note 2(h) The Group recognises an allowance for expected credit losses (ECLs) for all debt instruments not held at fair value through profit or loss. ECLs are based on the difference between the contractual cash flows due in accordance with the contract and all the cash flows that the Group expects to receive, discounted at an approximation of the original effective interest rate. The expected cash flows will include cash flows from the sale of collateral held or other credit enhancements that are integral to the contractual terms. ECLs are recognised in two stages. For credit exposures for which there has not been a significant increase in credit risk since initial recognition, ECLs are provided for credit losses that result from default events that are possible within the next 12-months (a 12-month ECL). For those credit exposures for which there has been a significant increase in credit risk since initial recognition, a loss allowance is required for credit losses Bisalloy Steel Group Limited 2019 Annual Report | 31 2. Summary of significant accounting policies (continued) expected over the remaining life of the exposure, irrespective of the timing of the default (a lifetime ECL). For trade receivables and contract assets, the Group applies a simplified approach in calculating ECLs. Therefore, the Group does not track changes in credit risk, but instead recognises a loss allowance based on lifetime ECLs at each reporting date. The Group has established a provision matrix that is based on its historical credit loss experience, adjusted for forward-looking factors specific to the debtors and the economic environment. The Group considers a financial asset in default when internal or external information indicates that the Group is unlikely to receive the outstanding contractual amounts in. A financial asset is written off when there is no reasonable expectation of recovering the contractual cash flows. Financial liabilities Initial recognition and measurement Financial liabilities are classified, at initial recognition, as financial liabilities at fair value through profit or loss, loans and borrowings, payables, or as derivatives designated as hedging instruments in an effective hedge, as appropriate. All financial liabilities are recognised initially at fair value and, in the case of loans and borrowings and payables, net of directly attributable transaction costs. The Group’s financial liabilities include trade and other payables, loans and borrowings including bank overdrafts, and derivative financial instruments. Subsequent measurement The measurement of financial liabilities depends on their classification, as described below: Financial liabilities at fair value through profit or loss Financial liabilities at fair value through profit or loss include financial liabilities held for trading and financial liabilities designated upon initial recognition as at fair value through profit or loss. Financial liabilities are classified as held for trading if they are incurred for the purpose of repurchasing in the near term. This category also includes derivative financial instruments entered into by the Group that are not designated as hedging instruments in hedge relationships as defined by IFRS 9. Separated embedded derivatives are also classified as held for trading unless they are designated as effective hedging instruments. Gains or losses on liabilities held for trading are recognised in the statement of profit or loss. Financial liabilities designated upon initial recognition at fair value through profit or loss are designated at the initial date of recognition, and only if the criteria in IFRS 9 are satisfied. The Group has not designated any financial liability as at fair value through profit or loss. Financial liabilities at amortised cost This is the category most relevant to the Group. After initial recognition, interest-bearing loans and borrowings are subsequently measured at amortised cost using the EIR method. Gains and losses are recognised in profit or loss when the liabilities are derecognised as well as through the EIR amortisation process. Amortised cost is calculated by taking into account any discount or premium on acquisition and fees or costs that are an integral part of the EIR. The EIR amortisation is included as finance costs in the statement of profit or loss. All loans and borrowings are classified as current liabilities unless the Group has an unconditional right to defer settlement of the liability for at least 12 months after the reporting date. This category generally applies to interest-bearing loans and borrowings. For more information, refer to Note 18. Derecognition A financial liability is derecognised when the obligation under the liability is discharged or cancelled or expires. When an existing financial liability is replaced by another from the same lender on substantially different terms, or the terms of an existing liability are substantially modified, such an exchange or modification is treated as the derecognition of the original liability and the recognition of a new liability. The difference in the respective carrying amounts is recognised in the statement of profit or loss. Offsetting of financial instruments Financial assets and financial liabilities are offset and the net amount is reported in the consolidated statement of financial position if there is a currently enforceable legal right to offset the recognised amounts and there is an intention to settle on a net basis, to realise the assets and settle the liabilities simultaneously. q) Goods and services tax Revenues, expenses and assets are recognised net of the amount of goods and services tax (GST), or GST equivalents, such as Value Added Tax, except: • where the amount of GST incurred is not recoverable from the Australian Tax Office (ATO), or equivalent foreign organisations. In these circumstances the GST is recognised as part of the cost of acquisition of the asset or as part of an item of the expenses; • receivables and payables are stated with the amount of GST included. The net amount of GST recoverable from, or payable to, the ATO is included as part of receivables or payables in the statement of financial position. Cash flows are included in the statement of cash flows on a gross basis. The GST components of cash flows arising from 32 | Bisalloy Steel Group Limited 2019 Annual Report Notes to the Consolidated Financial Statementscontinued investing and financing activities which are recoverable from, or payable to, the ATO are classified as operating cash flows. Commitments and contingencies are disclosed net of the amount of GST recoverable from, or payable to, the taxation authority. r) Revenue from contracts with customers The Group is in the business of manufacturing quench and tempered steel plates. Revenue from contracts with customers is recognised when control of the goods or services are transferred to the customer at an amount that reflects the consideration to which the Group expects to be entitled in exchange for those goods or services. The Group has concluded that it is the principal in its revenue arrangements, as it controls the goods or services before transferring them to the customer. Sale of goods Revenue from the sale of steel plates is recognised at the point in time when control of the asset is transferred to the customer, which is on delivery of the goods for domestic sales, on invoice for Bill and Hold sales and on bill of lading for export sales. Revenue from the services of shipping and handling is recognised over time as the service is performed. The normal credit terms are 30 to 90 days upon end of month invoiced. The Group considers whether there are other promises in the contract that are separate performance obligations to which a portion of the transaction price needs to be allocated (e.g., shipping). In determining the transaction price for the sale of goods, the Group considers the effects of variable consideration, the existence of significant financing components, non-cash consideration, and consideration payable to the customer (if any). (i) Variable consideration If the consideration in a contract includes a variable amount, the Group estimates the amount of consideration to which it will be entitled in exchange for transferring the goods to the customer. The variable consideration is estimated at contract inception and constrained until it is highly probable that a significant revenue reversal in the amount of cumulative revenue recognised will not occur when the associated uncertainty with the variable consideration is subsequently resolved. Some contracts for the sale of steel plates provide customers with a right of return and early settlement discounts. The rights of return and early settlement discounts give rise to variable consideration. Early Settlement Discounts The Group provides early settlement discounts to certain customers if the payment for the sale of goods is made within a specified period of time. The discounts are offset against amounts payable by the customer. To estimate the variable consideration to which it will be entitled, the Group applies the ‘expected value method’ to estimate the settlement discounts that will be issued. This method best predicts the amount of variable consideration to which the Group will be entitled. The Group then applies the requirements on constraining estimates of variable consideration that can be included in the transaction price and recognises a settlement discount liability for the obligation to provide a discount to the customer in the statement of financial position. (ii) Significant financing component Generally, the Group receives payment for the sale of goods between 30 to 90 days after the goods have been delivered. Should a significant financing component exist, the Group will apply the practical expedient in AASB 15. Using this, the Group does not adjust the promised amount of consideration for the effects of a significant financing component if it expects, at contract inception, that the period between the transfer of the promised good or service to the customer and when the customer pays for that good or service will be one year or less. (iii) Non-cash consideration The Group does not receive non-cash consideration for the sale of goods. Contract balances Contract Assets A contract asset is the right to consideration in exchange for goods or services transferred to the customer. If the Group performs by transferring goods or services to a customer before the customer pays consideration or before payment is due, a contract asset is recognised for the earned consideration that is conditional. Trade Receivables A receivable represents the Group’s right to an amount of consideration that is unconditional (i.e., only the passage of time is required before payment of the consideration is due). Refer to accounting policies of financial assets in section p) Financial instruments – initial recognition and subsequent measurement. Contract Liabilities A contract liability is the obligation to transfer goods or services to a customer for which the Group has received consideration (or an amount of consideration is due) from the customer. If a customer pays consideration before the Group transfers goods or services to the customer, a contract liability is recognised when the payment is made or the payment is due (whichever is earlier). Contract liabilities are recognised as revenue when the Group performs under the contract. s) Other Income Interest income Interest income is recognised as it accrues using the effective interest (EIR) method. The EIR is the rate that exactly discounts estimated future cash receipts over the expected life of the financial asset to the net carrying amount of the financial asset. Interest income is included in finance income in the statement of profit or loss and other comprehensive income. Dividend income Dividend income is recognised when the Group’s right to receive the payment is established. Bisalloy Steel Group Limited 2019 Annual Report | 33 2. Summary of significant accounting policies (continued) t) Borrowing costs 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 that asset. All other borrowing costs are expensed in the period in which they occur. Borrowing costs consist of interest and other costs that an entity incurs in connection with the borrowing of funds. Bisalloy Steel Group Limited does not currently hold qualifying assets but, if it did, the borrowing costs directly associated with this asset would be capitalised (including any other associated costs directly attributable to the borrowing and temporary investment income earned on the borrowing). u) Leases The determination of whether an arrangement is, or contains a lease is based on the substance of the arrangement at inception of the lease. The arrangement is, or contains, a lease if fulfilment of the arrangement is dependent on the use of a specific asset or assets or the arrangement conveys a right to use the asset or assets, even if that right is not explicitly specified in an agreement. Group as a lessee Finance leases, which transfer to the Group substantially all the risks and benefits incidental to ownership of the leased item, are capitalised at the inception of the lease at the fair value of the leased property or, if lower at the present value of the minimum lease payments. Lease payments are apportioned between the finance charges and a reduction of the lease liability so as to achieve a constant rate of interest on the remaining balance of the liability. Finance charges are included in finance costs in the statement of profit or loss and other comprehensive income. Capitalised leased assets are depreciated over the shorter of the estimated useful life of the asset and lease term, if there is no reasonable certainty that the Group will obtain ownership by the end of the lease term. Operating lease payments are recognised as an operating expense in the statement of profit or loss and other comprehensive income on a straight-line basis over the lease term. v) Foreign currency translation The Group’s consolidated financial statements are presented in Australian dollars (A$), which is the Company’s functional and presentation currency. Each entity in the Group determines its own functional currency and items included in the financial statements of each entity are measured using that functional currency. Transactions in foreign currencies are initially recorded in the functional currency rate ruling at the date of the transaction. Monetary assets and liabilities denominated in foreign currencies are retranslated at the functional currency rate of exchange ruling at the statement of financial position date. All differences are taken to profit or loss. Non-monetary items that are measured in terms of historical cost in a foreign 34 | Bisalloy Steel Group Limited 2019 Annual Report currency are translated using the exchange rates as at the dates of the initial transactions. The functional currency of the foreign operations is the currency in circulation in the country they each reside in. As at the reporting date, the assets and liabilities of these subsidiaries are translated into the Company’s presentation currency (A$) at the rate of exchange ruling at balance date, and their income statements are translated at the weighted average exchange rates for the year. The exchange differences arising on the translation are recognised in the foreign currency translation reserve within equity. On disposal of a foreign entity, the deferred cumulative amount recognised in equity relating to that particular foreign operation is recognised in the statement of comprehensive income. w) Earnings per share (EPS) Basic EPS is calculated as net profit attributable to members, adjusted to exclude costs of servicing equity (other than dividends), divided by the weighted average number of ordinary shares, adjusted for any bonus element. Diluted EPS is calculated as net profit attributable to members, adjusted for: • costs of servicing equity (other than dividends); • the after tax effect of dividends and interest associated with dilutive potential ordinary shares that have been recognised as expenses; and • other non-discretionary changes in revenues or expenses during the period that would result from the dilution of potential ordinary shares divided by the weighted average number of ordinary shares and dilutive potential ordinary shares, adjusted for any bonus element. x) Derivative financial instruments and hedging The Group uses derivative financial instruments such as forward currency contracts to hedge its risks associated with foreign currency risks. Such derivative financial instruments are initially recognised at fair value on the date on which a derivative contract is entered into and are subsequently remeasured at fair value. Derivatives are carried as financial assets when the fair value is positive and as financial liabilities when the fair value is negative. Any gains or losses arising from changes in fair value on derivatives that do not qualify for hedge accounting are taken directly to net profit or loss for the year. The fair value of forward currency contracts is calculated by reference to current forward exchange rates for contracts with similar maturity profiles. The fair value of interest rate swap contracts is determined by reference to market values for similar instruments. For the purpose of hedge accounting, hedges are classified as: Notes to the Consolidated Financial Statementscontinued • fair value hedges: when hedging the exposure to changes in the fair value of a recognised asset or liability; or • cash flow hedges: when hedging exposure to variability in cash flows that is either attributable to a particular risk associated with a recognised asset or liability or a highly forecast transaction or the foreign currency risk in an unrecognised firm commitment. At the inception of a hedge relationship, the Group formally designates and documents the hedge relationship to which the Group wishes to apply hedge accounting and the risk management objective and strategy for undertaking the hedge. Before 01 July 2018, the documentation includes identification of the hedging instrument, the hedged item or transaction, the nature of the risk being hedged and how the Group will assess the effectiveness of changes in the hedging instrument’s fair value in offsetting the exposure to changes in the hedged item’s fair value or cash flows attributable to the hedged risk. Such hedges are expected to be highly effective in achieving offsetting changes in fair value or cash flows and are assessed on an ongoing basis to determine that they actually have been highly effective throughout the financial reporting periods for which they were designated. Beginning 01 July 2018, the documentation includes identification of the hedging instrument, the hedged item, the nature of the risk being hedged and how the Group will assess whether the hedging relationship meets the hedge effectiveness requirements (including the analysis of sources of hedge ineffectiveness and how the hedge ratio is determined). A hedging relationship qualifies for hedge accounting if it meets all of the following effectiveness requirements: If the forecast transaction is no longer expected to occur, amounts previously recognised in equity are transferred to profit or loss. If the hedging instrument expires or is sold, terminated or exercised without replacement or rollover, or if its designation as a hedge is revoked, amounts previously recognised in equity remain in equity until the forecast transaction occurs. If the related transaction is not expected to occur, the amount is taken to profit or loss. Fair Value Hedges The change in the fair value of the hedged item attributable to the risk hedged is recorded as part of the carrying value of the hedged item and is also recognised in the statement of profit or loss and other comprehensive income as a finance cost. When an unrecognised firm commitment is designated as a hedged item, the subsequent cumulative change in the fair value of the firm commitment attributable to the hedged risk is recognised as an asset or liability with a corresponding gain or loss recognised in profit or loss. The Group discontinues fair value hedge accounting if the hedging instrument expires or is sold, terminated or exercised, the hedge no longer meets criteria for hedge accounting or the Group revokes the designation. Any adjustment to the carrying amount of a hedge financial instrument for which the effective interest method is used is amortised to the profit or loss. Amortisation may begin as soon as an adjustment exists and shall begin no later than when the hedged item ceases to be adjusted for changes in its fair value attributable to the risk being hedged. y) Fair Value Measurement • There is ‘an economic relationship’ between the hedged item and the hedging instrument. The Group measure financial instruments such as derivatives at fair value at each reporting date. • The effect of credit risk does not ‘dominate the value changes’ that result from that economic relationship. • The hedge ratio of the hedging relationship is the same as that resulting from the quantity of the hedged item that the Group actually hedges and the quantity of the hedging instrument that the Group actually uses to hedge that quantity of hedged item. Hedges that meet all the qualifying criteria for hedge accounting are accounted for as described below: Cash Flow Hedges The effective portion of the gain or loss on the hedging instrument is recognised directly in equity, while the ineffective portion is recognised in profit or loss. Amounts taken to equity are transferred to the statement of profit or loss and other comprehensive income when the hedged transaction affects profit or loss, such as when hedged financial income or financial expense is recognised or when a forecast sale or purchase occurs. Where the hedged item is the cost of a non-financial asset or liability, the amounts taken to equity are transferred to the initial carrying amount of the non- financial asset or liability. Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The fair value measurement is based on the presumption that the transaction to sell the asset or transfer the liability takes place either: • • in the principal market for the asset or liability, or in the absence of a principal market, in the most advantageous market for the asset or liability. The principal or the most advantageous market must be accessible by the Group. The fair value of an asset or a liability is measured using the assumptions that market participants would use when pricing the asset or liability, assuming that market participants act in their economic best interest. The Group uses valuation techniques that are appropriate in the circumstances and for which sufficient data are available to measure fair value, maximising the use of relevant observable inputs and minimising the use of unobservable inputs. Bisalloy Steel Group Limited 2019 Annual Report | 35 2. Summary of significant accounting policies (continued) All assets and liabilities for which fair value is measured or disclosed in the financial statements are categorised within the fair value hierarchy, described as follows, based on the lowest level input that is significant to the fair value measurement as a whole: • Level 1 – Quoted (unadjusted) market prices in active markets for identical assets or liabilities • Level 2 – Valuation techniques for which the lowest level input that is significant to the fair value measurement is directly or indirectly observable • Level 3 – Valuation techniques for which the lowest level input that is significant to the fair value measurement is unobservable. For assets and liabilities that are recognised in the financial statements on a recurring basis, the Group determines whether transfers have occurred between Levels in the hierarchy by re-assessing categorisation (based on the lowest level input that is significant to the fair value measurement as a whole) at the end of the reporting period. z) Changes in accounting standards The accounting policies adopted in the preparation of the condensed consolidated financial statements are consistent with those followed in the preparation of the Group’s annual consolidated financial statements for the year ended 30 June 2018, except for the adoption of new standards effective as of 1 July 2018. The Group has not early adopted any other standard, interpretation or amendment that has been issued but is not yet effective. The Group applies, for the first time, AASB 9 Financial Instruments and AASB 15 Revenue from Contracts with Customers. The Group has adopted AASB 9 under the retrospective method and AASB 15 under the modified retrospective method of adoption with the date of initial application of 01 July 2018 for both standards. The cumulative effect of initially applying the two standards is recognised at the date of initial application as an adjustment to the opening balance of retained earnings. As required by AASB 108, the nature and effect of these changes are disclosed below. The effect of adopting AASB 9 and AASB 15 as at 01 July 2018 was, as follows: Trade and other receivables Contract assets Current assets Total assets Trade and other payables Contract liabilities Income tax payable Current liabilities Deferred tax liability Non-current liabilities Total liabilities Net assets Accumulated profits Parent interests Non-controlling interest Total equity Amounts prepared under previous AASB Adjustments due to AASB 9 Amounts due to AASB 15 $’000 Amounts prepared under AASB 9 & 15 $’000 19,394 – 47,089 68,493 24,163 – 577 29,481 1,485 8,474 37,955 30,538 11,783 27,357 3,181 30,538 (90) – (90) (90) – – (27) (27) – – (27) (63) (63) (38) (25) (63) (341) 101 (240) (240) (341) 341 – – (72) (72) (72) (168) (168) (168) – (168) 18,963 101 46,759 68,163 23,822 341 550 29,454 1,413 8,402 37,856 30,307 11,552 27,151 3,156 30,307 Set out below, are the amounts by which each financial statement line is affected as at and for the year ended 30 June 2019 as a result of the adoption of AASB 9 and AASB 15. The adoption of AASB 9 and AASB 15 did not have a material impact on the Other Comprehensive Income or had no impact on the Group’s operating, investing and financing cash flows. The first column shows amounts prepared under AASB 9 and AASB 15 and the fourth column shows what the amounts would have been had AASB 9 and AASB 15 not been adopted: 36 | Bisalloy Steel Group Limited 2019 Annual Report Notes to the Consolidated Financial Statementscontinued Consolidated Statement of Profit or Loss and Other Comprehensive Income Year ended 30 June 2019 Revenue from contracts with customers Sales of goods Revenue Gross Profit Distribution Expenses Administration Expenses Operating Profit Profit before income tax Income tax Profit after income tax Attributable to: Non-controlling interest Owners of the parent Profit for the year Total comprehensive income Attributable to: Non-controlling interest Owners of the parent Total comprehensive income Amounts prepared under AASB 9 & 15 $’000 Adjustments due to AASB 9 Amounts due to AASB 15 $’000 Amounts prepared under previous AASB $’000 98,124 – 98,124 17,892 (1,865) (6,749) 5,245 5,677 (1,246) 4,431 749 3,682 4,431 1,094 5,346 6,440 – – – – – (93) (93) (93) 28 (65) (25) (40) (65) (25) (40) (65) (98,124) 98,427 303 303 (56) – 247 247 (74) 173 – 173 173 – 173 173 – 98,427 98,427 18,195 (1,921) (6,842) 5,399 5,831 (1,292) 4,539 724 3,815 4,539 1,069 5,479 6,548 Earnings per share for profit attributable to ordinary equity holders of the parent for the year ended 30 June 2019: – Basic earnings/(loss) per share (cents per share) – Diluted earnings/(loss) per share (cents per share) Amounts prepared under AASB 9 & 15 $’000 Amounts prepared under previous AASB $’000 8.3 7.9 8.6 8.3 Bisalloy Steel Group Limited 2019 Annual Report | 37 2. Summary of significant accounting policies (continued) Consolidated Statement of Financial Position as at 30 June 2019 Trade and other receivables Contract assets Current assets Total assets Trade and other payables Contract liabilities Income tax payable Current liabilities Total liabilities Net assets Accumulated profits Parent interests Non-controlling interest Total equity Amounts prepared under AASB 9 & 15 $’000 Adjustments due to AASB 9 Amounts due to AASB 15 $’000 Amounts prepared under previous AASB $’000 17,803 303 53,496 76,622 25,114 353 17 38,984 41,432 35,190 13,536 31,041 4,149 35,190 93 – 93 93 – – 28 28 28 65 65 40 25 65 303 (303) – – 106 (353) 74 (173) (173) 173 173 173 – 173 18,199 – 53,589 76,715 25,220 – 119 38,839 41,287 35,428 13,774 31,254 4,174 35,428 (a) AASB 9 Financial Instruments – Impact of Adoption AASB 9 Financial Instruments replaces AASB 139 Financial Instruments: Recognition and Measurement for annual periods beginning on or after 1 July 2018, bringing together all three aspects of the accounting for financial instruments: classification and measurement; impairment; and hedge accounting. With the exception of hedge accounting, which the Group applied prospectively, the Group has applied AASB 9 retrospectively, with the initial application date of 1 July 2018. • Classification and measurement The accounting for the Group’s financial assets and liabilities is the same as it was under AASB 139, excluding the accounting for impairment losses for financial assets. Detailed below is the measurement of the Group’s financial assets. Caption Cash and Cash Equivalents AASB 139 Fair Value Trade and Other Receivables Amortised Cost Derivative Asset • Impairment Fair Value AASB 9 Fair Value Amortised Cost Fair Value The adoption of AASB 9 has fundamentally changed the Group’s accounting for impairment losses for financial assets by replacing AASB 139’s incurred loss approach with a forward-looking expected credit loss (ECL) approach. ECLs are based on the difference between the contractual cash flows due in accordance with the contract and all the cash flows that the Group expects to receive. The shortfall is then discounted at an approximation to the asset’s original effective interest rate. For Trade and other receivables, the Group has applied the standard’s simplified approach and has calculated ECLs based on lifetime expected credit losses. Each subsidiary has established a provision matrix that is based on the subsidiary’s historical credit loss experience, adjusted for forward-looking factors specific to the debtors and the economic environment. The Group considers a financial asset in default when internal or external information indicates that the Group is unlikely to receive the outstanding contractual amounts in. 38 | Bisalloy Steel Group Limited 2019 Annual Report Notes to the Consolidated Financial Statementscontinued The adoption of the ECL requirements of AASB 9 has resulted in a change to the impairment allowances of the Group’s debt financial assets as at 30 June 2018. (b) AASB 15 Revenue Contracts with Customers – Impact of Adoption AASB 15 supersedes AASB 111 Construction Contracts, AASB 118 Revenue and related Interpretations and it applies to all revenue arising from contracts with customers, unless those contracts are in the scope of other standards. The new standard establishes a five-step model to account for revenue arising from contracts with customers. Under AASB 15, revenue is recognised at an amount that reflects the consideration to which an entity expects to be entitled in exchange for transferring goods or services to a customer. The standard has been applied to all contracts at the date of initial application. The standard requires entities to exercise judgement, taking into consideration all the relevant facts and circumstances when applying each step of the model to contracts with their customers. The standard also specifies the accounting for the incremental costs of obtaining a contract and the costs directly related to fulfilling a contract. The key changes to the Group’s reporting as a result of AASB 15 has been the timing of revenue recognition with respect to the performance obligations relating to shipping and handling being satisfied. Performance obligations The Group’s contracts with customers are for the sale of steel plates. In completing the sale of the steel plates, there are two performance obligations identified, being the provision of steel plates and the provision of shipping and handling. The Group has concluded that revenue from the provision of steel plates should be recognised at the point in time the obligation is satisfied and revenue from shipping and handling should be recognised over time as the obligation is performed. aa) Standards issued but not yet effective Australian Accounting Standards and Interpretations that are issued, but are not yet effective, up to the date of issuance of the Group’s financial statements are disclosed below. The Group intends to adopt these new standards and interpretations, if applicable, when they become effective. AASB 16 Leases AASB 16 was issued in January 2016 and it replaces AASB 117 Leases, AASB Interpretation 4 Determining whether an Arrangement contains a Lease, AASB Interpretation-115 Operating Leases-Incentives and AASB Interpretation 127 Evaluating the Substance of Transactions Involving the Legal Form of a Lease. AASB 16 sets out the principles for the recognition, measurement, presentation and disclosure of leases and requires lessees to account for all leases under a single on-balance sheet model similar to the accounting for finance leases under AASB 117. The standard includes two recognition exemptions for lessees – leases of ’low-value’ assets (e.g., personal computers) and short-term leases (i.e., leases with a lease term of 12 months or less). At the commencement date of a lease, a lessee will recognise a liability to make lease payments (i.e., the lease liability) and an asset representing the right to use the underlying asset during the lease term (i.e., the right-of-use asset). Lessees will be required to separately recognise the interest expense on the lease liability and the depreciation expense on the right-of-use asset. Lessees will be also required to remeasure the lease liability upon the occurrence of certain events (e.g., a change in the lease term, a change in future lease payments resulting from a change in an index or rate used to determine those payments). The lessee will generally recognise the amount of the remeasurement of the lease liability as an adjustment to the right-of-use asset. Lessor accounting under AASB 16 is substantially unchanged from today’s accounting under AASB 117. Lessors will continue to classify all leases using the same classification principle as in AASB 117 and distinguish between two types of leases: operating and finance leases. AASB 16, which is effective for annual periods beginning on or after 1 January 2019, requires lessees and lessors to make more extensive disclosures than under AASB 117. Transition to AASB 16 The Group plans to adopt AASB 16 using the cumulative method with the effect of initially applying this standard recognised at the date of initial application (i.e. 1 July 2019). As a result, the Group will not apply the requirements of AASB 16 to the comparative period presented. The Group will elect to use the exemptions proposed by the standard on lease contracts for which the lease term is 12 months or less, and lease contracts for which the underlying asset is of low value. During 2019, the Group has performed an impact assessment of AASB 16. The Group’s operating profit will improve, while it’s interest expense will increase. The net impact of this on the profit before tax is minimal. This is due to the change in the accounting for expenses of leases that were classified as operating leases under AASB 117. The net impact on the balance sheet will be minimal. In summary the impact of AASB 16 adoption is estimated to have a non-significant impact on the Group. AASB Interpretation 23 Uncertainty over Income Tax Treatment The Interpretation addresses the accounting for income taxes when tax treatments involve uncertainty that affects the application of AASB 112 and does not apply to taxes or levies outside the scope of AASB 112, nor does it specifically include requirements relating to interest and penalties associated with uncertain tax treatments. The Interpretation specifically addresses the following: • Whether an entity considers uncertain tax treatments separately • The assumptions an entity makes about the examination of tax treatments by taxation authorities Bisalloy Steel Group Limited 2019 Annual Report | 39 2. Summary of significant accounting policies (continued) • How an entity determines taxable profit (tax loss), tax bases, unused tax losses, unused tax credits and tax rates • How an entity considers changes in facts and circumstances An entity has to determine whether to consider each uncertain tax treatment separately or together with one or more other uncertain tax treatments. The approach that better predicts the resolution of the uncertainty should be followed. The interpretation is effective for annual reporting periods beginning on or after 1 January 2019, but certain transition reliefs are available. The Group will apply the interpretation from its effective date. The group does not believe this to have a significant impact. AASB 2014-10 Amendments to Australian Accounting Standards – Sale or Contribution of Assets between an Investor and its Associate or Joint Venture The amendments address the conflict between AASB 10 and AASB 128 in dealing with the loss of control of a subsidiary that is sold or contributed to an associate or joint venture. The amendments clarify that the gain or loss resulting from the sale or contribution of assets that constitute a business, as defined in AASB 3, between an investor and its associate or joint venture, is recognised in full. Any gain or loss resulting from the sale or contribution of assets that do not constitute a business, however, is recognised only to the extent of unrelated investors’ interests in the associate or joint venture. The IASB and AASB have deferred the effective date of these amendments indefinitely, but an entity that early adopts the amendments must apply them prospectively. The Group will apply these amendments when they become effective. 3. Revenue from contracts with customers 3.1 Disaggregated revenue information Set out below is the disaggregation of the Group’s revenue from contracts with customers: Year ended 30 June 2019 Performance obligation Sales of steel plates Shipping and handling Total revenue from contracts with customers Timing of revenue recognition Goods transferred at a point in time Services transferred over time Total revenue from contracts with customers 3.2 Contract balances Trade receivables (refer to note 11) Contract assets Contract liabilities Australia $’000 Overseas $’000 Total $’000 69,283 5,356 74,639 69,283 5,356 74,639 23,003 482 23,485 23,003 482 23,485 92,286 5,838 98,124 92,286 5,838 98,124 Consolidated Year ended 30 June 2019 $’000 Year ended 30 June 2018 $’000 17,478 18,917 303 (353) – – Trade receivables are non-interest bearing and are generally on terms of 30 to 90 days end of month. Contract assets are initially recognised for revenue earned from shipping and handling services as receipt of consideration is conditional on delivery of the steel plates. Upon delivery of the steel plates, the amounts recognised as contract assets are reclassified to trade receivables. Contract liabilities are recognised for shipping and handling services yet to be provided with respect to the steel plates invoiced and for any settlement discounts expected to be obtained by customers. 40 | Bisalloy Steel Group Limited 2019 Annual Report Notes to the Consolidated Financial Statementscontinued 3.3 Performance Obligations The Group’s contracts with customers are for the sale of steel plates. In completing the sale of the steel plates, there are two performance obligations identified, being the provision of steel plates and the provision of shipping and handling. The Group has concluded that revenue from the provision of steel plates is recognised at the point in time when control of the asset is transferred to the customer and revenue from the services of shipping and handling is recognised over time as the service is performed. As at 30 June 2019, the unsatisfied performance obligations per each segment as presented below. Shipping and handling Total Revenue from contracts with customers The remaining performance obligations are expected to be recognised within the next 12 months. 4. Operating Segments Overseas operations Consolidated Year ended 30 June 2019 $’000 Year ended 30 June 2018 $’000 303 303 341 341 Identification of reportable segments The Group has identified its operating segments based on the internal reports that are reviewed and used by the executive management team (the chief operating decision makers) in assessing performance and in determining the allocation of resources. The operating segments are identified by management based on country of origin. Discrete financial information about each of these operating businesses is reported to the executive management team on at least a monthly basis. The reportable segments are based on aggregated operating segments determined by the similarity of economic characteristics. Geographical areas Australian operations The Australian operations are comprised of Bisalloy Steels Pty Limited and Bisalloy Steel Group Limited. Bisalloy Steels Pty Limited distributes wear-grade and high tensile plate through distributors and directly to original equipment manufacturers in both Australia and Overseas. Bisalloy Steels is located in Unanderra, near Wollongong, NSW. Bisalloy Steel Group Limited is the corporate entity, also located in Unanderra NSW, which incurs expenses such as head office costs and interest. Corporate charges are allocated across the Australian and Overseas segments. The overseas operations comprise of PT Bima Bisalloy and Bisalloy (Thailand) Co Limited located in Indonesia and Thailand respectively. These businesses distribute Bisalloy Q&T plate as well as other steel plate products. The overseas operations also include the co-operative joint venture Bisalloy Shangang (Shandong) Steel Plate Co., Limited in the People’s Republic of China for the marketing and distribution of quench & tempered steel plate. Accounting policies and inter-segment transactions The accounting policies used by the Group in reporting segments internally are the same as those contained in note 2 to the accounts and in the prior period except as detailed below: Inter-entity sales Inter-entity sales are recognised based on an internally set transfer price. This price is set monthly and aims to reflect what the business operation could achieve if they sold their output to external parties at arm’s length. Major customers The group has a number of customers to which it provides products. There are three major distributors who account for 26% (2018: 30%), 10% (2018: 16%) and 9% (2018: 13%) of total external revenue. All these customers are in the Australian operating segment. Bisalloy Steel Group Limited 2019 Annual Report | 41 Australia $’000 Overseas $’000 Total $’000 74,639 7,749 82,388 23,485 – 98,124 7,749 23,485 105,873 1,753 – 963 1,645 – 792 2,678 16 228 136 1,607 454 58,589 20,599 938 33,753 18 4,310 (7,749) 98,124 4,431 16 1,191 1,781 1,607 1,246 79,188 956 38,063 Australia $’000 Overseas $’000 Total $’000 72,143 7,313 79,456 16,443 – 16,443 88,586 7,313 95,899 (7,313) 88,586 3,850 52 880 1,601 1,403 1,683 75,165 2,201 35,744 4. Operating segments (continued) Year ended 30 June 2019 Revenue: Sales to external customers Inter-segment sales Total segment revenue Inter-segment elimination Total consolidated revenue Segment net operating profit after tax Interest income Interest expense Depreciation Share of profit of joint venture Income tax expense Segment assets Capital expenditure Segment liabilities Year ended 30 June 2018 Revenue: Sales to external customers Inter-segment sales Total segment revenue Inter-segment elimination Total consolidated revenue Segment net operating profit after tax 2,736 1,114 Interest income Interest expense Depreciation Share of profit of joint venture Income tax expense Segment assets Capital expenditure Segment liabilities – 745 1,480 – 1,309 57,140 2,119 30,274 52 135 121 1,403 374 18,025 82 5,470 42 | Bisalloy Steel Group Limited 2019 Annual Report Notes to the Consolidated Financial Statementscontinued i) Segment revenue reconciliation to the statement of comprehensive income Total segment revenue Inter-segment sales elimination Total revenue Consolidated Year ended 30 June 2019 $’000 Year ended 30 June 2018 $’000 105,873 (7,749) 98,124 95,899 (7,313) 88,586 Revenue from external customers by geographical location is detailed below. Revenue is attributed to geographic location based on the location of the customers. Australia Indonesia Thailand Other foreign countries Total revenue Consolidated Year ended 30 June 2019 $’000 Year ended 30 June 2018 $’000 59,146 23,372 3,590 12,016 98,124 61,153 15,103 2,891 9,439 88,586 ii) Segment net operating profit after tax reconciliation to the statement of comprehensive income The executive management committee meets on a monthly basis to assess the performance of each segment by analysing the segment’s net operating profit after tax. Reconciliation of segment net operating profit after tax to net profit before tax Segment net operating profit after tax Income tax expense Total net profit before tax per the statement of profit or loss Consolidated Year ended 30 June 2019 $’000 Year ended 30 June 2018 $’000 4,431 1,246 5,677 3,850 1,683 5,533 Bisalloy Steel Group Limited 2019 Annual Report | 43 4. Operating segments (continued) iii) Segment assets reconciliation to the statement of financial position In assessing the segment performance on a monthly basis, the executive management committee analyses the segment result as described above and its relation to segment assets. Segment assets are those operating assets of the entity that the management committee views as directly attributing to the performance of the segment. These assets include plant and equipment, receivables, inventory and intangibles and exclude derivative assets, deferred tax assets, and pension assets. Reconciliation of segment operating assets to total assets Segment operating assets Inter–segment eliminations Derivative assets Total assets per the statement of financial position Consolidated Year ended 30 June 2019 $’000 Year ended 30 June 2018 $’000 79,188 (2,566) – 75,165 (6,672) – 76,622 68,493 The analysis of the location of non-current assets other than financial instruments, deferred tax assets and pension assets is as follows: Australia Overseas Total non-current assets Consolidated Year ended 30 June 2019 $’000 Year ended 30 June 2018 $’000 20,850 2,546 23,126 19,025 2,379 21,404 iv) Segment liabilities reconciliation to the statement of financial position Segment liabilities include trade and other payables and debt. The Group has a centralised finance function that is responsible for raising debt and capital for the Group operations. The executive management committee reviews the level of debt for each segment in the monthly meetings. Consolidated Year ended 30 June 2019 $’000 Year ended 30 June 2018 $’000 38,063 (1,134) 17 3,078 – 1,408 41,432 35,744 (3,079) 577 3,228 – 1,485 37,955 Reconciliation of segment operating liabilities to total liabilities Segment operating liabilities Inter-segment eliminations Income tax payable Employee Benefit Liabilities Derivative liability Deferred tax liabilities Total liabilities per the statement of financial position 44 | Bisalloy Steel Group Limited 2019 Annual Report Notes to the Consolidated Financial Statementscontinued 5. Other income and expenses (a) Other (income) / expenses Foreign exchange (gain) / loss Other (b) Finance (income) and costs Bank interest and borrowing costs Total finance costs Bank interest Total finance income (c) Depreciation and costs of inventories included in statement of comprehensive income Depreciation and amortisation These costs are apportioned over several functions of the Group based on the use of each asset. Costs of inventories recognised as an expense (d) Lease payment and other expenses included in statement of profit or loss Rental – operating leases (e) Employee benefits expense Wages and salaries Superannuation costs Expense of share-based payments Consolidated Year ended 30 June 2019 $’000 Year ended 30 June 2018 $’000 (48) (49) (97) 1,191 1,191 (16) (16) 360 46 406 880 880 (52) (52) 1,781 1,601 71,236 58,884 260 252 13,732 1,020 429 15,181 12,522 915 149 13,586 Investment in a joint venture 6. Interests in associates and the joint venture are accounted for using the equity method. They are initially recognised at cost, which includes transaction costs. Subsequent to initial recognition, the consolidated financial statements include the Group’s share of the profit or loss and OCI of equity-accounted investees, until the date on which significant influence or joint control ceases. In July 2011, Bisalloy Steel Group Limited signed a Cooperative Joint Venture Agreement with Ji’nan Iron & Steel Co., Limited to establish Bisalloy Jigang Steel Plate (Shandong) Co., Limited (‘the joint venture’) for the marketing and distribution of quench & tempered steel plate in the People’s Republic of China and other international markets. The Group has joint control under the terms of the Joint Venture Agreement. Under the terms of the JV, Bisalloy initially contributed US$1 million in capital and licenced its Q&T intellectual property and brand name to the joint venture to produce quench & tempered steel plate at Jinan’s production facility in Shandong Province, PRC for an initial 33% ownership of the equity and a 50% share in the operating result of the joint venture. In 2018 the JV changed its registered name to Bisalloy Shangang (Shandong) Steel Plate Co., Limited. In April 2019, due to the substantial growth in the CJV, both parties in the joint venture increased their contribution to registered capital, with Bisalloy’s contribution increasing from US$1.0m to US$2.5m, representing a 41.67% ownership of the equity and a 50% share in the operating result of the joint venture . The increase was funded through distributable profits from 2017 and 2018 calendar years that would have otherwise been fully paid to Bisalloy as a dividend in November 2018 and November 2019. Dividends of $0 (2018:$792,714) were received from the JV during the year. Bisalloy Steel Group Limited 2019 Annual Report | 45 6. Investment in a joint venture (continued) Joint venture’s statement of financial position: Current assets, including cash of $846,678 (2018: $4,905,744) Non-current assets Current liabilities Equity Joint ventures revenue and profit: Revenue Expenses Finance income / (expense) Profit before income tax Income tax Profit for the year Group’s share of profit Carrying amount of the investment The joint venture has no capital commitments or contingent liabilities at 30 June 2019 (2018: None). 7. Income tax (a) Income Tax Expense The major components of income tax expense are: Income Statement Current income tax Current income tax charge Adjustments in respect of current income tax of previous years Deferred income tax Relating to origination and reversal of temporary differences Adjustments in respect of current income tax of previous years Income tax expense The income tax expense for the period is disclosed as follows: Income tax expense attributable to continuing operations 46 | Bisalloy Steel Group Limited 2019 Annual Report Consolidated Year ended 30 June 2019 $’000 Year ended 30 June 2018 $’000 14,915 20,725 79 (3,662) 11,332 35 (12,793) 7,967 52,656 32,911 (48,372) (29,447) 1 4,285 (1,071) 3,214 1,607 4,982 (38) 3,426 (620) 2,806 1,403 2,720 Consolidated Year ended 30 June 2019 $’000 Year ended 30 June 2018 $’000 1,266 16 1,282 218 (254) (36) 1,668 5 1,673 10 – 10 1,246 1,683 1,246 1,246 1,683 1,683 Notes to the Consolidated Financial Statementscontinued (b) Amounts charged or credited directly to equity Deferred income tax related to items charged or credited directly to equity Net gain on revaluation of land and buildings and derivative assets Income tax expense reported in equity (c) Numerical reconciliation between aggregate tax expense recognised in the income statement and tax expense calculated per the statutory income tax rate Accounting profit before tax At the Group's statutory income tax rate of 30% (2018: 30%) Consolidation adjustment to prior year CFC temporary tax difference Income assessable for tax purposes Expenditure not allowable for tax purposes Foreign tax credits allowed De-recognition of foreign income tax credits Income not assessable for tax purposes Expenditure allowable for tax purposes Non-allowable withholding tax on foreign joint venture dividend Adjustments in respect of current income tax of previous years Consolidated Year ended 30 June 2019 $’000 Year ended 30 June 2018 $’000 (42) (42) 5,677 1,703 (271) 372 210 (87) – (522) (175) – 16 88 88 5,533 1,660 78 251 145 (68) – (438) (29) 79 5 Income tax expense on pre-tax net profit 1,246 1,683 Statement of financial position Statement of comprehensive income Equity Year ended 30 June 2019 $’000 Year ended 30 June 2018 $’000 Year ended 30 June 2019 $’000 Year ended 30 June 2018 $’000 Year ended 30 June 2019 $’000 Year ended 30 June 2018 $’000 (d) Deferred income tax Deferred income tax at 30 June relates to the following: CONSOLIDATED Property, plant and equipment (2,406) (2,403) Employee entitlement provisions Other provisions and accruals Inventory Other Foreign income tax credits Derivatives Deferred tax (liabilities)/assets reflected in the balance sheet Deferred tax credit/expense Equity 621 89 82 206 587 197 (71) 205 – – (1,408) (1,485) (27) (34) 180 (153) (2) – – (36) (32) (67) (122) 149 68 – 14 10 30 – – (72) – – – 92 – – – – – (4) (42) 88 Bisalloy Steel Group Limited 2019 Annual Report | 47 7. Income tax (continued) (e) Current income tax at 30 June relates to the following: The current tax payable for the Consolidated entity of $17,307 (2018: payable $577,258) represents the amount of income tax payable in respect of the current and prior periods. The Consolidated entity liability includes both the income tax payable by all members of the tax consolidated group and those members outside the tax consolidated group and outside the Australian tax jurisdiction. (f) Unrecognised temporary differences At 30 June 2019, there are no unrecognised temporary differences associated with the Group’s investments in subsidiaries, as the Group has no liability for additional taxation should unremitted earnings be remitted (2018: Nil). (g) Tax consolidation (i) Members of the tax consolidation group and the tax sharing arrangement Effective 1 July 2003, for the purposes of income taxation, the Company and its 100% owned Australian subsidiaries formed a tax consolidated group. Members of the group have entered into a tax sharing arrangement. This arrangement provides for the allocation of income tax liabilities between the entities should the head entity default on its tax payment obligations. At the balance date, the possibility of a default is remote. The head entity of the group is Bisalloy Steel Group Limited. (ii) Tax effect accounting by members of the tax consolidated group Members of the tax consolidated group have entered into a tax funding agreement. The allocation of taxes under the tax funding agreement is recognised under the separate tax payer within a group approach. Allocations under the tax funding agreement are made on a semi-annual basis. The amount that is allocated under the tax funding agreement is done so in accordance with a method permitted by UIG1052 and is recognised by way of an increase or decrease in the subsidiaries intercompany accounts. 8. Earnings per share (EPS) The following reflects the income and share data used in the basic and diluted earnings per share computations: Net profit for the period Net profit attributable to non-controlling interest holders Net profit attributable to equity holders of the parent (used in calculating basic and diluted EPS) Weighted average number of ordinary shares for basic earnings per share Effects of dilution: Performance rights Adjusted weighted average number of ordinary shares for diluted earnings per share Weighted average number of lapsed or cancelled potential ordinary shares included in diluted earnings per share Year ended 30 June 2019 $’000 Year ended 30 June 2018 $’000 4,431 (749) 3,682 3,850 (214) 3,636 Thousands Thousands 44,615 44,312 2,057 46,672 1,508 45,820 43 41 48 | Bisalloy Steel Group Limited 2019 Annual Report Notes to the Consolidated Financial Statementscontinued 9. Dividends paid or proposed (a) Dividends paid during the year Interim Final Consolidated Year ended 30 June 2019 $’000 Year ended 30 June 2018 $’000 – 1,775 1,775 – 1,105 1,105 (b) Proposed dividend (not recognised as a liability as at 30 June) Final dividend for 2019: 4.0 cents per share (2018: 4.0 cents per share) 1,790 1,775 (c) Franking credit balance The amount of franking credits available for the subsequent financial year are: Franking account balance as at the end of the financial year at 30% Franking (debits)/credits that will arise from the payment of tax as at the end of the financial year Franking debits that will arise from the payment of dividends as at the end of the financial year 5,071 (273) (784) 4,014 4,458 486 (757) 4,187 Bisalloy Steel Group Limited 2019 Annual Report | 49 10. Cash and cash equivalents (a) Reconciliation of cash For the purpose of the cash flow statement, cash and cash equivalents comprise the following at 30 June: Cash at bank Cash at hand Total (b) Reconciliation of net profit after income tax to net cash provided by operations Net profit after tax Non-cash items Depreciation and amortisation Share-based payments expense Provision for stock obsolescence Profit on sale of fixed assets Share of profit of a joint venture Net fair value change on derivatives Decrease/(increase) in foreign currency translation Change in operating assets and liabilities Decrease/(increase) in receivables and other assets (Increase)/decrease in inventories (Decrease)/increase in tax assets and liabilities Decrease/(increase) in other financial assets (Increase)/decrease in prepayments Increase/(decrease) in trade creditors (Decrease)/increase in employee benefit liabilities Settlement of share rights Net cash used in operating activities (c) Disclosure of financing facilities Refer note 18 (d) Reconciliation of movements of liabilities to cash flows arising from financing activities Changes from financing cash flows Proceeds from loans and borrowings Repayment of borrowings Net cash used in financing activities 50 | Bisalloy Steel Group Limited 2019 Annual Report Consolidated Year ended 30 June 2019 $’000 Year ended 30 June 2018 $’000 2,040 3 2,043 2,582 3 2,585 4,431 3,850 1,781 1,601 429 110 (6) 149 42 (18) (1,607) (1,403) – 927 1,198 (7,748) (637) – (599) 1,134 (151) (390) (1,128) 33 295 (4,399) (9,612) 618 – 134 9,672 451 – 1,413 3,426 (466) 2,960 279 (466) (187) Notes to the Consolidated Financial Statementscontinued 11. Trade and other receivables Current Trade receivables Less: Allowance for expected credit losses Other Goods and services tax Consolidated Year ended 30 June 2019 $’000 Year ended 30 June 2018 $’000 17,714 (236) 17,478 211 114 325 19,107 (190) 18,917 374 103 477 17,803 19,394 Trade receivables are non-interest bearing and are generally on 30-90 day terms. Refer to note 18.3 for more information of the allowance for expected credit losses. Other balances within trade and other receivables do not contain impaired assets and are not past due. It is expected that these other balances will be received when due. The Group has a credit insurance policy in place that covers 90% of the sales value to Australian and Indonesian eligible customers. Fair value and credit risk Due to the short term nature of these receivables, their carrying value is assumed to approximate their fair value. The maximum exposure to credit risk is the fair value of receivables. Collateral is not held as security, nor is it the Group’s policy to transfer (on-sell) receivables to special purpose entities. Foreign exchange and interest rate risk Detail regarding foreign exchange and interest rate risk exposure is disclosed in note 18.3. 12. Inventories Current Raw materials and stores Finished goods (a) Inventory expense Consolidated Year ended 30 June 2019 $’000 Year ended 30 June 2018 $’000 3,840 28,150 31,990 3,446 20,906 24,352 Inventories recognised as an expense for the year ended 30 June 2019 totalled $71,388,000 (2018: $58,884,000). This expense has been included in the cost of sales line item as a cost of inventories. The amount expensed includes $109,668 (2018: $41,710) for the Group relating to inventory write-downs. Bisalloy Steel Group Limited 2019 Annual Report | 51 13. Other current assets Current Prepayments Consolidated Year ended 30 June 2019 $’000 Year ended 30 June 2018 $’000 1,357 1,357 758 758 14. Property, plant and equipment (a) Reconciliation of carrying amounts at the beginning and end of the period Freehold land and buildings $’000 Leasehold improve- ments $’000 Plant and equipment $’000 Consolidated Year ended 30 June 2019 At 1 July 2018, net of accumulated depreciation and impairment 10,385 Total $’000 18,684 956 – 121 (1,781) 164 457 – 121 (199) 151 22 – – – (1) – 8,277 499 – – (1,581) 13 10,915 21 7,208 18,144 12,206 (1,821) 10,385 12,922 (2,007) 10,915 65 (43) 22 65 (44) 21 22,230 (13,953) 8,277 22,717 (15,509) 7,208 34,501 (15,817) 18,684 35,704 (17,560) 18,144 Additions Disposals Revaluation adjustment Depreciation and amortisation charge for the year Exchange adjustment At 30 June 2019, net of accumulated depreciation and impairment At 1 July 2018 Cost or fair value Accumulated depreciation and impairment Net carrying value At 30 June 2019 Cost or fair value Accumulated depreciation and impairment Net carrying value 52 | Bisalloy Steel Group Limited 2019 Annual Report Notes to the Consolidated Financial Statementscontinued Consolidated Year ended 30 June 2018 At 1 July 2017, net of accumulated depreciation and impairment 10,237 Additions Disposals Revaluation adjustment Depreciation and amortisation charge for the year Exchange adjustment At 30 June 2018, net of accumulated depreciation and impairment At 1 July 2017 Cost or fair value Accumulated depreciation and impairment Net carrying value At 30 June 2018 Cost or fair value Accumulated depreciation and impairment Net carrying value Freehold land and buildings $’000 Leasehold improve- ments $’000 Plant and equipment $’000 Total $’000 17,788 2,201 – 366 (1,601) (70) – – 366 (155) (63) 23 – – – (1) – 7,528 2,201 – – (1,445) (7) 10,385 22 8,277 18,684 11,918 (1,681) 10,237 12,206 (1,821) 10,385 65 (42) 23 65 (43) 22 20,150 32,133 (12,622) (14,345) 7,528 17,788 22,230 (13,953) 8,277 34,501 (15,817) 18,684 (b) Revaluation of freehold land and freehold buildings Freehold land and freehold buildings are required by the Group to be externally revalued every three years at minimum. In addition to this, Indonesian freehold land and freehold buildings are required to be externally revalued every 12 months in order to meet lending requirements stipulated by their finance provider. Fair value is the amount for which the assets could be exchanged between a knowledgeable willing buyer and a knowledgeable willing seller in an arm’s length transaction as at the valuation date. Fair value is determined by direct reference to recent market transactions on arm’s length terms for land and buildings comparable in size and location to those held by the Group, and to market based yields for comparable properties. In 2019, the Group engaged KJPP Pung’s Zulkarnain Dan Rekan, accredited independent valuers to determine the fair value of its Indonesian land and buildings. The effective date of the valuation was 30 June 2019 and fair value was determined as $2,375,572. In 2017, the Group engaged Herron Todd White, accredited independent valuers to determine the fair value of its Australian land and buildings respectively. The effective date of the valuation was 30 June 2017 and fair value was determined as $8,350,000. There has been no change in the valuation technique in current or prior period. For June 2019, it was determined by Directors’ valuation that there was no significant change in fair value for its Australian land and buildings. Bisalloy Steel Group Limited 2019 Annual Report | 53 14. Property, plant and equipment (continued) (c) Carrying amounts if land and buildings were measured at cost less accumulated depreciation and impairment If land and buildings were measured using the cost model the carrying amounts would be as follows: Cost Accumulated depreciation and impairment Net carrying amount 15. Share-based payments plans Long Term Incentives (LTI) Plan 2019 Freehold land and buildings $’000 2018 Freehold land and buildings $’000 5,990 (1,622) 4,368 5,395 (1,520) 3,875 The LTI program has been designed to align the remuneration received by executive directors and senior managers with the creation of shareholder wealth. Consequently LTI grants are only made to executives who are in a position to influence shareholder wealth and thus have the opportunity to influence the company’s performance against the relevant long term performance hurdles. Structure At the 2015 Annual General Meeting, an LTI plan was renewed for LTI grants to executives in the form of share rights. These rights are granted in two equal parts. The first part is based on retention and requires the holder remain an employee for three years from grant date. The second part is based on delivering superior long-term performance as measured by Return on Equity (“ROE”), with each grant of rights divided into three equal tranches. For each tranche, actual ROE is measured against a budget ROE and a stretch ROE as determined annually by the Board in respect of the forthcoming year. The proportion of the rights which vest depend on where within this range the Group performs, with 100% vesting on achieving the stretch ROE and no rights vesting if actual ROE is less than 90% of the budgeted ROE. For the 2019 year the stretch ROE was set at 115% of the budget ROE. Any rights to which the employee may become entitled on achieving the performance criteria, are still subject to the three year retention criteria before they can vest. Any share rights which do not vest, as a result of the relevant performance condition not being satisfied, lapse. If the holder leaves the business, the unvested rights lapse on the leaving date unless the Board determines otherwise. In the event of a change in control of the Group, the vesting date will generally be brought forward to the date of change of control and share rights will vest subject to performance over this shortened period, subject to ultimate Board discretion. Once vested a holder may exercise his share rights and be allocated a fully paid ordinary share of Bisalloy at no cost to the employee. During the 30 June 2019 financial year 1,200,000 share rights were awarded to executives under this scheme. The share rights have been valued by Mercer (Australia) Pty Ltd. A fair value expressed as a value per share right has been determined as at the grant date for each grant of rights. The rights have been valued according to a discounted cash flow (DCF) methodology. The share price at valuation date and a 7.7% dividend yield for Grants 6 and 7, a 5.5% dividend yield for Grant 8, a 5.1% dividend yield for Grants 9 and 10 and a 4.5% dividend yield for Grant 11 (based on historic and future estimates at the time) formed the basis of the valuation. Refer to note 2(n) for further details on the valuation methodology. 54 | Bisalloy Steel Group Limited 2019 Annual Report Notes to the Consolidated Financial Statementscontinued The following table lists the valuation outputs for outstanding grants as at 30 June 2019: Grant 61 Grant 7 Grant 8 Grant 9 Grant 10 Grant 11 Grant 122 Expiry term of three years Value of one right Proportion of rights that are outstandng $0.42 $0.33 $0.39 $0.82 $0.75 $0.79 $1.00 32.79% 0% 65.58% 83.33% 83.33% 83.33% 83.33% 1 Grant 6 is shown as at the date of the initial award, with a Fair value of $0.42. However, the 327,893 rights at 30 June 2019 still remain subject to shareholder approval at the upcoming AGM and the fair value determined as at 30 June 2019 is $1.00. 2 Grant 12 was awarded on the 26th February 2019. However, the 833,333 rights at 30 June 2019 still remain subject to shareholder approval at the upcoming AGM and the fair value determined as at 30 June 2019 is $1.00 The fair value of the performance rights granted is brought to account as an expense in the profit and loss over the three year vesting period. The following table shows the number of rights outstanding during the year and in the previous year. The expense recognised in the statement of comprehensive income in relation to share based payments is disclosed in note 5(e). Grant date Expiry date Exercise price Balance at 30 June 2017 New grants in the year Exercised in the year Forfeited during the year Balance at 30 June 2018 Exercisable at 30 June 2018 New grants in the year Grant 61 Unvested Grant 7 Unvested Grant 8 Unvested Grant 9 Unvested Grant 10 Unvested Grant 11 Unvested Grant 122 Unvested Total 26 Feb 2016 23 Mar 2016 19 Oct 2016 16 Apr 2018 15 Jun 2018 05 Nov 2018 26 Feb 2019 25 Feb 2019 22 Mar 2019 18 Oct 2019 15 Apr 2021 14 Jun 2021 04 Nov 2021 26 Feb 2022 $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 910,132 364,053 364,052 – – – – – – – – (87,667) (364,053) (35,067) 400,000 100,000 – – – – 822,465 – – 328,985 400,000 100,000 – – – – – – – – – – – – – – – – – – – – – 1,638,237 500,000 – (486,787) 1,651,450 – 200,000 1,000,000 1,200,000 – – (327,905) Exercised in the year (327,905) Forfeited during the year Balance at 30 June 2019 Exercisable at 30 June 2019 (166,667) 327,893 – (66,667) (66,667) (16,667) (33,333) (166,667) (516,668) 262,318 333,333 83,333 166,667 833,333 2,006,877 – – – – – – – – – – – – – 1 The grant date shown is the date of the initial award. However, the $372,893 balance at 30 June 2019 still remains subject to shareholder approval at the upcoming AGM and the fair value determined as at 30 June 2019 is $1.00. 2 Grant 12 was awarded on the 26th February 2019. However, the 833,333 rights at 30 June 2019 still remain subject to shareholder approval at the upcoming AGM and the fair value determined as at 30 June 2019 is $1.00. Bisalloy Steel Group Limited 2019 Annual Report | 55 15. Share-based payment plans (continued) The weighted average remaining contractual life for the share rights outstanding as at 30 June 2019 is 1.77 years (2018: 1.63 years). Share Rights Plan The net amount entered in the Profit or Loss in relation to the above for the current year was a debit of $428,698 (2018: $149,582). 16. Pensions and other post-employment benefit plans Superannuation commitments The Group contributes to externally managed defined contribution superannuation plans, as well as an unfunded defined benefit plan in Indonesia and a defined benefit plan in Thailand. The contributions are defined by the terms of each individual employee’s employment. 17. Trade and other payables Current Trade payables Other payables and accruals Consolidated Year ended 30 June 2019 $’000 Year ended 30 June 2018 $’000 23,296 1,818 25,114 22,009 2,154 24,163 Trade payables are non-interest bearing and are normally settled on 30 day terms. Other payables and accruals are non-interest bearing and have an average term of three months. Fair value Due to the short term nature of these payables, their carrying value is assumed to approximate their fair value. Interest rate, foreign exchange and liquidity risk Information regarding interest rate, foreign exchange and liquidity risk exposure is set out in note 18.3. 18. Financial assets and financial liabilities 18.1 Financial assets Consolidated Year ended 30 June 2019 $’000 Year ended 30 June 2018 $’000 17,478 17,478 17,478 – 18,917 18,917 18,917 – Financial assets at amortised cost Trade receivables (note 11) Total financial assets Total current Total non-current 56 | Bisalloy Steel Group Limited 2019 Annual Report Notes to the Consolidated Financial Statementscontinued 18.2 Financial liabilities Interest-bearing loans and borrowings Consolidated Year ended 30 June 2019 $’000 Year ended 30 June 2018 $’000 Current Borrowings secured by fixed and floating charges 11,462 2,434 Non-current Borrowings secured by fixed and floating charges – 6,068 Fair values Unless disclosed below, the carrying amount of the Group’s current and non-current borrowings approximate their fair value. Interest rate, foreign exchange and liquidity risk Details regarding interest rate, foreign exchange and liquidity risk is disclosed in note 18.3. Assets pledged as security The fixed and floating charge covers all current and future assets of the Bisalloy Closed Group (note 22). At reporting date, the following financing facilities had been negotiated and were available: Total facilities – invoice finance facility (incl. bank guarantees) (i) 10,000 10,000 Consolidated Year ended 30 June 2019 $’000 Year ended 30 June 2018 $’000 – bank bill facility (i) – export working capital facility (i) – Bisalloy Thailand facility (ii) - PT Bima facility (iii) Facilities used at reporting date Current – export working capital facility – PT Bima facility –bank bill facility Non-current - bank bill facility Total facilities used at reporting date 6,068 6,000 139 3,666 25,873 4,554 2,640 4,268 11,462 – – 11,462 6,534 2,000 123 2,800 21,457 – 1,968 466 2,434 6,068 6,068 8,502 Bisalloy Steel Group Limited 2019 Annual Report | 57 18. Financial assets and financial liabilities (continued) Facilities unused at reporting date – invoice finance facility (incl. bank guarantees) – bank bill facility – export working capital facility – Bisalloy Thailand facility – PT Bima facility Total facilities unused at reporting date Consolidated Year ended 30 June 2019 $’000 Year ended 30 June 2018 $’000 10,000 10,000 1,800 1,446 139 1,026 14,411 – 2,000 123 832 12,955 (i) On 30 May 2017 Bisalloy Steel Group Limited entered into a facility with Westpac Banking Corporation. The facility comprises a bank bill facility of $7m for 3 years from April 2017, with $4.27m drawn, and reducing by $116,500 per quarter over the term, an invoice finance facility of up to $10m (drawn to $0m) and an export working capital facility of up to $6m (drawn to $4.55m – facility increased from $2m to $6m on 22 October 2018). The facility is secured by a fixed and floating charge over all assets of the Closed Group. The facility is subject to usual provisions such as negative covenants and various undertakings, including compliance with an equity ratio covenant, a leverage ratio covenant and an interest coverage ratio. The bank bill facility has a three year term, whilst the other facilities are ongoing. The drawn invoice finance facility balance is limited to the value of the available collateral being eligible receivables, and fluctuates daily. The facility is variable rate linked to an interest rate plus a fixed margin. The average variable interest rate for the year is 5.19% (2018: 4.95%). ii) The Group had a THB 3m bank overdraft facility available to its Thailand based subsidiary as at 30 June 2019. These facilities are secured by a guarantee from Bisalloy Steel Group Limited. iii) The Group has IDR 1billion and USD$2,000,000 revolver facilities as well as a USD$500,000 Letter of Credit facility available to its Indonesian based subsidiary. These facilities are drawn to $2.6m and secured by a charge over the assets of the Indonesian subsidiary and mature on 30 June 2020. Other financial liabilities Other financial liabilities at amortised cost, other than interest-bearing loans and borrowings Trade and other payables (note 17) Total financial assets Total current Total non-current Consolidated Year ended 30 June 2019 $’000 Year ended 30 June 2018 $’000 25,114 25,114 25,114 – 24,163 24,163 24,163 – 58 | Bisalloy Steel Group Limited 2019 Annual Report Notes to the Consolidated Financial Statementscontinued 18.3 Financial risk management Overview The Group has exposure to the following risks from their use of financial instruments: • Credit risk • Liquidity risk • Market risk The Board is responsible for ensuring that risks, and also opportunities, are identified on a timely basis and that the Group’s objectives and activities are aligned with the risks and opportunities identified by the Board. The Board has established an Audit and Risk Committee comprising non-executive directors, whose meetings are also attended by the executive directors. In addition sub-committees are convened as appropriate in response to issues and risks identified by the Board, and the sub-committee further examines the issue and reports back to the Board. The Board has a number of mechanisms in place to ensure that management’s objectives and activities are aligned with the risks identified by the Board. These include the following: • Board approval of a strategic plan, which encompasses the Group’s vision, mission and strategy statements, designed to meet stakeholders’ needs and manage business risk. • Implementation of Board approved operating plans and budgets and Board monitoring of progress against these budgets, including the establishment and monitoring of KPIs of both a financial and non-financial nature. • The establishment of committees to report on specific business risks, including for example, matters such as environmental issues and concerns and occupational health and safety. • To ensure all orders are converted into cash within trading terms; • To minimise late payments and any potential bad debts through the constant application of sound commercial debtor management on a continuing basis; The credit policy requires credit insurance to be taken out against customers where the concentration risk of trading with any specific customer is assessed as high. Goods are sold subject to retention of title clauses that permit the Group to reclaim stock from a customer up to the value of monies owed in the event: • Official Manager • Receiver and Manager • Administrator • Liquidator or similar business administration is appointed to the customer’s business. The Group performs an impairment analysis at each reporting date using a provision matrix to measure expected credit losses. The provision rates are based on days past due for groupings of various customer segments with similar loss patterns (i.e. geographical region and coverage by insurance). The calculation reflects the probability-weighted outcome, the time value of money and reasonable and supportable information that is available at the reporting date about past events, current conditions and forecasts of future economic conditions. The Group did not provide detailed information on how the forecast economic conditions have been incorporated in the determination of ECL because the impact is not significant. The maximum exposure to credit risk for these financial assets is limited to their carrying amounts as disclosed in note 11. The Group does not hold collateral as security. • The Board reviews financial risks such as the Group’s liquidity, currency, interest rate and credit policies and exposures and monitors management’s actions to ensure they are in line with Group policy. The Group evaluates the concentration of risk with respect to trade receivables as low, as its customers are located in several jurisdictions and industries and operate in largely independent markets. Credit risk Credit risk is the risk of financial loss to the Group if a customer fails to meet its contractual obligations, and arises principally from the Group’s receivables from customers. The Group has for a number of years had credit insurance in place for Australian sales, however in July 2018 the Group began obtaining credit insurance for its Indonesian local sales. This credit enhancement is largely responsible for the decrease in ECL balance from 2018. Trade and other receivables The Group’s exposure to credit risk is influenced mainly by the individual characteristics of each customer. The Group has a narrow customer base and has the potential to be exposed to credit risk on a specific customer. A credit policy is in place, the objective of which is: • To ensure all credit worthiness checks are carried out prior to opening new credit accounts and appropriate authorisations obtained; • To ensure the approved credit limit is appropriate to the inherent risk of trading with any particular customer; Bisalloy Steel Group Limited 2019 Annual Report | 59 18. Financial assets and financial liabilities (continued) Set out below is the information about the credit risk exposure on the Group’s trade receivables and contract assets using a provision matrix: 30 June 2019 Trade Receivables Current $’000 <=30 days $’000 30-60 days $’000 61-90 days $’000 >91 days $’000 >91 days* $’000 Total $’000 Trade Receivables Expected credit loss rate 0.01% 0.04% 0.59% 1.03% 0.85% 100% 1.33% Estimated total gross carrying amount at default Expected Credit Loss 14,233 2,536 2 1 175 1 129 1 412 2 229 229 17,714 236 * Indonesian receivables with no insurance coverage 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’s approach to managing liquidity is to ensure, as far as possible, that it will always have sufficient liquidity to meet its liabilities as and when they fall due without incurring unacceptable losses or risking damaging the Group’s reputation. On 30 May 2017 the Group entered into a new facility agreement comprising a $7m bank bill facility, a $7m invoice finance facility and a $2m export working capital facility. On 29 January 2018, the Group increased the $7m invoice finance facility to $10m. On 22 October 2018, the Group increased the $2m export working capital facility to $6m. The drawn invoice finance facility balance is limited to the value of the available collateral being eligible receivables, and fluctuates daily. Eligible trade receivables, eligible inventory, plant and equipment and real property constitute available collateral. At reporting date, the carrying amount of assets pledged as collateral was $55.1m (2018: $57.1m). In addition to the eligible collateral, the Group has several general and financial undertakings which it must comply with including an Equity Ratio covenant, a Leverage Ratio covenant and an Interest Cover Ratio covenant. Due to the nature of the facility, cashflow is managed on a daily basis, comparing actual against forecast collateral, receipts and payments. Each month a complete review is undertaken of the projected daily cashflow. Contractual maturity of financial liabilities The table below reflects all contractually fixed payments for settlement, repayments and interest resulting from recognised financial liabilities, including derivative financial instruments as at 30 June 2019. For derivative financial instruments the market value is presented, whereas for the other obligations the respective undiscounted cash flows for the respective upcoming fiscal years are presented. Cash flows for financial assets and liabilities without fixed amount or timing are based on the conditions existing at 30 June 2019. Consolidated Year ended 30 June 2019 $’000 Year ended 30 June 2018 $’000 30,537 6,840 – – 24,613 2,412 6,378 – 37,377 33,403 6 months or less 6–12 months 1–5 years Over 5 years 60 | Bisalloy Steel Group Limited 2019 Annual Report Notes to the Consolidated Financial Statementscontinued Management analysis of financial assets and liabilities The table below is based on management expectations of the timing of cash inflows and outflows from its financial assets and liabilities which reflect a balanced view of cash inflows and outflows. Net settled derivatives comprise forward exchange contracts that are used to hedge future sales and purchase commitments. Leasing obligations, trade payables and other financial liabilities mainly originate from the financing of assets used in our ongoing operations such as property, plant, equipment and investments in working capital (e.g., inventories and trade receivables). These assets are considered in the Group’s overall liquidity risk. To monitor existing financial assets and liabilities as well as to enable an effective controlling of future risks, the Group has established comprehensive risk reporting covering its operation that reflects expectations of management of expected settlement of financial assets and liabilities. Year ended 30 June 2019 Consolidated Financial assets Cash and cash equivalents Trade and other receivables Contract assets Derivatives – gross settled (1) Inflows Outflows Financial liabilities Trade and other payables Interest bearing loans and borrowings Contract liabilities Derivatives – gross settled (1) Inflows Outflows Net inflow/(outflow) <=6 months $’000 6-12 months $’000 1-5 years $’000 >5 years $’000 Total $’000 2,043 17,802 304 – – 20,149 25,114 5,070 353 – – – – – – – – – 6,840 – – – 30,537 (10,388) 6,840 (6,840) – – – – – – – – – – – – - – – – – – – – – – – – – - 2,043 17,802 304 – – 20,149 25,114 11,910 353 – – 37,377 (17,228) (1) Derivatives are measured at fair value through other comprehensive income. Bisalloy Steel Group Limited 2019 Annual Report | 61 18. Financial assets and financial liabilities (continued) Year ended 30 June 2018 Consolidated Financial assets Cash and cash equivalents Trade and other receivables Derivatives – gross settled (1) Inflows Outflows Financial liabilities Trade and other payables Interest bearing loans and borrowings Derivatives – gross settled (1) Inflows Outflows Net inflow/(outflow) <=6 months $’000 6-12 months $’000 1-5 years $’000 >5 years $’000 Total $’000 2,585 19,394 – – – 21,979 24,163 450 – – – – – – – – – – – – – – – – – 2,412 6,378 – – – – – – 24,613 (2,634) 2,412 (2,412) 6,378 (6,378) – – – – – – – – – – – – – 2,585 19,394 – – – 21,979 24,163 9,240 – – – 33,403 (11,424) (1) Derivatives are measured at fair value through other comprehensive income. Market risk Market risk is the risk that changes in market prices, such as foreign exchange rates, interest rates and commodity prices will affect the Group’s income or the value of its holdings of financial instruments. The objective of market risk management is to manage and control market risk exposures within acceptable parameters, while optimising return. Foreign exchange risk Foreign currency risk is the risk that the fair value or future cash flows of a financial instrument will fluctuate because of changes in foreign exchange rates. The Group’s exposure to the risk of changes in foreign exchange rates relates primarily to the Group’s operating activities (when revenue or expense is denominated in different currency from the Group’s functional currency) and the Group’s net investment in foreign subsidiaries. The Group manages its foreign currency risk by hedging transactions that are expected to occur within a maximum twelve month period. The Group generally adopts a policy of covering exchange exposures related to purchases and sales of product at the time they are incurred or committed. Throughout the year the foreign exchange risk has been actively managed through periodic risk assessments. The objective of these assessments is to stratify foreign exchange exposure into risk categories and enable available hedge facilities to be applied to those assessed as higher risk. Risk assessments take into account macro economic lead indicators such as interest rate differentials, inflation rate differentials and externally published market analytical data to determine the likelihood of movement in exchange rates. The likelihood is applied to the Group’s foreign currency exposure to determine financial impact on a sensitivity basis. 62 | Bisalloy Steel Group Limited 2019 Annual Report Notes to the Consolidated Financial Statementscontinued Sensitivity analysis The following table summarises the sensitivity of financial instruments held at balance date to possible movements in the exchange rate of the Australian dollar to foreign currencies, with all other variables held constant. The +10%/-10% sensitivity is based on reasonably possible changes, over a financial year, using the observed range of actual historical rates for the preceding 5 year period, along with consideration for current market trends. Sensitivity to USD Consolidated AUD/USD +10% AUD/USD -10% Interest rate risk Post tax profit Higher/(Lower) Effect on equity Higher/(Lower) 2019 $’000 2018 $’000 2019 $’000 2018 $’000 (164) 201 (207) 253 (164) 201 (207) 253 The Group’s borrowing facility has a variable interest rate attached to it. The Group monitors the underlying interest rate outlook and considers the use of interest rate derivatives (principally swaps) to manage the exposure to interest rate fluctuations. The Group’s exposure to market interest rates relates primarily to the Group’s interest bearing borrowings. At 30 June 2019, the Group had the following mix of financial assets and liabilities exposed to variable interest rates that are not designated in cash flow hedges. Financial Assets Cash and cash equivalents less cash on hand Financial Liabilities Bank loans Net exposure Interest rate sensitivity analysis Consolidated Year ended 30 June 2019 $’000 Year ended 30 June 2018 $’000 2,040 2,582 (11,462) (9,422) (8,502) (5,920) The following table summarises the sensitivity of the fair value of financial instruments held at the balance date following a movement in interest rates, with all other variables held constant. The +100/-100 basis points sensitivity is based on reasonably possible changes over a financial year, using the observed range of actual historical rates for the preceding 5 year period. Consolidated +1% (100 basis points) - 1% (100 basis points) Commodity risk Post tax profit Higher/(Lower) Other comprehensive income Higher/(Lower) 2019 $’000 2018 $’000 2019 $’000 2018 $’000 (66) 66 (41) 41 – – – – The Group does not hedge for movements in the underlying price of product, but manages commodity risk within the parameters of the markets within which it trades. Bisalloy Steel Group Limited 2019 Annual Report | 63 18. Financial assets and financial liabilities (continued) Assets/Liabilities Measured at Fair value The Group uses various methods in estimating the fair value of assets and liabilities. The methods comprise: Level 1 – the fair value is calculated using quoted prices in active markets. Level 2 – the fair value is calculated using inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly (as prices) or indirectly (derived from prices). Level 3 – the fair value is estimated using inputs for the asset or liability that are not based on observable market data. The fair value of the assets and liabilities as well as the methods used to estimate the fair value are summarised in the table below. For assets and liabilities that are recognised in the financial statements on a recurring basis, the Group determines whether transfers have occurred between levels in the hierarchy by re-assessing categorisation (based on the lowest level input that is significant to the fair value measurement as a whole) at the end of each reporting period. At 30 June 2019 the fair values of land, buildings and improvements were determined by reference to valuations performed in June 2019 (Note 14 (b)). For properties not subject to independent valuations, fair value was determined by Directors’ valuation. Year ended 30 June 2019 Year ended 30 June 2018 Valuation technique- market observable inputs (Level 2) $’000 Valuation technique- non market observable inputs (Level 3) $’000 Quoted market price (Level 1) $’000 Valuation technique- market observable inputs (Level 2) $’000 Valuation technique- non market observable inputs (Level 3) $’000 Quoted market price (Level 1) $’000 Total $’000 Total $’000 – – – – – – – – – – – – 10,726 10,726 – – 10,726 10,726 – – – – – – – – – – – – – – 10,498 10,498 10,498 10,498 – – – – Consolidated Assets Land & Buildings Foreign exchange contracts Liabilities Foreign exchange contracts The fair value of forward currency contracts is calculated by reference to current forward exchange rates for contracts with similar maturity profiles. Transfer between categories There were no transfers between levels during the year. The fair value of interest bearing loans and borrowings approximates the carrying value. 64 | Bisalloy Steel Group Limited 2019 Annual Report Notes to the Consolidated Financial Statementscontinued 19. Employee Benefit Liabilities Current Employee Entitlements Non-Current Employee Entitlements Defined Benefit Plan 30 June 2019 $’000 30 June 2018 $’000 2,038 2,307 304 736 1,040 274 647 921 The Group has an unfunded defined benefit plan in Indonesia and a defined benefit plan in Thailand. The Indonesian plan provides severance and service benefits pursuant to Indonesian Labor Law No. 13/2003 and Company Regulation. The principal assumptions used in determining the obligation under the defined benefit plan are shown below: Discount rate Future salary increases 20. Contributed equity and reserves (a) Ordinary shares, issued and fully paid 2019 % 8.0 8.0 2018 % 8.0 8.0 Consolidated Year ended 30 June 2019 $’000 Year ended 30 June 2018 $’000 12,000 11,720 Fully paid ordinary shares carry one vote per share and carry the right to dividends. Shares have no par value. (b) Movements in shares on issue Balance at 1 July 2019 2018 Number of Shares $’000 Number of Shares 44,387,297 11,720 44,187,280 Shares issued under Dividend Reinvestment Plan 364,660 280 200,017 Balance at 30 June 44,751,957 12,000 44,387,297 $’000 11,575 145 11,720 (c) Capital management When managing capital, the Group’s objective is to maintain optimal returns to shareholders and benefits for other stakeholders. The Group also aims to maintain a capital structure that delivers the lowest cost of capital available to its operations. The Group adjusts the capital structure to take advantage of favourable costs of capital or high returns on assets. As the economic conditions change, the Group may change the amount of dividends to be paid to shareholders, return capital to shareholders, issue new shares or sell assets to reduce debt. No changes were made in the objectives, policies or processes for managing capital during the years ended 30 June 2019 and 2018. Bisalloy Steel Group Limited 2019 Annual Report | 65 20. Contributed equity and reserves (continued) The Group monitors capital through the gearing ratio (net debt/ total equity plus net debt) and currently targets a gearing ratio of between 10% and 35%. The Group includes within net debt interest bearing loans and borrowings less cash and cash equivalents. The gearing ratios based on continuing operations at 30 June 2019 and 2018 were as follows: Consolidated Year ended 30 June 2019 $’000 Year ended 30 June 2018 $’000 11,462 (2,043) 9,419 35,190 44,609 21% 8,502 (2,585) 5,917 30,538 36,455 16% Consolidated Year ended 30 June 2019 $’000 Year ended 30 June 2018 $’000 3,181 3,213 (25) 309 36 749 (101) 4,149 – (17) 110 214 (339) 3,181 Consolidated Year ended 30 June 2019 $’000 Year ended 30 June 2018 $’000 11,783 (206) 3,682 52 (1,775) 13,536 9,214 – 3,636 38 (1,105) 11,783 Total borrowings Less cash and cash equivalents Net debt Total equity Total capital Gearing ratio The Group is not subject to any externally imposed capital requirements. (d) Non-controlling interests Balance at 1 July Opening balance adjustments due to adoption of AASB 15 and 9 Gain / (loss) on translation of overseas controlled entities Revaluation of land and buildings Share of net profit for the year Dividends paid Balance at 30 June (e) Retained earnings Balance at 1 July Opening balance adjustments due to adoption of AASB 15 and 9 Net profit for the year Depreciation transfer for revaluation of buildings Dividends paid Balance at 30 June 66 | Bisalloy Steel Group Limited 2019 Annual Report Notes to the Consolidated Financial Statementscontinued Consolidated Employee equity benefits reserve $’000 Foreign currency translation reserve $’000 Cash flow hedge reserve $’000 Asset revaluation reserve $’000 Equity settlement reserve $’000 Other reserves $’000 (f) Reserves At 30 June 2017 Currency translation differences Share-based payments Settlement of performance rights Net loss on cash flow hedge Depreciation transfer for revaluation of buildings Actuarial gains/(losses) Revaluation of land and buildings At 30 June 2018 Currency translation differences Share-based payments Settlement of performance rights Net loss on cash flow hedge Depreciation transfer for revaluation of buildings Actuarial gains/(losses) Revaluation of land and buildings At 30 June 2019 160 – 149 – – – – – 309 – 429 (390) – – – – (720) 206 – – – – – – (514) 1,599 – – – – – – 348 1,085 (4) 3,973 – – – 4 – – – – – – – – – – – – – – – – (38) – 165 4,100 – – – – (52) – 55 4,103 6 – – – – – – – 6 – – – – – – – 6 – – – – – – (47) – (47) – – – – – 10 – (37) Total $’000 3,415 206 149 – 4 (38) (47) 165 3,854 1,599 429 (390) – (52) 10 55 5,505 Nature and purpose of reserves Employee equity benefits reserve This reserve is used to record the value of share-based payments provided to employees and directors as part of their remuneration. Refer to note 15 for further details of these plans. Foreign currency translation reserve The foreign currency translation reserve is used to record exchange differences arising from the translation of the financial statements of foreign subsidiaries. Cash flow hedge reserve This reserve records the portion of the gain or loss on a hedging instrument in a cash flow hedge that is determined to be an effective hedge. Bisalloy Steel Group Limited 2019 Annual Report | 67 20. Contributed equity and reserves (continued) Asset Revaluation Reserve The asset revaluation reserve is used to record increases and decreases in the fair value of land and buildings (net of tax) to the extent that they offset one another. The reserve can only be used to pay dividends in limited circumstances. Equity Settlement Reserve The equity settlement reserve records the net difference between payment for shares upon the exercise of performance rights under the LTIP and the amount expensed in the profit and loss and recorded in the employee equity benefits reserve over the three year vesting period. Other Reserve Relates to actuarial losses from defined benefit pensions. 21. Commitments and contingencies (a) Capital expenditure commitments Estimated capital expenditure contracted for at balance date, but not provided for payable: Not later than one year These capital expenditure commitments relate to office refurbishment and plant upgrade works. (b) Operating lease expenditure commitments Not later than one year Later than one year, but not later than five years Later than five years Consolidated 30 June 2019 $’000 30 June 2018 $’000 594 594 197 197 Consolidated 30 June 2019 $’000 30 June 2018 $’000 289 137 – 426 250 196 – 446 These operating lease commitments relate to motor vehicle leases and rent. (c) Contingent liabilities The directors draw the following contingent liabilities to the attention of users of the financial statements: Note 22 regarding the class order between certain subsidiaries and the Company. 68 | Bisalloy Steel Group Limited 2019 Annual Report Notes to the Consolidated Financial Statementscontinued 22. Related parties A Director of the Company, Mr P J Cave, has an interest in and is a Director of Anchorage Capital Partners Pty Ltd. The terms and conditions of any transactions with Directors and their Director related entities are no more favourable than those available, or which might reasonably be expected to be available, on similar transactions to non Director related entities on arm’s length basis. The total value of the transactions during the year with Director related entities were as follows: Director P J Cave Director – related entity Anchorage Capital Partners Pty Ltd 150,000 150,000 The above amounts were paid in relation to P J Cave’s services in his capacity as a director and are included in Directors’ remuneration in the Directors’ Report. Investments Consolidated 2019 $ 2018 $ Percentage of equity interest held by the Consolidated entity 30 June 2019 % Percentage of equity interest held by the Consolidated entity 30 June 2018 % 100.00 100.00 60.00 85.00 85.00 60.00 85.00 85.00 Country of incorporation Australia Australia Indonesia Thailand Thailand United States of America 100.00 100.00 Name of parent Bisalloy Steel Group Limited Controlled entities Bisalloy Steels Pty Limited PT Bima Bisalloy Bisalloy Holdings (Thailand) Co Ltd Bisalloy (Thailand) Co Limited Bisalloy North America LLC Joint venture Bisalloy Shangang (Shandong) Steel Plate Co.,Ltd* People’s Republic of China 41.67 33.33 * Refer Note 6 for details regarding equity interest, share of interest and joint control Bisalloy Steel Group Limited 2019 Annual Report | 69 22. Related parties (continued) Entities subject to class order relief Pursuant to Class Order 2016/785, relief has been granted to Bisalloy Steels Pty Limited from the Corporations Act 2001 requirements for preparation, audit and lodgement of their financial reports. As a condition of the Class Order, Bisalloy Steel Group Limited and Bisalloy Steels Pty Limited (the “closed” Group) entered into a Deed of Cross Guarantee on the 18th April 2002. The effect of the deed is that Bisalloy Steel Group Limited has guaranteed to pay any deficiency in the event of winding up of the controlled entity. The controlled entity has also given a similar guarantee in the event that Bisalloy Steel Group Limited is wound up. The consolidated statement of profit or loss and statement of financial position of the entities which are members of the “Closed Group” are as follows: i. Consolidated Income Statement Profit from continuing operations before income tax Income tax expense Profit after income tax Accumulated profits at the beginning of the year Opening balance adjustments due to adoption of AASB 15 and 9 Depreciation transfer for revaluation of buildings Dividends provided for or paid Accumulated profits at the end of the year ii. Consolidated Balance Sheet Current assets Cash and cash equivalents Trade and other receivables Inventories Contract assets Income tax receivable Other financial assets Total current assets Non-current assets Investments Property, plant and equipment Other financial assets Total non-current assets Total assets Current liabilities Trade and other payables Income tax payable Interest bearing liabilities Employee Benefit Liabilities Contract liabilities Total current liabilities 70 | Bisalloy Steel Group Limited 2019 Annual Report Closed Group 30 June 2019 $’000 30 June 2018 $’000 3,223 (793) 2,430 5,583 (168) 38 (1,775) 6,108 413 12,967 22,543 304 273 1,239 37,739 3,820 15,598 34 19,452 57,191 5,070 (1,309) 3,761 2,889 – 38 (1,105) 5,583 1,289 17,486 15,628 – – 765 35,168 1,689 16,305 34 18,028 53,196 24,580 23,741 – 8,822 1,234 353 486 466 1,682 – 34,989 26,375 Notes to the Consolidated Financial Statementscontinued Non-current liabilities Interest bearing liabilities Other liabilities Employee Benefit Liabilities Deferred tax liability Total non-current liabilities Total liabilities NET ASSETS Shareholders’ equity Contributed equity Reserves Accumulated profits TOTAL SHAREHOLDERS’ EQUITY Closed Group 30 June 2019 $’000 30 June 2018 $’000 – – 837 1,412 2,249 37,238 19,953 12,000 1,845 6,108 19,953 6,068 – 274 1,330 7,672 34,047 19,149 11,720 1,846 5,583 19,149 The following table provides the total amount of transactions, other than amounts disclosed above, that have been entered into between the Group and related parties for the relevant financial year: Related Party Bisalloy Shangang Steel Plate (Shandong) Co.,Ltd Interest and management fees to related parties $’000 Amounts owed by related parties $’000 Amounts owed to related parties $’000 Other $’000 2019 2018 – 0 11 31 30 53 – – Terms and conditions of transactions with related parties Sales to and purchase from related parties are made in arm’s length transactions both at normal market price and on normal commercial terms. Sale and purchases with related parties during 2019 were $11,000 (2018: $31,000). Outstanding balances at year-end are unsecured. Compensation of key management personnel of the Group Short-term employee benefits Post employment benefits Other long-term benefits Termination benefits Share-based payments Total compensation paid to key management personnel Consolidated 30 June 2019 $’000 30 June 2018* $’000 2,123,949 2,180,547 133,067 116,980 – – 22,607 53,765 428,968 149,582 2,685,714 2,523,481 * Refer to page 12 of remuneration report for restatement of 2018 share based payment expense. The restatement was not material to the financial statements. Bisalloy Steel Group Limited 2019 Annual Report | 71 23. Events after the balance date No significant events after the balance sheet date. 24. Auditors’ remuneration The auditor of Bisalloy Steel Group Limited is Ernst & Young. Amounts received or due and receivable by Ernst & Young (Australia) for: – an audit or review of the financial report of the entity and any other entity in the consolidated Group 151,000 175,000 Consolidated Year ended 30 June 2019 $’000 Year ended 30 June 2018 $’000 – tax compliance and advice – assurance related – other Amounts received or due and receivable by related practices of Ernst & Young (Australia) for: – an audit or review of the financial report of any other entity in the consolidated Group – tax compliance and advice 25. Parent entity information Information relating to Bisalloy Steel Group Limited: Current assets Total assets Current liabilities Total liabilities Issued capital Accumulated losses Reserves Total shareholder’s equity Profit of the parent entity Total comprehensive income of the parent entity – – – – – – 83,000 94,000 – – 234,000 269,000 Consolidated 30 June 2019 $’000 30 June 2018 $’000 273 6,716 – 3,529 12,000 (8,849) 36 3,187 1,741 1,741 – 4,312 486 1,370 11,720 (8,814) 36 2,942 1,341 1,341 Guarantees have been entered into by the Parent entity on behalf of Bisalloy Steels Pty Limited and Bisalloy (Thailand) Co Limited. The guarantees in place cover Bisalloy Steels Pty Limited’s $22M Westpac facility and 85% of Bisalloy Thailand’s THB 3M bank overdraft facility. There are no contingent liabilities or contractual commitments as at the reporting date. 72 | Bisalloy Steel Group Limited 2019 Annual Report Notes to the Consolidated Financial Statementscontinued Directors’ Declaration In accordance with a resolution of the directors of Bisalloy Steel Group Limited, I state that: In the opinion of the directors: a. the financial statements and notes of the consolidated entity are in accordance with the Corporations Act 2001, including: (i) giving a true and fair view of the consolidated entity’s financial position as at 30 June 2019 and of its performance for the year ended on that date; and (ii) complying with Australian Accounting Standards (including the Australian Accounting Interpretations) and the Corporations Regulations 2001; b. the financial statements and notes also comply with International Financial Reporting Standards (AASB) as disclosed in note 2. c. there are reasonable grounds to believe that the company will be able to pay its debts as and when they become due and payable. d. as at the date of this declaration, there are reasonable grounds to believe that the members of the Closed Group identified in Note 22 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. e. 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 2019. On behalf of the Board Greg Albert Managing Director Sydney 27 August 2019 Bisalloy Steel Group Limited 2019 Annual Report | 73 Independent Auditor’s Report To members of Bisalloy Steel Group Limited Ernst & Young 200 George Street Sydney NSW 2000 Australia GPO Box 2646 Sydney NSW 2001 Tel: +61 2 9248 5555 Fax: +61 2 9248 5959 ey.com/au Independent Auditor's Report to the Members of Bisalloy Steel Group Limited Report on the Audit of the Financial Report Opinion We have audited the financial report of Bisalloy Steel Group Limited (the Company) and its subsidiaries (collectively the Group), which comprises the consolidated statement of financial position as at 30 June 2019, the consolidated statement of comprehensive income, consolidated statement of changes in equity and consolidated statement of cash flows for the year then ended, notes to the financial statements, including 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: a) giving a true and fair view of the consolidated financial position of the Group as at 30 June 2019 and of its consolidated financial performance for the year ended on that date; and b) 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 auditor independence requirements of the Corporations Act 2001 and the ethical requirements of the Accounting Professional and Ethical Standards Board’s APES 110 Code of Ethics for Professional Accountants (the Code) that are relevant to our audit of the financial report in Australia. We have also 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. A member firm of Ernst & Young Global Limited Liability limited by a scheme approved under Professional Standards Legislation 74 74 | Bisalloy Steel Group Limited 2019 Annual Report 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. 1. Revenue Recognition Why significant How our audit addressed the key audit matter Revenue from the sales of goods is recognised when control of the goods transfers to the customer. The Group uses a variety of shipment terms across different markets and this has an impact on the timing of when control passes. There is a higher risk that revenue could be recognised in the incorrect period for sales transactions occurring on and around the year end. The Group’s accounting policy for revenue from contracts with customers is disclosed in Note 2(r) of the financial statements. The Group has adopted AASB 15 Revenue from contracts with customers at 1 July 2018 using the modified retrospective approach, with the impact of adopting the Standard adjusted in opening retained earnings. Our audit procedures included the following: • Evaluated whether the Group’s revenue recognition accounting policies were in accordance with Australian Accounting Standards. • Assessed the effectiveness of controls over the processing of revenue transactions. • • Selected a sample of revenue transactions, with an additional focus on revenue recognised around the year end period and assessed whether revenue was recognised upon the passing of control of goods to the customer. Evaluated the Groups adoption of AASB 15 Revenue from contracts with customers including the adjustment to opening retained earnings and the disclosures in the financial statements. A member firm of Ernst & Young Global Limited Liability limited by a scheme approved under Professional Standards Legislation 75 Bisalloy Steel Group Limited 2019 Annual Report | 75 Information Other than the Financial Report and Auditor’s Report Thereon The directors are responsible for the other information. The other information comprises the information included in the Company’s 2019 Annual Report other than the financial report and our auditor’s report thereon. We obtained the Directors’ Report and the Corporate Governance Statement that are to be included in the Annual Report, prior to the date of this auditor’s report, and we expect to obtain the remaining sections of the Annual Report after the date of this auditor’s report. Our opinion on the financial report does not cover the other information and we do not and will not express any form of assurance conclusion thereon, with the exception of the Remuneration Report and our related assurance opinion. 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 on the work we have performed on the other information obtained prior to the date of this auditor’s report, 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 Company’s and the Group’s ability to continue as a going concern, disclosing, as applicable, matters relating to going concern and using the going concern basis of accounting unless the directors either intend to liquidate the Company or Group or to 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 the 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 the Australian Auditing Standards, we exercise professional judgment and maintain professional scepticism throughout the audit. We also: A member firm of Ernst & Young Global Limited Liability limited by a scheme approved under Professional Standards Legislation 76 76 | Bisalloy Steel Group Limited 2019 Annual Report Independent Auditor’s ReportTo members of Bisalloy Steel Group Limited continued • • • • • • 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 Group’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 and, based on the audit evidence obtained, whether a material uncertainty exists related to events or conditions that may cast significant doubt on the Group’s ability to continue as a going concern. If we conclude that a material uncertainty exists, we are required to draw attention in our auditor’s report to the related disclosures in the financial report or, if such disclosures are inadequate, to modify our opinion. Our conclusions are based on the audit evidence obtained up to the date of our auditor’s report. However, future events or conditions may cause the Group 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 financial report represents the underlying transactions and events in a manner that achieves fair presentation. Obtain sufficient appropriate audit evidence regarding the financial information of the entities or business activities within the Group to express an opinion on the financial report. We are responsible for the direction, supervision and performance of the Group audit. We remain solely responsible for our audit opinion. 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. A member firm of Ernst & Young Global Limited Liability limited by a scheme approved under Professional Standards Legislation 77 Bisalloy Steel Group Limited 2019 Annual Report | 77 Report on the Audit of the Remuneration Report Opinion on the Remuneration Report We have audited the Remuneration Report included in the directors’ report for the year ended 30 June 2019. In our opinion, the Remuneration report of Bisalloy Steel Group Limited for the year ended 30 June 2019, 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 Glenn Maris Partner Sydney 27 August 2019 A member firm of Ernst & Young Global Limited Liability limited by a scheme approved under Professional Standards Legislation 78 78 | Bisalloy Steel Group Limited 2019 Annual Report Independent Auditor’s ReportTo members of Bisalloy Steel Group Limited continued ASX Additional Information Additional information required by the Australian Stock Exchange Ltd and not shown elsewhere in this report is as follows. The information is current as at 31 July 2019. a. Distribution of equity securities The number of shareholders, by size of holding in each class of share are: 1 – 1,000 1,001 – 5,000 5,001 – 10,000 10,001 – 100,000 100,001 and over Total The number of shareholders holding less than a marketable parcel of shares based on a share price of $1.025 at the date of this report are There are 2,006,877 performance rights issued. Performance rights do not carry a right to vote. b. Twenty largest shareholders The number of shareholders, by size of holding in each class of share are: 1. 2. 3. 4. 5. 6. 7. 8. 9. ANCHORAGE (BSG) PTY LTD BALRON NOMINEES PTY LIMITED J P MORGAN NOMINEES AUSTRALIA LIMITED EVELIN INVESTMENTS PTY LTD SILVERSTREET PTY LTD BALRON NOMINEES PTY LTD JEJL LTD REIS PENSION & SUPER FUND OLD OTTO PTY LTD 10. INTERB INVESTMENTS PTY LTD 11. ICART HOLDINGS PTY LTD 12. MR NIGEL BURGESS & MRS YUKARI BURGESS 13. CITICORP NOMINEES PTY LIMITED 14. KILCONQUHAR SUPERANNUATION FUND PTY LTD 15. BOND STREET CUSTODIANS LTD 16. BALKIN PTY LTD (BALKIN SUPER FUND) 17. MR ROBERT JAMES KENRICK & MRS WAI NING KENRICK 18. VELKOV FUNDS MANAGEMENT PTY LTD 19. SMALLER HOLDINGS PTY LIMITED 20. SENRAB (VIC) PTY LTD Ordinary shares Number of holders Number of shares 498 552 147 249 299,908 1,314,775 1,118,965 8,288,579 45 33,729,730 1,491 44,751,957 161 44,648 Listed ordinary shares Number of shares % of ordinary shares 7,016,575 6,154,102 5,784,173 1,349,330 1,344,364 1,255,403 823,515 650,000 637,635 606,201 486,470 452,433 440,203 408,000 400,000 371,590 330,531 300,000 277,154 275,000 15.68 13.75 12.92 3.02 3.00 2.81 1.84 1.45 1.42 1.35 1.09 1.01 0.98 0.91 0.89 0.83 0.74 0.67 0.62 0.61 Bisalloy Steel Group Limited 2019 Annual Report | 79 c. Substantial Shareholders: The names of substantial shareholders who have notified the Company in accordance with section 671B of the Corporations Act 2001 are: Mr Peter Smaller, Mirond Holdings Pty Ltd, Smaller Holdings Pty Ltd, Balron Nominees Pty Ltd, Balron Nominees Pty Limited Anchorage (BSG) Pty Limited, Interb Investments Pty Ltd J P Morgan Nominees Australia Limited d. Voting Rights: All ordinary shares carry one vote per share without restriction. Fully paid Number of shares % 7,789,421 7,622,776 5,784,173 21,196,370 17.41 17.03 12.92 47.36 80 | Bisalloy Steel Group Limited 2019 Annual Report ASX Additional Informationcontinued Corporate Directory Registered Office 18 Resolution Drive Unanderra NSW 2526 Telephone: +61 (0)2 4272 0444 Facsimile: +61 (0)2 4272 0445 www.bisalloy.com.au company secretary@bisalloy.com.au Auditors Ernst & Young The EY Centre Level 34, 200 George Street Sydney NSW 2000 Telephone: +61 (0)2 9248 5555 Facsimile: +61 (0)2 9248 5575 Bankers Westpac Banking Corporation Share Registry Computershare Yarra Falls 452 Johnston Street Abbotsford VIC 3067 GPO Box 2975 Melbourne VIC 3001 Telephone (within Australia): 1300 738 768 Telephone: +61 (0)3 9415 4377 Facsimile: +61 (0)3 9473 2500 www.computershare.com Legal Advisors Minter Ellison Level 40, Governor Macquarie Tower 1 Farrer Place Sydney NSW 2000 Telephone: +61 (0)2 9921 8888 Facsimile: +61 (0)2 9921 8123 Annual General Meeting The Group will hold its 2019 Annual General Meeting in the Sir James Fairfax Room at the Radisson Blu Plaza Hotel located at 27 O’Connell Street, Sydney NSW at 11:00am on Thursday, 28 November 2019. Copies of the annual report or further information can be obtained by emailing companysecretary@bisalloy.com.au or writing to the Company Secretary at the registered office. An electronic copy of this report is available on the Company’s website. Bisalloy Steel Group Limited 2019 Annual Report | 81