Carsales.Com Ltd
Annual Report 2014

Plain-text annual report

Annual Report 2 014 ABN 91-074-444-018 Corporate directory Directors Wal Pisciotta Non-Executive Chairman Greg Roebuck Managing Director Richard Collins Non-Executive Deputy Chairman Ian Law Non-Executive Director - from beginning of the year until retired 30 September 2013 Jeffrey Browne Non-Executive Director - appointed 16 December 2013 Pat O’Sullivan Non-Executive Director Kim Anderson Non-Executive Director Steve Kloss Alternate Non-Executive Director Company secretary Cameron McIntyre Principal registered office in Australia Level 4, 449 Punt Road Richmond Vic 3121 T: +61 3 9093 8600 F: +61 3 9093 8697 W: www.carsales.com.au Share registry Computershare Ltd 452 Johnston Street Abbotsford Vic 3067 T: +61 3 9415 4000 F: +61 3 9473 2500 W: www.computershare.com External auditor PricewaterhouseCoopers Freshwater Place 2 Southbank Boulevard Southbank Vic 3006 Stock exchange carsales.com Ltd is a public company listed with the Australian Stock Exchange Limited ASX: CRZ carsales.com Ltd Annual report - 30 June 2014 Contents Chairman’s letter to shareholders Managing Director’s review of operations Directors’ report Corporate Governance Statement Financial report Directors’ declaration Independent auditor’s report to the members Shareholder information Page 7 9 13 43 55 99 100 102 Results for Announcement to the Market carsales.com Ltd Full-year ended 30 June 2014 (Previous corresponding period: Full-year ended 30 June 2013) Results for Announcement to the Market Revenue from ordinary activities Profit from ordinary activities after tax attributable to members Net profit for the period attributable to members Dividends / Distributions 2013 Final Dividend paid 2014 Interim Dividend paid 2014 Final Dividend declared Up 10% Up Up 14% 14% to to to $’000 235,602 95,457 95,457 Amount per security Franked amount per security 15.6 cents 14.7 cents 17.4 cents 15.6 cents 14.7 cents 17.4 cents Record date for determining entitlements to the dividends Dividend payable 1st October 2014 22nd October 2014 Net tangible assets Net tangible assets backing per ordinary share is 39.99 cents (2013: 30.20 cents) Other information required by Listing Rule 4.3A Other information requiring disclosure to comply with Listing Rule 4.3A is contained in the 30 June 2014 Financial Report. carsales.com Limited Annual Report - 30 June 2014 | 3 With combined new car sales volumes of close to 10 million units each year across these markets, the prospects for strong long-term growth are immense. ““Wal PisciottaChairman’s Letter to shareholders Chairman’s letter to shareholders Dear Shareholders, The Board is pleased to present to shareholders the carsales.com Ltd’s Annual Report for the financial year ending 30 June 2014. It has been a year of significant achievement and transformation at carsales and yet again we are pleased to be presenting to shareholders another year of exceptional financial performance. Some of the major financial highlights of the past 12 months include: • Revenue up 10% on previous corresponding period (pcp) from $215.1m to $235.6m. • Profit (EBITDA) up 15% on pcp from $120.1m to $138.4m. • EBITDA margins rising on pcp from 55.8% to 58.7%. • Net profit (after tax) attributable to owners of carsales.com Ltd up 14% on pcp from $83.5m to $95.5m. • Operating cash flow up 11% on pcp from $89.1m to $98.7m. The Board has declared a final 2014 dividend of 17.4 cents per share fully franked, taking the total dividends paid for the year to 32.1 cents per share. The dividend payment will have a record date of 1 October 2014 and a payment date of 22 October 2014. Each year I wonder at what point my letter to shareholders will start to become a little repetitive and every year the biggest problem I seem to have is how to squeeze a year of very significant activity into just a number of short paragraphs, so here goes once again… FY2014 will be marked as a year that amongst many things put us firmly on the global stage. With the completion of high growth investments in Brazil (Webmotors) and South Korea (SKENCARSALES) along with our continued support in South East Asia (iCar), we now have a portfolio of meaningful investments in some of the fastest evolving car markets in the world. With combined new car sales volumes of close to 10 million units each year across these markets, the prospects for strong long-term growth are immense. On the domestic front we have continued to be very busy developing both new and existing market opportunities. Our investment in Tyresales.com.au has shown good signs of material potential to build a meaningful position in the $5 billion tyre market. Likewise, our most recent announcement of the investment in Stratton Finance will strengthen our current position in the private to private finance arena and in not just cars, but across many of our other market leading verticals. Our core business remains and will continue to remain the area of greatest focus. Once again we have demonstrated the enormous capacity of our people to develop new products and features that delight our customers and consumers while at the same time continuing to set us apart from our competition. With such significant organic and inorganic growth over the twelve months, the Board has been very conscious of the stretch on management resources. One of the ways in which we have been addressing this has been by regularly spending time with executives from right across the Company and I am pleased to report to shareholders that Greg has done an excellent job in building and developing a team of such great depth and talent. As a Board we are confident that we will meet all the exciting challenges these growth opportunities will avail. While the past twelve months have been marked by significant progress and achievement they have not been without tragedy and we mourned the loss of a number of close colleagues, including Mr Ian Law who lost his battle with cancer in September last year. Ian had served on the Board on more than one occasion since 2007 and he continues to be greatly missed by all his friends at carsales. In December last year we were also very fortunate to welcome back to the carsales Board Mr Jeffrey Browne. Jeffrey’s legal background and in depth knowledge of both the advertising and media markets, as well as his experience in the automotive industry are a significant asset to the Board and we are very pleased to have him back. I say this every year and will say it once again and that is that carsales.com Ltd continues to be very well positioned for the future. We have many exciting initiatives that we look forward to bringing to market over the coming months that will enable us to continue extending and reinforcing our core capabilities while enabling the ongoing evolution and strength of our people and culture. On behalf of the Board of Directors, I would like to once again thank our customers for their continued endorsement and business; our shareholders for their ongoing encouragement and support and Greg Roebuck and his team for their ongoing passion, commitment and dedication to the Company producing yet another great year of significant achievement. Yours sincerely, Wal Pisciotta Chairman 13 August 2014 carsales.com Limited Annual Report - 30 June 2014 | 7 Managing Director’s Review of operations Managing Director’s review of operations Dear Shareholders, FY14 was as usual, an eventful year for our great business. We’ve continued to make acquisitions (more on that later) and again demonstrated our focus on world class innovation to move further ahead in our marketplaces. One of the newest members of the carsales family is www.tyresales.com.au and it’s wonderful to see this new brand have an immediate impact. Historically, the Australian tyre market has been serviced by a small number of large tyre retailers. This has resulted in widely varying price points for the same tyre even within the same franchise network. It’s also resulted in a lack of transparent pricing for the consumer. The tyresales. com.au business addresses these issues and offers simple, online, low cost, compelling prices for what is a very relevant purchase for our consumer base. Add to this, we have (effectively) Australia’s largest fitment network: our car dealers. This is truly a win-win-win for the consumer, for the car dealer and for carsales. This year was not without its challenges, with a number of car companies requiring their dealers to cease the listing of in-stock new cars on carsales (and other third party) websites. While we believe this shift has had negative outcomes for these brands, I’m very pleased that the team at carsales were able to respond so quickly to this policy shift and deliver solutions to meet the needs of our consumers. There’s no doubt the new car marketplace continues to evolve and rest assured that carsales is at the forefront of addressing the needs of the consumer, the dealers and the car companies. MediaMotive - responsible for display advertising across our network As a result of this shift in new car inventory, we saw some car companies lower their ad spend owing to a perceived reduction in new car inventory. The great thing for the Company was that consumers continued to come in their droves looking for new cars. Our “BNCA” - Brand New Cars Available - product provided a great solution for consumers in their search for the perfect car irrespective of a brand’s inventory policy. Our consumer traffic looking for new cars is continuing to grow every month as we remain the clear number one destination for anyone looking for cars. We’re confident that with so many in-market buyers, the ad spend will follow the buyers. The other verticals (bikesales/trucksales/boatsales/ etc.) continue to benefit from the need for advertisers to reach a highly qualified in-market consumer. There is NO better place for this in Australia other than on a carsales owned site. Mobile devices continue to proliferate and it’s wonderful to be able to say that our solutions are not only market leading, but award winning. Consistently rated over 4 stars (out of 5), our apps have been downloaded literally millions of times. While the screen size of mobile means advertising opportunities are fewer, the extremely high engagement and targeted audience, are very attractive to advertisers. International / Acquisition update Our International operations now include DataMotive New Zealand; Redbook New Zealand, Thailand, Malaysia and China; 30% of WebMotors Brazil; 22.9% of iCar Asia (up from 19.9% a year ago) and more recently, 49.9% of SKENCARSALES in Korea. We also acquired 50.1% of Stratton Finance in July 2014. We work closely with all our International partners and while each of them are at different stages of development, we are very pleased with our progress to date. WebMotors for example has moved their operations to the “cloud” and is poised to release an updated version of their website powered by carsales proprietary search engine: Ryvus. Our Stratton Finance investment, enables us to leverage the many synergies of a burgeoning private to private market, across not just cars, but boats/bikes/caravans/etc. and provides us with a simple, cost effective, online finance offering. Private Seller - the market place for consumers wanting to sell their cars; motorbikes etc. This year saw us migrate all of our individual sites - including all mobile sites - to a common seller platform. This provides significant benefits in functionality to all of our users irrespective of which of our sites they use. A new Showcase product provides a high profile opportunity for sellers and our Premium Plus product accommodates time-poor consumers looking for a professional photo service and assistance in the sales process. We are very proud of our vigilance and success in keeping fraud, and fraudster elements of the internet, from our site and it requires a substantial investment in technology and people, but the result is a far safer and clearly more trusted means to buy and sell. This in in stark contrast to many of our competitors who are seemingly comfortable to allow scammers to post fake ads and send fake enquiries. carsales.com Limited Annual Report - 30 June 2014 | 9 Managing Director’s review of operations (continued) Dealer - the commercial seller part of the business, includes dealers of cars, trucks, motorbikes, etc. Along with a common seller platform for consumers, we’ve invested in a completely new Autogate - the system our dealers use to manage their inventories and their enquiries. This new Autogate has been rolled out to all of our non-car dealer customers, with the rollout to car dealers about to commence. The improved functionality is extensive and will provide even more world class tools to help in the management of a dealer’s online operations. Our non-car sites now all have the option of “pay per lead” billing, which provides truly accountable advertising. This has been well received and ensures our business is aligned to the same objectives as those of our customers. DataMotive - Provides data and services to (predominantly) our dealer customers Another strong performance this year from this key part of the business. Further investment in great quality data means consumers can accurately and confidently compare cars, features, values and fit for purpose. Our high value, low cost products continue to delight our customers and add enormous value in a complex marketplace. Watch this space… As regularly demonstrated over the years, the carsales. com business prides itself on challenging the status-quo and delivering world leading innovations. This core part of our culture continues to be alive and well. By the time you are reading this, we will have launched the latest member of the carsales family and again it’s a world first: www.pitchi.com Make sure you check it out! In closing, we’ve had another great year, more world class innovations, more investment in exciting markets, an even greater lead over our competitors and continued growth in all areas of the core business. As a team we strive to be the best in the world and while it is a high benchmark, I continue to be amazed and extremely proud of what truly talented people we have delivering on this objective. I’d like to publically thank each and every one of them. Yours sincerely, Greg Roebuck Managing Director and CEO 13 August 2014 10 | carsales.com Limited Annual Report - 30 June 2014 Mobile devices continue to proliferate and it’s wonderful to be able to say that our solutions are not only market leading, but award winning.““Greg RoebuckDirectors’ Report Directors’ report Your directors present their report on the consolidated entity (referred to hereafter as the Group) consisting of carsales.com Ltd, the entities it controlled and the investments in associates at the end of, or during, the year ended 30 June 2014. Directors The following persons were directors of carsales.com Ltd during the financial year and up to the date of this report unless indicated otherwise: Wal Pisciotta (Non-Executive Chairman) Greg Roebuck (Managing Director) Richard Collins (Non-Executive Deputy Chairman) Ian Law (Non-Executive Director - from beginning of the year until retired 30 September 2013) Jeffrey Browne (Non-Executive Director - appointed 16 December 2013) Pat O’Sullivan (Non-Executive Director) Kim Anderson (Non-Executive Director) Steve Kloss (Alternate Non-Executive Director) Principal activities carsales.com Ltd principal activities during the course of the financial year consisted of online classified and display advertising. As well as this carsales provides a number of software, data and other services predominantly sold to customers in the automotive industry. There have been no significant changes in these activities during the course of the last financial year. Dividends - carsales.com Ltd Dividends paid to members during the financial year were as follows: Final fully franked cash dividend for the year ended 30 June 2013 of 15.6 cents (2012 - 13.2 cents) per share paid on 25 September 2013. Interim fully franked ordinary dividend for the year ended 30 June 2014 of 14.7 cents (2013 - 12.7 cents) per share paid on 2 April 2014. 2014 $’000 2013 $’000 37,052 45,100 34,957 29,986 72,009 75,086 In addition to the above dividends, since the end of the financial year the Directors have recommended the payment of a final ordinary dividend of $41,408,000 (17.4 cents per fully paid ordinary share) to be paid on 22 October 2014 out of retained profits at 30 June 2014. Operating and financial review Group Financial Highlights • FY2014 was another year of record financial performance with Group operating revenue rising to $235,602,000, up 10% on the prior comparative period. • Group earnings remained very strong with EBITDA up 15% on the prior comparative period to $138,410,000 and EBITDA margins expanding to 59%. • Profit attributable to the owners of carsales.com Ltd was $95,457,000, up 14% on the prior comparative period. Directors’ report carsales.com Limited Annual Report - 30 June 2014 | 13 carsales Domestic Highlights • There were a number of highlights during the course of the year which contributed to the overall performance of the business including: • Dealer revenue up 8% on pcp overall. Key growth drivers being yield and growth in customer acquisition. • Mediamotive up 8% on pcp and delivering a good result in a more challenging market. • Private revenue grew by 12% on pcp, with a particularly strong H2 as a result of yield growth in automotive, new product and a positive contribution from tyresales. • Non-automotive verticals performing well. • Marine, industry and Caravan & Camping dealer customers moved from subscription based charging models to performance based. • Dealer and Data Services once again performed strongly with revenue up 14% on pcp. • On the 15th of July the Company announced that it had acquired a 50.1% interest in Stratton Finance Pty Ltd an innovative finance business that focuses on technology and the internet as a key competitive advantage and its primary channel for new customer acquisition. stratton.com.au is now one of the highest traffic generating vehicle finance websites in Australia with over a million visitors per year. carsales International Highlights • The Company has recently acquired interests in online automotive advertising companies operating in high growth international markets. These interests include: • 49.9% in the equity of SKENCARSALES.com Ltd (South Korea) on 15/04/2014 the number one online automotive classifieds company in South Korea. • 30% in the equity of Webmotors SA (Brazil) on 28/06/2013 the number one online automotive classifieds company in Brazil. • 22.9% in the equity of iCar Asia Ltd (ASX:ICQ) on 14/03/2013 where 19.9% was acquired and a further 3% was acquired on the 05/03/2014. iCar is the largest online automotive classifieds network in South East Asia. • SKENCARSALES.com Ltd - Strong revenue growth of 35% on pcp for the two and a half months since acquiring an interest in the Company in mid April 2014. Revenue growth largely as a result of growth in dealer yield. carsales share of net profit after tax was $815,000. Significant opportunities exist in licensing carsales’ world leading technology into the Korean market and good progress is being made in establishing strategic priorities. • Webmotors SA - Revenue growth of 22% pcp predominately from dealer advertisement volume growth. carsales share of net profit after tax was $4,609,000. Technology platform has been successfully migrated to Amazon allowing significant product improvement in FY15, including the adopting of carsales Ryvus search technology. Webmotors continues to grow its market share with its combined inventory (MeuCarango, CompreAuto and WebMotors) now almost double that of its closest competitor. • iCar Asia Ltd - carsales share of net loss after tax is estimated to be ($1,990,000). carsales continues to support iCar’s position in Thailand, Indonesia and Malaysia evolve. Outlook • Domestic trading conditions in the first 6 weeks of FY2015 have remained solid. Expect to provide a more detailed trading update at the October Annual General Meeting. • Looking forward to further growth from tyresales and Stratton albeit at lower EBITDA margins than broader carsales business. In addition, further opex in these areas as well as for our new site Pitchi, will likely result in overall EBITDA margins more aligned to FY13. • Anticipate further developments in relation to new vehicle product offerings. • Development of the Stratton Finance partnership onto other verticals. • Expect to continue focus on developing the market opportunities that exist in each of the international investments. 14 | carsales.com Limited Annual Report - 30 June 2014 Directors’ report Strategy The strategy of the Company is to continue to strengthen and grow its core business units through ongoing product innovation, while pro-actively seeking opportunities to leverage developed intellectual property in other adjacent or geographic high growth markets. Risk Being a complex business in a growth market carries with it a number of risks that the Company manages including but not limited to: • Maintenance of professional reputation and brand name - The success of carsales is heavily reliant on its reputation and branding. Unforeseen issues or events, which place carsales’ reputation at risk, may impact on its future growth and profitability. • Relationship with Dealers - carsales derives a significant proportion of its revenue from motor vehicle dealers. A change in the size and/or structure of this market could impact carsales’ earnings. In particular, consolidation of the market with fewer, larger dealers or increased manufacturer control of dealer’s online advertising activity may impact upon the prospects of carsales. In addition the majority of carsales’ revenue is generated under monthly agreements with motor vehicle dealers. Should a significant number of dealers cancel or fail to renew their agreements, this may have an adverse effect on the financial performance of carsales. • Competition - the online automotive advertising industry is highly competitive. carsales’ performance could be adversely affected if existing or new competitors reduce carsales’ market share from its current level. • Downturn in the motor vehicle or general advertising market - the performance of carsales will continue to be influenced by the overall condition of the motor vehicle market. The motor vehicle market is influenced by the general condition of the Australian economy, which by its nature is cyclical and subject to change. In addition, carsales derives a significant proportion of its revenue from display advertisers on its network of websites. A decline in the advertising market as a result of broader economic influences could have a negative impact on carsales’ earnings. • Information Technology - carsales’ business operations rely on owned and 3rd party IT infrastructure and systems. Any interruptions to these operations could impair carsales’ ability to operate its customer facing websites which could have a negative impact on carsales’ performance. • carsales’ future performance will also depend on its ability to monitor and manage major projects such as website upgrades and other projects involving its IT infrastructure. • International expansion - with the expansion of the business into new high growth international geographies the Company becomes exposed to the macro economic environment of these markets outside of the traditional markets the Company has operated in. Significant changes in the state of affairs During the financial year the Company continued to expand geographically by investing in South Korea’s number one automotive classifieds company SKENCARSALES.com Ltd. The consideration for this investment was $126,475,000. The Company added to its 19.9% investment in iCar Asia Ltd in March 2014 by acquiring an additional 3% (22.9% held at 30 June 2014) of the equity in the Company at a cost of $7,179,000. Both acquisitions were funded by a combination of cash and debt. The debt was acquired by extending an existing facility held with National Australia Bank to $165,000,000. The facility matures on the 31 July 2017 and is expected to be repaid from excess cash. On 15 July 2014 the Company acquired 50.1% of Stratton Finance Pty Ltd an Australian based automotive finance company. The acquisition cost of Stratton Finance was $59,100,000. The acquisition was funded by an additional $60,000,000 debt facility held with National Australia Bank. This facility will mature on 1 July 2015. It is intended to review this facility with National Australia Bank during the course of the FY2015 financial year. Directors’ report carsales.com Limited Annual Report - 30 June 2014 | 15 Matters subsequent to the end of the financial year No other matter or circumstance has arisen since 30 June 2014 that has significantly affected, or may affect: (a) the Group’s operations in future financial years (b) the results of those operations in future financial years, or (c) the Group’s state of affairs in future financial years. Sustainability carsales.com Ltd is committed to being a corporate citizen of good standing and implementing practical sustainability programs. carsales strives to be a green company; we aim to have the lowest possible negative impact on the global or our local environment, community, society or economy. carsales core values of enjoyment, respect, integrity, trust, communication and honesty (ENRITCH) support the companies culture of ethical conduct. Over the past several months the Company has reviewed its sustainability programs and engaged key stakeholders throughout the Company to build focus and involvement. carsales contributes to the wider community through initiatives such as its Community Day program, where each employee undertakes a day of volunteering in the community on an annual basis. The Company is also committed to reducing its carbon footprint and is focused on areas such as waste management and becoming a paperless office environment. People & Culture carsales is an employer of choice and aims to continually attract and retain the most talented people that can be found in the market with the right values and expertise that fit the carsales culture. The culture of carsales is one of inclusion, encouraged diversity and where people are provided with extensive opportunities to learn and evolve in a fast paced and dynamic business environment. Several years ago, carsales implemented the ‘carsales People Promise’ which is an ongoing program and commitment of the Company to employees in the areas of culture and benefits, career development, health and wellbeing, community, work life balance and reward and recognition. Each area contains several initiatives designed towards ensuring carsales is a workplace where people work hard and are also rewarded through things other than just financial incentives. Employee engagement at carsales is a critical success factor and over time the Company has developed a number of initiatives that build engagement. Each year all staff complete an Employee Opinion Survey (EOS) that covers areas such as reward and recognition, communication, personal development and training, business ethics, leadership and engagement. The survey results are reviewed by management and communicated to each contributing department where employees discuss results and develop strategies for continuous improvement. Annually senior executives will conduct ‘Discussion Groups’ with all employees of the Company in small groups. The objective of these sessions is to provide people with a forum where they can be updated on the performance of the Company, its strategy and initiatives. People are encouraged to challenge and ask questions on these topics and feedback is discussed and actioned by senior management. In the area of training and development there are a number of programs designed to support the learning and development of employees to support both the retention and succession of our most valuable asset being our people. Some of these programs include mentoring programs, CEO Scholarship awards and extensive availability of internal training programs. Workplace Health & Safety carsales is committed to providing employees with a safe and healthy working environment. The Company has an established Work, Health & Safety (WH&S) Committee and requires all employees to undertake annual WH&S training. The compliance with WH&S training is monitored to ensure everyone is well versed and continually reminded of safe working practices. Through our health and wellbeing program within our People Promise, the Company has developed many different programs such as annual flu shots, in house massage, provision of healthy food options and counselling services to support both the physical and mental health requirements of our employees. 16 | carsales.com Limited Annual Report - 30 June 2014 Directors’ report Community Through the People Promise the Company has a number of different community focused initiatives designed to provide the company and employees with avenues to support both charity and community based causes. Some of these initiatives include the provision of company wide support of charities that employees select based on need and relevance. Over the past twelve months both the Company and employees have actively participated in raising money for: Movember Foundation - A global men’s health charity committed to changing the face of men’s health. With an official presence in 21 countries, the Movember Foundation is committed to driving significant improvements for the prioritised men’s health issues - prostate cancer, testicular cancer and mental health. Peter MacCallum Cancer Institute - A major centre for cancer treatment, professional oncologist training, and oncology research in Australia. In the area of community, employees are provided with a community day each year to enable them to participate in community based service activities. Over the past twelve months employees have participated in a number of community based activities which amongst others have supported Sacred Heart Mission, Salvation Army and the Million Paws Walk. Diversity carsales values a diverse and inclusive working environment and has developed programs which support this objective. carsales has developed a ‘Women in Leadership’ program which is designed for women in leadership roles at carsales. The purpose of the program is to connect women from different areas in the workplace so they can share their experiences and learn from one another. The network meets regularly to discuss the role of women in leadership, the challenges they are facing as well as techniques and opportunities to continue their personal and career growth. This will in turn create new role models at carsales while the shared learning will aid personal development and increase the possibility for career advancement. The Company regularly runs a program called ‘Lunch with a Leader’, that is offered to employees and enables them to hear the stories of leaders in the community and business from diverse backgrounds and ask questions. The program is designed to build knowledge and understanding of employees that have come from various backgrounds. Ethical Conduct and Corporate Governance Policy carsales core values of integrity and honesty contained within the philosophy of ENRITCH are central to the culture of the business. The business through the Employee Opinion Survey (EOS) directs employees to respond to questions relating to ethical business behaviour and company performance in this area is annually assessed by management. The Company has also developed Code of Conduct that is published on the Company shareholder website and a Whistle blower policy to ensure that employees understand their available avenues for the reporting and handling of ethical and business related issues. Environmental regulation The Group is not subject to any significant environmental regulation in respect of its activities. Directors’ report carsales.com Limited Annual Report - 30 June 2014 | 17 Information on directors Wal Pisciotta (Non-Independent Non-Executive Chairman) Appointed: 25 June 1996 Experience and expertise Wal has over 40 years experience in supplying computer services to the automotive industry and is also the Chairman of Pentana Solutions Pty Ltd. Wal holds a Bachelor of Science Degree in Business Administration from the University of Alabama (United States) and has been the Chairman of carsales.com Ltd since its inception. Interests in shares and options 14,647,129 ordinary shares held in carsales.com Ltd. No options or performance rights held over ordinary shares in carsales.com Ltd. Greg Roebuck (Managing Director) Appointed: 25 June 1996 Experience and expertise Greg was the original architect of carsales.com Ltd; has been on its Board since inception and Managing Director and CEO since May of 2002. Greg is a Fellow of the Australian Institute of Company Directors. He has over 30 years experience in providing technology solutions to the Australian Automotive Industry. Greg studied computer science at RMIT (Melbourne). In July 2009 Greg won the Ernst & Young Entrepreneur of the Year Award for the Southern Region of Australia in technology & emerging industries: software, hardware, telecommunications, digital media and health sciences. He then went on to win the Ernst & Young Entrepreneur of the Year Award for Australia in November 2009. Interests in shares and options 4,988,505 ordinary shares held in carsales.com Ltd. 866,067 options and 112,992 performance rights held over ordinary shares in carsales.com Ltd. Richard Collins (Independent Non-Executive Deputy Chairman) Appointed: 17 July 2000 Experience and expertise Richard has been a director of carsales.com Ltd since 2000 and has over 35 years experience as Dealer Principal, currently holding Ford, Toyota, Subaru, Suzuki, and Isuzu Franchises. Richard holds a Bachelor of Commerce Degree from Melbourne University. Interests in shares and options 991,750 ordinary shares held in carsales.com Ltd. No options or performance rights held over ordinary shares in carsales.com Ltd. Pat O’Sullivan (Independent Non-Executive Director) Appointed: 29 June 2007 Experience and expertise Pat was the Chief Operating Officer and Finance Director of Nine Entertainment Co Pty Limited (formerly PBL Media Pty Ltd) a position he held from February 2006 before resigning on the 29th June 2012. Before that, Pat was the Chief Financial Officer of Optus, a position he held for over five years. Previously, he held a number of positions at Goodman Fielder and Burns Philp. Pat is a member of The Institute of Chartered Accountants in Ireland and The Institute of Chartered Accountants in Australia, and is a graduate of the Harvard Business School’s Advanced Management Programme. He also served as a Director and Company Secretary of Nine Entertainment Co Pty Limited and was Chairman of Ninemsn. Pat is currently a non-executive director of iiNet, iSentia, Little Company of Mary Health Care and chairman of HealthEngine. Interests in shares and options 5,376 ordinary shares held in carsales.com Ltd. No options or performance rights held over ordinary shares in carsales.com Ltd. Ian Law (Independent Non-Executive Director) Appointed: 21 April 2011 Retired: 30 September 2013 Experience and expertise Ian was the former Chief Executive Officer of PBL Media (now Nine Entertainment Co Pty Limited). Prior to his career at PBL Media, Ian was CEO of ACP Magazines Ltd. His previous roles included Managing Director and Chief Executive Officer of West Australian Newspaper Holdings Ltd; and Chairman of Ninemsn Limited. Ian had more than 30 years experience in the publishing and broadcasting industry; and also had extensive experience in the online and digital sector. Interests in shares and options No ordinary shares held in carsales.com Ltd. No options or performance rights held over ordinary shares in carsales.com Ltd. Kim Anderson (Independent Non-Executive Director) Appointed: 16 June 2010 Experience and expertise Kim is the Chief Executive Officer of The Reading Room (thereadingroom.com), a community/social networking site for readers and is a Non-Executive Director of the STW Group, and a member of the Sydney University Press Advisory Board. Kim has more than 28 years experience in various advertising and media executive positions within companies such as Southern Star Entertainment, PBL and Ninemsn. Interests in shares and options 10,000 ordinary shares held in carsales.com Ltd. No options or performance rights held over ordinary shares in carsales.com Ltd. 18 | carsales.com Limited Annual Report - 30 June 2014 Directors’ report Jeffrey Browne (Independent Non-Executive Director) Appointed: 16 December 2013 Experience and expertise Jeffrey practiced as a commercial lawyer in Sydney and Melbourne for 22 years before joining the Nine television Network, initially as Executive Director and later becoming Managing Director, with responsibility for all Network operations. His legal experience saw him involved in a wide range of matters concerning dealers and motor vehicle manufacturers as well other multi-national OEM’s. Jeffrey is also Chairman of Holden Special Vehicles where he has been a director or Chairman for over 12 years. Jeffrey’s media experience includes broad management responsibilities and the development and implementation of new broadcast and digital platforms. Interests in shares and options No ordinary shares held in carsales.com Ltd. No options or performance rights held over ordinary shares in carsales.com Ltd. Steve Kloss (Alternate Non-Executive Director) Appointed: 28 October 2005 Experience and expertise Steve has more than 24 years experience in supplying computer services to the automotive industry and is currently Chief Executive Officer at Pentana Solutions Pty Ltd. Steve holds a Bachelor of Business degree from Monash University. Interests in shares and options 2,774,500 ordinary shares held in carsales.com Ltd. No options or performance rights held over ordinary shares in carsales.com Ltd. Company secretary Cameron McIntyre holds the role of Company Secretary and is the Chief Financial Officer of carsales.com Ltd. Cameron joined carsales in 2007 and has over 20 years experience in finance and administration. Cameron holds a Degree in Economics from La Trobe University (Melbourne), he is a Certified Practicing Accountant and a graduate of the Harvard Business School’s General Management Program. Interests in shares and options 206,649 ordinary shares held in carsales.com Ltd. 238,763 options and 52,260 performance rights held over ordinary shares in carsales.com Ltd. Meetings of directors The numbers of meetings of the Company’s board of directors and of each board committee held during the year ended 30 June 2014 and the numbers of meetings attended by each director were: W Pisciotta (Board Chairman) G Roebuck R Collins (Chairman - Remuneration and Nomination) I Law J Browne P O'Sullivan (Chairman - Audit and Risk management) K Anderson S Kloss (Alternate Director) Full meetings of directors Meetings of committees Audit and risk Remuneration and nomination A 13 16 14 3 7 16 15 12 B 16 16 16 5 7 16 16 16 A ** ** 3 0 ** 4 4 ** B ** ** 4 1 ** 4 4 ** A 2 ** 1 0 ** 1 ** ** B 2 ** 2 1 ** 1 ** ** A = Number of meetings attended B = Number of meetings held during the time the director held office or was a member of the committee during the year ** = Not a member of the relevant committee Directors’ report carsales.com Limited Annual Report - 30 June 2014 | 19 Remuneration report The remuneration report is set out under the following main headings: Principles used to determine the nature and amount of remuneration. Details of remuneration. Service agreements. Share-based compensation. Additional information. The information provided in this remuneration report has been audited as required by section 308(3C) of the Corporations Act 2001. Principles used to determine the nature and amount of remuneration The objective of the Group’s executive reward framework is to ensure reward for performance is competitive and appropriate for the results delivered. The framework aligns executive reward with achievement of strategic objectives, the creation of value for shareholders and conforms with market practice for delivery of reward. The Board ensures that executive reward satisfies the following key criteria for good reward governance practices: • Competitiveness and reasonableness. • Acceptability to shareholders. • Performance linkage / alignment of executive compensation. • Transparency. In consultation with external remuneration consultants, the Company has structured an executive remuneration framework that is market competitive and complimentary to the reward strategy of the organisation. Alignment to shareholders’ interests: • Has economic profit as a core component of plan design. • Focuses on sustained growth in shareholder wealth, consisting of dividends, growth in share price and delivering constant return on assets as well as focusing the executive on key non-financial drivers of value. • Attracts and retains high calibre executives. Alignment to program participants’ interests: • Rewards capability and experience. • Reflects competitive reward for contribution to growth in shareholder wealth. • Provides a clear structure for earning rewards. • Provides recognition for contribution to operational performance. The framework provides a mix of fixed and variable pay along with a blend of short-term and long-term incentives. As executives gain seniority within the Group, the balance of this mix shifts to a higher proportion of ‘’at risk’’ rewards. The Board has established a remuneration and nomination committee which provides advice on remuneration, incentive policies and practices, as well as specific recommendations on remuneration packages and other terms of employment for the Managing Director, other senior executives and non-executive directors. Non-executive directors Fees and payments to non-executive directors reflect the demands which are made on, and the responsibilities of, the Directors. Directors’ fees The current base remuneration was last approved by shareholders at the Annual General Meeting held on 26 October 2012. Non-executive directors’ fees are determined within an aggregate directors’ fee pool limit, which is periodically recommended for approval by shareholders. The maximum payable to be shared by all non-executive directors currently stands at $900,000 per annum. The Directors determine how these are to be shared by the Directors. The Board will from time to time invite a remuneration specialist to conduct a review and benchmarking of fees. The annualised fees paid to the Board are comfortably below the $900,000 pool approved by shareholders. 20 | carsales.com Limited Annual Report - 30 June 2014 Directors’ report The following fee table applies: Chairman fee Deputy Chairman fee Base Director fee Alternate Director fee First Committee Second Committee $ 157,162 115,000 102,497 51,250 10,250 13,666 Executive pay In May 2013, the Board concluded a review of the carsales.com Short-term Incentive (“STI”) and Long-term Incentive (“LTI”) programs. The review was conducted with the assistance of remuneration consultant Hay Group. The objective of the Hay Group engagement was to critically evaluate the executive incentive program in particular the LTI program to ensure that its structure: • Supports the retention of KMPs • Drives long-term Shareholder value creation • Aligns broadly with the expectations of Shareholders, while at the same time not hindering the strategic objectives of the Company. As a result of this review the Board identified a number of enhancements to the Company’s current remuneration framework outlined below including the introduction of a Deferred Short-term Incentive (“DSTI”) structure. The objective of the DSTI is to more closely align executive remuneration to best practice, strengthen alignment to long-term shareholder interests and support the longer term retention of key executives. The executive pay and reward framework has five components: • Base pay and benefits • Short-term performance incentive • Deferred Short-term Incentive • Long-term Incentive • Other remuneration such as superannuation. Base pay and benefits Structured as a total employment cost package which may be delivered as a combination of cash and prescribed non-financial benefits at the executives’ discretion. Executives are offered a competitive base pay that comprises the fixed component of pay and rewards. External remuneration consultants are engaged from time to time provide analysis and advice to ensure base pay is set to reflect the market for a comparable role. Base pay for executives is reviewed annually to ensure the executive’s pay is competitive within the market. An executive’s pay is also reviewed on promotion. There are no guaranteed base pay increases included in any executive’s contract. Benefits Executives receive salary continuance insurance cover that is also provided to all other carsales employees. The policy is held with OnePath Life Ltd Executives may structure their remuneration to include benefits such as car allowances. Superannuation Retirement benefits are provided via defined contributions to approved superannuation funds. Under current legislation carsales permits superannuation choice for all employees. The Company default superannuation fund is held with Asteron. Other retirement benefits may be provided directly by the Group if approved by shareholders. Short-term Incentives (STI) Short-term Incentives (STI) are paid to key executives in the form of an annual cash payment on the achievement of objectives as described below. The size of the STI opportunity available to each key executive is based on their accountabilities and impact of the role on the organisation or business unit(s) that they lead. Directors’ report carsales.com Limited Annual Report - 30 June 2014 | 21 The Remuneration and Nomination Committee regularly considers appropriate targets and key performance indicators (KPI’s) to link the STI plan and the level of payout if targets are met. This includes setting any maximum payout under the STI plan, and minimum levels of performance to trigger payment of an STI. The Committee may also make recommendations to the Board for discretionary STI payments in rare circumstances where an executive performance warrants it. The KPI’s linked to STI plans contain 3 major components and within each component are a series of objectives: • Financial performance (50 - 75% of On-target Earnings Value): The financial objectives set against key executives relate to performance against the Board approved annual budget. The targets set in this component of the plan will normally relate to the achievement against: (a) (b) (c) Company Revenue Company EBITDA Business Revenue and EBITDA, where relevant. This section of the plan also enables the executive to earn up to an additional 75% of on-target earnings for over achievement against each of the above mentioned objectives. Budgeted financial objectives are always set in the context of ensuring that the Company is mindful of expected consensus earnings. • Project delivery (15 - 50% of On-target Earnings Value): The project objectives set involve the execution of pre-determined project targets that each key executive is responsible for the delivery of. Projects will include the deployment of new products, large business initiatives or market objectives. There is no ability for a key executive to earn more than the on-target KPI value in this section of the plan. • People & culture (10 - 15% of On-target Earnings Value): carsales is a business that prides itself on having a highly engaged and motivated workforce with a strong sense of values, culture and passion for what we do. The people and culture section of the plan is designed to ensure that key management are incented to nurture and build on these principles and values. Each key executive has performance objectives which include: (a) Development and maintenance of succession plans (b) Salary and performance reviews being completed on a timely basis (c) Staff retention rates (d) Annual Employee Opinion Survey results performance There is no ability for a key executive to earn more than the on-target KPI value in this section of the plan. The Remuneration and Nomination Committee is responsible for assessing whether the KPI’s are met and whether or not STI’s will be paid. The STI payments may be adjusted up or down in line with under or over achievement against the target performance levels. This is at the discretion of the Remuneration and Nomination Committee. The review of STI targets and payments is conducted on an annual basis. Key executives that leave during the financial year are paid a pro-rata share of their STI entitlements unless their departure is under adverse conditions. Deferred Short-term Incentive (DSTI) Deferred Short-term Incentives (DSTI) are paid to key executives in the form of an annual award of performance rights on the achievement of the objectives outlined below and are not exercisable for a further 12 months. The size of the DSTI opportunity available to each executive, like the STI, is based on the accountabilities and impact of the executives’ role in the organisation. The vesting of a DSTI award is linked entirely to the achievement of an Earnings Per Share (EPS) objective that is set each year by the Board. The EPS target value established takes into consideration both the annual budget earnings objectives and market determined consensus earnings expectations. Please see share-based compensation for further information. 22 | carsales.com Limited Annual Report - 30 June 2014 Directors’ report Long-term Incentives (LTI) Long-term Incentives are provided to certain employees via the carsales.com Ltd Employee Option Plan. See share-based compensation for further information. Group Performance The graph below shows the Group’s profitability (Revenue and EBIT) over the past five years. FY 2014 FY 2013 FY 2012 FY 2011 FY 2010 $135.1 $117.6 $235.6 $215.1 $184.2 $152.5 $97.9 $81.1 $123.1 $62.2 The EBIT excludes the share of gains and losses from associates. $ Millions Revenue EBIT The following table shows relationship between remuneration of key management personnel and carsales.com Ltd performance: 2010 2011 2012 2013 2014 Profit for the year attributable to owners of carsales.com Ltd ($'000) 43,235 58,260 71,589 83,516 95,457 Basic earnings per share (cents) 18.6 25.0 30.6 35.5 40.2 Dividend payments ($'000) 33,408 41,346 51,035 75,086 72,009 Dividend payout ratio (%) Increase/(decrease) in share price (%) Total KMP incentives as percentage of profit for the year (%) 77.3 19.3 4.0 71.0 (1.3) 4.2 71.3 27.7 4.4 89.9 75.4 57.2 3.4 15.5 3.8 Directors’ report carsales.com Limited Annual Report - 30 June 2014 | 23 Details of Remuneration Amounts of remuneration Details of the remuneration of directors, key management personnel of the Group (as defined in AASB 124 Related Party Disclosures) and specified executives of carsales.com Ltd and the carsales.com Ltd Group are set out in the following tables. The cash bonuses are dependent on the satisfaction of performance conditions as set out in the section headed “Short-term Incentives” and “Deferred Short-term Incentives” above and payments against performance caps are set out below. LTI’s are dependent on the satisfaction of EPS and employment conditions as set out in the section headed “Share-based payments” later in the report. All other elements of remuneration are not directly related to performance. The key management personnel of the Group are the Directors of carsales.com Ltd (see pages 18 -19 above) and those key executives that report directly to the Managing Director being: • Cameron McIntyre Chief Financial Officer, Company Secretary • Damian Hardy Dealer & Data Services Director • Anthony Saines Commercial Director • Ajay Bhatia Chief Information Officer • Paul Barlow Strategy Director Key management personnel Key management personnel have service agreements determining base salary, performance based cash bonuses and participation in the Company Employee Option Plan. They have no fixed employment terms and no special termination payment conditions. All agreements provide for dismissal due to gross misconduct. Remuneration is reviewed annually by the Remuneration and Nomination Committee. G Roebuck Managing Director C McIntyre Chief Financial Officer A Bhatia Chief Information Officer A Saines Commercial Director P Barlow Strategy Director D Hardy Dealer & Data Services Director Base Salary * 1,202,655 600,000 405,000 400,000 370,000 320,000 Participation in cash bonus plans Strategy Group STI plan Strategy Group STI plan Strategy Group STI plan Strategy Group STI plan Strategy Group STI plan Strategy Group STI plan Participation in DSTI plans Performance Rights Performance Rights Performance Rights Performance Rights Performance Rights Performance Rights Participation in LTI plans Performance Rights and Options Performance Rights and Options Performance Rights and Options Performance Rights and Options Performance Rights and Options Performance Rights and Options Termination notice period 6 month by either party 6 month by either party 6 month by either party 6 month by either party 6 month by either party 6 month by either party Non-compete period 6 month by either party 6 month by either party 6 month by either party 6 month by either party 6 month by either party 6 month by either party * Base Salary (including superannuation) as at 30 June 2014. Key management personnel received a salary increase on 1 July 2013. 24 | carsales.com Limited Annual Report - 30 June 2014 Directors’ report Key management personnel of the Group 2014 Short-term employee benefits Deferred Short- term Incentive Post- employ- ment benefits Long- term benefits Share-based payments Non-executive directors Wal Pisciotta Richard Collins Pat O'Sullivan Ian Law Kim Anderson Jeffrey Browne Steve Kloss (Alternate) Cash salary and fees $ 167,412 127,154 103,201 28,927 103,201 51,249 51,250 Sub-total Non-executive directors 632,394 Executive director Cash bonus $ Non monetary benefits $ Perfor- mance rights $ - - - - - - - - - - - - - - - - - - - - - - - - Super- annuation $ - 11,762 9,546 2,676 9,546 - - 33,530 Long service leave $ Options $ Perfor- mance rights $ - - - - - - - - - - - - - - - - - - - - - - - - Total $ 167,412 138,916 112,747 31,603 112,747 51,249 51,250 665,924 Greg Roebuck 1,184,880 660,000 4,366 81,521 17,775 155,196 422,269 448,185 2,974,192 Other key management personnel and executives (Group) Cameron McIntyre 582,225 210,325 Damian Hardy Anthony Saines Ajay Bhatia Paul Barlow 302,225 75,208 382,225 193,775 387,225 157,881 352,225 103,844 - - - - - 67,934 35,597 37,500 37,364 17,775 17,775 17,775 17,775 20,303 173,047 203,321 1,274,930 8,429 85,361 99,292 623,887 13,413 106,979 122,214 873,881 13,470 83,481 98,249 795,445 22,418 17,775 11,381 56,376 64,956 628,975 Total key management personnel compensation (Group) 3,823,399 1,401,033 4,366 282,334 140,180 222,192 927,513 1,036,217 7,837,234 Directors’ report carsales.com Limited Annual Report - 30 June 2014 | 25 Key management personnel of the Group 2013 Short-term employee benefits Deferred Short- term Incentive Post- employ- ment benefits Long term benefits Share-based payments Cash bonus $ Non monetary benefits $ Perfor- mance rights $ Non-executive directors Wal Pisciotta Richard Collins Pat O'Sullivan Ian Law Kim Anderson Steve Kloss (Alternate) Cash salary and fees $ 156,251 115,891 96,542 118,947 96,542 47,833 Sub-total Non-executive directors 632,006 - - - - - - - - - - - - - - Executive director Greg Roebuck 951,208 550,000 39,783 Other key management personnel and executives (Group) Cameron McIntyre 552,127 170,000 Damian Hardy Anthony Saines Ajay Bhatia Paul Barlow 283,530 57,175 358,530 175,000 363,530 100,000 333,530 63,206 - - - - - Total key management personnel compensation (Group) 3,474,461 1,115,381 39,783 Super- annuation $ - 10,430 8,689 10,705 8,689 - 38,513 Long service leave $ Options $ Perfor- mance rights $ - - - - - - - - - - - - - - - - - - - - - Total $ 156,251 126,321 105,231 129,652 105,231 47,833 670,519 16,470 28,719 402,603 272,938 2,261,721 16,470 22,913 205,108 129,804 1,096,422 16,470 16,470 16,470 3,937 7,332 7,143 127,555 64,358 553,025 141,436 81,126 779,894 122,961 60,733 670,837 16,470 6,287 88,505 42,509 550,507 137,333 76,331 1,088,168 651,468 6,582,925 - - - - - - - - - - - - - - STI & DSTI Payments (cash & performance rights) achievement against on-target earning. G Roebuck C McIntyre D Hardy A Saines A Bhatia P Barlow Actual STI Payment Actual DSTI Payment $ % Paid % Forfeited $ % Paid % Forfeited 660,000 210,325 75,208 193,775 157,881 103,844 118% 140% 125% 138% 211% 138% 0% 0% 0% 0% 0% 0% 81,521 67,934 35,597 37,500 37,364 22,418 68% 68% 68% 68% 68% 68% 32% 32% 32% 32% 32% 32% 26 | carsales.com Limited Annual Report - 30 June 2014 Directors’ report STI & DSTI Payments (cash & performance rights) achievement against maximum entitlement All Key Management Personnel and Executives received grants which were less than their maximum potential STI & DSTI entitlements with the exception of Ajay Bhatia. Mr Bhatia received the following: Current Year Grant $ Name Maximum Potential STI & DSTI STI - Cash Component DSTI - Performance Rights Total Grant of STI & DSTI Paid above Maximum Potential Ajay Bhatia 166,563 157,881 37,364 195,245 29,682 Mr Bhatia received an STI payment which was $46,282 above maximum potential which was awarded by the Board as a result of Mr Bhatia’s outstanding performance in product development and innovation throughout 2014. The relative proportions of remuneration that are linked to performance and those that are fixed are as follows: Fixed remuneration At risk - STI At risk - DSTI At risk - LTI* Directors of carsales.com Ltd 2014 % 2013 % Wal Pisciotta Greg Roebuck Richard Collins Pat O'Sullivan Ian Law Kim Anderson Jeffrey Browne Steve Kloss 100 46 100 100 100 100 100 100 100 46 100 100 100 100 - 100 Other key management personnel of the Group Cameron McIntyre Damian Hardy Anthony Saines Ajay Bhatia Paul Barlow 49 52 48 52 60 53 55 49 58 65 2014 % - 22 2013 % - 24 - - - - - - 16 12 22 20 17 - - - - - - 16 10 22 15 11 2014 % 2013 % - 3 - - - - - - 5 6 4 5 4 - - - - - - - - - - - - - 2014 % - 29 2013 % - 30 - - - - - - 30 30 26 23 19 - - - - - - 31 35 29 27 24 * Since the Long-term Incentive and Deferred Short-term Incentive are provided exclusively by way of options and performance rights, the percentages disclosed reflect the value of remuneration consisting of options and performance rights, based on the value expensed during the year. Service agreements There are no service agreements between the Company and its non-executive directors. The Company’s constitution requires that director’s remuneration be determined at Annual General Meetings. There are no agreements to pay benefits to non-executive directors upon termination. Remuneration and other terms of employment for the Managing Director and key management personnel are formalised in service agreements. Unless otherwise stated each of these agreements provide for the provision of base salary and in some circumstances the provision of other benefits such as commissions, cash bonuses, car allowances and where eligible participation in the Company’s Employee Option Plan. None of the agreements provide for any payment of benefits upon termination of employment, other than for accrued employee benefits and statutory or contractual notice periods. Details of payments made under the agreements are shown earlier in this note. All executives have on-going terms of agreement with the Group. Agreements can be terminated on the basis of performance, long-term illness or otherwise by agreement. Directors’ report carsales.com Limited Annual Report - 30 June 2014 | 27 Employee Share Trust In July 2011 carsales.com Ltd established an Employee Share Trust (EST) to oversee the administration of all current and future share option and performance rights plans. The Trustee of the EST is Computershare Plan Manager Pty Ltd. As well as streamlining administration of the plans, the structure enables the Trustee to buy carsales.com Ltd shares on market, or issue new carsales shares for delivery to employees exercising vested share options or performance rights. The establishment of the EST does not have any negative change to the rights of employees in the various plans, or on shareholders. Share-based compensation Options and performance rights Options and performance rights are granted under the carsales.com Ltd Employee Option Plan which was established via a prospectus lodged with ASIC in 2000. The Board of Directors determines who shall be invited to participate in the plan. Options and performance rights under this plan are issued for no cash consideration. Options and performance rights are issued subject to vesting rules and expiry periods. Options and performance rights vest on fixed dates provided that employment has not been terminated, and for senior executives, when EPS targets have been achieved. EPS targets relating to Senior Executive options and performance rights, together with the Company’s actual achievements are as follows: LTI Minimum Entitlement Maximum Entitlement Actual Achieved Grant Year ending 30 June 2012 Year ending 30 June 2013 Vesting Date Aug-12 Aug-13 Aug-14 Aug-14 % payable EPS target % payable EPS target % payable EPS 50% 50% 50% 50% 0.282 0.329 0.375 0.366 100% 100% 100% 100% 0.296 0.346 0.395 0.402 100% 100% 100% 100% 0.306 0.355 0.402 0.402 DSTI Minimum Entitlement Maximum Entitlement Actual Achieved Grant Vesting Date % payable EPS target % payable EPS target % payable EPS Year ending 30 June 2014 Aug-14 50% 0.396 100% 0.416 68% 0.402 The exercise price of each option is fixed by the Board of Directors when the options and performance rights are issued. Amounts received on the exercise of options are recognised as share capital. The performance rights have a $0 exercise price and are converted to shares when all vesting conditions have been met. Options and performance rights granted under the plan carry no dividend or voting rights. Senior executives who leave the Company have 30 days from their date of departure to exercise any vested options they may be holding unless such departure is under adverse conditions. In exceptional circumstances, and at the Board’s discretion, senior executives may be allowed to exercise unvested options in future periods when they vest. 28 | carsales.com Limited Annual Report - 30 June 2014 Directors’ report Alignment of Managing Director and senior executive employees Options and performance rights issued to the Managing Director contain the same terms, conditions and performance targets as those issued to senior executive employees. The Company has each year also used its Long-term Incentive plan to issue options and performance rights to a select number of key staff members to support retention of talent. These awards are not linked to particular performance targets and vest three years from the grant date. The Deferred Short-term Incentive (DSTI) program is only available to the Managing Director and senior executive employees. Since listing on the ASX in September 2009 the Board has reviewed a number of different incentive structures that align the terms and performance target methodologies with those of respected peers in our sector, as well as the interests of shareholders in ensuring management are incented to deliver high performance outcomes over the long-term. The Company has selected EPS to be the most appropriate target on which to apply its Long-term Incentive and Deferred Short-term Incentive programs. The rationale for this choice has historically been as a result of having only a small pool of relevant peers, being other ASX listed online businesses, and the lack of liquidity in the stock of both the Company until March 2011 and some appropriate peers. The Board continues to believe that EPS is the most appropriate measure that best aligns the interest of shareholders with those of management. The following award details are outlined for all unvested grants. Deferred Short-term Incentive (DSTI) The vesting of performance rights is subject to the achievement of a financial year ending 30 June 2014 earnings per share target. The Board, in considering appropriate performance targets, believes EPS is the most effective measure in ensuring alignment with the interests of shareholders. The minimum and maximum EPS target for the performance rights to vest has been set by the Board. In considering the appropriate EPS target, the Board has used the historical earnings performance of the Company, forward looking market consensus earnings expectations and other internal forward looking plans as inputs for determining the appropriate objective. Performance Rights will not be capable of exercise if at the testing date the minimum targeted growth rate has not been achieved. 11,343 performance rights were issued to the Managing Director on 25 October 2013, with an exercise price of $0.00. These performance rights were approved by shareholders at the AGM held on 25 October 2013. In addition, 42,357 performance rights were issued to senior executives on 25th October 2013, with an exercise price of $0.00, and with the same conditions as those of the Managing Director. Performance Rights will be capable of exercise if at the testing date the EPS target has been achieved or exceeded as follows; • If the EPS achieved is equal to the minimum target, 50% of the performance rights will be capable of exercise • If the EPS achieved is between the minimum and maximum targets, vested performance rights will be capable of exercise on a pro-rata basis between 50% and 100%. • If the EPS achieved is equal to or exceeds the maximum target, 100% of the performance rights will be capable of exercise. The performance conditions applying to the Performance Rights will be tested at 30 June 2014. Subject to the performance conditions being satisfied, performance rights may be exercised after the Board releases the 2015 Annual Report to the ASX. Directors’ report carsales.com Limited Annual Report - 30 June 2014 | 29 FY2012 Award (Issue dates 26 October 2011 Managing Director, March 2012 senior executive employees) 321,034* options and 87,720* performance rights were issued to the Managing Director on 26 October 2011, with an exercise price of $4.69 for employee share options and $0.00 for performance rights. These options were approved by shareholders at the AGM held on 26 October 2011. *There was a decrease of 21,566 options and an increase of 3,811 performance rights due to a change in valuation. In addition, 716,100 options and 175,385 performance rights were issued to senior executives on 26 October 2011, with an exercise price of $4.69 for employee share options and $0.00 for performance rights, and with the same conditions as those of the Managing Director. Subject to the performance conditions being satisfied, options and performance rights may, unless otherwise waived by the Board, be exercised as follows: • 25% with a testing date 30 June 2012 (Year 1), exercisable after the Board releases the 2012 Annual Report to the ASX. • 25% with a testing date 30 June 2013 (Year 2), exercisable after the Board releases the 2013 Annual Report to the ASX. • 50% with a testing date 30 June 2014 (Year 3), exercisable after the Board releases the 2014 Annual Report to the ASX. Attributable options and performance rights which have not achieved the EPS target on the applicable testing date: • in Year 1, will be carried forward to the testing date for Year 2, • in Year 2, will be carried forward in aggregate to the testing date for Year 3, • in Year 3, will lapse. Minimum and maximum EPS targets for the options and performance rights have been set for each of the 3 years of the vesting period. The target for the third year, namely the period ending 30 June 2014, has been set at a minimum aggregate growth rate over the three year period of 24.6% and a maximum aggregate growth rate over the three year period of 29.9%. Options and performance rights will be capable of exercise in tranches if, at the relevant testing date, the EPS target for the relevant period has been achieved or exceeded as follows: • If the EPS achieved is equal to the minimum target, 50% of the vested options and performance rights will be capable of exercise. • If the EPS achieved is equal to or exceeds the maximum target, 100% of the vested options and performance rights will be capable of exercise. • If the EPS achieved is between the minimum and maximum targets, vested options and performance rights will be capable of exercise on a pro-rata basis between 50% and 100%. 216,005 options and 68,873 performance rights were issued to several other select employees on 25 March 2012. The expiry date of this award is five years from the grant date. 30 | carsales.com Limited Annual Report - 30 June 2014 Directors’ report FY2013 Award (Issue date 26 October 2012 Managing Director, and senior executive employees) 198,603 options and 69,640 performance rights were issued to the Managing Director on 26 October 2012, with an exercise price of $5.93 for employee share options and $0.00 for performance rights. These options were approved by shareholders at the AGM held on 26 October 2012. In addition, 346,406 options and 121,466 performance rights were issued to senior executives on 26 October 2012, with an exercise price of $5.93 for employee share options and $0.00 for performance rights, and with the same conditions as those of the Managing Director. Subject to the performance conditions being satisfied, options and performance rights may, unless otherwise waived by the Board, be exercised as follows: • 40% with a testing date 30 June 2014 (Year 2), exercisable after the Board releases the 2014 Annual Report to the ASX. • 60% with a testing date 30 June 2015 (Year 3), exercisable after the Board releases the 2015 Annual Report to the ASX. Attributable options and performance rights which have not achieved the EPS target on the applicable testing date: • in Year 2, will be carried forward in aggregate to the testing date for Year 3, • in Year 3, will lapse. Minimum and maximum EPS targets for the options and performance rights have been set for each of the 2 years of the vesting period. The target for the third year, namely the period ending 30 June 2015, has been set at a minimum aggregate growth rate over the three year period of 15.2% and a maximum aggregate growth rate over the three year period of 24.0%. Options and performance rights will be capable of exercise in tranches if, at the relevant testing date, the EPS target for the relevant period has been achieved or exceeded as follows: • If the EPS achieved is equal to the minimum target, 50% of the vested options and performance rights will be capable of exercise. • If the EPS achieved is equal to or exceeds the maximum target, 100% of the vested options and performance rights will be capable of exercise. • If the EPS achieved is between the minimum and maximum targets, vested options and performance rights will be capable of exercise on a pro-rata basis between 50% and 100%. 182,863 options and 66,117 performance rights were issued to several other select employees on the 26th October 2012. The expiry date of this award is five years from the grant date. Directors’ report carsales.com Limited Annual Report - 30 June 2014 | 31 FY2014 Award (Issue date 25 October 2013 Managing Director and senior executive employees) 134,213 options and 50,874 performance rights were issued to the Managing Director on 25 October 2013, with an exercise price of $9.10 for employee share options and $0.00 for performance rights. These options were approved by shareholders at the AGM held on 25 October 2013. In addition, 168,404 options and 63,835 performance rights were issued to senior executives on 25th October 2013, with an exercise price of $9.10 for employee share options and $0.00 for performance rights, and with the same conditions as those of the Managing Director. The vesting of the options and performance rights issued are subject to the achievement of an EPS target with a testing date of 30 June 2016 and are exercisable after the Board releases the 2016 Annual Report to the ASX. The minimum and maximum EPS target for the Options and Performance Rights have been set by the Board. In considering the appropriate EPS target, the Board has used the historical earnings performance of the Company, forward looking market consensus earnings expectations and other internal forward looking plans as inputs for determining the appropriate objective. The minimum EPS target required for any of the awarded Options and Performance Rights to vest is a target that will require the Company to achieve an EPS value that will reflect double digit compound annual growth rate (“CAGR”) in EPS between the baseline year ending 30 June 2013 and the testing year ending 30 June 2016. The Company will publish in the FY2016 Annual Report the minimum and maximum EPS target that was applicable to the grant, along with the actual EPS achieved by the Company in that relevant year. Options and performance rights will be capable of exercise, at the relevant testing date, the EPS target for the relevant period has been achieved or exceeded as follows: • If the EPS achieved is equal to the minimum target, 50% of the vested options and performance rights will be capable of exercise. • If the EPS achieved is equal to or exceeds the maximum target, 100% of the vested options and performance rights will be capable of exercise. • If the EPS achieved is between the minimum and maximum targets, vested options and performance rights will be capable of exercise on a pro-rata basis between 50% and 100%. 105,456 options and 82,331 performance rights were issued to several other select employees on the 25th October 2013. The expiry date of this award is five years from the grant date. 32 | carsales.com Limited Annual Report - 30 June 2014 Directors’ report The terms and conditions of each grant of options and performance rights affecting remuneration in the current or a future reporting period are as follows: Grant date Date exercisable Expiry date Exercise price Value at grant date % Vested Performance achieved July 2007 July 2007 June 2009 June 2014 June 2009 September 2014 March 2010 October 2012 October 2014 October 2010 August 2011 October 2015 October 2010 August 2012 October 2015 October 2010 August 2013 October 2015 October 2011 October 2011 August 2012 October 2016 August 2013 October 2016 October 2011 August 2014 October 2016 October 2011 August 2013 October 2016 October 2011 August 2014 October 2016 $1.75 $1.75 $3.89 $4.90 $4.90 $4.90 $4.69 $4.69 $4.69 $0.00 $0.00 $0.55 $0.55 $2.01 $0.95 $1.16 $1.32 $0.96 $1.10 $1.19 $4.54 $4.36 October 2012 August 2014 October 2017 $5.93 $2.33 October 2012 August 2015 October 2017 $5.93 $2.43 October 2012 August 2014 October 2017 $0.00 $6.96 October 2012 August 2015 October 2017 $0.00 $6.73 October 2013 August 2016 October 2018 $9.10 $3.91 October 2013 August 2015 October 2018 $0.00 $10.58 October 2013 August 2016 October 2018 $0.00 $10.32 100 100 100 100 100 100 100 100 N/A 100 N/A N/A N/A N/A N/A N/A N/A N/A Yes Yes Yes Yes Yes Yes Yes Yes To be determined Yes To be determined To be determined To be determined To be determined To be determined To be determined To be determined To be determined $0.00 exercise price represents performance rights. When exercisable, each option is convertible into one ordinary share upon payment of the exercise price by the option holder, provided that the option holder complies with the rules of the carsales.com Ltd Employee Option Plan. Performance rights will automatically be converted to one ordinary share upon the vesting date provided the holder complies with the rules of carsales.com Ltd Employee Option Plan. Options and performance rights not exercised expire where (a) the expiry date applicable to the option or performance right is reached, (b) 30 days post the employee ceasing to be employed by carsales.com Ltd or their employment is terminated, (c) where EPS vesting conditions are not met, or (d) where there has been a special circumstance, then within 90 days after that special circumstance has occurred or as specified by the Board. Details of options and performance rights granted over ordinary shares in the Company provided as remuneration to each director of carsales.com Ltd and each of the key management personnel of the Parent Entity and the Group are set out below. Further information on the options and performance rights is set out in note 31 to the financial statements. Directors’ report carsales.com Limited Annual Report - 30 June 2014 | 33 Executive director G Roebuck Other Key management personnel and executives (Group) C McIntyre D Hardy A Saines A Bhatia P Barlow Number of options granted during the year 2014 Number of performance rights granted during the year 2014 $ Value of options at grant date 2014 $ Value of performance rights at grant date 2014 Number of options and performance rights vested during the year 2014 134,213 62,217 525,001 644,996 354,709 44,738 19,173 25,564 19,173 12,782 26,411 12,221 14,908 12,467 7,964 175,002 275,004 74,999 99,999 74,999 49,999 127,401 155,199 130,004 82,995 156,649 102,899 110,405 100,067 68,552 Shares provided on exercise of remuneration options and performance rights Details of ordinary shares in the Company provided as a result of the exercise of options by each director of carsales.com Ltd and other key management personnel of the Group are set out below. Date of exercise of options and performance rights Number of ordinary shares issued on exercise of options and performance rights during the year Value at exercise date * Directors of carsales.com Ltd G Roebuck August 2013 374,450 2,418,684 Other key management personnel and executives of the Group C McIntyre D Hardy A Saines A Bhatia P Barlow August 2013 August 2013 August 2013 August 2013 August 2013 156,649 170,914 110,405 100,067 229,370 1,001,936 1,110,128 700,956 617,721 1,561,236 * The value at the exercise date of options and performance rights that were granted as part of remuneration and were exercised during the year has been determined as the intrinsic value of the options and performance rights at that date. The amounts paid per ordinary share by each director and other key management personnel on the exercise of options and performance rights at the date of exercise were as follows: Exercise date August 2013 August 2013 August 2013 August 2013 Amount paid per share $3.89 $4.90 $4.69 $0.00 No amounts are unpaid on any shares issued on the exercise of option. Additional information Details of remuneration: Share-based compensation benefits For each grant of options and performance rights, the percentage of the available grant that vested, in the financial year, and the percentage that was forfeited because the person did not meet the service and performance criteria is set out below. The vesting periods for options and performance rights are detailed above. No options and performance rights will vest if the conditions are not satisfied, hence the minimum value of the options and performance rights yet to vest is nil. The value of the options and performance rights yet to vest has been determined as the amount of the grant date fair value of the options and performance rights that is yet to be expensed. 34 | carsales.com Limited Annual Report - 30 June 2014 Directors’ report G Roebuck C McIntyre D Hardy A Saines A Bhatia P Barlow Share-based compensation benefits (options and performance rights) Financial year granted 2011 2012 2012 2013 2013 2014 2014 2011 2012 2012 2013 2013 2014 2014 2011 2012 2012 2013 2013 2014 2014 2011 2012 2012 2013 2013 2014 2014 2011 2012 2012 2013 2013 2014 2014 2011 2012 2012 2013 2013 2014 2014 Vested % 100 100 - - - - - 100 100 - - - - - 100 100 - - - - - 100 100 - - - - - 100 100 - - - - - 100 100 - - - - - Forfeited % Financial years in which grant may vest Minimum total value of grant yet to vest $ Maximum total value of grant yet to vest $ - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - 2015* 2015* 2016* 2016* 2017* 2015* 2015* 2016* 2016* 2017* 2015* 2015* 2016* 2016* 2017* 2015* 2015* 2016* 2016* 2017* 2015* 2015* 2016* 2016* 2017* 2015* 2015* 2016* 2016* 2017* - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - 22,205 34,546 234,706 76,364 802,939 - - 11,457 14,546 98,824 63,640 267,648 - - 5,642 7,272 49,412 33,345 114,706 - - 7,160 9,090 61,764 35,129 152,938 - - 5,070 7,272 49,412 35,001 114,706 - - 3,752 4,764 32,364 20,998 76,469 * Vesting is contingent upon board approval. Options are exercisable after the Board release the results to ASX in August each year. Directors’ report carsales.com Limited Annual Report - 30 June 2014 | 35 The following tables show the number of: (i) Option holdings and performance rights The numbers of options and performance rights over ordinary shares in the Company held during the financial year by each director of carsales.com Ltd and other key management personnel of the Company, including their personally related parties, are set out below. 2014 Directors of carsales.com Ltd W Pisciotta R Collins G Roebuck P O'Sullivan I Law S Kloss (Alternate) K Anderson - - - - Other key management personnel of the Group D Hardy C McIntyre A Saines A Bhatia P Barlow (ii) Share holdings 280,049 376,523 247,826 203,855 301,379 Balance at start of the year Granted as compensation (including performance rights) Exercised Balance at end of the year Vested and exercisable Unvested - - - - - - - - - - - - 1,157,079 196,430 (374,450) 979,059 310,517 668,542 - - - - 31,394 71,149 40,472 31,640 20,746 - - - - - - - - (170,914) (156,649) (110,405) (100,067) (229,370) 140,529 291,023 177,893 135,428 92,755 - - - - - - - - - - - - - 140,529 291,023 177,893 135,428 92,755 The numbers of shares in the Company held during the financial year by each director of carsales.com Ltd and other key management personnel of the Group, including their personally related parties, are set out below. There were no shares granted during the reporting period as compensation. 2014 Directors of carsales.com Ltd Ordinary shares W Pisciotta R Collins G Roebuck S Kloss (Alternate) K Anderson P O'Sullivan Other key management personnel of the Group Ordinary Shares D Hardy C McIntyre A Saines A Bhatia P Barlow Balance at the start of the year Received during the year on the exercise of options Other changes during the year Balance at end of the year (101,593) 14,770,700 14,872,293 991,750 5,432,891 2,774,500 10,000 5,376 383,737 217,000 8,604 3,000 3,461 - - - 374,450 (768,836) - - - 170,914 156,649 110,405 100,067 229,370 - - - (148,078) (150,000) (103,525) (99,996) (200,376) 991,750 5,038,505 2,774,500 10,000 5,376 406,573 223,649 15,484 3,071 32,455 36 | carsales.com Limited Annual Report - 30 June 2014 Directors’ report Loans to key management personnel During the ordinary course of business Mr G Roebuck will routinely owe money to, or be owed money by, the Company for expense reimbursement. As at 30 June 2014 Mr Roebuck owed the Company $22,512.39. This amount has been paid in full. Other transactions with key management personnel (i) Directors of carsales.com Ltd W Pisciotta is a director and shareholder of Pentana, which entered into a relationship agreement with carsales. com Ltd in 2010 for the supply of data and services. Under the contract, Pentana supplies data for the exclusive use of carsales.com Ltd in return for a fixed annual payment, plus a percentage of revenues generated through Pentana Solutions. The term of the contract is 5 years from March 2010. R Collins is a shareholder of automotive dealerships which utilised the Group’s services under terms and conditions no more favourable than dealing with other customers at arm’s length in the same circumstances. Shares under option and performance rights Unissued ordinary shares of carsales.com Ltd under option at the date of this report are as follows: Date options granted Expiry date Issue price of shares Number under options Number under performance rights Jul-2007 Mar-2010 Oct-2010 Mar-2011 Oct-2011 Oct-2011 Mar-2012 Mar-2012 Oct-2012 Oct-2012 Oct-2012 Oct-2012 Oct-2013 Oct-2013 Oct-2013 Oct-2013 Sep-2014 Oct-2014 Oct-2015 Oct-2015 Oct-2016 Aug-2014 Mar-2017 Mar-2015 Oct-2017 Aug-2014 Aug-2015 Oct-2015 Oct-2018 Aug-2015 Aug-2016 Oct-2016 $1.75 $3.89 $4.90 $4.90 $4.69 $0.00 $4.69 $0.00 $5.93 $0.00 $0.00 $0.00 $9.10 $0.00 $0.00 5,000 30,625 175,000 100,000 659,387 164,283 710,338 406,156 133,735 52,379 74,888 116,219 59,805 53,700 114,709 39,247 No option or performance rights holder has any right under the options or performance rights to participate in any other share issue of the Company. No options or performance rights have been issued post 30 June 2014. 2,250,839 644,682 Directors’ report carsales.com Limited Annual Report - 30 June 2014 | 37 Shares issued on the exercise of options and performance rights The following ordinary shares of carsales.com Ltd were issued during the year ended 30 June 2014 on the exercise of options granted under the carsales.com Ltd Employee Option Plan. No amounts are unpaid on any of the shares. Date options and performance rights exercised Issue price of shares Number of shares issued Jul-2013 Jul-2013 Aug-2013 Aug-2013 Aug-2013 Aug-2013 Aug-2013 Aug-2013 Sep-2013 Sep-2013 Oct-2013 Nov-2013 Dec-2013 May-2014 May-2014 $2.00 $3.89 $0.00 $1.75 $2.00 $3.89 $4.69 $4.90 $3.89 $2.00 $4.90 $4.90 $4.90 $4.90 $4.90 10,000 10,000 67,819 2,000 5,000 109,375 222,960 892,347 7,500 5,000 165,000 85,000 10,000 30,000 25,000 1,647,001 Insurance of officers During the financial year, carsales.com Ltd paid a D&O insurance premium of $43,859 to insure the Directors, Officers and Company Secretary of the Group. The liabilities insured are legal costs that may be incurred in defending civil or criminal proceedings that may be brought against the officers in their capacity as officers of entities in the Group, and any other payments arising from liabilities incurred by the officers in connection with such proceedings. This does not include such liabilities that arise from conduct involving a willful breach of duty by the officers or the improper use by the officers of their position or of information to gain advantage for themselves or someone else or to cause detriment to the Company. It is not possible to apportion the premium between amounts relating to the insurance against legal costs and those relating to other liabilities. Prospectus Liability Insurance covers losses (such as damages and defence costs) in respect of claims (such as proceedings) against both the Company and its directors and officers, in respect of statements and information in the prospectus and related presentations. Prospectus Liability Insurance Policies are placed for a period of up to 7 years. Indemnification of directors and officers All current directors and officers are indemnified under a deed of indemnity, insurance and access. Non-audit services The Company may decide to employ the auditor on assignments additional to their statutory audit duties where the auditor’s expertise and experience with the Company are important. Details of the amounts paid or payable to the auditor (PwC) for audit and non-audit services provided during the year are set out below. The Board of Directors has considered the position and, in accordance with advice received from the Audit and Risk Management Committee, is satisfied that the provision of the non-audit services is compatible with the general standard of independence for auditors imposed by the Corporations Act 2001. The Directors are satisfied that the provision of non-audit services by the auditor, as set out below, did not compromise the auditor independence requirements of the Corporations Act 2001 for the following reasons: • all non-audit services have been reviewed by the Audit and Risk Committee to ensure they do not impact the impartiality and objectivity of the auditor. 38 | carsales.com Limited Annual Report - 30 June 2014 Directors’ report • none of the services undermine the general principles relating to auditor independence as set out in APES 110 Code of Ethics for Professional Accountants. During the year the following fees were paid or payable for non-audit services provided by the auditor of the parent entity, its related practices and non-related audit firms: Other assurance services PwC Australian firm Due diligence services Controls assurance services Due diligence fees paid to PricewaterhouseCoopers network firms Total remuneration for other assurance services Taxation services PwC Australian firm Tax compliance services Tax consulting and tax advice on acquisitions Total remuneration for taxation services Consolidated 2014 $ 2013 $ 165,543 - 91,755 257,298 64,439 61,880 126,319 289,000 15,000 - 304,000 48,000 61,000 109,000 Total remuneration for non-audit services 383,617 413,000 Auditor’s independence declaration A copy of the auditor’s independence declaration as required under section 307C of the Corporations Act 2001 is set out on page 40. Rounding of amounts The Company is of a kind referred to in Class Order 98/100, issued by the Australian Securities and Investments Commission, relating to the ‘rounding off’ of amounts in the Director’s Report. Amounts in the Director’s Report have been rounded off in accordance with that Class Order to the nearest thousand dollars, or in certain cases, to the nearest dollar. Auditor PwC continues in office in accordance with section 327 of the Corporations Act 2001. This report is made in accordance with a resolution of directors. Wal Pisciotta Chairman Greg Roebuck Managing Director and CEO Sydney, 13 August 2014 Directors’ report carsales.com Limited Annual Report - 30 June 2014 | 39 40 | carsales.com Limited Annual Report - 30 June 2014 There’s no doubt the new car marketplace continues to evolve and rest assured that carsales is at the forefront of addressing the needs of the consumer, the dealers and the car companies.““Greg RoebuckCorporate Governance Statement Corporate Governance Statement Introduction The Board of the Company is responsible for the governance of the Company and its controlled entities (the Group). The Board is committed to achieving and demonstrating the highest standards of corporate governance and ensuring that good corporate governance is a fundamental part of the culture and business practice of the Group. The Board also continually reviews the governance framework and practices of the Company to ensure that they meet the interests of all stakeholders. A description of the Group’s main corporate governance practices are set out below. All of these practices, unless otherwise stated, were in place for the entire year. They comply with the ASX Corporate Governance Principles and Recommendations (including 2010 Amendments), unless otherwise stated. 1. Principle: Laying Solid Foundations for management and oversight 1.1 The Board of Directors The Board has adopted a formal charter that details the functions and responsibilities of the Board. A copy of the Board Charter is available in the shareholder centre of the Company website at www.carsales.com.au. 1.2 The Board’s responsibilities include: setting strategies, directions and monitoring and reviewing of these strategic objectives; reviewing and ratifying internal controls, codes of conduct and legal compliance; reviewing the Company’s accounts; • protecting and enhancing the value of the assets of the Company; • • • • approval and review of the operating budget and strategic plan for the Company; • evaluating performance and determining the remuneration of the Managing Director and senior executives; • ensuring the significant risks facing the Company have been identified and adequate control monitoring and reporting mechanisms are in place; • approval of transactions relating to acquisitions, divestments and capital expenditure above delegated authority limits; • approval of financial and dividend policy; and • appointment of the Managing Director. 1.3 Matters specifically reserved for the Board The Board has reserved for itself the following matters, which are in addition to any matters expressly required by law or other regulation to be approved by the Directors: • setting the corporate objective of the Company and approving business strategies and plans of the Company designed to meet that objective; • approving changes to the Company’s capital structure and dividend policy; • approval of the Annual Budget; • appointing and removing the Managing Director and carrying out succession planning for the Managing Director as applicable; reviewing the performance of the Managing Director, his/her remuneration and contractual arrangements; • • appointing and removing senior executives on the recommendation of the Managing Director; • Managing Director • reviewing the performance and remuneration of senior executives on the review and recommendation of the reviewing the composition of the Board and Board Committees, the independence of Directors, the Board’s performance and carrying out succession planning for the Chairman and other Non-Executive Directors; reviewing the performance of management and the Company, including in relation to the corporate governance, risk management, internal controls and compliance frameworks, systems, policies and processes adopted by the • Company; • dealing with any matters in excess of any specific delegations that the Board may from time to time delegate to the Managing Director and senior executives; and • approving the communication to shareholders and to the public of the half-year and full-year results and generally any public statements which reflect issues of the Company’s policy or strategy that the Board deems material. carsales.com Limited Annual Report - 30 June 2014 | 43 1.4 Board committees The Board has established the following Board Committees to assist it in the discharge of its responsibilities: • Audit and Risk Management Committee; and • Remuneration and Nomination Committee. Each Board Committee operates under a formal charter that is made publicly available in the shareholder centre of the Company website at www.carsales.com.au. An outline of the responsibilities of the Audit and Risk Management Committee is also contained within Section 4.1 of this Statement. An outline of the responsibilities of the Remuneration and Nomination Committee is also contained within Section 8.1 of this Statement. 1.5 Relationship between directors and management Subject to the Company’s Constitution and matters specifically reserved for the Directors, the Directors delegate responsibility for day-to-day management of the Company to the Managing Director. The Non-Executive Directors do not participate in the day to day affairs or management of the Company. 1.6 Role of the Managing Director The Managing Director has responsibility for the day-to-day management of the Company, providing leadership and managing and overseeing the interfaces between the Company and the public and to act as the principal representative for the Company. The Managing Director periodically reviews management development and will report to the Board on the outcome of these reviews on an as required basis. 1.7 Senior executive performance The performance of the Managing Director and his direct reports are evaluated annually. The Company has documented a ‘Process for evaluation of performance’ policy which is made publicly available in the shareholder centre of the Company website at www.carsales.com.au. All direct reports of the Managing Director are evaluated by the Managing Director and the performance evaluation of the Managing Director is facilitated by the Chairman, with ultimate oversight by the Board. The evaluation of the Managing Director involves an assessment of a range of factors including the overall performance of the Company and the achievement of specific pre-determined goals. During the reporting period, a performance evaluation for senior executives (including the Managing Director) has taken place in accordance with this process. 2. Principle: Structuring the Board to add value 2.1 Board size: The Company’s Constitution includes provisions for the number of directors, casual vacancies and additional directors, appointment and removal of directors by General Meeting and retirement of directors. The Company’s Constitution specifically provides that the Company is to have not less than three, nor more than 12 directors. 44 | carsales.com Limited Annual Report - 30 June 2014 2.2 Board composition The current members of the Board and their skills, experience, expertise, qualifications, term of office, relationships affecting independence, their independent status and membership of committees are set out in the Directors’ Report under the heading ‘’Information on Directors’’. At the date of this report, the Board consists of 6 directors (a majority of which are independent directors), comprising: • 4 independent non-executive directors, • 1 non-independent non-executive director, (the Chairman); and • 1 executive director being the Managing Director The Board comprises the following directors: Mr G Roebuck (Managing Director) Mr W Pisciotta (Non-Independent Non-Executive Chairman) Mr I law (Independent Non-Executive Director - retired 30 September 2013) Mr P O’Sullivan (Independent Non-Executive Director) Mr R Collins (Independent Non-Executive Director) Ms K Anderson (Independent Non-Executive Director) Mr J Browne (Independent Non-Executive Director - appointed 16 December 2013) Mr S Kloss (Alternate Non-Executive Director) 2.3 Term of office The Company’s Constitution specifies that all non-executive directors must retire from office no later than the third annual general meeting (AGM) following their last election. Where eligible, a director may stand for re- election. 2.4 Remuneration and Nomination Committee The Company’s Remuneration and Nomination Committee is responsible for assisting the Board in developing criteria for Board membership, identifying specific individuals for nomination and establishing processes for the review of the performance of individual directors and the Board as a whole. A copy of the Remuneration and Nomination Committee Charter is made publicly available in shareholder centre of the Company website at www.carsales.com.au. The Remuneration and Nomination Committee consists of the following directors: Mr R Collins - Committee Chairman (Independent) Mr W Pisciotta Mr I Law (Independent - retired 30 September 2013) Mr J Browne (Independent - appointed 27 February 2014 Mr Pat O’Sullivan (Independent - appointed 24 October 2013, resigned 27 February 2014). Details of these directors’ attendance at Remuneration and Nomination Committee meetings are set out in the Directors’ Report on page 19. The Remuneration and Nomination Committee consists of a majority of independent directors, is chaired by an independent chair and has at least 3 members. Additional detail relating to role and responsibilities of the Remuneration and Nomination Committee is contained within Section 8.1 of this statement. carsales.com Limited Annual Report - 30 June 2014 | 45 2.5 Appointment & re-election of board members The Company has developed a ‘Procedure for the selection and appointment of directors’ which is made publicly available in the shareholder centre of the Company website at www.carsales.com.au. In addition to the specific skills, knowledge and experience deemed necessary for a suitable candidate, consideration is given to: • the extent to which the candidate is likely to contribute to the overall effectiveness of the Board and work constructively with the existing directors; • the integrity of the candidate; • whether the candidate would be prepared to question, challenge and offer critiques; • whether the candidate had a proven track record of creating value for shareholders; • a commitment by the candidate to the highest standards of governance; • the nature of existing positions held by the appointee including directorships or other relationships and the impact that each may have on the appointee’s ability to exercise an independent judgment; and • whether the candidate will bring an independent point of view to the Board’s decision making process. The composition of the Board is to be reviewed annually by the Board and the Chairman is to assess the Board’s effectiveness. 2.6 Independence of directors All directors, whether independent or not, are required to act in the best interests of the Company and to exercise unfettered and independent judgment. The independence of each of the non-executive directors is reviewed, at least annually. In assessing the independence of directors, the Board has regard to the provisions of the ASX Corporate Governance Council, ‘Corporate Governance Principles and Recommendations’ (2nd ed). The Company defines an independent director as a non-executive director (i.e. not a member of management) who is free of any business or other relationship that could materially interfere with or could reasonably be perceived to materially interfere with the exercise of his or her unfettered and independent judgment and ability to act in the best interests of the Company. When assessing the independent status of a director, the Board will consider whether the Director: • is a substantial shareholder of the Company or an officer of, or otherwise associated directly with, a substantial shareholder of the Company; is employed, or has previously been employed in an executive capacity by the Company or another group • member, and there has not been a period of at least three years between ceasing such employment and serving on the Board; • has within the last three years been a principal of a material professional adviser or a material consultant to the Company or another group member, or an employee materially associated with the service provided; • is a material supplier or customer of the Company or other group member, or an officer of or otherwise associated directly or indirectly with a material supplier or customer; and • has a material contractual relationship with the Company or another group member other than as a director. In assessing each director’s independence the Board will consider the effect of a director’s business and other relationships and interests from the perspective of both the Company and the Director. The Board may determine that a director is independent notwithstanding the existence of a relationship of the kind referred to above. It is considered that all non-executive directors are independent except Mr Wal Pisciotta for the reasons set out below. Mr Wal Pisciotta, the Chairman, has been a director of the Company since inception and is a substantial shareholder of the Company. Accordingly, he is not considered to be an independent director. However, given Mr Pisciotta’s substantial experience in the car industry of over 41 years the Company believes that it is valuable to have a Chairman with such depth of experience and skill. Given the specialist nature of the Company’s activities, an independent chairman is not regarded as necessary. With regard to other non-executive directors, any real or potential conflicts of interest are dealt with by procedures consistent with Corporations Act requirements which are designed to ensure that conflicted directors do not take part in the decision-making process on relevant issues. On this basis, it is believed that their independence on all other issues is not compromised. 46 | carsales.com Limited Annual Report - 30 June 2014 2.7 Role of the Chairman The roles of the Chairman and Managing Director are separate and the Chairman is a non-executive director. The role of the Chairman are set out in the Board Charter and include being responsible for managing the Board effectively, providing leadership to the Board and being the interface with the Managing Director. The Chairman has the authority to act and speak for the Board and liaise with the Company’s stakeholders between meetings, subject to any agreed consultation processes. The Board has appointed the role of Deputy Chairman & Lead Independent Director. The role of the Deputy Chairman & Lead Independent Director is to act as the Chair of the Board in the absence of the Chairman. In instances where the Chairman may be conflicted the Deputy Chairman & Lead Independent Director will be responsible for taking a leadership role in those matters. In addition, this role will co-ordinate any assessment of the performance of the Chairman with other non-executive directors. 2.8 Director conduct When exercising their powers and responsibilities as directors, and when acting as a representative of the Company, directors are expected to comply with all relevant laws and regulations and abide by the Company’s Code of Conduct. A copy of the Company’s ‘Code of Conduct’ is made publicly available in the shareholder centre of the Company website at www.carsales.com.au. 2.9 Conflict and declaration of interests Directors are required to take all reasonable steps to avoid actual, potential or perceived conflicts of interests. The Corporations Act 2001 and the Company’s Constitution require directors to disclose any conflicts of interest and, in certain circumstances, to abstain from participating in any discussion or voting on matters in which they have a material personal interest. It is expected that directors will be sensitive to actual and perceived conflicts of interest that may arise and it is something to which they are expected to give ongoing consideration in view of the dynamic and rapidly changing nature of the Company’s business. The Board has developed procedures to be followed: • by a director who believes he or she may have a conflict of interest or material personal interest; for the holding of or the continuation of a meeting where it is proposed that a meeting will discuss any matter • which gives rise or may give rise to a conflict or a real sensible possibility of a conflict of interest; and • for the monitoring and reporting of a director’s interest to ensure that the Company complies with the obligations pursuant to the Corporations Act 2001 and the ASX Listing Rules. Entities connected with the Directors that had material business dealings with the Group during the year, are described in note 25 to the financial statements. In accordance with the Board Charter, the Directors concerned declared their interests in those dealings to the Company and took no part in decisions relating to them or the preceding discussions. In addition, those directors did not receive any papers from the Company pertaining to those dealings. 2.10 Induction and training The appointment of any new director will be made by, and in accordance with, a formal letter of appointment which details the key terms and conditions relative to that appointment. All new directors appointed undertake an induction program, coordinated by the Company Secretary, to assist them in fulfilling their duties and responsibilities. The induction program will ensure that any new director is appropriately introduced to the Company, its operations and personnel and are acquainted with the industry within which the Company operates. 2.11 Board meetings The number of Board and Board Committee meetings held during the year along with the attendance by directors is set on page 19 of this report. Meetings and proceedings of the Board are governed by the relevant provisions of the Company’s Constitution. carsales.com Limited Annual Report - 30 June 2014 | 47 2.12 Performance of the Board, its committees and individual directors The Company has developed a ‘Process for evaluation of performance’ of the Board, Board Committees, individual directors and senior executives. This process is documented and made publicly available in the shareholder centre of the Company website at www.carsales.com.au. The process involves an annual assessment of the performance of the Board, and senior executives and, for the Board, includes an assessment as to the extent to which the Board achieved its stated objectives. In relation to the performance of committees and individual directors, regular dialogue and feedback takes place during the year between the Chairman and directors. An assessment has been undertaken within the last 12 months. 2.13 Access to independent professional advice The Board and each Board Committee has authority to retain, at the Company’s expense, such legal, accounting or other advisers, consultants or experts as it considers necessary from time to time in the performance of its duties. An individual director may engage separate independent counsel or advisors, at the expense of the Company, in appropriate circumstances, with the approval of the Chairman or by resolution of the Board. 3. Principle: Promote ethical and responsible decision making The Company, including its directors and senior executives, are committed to maintaining the highest standards of integrity and seek to ensure all its activities are undertaken with efficiency, honesty and fairness. The Company also maintains a high level of transparency regarding its actions consistent with the need to maintain the confidentiality of commercial-in-confidence material and, where appropriate, to protect the shareholders’ interests. 3.1 Restrictions on dealing in securities The Company has developed a ‘Securities Trading Policy’ relating to trading in the Company’s securities by directors, officers and certain other employees of the Group. This policy is documented and made publicly available in the shareholder centre of the Company website at www.carsales.com.au. 3.2 Code of conduct The Company has developed a ‘Code of Conduct’ Policy (Code) which has been fully endorsed by the Board and applies to all directors and employees. The Code is designed to ensure that it reflects the highest standards of behaviour and professionalism and the practices necessary to maintain confidence in the Group’s integrity and to take into account legal obligations and reasonable expectations of the Company’s stakeholders. In summary, the Code requires that at all times all company personnel act with the utmost integrity, objectivity and in compliance with the letter and the spirit of the law and company policies. The Code is documented and made publicly available in the shareholder centre of the Company website at www.carsales.com.au. 3.3 Approach to diversity The Company has established a ‘Diversity Policy which is publicly available in the shareholder centre of the Company website at www.carsales.com.au. The policy includes requirements for the Board to establish measurable objectives for achieving gender diversity and for the Board to assess annually both the objectives and progress in achieving them. These objectives and progress towards achieving them are outlined below: 48 | carsales.com Limited Annual Report - 30 June 2014 Diversity policy Objectives Initiatives Outcomes Continue to grow the number of women performing senior roles from external appointments Continue to implement career development programs to prepare women within the carsales business to take on more senior roles Create an environment that women network and mentor each other to progress their careers within carsales Implement workplace flexibility programs to create a workplace that women can meet both family and work responsibilities Educating managers on the importance of a diverse workforce. In FY14, 64% of our senior leadership appointments have been women. Mentoring program, Living Leadership training and development programs The Company’s mentoring program currently consists of 53% women. Of our leadership and management programs, 33% of attendees were women and 50% of FY14 promotions within the business have been female. Women in Leadership Program This program has membership of 21 females in leadership positions from across the business. The Group has again grown this year which reflects the higher % of senior leadership appointments being women. Meetings have involved attending external leadership events and speakers, including a member of the carsales board. Paid parental leave, part time, flexible re-entry into the business from the period of parental leave In FY14, 8 members of the team took maternity leave and we are currently supporting 11 women with flexible working arrangements. On 3 June 2014, as per the Workplace Gender Equality Act 2012, we submitted our report with the Workplace Gender Equality Agency. This report provided information on our policies and gender diversity numbers across the business. This report is available on the Company shareholder website at www.carsales.com.au carsales.com Limited Annual Report - 30 June 2014 | 49 4. Principle: Safeguard integrity in financial reporting 4.1 Audit and Risk Management Committee The Audit and Risk Management Committee consists of the following non-executive directors: Mr I Law - Committee Chairman (Independent - retired 30 September 2013) Mr R Collins (Independent) Mr P O’Sullivan - Committee Chairman (Independent) Ms K Anderson (Independent) Details of these directors’ qualifications, the number of meetings of the Audit and Risk Management Committee held and director’s attendance at these meetings are detailed in the Directors’ report on page 19. The Audit and Risk Management Committee operates in accordance with a charter which is publicly available in the shareholder centre of the Company website at www.carsales.com.au. The responsibilities of the Committee include: • external reporting; • external audit; • • internal control and risk management; and related party transactions. In fulfilling its responsibilities, the Audit and Risk Management Committee: • • receives regular reports from management and the external auditors; reviews the processes the Managing Director and Chief Financial Officer have in place to support their certifications to the Board; reviews any significant disagreements between the Auditors and management, irrespective of • whether they have been resolved; • meets separately with the external auditors at least twice a year without the presence of management; and • provides external auditors with a clear line of direct communication at any time to either the Chair of the Audit and Risk Management Committee or the Chair of the Board. The Audit and Risk Management Committee has authority, within the scope of its responsibilities, to seek any information it requires from any employee or external party. 4.2 Written affirmations The Board has received from the Managing Director and the Chief Financial Officer written affirmations concerning the Company’s financial statements as set out in the Directors’ Declaration on page 99. 4.3 External audit The Company appoints external auditors who clearly demonstrate quality and independence. The Company has a process to ensure the independence and competence of the Company’s external auditor including the Audit and Risk Management Committee reviewing any non-audit work to ensure that it does not conflict with audit independence. Information on procedures for the selection and appointment of the external auditor and for the rotation of external audit engagement partners are detailed in the Committee’s Charter which is publicly available in the shareholder centre of the Company website at www.carsales.com.au. The performance of the external auditor is reviewed as required taking into consideration assessment of performance, existing value and tender costs. An analysis of fees paid to the external auditors, including a break-down of fees for non-audit services, is disclosed in note 23 to the financial statements. It is the policy of the external auditors to provide an annual declaration of their independence to the Audit and Risk Management Committee. The external auditor will attend the Annual General Meeting and be available to answer shareholder questions about the conduct of the audit and the preparation and content of the Audit Report. 50 | carsales.com Limited Annual Report - 30 June 2014 5 Principle: Making timely and balanced disclosures 5.1 Continuous disclosure The Company has established a policy that contains the key obligations of directors and employees of the Company in relation to continuous disclosure to help ensure compliance with its ASX Listing Rule and Corporations Act 2001 obligations and also to ensure accountability at a senior executive level for that compliance. As an ASX Listed entity, the Company has an obligation under the ASX Listing Rules to maintain an informed market in its securities. Accordingly, the Company ensures that the market is advised of all information required to be disclosed under the Listing Rules and the Corporations Act 2001 which the Company believes would or may have a material effect on the price or value of the Company’s securities. The policy is documented and made publicly available in the shareholder centre of the Company website at www. carsales.com.au. 6. Principle: Respect the rights of shareholders 6.1 Communicating with shareholders The Company has developed a ‘Shareholder Communication Policy’ which is publicly available in the shareholder centre of the Company website at www.carsales.com.au. The Company is committed to ensuring that shareholders, regulators and the wider investment community are informed of all major developments affecting the Company in a timely and effective manner. Information is communicated in a number of ways including: • annual and half-yearly reports; • market disclosures in accordance with the continuous disclosure protocol; • updates on operations and developments; • announcements on the Company’s website; • market briefings; and • presentation at general meetings. Shareholders are encouraged to attend and participate at the Annual General Meeting and the full text of notices and accompanying materials will be included on the Company’s website. The shareholder centre of the Company website www.carsales.com.au currently carries the following information for the shareholders: • all market announcements and related information which is posted immediately after release to the ASX; • details relating to the Company’s directors and senior executives; and • board and board committee charters and other corporate governance documents. 7. Principle: Recognising and managing risk 7.1 Risk management The Company’s Board Charter provides that it is the responsibility of the Board to ‘ensure that the significant risks facing the Company have been identified and that adequate control monitoring and reporting mechanisms are in place’. The Company’s Audit and Risk Management Charter also provides that the role of the Committee is to assist the Board in carrying out its accounting, auditing, financial reporting and risk management responsibilities. Both the ‘Board Charter’ and the ‘Audit and Risk Management Charter’ are publicly available in the shareholder centre on the Company website at www.carsales.com.au. The Company has also developed a ‘Risk Management Policy’ which is publicly available in the shareholder centre of the Company website at www.carsales.com.au. carsales.com Limited Annual Report - 30 June 2014 | 51 The Company seeks to take and manage risk in ways that will generate and protect shareholder value and recognises that the management of risk is a continual process and an integral part of the management and corporate governance of the business. The Company acknowledges that it has an obligation to all stakeholders, including shareholders, customers, employees, contractors and the wider community and that the efficient and effective management of risk is critical to the Company meeting these obligations and achieving its strategic objectives. 7.2 Written Affirmations The Board has received from the Managing Director and the Chief Financial Officer written affirmation that, to the best of their knowledge and belief, the integrity of the financial statements is founded on a sound system of risk management and internal compliance and control which implements the policies adopted by the Board and that the Company’s risk management and internal compliance and control system is operating efficiently and effectively in all material respects insofar as they relate to financial reporting risks. Management has reported to the Board as to the effectiveness of the Company’s management of its material business risks. 8. Principle: Remunerate fairly and responsibly 8.1 Remuneration and Nomination Committee The Remuneration and Nomination Committee’s purpose, duties, membership and structure are documented in the ‘Remuneration and Nomination Charter’ which is publicly available in the shareholder centre of the Company website at www.carsales.com.au. The Company has also developed a ‘Remuneration Policy’ for the Company which details how the Company remunerates its non-executive directors and senior executives. This policy is also publicly available in the shareholder centre of the Company website at www.carsales.com.au. The Company’s Remuneration Policy contains a prohibition on directors and senior executives from entering into transactions or arrangement which limits the economic risk of participating in unvested entitlements. The Remuneration and Nomination Committee consists of the following Directors: Mr R Collins - Committee Chairman (Independent) Mr W Pisciotta Mr I Law (Independent - retired 30 September 2013) Mr J Browne (Independent - appointed 27 February 2014) Mr P O’Sullivan (Independent - appointed 24 October 2013, resigned 27 February 2014) Details of these directors’ attendance at Remuneration and Nomination Committee meetings are set out in the Directors’ Report on page 19. The Remuneration and Nomination Committee consists of a majority of independent directors, is chaired by an independent chairman and has at least 3 members. The Remuneration and Nomination Committee reviews and makes recommendations to the Board on remuneration, recruitment, retention and termination policies and procedures applicable to senior executives and directors. In addition the Committee will facilitate an efficient mechanism for examination of the selection and appointment practices of the Company. When a new director is to be appointed, the Remuneration and Nomination Committee reviews the range of skills, experience and expertise on the Board, identifies its needs and prepares a short-list of candidates with appropriate skills and experience. Where necessary, advice is sought from independent search consultants. The Board then appoints the most suitable candidate who must stand for election at the next Annual General Meeting of the Company. 52 | carsales.com Limited Annual Report - 30 June 2014 The specific matters the Committee may consider include a review of: • senior executives and directors’ remuneration and incentives, including the link between company and individual performance; • current industry best practice; • different methods for remunerating senior executives and directors; • existing or proposed share option schemes or other incentive schemes; • superannuation arrangements; • retirement, termination benefits and payments for senior executives; • professional indemnity and liability insurance policies; • considering the appropriate size and composition of the Board; • consider and implement a plan for identifying, assessing and enhancing director competencies; • developing a process for evaluation of the performance of the Board, its committees and directors; • reviewing the skills, experience and expertise represented on the Board and determining whether those skills meet the required skills identified; • recommending changes to the membership of the Board; • making recommendations to the Board on candidates it considers appropriate for appointment; • • reviewing the retiring non-executive director’s performance and making recommendations to the Board as to whether the Board should support the nomination of a retiring non-executive director; and reviewing the Company’s succession planning to maintain an appropriate balance of skills, experience and expertise on the Board. 8.2 Remuneration arrangements 8.2.1 Board and non-executive directors The remuneration policy for the Board and the remuneration of each director is set out in the Remuneration Report which forms part of the Directors’ Report. 8.2.2 Senior executives Information on the performance evaluation and structure of remuneration for the Company’s senior executives can be found in the Remuneration Report, which forms part of the Directors’ Report. carsales.com Limited Annual Report - 30 June 2014 | 53 Financial Report Contents Financial statements Consolidated statement of comprehensive income Consolidated statement of financial position Consolidated statement of changes in equity Consolidated statement of cash flows Notes to the consolidated financial statements Directors’ declaration Independent auditor’s report to the members Page 56 57 58 59 60 99 100 This financial report covers the financial statement of the consolidated entity consisting of carsales.com Ltd, its subsidiaries, investments in associates and a joint venture. The financial report is presented in the Australian currency. carsales.com Ltd is a company limited by shares, incorporated and domiciled in Australia. Its registered office and principal place of business is: carsales.com Ltd Level 4, 449 Punt Road Richmond Vic 3121 A description of the nature of the consolidated entity’s operations and its principal activities is included in the Chairman’s letter to shareholders on page 7, the Managing Director’s review of operations on page 9, and in the Directors’ Report on page 13-39, each of which are not part of this financial report. The financial report was authorised for issue by the directors on 13 August 2014. The directors have the power to amend and reissue the financial report. Through the use of the internet, we have ensured that our corporate reporting is timely and complete. All press releases, financial reports and other information are available at our shareholder’s centre on our website: www.carsales.com.au For queries in relation to our reporting please call +61 (3) 9093 8600. carsales.com Limited Annual Report - 30 June 2014 | 55 Consolidated statement of comprehensive income For the year ended 30 June 2014 Notes 2014 $’000 2013 $’000 Revenue from continuing operations Sale of goods and services Other revenue from ordinary activities Revenue from continuing operations Other Income Expenses Sales and marketing expenses Operations and administration Service development and maintenance Other expenses Finance costs Share of net profit/(loss) from associates accounted for using the equity method Profit before income tax Income tax expense Profit from continuing operations Other comprehensive income Items that may be reclassified to profit or loss: 5 6 7 7 8 Exchange differences on translation of foreign operations 21(a) 235,602 474 236,076 1 215,118 1,343 216,461 5 (61,860) (57,791) (18,151) (17,182) (3,309) (3,388) 3,434 135,621 (39,349) 96,272 (20,689) (16,516) (2,553) (5) (232) 118,680 (35,164) 83,516 (1,047) 95,225 85 83,601 Total comprehensive income for the year Profit is attributable to: Owners of carsales.com Ltd Non-controlling interests Total comprehensive income for the year is attributable to: Owners of carsales.com Ltd Non-controlling interests Earnings per share based on profit from continuing operations, attributable to the ordinary equity holders of the parent entity: Basic earnings per share Diluted earnings per share 95,457 83,516 27(b) 815 - 96,272 83,516 27(b) 94,410 815 95,225 83,601 - 83,601 Cents Cents 30 30 40.2 40.0 35.5 35.2 The above consolidated statement of comprehensive income should be read in conjunction with the accompanying notes. 56 | carsales.com Limited Annual Report - 30 June 2014 Consolidated statement of financial position As at 30 June 2014 ASSETS Current assets Cash and cash equivalents Receivables Total current assets Non-current assets Notes 2014 $’000 2013 $’000 9 10 26,042 35,384 61,426 15,140 31,262 46,402 Investments accounted for using the equity method 27(c) 240,426 104,187 Property, plant and equipment Intangible assets Deferred tax assets Total non-current assets Total assets LIABILITIES Current liabilities Payables Borrowings Current tax liabilities Provisions Deferred revenue Total current liabilities Non-current liabilities Provisions Borrowings Total non-current liabilities Total liabilities Net assets EQUITY Contributed equity Reserves Retained earnings Non-controlling interests Total equity 11 13 12 15 14 16 17 18 19 20 21(a) 21(b) 27(b) 4,402 92,269 5,916 343,013 404,439 22,740 9,842 9,349 3,818 5,535 51,284 938 164,841 165,779 217,063 187,376 77,603 17,695 90,946 1,132 187,376 4,732 81,192 6,638 196,749 243,151 19,220 54,525 7,544 3,334 5,297 89,920 721 - 721 90,641 152,510 70,104 14,908 67,498 - 152,510 The above consolidated statement of financial position should be read in conjunction with the accompanying notes. carsales.com Limited Annual Report - 30 June 2014 | 57 Consolidated statement of changes in equity For the year ended 30 June 2014 Attributable to owners of carsales.com Ltd Contributed equity $’000 Reserves $’000 Retained earnings $’000 61,749 7,568 59,068 Balance at 1 July 2012 Profit for the year Exchange differences on translation of foreign operations Total comprehensive income for the year - - - Transactions with owners in their capacity as owners: Contributions of equity upon exercise of employee share options 8,355 Dividends paid Increase in share-based payment reserve inclusive of tax - - - 85 85 - - 83,516 - 83,516 - (75,086) 7,255 - Balance at 30 June 2013 70,104 14,908 67,498 Profit for the year Exchange differences on translation of foreign operations Total comprehensive income for the year - - - - 95,457 (1,047) - (1,047) 95,457 Transactions with owners in their capacity as owners: Contributions of equity upon exercise of employee share options 7,499 Non-controlling interests on acquisition of subsidiaries Dividends paid Increase in share-based payment reserve inclusive of tax - - - - - - - - (72,009) 3,834 - Non-Con- trolling Interest $’000 - - - - - - - - 815 - 815 - 317 - - Total equity $’000 128,385 83,516 85 83,601 8,355 (75,086) 7,255 152,510 96,272 (1,047) 95,225 7,499 317 (72,009) 3,834 Balance at 30 June 2014 77,603 17,695 90,946 1,132 187,376 The above Consolidated statement of changes in equity should be read in conjunction with the accompanying notes. 58 | carsales.com Limited Annual Report - 30 June 2014 Consolidated statement of cash flows For the year ended 30 June 2014 Notes 2014 $’000 Cash flows from operating activities Receipts from customers (incl GST) Payments to suppliers and employees (incl GST) Interest received Interest paid Income taxes paid Net cash inflow from operating activities 29 254,341 (118,734) 474 (3,065) (34,323) 98,693 2013 $’000 234,760 (112,452) 1,343 (5) (34,510) 89,136 Cash flows from investing activities Investment in subsidiaries Investment in associates Payments for property, plant and equipment Payments for domain names Net outstanding receipts Payments for computer software Proceeds from disposal of other assets Payment for investment in Joint Venture Dividends received from associates (8,400) - (133,897) (104,169) (948) (529) - (331) 1 - 665 (944) (13) 2,427 (264) 13 (250) - Net cash (outflow) from investing activities (143,439) (103,200) Cash flows from financing activities Proceeds from issues of shares and other equity securities Proceeds from borrowings Repayment of borrowings Dividends paid to company shareholders Net cash inflow/(outflow) from financing activities Net increase (decrease) in cash and cash equivalents Cash and cash equivalents at the beginning of the financial year Cash and cash equivalents at end of year 7,499 183,500 (63,342) (72,009) 55,648 10,902 15,140 26,042 22 9 8,355 55,000 - (75,086) (11,731) (25,795) 40,935 15,140 The above consolidated statement of cash flows should be read in conjunction with the accompanying notes. carsales.com Limited Annual Report - 30 June 2014 | 59 Contents of the notes to the consolidated financial statements Notes Page 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 Summary of significant accounting policies Financial risk management Critical accounting estimates and judgements Segment information Revenue Other income Expenses Income tax expense Current assets - Cash and cash equivalents Current assets - Receivables Non-current assets - Property, plant and equipment Non-current assets - Deferred tax assets Non-current assets - Intangible assets Current liabilities - Borrowings Current liabilities - Payables Current liabilities - Provisions Deferred revenue Non-current liabilities - Provisions Non-current liabilities - Borrowings Contributed equity Reserves and retained earnings Dividends Remuneration of auditors Commitments Related party transactions Business combination Interests in other entities Events occurring after the reporting period Reconciliation of profit after income tax to net cash inflow from operating activities Earnings per share Share-based payments Parent entity financial information 61 68 71 71 74 74 74 74 75 75 77 78 79 80 80 81 81 81 81 81 84 85 86 87 87 88 90 93 93 94 95 97 60 | carsales.com Limited Annual Report - 30 June 2014 Notes to the consolidated financial statements 1. Summary of significant accounting policies The principal accounting policies adopted in the preparation of these consolidated financial statements are set out below. These policies have been consistently applied to all the years presented, unless otherwise stated. The financial statements are for the consolidated entity consisting of carsales.com Ltd and its subsidiaries. (a) Basis of preparation These general purpose financial statements have been prepared in accordance with Australian Accounting Standards, other authoritative pronouncements of the Australian Accounting Standards Board, Urgent Issues Group Interpretations and the Corporations Act 2001. carsales.com Ltd is a for-profit entity for the purpose of preparing the financial statements. (i) Compliance with International Financial Reporting Standards The financial report of carsales.com Ltd complies with International Financial Reporting Standards (IFRS) as issued by the International Accounting Standards Board (IASB). (ii) Historical cost convention These financial statements have been prepared under the historical cost convention. (iii) Critical accounting estimates The preparation of financial statements in conformity with AIFRS requires the use of certain critical accounting estimates. It also requires management to exercise its judgement in the process of applying the Group’s accounting policies. The areas involving a higher degree of judgement or complexity, or areas where assumptions and estimates are significant to the financial statements, are disclosed in note 3. (iv) Financial statement presentation The accounting policies adopted are consistent with those of the previous financial year. (v) Going concern The financial statements have been prepared on a going concern basis.. (b) Principles of consolidation (i) Subsidiaries The consolidated financial statements incorporate the assets and liabilities of all subsidiaries of carsales.com Ltd (‘’company’’ or ‘’parent entity’’) as at 30 June 2014 and the results of all subsidiaries for the year then ended. carsales. com Ltd and its subsidiaries together are referred to in this financial report as the Group or the Consolidated Entity. Subsidiaries are all those entities over which the Group has the power to govern the financial and operating policies, generally accompanying a shareholding of more than one-half of the voting rights. The existence and effect of potential voting rights that are currently exercisable or convertible are considered when assessing whether the Group controls another entity. Subsidiaries are fully consolidated from the date on which control is transferred to the Group. They are de-consolidated from the date that control ceases. The purchase method of accounting is used to account for the acquisition of subsidiaries by the Company (refer to note 1(h)). Intercompany transactions, balances and unrealised gains on transactions between companies are eliminated. Unrealised losses are also eliminated unless the transaction provides evidence of the impairment of the asset transferred. Accounting policies of subsidiaries have been changed where necessary to ensure consistency with the policies adopted by the Company. Investments in subsidiaries are accounted for at cost in the individual financial statements of carsales.com Ltd. Non-controlling interests in the results and equity of subsidiaries are shown separately in the consolidated income statement, statement of comprehensive income, statement of changes in equity and balance sheet respectively (ii) Associates Associates are all entities over which the Group has significant influence but not control or joint control, generally accompanying a shareholding of between 20% and 50% of the voting rights. Investments in associates are accounted for using the equity method of accounting, after initially being recognised at cost. The Group’s investment in associates includes goodwill identified on acquisition. Acquisition related costs of associates are capitalised. The Group’s share of its associates’ post-acquisition profits or losses is recognised in profit or loss, and its share of post- acquisition other comprehensive income is recognised in other comprehensive income. The cumulative post-acquisition movements are adjusted against the carrying amount of the investment. Dividends receivable from associates are recognised as reduction in the carrying amount of the investment. When the Group’s share of losses in an associate equals or exceeds its interest in the associate, including any other unsecured long-term receivables, the Group does not recognise further losses, unless it has incurred obligations or made payments on behalf of the associate. Unrealised gains on transactions between the Group and its associates are eliminated to the extent of the Group’s interest in the associates. Unrealised losses are also eliminated unless the transaction provides evidence of an impairment of the asset transferred. Accounting policies of associates have been changed where necessary to ensure consistency with the policies adopted by the Group. Notes to the consolidated financial statements carsales.com Limited Annual Report - 30 June 2014 | 61 (iii) Joint ventures The interest in a joint venture partnership is accounted for using the equity method after initially being recognised at cost. Under the equity method, the share of the profits or losses of the partnership is recognised in profit or loss, and the share of post-acquisition movements in in other comprehensive income is recognised in other comprehensive income. (iv) Employee Share Trust The Group has formed a trust to administer the Group’s employee share scheme. This trust is consolidated, as the substance of the relationship is that the trust is controlled by the Group. (c) Segment reporting Operating segments are reported in a manner consistent with the internal reporting provided to the chief operating decision maker. The chief operating decision maker has been identified as the Managing Director. (d) Foreign currency translation (i) Functional and presentation currency Items included in the financial statements of each of the Group’s entities are measured using the currency of the primary economic environment in which the entity operates (‘the functional currency’). The consolidated financial statements are presented in Australian dollars, which is carsales.com Ltd’s functional and presentation currency. (ii) Transactions and balances Foreign currency transactions are translated into the functional currency using the exchange rates prevailing at the dates of the transactions. Foreign exchange gains and losses resulting from the settlement of such transactions and from the translation at year-end exchange rates of monetary assets and liabilities denominated in foreign currencies are recognised in the consolidated statement of comprehensive income. (iii) Group companies The results and financial position of foreign operations (none of which has the currency of a hyperinflationary economy) that have a functional currency different from the presentation currency are translated into the presentation currency as follows: • Assets and liabilities for each consolidated statement of financial position presented are translated at the closing rate at the date of that balance sheet. • Income and expenses for each consolidated statement of comprehensive income are translated at average exchange rates (unless this is not a reasonable approximation of the cumulative effect of the rates prevailing on the transaction dates, in which case income and expenses are translated at the dates of the transactions). • All resulting exchange differences are recognised as a separate component of equity. On consolidation, exchange differences arising from the translation of any net investment in foreign entities, and of borrowings are taken to other comprehensive income. When a foreign operation is sold or any borrowings forming part of the net investment are repaid, a proportionate share of such exchange differences are recognised in the consolidated statement of comprehensive income, as part of the gain or loss on sale where applicable. Goodwill and fair value adjustments arising on the acquisition of a foreign operation are treated as assets and liabilities of the foreign operation and translated at the closing rate. (e) Revenue recognition Revenue is measured at the fair value of the consideration received or receivable. Amounts disclosed as revenue are net of returns, trade allowances and amounts collected on behalf of third parties. Where services have not been provided but the Company is obligated to provide the services in the future, revenue recognition is deferred. Where the Group has utilised the services of a sales agency to sell advertising services on behalf of the Group, the sale is recorded at a value net of sales commissions paid to the sales agency. Revenue is recognised for the major business activities as follows: (i) Advertising services A sale is recorded when a customer’s advertisement has been displayed or when a referral has been generated leading to an enforceable claim by the Group. (ii) Data and other services A sale is recorded when data and other services have been provided to a customer leading to an enforceable claim by the Group. (iii) Interest income Interest income is recognised on a time proportionate basis using the effective interest method. When a receivable is impaired, the Group reduces the carrying amount to its recoverable amount, being the estimated future cash flow discounted at the original effective interest rate of the instrument, and continues unwinding the discount as interest income. Interest income on impaired loans is recognised using the original effective interest rate. (iv) Dividends Dividends are recognised as revenue when the right to receive payment is established. (v) R&D Tax Rebate The R&D 10% taxable rebate is recognised as other income. 62 | carsales.com Limited Annual Report - 30 June 2014 Notes to the consolidated financial statements (f) Income tax The income tax expense or revenue for the period is the tax payable on the current period’s taxable income based on the applicable income tax rate for each jurisdiction adjusted by changes in deferred tax assets and liabilities attributable to temporary differences and to unused tax losses. Deferred income tax is provided in full, using the liability method, on temporary differences arising between the tax bases of assets and liabilities and their carrying amounts in the consolidated financial statements. However, the deferred income tax is not accounted for if it arises from initial recognition of an asset or liability in a transaction other than a business combination that at the time of the transaction affects neither accounting nor taxable profit or loss. Deferred income tax is determined using tax rates (and laws) that have been enacted or substantially enacted by the balance sheet date and are expected to apply when the related deferred income tax asset is realised or the deferred income tax liability is settled. Deferred tax assets are recognised for deductible temporary differences and unused tax losses only if it is probable that future taxable amounts will be available to utilise those temporary differences and losses. Deferred tax liabilities and assets are not recognised for temporary differences between the carrying amount and tax bases of investments in foreign operations where the Company is able to control the timing of the reversal of the temporary differences and it is probable that the differences will not reverse in the foreseeable future. Deferred tax assets and liabilities are offset when there is a legally enforceable right to offset current tax assets and liabilities and when the deferred tax balances relate to the same taxation authority. Current tax assets and tax liabilities are offset where the entity has a legally enforceable right to offset and intends either to settle on a net basis, or to realise the asset and settle the liability simultaneously. Tax consolidation legislation carsales.com Ltd and its wholly-owned Australian controlled entities have implemented the tax consolidation legislation. The head entity, carsales.com Ltd, and the controlled entities in the tax consolidated group account for their own current and deferred tax amounts. These tax amounts are measured as if each entity in the tax consolidated group continues to be a standalone taxpayer in its own right. In addition to its own current and deferred tax amounts, carsales.com Ltd also recognises the current tax liabilities (or assets) and the deferred tax assets arising from unused tax losses and unused tax credits assumed from controlled entities in the tax consolidated group. Assets or liabilities arising under tax funding agreements with the tax consolidated entities are recognised as amounts receivable from or payable to other entities in the Company. (g) Leases Leases of property, plant and equipment where the Group has substantially all the risks and rewards of ownership are classified as finance leases. Finance leases are capitalised at the lease’s inception at the fair value of the leased property or, if lower, the present value of the minimum lease payments. The corresponding rental obligations, net of finance charges, are included in other short-term and long-term payables. Each lease payment is allocated between the liability and finance cost. The finance cost is charged to the profit or loss over the lease period so as to produce a constant periodic rate of interest on the remaining balance of the liability for each period. The property, plant and equipment acquired under finance leases is depreciated over the asset’s useful life or over the shorter of the asset’s useful life and the lease term if there is no reasonable certainty that the Group will obtain ownership at the end of the lease term. Leases in which a significant portion of the risks and rewards of ownership are not transferred to the Company as lessee are classified as operating leases (note 24). Payments made under operating leases (net of any incentives received from the lessor) are charged to the profit or loss on a straight-line basis over the period of the lease. (h) Business combinations The acquisition method of accounting is used to account for all business combinations, including business combinations involving entities or businesses under common control, regardless of whether equity instruments or other assets are acquired. The consideration transferred for the acquisition of a subsidiary comprises the fair values of the assets transferred, the liabilities incurred and the equity interests issued by the Company. The consideration transferred also includes the fair value of any contingent consideration arrangement and the fair value of any pre-existing equity interest in the subsidiary. Contingent payments classified as debt are subsequently remeasured through profit or loss. Identifiable assets acquired and liabilities and contingent liabilities assumed in a business combination are, with limited exceptions, measured initially at their fair values at the acquisition date. On an acquisition-by-acquisition basis, the Company recognises any non-controlling interest in the acquiree either at fair value or at the non-controlling interest’s proportionate share of the acquiree’s net identifiable assets. The excess of the consideration transferred, the amount of any non-controlling interest in the acquiree and the acquisition-date fair value of any previous equity interest in the acquiree over the fair value of the Company’s share of the net identifiable assets acquired is recorded as goodwill. If those amounts are less than the fair value of the net identifiable assets of the subsidiary acquired and the measurement of all amounts has been reviewed, the difference is recognised directly in profit or loss as a discount on purchase. If the Company recognises previously acquired deferred tax assets after the initial acquisition accounting is completed these will be recorded directly in profit or loss. Where settlement of any part of cash consideration is deferred, the amounts payable in the future are discounted to their present value as at the date of exchange. The discount rate used is the entity’s incremental borrowing rate, being the rate at which a similar borrowing could be obtained from an independent financier under comparable terms and conditions. Notes to the consolidated financial statements carsales.com Limited Annual Report - 30 June 2014 | 63 (i) Impairment of assets Goodwill and intangible assets that have an indefinite useful life are not subject to amortisation and are tested annually for impairment, or more frequently if events or changes in circumstances indicate that they might be impaired. Other assets are tested for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. An impairment loss is recognised for the amount by which the asset’s carrying amount exceeds its recoverable amount. The recoverable amount is the higher of an asset’s fair value less costs to sell and value in use. For the purposes of assessing impairment, assets are grouped at the lowest levels for which there are separately identifiable cash inflows which are largely independent of the cash inflows from other assets or groups of assets (cash-generating units). Non-financial assets other than goodwill that suffered an impairment are reviewed for possible reversal of the impairment at each reporting date. (j) Cash and cash equivalents For cash flow statement presentation purposes, cash and cash equivalents includes cash on hand, deposits held at call with financial institutions, other short-term, highly liquid investments with original maturities of three months or less that are readily convertible to known amounts of cash and which are subject to an insignificant risk of changes in value, and bank overdrafts. Bank overdrafts are shown within borrowings in current liabilities on the consolidated statement of financial position. (k) Trade receivables Trade receivables are recognised initially at fair value and subsequently measured at amortised cost, less provision for impairment. Trade receivables are due for settlement generally within 30 days following the provision of advertising or data services. Collectability of trade receivables is reviewed on an ongoing basis. Debts which are known to be uncollectable are written off by reducing the carrying amount directly. An allowance account (provision for impairment of trade receivables) is used when there is objective evidence that the Group will not be able to collect all amounts due according to the original terms of the receivables. Significant financial difficulties of the debtor, probability that the debtor will enter bankruptcy or financial reorganisation and default or delinquency in payments (more than 30 days overdue) are considered indicators that the trade receivable is impaired. The amount of the impairment allowance is the difference between the asset’s carrying amount and the present value of estimated future cash flows, discounted at the original effective interest rate. Cash flows relating to short-term receivables are not discounted if the effect of discounting is immaterial. The amount of the impairment loss is recognised in the consolidated statement of comprehensive income within the ‘operations and administration’ expense. When a trade receivable for which an impairment allowance had been recognised becomes uncollectable in a subsequent period, it is written off against the allowance account. Subsequent recoveries of amounts previously written off are credited against other expenses in the consolidated statement of comprehensive income. (l) Investments and other financial assets The Group classifies its investments in the following categories: financial assets at fair value, loans and receivables and held-to-maturity investments. The classification depends on the purpose for which the investments were acquired. Management determines the classification of its investments at initial recognition and re-evaluates this designation at each reporting date. (i) Loans and receivables Loans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market. They are included in current assets, except for those with maturities greater than 12 months after the reporting date which are classified as non-current assets. Loans and receivables are included in trade and other receivables (note 10) and receivables in the consolidated statement of financial position. Refer to note 1(k) for details of the impairment policy for trade receivables. (m) Property, plant and equipment Property, plant and equipment is stated at historical cost less depreciation. Historical cost includes expenditure that is directly attributable to the acquisition of the items. Subsequent costs are included in the asset’s carrying amount or recognised as a separate asset, as appropriate, only when it is probable that future economic benefits associated with the item will flow to the Group and the cost of the item can be measured reliably. All other repairs and maintenance are charged to the profit or loss during the financial period in which they are incurred. Depreciation on assets is calculated using the straight line method to allocate their cost, net of their residual values, over their estimated useful lives, as follows: • Vehicles • Furniture, fittings and equipment • Computer hardware & peripherals 3 - 5 years 3 - 8 years 3 - 4 years The assets’ residual values and useful lives are reviewed, and adjusted if appropriate, at each reporting date. An asset’s carrying amount is written down immediately to its recoverable amount if the asset’s carrying amount is greater than its estimated recoverable amount (note 1(i)). Gains and losses on disposals are determined by comparing proceeds with carrying amount. These are included in the consolidated statement of comprehensive income. 64 | carsales.com Limited Annual Report - 30 June 2014 Notes to the consolidated financial statements (n) Intangible assets (i) Goodwill Goodwill represents the excess of the cost of an acquisition over the fair value of the Group’s share of the net identifiable assets of the acquired subsidiary at the date of acquisition. Goodwill on acquisitions of subsidiaries is included in intangible assets. Goodwill is not amortised. Instead, goodwill is tested for impairment annually, or more frequently if events or changes in circumstances indicate that it might be impaired, and is carried at cost less accumulated impairment losses. Gains and losses on the disposal of an entity include the carrying amount of goodwill relating to the entity sold. Goodwill is allocated to cash-generating units for the purpose of impairment testing. Each of those cash-generating units represents the Group’s investment in each primary operating segment (note 4). (ii) IT development: Software, domain names and database Costs incurred in developing products or systems and costs incurred in acquiring software and licenses that will contribute to future period financial benefits through revenue generation and/or cost reduction are capitalised to software and systems. Redbook database costs capitalised to date include direct payroll and payroll related costs of employees’ time spent on developing the database. These intangible assets have finite lives and are subject to amortisation on a straight line basis. The useful lives for these assets are as follows: • Software • Domain Names • Database 4 years 5 years 10 years (iii) Research and development Research expenditure is recognised as an expense as incurred. Costs incurred on development projects (relating to the design and testing of new or improved services) are recognised as intangible assets when it is probable that the project will, after considering its commercial and technical feasibility, be completed and generate future economic benefits and its costs can be measured reliably. The expenditure capitalised comprises all directly attributable costs, including costs of materials, services, direct labour and an appropriate proportion of overheads. Other development expenditures that do not meet these criteria are recognised as an expense as incurred. Development costs previously recognised as an expense are not recognised as an asset in a subsequent period. Capitalised development costs are recorded as intangible asset and amortised from the point of which the asset is ready for use on a straight line basis over its useful life, which varies from 3 to 5 years. (o) Trade and other payables These amounts represent liabilities for goods and services provided to the Group prior to the end of financial year which are unpaid. The amounts are unsecured and are usually paid within 30 days of recognition. (p) Borrowings Borrowings are initially recognised at fair value, net of transaction costs incurred. Borrowings are subsequently measured at amortised cost. Any difference between the proceeds (net of transaction costs) and the redemption amount is recognised in the profit or loss over the period of the borrowings using the effective interest method. Fees paid on the establishment of loan facilities, which are not incremental costs relating to the actual draw-down of the facility, are recognised net against the loan and amortised on a straight-line basis over the term of the facility. Borrowings are removed from the consolidated statement of financial position when the obligation specified in the contract is discharged, cancelled or expired. The difference between the carrying amount of a financial liability that has been extinguished or transferred to another party and the consideration paid, including any non-cash assets transferred or liabilities assumed, is recognised in other income or other expenses. 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 balance sheet date. (q) Borrowing costs Borrowing costs incurred for the construction of any qualifying asset are capitalised during the period of time that is required to complete and prepare the asset for its intended use or sale. Other borrowing costs are expensed. (r) Employee benefits (i) Short-term obligations Liabilities for wages and salaries, including non-monetary benefits, annual leave and accumulating sick leave expected to be settled within 12 months after the end of the period in which the employees render the related service are recognised in respect of employees’ service up to the end of the reporting period and are measured at the amount expected to be paid when the liabilities are settled. The liability for annual leave and accumulating sick leave is recognised in the provision for employee benefits. All other short-term employee benefit obligations are presented as payables. (ii) Other long-term employee benefit obligations The liability for long service leave and annual leave which is not expected to be settled within 12 months after the end of the period in which the employees render the related services is recognised in the provision for employee benefits and measured as the present value of expected future payments to be made in respect of services provided by employees up to the end of the reporting period using the projected unit credit method. Consideration is given to expected future wage and salary levels, experience of employee departures and period of service. Expected future payments are discounted using market yields at the end of the reporting period on national government bonds with terms to maturity and currency that match, as closely as possible, the estimated future cash outflows. Notes to the consolidated financial statements carsales.com Limited Annual Report - 30 June 2014 | 65 (iii) Retirement benefit obligations All employees of the Group are entitled to benefits on retirement, disability or death from the Group’s superannuation plan. The Group has a defined contribution plan. The defined contribution plan receives fixed contributions from Group companies and the Group’s legal or constructive obligation is limited to these contributions. The employees of the parent entity are all members of the defined contribution section of the Group’s plan. Past service costs are recognised immediately in profit or loss, unless the changes to the superannuation fund are conditional on the employees remaining in service for a specified period of time (the vesting period). In this case, the past service costs are amortised on a straight-line basis over the vesting period. (iv) Share-based payments Share-based compensation benefits are provided to employees via the carsales.com Ltd Option Plan. Information relating to these schemes is set out in note 31. The fair value of options granted under the carsales.com Ltd Option Plan is recognised as an employee benefit expense with a corresponding increase in equity. The fair value is measured at grant date and recognised over the period during which the employees become unconditionally entitled to the options or performance rights. The fair value at grant date is independently determined using a Black-Scholes option pricing model that takes into account the exercise price, the term of the option or performance right, the vesting and performance criteria, the impact of dilution, the non-tradeable nature of the option or performance right, the share price at grant date and expected price volatility of the underlying share, the expected dividend yield and the risk-free interest rate for the term of the option or performance right. (v) Bonus plans The Group recognises a liability and an expense for bonuses and profit-sharing based on a formula that takes into consideration the profit attributable to the Company’s shareholders after certain adjustments. The Company recognises a provision where contractually obliged or where there is a past practice that has created a constructive obligation. (s) Contributed equity Ordinary shares are classified as equity. Incremental costs directly attributable to the issue of new shares, options or performance rights are shown in equity as a deduction, net of tax, from the proceeds. Incremental costs directly attributable to the issue of new shares or options or performance rights for the acquisition of a business are not included in the cost of the acquisition as part of the purchase consideration. Shares bought back by the Company that have not been cancelled at the balance sheet date are presented within the treasury share reserve as a deduction from equity. When the shares are cancelled the value of the shares are transferred to the share capital reserve. (t) Dividends Provision is made for the amount of any dividend declared, being appropriately authorised and no longer at the discretion of the entity, on or before the end of the financial year but not distributed at balance date. (u) Earnings per share (i) Basic earnings per share Basic earnings per share is calculated by dividing: • the profit attributable to equity holders of the Company, excluding any costs of servicing equity other than ordinary shares • by the weighted average number of ordinary shares outstanding during the financial year, adjusted for bonus elements in ordinary shares issued during the year. (ii) Diluted earnings per share Diluted earnings per share adjusts the figures used in the determination of basic earnings per share to take into account: • the after income tax effect of interest and other financing costs associated with dilutive potential ordinary shares, and the weighted average number of additional ordinary shares that would have been outstanding assuming the • conversion of all dilutive potential ordinary shares. (v) Rounding of amounts The Company is of a kind referred to in Class order 98/100, issued by the Australian Securities and Investments Commission, relating to the ‘’rounding off’’ of amounts in the financial report. Amounts in the financial report have been rounded off in accordance with that Class Order to the nearest thousand dollars, or in certain cases, the nearest dollar. (w) New accounting standards and interpretations Certain new accounting standards and interpretations have been published that are mandatory for 30 June 2014 reporting periods and have been adopted by the Group. The Group’s assessment of the impact of these new standards and interpretations is set out below. 66 | carsales.com Limited Annual Report - 30 June 2014 Notes to the consolidated financial statements The Group has applied the following standards in their year-end reporting commencing 1 July 2013: • AASB 10 Consolidated Financial Statements, AASB 11 Joint Arrangements, AASB 12 Disclosure of Interests in Other Entities, revised AASB 127 Separate Financial Statements and AASB 128 Investments in Associates and Joint Ventures and AASB 2011-7 Amendments to Australian Accounting Standards arising from the Consolidation and Joint Arrangements Standards (effective 1 January 2013). • AASB 13 Fair Value Measurement and AASB 2011-8 Amendments to Australian Accounting Standards arising from AASB 13 (effective 1 January 2013). AASB 13 was released in September 2011. It explains how to measure fair value and aims to enhance fair value disclosures. The Group does not use fair value measurements extensively. The net fair value of cash and cash equivalents and non-interest bearing monetary financial assets and non-interest bearing financial liabilities of the consolidated entity approximates their carrying amounts. There are no off balance sheet financial instruments in place. The fair value of current borrowings approximates the carrying amount, as the impact of discounting is not significant. • AASB 2012-5 Amendments to Australian Accounting Standard arising from Annual Improvements - 2009-2011 Cycle (effective 1 January 2013). • AASB 2011-4 Amendments to Australian Accounting Standards to Remove Individual Key Management Personnel Disclosure Requirements (effective 1 July 2013). In July 2011 the AASB decided to remove the individual key management personnel (KMP) disclosure requirements from AASB 124 Related Party Disclosures, to achieve consistency with the international equivalent standard and remove a duplication of the requirements with the Corporations Act 2001. While this will reduce the disclosures that are currently required in the notes to the financial statements, it will not affect any of the amounts recognised in the financial statements. The amendments apply from 1 July 2013 and cannot be adopted early: • AASB 9 Financial Instruments, AASB 2009-11 Amendments to Australian Accounting Standards arising from AASB 9 and AASB 2010-7 Amendments to Australian Accounting Standards arising from AASB 9 (December 2010) (effective for annual reporting periods beginning on or after 1 January 2013). AASB 9 Financial Instruments addresses the classification, measurement and de-recognition of financial assets and financial liabilities. The standard is not applicable until 1 January 2015 but is available for early adoption. • AASB 2012-2 Amendments to Australian Accounting Standard - Disclosures - Offsetting Financial Assets and Financial Liabilities (effective 1 January 2013). No material impact in the financial statements as a result of the adoption of the above standards. The following standards are applicable and the Group will adopt the standards upon the operative date. The Group is assessing the impact of these standards however they are not expected to have a significant impact: • Annual Improvements to IFRSs 2010-2012 Cycle and Annual Improvements to IFRSs 2011-2013 Cycle (effective 1 July 2014). • Defined Benefit Plans: Employee Contributions - Amendments to IAS 19 (effective 1 January 2014). • AASB 2012-3 Amendments to Australian Accounting Standard - Offsetting Financial Assets and Financial Liabilities (effective 1 January 2014). • AASB 2013-3 Amendments to AASB 136 - Recoverable Amount Disclosures for Non-Financial Assets (effective 1 January 2014). • AASB 2013-5 Amendments to Australian Accounting Standards - Investment Entities (effective 1 January 2014). The following standards are not applicable to carsales.com Ltd and therefore there is no impact on the Group: • Revised AASB 119 Employee Benefits, AASB 2011-10 Amendments to Australian Accounting Standards arising from AASB 119 (September 2011) and AASB 2011-11 Amendments to AASB 119 (September 2011) arising from Reduced Disclosure Requirements (effective 1 January 2013). • AASB 1053 Application of Tiers of Australian Accounting Standards and AASB 2010-2 Amendments to Australian Accounting Standards arising from Reduced Disclosure Requirements (effective 1 July 2013). • AASB 2010-9 Amendments to Australian Accounting Standards - Severe Hyperinflation and Removal of Fixed Dates for First-time Adopters [AASB 1] and AASB 2010-10 Further Amendments to Australian Accounting Standards - Removal of Fixed Dates for First-time (effective 1 January 2011/1 January 2013). Adopters [AASB 2009- 11 & AASB 2010-7]. • AASB 2011-5 Amendments to Australian Accounting Standards - Extending Relief from Consolidation, the Equity Method and Proportionate Consolidation and AASB 2011-6 Amendments to Australian Accounting Standards - Extending Relief from Consolidation, the Equity Method and Proportionate Consolidation - Reduced Disclosure Requirements (effective 1 July 2013). • AASB Interpretation 20 Stripping Costs in the Production Phase of a Surface Mine and AASB 2011-12 Amendments to Australian Accounting Standards arising from Interpretation 20 (effective 1 January 2013). • AASB 2012-1 Amendments to Australian Accounting Standards - Fair Value Measurement - Reduced Disclosure Requirements [AASB 3, AASB 7, AASB 13, AASB 140 & AASB 141] (effective 1 July 2013). • AASB Interpretation 21 Levies (effective 1 January 2014). • AASB 2013-4 Amendments to Australian Accounting Standards - Novation of Derivatives and Continuation of Hedge Accounting - [AASB 139] (effective 1 January 2014). • Hedge Accounting and Amendments to IFRS 9, IFRS 7 and IAS 39. Notes to the consolidated financial statements carsales.com Limited Annual Report - 30 June 2014 | 67 (x) Parent entity financial information The financial information for the parent entity, carsales.com Ltd, disclosed in note 32 has been prepared on the same basis as the consolidated financial statements, except as set out below. (i) Investments in subsidiaries Investments in subsidiaries are accounted for at cost in the financial statements of carsales.com Ltd. Dividends received from subsidiaries are recognised in the parent entity’s profit or loss, rather than being deducted from the carrying amount of these investments. Investments in subsidiaries are tested for impairment whenever changes in events or circumstances indicate that the carrying amount may not be recoverable. Such events may include receipt of dividends, refer note 1(i) for details of impairment accounting policies. (ii) Tax consolidation legislation carsales.com Ltd and its wholly owned Australian controlled entities have implemented the tax consolidation legislation. Refer note 1(f). (y) Goods and Services Tax (GST) Revenues, expenses and assets are recognised net of the amount of associated GST, unless the GST incurred is not recoverable from the tax authority. In this case it is recognised as part of the cost of acquisition of the asset or as part of the expense. Receivables and payables are stated inclusive of the amount of GST receivable or payable. The net amount of GST recoverable from, or payable to, the tax authority is included with other receivables or payables in the consolidated statement of financial position. Cash flows are presented on a gross basis. The GST components of cash flows arising from investing or financing activities which are recoverable from, or payable to the taxation authority, are presented as operating cash flow. 2. Financial risk management The Group’s activities expose it to a variety of financial risks: credit risk, interest rate risk and liquidity and foreign exchange risk. The Group’s overall risk management program focuses on the unpredictability of financial markets and seeks to minimise potential adverse effects on the financial performance of the Group. The Group uses different methods to measure different types of risk to which it is exposed. Risk management is the responsibility of the Chief Financial Officer (CFO) and follows approved policies of the Board of Directors. The CFO identifies, evaluates and hedges financial risks in close cooperation with the Group’s operating units. (a) Market risk (i) Foreign exchange risk The Group operates internationally and is exposed to foreign exchange risk arising from various currency exposures, primarily with respect to the Brazilian Real (BRL) and the Korean Won (KRW). Foreign exchange risk arises from future commercial transactions and recognised assets and liabilities denominated in foreign currency that is not the entity’s functional currency. Hedging contracts are sometimes used to manage foreign currency exchange risk. The Company has a treasury strategy and a treasury policy and will actively hedge any major known commitments using forward exchange contracts. For instance during the financial year the Company acquired a 49.9% interest in SKENCARSALES.com Ltd in Korea. In funding this acquisition the Company entered into a forward exchange contract where 117,500,000,000 KRW was hedged against the Australian dollar (AUD) at the time in which contracts with the vendor were signed with defined funding delivery dates. This was the only foreign exchange hedge entered into during the course of the year. The analysis below reflects management’s view of possible movements in relevant foreign currencies against the Australian dollar. The table summarises the range of possible outcomes that would affect the Group’s net profit and equity as a result of foreign currency movements. The estimated impact on carsales.com Ltd share of the reported net profits of our overseas associates through potential movements in exchange rates are as follows: Impact on profit: AUD to KRW AUD to BRL Net Movement (+5% to -5%) (+5% to -5%) $’000 -5% 38.9 219.5 258.4 2014 $’000 +5% (43.0) (242.6) (285.6) 68 | carsales.com Limited Annual Report - 30 June 2014 Notes to the consolidated financial statements Impact on equity: AUD to KRW AUD to BRL Net Movement (ii) Price Risk (+5% to -5%) (+5% to -5%) $’000 -5% 6,686 4,855 11,541 2014 $’000 +5% (6,049) (4,393) (10,442) The Group is not exposed to significant equities price risk. (b) Credit risk Credit risk of the Group arises predominantly from outstanding receivables from customers. The Group’s credit risk on its receivables is recognised on the consolidated statement of financial position at the carrying amount of those receivable assets, net of any provisions for doubtful debts. There are no significant concentrations of receivables within the Group. Receivable balances are monitored on an ongoing basis with the result that the Group’s exposure to bad debts is not considered to be material. Details of impaired and past due receivables are disclosed in note 10. Credit risk also arises from cash and cash equivalents and deposits with banks and financial institutions. For banks and financial institutions, only independently rated parties with a minimum rating of ‘A’ are accepted by carsales.com Ltd. (c) Interest rate risk The Group’s main interest rate risk arises from long-term borrowings. The Group’s fixed rate borrowings and receivables are carried at amortised cost. They are therefore not subject to interest rate risk as defined in AASB7 since neither the carrying amount nor the future cash flows will fluctuate because of a change in market rates. The consolidated entity’s exposure to the cash flow risk of changes in market interest rates relates primarily to the cash at bank and the cash advance facility. The interest rate applicable at year end on the cash at bank was 2.5%, while the interest on the cash advance facility was 4.0% (2013 - 4.7%). As at reporting date, the Group had $175,000,000 (2013 - $55,000,000) variable rate borrowings at a weighted average interest rate of 3.9% (2013 - 4.7%). The variable interest rate may have an impact on cash flow, but this impact is not considered material. carsales.com Ltd has a recently approved a treasury policy and treasury strategy for the management of interest rate risk which at 30 June 2014 had not been implemented. The Company does not currently hedge against interest rate risk, however will adopt a strategy in FY2015 that will see 50% of interest rate exposures in forecast borrowings hedged via a SWAP instrument. (d) Liquidity risk Prudent liquidity risk management implies maintaining sufficient cash and marketable securities, the availability of funding through an adequate amount of committed credit facilities and the ability to close out market positions. The Group manages liquidity risk by continuously monitoring forecast and actual cash flows and matching the maturity profiles of financial assets and liabilities. Financing arrangements The Group has access to the following undrawn borrowing facilities at the end of the reporting period: Floating rate - Expiring within one year (overdraft and bill facility) - Expiring beyond one year (cash advance facility) 2014 $’000 3,000 - 3,000 2013 $’000 13,000 40,000 53,000 Notes to the consolidated financial statements carsales.com Limited Annual Report - 30 June 2014 | 69 Maturities of financial liabilities The following table sets out the Group’s exposure to liquidity risk. The amounts disclosed in the table are the contractual undiscounted cash flows. Contractual maturities of financial liabilities Group - at 30 June 2014 Non-derivatives Non-interest bearing payables Variable rate borrowings Fixed rate borrowings 0 - 12 months $’000 22,741 10,000 - Between 1 and 2 years $’000 Between 2 and 5 years $’000 Total contractual cash flows $’000 Carrying Amount (assets)/ liabilities $’000 - - 12,540 171,803 - - 22,741 194,343 - 22,741 174,683 - Total non-derivatives 32,741 12,540 171,803 217,084 197,424 Group - at 30 June 2013 Non-derivatives Non-interest bearing payables Variable rate borrowings Fixed rate borrowings Total non-derivatives 19,220 57,475 - 76,695 - 210 - 210 - - - - 19,220 57,685 - 19,220 57,685 - 76,905 76,905 (e) Net fair value of financial assets and liabilities The net fair value of cash and cash equivalents and non-interest bearing monetary financial assets and non-interest bearing financial liabilities of the consolidated entity approximates their carrying amounts. There are no off-balance sheet financial instruments in place. (f) Fair value estimation Summarised sensitivity analysis The following table summarises the sensitivity of the Group’s financial assets and financial liabilities to interest rate risk. At 30 June 2014 Financial assets Cash and cash equivalents Accounts receivable Financial liabilities Trade payables Borrowings Total increase/(decrease) Carrying amount $’000 26,042 34,721 (6,477) (175,000) Interest rate risk -100 bps +100 bps Profit $’000 Other equity $’000 Profit $’000 Other equity $’000 (168) (168) 168 168 - - 1,750 1,582 - - 1,750 1,582 - - - - (1,750) (1,582) (1,750) (1,582) 70 | carsales.com Limited Annual Report - 30 June 2014 Notes to the consolidated financial statements At 30 June 2013 Financial assets Cash and cash equivalents Accounts receivable Financial liabilities Trade payables Borrowings Carrying amount $’000 15,140 30,222 (1,728) (55,000) Interest rate risk -100 bps +100 bps Profit $’000 Other equity $’000 Profit $’000 Other equity $’000 (376) (376) 376 376 - - - - - - - - - - - - Total increase/(decrease) (376) (376) 376 376 3. Critical accounting estimates and judgements Estimates and judgements are continually evaluated and are based on historical experience and other factors, including expectations of future events that may have a financial impact on the entity and that are believed to be reasonable under the circumstances. (a) Critical accounting estimates and assumptions The Group makes estimates and assumptions concerning the future. The resulting accounting estimates will, by definition, seldom equal the related actual results. The estimates and assumptions that have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial year are discussed below. (i) Estimated impairment of goodwill The Company tests annually whether goodwill has suffered any impairment, in accordance with the accounting policy stated in note 1(n). The recoverable amounts of cash-generating units have been determined based on value-in-use calculations. These calculations require the use of assumptions. Refer to note 13 for details of these assumptions and the potential impact of changes to the assumptions. (ii) Employee options and performance rights Fair value of employee options and performance rights: refer to details of assumptions in note 31. 4. Segment information Management has determined the operating segments based on the reports reviewed by Key Management Personnel that are used to make strategic decisions. (a) Description of segments The Group principally operates in three business segments: namely Online Advertising Services, Data and Research Services and International. Online Advertising Services carsales.com Ltd online advertising offerings can be broken into two key product sets being classified advertising and display advertising services. Classified advertising is currently the major product offering of the Company and encompasses both private sellers and dealer customers. Classified advertising typically involves the owner of a specific item, such as a 2004 Red brand x car with 23,242 kilometres or a brand new Blue brand x motorbike with sidecar etc; advertising their item for sale via a particular medium, which in the case of carsales, is through its online websites. Display advertising, typically involves corporate customers such as automotive manufacturers/importers, finance and insurance companies etc, placing advertisements on carsales.com Ltd’s website. These advertisements typically display the product or service offerings of the corporate advertiser such as a special offer on new utes by manufacturer x, or save 10% on insurance this month only etc. Data and Research Services The carsales.com Ltd divisions of Redbook Australia, LiveMarket, DataMotive and DataMotive Business Intelligence provide various solutions to a range of customers including manufacturers/importers, dealers, industry bodies, finance and insurance companies offering products including software, analysis, research and reporting, valuation services, website development and hosting as well as photography services. This segment also includes display and consumer advertising related to these divisions. Notes to the consolidated financial statements carsales.com Limited Annual Report - 30 June 2014 | 71 International carsales.com Ltd has significantly increased its investments in overseas Associates with our international holdings comprising: Automotive Data Services: - Auto Information Ltd (New Zealand) - 100% - Red Book Automotive Services (M) Sdn Bhd (Malaysia) - 100% - Red Book Automotive Data Services (Beijing) Ltd (China) - 100% - Automotive Data Services (Thailand) Company Ltd - 100% Online automotive classifieds: - Webmotors (operation in Brazil) - 30% - iCar Asia (operation in Indonesia, Malaysia and Thailand) - 22.9% - SKENCARSALES (operation in South Korea) - 49.9%. (b) Segment analysis 2014 Segment revenue Segment revenue (note 4(c)(i)) Total segment revenue EBITDA (note 4(c)(ii)) Depreciation and amortisation Net interest expense Profit before income tax Income tax expense Share of gain from associates Non-controlling interests Profit for the year Online Advertising $’000 Data and Research $’000 International $’000 Total $’000 203,864 203,864 120,256 29,131 29,131 16,747 2,607 2,607 1,407 3,434 235,602 235,602 138,410 (3,309) (2,914) 132,187 (39,349) 3,434 (815) 95,457 Segment assets (note 4(c)(iii)) 100,463 19,393 240,426 360,282 Deferred tax assets Unallocated assets Total assets 5,916 38,241 404,439 72 | carsales.com Limited Annual Report - 30 June 2014 Notes to the consolidated financial statements 215,118 215,118 120,127 (2,553) 1,338 118,912 (35,164) (232) 83,516 212,672 6,638 23,841 243,151 Online Advertising $’000 Data and Research $’000 International $’000 Total $’000 187,206 187,206 105,511 25,604 25,604 13,383 2,308 2,308 1,233 2013 Segment revenue Segment revenue (note 4(c)(i)) Total segment revenue EBITDA (note 4(c)(ii)) Depreciation and amortisation Net interest income Profit before income tax Income tax expense Share of losses from associates and a joint venture (232) Profit for the year Segment assets (note 4(c)(iii)) 86,759 21,610 104,303 Deferred tax assets Unallocated assets Total assets (c) Notes to, and forming part of, the segment information (i) Segment revenues Segment revenues are derived from sales to external customers as set out in the table above. The nature of the segment revenues are as described in note 4(a) above. (ii) Segment EBITDA The consolidated entity’s chief operating decision maker assesses the performance of the segments based on a measure of EBITDA. Interest revenue and expense, depreciation and amortisation are not reported to the chief operating decision maker by segment. These items are assessed at a consolidated entity level. (iii) Segment assets Segment assets include goodwill and trade receivables. Unallocated assets include property, plant and equipment, intangibles and other assets. All unallocated assets are assessed by the chief operating decision maker at a consolidated level. (iv) Liabilities Liabilities are not reported to the chief operating decision maker by segment. All liabilities are assessed at a consolidated entity level. Notes to the consolidated financial statements carsales.com Limited Annual Report - 30 June 2014 | 73 5. Revenue From continuing operations Sales revenue Sale of services Other revenue Interest 6. Other income Net gain on disposal of property, plant and equipment 7. Expenses Profit before income tax includes the following specific expenses: Total employee benefits Foreign exchange losses (gains) Interest and finance charges paid/payable Research and development Defined contribution superannuation expense Depreciation and amortisation expense Minimum lease payments 8. Income tax expense (a) Income tax expense Current tax Deferred tax Adjustments for current tax of prior periods Deferred income tax (revenue) expense included in income tax expense comprises: Decrease (Increase) in deferred tax assets (note 12) 2014 $’000 2013 $’000 235,602 215,118 474 236,076 1,343 216,461 2014 $’000 1 2013 $’000 5 2014 $’000 2013 $’000 43,559 44,188 47 3,388 8,115 3,391 3,309 3,858 2014 $’000 38,934 450 (35) (10) 5 7,904 3,087 2,553 3,469 2013 $’000 35,031 60 73 39,349 35,164 450 450 60 60 Current tax of $2,331,000 has been directly recognised in equity, related to share based payments. 74 | carsales.com Limited Annual Report - 30 June 2014 Notes to the consolidated financial statements (b) Numerical reconciliation of income tax expense to prima facie tax payable Profit from continuing operations before income tax expense Tax at the Australian tax rate of 30.0% (2013 - 30.0%) Tax effect of amounts which are not deductible (taxable) in calculating taxable income: Tax offset for R&D Deferred tax on share options transferred to the Employee Share Trust Sundry items Adjustments for current tax of prior periods Tax on share of (profit)/losses from associates Total income tax expense 2014 $’000 135,621 40,686 (140) (320) 188 (35) (1,030) 39,349 2013 $’000 118,680 35,604 (873) (94) 384 73 70 35,164 (c) Tax consolidation legislation carsales.com Ltd and its wholly-owned Australian controlled entities implemented the tax consolidation legislation from 1 July 2006. The accounting policy in relation to this legislation is set out in note 1(f). 9. Current assets - Cash and cash equivalents Cash in hand Bank balances 2014 $’000 7 26,035 26,042 2013 $’000 3 15,137 15,140 (a) Risk exposure The Company’s exposure to interest rate risk is discussed in note 2. The maximum exposure to credit risk at the reporting date is the carrying amount of each class of cash and cash equivalents mentioned above. (b) Cash at bank and in hand Cash in hand is non-interest bearing. Bank balances attracted interest at an average rate of 2.6% (2013: 3.5%). 10. Current assets - Receivables Net trade receivables Trade receivables Provision for impairment of receivables (note 10(a)) Prepaid general Receivables from related parties are disclosed under note 25. 2014 $’000 34,721 (808) 33,913 1,471 35,384 2013 $’000 30,222 (746) 29,476 1,786 31,262 Notes to the consolidated financial statements carsales.com Limited Annual Report - 30 June 2014 | 75 (a) Impaired trade receivables The ageing of these receivables is as follows: 1 to 3 months 3 to 6 months Over 6 months 2014 $’000 2013 $’000 330 152 326 808 287 128 331 746 As at 30 June 2014 current trade receivables of the Group with a nominal value of $808,000 (2013 - $746,000) were impaired. The amount of the provision was $808,000 (2013 - $746,000). The individually impaired receivables mainly relate to customers which are in unexpectedly difficult economic situations. Movements in the provision for impairment of receivables are as follows: At 1 July Provision for impairment recognised during the year Receivables written off during the year as uncollectable At 30 June 2014 $’000 746 215 (153) 808 2013 $’000 937 111 (302) 746 The creation and release of the provision for impaired receivables has been included in ‘operational and administration’ expenses in the consolidated statement of comprehensive income. Amounts charged to the provision account are generally written off when there is no expectation of recovering additional cash. (b) Past due but not impaired As of 30 June 2014, trade receivables of $5,729,000 (2013 - $4,401,000) were past due but not impaired. These relate to a number of independent customers for whom there is no recent history of default. The ageing of these trade receivables is as follows: Up to 3 months 3 to 6 months 2014 $’000 5,329 400 5,729 2013 $’000 4,333 68 4,401 (c) Other receivables These amounts generally arise from transactions outside the usual operating activities of the Group. Interest is not charged and collateral is not normally obtained. The other classes within trade and other receivables do not contain impaired assets and are not past due. Based on the credit history of these other classes, it is expected that these amounts will be received when due. (d) Fair value and credit risk Due to the short-term nature of these receivables, their carrying amount is assumed to approximate their fair value. The maximum exposure to credit risk at the reporting date is the carrying amount of each class of receivables mentioned above. Refer to note 2 for more information on the risk management policy of the Company and the credit quality of the entity’s trade receivables. 76 | carsales.com Limited Annual Report - 30 June 2014 Notes to the consolidated financial statements 11. Non-current assets - Property, plant and equipment Plant and equipment $’000 Motor vehicles $’000 Leasehold improvements $’000 At 1 July 2012 Cost Accumulated depreciation Net book amount Year ended 30 June 2013 Opening net book amount Additions Asset disposal Depreciation charge Closing net book amount At 30 June 2013 Cost Accumulated depreciation Net book amount Year ended 30 June 2014 Opening net book amount Acquisition of subsidiary Additions Asset disposal Depreciation charge Closing net book amount At 30 June 2014 Cost Accumulated depreciation Net book amount 2,600 (1,720) 880 880 645 (1) (625) 899 3,036 (2,137) 899 899 10 551 (1) (589) 870 3,442 (2,572) 870 60 (27) 33 33 7 (6) (5) 29 42 (13) 29 29 38 14 - (32) 49 94 (45) 49 Total $’000 7,135 (2,096) 5,039 5,039 944 (8) (1,243) 4,732 7,838 (3,106) 4,732 4,475 (349) 4,126 4,126 292 (1) (613) 3,804 4,760 (956) 3,804 3,804 4,732 - 383 - (704) 3,483 5,143 (1,660) 3,483 48 948 (1) (1,325) 4,402 8,679 (4,277) 4,402 Notes to the consolidated financial statements carsales.com Limited Annual Report - 30 June 2014 | 77 12. Non-current assets - Deferred tax assets 2014 $’000 2013 $’000 The balance comprises temporary differences attributable to: Employee benefits Doubtful debts Expense provisions and accruals Share options in the Employee Share Trust Movements: Opening balance at 1 July Credited to the profit or loss (note 8) Credited directly to equity Closing balance at 30 June Deferred tax assets to be recovered within 12 months Deferred tax assets to be recovered after more than 12 months 1,017 205 839 3,855 5,916 6,638 (450) (272) 5,916 4,683 1,233 5,916 At 1 July 2012 (Charged)/credited to the profit or loss (note 8) Credited directly to equity At 30 June 2013 (Charged)/credited to the profit or loss (note 8) Credited directly to equity At 30 June 2014 Employee benefits $’000 Employee Share Trust $’000 1,088 129 - 1,217 (200) - 1,017 2,405 99 1,604 4,108 19 (272) 3,855 Other $’000 1,601 (288) - 1,313 (269) - 1,044 1,217 224 1,089 4,108 6,638 5,094 (60) 1,604 6,638 5,192 1,446 6,638 Total $’000 5,094 (60) 1,604 6,638 (450) (272) 5,916 78 | carsales.com Limited Annual Report - 30 June 2014 Notes to the consolidated financial statements 13. Non-current assets - Intangible assets Domain names and other $’000 Computer software* $’000 Intangible asset: Database $’000 Goodwill $’000 At 1 July 2012 Cost 77,444 2,621 5,699 Accumulated amortisation and impairment - (1,303) (4,452) Total $’000 86,929 (6,319) 80,610 80,610 1,892 (1,310) 81,192 1,165 (564) 601 601 25 (119) 507 77,444 1,318 1,247 77,444 - - 77,444 1,318 13 (386) 945 1,247 1,854 (805) 2,296 Accumulated amortisation and impairment - (1,689) (5,251) (684) (7,624) 77,444 2,634 7,547 1,191 88,816 Net book amount Year ended 30 June 2013 Opening net book amount Additions Amortisation charge ** Closing net book amount At 30 June 2013 Cost Net book amount Year ended 30 June 2014 Opening net book amount Additions Acquisition of subsidiary Amortisation charge ** 77,444 945 2,296 507 81,192 77,444 - 8,421 - 945 529 - 2,296 3,617 494 (487) (1,374) 507 - - (123) 384 81,192 4,146 8,915 (1,984) 92,269 Closing net book amount 85,865 987 5,033 At 30 June 2014 Cost 85,865 3,153 11,704 1,190 101,912 Accumulated amortisation and impairment - (2,166) (6,671) (806) (9,643) Net book amount 85,865 987 5,033 384 92,269 * Software includes capitalised development costs being an internally generated intangible asset. ** Amortisation is included in other expenses in the consolidated statement of comprehensive income. Notes to the consolidated financial statements carsales.com Limited Annual Report - 30 June 2014 | 79 (a) Impairment tests for goodwill Goodwill is allocated to the Group’s cash-generating units (CGUs) identified according to segment. A segment-level summary of the goodwill allocation is presented below. 2014 Online Advertising Data and Research 2013 Online Advertising Data and Research Australia $’000 Total $’000 70,715 15,150 70,715 15,150 85,865 85,865 62,294 15,150 77,444 62,294 15,150 77,444 The recoverable amount of a CGU is determined based on value-in-use calculations. These calculations use cash flow projections based on financial budgets covering a five-year period. Cash flows beyond the five-year period are extrapolated using the estimated growth rates stated below. The growth rate does not exceed the long-term average growth rate for the business in which the CGU operates. (b) Key assumptions used for value-in-use calculations CGU Online Advertising Data and Research Growth rate** Discount rate*** 2014 % 2.5 2.5 2013 % 2.5 2.5 2014 % 4.3 4.3 2013 % 6.4 6.4 The recoverable amount of a CGU is determined based on value-in-use calculations. These calculations use cash flow projections based on approved budgets. ** Weighted average growth rate used to extrapolate cash flows beyond the budget period *** In performing the value-in-use calculations for each CGU, the Company has applied pre-tax discount rates to discount the forecast future attributable pre-tax cash flows. (c) Impact of possible changes in key assumptions Management do not consider that a reasonable change in any of the key assumptions would lead to impairment. 14. Current liabilities - Borrowings Commercial bill 2014 $’000 9,842 2013 $’000 54,525 The commercial bill with the National Australia Bank is $10,000,000 net of establishment fees of $158,000. 15. Current liabilities - Payables Trade payables Accrued expenses Other payables Details of related party payables are disclosed under note 25. 2014 $’000 6,477 14,482 1,781 22,740 2013 $’000 1,728 15,201 2,291 19,220 80 | carsales.com Limited Annual Report - 30 June 2014 Directors’ report 16. Current liabilities - Provisions Employee benefits 17. Deferred revenue Deferred advertising services revenue - see note 1(e) 18. Non-current liabilities - Provisions Employee benefits 19. Non-current liabilities - Borrowings Bank loan 2014 $’000 3,818 2013 $’000 3,334 2014 $’000 5,535 2013 $’000 5,297 2014 $’000 938 2013 $’000 721 2014 $’000 164,841 2013 $’000 - This bank loan is part of an established facility of $165,000,000, net of establishment fees of $159,000, with the National Australia Bank and has an expiry date of 31 July 2017. In addition a facility of $60,000,000 was established in July 2014 with the National Australia Bank. This facility was put in place in order to fund the acquisition of Stratton Finance and will expire on 31 July 2015. 20. Contributed equity (a) Share capital Ordinary shares Fully paid Notes 2014 Shares 2013 Shares 20(b) 237,828,965 236,181,964 237,828,965 236,181,964 2014 $’000 77,603 77,603 2013 $’000 70,104 70,104 Directors’ report carsales.com Limited Annual Report - 30 June 2014 | 81 (b) Movements in ordinary share capital Date Details 1 July 2012 Opening balance August 2012 Exercise of employee options August 2012 Exercise of employee performance rights September 2012 Exercise of employee options September 2012 Exercise of employee options September 2012 Exercise of employee options September 2012 Exercise of employee options September 2012 Exercise of employee options September 2012 Exercise of employee options October 2012 Exercise of employee options October 2012 Exercise of employee options October 2012 Exercise of employee options October 2012 Exercise of employee options October 2012 Exercise of employee options November 2012 Exercise of employee options November 2012 Exercise of employee options November 2012 Exercise of employee options November 2012 Exercise of employee options December 2012 Exercise of employee options February 2013 Exercise of employee options March 2013 Exercise of employee options March 2013 Exercise of employee options March 2013 Exercise of employee options April 2013 April 2013 April 2013 May 2013 June 2013 June 2013 June 2013 Exercise of employee options Exercise of employee options Exercise of employee options Exercise of employee options Exercise of employee options Exercise of employee options Exercise of employee options Number of shares 233,689,223 Issue price $’000 61,749 72,703 61,551 10,000 70,000 590,000 250,000 332,653 13,029 10,000 10,000 20,000 25,000 8,469 10,000 5,000 531,250 52,117 7,500 15,000 120,000 190,000 12,500 7,500 12,500 8,469 22,500 5,000 5,000 15,000 $4.69 $0.00 $1.75 $2.15 $2.00 $3.89 $4.90 $4.69 $1.75 $2.15 $2.00 $4.90 $4.69 $1.75 $2.00 $3.89 $4.69 $3.89 $3.89 $2.00 $3.89 $4.90 $3.89 $4.90 $4.69 $3.89 $1.75 $2.00 $3.89 341 - 18 150 1,180 973 1,630 61 18 22 40 122 40 18 10 2,066 244 29 58 240 739 61 29 61 40 88 9 10 58 30 June 2013 Balance 236,181,964 70,104 82 | carsales.com Limited Annual Report - 30 June 2014 Notes to the consolidated financial statements (b) Movements in ordinary share capital Date Details July 2013 July 2013 Opening balance Exercise of employee options Exercise of employee options August 2013 Exercise of employee options August 2013 Exercise of employee options August 2013 Exercise of employee options August 2013 Exercise of employee options August 2013 Exercise of employee options August 2013 Exercise of employee performance rights September 2013 Exercise of employee options September 2013 Exercise of employee options October 2013 Exercise of employee options November 2013 Exercise of employee options December 2013 Exercise of employee options March 2014 Exercise of employee options May 2014 Exercise of employee options Number of shares 236,181,964 10,000 10,000 2,000 5,000 109,375 222,960 892,347 67,819 5,000 7,500 165,000 85,000 10,000 30,000 25,000 Issue price $2.00 $3.89 $1.75 $2.00 $3.89 $4.69 $4.90 $0.00 $2.00 $3.89 $4.90 $4.90 $4.90 $4.90 $4.90 $’000 70,104 20 39 4 10 425 1,046 4,372 - 10 29 808 417 49 147 123 Balance 237,828,965 77,603 (c) Ordinary shares Ordinary shares entitle the holder to participate in dividends and the proceeds on winding up of the Company in proportion to the number of and amounts paid on the shares held. On a show of hands every holder of ordinary shares present at a meeting in person or by proxy, is entitled to one vote, and upon a poll each share is entitled to one vote. Ordinary shares have no par value and the Company does not have a limited amount of authorised capital. (d) Employee share scheme Information relating to the employee share scheme, including details of shares issued under the scheme, is set out in note 31. (e) Options and performance rights Information relating to the carsales.com Ltd Employee Option Plan, including details of options and performance rights issued, exercised and lapsed during the financial year and options and performance rights outstanding at the end of the financial year, is set out in note 31. (f) Capital risk management The Company’s objectives when managing capital are to safeguard their ability to continue as a going concern, so that they can continue to provide returns for shareholders and benefits for other stakeholders and to maintain an optimal capital structure to reduce the cost of capital. In order to maintain or adjust the capital structure, the Group may adjust the amount of dividends paid to shareholders, return capital to shareholders, issue new shares or sell assets to reduce debt. Consistent with others in the industry, the Group monitors its capital on an ongoing-basis. There are no externally imposed capital requirements. Notes to the consolidated financial statements carsales.com Limited Annual Report - 30 June 2014 | 83 The Company’s capital position at 30 June 2014 and 30 June 2013 was as follows: Total payables and borrowings Less: cash and cash equivalents Net debt Total equity Total capital 21. Reserves and retained earnings (a) Reserves Share-based payment reserve Foreign currency translation reserve Movements: Share-based payment reserve Balance 1 July Option expense Tax on Employee Share Trust charged to equity Balance 30 June Movements: Foreign currency translation reserve Balance 1 July Currency translation differences arising during the year Balance 30 June (b) Retained earnings Movements in retained earnings were as follows: Balance 1 July Net profit for the year Dividends Balance 30 June Notes 15, 14, 19 2014 $’000 197,425 2013 $’000 73,745 9 (26,042) (15,140) 171,383 187,376 358,759 58,605 152,510 211,115 2014 $’000 18,735 (1,040) 17,695 14,901 1,775 2,059 18,735 7 (1,047) (1,040) 2014 $’000 67,498 95,457 2013 $’000 14,901 7 14,908 7,646 3,360 3,895 14,901 (78) 85 7 2013 $’000 59,068 83,516 (72,009) (75,086) 90,946 67,498 84 | carsales.com Limited Annual Report - 30 June 2014 Notes to the consolidated financial statements (c) Nature and purpose of reserves (i) Share-based payment reserve The share-based payments reserve is used to recognise the fair value of options and performance rights issued but not exercised. (ii) Foreign currency translation reserve Exchange differences arising on translation of the foreign operations are taken to the foreign currency translation reserve, as described in note 1(d) and accumulated within a separate reserve within equity. The reserve is recognised in profit and loss when the net investment is disposed of. 22. Dividends (a) Ordinary shares Final fully franked cash dividend for the year ended 30 June 2013 of 15.6 cents (2012 - 13.2 cents) per share paid on 25 September 2013. Interim ordinary dividend for the year ended 30 June 2014 of 14.7 cents (2013 - 12.7 cents) per fully paid share paid on 2 April 2014. (10 April 2013). Fully franked (2013 - fully franked) based on tax paid @ 30%. Total dividends provided for or paid Paid in cash (b) Dividends not recognised at year end In addition to the above dividends, since year end the Directors have recommended the payment of 17.4 cents per fully paid ordinary share, (2013 - final dividend 15.6 cents) fully franked based on tax paid at 30%. The aggregate amount of the proposed dividend expected to be paid on 22nd October 2014 out of retained earnings at 30 June 2014, but not recognised as a liability at year end, is 2014 $’000 2013 $’000 37,052 45,100 34,957 72,009 72,009 29,986 75,086 75,086 2014 $’000 2013 $’000 41,408 36,827 (c) Franked dividends Franking credits available for subsequent financial years based on a tax rate of 30.0% (2013 - 30.0%) 31,853 30,721 The above amounts represent the balance of the franking account as at the end of the reporting period, adjusted for: (a) franking credits that will arise from the payment of the amount of the provision for income tax. (b) franking debits that will arise from the payment of dividends recognised as a liability at the reporting date, and (c) franking credits that will arise from the receipt of dividends recognised as receivables at the reporting date. The consolidated amounts include franking credits that would be available to the parent entity if distributable profits of subsidiaries were paid as dividends. Notes to the consolidated financial statements carsales.com Limited Annual Report - 30 June 2014 | 85 23. Remuneration of auditors During the year the following fees were paid or payable for services provided by the auditor of the parent entity, its related practices and non-related audit firms: (a) PricewaterhouseCoopers PricewaterhouseCoopers firm Audit and review of financial reports Controls and assurance services Due diligence services Total remuneration for audit and other assurance services Taxation services Tax compliance services, including review of Company income tax returns International tax consulting and tax advice on mergers and acquisitions Total remuneration for taxation services Other services 2014 $ 2013 $ 190,000 190,000 - 165,543 355,543 15,000 289,000 494,000 64,439 61,880 126,319 48,000 61,000 109,000 Due diligence fees paid to PricewaterhouseCoopers network firms Total remuneration of PricewaterhouseCoopers 91,755 573,617 - 603,000 (b) Non-PwC audit firms Audit and other assurance services Audit and review of financial statements Total remuneration for audit and other assurance services Taxation services Tax compliance services Total remuneration for taxation services Total remuneration of non-PricewaterhouseCoopers audit firms Total auditors' remuneration 2014 $ 2013 $ 11,705 11,705 11,685 11,685 51,782 51,782 63,487 637,104 48,444 48,444 60,129 663,129 It is the Company’s policy to employ PwC on assignments additional to their statutory audit duties where PwC’s expertise and experience with the Company are important. These assignments are principally tax advice and due diligence reporting on acquisitions, or where PwC is awarded assignments on a competitive basis. It is the Company’s policy to seek competitive tenders for all major consulting projects. 86 | carsales.com Limited Annual Report - 30 June 2014 Notes to the consolidated financial statements 24. Commitments Non-cancellable operating leases The Group leases offices in a number of locations. The most significant of these leases is the Melbourne head office where the lease is a non-cancellable operating lease expiring within 6 years. Upon renewal date, the Company has the option to renew the lease for a further 2 years at terms which are negotiable. The Group also leases various motor cars and printers under non-cancellable operating leases. Commitments for minimum lease payments in relation to non-cancellable operating leases are payable as follows: Within one year Later than one year but not later than five years Later than five years 25. Related party transactions (a) Subsidiaries IInterests in subsidiaries are set out in note 27. (b) Key management personnel compensation Short-term employee benefits Deferred short-term employee benefits Post-employment benefits Long-term employment benefits Share-based payments 2014 $’000 2013 $’000 3,828 14,621 598 19,047 3,279 12,726 3,897 19,902 2014 $ 2013 $ 5,228,798 4,629,625 282,334 140,180 222,192 - 137,333 76,331 1,963,730 1,739,636 7,837,234 6,582,925 (c) Transactions with other related parties The following transactions occurred with related parties, the nature of which are described in the remuneration report. Sales of goods and services Sale of services to related parties Purchases of goods and services Purchases of goods and services from related parties 2014 $ 2013 $ 772,284 573,027 3,652,135 3,365,979 All transactions were made on normal commercial terms and conditions, at market rates and includes transactions with associates. Notes to the consolidated financial statements carsales.com Limited Annual Report - 30 June 2014 | 87 (d) Outstanding balances arising from sales/purchases of goods and services The following balances are outstanding at the end of the reporting period in relation to transactions with related parties: Current receivables (sales of goods and services) Other related parties Current payables (purchases of goods and services) Other related parties 2014 $ 2013 $ 135,710 126,033 805,886 503,537 There is no allowance account for impaired receivables in relation to any outstanding balances, and no expense has been recognised in respect of impaired receivables due from related parties. 26. Business combination (a) Stratton acquisition On 15 July 2014 carsales.com Ltd acquired 50.1% of Stratton Finance Pty Ltd (Stratton), an innovative vehicle finance business and long-term customer of carsales.com Ltd. Purchase consideration: Cash Paid The assets and liabilities acquired are estimated as follows: Cash and cash equivalents Trade and other receivables Plant and equipment Inventory Deferred tax assets Intangible assets Trade and other payables Provisions External loans Tax liabilities Net assets Outside shareholders interests Goodwill Net assets acquired $’000 59,118 4,425 3,355 1,701 1,035 100 3,064 (5,954) (725) (593) (3,464) 2,944 (1,469) 57,643 59,118 88 | carsales.com Limited Annual Report - 30 June 2014 Notes to the consolidated financial statements The goodwill is attributable to the workforce, Stratton’s strong position in a high growth market, its customer database, the high profitability of the business and synergistic benefits expected to be created by this acquisition. The goodwill is not expected to be deductible for tax purposes. (i) Initial accounting Both the net asset value and the allocation of the purchase price to acquired assets are still preliminary. In particular, the fair values assigned to intangible assets are still being assessed and may be subject to change. The acquisition accounting will be finalised within 12 months of the acquisition date. (ii) Acquired receivables The fair value of trade and other receivables is $1,681,000 which includes trade receivables with a fair value of $1,527,000. No trade receivables are considered uncollectable. (iii) Non-controlling interest In accordance with the accounting policy set out in note 1(h), the Group will recognise the non-controlling interests in Stratton at fair value rather than at the proportionate share of net identifiable assets. The fair value of the non-controlling interest will be determined with reference to the purchase price of the acquired interest, as this represented a transaction between a willing buyer and independent willing sellers. The current ownership structure of Stratton is as follows: carsales.com Ltd Non-controlling interests D'Azur Holdings Pty Ltd Other minor shareholders 50.1% 35.4% 14.5% 100.0% (iv) Revenue and profit contribution As the acquisition date for Stratton was after 30 June 2014 no associated revenues or profits are included in the reported results. (v) Year end The Stratton Group has a 30 June year-end which aligns with that of carsales.com Ltd. (vi) Acquisition related costs Acquisition costs totalling $182,202 have been recognised in the consolidated income statement in “operations and admininstration”. Notes to the consolidated financial statements carsales.com Limited Annual Report - 30 June 2014 | 89 27. Interests in other entities (a) Material subsidiaries The Group’s principal subsidiaries at 30 June 2014 are set out below. Unless otherwise stated, they have share capital consisting solely of ordinary shares that are held directly by the Group and the proportion of ownership interests held equals the voting rights held by the Group. The country of incorporation or registration is also their principal place of business. Place of business/ country of incorporation Ownership interest held by the Group * Ownership interest held by non-controlling interests Principal activities Name of entity 2014 % 2013 % 2014 % 2013 % Webpointclassifieds Pty Ltd Australia 100.0 100.0 Equipment Research Group Pty Ltd Australia 100.0 100.0 Discount Vehicles Australia Pty Ltd Australia 100.0 100.0 Automotive Data Services Pty Ltd Australia 100.0 100.0 Auto Information Limited New Zealand 100.0 100.0 Red Book Automotive Services (M) Sdn Bhd Malaysia 100.0 100.0 Red Book Automotive Data Services (Beijing) Limited China 100.0 100.0 Automotive Data Services (Thailand) Company Limited Thailand 100.0 100.0 Tyresales Pty Ltd ** Australia 50.0 Automotive Exchange Holdings Pty Ltd Australia 100.0 Automotive Exchange Pty Ltd Australia 50.0 - - - carsales.com Investments Pty Ltd Australia 100.0 100.0 carsales Holding Pty Ltd Australia 100.0 carsales Finance Pty Ltd Australia 100.0 carsales.com Ltd Employee Share Trust Australia - - - - - - - - - - - - 50.0 - 50.0 - - - - * The proportion of ownership interest is equal to the proportion of voting power held. ** In 2013 carsales.com Ltd did not have control and Tyresales Pty Ltd was accounted for under AASB128. - - - - - - - - - - - - - - - Classified advertising Data and research Classified advertising Data and research Data and research Data and research Data and research Data and research Online retail Holding company Classified advertising Holding company Holding company Holding company Employee Share Trust 90 | carsales.com Limited Annual Report - 30 June 2014 Notes to the consolidated financial statements (b) Non-controlling interests (NCI) Interest in: Share capital Retained earnings 2014 $’000 2013 $’000 100 1,032 1,132 - - - Set out below is summarised financial information for each subsidiary that has non-controlling interests that are material to the Group. The amounts disclosed for each subsidiary are before inter-company eliminations. Tyresales Auto Exchange 30 June 2014 $’000 30 June 2013 $’000 30 June 2014 $’000 30 June 2013 $’000 1,420 (1,275) 428 573 80 40 536 (358) 200 378 - - - - - - - - - - 2,827 (1,220) 102 1,709 1,550 775 182 (68) - 114 - - - - - - - - - - Summarised balance sheet Current assets Current liabilities Non-current assets Net assets Summarised statement of comprehensive income Profit for the period Profit/(loss) allocated to NCI Summarised cash flows Cash flows from operating activities Cash flows from investing activities Cash flows from financing activities Net increases in cash and cash equivalents (c) Interests in associates and joint ventures Place of business/ country of incorporation % of ownership interest Nature of relationship Measurement method Quoted fair value Carrying amount Name of entity 2014 % 2013 % 2014 $’000 30.0 Associate Equity method - 2013 $’000 - 2014 $’000 93,323 2013 $’000 90,535 Webmotors SA Brazil iCar Asia Indonesia SKENCARSALES South Korea Tyresales * Australia Total equity accounted investments 30.0 22.9 49.9 - 19.9 Associate Equity method 57,106 16,537 19,146 13,431 - Associate Equity method 50.0 Joint Venture Equity Method - - - - 127,957 - - 221 240,426 104,187 * Tyresales in 2013 was a joint venture but it is now consolidated. Notes to the consolidated financial statements carsales.com Limited Annual Report - 30 June 2014 | 91 (i) Commitments and contingent liabilities in respect of associates and joint ventures Commitments - joint ventures and associates Contingent liabilities - associates Contingent liabilities relating to liabilities of the associate for which the company is severally liable (ii) Summarised financial information for associates and joint ventures 2014 $’000 2013 $’000 1,230 - Webmotors SA iCar Asia Ltd SKENCARSALES Pty Ltd 30 June 2014 $’000 30 June 2013 $’000 30 June 2014 $’000* 30 June 2013 $’000 30 June 2014 $’000 30 June 2013 $’000 Summarised balance sheet Total current assets Total non-current assets 98,753 16,059 93,518 9,252 15,593 7,391 16,815 7,670 13,955 30,818 Total current liabilities (5,569) (3,757) (1,523) (1,905) (3,527) Total non-current liabilities - - Net assets Group's share in % Group's share in $ Goodwill Carrying amount 109,242 99,013 30.0 32,773 60,550 93,323 30.0 29,704 60,831 90,535 Reconciliation of carrying value Opening carrying value 90,535 - Investment in associate Profit/(loss) for the period Other comprehensive income Dividends received 430 4,609 (1,607) (644) 90,535 - - - (1,831) 19,630 22.9 4,495 14,651 19,146 13,431 7,705 (1,990) - - (1,858) 20,722 19.9 4,124 9,307 13,431 - 13,634 (203) - - (8,184) 33,062 49.9 16,499 111,458 127,957 - 126,475 815 667 - Closing carrying value 93,323 90,535 19,146 13,431 127,957 Summarised statement of comprehensive income Revenue 35,455 Profit from continuing operations 15,363 Other comprehensive income Total comprehensive income Carsales share Profit from continuing operations Comprehensive income Total Dividends received from associates and joint venture entities (1,607) 13,756 4,609 (1,607) 3,002 644 - - - - - - - - 1,991 500 (9,448) (1,020) - - 4,923 1,633 667 (9,448) (1,020) 2,300 (1,990) (203) - - 815 667 (1,990) (203) 1,482 - - - * These numbers are management estimates based on market available data. - - - - - - - - - - - - - - - - - - - - - - - 92 | carsales.com Limited Annual Report - 30 June 2014 Notes to the consolidated financial statements 28. Events occurring after the reporting period On the 15 July 2014 carsales.com Ltd acquired 50% of Stratton Finance Pty Ltd out of additional funding acquired post 30 June 2014 (details are included under note 19). Details of this acquisition can be found in Note 26 - Business combination. 29. Reconciliation of profit after income tax to net cash inflow from operating activities Profit for the year Depreciation and amortisation Profit on sale of assets Non-cash employee benefits expense - share-based payments Share of (profit)/losses of associates and joint venture partnership Net exchange differences Change in operating assets and liabilities: (Increase) in trade debtors Decrease/(Increase) in deferred tax assets Decrease in other operating assets Increase/(Decrease) in trade creditors (Decrease)/Increase in other operating liabilities Increase/(Decrease) in provision for income taxes payable Decrease/(Increase) in loan establishment fees* Increase in other provisions Net cash inflow from operating activities * The loan establishment fees have been netted off against the borrowings in the balance sheet. 2014 $’000 96,272 3,309 (1) 1,775 (3,434) (22) (4,437) 722 315 4,749 (3,219) 1,805 158 701 98,693 2013 $’000 83,516 2,553 (5) 3,360 232 85 (4,169) (1,544) 723 (249) 6,379 (1,697) (475) 427 89,136 Notes to the consolidated financial statements carsales.com Limited Annual Report - 30 June 2014 | 93 30. Earnings per share (a) Basic earnings per share From continuing operations attributable to the ordinary equity holders of the Company Total basic earnings per share attributable to the ordinary equity holders of the Company (b) Diluted earnings per share From continuing operations attributable to the ordinary equity holders of the Company Total diluted earnings per share attributable to the ordinary equity holders of the Company (c) Reconciliation of earnings used in calculating earnings per share Basic earnings per share Profit from continuing operations Diluted earnings per share 2014 Cents 40.2 40.2 40.0 40.0 2013 Cents 35.5 35.5 35.2 35.2 2014 $’000 2013 $’000 95,457 83,516 Profit attributable to the ordinary equity holders of the Company used in calculating diluted earnings per share 95,457 83,516 (d) Weighted average number of shares used as denominator Weighted average number of ordinary shares used as the denominator in calculating basic earnings per share Adjustments for calculation of diluted earnings per share: Options outstanding Weighted average number of ordinary shares and potential ordinary shares used as the denominator in calculating diluted earnings per share 2014 2013 237,466,757 235,244,384 1,322,631 1,814,145 238,789,388 237,058,529 (e) Information on the classification of securities (i) Options and performance rights Options and performance rights granted to employees under the carsales.com Ltd Employee Option Plan are considered to be potential ordinary shares and have been included in the determination of diluted earnings per share to the extent to which they are dilutive. The options and performance rights have not been included in the determination of basic earnings per share. Details relating to the options are set out in note 31. 94 | carsales.com Limited Annual Report - 30 June 2014 Notes to the consolidated financial statements 31. Share-based payments (a) Employee Option Plan Set out below are summaries of options and performance rights granted under the plan: Expiry date Exercise price Balance at start of the year Number Options granted during the year Number Performance rights granted during the year Number Total exercised during the year Number Expired during the year Number Balance at end of the year Number Vested and exercisable at end of the year Number Grant Date 2014 Jul 2007 Jun 2014 Jul 2007 Sep 2014 $1.75 $1.75 2,000 5,000 Sep 2008 Sep 2013 $2.00 20,000 Mar 2010 Oct 2014 $3.89 157,500 Oct 2010 Oct 2015 $4.90 1,067,347 Mar 2011 Oct 2015 $4.90 450,000 Oct 2011 Oct 2016 $4.69 882,347 Oct 2011 Oct 2016 $0.00 201,554 Mar 2012 Mar 2017 $4.69 208,247 Mar 2012 Mar 2017 $0.00 66,399 Oct 2012 Oct 2017 $5.93 727,850 Oct 2012 Oct 2017 $0.00 257,223 Oct 2013 Oct 2018 $9.10 Oct 2013 Oct 2018 $0.00 - - - - - - - - - - - - - - 408,073 - - - - - - - - - - - - - - 208,383 (2,000) - (20,000) (126,875) (892,347) - - - - - - - 5,000 5,000 - - 30,625 30,625 175,000 175,000 (315,000) (35,000) 100,000 100,000 (222,960) (67,819) - - 659,387 167,933 133,735 - - - - - - (43,964) 164,283 (14,020) 52,379 (17,462) 710,388 (6,311) 250,912 (1,917) 406,156 (727) 207,656 - - - - - - - Total 4,045,467 408,073 208,383 (1,647,001) (119,401) 2,895,521 478,558 Weighted average exercise price $4.33 $9.10 $0.00 $4.55 $4.18 $4.57 $4.71 Notes to the consolidated financial statements carsales.com Limited Annual Report - 30 June 2014 | 95 Balance at Options granted rights granted Total Vested and exercised Expired Balance at exercisable Exercise start of the during the during the during the during the end of the at end of Performance year Number year Number year Number year Number year Number year Number the year Number Grant Date Expiry date 2013 Jul 2007 Jun 2014 Oct 2007 Oct 2012 price $1.75 $2.15 42,000 80,000 Sep 2008 Sep 2013 $2.00 520,000 Jul 2009 Jul 2014 $2.00 240,000 Dec 2009 Jun 2014 $3.89 250,000 Mar 2010 Oct 2014 $3.89 946,250 Oct 2010 Oct 2015 $4.90 1,450,000 Mar 2011 Oct 2015 $4.90 485,000 Oct 2011 Oct 2016 $4.69 1,037,134 Oct 2011 Oct 2016 $0.00 263,105 Mar 2012 Mar 2017 $4.69 216,005 Mar 2012 Mar 2017 $0.00 68,873 Oct 2012 Oct 2017 $5.93 Oct 2012 Oct 2017 $0.00 - - - - - - - - - - - - - - 727,850 - - - - - - - - - - - - - - 257,223 (35,000) (80,000) (500,000) (240,000) (250,000) (788,750) (382,653) - - - - - - - 7,000 7,000 - - 20,000 20,000 - - - - 157,500 157,500 1,067,347 342,347 - (35,000) 450,000 - (154,787) (61,551) - - 882,347 130,812 201,554 - - - - (7,758) 208,247 (2,474) 66,399 - - 727,850 257,223 - - - - - Total 5,598,367 727,850 257,223 (2,492,741) (45,232) 4,045,467 657,659 Weighted average exercise price $3.90 $5.93 $0.00 $3.35 $4.60 $4.33 $4.49 The Director’s estimate of the weighted average share price at the date of exercise of options exercised regularly during the year ended 30 June 2014 is estimated to be approximately $10.61 (2013: approximately $7.71). The weighted average remaining contractual life of share options outstanding at the end of the period was 2.99 years (2013 - 3.12 years). The establishment of the carsales.com Ltd Employee Option Plan was undertaken under a prospectus lodged with ASIC in 2000. Staff eligible to participate in the plan are those invited by the Board of Directors. Options and performance rights are granted under the plan for no consideration with conditions including a vesting period and expiry date. For senior executives vesting conditions, including EPS targets, are noted in the Remuneration Report on page 28. Options and performance rights granted under the plan carry no dividend or voting rights. When exercisable, each option is convertible into one ordinary share in return for payment of the option’s exercise price. Each performance rights is convertible into one ordinary share for $0 exercise price, upon satisfaction of all vesting requirements. The exercise price of options is set in advance by the Board of Directors. Fair value of options and performance rights granted The assessed fair value at grant date of options granted during the year ended 30 June 2014 is $3.91 (2013 - between $2.33 and $2.43). The assessed value at grant date of performance rights granted during the year ended 30 June 2014 ranged between $10.32 and $10.58 (2013 - between $6.73 and $6.96). The fair value at grant date is determined using a Black-Scholes option pricing model that takes into account the exercise price, the term of the option and performance right, the impact of dilution, the share price at grant date and expected price volatility of the underlying share, the expected dividend yield and the risk free interest rate for the term of the option. 96 | carsales.com Limited Annual Report - 30 June 2014 Notes to the consolidated financial statements The model inputs for options granted during the year ended 30 June 2014 included: (a) Options are granted for no consideration. For vesting dates for senior executives, refer page 33. (b) Exercise price: $9.10 (2013: $5.93). (c) Grant date: October 2013 (2013: October 2012). (d) Expiry date: October 2018 (2013: October 2017). (e) Share price at grant date: $10.55 (2013: $7.71). (f) Expected price volatility of the Company’s shares: 34% (2013: 34%). (g) Expected dividend yield: 2.5% (2013: 3.4%). (h) Risk-free interest rate: 4.1% (2013: 3.04%). The model inputs for performance rights granted during the year ended 30 June 2014 included: (a) Performance rights are granted for no consideration. For vesting dates for senior executives, refer page 33. (b) Exercise price: $0. (c) Grant date: October 2013 (2013: October 2012). (d) Expiry date: October 2018 (2013: October 2017) (e) Share price at grant date: $10.55 (2013: $7.71) (f) Expected price volatility of the Company’s shares: 34% (2013: 34%) (g) Expected dividend yield: 2.5% (2013: 3.4%) (h) Risk-free interest rate: 4.1% (2013: 3.04%) The expected price volatility is based on historical volatility adjusted for any expected changes to future volatility due to publicly available information. (b) Expenses arising from share-based payment transactions Total expenses arising from share-based payment transactions recognised during the period as part of employee benefit expense were as follows: Options and performance rights issued under employee option plan 32. Parent entity financial information (a) Summary financial information Balance sheet Current assets Non-current assets Total assets Current liabilities Non-current liabilities Total liabilities Shareholders’ equity Issued capital Reserves Retained earnings Profit or loss for the year Total comprehensive income 2014 $’000 1,775 2013 $’000 3,360 Parent entity 2014 $’000 2013 $’000 53,553 344,352 397,905 60,190 166,008 226,198 77,603 17,711 76,393 171,707 81,759 81,759 42,095 199,074 241,169 97,195 721 97,916 70,105 14,902 58,246 143,253 70,223 70,223 (b) Contingent liabilities of the parent entity The parent entity did not have any contingent liabilities as at 30 June 2014 or 30 June 2013. Notes to the consolidated financial statements carsales.com Limited Annual Report - 30 June 2014 | 97 Directors’ declaration & Auditor’s report Directors’ declaration In the Directors’ opinion: (a) the financial statements and notes set out on pages 55 to 97 are in accordance with the Corporations Act 2001, including: (i) Complying with Accounting Standards, the Corporations Regulations 2001 and other mandatory professional reporting requirements. (ii) Giving a true and fair view of the consolidated entity’s financial position as at 30 June 2014 and of its performance for the financial year ended on that date.. (b) there are reasonable grounds to believe that the Company will be able to pay its debts as and when they become due and payable. Note 1(a) confirms that the financial statements also comply with International Financial Reporting Standards as issued by the International Accounting Standards Board. The Directors have been given the declarations by the Managing Director and Chief Financial Officer required by section 295A of the Corporations Act 2001. Greg Roebuck Managing Director Sydney, 13 August 2014 carsales.com Limited Annual Report - 30 June 2014 | 99 100 | carsales.com Limited Annual Report - 30 June 2014 carsales.com Limited Annual Report - 30 June 2014 | 101 Shareholder information The shareholder information set out below was applicable as at 13 August 2014. A. Distribution of equity securities Holding 1 - 1,000 1,001 - 5,000 5,001 - 10,000 10,001 - 100,000 100,001 and over Class of equity security Ordinary shares Shares 5,416 4,495 704 469 85 11,169 Options and performance rights Redeemable preference shares Convertible notes 25 29 7 30 5 96 - - - - - - - - - - - - There were 137 holders of less than a marketable parcel of ordinary shares. B. Equity security holders Twenty largest quoted equity security holders The names of the twenty largest holders of quoted equity securities are listed below: Name J P Morgan Nominees Australia Limited HSBC Custody Nominees (Australia) Limited National Nominees Limited Clear Way Investments Pty Ltd Citicorp Nominees Pty Limited BNP Paribas Noms Pty Ltd RBC Investor Services Australia Nominees Pty Limited Citicorp Nominees Pty Limited HSBC Custody Nominees (Australia) Limited Four Us Pty Ltd National Nominees Limited Steven Kloss Pty Ltd Billkaren Pty Ltd Essena Pty Ltd Essena Pty Ltd Kilienz Pty Ltd UBS Nominees Pty Ltd AMP Life Limited Mr Andrew Gajtan Curmi Gregory Paul Roebuck 102 | carsales.com Limited Annual Report - 30 June 2014 Ordinary shares Number held Percentage of issued shares 59,937,101 34,845,495 30,108,458 14,000,000 11,305,891 6,021,905 4,546,207 3,903,641 3,747,375 2,926,555 2,803,995 2,482,000 2,250,000 1,711,722 1,646,555 1,400,000 1,337,270 1,312,434 1,160,500 1,024,450 25.2 14.7 12.7 5.9 4.8 2.5 1.9 1.6 1.6 1.2 1.2 1.0 1.0 0.7 0.7 0.6 0.6 0.6 0.5 0.4 188,471,554 79.2 Options and performance rights issued under the carsales.com Ltd Employee Option Plan to take up ordinary shares 2,895,521 96 Number on issue Number of holders C. Substantial holders Substantial holders in the Company are set out below: Hyperion Asset Management JCP Investment Partners FIL Investment Management Australia Number held 28,703,183 16,413,962 14,891,613 Percentage 12.1 6.9 6.3 D. Voting rights The voting rights attaching to each class of equity securities are set out below: (a) Ordinary shares On a show of hands every member present at a meeting in person or by proxy shall have one vote and upon a poll each share shall have one vote. (b) Options No voting rights. carsales.com Limited Annual Report - 30 June 2014 | 103 104 | carsales.com Limited Annual Report - 30 June 2014 Notes to the consolidated financial statements 

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