T o y s “ R ” U s A N Z L i m i T e d | A n n u A l R e p o R t 2 0 2 2 T O Y S “ R ” U S T O Y S “ R ” U S A N Z L I M I T E D A N Z L I M I T E D 2 0 2 2 A nn u a l r e p o r t Contents Contents 01 Our story 01 Our story 02 Chair’s Letter 02 Chair’s Letter 04 CEO’s Letter 04 CEO’s Letter 06 Directors’ Report 06 Directors’ Report 25 Financial Report 25 Financial Report 84 Shareholder 84 Shareholder Information Information 86 Corporate 86 Corporate Directory Directory TOys“R”Us ANZ LimiTed TOys“R”Us ANZ LimiTed Annual Report 2022 Annual Report 2022 Our Our story story At Toys”R”Us, we believe that toys have the power to change lives. Play enables children to develop their imagination, collaborate, problem solve, explore, create or simply express themselves spontaneously. Our mission at Toys”R”Us is to encourage children to engage with as many forms of play as we possibly can. We have relaunched in 2019, as a new company, to bring play back into the lives of children of all ages. 01 Chair’s Letter Chair’s Letter Dear Fellow Shareholders, As Chair and on behalf of the Board of Directors, it is my pleasure to present the 2022 Annual Report for Toys“R”Us ANZ Limited (ASX:TOY) (“the Company”), a company with a bright future in a rapidly evolving online retail industry. At Toys”R”Us, we believe that toys have the power to change lives. Playing with toys empowers children to develop their imagination, collaborate, problem solve, explore and create. As licensee of the world’s most trusted children and baby brand, we are proud to play our part in encouraging children to express themselves fully and engage with play in all its forms. 02 TOys“R”Us ANZ LimiTed TOys“R”Us ANZ LimiTed Annual Report 2022 Annual Report 2022 Since relaunching in 2019, the Company has demonstrated its capacity to deliver growth by pursuing penetration of the large and attractive toy, baby and hobby markets in all licensed regions. According to research firm IBISWorld, toy, game and hobby retailing in Australia is a billion-dollar industry projected to grow strongly in the coming years, with baby products adding materially to this addressable market. We believe we are taking on this opportunity at the right time equipped with the right strategy, plan and resources. Over the course of FY22, our team has refined Toys“R”Us ANZ into a much stronger business, with financial stability, improving scale, strengthened leadership and market-leading capabilities. $26m$26m In FY22 our e-commerce direct-to- consumer (B2C) business grew its revenue by 98% to $26 million During the year, we remained focused on our growth strategy which deliberately plays to our competitive advantages. As custodian of the world’s most loved and trusted children and baby brands, Toys“R”Us and Babies“R”Us, we are well-placed to deliver conversion and growth in active customers by leveraging our strong market recognition. Our product range is expansive, specialising in toys, babies and hobbies, and we deliver an unbroken demographic journey – addressing the needs of families from newborns and toddlers through to teenagers and adults. Our business model is future-focused by design. We are pursuing a digital-first strategy which aligns with how shoppers are and will increasingly shop in the future. This affords us a relatively low cost of doing business, especially so as we can now enjoy the benefits of our centralised efficient operations which incorporate state-of-the-art logistics technologies. Early in FY22, the Company announced that WHP, owner of the Toys”R”Us brand globally, had granted Toys”R”Us ANZ a 45 year license to expand by digitally relaunching the Toys”R”Us and Babies”R”Us brands in the United Kingdom. As a toy market, the UK is more than 3 times larger than Australia and New Zealand. It is a market that Toys“R”Us knows well, having achieved annual UK sales revenue of £421 million (~A$740 million) in 2016 prior to closing in late 2017. We are well-advanced in delivering our plan to expand in the UK. With early feedback from our soft launch highly encouraging, we have secured all key logistics, delivery and vendor partnerships and are fully prepared for a productive holiday season. Many thanks for this progress must go to our UK senior executive team who joined the business over the course of FY22. Our nascent UK expansion complements our activities in the ANZ region. In FY22 our e-commerce direct-to-consumer (B2C) business grew its revenue by 98% to $26 million, while our B2B segment, led by the Mittoni IT importing and distribution business, delivered annual revenue growth of 28% to $11.1 million while more than doubling segment EBITDA to $1.3 million. We remain committed to growing both the B2C and B2B sides of our business, with both arms benefiting from TOY’s core infrastructure and capabilities. Throughout the last financial year, Toys“R”Us ANZ’s management, employees and industry partners have gone above and beyond to grasp opportunities to grow through what has been a challenging operating environment for online retail businesses. I would like to thank the team for their ongoing dedication, and in particular our CEO Louis Mittoni for leading the successful implementation of our growth strategy. I would also like to thank Yehuda Shmidman, board observer on the Company’s board, and Chair and CEO of WHP and Global license holder Toys”R”Us Kids for his sage guidance as we steer the Toys”R”Us and Babies”R”Us brands into their next phase of growth. I would also like to thank my fellow Board members and shareholders for their commitment and support over the year. As Chair of Toys”R”Us ANZ, I commit to you that your Company and its board of directors will work to deliver on its potential in 2023 and beyond. Kevin A Moore FAICD, MCIM Chair of the Board 25 October 2022 03 CeO’s Letter CeO’s Letter Dear Fellow Shareholders, Welcome to the 2022 Annual Report for Toys“R”Us ANZ Limited (ASX:TOY) (“the Company”). In the year to 31 July 2022 (FY22), our Company strengthened its position as an emerging force in digital-first e-commerce direct-to-consumer retail, focusing on category sectors based around families and children. In FY22, Toys“R”Us ANZ delivered results that reflected significant and sustained growth as we executed our strategy to enrich the lives of children and parents. In many ways it was a year of two halves, as the Company benefited from trading conditions which were seasonally strong in the first half but which were impacted by our pausing of shipments in February 2022 and by macroeconomic pressure in the second half. Despite the well-documented challenges flowing from mixed Australian consumer confidence, the war in Ukraine and its attendant supply chain disruptions and expectations of higher interest rates, we remain well-placed to outperform in this environment by offering compelling value to shoppers through our world-class e-commerce platform. The performance of our direct-to-consumer (B2C) business over the year is testament to the value that Toys“R”Us ANZ offers to consumers. Our three shopper-facing e-commerce pillars – Toys“R”Us, Babies“R”Us and Hobby Warehouse – experienced strong growth in FY22, driving segment revenue +98% year-on-year (YoY) to $26.0 million. 04 TOys“R”Us ANZ LimiTed TOys“R”Us ANZ LimiTed Annual Report 2022 Annual Report 2022 Several of our key success metrics show that our B2C business is heading in the right direction. In Q4 of FY22, the average value of orders taken through the Toys“R”Us e-commerce website grew by 10% YoY to $133.50. The value of this metric has now been growing steadily for the past two and a half years. Our customer acquisition – the lifeblood of any online retail business – continues to provide strong returns. In FY22, the Company’s total active customers across all e-commerce channels increased by 29% YoY to 188k. Our engagement with these customers continues to improve, with higher average click-ad conversion rates contributing to improved return on marketing investment and customer conversion. Our business-to-business (B2B) business continues to perform and complement our B2C operations very well, reflecting growth in demand for our IT products that support performance-oriented businesses and gaming enthusiasts, and expanding revenue by 28% during the year to $11.1 million. We were particularly proud to increase our profitability in this area, growing B2B segment EBITDA by 110% vs FY21 to $1.3 million. Underpinning all of this organic growth are our deliberate efforts to implement the back-end infrastructure and technology that will empower us to gain global scale. A key factor in this was our July 2021 commissioning of the Company’s Autonomous Mobile Robot (AMR) e-commerce logistics centre in Dandenong South, Victoria. These facilities have increased the capacity and efficiency of the Company’s storage, picking and logistics processes. Of equal significance is the completion of our new 19,650m2 warehouse facility in Clayton, Victoria, providing almost 4x the size of the previous interim facility and empowering Toys“R”Us to meet its ambitious growth plans over the next several years. We are excited to implement our plans to accelerate and scale our Toys“R”Us, Babies“R”Us and Hobby Warehouse operations in Australia, and relaunch Toys“R”Us and Babies“R”Us in the United Kingdom. We are now ready to scale up in the UK, having carefully built the operational capability to meet shoppers’ expectations and demand from market launch right through to the peak trading season. The UK has one of the most advanced e-commerce markets in Europe and the total addressable market for toys and games for 2020 was £3.3 billion, representing the largest toy market in Europe and the fourth largest globally. The opportunity in the Babies“R”Us addressable market is similar, if not greater, in its strategic significance. In July 2022 we were pleased to arrange a senior term loan facility of up to A$15 million to support and advance the Company’s planned entry into the UK market and e-commerce launch. We were encouraged by the support we received in finalising the loan facility and thank our existing and incoming investors for the confidence they have provided. With our strategy and team in place and funding secured, the Company enters FY23 with a strong platform for growth as we reintroduce one of the world’s best-loved children’s brands to Australia and the UK. We maintain a positive outlook for continued growth in revenue and customer engagement, with healthy momentum developing through strategic initiatives to drive the Company towards its medium-term goal of 5% market share penetration in the toys, baby and hobby markets in all licensed regions. I would like to sincerely thank our dedicated employees from warehouse, customer experience, buying and sales through to finance, administration and senior leadership in Australia and the UK. Their hard work, passion and commitment to our mission is empowering us to build a great company. Thank you to Lian Yu our COO, Wei Si our CFO and Company Secretary, Kevin Moore our Chair and my fellow Board Directors for their cohesive support throughout an incredible year. I’d like to thank Yehuda Shmidman, Chair and CEO of WHP Global, for his vision and drive, along with the entire WHP Global and Tru Kids Inc teams for their valuable insights and support. I’d also like to thank you, our shareholders, for your support and continued belief in our vision. We will continue our focus on executing our strategy to achieve our goals and drive sustainable long-term value and growth for your Company. Yours sincerely Louis Mittoni Managing Director and CEO 05 Directors’ Report The directors present their report, together with the consolidated financial statements, on the consolidated entity (referred to hereafter as the ‘Group’) consisting of Toys“R”Us ANZ Limited (referred to hereafter as ‘Toys“R”Us ANZ’, ‘TOY’, the ‘Company’ or ‘parent entity’) and the entities it controlled at the end of, or during, the year ended 31 July 2022. Directors The following persons were directors of Toys“R”Us ANZ Limited during the whole of the financial year and up to the date of this report unless otherwise stated: • Kevin Moore; • Louis Mittoni; • Nicki Anderson (resigned 31 August 2022); and • John Tripodi. Principal activities Toys“R”Us ANZ Limited is an Australian based listed company with a mission to enrich the lives of people by encouraging exploration, creativity and living life more fully through the enjoyment of toys and hobbies. The Company acquired 100% of the Hobby Warehouse Group in November 2020, including Australian e-commerce websites Toys“R”Us, Babies“R”Us and Hobby Warehouse and the distribution business Mittoni Pty Ltd. In October 2021, a 100% owned subsidiary UK Toys”R”Us Limited was incorporated for the distribution of toys and baby products under the brand name Toys“R”Us® and Babies“R”Us® in the United Kingdom. Dividends There were no dividends paid, recommended or declared during the current or previous financial year. Financial and operational review Financial results Key Financials AUD ‘m Revenue from continuing operations EBITDA from continuing operations Profit/(Loss) before Tax from continuing operations Net profit/(loss) after tax from continuing operations Basic EPS (cents) from continuing operations Dividend per share (cents) ROE1 Net cash balance / (Net debt) ($m) Gearing2 1. NPAT/average shareholder equity. 2. Debt/shareholder equity. FY22 37.9 (9.1) (25.2) (24.9) (2.9) N/A FY21 % Change 21.8 (4.4) (5.3) (5.1) (0.8) N/A 73.8 103.9 372.2 388.4 271.7 (8.48%) (1.16%) 631.03 2.5 29% 17.3 0.0 (85.4) n/a The Group’s statutory loss after income tax for the year ended 31 July 2022 was $24.8 million (2021: Loss after income tax $3.11 million). 06 Toys “R” Us ANZ Limited Annual Report 2022 Operating review Growth in customer activity and revenue During FY22, Toys“R”Us achieved significant and sustained growth as the Group delivered into trading conditions which were seasonally strong in the first half and which were impacted by the pausing of shipments in February 2022 and by macroeconomic pressure on trading conditions in the second half. The pause allowed completion of extensive changes to key business systems and migration of the Company’s accounting and Enterprise Resource Planning (ERP) systems. The Company achieved the following sales results through its Toys“R”Us Australian e-commerce website: • Average order value (AOV) of $133.50 for Q4 FY22; • Total number of all B2C active e-commerce customers increased to 188k as at end of July, a growth of 30% YoY; and • Cost of customer acquisition (CAC) for the Toys“R”Us e-commerce website was $12.45 for H2 FY22, representing an increase from the CAC of $10.10 achieved in H1 FY22. The Company is pleased to have delivered organic growth against a backdrop of decreased Australian toy industry sales between October 2021 and March 2022, having overcome the effects of elevated COVID-19 cases across Australia and mixed Australian consumer confidence. The FY22 revenue growth was led by significant expansion in the Company’s direct-to-consumer (B2C) business, where revenue increased by 98% YoY to $26.0 million. B2B segment revenue from continuing operations increased by 28% YoY to $11.1 million. The primary driver of the Company’s statutory net loss after tax was the recognition of a goodwill impairment charge valued at $14.5 million relating to the B2C segment. United Kingdom Expansion on Track On 27 October 2021, TOY and WHP Global announced a landmark long-term exclusive license agreement for Toys“R”Us ANZ Limited to operate digital and physical retail commerce for Toys“R”Us and Babies“R”Us in the United Kingdom. Following commencement of the license, taking effect mid-December 2021, the Company announced its senior executive team located in the UK, including highly experienced Marketing and eCommerce Director Mike Coogan and Buying Director Diane Lee. The Company strengthened this team further in 2022, welcoming an additional eight personnel including senior buyers, head of marketing and key support team members. In Q3 FY22, the Company appointed third-party logistics (3PL) specialist Amethyst Group as its warehouse and logistics provider in the UK. Based in Warwickshire, UK, Amethyst is a specialist warehousing and distribution business offering a range of 3PL services to manufacturers, wholesalers and distributors, retailers and online clients. Amethyst is one of the UK’s largest third-party provider of warehousing and distribution to the toy industry, delivering a cost-efficient supply chain with security and control over stock. The Company’s expansion to the UK represents a significant near-term growth opportunity for Toys“R”Us. The online share of UK toy sales grew to 60% in 2021, reinforcing that not only is the UK one of the most advanced e-commerce markets in Europe, but this advantage is significantly more pronounced in the toy industry. With the key UK team in place, the Company entered the UK market, with a soft e-commerce launch in the last week of September 2022. The unannounced soft launch generated unprompted media coverage, with approximately 10-fold higher visitor volumes in comparison to peak Australian e-commerce website users. A full media supported re-launch is scheduled in early October to coincide with the start of the toy buying season. This is in line with the capital light, digital-first market entry strategy announced earlier this year, with the objective of providing its e-commerce offering from fourth quarter of CY22, building to deliver broader e-commerce services to UK shoppers for the holiday and new year season in late 2022. 07 Directors’ Report (Cont.) Minimisation of Supply Chain Disruptions Global supply chain disruptions continued to affect suppliers and Australian industries throughout the period, causing shortages of raw materials, labour and increased logistics delays and costs. The Company met these challenges by strategically planning for extended lead times and collaborating closely with vendor partners to ensure adequate inventory levels. The Company pre-empted and proactively coordinated buying to mitigate supply disruptions in early 2021 and worked to expand its supply network. Toys“R”Us and Babies“R”Us added approximately 30 new brands between August 2021 and January 2022, providing increased category coverage and product redundancy. Selected ranges have also been forecast and pre-ordered in January 2022 for supply in advance of the seasonal peak period in November 2022. Further to the above inventory planning strategies employed during the year, TOY continues to plan gradual increases in factory-direct commitments that help manage and ameliorate supply risks and reduce corresponding landed costs, supporting TOY’s growth ambitions for the next several years. The Company also eliminated its reliance on pallet availability and their associated shortage in November 2021 by shifting to a dispatch model that conveys B2C consignments and collections with its Australia Post partnership. Further to this operational change, TOY plans to reactivate same-day delivery options for customers located in specific Victorian delivery zones in coming months. The Company is very pleased to report that COVID-19 has had negligible direct impact to team member health across the organisation to date through informed management and implementation of split warehouse shifts, diligent use of protective equipment by employees, and separation of team amenities where possible to minimise shared use. Business System Upgrade and Migration TOY achieved its objective, as set out at the 2021 AGM, to refine its technologies and business systems, completing the migration of its accounting and Enterprise Resource Planning (ERP) systems in February 2022. Toys“R”Us paused shipments between 28 January 2022 to 14 February 2022 to allow for extensive system changes to be undertaken. The new ERP platform is cloud-based and will enable Toys“R”Us to better integrate Warehouse Management Systems (WMS), automated robotic facilities, multi-tenant international operations, multi-currency and tax jurisdictions necessary for continued growth internationally. Once fully implemented, the ERP will provide improved order processing efficiency, scalability, and will enable enhanced analytics to expedite and augment management decisions. Victoria, Australia E-Commerce Distribution Centre and Headquarters On 20 July 2021, Toys“R”Us announced that it had entered into an agreement to lease a purpose built, state-of-the-art 19,650 m2 warehouse facility located in the Victorian City of Monash. The new premises, that will accommodate the Company’s short-term requirements for warehousing and office space, were completed in September 2022. The new warehouse and office facilities will enable Toys“R”Us to consolidate multiple sites to a single premises, scale its e-commerce operations considerably, meet increased demand, improve cost efficiencies and deliver higher levels of customer service and experiences to shoppers. The new warehouse is almost 4x the size of the previous interim facility and will empower Toys“R”Us to meet its ambitious growth plans over the next several years. The Company also expects to realise cost savings having secured the long-term lease prior to the recent emergence of construction material and service cost increases. Outlook and Strategic Plan The Company continues to pursue its aspirations of driving top line growth and deploying capital efficiently to achieve its medium-term goal of 5% market share penetration in the toys, baby and hobby markets in all licensed regions. 08 Toys “R” Us ANZ Limited Annual Report 2022 The Company plans to accelerate and scale Toys“R”Us, Babies“R”Us and Hobby Warehouse operations in Australia, and relaunch Toys“R”Us and Babies“R”Us in the UK in late CY22 with sufficient capability to meet shopper demand during the peak trading season. The Company continues to review strategic options to expand and realise its growth ambitions by identifying suitable business opportunities in addition to the growth initiatives reported above. Significant changes in the state of affairs New UK license agreement On 27 October 2021, the Company announced that it had signed a landmark long-term exclusive license agreement to run digital and physical retail commerce for Toys“R”Us® and Babies“R”Us® in the United Kingdom. This highly significant milestone is an acknowledgement of the Company’s commitment to the brands and successful relaunch in Australia of Toys“R”Us® and Babies“R”Us®, and a testament to the collaborative working relationship with worldwide brand owner WHP Global. The license took effect in mid-December 2021 and the Company is planning a capital light, digital-first, market entry strategy with the objective of providing its e-commerce offering from mid CY22, building to deliver broader e-commerce services to UK shoppers for the holiday and new year season in late 2022. The Company issued 13,502,326 shares during the year as follows: Date of issue Issued to 14/12/2021 15/12/2021 TRU Kids Inc in relation to the grant of the UK license Kevin Moore in relation to remuneration No. of shares issued 13,394,216 108,110 Issue price $0.18 $0.185 Secured loan facility In July 2022, the Company obtained a three-year secured loan facility of $15 million to support working capital and capital expenditure requirements for the Company’s planned entry into the UK market and e-commerce launch, including the acquisition of inventory. The loan is repayable at the end of July 2025 and as at the balance sheet date, the Group had utilised $10 million of the total facility limit and complied with the loan covenant requirements. Other than the above matters, no other significant changes in the state of affairs of the Group occurred during the year ended 31 July 2022. Matters subsequent to the end of the financial year The Company has entered into to an arrangement with the landlord on 20 July 2021 for lease of office and warehouse space in Clayton, Victoria for a period of ten years (with an option to extend for a further two terms of five years each) with an objective to consolidate all of its office and warehouse operations. The lease is expected to commence in October 2022, once ancillary works are completed by the landlord. The arrangement includes a lease incentive of $10.90 million, to be offset proportionally against monthly rental payments over the initial period of lease. The arrangement will result in recognition of right-of-use asset of $12.30 million and an equivalent lease liability upon commencement of the lease. No other matters or circumstance has arisen since 31 July 2022 that has significantly affected, or may significantly affect, the Group’s operations, the results of these operations, or the Group’s state of affairs in future years. 09 Directors’ Report (Cont.) Environmental regulations The Group is not subject to any significant environmental regulation under Australian Commonwealth or State law. Information on Directors Experience and expertise: Kevin has multinational board and governance experience, specialising in digital marketing, and is a growth director with a focus on $10 to $100 million businesses. He has a corporate career with director level marketing and general management experience across 30 countries, with success in launching and growing Australian and Global brands. His private company career saw him build a small technology based retail marketing business into the sector leader with 2,500 team members in ANZ, and clients that include Apple, Amazon, Bunnings, Coles and Woolworths. Kevin Moore Independent Non-Executive Director and Chair of the Board FAICD, MCIM Other current directorships: None Former directorships (last three years): Chair of the Board of Raiz Invest Limited Special responsibilities: Chair of the Board and member of the Remuneration and Nomination Committee and Audit and Risk Committee Interests in shares: 3,027,462 Interest in options over shares: 3,388,293 Experience and expertise: Louis is the founder of the Mittoni and Hobby Warehouse businesses. He has over 20 years’ experience in operating and managing Australian retail businesses in both distributor and online channels. As a qualified physicist and engineer, Louis has intimate knowledge of process optimisation, programming and artificial intelligence. Other current directorships: None Former directorships (last three years): None Special responsibilities: Chief Executive Officer and member of the Remuneration and Nomination Committee and Audit and Risk Committee Interests in shares: 291,455,818 Interest in options over shares: 16,941,463 Louis Mittoni Executive Director PhD – Chemical Engineering, BSc – Physics, MAICD, MAIP 10 Toys “R” Us ANZ Limited Annual Report 2022 Experience and expertise: Nicki is an accomplished leader and director with broad experience in strategy, sales, marketing, licensing and innovation within branded food, beverage and consumer goods businesses both in Australia and internationally. Nicki is a true global citizen having lived in Denmark, Canada and the United States, where she was Vice President Innovation for Cadbury Schweppes Americas Beverages based in New York. Nicki has strong links to Australia’s e-commerce, manufacturing and agricultural sectors. Nicki Anderson (resigned 31 August 2022) Other current directorships: Graincorp Independent Non-Executive Director B Bus, EMBA, GAICD Former directorships (last three years): Select Harvests Limited, Health and Plant Protein Group Limited Special responsibilities: Chair of the Remuneration and Nomination Committee and member of the Audit and Risk Committee Interests in shares: 1,075,467 Interest in service rights: 500,000 Experience and expertise: John is a business leader with extensive multinational FMCG experience in various strategic and operational roles with a track record of championing innovative brand strategies that deliver successful commercial outcomes. He is currently the CEO of the diversified sport, entertainment and consumer lifestyle agency, Twenty3 Group. Prior to co-founding the Twenty3 Group, John held senior sales and marketing roles with Mars Inc. before moving into general management with the L’Oréal Group. Other current directorships: None Former directorships (last three years): None Special responsibilities: Chair of the Audit and Risk Committee and member of the Remuneration and Nomination Committee Interests in shares: 110,803 Interest in service rights: 500,000 John Tripodi Independent Non-Executive Director B Com, B Bus (Hons) ‘Other current directorships’ quoted above are current directorships for listed entities only and exclude directorships of all other types of entities unless otherwise stated. ‘Former directorships (last three years)’ quoted above are directorships held in the last three years for listed entities only and exclude directorships of all other types of entities unless otherwise stated. 11 Directors’ Report (Cont.) Company Secretary Wei Si is the Company Secretary of the Group. He has substantial experience in governance and finance roles. Wei Si was appointed to the position of Company Secretary on 31 March 2022. Prior to Wei Si, Patrick Raper was the Company Secretary of the Group. Meetings of Directors The number of meetings of the Group’s Board of Directors held during the year ended 31 July 2022 and the number of meetings attended by each director were: Remuneration & Nomination Committee Board of Directors Audit & Risk Committee Kevin Moore Louis Mittoni Nicki Anderson John Tripodi A 4 3 4 4 B 4 3 4 4 A 13 13 13 13 B 13 13 13 13 A 6 6 6 6 B 6 6 6 6 A Number of meetings attended during the year the director was a member of the Board and/or Committee(s). B Number of meetings eligible to attend during the year the director was a member of the Board and/or Committee(s). 12 Toys “R” Us ANZ Limited Annual Report 2022 Remuneration report (audited) The Directors present the Remuneration report for the Group and its controlled entities for the year ended 31 July 2022. The Remuneration report forms a part of the Directors report and has been prepared in accordance with section 300A of the Corporations Act 2001. The information provided in the Remuneration report has been audited by the company auditors as required by section 308(3C) of the Corporations Act 2001. The Remuneration report outlines the remuneration policies and arrangements for the Company’s Key Management Personnel (KMP) including Directors and Executives who have authority and responsibility for planning, directing and controlling the activities of the Group. Details of key management personnel The directors and key management personnel of the Group during or since the end of the financial year were: Name Position Period in position during the year Kevin Moore Chair and Independent Non-Executive Director Appointed 26 November 2020 Louis Mittoni Managing Director Appointed 26 November 2020 John Tripodi Independent Non-Executive Director Appointed 25 October 2018 Nicki Anderson Independent Non-Executive Director Howard Abbey Chief Financial Officer Appointed 25 October 2018 – Resigned 31 August 2022 Appointed 2 May 2018 – Resigned 8 April 2022 Wei Si Lian Yu Chief Financial Officer and Company Secretary Appointed 28 March 2022 Chief Operating Officer Appointed 1 May 2021 Remuneration policy for directors and executives The objective of the Toys“R”Us ANZ remuneration policy is to attract, retain and motivate the people required to sustainably manage and grow the business. Executive remuneration packages include a balance of fixed remuneration, short term cash incentives and long-term equity incentives. The framework endeavours to align executive reward with market conditions and shareholders’ interests. Principles of Compensation The Remuneration & Nomination Committee makes specific recommendations to the Board on compensation packages and other terms of employment for directors and other senior executives. The Board then considers these recommendations and makes appropriate determinations, with compensation packages set at a level that is intended to attract and retain directors and executives capable of managing the consolidated entity’s diverse operations. Compensation of the senior executives is reviewed on an annual basis by the Remuneration & Nomination Committee having regard to personal and corporate performance and relevant comparative information. Compensation for senior executives comprises both fixed compensation and an “at risk” component. The “at risk” component comprises a short-term incentive payment based on a combination of the company’s results and individual performance levels, and a long-term incentive component pursuant to the Employee Incentive Plan. The payment of short-term incentives is dependent on the achievement of operating and financial targets set at the beginning of each year and assessed on an annual basis by the Board. Compensation and other terms of employment for senior executives are formalised in service agreements. The Group’s executive remuneration is directly related to the performance of the Group through the linking of short and long-term incentives to certain financial performance measures. These performance measures, as described below, are selected by the Board of Directors and considered relevant to the management of the operations of the Group and to effectively align the long-term interests of the directors, executives and shareholders. The performance conditions are assessed periodically by the Remuneration & Nomination Committee to ensure they remain relevant. 13 Directors’ Report (Cont.) Compensation and company performance Toys“R”Us ANZ Limited’s Earnings Before Interest, Tax, Depreciation and Amortisation (EBITDA) has been the key performance measure for the Company’s incentive plan for executives, linked to individual key performance objectives. Components of Compensation Fixed Compensation The terms of employment for all executive management contain a fixed compensation component, which is expressed in local currency. This fixed component is set in accordance with the market rate for a comparable role by reference to appropriate external benchmark information and having regard to an individual’s responsibilities, performance, qualifications, experience and location. An executive’s compensation is also reviewed on promotion. Fixed compensation includes contributions to superannuation and pension plans in accordance with relevant legislation or as contractually required. Fixed compensation is structured as a total employment cost package which may be delivered to the executive as a mix of cash and prescribed non-financial benefits at the executive’s discretion. There are no guaranteed pay increases in any senior executive’s contract. Benefits for termination of employment may be payable subject to the circumstances of the termination and within the terms of the employment contract. At risk Compensation Short-Term Incentives • The Short-Term Incentive (STI) plan is linked to specific targets (predominantly financial) with the opportunity to earn incentives based on a percentage of fixed compensation. • Performance measurements have been applied to each component of STI and accordingly, entitlements were determined with consideration to the executive’s level and area of responsibility. Performance against the objectives was determined and incentives and entitlements assessed against the audited financial results. The table below shows the Group’s earnings in the reporting period and the previous four financial periods/ years as well as an indication of the Group’s value over the corresponding period: Post Share Consolidation NPAT ($’000) Basic EPS (Cents) Diluted EPS (Cents) Total Dividends ($’000) Year End Share Price ($) Shares on Issue (No.) Year Ended 31-Jul-22 Year Ended 31-Jul-21 Year ended 31-Jul-20 Year ended 31-Jul-19 Year ended 31-Jul-18 (24,759) (2.89) (2.89) Nil 0.061 (3,113) (0.48) (0.48) Nil 0.160 (9,313) (3.94) (3.94) Nil 0.022 7,596 28,258 3.64 3.61 Nil 0.065 32.60 31.64 Nil 0.080 861,861,184 848,358,858 240,404,075 233,176,894 96,025,827 Market Capitalisation ($’000) 52,574 135,737 5,289 15,156 7,682 14 Toys “R” Us ANZ Limited Annual Report 2022 Remuneration of Key Management Personnel The aggregate compensation of the key management personnel of the Group is set out below: Short-term employee benefits Post- employ- ment benefits Other long-term employee benefits Share-based payments Year ended 31 July 2022 Directors Kevin Moore Louis Mittoni Nicki Anderson1 John Tripodi Sub-Totals Executives Howard Abbey2 Wei Si3 Lian Yu Sub-Totals TOTALS Salary and fees $ Cash bonus $ Non- monetary benefits $ Superan- nuation $ Long service leave $ Termi- nation Benefits $ 90,000 355,533 60,000 60,000 565,533 154,690 69,744 207,272 431,706 997,239 – – – – – – – – – – – – – – – – – – – – 9,038 27,693 6,025 6,025 – 9,947 – – 48,781 9,947 – – – – – 18,858 7,057 20,089 46,004 94,785 – – 9,266 9,266 19,213 30,931 – – 30,931 30,931 Share Appre- ciation Rights $ Share Options $ Total $ – – – – – – – – – – 95,403 214,441 477,016 870,189 30,000 96,025 30,000 96,025 632,419 1,276,680 – – 204,479 76,801 43,209 279,836 43,209 561,116 675,628 1,837,796 Shares $ 20,000 – – – 20,000 – – – – 20,000 1. Appointed 25 October 2018, resigned 31 August 2022. 2. Appointed 2 May 2018, resigned 8 April 2022. 3. Employed and appointed Chief Financial Officer and Company Secretary 28 March 2022. 15 Directors’ Report (Cont.) Short-term employee benefits Post- employ- ment benefits Other long-term employee benefits Salary and fees $ Short Term Incentive $ Non- monetary benefits $ Superan- nuation $ Long service leave $ Termi- nation Benefits $ Year ended 31 July 2021 Directors Kevin Moore 61,071 – Louis Mittoni 219,255 12,426 Nicki Anderson John Tripodi Bernie Brookes1 60,000 60,000 53,272 – – – Sub-Totals 453,598 12,426 Executives David Jackson2 36,555 Howard Abbey 235,535 – – Lian Yu3 134,937 46,500 Sub-Totals 407,027 46,500 TOTALS 860,625 58,926 – – – – – – – – – – – 5,839 16,050 5,725 5,725 5,061 38,400 24,150 24,932 15,897 64,979 103,379 – – – – – – – 994 10,212 11,206 11,206 – – – – – – 43,712 – – 43,712 43,712 Share-based payments Share Appre- ciation Rights $ Share Options $ Total $ – – 235,903 322,813 1,179,513 1,427,244 13,790 13,790 – – – – 79,515 79,515 58,333 Shares $ 20,000 – – – – 20,000 27,580 1,415,416 1,967,420 – – – – – – – – – – 104,417 261,461 10,802 218,348 10,802 584,226 20,000 27,580 1,426,218 2,551,646 1. Appointed 1 August 2019, resigned 26 November 2020. 2. Appointed 2 May 2019, resigned 4 September 2020. 3. Employed 26 November 2020, appointed Chief Operating Officer 1 May 2021. Fixed remuneration Remuneration linked to performance* 2022 2021 2022 2021 100% 100% 100% 100% – – 100% 100% 100% 100% 99.1% 100% 100% 100% 100% 100% – 78.7% – – – – – – – – – – 0.9% – – – – – – 21.3% Directors Kevin Moore Louis Mittoni John Tripodi Nicki Anderson (resigned 31 August 2022) Bernie Brookes (resigned 26 November 2020) Executive Officers David Jackson (resigned 4 September 2020) Howard Abbey (Resigned 8 April 2022) Wei Si (appointed as CFO 31 March 2022) Lian Yu * Represents short-term incentives. 16 Toys “R” Us ANZ Limited Annual Report 2022 Short term incentives In 2022 STI payments made were $nil (2021: $58,926). Long term incentives In 2022 LTI payments of $675,628 were made in the form of share options (2021: $1,426,218). Service Agreements Remuneration and other terms of employment for the Chair, Executive Director, Non-Executive Directors and the other executives are formalised in service agreements/employment letters. In the case of the Executive Director and other executives, these allow for the provision of performance-related short-term incentives and, where eligible, participation in the Toys“R”Us ANZ Limited Employee Incentive Plan. Additionally, other benefits including car allowances can be provided to all Key Management Personnel. Other major provisions of the service agreements relating to the remuneration of Directors and Executives are set out below: Kevin Moore – Chair & Independent Non-Executive Director • Term of the agreement – Full-Time permanent and no specific term. • Payment of a termination benefit on early termination by the employer is not applicable. John Tripodi – Non-executive Director • Term of the agreement – full-time permanent and no specific term. • Payment of a termination benefit on early termination by the employer is not applicable. Nicki Anderson – Non-executive Director (resigned 31 August 2022) • Term of the agreement – full-time permanent and no specific term. • Payment of a termination benefit on early termination by the employer is not applicable. Louis Mittoni – Executive Director and Chief Executive Officer • Term of the agreement – full-time permanent and no specific term. • Payment of a termination benefit on early termination by the employer, other than for gross misconduct, equal to six months base salary. • Notice period six months. Howard Abbey – Chief Financial Officer (resigned 8 April 2022) • Term of the agreement – full-time permanent and no specific term. • Payment of a termination benefit on early termination by the employer, other than for gross misconduct, equal to three months base salary. • Notice period three months. 17 Directors’ Report (Cont.) Wei Si – Chief Financial Officer • Term of the agreement – full-time permanent and no specific term. • Payment of a termination benefit on early termination by the employer, other than for gross misconduct, equal to three months base salary. • Notice period three months. Lian Yu – Chief Operating Officer • Term of the agreement – full-time permanent and no specific term. • Payment of a termination benefit on early termination by the employer, other than for gross misconduct, equal to three months base salary. • Notice period six months. Key management personnel equity holdings The number of ordinary shares and options/rights over ordinary shares in the company held during the financial year by each director of Toys”R”Us ANZ Limited and each of the key management personnel of the consolidated entity, including their related entities, are set out below. Ordinary shares Year ended 31 July 2022 Directors Balance at the start of the year Shares purchased on market Received under the placement or as acquisition consider- ation Kevin Moore 2,759,352 Louis Mittoni 291,205,818 John Tripodi 110,803 Nicki Anderson 1,075,467 160,000 250,000 – – Sub-Total 295,151,440 410,000 Executives Howard Abbey1 Lian Yu Sub-Total 454,545 – 454,545 – – – Grand Total 295,605,985 410,000 1. Resigned on 8 April 2022. – – – – – – – – – Shares Issued as Remuner- ation 108,110 – – – 108,110 Balance at the end of the period Balance held nominally Other1 – – – – – 3,027,462 3,027,462 291,455,818 291,455,818 110,803 110,803 1,075,467 1,075,467 295,669,550 295,669,550 – – – (454,545) – (454,545) – – – – – – 108,110 (454,545) 295,669,550 295,669,550 18 Toys “R” Us ANZ Limited Annual Report 2022 Year ended 31 July 2021 Directors Kevin Moore1 Louis Mittoni2 John Tripodi Balance at the start of the year Shares purchased on market Received under the placement or as acquisition consider- ation Shares Issued as Remun- eration Balance at the end of the period Balance held nominally Other5 – – – 336,733 2,232,143 190,476 – 291,205,818 110,803 – – – – – – – – – – – – – 2,759,352 2,759,352 291,205,818 291,205,818 110,803 110,803 1,075,467 1,075,467 (900,000) – – Nicki Anderson 1,075,467 Bernie Brookes3 900,000 Sub-Total 1,975,467 447,536 293,437,961 190,476 (900,000) 295,151,440 295,151,440 Executives Howard Abbey David Jackson4 Sub-Total – 1,353 1,353 – – – – – – 454,545 – 454,545 454,545 – 454,545 (1,353) (1,353) – – 454,545 454,545 Grand Total 1,976,820 447,536 293,437,961 645,021 (901,353) 295,605,985 295,605,985 1. Placement Shares were issued under the same terms as shares issued to the investors under the November 2020 placement including the issue price of $0.112 per share. Remuneration shares were issued under the Employee Incentive Plan 2020. 2. Shares issued as consideration for the acquisition of the Hobby Warehouse Group as approved by shareholders at the 2020 Annual General Meeting of the Company. 3. Appointed 1 August 2019, resigned 26 November 2020. 4. Appointed 2 May 2019, resigned 4 September 2020. 5. Resigned during the period. Share options The tables below include balances for unlisted options. Year ended 31 July 2022 Directors Kevin Moore1 Louis Mittoni1 Nicki Anderson John Tripodi Executives Lian Yu Totals Balance at the start of the year Granted during the year Expired during the year Forfeited during the year Balance at the end of the year Vested and exercisable at the end of the year 1,691,575 1,696,718 8,457,875 8,483,588 – – 1,691,956 – – – 11,841,406 10,180,306 – – – – – – – – – – – – 3,388,293 3,388,293 16,941,463 16,941,463 – – 1,691,956 – – – 22,021,712 20,329,756 1. Issue Date 14 December 2021, Vesting Date 14 December 2021, Issue Price $0.166, Expiry Date 1 November 2024. 19 Directors’ Report (Cont.) Year ended 31 July 2021 Directors Kevin Moore1 Louis Mittoni1 Nicki Anderson John Tripodi Executives Lian Yu2 Totals Balance at the start of the year Granted during the year Expired during the year Forfeited during the year Balance at the end of the year Vested and exercisable at the end of the year – – – – – – 1,691,575 8,457,875 – – 1,691,956 11,841,406 – – – – – – – – – – – – 1,691,575 1,691,575 8,457,875 8,457,875 – – 1,691,956 – – – 11,841,406 10,149,450 1. 2. Issue Date 23 November 2020, Vesting Date 23 November 2020, Issue Price $0.138, Expiry Date 1 November 2023. Issue Date 1 May 2021, Vesting Date 1 May 2023, Issue Price $0.138, Expiry Date 1 May 2025. Share Appreciation Rights Year ended 31 July 2022 Directors Nicki Anderson John Tripodi Totals Balance at the start of the year Granted during the year Expired during the year Cancelled during the year1 Balance at the end of the year Vested and exercisable at the end of the year 240,000 240,000 480,000 – – – – – – 240,000 240,000 480,000 – – – – – – 1. Share appreciation rights were cancelled and replaced by issue of service rights during the year. Year ended 31 July 2021 Directors Nicki Anderson John Tripodi Totals Balance at the start of the year Granted during the year1 Expired during the year Forfeited during the year Balance at the end of the year Vested and exercisable at the end of the year – – – 240,000 240,000 480,000 – – – – – – 240,000 240,000 480,000 – – – 20 Toys “R” Us ANZ Limited Annual Report 2022 Service Rights Year ended 31 July 2022 Directors Nicki Anderson1 John Tripodi1 Totals Balance at the start of the year Granted during the year1 Expired during the year Cancelled during the year Balance at the end of the year Vested and exercisable at the end of the year – – – 500,000 500,000 1,000,000 – – 500,000 500,000 1,000,000 – – – 1. Ms Anderson and Mr Tripodi were each issued 240,000 Share Appreciation Rights (SARs) under the Employee Incentive Plan 2020 during FY 2021. These SARs were cancelled and replaced by Service Rights on 14 December 2021. Grant Date 14 December 2021, Vesting Date 31 Jul 2023, Expiry Date 14 Dec 2036, Exercise Price is $Nil. Grant Value for each tranche of Share Rights to be issued to Ms Anderson and Mr Tripodi is $30,000, and the number of Shares these convert to shall be determined by the Share Price on the relevant Vesting Date. If the person ceases to hold the office of non-executive director of the Company for any reason prior to 31 July 2023, then they will forfeit Service Rights in the proportion that the period following the date of cessation of holding the office of NED until 31 July 2023 bears to 3 years. Any Service Rights that are not forfeited will vest. Other statutory disclosures Loans to key management personnel and their related parties During FY22 and to the date of this report, the Group made no loans to directors and other KMP. As at 31 July 2022, Louis Mittoni owed the Company $16,719 (2021: $77,503) related to personal expenses incurred on a company credit card. Transactions with Key Management Personnel During FY22 there were no other reportable transactions between the Group and its directors, KMP, or their personally related entities (Related Parties). This concludes the Remuneration report which has been audited. 21 Directors’ Report (Cont.) Unissued shares As at the date of this report and at the reporting date, there were 22,021,712 unissued ordinary shares under options. The number of options and rights over ordinary shares in the Company held during and after the end of the financial year by each director of Toys“R”Us ANZ Limited and each of the key management personnel (KMP) of the Group, including their related entities, are set out in the remuneration report. Shares issued on the exercise of options During the financial year, there were no employees or executives that exercised options to acquire ordinary shares in the Company. Indemnity of and insurance of officers The Company has indemnified the directors and executives of the Company for costs incurred, in their capacity as a director or executive, for which they may be held personally liable, except where there is a lack of good faith. During the financial year the Company paid a premium in respect of a contract to insure the directors and executives of the Company and of any related body corporate against a liability to the extent permitted by the Corporations Act 2001. The contract of insurance prohibits disclosure of the nature of the liability and the amount of the premium. Indemnity and insurance of auditor To the extent permitted by law, the Company has agreed to indemnify its auditors, RSM Australia Partners, as a part of its audit engagement agreement against claims by third parties arising from the audit (for an unspecified amount), other than a loss arising from RSM Australia Partners negligent, wrongful or wilful acts or omissions. No payment has been made to indemnify RSM Australia Partners during the financial year or up to the date of this report. Proceedings on behalf of the Company No person has applied to the Court under section 327 of the Corporations Act 2001 for leave to bring proceedings on behalf of the Company, or to intervene in any proceedings to which the Company is a party for the purpose of taking responsibility on behalf of the Company for all or part of those proceedings. Non-audit services Details of amounts paid or payable to the auditor for non-audit services provided during the year by the auditor are outlined in Note 30 to the financial statements. The directors are satisfied that the provision of non-audit services, during the year, by the auditor (or by another person or firm on the auditor’s behalf) is compatible with the general standard of independence for auditors imposed by the Corporations Act 2001. The Directors are of the opinion that the services as disclosed in Note 30 to the financial statements do not compromise the external auditor’s independence, based on advice received from the Audit & Risk Committee, for the following reasons: • all non-audit services have been reviewed and approved to ensure that they do not impact the integrity and objectivity of the auditor; and • none of the services undermine the general principles relating to auditor independence as set out in Code of Conduct APES 110 Code of Ethics for Professional Accountants issued by the Accounting Professional & Ethical Standards Board, including reviewing or auditing the auditor’s own work, acting in a management or decision-making capacity for the Company, acting as advocate for the Company or jointly sharing economic risks and rewards. 22 Toys “R” Us ANZ Limited Annual Report 2022 Officers of the Company who are former partners of RSM Australia Partners There are no officers of the Company who are former partners of RSM Australia Partners. Rounding of amounts The company is a company of the kind referred to in ASIC Corporations (Rounding in Financials/Directors’ Reports) Instrument 2016/191, dated 24 March 2016, and in accordance with that Corporations Instrument amounts in the directors’ report and the financial statements are rounded off to the nearest thousand dollars, unless otherwise indicated. 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 the following page. Auditor RSM Australia Partners continues in office in accordance with section 327 of the Corporations Act 2001. This directors’ report is signed in accordance with a resolution of directors made pursuant to s.298(2) of the Corporations Act 2001. On behalf of the directors, Kevin A Moore, FAICD, MCIM Chair of the Board 25 October 2022 23 Auditor’s Independence Declaration RSM Australia Partners Level 21, 55 Collins Street Melbourne VIC 3000 PO Box 248 Collins Street West VIC 8007 T +61 (0) 3 9286 8000 F +61 (0) 3 9286 8199 www.rsm.com.au AUDITOR’S INDEPENDENCE DECLARATION As lead auditor for the audit of the financial report of Toys“R”Us ANZ Ltd and its controlled entities for the year ended 31 July 2022, I declare that, to the best of my knowledge and belief, there have been no contraventions of: (i) the auditor independence requirements of the Corporations Act 2001 in relation to the audit; and (ii) any applicable code of professional conduct in relation to the audit. RSM AUSTRALIA PARTNERS R B MIANO Partner Dated: 29 September 2022 Melbourne, Victoria THE POWER OF BEING UNDERSTOOD AUDIT | TAX | CONSULTING 19 RSM Australia Partners is a member of the RSM network and trades as RSM. RSM is the trading name used by the members of the RSM network. Each member of the RSM network is an independent accounting and consulting firm which practices in its own right. The RSM network is not itself a separate legal entity in any jurisdiction. RSM Australia Partners ABN 36 965 185 036 Liability limited by a scheme approved under Professional Standards Legislation 24 Toys “R” Us ANZ Limited Annual Report 2022 Consolidated Statement of Profit or Loss and Other Comprehensive Income for the year ended 31 July 2022 Continuing operations Revenue Cost of goods sold Gross profit Other income Warehouse and distribution expenses Marketing and selling expenses Employee benefits expenses Administration expenses Earnings before interest, taxation, depreciation and amortisation (EBITDA) Finance costs Impairment of goodwill Depreciation and amortisation expenses Loss before income tax expense from continuing operations Income tax (expense)/benefit Loss after income taxes from continuing operations Discontinued operations Profit after income taxes from discontinued operations Loss for the year Other comprehensive income (net of tax) Items that may be reclassified subsequently to profit or loss Exchange differences on translating foreign operations Derecognition of foreign currency translation reserve Other comprehensive income for the year (net of tax) Total comprehensive loss for the year attributable to the members of Toys“R”Us ANZ Limited Total comprehensive income for the year is attributable to: Continuing operations Discontinued operations Earnings per share Basic earnings/(loss) per share (cents per share) Diluted earnings/(loss) per share (cents per share) Earnings per share – continuing operations Basic earnings/(loss) per share (cents per share) Diluted earnings/(loss) per share (cents per share) Earnings per share – discontinued operations Basic earnings per share (cents per share) Diluted earnings per share (cents per share) Note 31-Jul-22 $’000 31-Jul-21 $’000 6 7 7 14 7 8 5 21 21 21 21 21 21 37,927 (29,972) 7,955 3 (2,385) (5,974) (6,671) (1,985) (9,057) – (14,500) (1,594) (25,151) 295 (24,856) 21,827 (17,696) 4,131 53 (963) (1,567) (3,961) (2,134) (4,441) (22) – (863) (5,326) 237 (5,089) 97 (24,759) 1,976 (3,113) 20 – 20 8 707 715 (24,739) (2,398) (24,836) 97 (24,739) (5,089) 2,691 (2,398) (2.89) (2.89) (2.90) (2.90) 0.01 0.01 (0.48) (0.48) (0.78) (0.78) 0.30 0.30 The above consolidated statement of profit or loss and other comprehensive income should be read in conjunction with the accompanying notes. 25 Consolidated Statement of Financial Position as at 31 July 2022 Current assets Cash and cash equivalents Trade and other receivables Inventories Tax receivable Other current assets Total current assets Non-current assets Property, plant and equipment Goodwill and other intangibles Right-of-use assets Other non-current assets Total non-current assets Total Assets Current Liabilities Trade payables Contract liabilities/deferred revenue Provisions Lease liabilities Provisions Other current liabilities Total current liabilities Non-current liabilities Borrowings Provisions Deferred tax Total non-current liabilities Total liabilities Net assets Equity Issued capital Accumulated losses Reserves Total Equity Note 31-Jul-22 $’000 31-Jul-21 $’000 25 (a) 12,538 9 10 8 (d) 11 794 9,851 – 679 17,338 1,882 6,006 12 925 23,862 26,163 13 14 12 11 17 18 17 19 16 17 8 (f) 20 20 2,384 21,447 – 3,763 27,594 51,456 3,263 422 393 281 393 1,884 6,243 10,000 11 1,054 11,065 17,308 34,148 1,937 34,569 – 1,133 37,639 63,802 2,101 896 415 535 415 2,707 6,654 – 4 1,344 1,348 8,002 55,800 292,965 290,545 (260,958) (236,199) 2,141 34,148 1,454 55,800 The above consolidated statement of financial position should be read in conjunction with the accompanying notes. 26 Toys “R” Us ANZ Limited Annual Report 2022 Consolidated Statement of Changes in Equity for the year ended 31 July 2022 Issued Capital $’000 Note Accum- ulated Losses $’000 Foreign Currency Translation Reserve $’000 Equity settled Employee Benefits Reserve $’000 225,166 (233,086) (715) Balance at 31 July 2020 Loss after income taxes for the year Other comprehensive income for the year, net of taxes Total comprehensive income/(loss) Issue of ordinary shares, net of transaction costs Issue of share appreciation rights Issue of employee share options Balance at 31 July 2021 Loss after income taxes for the year Other comprehensive income for the year, net of taxes Total comprehensive income/(loss) Issue of ordinary shares, net of transaction costs Issue of share appreciation/ service rights (net) Issue of employee options – – – 20 65,379 – – (3,113) – (3,113) – – – 290,545 (236,199) – – – (24,759) – (24,759) 20 2,420 – – – – – Total $’000 (8,635) (3,113) 715 (2,398) 65,379 – – – – – 28 28 1,426 1,454 – – – – 46 621 2,121 1,426 55,800 (24,759) 20 (24,739) 2,420 46 621 34,148 – 715 715 – – – – – 20 20 – – – 20 Balance at 31 July 2022 292,965 (260,958) The above consolidated statement of changes in equity should be read in conjunction with the accompanying notes. 27 Consolidated Statement of Cash Flows for the year ended 31 July 2022 Cash flows from operating activities Receipts from customers (inclusive of GST) Receipts from other income (including government grants) Payments to suppliers (inclusive of GST) Payments to employees Cash utilised in operations Income taxes refunded Interest and other costs of finance paid Year ended 31-Jul-22 $’000 Year ended 31-Jul-21 $’000 Note 43,746 – 42,951 363 (48,680) (42,049) (5,980) (10,914) 12 – (4,664) (3,399) 17 (533) Net cash outflow from operating activities 25(c) (10,902) (3,915) Cash flows from investing activities Interest and other investment income received Net cash acquired on purchase of business Payments for plant and equipment Payments for intangible assets Payments for security deposits Proceeds from disposal of property, plant and equipment Proceeds from sale of business 5 Net cash inflow/(outflow) from investing activities Cash Flows from Financing Activities (Repayment of)/Proceeds from borrowings – net Repayment of lease liabilities Proceeds from share issue Costs from share issue Net cash inflow from financing activities Net increase/(decrease) in cash and cash equivalents Cash and cash equivalents at the beginning of the year Cash and cash equivalents at the end of the year 25(a) 3 – (980) (33) 2 289 (1,691) – (2,629) (1,026) 6 – (3,633) 10,000 (254) – (11) 9,735 (4,800) 17,338 12,538 – 3,169 743 (6,148) (211) 28,450 (1,948) 20,143 16,971 367 17,338 The above consolidated statement of cash flows should be read in conjunction with the accompanying notes. 28 Toys “R” Us ANZ Limited Annual Report 2022 Notes to the Consolidated Financial Statements for the year ended 31 July 2022 NOTE 1: Significant accounting policies Statement of compliance These financial statements are general purpose financial statements which have been prepared in accordance with the Corporations Act 2001, Accounting Standards and Interpretations, and comply with other requirements of the law. The financial statements comprise the consolidated financial statements of the Group. For the purpose of preparing the consolidated financial statements the Company is a for profit entity. Accounting Standards include Australian Accounting Standards (AASB). Compliance with Australian Accounting Standards ensures that the financial statements and notes comply with International Financial Reporting Standards (IFRS). Basis of preparation The financial report has been prepared on the basis of historical cost, except for derivative financial instruments that have been measured at fair value. Cost is based on the fair values of the consideration given in exchange for assets. All amounts are presented in Australian dollars, unless otherwise stated. Parent entity information In accordance with the Corporations Act 2001, these financial statements present the results of the Group only. Supplementary information about the parent entity is disclosed in Note 31. Going concern basis of accounting The financial report has been prepared on the going concern basis which contemplates the continuity of normal business activities and the realisation of assets and the payment of liabilities in the normal course of business. As disclosed in the financial statements, the Group has incurred a loss from continuing operations of $24.86 million and cash outflows from operating activities of $10.90 million for the year ended 31 July 2022. The Directors believe that it is reasonably foreseeable that the Group will continue as a going concern and that it is appropriate to adopt the going concern basis in the preparation of the financial report after consideration of the following factors: • The Group holds cash and cash equivalents of $12.54 million as at 31 July 2022; • The Group has an undrawn facility of $5 million on the term loan to support its working capital and capital expenditure requirements; and • The budget and cashflow forecast prepared by the Group for the twelve-month period from the date of signing the financial statements, which are based on the directors’ estimates and assumptions about certain economic factors, and the operating and trading performance of the Group, support the directors’ assertion, and suggest that the Group has cash and other financial resources sufficient to support its operations for the relevant period. Basis of consolidation The consolidated financial statements incorporate the financial statements of the Company and entities controlled by the Company (its subsidiaries), together referred to as “the Group” in these financial statements. Control is achieved when the Company: • Has the power over the investee; • is exposed, or has rights, to variable returns from its involvement with the investee; and • has the ability to use its power to affect its returns. 29 Notes to the Consolidated Financial Statements (Cont.) The Company reassesses whether or not it controls an investee if facts and circumstances indicate that there are changes to one or more of the three elements of control listed above. The acquisition of subsidiaries is accounted for using the acquisition method of accounting. Consolidation of a subsidiary begins when the Company obtains control over the subsidiary and ceases when the Company losses control of the subsidiary. Specifically, income and expenses of a subsidiary acquired or disposed of during the year are included in the consolidated statement of profit or loss and other comprehensive income from the date the Company gains control until the date the Company ceases to control the subsidiary. Profit or loss and each component of other comprehensive income are attributed to the owners of the Company and to the non-controlling interests. Total comprehensive income of subsidiaries is attributed to the owners of the Company and to the non-controlling interests even if this results in the non-controlling interest having a deficit balance. Where the Group loses control over a subsidiary, it derecognises the assets including goodwill, liabilities and non-controlling interest in the subsidiary together with any cumulative translation differences recognised in equity. The Group recognises the fair value of the consideration received and the fair value of any investment retained together with any gain or loss in profit or loss. When necessary, adjustments are made to the financial statements of subsidiaries to bring their accounting policies into line with the Group’s accounting policies. All intra-Group assets and liabilities, equity, income and expenses and cash flows relating to transactions between members of the Group are eliminated in full on consolidation. 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 Group. Operating segments Operating segments are presented using the ‘management approach’, where the information presented is on the same basis as the internal reports provided to the Chief Operating Decision Makers (‘CODM’). The CODM is responsible for the allocation of resources to operating segments and assessing their performance. 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. Financial statements are presented in Australian dollars, which is Toys“R”Us ANZ Limited’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 income statement, except when deferred in equity as qualifying cash flow hedges and qualifying net investment hedges. Translation differences on non-monetary items, such as equities held at fair value through profit or loss, are reported as part of the fair value gain or loss. 30 Toys “R” Us ANZ Limited Annual Report 2022 NOTE 1: Significant accounting policies (Cont.) Foreign currency translation (Cont.) (iii) Group companies The results and financial position of all the Group entities, (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 balance sheet presented are translated at the closing rate at the date of that balance sheet; • income and expenses for each profit or loss presented are translated at the rates prevailing on the transaction dates, in which case income and expenses are translated at the dates of the transactions); and • all resulting exchange differences are 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 and other currency instruments designated as hedges of such investments, are taken to equity. When a foreign operation is sold or borrowings repaid, a proportionate share of such exchange differences are recognised in the profit or loss as part of the gain or loss on sale. Goodwill and fair value adjustments arising on the acquisition of a foreign entity are treated as assets and liabilities of the foreign entity and translated at the closing rate. Revenue recognition Revenue is recognised at an amount that reflects the consideration to which the consolidated entity is expected to be entitled in exchange for transferring goods to a customer. Revenue arises mainly from the sale of goods to customers. To determine whether to recognise revenue, the Group follows a 5-step process: 1. Identifying the contract with a customer. 2. Identifying the performance obligations. 3. Determining the transaction price. 4. Allocating the transaction price to the performance obligations. 5. Recognising revenue when/as performance obligation(s) are satisfied. (i) Sale of Goods The Group generates the majority of its revenue from the sales of goods. Sale of goods is recognised when the customer obtains control of the goods. Revenue from the sale of goods is recognised on delivery of goods to the customer. (ii) Government Grants Government grants relating to costs are deferred and recognised in profit and loss over the period necessary to match them with the costs that they are intended to compensate. Government payments received in relation to COVID-19 have been recognised under other income. (iii) Other revenue Other revenue is recognised when it is received or when the right to receive payment is established. 31 Notes to the Consolidated Financial Statements (Cont.) Income tax (i) Current tax The income tax expense or benefit for the period is the tax payable on that period’s taxable income based on the applicable income tax rate for each jurisdiction, adjusted by the changes in deferred tax assets and liabilities attributable to temporary differences, unused tax losses and the adjustment recognised for prior periods, where applicable. (ii) Deferred tax Deferred tax assets and liabilities are recognised for temporary differences at the tax rates expected to be applied when the assets are recovered or liabilities are settled, based on those tax rates that are enacted or substantively enacted, except for: • When the deferred income tax asset or liability arises from the initial recognition of goodwill or an asset or liability in a transaction that is not a business combination and that, at the time of the transaction, affects neither the accounting nor taxable profits; or • When the taxable temporary difference is associated with interests in subsidiaries, associates or joint ventures, and the timing of the reversal can be controlled and it is probable that the temporary difference will not reverse in the foreseeable future. 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. The carrying amount of recognised and unrecognised deferred tax assets are reviewed at each reporting date. Deferred tax assets recognised are reduced to the extent that it is no longer probable that future taxable profits will be available for the carrying amount to be recovered. Previously unrecognised deferred tax assets are recognised to the extent that it is probable that there are future taxable profits available to recover the asset. Deferred tax assets and liabilities are offset only where there is a legally enforceable right to offset current tax assets against current tax liabilities and deferred tax assets against deferred tax liabilities; and they relate to the same taxable authority on either the same taxable entity or different taxable entities which intend to settle simultaneously. (iii) Current and deferred tax for the period Current and deferred tax balances attributable to amounts recognised directly in equity are also recognised directly in equity. (iv) Tax Losses A deferred tax asset in respect to tax losses is only recognised where there is a reasonable certainty that future taxable profits will be guaranteed. Management assesses continuity of ownership test and same business test hurdles bi-annually. 32 Toys “R” Us ANZ Limited Annual Report 2022 NOTE 1: Significant accounting policies (Cont.) Income tax (Cont.) (v) Tax Consolidation The company and its wholly-owned Australian resident entities are part of a tax-consolidated Group under Australian taxation law. Toys“R”Us ANZ Limited is the head entity in the tax-consolidated Group. Tax expense/revenue, deferred tax liabilities and deferred tax assets arising from temporary differences of the members of the tax-consolidated Group are recognised in the separate financial statements of the members of the tax-consolidated Group using the “separate taxpayer within Group” approach by reference to the carrying amounts in the separate financial statements of each entity and the tax values applying under tax consolidation. Due to the existence of a tax funding arrangement between the entities in the tax-consolidated Group, amounts are recognised as payable to or receivable by the company and each member of the Group in relation to the tax contribution amounts paid or payable between the parent entity and the other members of the tax-consolidated Group in accordance with the arrangement. Further information about the tax funding arrangement is detailed in Note 8 to the financial statements. Discontinued operations A discontinued operation is a component of the Group’s business, the operations and cash flows of which can be clearly distinguished from the rest of the Group and which: • • • represents a separate major line of business or geographical area of operations; is part of a single co-ordinated plan to dispose of a separate major line of business or geographical area of operations; or is a subsidiary acquired exclusively with a view to re-sell. Classification as a discontinued operation occurs upon disposal or when the operation meets the criteria to be classified as held-for-sale, if earlier. When an operation is classified as a discontinued operation, the comparative statement of profit or loss and other comprehensive income is re-presented as if the operation had been discontinued from the start of the comparative year. The assets or disposal group are measured at the lower of their carrying amount and fair value less costs to sell. Any impairment loss on a disposal group, is first allocated to goodwill, and then to remaining assets and liabilities on a pro-rata basis, except that no loss is allocated to inventories, financial assets and deferred tax assets which continue to be measured in accordance with the Group’s other accounting policies. Gains or losses on disposal are recognised in profit or loss. Current and non-current classification Assets and liabilities are presented in the statement of financial position based on current and non-current classification. An asset is classified as current when: it is either expected to be realised or intended to be sold or consumed in the Group’s normal operating cycle; it is held primarily for the purpose of trading; it is expected to be realised within 12 months after the reporting period; or the asset is cash or cash equivalent unless restricted from being exchanged or used to settle a liability for at least 12 months after the reporting period. All other assets are classified as non-current. A liability is classified as current when: it is either expected to be settled in the Group’s normal operating cycle; it is held primarily for the purpose of trading; it is due to be settled within 12 months after the reporting period; or there is no unconditional right to defer the settlement of the liability for at least 12 months after the reporting period. All other liabilities are classified as non-current. Deferred tax assets and liabilities are always classified as non-current. 33 Notes to the Consolidated Financial Statements (Cont.) Cash and cash equivalents Cash and cash equivalents include cash on hand, deposits 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 are subject to an insignificant risk of changes in value. Bank overdrafts are shown within borrowings in current liabilities in the statement of financial position. Trade and other receivables Trade receivables are initially recognised at fair value and subsequently measured at amortised cost using the effective interest method less any allowances for expected credit losses. Trade receivables are generally due for settlement within 30-60 days. The Group has applied the simplified approach to measure expected credit losses which uses a lifetime expected loss allowance. To measure the expected credit losses, trade receivables have been grouped based on days overdue. Other receivables are recognised at amortised cost less any allowance for expected credit losses. Inventories Inventories are stated at the lower of cost and net realisable value. Costs are assigned to individual items of stock on the basis of weighted average costs. Cost comprises of direct materials and delivery costs, import duties and other taxes. Costs of purchased inventory are determined after deducting rebates and discounts received or receivable. Net realisable value represents the estimated selling price less the carrying value of inventory and costs necessary to make the sale. Stock write downs occur where the estimated selling price of stock, in the ordinary course of business, is less than the estimated costs of completion and costs necessary to make the sale. Excess stock levels are reviewed on a regular basis, where discussions with the sales teams are undertaken. Derivative financial instruments The Group enters into derivative financial instruments to manage its exposure to foreign exchange rate risk, including forward contracts comprising foreign exchange forward contracts and options. Further details of derivative financial instruments are disclosed in Note 26 to the financial statements. Derivatives are initially recognised at fair value on the date a derivative contract is entered into and are subsequently re-measured to their fair value at each reporting date. The resulting gain or loss is recognised in profit or loss immediately unless the derivative is designated and effective as a hedging instrument, in which event, the timing of the recognition in profit or loss depends on the nature of the hedge relationship. The Group designates certain derivatives as either hedges of the fair value of recognised assets or liabilities or firm commitments (fair value hedges), or hedges of highly probable forecast transactions or hedges of foreign currency risk of firm commitments (cash flow hedges). The fair value of hedging derivatives is classified as a current asset or current liability if the remaining maturity of the hedge relationship is less than 12 months and as a non-current asset or a non-current liability if the remaining maturity of the hedge relationship is more than 12 months. 34 Toys “R” Us ANZ Limited Annual Report 2022 NOTE 1: Significant accounting policies (Cont.) Financial assets (i) Recognition and derecognition Financial assets and financial liabilities are recognised when the Group becomes a party to the contractual provisions of the financial instrument and are measured initially at fair value adjusted by transactions costs, except for those carried at fair value through profit or loss, which are measured initially at fair value. Subsequent measurement of financial assets and financial liabilities are described below. Financial assets are derecognised when the contractual rights to the cash flows from the financial asset expire, or when the financial asset and substantially all the risks and rewards are transferred. A financial liability is derecognised when it is extinguished, discharged, cancelled or expires. (ii) Classification and initial measurement of financial assets Except for those trade receivables that do not contain a significant financing component and are measured at the transaction price in accordance with AASB 15, all financial assets are initially measured at fair value adjusted for transaction costs (where applicable). (iii) Subsequent measurement of financial assets For the purpose of subsequent measurement, financial assets, other than those designated and effective as hedging instruments, are classified into the following categories upon initial recognition: • • financial assets at amortised cost; and financial assets at fair value through profit or loss (FVPL). Classifications are determined by both: • The entity’s business model for managing the financial asset; and • The contractual cash flow characteristics of the financial assets All income and expenses relating to financial assets that are recognised in profit or loss are presented within finance costs, finance income or other financial items, except for impairment of trade receivables which is presented within other expenses. (iv) Financial assets at amortised cost Financial assets are measured at amortised cost if the assets meet the following conditions (and are not designated as FVPL): • • they are held within a business model whose objective is to hold the financial assets and collect its contractual cash flows; and the contractual terms of the financial assets give rise to cash flows that are solely payments of principal and interest on the principal amount outstanding. After initial recognition, these are measured at amortised cost using the effective interest method. Discounting is omitted where the effect of discounting is immaterial. The Group’s cash and cash equivalents, trade and most other receivables fall into this category of financial instruments. (v) Impairment of financial assets AASB 9’s impairment model uses more forward-looking information to recognize expected credit losses – the ‘expected credit losses (ECL) model’. The application of the new impairment model depends on whether there has been a significant increase in credit risk. The Group considers a broader range of information when assessing credit risk and measuring expected credit losses, including past events, current conditions, reasonable and supportable forecasts that affect the expected collectability of the future cash flows of the instrument. 35 Notes to the Consolidated Financial Statements (Cont.) In applying this forward-looking approach, a distinction is made between: • • financial instruments that have not deteriorated significantly in credit quality since initial recognition or that have low credit risk (‘Stage 1’); and financial instruments that have deteriorated significantly in credit quality since initial recognition and whose credit risk is not low (‘Stage 2’). ‘Stage 3’ would cover financial assets that have objective evidence of impairment at the reporting date. ‘12-month expected credit losses’ are recognised for the first category while ‘lifetime expected credit losses’ are recognised for the second category. Measurement of the expected credit losses is determined by a probability-weighted estimate of credit losses over the expected life of the financial instrument. Plant and Equipment Plant and equipment are stated at cost less accumulated depreciation and impairment. Cost includes expenditure that is directly attributable to the acquisition of the item. Depreciation is calculated on a straight-line basis to write off the net cost of each item of plant and equipment over the shorter of its expected useful life and the lease term. Estimates of remaining useful lives are made on a regular basis for all assets, with annual reassessments for major items. The cost of improvements to or on leasehold properties is amortised over the estimated useful life of the improvement to the Group. The expected useful lives are as follows: Plant and equipment: 2.5-10 years Leasehold improvements: 3-5 Years An item of property, plant and equipment is derecognised upon disposal or when there is no future economic benefit to the consolidated entity. Gains and losses between the carrying amount and the disposal proceeds are taken to profit or loss. Right-of-use Assets A right-of-use asset is recognised at the commencement of a lease. The right-of-use asset is measured at cost, which comprises the initial amount of the lease liability adjusted for, as applicable, any lease payments made at or before the commencement date net of any lease incentives received, any initial direct costs incurred and, except where included in the cost of inventories, an estimate of costs expected to be incurred for dismantling and removing the underlying asset and restoring the site or asset. Right-of-use assets are depreciated on a straight-line basis over the unexpired period of the lease or the estimated useful life of the asset, whichever is the shorter. Where the Group expects to obtain ownership of the leased asset at the end of the lease term, the depreciation is over its estimated useful life. Right-of-use assets are subject to impairment or adjusted for any remeasurement of lease liabilities. The Group has elected not to recognise a right-of-use asset and corresponding lease liability for short-term leases with terms of 12 months or less and leases of low-value assets. Lease payments on these assets are expensed to profit and loss as incurred. 36 Toys “R” Us ANZ Limited Annual Report 2022 NOTE 1: Significant accounting policies (Cont.) Intangible assets Intangible assets acquired separately or in a business combination are initially measured at cost. The cost of an intangible asset acquired in a business combination is its fair value as at the date of acquisition. Following initial recognition, intangible assets are carried at cost less any accumulated amortisation and any accumulated impairment losses. Internally generated intangible assets, excluding capitalised development costs, are not capitalised and expenditure is recognised in profit or loss in the year in which the expenditure is incurred. Amortisation of the Group’s intangible assets is recognised on a straight-line basis over their estimated useful lives. The estimated useful life and amortisation method are reviewed at the end of each annual reporting period, with the effect of any changes in estimate being accounted for on a prospective basis. Goodwill arises on the acquisition of a business. Goodwill is not amortised. Instead, goodwill is tested annually for impairment, or more frequently if events or changes in circumstances indicate that it might be impaired and is carried at cost less accumulated impairment losses. Impairment losses on goodwill are taken to profit or loss and are not subsequently reversed. Intangible assets are amortised, based on the useful live assessed by management, as follows: • Software • Customer database • Patents • Trademarks 3 years 5 years 20 years 3-5 years • Licensed distribution agreements 1-20 years Impairment of tangible and intangible assets At each reporting date, the Group reviews the carrying amounts of its tangible and intangible assets to determine whether there is any indication that those assets have suffered an impairment loss. If any such indication exists, the recoverable amount of the asset is estimated in order to determine the extent of the impairment loss (if any). Where the asset does not generate cash flows that are independent from other assets, the Group estimates the recoverable amount of the CGU to which the asset belongs. Where a reasonable and consistent basis of allocation can be identified, corporate assets are also allocated to individual CGU, or otherwise they are allocated to the smallest group of CGU for which a reasonable and consistent allocation basis can be identified. Goodwill and other 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 non-financial assets are reviewed 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. Recoverable amount is the higher of fair value less cost to sell and value in use. In assessing value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset for which the estimates of future cash flows have not been adjusted. If the recoverable amount of an asset (or CGU) is estimated to be less than its carrying amount, the carrying amount of the asset (or CGU) is reduced to its recoverable amount. An impairment loss is recognised immediately in the profit and loss. Where an impairment loss subsequently reverses, the carrying amount of the asset (CGU) is increased to the revised estimate of its recoverable amount, but only to the extent that the increased carrying amount does not exceed the carrying amount that would have been determined had no impairment loss been recognised for the asset (CGU) in prior years. 37 Notes to the Consolidated Financial Statements (Cont.) Trade payables These amounts represent liabilities for goods and services provided to the Group prior to the end of the financial year for which an invoice has been processed through the Group’s payables system and the amount remains unpaid. The amounts are unsecured and usually paid within 30 to 90 days of recognition. The average credit period on purchases of certain goods from international supplier’s ranges from 4 weeks to 4 months. There is no interest charged on trade payables. The Group has financial risk management policies in place to ensure that, as often as possible, all payables are paid within a reasonable timeframe. Contract liabilities Contract liabilities represent the Group’s obligation to transfer goods or services to a customer and are recognised when a customer pays consideration, or when the Group recognises a receivable to reflect its unconditional right to consideration (whichever is earlier) before the Group has transferred the goods or services to the customer. License guarantee commitments The Group enters into royalty agreements. The terms of the royalty agreements require minimum levels of royalty payments to be offset against the minimum guarantees received at the start of the agreement. If, after calculating the net contribution relating to the products sold under the specific agreement, there is a shortfall between the minimum guarantee and the actual royalty derived (or forecast to be derived in future periods) from the reported sales the agreement is impaired. Net contribution is calculated after taking into account net sales revenue, cost of goods sold, applicable royalties and direct selling costs. If the royalty shortfall cannot be recovered from the resulting net contribution a provision is made through profit or loss. Borrowings Other financial liabilities, including borrowings, are initially measured at fair value, net of transaction costs. Other financial liabilities are subsequently measured at amortised cost using the effective interest method, with interest expense recognised on an effective yield basis. The effective interest method is a method of calculating the amortised cost of a financial liability and of allocating interest expense over the relevant period. The effective interest rate is the rate that exactly discounts estimated future cash payments through the expected life of the financial liability, or, where appropriate, a shorter period. Borrowing costs Borrowing costs are recognised as expenses in the period in which they are incurred. Borrowing costs include: • • • interest on bank overdrafts and short-term and long-term borrowings; finance lease charges; and certain exchange differences arising from foreign currency borrowings. Lease liabilities A lease liability is recognised at the commencement date of a lease. The lease liability is initially recognised at the present value of the lease payments to be made over the term of the lease, discounted using the interest rate implicit in the lease or, if that rate cannot be readily determined, the consolidated entity’s incremental borrowing rate. Lease payments comprise of fixed payments less any lease incentives receivable, variable lease payments that depend on an index or a rate, amounts expected to be paid under residual value guarantees, exercise price of a purchase option when the exercise of the option is reasonably certain to occur, and any anticipated termination penalties. The variable lease payments that do not depend on an index or a rate are expensed in the period in which they are incurred. 38 Toys “R” Us ANZ Limited Annual Report 2022 NOTE 1: Significant accounting policies (Cont.) Lease liabilities (Cont.) Lease liabilities are measured at amortised cost using the effective interest method. The carrying amounts are remeasured if there is a change in the following: future lease payments arising from a change in an index or a rate used; residual guarantee; lease term; certainty of a purchase option and termination penalties. When a lease liability is remeasured, an adjustment is made to the corresponding right-of use asset, or to profit or loss if the carrying amount of the right-of-use asset is fully written down. Provisions Provisions are recognised when the Group has a present obligation (legal or constructive) as a result of a past event, it is probable that the Group will be required to settle the obligation, and a reliable estimate can be made of the amount of the obligation. The amount recognised as a provision is a best estimate of the consideration required to settle the present obligation at reporting date, taking into account the risks and uncertainties surrounding the obligation. Where a provision is measured using the cash flows estimated to settle the present obligations, its carrying amount is the present value of those cash flows. When some or all of the economic benefits required to settle a provision are expected to be recovered from a third party, the receivable is recognised as an asset if it is virtually certain that recovery will be received and the amount of the receivable can be measured reliably. Employee benefits (i) Wages and salaries annual leave and long service leave A liability is recognised for benefits accruing to employees in respect of wages and salaries, annual leave and long service leave where it is probable that settlement will be required and they are capable of being measured reliably. Liabilities recognised in respect of short-term employee benefits expected to be settled within 12 months, are measured at their nominal values using the remuneration rate expected to apply at the time of settlement. Liabilities recognised in respect of employee benefits which are not expected to be settled within 12 months are measured at the present value of the estimated future cash outflows to be made by the Group in respect of services provided by employees up to reporting date. Consideration is given to expected future wage and salary levels, experience of employee departures and periods of service. Expected future payments are discounted using market yields at the reporting date on corporate bonds with terms to maturity and currency that match, as closely as possible, the estimated future cash outflows. (ii) Defined contribution plans Contributions to defined contribution superannuation plans are expensed when incurred. (iii) Profit sharing and bonus plans Liabilities for profit sharing and bonus plans are expected to be settled within 12 months and are measured at the amounts expected to be paid when they are settled. (iv) Employee benefit on-costs Employee benefit on-costs, including payroll tax, are recognised and included in employee benefit liabilities and costs, when the employee benefits to which they relate are recognised as liabilities. 39 Notes to the Consolidated Financial Statements (Cont.) (v) Share-based payments Share-based compensation benefits are provided to employees via the Company Employee Incentive Plan. The fair value of options and performance and service share rights granted under the Company Employee Incentive 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 (vesting period). The fair value at grant date is independently determined using an appropriate option pricing model that takes into account the exercise price, the term of the option, the vesting and performance criteria, the impact of dilution, the non-tradeable nature of the option, the share price at grant date and expected price volatility of the underlying share, the expected dividend yield, total shareholder performance hurdles and the risk-free interest rate for the term of the option. The fair value of the options, performance and service share rights and schemes granted excludes the impact of any non-market vesting conditions (for example, profitability and sales growth targets). Non-market vesting conditions are included in assumptions about the number of options that are expected to become exercisable. At each balance sheet date, the entity revises its estimate of the number of options that are expected to become exercisable. The employee benefit expense recognised each period takes into account the most recent estimate. Upon the exercise of options or performance and service share rights, the balance of the share-based payments reserve relating to those options is transferred within equity. The market value of shares issued to employees for no cash consideration under the employee incentive plan is recognised as an employee benefits expense with a corresponding increase in equity when the employees become entitled to the shares. Determination of fair values A number of the Group’s accounting policies and disclosures require the determination of fair value, for both financial and non-financial assets and liabilities. Fair values have been determined for measurement and/or disclosure purposes, based on the methods as stated below. When applicable, further information about the assumptions made in determining fair values is disclosed in the notes specific to that asset or liability. In estimating the fair value of an asset or liability, the Group uses market observable data to the extent it is available. Where it is not available, the Group engages third party qualified valuers to perform the valuation. The fair value of the asset or liability is the price that would be received to sell the asset or paid to transfer the liability in an orderly transaction between market participants at measurement date. The Group shall use valuation techniques that are appropriate in the circumstances and for which sufficient data are available to measure fair value, maximising the use of relevant observable inputs and minimising the use of unobservable inputs. To increase consistency and comparability in fair value measurements and related disclosures, the Group has adopted the fair value hierarchy established in AASB 13 ‘Fair Value Measurement’ that categorises fair value measurement into three levels: • • • Level 1 fair value measurements are those derived from quoted prices (unadjusted) in active markets for identical assets or liabilities. Level 2 fair value measurements are those derived from inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly (i.e. as prices) or indirectly (i.e. derived from prices). Level 3 fair value measurements are those derived from valuation techniques that include inputs for the asset or liability that are not based on observable market data (unobservable inputs). Valuation techniques used to measure fair value shall be applied consistently. However, a change in a valuation technique or its application (e.g. a change in its weighting when multiple valuation techniques are used or a change in an adjustment applied to a valuation technique) is appropriate if the change results in a measurement that is equally or more representative of fair value in the circumstances. 40 Toys “R” Us ANZ Limited Annual Report 2022 NOTE 1: Significant accounting policies (Cont.) Financial instruments issued by the Group (i) Equity instruments Equity instruments are classified as either financial liabilities or as equity in accordance with the substance of the contractual arrangement. Transaction costs arising on the issue of equity instruments are recognised directly in contributed equity. (ii) Other financial liabilities Other financial liabilities, including borrowings, are initially measured at fair value net of transaction costs. Other financial liabilities are subsequently measured at amortised cost using the effective interest method, with interest expense recognised on an effective yield basis. The effective interest method is a method of calculating the amortised cost of a financial liability and of allocating interest expense over the relevant period. The effective interest rate is the rate that exactly discounts estimated future cash payments through the expected life of the financial liability, or, where appropriate, a shorter period. Business combinations The acquisition method of accounting is used to account for business combinations regardless of whether equity instruments or other assets are acquired. The consideration transferred is the sum of the acquisition-date fair values of the assets transferred, equity instruments issued or liabilities incurred by the acquirer to former owners of the acquiree and the amount of any non-controlling interest in the acquiree. For each business combination, the non-controlling interest in the acquiree is measured at either fair value or at the proportionate share of the acquiree’s identifiable net assets. All acquisition costs are expensed as incurred to profit or loss. On the acquisition of a business, the Group assesses the financial assets acquired and liabilities assumed for appropriate classification and designation in accordance with the contractual terms, economic conditions, the Group’s operating or accounting policies and other pertinent conditions in existence at the acquisition-date. Contingent consideration to be transferred by the acquirer is recognised at the acquisition-date fair value. Subsequent changes in the fair value of the contingent consideration classified as an asset or liability is recognised in profit or loss. Contingent consideration classified as equity is not remeasured and its subsequent settlement is accounted for within equity. The difference between the acquisition-date fair value of assets acquired, liabilities assumed and any non-controlling interest in the acquiree and the fair value of the consideration transferred and the fair value of any pre-existing investment in the acquiree is recognised as goodwill. If the consideration transferred and the pre-existing fair value is less than the fair value of the identifiable net assets acquired, being a bargain purchase to the acquirer, the difference is recognised as a gain directly in profit or loss by the acquirer on the acquisition-date, but only after a reassessment of the identification and measurement of the net assets acquired, the non-controlling interest in the acquiree, if any, the consideration transferred and the acquirer’s previously held equity interest in the acquirer. Business combinations are initially accounted for on a provisional basis. The acquirer retrospectively adjusts the provisional amounts recognised and also recognises additional assets or liabilities during the measurement period, based on new information obtained about the facts and circumstances that existed at the acquisition- date. The measurement period ends on either the earlier of (i) 12 months from the date of the acquisition or (ii) when the acquirer receives all the information possible to determine fair value. 41 Notes to the Consolidated Financial Statements (Cont.) Earnings per share Basic earnings per share Basic earnings per share is calculated by dividing the profit attributable to the owners of Toys “R” Us ANZ Limited, 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 financial year. 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 shares assumed to have been issued for no consideration in relation to dilutive potential ordinary shares. Goods and services tax Revenues, expenses and assets are recognised net of the amount of goods and services tax (GST), except: • where the amount of GST incurred is not recoverable from the taxation authority, it is recognised as part of the cost of acquisition of an asset or as part of an item of expense; or • for receivables and payables which are recognised inclusive of GST. The net amount of GST recoverable from, or payable to, the tax authority is included as a current asset or liability in the balance sheet. Cash flows are included in the cash flow statement on a gross basis. The GST components of cash flows arising from investing and financing activities which are recoverable from, or payable to, the tax authority are classified as operating cash flows. Rounding of amounts The company is a company of the kind referred to in ASIC Corporations (Rounding in Financials/Directors’ Reports) Instrument 2016/191, dated 24 March 2016, and in accordance with that Corporations Instrument amounts in the directors’ report and the financial statements are rounded off to the nearest thousand dollars, unless otherwise indicated. NOTE 2: Application of new and revised Accounting Standards 2.1 Amendments to AASBs and the new Interpretation that are mandatorily effective for the current year In the current year, the Group has applied all amendments to AASBs issued by the Australian Accounting Standards Board (AASB) that are mandatorily effective for an accounting period that begins on or after 1 August 2021. 2.2 Accounting Standards issued but not yet effective and not early adopted Any new or amended Accounting Standard or Interpretations that are not yet mandatory have not been early adopted. Other amending accounting standards Other amending accounting standards issued are not considered to have a significant impact on the financial statement of the Group as the amendments provide either clarification of existing accounting treatment or editorial amendments. 42 Toys “R” Us ANZ Limited Annual Report 2022 NOTE 3: Critical accounting judgments and key sources of estimation uncertainty In the application of the Group’s accounting policies, which are described in Note 1, the directors are required to make judgements, estimates and assumptions about the carrying amounts of assets and liabilities that are not readily apparent from other sources. The estimates and associated assumptions are based on historical experience and other factors that are considered to be relevant. Actual results may differ from these estimates. The estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognised in the period in which the estimate is revised if the revision affects only that period or in the period of the revision and future periods if the revision affects both current and future periods. Key sources of estimation uncertainty In addition to the key sources of estimation uncertainty on the going concern basis as disclosed in Note 1, the following are the key assumptions concerning the future, and other key sources of estimation uncertainty at the end of the reporting period, that have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial year. (i) Useful life and impairment of intangible assets Management has assessed the useful life of intangibles on the following basis: • Software – based on the license or expected useful lives, not exceeding 3 years; • Customer database – based on the expected churn rates; • Patents and Trademarks – based on the contractual life of the patent/trademark, ranging from 10-20 years; and • Licensed distribution agreements – based on the term of the agreement or the expected Brand product life cycle, ranging from 1-20 years. Whilst the current useful lives are management’s best estimate, a periodic review is undertaken to ensure that these remain appropriate. The Group tests annually for intangibles assets with indefinite useful lives or when impairment indicators are identified, whether intangible assets have suffered any impairment, in accordance with the accounting policy. The recoverable amounts of cash-generating units have been determined based on value-in-use calculations. These calculations require the use of assumptions, including estimated discount rates based on the current cost of capital and growth rates of the estimated future cash flows. The recoverable amounts of the other intangible assets have been determined on a relief from royalty basis. These calculations require the use of assumptions. A significant change to the assumptions affects the recoverable amount of the other intangible assets. 43 Notes to the Consolidated Financial Statements (Cont.) (ii) Recoverability of inventory The Group periodically assesses whether the net realisable value (NRV) of its inventories is reasonable in light of changing market conditions within the retail sector and the Group’s reassessment of brand portfolio. Whilst the Group has provided to recognise the best estimate for the amount for which its inventory will be realised, the final amounts will be subject to the prevailing market conditions and may differ from the amounts provided for. (iii) Allowance for expected credit losses The allowance for expected credit losses assessment requires a degree of estimation and judgement. It is based on the lifetime expected credit loss grouped based on days overdue and industry type and makes assumptions to allocate an overall expected credit loss rate for each group. These assumptions include recent sales experience and historical collection rates. The allowance for expected credit losses is calculated based on the information available at the time of preparation. The actual credit losses in future years may be higher or lower. (iv) Taxation timing differences recognised as asset and deferral of tax liability The amount of deferred tax asset in respect of revenue tax losses is determined based upon expected future taxable income, and judgement as to the loss availability under the “continuity of ownership test”, and where applicable the “similar business test”. Based on the current assessment, determined using budget forecasts for FY2022, the Group has continued to not recognise an amount within the deferred tax asset for temporary differences. Refer to Note 8 for details. (v) Coronavirus (COVID-19) pandemic Events related to the coronavirus pandemic (COVID-19) have resulted in continued uncertainty as to ongoing and future response of governments and authorities globally, as well as a likelihood of an Australian economic recession of unknown duration or severity. As such, the full impact of COVID-19 to consumer behaviour, suppliers, employees and the Group are not fully known. Given this, the impact of COVID-19 could potentially be materially adverse to the Group’s financial and operational performance. Further, any government or industry measures may adversely affect the Group’s operations and are likely to be beyond the control of the Group. The longer-term impacts of COVID-19 on the operations of the Group remain uncertain and cannot be quantified at this time. (vi) Share-based payment transactions The Group measures the cost of equity-settled transactions with employees by reference to the fair value of the equity instruments at the date at which they are granted. The fair value is determined by using either the Binomial or Black-Scholes model taking into account the terms and conditions upon which the instruments were granted. The accounting estimates and assumptions relating to equity-settled share-based payments would have no impact on the carrying amounts of assets and liabilities within the next annual reporting period but may impact profit or loss and equity. 44 Toys “R” Us ANZ Limited Annual Report 2022 NOTE 4: Operating segments Identification of reportable operating segments The Group is organised into two operating segments based on differences in products sold: Business to Consumer (B2C) and Business to Business (B2C). These operating segments are based on the internal reports that are reviewed and used by the Board of Directors and KMP (who are identified as the Chief Operating Decision Makers (‘CODM’)) to make strategic and operating decisions, in assessing business performance and in determining the allocation of resources. There is no aggregation of operating segments. The CODM reviews EBITDA (earnings before interest, tax, depreciation and amortisation). The accounting policies adopted for internal reporting to the CODM are consistent with those adopted in the financial statements. The information reported to the CODM is on a monthly basis. Information about products and services The principal products of each of these operating segments are as follows: • B2C – direct-to-consumer sale of consumer products (toys, hobby and baby goods); and • B2B – wholesaling* and distribution of IT products. * includes the revenues from the erstwhile Funtastic business (discontinued operations). Intersegment transactions and balances are eliminated on consolidation. There were no inter-segment transactions during the year or account balances at 31 July 2022. The directors have assessed that there are no major customers. Operating segment Information The Group’s operating segment information is as follows: Year ended 31-Jul-22 Revenue Other income Cost of goods sold Other expenses EBITDA Year ended 31-Jul-21 Revenue Other income Cost of goods sold Other expenses EBITDA B2C $’000 26,029 – B2B $’000 13,098 0 (20,585) (10,409) Corporate $’000 – 3 – (1,371) 1,318 (4,438) (4,435) (11,281) (5,837) B2C $’000 13,145 344 (10,187) (4,394) (1,092) Corporate $’000 – 1,627 B2B $’000 23,917 124 (16,738) (6,675) 628 Total $’000 39,127 3 (30,994) (17,090) (8,954) Total $’000 37,062 2,095 – (26,925) (2,452) (825) (13,521) (1,289) 45 Notes to the Consolidated Financial Statements (Cont.) Reconciliation from segment reporting to net profit/(loss) after tax EBITDA Depreciation, amortisation and impairment expenses Finance costs (net) Loss before income tax expenses Income tax benefit/(expense) Loss after income tax expense Year ended 31-Jul-22 $’000 Year ended 31-Jul-21 $’000 (8,954) (16,100) – (1,289) (1,529) (532) (25,054) (3,350) 295 (24,759) 237 (3,113) Depreciation, amortisation and impairment expense by segment B2C B2B Corporate Year ended 31-Jul-22 $’000 Year ended 31-Jul-21 $’000 15,966 6 128 16,100 795 68 666 1,529 Geographical information The Group operates in one principal geographical area – Australia/NZ. The Group’s non-current assets are situated in Australia. The geographical non-current assets below are exclusive of, where applicable, financial instruments. Non-Current Assets B2C B2B Total 31-Jul-22 $’000 31-Jul-21 $’000 19,764 4,067 23,831 32,169 4,337 36,506 46 Toys “R” Us ANZ Limited Annual Report 2022 NOTE 5: Discontinued operations Razor Distributorship During the prior year, the Group: (a) sold its confectionery business effective 22 January 2021; (b) sold its Chill Factor business effective 5 July 2021; (c) announced that its distribution agreement with Razor USA LLC would be discontinued effective from 1 May 2021; and (d) commenced the winding down of its overseas subsidiaries in USA and Hong Kong. Consequent to the above, the entire business operations of the erstwhile Funtastic Limited has been reclassified as discontinued operations in accordance with AASB 5 Non-current Assets Held for Sale and Discontinued Operations, consistent with the prior year. (a) Financial performance of discontinued operations Revenue Cost of Goods Sold Other Income (including government grants) Warehouse and Distribution Expenses Marketing and Selling Expenses Employee benefits Expenses Administration Expenses Earnings before interest, taxation, depreciation and amortisation (EBITDA) Finance costs Depreciation and amortisation expenses Impairment of right-of-use assets Profit before income taxes Income tax expense Profit after income taxes Profit on sale of businesses before income taxes Income tax expense Profit on sale of businesses after income taxes Profit after income taxes from discontinued operations Year ended 31 July 2022 $’000 Year ended 31 July 2021 $’000 1,200 (1,021) 179 – (68) – – (8) 103 – (6) – 97 – 97 – – – 97 15,235 (9,231) 6,004 419 (1,299) (103) (2,059) (1,436) 1,526 (510) (208) (458) 350 – 350 1,626 – 1,626 1,976 47 Notes to the Consolidated Financial Statements (Cont.) (b) Cash flow information relating to discontinued operations Net cash from/(used in) operating activities Net cash from investing activities Net cash used in financing activities Net increase in cash and cash equivalents from discontinued operations (c) Assets relating to discontinued operations Trade and other receivables Inventories Other current assets (d) Liabilities relating to discontinued operations Trade payables Other current liabilities Lease liabilities Provisions Year ended 31 July 2022 $’000 Year ended 31 July 2021 $’000 837 – (254) 583 – – – – 3 214 281 – 498 (1,356) 3,169 (211) 1,602 935 1,035 129 2,099 557 994 535 27 2,113 The assets and liabilities relating to discontinued operations are included in the relevant categories of assets and liabilities respectively. 48 Toys “R” Us ANZ Limited Annual Report 2022 NOTE 6: Revenue From continuing operations Revenues from contracts with customers Gross revenue from the sale of goods Less: settlement discounts and rebates Total revenue from the sale of goods Other Revenue Total other revenue Total revenue Disaggregation of revenues The disaggregation of revenue from contracts with customers from continuing operations is as follows: Operating segments B2C B2B Timing of revenue recognition Goods transferred at a point in time Geographical regions Australia Year ended 31-Jul-22 $’000 Year ended 31-Jul-21 $’000 37,822 – 37,822 105 105 21,519 – 21,519 308 308 37,927 21,827 26,029 11,898 37,927 13,145 8,682 21,827 37,927 21,827 37,927 21,827 49 Notes to the Consolidated Financial Statements (Cont.) NOTE 7: Profit/(loss) for the year Profit/(loss) before income taxes from continuing operations includes the following specific expenses: Year ended 31-Jul-22 $’000 Year ended 31-Jul-21 $’000 Note 3 – 3 2 51 53 5,625 2,314 378 668 6,671 533 1,061 1,594 193 1,454 3,961 40 823 863 13 14 Year ended 31-Jul-22 $’000 Year ended 31-Jul-21 $’000 (2,339) (1,645) (5) – (2,344) (1,645) 2,049 (295) 1,408 (237) (295) – (295) (237) – (237) Other income Interest from bank deposits Government subsidies related to COVID-19 Total other income Employee benefits expense Other employee benefits Post-employment benefits – Defined contribution superannuation plans Share-based payments Total employee benefits expense Depreciation and amortisation expense Depreciation of property, plant & equipment Amortisation of other intangible assets Total depreciation and amortisation expense NOTE 8: Income tax (a) Income tax (benefit)/expense Tax expense comprises: Current tax (benefit)/expense in respect of the current year Adjustments for prior periods Deferred tax expense comprises: Deferred tax (benefit)/expense relating to the origination and reversal of temporary differences Total income tax (benefit)/expense Income tax (benefit)/expense is attributable to: Loss from continuing operations Profit/(loss) from discontinued operations Total tax (benefit)/expense 50 Toys “R” Us ANZ Limited Annual Report 2022 NOTE 8: Income tax (Cont.) (b) Income tax recognised in profit or loss The expense for the year can be reconciled to the accounting profit as follows: Loss before income taxes from continuing operations Profit before income taxes from discontinued operations Year ended 31-Jul-22 $’000 Year ended 31-Jul-21 $’000 (25,151) 97 (25,054) (5,326) 1,976 (3,350) Tax expense/(benefit) at the Australian tax rate of 25% (FY 2021: 27.5%) (6,264) (921) Tax effect of amounts which are not deductible/(taxable) in calculating taxable income: Impairment of goodwill Other expenses that are not deductible in determining taxable loss Effect of current year’s unrecognised and unused tax losses Effect of reversal of deferred tax liabilities Adjustment for prior period Income tax (benefit)/expense recognised in profit or loss (c) Income tax recognised directly in equity Deferred Tax Relating to share issue expenses deductible over 5 years (d) Current tax balances Current tax liabilities and assets Income tax (payable)/receivable (e) Deferred tax assets No movements in deferred tax asset balances were recognised in the financial year 2022 (2021: $0). The following deferred tax assets relating to tax losses have not been brought to account as assets: Tax losses – Revenue (gross) Tax losses – Capital (gross) Potential tax benefit on revenue losses at 25% (FY 2021: 27.5%) 3,625 552 2,087 (290) (5) (295) – – – – 2 919 (237) – (237) – – 12 79,436 11,023 90,459 19,859 68,290 4,973 73,263 18,780 Tax Losses and temporary differences The Company has made losses in current and previous reporting periods. Following the assessment of the probability of recovery, having considered forecast future taxable income and current tax legislation with respect to carrying forward tax losses and temporary differences, the full balance of tax losses available at 31 July 2022 has not been booked as a deferred tax asset in these financial statements. 51 Notes to the Consolidated Financial Statements (Cont.) (f) Deferred tax liabilities Deferred tax liability comprises temporary differences attributable to: Amounts recognised in profit or loss: Customer database intangible assets Movement in deferred tax liabilities Opening balance Additions through business combinations Credited to profit or loss Closing balance 31-Jul-22 $’000 31-Jul-21 $’000 1,054 1,344 Year ended 31-Jul-22 $’000 Year ended 31-Jul-21 $’000 1,344 – (290) 1,054 – 1,581 (237) 1,344 Unrecognised taxable temporary differences associated with investments and interests in subsidiaries Under the tax law, the taxable profit made by a tax-consolidated group in relation to an entity leaving the group depends on a range of factors, including the tax values and/or carrying values of the assets and liabilities of the leaving entities, which vary in line with the transactions and events recognised in each entity. The taxable profit or loss ultimately made on any disposal of the investments within the tax-consolidated group will therefore depend upon when each entity leaves the tax-consolidated group and the assets and liabilities that the leaving entity holds at that time. The Group considers the effects of entities entering or leaving the tax-consolidated group to be a change of tax status that is only recognised when those events occur. As a result, temporary differences and deferred tax liabilities have not been measured or recognised in relation to investments remaining within the tax-consolidated group. Tax consolidation (i) Relevance of tax consolidation to the Group The Company and its wholly owned Australian resident entities formed a tax-consolidated Group with effect from 1 January 2003 and are therefore taxed as a single entity from that date. The head entity within the tax-consolidated Group is Toys”R”Us ANZ Limited. The members of the tax-consolidated Group are identified in Note 24. (ii) Nature of tax funding arrangement and tax sharing agreement Entities within the tax-consolidated Group have entered into a tax funding arrangement and a tax sharing agreement with the head entity. Under the terms of the tax funding arrangement, Toys”R”Us ANZ Limited and each of the entities in the tax-consolidated Group have agreed to pay a tax equivalent payment to or from the head entity, based on the current tax liability or current tax asset of the entity. Such amounts are reflected in amounts receivable from or payable to the other entities in the tax consolidated Group. The tax sharing agreement entered into between members of the tax-consolidated Group provide for the determination of the allocation of income tax liabilities between the entities should the head entity default on its tax payment obligations or if an entity should leave the tax consolidated Group. The effect of the tax sharing agreement is that each member’s liability for tax payable by the tax consolidated Group is limited to the amount payable to the head entity under the tax funding arrangement. 52 Toys “R” Us ANZ Limited Annual Report 2022 NOTE 9: Current assets – Trade and other receivables Trade receivables Allowance for expected credit losses Other receivables Total Year ended 31-Jul-22 $’000 Year ended 31-Jul-21 $’000 779 (2) 777 17 794 1,799 (2) 1,797 85 1,882 The Group does not hold any collateral over these balances. The Group’s trade and other receivables have been reviewed for indicators of impairment and include an allowance for expected credit losses as described in Note 3 (iii). The Group has recognised a gain of $75,340 in profit or loss in respect of the expected credit losses for the year ended 31 July 2022 (FY 2021: loss of $33,388). The ageing of the receivables and allowance for expected credit losses provided for above are as follows: Expected credit loss rate Carrying amount Consolidated Not overdue 1-60 days overdue 91-90 days overdue 2022 % 0% 0% 0% 2021 % 0% 0% 0% Over 90 days overdue 100% 100% Total 2022 $’000 667 108 2 2 779 2021 $’000 1,797 – – 2 1,799 Allowance for expected Credit losses 2022 $’000 2021 $’000 – – – 2 2 – – – 2 2 53 Notes to the Consolidated Financial Statements (Cont.) Movement in allowances Year ended 31 July 2022 Balance at beginning of year Additional provisions recognised Provisions reversed Balance at end of the period Year ended 31 July 2021 Balance at beginning of year Additional provisions recognised Provisions Acquired through business combinations Provision released Provision utilised/adjusted Balance at end of the year Rebates, credit notes & settlement discount $’000 Allowance for Impairment $’000 (2) (1) 1 (2) (1,915) (76) (2) 30 1,961 (2) – – – – (947) (1,090) – – 2,037 – Total $’000 (2) (1) 1 (2) (2,862) (1,166) (2) 30 3,998 (2) In determining the recoverability of a trade receivable, the Group considers any change in the credit quality of the trade receivable from the date credit was initially granted up to the reporting date. The concentration of credit risk is limited due to the customer base being large and unrelated. Accordingly, the directors believe that there is no further credit provision required in excess of the allowance for impairment. NOTE 10: Current assets – Inventories Year ended 31-Jul-22 $’000 Year ended 31-Jul-21 $’000 10,324 (473) 9,851 530 – (57) 473 6,536 (530) 6,006 904 375 (749) 530 Stock at cost Less: Provision for obsolescence Movement in provision for obsolescence Balance at beginning of year Additions on business combinations Provisions utilised/adjusted Balance at end of the year 54 Toys “R” Us ANZ Limited Annual Report 2022 NOTE 11: Other assets Current Prepaid royalties Prepaid expenses Prepaid deposits for purchase of inventory Non-current Bonds and security deposits NOTE 12: Right-of-use assets Right-of-use assets – at cost Less: Accumulated depreciation and impairment Reconciliation Balance at 1 August 2021 Depreciation expense Balance at 31 July 2022 Right-of-use assets – at cost Less: Accumulated depreciation and impairment Reconciliation Balance at 1 August 2020 Adjustment for rent relief Impairment expense Depreciation expense Balance at 31 July 2020 Year ended 31-Jul-22 $’000 Year ended 31-Jul-21 $’000 – 113 566 679 3,763 3,763 215 214 496 925 1,133 1,133 Property 31-Jul-22 $’000 Equipment 31-Jul-22 $’000 Total 31-Jul-22 $’000 – – – – – – – – – – – – – – – – – – Property 31-Jul-21 $’000 Equipment 31-Jul-21 $’000 Total 31-Jul-21 $’000 904 (904) – 681 (25) (458) (198) – 20 (20) – 10 – – (10) – 924 (924) – 691 (25) (458) (208) – There were no additions to the right-of-use assets during the current and previous years. As at 31 July 2022, the Group leased office and warehouse premises under agreements of less than one year. These leases are either short-term or low-value, so have been expensed as incurred and not capitalised as right-of-use assets. 55 Notes to the Consolidated Financial Statements (Cont.) NOTE 13: Non-current assets – Property, Plant and equipment Plant and equipment – at cost Less: accumulated depreciation Leasehold improvements – at cost Less: accumulated depreciation Year ended 31-Jul-22 $’000 Year ended 31-Jul-21 $’000 2,932 (560) 2,372 16 (4) 12 2,174 (241) 1,933 4 – 4 2,384 1,937 Reconciliations Reconciliations of the carrying amounts of each class of plant and equipment at the beginning and end of the current financial year are set out below: Year ended 31-Jul-22 Year ended 31-Jul-21 Plant and equipment $’000 Leasehold improvements $’000 Opening Balance Additions during the year Disposals Depreciation expense Addition through business combination Closing Balance 1,933 974 (6) (529) – 2,372 4 12 – (4) – 12 Total $’000 1,937 986 (6) (533) 2,384 Plant and equipment $’000 Leasehold Improvements $’000 25 1,691 – (40) 257 1,933 – – – – 4 4 Total $’000 25 1,691 – (40) 261 1,937 56 Toys “R” Us ANZ Limited Annual Report 2022 NOTE 14: Non-current Assets – Goodwill and Other Intangibles Goodwill Less: Accumulated Impairment Software costs Less: Accumulated amortisation Chill Factor – Trademarks and patents Less: Accumulated amortisation Customer database Less: Accumulated amortisation Other Licenses and trademarks Less: Accumulated amortisation Total Goodwill and Other Intangibles Reconciliations Year ended 31-Jul-22 $’000 Year ended 31-Jul-21 $’000 29,695 (14,500) 15,195 29,695 – 29,695 265 (220) 45 – – – 5,271 (1,756) 3,515 2,786 (94) 2,692 21,447 269 (245) 24 – – – 5,271 (791) 4,480 375 (5) 370 34,569 Reconciliations of the carrying amounts of each class of intangibles at the beginning and end of the current financial year are set out below: Software costs $’000 Chill Factor Trademarks and Patents $’000 Customer Database $’000 Other Licenses and Trademarks $’000 Goodwill $’000 2022 Opening Balance Additions Disposals Impairment Amortisation Closing Balance 2021 Opening Balance Additions through business combinations Additions Disposals Amortisation 29,695 – – (14,500) – 15,195 – 29,695 – – – Closing Balance 29,695 24 31 (4) – (6) 45 1 26 – – (3) 24 – – – – – – 101 – – (78) (23) – 4,480 – – – (965) 3,515 – 5,271 – – (791) 4,480 Total $’000 34,569 2,443 (4) (14,500) (1,061) 21,447 102 34,992 375 (78) (822) 370 2,412 – – (90) 2,692 – – 375 – (5) 370 34,569 57 Notes to the Consolidated Financial Statements (Cont.) Impairment testing – Intangible Assets Recoverability of software and licenses has been assessed at the time of creation/subscription based on their useful life and is then amortised accordingly. All software and licenses are reviewed for their usefulness and validity annually and impaired if required. The Group has identified that there are two cash-generating units which are aligned with the operating segments disclosed in Note 4 and against which goodwill and other intangible assets are allocated and tested. Goodwill Business to consumer (B2C) Business to business (B2B) Year ended 31-Jul-22 $’000 Year ended 31-Jul-21 $’000 11,128 4,067 15,195 25,628 4,067 29,695 The recoverable amount of the Group’s goodwill has been determined by a value-in-use calculation using a discounted cash flow model, based on budgets for FY 2023 approved by the Board and extrapolated for a further 4 years using a steady rate, together with a terminal value. As at 31 July 2022, the recoverable value of value-in use calculation of the B2C CGU was below the carrying value of the CGU. As a result of this analysis, the Group has recognised an impairment charge of $14.5 million in the current year against goodwill with a carrying value of $25.628 million as at 31 July 2021. The impairment charge was recorded as a separate line in the statement of profit or loss. Key assumptions Key assumptions are those to which the recoverable amount of the cash-generating units is most sensitive. The following key assumptions were used in the discounted cash flow model for the CGUs: Key assumptions Revenue and expenses for FY 2022 Projected revenue and cost of sales growth rate per annum after budget period Projected operating costs and overheads increase after budget period Pre-tax discount rate Long-term growth rate B2C B2B Based on approved budgets Based on approved budgets 16% 2.4% 19.43% 3.0% 3.5% 2.4% 19.43% 2.0% The pre-tax discount rates reflect management’s estimate of the time value of money and the Group’s weighted average cost of capital, the risk-free rate and the volatility of the share price relative to market movements. Management believes the projected revenue growth rates are prudent and justified, based on historical performance of the businesses. Outcome of impairment assessment Based on the above: • an impairment charge of $14,500,000 has been applied as the carrying amount of goodwill exceeded its recoverable amount for the B2C CGU. • the recoverable amount of the B2B CGU exceeded the carrying amount by $1,100,000. 58 Toys “R” Us ANZ Limited Annual Report 2022 NOTE 14: Non-current Assets – Goodwill and Other Intangibles (Cont.) Key assumptions (Cont.) Sensitivity As disclosed in Note 3, the directors have made judgements and estimates in respect of impairment testing of goodwill. Should these judgements and estimates not occur, the resulting goodwill carrying amount may decrease. The sensitivities are as follows: B2C Any negative changes in the key assumptions on which the recoverable amount of goodwill is based, would result in a further impairment charge for the B2C CGU’s goodwill. B2B • Revenue growth during the budget period would need to decrease by more than 4.5% before goodwill would need to be impaired, with all other assumptions remaining constant. • The pre-tax discount rate would need to increase by 2% or more before goodwill would need to be impaired, with all other assumptions remaining constant. Management believes that other reasonable changes in the key assumptions on which the recoverable amount of both the CGUs’ goodwill is based would not cause the CGUs’ carrying amount to exceed its recoverable amount. NOTE 15: Assets pledged as security In accordance with the security arrangements of liabilities as disclosed in Note 16 to the financial statements, all assets of the Group, present and future, have been pledged as security. The Group does not have the right to sell or re-pledge the assets. NOTE 16: Borrowings Secured – at amortised cost Non-current Interest bearing liabilities Total Non-current Year ended 31-Jul-22 $’000 Year ended 31-Jul-21 $’000 10,000 10,000 – – In July 2022, the Company obtained a three-year secured loan facility of $15 million to support working capital and capital expenditure requirements for the Company’s planned entry into the UK market and e-commerce launch, including the acquisition of inventory. The loan is repayable at the end of July 2025 and as at the balance sheet date, the Group had utilised $10 million of the total facility limit. The facility is secured against all assets of the Group, both present and future. 59 Notes to the Consolidated Financial Statements (Cont.) NOTE 17: Provisions Current Employee benefits(i)(ii) Total Current Non-current Employee benefits(i) Total Non-current Total Year ended 31-Jul-22 $’000 Year ended 31-Jul-21 $’000 393 393 11 11 404 415 415 4 4 419 (i) The provision for employee benefits represents annual leave and long service leave entitlements accrued. (ii) The current provision for employee benefits includes all unconditional entitlements where employees have completed the required period of service and also those where employees are entitled to pro-rata payments in certain circumstances. The entire amount is presented as current, since the Group does not have an unconditional right to defer settlement. However, based on past experience, the Group does not expect all employees to take the full amount of accrued leave or require payment within the next 12 months. NOTE 18: Lease liabilities Current Maturity analysis of lease liabilities Year ended 31-Jul-22 $’000 Year ended 31-Jul-21 $’000 281 535 2022 Lease payments Less: Finance charge Discounted Lease Liabilities 2021 Lease payments Less: Finance charge Discounted Lease Liabilities Within 1 year $’000 294 (13) 281 581 (46) 535 1-2 years $’000 2-3 years $’000 3-4 years $’000 4-5 years $’000 After 5 years $’000 Total $’000 – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – 294 (13) 281 581 (46) 535 60 Toys “R” Us ANZ Limited Annual Report 2022 NOTE 19: Other current liabilities Accrued royalties GST payable/(receivable) – net Payroll accruals Other accrued expenses Total NOTE 20: Equity and reserves Share Capital 861,861,184 (2021: 848,358,858) fully paid ordinary shares Year ended 31-Jul-22 $’000 Year ended 31-Jul-21 $’000 726 (22) 178 1,002 1,884 1,138 79 86 1,404 2,707 Year ended 31-Jul-22 $’000 Year ended 31-Jul-21 $’000 292,965 290,545 Movements in Ordinary Share Capital Opening balance Placement Offer, net of transaction costs Consideration for Acquisition Shares issued as consideration for conversion of borrowings Shares issued as payment for intangible assets Shares issued as consideration for remuneration Shares issued as consideration for remuneration Shares issued as payment for intangible assets Shares issued as payment for intangible assets (net of transaction costs of $11,000) Shares issued as consideration for remuneration Year ended 31-Jul-22 Year ended 31-Jul-21 Date Number of Shares Share Capital $’000 Number of Shares Share Capital $’000 848,358,858 290,545 240,404,075 225,166 26-Nov-20 26-Nov-20 26-Nov-20 26-Nov-20 26-Nov-20 30-Nov-20 25-Jun-21 258,928,571 291,205,818 27,054 32,033 53,571,429 5,891 1,223,092 454,545 190,476 137 10 20 2,380,852 234 14-Dec-21 13,394,216 2,401 15-Dec-21 108,110 19 – – – – Closing balance 861,861,184 292,965 848,358,858 290,545 61 Notes to the Consolidated Financial Statements (Cont.) Ordinary shares Ordinary shares entitle the holder to participate in dividends and the proceeds on winding up of the parent entity in proportion to the number of members’ shares held. At members’ meetings, each fully paid ordinary share is entitled to vote when ta poll is called, otherwise each shareholder has one vote on a show of hands. The fully paid ordinary shares have no par value and the company does not have a limited amount of authorised capital. Foreign currency translation reserve The foreign translation reserve account accumulates exchange differences arising on translation of foreign controlled entities which are recognised in other comprehensive income. The carrying amount is reclassified to profit or loss when the net investment is disposed of. Equity-settled employee benefits reserve Movements in the reserve are detailed in the consolidated statement of changes in equity. The reserve records amount for the fair value of options granted and recognised as an employee benefits expense but not exercised. NOTE 21: Earnings per share Basic earnings/(loss) per share From continuing operations From discontinued operations Total Basic Earnings/(loss) per share Diluted earnings/(loss) per share From continuing operations From discontinued operations Total Diluted Earnings/(loss) per share Basic earnings per share calculation: Net loss after tax for the year – continuing operations Net profit after tax for the year – discontinued operations Profit/(Loss) used in the calculation of total basic EPS Weighted average number of ordinary shares (‘WANOS’) outstanding during the year used in the calculation of basic earnings/(loss) per share Diluted earnings per share calculation: WANOS outstanding during the year used in the calculation of basic earnings/(loss) per share Add: Shares deemed to be issued for no consideration in respect of: Performance and service rights1 WANOS and potential ordinary shares used as the denominator in calculating diluted earnings per share 31-Jul-22 Cents per share 31-Jul-21 Cents per share (2.90) 0.01 (2.89) (2.90) 0.01 (2.89) $’000 (24,856) 97 (24,759) (0.78) 0.30 (0.48) (0.78) 0.30 (0.48) $’000 (5,089) 1,976 (3,113) No. ’000 No. ’000 856,867 652,102 856,867 652,102 22,184 21,694 879,051 673,796 1 Potential shares comprising performance and service rights have not been considered in the calculation of WANOS for diluted earnings per share as they are anti-dilutive in nature, due to the losses incurred. 62 Toys “R” Us ANZ Limited Annual Report 2022 NOTE 22: Dividends on equity instruments There were no dividends declared or paid during the financial year (2021: nil). The franking account balance at 31 July 2022 is $19,318,846 (2021: $19,301,903). NOTE 23: License guarantee commitments Under the terms of various License Agreements, the company guarantees the minimum level of license payments. The commitment in relation to these guarantees not already recognised is as follows: Not later than one year Later than one year but not later than two years Later than two years but not later than five years Later than five years NOTE 24: Subsidiaries Name of Entity Company Toys”R”Us ANZ Limited(i),(v),(vi) Subsidiaries UK Toys”R”US Limited (Donatello Limited)(iii),(v) FUN International Limited(v) Country of Incorporation Australia United Kingdom Hong Kong Funtastic America Inc. (formerly My Paint Box Inc.)(v) USA NSR (HK) Limited(v) Hong Kong Fun Toy Products Consulting (Shenzhen) Company Limited(iv) China Mittoni Pty Limited(ii),(v) Hobby warehouse Pty Limited(ii),(v) Toys R Us Licensee Pty Limited(ii),(v) Australia Australia Australia Year ended 31-Jul-22 $’000 Year ended 31-Jul-21 $’000 1,713 1,713 5,138 26,545 35,109 1,627 1,617 4,852 27,632 35,728 Equity Holding Year ended 31-Jul-22 % Year ended 31-Jul-21 % 100 100 100 100 100 – 100 100 100 100 – 100 100 100 100 100 100 100 (i) Toys”R”Us ANZ Limited is the head entity within the tax consolidated Group. (ii) These companies are members of the tax consolidated Group. (iii) Newly incorporated on 12 October 2021 for the Toys”R”Us business operations in United Kingdom. (iv) This subsidiary was wound down and deregistered on April 2022. (v) These subsidiaries are parties to a Deed of Cross Guarantee with Toys”R”Us ANZ Limited created on 15 June 2022 pursuant to ASIC Class Order 2016/785 and are relieved from the requirement to prepare and lodge an audited Financial Report. Refer to disclosure for Consolidated Statement of Profit or Loss and Other Comprehensive Income and Consolidated Balance Sheet of the entities who are a party to the Deed of Cross Guarantee. (vi) These subsidiaries were in a deed of cross guarantee with Toys”R”Us ANZ limited and now being replaced by a new Deed of Cross Guarantee created on 15 June 2022 as referred in footnote (v). Refer to disclosure for Consolidated Statement of Profit or Loss and Other Comprehensive Income and Consolidated Balance Sheet of the entities who are a party to the Deed of Cross Guarantee for prior year disclosure. 63 Notes to the Consolidated Financial Statements (Cont.) The consolidated Statements of Profit or Loss and Other Comprehensive Income of the entities party to the deed of cross guarantee are: Revenue Cost of Goods Sold Gross profit Other income Warehouse and distribution expenses Marketing and Selling Expenses Administration Expenses Employee benefit expenses Earnings before interest, taxation, depreciation and amortisation (EBITDA) Finance costs (net) Impairment of goodwill Depreciation and amortisation expenses Loss before income tax Income tax (expense)/benefit Loss for the period from continuing operations Profit/(Loss) after income taxes from discontinued Operations Loss for the year Other comprehensive income/(loss) for the year (net of tax) Total comprehensive income/(loss) for the year Financial performance of discontinued operations Revenue Cost of Goods Sold Gross Profit Other Income (including government grants) Warehouse and Distribution Expenses Marketing and Selling Expenses Employee benefits Expenses Administration Expenses Earnings before interest, taxation, depreciation and amortisation (EBITDA) Finance costs Depreciation, amortisation and impairment expenses Profit/(Loss) before income taxes Income tax expense Profit/(Loss) after income taxes Profit on sale of businesses before income taxes Income tax expense Profit on sale of businesses after income taxes Profit/(Loss) after income taxes from discontinued operations Year ended 31-Jul-22 $’000 Year ended 31-Jul-21 $’000 37,927 (29,972) 7,955 3 (2,385) (5,974) (1,985) (6,671) (9,057) – (14,500) (1,594) (25,151) 295 – – – 26 – – (1,782) (2,135) (3,891) – – (830) (4,721) 237 (24,856) (4,484) 97 (24,759) (18,098) (22,582) 20 – (24,739) (22,582) $’000 1,200 (1,021) 179 – (68) – (8) – 103 – (6) 97 – 97 – – – 97 $’000 15,235 (9,231) 6,004 419 (1,299) (103) (2,059) (1,436) 1,526 (510) (20,740) (19,724) – (19,724) 1,626 – 1,626 (18,098) 64 Toys “R” Us ANZ Limited Annual Report 2022 NOTE 24: Subsidiaries (Cont.) The consolidated Statements of Financial Position of the entities party to the deed of cross guarantee are: Current Assets Cash and cash equivalents Trade and other receivables Inventories Other current assets Total Current Assets Non-Current Assets Property, plant and equipment Goodwill and other intangibles Right of Use Assets Other non-current assets Total non-current assets Total assets Current liabilities Trade payables Contract liabilities Lease liabilities Provisions Other current liabilities Total current liabilities Non-current liabilities Borrowings Deferred Tax Provisions Total non-current liabilities Total liabilities Net Assets Equity Issued capital Accumulated Losses Reserves Total Equity Year ended 31-Jul-22 $’000 Year ended 31-Jul-21 $’000 12,538 794 9,851 679 23,862 2,384 21,447 – 3,763 27,594 51,456 16,128 699 1,035 272 18,134 1,706 33,195 – 7,014 41,915 60,049 3,263 326 422 281 393 1,884 6,243 10,000 1,054 11 11,065 17,308 535 196 1,248 2,305 – 1,344 – 1,344 3,649 34,148 56,400 292,965 290,545 (260,958) (235,599) 2,141 34,148 1,454 56,400 65 Notes to the Consolidated Financial Statements (Cont.) NOTE 25: Notes to the cash flow statements (a) Reconciliation of cash and cash equivalents For the purposes of the cash flow statement, cash and cash equivalents includes cash on hand and in banks and investments in money market instruments, net of outstanding bank overdrafts. Cash and cash equivalents at the end of the financial year as shown in the cash flow statement is reconciled to the related items in the Statement of Financial Position as follows: Cash Cash equivalents (b) Financing facilities Total Financing Facilities Bank Guarantees Secured Loan(i) Reconciliation of Finance facilities Used at Balance Date Bank Guarantees Secured Loan(i) Unused at Balance Date Bank Guarantees Debtor finance Secured Loan(i) Year ended 31-Jul-22 $’000 Year ended 31-Jul-21 $’000 – 12,538 12,538 – 17,338 17,338 Year ended 31-Jul-22 $’000 Year ended 31-Jul-21 $’000 – 15,000 15,000 – 10,000 10,000 – – 5,000 5,000 1,083 – 1,083 1,083 – 1,083 – – – – (i) In July 2022, the Company has obtained a three-year secured loan facility of $15 million for the UK business operations, repayable at the end of July 2025. As at 31 July 2022, the Company had utilised $10 million of the total facility limit. 66 Toys “R” Us ANZ Limited Annual Report 2022 NOTE 25: Notes to the cash flow statements (Cont.) (c) Reconciliation of Profit after Income Tax to Net Cash Inflow from Operating Activities Profit/(Loss) after income tax Impairment of right-of-use assets Depreciation and amortisation Impairment of goodwill (Profit)/loss on sale of business/assets – net Share-based payments expense Shares issued as consideration for salaries and bonus Other revenue Unrealised FX loss on revaluation of intercompany loans Finance costs Changes in net assets and liabilities, net of effects from acquisition and disposal of businesses: Decrease in trade and other receivables (Increase) in inventories Decrease in prepayments and other assets (Decrease)/Increase in trade and other payables (Decrease) in provisions Decrease in income tax receivable (Decrease) in deferred tax liabilities (Decrease) in other liabilities Net cash outflow from operating activities Year ended 31-Jul-22 $’000 Year ended 31-Jul-21 $’000 (24,759) – 1,600 14,500 – 668 19 (3) 1,088 (3,845) 270 688 (16) 12 (290) (834) (10,902) (3,113) 458 1,071 – (1,626) 1,454 30 (107) – – 1,948 (1,615) 537 (1,141) (97) 17 (237) (1,494) (3,915) 67 Notes to the Consolidated Financial Statements (Cont.) NOTE 26: Financial Instruments Capital risk management The Group manages its capital to ensure that entities in the Group will be able to continue as a going concern while maximising the return to stakeholders through the optimisation of the debt and equity balance. The capital structure of the Group consists of debt, which comprises the borrowings detailed in Note 16, cash and cash equivalents and equity attributable to equity holders of the parent, comprising issued capital, accumulated losses and reserves as disclosed in the Statement of Changes in Equity. The Board reviews the capital structure on a regular basis. As part of this review the cost of capital and the risks associated with each class of capital is considered. The Group balances its overall capital structure through the payment of dividends, new share issues and share buy-backs as well as the issue of new debt and the repayment of debt. Significant accounting policies Details of significant accounting policies and methods adopted, including the criteria for recognition, the basis of measurement and the basis on which income and expenses are recognised, in respect of each class of financial asset, financial liability and equity instrument are disclosed in Note 1 to the financial statements. These policies were consistent throughout the current year and the previous year. Categories of financial instruments Financial assets Cash and cash equivalents Trade and other receivables Other assets Total non-derivative financial assets Total derivative financial assets Total financial assets Financial liabilities Non-interest bearing Other liabilities Fixed interest rate instruments Total non-derivative financial liabilities Total derivative financial liabilities Total financial liabilities Year ended 31-Jul-22 $’000 Year ended 31-Jul-21 $’000 12,538 794 3,763 17,095 – 17,338 1,882 1,133 20,353 – 17,095 20,353 3,263 1,906 10,000 15,169 – 15,169 2,998 2,628 5,626 – 5,626 68 Toys “R” Us ANZ Limited Annual Report 2022 NOTE 26: Financial Instruments (Cont.) Financial risk management objectives The Group’s finance function provides services to the business, co-ordinates access to domestic and international financial markets, monitors and manages the financial risks relating to the operations of the Group through internal risk reports which analyse exposures by degree and magnitude of risk. These risks include market risk (including currency risk, interest rate risk), credit risk and liquidity risk. The Group seeks to minimise the effects of these risks, by using various financial instruments to hedge these exposures. The use of financial instruments is governed by the Group’s policies approved by the Board of Directors, who provide written principles on foreign exchange risk, interest rate risk, credit risk, the use of financial derivatives and non-derivative financial instruments and the investment of excess liquidity. Compliance with policies and exposure limits is reviewed on a continual basis. The Group does not enter into any trade financial instruments, including derivative financial instruments, for speculative purposes. Market risk The Group’s activities expose it primarily to the financial risks of changes in foreign currency exchange rates and interest rates. The Group enters into a variety of derivative financial instruments to manage its exposure to interest rate risk and foreign currency risk, including: • Foreign exchange forward contracts to hedge the exchange rate risk arising on the import of goods denominated in US dollars; and • Interest rate swaps to mitigate the risk of rising interest rates. At a Group level, market risk exposures are measured through sensitivity analysis and stress scenario analysis. In FY 2022, while there have been interest rate increases, there has been no material change to the Group’s exposure to market risk or the manner in which it manages and measures the risk. Foreign currency risk management Foreign currency risk refers to the risk that the fair value of future cash flows of a financial instrument will fluctuate because of changes in foreign exchange rates. The Group’s exposure to foreign exchange risk arises from the net investment in the United States operations and the undertaking of certain transactions denominated in foreign currencies. The carrying amount of the Group’s foreign currency denominated monetary assets and monetary liabilities at the reporting date is as follows: US Dollars GBP Liabilities Assets 2022 $’000 1,317 304 2021 $’000 1,431 2022 $’000 78 2021 $’000 184 The Group undertakes certain transactions denominated in foreign currency and is exposed to foreign currency risk through foreign exchange rates fluctuations. Foreign exchange risk arises from future commercial transactions and recognised financial assets and financial liabilities denominated in a currency that is not the Group’s functional currency. This is measured using sensitivity and cash flow forecasting. 69 Notes to the Consolidated Financial Statements (Cont.) Foreign currency sensitivity The Group is mainly exposed to the US dollar (USD) and the UK Pound Sterling (GBP). The following table details the Group’s sensitivity to a 10% increase and 10% decrease in the Australian dollar against the relevant foreign currencies. 10% is the sensitivity rate which represents management’s assessment of the possible change in foreign exchange rates. The sensitivity analysis includes only outstanding foreign currency denominated monetary items and adjusts their translation at the period end for a 10% change in foreign currency rates. A positive number indicates an increase in profit or loss where the Australian dollar strengthens against the respective currency. For a weakening of the Australian dollar against the respective currency there would be an equal and opposite impact on profit or loss and the balances below would be equal and opposite. A positive number indicates an increase in other equity where the Australian dollar weakens against the respective currency. For a strengthening of the Australian dollar against the respective currency there would be an equal and opposite impact on other equity and the balances below would be negative. 10% increase in AUD against foreign currency USD GBP 10% decrease in AUD against foreign currency USD GBP Impact on profit or loss Gain/(loss) 2022 $’000 2021 $’000 132 23 155 (132) (23) (155) 62 – 62 (62) – (62) Forward foreign exchange contracts At 31 July 2022, there were no foreign exchange contracts (2021: Nil). Interest rate risk management Interest rate risk refers to the risk that the fair value of future cash flows of a financial instrument will fluctuate because of changes in market interest rates. The Group is exposed to interest rate risk as it borrows funds at both fixed and floating interest rates. The risk is managed by the use of interest rate swap contracts. Hedging activities are evaluated regularly to align with interest rate views and defined risk appetite, ensuring optimal hedging strategies are applied, by either positioning the statement of financial position or protecting interest expense through different interest rate cycles. The Group’s exposure to interest rates on financial assets and financial liabilities are detailed in the liquidity risk management section below. Interest rate sensitivity As at 31 July 2022, the Group has a fixed interest rate of 9.50% p.a. on its secured borrowings of $10 million as at the balance sheet date. In an event of default payment of interest, the Group will have an additional interest expense of $0.35 million at an incremental 3.5% interest rate. It is the Group’s policy to protect part of the loans from exposure to increasing interest rates. The Group does not have any variable rate borrowings as at the balance sheet date. 70 Toys “R” Us ANZ Limited Annual Report 2022 NOTE 26: Financial Instruments (Cont.) Credit risk management Credit risk refers to the risk that a counter party will default on its contractual obligations resulting in a financial loss to the Group. The Group has adopted a policy of only dealing with creditworthy counterparties. The Group’s exposure and the credit ratings of its counterparties are monitored continuously and the aggregate value of transactions concluded is spread amongst approved counterparties. Trade receivables consist of a large number of customers spread across diverse industries. Ongoing credit evaluation is performed on the financial condition of accounts receivable and, where appropriate, credit guarantee insurance is purchased. The Group has a credit risk exposure to a small number of major ASX listed corporations for which credit guarantee insurance is not purchased. Ongoing credit evaluation is performed on the financial condition of these accounts receivable. The carrying amount of financial assets recorded in the financial statements, net of any allowance for losses, represents the Group’s maximum exposure to credit risk. Liquidity risk management Ultimate responsibility for liquidity risk management rests with the Board of Directors, who have built an appropriate liquidity risk management framework for the management of the Group’s short, medium and long-term funding and liquidity management requirements. The Group manages liquidity risk by maintaining adequate reserves, banking facilities and reserve borrowing facilities by continuously monitoring forecast and actual cash flows and matching the maturity profiles of financial assets and liabilities. Liquidity and interest tables – financial liabilities The following table details the Group’s remaining contractual maturity for its non-derivative financial liabilities. The table has been drawn up based on the undiscounted cash flows of financial liabilities based on the earliest date on which the Group can be required to pay. Weighted average effective interest rate % – – 9.50% – – – – 0-3 months $’000 3 months to 1 year $’000 1-5 years $’000 5+ years $’000 Total $’000 3,263 1,906 – 5,169 2,998 2,628 5,626 – – – – – – – – – 10,000 10,000 – – – – – – – – – – 3,263 1,906 10,000 15,169 2,998 2,628 5,626 2022 Non-interest bearing Other liabilities Fixed interest rate instruments 2021 Non-interest bearing Other liabilities 71 Notes to the Consolidated Financial Statements (Cont.) Liquidity and interest tables – financial assets The following table details the Group’s expected maturity for its non-derivative financial assets. The table below has been drawn up based on the understood contractual maturities of the financial assets including interest that will be earned on those assets except where the Group anticipates that the cash flow will occur in a different period. Weighted average effective interest rate % 0.00% – – 0.00% – – 0-3 months $’000 3 months to 1 year $’000 1–5 years $’000 5+ years $’000 Total $’000 12,538 794 13,332 17,338 1,882 19,220 – – – – – – – – – – – – – 3,763 3,763 – 1,133 1,133 12,538 4,557 17,095 17,338 3,015 20,353 2022 Cash Non-interest bearing 2021 Cash Non-interest bearing Fair value of financial instruments The fair values of financial assets and financial liabilities are determined as follows: • The fair value of other financial assets and financial liabilities (excluding derivative instruments) are determined in accordance with generally accepted pricing models based on discounted cash flow analysis using prices from observable current market transactions; and • The fair value of derivative instruments are calculated using quoted prices. Where such prices are not available, discounted cash flow analysis using the applicable yield curve for the duration of the instruments for non-optional derivatives and option pricing models for optional derivatives is used. The directors consider that the carrying amounts of financial assets and financial liabilities recorded at amortised cost in the financial statements approximates their fair values. Fair value measurements recognised in the consolidated statement of financial position Fair value measurements are discussed in Note 1 and in the notes specific to that asset or liability. 72 Toys “R” Us ANZ Limited Annual Report 2022 NOTE 27: Share-based payments (a) Expenses recognised An expense of $667,543 (2021: $1,453,800) has been recognised in the profit and loss in relation to share-based payments granted during the period. (b) Share options and share appreciation rights An employee incentive plan has been established by the Group and approved by shareholders at a general meeting whereby the Group may, at the discretion of the Remuneration and Nomination Committee, grant options and rights over ordinary shares in the company to directors and employees. The grant of options and rights forms a part of the Company’s long term incentive objectives to encourage directors and employees to have a greater involvement in the achievement of the Company’s objectives. Options and rights provide an incentive to strive to that end by participating in the future growth and prosperity of the Company through share ownership. The options and rights are issued for nil consideration and are only subject to a vesting condition relating to the participant’s continued employment with the Company. The options and rights must be exercised before their expiry date, or they will lapse. On the exercise of an option, the holder must pay to the Company the relevant exercise price multiplied by the number of options being exercised by the holder. The Company will issue the holder with a share for each option or right that the participant validly exercises. (c) Reconciliation Set out below are the summaries of options granted under the employee incentive plan as at 31 July 2022: Grant date Vesting date Expiry date Exercise price Balance at the start of the year Granted Exercised 23-Nov-201 23-Nov-20 1-Nov-23 $0.138 10,149,450 23-Nov-201 1-Nov-21 1-Nov-24 $0.166 10,271,244 23-Nov-201 1-Nov-22 1-Nov-25 $0.199 10,394,498 1-May-21 1-May-23 1-May-25 $0.138 1,691,956 – (90,939) (52,165) – Weighted average exercise price 32,507,148 (143,104) $0.166 $0.178 – – – – – – Balance at the end of the year 10,149,450 10,180,305 10,342,333 1,691,956 32,507,148 $0.166 1. Of the total employee options under the employee incentive plan approved at the 2020 AGM, tranches 1 and 2 have been granted to date. The balance at the start of the year for Tranche 2 was an estimate and has been adjusted for the actual options issued based on the actual shares on issue at 1 November 2021. Tranche 3 will be number of options that equal 1.2% of the total TOY shares on issue on 1 November 2022 and the previous estimate has been adjusted in line with current and expected shares on issue at that date. Option numbers have been estimated and related expenses have been recognised for the current year, based on the expected number of TOY shares on issue at 1 November 2022. The weighted average remaining contractual life of options outstanding at the end of the financial year was 2.29 years (2021: 3.29 years). 73 Notes to the Consolidated Financial Statements (Cont.) Set out below are the summaries of rights granted under the employee incentive plan as at 31 July 2022: Grant date Vesting date Expiry date Exercise price Balance at the start of the year Granted Exercised Cancelled Balance at the end of the year 23-Nov-20 1-Nov-21 1-Nov-21 $0.125 480,000 – 21-Sep-21 31-Jul-24 21-Sep-26 $0.180 23-Nov-20** 31-Jul-23 10-Dec-36 $0.180* – 340,000 – 1,000,000 Weighted average exercise price 480,000 1,340,000 $0.125 $0.180 – – – – – (480,000) – – 340,000 – 1,000,000 (480,000) 1,340,000 $0.125 $0.180 * Being the amount equivalent to the fee sacrificed. There is no cash payable in relation to these rights. ** The Service Rights replaced the Share Appreciation Rights (SARs) originally granted on the 23 November 2020. The Service Rights were approved at the AGM dated 14 December 2021. The weighted average remaining contractual life of rights outstanding at the end of the financial year was 11.78 years (2021: 0.25 years). (d) Fair value inputs For appreciation/service rights granted during the current financial year, the valuation model inputs used to determine the fair value at the grant date, are as follows: Grant date 21-Sep-21 23-Nov-20* Vesting date 31-Jul-24 31-Jul-23 Share price at grant date Exercise price Expected volatility Dividend yield Risk-free interest rate Fair value at grant date $0.175 $0.180 $0.180 $0.180 76% 73% 0% 0% 0.64% 1.64% $0.062 $0.112 * The Service Rights replaced the Share Appreciation Rights (SARs) originally granted on the 23 November 2020. The Service Rights were approved at the AGM dated 14 December 2021. The appreciation/service rights are effectively options with a cashless exercise feature embedded. (e) Other information The weighted average share price during the financial year was $0.140 (2021: $0.112). 74 Toys “R” Us ANZ Limited Annual Report 2022 NOTE 28: Key management personnel compensation Details of key management compensation The aggregate compensation made to key management personnel of the Group is set out below: Short-term employee benefits Post-employment benefits Other long-term benefits Termination benefits Share-based payments Year ended 31-Jul-22 $ Year ended 31-Jul-21 $ 997,239 94,785 19,213 30,931 919,551 103,379 11,206 43,712 695,628 1,473,798 1,837,796 2,551,646 NOTE 29: Related party transactions (a) Equity interests in related parties Equity interests in subsidiaries Details of the percentage of ordinary shares held in subsidiaries are disclosed in Note 24 to the financial statements. (b) Transactions with Key Management Personnel Key management personnel compensation Details of key management personnel compensation are disclosed in Note 28 to the financial statements. Loans to key management personnel and their related parties During the financial year and to the date of this report, the Group made no loans to directors and other KMP. As at 31 July 2022, Louis Mittoni owed the Company $16,719 (31 July 2021: $77,503) related to personal expenses incurred on a company credit card. As at the date of this report, the balance outstanding was $16,719. During the financial year, there were no other reportable transactions between the Group and its directors, KMP, or their personally related entities (Related Parties) (2021: $Nil). (c) Transactions with other related parties Transactions between Toys”R”Us ANZ Limited and other entities in the wholly owned Group during the financial years ended 31 July 2022 and 31 July 2021, which were eliminated on consolidation, consist of: • loans advanced by Toys”R”Us ANZ Limited; • management services provided by Toys”R”Us ANZ Limited; • management services provided to Toys”R”Us ANZ Limited; and • payment to/from Toys”R”Us ANZ Limited for the above services. 75 Notes to the Consolidated Financial Statements (Cont.) NOTE 30: Remuneration of Auditors RSM Australia Partners1 Audit Services Audit and review of the financial reports of the entity 118,210 79,000 Year ended 31-Jul-22 $ Year ended 31-Jul-21 $ Other Services Transaction services2 Compliance Services3 Independent Expert’s Report in relation to acquisition Grant Thornton Audit Pty Ltd Audit Services Audit and review of the financial reports of the entity Audit of the financial report of overseas subsidiary Other Services Preparation of tax return and general taxation services 22,000 82,644 – 222,854 – – – – 25,500 – 43,255 147,755 80,700 16,600 83,700 181,000 1. TOY changed its auditors from Grant Thornton Audit Pty Ltd to RSM Australia Partners following shareholder approval at the Extraordinary General Meeting (EGM) held on 23 June 2021. 2. FY 2022 relates to security and privacy services. For FY 2021, the fees relate to services provided prior to being appointed as auditor. 3. Relates to services performed by network firms of RSM Australia Partners. NOTE 31: Parent entity disclosures Financial Position Assets Current assets Non-current assets Liabilities Current liabilities Non-current liabilities Net Assets Issued capital Accumulated losses Equity-settled employee benefits reserve Total Equity 76 As at 31-Jul-22 $’000 As at 31-Jul-21 $’000 30,737 24,725 55,462 (4,192) (10,000) (14,192) 41,270 18,134 41,915 60,049 (2,305) (1,344) (3,649) 56,400 292,965 290,545 (251,900) (235,599) 205 41,270 1,454 56,400 Toys “R” Us ANZ Limited Annual Report 2022 NOTE 31: Parent entity disclosures (Cont.) Financial Performance Profit/Loss for the year – continuing operations Profit/Loss for the year – discontinued operations Total comprehensive loss Year ended 31-Jul-22 $’000 Year ended 31-Jul-21 $’000 (19,067) 297 (4,484) (18,098) (18,770) (22,582) Guarantees entered into by the parent entity in relation to the debts of its subsidiaries The parent entity and some of its subsidiaries are party to a deed of cross guarantee under which each company guarantees the debts of the others. No deficiencies of assets exist in any of these subsidiaries. Contingent liabilities The parent entity had no contingent liabilities as at 31 July 2022 (2021: $Nil). Capital commitments – Property, plant and equipment The parent entity had no capital commitments for property, plant and equipment as at 31 July 2022 (2021: $Nil). Significant accounting policies The accounting policies of the parent entity are consistent with those of the consolidated entity, as disclosed in Note 1, except for the following: • • Investments in subsidiaries are accounted for at cost, less any impairment, in the parent entity. Indicator of an impairment of the investment. NOTE 32: Contingent liabilities and contingent assets As at 31 July 2022, the Group had issued bank guarantees of $3.661million (2021: $1.083 million). The Group has placed an equivalent amount of cash deposit with the banks in relation to these bank guarantees (see note 11). There are no contingent assets as at 31 July 2022 (2021: $Nil). NOTE 33: Non-cash investing and financing activities Shares issued as consideration for intangible assets Shares issued as consideration for acquisition of business Shares issued as consideration for conversion of borrowings Shares issued as consideration for repayment of borrowings Year ended 31-Jul-22 $’000 Year ended 31-Jul-21 $’000 2,412 – – – 375 32,033 5,891 550 2,412 38,849 77 Notes to the Consolidated Financial Statements (Cont.) NOTE 34: Changes in liabilities arising from financing activities Balance at 1 August 2020 Net cash from/(used in) financing activities Issue of equity shares Other changes Balance at 1 August 2021 Net cash from/(used in) financing activities Balance at 31 July 2022 Borrowings $’000 Lease Liabilities $’000 8,906 (2,356) (6,441) (109) – 10,000 10,000 746 (211) – – 535 (254) 281 Total $’000 9,652 (2,567) (6,441) (109) 535 9,746 10,281 NOTE 35: Subsequent events The Company has entered into to an arrangement with the landlord on 20 July 2021 for lease of office and warehouse space in Clayton, Victoria for a period of ten years (with an option to extend for a further two terms of five years each) with an objective to consolidate all of its office and warehouse operations. The lease is expected to commence in October 2022, once ancillary works are completed by the landlord. The arrangement includes a lease incentive of $10.90 million, to be offset proportionally against monthly rental payments over the initial period of lease. The arrangement will result in recognition of right-of-use asset of $12.30 million and an equivalent lease liability upon commencement of the lease. No other matters or circumstance has arisen since 31 July 2022 that has significantly affected, or may significantly affect, the Group’s operations, the results of these operations, or the Group’s state of affairs in future years. NOTE 36: General Information Toys”R”Us ANZ Limited (“the Company”) is a limited company incorporated in Australia. The addresses of its registered office and principal place of business are disclosed in the Corporate Directory. The principal activities of the Company and its subsidiaries (the Group) are described in Note 4. 78 Toys “R” Us ANZ Limited Annual Report 2022 Directors’ Declaration The directors declare that, in the directors’ opinion: (a) the attached financial statements and notes comply with the Corporations Act 2001, the Accounting Standards, the Corporations Regulations 2001 and other mandatory professional reporting standards; (b) the attached financial statements and notes comply with International Financial Reporting Standards, as issued by the International Accounting Standards Board as stated in Note 1 to the financial statements; (c) the attached financial statements and notes give a true and fair view of the Group’s financial position as at 31 July 2022 and of its performance for the year ended on that date; and (d) there are reasonable grounds to believe that the Company will be able to pay its debts as and when they become due and payable; At the date of this declaration, the Company is within the class of companies affected by ASIC Legislative Instrument 2016/785 and has entered into a deed of cross guarantee as contemplated in that order. The nature of the deed of cross guarantee is such that each company which is party to the deed guarantees to each creditor payment in full of any debt in accordance with the deed of cross guarantee. In the directors’ opinion, there are reasonable grounds to believe that the Company and the companies to which the ASIC Class Order applies, as detailed in Note 24 to the financial statements will, as a Group, be able to meet any obligations or liabilities to which they are, or may become, subject by virtue of the deed of cross guarantee. The directors have been given the declarations required by section 295A of the Corporations Act 2001. Signed in accordance with a resolution of the directors made pursuant to section 295(5) of the Corporations Act 2001. On behalf of the Directors, Kevin A Moore, FAICD, MCIM Chair of the Board 29 September 2022 Cairns, Queensland 79 Independent Auditor’s Report RSM Australia Partners Level 21, 55 Collins Street Melbourne VIC 3000 PO Box 248 Collins Street West VIC 8007 T +61 (0) 3 9286 8000 F +61 (0) 3 9286 8199 www.rsm.com.au INDEPENDENT AUDITOR’S REPORT To the Members of Toys“R”Us ANZ Limited Opinion We have audited the financial report of Toys“R”Us ANZ Limited (“the Company”) and its subsidiaries (together referred to as “the Group”) which comprises the consolidated statement of financial position as at 31 July 2022, the consolidated statement of profit or loss and other comprehensive income, the consolidated statement of changes in equity and the consolidated statement of cash flows for the year then ended, and notes to the financial statements, including a summary of significant accounting policies, and the directors' declaration. In our opinion the accompanying financial report of the Group is in accordance with the Corporations Act 2001, including: (i) giving a true and fair view of the Group’s financial position as at 31 July 2022 and of its financial performance for the year then ended; and (ii) complying with Australian Accounting Standards and the Corporations Regulations 2001. Basis for Opinion We conducted our audit in accordance with Australian Auditing Standards. Our responsibilities under those standards are further described in the Auditor's Responsibilities for the Audit of the Financial Report section of our report. We are independent of the Group in accordance with the auditor independence requirements of the Corporations Act 2001 and the ethical requirements of the Accounting Professional and Ethical Standards Board's APES 110 Code of Ethics for Professional Accountants (the Code) that are relevant to our audit of the financial report in Australia. We have also fulfilled our other ethical responsibilities in accordance with the Code. We confirm that the independence declaration required by the Corporations Act 2001, which has been given to the directors of the Company, would be in the same terms if given to the directors as at the time of this auditor's report. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion. THE POWER OF BEING UNDERSTOOD AUDIT | TAX | CONSULTING (cid:1011)(cid:1006) RSM Australia Partners is a member of the RSM network and trades as RSM. RSM is the trading name used by the members of the RSM network. Each member of the RSM network is an independent accounting and consulting firm which practices in its own right. The RSM network is not itself a separate legal entity in any jurisdiction. RSM Australia Partners ABN 36 965 185 036 Liability limited by a scheme approved under Professional Standards Legislation 80 Toys “R” Us ANZ Limited Annual Report 2022 Key Audit Matters Key audit matters are those matters that, in our professional judgement, were of most significance in our audit of the financial report of the current period. These matters were addressed in the context of our audit of the financial report as a whole, and in forming our opinion thereon, and we do not provide a separate opinion on these matters. Key Audit Matter Impairment assessment of goodwill Refer to Note 14 in the financial statements As at 31 July 2022, the Group had goodwill with a carrying amount of $15.20 million (approximately 30% of the total assets of the Group) relating to its acquisition of Hobby Warehouse Group in the prior year. As required by AASB 136 Impairment of Assets (“AASB 136”), management performed an impairment test over the goodwill balance at 31 July 2022 by: • • calculating the value-in-use (“VIU”) for each identified cash generating unit (“CGU”) using a discounted cash flow model. This model used cash flows projections for the CGUs for 5 years, with a terminal growth rate applied to the year 5. These cash flows were then discounted to their net present value using the Group’s weighted average cost of capital (WACC); and comparing the resulting VIU of each CGU to its carrying amount. Management has identified that there are two CGUs for the purpose of performing impairment testing (being B2B and B2C businesses). As a result of this exercise, an impairment of goodwill of $14.50 million was recognised during the year in relation to the B2C CGU. Management also performed a sensitivity analysis over the assumptions used (growth rates, terminal growth rate and WACC) to assess the impact on the valuations. the VIU calculation, by varying How our audit addressed this matter Our audit procedures in relation to the impairment testing of goodwill involved the assistance of our Corporate Finance team, and included: • • • Assessing management’s determination that goodwill should be allocated to two CGUs based on the Group’s business and the manner in which the results are monitored and reported; Assessing and challenging the reasonableness of key assumptions used in the discounted cash flow model, including the cash flow projections, future growth rates, discount rate applied and terminal value. We also assessed whether the key assumptions adopted were applied on a consistent basis across the models; Verifying the mathematical accuracy of the cash flow to supporting model and reconciling evidence, such as approved budgets and considering the reasonableness of these budgets; input data • Reviewing management’s sensitivity analysis over the key assumptions in the model and assessing the reasonableness of the changes in key assumptions used in the analysis to determine when those changes would cause an additional impairment to be recognised; • Reviewing management’s calculation of the impairment loss determined at 31 July 2022; and this test involves significant We determined impairment testing of goodwill to be a Key Audit Matter due to the materiality of the goodwill balance. Also, because level of management judgements and estimates such as the determination of the existing CGUs, the estimation of future cash flows of the business, including the growth rates and the discount rates applied to the estimated cash flows. We note that the impact and uncertainties resulted from the COVID-19 pandemic and macro-economic volatility has increased the level of difficulty in estimating future cash flows. • Reviewing the disclosures in Note 14 to the financial statements appropriateness, assess completeness, and compliance with the disclosure requirements of AASB 136 and AASB 138 Intangible Assets. the to 7(cid:1007) 81 Independent Auditor’s Report (Cont.) Key Audit Matters (continued) Key Audit Matter Revenue recognition Refer to Note 6 in the financial statements Revenue recognition is considered a Key Audit Matter because of its significance to the Group’s reported financial performance. The risk is heightened due to having revenue streams across two distinct segments. Revenue recognition can be impacted by a failure to correctly measure revenue in accordance with applicable accounting standards and/or by applying an incorrect approach to period end cut-off. How our audit addressed this matter Our audit procedures in relation to revenue recognition included: • • Assessing whether the Group’s revenue recognition policies were in compliance with the requirements of AASB 15 Revenues from Contracts with Customers; Evaluating and testing the operating effectiveness of key controls related to revenue recognition; • Reviewing any large or unusual transactions close to the end of the financial year; • Performing cut-off testing over transactions recorded either side of the period end, to ensure that revenues were recorded in the appropriate period; • Conducting a combination of tests of controls, substantive analytical procedures and tests of details in respect of revenue transactions; and • Reviewing disclosures to corroborate they are appropriate and meet the requirements of AASB 15. Other Information The directors of the Company are responsible for the other information. The other information comprises the information included in the Group's annual report for the year ended 31 July 2022; but does not include the financial report and the auditor's report thereon. Our opinion on the financial report does not cover the other information and accordingly we do not express any form of assurance conclusion thereon. In connection with our audit of the financial report, our responsibility is to read the other information and, in doing so, consider whether the other information is materially inconsistent with the financial report, or our knowledge obtained in the audit or otherwise appears to be materially misstated. If, based on the work we have performed, we conclude that there is a material misstatement of this other information, we are required to report that fact. We have nothing to report in this regard. Responsibilities of the Directors for the Financial Report The directors of the Company are responsible for the preparation of the financial report that gives a true and fair view in accordance with Australian Accounting Standards and the Corporations Act 2001 and for such internal control as the directors determine is necessary to enable the preparation of the financial report that gives a true and fair view and is free from material misstatement, whether due to fraud or error. In preparing the financial report, the directors are responsible for assessing the ability of the Group to continue as a going concern, disclosing, as applicable, matters related to going concern and using the going concern basis of accounting unless the directors either intend to liquidate the Group or to cease operations, or have no realistic alternative but to do so. 7(cid:1008) 82 Toys “R” Us ANZ Limited Annual Report 2022 Auditor's Responsibilities for the Audit of the Financial Report Our objectives are to obtain reasonable assurance about whether the financial report as a whole is free from material misstatement, whether due to fraud or error, and to issue an auditor's report that includes our opinion. Reasonable assurance is a high level of assurance; but is not a guarantee that an audit conducted in accordance with the Australian Auditing Standards will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of this financial report. A further description of our responsibilities for the audit of the financial report is located at the Auditing and Assurance Standards Board website at: https://www.auasb.gov.au/admin/file/content102/c3/ar2_2020.pdf. This description forms part of our auditor's report. Report on the Remuneration Report Opinion on the Remuneration Report We have audited the Remuneration Report included in the directors' report for the year ended 31 July 2022. In our opinion, the Remuneration Report of Toys“R”Us ANZ Limited for the year ended 31 July 2022, complies with section 300A of the Corporations Act 2001. Responsibilities The directors of the Company are responsible for the preparation and presentation of the Remuneration Report in accordance with section 300A of the Corporations Act 2001. Our responsibility is to express an opinion on the Remuneration Report, based on our audit conducted in accordance with Australian Auditing Standards. RSM AUSTRALIA PARTNERS R B MIANO Partner Melbourne, Victoria Dated: 29 September 2022 75 83 Shareholder Information Distribution of equity securities as at 21 October 2022. Analysis of numbers of equity security holders by size of holdings: Holding Ranges 1-1,000 1,001-5,000 5,001-10,000 10,001-100,000 100,001 and over Fully Paid Ordinary Shares Holders Total Units 2,346 432,593 397 209 564 1,059,944 1,575,603 22,868,956 % Issued Share Capital 0.05% 0.12% 0.18% 2.65% Options Rights – – 160,000 180,000 – – – – 321 837,149,578 96.99% 22,021,711 500,000 3,837 863,086,674 100.00% 22,361,711 500,000 The number of shareholders holding less than a marketable parcel of shares was 2,974 holding 3,295,741 shares (based on the closing market price on 21 October 2022). Substantial shareholders report Louis Mittoni and Associated Entities Jason Sourasis and Associated Entities Thorney Investment Group Shares 291,205,818 116,664,553 43,593,832 % 33.74% 13.52% 5.06% 84 Toys “R” Us ANZ Limited Annual Report 2022 Twenty largest quoted equity security holders Louis Mittoni Jason Sourasis UBS Nominees Pty Ltd Citicorp Nominees Pty Limited Theo Andriopoulos Mittoni Holdings Pty LtdNational Nominees Limited Apes With Wings Pty Ltd Tru Kids Inc J P Morgan Nominees Australia Pty Limited BT Portfolio Services Limited CS Fourth Nominees Pty Limited Brispot Nominees Pty Ltd Neweconomy Com AU Nominees Pty Limited <900 Account> Honeystash Pty Ltd Monawatu Pty Ltd Vawdrey Nominees Pty Ltd HSBC Custody Nominees (Australia) Limited Woodross Nominees Pty Ltd Tucks Industrial Packings & Seals Pty Ltd Total Top 20 Shareholders Total Issued Capital Unquoted equity securities as at the date of this report Security Classes Unlisted Options / Strike Price @ $0.166 / Expiring on 1/11/2024 Unlisted Options / Strike Price @ $0.138 / Expiring on 1/11/2023 Unlisted Options / Strike Price @ $0.138 / Expiring on 1/05/25 Unlisted Service Rights Unlisted Employees Share Appreciation Rights Shares 252,877,438 116,664,553 % 29.30% 13.52% 62,317,930 43,873,958 41,257,508 38,328,380 32,116,393 24,825,000 16,998,160 14,247,957 10,000,000 9,755,786 6,825,718 6,656,133 6,000,000 4,500,000 3,296,324 3,290,369 3,208,286 3,112,097 700,151,990 7.22% 5.08% 4.78% 4.44% 3.72% 2.88% 1.97% 1.65% 1.16% 1.13% 0.79% 0.77% 0.70% 0.52% 0.38% 0.38% 0.37% 0.36% 81.12% 863,086,674 100.00% No. of Securities 10,180,305 10,149,450 1,691,956 500,000 340,000 Voting Rights The voting rights attaching to each class of equity securities are set out below: 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. Options, Share Rights and Share Appreciation Rights No voting rights. 85 Corporate Directory Directors Kevin Moore Chair and Independent Non-Executive Director Louis Mittoni Chief Executive Officer and Managing Director John Tripodi Independent Non-Executive Director Nicki Anderson (resigned on 31 August 2022) Independent Non-Executive Director Senior Management Wei Si Chief Financial Officer Lian Yu Chief Operating Officer Company Secretary Wei Si Auditors RSM Australia Partners Level 21, 55 Collins Street Melbourne VIC 3000 Bankers Commonwealth Bank of Australia 201 Sussex Street Sydney NSW 2000 Westpac Banking Corporation 4 Nexus Court Mulgrave VIC 3170 Solicitors Rotstein Commercial Lawyers Level 5, 552 Lonsdale Street Melbourne VIC 3000 Registered Office and Principal Place of Business Level 2, 315 Ferntree Gully Road Mount Waverley VIC 3149 Stock Exchange Listing Toys”R”Us ANZ Limited shares are listed on the Australian Securities Exchange (ASX code: TOY) Share Registry Automic Group Level 5, 126 Phillip Street Sydney NSW 2000 Website corporate.toysrus.com.au Corporate Governance Statement Refer to the Company’s website for all corporate governance information: https://corporate.toysrus.com.au/investors/ corporate-governance/ 86 Toys “R” Us ANZ Limited Annual Report 2022 This page has been left blank intentionally. www.colliercreative.com.au #TOY0001 T o y s “ R ” U s A N Z L i m i T e d | A n n u A l R e p o R t 2 0 2 2 toysrus.com.au