Eagers Automotive Limited
Annual Report 2017

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2 0 1 7 A N N U A L R E P O R T 5 YEAR FINANCIAL SUMMARY Year ended 31 December OPERATING RESULTS REVENUE EBITDA Depreciation and amortisation Impairment charge EBIT Finance costs PROFIT BEFORE TAX Income tax expense Non-controlling interest in subsidiary ATTRIBUTABLE PROFIT AFTER TAX OPERATING STATISTICS Basic earnings per share - cents Dividends per share - cents Dividend franking - % As at 31 December FUNDS EMPLOYED Contributed equity Reserves Retained earnings Non-controlling interest in subsidiary Total equity Non-current liabilities Current liabilities Total liabilities TOTAL FUNDS EMPLOYED REPRESENTED BY Property plant and equipment Intangibles Available-for-sale investments Other non-current assets Property assets held for resale Other current assets TOTAL ASSETS 2017 $’000 2016 $’000 2015 $’000 2014 $’000 2013 $’000 4,058,779 176,668 (16,651) 210 160,227 (24,598) 135,629 (37,456) (2,146) 96,027 3,833,222 179,776 (13,993) - 165,783 (24,378) 141,405 (35,879) (1,542) 103,984 3,246,376 163,077 (13,216) (7,610) 142,251 (21,293) 120,958 (33,943) (798) 86,217 2,858,113 138,081 (12,583) (578) 124,920 (22,080) 102,840 (26,150) (460) 76,230 2,672,813 122,252 (12,354) - 109,898 (23,188) 86,710 (22,748) (353) 63,609 50.3 36.0 100 2017 $’000 369,028 38,131 367,855 10,761 785,775 276,092 762,904 1,038,996 1,824,771 361,121 309,414 288,033 22,600 - 843,603 1,824,771 55.4 35.0 100 2016 $’000 364,449 55,398 335,779 8,166 763,792 319,846 670,796 990,642 47.6 32.0 100 2015 $’000 296,060 105,375 293,435 8,139 703,009 228,479 557,922 786,401 43.0 27.0 100 2014 $’000 242,070 99,020 242,480 7,486 591,056 241,875 525,067 766,942 36.4 23.0 100 2013 $’000 231,205 108,612 198,369 939 539,125 246,082 431,658 677,740 1,754,434 1,489,410 1,357,998 1,216,865 354,710 298,908 264,817 22,505 - 291,298 160,762 281,817 35,440 - 813,494 720,093 292,485 165,733 234,391 30,233 27,781 607,375 344,956 125,259 195,195 5,764 21,612 524,079 1,754,434 1,489,410 1,357,998 1,216,865 OTHER STATISTICS Net tangible asset backing per share – $ Shares on issue – ‘000 Number of shareholders Total Debt(1) Net debt (total debt less bailment finance less cash) - $’000 Gearing ratio (debt/debt plus equity) – % Gearing ratio (net debt/net debt plus total equity) – % 2.49 191,008 5,442 793,544 2.44 190,493 5,206 769,525 2.95 184,074 5,062 614,280 2.38 178,519 4,517 579,799 2.34 176,548 4,636 514,889 238,523 266,035 172,611 198,467 199,001 50.2 23.3 50.2 25.8 46.6 19.7 49.5 25.1 48.8 27.0 (1) Bailment Finance Bailment finance is a form of financing peculiar to the motor industry, which is provided by financiers on a vehicle by vehicle basis. It is short-term in nature, is generally secured by the vehicle being financed and is principally represented on the borrower’s balance sheet as vehicle inventory with the liability reflected under current liabilities. Because of its short-term nature, it is excluded from net debt and the corresponding gearing ratio. CONTENTS AP Eagers Foundation Company Profile Board of Directors Executive Management Directors’ Report Auditor’s Declaration of Independence Financial Statements Notes to the Financial Statements Directors’ Declaration Independent Auditor’s Report Shareholder Information Corporate Directory 2 4 5 5 6 20 21 27 84 85 91 93 ANNUAL GENERAL MEETING Our Annual General Meeting will be held at our registered office, 5 Edmund Street, Newstead, Queensland, on Wednesday 16 May 2018 at 9.00 am. FINANCIAL CALENDAR 2017 financial year end 31 December 2017 Full year results announcement 21 February 2018 Final dividend announcement 21 February 2018 Final dividend record date 29 March 2018 Final dividend payment date Annual General Meeting Half year end 18 April 2018 16 May 2018 30 June 2018 Half year results announcement * 22 August 2018 Interim dividend announcement * 22 August 2018 Interim dividend record date * Mid-September 2018 Interim dividend payment date * Early October 2018 2018 financial year end 31 December 2018 * estimate only, subject to changes notified to the ASX. 1 COMMUNITY DRIVEN In 2017 we continued our long history of supporting local communities and charities through various fund raising activities conducted by our dealerships in Northern Territory, Queensland, New South Wales, Victoria, Tasmania and South Australia. The support for these communities and charities during 2017 exceeded $800,000. NUMEROUS CHARITIES AND WORTHWHILE CAUSES BENEFITTED FROM OUR FUNDRAISING INITIATIVES DURING 2017 INCLUDING: NORTHERN TERRITORY Camp Quality • St Johns Ambulance • Alzheimers’ NT • Riding for the Disabled NT. QUEENSLAND Life Flight • Ronald McDonald House (NQ) • Mooloolaba Surf Life Saving Club • RSPCA (Brisbane & Toowoomba) • Childrens’ Hospital Christmas Appeal • Cancer Council. NEW SOUTH WALES NSW Rural Fire Services • Crohns & Colitis Disease Australia • Newcastle Meals on Wheels • Autism Awareness • Surf Life Saving Sydney Northern Beaches. VICTORIA Autism Awareness • Very Special Kids Foundation • Rotary Club of Werribee • Rotary Club of Castlemaine. TASMANIA Hobart City Mission • Launceston City Mission. SOUTH AUSTRALIA RSB Guide Dogs • Living With Limits Foundation • Youth Opportunities Foundation • Novita Childrens’ Service • Riding For Disabled. Our commitment to community support for over 100 years led to the establishment of the A.P. Eagers Foundation in 2013. By utilising the growing scale of our dealership network, the Foundation enhances our ability to support the communities in which we operate. 1 VISION To actively contribute in meaningful and sustainable ways to communities, families in need and other worthy causes. MISSION To provide support and assistance to these community-focussed initiatives, by engaging the collaboration of A.P. Eagers and its automotive industry network, employees and other stakeholders.. OBJECTIVES > To encourage and support engagement by A.P. Eagers and its stakeholders in these initiatives. > To secure voluntary assistance through financial support, sponsorship, skills transfer and in-kind donations to worthy and well-run organisations and other causes. > To deliver 100 cents of every dollar donated to the intended recipients. > To operate with the highest standards of integrity. 2 2 6 5 1. Motors Group (TAS) The Hobart City Mission 2. Toowoomba Holden (QLD) - RSPCA 3. Bridge Toyota (Darwin) – The Sommerville Community Services Christmas Appeal 4. Audi Centre Sunshine Coast (QLD) - Mooloolaba Surf Life Saving Club 5. The Kloster Group (Newcastle) - Meals on Wheels 6. Adtrans Hino (Melbourne) - Stuff the Bus 7. Adtrans SA Cars (Adelaide) - Backpacks 4 SA Kids 8. Black Toyota (Dalby) - Life Flight 3 4 7 8 3 ANNUAL REPORT 2017 COMPANY PROFILE ABOUT US A.P. Eagers Limited is a pure automotive retail group with our main operations in Queensland, Adelaide, Darwin, Melbourne, Sydney, the Newcastle/Hunter Valley region of New South Wales and Tasmania. We represent a diversified portfolio of automotive brands, including all 20 of the top 20 selling car brands in Australia and 10 of the top 11 selling luxury car brands. In total, we represent 33 car brands and 11 truck and bus brands. Our core business consists of the ownership and operation of motor vehicle dealerships. We provide full facilities including the sale of new and used vehicles, service, parts and the facilitation of allied consumer finance. Our operations are generally provided through strategically clustered dealerships, many of which are situated on properties owned by us, with the balance leased. We own $307 million of prime real estate positioned in high profile, main road locations in Brisbane, Sydney, Melbourne, Adelaide and Newcastle. DIVIDENDS AND EPS GROWTH We have paid a dividend to shareholders every year since listing in 1957, and a record dividend in 16 of the past 17 years. A.P. Eagers also has a track record of delivering Earnings Per Share (EPS) growth from acquisitions. ORIGINS Our origins trace back to 1913 when Edward Eager and his son, Frederic, founded their family automotive business, E.G. Eager & Son Ltd, which continues today as a wholly-owned subsidiary of A.P. Eagers Limited. After establishing the first motor vehicle assembly plant in Queensland in 1922, the business secured the distributorship of General Motors’ products in Queensland and northern New South Wales in 1930 and listed as a public company in 1957 under the name Eagers Holdings Limited. A merger in 1992 with the listed A.P. Group Limited saw the addition of a number of new franchises and our name change to A.P. Eagers Limited. Further new franchises and geographic diversification have since followed. GROWTH Since 2000, our sales revenue has increased from $500 million to $4.1 billion, profit after tax has increased from $4.3 million to $98.2 million in 2017 and the number of employees has increased from 600 to 4,350. We expanded into the Northern Territory with the acquisition of Bridge Toyota in 2005. In 2007, we established ourselves on the Gold Coast with the acquisition of Surfers City Holden. The addition of Kloster Motor Group in the Newcastle/Hunter Valley region in 2007 heralded our advance into New South Wales. Our operations in that state grew with the acquisition of Bill Buckle Auto Group in Sydney’s northern beaches region including Brookvale in 2008. 4 In 2010, we acquired the publicly listed Adtrans Group Limited, being South Australia’s premier car retailer and the operator of truck and bus dealerships in New South Wales, Victoria and South Australia. This represented our direct entry into the South Australian, Victorian and truck markets. We also acquired Caloundra City Autos Group in Queensland’s growing Sunshine Coast region in 2010. Further expansion of our truck and bus operations occurred in late 2010 with the addition of six new franchises in New South Wales, Victoria and South Australia. Daimler Trucks Adelaide and Eblen Motors were acquired in 2011 and Main North and Unley Nissan and Renault, in Adelaide, were acquired in 2013 to complement our existing operations in South Australia. A strategic holding in listed Automotive Group Holdings Limited (AHG) was acquired in 2012, providing us with exposure to the West Australian market. This investment represented 23.8% of AHG, valued at $287 million, at the end of 2017. Northern Beaches Land Rover and Jaguar were added to our Bill Buckle operations at Brookvale during 2013. A new business, Precision Automotive Technology, was established in 2013 to source and distribute our own range of car care products under the brand names, Perfexion and 365+. In 2014, our Queensland operations expanded through the acquisition of Ian Boettcher Motors in Ipswich representing Mazda, Nissan, Volkswagen, Suzuki and Proton, and the Craig Black Group representing Toyota, Hyundai, Volkswagen, Mitsubishi and Great Wall at multiple locations in south-west and central Queensland. Volvo Sunshine Coast and Reynella Subaru were also added to the group during 2014. 2016 saw further growth with the acquisition of Motors Group Tasmania, including state-wide representation for Holden, HSV, Hyundai, Citroen, Isuzu Trucks, Volvo Trucks, Mack Trucks and UD Trucks, together with the Victorian businesses Silver Star Motors (Mercedes-Benz) in Doncaster and Burwood, Mercedes–Benz Ringwood and Waverley Toyota in Glen Waverley. These businesses represent 12 car and truck brands. Our representation in regional Queensland also saw substantial growth in 2016 with the acquisition of the Crampton Automotive and Tony Ireland Groups, representing Holden, Hyundai, Mercedes-Benz, Citroen, Peugeot, Jaguar, Land Rover, Subaru, Chrysler Jeep Dodge and Isuzu Trucks, and taking us into new geographic territories in Toowoomba, Townsville and Hervey Bay. In 2016 we launched our first Carzoos retail stores at Westfield Garden City and North Lakes, in Brisbane, introducing an entirely new way for customers to buy and sell used cars. Carzoos is supported by our new finance initiative, Simplr. In 2017 we committed to establish a major new automotive retailing and mobility hub on 61,400m2 within Brisbane Airport’s new $300 million BNE Auto Mall project in 2021. The plan is to create a world-class automotive retailing experience for our customers of the future. FURTHER INFORMATION Please visit www.apeagers.com.au for further information about A.P. Eagers Limited. BOARD OF DIRECTORS Timothy Boyd Crommelin BCom, FSIA, FSLE Chairman of Board, Member of Audit, Risk & Remuneration Committee David Arthur Cowper BCom, FCA Director, Chairman of Audit, Risk & Remuneration Committee Independent, non-executive Director since February 2011. Chairman of Morgans Holdings (Australia) Limited. Director of Senex Energy Ltd (appointed October 2010) and Australian Cancer Research Foundation. Member of the University of Queensland Senate. Broad knowledge of corporate finance, risk management and acquisitions and over 40 years’ experience in the stockbroking and property industry. Martin Andrew Ward BSc (Hons), FAICD Managing Director, Chief Executive Officer Joined the Company in July 2005. Appointed Chief Executive Officer in January 2006. Appointed Managing Director in March 2006. Motor vehicle dealer. Director of Australian Automotive Dealer Association Limited (appointed January 2014). Former Chief Executive Officer of Ford Motor Company’s Sydney Retail Joint Venture. Nicholas George Politis BCom Director Non-executive Director since May 2000. Motor vehicle dealer. Executive Chairman of WFM Motors Pty Ltd, A.P. Eagers Limited’s largest shareholder. Vast automotive retail industry experience and Director of a substantial number of proprietary limited companies. Daniel Thomas Ryan BEc, MBus, FAICD Director Non-executive Director since January 2010. Director and Chief Executive Officer of WFM Motors Pty Ltd, A.P. Eagers Limited’s largest shareholder. Director of a substantial number of proprietary limited companies. Significant management experience in automotive, transport, manufacturing and retail industries. Independent, non-executive Director since July 2012. Chartered accountant, with more than 35 years in the profession. Former partner of Horwath Chartered Accountants and Deloitte Touche Tohmatsu. Former Chairman of Horwath’s motor industry specialisation unit for six years. Area of professional specialisation while at Horwath and Deloitte was in providing audit, financial and taxation services to public and large private companies in the motor industry. Marcus John Birrell Director, Member of Audit, Risk & Remuneration Committee Non-executive Director since July 2016. Director of Australian Automotive Dealer Association Limited (appointed January 2014, retired October 2017). A distinguished career in the automotive industry, including 38 years at manufacturer, financier and retail level and 21 years as Executive Chairman of Birrell Motors Group. Sophie Alexandra Moore BBus, CA, FFin Director (appointed 29 March 2017), Chief Financial Officer Joined the Company as Chief Financial Officer in August 2015. Appointed to the board in March 2017 with continuing executive responsibility for accounting, taxation, internal audit and treasury functions. Previous senior finance roles with PricewaterhouseCoopers and Flight Centre Travel Group Limited. Admitted as a chartered accountant in 1997. Peter William Henley FAIM, MAICD Director, Member of Audit, Risk & Remuneration Committee (Retired 22 February 2017) Independent, non–executive Director from December 2006 until retirement in February 2017. Director of Thorn Group Ltd (appointed May 2007, retired August 2016). Former Deputy Chairman of MTQ Insurance Services Ltd. Former Chairman and Chief Executive Officer of GE Money Motor Solutions. Over 30 years’ local and international experience in the financial services industry. EXECUTIVE MANAGEMENT Keith Thomas Thornton BEc Chief Operating Officer – Cars Denis Gerard Stark LLB, BEc General Counsel & Company Secretary Commenced in July 2002. Licensed motor dealer. Responsible for all operational issues in Queensland and Northern Territory from June 2007 to 31 December 2016. Since January 2017, national responsibility for the group’s car operations. Significant retail and wholesale experience in volume, niche and prestige industry sectors. Prior industry experience with various manufacturers. Director of Australian Automotive Dealer Association Limited (appointed September 2014). Commenced with the Company in January 2008. Responsible for overseeing the company secretarial, legal, insurance and investor relations functions and property portfolio. Previous company secretarial and senior executive experience with public companies. Admitted as a solicitor in Queensland in 1994 and Victoria in 1997. 5 ANNUAL REPORT 2017 DIRECTORS’ REPORT The Directors of A.P. Eagers Limited ABN 87 009 680 013 (the Company) present their report together with the consolidated financial report of the Company and its controlled entities (the Group), for the year ended 31 December 2017 and the auditor’s report thereon. DIRECTORS The Directors of the Company at any time during or since the end of the year, and their qualifications, experience and special responsibilities, are detailed on page 5. COMPANY SECRETARY The Company Secretary and his qualifications and experience are detailed on page 5. DIRECTORS’ MEETINGS The number of Directors’ meetings (including meetings of committees of Directors) and number of meetings attended by each Director during the year were: T B Crommelin(1) N G Politis M A Ward P W Henley(1)(2) D T Ryan D A Cowper(1) M J Birrell(1)(3) S A Moore(4) Board Meetings Audit, Risk & Remuneration Committee Meetings Held Attended Held Attended 9 9 9 2 9 9 9 7 8 9 9 2 9 9 9 6 4 - - 1 - 4 3 - 3 - - 1 - 4 2 - (1) Audit, Risk & Remuneration Committee members. (2) Mr Henley retired as a Director on 22 February 2017. (3) Mr Birrell was appointed to the Audit, Risk & Remuneration Committee on 29 March 2017. (4) Ms Moore was appointed as a Director on 29 March 2017. PRINCIPAL ACTIVITIES The Group’s principal activities during the year consisted of the selling of new and used motor vehicles, distribution and sale of parts, accessories and car care products, repair and servicing of vehicles, provision of extended warranties, facilitation of finance and leasing in respect of motor vehicles, and the ownership of property and investments. The products and services supplied by the Group were associated with, and integral to, the Group’s motor vehicle dealership operations. There were no significant changes in the nature of the Group’s activities during the year. 6 FINANCIAL & OPERATIONAL REVIEW The Directors of A.P. Eagers Limited (ASX: APE) are pleased to report a 2017 Net Profit Before Tax (NPBT) of $135.6 million. This compares to a record Net Profit Before Tax of $141.4 million in 2016, a decrease of -4.1% on the previous corresponding period (pcp). Net Profit After Tax was $98.2 million in 2017 compared to a record $105.5 million in 2016, a decrease of -7.0% on the pcp. Earnings per share (basic) for 2017 were 50.3 cents compared to 55.4 cents on the pcp, a decrease of 9.2%. Profit Comparison Statutory EPS (basic) cents Statutory profit after tax Statutory profit before tax Impairment adjustments (1) Freehold property adjustments (reversal) Goodwill impairment Business acquisition costs (2) GST (refunds)/expenses (3) Restructure costs(4) Underlying profit before tax Underlying profit after tax (5) Underlying EPS (basic) cents Full Year to December 2017 $Million Full Year to December 2016 $ Million 50.3 98.2 135.6 (0.2) - 0.1 0.1 5.2 140.8 99.6 52.1 55.4 105.5 141.4 (1.2) - 1.8 (4.5) - 137.5 100.2 53.3 % Change (9.2%) (7.0%) (4.1%) 2.3% (0.6%) (2.3%) (1) Represents the aggregate value of freehold property fair value adjustments (positive and negative) to the Statement of Profit and Loss. (2) Business acquisition costs include taxes, legal and other costs associated with business acquisitions. (3) Benefit from tax refunds associated with previous years’ GST payments net of expenses. (4) Costs related to the restructuring of underperforming and unsustainable automotive division assets and operations. (5) Underlying profit after tax includes the adjustments per Note (1) above, and the related tax impact at 30% equating to $1.5 million charge in 2017 (2016: $0.3 million benefit). The Group delivered record trading performances in Victoria, Tasmania, New South Wales Hunter Region and National Trucks division. However, challenging market dynamics related to our portfolio representation during the year in our two largest geographic market segments of Queensland and South Australia adversely impacted trading performance versus the pcp. Increased gains on sale of non- core investments and property helped offset the reduced profit contribution from car retailing operations. The Company has recorded $5.2 million in one-off costs associated with the re-structuring of underperforming and unsustainable businesses in the 2017 statutory Net Profit Before Tax. 7 ANNUAL REPORT 2017 Dividends Business Initiatives Our Birrell Group acquisition in Victoria/ Tasmania performed strongly in its first full year of operation within the A.P. Eagers Group in 2017. All businesses delivered record results assisted by strong market conditions in Victoria and an improved truck and car division performance in Tasmania. Encouragingly, these results have been achieved despite a brand portfolio that was challenged in Tasmania in 2017. The Crampton and Ireland Group (Queensland Provincial) acquisitions delivered stronger results in the second half of 2017. The Group’s National Trucks division capitalised on strong growth in the Heavy and Light commercial sales, resulting in a record result for 2017. This result continues the strong performance and growth of the National Trucks division since 2015. Volatility in the new car market dynamics combined with recent regulatory pressure has increased activity in the dealership acquisition/disposal marketplace in general, with price expectations now at more reasonable multiples. We completed the acquisition of Porsche Centre Adelaide in the last quarter of 2017 and we will continue with our disciplined approach in reviewing further acquisition opportunities. A.P. Eagers committed to establish a major new automotive retailing and mobility hub on 61,400m² within Brisbane Airport’s new $300m BNE Auto Mall project in 2021. The plan is to create a world-class automotive retailing experience for our customers of the future. We currently represent 12 major car brands within the geographic area serviced by the BNE Auto Mall, with the opportunity for a number of other brands to join the group. The existing brands collectively represent 48 per cent of the total automotive industry. We increased our strategic investment in Automotive Holdings Group to 23.81% as at 31 December 2017 which was valued at $287.4 million based on their closing share price of $3.64 per share (2016: $3.95). Whilst not included in the Company’s Statutory Profit after Tax, a before tax unrealised loss of $22.9 million has been recorded in the Statement of Comprehensive Income for the 2017 year due to their $3.95 closing share price at 31 December 2016. Financial Performance Total revenue increased by 5.9% to $4.1 billion in 2017 (2016: $3.8 billion), with all business units reflecting increases in vehicle sales. The additional contribution from business acquisitions in 2016 and strong trading in the New South Wales and Victorian/Tasmanian car divisions also combined to boost total revenue. On a like-for-like basis, the Group recorded neutral revenue growth compared to the pcp (0.1% increase), impacted by challenging trading conditions in Queensland. A fully franked final dividend of 22.5 cents per share (2016: 22.0 cents) has been approved for payment on 18 April 2018 to shareholders who are registered on 29 March 2018 (Record Date). When combined with the interim dividend of 13.5 cents paid in October 2017, the total dividend based on 2017 earnings is 36.0 cents per share (2016: 35.0 cents) fully franked, an increase of 2.9% on 2016. The Company’s dividend reinvestment plan (DRP) will not operate in relation to the final dividend. Dividends paid to members during the year under review were as follows: Year ended 31 December Final ordinary dividend for the year ended 31 December 2016 of 22.0 cents (2015: 20.0 cents) per share paid on 18 April 2017 2017 $’000 2016 $’000 41,984 37,015 Interim ordinary dividend of 13.5 cents (2016: 13.0 cents) per share paid on 6 October 2017 25,786 67,770 24,625 61,640 External Environment According to Federal Chamber of Automotive Industry statistics, Australia’s new motor vehicle sales increased by 0.9% in 2017 to 1,189,116 units compared to a 2.0% increase in 2016. Whilst the percentage growth rate in sales reduced, 2017 represented the third record year in a row for total new unit sales volume. New vehicle sales growth was strongest in Victoria, where the market was up 4.0% on pcp, and weakest in Western Australia where the market fell -2.5%. The two other large markets, New South Wales and Queensland, recorded neutral growth on the pcp of -0.1% and 0.0%, respectively. The remaining markets also recorded relatively flat growth on the pcp, with South Australia, Tasmania and Northern Territory up 1.0%, 0.8% and 0.2% respectively, and Australian Capital Territory down -1.5%. A decrease of -2.5% in private sales was offset by a 2.6% increase in business sales. Luxury vehicle segment contracted from 11.4% to 10.7% of total market share, finishing -5.0% down, with record sales from brands such as Mercedes-Benz, Porsche and Maserati, being offset by declines in Audi, BMW, Infiniti, Lexus, Jaguar, Volvo, Land Rover, and Mini. Traditional fuel vehicles made up 99% of all new vehicle sales, with the sale of electric vehicles increasing 46.2% and having total sales of 1,124 units in 2017. Australian manufactured vehicles represented only 4.8% (2016: 7.4%) of new cars sold in the national market in 2017. Nationally, the Heavy Commercial segment recorded an 11.8% (2016: 2.9%) increase with significant increases in light/medium duty trucks and heavy-duty sales, +7.4% and +22.4% respectively. The Light Commercial segment recorded an 8.6% increase. 8 DIRECTORS’ REPORT CONTINUED EBITDA decreased by 1.7% to $176.7 million (2016: $179.8 million). Profit margins declined slightly as indicated by the EBITDA/Revenue ratio of 4.4% (2016: 4.7%) and the NPBT/Sales ratio also declined to 3.3% from 3.7% (2016). This result was impacted by reduced Finance and Insurance income due to regulatory pressures and challenging trading conditions in Queensland. On an underlying basis NPBT/Sales for 2017 was 3.5%, down from 3.6% in 2016. Borrowing costs increased by 0.9% to $24.6 million (2016: $24.4 million), reflecting higher average debt (including additional bailment finance for the businesses acquired in 2016) being offset by lower interest rates. The increase in depreciation and amortisation costs by 19.0% to $16.7 million (2016: $14.0 million) reflects the additional depreciation contributed by the businesses and properties acquired in 2016, the redevelopment of properties and one-off impacts from accelerating depreciation of underperforming assets, offset by the depreciation charges associated with the properties sold in the second half of 2017. Business acquisition costs of $0.1 million were expensed in the financial year relating to the acquisition of Porsche Centre Adelaide, compared to $1.8 million relating to the Birrell, Crampton Automotive and Tony Ireland Group acquisitions. The Company’s net cash provided by operating activities was $145.0 million in 2017 (2016: $109.7 million), with increases due to contributions from acquisitions made in 2016, improved EBITDA to cash conversion and lower income taxes paid compared to 2016 due primarily to 2016 tax refund received in 2017 and a lower tax instalment rate. Results Summary Consolidated results Year Ended 31 December Revenue from operations Other revenue Total revenue Earnings before interest, tax, depreciation and amortisation and impairment (EBITDA) Depreciation and Amortisation Impairment charge/net reversal Earnings before interest and tax (EBIT) Borrowing costs Profit before tax Income tax expense Profit after tax Non-controlling interest in subsidiaries Attributable profit after tax Earnings per share - basic This report is based on accounts which have been audited. 2017 $’000 2016 $’000 Increase/ (Decrease) 4,014,795 3,777,615 43,984 55,607 4,058,779 3,833,222 176,668 (16,651) 210 160,227 (24,598) 135,629 (37,456) 98,173 (2,146) 96,027 179,776 (13,993) - 165,783 (24,378) 141,405 (35,879) 105,526 (1,542) 103,984 50.3 cents 55.4 cents 6.3% (20.9%) 5.9% (1.7%) 19.0% - (3.4%) 0.9% (4.1%) 4.4% (7.0%) (7.7%) (9.2%) 9 ANNUAL REPORT 2017 Segments (1) Profit before tax from our Car Retail segment was $84.4 million, a decrease from $104.6 million for 2016. Underlying Profit before tax for the Car Retail segment was $89.6 million in 2017 (excludes $5.2 million in one-off costs and restructuring of underperforming and unsustainable businesses), a decrease from $100.2 million in 2016 (excludes $4.4 million of GST refunds received in 2016). Car Retail segment revenue increased by 6.1%, with the increase primarily attributable to the strong trading in New South Wales, Victoria and Tasmania and an additional 3 months’ trading from the Birrell Group and an additional 6 and 9 months’ trading respectively from the Crampton and Ireland Groups, offset by lower like-for-like results in Queensland due to challenging trading conditions. The strong trading was also reflected in the parts and service businesses with improvements across the Group. The National Truck division continues to improve profitability, delivering a record profit before tax result of $9.0 million compared to $6.3 million for the pcp, reflecting strong performance in all departments including improved results from the new truck division and service division. Revenue increased by 4.9% reflecting strong performance in the Victoria and South Australia truck divisions, partly offset by the divestment of Sydney Truck Centre in June 2017 with the segment continuing to restructure the business to drive business optimisation and deliver improved returns. The value of the property portfolio increased to $307 million as at 31 December 2017 compared to $299 million as at 31 December 2016. Continued management of our property portfolio to maximise operational and financial outcomes saw the divestment of five properties and purchase of two additional properties during 2017. The divested properties included two unused sites, two non-core sites which will be exited within three years and one site which was sold to rectify a complicated lease. The Property segment profit contribution of $32.0 million was higher than the previous year of $28.2 million, due to strong outcomes achieved from the Company’s management of its property portfolio contributing an additional $10.6 million to pre-tax profit in 2017. Also, 2017 valuation increases of $5.6 million ($0.2 million P&L, $5.4 million revaluation reserve) in the Queensland and New South Wales portfolios compared with valuation increases in 2016 of $12.1 million ($1.2 million P&L, $10.9 million revaluation reserve). The Investment segment registered a pre-tax loss of $8.4 million in 2017 compared to a loss of $24.0 million for the pcp, due primarily to an unrealised revaluation loss on the AHG investment of $22.9 million. This reflected a 31 December 2017 AHG closing share price of $3.64 per share compared with $3.95 as at 31 December 2016. As at 31 December 2017, the 23.81% strategic investment in AHG had a market value of $287.4 million based on a closing share price of $3.64 per share. Financial Position The Company’s financial position remains very strong. EBITDA Interest Cover (EBITDA/Borrowing costs) was 7.2 times as at 31 December 2017 compared to 7.2 times as at June 2017 and 7.4 times as at 31 December 2016. Corporate debt (Term and Capital Loan Facility) net of cash on hand was lower at $238.5 million as at 31 December 2017 (2016: $266.0 million) due to strong operating cash generation and repayment of debt. Total debt including vehicle bailment net of cash on hand was $782.7 million as at 31 December 2017, as compared to $751.9 million as at 31 December 2016. Total gearing (Debt /Debt + Equity), including bailment inventory financing and finance leases, was 50.2% as at 31 December 2017, consistent with 50.2% as at 31 December 2016. Bailment finance is cost effective short-term finance secured against vehicle inventory on a vehicle by vehicle basis. Gearing excluding bailment, and including cash on hand, was 23.3% as at 31 December 2017, compared to 25.8% as at 31 December 2016. Total inventory levels increased to $652.7 million at 31 December 2017 from $625.0 million at 31 December 2016. Net tangible assets increased to $2.49 per share as at 31 December 2017, as compared to $2.44 per share at 31 December 2016, due to higher asset balances including higher value of AHG investment. The Company’s cash flow from operations was $145.0 million for the year ended 31 December 2017 (2016: $109.7 million) with the increase due to timing of receipts from customers, payments to suppliers, and lower tax payments. Outlook and Strategy Update Although the market dynamics remain challenging, we are encouraged by the record National new vehicle market volumes with continued record affordability and aggressive manufacturer sales campaigns driving customer demand. Operationally, our initial focus during the first half of the year is to complete the portfolio adjustments identified as unsustainable that required the $5.2m restructuring charge. This is expected to be completed by July 2018. Concurrently we expect to grow EPS from recent (2016/2017) acquisitions in line with historical trends and continue to redevelop and reorganise our inner-city Brisbane facilities (Newstead, Woolloongabba and Windsor) to provide improved long-term solutions for all stakeholders. Strategically, we remain focussed on being Australia’s leading automotive retail partner and our two-pronged approach of driving value from existing business through process improvement, operating synergies, portfolio management and organic growth, while taking advantage of value adding acquisition opportunities as they present themselves. (1) Note: Changes in fair value of property and investments are recognised as profit and loss adjustments for segment reporting purposes but are not recorded in the Group’s Statutory Net Profit After Tax 10 DIRECTORS’ REPORT CONTINUED In addition, the Company continues to grow and invest in alternative and complimentary related models while exploring alternate mobility solutions via innovative vehicle usage and ownership platforms. Carzoos continues to be a focus as we refine the business model to ensure scalability benefits can be realised and maximised in the mid-term. A.P. Eagers plan to continue to be at the forefront of delivering mobility solutions while being the preferred partner for customers, manufacturers and the communities in which we operate. SIGNIFICANT CHANGES IN THE STATE OF AFFAIRS In the Directors’ opinion there was no significant change in the state of affairs of the Group during the financial year that is not disclosed in this report or the consolidated financial report. MATTERS SUBSEQUENT TO THE END OF THE FINANCIAL YEAR The Directors are not aware of any matter or circumstance not dealt with in this report or the consolidated financial report that has arisen since the end of the year under review and has significantly affected or may significantly affect the Group’s operations, the results of those operations or the state of affairs of the Group in future financial years. ENVIRONMENTAL REGULATION The Group’s property development and service centre operations are subject to various environmental regulations. Environmental licences are held for particular underground petroleum storage tanks. Planning approvals are required for property developments undertaken by the Group in relevant circumstances. Authorities are provided with appropriate details and to the Directors’ knowledge developments during the year were undertaken in compliance with planning requirements in all material respects. Management works with regulatory authorities, where appropriate, to assist compliance with regulatory requirements. There were no material adverse environmental issues during the year to the Directors’ knowledge. REMUNERATION REPORT 1. Principles Used to Determine Remuneration The board as a whole is responsible for recommending and reviewing the remuneration arrangements of non-executive Directors, whilst the board (excluding the Chief Executive Officer) reviews the performance of the Chief Executive Officer on a continual basis and ensures the reward framework is appropriate. To assist the board, the Audit, Risk & Remuneration Committee reviews and makes recommendations regarding these remuneration arrangements. The Chief Executive Officer in consultation with the Chairman reviews the performance of the Group’s senior executives on an ongoing basis and ensures the appropriateness of their reward framework. Remuneration packages are intended to properly reflect the individual’s duties and responsibilities, be competitive in attracting, retaining and motivating staff of the highest quality and be aligned to shareholder interests. The remuneration framework for executives has been developed to provide, where appropriate, a high proportion of “at risk” remuneration. This is designed to reflect competitive reward for contribution to growth in Group profits and shareholder wealth. In considering the impact of the Group’s performance on shareholder wealth, the Directors have regard to various factors including the following metrics: Statutory NPAT ($ million) Statutory Earnings per share – basic (c) Dividend per share (c) Share Price at year end ($) 2017 98.2 50.3 36.0 7.97 2016 105.5 55.4 35.0 9.22 2015 87.0 47.6 32.0 12.70 2014 76.7 43.0 27.0 5.98 2013 64.0 36.4 23.0 4.96 11 ANNUAL REPORT 2017 2. Non-executive Directors’ Remuneration Framework (d) Executive Incentive Plan (EIP) Non-executive Directors are remunerated for their services by way of fees (and where applicable, superannuation) from the maximum amount approved for that purpose by shareholders in general meeting, currently $750,000 per annum, which was fixed at the annual general meeting in 2015. For the year under review, non-executive Director fees were $85,000 per annum plus superannuation, and the Chairman’s fee was $100,000 per annum plus superannuation. The board, with the assistance of the Audit, Risk & Remuneration Committee, annually reviews non-executive Director fees, taking into account relevant market conditions. Non-executive Directors do not participate in schemes designed for the remuneration of executives, equity schemes or retirement allowance programmes, nor do they receive performance-based bonuses. 3. Executives’ Remuneration Framework (a) Base Pay Each executive is offered a competitive base pay to reflect the market for a comparable role. Base pay is reviewed annually and on promotion to ensure it remains competitive with the market. It may be delivered as a combination of cash and superannuation that the executive elects to salary sacrifice. (b) Benefits Executives receive benefits including the provision of fully maintained motor vehicles, personal health and fitness programs and, in the case of the Chief Executive Officer, personal insurance. Retirement benefits are delivered under superannuation funds providing accumulation benefits. No lump sum defined benefits are provided. (c) Short-term Performance Incentives Incentive / Bonus (i) Non-commission based executives are eligible to receive short-term incentive payments of up to 30% of base salary in accordance with contractual arrangements. This is not available to the Chief Executive Officer, the Chief Operating Office – Cars (as his remuneration is commission based) or any non-executive Director. The short-term incentive allocations are determined on a discretionary basis during annual review by the Chief Executive Officer in consultation with the Chairman after considering individual and Company achievements and performances. (ii) Commission Structure A commission structure is included in the remuneration for the Chief Operating Office - Cars. The commission is set at a percentage of net profit before tax of relevant business units and is therefore based on measurable business performance and designed to improve shareholder value. The EIP was approved by shareholders at the annual general meeting in 2013. It is intended as both a long-term and short- term incentive for key management personnel, focussing on corporate performance and the creation of shareholder value over multi-year periods. The EIP is not available to non-executive Directors. Through the EIP, executives are driven to improve the Company’s performance and shareholder return. This is accomplished through the grant of performance rights and options which reward the achievement of pre-determined Group performance hurdles and allow executives to share in the Company’s growth. A performance right is a right to be given a fully paid ordinary share in the Company at a nil exercise price upon the achievement of performance hurdles. An option is a right to be given a fully paid ordinary share upon payment of an exercise price and achievement of performance hurdles. The exercise price is the market share price on or about the grant date or when the executive agreed in principle to participate in the plan. The performance rights and options are divided into separate tranches for each annual performance period. Each tranche of options may be further divided into sub-tranches. The tranches and sub-tranches are tested against the performance hurdles for the relevant performance period. (i) Performance Hurdles Pre-determined performance hurdles for the relevant performance period must be achieved for performance rights and options to vest. Performance hurdles include: > > > the Company must meet the applicable EPS hurdle (as described below). the Company must meet any prescribed interest cover ratio, being at least 2.5 times. the executive must remain permanently employed by the Group. All performance hurdles for a performance period must be met for the relevant rights and options to vest. The board does, however, retain discretion to waive hurdles in exceptional circumstances where it is believed to be in the Company’s best interests to do so. (ii) EPS Hurdles A separate EPS performance hurdle applies for each tranche or sub-tranche of performance rights and options. These EPS hurdles are pre-determined using a base-line EPS when the participant agreed to join the plan. The Company must achieve a minimum of 7% annual compound growth in diluted EPS above the base-line before any performance rights or options will vest for the performance period, with 10% annual compound growth required for all performance rights and options to vest for the period. 12 DIRECTORS’ REPORT CONTINUED As these “at risk” earnings are demonstrably linked to the creation of shareholder value, it is considered that if an EPS hurdle is not achieved at the end of a 12 month performance period, re-testing would be appropriate to allow for market reaction to the Company’s longer term strategic initiatives. In these circumstances, re-testing would take place 12 months later. If the EPS hurdle is not achieved on the re-test, it may be re-tested a second time a further 12 months later. However, there cannot be more than two re-tests. Performance rights and options immediately lapse if they do not vest on the second re-test. (iii) CEO’s Participation in EIP At the Company’s annual general meeting in 2014, shareholders approved the Chief Executive Officer, Mr Ward, participating in the EIP for the five years from 2015 to 2019. With 96.6% of proxy votes in favour or at the Chairman’s discretion, shareholders approved the following: > Mr Ward’s performance hurdles are measured over the five year period 2015 to 2019. > Before any of Mr Ward’s performance rights or options will vest for an individual year, the Company must achieve at least 7% annual compound growth in diluted EPS above the base-line EPS. The base-line was set at the diluted EPS for 2013. This base-line was used in order to give shareholders visibility of the base-line before they approved Mr Ward’s rights and options at the annual general meeting in 2014. > For 100% of Mr Ward’s performance rights and options to vest for the five years, the Company must achieve at least 10% annual compound growth in diluted EPS above the base-line. The cost to the Company of Mr Ward’s participation in the EIP is determined as follows: > > There has been no increase to the average annual cost to the Company of Mr Ward’s participation in the EIP since 2010. If 100% of the performance rights and options are to vest over the five year period 2015 to 2019 (requiring at least 10% annual compound growth in diluted EPS for five years), the recognised cost of the plan will average $850,000 per annum being the fair value at grant date. However, accounting standards require that the cost be recognised based on the progressive recognition of each share option grant over its expected vesting period, as shown in the remuneration table on page 16, which results in a higher overall cost of the EIP in the earlier years and a lower cost in later years. On the assumption that all performance hurdles will be achieved over the five year period, the total cost recognised in each year will be as shown in the following graphs. > If no performance hurdles at all were to be achieved over the five year period, then no performance rights or options would vest and the plan would cost the Company zero dollars. > By way of comparison, if only 50% of the performance rights and options by value were to vest each year over the five year period (requiring 7% annual compound growth in diluted EPS for five years), the cost of the plan would be on average $425,000 per annum for 5 years. Accounting accrual Accounting accrual 6 3 2 2 2 1 , 1 8 4 9 4 0 9 4 8 8 5 5 1 s ’ 0 0 0 $ 1500 1200 900 600 300 0 Average annual cost Average annual cost 0 5 8 0 5 8 0 5 8 0 5 8 0 5 8 1500 1200 s ’ 0 0 0 $ 900 600 300 0 0 2014 2015 2016 2017 2018 2019 2014 2015 2016 2017 2018 2019 Accounting accrual cost of CEO’s participation in EIP – progressive recognition based, assuming all performance hurdles are achieved. Average annual cost of CEO’s participation in EIP, assuming all performance hurdles are achieved. 13 ANNUAL REPORT 2017 3. Executives’ Remuneration Framework (continued) (d) Executive Incentive Plan (EIP) (continued) (iv) Grants to Key Management Personnel The following tables show details of current grants of performance rights and options over unissued ordinary shares, which were granted to key management personnel in or before the year under review. No rights or options were granted to, lapsed or were exercised by, key management personnel during or after the year under review, except as shown in these tables. Chief Executive Officer Tranche No. Grant Date No. granted No. lapsed No. exercised (1) Fair value No. granted No. lapsed No. exercised (2) Fair value End of 1st performance period Performance Rights Options 1 2 3 4 5 4 Jul 2014 83,661 4 Jul 2014 87,268 4 Jul 2014 91,006 4 Jul 2014 94,866 4 Jul 2014 99,067 - - - - - 83,661 $5.08 467,032 87,268 $4.87 452,127 91,006 $4.67 447,368 - - $4.48 420,792 $4.29 416,666 - - - - - - - - - 50,000 $0.91 31 Dec 2015 $0.94 31 Dec 2016 $0.95 31 Dec 2017 Status Vested without re-testing Vested without re-testing All Performance Rights and 1/3 of Options vested without re-testing. 2/3 of Options remain unvested and subject to re-testing $1.01 31 Dec 2018 $1.02 31 Dec 2019 Unvested Unvested (1) Performance rights are automatically exercised upon vesting. 87,268 rights that were granted for 2016 were exercised during the year under review and these were valued at $805,484 on the day of exercise. (2) No options were exercised during the year under review. 50,000 options were exercised during 2016. Chief Operating Officer - Cars Tranche No. Grant Date No. granted No. lapsed No. exercised (1) Fair value No. granted No. lapsed No. exercised (2) Fair value End of 1st performance period Performance Rights Options 1 2 3 4 5 4 July 2014 19,685 4 July 2014 20,533 4 July 2014 21,413 4 July 2014 22,321 4 July 2014 23,310 - - - - - 19,685 $5.08 109,890 20,533 $4.87 106,382 21,413 $4.67 105,263 - - $4.48 $4.29 99,009 98,039 - - - - - - - - - - $0.91 31 Dec 2015 $0.94 31 Dec 2016 $0.95 31 Dec 2017 Status Vested without re-testing Vested without re-testing All Performance Rights and 1/3 of Options vested without re-testing. 2/3 of Options remain unvested and subject to re-testing $1.01 31 Dec 2018 $1.02 31 Dec 2019 Unvested Unvested (1) Performance rights are automatically exercised upon vesting. 20,533 rights that were granted for 2016 were exercised during the year under review and these were valued at $189,520 on the day of exercise. (2) No options were exercised during the year under review. 14 DIRECTORS’ REPORT CONTINUED - - - - - - - - - - General Counsel & Company Secretary Performance Rights Options No. granted No. lapsed No. exercised (1) Fair value Tranche No. 1 2 3 4 5 6 7 8 Grant Date 27 Mar 2013 27 Mar 2013 27 Mar 2013 27 Mar 2013 27 Mar 2013 4 July 2014 4 July 2014 4 July 2014 - - - - - 2,460 2,566 2,676 No. granted 26,880 26,880 26,040 25,510 25,250 13,736 13,297 13,157 - - - - - - - - - - 2,460 2,566 2,676 $5.08 $4.87 $4.67 No. lapsed No. exercised (2) Fair value End of 1st performance period Status - - - - - - - - - - - - - - - - - - - - $0.93 31 Dec 2013 Vested without re-testing $0.93 $0.96 $0.98 $0.99 $0.91 $0.94 31 Dec 2014 Vested without re-testing 31 Dec 2015 Vested without re-testing 31 Dec 2016 Vested without re-testing 31 Dec 2017 Vested without re-testing 31 Dec 2015 Vested without re-testing 31 Dec 2016 Vested without re-testing $0.95 31 Dec 2017 All Performance Rights and 1/3 of Options vested without re-testing. 2/3 of Options remain unvested and subject to re-testing $1.01 31 Dec 2018 $1.02 31 Dec 2019 Unvested Unvested 9 10 4 July 2014 4 July 2014 2,790 2,913 - - $4.48 $4.29 12,376 12,254 (1) Performance rights are automatically exercised upon vesting. 2,566 rights that were granted for 2016 were exercised during the year under review and these were valued at $23,684 on the day of exercise. (2) No options were exercised during the year under review. Chief Financial Officer Performance Rights Options No. granted No. lapsed No. exercised (1) Fair value No. granted No. lapsed No. exercised (2) Fair value End of 1st performance period Status Tranche No. 1 2 3 4 5 Grant Date 12 Jun 2015 12 Jun 2015 12 Jun 2015 2,227 4,624 4,796 12 Jun 2015 12 Jun 2015 4,975 5,167 - - - - - 2,227 4,624 4,796 $8.98 $8.65 $8.34 14,084 27,027 26,143 - - $8.04 $7.74 25,316 25,000 - - - - - - - - - - $1.42 31 Dec 2015 Vested without re-testing $1.48 31 Dec 2016 Vested without re-testing $1.53 31 Dec 2017 All Performance Rights and 1/3 of Options vested without re-testing. 2/3 of Options remain unvested and subject to re-testing $1.58 31 Dec 2018 $1.60 31 Dec 2019 Unvested Unvested (1) Performance rights are automatically exercised upon vesting. 4,624 rights that were granted for 2016 were exercised during the year under review and these were valued at $42,680 on the day of exercise. (2) No options were exercised during the year under review. Further details of the performance rights and options granted under the EIP are specified in notes 37 and 38 to the consolidated financial report. 4. Hedging The board has adopted a policy which prohibits any Director or employee who participates in an equity plan from using derivatives, hedging or similar arrangements to reduce or eliminate the risk associated with the plan in relation to unvested securities or securities that are subject to trading restrictions, without the Chairman’s approval. Any breach will result in forfeiture or lapsing of the unvested securities or additional performance hurdles or trading restrictions being imposed, at the board’s discretion. 5. Executive Employment Agreements Executives who are key management personnel are employed under common employment agreements. The agreements do not have a finite term, can be terminated by either employer or employee giving three months’ notice and do not contain any termination payment arrangements. The board has discretion to extend the termination notice period that may be given to an executive and to make payments upon termination, as appropriate. 15 ANNUAL REPORT 2017 5. Executive Employment Agreements (continued) The Chief Executive Officer’s employment agreement differs from that of other executives as follows: (a) The Company may terminate the Chief Executive Officer’s employment if he is unable to satisfactorily perform his duties due to illness, injury or accident for a period of six months or for cause. Termination for any other reason may entitle the Chief Executive Officer to a termination benefit equivalent to two times annual remuneration at the time of termination, subject to any limit imposed by law. (b) The Chief Executive Officer may terminate his employment agreement on six months’ notice unless otherwise agreed with the Company. 6. Details of Remuneration Key management personnel include Directors and executives who have authority and responsibility for planning, directing and controlling the activities of the Group. Remuneration details of key management personnel are set out in the following tables. Short-term benefits Salary & fees $ Bonus & commission (4) $ Non-monetary & other benefits (1) $ Post- employment benefits Super- annuation benefits $ Share-based payments Performance Rights & Options (2) (3) $ Performance -related percentage % Total $ 100,000 1,205,004 85,000 14,167 85,000 85,000 85,000 - - - - - - - 682 9,500 - 110,182 97,268 30,000 904,070 2,236,342 682 99 682 682 682 8,075 1,346 8,075 8,075 8,075 - - - - - 93,757 15,612 93,757 93,757 93,757 - 40 - - - - - 328,502 1,987,673 66,800 66,800 41,125 141,902 20,660 93,806 89,141 546,228 29 993,211 3,283,392 205,676 647,828 (22,599) 20,049 212,722 1,063,676 292,006 497,682 73,000 720,828 33,405 10,806 27,741 47,790 31,834 457,986 244,556 1,521,662 81 23 2017 Directors T B Crommelin Chairman M A Ward Managing Director & CEO N G Politis Non-executive Director P W Henley Non-executive Director(5) D T Ryan Non-executive Director D A Cowper Non-executive Director M J Birrell Non-executive Director S A Moore Executive Director & Chief Financial Officer(6) Executives K T Thornton Chief Operating Officer - Cars D G Stark General Counsel & Company Secretary (1) Includes benefits such as the provision of motor vehicles, insurance policy costs and the movement in the provision for the individual’s employee entitlements. For Mr Thornton, this includes a $78,017 reduction in the accrued provision for long service leave as a result of his reduced commission in 2017. (2) Performance rights and options granted under the EIP are valued using a binomial tree methodology. A pre-determined value of the portion of the rights and options attributable to the year under review has been expensed in the income statement in conformity with AASB 2 and reflected in each recipient’s remuneration. In each year, performance rights and options vested under the EIP for the previous year. Vesting is subject to the achievement of performance hurdles as previously detailed in this Remuneration Report. (3) The share-based payment is based on progressive recognition of each award grant over its expected vesting period, which results in an increased cost in the earlier years of the EIP and a reduced cost in later years on the assumption that all performance hurdles will be achieved over the five year period. For further details, refer to commentary on page 13 under the heading “CEO’s Participation in EIP” of which the treatment of share plan expense is applicable to all key management personnel. (4) For Mr Thornton, this is a commission representing a percentage of net profit before tax of relevant business units and is therefore based on measurable business performance and designed to improve shareholder value. No commission is included for any other key management personnel. (5) Mr Henley retired as a Director on 22 February 2017. (6) Ms Moore was appointed as a Director on 29 March 2017. 16 DIRECTORS’ REPORT CONTINUED 2016 Directors T B Crommelin Chairman M A Ward Managing Director N G Politis Non-executive Director P W Henley Non-executive Director D T Ryan Non-executive Director D A Cowper Non-executive Director M J Birrell Non-executive Director (5) Executives K T Thornton General Manager Qld & NT D G Stark General Counsel & Company Secretary S A Moore Chief Financial Officer Short-term benefits Salary & fees $ Bonus & commission (4) $ Non-monetary & other benefits (1) $ Post- employment benefits Super- annuation benefits $ Share-based payments Performance Rights & Options (2) (3) $ Performance -related percentage % Total $ 100,000 1,200,000 85,000 85,000 85,000 85,000 42,500 1,682,500 - - - - - - - - 635 9,500 - 110,135 136,556 35,000 948,336 2,319,892 635 635 635 635 275 140,006 8,075 8,075 8,075 8,075 4,038 80,838 - - - - - 93,710 93,710 93,710 93,710 46,813 948,336 2,851,680 200,004 819,230 62,663 19,616 223,138 1,324,651 286,677 73,000 46,554 27,234 55,218 488,683 306,006 62,400 30,116 22,253 101,330 522,105 792,687 954,630 139,333 69,103 379,686 2,335,439 - 41 - - - - - 79 26 31 (1) Includes benefits such as the provision of motor vehicles, insurance policy costs and the movement in the provision for the individual’s employee entitlements. (2) Performance rights and options granted under the EIP are valued using a binomial tree methodology. A pre-determined value of the portion of the rights and options attributable to the year under review has been expensed in the income statement in conformity with AASB 2 and reflected in each recipient’s remuneration. In each year, performance rights and options vested under the EIP for the previous year. Vesting is subject to the achievement of performance hurdles as previously detailed in this Remuneration Report. (3) The share-based payment is based on progressive recognition of each award grant over its expected vesting period, which results in an increased cost in the earlier years of the EIP and a reduced cost in later years on the assumption that all performance hurdles will be achieved over the five year period. For further details, refer to commentary on page 13 under the heading “CEO’s Participation in EIP” of which the treatment of share plan expense is applicable to all key management personnel. (4) For Mr Thornton, this is a commission representing a percentage of net profit before tax of relevant business units and is therefore based on measurable business performance and designed to improve shareholder value. No commission is included for any other key management personnel. (5) Mr Birrell was appointed as a Director on 27 July 2016. 17 ANNUAL REPORT 2017 7. Relevant Interest in the Company’s Shares Held by Key Management Personnel 2017 Directors M A Ward N G Politis P W Henley(1) D T Ryan T B Crommelin D A Cowper M J Birrell S A Moore(2) Executives K T Thornton D G Stark 1 January 2017 Dividend Reinvestment Plan Executive Incentive Plan Purchases Sales 31 December 2017 4,211,387 68,419,139 113,092 0 378,286 12,053 2,000,000 2,227 428,585 140,574 75,705,343 0 0 0 0 0 0 0 0 0 0 - 87,268 0 2,000,000 2,298,655 0 0 0 0 0 0 4,624 20,533 2,566 393,942 0 0 5,000 3,000 0 0 0 0 0 0 0 0 0 0 0 0 0 68,813,081 113,092 0 383,286 15,053 2,000,000 6,851 449,118 143,140 114,991 401,942 2,000,000 74,222,276 (1) This table includes changes for Mr Henley up to his retirement as a Director on 22 February 2017. (2) Ms Moore was appointed as a Director on 29 March 2017. 1 January 2016 Dividend Reinvestment Plan Executive Incentive Plan Purchases Sales 31 December 2016 4,115,085 68,079,091 111,825 0 357,229 8,248 0 448,135 145,624 0 0 0 0 0 0 0 0 0 0 0 133,661 0 0 0 0 0 0 12,641 340,048 4,000 0 21,057 3,805 2,000,000 50,000 4,211,387 0 68,419,139 2,733 113,092 0 0 0 0 0 378,286 12,053 2,000,000 933,635 115,950 2,227 0 0 0 953,185 121,000 0 428,585 140,574 2,227 73,265,237 - 1,185,473 2,381,551 1,126,918 75,705,343 2016 Directors M A Ward N G Politis P W Henley D T Ryan T B Crommelin D A Cowper M J Birrell Executives K T Thornton D G Stark S A Moore 18 DIRECTORS’ REPORT CONTINUED DIRECTORS’ INTERESTS The relevant interest of each Director in shares, rights and options issued by the Company as at the date of this report are as follows: Ordinary Shares (fully paid) Share Options(1) Performance Rights(1) T B Crommelin N G Politis M A Ward D T Ryan D A Cowper M J Birrell S A Moore 383,286 68,813,081 2,389,661 - 15,053 2,000,000 11,647 - - - - 2,153,985 193,933 - - - - - - 117,570 10,142 (1) Share options and performance rights vest only if performance hurdles are met in accordance with the Executive Incentive Plan, as described in the Remuneration Report. SHARES UNDER OPTION NON-AUDIT SERVICES No options or performance rights were granted by the Company over unissued fully paid ordinary shares during the year under review, and none have been granted since the end of the year. A copy of the auditor’s Independence Declaration as required under section 307C of the Corporations Act 2001 is attached and forms part of this report. 640,652 shares were issued as a result of the exercise of options during or since the year under review. 175,843 shares were issued on the exercise of performance rights during or since the year under review. At the date of this report, there are 7,628,707 unissued shares under option and 370,781 unvested performance rights. INDEMNIFICATION AND INSURANCE The Company’s constitution provides that, to the extent permitted by law, the Company must indemnify each person who is or has been a Director or Secretary against liability incurred in or arising out of the discharge of duties as an officer of the Company or out of the conduct of the business of the Company and specified legal costs. The indemnity is enforceable without the person having to incur any expense or make any payment, is a continuing obligation and is enforceable even though the person may have ceased to be an officer of the Company. At the start of the financial year under review and at the start of the following financial year, the Company paid insurance premiums in respect of Directors and Officers liability insurance contracts. The contracts insure each person who is or has been a Director or executive officer of the Company against certain liabilities arising in the course of their duties to the Company and its controlled entities. The Directors have not disclosed details of the nature of the liabilities covered or the amount of the premiums paid in respect of the insurance contracts as such disclosure is prohibited under the terms of the contracts. The Company may decide to employ its auditor on assignments additional to their statutory audit duties where the auditor’s expertise or experience with the Group is important. Details of the amounts paid or payable to the auditor for audit and non-audit services provided to the Group during the year are set out in note 35 to the consolidated financial report. In accordance with advice received from the Audit, Risk & Remuneration Committee, the Directors are satisfied that the provision of the non-audit services was compatible with the general standard of independence for auditors imposed by the Corporations Act 2001 and did not compromise the auditor independence requirements of the Act because all non-audit services were reviewed by the Committee to ensure they did not impact the partiality and objectivity of the auditor. ROUNDING OF AMOUNTS TO NEAREST THOUSAND DOLLARS The Company is of a kind referred to in Class Order 98/100 issued by the Australian Securities & Investments Commission, relating to the “rounding off” of amounts in the Directors’ report and financial report. Amounts in the Directors’ report and financial report have been rounded off to the nearest thousand dollars in accordance with that Class Order. This report is made in accordance with a resolution of the Directors. AUDITOR Deloitte Touche Tohmatsu continues in office as auditor of the Group in accordance with section 327 of the Corporations Act 2001. Martin Ward Director Brisbane, 21 February 2018 19 ANNUAL REPORT 2017 AUDITOR’S DECLARATION OF INDEPENDENCE 20 FINANCIAL STATEMENTS Statement of Profit or Loss Statement of Profit or Loss and Other Comprehensive Income Statement of Financial Position Statement of Changes in Equity Statement of Cash Flows Notes to and forming part of the Financial Statements Directors’ Declaration Independent Auditor’s Report Shareholder Information Corporate Directory 22 23 24 25 26 27 84 85 91 93 21 ANNUAL REPORT 2017 STATEMENT OF PROFIT OR LOSS FOR THE YEAR ENDED 31 DECEMBER 2017 Revenue Other Gains CONSOLIDATED 2017 $’000 2016 $’000 4,058,779 3,833,222 17,934 4,326 Notes 3 4 Share of net profits of associate 43(d) 407 191 Changes in inventories of finished goods and work in progress Raw materials and consumables purchased Employee benefits expense Finance costs Depreciation and amortisation expense Other expenses Profit before tax Income tax expense Profit for the year Attributable to: Owners of A.P. Eagers Limited Non-controlling interests Earnings per share: Basic earnings per share Diluted earnings per share The above Statement of Profit or Loss should be read in conjunction with the accompanying notes. 5(a) 5(a) 6 32(e) 30(b) 27,645 94,844 (3,374,157) (3,230,501) (331,009) (311,423) (24,598) (16,651) (24,378) (13,993) (222,721) (210,883) 135,629 141,405 (37,456) 98,173 (35,879) 105,526 96,027 2,146 98,173 103,984 1,542 105,526 Cents Cents 40(a) 40(b) 50.3 49.5 55.4 54.0 22 STATEMENT OF PROFIT OR LOSS AND OTHER COMPREHENSIVE INCOME FOR THE YEAR ENDED 31 DECEMBER 2017 CONSOLIDATED 2017 $’000 2016 $’000 Notes Profit for the year 98,173 105,526 Other comprehensive income Items that will not be reclassified subsequently to profit or loss Gain on revaluation of property Income tax expense relating to items that will not be reclassified subsequently Items that may be reclassified subsequently to profit or loss Loss on revaluation of available for sale investment Income tax benefit Reclassification adjustments net of tax relating to available-for-sale financial assets disposed of in the year Fair value gain arising from cash flow hedges during the year Income tax expense 30(a) 30(a) 30(a) 30(a) 30(a) 30(a) 30(a) 5,380 (1,614) 3,766 (22,920) 6,876 (1,482) (17,526) 278 (84) 194 10,842 (3,253) 7,589 (36,819) 11,046 (1,369) (27,142) 405 (121) 284 Total other comprehensive income/(loss) for the year (13,566) (19,269) Total comprehensive income for the year 84,607 86,257 Total comprehensive income attributable to: Owners of the parent Non-controlling interests 82,461 2,146 84,607 84,715 1,542 86,257 The above Statement of Profit or Loss and Other Comprehensive Income should be read in conjunction with the accompanying notes. 23 ANNUAL REPORT 2017 STATEMENT OF FINANCIAL POSITION FOR THE YEAR ENDED 31 DECEMBER 2017 Current assets Cash and cash equivalents Trade and other receivables Inventories Current tax receivables Prepayments and deposits Property sale receivable Total current assets Non-current assets Other loans receivable Available-for-sale financial assets Investments in associates Property, plant and equipment Intangible assets Total non-current assets Total assets Current liabilities Trade and other payables Derivative financial instruments Borrowings - bailment and other current loans Current tax liabilities Provisions Other current liabilities Total current liabilities Non-current liabilities Borrowings Derivative financial instruments Deferred tax liabilities Provisions Other Total non-current liabilities Total liabilities Net assets Equity Contributed equity Reserves Retained earnings Non-controlling interests Total equity The above Statement of Financial Position should be read in conjunction with the accompanying notes. 24 Notes 8 9 10 11 12(a) 12(b) 13 14 15 16 17 18 19 20(a) 21 22 23 CONSOLIDATED 2017 $’000 2016 $’000 10,827 161,807 652,652 - 11,172 7,145 843,603 10,600 288,033 12,000 361,121 309,414 981,168 17,615 148,746 625,007 3,817 8,844 9,466 813,495 10,612 264,817 11,893 354,710 298,908 940,940 1,824,771 1,754,435 152,853 133,601 20 210 545,200 485,875 13,221 51,360 250 - 51,111 - 762,904 670,797 24(a) 248,344 283,650 19 25 26 27 29 30(a) 30(b) 32(e) 118 2,273 5,988 19,369 276,092 206 7,447 9,226 19,317 319,846 1,038,996 990,643 785,775 763,792 369,028 38,131 367,855 775,014 10,761 785,775 364,449 55,398 335,779 755,626 8,166 763,792 STATEMENT OF CHANGES IN EQUITY FOR THE YEAR ENDED 31 DECEMBER 2017 Consolidated entity 2017 Balance at 1 January 2017 Profit for the year Other comprehensive income Total comprehensive income for the year Transfer to retained earnings Transactions with owners in their capacity as owners: Share based payment expense Dividends provided for or paid Shares issued pursuant to Staff share plan Payments received from employees for exercised shares Sale of shares to non-controlling interests Prior year tax adjustment Income tax on items taken to or transferred directly from equity Issued capital $’000 364,449 - - - - - - 4,579 - - - - 4,579 Asset revaluation reserve $’000 Hedging reserve $’000 52,781 - 3,766 3,766 (3,819) (291) - 194 194 - Share- based payments reserve $’000 (34,486) - - Investment revaluation reserve $’000 37,394 - (17,526) Attributable to owners of the parent $’000 755,626 96,027 (13,566) Retained earnings $’000 335,779 96,027 - - - (17,526) - 96,027 3,819 82,461 - Non- controlling interests $’000 8,166 2,146 - 2,146 - Total $’000 763,792 98,173 (13,566) 84,607 - - - - - - - - - - - - - - - - - 2,105 - (4,579) 1,636 - 536 420 118 - - - - - - - - - (67,770) 2,105 (67,770) - (1,455) 2,105 (69,225) - - - - - 1,636 - 536 - - 1,904 - - 1,636 1,904 536 - (67,770) 420 (63,073) - 449 420 (62,624) Balance at 31 December 2017 369,028 52,728 (97) (34,368) 19,868 367,855 775,014 10,761 785,775 Consolidated entity 2016 Balance at 1 January 2016 Profit for the year Other comprehensive income Total comprehensive income for the year Transactions with owners in their capacity as owners: Shares issued as consideration for business acquisitions Share based payments Non-controlling interests on acquisition of subsidiary Payment of dividend Shares issued pursuant to Staff share plan Payments received from employees for exercised shares Current tax on share plan Income tax on items taken to or transferred directly from equity 296,060 - - 45,192 - 7,589 (575) - 284 (3,778) - - 64,536 - (27,142) 293,435 103,984 - 694,870 103,984 (19,269) 8,139 1,542 - 703,009 105,526 (19,269) - 7,589 284 - (27,142) 103,984 84,715 1,542 86,257 32,450 - - - 35,939 - - - 68,389 - - - - - - - - - - - - - - - - - - - 2,966 - - (35,939) 6,948 (28) (4,655) (30,708) - - - - - - - - - - - 32,450 2,966 - - 32,450 2,966 - (61,640) - (61,640) (368) (1,147) (368) (62,787) - - - - 6,948 (28) - - - - 6,948 (28) - (61,640) (4,655) (23,959) - (1,515) (4,655) (25,474) Balance at 31 December 2016 364,449 52,781 (291) (34,486) 37,394 335,779 755,626 8,166 763,792 The above Statement of Changes in Equity should be read in conjunction with the accompanying notes. 25 ANNUAL REPORT 2017 STATEMENT OF CASH FLOWS FOR THE YEAR ENDED 31 DECEMBER 2017 Cash flows from operating activities Receipts from customers (inclusive of GST) Payments to suppliers and employees (inclusive of GST) Receipts from insurance claims Interest and other costs of finance paid Income taxes paid Dividends received Interest received CONSOLIDATED 2017 $’000 2016 $’000 Notes 4,426,933 4,154,100 (4,258,688) (4,012,247) 7,235 (24,598) (20,995) 14,501 588 8,737 (24,151) (34,028) 14,633 2,678 Net cash provided by operating activities 41 144,976 109,722 Cash flows from investing activities Payment for acquisition of businesses - net of cash acquired Payments for property, plant and equipment Payments for intangible assets Proceeds from sale of businesses Proceeds from sale of property, plant and equipment Proceeds from sale of available-for-sale financial assets Payments for shares in other corporations Net cash used in investing activities 32(c) Cash flows from financing activities Proceeds from issues of shares and other equity securities 30(a) (11,534) (29,383) - 2,303 32,115 3,116 (49,134) (52,517) 1,636 43,200 (77,500) 1,400 (118,333) (52,706) (500) - 50,077 2,633 (29,469) (148,298) 6,948 114,650 (41,145) - 7 8 (67,770) (61,640) (213) (99,247) (6,788) 17,615 10,827 (157) 18,656 (19,920) 37,535 17,615 Proceeds from borrowings Repayment of borrowings Transactions with non-controlling interests Dividends paid to members of A.P. Eagers Limited Dividends paid to minority shareholders of a subsidiary Net cash (used in)/provided by financing activities Net decrease in cash and cash equivalents Cash and cash equivalents at the beginning of the financial year Cash and cash equivalents at the end of the financial year The above Statement of Cash Flows should be read in conjunction with the accompanying notes. 26 NOTES TO AND FORMING PART OF THE FINANCIAL STATEMENTS 31 DECEMBER 2017 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Functional and presentation currency (a) General information and basis of preparation The financial report covers the Group (consolidated entity) of A.P. Eagers Limited and its subsidiaries (consolidated financial statements). A.P. Eagers Limited is a publicly listed company incorporated and domiciled in Australia. Compliance with IFRS 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 purposes of preparing the consolidated financial statements, the Company is a for-profit entity. Accounting Standards include Australian Accounting Standards. Compliance with Australian Accounting Standards ensures that the financial statements and notes of the company and the Group comply with International Financial Reporting Standards (IFRS). Historical cost convention These financial statements have been prepared under the historical cost convention, as modified by the revaluation of financial assets, derivatives and certain classes of property, plant and equipment to fair value. Fair Value is the price received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date, regardless of whether that price is directly observable or estimated using another valuation technique. In estimating the fair value of an asset or a liability, the Group takes into account the characteristics of the asset or liability if market participants would take those characteristics into account when pricing the asset or liability at the measurement date. Fair value for measurement and/or disclosure purposes in these consolidated financial statements is determined on such a basis, except for share-based payment transactions that are within the scope of IFRS 2, leasing transactions that are within the scope of IAS 17, and measurements that have some similarities to fair value but are not fair value, such as net realisable value in IAS 2 or value in use in IAS 36. In addition, for financial reporting purposes, fair value measurements are categorised into Level 1, 2 or 3 based on the degree to which the inputs to the fair value measurements are observable and the significance of the inputs to the fair value measurements in its entirety, which are described as follows: > > > Level 1 inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities that the entity can access at the measurement date; Level 2 inputs are inputs, other than quoted prices included within Level 1, that are observable for the asset or liability, either directly or indirectly; and Level 3 inputs are unobservable inputs for the asset or liability. The functional and presentation currency of the Group is the Australian Dollar. The financial statements were authorised for issue by the directors on the 21st of February 2018. Reallocation of liabilities In preparation of the financial report, the Group has reclassified “provision for annual leave” from “trade and other payables” to “current provisions”. In addition to this, an adjustment to reclassify certain transactions from “trade payables” to “other payables” has been affected in the notes. The comparatives have been reclassified for the purposes of consistency. Total amount reclassified is $24,318,000 (2016: $24,705,000). Accounting Policies The following is a summary of the material accounting policies adopted in the preparation of the financial report. The accounting policies have been consistently applied, unless otherwise stated. (b) Basis of consolidation The consolidated financial statements incorporate the financial statements of A.P. Eagers Limited (the Company or Group) and entities (including structured entities) controlled by the Company and its subsidiaries. Control is achieved when the Company: > > > has 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. 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. When the company has less than a majority of the voting rights of an investee, it has power over the investee when the voting rights are sufficient to give it the practical ability to direct the relevant activities of the investee unilaterally. The Company considers all relevant facts and circumstances in assessing whether or not the Company’s voting rights in an investee are sufficient to give it power, including: > > > > the size of the Company’s holding of voting rights relative to the size and dispersion of holdings of the other vote holders; potential voting rights held by the Company, other vote holders or other parties; rights arising from other contractual arrangements; and any additional facts and circumstances that indicate that the Company has, or does not have, the current ability to direct the relevant activities at the time that decisions need to be made, including voting patterns at previous shareholders’ meetings. 27 ANNUAL REPORT 2017 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES CONTINUED (b) Basis of consolidation (continued) (ii) Investments in associates Consolidation of a subsidiary begins when the Company obtains control over the subsidiary and ceases when the Company loses 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 when 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 interests having a deficit balance. 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 intragroup assets and liabilities, equity, income, expenses and cash flows relating to transactions between members of the Group are eliminated in full on consolidation. (i) Changes in the Group’s ownership interests in existing subsidiaries Changes in the Group’s ownership interests in subsidiaries that do not result in the Group losing control over the subsidiaries are accounted for as equity transactions. The carrying amounts of the Group’s interests and the non-controlling interests are adjusted to reflect the changes in their relative interests in the subsidiaries. Any difference between the amount by which the non- controlling interests are adjusted and the fair value of the consideration paid or received is recognised directly in equity and attributed to owners of the Company. When the Group loses control of a subsidiary, a gain or loss is recognised in profit or loss and is calculated as the difference between (i) the aggregate of the fair value of the consideration received and the fair value of any retained interest and (ii) the previous carrying amount of the assets (including goodwill), and liabilities of the subsidiary and any non-controlling interests. All amounts previously recognised in other comprehensive income in relation to that subsidiary are accounted for as if the Group had directly disposed of the related assets or liabilities of the subsidiary (i.e. reclassified to profit or loss or transferred to another category of equity as specified/permitted by applicable AASBs). The fair value of any investment retained in the former subsidiary at the date when control is lost is regarded as the fair value on initial recognition for subsequent accounting under AASB 9, when applicable, the cost on initial recognition of an investment in an associate or a joint venture. An associate is an entity over which the Group has significant influence. Significant influence is the power to participate in the financial and operating policy decisions of the investee but is not control over those policies. If the Group holds, directly or indirectly, 20% or more of the voting power of the investee, it is presumed the Group has significant influence, unless it can be clearly demonstrated that this is not the case. Refer to further details in Note 2(a)(i). The results and assets and liabilities of associates are incorporated in these consolidated financial statements using the equity method of accounting, except when the investment, or a portion thereof, is classified as held for sale, in which case it is accounted for in accordance with AASB 5. Under the equity method, an investment in an associate is initially recognised in the consolidated statement of financial position at cost and adjusted thereafter to recognise the Group’s share of the profit or loss and other comprehensive income of the associate. When the Group’s share of losses of an associate exceeds the Group’s interest in that associate (which includes any long-term interests that, in substance, form part of the Group’s net investment in the associate), the Group discontinues recognising its share of further losses. Additional losses are recognised only to the extent that the Group has incurred legal or constructive obligations or made payments on behalf of the associate. An investment in an associate is accounted for using the equity method from the date on which the investee becomes an associate. On acquisition of the investment in an associate, any excess of the cost of the investment over the Group’s share of the net fair value of the identifiable assets and liabilities of the investee is recognised as goodwill, which is included within the carrying amount of the investment. Any excess of the Group’s share of the net fair value of the identifiable assets and liabilities over the cost of the investment, after reassessment, is recognised immediately in profit or loss in the period in which the investment is acquired. The requirements of AASB 139 are applied to determine whether it is necessary to recognise any impairment loss with respect to the Group’s investment in an associate. When necessary, the entire carrying amount of the investment (including goodwill) is tested for impairment of assets as a single asset by comparing its recoverable amount (higher of value in use and fair value less costs of disposal) with its carrying amount. Any impairment loss recognised forms part of the carrying amount of the investment. Any reversal of that impairment loss is recognised in accordance with AASB 136 to the extent that the recoverable amount of the investment subsequently increases. 28 NOTES TO AND FORMING PART OF THE FINANCIAL STATEMENTS CONTINUED31 DECEMBER 2017 The Group discontinues the use of the equity method from the date when the investment ceases to be an associate, or when the investment is classified as held for sale. When the Group retains an interest in the former associate and the retained interest is a financial asset, the Group measures the retained interest at fair value at that date and the fair value is regarded as its fair value on initial recognition in accordance with AASB 139. The difference between the carrying amount of the associate at the date the equity method was discontinued, and the fair value of any retained interest and any proceeds from disposing of a part interest in the associate is included in the determination of the gain or loss on disposal of the associate. In addition, the Group accounts for all amounts previously recognised in other comprehensive income in relation to that associate on the same basis as would be required if that associate had directly disposed of the related assets or liabilities. Therefore, if a gain or loss previously recognised in other comprehensive income by that associate would be reclassified to profit or loss on the disposal of the related assets or liabilities, the Group reclassifies the gain or loss from equity to profit or loss (as a reclassification adjustment) when the equity method is discontinued. The Group continues to use the equity method when an investment in an associate becomes an investment in a joint venture or an investment in a joint venture becomes an investment in an associate. There is no remeasurement to fair value upon such changes in ownership interests. When the Group reduces its ownership interest in an associate but the Group continues to use the equity method, the Group reclassifies to profit or loss the proportion of the gain or loss that had previously been recognised in other comprehensive income relating to that reduction in ownership interest if that gain or loss would be classified to profit or loss on the disposal of the related assets or liabilities. When a Group entity transacts with an associate of the Group, profits and losses resulting from the transactions with the associate are recognised in the Group’s consolidated financial statements only to the extent of interests in the associate that are not related to the Group. (c) Operating segments Operating segments are identified based on internal reports that are regularly reviewed by the entity’s chief operating decision maker in order to allocate resources to the segment and assess its performance. The Group has four operating segments being (i) Car Retail (ii) Truck Retail (iii) Property (iv) Investments. Currently the segment of “Other” is not required. (d) Revenue (i) Sales revenue Revenue from the sales of motor vehicles and parts is recognised when the buyer has accepted the risks and rewards of ownership, generally by taking delivery of the goods. (ii) Service revenue Service work on customers’ vehicles is carried out under instruction from the customer. Service revenue is recognised based upon when services are rendered. Revenue arising from the sale of parts fitted to customers’ vehicles during service is recognised upon delivery of the fitted parts to the customer upon completion of the service. (iii) Rental income Rental income from operating leases is recognised in income on a straightline basis over the lease term. (iv) Interest revenue Interest revenue is recognised on a time proportional basis, taking into account the effective interest rates applicable to the financial assets. (v) Property, Plant and Equipment sales revenue Revenue from the sales of property, plant and equipment is recognised when the buyer has accepted the risks and rewards of ownership, generally at the transfer of ownership. (vi) Dividend revenue Dividend revenue is recognised when the right to receive a dividend has been established. Dividends received from associates are accounted for in accordance with the equity method of accounting in the consolidated financial statements. (vii) Goods and Services Tax (GST) All revenue is stated net of the amount of Goods and Services Tax (GST). (e) Finance costs Borrowing costs are recognised as expenses in the period in which they are incurred. Borrowing costs include: > > > > interest on bank overdrafts, short and long-term borrowings interest on vehicle bailment arrangements interest on finance lease liabilities amortisation of ancillary costs incurred in connection with the arrangement of borrowings 29 ANNUAL REPORT 2017 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES CONTINUED (g) Leases Leases in which a significant portion of the risks and rewards of ownership are retained by the lessor are classified as operating leases. Payments made under operating leases (net of any incentives received from the lessor) are charged to profit or loss on a straightline basis over the period of the lease. (h) Business combinations The acquisition method of accounting is used for all business combinations regardless of whether equity instruments or other assets are acquired. Cost is measured as the fair value of the assets given, shares issued or liabilities incurred or assumed at the date of exchange. Acquisition related costs are recognised in profit or loss as incurred. Where equity instruments are issued in an acquisition, the value of the instruments is their published market price as at the date of exchange unless, in rare circumstances, it can be demonstrated that the published price at the date of exchange is an unreliable indicator of fair value and that other evidence and valuation methods provide a more reliable measure of fair value. Transaction costs arising on the issue of equity instruments are recognised directly in equity. Identifiable assets acquired and liabilities and contingent liabilities assumed in a business combination are measured initially at their fair values at the acquisition date, irrespective of the extent of any non-controlling interest. The excess of the cost of acquisition over the fair value of the Group’s share of the identifiable net assets acquired is recorded as goodwill (refer to Note 1(r)). If the cost of acquisition is less than the fair value of the net assets of the subsidiary acquired, the difference is recognised directly in profit or loss but only after assessment of the identification and measurement of the net assets acquired. Where settlement of any part of cash consideration is deferred, the amounts payable in the future are discounted to their present values as at the date of acquisition. The discount rate used is the Australian government bond rate that matches the future maturity period. If the initial accounting for a business acquisition is incomplete by the end of the reporting period in which the combination occurs, the consolidated entity reports provisional amounts for the items for which accounting is incomplete. The provisional amounts are adjusted during the measurement period (no longer than 12 months from the initial acquisition) on a retrospective basis by restating the comparative information presented in the financial statements. (f) Taxes (i) Income tax The income tax expense or revenue for the period is the tax payable on the current period’s taxable income based on the notional income tax rate for each jurisdiction, adjusted by changes in deferred tax assets and liabilities attributable to temporary differences between the tax bases of assets and liabilities and their carrying amounts in the financial statements, and to unused tax losses. Deferred tax assets and liabilities are recognised for temporary differences at the tax rates expected to apply when the assets are recovered or liabilities are settled, based on those tax rates which are enacted or substantively enacted for each jurisdiction. The relevant tax rates are applied to the cumulative amounts of deductible and taxable temporary differences to measure the deferred tax asset or liability. An exception is made for certain temporary differences arising from the initial recognition of an asset or a liability. No deferred tax asset or liability is recognised in relation to these temporary differences if they arose in a transaction, other than a business combination, that at the time of the transaction did not affect either accounting profit or taxable profit or loss. 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. Current and deferred tax balances attributable to amounts recognised directly in equity are also recognised directly in equity. (ii) Goods and services tax (“GST”) Revenues, expenses, assets and liabilities are recognised net of the amount of GST except: > where the GST incurred on a purchase of goods and services is not recoverable from the taxation authority, in which case the GST is recognised as part of the cost of acquisition of the asset or is part of the expense item as applicable; and > receivables and payables are stated with the amount of GST included. The net amount of GST recoverable from, or payable to, the taxation authority is included as part of receivables or payables in the statement of financial position. Cash flows are included in the Statement of Cash Flows on a gross basis and the GST component of cash flows arising from investing and financing activities, which is recoverable from or payable to the taxation authority, are classified as operating cash flows. Commitments and contingencies are disclosed net of the amount of GST recoverable from, or payable to, the taxation authority. 30 NOTES TO AND FORMING PART OF THE FINANCIAL STATEMENTS CONTINUED31 DECEMBER 2017 (i) Impairment of long lived assets (excluding goodwill) (l) Inventories Assets that have an indefinite useful life are not subject to amortisation and are tested annually for impairment. Assets that are subject to amortisation 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. The recoverable amount is the higher of an asset’s fair value less costs of disposal and its value in use. For the purposes of assessing impairment, assets are grouped at the lowest levels for which there are separately identifiable cash flows (cash-generating units “CGU”) and these cash flows are discounted using the estimated weighted average cost of capital of the asset/CGU. An impairment loss is recognised in profit or loss immediately, unless the relevant asset is carried at fair value, in which case the impairment loss is treated as a revaluation decrease (refer Note 1(p)). 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 losses been recognised for the asset (CGU) in prior years. A reversal of an impairment loss is recognised in profit or loss immediately, unless the relevant asset is carried at fair value, in which case, the reversal of the impairment loss is treated as a revaluation increase (refer Note1(p)). (j) Cash and cash equivalents Cash and cash equivalents include cash on hand, deposits held at call with financial institutions, other short term, highly liquid investments with original maturities of three months or less that are readily convertible to known amounts of cash and which are subject to an insignificant risk of changes in value, and bank overdrafts. Bank overdrafts are shown within borrowings in current liabilities on the statement of financial position. (k) Receivables Trade receivables Trade receivables are recognised initially at fair value and subsequently measured at amortised cost, less provision for doubtful debts. Trade receivables are due for settlement no more than 60 days from the date of recognition. In respect of trade and lease book receivables, collectability is reviewed on an ongoing basis. Debts which are known to be uncollectible are written off. A provision for doubtful debts is raised where some doubt as to collectability exists. The amount of the provision is the difference between the asset’s carrying amount and the present value of estimated future cash flows, discounted at the effective interest rate. The amount of the provision is recognised in profit or loss. New motor vehicles and demonstrator vehicles are stated at the lower of cost and net realisable value. Costs are assigned on the basis of specific identification. Used motor vehicles are stated at the lower of cost and net realisable value on a unit by unit basis. Net realisable value has been determined by reference to the likely net realisable value given the age of the vehicles at year end. This is effected through the application of a specific provision percentage against cost of vehicles based on age. Costs are assigned on the basis of specific identification. Spare parts and accessories are stated at the lower of cost and net realisable value. Costs are assigned to individual items on the basis of weighted average cost. Work in progress is stated at cost. Cost includes labour incurred to date and consumables utilised during the service. Costs are assigned to individual customers on the basis of specific identification. (m) Investments and other financial assets Investments are recognised and derecognised on settlement date where the purchase or sale of an investment is under a contract whose terms require delivery of the investment within the time-frame established by the market concerned. They are initially measured at fair value, net of transaction costs except for those financial assets classified as at fair value through profit or loss which are initially measured at fair value. Subsequent to initial recognition, investments in associates are accounted for under the equity method in the consolidated financial statements. The Group classifies its other financial assets in the following categories; (i) available-for-sale financial assets and (ii) loans and receivables. The classification depends on the purpose for which the financial assets were acquired. Management determines the classification of its investments at initial recognition and re-evaluates this designation at each reporting date. (i) Available-for-sale financial assets Available-for-sale financial assets are initially measured at cost at date of acquisition, which include transaction costs, and subsequent to initial recognition, they are carried at fair value. Unrealised gains and losses arising from changes in the fair value of non-monetary securities classified as available- for- sale are recognised in equity in the available-for-sale investments revaluation reserve. When securities classified as available-for-sale are sold or impaired, the accumulated fair value adjustments are included in profit or loss as gains and losses from the sale or impairment of investment securities. 31 ANNUAL REPORT 2017 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES CONTINUED (m) Investments and other financial assets (continued) (i) Available-for-sale financial assets (continued) The fair values of quoted investments are based on current bid prices. If the market for a financial asset is not active (and for unlisted securities), the Group establishes fair value by using valuation techniques. These include reference to the fair values of recent arm’s length transactions, involving the same instruments or other instruments that are substantially the same, discounted cash flow analysis, and pricing models to reflect the issuer’s specific circumstances. The Group assesses at each balance date whether there is objective evidence that a financial asset or group of financial assets is impaired. In the case of equity securities classified as available-for-sale, a significant or prolonged decline in fair value of a security below its cost is considered in determining whether the security is impaired. If any such evidence exists for available-for-sale financial assets, the cumulative loss measured as the difference between the acquisition cost and the current fair value, less any impairment loss on that financial asset previously recognised in profit or loss is removed from equity and recognised in profit or loss. (ii) Loans and receivables Loans and receivables are non derivative financial assets with fixed or determinable payments that are not quoted in an active market. They arise when the Group provides money, goods or services directly to a debtor with no intention of selling the receivable. They are included in current assets, except for those with maturities greater than 12 months after the balance date which are classified as non-current assets. Loans and receivables are included in receivables in the statement of financial position (Notes 9, 12(b) and 13). Loans and receivables are measured at amortised cost using the effective interest method less impairment. Interest is recognised by applying the effective interest rate classification of its investments at initial recognition and re-evaluates this designation at each reporting date. (n) Fair value estimation The fair value of financial assets and financial liabilities must be estimated for recognition and measurement or for disclosure purposes. The fair value of financial instruments traded in active markets (such as publicly traded derivatives and available-for-sale securities) is based on quoted market prices at the balance date. The quoted market price used for financial assets held by the Group is the current bid price. The fair value of financial instruments that are not traded in an active market is determined using valuation techniques. The Group uses a variety of methods and makes assumptions that are based on market conditions existing at each balance date. Quoted market prices or dealer quotes for similar instruments are used for long-term debt instruments held. Other techniques, such as estimated discounted cash flows, are used to determine fair value for the remaining financial instruments. The fair value of interest rate swaps is determined based on market expectations of future interest rates. The nominal value less estimated credit adjustments of trade receivables and payables are assumed to approximate their fair values. The fair value of financial liabilities for disclosure purposes is estimated by discounting the future contractual cash flows at the current market interest rate that is available to the Group for similar financial instruments. (o) Derivatives Derivatives are recognised at their fair value at each reporting date. The method of recognising the resulting gain or loss depends on whether the derivative is designated as a hedging instrument, and if so, the nature of the item being hedged. The Group designates certain derivatives as hedges of exposure to variability in cash flows, which includes hedges for highly probable forecast transactions (cash flow hedges). The Group documents at the inception of the transaction the relationship between hedging instruments and hedged items, as well as its risk management objective and strategy for undertaking various hedge transactions. The Group also documents its assessments, both at hedge inception and on an ongoing basis, of whether the derivatives that are used in hedging transactions have been and will continue to be highly effective in offsetting changes in fair values or cash flows of hedged items. Refer further details in Note 19. (i) Cash flow hedges The change in the fair value from remeasuring derivatives that are designated and qualify as cash flow hedges is deferred in equity as a hedging reserve, to the extent that the hedge is effective. The ineffective portion is recognised in profit or loss immediately. Amounts deferred in the hedging reserve are recycled in profit or loss in the periods when the hedged item is recognised in profit or loss. However, when the forecast transaction that is hedged results in the recognition of a non-financial asset or non-financial liability, the gains or losses previously deferred in the hedging reserve are transferred from equity and included in the initial measurement of the cost of the asset or liability. Hedge accounting is discontinued when the Group revokes the hedging relationship, the hedging instrument expires or is sold, terminated or exercised, or no longer qualifies for hedge accounting. Any cumulative gain or loss deferred in the hedging reserve at that time remains in equity and is recognised when the forecast transaction is ultimately recognised in profit or loss. When a forecast transaction is no longer expected to occur, the cumulative gain or loss that was deferred in equity is recognised immediately in profit or loss. 32 NOTES TO AND FORMING PART OF THE FINANCIAL STATEMENTS CONTINUED31 DECEMBER 2017 (p) Property, plant and equipment Land and buildings are shown at fair value, based on annual assessment by the directors supported by periodic valuations by external independent valuers, less subsequent depreciation for buildings. Revaluations are made with sufficient regularity to ensure that the carrying amount does not differ materially from that which would be determined using fair value at the end of the reporting or immediately prior to the initial classification of assets held for sale. Any accumulated depreciation at the date of revaluation is eliminated against the gross carrying amount of the asset and the net amount is restated to the revalued amount of the asset. All other property, plant and equipment are stated at historical cost less accumulated depreciation and impairment losses. Historical cost includes expenditure that is directly attributable to the acquisition of the items. Subsequent costs are included in the asset’s carrying amount or recognised as a separate asset, as appropriate, only when it is probable that future economic benefits associated with the item will flow to the Group and the cost of the item can be measured reliably. All other repairs and maintenance are charged to profit or loss during the financial period in which they are incurred. Increases in the carrying amounts arising on revaluation of land and buildings are credited to property, plant and equipment revaluation reserve in shareholders’ equity. To the extent that the increase reverses a decrease previously recognised in profit or loss, the increase is first recognised in profit or loss. Decreases that reverse previous increases of the same asset are first charged against revaluation reserves directly in equity to the extent of the remaining reserve attributable to the asset, all other decreases are charged to profit or loss. Land is not depreciated. Depreciation on other assets is calculated using the straight line method to allocate their cost or revalued amounts,net of their residual values, over their estimated useful lives, as follows: > Buildings 40 years > Plant & equipment 3 - 10 years > Leasehold improvements 5 - 30 years The asset’s residual values and useful lives are reviewed, and adjusted if appropriate, at each balance date. An asset’s carrying amount is written down immediately to its recoverable amount if the asset’s carrying amount is greater than its estimated recoverable amount (Note 1(i)). Gains and losses on disposals are determined by comparing proceeds with carrying amounts. These are included in profit or loss. When revalued assets are sold, it is Group policy to transfer the amounts included in the asset revaluation reserve in respect of those assets to retained earnings. The cost of improvements to or on leasehold properties is amortised over the unexpired period of the lease or the estimated useful life of the improvement, whichever is the shorter. The make good provision is capitalised as leasehold improvements and amortised over the term of the lease. (q) Trademarks / brand names Trademarks / brand names are valued on acquisition where management believe there is evidence of any of the following factors: an established brand name with longevity, a reputation that may positively influence a consumer’s decision to purchase or service a vehicle, and strong customer awareness within a particular geographic location. Trademarks are valued using a discounted cash flow methodology. Trademarks are considered to have an indefinite life as the Group expects to hold and support such trademarks through marketing and promotional support for an indefinite period. They are recorded at cost less any impairment. (r) Goodwill Goodwill represents the excess of the cost of an acquisition over the fair value of the Group’s share of the net identifiable assets of the acquired subsidiary, associate or business at the date of acquisition. Goodwill on acquisition of subsidiaries and businesses is included in intangible assets. Goodwill on acquisition of associates is included in investment in associates. Goodwill acquired in business combinations is not amortised. Instead, goodwill is tested for impairment annually, or more frequently if events or changes in circumstances indicate that it might be impaired, and is carried at cost less accumulated impairment losses. An impairment loss for goodwill is recognised immediately in profit or loss and is not reversed in a subsequent period. Gains and losses on the disposal of an entity include the carrying amount of goodwill relating to the entity sold. Goodwill is allocated to cash-generating units for the purpose of impairment testing (refer Note 17). (s) Trade and other payables These amounts represent liabilities for goods and services provided to the Group prior to the end of the financial year which are unpaid. The amounts are unsecured and are usually paid within 30 days of recognition. They are recognised initially at the fair value of what is expected to be paid, and subsequently at amortised cost, using the effective interest rate method. (t) Borrowings Borrowings are initially recognised at fair value net of transaction costs incurred. Borrowings are subsequently measured at amortised cost. Any difference between the proceeds (net of transaction costs) and the redemption amount is recognised in profit or loss over the period of the borrowings using the effective interest rate method. Borrowings are classified as current liabilities unless the Group has an unconditional right to defer settlement of the liability for at least 12 months after the balance date. 33 ANNUAL REPORT 2017 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES CONTINUED (u) New motor vehicle stock and related bailment (x) Dividends Motor vehicles secured under bailment plans are provided to the Group under bailment agreements between the floor plan loan providers and entities within the Group. The Group obtains title to the vehicles immediately prior to sale. Motor vehicles financed under bailment plans held by the Group are recognised as trading stock with the corresponding liability shown as owing to the finance provider. (v) 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 the best estimate taking into account the risks and uncertainties surrounding the obligation. Provision for Warranties Provision is made for the estimated claims in respect of extended warranties provided on the majority of the Group’s retail new and used vehicle sales. These claims are generally expected to settle in the next financial year but some may be extended into the following year if claims are made late in the warranty period. (w) Employee benefits A liability is recognised for benefits accruing to employees in respect of wages and salaries, annual leave and long service leave, when 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, are measured at their nominal values using the remuneration rate expected to apply at the time of settlement. Liabilities recognised in respect of long-term employee benefits are measured as 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. The fair value determined at the grant date of the equity-settled share-based payments is expensed on a straight-line basis over the vesting period, based on the Group’s estimate of equity instruments that will eventually vest, with a corresponding increase in equity. At the end of each reporting period, the Group revises its estimate of the number of equity instruments expected to vest. The impact of the revision of the original estimates, if any, is recognised in profit or loss such that the cumulative expense reflects the revised estimate, with a corresponding adjustment to the share-based payments reserve. Contributions are made by the Group to defined contribution employee superannuation funds and are charged as expenses when incurred. Provision is made for the amount of any dividend declared on or before the end of the year but not distributed at balance date. (y) Earnings per share (i) Basic earnings per share Basic earnings per share is calculated as net profit attributable to members of the parent, adjusted to exclude any costs of servicing equity (other than dividends), divided by the weighted average number of ordinary shares, adjusted for any bonus element. (ii) Diluted earnings per share Diluted earnings per share is calculated as net profit attributable to members of the parent, adjusted for: > Costs of servicing equity (other than dividends) > The after tax effect of dividends and interest associated with dilutive potential ordinary shares that have been recognised as expenses > Other non-discretionary changes in revenues or expenses during the period that would result from the dilution of potential ordinary shares, divided by the weighted average number of ordinary shares and dilutive potential ordinary shares, adjusted for any bonus element. (z) Non-current assets held for sale Non-current assets and disposal groups are classified as held for sale if their carrying amount will be recovered principally through a sale transaction rather than through continuing use. This condition is regarded as met only when the sale is highly probable and the asset (or disposal group) is available for immediate sale in its present condition. Management must be committed to the sale, which should be expected to qualify for recognition as a completed sale within one year from the date of classification. Non-current assets (and disposal groups) classified as held for sale are measured at the lower of their previous carrying amount and fair value less costs to sell. Where non-current assets are sold above the lower of their previous carrying amounts and fair value less costs to sell, this gain is recognised in the Profit and Loss when the sale is recognised. (aa) Rounding of amounts The Company is of a kind referred to in ASIC Corporations (Rounding in Financial/Directors’ Reports) Instrument 2016/191, issued by the Australian Securities and Investments Commission, relating to the “rounding off” of amounts in the financial report. Amounts in the financial report have been rounded off in accordance with that instrument to the nearest thousand dollars, or in certain cases, to the nearest dollar. 34 NOTES TO AND FORMING PART OF THE FINANCIAL STATEMENTS CONTINUED31 DECEMBER 2017 (ab) New or revised standards and interpretations that are first effective in the current reporting period The group has applied the following standards and amendments for the first time for their annual reporting period commencing 1 January 2017: > AASB 2016-1 Amendments to Australian Accounting Standards - Recognition of Deferred Tax Assets for Unrealised Losses > AASB 2016-2 Amendments to Australian Accounting Standards - Disclosure Initiative: Amendments to AASB 107, and > AASB 2017-2 Amendments to Australian Accounting Standards - Further Annual Improvements 2014-2016 Cycle. The application of these amendments has not had any material impact on the disclosures or the amounts recognised in the Group’s consolidated financial statements. Certain new accounting standards and interpretations have been published that are not mandatory for 31 December 2017 reporting periods and have not been early adopted by the Group. The potential impact of the new or revised Standards and Interpretations has been contemplated below. List of Standards and Interpretations in issue not yet effective At the date of authorisation of the financial statements, the Standards and Interpretations listed below were in issue but not yet effective. Title of standard Nature of change Impact Date of adoption by group AASB 9 Financial Instruments AASB 9 addresses the classification, measurement and derecognition of financial assets and financial liabilities, introduces new rules for hedge accounting and a new impairment model for financial assets. Management has reviewed the Group’s financial assets and liabilities to assess the impact of adoption of the new Standard on 1 January 2018. The Group’s equity instruments that are currently classified as available for-sale will satisfy the conditions for classification as at fair value through other comprehensive income (FVOCI), hence there will be no change to the classification and measurement of these financial assets. Gains/losses realised on the sale of the financial assets at FVOCI will no longer be transferred to profit or loss on sale, but instead reclassified below the line from the FVOCI reserve to retained earnings. All other financial assets and financial liabilities will continue to be measured on the same bases as is currently adopted under AASB 139. The new hedge accounting rules will align the accounting for hedging instruments more closely with the Group’s risk management practices. The Group has confirmed that its current hedge relationships will qualify as continuing hedges upon the adoption of AASB 9. Management does not anticipate that the application of the AASB 9 hedge accounting and new impairment model requirements will have a material impact on the Group’s consolidated financial statements. Must be applied for financial years commencing on or after 1 January 2018. The Group will apply the new rules prospectively from 1 January 2018, with the practical expedients permitted under the standard. Comparatives for 2017 will not be restated. 35 ANNUAL REPORT 2017 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES CONTINUED List of Standards and Interpretations in issue not yet effective (continued) Title of standard Nature of change Impact Date of adoption by group Title of standard Nature of change AASB 15 Revenue from Contracts with Customers The AASB has issued a new standard for the recognition of revenue. This will replace AASB 118 which covers revenue arising from the sale of goods and the rendering of services. The new standard is based on the principle that revenue is recognised when control of a good or service transfers to a customer. The standard permits either a full retrospective or a modified retrospective approach for the adoption. Management has engaged a third party to assist in the review of the adoption of the new standard on the Group’s revenue from contracts with customers. Whilst this assessment is ongoing, the following areas are currently noted as being affected; however, the impact at this stage is not considered to be significant: > Accounting for warranties – AASB 15 requires that if a warranty provides a customer with a service in addition to the assurance that the product complies with agreed-upon specifications, the promised service is a performance obligation. This means that the entity shall allocate a portion of the total transaction price to that performance obligation. This will result in deferral of revenue associated with the sale of standard and premium warranties, which will need to be recognised over the life of the warranty. > Accounting for returns/refunds of sales and commissions – AASB 15 requires a right of return liability to be recognised for the probable refund of sales and commissions. This will have an impact on the revenue recognised in the Group’s consolidated financial statements, as any sale or commission with a high probability of being refunded shall be deferred into the right of return liability account and recognised after the refund period expires. Mandatory for financial years commencing on or after 1 January 2018. The group intends to adopt the standard using the modified retrospective approach which means that the cumulative impact of the adoption will be recognised in retained earnings as of 1 January 2018 and that comparatives will not be restated. AASB 16 Leases AASB 16 was issued in February 2016. It will result in almost all leases being recognised on the balance sheet, as the distinction between operating and finance leases has been removed. Under the new standard, an asset (the right to use the leased item) and a financial liability to pay rentals are recognised. The only exceptions are short term and low-value leases. The accounting for lessors will not significantly change. Impact Management has reviewed the Group’s lease arrangements to assess the impact of adoption of the new Standard on 1 January 2019. The standard will affect primarily the accounting for the Group’s operating leases. As at the reporting date, the group has non-cancellable operating lease commitments of $224,415,000, see note 34. Management notes that some of these relate to payments for short-term and low value leases which will be recognised on a straight-line basis as an expense in the Group’s consolidated financial statements. However, the Group has not yet assessed what other adjustments, if any, are necessary for example because of the change in the definition of the lease term and the different treatment of variable lease payments and of extension and termination options. It is therefore not yet possible to estimate the amount of right-of-use assets and lease liabilities that will have to be recognised on adoption of the new standard and how this may affect the Group’s profit or loss and classification of cash flows going forward. Date of adoption by group Mandatory for financial years commencing on or after 1 January 2019. The Group does not intend to adopt the standard before its effective date. 36 NOTES TO AND FORMING PART OF THE FINANCIAL STATEMENTS CONTINUED31 DECEMBER 2017 2 CRITICAL ACCOUNTING ESTIMATES AND JUDGEMENTS (a) Critical accounting estimates, assumptions (iv) Provisions for warranties A provision for warranties of $5,319,000 (2016: $4,870,000) has been recognised for extended warranties provided for the Group’s retail new and used vehicle sales. This provision has been estimated based on past experience and confirmation of future costs by the administrators of the warranty programmes. Further information on the provision for warranties can be found in Note 22. (v) New and demonstrator vehicle write down to net realisable value In determining the amount of write-downs for new and demonstrator vehicle inventory, management has made judgements based on the expected net realisable value of inventory. Historic experience and current knowledge of the products has been used in determining any write-downs to net realisable value. Refer to Note 10. (vi) Used vehicle write down to net realisable value In determining the amount of write-downs required for used vehicle inventory, management has, in consultation with published used vehicle valuations, made judgements based on the expected net realisable value of that inventory. Historic experience, current knowledge of the products and the valuations from an independent used car publication has been used in determining any write-downs to net realisable value. Refer to Note 10. (vii) Fair value of assets and liabilities acquired in a business combination The acquisitions made by the Group have required a number of judgements and estimates to be made. The directors have judged that no significant intangible assets have been acquired in the business combinations other than Goodwill (see also (ii) above). Additionally as part of the acquisition and negotiation process judgements have been made as to the fair value of vehicle and parts inventory, warranties and other assets and liabilities acquired. Further judgements and estimates have been made in relation to the probability of achieving future milestones of certain acquired businesses as disclosed in Note 32(b). and judgements Estimates, assumptions and judgements are continually evaluated and are based on historical experience and other factors, including expectations of future events that may have a financial impact on the Group and that are believed to be reasonable under the circumstances. The Group makes estimates, assumptions and judgements concerning the future. The resulting accounting estimates will, by definition, seldom equal the related actual results. The estimates, assumptions and judgements that have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities are discussed below: (i) Classification of investment in Automotive Holdings Group (AHG) During the period ended 31 December 2017, the Group increased its shareholding in AHG Limited to 23.81% of the equity shares. Although the Group owns over 20% of the voting power of AHG Limited, the Directors have rebutted the presumption of exercising significant influence on the basis that the Group has no representation on the Board of Directors of AHG Limited and limited ability to participate in policy making decisions. Therefore the investment in AHG Limited has been accounted for as an available for sale financial asset until such time as significant influence is deemed to exist. (ii) Recoverability of goodwill and other intangibles with indefinite useful lives Goodwill and other intangibles with indefinite useful lives with a carrying value of $309,414,000 (2016: $298,908,000) are tested annually for impairment, based on estimates made by directors. The recoverable amount of the intangibles is based on the greater of ‘Value in use’ or ‘Fair value less costs to dispose’. Value in use is assessed by the directors through a discounted cash flow analysis which includes significant estimates and assumptions related to growth rates, margins, working capital requirements and cost of capital. Fair value less costs of disposal is assessed by the directors based on their knowledge of the industry and recent market transactions. Further information on the intangibles impairment test can be found in Note 17. (iii) Fair value estimation of land and buildings Land and buildings (including construction in progress) with a carrying value of $306,572,000 (2016: $298,507,000) are carried at fair value. Fair value inherently involves estimates and judgements to be made. The directors determine the fair value of land and buildings at least annually and if required in contemplation of sale. The directors’ assessment is supported by formal independent valuations conducted periodically but at least every three years. Further information on the fair value estimation of land and buildings can be found in Note 16. 37 ANNUAL REPORT 2017 3 REVENUE Sales revenue New vehicles Used vehicles Parts Service Other Other revenue Dividend received Rents Interest Proceeds of insurance claims Commissions Other Total revenue 4 OTHER GAINS Gains on disposal of other assets Fair value gains on financial assets at fair value through profit or loss Gain on disposal of Available for Sale Investments CONSOLIDATED 2017 $’000 2016 $’000 2,544,143 2,393,429 749,391 473,982 246,396 883 728,236 433,475 224,360 238 4,014,795 3,779,738 14,501 14,442 408 1,314 7,312 15,385 5,064 43,984 440 6,103 6,104 16,961 9,434 53,484 4,058,779 3,833,222 15,644 210 2,080 17,934 1,136 1,235 1,955 4,326 38 NOTES TO AND FORMING PART OF THE FINANCIAL STATEMENTS CONTINUED31 DECEMBER 2017 5 EXPENSES (a) Profit before income tax includes the following specific expenses: Depreciation Buildings Plant and equipment Total depreciation Amortisation Leasehold improvements Brand names Total amortisation CONSOLIDATED 2017 $’000 2016 $’000 Notes 16 16 17 3,771 10,399 14,170 2,387 94 2,481 3,637 8,399 12,036 1,863 94 1,957 Total Depreciation and Amortisation 16,651 13,993 Finance costs Vehicle bailment & related hedge Other Total finance expense Rental expense relating to operating leases Minimum lease payments Superannuation Provision expenses Inventory Warranties Bad debts Share-based payments Business acquisition costs Business restructuring costs 12,773 11,825 24,598 12,537 11,841 24,378 41,391 37,221 29,866 27,942 4,043 7,642 79 6,275 6,879 580 11,764 13,734 2,105 2,966 62 1,758 5,145 - 39 ANNUAL REPORT 2017 CONSOLIDATED 2017 $’000 2016 $’000 Notes 37,808 (352) 37,456 272 (624) (352) 26,885 8,994 35,879 8,407 587 8,994 135,629 141,405 40,689 42,422 19 (4,350) 400 (63) - 761 37,456 304 (4,390) 355 (371) (306) (2,135) 35,879 5,178 7,672 6 INCOME TAX (a) Income tax expense Current income tax expense Deferred income tax (benefit)/expense Deferred income tax expense/(benefit) included in income tax expense comprises: In respect of the current year Deferred tax reclassified from equity to profit or loss Closing balance 25 (b) Numerical reconciliation of income tax expense to prima facie tax payable Profit before income tax expense Tax at the Australian tax rate of 30.0% (2016 - 30.0%) Tax effect of amounts which are not deductible (taxable) in calculating taxable income: Non-deductible capital expenditure Non-taxable dividends Non-allowable expenses Property (revaluation) / impairment Tax offsets Sundry items Income tax expense (c) Tax benefit/(expense) relating to items of other comprehensive income Aggregate deferred tax arising in the reporting period and directly debited to other comprehensive income 40 NOTES TO AND FORMING PART OF THE FINANCIAL STATEMENTS CONTINUED31 DECEMBER 2017 7 DIVIDENDS (a) Ordinary dividends fully franked based on tax paid @ 30% Final dividend for the year ended 31 December 2016 of 22.0 cents per share (2015: 20.0 cents) paid on 15 April 2017 Interim dividend of 13.5 cents per share (2016: 13.0 cents) paid on 6 October 2017 Total dividends paid CONSOLIDATED 2017 $’000 2016 $’000 41,984 25,786 67,770 37,015 24,625 61,640 Dividends paid in cash or satisfied by the issue of shares under the dividend reinvestment plan during the years ended 31 December 2017 and 2016 were as follows: Paid in cash 67,770 61,640 (b) Dividends not recognised at year end In addition to the above dividends, since year end the directors have recommended the payment of a final dividend of 22.5 cents per share, fully franked based on tax paid at 30%. The aggregate amount of the proposed dividend expected to be paid on 18 April 2018 out of the retained profits at 31 December 2017 but not recognised as a liability at year-end is: 43,083 41,923 (c) Franked dividends The final dividend recommended after 31 December 2017 will be franked out of existing franking credits or out of franking credits arising from the payment of income tax in the year ending 31 December 2017. Franking credits available for subsequent reporting periods based on a tax rate of 30.0% (2016 - 30.0%) 166,029 169,770 The above amounts represent the balances of the franking account as at the end of the financial year, adjusted for: (a) franking credits that will arise from the payment of the current tax liability (b) franking debits that will arise from the payment of dividends recognised as a liability at the reporting date, and (c) franking credits that will arise from the receipt of dividends recognised as receivables at the reporting date. Impact on franking credits of dividends not recognised (18,464) (17,967) 8 CURRENT ASSETS – CASH AND CASH EQUIVALENTS Current assets Cash at bank and on hand Short term deposits 10,827 - 10,827 12,615 5,000 17,615 The above figures are reconciled to cash at the end of the financial year as shown in the statement of cash flows. 41 ANNUAL REPORT 2017 9 CURRENT ASSETS – TRADE AND OTHER RECEIVABLES Trade and other receivables Provision for doubtful receivables CONSOLIDATED 2017 $’000 2016 $’000 164,429 151,933 (2,622) (3,187) 161,807 148,746 (a) The ageing of lease, property and trade receivables at 31 December 2017 is detailed below: CONSOLIDATED 2017 2016 Not past due Past due 0-30 days Past due 31 days plus Total Gross $’000 154,100 5,283 5,046 Provision $’000 Gross $’000 Provision $’000 1,985 142,265 132 505 5,325 4,343 2,504 108 575 3,187 164,429 2,622 151,933 The maximum credit period on trade sales is 60 days. No interest is charged on the trade receivables from the date of invoice or when past due. The Group has provided fully for all receivables identified by management as being specifically doubtful, and in addition has provided 10% for all receivables over 90 days and 2.5% of total trade receivables excluding motor vehicle debtors. The Group’s provision policy is based on an assessment of changes in credit quality and historical experience. Included in the Group’s trade receivables balance are debtors with a net carrying amount of $9,692,000 (2016: $8,985,000) which are past due at the reporting date. The Group has not provided for these balances as there have not been any specifically identified factors that would indicate a deterioration of credit quality. The Group therefore still considers the amounts recoverable. The Group does not hold any collateral over these balances. The average age of these receivables is 62 days (2016: 62 days). (b) Movement in provision for doubtful receivables Opening balance Additional provisions Amounts written off during the year Closing balance CONSOLIDATED 2017 $’000 3,187 (79) (486) 2,622 2016 $’000 2,771 580 (164) 3,187 In determining the recoverability of a trade receivable the Group considers any deterioration 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, diverse and unrelated. Accordingly, the Directors believe that there is no further provision required in excess of the provision for doubtful debts. 42 NOTES TO AND FORMING PART OF THE FINANCIAL STATEMENTS CONTINUED31 DECEMBER 2017 10 CURRENT ASSETS – INVENTORIES New and demonstrator motor vehicles & trucks - bailment stock - at cost Less: Write-down to net realisable value Used vehicles & trucks - at cost Less: Write-down to net realisable value Parts and other consumables - at cost Less: Write-down to net realisable value Total inventories CONSOLIDATED 2017 $’000 501,770 (10,458) 491,312 2016 $’000 473,127 (8,900) 464,227 101,319 103,594 (5,109) 96,210 67,123 (1,993) 65,130 (5,664) 97,930 64,678 (1,828) 62,850 652,652 625,007 11 CURRENT ASSETS - CURRENT TAX RECEIVABLES Current tax receivables - 3,817 12 CURRENT ASSETS – OTHER CURRENT ASSETS (a) Prepayments and deposits Prepayments and deposits (b) Property sale receivables Property sale receivables Sale of property where proceeds are expected to be received within 12 months of balance date. 13 NON-CURRENT ASSETS – RECEIVABLES Other loans receivable 11,172 8,844 7,145 9,466 10,600 10,612 43 ANNUAL REPORT 2017 14 NON-CURRENT ASSETS – AVAILABLE-FOR-SALE INVESTMENTS CARRIED AT FAIR VALUE Available-for-sale financial assets Shares in a listed company - Automotive Holdings Group Limited (1) Shares in a listed company - Smartgroup Corporation Ltd (1) Shares in an unlisted company - Dealercell Holdings Pty Ltd (2) CONSOLIDATED 2017 $’000 2016 $’000 287,445 - 588 261,989 2,828 - 288,033 264,817 (1) The Directors have assessed the fair value of the investment as at 31 December 2017 based on the market price of the shares on the last trading day of the reporting period. This is a level 1 fair value measurement asset being derived from inputs based on quoted prices that are observable. (2) The Directors have assessed the fair value of the investment as at 31 December 2017 is materially consistent with its cost of acquisition. This is a level 3 fair value measurement asset being derived from inputs other than quoted prices that are unobservable from the asset either directly or indirectly. Valuation of available-for-sale investments Details of the Group’s available for sale investments and information about the fair value hierarchy as at 31 December 2017 are as follows: Unobservable inputs used in determination of fair values Class of Financial Assets and Liabilities Level 1 Available-for-sale investments - listed entities Level 3 Available-for-sale investments - unlisted entities Carrying Amount 31/12/17 $’000 287,445 588 Carrying Amount 31/12/16 $’000 264,817 Valuation Technique Key Input Quoted bid prices in an active market. Quoted bid prices in an active market. - Net asset assessment and available bid prices from equity participants. Pre tax operating margin taking into account managements’ experience and knowledge of market conditions and financial position. Market information based on available bid prices. There were no transfers between levels in the year. 15 NON-CURRENT ASSETS – INVESTMENTS IN ASSOCIATES Shares in associate - Norna Limited Shares in associate - DealerMotive Ltd Shares in associate - Carzapp Pty Ltd CONSOLIDATED 2017 $’000 1,620 10,380 - 2016 $’000 1,620 9,973 300 12,000 11,893 Investments in associates are accounted for in the consolidated financial statements using the equity method of accounting (refer Note 43). Reconciliation of the carrying amount of investment in associate is set out in Note 43(b). 44 NOTES TO AND FORMING PART OF THE FINANCIAL STATEMENTS CONTINUED31 DECEMBER 2017 16 NON-CURRENT ASSETS - PROPERTY, PLANT AND EQUIPMENT Freehold land and buildings - at fair value Directors’ valuation Land Buildings Total land and buildings Construction in progress - at cost Construction in progress Leasehold improvements At cost Accumulated depreciation Total leasehold improvements Plant and equipment At cost Accumulated depreciation Total plant and equipment CONSOLIDATED 2017 $’000 2016 $’000 199,489 106,860 306,349 188,108 106,693 294,801 223 3,706 28,756 (11,847) 16,909 85,795 (48,155) 37,640 32,469 (14,328) 18,141 78,032 (39,970) 38,062 Total property, plant and equipment 361,121 354,710 45 ANNUAL REPORT 2017 16 NON-CURRENT ASSETS - PROPERTY, PLANT AND EQUIPMENT (CONTINUED) Valuation of land and buildings The basis of the Directors’ valuation of land and buildings is the assessed fair value, being the amounts for which the assets could be exchanged between willing parties in an arm’s length transaction at balance date, based on current prices in an active market for similar properties in the same location and condition. The assessed fair value is supported by periodic, but at least triennial valuations, by external third party valuers. The 2017 valuations were made by the Directors based on their assessment of prevailing market conditions and supported by fair value information received from independent expert property valuers on certain properties and the Group’s own market activities and market knowledge. Details of the Group’s freehold land and buildings and information about the fair value hierarchy as at 31 December 2017 are as follows: Carrying Amount 31/12/17 $’000 Carrying Amount 31/12/16 $’000 75,313 49,747 Class of Financial Assets & Liabilities Level 3 Car – HBU Alternate Use Level 3 Car Dealership 199,591 205,157 Unobservable inputs used in determination of fair values Valuation Technique Key Input Input Average / Range 2017 Average / Range 2016 Direct comparison External valuations Price /sqm land Average $2,276/sqm Average $1,563/sqm Other Key Information Land size Range $1,260 - $4,004/sqm Range $1,262 - $3,584/sqm Range (weighted average) 2017 Range (weighted average) 2016 Average 5,516 sqm Average 7,952 sqm Range 2,015 - 18,070 sqm Range 779 to 24,160 sqm External valuations industry benchmarks Summation method, income capitali- sation and direct comparison Capitalisa- tion rate Average 7.3% Average 7.3% Net rent / sqm land Average $100/sqm Average $102/sqm Range 3.2% - 10.9% Range 3.1% - 9.9% Range $25 - $297/sqm Range $25 - $297/ sqm Net rent / sqm GBA Average $206/sqm Average $212/sqm Range $106 - $1,573/sqm Range $73 - $806/ sqm Level 3 Development - Car Dealership Level 3 Truck Dealership - 9,328 Direct comparison External valuations Price /sqm land Average $0/sqm Average $458/sqm Range $0/sqm Range $330 - $817 /sqm 18,098 18,319 Direct comparison External valuations Price /sqm land Price/ sqm GBA Average $324/sqm Average $328/sqm Land size Average 18,641 sqm Average 18,641 sqm Range $201 - $428 /sqm Range $203 - $434 /sqm Range 7,218 - 25,700 sqm Range 7,218 to 25,700 sqm Net rent/ sqm land Average $22/sqm Range $17 - $27/sqm Capitalisa- tion rate Average 6.7% Average $30/sqm Range $17 to $43/sqm Average 9.2% Range 5.6% - 8.7% Range 7.9% to 9.8% Level 3 Other Logistics 13,347 12,250 Income capitalisa- tion method supported by market comparison Total 306,349 294,801 External valuations Capitalisa- tion Rate Average 7.1% Average 7.8% Net rent / sqm GBA Average $109/sqm Average $109/sqm Range 6.4% - 9.5% Range 6.9% - 8.4% Range $79 - $179/sqm Range $79 - $179/sqm There were no transfers between levels in the year. 46 NOTES TO AND FORMING PART OF THE FINANCIAL STATEMENTS CONTINUED31 DECEMBER 2017 Explanation of asset classes: Car - Higher and best use (HBU) alternate use refers to properties currently operated as car dealerships which have a higher and best use HBU greater than that of a car dealership; Car Dealership refers to properties operating as car dealership with a consistent HBU; Development Car Dealership refers to properties which are in progress of, or being held for future development as a car dealership; Truck Dealership refers to properties being operated as a truck dealership with a HBU consistent with that use; Other Logistics are industrial properties used for parts warehousing and vehicle logistics. Carrying amounts that would have been recognised if land and buildings were stated at cost If freehold land was carried at historical cost, its current carrying value would be $132,688,000 (2016: $130,861,000). If freehold buildings (including construction in progress) were carried at historical cost, its current carrying value (after depreciation) would be $106,860,000 (2016: $106,693,000). Non-current assets pledged as security Refer to Note 24 for information on non-current assets pledged as security by the Group. Reconciliations Reconciliation of the carrying amounts of each class of property, plant and equipment at the beginning and end of the year is set out below: Consolidated 2017 Freehold land $’000 Opening net book amount 188,108 Construction in progress $’000 Leasehold improve- ments $’000 Motor vehicles under lease $’000 Freehold buildings $’000 106,693 1,748 2,190 - - 99,377 10,999 (46) - - 22,432 (16,641) 5,380 210 26,461 (22) 10,842 1,235 3,706 4,782 (8,265) - - - 18,141 2,421 (1,266) - - (2,387) 277 3,429 - - - - 14,509 5,121 374 - - (1,863) - (3,637) 188,108 106,693 3,706 18,141 Additions Disposals/transfers Revaluation gain credited to asset revaluation reserve Revaluation charged to profit and loss Depreciation/ amortisation charge Carrying amount at end of year Additions Disposals/transfers Revaluation gain credited to asset revaluation reserve Revaluation charged to profit and loss Depreciation/ amortisation charge Carrying amount at end of year - (3,771) 199,489 106,860 223 16,909 Consolidated 2016 Opening net book amount 149,592 Plant and equipment $’000 38,062 12,875 Total $’000 354,710 44,258 (2,898) (26,880) - - 5,380 210 (10,399) (16,557) 37,640 361,121 1,140 - (1,140) 26,403 22,583 (2,525) 291,298 68,593 (3,359) 10,842 1,235 - - - - - - - - - - - - - (8,399) (13,899) 38,062 354,710 47 ANNUAL REPORT 2017 17 NON-CURRENT ASSETS – INTANGIBLES Goodwill Trade marks/brand names Movement - Goodwill Balance at the beginning of the financial year Additional amounts recognised: - from business combinations during the year (Note 32(a)) Balance at the end of the financial year Movement - Trade marks/brand names Balance at the beginning of the financial year Amortisation of brand names Balance at the end of the financial year (a) Impairment tests for goodwill CONSOLIDATED 2017 $’000 302,833 6,581 309,414 2016 $’000 292,233 6,675 298,908 292,233 153,993 10,600 302,833 138,240 292,233 6,675 (94) 6,581 6,769 (94) 6,675 For the purpose of impairment testing, goodwill is allocated to each of the consolidated entity’s cash generating units (CGU), or groups of CGUs, that are expected to benefit from the synergies of the combinations. Each unit or groups of units to which goodwill is allocated represents the lowest level at which assets are monitored for internal management purposes. The Group has four CGUs in the Car Automotive segment grouped by state(s) (QLD & NT, NSW, VIC & TAS, SA) and one national CGU for the Truck segment. A segment-level summary of the goodwill allocation is presented as follows: Automotive dealership operations: Goodwill Trade marks/brand names Truck dealership operations: Goodwill Trade marks/brand names 294,683 5,531 300,214 8,150 1,050 9,200 284,283 5,625 289,908 7,950 1,050 9,000 309,414 298,908 The recoverable amount of a CGU or group of CGU’s to which goodwill and other indefinite life intangible assets is allocated is determined based on the greater of its value in use and its fair value less costs of disposal. Fair value is determined as being the amount obtainable from the sale of a CGU in an arms length transaction between knowledgeable and willing parties at balance date. If relevant, this fair value assessment less costs of disposal is conducted by the Directors based on their extensive knowledge of the automotive and truck retailing industry including the current market conditions prevailing in the industry. The value in use assessment is conducted using a discounted cash flow (DCF) methodology requiring the Directors to estimate the future cash flows expected to arise from the cash generating units and then applying a discount rate to calculate the present value. The DCF model adopted by Directors was based on the 2018 financial budgets approved by the Board, a 3% (2016: 3%) perpetual growth rate and a pre-tax discount rate of 11% (2016: 11%). This growth rate does not exceed the long term average growth rate for the industry. For the automotive dealership operations, the Directors believe that any reasonable change in the key assumptions on which the recoverable amount is based is not expected to cause the carrying amount to exceed the recoverable amount of the segment, however see Note 32(b) for considerations surrounding contingent consideration. For the truck dealership operations, the Directors believe that any reasonable change in the key assumptions on which the recoverable amount is based is not expected to cause the carrying amount to exceed the recoverable amount of the segment. 48 NOTES TO AND FORMING PART OF THE FINANCIAL STATEMENTS CONTINUED31 DECEMBER 2017 18 CURRENT LIABILITIES – TRADE AND OTHER PAYABLES Trade and other payables Trade payables (1) Other payables CONSOLIDATED 2017 $’000 2016 $’000 56,555 96,298 57,652 75,949 152,853 133,601 (1) The average credit period on purchases of goods is 30 days. No interest is charged on trade payables from the date of invoice. The Group has financial risk management policies in place to ensure that all payables are paid within the credit timeframe. 19 DERIVATIVE FINANCIAL INSTRUMENTS Current liabilities Interest rate swap contracts - cash flow hedges Total current derivative financial instrument liabilities Non-current liabilities Interest rate swap contracts - cash flow hedges Total non-current derivative financial instrument liabilities 20 20 118 118 138 210 210 206 206 416 The Group is party to derivative financial instruments in the normal course of business in order to hedge exposure to fluctuations in interest rates in accordance with the Group’s financial risk management policies (refer to Note 31). Bailment finance of the Group currently bears an average variable interest rate at 31 December 2017 of 4.18% (2016: 4.12%). As per Group policy bailment finance is not hedged. The interest rate swaps currently in place are providing a fixed rate of interest on the variable cash advances drawn down under the term facility. The swap contracts in place cover approximately 14% (2016: 34%) of the term facility outstanding at the year end. The contracts require settlement of net interest receivable or payable each 30 days. The gain or loss from remeasuring the hedging instruments at fair value is deferred in equity in the hedging reserve to the extent that the hedge is effective and re-classified into profit or loss when the hedged interest expense is recognised. The ineffective portion is recognised in profit or loss immediately. At balance date, a gain from remeasuring the hedging instruments at fair value of $138,000 (2016: $416,000) has been recognised in equity in the hedging reserve (Note 30(a)). No portion was ineffective. Valuation of derivative financial instruments Details of the Group’s derivative financial instruments and information about the fair value hierarchy as at 31 December 2017 are as follows: Class of Financial Assets and Liabilities Level 2 Cash flow hedges – Interest rate swaps Unobservable inputs used in determination of fair values Carrying Amount 31/12/17 $’000 Carrying Amount 31/12/16 $’000 Valuation Technique Key Input 138 416 Discounted cash flow Future cash flows are estimated based on forward interest rates (from observable yield curves at the end of the reporting period) and contract interest rates, discounted at a rate that reflects the credit risk of various counterparties. There were no transfers between levels in the year. 49 ANNUAL REPORT 2017 20 CURRENT LIABILITIES - BORROWINGS - BAILMENT AND OTHER CURRENT LOANS (a) Bailment finance and other current loans Bailment finance Capital loan (i) Bailment finance CONSOLIDATED 2017 $’000 2016 $’000 544,194 1,006 545,200 485,875 - 485,875 Bailment finance is provided on a vehicle by vehicle basis by various finance providers at an average interest rate of 4.18% p.a. applicable at 31 December 2017 (2016: 4.12%). Bailment finance is repayable within a short period after the vehicle is sold to a third party, generally within 48 hours. (ii) Interest rate risk exposures Details of the Group’s exposure to interest rate changes on interest bearing liabilities is set out in Note 31. (iii) Fair value disclosures Details of the Group’s fair value of interest bearing liabilities is set out in Note 31. (iv) Security Details of the security relating to each of the secured liabilities and further information on bank loans is set out in Note 24. 21 CURRENT LIABILITIES – CURRENT TAX LIABILITIES Income tax 13,221 - 22 CURRENT LIABILITIES – PROVISIONS Annual Leave Long Service Leave Warranties 24,318 21,723 5,319 51,360 24,705 21,536 4,870 51,111 (a) Movements in provisions Movements in each class of provision during the financial year, other than employee benefits, are set out below: Warranties Carrying amount at the start of the year Additional provisions recognised Payments charged against provisions Acquired through business combination 4,870 7,642 (7,193) - 5,319 4,183 6,879 (6,789) 597 4,870 (b) Warranty Provision An estimate is made based on past experience, and confirmation of future costs by the administrator of the warranty program, of the expected expenditure on new and used motor vehicles in terms of warranties on these vehicles. 50 NOTES TO AND FORMING PART OF THE FINANCIAL STATEMENTS CONTINUED31 DECEMBER 2017 23 CURRENT LIABILITIES – OTHER CURRENT LIABILITIES Other current liabilities CONSOLIDATED 2017 $’000 2016 $’000 250 - Other current liabilities represent the estimated fair value of the contingent consideration relating to the acquisition of Tony Ireland Group (see Note 32(b)). There has been no change in the fair value of the contingent consideration since the acquisition date. 24 NON-CURRENT LIABILITIES – BORROWINGS (SECURED) (a) Borrowings – others Term facility Capital loan SECURED LIABILITIES Total secured liabilities (current and non-current) are: Term facility (i) Capital loan (ii) Bailment finance (iii) 170,200 78,144 248,344 204,500 79,150 283,650 170,200 79,150 544,194 793,544 204,500 79,150 485,875 769,525 (i) The term facility is secured by a general security agreement which includes registered first mortgages held by a security trustee over specific freehold land and buildings and a general charge over assets. This excludes new and used inventory and related receivables, letter of set off given by and on account of the parent entity and its subsidiaries, and a Corporate Guarantee and Indemnity unlimited as to amount given by the parent entity and its subsidiaries. (ii) The capital loan is secured by registered first mortgages given by subsidiaries over specific freehold land and buildings, letter of set off given by and on account of the parent entity and its subsidiaries, and a Corporate Guarantee and Indemnity unlimited as to amount given by the parent entity and its subsidiaries. (iii) Vehicle bailment finance reflects a liability payable to the consolidated entity’s bailment financiers. This liability is represented by and secured over debtors included in current assets receivables in respect of recent vehicle deliveries to customers, and by new vehicles, demonstrator vehicles and some used vehicles all included in inventories (bailment stock). Refer to Note 10. Refer to Note 31 for maturities. ASSETS PLEDGED AS SECURITY The carrying amounts of assets pledged as security are: Non-current assets pledged as security Freehold land and buildings - first mortgage Other non-current assets Current assets pledged as security Inventories Other current assets Total assets pledged as security 304,456 674,645 297,083 651,999 544,194 143,416 485,875 177,304 1,666,711 1,612,261 51 ANNUAL REPORT 2017 24 NON-CURRENT LIABILITIES – BORROWINGS (SECURED) (CONTINUED) FINANCING ARRANGEMENTS The consolidated entity has access to the following lines of credit at balance date: Total facilities Term facility (i) Working capital facility (includes bank overdraft) (ii) Capital loan (iii) Bailment finance (iv) Bank guarantees Used at balance date Term facility Capital loan Bailment finance Bank guarantees Unused at balance date Term facility Working capital facility (includes bank overdraft) Bailment finance Bank guarantees CONSOLIDATED 2017 $’000 2016 $’000 290,000 260,000 25,000 79,150 694,294 27,018 25,000 79,150 671,534 22,000 1,115,462 1,057,684 170,200 79,150 544,194 15,039 808,583 119,800 25,000 150,100 11,979 306,879 204,500 79,150 485,875 19,879 789,404 55,500 25,000 185,659 2,121 268,280 (i) Term facility at balance date was provided on a non-amortisable (interest only) basis subject to compliance with specific covenants for a fixed term. (ii) Working capital facility at balance date was provided on a non-amortisable (interest only) basis subject to compliance with specific covenants and an annual review. (iii) Capital loan facility at balance date was provided on a non-amortisable (interest only) basis for a fixed term. (iv) Bailment facilities are used to finance the acquisition of new vehicle and some used vehicle trading stock. These facilities include a combination of fixed term and open ended arrangements and are subject to review periods ranging from quarterly to annual. These facilities generally include short term termination notice periods and are disclosed as current liabilities in the statement of financial position. 52 NOTES TO AND FORMING PART OF THE FINANCIAL STATEMENTS CONTINUED31 DECEMBER 2017 25 NON-CURRENT LIABILITIES – DEFERRED TAX LIABILITIES Deferred tax liabilities The balance comprises temporary differences attributable to: Amounts recognised in profit or loss Book versus tax carrying value of plant and equipment Inventory valuation Prepayments Provisions Doubtful debts Employee benefits Warranties Property receivable Sundry items Total amounts recognised in profit or loss Amounts recognised directly in equity Revaluation of available-for-sale investment Revaluation of property, plant and equipment Hedge liability Share options trust Total amounts recognised directly in equity The deferred tax expense included in income tax expense in respect of the above temporary differences resulted from the following movements: Opening balance at 1 January 2017 Deferred tax assets relating to business combinations Reinstatement of Gabba Property Deferred tax expense/(benefit) Current year adjustments related to prior year deferred tax Deferred tax recognised directly in equity Revaluation of available-for-sale investment Revaluation of property plant and equipment Movement in fair value of cash flow hedge Share options trust Arising on income and expenses reclassified from equity to profit & loss - relating to available-for-sale financial assets Closing balance at 31 December 2017 6(a) 30(a) 30(a) 30(a) 30(a) CONSOLIDATED 2017 $’000 2016 $’000 2,273 7,447 (866) 4,384 1,715 (788) (15,609) (2,254) - (4,324) (17,742) 8,603 18,898 (41) (7,445) 20,015 7,447 (109) 1,557 (352) (48) (6,876) 1,614 84 (420) (624) 2,273 (1,488) 4,225 661 (956) (13,310) (5,339) (66) (937) (17,210) 15,964 16,094 (125) (7,276) 24,657 7,718 (2,343) - 8,994 (3,318) (11,046) 3,253 121 4,655 (587) 7,447 53 ANNUAL REPORT 2017 26 NON-CURRENT LIABILITIES – PROVISIONS Employee benefits - long service leave Make good provision (a) CONSOLIDATED 2017 $’000 5,988 - 5,988 2016 $’000 7,256 1,970 9,226 (a) A make good clause under a long term property lease had been recognised in the financial statements. The lessor of the property had been provided with a bank guarantee of $1,970,000 in respect of the estimated make good cost and rental costs. The provision has been derecognised in 2017 upon the execution of a new lease agreement on the leased property. (b) Movement in the make good provision: Balance at start of year Payments against provision Derecognised during the year Carrying amount at end of year 1,970 - (1,970) - 2,122 (152) - 1,970 27 NON-CURRENT LIABILITIES – OTHER NON-CURRENT LIABILITIES Other (contingent consideration) 19,369 19,317 Other liabilities represent the estimated fair value of the contingent consideration relating to the acquisitions of Birrell Motors Group and Tony Ireland Group (see Note 32(b)). There has been no change in the fair value of the contingent consideration since the acquisition date except for unwinding of the discounting. 54 NOTES TO AND FORMING PART OF THE FINANCIAL STATEMENTS CONTINUED31 DECEMBER 2017 28 SEGMENT INFORMATION (b) Truck Retailing Within the Truck Retail segment, the consolidated entity offers a diversified range of products and services, including new trucks, used trucks, truck maintenance and repair services, truck parts, extended service contracts, truck protection products and other aftermarket products. They also facilitate financing for truck purchases through third-party sources. New trucks, truck parts, and maintenance services are predominantly supplied in accordance with franchise agreements with manufacturers. (c) Property Within the Property segment, the consolidated entity acquires commercial properties principally for use as facility premises for its motor dealership operations. The Property segment charges the Car Retailing segment commercial rentals for owned properties occupied by that segment. The Property segment reports property assets at fair value, based on annual assessments by the directors supported by periodic, but at least triennial valuations by external independent valuers. Revaluation increments arising from fair value adjustments are reported internally and assessed by the chief operating decision maker as profit adjustments in assessing the overall returns generated by this segment to the consolidated entity. (d) Investments This segment includes the investments in DealerMotive Ltd, Automotive Holdings Group Limited, Smartgroup Corporation Limited (divested in 2017), and Dealercell Holdings Pty Ltd. Geographic Information The Group operates in one principal geographic location, being Australia. Segments are identified on the basis of internal reports about components of the consolidated entity that are regularly reviewed by the chief operating decision maker, being the board of directors, in order to allocate resources to the segment and to assess its performance. The consolidated entity operates in four operating and reporting segments being (a) Car Retailing (b) Truck Retailing (c) Property and (d) Investments, these being identified on the basis of being the components of the consolidated entity that are regularly reviewed by the chief decision maker for the purpose of resource allocation and assessment of segment performance. Information regarding the consolidated entity’s reporting segments is presented below. The accounting policies of the reportable segments are the same as the Group’s accounting policies as described in Note 1 with the exception of all changes in fair value of property and investments being recognised as profit or loss adjustments for segment reporting purposes. This compares to the Group policy of crediting increments to a property plant and equipment and investment reserve in equity (refer Note 1(p)). Segment profit represents the profit earned by each segment without allocation of unrecouped corporate / head office costs and income tax. External bailment is allocated to the Car Retailing and Truck Retailing segments. Bills payable funding costs are allocated to the Car Retailing, Truck Retailing, Property, and Investment segments based on notional market based covenant levels. This is the measure reported to the chief operating decision maker for the purposes of resource allocation and assessment of segment performance. For the purpose of monitoring segment performance and allocating resources between segments, the chief operating decision maker monitors the tangible, intangible, and financial assets attributable to each segment. All assets are allocated to reportable segments. (a) Car Retailing Within the Car Retail segment, the consolidated entity offers a diversified range of automotive products and services, including new vehicles, used vehicles, vehicle maintenance and repair services, vehicle parts, extended service contracts, vehicle brokerage, vehicle protection products and other aftermarket products. They also facilitate financing for vehicle purchases through third-party sources. New vehicles, vehicle parts, and maintenance services are predominantly supplied in accordance with franchise agreements with manufacturers. This segment also includes a motor auction business. 55 ANNUAL REPORT 2017 28 SEGMENT INFORMATION (CONTINUED) (e) Segment results Segment reporting 2017 Car Retailing $’000 Truck Retailing $’000 Property $’000 Investments $’000 Eliminations $’000 Consolidated $’000 Sales to external customers 3,661,620 381,688 Inter-segment sales Total sales revenue TOTAL REVENUE - 3,661,620 3,661,620 - 381,688 381,688 970 26,554 27,524 27,524 18,639 (7,652) 10,987 - - - 5,590 15,376 - 14,501 - 4,058,779 - (26,554) - 14,501 14,501 (26,554) 4,058,779 (26,554) 4,058,779 14,500 (2,468) 12,032 407 - (22,920) - 2,080 - - - - - - 22,920 (5,380) - - 145,985 (24,598) 121,387 407 (62) - 210 17,724 (5,145) 10,332 (1,289) 9,043 - - - - - - 9,043 31,953 (8,401) 17,540 134,521 102,514 (13,189) 89,325 - (62) - - 268 (5,145) 84,386 SEGMENT RESULT Operating profit before interest External interest expense allocation OPERATING CONTRIBUTION Share of net profit of equity accounted investments Business acquisition costs Investment revaluation Property revaluation Profit on sale of property/businesses Business restructuring costs SEGMENT PROFIT Unallocated corporate expenses PROFIT BEFORE TAX Income tax expense NET PROFIT Depreciation and amortisation (11,303) (1,079) (4,269) Non-cash expenses (reversal of expenses) other than depreciation and amortisation Impairment of trade receivables Write down (back) of inventories to net realisable value 3,815 471 (337) 43 (1,330) 161 - - - - - - - ASSETS Segment assets LIABILITIES Segment liabilities NET ASSETS 1,101,925 102,273 322,747 297,826 682,749 419,176 87,305 14,968 190,039 132,708 78,903 218,923 Acquisitions of non-current assets 24,230 1,468 28,957 48,546 56 1,108 135,629 (37,456) 98,173 (16,651) 3,478 514 (1,169) 1,824,771 1,038,996 785,775 103,201 - - - - - - - - NOTES TO AND FORMING PART OF THE FINANCIAL STATEMENTS CONTINUED31 DECEMBER 2017 Segment reporting 2016 Car Retailing $’000 Truck Retailing $’000 Property $’000 Investments $’000 Eliminations $’000 Consolidated $’000 Sales to external customers 3,449,738 363,802 Inter-segment sales Total sales revenue TOTAL REVENUE - 3,449,738 3,449,738 - 363,802 363,802 SEGMENT RESULT Operating profit before interest External interest expense allocation OPERATING CONTRIBUTION Share of net profit of equity accounted investments Business acquisition costs GST refunds Investment revaluation Property revaluation Profit on sale of property/businesses 114,777 (13,005) 101,772 191 (1,758) 4,418 - - - 8,090 (1,826) 6,264 - - - - - - SEGMENT PROFIT 104,623 6,264 Unallocated corporate expenses PROFIT BEFORE TAX Income tax expense NET PROFIT 5,240 25,071 30,311 30,311 23,013 (7,994) 15,019 - - - - 12,077 1,136 28,232 14,442 - 3,833,222 - (25,071) - 14,442 14,442 (25,071) 3,833,222 (25,071) 3,833,222 14,392 (1,553) 12,839 - - - - - - - - - (38,774) - 1,955 38,774 (10,842) - 160,272 (24,378) 135,894 191 (1,758) 4,418 - 1,235 3,091 (23,980) 27,932 143,071 Depreciation and amortisation Non-cash expenses (reversal of expenses) other than depreciation and amortisation Impairment of trade receivables Write down (back) of inventories to net realisable value 9,192 3,293 448 1,676 980 3,821 (358) (44) (194) (152) - - - - - - ASSETS Segment assets LIABILITIES Segment liabilities NET ASSETS 1,067,473 91,488 320,813 274,660 661,164 406,309 69,100 22,388 197,173 123,640 63,205 211,455 Acquisitions of non-current assets 155,135 104 52,852 35,039 (1,666) 141,405 (35,879) 105,526 13,993 2,783 404 1,482 1,754,434 990,642 763,792 243,130 - - - - - - - - 57 ANNUAL REPORT 2017 29 CONTRIBUTED EQUITY (a) Paid up capital Ordinary shares - fully paid CONSOLIDATED 2017 $’000 2016 $’000 369,028 364,449 Ordinary shares confer on their holders the right to participate in dividends declared by the Board and to vote at general meetings of the Company. (b) Movements in ordinary share capital Date 01-Jan-2017 16-Jan-2017 24-Feb-2017 27-Mar-2017 04-Jul-2017 Details Opening balance Issue of options to staff under share incentive schemes Issue of options to staff under share incentive schemes Issue of options to staff under share incentive schemes Issue of options to staff under share incentive schemes 31-Dec-2017 Closing balance 01-Jan-2016 09-Feb-2016 29-Feb-2016 17-Mar-2016 31-Mar-2016 01-Jul-2016 19-Jul-2016 17-Aug-2016 05-Oct-2016 07-Nov-2016 31-Dec-2016 Opening balance Issue of options to staff under share incentive schemes Issue of options to staff under share incentive schemes Issue of options to staff under share incentive schemes Issue of shares as partial consideration for acquisition of Birrell Motors Group Issue of shares for Crampton acquisition Issue of options to staff under share incentive schemes Issue of options to staff under share incentive schemes Issue of options to staff under share incentive schemes Issue of options to staff under share incentive schemes Closing balance Number of shares 190,492,806 50,460 175,843 116,960 172,409 191,008,478 184,073,803 220,430 164,031 615,175 2,200,000 937,742 1,164,695 50,000 1,008,375 58,555 190,492,806 Issue price $9.06 $9.28 $9.27 $8.16 $11.30 $10.90 $10.48 $9.75 $11.73 $11.80 $12.25 $10.20 $9.87 $’000 364,449 457 1,632 1,084 1,406 369,028 296,060 2,491 1,788 6,447 21,450 11,000 13,742 612 10,281 578 364,449 58 NOTES TO AND FORMING PART OF THE FINANCIAL STATEMENTS CONTINUED31 DECEMBER 2017 30 RESERVES AND RETAINED EARNINGS (a) Reserves: Property, plant and equipment revaluation reserve Hedging reserve - cash flow hedge Share-based payments reserve Investment revaluation reserve Movements: Property, plant and equipment revaluation reserve: Balance at beginning of the financial year Revaluation surplus/(deficit) during the year - gross Transfer to retained earnings relating to properties sold Deferred tax Balance at the end of the financial year Hedging reserve - cash flow hedge: Balance at beginning of the financial year Movement during the year Deferred tax Balance at the end of the financial year Share-based payments reserve: Balance at beginning of the financial year Deferred tax Payments received from employees for exercised options Prior period tax adjustment Employee share schemes - value of employee services Transfer to share capital (shares issued) Current tax on share plans Balance at the end of the financial year Investment revaluation reserve: Balance at beginning of the financial year Gain/(loss) on revaluation of available-for-sale investment Deferred tax Cumulative gain (net of tax) reclassed to profit or loss on disposal of available for sale financial assets Balance at the end of the financial year Notes 16 30(b) 25 25 25 25 CONSOLIDATED 2017 $’000 52,728 (97) 2016 $’000 52,781 (291) (34,368) (34,486) 19,868 38,131 37,394 55,398 52,781 5,380 (3,819) (1,614) 52,728 (291) 278 (84) (97) (34,486) 420 1,636 536 2,105 45,192 10,842 - (3,253) 52,781 (575) 405 (121) (291) (3,778) (4,655) 6,948 - 2,966 (4,579) (35,939) - (28) (34,368) (34,486) 37,394 (22,920) 6,876 (1,482) 19,868 64,536 (36,819) 11,046 (1,369) 37,394 59 ANNUAL REPORT 2017 30 RESERVES AND RETAINED EARNINGS (CONTINUED) (b) Retained earnings Retained profits at the beginning of the financial year Net profit for the year Less: NCI Share Transfer from asset revaluation reserve re properties sold Dividends provided for or paid Retained profits at the end of the financial year (c) Nature and purpose of other reserves (i) Property, plant and equipment revaluation reserve CONSOLIDATED 2017 $’000 2016 $’000 Notes 335,779 98,173 (2,146) 3,819 (67,770) 367,855 293,435 105,526 (1,542) - (61,640) 335,779 7 The property, plant and equipment revaluation reserve is used to record increments and decrements on the revaluation of non-current assets as described in Note 1(p). (ii) Hedging reserve The hedging reserve contains the effective portion of interest rate hedge arrangements incurred as at the reporting date. (iii) Share-based payments reserve The share-based payment reserve is used to recognise the fair value of performance rights expected to vest and the fair value of equity expected to be issued under various share incentive schemes referred to in Notes 37 and 38. (iv) Investment revaluation reserve The investments revaluation reserve represents the cumulative gains and losses arising on the revaluation of available-for-sale financial assets that have been recognised in other comprehensive income, net of amounts reclassified to profit or loss when those assets have been disposed of or are determined to be impaired. 31 FINANCIAL INSTRUMENTS Overview The consolidated entity has exposure to the following key risks from its use of financial instruments: > Credit risk > Liquidity risk > Market risk (interest rate risk) This note presents information about the consolidated entity’s exposure to each of the above risks, the consolidated entity’s objectives, policies and processes for measuring and managing risk, and the consolidated entity’s management of capital. Further quantitative disclosures are included throughout these consolidated financial statements. The Directors have overall responsibility for the establishment and oversight of the consolidated entity’s risk management framework. The Directors have established an Audit, Risk and Remuneration Committee which is responsible for monitoring, assessing and reporting on the consolidated entity’s risk management system. The committee will provide regular reports to the Board of Directors on its activities. The consolidated entity’s risk management policies are established to identify and analyse the risks faced by the consolidated entity, to set appropriate risk limits and controls, and to monitor risks and adherence to limits. Risk management policies and systems are reviewed regularly to reflect changes in market conditions and the consolidated entity’s activities. The Audit, Risk and Remuneration Committee oversees how management monitors compliance with the risk management policies and procedures and reviews the adequacy of the risk management framework in relation to the risks. The Committee is assisted in its oversight by Internal Audit. Internal Audit undertakes both regular and ad hoc reviews of risk management controls and procedures, the results of which are reported to the Committee. 60 NOTES TO AND FORMING PART OF THE FINANCIAL STATEMENTS CONTINUED31 DECEMBER 2017 The Group’s principal financial instruments comprise bank loans, bailment finance, cash, short-term deposits and interest rate swap contracts. The main purpose of these financial instruments is to raise finance for and fund the Group’s operations and to hedge the Group’s exposures to interest rate volatility. The Group has various other financial instruments such as trade debtors and trade creditors which arise directly from its operations. It is, and has been throughout the period under review, the Group’s policy that no speculative trading in financial instruments shall be undertaken. The main risk arising from the Group’s financial instruments are interest rate risk, credit risk and liquidity risk. The Board reviews and agrees policies for managing each of these risks and they are summarised below. CREDIT RISK Credit risk refers to the risk that a counterparty 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 and obtaining sufficient collateral where appropriate, as a means of mitigating the risk of financial loss from defaults. Further, it is the Group’s policy that all customers who wish to trade on credit terms are subject to credit verification procedures. Trade receivables consist of a large number of customers, spread across geographical areas. Ongoing credit evaluation is performed on the financial condition of debtors and other receivable balances are monitored on an ongoing basis, with the result that the Group’s exposure to bad debts is not significant. The consolidated entity establishes an allowance for doubtful debts that represents its estimate of incurred losses in respect of trade and other receivables and investments. With respect to credit risk arising from financial assets of the Group comprised of cash, cash equivalents and receivables, the Group’s maximum exposure to credit risk, excluding the value of any collateral or other security, at balance date is in the carrying amount as disclosed in the statement of financial position and notes to the financial statements. The Group’s credit risk on liquid funds is limited as the counter parties are major Australian banks with favourable credit ratings assigned by international credit rating agencies. LIQUIDITY RISK Liquidity risk is the risk that the consolidated entity will not be able to meet its financial obligations as they fall due. The consolidated entity’s approach to managing liquidity is to ensure, as far as possible, that it will always have sufficient liquidity to meet its liabilities when due, under both normal and stressed conditions. The Group’s overall objective is to maintain a balance between continuity of funding and flexibility through the use of bank overdrafts and bank loans. The Group also 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. Information on available facilities can be found in Note 24. MARKET RISK Market risk is the risk that changes in market prices, such as interest rates, will affect the consolidated entity’s income or the value of its holdings of financial instruments. The objective of market risk management is to manage and monitor market risk exposures within acceptable parameters, whilst optimising the return on risk. (i) Interest rate risk The Group is exposed to interest rate risk as a consequence of its financing facilities as set out in Notes 20 & 24. Funds are borrowed by the Group at both fixed and floating interest rates. The Group’s policy is to manage its interest cost using a mix of fixed and variable rate debt. The Group’s policy is to keep between 0% and 50% of its borrowings at fixed rates of interest. As at 31 December 2017, approximately 29% (2016: 42%) of the Group’s borrowings were at a fixed rate of interest. The Group hedges part of the interest rate risk (see Note 19) by swapping floating for fixed interest rates. The consolidated entity classifies interest rate swaps as cash flow hedges. The net fair value of the swaps at 31 December 2017 was $138,000 liability (2016: $416,000 liability), with the movement being recognised in equity for the consolidated entity. (ii) Interest rate sensitivity The sensitivity analyses below have been determined based on the exposure to interest rates for both derivative and non-derivative instruments at reporting date and the stipulated change taking place at the beginning of the financial year and held constant throughout the reporting period. A 50 basis point increase or decrease is used when reporting interest rate risk internally to key management and represents management’s assessment of the possible change in interest rates. At reporting date, if interest rates had been 50 basis points higher or lower and all other variable were held constant, the Group’s net profit after tax would increase/decrease by $3,923,000 (2016: $3,699,000) per annum. This is mainly due to the Group’s exposures to interest rates on its variable rate borrowings. 61 ANNUAL REPORT 2017 31 FINANCIAL INSTRUMENTS (CONTINUED) MARKET RISK (continued) (iii) Interest rate swap contracts Under interest rate swap contracts, the Group agrees to exchange the difference between fixed and floating rate interest amounts calculated on agreed notional principal amounts. Such contracts enable the Group to mitigate the cash flow exposures on the issued variable rate debt held. The fair value of interest rate swaps at the reporting date is determined by discounting future cash flows using the curves at reporting date and the credit risk inherent in the contract, and are disclosed below. The average interest rate is based on the outstanding balances at the start of the financial period. The following tables detail the notional principal amounts and remaining terms of interest rate swap contracts outstanding as at reporting date: Outstanding floating for fixed contracts Less than 1 year Between 1 - 2 years Between 2 - 3 years Average contracted fixed interest rate Notional principal amount Fair value 2017 % 2.34% 2.38% - 2.36% 2016 % 2.59% 2.34% 2.38% 2.44% 2017 $’000 8,000 15,000 - 23,000 2016 $’000 46,200 8,000 15,000 69,200 2017 $’000 2016 $’000 (20) (118) - (138) (210) (54) (152) (416) The interest rate swaps settle on a monthly basis. The floating rate on the interest rate swaps is the Australian BBSW. The Group will settle the difference between the fixed and floating interest rate on a net basis. All interest rate swap contracts exchanging floating rate interest amounts for fixed rate interest amounts are designated as cash flow hedges in order to reduce the Group’s cash flow exposure resulting from variable interest rates on borrowings. The interest rate swaps and the interest payments on the loan occur simultaneously and the amount deferred in equity is recognised in profit or loss over the loan period. CAPITAL MANAGEMENT The Board’s policy is to maintain a strong capital base so as to maintain investor, creditor and market confidence and to sustain future development of the business. The Board seeks to maintain a balance between the higher returns that might be possible with higher levels of borrowings and the advantages and security afforded by a sound capital position. There were no changes in the consolidated entity’s approach to capital management during the period. CREDIT RISK (i) Exposure to Credit Risk The carrying amount of financial assets (as per Notes 9, 12(b) and 13) represents the maximum credit exposure. The maximum exposure to credit risk as the reporting date was: CONSOLIDATED 2017 $’000 2016 $’000 182,174 172,011 (2,622) (3,187) 179,552 168,824 Trade and other receivables Less: Provision for doubtful receivables 62 NOTES TO AND FORMING PART OF THE FINANCIAL STATEMENTS CONTINUED31 DECEMBER 2017 (ii) Impairment Losses The ageing of trade receivables at reporting date is detailed in Note 9. (iii) Fair values & Exposures to Credit & Liquidity Risk Detailed in the following table, the Directors consider that the carrying amounts of financial assets and financial liabilities recorded in the financial statements approximate their fair value. Financial assets Trade and other receivables net of doubtful debts Cash and cash equivalents Financial liabilities Bills payable and fully drawn advances Capital loan Vehicle bailment Trade and other payables Derivative financial instruments CONSOLIDATED 2017 $’000 2016 $’000 179,552 10,827 190,379 170,200 78,144 544,194 152,853 138 168,824 17,615 186,439 204,500 79,150 485,875 133,601 416 945,529 903,542 The fair value of financial assets and financial liabilities are determined as follows: > > The fair value of financial assets and financial liabilities with standard terms and conditions and traded on active liquid markets are determined with reference to quoted market prices (includes listed redeemable notes, bills of exchange, debentures and perpetual notes). The fair values of derivative instruments are calculated using quoted prices. Where such prices are not available, discounted cash flow analysis is performed using the applicable yield curve for the duration of the instruments for non-optional derivatives and option pricing models for optional derivatives. Interest rate swaps are measured at the present value of future cash flows estimated and discounted based on the applicable yield curves derived from quoted interest rates. 63 ANNUAL REPORT 2017 31 FINANCIAL INSTRUMENTS (CONTINUED) CREDIT RISK (continued) (iii) Fair values & Exposures to Credit & Liquidity Risk (continued) Maturity profile The below table provides a maturity profile for the Group’s financial instruments that are exposed to interest rate risk at balance date. The amounts disclosed in the table are gross contractual undiscounted cash flows (principal and interest) required to settle the respective liabilities. The interest rate is based on the rate applicable as at the end of the financial period. Contractual maturities of financial liabilities Less than 1 year $’000 1 - 2 years $’000 2 - 3 years $’000 3 - 4 years $’000 4 - 5 years $’000 5+ years $’000 Total $’000 At 31 December 2017 INTEREST BEARING Floating rate Financial assets Cash and cash equivalents 10,827 Average interest rate 2.46% Financial liabilities Vehicle bailment (current) 566,364 - - - - - - - - - - - - Fully drawn advances Fully drawn advances (1) Capital loan (Non-current) 7,425 445 3,037 6,488 181 4,335 577,271 11,004 6,733 146,805 31,574 - 4,335 11,068 - 4,335 151,140 - 57,373 88,947 - - - - - 28,907 28,907 Average interest rate 4.00% 3.55% 3.43% 3.45% 3.76% 4.65% Fixed rate Financial liabilities Capital loan (Non-current) 1,305 Average interest rate 5.20% NON-INTEREST BEARING Financial assets Property sale receivables Trade debtors 7,145 172,408 179,553 Financial liabilities Trade and other payables 152,872 - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - (1) The amount included in fully drawn advances relate to variable rates that are hedged with interest rate swaps to fixed rates. 10,827 566,364 199,025 626 102,322 868,337 1,305 7,145 172,408 179,553 152,872 64 NOTES TO AND FORMING PART OF THE FINANCIAL STATEMENTS CONTINUED31 DECEMBER 2017 Maturity profile (continued) At 31 December 2016 INTEREST BEARING Floating rate Financial assets Less than 1 year $’000 1 - 2 years $’000 2 - 3 years $’000 3 - 4 years $’000 4 - 5 years $’000 5+ years $’000 Total $’000 Cash and cash equivalents 17,615 Average interest rate 2.39% Financial liabilities Vehicle bailment (current) 506,322 - - - Fully drawn advances Fully drawn advances (1) Capital loan (Non-current) 8,596 1,145 1,036 112,197 52,145 1,036 517,099 165,378 - - - 3,677 181 1,036 4,894 - - - 3,677 - 1,036 4,713 - - - - - - 3,677 - 1,036 4,713 99,951 - 41,138 141,089 Average interest rate 4.10% 3.35% 3.79% 3.51% 3.51% 3.51% Fixed rate Financial liabilities Capital loan (Non-current) 2,669 51,305 Average interest rate 5.20% 5.20% NON-INTEREST BEARING Financial assets Property sale receivables Trade debtors 9,466 159,358 168,824 - - - Financial liabilities Trade and other payables 158,305 19,317 - - - - - - - - - - - - - - - - - - - - - - - - 17,615 506,322 231,775 53,471 46,318 837,886 53,974 9,466 159,358 168,824 177,622 (1) The amount included in fully drawn advances relate to variable rates that are hedged with interest rate swaps to fixed rates. Estimation of Fair Value The following summarises the major methods and assumptions used in estimating the fair value of financial instruments: Loans and Borrowings Fair value is calculated based on discounted expected future principal and interest cash flows. Trade and Other Receivables/Payables For receivables/payables with a remaining life of less than one year, the notional amount is deemed to reflect the fair value. All other receivables/payables are discounted to determine the fair value. Interest Rate Swaps The fair value of interest rate swaps is calculated based on the present value of the estimated future cash flows of these instruments. 65 ANNUAL REPORT 2017 32 INVESTMENTS IN SUBSIDIARIES Name of Entity Eagers Retail Pty Ltd Eagers MD Pty Ltd Eagers Finance Pty Ltd Nundah Motors Pty Ltd Eagers Nominees Pty Ltd Austral Pty Ltd E G Eager & Son Pty Ltd A.P. Group Ltd A.P. Ford Pty Ltd A.P. Motors Pty Ltd A.P. Motors (No.1) Pty Ltd A.P. Motors (No.2) Pty Ltd A.P. Motors (No.3) Pty Ltd Associated Finance Pty Limited Leaseline & General Finance Pty Ltd City Automotive Group Pty Ltd PPT Investments Pty Ltd PPT Holdings No 1 Pty Ltd PPT Holdings No 2 Pty Ltd PPT Holdings No 3 Pty Ltd Bill Buckle Holdings Pty Ltd Bill Buckle Autos Pty Ltd Bill Buckle Leasing Pty Ltd Adtrans Group Limited Adtrans Corporate Pty Ltd Adtrans Automotive Group Pty Ltd Stillwell Trucks Pty Ltd Adtrans Trucks Pty Ltd Graham Cornes Motors Pty Ltd Whitehorse Trucks Pty Ltd Adtrans Used Pty Ltd Adtrans Hino Pty Ltd Adtrans Australia Pty Ltd Melbourne Truck and Bus Centre Pty Ltd Adtrans Truck Centre Pty Ltd Adtrans Trucks Adelaide Pty Ltd Precision Automotive Technology Pty Ltd IB Motors Pty Ltd IB MD Pty Ltd AP Townsville Pty Ltd South West Queensland Motors Pty Ltd BASW Pty Ltd Western Equipment Rentals Pty Ltd Boonarga Welding Pty Ltd Black Auto CQ Pty Ltd CH Auto Pty Ltd Auto Ad Pty Ltd Motors TAS Pty Ltd WS Motors Pty Ltd MB VIC Pty Ltd Carzoos Pty Ltd Crampton Automotive Pty Ltd Motors Group (Glen Waverley) Pty Ltd 66 EQUITY HOLDING 2017 % 100 80 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 90 100 100 100 100 100 100 100 100 100 80 100 80 80 80 80 100 80 100 100 100 100 100 100 80 2016 % 100 80 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 90 100 100 100 100 100 100 100 100 100 80 100 80 80 80 80 100 100 100 100 100 100 100 100 80 * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * NOTES TO AND FORMING PART OF THE FINANCIAL STATEMENTS CONTINUED31 DECEMBER 2017 32 INVESTMENTS IN SUBSIDIARIES (CONTINUED) Name of Entity Port City Autos Pty Ltd Adverpro Pty Ltd AP Queensland (No. 1) Pty Ltd Eurocars (SA) Pty Ltd Finmo Pty Ltd EQUITY HOLDING 2017 % 100 100 100 100 100 2016 % 100 100 100 - - * * * * * All subsidiaries are either directly controlled by A.P. Eagers Limited, or are wholly owned within the Group, have ordinary class of shares and are incorporated in Australia. Information relating to A.P. Eagers Limited (‘the parent entity’) Financial position Assets Current assets Non-current assets Liabilities Current liabilities Non-current liabilities Equity Issued capital Retained earnings Reserves Asset revaluation reserve Investment revaluation reserve Share based payments reserve Financial performance Profit for the year Other comprehensive income 2017 $’000 2016 $’000 - 519,535 519,535 11,366 25,975 37,341 - 510,553 510,553 5,836 16,005 21,841 369,028 122,835 364,449 115,459 1,683 19,868 (31,220) 482,194 1,683 37,394 (30,274) 488,711 74,230 (17,526) 60,221 (38,774) All subsidiaries were parties to a deed of cross guarantee with A.P. Eagers Limited pursuant to ASIC Corporations (Wholly-owned Companies) Instrument 2016/785 which has been lodged with and approved by Australian Securities and Investments Commission as at 31 December 2017. Under the deed of cross guarantee each of these companies guarantee the debts of the other named companies. The aggregate assets and liabilities of these companies at 31 December 2017 and their aggregate net profit after tax for the year ended 31 December 2017 match the reported balances within the Statement of Financial Position and the Statement of Profit or Loss respectively. As a party to the deed of cross guarantee, each of the wholly-owned subsidiaries (marked *) is relieved from the requirement to prepare and lodge an audited financial report. Also refer Notes 33(a) and 33(b) in respect of guarantees entered into by the parent entity in relation to debts of its subsidiaries. 67 ANNUAL REPORT 2017 32 INVESTMENTS IN SUBSIDIARIES (CONTINUED) (a) Acquisition of businesses The Group acquired the following business during the 2017 year as detailed below: Year 2017 2017 2017 Name of business Fuso Hallam Crash Supplies Porsche Centre Adelaide Date of acquisition Principal activity 14-Jul-17 01-Sep-17 28-Sep-17 Motor Dealership Parts Supplier Motor Dealership Proportion acquired 100% 100% 100% During 2017 the acquired businesses contributed revenue of $14,974,039 and profit before tax of $230,529 to the consolidated result. If the acquisitions had occurred on 1 January 2017, the consolidated revenue and the consolidated profit before tax of the acquired businesses would have been approximately $51,550,000 and $1,658,000 respectively. Allocation of purchase consideration The purchase price of the businesses acquired has been allocated as follows: Cash consideration Total purchase consideration Consolidated fair value at acquisition date Net assets acquired Cash Receivables, prepayments Inventory Property, plant and equipment Deferred tax assets Creditors, borrowings and provisions Net assets acquired Acquisition cost Goodwill on acquisition (i) Fuso Hallam $’000 325 325 Crash Supplies $’000 1,165 1,165 Porsche Centre Adelaide $’000 11,376 11,376 2017 Total Consolidated $’000 12,866 12,866 2017 $’000 1,496 536 4,868 512 109 (5,255) 2,266 12,866 10,600 (i) Goodwill arose in the business combinations because as at the date of acquisition the consideration paid for the combination included amounts in relation to the benefit of expected synergies and future revenue and profit growth from the businesses acquired. These benefits were not recognised separately from goodwill as the future economic benefits arising from them could not be reliably measured in time for inclusion in these financial statements. Therefore, the amount allocated to goodwill on acquisition has been provisionally determined at the end of the reporting period. Cash consideration on acquisition Cash acquired on acquisition Net cash flow on acquisition of business 12,866 (1,496) 11,370 68 NOTES TO AND FORMING PART OF THE FINANCIAL STATEMENTS CONTINUED31 DECEMBER 2017 (b) Acquisition of businesses in prior year The Group acquired the following business during the 2016 year as detailed below: Year 2016 2016 2016 2016 Name of business Birrell Motors Group Jeep/Kia Ipswich Crampton Automotive Group Tony Ireland Motors Date of acquisition Principal activity 1-Apr-16 15-Apr-16 1-July-16 1-Oct-16 Motor Dealership Motor Dealership Motor Dealership Motor Dealership Proportion acquired 100% (1) 100% 100% 100% (1) As part of the Birrell Motors Group acquisition 80% shares of Motors Group (Glen Waverley) Pty Ltd were acquired. The remaining 20% interest is accounted for as a non controlling interest. During 2016 the acquired businesses contributed revenue of $418,718,346 and profit before tax of $10,054,210 to the consolidated result. If the acquisition had occurred on 1 January 2016, the consolidated revenue and the consolidated profit before tax of the Group would have been $4,069 million and $146 million respectively. Allocation of purchase consideration The purchase price of the businesses acquired has been allocated as follows: Cash consideration Issue of ordinary shares Contingent consideration(i) Total purchase consideration Consolidated fair value at acquisition date Net assets acquired Cash Receivables, prepayments Other investments Inventory Property, plant and equipment Deferred tax assets Creditors, borrowings and provisions Deferred tax liabilities Net assets acquired Acquisition cost Non-Controlling Interest Goodwill on acquisition(ii) Birrell Motors Group $’000 85,976 21,450 18,590 Jeep/Kia Ipswich $’000 1,222 - - Crampton Motor Group $’000 24,896 11,000 - Tony Ireland Group $’000 2016 Total Consolidated $’000 9,603 121,697 - 500 32,450 19,090 126,016 1,222 35,896 10,103 173,237 2016 $’000 3,364 6,276 250 62,547 12,550 2,375 (52,700) (32) 34,630 173,237 (367) 138,240 (i) The purchase consideration for the acquisition of Birrell Motors Group included a contingent consideration amount payable up to a maximum value of $19,800,000 (discounted value of $18,590,000 at date of acquisition), contingent on Birrell Motors Group achieving future earnings performance targets for 2018 and 2019. The directors have judged that the full contingent consideration will be payable in 2019 based on the track record of the acquired businesses, upside in the business and outlook for luxury vehicles in particular. This necessarily requires an element of estimation. Should the businesses not achieve the expected future milestones, the associated goodwill balance will be reviewed for impairment within the VIC & TAS CGU. The purchase consideration for the acquisition of the Tony Ireland Group includes an earn out payable up to a maximum value of $500,000. The earn out is contingent on the Tony Ireland Group achieving future earnings performance targets. (ii) Goodwill arose in the business combinations because as at the date of acquisition the consideration paid for the combination included amounts in relation to the benefit of expected synergies and future revenue and profit growth from the businesses acquired. These benefits were not recognised separately from goodwill as the future economic benefits arising from them could not be reliably measured in time for inclusion in these financial statements. 69 ANNUAL REPORT 2017 32 INVESTMENTS IN SUBSIDIARIES (CONTINUED) (b) Acquisition of businesses in prior year (continued) Cash consideration on acquisition Cash acquired on acquisition Net cash flow on acquisition of businesses 2016 $’000 121,697 (3,364) 118,333 (c) Disposal of businesses The Group sold the following business during the 2017 year as detailed below: Year 2017 Name of business Sydney Truck Centre Date of sale 08-Jun-17 Principal activity Proportion disposed Motor Dealership 100% Net assets disposed of Receivables, prepayments Inventory Creditors, borrowings and provisions Net assets disposed Total consideration received (100% Cash) Gain on sale (d) Disposal of businesses in prior year There were no businesses sold by the Group during 2016. (e) Details of non-wholly owned subsidiaries 2017 $’000 324 3,106 (1,127) 2,303 2,303 - The table below shows details of non-wholly owned subsidiaries of the Group. The Group has reviewed its subsidiaries that have non-controlling interests and note that they are not material to the reporting entity. Profit allocated to non-controlling interests Accumulated non-controlling interests 2017 $’000 2016 $’000 2017 $’000 2016 $’000 Individually immaterial subsidiaries with non-controlling interest 2,146 1,542 10,761 8,166 Movement – Non-Controlling Interest Balance at the beginning of the financial year Profit for the year Payment / (repayment) for shares Payment of dividend Balance at the end of the financial year 70 CONSOLIDATED 2017 $’000 8,166 2,146 1,904 (1,455) 10,761 2016 $’000 8,139 1,542 (368) (1,147) 8,166 NOTES TO AND FORMING PART OF THE FINANCIAL STATEMENTS CONTINUED31 DECEMBER 2017 33 CONTINGENT LIABILITIES (a) Parent entity Unsecured guarantees, indemnities and undertakings have been given by the parent entity in the normal course of business in respect of financial and trade arrangements entered into by its subsidiaries. It is not anticipated that the parent entity will become liable for any amount in respect thereof. At 31 December 2017 no subsidiary was in default in respect of any arrangement guaranteed by the parent entity and all amounts owed have been brought to account as liabilities in the financial statements. (b) Deed of cross guarantee A.P. Eagers Limited and all of its subsidiaries were parties to a deed of cross guarantee lodged with the Australian Securities and Investments Commission as at 31 December 2017. Under the deed of cross guarantee each company within the closed Group guarantees the debts of the other companies. The maximum exposure of the parent entity in relation to the cross guarantees is $1,012,855,000 (2016: $968,800,000). (c) Buy back agreements As at 31 December 2017, entities within the Group had entered into sale and buy back agreements for new vehicles. The financial exposure to the Group is immaterial. 34 COMMITMENTS FOR EXPENDITURE CONSOLIDATED 2017 $’000 2016 $’000 (a) Capital commitments Capital expenditure for land, buildings, plant and equipment contracted for at the end of the reporting period but not recognised as liabilities is as follows: Within one year 218 2,949 (b) Operating lease commitments Commitments for minimum lease payments in relation to non-cancellable operating leases for premises are payable as follows: Within one year Later than 1 year but not later than 5 years Later than 5 years 39,640 107,255 77,520 224,415 38,758 103,067 83,450 225,275 The consolidated entity leases property under non-cancellable operating leases with expiry dates between 31 January 2018 and 1 July 2035. Leases generally provide for a right of renewal at which time the lease is renegotiated. Lease rental payments comprise a base amount plus an incremental contingent rental based on movements in the consumer price index or a fixed percentage increase. 35 REMUNERATION OF AUDITOR Amounts received or due and receivable by Deloitte Touche Tohmatsu (“Deloitte”) for: - Audit or review of the financial report of the parent entity and any other entity in the consolidated entity Amounts received or due and receivable by related entities of Deloitte for: - Other services in relation to the parent entity and any other entity in the consolidated entity 745 762 274 1,019 438 1,200 71 ANNUAL REPORT 2017 36 SUBSEQUENT EVENTS Commencing 16 January 2018, the Group acquired a further 3.7 million shares in Automotive Holdings Group Limited (‘AHG’) at a total cost of $13.4 million through a series of on-market share purchases. As a result, the Group’s shareholding in AHG increased from 23.81% as at 31 December 2017 to 24.94%. 37 KEY MANAGEMENT PERSONNEL The remuneration report included in the Directors’ Report sets out the remuneration policies of the consolidated entity and the relationship between these policies and the consolidated entity’s performance. The following have been identified as key management personnel (KMP) with authority and responsibility for planning, directing and controlling the activities of the Group, directly or indirectly during the financial year: The specified Executives of A.P. Eagers Limited during the financial year were: (a) Details of key management personnel (i) Directors T B Crommelin Chairman (non-executive) M A Ward S A Moore D A Cowper P W Henley N G Politis D T Ryan M J Birrell D G Stark K T Thornton (ii) Executives Managing Director and Chief Executive Officer Director and Chief Financial Officer - appointed 29th March 2017 Director (non-executive) Director (non-executive) - resigned 22nd February 2017 Director (non-executive) Director (non-executive) Director (non-executive) General Counsel & Company Secretary Chief Operating Officer - Cars (b) Compensation of key management personnel The aggregate compensation made to key management personnel of the Company and the Group is as follows: Short term Post employment benefits Share based payments 3,425 137 1,238 4,800 3,709 150 1,328 5,187 CONSOLIDATED 2017 $’000 2016 $’000 (c) Option holdings of key management personnel Details of options held by key management personnel can be found in Note 37(f). (d) Loans to key management personnel There are no loans to key management personnel. (e) Other transactions with key management personnel Other transactions with key management personnel are detailed in Note 39. 72 NOTES TO AND FORMING PART OF THE FINANCIAL STATEMENTS CONTINUED31 DECEMBER 2017 (f) Share Based Payments Plan C: EPS Performance Rights and Options – Key Executives 2014 The Group commenced an Earnings Per Share (EPS) based performance rights and options compensation scheme for specific executive officers in 2014. The fair value of these performance rights and options is calculated on grant date and recognised over the period to vesting. The vesting of the performance rights and options granted is based on the achievement of specified earnings per share growth targets and interest cover thresholds. The fair value has been calculated using a binomial option pricing model based on numerous variables including the following: Performance Rights Award date 4 July 2014 Vesting date Expiry date Share price at grant date Expected life Volatility Risk free interest rate Dividend yield Performance Options Award date 4 July 2014 Vesting date Expiry date Share price at grant date Exercise price Expected life Volatility Risk free interest rate Dividend yield 31-Mar-16 04-Jul-21 $ 5.47 1.7 years 25% 2.51% 4.2% 31-Mar-17 04-Jul-21 $ 5.47 2.7 years 25% 2.63% 4.2% 31-Mar-18 04-Jul-21 $ 5.47 3.7 years 25% 2.79% 4.2% 31-Mar-19 30-Sep-22 $ 5.47 4.7 years 25% 2.96% 4.2% 31-Mar-20 30-Sep-22 $ 5.47 5.7 years 25% 3.13% 4.2% 31-Mar-16 04-Jul-21 $ 5.47 $ 5.47 4.4 years 25% 2.90% 4.2% 31-Mar-17 04-Jul-21 $ 5.47 $ 5.47 4.9 years 25% 2.98% 4.2% 31-Mar-18 04-Jul-21 $ 5.47 $ 5.47 5.4 years 25% 3.06% 4.2% 31-Mar-19 30-Sep-22 $ 5.47 $ 5.47 5.9 years 25% 3.24% 4.2% 31-Mar-20 30-Sep-22 $ 5.47 $ 5.47 7.0 years 25% 3.31% 4.2% The Managing Director, General Manager Queensland and Northern Territory, previous Chief Financial Officer, General Counsel and Company Secretary and four other senior executives have been granted rights and options under the EPS share incentive plan (Plan C). The modified grant date method (AASB 2) is applied to this incentive plan whereby the cost of the plan is determined by the value of the rights and options at grant date and the probability of the EPS and interest cover targets being achieved and vesting occurring. The number of rights and options granted under the plan is as follows: Performance Rights Number 137,791 137,571 143,464 149,551 156,173 Performance Options Number 769,228 712,760 705,258 663,363 656,857 Grant Date 04-Jul-14 04-Jul-14 04-Jul-14 04-Jul-14 04-Jul-14 Grant Date 04-Jul-14 04-Jul-14 04-Jul-14 04-Jul-14 04-Jul-14 End Performance Period 31-Dec-15 31-Dec-16 31-Dec-17 31-Dec-18 31-Dec-19 End Performance Period 31-Dec-15 31-Dec-16 31-Dec-17 31-Dec-18 31-Dec-19 Expiry Date 04-Jul-21 04-Jul-21 04-Jul-21 30-Sep-22 30-Sep-22 Expiry Date 04-Jul-21 04-Jul-21 04-Jul-21 30-Sep-22 30-Sep-22 Fair Value at Grant Date $ 5.08 $ 4.87 $ 4.67 $ 4.48 $ 4.29 Fair Value at Grant Date $ 0.91 $ 0.94 $ 0.95 $ 1.01 $ 1.02 A total of 30,168 rights and 136,039 options were forfeited or expired during the year. A total of 137,571 rights were issued and 130,289 options exercised during the year. As a result of the partial achievement of specific EPS and interest coverage targets, all of the performance rights and one third of the options relating to the 31 December 2017 performance period have vested. The value of the performance rights and options expensed during the year was $1,363,178, with a cumulative expense being recognised at 31 December 2017 of $5,059,792 (2016: $3,696,614). 73 ANNUAL REPORT 2017 38 OTHER SHARE BASED PAYMENTS Recognised share-based payments expenses Refer Note 30(a) for movements in share based payments reserve. Plan D: EPS Performance Rights and Options – Senior Management (A) The Group commenced an Earnings Per Share (EPS) based performance rights and options compensation scheme for nineteen specific management personnel in 2010. The fair value of these performance rights and options is calculated on grant date and recognised over the period to vesting. The vesting of the performance rights and options granted is based on the achievement of specified earnings per share growth targets and interest cover thresholds. The fair value has been calculated using a binomial option pricing model based on numerous variables including the following: Performance Rights Award date 27 January 2010 Vesting date Expiry date Share price at grant date Expected life Volatility Risk free interest rate Dividend yield Performance Options Award date 27 January 2010 Vesting date Expiry date Share price at grant date Exercise price Expected life Volatility Risk free interest rate Dividend yield 27-Mar-11 27-Jan-17 $ 2.42 1.2 years 30% 5.06% 5.10% 27-Mar-12 27-Jan-17 $ 2.42 2.2 years 30% 5.11% 5.10% 27-Mar-13 27-Jan-17 $ 2.42 3.2 years 30% 5.17% 5.10% 27-Mar-11 27-Jan-17 $ 2.42 $ 2.42 4.1 years 30% 5.06% 5.10% 27-Mar-12 27-Jan-17 $ 2.42 $ 2.42 4.6 years 30% 5.11% 5.10% 27-Mar-13 27-Jan-17 $ 2.42 $ 2.42 5.1 years 30% 5.17% 5.10% Specific executives have been granted rights and options under the EPS share incentive plan (Plan D). This includes the General Counsel & Company Secretary. The modified grant date method (AASB 2) is applied to this incentive plan whereby the cost of the plan is determined by the value of the rights and options at grant date and the probability of the EPS and interest cover targets being achieved and vesting occurring. The number of rights and options granted under the plan is as follows: Performance Rights Number 162,310 219,265 230,750 Performance Options Number 547,705 731,250 714,690 Grant Date End Performance Period Expiry Date Fair Value at Grant Date 27-Jan-10 27-Jan-10 27-Jan-10 31-Dec-10 31-Dec-11 31-Dec-12 27-Jan-17 27-Jan-17 27-Jan-17 $ 2.28 $ 2.17 $ 2.06 Grant Date End Performance Period Expiry Date Fair Value at Grant Date 27-Jan-10 27-Jan-10 27-Jan-10 31-Dec-10 31-Dec-11 31-Dec-12 27-Jan-17 27-Jan-17 27-Jan-17 $ 0.50 $ 0.52 $ 0.53 No rights or options were forfeited or expired during the year. A total of 50,460 options were exercised during the year. No costs of the share plan were expensed during 2017 (2016: $nil). The share plan was fully expensed by the end of 2012. 74 NOTES TO AND FORMING PART OF THE FINANCIAL STATEMENTS CONTINUED31 DECEMBER 2017 Plan F: EPS Performance Options – Senior Management 2013 The Group commenced an Earnings Per Share (EPS) based share options compensation scheme for 57 specific senior staff, including the Company Secretary/General Counsel. The fair value of these performance options is calculated on grant date and recognised over the period to vesting. The vesting of the performance options granted is based on the achievement of specified earnings per share growth targets. The fair value has been calculated using a binomial option pricing model based on numerous variables including the following: Performance Options Award date 27 March 2013 Vesting date Expiry date Share price at grant date Exercise price Expected life Volatility Risk free interest rate Dividend yield 31-Mar-15 31-Mar-20 $ 4.84 $ 5.04 4.5 years 30% 3.08% 4.20% 31-Mar-16 31-Mar-20 $ 4.84 $ 5.04 4.5 years 30% 3.08% 4.20% 31-Mar-17 31-Mar-20 $ 4.84 $ 5.04 5.0 years 30% 3.13% 4.20% 31-Mar-18 31-Mar-20 $ 4.84 $ 5.04 5.5 years 30% 3.17% 4.20% 31-Mar-19 31-Mar-20 $ 4.84 $ 5.04 6.0 years 30% 3.22% 4.20% Specific executives have been granted options under the EPS share incentive plan (Plan F). The modified grant date method (AASB 2) is applied to this incentive plan whereby the cost of the plan is determined by the value of the options at grant date and the probability of the EPS targets being achieved and vesting occurring. The number of options granted under the plan is as follows: Performance Options Number 951,950 951,950 911,510 892,840 883,750 Grant Date 27-Mar-13 27-Mar-13 27-Mar-13 27-Mar-13 27-Mar-13 End Performance Period 31-Dec-14 31-Dec-15 31-Dec-16 31-Dec-17 31-Dec-18 Expiry Date 31-Mar-20 31-Mar-20 31-Mar-20 31-Mar-20 31-Mar-20 Fair Value at Grant Date $ 0.93 $ 0.93 $ 0.96 $ 0.98 $ 0.99 A total of 65,650 options in 2017 were forfeited or expired during the year. A total of 159,080 options were exercised during the year. As a result of the specific EPS target being achieved the options relating to the 31 December 2017 performance period have vested. The value of the options expensed during the year was $132,142, with a cumulative expense being recognised at 31 December 2017 of $3,607,822 (2016: $3,475,680). 75 ANNUAL REPORT 2017 38 OTHER SHARE BASED PAYMENTS (CONTINUED) Plan H: EPS Performance Rights and Options – Key Executives The Group commenced a new Earnings Per Share (EPS) based performance rights and options compensation scheme for four specific executive officers in 2015. The fair value of these performance rights and options is calculated on grant date and recognised over the period to vesting. The fair value has been calculated using a binomial option pricing model based on numerous variables including the following: Performance Rights Award date 21 January 2015 Vesting date Expiry date Share price at grant date Expected life Volatility Risk free interest rate Dividend yield Performance Options Award date 21 January 2015 Vesting date Expiry date Share price at grant date Exercise price Expected life Volatility Risk free interest rate Dividend yield 31-Mar-16 31-Mar-17 31-Mar-18 31-Mar-19 31-Mar-20 21-Jan-22 21-Jan-22 21-Jan-22 30-Sep-22 30-Sep-22 $5.85 $5.85 $5.85 $5.85 $5.85 1.2 years 2.2 years 3.2 years 4.2 years 5.2 years 22% 2.20% 4.4% 22% 2.12% 4.4% 22% 2.11% 4.4% 22% 2.15% 4.4% 22% 2.22% 4.4% 31-Mar-16 31-Mar-17 31-Mar-18 31-Mar-19 31-Mar-20 21-Jan-22 21-Jan-22 21-Jan-22 30-Sep-22 30-Sep-22 $5.85 $5.65 $5.85 $5.65 $5.85 $5.65 $5.85 $5.65 $5.85 $5.65 4.1 years 4.6 years 5.1 years 5.9 years 6.4 years 22% 2.15% 4.4% 22% 2.18% 4.4% 22% 2.21% 4.4% 22% 2.28% 4.4% 22% 2.33% 4.4% Four specific executives have been granted rights and options under the EPS share incentive plan (Plan H). The modified grant date method (AASB 2) is applied to this incentive plan whereby the cost of the plan is determined by the value of the rights and options at grant date and the probability of the EPS targets being achieved and vesting occurring. The number of rights and options granted under the plan is as follows: Performance Rights Number Grant Date End Performance Period Expiry Date Fair Value at Grant Date 14,412 15,065 15,746 16,459 17,202 21-Jan-15 21-Jan-15 21-Jan-15 21-Jan-15 21-Jan-15 31-Dec-15 31-Dec-16 31-Dec-17 31-Dec-18 31-Dec-19 21-Jan-22 12-Feb-22 12-Feb-22 12-Feb-22 30-Sep-22 $5.55 $5.31 $5.08 $4.86 $4.65 Performance Options Number Grant Date End Performance Period Expiry Date Fair Value at Grant Date 95,235 93,020 93,020 91,953 93,020 21-Jan-15 21-Jan-15 21-Jan-15 21-Jan-15 21-Jan-15 31-Dec-15 31-Dec-16 31-Dec-17 31-Dec-18 31-Dec-19 21-Jan-22 12-Feb-22 12-Feb-22 12-Feb-22 30-Sep-22 $0.84 $0.86 $0.86 $0.87 $0.86 A total of 6,175 performance rights and 34,748 options were forfeited or expired during the year. A total of 15,065 performance rights were issued during the year. As a result of the partial achievement of specific EPS and interest coverage targets, all of the performance rights and one third of the options relating to the 31 December 2017 performance period have vested. The value of the performance rights and options expensed during the year was $151,658, with a cumulative expense being recognised as at 31 December 2017 of $574,293 (2016: $422,635). 76 NOTES TO AND FORMING PART OF THE FINANCIAL STATEMENTS CONTINUED31 DECEMBER 2017 Plan I: EPS Performance Rights and Options – Key Executives The Group commenced in 2015 a new performance rights and options compensation scheme for a specific senior staff member, based on achieving certain defined operating targets for a specific business entity. The fair value of these performance rights and options is calculated on grant date and recognised over the period to vesting. The fair value has been calculated using a binomial option pricing model based on numerous variables including the following: Performance Rights Award date 12 February 2015 Vesting date Expiry date Share price at grant date Expected life Volatility Risk free interest rate Dividend yield Performance Options Award date 12 February 2015 Vesting date Expiry date Share price at grant date Exercise price Expected life Volatility Risk free interest rate Dividend yield 31-Mar-16 31-Mar-17 31-Mar-18 31-Mar-19 31-Mar-20 12-Feb-22 12-Feb-22 12-Feb-22 30-Sep-22 30-Sep-22 $6.26 $6.26 $6.26 $6.26 $6.26 1.1 years 2.1 years 3.1 years 4.1 years 5.1 years 22% 1.91% 4.2% 22% 1.85% 4.2% 22% 1.87% 4.2% 22% 1.95% 4.2% 22% 2.05% 4.2% 31-Mar-16 31-Mar-17 31-Mar-18 31-Mar-19 31-Mar-20 12-Feb-22 12-Feb-22 12-Feb-22 30-Sep-22 30-Sep-22 $6.26 $6.26 $6.26 $6.26 $6.26 $6.26 $6.26 $6.26 $6.26 $6.26 4.1 years 4.6 years 5.1 years 5.9 years 6.4 years 22% 1.94% 4.2% 22% 1.99% 4.2% 22% 2.04% 4.2% 22% 2.14% 4.2% 22% 2.20% 4.2% A specific senior staff member has been granted rights and options under the Specific Target share plan (Plan I). The modified grant date method (AASB 2) is applied to this incentive plan whereby the cost of the plan is determined by the value of the rights and options at grant date and the probability of specific targets being achieved and vesting occurring. The number of rights and options granted under the plan is as follows: Performance Rights Number Grant Date End Performance Period Expiry Date Fair Value at Grant Date 9,045 9,440 9,836 11,406 11,881 12-Feb-15 12-Feb-15 12-Feb-15 12-Feb-15 12-Feb-15 31-Dec-15 31-Dec-16 31-Dec-17 31-Dec-18 31-Dec-19 12-Feb-22 12-Feb-22 12-Feb-22 30-Sep-22 30-Sep-22 $5.97 $5.72 $5.49 $5.26 $5.05 Performance Options Number 97,590 95,294 94,186 102,272 102,272 Grant Date End Performance Period Expiry Date Fair Value at Grant Date 12-Feb-15 12-Feb-15 12-Feb-15 12-Feb-15 12-Feb-15 31-Dec-15 31-Dec-16 31-Dec-17 31-Dec-18 31-Dec-19 12-Feb-22 12-Feb-22 12-Feb-22 30-Sep-22 30-Sep-22 $0.83 $0.85 $0.86 $0.88 $0.88 No performance rights or options were forfeited or expired during the year. A total of 9,440 performance rights were issued during the year. As a result of the specific performance targets being achieved the performance rights and options relating to the 31 December 2017 performance period have vested since balance date. The value of the performance rights and options expensed during the year was $161,139, with a cumulative expense being recognised as at 31 December 2017 of $512,134 (2016: $350,995). 77 ANNUAL REPORT 2017 38 OTHER SHARE BASED PAYMENTS (CONTINUED) Plan J: EPS Performance Rights and Options – Key Executives The Group commenced a new Earnings Per Share (EPS) based performance rights and options compensation scheme for two specific executive officers in 2015. The fair value of these performance rights and options is calculated on grant date and recognised over the period to vesting. The vesting of the performance rights and options granted is based on the achievement of specified earnings per share growth targets and interest cover thresholds. The fair value has been calculated using a binomial option pricing model based on numerous variables including the following: Performance Rights Award date 12 June 2015 Vesting date Expiry date Share price at grant date Expected life Volatility Risk free interest rate Dividend yield Performance Options Award date 12 June 2015 Vesting date Expiry date Share price at grant date Exercise price Expected life Volatility Risk free interest rate Dividend yield 31-Mar-16 31-Mar-17 31-Mar-18 31-Mar-19 31-Mar-20 12-Jun-22 12-Jun-22 12-Jun-22 30-Sep-22 30-Sep-22 $9.25 $9.25 $9.25 $9.25 $9.25 0.8 years 1.8 years 2.8 years 3.8 years 4.8 years 24% 1.98% 3.7% 24% 1.99% 3.7% 24% 2.06% 3.7% 24% 2.18% 3.7% 24% 2.33% 3.7% 31-Mar-16 31-Mar-17 31-Mar-18 31-Mar-19 31-Mar-20 12-Jun-22 12-Jun-22 12-Jun-22 30-Sep-22 30-Sep-22 $9.25 $9.25 $9.25 $9.25 $9.25 $9.25 $9.25 $9.25 $9.25 $9.25 3.9 years 4.4 years 4.9 years 5.5 years 6.1 years 24% 2.19% 3.7% 24% 2.27% 3.7% 24% 2.35% 3.7% 24% 2.46% 3.7% 24% 2.54% 3.7% Two specific executives have been granted rights and options under the EPS share incentive plan (Plan J). The modified grant date method (AASB 2) is applied to this incentive plan whereby the cost of the plan is determined by the value of the rights and options at grant date and the probability of the EPS targets being achieved and vesting occurring. The number of rights and options granted under the plan is as follows: Performance Rights Number 2,783 5,780 5,995 6,218 6,458 Performance Options Grant Date 12-Jun-15 12-Jun-15 12-Jun-15 12-Jun-15 12-Jun-15 End Performance Period Expiry Date Fair Value at Grant Date 31-Dec-15 31-Dec-16 31-Dec-17 31-Dec-18 31-Dec-19 12-Jun-22 12-Jun-22 12-Jun-22 30-Sep-22 30-Sep-22 $8.98 $8.65 $8.34 $8.04 $7.74 Number Grant Date End Performance Period Expiry Date Fair Value at Grant Date 17,605 33,783 32,678 31,645 31,250 12-Jun-15 12-Jun-15 12-Jun-15 12-Jun-15 12-Jun-15 31-Dec-15 31-Dec-16 31-Dec-17 31-Dec-18 31-Dec-19 12-Jun-22 12-Jun-22 12-Jun-22 30-Sep-22 30-Sep-22 $1.42 $1.48 $1.53 $1.58 $1.60 No performance rights or options were forfeited or expired during the year. A total of 5,780 performance rights were issued during the year. As a result of the partial achievement of specific EPS and interest coverage targets, all of the performance rights and one third of the options relating to the 31 December 2017 performance period have vested. The value of the performance rights and options expensed during the year was $111,421, with a cumulative expense being recognised as at 31 December 2017 of $321,405 (2016: $209,984). 78 NOTES TO AND FORMING PART OF THE FINANCIAL STATEMENTS CONTINUED31 DECEMBER 2017 Plan K: EPS Performance Rights and Options – Key Executives The Group commenced a new Earnings Per Share (EPS) based performance rights and options compensation scheme for one specific executive officer in 2016. The fair value of these performance rights and options is calculated on grant date and recognised over the period to vesting. The vesting of the performance rights and options granted is based on the achievement of specified earnings per share growth targets and interest cover thresholds. The fair value has been calculated using a binomial option pricing model based on numerous variables including the following: Performance Rights Award date 31 March 2016 Vesting date Expiry date Share price at grant date Expected life Volatility Risk free interest rate Dividend yield Performance Options Award date 31 March 2016 Vesting date Expiry date Share price at grant date Exercise price Expected life Volatility Risk free interest rate Dividend yield 31-Mar-17 31-Mar-18 31-Mar-19 31-Mar-20 31-Mar-24 31-Mar-24 31-Mar-24 31-Mar-24 $9.75 1.0 year 27% 1.95% 3.8% $9.75 $9.75 $9.75 2.0 years 3.0 years 4.0 years 27% 1.88% 3.8% 27% 1.90% 3.8% 27% 1.98% 3.8% 31-Mar-17 31-Mar-18 31-Mar-19 31-Mar-20 31-Mar-24 31-Mar-24 31-Mar-24 31-Mar-24 $9.75 $10.34 $9.75 $10.34 $9.75 $10.34 $9.75 $10.34 4.5 years 5.0 years 5.5 years 6.0 years 27% 2.03% 3.8% 27% 2.08% 3.8% 27% 2.13% 3.8% 27% 2.18% 3.8% One specific executive has been granted rights and options under the EPS share incentive plan (Plan K). The modified grant date method (AASB 2) is applied to this incentive plan whereby the cost of the plan is determined by the value of the rights and options at grant date and the probability of the EPS targets being achieved and vesting occurring. The number of rights and options granted under the plan is as follows: Performance Rights Number 7,987 8,296 8,620 8,960 Performance Options Number 48,076 46,012 44,910 43,859 Grant Date 31-Mar-16 31-Mar-16 31-Mar-16 31-Mar-16 Grant Date 31-Mar-16 31-Mar-16 31-Mar-16 31-Mar-16 End Performance Period Expiry Date Fair Value at Grant Date 31-Dec-16 31-Dec-17 31-Dec-18 31-Dec-19 31-Mar-24 31-Mar-24 31-Mar-24 31-Mar-24 $9.39 $9.04 $8.70 $8.37 End Performance Period Expiry Date Fair Value at Grant Date 31-Dec-16 31-Dec-17 31-Dec-18 31-Dec-19 31-Mar-24 31-Mar-24 31-Mar-24 31-Mar-24 $1.56 $1.63 $1.67 $1.71 No performance rights or options were forfeited or expired during the year. A total of 7,987 rights were issued during the year. As a result of the specific targets not being achieved the performance rights and options relating to the 31 December 2017 performance period have not vested. The value of the performance rights and options expensed during the year was $181,063, with a cumulative expense being recognised as at 31 December 2017 of $395,511 (2016: $214,448). 79 ANNUAL REPORT 2017 39 RELATED PARTIES Key management personnel Other information on key management personnel has been disclosed in the Directors’ Report. Remuneration and retirement benefits Information on the remuneration of key individual management personnel has been disclosed in the Remuneration Report included in the Directors’ Report. Other transactions of directors and director related entities The aggregate amount of “Other transactions” with key management personnel are as follows: (i) Mr N G Politis is a director and shareholder of a number of companies involved in the motor industry with whom the consolidated entity transacts business. These transactions, sales of $510,641 (2016: $462,274) and purchases of $398,021 (2016: $520,476) during the last 12 months, are primarily the sale and purchase of spare parts and accessories and are carried out under terms and conditions no more favourable than those which it is reasonable to expect would have applied if the transactions were at arm’s length. (ii) Mr M Birrell is a director and owner of a number of properties leased by subsidiaries of A. P. Eagers. The lease transactions of $4,351,456 (2016 for 6 months since his appointment to the board: $1,956,301) have been carried out under terms and conditions no more favourable than those which it is reasonable to expect would have applied if the transactions were at arm’s length. Mr M Birrell also has a consultancy arrangement with AP Eagers whereby he is paid a consultancy fee in consideration for provision of professional services provided for AP Eagers’ Victorian and Tasmanian businesses. There were nil transactions (2016: nil) since his appointment to the board. Mr M Birrell was a party to the Birrell Motors Group business acquisition which is subject to a contingent consideration arrangement whereby an additional amount is payable at 31 December 2019 if a specified performance target is met. The contingent consideration has been recognised as a financial liability as at 31 December 2017, refer to Note 27. Finally, Mr M Birrell is a director and owner of a company involved in the provision of finance to the motor vehicle industry with whom the consolidated entity transacts business. These transactions, since the company commenced operations 1 June 2017, are commissions paid to the consolidated entity, totalling $76,605, and are carried out under terms and conditions no more favourable than those which it is reasonable to expect would have applied if the transactions were at arm’s length. (iii) Controlled entities may, from time to time, sell motor vehicles, parts and servicing of motor vehicles for domestic use to directors of entities in the consolidated entity or their director-related entities within a normal employee relationship on terms and conditions no more favourable than those which it is reasonable to expect would have been adopted if dealing with the directors or their director-related entities at arm’s length in the same circumstances. Wholly-owned group The parent entity of the wholly-owned group is A.P. Eagers Limited. Information relating to the wholly-owned group is set out in Note 32. 40 EARNINGS PER SHARE (a) Basic earnings per share CONSOLIDATED 2017 Cents 2016 Cents Earnings attributable to the ordinary equity holders of the Company 50.3 55.4 (b) Diluted earnings per share Earnings attributable to the ordinary equity holders of the Company 49.5 54.0 80 NOTES TO AND FORMING PART OF THE FINANCIAL STATEMENTS CONTINUED31 DECEMBER 2017 (c) Reconciliation of earnings used in calculating earnings per share Basic earnings per share Profit attributable to the ordinary equity holders of the Company used in calculating basic earnings per share: Profit for the year Less: attributable to non-controlling interest Profit attributable to the ordinary equity holders of the company used in calculating basic earnings per share Diluted earnings per share Profit for the year less attributable to non-controlling interest Profit attributable to the ordinary equity holders of the company used in calculating diluted earnings per share Weighted average number of ordinary shares outstanding during the year Shares deemed to be issued for no consideration in respect of employee options (1) Weighted average number of ordinary shares outstanding during the year used in the calculation of diluted earnings per share CONSOLIDATED 2017 $’000 2016 $’000 98,173 (2,146) 96,027 105,526 (1,542) 103,984 96,027 96,027 103,984 103,984 Number Number 190,865,298 187,811,094 3,167,755 4,747,506 194,033,053 192,558,600 (1) 329,818 performance options representing potential ordinary shares are anti-dilutive and are therefore excluded from the weighted average number of ordinary shares for the purposes of diluted earnings per share. 41 RECONCILIATION OF NET PROFIT AFTER TAX TO THE NET CASH INFLOWS FROM OPERATIONS Net profit after tax 98,173 105,526 Depreciation and amortisation Net gain on sale of available-for-sale financial assets 5 4 Share of profits of associate Dividends from investments Gain on sale of property, plant & equipment Employee share scheme expense Non controlling interest adjustments Property receivable and deposits Gain to property revaluation (through P&L) (Increase)/decrease in assets Receivables Inventories Prepayments Increase/(decrease) in liabilities Creditors (including bailment finance) Provisions Taxes payable Net cash inflow from operating activities 16,651 (2,080) (407) - (15,644) 2,105 - 2,321 (210) (13,061) (27,645) (2,328) 13,993 (1,955) (191) 191 (1,136) 2,966 (535) 22,547 (1,235) (39,631) (94,844) (588) 78,225 (2,988) 11,864 103,090 5,737 (4,213) 144,976 109,722 81 ANNUAL REPORT 2017 42 NON-CASH TRANSACTIONS In 2017, the Group entered into a contract for the sale of 157-159 Newmarket Road, Windsor. As a result a profit of $2.3 million was recognised in 2017 and was included in the amount disclosed in Note 4. Consideration for the sale totalling $7.2 million will be received in 2018. 43 INVESTMENTS IN ASSOCIATES (a) Carrying amounts Investments in associate are accounted for in the consolidated financial statements using the equity method of accounting. Information relating to the associate is set out below: Name of company Unlisted securities Norna Limited (formerly MTQ Insurance Services Limited) DealerMotive Ltd Carzapp Pty Ltd OWNERSHIP INTEREST CONSOLIDATED 2017 % 20.65 25.50 - 2016 % 20.65 25.76 10.00 2017 $’000 1,620 10,380 - 2016 $’000 1,620 9,973 300 12,000 11,893 Norna Limited (formerly MTQ Insurance Servers Limited) In 2014 MTQ Insurance Services Limited changed its name to Norna Limited. On 29 August 2014 MTA Insurance Limited (a wholly owned subsidiary of Norna Limited) was sold to AAI Limited with settlement to take place in instalments, the final of which is expected to be realised in 2018. Once the sale is completed Norna Limited will be liquidated. AP Eagers Limited will remain a shareholder in Norna Limited with a 20.65% interest (2016: 20.65%) and will continue to equity account the investment in the associate which has been equity accounted from 1 January 2006 (refer Note 15), until the final distributions are received and Norna Limited is liquidated. Norna Limited is incorporated in Australia. Its principal activities for the period up to the sale remained the sale of consumer credit and insurance products, as well as undertaking investment activities. Since the sale, the entity has ceased operations with the only transactions being related to holding costs and interest until the final terms of the sale agreement are met and the entity is liquidated. DealerMotive Limited In 2016, AP Eagers transferred its shares in One Way Traffic Pty Ltd (Carsguide) and Auto Trader Australia Pty Ltd (Auto Trader) to DealerMotive Limited (DealerMotive) under a scheme of arrangement, in return for an equal dollar value of shares in DealerMotive. AP Eagers also subscribed to shares in DealerMotive during the year as part of a capital raising. AP Eagers holds a 25.5% shareholding in DealerMotive as at 31 December 2017. DealerMotive Limited is incorporated in Australia. Its principal activity for the period is holding a 30% investment in Cox Automotive Australia, a subsidiary of Cox Automotive. Cox Automotive Australia controls and operates Manheim Australia, Dealer Solutions and One Way Traffic (Carsguide) businesses and owns the Auto Traders brand. (b) Movement in the carrying amounts of investment in associate Carrying amount at the beginning of the financial year Equity share of profit from ordinary activities after income tax Dividends received during the year Equity accounted investments acquired Disposal of investment Carrying amount at the end of the financial year 82 CONSOLIDATED 2017 $’000 2016 $’000 11,893 407 - - (300) 12,000 1,620 191 (191) 10,273 - 11,893 NOTES TO AND FORMING PART OF THE FINANCIAL STATEMENTS CONTINUED31 DECEMBER 2017 (c) Summarised financial information of associates The aggregate profits, assets and liabilities of associate are: Revenue Profits from ordinary activities after income tax expense Assets Liabilities (d) Share of associate profit CONSOLIDATED 2017 $’000 2016 $’000 68,922 3,375 46,786 6,827 112 925 50,537 57 Based on the last published results for the 12 months to 30 June 2017 plus unaudited results up to 31 December 2017. Profit from ordinary activities after income tax 407 191 (e) Dividends received from associates Dividends received from associates (f) Reporting date of associates The associates reporting dates are 30 June annually. - 191 83 ANNUAL REPORT 2017 DIRECTORS’ DECLARATION The Directors declare that: (a) in the directors’ opinion, there are reasonable grounds to believe that the Company will be able to pay its debts as and when they become due and payable; (b) in the directors’ opinion, the attached financial statements and notes thereto are in accordance with the Corporations Act 2001, including compliance with accounting standards and giving a true and fair view of the financial position and performance of the consolidated entity; (c) in the directors’ opinion, the attached financial statements are in compliance with International Financial Reporting Standards as stated in Note 1(a) to the financial statements; and (d) the directors have been given the declarations required by s.295A of the Corporations Act 2001 At the date of this declaration, the Company is within the class of companies affected by ASIC Corporations (Wholly owned Companies) Instrument 2016/785. 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 Corporation Instrument applies, as detailed in Note 32 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. Signed in accordance with a resolution of the Directors made pursuant to s.295(5) of the Corporations Act 2001. On behalf of the Directors M A Ward Director Brisbane, 21st February 2018 84 INDEPENDENT AUDITOR’S REPORT 85 ANNUAL REPORT 2017 INDEPENDENT AUDITOR’S REPORT CONTINUED 86 87 ANNUAL REPORT 2017 INDEPENDENT AUDITOR’S REPORT CONTINUED 88 89 ANNUAL REPORT 2017 INDEPENDENT AUDITOR’S REPORT CONTINUED 90 SHAREHOLDER INFORMATION AS AT 12 MARCH 2018 EQUITY SECURITIES The company’s quoted securities consist of 191,309,301 ordinary fully paid shares (ASX: APE). TOP 20 HOLDERS OF ORDINARY SHARES WFM Motors Pty Ltd Patterson Cheney Investments Pty Ltd Jove Pty Ltd HSBC Custody Nominees (Australia) Limited Alan Piper Investments (No1) Pty Ltd Milton Corporation Limited Argo Investments Limited UBS Nominees Pty Ltd Citicorp Nominees Pty Limited Berne No 132 Nominees Pty Ltd <315738 A/C> Martin Ward Birrell Investments Pty Ltd Diane Colman Australian Foundation Investment Company Limited J P Morgan Nominees Australia Limited Hegford Pty Ltd ANZ Trustees Limited National Nominees Limited Peter Gary Robinson Trevor Reading No. of Shares % of Issued Shares 68,782,275 12,591,761 10,560,000 8,751,237 6,406,250 5,833,107 4,432,620 2,812,452 2,562,199 2,444,101 2,389,661 2,000,000 1,881,710 1,404,001 1,313,784 1,264,563 1,181,920 1,174,348 1,116,455 1,107,550 35.97 6.58 5.52 4.57 3.35 3.05 2.32 1.47 1.34 1.28 1.25 1.05 0.98 0.73 0.69 0.66 0.62 0.61 0.58 0.58 91 ANNUAL REPORT 2017 SHAREHOLDER INFORMATION AS AT 12 MARCH 2018 CONTINUED Distribution of Shareholders Range 1 1,001 5,001 10,001 - - - - 1,000 5,000 10,000 100,000 100,001 and over No. of Shareholders 1,967 1,990 606 823 103 5,489 134 shareholders hold less than a marketable parcel of 58 shares at $8.75 per share. Substantial Shareholders* Notice Date No. of Shares* WFM Motors Pty Ltd 17 October 2012 62,817,353 Patterson Cheney Investments Pty Ltd 2 May 2016 12,591,761 Jove Pty Ltd 11 July 2012 10,193,381 * As disclosed in substantial holding notices received by the company. Performance Rights and Options 370,781 unvested performance rights, 2,276,860 unvested options and 5,343,076 vested options are on issue to forty-nine holders pursuant to the Executive Incentive Plan. Vesting is subject to the achievement of pre-determined performance hurdles, as described in the Directors’ Report. The rights and options do not have any dividend or voting rights. On-market Buy-back The company does not have a current on-market share buy-back. Voting Rights The following voting rights attach to ordinary shares, subject to the company’s constitution: > A shareholder entitled to attend and vote at a meeting may do so in person or by proxy, attorney or corporate representative. > On a show of hands, each shareholder entitled to vote has one vote. > On a poll, each shareholder entitled to vote has one vote for each fully paid share and a fraction for each partly paid share. > If a share is held jointly with two or more holders in attendance, only the holder whose name appears first in the register may vote. Corporate Governance Statement The company’s Corporate Governance Statement is located on the company’s website at http://www.apeagers.com.au/shareholders/corporate-governance/. 92 CORPORATE DIRECTORY A.P. EAGERS LIMITED ABN 87 009 680 013 INCORPORATION Incorporated in Queensland on 17 April 1957 REGISTERED OFFICE 5 Edmund Street Newstead Qld 4006 POSTAL ADDRESS PO Box 199 Fortitude Valley Qld 4006 TELEPHONE (07) 3608 7100 FACSIMILE (07) 3608 7111 WEBSITE www.apeagers.com.au AUDITOR Deloitte Touché Tohmatsu Grosvenor Place 225 George Street Sydney NSW 2000 SHARE REGISTRY Computershare Investor Services Pty Limited Level 1, 200 Mary Street Brisbane Qld 4000 Enquiries within Australia: 1300 552 270 Enquiries outside Australia: +61 3 9415 4000 BOARD OF DIRECTORS Tim Crommelin, Chairman, Non-executive Director Martin Ward, Managing Director & Chief Executive Officer Nick Politis, Non-executive Director Dan Ryan, Non-executive Director David Cowper, Non-executive Director Marcus Birrell, Non-executive Director Sophie Moore, Executive Director & Chief Financial Officer COMPANY SECRETARY Denis Stark, General Counsel & Company Secretary CONTROLLED ENTITIES ABN 47 008 278 171 Adtrans Australia Pty Ltd ABN 83 007 866 917 Adtrans Automotive Group Pty Ltd ABN 85 056 340 928 Adtrans Corporate Pty Ltd ABN 28 008 129 477 Adtrans Group Ltd ABN 51 127 369 260 Adtrans Hino Pty Ltd ABN 17 106 764 327 Adtrans Truck Centre Pty Ltd ABN 45 151 699 651 Adtrans Trucks Adelaide Pty Ltd ABN 71 008 264 935 Adtrans Trucks Pty Ltd ABN 11 074 561 514 Adtrans Used Pty Ltd ABN 72 612 630 618 Adverpro Pty Ltd ABN 43 010 602 383 A.P. Ford Pty Ltd ABN 53 010 030 994 A.P. Group Ltd ABN 76 010 579 996 A.P. Motors Pty Ltd ABN 95 010 585 234 A.P. Motors (No.1) Pty Ltd ABN 97 010 585 243 A.P. Motors (No.2) Pty Ltd ABN 99 010 585 252 A.P. Motors (No.3) Pty Ltd ABN 30 616 472 729 AP Queensland (No.1) Pty Ltd ABN 12 600 279 927 AP Townsville Pty Ltd ABN 76 009 677 678 Associated Finance Pty Ltd ABN 89 009 662 202 Austral Pty Ltd ABN 23 605 815 021 Auto Ad Pty Ltd ABN 63 601 452 199 BASW Pty Ltd ABN 75 000 388 054 Bill Buckle Autos Pty Ltd ABN 44 062 951 106 Bill Buckle Holdings Pty Ltd ABN 52 000 871 910 Bill Buckle Leasing Pty Ltd ABN 50 135 015 191 Black Auto CQ Pty Ltd ABN 31 099 480 903 Boonarga Welding Pty Ltd ABN 35 608 791 911 Carzoos Pty Ltd ABN 20 600 297 783 CH Auto Pty Ltd ABN 14 067 985 602 City Automotive Group Pty Ltd ABN 64 057 283 253 Crampton Automotive Pty Ltd ABN 20 009 658 306 E.G. Eager & Son Pty Ltd ABN 65 009 721 288 Eagers Finance Pty Ltd ABN 58 009 727 753 Eagers MD Pty Ltd ABN 98 009 723 488 Eagers Nominees Pty Ltd ABN 91 009 662 211 Eagers Retail Pty Ltd ABN 20 114 124 346 Eurocars (SA) Pty Ltd ABN 85 621 801 054 FinMo Pty Ltd ABN 73 008 123 993 Graham Cornes Motors Pty Ltd ABN 50 169 210 173 IB MD Pty Ltd ABN 90 169 209 607 IB Motors Pty Ltd ABN 51 010 131 361 Leaseline & General Finance Pty Ltd MB Vic Pty Ltd ABN 12 608 791 877 Melbourne Truck and Bus Centre Pty Ltd ABN 42 143 202 699 ABN 85 164 997 228 Motors Group (Glen Waverley) Pty Ltd ABN 69 608 791 680 Motors Tas Pty Ltd ABN 52 009 681 556 Nundah Motors Pty Ltd ABN 43 160 315 579 Port City Autos Pty Ltd ABN 13 078 207 333 PPT Holdings No 1 Pty Ltd ABN 13 078 207 397 PPT Holdings No 2 Pty Ltd ABN 30 078 207 468 PPT Holdings No 3 Pty Ltd PPT Investments Pty Ltd ABN 80 000 868 860 Precision Automotive Technology Pty Ltd ABN 59 163 233 207 ABN 21 600 279 589 South West Queensland Motors Pty Ltd ABN 19 008 014 720 Stillwell Trucks Pty Ltd ABN 91 131 269 184 Western Equipment Rentals Pty Ltd ABN 13 116 437 702 Whitehorse Trucks Pty Ltd ABN 99 608 791 804 WS Motors Pty Ltd 93 ANNUAL REPORT 2017 2 0 1 7 A N N U A L R E P O R T

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