Fairfax Media Limited
Annual Report 2015

Plain-text annual report

F A I R F A X M E D I A A N N U A L R E P O R T 2 0 1 5 G R O W . T R A N S F O R M . I N V E S T . F A I R F A X M E D I A A N N U A L R E P O R T 2 0 1 5 G R O W T R A N S F O R M I N V E S T G R O W BUILDING AND INVESTING IN DOMAIN GROUP, GROWING VERTICALS AND LEVERAGING AREAS WHERE WE HAVE COMPETITIVE STRENGTH AND SKILLS, SUCH AS LIFE MEDIA & EVENTS. REALISING THE FULL POTENTIAL OF OUR RESTRUCTURED RADIO BUSINESS. IV FAIRFAX MEDIA IS AT THE FOREFRONT OF REVOLUTIONISING MEDIA AND LEADING THE CHANGE WITH OUR STRATEGY TO GROW, TRANSFORM AND INVEST. We are at the heart of conversations that matter and creating connections that count. We are the trusted voice, informing, engaging and entertaining audiences and communities in Australia and New Zealand via our newspapers, websites, radio stations, events and dynamic digital venues for commerce and information. Every day we empower millions of people with our independent journalism, quality content and great experiences – and we have been doing it for 184 years. Our journalists perform their jobs with independence, insight and integrity. Everyone in our business is passionate and puts customers and audiences at the centre of everything we do. We are focused on growing shareholder value by engaging audiences, communities and businesses through compelling content and services, monetising across a range of business models. We are growing and transforming Fairfax Media, investing in it, making it a stronger, diversified portfolio of businesses – spanning media, marketing services, property services, data, entertainment, and beyond – sustaining the important work we do in the communities we serve. Independent. Always. AUSTRALIAN METRO MEDIA LEADING METROPOLITAN NEWSPAPERS & DIGITAL MEDIA Publishing arm for The Sydney Morning Herald, The Age and The Australian Financial Review saw earnings growth of 52%, resulting from cost reduction and benefiting from the closure of Tullamarine and Chullora print sites in 2014. Re-scaling printing operations for efficiency, digital subscriptions and other new revenue streams helped sustain publishing profitability in the face of continued print advertising declines. DOMAIN GROUP REAL ESTATE MEDIA AND SERVICES Domain Group continued to fast-track its national expansion with a 20% increase in agent subscribers; 16% increase in listings; and 30% increase in average monthly visits across main and mobile sites and apps. Acquisitions totalling $150 million and operational investment in sales and product development have been undertaken to aggressively expand Domain’s footprint and establish it as a strong growth vehicle. LIFE MEDIA & EVENTS LIFESTYLE MEDIA ASSETS AND EVENTS Life Media’s strong portfolio includes lifestyle- oriented products spanning travel, health, food, parenting and motoring combined with our Events business focused on running, swimming, food and wine, parenting and the arts. The combination builds on the strong natural audience and commercial links of the two businesses and brings sharper commercial focus, speed to market and an improved product mix to our millions of customers. 7%+ Digital revenue growth 5%- Total revenue 52%+ Adjusted EBITDA growth 36%+ Digital revenue growth 45%+ Total revenue growth 46%+ EBITDA growth 41%+ Events revenue growth 53%+ Number of consumer events 2M Event participant numbers SNAPSH OT 2 DIGITAL VENTURES PORTFOLIO OF DIGITALLY-FOCUSED ASSETS HuffPost Australia, a local partnership with leading global source of news and information The Huffington Post, adds to the strong portfolio of digital-only publishing assets. Joint venture Subscription Video-On- Demand service Stan launched on Australia Day and is fast gaining traction with consumers. Pleasing progress was made with transactional businesses and early stage investments, with some strategic bolt-on acquisitions made. AUSTRALIAN COMMUNITY MEDIA LEADING RURAL AND REGIONAL NEWSPAPERS & DIGITAL MEDIA ACM restructured from 65 separately run businesses into six geographic operating groups to create a modern, stronger rural and regional media network. The transformation program is focused on maintaining a strong footprint for local news, content and sales capability, while adopting new technology, upgrading newsrooms, and working more efficiently with new systems. NEW ZEALAND MEDIA LEADING NZ NEWSPAPERS & DIGITAL MEDIA Building a digital future and improving audience monetisation through product innovation, marketing investment, as well as significant editorial and sales transformation. The number of stories published across digital platforms has increased from 400 to 1,500 a day. Stuff.co.nz is setting an impressive pace as our New Zealand digital brand, moving from seventh to fourth largest digital site in the country with monthly audience of 1.8 million. MACQUARIE RADIO NETWORK LEADING NATIONAL NEWS, TALK, SPORT & MUSIC RADIO NETWORK Fairfax has a 54.5% share- holding in the ASX-listed Macquarie Radio Network. The expanded MRN is the result of the merger of Fairfax Radio Network’s 3AW, 2UE, 4BC and 6PR stations with MRN’s 2GB. The radio merger unlocked significant value and synergies, and creates new advertiser opportunity by bringing together the leading news, talk and sport stations in Sydney and Melbourne. $20M FY15 investment (excl. Stan) OF 3 5 Partnerships with 3 of the top 5 digital-only US media groups 300K Stan gross sign-ups $60M Targeted annualised savings by end of FY16 8%- Total revenue 34%- Adjusted EBITDA 38%+ Digital revenue growth 5%- Total revenue 12%- Adjusted EBITDA #1 Stations in Sydney and Melbourne UP TO $15M Annualised merger synergy benefits $78M Proceeds from sale of 96FM SNAPSH OT FAIRFAX MEDIA ANNUAL REPORT 2015 | 3 S T A T S 4 TRANSFORM CONTINUING THE TRANSFORMATION TO CREATE A SUSTAINABLE PUBLISHING BUSINESS ON THE PRINT TO DIGITAL JOURNEY. MAINTAINING COST DISCIPLINE AND DELIVERING EFFICIENCIES. WE ARE BUILDING A STRONGER, MORE DIVERSIFIED BUSINESS 11M 7.5M Australian audience across print, web and mobile Australian national and metro masthead reach 5.1M Audience for The Sydney Morning Herald – Australia’s No. 1 masthead 159K Paid digital subscribers to The Sydney Morning Herald and The Age 45% 34% Growth in Domain unique monthly audience to 2.5m Increase in Domain mobile app downloads to 3.8m 20% 2.3M Growth in Domain.com.au agent subscribers Listeners across MRN’s national radio network 2.8M New Zealanders connect with Fairfax every day 1.8M New Zealanders visit Stuff.co.nz each month FAIRFAX MEDIA ANNUAL REPORT 2015 | 5 FAIRFAX MEDIA ANNUAL REPORT 2015 | 5 FAIRFAX MEDIA HAS ACHIEVED A PROFOUND TRANSFORMATION IN THE LAST FOUR YEARS FROM A TRADITIONAL MEDIA BUSINESS INTO A STRONGER, MORE DIVERSIFIED MEDIA COMPANY INCREASINGLY FOCUSED ON HIGH-GROWTH OPPORTUNITIES. ROGER CORBETT, AO Fairfax’s robust financial position and operating earnings stability in the last two financial years demonstrates the success of the Company’s strategy to optimise its core strengths and reshape the business for future growth while continually adapting to the innovation happening in the media industry globally. Total Group revenue grew 0.3% year-on-year to $1,840.8 million for continuing businesses in the 2015 financial year. This is the first time in eight years that the Group has delivered revenue growth. This achievement reflects the many actions we have taken over recent years, including acquisitions, restructuring and growth initiatives. Fairfax anticipated and took strategic action to prepare for the ongoing structural shift away from print advertising which is taking place in both local and international markets. In the financial year, the pressures faced by print were offset by revenue growth in our real estate and media services business Domain Group, digital revenue growth and new revenue streams, and contribution from acquisitions. The Company’s revenue streams have evolved to include digital subscriptions, marketing services, property services, events, entertainment and more. Gone are the days where revenue consists of just advertising and cover price revenue. A concerted effort to diversify our revenue base has resulted in improved profitability. For the 2015 financial year, Fairfax delivered operating earnings before interest, tax, depreciation and amortisation (EBITDA) of $287.4 million for continuing businesses, which was about 3% lower than the $297.7 million in the prior year. This result has been achieved despite significant investment of around $42 million, the majority in Domain, Events and Stan which is yet to be fully reflected in the performance of these businesses. Earnings before interest and tax (EBIT) of $222.6 million is 8% higher. For continuing businesses, earnings per share went from 6.3 cents to 6.0 cents and paid total dividends for the year of 4 cents per share. After taking into account significant items, the company reported a net profit after tax of $83.2 million. The reported net profit result includes significant items expense after tax of $60.5 million. The Company started the financial year with a strong balance sheet following significant net debt reduction in recent years. The Company finished the year in a net cash position, putting us in a strong position to both invest for growth and undertake capital management strategies focused on maximising shareholder returns. In February, the company announced an on- market buyback of up to 5% of ordinary shares over 12 months. REVOLUTIONISING MEDIA Fairfax has been at the forefront of revolutionising media by thinking through the immense challenges of reshaping, restructuring and revitalising the traditional media model. Fairfax is an undisputed leader in transforming to embrace the new realities of modern 6 CH AIRM AN communication and technology. We have truly led the change. Aggressive change has been vital in the face of reducing traditional revenues and the dramatic industry transition happening in Australia, New Zealand and internationally. Throughout this evolution, Fairfax has maintained a resolute focus on maximising shareholder value by engaging audiences, communities and businesses through its compelling content and services, monetised across a range of business models. The business is maintaining and leveraging its strength and scale as a provider of quality, independent journalism - across print, digital and radio - in the local and metropolitan communities we serve. In the 2014 Annual Report, I set out a number of elements that would contribute to our objective to build on our core strengths, become stronger and more digital-centric through transformation of our publishing businesses, and invest in our growth engines and new opportunities. We have reshaped our business model to include a range of services - marketing services, property services, events, and entertainment - all driven by our fundamental capabilities as a leading multi-media business with large-scale audiences. We create commercial opportunities by taking a 360-degree view of clients’ needs - beyond traditional advertising - and offer a full suite of marketing solutions, including data services and content marketing, to provide additional value to our advertisers. Domain is a standout performer in extending and growing, with its digital EBITDA up 37.1% during the year. This is an impressive accomplishment. Domain is maintaining its strong growth momentum as it continues its aggressive national expansion strategy. FAIRFAX HAS BEEN AT THE FOREFRONT OF REVOLUTIONISING MEDIA BY THINKING THROUGH THE IMMENSE CHALLENGES OF RESHAPING, RESTRUCTURING AND REVITALISING THE TRADITIONAL MEDIA MODEL. Our Events business has a blossoming portfolio, having combined with our Life Media business of lifestyle-oriented products spanning travel, health, food, parenting and motoring in order to build on the strong natural audience and commercial links between these two businesses. In December 2014 we announced the creation of a stronger national radio network through the merger of Fairfax Radio Network’s 3AW, 2UE, 4BC and 6PR stations with Macquarie Radio Network’s 2GB. The merger unlocks significant value and advertiser opportunity and brings together the leading news, talk and sport stations in Sydney and Melbourne. Further significant value was realised through Fairfax’s sale of Perth music station 96FM for cash consideration of approximately $78 million, which was a compelling offer. I noted in my report last year that Fairfax and Nine Entertainment Co. had formed a 50:50 joint venture to launch a Subscription Video-On-Demand (SVOD) service in 2015 to provide unlimited access to television shows and movies. Stan was launched on Australia Day and is making pleasing progress. In 2015 we also made significant progress in delivering greater levels of productivity and efficiency right across the business. We have simplified our operations and well exceeded our targeted $311 million annualised cost savings by 2015, resulting from our Fairfax of the Future program to become a leaner, more agile organisation. That program was announced in February 2012 to run over three- to-four years. The disciplined and pragmatic approach instilled through Fairfax of the Future is now embedded in management, with cost savings and transformation continuing. Transformation is delivering the outcomes we planned for. Core operating costs for the year were down 4% and Metropolitan publishing costs down 7%. We continue to seek out efficiencies and are constantly developing smarter ways of doing what we do. Restructuring of our Australian Community Media CH AIRM AN FAIRFAX MEDIA ANNUAL REPORT 2015 | 7 CHAIRMAN’S REPORT CONT’D February 2012 March 2013 Fairfax of the Future program launched Compact editions of The Age and SMH launched April 2013 Organisational structure simplified June 2013 Digital subscriptions launched for The Age and SMH December 2013 Sale of Stayz for $220m $83.2M Statutory net profit after tax $143.6M Underlying net profit after tax 4¢ Total dividends partly franked $64M Net cash as at 28 June 2015 business of more than 150 rural and regional newspapers and websites is well progressed and on track to deliver annualised savings of up to $60 million by end of financial year 2016. GROW, TRANSFORM, INVEST We are executing a strategy to optimise our core strengths. Put simply there are three elements to our strategy: > We are growing our core businesses. This includes building and investing in our major growth vehicle Domain Group, growing verticals and leveraging areas where we have competitive strength and skills - such as Life Media & Events. In addition, we are realising the full potential of our restructured Radio business which now takes the form of a 54.5% shareholding in the ASX-listed Macquarie Radio Network. > We are continuing the transformation required to create a sustainable publishing business, spanning metropolitan and community titles, on the print to digital journey. This involves reshaping the publishing model, continuing to deliver efficiencies, and maintaining cost discipline. Setting an impressive pace is our New Zealand digital brand, Stuff.co.nz, which lifted audiences 23% year-on-year to 1.8 million, supporting 38% growth in our digital revenues in that market. > We are investing to develop new growth verticals. An example of which is our joint venture with leading global source of news and information, The Huffington Post, to launch a local version HuffPost Australia in August, which is part of our Digital Ventures portfolio of high- potential digital businesses and investments. We are leveraging our balance sheet strength to pursue strategic opportunities and to create shareholder value. Our strategy and strong balance sheet puts us in a position to invest in existing and new business areas where our journalism and content gives us competitive strength. In his report, our Chief Executive Officer elaborates further on our strategy and the significant developments and milestones that contributed to our progress. THE FUTURE Your Board is ever mindful to ensure our decisions position Fairfax to best operate in the contemporary media environment, ready to take full advantage of new opportunities. Fairfax has made its position absolutely clear that the archaic media ownership restrictions currently in place in Australia are outdated and outmoded by technological change and shifts in how consumers now source their news and information. Fairfax strongly advocates for media ownership law reform and the flexibility to operate across all available media platforms. The current legislation simply does not meet the needs of the industry or the community. It is hindering the development of modern media for Australian consumers and has the potential to greatly restrict the quality of content which flows to them in the future. 8 >June 2014 August 2014 August 2014 Closure of Chullora and Tullamarine print sites Australian Community Media transformation 50% investment in SVOD service Stan October 2014 Acquisition of Allhomes January 2015 March 2015 Move to 100% ownership of Metro Media Publishing Merger of Radio assets with Macquarie Radio Network Abolishing the reach rules, and the two-out-of-three rule which stops anyone owning more than two of a newspaper, commercial TV or radio licence in a major market, would reset the competitive base for a modern media industry. Our industry operates in an environment of intense competition for advertising revenue and audiences from global media and technology giants, such as Google, Facebook and Twitter. The old media rules advantage the overseas competitors at the expense of Australian-owned media. The growth in the number of international digital media players in Australia is challenging, and the advertising market is becoming increasingly fragmented, driving the need for Australian media companies to be free to compete on an even playing field. There is a multitude of possible scenarios should the legislation change. The strength of our balance sheet, reduced cost structures and strong market position of our mastheads position Fairfax to take advantage of any market opportunities that might arise to the benefit of our audiences and consumers - and to maximise value for our shareholders - should the Government act in the national interest on what is a compelling and convincing case for reform. Turning now to another important matter. New remuneration arrangements for management have now been in operation for two years, having been implemented following strong support received at the 2013 Annual General Meeting. Under these arrangements, Key Management Personnel will not receive short-term performance incentives for the 2015 financial year despite the year’s robust financial results. Management recognised that there was a strategic imperative in the 2015 financial year to concentrate on longer-term growth, rather than short-term earnings. There was an economic incentive for them to take this approach as our remuneration arrangements are operating as intended, with incentives weighted towards longer term equity opportunities. Annual targets have been set that represent milestones along the way but management’s primary focus is on delivering the Company’s strategic transformation for the long term. Your continuing support of these arrangements is well justified by the results to date. This is my final report to you as Chairman of Fairfax, a role I’ve held since October 2009 having joined the Board in February 2003. In March, we announced Nick Falloon’s appointment to the Board as a Non-Executive Director, which was effective 1 May 2015, and that he would assume the Chairmanship when I leave the Board at the end of August following the signing of the full year accounts. We welcome Nick to the Board. He brings a lifetime of experience in the media industry, including serving as the Chief Financial Officer and later Chief Executive Officer of Publishing and Broadcasting Ltd, which included ACP Magazines, Nine Network and Crown Casino. He was also the Executive Chairman of Network Ten between 2002 and 2010, one of the most successful periods in the network’s history. Nick will conduct the 2015 Annual General Meeting to be held in Sydney in November. At this meeting we will have three serving Directors standing for re-election, Jack Cowin, Michael Anderson and James Millar. Nick will be standing for election. It has been a tremendous honour to have served the shareholders of Fairfax, an important organisation enriching the lives of Australians and New Zealanders as their trusted voice. I have every confidence in management, Nick and the Board. I take this opportunity to acknowledge my fellow Board members for the invaluable skills, expertise and experience they bring to your Company. On behalf on the Board, I would like to thank everyone who works as part of Fairfax for their efforts in achieving significant progress and for doing the important work that they do. Your Board is confident Fairfax is well-positioned to thrive into the future and maximise shareholder value, while staying true to its proud 184-year history of maintaining core editorial values of independence and integrity. There is great opportunity ahead for Fairfax. FAIRFAX MEDIA ANNUAL REPORT 2015 | 9 IN 2015 FAIRFAX MEDIA DELIVERED REVENUE GROWTH FOR CONTINUING BUSINESSES FOR THE FIRST TIME IN EIGHT YEARS. THIS MILESTONE IS TESTAMENT TO OUR COMMITMENT TO EMBRACE THE OPPORTUNITIES ARISING FROM THE NEW REALITIES OF MODERN MEDIA. GREG HYWOOD Our efforts to transform the financial and operational performance of Fairfax began around four years ago. The early stages of this journey involved a resetting of our cost base, implementing a series of operational changes, and strengthening the Fairfax balance sheet through a number of strategic asset sales. Today, our business and culture thrive on innovation. Customer and digital centricity is part of our organisational DNA as we implement our strategy of building and monetising our large-scale audiences by providing quality, independent journalism, content and experiences. We are now focused on reshaping the business for growth and investing for the future. During the 2015 financial year, we applied dedicated focus, attention and resources to our growth engines, which include: > Domain Group - our real estate media and services business which is fast-tracking its national expansion. > Life Media & Events - our strong portfolio of lifestyle- oriented products spanning travel, health, food, parenting, motoring, combined with one of the largest events businesses operating across Australia and New Zealand, focused on running, swimming, food and wine, parenting and the arts. > Digital Ventures - our specialist business unit embracing entrepreneurial and disruptive thinking, with a strong portfolio of digital publishing assets and transactional businesses, along with our 50:50 joint venture Subscription Video-On-Demand (SVOD) service, Stan. We are making pleasing progress in our efforts, which I outlined in the 2014 Annual Report, to optimise our strengths by building new audiences and extending our media core into a broadly- based services business. Key to this is leveraging our multi-platform media business and its highly valuable audiences, content and journalism. Our business is stronger as a result of a more diversified revenue base. The Chairman’s Report outlined three elements in Fairfax’s strategy - grow, transform and invest - to accelerate the Company’s performance over the long-term. The significant developments and milestones in executing our strategy are outlined below. GROW In the last two years we have implemented a strategy to realise Domain’s full potential - providing the business with the autonomy, and the resources necessary, to make it the real estate media and services powerhouse it is fast becoming. Domain has aggressive growth objectives and we believe it is well-positioned to achieve them. The evidence is in that as in other international markets, like the United Kingdom, there is room for two strong players in the real estate classifieds category. 10 CEO & MD shareholder value, with further significant value unlocked through our sale of Perth-based 96FM for cash consideration of approximately $78 million. TRANSFORM We are well-advanced in creating a sustainable publishing business on the print to digital journey. Audiences flock to us for the quality, independent journalism and content we deliver in ways our readers want it. We put hundreds of journalists and salespeople into communities to be at the heart of conversations that matter and to create connections that count. That localism – combined with a national footprint and journalism of significant scale – is our competitive advantage. Transforming our Australian metropolitan publishing business has included reorganising newsrooms to be genuinely digital-first, significantly reducing costs and outsourcing where appropriate, while Domain has leadership in several key markets - it is number one in Sydney and Canberra - and is a serious challenger in other key markets. We have invested $150 million in acquisitions that expand Domain’s footprint and broaden its offering. This has included buying Canberra’s leading property portal Allhomes for approximately $50 million in October 2014, and moving from 50% to full ownership of Victoria’s premium real estate and lifestyle-focused magazine and newspaper business Metro Media Publishing (MMP). There has also been significant operational investment in sales and product development. In 2015, Domain made fast progress in executing its strategy: > 20% increase in agent subscribers to 10,400; > 16% increase in listings to more than 350,000 with 85% overall market penetration; > 30% increase in average monthly visits across main, mobile sites and apps to 25 million; and > National roll-out of agent ownership model. Domain achieved digital revenue growth of 36% and a 37% increase in digital earnings before interest, tax, depreciation and amortisation (EBITDA) to $61 million. Including the acquired MMP business, Domain Group revenue increased 45% and EBITDA increased 46% to almost $86 million. Domain is well positioned with a great strategy and a great team. Momentum in this business is strong. We have also grown our Events business, having combined it with our Life Media business, in order to build on strong natural audience and commercial links. This new structure brings sharper commercial focus, speed to market, and an improved product mix to our millions of customers. Our journalism drives enormous audiences and we are taking advantage of that success. In the year, we expanded the number of events from 15 to 23, with a 41% increase in revenue reflecting strong organic growth, new event launches, and acquisitions such as the Baby & Toddler Show. Fairfax’s radio interests now take the form of a 54.5% shareholding in the ASX-listed Macquarie Radio Network. During the year Fairfax Radio Network’s 3AW, 2UE, 4BC and 6PR stations merged with Macquarie Radio Network’s 2GB. The radio merger has created a genuine national news, talk and sport network, bringing together the number one stations in Sydney and Melbourne. MRN now has the greatest mix of talkback talent ever assembled in a single radio network, engaging with a total audience of 2.3 million. The merger provides both cost and revenue benefits. Cost benefits are estimated between $10 million and $15 million on an annualised basis and MRN is well underway with business integration. The restructuring of our radio assets has been a key driver of CEO & MD CEO & MD’S REPORT CONT’D $287.4M Underlying EBITDA excluding businesses divested + 37.1% Domain digital EBITDA growth $265M Cashflow from trading 47% Metro 4% Radio 19% New Zealand Australian Community Media 30% Share of underlying EBITDA for continuing businesses excluding corporate/other (%) maintaining reach of almost 11 million Australians aged 14+ across publishing mastheads - which is the largest audience in the company’s history. The Sydney Morning Herald is the nation’s most read masthead across print and digital platforms, with a monthly audience well over five million. We have dismantled the legacy- based, vertically-integrated structure, and become a leaner, more agile organisation, from editorial production, advertising, sales and contact centres. We run our business on a 24/7 digital-first basis, where the production of a physical newspaper is important but just one part of the process. Smarter production methods and increased circulation yield have improved profitability. Closing down our printing operations in Tullamarine and Chullora allowed us to replace presses with an original cost of $600 million with $40 million of extra capital equipment at our regional printing sites in Ballarat and North Richmond. This rescaling for efficiency saw printing capacity utilisation in Sydney and Melbourne markets improve from 40% to 90%. We have also improved profitability through the diversification of our revenue base, having introduced digital subscriptions for The Sydney Morning Herald and The Age, with 159,000 paid digital subscribers as at August 2. The diversification of our revenue base can be seen in print advertising making up just 34% of total Metropolitan revenue in 2015. Our Metropolitan publishing operating costs are down by 7%, which together with Domain and the new revenue initiatives, have contributed to EBITDA growth for Metropolitan Media of 30%. transformed the operations and performance of our metro business to our Australian Community Media (ACM) business of rural and regional newspapers and websites. We have restructured ACM from 65 largely separately-run businesses into six geographic operating groups to create a stronger rural and regional media network. This approach has involved working more closely together and sharing resources across our many newspapers, websites and events. ACM is maintaining a strong footprint for local news, content and sales capability, while adopting new technology and upgrading newsrooms. Our people are working more efficiently with new systems and digital-first editorial production practices and we have a vastly improved local sales approach. Our New Zealand publishing business has also been reshaping - through product innovation, as well as significant editorial and sales transformation - to build a digital future and improve audience monetisation. The business reaches 2.8 million people each day, driven largely by Stuff.co.nz. Stuff has moved from seventh to fourth largest digital site in the country, ahead of YouTube and just behind TradeMe. Fairfax is leading the way in shaping the modern digital news product for Australians and New Zealanders. In transforming our publishing business, we are taking advantage of the opportunities presented by the global nature of digital publishing. Around 75% of the audiences of our main metro mastheads are coming to us on digital platforms and increasingly mobile. This trend underpins our efforts to refine our digital news product so it is tailored optimally for our audiences. We are applying many of the same principles that successfully Fairfax is in the enviable position of having access to the best 12 intelligence and learnings in the evolving digital environment because of our exclusive relationships with three of the top five digital-only media groups in the US, the centrepiece of which is our relationship with leading global source of news and information The Huffington Post, coupled with the alliances formed by our Allure Media business, which is part of the Digital Ventures portfolio. FAIRFAX NOW OPERATES WITH A REINVIGORATED AND HIGHLY ENERGISED CULTURE, WITH OUR PEOPLE ADEPT AT USING THE MODERN TOOLS OF MEDIA TO DRIVE AUDIENCE ENGAGEMENT AND COMMERCIAL SUCCESS. INVEST Our Digital Ventures business encompasses three core components, the first being digital-only publishing as mentioned above. The second component is Stan, and the third is our range of transactional and early stage investments such as Tenderlink, Weatherzone, RSVP/ Oasis Active, Healthshare and Adzuna. During the year we invested $20 million in Digital Ventures, excluding our investment in Stan. Investments included The Huffington Post Australia, game-based e-learning business for children Skoolbo, publishing and online community business Over 60, lightning data business Kattron (part of Weatherzone), and Weatherzone’s joint venture with South Africa’s leading commercial weather services company AfricaWeather. We are investing $50 million in Stan over a multi-year period, including marketing and advertising. Stan has a compelling consumer proposition in terms of value and content. The $10 a month service provides subscribers with access to the largest content library of TV shows and movies in Australia. The SVOD category is fast gaining traction with media consumers looking to supplement their free- to-air viewing with on-demand, internet delivered content. Consumer interest in Stan has exceeded expectations, with well over 300,000 gross sign-ups as at August 3. There has been a strong response to SMH/The Age subscription bundling offers. Our publishing business has provided valuable marketing and advertising support to our new and growth businesses. Fairfax has a strong balance sheet with net cash of $64 million, which provides us with considerable flexibility to continue to invest, both in our existing businesses and via acquisition, as we continue the Company’s transformation. OUR PEOPLE Fairfax now operates with a reinvigorated and highly energised culture, with our people adept at using the modern tools of media to drive audience engagement and commercial success. The Company’s solid financial results are a reflection of the performance of our people. We are investing in our large, highly talented workforce across Australia and New Zealand and equipping them with the new skills and technology needed to take our business into the future. Everyone in our business has an unrelenting focus on the future and the great opportunity ahead. Our people embrace change and innovation and are committed to delivering on our long-term plan to grow, transform and invest. Step by step, milestone by milestone, we are doing what some thought could not be done. In reshaping the business, the Fairfax team is proudly at the forefront of developing a contemporary media business model, underpinned by our contemporary journalism. That outstanding journalism remains at the heart of our business. We deliver quality journalism and content to our large-scale audiences across all available platforms, while maintaining absolute independence and integrity. Finally, I would like acknowledge our Chairman, Roger Corbett, who is stepping down from the Board after more than 12 years. Roger has made an invaluable contribution and been instrumental in guiding Fairfax, its strategy and transformation. I have valued his wise counsel and advice. Roger and the Board have overseen the great progress Fairfax has made in recent years. Today, Fairfax is a stronger, more diversified media company. We are clear-sighted about the immense opportunities ahead and our ability to seize them. We are confident in our business model and strategy to provide advertising to clients, subscriptions to customers, and leverage our marketing inventory and audiences to grow new businesses, such as Domain and Events. Fairfax is accelerating into the future. FAIRFAX MEDIA ANNUAL REPORT 2015 | 13 FAIRFAX MEDIA’S COMMERCIAL SUCCESS AND FINANCIAL PERFORMANCE IS VITALLY IMPORTANT TO THE COMPANY’S ABILITY TO PROVIDE MEANINGFUL LONG-TERM BENEFITS TO THE COMMUNITIES WE SERVE THROUGHOUT AUSTRALIA AND NEW ZEALAND. In all aspects of our business, we maintain a strong focus on environmental and corporate social responsibility (CSR). We believe it is important to play an active role in supporting local communities. We utilise our position as a community leader to support initiatives and causes which are aligned with our business objectives through measures including sponsorships, contra advertising, partnerships, fundraising campaigns as well as editorial exposure across our extensive network of media assets. By driving conversations that matter and creating connections that count in the communities we serve, Fairfax uses its trusted voice to deliver a powerful public good. Our journalism makes communities stronger - more civil, more open and transparent. We hold governments and the powerful up to public scrutiny and to account. At Fairfax, we strive to be accurate and fair-minded in our reporting. We have established internal processes which aim to ensure this happens. We embrace self-regulation of the media industry, which we actively support and fund. Our CSR strategy considers risks and the interests of our customers, employees, shareholders, communities and social and environmental aspects of our business activities and the impact on long-term financial viability. By integrating CSR into core business processes and stakeholder management, Fairfax can achieve the ultimate goal of creating both social and corporate value. Fairfax runs a combination of both centralised and decentralised CSR programs to ensure maximum benefits to our local communities, our customers and our employees. There are five strategic pillars in our CSR and sustainability strategy: 1. Environment 2. Community 3. People and Culture 4. Editorial Integrity 5. Financial Viability and Sustainability CORPORATE SOCIAL RESPONSIBILITY & SUSTAIN ABILITY 14 ENVIRONMENT Fairfax performs a vital role in educating, informing and raising awareness in the community about important sustainability and environmental issues. At the same time, the Company’s environmental strategies ensure positive action is taken to reduce energy consumption and manage our carbon footprint. Fairfax’s Environment Policy sets out the Company’s commitment to managing and improving environmental performance across all business activities, with key impacts being in the areas of waste generation, air and water emissions and recycled waste. In 2011, Fairfax made a commitment to reduce its carbon emissions by 20% to 25% by 2020. From FY12 to FY15, a reduction of more than 30% of Scope 1 and Scope 2 Greenhouse Gas (GHG) emissions has been achieved. The table overleaf highlights Fairfax’s improved performance against the 2020 carbon emissions reduction target. To maintain consistency with FY11/12, the GHG figures for following years are from the National Greenhouse Energy Reporting Scheme (NGERS) report. This achievement is the result of a number of key initiatives including: > consolidation of printing assets across both Australia and New Zealand; > education in administration and office facilities across the property portfolio; and > installation of energy efficient plant, equipment and lighting across a number of key business units. Fairfax is continuing to focus on further reductions in GHG emissions and environmental performance. A number of key initiatives are under way, including: > reviewing efficiency opportunities across the Fairfax property portfolio with potential energy and cost savings through better management of energy transmission and distribution losses; > the introduction of a monthly energy data validation process to identify consumption trends, review energy intensities and pick up anomalies to improve the quality and accuracy of reporting overall; > implementation of a single waste contract and reporting standards across Australia and New Zealand and development of a waste reduction strategy for all Fairfax sites; > the introduction of a Carbon Footprint Dashboard to provide up-to-date energy data for management and staff; > the continuation of the property asset review and real estate consolidation program to reduce floor space, energy consumption and property running and maintenance costs; and > investigation and analysis of voltage stabilisation technology to reduce power consumption and damage to electronic equipment at print sites caused by power fluctuations. Fairfax is a co-signatory to the National Environmental Sustainability Agreement. The Company maintains a strong commitment to using sustainable technologies and materials such as inks with a vegetable oil base and newsprint from sustainable sources. SUSTAIN ABILITY FAIRFAX MEDIA ANNUAL REPORT 2015 | 15 CORPORATE SOCIAL RESPONSIBILITY & SUSTAINABILITY CONT’D Fairfax’s printing division is a member of The Newspaper Works’ Environment Advisory Group (EAG) which aims to advance newsprint recycling, improve product stewardship and promote sustainability. Fairfax’s Events business remains focused on reducing its environmental impact, including waste reduction, with 70% or 242.63 tonnes of food waste generated from events successfully diverted from landfill into compost, organics and recycling in FY15. IMPROVED PERFORMANCE AGAINST REPORTED 2020 CARBON EMISSIONS REDUCTION TARGET T CO2-E (NGERS) YEAR-ON-YEAR PERFORMANCE (%) 2013-14 PERFORMANCE C.F. 2011-12 (%) 2011-12 2012-13 2013-14 84,976 79,174 68,929 -7% -13% -19% Fairfax is committed to supporting and making a positive contribution to the hundreds of communities in which it operates. We do this in many different ways, each unique to our role as a powerful community leader. Fairfax newspapers and websites play an important role in encouraging fundraising. For example, Stuff.co.nz utilised a ‘givealittle’ page to encourage its readers to support the Red Cross Nepal Earthquake appeal in May 2015, raising NZ$57,717. Fairfax also supports numerous charities through the provision of advertising support. In FY15, Fairfax and its divisions delivered multi-million dollar exposure for charities and community organisations. FAIRFAX EVENTS Fairfax attracted more than two million people to its expanding calendar of arts, business, food and wine, parenting and sports events. Extending our large-scale audiences into communities provides significant social and economic benefits. As well as connecting us to our readers, Fairfax Events enables the Company to build key partnerships with local charities, clubs and associations as well as helping to raise valuable funds for hundreds of deserving charities. Our sporting events portfolio - including City2Surf (Sydney), City2Sea (Melbourne), City2South (Brisbane), the Swan River Run (Perth) and Round the Bays (Auckland) - works closely with Everyday Hero to promote participants raising money for charity. Fairfax Media is proud to partner with key stakeholders to deliver world-class, mass participation events and experiences in Australia and New Zealand. In FY15, Since 1971, Fairfax Events have generated more than $35 million in contributions to various charities, with popular The Age Run Melbourne contributing $8.9 million for COMMUNITY 16 IMPROVED PERFORMANCE AGAINST REPORTED 2020 CARBON EMISSIONS REDUCTION TARGET T CO2-E (NGERS) YEAR-ON-YEAR PERFORMANCE (%) 2013-14 PERFORMANCE C.F. 2011-12 (%) 2011-12 2012-13 2013-14 84,976 79,174 68,929 -7% -13% -19% 400 charities since 2008 and the iconic Round the Bays event in Auckland, New Zealand, raising NZ$1.75 million over the past 11 years for charitable causes and initiatives. March 2015 partnered with Melanoma Institute Australia (MIA), the world’s largest melanoma research and treatment centre, by fundraising and promoting the important work of the MIA. In FY15, Fairfax Events raised around $7 million for charity and community initiatives across Australia and New Zealand. > The Sun-Herald City2Surf, the world’s largest community run attracting more than 80,000 participants each year, raised more than $4.5 million for participating charities in August 2014. > The Sydney Morning Herald Half Marathon, Australia’s largest 21km running event, in its 23rd year and attracting 12,000+ runners, who raised more than $875,000 for charity. > The Sydney Morning Herald Cole Classic of 3,600+ swimmers and SMH Sun Run of 5,000+ runners raised more than $140,000 in March 2015. > Fairfax food events, such as Night Noodle Markets, contributed more than $50,000 in cash donations to OzHarvest which provided more than 100,000 meals to vulnerable Australians. Fairfax Events engages over 5,000 volunteers annually donating more than $150,000 to organisations including Girl Guides, Surf Clubs, Rotary, run clubs and local Scouts. Fairfax provides national support to the prestigious Australian of the Year Awards, as well as numerous arts organisations and events including the Sydney Festival, Melbourne Festival, Brisbane Festival, Art Gallery of New South Wales, National Gallery of Australia and the Melbourne and Sydney Film and Writers’ Festivals. The inaugural Sydney Morning Herald Spectrum Now arts festival held in AUSTRALIAN COMMUNITY MEDIA Fairfax’s Australian Community Media includes hundreds of rural and regional newspapers and websites which proudly support a range of charitable and community causes across Australia, through cash and in-kind contributions. In FY15, ACM contributed more than $366,000 to assist hundreds of special groups, projects and programs. RADIO Fairfax’s radio assets (prior to the radio transactions completed in early 2015) continued to support hundreds of national and local non-profit organisations through community-based activities, sponsorships and community service announcement airtime in FY15. The total value of this contra airtime was $3.7 million. WORKPLACE GIVING Fairfax’s Australian employees are encouraged to participate in our More than Words’ workplace giving initiative by donating part of their pre-tax salary to nominated charities. More than $858,000 has been donated since the program started in 2005. AUSSMC Fairfax Media is a Foundation Sponsor of the Australian Science Media Centre (AusSMC) - an independent, not-for-profit service aimed at better informing public debate on major science issues - providing financial and in-kind support since 2005. AusSMC works for the benefit of the FAIRFAX MEDIA ANNUAL REPORT 2015 | 17 CORPORATE SOCIAL RESPONSIBILITY & SUSTAINABILITY CONT’D COMMUNITY CONT’D PEOPLE AND CULTURE broader community by fostering stronger links between the media and the scientific community to encourage the dissemination of evidence-based science information. NZ HOUSE & GARDEN HOUSE TOURS NZ House & Garden House Tours profiles some of New Zealand’s most stunning homes in four regions across the country, while supporting a charitable cause - the NZ Breast Cancer Foundation. Fairfax provides the NZ Breast Cancer Foundation with a NZ$50,000 cash donation, along with a NZ$100,000 media campaign. NEWS IN EDUCATION PROGRAM Stuff.co.nz’s award-winning News in Education (NiE) program supports teachers across New Zealand with high-quality, motivating, curriculum-based resources on a range of topics and subject areas. NiE provides mini newspapers, aimed at five different curriculum levels from Years 1-2 through to Years 9-10. CREATIVE SPIRIT Creative Spirit (creativespirit.org.nz) is a Fairfax New Zealand initiative setting the challenge to employers in all industries, especially media and advertising, to provide employment opportunities to people with disabilities. Since Fairfax NZ started the Creative Spirit journey in 2012, the number of opportunities created within Fairfax alone has grown substantially, with the Company actively involved in assisting many other businesses to do the same. Fairfax works to actively build a diverse, innovative and highly engaged workforce. It is important in enhancing the quality and creativity that underpins our brands and businesses, and which makes Fairfax a good place to work. Our business is underpinned by a robust culture, values and behaviours and open, transparent manager-led two-way communication. The Company has identified its people and culture as being critically important in delivering its business objectives, as well as attracting and retaining high quality staff. This includes promoting gender diversity, equality and inclusiveness in our workplace in all respects. More information on how Fairfax creates a fair and inclusive workplace can be found in the Corporate Governance section of this report. Our transformation involves significant change and building a culture which is adaptive, resilient and prepared to continually evolve as the strategy develops. While some areas of the business are reducing headcount, in other areas of the business we are hiring staff and investing. Our culture and values are embedded and reinforced across all areas of the business, including in the performance management system and processes, learning and development programs, as well and recognition and reward programs to acknowledge success and achievement. HEALTH & SAFETY Fairfax has continued to put safety at the forefront of its operating principles. This has resulted in a significant improvement in safety performance in 2015. Since the 2009/2010 financial year, the Company has reduced the number of Lost Time Injuries by 73%, achieving a 48% reduction from FY13/14 to FY14/15. Headcount reductions contribute to this change, however, the majority of the reduction is the result of the Company’s significantly improved focus on safety accountability through various policy, training and education measures. Fairfax exceeded its target for Group Lost Time Injury Frequency Rate (LTIFRMAT) in FY15, achieving 1.47 as of June 2015 compared with a target of 2.32. This is an overall reduction of 36.6% compared with FY14. CELEBRATING DIVERSITY Across all levels of Fairfax we are committed to pursuing gender diversity, equality and inclusiveness for all employees. The Company has set a target of achieving 35% of women in senior management positions across the business by 2018. To support Fairfax’s focus on increasing the number of women in senior roles, our recruitment practice has been updated. Fairfax’s recruitment practice now requires at least one woman be included on all selection panels and shortlists for all senior positions. 18 EMPLOYEE SUPPORT SERVICES Fairfax offers independent, confidential external assistance and counselling services, through provider Optum, to all employees across Australia and New Zealand and their immediate families. This 24-hour service provides direct counselling and support on a wide range of issues. In FY15, 325 staff and their families accessed the service and 708 employees utilised Optum’s online portal. 2,821 Employees received a free flu vaccination 711 Employees made use of company- subsidised gym facilities 205 Employees attended Leadership Development programs 2,634 Employees attended Learning and Development training programs 1,028 Employees received company subsidised entry to company-run sporting events Changes were also made to the Fairfax Diversity Guidelines in FY15, including updated recruitment and promotion processes, development of frameworks for identification, assessment and development of high-performing talent, as well as a review of talent and succession management programs. More information about Fairfax and diversity is included in the Corporate Governance section of this report. WOMEN OF INFLUENCE AWARDS Fairfax’s The Australian Financial Review has been a proud partner together with Westpac of the 100 Women of Influence Awards since 2011. Fairfax also works with Westpac to run the 60 Women of Influence Awards in New Zealand. These awards have had a profound influence in business by raising gender diversity to the top of the agenda, and creating a powerful platform for the most influential, visionary and inspirational women to share their positive stories. Fairfax also runs the Women of Influence program for its employees. The initiative has gained momentum over the past three years and now has an alumni of 13 winners who are positive role models for others. MENTORING PROGRAM Fairfax’s values and cultural drivers are embedded within our internal employee development programs. Our successful Mentoring Program provides a structured framework for our people to share professional and personal experiences and knowledge. The 2015 Fairfax Mentoring Program paired 450 motivated and committed staff in Australia and New Zealand, building mutually beneficial relationships between highly-skilled mentors and high-performing mentees to support knowledge and skills transfer across the business. FAIRFAX FOUNDATION The Fairfax Foundation was established in 1959, operating separately from Fairfax Media with the purpose of providing support to current and former Fairfax employees and their dependants. During the 2015 financial year, the Foundation provided $383,185 in financial grants, loans and other benefits to eligible recipients. FAIRFAX MEDIA ANNUAL REPORT 2015 | 19 CORPORATE SOCIAL RESPONSIBILITY & SUSTAINABILITY CONT’D EDITORIAL INTEGRITY Fairfax is proud of its 184-year history of providing quality independent journalism. Our journalists pursue the truth without fear or favour. All our journalists operate with a robust code of ethics. We maintain an uncompromising approach to media ethics and integrity, with our “Independent. Always.” editorial position celebrating our point of difference and competitive advantage as a news media organisation, spanning print, digital, radio and social platforms. Fairfax’s multi-award-winning journalism is recognised for its powerful role in influencing change and the social agenda, sparking public interest and debate, and serving as a source of timely and reliable information for its audiences and communities. EDITORIAL INTEGRITY IN ACTION EXAMPLES INCLUDE: Financial Planning Scandals: Senior Business journalist Adele Ferguson won Australia’s highest journalism accolade in December 2014, The Gold Walkley, for her tenacious reporting into financial planning scandals. Ferguson’s collaboration with Deb Masters and Mario Christodoulo (ABC) titled ‘Banking Bad’ prompted a Senate inquiry and subsequent compensation for victims. Ferguson’s work was also recognised with Melbourne Press Club Gold Quill, NSW Journalist of the Year Kennedy Award, and Logie for Most Outstanding Public Affairs Report. International Affairs: The Sydney Morning Herald’s Matt Wade was awarded the 2014 Australian Council for International Development (ACFID) Media Award for excellence in reporting on international development issues, for his effort to highlight the ‘forgotten famine’ in South Sudan with a series of articles. The judges commended Matt for articulating, in a dignified and accessible way, the complex historical and political situation in South Sudan and for compassionately pursuing stories the world had forgotten. Women’s Rights: The Courier’s Kim Quinlan was presented with the prestigious 2014 United Nations Association of Australia award for Increasing Awareness and Understanding for Women’s Rights and Issues, following the five-month ‘It’s Up to Us’ campaign. Under Kim’s leadership, the stories broke down community barriers and paved the way for a new conversation about family violence. ‘It’s Up to Us’ was also awarded the Rural Press Club of Victoria best feature award and back- to-back City of Ballarat Community Safety Awards. Climate Change: The Sydney Morning Herald, The Age and Stuff.co.nz are founding partners of the Climate Publishing Network (CPN), a 25-strong new global publishers’ network collaborating to educate and inform communities about the important issue of climate change. The CPN is coordinated by the Global Editors Network and connects Fairfax Media 20 20 with publishers including The Guardian, Le Monde and China Daily in a global conversation to raise awareness about climate change. The Sydney Morning Herald and The Age have run a special ‘Climate for Change’ series on global warming. Environment: Newcastle Herald’s Donna Page teamed with colleagues Matthew Kelly, Helen Gregory and Damon Cronshaw on the investigative series ‘Toxic Truth’, exposing the failed state-sanctioned clean- up of pollution from a former lead smelter at Boolaroo in Lake Macquarie NSW, and its ongoing health effects on the community. The series, which involved collecting dozens of soil samples, won the United Nations Association of Australia’s overall media award for World Environment Day. Toxic Truth was also used as an exemplar in The Newspaper Works’ Influential by Nature campaign. Social Issues: The Age’s Aisha Dow in June 2015 uncovered the moving story of a 19-year-old homeless girl living under a bridge in the inner city and determined to complete her Victorian Certificate of Education. Within 24 hours of the story running on The Age front page, the newspaper was flooded with offers of support; within the week she had a free flat for herself and her boyfriend, additional coaching for her studies, and a confirmed offer of a place with La Trobe University if she passed her exams. The Canberra Times created a series ‘Behind Closed Doors’ in April 2015 to raise awareness about domestic violence in the nation’s capital, which promoted additional funding from the government to address the issues. Mental Health: The Border Mail’s PANPA award-winning ‘Ending the Suicide Silence’ campaign following a series of local youth suicides led to the opening of a Headspace centre in Albury, Victoria in January 2015, signalling to the community the power of the local masthead in advocating change - with lasting impact. FINANCIAL VIABILITY AND SUSTAINABILITY Being financially sustainable is necessary to serve shareholders’ interests and fulfil our corporate purpose, which is to grow shareholder value by engaging audiences, communities and businesses through compelling content and services, monetised across a range of business models. Fairfax is successfully delivering its transformation plan as the traditional media landscape continues to evolve and digital trends continue, which presents short term risk and immense opportunity. The Company is taking necessary actions to address the challenges the media faces and to shape a new model and structure to sustain the important work we do. FAIRFAX MEDIA ANNUAL REPORT 2015 | 21 INVEST INVESTING TO DEVELOP NEW GROWTH VERTICALS, E.G. OUR SUBSCRIPTION VIDEO-ON-DEMAND JV, STAN, AND UTILISE BALANCE SHEET STRENGTH TO PURSUE STRATEGIC OPPORTUNITIES TO CREATE SHAREHOLDER VALUE. FINANCE TABLE OF CONTENTS FINANCIAL STATEMENTS Board of Directors Directors’ Report Auditor’s Independence Declaration Remuneration Report Corporate Governance Management Discussion and Analysis Report Consolidated Income Statement Consolidated Statement of Comprehensive Income Consolidated Balance Sheet Consolidated Cash Flow Statement Consolidated Statement of Changes in Equity 1. Summary of significant accounting policies NOTES TO THE FINANCIAL STATEMENTS KEY NUMBERS GROUP STRUCTURE 2. Revenues 6. Business combinations, acquisition and disposal of controlled entities OPERATING ASSETS AND LIABILITIES CAPITAL STRUCTURE AND FINANCIAL COSTS 9. Intangible assets 15. Interest bearing liabilities UNRECOGNISED ITEMS OTHER 21. Commitments 24. Other financial assets 3. Expenses 7. Assets and 10. Receivables 16. Derivative financial instruments 22. Contingencies 25. Taxation 11. Inventories 17. Financial and capital risk management 23. Events subsequent to reporting date 26. Employee entitlements liabilities held for sale 8. Investments accounted for using the equity method 4. Significant items 5. Segment reporting 12. Payables 18. Equity 13. Provisions 14. Property, plant and equipment 19. Dividends paid and proposed 20. Earnings per share FINANCIAL STATEMENTS Directors’ Declaration Independent Auditor’s Report ASX INFORMATION Five Year Performance Summary Shareholder Information Directory FAIRFAX MEDIA ANNUAL REPORT 2015 | 23 24 27 31 32 52 61 64 65 66 67 68 70 27. Remuneration of auditors 28. Related parties and entities 29. Notes to the cash flow statement 30. Summary of significant other accounting policies 146 147 149 150 152 BOARD OF DIRECTORS ROGER CORBETT, AO NON-EXECUTIVE CHAIRMAN APPOINTED TO THE BOARD 4 FEBRUARY 2003 Mr Corbett was elected Chairman of the Board in October 2009. He has been involved in the retail industry for more than 50 years. In 1984, Mr Corbett joined the Board of David Jones Australia as Director of Operations. In 1990, he was appointed to the Board of Woolworths Limited and to the position of Managing Director of BIG W. In 1999, Mr Corbett was appointed Chief Executive Officer of Woolworths Limited. He retired from that position in 2006. Mr Corbett is a Director of the Reserve Bank of Australia, a Director of Wal-Mart Stores and Chairman of Mayne Pharma Group Limited. He is also Chairman of the Salvation Army Advisory Board (Australian Eastern Territory) and a member of the Dean’s Advisory Group of the Faculty of Medicine at the University of Sydney. Other Current Australian Listed Company Directorships: Mayne Pharma (appointed November 2010). Former Australian Listed Company Directorships in Last 3 Years: PrimeAg Australia (resigned November 2013). APPOINTED TO THE BOARD 2 SEPTEMBER 2010 Mr Anderson has had a long career in the radio industry including as Chief Executive of Austereo Limited from 2003 until January 2010. During his time as Chief Executive he focused the company on building strong station brands and adapting the business to the changing media market, including building and maintaining market leadership and developing new strategic directions, focusing on target audiences and adapting to increased competition. He has been a leader in adapting radio to the digital era and is Director of OzTAM Pty Limited and Chairman of Ooh! Media Limited. MICHAEL ANDERSON NON-EXECUTIVE DIRECTOR Other Current Australian Listed Company Directorships: Ooh! Media Limited (appointed July 2013). APPOINTED TO THE BOARD 19 JULY 2012 Mr Cowin is the Founder and Executive Chairman of Competitive Foods Australia, a business that has grown from a single food service outlet to one that employs more than 16,000 staff throughout Australia. Mr Cowin moved to Australia from Canada to establish his business. In addition to operating 350 restaurants in Australia, the company operates five manufacturing facilities producing frozen value-added meat products as well as processing fresh vegetables. It exports to 29 countries. Mr Cowin is also a Director of the Network Ten television business, Chairman and largest shareholder of Domino’s Pizza Enterprises Ltd, a listed public company, and Director and largest shareholder of BridgeClimb. Other Current Australian Listed Company Directorships: Ten Network Holdings Limited (appointed April 1998), Domino’s Pizza Enterprises Limited (appointed 20 March 2014). Former Australian Listed Company Directorships in Last 3 Years: Chandler Macleod Group (resigned 7 April 2015). JACK COWIN NON-EXECUTIVE DIRECTOR 24 NICK FALLOON NON-EXECUTIVE DIRECTOR APPOINTED TO THE BOARD 1 MAY 2015 Mr Falloon was appointed to the Board in May 2015 and succeeds Mr Corbett as Chairman in August 2015. Mr Falloon has had 30 years experience in the media industry, 19 years working for the Packer owned media interests from 1982 until 2001. Mr Falloon served as Chief Executive Officer of Publishing and Broadcasting Limited (PBL) from 1998 to 2001 and before that as Chief Executive Officer of PBL Enterprises and Group Financial Director of PBL. The PBL experiences provided a strong background in television, pay TV, magazines, radio and digital industries. From 2002 Mr Falloon spent nine years as Executive Chairman and CEO of Ten Network Holdings. Mr Falloon holds a Bachelor of Management Studies (BMS) from Waikato University in New Zealand. APPOINTED TO THE BOARD (NON-EXECUTIVE) 4 OCTOBER 2010 APPOINTED AS CEO AND MANAGING DIRECTOR 7 FEBRUARY 2011 Mr Hywood has enjoyed a long career in the media and government. A Walkley Award winning journalist, he has held a number of senior management positions at Fairfax including Publisher and Editor-in-Chief of each of The Australian Financial Review, The Sydney Morning Herald/Sun Herald and The Age. He also held the position of Group Publisher Fairfax magazines. He was Executive Director Policy and Cabinet in the Victorian Premier’s Department between 2004 and 2006, and from 2006 to 2010 was Chief Executive of Tourism Victoria. GREGORY HYWOOD EXECUTIVE DIRECTOR Other Current Australian Listed Company Directorships: Macquarie Radio Network Limited (appointed 31 March 2015). APPOINTED TO THE BOARD 26 FEBRUARY 2010 Ms McPhee was appointed to the Board of Directors on 26 February 2010. She is a Director of AGL Energy Limited and Kathmandu Limited. Her previous Directorships include Scentre Group (previously Westfield Retail Trust), Australia Post, Coles Group Limited and Perpetual Limited. Prior to becoming a Non-Executive Director, Ms McPhee held senior executive positions in a range of consumer oriented industries including retail, tourism and aviation, including 10 years with Qantas Airways Limited. Other Current Australian Listed Company Directorships: AGL Energy Limited (appointed October 2006), Kathmandu Holdings Limited (appointed 16 October 2009). SANDRA MCPHEE, AM NON-EXECUTIVE DIRECTOR Former Australian Listed Company Directorships in Last 3 Years: Scentre Group (resigned 7 May 2015), RE1 Limited and RE2 Limited (Westfield Retail Trust) (resigned 1 July 2014). APPOINTED TO THE BOARD 1 JULY 2012 Mr Millar is the former Chief Executive Officer of Ernst & Young (EY) in the Oceania Region and was a Director on their Global Board. Mr Millar commenced his career in the Insolvency and Reconstruction practice at EY, conducting some of the largest corporate workouts of the early 1990’s. He has qualifications in both business and accounting. Mr Millar is a Non-Executive Director of Mirvac Limited, Helloworld Limited and Macquarie Radio Network Limited. He is Chairman of both the Export Finance and Insurance Corporation and Forestry Corporation of NSW. Mr Millar serves a number of charities where he is the Chairman of The Smith Family, and is a Trustee of the Australian Cancer Research Foundation and the Vincent Fairfax Family Foundation. He is a former Chairman of Fantastic Holdings Limited. JAMES MILLAR, AM NON-EXECUTIVE DIRECTOR Other Current Australian Listed Company Directorships: Mirvac Limited (appointed 19 November 2009), Helloworld Limited (appointed 30 September 2010), Macquarie Radio Network Limited (appointed 31 March 2015). Former Australian Listed Company Directorships in Last 3 Years: Fantastic Holdings Limited (resigned 30 June 2014). FAIRFAX MEDIA ANNUAL REPORT 2015 | 25 BOARD OF DIRECTORS APPOINTED TO THE BOARD 26 FEBRUARY 2010 Mrs Nicholls has more than 30 years’ experience as a senior executive and company Director in Australia, New Zealand and the United States. She is currently the Chair of Japara Healthcare and Keolis Downer and a Director of Pacific Brands, Sigma Pharmaceuticals, and Medibank Private. Mrs Nicholls holds a Bachelor of Arts in Economics from Cornell University and a Masters of Business Administration from Harvard Business School, where she was formerly Trustee and Vice President of The Harvard Business School Alumni Board. Other Current Australian Listed Company Directorships: Japara Healthcare (appointed 19 March 2014), Medibank Private (appointed March 2014), Pacific Brands Group (appointed October 2013), Sigma Pharmaceuticals (appointed April 1997). LINDA NICHOLLS, AO NON-EXECUTIVE DIRECTOR APPOINTED TO THE BOARD 29 MAY 2014 Mr Sampson is the national Chief Executive Officer of Australia’s leading communications company, Leo Burnett Australia and a Non-Executive Director to the Board of Qantas Airways Limited. He has an MBA and has spent nearly 20 years working as a strategic advisor with a diverse range of expertise including marketing, communication, digital transformation, new media, reputational risk and corporate turnaround. Both News Limited and The Australian Financial Review ranked him as one of Australia’s most influential executives. He is also a writer, producer and host on a number of TV shows including Gruen Planet, The Project and the award winning documentary Redesign My Brain. Outside of work, he enjoys mountaineering and has climbed to the top of Mount Everest, unguided. TODD SAMPSON NON-EXECUTIVE DIRECTOR Other Current Australian Listed Company Directorships: Qantas Airways Limited (appointed March 2015). APPOINTED TO THE BOARD 16 SEPTEMBER 2005 Over the last 30 years, Mr Young has been an investment banking executive in Australia, New Zealand and the U.S.A. He is currently the Chairman of Barclays Australia and New Zealand and Chairman of Standard Life Investments Australasia. Mr Young was a member of the Royal Bank of Scotland’s Advisory Council in Australia. He also served as Chairman of Investment Banking for ABN AMRO in Australia and New Zealand, Chairman of Queensland Investment Corporation and a Director of PrimeAg Australia. From 1998 to 2002, Mr Young was Executive Vice Chairman, ABN AMRO Group (Australia and New Zealand) and Head of Telecommunications, Media & Technology Client Management for Asia Pacific. Mr Young is also a member of Standard Life plc Asia Advisory Board, a member of the Barangaroo Delivery Authority Board, the Sydney Theatre Company and Governor of the Taronga Foundation. He is involved in a number of community, environmental and artistic activities. Former Australian Listed Company Directorships in Last 3 Years: PrimeAg Australia Limited (resigned November 2013), QIC Limited (resigned November 2013). PETER YOUNG, AM NON-EXECUTIVE DIRECTOR 26 DIRECTOR’S REPORT The Board of Directors presents its report together with the financial report of Fairfax Media Limited (the Company) and of the consolidated entity, being the Company and its controlled entities for the period ended 28 June 2015 and the auditor’s report thereon. DIRECTORS The Directors of the Company at any time during the financial year or up to the date of this report are as follows. Directors held office for the entire period unless otherwise stated. ROGER CORBETT, AO NON-EXECUTIVE CHAIRMAN MICHAEL ANDERSON NON-EXECUTIVE DIRECTOR JACK COWIN NON-EXECUTIVE DIRECTOR NICK FALLOON NON-EXECUTIVE DIRECTOR APPOINTED 1 MAY 2015 GREGORY HYWOOD CHIEF EXECUTIVE OFFICER AND MANAGING DIRECTOR SANDRA MCPHEE, AM NON-EXECUTIVE DIRECTOR JAMES MILLAR, AM NON-EXECUTIVE DIRECTOR LINDA NICHOLLS, AO NON-EXECUTIVE DIRECTOR TODD SAMPSON NON-EXECUTIVE DIRECTOR PETER YOUNG, AM NON-EXECUTIVE DIRECTOR FAIRFAX MEDIA ANNUAL REPORT 2015 | 27 DIRECTOR’S REPORT A profile of each Director holding office at the date of this report is included in the Board of Directors section of this report. COMPANY SECRETARY Gail Hambly is Group General Counsel and Company Secretary. She is a commercial and media law specialist. Ms Hambly is Chair of CopyCo Pty Limited, a Director of Trade Me Limited and Sydney Story Factory. She is a member of the Media and Communications Committee and the Privacy Committee for the Law Council of Australia, a member of the Advisory Board for the Centre of Media and Communications Law at the Melbourne Law School, a member of Chartered Secretaries Australia and of the Australian Institute of Company Directors. She holds degrees in Law, Economics and Science. CORPORATE STRUCTURE Fairfax Media Limited is a company limited by shares that is incorporated and domiciled in Australia. PRINCIPAL ACTIVITIES During the course of the financial year the consolidated entity operated as a multi-platform media, marketing services and real estate services group. The principal activities were the publishing of news, information and entertainment, advertising sales in print and digital formats, and radio broadcasting. The group operates or holds investments in a number of digital businesses. There were no significant changes in the nature of the consolidated entity during the year other than the matters set out as significant changes in the state of affairs below. CONSOLIDATED RESULT The profit attributable to the consolidated entity for the financial year was $83,168,000 (2014: $224,432,000). DIVIDENDS An interim fully franked dividend of 2.0 cents per ordinary share and debenture was paid on 18 March 2015 in respect of the half year ended 28 December 2014. Since the end of the financial year, the Board has declared a partly franked dividend of 2.0 cents per ordinary share and debenture in respect of the year ended 28 June 2015. This dividend is payable on 8 September 2015. REVIEW OF OPERATIONS Revenue and income for the Group was lower than the prior year at $1,878 million (2014: $1,988 million). After significant items of $61 million loss (2014: $66.7 million) the Group generated a net profit after tax of $83.2 million (2014: $224.4 million). Earnings per share decreased to 3.5 cents (2014: 9.5 cents). Further information is provided in the Management Discussion and Analysis Report. SIGNIFICANT CHANGES IN THE STATE OF AFFAIRS Significant changes in the state of affairs of the consolidated entity during the financial year were as follows: On 10 July 2014, the Company repaid US$105 million (A$125 million) of senior notes. On 2 October 2014, the Company acquired All Homes Pty Ltd and All Data Australia Pty Ltd for total consideration of $51.5 million. On 22 January 2015, the Group acquired the remaining 50% of issued shares in MMP Holdings Pty Ltd for total consideration of $75.4 million including $18.5 million in cash. On 30 January 2015, the Company completed an agreement to sell Radio 96FM Perth Pty Limited to APN News & Media Limited for cash consideration of $78 million. In March 2015, the Group commenced an on market share buyback of ordinary shares as part of the Group’s ongoing capital management strategy. At June 2015, 37.1 million shares were repurchased and cancelled for $37.9 million. 28 On 31 March 2015, the Company entered into merger with Macquarie Radio Network Limited and has received $18 million in cash consideration and holds a 54.5% shareholding. There are no subsequent events after reporting date. LIKELY DEVELOPMENTS AND EXPECTED RESULTS The consolidated entity’s prospects and strategic direction are discussed in the Management Discussion and Analysis Report. Further information about likely developments in the operations of the consolidated entity and the expected results of those operations in future financial years has not been included in this report because disclosure of the information would be likely to result in unreasonable prejudice to the consolidated entity. ENVIRONMENTAL REGULATION AND PERFORMANCE No material non-compliance with environmental regulation has been identified relating to the 2015 financial year. The Company reported to the Department of Climate Change on the total carbon emissions of the Group generated in the 2014 financial year under the National Greenhouse and Energy Reporting legislation. The Group’s main source of carbon emissions overall was from electricity consumption at its larger sites and total scope 1 and 2 emissions reported was 68,929 (2013: 79,174) tonnes CO2-e. REMUNERATION REPORT A remuneration report is set out on the pages that follow and forms part of this Directors’ Report. DIRECTORS’ INTERESTS The relevant interest of each Director in the equity of the Company and related bodies corporate as at the date of this report are disclosed in the remuneration report. MEETINGS* BOARD MEETING AUDIT AND RISK NOMINATIONS PEOPLE AND CULTURE NO. HELD NO. ATTENDED NO. HELD NO. ATTENDED NO. HELD NO. ATTENDED NO. HELD NO. ATTENDED R Corbett AO** G Hywood*** M Anderson J Cowin N Falloon S McPhee AM J Millar AM L Nicholls AO T Sampson P Young AM 9 9 9 9 2 9 8 9 9 9 9 9 9 7 2 9 7 9 7 7 4 - - - - - 4 4 - 4 4 - - - - - 4 4 - 4 3 - - - - - 3 3 - 3 3 - - - - - 3 3 - 2 6 - 7 7 - 7 - - - - 6 - 7 4 - 7 - - - - * The number of meetings held refers to the number of meetings held while the Director was a member of the Board or Committee. ** Mr Corbett, Chairman, is an ex officio member of all Board committees. Mr Corbett resigned from the People and Culture Committees on 29 May 2015. *** Mr Hywood attends the Audit and Risk, People and Culture and Sustainability and Corporate Responsibility Committee meetings as an invitee of the Committees. FAIRFAX MEDIA ANNUAL REPORT 2015 | 29 DIRECTOR’S REPORT INDEMNIFICATION AND INSURANCE OF OFFICERS The Directors of the Company and such other officers as the Directors determine, are entitled to receive the benefit of an indemnity contained in the Constitution of the Company to the extent allowed by the Corporations Act 2001, including against liabilities incurred by them in their respective capacities in successfully defending proceedings against them. During or since the end of the financial year, the Company has paid premiums under contracts insuring the Directors and officers of the Company and its controlled entities against liability incurred in that capacity to the extent allowed by the Corporations Act 2001. The terms of the policies prohibit disclosure of the details of the liability and the premium paid. Each Director has entered into a Deed of Access, Disclosure, Insurance and Indemnity which provides for indemnity by the Company against liability as a Director to the extent allowed by the law. INDEMNIFICATION OF AUDITORS To the extent permitted by law, the Company has agreed to indemnify its auditors, Ernst & Young Australia, as part of its audit engagement agreement against claims by third parties arising from the audit (for an unspecified amount). No payment has been made to Ernst & Young during or since the financial year. NO OFFICERS ARE FORMER AUDITORS No officer of the consolidated entity has been a partner of an audit firm or a Director of an audit company that is the auditor of the Company and the consolidated entity for the financial year. NON-AUDIT SERVICES Under its Charter of Audit Independence, the Company may employ the auditor to provide services additional to statutory audit duties where the type of work performed and the fees for services do not impact on the actual or perceived independence of the auditor. Details of the amounts paid or payable to the auditor, Ernst & Young, for non-audit services provided during the financial year are set out below. Details of amounts paid or payable for audit services are set out in Note 27 to the financial statements. The Board of Directors has received advice from the Audit and Risk Committee and is satisfied that the provision of the non-audit services did not compromise the auditor independence requirements of the Corporations Act 2001 because none of the services undermine the general principles relating to auditor independence as set out in Professional Statement F1, including reviewing or auditing the auditor’s own work, acting in a management or a decision-making capacity for the Company, acting as advocate for the Company or jointly sharing economic risk and rewards. A copy of the auditor’s independence declaration under section 307C of the Corporations Act 2001 follows this report. During the financial year, Ernst & Young received or were due to receive the following amounts for the provision of non-audit services: Subsidiary company and other audits required by contract or regulatory or other bodies: • Australia $118,141 • Overseas $63,654 Other assurance and non-assurance services: • Australia $816,167 ROUNDING The Company is of a kind referred to in Class Order 98/0100, issued by the Australian Securities and Investments Commission, relating to the “rounding off” of amounts in the Directors’ Report. Amounts contained in the Directors’ Report have been rounded off in accordance with that Class Order to the nearest thousand dollars, or in certain cases, to the nearest dollar. Signed on behalf of the Directors in accordance with a resolution of the Directors. Roger Corbett, AO Chairman 30 AUDITOR’S INDEPENDENCE DECLARATION FAIRFAX MEDIA ANNUAL REPORT 2015 | 31 REMUNERATION REPORT Dear Shareholder, On behalf of the Board, I am pleased to present Fairfax Media’s Remuneration Report for 2015. Fairfax’s financial results for 2015 reflect a robust financial position forming the basis for future growth. As the Chairman’s and CEO’s reports highlight, the Company is making pleasing progress with its business strategy of maximising long term shareholder value and transforming from a traditional media business into a stronger, more diversified media company increasingly focused on high-growth opportunities. Fairfax delivered underlying earnings before interest, tax, depreciation and amortisation (EBITDA) of $289.4 million for the year, excluding significant items, which was marginally lower than last year. This result was achieved whilst making significant investment into growth opportunities totalling around $42 million, the majority of which is still to be fully reflected in business performance. Specifically during the 2015 financial year we: • made considerable investments in our growth businesses including Domain and Events; • made substantial portfolio investment decisions including the acquisitions of All Homes and the remaining 50% of Metro Media Publishing Holdings in Domain; • developed partnership opportunities including Stan, the streaming venture with Nine Entertainment Co., The Huffington Post, and the merger of our Radio business with Macquarie Radio Network including the sale of radio station 96FM; • continued cost management control; • commenced the transformation of our Australian Community Media division to build a modern stronger rural and regional network. Transformation Incentive Plan (TIP) Shareholders at the 2014 Annual General Meeting approved the Remuneration Report which included the continuation of the Company’s Transformation Incentive Plan (TIP) for 2015. The TIP was implemented as approved. Incentives continue to be heavily weighted toward achieving long-term growth, with a smaller portion toward delivering short-term objectives. The TIP strongly aligns executive rewards with shareholder interests since any incentive award for executive Key Management Personnel (KMP) is made entirely in equity, through a combination of long term options and annual deferred performance shares which are subject to achievement of performance hurdles. Annual Component: In 2015 we reduced the amount of incentive available to KMP for achieving budgeted outcomes. KMP were assessed against two annual metrics, Group EBITDA and Group Revenue. Management recognised that there was a strategic imperative to continue to focus on long term growth, as well as short term earnings, and made certain decisions to invest to support the long term growth of the Group. As a result, KMP narrowly missed achieving targets and no annual component will be paid in 2015. Details of the objectives and outcomes are set out later in this Remuneration Report. Long Term Incentives: None of the allocations under the TIP were eligible to vest in 2015. However, both the 2014 and 2015 allocations are currently tracking to satisfy performance hurdles which if achieved will deliver strong value to shareholders. Previous Incentive Schemes There were two allocations under the previous long term incentive schemes which were eligible to vest at the end of 2015. The 2012 allocation did not meet the performance hurdles and was totally forfeited. The performance rights in the 2013 allocation partially vested. The vesting of these rights is reflective of strong shareholder growth over this period. Other Remuneration elements KMP base pay remained unchanged in 2015 and the KMP also continued to sacrifice 10% of their annual fixed remuneration into Fairfax shares. On behalf of the Board, I would like to thank our executives for their continued efforts in achieving significant progress for the Company in the past year. The Board recommends the Remuneration Report to you and asks that you support our remuneration policies and practices by voting in favour of this Report at our 2015 Annual General Meeting. Yours faithfully, Sandra McPhee, AM Chair – People and Culture Committee 32 REMUNERATION REPORT (AUDITED) 1. INTRODUCTION This report forms part of the Company’s 2015 Directors’ Report and sets out the Fairfax Group’s remuneration arrangements for Key Management Personnel (KMP) in accordance with the requirements of the Corporations Act 2001 and its regulations. KMP comprises Directors and members of the senior executive team who have authority and responsibility for planning, directing and controlling the activities of the Fairfax Group. The KMP for the financial year are set out in Table 1. TABLE 1 NON-EXECUTIVE DIRECTORS Roger Corbett Michael Anderson Jack Cowin Nick Falloon(1) Sandra McPhee James Millar Linda Nicholls Todd Sampson Peter Young EXECUTIVE DIRECTOR Greg Hywood OTHER EXECUTIVES David Housego Gail Hambly (1) Nick Falloon joined the Board on 1 May 2015 ROLE Non-Executive Chairman Non-Executive Director Non-Executive Director Non-Executive Director Non-Executive Director Non-Executive Director Non-Executive Director Non-Executive Director Non-Executive Director Chief Executive Officer Chief Financial Officer Group General Counsel/Company Secretary FAIRFAX MEDIA ANNUAL REPORT 2015 | 33 REMUNERATION REPORT (AUDITED) 2. REMUNERATION FRAMEWORK FOR 2015 The Company’s remuneration principles and framework set out below were established in 2013 and received shareholder approval in 2013 and 2014. The principles and framework remained unchanged in 2015. 2.1 REMUNERATION PRINCIPLES AND FRAMEWORK FAIRFAX MEDIA EXECUTIVE REMUNERATION FRAMEWORK The objectives of the Company’s executive remuneration framework are to align executive remuneration with the creation of value for shareholders, achievement of strategic objectives, and to have regard to the employment market so as to be able to attract and retain key people. The executive remuneration framework comprises a mix of fixed and performance based components. The framework aims to: • align remuneration with achievement of business strategy; • fairly remunerate and reward for achievement of Group strategic milestones, with incentive payments deferred to promote alignment with shareholder interests; • attract, retain and motivate talented, qualified and experienced people in the context of industry changes; and • be transparent and fair. Fixed Remuneration Package • set to attract and retain high calibre talent to drive the Company’s transformation strategy. • has regard to the scope of the individual’s role, level of knowledge and experience, and the market (including Fairfax’s competitors). • most senior executives’ fixed remuneration was frozen in 2015. • for 2015, executive KMP continued to volunteer to sacrifice 10% of their annual fixed remuneration into Fairfax shares. • acknowledging the voluntary sacrifice, and as a further retention mechanism, if the executive KMP is still employed at the end of a 2 year period, then Fairfax will provide one additional bonus share for every five shares purchased by the executive through the voluntary salary sacrifice arrangement. Performance Based Incentives - Transformation Incentive Plan • the Transformation Incentive Plan (TIP) was implemented during 2014 replacing the former short term and long term incentive plans. The TIP better aligns executive outcomes with shareholder interests and provides rewards on delivery of our transformation plan. • the TIP is designed to reward the most senior executives if they achieve the transformation plan for the Company over 3-4 years. • under the TIP, long term options are granted. The options are exercisable only if challenging absolute shareholder return objectives are achieved at the end of the vesting period. • a smaller proportion of deferred performance shares are granted if specific annual business metrics linked to the transformation of the Company are achieved. Metrics are measurable and are weighted and tailored according to each executive’s responsibilities. • any performance shares earned are deferred so that executives do not become entitled to the equity until later in the transformation process which also promotes and rewards longer term service by the executives. 34 0% 20% 40% 60% 80% 100% REMUNERATION REPORT (AUDITED) 2.2 REMUNERATION MIX The Board considers that a significant proportion of executive remuneration should be ‘at risk’, and linked to Fairfax’s short and long term strategy and performance. The following diagram provides the executive KMP remuneration mix for the 2015 financial year at maximum opportunity. EXECUTIVE KMP 0% 20% 40% 60% 80% 100% 30% 3% 47% 20% Fixed: Base Salary, Allowances and Superannuation Fixed: Sacrifice of Fixed Remuneration to purchase Company shares At Risk: Long Term Options At Risk: Deferred Performance Shares Note – Long term options are granted at on-target performance. Determination of further options up to the maximum opportunity will be at the Board’s discretion based on the outcomes against the performance hurdles at the conclusion of the performance period. The Company encourages executives to hold Fairfax Media shares to align their interests with our shareholders, and the Company’s remuneration framework has been developed with this in mind. To reinforce this, during 2015 executive KMP continued to sacrifice 10% of their fixed remuneration, post-tax, into Company shares. Furthermore the TIP rewards executives with equity grants of long term options and deferred performance shares. FAIRFAX MEDIA ANNUAL REPORT 2015 | 35 REMUNERATION REPORT (AUDITED) 3. REMUNERATION GOVERNANCE The Board’s goal is to align Fairfax’s executive remuneration strategy with Company performance and shareholder interests. Importantly, the Board is focused on delivering a remuneration framework that attracts and retains the right executive team to establish and deliver upon Company strategy, and growth in shareholder value. The People and Culture Committee (P&CC), comprising solely of Non-Executive Independent Directors, assists the Board in discharging its duties. The members of the P&CC during 2015 were: • Sandra McPhee (Chair); • Roger Corbett; • Michael Anderson; • Jack Cowin. The CEO, CFO, Group General Counsel/Company Secretary and Group Director Human Resources attend P&CC meetings as invitees except when their own performance or remuneration arrangements are being discussed. The Board has a formal Charter for the P&CC which sets out the responsibilities, composition and rules of the Committee. The Committee’s primary responsibilities include making recommendations in relation to executive remuneration that support the remuneration strategy and the performance conditions that underpin it, to promote the achievement of the Group’s strategy, make recommendations to the Board on Non-Executive Directors fees (within the maximum amount approved by shareholders) and review and recommend to the Board the aggregate remuneration pool of Non-Executive Directors. Further details of the role and responsibilities of the Committee are set out in its Charter, which is available on the Fairfax Media website, www.fairfaxmedia.com.au. The Committee engages independent remuneration consultants to provide advice and information regarding market relativities as required, and during the year 3 Degrees Consulting was engaged by the Committee to provide advice on governance, market practice, emerging market considerations and regulatory developments. $1.20 $1.00 $0.80 $0.60 $0.40 $0.20 $0.00 36 REMUNERATION REPORT (AUDITED) 4. LINKING EXECUTIVE REMUNERATION TO PERFORMANCE The remuneration structure aligns executive rewards with our shareholders over the medium and longer term and provides an appropriate incentive to deliver on our strategy. During the 2015 financial year we: • made considerable investments in our growth businesses including Domain and Events; • made substantial portfolio investment decisions for the future, such as the acquisitions of All Homes and the remaining 50% of Metro Media Publishing Holdings in Domain; • developed partnership opportunities including Stan, the streaming venture with Nine Entertainment Co., The Huffington Post, the merger of Fairfax Radio Network with Macquarie Radio Network, and the sale of Fairfax radio station 96FM; • continued cost management control; • commenced the transformation of our Australian Community Media division to build a modern stronger rural and regional network. Management made decisions during the year to sacrifice short term EBITDA for longer term growth. In doing so, they narrowly missed their ambitious incentive targets. This is reflected with the zero incentive outcomes for 2015. Both the 2014 and 2015 option allocations are currently tracking to satisfy performance hurdles, indicating alignment to the long term value for shareholders. The following graph represents the share price performance and the TIP annual component of the CEO’s incentive. SHARE PRICE PERFORMANCE AND CEO ANNUAL INCENTIVE $1.20 $1.00 $0.80 Share Price $0.60 $0.40 $0.20 $0.00 $1,200 $1,000 $800 $600 $400 $200 $0 CEO STI ($’000) 24 June 2012 30 June 2013 29 June 2014* 28 June 2015* Share Price CEO Annual Incentive ($’000) Note – share price relates to closing price at financial year end date. * Introduction of TIP with annual incentive awarded in the form of deferred performance shares. Prior to 2014 the short term incentive was paid in cash. The executive KMP earned partial vesting of the 2013 legacy Long Term Incentive Plan following increase shareholder value over the last three years. Further details can be found in section 6. FAIRFAX MEDIA ANNUAL REPORT 2015 | 37 REMUNERATION REPORT (AUDITED) 5. TRANSFORMATION INCENTIVE PLAN (TIP) 5.1. TIP OUTLINE The following table sets out how the Company’s TIP operated during the 2015 financial year. The TIP is designed to reward executives for achieving objectives linked to the Company’s transformation strategy and for creating growth in shareholder value. Changes to the TIP for 2015 There were two changes made to the TIP which were approved by shareholders in 2014: • for the deferred performance shares component executives can now only earn 20% of their opportunity for “on-budget” performance rather than the 50% in previous years; and • the options granted in 2015 will be tested based on performance over an initial period of 4 years, commencing 1 July 2013, rather than 3 years. This is the same commencement date as the performance period for the 2014 grant because 1 July 2013 was the beginning of the Transformation Plan. TABLE 2 DETAIL OF TRANSFORMATION INCENTIVE PLAN Who Participates? How is the options grant determined? What is the performance period? What are the performance hurdles? Why were they chosen? 38 Senior executives whose roles and skills are critical to the strategy of the Group are eligible to participate in the TIP. Executive KMP are offered an incentive opportunity that comprises: • options (70% of total incentive opportunity); and • deferred performance shares (30% of total incentive opportunity). Options are granted each year with an exercise price determined by the Volume Weighted Average Price (VWAP) of Fairfax shares over the 5 trading day period commencing on the day after the Fairfax AGM. Each option entitles the participant to one ordinary Company share, subject to achievement of the performance and service conditions and payment of the exercise price. The number of options granted is set by the Board with the assistance of an independent valuation based on the Monte Carlo pricing model and depends on the executives’ role and responsibilities. Options are granted at on-target opportunity. Determination of further options up to the maximum opportunity will be at the Board’s discretion based on the outcomes against the performance hurdles at the conclusion of the performance period. The performance period for the 2015 grant will be an initial four year period commencing on the same date as the performance period for the 2014 financial year (1 July 2013). Options will not vest unless the compound annual growth rate (CAGR) targets for absolute total shareholder return growth (Absolute TSR) are met. Absolute TSR measures growth in shareholder wealth over the performance period as it takes into account both share price growth as well as dividends paid to shareholders. The applicable targets are set out in the table below. PERFORMANCE % EXERCISABLE ABSOLUTE TSR GROWTH Threshold Target Stretch 25% 50% 100% 15% CAGR 20% CAGR 25% CAGR REMUNERATION REPORT (AUDITED) DETAIL OF TRANSFORMATION INCENTIVE PLAN CONT’D What are the performance hurdles? Why were they chosen? (cont’d) The Board adopted Absolute TSR as the performance condition for the options as it considers share price growth and other distributions to shareholders to be a key indicator of Fairfax’s success over the coming years. The Board believes that the level of growth required in order for the options to vest would result in a healthy rate of return to shareholders. The Board also considers absolute return targets to be appropriate during the current rebuilding phase, rather than a relative measure against a variety of companies that are not facing the issues Fairfax currently faces. Notwithstanding these targets, the Board has discretion to deem performance conditions not met if vesting would otherwise only occur as a result of extraneous factors, such as speculation about a takeover bid for the Company. The Company considers it important that any award of options reflects the quality of the Company’s performance and excludes any independent factors. Are the performance conditions re-tested? Yes, in the year following the initial performance period. If the performance hurdles are not achieved in the initial performance period, there are two further re-testing opportunities at six monthly intervals. In order for the condition to be met on re-testing, Absolute TSR on a cumulative basis will be tested over the extended period. If the condition is met over the extended period, the Board considers it appropriate that executives should be rewarded along with shareholders. Any options that remain unvested after the final re-test will lapse immediately. DEFERRED PERFORMANCE SHARES How is the grant of deferred performance shares determined? Performance shares are granted if participants achieve certain annual objectives that are linked to the Company’s transformation strategy. What is the deferral period? What are the performance conditions? The actual number of performance shares granted will be dependent on the participants’ performance outcomes for the year and the VWAP of the Company share price in the 5 days commencing on the day after the August 2015 results announcement. Half (50%) of the performance shares granted following testing of performance for FY2015, around August 2015, will be deferred for 1 year and the other half (50%) will be deferred for 2 years. Objectives are set annually by the Board and are linked to the transformation strategy. For executive KMP, the 2015 opportunity was tied to the financial measures of: • Group EBITDA 60%; and, • Group Revenue 40%. The Board selected these clear and measurable objectives over which executives have a clear line of sight in driving revenue growth and cost containment in the transformation strategy, which translates into shareholder value. Are the performance conditions re-tested? No. FAIRFAX MEDIA ANNUAL REPORT 2015 | 39 REMUNERATION REPORT (AUDITED) DETAIL OF TRANSFORMATION INCENTIVE PLAN CONT’D GENERAL Is there an ability to claw back awards under the TIP? Yes. The Board has the discretion to claw back awards made under the TIP to ensure that participants do not unfairly benefit, including in the event of fraud, dishonesty or a breach of obligation to the Company. In addition, the Board may also claw back awards in the case of material risk or where financial information becomes available after awards are granted, which suggests that the initial grant was not justified. Is there a restriction on executives hedging awards under the TIP? Yes. The rules prohibit employees from creating any encumbrance on unvested awards. All executives must operate under the Fairfax Security Trading Policy. What happens in a change of control? What happens if the executive ceases employment? In the event of a takeover bid or other transaction, event or state of affairs that in the Board’s opinion is likely to result in a change in control of the Company, the Board has discretion to determine that vesting of some or the entire TIP should be accelerated. If the Board needs to exercise its discretion regarding a change of control event it would be guided by the time remaining before the set vesting test date, whether if, the performance hurdles were applied at the date of the likely change of control, the vesting test would be achieved, and, the best interest of shareholders. Where an executive resigns or their employment is terminated by mutual agreement, the unvested transformation incentives will remain on foot and subject to the original performance hurdle (in the case of Options) and the deferral period (in the case of Performance Shares), as though the executive has not ceased employment. However, the Board may at its discretion determine to lapse any or all of the unvested transformation incentives and ordinarily, in the case of resignation, would be expected to do so. Where an executive is terminated for cause such as misconduct or poor performance all of the unvested transformation incentives will lapse or be forfeited, unless the Board determines otherwise. 40 REMUNERATION REPORT (AUDITED) 5.2 2015 PROGRESS / OUTCOMES UNDER THE TRANSFORMATION INCENTIVE PLAN (A) OPTIONS GRANTED No options were available to vest under the TIP during 2015 as none of the grants have reached the end of their respective performance periods. Tracking of Performance Set out in the following table is the performance to date of the 2014 and 2015 options granted as at 30 June 2015. Current Absolute TSR demonstrates performance is tracking above stretch performance. TABLE 3 GRANT YEAR PERFORMANCE PERIOD RE-TEST DATES THRESHOLD PERFORMANCE TARGET PERFORMANCE STRETCH PERFORMANCE PERFORMANCE TO 30 JUNE 2015 PERFORMANCE HURDLE 2014 2015 1 July 2013 – 30 June 2016 1 July 2013 – 30 June 2017 31 Dec 2016 and 30 June 2017 31 Dec 2017 and 30 June 2018 Note – Performance provided by Orient Capital Pty Ltd. (B) DEFERRED PERFORMANCE SHARES 15% CAGR 20% CAGR 25% CAGR 34% CAGR 15% CAGR 20% CAGR 25% CAGR 34% CAGR For 2015 the Board decided that the transformation initiatives and measures be reflected in the overall Group EBITDA and Group Revenue targets for executive KMP. The overall Group’s performance for 2015 financial year included the effect of numerous strategic decisions made this year for future growth and success. This meant that the 2015 results marginally missed the 2015 Group targets for EBITDA and Revenue. Accordingly no annual incentive was paid for 2015. The table below provide a summary of the performance and the executive KMP incentive opportunity which was forfeited. EXECUTIVE Greg Hywood David Housego Gail Hambly THRESHOLD OPPORTUNITY ($) ON-TARGET OPPORTUNITY ($) MAXIMUM OPPORTUNITY ($) INCENTIVE EARNED ($) PERCENTAGE OF MAXIMUM OPPORTUNITY EARNED (%) $192,000 $99,000 $75,000 $480,000 $247,500 $187,500 $960,000 $495,000 $375,000 $0 $0 $0 0% 0% 0% Note - The figures that are represented above are the dollar value that each executive KMP had the opportunity to earn. For executive KMP any annual incentive earned is award in deferred performance shares. FAIRFAX MEDIA ANNUAL REPORT 2015 | 41 REMUNERATION REPORT (AUDITED) 6. LONG TERM INCENTIVE PLAN PRIOR TO 2014 Prior to 2014, the Company operated a short term incentive plan and a separate long term incentive plan (LTIP). These plans were discontinued from 2014 and replaced with the TIP. REWARD INSTRUMENTS Under the former LTIP, executives were granted an allocation of performance shares (FY12 grant) or performance rights (FY13 grant) that would vest at the end of the performance period, subject to specific performance hurdles being met. PERFORMANCE PERIODS For the FY12 grant, the performance period was 1 July 2011 to 30 June 2014. If performance hurdles were not met at the end of the performance period, a further re-test would take place at the end of 30 June 2015. For FY13 grant, the performance period was 1 July 2012 to 30 June 2015. No re-testing applied to the FY13 grant. PERFORMANCE HURDLES AND VESTING SCHEDULES Each allocation was subject to two performance hurdles. Fifty percent of the allocation was subject to achievement of a relative TSR target. The remaining fifty percent was subject to an EPS hurdle, TSR was measured against the S&P/ASX 300 Consumer Discretionary Index and allocations vested as described in the table below: EPS was measured by the compound annual growth rate (CAGR) of the Company’s EPS and vested according to the table below: TSR PERFORMANCE % OF ALLOCATION THAT VESTS EPS PERFORMANCE % OF ALLOCATION THAT VESTS Under 50th percentile Nil 50th percentile 50% of Allocation Less than 7% CAGR 7% CAGR Nil 25% 50th to 75th percentile Straight line pro rata 7% to 10% CAGR Straight line pro rata Above 75th percentile 100% 10% CAGR or above 100% OUTCOMES The FY12 grant of performance shares were re-tested for period ending 30 June 2015, and neither the TSR or EPS performance hurdles were met and subsequently these performance shares were forfeited. The FY13 grant of performance rights were tested for period ending 30 June 2015. The EPS hurdle was not achieved, however TSR performance was achieved (at the 65.5th percentile, against the S&P/ASX300 Consumer Discretionary Index) and 81% of the TSR portion of the grant due to vest. The table below sets out the number of performance rights that was originally granted, the amount is due to vest and the amount forfeited relating to executive KMP for the FY13 grant: TOTAL NUMBER OF PERFORMANCE RIGHTS GRANTED 8,888,889 3,666,667 2,083,333 14,638,889 RIGHTS TO VEST 3,600,000 1,485,000 843,751 5,928,751 RIGHTS TO FORFEIT 5,288,889 2,181,666 1,239,583 8,710,138 RIGHTS TO VEST % RIGHTS TO FORFEIT % 41% 41% 41% 41% 59% 59% 59% 59% TABLE 5 NAME Greg Hywood David Housego Gail Hambly Total 42 REMUNERATION REPORT (AUDITED) 7. EXECUTIVE SERVICE AGREEMENTS The remuneration and other terms of employment for the executive KMP are set out in written service agreements. These service agreements are unlimited in term but may be terminated by written notice by either party or by the Company making payment in lieu of notice. They may also be terminated with cause as set out below. Each agreement sets out the Fixed Remuneration, performance related incentive opportunities and termination rights and obligations. The Company may terminate the employment of the executive without notice and without payment in lieu of notice in some circumstances, including if the executive commits an act of serious misconduct or a material breach of the executive service agreement or is charged with any criminal offence which, in the reasonable opinion of the Company, may embarrass or bring the Fairfax Group into disrepute. The Company may terminate the employment of the executive at any time by giving the executive notice of termination or payment in lieu of such notice. The amount of notice required from the Company in these circumstances is set out in the table below. If the Company elects to make payment in lieu of all or part of the required notice, the payment is calculated on the basis of fixed remuneration excluding bonuses and non-cash incentives. Also set out in the table below is the notice that the executive is required to give. TABLE 6 NAME OF EXECUTIVE COMPANY TERMINATION NOTICE PERIOD EMPLOYEE TERMINATION NOTICE PERIOD Greg Hywood 12 months 6 months David Housego 12 months 4 months Gail Hambly(1) 18 months 3 months (1) Participant in the Fairfax defined benefit superannuation scheme. POST-EMPLOYMENT RESTRAINT • 12 month no solicitation of employees or clients • 6 months no work for a competitor of the Fairfax Group • 12 month no solicitation of employees or clients • 6 months no work for a competitor of the Fairfax Group • 12 month no solicitation of employees or clients • 6 months no work for a competitor of the Fairfax Group FAIRFAX MEDIA ANNUAL REPORT 2015 | 43 REMUNERATION REPORT (AUDITED) 8. EXECUTIVE KMP REMUNERATION AND EQUITY GRANTED IN 2015 (A) REMUNERATION OF KEY MANAGEMENT PERSONNEL This table sets out details of remuneration during the financial year. TABLE 7 BASE SALARY, & OTHER BENEFITS(1) 1,575,000 1,575,000 790,156 760,000 554,232 554,210 - 750,000 2,919,388 3,639,210 G. Hywood – Chief Executive Officer D. Housego – Chief Financial Officer G. Hambly – Group General Counsel & Company Secretary(2) A. Williams – Managing Director Australian Publishing Media Total 2015 2014 2015 2014 2015 2014 2015 2014 2015 2014 - - - - - - - - - - CASH BONUS SUPER- ANNUATION LONG SERVICE LEAVE EXPENSE TOTAL EXCLUDING SHARES / RIGHTS VALUE OF SHARES / RIGHTS(3) TOTAL INCLUDING SHARES / RIGHTS 23,549 1,623,549 867,916 2,491,465 17,394 1,617,394 1,244,877 2,862,271 5,385 2,357 10,863 10,829 830,541 470,252 1,300,793 787,357 545,748 1,333,105 635,863 388,172 1,024,035 635,829 427,365 1,063,194 25,000 25,000 35,000 25,000 70,768 70,790 - - - - - 25,000 14,655 789,655 406,923 1,196,578 130,768 145,790 39,797 3,089,953 1,726,340 4,816,293 45,235 3,830,235 2,624,913 6,455,148 (1) Executive KMP voluntary salary sacrifice of 10% of their fixed annual remuneration to purchase Company shares is on a post-tax basis. (2) Ms Hambly is a participant in the Fairfax defined benefit superannuation benefit scheme. Except for a small number of long serving executives who are members of a defined-benefit superannuation plan, retirement benefits are delivered through contribution accumulation superannuation plans. The defined-benefit funds (which are closed to new entrants) provide defined lump sum benefits based on years of service, retirement age and the executive’s remuneration at the time of retirement. (3) Amount includes the amortised cost of the fair value of rights to shares and options issued but not yet vested. 44 REMUNERATION REPORT (AUDITED) (B) EQUITY GRANTED TO EXECUTIVES WHO ARE KEY MANAGEMENT PERSONNEL DURING THE FINANCIAL YEAR TABLE 8 EQUITY AWARD(1) PERFORMANCE CONDITION(2) NUMBER OF OPTIONS/ SHARES GRANTED(3) FAIR VALUE PER OPTIONS/ SHARES(4) VALUE OF GRANT(5) Options Absolute TSR 4,666,666 $0.24 $1,120,000 Performance Shares Transformation Objectives nil - $0 G Hywood – Chief Executive Officer D Housego – Chief Financial Officer Options Absolute TSR 2,406,250 Performance Shares Transformation Objectives nil G Hambly – Group General Counsel & Company Secretary Options Absolute TSR 1,822,916 Performance Shares Transformation Objectives nil $0.24 - $0.24 - $1,120,000 $577,500 $0 $577,500 $437,500 $0 $437,500 (1) No Performance Shares were granted to executives for 2015 as indicated in 5.2 (B). (2) Performance Shares and Options are subject to performance hurdles that are outlined in section 5.1. Rights to Performance Shares and Options lapse where the applicable performance conditions are not satisfied on testing. As the Performance Shares and Options only vest on satisfaction of performance conditions which are to be tested in future years, the 2015 Performance Shares and Options have not yet been forfeited or vested. (3) Options are granted at on-target performance. Determination of further options up to the maximum opportunity will be at the Board’s discretion based on the outcomes against the performance hurdles at the conclusion of the performance period. (4) The Board determined the Fair value per Option to be 24 cents with a grant date 18 December 2014. (5) The maximum value of the grant has been estimated based on the fair value per instrument. The minimum total value of the grant is nil (this assumes none of the applicable performance conditions are met). FAIRFAX MEDIA ANNUAL REPORT 2015 | 45 REMUNERATION REPORT (AUDITED) 9. EXECUTIVE SHAREHOLDINGS Executive KMP equity holdings disclosure as at 28 June 2015 is set out below: (A) SHAREHOLDINGS OF EXECUTIVE KMP TABLE 9 2015 EXECUTIVE KMP BALANCE AT 29 JUNE 2014 NET CHANGE(1) BALANCE AT 28 JUNE 2015 POST YEAR-END ACQUISITIONS(2) POST YEAR- END DISPOSALS POST YEAR- END BALANCE G. Hywood D. Housego G. Hambly Total 2014 429,255 348,321 148,136 925,712 121,958 (228,257) 47,633 (58,666) 551,213 120,064 195,769 867,046 27,241 14,047 10,639 51,927 - - - - 578,454 134,111 206,408 918,973 EXECUTIVE KMP BALANCE AT 24 JUNE 2013 NET CHANGE(1) BALANCE AT 29 JUNE 2014 POST YEAR-END ACQUISITIONS(2) POST YEAR- END DISPOSALS POST YEAR- END BALANCE G. Hywood D. Housego G. Hambly A. Williams Total 318,343 291,139 104,815 - 714,297 110,912 57,182 43,321 44,200 255,615 429,255 348,321 148,136 44,200 969,912 - - - - - - - - - - 429,255 348,321 148,136 44,200 969,912 (1) Includes shares acquired by sacrifice of 10% of fixed remuneration. (2) Shares acquired post year end is part of the 10% salary sacrifice arrangement as indicated in section 2.1. Share purchase dates are predetermined by the Company and the administrator Link Market Services Ltd. 46 REMUNERATION REPORT (AUDITED) (B) RIGHTS OVER SHAREHOLDINGS OF EXECUTIVE KMP TABLE 10 2015 EXECUTIVE KMP G. Hywood D. Housego G. Hambly Total 2014 EXECUTIVE KMP G. Hywood D. Housego G. Hambly A. Williams Total BALANCE AT 29 JUNE 2014 GRANTED AS REMUNERATION NET CHANGE(1) CLOSING BALANCE AT 28 JUNE 2015 18,403,380 7,791,667 5,758,825 31,953,872 5,479,324 2,840,678 2,141,742 10,461,744 (571,428) - (234,194) (805,622) 23,311,276 10,632,345 7,666,373 41,609,994 BALANCE AT 24 JUNE 2013 GRANTED AS REMUNERATION NET CHANGE(1) CLOSING BALANCE AT 29 JUNE 2014 10,403,380 3,666,667 2,690,313 1,837,124 18,597,484 8,000,000 4,125,000 3,125,000 3,875,000 19,125,000 - - (56,488) - (56,488) 18,403,380 7,791,667 5,758,825 5,712,124 37,665,996 (1) Net change movements due to forfeitures. FAIRFAX MEDIA ANNUAL REPORT 2015 | 47 REMUNERATION REPORT (AUDITED) 10. REMUNERATION OF NON-EXECUTIVE DIRECTORS Under the Fairfax Constitution, the aggregate remuneration of Non-Executive Directors is set by resolution of shareholders. The aggregate was last approved by shareholders at the 2010 Annual General Meeting and set at $2,100,000 per annum. Within this limit, the Board annually reviews Directors’ remuneration with advice from the P&CC. The Board also considers survey data on Directors’ fees paid by comparable companies, and any independent expert advice commissioned. Board and committee fees payable as at the date of this report are as follows: TABLE 11 Chairman of the Board* Other Non-Executive Director Chair of Audit and Risk Committee Members of Audit and Risk Committee Chair of People and Culture Committee Members of People and Culture Committee Chair of the Nominations Committee Members of Nominations Committee $ 327,600 117,000 44,000 33,000 33,000 22,000 0 0 *The Chairman of the Board does not receive committee fees for membership of Committees. The fees above do not include statutory superannuation payments. 10.1 RETIREMENT BENEFITS FOR NON-EXECUTIVE DIRECTORS Other than superannuation contributions made on behalf of Non-Executive Directors in accordance with statutory requirements, Non-Executive Directors are not entitled to any retirement benefits. 48 REMUNERATION REPORT (AUDITED) 10.2 NON-EXECUTIVE DIRECTORS’ FEES The following table outlines fees paid to Non-Executive Directors during the financial year. TABLE 12 EXECUTIVE KMP M. Anderson R. Corbett J. Cowin N. Falloon(1) J. Millar S. McPhee S. Morgan(2) L. Nicholls T. Sampson(3) P. Young Directors NON-EXECUTIVE DIRECTORS FEES SUPERANNUATION TOTAL 139,000 156,883 327,600 327,600 139,000 140,426 19,500 150,000 151,538 150,000 162,510 117,472 161,000 162,651 117,000 12,150 150,000 151,538 13,205 14,512 31,065 30,303 13,205 12,989 1,853 14,250 14,017 14,250 15,032 10,866 15,295 15,045 11,115 1,124 14,250 14,017 152,205 171,395 358,065 357,903 152,205 153,415 21,353 164,250 165,555 164,250 177,542 128,338 176,295 177,696 128,115 13,274 164,250 165,555 1,352,500 1,382,768 128,488 127,905 1,480,988 1,510,673 2015 2014 2015 2014 2015 2014 2015 2015 2014 2015 2014 2014 2015 2014 2015 2014 2015 2014 2015 2014 (1) N. Falloon joined the Board on 1 May 2015 (2) S. Morgan retired from the Board on 29 May 2014 (3) T. Sampson joined the Board on 29 May 2014 FAIRFAX MEDIA ANNUAL REPORT 2015 | 49 REMUNERATION REPORT (AUDITED) 10.3 NON-EXECUTIVE DIRECTORS’ SHAREHOLDINGS Non-Executive Director equity holdings disclosure as at 28 June 2015 is set out below: TABLE 13 2015 NON- EXECUTIVE DIRECTOR M. Anderson R. Corbett J. Cowin N. Falloon(1) J. Millar S. McPhee L. Nicholls T. Sampson(2) P. Young Total 2014 NON- EXECUTIVE DIRECTOR M. Anderson R. Corbett J. Cowin J. Millar S. McPhee S. Morgan(3) L. Nicholls T. Sampson(2) P. Young Total BALANCE AT 29 JUNE 2014 NET CHANGE OTHER BALANCE AT 28 JUNE 2015 POST YEAR-END ACQUISITIONS(4) POST YEAR- END DISPOSALS POST YEAR- END BALANCE - 15,467 99,206 3,000,000 - 100,000 140,795 135,843 - 131,117 3,606,961 - - - - 26,564 29,448 18,317 - 15,467 99,206 3,000,000 - 100,000 167,359 165,291 18,317 131,117 89,796 3,696,757 7,771 - - - - 7,744 8,281 6,126 - 29,922 - - - - - - - - - - 23,238 99,206 3,000,000 - 100,000 175,103 173,572 24,443 131,117 3,726,679 BALANCE AT 24 JUNE 2013 NET CHANGE OTHER BALANCE AT 29 JUNE 2014 POST YEAR-END ACQUISITIONS(4) POST YEAR- END DISPOSALS POST YEAR- END BALANCE - 99,206 3,000,000 100,000 110,893 1,564,668 107,758 - 131,117 5,113,642 - - - - 29,902 - 99,206 3,000,000 100,000 140,795 - 1,564,668 28,085 135,843 - - - 131,117 57,987 5,171,629 - - - - - - - - - - - - - - - - - - - - - 99,206 3,000,000 100,000 140,795 1,564,668 135,843 - 131,117 5,171,629 (1) N. Falloon joined the Board on 1 May 2015. (2) T. Sampson joined the Board on the 29 May 2014. (3) S. Morgan retired from the Board on 29 May 2014. (4) Shares acquired post year end is part of the salary sacrifice arrangement. Share purchase dates are predetermined by the Company and the administrator Link Market Services Ltd. 50 REMUNERATION REPORT (AUDITED) 11. LOANS TO KEY MANAGEMENT PERSONNEL There were no loans made to Directors of Fairfax Media Limited or to other key management personnel of the Group, including their personally related parties, during the financial period ended 28 June 2015 (2014: nil). There are no outstanding loans for the financial years ended 28 June 2015 and 29 June 2014. 12. FIVE YEAR FINANCIAL PERFORMANCE OF THE COMPANY IN KEY SHAREHOLDER VALUE MEASURES The financial performance of the Company in key shareholder value measures over the past five years is shown below. TABLE 14 IFRS 2015 IFRS 2014 IFRS 2013(1) IFRS 2012 IFRS 2011 Underlying operating revenue Underlying net profit after tax Earnings per share after significant items Dividends per share *Total Shareholder Returns (TSR) $m $m Cents Cents % 1,853 148.2 6.0 4.0 (0.7) 1,866 158.5 6.7 4.0 97.5 2,074 143.5 5.4 2.0 (3.4) 2,328 212.0 8.7 3.0 (40.5) 2,466 285.0 11.6 3.0 (23.9) * TSR comprises share price appreciation and dividends, gross of franking credits, reinvested in the shares. Source: Bloomberg. (1) Trade Me revenue has been included in 2013 for comparative purposes up to the date of sale on 21 December 2012. FAIRFAX MEDIA ANNUAL REPORT 2015 | 51 CORPORATE GOVERNANCE Fairfax has adopted a corporate governance framework that is consistent with the 3rd edition of the ASX Corporate Governance Council Principles and Recommendations (ASX Recommendations). The key corporate governance practices of the Fairfax Group are set out below including summaries of the Policy on Market Disclosure and Shareholder Communications, Risk Management Policy and Securities Trading Policy. The Fairfax Constitution, Board Charter, Board Committee Charters, Code of Conduct and Diversity Guidelines are available at http://www.fairfaxmedia.com.au/Company/corporate-governance. BOARD OF DIRECTORS COMPOSITION OF THE BOARD Membership of the Board and its Committees during the 2015 financial year is set out below. COMMITTEE MEMBERSHIP DIRECTOR R Corbett AO G Hywood M Anderson J Cowin *N Falloon S McPhee AM J Millar AM L Nicholls AO T Sampson P Young AM *Appointed 1 May 2015 MEMBERSHIP TYPE AUDIT AND RISK NOMINATIONS Independent Chair Member Chair CEO/Managing Director Independent Independent Independent Independent Independent Independent Independent Independent – – – – – – – – – – Member Chair – Member Member – Member Member PEOPLE AND CULTURE Member – Member Member – Chair – – – – The qualifications, experience, term of office and other details of each member of the Board are set out on pages 24 to 26. The number of Board and Committee meetings held during the 2015 financial year and each Director’s attendance at these meetings are set out in the Directors’ Meetings section of the Directors’ Report on page 29. 52 CORPORATE GOVERNANCE BOARD SKILLS The following table summarises the skills, attributes and experience of the Company’s Directors. The Board benefits from the combination of the diverse skills, experiences and expertise that its Directors bring to the Board and the insights that results from this diversity. Media Expertise Expertise and experience in the media industry. Advertising and subscriber management Expertise and experience in advertising, advertising sales and subscriber and customer management. Strategy Expertise in the development and implementation of strategic plans to deliver investor returns over time. Executive leadership Experience and success in leadership of large organisations. Marketing and product development Expertise and experience in the development and marketing of major new products and services. Financial acumen Proficiency in understanding financial accounting and reporting, corporate finance and internal financial controls, including an ability to probe the adequacies of financial and risk controls. Remuneration Experience in remuneration design to drive business success. Capital projects, acquisitions and divestitures Experience in evaluating and implementing projects involving large-scale financial commitments, investment horizons and major transactions Governance Technology and data Knowledge and experience of standards of corporate governance, including ASX Listing Rules and practices. Expertise and experience in the adoption of new technology and technology projects and in the use of data and data analytics to drive successful sales, marketing and business development. Health, safety and corporate responsibility Expertise related to workplace health and safety, environmental, community and social responsibility. Public policy Experience in public and regulatory policy, including how it affects corporations. INDEPENDENCE OF DIRECTORS Under the Board Charter, the majority of the Board and the Chair must be independent. A Director must notify the Company about any conflict of interest, potential material relationship with the Company or circumstance relevant to his/her independence. Directors have determined that all Directors except the Chief Executive Officer (CEO) are independent. In assessing whether a Director is independent, the Board has considered Directors’ obligations to shareholders, the requirements of applicable laws and regulations, criteria set out in the Board Charter and the ASX Recommendations. The Board has not set specific materiality thresholds, considering it more effective to assess any relationship on its merits on a case-by-case basis and determine whether it might interfere, or might reasonably be seen to interfere, with the Director’s capacity to bring an independent judgement to bear on issues before the Board and to act in the best interests of Fairfax and its shareholders generally. Where appropriate, external advice will be sought to assist the Board’s assessment. The ASX Recommendations, in summary, state that the Board should consider whether the Director: • is, or has been, employed in an executive capacity by Fairfax or any of its child entities and there has not been a period of at least three years between ceasing such employment and serving on the Board; • is, or has within the last three years been, a partner, director or senior employee of a provider of material professional services to Fairfax or any of its child entities; • is, or has been within the last three years, in a material business relationship with Fairfax or any of its child entities, or an officer of, or otherwise associated with, someone with such a relationship; FAIRFAX MEDIA ANNUAL REPORT 2015 | 53 CORPORATE GOVERNANCE • is a substantial shareholder of Fairfax or an officer of, or otherwise associated with, a substantial shareholder; • has a material contractual relationship with Fairfax or its child entities other than as a Director; • has close family ties with any person who falls within any of the categories described above; or • has been a director of Fairfax for such a period that his or her independence may have been compromised. ROLE OF THE BOARD The Board of Directors is responsible for the long-term growth and profitability of the Group. The Board has adopted a Board Charter which sets out the responsibilities of the Board and its structure and governance requirements. Under the Board Charter, the responsibilities of the Board include: (a) setting the strategic direction of the Fairfax Group; (b) approving performance targets for the Fairfax Group and monitoring the achievement of these targets; (c) providing overall policy guidance and ensuring that policies and procedures for corporate governance and risk management are in place to ensure shareholder funds are prudently managed and that the Group complies with its regulatory obligations and ethical standards; (d) determining the terms of employment and reviewing the performance of the CEO; (e) setting and monitoring the Group’s programs for succession planning and key executive development with the aim to ensure these programs are effective; (f) approving acquisitions and disposals of assets, businesses and expenditure above set monetary limits; and (g) approving the issue of securities and entry into material finance arrangements, including loans and debt issues. The Board Charter also sets out the matters specifically reserved for the Board which include: (a) appointment and tenure of the CEO and his director reports; (b) determination of the CEO’s terms and conditions (including remuneration); (c) determination of matters relating to expenditure, capital management and loan raisings above a monetary limit; (d) approval of the Fairfax Group’s strategic plans at least annually; (e) approval of the issue of securities; and (f) approval of public statements which reflect significant issues of Fairfax policy, finance or strategy. DELEGATION TO SENIOR MANAGEMENT Subject to the Board’s reserved powers and to the authorities delegated to the Board Committees, the Board has delegated to the CEO responsibility for the management and operation of the Fairfax Group. The CEO is responsible for the day-to-day operations, financial performance and administration of the Fairfax Group within the powers authorised to him from time-to-time by the Board. The CEO may make further delegation within the delegations specified by the Board and is accountable to the Board for the exercise of these delegated powers. DIRECTOR APPOINTMENT, ROTATION AND SUCCESSION PLANNING The Company’s Constitution authorises the Board to appoint Directors to fill casual vacancies and to elect the Chair. Any Director appointed by the Board must stand for election at the next Annual General Meeting of shareholders. One third of Directors (excluding the CEO and any Director appointed to fill a casual vacancy, and rounded down to the nearest whole number) must retire at every Annual General Meeting. In addition, no Director (other than the CEO) may remain in office for more than three years or beyond the third Annual General Meeting following appointment without retiring and being re-elected. 54 CORPORATE GOVERNANCE The Company provides shareholders with material information that is relevant to a shareholder’s decision regarding whether to elect or re-elect a Director. The Nominations Committee assists the Board to identify potential candidates for appointment to the Board, as required. The Committee uses the following principles to recommend candidates and provide advice and other recommendations to the Board: • a majority of the Directors and the Chair should be independent; and • the Board should represent a broad range of expertise consistent with the Company’s strategic focus. As part of the process for identifying potential Director candidates, the Committee undertakes background checks. Where appropriate, the Committee seeks external advice on suitable candidates. All new Directors receive an appointment letter setting out the terms of their appointment including details of their role and Committee memberships (if any) and their expected time commitment. DIRECTOR INDUCTION AND CONTINUING EDUCATION The Company provides an induction program for all new Directors. As part of this program, a comprehensive induction pack is provided containing materials to enable the Directors to understand their rights, duties and responsibilities as a Director of the Company. Meetings between key members of senior management and the Directors are scheduled so that the Directors can gain an understanding of the Company’s businesses, key issues, strategy and operations. Given the Company’s recent and ongoing transformation within the industries in which it operates, and the increasing diversification of its businesses, the Board’s development activities aim to reflect this through the provision of regular updates on each of the Group’s activities and industry trends presented by senior management and, where appropriate external experts. ACCESS TO INDEPENDENT PROFESSIONAL ADVICE Any Director may seek independent professional advice at the Company’s expense. Prior approval by the Chair is required, but approval must not be unreasonably withheld. BOARD COMMITTEES NOMINATIONS COMMITTEE The Board has a Nominations Committee, which operates under a formal Nominations Committee Charter. Under the Charter, the purpose of the Committee is to identify individuals qualified to become Board members and recommend them for nomination to the Board and its Committees, to ensure Board members’ performance is reviewed regularly, and to recommend changes from time to time to ensure the Board has an appropriate mix of skills and experience. Duties of the Nominations Committee include: • making recommendations to the Board on the size and composition of the Board; • identifying and recommending individuals qualified to be Board members, taking into account such factors as it deems appropriate; • identifying Board members qualified to fill vacancies on the Committees; • recommending the appropriate process for the evaluation of the performance of each director and the Board; and • other duties delegated to it from time to time relating to nomination of Board or Committee members or corporate governance. The Committee is comprised solely of Non-Executive Independent Directors. FAIRFAX MEDIA ANNUAL REPORT 2015 | 55 CORPORATE GOVERNANCE AUDIT AND RISK COMMITTEE The Audit and Risk Committee operates in accordance with a Charter which sets out its role and functions. In summary, the Committee’s role is to advise and assist the Board on the establishment and maintenance of a framework of risk management, internal controls and ethical standards for the management of the Fairfax Group, to monitor the quality and reliability of financial information for the Group, and to manage certain sustainability and corporate responsibility matters. To carry out this role, the responsibilities of the Committee include: • recommending to the Board the appointment of the external auditor, reviewing its performance, independence and effectiveness, approving the auditor’s fee arrangements and enforcing the Company’s Charter of Audit Independence; • ensuring that appropriate systems of control are in place to effectively safeguard assets; • ensuring accounting records are maintained in accordance with statutory and accounting requirements; • formulating and overseeing an effective business risk plan; • ensuring there is an appropriate framework for compliance with all legal and Australian Securities Exchange requirements; • reviewing the external audit process with the external auditor, including in the absence of management; • reviewing and approving the internal audit plan; and • receiving internal audit summaries of significant reports prepared by internal audit. Under its Charter, all members of the Committee must be Non-Executive Directors. Executives may attend by invitation. The Chair of the Committee is required to be independent and have relevant financial expertise and may not be the Chair of the Board. PEOPLE AND CULTURE COMMITTEE The Board has a People and Culture Committee, which operates under a formal People and Culture Committee Charter. The primary responsibilities of the Committee are: • overseeing the development and implementation of the HR strategy with reference to appropriate resources, policies and procedures to support the achievement of the Company’s strategy; • promoting a safe work culture; • driving high performance management by providing effective remuneration policies and plans; • overseeing effective succession management programs develop talented, motivated and engaged people available to achieve the Company strategy; and • reporting to shareholders in line with required legislation and governance standards. COMPANY SECRETARY The Company Secretary is accountable to the Board through the Chairman on all matters to do with the proper functioning of the Board. PERFORMANCE EVALUATION BOARD, COMMITTEES AND DIRECTORS The Board conducts an internal review of its structure, composition and performance annually. The Board may seek external advice to assist in the review process. Performance evaluations of all individual Directors, the Board and each Committee, as well as governance processes that support the Board’s work, are reviewed on a regular basis. In accordance with this process, a performance evaluation for the Board and each Committee was conducted during the 2015 financial year. SENIOR EXECUTIVES Fairfax’s senior executives are employed under individual employment contracts that set out the terms of their employment. A process for senior management evaluations is undertaken each year. The executive’s performance is measured against his or her KPIs set at the beginning of the year. The CEO undertakes performance evaluations with each of his direct reports. In accordance with this process, a performance evaluation for senior executives was conducted during the 2015 financial year. 56 CORPORATE GOVERNANCE REMUNERATION Information about the Company’s remuneration policies and practices for Non-Executive Directors, the CEO and other senior executives, and their remuneration during the 2015 financial year, are set out in the Remuneration Report on pages 44 to 49. RISK MANAGEMENT AND INTEGRITY OF FINANCIAL REPORTING RISK MANAGEMENT FRAMEWORK The Board oversees the risk management and internal compliance and control system of the Group. The risk management process seeks to provide a consistent approach to identifying, assessing, and reporting risks, including those related to Company performance, reputation, safety, environment, internal control, compliance and other risk areas. The Company’s risk framework is overseen and monitored by both the Board and the Audit and Risk Committee. Key aspects of the Company’s risk management and internal compliance and control system are summarised as follows: • the Board, with the support of the Audit and Risk Committee, assesses the risk management framework to satisfy itself that it continues to be sound; • risks are assessed at least annually and revised periodically for each division through the business planning, budgeting, forecasting, reporting, internal audit and performance management processes; • the Board, through the Audit and Risk Committee, receives regular reports from management (and independent advisers where appropriate) on key risk areas such as treasury, health safety and environment, regulatory compliance, taxation, finance and internal audit and the effectiveness of the risk management system; • formal risk assessments are required as part of business case approvals for projects or initiatives of a significant nature. Project teams are responsible for managing the risks identified; and • under the direction of the Audit and Risk Committee, Internal Audit conducts a program of internal process control reviews over key areas, based on their importance to the Company, and provides assurance over the internal control assessments undertaken by management. As part of the risk framework, specific policies and approval processes have been developed to cover key risk areas such as material investments and contracts, treasury, capital expenditure approval, occupational health and safety and environmental processes. During the 2015 financial year, the Board assessed the risk management framework and is satisfied that it continues to be sound. INTERNAL AUDIT The Company’s Internal Audit function comprises the Manager, Corporate Risk and Assurance and a team of professionals who work through a schedule of prioritised risk areas across all the major business units to provide an independent risk assessment and evaluation of operating and financial controls. The Internal Audit and Risk function is independent from the external auditor and the Manager, Corporate Risk and Assurance meets with the Audit and Risk Committee in the absence of management as required. Internal Audit and Risk reports its results to the Audit and Risk Committee and the Manager, Corporate Risk and Assurance attends the meetings. MATERIAL RISKS The Company assesses material exposure to economic, environmental and social sustainability risks on an annual basis and determines how they are to be managed. Like all media companies globally the Company is subject to the ongoing structural shift away from print advertising and to fragmentation of the advertising market. Fairfax has taken strategic action to transform its business in the face of these challenges. this is discussed in detail in the Chairman and CEO & MD reports. The Company addresses the issues of financial, social and environmental sustainability in its Sustainability Report beginning on page 14. Declarations from the Chief Executive Officer and Chief Financial Officer The Board receives written declarations from the CEO and the Chief Financial Officer (CFO) in relation to the half-year and full-year that in their opinion: (a) the financial statements and associated notes comply in all material respects with the accounting standards as required by the Corporations Act 2001 (Cth) (Corporations Act); FAIRFAX MEDIA ANNUAL REPORT 2015 | 57 CORPORATE GOVERNANCE (b) the financial statements and associated notes give a true and fair view, in all material respects, of the financial position as at the end of the financial year and performance of the Company and Consolidated Entity for the period then ended as required by the Corporations Act; and (c) the financial records of the Company have been properly maintained in accordance with the Corporations Act, and that the statements made above are founded on a sound system of financial risk management and internal compliance and control, which is operating effectively. These statements to the Board are underpinned by the requirement for appropriate senior executives to provide a signed letter of representation addressed to the CEO and CFO verifying material issues relating to the executive’s areas of responsibility and disclosing factors that may have a material effect on the financial results or operations of the Group. CHARTER OF AUDIT INDEPENDENCE The Board has also adopted a Charter of Audit Independence. The purpose of this Charter is to provide a framework for the Board and management to ensure that the external auditor is both independent and seen to be independent. The purpose of an independent statutory audit is to provide shareholders with reliable and clear financial reports on which to base investment decisions. The Charter sets out key commitments by the Board and procedures to be followed by the Audit and Risk Committee and management aimed to set a proper framework of audit independence. CODE OF CONDUCT All Directors, managers and employees are required to act honestly and with integrity. The Company has developed and communicated to all employees and Directors the Fairfax Code of Conduct. The Code assists in upholding ethical standards and conducting business in accordance with applicable laws. The Code also sets out the responsibility of individuals for reporting Code breaches. The Fairfax Code of Conduct aims to: • provide clear guidance on the Company’s values and expectations while acting as a representative of Fairfax; • promote minimum ethical behavioural standards and expectations across the Group, all business units and locations; • offer guidance for shareholders, customers, readers, suppliers and the wider community on our values, standards and expectations, and what it means to work for Fairfax; and • raise employee awareness of acceptable and unacceptable behaviour and provide a means to assist in avoiding any real or perceived misconduct. Supporting the Code of Conduct is the Company’s range of guidelines and policies. These policies are posted on the Company intranet, are communicated to employees at the time of employment and are reinforced by training programs. The Code of Conduct is to be read in conjunction with the codes of ethics for each masthead and the other Fairfax policies as amended from time to time. MARKET DISCLOSURE AND SHAREHOLDER COMMUNICATIONS The Company has a Policy on Market Disclosure and Shareholder Communications which sets out requirements aimed to ensure full and timely disclosure to the market of material issues relating to the Group to ensure that all stakeholders have an equal opportunity to access information. The Policy reflects the ASX Listing Rules and Corporations Act continuous disclosure requirements. The Policy requires that the Company notify the market, via the ASX, of any price sensitive information (subject to the exceptions to disclosure under the Listing Rules). Information is price sensitive if a reasonable person would expect the information to have a material effect on the price or value of the Company’s securities or if the information would, or would be likely to, influence investors in deciding whether to buy, hold or sell Fairfax securities. 58 CORPORATE GOVERNANCE The CEO, CFO and Group General Counsel/Company Secretary are designated as Disclosure Officers who are responsible for reviewing potential disclosures and deciding what information should be disclosed. Only the Disclosure Officers may authorise communications on behalf of the Company to the ASX, media, analysts and investors. This safeguards the premature exposure of confidential information and aims to ensure proper disclosure is made in accordance with the law. ASX and press releases of a material nature must be approved by a Disclosure Officer. The Disclosure Officers, in conjunction with the Chair of the Board, are authorised to determine whether a trading halt will be requested from the ASX to prevent trading in an uninformed market. The onus is on all staff to inform a Disclosure Officer of any price sensitive information as soon as becoming aware of it. The Executive Leadership Team is responsible for ensuring staff understand and comply with the Policy. The Company actively encourages timely and ongoing shareholder communications. To ensure ready access for shareholders to information about the Company, Company announcements, Annual Reports, analyst and investor briefings, financial results and other information useful to investors such as press releases are placed on the Company’s website at www.fairfaxmedia.com.au as soon as practicable after their release to the ASX (where release is required). Several years’ worth of historical financial information is available on the website. Webcasts and recordings of results announcements and investor briefings can be accessed on the website for a length of time. The full text of Notices of Meetings and the accompanying explanatory materials are posted on the website for each Annual General Meeting. The Chair’s and the CEO’s addresses, proxy counts and results of shareholder resolutions at the meeting are also posted on the website as soon as practicable after their release to the ASX. At the Annual General Meeting, shareholders are encouraged to ask questions and are given a reasonable opportunity to comment on matters relevant to the Company. The external auditor attends the Annual General Meeting and is available to answer shareholder questions about the audit and the Auditor’s Report. Shareholders are also able to send communications to, and receive communications from, Fairfax and its share registry electronically. TRADING IN COMPANY SECURITIES Directors and managers must not trade directly or indirectly in Fairfax securities while in possession of price sensitive information. Price sensitive information is information which has not been made public, usually about the Group or its intentions, which a reasonable person would expect to have a material effect on the price or value of Fairfax securities or which would be likely to influence an investment decision in relation to the securities. The Fairfax Securities Trading Policy regulates dealings by Directors and certain senior employees (Designated People) in Fairfax securities (including shares, convertible notes, derivatives and options). The purpose of the Policy is to ensure that Designated People comply with the legal and company-imposed restrictions on trading in securities whilst in possession of unpublished price sensitive information. The Policy sets out blackout periods when no trading is to be undertaken and a process for authorisation of trading at other times. Designated People means the Directors, CEO, Company Secretary, those employees who report directly to the CEO and those employees who are notified that they are subject to the Policy. A Designated Person must not trade in breach of the Policy either directly or indirectly through another entity, such as a partner, child, nominee or controlled company acting on his/her behalf. Under the Policy, Designated People are prohibited from trading in Fairfax securities without approval under the Policy or when in possession of price-sensitive information about Fairfax. In addition, Designated People must not tip anyone else on Fairfax securities, engage in short term speculative trading in Fairfax securities or trade in Fairfax derivatives. Black-out periods occur before the announcement of the half-yearly and annual results, other trading updates and the Annual General Meeting. During black-out periods Designated People will not be authorised to trade. Outside of the trading black-out periods, Directors must obtain approval from the Chair (or the chairman of the Audit and Risk Committee for approvals for the Chair to trade). Other Designated People must obtain approval from the Company Secretary who will consult with the Chair. Each Director must notify the Company Secretary of any change in the Director’s interest in Fairfax securities so as to ensure compliance with the disclosure requirements of the ASX Listing Rules. The Policy prohibits Designated People from entering into any financial transactions that operate to limit the economic risk of unvested Fairfax securities which have been allocated to an employee as part of his/her remuneration, prior to the securities vesting. Any breach of this prohibition risks disciplinary sanctions. FAIRFAX MEDIA ANNUAL REPORT 2015 | 59 CORPORATE GOVERNANCE DIVERSITY Fairfax is committed to creating a workplace that is fair and inclusive and reflects the diversity of the communities in which we operate. Fairfax values respects and encourages diversity of board members, employees, customers and suppliers. The Company believes diversity includes but is not limited to gender, age, ethnicity and cultural background. Accordingly, Fairfax has adopted Diversity Guidelines to establish the framework within which it will promote diversity, including the requirement for the People and Culture Committee to endorse measurable objectives for the year and to annually review the objectives and progress towards achieving them. Fairfax recognises the importance of its employees and aims to attract, motivate, retain and engage high performing employees. The Company recognises that each employee brings their own unique capabilities, experiences and characteristics to their work, and values such diversity at all levels of the Company in all that it does. Encouraging diversity broadens the pool for the recruitment of talented employees, enhances retention and supports innovation. Increasing the focus on high quality employees supports the Company to improve its financial performance and achieve its strategic objectives. The Company’s workforce gender demographics are: • Proportion of women who are Non-Executive Directors on the Board: 22% • Proportion of women in senior management (which, for these purposes, includes any senior manager of the Group, including those who participate in the Group’s employee incentive schemes): 34% • Proportion of women across the organisation: 53% The Company has exceeded its objective of 30% female gender representation among senior managers by 2015. A new target of 35% female participation in senior management by 2018 has been set. In 2013, the Fairfax Women of Influence Awards was introduced. Fairfax Women of Influence Awards is an internal reward and recognition award aiming to celebrate the contributions and successes of high-achieving female Fairfax employees to raise their leadership profiles. The awards comprised of six categories: agenda setter, emerging leader, customer centric leader, community leader, leadership champion, and change and innovation champion. Judging panel included members of the Board in addition to senior leaders across the business. Participation in the awards was high and the calibre and diversity of nominees was outstanding. The program has made a significant impact in raising the leadership profiles of females across the business. The Company has continued in its efforts to have a senior female included in all panels for senior executive roles and at least one female candidate in the shortlist for senior roles. A number of employment terms are in place to positively impact on women’s participation in the workforce. These include: • Flexible work hours • Compressed working weeks • Time-in-lieu • Telecommuting • Part-time work job sharing • Carer’s leave • Purchased leave • Unpaid leave The Company is compliant with the Workplace Gender Equality Act 2012 in Australia. This Corporate Governance Statement is current as at 13 August 2015 and has been approved by the Board of Fairfax. 60 MANAGEMENT DISCUSSION AND ANALYSIS REPORT TRADING OVERVIEW For the financial year 2015, Fairfax Media Group reported a statutory net profit excluding significant items and tax of $143.6 million with underlying operating earnings before interest tax depreciation and amortisation (EBITDA) of $289.4 million. EBITDA for continuing businesses after disposals of $287.4 million was 3.4% below last year. The Australian Metropolitan Media segment performed strongly with EBITDA growth of 29.7%. Driving this result is growth in the Domain Group and continued cost savings in the publishing business. Print advertising revenue declined only 0.5%, reflecting the move from 50% to 100% ownership of Metro Media Publishing Holdings Pty Ltd. (MMP) in January 2015. Excluding MMP, print revenue was down 10.7%. Digital advertising revenue increased 22.6% driven by organic growth in Domain online and the acquisition of Canberra’s leading property portal All Homes in October 2014. Events revenue increased 41% reflecting strong organic growth, eight new events and the acquisition of the Baby & Toddler Show. Domain Group delivered strong revenue performance across print and digital, reflecting organic growth and the impact of acquisitions. Digital advertising revenue increased 36.4% and EBITDA increased by 37.1%. Domain.com.au’s revenue was 30% higher than the prior year. During the year, the number of agent subscribers grew by 20%; listings were up 16%; and total average monthly visits to Domain sites increased 30%. Digital Ventures continued to execute its strategy of value creation through investment in digital opportunities and managing our portfolio of digitally-focused assets. Total investments of approximately $20 million included publishing and online community business Over 60, game-based e-learning business for children Skoolbo, lightning data network business Kattron (part of Weatherzone), and a joint venture with Africa Weather. HuffPost Australia, a joint venture with The Huffington Post, was formed during the financial year. Australian Community Media revenue declined 7.8%, with revenue from advertising down 9.1%. Declines in employment and automotive were contributing factors, along with weaker supermarket-related advertising in the second half. Print real estate advertising experienced an improving trend while local advertising was relatively stable. Australian Community Media is progressing through its transformation program involving the introduction of a new operating model and new ways of working for editorial and sales teams. The $60 million run-rate of costs benefits from transformation are on track to achieve cost reduction target by the end of financial year 2016. New Zealand total revenue was down 3.7%, with advertising revenue down 6.1%, in local currency terms. Digital revenue growth of 38% for the year and 52% in the second half reflected the strong momentum at Stuff.co.nz and continued investment in product development and marketing. Stuff.co.nz is setting an impressive pace of growth, increasing its unique audience 23% year on year to become the number four digital brand in the country. Cost control contributed to New Zealand’s improved EBITDA performance in the second half, with a 5% decline compared with the 12% decline for the full year. The Radio business, a 54.5% shareholding in the ASX-listed Macquarie Radio Network, made a stable EBITDA contribution of $13.9 million. The merger of Fairfax Radio Network and Macquarie Radio Network was completed in March 2015 and provides both cost and revenue synergies from enhanced network and sales opportunities that will create a more efficient and effective network for news, talk and sports radio along with music stations. In January 2015, Fairfax Radio sold its Perth station 96FM for $78 million excluding working capital adjustments. FINANCIAL POSITION The 2015 financial year recorded significant expenses after tax totalling $61.0 million for the Group. This included restructuring and redundancy costs of $46.6 million and impairment of intangibles, investments and property, plant and equipment of $28.5 million. The gain of $14.1 million primarily reflects the sale of 96FM and the fair value uplift on the original MMP investment. Net cash inflow from operating activities was $205.7 million. Cash and cash equivalents decreased by $108.6 million after payment of financial liabilities $152.4 million, dividends paid of $95.4 million, capital expenditure of $61.8 million. Net cash for covenant purposes was $64 million at 28 June 2015. FAIRFAX MEDIA ANNUAL REPORT 2015 | 61 MANAGEMENT DISCUSSION AND ANALYSIS REPORT RECONCILIATION OF STATUTORY TO UNDERLYING PERFORMANCE AS REPORTED SIGNIFICANT ITEMS (iii) TRADING PERFORMANCE EXCLUDING SIGNIFICANT ITEMS NOTE (i) 28 JUNE 2015 $’000 29 JUNE 2014 $’000 28 JUNE 2015 $’000 29 JUNE 2014 $’000 28 JUNE 2015 $’000 29 JUNE 2014 $’000 1,867,212 1,972,694 14,071 106,477 1,853,141 1,866,217 310 8,007 - - 310 8,007 (1,665,146) (1,609,387) (101,094) (47,909) (1,564,052) (1,561,478) 202,376 371,314 (87,023) 58,568 289,399 312,746 (64,982) (93,517) - - (64,982) (93,517) 137,394 277,797 (87,023) 58,568 224,417 219,229 (ii) (16,277) (10,428) - - (16,277) (10,428) 121,117 267,369 (87,023) 58,568 208,140 208,801 (33,912) (42,201) 26,003 8,108 (59,915) (50,309) 87,205 225,168 (61,020) 66,676 148,225 158,492 (4,037) (736) 541 - (4,578) (736) 83,168 224,432 (60,479) 66,676 143,647 157,756 3.5 9.5 6.1 6.7 Total revenue Associate profits Expenses OPERATING EBITDA Depreciation and amortisation EBIT Net finance costs Net profit/(loss) before tax Tax (expense)/ benefit Net profit/(loss) after tax Net (profit)/loss attributable to non-controlling interest Net profit/(loss) attributable to members of the Company Earnings per share (i) Revenue from ordinary activities excluding interest income. (ii) Finance costs less interest income. (iii) Significant items are those items of such a nature or size that separate disclosure will assist users to understand the accounts. Refer to Note 4 for further details of significant items for impairments, restructuring and redundancy and gains on controlled entities and investments consistent with prior period disclosures. 62 MANAGEMENT DISCUSSION AND ANALYSIS REPORT RECONCILIATION OF TRADING TO OPERATING CASH FLOW Cash Flow from trading activities Redundancy Payments Interest and dividends received Finance costs and income tax paid Net cash flow from operating activities 28 JUNE 2015 $’000 29 JUNE 2014 $’000 264,769 284,343 (35,639) (86,397) 18,585 17,821 (41,966) (44,285) 205,749 171,482 FAIRFAX MEDIA ANNUAL REPORT 2015 | 63 CONSOLIDATED INCOME STATEMENT FAIRFAX MEDIA LIMITED AND CONTROLLED ENTITIES FOR THE PERIOD ENDED 28 JUNE 2015 Revenue from operations Other revenue and income TOTAL REVENUE AND INCOME Share of net profits of associates and joint ventures Expenses from operations excluding impairment, depreciation, amortisation and finance costs Depreciation and amortisation Impairment of intangibles, investments and property, plant and equipment Finance costs Net profit from operations before income tax expense Income tax expense Net profit from operations after income tax expense Net profit is attributable to: Non-controlling interest Owners of the parent Earnings per share (cents per share) Basic earnings per share (cents per share) Diluted earnings per share (cents per share) NOTE 2(A) 2(B) 8(C) 3(A) 3(B) 3(C) 25 20 20 28 JUNE 2015 $’000 29 JUNE 2014 $’000 1,838,629 39,427 1,878,056 310 (1,630,091) (64,982) (35,055) (27,121) 121,117 (33,912) 87,205 4,037 83,168 87,205 3.5 3.5 1,856,762 130,806 1,987,568 8,007 (1,585,928) (93,517) (23,459) (25,302) 267,369 (42,201) 225,168 736 224,432 225,168 9.5 9.5 The above Consolidated Income Statement should be read in conjunction with the accompanying Notes. 64 CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME FAIRFAX MEDIA LIMITED AND CONTROLLED ENTITIES FOR THE PERIOD ENDED 28 JUNE 2015 Net profit after income tax expense 87,205 225,168 NOTE 28 JUNE 2015 $’000 29 JUNE 2014 $’000 OTHER COMPREHENSIVE INCOME Items that may be reclassified to profit or loss: Changes in fair value of available for sale financial assets Changes in fair value of cash flow hedges Changes in value of net investment hedges Exchange differences on translation of foreign operations Income tax relating to these items Items that will not be reclassified to profit or loss: Actuarial (loss)/gain on defined benefit plans Income tax relating to these items Other comprehensive income for the period, net of tax Total comprehensive income for the period Total comprehensive income is attributable to: Non-controlling interest Owners of the parent 25 25 (276) 4,183 1,104 (15,603) (3,023) (146) 27 (13,734) 73,471 4,037 69,434 73,471 707 511 (11,231) 22,451 3,387 518 (149) 16,194 241,362 736 240,626 241,362 The above Consolidated Statement of Comprehensive Income should be read in conjunction with the accompanying Notes. FAIRFAX MEDIA ANNUAL REPORT 2015 | 65 CONSOLIDATED BALANCE SHEET FAIRFAX MEDIA LIMITED AND CONTROLLED ENTITIES AS AT 28 JUNE 2015 CURRENT ASSETS Cash and cash equivalents Trade and other receivables Inventories Derivative assets Assets held for sale Income tax receivable Other financial assets Total current assets NON-CURRENT ASSETS Receivables Investments accounted for using the equity method Available for sale investments Intangible assets Property, plant and equipment Derivative assets Deferred tax assets Pension assets Other financial assets Total non-current assets Total assets CURRENT LIABILITIES Payables Interest bearing liabilities Derivative liabilities Liabilities directly associated with held for sale assets Provisions Current tax liabilities Total current liabilities NON-CURRENT LIABILITIES Interest bearing liabilities Derivative liabilities Provisions Pension liabilities Other non-current liabilities Total non-current liabilities Total liabilities NET ASSETS EQUITY Contributed equity Reserves Retained losses Total parent entity interest Non-controlling interest TOTAL EQUITY NOTE 29(B) 10 11 16 7(A) 24 10 8 9 14 16 25 24 12 15 16 7(B) 13 15 16 13 18 18 28 JUNE 2015 $’000 29 JUNE 2014 $’000 342,830 314,719 26,333 - 70,947 3,528 1,384 759,741 822 95,831 2,276 1,523,402 330,189 16,902 76,053 1,429 16,625 2,063,529 2,823,270 241,930 27,101 3,912 187 136,716 22,039 431,885 255,858 7,137 51,949 - 10,040 324,984 756,869 452,687 295,424 25,362 213 91,494 8,725 4,858 878,763 1,232 88,801 2,488 1,312,111 407,978 1,551 86,022 1,195 1,369 1,902,747 2,781,510 218,052 119,721 13,278 4,202 118,959 9,290 483,502 235,526 21,957 49,416 440 - 307,339 790,841 2,066,401 1,990,669 4,650,798 21,034 (2,725,544) 1,946,288 120,113 2,066,401 4,646,525 55,432 (2,713,145) 1,988,812 1,857 1,990,669 The above Consolidated Balance Sheet should be read in conjunction with the accompanying Notes. 66 CONSOLIDATED CASH FLOW STATEMENT FAIRFAX MEDIA LIMITED AND CONTROLLED ENTITIES FOR THE PERIOD ENDED 28 JUNE 2015 NOTE 28 JUNE 2015 $’000 29 JUNE 2014 $’000 CASH FLOWS FROM OPERATING ACTIVITIES Receipts from customers (inclusive of GST) Payments to suppliers and employees (inclusive of GST) Redundancy payments Interest received Dividends and distributions received Finance costs paid Net income taxes paid Net cash inflow from operating activities 29(A) CASH FLOWS FROM INVESTING ACTIVITIES Payment for purchase of controlled entities, associates and joint ventures (net of cash acquired) Payment for purchase of businesses, including mastheads Payment for property, plant, equipment and software Proceeds from sale of property, plant and equipment Proceeds from sale of investments, net of transaction fees and cash disposed* Loans advanced to other parties Loans repaid by other parties Net cash (outflow)/inflow from investing activities CASH FLOWS FROM FINANCING ACTIVITIES Payment for purchase of non-controlling interests in subsidiaries Proceeds from borrowings and other financial liabilities Repayment of borrowings and other financial liabilities Payment of facility fees Payment for on market buy-back Dividends paid to shareholders Dividends paid to non-controlling interests in subsidiaries Net cash outflow from financing activities NET DECREASE IN CASH AND CASH EQUIVALENTS HELD Cash and cash equivalents at beginning of the financial year Reclassification to held for sale Effect of exchange rate changes on cash and cash equivalents Cash and cash equivalents at end of the financial year 19 7(A) 29(B) 2,032,148 (1,767,379) (35,639) 10,618 7,967 (23,244) (18,722) 205,749 2,044,784 (1,760,441) (86,397) 12,933 4,888 (31,162) (13,123) 171,482 (53,507) (33,713) (3,047) (61,794) 20,152 77,671 (16,250) 5,090 (31,685) - 5,441 (152,366) (1,160) (37,928) (95,449) (1,211) (282,673) (108,609) 452,687 - (1,248) 342,830 (482) (72,321) 12,260 222,444 - 4,986 133,174 (3,983) 12,871 (319,457) (1,475) - (70,559) (884) (383,487) (78,831) 533,531 (8,439) 6,426 452,687 * The prior year proceeds primarily relate to the disposal of the Stayz business on 6 December 2013. The above Consolidated Cash Flow Statement should be read in conjunction with the accompanying Notes. FAIRFAX MEDIA ANNUAL REPORT 2015 | 67 - N O N 0 0 0 $ L A T O T I Y T U Q E G N I L L O R T N O C I D E N A T E R L A T O T 0 0 0 $ T S E R E T N I 0 0 0 $ S E S S O L 0 0 0 $ S E V R E S E R 0 0 0 $ L A R E N E G E V R E S E R ) 8 1 E T O N ( 0 0 0 $ T N E M Y A P E V R E S E R ) 8 1 E T O N ( 0 0 0 $ E G D E H E V R E S E R ) 8 1 E T O N ( 0 0 0 $ E G D E H E V R E S E R ) 8 1 E T O N ( 0 0 0 $ E V R E S E R ) 8 1 E T O N ( 0 0 $’0 E V R E S E R ) 8 1 E T O N ( I N O T A L S N A R T I N O T I S I U Q C A T E S S A 0 0 0 $ ’ E V R E S E R ) 8 1 E T O N ( 0 0 0 $ ’ I Y T U Q E ) 8 1 E T O N ( I N O T A U L A V E R I D E T U B R T N O C , 9 6 6 0 9 9 , 1 7 5 8 , 1 ) 5 4 1 , 3 1 7 2 ( , 2 3 4 5 5 , ) 7 3 8 6 ( , 1 3 2 , 1 1 ) 4 9 0 8 1 ( , ) 9 7 1 , 4 ( ) 8 4 1 , 0 1 1 ( 6 0 7 2 8 1 , 3 5 7 , 5 2 5 6 4 6 4 , 5 0 2 7 8 , 7 3 0 4 , 8 6 1 , 3 8 - ) 4 3 7 3 1 ( , - ) 8 1 1 ( ) 6 1 6 3 1 ( , 1 7 4 3 7 , 7 3 0 4 , 0 5 0 3 8 , ) 6 1 6 3 1 ( , 1 8 0 2 4 , ) 8 2 9 7 3 ( , ) 9 4 4 5 9 , ( - - - - - ) 9 4 4 5 9 , ( - ) 2 4 ( ) 1 1 2 , 1 ( ) 1 1 2 , 1 ( - 8 0 7 3 , - - 0 6 0 , 1 9 2 7 4 5 1 1 , - - - - - - - - - 2 4 ) 0 2 1 ( ) 2 1 4 4 2 ( , 8 0 7 3 , 1 6 2 2 , 9 1 2 4 1 1 , ) 9 4 4 5 9 ( , ) 2 8 7 0 2 ( , - - - - - - - - - - - - - - - - - - - - - ) 0 2 1 ( 8 0 7 3 , 8 8 5 3 , - 6 5 7 6 5 7 - - 7 0 5 , 1 ) 3 0 6 5 1 ( , 7 0 5 , 1 ) 3 0 6 5 1 ( , - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - 2 4 ) 2 1 4 4 2 ( , ) 0 7 3 4 2 ( , - - - - - - - - - - ) 6 7 2 ( ) 6 7 2 ( - - - 1 8 0 2 4 , - - - - - 0 2 1 3 7 2 4 , , 1 0 4 6 6 0 2 , 3 1 1 , 0 2 1 , ) 4 4 5 5 2 7 2 ( , 4 3 0 , 1 2 ) 7 3 8 6 ( , 9 1 8 4 1 , ) 8 3 3 7, 1 ( ) 2 7 6 2 ( , , ) 1 5 7 5 2 1 ( 6 3 3 8 5 1 , 7 7 4 , 8 9 7 0 5 6 4 , 4 1 0 2 E N U J 9 2 T A E C N A L A B e m o c n i e v i s n e h e r p m o c r e h t O d o i r e p e h t r o f t fi o r P d o i r e p e h t r o f e m o c n i e v i s n e h e r p m o c l a t o T : s r e n w o s a y t i c a p a c r i e h t n i s r e n w o h t i w s n o i t c a s n a r T d n a d e r i u q c a s e r a h S d e u s s i s e r a h S n o f o t r a p s a d e l l e c n a c i - n o n o t d a p s d n e d v D i i i o t d a p s d n e d v D i i l s r e d o h e r a h s n i s t s e r e t n i g n i l l o r t n o c - n o n f o n o i t i s i u q c A i s e i r a d i s b u s t s e r e t n i g n i l l o r t n o c , s t n e m y a p d e s a b - e r a h S x a t f o t e n s n o i t c a s n a r t l a t o T s r e n w o h t i w s s e n i s u b n o g n i s i r a n o i t a n b m o c i s e r a h s f o e s a e e R l 5 1 0 2 E N U J 8 2 T A E C N A L A B t s e r e t n i g n i l l o r t n o c - n o N ) 8 2 9 7 3 ( , k c a b y u b t e k r a m D E S A B - E R A H S T N E M T S E V N I W O L F H S A C Y C N E R R U C T E N I N G E R O F S E V R E S E R 5 1 0 2 E N U J 8 2 D E D N E D O R E P E H T R O F I I Y T U Q E N I S E G N A H C F O T N E M E T A T S D E T A D I L O S N O C 68 I I S E T T N E D E L L O R T N O C D N A D E T M I L A D E M X A F R A F I I I i . s e t o N g n y n a p m o c c a e h t h t i w n o i t c n u n o c n j i l d a e r e b d u o h s y t i u q E n i s e g n a h C f o t n e m e t a t S d e t a d i l o s n o C e v o b a e h T 0 0 0 $ L A T O T I Y T U Q E - N O N G N I L L O R T N O C I D E N A T E R L A T O T L A R E N E G T N E M Y A P E V R E S E R E V R E S E R 0 0 0 $ T S E R E T N I 0 0 0 $ S E S S O L 0 0 0 $ 0 0 0 $ 0 0 0 $ S E V R E S E R ) 8 1 E T O N ( ) 8 1 E T O N ( 0 0 0 $ E G D E H E V R E S E R ) 8 1 E T O N ( 0 0 0 $ E G D E H E V R E S E R ) 8 1 E T O N ( 0 0 0 $ E V R E S E R ) 8 1 E T O N ( 0 0 0 $ ’ E V R E S E R ) 8 1 E T O N ( 0 0 0 $ ’ E V R E S E R ) 8 1 E T O N ( 0 0 0 $ ’ I Y T U Q E ) 8 1 E T O N ( I N O T A L S N A R T I N O T I S I U Q C A I N O T A U L A V E R I D E T U B R T N O C S E V R E S E R T E N I N G E R O F D E S A B - E R A H S T N E M T S E V N I W O L F H S A C Y C N E R R U C T E S S A I Y T U Q E N I S E G N A H C F O T N E M E T A T S D E T A D I L O S N O C 5 1 0 2 E N U J 8 2 D E D N E D O R E P E H T R O F I I I S E T T N E D E L L O R T N O C D N A D E T M I L A D E M X A F R A F I I I 5 9 1 , 6 1 8 , 1 7 1 8 , 1 , ) 7 8 3 7 6 8 2 ( , 7 1 5 5 3 , ) 7 3 8 6 ( , 9 9 7 8 , ) 2 3 2 0 1 ( , ) 3 0 7 4 ( , ) 9 9 5 2 3 1 ( , 8 4 0 , 1 8 1 1 4 , 8 4 2 6 4 6 4 , 8 6 1 , 5 2 2 6 3 7 , 2 3 4 4 2 2 - 4 9 1 , 6 1 - 9 6 3 5 2 8 5 1 , 2 6 3 , 1 4 2 6 3 7 , 1 0 8 4 2 2 5 2 8 5 1 , 8 9 6 , 1 0 4 - 9 0 7 2 , - - ) 6 3 7 ( ) 6 3 7 ( - - - - ) 9 5 5 0 7 ( , - ) 9 5 5 0 7 ( , - - 8 5 6 , 1 ) 7 7 2 ( 9 0 7 2 , ) 8 8 8 6 6 ( , ) 6 9 6 ( ) 9 5 5 0 7 ( , 0 9 0 4 , - - - - - - - - - , 9 6 6 0 9 9 , 1 7 5 8 , 1 ) 5 4 1 , 3 1 7 2 ( , 2 3 4 5 5 , ) 7 3 8 6 ( , - - - - - - ) 7 7 2 ( 9 0 7 2 , 2 3 4 2 , 1 3 2 , 1 1 - ) 2 6 8 7 ( , ) 2 6 8 7 ( , - 4 2 5 4 2 5 - 1 5 4 2 2 , 1 5 4 2 2 , - - - - - - - - - - - - - - - - - - ) 4 9 0 8 1 ( , ) 9 7 1 , 4 ( ) 8 4 1 , 0 1 1 ( - - - - - - - 8 5 6 , 1 8 5 6 , 1 6 0 7 2 8 1 , - 2 1 7 2 1 7 - - - - - - 3 5 7 - - - - - - - 7 7 2 7 7 2 , 5 2 5 6 4 6 4 , 3 1 0 2 E N U J 0 3 T A E C N A L A B d o i r e p e h t r o f t fi o r P e v i s n e h e r p m o c r e h t O e m o c n i d o i r e p e h t r o f e m o c n i e v i s n e h e r p m o c l a t o T s r e n w o h t i w s n o i t c a s n a r T s a y t i c a p a c r i e h t n i : s r e n w o i - n o n o t d a p s d n e d v D i i l s r e d o h e r a h s i o t d a p s d n e d v D i i n i s t s e r e t n i g n i l l o r t n o c - n o n f o n o i t i s i u q c A i s e i r a d i s b u s t s e r e t n i g n i l l o r t n o c s e r a h s f o n o i t u b i r t s i d r o i r p o t e u d n o i t a c fi i s s a c e R l , s t n e m y a p d e s a b - e r a h S x a t f o t e n s n o i t c a s n a r t l a t o T s r e n w o h t i w 4 1 0 2 E N U J 9 2 T A E C N A L A B i . s e t o N g n y n a p m o c c a e h t h t i w n o i t c n u n o c n j i l d a e r e b d u o h s y t i u q E n i s e g n a h C f o t n e m e t a t S d e t a d i l o s n o C e v o b a e h T FAIRFAX MEDIA ANNUAL REPORT 2015 | 69 NOTES TO THE FINANCIAL STATEMENTS FAIRFAX MEDIA LIMITED AND CONTROLLED ENTITIES FOR THE PERIOD ENDED 28 JUNE 2015 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Fairfax Media Limited is a for profit company limited by ordinary shares which are publicly traded on the Australian Securities Exchange. The financial report includes the consolidated entity consisting of Fairfax Media Limited and its controlled entities. (A) BASIS OF PREPARATION This financial report is for the period 30 June 2014 to 28 June 2015 (2014: the period 1 July 2013 to 29 June 2014). Reference in this report to ‘a year’ is to the period ended 28 June 2015 or 29 June 2014 respectively, unless otherwise stated. The financial report is a general-purpose financial report. It has been prepared: • in accordance with the requirements of the Corporations Act 2001; Australian Accounting Standards and other authoritative  pronouncements of the Australian Accounting Standards Board; and International Financial Reporting Standards (IFRS) as issued by the International Accounting Standards Board; • on a historical cost basis, except for those assets and liabilities disclosed in Note 17(E) which are measured at fair value; and • in accordance with ASIC Class Order 98/0100, with all values rounded to the nearest thousand dollars unless otherwise indicated.  The financial report has been re-ordered this year. Significant accounting policies are provided throughout the notes to the financial statements. (B) SIGNIFICANT JUDGEMENTS AND ESTIMATES The carrying amounts of certain assets and liabilities are determined based on estimates and assumptions of future events. The key estimates and assumptions which are material to the financial reports are found in the following notes: • Note 6: Business combinations, acquisition and disposal of controlled entities • Note 9: Intangible assets • Note 13: Provisions • Note 14: Property, plant and equipment • Note 25: Taxation • Note 26: Employee entitlements (C) SIGNIFICANT CHANGES IN THE CURRENT REPORTING PERIOD During the current financial year, the financial position and performance of the group was particularly affected by the following events and transactions: • On 10 July 2014, the Company repaid US$105 million (A$125 million) of senior notes. • On 2 October 2014, the Company acquired All Homes Pty Ltd and All Data Australia Pty Ltd for total consideration of $51.5 million. • On 22 January 2015, the Group acquired the remaining 50% of issued shares in MMP Holdings Pty Ltd for total consideration of $75.4 million including $18.5 million in cash. • On 30 January 2015, the Company completed an agreement to sell Radio 96FM Perth Pty Limited to APN News & Media Limited for cash consideration of $78 million. • In March 2015, the Group commenced an on market share buyback of ordinary shares as part of the Group’s ongoing capital management strategy. At June 2015, 37.1 million shares were repurchased and cancelled for $37.9 million. • On 31 March 2015, the Company entered into merger with Macquarie Radio Network Limited and has received $18 million in cash consideration and holds a 54.5% shareholding. For a detailed discussion about the Group’s performance and financial position please refer to the Management Discussion and Analysis. 70 NOTES TO THE FINANCIAL STATEMENTS: KEY NUMBERS FAIRFAX MEDIA LIMITED AND CONTROLLED ENTITIES FOR THE PERIOD ENDED 28 JUNE 2015 2. REVENUES (A) REVENUE FROM OPERATIONS Total revenue from sale of goods* Total revenue from services Total revenue from operations (B) OTHER REVENUE AND INCOME Interest income Foreign exchange gains Gains on sale of property, plant and equipment Gains on sale of controlled entities Gain on investment at fair value Other Total other revenue and income Total revenue and income 28 JUNE 2015 $’000 29 JUNE 2014 $’000 494,297 1,344,332 1,838,629 10,844 3,725 2,214 6,803 7,268 8,573 39,427 1,878,056 503,919 1,352,843 1,856,762 14,874 3,817 868 106,477 - 4,770 130,806 1,987,568 *Revenue from the sale of goods includes revenue from circulation, subscription, printing and printing-related products. ACCOUNTING POLICY Revenue from advertising, circulation and subscription for newspapers, magazines and other publications is recognised on the publication date. Revenue from the provision of advertising on websites is recognised in the period the advertisements are placed or the impression occurs. Revenue from radio advertising is recognised when the programme is aired. Amounts disclosed as revenue are net of commissions, rebates, discounts and returns which are recognised when they can be reliably measured. Interest revenue is recognised as it accrues, based on the effective yield of the financial asset. FAIRFAX MEDIA ANNUAL REPORT 2015 | 71 NOTES TO THE FINANCIAL STATEMENTS: KEY NUMBERS FAIRFAX MEDIA LIMITED AND CONTROLLED ENTITIES FOR THE PERIOD ENDED 28 JUNE 2015 3. EXPENSES (A) EXPENSES BEFORE IMPAIRMENT, DEPRECIATION, AMORTISATION AND FINANCE COSTS Staff costs excluding staff redundancy costs Redundancy costs Newsprint and paper Distribution costs Production costs Promotion and advertising costs Rent and outgoings Repairs and maintenance Outsourced services Communication costs Maintenance and other computer costs Fringe benefits tax, travel and entertainment Other 28 JUNE 2015 $’000 29 JUNE 2014 $’000 724,693 51,938 116,210 144,237 151,567 98,662 62,140 28,088 28,265 18,373 29,690 25,066 151,162 731,502 22,126 141,752 144,155 135,155 91,997 59,815 25,832 22,477 18,630 24,763 25,174 142,550 Total expenses before impairment, depreciation, amortisation and finance costs 1,630,091 1,585,928 (B) DEPRECIATION AND AMORTISATION Depreciation of freehold property Depreciation of plant and equipment Depreciation of leasehold property Amortisation of software Amortisation of customer relationships and tradenames Total depreciation and amortisation (C) FINANCE COSTS External parties borrowing costs Gain on partial redemption of senior notes Finance lease Hedge ineffectiveness Total finance costs (D) OTHER EXPENSE DISCLOSURES Operating lease rental expense Defined contribution superannuation expense Share-based payment expense ACCOUNTING POLICY BORROWING COSTS 6,548 32,791 4,408 21,076 159 64,982 22,761 - 4,358 2 27,121 44,855 49,884 5,298 6,275 54,629 4,370 27,451 792 93,517 31,172 (10,183) 4,073 240 25,302 40,580 47,658 3,870 Borrowing costs include interest, amortisation of discounts or premiums relating to borrowings, amortisation or ancillary costs incurred in connection with arrangement of borrowings and foreign exchange losses net of hedged amounts on borrowings, including trade creditors and lease finance charges. Borrowing costs are expensed as incurred. Where funds are borrowed generally, borrowing costs are capitalised using a weighted average capitalisation rate. 72 NOTES TO THE FINANCIAL STATEMENTS: KEY NUMBERS FAIRFAX MEDIA LIMITED AND CONTROLLED ENTITIES FOR THE PERIOD ENDED 28 JUNE 2015 4. SIGNIFICANT ITEMS The net profit after tax includes the following items whose disclosure is relevant in explaining the financial performance of the consolidated entity. IMPAIRMENT OF SOFTWARE, EQUITY ACCOUNTED INVESTMENTS AND PROPERTY, PLANT AND EQUIPMENT - COMPRISING: Impairment of software, equity accounted investments and property, plant and equipment (i) Income tax benefit Impairment of software, equity accounted investments and property, plant and equipment, net of tax RESTRUCTURING AND REDUNDANCY - COMPRISING: Restructuring and redundancy charges Income tax benefit Restructuring and redundancy, net of tax GAINS ON CONTROLLED ENTITIES AND INVESTMENTS - COMPRISING: Gain on sale of controlled entities disclosed in other revenue and income (ii) Gain on investment at fair value disclosed in other revenue and income Income tax expense Gains on controlled entities and investments, net of tax 28 JUNE 2015 $’000 29 JUNE 2014 $’000 (34,881) 6,343 (23,890) 7,056 (28,538) (16,834) (66,213) 19,660 (46,553) 6,803 7,268 - 14,071 (24,019) 7,094 (16,925) 106,477 - (6,042) 100,435 Net significant items after income tax (61,020) 66,676 (i) Software and property, plant and equipment impairments relate to assets no longer in use. Equity accounted investment impairments are where the carrying value has been adjusted to reflect managements fair value estimate of non-listed investments. (ii) On 6 December 2013, the Group disposed of the Stayz business for gross proceeds of $218.0 million. ACCOUNTING POLICY Significant items are those items of such a nature or size that separate disclosure will assist users to understand the financial statements. FAIRFAX MEDIA ANNUAL REPORT 2015 | 73 NOTES TO THE FINANCIAL STATEMENTS: KEY NUMBERS FAIRFAX MEDIA LIMITED AND CONTROLLED ENTITIES FOR THE PERIOD ENDED 28 JUNE 2015 5. SEGMENT REPORTING (A) DESCRIPTION OF SEGMENTS The Group has identified its operating segments based on the internal reports that are reviewed and used by the Board of Directors, CEO and CFO in assessing performance and in determining the allocation of resources. REPORTABLE SEGMENT PRODUCTS AND SERVICES Australian Community Media Newspaper publishing and online for all Australian regional, community and agricultural media. Metropolitan Media Metropolitan news, sport, lifestyle and business media across various platforms including print, online, tablet and mobile. Also includes classifieds (including Domain) for metropolitan publications and transactional businesses. New Zealand Media Newspaper, magazine and general publishing and online for all New Zealand media. Radio Other Metropolitan radio networks in Australia. Comprises corporate and other entities not included in the segments above.  (B) RESULTS BY OPERATING SEGMENT The segment information provided to the Board of Directors, CEO and CFO for the reportable segments for the period ended 28 June 2015 and 29 June 2014 is as follows: SEGMENT REVENUE $’000 INTERSEGMENT REVENUE $’000 REVENUE FROM EXTERNAL CUSTOMERS $’000 SHARE OF PROFITS OF ASSOCIATES AND JOINT VENTURES $’000 UNDERLYING EBIT $’000 539,216 830,167 358,561 108,698 16,840 1,853,482 586,569 804,088 362,672 103,955 9,602 1,866,886 (73) (244) (4) - (20) (341) (89) (895) (6) (130) 451 (669) 539,143 829,923 358,557 108,698 16,820 1,853,141 586,480 803,193 362,666 103,825 10,053 1,866,217 2,212 2,562 (772) (7) (3,685) 310 2,266 3,780 - (3) 1,964 8,007 77,447 111,460 54,263 11,084 (29,837) 224,417 112,714 63,536 59,752 10,718 (27,491) 219,229 28 JUNE 2015 Australian Community Media Metropolitan Media New Zealand Media Radio Other Total for the Group 29 JUNE 2014 Australian Community Media Metropolitan Media New Zealand Media Radio Other Total for the Group 74 NOTES TO THE FINANCIAL STATEMENTS: KEY NUMBERS FAIRFAX MEDIA LIMITED AND CONTROLLED ENTITIES FOR THE PERIOD ENDED 28 JUNE 2015 (C) OTHER SEGMENT INFORMATION (i) SEGMENT REVENUE Segment revenue reconciles to total revenue and income as follows: Total segment revenue from external customers Interest income Gains on controlled entities and investments Total revenue and income 28 JUNE 2015 $’000 29 JUNE 2014 $’000 1,853,141 10,844 14,071 1,878,056 1,866,217 14,874 106,477 1,987,568 Transactions between operating segments relating to management charges are on third party terms. The consolidated entity operates predominantly in two geographic segments, Australia and New Zealand. The amount of its revenue from external customers in Australia is $1,492.8 million (2014: $1,501.8 million) and the amount of revenue from external customers in New Zealand is $360.3 million (2014: $364.4 million). Segment revenues are allocated based on the country in which the customer is located. (ii) SEGMENT RESULT - EBIT The Board of Directors, CEO and CFO assess the performance of the operating segments based on a measure of underlying EBIT. A reconciliation of underlying EBIT to operating profit before income tax is provided as follows: SEGMENT RESULTS - EBIT Interest income Finance costs Gains on controlled entities and investments in other revenue and income Impairment of software, equity accounted investments, and property, plant and equipment Restructuring and redundancy charges Reported net profit before tax 28 JUNE 2015 $’000 29 JUNE 2014 $’000 224,417 10,844 (27,121) 14,071 (34,881) (66,213) 121,117 219,229 14,874 (25,302) 106,477 (23,890) (24,019) 267,369 FAIRFAX MEDIA ANNUAL REPORT 2015 | 75 NOTES TO THE FINANCIAL STATEMENTS: KEY NUMBERS FAIRFAX MEDIA LIMITED AND CONTROLLED ENTITIES FOR THE PERIOD ENDED 28 JUNE 2015 A summary of significant items by operating segments is provided for the period ended 28 June 2015 and 29 June 2014. IMPAIRMENT OF SOFTWARE, INVESTMENTS AND PROPERTY, PLANT AND EQUIPMENT $’000 RESTRUCTURING AND REDUNDANCY CHARGES $’000 GAIN ON CONTROLLED ENTITIES AND INVESTMENTS $’000 28 JUNE 2015 Australian Community Media Metropolitan Media New Zealand Media Radio Other Consolidated entity 29 JUNE 2014 Australian Community Media Metropolitan Media New Zealand Media Radio Other Consolidated entity (iii) SEGMENT ASSETS - - 6,501 - 28,380 34,881 440 15,058 5,539 - 2,853 23,890 - - - 2,239 63,974 66,213 - - 5,589 - 18,430 24,019 - (10,468) - (37,075) 33,472 (14,071) - - - - (106,477) (106,477) TOTAL $’000 - (10,468) 6,501 (34,836) 125,826 87,023 440 15,058 11,128 - (85,194) (58,568) Information provided to the Board of Directors, CEO and CFO in respect of assets and liabilities is presented on a group basis consistent with the consolidated financial statements. The total of non-current assets other than financial instruments, deferred tax assets and employment benefit assets (there are no rights arising under insurance contracts) located in Australia is $1,709.9 million (2014: $1,608.4 million) and the total of these non-current assets located in New Zealand is $242.6 million (2014: $204.2 million). Segment assets are allocated to countries based on where the assets are located. ACCOUNTING POLICY An operating segment is a component of an entity that engages in business activities from which it may earn revenues and incur expenses (including revenue and expenses relating to transactions with other components of the same entity), whose operating results are regularly reviewed by the entity’s chief operating decision maker to assess performance, make resource allocation decisions and for which discrete financial information is available. Information about other business activities and operating segments that are below the quantitative criteria as prescribed by AASB 8 are combined and disclosed in a separate category for “Other segments”. 76 NOTES TO THE FINANCIAL STATEMENTS: GROUP STRUCTURE FAIRFAX MEDIA LIMITED AND CONTROLLED ENTITIES FOR THE PERIOD ENDED 28 JUNE 2015 6. BUSINESS COMBINATIONS, ACQUISITION AND DISPOSAL OF CONTROLLED ENTITIES (A) ACQUISITIONS The Group gained control over the following entities during the year: ENTITY OR BUSINESS ACQUIRED PRINCIPAL ACTIVITY DATE OF ACQUISITION OWNERSHIP INTEREST The Baby and Toddler Show Baby and toddler exhibition event 17 September 2014 Duskhail Pty Limited Supplier of lightning information All Homes Pty Limited and its controlled entities Online real estate website MMP Holdings Pty Ltd and its controlled entities (ii) Community newspaper publisher Macquarie Radio Network Limited and its controlled entities Radio broadcaster 1 October 2014 2 October 2014 22 January 2015 31 March 2015 (i) (i) 100% 100% 54.5% (i) The business assets of these entities were acquired. (ii) The Group previously owned 50.01% of MMP Holdings Pty Ltd. On 22 January 2015 the remaining 50% ownership interest was acquired and the Group gained control of MMP Holdings Pty Ltd and its controlled entities. The provisionally determined fair values of the identifiable assets and liabilities acquired are detailed below. Balances are provisional as purchase price accounting has not been finalised. MACQUARIE RADIO NETWORK LIMITED $’000 OTHER ACQUISITIONS $’000 VALUE OF NET ASSETS ACQUIRED Cash and cash equivalents Receivables Property, plant and equipment Intangible assets Deferred tax assets Income tax receivable Total assets Payables Provisions Interest bearing liabilities Deferred tax liabilities Total liabilities VALUE OF IDENTIFIABLE NET ASSETS Fair value of original equity accounted investment Non-controlling interest recognised on acquisition Goodwill arising on acquisition Total identifiable net assets and goodwill attributable to the Group PURCHASE CONSIDERATION Cash paid Contingent consideration liability Shares issued, at fair value Total purchase consideration NET CASH INFLOW/(OUTFLOW) ON ACQUISITION Net cash acquired with subsidiary Cash received/(paid) Net cash inflow/(outflow) 559 14,880 4,166 39,898 1,756 1,038 62,297 9,136 4,373 18,250 5,512 37,271 25,026 - (38,061) 60,220 46,645 - - 46,645 46,645 559 25,081 25,640 8,842 14,708 2,132 36,107 1,037 1,679 64,505 10,774 2,634 - 7,500 20,908 43,597 (58,020) (5,816) 150,784 130,545 60,100 28,364 42,081 130,545 8,842 (60,100) (51,258) FAIRFAX MEDIA ANNUAL REPORT 2015 | 77 NOTES TO THE FINANCIAL STATEMENTS: GROUP STRUCTURE FAIRFAX MEDIA LIMITED AND CONTROLLED ENTITIES FOR THE PERIOD ENDED 28 JUNE 2015 MACQUARIE RADIO NETWORK LIMITED On 31 March 2015, Macquarie Radio Network Limited (MRN) acquired 100% of the share capital of Fairfax Radio Network Pty Limited (FRN) from the Group. In exchange, the Group received a 54.5% ownership interest in MRN. The acquisition of FRN by MRN is considered a reverse acquisition, with the Group being considered the parent for reporting purposes and the business combination being accounted for under AASB 3 Business Combinations. As a result of this acquisition, the consolidated income statement includes revenue and net loss before tax for the period ended 28 June 2015 of $14.7 million and $0.1 million respectively. Had the acquisition occurred at the beginning of the reporting period, the consolidated income statement would have included revenue and net loss before tax of $56.3 million and $0.7 million respectively. Goodwill of $60.2 million includes the expected synergies and future growth opportunities. OTHER ACQUISITIONS In addition to cash paid of $60.1 million and shares issued of $42.1 million, contingent consideration of up to $31.4 million is payable, with an expected settlement of $28.4 million, by the Group to specified sellers if certain financial performance criteria are achieved. This is payable over a period of up to three years. As a result of these acquisitions, the consolidated income statement includes revenue and net profit before tax for the period ended 28 June 2015 of $42.4 million and $14.9 million respectively. Had the acquisitions occurred at the beginning of the reporting period, the consolidated income statement would have included revenue and net profit before tax of $88.5 million and $26.7 million respectively. Goodwill of $150.8 million includes the expected synergies and future growth opportunities. ACCOUNTING POLICY Business combinations are accounted for using the acquisition method. The consideration transferred in a business combination is measured at fair value, which is calculated as the sum of the acquisition-date fair values of the assets transferred by the acquirer, the liabilities incurred by the acquirer to former owners of the acquiree and the equity issued by the acquirer, and the amount of any non-controlling interest in the acquiree. For each business combination, the acquirer measures the non-controlling interest in the acquiree either at fair value or at the proportionate share of the acquiree’s identifiable net assets. Acquisition-related costs are expensed as incurred and included in other expenses. When the Group acquires a business, it assesses the financial assets and liabilities assumed for appropriate classification and designation in accordance with the contractual terms, economic conditions, the Group’s operating or accounting policies and other pertinent conditions as at the acquisition date. If the business combination is achieved in stages, the acquisition date fair value of the acquirer’s previously held equity interest in the acquiree is remeasured to fair value at the acquisition date through the income statement. Any contingent consideration to be transferred by the acquirer is recognised at fair value at the acquisition date. Subsequent changes to the fair value of the contingent consideration which is deemed to be an asset or liability is recognised in accordance with AASB 139 either in the income statement or as a change to other comprehensive income. 78 NOTES TO THE FINANCIAL STATEMENTS: GROUP STRUCTURE FAIRFAX MEDIA LIMITED AND CONTROLLED ENTITIES FOR THE PERIOD ENDED 28 JUNE 2015 (B) DISPOSALS The Group disposed of its interest in the following entities during the year: ENTITY OR BUSINESS DISPOSED PRINCIPAL ACTIVITY DATE OF DISPOSAL OWNERSHIP INTEREST Radio 96FM Perth Pty Limited RSVP.com.au Pty Limited (iii) Radio broadcaster 30 January 2015 Online dating services 1 July 2014 100% 42.2% (iii) (iii) On 1 July 2014, the Group disposed of 42.2% of RSVP.com.au Pty Limited and RSVP acquired 100% of 3H Group Pty Ltd. This investment was equity accounted from 1 July 2014. The Group does not have control of this company as it does not have power to govern the financial and operating policies of the company, such as power over budget, operational plans and appointment and removal of key personnel. For the above entities, the major classes of assets and liabilities disposed were as follows: Cash and cash equivalents Trade and other receivables Investment Intangible assets Property, plant and equipment Total assets Payables Provisions Total liabilities Net assets $’000 8,439 532 45 117,906 542 127,464 4,065 1,247 5,312 122,152 FAIRFAX MEDIA ANNUAL REPORT 2015 | 79 NOTES TO THE FINANCIAL STATEMENTS: GROUP STRUCTURE FAIRFAX MEDIA LIMITED AND CONTROLLED ENTITIES FOR THE PERIOD ENDED 28 JUNE 2015 7. ASSETS AND LIABILITIES HELD FOR SALE (A) ASSETS HELD FOR SALE Property, plant and equipment Macquarie Regional Radio Pty Limited disposal group Intangible assets Property, plant and equipment Other assets RSVP.com.au Pty Limited disposal group Cash Intangible assets Other assets Total assets held for sale (B) LIABILITIES DIRECTLY ASSOCIATED WITH HELD FOR SALE ASSETS Macquarie Regional Radio Pty Limited disposal group Other liabilities RSVP.com.au Pty Limited disposal group Payables Other liabilities Total liabilities directly associated with held for sale assets 28 JUNE 2015 $’000 29 JUNE 2014 $’000 68,215 36,244 324 1,975 433 - - - 70,947 187 - - 187 - - - 8,439 46,262 549 91,494 - 4,066 136 4,202 PROPERTY, PLANT AND EQUIPMENT Assets held for sale comprise properties in Australia and New Zealand that are being actively marketed and for which the sale is highly probable. During 2015, six properties previously held for sale were sold. Prior to being transferred to held for sale, the properties are remeasured at the lower of carrying amount and fair value less costs to sell. RSVP.COM.AU PTY LIMITED DISPOSAL GROUP On 1 July 2014, the sale of 42.2% of RSVP.com.au Pty Limited was completed. ACCOUNTING POLICY The Group classifies non-current assets and disposal groups as held for sale if their carrying amounts will be recovered principally through a sale transaction rather than through continuing use. Non-current assets and disposal groups classified as held for sale are measured at the lower of their carrying amount and fair value less costs to sell. The criteria for held for sale classification is regarded as met only when the sale is highly probable and the asset or disposal group is available for immediate sale in its present condition. Management must be committed to the sale, which should be expected to qualify for recognition as a completed sale within one year from the date of classification. Discontinued operations are excluded from the results of continuing operations and are presented as a single amount as profit or loss after tax from discontinued operations in the income statement. Property, plant and equipment and intangible assets are not depreciated or amortised once classified as held for sale. 80 NOTES TO THE FINANCIAL STATEMENTS: GROUP STRUCTURE FAIRFAX MEDIA LIMITED AND CONTROLLED ENTITIES FOR THE PERIOD ENDED 28 JUNE 2015 8. INVESTMENTS ACCOUNTED FOR USING THE EQUITY METHOD Shares in associates Shares in joint ventures Total investments accounted for using the equity method NOTE (A) (B) 28 JUNE 2015 $’000 29 JUNE 2014 $’000 71,396 24,435 95,831 69,457 19,344 88,801 FAIRFAX MEDIA ANNUAL REPORT 2015 | 81 NOTES TO THE FINANCIAL STATEMENTS: GROUP STRUCTURE FAIRFAX MEDIA LIMITED AND CONTROLLED ENTITIES FOR THE PERIOD ENDED 28 JUNE 2015 (A) INTERESTS IN ASSOCIATES NAME OF COMPANY PRINCIPAL ACTIVITY PLACE OF INCORPORATION OWNERSHIP INTEREST 28 JUNE 2015 29 JUNE 2014 Australian Associated Press Pty Ltd Bellabox Pty Ltd (i) Digital Radio Broadcasting Melbourne Pty Ltd (ii) News agency business and information service Subscription beauty box business Australia Australia Digital audio broadcasting Australia Digital Radio Broadcasting Perth Pty Ltd (ii) Digital audio broadcasting Australia Digital Radio Broadcasting Brisbane Pty Ltd Digital audio broadcasting Australia Digital Radio Broadcasting Sydney Pty Ltd (ii) Digital audio broadcasting Australia Healthshare Pty Ltd Homebush Transmitters Pty Ltd MMP Holdings Pty Ltd (iii) New Zealand Press Association Ltd NGA.net Pty Ltd Perth FM Facilities Pty Ltd (iv) Information technology tools for healthcare practitioners and consumers Australia Rental of a transmission facility Community newspaper publisher Australia Australia News agency business and financial information service New Zealand Provider of e-recruitment software to corporations Rental of a transmission facility Australia Australia RSVP.com.au Pty Limited (v) Online dating services Australia Skoolbo Pty Ltd (vi) Online education provider Singapore The Seniors Ad Network Pty Ltd (vii) The Video Network Pty Ltd Digital community for over 60s Australia Internet delivered television network Australia Times Newspapers Ltd Newspaper publishing New Zealand Xchange IT Software Pty Ltd Provider of EDI software Australia Xchange IT Newsagents Pty Ltd Provider of EDI software Australia 47.0% 50.3% 18.2% 16.7% 25.0% 11.3% 28.2% 47.0% - 18.2% 33.3% 25.0% 11.3% 19.7% 50.0% 50.0% 100.0% 50.01% 49.2% 23.7% - 57.5% 20.0% 33.3% 28.6% 49.9% 33.3% 25.0% 49.2% 23.7% 33.3% 100.0% - - 28.6% 49.9% 33.3% 25.0% (i) This investment was acquired on 2 September 2014. The Group does not have control of this company as it does not have power to govern the financial and operating policies of the company, such as power over budget, operational plans and appointment and removal of key personnel. The Group has significant influence in the entity due to its right to participate in policy setting for the entity. (ii) (iii) Control was obtained on 22 January 2015 when the Group acquired the remaining 50% ownership interest. The results of the entity have been consolidated from this date. (iv) This investment was disposed on 30 January 2015 as part of the Radio 96FM Perth Pty Limited disposal. (v) On 1 July 2014, the Group disposed of 42.2% of RSVP.com.au Pty Limited and RSVP acquired 100% of 3H Group Pty Ltd. This investment was equity accounted from 1 July 2014. The Group does not have control of this company as it does not have power to govern the financial and operating policies of the company, such as power over budget, operational plans and appointment and removal of key personnel. (vi) This investment was acquired on 17 December 2014. (vii) This investment was acquired on 2 July 2014. 82 NOTES TO THE FINANCIAL STATEMENTS: GROUP STRUCTURE FAIRFAX MEDIA LIMITED AND CONTROLLED ENTITIES FOR THE PERIOD ENDED 28 JUNE 2015 (i) SHARE OF ASSOCIATES' PROFITS Revenue Profit before income tax expense Income tax expense Net profit after income tax expense (ii) SHARE OF ASSOCIATES' ASSETS AND LIABILITIES Current assets Non-current assets Total assets Current liabilities Non-current liabilities Total liabilities 28 JUNE 2015 $’000 29 JUNE 2014 $’000 78,163 3,579 (1,300) 2,279 21,422 51,931 73,353 12,493 4,883 17,376 79,853 8,284 (2,398) 5,886 28,001 28,363 56,364 14,333 3,634 17,967 (B) INTERESTS IN JOINT VENTURES NAME OF COMPANY PRINCIPAL ACTIVITY Adzuna Australia Pty Ltd (ix) Job advertisements search engine PLACE OF INCORPORATION Australia Fermax Distribution Company Pty Ltd Letterbox distribution of Australia Future Foresight Group Pty Ltd (x) Gilgandra Newspapers Pty Ltd newspapers Weather safety and risk information provider Newspaper publishing and printing Gippsland Regional Publications Partnership Newspaper publishing and printing Neighbourly Limited (xi) Private neighbourhood website service South Africa Australia Australia New Zealand Pricemaker Ltd (xii) Online shopping platform New Zealand Stan Entertainment Pty Ltd (xiii) Torch Publishing Company Pty Ltd Provider of subscription video on demand Newspaper publishing and printing Australia Australia OWNERSHIP INTEREST 28 JUNE 2015 29 JUNE 2014 49.3% 50.0% 50.0% 50.0% 50.0% 22.5% 51.4% 50.0% 50.0% 50.0% - 50.0% 50.0% - 50.0% - 50.0% 50.0% (ix) This investment is classified as a joint venture, rather than an associate, as all significant decisions require unanimous consent. (x) This investment was acquired on 19 May 2015. (xi) This investment was acquired on 10 December 2014. This investment is classified as a joint venture, rather than an associate, as all significant decisions require unanimous consent. The Group does not have control of this company as it does not have power to govern the financial and operating policies of the company, such as power over budget, operational plans and appointment and removal of key personnel. (xii) (xiii) This investment was acquired on 1 September 2014. The Group has committed to providing up to $50 million in loans to Stan Entertainment Pty Ltd over a multi-year period. FAIRFAX MEDIA ANNUAL REPORT 2015 | 83 NOTES TO THE FINANCIAL STATEMENTS: GROUP STRUCTURE FAIRFAX MEDIA LIMITED AND CONTROLLED ENTITIES FOR THE PERIOD ENDED 28 JUNE 2015 (i) SHARE OF JOINT VENTURES’ (LOSSES)/PROFITS Revenues Expenses (Loss)/profit before income tax expense Income tax expense Net (loss)/profit after income tax expense (ii) SHARE OF JOINT VENTURES’ ASSETS AND LIABILITIES Current assets Non-current assets Total assets Current liabilities Non-current liabilities Total liabilities 28 JUNE 2015 $’000 29 JUNE 2014 $’000 10,540 (12,418) (1,878) (91) (1,969) 39,602 55,350 94,952 71,720 12,830 84,550 10,449 (8,208) 2,241 (120) 2,121 5,126 17,789 22,915 1,330 177 1,507 (C) SHARE OF NET PROFITS OF ASSOCIATES AND JOINT VENTURES Profit before income tax expense Income tax expense Net profit after income tax expense ACCOUNTING POLICY 28 JUNE 2015 $’000 29 JUNE 2014 $’000 1,701 (1,391) 310 10,525 (2,518) 8,007 Investments in associates and joint ventures are accounted for in the consolidated financial statements using the equity method. Associates are entities over which the Group has significant influence and are neither subsidiaries or joint ventures. The Group’s share of its associates’ and joint ventures’ post-acquisition profits or losses are recognised in the income statement, and its share of post-acquisition movements in reserves is recognised in reserves. The cumulative post-acquisition movements are adjusted against the carrying amount of the investment. Dividends received from associates and joint ventures are recognised in the consolidated financial statements as a reduction in the carrying amount of the investment. When the Group’s share of losses in an associate or joint venture equals or exceeds its interest in the associate or joint venture, the Group does not recognise further losses, unless it has incurred obligations or made payments on behalf of the associate or joint venture. Unrealised gains on transactions between the Group and its associates and joint ventures are eliminated to the extent of the Group’s interest in associates and joint ventures. IMPAIRMENT OF ASSETS Investments accounted for using the equity method are tested for impairment at each reporting date where there is an indication that the asset may be impaired. An impairment loss is recognised for the amount by which the asset’s carrying amount exceeds its recoverable amount. Assets that suffered an impairment are reviewed for possible reversal of the impairment at the end of each reporting period. 84 NOTES TO THE FINANCIAL STATEMENTS: OPERATING ASSETS AND LIABILITIES FAIRFAX MEDIA LIMITED AND CONTROLLED ENTITIES FOR THE PERIOD ENDED 28 JUNE 2015 9. INTANGIBLE ASSETS Mastheads and tradenames Goodwill Radio licences Software Customer relationships Total intangible assets ACCOUNTING POLICY MASTHEADS AND TRADENAMES 28 JUNE 2015 $’000 29 JUNE 2014 $’000 982,693 355,648 115,211 53,249 16,601 1,523,402 972,022 177,898 114,037 46,974 1,180 1,312,111 The Group’s mastheads and tradenames operate in established markets with limited licence conditions and are expected to continue to complement the Group’s new media initiatives. On this basis, the Directors have determined that the majority of mastheads and tradenames have indefinite useful lives as there is no foreseeable limit to the period over which the assets are expected to generate net cash inflows for the Group. These assets are not amortised but are tested for impairment annually. Tradenames that have been assessed to have a definite useful life and are amortised using a straight-line method over twenty years. GOODWILL Goodwill represents the excess of cost of an acquisition over the fair value of the Group’s share of the net identifiable assets of the acquired entity at the date of acquisition. Goodwill is not amortised but is tested for impairment annually. RADIO LICENCES Radio licences consist of commercial radio licences held by the consolidated entity under the provisions of the Broadcasting Services Act 1992 and have been assessed as having indefinite useful lives as there is no foreseeable limit to the period over which the assets are expected to generate net cash inflows for the Group. These assets are not amortised but are tested for impairment annually. SOFTWARE, DATABASES AND WEBSITES Internal and external costs directly incurred in the purchase or development of software or databases are capitalised as intangible assets, including subsequent upgrades and enhancements, when it is probable that they will generate future economic benefits attributable to the Group. Software licences and databases are amortised on a straight-line basis over their useful lives, which are between three and six years. Internal and external costs directly incurred in the development of websites are capitalised as intangible assets and amortised on a straight-line basis over their useful lives, which are between two and four years. CUSTOMER RELATIONSHIPS Customer relationships purchased in a business combination are amortised on a straight-line basis over their useful lives, which are between two and thirteen years. IMPAIRMENT OF ASSETS Intangibles are tested for impairment where there is an indication that the asset may be impaired. Goodwill and other indefinite life assets are further tested at least annually in June each year. An impairment loss is recognised for the amount by which the asset’s carrying amount exceeds its recoverable amount. The recoverable amount is the higher of an asset’s fair value less costs to sell and value in use. In assessing value in use, the estimated future cash flows are discounted to their present value using a post- tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset. Assets other than goodwill that suffered an impairment are reviewed for possible reversal of the impairment whenever there is an indication of a potential reversal and at least annually. FAIRFAX MEDIA ANNUAL REPORT 2015 | 85 NOTES TO THE FINANCIAL STATEMENTS: OPERATING ASSETS AND LIABILITIES FAIRFAX MEDIA LIMITED AND CONTROLLED ENTITIES FOR THE PERIOD ENDED 28 JUNE 2015 RECONCILIATIONS Reconciliations of the carrying amount of each class of intangible at the beginning and end of the current financial year are set out below: MASTHEADS & TRADENAMES $’000 NOTE GOODWILL $’000 RADIO LICENCES $’000 SOFTWARE $’000 CUSTOMER RELATIONSHIPS $’000 TOTAL $’000 PERIOD ENDED 29 JUNE 2014 Balance at beginning of the financial year Additions Capitalisations from works in progress 14 Disposals Disposal of controlled entities Assets classified as held for sale Acquisition through business combinations Amortisation 3(B) Exchange differences At 29 June 2014, net of accumulated amortisation and impairment AT 29 JUNE 2014 Cost Accumulated amortisation and impairment 966,223 294,385 114,037 - - - - - - (2,867) (104,149) (5,850) (39,717) - (33) 14,549 26,890 - 489 - - - - - - - - 56,840 12,735 8,028 (1,327) 6,549 1,438,034 - - - 12,735 8,028 (1,327) (3,803) (4,695) (115,514) (695) - (46,262) 1,350 (27,451) 1,297 - (759) 85 28,240 (28,243) 16,420 972,022 177,898 114,037 46,974 1,180 1,312,111 3,791,271 1,676,208 143,700 285,513 8,342 5,905,034 (2,819,249) (1,498,310) (29,663) (238,539) (7,162) (4,592,923) Net carrying amount 972,022 177,898 114,037 46,974 1,180 1,312,111 86 NOTES TO THE FINANCIAL STATEMENTS: OPERATING ASSETS AND LIABILITIES FAIRFAX MEDIA LIMITED AND CONTROLLED ENTITIES FOR THE PERIOD ENDED 28 JUNE 2015 MASTHEADS & TRADENAMES $’000 NOTE GOODWILL $’000 RADIO LICENCES $’000 SOFTWARE $’000 CUSTOMER RELATIONSHIPS $’000 TOTAL PERIOD ENDED 28 JUNE 2015 Balance at beginning of the financial year Additions Capitalisations from works in progress 14 Disposals Disposal of controlled entities Assets classified as held for sale Acquisition through business combinations Amortisation Impairment 972,022 177,898 114,037 - - - - - - 46,974 27,950 35 (183) (33,000) (38,400) (244) - (324) - - - - - - 1,180 1,312,111 - - - - - 27,950 35 (183) (71,644) (324) 17,250 211,004 39,898 3,280 15,577 287,009 3(B) (34) - - - Exchange differences (6,545) (254) - - - (21,076) (2,693) (794) (125) (21,235) - (31) (2,693) (7,624) At 28 June 2015, net of accumulated amortisation and impairment AT 28 JUNE 2015 Cost Accumulated amortisation and impairment 982,693 355,648 115,211 53,249 16,601 1,523,402 3,766,713 1,847,606 144,874 286,494 24,610 6,070,297 (2,784,020) (1,491,958) (29,663) (233,245) (8,009) (4,546,895) Net carrying amount 982,693 355,648 115,211 53,249 16,601 1,523,402 FAIRFAX MEDIA ANNUAL REPORT 2015 | 87 NOTES TO THE FINANCIAL STATEMENTS: OPERATING ASSETS AND LIABILITIES FAIRFAX MEDIA LIMITED AND CONTROLLED ENTITIES FOR THE PERIOD ENDED 28 JUNE 2015 (i) INDEFINITE LIVED INTANGIBLE ASSETS: IMPAIRMENT TESTING Goodwill and intangible assets with indefinite useful lives have been allocated to the following cash generating units (CGUs) for impairment testing purposes: AT 28 JUNE 2015 OPERATING SEGMENT ALLOCATION TO CGU GROUPS Metropolitan Media Metropolitan Media Australian Digital Transactions Metropolitan Media Australian Regional Media Australian Community Media Agricultural Media Australian Community Media Radio Radio New Zealand Media New Zealand Media Total goodwill, licences, mastheads and tradenames AT 29 JUNE 2014 OPERATING SEGMENT ALLOCATION TO CGU GROUPS Metropolitan Media Metropolitan Media Australian Digital Transactions Metropolitan Media Australian Regional Media Australian Community Media Agricultural Media Australian Community Media Radio Radio New Zealand Media New Zealand Media Total goodwill, licences, mastheads and tradenames LICENCES, MASTHEADS AND TRADENAMES $’000 GOODWILL $’000 241,363 30,880 - - 83,405 - 404,385 520 299,224 122,333 115,211 156,231 TOTAL $’000 645,748 31,400 299,224 122,333 198,616 156,231 355,648 1,097,904 1,453,552 LICENCES, MASTHEADS AND TRADENAMES $’000 GOODWILL $’000 91,558 30,155 - - 56,185 - 387,135 564 299,224 122,333 114,037 162,766 TOTAL $’000 478,693 30,719 299,224 122,333 170,222 162,766 177,898 1,086,059 1,263,957 88 NOTES TO THE FINANCIAL STATEMENTS: OPERATING ASSETS AND LIABILITIES FAIRFAX MEDIA LIMITED AND CONTROLLED ENTITIES FOR THE PERIOD ENDED 28 JUNE 2015 The recoverable amount of a CGU is determined based on value in use calculations, using a discounted cash flow methodology which requires the use of assumptions. The calculations use cash flow projections based on the annual budget approved by the Board and adjusted cash flow forecasts for up to five years. Cash flows beyond the forecast period are extrapolated using the estimated growth rates stated below. The cash flow projections are based on the following key assumptions: KEY APPROACH Year 1 cash flows • Based on board approved annual budget. Year 2 -5 cash flows • A revenue decline has been assumed for the publishing businesses as management expect a cyclical downturn and structural change to continue. Assumptions have been made in line with past performance and management’s expectation of market development. • Revenue growth is assumed in the digital businesses based on market maturity and the introduction of digital subscription – these assumptions are in line with industry trends and management’s expectation of market development. • Expenses expected to decrease based on announced restructuring initiatives which have already produced a cost saving trend. Future savings are expected to continue in line with the current trend.   • Given the impact and timing of Project Transcend cost savings on Australian Community Media, cashflows have been forecast over five years rather than three. Long term growth rate • These rates are consistent with industry forecasts specific to the industry in which the CGU operates. Discount rate • Reflects current market assessment of the time value of money and the risks specific to the relevant segments and countries in which the CGU operates. Each of the above factors is subject to significant judgement about future economic conditions and the ongoing structure of the publishing and digital industries. Specifically, the Directors note that the extent and duration of the structural change in print advertising is difficult to predict. The Directors have applied their best estimates to each of these variables but cannot warrant their outcome. The long term growth rates and discount rates used in the current year calculations are: METROPOLITAN MEDIA AUSTRALIAN DIGITAL TRANSACTIONS AUSTRALIAN REGIONAL MEDIA AGRICULTURAL MEDIA Long term growth rate Discount rate - 10.5% 3.5% 11.3% - 10.5% - 10.5% NEW ZEALAND MEDIA - 10.8% RADIO 2.5% 10.5% Impairment testing as outlined above resulted in a $46.8 million masthead impairment and $46.8 million reversal of masthead impairment in the Australian Regional Media CGU Group as a result of the allocation of savings from the Transcend cost saving program. FAIRFAX MEDIA ANNUAL REPORT 2015 | 89 NOTES TO THE FINANCIAL STATEMENTS: OPERATING ASSETS AND LIABILITIES FAIRFAX MEDIA LIMITED AND CONTROLLED ENTITIES FOR THE PERIOD ENDED 28 JUNE 2015 (ii) IMPACT OF A REASONABLY POSSIBLE CHANGE IN KEY ASSUMPTIONS The calculations are sensitive to changes in key assumptions as set out below: Metropolitan Media • Discount rate – increase from 10.5% to 11% would result in an impairment of $34.4 million. • Year one cash flow forecasts – reduction of 5% would result in an impairment of $51 million. • Terminal cash flow forecasts – reduction of 5% would result in an impairment of $42.4 million. Australian Regional Media • Discount rate –increase from 10.5% to 11% would result in an impairment of $16.6 million. • Year one cash flow forecasts – reduction of 5% would result in no additional impairment. • Terminal cash flow forecasts – reduction of 5% would result in an impairment of $12 million. Agricultural Media • Discount rate – increase from 10.5% to 11% would result in an impairment of $4.4 million. • Year one cash flow forecasts – reduction of 5% would result in no impairment. • Terminal cash flow forecasts – reduction of 5% would result in an impairment of $3 million. New Zealand Media • Discount rate – increase from 10.8% to 11.3% would result in an impairment of $8.2 million. • Year one cash flow forecasts – reduction of 5% would result in an impairment of $34.7 million. • Terminal cash flow forecasts – reduction of 5% would result in an impairment of $8.1 million. Adjusting the cashflow forecasts and discount rate for the above key assumptions would not result in an impairment within the Australian Digital Transactions and Radio CGUs and therefore management has concluded that no reasonable possible change in the key assumptions would result in an impairment in respect of the Australian Digital Transactions and Radio CGU’s. 90 NOTES TO THE FINANCIAL STATEMENTS: OPERATING ASSETS AND LIABILITIES FAIRFAX MEDIA LIMITED AND CONTROLLED ENTITIES FOR THE PERIOD ENDED 28 JUNE 2015 10. RECEIVABLES CURRENT Trade debtors* Provision for doubtful debts Prepayments Other Total current receivables Non-current Other Total non-current receivables 28 JUNE 2015 $’000 29 JUNE 2014 $’000 282,843 (8,862) 273,981 16,024 24,714 314,719 822 822 266,955 (8,253) 258,702 20,250 16,472 295,424 1,232 1,232 * Trade debtors are non-interest bearing and are generally on 7 to 45 day terms. IMPAIRED TRADE DEBTORS As at 28 June 2015, trade debtors of the Group with a nominal value of $8.9 million (2014: $8.3 million) were impaired and provided for. No individual amount within the provision for doubtful debts is material. Refer to Note 17(C) for the factors considered in determining whether trade debtors are impaired. As at 28 June 2015, an analysis of trade debtors that are not considered impaired is as follows: Not past due Past due 0 - 30 days Past due 31 - 60 days Past 60 days 28 JUNE 2015 $’000 29 JUNE 2014 $’000 206,606 51,877 11,752 3,746 273,981 190,229 48,026 9,885 10,562 258,702 Based on the credit history of the trade debtors, it is expected that these amounts will be received. All other receivables are not past due and not considered impaired. FAIRFAX MEDIA ANNUAL REPORT 2015 | 91 NOTES TO THE FINANCIAL STATEMENTS: OPERATING ASSETS AND LIABILITIES FAIRFAX MEDIA LIMITED AND CONTROLLED ENTITIES FOR THE PERIOD ENDED 28 JUNE 2015 Movements in the provision for doubtful debts are as follows: Balance at the beginning of the financial year Additional provisions Disposal of controlled entities Receivables written off as uncollectible Other Balance at the end of the financial year ACCOUNTING POLICY 2015 $’000 8,253 1,997 - (1,514) 126 8,862 2014 $’000 10,014 2,608 (523) (4,072) 226 8,253 Trade receivables are initially recognised at fair value and subsequently measured at amortised cost which is the original invoice amount less an allowance for any uncollectible amount. Collectability of trade receivables is reviewed on an ongoing basis and a provision for doubtful debts is recognised when there is objective evidence that the Group will not be able to collect the debts. 92 NOTES TO THE FINANCIAL STATEMENTS: OPERATING ASSETS AND LIABILITIES FAIRFAX MEDIA LIMITED AND CONTROLLED ENTITIES FOR THE PERIOD ENDED 28 JUNE 2015 11. INVENTORIES Raw materials and stores - at net realisable value Finished goods - at cost Work in progress - at cost Total inventories 28 JUNE 2015 $’000 29 JUNE 2014 $’000 18,786 6,739 808 26,333 19,990 4,753 619 25,362 During the year, newsprint and paper expense (excluding cartage) of $114.8 million (2014: $139.7 million) was recognised in the income statement. During the year, no write down (2014: $0.4 million) to net realisable value on raw materials and stores was recognised within other expenses in the income statement. ACCOUNTING POLICY Inventories, including work in progress, are stated at the lower of cost and net realisable value. The methods used to determine cost for the main items of inventory are: • raw materials (comprising mainly newsprint and paper on hand) are assessed at average cost and newsprint and paper in transit by specific identification cost; • finished goods and work in progress are assessed as the cost of direct material and labour and a proportion of manufacturing overheads based on normal operating capacity; and • in the case of other inventories, cost is assigned by the weighted average cost method. 12. PAYABLES Trade and other payables* Income in advance Interest payable Total current payables 28 JUNE 2015 $’000 29 JUNE 2014 $’000 183,639 54,220 4,071 241,930 155,599 56,413 6,040 218,052 * Trade payables are non-interest bearing and are generally on 30 day terms. ACCOUNTING POLICY Liabilities for trade creditors and other amounts are carried at amortised cost which is the fair value of the consideration to be paid in the future for goods and services received. Loans payable to related parties are carried at amortised cost and interest payable is recognised on an accruals basis. FAIRFAX MEDIA ANNUAL REPORT 2015 | 93 NOTES TO THE FINANCIAL STATEMENTS: OPERATING ASSETS AND LIABILITIES FAIRFAX MEDIA LIMITED AND CONTROLLED ENTITIES FOR THE PERIOD ENDED 28 JUNE 2015 13. PROVISIONS CURRENT Employee benefits Restructuring and redundancy Property Other Total current provisions NON-CURRENT Employee benefits Property Total non-current provisions 28 JUNE 2015 $’000 29 JUNE 2014 $’000 84,515 41,228 3,981 6,992 136,716 10,936 41,013 51,949 85,478 25,394 1,116 6,971 118,959 8,287 41,129 49,416 RECONCILIATION Reconciliations of the carrying amount of each class of provision, other than employee benefits, during the financial year are set out below: PERIOD ENDED 28 JUNE 2015 Balance at beginning of the financial year Additional provision Utilised Acquisition through business combinations Disposal of controlled entities Exchange differences Balance at end of the financial year AT 28 JUNE 2015 Current Non-current Total provisions, excluding employee benefits PROPERTY $’000 RESTRUCTURING AND REDUNDANCY $’000 42,245 7,744 (5,077) 244 (100) (62) 44,994 3,981 41,013 44,994 25,394 49,781 (33,880) - - (67) 41,228 41,228 - 41,228 OTHER $’000 6,971 3,114 (3,093) - - - 6,992 6,992 - 6,992 94 NOTES TO THE FINANCIAL STATEMENTS: OPERATING ASSETS AND LIABILITIES FAIRFAX MEDIA LIMITED AND CONTROLLED ENTITIES FOR THE PERIOD ENDED 28 JUNE 2015 ACCOUNTING POLICY PROVISIONS Provisions are recognised when the Group has a legal or constructive obligation to make a future sacrifice of economic benefits to others as a result of past transactions or events, it is probable that a future sacrifice of economic benefits will be required and a reliable estimate can be made of the amount of the obligation. Provisions are not recognised for future operating losses. Provisions are measured at the present value of management’s best estimate of the expenditure required to settle the present obligation at the reporting date using a discounted cash flow methodology. The risks specific to the provision are factored into the cash flows and as such a risk-free government or corporate bond rate relative to the expected life of the provision is used as a discount rate. If the effect of the time value of money is material, provisions are discounted using a current pre-tax rate that reflects the time value of money and the risks specific to the liability. The increase in the provision resulting from the passage of time is recognised in finance costs. A provision for dividends is not recognised as a liability unless the dividends are declared, determined or publicly recommended on or before reporting date. (i) EMPLOYEE BENEFITS Current liabilities for wages and salaries, holiday pay, annual leave and long service leave are recognised in the provision for employee benefits and measured at the amounts expected to be paid when the liabilities are settled. The employee benefit liability expected to be settled within twelve months from reporting date is recognised in current liabilities. The non-current provision relates to entitlements, including long service leave, which are expected to be payable after twelve months from reporting date and, where material, are measured as the present value of expected future payments to be made in respect of services, employee departures and periods of service. Expected future payments are discounted using market yields at reporting date on corporate bonds with terms to maturity and currency that match, as closely as possible, the estimated future cash outflows. Employee benefit on-costs are recognised and included in employee benefit liabilities and costs when the employee benefits to which they relate are recognised as liabilities. The Group recognises a provision and an expense for bonuses where contractually obliged or where there is a past practice that has created a constructive obligation. (ii) RESTRUCTURE AND REDUNDANCY The provision is in respect of amounts payable in connection with restructuring and redundancies, including termination benefits, on-costs, outplacement and consultancy services. Termination benefits are payable when employment is terminated before the normal retirement date, or when an employee accepts voluntary redundancy in exchange for these benefits. The Group recognises termination benefits when it is demonstrably committed to either terminating the employment of current employees according to a detailed formal plan without possibility of withdrawal or providing termination benefits as a result of an offer made to encourage voluntary redundancy. (iii) PROPERTY The provision for property costs is in respect of make good provisions, deferred lease incentives and onerous lease provisions. The make good provisions and deferred lease incentives are amortised over the shorter of the term of the lease or the useful life of the assets, being up to fifteen years. Property leases are considered to be an onerous contract if the unavoidable costs of meeting the obligations under the contract exceed the economic benefits expected to be received under it. Where a decision has been made to vacate the premises or there is excess capacity and the lease is considered to be onerous, a provision is recorded.  (iv) OTHER Other provisions includes defamation and various other costs relating to the business. FAIRFAX MEDIA ANNUAL REPORT 2015 | 95 NOTES TO THE FINANCIAL STATEMENTS: OPERATING ASSETS AND LIABILITIES FAIRFAX MEDIA LIMITED AND CONTROLLED ENTITIES FOR THE PERIOD ENDED 28 JUNE 2015 14. PROPERTY, PLANT AND EQUIPMENT FREEHOLD LAND AND BUILDINGS At cost Accumulated depreciation and impairment Total freehold land and buildings LEASEHOLD BUILDINGS At cost Accumulated depreciation and impairment Total leasehold buildings PLANT AND EQUIPMENT At cost Accumulated depreciation and impairment Total plant and equipment Capital works in progress - at cost Total property, plant and equipment RECONCILIATIONS 28 JUNE 2015 $’000 29 JUNE 2014 $’000 169,358 (25,670) 143,688 57,661 (18,487) 39,174 497,360 (370,319) 127,041 20,286 330,189 226,959 (34,956) 192,003 115,711 (66,245) 49,466 1,091,328 (942,820) 148,508 18,001 407,978 Reconciliations of the carrying amount of each class of property, plant and equipment during the financial year are set out below: CAPITAL WORKS IN PROGRESS $’000 FREEHOLD LAND & BUILDINGS $’000 LEASEHOLD BUILDINGS $’000 PLANT & EQUIPMENT $’000 NOTE TOTAL $’000 AT 30 JUNE 2013 Cost 33,222 273,198 110,574 1,061,360 1,478,354 Accumulated depreciation and impairment - (59,774) (70,785) (868,862) (999,421) Net carrying amount 33,222 213,424 39,789 192,498 478,933 PERIOD ENDED 29 JUNE 2014 Balance at beginning of financial year Additions/capitalisations Capitalisation to software Disposals Disposal of controlled entities Acquisition through business combinations Depreciation Assets classified as held for sale Reclasses between asset categories Impairment Exchange differences At 29 June 2014, net of accumulated depreciation and impairment 9 3(B) 96 33,222 (930) (8,028) (4) - - - (20) (6,340) - 101 213,424 39,789 192,498 478,933 17,716 8,497 34,524 59,807 - - - (8,028) (4,611) (696) (2,553) (7,864) - - (6,275) (32,782) - - (112) 51 (112) 51 (4,370) (54,629) (65,274) - (99) (32,901) 13,303 6,044 (13,007) - (12,388) 3,616 - (10,421) (22,809) 202 2,256 6,175 18,001 192,003 49,466 148,508 407,978 NOTES TO THE FINANCIAL STATEMENTS: OPERATING ASSETS AND LIABILITIES FAIRFAX MEDIA LIMITED AND CONTROLLED ENTITIES FOR THE PERIOD ENDED 28 JUNE 2015 CAPITAL WORKS IN PROGRESS $’000 FREEHOLD LAND & BUILDINGS $’000 LEASEHOLD BUILDINGS $’000 PLANT & EQUIPMENT $’000 NOTE TOTAL $’000 AT 29 JUNE 2014 Cost 18,001 226,959 115,711 1,091,328 1,451,999 Accumulated depreciation and impairment - (34,956) (66,245) (942,820) (1,044,021) Net carrying amount 18,001 192,003 49,466 148,508 407,978 PERIOD ENDED 28 JUNE 2015 Balance at beginning of financial year 18,001 192,003 49,466 148,508 407,978 Additions/capitalisations Capitalisation to software Disposals Disposal of controlled entities Acquisition through business combinations Depreciation Assets classified as held for sale Impairment Exchange differences At 28 June 2015, net of accumulated depreciation and impairment 9 3(B) AS 28 JUNE 2015 Cost 3,124 (35) - - - - - - (804) 8,163 4,459 18,069 33,815 - (7,763) - - - (906) (50) 1,238 - (35) (2,558) (11,227) (372) 5,060 (422) 6,298 (6,548) (4,408) (32,791) (43,747) (37,535) (10,325) (3,162) (51,022) (3,485) (1,147) - (5,840) (9,325) (300) 127 (2,124) 20,286 143,688 39,174 127,041 330,189 20,286 169,358 57,661 497,360 744,665 Accumulated depreciation and impairment - (25,670) (18,487) (370,319) (414,476) Net carrying amount 20,286 143,688 39,174 127,041 330,189 During the current year, an impairment charge of $9.3 million (2014: $22.8 million) was recorded on property, plant and equipment. This impairment primarily relates to freehold land and buildings and plant and equipment at various sites in the Group’s print network. The impairment was recognised following a review of the fair value less costs to sell. ACCOUNTING POLICY Property, plant and equipment is recorded at cost less accumulated depreciation and any accumulated impairment losses. Directly attributable costs arising from the acquisition or construction of fixed assets, including internal labour and interest, are also capitalised as part of the cost. RECOVERABLE AMOUNT All items of property, plant and equipment are reviewed annually to ensure carrying values are not in excess of recoverable amounts. Recoverable amounts are based upon the present value of expected future cashflows. DEPRECIATION AND AMORTISATION Land is not depreciated. Depreciation on other assets is calculated using the straight-line method to allocate their cost, net of their residual values, over their estimated useful lives, as follows: Buildings: up to 60 years; Printing presses: up to 10 years; Other production equipment: up to 15 years; Other equipment: up to 20 years; Computer equipment: up to 6 years. The assets’ residual values and useful lives are reviewed and adjusted, if appropriate, at each reporting date. An asset’s carrying amount is written down immediately to its recoverable amount if the asset’s carrying amount is greater than its estimated recoverable amount. Gains and losses on disposals are determined by comparing the proceeds with carrying amount. These are included in the income statement. FAIRFAX MEDIA ANNUAL REPORT 2015 | 97 NOTES TO THE FINANCIAL STATEMENTS: CAPITAL STRUCTURE AND FINANCIAL COSTS FAIRFAX MEDIA LIMITED AND CONTROLLED ENTITIES FOR THE PERIOD ENDED 28 JUNE 2015 15. INTEREST BEARING LIABILITIES CURRENT INTEREST BEARING LIABILITIES - UNSECURED Other loans Senior notes Other Finance lease liability Total current interest bearing liabilities NON-CURRENT INTEREST BEARING LIABILITIES - UNSECURED Bank borrowings Other loans Senior notes Other Finance lease liability Total non-current interest bearing liabilities NET DEBT Cash and cash equivalents Current interest bearing liabilities Non-current interest bearing liabilities Derivative financial instruments liabilities* Net cash NOTE 28 JUNE 2015 $’000 29 JUNE 2014 $’000 (C) (D) (D) (B) (C) (D) (D) 25,352 503 1,246 27,101 111,637 3,316 4,768 119,721 165,191 138,055 90,667 - - 255,858 95,722 503 1,246 235,526 29(B) (342,830) (452,687) 27,101 255,858 (4,518) (64,389) 119,721 235,526 29,879 (67,561) * Debt hedging instruments are measured against the undiscounted contractual AUD cross currency swap obligations and therefore may not equate to the values disclosed in the balance sheet (inclusive of transaction costs). (A) FINANCING ARRANGEMENTS The Group net cash, taking into account all debt related derivative financial instruments, was $64.4 million as at 28 June 2015 (2014: Net cash of $67.6 million). The Group has sufficient unused committed facilities and cash at the reporting date to finance maturing current interest bearing liabilities. The Group has a number of finance facilities which are guaranteed by the Group and are covered by deeds of negative pledge. (B) BANK BORROWINGS A $325.0 million syndicated bank facility (2014: $275.0 million) is available to the Group with maturities in July 2018 and July 2019. At 28 June 2015, $125.0 million was drawn (2014: $125.0 million). The interest rate for drawings under this facility is the applicable bank bill rate plus a credit margin. A $50.0 million revolving cash advance facility is available to Macquarie Radio Network Limited until March 2017. At 28 June 2015, $39.4 million was drawn (29 June 2014: nil). The interest rate for drawings under this facility is the applicable bank bill rate plus a credit margin. A NZ$40.0 million revolving cash advance facility is available to the Group until July 2018. At 28 June 2015, nil was drawn (29 June 2014: NZ$15.5 million). The interest rate for drawings under this facility is the applicable bank bill rate plus a credit margin. 98 NOTES TO THE FINANCIAL STATEMENTS: CAPITAL STRUCTURE AND FINANCIAL COSTS FAIRFAX MEDIA LIMITED AND CONTROLLED ENTITIES FOR THE PERIOD ENDED 28 JUNE 2015 (C) SENIOR NOTES The Group issued senior notes in the US private placement market with a principal value of US$230 million (A$289.8 million) in January 2004 with a fixed coupon of between 4.7% p.a. and 5.9% p.a. payable semi-annually in arrears. The interest and principal on the senior notes are payable in US dollars and were swapped into floating rate New Zealand dollars and floating rate Australian dollars via cross currency swaps. This issue of senior notes comprises maturities ranging from January 2011 to January 2019. Senior notes of US$50 million were repaid in January 2011, US$148 million were repaid in July 2013 and US$13 million were repaid in January 2014. The weighted average maturity of the issue is approximately 0.6 years. The applicable cross currency swap credit margin includes the cost of hedging all currency risk and future interest and principal repayments on a quarterly basis. The Group issued further senior notes in the US private placement market with a principal value of US$250 million (A$308.2 million) in July 2007 comprising maturities ranging from July 2013 to July 2017. Senior notes of US$76 million were repaid in July 2013 and US$105 million were repaid in July 2014. The maturity of the remaining issued note is approximately 2 years. The issued note include fixed and floating rate coupon note, paying a coupon of 7.5% p.a. semi-annually in arrears. The interest and principal on the senior notes are payable in US dollars and were swapped into fixed and floating rate Australian dollars via cross currency swaps. An additional 1.0% p.a. step up margin is payable on the coupons, effective from 10 July 2009. (D) OTHER LOANS AND FINANCE LEASE LIABILITY The Chullora site in Sydney is partially financed by a finance lease facility and loans with a maturity date of 30 September 2015. This comprises a finance lease of $1.2 million (2014: $6.0 million), which was entered into in February 1996, and principal and interest outstanding of $0.5 million (2014: $3.8 million) in the form of a fixed rate loan with an established repayment schedule. ACCOUNTING POLICY Subsequent to initial recognition at fair value, net of transaction costs incurred, interest bearing liabilities are measured at amortised cost. Any difference between the proceeds (net of transaction costs) and the redemption amount is recognised in the income statement over the period of the borrowings using the effective interest method. Finance lease liabilities are determined in accordance with the requirements of AASB 117 Leases (refer to Note 21). FAIRFAX MEDIA ANNUAL REPORT 2015 | 99 NOTES TO THE FINANCIAL STATEMENTS: CAPITAL STRUCTURE AND FINANCIAL COSTS FAIRFAX MEDIA LIMITED AND CONTROLLED ENTITIES FOR THE PERIOD ENDED 28 JUNE 2015 16. DERIVATIVE FINANCIAL INSTRUMENTS CURRENT ASSETS Forward contracts Total current derivative assets NON-CURRENT ASSETS Cross currency swap - cash flow hedge Total non-current derivative assets CURRENT LIABILITIES Interest rate swap - cash flow hedge Cross currency swap - cash flow hedge Cross currency swap - fair value hedge Cross currency swap - net investment hedge Total current derivative liabilities NON-CURRENT LIABILITIES Interest rate swap - cash flow hedge Cross currency swap - fair value hedge Cross currency swap - cash flow hedge Cross currency swap - net investment hedge Total non-current derivative liabilities 28 JUNE 2015 $’000 29 JUNE 2014 $’000 - - 16,902 16,902 1,582 9 1,537 784 3,912 7,137 - - - 7,137 213 213 1,551 1,551 - 4 13,274 - 13,278 14,711 5,254 73 1,919 21,957 The Group is exposed to interest rate risk on interest bearing assets and liabilities, as well as foreign exchange risk on USD denominated senior notes. The Group uses derivative financial instruments to reduce exposure to these risks. The Group: • formally designates hedging instruments against an underlying exposure; • formally documents the risk management objectives and strategies for undertaking hedge transactions; and • assess at inception and on a semi-annual basis thereafter, as to whether the derivative financial instruments used in the hedging transactions are effective at offsetting the risks they are designed to hedge. Due to the high levels of effectiveness, value changes in the derivatives are generally offset by changes in the fair value of the cash flows of the underlying exposure. Any derivatives not formally designated as part of a hedging relationship are fair valued with any changes in fair value recognised in the income statement. The derivatives entered into are generally highly liquid instruments entered into in the “over the counter” market. 100 NOTES TO THE FINANCIAL STATEMENTS: CAPITAL STRUCTURE AND FINANCIAL COSTS FAIRFAX MEDIA LIMITED AND CONTROLLED ENTITIES FOR THE PERIOD ENDED 28 JUNE 2015 HEDGING ACTIVITIES For the purposes of hedge accounting, hedges are classified as: • Fair value hedges: hedges of the fair value of recognised assets or liabilities or a firm commitment; • Cash flow hedges: hedges of highly probable forecast transactions; or • Net investment hedges: hedges of the net investment in a foreign operation. For derivatives that do not qualify for hedge accounting, any gains or losses arising from changes in fair value are taken directly to the income statement. (i) CASH FLOW HEDGES - INTEREST RATE AND CROSS CURRENCY SWAPS At 28 June 2015, the Group held cross currency swaps designated as hedges of future contracted interest payments on the USD denominated senior notes issued in July 2007. The cross currency swaps are being used to hedge a combination of future movements in interest rates and foreign currency exchange rates. At 28 June 2015, the notional principal amounts and period of expiry of the swaps for each counterparty are as follows: INTEREST RATE Pay fixed, receive floating - AUD$59.5m Pay fixed, receive floating - AUD$22.6m MATURITY DATE 10/07/17 10/07/17 2015 7.52% 7.46% 2014 PAYMENT TERMS 7.52% Interest receivable settles semi- 7.46% annually and interest payable each 90 days. These dates coincide with the interest payable dates on the underlying senior notes. At 28 June 2015, the Group held an interest rate swap designated as hedging the future contracted interest payments on AUD denominated bank borrowings. The interest rate swap is being used to hedge future movements in interest rates. At 28 June 2015, the notional principal amount and period of expiry of the swap is as follows: Pay fixed, receive floating - AUD$125m 12/10/2015 MATURITY DATE INTEREST RATE 2015 6.52% 2014 PAYMENT TERMS 6.52% Interest receivable and interest payable settle each 90 days. These dates coincide with the interest payable dates on the underlying AUD denominated bank borrowings. At 28 June 2015, the above hedges were assessed to be highly effective with a combined unrealised gain in fair value of $4.4 million (2014: $1.4 million gain) recognised in equity for the period. During the period no material ineffectiveness (2014: no material ineffectiveness) was recognised in the income statement attributable to the cash flow hedges. During the year no material gain was transferred from equity to finance costs (2014: $0.1 million). FAIRFAX MEDIA ANNUAL REPORT 2015 | 101 NOTES TO THE FINANCIAL STATEMENTS: CAPITAL STRUCTURE AND FINANCIAL COSTS FAIRFAX MEDIA LIMITED AND CONTROLLED ENTITIES FOR THE PERIOD ENDED 28 JUNE 2015 (ii) CASH FLOW HEDGES - FORWARD FOREIGN EXCHANGE CONTRACTS During the year, forward exchange contracts were used by the Group to hedge future foreign capital and non-capital purchase commitments across the Australian and New Zealand business. The contracts are timed to mature as payments are scheduled to be made to suppliers. At 28 June 2015, the Group held no forward exchange contracts (2014: $0.2 million). The foreign currency contracts are considered to be fully effective hedges as they are matched against the highly probable foreign capital and non-capital purchases with any gain or loss on the contracts taken directly to equity. When the contract is delivered, the Group will adjust the initial measurement of any component recognised on the balance sheet by the related amount deferred in equity. During the current and prior financial period there was no material ineffectiveness recognised in the income statement attributable to cash flow hedges of foreign exchange contracts. ACCOUNTING POLICY The fair value of interest rate swap contracts is determined by reference to market values for similar instruments. The measurement of the fair value of forward foreign exchange contracts is calculated by reference to current forward exchange rates for contracts with similar maturity profiles. The effective portion of changes in the fair value of derivatives that are designated and qualify as cash flow hedges are recognised in equity in the hedging reserve. The gain or loss relating to the ineffective portion is recognised immediately in the income statement within finance costs. Gains or losses that are recognised in equity are transferred to the income statement in the same year in which the hedged firm commitment affects the net profit and loss, for example when the future sale actually occurs. Hedge accounting is discontinued when the hedging instrument expires or is sold, terminated or exercised, or no longer qualifies for hedge accounting. At that point in time, any cumulative gain or loss on the hedging instrument recognised in equity is retained in equity until the forecasted transaction occurs. If a hedged transaction is no longer expected to occur, the net cumulative gain or loss recognised in equity is transferred to the income statement. 102 NOTES TO THE FINANCIAL STATEMENTS: CAPITAL STRUCTURE AND FINANCIAL COSTS FAIRFAX MEDIA LIMITED AND CONTROLLED ENTITIES FOR THE PERIOD ENDED 28 JUNE 2015 (iii) FAIR VALUE HEDGES At 28 June 2015, the Group held cross currency swap agreements designated as hedging changes in the underlying value of USD denominated senior notes (refer to Note 15). The terms of certain cross currency swap agreements exchange USD obligations into AUD obligations and other agreements exchange USD obligations into NZD obligations. The latter are also designated to hedge value changes in the Group’s New Zealand controlled entities, as discussed in Note (iv) below. At 28 June 2015, the cross currency swap agreements had a combined derivative liability position of $1.5 million (2014: $18.5 million). The cross currency swaps are designated based on matched terms to the debt and also have the same maturity profile as the USD denominated senior notes. The terms of these cross currency swaps are as follows: Pay floating NZD receive fixed USD - USD$19m MATURITY DATE 15 January 2016 For the Group, the remeasurement of the hedged items resulted in a loss before tax of $3.9 million (2014: $13.9 million gain) and the changes in the fair value of the hedging instruments resulted in a gain before tax of $3.7 million (2014: $14.0 million loss) resulting in a net loss before tax of $0.2 million (2014: $0.1 million loss) recorded in finance costs. ACCOUNTING POLICY Changes in the fair value of derivatives that are designated and qualify as fair value hedges are recorded in the income statement, together with any changes in the fair value of the hedged asset or liability that are attributable to the hedged risk. Any gain or loss attributable to the hedged risk on remeasurement of the hedged item is adjusted against the carrying amount of the hedged item and recognised in the income statement within finance costs. Where the adjustment is to the carrying amount of a hedged interest bearing financial instrument, the adjustment is amortised to the income statement such that it is fully amortised by maturity. When the hedged firm commitment results in the recognition of an asset or a liability, then, at the time the asset or liability is recognised, the associated gains or losses that had previously been recognised in equity are included in the initial measurement of the acquisition cost or other carrying amount of the asset or liability. (iv) NET INVESTMENT HEDGES The NZD/USD cross currency swap agreements have also been designated to hedge the net investment in New Zealand controlled entities acquired as part of the acquisition of the business assets of Independent News Limited in June 2003. At 28 June 2015, the hedges were assessed to be highly effective with an unrealised gain of $0.8 million (2014: $7.9 million loss) recognised in equity. During the current financial period there was an unrealised gain of $0.1 million (2014: $0.2 million loss) recognised in the income statement attributable to the ineffective portion of the net investment hedges. ACCOUNTING POLICY Hedges of a net investment in a foreign operation are accounted for in a similar way to cash flow hedges. Gains or losses on the hedging instrument relating to the effective portion of the hedge are recognised directly in equity while any gains or losses relating to the ineffective portion are recognised in the income statement. On disposal of the foreign operation, the cumulative value of such gains or losses recognised directly in equity is transferred to the income statement based on the amount calculated during the direct method of consolidation. FAIRFAX MEDIA ANNUAL REPORT 2015 | 103 NOTES TO THE FINANCIAL STATEMENTS: CAPITAL STRUCTURE AND FINANCIAL COSTS FAIRFAX MEDIA LIMITED AND CONTROLLED ENTITIES FOR THE PERIOD ENDED 28 JUNE 2015 17. FINANCIAL AND CAPITAL RISK MANAGEMENT FINANCIAL RISK MANAGEMENT The Group’s principal financial instruments, other than derivatives, comprise cash, short term deposits, bills of exchange and bank loans. The main purpose of these financial instruments is to manage liquidity and to raise finance for the Group’s operations. The Group has various other financial instruments, such as trade and other receivables and trade and other payables, which arise directly from its operations. The Group uses derivatives in accordance with Board approved policies to reduce the Group’s exposure to fluctuations in interest rates and foreign exchange rates. These derivatives create an obligation or right that effectively transfers one or more of the risks associated with an underlying financial instrument, asset or obligation. Derivative instruments that the Group uses to hedge risks such as interest rate and foreign currency movements include: • cross currency swaps; • interest rate swaps; • forward foreign currency contracts; and • forward rate agreements. The Group’s risk management activities for interest rate and foreign exchange exposures are carried out centrally by Fairfax Media Group Treasury department. The Group Treasury department operates under policies as approved by the Board. The Group Treasury department operates in co-operation with the Group’s operating units so as to maximise the benefits associated with centralised management of Group risk factors. CAPITAL RISK MANAGEMENT The capital structure of Group entities is monitored using net debt to EBITDA (earnings before interest, tax, depreciation and amortisation) ratio. The ratio is calculated as net debt divided by underlying EBITDA. Net debt is calculated as total interest bearing liabilities less cash and cash equivalents. Where interest bearing liabilities are denominated in a currency other than the Australian dollar functional currency, and the liability is hedged into an Australian dollar obligation, the liability is measured for financial covenant purposes as the hedged Australian dollar amount. In order to maintain or adjust the capital structure, the Group may adjust the amount of dividends paid to shareholders, buy back shareholder equity, issue new shares or sell assets to reduce debt. The Group reviews the capital structure to ensure: • sufficient finance capacity for the business is maintained at a reasonable cost; • sufficient funds are available for the business to implement its capital expenditure and business acquisition strategies; and • all financial covenants are complied with. Where excess funds arise with respect to the funds required to enact the Group’s business strategies, consideration is given to increased dividends or buy back of shareholder equity. Refer to Note 18 for details on the buy back of shareholder equity. 104 NOTES TO THE FINANCIAL STATEMENTS: CAPITAL STRUCTURE AND FINANCIAL COSTS FAIRFAX MEDIA LIMITED AND CONTROLLED ENTITIES FOR THE PERIOD ENDED 28 JUNE 2015 RISK FACTORS The key financial risk factors, including market risk, that arise from the Group’s activities, including the Group’s policies for managing these risks are outlined below. (A) INTEREST RATE RISK Interest rate risk refers to the risks that the value of a financial instrument or future cash flows associated with the instrument will fluctuate due to movements in market interest rates. Interest rate risk arises from interest bearing financial assets and liabilities that the Group utilises. Non-derivative interest bearing assets are predominantly short term liquid assets. Long term debt issued at fixed rates exposes the Group to fair value interest rate risk. The Group’s borrowings which have a variable interest rate attached give rise to cash flow interest rate risk. The Group’s risk management policy for interest rate risk seeks to reduce the effects of interest rate movements on its asset and liability portfolio. The Group seeks to maintain a mix of foreign and local currency fixed rate and variable rate debt, as well as a mix of long term debt versus short term debt. The Group primarily enters into interest rate swap, interest rate option and cross currency agreements to manage these risks. The Group designates which of its financial assets and financial liabilities are exposed to a fair value or cash flow interest rate risk, such as financial assets and liabilities with a fixed interest rate or financial assets and financial liabilities with a floating interest rate that is reset as market rates change. Over the counter derivative contracts are carried at fair value, which are estimated using valuation techniques based wherever possible on assumptions supported by observable market prices or rates prevailing at the reporting date. For other financial instruments for which quoted prices in an active market are available, fair value is determined directly from those quoted market prices. Refer to Note 16 for further details of the Group’s derivative financial instruments and details of hedging activities. At reporting date, the Group had the following mix of financial assets and financial liabilities exposed to interest rate risks: AS AT 28 JUNE 2015 FINANCIAL ASSETS Cash and cash equivalents Trade and other receivables Available for sale investments Other financial assets Derivatives Total financial assets FINANCIAL LIABILITIES Payables Interest bearing liabilities: Bank borrowings and loans Senior notes Finance lease liability Total interest bearing liabilities Derivatives Total financial liabilities Total interest bearing liabilities Notional principal hedged Net exposure to cash flow interest rate risk* FLOATING RATE $’000 FIXED RATE $’000 NON-INTEREST BEARING $’000 342,830 - - 18,009 - 360,839 - 165,191 - - 165,191 2,330 167,521 165,191 (123,306) 41,885 - - - - - - - 503 116,019 1,246 117,768 8,719 126,487 117,768 (91,092) 26,676 TOTAL $’000 342,830 299,517 2,276 18,009 16,902 679,534 - 299,517 2,276 - 16,902 318,695 241,930 241,930 - - - - - 241,930 - - - 165,694 116,019 1,246 282,959 11,049 535,938 282,959 (214,398) 68,561 FAIRFAX MEDIA ANNUAL REPORT 2015 | 105 NOTES TO THE FINANCIAL STATEMENTS: CAPITAL STRUCTURE AND FINANCIAL COSTS FAIRFAX MEDIA LIMITED AND CONTROLLED ENTITIES FOR THE PERIOD ENDED 28 JUNE 2015 AS AT 29 JUNE 2014 FINANCIAL ASSETS Cash and cash equivalents Trade and other receivables Available for sale investments Other financial assets Derivatives Total financial assets FINANCIAL LIABILITIES Payables Interest bearing liabilities: Bank borrowings and loans Senior notes Finance lease liability Total interest bearing liabilities Derivatives Total financial liabilities Total interest bearing liabilities Notional principal hedged Net exposure to cash flow interest rate risk* FLOATING RATE $’000 FIXED RATE $’000 NON-INTEREST BEARING $’000 452,687 - - 6,227 - 458,914 - 138,055 - - 138,055 20,518 158,573 138,055 (123,654) 14,401 - - - - - - - 3,819 207,359 6,014 217,192 14,717 231,909 217,192 (78,012) 139,180 TOTAL $’000 452,687 276,406 2,488 6,227 1,764 - 276,406 2,488 - 1,764 280,658 739,572 218,052 218,052 - - - - - 218,052 - - - 141,874 207,359 6,014 355,247 35,235 608,534 355,247 (201,666) 153,581 * For floating rate instruments, this represents the unhedged portion. For fixed rate instruments, this represents amounts hedged to floating. SENSITIVITY ANALYSIS The Group performs sensitivity analysis to determine the effect on net profit and equity after income tax if interest rates at reporting date had been 30% higher or lower with all other variables held constant, taking into account all underlying exposures and related hedges. Based on the sensitivity analysis the impact to the Group’s post tax profit would be $0.6 million (2014: $0.7 million) and the Group’s equity would be $0.1 million (2014: $0.9 million). 106 NOTES TO THE FINANCIAL STATEMENTS: CAPITAL STRUCTURE AND FINANCIAL COSTS FAIRFAX MEDIA LIMITED AND CONTROLLED ENTITIES FOR THE PERIOD ENDED 28 JUNE 2015 (B) FOREIGN CURRENCY RISK Foreign currency risk refers to the risk that the value or the cash flows arising from a financial commitment, or recognised asset or liability will fluctuate due to changes in foreign currency rates. The Group’s foreign currency exchange risk arises primarily from: • borrowings denominated in foreign currency; and • firm commitments and/or highly probable forecast transactions for receipts and payments settled in foreign currencies and prices dependent on foreign currencies respectively. The Group is exposed to foreign exchange risk from various currency exposures, primarily with respect to: • United States Dollars; and • New Zealand Dollars. The Group hedges the currency risk on foreign currency borrowings by entering into cross currency swaps, which have the economic effect of converting foreign currency borrowings to local currency borrowings. Forward foreign exchange contracts are used to hedge the Group’s known non-debt related foreign currency risks. These contracts generally have maturities of less than twelve months after the reporting date and consequently the net fair value of the gains and losses on these contracts will be transferred from the cash flow hedging reserve to the income statement at various dates during this period when the underlying exposure impacts earnings. The derivative contracts are carried at fair value, being the market value as quoted in an active market. The Group’s risk management policy for foreign exchange is to only hedge known or highly probable future transactions. The policy only permits hedging of the Group’s underlying foreign exchange exposures. Benefits or costs arising from currency hedges for revenue and expense transactions that are designated and documented in a hedge relationship are brought to account in the income statement over the lives of the hedge transactions depending on the effectiveness testing outcomes and when the underlying exposure impacts earnings. For transactions entered into that hedge specific capital or borrowing commitments, any cost or benefit resulting from the hedge forms part of the initial asset or liability carrying value. When entered into, the Group formally designates and documents the financial instrument as a hedge of the underlying exposure, as well as the risk management objectives and strategies for undertaking the hedge transactions. The Group formally assesses both at the inception and at least semi-annually thereafter, whether the financial instruments that are used in hedging transactions are effective at offsetting changes in either the fair value or cash flows of the related underlying exposure. Because of the high degree of effectiveness between the hedging instrument and the underlying exposure being hedged, fluctuations in the value of the derivative instruments are generally offset by changes in the fair values or cash flows of the underlying exposures being hedged. Any ineffective portion of a financial instrument’s change in fair value is immediately recognised in the income statement and this is mainly attributable to financial instruments in a fair value hedge relationship. Derivatives entered into and not documented in a hedge relationship are revalued with the changes in fair value recognised in the income statement. All of the Group’s derivatives are straight forward over the counter instruments with liquid markets. Refer to Note 16 for further details of the Group’s derivative financial instruments and details of hedging activities. SENSITIVITY ANALYSIS The Group performs sensitivity analysis to determine the effect on net profit and equity after income tax if foreign exchange rates at reporting date had been 15% higher or lower with all other variables held constant, taking into account all underlying exposures and related hedges. Based on the sensitivity analysis the impact to the Group’s post tax profit would be $0.1 million (2014: $0.1 million) and the Group’s equity would be $3.4 million (2014: $3.6 million). FAIRFAX MEDIA ANNUAL REPORT 2015 | 107 NOTES TO THE FINANCIAL STATEMENTS: CAPITAL STRUCTURE AND FINANCIAL COSTS FAIRFAX MEDIA LIMITED AND CONTROLLED ENTITIES FOR THE PERIOD ENDED 28 JUNE 2015 (C) CREDIT RISK Credit risk is the risk that a contracting entity will not complete its obligations under a financial instrument and cause the Group to make a financial loss. The Group has exposure to credit risk on all financial assets included in the Group’s balance sheet. To help manage this risk, the Group: • has a policy for establishing credit limits for the entities it deals with; • may require collateral where appropriate; and • manages exposures to individual entities it either transacts with or enters into derivative contracts with (through a system of credit limits). The Group is exposed to credit risk on financial instruments and derivatives. For credit purposes, there is only a credit risk where the contracting entity is liable to pay the Group in the event of a closeout. The Group has policies that limit the amount of credit exposure to any financial institution. Derivative counterparties and cash transactions are limited to financial institutions that meet minimum credit rating criteria in accordance with the Group’s policy requirements. At 28 June 2015 counterparty credit risk was limited to financial institutions with S&P credit ratings ranging from A- to AA-. The Group’s credit risk is mainly concentrated across a number of customers and financial institutions. The Group does not have any significant credit risk exposure to a single or group of customers or individual institutions. Financial assets are considered impaired where there is objective evidence that the Group will not be able to collect all amounts due according to the original trade and other receivable terms. Factors considered when determining if an impairment exists include ageing and timing of expected receipts and the credit worthiness of counterparties. A provision for doubtful debts is created for the difference between the assets carrying value and the present value of estimated future cash flows. The Group’s trading terms do not generally include the requirement for customers to provide collateral as security for financial assets. Refer to Note 10 for an ageing analysis of trade receivables and the movement in the provision for doubtful debts. All other financial assets are not impaired and are not past due. Based on the credit history of these classes, it is expected that these amounts will be received when due. 108 NOTES TO THE FINANCIAL STATEMENTS: CAPITAL STRUCTURE AND FINANCIAL COSTS FAIRFAX MEDIA LIMITED AND CONTROLLED ENTITIES FOR THE PERIOD ENDED 28 JUNE 2015 (D) LIQUIDITY RISK Liquidity risk is the risk that the Group cannot meet its financial commitments as and when they fall due. To help reduce this risk the Group: • has a liquidity policy which targets a minimum level of committed facilities and cash relative to EBITDA; • has readily accessible funding arrangements in place; and • staggers maturities of financial instruments. Refer to Note 15(B) for details of the Group’s unused credit facilities at 28 June 2015. The contractual maturity of the Group’s fixed and floating rate derivatives, other financial assets and other financial liabilities are shown in the tables below. The amounts represent the future undiscounted principal and interest cash flows and therefore may not equate to the values disclosed in the balance sheet. AS AT 28 JUNE 2015 (NOMINAL CASH FLOWS) 1 YEAR OR LESS $’000 1 TO 2 YEARS $’000 2 TO 5 YEARS $’000 MORE THAN 5 YEARS $’000 FINANCIAL LIABILITIES* Payables Bank borrowings and loans Notes and bonds Finance lease liability DERIVATIVES - INFLOWS* (241,930) (6,957) (32,271) (2,533) - (45,855) (97,115) - - (137,236) - - Cross currency swaps - foreign leg (fixed)** 32,333 6,746 90,369 DERIVATIVES - OUTFLOWS* Cross currency swaps - AUD leg (fixed)** Cross currency swaps - NZD leg (variable)** Interest rate swaps *** (6,149) (28,164) (1,359) (6,149) (82,262) - - - - - - - - - - - - FAIRFAX MEDIA ANNUAL REPORT 2015 | 109 NOTES TO THE FINANCIAL STATEMENTS: CAPITAL STRUCTURE AND FINANCIAL COSTS FAIRFAX MEDIA LIMITED AND CONTROLLED ENTITIES FOR THE PERIOD ENDED 28 JUNE 2015 AS AT 29 JUNE 2014 FINANCIAL LIABILITIES* Payables Bank borrowings and loans Notes and bonds Finance lease liability DERIVATIVES - INFLOWS* Cross currency swaps - foreign leg (fixed)** Forward foreign currency contracts DERIVATIVES - OUTFLOWS* Cross currency swaps - AUD leg (fixed)** Cross currency swaps - AUD leg (variable)** Cross currency swaps - NZD leg (variable)** Interest rate swaps *** Forward foreign currency contracts (NOMINAL CASH FLOWS) 1 YEAR OR LESS $’000 1 TO 2 YEARS $’000 2 TO 5 YEARS $’000 MORE THAN 5 YEARS $’000 (218,052) (10,153) (126,273) (9,848) - (144,842) (26,213) (2,533) - - (78,886) - 118,304 4,169 26,264 - 78,886 - (6,149) (125,043) (938) (4,706) (4,112) (6,149) (88,411) - (29,341) (1,177) - - - - - - - - - - - - - - - - * For floating rate instruments, the amount disclosed is determined by reference to the interest rate at the last repricing date. ** Contractual amounts to be exchanged representing gross cash flows to be exchanged. *** Net amount for interest rate swaps for which net cash flows are exchanged. 110 NOTES TO THE FINANCIAL STATEMENTS: CAPITAL STRUCTURE AND FINANCIAL COSTS FAIRFAX MEDIA LIMITED AND CONTROLLED ENTITIES FOR THE PERIOD ENDED 28 JUNE 2015 (E) FAIR VALUE The carrying amounts and fair values of financial assets and financial liabilities at reporting date are the same with the exception of the following: Interest bearing liabilities: Bank borrowings Senior notes Finance lease liability CARRYING VALUE 2015 $’000 FAIR VALUE 2015 $’000 CARRYING VALUE 2014 $’000 FAIR VALUE 2014 $’000 165,694 116,019 1,246 166,885 116,368 2,454 141,874 207,359 6,014 143,220 207,386 10,859 Exchange traded listed share prices have been used to determine the fair value of listed available for sale investments. The fair value of the senior notes and lease liabilities have been calculated by discounting the future cash flows by interest rates for liabilities with similar risk profiles. The discount rates applied range from 5.57% to 13.29% (2014: 5.57% to 13.29%). The carrying value of all other balances approximate their fair value. The Group uses various methods in estimating fair value. The methods comprise: (a) quoted prices (unadjusted) in active markets for identical assets or liabilities (level 1); (b) inputs other than quoted prices included within level 1 that are observable for the asset or liability, either directly (as prices) or indirectly (derived from prices) (level 2); and (c) inputs for the asset or liability that are not based on observable market data (unobservable inputs) (level 3). FAIRFAX MEDIA ANNUAL REPORT 2015 | 111 NOTES TO THE FINANCIAL STATEMENTS: CAPITAL STRUCTURE AND FINANCIAL COSTS FAIRFAX MEDIA LIMITED AND CONTROLLED ENTITIES FOR THE PERIOD ENDED 28 JUNE 2015 The fair value of assets and liabilities held at fair value, as well as the methods used to estimate the fair value, are summarised in the table below: AS AT 28 JUNE 2015 ASSETS AT FAIR VALUE Derivative assets Available for sale investments Assets held for sale Property, plant and equipment LIABILITIES AT FAIR VALUE Derivative liabilities AS AT 29 JUNE 2014 ASSETS AT FAIR VALUE Derivative assets Available for sale investments Assets held for sale Property, plant and equipment LIABILITIES AT FAIR VALUE Derivative liabilities LEVEL 1 $’000 LEVEL 2 $’000 LEVEL 3 $’000 TOTAL $’000 - 2,276 - 2,276 - - 16,902 - - 16,902 11,049 11,049 - - 68,215 68,215 - - 16,902 2,276 68,215 87,393 11,049 11,049 LEVEL 1 $’000 LEVEL 2 $’000 LEVEL 3 $’000 TOTAL $’000 - 2,488 - 2,488 1,764 - - 1,764 - - 35,235 35,235 - - 29,963 29,963 - - 1,764 2,488 29,963 34,215 35,235 35,235 Held for sale property, plant and equipment are carried at the Directors’ determination of fair value which takes into account latest independent valuations and evidence of fair value from disposal negotiations. The key assumptions in determining the valuation of the properties are the estimated weighted average yield and costs of dismantling plant and equipment where relevant. Significant movement in these assumptions in isolation would result in a higher or lower fair value of the properties. Derivatives assets and liabilities are valued using valuation techniques with market observable inputs (refer to Note 16). 112 NOTES TO THE FINANCIAL STATEMENTS: CAPITAL STRUCTURE AND FINANCIAL COSTS FAIRFAX MEDIA LIMITED AND CONTROLLED ENTITIES FOR THE PERIOD ENDED 28 JUNE 2015 18. EQUITY ORDINARY SHARES 2,383,370,791 ordinary shares authorised and fully paid (2014: 2,351,955,725) UNVESTED EMPLOYEE INCENTIVE SHARES NOTE 28 JUNE 2015 $’000 29 JUNE 2014 $’000 (A) 4,672,097 4,667,944 11,407,603 unvested employee incentive shares (2014: 11,594,031) (B) (21,299) (21,419) DEBENTURES 281 debentures fully paid (2014: 281) Total contributed equity * Amount is less than $1000. RECONCILIATIONS (C) * * 4,650,798 4,646,525 Movements for each class of contributed equity, by number of shares and dollar value, are set out below: 28 JUNE 2015 NO. OF SHARES 29 JUNE 2014 NO. OF SHARES 28 JUNE 2015 $’000 29 JUNE 2014 $’000 (A) ORDINARY SHARES (i) Balance at beginning of the financial year 2,351,955,725 2,351,955,725 4,667,944 4,667,944 Shares issued Shares acquired and cancelled as part of on market buyback 68,519,821 (37,104,755) - - 42,081 (37,928) - - Balance at end of the financial year 2,383,370,791 2,351,955,725 4,672,097 4,667,944 (B) UNVESTED EMPLOYEE INCENTIVE SHARES Balance at beginning of the financial year 11,594,031 11,723,026 (21,419) (21,696) Release of shares (186,428) - Reclassification due to prior distribution of shares - (128,995) 120 - - 277 Balance at end of the financial year 11,407,603 11,594,031 (21,299) (21,419) (C) DEBENTURES Balance at beginning of the financial year Balance at end of the financial year Total contributed equity * Amount is less than $1000. 281 281 281 281 * * * * 4,650,798 4,646,525 FAIRFAX MEDIA ANNUAL REPORT 2015 | 113 NOTES TO THE FINANCIAL STATEMENTS: CAPITAL STRUCTURE AND FINANCIAL COSTS FAIRFAX MEDIA LIMITED AND CONTROLLED ENTITIES FOR THE PERIOD ENDED 28 JUNE 2015 (i) 57,916,616 ordinary shares issued on 20 February 2015 are subject to the following voluntary escrow arrangements: • 28,958,321 ordinary shares will be held in escrow from the date of issue and will be released on 1 July 2016. • 9,652,765 ordinary shares will be held in escrow from the date of issue and will be released (either in whole or part), at the earliest, on 1 January 2016. • 9,652,765 ordinary shares will be held in escrow from the date of issue and will be released (either in whole or part), at the earliest, on 1 January 2017. • 9,652,765 ordinary shares will be held in escrow from the date of issue and will be released (either in whole or part), at the earliest, on 1 January 2018. ACCOUNTING POLICY (A) ORDINARY SHARES Ordinary shares are classified as equity and entitle the holder to receive dividends as declared and, in the event of winding up the Company, to participate in the proceeds from the sale of all surplus assets in proportion to the number of and amounts paid up on shares held. Ordinary shares entitle their holder to one vote, either in person, or by proxy, at a meeting of the Company. Incremental costs directly attributable to the issue of new shares or options are recognised in equity as a reduction from the proceeds. Incremental costs directly attributable to the issue of new shares for the acquisition of a business are not included in the cost of the acquisition as part of the purchase consideration. (B) UNVESTED EMPLOYEE INCENTIVE SHARES Shares in Fairfax Media Limited are held by the Executive Employee Share Plan Trust for the purpose of issuing shares under the Long Term Incentive Plan. Holders of ordinary shares are entitled to receive dividends as declared and are entitled to one vote per share at a meeting of the Company. (C) DEBENTURES Debentures have been included as equity as the rights attaching to them are in all material respects comparable to those attaching to the ordinary shares. Such debentures are unsecured non-voting securities that have interest entitlements equivalent to the dividend entitlements attaching to the ordinary voting shares and rank equally with such shares on any liquidation or winding up. These interest entitlements are treated as dividends. The debentures are convertible into shares on a one-for-one basis at the option of the holder provided that conversion will not result in a breach of any of the following: (i) any provision of the Foreign Acquisitions and Takeovers Act 1975; (ii) any undertaking given by the Company to the Foreign Investment Review Board or at the request of the Foreign Investment Review Board from time to time; or (iii) any other applicable law including, without limitation the Broadcasting Act 1942. 114 NOTES TO THE FINANCIAL STATEMENTS: CAPITAL STRUCTURE AND FINANCIAL COSTS FAIRFAX MEDIA LIMITED AND CONTROLLED ENTITIES FOR THE PERIOD ENDED 28 JUNE 2015 RESERVES Asset revaluation reserve, net of tax Foreign currency translation reserve, net of tax Cashflow hedge reserve, net of tax Net investment hedge reserve, net of tax Share-based payment reserve, net of tax Acquisition reserve General reserve Total reserves (A) ASSET REVALUATION RESERVE Balance at beginning of the financial year Revaluation of available for sale investments Impairment losses transferred to the income statement Disposal of available for sale investments Tax effect on available for sale investments Balance at end of the financial year NOTE 28 JUNE 2015 $’000 29 JUNE 2014 $’000 (A) (B) (C) (D) (E) (F) (G) 477 (125,751) (2,672) (17,338) 14,819 158,336 (6,837) 21,034 753 (257) - (19) - 477 753 (110,148) (4,179) (18,094) 11,231 182,706 (6,837) 55,432 41 820 16 (129) 5 753 The asset revaluation reserve is used to record increments and decrements on the revaluation of non-current assets. From 1 July 2004, changes in the fair value of investments classified as available for sale investments are recognised in the asset revaluation reserve. (B) FOREIGN CURRENCY TRANSLATION RESERVE Balance at beginning of the financial year Exchange differences on currency translation Balance at end of the financial year NOTE 28 JUNE 2015 $’000 29 JUNE 2014 $’000 (110,148) (15,603) (125,751) (132,599) 22,451 (110,148) The foreign currency translation reserve is used to record exchange differences arising on translation of foreign controlled entities and associated funding of foreign controlled entities, as described in Note 30(B). FAIRFAX MEDIA ANNUAL REPORT 2015 | 115 NOTES TO THE FINANCIAL STATEMENTS: CAPITAL STRUCTURE AND FINANCIAL COSTS FAIRFAX MEDIA LIMITED AND CONTROLLED ENTITIES FOR THE PERIOD ENDED 28 JUNE 2015 NOTE 28 JUNE 2015 $’000 29 JUNE 2014 $’000 (C) CASHFLOW HEDGE RESERVE Balance at beginning of the financial year Gains arising during the year on interest rate and cross currency swaps Losses arising during the year on currency forward contracts Reclassification adjustments for losses/(gains) included in the income statement Tax effect of net changes on cashflow hedges Balance at end of the financial year (4,179) 4,389 (211) 5 (2,676) (2,672) (4,703) 1,410 (774) (125) 13 (4,179) The hedging reserve is used to record the portion of gains and losses on a hedging instrument in a cash flow hedge that is determined to be an effective hedge, as described in Note 16. NOTE 28 JUNE 2015 $’000 29 JUNE 2014 $’000 (D) NET INVESTMENT HEDGE RESERVE Balance at beginning of the financial year Effective portion of changes in value of net investment hedges Tax effect on net investment hedges Balance at end of the financial year (18,094) 1,104 (348) (17,338) (10,232) (11,231) 3,369 (18,094) The net investment hedge reserve is used to record gains and losses on a hedging instruments in a fair value hedge, as described in Note 16. (E) SHARE-BASED PAYMENT RESERVE Balance at beginning of the financial year Release of shares Reclassification due to prior distribution of shares Share-based payment expense Tax effect on share-based payment expense Balance at end of the financial year NOTE 28 JUNE 2015 $’000 29 JUNE 2014 $’000 11,231 (120) - 5,298 (1,590) 14,819 8,799 - (277) 3,870 (1,161) 11,231 The share-based payment reserve is used to recognise the fair value of shares issued but not vested and transfers to fund the acquisition of Share Trust shares, as described in Note 26. 116 NOTES TO THE FINANCIAL STATEMENTS: CAPITAL STRUCTURE AND FINANCIAL COSTS FAIRFAX MEDIA LIMITED AND CONTROLLED ENTITIES FOR THE PERIOD ENDED 28 JUNE 2015 (F) ACQUISITION RESERVE Balance at beginning of the financial year Non-controlling interest arising on the disposal of Fairfax Radio Network Pty Limited as part of the acquisition of Macquarie Radio Network Limited Acquisition of non-controlling interest Balance at end of the financial year NOTE 28 JUNE 2015 $’000 29 JUNE 2014 $’000 182,706 181,048 (24,412) 42 158,336 - 1,658 182,706 The acquisition reserve is used to record differences between the carrying value of non-controlling interests and the consideration paid/received, where there has been a transaction involving non-controlling interests that does not result in a loss of control. The reserve is attributable to the equity of the parent. (G) GENERAL RESERVE Balance at beginning of the financial year Balance at end of the financial year NOTE 28 JUNE 2015 $’000 29 JUNE 2014 $’000 (6,837) (6,837) (6,837) (6,837) The general reserve is used to record Stapled Preference Share (SPS) issue costs that have been transferred from contributed equity. The SPS were repurchased on 29 April 2011. FAIRFAX MEDIA ANNUAL REPORT 2015 | 117 NOTES TO THE FINANCIAL STATEMENTS: CAPITAL STRUCTURE AND FINANCIAL COSTS FAIRFAX MEDIA LIMITED AND CONTROLLED ENTITIES FOR THE PERIOD ENDED 28 JUNE 2015 19. DIVIDENDS PAID AND PROPOSED (A) ORDINARY SHARES Interim 2015 dividend: fully franked 2.0 cents - paid 18 March 2015 (2014: fully franked dividend 2.0 cents - paid 19 March 2014) 2014 dividend: fully franked 2.0 cents - paid 17 September 2014 (2013: fully franked dividend 1.0 cent - paid 17 September 2013) CONSOLIDATED 28 JUNE 2015 $’000 CONSOLIDATED 29 JUNE 2014 $’000 COMPANY 28 JUNE 2015 $’000 COMPANY 29 JUNE 2014 $’000 48,410 47,039 48,410 47,039 47,039 23,520 47,039 23,520 Total dividends paid 95,449 70,559 95,449 70,559 (B) DIVIDENDS PROPOSED AND NOT RECOGNISED AS A LIABILITY Since reporting date the Directors have declared a dividend of 2.0 cents per fully paid ordinary share, partly franked at the corporate tax rate of 30%. The aggregate amount of the dividend to be paid on 8 September 2015 out of profits, but not recognised as a liability at the end of the year, is expected to be $47.7 million. (C) FRANKED DIVIDENDS Franking account balance as at reporting date at 30% (2014: 30%) Franking credits that will arise from the payment of income tax payable balances as at the end of the financial year Total franking credits available for subsequent financial years based on a tax rate of 30% COMPANY 2015 $’000 COMPANY 2014 $’000 8,019 34,063 1,513 9,532 1,262 35,325 On a tax-paid basis, the Company’s franking account balance is approximately $8.0 million (2014: $34.1 million). The impact on the franking account of the dividend declared by the Directors since reporting date will be a reduction in the franking account to approximately $0.7 million. 118 NOTES TO THE FINANCIAL STATEMENTS: CAPITAL STRUCTURE AND FINANCIAL COSTS FAIRFAX MEDIA LIMITED AND CONTROLLED ENTITIES FOR THE PERIOD ENDED 28 JUNE 2015 20. EARNINGS PER SHARE BASIC EARNINGS PER SHARE Net profit attributable to owners of the parent DILUTED EARNINGS PER SHARE Net profit attributable to owners of the parent EARNINGS RECONCILIATION - BASIC Net profit attributable to owners of the parent EARNINGS RECONCILIATION - DILUTED Net profit attributable to owners of the parent 28 JUNE 2015 ¢ PER SHARE 29 JUNE 2014 ¢ PER SHARE 3.5 3.5 9.5 9.5 28 JUNE 2015 $’000 29 JUNE 2014 $’000 83,168 224,432 83,168 224,432 28 JUNE 2015 NUMBER ‘000 29 JUNE 2014 NUMBER ‘000 Weighted average number of ordinary shares used in calculating basic EPS 2,369,820 2,351,956 Weighted average number of ordinary shares used in calculating diluted EPS 2,399,176 2,365,174 ACCOUNTING POLICY BASIC EARNINGS PER SHARE Basic earnings per share (EPS) is calculated by dividing the net profit attributable to members, adjusted to exclude costs of servicing equity other than ordinary shares, by the weighted average number of ordinary shares outstanding during the financial year, adjusted for any bonus elements in ordinary shares issued during the financial year. DILUTED EARNINGS PER SHARE Diluted earnings per share is calculated by dividing the basic EPS earnings adjusted by the after tax effect of interest and other financing costs associated with dilutive potential ordinary shares and the effect on revenues and expenses of conversion to ordinary shares associated with dilutive potential ordinary shares by the weighted average number of ordinary shares and dilutive potential ordinary shares adjusted for any bonus issue. FAIRFAX MEDIA ANNUAL REPORT 2015 | 119 NOTES TO THE FINANCIAL STATEMENTS: UNRECOGNISED ITEMS FAIRFAX MEDIA LIMITED AND CONTROLLED ENTITIES FOR THE PERIOD ENDED 28 JUNE 2015 21. COMMITMENTS OPERATING LEASE COMMITMENTS - GROUP AS LESSEE The Group has entered into commercial leases on office and warehouse premises, motor vehicles and office equipment. Future minimum rentals payable under non-cancellable operating leases as at the period end are as follows: Within one year Later than one year and not later than five years Later than five years Total operating lease commitments 28 JUNE 2015 $’000 29 JUNE 2014 $’000 45,223 147,966 254,289 447,478 42,661 143,080 266,212 451,953 Non-cancellable leases have varying terms, escalation clauses and renewal rights. On renewal, the terms of the leases can be renegotiated. The leases have remaining terms of between one and twenty-three years and usually include a clause to enable upward revision of the rental charge on an annual basis according to prevailing market conditions. OPERATING LEASE COMMITMENTS - GROUP AS LESSOR The Group has entered into commercial subleases on office premises. Future minimum rentals receivable under non-cancellable operating leases as at the period end are $29.2 million. FINANCE LEASE COMMITMENTS - GROUP AS LESSEE The Group has a finance lease for property, plant and machinery with a carrying amount of $6.3 million (2014: $7.0 million). The lease has a remaining term of three months (2014: one year) and a weighted average interest rate of 13.3% (2014: 13.3%). The future minimum lease payments under the finance lease are $1.3 million (2014: $6.3 million). The present value of the net minimum lease payments are $1.2 million (2014: $6.0 million). CONTINGENT RENTALS UNDER FINANCE LEASE A component of the finance lease payments are contingent on movements in the consumer price index. At reporting date, the rent payable over the remaining lease term of three months which is subject to such movements amounts to $1.2 million (2014: $6.0 million). 120 NOTES TO THE FINANCIAL STATEMENTS: UNRECOGNISED ITEMS FAIRFAX MEDIA LIMITED AND CONTROLLED ENTITIES FOR THE PERIOD ENDED 28 JUNE 2015 CAPITAL COMMITMENTS At 28 June 2015, the Group has commitments principally relating to the purchase of property, plant and equipment. Commitments contracted for at reporting date but not recognised as liabilities are as follows: Within one year Later than one year and not later than five years Later than five years Total capital commitments OTHER COMMITMENTS 28 JUNE 2015 $’000 29 JUNE 2014 $’000 3,117 - - 3,117 4,619 109 - 4,728 The Group has committed to providing up to $50 million in loans to Stan Entertainment Pty Ltd over a multi-year period. ACCOUNTING POLICY OPERATING LEASES Leases where the lessor retains substantially all the risks and benefits of ownership of the asset are classified as operating leases. Net rental payments, excluding contingent payments, are recognised as an expense in the income statement on a straight-line basis over the period of the lease. FINANCE LEASES Assets acquired under finance leases which result in the consolidated entity receiving substantially all the risks and rewards of ownership of the asset are capitalised at the lease’s inception at the lower of the fair value of the leased property or the estimated present value of the minimum lease payments. The corresponding finance lease obligation, net of finance charges, is included within interest bearing liabilities. The interest element is allocated to accounting periods during the lease term to reflect a constant rate of interest on the remaining balance of the liability for each accounting period. The leased asset is included in property, plant and equipment and is depreciated over the shorter of the estimated useful life of the asset or the lease term. FAIRFAX MEDIA ANNUAL REPORT 2015 | 121 NOTES TO THE FINANCIAL STATEMENTS: UNRECOGNISED ITEMS FAIRFAX MEDIA LIMITED AND CONTROLLED ENTITIES FOR THE PERIOD ENDED 28 JUNE 2015 22. CONTINGENCIES GUARANTEES Under the terms of ASIC Class Order 98/1418 (as amended), the Company and certain controlled entities (refer Note 28), have guaranteed any deficiency of funds if any entity to the class order is wound-up. No such deficiency exists at reporting date. The Group has provided a bank guarantee of $2.5 million in relation to a property sublease for a period of 30 months commencing 4 July 2013. DEFAMATION From time to time, entities in the Group are sued for defamation and similar matters in the ordinary course of business. At the date of this report, there were no legal actions against the consolidated entity, other than those recognised at Note 13, that are expected to result in a material impact. 122 NOTES TO THE FINANCIAL STATEMENTS: UNRECOGNISED ITEMS FAIRFAX MEDIA LIMITED AND CONTROLLED ENTITIES FOR THE PERIOD ENDED 28 JUNE 2015 23. EVENTS SUBSEQUENT TO REPORTING DATE No significant events subsequent to the balance sheet date have occurred. FAIRFAX MEDIA ANNUAL REPORT 2015 | 123 NOTES TO THE FINANCIAL STATEMENTS: OTHER FAIRFAX MEDIA LIMITED AND CONTROLLED ENTITIES FOR THE PERIOD ENDED 28 JUNE 2015 24. OTHER FINANCIAL ASSETS CURRENT Loan receivable Total current other financial assets NON-CURRENT Shares in unlisted entities - at fair value Loan receivable Total non-current other financial assets ACCOUNTING POLICY 28 JUNE 2015 $’000 29 JUNE 2014 $’000 1,384 1,384 67 16,558 16,625 4,858 4,858 67 1,302 1,369 Loans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market and are included in receivables and other financial assets in the balance sheet. These assets are measured at amortised cost using the effective interest method. 124 NOTES TO THE FINANCIAL STATEMENTS: OTHER FAIRFAX MEDIA LIMITED AND CONTROLLED ENTITIES FOR THE PERIOD ENDED 28 JUNE 2015 25. TAXATION CONSOLIDATED INCOME STATEMENT Income tax expense is reconciled to prima facie income tax payable as follows: Net profit before income tax expense Prima facie income tax at 30% (2014: 30%) Tax effect of differences: Share of net profits of associates and joint ventures Capital gains not taxable Non-assessable external dividends Adjustments in respect of current income tax of previous years * Temporary differences not recognised on intangible and other asset write-offs Other Income tax expense 28 JUNE 2015 $’000 29 JUNE 2014 $’000 121,117 36,335 (106) (4,664) (1,459) (3,917) 8,322 (599) 33,912 267,369 80,211 (1,813) (24,581) (11) (11,686) (891) 972 42,201 * The 2015 adjustment includes $2.8 million of prior year R&D tax claims finalised in the current year (2014: $9.8 million). The major components of income tax expense in the income statement are: Current income tax expense Deferred income tax expense Adjustments in respect of current income tax of previous years Income tax expense in the income statement 28 JUNE 2015 $’000 29 JUNE 2014 $’000 44,328 (6,499) (3,917) 33,912 32,842 21,045 (11,686) 42,201 CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME Deferred tax related to items charged or credited directly to other comprehensive income during the year: Unrealised gain on available for sale financial assets Net gain/(loss) on actuarial gains and losses Net (loss)/gain on revaluation of cash flow hedges Net (loss)/gain on hedge of net investment Income tax on items of other comprehensive income 28 JUNE 2015 $’000 29 JUNE 2014 $’000 - 27 (2,676) (347) (2,996) 5 (149) 13 3,369 3,238 FAIRFAX MEDIA ANNUAL REPORT 2015 | 125 NOTES TO THE FINANCIAL STATEMENTS: OTHER FAIRFAX MEDIA LIMITED AND CONTROLLED ENTITIES FOR THE PERIOD ENDED 28 JUNE 2015 RECOGNISED DEFERRED TAX ASSETS AND LIABILITIES Deferred tax assets and liabilities are attributable to the following: ASSETS LIABILITIES NET 28 JUNE 2015 $’000 29 JUNE 2014 $’000 28 JUNE 2015 $’000 29 JUNE 2014 $’000 28 JUNE 2015 $’000 29 JUNE 2014 $’000 30,300 15,987 28,438 - - 6,057 13,340 52,847 12,753 6,019 - 2,146 - - 6,120 16,677 44,980 7,208 5,134 - 941 767 163 11,461 6,039 - - - - 541 7,177 1,068 364 2,059 194 - - 130 - 33 1,862 (767) (163) (5,404) 7,301 52,847 12,753 6,019 - 1,605 8,810 (1,068) (364) 4,061 16,483 44,980 7,208 5,004 - 908 123,462 97,047 47,409 11,025 76,053 86,022 (47,409) (11,025) (47,409) (11,025) - - 76,053 86,022 - - 76,053 86,022 Property, plant and equipment Inventories Investments Intangible assets Other assets Provisions Payables Other liabilities Tax losses Other Gross deferred tax assets/ liabilities Set-off of deferred tax assets/liabilities Net deferred tax assets/ liabilities MOVEMENT IN TEMPORARY DIFFERENCES DURING THE FINANCIAL YEAR BALANCE 29 JUNE 2014 $’000 RECOGNISED ON ACQUISITION $’000 RECOGNISED IN INCOME $’000 RECOGNISED IN EQUITY $’000 BALANCES DISPOSED $’000 BALANCE 28 JUNE 2015 $’000 8,810 1,228 (7,002) (1,227) 53 1,862 (1,068) (364) 4,061 16,483 44,980 7,208 5,004 - 908 - (62) (13,426) - (2,227) (676) (46) - 394 86,022 (14,815) 301 288 5,043 (6,507) 7,248 5,517 1,016 - 595 6,499 - (25) (1,082) (2,675) 2,853 710 45 - (292) (1,693) - - - - (7) (6) - - - 40 (767) (163) (5,404) 7,301 52,847 12,753 6,019 - 1,605 76,053 Property, plant and equipment Inventories Investments Intangible assets Other assets Provisions Payables Other liabilities Tax losses Other 126 NOTES TO THE FINANCIAL STATEMENTS: OTHER FAIRFAX MEDIA LIMITED AND CONTROLLED ENTITIES FOR THE PERIOD ENDED 28 JUNE 2015 Property, plant and equipment Inventories Investments Intangible assets Other assets Provisions Payables Other liabilities Tax losses Other BALANCE 30 JUNE 2013 $’000 RECOGNISED ON ACQUISITION $’000 RECOGNISED IN INCOME $’000 RECOGNISED IN EQUITY $’000 BALANCES DISPOSED $’000 BALANCE 29 JUNE 2014 $’000 1,496 (3,055) (515) 1,248 12,764 62,524 10,669 9,272 8,144 1,767 - - - (405) - 95 10 - - - 7,417 1,987 146 1,695 336 (17,434) (3,431) (4,068) (8,143) 450 104,314 (300) (21,045) - - 5 - 3,383 - - - - (1,309) 2,079 (103) 8,810 - - 1,523 - (205) (40) (200) (1) - 974 (1,068) (364) 4,061 16,483 44,980 7,208 5,004 - 908 86,022 TAX LOSSES AND FUTURE DEDUCTIBLE TEMPORARY DIFFERENCES The Group has realised Australian capital losses for which no deferred tax asset is recognised on the balance sheet of $308.4 million (2014: $146.0 million) which are available indefinitely for offset against future capital gains subject to continuing to meet relevant statutory tests. The Group has deductible temporary differences for which no deferred tax asset is recognised on the balance sheet of $741.2 million (2014: $755.6 million). FUTURE ASSESSABLE TEMPORARY DIFFERENCES At 28 June 2015, there are no material unrecognised future assessable temporary differences associated with the Group’s investments in associates or joint ventures, as the Group has no material liability should the associates or joint ventures retained earnings be distributed (2014: Nil). FAIRFAX MEDIA ANNUAL REPORT 2015 | 127 NOTES TO THE FINANCIAL STATEMENTS: OTHER FAIRFAX MEDIA LIMITED AND CONTROLLED ENTITIES FOR THE PERIOD ENDED 28 JUNE 2015 ACCOUNTING POLICY INCOME TAX AND OTHER TAXES The income tax expense or benefit for the period is the tax payable on the current period’s taxable income based on the national income tax rate for each jurisdiction adjusted by changes in deferred tax assets and liabilities attributed to temporary differences and to unused tax losses. Deferred tax assets and liabilities are recognised for temporary differences at the reporting date between the tax bases of assets and liabilities and their carrying amounts for financial reporting purposes. Deferred income tax liabilities are recognised for all taxable temporary differences: • except where the deferred income tax liability arises from the initial recognition of an asset or liability in a transaction that is not a business combination and, at the time of the transaction, affects neither the accounting profit nor taxable profit or loss; and • in respect of taxable temporary differences associated with investments in subsidiaries, associates and interests in joint ventures, except where the timing of the reversal of the temporary differences can be controlled and it is probable that the temporary differences will not reverse in the foreseeable future. Deferred income tax assets are recognised for all deductible temporary differences, carry-forward of unused tax assets and unused tax losses, to the extent that it is probable that taxable profit will be available against which the deductible temporary differences, and the carry-forward of unused tax assets and unused tax losses can be utilised: • except where the deferred income tax asset relating to the deductible temporary difference arises from the initial recognition of an asset or liability in a transaction that is not a business combination and, at the time of the transaction, affects neither the accounting profit nor taxable profit or loss; and • in respect of deductible temporary differences associated with investments in subsidiaries, associates and interests in joint ventures, deferred tax assets are only recognised to the extent that it is probable that the temporary differences will reverse in the foreseeable future and taxable profit will be available against which the temporary differences can be utilised. The carrying amount of deferred income tax assets is reviewed at each reporting date and reduced to the extent that it is no longer probable that sufficient taxable profit will be available to allow all or part of the deferred income tax asset to be utilised. Deferred income tax assets and liabilities are measured at the tax rates that are expected to apply to the year when the asset is realised or the liability is settled, based on tax rates (and tax laws) that have been enacted or substantively enacted at the reporting date. Income taxes relating to items recognised directly in equity are recognised in equity. Deferred tax assets and deferred tax liabilities are offset only if a legally enforceable right exists to set off current tax assets against current tax liabilities and the deferred tax assets and liabilities relate to the same taxable group and the same taxation authority. TAX CONSOLIDATION - AUSTRALIA Fairfax Media Limited (the head entity) and its wholly-owned Australian entities implemented the tax consolidation legislation as of 1 July 2003. The current and deferred tax amounts for each member in the tax consolidated group (except for the head entity) have been allocated based on stand-alone calculations that are modified to reflect membership of the tax consolidated group. On adoption of the tax consolidation legislation, the entities in the tax consolidated group entered into a tax sharing agreement which, in the opinion of the Directors, limits the joint and several liability of the wholly-owned entities in the case of a default of the head entity, Fairfax Media Limited. The entities have also entered into a tax funding agreement under which the wholly-owned entities fully compensate Fairfax Media Limited for any current tax payable assumed and are compensated by the Company for any current tax receivable and deferred tax assets relating to unused tax losses or unused tax credits transferred to Fairfax Media Limited under the tax consolidation legislation. Assets or liabilities arising under tax funding arrangements with the tax consolidated entities are recognised as amounts receivable from or payable to other entities in the group. The amounts receivable/payable under the tax funding arrangements are due upon demand from the head entity. The head entity may also require payment of interim funding amounts to assist with its obligations to pay tax instalments. 128 NOTES TO THE FINANCIAL STATEMENTS: OTHER FAIRFAX MEDIA LIMITED AND CONTROLLED ENTITIES FOR THE PERIOD ENDED 28 JUNE 2015 26. EMPLOYEE ENTITLEMENTS (A) NUMBER OF EMPLOYEES As at 28 June 2015 the Group employed 6,169 full-time employees (2014: 6,410) and 1,010 part-time and casual employees (2014: 1,211). This includes 1,405 (2014: 1,636) full-time employees and 150 (2014: 259) part-time and casual employees in New Zealand. (B) EMPLOYEE SHARE PLANS The Company had three employee share plans during the period. The terms of each plan are set out below: 1. FAIRFAX EXEMPT EMPLOYEE SHARE PLAN This plan is open to all Australian employees with at least twelve months service with the consolidated entity in Australia, whose adjusted taxable income is $180,000 per annum or less. Under this Plan, participants may salary sacrifice up to $1,000 of pre tax salary per annum for the purchase of issued Fairfax shares at the market price on the open market of the ASX. The shares are purchased by an independent trustee company on predetermined dates. 2. FAIRFAX DEFERRED EMPLOYEE SHARE PLAN This plan is open to all Australian employees with at least twelve months service with the consolidated entity in Australia. Under this Plan, participants may salary sacrifice a minimum of $1,000 and up to a maximum of $5,000 of salary per annum for the purchase of issued Fairfax shares at the market price on the open market of the ASX. The shares are purchased by an independent trustee company on predetermined dates. Participants must nominate a ‘lock’ period of either 3, 5 or 7 years during which their shares must remain in the plan, unless they leave the consolidated entity in Australia. 3. LONG TERM EQUITY BASED INCENTIVE SCHEME The long term incentive plan is available to certain permanent employees of the consolidated entity. 2013 Financial Year For 2013, participants in the plan received an allocation of performance rights (rights) which allow the executives to acquire shares for no consideration subject to achievement of the performance hurdles. No dividends are payable to participants on the unvested rights. The number of rights to which a participant was entitled depended on the participant’s role and responsibilities. Allocations were set at a fixed percentage of the executive’s fixed remuneration at the time they participate in the scheme. The value of the rights at the time of allocation was determined by an independent external valuer. 2014 & 2015 Financial Year For 2014 & 2015, participants in the plan were granted options following the AGM with the exercise price set at the share price around the time of issue. The options have a vesting hurdle of absolute total shareholder return over three years from issue with a retest in the fourth year. No dividends are payable to participants on the unvested options. Participants are also entitled to receive performance shares for no consideration subject to achievement of certain performance hurdles. Half of the shares granted are deferred for one year and the other half are deferred for two years. Participants must remain employed during the deferral period or the shares will be forfeited. FAIRFAX MEDIA ANNUAL REPORT 2015 | 129 NOTES TO THE FINANCIAL STATEMENTS: OTHER FAIRFAX MEDIA LIMITED AND CONTROLLED ENTITIES FOR THE PERIOD ENDED 28 JUNE 2015 ACCOUNTING POLICY Share-based compensation benefits can be provided to employees in the form of equity instruments. The cost of share-based payments is recognised over the period in which the performance and/or service conditions are fulfilled (the vesting period), ending on the date on which the relevant employees become entitled to the award (the vesting date). At each reporting date until vesting, the cumulative charge to the income statement is the product of (i) the grant date fair value of the award; (ii) the current best estimate of the number of awards that will vest, taking into account such factors as the likelihood of employee turnover during the vesting period and the likelihood of non-market performance conditions being met; and (iii) the expired portion of the vesting period. The market value of equity instruments issued to employees for no cash consideration under the Long Term Incentive Plan is recognised as an employee benefits expense over the vesting period. Shares purchased, but which have not yet vested to the employee as at reporting date are offset against contributed equity of the Group (refer to Note 18). 130 NOTES TO THE FINANCIAL STATEMENTS: OTHER FAIRFAX MEDIA LIMITED AND CONTROLLED ENTITIES FOR THE PERIOD ENDED 28 JUNE 2015 27. REMUNERATION OF AUDITORS During the financial year the following amounts were paid or payable for services provided by the auditor of the Company and its related parties: AUDIT SERVICES Ernst & Young Australia Audit and review of financial reports Affiliates of Ernst & Young Australia Audit and review of financial reports Non Ernst & Young Firms Audit and review of financial reports Total audit services OTHER ASSURANCE SERVICES Ernst & Young Australia Regulatory and contractually required audits Other Affiliates of Ernst & Young Australia Regulatory and contractually required audits Other Non Ernst & Young Firms Regulatory and contractually required audits Other Total other assurance services Total remuneration for assurance services NON ASSURANCE SERVICES Ernst & Young Australia Other services Affiliates of Ernst & Young Australia Other services Non Ernst & Young Firms Other services Total non assurance services Total remuneration of auditors 28 JUNE 2015 $ 29 JUNE 2014 $ 1,280,557 885,800 165,006 228,521 - 23,251 1,445,563 1,137,572 118,141 36,218 63,654 - 178,249 110,164 71,948 - 3,031 - 2,160 - 221,044 362,521 1,666,607 1,500,093 779,949 - - 779,949 - - - - 2,446,556 1,500,093 FAIRFAX MEDIA ANNUAL REPORT 2015 | 131 NOTES TO THE FINANCIAL STATEMENTS: OTHER FAIRFAX MEDIA LIMITED AND CONTROLLED ENTITIES FOR THE PERIOD ENDED 28 JUNE 2015 28. RELATED PARTIES AND ENTITIES (A) ULTIMATE PARENT Fairfax Media Limited is the ultimate parent company. (B) CONTROLLED ENTITIES Interests in controlled entities are set out in (F) in this Note. (C) KEY MANAGEMENT PERSONNEL TRANSACTIONS WITH DIRECTOR-RELATED ENTITIES A number of Directors of Fairfax Media Limited also hold directorships with other corporations which provide and receive goods or services to and from the Fairfax Group in the ordinary course of business on normal terms and conditions. None of these Directors derive any direct personal benefit from the transactions between the Fairfax Group and these corporations. Transactions were entered into during the financial year with the Directors of Fairfax Media Limited and its controlled entities or with Director-related entities, which: • occurred within a normal employee, customer or supplier relationship on terms and conditions no more favourable than those which it is reasonable to expect would have been adopted if dealing with the Director or Director-related entity at arm’s length in the same circumstances; • do not have the potential to adversely affect decisions about the allocation of scarce resources or discharge the responsibility of the Directors; or • are minor or domestic in nature. COMPENSATION OF KEY MANAGEMENT PERSONNEL OF THE GROUP Short-term employee benefits Post-employment benefits Other long-term benefits Termination benefits Share-based payment Total compensation paid to key management personnel 28 JUNE 2015 $’000 29 JUNE 2014 $’000 2,919 131 40 - 1,726 4,816 3,639 146 45 - 2,625 6,455 The amounts disclosed in the table are the amounts recognised as an expense during the reporting period related to key management personnel. INTERESTS HELD BY KEY MANAGEMENT PERSONNEL UNDER THE SENIOR EXECUTIVE PLAN Share options held by key management personnel under the Senior Executive Plan to purchase ordinary shares have the following expiry dates and exercise prices: ISSUE DATE EXPIRY DATE 2014 2015 Total (i) (i) EXERCISE PRICE $ 0.58 0.82 28 JUNE 2015 NUMBER OUSTANDING 15,250,000 8,895,832 24,145,832 29 JUNE 2014 NUMBER OUTSTANDING 19,125,000 - 19,125,000 (i) Share options expire three years from the date that the options vest. Refer to details of Transformation Incentive Plan in Section 5 of the Remuneration Report. 132 NOTES TO THE FINANCIAL STATEMENTS: OTHER FAIRFAX MEDIA LIMITED AND CONTROLLED ENTITIES FOR THE PERIOD ENDED 28 JUNE 2015 (D) TRANSACTIONS WITH RELATED PARTIES The following transactions for the sale and purchase of goods and services occurred with related parties on normal market terms and conditions: SALES TO RELATED PARTIES $’000 PURCHASES FROM RELATED PARTIES $’000 AMOUNT OWED BY RELATED PARTIES $’000 AMOUNT OWED TO RELATED PARTIES $’000 ASSOCIATES 28 June 2015 29 June 2014 JOINT VENTURES 28 June 2015 29 June 2014 1,907 3,588 212 348 24,640 17,753 4,833 3,101 91 343 178 35 82 64 19 155 (E) PARENT ENTITY INFORMATION The following disclosures relate to Fairfax Media Limited as an individual entity, being the ultimate parent entity of the Fairfax Media group. FINANCIAL POSITION OF PARENT ENTITY Current assets Total assets Current liabilities Total liabilities TOTAL EQUITY OF PARENT ENTITY Contributed equity General reserve Acquisition reserve Share-based payment reserve Retained losses Total equity RESULT OF PARENT ENTITY Profit for the period Other comprehensive income Total comprehensive income for the period 28 JUNE 2015 $’000 29 JUNE 2014 $’000 1,236,650 1,956,755 13,428 23,289 1,492,947 1,900,484 13,395 13,395 4,650,798 4,646,525 (722) (10,672) 14,819 (722) (10,672) 11,231 (2,720,757) (2,759,273) 1,933,466 1,887,089 133,966 138,744 - - 133,966 138,744 FAIRFAX MEDIA ANNUAL REPORT 2015 | 133 NOTES TO THE FINANCIAL STATEMENTS: OTHER FAIRFAX MEDIA LIMITED AND CONTROLLED ENTITIES FOR THE PERIOD ENDED 28 JUNE 2015 Fairfax Media Limited has entered into a Deed of Cross Guarantee with the effect that the Company guarantees debts in respect of its subsidiaries within the Closed Group. Further details regarding the deed are set out in (G) in this Note. OPERATING LEASE COMMITMENTS - PARENT ENTITY AS LESSEE Future minimum rentals payable under non-cancellable operating leases as at the period end are as follows: Within one year Later than one year and not later than five years Later than five years Total operating lease commitments (F) CONTROLLED ENTITIES The following entities were controlled as at the end of the financial year: 28 JUNE 2015 $’000 29 JUNE 2014 $’000 - - - - - - - - NOTES COUNTRY OF INCORPORATION OWNERSHIP INTEREST 2015 % 2014 % Fairfax Media Limited (a) Australia CONTROLLED ENTITIES 2GTHR Pty Limited ACN 000 128 281 Pty Limited (In Liq) ACN 000 834 257 Pty Limited ACN 001 004 815 Pty Limited (In Liq) ACN 001 260 671 Pty Limited (In Liq) ACN 091 950 462 Pty Limited (In Liq) ACN 101 806 302 Pty Limited ACN 129 831 072 Pty Limited ACN 113 587 527 Pty Limited (In Liq) Agricultural Publishers Pty Limited Alldata Australia Pty Limited All Homes Pty Limited Allure Media Pty Ltd Associated Newspapers Pty Limited Aussie Destinations (1) Pty Ltd Australian Capital Territory Real Estate Media Pty Limited Australian Property Monitors Pty Limited AZXC Pty Ltd Border Mail Printing Pty Ltd Bridge Printing Office Pty Limited (a) (i) (i) (i) (i) (a) (b) (i) (a) (a) (c) (a) (c) (a) (a) (a) (a) (a) (a) (a) Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia 134 100 - 100 - - - 100 100 - 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 70 100 100 - - 100 100 100 - 100 100 100 100 NOTES TO THE FINANCIAL STATEMENTS: OTHER FAIRFAX MEDIA LIMITED AND CONTROLLED ENTITIES FOR THE PERIOD ENDED 28 JUNE 2015 Buyradio Pty Ltd Carpentaria Newspapers Pty Ltd Commerce Australia Pty Ltd Commercial Real Estate Holdings Pty Limited Commercial Real Estate Media Nominees Pty Limited Commercial Real Estate Media Pty Limited Country Publishers Pty Ltd CountryCars.com.au Pty Ltd Creative House Publications Pty Ltd David Syme & Co Pty Limited Debt Retrieval Agency Limited Examiner Properties Pty Ltd Fairfax Business Media (South Asia) Pte Ltd (in liq) Fairfax Community Newspapers Pty Limited Fairfax Corporation Pty Limited Fairfax Digital Australia & New Zealand Pty Limited Fairfax Digital Pty Limited Fairfax Entertainment Pty Limited Fairfax Group Finance New Zealand Limited Fairfax Media (UK) Limited Fairfax Media Group Finance Pty Limited Fairfax Media Management Pty Limited Fairfax Media Operations Limited Fairfax Media Publications Pty Limited Fairfax New Zealand Limited Fairfax News Network Pty Limited Fairfax Print Holdings Pty Limited Fairfax Printers Pty Limited Fairfax Radio Network Pty Limited Fairfax Radio Syndication Pty Limited Fairfax Regional Media (Tasmania) Pty Limited Fairfax Regional Printers Pty Limited Financial Essentials Pty Ltd (In Liq) NOTES COUNTRY OF INCORPORATION (d) (a) (a) (a) (a) (a) (a) (a) (a) (a) (a) (a) (a) (a) (a) (a) (a) (a) (a) (d) (d) (a) (a) (e) Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia New Zealand Australia Singapore Australia Australia Australia Australia Australia New Zealand United Kingdom Australia Australia New Zealand Australia New Zealand Australia Australia Australia Australia Australia Australia Australia Australia OWNERSHIP INTEREST 2015 % 55 100 100 100 100 100 100 100 60 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 55 55 100 100 - 2014 % - 100 100 - - - 100 100 60 100 100 100 100 100 100 100 100 - 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 FAIRFAX MEDIA ANNUAL REPORT 2015 | 135 NOTES TO THE FINANCIAL STATEMENTS: OTHER FAIRFAX MEDIA LIMITED AND CONTROLLED ENTITIES FOR THE PERIOD ENDED 28 JUNE 2015 NOTES COUNTRY OF INCORPORATION Find a Babysitter Pty Ltd Golden Mail Pty Limited Gunnedah Publishing Co Pty Ltd Harbour Radio Pty Ltd Harris and Company Pty Limited Harris Enterprises Pty Ltd Harris Print Pty Ltd Hunter Distribution Network Pty Ltd Illawarra Newspapers Holdings Pty Ltd Integrated Publication Solutions Pty Limited Internet Marketing Australia Pty Ltd Internet Products Sales & Services Pty Ltd JFRF Nominee Pty Ltd John Fairfax & Sons Pty Limited John Fairfax (US) Limited John Fairfax Pty Limited Lime Digital Pty Limited (In Liq) Mackamedia Pty Ltd Macquarie Media Network Pty Ltd Macquarie Radio Network Limited Macquarie Regional Radio Pty Ltd Mamiko Co Pty Ltd Map & Page Pty Ltd Mapshed Pty Ltd Mayas Pty Ltd Mayas Unit Trust Media Investments Pty Ltd Metro Media Publishing Pty Ltd (a) (a) (d) (a) (a) (a) (a) (a) (a) (a) (a) (a) (a) (i) (a) (d) (d) (d) (a) (d) (a) (a) (f) Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia United States Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Metro Media Services Pty Ltd (a) (f) Australia Micosh Pty Ltd (In Liq) Milton Ulladulla Publishing Co. Pty Ltd Mistcue Pty Limited MMP (CGE) Pty Ltd MMP (DVH) Pty Ltd MMP (Melbourne Times) Pty Ltd MMP Bayside Pty Ltd MMP Community Network Pty Limited MMP Eastern Pty Ltd MMP Greater Geelong Pty Ltd (i) (a) Australia Australia Australia (a) (f) Australia (f) (f) (f) (a) (f) (a) (f) (f) Australia Australia Australia Australia Australia Australia 136 OWNERSHIP INTEREST 2015 % 100 100 100 55 100 100 100 100 100 100 100 100 100 100 100 100 - 100 55 55 55 100 55 100 100 100 100 92 100 - 100 65 100 63 90 78 100 100 38 2014 % 100 100 100 - 100 100 100 100 100 100 100 100 100 100 100 100 100 100 - - - 100 - 100 100 100 100 - - 100 100 65 - - - - - - - NOTES TO THE FINANCIAL STATEMENTS: OTHER FAIRFAX MEDIA LIMITED AND CONTROLLED ENTITIES FOR THE PERIOD ENDED 28 JUNE 2015 NOTES COUNTRY OF INCORPORATION MMP Holdings Pty Ltd MMP Moonee Valley Pty Ltd MMP Star Pty Ltd Mountain Press Pty Ltd Namoi Media & Marketing Pty Ltd National Real Estate Media Nominees Pty Limited National Real Estate Media Pty Limited Netus Pty Limited New South Wales Real Estate Media Pty Limited Network Classifieds Pty Ltd Newcastle Newspapers Pty Ltd Newsagents Direct Distribution Pty Ltd North Australian News Pty Ltd Northern Newspapers Pty Ltd Northern Territory Real Estate Media Pty Limited Ollority Pty Ltd Online Marketing Group Pty Limited OSF Australia Pty Limited (In Liq) Port Lincoln Times Pty Ltd Port Stephens Publishers Pty Ltd Port Stephens Publishers Trust Property Data Solutions Pty Ltd Queensland Community Newspapers Pty Ltd Queensland Real Estate Media Pty Limited Radio 1278 Melbourne Pty Limited Radio 2CH Pty Ltd Radio 2UE Sydney Pty Ltd Radio 3AW Melbourne Pty Limited Radio 4BC Brisbane Pty Limited Radio 6PR Perth Pty Limited Radio 96FM Perth Pty Limited Radio Magic 882 Brisbane Pty Limited Regional Press Australia Pty Limited (In Liq) Regional Printers Pty Limited (a) (f) (a) (f) (f) (a) (a) (a) (a) (f) (a) (a) (a) (a) (a) (a) (e) (a) (a) (a) (a) (d) (d) (d) (d) (d) (d) (g) (d) (e) (a) Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia OWNERSHIP INTEREST 2015 % 100 100 67 100 100 100 100 100 100 67 100 100 100 100 100 100 100 - 100 100 100 100 100 100 55 55 55 55 55 55 - 55 - 100 2014 % 50 - - 100 100 - - 100 - - 100 100 100 100 - 100 100 100 100 100 100 100 100 - 100 - 100 100 100 100 100 100 100 100 FAIRFAX MEDIA ANNUAL REPORT 2015 | 137 NOTES TO THE FINANCIAL STATEMENTS: OTHER FAIRFAX MEDIA LIMITED AND CONTROLLED ENTITIES FOR THE PERIOD ENDED 28 JUNE 2015 NOTES COUNTRY OF INCORPORATION OWNERSHIP INTEREST 2015 % 2014 % Regional Publishers (Tasmania) Pty Ltd (In Liq) Regional Publishers (Victoria) Pty Limited Regional Publishers (Western Victoria) Pty Limited Regional Publishers Pty Ltd Review Property (SA) Pty Ltd Review Property Pty Ltd RSVP.com.au Pty Limited Rural Press Printing (Victoria) Pty Limited Rural Press Printing Pty Limited Rural Press Pty Limited Rural Press Queensland Pty Ltd Rural Press Regional Media (WA) Pty Limited Rural Publishers Pty Limited S.A. Regional Media Pty Limited Satellite Music Australia Pty Limited South Australia Real Estate Media Pty Limited Southern Weekly Partnership Stock Journal Publishers Pty Ltd Suzannenic Pty Limited Tasmania Real Estate Media Pty Limited The Advocate Newspaper Proprietary Limited The Age Company Pty Limited The Age Print Company Pty Ltd The Barossa News Pty Limited The Border Morning Mail Pty Limited The Border News Partnership The Federal Capital Press of Australia Pty Limited The Independent News Pty Ltd (In Liq) The Wagga Daily Advertiser Pty Ltd The Warrnambool Standard Pty Ltd The Weather Company Pty Limited Tricom Group Pty Ltd (In Liq) Weatherzone Japan LLC 138 (e) (a) (a) (a) (f) (f) (h) (a) (a) (a) (a) (a) (a) (a) (d) (a) (a) (a) (a) (a) (a) (a) (a) (e) (a) (a) (e) Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Japan - 100 100 100 100 50 - 100 100 100 100 100 100 100 55 100 75 100 100 100 100 100 100 100 100 63 100 - 100 100 75 - 75 100 100 100 100 - - 100 100 100 100 100 100 100 100 100 - 75 100 100 - 100 100 100 100 100 63 100 100 100 100 75 100 75 NOTES TO THE FINANCIAL STATEMENTS: OTHER FAIRFAX MEDIA LIMITED AND CONTROLLED ENTITIES FOR THE PERIOD ENDED 28 JUNE 2015 NOTES COUNTRY OF INCORPORATION West Australian Rural Media Pty Ltd Western Australian Primary Industry Press Pty Ltd Western Australia Real Estate Media Pty Limited Western Magazine Pty Ltd Western Magazine Settlement Trust Whyalla News Properties Pty Ltd (In Liq) Winbourne Pty Limited (a) (a) (e) (a) Australia Australia Australia Australia Australia Australia Australia OWNERSHIP INTEREST 2015 % 100 100 100 75 75 - 100 2014 % 100 100 - 75 75 100 100 (a) The Company and the controlled entities incorporated within Australia are party to Class Order 98/1418 (as amended) issued by the Australian Securities & Investment Commission. These entities have entered into a Deed of Cross Guarantee dated June 2007 (as varied from time to time) under which each entity guarantees the debts of the others. These companies represent a ‘Closed Group’ for the purposes of the Class Order and there are no other members of the ‘Extended Closed Group’. Under the Class Order, these entities have been relieved from the requirements of the Corporations Act 2001 with regard to the preparation, audit and publication of accounts. (b) This company was formerly called TheVine.com.au Pty Limited. The remaining interest in this company was acquired on 22 July 2014. (c) Acquired on 2 October 2014. (d) On 31 March 2015, Macquarie Radio Network Limited acquired 100% of the share capital of Fairfax Radio Network Pty Limited from the Group. In exchange, the Group received a 54.5% ownership interest in Macquarie Radio Network Limited. (e) Deregistered on 8 January 2015. (f) Control was obtained on 22 January 2015 when the Group acquired the remaining 50% ownership interest in MMP Holdings Pty Ltd. (g) Disposed on 30 January 2015. (h) On 1 July 2014, the Group disposed of 42.2% of RSVP.com.au Pty Limited. This investment was equity accounted from 1 July 2014. Refer to Note 8 for further details. (i) Deregistered on 14 July 2014. FAIRFAX MEDIA ANNUAL REPORT 2015 | 139 NOTES TO THE FINANCIAL STATEMENTS: OTHER FAIRFAX MEDIA LIMITED AND CONTROLLED ENTITIES FOR THE PERIOD ENDED 28 JUNE 2015 (G) DEED OF CROSS GUARANTEE Fairfax Media Limited and certain wholly-owned entities (the ‘Closed Group’) identified at (F) in this Note are parties to a Deed of Cross Guarantee under ASIC Class Order 98/1418 (as amended). Pursuant to the requirements of that Class Order, a summarised consolidated income statement for the period ended 28 June 2015 and consolidated balance sheet as at 28 June 2015, comprising the members of the Closed Group after eliminating all transactions between members are set out below: BALANCE SHEET CURRENT ASSETS Cash and cash equivalents Trade and other receivables Inventories Derivative assets Assets held for sale Other financial assets Total current assets NON-CURRENT ASSETS Receivables Investments accounted for using the equity method Available for sale investments Intangible assets Property, plant and equipment Derivative assets Deferred tax assets Pension assets Other financial assets Total non-current assets Total assets CURRENT LIABILITIES Payables Interest bearing liabilities Derivative liabilities Liabilities directly associated with held for sale assets Provisions Current tax liabilities Total current liabilities 140 28 JUNE 2015 $’000 29 JUNE 2014 $’000 305,104 221,740 21,307 - 64,297 1,384 613,832 171 87,828 7 1,176,198 254,006 16,902 76,647 951 820,028 2,432,738 3,046,570 13,891 27,101 3,912 - 114,466 20,635 180,005 444,707 230,103 20,674 213 83,784 4,858 784,339 1,248 87,667 2,488 1,141,818 341,196 1,551 84,773 - 574,070 2,234,811 3,019,150 103,074 119,721 13,278 4,202 99,958 3,132 343,365 NOTES TO THE FINANCIAL STATEMENTS: OTHER FAIRFAX MEDIA LIMITED AND CONTROLLED ENTITIES FOR THE PERIOD ENDED 28 JUNE 2015 NON-CURRENT LIABILITIES Interest bearing liabilities Derivative liabilities Provisions Pension liabilities Other non-current liabilities Total non-current liabilities Total liabilities Net assets EQUITY Contributed equity Reserves Retained losses Total equity INCOME STATEMENT Total revenue Share of net profits of associates and joint ventures Expenses before finance costs Finance costs Net profit from operations before income tax expense Income tax expense Net profit from operations after income tax expense 28 JUNE 2015 $’000 29 JUNE 2014 $’000 213,973 7,137 48,820 - 10,040 279,970 459,975 235,526 21,957 47,041 440 - 304,964 648,329 2,586,595 2,370,821 4,650,798 4,646,525 (203,254) (12,711) (1,860,949) (2,262,993) 2,586,595 2,370,821 28 JUNE 2015 $’000 29 JUNE 2014 $’000 1,404,364 1,637,018 1,038 8,012 (1,192,956) (1,350,936) (25,824) 186,622 (19,387) 167,235 12,040 306,134 (41,847) 264,287 FAIRFAX MEDIA ANNUAL REPORT 2015 | 141 NOTES TO THE FINANCIAL STATEMENTS: OTHER FAIRFAX MEDIA LIMITED AND CONTROLLED ENTITIES FOR THE PERIOD ENDED 28 JUNE 2015 29. NOTES TO THE CASH FLOW STATEMENT (A) RECONCILIATION OF NET PROFIT AFTER INCOME TAX EXPENSE TO NET CASH INFLOW FROM OPERATING ACTIVITIES NOTE 3(B) Net profit for the period NON-CASH ITEMS Depreciation and amortisation Impairment of property, plant and equipment, intangibles and investments Amortisation of borrowing costs Share of losses/(profits) of associates and joint ventures not received as dividends Straight-line rent adjustment Net gain on disposal of property, plant and equipment Net gain on disposal of investments and other assets Fair value adjustment to derivatives Net foreign currency gains Share-based payment expense Non-cash superannuation expense Gain on partial redemption of senior notes Other non-operating gains CHANGES IN OPERATING ASSETS AND LIABILITIES, NET OF EFFECTS FROM ACQUISITIONS (Increase)/decrease in trade receivables Decrease/(increase) in other receivables (Increase)/decrease in inventories Increase in other assets Decrease in payables Increase/(decrease) in provisions Increase in tax balances Net cash inflow from operating activities 28 JUNE 2015 $’000 29 JUNE 2014 $’000 87,205 225,168 64,982 35,055 492 7,483 (151) (1,226) (13,808) 2 (3,665) 5,298 (12) - (335) (1,306) 5,592 (1,206) (314) (10,446) 16,919 15,190 205,749 93,517 23,459 1,764 (3,266) 312 (121) (106,345) (157) (5,526) 3,870 (731) (10,183) - 8,751 (11,153) 5,916 (1,286) (3,287) (78,298) 29,078 171,482 142 NOTES TO THE FINANCIAL STATEMENTS: OTHER FAIRFAX MEDIA LIMITED AND CONTROLLED ENTITIES FOR THE PERIOD ENDED 28 JUNE 2015 (B) RECONCILIATION OF CASH AND CASH EQUIVALENTS Reconciliation of cash at end of the financial year (as shown in the Cash Flow Statement) to the related items in the financial statements is as follows: Cash on hand and at bank Total cash at end of the financial year ACCOUNTING POLICY NOTE 28 JUNE 2015 $’000 29 JUNE 2014 $’000 342,830 342,830 452,687 452,687 Cash and cash equivalents includes cash on hand, deposits held at call with financial institutions and other short term investments with original maturities of three months or less that are readily convertible to cash and subject to insignificant risk of changes in value. Bank overdrafts are shown within interest bearing liabilities in current liabilities on the balance sheet. FAIRFAX MEDIA ANNUAL REPORT 2015 | 143 NOTES TO THE FINANCIAL STATEMENTS: OTHER FAIRFAX MEDIA LIMITED AND CONTROLLED ENTITIES FOR THE PERIOD ENDED 28 JUNE 2015 30. SUMMARY OF SIGNIFICANT OTHER ACCOUNTING POLICIES The principal accounting policies adopted in the preparation of the financial report are set out below. These policies have been consistently applied to all the years presented, unless otherwise stated. The financial report is for the consolidated entity, consisting of Fairfax Media Limited and its controlled entities. Fairfax Media Limited was incorporated in Australia. (A) PRINCIPLES OF CONSOLIDATION (I) CONTROLLED ENTITIES Controlled entities are fully consolidated from the date on which control is transferred to the Group. They are de-consolidated from the date that control ceases. The acquisition method of accounting is used to account for business combinations by the Group (refer to Note 6). Intercompany transactions, balances and unrealised gains on transactions between Group entities are eliminated. Non-controlling interests in the earnings and equity of controlled entities are shown separately in the income statement, statement of comprehensive income, statement of changes in equity and balance sheet respectively. (B) FOREIGN CURRENCY (i) CURRENCY OF PRESENTATION All amounts are expressed in Australian dollars, which is the consolidated entity’s presentation currency. Items included in the financial statements of each of the Group’s entities are measured using the currency of the primary economic environment in which the entity operates (the functional currency). (ii) TRANSACTIONS AND BALANCES Foreign currency transactions are translated into the functional currency using the exchange rates prevailing at the dates of the transactions. Foreign exchange gains and losses resulting from the settlement of such transactions and from the translation of monetary assets and liabilities denominated in foreign currencies are generally recognised in the income statement. These are deferred in equity if they relate to qualifying cash flow hedges and qualifying net investment hedges, until the entity is disposed. Tax charges and credits attributable to exchange differences on borrowings are also recognised in equity. Non-monetary items that are measured at fair value in a foreign currency (i.e. available for sale financial assets) are translated using the exchange rates at the date when the fair value was determined. Translation differences on assets and liabilities carried at fair value are included in the asset revaluation reserve in equity. (iii) GROUP ENTITIES The results and financial position of all the Group entities that have a functional currency different from the presentation currency are translated into the presentation currency as follows: • assets and liabilities for each balance sheet presented are translated at the closing rate at the date of that balance sheet; • income and expenses for each income statement are translated at average monthly exchange rates during the financial year; and • all resulting exchange differences are recognised as a separate component of equity. On consolidation, exchange differences arising from the translation of the borrowings designated as hedges of the net investment in foreign entities are taken directly to a separate component of equity; the net investment hedge reserve. On disposal of a foreign entity, or when borrowings that form part of the net investment are repaid, the deferred cumulative amount of the exchange differences in the net investment hedge reserve relating to that foreign entity are recognised in the income statement as part of the gain or loss on sale. Goodwill and fair value adjustments arising on the acquisition of a foreign entity are treated as assets and liabilities of the foreign entity and translated at the closing rate. 144 NOTES TO THE FINANCIAL STATEMENTS: OTHER FAIRFAX MEDIA LIMITED AND CONTROLLED ENTITIES FOR THE PERIOD ENDED 28 JUNE 2015 (C) GOODS AND SERVICES TAX (GST) Revenues, expenses and assets are recognised net of the amount of GST except: (i) where the GST incurred on a purchase of goods and services is not recoverable from the taxation authority, in which case the GST is recognised as part of the cost of acquisition of the asset or as part of the expense item as applicable; and (ii) receivables and payables are stated with the amount of GST included. This net amount of GST recoverable from, or payable to, the taxation authority is included as part of receivables or payables in the balance sheet. Cashflows are included in the cash flow statement on a gross basis and the GST component of cashflows arising from investing and financing activities, which are recoverable from, or payable to the taxation authority are classified as operating cashflows. Commitments and contingencies are disclosed net of the amount of GST recoverable from, or payable to, the taxation authority. (D) NEW ACCOUNTING STANDARDS AND URGENT ISSUES GROUP (UIG) INTERPRETATIONS (i) CHANGES IN ACCOUNTING POLICY AND DISCLOSURE New standards and interpretations that are applicable for the first time for the June 2015 year end report are: • AASB 1031 Materiality • AASB 2012-3 Amendments to Australian Accounting Standards - Offsetting Financial Assets and Financial Liabilities • AASB 2013-3 Amendments to AASB 136 - Recoverable Amount Disclosures for Non-Financial Assets • AASB 2013-4 Amendments to Australian Accounting Standards – Novation of Derivatives and Continuation of Hedge Accounting • AASB 2013-9 Amendments to Australian Accounting Standards – Conceptual Framework, Materiality and Financial Instruments These standards have introduced new disclosures but did not affect the Group’s accounting policies or any of the amounts recognised in the financial statements. (ii) ACCOUNTING STANDARDS AND INTERPRETATIONS ISSUED BUT NOT YET EFFECTIVE Certain new accounting standards and interpretations have been published that are not mandatory for 28 June 2015 reporting periods. The Group has elected not to early adopt these new standards or amendments in the financial statements. The Group has yet to fully assess the impact the following accounting standards and amendments to accounting standards will have on the financial statements, when applied in future periods. They include: • AASB 9 Financial Instruments • AASB 15 Revenue from Contracts with Customers. Other standards and interpretations that have been issued but are not yet effective are not expected to have any significant impact on the Group’s financial statements in the year of their initial application. FAIRFAX MEDIA ANNUAL REPORT 2015 | 145 DIRECTOR’S DECLARATION In accordance with a resolution of the Directors of Fairfax Media Limited, we state that: 1. In the opinion of the Directors: (a) the financial statements and notes of the consolidated entity are in accordance with the Corporations Act 2001, including: (i) giving a true and fair view of the consolidated entity’s financial position as at 28 June 2015 and of its performance for the year ended on that date; and (ii) complying with Australian Accounting Standards and the Corporations Regulations 2001; (b) the financial statements and notes also comply with International Financial Reporting Standards as disclosed in Note 1; (c) there are reasonable grounds to believe that the Company will be able to pay its debts as and when they become due and payable; and (d) as at the date of this declaration, there are reasonable grounds to believe that the members of the Closed Group identified in Note 28 will be able to meet any obligations or liabilities to which they are or may become subject, by virtue of the Deed of Cross Guarantee. 2. This declaration has been made after receiving the declarations required to be made to the Directors from the Chief Executive Officer and the Chief Financial Officer in accordance with section 295A of the Corporations Act 2001 for the financial year ended 28 June 2015. On behalf of the Board Roger Corbett, AO Chairman 13 August 2015 Gregory Hywood Chief Executive Officer and Managing Director 13 August 2015 146 INDEPENDENT AUDITOR’S REPORT TO THE MEMBERS OF FAIRFAX MEDIA LIMITED FAIRFAX MEDIA ANNUAL REPORT 2015 | 147 INDEPENDENT AUDITOR’S REPORT TO THE MEMBERS OF FAIRFAX MEDIA LIMITED 148 FIVE YEAR PERFORMANCE SUMMARY FAIRFAX MEDIA LIMITED AND CONTROLLED ENTITIES AS AT 28 JUNE 2015 2015 2014 2013 2012 2012 2011 RESTATED* AS REPORTED 1,878.1 1,838.6 1,987.6 1,856.8 2,045.4 2,010.5 2,224.9 2,199.9 2,339.2 2,310.9 2,476.5 2,463.4 202.4 65.0 137.4 16.3 121.1 33.9 371.3 93.5 277.8 10.4 267.4 42.2 (119.2) (2,644.6) (2,558.6) 100.8 103.5 107.5 (220.0) (2,748.1) (2,666.1) 55.0 109.7 111.7 (274.9) (2,857.8) (2,777.8) 37.9 (73.0) (52.0) (80.7) 114.4 (195.0) 108.0 (303.1) 86.6 83.2 224.4 (16.4) (2,732.4) (2,732.4) (390.9) 143.6 157.8 128.0 205.4 205.4 283.8 2,066.4 2,823.3 283.0 1,990.7 2,781.5 355.2 1,816.2 3,016.7 638.2 2,042.7 2,042.7 4,006.6 4,006.6 1,207.4 1,207.4 4,438.7 6,700.6 1,532.0 2,383.4 28,120 2,352.0 30,071 11.0 7.5 3.5 6.1 8.6 4.0 114.3 17.8 13.7 7.0 0.85 20.0 15.0 9.5 6.7 7.3 4.0 42.1 30.0 17.8 7.9 0.93 2,352.0 34,805 (5.9) (10.9) (0.7) 2,352.0 2,352.0 2,352.0 35,174 35,174 37,974 (120.2) (124.9) (116.2) (110.7) (115.4) (116.2) (3.3) (7.9) (17.0) 5.4 7.9 2.0 - 5.8 35.1 7.0 0.50 8.7 11.4 3.0 - 3.8 59.1 10.1 0.58 8.7 11.6 11.4 3.0 - 4.5 59.1 10.1 0.58 18.3 3.0 - 5.6 34.5 6.4 0.98 INCOME STATEMENT Total revenue Revenues from operations Earnings/(loss) before depreciation, interest and tax (EBITDA) Depreciation and amortisation Earnings/(loss) before interest and tax Net interest expense Profit/(loss) before tax Income tax expense/(benefit) Net profit/(loss) attributable to members of the Company Net profit before significant items BALANCE SHEET Total equity Total assets Total borrowings STATISTICAL ANALYSIS Number of shares and debentures Number of shareholders EBITDA to operating revenue EBIT to operating revenue $m $m $m $m $m $m $m $m $m $m $m $m $m m % % Basic earnings/(loss) per share cents cents cents cents % Times % % $ Basic earnings per share before significant items Operating cash flow per share Dividend per share Dividend payout ratio Interest cover based on EBITDA before significant items Gearing Return on equity Market price per share Market capitalisation Number of full-time employees Number of part-time and casual employees $m 2,025.9 2,175.6 1,164.2 1,364.1 1,364.1 2,304.9 6,169 6,410 7,043 8,416 8,416 8,806 1,010 1,211 1,384 1,748 1,748 1,825 * 2012 ‘Restated’ figures reflect adjustments made to the 2012 ‘As Reported’ as a result of applying the discontinued operations standard AASB 5. For further details of discontinued operations, refer to Note 5 of the 2014 financial statements where the standard was applied. FAIRFAX MEDIA ANNUAL REPORT 2015 | 149 SHAREHOLDER INFORMATION FAIRFAX MEDIA LIMITED TWENTY LARGEST HOLDERS OF SECURITIES AT 7 AUGUST 2015 NUMBER OF SECURITIES 472,487,566 415,511,287 400,660,205 400,232,084 94,820,237 36,452,973 33,389,089 33,032,228 24,643,824 21,951,224 12,071,502 11,592,369 10,568,281 8,246,799 7,760,000 6,299,917 5,118,416 5,000,000 4,782,155 4,635,230 % 19.82 17.43 16.81 16.79 3.98 1.53 1.40 1.39 1.03 0.92 0.51 0.49 0.44 0.35 0.33 0.26 0.21 0.21 0.20 0.19 2,009,255,386 84.29 NUMBER OF SECURITIES 281 % 100 ORDINARY SHARES (FXJ) HSBC Custody Nominees (Australia) Limited JP Morgan Nominees Australia Limited National Nominees Limited Citicorp Nominees Pty Limited BNP Paribas Noms Pty Ltd AMP Life Limited Citicorp Nominees Pty Limited RBC Investor Services Australia Nominees Pty Limited UBS Nominees Pty Ltd HSBC Custody Nominees (Australia) Limited RBC Investor Services Australia Nominees P/L Pacific Custodians Pty Limited Share Direct Nominees Pty Ltd <10026 A/C> National Nominees Limited SBN Nominees Pty Limited <10004 ACCOUNT> RBC Investor Services Australia Nominees Pty Limited RBC Investor Services Australia Nominees Pty Limited Wilmar Enterprises Pty Ltd UBS Nominees Pty Ltd HSBC Custody Nominees (Australia) Limited - A/C 3 DEBENTURES National Financial Services Corp. OPTIONS There were no options exercisable at the end of the financial year. 150 SHAREHOLDER INFORMATION FAIRFAX MEDIA LIMITED SUBSTANTIAL SHAREHOLDERS Substantial shareholders as shown in substantial shareholder notices received by the Company as at 7 August 2015 are: Morgan Stanley & Co IOOF Holdings Limited Ausbil Dexia Limited SAS Trustee Corporation Dimensional Fund Advisors Group DISTRIBUTION OF HOLDINGS AT 7 AUGUST 2015 NO. OF SECURITIES 1 – 1,000 1,001 – 5,000 5,001 – 10,000 10,001 – 100,000 100,001 and over Total number of holders Number of holders holding less than a marketable parcel VOTING RIGHTS ORDINARY SHARES 358,946,063 154,618,018 149,340,606 118,279,205 117,713,482 NO. OF ORDINARY SHAREHOLDERS NO. OF DEBENTURE SHAREHOLDERS 8,127 11,132 3,922 4,584 341 28,106 5,136 1 – – – – 1 – Voting rights of ordinary shareholders are governed by Rules 5.8 and 5.9 of the Company’s Constitution which provide that every member present personally or by proxy, attorney or representative shall on a show of hands have one vote and on a poll, shall have one vote for every share held. Debentures do not carry any voting rights. FAIRFAX MEDIA ANNUAL REPORT 2015 | 151 DIRECTORY FAIRFAX MEDIA LIMITED ANNUAL GENERAL MEETING SECURITIES EXCHANGE LISTING The Annual General Meeting will be held at 10.30am on Thursday, 5 November 2015 at the Heritage Ballroom Level 6, The Westin Sydney No. 1 Martin Place Sydney NSW 2000 FINANCIAL CALENDAR 2016 Interim result February 2016 Preliminary final result August 2016 Annual General Meeting November 2016 COMPANY SECRETARY Gail Hambly REGISTERED OFFICE 1 Darling Island Road, Pyrmont NSW 2009 Ph: +61 2 9282 2833 Fax: +61 2 9282 1633 SHARE REGISTRY Link Market Services Limited Level 12 680 George Street Sydney NSW 2000 Ph: 1300 888 062 (toll free within Australia) Ph: +61 2 8280 7670 Fax: +61 2 9287 0303 Email: registrars@linkmarketservices.com.au Website: www.linkmarketservices.com.au The Company’s ordinary shares are listed on the Australian Securities Exchange as FXJ. WEBSITE Corporate information and the Fairfax annual report can be found via the Company’s website at www.fairfaxmedia.com.au. The Company’s family of websites can be accessed through www.fairfaxmedia.com.au HOW TO OBTAIN THE FAIRFAX ANNUAL REPORT A soft copy of the annual report is available at www.fairfaxmedia.com.au. To obtain a hard copy of the report, contact Link Market Services – see contact details under Share Registry. CONSOLIDATION OF SHAREHOLDINGS Shareholders who wish to consolidate their separate shareholdings into one account should advise the Share Registry in writing via post or email. DIRECT PAYMENT TO SHAREHOLDERS’ ACCOUNTS The Company pays dividends by direct credit to shareholders’ bank accounts. The Company no longer issues cheques except in exceptional circumstances. A direct credit form can be obtained from the Share Registry. Payments are electronically credited on the dividend date and confirmed by a mailed payment advice either by post or email. Shareholders are advised to notify the Share Registry (although it is not obligatory) of their tax file number so that dividends can be paid without tax being withheld. 152 F A I R F A X M E D I A A N N U A L R E P O R T 2 0 1 5 G R O W . T R A N S F O R M . I N V E S T . INDEPENDENT. ALWAYS. FAIRFAX MEDIA LIMITED GPO 506 SYDNEY NSW 2001 | 1 DARLING ISLAND ROAD PYRMONT NSW 2009 | T: +61 2 9282 2833 WWW.FAIRFAXMEDIA.COM.AU @FAIRFAXMEDIA 

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