Everest Re Group Annual Report 2016

Plain-text annual report

R.E.A. HOLDINGS PLC . R E A . . i l H o d n g s p l c A n n u a l R e p o r t a n d A c c o u n t s 2 0 1 6 Annual Report and Accounts 2016 R.E.A. Holdings plc (“REA”) is a UK company of which the shares are admitted to the Ofﬁcial List and to trading on the main market of the London Stock Exchange. The REA group is principally engaged in the cultivation of oil palms in the province of East Kalimantan in Indonesia and in the production and sale of crude palm oil and crude palm kernel oil. Sterilising cages Steam turbine Contents Overview Key statistics Highlights Ofﬁcers and advisers Maps Chairman’s statement Strategic report Introduction and strategic environment Agricultural operations Stone and coal operations Sustainability Finance Risks and uncertainties Governance Board of directors Directors’ report Corporate governance report Audit committee report Directors’ remuneration report Directors’ responsibilities Auditor’s report Group ﬁnancial statements Income statement Balance sheet Statement of comprehensive income Statement of changes in equity Cash ﬂow statement Accounting policies Notes Company ﬁnancial statements Balance sheet Statement of changes in equity Cash ﬂow statement Accounting policies Notes Notice of annual general meeting 2 2 3 4 5 6 8 8 14 20 22 30 36 42 42 43 51 55 58 69 70 78 78 79 80 80 81 82 88 116 116 117 118 119 120 130 Currency References to “dollars” and “$” are to the lawful currency of the United States of America. R.E.A. Holdings plc Annual Report and Accounts 2016 01 O v e r v i e w S t r a t e g c i r e p o r t G o v e r n a n c e G r o u p ﬁ n a n c a i l s t a t e m e n t s C o m p a n y ﬁ n a n c a i l s t a t e m e n t s N o t i c e o f A G M Overview Key statistics 2016 Results ($’000) Revenue 79,265 Earnings before interest, tax, depreciation and amortisation 15,933 (Loss) / proﬁt before tax (9,289) (Loss) / proﬁt for the year (11,308) (Loss) / proﬁt attributable to 2015* 2014 2013 2012 90,515 125,865 110,547 124,600 15,123 38,797 30,269 38,083 (12,245) 23,744 25,216 30,558 (12,931) 21,981 12,672 17,703 ordinary shareholders (17,800) Cash generated by operations 25,371 (20,912) 14,153 5,457 11,342 37,286 33,053 19,358 55,110 Returns per ordinary share (Loss) / earnings (US cents) (48.2) Dividend (pence) – (59.0) 40.3 15.8 33.9 – 7.75 7.25 7.0 * Restated - see Accounting policies (group) Land areas (hectares) Mature oil palm 31,521 Immature oil palm 11,325 29,367 28,275 27,102 26,688 7,730 6,339 6,960 4,819 Planted areas 42,846 Infrastructure and undeveloped 27,738 37,097 34,614 34,062 31,507 33,487 35,970 36,522 39,077 Fully titled 70,584 Subject to completion of title 37,631 70,584 70,584 70,584 70,584 37,631 37,631 30,043 31,601 Total 108,215 108,215 108,215 100,627 102,185 FFB Harvested (tonnes) ** Group 468,371 600,741 631,728 578,785 597,722 Third party 98,052 138,657 149,002 99,348 64,014 Total 566,423 739,398 780,730 678,133 661,736 Production (tonnes) ** Total FFB processed 560,957 728,871 774,420 677,389 660,954 CPO 127,697 161,844 169,371 147,649 151,516 Palm kernels 26,371 33,877 35,812 30,741 30,734 CPKO 9,840 12,557 12,610 11,393 11,549 CPO extraction rate *** 22.8% 22.2% 21.9% 21.8% 22.9% Yields (tonnes per mature hectare) FFB 14.9 20.5 22.3 21.4 22.4 CPO 3.4 CPKO 0.3 4.5 4.9 4.6 5.1 0.3 0.4 0.4 0.4 Average exchange rates Indonesian rupiah to US dollar 13,369 US dollar to sterling 1.36 13,377 11,908 10,494 9,392 1.53 1.65 1.57 1.59 ** 2015 restated - see footnote to table under “Agricultural operations” page 18 *** The group cannot separately determine extraction rates for its own FFB and for third party FFB. CPO extraction rate and CPO and CPKO yields are therefore calculated applying uniform extraction rates across all FFB processed. 02 R.E.A. Holdings plc Annual Report and Accounts 2016 Overview Highlights Financial Stone and coal operations • • • • • • Adoption of amended IAS 41, effective 1 January 2016, on biological assets has impacted 2016 proﬁts due to a new additional depreciation charge and the elimination of fair value gains; 2015 comparatives restated to reﬂect the change with reduction in results before tax of $23.8 million • • Long term arrangements agreed for purchasing crushed stone for own use in hardening roads and other infrastructure and for sale to third parties Agreements reached for resumption of coal operations at the coal concession near Kota Bangun Revenues of $79.3 million (2015: $90.5 million), reﬂecting lower production following two year severe dry period Firmer CPO prices, continued focus on costs and exchange gains limiting the impact of lower production: loss before tax of $9.3 million (2015: $12.2 million) Net new investment of $31.6 million (2015: $34.8 million) Permanent capital base to support extension planting programme strengthened by $27.0 million, net of expenses, from combination of acquisition by DSN group of 15 per cent in the REA Kaltim group and cash placing of 3.7 million new ordinary shares Debt maturity proﬁle improved by exchange of $13.8 million of 2017 dollar notes for new 2022 dollar notes, repackaging of Indonesian bank loans and new funding of $14.4 million to reﬁnance maturing debt from combination of sale of 2020 sterling notes held in treasury and loans from the DSN group Sustainability • • • • • Renewable energy from methane capture plants supplying 26 local villages and making an increasing contribution as household take up continues to grow RSPO recertiﬁcation audits competed satisfactorily; ISCC renewals in process Completion of new estate school and new housing at KMS Completion of ﬁve village water treatment community development projects REA Kaltim awarded Class 1 status by the regional governor following assessment of local plantation companies, based on operational, social and environmental criteria Agricultural operations • • • • • Crop of FFB 468,371 tonnes (2015: 600,741 tonnes); CPO production of 127,697 tonnes (2015: 161,844 tonnes) Extraction rates averaged 22.8 per cent (2015: 22.2 per cent) despite impact on FFB quality of disruptions to harvesting and transportation caused by heavy rainfall in ﬁnal quarter Signiﬁcant progress with new development: over 5,700 hectares of new land planted and a further 1,500 prepared for planting Reliability of mill operations beneﬁting from recent extensive refurbishment programme and enhanced security systems New enhanced fertiliser regime targeted at mature areas initiated O v e r v i e w S t r a t e g c i r e p o r t G o v e r n a n c e G r o u p ﬁ n a n c a i l s t a t e m e n t s C o m p a n y ﬁ n a n c a i l s t a t e m e n t s N o t i c e o f A G M R.E.A. Holdings plc Annual Report and Accounts 2016 03 Overview Ofﬁcers and advisers Directors D J Blackett I Chia C E Gysin J C Oakley R M Robinow M A St. Clair-George Secretary and registered ofﬁce R.E.A. Services Limited First Floor 32-36 Great Portland Street London W1W 8QX Stockbrokers Mirabaud Securities LLP 10 Bressenden Place London SW1E 5DH Solicitors Ashurst LLP Broadwalk House 5 Appold Street London EC2A 2HA Auditor Deloitte LLP Hill House 1 Little New Street London EC4A 3TR Registrars and transfer ofﬁce Capita Asset Services The Registry 34 Beckenham Road Beckenham Kent BR3 4TU 04 R.E.A. Holdings plc Annual Report and Accounts 2016 Overview Maps g abang T Tabang (cid:122) (cid:122) S naketne reviR i R M M S S e e e n n n y y y i i i u u u r r r RR R R ii i i v v v e e r r K embang J (cid:122) anggut B e e l l a a y y a a n n n R R i i i v v v e e e r r M M a reviRmakaaha k EAST ALIMK ANT ANTAN Muar a A ncalong K K e e d a n g K K e e p a a l l a R R i i v e r n onB n tang (cid:122) M aMa h h a a a k k k a a a m m RR R ii i i v v v e e r r (cid:122) ota B K angun T Tenggar enggar ong (cid:122) S S S amarinda (cid:87) 0 10 20 30 40 50 k 0 10 20 30 40 50 k m BB B B alik lik papan M AK ASSAR STR AIT The smaller map shows the location of the group’s operations within the context of South East Asia. The larger map provides a plan of the operational areas. Key Methane capture plant Oil mill Stone quarry Tank storage CDM PT Cipta Davia Mandiri KKS PT Kartanegara Kumalasakti KMS PT Kutai Mitra Sejahtera PBJ PBJ2 PT Persada Bangun Jaya REAK PT REA Kaltim Plantations SYB PT Sasana Yudha Bhakti SYB swap: land surrender SYB swap: new PU land PT Putra Bongan Jaya R.E.A. Holdings plc Annual Report and Accounts 2016 05 O v e r v i e w S t r a t e g c i r e p o r t G o v e r n a n c e G r o u p ﬁ n a n c a i l s t a t e m e n t s C o m p a n y ﬁ n a n c a i l s t a t e m e n t s N o t i c e o f A G M Overview Chairman’s statement The accompanying ﬁnancial statements for 2016 incorporate a signiﬁcant change in accounting policies in accordance with the amendment of IAS 41 Agriculture effective 1 January 2016. The amendment means that bearer plants are no longer carried as biological assets at fair value but are instead accounted for as property, plant and equipment, and are depreciated. The 2015 ﬁnancial statements have been restated to reﬂect the change. The effect has been to reduce the previously reported proﬁt before tax for 2015 by $23.8 million and, whilst the comparable reduction for 2016 has not been computed, it is most probably even higher given the likely beneﬁt to the fair value of what were formerly biological assets from the sizeable extension planting achieved in 2016. As a result, with margins already reduced by lower production, and despite improved crude palm oil (“CPO”) prices, the group incurred a loss before taxation for the year, albeit reduced from the restated loss of the preceding year. Total revenue for the year amounted to $79.3 million, compared with $90.5 million in 2015; at the operating level, the group incurred a loss of $5.0 million for the year, compared with a restated loss of $6.6 million in 2015. Firmer CPO prices in 2016 as well as continued focus on cost controls restricted the loss before tax in 2016 to $9.3 million compared with a restated loss of $12.2 million in 2015. As previously reported, the group’s lower production mirrored the production experience reported by many other oil palm plantations in East Kalimantan and several other areas of South East Asia and is attributed to the severe dry periods experienced in both 2014 and 2015. The group’s cropping rates started to recover from September onwards, but heavy rainfall in November and December disrupted collection, which meant that production in the ﬁnal months of the year fell short of crop availability as not all crop could be recovered. Oil quality was also affected. Whilst the change in precipitation is positive for future productivity, such a dramatic increase after a prolonged period of drought, with average rainfall in 2016 more than 60 per cent higher than in 2015, had a short term negative impact on conditions for both harvesting and transportation. With the easing of the rains, essential repairs to, and hardening of, estate roads have become feasible and these should progressively beneﬁt production as the current year progresses. Fresh fruit bunches (“FFB”) harvested in 2016 amounted to some 468,000 tonnes compared with 601,000 tonnes in 2015. Smallholder and other third party FFB purchased by the group also fell short of 2015 levels at 98,000 tonnes compared with 139,000 tonnes in the previous year. CPO production amounted to 128,000 tonnes compared with 162,000 tonnes in 2015, while CPO extraction rates averaged 22.8 per cent compared with 22.2 per cent in 2015. Extraction rates in 2016 would have been higher were it not for the impact on FFB quality of the disruptions to harvesting and transportation in the last part of the year. The CPO price, CIF Rotterdam, edged steadily upwards through 2016 from an opening price of $570 per tonne to close at $801 per tonne but has since fallen back and currently stands at $710 per tonne. Whilst there is an expectation of better CPO production in 2017, soybean oil production may be constrained by a relatively weak market for soya meal so that, with vegetable oil and CPO stocks much depleted following the poor harvests of 2016, there is a reasonable prospect that prices will stabilise at above the $700 per tonne level during the second half of 2017. Through PLN, the Indonesian state electricity company, the group now supplies power to 26 villages and sub-villages surrounding the estates. Revenue from electricity generated from the group’s two methane capture plants amounted to some $563,000 in 2016, compared with $233,000 in the ﬁrst eight months of operation in 2015. Excellent progress was made with the group's extension planting programme in 2016, following completion of the bunding and construction of the water gates to control the ﬂood prone lower lying areas of PT Putra Bongan Jaya (“PBJ”). A total of 5,758 hectares were planted during the year and a further 4,000 hectares of plantings are planned for 2017. The latter programme will require extension of existing bunding into the northern section of PBJ and new bunding along the southern boundary of PT Cipta Davia Mandiri (“CDM”). Work on this additional bunding is already well in hand. As reported previously, in December 2016, PT Dharma Satya Nusantara Tbk ("DSN") completed its acquisition of a 15 per cent interest in the group’s principal operating subsidiary in Indonesia, PT REA Kaltim Plantations (“REA Kaltim”). In addition, the DSN group has provided loans to the REA Kaltim group. DSN’s investment and provision of loans will help to ﬁnance the group’s extension planting programme and accords with the long-held intention of increasing Indonesian participation in the group. The group successfully addressed several key elements of funding that were highlighted in the 2015 annual report. Speciﬁcally, the group issued new US dollar denominated notes maturing in 2022 by way of an exchange offer to existing 2017 dollar noteholders to extend the maturity of $13.8 million and latterly issued 3.7 million ordinary shares by way of a placing to raise some £10.5 million. In addition, £1.5 million of 2020 sterling notes held in treasury were sold by a group subsidiary and Indonesian bank loans were repackaged so as to extend the maturities and signiﬁcantly reduce nearer term repayments under the existing facilities. 06 R.E.A. Holdings plc Annual Report and Accounts 2016 Looking ahead, the recent return to more normal levels of rainfall, allowing harvesting rounds gradually to improve and renovation and repairs to the estate roads to become fully effective, should see both harvesting and production levels increase. With extraction rates expected to improve further, an increasing hectarage of mature plantings and CPO prices that could well remain around current levels, a signiﬁcant improvement in revenues should be possible. This and the continuing development of the group’s land bank, coupled with further progress in the stone and coal operations, should lead to enhanced shareholder value. DAVID J BLACKETT Chairman Under fresh agreements recently reached with third parties, operations at the group’s coal concession near Kota Bangun are expected to resume shortly following dewatering of the concession area. Under these agreements, the group should receive a steady cash ﬂow based upon the prevailing coal prices but with an agreed ﬂoor. Previously reported negotiations with another third party in relation to the Liburdinding concession proved abortive but the group is continuing to hold discussions regarding this concession with several potentially interested parties. The group is also continuing to review options for developing suitable road access to the group’s andesite stone concession. This will be a necessary preliminary to commencing extraction operations. Previous discussions with potential strategic investors have not been renewed pending the outcome of such review. Arrangements have been agreed, however, in respect of a limestone deposit adjacent to PBJ. These arrangements will provide the group with the crushed stone required for infrastructure in the agricultural operations and other construction programmes, as well as for sale to third parties. Revenue from these recent developments in the stone and coal operations will provide a useful addition to the group’s cash ﬂow. However, depending upon the level of CPO prices and operational performance during the remainder of 2017, some further funding may be required to enable the group to continue its expansion programme at the speed that it would like. Accordingly, the group is actively engaged in discussions to obtain new longer term debt ﬁnancing to replace, or replace in part, the remaining component of the group’s maturing sterling and dollar notes that has not yet been reﬁnanced. The directors are optimistic of a successful outcome to these discussions. In view of the ﬁnancial performance in 2016, the directors have not declared, or recommended the payment of any ordinary dividend in respect of the year. Provided that crops continue to recover as expected and prices for the group’s produce are maintained around current levels, the directors will consider recommending the payment of a ﬁnal ordinary dividend in respect of 2017. Following the resignation of Mark Parry, I would like to welcome Carol Gysin as the company’s new managing director. Carol has worked for the group for over eight years and is very familiar with its operations. Further, I also welcome Michael St Clair-George who joined the board in October 2016 as the senior independent non-executive director and chairman of both the audit and remuneration committees. Michael has over 40 years’ experience in the plantation and agribusiness industries in Malaysia and Indonesia. O v e r v i e w S t r a t e g c i r e p o r t G o v e r n a n c e G r o u p ﬁ n a n c a i l s t a t e m e n t s C o m p a n y ﬁ n a n c a i l s t a t e m e n t s N o t i c e o f A G M R.E.A. Holdings plc Annual Report and Accounts 2016 07 Strategic report Introduction and strategic environment Introduction Business model and resources This strategic report has been prepared to provide holders of the company’s shares with information that complements the accompanying ﬁnancial statements. Such information is intended to help shareholders in understanding the group’s business and strategic objectives and thereby assist them in assessing how the directors have performed their duty of promoting the success of the company. This report should not be relied upon by any persons other than shareholders or for any purposes other than those stated. The report contains forward-looking statements, which have been included by the directors in good faith based on the information available to them up to the time of their approval of this report. Such statements should be treated with caution given the uncertainties inherent in any prognosis regarding the future and the economic and business risks to which the group’s operations are exposed. In preparing this report, the directors have complied with section 414C of the Companies Act 2006. The report has been prepared for the group as a whole and therefore gives emphasis to those matters that are signiﬁcant to the company and its subsidiaries when taken together. The report is divided into the following sections: • • • • • • Introduction and strategic environment Agricultural operations Stone and coal operations Sustainability Finance Risks and uncertainties The balance of this ﬁrst section discusses the group’s business model and resources, its objectives and strategy for achieving these, the market context in which the group operates and the quantitative indicators that the directors consider relevant to assessment of the group’s performance. The sections on “Agricultural operations” and “Stone and coal operations” review the current status of and trends within the group’s activities and the group’s plans for their further development. “Sustainability” deals with environmental and social issues facing the group while “Finance” provides explanations regarding amounts disclosed in the ﬁnancial statements, the group’s ﬁnancial resources and its ability to fund its declared strategies. “Risks and uncertainties” itemises those risks and uncertainties currently faced by the group that the directors consider to be material. The group is principally engaged in the cultivation of oil palms in the province of East Kalimantan in Indonesia and in the production and sale of crude palm oil (“CPO”) and crude palm kernel oil (“CPKO”). Ancillary to these activities, the group generates renewable energy from its methane capture plants to provide power for its own operations and also for sale to local villages via the Indonesian state electricity company (“PLN”). The group also holds interests in respect of two stone deposits and two coal mining concessions, all of which are located in East Kalimantan. Detailed descriptions of the group’s oil palm and related activities and of its stone and coal interests are provided under, respectively, “Agricultural operations” and “Stone and coal operations” below. The group and predecessor businesses have been involved for over one hundred years in the operation of agricultural estates growing a variety of crops in developing countries in South East Asia and elsewhere. Today, the group sees itself as marrying developed world capital and Indonesian opportunity by offering investors in, and lenders to, the company the transparency of a company listed on a stock exchange of international standing while using capital raised by the company (or with the company’s support) to develop natural resource based operations in Indonesia from which the group believes good returns can be achieved. The knowledge and expertise gained from the group’s long involvement in the plantation industry represent signiﬁcant intangible resources that underpin the group’s credibility. This is important when sourcing capital, working closely with the Indonesian authorities in relation to project development and recruiting a high calibre experienced management team familiar with Indonesian regulatory processes and social customs and committed to sustainable practices. Other resources important to the group are its established base of operations, large, and near contiguous, land concessions, and a trained workforce with strong links to the local community. Objectives and general strategy The group’s objectives are both to provide attractive overall returns to investors in the shares and other securities of the company from the operation and expansion of the group’s existing businesses and to foster social and economic progress in the localities of the group’s activities, while maintaining high standards of sustainability. Achieving these objectives is dependent upon, among other things, the group’s ability to generate the operating proﬁts necessary to ﬁnance such achievement. 08 R.E.A. Holdings plc Annual Report and Accounts 2016 Future direction An Indonesian plantation law enacted in October 2014, conﬁrming a 100,000 hectare limit on licensed development of oil palms for entities that are not listed and not under majority local ownership, should not impact the group in the foreseeable future as the group has signiﬁcant headroom for development within this limit. However, the continuing growth of the Indonesian economy and a gradual shift in Indonesian political opinion towards encouraging and potentially mandating increased local ownership of Indonesian oil palm operations has reinforced the directors' long-held view on the desirability of increasing Indonesian participation in the ownership of the group's agricultural operations. To this end, in May 2016, the directors concluded a transaction with a strategic investor in the group’s principal operating subsidiary, PT REA Kaltim Plantations (“REA Kaltim”) whereby subsidiary companies of PT Dharma Satya Nusantara Tbk ("DSN"), acquired, by a combination of subscription for new shares and the acquisition of existing shares, a 15 per cent equity interest in REA Kaltim. DSN is an Indonesian natural resources company listed on the Indonesia Stock Exchange in Jakarta and engaged in the business of oil palm plantations and wood products, with plantation estates based in East, Central and West Kalimantan. In addition to securing more permanent capital in the local operations of the group, the directors believe that through this association with DSN the group will beneﬁt from exchanges of information on agronomic practices and that there will be scope for more efﬁcient sourcing of supplies and marketing of produce. The group has acknowledged that DSN may increase its participation in REA Kaltim to an eventual level of 49 per cent by gradual stages over a period of ﬁve years, but on the basis that each increase will be subject to agreement of the price and other terms at the time of such increase and to the receipt of all necessary consents and approvals, including the approval of the company’s shareholders to the extent required. CPO and CPKO are primary commodities that, as such, are sold at prices determined by world supply and demand. Such prices ﬂuctuate in ways that are difﬁcult to predict and that the group cannot control. The group’s operational strategy is therefore to concentrate on minimising unit production costs, without compromising on quality or its objectives as respects sustainable practices, with the expectation that, as a lower cost producer, the group will have greater resilience in any downturn in prices than competitor producers. In the agricultural operations, the group adopts a two pronged approach in seeking production cost efﬁciencies. First, the group aims to capitalise on its available resources by developing its land bank as rapidly as logistical, ﬁnancial and regulatory constraints permit while utilising the group’s existing agricultural management capacity to manage the resultant larger business. Secondly, the group strives continually to improve the productivity and efﬁciency of its established agricultural operations. The stone and coal mining interests represent group diversiﬁcations. The directors believe that quarrying of the group’s stone deposits will improve the durability of infrastructure in its agricultural operations and could also provide useful additional revenue from the sale of stone to third parties. Following a decision in 2012 to limit further capital committed to the coal mining interests, the group’s strategy for these interests is to maximise the recovery of capital already invested. The group’s ﬁnancial strategy is to enhance returns to equity investors in the company by procuring that a prudent proportion of the group’s funding requirements is met with prior ranking capital in the form of ﬁxed return permanent preferred capital and debt with a maturity proﬁle appropriate to the group’s projected future cash ﬂows. The group recognises that its agricultural operations, of which the total assets at 31 December 2016 represented some 92 per cent of the group’s total assets and which, in 2016, contributed all of the group’s revenue, lie within a single locality and rely on a single crop. This permits signiﬁcant economies of scale but brings with it some risks. Whilst further diversiﬁcation would afford the group some offset against these risks, the directors believe that, for the foreseeable future, the interests of the group and its shareholders will be best served by growing and developing the existing operations. They therefore have no plans for further diversiﬁcation. O v e r v e w i S t r a t e g i c r e p o r t G o v e r n a n c e G r o u p ﬁ n a n c a i l s t a t e m e n t s C o m p a n y ﬁ n a n c a i l s t a t e m e n t s N o t i c e o f A G M R.E.A. Holdings plc Annual Report and Accounts 2016 09 Strategic report Introduction and strategic environment continued The vegetable oil market context According to Oil World, worldwide consumption of the 17 major vegetable and animal oils and fats increased by 3.1 per cent to 208 million tonnes in the year to 30 September 2016 (of which vegetable oils represented 155 million tonnes). World production of the same group of vegetable oils and fats during the same period was 206 million tonnes with vegetable oils accounting for 153 million tonnes and CPO 61 million tonnes (some 29 per cent of the total). The excess of consumption over production was reﬂected in a material depletion in stocks. Total vegetable oil production is currently forecast by Oil World to rise by 2.4 per cent in 2017 to 213 million tonnes, driven principally by a recovery in CPO production (which was depressed in the preceding year by weather factors) and increased production of soybean oil. Total CPO production is projected to account for approximately 61 million tonnes of the total. Vegetable and animal oils and fats have conventionally been used principally for the production of cooking oil, margarine and soap. Consumption of these basic commodities correlates with population growth and, in less developed areas, with per capita incomes and thus economic growth. Demand is therefore driven by the increasing world population and economic growth in the key markets of China and India. Vegetable and animal oils and fats can also be used to provide biofuels and, in particular, biodiesel. The principal competitors of CPO are the oils from the annual oilseed crops, the most signiﬁcant of which are soybean, oilseed rape and sunﬂower. Because these oilseeds are sown annually, their production can be rapidly adjusted to meet prevailing economic circumstances with high vegetable oil prices encouraging increased planting and low prices producing a converse effect. Accordingly, in the absence of special factors, pricing within the vegetable oil and fat complex can be expected to oscillate about a mean at which adequate returns are obtained from growing the annual oilseed crops. Since the oil yield per hectare from oil palms (at up to seven tonnes) is much greater than that of the principal annual oilseeds (less than one tonne), CPO can be produced more economically than the principal competitor oils and this provides CPO with a natural competitive advantage within the vegetable oil and animal fat complex. Within vegetable oil markets, CPO should also continue to beneﬁt from health concerns in relation to trans-fatty acids. Such acids are formed when vegetable oils are artiﬁcially hardened by partial hydrogenation. Poly-unsaturated oils, such as soybean oil, rape oil and sunﬂower oil, require partial hydrogenation before they can be used for shortening and other solid fat applications but CPO does not. The directors believe that demand for, supply of and consequent pricing of, vegetable and animal oils and fats will ultimately be driven by fundamental market factors. However, they also recognise that normal market mechanisms can be affected by government intervention. It has long been the case that some areas (such as the EU) have provided subsidies to encourage the growing of oilseeds and that such subsidies have distorted the natural economics of producing oilseed crops. In particular, there have been actions by governments attempting to reduce dependence on fossil fuels. These have included steps to enforce mandatory blending of biofuel as a ﬁxed minimum percentage of all fuels and subsidies to support the cultivation of crops capable of being used to produce biofuel. In recent years, biofuel has become an important factor in the vegetable oil markets. According to Oil World, biofuel production in the year to 30 September 2016 accounted for some 15 per cent of global vegetable oil consumption. There is substantial evidence that over a period of several years there has been a correlation between vegetable oil and petroleum oil prices but, following the sharp decline in petroleum oil prices during 2015, it appears that the correlation has, for the time being at least, been broken. There are probably two principal reasons for this: the continuing growth in food consumption of vegetable oils and the fact that not all conversion of vegetable oils to biofuels is dependent upon market factors. An increasing element of biofuel use reﬂects government mandates. In Indonesia, for example, a levy on exports of CPO of $50 per tonne introduced in July 2015 is being used to subsidise biodiesel production and is leading to increasing amounts of CPO being converted to biodiesel for internal consumption. The resultant effect is that the economics of producing biodiesel (which, subsidies apart, are dependent upon the price of competing petroleum based diesel) are not currently the determinant of vegetable oil prices so that those prices no longer correlate with energy prices. This situation would, of course, change should petroleum oil prices recover materially from present levels and restore the economics of manufacturing unsubsidised biodiesel. A graph of CIF Rotterdam spot CPO prices for the last ten years, as derived from prices published by Oil World, is shown on the adjacent page. The monthly average price over the ten years has moved between a high of $1,292 per tonne and a low of $488 per tonne. The monthly average price over the ten years as a whole has been $844 per tonne. The CPO price, CIF Rotterdam, edged steadily upwards through 2016 from an opening price of $570 per tonne to close at $801 per tonne but has fallen back since then and currently stands at $710 per tonne. Whilst there is an expectation of better CPO production in 2017, soybean oil 10 R.E.A. Holdings plc Annual Report and Accounts 2016 Crude palm oil monthly average price 1400 1200 1000 800 600 400 200 0 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 production may be constrained by a relatively weak market for soya meal so that, with vegetable oil and CPO stocks much depleted following the poor harvests of 2016, there is a reasonable expectation that prices will stabilise at above the $700 per tonne level during the second half of 2017. The Indonesian context The Indonesian economy remained relatively stable during 2016 and continued to be one of the best performing global economies behind India and China. Despite the adverse impact of continuing low global commodity prices, GDP still grew by over 5.0 per cent in 2016 (2015: 4.9 per cent) boosted by a number of government infrastructure projects throughout Indonesia. The ofﬁcial inﬂation rate was around 3.0 per cent in 2016 (2015: 3.4 per cent), although real inﬂation, particularly in the outer islands, is likely to have been higher than this as suggested by an average increase of 8.3 per cent in the minimum wage for 2017 in the three districts in which the group operates in East Kalimantan. The Indonesian rupiah strengthened from Rp 13,795 = $1 at the start of 2016 to Rp 13,436 = $1 by the end of the year and has strengthened slightly further in the ﬁrst months of 2017. The consistently high level of security, in place in Jakarta for many years, has meant that the police have apparently been able to prevent or respond swiftly to a number of planned terrorist incidents. This has helped to maintain international, as well as domestic, investor conﬁdence in the effectiveness of the government, an important facilitator of economic growth. Against a background of positive macro-economic indicators, the government of President Joko Widodo (“Jokowi”) has started to make progress with delivering on key election pledges of reduced unemployment, increased infrastructure investment and structural reform. R.E.A. Holdings plc Annual Report and Accounts 2016 11 O v e r v e w i S t r a t e g i c r e p o r t G o v e r n a n c e G r o u p ﬁ n a n c a i l s t a t e m e n t s C o m p a n y ﬁ n a n c a i l s t a t e m e n t s N o t i c e o f A G M Strategic report Introduction and strategic environment continued Evaluation of performance In seeking to meet its expansion, efﬁciency and sustainability objectives, the group sets operating standards and targets for most aspects of its activities and regularly monitors performance against those standards and targets. For many aspects of the group’s activities, there is no single standard or target that, in isolation from other standards and targets, can be taken as providing an accurate continuing indicator of progress. In these cases, a collection of measures has to be evaluated and a qualitative conclusion reached. The directors do, however, rely on regular reporting of certain key performance indicators that are comparable from one year to the next, in addition to monitoring the key components of the group’s proﬁt and loss account and balance sheet. These performance indicators are summarised in the table below. Quantiﬁcations of the indicators for 2016 with, where available, comparative ﬁgures for 2015 are provided in the succeeding sections of this report, with each category of indicators being covered in the corresponding section of the report. The run up to the governor’s elections in Jakarta held in February 2017, which resulted in the failure of any candidate to attain the required minimum 50 per cent of the vote and consequently the need for a second and ﬁnal round of voting to be held in April 2017, was tarnished by political tensions and accusations amongst the candidates. Although this led to a few mass demonstrations in Jakarta, there has since been a public reconciliation between the sides supporting each of the candidates, suggesting that democracy in Indonesia is maturing and able to weather major political storms that erupt from time to time. Maintaining investor conﬁdence in the country is key to its economic growth. In East Kalimantan, where the group’s operations are based, the local economy continued to suffer for most of 2016 from the low coal prices that had previously led to the closure of many coal mines, as well as from the sharp fall in oil palm production during the middle of the year associated with the worst El Niño event on record. The ﬁnal quarter of 2016 saw the start of a recovery in coal prices, leading to the reopening of some mines, as well as improving production in the plantation sector. The group continues to maintain excellent relations with the longstanding regent of Kutai Kartanegara, where the group’s mature estates are located, and is building good relations with the newly elected regents of Kutai Timur and Kutai Barat, where the developing estates are located. The Kutai Kartanegara regent is seen as a front runner for the elections for governor of East Kalimantan to be held in 2018. The export levy of $50 per tonne introduced in July 2015 continues to be applied to all Indonesian export sales of CPO and CPKO irrespective of selling price. In addition, Indonesia applies sliding scales of duty on exports of CPO and CPKO at export prices above certain levels. These scales have been adjusted so that, at export prices at which export duty was payable under the previous sliding scales, the combined cost of export levy and export duty under the new sliding scale is unchanged from the export duty that would have been payable under the previous sliding scales. Export duty on CPO now becomes payable when export prices CIF Rotterdam exceed $750 per tonne. 12 R.E.A. Holdings plc Annual Report and Accounts 2016 Performance indicator Agricultural operations New extension area planted Crop of fresh fruit bunches (“FFB”) harvested Measurement Purpose The area in hectares of new land planted out during the applicable period The weight in tonnes of FFB delivered to oil mills from the group’s estates during the applicable period CPO extraction rate achieved The percentage by weight of CPO extracted from FFB processed Palm kernel extraction rate achieved The percentage by weight of palm kernels extracted from FFB processed CPKO extraction rate achieved The percentage by weight of CPKO extracted from palm kernels crushed To measure performance against the group’s expansion objective To measure ﬁeld efﬁciency and assess the extent to which the group is achieving its objective of maximising output from its operations To measure mill efﬁciency and assess the extent to which the group is achieving its objective of maximising output from its operations To measure mill efﬁciency and assess the extent to which the group is achieving its objective of maximising output from its operations To measure mill efﬁciency and assess the extent to which the group is achieving its objective of maximising output from its operations Stone and coal operations Stone or coal produced Sustainability Work related fatalities Smallholder percentage Greenhouse gas emissions per tonne of CPO and per planted hectare Finance Return on adjusted equity Net debt to total equity The weight in tonnes of stone or coal extracted from each applicable concession during the applicable period To measure production efﬁciency and assess the extent to which the group is achieving its objective of maximising output from its operations Number of work related fatalities during the applicable period To measure the efﬁcacy of the group’s health and safety policies The area of associated smallholder plantings expressed as a percentage of the planted area of the group’s estates To measure performance against the group’s smallholder expansion objective Greenhouse gas emissions measured in tonnes of CO2 equivalent divided, respectively, by the weight of CPO extracted from FFB processed and by the number of group planted hectares supplying the group mills Proﬁt before tax for the period less amounts attributable to preferred capital expressed as a percentage of average total equity (less preferred capital) for the period Borrowings and other indebtedness (other than intra group indebtedness) less cash and cash equivalents expressed as a percentage of total equity To measure the intensity of the group’s greenhouse gas emissions To measure the group’s ﬁnancial performance To assess the risks of the group’s capital structure R.E.A. Holdings plc Annual Report and Accounts 2016 13 O v e r v e w i S t r a t e g i c r e p o r t G o v e r n a n c e G r o u p ﬁ n a n c a i l s t a t e m e n t s C o m p a n y ﬁ n a n c a i l s t a t e m e n t s N o t i c e o f A G M Strategic report Agricultural operations Structure Land areas All of the group’s agricultural operations are located in East Kalimantan and have been established pursuant to an understanding dating from 1991 whereby the East Kalimantan authorities undertook to support the group in acquiring, for its own account and in cooperation with local interests, substantial areas of land in East Kalimantan for planting with oil palms. The oldest planted areas, which represent the core of the group’s agricultural operations, are owned through REA Kaltim in which a group company now holds an 85 per cent economic interest (2015: 100 per cent). With the REA Kaltim land areas approaching full utilisation, over the four-year period from 2005 to 2008 the company established or acquired ﬁve additional Indonesian subsidiaries, each potentially bringing with it a substantial allocation of land in the vicinity of the REA Kaltim estates. Each of these ﬁve subsidiaries is currently owned as to 95 per cent by REA Kaltim and 5 per cent by Indonesian local investors. A further subsidiary PBJ2 acquired in 2012 and with additional land allocations will, upon completion of necessary legal formalities, be owned as to 95 per cent by the group and as to the balance by a local investor. As noted under “Land areas” below, an agreement concluded in 2015 will result in the swap of certain land areas owned by the group for shares in PT Prasetia Utama (“PU”) which will be similarly owned. A diagram showing the structure of the REA Kaltim sub-group is set out below. The operations of REA Kaltim are located some 140 kilometres north west of Samarinda, the capital of East Kalimantan, and lie either side of the Belayan river, a tributary of the Mahakam, one of the major river systems of South East Asia. The SYB area and one KKS area are contiguous with the REA Kaltim areas and together form a single site. All of these areas fall within the Kutai Kartanegara regency of East Kalimantan. The PBJ area sits some 70 kilometres to the south of the REA Kaltim areas in the West Kutai regency of East Kalimantan while the CDM and KMS areas and a second KKS area are located in close proximity to each other in the East Kutai regency of East Kalimantan less than 30 kilometres to the east of the REA Kaltim areas. Two strips of land held by PBJ2 are adjacent to the land areas held by REA Kaltim and SYB; a third strip, bordering the PBJ land areas and formerly held by PBJ2, is being reallocated to PBJ. Historically, the REA Kaltim, SYB, KKS, CDM and KMS areas were most readily accessed by river. However, construction in 2015 of a new road between Tabang (a town to the north of the REA Kaltim estates) and Kota Bangun, that passes through the REA Kaltim estates and connects via a long- standing bridge over the Mahakam River with an existing road from Kota Bangun to Samarinda (the capital of East Kalimantan), means that the group has alternative transport options particularly when either excessively dry or wet weather periods affect river or road access. Transit times between the estates and Balikpapan can now be as little as six hours by road. A bridge across the Senyiur River links REA Kaltim and the KMS, CDM and second KKS areas. The PBJ area is easily accessible by road. REA Kaltim sub-group PT REA Kaltim Plantations REA Kaltim PT Cipta Davia Mandiri CDM PT Kartanegara Kumala Sakti KKS PT Kutai Mitra Sejahtera KMS PT Putra Bongan Jaya PBJ PT Sasana Yudha Bhakti SYB PT Persada Bangun Jaya PBJ2 14 R.E.A. Holdings plc Annual Report and Accounts 2016 Although the 1991 understanding established a basis for the provision of land for development by, or in cooperation with, the group, all applications to develop previously undeveloped land areas have to be agreed by the Indonesian Ministry of Forestry and have to go through a titling and permit process. This process begins with the grant of an allocation of Indonesian state land by the Indonesian local authority responsible for administering the land area to which the allocation relates (an “izin lokasi”). Allocations are normally valid for periods of between one and three years but may be extended if steps have been taken to obtain full titles. Pre Post swap swap Land areas Hectares Hectares Fully titled land CDM 9,784 9,784 KMS 7,321 7,321 PBJ 11,602 11,602 PU – 9,097 REA Kaltim 30,106 30,106 SYB 11,771 8,217 70,584 76,127 After a land allocation has been obtained (either by direct grant from the applicable local authority or by acquisition from the original recipient of the allocation or a previous assignee), the progression to full title involves environmental and other assessments to delineate those areas within the allocation that are suitable for development, settlement of compensation claims from local communities and other necessary legal procedures that vary from case to case. The titling process is then completed by a cadastral survey (during which boundary markers are inserted) and the issue of a formal registered land title certiﬁcate (an “hak guna usaha” or “HGU”). Once full title has been obtained, central government and local authority permits are required for the development of the fully titled land. These permits are often issued in stages. During 2016, the overall area of the group’s fully titled agricultural land remained at 70,584 hectares. In addition, at 31 December 2016, the group held, or had previously held and can potentially renew, land allocations totalling 37,631 hectares. Certain of the land areas held by SYB overlap with mineral rights held by an Indonesian third party company, PT Ade Putra Tanrajeng (“APT”). Pursuant to an agreement concluded in 2015, it has been agreed that SYB will swap 3,554 hectares of fully titled land and relinquish 2,212 hectares of untitled land allocations (both being areas the subject of the overlapping rights), in exchange for the transfer to SYB of ownership of PU, an associate of APT, and thus, indirectly, for the fully titled land areas of 9,097 hectares held by PU. The PU land is located on the southern side of the Belayan River opposite the SYB northern areas that are to be retained and is linked by a government road to the southern REA Kaltim areas. Areas to be designated for conservation have now been identiﬁed and completion of the swap arrangements is now being actively progressed with a view to satisfying any remaining conditions in 2017. The breakdown of the land areas held by the group as they currently are and as they are expected to be following completion of the SYB land swap agreement is set out below: Land subject to completion of titling CDM 6,280 6,280 KKS (area adjacent to CDM) 5,150 5,150 KKS (provisional allocation) 12,050 12,050 KMS 1,964 1,964 PBJ 2,564 2,564 PBJ2* 7,411 7,411 SYB 2,212 – 37,631 35,419 * Of the area shown above as held by PBJ2, application has been made to reallocate to PBJ 2,142 hectares comprising a strip of land adjacent to the existing PBJ land areas. A proportion of this strip and a substantial proportion of the balance of the PBJ2 land allocation will be transferred to smallholder cooperatives. A proportion of the other areas classiﬁed above as “land subject to completion of titling” will also be so transferred. The KKS provisional allocation is conditional not only upon satisfaction of the normal titling requirements but also upon completion of a necessary rezoning of the area concerned. Whilst the group continues to maintain its claim to this area should rezoning occur, the prospect of a favourable decision on such rezoning appears increasingly unlikely. Titling of the not yet fully titled land allocations may be expected to result in full titles being granted to only part of the allocated areas as land the subject of conﬂicting claims, deemed unsuitable for oil palm cultivation or allocated for smallholder cooperatives may be excluded. Moreover, not all of the areas in respect of which full HGU titles are issued can be planted with oil palms. Some fully titled land may be unsuitable for planting, a proportion must be set aside for conservation and a further proportion will be required for roads, buildings and other infrastructural facilities. The directors believe that the 76,127 hectares of fully titled land expected to be held following completion of the SYB land swap agreement, together with the land allocations listed above (but excluding the KKS provisional land allocation), will permit extension of the group’s existing oil palm planting to an eventual total planted area approaching 60,000 hectares. With land prices rising and increasing interest in plantation development, land is much less available than was the case in 1991 when the group was ﬁrst established in East Kalimantan. Moreover, the Indonesian government is now applying a “use it or lose it” policy to land. Pursuant to this R.E.A. Holdings plc Annual Report and Accounts 2016 15 O v e r v e w i S t r a t e g i c r e p o r t G o v e r n a n c e G r o u p ﬁ n a n c a i l s t a t e m e n t s C o m p a n y ﬁ n a n c a i l s t a t e m e n t s N o t i c e o f A G M Strategic report Agricultural operations continued policy, land allocations and titles may be rescinded if the land concerned is not utilised within a reasonable period for the purposes for which it was allocated. The group must therefore be careful in managing its land bank to ensure that it can demonstrate clear plans for the development of all of its undeveloped land holdings in addition to monitoring its compliance with the regulations in respect of the limit on ownership of plantation land as referred to under “Future direction” in “Introduction and strategic environment” above. Land development Areas planted as at 31 December 2016 amounted in total to 42,846 hectares. Of this total, mature plantings comprised 31,521 hectares having a weighted average age of 13 years. A further 2,555 hectares planted in 2013 were scheduled to come to maturity at the start of 2017. The breakdown by planting year of the total of 42,846 planted hectares (which exclude planted areas to be relinquished by SYB upon completion of the SYB land swap agreement described under “Land areas” above) is shown below. Planted areas were resurveyed during 2016 as a result of which the previously reported planted area was reduced by eight hectares and certain areas were reallocated between different planting years. Planted areas Hectares Mature areas 1994 416 1995 1,956 1996 2,272 1997 2,479 1998 4,829 1999 351 2000 874 2004 3,190 2005 2,279 2006 3,362 2007 3,455 2008 991 2009 625 2010 1,419 2011 1,073 2012 1,950 31,521 Immature areas 2013 2,555 2014 777 2015 2,236 2016 5,757 42,846 Planted areas that complete a planned planting programme for a particular year but are planted in the early months of the succeeding year are normally allocated to the planting year for which they were planned. The above table includes a total of 232 hectares of ﬂood prone areas forming part of the 2009 and 2010 plantings at CDM that were previously abandoned but are now expected to be recovered following construction of bunding. 16 R.E.A. Holdings plc Annual Report and Accounts 2016 There remain some additional areas for planting out in KMS, where some 4,500 hectares have been planted to date. When fully planted, this hectarage should amount to around 4,800 hectares, of which some 800 hectares that were planted in 2013 will be transferred to village cooperatives in due course. Rapid progress was made with the group's extension planting programme in 2016, following completion of bunding and construction of water gates to control the ﬂood prone lower lying areas of PBJ. Cumulative development for the year is detailed below: PBJ CDM Total hectares hectares hectares Cleared, not yet planted at 1 January 2016 2,338 353 2,691 Cleared, during 2016 2,110 2,538 4,648 Cleared, not yet planted at 31 December 2016 (492) (1,089) (1,581) Planted during the period 3,956 1,802 5,758 The group plans further extension planting in 2017 of not less than 4,000 hectares again to be split predominantly between PBJ and CDM. This programme will require extension of the existing bunding into the northern section of PBJ and new bunding along the southern boundary of CDM. Work on bunding is already well in hand and the group is on course to achieve the planned expansion. At current cost levels, extension planting in areas adjacent to the existing developed areas still offers the prospect of good returns. Accordingly, it remains the policy of the directors that, subject to ﬁnancial and logistical constraints, the group should continue its expansion and should aim over time to plant with oil palms all suitable undeveloped land available to the group (other than areas set aside by the group for conservation). Such expansion will, however, involve a series of discrete annual decisions as to the area to be planted in each forthcoming year and the rate of planting may be accelerated or scaled back in the light of prevailing circumstances. Moreover, the group’s capacity for extension development is likely to remain dependent upon the rate at which the group can make additional land areas available for planting. Processing and transport facilities The group currently operates three oil mills in which the FFB crops harvested from the mature oil palm areas are processed into CPO and palm kernels. The two older mills date from 1998 and 2006 respectively and each is designed to have effective processing capacity of 80 tonnes per hour. The third mill, operating since 2012, has a current capacity of 40 tonnes per hour but is now being expanded to increase its capacity to 60 tonnes per hour. Installation of a second boiler and the other equipment needed to achieve this expansion is expected to be completed during 2017. Following an extensive programme of refurbishment, all but one of the four boilers in the group’s older mills have now been reconditioned; reconditioning of the remaining boiler will be completed during 2017. Having two boilers in a mill provides resilience and facilitates downtime for routine maintenance while retaining the designed throughput. Breakdown hours were substantially reduced in 2016 and, with enhanced security systems and ﬂow meters to monitor throughput, extraction rates improved as noted under “Crops and extraction rates” below. Once the recent plantings at KMS and the plantings at CDM reach a certain level of maturity, a further oil mill is likely to be needed to process the additional FFB production from these new areas. Early fruit from PBJ is being sent for processing in the REA Kaltim mills but because of the distance between PBJ and the group’s other planted areas, this arrangement will become sub-optimal as the PBJ production increases. It is therefore planned that, as FFB production from PBJ grows, a further mill will also be built on PBJ. The directors do not currently foresee either of the two further oil mills that may eventually be needed being required before 2019. Two of the group’s oil mills incorporate, within the overall facilities, palm kernel crushing plants in which palm kernels are further processed to extract the CPKO that the palm kernels contain. The processing of kernels into CPKO avoids the material logistical difﬁculties and cost associated with the transport and sale of kernels. Each kernel crushing plant has a ﬁnal design capacity of 150 tonnes of kernels per day which is sufﬁcient to process kernel output from the group’s three oil mills. Total installed capacity is currently 250 tonnes per day. A ﬂeet of barges for transporting CPO and CPKO is used in conjunction with tank storage adjacent to the oil mills and a transhipment terminal owned by the group downstream of the port of Samarinda. The core river barge ﬂeet, which is operated under time charter arrangements to ensure compliance with current Indonesian cabotage regulations, comprises a number of small vessels, ranging between 750 and 2,000 tonnes. These barges are used for transporting CPO and CPKO from the estates to the transhipment terminal for bulking and then either loading to buyers' own vessels on an FOB basis or for loading to either a 4,000 tonne or 2,400 tonne sea-going barge. The sea-going barges, also operated under time charter arrangements, make deliveries to customers on a CIF basis in other parts of Indonesia. On occasion, the group also spot charters additional barges for shipments and to provide temporary storage if required. The directors believe that ﬂexibility of delivery options is helpful to the group in its efforts to optimise the net prices, FOB port of Samarinda, that it is able to realise for its produce. Moreover, the group’s ability itself to deliver CPO on a CIF basis, buyer’s port, allows the group to make sales without exposure to the collection delays sometimes experienced with FOB buyers. The majority of CPO sales are now made to Indonesian reﬁneries in Balikpapan, East Kalimantan, and Kota Baru, South Kalimantan, which can be easily accessed from the group’s bulking station on the Mahakam River and to which the voyage time is much shorter than that to East Malaysia where historically the majority of CIF sales were made. During periods of lower rainfall (which normally occur for short periods during the drier months of May to August of each year), river levels on the upper part of the Belayan become more volatile and CPO and CPKO must be transferred by road from the mills to a point some 70 kilometres downstream at Pendamaran where the group has established a permanent loading facility and the year round loading of barges of up to 2,400 tonnes is possible. The group maintains its own ﬂeet of trucks to transport CPO and CPKO from the oil mills either to the usual loading points on the upper reaches of the Belayan River or to the downstream loading point at Pendamaran as weather conditions may dictate. The current river route downstream from the mature estates follows the Belayan River to Kota Bangun (where the Belayan joins the Mahakam River), and then the Mahakam through Tenggarong, the capital of the Kutai Kartanegara regency, Samarinda, the East Kalimantan provincial capital, and ultimately through the Mahakam delta into the Makassar Straits. When a fourth oil mill is eventually constructed to process FFB from the newer estates at KMS and CDM, the CPO and CPKO from that mill is likely to be evacuated by an alternative upstream route via the Kedang Kepala River which joins the Mahakam between Kota Bangun and Tenggarong. In due course, a ﬁfth mill at PBJ will have direct access to the Mahakam and will follow the same route along the Mahakam as CPO and CPKO from the group’s existing mills. O v e r v e w i S t r a t e g i c r e p o r t G o v e r n a n c e G r o u p ﬁ n a n c a i l s t a t e m e n t s C o m p a n y ﬁ n a n c a i l s t a t e m e n t s N o t i c e o f A G M R.E.A. Holdings plc Annual Report and Accounts 2016 17 Strategic report Agricultural operations continued Crops and extraction rates Key agricultural statistics for the year to 31 December 2016 (with restated comparative ﬁgures for the corresponding period of 2015) were as follows: FFB crops (tonnes) 2016 2015* Group harvested 468,371 600,741 Third party harvested 98,052 138,657 Total 566,423 739,398 Production (tonnes) Total FFB processed 560,957 728,871 CPO 127,697 161,844 Palm kernels 26,371 33,877 CPKO 9,840 12,557 Extraction rates (percentage) CPO 22.8 22.2 Palm kernels 4.7 4.7 CPKO 34.7 35.0 Rainfall (mm) Average across the estates 3,449 2,141 * The 2015 comparative ﬁgures have been restated as the group’s new information system now allows for data collection in real time so that operational statistics can be reported on an actual month basis. As previously reported, the severe dry periods experienced in both 2014 and 2015 had a signiﬁcant negative impact on the group's crop production in 2016, alongside that of other oil palm plantations in East Kalimantan and in a number of other areas of South East Asia. Cropping rates started to recover from September onwards, but heavy rainfall in November and December disrupted collection, which meant that production in the ﬁnal months of the year fell short of crop availability as not all crop could be recovered. Whilst the change in precipitation is positive for future productivity, such a dramatic increase after a prolonged period of drought, with average rainfall in 2016 more than 60 per cent higher than in 2015, had a short term negative impact on conditions for both harvesting and transportation. The substantial recent investment in refurbishment of the group’s two older mills, a regular programme of mill maintenance and a drive to improve the quality of third party FFB from smallholders and nearby estates have all contributed to the improvements in overall extraction rates achieved over the last two years, with the CPO extraction rate averaging close to 23 per cent in 2016. Indeed, the extraction rate achieved in 2016 would have been higher were it not for the problems in the closing months of the year with harvesting and transportation. These reduced the quality of FFB delivered to the mills and thereby reduced the CPO extraction potential of the FFB concerned. Third party FFB continues to provide additional throughput and revenue. Moving into 2017, the group has instituted a programme to strengthen the group’s road infrastructure. This will be assisted by the arrangements now in place for sourcing stone from the group’s own stone operations as detailed under “Stone and coal operations” below. This should produce fairly rapid improvements in production but, having effectively started only in March 2017, did not improve the harvesting and transportation situation to any signiﬁcant extent during the wetter part of the ﬁrst quarter of the year. As a result, not all available crop was harvested in that period and the FFB crop for the period from the beginning of the year to the end of March 2017 amounted to 127,636 tonnes, against 124,475 tonnes for the same period in 2016. In line with a previously announced decision, planned fertiliser levels in the mature areas were signiﬁcantly increased for 2016 although a proportion of the planned programme had to be rolled over into 2017 because of the heavy rainfall at the end of the year. The group intends to maintain higher dosages going forward. Fertiliser applications in immature areas have always been maintained at high levels and therefore no material changes are planned for those areas. The group has recently engaged a new agronomy adviser to provide advice on optimising ﬁeld disciplines and improving crop yields. The adviser has conﬁrmed his support for the group’s planned higher levels of fertiliser application. Steps are to be taken to bund and resupply mature areas totalling slightly over 1,000 hectares that have been damaged over the years by periodic ﬂooding. These areas apart, the group retains good stands in all of its mature areas. With good bunch formation being reported, increased fertiliser applications and work now underway to strengthen the group’s road infrastructure, the directors are optimistic that monthly production will steadily improve and that, over the next couple of years, annual production levels will be restored to the levels that the group would expect given the normal yield proﬁles of the plant varieties that make up the group’s plantings. Revenues During 2016, all of the group’s CPO and CPKO was sold in the local Indonesian market, reﬂecting continuing strong demand from easily accessible local reﬁners and the delivery efﬁciencies achievable from selling to this nearby customer base. The group has established relationships with each of the four reﬁneries now operating in the region. Competition between these reﬁneries ensures that prices achieved are competitive. Local sales do not attract export duty but arbitrage between the local and international markets means that the price differential between the markets is normally an 18 R.E.A. Holdings plc Annual Report and Accounts 2016 almost exact reﬂection of the additional imposts incurred on exports. CPO and CPKO sales are made on contract terms that are comprehensive and standard for each of the markets into which the group sells. The group therefore has no current need to develop its own terms of dealing with customers. CPO and CPKO are widely traded and the group does not therefore see the concentration of its sales on a small number of customers as a signiﬁcant risk. Were there to be problems with any one customer, the group could readily arrange for sales to be made further aﬁeld and, whilst this could result in additional delivery costs, the overall impact would not be material. With some revival in the ISCC certiﬁed market, the group sold 95,660 tonnes of ISCC certiﬁed CPO and a further 2,301 tonnes of RSPO certiﬁed CPKO during 2016 at premia of, respectively, $5 and $35 per tonne. By contrast, there were no sales of Greenpalm certiﬁcates under the RSPO’s book and claim system as explained under “Certiﬁcation” in “Sustainability” below. As a rule, all CPO and CPKO produced by the group is sold on the basis of prices prevailing immediately ahead of delivery but, on occasions when market conditions appear favourable, the group may make forward sales at ﬁxed prices. The fact that export duty is levied on prices prevailing at date of delivery, not on prices realised, does act as a disincentive to making forward ﬁxed price sales since a rise in CPO prices prior to delivery of such sales will mean that the group will not only forego the beneﬁt of a higher price but may also pay export tax on, and at a rate calculated by reference to, a higher price than it has obtained. No deliveries were made against forward ﬁxed price sales of CPO or CPKO during 2016 and the group currently has no sales outstanding on this basis. The average prices per tonne realised by the group in respect of 2016 sales of CPO and CPKO, adjusted to FOB, Samarinda, and net of export duty were, respectively, $521 (2015: $485) and $1,111 (2015: $744). Operating efﬁciency The group’s costs principally comprise: direct costs of harvesting, processing and despatch; direct costs of upkeep of mature areas; estate and central overheads in Indonesia; the overheads of the UK head ofﬁce; and ﬁnancing costs. The group’s strategy, in seeking to minimise unit costs of production, is to maximise yields per hectare, to seek efﬁciencies in overall costs and to spread central overheads over as large a cultivated hectarage as possible. The group’s operations lie in an area where average rainfall levels are high. The group endeavours to capitalise on this advantage by striving to achieve economic efﬁciencies and best agricultural practice. In particular, careful attention is given to ensuring that new oil palm areas are planted with high quality seed from proven seed gardens and that all oil palm areas receive appropriate husbandry. Methane from the group’s two methane capture plants, which were commissioned in 2012, drives four generators (each of one megawatt capacity) generating power for the group’s own use. These generators have enabled the group to achieve material savings in energy costs with consumption of diesel oil for electricity generation largely eliminated on the REA Kaltim and SYB estates. An additional three megawatts of generating capacity are dedicated to PLN, the Indonesian state electricity company, to use in supplying power to 26 villages and sub-villages surrounding the group's estates by way of a local grid. Payment for the power so utilised is made by PLN to the company and the local district power company, Perusahaan Daerah Kelistrikan Dan Sumber Daya Energi Kabupaten Kutai Kartanegara (“Perusda”), at ﬁxed rates determined by Indonesian state regulations. The rate of uptake continues to grow and, as further households install prepay meters, power offtake from the group is projected to increase. Revenue from electricity sales amounted to some $563,000 in 2016, compared with $233,000 in the ﬁrst eight months of operation in 2015. PLN may, in due course, be able to increase its power capacity requirement to eight megawatts. Methane production could be further increased by installing a third methane capture plant in the group's most recently constructed mill. There are other potential opportunities for cost reduction from the use of surplus methane, such as conversion of the group’s vehicle ﬂeet to run on a biomethane and diesel mix, which could reduce diesel consumption in the group's vehicles by some 70 per cent. Other cost saving initiatives that have been implemented by the group in recent years include measures to reduce the use of pesticides, in-house production of harvester bridges and manufacture of bricks for housing using a mixture of cement and boiler ash from the mills. The group’s new information system, of which the ﬁrst phase was implemented in 2015, now provides transparent oversight of substantially all estate activities involving labour and production. Work is now in hand on implementing ﬁeld inputting of data from handheld devices and integrating the operational data being recorded with the group’s accounting records. O v e r v e w i S t r a t e g i c r e p o r t G o v e r n a n c e G r o u p ﬁ n a n c a i l s t a t e m e n t s C o m p a n y ﬁ n a n c a i l s t a t e m e n t s N o t i c e o f A G M R.E.A. Holdings plc Annual Report and Accounts 2016 19 Strategic report Stone and coal operations Concessions The group holds interests in respect of two stone deposits and two coal mining concessions, all of which are located in East Kalimantan in Indonesia. The stone concessions comprise a substantial deposit of high grade andesite stone located to the north east of the SYB northern plantations and a much smaller limestone deposit adjacent to the PBJ plantations. The coal mining concessions comprise a high caloriﬁc value deposit near Kota Bangun and the lower grade Liburdinding concession in the southern part of East Kalimantan. The rights in respect of the Muser coal concession (in which the group formerly held an interest acquired together with the Liburdinding concession) have been allowed to lapse as the group concluded that the prospects for this concession were insufﬁcient to justify the costs of extending the Muser licences. Structure Stone quarrying is classiﬁed as a mining activity for Indonesian licensing purposes and is subject to the same regulatory regime as coal mining. The group’s stone interests are therefore managed in conjunction with the group’s coal interests through an Indonesian subsidiary company, PT KCC Resources Indonesia (“KCCRI”), which is 95 per cent owned by the company’s UK subsidiary company, KCC Resources Limited, and ﬁve per cent owned by local partners. The andesite stone and coal mining concessions are held by Indonesian concession holding companies, which are currently wholly owned by the group’s local partners but with the group having the right, subject to satisfaction of certain conditions (the “applicable conditions”), to acquire 95 per cent of each of the concession holding companies at the local partners’ original cost. In the meanwhile, the concession holding companies are ﬁnanced by loan funding from the group on terms such that no dividends or other distributions or payments may be paid or made by the concession holding companies to the local partners without the prior agreement of the group. Recent changes to the Indonesian regulatory regime applicable to foreign investment in mining are likely to mean that the applicable conditions cannot be satisﬁed in their existing form. The concession holding companies have not been consolidated, therefore, although the group is conﬁdent that such conditions could over time be successfully renegotiated without material loss to the group. In the meanwhile, in consideration of the group’s continuing support for KCCRI and all the concession holding companies, the andesite stone concession holding company has guaranteed the obligations to the group of the coal concession holding companies. The limestone concession is held by an independent Indonesian third party with which the group has indirectly concluded an exclusive offtake agreement as detailed below. Operating activities Pursuant to the arrangements agreed in respect of the limestone quarry, KCCRI will purchase crushed stone from a third party contractor who will quarry the stone at the concession site and then transfer it to a site within the PBJ property for crushing by the same contractor. The resultant crushed stone will be sold by KCCRI to PBJ and potentially other group companies, as well as to third parties. The crushed stone purchased by PBJ and other group companies will be utilised for hardening roads. The arrangements agreed between KCCRI and the third party contractor, and between that contractor and the concession owner, provide that the contractor will have exclusive rights to quarry the concession and that all stone quarried will be transferred to and crushed at PBJ and then sold to KCCRI. The concession size is estimated at between 1.2 and 1.5 million tonnes although there may be scope later to extend into an adjacent area. The contractor is currently mobilising and production is expected to start in June 2017. The operating licence required to establish a simple quarrying and crushing operation on the andesite stone concession was obtained in 2014. Crushed stone will be transferred from the concession site by truck to a stockpile on the REA Kaltim estates from which onward deliveries will be made to the agricultural operations and third party buyers. The agricultural operations can utilise signiﬁcant quantities of crushed stone for their building and infrastructure construction programmes and indications are encouraging that there will also be good third party demand for crushed stone for road building and use as a concrete aggregate. The group is continuing to review options for developing suitable road access to the andesite stone concession. This will be a necessary preliminary to commencing extraction operations at the concession. A recent study suggests that it may be sensible to upgrade the existing road to the concession only to the extent necessary to support smaller trucks and to limit initial production volumes to the level that such smaller trucks have the capacity to move. This would reduce the capital cost of opening the concession and thus facilitate initial funding, particularly if ﬁrm indications of offtake can be obtained. As cash ﬂow builds, the road could then be upgraded to support larger trucks and higher production volumes. The directors decided in 2012 to limit further capital commitments to the coal operations and to concentrate the group’s efforts on maximising recoveries of the amounts already invested. Then in 2014, there was a substantial fall in international coal prices and coal activities were suspended. The past twelve months have seen a considerable recovery in prices and it is now proposed that operations be resumed. 20 R.E.A. Holdings plc Annual Report and Accounts 2016 Discussions have recently been concluded on novation of a project agreement signed in 2013 with a third party relating to the development and operation of the Kota Bangun concession. The novation will bring in a second third party to fund resumption of mining. This will permit dewatering of the concession area to begin shortly with coal extraction operations expected to resume shortly thereafter. Under the novated agreement, the group would receive a steady cash inﬂow based upon prevailing coal prices but with an agreed ﬂoor. Previously reported negotiations with another third party in relation to the Liburdinding concession proved abortive but the group is continuing to hold discussion regarding this concession with several potentially interested parties. The group’s aim is either to divest the concession in its entirety or to conclude arrangements similar to those applicable to the Kota Bangun concession with the group guaranteed a minimum revenue from the concession. O v e r v e w i S t r a t e g i c r e p o r t G o v e r n a n c e G r o u p ﬁ n a n c a i l s t a t e m e n t s C o m p a n y ﬁ n a n c a i l s t a t e m e n t s N o t i c e o f A G M R.E.A. Holdings plc Annual Report and Accounts 2016 21 Strategic report Sustainability Transparency The group is committed to operating in a responsible and transparent manner. The group has made its policy framework publicly available since early 2015 and publishes biennial sustainability reports in addition to the sustainability updates published in the annual strategic reports. During 2017, the group will publish its third sustainability report. This report will describe in greater detail the group’s environmental and social performance as well as the sustainability challenges faced through 2015 and 2016, allowing stakeholders to monitor the group's progress in meeting its sustainability commitments. The report will follow the internationally recognised Global Reporting Initiative (“GRI”) standard, allowing the group's sustainability performance to be compared with that of other palm oil companies. The report will be available for download from the group’s website: www.rea.co.uk. The group continues to be ranked by the Zoological Society of London’s (“ZSL”) Sustainable Palm Oil Transparency Toolkit (“SPOTT”). The toolkit uses publicly available information regarding certiﬁcation, supply chain traceability and environmental management policies to generate a score indicating a company's commitment to sustainability and transparency. In October 2016, the group was ranked joint ninth out of 50 palm oil companies. The group gained three points in 2016 by providing maps of concessions and encouraging smallholders to adopt policies of zero burning and no planting on peat soils. Despite this gain, the group’s 2016 ranking was slightly lower than in 2015 (seventh), due to other companies also improving their overall scores. Policies The group continues to follow the policy framework implemented in early 2015, which incorporates the requirements of all of the sustainability standards and regulations to which the group has committed. Together these policies reinforce the group’s commitment to well-established best practices, including sustainable development through the provision of socio-economic beneﬁts for local communities, the protection of biodiversity and ecosystem functions, zero- burning, reducing greenhouse gas emissions and a zero-tolerance approach to bribery and slavery. The policy framework can be downloaded from the group's website at www.rea.co.uk/sustainability/policies. Certiﬁcation Certiﬁcation of the oil palm industry is important. It provides third party veriﬁcation that a company is operating according to national and international standards while encouraging the improvement of practices across the industry by establishing higher premia for certiﬁed products. The group remains committed to ensuring that all of its plantations and mills 22 R.E.A. Holdings plc Annual Report and Accounts 2016 achieve and maintain Roundtable for Sustainable Palm Oil (“RSPO”), International Sustainability and Carbon Certiﬁcation (“ISCC”) and Indonesian Sustainable Palm Oil (“ISPO”) certiﬁcation. The group has been a member of the RSPO since 2007. REA Kaltim's two oldest oil mills, Perdana (“POM”) and Cakra (“COM”), were ﬁrst certiﬁed in 2011 along with their supply chains. Each year since, these mills and their supply chains have undergone assessments to monitor their continued compliance with the RSPO standard. In 2016, POM, COM and their supply chains underwent full recertiﬁcation audits, which are required every ﬁve years under the RSPO certiﬁcation system. POM was successfully recertiﬁed; and the recertiﬁcation process for COM is expected to be completed in the coming months. The group's third oil mill, Satria (“SOM”) has not yet achieved RSPO certiﬁcation. This is due to an outstanding High Conservation Value (“HCV”) compensation liability at Satria estate, which supplies the mill. The compensation liability is for 20 hectares of land that was cleared in 2008 prior to conducting an HCV assessment. In 2016 a compensation plan was submitted to the RSPO, including a third party report indicating the location and extent of land clearing and a proposal of how the group intends to compensate for the cleared land. Once the plan has been approved, the mill and its supply chain can undergo an RSPO audit. The original target deadline for the RSPO certiﬁcation of SOM was December 2015, but due to the time required to resolve the compensation liability this deadline has been extended to December 2017. The group has a second outstanding HCV compensation liability for approximately 968 hectares of land cleared at Cipta Davia Mandiri (“CDM”). Although there is no mill at CDM, the group submitted a compensation plan to the RSPO in order to pursue its commitment of achieving full RSPO certiﬁcation for the group in the future. CDM's HCV compensation plan is currently still under review by the RSPO. CPO produced from ISCC certiﬁed mills can be sold for the production of biodiesel that meets the requirements of the European Union Renewable Energy Directive (“EU RED”). In 2016, all three of the group's mills underwent an ISCC recertiﬁcation audit. The certifying body issued new certiﬁcates for POM and SOM in 2016 and for COM in March 2017. For oil palm companies operating in Indonesia it is mandatory to maintain ISPO certiﬁcation. POM, COM and SOM all successfully retained their ISPO certiﬁcation in 2016. Further information about the requirements of the RSPO, ISCC and ISPO standards can be found in the group’s 2015 sustainability report and will be provided in the forthcoming 2017 sustainability report. In 2016, the group sold 126,012 tonnes of CPO and 10,029 tonnes of CPKO comprising: CPO CPKO RSPO certified – 2,301 ISCC certified 95,660 – Other 30,352 7,728 Total 126,012 10,029 In making sales of CPO that is both RSPO and ISCC certiﬁed, the group has to decide which certiﬁcation should apply to each sale. The reason that little CPO and CPKO is sold under RSPO certiﬁcation is that in the context of the overall market for such oils, the group’s monthly production is relatively small and this makes the logistics of ﬁnding a suitable buyer challenging. Instead, the group uses the RSPO's “Book and Claim” system. Until the end of 2016, this allowed end users of palm oil products to support RSPO certiﬁed producers by purchasing from them Greenpalm certiﬁcates, such certiﬁcates being issued on the basis of one certiﬁcate for every one tonne of RSPO certiﬁed CPO or CPKO that the producer has elected to sell in the general market rather than as RSPO or ISCC certiﬁed oil. As of 1 January 2017, the RSPO no longer endorses Greenpalm certiﬁcates but in their place has launched its own Book and Claim system called “PalmTrace” which will operate similarly to the former Greenpalm system but with RSPO “credits” replacing Greenpalm certiﬁcates. During 2016 no sales of Greenpalm certiﬁcates were made due to the delay in the issuance of ISCC and RSPO certiﬁcates for COM, without which the group was unable to calculate the number of Greenpalm certiﬁcates available for sale in respect of 2016. However, once the ﬁnal calculations for 2016 have been made, the group can proceed with the sale of RSPO credits to which it will be entitled in lieu of Greenpalm certiﬁcates in respect of its non-certiﬁed sales of CPO and CPKO during 2016. Employees At the end of 2016, the group’s workforce numbered 8,368, compared to 7,400 at the end of 2015. The increase in headcount is due to a rise in the number of harvesters and casual workers employed by the group towards the end of the year. To improve productivity, the group aims to ensure that employees at every level within the organisation are rewarded based on their performance. Performance from assistant to director level is evaluated annually in relation to a pre-agreed set of quantitative and objective key performance indicators (“KPIs”). The reward system is under constant review and is subject to change if more effective methods for improving productivity are found. For example, in 2016 a new system was implemented for harvesters. Annual bonuses are now paid based on the number of days in a year in which the quantity of FFB harvested by an individual exceeds a set minimum level. The more days a harvester exceeds the minimum level, the greater their bonus. A quarterly bonus is also awarded to the two most productive harvesters at each estate as an added incentive. This system replaced the previous scheme where bonuses were calculated based on attendance. Since the introduction of the new bonus system there has been a marked improvement in harvester productivity. The group endeavours to provide competitive salary packages, opportunities for career development and a decent standard of living on the estates for employees and their families. This is particularly important given the remote location of the group’s estates. High quality housing and community facilities for employees are a priority. Houses are now built using bataco blocks, which are produced in-house by mixing boiler ash from the mills with cement. Use of this material has signiﬁcantly reduced both the cost and environmental footprint of new houses. In 2016, houses were constructed for 32 workers’ families at the group's KMS and SYB estates, with a further 26 new houses planned for SYB in 2017. The group also provides each worker emplacement with a medical clinic, church, mosque, sports facilities and a market. In 2008, the group established a foundation to manage the network of schools across the estates. The foundation now manages 28 schools, including 11 pre-schools, 16 primary schools and one secondary school. As of the end of year 2016, 516 pre-school children, together with 1,624 primary school and 170 secondary school students, were enrolled in the group’s school system. In order for the group's operations to run efﬁciently, it is essential to establish and maintain quality management. The group aims to achieve this by facilitating the upward mobility of promising employees and by recruiting and training new graduates. The mechanism for this is the group’s long established cadet training programme. The programme is run from the group’s central training school, and provides participants with 12 months of theoretical and practical training in all aspects of plantation management. Cadets who successfully complete the training are appointed as assistants on the group’s estates, in the mills and various other departments. Over the last ten years, 259 cadets have participated in this programme and almost 70 per cent are still employed by the group. 33 people enrolled in the 2015/2016 programme, of which 25 successfully graduated and progressed to positions at the group's mills, the established and developing estates, the plasma projects and the conservation department. Career advancement is not restricted to members of the cadet training programme. To equip employees at every level with O v e r v e w i S t r a t e g i c r e p o r t G o v e r n a n c e G r o u p ﬁ n a n c a i l s t a t e m e n t s C o m p a n y ﬁ n a n c a i l s t a t e m e n t s N o t i c e o f A G M R.E.A. Holdings plc Annual Report and Accounts 2016 23 Strategic report Sustainability continued the skills and knowledge to perform effectively and to advance their careers, the group also runs an annual training programme. The programme is designed by the group’s training manager, based on input received from every department, and consists of both in-house training and participation in external training and conferences. The group takes seriously its duty to protect and respect the human rights of any person affected by its operations and is committed to adhering to the core conventions of the International Labour Organisation’s Fundamental Principles and Rights at Work, as well as Indonesian labour regulations and the provisions of the Modern Slavery Act 2015. The policy on human rights is displayed at every work site in order to communicate the group’s commitments in this regard to employees at every level. This policy includes a commitment to promote diversity and equality in the workplace and states clearly that discrimination based on age, disability, ethnicity, gender, marital status, political opinion, race, religion or sexual orientation will not be tolerated. As at 31 December 2016, 37 ethnicities and 5 religions were represented in the group’s workforce. The group pays careful attention to the gender balance within its workforce. At the end of 2016, women accounted for 28 per cent of the group’s workforce, including 17 per cent of the management team. 2016 2015 Number of Number of Number of Number of male staff female staff male staff female staff Directors 5 1 5 1 Management 58 12 60 13 Rest of workforce 6,007 2,298 5,398 1,565 Total 6,070 2,311 5,463 1,579 Management Overall responsibility for the Indonesian operations resides with the group managing director. Following the resignation of Mark Parry in February 2017 the directors appointed Carol Gysin as managing director of the group based in London. Concurrently with Carol’s appointment, George Kapitan, who is an Indonesian citizen, was appointed president director of REA Kaltim. The board of REA Kaltim now comprises four directors, of whom three are Indonesian nationals, including one female and the fourth is a British expatriate. Together, the REA Kaltim directors have overall local responsibility for the group’s affairs in Indonesia, covering the estate operations, corporate affairs, commercial administration and ﬁnance. behalf of the group’s board to assist in ensuring consistency and cohesion between London and Indonesia. The directors believe that basing senior management in the same time zone as the group’s operations facilitates management oversight and improves its effectiveness. The development of the senior management team in Singapore is consistent with the group’s previously stated intention of progressively transferring overall executive responsibility for the management of the group from the UK to Indonesia and Singapore. As a foreign investor in Indonesia, the group is conscious that it is in essence a guest in Indonesia and an understanding of local customs and sensitivities is important. The group’s ability to rely on senior Indonesian staff to handle its local interface is therefore a signiﬁcant asset upon which the group continues to build. This asset is augmented by the support and advice that the group obtains from local advisers and from the local non-controlling investors in, and local commissioners of, the company’s Indonesian subsidiaries. Health and safety The group remains committed to implementing the internationally recognised Operational Health and Safety Management System (“OHSAS”) 18001. In 2016 a new head of health and safety joined the company and reviewed the health and safety standards across the group's operations. Monthly inspections of the group's mills, estates and biogas facilities are undertaken to ensure planned health and safety measures are implemented in order to meet the criteria for OHSAS 18001 certiﬁcation. Regular training sessions are conducted to instil the importance of safe working practices into all employees and contractors. Routine training sessions include the appropriate use of protective equipment, ﬁrst aid, ﬁre safety and risk management for high risk tasks (working at height, in conﬁned spaces or with chemicals). Following the widespread ﬁres in Kalimantan in 2015, additional emergency response training courses were conducted for ﬁres, which also included training for responding to chemical spills, explosions and riots. Roads in the region of the group's operations can be hazardous, particularly after heavy rain, therefore drivers of all vehicles are required to pass a company-set driving test and motorcycle safety training is provided for employees and their families. Despite regular and routine training, it takes time for health and safety practices to become naturalised within a workforce. It has been decided, therefore, that the target for obtaining OHSAS 18001 certiﬁcation should be delayed until the end of 2017. Day to day execution of the board’s executive responsibilities is undertaken by a small team of senior managers in Indonesia together with the group’s chief ﬁnancial ofﬁcer and regional secretary, both of whom are based in Singapore but spend a substantial proportion of their time in Indonesia acting on Although measures are taken to minimise the occurrence and severity of accidents, incidents still occur. In 2016 there were 855 reported accidents, 690 of which resulted in a worker needing to take at least one day off work. Regretfully there were three fatalities between January 2016 and January 24 R.E.A. Holdings plc Annual Report and Accounts 2016 2017. Of these, one was work related and the other two were non work-related. The group treats any fatality within its premises extremely seriously and responds in the same way irrespective of whether the incident is considered to be work- related or otherwise. The group maintains a rigorous incident investigation and reporting procedure to ensure that the cause of any incident is properly identiﬁed and the senior management operations teams understand the remedial action required. External healthcare provision is extremely limited in the remote locations of the group’s operations. The group has established a network of 16 clinics, which treat employees, their families and also members of the local communities. Medical care is provided by two doctors, a dentist and a team of paramedics and midwives. The medical team conducts a monthly immunisation programme for families, including collaborations with external medical professionals to participate in the Indonesian government's polio immunisation programme. The medical team also conducts blood tests twice a year to check for chemical exposure in workers who come into regular contact with pesticides. If workers test positive for pesticide exposure, they are rotated out of spraying and into other roles. Community relations The group works hard to develop and maintain good relationships with the people that are impacted by its operations. Successful relationship building with surrounding communities is seen as key to the group's ability to operate efﬁciently and reduce the frequency of compensation claims by villages. Relationships with local communities have improved over the last few years through regular formal and informal engagement with a wide variety of village groups and representatives, as well as a transparent approach to resolving claims of outstanding rights to compensation for land through the group’s department of village affairs (“DVA”). In 2016, 70 land rights claims were made against the group for a total area of 1,572 hectares, a reduction from 105 claims over 1,814 hectares of land in 2015. Most of these claims were successfully resolved by the end of 2016. A large proportion of the claims were found to be spurious following investigation by the DVA. operations without being dependent on them. The initiatives developed to achieve this include maximising employment opportunities for local people, supporting and improving local businesses, expanding smallholder schemes and investing in infrastructure projects that will catalyse further development. During 2016, in collaboration PLN, the group expanded the provision of electricity generated by the group’s methane capture facilities to two additional local villages. PLN provides the infrastructure required to connect villages to the electricity supplied by the group which it purchases from the group at a price of $0.07 per kilowatt hour. The beneﬁts to local communities from this project are signiﬁcant. Prior to the establishment of this energy scheme, villages relied on diesel- powered generators for their electricity supply. The switch to methane-generated electricity not only provides communities with a cheaper, lower emission and renewable energy source, but also allows them to be more independent from the group as they no longer rely on donations of diesel from the group to run their generators. Renewable energy generated by the group is now provided to 26 villages, comprising approximately 13,000 households, through the infrastructure established by PLN. The group also works to provide an improvement to the welfare of local communities by facilitating access to clean water. In 2016, the group completed the installation of ﬁve new water treatment facilities. Training is provided for treatment plant operators to encourage independence from the group and allows each village to have full control of the management and maintenance of their own resources. The community development department conducts a mentoring scheme for small businesses and households. During 2016, members of the department made routine visits to local communities to provide advice to farmers on improving their yields and minimising the environmental impact of their practices. Sessions were also conducted on how to manage household ﬁnances and loans. Donations in the form of equipment, expertise or money are provided where necessary to help villages improve their own roads, schools and other community facilities. Community development Smallholders Over the last 20 years the group has endeavoured to ensure that its business contributes a signiﬁcant and long-lasting improvement to the socio-economic status of the communities that live in the vicinity of its operations. What began as a primarily philanthropic approach has evolved into established schemes designed to ensure that local communities share in the beneﬁts generated by the group’s operations. The core principle is to help communities grow and succeed while being self-sufﬁcient, in other words to beneﬁt from the group’s Developing smallholder schemes and purchasing FFB from independent smallholders not only creates mutually beneﬁcial business relationships, but also results in ﬁnancial beneﬁts for local communities and an opportunity to educate local farmers in more sustainable agricultural practices. The group engages with smallholders in three ways: through a programme known as “Program Pemberdayaan Masyarakyat Desa” (“PPMD”), through “plasma” schemes and by purchasing FFB directly from independent smallholders. During 2016, the group O v e r v e w i S t r a t e g i c r e p o r t G o v e r n a n c e G r o u p ﬁ n a n c a i l s t a t e m e n t s C o m p a n y ﬁ n a n c a i l s t a t e m e n t s N o t i c e o f A G M R.E.A. Holdings plc Annual Report and Accounts 2016 25 Strategic report Sustainability continued purchased a total of 93,000 tonnes of FFB from PPMD, plasma and independent smallholders, providing local farmers with a total revenue equivalent to approximately USD $10.4 million. Although the quantity of FFB purchased in 2016 was smaller than in 2015 (125,000 tonnes), smallholder FFB still accounted for 16 per cent of the FFB processed in the group’s mills, a proportion similar to 2015 (17 per cent). The group has been working with smallholders since 2000, when the group established the PPMD programme. Through this scheme, the group assisted cooperatives of local people with access to land to cultivate oil palm by providing them with oil palm seedlings, fertilisers, herbicides and technical assistance. The costs of the inputs provided are repaid by the members of these cooperatives, interest free, through deductions made when their FFB is sold to the group’s mills. The PPMD scheme provides the second largest input of FFB to the mills after the group's own estates, with a total of 61,000 tonnes produced in 2016 by 15 cooperatives of smallholders. Plasma smallholder schemes are established for the beneﬁt of the surrounding community as part of the group's responsible development of new land for oil palm, in line with regulations introduced by the Indonesian government in 2007. Plasma schemes differ from PPMD in their ﬁnancing and management. Plasma schemes established to date have been ﬁnanced by loans to the cooperatives from the group and local development banks. The cooperatives themselves are not responsible for, or involved in, the management of cultivated plasma land, rather the group manages these areas in return for a pre-agreed management fee. Cooperatives therefore receive an income based on the value of FFB harvested minus loan repayments and management fees. Due to the more complex nature of the funding and management of plasma areas, their development into oil palm can take longer to organise than the development of PPMD or group-owned estates. It is critical that, before development begins, members of each cooperative fully understand how plasma schemes work, including the cost of cultivating oil palm, the terms of the ﬁnancial agreements with the group or bankers to the schemes and the predicted income over time to the members of each cooperative. The group is currently working towards developing 13 plasma schemes for newer concessions, as well as 6 additional plasma schemes around the established estates. The plasma schemes at the established estates are not required under the 2007 government legislation as the estates were developed prior to 2007, but in the interests of equitable treatment the group has committed to develop these plasma cooperatives for villages whose land overlaps with the group’s concessions. By the end of 2016, 3,567 hectares of plasma land had been developed, increasing from 3,400 hectares by the end of 2015. Four plasma areas are currently producing FFB with a total of just over 9,680 tonnes delivered to two of the group's mills in 2016. The group purchased 19,760 tonnes of FFB from independent smallholders in 2016. Since 2015, FFB has only been accepted from smallholders who have participated in the group’s smallholder mapping process. The aim of this process is to create a map and comprehensive database of all smallholder land within the group’s supply base in order to make the group's FFB supply chain fully traceable. Traceability of fruit purchased from smallholders to a speciﬁc farmer and plot of oil palm is critical to the group’s ability to improve practices among its suppliers. The group remains committed to achieving RSPO certiﬁcation for independent smallholders that make up part of the supply base. Greenhouse Gas (“GHG”) emissions reduction 2016 is the sixth year for which the group has calculated and publicly reported its carbon footprint using the RSPO’s PalmGHG methodology. In 2016 the group reduced its gross carbon dioxide emissions from 2015 levels by 6.7 per cent and net GHG emissions by 17.1 per cent. The reduction in net GHG emissions is largely due to the increase in credits gained in 2016 from the provision of renewable energy to workers' housing and local communities by the group's two methane capture facilities. Provision of electricity increased markedly in 2016, up by 73.8 per cent from 2015 following the completion of PLN's infrastructure in 2015. Net GHG emissions per tonne of CPO and CPKO increased slightly from 2015 to 2016 due to an overall reduction in the production of crude oil palm products in 2016, resulting from the lower FFB yields across the group's and third party plantations. Net GHG emissions per planted hectare decreased in 2016, due to an increase in the group’s total planted area following 2016 plantings in PBJ and CDM in conjunction with the group's overall reduction in net GHG emissions. The largest individual component of GHG emissions is land use change, which accounted for 65.8 per cent of the group's gross GHG emissions. The second largest contributor was palm oil mill efﬂuent (“POME”), accounting for 8.8 per cent of the gross GHG emissions, although gross CO2 emissions from POME have been reduced by 29.5 per cent from 2015 as a result of the increased quantity of POME used by the methane capture facilities to produce electricity. Conservation Development of land for agriculture can result in a loss of biodiversity and natural ecosystem function. For an agricultural business to be productive over the long term, it is essential that natural ecosystem services are maintained, including nutrient cycling, pollination, erosion defence and climate regulation. It is therefore important to understand how oil palm cultivation affects the environment and put measures in place to avoid or mitigate negative environmental impacts. 26 R.E.A. Holdings plc Annual Report and Accounts 2016 Aware of the importance of minimising the environmental impact of its operations, the group incorporated a strategy for responsible development into the policy framework adopted at the beginning of 2015. This was to ensure that everyone, from in-house teams to third party contractors, involved in the process of planning and developing new land is aware of their responsibility to mitigate the negative impacts of development. As dictated by the group's policy for responsible development and the RSPO's new planting procedure, on which the group's policy is based, the process of developing new land begins with a series of surveys and assessments typically conducted by external experts. These assessments include environmental and social impact assessments, land use change analyses, assessments of high conservation value (“HCV”) constraints, soil surveys and carbon stock assessments. Once collated, the results of these surveys and assessments inform the development teams as to the areas to be set aside for conservation. Conservation zones include areas of cultural signiﬁcance or valuable biodiversity, steep areas, riparian zones and peat soils, in line with the group’s commitment to avoid development of these high carbon stock areas. The area designated as conservation reserves within the group’s titled land bank totals approximately 23,950 hectares, accounting for some 23 per cent of the group’s titled areas. Since 2008, this network of conservation reserves has been managed by REA Kon, an in-house team of experienced conservationists and local staff with good knowledge of the biological and cultural diversity of the region. Using scientiﬁc research, education and active ﬁeld projects, REA Kon’s aim is to conserve and enhance the natural biodiversity and ecosystem functions of the landscape in which the group operates. REA Kon conducts routine biodiversity surveys, camera trapping and water quality monitoring to gain a scientiﬁc understanding of the biodiversity present in, and environmental state of, conservation areas. As of December 2016, biodiversity surveys revealed a total of 551 species of mammals, birds, amphibians, reptiles, ﬁsh and invertebrates, of which 94 species are classed as “Near Threatened”, “Vulnerable”, “Endangered” or “Critically Endangered” according to the International Union for the Conservation of Nature’s (“IUCN”) Red List of Threatened Species. In 2016, 4 species of bird not previously recorded within the group's conservation areas were found: the crested goshawk (Accipiter trivirgatus), sooty-capped babbler (Malacopteron afﬁne), garnet pitta (Pitta granatina) and rufous-winged philentoma (Philentoma pyrhoptera). Conservation areas in four of the group's concessions also support a population of the Endangered Borneo orangutan. REA Kon monitors the orangutan population on a monthly basis by conducting nest surveys along permanent transects. Surveys conducted in 2016 conﬁrmed the continued use of the group's conservation areas by orangutans, revealing evidence of recent feeding activity and the establishment of 26 new orangutan nests. An important aspect of REA Kon's work to protect the habitat and biodiversity within conservation areas is regular engagement with surrounding communities and REA's workforce. Frequent engagement not only allows REA Kon to educate communities and workers about the importance and beneﬁts of conserving biodiversity and natural ecosystem services, but also results in the formation of closer bonds with local villages and independent farmers. Throughout 2016, REA Kon conducted regular visits to schools in REA emplacements and local villages to educate children about the need for conservation. These education programmes are extended into community education camps, which provide more hands-on learning about environmental issues to a wider age range within local communities. REA Kon also conducts visits to villages to meet with senior members of communities to promote positive environmental action by villages, including HCV protection and proper waste management. REA Kon often conducts these visits in collaboration with the Indonesian Government's Natural Resources Conservation Agency (“BKSDA”). Education can help to promote a positive attitude towards conservation amongst local communities and the workforce, but the message needs to be reinforced through the active management of conservation areas. Following feedback from village leaders, during 2016 REA Kon marked the boundaries of conservation areas with visible posts and signboards to clearly delineate HCV land within the group's concessions. REA Kon also routinely patrols the edges of conservation areas to monitor for signs of human disturbance and to map areas damaged through human activity or ﬁre. Despite REA Kon's continued engagement with local communities, there are still cases of encroachment into REA's conservation areas by loggers or independent farmers. Managing the encroachment of conservation reserves is arguably the greatest sustainability challenge faced by the group. The problem is exacerbated by Indonesia's complicated land rights system. A standard operating procedure has been developed to ensure that the plantation, conservation, village affairs and security teams fully understand their respective responsibilities in tackling encroachment and can respond quickly and effectively if logging or land clearing is detected within the conservation reserves. When an area of encroachment is reported by plantation teams or found during patrols, REA Kon visits the location to determine the extent of the affected area, the person or group responsible and the existence of any legal or customary rights. The matter is then passed to the group's department of village affairs, which is responsible for determining whether a case requires compensation or prosecution and for proceeding with the appropriate action. O v e r v e w i S t r a t e g i c r e p o r t G o v e r n a n c e G r o u p ﬁ n a n c a i l s t a t e m e n t s C o m p a n y ﬁ n a n c a i l s t a t e m e n t s N o t i c e o f A G M R.E.A. Holdings plc Annual Report and Accounts 2016 27 Strategic report Sustainability continued In addition to gathering information regarding each case of encroachment, REA Kon also assesses the risk of further encroachment for each area and establishes the ecological, social and legal feasibility of restoring the natural vegetation as well as the cost of doing so. Based on this information, REA Kon develops an action plan for each location where encroachment has occurred. REA Kon manages a nursery area of native species for the purpose of restoring the natural vegetation, but whilst it would be ideal to restore all locations with natural vegetation, the group’s ability to do so depends on obtaining the free, prior and informed consent of any legitimate legal or customary land use rights holders to change the use of these areas. To protect the conservation areas set-aside in newer developments, all legal and customary land use rights to the conservation reserves are identiﬁed and acquired in the same way as for the land designated for oil palm cultivation. The group acknowledges the importance of free, prior and informed consent for conservation and, although this was not the group's policy when REA Kaltim and SYB were developed many years ago, adhering to this policy going forward should facilitate the group’s ability to prevent and address any clearance of future reserves. A beneﬁt of the better rainfall received during 2016 was a reduction in the frequency of forest ﬁres in the region, with no loss of oil palm or conservation reserves suffered by the group in 2016. Responsible agricultural practices Maintaining fresh water resources is vitally important for the group's operations, both for use in the mills and for the provision of clean water for homes in the group villages. The group's mills operate a zero efﬂuence policy, whereby no by- products resulting from the production of CPO or CPKO are expelled into local water courses. A signiﬁcant proportion of the palm oil mill efﬂuent ("POME") that is produced at POM and COM is diverted to the methane capture facilities at each mill to be used in generating renewable energy. Other POME from these mills, as well as POME produced at SOM, is sprayed over empty FFB discarded from each mill in order to produce organic compost. Any POME that is not used for methane production and composting, and the digested POME residue of methane production is treated in the traditional manner by being pumped through a series of open ponds to reduce its biological oxygen demand (“BOD”) and then used for land application in ﬂat beds between rows of oil palm, allowing the remaining nutrient content to be used as a fertiliser. The BOD of the POME in the ﬁnal open pond at each mill is tested on a monthly basis by a third party to ensure that it is below the legal limit for land application in Indonesia (5,000mg/l). In recent years, the group has applied reduced quantities of inorganic fertiliser and has supplemented inorganic fertiliser applications with organic compost produced at each mill. The group's inorganic fertiliser regime is designed by independent agronomy consultants, based on analysis of the nutrient content of systematically selected oil palm frond samples. In 2016, the total annual quantity of inorganic fertiliser applied was over twice the quantity used in 2015. This was in part in response to a decline in FFB yields that the group had experienced over several years but also reﬂected the fact that 2015 was a very dry year and inorganic fertiliser is not applied during drought periods as moisture is required to mobilise the nutrients in the fertiliser and make them available to the palms. Furthermore, the defence mechanism employed by palms against the stress caused by prolonged drought is to become less active and reduce the uptake of nutrients. Consequently, fertiliser application during drought conditions is both costly and a waste of resources. The increased quantity applied during 2016 took advantage of the wetter conditions and was designed to provide a boost to the nutrient supply base and improve FFB yields. Following the completion of the collaboration with PLN in 2015 to supply electricity to local villages, the POME demand of the methane capture facilities has been very high. To meet the demand, the majority of POME from POM and COM is now directed to the biogas facilities rather than composting. POME that has already passed through biogas facilities does not create good conditions for composting as the digestion process cools the POME, resulting in compost with reduced nutrient levels. Given that this situation is likely to continue, the group has concluded that it should cease composting operations, utilise all POME for land application and adjust the level of inorganic fertiliser applications appropriately. Every effort is taken to prevent POME polluting water courses or neighbouring land. In 2016, however, there were three cases of pollution where prolonged periods of heavy rainfall caused POME ponds or ﬂat beds to overﬂow into neighbouring land belonging to local communities. The group responded by constructing bunding around ponds and embankments around ﬂat beds to accommodate any future POME overﬂow during extended periods of rain. Communities are always compensated for damage to the extent appropriate. In March 2016, an outbreak of the leaf-eating caterpillar, Setora nitens, was detected at Cakra estate over an area of approximately 200 hectares. Further outbreaks were recorded at Perdana, Senteken, Lestari and Berkat estates in the second quarter of 2016, with a total of 1,200 hectares affected. Treatment to combat the outbreak began in April, consisting of the injection of systemic insecticides into the trunks of oil palms. Trunk injection is a preferable method of pest management, compared to spraying, as the method is more targeted to the problem species and does not involve the blanket application of harmful chemicals to the environment 28 R.E.A. Holdings plc Annual Report and Accounts 2016 that can affect non-target species or be leached into waterways. The outbreak of caterpillars was brought under control by the end of September 2016, but insecticide application continued into the fourth quarter to prevent a recurrence. O v e r v e w i S t r a t e g i c r e p o r t G o v e r n a n c e G r o u p ﬁ n a n c a i l s t a t e m e n t s C o m p a n y ﬁ n a n c a i l s t a t e m e n t s N o t i c e o f A G M Camera trap photo from KMS conservation reserve 2015 Company birthday celebrations 2014 R.E.A. Holdings plc Annual Report and Accounts 2016 29 Strategic report Finance Accounting policies Group results The group and the company continue to report in accordance with International Financial Reporting Standards (“IFRS”) and to present their ﬁnancial statements in dollars. However, as stated in the 2016 half yearly report published in September 2016, in accordance with the amendment of IAS 41 Agriculture effective 1 January 2016, the ﬁnancial statements incorporate a signiﬁcant change in accounting policy. The amendment means that bearer plants are no longer to be carried as biological assets but are instead accounted for as property, plant and equipment. The ﬁnancial statements for 2015 have been restated to reﬂect this change in accounting policy. Whilst the change has no effect on the group’s cash ﬂows, it means that the reported proﬁts for 2016 and restated 2015 proﬁts are lower than they would have been, or were, applying the previous accounting provisions of IAS 41. The reason for this is that the group’s income statement no longer reﬂects any movement in the fair value of the group’s biological assets (other than growing produce as detailed below) but instead includes a charge for the depreciation of those assets. This charge is based on the fair value of such biological assets at 1 January 2015 which the group has, as permitted by the revisions to IAS 41, adopted as the deemed cost of the assets in question. While the group continues to expand, it could reasonably expect that the periodic movements in the fair value of its biological assets under the previous provisions of IAS 41 would be positive whereas the depreciation charges that replace these movements will be negative. Speciﬁcally, in 2015, the net gain from changes in the value of biological assets (excluding growing produce) amounted to $13.1 million whereas, on restatement, this gain has been replaced by a depreciation charge of $10.6 million, resulting in a net reduction in 2015 reported proﬁt before tax of $23.7 million. The amendment of IAS 41 still requires plantation companies to account for growing produce as biological assets. In the case of the group, growing produce will mean FFB in formation on the group’s oil palms. Such ripening FFB is therefore treated as a separate asset with changes in the value of the asset from year to year being taken to the income statement. There is no market for ripening FFB, so the group, in common with other oil palm companies, has adopted a formulaic methodology for deriving fair value of this growing produce based on the estimated value of the oil content of the FFB in question. Movements from year to year in this value are unlikely to have a material impact on the group’s proﬁts. Applying the changed accounting principles, group revenue, operating loss and loss before tax for 2016, with restated comparative ﬁgures for 2015, were as follows: 2015 (restated) $’m $’m 2016 Revenue 79.3 90.5 Operating loss (5.0) (6.6) Loss before tax (9.3) (12.2) The signiﬁcant revenue reduction in 2016 reﬂected the fall in the group’s own crop and a mirroring fall in purchases of FFB from third party growers as compared with the preceding year. The reasons for these falls are covered under “Crops” in “Agricultural operations” above. Revenue was also negatively impacted by the harvesting and transportation issues in the closing months of the year adversely affecting CPO quality. Despite the lower revenue, the operating loss was reduced as a consequence of the improved CPO prices during 2016 and continued focus by the group on cost control with particular attention to the management of overtime. Cost of sales reported for 2016, with restated comparative ﬁgures for 2015, was made up as follows: 2015 (restated) $’m $’m 2016 Depreciation and amortisation 21.0 21.7 Purchase of external FFB 9.1 13.3 Estate operating costs 41.7 48.1 71.8 83.1 As noted under “Accounting policies” above, the change in IAS 41 has eliminated the previous movement in the fair value of biological assets (other than growing produce) and has replaced it with a new additional depreciation charge. Fair value gains are no longer reﬂected in proﬁts or assets for any enhancements to the value of the group’s assets generated by the continuing development programme. The valuation of closing agricultural produce inventory at end 2016 at higher prices than at 31 December 2015 resulted in a positive movement on such inventory of $0.6 million (2015: $1.1 million loss). Whilst total administrative expenses at $12.0 million for 2016 were not dissimilar from those of the preceding year ($11.7 million), the latter beneﬁted from a non-recurring credit in relation to pension funding of $2.3 million. Overheads in both Indonesia and externally showed a reduction, in the latter case assisted by the weakness of sterling. 30 R.E.A. Holdings plc Annual Report and Accounts 2016 The substantial increase in investment revenues ($1.7 million against $0.3 million) arises from the inclusion of interest of $1.1 million received in respect of certain tax amounts previously refunded as a result of Jakarta Tax Court decisions that remain subject to Supreme Court review. Such interest was previously only paid on completion of such review but a new regulation now permits taxpayers to apply for earlier payment. The tax authorities are disputing the group’s entitlement to further interest of some $2.8 million on that balance of tax refunded that was originally paid voluntarily. No credit for such further interest has been taken in the group ﬁnancial statements. Finance costs totalled $6.0 million (2015: $6.0 million). There was an increase in the interest charge relating to Indonesian rupiah denominated bank loans but this was offset by favourable exchange rate movements in sterling liabilities and increased capitalisation of interest charges incurred. Tax charged against proﬁt for 2016 amounted to $2.0 million against $0.7 million in 2015. A signiﬁcant component of the 2016 charge reﬂected the introduction of new regulations in Indonesia limiting interest deductions for tax purposes in some circumstances. Planned restructuring of Indonesian subsidiary capitals should mitigate the negative impact of these regulations in future years. Appeals by both REA Kaltim and the Indonesian tax authorities remain pending with the Supreme Court of Indonesia in respect of decisions by the Jakarta Tax Court in 2012 on disputed elements of a 2006 Indonesian assessment of tax payable by REA Kaltim. The Indonesian tax authorities have also appealed to the Supreme Court for review of a decision by the Jakarta Tax Court in 2014 in favour of REA Kaltim allowing deduction for tax purposes of mark to market losses recorded in 2008 on cross currency interest rate swaps. The group’s previously published target of a long term average 20 per cent annual return on equity took into account the expected beneﬁt to group proﬁts from movements in the fair value of biological assets as previously deﬁned prior to the recent change to IAS 41. Following that change, such a target is no longer appropriate and the directors are renewing an appropriate revision of the target once group proﬁtability has been restored. The negative return for 2016 was 7.6 per cent (2015: negative 10.5 per cent) Dividends The ﬁxed semi-annual dividends on the 9 per cent cumulative preference shares that fell due on 30 June and 31 December 2016 were duly paid. In view of the difﬁcult conditions that faced the group during 2016, the directors have concluded that, as previously announced, they should not declare or recommend the payment of any dividend on the ordinary shares in respect of 2016. The group’s programme of planting its land bank remains ongoing. This will continue to require major capital expenditure and constrain the rates at which the directors feel that they can prudently declare, or recommend the payment of, ordinary dividends over the next few years. Nevertheless, the directors will consider recommending the payment of a ﬁnal ordinary dividend in respect of 2017, although this will necessarily depend upon crops and CPO prices over the balance of 2017. DSN transaction Discussions with a short list of potential strategic investors culminated in an initial conditional agreement between the group and PT Dharma Satya Nusantara Tbk (“DSN”) on 16 May 2016. This was followed on 16 August 2016 by detailed implementing agreements. Regulatory approval was granted on 2 December 2016. As a result, two wholly owned subsidiaries of DSN have acquired a 15 per cent interest in the group’s principal operating subsidiary in Indonesia, PT REA Kaltim Plantations (“REA Kaltim”). The overall consideration amounted to $15.0 million in cash with up to a further $850,000 payable on a deferred basis depending upon the recovery by REA Kaltim of certain overpaid tax amounts prior to 1 January 2018. Concurrently with this acquisition, a subsidiary of DSN provided dollar and sterling loans to REA Kaltim of, respectively, $10.0 million and £3.9 million on terms mirroring the terms of existing dollar and sterling loans from the company to REA Kaltim. Subsequent to the end of 2016, the same subsidiary has provided loans to subsidiaries of REA Kaltim totalling $11.7 million and £3.9 million again on terms mirroring loans by the company and a UK subsidiary to those subsidiaries. Capital structure The group is ﬁnanced by a combination of debt and shareholder funds. Total shareholder funds less non- controlling interests at 31 December 2016 amounted to $286.7 million as compared with $292.2 million at 31 December 2015. Non-controlling interests at 31 December 2016 amounted to $22.8 million (2015: $1.7 million). In July 2016, the group raised some £1.46 million from the sale of £1.5 million nominal of 8.75 per cent guaranteed sterling notes 2020 held by a subsidiary of the company. Then, in August 2016, discussions with the group’s principal Indonesian bankers, PT Bank DBS Indonesia (“DBS”), were successfully concluded, as a result of which borrowings, denominated in a combination of Indonesian rupiah and US dollars and totalling the equivalent of $88.6 million, were replaced with new increased borrowings, denominated in Indonesian rupiah and totalling the equivalent of $95.5 million. O v e r v e w i S t r a t e g i c r e p o r t G o v e r n a n c e G r o u p ﬁ n a n c a i l s t a t e m e n t s C o m p a n y ﬁ n a n c a i l s t a t e m e n t s N o t i c e o f A G M R.E.A. Holdings plc Annual Report and Accounts 2016 31 Strategic report Finance continued The new borrowings incorporate a reduced annual revolving credit facility (committed until July 2017) of the equivalent of $26.0 million against the previous annual revolving credit facilities of $35.5 million. The balance of the new borrowings is repayable over ﬁve years. In November 2016, the group issued $24.0 million nominal of 7.5 per cent dollar notes 2022 the (“2022 dollar notes”). Of these new notes, $14.0 million nominal was issued pursuant to an exchange offer to holders of 7.5 per cent dollar notes 2017 (the “2017 dollar notes”). The balance of the new notes, being $10.0 million, was issued to R.E.A. Services Limited (”REAS”), a wholly owned subsidiary of the group. $13.8 million nominal of 2017 dollar notes were acquired pursuant to the exchange offer and were cancelled. In December 2016, 3,670,000 new ordinary shares, representing some 10 per cent of the ordinary shares in issue, were issued for cash at a price of 295p per share by way of a placing to raise £10.5 million ($13.0 million) net of expenses. The company has obtained shareholder authority to buy back limited numbers of ordinary shares into treasury with the intention that, once a holding of a reasonable size has been accumulated, the holding be placed with one or more investors. To date, 132,500 ordinary shares have been acquired pursuant to this authority and are currently held in treasury. Following these transactions, group indebtedness at 31 December 2016 amounted to $229.7 million against which the group held cash and cash equivalents of $24.6 million. The composition of the resultant net indebtedness of $205.1 million was as follows: $’m 7.5 per cent dollar notes 2017 (“2017 dollar notes”) ($20.2 million nominal) 20.0 7.5 per cent dollar notes 2022 (“2022 dollar notes”) ($24.0 million nominal) 23.6 9.5 per cent guaranteed sterling notes 2015/17 (“2017 sterling notes”) (£8.3 million nominal) 10.1 8.75 per cent guaranteed sterling notes 2020 (“2020 sterling notes”) (£31.9 million nominal) 37.1 Loans from non-controlling shareholder 12.5 Indonesian term bank loans 69.6 Drawings under working capital lines 56.8 229.7 Cash and cash equivalents (24.6) Net indebtedness 205.1 The group has no material contingent indebtedness save that, in connection with the development of oil palm plantings owned by village cooperatives and managed by the group, the group has, as noted under “Smallholder schemes” in “Sustainability” above, guaranteed the bank borrowings of the cooperatives concerned. The outstanding balance of these at 31 December 2015 was equivalent to $9.0 million. The 2017 dollar notes are unsecured obligations of the company and repayable in a single instalment on 30 June 2017. The 2022 dollar notes are unsecured obligations of the company and are repayable in a single instalment on 30 June 2022. The sterling notes are issued by REA Finance B.V., a wholly owned subsidiary of the company, are guaranteed by the company and REAS, and are secured almost wholly on unsecured loans made by REAS to Indonesian plantation operating subsidiaries of the company. The 2017 sterling notes are repayable in a single instalment on 31 December 2017. The 2020 sterling notes are repayable in a single instalment on 31 August 2020. Following the repackaging of the group’s facilities with DBS referred to above, Indonesian bank borrowings at 31 December 2016 comprised Indonesian rupiah denominated amortising term loans and working capital loans to each of REA Kaltim, SYB, PBJ and KMS. The REA Kaltim loans are provided by DBS, are secured on certain assets of REA Kaltim and are guaranteed by the company. The outstanding balance of such loans at 31 December 2016 was the equivalent of $76.6 million comprising term loans of $ 25.5 million and working capital loans of $51.1 million. The term loans are repayable as follows: 2017: $2.2 million, 2018: $3.5 million and thereafter $19.8 million. The working capital loans fall due for renewal in 2017 - $19.8 million and in 2019 - $31.3 million. The SYB loans are also provided by DBS, are secured on certain assets of SYB and are guaranteed jointly by the company and REA Kaltim. The outstanding balance of the loans at 31 December 2016 was the equivalent of $15.9 million, comprising a term loan of $10.2 million and a working capital loan of $5.7 million. The term loan is repayable as follows: 2017: $0.9 million, 2018: $1.4 million and thereafter $7.9 million. The working capital loan falls due for renewal in 2017. The PBJ loan is provided by PT Bank UOB Indonesia (“UOB”), is secured on the assets of PBJ and is guaranteed jointly by the company and REA Kaltim. The outstanding balance of the loan at 31 December 2016 was the equivalent of $15.5 million repayable as follows: 2018 $0.8 million and thereafter: $14.7 million. The KMS loan is provided by PT Bank Mandiri (Persero) Tbk (“Mandiri”), is secured on the assets of KMS and is guaranteed by the company. The outstanding balance of the loan at 31 December 2016 was the equivalent of $18.4 million repayable as follows: 2018: $0.3 million and thereafter $18.1 million. 32 R.E.A. Holdings plc Annual Report and Accounts 2016 At 31 December 2016, unutilised facilities available to the group comprised the equivalent of $14.3 million available to be drawn from UOB as an addition to the existing amortising term loan to PBJ. Group cash ﬂow Group cash inﬂows and outﬂows are analysed in the consolidated cash ﬂow statement. Cash and cash equivalents increased over 2016 from $15.8 million to $24.6 million. As noted under “Group results” above, operating loss for 2016 amounted to $5.0 million compared to a loss of $6.6 million in the prior year. After adjusting for depreciation, amortisation and other non-cash items ($21.2 million) and a reduction in working capital ($9.2 million) cash generated by operations was $25.4 million (2015: $37.3 million). The decrease in working capital was primarily due to careful management of trade payables and an increase in customer deposits. Taxes paid net of refunds at $2.1 million were slightly higher than in 2015 ($0.8 million) because of the lower level of refunds due. Interest amounted to $20.7 million (2015: $16.4 million) reﬂecting the fact that a greater proportion of borrowings than in the past was denominated in Indonesian rupiah for which interest rates are higher than for dollars and sterling. Investing activities for 2016 involved a net outﬂow of $31.6 million (2015: $34.8 million). This represented new investment of $33.4 million (2015: $37.6 million) offset by interest received and a small amount received from the disposal of property, plant and equipment together amounting to $1.8 million (2015: $2.8 million including $2.5 million proceeds from the disposal of property, plant and equipment). The new investment comprised expenditure of $31.1 million (2015: $32.3 million) on further development of the group’s agricultural operations, $0.4 million (2015: $1.3 million) on land rights and titling and $1.9 million (2015: $4.0 million) on the stone and coal operations. The net cash inﬂow from ﬁnancing activities amounted to $37.8 million (2015: inﬂow of $14.5 million) made up as follows: 2015 $’m $’m 2016 Issue of new ordinary shares 13.1 6.8 Issue of new preference shares – 7.8 Reorganisation of dollar notes (0.1) – Issue / sale of new sterling notes 1.9 4.1 Purchase of sterling notes – (2.2) Payment to close out hedging contract – (10.2) Transaction with DSN 14.0 – Borrowings from DSN 12.4 – Net increase in borrowings 3.9 20.8 Dividend payments (7.4) (12.6) 37.8 14.5 Liquidity and ﬁnancing adequacy As explained under “Group results” above, the recovery in CPO prices and improved extraction rates achieved by the group’s mills during 2016 were offset by the low level of crop harvested during the year. However, going forward, continuation of the revised fertiliser regime, an increasing hectarage of mature plantings and more normal levels of precipitation should ensure that crops recover. With extraction rates expected to improve further and CPO prices likely to remain at current better levels, this will mean signiﬁcant increases in revenue. With continued focus on cost control, the directors are therefore conﬁdent that the group’s operations will remain cash generative and at higher levels. As noted under “Capital structure” above, as at 31 December 2016, the group held cash of $24.6 million and had undrawn facilities equivalent to a total of $14.3 million under the UOB amortising term loan facility. This facility will continue to be used to fund the development of PBJ. The repackaging of the DBS facility resulted in a much improved proﬁle of term loan repayments. As at 31 December 2016, bank debt due within one year reduced to $28.6 million from $50.9 million at 31 December 2015. Moreover, of such $28.6 million, $25.5 million represented drawings under the group’s revolving working capital facilities. The directors have no reason to believe that these facilities will not be rolled over at the end of July 2017 when the facilities fall due for renewal. The 2016 exchange offer for the group’s 2017 dollar notes (referred to under “Capital structure” above) has reduced the nominal amount of such notes outstanding and falling due for redemption in June 2017 to $20.2 million. In addition, £8.3 million nominal of 2017 sterling notes fall due for redemption in December 2017. The directors are conﬁdent that the group will have the cash resources to meet these commitments and the capital expenditure needed to maintain existing immature plantings and for other routine capital requirements. However, depending upon the level of CPO prices and operational performance during the remainder of 2017, some further funding may be required to enable the group to continue its expansion programme at the level that it would like. Accordingly, the group is actively engaged in discussions to obtain new longer term debt ﬁnancing to replace, or replace in part, the maturing notes. The directors are optimistic of a successful outcome to these discussions. Limited further capital expenditure will be required on mills until the group commences construction of its fourth mill. This is scheduled for 2018 but could be postponed if cash constraints so require as FFB production in excess of the capacity of the group’s existing mills can, if necessary, be sold to third party mills. The agreements recently reached or imminently expected to be reached in relation to the group’s O v e r v e w i S t r a t e g i c r e p o r t G o v e r n a n c e G r o u p ﬁ n a n c a i l s t a t e m e n t s C o m p a n y ﬁ n a n c a i l s t a t e m e n t s N o t i c e o f A G M R.E.A. Holdings plc Annual Report and Accounts 2016 33 Strategic report Finance continued stone and coal interests should not involve the group in any material cash outlay and should lead to the interests in question becoming rapidly cash generative. The group’s ﬁnancing is materially dependent upon the contracts governing its indebtedness. Under the terms of those contracts, there are no restrictions on the use of group cash resources or existing borrowings and facilities that the directors would expect materially to impact the planned development of the group. Under the terms of the DBS, UOB and Mandiri facilities, REA Kaltim, SYB and PBJ are restricted to an extent in the payment of interest on borrowings from, and on the payment of dividends to, other group companies. The directors do not believe that the applicable covenants will affect the ability of the company to meet its cash obligations. The group’s oil palms fruit continuously throughout the year and there is therefore no material seasonality in the funding requirements of the agricultural operations in their ordinary course of business. It is not expected that development of the stone and coal operations will cause any material swings in the group’s utilisation of cash for the funding of its routine activities. Financing policies The directors believe that, in order to maximise returns to holders of the company’s ordinary shares, a proportion of the group’s funding needs should be met with prior ranking capital, namely borrowings and preference share capital. The latter has the particular advantage that it represents relatively low risk permanent capital and, to the extent that such capital is available, the directors believe that it is to be preferred to debt. As respects group borrowings, the directors believe that the group’s interests are best served if borrowings are structured to ﬁt the maturity proﬁle of the assets that the borrowings are ﬁnancing. Since oil palm plantings take nearly four years from nursery planting to maturity and then a further period of three to four years to full yield, the directors would prefer to structure borrowings for the group’s agricultural operations so that shorter term bank debt is used only to ﬁnance working capital requirements, while debt funding for the group’s extension planting programme is sourced from issues of listed debt securities and medium term bank borrowings. Whilst the group’s borrowings were, when put in place substantially consistent with the above objectives, subsequent events and in particular some delays in the original plans for expansion of the group’s planted hectarage, meant that by the end of 2014, the group had become too dependent on short term debt. To address this, the group raised some $27.7 million from issues of ordinary and preference shares during 2015 and 2016 and a further $15 million from the transaction with DSN detailed above. Additionally, as noted under “Liquidity and ﬁnancing adequacy” above, the directors have completed various steps to improve the repayment proﬁle of the group’s debt. As a result, the ﬁnancing position of the group is now much improved although, as noted above, the directors are still endeavouring to obtain additional longer term ﬁnancing to replace maturing debt. The directors retain their existing policy of replacing debt with preference share capital when market conditions permit. Net debt at 31 December 2016 was 66.3 per cent of total shareholder funds against a level of 66.9 per cent at 31 December 2015. Whilst the directors intend to maintain the overall amount of the group’s prior ranking capital, they expect that with growth in the net assets attributable to ordinary shareholders, the percentage of ordinary shareholder funds represented by prior ranking capital will, over time, fall. The 2017 sterling notes, the 2020 sterling notes and the 2017 and 2022 dollar notes carry interest at ﬁxed rates of, respectively, 9.5, 8.75 and 7.5 per cent per annum. Interest is payable by REA Kaltim and SYB under the DBS amortising term loans and the working capital line, and by PBJ under the UOB term loan, at ﬂoating rates equal to Jakarta Inter Bank Offered Rate plus a margin and by KMS under the Mandiri loan at a variable rate currently 11.5 per cent. As a policy, the group does not hedge its exposure to ﬂoating rates but maintains a balance between ﬂoating and ﬁxed rate borrowings. A one per cent increase in the ﬂoating rates of interest payable on the group’s ﬂoating rate borrowings at 31 December 2016 would have resulted in an additional annual cost to the group of approximately $1.4 million (2015: additional $1.2 million). The group regards the dollar as the functional currency of most of its operations. The directors believe that the group will be best served going forward by simply maintaining a balance between its borrowings in different currencies and avoiding currency hedging transactions. Accordingly, the group regards some exposure to currency risk on its non-dollar borrowing as an inherent and unavoidable risk of its business. Whilst interest rates payable on Indonesian rupiah borrowings are higher than on dollar borrowings, the directors believe that such higher rates reﬂect the fact that the Indonesian rupiah is a weak currency and that the higher cost that such borrowings entail is likely over time to be more than offset by exchange gains on the borrowings concerned. The group has never covered, and does not intend in future to cover, the currency exposure in respect of the component of the investment in its operations that is ﬁnanced with sterling denominated shareholder capital. The group’s policy is to maintain a cash balance in sterling sufﬁcient to meet its projected sterling expenditure for a period of between six and twelve months and a limited cash balance in Indonesian rupiah. 34 R.E.A. Holdings plc Annual Report and Accounts 2016 O v e r v e w i S t r a t e g i c r e p o r t G o v e r n a n c e G r o u p ﬁ n a n c a i l s t a t e m e n t s C o m p a n y ﬁ n a n c a i l s t a t e m e n t s N o t i c e o f A G M Bornean langur monkey Storm’s storks Orangutan R.E.A. Holdings plc Annual Report and Accounts 2016 35 Strategic report Risks and uncertainties The group’s business involves risks and uncertainties. Identiﬁcation, assessment, management and mitigation of the risks associated with environmental, social and governance matters forms part of the group’s system of internal control for which the board of the company has ultimate responsibility. The board discharges that responsibility as described in “Corporate governance” below. Where risks are reasonably capable of mitigation, the group seeks to mitigate them. Beyond that, the directors endeavour to manage the group’s ﬁnances on a basis that leaves the group with some capacity to withstand adverse impacts from identiﬁed areas of risk but such management cannot provide insurance against every possible eventuality. Those risks and uncertainties that the directors currently consider to be material are described below. There are or may be other risks and uncertainties faced by the group that the directors currently deem immaterial, or of which they are unaware, that may have a material adverse impact on the group. Material risks, related policies and the group’s successes and failures with respect to environmental, social and governance matters and the measures taken in response to any failures are described in more detail under “Sustainability” above. Risks assessed by the directors as being of particular signiﬁcance are those detailed below under climatic and other operational factors, produce prices and funding. In the case of climatic and other operational factors and produce prices, the directors’ assessment reﬂects the negative impact on revenues that could be caused by adverse climatic conditions or operational circumstances and, in the case of funding, the possibility that the group’s expansion programme might have to be curtailed. Risk Agricultural operations Climatic factors Potential impact Mitigating or other relevant considerations Material variations from the norm in climatic conditions A loss of crop or reduction in the quality of harvest resulting in loss of potential revenue Over a long period, crop levels should be reasonably predictable Unusually low levels of rainfall that lead to a water availability below the minimum required for the normal development of the oil palm Overcast conditions A reduction in subsequent crop levels resulting in loss of potential revenue; the reduction is likely to be broadly proportional to the cumulative size of the water deﬁcit Delayed crop formation resulting in loss of potential revenue Low levels of rainfall disrupting river transport or, in an extreme situation, bringing it to a standstill Inability to obtain delivery of estate supplies or to evacuate CPO and CPKO (possibly leading to suspension of harvesting) Operations are located in an area of high rainfall. Notwithstanding some seasonal variations, annual rainfall is usually adequate for normal development Normal sunshine hours in the location of the operations are well suited to the cultivation of oil palm The group has established a permanent downstream loading facility, where the river is tidal. In addition, road access between the ports of Samarinda and Balikpapan and the estates now offers a viable alternative route for transport and any associated additional cost is more than outweighed by the potential negative impact of disruption to the business cycle by any delay in evacuating CPO Cultivation risks Pest and disease damage to oil palms and growing crops Other operational factors A loss of crop or reduction in the quality of harvest resulting in loss of potential revenue The group adopts best agricultural practice to limit pests and diseases Shortages of necessary inputs to the operations, such as fuel and fertiliser Disruption of operations or increased input costs leading to reduced proﬁt margins The group maintains stocks of necessary inputs to provide resilience and has established biogas plants to improve its self- reliance in relation to fuel and fertiliser 36 R.E.A. Holdings plc Annual Report and Accounts 2016 Risk Potential impact Mitigating or other relevant considerations FFB crops becoming rotten or over-ripe leading either to a loss of CPO production (and hence revenue) or to the production of CPO that has an above average free fatty acid content and is saleable only at a discount to normal market prices The group endeavours to maintain resilience in its palm oil mills with each of the mills operating separately and some ability within each mill to switch from steam based to biogas or diesel based electricity generation The requirement for CPO and CPKO storage exceeding available capacity and forcing a temporary cessation in FFB harvesting or processing with a resultant loss of crop resulting in a loss of potential revenue The group’s bulk storage facilities have substantial capacity and further storage facilities are afforded by the ﬂeet of barges. Together, these have hitherto always proved adequate to meet the group’s requirements for CPO and CPKO storage Other operational factors A hiatus in collection or processing of FFB crops Disruptions to river transport between the main area of operations and the Port of Samarinda or delays in collection of CPO and CPKO from the transhipment terminal Occurrence of an uninsured or inadequately insured adverse event; certain risks (such as crop loss through ﬁre or other perils), for which insurance cover is either not available or is considered disproportionately expensive, are not insured Produce prices Volatility of CPO and CPKO prices which as primary commodities may be affected by levels of world economic activity and factors affecting the world economy, including levels of inﬂation and interest rates Restriction on sale of the group’s CPO and CPKO at world market prices including restrictions on Indonesian exports of palm products and imposition of high export duties (as has occurred in the past for short periods) Material loss of potential revenues or claims against the group Reduced revenue from the sale of CPO and CPKO production and a consequent reduction in cash ﬂow and proﬁt Reduced revenue from the sale of CPO and CPKO production and a consequent reduction in cash ﬂow and proﬁt Distortion of world markets for CPO and CPKO by the imposition of import controls or taxes in consuming countries Depression of selling prices for CPO and CPKO if arbitrage between markets for competing vegetable oils proves insufﬁcient to compensate for the market distortion created Expansion Failure to secure in full, or delays in securing, the land or funding required for the group’s planned extension planting programme Inability to complete, or delays in completing, the planned extension planting programme with a consequential reduction in the group’s prospective growth The group maintains insurance at levels that it considers reasonable against those risks that can be economically insured and mitigates uninsured risks to the extent reasonably feasible by management practices Price swings should be moderated by the fact that the annual oilseed crops account for the major proportion of world vegetable oil production and producers of such crops can reduce or increase their production within a relatively short time frame The Indonesian government allows the free export of CPO and CPKO but applies a sliding scale of duties on exports which allows producers economic margins. The extension of this sliding scale to incorporate a $50 per tonne export levy to fund biodiesel subsidies is designed to support the local price of CPO and CPKO The imposition of controls or taxes on CPO or CPKO in one area can be expected to result in greater consumption of alternative vegetable oils within that area and the substitution outside that area of CPO and CPKO for other vegetable oils The group holds substantial fully titled or allocated land areas suitable for planting. It works continuously to obtain and maintain up to date permits for the planting of these areas and aims to manage its ﬁnances to ensure, in so far as practicable, that it will be able to fund the planned extension planting programme O v e r v e w i S t r a t e g i c r e p o r t G o v e r n a n c e G r o u p ﬁ n a n c a i l s t a t e m e n t s C o m p a n y ﬁ n a n c a i l s t a t e m e n t s N o t i c e o f A G M R.E.A. Holdings plc Annual Report and Accounts 2016 37 Strategic report Risks and uncertainties continued Risk Expansion Potential impact Mitigating or other relevant considerations A shortfall in achieving the group’s planned extension planting programme impacting negatively the continued growth of the group A possible adverse effect on market perceptions as to the value of the company’s securities The group maintains ﬂexibility in its planting programme to be able to respond to changes in circumstances Environmental, social and governance practices Failure by the agricultural operations to meet the standards expected of them as a large employer of signiﬁcant economic importance to local communities Reputational and ﬁnancial damage Reputational and ﬁnancial damage Criticism of the group’s environmental practices by conservation organisations scrutinising land areas that fall within a region that in places includes substantial areas of unspoilt primary rain forest inhabited by diverse ﬂora and fauna Community relations A material breakdown in relations between the group and the host population in the area of the agricultural operations Disruption of operations, including blockages restricting access to oil palm plantings and mills, resulting in reduced and poorer quality CPO and CPKO production Disputes over compensation payable for land areas allocated to the group that were previously used by local communities for the cultivation of crops or as respects which local communities otherwise have rights Disruption of operations, including blockages restricting access to the area the subject of the disputed compensation Individuals party to a compensation agreement subsequently denying or disputing aspects of the agreement Disruption of operations, including blockages restricting access to the areas the subject of the compensation disputed by the affected individuals The group has established standard practices designed to ensure that it meets its obligations, monitors performance against those practices and investigates thoroughly and takes action to prevent recurrence in respect of any failures identiﬁed The group is committed to sustainable development of oil palm and has obtained RSPO certiﬁcation for most of its current operations. All group oil palm plantings are on land areas that have been previously logged and zoned by the Indonesian authorities as appropriate for agricultural development. The group maintains substantial conservation reserves that safeguard landscape level biodiversity The group seeks to foster mutually beneﬁcial economic and social interaction between the local villages and the agricultural operations. In particular, the group gives priority to applications for employment from members of the local population, encourages local farmers and tradesmen to act as suppliers to the group, its employees and their dependents and promotes smallholder development of oil palm plantings The group has established standard procedures to ensure fair and transparent compensation negotiations and encourages the local authorities, with whom the group has developed good relations and who are therefore generally supportive of the group, to assist in mediating settlements Where claims from individuals in relation to compensation agreements are found to have a valid basis the group seeks to agree a new compensation arrangement; where such claims are found to be falsely based the group encourages appropriate action by the local authorities 38 R.E.A. Holdings plc Annual Report and Accounts 2016 Risk Potential impact Stone and coal operations Operational factors Failure by external contractors to achieve agreed production volumes Loss of prospective revenue External factors, in particular weather, delaying or preventing delivery of extracted stone and coal Delays to receipt or loss of revenue Geological assessments, which are extrapolations based on statistical sampling, proving inaccurate Unforeseen extraction complications causing cost overruns and production delays Prices Local competition reducing stone prices and volatility of international coal prices Reduced revenue and a consequent reduction in cash ﬂow and proﬁt Imposition of additional royalties or duties on the extraction of stone or coal Reduced revenue and a consequent reduction in cash ﬂow and proﬁt Unforeseen variations in quality of deposits Inability to supply product within the speciﬁcations that are, at any particular time, in demand with consequent loss of revenue Environmental, social and governance practices Failure by the stone and coal operations to meet the expected standards Reputational and ﬁnancial damage Mitigating or other relevant considerations The group endeavours to use experienced contractors, to supervise them closely and to take care to ensure that they have equipment of capacity appropriate for the planned production volumes once operations have commenced Deliveries are not normally time critical and adverse external factors would not normally have a continuing impact for more than a limited period The group seeks to ensure the accuracy of geological assessments of any extraction programme and taking expert geological advice on the results There are currently no other stone quarries in the vicinity of the group’s deposits and the cost of transporting stone should restrict competition. In relation to coal, the cooperation arrangement negotiated for the mining of the group’s main coal concession provides a ﬂoor price for the coal mined The Indonesian government has not to date imposed measures that would seriously affect the viability of Indonesian stone quarrying or coal mining operations Geological assessments ahead of commencement of extraction operations should have identiﬁed any material variations in quality The area of the stone and coal concessions are relatively small and should not be difﬁcult to supervise. The group is committed to international standards of best environmental and social practice and, in particular, to proper management of waste water and reinstatement of quarried and mined areas on completion of extraction operations O v e r v e w i S t r a t e g i c r e p o r t G o v e r n a n c e G r o u p ﬁ n a n c a i l s t a t e m e n t s C o m p a n y ﬁ n a n c a i l s t a t e m e n t s N o t i c e o f A G M R.E.A. Holdings plc Annual Report and Accounts 2016 39 Strategic report Risks and uncertainties continued Risk General Currency Potential impact Mitigating or other relevant considerations Strengthening of sterling or the Indonesian rupiah against the dollar Adverse exchange movements on those components of group costs and funding that arise in Indonesian rupiah or sterling and are not hedged against the dollar Inability to meet liabilities as they fall due Funding Bank debt repayment instalments and other debt maturities coincide with periods of adverse trading and negotiations with bankers and investors are not successful in rescheduling instalments, extending maturities or otherwise concluding satisfactory reﬁnancing arrangements Counterparty risk Default by a supplier, customer or ﬁnancial institution Loss of any prepayment, unpaid sales proceeds or deposit As respects costs and sterling denominated shareholder capital, the group considers that this risk is inherent in the group’s business and structure and must simply be accepted. As respects borrowings, where efﬁcient the group seeks to borrow in dollars but, when borrowing in another currency, considers it better to accept the resultant currency risk than to hedge that risk with hedging instruments The group maintains good relations with its bankers and other holders of debt who have generally been receptive to reasonable requests to moderate debt proﬁles when circumstances require; moreover, the directors believe that the fundamental proﬁtability of the group’s business will facilitate divestment of assets or procurement of additional equity capital should this prove necessary The group maintains strict controls over its ﬁnancial exposures which include regular reviews of the creditworthiness of counterparties and limits on exposures to counterparties. Export sales are made either against letters of credit or on the basis of cash against documents Regulatory exposure Failure to renegotiate the existing arrangements relating to the stone interests Limitation of the group’s return from these interests to the loans advanced Current regulations in Indonesia limit foreign investment in mining concessions New, and changes to, laws and regulations that affect the group (including, in particular, laws and regulations relating to land tenure, work permits for expatriate staff and taxation) Restriction on the group’s ability to retain its current structure or to continue operating as currently Breach of the various continuing conditions attaching to the group’s land rights and the stone quarry concession (including conditions requiring utilisation of the rights and concessions) or failure to maintain all permits and licences required for the group’s operations Failure by the group to meet the standards expected in relation to bribery and corruption Civil sanctions and, in an extreme case, loss of the affected rights or concessions Reputational damage and criminal sanctions 40 R.E.A. Holdings plc Annual Report and Accounts 2016 Save as noted above regarding interests in stone, the directors are not aware of any speciﬁc changes that would adversely affect the group to a material extent; current regulations restricting the size of oil palm growers in Indonesia will not impact the group for the foreseeable future The group endeavours to ensure compliance with the continuing conditions attaching to its land rights and concessions and that activities are conducted within the terms of the licences and permits that are held and that licences and permits are obtained and renewed as necessary The group has traditionally had, and continues to maintain, strong controls in this area because Indonesia, where all of the group’s operations are located, has been classiﬁed as relatively high risk by the International Transparency Corruption Perceptions Index Risk Potential impact Country exposure Deterioration in the political or economic situation in Indonesia Difﬁculties in maintaining operational standards particularly if there was a consequential deterioration in the security situation Introduction of exchange controls or other restrictions on foreign owned operations in Indonesia Restriction on the transfer of proﬁts from Indonesia to the UK with potential consequential negative implications for the servicing of UK obligations and payment of dividends; loss of effective management control Mandatory reduction of foreign ownership of Indonesian plantation operations Forced divestment of interests in Indonesia at below market values with consequential loss of value Miscellaneous relationships Disputes with staff and employees Disruption of operations and consequent loss of revenues Breakdown in relationships with the local shareholders in the company’s Indonesian subsidiaries Reliance on the Indonesian courts for enforcement of the agreements governing its arrangements with local partners with the uncertainties that any juridical process involves and with any failure of enforcement likely to have a material negative impact on the value of the stone and coal operations because the concessions are at the moment legally owned by the group’s local partners Mitigating or other relevant considerations In the recent past, Indonesia has been stable and the Indonesian economy has continued to grow but, in the late 1990s Indonesia experienced severe economic turbulence and there have been subsequent occasional instances of civil unrest, often attributed to ethnic tensions, in certain parts of Indonesia. The group has never, since the inception of its East Kalimantan operations in 1989, been adversely affected by regional security problems The directors are not aware of any circumstances that would lead them to believe that, under current political conditions, any Indonesian government authority would impose exchange controls or otherwise seek to restrict the group’s freedom to manage its operations The group accepts there is a signiﬁcant possibility that foreign owners may be required over time to partially divest ownership of Indonesian oil palm operations but has no reason to believe that such divestment would be at anything other than market value. Moreover, the group has recently increased local participation by a transaction with a local investor The group appreciates its material dependence upon its staff and employees and endeavours to manage this dependence in accordance with international employment standards as detailed under “Employees” in “Sustainability” above The group endeavours to maintain cordial relations with its local investors by seeking their support for decisions affecting their interests and responding constructively to any concerns that they may have The directors have also considered the implications of the notice given to terminate UK membership of the European Union in the context of the group and its operations. Any ensuing weakness of sterling will positively impact the group as its operations are essentially dollar denominated and costs incurred and liabilities recognised in sterling will be reduced in dollar terms. Any reduction in UK interest rates may negatively impact the level of the technical provisions of the REA Pension Scheme by, given the Scheme’s estimated funding position and having regard to the performance of the assets, the directors do not expect that the impact will be material in the context of the group. Approved by the board on 27 April 2017 and signed on behalf of the board by DAVID J BLACKETT Chairman R.E.A. Holdings plc Annual Report and Accounts 2016 41 O v e r v e w i S t r a t e g i c r e p o r t G o v e r n a n c e G r o u p ﬁ n a n c a i l s t a t e m e n t s C o m p a n y ﬁ n a n c a i l s t a t e m e n t s N o t i c e o f A G M Governance Board of directors David Blackett Chairman (independent) (66) Committees: audit, nomination (chairman), remuneration David Blackett was appointed a non-executive director in July 2008. After qualifying as a chartered accountant in Scotland, he worked for over 25 years in South East Asia, where he concluded his career as chairman of AT&T Capital Inc’s Asia Paciﬁc operations. Previously, he was a director of an international investment bank with responsibility for the bank’s South East Asian operations and until October 2014 served as an independent non-executive director of South China Holdings Limited (now Orient Victory China Holdings Limited), a company listed on the Hong Kong Stock Exchange. He was appointed chairman on 1 January 2016 following the retirement of Richard Robinow from that position. Irene Chia Independent non-executive director (76) Irene Chia was appointed a non-executive director in January 2013. She has extensive corporate, investment and entrepreneurial experience in Asia, the USA and the UK. A graduate in economics and formerly a director of one of the Jardine Matheson Group companies, she now lives in Singapore and is currently self-employed with Far Eastern interests in consulting, property and ﬁnancial investment as well as in the charitable sector. Carol Gysin Executive director (59) Carol Gysin was appointed to the board as managing director on 21 February 2017. Based in London, she has worked for the group for over eight years as group company secretary, with increasing involvement in the operational areas of the business, including making regular visits to the group’s ofﬁces and plantation estates in Indonesia. Prior to joining the group, Carol worked as company secretary to a telecommunications company, Micadant plc (formerly, Ionica Group plc, listed on NASDAQ and in London), to a medical devices company, Weston Medical plc, as well as to a number of early-stage technology companies, following an initial career in investment banking. John Oakley Non-executive director (68) After early experience in investment banking and general management, John Oakley joined the group in 1983 as divisional managing director of the group’s then horticultural operations. He was appointed to the main board in 1985 and in the early 1990s he took charge of the day to day management of the group’s then embryonic East Kalimantan agricultural operations. He was appointed managing director in January 2002 and, until the appointment of a regional executive director in 2013, was the sole executive director of the group. He retired as managing director on 1 January 2016 but remains on the board as a non-executive director and for a transitional period undertaking some additional responsibilities, in particular overseeing completion of the group’s new information systems as well as making twice yearly visits to the group’s estate operations to advise on agronomic matters. Richard Robinow Non-executive director (71) Richard Robinow was appointed a director in 1978 and became chairman in 1984. Following his seventieth birthday, he retired from the chairmanship on 1 January 2016. He remains on the board as a non-executive director and, for a transitional period, is undertaking some additional responsibilities particularly as respects the ﬁnancing of the group. After early investment banking experience, he has been involved for over 40 years in the plantation industry. He is a non-executive director of M. P. Evans Group plc, a UK plantation company of which the shares are admitted to trading on the Alternative Investment Market of the London Stock Exchange, and of a Kenyan plantation company, REA Vipingo Plantations Limited (substantially all of the shares in which are indirectly owned by his family). Michael St. Clair-George Senior independent non-executive director (74) Committees: audit (chairman), nomination, remuneration (chairman) Michael St. Clair-George was appointed to the board on 24 October 2016. He is a fellow of the Institute of Chartered Accountants in England & Wales. He has over 40 years' experience in the plantation and agribusiness industries in Malaysia and Indonesia, having worked for some 25 years with Harrisons & Crosﬁeld and Harrisons Malaysian Plantations Berhad, as ﬁnance director, and then as president director of Sipef NV's Indonesian operations. He then spent 10 years as managing director of Sipef NV, based in Belgium. Retiring from this position in 2007 and returning to London, he served until 2013 as senior non-executive director and chairman of the audit committee of New Britain Palm Oil Limited, a company then listed in London. Former directors David Killick, FCIS (retired 6 June 2016) Senior independent non-executive director (78) Committees: audit (chairman), nomination (chairman), remuneration (chairman) David Killick was appointed a non-executive director in 2006 and retired from that position in 2016 having served on the board for over nine years. Mark Parry (resigned 20 February 2017) Executive director (55) Mark Parry joined the group in 2011 as the group’s regional director based in Singapore and Indonesia. He was appointed as an executive director in January 2012, as president director of PT REA Kaltim Plantations in July 2012, and as group managing director in January 2016. 42 R.E.A. Holdings plc Annual Report and Accounts 2016 Governance Directors’ report The directors present their annual report on the affairs of the group, together with the ﬁnancial statements and auditor’s report, for the year ended 31 December 2016. The “Corporate governance report” below forms part of this report. There are no signiﬁcant events since 31 December 2016 to be disclosed. An indication of likely future developments in the business of the company and details of research and development activities are included in the “Strategic report” above. Information about the use of ﬁnancial instruments by the company and its subsidiaries is given in note 23 to the consolidated ﬁnancial statements. Results and dividends The results are presented in the consolidated income statement and notes thereto. The ﬁxed semi-annual dividends on the 9 per cent cumulative preference shares that fell due on 30 June and 31 December 2016 were duly paid. In view of the difﬁcult conditions that faced the group during 2016, the directors have concluded that, as previously announced, they should not declare or recommend the payment of any dividend on the ordinary shares in respect of 2016. The group’s programme of planting its land bank remains ongoing. This will continue to require major capital expenditure and constrain the rates at which the directors feel that they can prudently declare, or recommend the payment of, ordinary dividends over the next few years. Nevertheless, the directors will consider recommending the payment of a ﬁnal ordinary dividend in respect of 2017, although this will necessarily depend upon crops and CPO prices over the balance of 2017. Viability statement The group’s business activities, together with the factors likely to affect its future development, performance and position are described in the “Strategic report” above which also provides (under the heading “Finance”) a description of the group’s cash ﬂow, liquidity and ﬁnancing adequacy and treasury policies. In addition, note 23 to the consolidated ﬁnancial statements includes information as to the group’s policy, objectives and processes for managing capital, its ﬁnancial risk management objectives, details of ﬁnancial instruments and hedging policies and exposures to credit and liquidity risks. The “Risks and uncertainties” section of the Strategic report describes the material risks faced by the group and actions taken to mitigate those risks. In particular, there are risks associated with the group’s local operating environment and the group is materially dependent upon selling prices for crude palm oil (“CPO”) and crude palm kernel oil over which it has no control. As respects funding risk, the group has material indebtedness, in the form of bank loans and listed notes. Some $3.1 million of bank term indebtedness falls due for repayment during 2017, and a further $25.5 million of revolving working capital lines fall due for renewal during the same period. In addition, $20.2 million of dollar notes fall due for repayment in June 2017 and £8.3 million of sterling notes in December 2017. In 2018 and 2019 bank term loans of $6.0 million and $12.9 million respectively fall due for repayment and $31.3 million of a committed revolving bank line falls due for renewal. A further £31.9 million ($38.9 million) sterling notes will become repayable in August 2020. In view of the material proportion of the group’s indebtedness falling due in the period to 31 December 2020, as described above, the directors have chosen this period for their assessment of the long-term viability of the group. In April 2017, PT Dharma Satya Nusantara Tbk, the non- controlling shareholder in PT REA Kaltim Plantations (“REA Kaltim”), provided further loans of $16.6 million to REA Kaltim’s plantation subsidiaries. The group continues in discussions to reﬁnance, with longer term debt, indebtedness falling due in 2017 and 2018. Furthermore, the directors have no reason to believe that the revolving working capital facilities falling due in 2017 and 2019 will not be rolled over when these facilities fall due for renewal. Limited further capital expenditure will be required on the group’s mills until construction is commenced on the fourth mill. This is scheduled for 2018 but could be postponed if cash constraints so require. In 2020 consideration will be given to proposals to the holders of the sterling notes to reﬁnance these with securities of longer duration. The group holds in treasury $9.9 million of dollar notes 2022 which it acquired in the placing in December 2016; the group plans to sell these over time as market conditions permit. Should funding be required pending completion of any of the debt ﬁnancing initiatives, the group will seek to place for cash a limited number of ordinary and/or preference shares, authority for which will be sought as and when appropriate. The directors fully expect that the foregoing measures will reﬁnance, or permit the group to repay, the group indebtedness falling due for repayment during the period of assessment. As the beneﬁts of recent improvements in operational efﬁciencies start to ﬂow through, with CPO prices likely to remain at current better levels, the group’s plantation operations can be expected to generate increasing cash ﬂows going forward. Operations are expected to restart shortly at one of the group’s coal concessions and to commence at a new stone deposit. Together these are expected to result in increasing cash ﬂow. Based on the foregoing and after making enquiries, the directors therefore have a reasonable expectation that the company and the group have adequate resources to continue R.E.A. Holdings plc Annual Report and Accounts 2016 43 O v e r v e w i S t r a t e g c i r e p o r t G o v e r n a n c e G r o u p ﬁ n a n c a i l s t a t e m e n t s C o m p a n y ﬁ n a n c a i l s t a t e m e n t s N o t i c e o f A G M Governance Directors’ report continued in operational existence for the period to 31 December 2020 and to remain viable during that period. takes into account all Scope 2 emissions and some Scope 3 GHG emissions. Going concern The business risks are set out on pages 36 to 41 with an indication of those risks regarded by the directors to be potentially signiﬁcant together with mitigating and other relevant considerations for the management of risks. The ﬁnancing policies are described on pages 34 of the strategic report and the 2016 developments relating to capital structure are contained in the “Finance” section of the strategic report under “Capital structure”. The directors have set out their assessment of liquidity and ﬁnancing adequacy on pages 33 to 34 of the strategic report including the actions either in progress or contemplated in order to ensure adequate liquidity for the next twelve months. Accordingly, having made due enquiries, the directors reasonably expect that the company and the group have adequate resources to continue in operational existence for at least twelve months from the date of approval of the ﬁnancial statements, and therefore they continue to adopt the going concern basis of accounting in preparing the ﬁnancial statements. Greenhouse gas emissions (“GHG”) GHG emissions data for the period 1 January 2015 to 31 December 2016 is as shown below: Tonnes of CO2e 2016 2015 Gross emissions associated with oil palm operations in Indonesia1 1,033,340 1,107,127 Net emissions associated with oil palm operations in Indonesia 466,939 563,167 Net emissions per tonne of CPO produced 3.66 3.48 Net emissions per planted hectare 10.81 15.05 Electricity, heat, steam and cooling purchased for own use 57.3 57.6 1 In addition to all material Scope 1 emissions, some Scope 3 emissions have also been included in this category. Examples include GHG emissions associated with the manufacture and transport of the inorganic fertilisers used by, and an estimate of the GHG emissions associated with, the cultivation of fresh fruit bunches purchased by the group’s mills from third parties. 2 The Greenhouse Gas Protocol deﬁnes direct GHG emissions as emissions from sources that are owned or controlled by the reporting entity. These are categorised as Scope 1 emissions. The Protocol deﬁnes indirect GHG emissions as emissions that are a consequence of the activities of the reporting entity, but occur at sources owned or controlled by another entity. Indirect GHG emissions are further categorised into Scope 2 (indirect GHG emissions from the consumption of purchased electricity, heat and steam) and Scope 3 emissions (all other indirect GHG emissions, such as the extraction and production of purchased materials and fuel and transport in vehicles not owned or controlled by the reporting entity). PalmGHG The group has used the PalmGHG tool (v. 3.0.1), developed by the Roundtable on Sustainable Palm Oil (“RSPO”), to calculate the carbon footprint of its oil palm operations in Indonesia 2016 and to restate its previously calculated carbon footprint for 2015. This methodology was chosen because it is tailored to the palm oil industry. It was developed by a multi- stakeholder group which included leading scientists in the ﬁeld of GHG accounting for oil palm. As of 31 December 2016, all RSPO member palm oil producers have been required to report publicly their GHG emissions using the PalmGHG tool, so it is expected that this methodology will become industry best practice. Following the change in the methodology of the most recent version of PalmGHG, the data presented above is not directly comparable with that for the years 2012 to 2015 presented in previous Directors’ reports which was computed in accordance with an earlier version of the PalmGHG tool. The PalmGHG tool uses a lifecycle assessment approach, whereby all of the major sources of GHG emissions (carbon dioxide (CO2), methane (CH4) and nitrous oxide (N2O)) linked to the cultivation, processing and transport of oil palm products are quantiﬁed and balanced against the carbon sequestration and GHG emissions’ avoidance as a result of those processes. All direct and the majority of the indirect emissions associated with the group’s oil palm operations in Indonesia are reﬂected. Aspects of the operations that are not included are the production of oil palm seedlings, the application of pesticides, fuel used for land clearing, emissions associated with infrastructure and machinery and the sequestration of carbon in oil palm products and by-products. The GHG emissions linked to these processes are not considered to be material. The unit of calculation for the PalmGHG tool is the palm oil mill and its supply base. The boundary of calculation includes all three of the group’s palm oil mills and their supply bases. The boundary for the GHG emissions’ reporting thus differs from that used for ﬁnancial reporting, as the emissions linked to oil palm estates which do not yet supply fresh fruit bunches to one of the group’s mills are not directly included. Instead, emissions associated with the land use change component of new oil palm developments (which represent the majority of emissions from new developments) are accumulated over the immaturity period of each development and then amortised over the 25 year oil palm lifecycle. The group has reported both the gross and net GHG emissions associated with its oil palm operations in Indonesia. The net GHG emissions were calculated by deducting from the gross GHG emissions the CO2 that is estimated to have been ﬁxed (sequestered) by the oil palms and conserved set- aside forest through the process of photosynthesis. A further deduction was made to account for the GHG emissions that have been avoided as a result of the export of renewable 44 R.E.A. Holdings plc Annual Report and Accounts 2016 electricity from the group’s methane capture facilities to domestic buildings and local communities that were previously supplied with electricity by diesel powered generators. The group’s net GHG emissions have been expressed per tonne of CPO produced and per planted hectare (immature and mature). It is deemed necessary to consider both measures because the trend in GHG emissions per planted hectare is not inﬂuenced by the maturity of the oil palm within the supply base, whereas this does impact the GHG emissions per tonne of CPO. The group’s Scope 2 emissions are limited to the electricity purchased by the group’s ofﬁces in London, Jakarta and Samarinda. These GHG emissions are not accounted for in the PalmGHG methodology. These emissions were therefore estimated separately by multiplying the amount of electricity consumed in kilowatt hours by the electricity emission coefﬁcients for the UK and Indonesia respectively. Since these emissions are immaterial by comparison with the GHG emissions associated with the group’s oil palm operations they have not been included in the net GHG emissions to ensure that the methodology used to calculate the intensity of the group’s GHG emissions is consistent with what is likely to become the standard oil palm industry methodology for reporting GHG emission intensity. Control and structure of capital Details of the company’s share capital and changes in share capital during 2016 are set out in note 30 to the company’s ﬁnancial statements. At 31 December 2016, the preference share capital and the ordinary share capital represented, respectively, 86.3 and 13.7 per cent of the total issued nominal value of share capital. The rights and obligations attaching to the ordinary and preference shares are governed by the company’s articles of association and prevailing legislation. A copy of the articles of association is available on the company’s website at www.rea.co.uk. Rights to income and capital are summarised in note 30 to the company’s ﬁnancial statements. On a show of hands at a general meeting of the company, every holder of shares and every duly appointed proxy of a holder of shares, in each case being entitled to vote on the resolution before the meeting, shall have one vote. On a poll, every holder of shares present in person or by proxy and entitled to vote on the resolution the subject of the poll shall have one vote for each share held. Holders of preference shares are not entitled to vote on a resolution proposed at a general meeting unless, at the date of notice of the meeting, the dividend on the preference shares is more than six months in arrears or the resolution is for the winding up of the company or is a resolution directly and adversely affecting any of the rights and privileges attaching to the preference shares. Deadlines for the exercise of voting rights and for the appointment of a proxy or proxies to vote in relation to any resolution to be proposed at a general meeting are governed by the company’s articles of association and prevailing legislation and will normally be as detailed in the notes accompanying the notice of the meeting at which the resolution is to be proposed. There are no restrictions on the size of any holding of shares in the company. Shares may be transferred either through the CREST system (being the relevant system as deﬁned in the Uncertiﬁcated Securities Regulations 2001 of which Euroclear UK & Ireland Limited is the operator) where held in uncertiﬁcated form or by instrument of transfer in any usual or common form duly executed and stamped, subject to provisions of the company’s articles of association empowering the directors to refuse to register any transfer of shares where the shares are not fully paid, the shares are to be transferred into a joint holding of more than four persons, the transfer is not appropriately supported by evidence of the right of the transferor to make the transfer or the transferor is in default in compliance with a notice served pursuant to section 793 of the Companies Act 2006. The directors are not aware of any agreements between shareholders that may result in restrictions on the transfer of securities or on voting rights. No person holds securities carrying special rights with regard to control of the company and there are no arrangements in which the company co-operates by which ﬁnancial rights carried by shares are held by a person other than the holder of the shares. The articles of association provide that the business of the company is to be managed by the directors and empower the directors to exercise all powers of the company, subject to the provisions of such articles (which include a provision speciﬁcally limiting the borrowing powers of the group) and prevailing legislation and subject to such directions as may be given by the company in general meeting by special resolution. The articles of association may be amended only by a special resolution of the company in general meeting and, where such amendment would modify, abrogate or vary the class rights of any class of shares, with the consent of that class given in accordance with the company’s articles of association and prevailing legislation. The 7.5 per cent dollar notes 2017 and the 7.5 per cent dollar notes 2022 (respectively, the “2017 dollar notes” and the “2022 dollar notes” and, together, the “dollar notes”) of the company and the 9.5 per cent guaranteed sterling notes 2015/17 and 8.75 per cent guaranteed sterling notes 2020 (respectively the “2017 sterling notes” and the “2020 sterling notes” and, together, the “sterling notes”) that have been issued by REA Finance B.V. and guaranteed by the company are transferable either through the CREST system where held in uncertiﬁcated form or by instrument of transfer. Transfers may be in any usual or common form duly executed in amounts and multiples: in the case of the 2017 dollar notes of $1; in the case of the 2022 dollar notes, of $120,000 and R.E.A. Holdings plc Annual Report and Accounts 2016 45 O v e r v e w i S t r a t e g c i r e p o r t G o v e r n a n c e G r o u p ﬁ n a n c a i l s t a t e m e n t s C o m p a n y ﬁ n a n c a i l s t a t e m e n t s N o t i c e o f A G M Governance Directors’ report continued integral multiples of $1 in excess thereof; in the case of the 2017 sterling notes, of £1,000; and, in the case of the 2020 sterling notes, of £100,000 and integral multiples of £1,000 in excess thereof. There is no maximum limit on the size of any holding in each case. Substantial holders On 31 December 2016, the company had received notiﬁcations in accordance with chapter 5 of the Disclosure Rules and Transparency Rules of the Financial Conduct Authority of the following voting rights held by them as holders of ordinary shares of the company: Number Percentage of of ordinary voting Substantial holders of ordinary shares shares rights Emba Holdings Limited 11,082,420 27.4 Prudential plc and certain subsidiaries* 6,043,129 15.0 Alcatel Bell Pensioenfonds VZW 4,167,049 10.3 Artemis UK Smaller Companies 3,563,620 8.8 First State Investments (UK) Limited 1,476,858 3.7 * The company has been notiﬁed that the interest of Prudential plc group of companies includes 6,021,116 ordinary shares (14.9 per cent) in which M&G Investment Funds 3 is also interested. The shares held by Emba Holdings Limited (“Emba”) are included as part of the interest of Richard Robinow shown under “Statement of directors’ shareholdings” in the Directors’ remuneration report. Pursuant to notiﬁcations received in the period from 31 December 2016 to the date of this report, substantial shareholders were as set out below: Number Percentage of of ordinary voting shares rights Emba Holdings Limited 11,082,420 27.4 Prudential plc and certain subsidiaries 6,043,129 15.0 Alcatel Bell Pensioenfonds VZW 4,167,049 10.3 Artemis UK Smaller Companies 3,563,620 8.8 Aberforth LLP 2,946,902 7.3 The Capital Group Companies, Inc 2,162,000 5.4 Signiﬁcant holdings of dollar notes and sterling notes shown by the respective registers of members and noteholders at 31 December 2016 are set out below. There were no signiﬁcant holders of preference shares at 31 December 2016. Dollar Dollar Sterling Sterling notes notes notes notes 2020 2017 2022 2017 Substantial holders of securities $’000 $’000 £’000 £’000 The Bank of New York (Nominees) Limited – – 7,800 The Bank of New York (Nominees) Limited AHIF account – – – Euroclear Nominees Limited EOC01 account 2,958 – – Ferlim Nominees Limited pooled account – – – – 2,028 – 842 Dollar Dollar Sterling Sterling notes notes notes notes 2020 2017 2022 2017 Substantial holders of securities $’000 $’000 £’000 £’000 HSBC Global Custody Nominees (UK) Limited 641898 account – – 5,967 KBC Securities NV Client account 6,080 4,690 – R.E.A. Services Limited – 9,880 – Securities Services Nominees Limited 2300007 account – – – State Street Nominees Limited OM04 account – – 5,300 State Street Nominees Limited OU61 account 2,566 – 8,816 Vidacos Nominees Limited CLRLux account 3,910 – – Vidacos Nominees Limited CLRLux2 account – 2,264 – – – – 1,595 - - – – A change of control of the company would entitle holders of the sterling notes to require repayment of the notes held by them as detailed in note 25 to the consolidated ﬁnancial statements. The directors are not aware of any agreements between the company and its directors or between any member of the group and a group employee that provides for compensation for loss of ofﬁce or employment that occurs because of a takeover bid. Directors The directors who served during 2016 or were appointed subsequent to the end of 2016 are listed under “Board of directors” above, which is incorporated by reference in this Directors’ report. Biographical details of each of the directors proposed for election or re-election are also set out under “Board of directors”. David Killick retired as a non-executive director on 6 June 2016 and Mark Parry resigned as managing director on 20 February 2017. Carol Gysin and Michael St. Clair-George, who were appointed on 21 February 2017 and 24 October 2016, respectively, retire at the forthcoming annual general meeting and being eligible, offer themselves for election, such retirement being in compliance with the company’s articles of association providing for the rotation of directors. Resolutions 4 and 5, which are set out in the 2017 notice of annual general meeting (the “2017 Notice”) and will be proposed as ordinary resolutions, deal with the election of Carol Gysin and Michael St. Clair-George. John Oakley and Richard Robinow retire at the forthcoming annual general meeting and, being eligible, offer themselves for re-election, such retirement being in compliance with the provisions of the UK Corporate Governance Code requiring the annual re-election of non-executive directors who have served for more than nine years. Resolutions 6 and 7, which are set out in the 2017 Notice and will be proposed as ordinary resolutions, deal with the re-election of John Oakley and Richard Robinow. 46 R.E.A. Holdings plc Annual Report and Accounts 2016 John Oakley and Richard Robinow relinquished their positions as, respectively, managing director and chairman of the company at the end of 2015. However they remain on the board as non-executive directors and continue to oversee certain executive matters to the extent necessary to ensure a smooth transfer of their responsibilities. The group continues to beneﬁt from John Oakley’s knowledge of agronomical practices as well as his essential oversight of the development and implementation of the new information technology systems. As respects Richard Robinow, his signiﬁcant family shareholding in the company will continue to support the development of the group, particularly with regard to current strategic initiatives. The chairman conﬁrms that, following a formal evaluation, the performance of each of the non-executive directors continues to be effective and recommends each of John Oakley, Richard Robinow and Michael St. Clair-George for re-election or election as a non-executive director. Further, the chairman recommends for election Carol Gysin as sole executive director. The chairman particularly welcomes the valuable commitment and extensive experience of all of the directors. Companies Act 2006, the detailed terms of the arrangements agreed between the company and Mark Parry in relation to the latter’s resignation are available on the company’s website at www.rea.co.uk and will remain so available until the company’s 2018 annual general meeting. In addition and in accordance with section 226D of the Companies Act 2006, such terms are available for inspection at the registered ofﬁce of the company, First Floor, 32-26 Great Portland Street, London W1W 8QX, will so remain until the conclusion of the company’s forthcoming annual general meeting and will be available for inspection at the place of that meeting at least 15 minutes prior to and during the meeting. Directors’ indemnities Qualifying third party indemnity provisions (as deﬁned in section 234 of the Companies Act 2006) were in force for the beneﬁt of directors of the company and of other members of the group throughout 2016 and remain in force at the date of this report. Political donations Resignation of Mark Parry No political donations were made during the year. Mark Parry's directorships with the company and all subsidiaries of the group ceased with effect from 20 February 2017. His employment with the company's Singapore subsidiary will end on 20 May 2017. Mark Parry decided to offer his resignation following concerns expressed by the authorities in East Kalimantan that, in his position as president director of PT REA Kaltim Plantations, he might have undertaken various tasks that were outside the scope of his work permits. The tasks in question involved matters relating to human resources and personnel management (which are reserved by Indonesian law to Indonesian nationals) and conducting business at group locations not speciﬁcally covered by the work permits. On 20 February 2017, the directors resolved unanimously that it was in the best interests of the company and its shareholders for the company to pay to Mark Parry the sum of £200,000 as compensation for his loss of ofﬁce as a director of the company (the “Loss of Ofﬁce Payment”), such payment to be subject to the approval of shareholders at the next annual general meeting of the company. The remuneration policy of the company contemplates directors being paid their contractual notice entitlement and, in respect of expatriate executive directors, reasonable repatriation costs upon termination of their appointments. However, the remuneration policy does not contemplate any other loss of ofﬁce payments. The Loss of Ofﬁce Payment, therefore, is inconsistent with the company’s current remuneration policy. Accordingly, a resolution will be proposed at the forthcoming general meeting to approve the Loss of Ofﬁce Payment to Mark Parry (resolution 3 set out in the 2017 Notice). In accordance with section 430(2b) of the Acquisition of the company’s own shares The company’s articles of association permit the purchase by the company of its own shares subject to prevailing legislation which requires that any such purchase (commonly known as a “buy-back”), if a market purchase, has been previously authorised by the company in general meeting and, if not, is made pursuant to a contract of which the terms have been authorised by a special resolution of the company in general meeting. The company currently holds 132,500 of its ordinary shares of 25p each, representing 0.33 per cent of the called up ordinary share capital, as treasury shares with the intention that, once a holding of reasonable size has been accumulated, such holding be placed with one or more substantial investors on a basis that, to the extent reasonably possible, broadens the spread of substantial shareholders in the company. Save to the extent of this intention, no agreement, arrangement or understanding exists whereby any ordinary shares acquired pursuant to the share buy-back authority referred to below will be transferred to any person. The directors are seeking renewal at the forthcoming annual general meeting (resolution 10 set out in the 2017 Notice) of the buy-back authority granted in 2016 to purchase up to 5,000,000 ordinary shares, on terms that the maximum number of ordinary shares that may be bought back and held in treasury at any one time is limited to 400,000 ordinary shares. The directors may, if it remains appropriate, seek further annual renewals of this authority at subsequent annual general meetings. The authorisation being sought will continue to be utilised only for the limited purpose of buying R.E.A. Holdings plc Annual Report and Accounts 2016 47 O v e r v e w i S t r a t e g c i r e p o r t G o v e r n a n c e G r o u p ﬁ n a n c a i l s t a t e m e n t s C o m p a n y ﬁ n a n c a i l s t a t e m e n t s N o t i c e o f A G M Governance Directors’ report continued back ordinary shares into treasury with the expectation that the shares bought back will be re-sold within a limited period. The new authority, if provided, will expire on the date of the annual general meeting to be held in 2018 or on 30 June 2018 (whichever is the earlier). The renewed buy-back authority is sought on the basis that the price (exclusive of expenses, if any) that may be paid by the company for each ordinary share purchased by it will be not less than £1.00 and not greater than an amount equal to the higher of: (i) 105 per cent of the average of the middle market quotations for the ordinary shares in the capital of the company as derived from the Daily Ofﬁcial List of the London Stock Exchange for the ﬁve business days immediately preceding the day on which such share is contracted to be purchased; and (ii) the higher of the last independent trade and the current highest independent bid on the London Stock Exchange. into, ordinary shares in the capital of the company (other than 9 per cent cumulative preference shares) up to an aggregate nominal amount of £3,364,752 representing 33.3 per cent of the issued ordinary share capital (excluding treasury shares) at the date of this report), and (b) to allot and to grant rights to subscribe for, or to convert any security into, 9 per cent cumulative preference shares in the capital of the company up to an aggregate nominal amount of £21,358,768 representing 33.6 per cent of the issued preference share capital of the company at the date of this report. The new authorities, if provided, will expire on the date of the annual general meeting to be held in 2018 or on 30 June 2018 (whichever is the earlier). The directors have no present intention of exercising these authorities. Authority to disapply pre-emption rights Any ordinary shares held in treasury by the company will remain listed and form part of the company’s issued ordinary share capital. However, the company will not be entitled to attend meetings of the members of the company, exercise any voting rights attached to such ordinary shares or receive any dividend or other distribution (save for any issue of bonus shares). Sales of shares held in treasury will be made from time to time as investors are found, following which the new legal owners of the ordinary shares will be entitled to exercise the usual rights from time to time attaching to such shares and to receive dividends and other distributions in respect of the ordinary shares. The consideration payable by the company for any ordinary shares purchased by it will come from the distributable reserves of the company. The proceeds of sale of any ordinary shares purchased by the company would be credited to distributable reserves up to the amount of the purchase price paid by the company for the shares, with any excess over such price being credited to the share premium account of the company. Thus, as regards its impact on both cash resources and distributable reserves, it is intended that exercise of the share buy-back authority will be broadly neutral. Fresh powers are also being sought at the forthcoming annual general meeting under the provisions of sections 571 and 573 of the Companies Act 2006 to enable the board to make a rights issue or open offer of ordinary shares to existing ordinary shareholders without being obliged to comply with certain technical requirements of the Companies Act 2006 which can create problems with regard to fractions and overseas shareholders. In addition, the resolution to provide these powers (resolution 13 set out in the 2017 Notice) will, if passed, empower the directors to make issues of ordinary shares for cash other than by way of a rights issue or open offer up to a maximum nominal amount of £1,009,425 (representing 10 per cent of the issued ordinary share capital of the company (excluding treasury shares) at the date of this report). It is intended that this power be used for the purpose of placing shares should the need arise as discussed in the viability statement above. The foregoing powers (if granted) will expire on the date of the annual general meeting to be held in 2018 or on 30 June 2018 (whichever is the earlier). The company will continue to comply with its obligations under the Listing Rules of the Financial Conduct Authority (“the Listing Rules”) in relation to the timing of any share buy-backs and re-sales of ordinary shares from treasury. Authorities to allot share capital At the annual general meeting held on 6 June 2016, shareholders authorised the directors under the provisions of section 551 of the Companies Act 2006 to allot ordinary shares or 9 per cent cumulative preference shares within speciﬁed limits. Replacement authorities are being sought at the 2017 annual general meeting (resolutions 11 and 12 set out in the 2017 Notice) to authorise the directors (a) to allot and to grant rights to subscribe for, or to convert any security General meeting notice period At the 2017 annual general meeting a resolution (resolution 14 set out in the 2017 Notice) will be proposed to authorise the directors to convene a general meeting (other than an AGM) on 14 clear days’ notice (subject to due compliance with requirements for electronic voting). The authority will be effective until the date of the annual general meeting to be held in 2018 or on 30 June 2018 (whichever is the earlier). This resolution is proposed following legislation which, notwithstanding the provisions of the company’s articles of association and in the absence of speciﬁc shareholder approval of shorter notice, has increased the required notice period for general meetings of the company to 21 clear days. While the directors 48 R.E.A. Holdings plc Annual Report and Accounts 2016 believe that it is sensible to have the ﬂexibility that the proposed resolution will offer to convene general meetings on shorter notice than 21 days, this ﬂexibility will not be used as a matter of routine for such meetings, but only where use of the ﬂexibility is merited by the business of the meeting and is thought to be to the advantage of shareholders as a whole. Disclosure requirements of Listing Rule 9.8.4R The following table references the location of information required to be disclosed in accordance with Rule 9.8.4R of the Listing Rules published by the Financial Conduct Authority. Recommendation The board considers that the proposed Loss of Ofﬁce Payment to Mark Parry as detailed under “Resignation of Mark Parry” above that the proposals to grant the directors the authorities and powers as detailed under “Acquisition of the company’s own shares”, “Authorities to allot share capital” and “Authority to disapply pre-emption rights” above and the proposal to permit general meetings (other than annual general meetings) to be held on just 14 clear days’ notice as detailed under “General meeting notice period” above are all in the best interests of the company and shareholders as a whole and accordingly the board recommends that shareholders vote in favour of resolution 3 and resolutions 10 to 14 as set out in the 2017 Notice. Directors’ remuneration report Resolution 2 as set out in the 2017 Notice provides for approval of the company’s remuneration report regarding the remuneration of directors as detailed in the Directors’ remuneration report below. Listing Rule 9.8.4(1) 9.8.4(2) 9.8.4(4) 9.8.4(5) 9.8.4(6) 9.8.4(7) Auditor Each director of the company at the date of approval of this report has conﬁrmed that, so far as such director is aware, there is no relevant audit information of which the company’s auditor is unaware; and that such director has taken all the steps that ought to be taken as a director in order to make himself or herself aware of any relevant audit information and to establish that the company’s auditor is aware of that information. This conﬁrmation is given and should be interpreted in accordance with the provisions of section 418 of the Companies Act 2006. Deloitte LLP have expressed their willingness to continue in ofﬁce as auditor and Resolution 8 set out in the 2017 Notice proposes their re-appointment. Disclosure requirement The amount of interest capitalised dur- ing the year with an indication of the amount and treatment of any related tax relief Any information required by Listing Rules 9.2.18 R (publication of unaudited ﬁnancial information) Details of long-term incentive scheme as required under LR 9.4.3R (2) (for a sole director to facilitate recruitment or retention) Any arrangements under which a director has waived or agreed to waive any emoluments from the company or any subsidiary undertaking Any arrangement under which a director has agreed to waive future emoluments Allotments for cash of equity securities made during the period under review otherwise than to the holders of the company’s equity shares in proportion to their holdings of such equity shares and which has not been speciﬁcally authorised by the company’s shareholders Disclosure in annual report Note 8 to the consolidated ﬁnancial statements Not applicable Not applicable Not applicable Not applicable Note 30 to the consolidated ﬁnancial statements Note 34 to the consolidated ﬁnancial statements Not applicable 9.8.4(8) Allotments of shares for cash by a major subsidiary of the company 9.8.4(9) Participation by a parent company in any placing made by the company 9.8.4(10) Any contract of signiﬁcance: Not applicable (i) to which the listed company, or one of its subsidiary undertakings, is a party and in which a director of the listed company is or was materially interested; and (ii) between the listed company, or one of its subsidiary undertakings, and a controlling shareholder R.E.A. Holdings plc Annual Report and Accounts 2016 49 O v e r v e w i S t r a t e g c i r e p o r t G o v e r n a n c e G r o u p ﬁ n a n c a i l s t a t e m e n t s C o m p a n y ﬁ n a n c a i l s t a t e m e n t s N o t i c e o f A G M Governance Directors’ report continued Listing Rule Disclosure requirement 9.8.4(11) Contracts for the provision of services to the company or any of its subsidiary undertakings by a controlling shareholder Disclosure in annual report Not applicable 9.8.4(12) Arrangements under which a Not applicable shareholder has waived or agreed to waive any dividends 9.8.4(13) Where a shareholder has agreed to waive future dividends Not applicable 9.8.4(14) Board statement in respect of Not applicable relationship agreement with the controlling shareholder By order of the board R.E.A. SERVICES LIMITED Secretary 27 April 2017 50 R.E.A. Holdings plc Annual Report and Accounts 2016 Governance Corporate governance report Throughout the year ended 31 December 2016, the company was in compliance with the provisions set out in the 2016 UK Corporate Governance Code issued by the Financial Reporting Council (the “Code”) save for an interim period from June to October 2016 as respects code provision C.3.1 regarding audit committees for the reasons explained under ‘Composition of the audit committee’ in the Audit committee report below. The Code is available from the Financial Reporting Council’s website at “www.frc.org.uk”. Chairman’s statement on corporate governance The directors appreciate the importance of ensuring that the group’s affairs are managed effectively and with integrity and acknowledge that the principles laid down in the Code provide a widely endorsed model for achieving this. The directors seek to apply the Code principles in a manner proportionate to the group’s size but, as the Code permits, reserving the right, when it is appropriate to the individual circumstances of the company, not to comply with certain Code principles and to explain why. At the performance evaluation conducted in 2016, the board concluded that the board is performing effectively as constituted and that the complementary skills of individual board members are appropriate for the size and strategic direction of the group and for the challenges that it faces. It was considered that each director brings separate valuable insights into, variously, the plantation industry, business in Indonesia and the group’s own affairs. The directors are conscious that the group relies not only on its shareholders but also on the holders of its debt securities for the provision of the capital that the group utilises. The comments below regarding liaison with shareholders apply equally to liaison with holders of debt securities. Role and responsibilities of the board The board is responsible for the proper management of the company. The board has a schedule of matters reserved for its decision which is kept under review. Such matters include strategy, material investments and ﬁnancing decisions and the appointment or removal of executive directors and the company secretary. In addition, the board is responsible for ensuring that resources are adequate to meet the group’s objectives and for reviewing performance, ﬁnancial and operational controls, risk and compliance with the group’s policies and procedures with respect to business ethics, human rights and sustainability. The chairman and managing director (being the chief executive) have deﬁned separate responsibilities under the overall direction of the board. The chairman has responsibility for leadership and management of the board in the discharge of its duties; the managing director has responsibility for the executive management of the group overall. Neither has unfettered powers of decision. Irene Chia and Michael St. Clair-George, are considered by the board to be independent directors. Further, the Chairman on appointment was considered to meet the board of directors’ criteria for independence. There is a regular and robust dialogue, both formal and informal, between all directors and senior management and communication is open and constructive and non-executive directors are able to express their views, speak frankly and raise issues or concerns. Executive management is responsive to feedback from non- executive directors and to requests for clariﬁcation and ampliﬁcation. The company carries appropriate insurance against legal action against its directors. The current policy was in place throughout 2016 in compliance with the Code requirement to carry such insurance. Composition of the board The board currently comprises one executive director and ﬁve non-executive directors (including the chairman). Throughout 2016 and up to the date of his resignation on 20 February 2017, Mark Parry, who was based in Singapore and Indonesia, was managing director with overall responsibility for the Indonesian operations. Mark was also president director and the chief operating ofﬁcer of the company’s principal operating subsidiary, PT REA Kaltim Plantations (“REA Kaltim”). Following Mark’s resignation, Carol Gysin, who is based in London, was appointed managing director on 21 February 2017. At the same time, George Kapitan, who is an Indonesian citizen, relinquished his position as chairman of REA Kaltim’s board of commissioners, and was appointed president director of REA Kaltim, in place of Mark Parry. In line with his previously stated intention, David Killick retired as a director on 6 June 2016. Michael St. Clair-George was appointed to succeed David Killick on 24 October 2016. Biographical information concerning each of the directors of the company is set out under “Board of directors” above. The variety of backgrounds brought to the board by its members provides perspective and facilitates balanced and effective strategic planning and decision making for the long-term success of the company in the context of the company’s obligations and responsibilities both as the owner of a business in Indonesia and as a UK listed entity. In particular, the board believes that the respective skills and experience of its members complement each other and that their knowledge and commitment is of speciﬁc relevance to the nature and geographical location of the group’s operations. The recent changes in board positions and responsibilities do not alter the group’s intention that, over time, overall executive responsibility for the management of the group will progressively be transferred from the UK to Indonesia and Singapore. It is expected that a consequence of this will be that the group’s London ofﬁce will be reduced to a secretariat R.E.A. Holdings plc Annual Report and Accounts 2016 51 O v e r v e w i S t r a t e g c i r e p o r t G o v e r n a n c e G r o u p ﬁ n a n c a i l s t a t e m e n t s C o m p a n y ﬁ n a n c a i l s t a t e m e n t s N o t i c e o f A G M Governance Corporate governance report continued managing the company’s London listing and liaising with its European shareholders. Information and support Under the company’s articles of association, any director who has not been appointed or re-appointed at each of the preceding two annual general meetings shall retire by rotation and may submit himself for re-election. This has the effect that each director is subject to re-election at least once every three years. In addition, in compliance with the Code, non- executive directors who have served on the board for more than nine years submit themselves for re-election every year. Further, any director appointed during the year holds ofﬁce until the next annual general meeting and may then submit himself or herself for re-election. It is the policy of the company that the board should be refreshed on the basis that independent non-executive directors will not normally be proposed for reappointment if, at the date of reappointment, they have served on the board for more than nine years. Directors’ conﬂicts of interest In connection with the statutory provisions regarding the avoidance by directors of situations which conﬂict or may conﬂict with the interests of the company, the board has approved the continuance of potential conﬂicts notiﬁed by Richard Robinow, who absented himself from the discussion in this respect. Such notiﬁcations relate to Richard Robinow’s interests as a shareholder in or a director of companies the interests of which might conﬂict with those of the group but are not at present considered to do so. No other conﬂicts or potential conﬂicts have been notiﬁed by directors. Professional development and advice In view of their previous relevant experience and, in some cases, length of service on the board, all directors are familiar with the ﬁnancial and operational characteristics of the group’s activities. Directors are required to ensure that they maintain that familiarity and keep themselves fully cognisant of the affairs of the group and matters affecting its operations, ﬁnances and obligations (including environmental, social and governance responsibilities). Whilst there are no formal training programmes, the board regularly reviews its own competences, receives periodic brieﬁngs on legal, regulatory, operational and political developments affecting the group and may arrange training on speciﬁc matters where it is thought to be required. Directors are able to seek the advice of the company secretary and, individually or collectively, may take independent professional advice at the expense of the company if necessary. Newly appointed directors receive induction on joining the board and steps are taken to ensure that they become fully informed as to the group’s activities. Quarterly operational and ﬁnancial reports are issued to all directors following the end of each quarter for their review and comment. These reports are augmented by monthly management reports, annual budgets and positional papers on matters of a non routine nature and by prompt provision of such other information as the board periodically decides that it should have to facilitate the discharge of its responsibilities. Board evaluation A formal internal evaluation of the performance of the board, the committees and individual directors is undertaken annually. Balance of powers, contribution to strategy, efﬁcacy and accountability to stakeholders are reviewed by the board as a whole and the performance of the chairman is appraised by the independent non-executive directors led by the senior independent director. The appraisal process includes assessments against a detailed set of criteria covering a variety of matters from the commitment and contribution of the board in developing strategy and enforcing disciplined risk management, pursuing areas of concern, if any, and setting appropriate commercial and social responsibility objectives to the adequacy and timeliness of information made available to the board. At the performance evaluation conducted in 2016, the board concluded that it performs effectively as constituted and that the directors communicate and work well together as a team. Board committees The board has appointed audit, nomination and remuneration committees to undertake certain of the board’s functions, with written terms of reference which are available for inspection on the company’s website and are updated as necessary. There is an executive committee of the board, currently comprising any two of David Blackett, Carol Gysin and Richard Robinow, to deal with various matters of a routine or executory nature. Audit committee The audit committee reports on its composition and activities in the “Audit committee report” below. This also provides information concerning the committee’s relationship with the external auditor. Nomination committee The nomination committee comprises David Blackett (chairman) and Michael St. Clair-George. The committee is responsible for submitting recommendations for the appointment of directors for approval by the full board. In making such recommendations, the committee pays due regard to the group’s open policy with respect to diversity, 52 R.E.A. Holdings plc Annual Report and Accounts 2016 including gender and race, and takes into consideration the ethos of the company and the speciﬁc nature and location of the group operations. Experience and understanding of the plantation industry and business in Indonesia is an important factor in considering a potential appointment. Remuneration committee The remuneration committee reports on its composition and activities in the “Directors’ remuneration report” below. This also provides information concerning the remuneration of the directors and includes details of the basis upon which such remuneration is determined. Board proceedings Four meetings of the board are scheduled each year. Other board meetings are held as required to consider corporate and operational matters with all directors consulted in advance regarding signiﬁcant matters for consideration and provided with relevant supporting information. Minutes of board meetings are circulated to all directors. The managing director, unless travelling, is normally present at full board meetings. Where appropriate, telephone discussions take place between the chairman and the other non-executive directors outside the formal meetings. Committee meetings are held as and when required. All proceedings of committee meetings are reported to the full board. The attendance of individual directors, who served during 2016, at the regular board meetings held in 2016 is set out below. There were no ad hoc meetings held in 2016. Regular meeting David Blackett 4 Irene Chia 4 David Killick (retired 6 June 2016) 2 John Oakley 4 Mark Parry (resigned 20 February 2017) 4 Richard Robinow 4 Michael St. Clair-George (appointed 24 October 2016) 1 In addition, during 2016 there were three meetings of the audit committee, three meetings of the remuneration committee and one meeting of the nomination committee. All committee meetings were attended by all of the committee members appointed at the time of each meeting. Whilst all formal decisions are taken at board meetings, the directors have frequent informal discussions between themselves and with management and most decisions at board meetings reﬂect a consensus that has been reached ahead of the meetings. Some directors reside permanently, or for part of each year, in the Asia Paciﬁc region and some UK based directors travel extensively. Since the regular board meetings are ﬁxed to ﬁt in with the company’s budgeting and reporting cycle and ad hoc meetings normally have to be held at short notice to discuss speciﬁc matters, it may not always be practical to ﬁx meeting dates to ensure that all directors are able to attend each meeting. In the event that a director is unable to attend a meeting, the company ensures that he is fully briefed so that he can make his views known to other directors ahead of time and his views are reported to, and taken into account, at the meeting. Risk management and internal control The board is responsible for the group’s system of internal control and for reviewing its effectiveness. The system is designed to manage, rather than eliminate, the risk of failure to achieve business objectives and can only provide reasonable and not absolute assurance against material misstatement or loss. The board has established a continuous process for identifying, evaluating and managing the principal risks which the group faces (including risks arising from environmental, social and governance matters) and considering any such risks in the context of the group’s overall strategic objectives. The board regularly reviews the process and internal control systems, which were in place throughout 2016 and up to the date of approval of this report, in accordance with the Financial Reporting Council (“FRC”) Guidance on Risk Management, Internal Control and Related Financial and Business Reporting. The board attaches importance not only to the process established for controlling risks but also to promoting an internal culture in which all group staff are conscious of the risks arising in their particular areas of activity, are open with each other in their disclosure of such risks and combine together in seeking to mitigate risk. In particular, the board has always emphasised the importance of integrity and ethical dealing and continues to do so, in accordance with the group’s policies on business ethics and human rights. Policies and procedures in respect of bribery and corruption are in place for all of the group’s operations in Indonesia as well as in the UK. These include detailed guidelines and reporting requirements, a comprehensive continuous training programme for all management and employees and a process for on-going monitoring and review. The group also seeks to ensure that its partners abide by its ethical principles, including those with respect to slavery as set out in the policy on human rights. The board is in compliance with the Modern Slavery Act 2015 and has a statement on its website in relation to modern slavery. The board, assisted by the audit committee and the internal audit process, reviews the effectiveness of the group’s system of internal control on an on-going basis. The board’s monitoring covers all controls, including ﬁnancial, operational and compliance controls and risk management. It is based O v e r v e w i S t r a t e g c i r e p o r t G o v e r n a n c e G r o u p ﬁ n a n c a i l s t a t e m e n t s C o m p a n y ﬁ n a n c a i l s t a t e m e n t s N o t i c e o f A G M R.E.A. Holdings plc Annual Report and Accounts 2016 53 Governance Corporate governance report continued principally on reviewing reports from management (providing such information as the board requires) and considering whether signiﬁcant risks are identiﬁed, evaluated, managed and controlled and whether any signiﬁcant weaknesses are promptly remedied or indicate a need for more extensive monitoring. Details of the internal audit function are provided under “Internal audit” in the “Audit committee report” below. Following formal reviews of the systems of internal control and risk management (including the group’s internal audit arrangements) in October 2016 and April 2017, the board concluded that these remain effective and sufﬁcient for their purpose. The board did not identify, nor was it advised of, any speciﬁc failings or weaknesses that it determined to be signiﬁcant and warranting further action. Internal audit and reporting The group’s internal audit arrangements are described in the Audit committee report below. The group has established a management hierarchy which is designed to delegate the day to day responsibility for speciﬁc departmental functions within each working location, including ﬁnancial, operational and compliance controls and risk management, to a number of senior managers and department heads who in turn report to the managing director. Management reports to the audit committee and the board on a regular basis by way of the circulation of progress reports, management reports, budgets and management accounts. Management is required to seek authority from the board in respect of any transaction outside the normal course of trading which is above an approved limit and in respect of any matter that is likely to have a material impact on the operations that the transaction concerns. Monthly meetings to consider operational matters are held in London and Indonesia and regular meetings are held between the two ofﬁces by way of conference calls. Directors and managers based in London make periodic visits to the overseas operations each year. The managing director has a continuous dialogue with the chairman and with other members of the board. Relations with shareholders The “Chairman’s statement” and “Strategic report” above, when read in conjunction with the ﬁnancial statements, the “Directors’ report” above and the “Audit committee report” and “Directors’ remuneration report” below are designed to present a comprehensive and understandable assessment of the group’s position and prospects. The respective responsibilities of the directors and auditor in connection with the ﬁnancial statements are detailed in “Directors’ responsibilities” below and in the “Auditor’s report”. The directors endeavour to ensure that there is satisfactory dialogue, based on mutual understanding, between the company and its shareholder body. The annual report, interim communications, periodic press releases and such circular letters to shareholders as circumstances may require are intended to keep shareholders informed as to progress in the operational activities and ﬁnancial affairs of the group. In addition, within the limits imposed by considerations of conﬁdentiality, the company engages with institutional and other major shareholders through regular meetings and other contact in order to understand their concerns. The views of shareholders are communicated to the board as a whole to ensure that the board maintains a balanced understanding of shareholder opinions and issues arising. All ordinary shareholders may attend the company’s annual and other general meetings and put questions to the board. As noted above, some directors reside permanently, or for part of each year, in the Asia Paciﬁc region and the nature of the group’s business requires that other directors travel frequently to Indonesia. It is therefore not always feasible for all directors to attend general meetings, but those directors who are present are available to talk on an informal basis to shareholders after the meeting’s conclusion. At least twenty working days’ notice is given of the annual general meeting and related papers are made available to shareholders at least twenty working days ahead of the meeting. For every general meeting, proxy votes are counted and details of all proxies lodged for each resolution are reported to the meeting and made available on the company’s website as soon as practicable after the meeting. The company maintains its website at “www.rea.co.uk”. The website has detailed information on, and photographs illustrating various aspects of, the group’s activities, including its commitment to sustainability, conservation work and managing its carbon footprint. The website is updated regularly and includes information on the company’s share prices and the price of crude palm oil. The company’s results and other news releases issued via the London Stock Exchange’s Regulatory News Service are published on the “Investors” section of the website and, together with other relevant documentation concerning the company, are available for downloading. Approved by the board on 27 April 2017 and signed on behalf of the board by DAVID J BLACKETT Chairman 54 R.E.A. Holdings plc Annual Report and Accounts 2016 Governance Audit committee report Summary of the role of the audit committee Composition of the audit committee The audit committee currently comprises Michael St. Clair- George (chairman) and David Blackett both of whom are considered by the directors to have relevant ﬁnancial and professional experience, as well as experience of the business sector and region in which the company operates, in order to be able to fulﬁl their speciﬁc duties with respect to the audit committee. David Killick was chairman of the audit committee until his retirement on 6 June 2016. Following his retirement, for an interim period between June 2016 and October 2016, the company no longer had a sufﬁcient number of independent and qualiﬁed directors who were eligible to be members of the audit committee. Pending the appointment of a suitable successor to David Killick, responsibility for matters that were normally reserved for consideration by the audit committee was assumed by the full board. Meetings Three audit meetings are scheduled each year to match the company’s budgeting and reporting cycle. There are additional ad hoc meetings held to discuss speciﬁc matters when required. Signiﬁcant issues related to the ﬁnancial statements The committee reviewed the half year ﬁnancial statements to 30 June 2016 (on which the auditor did not report) and the full year consolidated ﬁnancial statements for 2016 (the “2016 ﬁnancial statements”) contained in this annual report. The external audit report on the latter was considered together with a paper to the committee by the auditor reporting on the principal audit ﬁndings. The audit partner of Deloitte LLP responsible for the audit of the group attended the audit planning meeting prior to the year end as well as the meeting of the committee at which the full year audited consolidated ﬁnancial statements were considered and approved. Senior members of staff of Deloitte LLP who were involved in the audit also attended the meetings. In relation to the group’s audited 2016 ﬁnancial statements, the committee considered the signiﬁcant accounting and judgement issues set out below. The terms of reference of the audit committee are available for download from the company’s website at www.rea.co.uk. The audit committee is responsible for: • • • • monitoring the integrity of the ﬁnancial statements, reviewing formal announcements of ﬁnancial performance and the signiﬁcant reporting issues and judgements that such statements and announcements contain; reviewing the effectiveness of the internal control functions (including the internal ﬁnancial controls and internal audit function in the context of the company’s overall risk management system, as well as arrangements whereby internally raised staff concerns as to ﬁnancial reporting and other relevant matters are considered); making recommendations to the board in relation to the appointment, reappointment, removal, remuneration and terms of engagement of the external auditor, and overseeing the relationship with and reviewing the audit ﬁndings of the external auditor; and reviewing and monitoring the independence of the external auditor and the effectiveness of the audit process. The audit committee also monitors the engagement of the external auditor to perform non-audit work. During 2016, the only non-audit work undertaken by the auditor was, as in the previous year, routine compliance reporting in connection with covenant obligations applicable to certain group loans (as respects which the governing instruments require that such compliance reporting is carried out by the auditor) and routine taxation compliance services. The audit committee considered that the nature and scope of, and remuneration payable in respect of, these engagements were such that the independence and objectivity of the auditor was not impaired. Fees payable are detailed in note 5 to the consolidated ﬁnancial statements. The members of the audit committee discharge their responsibilities by formal meetings and informal discussions between themselves, meetings with the external auditor, with the internal auditor in Indonesia and with management in Indonesia and London and by consideration of reports from management, the Indonesian internal audit function and the external auditor. The committee provides advice and recommendations to the board with respect to the ﬁnancial statements to ensure that these offer fair, balanced and comprehensive information for the purpose of informing and protecting the interests of the company’s shareholders. O v e r v e w i S t r a t e g c i r e p o r t G o v e r n a n c e G r o u p ﬁ n a n c a i l s t a t e m e n t s C o m p a n y ﬁ n a n c a i l s t a t e m e n t s N o t i c e o f A G M R.E.A. Holdings plc Annual Report and Accounts 2016 55 Governance Audit committee report continued Signiﬁcant accounting and judgement issues Issues Biological assets: compliance with the amended provisions of IAS 41 Agriculture requiring that produce growing on bearer plants, if capable of reliable measurement, be treated as a separate asset and carried at fair value and that the balance of what was formerly accounted for as biological assets be reclassiﬁed as property, plant and equipment and depreciated. Indonesian tax balances: from time to time the group ﬁnds itself in dispute with the Indonesian tax authorities over the interpretation of Indonesian tax legislation. Certain disputed items are currently the subject of cases in appeal courts. Valuation of stone and coal loans: the value of these loans is based on their expected future generation of revenue; following a review in 2012, a provision of $3.0 million was booked in the 2012 consolidated ﬁnancial statements. Relevant considerations The group has applied a formulaic methodology for valuing growing produce based on oil content in growing fresh fruit bunches. It has concluded that this provides “reliable measurement” based on its understanding of how that phrase has to be interpreted in the context of Accounting Standards, notwithstanding that a different and still reasonably justiﬁable formulaic methodology could give a materially different result. As permitted by the amended provisions of IAS 41, the group decided to adopt the fair value ascribed to biological assets (other than growing produce) at 31 December 2014 (the transition date for the purposes of the provisions) as deemed cost. The assets concerned comprise individual oil palm trees, nurseries and the ﬁeld infrastructural improvements that accompanied the planting of the trees. The group concluded that a component of deemed cost could be speciﬁcally attributed to nurseries. The balance of deemed cost was then allocated by separating the infrastructural improvement at estimated depreciated current cost at 31 December 2014 and treating the remaining balance as attributable to the oil palm trees. Each year the group prepares an evaluation of items that may be disputed and adjusts tax balances as required. Two long disputed cases which had been found in the group’s favour in past years remain subject to judicial review by the Supreme Court of Indonesia, which may take some years. Meanwhile, in response to a 2015 ruling from the Director General of Taxation in Indonesia, which permits successful litigants to apply for interest following favourable Tax Court decisions, the group has applied to the regional tax ofﬁce to secure payments of interest of up to some $4.0 million. During discussions in 2016 with the local tax ofﬁce, the tax ofﬁcials rejected the subsidiary’s claim for interest on that part of the repayment which represented a refund to the subsidiary of the tax that had been voluntarily paid at the time of the disputed assessment. The subsidiary disagrees with this interpretation and is considering an appeal. In the meanwhile, only undisputed interest received in 2016 has been credited to income and no other disputed interest has been recognised in the ﬁnancial statements. The group has made further progress towards resumption of its stone and coal extraction activities. Discussions have recently been concluded on re-opening the Kota Bangun concession which should permit coal extraction to resume shortly following dewatering of the concession area. Arrangements have been concluded for the extraction of limestone from a deposit close to the group’s plantations. The group continues to review options for developing suitable road access to the andesite stone concession. Meanwhile, current feasibility studies indicate that the value of such operations signiﬁcantly exceeds the loan values, and support the conclusion that no further impairment charge is required. 56 R.E.A. Holdings plc Annual Report and Accounts 2016 Signiﬁcant accounting and judgement issues Issues Revenue recognition: compliance with the “bill and hold” sale revenue recognition requirements of IAS18 “Revenue” and those relating to forward sales. In its review of the annual report and the consolidated ﬁnancial statements, the committee considered management’s submissions on the matters above, together with the conclusions reached by the auditor, in order to ensure that the annual report and the consolidated ﬁnancial statements are fair, balanced and understandable and provide sufﬁcient information to enable shareholders to make an assessment of the group’s performance, business model and strategy. External audit The external auditor was appointed as the company’s external auditor in 2002. There has been no tender for audit services since that time. In accordance with the EU Audit Directive and Audit Regulation, consideration will be given to tendering for future audits in due course. Colin Rawlings has been the company’s audit engagement partner since June 2015 succeeding Mark McIlquham, who had been the audit partner since November 2010 and stepped down under the standard rotation procedure of his ﬁrm. The audit committee has recommended to the board that it should seek the approval of the company’s shareholders for the reappointment of the company’s current auditor. That recommendation reﬂects an assessment of the qualiﬁcations, expertise, resources and independence of the auditor based upon reports produced by the auditor, the committee’s own dealings with the auditor and feedback from management. The committee took into account the possibility of the withdrawal of the auditor from the market and noted that there were no contractual obligations to restrict the choice of external auditor. However, given the current level of audit fees, the limited choice of audit ﬁrms with sufﬁcient international coverage and experience and the costs that a change would be likely to entail, the committee did not recommend that the company’s audit be put out to tender. Relevant considerations There are long-standing operating procedures for the storage of product where the buyer has requested a delivery delay, and these comply with IFRS. In addition the shift of delivery method over recent years from FOB Samarinda to CIF has reduced the occurrence and the materiality of this issue. Any forward sales made by the group are priced relevant to benchmarks at the time of delivery and so are not at ﬁxed prices. In its assessment of the external auditor, the audit committee considered the following criteria: • • • • • delivery of a thorough and efﬁcient audit of the group in accordance with agreed plans and timescales provision of accurate, relevant and robust advice on key accounting and audit judgements, technical issues and best practice the degree of professionalism and expertise demonstrated by the audit staff sufﬁcient continuity within the core audit team adherence to independence policies and other regulatory requirements. Risk management and internal control The board of the company has primary responsibility for the group’s risk management and internal control systems. The audit committee supervises the internal audit function, which forms a key component of the control systems, and keeps the systems of ﬁnancial, operational and compliance controls generally under review. Any deﬁciencies identiﬁed are drawn to the attention of the board. Internal audit The group’s Indonesian operations have a fully staffed in- house internal audit function supplemented where necessary by the use of external consultants. The function issues a full report on each internal audit topic and a summary of the report is issued to the audit committee. An internal audit programme is agreed at the beginning of each year and supplemented by special audits through the year as and when required by management. In addition, follow-up audits are undertaken to ensure that the necessary remedial action has been taken. In the opinion of the audit committee and the board, there is no need for an internal audit function outside Indonesia due to the limited nature of the non-Indonesian operations. O v e r v e w i S t r a t e g c i r e p o r t G o v e r n a n c e G r o u p ﬁ n a n c a i l s t a t e m e n t s C o m p a n y ﬁ n a n c a i l s t a t e m e n t s N o t i c e o f A G M Approved by the audit committee on 27 April 2017 and signed on behalf of the committee by: MICHAEL A ST. CLAIR-GEORGE Chairman R.E.A. Holdings plc Annual Report and Accounts 2016 57 Governance Directors’ remuneration report This report has been prepared in accordance with Schedule 8 of The Large and Medium-sized Companies and Groups (Accounts and Reports) Regulations 2008 (the “Regulations”) as amended in August 2013. The report is split into three main sections: the statement by the chairman of the remuneration committee, the annual report on remuneration and the policy report. The current policy report took effect immediately upon approval at the 2015 AGM (the “2015 AGM”). The annual report on remuneration provides details on remuneration during 2016 and certain other information required by the Regulations. The overall report, excluding the policy report, will be subject to an advisory shareholder vote at the 2017 annual general meeting. The Companies Act 2006 requires the auditors to report to shareholders on certain parts of the annual report on remuneration and to state whether, in their opinion, those parts of the report have been properly prepared in accordance with the Regulations. The parts of the annual report on remuneration that are subject to audit are indicated in that report. The statement by the chairman of the remuneration committee and the policy report are not subject to audit. Statement by Michael St. Clair-George, chairman of the remuneration committee The succeeding sections of this directors’ remuneration report cover the activities of the remuneration committee during 2016 and provide information regarding the remuneration of executive and non-executive directors. In particular, the report is designed to compare the remuneration of directors with the performance of the company. The policy and principles applied by the remuneration committee in ﬁxing the remuneration of executive directors takes account of the company’s commercial goals and achievements as well as its sustainability objectives. In considering bonuses in respect of 2016, the committee considered it important to strike an appropriate balance between positive and negative factors. In particular, the committee took note of the external factors that are beyond the control of management and that impacted the performance of the company during 2016, speciﬁcally the knock on effect of the 2015 El Niño on production and transportation. Whilst harvesting and production levels were less than expected in 2016, the rate of development in the group’s newer land areas and some improvement in extraction rates were positive outcomes. Other successes of the executive management in respect of the company’s operational objectives include: completion of the ﬂood control systems allowing for acceleration of development in PT Putra Bongan Jaya; enhanced security, data and administration systems; relocation of the Jakarta and Samarinda ofﬁces to improve efﬁciencies and reduce costs and commencement of the expansion of the mill operations at Satria Oil Mill. In addition a number of sustainability initiatives were achieved, including: construction of a new school and housing in Kutai Mitra Sejahtera; a more rigorous training programme for cadets; the introduction of tenancy agreements for staff housing; reorganisation of the three original plasma cooperatives in order to achieve a more equitable division of the land in accordance with the now agreed village boundaries; and three new clean water projects for local villages. The committee reﬂected these factors in awarding bonuses in respect of 2016 and setting the executive remuneration for 2017. The committee believes that remuneration should continue to motivate and reward individual performance in a way that is consistent with the best long term interests of the company and its shareholders, and, in approving remuneration packages for 2017, considers that it struck an appropriate balance between reward and incentive. Annual report on remuneration The information provided below under “Single total ﬁgure of remuneration for each director”, “Pension entitlements”, “Scheme interests awarded during the ﬁnancial year”, “Directors’ shareholdings” and “Scheme interests” has been audited. 58 R.E.A. Holdings plc Annual Report and Accounts 2016 Single total ﬁgure of remuneration for each director The remuneration of the executive and non-executive directors for 2015 and 2016 was as follows (stated in sterling as all the directors with the exception of Mark Parry are remunerated in sterling): Salary All taxable Annual Long term and fees benefits * bonus** incentive Total 2016 £’000 £’000 £’000 £’000 £’000 Managing director M A Parry (resigned 20 February 2017) 404.0 124.2 101.0 – 629.2 Chairman and non-executive directors D J Blackett 100.0 – – – 100.0 I Chia 27.0 – – – 27.0 D H R Killick (retired 6 June 2016) 14.8 – – – 14.8 J C Oakley 90.0 19.3 – – 109.3 R M Robinow 100.0 7.2 – – 107.2 M A St. Clair-George (appointed 24 October 2016) 5.6 – – – 5.6 Total 741.4 150.7 101.0 – 993.1 Salary All taxable Annual Long term and fees benefits * bonus** incentive Total 2015 £’000 £’000 £’000 £’000 £’000 Executive directors J C Oakley (managing director) 344.0 17.9 112.0 – 473.9 M A Parry 295.2 111.1 135.3 – 541.6 Chairman and non-executive directors D J Blackett 29.5 – – – 29.5 I Chia 27.0 – – – 27.0 D H R Killick 29.5 – – – 29.5 R M Robinow 205.0 7.2 – – 212.2 Total 930.2 136.2 247.3 – 1,313.7 * Types of beneﬁt: company car, medical insurance, overseas rental accommodation ** In respect of current year Fees paid to David Blackett and David Killick in respect of 2015 and 2016 included, in each case, additional remuneration of £2,500 in respect of their membership of the audit committee. Pension entitlements In the past, executive directors were eligible to join the R.E.A. Pension Scheme, a deﬁned beneﬁt scheme of which details are given in note 37 to the consolidated ﬁnancial statements. That scheme is now closed to new members and it is no longer the policy of the company to offer pensionable remuneration to directors, except to the extent as may be or may become required under local legislation. Mr Oakley (who was aged 68 at 31 December 2016) is a pensioner member of the scheme. Details of Mr Oakley’s annual pension entitlement are set out below. £ In payment at beginning of year 74,994 Increase during the year 101 In payment at end of year 75,095 O v e r v e w i S t r a t e g c i r e p o r t G o v e r n a n c e G r o u p ﬁ n a n c a i l s t a t e m e n t s C o m p a n y ﬁ n a n c a i l s t a t e m e n t s N o t i c e o f A G M R.E.A. Holdings plc Annual Report and Accounts 2016 59 Governance Directors’ remuneration report continued Scheme interests awarded during the ﬁnancial year The table below sets out scheme interests awarded to directors. Only one director was awarded a scheme interest during the year. As noted below, this award has subsequently lapsed. Director Type of scheme interest Percentage of award vesting for Face value* minimum Length of vesting Summary of performance Basis of award £’000 performance** period measures and targets M A Parry Long term A notional right to 631,044 33.33 1 January 2016 to Up to 50 per cent of the maximum incentive plan acquire 234,589 31 December 2019 aggregate amount will be payable ordinary shares at dependent on the annual total 269p per share shareholder return (TSR) per exercisable subject to ordinary share; up to 25 per cent certain performance dependent upon the percentage conditions amount by which the inflation adjusted cost per tonne of crude palm oil and equivalents produced by the group has reduced (RCPT); and up to 25 per cent dependent upon the average annual extension planting rate achieved by the group (AEPR). For each performance measure, the thresholds for one third, two thirds or full vesting, are, respectively. as follows: TSR – 10, 15 and 20 per cent; RCPT – 5,10 and 15 per cent; and AEPR – 2,500, 3,000 and 3,500 hectares * The face value comprises the number of shares awarded multiplied by the average share price (269p) for the period 1 January 2016 up to and including the day immediately preceding the date of grant (16 December 2016) being the price at which the award was initially exercisable. ** Assuming minimum performance against all performance conditions. Payment for loss of ofﬁce Mark Parry resigned from the company following concerns expressed by the authorities in East Kalimantan that, in his position as president director of PT REA Kaltim Plantations, Mark might have undertaken various tasks that were outside the scope of his work permits. The tasks in question involved matters relating to human resources and personnel management (which are reserved by Indonesian law to Indonesian nationals) and conducting business at group locations not speciﬁcally covered by the work permits. Accordingly, Mark ceased to be an executive director of the company on 20 February 2017. Mark's employment with the company’s Singapore subsidiary will terminate at the end of his three-month notice period on 20 May 2017. Mark is on garden leave for his three-month notice period during which period Mark receives his normal base salary and contractual entitlements. Mark is not entitled to any bonus or commission during his garden leave. Pursuant to the company’s remuneration policy, Mark's service agreement and the terms of Mark’s settlement agreement, the company will pay the reasonable costs of relocation for Mark and his spouse back to the UK from Singapore, provided that they relocate by 20 November 2017, up to a maximum of S$30,000 (approximately £17,500) plus the cost of one-way ﬂights for each of Mark and his spouse from Singapore to the UK. In addition, Mark will receive an ex gratia payment of £200,000 and a contribution of £15,000 plus VAT towards the reasonable legal fees incurred by Mark with regard to these arrangements, the ex gratia payment being conditional upon the approval of the company’s shareholders as noted under “Resignation of Mark Parry” in the Director’s report above. In considering the ex gratia payment to Mark Parry, the committee took account of the company’s policy with regard to directors’ 60 R.E.A. Holdings plc Annual Report and Accounts 2016 notice periods being for no more than one year and noted that the service contract for Mark’s predecessor as managing director provided for a notice period of six months. It was further noted that, in accordance with the rules of the 2015 LTIP, Mark’s award granted under the 2015 LTIP will lapse on the date of his termination. It was agreed, therefore, that the sum of £200,000, being approximately equivalent to Mark’s salary and beneﬁts for four months, is fair and reasonable. Other than as disclosed above, Mark is not eligible for any pay in lieu of notice or severance as a result of his resignation. Directors’ shareholdings There is no requirement for directors to hold shares in the company. At 31 December 2016, the interests of directors (including interests of connected persons as deﬁned in section 96B (2) of the Financial Services and Markets Act 2000 of which the company is, or ought upon reasonable enquiry to have been, aware) in the 9 per cent cumulative preference shares of £1 each and the ordinary shares of 25p each of the company were as set out in the table below. Preference Ordinary Directors shares shares D J Blackett 250,600 10,000 I Chia – 1,000 C E Gysin (appointed 21 February 2017) 91,957 1,132 J C Oakley – 442,493 M A Parry (resigned 20 February 2017) 83,186 37,343 R M Robinow – 11,082,420 M A St. Clair-George (appointed 24 October 2016) 2,108 10,149 There have been no changes in the interests of the directors between 31 December 2016 and the date of this report. Scheme interests The following table shows the total number of scheme interests, being entitlements to notional shares with and without performance conditions, held by Mark Parry up until his resignation on 20 February 2017. No director currently holds any scheme interests in ordinary shares. With Without performance performance Scheme interests in ordinary shares conditions conditions M A Parry 234,589 Nil In December 2016 Mark Parry surrendered his award under the 2013 long term incentive plan approved by shareholders and put in place in June 2013, so as to receive a new award under the 2015 long term incentive plan (the “2015 plan”) approved by shareholders in June 2015. In accordance with the rules of the 2015 plan, an award was granted to Mark on 21 December 2016. The 2015 plan is linked to the market price performance of ordinary shares in the company, designed with a view to participation over the long term in value created for the group. The performance period in respect of the award granted to Mark commenced on 1 January 2016 and was to end on 31 December 2019 (the “performance period”). The exercise of vested entitlements depends upon continued employment with the group. If the participant leaves, he may exercise a vested entitlement within six months of leaving. Upon Mark’s resignation in February 2017, the award granted to Mark lapsed on the cessation of his employment, in accordance with the rules of the 2015 plan. Under the 2015 plan, participants are awarded potential entitlements over notional ordinary shares of the company. These potential entitlements then vest to an extent that is dependent upon the achievement of certain targets. Vested entitlements are exercisable in whole or part at any time within the six years following the date upon which they vested. On exercising a vested entitlement, a participant receives a cash amount for each ordinary share over which the entitlement is exercised, equal to the excess (if any) of the market price of an ordinary share on the date of exercise over the price at which the entitlement was granted, subject to adjustment for subsequent variations in the share capital of the company in accordance with the rules of the plan. O v e r v e w i S t r a t e g c i r e p o r t G o v e r n a n c e G r o u p ﬁ n a n c a i l s t a t e m e n t s C o m p a n y ﬁ n a n c a i l s t a t e m e n t s N o t i c e o f A G M R.E.A. Holdings plc Annual Report and Accounts 2016 61 Governance Directors’ remuneration report continued The plan provides that the vesting of the participant’s potential entitlements to notional ordinary shares be determined by key performance targets with each performance target measured on a cumulative basis over a designated performance period. For the initial award to Mark Parry under the 2015 plan, there were threshold, target and maximum levels of performance determining the extent of vesting in relation to each performance target. The three key performance targets set for the award and the respective thresholds for determining the extent of vesting under the plan are set out in the table showing the scheme interests awarded during the year. Targets under the 2015 plan are subject to adjustment at the discretion of the remuneration committee where, in the committee’s opinion, warranted by actual performance. In the event of a change in control of the company as a result of a takeover offer or similar corporate event, vested entitlements would be exercisable for a period of one month following the date of the change of control or other relevant event (as determined by the remuneration committee). On the basis of the market price of the ordinary shares at 31 December 2016 of 352.5p, there would have been an 83.5p gain under the 2015 plan. Performance graph and managing director remuneration table The following graph shows the company’s performance, measured by total shareholder return, compared with the performance of the FTSE All Share Index also measured by total shareholder return. The FTSE All Share index has been selected for this comparison as there is no index available that is speciﬁc to the activities of the company. 180 160 140 120 100 80 60 40 20 0 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 R.E.A FTSE Record of remuneration of the managing director The table below provides details of the remuneration of the managing director over the ﬁve years to 31 December 2016. Long term incentive Annual bonus vesting rates Single figure of pay-out against total against maximum remuneration maximum opportunity Managing director’s remuneration £’000 % % 2016 M A Parry 629.2 92 N/A 2015 M A Parry 541.7 88 N/A 2015 J C Oakley 473.9 60 N/A 2014 J C Oakley 453.3 67 N/A 2013 J C Oakley 488.8 65 N/A 2012 J C Oakley 499.5 71 N/A 62 R.E.A. Holdings plc Annual Report and Accounts 2016 (cid:0) (cid:0) (cid:0) (cid:0)(cid:0) (cid:0)(cid:0) (cid:0)(cid:0) (cid:0) Percentage change in remuneration of the managing director The table below shows the percentage changes in the remuneration of the managing director and in the average remuneration of certain senior management and executives in Indonesia and Singapore between 2015 and 2016. The selected comparator employee group is considered to be the most relevant taking into consideration the nature and location of the group’s operations. Using the entire employee group would involve comparison with a workforce in Indonesia, whose terms and conditions are substantially different from those pertaining to employees elsewhere and of which the changes from year to year reﬂect local employment conditions. In order to achieve a meaningful comparison, the 2015 remuneration of the selected comparator employee group has been restated to reﬂect only the remuneration in that year of those employees comprising the 2016 selected comparator employee group. The 2015 remuneration of the selected group has also been restated at prevailing average exchange rates for 2016 so as to eliminate distortions based on exchange rate movements of the Indonesian rupiah, US dollar and Singapore dollar against sterling. 2016 2015 change Percentage change in managing director’s remuneration £’000 £’000 % Salary 404.0 295.2 37 Benefits 124.2 111.1 12 Annual bonus 101.0 135.3 (25) Total 629.2 541.6 16 2016 2015 change Percentage change in selected employee group remuneration £’000 £’000 % Salary 174.2 150.5 16 Benefits 6.8 3.3 106 Annual bonus 53.6 50.6 6 Total 234.6 204.4 15 Relative importance of spend on pay The graph below shows the movements between 2015 and 2016 in total employee remuneration, cost of goods sold and ordinary and preference dividends. Cost of goods sold has been selected as an appropriate comparator as it provides a reasonable measure of the growth in the group’s activities. $’000 90,000 80,000 70,000 60,000 50,000 40,000 30,000 20,000 10,000 0 -14% -5% 2015 2016 Total employee remuneration 2015 2016 Cost of goods sold 2015 2016 Ordinary and preference dividends -41% R.E.A. Holdings plc Annual Report and Accounts 2016 63 O v e r v e w i S t r a t e g c i r e p o r t G o v e r n a n c e G r o u p ﬁ n a n c a i l s t a t e m e n t s C o m p a n y ﬁ n a n c a i l s t a t e m e n t s N o t i c e o f A G M Governance Directors’ remuneration report continued Functions of the remuneration committee The remuneration committee currently comprises two independent non-executive directors, Michael St. Clair-George (chairman) and David Blackett. The committee sets the remuneration and beneﬁts of the chairman and the executive directors. The committee is also responsible for long term incentive arrangements, if any, for key senior executives in Indonesia. The committee does not use independent consultants but takes into consideration external guidance, including the annual publication by Deloitte LLP regarding directors’ remuneration in smaller companies. The chairman plays no part in the discussion of his own remuneration. Service contracts of directors standing for re-election John Oakley, Richard Robinow, Michael St. Clair-George and Carol Gysin are proposed for re-election or election, as applicable, at the forthcoming annual general meeting. All the non-executive directors have a contract for services to the company which is terminable at will by either party. Continuation of their appointment depends upon satisfactory performance and re-election at annual general meetings in accordance with the articles of association of the company. Carol Gysin’s service agreement, effective from 1 February 2017, states that the appointment shall continue until it automatically terminates on 31 January 2021 without the need for notice unless it is previously terminated by either party giving the other at least 12 months' prior written notice expiring before 31 January 2021. As at the date of this report, the unexpired term under Carol Gysin’s contract was 12 months. Statement of voting at general meeting At the AGM held on 6 June 2016, votes lodged by proxy in respect of the directors’ remuneration were as follows: Votes Percentage Votes Percentage Total Votes for for against against votes cast withheld Voting on remuneration report 25,188,202 99.99 168 0.01 25,188,370 0 The company pays due attention to voting outcomes. Where there are substantial votes against resolutions in relation to directors’ remuneration, the reasons for any such vote will be sought, and any actions in response will be detailed in the next directors’ remuneration report. Policy Report The information provided in this part of the directors’ remuneration report is not subject to audit. Future policy tables The table below provides a summary of the key components that it will in future be the policy of the company to provide in the remuneration package of each executive director. It is not the policy of the company to provide for possible recovery after payment of directors’ remuneration except under the 2015 long term incentive plan. 64 R.E.A. Holdings plc Annual Report and Accounts 2016 Purpose Operation Opportunity Applicable performance measures Executive directors Salary and fees To provide a competitive level of ﬁxed remuneration aligned to market practice for comparable organisations, reﬂecting the demands, seniority and location of the position and the expected contribution to achievement of the company’s strategic objectives Taxable beneﬁts To attract, motivate, retain and reward fairly individuals of suitable calibre Annual bonus To incentivise performance over a 12 month period, based on achievements linked to the company’s strategic objectives Reviewed annually with annual increases effective from 1 January by reference to: the rate of inﬂation, speciﬁc responsibilities and location of the executive, current market rates for comparable organisations, rates for senior employees and staff across the operations, and allowing for differences in remuneration applicable to different geographical locations Company car; and, where relevant, other beneﬁts customarily provided to equivalent senior management in their country of residence Annual review of performance measured against prior year progress in corporate development, both commercial and ﬁnancial, and including objectives relating to sustainability and governance Within the second or third quartile for similar sized companies None None The cost of providing the appropriate beneﬁts, subject to regular review to ensure that such costs are competitive Up to a maximum of 50 per cent of annual base salary Long term incentives To provide incentives, linked to ordinary shares, with a view to participation by the director over the long term in the value that a director helps to create for the group The grant of rights to acquire shares or to receive cash payments vesting by reference to the achievement over a deﬁned period of certain key performance targets Cumulative unvested awards, measured at face value on dates of grant, limited to 150 per cent of prevailing annual base salary (200 per cent in exceptional circumstances) A range of objectives for the respective director, reﬂecting speciﬁc goals for the relevant year, with weighting assessed annually on a discretionary basis depending upon the dominant inﬂuences during the year to which a bonus relates Total shareholder return, cost per tonne of crude palm oil produced, and the annual extension planting rate achieved in proportions considered at the remuneration committee’s discretion appropriate to the company’s objectives at the time of making any award Pensions Compliance with prevailing legislation Compliance with prevailing legislation Compliance with prevailing legislation None R.E.A. Holdings plc Annual Report and Accounts 2016 65 O v e r v e w i S t r a t e g c i r e p o r t G o v e r n a n c e G r o u p ﬁ n a n c a i l s t a t e m e n t s C o m p a n y ﬁ n a n c a i l s t a t e m e n t s N o t i c e o f A G M Governance Directors’ remuneration report continued Purpose Operation Non-executive directors Fees To attract and retain individuals with suitable knowledge and experience to serve as directors of a listed UK company engaged in the plantation business in Indonesia Fees for additional duties An additional ﬂat fee in each year in respect of membership of certain committees and additional fees in respect of particular services performed Taxable beneﬁts Continuance of previously agreed arrangements Determined by the board within the limits set by the articles of association and by reference to comparable organisations and to the time commitment expected; reviewed annually Determined by the board having regard to the time commitment expected and with no director taking part in the determination of such additional remuneration in respect of himself; reviewed annually The provision of private medical insurance, subject to regular review to ensure that the cost is competitive The policies on remuneration set out above in respect of executive directors are applied generally to the senior management and executives of the group but adjusted appropriately to reﬂect the position, role and location of an individual. Remuneration of other employees, almost all of whom are based in Indonesia, is based on local and industry benchmarks for basic salaries and beneﬁts, subject as a minimum to an annual inﬂationary adjustment, and with additional performance incentives as and where this is appropriate to the nature of the role. Where any arrangements have been agreed with a director within the existing policies on remuneration, such arrangements shall be deemed to be arrangements falling within the new policies on remuneration set out above. Approach to recruitment remuneration In setting the remuneration package for a newly appointed executive director, the committee will apply the policy as set out above. Base salary and bonuses, if any, will be set at levels appropriate to the role and the experience of the director being appointed and, together with any beneﬁts to be included in the remuneration package, will also take account of the geographical location in which the executive is to be based. The maximum variable incentive which may be awarded by way of annual bonus will be 50 per cent of the annual base salary and by way of long term incentive will be 150 per cent of annual base salary, except in exceptional circumstances when the maximum long term incentive would be 200 per cent of annual base salary. In instances where a new executive is to be domiciled outside the United Kingdom, the company may provide certain relocation beneﬁts to be determined as appropriate on a case by case basis taking account of the speciﬁc circumstances and costs associated with such relocation. Directors’ service agreements and letters of appointment The company’s policy on directors’ service contracts is that contracts should have a notice period of not more than one year and a maximum termination payment not exceeding one year’s salary. No director has a service contract that is not fully compliant with this policy. 66 R.E.A. Holdings plc Annual Report and Accounts 2016 Contracts for the services of non-executive directors may be terminated at the will of either party, with fees payable only to the extent accrued to the date of termination. Continuation of the appointment of each non-executive director depends upon satisfactory performance and re-election at annual general meetings in accordance with the articles of association of the company and the provisions of the UK Corporate Governance Code. The service agreement of Mark Parry, who resigned on 20 February 2017, stated that it may be terminated by either party by giving notice to the other party of not less than three months. At 31 December 2016, the unexpired term under Mark Parry’s contract was three months. Details of Carol Gysin’s service agreement are noted under “Service contracts of directors standing for re-election” above. Illustration of application of remuneration policy The charts below provide estimates of the potential remuneration receivable pursuant to the remuneration policy by the managing director (being the only executive director) and the potential split of such remuneration between its different components (being the ﬁxed component, the annual variable component and the long term variable component) under three different performance scenarios: minimum, in line with expectations and maximum. The long term variable component in respect of 2016 will be nil. Managing director C 500 400 300 200 100 0 366 406 325 11% 20% 100% 89% 80% Minimum remuneration receivable In line with expectations Maximum remuneration receivable Fixed pay Annual bonus The ﬁgures reﬂected in the chart above have been calculated against the policies that were applicable throughout 2016 and on the basis of remuneration payable in respect of 2017. Payment for loss of ofﬁce It is not company policy to include provisions in directors’ service contracts for compensation for early termination beyond providing for an entitlement to a payment in lieu of notice if due notice is not given. On 20 February 2017, in connection with the resignation of Mark Parry described under the Directors’ report above, the Loss of Ofﬁce Payment does not constitute a variation to the current remuneration policy. The company may cover the reasonable cost of repatriation of any expatriate executive director and the director’s spouse in the event of termination of appointment, other than for reasons of misconduct, and provided that the move back to the director’s home country takes place within a reasonable period of such termination. O v e r v e w i S t r a t e g c i r e p o r t G o v e r n a n c e G r o u p ﬁ n a n c a i l s t a t e m e n t s C o m p a n y ﬁ n a n c a i l s t a t e m e n t s N o t i c e o f A G M R.E.A. Holdings plc Annual Report and Accounts 2016 67 Governance Directors’ remuneration report continued Consideration of employment conditions elsewhere in the company In setting the remuneration of executive directors, regard will be had to the levels of remuneration of expatriate employees overseas and to the increments granted to employees operating in the same location as the relevant director. Employee views are not speciﬁcally sought in determining this policy. Employee salaries will normally be subject to the same inﬂationary adjustment as the salaries of executive directors in their respective locations. Shareholder views Shareholders are not speciﬁcally consulted on the remuneration policy of the company. Shareholders who have expressed views on remuneration have supported the company’s policies and the application of those policies to date. Were a signiﬁcant shareholder to express a particular concern regarding any aspect of the policy, the views expressed would be carefully weighed. Approved by the board on 27 April 2017 and signed on behalf of the board by MICHAEL A ST. CLAIR-GEORGE Chairman 68 R.E.A. Holdings plc Annual Report and Accounts 2016 Responsibility statement To the best of the knowledge of each of the directors: • • • the ﬁnancial statements, prepared in accordance with International Financial Reporting Standards, give a true and fair view of the assets, liabilities, ﬁnancial position and proﬁt or loss of the company and the undertakings included in the consolidation taken as a whole; the “Strategic report” section of this annual report includes a fair review of the development and performance of the business and the position of the company and the undertakings included in the consolidation taken as a whole, together with a description of the principal risks and uncertainties that they face; and the annual report and ﬁnancial statements, taken as a whole, are fair, balanced and understandable and provide the information necessary for shareholders to assess the company’s performance, business model and strategy. By order of the board R.E.A. SERVICES LIMITED 27 April 2017 Governance Directors’ responsibilities The directors are responsible for preparing the annual report and the ﬁnancial statements in accordance with applicable law and regulations. UK company law requires the directors to prepare ﬁnancial statements for each ﬁnancial year. The directors are required to prepare the group ﬁnancial statements in accordance with International Financial Reporting Standards (“IFRS”) as adopted by the European Union (the “EU”) and Article 4 of the IAS Regulation and have also elected from 2013 to prepare the parent company ﬁnancial statements in accordance with IFRSs as adopted by the EU. Under company law, the directors must not approve the accounts unless they are satisﬁed that they give a true and fair view of the state of affairs of the company and of the proﬁt or loss of the company for that period. In preparing these ﬁnancial statements, the directors are required to: • • • • properly select and apply accounting policies; present information, including accounting policies, in a manner that provides relevant, reliable, comparable and understandable information; provide additional disclosure when compliance with the speciﬁc requirements in IFRS is insufﬁcient to enable users to understand the impact of particular transactions, other events and conditions on the entity’s ﬁnancial position and ﬁnancial performance; and make an assessment of the company’s ability to continue as a going concern. The directors are responsible for keeping adequate accounting records that are sufﬁcient to show and explain the company’s transactions and disclose with reasonable accuracy at any time the ﬁnancial position of the company and enable them to ensure that the ﬁnancial statements comply with the Companies Act 2006. They are also responsible for safeguarding the assets of the company and hence for taking reasonable steps for the prevention and detection of fraud and other irregularities. The directors are responsible for the maintenance and integrity of the corporate and ﬁnancial information included on the company’s website. Legislation in the United Kingdom governing the preparation and dissemination of ﬁnancial statements may differ from legislation in other jurisdictions. O v e r v e w i S t r a t e g c i r e p o r t G o v e r n a n c e G r o u p ﬁ n a n c a i l s t a t e m e n t s C o m p a n y ﬁ n a n c a i l s t a t e m e n t s N o t i c e o f A G M R.E.A. Holdings plc Annual Report and Accounts 2016 69 Governance Independent auditor’s report to the members of R.E.A. Holdings plc Opinion on ﬁnancial statements of R.E.A. Holdings plc In our opinion: • the ﬁnancial statements give a true and fair view of the state of the group’s and of the parent company’s affairs as at 31 December 2016 and of the group’s loss for the year then ended; the group ﬁnancial statements have been properly prepared in accordance with International Financial Reporting Standards (IFRSs) as adopted by the European Union; the parent company ﬁnancial statements have been properly prepared in accordance with IFRSs as adopted by the European Union and as applied in accordance with the provisions of the Companies Act 2006; and the ﬁnancial statements have been prepared in accordance with the requirements of the Companies Act 2006 and, as regards the group ﬁnancial statements, Article 4 of the IAS Regulation. • • • The ﬁnancial statements that we have audited comprise: • • • • • • the Consolidated Income Statement; the Consolidated and Parent Company Balance Sheets; the Consolidated and Parent Company Cash Flow Statements; the Consolidated and Parent Company Statements of Changes in Equity; the Statement of Accounting Policies; and the related notes 1 to 44 to the Group ﬁnancial statements and notes i to xix to the Company ﬁnancial statements The ﬁnancial reporting framework that has been applied in their preparation is applicable law and IFRSs as adopted by the European Union and, as regards the parent company ﬁnancial statements, as applied in accordance with the provisions of the Companies Act 2006. Summary of our audit approach Key risks Materiality Scoping The key risks that we identiﬁed in the current year were: • • • Valuation of biological assets Valuation of loans to stone and coal interests Taxation matters arising in Indonesia The materiality that we used in the current year was $6.5m which was determined on the basis of 2% of biological assets The scope of our audit of the group remains unchanged from the previous year. We continue to focus our group audit scope primarily on the audit work of 12 active legal entities, all of which were subject to full scope audits Signiﬁcant changes in our approach We do not consider going concern to be a key risk for the current year as the material uncertainties that existed in the prior year are no longer present, due to the sale of 15% of R.E.A Kaltim and an agreed bank facility in Indonesia. 70 R.E.A. Holdings plc Annual Report and Accounts 2016 Separate opinion in relation to IFRSs as issued by the IASB As explained in the basis of accounting section of the Accounting policies (group), in addition to complying with its legal obligation to apply IFRSs as adopted by the European Union, the group has also applied IFRSs as issued by the International Accounting Standards Board (IASB). In our opinion the group ﬁnancial statements comply with IFRSs as issued by the IASB. Going concern and the directors’ assessment of the principal risks that would threaten the solvency or liquidity of the group We conﬁrm that we have nothing material to add or draw attention to in respect of these matters. We agreed with the directors’ adoption of the going concern basis of accounting and we did not identify any such material uncertainties. However, because not all future events or conditions can be predicted, this statement is not a guarantee as to the group’s ability to continue as a going concern. As required by the Listing Rules we have reviewed the directors’ statement regarding the appropriateness of the going concern basis of accounting contained within the basis of accounting section of the Accounting policies (group) and the directors’ statement on the longer-term viability of the group contained within the Directors’ report. We are required to state whether we have anything material to add or draw attention to in relation to: • the directors' conﬁrmation on page 44 that they have carried out a robust assessment of the principal risks facing the group, including those that would threaten its business model, future performance, solvency or liquidity; the disclosures on pages 36 to 41 that describe those risks and explain how they are being managed or mitigated; the directors’ statement in basis of accounting section of the Statement of Accounting Policies to the group ﬁnancial statements about whether they considered it appropriate to adopt the going concern basis of accounting in preparing them and their identiﬁcation of any material uncertainties to the group’s ability to continue to do so over a period of at least twelve months from the date of approval of the ﬁnancial statements; and the directors’ explanation on pages 43 and 44 as to how they have assessed the prospects of the group, over what period they have done so and why they consider that period to be appropriate, and their statement as to whether they have a reasonable expectation that the group will be able to continue in operation and meet its liabilities as they fall due over the period of their assessment, including any related disclosures drawing attention to any necessary qualiﬁcations or assumptions. • • • Independence We are required to comply with the Financial Reporting Council’s Ethical Standards for Auditors and conﬁrm that we are independent of the group and we have fulﬁlled our other ethical responsibilities in accordance with those standards. We conﬁrm that we are independent of the group and we have fulﬁlled our other ethical responsibilities in accordance with those standards. We also conﬁrm we have not provided any of the prohibited non-audit services referred to in those standards. R.E.A. Holdings plc Annual Report and Accounts 2016 71 O v e r v e w i S t r a t e g c i r e p o r t G o v e r n a n c e G r o u p ﬁ n a n c a i l s t a t e m e n t s C o m p a n y ﬁ n a n c a i l s t a t e m e n t s N o t i c e o f A G M Governance Independent auditor’s report to the members of R.E.A. Holdings plc continued Our assessment of risks of material misstatement The assessed risks of material misstatement described below are those that had the greatest effect on our audit strategy, the al- location of resources in the audit and directing the efforts of the engagement team. We do not consider going concern to be a signiﬁcant risk for the current year end as the material uncertainties that existed in the prior year are no longer present, due to the sale of 15% of R.E.A Kaltim and an agreed bank facility in Indonesia. Valuation of biological assets Risk description Under the revised IAS 41 standard, effective for periods beginning on or after 1 January 2016, biological assets are no longer carried at fair value but are instead accounted for as property, plant and equipment. The amendment also introduced a requirement for plantation companies to account for “growing produce” (for the group developing fresh fruit bunches (“FFB”)), but only if this can be reliably measured. The group has concluded that developing FFB can be reliably measured. We identiﬁed two key risks around the valuation of biological assets: • • The valuation of growing produce. This calculation is considered judgmental and it is the ﬁrst year it has been prepared. There is no historical approach to base the valuation on and the industry has yet to agree upon a standard valuation methodology. The split of deemed cost between asset classes. The biological assets valuation has been split into plantings, relating to the actual palms, and buildings and structures. The split between the two will have a material impact on the current and future reporting of the company’s results because these are depreciated over different useful economic lives. The calculation of the split is complex and the methodology judgmental. The revised standard allows management to take the plantings’ valuation as at 31st December 2014 as the deemed cost of the asset. The buildings and structures have been brought in at depreciated cost. At the 31 December 2016 a total of $323m (2015: $330m) was recognised, which included; plantings of $168m (2015: $185m), buildings and structures of $153m (2015: $143m) and biological assets of $2m (2015: $2m). Further information is provided in the Audit Committee report on page 57, note 14 to the ﬁnancial statements, as well as in the accounting policy note and note 1, “Critical accounting judgements and key sources of estimation uncertainty.” How the scope of our audit responded to the risk Our work on the split of deemed cost between asset classes has included: • Reviewing the nature of the costs which have been capitalised to assess whether they are appropriate. Challenging the split of costs between plantings and buildings and structures, by reference to our audit work, our knowledge of the business and our interpretation of the revised standard. Challenging if the plantings and buildings and structures are being depreciated over appropriate useful economic lives, by comparing to scientiﬁc literature, the licensing agreements and future land rights. Assessing the carrying value of plantings and buildings and structures for impairment as required by IAS 16. • • • 72 R.E.A. Holdings plc Annual Report and Accounts 2016 During our work on the valuation of growing produce we identiﬁed and challenged: • The amount of palm oil and palm kernel oil developed in the average fresh fruit bunch in the last month before harvest. This has been compared to papers published in scientiﬁc journals. The fair value of palm oil and palm kernel oil at the mill. This has been compared to market derived prices. The amount of palm oil produced by the mill in January 2017. This has been compared to internal management reports. Growing produce is the value of oil in the fruit at year end, this is extracted from the fruit in the mill over the 4 week period after year end. The costs associated with production and distribution have been ﬂexed to analyse the impact on the growing produce calculation. • • • Key observations Based on the audit evidence obtained from the work performed above, we conclude that the valuation of growing produce and the split of cost between the plantings and buildings and structures asset classes is appropriate. Valuation of loans to stone and coal interests Risk description How the scope of our audit responded to the risk The carrying value of these loans relies on certain assumptions and estimates (such as the discount rate, the timing of commencement of future operations, and expected sale prices) in relation to the likelihood of the underlying investments generating suitable future proﬁts in order to repay the loans made by the Group. At 31 December 2016 the carrying value of the loans increased to $37.2m due to additional drawdowns ($35.3m at 31 December 2015). In 2014 it was decided by management to guarantee the value of the coal loans using the andesite stone concession. This meant no impairment was taken even though the coal operations remained suspended in 2016. The coal price has now recovered sufﬁciently such that mining operations are expected to resume in the ﬁrst half of 2017, as evidenced by a proposal from third party contractors. Whilst mining of the stone quarry has yet to commence, management remains committed to funding this at the earliest opportunity. Should activity not commence during the near future on either stone or coal sites, the likelihood of impairment of the loans in future periods will increase. Further information is provided in the Audit Committee report on page 56, note 16 to the ﬁnancial statements, as well as in the accounting policy note and note 1, “Critical accounting judgements and key sources of estimation uncertainty”. We challenged management’s plans and cash ﬂow forecasts in relation to the mining operations to support the value of investments in the stone and coal interests. Our work on the discounted cash ﬂow forecasts for the operations included: • • Agreement of total stone and coal reserves to external third party evidence. Testing the accuracy and integrity of management’s discounted cash ﬂow calculation including identifying key changes made to the model in terms of inputs and assumptions, and performing sensitivity analysis over the key assumptions used within the model. These assumptions are the selling price of stone and the discount rate used. Challenge over expected prices to be used in the valuation with reference to third party sources, and the proﬁt margin per year used within the calculation. Challenge of the discount rates used by management by comparing to others in the plantation industry, terminal growth rates and the forecast ﬁgures used and the assumptions in the discounted cash ﬂow calculation. • • Key observations Based on the audit evidence obtained from the work performed above, we conclude that the valuation of loans to stone and coal interests is appropriate. R.E.A. Holdings plc Annual Report and Accounts 2016 73 O v e r v e w i S t r a t e g c i r e p o r t G o v e r n a n c e G r o u p ﬁ n a n c a i l s t a t e m e n t s C o m p a n y ﬁ n a n c a i l s t a t e m e n t s N o t i c e o f A G M Governance Independent auditor’s report to the members of R.E.A. Holdings plc continued Taxation matters arising in Indonesia Risk description Tax legislation in Indonesia can be complex and issues can take a signiﬁcant number of years to resolve. Furthermore, signiﬁcant deferred tax balances (31 December 2016: assets of $12.8m, liabilities of $80.8m, (31 December 2015: assets of $15.7m, liabilities of $86.1m)) arise in the consolidated ﬁnancial statements because a number of items are carried at fair value, which may result in a different valuation to that used for tax purposes. This gives rise to judgements in how much deferred tax should be recognised including consideration of rules relating to the expiry of losses in Indonesia. Notes 1, 9 and 27 and the Audit Committee report on page 56 contain more disclosure relating to the status of tax issues. How the scope of our audit responded to the risk Our work included: • Challenging group and local management in respect of the treatment of open tax positions and the recognition of deferred tax assets by utilising tax experts in the UK in order to help understand the potential impacts of Indonesian tax regulations on the group’s operations. Reviewing the status of open queries with the Indonesian tax authorities and tax advice obtained by the Group’s external tax advisors in Indonesia. Assessing the tax disclosures for consistency with the status of open queries, and independently re-computed temporary differences on those assets and liabilities which were expected to give rise to signiﬁcant deferred tax. Reviewing forecasts to assess the recoverability of the assets, including assessing those forecasts for consistency with the going concern status. • • • Key observations Based on the audit evidence obtained from the work performed above, we conclude that the deferred tax assets have been appropriately recognised and the open tax positions have been appropriately accounted for in the balance sheet. These matters were addressed in the context of our audit of the ﬁnancial statements as a whole, and in forming our opinion thereon, and we do not provide a separate opinion on these matters. Our application of materiality We deﬁne materiality as the magnitude of misstatement in the ﬁnancial statements that makes it probable that the economic decisions of a reasonably knowledgeable person would be changed or inﬂuenced. We use materiality both in planning the scope of our audit work and in evaluating the results of our work. Based on our professional judgement, we determined materiality for the ﬁnancial statements as a whole as follows: Group materiality $6.5m (2015: $6.4m) Basis for determining materiality 2% of biological assets (2015: 2% of biological assets), which includes growing produce, plantings and infrastructure. Rationale for the benchmark applied We consider that the valuation of biological assets is a key indicator of the current and future performance of the company. It is the KPI of critical interest to users of the ﬁnancial statements of R.E.A. Holdings plc as it is the key measure of the company’s success in developing its palm oil plantations. 74 R.E.A. Holdings plc Annual Report and Accounts 2016 We agreed with the Audit Committee that we would report to the committee all audit differences in excess of $250k (2015: $138k), as well as differences below that threshold that, in our view, warranted reporting on qualitative grounds. The change in the reporting threshold has been made following our reassessment of what matters require communicating. We also report to the Audit Committee on disclosure matters that we identiﬁed when assessing the overall presentation of the ﬁnancial statements. An overview of the scope of our audit Our group audit was scoped by obtaining an understanding of the group and its environment, including group-wide controls, and assessing the risks of material misstatement at the group level. Based on that assessment, we focused on the full scope audit work of 12 active legal entities (2015: 12 active legal entities), all of which were subject to full scope audits. These 12 entities represent the principal business activities and account for 98% (2015: 95%) of the group’s net assets, 100% (2015: 100%) of the group’s revenue and 98% (2015: 100%) of the group’s proﬁt before tax. They were also selected to provide an appropriate basis for undertaking audit work to address the risks of material misstatement identiﬁed above. Our audit work at the 12 active legal entities was executed at levels of materiality applicable to each individual entity which were lower than group materiality and ranged from $3.2m to $4.5m (2015: $3.2m to $5.4m). At the parent entity level we also tested the consolidation process and carried out analytical procedures to conﬁrm our conclusion that there were no signiﬁcant risks of material misstatement of the aggregated ﬁnancial information of the remaining components not subject to audit or audit of speciﬁed account balances. The group audit team continued to follow a programme of planned visits that has been designed so that appropriately qualiﬁed members of the group audit team visit the group’s operations and component auditors in Indonesia annually and visit the planta- tion estates at least once every three years, with the most recent visit to the plantation being in April 2017. Opinion on other matters prescribed by the Companies Act 2006 In our opinion, based on the work undertaken in the course of the audit: • the part of the Directors’ remuneration report to be audited has been properly prepared in accordance with the Companies Act 2006; • the information given in the Strategic report and the Directors’ report for the ﬁnancial year for which the ﬁnancial statements are prepared is consistent with the ﬁnancial statements; and • the Strategic report and the Directors’ report have been prepared in accordance with applicable legal requirements. In the light of the knowledge and understanding of the company and its environment obtained in the course of the audit, we have not identiﬁed any material misstatements in the Strategic report and the Directors’ report. O v e r v e w i S t r a t e g c i r e p o r t G o v e r n a n c e G r o u p ﬁ n a n c a i l s t a t e m e n t s C o m p a n y ﬁ n a n c a i l s t a t e m e n t s N o t i c e o f A G M R.E.A. Holdings plc Annual Report and Accounts 2016 75 Governance Independent auditor’s report to the members of R.E.A. Holdings plc continued Matters on which we are required to report by exception Adequacy of explanations received and accounting records We have nothing to report in respect of these matters. We have nothing to report arising from these matters. We have nothing to report arising from our review. We conﬁrm that we have not identiﬁed any such inconsistencies or misleading statements. Under the Companies Act 2006 we are required to report to you if, in our opinion: • we have not received all the information and explanations we require for our audit; or adequate accounting records have not been kept by the parent company, or returns adequate for our audit have not been received from branches not visited by us; or the parent company ﬁnancial statements are not in agreement with the accounting records and returns. • • Directors’ remuneration Under the Companies Act 2006 we are also required to report if in our opinion certain disclosures of directors’ remuneration have not been made or the part of the Directors’ remuneration report to be audited is not in agreement with the accounting records and returns. Corporate Governance Statement Under the Listing Rules we are also required to review part of the Corporate Governance Statement relating to the company’s compliance with certain provisions of the UK Corporate Governance Code. Our duty to read other information in the Annual Report Our duty to read other information in the annual report under International Standards on Auditing (UK and Ireland), we are required to report to you if, in our opinion, information in the annual report is: • materially inconsistent with the information in the audited ﬁnancial statements; or apparently materially incorrect based on, or materially inconsistent with, our knowledge of the group acquired in the course of performing our audit; or otherwise misleading. • In particular, we are required to consider whether we have identiﬁed any inconsistencies between our knowledge acquired during the audit and the directors’ statement that they consider the annual report is fair, balanced and understandable and whether the annual report appropriately discloses those matters that we communicated to the Audit Committee which we consider should have been disclosed. 76 R.E.A. Holdings plc Annual Report and Accounts 2016 Respective responsibilities of directors and auditor As explained more fully in the Directors’ responsibilities statement, the directors are responsible for the preparation of the ﬁnan- cial statements and for being satisﬁed that they give a true and fair view. Our responsibility is to audit and express an opinion on the ﬁnancial statements in accordance with applicable law and International Standards on Auditing (UK and Ireland). We also comply with International Standard on Quality Control 1 (UK and Ireland). Our audit methodology and tools aim to ensure that our quality control procedures are effective, understood and applied. Our quality controls and systems include our dedicated professional standards review team and independent partner reviews. This report is made solely to the company’s members, as a body, in accordance with Chapter 3 of Part 16 of the Companies Act 2006. Our audit work has been undertaken so that we might state to the company’s members those matters we are required to state to them in an auditor’s report and for no other purpose. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the company and the company’s members as a body, for our audit work, for this report, or for the opinions we have formed. Scope of the audit of the ﬁnancial statements An audit involves obtaining evidence about the amounts and disclosures in the ﬁnancial statements sufﬁcient to give reasonable assurance that the ﬁnancial statements are free from material misstatement, whether caused by fraud or error. This includes an assessment of: whether the accounting policies are appropriate to the group’s and the parent company’s circumstances and have been consistently applied and adequately disclosed; the reasonableness of signiﬁcant accounting estimates made by the directors; and the overall presentation of the ﬁnancial statements. In addition, we read all the ﬁnancial and non-ﬁnancial information in the annual report to identify material inconsistencies with the audited ﬁnancial statements and to identify any information that is apparently materially incorrect based on, or materially inconsistent with, the knowledge acquired by us in the course of performing the audit. If we become aware of any apparent material misstatements or inconsistencies we consider the implications for our report. Colin Rawlings, FCA (Senior statutory auditor) for and on behalf of Deloitte LLP Chartered Accountants and Statutory Auditor London 27 April 2017 O v e r v e w i S t r a t e g c i r e p o r t G o v e r n a n c e G r o u p ﬁ n a n c i a l s t a t e m e n t s C o m p a n y ﬁ n a n c a i l s t a t e m e n t s N o t i c e o f A G M R.E.A. Holdings plc Annual Report and Accounts 2016 77 Group ﬁnancial statements Consolidated income statement for the year ended 31 December 2016 2016 2015* Note $’000 $’000 Revenue 2 79,265 90,515 Net gain / (loss) arising from changes in fair value of agricultural produce inventory 4 632 (1,147) Cost of sales: Depreciation and amortisation (20,959) (21,676) Other costs (50,868) (61,448) Gross profit 8,070 6,244 Other operating income 2 1 2 Distribution costs (1,110) (1,097) Administrative expenses 5 (11,987) (11,702) Operating loss (5,026) (6,553) Investment revenues 2, 7 1,742 259 Finance costs 8 (6,005) (5,951) Loss before tax 5 (9,289) (12,245) Tax 9 (2,019) (686) Loss for the year (11,308) (12,931) Attributable to: Ordinary shareholders (17,800) (20,912) Preference shareholders 10 7,402 8,461 Non-controlling interests 34 (910) (480) (11,308) (12,931) Basic and diluted loss per 25p ordinary share (US cents) 11 (48.2) (59.0) * Restated - see Accounting policies (group) The company is exempt from preparing and disclosing its proﬁt and loss account All operations for both years are continuing 78 R.E.A. Holdings plc Annual Report and Accounts 2016 Group ﬁnancial statements Consolidated balance sheet as at 31 December 2016 2016 2015* 2014* Note $’000 $’000 $’000 Non-current assets Goodwill 12 12,578 12,578 12,578 Intangible assets 13 4,176 – – Property, plant and equipment 14 471,922 468,850 459,096 Prepaid operating lease rentals 15 34,230 34,295 33,879 Stone and coal interests 16 37,208 35,338 31,334 Deferred tax assets 27 12,781 15,669 8,909 Non-current receivables 3,136 1,395 2,749 Total non-current assets 576,031 568,125 548,545 Current assets Inventories 18 15,767 11,190 16,180 Biological assets 19 2,037 2,105 2,251 Investments 20 9,880 2,158 – Trade and other receivables 21 42,554 29,103 25,487 Cash and cash equivalents 22 24,593 15,758 16,224 Total current assets 94,831 60,314 60,142 Total assets 670,862 628,439 608,687 Current liabilities Trade and other payables 29 (43,426) (27,025) (17,818) Current tax liabilities (317) (3,406) (2,581) Bank loans 24 (28,628) (50,906) (40,326) Sterling notes 25 (10,103) – (14,693) US dollar notes 26 (20,048) – – Hedging instruments – – (9,590) Other loans and payables 28 (519) (93) (1,238) Total current liabilities (103,041) (81,430) (86,246) Non-current liabilities Bank loans 24 (97,771) (72,034) (60,638) Sterling notes 25 (37,037) (55,853) (37,713) US dollar notes 26 (23,646) (33,637) (33,472) Deferred tax liabilities 27 (80,830) (86,105) (77,191) Other loans and payables 28 (18,987) (5,558) (6,802) Total non-current liabilities (258,271) (253,187) (215,816) Total liabilities (361,312) (334,617) (302,062) Net assets 309,550 293,822 306,625 Equity Share capital 30 121,426 120,288 112,974 Share premium account 31 42,585 30,683 23,366 Translation reserve 32 (39,127) (46,282) (44,324) Retained earnings 33 161,839 187,481 212,928 286,723 292,170 304,944 Non-controlling interests 34 22,827 1,652 1,681 Total equity 309,550 293,822 306,625 * Restated - see Accounting policies (group) Approved by the board on 27 April 2017 and signed on behalf of the board. DAVID J BLACKETT Chairman O v e r v e w i S t r a t e g c i r e p o r t G o v e r n a n c e G r o u p ﬁ n a n c i a l s t a t e m e n t s C o m p a n y ﬁ n a n c a i l s t a t e m e n t s N o t i c e o f A G M R.E.A. Holdings plc Annual Report and Accounts 2016 79 Group ﬁnancial statements Consolidated statement of comprehensive income for the year ended 31 December 2016 2016 2015* Note $’000 $’000 Loss for the year (11,308) (12,931) Other comprehensive income Items that may be reclassified to profit or loss: Actuarial losses (569) (489) Deferred tax on actuarial losses 27 143 122 (426) (367) Items that will not be reclassified to profit and loss: Exchange differences on translation of foreign operations 32 5,222 3,575 Exchange differences on deferred tax 27 2,617 (5,082) 7,413 (1,874) Total comprehensive income for the year (3,895) (14,805) Attributable to: Ordinary shareholders (10,387) (22,786) Preference shareholders 7,402 8,461 Non-controlling interests (910) (480) (3,895) (14,805) * Restated - see Accounting policies (group) Consolidated statement of changes in equity for the year ended 31 December 2016 Share Share Translation Retained Subtotal Non- Total capital premium reserve earnings controlling equity interests (note 30) (note 31) (note 32) (note 33) (note 34) $’000 $’000 $’000 $’000 $’000 $’000 $’000 At 1 January 2015* 112,974 23,366 (44,324) 212,928 304,944 1,681 306,625 Total comprehensive income – – (1,958) (12,818) (14,776) (29) (14,805) Issue of new preference shares (cash) 6,639 1,199 – – 7,838 – 7,838 Issue of new ordinary shares (cash) 675 6,118 – – 6,793 – 6,793 Dividends to preference shareholders – – – (8,461) (8,461) – (8,461) Dividends to ordinary shareholders – – – (4,168) (4,168) – (4,168) At 31 December 2015 120,288 30,683 (46,282) 187,481 292,170 1,652 293,822 Total comprehensive income – – 7,155 (10,824) (3,669) (226) (3,895) Sale of shareholding in sub-group – – – (7,416) (7,416) 21,401 13,985 Issue of new ordinary shares (cash) 1,138 11,902 – – 13,040 – 13,040 Dividends to preference shareholders – – – (7,402) (7,402) – (7,402) At 31 December 2016 121,426 42,585 (39,127) 161,839 286,723 22,827 309,550 * Restated - see Accounting policies (group) 80 R.E.A. Holdings plc Annual Report and Accounts 2016 Group ﬁnancial statements Consolidated cash ﬂow statement for the year ended 31 December 2016 2016 2015 Note $’000 $’000 Net cash from operating activities 35 2,598 20,063 Investing activities Interest received 1,742 259 Proceeds from disposal of property, plant and equipment 61 2,512 Purchases of property, plant and equipment (31,137) (32,348) Expenditure on prepaid operating lease rentals (367) (1,250) Investment in stone and coal interests (1,860) (4,004) Net cash used in investing activities (31,561) (34,831) Financing activities Preference dividends paid (7,402) (8,461) Ordinary dividends paid – (4,168) Repayment of borrowings (11,004) (9,620) Proceeds of issue of ordinary shares, less costs of issue 13,040 6,793 Proceeds of issue of US dollar notes, less costs of issue (44) – Redemption of US dollar notes (45) – Proceeds of issue / sale of sterling notes, less costs of issue 1,922 4,086 Proceeds of issue of sterling notes, by exchange – 39,921 Proceeds of issue of preference shares, less costs of issue – 7,838 Redemption of sterling notes, by exchange – (39,921) Payment on termination of hedging contract – (10,184) Purchase of sterling notes – (2,158) Proceeds of sale of shareholding in subsidiary 13,985 – New borrowings from related party 12,446 – New bank borrowings drawn 14,939 30,326 Net cash from financing activities 37,837 14,452 Cash and cash equivalents Net increase / (decrease) in cash and cash equivalents 36 8,874 (316) Cash and cash equivalents at beginning of year 15,758 16,224 Effect of exchange rate changes (39) (150) Cash and cash equivalents at end of year 22 24,593 15,758 O v e r v e w i S t r a t e g c i r e p o r t G o v e r n a n c e G r o u p ﬁ n a n c i a l s t a t e m e n t s C o m p a n y ﬁ n a n c a i l s t a t e m e n t s N o t i c e o f A G M R.E.A. Holdings plc Annual Report and Accounts 2016 81 Group ﬁnancial statements Accounting policies (group) General information R.E.A. Holdings plc is a company incorporated and domiciled in the United Kingdom under the Companies Act 2006 with registration number 00671099. The company’s registered ofﬁce is at First Floor, 32-36 Great Portland Street, London W1X 8QX. Details of the group’s principal activities are provided in the Strategic report. Basis of accounting The consolidated ﬁnancial statements set out on pages 78 to 114 are prepared in accordance with International Financial Reporting Standards (“IFRS”) as adopted by the EU as at the date of approval of the ﬁnancial statements and therefore comply with Article 4 of the EU IAS Regulation. The statements are prepared under the historical cost convention except where otherwise stated in the accounting policies. The directors have conducted a review of the projected cash ﬂows from operations, investing and ﬁnancing and have set out their assessment of liquidity and ﬁnancing adequacy on pages 33 and 34 of the strategic report, including the actions either in progress or contemplated in order to ensure adequate liquidity for the next twelve months. Accordingly, having made due enquiries, the directors reasonably expect that the company and the group have adequate resources to continue in operational existence for at least twelve months from the date of approval of the ﬁnancial statements and, therefore, they continue to adopt the going concern basis of accounting in preparing the ﬁnancial statements. Presentational currency The consolidated ﬁnancial statements of the group are presented in US dollars, which is also considered to be the currency of the primary economic environment in which the group operates. References to “$” or “dollar” in these ﬁnancial statements are to the lawful currency of the United States of America. Adoption of new and revised standards In the current year the group has applied new IFRSs, a number of amendments to IFRSs and a new interpretation (IFRIC) issued by the International Accounting Standards Board (“IASB”) that are mandatorily effective for an accounting period beginning on 1 January 2016. The principal change in accounting policies results from the amendments to IAS 41 Agriculture and to IAS 16 Property plant and equipment. The new accounting policies are set out under “Property, plant and equipment - plantings” and under “Property, plant and equipment - other” below. 82 R.E.A. Holdings plc Annual Report and Accounts 2016 As a result of this change in accounting policies and, as set out in note 44, the consolidated balance sheets for 2014 and 2015 and the consolidated income statement for 2015 have been restated. In these ﬁnancial statements, references to “restated” should be construed accordingly. The adoption of other amendments to IFRSs has not had any signiﬁcant impact on the amounts reported in these ﬁnancial statements, although certain disclosures have been amended to reﬂect the new requirements. At the date of authorisation of these ﬁnancial statements, the standards and interpretations which were in issue but not yet effective (and in certain cases had not yet been adopted by the EU and therefore not applied in these ﬁnancial statements), are set out below together with their effective dates of implementation: IFRS 9: Financial instruments 1 January 2018 IFRS 15: Revenue from contracts with customers 1 January 2018 IFRS 16: Leases 1 January 2019 IFRS 10 and IAS28: Sale or contribution of assets between an investor and its associate or joint venture (amendments) 1 January 2017 IAS 12: Recognition of deferred tax assets for unrealised losses (amendments) 1 January 2017 IFRS 2: Classiﬁcation and measurement of share-based payment transactions (amendments) 1 January 2018 IFRS 4: Applying IFRS9 Financial instruments with IFRS 4 Insurance contracts (amendments) 1 January 2018 Annual improvements to IFRSs: 2014 - 2016 cycle 1 January 2017/2018 IFRIC interpretation 22: Foreign currency transactions and advance consideration 1 January 2018 IAS 40: Transfers of investment property (amendments) 1 January 2018 IFRS 9 implements the IASB’s project to replace IAS 39: Financial instruments: recognition and measurement. It sets out the classiﬁcation and measurement criteria for ﬁnancial assets and ﬁnancial liabilities and the requirements relating to hedge accounting. It is not considered that the effect of applying the standard will have a material impact on the group’s reported proﬁt or equity. The directors are also considering the impact of IFRS 15: Revenue from contracts with customers. The new standard requires entities to recognise revenue on the transfer of goods or services to customers in amounts that reﬂect the consideration to which the company expects to be entitled in exchange for those goods or services. The new standard will also result in enhanced disclosures about revenue, provide guidance for transactions that were not previously addressed comprehensively (for example, service revenue and contract modiﬁcations) and improve guidance for multiple-element arrangements. The directors do not consider that the adoption of IFRS 15 will result in any change to the amount and timing of the group’s revenue, but may require some additional disclosures. The directors do not expect that the adoption of the other standards, amendments and interpretations listed above will have a material impact on the ﬁnancial statements of the group in future periods. Basis of consolidation The consolidated ﬁnancial statements consolidate the ﬁnancial statements of the company and its subsidiary companies (as listed in note (iv) to the company’s individual ﬁnancial statements) made up to 31 December of each year. The acquisition method of accounting is adopted with assets and liabilities valued at fair values at the date of acquisition. The interest of non-controlling shareholders is stated at the non-controlling shareholders’ proportion of the fair values of the assets and liabilities recognised. The share of total comprehensive income is attributed to the owners of the parent and to non-controlling interests even if this results in the non-controlling interests having a deﬁcit balance. Results of subsidiaries acquired or disposed of are included in the consolidated income statement from the effective date of acquisition or to the effective date of disposal. Where necessary, adjustments are made to the ﬁnancial statements of subsidiaries to bring the accounting policies into line with those used by the group. On acquisition, any excess of the fair value of the consideration given over the fair value of identiﬁable net assets acquired is recognised as goodwill. Any deﬁciency in consideration given against the fair value of the identiﬁable net assets acquired is credited to proﬁt or loss in the consolidated income statement in the period of acquisition. For the purpose of impairment testing, goodwill is allocated to each of the group's cash generating units expected to beneﬁt from the synergies of the combination. Cash generating units to which goodwill has been allocated are tested for impairment annually, or more frequently when there is an indication that the unit may be impaired. Goodwill arising between 1 January 1998 and the date of transition to IFRS is retained at the previous UK Generally Accepted Accounting Practice amount subject to testing for impairment at that date. Goodwill written off to reserves prior to 1 January 1998, in accordance with the accounting standards then in force, has not been reinstated and is not included in determining any subsequent proﬁt or loss on disposal. Other intangible assets Other intangible assets are stated at cost less accumulated amortisation and any recognised impairment losses. Intangible assets acquired separately are measured at cost on initial recognition. An intangible asset with a ﬁnite life is amortised on a straight-line basis so as to charge its cost to the income statement over its expected useful life. An intangible asset with an indeﬁnite life is not amortised but is tested at least annually for impairment and carried at cost less any recognised impairment losses. Computer software that is not integral to an item of property, plant and equipment is recognised separately as an intangible asset. Amortisation is provided on a straight-line basis so as to charge the cost of the software to the income statement over its expected useful life, not exceeding eight years. The expected useful lives of acquired intangible assets are as follows: Purchased software Licences (other than land titles) Other 4-8 years duration of the licence up to 6 years All intra-group transactions, balances, income and expenses are eliminated on consolidation. Revenue recognition Goodwill Goodwill is recognised as an asset on the basis described under “Basis of consolidation” above and once recognised is not depreciated although it is tested for impairment at least annually. Any impairment is debited immediately as a loss in the consolidated income statement and is not subsequently reversed. On disposal of a subsidiary, the attributable amount of any goodwill is included in the determination of the proﬁt or loss on disposal. Revenue is measured at the fair value of the consideration received or receivable in respect of goods and services provided in the normal course of business, net of VAT and other sales related taxes. Sales of goods are recognised when the signiﬁcant risks and rewards of ownership of the goods are transferred to the buyer and include contracted sales in respect of which the contracted goods are available for collection by the buyer in the accounting period. Income from services is accrued on a time basis by reference to the rate of fee agreed for the provision of services. Interest income is accrued on a time basis by reference to the principal outstanding and at the effective interest rate O v e r v e w i S t r a t e g c i r e p o r t G o v e r n a n c e G r o u p ﬁ n a n c i a l s t a t e m e n t s C o m p a n y ﬁ n a n c a i l s t a t e m e n t s N o t i c e o f A G M R.E.A. Holdings plc Annual Report and Accounts 2016 83 Group ﬁnancial statements Accounting policies (group) continued applicable (which is the rate that exactly discounts estimated future cash receipts, through the expected life of the ﬁnancial asset, to that asset’s net carrying amount). Dividend income is recognised when the shareholders’ rights to receive payment have been established. the US dollar are treated as assets and liabilities of that entity and are translated at the closing rate of exchange. Borrowing costs Leasing Assets held under ﬁnance leases and other similar contracts are recognised as assets of the group at their fair values or, if lower, at the present values of minimum lease payments (for each asset, determined at the inception of the lease) and are depreciated over the shorter of the lease terms and their useful lives. The corresponding liabilities are included in the balance sheet as ﬁnance lease obligations. Lease payments are apportioned between ﬁnance charges and a reduction in the lease obligation to produce a constant rate of interest on the balance of the capital repayments outstanding. Hire purchase transactions are dealt with similarly, except that assets are depreciated over their useful lives. Finance and hire purchase charges are charged directly against income. Borrowing costs incurred in ﬁnancing construction or installation of qualifying property, plant or equipment are added to the cost of the qualifying asset, until such time as the construction or installation is substantially complete and the asset is ready for its intended use. Borrowing costs incurred in ﬁnancing the planting of extensions to the developed agricultural area are treated as expenditure relating to plantings until such extensions reach maturity. All other borrowing costs are recognised in the consolidated income statement of the period in which they are incurred. Operating proﬁt Operating proﬁt is stated after any gain or loss arising from changes in the fair value of agricultural produce inventory but before investment income and ﬁnance costs. Pensions and other post-employment beneﬁts Rental payments under operating leases are charged to income on a straight-line basis over the term of the relevant lease. United Kingdom Foreign currencies Transactions in foreign currencies are recorded at the rates of exchange ruling at the dates of the transactions. At each balance sheet date, assets and liabilities denominated in foreign currencies are retranslated at the rates of exchange prevailing at that date except that non-monetary items that are measured in terms of historical cost in a foreign currency are not retranslated. Exchange differences arising on the settlement of monetary items, and on the retranslation of other items that are subject to retranslation, are included in the net proﬁt or loss for the period, except for exchange differences arising on non-monetary assets and liabilities, including foreign currency loans, which, to the extent that such loans relate to investment in overseas operations or hedge the group’s investment in such operations, are recognised directly in equity. Certain existing and former UK employees of the group are members of a deﬁned beneﬁt scheme. The estimated regular cost of providing for beneﬁts under this scheme is calculated so that it represents a substantially level percentage of current and future pensionable payroll and is charged as an expense as it is incurred. Amounts payable to recover actuarial losses, which are assessed at each actuarial valuation, are payable over a recovery period agreed with the scheme trustees. Provision is made for the present value of future amounts payable by the group to cover its share of such losses. The provision is reassessed at each accounting date, with the difference on reassessment being charged or credited to the consolidated income statement in addition to the adjusted regular cost for the period. Indonesia For consolidation purposes, the assets and liabilities of any group entity with a functional currency other than the US dollar are translated at the exchange rate at the balance sheet date. Income and expenses are translated at the average rate for the period unless exchange rates ﬂuctuate signiﬁcantly. Exchange differences arising are classiﬁed as equity and transferred to the group’s translation reserve. Such exchange differences are recognised as income or expenses in the period in which the entity is sold. In accordance with local labour law, the group’s employees in Indonesia are entitled to lump sum payments on retirement. These obligations are unfunded and provision is made annually on the basis of a periodic assessment by independent actuaries. Actuarial gains and losses are recognised in the statement of comprehensive income; any other increase or decrease in the provision is recognised in the consolidated statement of income, net of amounts added to plantings within property, plant and equipment. Goodwill and fair value adjustments arising on the acquisition of an entity with a functional currency other than 84 R.E.A. Holdings plc Annual Report and Accounts 2016 Taxation The tax expense represents the sum of tax currently payable and deferred tax. Tax currently payable represents amounts expected to be paid (or recovered) based on the taxable proﬁt for the period using the tax rates and laws that have been enacted or substantively enacted at the balance sheet date. Deferred tax is calculated on the balance sheet liability method on a non-discounted basis on differences between the carrying amounts of assets and liabilities in the ﬁnancial statements and the corresponding ﬁscal balances used in the computation of taxable proﬁts (temporary differences). Deferred tax liabilities are generally recognised for all taxable temporary differences and deferred tax assets are recognised to the extent that it is probable that taxable proﬁts will be available against which deductible temporary differences can be utilised. A deferred tax asset or liability is not recognised in respect of a temporary difference that arises from goodwill or from the initial recognition of other assets or liabilities in a transaction which affects neither the proﬁt for tax purposes nor the accounting proﬁt. Deferred tax is calculated at the tax rates that are expected to apply in the periods when deferred tax liabilities are settled or deferred tax assets are realised. Deferred tax is charged or credited in the consolidated income statement, except when it relates to items charged or credited directly to equity, in which case the deferred tax is also dealt with in equity. Property, plant and equipment - plantings On application of the amendments to IAS41: Agriculture and IAS 19: Property, plant and equipment, the directors elected to state the group’s plantings at deemed cost being the fair value recognised as at 1 January 2015 less the fair value at that date of the growing produce which is disclosed in current assets under “Biological assets”. Additions (which include interest incurred during the period of immaturity) are recognised at historical cost. Depreciation is not provided on immature plants. Once plants reach maturity, depreciation is provided on a straight line basis at a rate that will write off the costs of the plants by the date on which they are scheduled to be replanted, with a maximum of 24 years. Property, plant and equipment - other All property, plant and equipment other than plantings is carried at original cost less any accumulated depreciation and any accumulated impairment losses. Depreciation is computed using the straight line method so as to write off the cost of assets, other than property and plant under construction, over the estimated useful lives of the assets as follows: buildings and structures – 20 to 67 years; plant, equipment and vehicles - 5 to 16 years. Construction in progress is not depreciated. Where the directors consider that the residual value of an asset exceeds its carrying value, no depreciation will be provided. Assets held under ﬁnance leases are depreciated over their expected useful lives on the same basis as owned assets or, where shorter, over the terms of the relevant leases. The gain or loss on the disposal or retirement of an asset is determined as the difference between the sales proceeds, less costs of disposal, and the carrying amount of the asset and is recognised in the consolidated income statement. Prepaid operating lease rentals Payments to acquire leasehold interests in land are treated as prepaid operating lease rentals and are amortised over 67 years. Impairment of tangible and intangible assets excluding goodwill At each balance sheet date, the group reviews the carrying amounts of its tangible and intangible assets to determine whether there is any indication that any asset has suffered an impairment loss. If any such indication exists, the recoverable amount of the asset is estimated in order to determine the extent of the impairment loss (if any). Where the asset does not generate cash ﬂows that are independent from other assets, the group estimates the recoverable amount of the cash-generating unit to which the asset belongs. An intangible asset with an indeﬁnite useful life is tested for impairment annually and whenever there is an indication that the asset may be impaired. The recoverable amount of an asset (or cash-generating unit) is the higher of fair value less costs to sell and value in use. In assessing value in use, estimated future cash ﬂows are discounted to their present value using a pre-tax discount rate that reﬂects current market assessments of the time value of money and those risks speciﬁc to the asset (or cash-generating unit) for which the estimates of future cash ﬂows have not been adjusted. If the recoverable amount of an asset (or cash-generating unit) is estimated to be less than its carrying amount, the carrying amount of the asset (or cash-generating unit) is reduced to its recoverable amount. An impairment loss is recognised as an expense immediately, unless the relevant asset is carried at a revalued amount, in which case the impairment loss is treated as a revaluation decrease. Where, with respect to assets other than goodwill, an impairment loss subsequently reverses, the carrying amount of the asset (or cash-generating unit) is increased to the revised estimate of its recoverable amount, but so that the O v e r v e w i S t r a t e g c i r e p o r t G o v e r n a n c e G r o u p ﬁ n a n c i a l s t a t e m e n t s C o m p a n y ﬁ n a n c a i l s t a t e m e n t s N o t i c e o f A G M R.E.A. Holdings plc Annual Report and Accounts 2016 85 Group ﬁnancial statements Accounting policies (group) continued increased carrying amount does not exceed the carrying amount that would have been determined had no impairment loss been recognised for the asset (or cash- generating unit) in prior years. A reversal of an impairment loss is recognised as income immediately, unless the relevant asset is carried at a revalued amount, in which case the reversal of the impairment loss is treated as a revaluation increase. Inventories Inventories of agricultural produce harvested from the group’s oil palms are stated at fair value at the point of harvest of the fresh fruit bunches (“FFB”) from which the produce derives plus costs incurred in the processing of such FFB (including direct labour costs and overheads that have been incurred in bringing such inventories to their present location and condition) or at net realisable value if lower. Inventories of engineering and other items are valued at the lower of cost, on the weighted average method, or net realisable value. For these purposes, net realisable value represents the estimated selling price (having regard to any outstanding contracts for forward sales of produce) less all estimated costs of processing and costs incurred in marketing, selling and distribution. Biological assets Biological assets comprise the growing produce (fresh fruit bunches – “FFB”) on oil palm trees and are carried at fair value. Non-derivative ﬁnancial assets The group’s non-derivative ﬁnancial assets comprise loans and receivables (including stone and coal interests), and cash and cash equivalents. The group does not hold any ﬁnancial assets designated as held at “fair value through proﬁt and loss” or “available-for-sale” ﬁnancial assets. Loans and receivables Trade receivables, loans and other receivables in respect of which payments are ﬁxed or determinable and which are not quoted in an active market are classiﬁed as loans and receivables. Stone and coal interests are also classiﬁed as loans and receivables. Stone and coal interests are measured at amortised cost using the effective interest rate method. All other loans and receivables held by the group are non-interest bearing and are stated at their nominal amount. All loans and receivables are reduced by appropriate allowances for potentially irrecoverable amounts. Cash and cash equivalents Cash and cash equivalents comprise cash in hand, demand deposits and other short-term highly liquid investments that have a maturity of not more than three months from the date of acquisition and are readily convertible to a known amount of cash and, being subject to an insigniﬁcant risk of changes in value, are stated at their nominal amounts. Held-to-maturity investments Growing produce is valued using a formulaic methodology to determine the estimated value of the oil content of FFB which develops in the fruitlets in the ﬁve to six weeks immediately prior to harvest. The oil content so derived, both CPO and CPKO, is valued at market value, after deducting harvesting, processing and transport costs. Debentures and shares with ﬁxed and determinable payments and ﬁxed maturity dates that are intended to be held to maturity are classiﬁed as held-to-maturity investments, and are measured at amortised cost using the effective interest method, less any impairment, with revenue recognised on an effective yield basis. Periodic movements in the fair value of growing produce are reﬂected in the consolidated income statement Non-derivative ﬁnancial liabilities Recognition and de-recognition of ﬁnancial instruments Financial assets and liabilities are recognised in the group’s ﬁnancial statements when the group becomes a party to the contractual provisions of the relative constituent instruments. Financial assets are derecognised only when the contractual rights to the cash ﬂows from the assets expire or if the group transfers substantially all the risks and rewards of ownership to another party. Financial liabilities are derecognised when the group’s obligations are discharged, cancelled or have expired. The group’s non-derivative ﬁnancial liabilities comprise redeemable instruments, bank borrowings, loans from non- controlling shareholders, ﬁnance leases and trade payables, which are held at amortised cost. Note issues, bank borrowings and ﬁnance leases Redeemable instruments being US dollar and sterling note issues, bank borrowings and ﬁnance leases are classiﬁed in accordance with the substance of the relative contractual arrangements. Finance costs are charged to income on an accruals basis, using the effective interest method, and comprise, with respect to redeemable instruments, the coupon payable together with the amortisation of issuance 86 R.E.A. Holdings plc Annual Report and Accounts 2016 costs (which include any premiums payable or expected by the directors to be payable on settlement or redemption) and, with respect to bank borrowings and ﬁnance leases, the contractual rate of interest together with the amortisation of costs associated with the negotiation of, and compliance with, the contractual terms and conditions. Redeemable instruments are recorded in the accounts at their expected redemption value net of the relative unamortised balances of issuance costs. Bank borrowings and ﬁnance leases are recorded at the amounts of the proceeds received less subsequent repayments with the relative unamortised balance of costs treated as non-current receivables. Trade payables All trade payables owed by the group are non-interest bearing and are stated at their nominal value. Equity instruments Instruments are classiﬁed as equity instruments if the substance of the relative contractual arrangements evidences a residual interest in the assets of the group after deducting all of its liabilities. Equity instruments issued by the company are recorded at the proceeds received, net of direct issue costs not charged to income. The preference shares of the company are regarded as equity instruments. O v e r v e w i S t r a t e g c i r e p o r t G o v e r n a n c e G r o u p ﬁ n a n c i a l s t a t e m e n t s C o m p a n y ﬁ n a n c a i l s t a t e m e n t s N o t i c e o f A G M R.E.A. Holdings plc Annual Report and Accounts 2016 87 Group ﬁnancial statements Notes to the consolidated ﬁnancial statements 1. Critical accounting judgements and key sources of estimation uncertainty Key sources of estimation uncertainty The key sources of estimation uncertainty at the balance sheet date, which have a signiﬁcant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next ﬁnancial year, are described below. Biological assets Because of the inherent uncertainty associated with the valuation methodology used in determination of the fair value of the group’s biological assets, and the fact that choice of a different methodology could give a materially different result, the actual value of ripening FFB may differ from that estimated (see note 19). Taxes The group is subject to taxes in various jurisdictions. Uncertainties relating to certain Indonesian legislative provisions, the availability of tax losses, the future periods in which timing differences are likely to reverse and the ﬁnal determination of liabilities in respect of disputed tax items in Indonesia (see note 9) mean that tax outcomes may differ from estimates. Stone and coal interests In view of the ﬂuctuations in the market prices for stone and coal to be extracted from the group’s concessions, the carrying value of the stone and coal interests may differ from their realisable value (see note 16). In the application of the group’s accounting policies, which are set out in “Accounting policies (group)” above, the directors are required to make judgements, estimates and assumptions. Such judgements, estimates and assumptions are based on historical experience and other factors that are considered to be relevant. Actual values of assets and amounts of liabilities may differ from estimates. The judgements, estimates and assumptions are reviewed on a regular basis. Revisions to estimates are recognised in the period in which the estimates are revised. Critical judgements in applying the group’s accounting policies The following are critical judgements not being judgements involving estimations (which are dealt with below) that the directors have made in the process of applying the group’s accounting policies. Biological assets IAS 41 “Agriculture” requires the determination of the fair value of biological assets (the growing crop of FFB). No market exists for unripe FFB, so management must select an appropriate methodology to be used, together with suitable metrics, for determining fair value. The quantity of trees and the absence of accepted valuation bases for measuring the value of the ripening FFB between ﬂowering and harvest have led management to value the growing crop of FFB by reference to the formation of the oil content in the fruitlets on the FFB in the period immediately before harvest. Capitalisation of interest and other costs As described under “Property plant and equipment - plantings” in “Accounting policies (group)”, all expenditure on plantings up to maturity, including interest, is treated as an addition to such assets. The directors have determined that normally such capitalisation will cease at the end of the third ﬁnancial year following the year in which land clearing commenced. At this point, plantings should produce a commercial harvest and accordingly be treated as having been brought into use for the purposes of IAS16 “Property plant and equipment” and of IAS 23 “Borrowing costs”. However, crop yields at this point may vary depending on the time of year that land clearing commenced and on climatic conditions thereafter. In speciﬁc cases, the directors may elect to extend the period of capitalisation by a further year. 88 R.E.A. Holdings plc Annual Report and Accounts 2016 2. Revenue 2016 2015 $’000 $’000 Sales of goods 77,642 87,824 Revenue from services 1,623 2,691 79,265 90,515 Other operating income 1 2 Investment revenue 1,742 259 Total revenue 81,008 90,776 In 2016, two customers accounted for respectively 72 per cent and 16 per cent of the group’s sales of agricultural goods (2015: three customers, 59 per cent, 16 per cent and 15 per cent). As stated in note 23 “Credit risk”, substantially all sales of goods are made on the basis of cash against documents or letters of credit and accordingly the directors do not consider that these sales result in a concentration of credit risk to the group. The crop of oil palm fresh fruit bunches for 2016 amounted to 468,371 tonnes (2015: 600,741 tonnes). The fair value of the crop of fresh fruit bunches was $49.7 million (2015: $45.1 million), based on the price formulae determined by the Indonesian government for purchases of fresh fruit bunches from smallholders. 3. Segment information In the table below, the group’s sales of goods are analysed by geographical destination and the carrying amount of net assets is analysed by geographical area of asset location. The group operates in two segments: the cultivation of oil palms and stone and coal operations. In 2016 and 2015, the latter did not meet the quantitative thresholds set out in IFRS 8 “Operating segments” and, accordingly, no analyses are provided by business segment. 2016 2015* $’m $’m Sales by geographical destination: Indonesia 79.3 90.5 Rest of World – – 79.3 90.5 Carrying amount of net assets by geographical area of asset location: UK, Continental Europe and Singapore 56.0 58.0 Indonesia 253.6 237.9 309.6 295.9 * Restated - see Accounting policies (group) 4. Agricultural produce inventory movement The net gain / (loss) arising from changes in fair value of agricultural produce inventory represents the movement in the fair value of that inventory less the amount of the movement in such inventory at historic cost (which is included in cost of sales). O v e r v e w i S t r a t e g c i r e p o r t G o v e r n a n c e G r o u p ﬁ n a n c i a l s t a t e m e n t s C o m p a n y ﬁ n a n c a i l s t a t e m e n t s N o t i c e o f A G M R.E.A. Holdings plc Annual Report and Accounts 2016 89 Group ﬁnancial statements Notes to the consolidated ﬁnancial statements continued 5. Loss before tax 2016 2015* $’000 $’000 Salient items charged / (credited) in arriving at loss before tax Administrative expenses (see below) 11,987 11,702 Movement in inventories (at historic cost) (313) 1,937 Amounts provided against inventories 73 497 Movement in fair value of growing produce 68 146 Operating lease rentals 373 234 Amortisation of intangible assets 74 – Depreciation of property, plant and equipment 20,453 21,097 Amortisation of prepaid operating lease rentals 432 579 Administrative expenses Net foreign exchange losses 1,290 818 Net credit for additional pension contributions (see note 37) – (2,267) Loss on disposal of property, plant and equipment 12 49 Indonesian operations 9,621 11,556 Head office 5,377 6,160 16,300 16,316 Amount included as additions to property, plant and equipment (4,313) (4,614) 11,987 11,702 * Restated - see Accounting policies (group) Amounts payable to the company’s auditor The amount payable to Deloitte LLP for the audit of the company’s ﬁnancial statements was $149,000 (2015: $180,000). Amounts payable to Deloitte LLP for the audit of accounts of subsidiaries of the company pursuant to legislation were $17,000 (2015: $24,000). Amounts payable to Deloitte LLP for other services were $8,000 (2015: $10,000) for the provision of certiﬁcates of group compliance with covenants under certain debt instruments (being certiﬁcates that those instruments require to be provided by the company’s auditor) and for group accountancy services. Amounts payable to afﬁliates of Deloitte LLP for the audit of subsidiaries’ ﬁnancial statements were $174,000 (2015: $195,000) and for other services to subsidiaries were $nil (2015: $95,000). 2016 2015* $’000 $’000 Earnings before interest, tax, depreciation and amortisation Operating loss (5,026) (6,553) Depreciation and amortisation 20,959 21,676 15,933 15,123 * Restated - see Accounting policies (group) 90 R.E.A. Holdings plc Annual Report and Accounts 2016 6. Staff costs, including directors 2016 2015 Number Number Average number of employees (including executive directors): Agricultural – permanent 5,501 5,333 Agricultural – temporary 2,868 2,991 Head office 11 9 8,380 8,333 $’000 $’000 Their aggregate remuneration comprised: Wages and salaries 31,825 35,893 Social security costs 700 807 Pension costs 1,493 (728) 34,018 35,972 Details of the remuneration of directors are shown in the “Directors’ remuneration report”. 7. Investment revenues 2016 2015 $’000 $’000 Interest on bank deposits 44 62 Other interest income 1,698 197 1,742 259 8. Finance costs 2016 2015 $’000 $’000 Interest on bank loans and overdrafts 12,617 8,130 Interest on US dollar notes 2,899 2,716 Interest on sterling notes 5,184 5,042 Interest on other loans 273 – Change in value of sterling notes arising from exchange fluctuations (10,470) (2,694) Movements relating to derivative financial instruments – 1,685 Change in value of loans arising from exchange fluctuations 1,378 (4,946) Other finance charges 251 887 12,132 10,820 Amount included as additions to property, plant and equipment (6,127) (4,869) 6,005 5,951 Amounts included as additions to property, plant and equipment and construction in progress arose on borrowings applicable to the Indonesian operations and reﬂected a capitalisation rate of 22.0 per cent (2015: 27.3 per cent); there is no directly related tax relief. O v e r v e w i S t r a t e g c i r e p o r t G o v e r n a n c e G r o u p ﬁ n a n c i a l s t a t e m e n t s C o m p a n y ﬁ n a n c a i l s t a t e m e n t s N o t i c e o f A G M R.E.A. Holdings plc Annual Report and Accounts 2016 91 Group ﬁnancial statements Notes to the consolidated ﬁnancial statements continued 9. Tax 2016 2015* $’000 $’000 Current tax: UK corporation tax 1 – Overseas withholding tax 1,604 1,467 Foreign tax 38 50 Foreign tax - prior year 3 1,778 Total current tax 1,646 3,295 Deferred tax: Current year 373 (2,987) Prior year – 378 Total deferred tax 373 (2,609) Total tax 2,019 686 * Restated - see Accounting policies (group) Taxation is provided at the rates prevailing for the relevant jurisdiction. For Indonesia, the current and deferred taxation provision is based on a tax rate of 25 per cent (2015: 25 per cent) and for the United Kingdom, the taxation provision reﬂects a corporation tax rate of 20 per cent (2015: 20.25 per cent) and a deferred tax rate of 19 per cent (2015: 20 per cent). The tax charge for the year can be reconciled to the loss per the consolidated income statement as follows: 2016 2015* $’000 $’000 Loss before tax (9,289) (12,245) Notional tax at the UK standard rate of 20 per cent (2015: 20.25 per cent) (1,858) (2,480) Tax effect of the following items: Interest not deductible 2,475 – Other expenses not deductible 702 897 Non taxable income (29) (27) Overseas tax rates above UK standard rate (24) (637) Overseas withholding taxes, net of relief 310 608 Tax credit on loss in overseas subsidiary not recognised 381 178 Tax losses in overseas subsidiaries time expired 21 – Prior year adjustments 3 2,156 Change in rate of tax applicable to UK tax losses 49 – Additional tax credits (11) (9) Tax expense at effective tax rate for the year 2,019 686 * Restated - see Accounting policies (group) A regulation issued in 2015 by the Indonesian Ministry of Finance restricts the amount of ﬁnance charges that may be deducted from company proﬁts for taxation purposes by reference to the debt equity ratio of the entity concerned. Where equity is negative, no deduction of ﬁnance charges is permitted. The company’s principal subsidiary in Indonesia has been involved for several years in two tax disputes with the tax authorities. The principal case relates to a disputed assessment with respect to mark-to-market losses recorded in 2008 by a subsidiary on its cross-currency interest rate swaps. In May 2014 the Jakarta Tax Court found in favour of the subsidiary, following which the disputed tax amounting to some Indonesian rupiah 103 billion ($7.4 million) was refunded in full. 92 R.E.A. Holdings plc Annual Report and Accounts 2016 9. Tax - continued The tax authorities have the right to apply to the Supreme Court of Indonesia for a judicial review of the Tax Court decision. This comprises an examination of the reasoning of the lower court judges, consideration of the consistency of the judgement with the evidence presented and with the relevant law, and consideration of any new evidence submitted by either party which could have a bearing on the matter. It is the normal practice of the tax authorities to ﬁle such an appeal in cases which have been decided by the lower court in favour of the taxpayer. In February 2015, the subsidiary was notiﬁed that the tax authorities ﬁled an appeal for judicial review with the Supreme Court of Indonesia and the subsidiary ﬁled its counter submission in February 2015 within the prescribed time limit. The group’s tax advisers, who have acted on all aspects of the appeal stages, have advised the directors of the sound merits of the subsidiary’s case. The second tax dispute relates to a disputed 2006 assessment and was decided by the Jakarta Tax Court in 2012. Those elements of the judgement in favour of the subsidiary have been appealed by the tax authorities to the Supreme Court for judicial review. It had been the practice of the tax authorities to withhold interest on refunds of disputed tax until the outcome of judicial review by the Supreme Court has been handed down. However, a regulation issued in late 2015 now permits taxpayers to apply for such interest following receipt of the disputed tax refunds. Following the Tax Court decisions, the subsidiary applied to the tax ofﬁce for the payment to it of interest of up to 48 per cent of the disputed tax that had been refunded. This amounted to some Indonesian rupiah 52 billion ($3.9 million) in aggregate. During discussions in 2016 with the local tax ofﬁce, the tax ofﬁcials rejected the subsidiary’s claim for interest on that part of the repayment which represented a refund to the subsidiary of the tax which had been voluntarily paid at the time of the disputed assessment. The subsidiary disagrees with this interpretation and is considering an appeal. In the meanwhile, undisputed interest (equivalent to $1.1 million) was repaid during 2016 and has been credited to income; only this amount has been recognised in these ﬁnancial statements. 10. Dividends 2016 2015 $’000 $’000 Amounts recognised as distributions to equity holders: Preference dividends of 9p per share (2015: 9p per share) 7,402 8,461 Ordinary dividends (2015: 7.75p per share) – 4,168 7,402 12,629 11. Loss per share 2016 2015* $’000 $’000 Basic and diluted loss for the purpose of calculating loss per share ** (17,800) (20,912) ’000 ’000 Weighted average number of ordinary shares for the purpose of basic and diluted loss per share 36,950 35,455 * Restated - see Accounting policies (group) ** Being net loss attributable to ordinary shareholders O v e r v e w i S t r a t e g c i r e p o r t G o v e r n a n c e G r o u p ﬁ n a n c i a l s t a t e m e n t s C o m p a n y ﬁ n a n c a i l s t a t e m e n t s N o t i c e o f A G M R.E.A. Holdings plc Annual Report and Accounts 2016 93 Group ﬁnancial statements Notes to the consolidated ﬁnancial statements continued 12. Goodwill 2016 2015 $’000 $’000 Beginning of year 12,578 12,578 End of year 12,578 12,578 The goodwill of $12.6 million arose from the acquisition by the company in 2006 of a non-controlling interest in the issued ordinary share capital of Makassar Investments Limited, the parent company of REA Kaltim, for a consideration of $19.0 million and has an indeﬁnite life. The goodwill is reviewed for impairment as explained under “Goodwill” in “Accounting policies (group)”. Accordingly, the oil palm business in Indonesia is regarded as the cash generating unit to which the goodwill relates. The recoverable amount of the goodwill has been assessed by comparing the carrying value per planted hectare of the group’s oil palm plantations with publicly disclosed valuations conducted recently of Indonesian plantations held by other groups. Based upon their review, the directors have concluded that no impairment of goodwill is required. 13. Intangible assets 2016 $’000 Beginning of year – Transfers from property, plant and equipment 4,123 Transfers from deferred charges 1,142 End of year 5,265 Amortisation: Beginning of year – Additions 74 Transfers from property, plant and equipment 124 Transfers from deferred charges 891 End of year 1,089 Carrying amount: Beginning of year – End of year 4,176 Computer software that is not integral to an item of property, plant and equipment is recognised separately as an intangible asset. 94 R.E.A. Holdings plc Annual Report and Accounts 2016 14. Property, plant and equipment Plantings Buildings Plant, Construction Total and structures equipment in progress and vehicles $’000 $’000 $’000 $’000 $’000 Cost: At 1 January 2015 (restated) 178,420 213,898 104,431 12,510 509,259 Opening balance adjustment (363) 363 – – – Additions 9,411 15,629 1,897 5,412 32,349 Exchange differences – – (36) – (36) Disposals – (1) (2,530) – (2,531) Transfers from plantings (8,202) 8,202 – – – Transfers to / (from) construction in progress – 1,708 6,281 (7,989) – Transfers to current receivables (345) – – (2) (347) At 31 December 2015 (restated) 178,921 239,799 110,043 9,931 538,694 Additions 7,104 18,082 2,173 3,778 31,137 Exchange differences – – (63) – (63) Disposals (24) (16) (439) – (479) Transfers to / (from) construction in progress – 1,008 82 (1,090) – Transfers to intangible assets – – (124) (3,999) (4,123) Transfers to deferred charges – – – (3,025) (3,025) Transfers to current receivables (4) – – – (4) Transfers to income statement (141) – – – (141) At 31 December 2016 185,856 258,873 111,672 5,595 561,996 Accumulated depreciation: At 1 January 2015 (restated) – 16,291 33,872 – 50,163 Opening balance adjustment – 1,682 – – 1,682 Charge for year 8,689 4,061 6,898 – 19,648 Exchange differences – – (29) – (29) Disposals – (1) (1,619) – (1,620) At 31 December 2015 (restated) 8,689 22,033 39,122 – 69,844 Charge for year 9,082 5,076 6,608 – 20,766 Transfers to intangible assets – – (124) – (124) Disposals – (11) (401) – (412) At 31 December 2016 17,771 27,098 45,205 – 90,074 Carrying amount: At 31 December 2016 168,085 231,775 66,467 5,595 471,922 At 31 December 2015 170,232 217,766 70,921 9,931 468,850 At 1 January 2015 178,420 197,607 70,559 12,510 459,096 The depreciation charge for the year includes $313,000 (2015: $233,000) which has been capitalised as part of additions to plantings. In accordance with the amendments to IAS 41: Agriculture and IAS 16: Property, plant and equipment, the assets previously disclosed as ‘Biological assets’ have been transferred as follows. Growing produce, which is still classiﬁed as a biological asset, is now disclosed in current assets. As regards the balance, the group has adopted, as permitted by the amended provisions of IAS 41, the fair value as at 31 December 2014 as deemed cost. The assets concerned comprise oil palm trees, nurseries and the ﬁeld infrastructural improvements relating to the planting of trees. This balance of deemed cost has been allocated by separating the infrastructural improvements at estimated depreciated current cost and treating the remaining balance as attributable to the oil palm trees (plantings). At the balance sheet date, the book value of ﬁnance leases included in property, plant and equipment was $nil (2015: $nil). At the balance sheet date, the group had entered into contractual commitments for the acquisition of property, plant and equipment amounting to $1.4 million (2015: $1.2 million). R.E.A. Holdings plc Annual Report and Accounts 2016 95 O v e r v e w i S t r a t e g c i r e p o r t G o v e r n a n c e G r o u p ﬁ n a n c i a l s t a t e m e n t s C o m p a n y ﬁ n a n c a i l s t a t e m e n t s N o t i c e o f A G M Group ﬁnancial statements Notes to the consolidated ﬁnancial statements continued 14. Property, plant and equipment - continued At the balance sheet date, property, plant and equipment of $298.6 million had been charged as security for bank loans. 15. Prepaid operating lease rentals 2016 2015 $’000 $’000 Cost: Beginning of year 38,536 37,286 Additions 367 1,250 Exchange differences – – End of year 38,903 38,536 Accumulated amortisation: Beginning of year 4,241 3,407 Opening balance adjustment – 112 Exchange differences – – Charge for year 432 722 End of year 4,673 4,241 Carrying amount: End of year 34,230 34,295 Beginning of year 34,295 33,879 The amortisation charge for the year includes $nil (2015: $143,000) which has been capitalised as part of the additions to plantings. Balances classiﬁed as prepaid operating lease rentals represent amounts invested in land utilised for the purpose of the plantation operations in Indonesia. At 31 December 2015, certiﬁcates of HGU had been obtained in respect of areas covering 70,584 hectares (2015: 70,584 hectares). An HGU is effectively a government lease entitling the lessee to utilise the land leased for agricultural and related purposes. Retention of an HGU is subject to payment of annual land taxes in accordance with prevailing tax regulations. HGUs are normally granted for an initial term of 30 years and are renewable on expiry of such term. At the balance sheet date, prepaid operating lease rentals of $15.2 million had been charged as security for bank loans (see note 24). 16. Stone and coal interests 2016 2015 $’000 $’000 Stone company 17,435 17,435 Coal companies 22,773 20,903 Provision against loan to coal companies (3,000) (3,000) 37,208 35,338 Interest bearing loans have been made to two Indonesian companies that, directly and through a further Indonesian company, own rights in respect of certain stone and coal concessions in East Kalimantan Indonesia together, with related balances; such loans are repayable not later than 2020. Pursuant to the arrangements between the group and its local partners, the company’s subsidiary, KCC Resources Limited (“KCC”), has the right, subject to satisfaction of local regulatory requirements, to acquire the three concession holding companies at original cost on a basis that will give the group (through KCC) 95 per cent ownership with the balance of 5 per cent remaining owned by the local partners. Under current regulations such rights cannot be exercised. In the meantime, the concession holding companies are being ﬁnanced by loan funding from the group and no dividends or other distributions or payments may be paid or made by the concession holding companies to the local partners without the prior agreement of KCC. A guarantee has been executed by the stone concession company in respect of the amounts owed to the group by the two coal concession companies. 96 R.E.A. Holdings plc Annual Report and Accounts 2016 16. Stone and coal interests - continued The directors have carried out a recoverability assessment of the loans by which the group is funding the concession holding companies. Each concession holding company has been treated as a cash-generating unit and its recoverable amount has been estimated on the basis of value in use, applying an appropriate discount rate and, where applicable, taking into account cross guarantees. No impairment charge has been considered necessary in the 2016 consolidated income statement (2015: $nil). 17. Subsidiaries A list of the subsidiaries, including the name, country of incorporation and proportion of ownership is given in note (iv) to the company’s individual ﬁnancial statements. 18. Inventories 2016 2015 $’000 $’000 Agricultural produce 6,921 4,221 Engineering and other operating inventory 8,846 6,969 15,767 11,190 Agricultural produce inventory is carried at fair value less selling costs. Engineering and other operating inventory is carried at cost less any amounts provided against which approximates its fair value. Inventory with a carrying value of $625,000 is subject to a floating charge as security for a bank loan. At the balance sheet date, inventories of $13.5 million had been charged as security for bank loans (see note 24). 19. Biological assets Biological assets comprise the growing produce on the group's oil palms and are carried at fair value. The basis of valuation is set out under “Biological assets” in Accounting policies (group). Biological assets are classiﬁed as level 3 in the fair value hierarcy prescribed by IFRS 7 “Financial instruments: Disclosures” as no transactions occur in growing produce prior to harvest. 2016 2015* $’000 $’000 Beginning of year 2,105 2,251 Fair value loss taken to income (68) (146) End of year 2,037 2,105 * Restated - see Accounting policies (group) At the balance sheet date, biological assets of $2.0 million had been charged as security for bank loans (see note 24). 20. Investments 2016 2015 $’000 $’000 R.E.A. Holdings plc 7.5 per cent US dollar notes 2022 9,880 – REA Finance B.V. 8.75 per cent guaranteed sterling notes 2020 – 2,158 9,880 2,158 O v e r v e w i S t r a t e g c i r e p o r t G o v e r n a n c e G r o u p ﬁ n a n c i a l s t a t e m e n t s C o m p a n y ﬁ n a n c a i l s t a t e m e n t s N o t i c e o f A G M R.E.A. Holdings plc Annual Report and Accounts 2016 97 Group ﬁnancial statements Notes to the consolidated ﬁnancial statements continued 20. Investments - continued On 24 November 2016 the company issued $24,035,218 nominal of 7.5 per cent dollar notes 2022 by way of an exchange offer and placing at 100 per cent of their principal amount. $10.0 million of such notes were acquired by R.E.A. Services Limited (“REAS”) (a wholly owned subsidiary of the company) of which $120,000 were sold prior to the year end at the purchase price. The £1.5 million nominal of REA Finance B.V. (“REAF”) 8.75 per cent guaranteed sterling notes 2020 (“the 2020 sterling notes”) acquired at 97 per cent of their principal amount during 2015 were sold on 6 July 2016 at the purchase price. The company has designated the above holdings as available-for-sale investments carried at cost. The directors consider that the fair value of the investments approximates cost. The investments are quoted on the London Stock Exchange. 21. Trade and other receivables 2016 2015 $’000 $’000 Due from sale of goods 10,269 5,233 Prepayments and advance payments 8,703 7,035 Advance payment of taxation 15,236 9,883 Deposits and other receivables 8,346 6,952 42,554 29,103 Sales of goods are normally made on a cash against documents basis with an average credit period (which takes account of customer deposits as disclosed in note 29) of 11 days (2015: 7 days). The directors consider that the carrying amount of trade and other receivables approximates their fair value. At the balance sheet date, trade and other receivables of $14.2 million had been charged as security for bank loans (see note 24). 22. Cash and cash equivalents Cash and cash equivalents comprise cash held by the group and short-term bank deposits. The Moody’s prime rating of short term bank deposits amounting to $24.6 million (2015: $15.8 million) is set out in note 23 under the heading “Credit risk”. At 31 December 2016, $0.1 million of total bank deposits were subject to charges. 23. Financial instruments Capital risk management The group manages as capital its debt, which includes the borrowings disclosed in notes 24 to 26 and note 29, cash and cash equivalents and equity attributable to shareholders of the parent, comprising issued ordinary and preference share capital, reserves and retained earnings as disclosed in notes 30 to 33. The group is not subject to externally imposed capital requirements. The directors’ policy in regard to the capital structure of the group is to seek to enhance returns to holders of the company's ordinary shares by meeting a proportion of the group's funding needs with prior ranking capital and to constitute that capital as a mix of preference share capital and borrowings from ﬁnancial institutions and the public debt market, in proportions which suit, and as respects borrowings that have a maturity proﬁle which suits, the assets that such capital is ﬁnancing. In so doing, the directors regard the company’s preference share capital as permanent capital and then seek to structure the group's borrowings so that shorter term bank debt is used only to ﬁnance working capital requirements while debt funding for the group's development programme is sourced from issues of listed debt securities and medium term borrowings from ﬁnancial institutions. 98 R.E.A. Holdings plc Annual Report and Accounts 2016 23. Financial instruments - continued Net debt to equity ratio Net debt, equity and the net debt to equity ratio at the balance sheet date were as follows: 2016 2015 $’000 $’000 Debt * 229,702 212,430 Cash and cash equivalents (24,593) (15,758) Net debt 205,109 196,672 * Being the book value of long and short term borrowings as detailed in the table below under “Fair value of ﬁnancial instruments”. Equity (including non-controlling interests) 309,550 293,822 Net debt to equity ratio 66.3% 66.9% Signiﬁcant accounting policies Details of the signiﬁcant accounting policies and methods adopted, including the criteria for recognition, the basis of measurement and the basis on which income and expenses are recognised, in respect of each class of ﬁnancial instrument are disclosed in “Accounting policies (group)” above. Categories of ﬁnancial instruments Non-derivative ﬁnancial assets as at 31 December 2016 comprised loans, investments and receivables (including stone and coal interests) and cash and cash equivalents amounting to $90.6 million (2015: $67.1 million). Non-derivative ﬁnancial liabilities as at 31 December 2016 comprised liabilities at amortised cost amounting to $280.6 million (2015: $201.0 million). As explained in note 16, conditional arrangements exist for the group to acquire at historic cost the shares in the Indonesian companies owning rights over certain stone and coal concessions. The directors have attributed a fair value of zero to these interests in view of the prior claims of loans to the concession owning companies and the present stage of the operations. Financial risk management objectives The group manages the ﬁnancial risks relating to its operations through internal reports which permit the degree and magnitude of such risks to be assessed. These risks include market risk, credit risk and liquidity risk. The group seeks to reduce risk by using, where appropriate, derivative ﬁnancial instruments to hedge risk exposures. The use of derivative ﬁnancial instruments is governed by group policies set by the board of directors of the company. The board also sets policies on foreign exchange risk, interest rate risk, credit risk, the use of non-derivative ﬁnancial instruments, and the investment of excess liquidity. Compliance with policies and exposure limits is reviewed on a continuous basis. The group does not enter into or trade ﬁnancial instruments, including derivative ﬁnancial instruments, for speculative purposes. Market risk The ﬁnancial market risks to which the group is primarily exposed are those arising from changes in interest rates and foreign currency exchange rates. The group’s policy as regards interest rates is to borrow whenever economically practicable at ﬁxed interest rates, but where borrowings are raised at ﬂoating rates the directors would not normally seek to hedge such exposure. The 2015/17 sterling notes, the 2020 sterling notes and the US dollar notes carry interest at ﬁxed rates of, respectively, 9.5, 8.75 and 7.5 per cent per annum. In addition, the company’s preference shares carry an entitlement to a ﬁxed annual dividend of 9 pence per share. O v e r v e w i S t r a t e g c i r e p o r t G o v e r n a n c e G r o u p ﬁ n a n c i a l s t a t e m e n t s C o m p a n y ﬁ n a n c a i l s t a t e m e n t s N o t i c e o f A G M R.E.A. Holdings plc Annual Report and Accounts 2016 99 Group ﬁnancial statements Notes to the consolidated ﬁnancial statements continued 23. Financial instruments - continued Interest is payable on drawings under Indonesian rupiah term loan facilities varying between 1.2 per cent and 4.8 per cent (2015: between 3.8 per cent and 4.8 per cent) above the Jakarta Inter Bank Offer Rate. In addition, the interest rate formula on certain loans includes an allowance for the bankers’ cost of funds. A one per cent increase in interest applied to those ﬁnancial instruments shown in the table below entitled “Fair value of ﬁnancial instruments” as held at 31 December 2016 which carry interest at ﬂoating rates would have resulted over a period of one year in a pre-tax proﬁt (and equity) decrease of approximately $1.1 million (2015: pre-tax proﬁt (and equity) decrease of $1.1 million). The group regards the US dollar as the functional currency of most of its operations and formerly sought to ensure that, as respects that proportion of its investment in the operations that was met by borrowings, it had no material currency exposure against the US dollar. Accordingly, where borrowings were incurred in a currency other than the US dollar, the group endeavoured to cover the resultant currency exposure by way of a debt swap or other appropriate currency hedge. The receipt by REA Kaltim during 2011 of an Indonesian tax assessment on its 2008 proﬁts seeking to disallow, for tax purposes, losses on certain debt swaps called into question the wisdom of entering into currency hedges. In the light of the decision by the Jakarta Tax Court in 2014 in REA Kaltim’s favour regarding the disputed losses, the directors have considered whether the group should revert to its previous policy of hedging non-dollar exposures against the dollar. They continue to believe that, given that tax law in Indonesia is uncertain and that precedent is often not taken into account in Indonesian judicial decisions, the group will be best served going forward by simply maintaining a balance between its borrowings in different currencies and avoiding any new currency hedging transactions. Accordingly, the group will in future regard some exposure to currency risk on its non-dollar borrowing as an inherent and unavoidable risk of its business. Whilst interest rates payable on Indonesian rupiah borrowings are higher than on dollar borrowings, the directors believe that such higher rates reﬂect the fact that the Indonesian rupiah is a weak currency and that the higher cost that such borrowings entail is likely over time to be offset by exchange gains on the borrowings concerned. The group has never covered, and does not intend in future to cover, the currency exposure in respect of the component of the investment in its operations that is ﬁnanced with sterling denominated shareholder capital. The group’s policy is to maintain a cash balance in sterling sufﬁcient to meet its projected sterling expenditure for a period of between six and twelve months and a limited cash balance in Indonesian rupiah. At the balance sheet date, the group had non US dollar monetary items denominated in pounds sterling and Indonesian rupiah. A 5 per cent strengthening of the pound sterling against the US dollar would have resulted in a loss dealt with in the consolidated income statement and equity of $2.3 million on the net sterling denominated non-derivative monetary items (2015: loss $2.2 million). A 5 per cent strengthening of the Indonesian rupiah against the US dollar would have resulted in a loss dealt with in the consolidated income statement and equity of $6.9 million on the net Indonesian rupiah denominated, non-derivative monetary items (2015: loss of $5.0 million). Credit risk Credit risk refers to the risk that a counterparty will default on its contractual obligations resulting in ﬁnancial loss to the group. The directors consider that the group is not exposed to any major concentrations of credit risk. At 31 December 2016, 87 per cent of bank deposits were held with banks with a Moody’s prime rating of P1 and 13 per cent with a bank with a Moody’s prime rating of P3. Substantially all sales of goods are made on the basis of cash against documents or letters of credit. At the balance sheet date, no trade receivables were past their due dates, nor were any impaired; accordingly no bad debt provisions were required. The maximum credit risk exposures in respect of the group’s ﬁnancial assets at 31 December 2016 and 31 December 2015 equal the amounts reported under the corresponding balance sheet headings. Liquidity risk Ultimate responsibility for liquidity risk management rests with the board of directors of the company, which has established an appropriate framework for the management of the group’s short, medium and long-term funding and liquidity requirements. 100 R.E.A. Holdings plc Annual Report and Accounts 2016 23. Financial instruments - continued Within this framework, the board continuously monitors forecast and actual cash ﬂows and endeavours to maintain adequate liquidity in the form of cash reserves and borrowing facilities while matching the maturity proﬁles of ﬁnancial assets and liabilities. Undrawn facilities available to the group at balance sheet date are disclosed in note 24. The board reviews the cash forecasting models for the operation of the plantations and compares these with the forecast outﬂows for debt obligations and projected capital expenditure programmes for the plantations, applying sensitivities to take into account perceived major uncertainties. In their review, the directors place the greatest emphasis on the cash ﬂow of the ﬁrst two years. Non-derivative ﬁnancial instruments The following tables detail the contractual maturity of the group’s non-derivative ﬁnancial liabilities. The tables have been drawn up based on the undiscounted amounts of the group’s ﬁnancial liabilities based on the earliest dates on which the group can be required to discharge those liabilities. The table includes liabilities for both principal and interest. Weighted Under Between Over 2 Total average 1 year 1 and 2 years interest rate years 2016 % $’000 $’000 $’000 $’000 Bank loans 11.0 38,269 15,455 83,210 136,934 US dollar notes - repayable 2017 8.5 21,813 – – 21,813 US dollar notes - repayable 2022 8.5 901 1,803 30,344 33,048 Sterling notes - repayable 2015/2017 10.4 11,231 – – 11,231 Sterling notes - repayable 2020 10.1 3,434 3,436 45,094 51,964 Non-controlling shareholder loans - US dollar 6.0 460 3,026 5,593 9,079 Non-controlling shareholder loans - sterling 10.6 504 2,101 3,703 6,308 Trade and other payables, and customer deposits 31,385 – – 31,385 107,997 25,821 167,944 301,762 Weighted Under Between Over 2 Total average 1 year 1 and 2 years interest rate years 2015 % $’000 $’000 $’000 $’000 Bank loans 7.3 59,316 27,432 48,068 134,816 US dollar notes 8.5 2,551 35,286 – 37,837 Sterling notes - repayable 2015/2017 10.4 1,175 13,532 – 14,707 Sterling notes - repayable 2020 10.1 4,140 4,138 58,370 66,648 Trade and other payables, and customer deposits 15,966 – – 15,966 83,148 80,388 106,438 269,974 At 31 December 2016, the group’s non-derivative ﬁnancial assets (other than receivables) comprised cash and deposits of $24.6 million (2015: $15.8 million) carrying a weighted average interest rate of nil per cent (2015: 1.4 per cent) all having a maturity of under one year, and stone and coal interests of $37.2 million (2015: $35.3 million) details of which are given in note 16. Fair value of ﬁnancial instruments The table below provides an analysis of the book values and fair values of ﬁnancial instruments, excluding receivables and trade payables and Indonesian coal interests, as at the balance sheet date. Cash and deposits, US dollar notes and sterling notes are classiﬁed as level 1 in the fair value hierarchy prescribed by IFRS 7 “Financial instruments: disclosures”. (Level 1 includes instruments where inputs to the fair value measurements are quoted prices in active markets). All other ﬁnancial instruments are classiﬁed as level 3 in the fair value hierarchy. (Level 3 includes instruments which have no observable market data to provide inputs to the fair value measurements). No reclassiﬁcations between levels in the fair value hierarchy were made during 2016 (2015: none). O v e r v e w i S t r a t e g c i r e p o r t G o v e r n a n c e G r o u p ﬁ n a n c i a l s t a t e m e n t s C o m p a n y ﬁ n a n c a i l s t a t e m e n t s N o t i c e o f A G M R.E.A. Holdings plc Annual Report and Accounts 2016 101 Group ﬁnancial statements Notes to the consolidated ﬁnancial statements continued 23. Financial instruments - continued 2016 2016 2015 2015 Book value Fair value Book value Fair value $’000 $’000 $’000 $’000 Cash and deposits* 24,593 24,593 15,758 15,758 Bank debt - within one year* (28,628) (28,628) (50,906) (50,906) Bank debt - after more than one year* (97,771) (97,771) (72,034) (72,034) Loans from non-controlling shareholder - after more than one year* (12,469) (12,469) – – US dollar notes - repayable 2017** (20,048) (20,206) (33,637) (31,290) US dollar notes - repayable 2022** (23,646) (24,035) – – Sterling notes - repayable 2015/2017** (10,103) (10,143) (10,623) (12,346) Sterling notes - repayable 2020** (37,037) (38,553) (45,230) (45,826) Net debt (205,109) (207,212) (196,672) (196,644) * Bearing interest at ﬂoating rates ** Bearing interest at ﬁxed rates The fair values of cash and deposits and bank debt approximate their carrying values since these carry interest at current market rates. The fair value of investments approximates their carrying value. The fair values of the US dollar notes and sterling notes are based on the latest prices at which those notes were traded prior to the balance sheet dates. 24. Bank loans 2016 2015 $’000 $’000 Bank loans 126,399 122,940 The bank loans are repayable as follows: On demand or within one year 28,628 50,906 Between one and two years 5,997 22,575 After two years 91,774 49,459 126,399 122,940 Amount due for settlement within 12 months (shown under current liabilities) 28,628 50,906 Amount due for settlement after 12 months 97,771 72,034 126,399 122,940 All bank loans are denominated in Indonesian rupiah (2015: denominated in US dollars $73.7 million and Indonesian rupiah $49.2 million) and are at ﬂoating rates, thus exposing the group to interest rate risk. The weighted average interest rate in 2016 was 11 per cent (2015: 7.3 per cent). Bank loans of $126.4 million (2015: $92.9 million) are secured on the land, plantations, property, plant and equipment and certain current assets owned by REA Kaltim, PT Kutai Mitra Sejahtera, PT Putra Bongan Jaya and PT Sasana Yudha Bhakti having an aggregate book value of $343 million (2015: $300 million), and are the subject of an unsecured guarantee by the company and REA Kaltim. The banks are entitled to have recourse to their security on usual banking terms. Under the terms of its bank facilities, certain plantation subsidiaries are restricted to an extent in the payment of interest on borrowings from, and on the payment of dividends to, other group companies. The directors do not believe that the applicable covenants will affect the ability of the company to meet its cash obligations. At the balance sheet date, the group had undrawn Indonesian rupiah denominated facilities of $14.3 million (2015: $21.6 million). 102 R.E.A. Holdings plc Annual Report and Accounts 2016 25. Sterling notes The sterling notes comprise £8.3 million (2015: £8.3 million) nominal of 9.5 per cent guaranteed 2015/17 sterling notes and £31.9 million (2015: £31.9 million) nominal of 8.75 per cent guaranteed 2020 sterling notes, in each case issued by the company’s subsidiary, REAF. The sterling notes are guaranteed by the company and another wholly owned subsidiary of the company, REAS, and are secured principally on unsecured loans made by REAS to Indonesian plantation operating subsidiaries of the company. Unless previously redeemed or purchased and cancelled by the issuer, the sterling notes are repayable in two instalments, £8.3 million on 31 December 2017 and £31.9 million on 31 August 2020. The repayment obligation in respect of the sterling notes of £40.2 million ($49.1 million) is carried in the balance sheet net of the unamortised balance of the note issuance costs. If a person or group of persons acting in concert obtains the right to exercise more than 50 per cent of the votes that may generally be cast at a general meeting of the company, each holder of sterling notes has the right to require that the notes held by such holder be repaid at 101 per cent of par, plus any interest accrued thereon up to the date of completion of the repayment. 26. US dollar notes The US dollar notes comprise $20.2 million (2015: $34.0 million) nominal of 7.5 per cent dollar notes 2017 (“2017 dollar notes”) and $24.0 million (2015: nil) nominal of 7.5 per cent dollar notes 2022 (“2022 dollar notes”). The 2017 dollar notes are repayable on 30 June 2017 and the 2022 dollar notes on 30 June 2022. Pursuant to proposals made in November 2016 to holders of the 2017 dollar notes, $13.8 million of such notes were exchanged on 24 November 2016 for a like amount of 2022 dollar notes, and at the same time a further $225,000 of 2022 dollar notes were issued to holders of $45,000 of 2017 dollar notes who subscribed in cash $180,000 under the top-up provisions of the exchange proposals. In addition, R.E.A. Services Limited, a wholly owned subsidiary of the company, subscribed a further $10.0 million of 2022 dollar notes pursuant to the placing. The US dollar notes are unsecured obligations of the company and are stated net of the unamortised balance of the note issuance costs. O v e r v e w i S t r a t e g c i r e p o r t G o v e r n a n c e G r o u p ﬁ n a n c i a l s t a t e m e n t s C o m p a n y ﬁ n a n c a i l s t a t e m e n t s N o t i c e o f A G M R.E.A. Holdings plc Annual Report and Accounts 2016 103 Group ﬁnancial statements Notes to the consolidated ﬁnancial statements continued 27. Deferred tax The following are the major deferred tax assets and liabilities recognised by the group and the movements thereon during the year and preceding year: Deferred tax assets / (liabilities) Plantings Other Income/ Agricultural Tax Total property, expenses* produce losses plant and and other equipment inventory $’000 $’000 $’000 $’000 $’000 $’000 At 1 January 2015 (restated) (42,630) (24,308) (8,816) (843) 8,315 (68,282) Credit/(charge) to income for the year 1,553 495 (8,069) 438 8,192 2,609 Credit to comprehensive income for the year** – – 122 – – 122 Transfers – (23) 197 – 23 197 Exchange differences*** (4,018) (662) 583 (4) (981) (5,082) At 31 December 2015 (restated) (45,095) (24,498) (15,983) (409) 15,549 (70,436) Credit/(charge) to income for the year 1,397 (280) 2,308 (207) (3,591) (373) Credit to comprehensive income for the year** – – 143 – – 143 Exchange differences*** 475 2,053 (318) 2 405 2,617 At 31 December 2016 (43,223) (22,725) (13,850) (614) 12,363 (68,049) Deferred tax assets – 43 367 8 12,363 12,781 Deferred tax liabilities (43,223) (22,768) (14,217) (622) – (80,830) At 31 December 2016 (43,223) (22,725) (13,850) (614) 12,363 (68,049) Deferred tax assets – 1 119 – 15,549 15,669 Deferred tax liabilities (45,095) (24,499) (16,102) (409) – (86,105) At 31 December 2015 (restated) (45,095) (24,498) (15,983) (409) 15,549 (70,436) * Includes income, gains or expenses recognised for reporting purposes, but not yet charged to or allowed for tax. ** Relating to actuarial losses. *** Included in the consolidated statement of comprehensive income. Deferred tax assets and liabilities at 1 January and 31 December 2015 have been restated - see Accounting policies (group). At the balance sheet date, the group had unused tax losses of $50.5 million (2015: $63.2 million) available to be applied against future proﬁts. A deferred tax asset of $12.4 million (2015: $15.6 million) has been recognised in respect of these losses, which are expected to be used in the future based on the group’s projections. A tax loss of $462,000 incurred by the group’s coal subsidiary in 2016 (2015: tax loss $122,000) has not been recognised and at the balance sheet date, tax losses aggregating $9.7 million incurred by the group’s coal subsidiary have not been recognised; these tax losses expire after ﬁve years. At the balance sheet date, the aggregate amount of temporary differences associated with undistributed earnings of subsidiaries for which deferred tax liabilities have not been recognised was $6.1 million (2015: $5.6 million). No liability has been recognised in respect of these differences because the group is in a position to control the reversal of the temporary differences and it is probable that such differences will not reverse signiﬁcantly in the foreseeable future. The temporary difference of $43.2 million (2015: $45.1 million) in respect of plantings arises from their recognition prior to 2015 at fair value in the group accounts, compared with their historic base cost in the local accounts of overseas subsidiaries. From 2015 onwards this temporary difference reverses as the plantings are depreciated over their remaining useful life. 104 R.E.A. Holdings plc Annual Report and Accounts 2016 28. Other loans and payables 2016 2015 $’000 $’000 Indonesian retirement benefit obligations 7,037 5,651 Loans from non-controlling shareholder 12,469 – 19,506 5,651 Repayable as follows: On demand or within one year (shown under current liabilities) 519 93 In the second year 5,195 186 In the third to fifth years inclusive 9,871 280 After five years 3,921 5,092 Amount due for settlement after 12 months 18,987 5,558 19,506 5,651 Liabilities by currency: Sterling 4,746 – US dollar 7,723 – Indonesian rupiah 7,037 5,651 19,506 5,651 Further details of the retirement beneﬁt obligations are set out in note 37. The directors estimate that the fair value of other loans and payables approximates their carrying value. 29. Trade and other payables 2016 2015 $’000 $’000 Trade purchases and ongoing costs 12,309 7,763 Customer deposits 14,926 6,852 Other tax and social security 3,730 2,810 Accruals 11,172 8,249 Other payables 1,289 1,351 43,426 27,025 The average credit period taken on trade payables is 30 days (2015: 33 days). The directors estimate that the fair value of trade and other payables approximates their carrying value. 30. Share capital 2016 2015 £’000 £’000 Authorised (in sterling): 85,000,000 – 9 per cent cumulative preference shares of £1 each (2015: 75,000,000) 85,000 75,000 50,000,000 – ordinary shares of 25p each (2015: 41,000,000) 12,500 10,250 97,500 85,250 O v e r v e w i S t r a t e g c i r e p o r t G o v e r n a n c e G r o u p ﬁ n a n c i a l s t a t e m e n t s C o m p a n y ﬁ n a n c a i l s t a t e m e n t s N o t i c e o f A G M R.E.A. Holdings plc Annual Report and Accounts 2016 105 Group ﬁnancial statements Notes to the consolidated ﬁnancial statements continued 30. Share capital - continued 2016 2015 $’000 $’000 Issued and fully paid (in US dollars): 63,641,232 – 9 per cent cumulative preference shares of £1 each (2015: 63,641,232) 105,414 105,414 40,509,529 – ordinary shares of 25p each (2015: 36,839,529) 17,013 15,875 132,500 – ordinary shares of 25p each held in treasury (2015: 132,500) (1,001) (1,001) 121,426 120,288 The preference shares entitle the holders thereof to payment, out of the proﬁts of the company available for distribution and resolved to be distributed, of a ﬁxed cumulative preferential dividend of 9 per cent per annum on the nominal value of the shares and to repayment, on a winding up of the company, of the amount paid up on the preference shares and any arrears of the ﬁxed dividend in priority to any distribution on the ordinary shares. Subject to the rights of the holders of preference shares, holders of ordinary shares are entitled to share equally with each other in any dividend paid on the ordinary share capital and, on a winding up of the company, in any surplus assets available for distribution among the members. Changes in share capital: • on 20 December 2016 3,670,000 ordinary shares were issued, credited as fully paid, by way of placing at £2.95 per share (total consideration £10.8 million - $13.4 million) to Mirabaud Pereire Nominees Limited and Emba Holdings Limited (a related party). The middle market price at close of business on 14 December 2016 (being the date at which the terms of issue were ﬁxed) was £2.94 There have been no changes in ordinary shares held in treasury during the year. 31. Share premium account $’000 At 1 January 2015 23,366 Issue of new preference shares (cash) 1,328 Issue of new ordinary shares (cash) 6,347 Cost of issues (358) At 31 December 2015 30,683 Issue of new ordinary shares (cash) (see note 30) 12,289 Cost of issues (387) At 31 December 2016 42,585 32. Translation reserve 2016 2015* $’000 $’000 Beginning of year (46,282) (44,324) Exchange differences on translation of foreign operations 5,222 3,575 Exchange differences on deferred tax 2,617 (5,082) Attributable to non-controlling interests (684) (451) End of year (39,127) (46,282) * Restated - see Accounting policies (group) 33. Retained earnings 2016 2015* $’000 $’000 Beginning of year 187,481 212,928 Sale of non-controlling shareholding in a subsidiary (7,416) – Loss for the year after preference dividend (18,226) (21,279) Ordinary dividend paid – (4,168) End of year 161,839 187,481 * Restated - see Accounting policies (group) 106 R.E.A. Holdings plc Annual Report and Accounts 2016 34. Non-controlling interests 2016 2015* $’000 $’000 Beginning of year 1,652 1,681 Sale of non-controlling shareholding in a subsidiary 21,401 – Share of result for the year (910) (480) Exchange translation differences 684 451 End of year 22,827 1,652 * Restated - see Accounting policies (group) DSN’s purchase of a shareholding in a subsidiary was accounted for as follows: 2016 $’000 Amount paid for shareholding 13,985 Share of net assets purchased (21,401) Loss on disposal (7,416) In connection with the acquisition by DSN of a shareholding in REA Kaltim, subsidiaries of DSN subscribed in December 2016 in cash for 77 class B shares and 1,453 class A shares in the share capital of REA Kaltim at a price of $6,864.60 per share. Also in December 2016 REA Kaltim issued to subsidiaries of DSN by way of the capitalisation of shareholder loans a further 110 class B shares and 220 class B shares at a price of $6,864.60 per share. 35. Reconciliation of operating loss to operating cash ﬂows 2016 2015* $’000 $’000 Operating loss (5,026) (6,553) Amortisation of intangible assets 74 – Depreciation of property, plant and equipment 20,766 19,648 (Increase) / decrease in fair value of agricultural produce inventory (632) 1,147 Amortisation of prepaid operating lease rentals 432 722 Amortisation of sterling and US dollar note issue expenses 584 275 Loss on disposal of property, plant and equipment 12 49 Cumulative loss on termination of hedging contract ** – 9,002 Operating cash flows before movements in working capital 16,210 24,290 (Increase) / decrease in inventories (excluding fair value movements) (3,944) 3,844 Decrease in receivables 760 3,585 Increase in payables 13,136 6,964 Exchange translation differences (791) (1,397) Cash generated by operations 25,371 37,286 Taxes paid (2,313) (5,427) Tax refunds received 241 4,601 Interest paid (20,701) (16,397) Net cash from operating activities 2,598 20,063 * Restated - see Accounting policies (group) ** The cumulative loss on termination of hedging contract represented the cumulative prior year mark-to-market losses on the terminated hedging contract, and was a cash ﬂow offset against the $10.2 million payment on termination of the contract treated as an outﬂow under Financing activities. No additions to property, plant and equipment during the year were ﬁnanced by new ﬁnance leases (2015: $nil). O v e r v e w i S t r a t e g c i r e p o r t G o v e r n a n c e G r o u p ﬁ n a n c i a l s t a t e m e n t s C o m p a n y ﬁ n a n c a i l s t a t e m e n t s N o t i c e o f A G M R.E.A. Holdings plc Annual Report and Accounts 2016 107 Group ﬁnancial statements Notes to the consolidated ﬁnancial statements continued 36. Movement in net borrowings 2016 2015 $’000 $’000 Change in net borrowings resulting from cash flows: Decrease in cash and cash equivalents 8,874 (316) Net increase in bank borrowings (3,935) (20,706) Increase in related party borrowings (12,469) – (7,530) (21,022) Issue of sterling notes – (4,086) Issue of US dollar notes (345) – Amortisation of sterling notes expenses (318) (109) Amortisation of US dollar notes expenses (266) (165) (8,459) (25,382) Currency translation differences 2,036 (2,686) Net borrowings at beginning of year (198,686) (170,618) Net borrowings at end of year (205,109) (198,686) 37. Retirement beneﬁt obligations United Kingdom The company is the principal employer of the R.E.A. Pension Scheme (the “Scheme”) and a subsidiary company is a participating employer. The Scheme is a multi-employer contributory deﬁned beneﬁt scheme with assets held in a trustee-administered fund, which has participating employers outside the group. The Scheme is closed to new members. As the Scheme is a multi-employer scheme, in which the employers are unable to identify their respective shares of the underlying assets and liabilities (because there is no segregation of the assets), and does not prepare valuations on an IAS 19 basis, the group accounts for the Scheme as if it were a deﬁned contribution scheme. A non-IAS 19 valuation of the Scheme was last prepared, using the attained age method, as at 31 December 2014. This method had been adopted in the previous valuation as at 31 December 2011 and in earlier valuations, as it was considered the appropriate method of calculating future service beneﬁts as the Scheme is closed to new members. At 31 December 2014 the Scheme had an overall marginal surplus of assets, when measured against the Scheme’s technical provisions, of £202,000 - $315,000. The technical provisions were calculated using assumptions of an investment return of 4.35 per cent pre-retirement and 2.80 per cent post-retirement and annual increases in pensionable salaries of 3.2 per cent. The basis for the inﬂationary revaluation of deferred pensions and increases to pensions in payment was changed from the Retail Prices Index (RPI) to the Consumer Prices Index (CPI) with effect from 1 January 2011 in line with the statutory change, except that the change does not apply to pension accrual from 1 January 2006, where the RPI still applies. The rates of increase in the RPI and the CPI were assumed to be 3.2 per cent and 2.45 per cent respectively. It was further assumed that both non-retired and retired members’ mortality would reﬂect S2PXA tables (light version) at 100 per cent and that non-retired members would take on retirement the maximum cash sums permitted from 1 January 2015. Had the Scheme been valued at 31 December 2014 using the projected unit method and the same assumptions, the overall surplus would have been similar. The Scheme has agreed a statement of funding principles with the principal employer and has also agreed a schedule of contributions with participating employers covering normal contributions which are payable at a rate calculated to cover future service beneﬁts under the Scheme. 108 R.E.A. Holdings plc Annual Report and Accounts 2016 37. Retirement beneﬁt obligations - continued The Scheme had also agreed a recovery plan with participating employers which provided for recovery of the deﬁcit shown by the 31 December 2011 valuation through the payment of quarterly additional contributions over the period from 1 January 2013 to 30 September 2018. No contributions under that recovery plan were required to be made in 2016 or will be required going forward (2015: £313,400 - $475,000) and the remaining provision for such contributions was credited to the group’s 2015 income statement. The resultant net credit to administrative expenses relating to additional contributions to the Scheme pursuant to the recovery plan was as follows: 2016 2015 $’000 $’000 Release of provision relating to additional contributions paid in the year – (475) Additional contributions paid in the year – 475 Release of balance of provision relating to additional contributions no longer required – (2,267) Net credit to administrative expenses (note 5) – (2,267) The sensitivity of the surplus as at 31 December 2014 to variations in certain of the principal assumptions underlying the actuarial valuation as at that date is summarised below: Decrease in post-retirement investment returns by 0.1% Increase in base table mortality rates by 10% Increase in long term rate of mortality by 0.25% The next actuarial valuation will be made as at 31 December 2017. (Decrease) / increase in surplus $’000 (651) 1,439 (617) The company is responsible for contributions payable by other (non group) employers in the Scheme; such liability will only arise if other (non group) employers do not pay their contributions. There is no expectation of this and, therefore, no provision has been made. Indonesia In accordance with Indonesian labour laws, group employees in Indonesia are entitled to lump sum payments on retirement at the age of 55 years. The group makes a provision for such payments in its ﬁnancial statements but does not fund these with any third party or set aside assets to meet the entitlements. The provision was assessed at each balance sheet date by an independent actuary using the projected unit method. The principal assumptions used were as follows: 2016 2015 Discount rate (per cent) 8.45 9.14 Salary increases per annum (per cent) 6 6 Mortality table (Indonesia) (TM1) 111-2011 111-2011 Retirement age (years) 55 55 Disability rate (per cent of the mortality table) 10 10 O v e r v e w i S t r a t e g c i r e p o r t G o v e r n a n c e G r o u p ﬁ n a n c i a l s t a t e m e n t s C o m p a n y ﬁ n a n c a i l s t a t e m e n t s N o t i c e o f A G M R.E.A. Holdings plc Annual Report and Accounts 2016 109 Group ﬁnancial statements Notes to the consolidated ﬁnancial statements continued 37. Retirement ben eﬁt obligations - continued The movement in the provision for employee service entitlements was as follows: 2016 2015 $’000 $’000 Balance at 1 January 5,651 5,584 Current service cost 958 883 Interest expense 533 439 Actuarial loss recognised in statement of comprehensive income 571 489 Exchange 139 (569) Paid during the year (815) (1,175) Balance at 31 December (see note 28) 7,037 5,651 The amounts recognised in administrative expenses in the consolidated income statement were as follows: 2016 2015 $’000 $’000 Current service cost 958 883 Interest expense 533 439 1,491 1,322 Amount included as additions to property, plant and equipment (114) (110) 1,377 1,212 Estimated lump sum payments to Indonesian employees on retirement in 2017 are $519,000 (2016: $93,000). 38. Related party transactions Transactions between the company and its subsidiaries, which are related parties, have been eliminated on consolidation and are not disclosed in this note. Transactions between the company and its subsidiaries are dealt with in the company’s individual ﬁnancial statements. The remuneration of the directors, who are the key management personnel of the group, is set out below in aggregate for each of the categories speciﬁed in IAS 24 “Related party disclosures”. Further information about the remuneration of, and fees paid in respect of services provided by, individual directors is provided in the audited part of the “Directors’ remuneration report”. 2016 2015 $’000 $’000 Short term benefits 1,405 2,111 Post employment benefits – – Other long term benefits – – Termination benefits – – Share based payments – – 1,405 2,111 As described in note 30 ordinary shares were placed with Emba Holdings Limited on 20 December 2016. 39. Rates of exchange 2016 2016 2015 2015 Closing Average Closing Average Indonesian rupiah to US dollar 13,436 13,369 13,795 13,377 US dollar to sterling 1.2226 1.36 1.4832 1.53 40. Events after the reporting period There have been no material post balance sheet events that would require disclosure or adjustment to these ﬁnancial statements. 110 R.E.A. Holdings plc Annual Report and Accounts 2016 41. Resolution of competing rights over certain plantation areas The fully titled land areas held by SYB, a plantation subsidiary of the company, include 3,557 hectares that are the subject of third party claims in respect of the rights to coal underneath such land. On 30 December 2011, SYB entered into a conditional settlement arrangement to resolve such claims. Under this agreement, SYB has agreed to swap the 3,557 hectares the subject of the claims for 9,097 hectares of fully titled land held by another company, PT Prasetia Utama (“PU”), the whole of the issued share capital of which is to be transferred to SYB. The book value of the assets to be relinquished by SYB amounted as at 31 December 2016 to $8.6 million (2015: $8.6 million), comprising prepaid operating lease rentals of $2.6 million (2015: $2.6 million) and infrastructural improvements of $6.0 million (2015: $6.0 million). Completion has been subject to the now successful resolution of certain due diligence queries in respect of PU (in particular with regard to land titles) and the satisfaction of various Indonesian regulatory approvals, which are anticipated to be obtained during the course of 2017. 42. Contingent liabilities In furtherance of Indonesian government policy which requires the owners of oil palm plantations to develop smallholder plantations, during 2009 and 2010 PT REA Kaltim Plantations (“REA Kaltim”) and PT Sasana Yudha Bhakti (“SYB”) , both subsidiaries of the company, entered into agreements with three cooperatives to develop and manage land owned by the cooperatives as oil palm plantations. To assist with the funding of such development, the cooperatives have concluded various long term loan agreements with Bank Pembangunan Daerah Kalimantan Timur (“Bank BPD”), a regional development bank, under which the cooperatives may borrow in aggregate up to Indonesian rupiah 157 billion ($11.6 million) with amounts borrowed repayable over 14 years and secured on the lands under development (“the bank facilities”). REA Kaltim has guaranteed the obligations of two cooperatives as to payments of principal and interest under the respective bank facilities and, in addition, has committed to lend to the cooperatives any further funds required to complete the agreed development. REA Kaltim is entitled to a charge over the developments when the bank facilities have been repaid in full. SYB has guaranteed the obligations of the third cooperative on a similar basis. On maturity of the developments, the cooperatives are required to sell all crops from the developments to REA Kaltim and SYB respectively and to permit repayment of indebtedness to Bank BPD, REA Kaltim and SYB respectively out of the sale proceeds. As at 31 December 2016 the aggregate outstanding balances owing by the three cooperatives to Bank BPD amounted to Indonesian rupiah 121.4 billion ($9.0 million) (2015: Indonesian rupiah 122.6 billion - $8.9 million). 43. Operating lease commitments The group leases premises under operating leases in London, Balikpapan, Samarinda and Singapore. These leases, which are renewable, run for periods of between 6 months and 10 years, and do not include contingent rentals, or options to purchase the properties. The future minimum lease payments under operating leases are as follows: 2016 2015 $’000 $’000 Within one year 212 147 In the second to fifth year inclusive 1,062 111 After five years 996 – 2,270 258 O v e r v e w i S t r a t e g c i r e p o r t G o v e r n a n c e G r o u p ﬁ n a n c i a l s t a t e m e n t s C o m p a n y ﬁ n a n c a i l s t a t e m e n t s N o t i c e o f A G M R.E.A. Holdings plc Annual Report and Accounts 2016 111 Group ﬁnancial statements Notes to the consolidated ﬁnancial statements continued 44. Reconciliation of change in accounting policy Prior-year ﬁnancial information has had to be re-stated as a result of a change explained in Accounting policies (group). The following tables show the adjustments made accordingly to the balance sheet and income statement for the prior year. Previously Adoption of reported amended 31 December IAS 16 and 31 December 2015 IAS 41 2015 (restated) Balance sheet $’000 $’000 $’000 Non-current assets Goodwill 12,578 – 12,578 Biological assets 339,091 (339,091) – Property, plant and equipment 155,642 313,208 468,850 Prepaid operating lease rentals 34,295 – 34,295 Stone and coal interests 35,338 – 35,338 Deferred tax assets 15,787 (118) 15,669 Non-current receivables 1,395 – 1,395 Total non-current assets 594,126 (26,001) 568,125 Current assets Inventories 11,190 – 11,190 Biological assets – 2,105 2,105 Investments 2,158 – 2,158 Trade and other receivables 29,103 – 29,103 Cash and cash equivalents 15,758 – 15,758 Total current assets 58,209 2,105 60,314 Total assets 652,335 (23,896) 628,439 Current liabilities Trade and other payables (27,025) – (27,025) Current tax liabilities (3,406) – (3,406) Bank loans (50,906) – (50,906) Other loans and payables (93) – (93) Total current liabilities (81,430) – (81,430) Non-current liabilities Bank loans (72,034) – (72,034) Sterling notes (55,853) – (55,853) US dollar notes (33,637) – (33,637) Deferred tax liabilities (92,168) 6,063 (86,105) Other loans and payables (5,558) – (5,558) Total non-current liabilities (259,250) 6,063 (253,187) Total liabilities (340,680) 6,063 (334,617) Net assets 311,655 (17,833) 293,822 Equity Share capital 120,288 – 120,288 Share premium account 30,683 – 30,683 Translation reserve (46,282) – (46,282) Retained earnings 204,429 (16,948) 187,481 309,118 (16,948) 292,170 Non-controlling interests 2,537 (885) 1,652 Total equity 311,655 (17,833) 293,822 112 R.E.A. Holdings plc Annual Report and Accounts 2016 44. Reconciliation of change in accounting policy - continued Previously Adoption of reported amended 31 December IAS 16 and 31 December 2014 IAS 41 2014 (restated) Balance sheet $’000 $’000 $’000 Non-current assets Goodwill 12,578 – 12,578 Biological assets 310,175 (310,175) – Property, plant and equipment 151,172 307,924 459,096 Prepaid operating lease rentals 33,879 – 33,879 Stone and coal interests 31,334 – 31,334 Deferred tax assets 8,909 – 8,909 Non-current receivables 2,749 – 2,749 Total non-current assets 550,796 (2,251) 548,545 Current assets Inventories 16,180 – 16,180 Biological assets – 2,251 2,251 Trade and other receivables 25,487 – 25,487 Cash and cash equivalents 16,224 – 16,224 Total current assets 57,891 2,251 60,142 Total assets 608,687 – 608,687 Current liabilities Trade and other payables (17,818) – (17,818) Current tax liabilities (2,581) – (2,581) Bank loans (40,326) – (40,326) Sterling notes (14,693) – (14,693) Hedging instruments (9,590) – (9,590) Other loans and payables (1,238) – (1,238) Total current liabilities (86,246) – (86,246) Non-current liabilities Bank loans (60,638) – (60,638) Sterling notes (37,713) – (37,713) US dollar notes (33,472) – (33,472) Deferred tax liabilities (77,191) – (77,191) Other loans and payables (6,802) – (6,802) Total non-current liabilities (215,816) – (215,816) Total liabilities (302,062) – (302,062) Net assets 306,625 – 306,625 Equity Share capital 112,974 – 112,974 Share premium account 23,366 – 23,366 Translation reserve (44,324) – (44,324) Retained earnings 212,928 – 212,928 304,944 – 304,944 Non-controlling interests 1,681 – 1,681 Total equity 306,625 – 306,625 O v e r v e w i S t r a t e g c i r e p o r t G o v e r n a n c e G r o u p ﬁ n a n c i a l s t a t e m e n t s C o m p a n y ﬁ n a n c a i l s t a t e m e n t s N o t i c e o f A G M R.E.A. Holdings plc Annual Report and Accounts 2016 113 Group ﬁnancial statements Notes to the consolidated ﬁnancial statements continued 44. Reconciliation of change in accounting policy - continued Previously Adoption of reported amended 31 December IAS 16 and 31 December 2015 IAS 41 2015 (restated) Income statement $’000 $’000 $’000 Revenue 90,515 – 90,515 Net gain / (loss) arising from changes in fair value of agricultural produce inventory (1,147) – (1,147) Cost of sales: Depreciation and amortisation (11,104) (10,572) (21,676) Other costs (61,302) (146) (61,448) Gross profit 16,962 (10,718) 6,244 Net gain arising from changes in fair value of biological assets 13,060 (13,060) – Other operating income 2 – 2 Distribution costs (1,097) – (1,097) Administrative expenses (11,702) – (11,702) Operating profit / (loss) 17,225 (23,778) (6,553) Investment revenues 259 – 259 Finance costs (5,951) – (5,951) Profit / (loss) before tax 11,533 (23,778) (12,245) Tax (6,631) 5,945 (686) Profit / (loss) for the year 4,902 (17,833) (12,931) Cash flow Cash flow from operating, investing and financing activities is unaffected by the change of accounting policy. 114 R.E.A. Holdings plc Annual Report and Accounts 2016 O v e r v e w i S t r a t e g c i r e p o r t G o v e r n a n c e G r o u p ﬁ n a n c i a l s t a t e m e n t s C o m p a n y ﬁ n a n c a i l s t a t e m e n t s N o t i c e o f A G M R.E.A. Holdings plc Annual Report and Accounts 2016 115 Company ﬁnancial statements Company balance sheet as at 31 December 2016 2016 2015 Note $’000 $’000 Non-current assets Investments (iv) 269,827 270,489 Deferred tax assets (v) 929 978 Non-current receivables – 51 Total non-current assets 270,756 271,518 Current assets Trade and other receivables (vi) 26,146 15,859 Cash and cash equivalents (vii) 614 278 Total current assets 26,760 16,137 Total assets 297,516 287,655 Current liabilities Trade and other payables (viii) (4,627) (1,069) US dollar notes (ix) (20,048) – Amount owed to group undertaking (x) (13,765) – Total current liabilities (38,440) (1,069) Non-current liabilities US dollar notes (ix) (23,646) (33,637) Amount owed to group undertaking (x) (38,944) (63,944) Total non-current liabilities (62,590) (97,581) Total liabilities (101,030) (98,650) Net assets 196,486 189,005 Equity Share capital (xi) 121,426 120,288 Share premium account (xii) 42,585 30,683 Exchange reserve (xii) (4,300) (4,300) Profit and loss account (xii) 36,775 42,334 Total equity 196,486 189,005 The company reported a loss in the ﬁnancial year ended 31 December 2016 of $2.2 million (2015: loss $2.8 million). Approved by the board on 27 April 2017 and signed on behalf of the board. DAVID J BLACKETT Chairman 116 R.E.A. Holdings plc Annual Report and Accounts 2016 Company ﬁnancial statements Company statement of changes in equity for the year ended 31 December 2016 Share Share Exchange Profit Total capital premium reserve and loss Note $’000 $’000 $’000 $’000 $’000 At 1 January 2015 112,974 23,366 (4,300) 57,730 189,770 Total comprehensive income (xii) – – – (2,767) (2,767) Issue of new preference shares (cash) (xi) 6,639 1,199 – – 7,838 Issue of new ordinary shares (cash) (xi) 675 6,118 – – 6,793 Dividends to preference shareholders (iii) – – – (8,461) (8,461) Dividends to ordinary shareholders (iii) – – – (4,168) (4,168) At 31 December 2015 120,288 30,683 (4,300) 42,334 189,005 Total comprehensive income (xii) – – – 1,843 1,843 Issue of new ordinary shares (cash) (xi) 1,138 11,902 – – 13,040 Dividends to preference shareholders (iii) – – – (7,402) (7,402) At 31 December 2016 121,426 42,585 (4,300) 36,775 196,486 There are no gains or losses other than those recognised in the proﬁt and loss account. O v e r v e w i S t r a t e g c i r e p o r t G o v e r n a n c e G r o u p ﬁ n a n c a i l s t a t e m e n t s C o m p a n y ﬁ n a n c i a l s t a t e m e n t s N o t i c e o f A G M R.E.A. Holdings plc Annual Report and Accounts 2016 117 Company ﬁnancial statements Company cash ﬂow statement for the year ended 31 December 2016 2016 2015 Note $’000 $’000 Net cash (outflow) / inflow from operating activities (xiv) (6,925) 427 Investing activities Interest received 7,592 6,952 Dividends and other distributions received from subsidiaries (xvi) 4,028 – Repayment of loans by subsidiary companies * – 5,242 New loans made to subsidiary companies * (8,033) (19,787) Further investment in stone and coal interests (1,860) (3,968) Net cash used in investing activities 1,727 (11,561) Financing activities Preference dividends paid (iii) (7,402) (8,461) Ordinary dividends paid (iii) – (4,168) Proceeds of issue of ordinary shares, less costs of issue 13,040 6,793 Proceeds of issue of preference shares, less costs of issue – 7,838 Proceeds of issue of US dollar notes, less costs of issue (44) – Redemption of US dollar notes (ix) (45) – New loans from subsidiary company – 8,709 Net cash from financing activities 5,549 10,711 Cash and cash equivalents Net increase / (decrease) in cash and cash equivalents 351 (423) Cash and cash equivalents at beginning of year 278 728 Effect of exchange rate changes (15) (27) Cash and cash equivalents at end of year (vii) 614 278 * Excluding amounts dealt with within “Further investment in stone and coal interests” 118 R.E.A. Holdings plc Annual Report and Accounts 2016 Company ﬁnancial statements Accounting policies (company) The accounting policies of R.E.A. Holdings plc (the “company”) are the same as those of the group, save as modiﬁed below. Financial risk Basis of accounting The company’s ﬁnancial risk is managed as part of the group’s strategy and policies as discussed in note 23 to the consolidated ﬁnancial statements. The company ﬁnancial statements are set out on pages 116 to 128. Taxation Current tax including UK corporation tax and foreign tax is provided at amounts expected to be paid (or recovered) using the tax rates and laws that have been enacted or substantially enacted by the balance sheet date. Deferred tax is calculated on the liability method. Deferred tax is provided on a non discounted basis on timing and other differences which are expected to reverse, at the rate of tax likely to be in force at the time of reversal. Deferred tax is not provided on timing differences which, in the opinion of the directors, will probably not reverse. Deferred tax assets are only recognised to the extent that it is regarded as more likely than not that there will be suitable taxable proﬁts from which the future reversal of timing differences can be deducted. Leases No assets are held under ﬁnance leases. Rentals under operating leases are charged to proﬁt and loss account on a straight-line basis over the lease term. Separate ﬁnancial statements of the company are required by the Companies Act 2006, and these have been prepared in accordance with International Financial Reporting Standards (IFRS) as endorsed for use by the European Union as at the date of approval of the ﬁnancial statements and therefore comply with Article 4 of the EU IAS Regulation. The statements are prepared under the historic cost convention except where otherwise stated in the accounting policies. By virtue of section 408 of the Companies Act 2006, the company is exempted from presenting a proﬁt and loss account. Presentational currency The ﬁnancial statements of the company are presented in US dollars which is also considered to be the currency of the primary economic environment in which the company operates. References to “$” or “dollar” in these ﬁnancial statements are to the lawful currency of the United States of America. Adoption of new and revised standards The directors do not expect that the adoption of the standards listed on page 82 in Accounting policies (group) will have a material impact on the ﬁnancial statements of the company in future periods. Investments The company’s investments in its subsidiaries are stated at cost less any provision for impairment. Impairment provisions are charged to the proﬁt and loss account. Dividends received from subsidiaries are credited to the company’s proﬁt and loss account. O v e r v e w i S t r a t e g c i r e p o r t G o v e r n a n c e G r o u p ﬁ n a n c a i l s t a t e m e n t s C o m p a n y ﬁ n a n c i a l s t a t e m e n t s N o t i c e o f A G M R.E.A. Holdings plc Annual Report and Accounts 2016 119 Company ﬁnancial statements Notes to the company ﬁnancial statements (i) Critical accounting judgements and key sources of estimation uncertainty In the application of the company’s accounting policies, which are described on page 119, the directors are required to make judgements, estimates and assumptions; these are based on historical experience and other factors that are considered to be relevant, and are reviewed on a regular basis. Actual values of assets and amounts of liabilities may differ from estimates. Revisions to estimates are recognised in the period in which the estimates are revised. In the opinion of the directors, all critical accounting judgements and key sources of estimation uncertainty relate to the group’s operations as disclosed in note 1 to the consolidated ﬁnancial statements and no such judgements or estimates apply to the company’s ﬁnancial statements (ii) Auditor’s remuneration The remuneration of the company’s auditor is disclosed in note 5 to the company’s consolidated ﬁnancial statements as required by section 494(4)(a) of the Companies Act 2006. (iii) Dividends 2016 2015 $’000 $’000 Amounts recognised as distributions to equity holders: Preference dividends of 9p per share (2015: 9p per share) 7,402 8,461 Ordinary dividends (2015: 7.75p per share) – 4,168 7,402 12,629 Investments (iv) 2016 2015 $’000 $’000 Shares in subsidiaries 91,775 91,775 Loans 178,052 178,714 269,827 270,489 The movements were as follows: Shares Loans $’000 $’000 At 1 January 2015 91,775 163,238 Repayment of loans – (5,316) Additions to loans – 23,833 Effect of exchange – (3,041) At 31 December 2015 91,775 178,714 Additions to loans – 10,846 Effect of exchange – (11,508) At 31 December 2016 91,775 178,052 120 R.E.A. Holdings plc Annual Report and Accounts 2016 The subsidiaries at the year end, together with their countries of incorporation, are listed below. Details of UK dormant subsidiaries are not shown. Class of Percentage Subsidiary Activity shares owned Makassar Investments Limited (Jersey) Sub holding company Ordinary 100 PT Cipta Davia Mandiri (Indonesia) Plantation agriculture Ordinary 80.8 PT Kartanegara Kumala Sakti (Indonesia) Plantation agriculture Ordinary 80.8 PT KCC Resources Indonesia (Indonesia) Stone and coal operations Ordinary 80.8 PT Kutai Mitra Sejahtera (Indonesia) Plantation agriculture Ordinary 80.8 PT Persada Bangun Jaya (Indonesia) Plantation agriculture Ordinary 80.8 PT Putra Bongan Jaya (Indonesia) Plantation agriculture Ordinary 80.8 PT REA Kaltim Plantations (Indonesia) Plantation agriculture Ordinary 85 PT Sasana Yudha Bhakti (Indonesia) Plantation agriculture Ordinary 80.8 KCC Resources Limited (England and Wales) Sub holding company Ordinary 100 REA Finance B.V. (Netherlands) Group finance Ordinary 100 R.E.A. Services Limited (England and Wales) Group finance and services Ordinary 100 REA Services Private Limited (Singapore) Group services Ordinary 100 The entire shareholdings in Makassar Investments Limited, KCC Resources Limited, R.E.A. Services Limited, REA Finance B.V. and REA Services Private Limited are held directly by the company. All other shareholdings are held by subsidiaries. Covenants contained in credit agreements between certain of the company’s plantation subsidiaries and banks restrict the amount of dividend that may be paid to the UK without the consent of the banks to certain proportions of the relevant subsidiaries’ pre-tax proﬁts. The directors do not consider that such restrictions will have any signiﬁcant impact on the liquidity risk of the company. A dormant UK subsidiary, Jentan Plantations Limited, company registration number 06662767, has taken advantage of the exemption pursuant to Companies Act 2006 s394A from preparing and ﬁling individual accounts. Deferred tax asset (v) $’000 At 1 January 2015 978 Credit to income for the year – Effect of change in tax rate – Effect of exchange – At 31 December 2015 978 Charge to income for the year – Effect of change in tax rate (49) Effect of exchange – At 31 December 2016 929 There were no deferred tax liabilities at 1 January 2015, 31 December 2015 or 31 December 2016. At the balance sheet date, the company had unused tax losses of $4.9 million (2015: $4.9 million) available to be applied against future proﬁts. A deferred tax asset of $929,000 (2015: $978,000) has been recognised in respect of these losses as the company considers, based on ﬁnancial projections, that these losses will be utilised. The aggregate amount of temporary differences associated with undistributed earnings of subsidiaries for which tax liabilities have not been recognised are disclosed in note 27 to the consolidated ﬁnancial statements. O v e r v e w i S t r a t e g c i r e p o r t G o v e r n a n c e G r o u p ﬁ n a n c a i l s t a t e m e n t s C o m p a n y ﬁ n a n c i a l s t a t e m e n t s N o t i c e o f A G M R.E.A. Holdings plc Annual Report and Accounts 2016 121 Company ﬁnancial statements Notes to the company ﬁnancial statements (continued) Trade and other receivables (vi) 2016 2015 $’000 $’000 Trade debtors – – Amount owing by group undertakings 26,035 15,267 Other debtors 88 567 Prepayments and accrued income 23 25 26,146 15,859 The directors consider that the carrying amount of trade and other receivables approximates their fair value. The amounts owing by group undertakings are non-interest bearing and repayable on demand. (vii) Cash and cash equivalents Cash and cash equivalents comprise short-term bank deposits. The Moody’s prime ratings of these deposits amounting to $614,000 (2015: $278,000) is set out in note 23 to the consolidated ﬁnancial statements under the heading “Credit risk”. (viii) Trade and other payables 2016 2015 $’000 $’000 Amount owing to group undertakings 561 651 Other creditors 442 90 Accruals 3,624 328 4,627 1,069 The directors consider that the carrying amount of trade and other payables approximates their fair value. The amounts owing to group undertakings are non-interest bearing and repayable on demand. (ix) US dollar notes The US dollar notes comprise $20.2 million (2015: $34.0 million) nominal of 7.5 percent dollar notes 2017 (“2017 dollar notes”) and $24.0 million (2015: nil) nominal of 7.5 percent dollar notes 2020 (“2020 dollar notes”). The 2017 dollar notes are repayable on 30 June 2017 and the 2020 dollar notes on 30 June 2020. Pursuant to proposals made in November 2016 to holders of the 2017 dollar notes, $13.8 million of such notes were exchanged on 24 November 2016 for a like amount of 2022 dollar notes, and at the same time a further $225,000 of 2022 dollar notes were issued to holders of $45,000 of 2017 dollar notes who subscribed in cash $180,000 under the top-up provisions of the exchange proposals. In addition, R.E.A. Services Limited, a wholly owned subsidiary of the company, subscribed a further $10.0 million of 2022 dollar notes pursuant to the placing. The US dollar notes are unsecured obligations of the company and are stated net of the unamortised balance of the note issuance costs. (x) Amount owed to group undertaking Amount owed to group undertaking comprises two unsecured interest-bearing loans from REA Finance B.V.. One loan of £11.3 million ($13.8 million) is repayable in December 2017, the second loan of £31.9 million ($38.9 million) is repayable in August 2020. 122 R.E.A. Holdings plc Annual Report and Accounts 2016 (xi) Share capital 2016 2016 £’000 £’000 Authorised (in sterling): 85,000,000 – 9 per cent cumulative preference shares of £1 each (2015: 75,000,000) 85,000 75,000 50,000,000 – ordinary shares of 25p each (2015: 41,000,000) 12,500 10,250 97,500 85,250 $’000 $’000 Issued and fully paid (in US dollars): 63,641,232 – 9 per cent cumulative preference shares of £1 each (2015: 63,641,232) 105,414 105,414 40,509,529 – ordinary shares of 25p each (2015: 36,839,529) 17,013 15,875 132,500 – ordinary shares of 25p each held in treasury (2015: 132,500) (1,001) (1,001) 121,426 120,288 The preference shares entitle the holders thereof to payment, out of the proﬁts of the company available for distribution and resolved to be distributed, of a ﬁxed cumulative preferential dividend of 9 per cent per annum on the nominal value of the shares and to repayment, on a winding up of the company, of the amount paid up on the preference shares and any arrears of the ﬁxed dividend in priority to any distribution on the ordinary shares. Subject to the rights of the holders of preference shares, holders of ordinary shares are entitled to share equally with each other in any dividend paid on the ordinary share capital and, on a winding up of the company, in any surplus assets available for distribution among the members. Changes in share capital: • on 20 December 2016 3,670,000 ordinary shares were issued, credited as fully paid, by way of placing at £2.95 per share (total consideration £10.8 million - $13.4 million) to Mirabaud Pereire Nominees Limited and Emba Holdings Limited (a related party). The middle market price at close of business on 14 December 2016 (being the date at which the terms of issue were ﬁxed) was £2.94 There have been no changes in ordinary shares held in treasury during the year. O v e r v e w i S t r a t e g c i r e p o r t G o v e r n a n c e G r o u p ﬁ n a n c a i l s t a t e m e n t s C o m p a n y ﬁ n a n c i a l s t a t e m e n t s N o t i c e o f A G M R.E.A. Holdings plc Annual Report and Accounts 2016 123 Company ﬁnancial statements Notes to the company ﬁnancial statements (continued) (xii) Movement in reserves Share Exchange Profit premium reserve and loss account account $’000 $’000 $’000 At 1 January 2015 23,366 (4,300) 57,730 Total comprehensive income – – (2,767) Dividends to preference shareholders – – (8,461) Dividends to ordinary shareholders – – (4,168) Issue of preference shares (cash) 1,328 – – Issue of ordinary shares (cash) 6,347 – – Costs of issues (358) – – At 31 December 2015 30,683 (4,300) 42,334 At 1 January 2016 30,683 (4,300) 42,334 Total comprehensive income – – 1,843 Dividends to preference shareholders – – (7,402) Issue of ordinary shares (cash) 12,289 – – Costs of issues (387) – – At 31 December 2016 42,585 (4,300) 36,775 As permitted by section 408 of the Companies Act 2006, a separate proﬁt and loss account dealing with the results of the company has not been presented. The loss before dividends recognised in the company’s proﬁt and loss account for the year is $2.2 million (2015: loss $2.8 million). (xiii) Financial instruments and risks Financial instruments The company’s ﬁnancial instruments comprise borrowings, cash and liquid resources and in addition certain debtors and trade creditors that arise from its operations. The main purpose of these ﬁnancial instruments is to raise ﬁnance for, and facilitate the conduct of, the company’s operations. The hierarchy for determining and disclosing the fair value of ﬁnancial instruments is set out in note 23 to the consolidated ﬁnancial statements. Loans from group undertakings are not included in the consolidated ﬁnancial statements but are considered to be level 3 in the hierarchy due to the lack of observable market data available. The table below provides an analysis of the book and fair values of ﬁnancial instruments excluding trade receivables and trade payables at the balance sheet date. 2016 2016 2015 2015 Book value Fair value Book value Fair value $’000 $’000 $’000 $’000 Cash and cash equivalents 614 614 278 278 US dollar notes - repayable 2017 (20,048) (20,206) (33,637) (31,290) US dollar notes - repayable 2022 (23,646) (24,035) – – Loan from REA Finance B.V. - repayable 2017 (13,765) (13,765) (16,699) (16,699) Loan from REA Finance B.V. - repayable 2020 (38,944) (38,944) (47,243) (47,243) Net debt (95,789) (96,336) (97,301) (94,954) The fair value of the US dollar notes reﬂects the last price at which transactions in those notes were effected prior to the balance sheet dates. Risks The main risks arising from the company’s ﬁnancial instruments are liquidity risk, interest rate risk, credit risk and foreign currency risk. The board reviews and agrees policies for managing each of these risks. These policies have remained unchanged since the beginning of the year. It is, and was throughout the year, the company’s policy that no trading in ﬁnancial instruments be undertaken. 124 R.E.A. Holdings plc Annual Report and Accounts 2016 The company ﬁnances its operations through a mixture of share capital, retained proﬁts, loans from a group undertaking, borrowings in US dollars at ﬁxed rates and credit from suppliers. At 31 December 2016, the company had outstanding $20.2 million nominal (2015: $34 million) of 7.5 per cent dollar notes 2017 and $24.0 million (2015: nil) of 7.5 per cent dollar notes 2022. The policy for liquidity risk management is disclosed in note 22 to the consolidated ﬁnancial statements together with the contractual maturity of the company’s dollar notes. Credit risk refers to the risk that a counterparty will default on its contractual obligations resulting in ﬁnancial loss to the company. The directors consider that the company is not exposed to any major concentrations of credit risk. At 31 December 2016, all bank deposits were held with banks with a Moody’s prime rating of P1. At the balance sheet date, no trade receivables were past their due dates, nor were any impaired; accordingly no bad debt provisions were required. The maximum credit risk exposures in respect of the company’s ﬁnancial assets at 31 December 2015 and 31 December 2014 equal the amounts reported under the corresponding balance sheet headings. A limited degree of interest rate risk is accepted. A substantial proportion of the company’s ﬁnancial instruments at 31 December 2015 carried interest at ﬁxed rates rather than ﬂoating rates. On the basis of the company’s analysis, it is estimated that a rise of one percentage point in interest rates applied to those ﬁnancial instruments which carry interest at ﬂoating rates would have resulted in an increase of $nil (2015: $nil) in the company’s interest revenues in its proﬁt and loss account. Non-derivative ﬁnancial instruments The following table details the contractual maturity of the company’s non-derivative ﬁnancial liabilities. The table has been drawn up based on the undiscounted amounts of the company’s ﬁnancial liabilities based on the earliest dates on which the company can be required to discharge those liabilities. The table includes liabilities for both principal and interest. Weighted Under Between Over 2 Total average 1 year 1 and 2 years interest rate years 2016 % $’000 $’000 $’000 $’000 US dollar notes - repayable 2017 8.5 21,813 – – 21,813 US dollar notes - repayable 2022 8.5 901 1,803 30,344 33,048 Loan from REA Finance.B.V. - repayable 2017 9.7 15,215 – – 15,215 Loan from REA Finance B.V. - repayable 2020 8.9 3,504 3,506 46,382 53,392 41,433 5,309 76,726 123,468 Weighted Under Between Over 2 Total average 1 year 1 and 2 years interest rate years 2015 % $’000 $’000 $’000 $’000 US dollar notes - repayable 2017 8.5 2,551 35,286 – 37,837 Loan from REA Finance B.V. - repayable 2017 9.7 1,619 13,975 – 15,594 Loan from REA Finance B.V. - repayable 2020 8.9 4,225 4,222 60,004 68,451 8,395 53,483 60,004 121,822 At 31 December 2016, the company’s non-derivative ﬁnancial assets (other than receivables) comprised cash and deposits of $614,000 (2015: $278,000) carrying a weighted average interest rate of nil per cent (2015: nil per cent) all having a maturity of under one year and loans (including Indonesian stone and coal interests) of $39,028,000 (2015: $37,200,000). O v e r v e w i S t r a t e g c i r e p o r t G o v e r n a n c e G r o u p ﬁ n a n c a i l s t a t e m e n t s C o m p a n y ﬁ n a n c i a l s t a t e m e n t s N o t i c e o f A G M R.E.A. Holdings plc Annual Report and Accounts 2016 125 Company ﬁnancial statements Notes to the company ﬁnancial statements (continued) (xiv) Reconciliation of operating loss to operating cash ﬂows 2016 2015 $’000 $’000 Operating loss (225) (57) Amortisation of US dollar note issue expenses 266 166 Operating cash inflows before movements in working capital 41 109 (Increase) / decrease in receivables (1,599) 8,754 Increase in payables 3,474 313 Exchange translation differences 103 246 Cash outflow from operations 2,019 9,422 Taxes paid (982) (903) Interest paid (7,962) (8,092) Net cash (outflow) / inflow from operating activities (6,925) 427 (xv) Pensions The company is the principal employer of the R.E.A. Pension Scheme (the “Scheme”) and a subsidiary company is a participating employer. The Scheme is a multi-employer contributory deﬁned beneﬁt scheme with assets held in a trustee-administered fund, which has participating employers outside the group. The Scheme is closed to new members. As the Scheme is a multi-employer scheme, in which the employers are unable to identify their respective shares of the underlying assets and liabilities (because there is no segregation of the assets), and does not prepare valuations on an IAS 19 basis, the group accounts for the Scheme as if it were a deﬁned contribution scheme. A non-IAS 19 valuation of the Scheme was last prepared, using the attained age method, as at 31 December 2014. This method had been adopted in the previous valuation as at 31 December 2011 and in earlier valuations, as it was considered the appropriate method of calculating future service beneﬁts as the Scheme is closed to new members. At 31 December 2014 the Scheme had an overall marginal surplus of assets, when measured against the Scheme’s technical provisions, of £202,000 - $315,000. The technical provisions were calculated using assumptions of an investment return of 4.35 per cent pre-retirement and 2.80 per cent post-retirement and annual increases in pensionable salaries of 3.2 per cent. The basis for the inﬂationary revaluation of deferred pensions and increases to pensions in payment was changed from the Retail Prices Index (RPI) to the Consumer Prices Index (CPI) with effect from 1 January 2011 in line with the statutory change, except that the change does not apply to pension accrual from 1 January 2006, where the RPI still applies. The rates of increase in the RPI and the CPI were assumed to be 3.2 per cent and 2.45 per cent respectively. It was further assumed that both non-retired and retired members’ mortality would reﬂect S2PXA tables (light version) at 100 per cent and that non-retired members would take on retirement the maximum cash sums permitted from 1 January 2015. Had the Scheme been valued at 31 December 2014 using the projected unit method and the same assumptions, the overall surplus would have been similar. The Scheme has agreed a statement of funding principles with the principal employer and has also agreed a schedule of contributions with participating employers covering normal contributions which are payable at a rate calculated to cover future service beneﬁts under the Scheme. The Scheme had also agreed a recovery plan with participating employers which provided for recovery of the deﬁcit shown by the 31 December 2011 valuation through the payment of quarterly additional contributions over the period from 1 January 2013 to 30 September 2018. No contributions under that recovery plan were required in 2016 nor will be required going forward. The company made no payments to the Scheme in 2016 (2015: $nil). There are no agreed allocations of any surplus on either the wind-up of the Scheme or on any participant’s withdrawal from the Scheme. The next actuarial valuation will be made as at 31 December 2017. The company is responsible for contributions payable by other (non group) employers in the Scheme; such liability will only arise if other (non group) employers do not pay their contributions. There is no expectation of this and, therefore, no provision has been made. 126 R.E.A. Holdings plc Annual Report and Accounts 2016 (xvi) Related party transactions 2016 2015 Loans to subsidiaries $’000 $’000 PT Cipta Davia Mandiri 14,561 6,528 PT KCC Resources Indonesia 12,622 12,622 Makassar Investments Limited 14,216 425 REA Finance B.V. 3,008 3,649 PT REA Kaltim Plantations 70,531 89,101 R.E.A. Services Limited 24,086 29,220 139,024 141,545 2016 2015 Dividends received from subsidiaries $’000 $’000 R.E.A. Services Limited 4,028 – 4,028 – 2016 2015 Interest received from subsidiaries $’000 $’000 PT Cipta Davia Mandiri 417 410 REA Finance B.V. 283 322 PT REA Kaltim Plantations 6,612 5,951 7,312 6,683 Placing with related party As described in note (xi) ordinary shares were placed with Emba Holdings Limited on 20 December 2016. Remuneration of key management personnel The remuneration of the directors, who are the key management personnel of the group, is set out below in aggregate for each of the categories speciﬁed in IAS 24 “Related party disclosures”. Further information about the remuneration of, and fees paid in respect of services provided by, individual directors is provided in the audited part of the “Directors’ remuneration report”. 2016 2015 $’000 $’000 Short term benefits 1,405 2,111 1,405 2,111 There is no remuneration other than short term beneﬁts. (xvii) Rates of exchange See note 39 to the consolidated ﬁnancial statements. O v e r v e w i S t r a t e g c i r e p o r t G o v e r n a n c e G r o u p ﬁ n a n c a i l s t a t e m e n t s C o m p a n y ﬁ n a n c i a l s t a t e m e n t s N o t i c e o f A G M R.E.A. Holdings plc Annual Report and Accounts 2016 127 Company ﬁnancial statements Notes to the company ﬁnancial statements (continued) (xviii) Contingent liabilities and commitments Sterling notes The company has guaranteed the obligations for both principal and interest relating to the outstanding £8.3 million nominal 9.5 per cent guaranteed sterling notes 2017 and the outstanding £31.9 million nominal 8.75 per cent guaranteed sterling notes 2020 issued by REA Finance B.V.. The directors consider the risk of loss to the company from these guarantees to be remote. Bank borrowings The company has given, in the ordinary course of business, guarantees in support of subsidiary company borrowings from, and other contracts with, banks amounting in aggregate to $126 million (2015: $123 million). The directors consider the risk of loss to the company from these guarantees to be remote. Pension liability The company’s contingent liability for pension contributions is disclosed in note (xv) above. Operating leases The company has an annual commitment under an operating lease of $199,000 (2015: $157,000). The commitment expires after ten years (2015: one year). The lease does not contain any contingent rentals or an option to purchase the property. The future minimum lease payments under the operating lease are as follows: 2016 2015 $’000 $’000 Within one year 113 157 In the second to fifth year inclusive 797 – After five years 996 – 1,906 157 (xix) Post balance sheet events There have been no material post balance sheet events that would require disclosure or adjustment to these ﬁnancial statements. 128 R.E.A. Holdings plc Annual Report and Accounts 2016 O v e r v e w i S t r a t e g c i r e p o r t G o v e r n a n c e G r o u p ﬁ n a n c a i l s t a t e m e n t s C o m p a n y ﬁ n a n c i a l s t a t e m e n t s N o t i c e o f A G M R.E.A. Holdings plc Annual Report and Accounts 2016 129 Notice of annual general meeting This notice is important and requires your immediate attention. If 8. To re-appoint Deloitte LLP, chartered accountants, as auditor of you are in any doubt as to what action to take, you should the company to hold ofﬁce until the conclusion of the next consult your stockbroker, solicitor, accountant or other annual general meeting of the company at which accounts are appropriate independent professional adviser authorised under laid before the meeting. the Financial Services and Markets Act 2000 if you are resident in the United Kingdom or, if you are not so resident, another 9. To authorise the directors to ﬁx the remuneration of the auditor. appropriately authorised independent adviser. If you have sold or otherwise transferred all your ordinary shares in R.E.A. Holdings 10. That the company is generally and unconditionally authorised for plc, please forward this document and the accompanying form of the purposes of section 701 of the Companies Act 2006 to proxy to the person through whom the sale or transfer was make market purchases (within the meaning of section 693(4) effected, for transmission to the purchaser or transferee. of the Companies Act 2006) of any of its ordinary shares on such terms and in such manner as the directors may from time Notice is hereby given that the ﬁfty-seventh annual general meeting of to time determine provided that: R.E.A. Holdings plc will be held at the London ofﬁce of Ashurst LLP at Broadwalk House, 5 Appold Street, London EC2A 2HA on 13 June (a) the maximum number of ordinary shares which may be 2017 at 10.00 am to consider and, if thought ﬁt, to pass the following purchased is 5,000,000 ordinary shares; resolutions. Resolutions 13 and 14 will be proposed as special resolutions and resolution 3 will be dealt with as special business; all (b) the minimum price (exclusive of expenses, if any) that other resolutions will be proposed as ordinary resolutions. may be paid for each ordinary share is £1.00; 1. To receive the company’s annual accounts for the ﬁnancial year (c) the maximum price (exclusive of expenses, if any) that ended 31 December 2016, together with the accompanying may be paid for each ordinary share is an amount equal to statements and reports including the auditor’s report. the higher of: (i) 105 per cent of the average of the middle market quotations for the ordinary shares in the 2. To approve the directors’ remuneration report for the ﬁnancial capital of the company as derived from the Daily Ofﬁcial year ended 31 December 2016. List of the London Stock Exchange for the ﬁve business days immediately preceding the day on which such share 3. To approve, for the purposes of section 226C(1)(b) of the is contracted to be purchased and (ii) the higher of the Companies Act 2006, the making of the Loss of Ofﬁce Payment last independent trade and the current highest (as deﬁned and described under “Resignation of Mark Parry” in independent bid on the London Stock Exchange; and the Directors’ report) and to authorise the directors to do all acts and things that they may reasonably consider necessary or (d) unless previously renewed, revoked or varied, this desirable in connection with the same. authority shall expire at the conclusion of the annual general meeting of the company to be held in 2018 (or, if 4. To elect as a director Carol Gysin, who having been appointed an earlier, on 30 June 2018) executive director of the company on 21 February 2017, retires in accordance with the articles of association and submits provided further that: herself for election. 5. To elect as a director Michael St. Clair-George, who, having been maximum number of ordinary shares that may be bought appointed a non-executive director of the company during 2016, back and held in treasury at any one time is 400,000 retires in accordance with the articles of association and submits ordinary shares; and (i) notwithstanding the provisions of paragraph (a) above, the himself for election. 6. To re-elect as a director John Oakley, who, having become a company may, before this authority expires, make a non-executive director at the beginning of 2016 and having contract to purchase ordinary shares that would or might served for more than nine years as a director, retires as required be executed wholly or partly after the expiry of this by the UK Corporate Governance Code and submits himself for authority, and may make purchases of ordinary shares re-election. pursuant to it as if this authority had not expired. (ii) notwithstanding the provisions of paragraph (d) above, the 7. To re-elect as a director Richard Robinow, who, having been a 11. That the directors be and are hereby generally and non-executive director for more than nine years, retires as unconditionally authorised for the purposes of section 551 of required by the UK Corporate Governance Code and submits the Companies Act 2006 (the “Act”) to exercise all the powers of himself for re-election. the company to allot, and to grant rights to subscribe for or to convert any security into, shares in the capital of the company (other than 9 per cent cumulative preference shares) up to an 130 R.E.A. Holdings plc Annual Report and Accounts 2016 aggregate nominal amount (within the meaning of sub-sections therein or, if the directors consider it necessary, as (3) and (6) of section 551 of the Act) of £2,372,617; such permitted by the rights of those securities) but subject in authorisation to expire at the conclusion of the next annual each case to such exclusions or other arrangements as general meeting of the company (or, if earlier, on 30 June 2018), the directors may consider necessary or appropriate to save that the company may before such expiry make any offer or deal with fractional entitlements, treasury shares (other agreement which would or might require shares to be allotted, or than treasury shares being sold), record dates or legal, rights to be granted, after such expiry and the directors may allot regulatory or practical difﬁculties which may arise under shares, or grant rights to subscribe for or to convert any security the laws of any territory or the requirements of any into shares, in pursuance of any such offer or agreement as if regulatory body or stock exchange in any territory the authorisations conferred hereby had not expired. whatsoever; and 12. That the directors be and are hereby generally and (ii) otherwise than as speciﬁed at paragraph (i) of this unconditionally authorised for the purposes of section 551 of resolution, to the allotment of equity securities and the the Companies Act 2006 (the “Act”) to exercise all the powers of sale of treasury shares up to an aggregate nominal the company to allot, and to grant rights to subscribe for or to amount (calculated, in the case of the grant of rights to convert any security into, 9 per cent cumulative preference subscribe for, or convert any security into, shares in the shares in the capital of the company (“preference shares”) up to capital of the company, in accordance with sub-section an aggregate nominal amount (within the meaning of sub- (6) of section 551 of the Act) of £1,009,425 sections (3) and (6) of section 551 of the Act) of £21,358,768, such authorisation to expire at the conclusion of the next annual and shall expire at the conclusion of the next annual general general meeting of the company (or, if earlier, on 30 June 2018), meeting of the company (or, if earlier, on 30 June 2018), save save that the company may before such expiry make any offer or that the company may before such expiry make any offer or agreement which would or might require preference shares to be agreement which would or might require equity securities to be allotted or rights to be granted, after such expiry and the allotted, or treasury shares to be sold, after such expiry and the directors may allot preference shares, or grant rights to directors may allot equity securities or sell treasury shares, in subscribe for or to convert any security into preference shares, in pursuance of any such offer or agreement as if the power pursuance of any such offer or agreement as if the conferred hereby had not expired. authorisations conferred hereby had not expired. 13. That the directors be and are hereby given power: general meeting may be called on not less than 14 clear days’ 14. That a general meeting of the company other than an annual notice. By order of the board R.E.A. SERVICES LIMITED Secretary 27 April 2017 Registered ofﬁce: First Floor 32 – 36 Great Portland Street London W1W 8QX Registered in England and Wales no: 00671099 (a) for the purposes of section 570 of the Companies Act 2006 (the “Act”) and subject to the passing of resolution 11 set out in the notice of the 2017 annual general meeting, to allot equity securities (as deﬁned in sub- section (1) of section 560 of the Act) of the company for cash pursuant to the authorisation conferred by the said resolution 11; and (b) for the purposes of section 573 of the Act, to sell ordinary shares (as deﬁned in sub-section (1) of section 560 of the Act) in the capital of the company held by the company as treasury shares for cash. as if section 561 of the Act did not apply to the allotment or sale, provided that such powers shall be limited: (i) to the allotment of equity securities for cash in connection with a rights issue or open offer in favour of holders of ordinary shares and to the sale of treasury shares by way of an invitation made by way of rights to holders of ordinary shares, in each case in proportion (as nearly as practicable) to the respective numbers of ordinary shares held by them on the record date for participation in the rights issue, open offer or invitation (and holders of any other class of equity securities entitled to participate O v e r v e w i S t r a t e g c i r e p o r t G o v e r n a n c e G r o u p ﬁ n a n c a i l s t a t e m e n t s C o m p a n y ﬁ n a n c a i l s t a t e m e n t s N o t i c e o f A G M R.E.A. Holdings plc Annual Report and Accounts 2016 131 Notice of annual general meeting continued Notes CREST members may register the appointment of a proxy or proxies for the annual general meeting and any adjournment(s) thereof through The sections of the accompanying Directors’ report entitled the CREST electronic proxy appointment service by using the “Results and dividends”, “Directors”, ”Resignation of Mark Parry”, procedures described in the CREST Manual (available via “Acquisition of the company’s own shares”, “Authorities to allot www.euroclear.com/CREST) subject to the company’s articles of share capital”, “Authority to disapply pre-emption rights”, association. CREST personal members or other CREST sponsored “General meeting notice period” and “Recommendation” contain members, and those CREST members who have appointed (a) voting information regarding, and recommendations by the board of the service provider(s), should refer to their CREST sponsor or voting company as to voting on, resolutions 3 to 7 and 10 to 14 set out service provider(s), who will be able to take the appropriate action on above in this notice of the 2017 annual general meeting of the their behalf. company (the “2017 Notice”). In order for a proxy appointment or instruction regarding a proxy The company speciﬁes that in order to have the right to attend and vote appointment made or given using the CREST service to be valid, the at the annual general meeting (and also for the purpose of determining appropriate CREST message (a “CREST proxy instruction”) must be how many votes a person entitled to attend and vote may cast), a properly authenticated in accordance with the speciﬁcations of person must be entered on the register of members of the company at Euroclear UK and Ireland Limited (“Euroclear”) and must contain the close of business on 11 June 2017 or, in the event of any adjournment, required information as described in the CREST Manual (available via at close of business on the date which is two days before the day of the www.euroclear.com/CREST). The CREST proxy instruction, regardless adjourned meeting. Changes to entries on the register of members of whether it constitutes a proxy appointment or an instruction to after this time shall be disregarded in determining the rights of any amend a previous proxy appointment, must, in order to be valid be person to attend or vote at the meeting. transmitted so as to be received by the company’s registrars (ID: RA10) by 10.00 am on 11 June 2017. For this purpose, the time of receipt will Only holders of ordinary shares are entitled to attend and vote at the be taken to be the time (as determined by the time stamp applied to the annual general meeting. A holder of ordinary shares may appoint another person as that holder’s proxy to exercise all or any of the message by the CREST applications host) from which the company’s registrars are able to retrieve the message by enquiry to CREST in the holder’s rights to attend, speak and vote at the annual general meeting. manner prescribed by CREST. The company may treat as invalid a A holder of ordinary shares may appoint more than one proxy in relation CREST proxy instruction in the circumstances set out in Regulation to the meeting provided that each proxy is appointed to exercise the 35(5) (a) of the Uncertiﬁcated Securities Regulations 2001. rights attached to (a) different share(s) held by the holder. A proxy need not be a member of the company. A form of proxy for the meeting is CREST members and, where applicable, their CREST sponsors or enclosed. To be valid, forms of proxy and other written instruments voting service provider(s) should note that Euroclear does not make appointing a proxy must be received by post or by hand (during normal available special procedures in CREST for particular messages. Normal business hours only) by the company’s registrars, Capita Asset Services, system timings and limitations will therefore apply in relation to the PXS, 34 Beckenham Road, Beckenham BR3 4TU by no later than input of CREST proxy instructions. It is the responsibility of the CREST 10.00 am on 11 June 2017. member concerned to take (or, if the CREST member is a CREST personal member or sponsored member or has appointed (a) voting Alternatively, appointment of a proxy may be submitted electronically by service provider(s), to procure that such member’s CREST sponsor or using either Capita’s share portal at www.signalshares.com (and so that voting service provider(s) take(s)) such action as shall be necessary to the appointment is received by the service by no later than 10.00 am on ensure that a message is transmitted by means of the CREST system 11 June 2017) or the CREST electronic proxy appointment service as by any particular time. In this connection, CREST members and, where described below. Shareholders who have not already registered for applicable, their CREST sponsors or voting service provider(s) are Capita’s share portal may do so by registering as a new user at referred, in particular, to those sections of the CREST Manual www.signalshares.com and giving the investor code shown on the concerning practical limitations of the CREST system and timings. enclosed proxy form (as also shown on their share certiﬁcate). Completion of a form of proxy, or other written instrument appointing a The rights of members in relation to the appointment of proxies proxy, or any appointment of a proxy submitted electronically, will not described above do not apply to persons nominated under section 146 preclude a holder of ordinary shares from attending and voting in of the Companies Act 2006 to enjoy information rights (“nominated person at the annual general meeting if such holder wishes to do so. persons”) but a nominated person may have a right, under an agreement with the member by whom such person was nominated, to be appointed (or to have someone else appointed) as a proxy for the annual general meeting. If a nominated person has no such right or does not wish to exercise it, such person may have a right, under such an agreement, to give instructions to the member as to the exercise of voting rights. Any corporation which is a member can appoint one or more corporate representatives who may exercise on its behalf all of its powers as a member provided that they do not do so in relation to the same shares. 132 R.E.A. Holdings plc Annual Report and Accounts 2016 Any member attending the annual general meeting has the right to ask Shareholders may not use any electronic address (within the meaning questions. The company must cause to be answered any such question of sub-section 4 of section 333 of the Companies Act 2006) provided relating to the business being dealt with at the meeting but no such in this 2017 Notice (or any other related document including the form answer need be given if (a) to do so would interfere unduly with the of proxy) to communicate with the company for any purposes other preparation for the meeting or involve the disclosure of conﬁdential than those expressly stated. information, (b) the answer has already been given on a website in the form of an answer to a question, or (c) it is undesirable in the interests Under section 338 and section 338A of the Companies Act 2006, of the company or the good order of the meeting that the question be members meeting the threshold requirements in those sections have answered. the right to require the company (i) to give, to members of the company entitled to receive notice of the annual general meeting, notice of a Copies of the executive directors’ service agreements and letters resolution which may properly be moved and is intended to be moved at setting out the terms and conditions of appointment of non-executive the meeting and/or (ii) to include in the business to be dealt with at the directors are available for inspection at the company's registered ofﬁce meeting any matter (other than a proposed resolution) which may be during normal business hours from the date of this 2017 Notice until properly included in the business. A resolution may properly be moved the close of the annual general meeting (Saturdays, Sundays and public or a matter may properly be included in the business unless (a) (in the holidays excepted) and will be available for inspection at the place of case of a resolution only) it would, if passed, be ineffective (whether by the annual general meeting for at least 15 minutes prior to and during reason of inconsistency with any enactment or the company’s the meeting. constitution or otherwise), (b) it is defamatory of any person, or (c) it is frivolous or vexatious. Such a request may be in hard copy form or A copy of this 2017 Notice, and other information required by section electronic form, must identify the resolution of which notice is to be 311A of the Companies Act 2006, may be found on the company's given or the matter to be included in the business, must be authorised website www.rea.co.uk. by the person or persons making it, must be received by the company not later than the date 6 clear weeks before the meeting, and (in the Under section 527 of the Companies Act 2006, members meeting the case of a matter to be included in the business only) must be threshold requirements set out in that section have the right to require accompanied by a statement setting out the grounds for the request. the company to publish on a website (in accordance with section 528 of the Companies Act 2006) a statement setting out any matter that the members propose to raise at the relevant annual general meeting relating to (i) the audit of the company's annual accounts that are to be laid before the annual general meeting (including the auditor’s report and the conduct of the audit); or (ii) any circumstance connected with an auditor of the company having ceased to hold ofﬁce since the last annual general meeting of the company. The company may not require the members requesting any such website publication to pay its expenses in complying with section 527 or section 528 of the Companies Act 2006. Where the company is required to place a statement on a website under section 527 of the Companies Act 2006, it must forward the statement to the company's auditor by not later than the time when it makes the statement available on the website. The business which may be dealt with at the annual general meeting includes any statement that the company has been required under section 527 of the Companies Act 2006 to publish on a website. As at the date of this 2017 Notice, the issued share capital of the company comprises 40,509,529 ordinary shares, of which 132,500 are held as treasury shares, and 63,641,232 9 per cent cumulative preference shares. Only holders of ordinary shares (and their proxies) are entitled to attend and vote at the annual general meeting. Accordingly, the voting rights attaching to shares of the company exercisable in respect of each of the resolutions to be proposed at the annual general meeting total 40,377,029 as at the date of this 2017 Notice. O v e r v e w i S t r a t e g c i r e p o r t G o v e r n a n c e G r o u p ﬁ n a n c a i l s t a t e m e n t s C o m p a n y ﬁ n a n c a i l s t a t e m e n t s N o t i c e o f A G M R.E.A. Holdings plc Annual Report and Accounts 2016 133 This report has been managed by Perivan Financial and printed in the UK by Park Communications. Park Communications is an Eco-Management and Audit Scheme (“EMAS”) certified company. EMAS is designed to improve environmental performance of companies. Its environmental management system is certified to ISO14001. 100 per cent of the inks used are vegetable oil based, 95 per cent of press chemicals are recycled for further use and, on average, 99 per cent of any waste associated with this production will be re- cycled. This document is printed on carbon balanced Galerie satin paper, accredited by the World Land Trust and made with 15 per cent recycled fibre and the remaining 85 per cent sourced from responsibly managed forests, certified in accordance with the Forest Stewardship Council®. Carbon emissions generated during the manufacture and delivery of this product have been reduced to net zero through a verified carbon offsetting project. R.E.A. HOLDINGS PLC R.E.A. Holdings plc First Floor 32-36 Great Portland Street London W1W 8QX www.rea.co.uk Registered number 00671099 (England and Wales) . R E A . . i l H o d n g s p l c A n n u a l R e p o r t a n d A c c o u n t s 2 0 1 6

Continue reading text version or see original annual report in PDF format above