Green Minerals
Annual Report 2016

Plain-text annual report

Annual Report 2016 Brands A s a f e p l a c e f o r c h i l d r e n t o g r o w Kinder Haven Committed to growing the whole chi ld Casa Bambini Early Education Centre Early Learning Services  Mission Our mission is to be Australia’s leading provider of high quality, developmental and educational child care services. We seek to achieve this through our four pillars for growth and sustainability: Quality Education & Care To nurture and develop childrens’ minds, social skills and confidence in a safe and stimulating environment. Employees To commit to employee development and a rewarding culture which will ensure an engaged and driven workforce. Community To be responsive to local families and deliver upon community expectations. Profitability To grow and derive value for shareholders through innovative services, systems and management. 2 G8 Education limited | Annual Report 2016 Contents Chairman’s Report Managing Director’s Report Key Operational Information Section One Directors’ Report Section Two Financial Report Independent Audit Report Shareholder Information Corporate Directory 6 7 9 11 37 103 112 114 3 G8 Education limited | Annual Report 2016 At a glance Revenue ($m) $778.5m Earnings Before Interest and Tax ($m) $160.7m $778.5 $706.2 $491.3 $275.2 $179.9 2012 2013 2014 2015 2016 $160.4 $160.7 $106.0 $47.4 $27.0 2012 2013 2014 2015 2016 $88.6 $80.3 Net Profit After Tax ($m) $80.3m $52.7 $31.1 $19.2 2012 2013 2014 2015 2016 24.3c 21.2c 16.2c 11.3c 8.9c 2012 2013 2014 2015 2016 Earnings Per Share (CPS) 21.2c From a financial perspective, the Group continued to generate good level of growth for shareholders. Revenues increased 10% to $778 million, underlying earnings before interest and tax rose 10% to $161 million and underlying net profit after tax increased by 7% to $93 million. The Group generated $109 million of cash from operations and returned $91 million in dividends to shareholders. In December 2016 the Group announced a change in executive leadership, with our CFO, Gary Carroll, being appointed as CEO and Managing Director from 1 January 2017. Chris Scott, our Managing Director from 2010, transferred to an Executive Director role and will be assisting Gary in his transition to the new role. I would like to take the opportunity to thank Chris for the outstanding contribution that he has made to G8 over the last 6+ years. His vision, energy, leadership and commercial acumen have driven the Group to be the leading player in the sector and have laid an outstanding platform for the future. As we look forward to 2017 we feel strongly that we are positioned well to take advantage of any opportunities that may arise whilst maintaining our high levels of service provision to Australia’s communities. 2017 is likely to be another exciting year for the Group. On behalf of the Board, I would like to take this opportunity to thank all of our shareholders, employees and customers for their ongoing support in 2017. Yours sincerely, Mark Johnson Chairman Chairman’s Report Dear Shareholders, On behalf of the Board, I am pleased to present the G8 Education Limited 2016 Annual Report. During 2016, the Group has maintained a balance between growing our network and continuously improving the quality of our existing services. In 2016 we acquired 19 early education centres in Australia and 2 in Singapore, bringing the total number of centres as at 31 December 2016 to 490 in Australia and 20 in Singapore. These centres provide a total combined licenced capacity of 38,713 places. in 2015, the centres were As was the case predominantly premium in metropolitan areas, all of which were subjected to the Group’s rigorous screening and due diligence disciplines prior to settlement. located centres Our ability to integrate acquired centres in a seamless, efficient manner has long been one of our core competencies and I am pleased to report that 2016 was a year of real achievement in this area. In addition, continued investment in our Support Office systems and a focus on utilising technology has enabled us to enhance the experience that our families receive in our G8 centres. During the year we rolled out an application that provides parents their children’s experience with updates of throughout each day, providing significantly enhanced information and connectivity for our families. With over 75,000 children attending our services in any given week and over 10,000 employees educating and caring for those children our responsibilities to the families and communities from which they come is paramount. Our vision – Partnering with you to inspire the next generation – reinforces this point. Our focus on ensuring that our centre based teams are appropriately resourced, trained and supported is essential to us maintaining our position as Australia’s leading for profit early education provider. In that regard I am pleased to report that capital investment in our centres was at record levels this year, increasing by 19% from the prior year. We have also continued to in our professional and leadership development programs across both centre and support office teams. invest significantly 6 G8 Education limited | Annual Report 2016  Section 01 Directors’ Report Directors’ Report Auditor’s Independence Declaration 11 34 10 G8 Education limited | Annual Report 2016 Managing Director’s Report Dear Shareholders, 2016 was a year in which G8 Education solidified its position as the leading for profit child care and early in Australia, and built the education provider foundations for the sustainable growth of the Group. With our position as the trusted provider of care and education for more than 75,000 children each week, it is vital that we continue to evolve our services and engagement with families to ensure we are meeting the needs of children and parents. 2016 saw the roll-out of the Net Promoter Score (“NPS”) process to enable us to clearly measure customer engagement levels and capture valuable improve our relationships with families. Opportunities to improve our operational processes to make it easier for families to interact with centres were identified as part of NPS, with a number being implemented during 2016 with good results. We look forward to continuing the journey to being a truly customer-centric organisation in 2017 and beyond. ideas on how to The key to our success as an organisation is the quality, skill and commitment of our team members. 2016 saw the roll-out of our core values – Passion, Integrity, Compassion, Innovation and Dedication. Embedding these core values in all our centres and support office will enable the formation of a single culture, combining the strengths of the brands we have purchased over the last 6+ years into a single, unified organisation. As well as building on our cultural foundation, 2016 was a year in which the Group increased its investment in training its team, from both a professional and leadership perspective. We are confident that building the professional skill of our teams will improve the quality of services offered to our families every day, while the development of a deep pool of quality leadership talent will assist in maintaining and building our existing leading position in the market. From an operational perspective, the Group acquired a further 21 early education centres in 2016. Our acquisition strategy continues to focus on opportunities in and around metropolitan areas where supply and demand dynamics combined with attractive pricing create the right conditions for earnings accretive acquisitions. 7 G8 Education limited | Annual Report 2016 It is pleasing to report that the acquisitions completed in2016 are performing in line with expectations. By year end 2016, the Group’s total portfolio comprised 510 centres with capacity of 38,713 licensed places. challenges. albeit not without 2016 continued to deliver good financial results for the Group, The implementation of the last phase of National Quality Framework changes to staff to children ratios occurred at the start of 2016, adversely impacting on results for the first half of the year. The Group managed to implement a number of operational process improvements during the year to improve second half performance. The end result was that underlying net profit after tax rose 7% to $93 million, off the back of a 10% rise in revenues to $778 million. The Group’s ability to convert earnings before interest, tax, depreciation and amortisation (“EBITDA”) to cash remained strong with 97% cash conversion in 2016, generating operating cash flows of $109 million. During 2016, the Group also improved its capital structure by increasing the tenor of its borrowings via a S$270 million bond issue that was completed in May 2016. The foreign currency exposure relating to the bonds has been fully hedged, mitigating any impact on the Group’s reported results. Outlook for 2017 We continue to believe there are significant organic and acquisition growth opportunities for the Group. Our growth strategy contains the following key elements:  Driving occupancy in existing centres through development of a differentiated offer focused on the customer experience and providing value for families. To facilitate this, the Group will be implementing a new Customer Relationship Management (“CRM”) platform to enhance all our communications with existing and new families;  Continuing to grow our network of child care centres through acquisition and greenfield development, working with our established providers who continue to produce quality assets at reasonable prices;  Developing new revenue streams for existing and new centres that deliver enhanced value to our families and better utilise our existing assets; and  Engaging and developing our team through a series of initiatives such as enhanced leadership training and re-engineering our incentive framework. To support our strategy, in February 2017 the Group announced raising approximately $212 million from a share placement to a subsidiary of China First Capital Group, a Hong Kong-listed investment company. The funding raised from the issue will enable the Group to repay a portion of its A$ bond and bank debt facilities as well as assisting in funding the acquisition of additional child care centres. With this funding in place, and a clear strategy that is supported by a passionate and capable team, we believe we are well placed to deliver sustainable value to children, families and our shareholders in the years ahead. Yours sincerely, Gary Carroll CEO and Managing Director 8 G8 Education limited | Annual Report 2016 Key Operational Information Number of owned centres at year end Licence capacity of owned centres at year end Total Number of employees at year end Total number of full time equivalent employees at year end Consolidated Group 510 38,713 10,052 7,258 Underlying Net Profit After Tax Reconciliation (Unaudited, Non IFRS) Consolidated Year end 31 December Revenue# Expenses Net Financing Cost Net Profit Before Tax Net Profit After Tax Add/(Less) non-operating transactions: Deferred consideration not paid* Acquisition expenses Share based payment expense * Write off of borrowing costs on refinance*^ Profit on sale of financial assets^ Foreign currency translation loss*^ Underlying Net Profit After Tax Underlying EPS (cents per share)^^ Earnings Before Interest and Tax Add/(Less) non-operating transactions: Deferred consideration not paid Acquisition expenses Share based payment expense Profit on sale of financial assets Underlying Earnings Before Interest and Tax^^^ 2016 $'000 777,470 (616,779) (46,022) 114,669 80,265 (2,500) 2,574 (105) 7,474 - 5,634 93,342 24.68 160,691 (2,500) 2,574 (105) - 160,660 2015 $'000 704,548 (543,124) (37,651) 123,772 88,581 (5,755) 916 344 2,010 (7,343) 8,378 87,131 23.87 161,423 (5,755) 916 344 (10,490) 146,438 Variance 10% 14% 22% -7% -9% 7% 3% 10% #Adjustment for interest income of $1.0m excluded from revenue and included in financing costs (2015 $2.6m). *Non-Cash adjustments. ^Tax adjusted ^^Underlying EPS equals Underlying NPAT divided by weighted average number of shares ^^^Underlying EBIT equals NPAT plus income tax expense plus net finance costs plus non-operating transactions 9 G8 Education limited | Annual Report 2016 Directors’ Report The Directors present their report on the consolidated entity (referred to hereafter as the Group) consisting of G8 Education Limited and the entities it controlled at the end of, or during, the year ended 31 December 2016. All of the following persons were Directors of G8 Education Limited during the financial year and up to the date of this report unless otherwise stated Mark Johnson Mark Johnson is an experienced chairman and company director with a diverse portfolio, including Chairman of MH Premium Farms Holdings Pty Ltd, Director of Westfield Corporation, Director of HSBC Bank Australia Limited, Director of Coca-Cola Amatil Limited, Director of The Hospitals Contribution Fund of Australia Limited (HCF) and Councillor – St Aloysius’ College. B. Comm, FCA, CPA, FAICD Chairman Independent Non-Executive Director since 1 January 2016 Gary Carroll B.Comm (Hons), B.Law (Hons), CPA Managing Director/CEO since 1 January 2017 Christopher Scott B.Econ (Hons) Managing Director from 25 March 2010 to 31 December 2016 Executive Director since 1 January 2017 Prior to embarking on his Board career, Mr Johnson was the Chief Executive Officer and Senior Partner of PricewaterhouseCoopers (PwC), one of Australia’s leading professional services firms, from July 2008 to June 2012. His former roles include Chairman of the PwC Foundation, member of the Auditing and Assurance Board and Deputy Chair of the Finance and Reporting Committee at the Australian Institute of Company Directors. Mr Johnson is a Fellow of the Institute of Chartered Accountants and the Australian Institute of Company Directors, and holds a Bachelor of Commerce from the University of NSW. Special responsibilities: Chair of the Nomination Committee, Member of the Audit and Risk Management Committee and People and Culture Committee Other current listed public Company Directorships: Westfield Corporation Limited (appointed 30 June 2014) and Westfield Holdings Limited (appointed 29 May 2013 until 30 June 2014). Coca-Cola Amatil Limited (appointed 06 December 2016) Former listed public Company Directorships in the last three years: Nil Gary Carroll was appointed as Managing Director and CEO on 1 January 2017, having previously served as Chief Financial Officer for the Group from 25 July 2016. Prior to joining G8, Gary had over 15 years’ experience in senior leadership roles across multiple industries, including being Chief Financial Officer and Chief Supply Chain Officer at Super Retail Group Limited. Mr Carroll holds Bachelor of Commerce (Hons) and Bachelor of Law (Honours) degrees from the University of Queensland, and is a Fellow of CPA Australia. Special responsibilities: Member Nomination Committee Other current listed public Company Directorships: Nil Former listed public Company Directorships in the last three years: Nil Chris Scott has over 25 years experience in senior management positions. He has spent over 30 years in business in Singapore where he was involved in a number of successful businesses. Chris was also the founder and Managing Director of ASX listed S8 which was an integrated travel Company that acquired 36 businesses over a 5 year period and was capitalised at $700 million. His operational, analytical and strategic skills are critical in the selection of potential acquisitions and operational management. Special responsibilities: Member Nomination Committee Other current listed public Company Directorships: Nil Former listed public Company Directorships in the last three years: Nil 11 G8 Education limited | Annual Report 2016 Brian Bailison B.Com., B.Acc (Cum Laude), ACA Independent Non- Executive Director Audit Committee Chair since 25 March 2010 Matthew Reynolds B.Sc (Hons), LLB (Hons), MQLS Independent Non- Executive Director since 17 March 2015 Susan Forrester BA, LLB (Hons) EMBA, FAICD Independent Non- Executive Director since 1 November 2011 Brian Bailison has over 20 years experience in finance, corporate finance and operations from senior roles in listed and unlisted businesses in South Africa and Australia, including senior positions at Rand-Merchant Bank Limited (South Africa’s largest bank-assurance business), the Ivany Investment Group (diversified investment Group) and Payce Consolidated Limited which operated 59 child care centres prior to them being acquired by the Company. Special responsibilities: Chair Audit and Risk Management Committee and Member of the Nomination Committee Other current listed public Company Directorships: Nil Former listed public Company Directorships in the last three years: Nil Matthew is leading a partner in HWL Ebsworth Lawyers national corporate team. He specialises in debt and equity capital markets, mergers and acquisitions and private equity spanning over 20 years. Matthew provides tailored structuring and strategic legal advice to businesses in Australia and throughout Asia particularly the People’s Republic of China. Matthew has been recognised as a leading lawyer in M&A by Chambers & Partners, Legal 500 and by the Australian Financial Review as one of Australia’s best lawyers in the fields of debt capital markets and leveraged buyouts.. Special responsibilities: Member of the Nomination Committee and People and Culture Committee Other current listed public Company Directorships: Bubs Australia Limited (appointed 20 December 2016) and Axsesstoday Limited (appointment date 21 December 2016) Former listed public Company Directorships in the last three years: Nil Susan Forrester is an experienced Chair and Company Director with a diverse portfolio career. She has a valuable blend of commercial, legal and executive management experience gained across public and private organisations. She is currently chair for National Veterinary Care Ltd and Oncore Group Holdings Pty Ltd and is a non-executive director of Over the Wire Group Ltd, Xenith IP Ltd and Uniting Care Qld. She serves as Independent Chair of the Audit Committee of Transport and Main Roads Qld. Special responsibilities: Chair of the People and Culture Committee and Member of the Nomination Committee Other current listed public Company Directorships: Over the Wire Ltd (appointed 1 November 2015), Xenith IP Ltd (appointed 1 October 2015) and National Veterinary Care Ltd (appointed 1 February 2015) Former listed public Company Directorships in the last three years: Nil David Foster B.App.Sci, MBA, GAICD, SFFin Independent Non- Executive Director since 1 February 2016 David Foster enjoyed a successful career in financial services spanning over 25 years. His last executive role was as Chief Executive Officer of Suncorp Bank, Australia’s 5th largest bank. Since leaving Suncorp, Mr Foster has further developed his career as an experienced Non-Executive Director with a portfolio of Board roles across a diverse range of industries including financial services, retailing, local government, education and professional services. He currently serves as Chairman of Motor Cycle Holdings Limited and Director of Genworth Mortgage Insurance Australia Limited and is a Director on the Boards of the Thorn Group Limited and Kina Securities Limited and chairs both their Audit and Risk Committees. Special responsibilities: Member of Audit and Risk Management Committee and Nomination Committee Other current listed public Company Directorships: Motor Cycle Holdings Limited (appointed 08 March 2015), Thorn Group Limited (appointed 1 December 2014), Kina Securities Limited (appointed 1 May 2015) and Genworth Mortgage Insurance Australia Limited (appointed 30 May 2016) Former listed public Company Directorships in the last three years: Nil 12 G8 Education limited | Annual Report 2016 Chief Executive Officer Gary Carroll was appointed as Managing Director and Chief Executive Officer on 1 January 2017. He is responsible for managing the external and internal operations of the Group and providing consistent high level advice to the Board on operations, policy and planning S$600m Multicurrency Debt Issuance Programme established on 2 May 2014. Matters subsequent to the end of the financial year The following material matters have taken place subsequent to year end: Gary has over 15 years’ experience in senior leadership roles covering a number of industries.  Gary Carroll was appointed Managing Director and Chief Executive Officer on 1 January 2017.  Sarah Zeljko was appointed Company Secretary on 16 January 2017.  Sharyn Williams was appointed Chief Financial Officer on 6 February 2017.  To support our strategy, in February 2017 the Group announced raising approximately $212 million from a share placement to a subsidiary of China First Capital Group, a Hong Kong-listed investment company  In accordance with the terms of the executive share plan a third of the shares issued will be cancelled by the Group as the underlying EPS growth did not exceed 15% as required by the terms of the plan. Accordingly this will decrease the number of shares in the executive share plan. The Group plans to discontinue the Executive Share Plan, which was in place for the full year in 2016 and will implement the new LTI scheme subject to shareholder approval. Likely developments and expected results of operations The Group will continue to pursue its objectives of increasing the profitability and the market share of its child care business during the next financial year. This will be achieved through organic and acquisition led growth. is of a kind referred to Rounding Amounts The Company in ASIC Corporations (Rounding in Financial/Directors’ reports) Instrument 2016/191, relating to the “rounding off” of amounts in the financial reports. Amounts in the financial statements have been rounded off in accordance with that Instrument to the nearest thousand dollars, or in certain cases, the nearest dollar. Jason Roberts was Chief Executive Officer at 31 December 2016. He has been appointed as General Manager Business Developments from 1 January 2017. Company Secretary Sarah Zeljko was appointed as Company Secretary and General Counsel on 16 January 2017. She is responsible Facilities for Management, Risk Management, Insurance and Company Secretarial functions for the Group. Legal, Compliance, Safety, the Gary Carroll was Company Secretary at 31 December 2016. Maria Forgione was Company Secretary from 19 April 2016 to 18 October 2016. Chris Sacre resigned as Company Secretary on 27 May 2016. Principal activities The principal continuing activities of the Group during the year were:  Operation of early education centres owned by the Group; and  Ownership of early education centre franchises. There has been no significant change to the Group’s activities during the financial year ended 31 December 2016. Review of operations Information on the operations and financial position of the Group and its business strategies and prospects are set out in the Chairman’s and Managing Director’s Reports. Significant changes in the state of affairs Significant changes in the state of affairs of the Group during the year were as follows:  Acquired an additional 19 child care centres in Australia and 2 in Singapore.  In May 2016 the Group repaid the Series 001 S$260m unsecured notes by raising S$270m pursuant to its third issue of Series 003 unsecured notes under its 13 G8 Education limited | Annual Report 2016 Dividends Dividends declared or paid during the financial year were as follows: Dividends Declared or paid during the financial year were as follows: Dividend for the quarter ended 31 March 2016 of 6.0 cents per share (2015: 6.0 cents per share) paid on 8 April 2016 (2015: Paid on 10 April 2015) Dividend for the quarter ended 30 June 2016 of 6.0 cents per share (2015: 6.0 cents per share) paid on 8 July 2016 (2015: Paid on 7 July 2015) 2016 $'000 2015 $'000 22,481 21,549 22,616 21,903 Dividend for the quarter ended 30 September 2016 of 6.0 cents per share (2015: 6.0 cents per share) paid on 7 October 2016 (2015: Paid on 7 October 2015) 22,772 22,070 Dividend for the quarter ended 31 December 2016 of 6.0 cents per share (2015: 6.0 cents per share) paid on 6 January 2017 (2015: Paid 11 January 2016) 22,950 22,369 Meeting of Directors The number of meetings of the Company’s Board of Directors and of each Board Committee held during the year ended 31 December 2016, and the number of meetings attended by each Director were: Full meetings of Directors A 11 11 11 11 10 10 B 11 11 11 11 11 11 Audit and Risk Management Committee B A 4 - - 4 - 4 4 - - 4 - 4 Nomination Committee People and Culture Committee A 2 2 2 2 2 2 B 2 2 2 2 2 2 A 2 - 2 - 2 - B 2 - 2 - 2 - M Johnson C Scott M Reynolds B Bailison S Forrester D Foster A = Number of meetings attended B = Number of meetings held during the time the Director held office or was a member of the committee during the year Environmental regulation The Group is subject to and complies with environmental regulations under State Legislation in the management of its operations. The Group does not engage in activities that have particular potential for environmental harm. No incidents have been recorded and the Directors are not aware of any environmental issues which have had, or are likely to have, a material impact on the Group’s business. Insurance of Officers and Auditors During the year, the Group paid a premium to insure the Directors and Officers of the Company and its controlled entities. Under the terms of the policy the amount of the premium and the nature of the liability cannot be disclosed. The liabilities insured are legal costs that may be incurred in defending civil or criminal proceedings that may be brought against the Officers in their capacity as Officers of entities in the Group and any other payments arising from liabilities incurred by the Officers in connection with such proceedings. This does not include such liabilities that arise from conduct involving willful breach of duty of the Officers or the 14 G8 Education limited | Annual Report 2016 improper use by the Officers of their position or of information to gain advantage for themselves or someone else or to cause detriment to the Group. It is not possible to apportion the premium between the amounts relating to the insurance against legal costs and those relating to other liabilities. No insurance premiums or indemnities have been paid for or agreed by the Group for the current or former auditors. Indemnification of auditors To the extent permitted by law, the Group has agreed to indemnify its auditors, Ernst & Young Australia, as part of the terms of its audit agreement against claims by third parties arising from the audit (for an unspecified amount). No payment has been made to indemnify Ernst & Young during or since the financial year. Ernst & Young provide an annual declaration of their independence to the ARM Committee in accordance with the requirements of the Corporations Act 2001. 15 G8 Education limited | Annual Report 2016 Remuneration Report Audited Contents Section Title Description 1 2 3 4 5 6 Introduction Describes the scope of the Remuneration Report and the individuals whose remuneration details are disclosed together with a summary of the key changes during the year. Remuneration governance Describes the role of the Board and the People and Culture Committee, and the use of remuneration consultants when making remuneration decisions. Non-executive director remuneration Provides details regarding the fees paid to non-executive directors. Executive remuneration Outlines the principles and strategy applied to executive remuneration decisions and the framework used to deliver rewards including the performance and remuneration linkages. KMP equity interests Provides details regarding shareholdings in G8 Education Limited of KMP. Employment agreements Provides details regarding the contractual arrangements between the G8 Education and the executives whose remuneration details are disclosed. 16 G8 Education limited | Annual Report 2016 1. Introduction G8 Education Limited (G8 Education) has a firm belief that attracting, developing, engaging and retaining passionate, capable team members will provide the Group with a sustainable advantage over the long term. Building and maintaining a culture and implementing people systems to support such a belief and culture are strategic priorities for the Group. The relevant people systems are attraction, learning and development, engagement, workplace health and safety, talent and succession management, and remuneration and benefits. The Board’s philosophy and approach to executive remuneration have always been to balance fair remuneration for skills and expertise with a risk and reward framework that supports longer-term growth and sustainability of G8 Education as a geographically diverse business. At the end of 2015 the Board appointed PwC to assist in benchmarking Board and Senior Executive Remuneration. The review highlighted the need to implement changes across two areas. Firstly to lift base remuneration where necessary with immediate effect through 2016 and secondly to redesign and implement new STI and LTI programs. In the case of the base remuneration the intent was agreed to pay at market median with upside all being delivered through the STI and LTI programs linked to closely to challenging performance goals. This leaves the following key initiatives to be implemented during 2017:  Introduction of a Short-term Incentive (“STI”) scheme for the CEO and other executive KMP that provides cash rewards and equity rewards subject to deferral for the achievement of performance targets that are consistent with the Group’s approved business plan and that are aligned to delivering sustainable value to shareholders.  Underpinning the STI scheme is the introduction of a new Key Performance Indicator (“KPI”) framework. The CEO and other executive KMP have KPI targets that cover achievement of financial and operational performance metrics and strategic plan implementation milestones across four areas: Team, Safety, Performance and Customer. The level of reward available under the STI scheme is dependent on the achievement of KPI targets.  Replacement of the Executive Share Plan that was approved by shareholders on 21 May 2015 with a Long-Term Incentive (“LTI”) scheme, subject to approval by shareholders in May 2017. The Company’s view is that the proposed new LTI scheme, which is detailed in section 4 below, will provide a stronger linkage between long-term performance and KMP remuneration than the previous Executive Share Plan. The STI scheme and supporting KPI framework were finalised in February 2017, and are applicable for the years commencing 1 January 2017. For the 2016 financial year, the Board has exercised discretion in determining the short-term incentive payments for executive KMP based individual performance. Performance assessment related to financial and operating areas relevant to each executive KMP. The changes to be adopted in 2017 are under constant review. Any further material Board or executive KMP remuneration strategy changes will be advised. The Board believes, G8 Education’s approach to Board and executive KMP remuneration is a balanced, fair and equitable approach designed to reward and motivate a successful and experienced executive team to deliver ongoing business growth which is designed meets the expectations of all shareholders. The Board will continue to welcome feedback from shareholders on our remuneration practices or on the communication of remuneration matters in the 2016 Remuneration Report and beyond. Scope This Remuneration Report sets out, in accordance with the relevant Corporations Act 2001 (Corporations Act) and accounting standard requirements, the remuneration arrangements in place for key management personnel (KMP) during 2016. 17 G8 Education limited | Annual Report 2016 Key management personnel KMP have authority and responsibility for planning, directing and controlling the activities of G8 Education and comprise the non-executive directors, and executive KMP (being the executive directors and other senior executives named in this report). Details of the KMP as at year end are set out in the table below: Title (at year end)/Committees Change in 2016 Non-executive directors Mark Johnson Chairman No Change. Full Year Member, Audit & Risk Management Chairman, Nomination Member, People & Culture Brian Bailison Director No Change. Full Year Chairman, Audit & Risk Management Member, Nomination Susan Forrester Director No Change. Full Year Member, Nomination Chairman, People & Culture Matthew Reynolds Director No Change. Full Year Member, Nomination Member, People & Culture David Foster Director Member, Nomination Member, Audit & Risk Management Executive directors Christopher Scott Gary Carroll Other executive KMP Managing Director Member, Nomination CEO and Managing Director Member, Nomination Jason Roberts Chief Executive Officer Gary Carroll Chief Financial Officer Ann Perriam Executive officer Christopher Sacre Chief Financial Officer Commenced with Group as Non-Executive Director on 1 February 2016 No change. Full year. Resigned as Managing Director on 1 January 2017, continues as Executive Director Appointed 1 January 2017 No change. Full year. Ceased CEO on 1 January 2017. Appointed GM – Development on 1 January 2017 Commenced with Group and as KMP on 25 July 2016, appointed CEO and MD on 1 January 2017 Ceased as KMP on 1 January 2017. Appointed Commercial Manager Developments on 1 January 2017 Resigned effective 27 May 2016 and ceased as KMP on this date 18 G8 Education limited | Annual Report 2016 2. Remuneration governance This section of the Remuneration Report describes the role of the Board and the People and Culture Committee, and the use of remuneration consultants when making remuneration decisions affecting KMP. Role of the Board and the People and Culture Committee The Board is responsible for G8 Education’s remuneration strategy and policies. Consistent with this responsibility, the Board has established the People & Culture Committee (PCC) which comprises solely independent non- executive directors (NEDs). The role of the PCC is set out in its Charter, which is reviewed annually and was last revised and approved by the Board in December 2016. In summary, the PCC’s role is to:  ensure that the appropriate procedures exist to assess the remuneration levels of the Chairman, other NEDs, executive directors, direct reports to the CEO, Board Committees and the Board as a whole;  ensure that G8 Education meets the requirements of Australian Securities Exchange (ASX) diversity and other relevant Guidelines;  ensure that G8 Education adopts, monitors and applies appropriate remuneration policies and procedures;  ensure that reporting disclosures related to remuneration meet the Board’s disclosure objectives and all relevant legal requirements;  develop, maintain and monitor appropriate talent management programs including succession planning, recruitment, development; and retention and termination policies and procedures for senior management; and develop, maintain and monitor appropriate superannuation arrangements for G8 Education. The PCC’s role and interaction with Board, internal and external advisors, are further illustrated below: The Board Reviews, applies judgment and, as appropriate, approves the PCC’s recommendations The People & Culture(“PCC”) The PCC operates under the delegated authority of the Board. The PCC is empowered to source any internal resources and obtain external independent professional advice it considers necessary to enable it to make recommendations to the Board on the following: Remuneration policy, composition and quantum of remuneration components for executive KMP, and performance targets Remuneration policy in respect of NEDs Talent management policies and practices including superannuation arrangements Design features of employee and executive STI and LTI plan awards, including setting of performance and other vesting conditions External consultants Internal resources Further information on the PCC’s role, responsibilities and membership is contained in the Corporate Governance Report of this Annual Report. The PCC terms of reference can also be viewed in the Investor Centre, Corporate Governance section of the G8 Education website. 19 G8 Education limited | Annual Report 2016 Use of remuneration consultants All proposed remuneration consultancy contracts (within the meaning of section 206K of the Corporations Act) are subject to prior approval by the Board or the PCC in accordance with the Corporations Act. During the 2016 financial year, G8 Education used the following remuneration consultants: 1. PwC, who were appointed by the PCC in December 2015 to undertake a comprehensive review of the Group’s executive remuneration framework with a view to establishing a competitive remuneration framework that encourages sustainable business performance and alignment between KMP remuneration and shareholder returns. 2. Crichton & Associates Pty Limited, who were appointed by the PCC in October 2016 to assist in documenting the proposed STI and LTI schemes that flowed from the PwC review, including benchmarking the schemes against comparable companies and reviewing remuneration report disclosures. The remuneration advice was general in nature and not considered to be remuneration advice in accordance with the Corporations Act. 3. Non-executive director “NED” remuneration NED remuneration Principle Comment Fees are set by reference to key considerations Remuneration is structured to preserve independence whilst creating alignment Aggregate Board and committee fees are approved by shareholders Fees for NEDs are based on the nature of the NEDs’ work and their responsibilities. The remuneration rates reflect the complexity of G8 Education’s business and the extent of the number of geographical locations in which G8 Education operates. In determining the level of fees, survey data on comparable companies is considered. NEDs’ fees are recommended by the PCC and determined by the Board. Shareholders approve the aggregate amount available for the remuneration of NEDs. To preserve independence and impartiality, NEDs are not entitled to any form of incentive payments including options and the level of their fees is not set with reference to any measure of G8 Education performance. However, to create alignment between directors and shareholders, the Board has adopted guidelines that request NEDs to hold (or have a benefit in) shares in G8 Education equivalent in value to at least one year’s base fees. G8 Education does not offer loans to NEDs to fund share ownership. The total amount of fees paid to NEDs in 2016 is within the aggregate amount approved by shareholders at the AGM in 25 May 2015 of $850,000 per annum including superannuation. 20 G8 Education limited | Annual Report 2016 NED fees and other benefits explained Elements Details Board fee per annum Committee fees 2016 Board Chairman Fee Board NED Base fee Committee Fees Audit Nomination People and Culture Post-employment benefits 2016 2015 225,000 110,000 225,000 95,000 Committee Chair 25,000 No Fee 17,000 Committee member 10,000 No Fee 9,000 Superannuation contributions have been made at a rate of 9.5% of the board fee (but only up to the Australian Government’s prescribed maximum contributions limit) which satisfies the Company’s statutory superannuation contributions. The contribution rate will increase in future years in line with mandated legislative increases. Contributions are not included in the base fee. There are no retirement schemes in place for NED other than Statutory Superannuation. Superannuation Retirement schemes Other benefits Equity instruments NEDs do not receive any performance related remuneration, options, performance rights or shares. Other fees/benefits NEDs receive reimbursement for costs directly related to G8 Education business. No payments were made to NEDs during 2016 for travel allowances, extra services or special exertions. NED total remuneration paid M Johnson B Bailison M Reynolds S Forrester D Foster J Hutson (resigned 15 October 2015) A Kemp (resigned 17 March 2015) Total Total Year 2016 2015 2016 2015 2016 2015 2016 2015 2016 2015 2016 2015 2016 2015 2016 2015 21 G8 Education limited | Annual Report 2016 Short-term benefits Post-employment benefits Fees Termination benefits - 225,865 - 121,923 83,769 111,153 72,346 116,539 85,308 104,519 - - 138,876 - 59,361 679,999 439,660 Superannuation benefits 21,457 - 11,583 7,958 10,560 6,873 11,071 8,104 9,929 - - 13,027 - 5,639 64,600 41,601 Total 247,322 - 133,506 91,727 121,713 79,219 127,610 93,412 114,448 - - 151,903 - 65,000 744,599 481,261 - - - - - - - - - - - - - Minimum shareholding guidelines The Board has approved minimum shareholding guidelines for NEDs, the CEO and those executives who report directly to the CEO. Under these guidelines, all NEDs are requested to accumulate a minimum shareholding in G8 Education shares equivalent in value to one year’s base fees and all executive KMP are requested to accumulate a minimum shareholding in G8 Education shares equivalent to one year’s fixed remuneration. The guidelines were implemented in January 2017, with NEDs and executive KMP required to accumulate the required holding over the next 5 years or from appointment. 4. Executive remuneration Executive KMP remuneration The Group has undertaken a comprehensive review of executive KMP remuneration policies during 2016, for implementation from 2017 onwards. G8 Education’s executive remuneration policies are designed to attract, motivate and retain a qualified and experienced group of executives with complimentary skills. Fixed remuneration components are determined having regard to the specific skills and competencies of the executive KMP with reference to both internal and external relativities, particularly local market and industry conditions. The ‘at risk’ components of remuneration are strategically directed to encourage management to strive for superior (risk balanced) performance by rewarding the achievement of targets that are challenging, clearly defined, understood and communicated within the ambit of accountability of the relevant executive KMP. 22 G8 Education limited | Annual Report 2016 Executive KMP remuneration objectives are exemplified through three categories of remuneration, as illustrated below: Executive KMP remuneration objectives Attract, motivate and retain executive talent across diverse geographies The creation of reward differentiation to drive performance values and behaviours. An appropriate balance of ‘fixed’ and ‘at risk’ components Shareholder value creation through equity components Total target remuneration (TTR) is set by reference to the relevant geographic market Fixed At risk Total fixed remuneration (TFR) Short-term incentives (STI) Long-term incentives (LTI) TFR is set based on relevant market relativities, reflecting responsibilities, performance, qualifications, experience and geographic location STI performance criteria are set by reference to G8 Education group earnings and individual performance targets relevant to the specific KMP LTI targets are linked to G8 Education group EPS growth Remuneration will be delivered as: Base salary plus any fixed elements related to local markets, including superannuation or equivalents Part cash and part equity (performance rights). The equity component will be subject to service and deferred for 1 year. Equity in performance rights. All equity is held subject to service and performance for 3 years from grant date. The equity is at risk until vesting. Performance is tested once at the vesting date Strategic intent and market positioning TFR will generally be positioned at the median compared to relevant market based data considering expertise and performance in the role Performance incentive is directed to achieving Board approved targets, reflective of market circumstances. TFR + STI is intended to be positioned in the 3rd quartile of the relevant benchmark comparisons LTI is intended to reward executives KMP for sustainable long-term growth aligned to shareholders’ interests. LTI allocation values are intended to be positioned in the 3rd quartile of the relevant benchmark comparisons Total targeted remuneration (TTR) TTR is intended to be positioned in the 3rd quartile compared to relevant market benchmark comparisons. 4th quartile TTR may result if outperformance is achieved. The remuneration structure is designed to ensure top quartile executive KMP remuneration is only achieved if G8 Education outperforms. 23 G8 Education limited | Annual Report 2016 Remuneration composition mix and timing of receipt G8 Education endeavours to provide an appropriate and competitive mix of remuneration components balanced between fixed and at risk and paid in both cash and deferred equity. The broad remuneration composition mix for executive KMP can be illustrated as follows: Remuneration mix 2016 The remuneration mix for the Managing Director and other executive KMP in 2016 consisted of TFR, dividends paid under the Executive Share Plan and a cash bonus. This resulted in the following remuneration mix: Position CEO Executive KMP TFR Dividend payments on escrow shares STI 66% At least 83% 21% of TTR Up to 7% of TTR 13% of TTR Up to 10% of TTR The 2016 STI entitlement was based on achievement of Group financial targets (80% of STI) and individual KPIs (20% of STI). The Group’s financial targets were not achieved, however the Board exercised discretion relating to individual performance being achieved. Accordingly, 20% of the STI opportunity was achieved in 2016. Remuneration mix F17 proposed The mix of remuneration for the CEO and executive KMP for 2017 will change significantly. The proposed ‘new’ remuneration mix effective from 1 January 2017, will be as follows: Position CEO Executive KMP TFR 40% At least 50 % STI 30% of TTR Up to 25% of TTR LTI 30% of TTR Up to 25% of TTR Total fixed remuneration (TFR) G8 Education’s approach to TFR settings has been reevaluated. It is now the aim of G8 Education to position all executives at between the median and 62.5th percentile of the market, but at the lower end of this range where possible to control fixed costs. This positioning has been determined by our recent independent remuneration benchmark assessments conducted by PwC. A description of the 2017 short-term and long-term incentive schemes, including changes when compared to the 2016 schemes, are set out below. Total target remuneration TTR under the remuneration mix adopted will, in the opinion of the Board, deliver an overall risk adjusted reward opportunity which is fair and market competitive. 24 G8 Education limited | Annual Report 2016 Remuneration – timing of receipt of the benefit for 2017 onwards The three complementary components of executive KMP remuneration are ‘earned’ over multiple time ranges. This is illustrated in the following chart: As illustrated, executive KMP remuneration is delivered on a cascading basis, with a material component deferred for one (STI) and three (LTI) years and awarded as equity. This remuneration mix is designed to ensure executive KMP are focused on delivering results over the short, medium and long term if they are to maximise their remuneration opportunity. The Board believes this approach will align executive KMP remuneration to shareholder interests and expectations. Total fixed remuneration explained Total fixed remuneration (TFR) includes all remuneration and benefits paid to an executive KMP calculated on a total employment cost basis. In addition to base salary, superannuation and other allowances are included. Executive KMP TFR is tested regularly for market competiveness by reference to appropriate independent and externally sourced comparable benchmark information, including for comparable ASX listed companies, and based on a range of size criteria including market capitalisation, taking into account an executive’s responsibilities, performance, qualifications, experience and location. TFR adjustments, if any, are made with reference to individual performance, an increase in job role or responsibility, changing market circumstances as reflected through independent benchmark assessments or through promotion. Any adjustments to executive KMP remuneration are approved by the Board, based on PCC and CEO recommendations. Variable (at risk) remuneration explained Variable remuneration is intended to form a significant portion of the CEO and other executive KMP remuneration opportunity. Apart from being market competitive, the purpose of variable remuneration is to direct executives’ behaviours towards maximising G8 Education’s short, medium and long-term performance. The key aspects are summarised below: 25 G8 Education limited | Annual Report 2016 Year 1 Year 3 Year 4 Year 5 Year 2 LTI STI equity deferral STI cash opportunity TFR F17 LTI STI equity deferral STI cash opportunity TFR F18 LTI STI equity deferral STI cash opportunity TFR F19 Short-term incentives (STI) Purpose The STI arrangements at G8 Education are designed to reward executives for the achievement against annual performance targets set by the Board at the beginning of the performance period. The STI program is reviewed annually by the PCC and approved by the Board. Any STI award in excess of the 100% budget opportunity is individually approved by the PCC. All STI awards to the CEO and other executive KMP are approved by the PCC and Board. Performance targets The key performance objectives of G8 Education are currently directed to achieving Board approved earnings targets, and by the achievement of individual performance KPIs. There are ten individual KPIs that are split into four areas – Team (2), Safety (2), Performance (4) and Customer (2). These KPIs are yet to be finalised for 2017 The targets for the 2017 include achievement of individual KPIs and Group financial performance as follows: Underlying net profit after tax growth Performance < 8% 8% to 10% > 10% % of performance-related STI 0% 50% to 100% pro-rata 100% Achievement of at least 80% of individual KPIs (10 KPIs) yet to be finalised with individual KMP. Any anomalies or discretionary elements are approved and validated by the Board. No more than 10% of an Individual’s STI will be awarded if the Group target is not met. Rewarding performance The STI performance ratings are determined under a predetermined matrix with the Board determination final. Mandatory deferral of STI Effective from 1 January 2017 a mandatory deferral of a portion of STI was introduced to reinforce alignment with shareholder interests. Grants will be determined at the end of each year and then held for one year until vesting. This achieves additional retention and alignment of executives with shareholder interests. The deferred STI component for 2017 will be calculated based on up to 50% of the STI amount, above a minimum threshold, depending on the position. The equity component will be independently determined based on the gross contract value using G8 Education’s five day volume weighted average price (VWAP) following the announcement of year end results in February 2018. That is, based on a Black-Scholes-Merton pricing model without discounting for service or performance hurdles. The deferred component taken form of equity rights. Once the STI awarded as service rights has been granted, there are no further performance measures attached to the performance rights other than continued tenure for the vesting period (one year). 26 G8 Education limited | Annual Report 2016 Long-term incentives (LTI) The LTI provides an annual opportunity for executive KMP and other selected executives (based on their ability to influence and execute strategy) to receive an equity award deferred for three years, that is intended to align a significant portion of executives’ overall remuneration to shareholder value over the longer term. All LTI awards remain at risk and subject to ‘claw back’ (forfeiture or lapse) until vesting and must meet or exceed EPS growth rates over the vesting period. Purpose Types of equity awarded To align executive KMP remuneration opportunity with shareholder value and provide retention stimulus. LTI is provided under the G8 Education Employee Incentive Plan. See section 5 for further details. Under the G8 Education Employee Incentive Plan, selected senior executives are offered performance rights (being a nil exercise price right to fully paid ordinary shares of G8 Education Limited), subject to satisfying the relevant requirements. Time of grant All equity grants will be made after the AGM each year but based on values determined in February. Time restrictions Equity grants awarded to the CEO and other executive KMP are tested against the performance hurdles set, at the end of three years. If the performance hurdles are not met at the vesting date, performance rights lapse. Equity grants to the CEO and other executive KMP are subject to one performance condition, as follows: Performance hurdles and vesting schedule Compound annual growth in Underlying EPS (3 years) Performance < 10% 10% to 15% > 15% % of equity to vest 0% 50% to 100% pro-rata 100% Performance rights vest if the time restrictions and relevant performance hurdles are met. The Board must approve any special provisions, in accordance with Company policies, in the event of termination of employment or a change of control. Dividends No dividends are attached to performance rights. Voting rights There are no voting rights attached to performance rights. Retesting There is no retesting of performance hurdles under G8 Education LTI. LTI allocation The size of individual LTI grants for the CEO and other executive KMP is determined in accordance with the Board approved remuneration strategy mix. The allocation methodology for performance rights is to determine the target LTI dollar value for each executive and divide it by the gross contract value based on a Black-Scholes-Merton pricing model without discounting for service or performance hurdles. 27 G8 Education limited | Annual Report 2016 Executive Share Plan In accordance with the terms and conditions of the Plan approved by shareholders on 21 May 2015, selected KMP are granted the right to acquire shares at a nominated exercise price subject to agreed service and performance criteria (i.e. vesting conditions). The Plan is an equity plan where shares are acquired up front through the provision of a limited recourse loan from the Company, provided for the sole purpose of acquiring shares in the Company. It operates much like a traditional option plan, as the outstanding loan balance is effectively the ‘exercise price’ that must be paid before any value can be realised. The following is a summary of the key terms and conditions of the Plan:  The loan is repayable on termination date (3 years from approval) or earlier if there is a default in which case the shares are no longer held in escrow.  No interest is payable on the loan.  The shares are held in escrow as security for the outstanding loan.  Limited recourse – if the KMP fails to repay the outstanding loan balance in accordance with the plan, they are under no obligation to repay the full amount of the outstanding loan balance and the Group must accept the net proceeds of the sale or buy-back of the shares in escrow in full satisfaction of the outstanding loan balance.  Borrower is not able to sell, transfer or dispose of shares in escrow. However, the Borrower receives the benefits associated with the shares such as dividends and voting rights during the escrow period.  The shares rank equally with other ordinary shares on issue with respect to dividends, distribution or return of capital and other rights.  If borrower leaves the employment of G8 then all secured shares are transferred to a party nominated by G8 and the money owed reduced by number of shares transferred multiplied by $5 per share – exception is where the borrower is unfit for work.  Shares are released to borrower in tranches – if conditions are not met then the shares are transferred to a party nominated by G8.  1 year – 1/3 shares if EPS @ 31/12/15 is 40% more than EPS at 31/12/14  2 years – 1/3 shares if EPS @ 31/12/16 is 15% above EPS at 31/12/15.  3 years – 1/3 shares if EPS @ 31/12/17 is 15% above EPS at 31/12/16. During 2016 1/3 of the shares were cancelled due to conditions of performance criteria not being met. Due to the vesting conditions not being met in 2016 1/3 of the shares held in escrow were not issued. The Group will discontinue the Executive Share Plan, which was in place for the full year in 2016 and will implement the new LTI scheme subject to shareholder approval as outlined above. 28 G8 Education limited | Annual Report 2016 Other remuneration elements and disclosures relevant to executive KMP Claw back The Board has discretion to claw back incentive payments where material misconduct is evident. Hedging and margin lending prohibition Under the G8 Education Securities Trading Policy and in accordance with the Corporations Act, equity granted under G8 Education equity incentive schemes must remain at risk until vested, or until exercised if performance rights. It is a specific condition of grant that no schemes are entered into, by an individual or their associates that specifically protect the unvested value of performance rights allocated. G8 Education also prohibits the CEO or other ‘Designated Persons’ (including executive KMP) providing G8 Education securities in connection with any margin loan or similar financing arrangement unless that person has received a specific notice of no objection in compliance with the policy from the Board. G8 Education, in line with good corporate governance, has a formal policy setting down how and when employees of G8 Education may deal in G8 Education securities. G8 Education’s Securities Trading Policy is available on the G8 Education website under Investor Centre, Corporate Governance. Relationship between G8 Education performance and executive KMP remuneration The performance of the Group and remuneration paid to KMP over the last 5 years is summarised in the table below. Total revenue EBIT Net Profit After Tax Underlying EBIT (unaudited, Non IFRS)^ Underlying NPAT (unaudited, Non IFRS)^^ Underlying EPS (cents) Average quarterly dividend per share (cents) Share price as at 31 December ($) 2012 $'000 179,991 27,039 19,209 30,012 19,730 9.2 1.75 1.63 2013 $'000 275,165 47,350 31,072 50,593 32,276 11.72 3.0 3.16 2014 $'000 491,288 105,965 52,731 100,248 60,613 18.57 4.75 4.17 2015 $'000 706,164 160,423 88,581 145,438 87,131 23.87 6.0 3.57 2016 $'000 778,513 160,691 80,265 160,660 93,342 24.68 6.0 3.59 ^Underlying EBIT equals NPBT plus finance costs plus non-operating costs as per page 9 ^^ Underlying NPAT equals NPAT plus non-operating costs as per page 9 29 G8 Education limited | Annual Report 2016 Total Fixed Remuneration G Carroll C Scott J Roberts T King A Perriam C Sacre (resigned 27 May 2016) J Fraser (resigned 29 August 2014) K Lacey (resigned 16 January 2013) D Peters (resigned 27 September 2012) Executive Share Plan C Scott J Roberts Ann Perriam C Sacre (resigned 27 May 2016) J Fraser K Lacey (resigned 16 January 2013) Total 2012 2013 2014 2015 2016 - 420,411 - - 271,043 196,314 50,271 128,667 - 444,490 - - 285,531 200,555 16,781 - - 667,460 248,908 - 379,784 191,054 - - - 745,433 412,418 73,048 214,010 374,606 - - - 210,562 896,783 566,698 310,066 263,569 154,690 - - - - - - 114,562 76,375 59,237 1,316,880 - - - 133,893 89,262 - 1,170,512 - - - 58,000 48,649 - 1,593,855 105,284 105,284 12,865 120,257 - - 2,163,205 - - - (105,284) - - 2,297,084 Since 2012 underlying EPS has increased by 169%, dividends per share have increased by 243% and the share price has increased by 120% demonstrating a balance between strategic growth and shareholder value. During the same period, total remuneration paid to KMP has increased by 87%. Total remuneration paid to KMP as a proportion of underlying Net profit After Tax was 5.3% in 2012 and has decreased to 2.1% in 2016. Executive remuneration table – audited statutory disclosure *Share based payments for the year 2016 is nil due to reversal of share based payment from non-vesting shares from 2015 offsetting 2016 share based payment. ^G Carroll appointed 25 July 2016 **C Sacre resigned 27 May 2016 30 G8 Education limited | Annual Report 2016 YearPost employment Executive Share PlanTotalPerformance relatedShare Plan relatedAmount $SalarySTIDividends from Share PlanSuperannuation benefitsTermination paymentTotalShare based payment*%%G Carroll^2016199,11050,000-11,452-260,562-260,56219%0%2015----------C Scott2016889,218168,75090,0007,564-1,155,532-1,155,53215%8%2015739,264-120,0006,169-865,433105,284970,717-0J Roberts2016546,834108,75090,00019,864-765,448-765,44814%12%2015391,273-120,00020,145-531,418105,284636,702-0T King2016290,38570,000-19,681-380,066-380,06618%-201567,308--5,740-73,048-73,048--A Perriam2016243,92330,62510,99819,646-305,192-305,19210%4%2015197077-14,66416933-228,67412,865241,539-0C Sacre**2016141,814-100,00012,87614,870269,560(105,284)164,276-37%2015350,000-120,00024,606-494,606120,257614,863-0Total 20162,311,284428,125290,99891,08314,8703,136,359(105,284)3,031,075Total20151,744,922-374,66473,593-2,193,179343,6902,536,869Proportion of total Fixed RemunerationShort-term 5. KMP equity interests The tables below set out the equity interests held by Non-executive Directors (“NEDs”) and executive KMP. Shares Directors of G8 Education Limited Balance at the start of the year Shares cancelled under limited recourse loans disclosed as share options Other changes during the year Balance at the end of the year Ordinary Shares M Johnson C Scott B Bailison M Reynolds S Forrester D Foster KMP of G8 Education Limited Ordinary Shares Directly Beneficially* Directly Directly Directly Directly - 1,000,000 - 24,195 5,423 - - (333,333) - - - - 25,000 - - - 10,000 14,587 25,000 666,667 - 24,195 15,423 14,587 G Carroll J Roberts C Sacre A Perriam T King - - - 631,329 *Shares are issued as part the Executive Share Plan that have not vested and are not exercisable. Beneficially* Beneficially* Beneficially* Indirectly (333,333) (1,000,000) (40,733) - 666,667 - 81,465 631,329 - 1,000,000 1,000,000 122,198 - 31 G8 Education limited | Annual Report 2016 2016NameBalance at the start of the yearLimited recourse loans cancelled due to vesting condition not being metLimited recourse loans to be cancelled due to vesting condition not being metForfeiture due to resignationBalance at the end of the yearHighest Indebtedness during the year$$$$$$C Scott5,000,000(1,666,667)(1,666,667)-1,666,6673,333,333J Roberts5,000,000(1,666,667)(1,666,667)-1,666,6673,333,333C Sacre5,000,000(1,666,667)-(3,333,333)-3,333,333A Perriam610,990(203,663)(203,663)-203,663407,327 6. Employment Agreements (audited) The CEO and other executive KMP operate under employment agreements. The following sets out details of the employment agreements relating to the CEO and other executive KMP. The terms for the CEO and all other executive KMP are similar but do, on occasion, vary to suit different needs. Length of contract The CEO and other executive KMP are on permanent contracts, which is an ongoing employment contract until notice is given by either party. Notice periods In order to terminate the employment arrangements, the CEO is required to provide G8 Education with six months’ written notice. Other executive KMP are required to provide G8 Education with between 3 months’ and six months’ written notice. Resignation On resignation, unless the Board determines otherwise: All unvested STI or LTI benefits are forfeited. Termination on notice by G8 Education G8 Education may terminate employment of the CEO by providing six months’ written notice. For other executive KMP, the notice period varies from three to six months’ written notice. The Company may make payment in lieu of the notice period based on TFR. On termination on notice by G8 Education, unless the Board determines otherwise: Unvested STI or LTI benefits may be exercised or paid within 30 days of notice being given. Death or total and permanent disability On death or total and permanent disability, the Board has discretion to allow all unvested STI and LTI benefits to vest. Termination for serious misconduct G8 Education may immediately terminate employment at any time in the case of serious misconduct, and other executive KMP will only be entitled to payment of TFR up to the date of termination. On termination without notice by G8 Education in the event of serious misconduct:  all unvested STI or LTI benefits will be forfeited; and  any ESS instruments provided to the employee on vesting of STI or LTI awards that are held in trust, will be forfeited. Statutory entitlements Payment of statutory entitlements of long service leave and annual leave applies in all events of separation. Post-employment restraints The CEO is subject to post-employment restraints of up to 24 months. All other executive KMP are subject to post-employment restraints for up to 12 months. 32 G8 Education limited | Annual Report 2016 Corporate Governance G8 Education Limited is strongly committed to good corporate governance practices and substantially complies with the ASX Corporate Governance Council’s (CGC) Corporate Governance Principles and Recommendations (Third Edition). The board of directors guides and monitors the business and affairs of G8 Education Limited on behalf of the shareholders by whom they are elected and to whom they are accountable. G8 Educations Limited compliance with the Principles are found in the corporate governance section of our website: www.g8education.edu.au/investor-information/corporate-governance Non-audit services The Group may decide to employ the auditor on assignments additional to their statutory audit duties where the auditor’s expertise and experience with the Group are important. During 2016, G8 Education engaged Ernst & Young to perform non-audit services relating to other audit advice. The Board has considered the position and is satisfied that the provision of the non-audit services is compatible with the general standard of independence for auditors imposed by the Corporations Act 2001. The Directors are satisfied the provision of non-audit services by the auditor, as set out below, did not compromise the auditor independence requirements of the Corporations Act 2001 for the following reasons:  all non-audit services have been reviewed by the Board to ensure they do not impact the impartiality and objectivity of the auditor;  none of the services undermine the general principles relating to auditor independence as set out in APES 110 Code of Ethics of Professional Accountants. Auditor’s independence declaration A copy of the Auditor’s independence declaration as required under section 307C of the Corporations Act 2001 is set out on page 35. Auditor Ernst & Young were appointed as auditor on 25 May 2016 and continue in office in accordance with section 237 of the Corporations Act 2001. This report is made in accordance with a resolution of Directors. Gary Carroll Managing Director 20 February 2017 33 G8 Education limited | Annual Report 2016 Ernst & Young 111 Eagle Street Brisbane QLD 4000 Australia GPO Box 7878 Brisbane QLD 4001 Tel: +61 7 3011 3333 Fax: +61 7 3011 3100 ey.com/au Auditor’s Independence Declaration to the Directors of G8 Education Limited As lead auditor for the audit of G8 Education Limited for the financial year ended 31 December 2016, I declare to the best of my knowledge and belief, there have been: a) no contraventions of the auditor independence requirements of the Corporations Act 2001 in relation to the audit; and b) no contraventions of any applicable code of professional conduct in relation to the audit. Ernst & Young Ric Roach Partner 20 February 2017 A member firm of Ernst & Young Global Limited Liability limited by a scheme approved under Professional Standards Legislation  Section 02 Financial Report Consolidated Income Statement Consolidated Statement of Comprehensive Income Consolidated Balance Sheet Consolidated Statement of Changes in Equity Consolidated Statement of Cash Flows Notes to the Financial Statements 37 37 38 39 40 43 Directors’ Declaration 102 36 G8 Education limited | Annual Report 2016 Consolidated Income Statement For the Year ended 31 December 2016 Revenue Revenue from continuing operations Other income Profit on sale of financial assets Total revenue Expenses Employee benefits Occupancy Direct costs of providing services Depreciation Other expenses Finance costs Total expenses Profit before income tax Income tax expense Profit for the year attributable to members of the parent entity Basic earnings per share Diluted earnings per share Consolidated 2016 $'000 2015 $'000 774,970 3,543 - 778,513 686,747 8,927 10,490 706,164 (432,126) (88,396) (59,348) (11,707) (25,202) (47,065) (663,844) 114,669 (34,404) 80,265 Cents 21.22 21.22 (382,320) (77,994) (53,052) (9,372) (20,386) (40,267) (583,391) 122,773 (34,192) 88,581 Cents 24.27 24.27 Notes 2 3 4 4 5 6 6 The above Consolidated Income Statement should be read in conjunction with the accompanying notes. Consolidated Statement of Comprehensive Income For the year ended 31 December 2016 Profit for the year Other comprehensive income, net of income tax Items that are or may be reclassified to profit or loss: Exchange differences on translation of foreign operations Recycle to income statement for amount reversed in current period Effective portion of changes in fair value of cash flow hedges Total other comprehensive income Total comprehensive income for the year Notes 22 22 22 Consolidated 2016 $'000 80,265 2015 $'000 88,581 (455) (3,559) (1,042) (5,056) 75,209 1,514 - 3,559 5,073 93,654 The above Consolidated Statement of Comprehensive Income should be read in conjunction with the accompanying notes. 37 G8 Education limited | Annual Report 2016 Consolidated Balance Sheet As at 31 December 2016 ASSETS Current assets Cash and cash equivalents Trade and other receivables Other current assets Current tax asset Total current assets Non-current assets Property plant and equipment Deferred tax assets Goodwill Other non-current assets Derivative Financial Instruments Total non-current assets Total assets LIABILITIES Current liabilities Trade and other payables Borrowings Provisions Derivative financial instruments Current tax liabilities Total current liabilities Non-current liabilities Borrowings Other payables Provisions Derivative financial instruments Total non-current liabilities Total liabilities Net assets EQUITY Contributed equity Reserves Retained earnings Total equity Notes Consolidated 2016 $'000 2015 $'000 18 7 8 9 10 16 8 20 11 19 30 20 19 11 12 20 21 22 22 26,467 22,948 9,234 2,923 61,572 54,845 15,415 1,015,002 23,022 3,359 1,111,643 1,173,215 88,847 - 25,956 - - 114,803 410,649 754 4,783 16,351 432,537 547,340 625,875 641,848 35,649 (51,622) 625,875 193,840 22,943 9,754 - 226,537 41,370 21,678 944,604 - - 1,007,652 1,234,189 83,054 148,891 22,824 1,184 4,400 260,353 366,270 712 4,069 - 371,051 631,404 602,785 603,043 43,635 (43,893) 602,785 The above Consolidated Balance Sheet should be read in conjunction with the accompanying notes. 38 G8 Education limited | Annual Report 2016 Consolidated Statement of Changes in Equity For the year ended 31 December 2016 Contributed Equity Hedging Reserve Translation Reserve Profits Reserve Retained Earnings Total Share Based Payment Reserve Consolidated Notes $’000 $’000 $’000 $’000 $’000 $’000 $’000 Balance 1 January 2015 Profit for the year Other comprehensive income Total comprehensive income for the year Transactions with owners in their capacity as owners Contributions of equity, net of transaction cost Transfer of profits reserve Share based payment expense Dividends provided for or paid Balance 31 December 2015 Balance 1 January 2016 Profit for the year Other comprehensive income Total comprehensive income for the year Transactions with owners in their capacity as owners Contributions of equity, net of transaction cost Transfer of profits reserve Share based payment expense Dividends provided for or paid Balance 31 December 2016 21 22 32 23 21 22 32 23 548,374 - - - 4,512 - - - 22,745 - (33,622) 88,581 542,009 88,581 - 3,559 1,514 - - - 5,073 - 3,559 1,514 - - 88,581 93,654 54,669 - - - - - - - - 98,852 - (98,852) 54,669 - - - - 344 - - 344 - 54,669 603,043 - - 3,559 - - 6,026 - 344 344 (87,891) 10,961 33,706 - (87,891) (32,878) (98,852) 602,785 (43,893) 603,043 3,559 6,026 344 33,706 (43,893) 602,785 - - - - - 80,265 80,265 - (4,601) (455) - - - (5,056) - (4,601) (455) - - 80,265 75,209 38,805 - - - - - 38,805 - - - - 87,994 (87,994) - - - - (105) - - (105) - 38,805 641,848 - - (1,042) - - 5,571 - (105) 239 (90,819) (2,825) 30,881 - (90,819) (52,119) (87,994) 625,875 (51,622) The above Consolidated Statement of Changes in Equity should be read in conjunction with the accompany notes. 39 G8 Education limited | Annual Report 2016 Consolidated Statement of Cash Flows For the year ended 31 December 2016 Cash flows from Operating Activities Receipts from customers (net of GST) Payments to suppliers and employees (net of GST) Interest received Interest paid Income taxes paid Net cash inflows from operating activities Cash flows from Investing Activities Payments for purchase of businesses (net of cash acquired) Payments for deposits on purchase of businesses Proceeds from sale of financial assets Payments for purchase of financial assets Payments for property plant and equipment Net cash outflows from investing activities Cash flows from Financing Activities Share issue costs Debt issue costs Dividends paid Proceeds from issue of corporate note Repayment of corporate note Proceeds from issue of shares Inflows from borrowings Premium paid on FX option Proceeds from sale of FX option Net cash inflows (cash outflows) from financing activities Notes Consolidated 2016 $'000 2015 $'000 13 769,277 (601,491) 1,198 (25,431) (34,970) 108,583 (66,667) (15,473) - - (25,009) (107,149) (57) (12,747) (57,964) 269,281 (411,208) 6,537 40,000 (11,028) 8,281 (168,905) (167,471) 193,826 98 26,453 676,870 (516,762) 2,861 (22,354) (45,563) 95,052 (128,940) - 52,073 (33,182) (21,082) (131,131) (151) (4,282) (53,244) 153,617 - 12,934 - - - 108,874 72,795 120,179 852 193,826 Net (decrease) / increase in cash and cash equivalents Cash and cash equivalents at the beginning of the financial year Effects of exchange rate changes on cash Cash and cash equivalents at the end of the financial year 18 The above Consolidated Statement of Cash Flows should be read in conjunction with the accompany notes. 40 G8 Education limited | Annual Report 2016 Index to Notes to the Financial Statements 1. Financial Overview NOTE 1: SEGMENT INFORMATION NOTE 2: REVENUE NOTE 3: OTHER INCOME NOTE 4: EXPENSES NOTE 5: INCOME TAX EXPENSE NOTE 6: EARNINGS PER SHARE NOTE 7: CURRENT ASSETS – TRADE AND OTHER RECEIVABLES NOTE 8: CURRENT AND NON – CURRENT ASSETS – OTHER NOTE 9: NON-CURRENT ASSETS – PROPERTY, PLANT AND EQUIPMENT NOTE 10: NON-CURRENT ASSETS – DEFERRED TAX ASSETS NOTE 11: CURRENT AND NON-CURRENT LIABILITIES – TRADE AND OTHER PAYABLES NOTE 12: NON-CURRENT LIABILITIES – PROVISIONS NOTE 13: RECONCILIATION OF PROFIT AFTER INCOME TAX TO NET CASH INFLOW FROM OPERATING ACTIVITIES 2. Business Combinations, Goodwill & Impairment NOTE 14: CRITICAL ACCOUNTING ESTIMATES AND JUDGEMENTS NOTE 15: BUSINESS COMBINATIONS NOTE 16: NON-CURRENT ASSETS – GOODWILL 3. Capital Structure & Financial Risk Management NOTE 17: FINANCIAL RISK MANAGEMENT NOTE 18: CURRENT ASSETS – CASH AND CASH EQUIVALENTS NOTE 19: CURRENT AND NON – CURRENT LIABILITIES - BORROWINGS NOTE 20: DERIVATIVE FINANCIAL INSTRUMENTS NOTE 21: CONTRIBUTED EQUITY NOTE 22: RESERVES AND RETAINED EARNINGS NOTE 23: DIVIDENDS 4. Group Structure NOTE 24: SUBSIDIARIES NOTE 25: PARENT ENTITY DISCLOSURES NOTE 26: DEED OF CROSS GUARANTEE 5. Unrecognised Items NOTE 27: COMMITMENTS NOTE 28: CONTINGENCIES NOTE 29: EVENTS OCCURRING AFTER THE BALANCE SHEET DATE 6. Other NOTE 30: EMPLOYEE ENTITLEMENTS NOTE 31: KEY MANAGEMENT PERSONNEL DISCLOSURES NOTE 32: SHARE-BASED PAYMENTS NOTE 33: REMUNERATION OF AUDITORS NOTE 34: RELATED PARTY TRANSACTIONS NOTE 35: OTHER SIGNIFICANT ACCOUNTING POLICIES 42 G8 Education limited | Annual Report 2016 44 45 46 46 47 50 51 53 54 56 57 57 58 59 60 62 64 71 72 75 76 78 79 80 82 84 86 87 87 88 89 95 98 99 99 1. Financial Overview Note 1: Segment Information (a) Description of segments Management has determined the operating segments based on the reports reviewed by the Executive Team that are used to make strategic decisions. The Executive Team has been identified as the Chief Operating Decision Maker that makes strategic decisions. Prior to 2016, the function that allocated resources and assessed the operating performance was the Board. During 2016 there have been a number of changes at Board and senior executive level at the Group, both in terms of personnel and processes. The key changes can be summarised as follows:   Formation of an executive leadership group, comprising the MD, CEO, CFO and GM Operations (the “Executive Team”); The Executive Team meeting regularly (weekly) to review performance and allocate resources to drive operating results, with decisions being made as a team;  Responsibility for the formation of the Group’s strategy being handed from the Board to the Executive Team, with the Board’s role evolving to reviewing and endorsing the strategy;  Amending the delegations of authority to provide increased authority to the Executive Team, with key expenses/contracts requiring joint approval/signature by the Executive Team. As a result of the above changes it was considered that the chief operating decision maker of the Group is now the Executive Team, not the Board. The Executive Team considers the business as one Group of centres and has therefore identified one operating segment, being the management of child care centres. All revenue in this report was derived from external customers and relates to the single operating segment and the segment disclosure has not altered from the last Annual Report. 2016 Revenue from external customers Non-current assets 2015 Revenue from external customers Non-current assets Australia $'000 Foreign Country $'000 760,203 1,061,052 673,660 955,899 14,767 31,817 13,087 30,075 Total $'000 774,970 1,092,869 686,747 985,974 43 G8 Education limited | Annual Report 2016 Note 2: Revenue From continuing operations Sales revenue Revenue from child care centres Funding relating to child care operations Other revenue Management fee Income Total revenue continuing operations Consolidated 2016 $'000 2015 $'000 754,757 18,203 772,960 2,010 774,970 662,717 21,962 684,679 2,068 686,747 Accounting Policy Revenue is measured at the fair value of the consideration received or receivable. Amounts disclosed as revenue are net of discounts, refunds, rebates and amounts collected on behalf of third parties. The Group recognises revenue when the amount of revenue can be reliably measured, it is probable that the future economic benefits will flow to the entity and specific criteria have been met for each of the Group’s activities as described below. Revenue is recognised for the major business activities as follows: (i) Child care fees Fees paid by families and/or the Australian Government (Child Care Benefit and Child Care Tax Rebate) are recognised as and when a child attends a child care service. Revenue received in advance from parents and guardians and government is recognised as deferred income and classified as a current liability. (See note 11) (ii) Government Funding/Grants Training incentives and additional funding receipts are recognised when there is reasonable assurance that the incentive/receipt will be received and when the relevant conditions have been met. 44 G8 Education limited | Annual Report 2016 Note 3: Other Income Net gain on disposal of assets Deferred consideration not payable Interest Accounting Policy (i) Deferred consideration Consolidated 2016 $'000 - 2,500 1,043 3,543 2015 $'000 556 5,755 2,616 8,927 Deferred consideration not payable and recognised in accordance with note 15. The deferred consideration is not payable due to certain centres not achieving some, or all of the earn-out hurdle for the earn-out period. As a result, in accordance with AASB 3 Business Combinations, the earn-out amounts not payable which were previously disclosed as a liability in deferred consideration has been written back to the Consolidated Income Statement. (ii) Interest income Interest income is recognised using the effective interest method. Note 4: Expenses Profit before income tax includes the following specific expenses: Depreciation Finance Costs Interest and finance charges paid/payable Foreign Exchange Loss (refer note 17) Rental expenses relating to operating leases Minimum lease payments Consolidated 2016 $'000 2015 $'000 11,707 9,372 39,017 8,048 47,065 28,299 11,968 40,267 79,876 70,500 Bad & doubtful debts 671 480 45 G8 Education limited | Annual Report 2016 Note 5: Income Tax Expense (a) Income tax expense Current Tax Deferred Tax Income tax expense Income tax expense is attributable to: Profit from continuing operations Deferred income tax expense included in income tax expense comprises: Decrease / (increase) in deferred tax assets (refer note 10) (b) Numerical reconciliation of income tax expense to prima facie tax payable Profit from continuing operations before income tax expense Tax on operations at the Australian tax rate of 30% (2015: 30%) Tax effect of amounts which are not deductible (taxable) in calculating taxable income Adjustment relating to prior year Entertainment Deferred consideration not payable Other non-allowable items Difference in overseas tax rates Income tax expense Weighted average tax rate (c) Amounts recognised directly in equity Aggregate current and deferred tax arising in the reporting year and not recognised in net profit or loss but directly debited or credited to equity Net deferred tax - debited (credited) directly to equity (d) Tax expense (income) relating to items of other comprehensive income Cash flow hedges Consolidated 2016 $'000 2015 $'000 27,564 6,840 34,404 40,427 (6,235) 34,192 34,404 34,404 34,192 34,192 6,840 (6,210) 114,669 34,401 122,773 36,832 215 139 (750) 659 (260) 34,404 30% (633) 175 (1,726) (359) (97) 34,192 28% 577 - 20 69 46 G8 Education limited | Annual Report 2016 Tax consolidation (i) Members of the tax consolidated group and the tax sharing agreement G8 Education Limited and its 100% owned Australian resident subsidiaries formed a tax consolidated group with effect from 3 December 2007. G8 Education Limited is the head entity of the tax consolidated group. Members of the tax consolidated group have entered into a tax sharing agreement that provides for the allocation of income tax liabilities between the entities should the head entity default on its tax payment obligations. No amounts have been recognised in the financial statements in respect of this agreement on the basis that the possibility of default is remote. (ii) Tax effect accounting by members of the tax consolidated group Measurement method adopted under AASB Interpretation 1052 Tax Consolidation Accounting The head entity and the controlled entities in the tax consolidated group continue to account for their own current and deferred tax amounts. The Group has applied the group allocation approach in determining the appropriate amount of current taxes and deferred taxes to allocate to members of the tax consolidated group. The current and deferred tax amounts are measured in a systematic manner that is consistent with the broad principles in AASB 112 Income Taxes. The nature of the tax funding agreement is discussed further below. In addition to its own current and deferred tax amounts, the head entity also recognises current tax liabilities (or assets) and the deferred tax assets arising from unused tax losses and unused tax credits assumed from controlled entities in the tax consolidated group. Nature of the tax funding agreement Members of the tax consolidated group have entered into a tax funding agreement. Under the funding agreement, the funding of tax within the Group is based on an acceptable method of allocation under AASB Interpretation 1052. The tax funding agreement requires payments to/from the head entity to be recognised via an inter-entity receivable (payable) which is at call. To the extent that there is a difference between the amount charged under the tax funding agreement and the allocation under AASB Interpretation 1052, the head entity accounts for these as equity transactions with the subsidiaries. The amounts receivable or payable under the tax funding agreement are due upon receipt of the funding advice from the head entity, which is issued as soon as practicable after the end of each financial year. The head entity may also require payment of interim funding amounts to assist with its obligations to pay tax instalments. (iii) Tax related contingencies At 31 December 2016 there are no tax related contingencies. Accounting Policy The income tax expense or revenue for the period is the tax payable on the current period’s taxable income based on the notional income tax rate for each jurisdiction adjusted by changes in deferred tax assets and liabilities attributable to temporary differences and to unused tax losses. The current income tax charge is calculated on the basis of the tax laws enacted or substantively enacted at the end of the reporting period in the countries where the Company’s subsidiaries operate and generate taxable income. Management periodically evaluates positions taken in tax returns with respect to situations in which applicable tax regulation is subject to interpretation. It establishes provisions where appropriate on the basis of amounts expected to be paid to the tax authorities. Deferred income tax is provided in full, using the liability method, on temporary differences arising between the tax bases of assets and liabilities and their carrying amounts in the consolidated financial statements. However, the deferred income tax is not accounted for if it arises from initial recognition of an asset or liability in a transaction other than a business combination that at the time of the transaction affects neither accounting nor taxable profit or loss. Deferred income tax is determined using tax rates (and laws) that have been enacted or substantially enacted by the end of the reporting period and are expected to apply when the related deferred income tax asset is realised or the deferred income tax liability is settled. 47 G8 Education limited | Annual Report 2016 Deferred tax assets are recognised for deductible temporary differences and unused tax losses only if it is probable that future taxable amounts will be available to utilise those temporary differences and losses. G8 Education and its wholly-owned Australian controlled entities have implemented the tax consolidation legislation. As a consequence, these entities are taxed as a single entity and the deferred tax assets and liabilities of these entities are set off in the consolidated financial statements. Current and deferred tax is recognised in profit and loss, except to the extent that it relates to items recognised in other comprehensive income or directly in equity. In this case, the tax is also recognised in other comprehensive income or directly in equity, respectively. 48 G8 Education limited | Annual Report 2016 Note 6: Earnings per Share (a) Basic earnings per share Profit attributable to the ordinary equity holders of the company (b) Diluted earnings per share Profit from continuing operation attributable to the ordinary equity holders of the Company (c) Reconciliation of earnings used in calculating earnings per share Basic earnings per share Profit attributable to the ordinary equity holders of the Company used in calculating basic earnings per share Diluted earnings per share Profit attributable to the ordinary equity holders of the Company used in calculating diluted earnings per share Consolidated 2016 CPS 2015 CPS 21.22 24.27 21.22 24.27 $'000 $'000 80,265 88,581 80,265 88,581 Number Number (d) Weighted average number of shares used as the denominator Weighted average number of ordinary shares used as the denominator in calculating basic earnings per share* 378,206,976 364,999,576 Adjustments for calculation of diluted earnings per share: Options Weighted average number of ordinary shares and potential ordinary shares used as the denominator in calculating diluted earnings per share - - 378,206,976 364,999,576 Accounting Policy (i) Basic Earnings Per Share Basic Earnings Per Share is calculated by dividing:  the profit attributable to owners of the Company, excluding any costs of servicing equity other than ordinary shares  by the weighted average number of ordinary shares outstanding during the financial year, adjusted for bonus elements in ordinary shares issued during the year. (ii) Diluted Earnings Per Share Diluted Earnings Per Share adjusts the figures used in the determination of Basic Earnings Per Share to take into account:  the after income tax effect of interest and other financing costs associated with dilutive potential ordinary shares; and  the weighted average number of additional ordinary shares that would have been outstanding assuming the conversion of all dilutive potential ordinary shares. 49 G8 Education limited | Annual Report 2016 Note 7: Current Assets - Trade and Other Receivables Trade receivables Allowance for impairment of receivables (note (a) below) GST receivable Other debtors Total trade and other receivables (a) Impaired trade receivables Consolidated 2016 $'000 20,113 (718) 19,395 1,237 2,316 22,948 2015 $'000 17,646 (618) 17,028 2,791 3,124 22,943 As at 31 December 2016 current trade receivables of the Group with a nominal value of $1,435,288 (2015: $1,235,326) were assessed for impairment. The amount of the allowance for impairment was $718,486 (2015: $617,663). The ageing of these receivables is as follows: 31-60 days 61+ days Movements in the allowance for impairment of receivables are as follows: Opening balance Allowance for impairment recognised during the year Receivables written off during the year as uncollectable Exchange differences Closing balance Consolidated 2016 $'000 247 1,189 2015 $'000 - 1,235 Consolidated 2016 $'000 618 671 (571) - 718 2015 $'000 423 480 (287) 2 618 The creation and release of the provision for impaired receivables has been included in ‘other expenses’ in the income statement. Amounts charged to the allowance account are generally written off when there is no expectation of recovery. 50 G8 Education limited | Annual Report 2016 (b) Past due but not impaired As at 31 December 2016, trade receivables of $6,294,399 (2015: $6,797,000) were past due but not impaired. These relate to a number of customers for whom there is no recent history of default and for which full payment is expected. The ageing analysis of these trade receivables is as follows: Up to 3 months 3 to 6 months Over 6 months Consolidated 2016 $'000 5,827 47 420 6,294 2015 $'000 6,689 23 85 6,797 (c) Fair value and credit risk Due to the short-term nature of these receivables, their carrying amount is considered to approximate their fair value. Information concerning the credit risk of receivables is set out in note 17. Accounting Policy Trade receivables are recognised initially at fair value and subsequently measured at amortised cost using the effective interest method, less provision for impairment. Trade receivables represent child care fees receivable from families and/or the Australian Government. Under the Child Care Management System (CCMS), implemented in July 2008, Child Care Benefit is generally paid weekly in arrears by the Australian Government based on the actual attendance and entitlement of each child attending the child care centre. Parent fees are required to be paid one week in advance. The parent fees receivable relate to parent fees where amounts are past due and not paid in advance. Collectability of trade receivables is reviewed on an ongoing basis. Debts which are known to be uncollectable are written off. A provision for impairment of trade receivables is established when there is objective evidence that the Group will not be able to collect all amounts due according to the original terms of the receivables. Significant financial difficulties of the debtor, probability that the debtor will enter bankruptcy or financial reorganisation, and default or delinquency in payments (more than 30 days overdue) are considered indicators that the trade receivable is impaired. The amount of the provision is the difference between the asset’s carrying amount and the present value of estimated future cash flows, discounted at the original effective interest rate. Cash flows relating to short-term receivables are not discounted if the effect of discounting is immaterial. The amount of the provision is recognised in the income statement in other expenses. The carrying amount of the asset is reduced through the use of an allowance account and the amount of the loss is recognised in the statements of comprehensive income within other expenses. When a trade receivable is uncollectable, it is written off against the allowance for trade receivables. Subsequent recoveries of amounts previously written off are credited against other expenses in the income statement. 51 G8 Education limited | Annual Report 2016 Note 8: Current and Non-Current Assets - Other Current Prepayments Deposits Total other current assets Non- Current Deposits on acquisitions Total other current and non-current assets Consolidated 2016 $'000 5,481 3,753 9,234 2015 $'000 4,721 5,033 9,754 23,022 32,256 - 9,754 Accounting Policy Deposits on acquisitions relate to deposits made for the potential purchase of centres. Once settled the amount is transferred forms part of the business combination accounting. 52 G8 Education limited | Annual Report 2016 Note 9: Non-Current Assets – Property, Plant and Equipment Consolidated Year ended 31 December 2016 Opening net book amount Additions through business combinations (refer note 15) Additions - other Disposals Depreciation charge Effect of foreign exchange on depreciation Closing net book amount At 31 December 2016 Cost Accumulated depreciation Net Book amount Consolidated Year ended 31 December 2015 Opening net book amount Additions through business combinations (refer note 15) Additions - other Disposals Depreciation charge Effect of foreign exchange on depreciation Closing net book amount At 31 December 2015 Cost Accumulated depreciation Net Book amount Buildings Vehicles Furniture, fittings and equipment Total $'000 $'000 $'000 $'000 4,450 581 36,339 41,370 - - - (152) - 4,298 5,046 (748) 4,298 - - (202) (67) - 312 270 25,141 (13) (11,488) (14) 50,235 270 25,141 (215) (11,707) (14) 54,845 1,184 (872) 312 83,867 (33,632) 50,235 90,097 (35,252) 54,845 Buildings Vehicles Furniture, fittings and equipment Total $'000 $'000 $'000 $'000 4,602 951 24,022 29,575 - - - (152) - 4,450 5,046 (596) 4,450 97 50 (395) (122) - 581 2,320 19,100 (65) (9,099) 61 36,339 2,417 19,150 (460) (9,373) 61 41,370 1,386 (805) 581 58,483 (22,144) 36,339 64,915 (23,545) 41,370 53 G8 Education limited | Annual Report 2016 (a) Leasehold Improvements Furniture, fittings and equipment includes the following amounts that are leasehold improvements: Cost Accumulated depreciation Net book amount Consolidated 2016 $'000 50,676 (14,361) 36,315 2015 $'000 31,449 (9,328) 22,121 (b) Non-current assets pledged as security Refer to note 19 for information on the non-current assets pledged as security by the Company and its controlled entities. Accounting Policy Property, plant and equipment are stated at historical cost less depreciation. Historical cost includes expenditure that is directly attributable to the acquisition of the items. Subsequent costs are included in the asset’s carrying amount or recognised as a separate asset, as appropriate, only when it is probable the future economic benefits associated with the item will flow to the Group and the cost of the item can be measured reliably. The carrying amount of the replaced part is derecognised. All other repairs and maintenance are charged to the Income Statement during the reporting year in which they are incurred. Depreciation for vehicles is calculated using the diminishing value method and on other assets calculated using the straight-line method to allocate their cost net of their residual values, over their estimated lives, as follows:  Buildings: 40 years  Vehicles: 3 - 12 years  Furniture, fittings and equipment: 2 - 15 years The assets’ residual values and useful lives are reviewed, and adjusted if appropriate, at the end of each reporting period. Gains and losses on disposals are determined by comparing proceeds with the carrying amount. These are included in the Income Statement. 54 G8 Education limited | Annual Report 2016 Consolidated 2016 $'000 2015 $'000 8,510 1,295 9,805 7,143 2,132 9,275 402 185 2,396 2,050 1,199 6,232 16,037 (216) (406) (623) 15,415 - 170 3,628 8,962 - 12,760 22,035 - (357) (357) 21,678 Other Total Consolidated Foreign Exchange Share Issue Transaction Costs $'000 2,967 (910) 77 2,132 $'000 5,386 3,533 - 8,919 $'000 592 2,949 (57) 3,484 $'000 15,448 6,210 20 21,678 (857) 18 1,293 (6,869) - 2,050 (483) 559 3,560 (6,840) 577 15,415 Note 10: Non-Current Assets – Deferred Tax Assets Deferred tax asset The balance comprises temporary differences attributable to: Employee benefits Share issue transaction costs Other s40-880 Deductions Doubtful debts Accrued expenses Foreign Exchange Loss (derivatives) Provision Sub total other Total deferred tax assets Deferred Tax Liability Buildings Prepayments Total deferred tax liability Net deferred tax asset At 1 January 2015 Charged to the consolidated income statement Charged directly to equity At 31 December 2015 Charged to the consolidated income statement Charged directly to equity At 31 December 2016 Employee Benefits $'000 6,503 640 - 7,143 1,367 - 8,510 55 G8 Education limited | Annual Report 2016 Note 11: Current and Non-Current Liabilities - Trade and Other Payables Trade payables Deferred centre acquisitions Dividends payable Centre enrolment advances Other payables and accruals Deferred income Total Current Other payables Total Non-Current Notes 15 23 15 Consolidated 2016 $'000 7,534 3,998 22,951 8,260 35,872 10,232 88,847 754 754 2015 $'000 7,587 3,655 22,369 8,754 29,388 11,301 83,054 712 712 Trade payables are non-interest bearing and are normally settled on 30-day terms. Accounting Policy These amounts represent liabilities for goods and services provided to the Group prior to the end of the year which are unpaid. The amounts are unsecured and are usually paid within 30 days of recognition. Trade and other payables are presented as current liabilities unless payment is not due within 12 months from the reporting date. Note 12: Non-Current Liabilities - Provisions Employee benefits Consolidated 2016 $'000 4,783 4,783 2015 $'000 4,069 4,069 56 G8 Education limited | Annual Report 2016 Note 13: Reconciliation of Profit After Tax to Net Cash Flows from Operating Activities Profit for the year Depreciation/(gain) Foreign exchange loss on Singapore corporate notes Fair value adjustment to derivatives Net gain on sale of shares Net loss on sale of assets Write back of deferred consideration not payable Increase in borrowings cost prepayments (Increase)/Decrease in deferred tax asset (Increase) in trade and other debtors Increase in trade and other creditors Increase in other provisions Non - cash employee benefits expense - share based payments Increase/(Decrease) in provision for income taxes payable Acquisition expenses Net exchange differences Net cash inflows from operating activities Consolidated 2016 $'000 80,265 11,707 (10,080) 18,128 - 244 (2,500) 11,940 6,263 (8,464) 4,868 3,846 (105) (7,323) - (206) 108,583 2015 $'000 88,581 9,372 8,378 - (7,343) - (5,754) 1,574 (6,210) (10,020) 16,098 3,520 344 (5,255) 915 852 95,052 57 G8 Education limited | Annual Report 2016 2. Business Combinations, Goodwill & Impairment Note 14: Critical Accounting Estimates and Judgements Estimates and judgements are continually evaluated and are based on historical experience and other factors, including expectations of future events that may have a financial impact on the entity and that are believed to be reasonable under the circumstances. The Group makes estimates and assumptions concerning the future. The resulting estimates will, by definition, seldom equal the related actual results. The estimates and assumptions that have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial year are discussed below. (i) Estimated impairment of goodwill The Group tests annually whether goodwill has suffered any impairment, in accordance with the accounting policy stated in note 16. The recoverable amounts of goodwill have been determined based on value-in-use calculations. These calculations require the use of assumptions. Refer to note 16 for details of these assumptions and the potential impact of changes to these assumptions. (ii) Deferred contingent consideration on acquisition of businesses The Group includes the fair value of deferred contingent consideration as a liability for the acquisition of a business where it expects the earn-out target to be met. This judgement is based on operational due diligence and knowledge of the business trading conditions including location, occupancy and profitability at the time of settlement. If the earn out target is not met then the amount not paid of the deferred contingent consideration is taken to the income statement as a credit and the corresponding entry against the liability. The value of the deferred consideration is reviewed at each reporting date. 58 G8 Education limited | Annual Report 2016 Note 15: Business Combinations The acquisitions below have increased the Group’s market share and are expected to reduce costs per centre through economies of scale. The goodwill is attributable to the future profitability of the acquired businesses. During the year the Group purchased 21 centres from various vendors as outlined below: Acquisition costs of $2,574,323 (2015: $916,000) are included in other expenses in the consolidated income statement. As at 31 December 2016 accounting for the 2016 acquisitions are provisional in nature due to final completion statements not being received at year end. During the year accounting adjustments were made to provisional amounts recognised in 2015 as outlined below: The above amounts relate to accounting adjustments for assets and liabilities taken on at acquisition date but not finalised at 31 December 2015. 59 G8 Education limited | Annual Report 2016 Number of centres61124411121StateNSW/VIC/ SingaporeNSWVICVICNSWWANSWQLDVICTOTAL$'000$'000$'000$'000$'000$'000$'000$'000$'000$'000Purchase ConsiderationCash consideration6,0892,8674,6485,03311,71910,0125,7609,0007,74662,874Contingent consideration1,683---2,315----3,998Purchase price adjustments(100)(41)(73)(23)(63)(216)(83)(149)-(748)Total purchase consideration7,6722,8264,5755,01013,9719,7965,6778,8517,74666,124Assets & Liabilities acquired at fair valueProperty, Plant & equipment155311119018---270Payables(3)(9)---12(57)(90)-(147)Employee benefit liabilities(86)(18)---(130)(44)(98)-(376)Net identifiable assets/(liabilities) acquired(74)(22)3111190(100)(101)(188)-(253)Goodwill7,7462,8484,5444,99913,7819,8965,7789,0397,74666,3777,6722,8264,5755,01013,9719,7965,6778,8517,74666,124Revenue & profit contribution from the date of acquisition to period end 31 December 2016Revenue 4,9081,0441,3053,0321,2912,0466751,070-15,371Profit before tax44736014967947507239322(10)2,740Revenue & profit contribution for full year 2016Revenue 6,9751,7563,8066,1927,1418,0632,4423,9682,42942,772Profit before tax1,0965106691,6431,1102,1847651,1907069,8732015 Provisional2016 AdjustmentsFinalStateVIC/NSW/ QLD/SA/WAVIC/NSW/ QLD/SA/WAVIC/NSW/ QLD/SA/WA$'000$'000$'000Purchase ConsiderationCash consideration137,1703,792140,962Contingent consideration3,080423,122Purchase price adjustments281507788Total purchase consideration140,5314,341144,872Assets & Liabilities acquired at fair valueProperty, Plant & equipment2,417302,447Payables(515)0(515)Employee benefit liabilities(1,634)0(1,634)Net identifiable assets/(liabilities) acquired26830298Goodwill140,2634,311144,574140,5314,341144,872 Contingent Consideration As part of the purchase agreement with previous owners a portion of the consideration was determined to be contingent, based on the performance of the acquired business. The following table outlines the additional cash payments to the previous owners upon meeting specified performance conditions: At 31 December 2016 Acquisition of 1 Centre* Acquisition of 3 Centres* Acquisition of 1 centre Total Total potential contingent consideration payable $’000 1,683 2,315 1,200 5,198 Carrying value Conditions $’000 1,683 24 month performance hurdle based on EBIT 24 month performance hurdle based on EBIT 2,315 754 19 years occupancy hurdle based on licence capacity 4,752 *The Group has assessed these hurdles will be reached within 12 months and accordingly have recorded these amounts as current. A reconciliation of the fair value of the contingent consideration liability is provided below: Movement in Contingent consideration 2015 Initial fair value of the contingent consideration at acquisition date Financial liability for contingent consideration as at 31 December 2014 Write back of contingent consideration to P&L performance condition not met - other income Write back of contingent consideration to Goodwill performance condition not met Paid contingent consideration performance condition met Contingent consideration for new acquisitions Total consideration payable as at 31 December 2015 Movement in Contingent consideration 2016 Initial fair value of the contingent consideration at acquisition date Financial liability for contingent consideration as at 31 December 2015 Write back of contingent consideration performance condition not met - other income Paid contingent consideration performance condition met Contingent consideration for new acquisitions - Goodwill Total consideration payable as at 31 December 2016 10,432 10,432 (5,755) (2,938) (1,622) 4,250 4,367 4,367 4,367 (2,500) (1,112) 3,998 4,752 Adjustments to the contingent consideration from acquisition to 31 December 2016 were recognised in the statement of profit and loss. The fair value is determined using the discount cash flow method on contingent consideration payable over 12 months as such the carrying value is equal to the fair value. Accounting Policy The acquisition method of accounting is used to account for all business combinations. Cost is measured as the fair value of the assets given, equity instruments issued or liabilities incurred or assumed at the date of exchange. Where equity instruments are issued in an acquisition, the fair value of the instruments is their published market price as at the date of exchange. Acquisition costs paid by the Company are expensed. 60 G8 Education limited | Annual Report 2016 Identifiable assets acquired and liabilities and contingent liabilities assumed in a business combination are measured initially at their fair values at the acquisition date, irrespective of the extent of any non-controlling interest. The excess of the cost of acquisition over the fair value of the Group’s share of the identifiable net assets acquired is recorded as goodwill. Where settlement of any part of cash consideration is deferred, the amounts payable in the future are discounted to their present value as at the date of exchange. The discount rate used is the entity’s incremental borrowing rate, being the rate at which a similar borrowing could be obtained from an independent financier under comparable terms and conditions. Contingent consideration is classified either as equity or a financial liability. Amounts classified as a financial liability that are subsequently not required to be paid at the end of the earn out period are recognised as other income. Note 16: Non-Current Assets - Goodwill Goodwill Year ended 31 December Opening net book amount Additions Adjustments in respect of prior year acquisitions Exchange differences Closing net book amount At 31 December Cost Accumulated impairment Net book amount Consolidated 2016 $'000 2015 $'000 944,604 66,377 4,311 (290) 1,015,002 809,162 140,263 (6,017) 1,196 944,604 1,026,054 (11,052) 1,015,002 955,656 (11,052) 944,604 (a) Impairment tests for goodwill Goodwill is monitored and tested for impairment on an operating segment level as outlined in the accounting policy below. The recoverable amount of the child care centre assets is determined based on value-in-use calculations. These calculations use cash flow projections based on budgets for 2017 and then extrapolated using estimated growth rates. The growth rate does not exceed the long-term average growth rate for the business. For the purposes of goodwill impairment testing, the recoverable amount is compared to the carrying amount of the assets of the Group, which aside from goodwill, also includes the fixed assets of the child care centres. (b) Key assumptions used for value-in-use calculation The value-in-use calculation is based on forecast EBITDA which is a function of occupancy, child care fees and centre expenses. Occupancy and child care fees are based on the current market conditions plus anticipated annual increases. Centre expenses include the following key items:  Centre wages – based on industry award standards and forecast to increase by a 3% index annually;  Centre occupancy expenses – based on current operating leases and increased by a 4% index annually; and  Other child care expenses – driven by historical expenditure and future occupancy growth. The anticipated occupancy reflects seasonal factors and underlying growth in occupancy achieved from the implementation of the Group’s strategies. Economic occupancy levels represent the key to financial success for the Group given the largely fixed cost-base of child care centres. The impairment model has the following key attributes:  Revenue growth of 6%;  Pre-tax discount rate of 13%; 61 G8 Education limited | Annual Report 2016  Full head office costs allocation; and  Forecast period of 5 years plus a terminal growth calculation with a growth rate of 0%. Key assumptions have not changed from prior year. (c) Impairment charge As a result of the value in use calculations described above it was determined that no impairment was required to be recognised. The Group has completed a sensitivity analysis on its impairment model and no reasonably possible movement in the key assumptions would give rise to an impairment loss. Accounting Policy Goodwill is not subject to amortisation and is tested annually for impairment or more frequently if events or changes in circumstances indicate that they might be impaired. Other assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. An impairment loss is recognised for the amount by which the asset’s carrying amount exceeds its recoverable amount. The recoverable amount is the higher of an asset’s fair value less costs to sell and value in use. The value in use is calculated based on the discounted cash flows of the child care centres over the lease period including a terminal value calculation, which is assessed on a segment level. 62 G8 Education limited | Annual Report 2016 3. Capital Structure & Financial Risk Management Note 17: Financial Risk Management The Group’s activities expose it to a variety of financial risks: interest rate risk, credit risk, foreign exchange risk and liquidity risk. The Group’s overall risk management program focuses on the unpredictability of financial markets and seeks to minimise potential adverse effects on the financial performance of the Group. The Group uses derivative financial instruments to hedge certain risk exposures. Derivatives are exclusively used for hedging purposes, i.e. not as trading or other speculative instruments. The Group uses different methods to measure different types of risk to which it is exposed. These methods include sensitivity analysis in the case of interest rate, and other risks, and ageing analysis for credit risk. The risk management of the Group is conducted in a manner consistent with policies approved by the Board. The Board provides principles for overall risk management, as well as policies covering specific areas, such as, interest rate risk, credit risk, foreign exchange risk and investment of excess liquidity. The Group holds the following financial instruments: 2016 Financial Assets Cash and Cash equivalents Trade and other receivables Deposits on acquisitions Derivative Financial Instruments 2015 Financial Assets Cash and Cash equivalents Trade and other receivables Financial assets at fair value $'000 Financial assets at amortised cost $'000 - - - 3,359 3,359 26,467 21,711 23,022 - 71,200 Total $'000 26,467 21,711 23,022 3,359 74,559 - - - 193,840 20,152 213,992 193,840 20,152 213,992 63 G8 Education limited | Annual Report 2016 2016 Financial Liabilities Trade and other payables Borrowings Derivative financial instrument 2015 Financial Liabilities Trade and other payables Borrowings Derivative financial instrument Derivatives used for Cash Flow Hedges $'000 Derivatives used for Fair Value Hedges $'000 Liabilities at amortised cost Total $'000 $'000 - - 1,042 1,042 - - 1,184 1,184 - - 15,309 15,309 - - - - 73,628 410,649 - 484,277 63,571 515,161 - 578,732 73,628 410,649 16,351 500,628 63,571 515,161 1,184 579,916 (a) Foreign exchange risk The Group has operations and borrowings in Singapore and is exposed to foreign exchange risk associated with the Singapore dollar. Foreign exchange risk arises from future commercial transactions and from recognised assets and liabilities denominated in a currency that is not the entity’s functional currency. The foreign exchange risk associated with the Singapore operations is managed through a natural hedge as the cash flows from the Singapore operations are denominated in Singapore dollars. The Group also has current Singapore dollar denominated corporate notes outstanding with a total value of S$270m. On 18 May 2016 the Group entered into a cross currency swap agreement to hedge against 1) changes to the AUD/SGD forward rate at inception to mitigate the foreign exchange exposure on the highly probable repayment of SGD denominated borrowings (Senior Unsecured Notes issued under G8’s SGD 600million Multicurrency Issuance Program); and 2) the foreign exchange exposure on the coupon payments associated with the S$270m corporate notes where the group pays 6.54% on AUD 269,892,043 and receives 5.50% on SGD $270m. The Group’s exposure to foreign currency risk at the end of the reporting period, expressed in Singapore dollars, was as follows: Cash and Cash equivalents Trade receivables Borrowings* Trade payables 2016 SGD $'000 2015 SGD $'000 3,565 319 (262,977) (240) (259,333) 2,630 236 (410,814) (118) (408,066) *The Group entered into a cross currency swap to hedge against foreign exchange exposure on SGD borrowings whereby foreign exchange risk is mitigated by fair value movements being fully hedged. The SGD to AUD exchange rate at 31 December 2016 was 0.9584. 64 G8 Education limited | Annual Report 2016 Amounts recognised in profit or loss and other comprehensive income During the year, the following foreign-exchange related amounts were recognised in profit or loss and other comprehensive income: Amounts recognised in profit or loss Exchange losses on foreign currency borrowing included in finance costs Net revaluation of cross currency swap included in finance costs - SGD borrowings Net revaluation of the AUD/SGD call option included in finance costs Net gains recognised in other comprehensive income Translation of foreign operations Net Revaluation of foreign exchange contract from prior period and recognition in income statement Net revaluation of the cross currency swap - SGD borrowings 2016 $'000 (10,080) 15,309 2,819 2016 $'000 (455) (3,559) 1,042 2015 $'000 11,968 - - 2015 $'000 1,514 3,559 - Sensitivity As shown in the table above, the Group's only foreign exchange risk relates to changes in AUD/SGD exchange rates. The sensitivity of profit or loss to changes in the exchange rates arises mainly from SGD-dollar denominated borrowings. The group entered into a cross currency swap during the year to fully hedge against foreign currency exposure on SGD borrowings. Due to the effective nature of the hedge arrangement there is no material impact on post tax profits. Accounting Policy (i) Functional and presentation currency Items included in the financial statements of each of the Group’s entities are measured using the currency of the primary economic environment in which the entity operates (‘the functional currency’). The consolidated financial statements are presented in Australian dollars, which is G8 Education Limited’s functional and presentation currency. (ii) Transactions and balances Foreign currency transactions are translated into the functional currency using the exchange rates prevailing at the dates of the transactions. Foreign exchange gains and losses resulting from the settlement of such transactions and from the translation at year end exchange rates of monetary assets and liabilities denominated in foreign currencies are recognised in the income statement except when they are deferred in equity as qualifying cash flow hedges and qualifying net investment in a foreign operation. Foreign exchange gains and losses that relate to borrowings are presented in the income statement, within finance costs. All other foreign exchange gains and losses are presented in the income statement on a net basis within other income or other expenses. Non-monetary items that are measured at fair value in a foreign currency and 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 reported as part of the fair value gain or loss. 65 G8 Education limited | Annual Report 2016 (iii) Group companies The results and financial position of foreign operations that have a functional currency different from the presentation currency are translated into the presentation currency as follows: 1. assets and liabilities for each balance sheet presented are translated at the closing rate at the date of that balance sheet 2. income and expenses for each income statement and statement of comprehensive income are translated at average exchange rates (unless this is not a reasonable approximation of the cumulative effect of the rates prevailing on the transaction dates, in which case income and expenses are translated at the dates of the transactions); and 3. all resulting exchange differences are recognised in other comprehensive income. On consolidation, exchange differences arising from the translation of any net investment in foreign entities and of borrowings and other financial instruments designated as hedges of such investments, are recognised in other comprehensive income. Goodwill and fair value adjustments arising on the acquisition of a foreign operation are treated as assets and liabilities of the foreign operation and are translated at the closing rate. (b) Interest Rate Risk Cash flow and fair value interest rate risk The Group’s main interest rate risk arises from long term borrowings. Borrowings issued at variable rates expose the Group to cash flow interest rate risk. Borrowings issued at fixed rates expose the Group to fair value interest rate risk if the borrowings are carried at fair value. Group policy is to maintain between 50% - 80% of its borrowings at fixed rate using interest rate swaps to achieve this when necessary. During 2016 and 2015, the Group’s borrowings at variable rates were denominated in Australian dollars only. The Group’s fixed rate borrowings and receivables are carried at amortised cost. They are therefore not subject to interest rate risk as defined in AASB 7, since neither the carrying amount nor the future cash flows will fluctuate because of a change in market interest rates. The corporate notes denominated in Singapore dollars are all fixed rate notes. Instruments used by the Group At 2016 year end 76% of the borrowings outstanding at year end were fixed rate borrowings. The fixed interest rates range between 6.54% and 7.65% per annum (2015 – between 3.75% and 7.65% per annum) and the variable rates are 3.90% per annum above the 90 day bank bill rate which at the end of the reporting period was 1.78% per annum (2015 – 2.375% per annum). During the year the group entered into a cross currency swap. The swap transaction was to hedge the 5.5% on SGD amount for 6.54% on AUD amount. The Bankwest facility variable rate in the year ranged between 2% and 4%. 66 G8 Education limited | Annual Report 2016 As at the reporting date, the Group had the following variable rate borrowings outstanding: Corporate Note Bank facility Net exposure to cash flow interest rate risk 31 December 2016 31 December 2015 Weighted avg interest rate % 5.98% 2.44% - Balance % of Total Loans Weighted avg interest rate Balance % of Total Loans $'000 50,000 40,000 90,000 6.12% $'000 50,000 - - - 50,000 9% - 9% 12% 12% 12% An analysis by maturities is provided in (d) following. Amounts recognised in profit or loss and other comprehensive income During the year the cross currency swap was partially redesignated as a cash flow hedge, the following gains/ (losses) were recognised in profit or loss and other comprehensive income in relation to cross currency swap. Amounts recognised in other comprehensive income Gains recognised as a result of cross currency swap designated as cash flow hedge 2016 $'000 1,042 2015 $'000 - Group sensitivity At 31 December 2016, if interest rates had changed by -0.25%/+ 0.25% absolute from the year end rates with all other variables held constant, post-tax profit for the year would have been $88,291 higher or $88,291 lower respectively (net profit for 2015: $87,740 higher or $87,740 lower respectively). (c) Credit risk Credit risk is managed on a Group basis. Credit risk arises from cash and cash equivalents, favourable derivative financial instruments and deposits with banks and financial institutions, as well as credit exposures to trade and other debtors. For banks and financial institutions, only independently rated parties with a minimum rating of ‘A’ are accepted . The maximum exposure to credit risk at the reporting date is the carrying amount of the financial assets as summarised below. Trade debtor credit risk is managed by requiring child care fees to be paid in advance. Outstanding debtor balances are reviewed weekly and followed up in accordance with the Group’s debt collection policy. Credit risk is also minimised by federal government funding in the form of child care benefits, as they are considered to be a high quality debtor. Analysis of the ageing of receivables is performed in note 7. 67 G8 Education limited | Annual Report 2016 Trade receivables Counterparties with external credit rating AAA Counterparties without external credit rating Receivables (current and non-current) Total receivables Cash at bank and short term deposits Counterparties with external credit rating - AA 2016 $'000 2015 $'000 13,620 12,405 9,328 22,948 10,539 22,944 26,467 193,840 (d) Liquidity risk Prudent liquidity risk management implies maintaining sufficient cash and marketable securities and the availability of funding through an adequate amount of committed credit facilities. The Group manages liquidity risk by continuously monitoring forecast and actual cash flows and matching the maturity profiles of financial assets and liabilities. Financing arrangements Details of financing arrangements are disclosed in note 19. Maturities of financial liabilities The table below analyses the Group’s financial liabilities into relevant maturity groupings based on the remaining term at the reporting date to the contractual maturity date. The amounts disclosed in the table are the contractual undiscounted cash flows. Balances due within 24 months equal their carrying balances as the impact of discounting is not significant. For interest rate swaps the cash flows have been estimated using forward interest rates applicable at the end of the reporting period. 0 to 6 months 6 to 12 months Consolidated 2016 $'000 Between 2 and 5 years >5years Between 1 and 2 years Total contractual cash flows Carrying Amount Non Derivative Corporate Note Bank facility Deferred centre acquisition Trade and other payables Derivatives 11,537 11,895 107,092 378,704 623 623 623 40,623 - - 509,228 378,021 42,491 40,000 - 73,628 4,073 - 75 - 225 - 825 - 5,198 73,628 4,752 73,628 Net settled (FX hedge) 1,783 1,839 7,943 8,342 - 19,907 16,351 68 G8 Education limited | Annual Report 2016 0 to 6 months 6 to 12 months Consolidated 2015 $'000 Between 2 and 5 years >5years Between 1 and 2 years Total contractual cash flows Carrying Amount 162,413 10,810 279,975 155,910 - 609,108 521,720 400 63,571 3,180 - 71 - 195 - 521 - 4,367 63,571 4,367 63,571 1,184 - - - - 1,184 1,184 Non Derivative Corporate Note Deferred centre acquisition Trade and other payables Derivatives Net settled (FX hedge) (e) Fair value measurements The fair value of financial assets and financial liabilities must be estimated for recognition and measurement or for disclosure purposes. AASB 13 Fair Value Measurement requires disclosure of fair value measurements by level of the following fair value measurement hierarchy: 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). The following table present the Group’s assets and liabilities measured and recognised at fair value on a recurring basis at 31 December 2015 and 31 December 2016: At 31 December 2015 $000 Liabilities Derivatives used for hedging Contingent consideration (refer note 15) At 31 December 2016 $000 Asset Derivative financial asset Liabilities Derivatives used for hedging Contingent consideration (refer note 15) Level 1 Level 2 Level 3 Total - - 1,184 - - 4,367 1,184 4,367 Level 1 Level 2 Level 3 Total - - - 3,359 16,351 - - 3,359 - 4,752 16,351 4,752 69 G8 Education limited | Annual Report 2016 The fair value of financial instruments that are not traded in an active market (for example, over-the-counter derivatives) is determined using valuation techniques. These valuation techniques maximise the use of observable market data where it is available and rely as little as possible on entity specific estimates. If all significant inputs required to fair value an instrument are observable, the instrument is included in level 2. The fair value of the financial instrument equals the carrying value. Specific valuation techniques used to value financial instruments include:  The use of quoted market prices or dealer quotes for similar instruments;  The fair value of interest rate swaps is calculated as the present value of the estimated future cash flows based on observable yield curves; and  Other techniques, such as discounted cash flow analysis, are used to determine fair value for the remaining financial instruments. On 18 May 2016 the Group entered into a cross currency swap agreement to hedge against 1) changes to the AUD/SGD forward rate at inception to mitigate the foreign exchange exposure on the highly probable repayment of SGD denominated borrowings (Senior Unsecured Notes issued under G8’s SGD 600million Multicurrency Issuance Program); and 2) the foreign exchange exposure on the coupon payments associated with the S$270m corporate notes where the group pays 6.54% on AUD 269,892,043 and receives 5.50% on SGD $270m. The fair value movement on the principal repayment is being treated as a fair value hedge with all movements being recorded through finance costs. The coupon payments associated with the corporate notes have been designated as a cash flow hedge with all movements being recorded in other comprehensive income. In February 2016 the Group closed out an AUD/SGD put option that was purchased to hedge against the currency risk of the S$260m unsecured May 2017 notes. The gain on this instrument has been reflected though the profit and loss. On the 18th May 2016 purchased an AUD/SGD call option with a notional value of S$270,000,000, strike price of $1.175 and maturity date of 18 May 2019. This instrument is not designated as a hedge instrument and was purchased as an additional layer of counterparty security that ultimately eliminated collateral posting requirements. The movement in the value of this option is recognised through the income statement. Note 18: Current Assets - Cash and Cash Equivalents Cash at bank and in hand Deposits at call* Total Cash and Cash Equivalents Consolidated 2016 $'000 2015 $'000 26,448 19 26,467 175,978 17,862 193,840 *The effective average interest rate for the deposits at call was 1.3% (2015: 2.33%). Included above is $14,347 used as security against the Company’s bank guarantee facility (2015: $14,203). 70 G8 Education limited | Annual Report 2016 (a) Reconciliation to cash at the end of the year The above figures are reconciled to cash at the end of the financial year as shown in the statement of cash flows as follows: Balance as per above Term Deposits held as security against bank guarantees and foreign exchange hedge Balance as per Statement of Cash Flows Consolidated 2016 $'000 26,467 (14) 26,453 2015 $'000 193,840 (14) 193,826 Accounting Policy For statement of cash flows presentation purposes, cash and cash equivalents includes cash on hand, deposits held at call with financial institutions, other short-term, highly liquid investments with original maturities of three months or less that are readily convertible to known amounts of cash and which are subject to an insignificant risk of changes in value. Note19: Current and Non-Current Liabilities - Borrowings Unsecured Corporate Notes (a) Total Unsecured Borrowings Secured Bankwest Facility Total Secured Borrowings Total Borrowings Current $'000 2016 Non-current $'000 Total $'000 Current $'000 2015 Non-current $'000 Total $'000 - - - - 370,649 370,649 370,649 148,891 370,649 148,891 366,270 515,161 366,270 515,161 40,000 40,000 410,649 40,000 40,000 - - 410,649 148,891 - - - - 366,270 515,161 As at 31 December 2016 the Group had $40m drawn from the $50m Bankwest facility. The facility termination date is 31 December 2018. (a) Corporate Notes G8 Education Limited has the following Corporate Notes outstanding at year end: Issue Date Face Value in Issue Currency $000 Issue Currency Repayment Date Interest Rate % Floating or Fixed 7 August 2013 3 March 2014 18 May 2016 70,000 50,000 258,021 AUD AUD SGD 7 August 2019 3 March 2018 18 May 2019 7.65% 390bps + 90 day Bank Bill Rate Variable 5.50% Fixed Fixed G8 Education Limited has complied with the financial covenants relating to the AUD and SGD Corporate Notes and Bankwest Facility during 2016 and 2015 reporting periods. On 18 May 2016 the Group entered into an AUDSGD cross currency swap whereby the Group pays 6.54% on AUD $269,892,043 and receives 5.50% on S$270,000,000. The spot rate at inception was 0.9996. The objective of this transaction is to hedge the highly probable repayment of SGD denominated borrowings (Senior Unsecured Notes issued under G8’s S$600 million Multicurrency Issuance Program) by G8 Education against changes in the AUD/SGD forward rate from that at the inception of this hedging relationship. The swap has been designated as a fair value hedge of the highly probable repayment of S$270,000,000 Series 003 5.50% unsecured notes relating to the 71 G8 Education limited | Annual Report 2016 principal repayment of SGD denominated borrowings (senior unsecured notes under G8’s S$600,000,000 multi- currency issuance program) and as a cash flow hedge from 1 July 2016 for the coupon payments associated with the Series 003 notes. The movements of the foreign exchange on the fair value of the swap are recognised in finance costs offset by similar movements on the borrowings and the movement of the fair value of the swap associated with fixing the coupon payment has been recognised in equity. Furthermore on the 18th May 2016 purchased an AUDSGD call option with a notional value of S$270,000,000, strike price of $1.175 and maturity date of 18 May 2019. This instrument is not designated as a hedge instrument and was purchased as an additional layer of counterparty security that ultimately eliminated collateral posting requirements. The movement in the value of this option is recognised through the income statement.In February 2016 the Group closed out an AUD/SGD call option that was purchased to hedge against the currency risk of the S$260m unsecured May 2017 notes. The gain on this instrument has been reflected though the profit and loss. (b) Interest rate risk exposures Details of the Group’s exposure to interest rate changes on debt are set out in note 17(b). (c) Assets pledged as security The facility is secured by:  First ranking registered mortgages over all leasehold assets owned by the Group;  An unlimited guarantee in favour of the Company from its subsidiaries; and  A right of entry in relation to certain leased premises. The carrying amounts of assets pledged as security for current and non-current borrowings are: Current Floating charge Cash and cash equivalents Trade and other receivables Other current assets Total current assets pledged as security Non-current First mortgage Buildings Floating charge Vehicles, plant and equipment Total non-current assets pledged as security Total assets pledged as security Notes 18 7 8 9 9 Consolidated 2016 $'000 2015 $'000 26,467 22,948 9,234 58,649 193,840 22,943 9,754 226,537 4,298 4,450 50,547 54,845 113,494 36,920 41,370 267,907 72 G8 Education limited | Annual Report 2016 (d) Financing arrangements As at 31 December 2016 the following lines of credit were in place: Credit standby arrangements Total facilities Credit cards Used at balance date Unused at balance date Bank loan facilities Total facilities Used at balance date Unused at balance date Bank Guarantee facilities Total Facilities Used at balance date Unused at balance date Corporate Notes Total facilities Used at balance date Unused at balance date Consolidated 2016 $'000 500 (25) 475 50,000 (40,000) 10,000 35,000 (33,557) 1,443 2015 $'000 500 (137) 363 50,000 - 50,000 30,000 (26,717) 3,283 410,649 (410,649) - 515,161 (515,161) - The group maintains a secured facility for the provision of bank guarantees to landlords of premises leased by the Group and senior debt. (e) Fair value The carrying amounts and fair values of borrowings at balance dates are as reflected in the Balance Sheet. The SGD bond carrying amount is A$258m and the fair value is A$264.9m. Accounting Policy Measurement Borrowings are initially recognised at fair value, net of transaction cost incurred. Borrowings are subsequently measured at amortised cost. Any difference between the proceeds (net of transaction costs) and the redemption amount is recognised in the income statement over the year of the borrowings using the effective interest method. Fees paid on the establishment of loan facilities, which are not an incremental cost relating to the actual draw- down of the facility, are capitalised to the loan and expensed on a straight-line basis over the term of the facility. Borrowings are removed from the balance sheet when the obligation specified in the contract is discharged, cancelled or expired. The difference between the carrying amount of a financial liability that has been extinguished or transferred to another party and the consideration paid, including any non-cash assets transferred or liabilities assumed, is recognised in profit or loss as other income or finance costs. Borrowings are classified as current liabilities unless the Group has an unconditional right to defer settlement of the liability for at least 12 months after the balance date. 73 G8 Education limited | Annual Report 2016 Note 20: Derivative Financial Instruments Non-Current Asset Foreign exchange option Total non-current derivative financial instrument asset Current Liability Interest rate swap Non-Current Liability Cross currency swap contracts - cash flow hedges Cross currency swap contracts - fair value hedge Total non-current derivative financial instrument liability Consolidated 2016 $'000 2015 $'000 3,359 3,359 - - - (1,184) 1,042 15,309 16,351 - - - The Group is party to derivative financial instruments in the normal course of business in order to hedge exposure to fluctuations in interest rates and foreign exchange rates in accordance with the Group’s financial risk management policies (refer to note 17). Accounting Policy Derivatives are initially recognised at fair value on the date a derivative contract is entered into and subsequently remeasured to their fair value at the end of each reporting period. The accounting for subsequent changes in fair value depends on whether the derivative is designated as a hedging instrument, and if so, the nature of the item being hedged. The Group designates certain derivatives as either: (i) Hedges of a particular risk associated with the cash flows of recognised assets and liabilities and highly probable forecast transactions (cash flow hedge); or (ii) Hedges of a particular risk associated with the fair value of recognised assets and liabilities and highly probable forecast transactions (fair value hedge) The Group documents at the inception of the hedging transaction the relationship between hedging instruments and hedged items, as well as its risk management objective and strategy for undertaking various hedge transactions. The Group also documents its assessment, both at hedge inception and on an ongoing basis, of whether the derivatives that are used in hedging transactions have been and will continue to be highly effective in offsetting changes in fair values or cash flows of hedged items. The fair values of derivative financial instruments used for hedging purposes are disclosed in note 20. Movements in the hedging reserve in shareholders’ equity are shown in note 22. The full fair value of a hedging derivative is classified as a non-current asset or liability when the remaining maturity of the hedged item is more than 12 months; it is classified as a current asset or liability when the remaining maturity of the hedged item is less than 12 months. Fair Value Hedge The effective portion of changes in the fair value of derivatives that are designated and qualify as fair value hedges is recognised in finance costs and offset with a similar gain or loss on the associated borrowings. There is no ineffectiveness in the year 2016. Cash flow hedge The effective portion of changes in the fair value of derivatives that are designated and qualify as cash flow hedges is recognised in other comprehensive income and accumulated in reserves in equity. The gain or loss relating to the ineffective portion is recognised immediately in profit or loss within other income or other expense. Amounts accumulated in equity are reclassified to profit or loss in the periods when the hedged item affects profit or loss (for instance when the forecast sale that is hedged takes place). The gain or loss relating to the effective portion of interest rate swaps hedging variable rate borrowings is recognised in within finance costs. When a hedging instrument expires or is sold or terminated, or when a hedge no longer meets the criteria for hedge accounting, any cumulative gain or loss existing in equity at that time remains in equity and is recognised when the forecast transaction is ultimately recognised in profit or loss. When a forecast transaction is no longer expected to occur, the cumulative gain or loss that was reported in equity is immediately reclassified to profit or loss. 74 G8 Education limited | Annual Report 2016 Consolidated Consolidated 2016 Shares 2015 Shares 382,511,733 372,820,198 2016 $'000 641,848 2015 $'000 603,043 Note 21: Contributed Equity (a) Share capital Ordinary shares fully paid (b) Movements in ordinary share capital Details 31 December 2014 Balance Share placement from script offer for Affinity Education Group Limited Shares issued to Key Management Personnel Shares held in escrow Issuance of shares Dividend reinvestment plan Transaction costs of shares issued Deferred tax credit recognised directly in equity 31 December 2015 Balance 31 December 2015 Balance Dividend reinvestment plan Issuance of shares Transaction costs of shares issued Deferred tax credit recognised directly in equity 31 December 2016 Balance (c) Shares held in escrow under the executive share plan Balance at the beginning of the financial year Shares transferred under the plan Total outstanding at the end of the financial year Number of Shares '000 $'000 353,692 2,535 3,122 (3,122) 3,288 10,183 - - 369,698 369,698 9,692 1,707 - - 381,097 548,374 8,402 11,302 (11,302) 12,889 33,500 (150) 28 603,043 603,043 32,272 6,537 (22) 18 641,848 Consolidated 2016 Shares '000 3,122 (1,707) 1,415 2015 Shares - 3,122 3,122 (d) Ordinary shares Ordinary shares entitle the holder to participate in dividends and the proceeds on winding up of the Company in proportion to the number of and amounts paid on shares held. On a show of hands every holder of ordinary shares present at a meeting in person or by proxy, is entitled to one vote, and upon a poll each share is entitled to one vote. Ordinary shares have no par value and the Company does not have a limited amount of authorised capital. (e) Dividend reinvestment plan The Company has established a dividend reinvestment plan under which holders of ordinary shares may elect to have all or part of their dividend entitlements satisfied by the issue of new ordinary shares. Shares are issued under the plan. The Company advises the market at the time of announcing the dividend if there will be a discount applied to the market price. 75 G8 Education limited | Annual Report 2016 (f) Capital risk management The Group’s objectives when managing capital are to safeguard the Group’s ability to continue as a going concern, so that they can continue to provide returns for shareholders and benefits for other stakeholders and to maintain an optimal capital structure to reduce the cost of capital. In order to maintain or adjust the capital structure, the Group may adjust the amount of dividends paid to shareholders, return capital to shareholders, issue new shares or sell assets to reduce debt. Consistent with others in the industry, the Group monitors capital on the basis of the gearing ratio. This ratio is calculated as net debt divided by total capital. Net debt is calculated as total borrowings (including ‘borrowings’ and ‘trade and other payables’ as shown in the balance sheet) less cash and cash equivalents. Total capital is calculated as ‘equity’ as shown in the balance sheet plus net debt. The gearing ratios at 31 December were as follows: Borrowings Trade and other payables Less: cash and cash equivalents Net debt Total equity Total capital Gearing ratio Notes 19 11 18 Consolidated 2016 $'000 410,649 89,601 (26,467) 473,782 625,878 1,099,661 2015 $'000 515,161 83,054 (193,840) 404,375 602,785 1,007,160 43% 40% The Directors assess an appropriate level of gearing based on a leverage rate of less than 45%. Gearing ratio is calculated as net debt divided by total capital. Total capital is net debt plus total equity Accounting Policy Ordinary shares are classified as equity. Incremental costs directly attributable to the issue of new shares or options are shown in equity as a deduction, net of tax, from the proceeds. 76 G8 Education limited | Annual Report 2016 Note 22: Reserves and Retained Earnings Movements Translation reserve Opening balance Currency translation differences arising during the year Closing Balance Profits reserve Opening balance Transfer from retained earnings Dividends Closing Balance Share based payment reserve Opening balance Share based payment expense Closing Balance Hedging reserve Opening balance Revaluation - gross Closing Balance Total Reserves Retained earnings movements Opening balance Profit for the year Transfer to profits reserve Closing Balance (a) Nature and purpose of reserves (i) Share-based payments Consolidated 2016 $'000 6,026 (455) 5,571 33,706 87,994 (90,819) 30,881 344 (105) 239 3,559 (4,601) (1,042) 35,649 Consolidated 2016 $'000 (43,893) 80,265 (87,994) (51,622) 2015 $'000 4,512 1,514 6,026 22,745 98,852 (87,891) 33,706 - 344 344 - 3,559 3,559 43,635 2015 $'000 (33,622) 88,581 (98,852) (43,893) The share-based payments reserve is used to recognise the expensing of the grant date fair value of options issued to employees but not exercised. (ii) Translation Exchange differences arising on translation of the foreign controlled entity are recognised in other comprehensive income as described in note 17 and accumulated in a separate reserve within equity. The cumulative amount is reclassified to profit or loss when the net investment is disposed of. (iii) Hedging The hedging reserve is used to record gains or losses on hedging instruments in cash flow hedges that are recognised in other comprehensive income, as described in note 20. Amounts are reclassified to profit or loss when the associated hedge transaction affects profit or loss. (iv) Profits The profits reserve comprises the transfer of net profit for the current and previous years and characterises profits available for distribution as dividends in future years. Dividends amounting to $90.8 million (2015: $87.9 million) were distributed from the profits reserve during the year. 77 G8 Education limited | Annual Report 2016 Note 23: Dividends (a) Ordinary Shares Dividends Declared or paid during the financial year were as follows: Dividend for the quarter ended 31 March 2016 of 6.0 cents per share (2015: 6.0 cents per share) paid on 8 April 2016 (2015: Paid on 10 April 2015) Dividend for the quarter ended 30 June 2016 of 6.0 cents per share (2015: 6.0 cents per share) paid on 8 July 2016 (2015: Paid on 7 July 2015) 2016 $'000 2015 $'000 22,481 21,549 22,616 21,903 Dividend for the quarter ended 30 September 2016 of 6.0 cents per share (2015: 6.0 cents per share) paid on 7 October 2016 (2015: Paid on 7 October 2015) 22,772 22,070 Dividend for the quarter ended 31 December 2016 of 6.0 cents per share (2015: 6.0 cents per share) paid on 6 January 2017 (2015: Paid 11 January 2016) 22,950 22,369 Dividends paid in cash or satisfied by the issue of shares under the dividend reinvestment plan during the years ended 31 December were as follows: Paid in cash - March, June, September dividend Dividend payable in cash December Dividend reinvestment plan Total dividend Reconciliation to cash flow Paid in cash - December dividend paid in January Paid in cash - March, June, September dividend Total paid in cash 90,819 87,891 2016 $'000 2015 $'000 41,497 12,846 36,476 90,819 40,355 16,467 31,069 87,891 16,467 41,497 57,964 12,889 40,355 53,244 (b) Franked credits The franked portions of the December 2016 quarterly dividend will be franked out of existing franking credits. Franking credits available for subsequent financial years based on a tax rate of 30% (2015: 30%) Consolidated 2016 $'000 2015 $'000 Parent Entity 2016 $'000 2015 $'000 11,622 14,868 11,622 14,868 The above amounts represent the balance of the franking account as at the end of the reporting period, adjusted for: a) Franking credits that will arise from the payment of the amount of the provision for income tax; b) Franking debits that will arise from the payment of dividends recognised as a liability at the reporting date; and c) Franking credits that will arise from the receipt of dividends recognised as receivables at the reporting date. The consolidated amounts include franking credits that would be available to the parent entity if the distributable profits of subsidiaries were paid as dividends. 78 G8 Education limited | Annual Report 2016 Accounting Policy Provision is made for the amount of any dividend declared, being appropriately authorised and no longer at the discretion of the entity, on or before the end of the financial year but not distributed at reporting date. 4. Group Structure Note 24: Subsidiaries The consolidated financial statements incorporate the assets, liabilities and results of the following subsidiaries in accordance with the accounting policy set out in Note 35(b). Name of Entity Subsidiaries of Company Grasshoppers Early Learning Centre Pty Ltd Togalog Pty Ltd RBWOL Holding Pty Ltd** Ramsay Bourne Holdings Pty Ltd** Bourne Learning Pty Ltd Ramsay Bourne Acquisitions (No.1) Pty Ltd Ramsay Bourne Acquisitions (No.2) Pty Ltd** RBL No. 1 Pty Ltd Ramsay Bourne Licences Pty Ltd Sydney Cove Children’s Centre Pty Ltd Sydney Cove Children’s Centre B Pty Ltd Sydney Cove Children’s Centre C Pty Ltd Sydney Cove Property Holdings Pty Ltd World Of Learning Pty Ltd** World Of Learning Acquisitions (No.1) Pty Ltd World Of Learning Acquisitions Pty Ltd World Of Learning Licences Pty Ltd G8 KP Pty Ltd** Sterling Early Education Finance Pty Ltd Sterling Early Education Holdings Pty Ltd** Woodland Education Operations Pty Ltd Kindy Kids Operations Pty Ltd CG Operations Pty Ltd ** Kool Kids Operations Pty Ltd ** North Shore Childcare Pty Ltd** Ooorama Operations Pty Ltd** Jacaranda Operations Pty Ltd** Huggy Bear Operations Pty Ltd** Jellybeans Operations Pty Ltd** Janes Place Operations Pty Ltd Jolimont Private Education Pty Ltd WTTS Operations Pty Ltd BUI Investments Pty Ltd Derafi Pty Ltd Alfoom Investments Pty Ltd Shemlex Pty Ltd** Kindy Kids Village Pty Ltd Kindy Kids Long Day Care and Preschool Pty Ltd Three Little Pigs Pty Ltd 79 G8 Education limited | Annual Report 2016 Country of incorporation Class of Shares/Units 2016 2015 % % 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 Australia Australia Australia Australia Australia Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary 52 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 52 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 A.C.N 078 042 378 Pty Ltd ES5 Pty Ltd Kindy Patch Unit Trust Sydney Cove Children's Centre Trust Sydney Cove Children's Centre B Trust Shemlex Investment Unit Trust ** Shemlex Investments Freehold Trust No 1** Morley Perth Unit Trust Kindy Kids Village Trust Kindy Kids Long Day Care and Preschool Trust Adelaide Montessori Pty Ltd GW Concord Pty Ltd GW Macquarie Park Pty Ltd GW Brookvale Pty Ltd GW Bronte Pty Ltd GW Katoomba Pty Ltd GW Gladesville Pty Ltd Greenwood Prep 10 Pty Ltd Greenwood Prep Holdings Pty Ltd** The Trustee for Lane Cove CCC Unit Trust Lane Cove CCC Pty Ltd The Trustee for Waterloo CCC Unit Trust Waterloo CCC Pty Ltd The Trustee for GW Chatswood Unit Trust GW Chatswood Pty Ltd G8 Singapore Pte Ltd Cherie Hearts Corporate Pte Ltd Cherie Hearts Holdings Pte Ltd Cherie Hearts @ KK Pte Ltd Cherie Hearts @ SK Pte Ltd Cherie Hearts @ Gombak Pte Ltd Bright Juniors @ YS Pte Ltd Bright Juniors @ TM Pte Ltd Bright Juniors @ PGL Pte Ltd Bright Juniors @ SC Pte Ltd Bright Juniors Pte Ltd Our Juniors Schoolhouse Pte Ltd Subsidiaries of Togalog Pty Ltd Grasshoppers Early Learning Centre Pty Ltd 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 Singapore Singapore Singapore Singapore Singapore Singapore Singapore Singapore Singapore Singapore Singapore Singapore Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 - - - - - - 100 100 100 100 100 100 100 100 100 100 100 100 Australia Ordinary 48 48 * The proportion of ownership interest is equal to the proportion of voting power held. ** These subsidiaries have been granted relief from the necessity to prepare financial reports in accordance with Class Order 98/1418 issued by the Australian Securities and Investment Commission. For further information please refer to note 26. 80 G8 Education limited | Annual Report 2016 Note 25: Parent Entity Disclosures As at, and throughout the financial year ended 31 December 2016 the parent entity of the Group was G8 Education Limited. Result of parent entity Profit for the year after tax Other comprehensive income Total comprehensive income for the year Financial position of parent entity at year end Current assets Non-current assets Total assets Current liabilities Non-current liabilities Total liabilities Total equity of parent entity comprising of: Contributed equity Reserves Accumulated losses Total equity Consolidated 2016 $'000 79,811 (5,056) 74,755 2015 $'000 90,519 3,559 94,078 36,542 1,080,209 1,116,751 233,993 994,220 1,228,213 125,239 376,090 501,329 641,848 30,079 (56,505) 615,422 251,487 371,051 622,538 603,043 31,445 (28,813) 605,675 Parent entity contingencies Refer to note 28 for parent entity contingent liabilities. Parent entity guarantees in respect of the debts of its subsidiaries The parent entity has entered into a Deed of Cross Guarantee with the effect that the Company guarantees debts in respect of its subsidiaries. Further details of the Deed of Cross Guarantee and the subsidiaries subject to the deed are disclosed in note 26. Accounting Policy The financial information for the parent entity, G8 Education Limited, has been prepared on the same basis as the consolidated financial statements, except as set out below. (i) Investments in subsidiaries Investments in subsidiaries are accounted for at cost in the financial statements of G8 Education Limited. (ii) Tax consolidation legislation G8 Education Limited and its wholly-owned Australian controlled entities have implemented the tax consolidation legislation. The head entity, G8 Education Limited and the controlled entities in the tax consolidated Group account for their own current and deferred tax amounts. These tax amounts are measured as if each entity in the tax consolidated Group continues to be a standalone taxpayer in its own right. In addition to its own current and deferred tax amounts, G8 Education Limited also recognises the current tax liabilities (or assets) and the deferred tax assets arising from unused tax losses and unused tax credits assumed from controlled entities in the tax consolidated Group. 81 G8 Education limited | Annual Report 2016 The entities have also entered into a tax funding agreement under which the wholly-owned entities fully compensate G8 Education Limited for any current tax payable assumed and are compensated by G8 Education Limited for any current tax receivable and deferred tax assets relating to unused tax losses or unused tax credits that are transferred to G8 Education Limited under the tax consolidation legislation. The funding amounts are determined by reference to the amounts recognised in the wholly-owned entities’ financial statements. The amounts receivable/payable under the tax funding agreement is due upon receipt of the funding advice from the head entity, which is issued as soon as practicable after the end of each financial year. The head entity may also require payment of interim funding amounts to assist with its obligations to pay tax instalments. Assets or liabilities arising under tax funding agreements with the tax consolidated entities are recognised as current amounts receivable from or payable to other entities in the Group. Any difference between the amounts assumed and amounts receivable or payable under the tax funding agreement are recognised as a contribution to (or distribution from) wholly-owned tax consolidated entities. 82 G8 Education limited | Annual Report 2016 Note 26: Deed of Cross Guarantee All Australia subsidiaries listed in Note 24 are considered to be in the closed group and have been relieved from the requirement to prepare a Financial Report And Directors’ Report Under Class Order 98/1418 (As Amended) issued by the Australian Securities and Investments Commission. Below is a consolidated statement of comprehensive income for the year ended 31 December 2016 of the closed group: (a) Consolidated statements of comprehensive income Revenue from continuing operations Other income Profit on sale of financial assets Expenses Employee benefits expense Occupancy Direct costs of providing services Depreciation Other expenses Finance costs Total expenses Profit before income tax Income tax (expense) Profit for the year Recycle to income statement for amount reversed in current period Effective portion of changes in fair value of cash flow hedges Total Comprehensive income for the year 2016 $'000 760,048 1,459 - (423,780) (85,639) (57,603) (11,333) (25,092) (45,750) (649,197) 112,310 (34,581) 77,729 (3,559) (1,042) 73,128 2015 $'000 631,178 6,214 10,490 (345,140) (68,493) (47,366) (10,750) (18,368) (26,677) (516,794) 131,088 (34,064) 97,024 - 3,559 100,583 83 G8 Education limited | Annual Report 2016 (b) Balance Sheets Set out below is a consolidated balance sheet as at 31 December of the Closed Group. 2016 $'000 2015 $'000 23,050 22,831 30,453 3,669 80,003 139 53,909 13,747 984,696 23,006 3,359 1,078,856 1,158,859 82,651 3,999 - 25,826 - - 112,476 410,649 754 4,783 16,351 432,537 545,013 188,898 21,105 28,334 - 238,337 144,602 33,683 21,678 805,302 - - 1,005,265 1,243,602 82,257 - 148,891 19,591 1,184 4,297 256,220 366,270 712 4069 - 371,051 627,271 613,846 616,331 641,848 29,714 (57,716) 613,846 603,043 36,274 (22,986) 616,331 Current assets Cash and cash equivalents Trade and other receivables Other current assets Current tax asset Total current assets Non-current assets Investments in extended Group Property, plant and equipment Deferred tax assets Intangible assets Other non-current assets Derivative Financial Instruments Total non-current assets Total assets Current liabilities Trade and other payables Other creditors Borrowings Employee Entitlements Derivative liability Current tax liabilities Total current liabilities Non-current liabilities Borrowings Other payables Employee Entitlements Provisions Total non-current liabilities Total liabilities Net assets Equity Contributed equity Reserves Accumulated losses Total equity 84 G8 Education limited | Annual Report 2016 5. Unrecognised Items Note 27: Commitments (a) Capital commitments There is no capital expenditure unconditionally contracted for at the reporting date but not recognised as a liability. (b) Lease commitments: Group as lessee (i) Non-cancellable operating leases for premises and vehicles The Group leases various child care facilities under non-cancellable operating leases. The leases have varying terms, escalation clauses and renewal rights. On renewal, the terms of the leases are re-negotiated. Commitments in relation to leases contracted for at the reporting date but not recognised as liabilities: Payable: Within one year Later than one year but no later than five years Later than five years Representing: Non-cancellable operating leases (ii) Finance Leases The Group had no finance leases during 2016 or 2015. Consolidated 2016 $'000 2015 $'000 86,406 242,078 164,788 493,272 81,191 233,038 172,484 486,713 493,272 486,713 Accounting Policy Leases of property, plant and equipment where the Group, as lessee, has substantially all the risks and rewards of ownership are classified as finance leases. Finance leases are capitalised at the lease’s inception at the fair value of the leased property or, if lower, the present value of the minimum lease payments. The corresponding rental obligations, net of finance charges, are included in other short-term and long-term payables. Each lease payment is allocated between the liability and finance cost. The finance cost is charged to the income statement over the lease year so as to produce a constant periodic rate of interest on the remaining balance of the liability for each year. The property, plant and equipment acquired under finance leases are depreciated over the shorter of the asset’s useful life and the lease term. Leases in which a significant portion of the risks and rewards of ownership are not transferred to the Group as lessee are classified as operating leases. Payments made under operating leases (net of any incentives received from the lessor) are charged to the income statement on a straight-line basis over the year of the lease. 85 G8 Education limited | Annual Report 2016 Note 28: Contingencies (a) Contingent liabilities The Group had no contingent liabilities as at 31 December 2016 (2015: Nil). Note 29: Events occurring after the balance sheet date The following material matters have taken place subsequent to year end:  Gary Carroll was appointed Managing Director and Chief Executive Officer on 1 January 2017.  Sarah Zeljko was appointed Company Secretary on 16 January 2017.  Sharyn Williams was appointed Chief Financial Officer on 6 February 2017. To support our strategy, in February 2017 the Group announced raising approximately $212 million from a share placement to a subsidiary of China First Capital Group, a Hong Kong-listed investment company. The funding raised from the issue will enable the Group to repay a portion of it’s A$ bond and bank debt facilities as well as assisting in funding the acquisition of additional child care centres.  In accordance with the terms of the executive share plan a third of the shares issued will be cancelled by the Group as the underlying EPS growth did not exceed 15% as required by the terms of the plan. The impact of this has been accounted for in accordance with the requirements of AASB 2 in the current period. The Group plans to discontinue the Executive Share Plan, which was in place for the full year in 2016 and will implement the new LTI scheme subject to shareholder approval as outlined above. 86 G8 Education limited | Annual Report 2016 6. Other Note 30: Employee Entitlements Employee benefits Consolidated 2016 $'000 25,956 25,956 2015 $'000 22,824 22,824 (a) Amounts not expected to be settled within the next 12 months The current provision for employee benefits includes accrued annual leave and long service leave. For long service leave, it covers all unconditional entitlements where employees have completed the required period of service and also those where employees are entitled to pro-rata payments in certain circumstances. The entire amount of the annual leave provision is presented as current since the Group does not have an unconditional right to defer settlement for any of these obligations. However, based on past experience, the Group does not expect all employees to take the full amount of accrued leave or require payment within the next 12 months. The following amounts reflect leave that is not expected to be taken or paid within the next 12 months. Leave obligations expected to be settled after 12 months Consolidated 2016 $'000 2,575 2,575 2015 $'000 2,231 2,231 Accounting Policy (i) Short term obligations Liabilities for wages and salaries, including non-monetary benefits and annual leave expected to be settled wholly within 12 months of the reporting date are recognised in other payables in respect of employees’ services up to the reporting date and are measured at the amounts expected to be paid when the liabilities are settled. The liability for annual leave is recognised in the provision for employee benefits. All other short-term employee benefit obligations are presented as payables. (ii) Other long-term employee benefit obligations The liability for long service leave and in particular cases, annual leave, is recognised in the provision for employee benefits and measured as the present value of expected future payments to be made in respect of services provided by employees up to the reporting date using the projected unit credit method. Consideration is given to expected future wage and salary levels, experience of employee departures and years of service. Expected future payments are discounted using market yields at the reporting date on corporate bonds with terms to maturity and currency that match, as closely as possible, the estimated future cash outflows. (iii) Share-based payments Share-based payments made to employees and others providing similar services, that grant rights over the shares of the parent entity, G8 Limited, are accounted for as equity-settled share-based payment transactions when the rights over the shares are granted by G8. 87 G8 Education limited | Annual Report 2016 Equity-settled share based-payments with employees and others providing similar services are measured at the fair value of the equity instrument at the grant date. Fair value is measured using the Black-Scholes option pricing model. The expected life used in the model has been adjusted, based on directors’ best estimates, for the effects of non-transferability, exercise restrictions, and behavioural considerations. The fair value determined at the grant date of the equity-settled share-based payments is expensed on a straight-line basis over the vesting period, based on the Company’s estimate of shares that will eventually vest. At each reporting date, the Group revises its estimate of the number of equity instruments expected to vest. The impact of the revision of the original estimates, if any, is recognised in profit or loss over the remaining vesting period, with corresponding adjustment to the equity-settled employee benefits reserve. Note 31: Key Management Personnel Disclosures (a) Directors The following persons were directors of G8 Education Limited during the financial year: (i) Chairperson –Independent Non-Executive  M Johnson (appointed 1 January 2016) (ii) Executive Directors  C Scott (iii) Non-Executive Directors  B Bailison  S Forrester  D Foster (appointed 1 February 2016)  M Reynolds (b) Other Key Management Personnel The following persons also had authority and responsibility for planning, directing and controlling the activities of the Group, directly or indirectly, during the financial year: Name Position  J Roberts - Chief Executive Officer  G Carroll - Chief Financial Officer (appointed 25 July 2016)  T King - General Manager Operations  A Perriam - Executive Officer  C Sacre - Chief Financial Officer & Company Secretary until resignation on 27 May 2016 (c) Key Management Personnel compensation Short term employee benefits Post-employment benefits Share based payments* Dividend payments on escrow shares Termination payments Consolidated 2016 $ 3,419,408 155,683 (105,284) 290,998 14,870 3,775,676 2015 $ 2,139,163 111,094 343,690 374,664 - 2,968,611 *Includes the write back of share based payments expense due to vesting conditions not being met The relevant information on detailed remuneration disclosures can be found in the Remuneration Report on pages 16 to 32. 88 G8 Education limited | Annual Report 2016 (d) Equity instrument disclosures relating to Key Management Personnel (i) Options provided as remuneration and shares issued on exercise of such options Refer to note 32(a) for details of options issued to Key Management Personnel. (ii) Option holdings Refer to note 32(a) for details of options issued to Key Management Personnel. (iii) Share holdings The numbers of shares in the Company held during the financial year by each Director of G8 Education Limited and other Key Management Personnel of the Group, including their associates, are set out below. There were no shares issued during the reporting year as compensation. * C Sacre resigned as Chief Financial Officer on 27 May 2016 89 G8 Education limited | Annual Report 2016 2016Balance at the start of the yearShares to be cancelled under limited recourse loans disclosed as share optionsShares cancelled under limited recourse loans disclosed as share optionsOther changes during the yearBalance at the end of the yearDirectors of G8 Education LimitedOrdinary SharesM Johnson--025,00025,000C Scott 1,000,000(333,333)(333,333)-333,333B Bailison-----M Reynolds24,195---24,195S Forrester5,423--10,00015,423D Foster---14,58714,587Other Key Management Personnel of the GroupOrdinary SharesJ Roberts1,000,000(333,333)(333,333)-333,333G Carroll-----T King---631,329631,329A Perriam122,198(40,733)(40,733)-40,733C Sacre*1,848,000-(1,000,000)(848,000)- 2015 Directors of G8 Education Limited Ordinary Shares C Scott B Bailison M Reynolds S Forrester J Hutson* A Kemp* Other Key Management Personnel of the Group Ordinary Shares J Roberts T King A Perriam C Sacre* Other changes during the year Balance at the end of the year Balance at the start of the year Shares issued under limited recourse loans disclosed as share options - - 14,695 - 1,800,000 103,043 1,000,000 - - - - - - 9,500 5,423 153,778 120,660 1,000,000 - 24,195 5,423 1,953,778 223,703 - - - 600,000 1,000,000 - 122,198 1,000,000 - - - 248,000 1,000,000 - 122,198 1,848,000 * C Sacre resigned as Chief Financial Officer on 27 May 2016 *J Hutson resigned 15 October 2015 *A Kemp resigned 17 March 2015 (e) Loans to Key Management Personnel Details of loans made to directors of G8 Education Limited and other Key Management Personnel of the Group, including their associates, are set out below. (i) Aggregates for Key Management Personnel Group 2016 2015 Balance at the start of the year $ 15,610,990 - Shares issued under limited recourse loans disclosed as share options $ - - Other changes during the year Balance at the end of the year $ (12,073,993) - $ 3,536,997 15,610,990 (ii) Individuals with loans above $100,000 during the financial year Refer to note 31(f) 90 G8 Education limited | Annual Report 2016 2016 Name Balance at the start of the year C Scott J Roberts C Sacre A Perriam $ 5,000,000 5,000,000 5,000,000 610,990 Limited recourse loans cancelled due to vesting condition not being met $ (1,666,667) (1,666,667) (1,666,667) (203,663) Limited recourse loans to be cancelled due to vesting condition not being met $ (1,666,667) (1,666,667) - (203,663) Forfeiture due to resignation Balance at the end of the year $ - - (3,333,333) - $ 1,666,667 1,666,667 - 203,663 The Executive Share Plan includes an Employee Loan Scheme that permits G8 to grant financial assistance to employees by way of interest free limited recourse loans to enable them to purchase shares which are held in escrow until the loan is repaid. The shares are not able to be traded whilst the loan remains outstanding. The Accounting Standards require that shares issued under employee incentive share plans in conjunction with limited-recourse loans are to be accounted for as options. As a result, the amounts receivable from employees in relation to these loans have not been recognised in the financial statements until repayment or part repayment of the loans occur. The balance of limited recourse loans outstanding at 31 December 2016 is $3,536,997. During the year the Group cancelled 1/3 of the KMP shares as the condition of 40% EPS growth from 2014 to 2015 was not met. Due to vesting conditions not being met in 2016, 1/3 of the shares in escrow were not issued. In February 2017 the Group will discontinue the Executive Share Plan. Refer to note 32 for the share based payments disclosure to Key Management Personnel. 2015 Name Balance at the start of the year C Scott J Roberts C Sacre A Perriam $ - - - - Limited recourse loans cancelled due to vesting condition not being met $ - - - - Interest not charged Balance at the end of the year Highest Indebtedness during the year $ - - - - $ 5,000,000 5,000,000 5,000,000 610,990 $ 5,000,000 5,000,000 5,000,000 610,990 91 G8 Education limited | Annual Report 2016 (f) Other transactions with Key Management Personnel Details of material transactions and their impact on the financial statements exclusive of GST at year end that Key Management Personnel and their related entities had with the Group during the year are as follows: Mr C Scott (Managing Director) who had the following transactions: a) Interest charged on share loan agreement b) Loan granted to nominee of Mr C Scott to purchase 1,000,000 shares G8 Education Limited for a total amount of $5,000,000 Revenue interest income Employment Expenses Mr C Sacre (Company Secretary and Chief Financial Officer) who had the following transactions*: a) Interest charged on share loan agreement b) Loan granted to nominee of Mr C P Sacre to purchase 1,000,000 shares G8 Education Limited for a total amount of $5,000,000 c) Share based payment expense for the difference in market price of the shares issued compared to loan value Revenue interest income Employment expenses Employment expenses and equity Mr J Roberts (Chief Executive Officer) who had the following transactions: a) Loan granted to nominee of Mr J Roberts to purchase 1,000,000 shares G8 Education Limited for a total amount of $5,000,000 Employment Expenses Ms A Perriam (Junior Executive) who had the following transactions: a) Loan granted to nominee of Ms A Perriam to purchase 122,198 shares G8 Education Limited for a total amount of $610,990 Employment Expenses 2016 2015 $ - $ - - 105,284 2016 2015 $ - $ - (105,284) 105,284 - 14,973 2016 2015 $ $ - 105,284 2016 2015 $ - $ 12,865 *Chris Sacre resigned on 27 May 2016 resulting in a write back of Share Based Payments expense. On 21 May 2015 the Company obtained shareholders’ approval to offer:  The nominee of Chris Scott, Managing Director the right to acquire 1,000,000 Shares at $5.00 per Share with a total value of $5,000,000;  The nominee of Jason Roberts, Chief Executive Officer the right to acquire 1,000,000 Shares at $5.00 per Share with a total value of $5,000,000;  The nominee of Chris Sacre, Chief Financial Officer the right to acquire 1,000,000 Shares at $5.00 per Share with a total value of $5,000,000;  The nominee of Ann Perriam, Junior Executive, the right to acquire 122,198 Shares at $5.00 per Share with a total value of $610,990. 92 G8 Education limited | Annual Report 2016 The Company has granted a limited recourse, interest free loan to each of the nominees of the above members of the Company’s senior management team to subscribe for the Shares. The Shares have been issued to the nominees of the Company’s senior management team to provide further incentive to perform and to secure the ongoing commitment of each of them to the continued growth of the Company. The shares were issued on 16 June 2015 (refer to note 21). (g) The aggregate value of transactions with Key Management Personnel: Revenue Interest income Expenses Employment expense Consolidated 2016 $ - 2015 $ - (105,284) 343,690 93 G8 Education limited | Annual Report 2016 Note 32: Share–based payments Details of options over ordinary shares in G8 Education Limited provided as an incentive to Key Management Personnel of the Group are set out below. The value of options at grant date is set out below. When exercisable, each option is convertible into one ordinary share of G8 Education Limited. (a) Fair value of options granted Executive Share Plan “the Plan” In accordance with the terms and conditions of the Plan approved by shareholders on 21 May 2015, selected KMP are granted the right to acquire shares at a nominated exercise price subject to agreed service and performance criteria (i.e. vesting conditions). The Plan is an equity plan where shares are acquired up front through the provision of a limited recourse loan from the Company, provided for the sole purpose of acquiring shares in the Company. It operates much like a traditional option plan, as the outstanding loan balance is effectively the ‘exercise price’ that must be paid before any value can be realised. The following is a summary of the key terms and conditions of the Plan:  The loan is repayable on termination date (3 years from approval) or earlier if there is a default in which case the shares are no longer held in escrow.  No interest is payable on the loan.  The shares are held in escrow as security for the outstanding loan.  Limited recourse – if the KMP fails to repay the outstanding loan balance in accordance with the plan, they are under no obligation to repay the full amount of the outstanding loan balance and the Group must accept the net proceeds of the sale or buy-back of the shares in escrow in full satisfaction of the outstanding loan balance.  Borrower is not able to sell, transfer or dispose of shares in escrow. However, the Borrower receives the benefits associated with the shares such as dividends and voting rights during the escrow period.  The shares rank equally with other ordinary shares on issue with respect to dividends, distribution or return of capital and other rights.  If borrower leaves the employment of G8 then all secured shares are transferred to a party nominated by G8 and the money owed reduced by number of shares transferred multiplied by $5 per share – exception is where the borrower is unfit for work.  Shares are released to borrower in tranches – if conditions are not met then the shares are transferred or cancelled to a party nominated by G8.  1 year – 1/3 shares if EPS @ 31/12/15 is 40% more than EPS at 31/12/14  2 years – 1/3 shares if EPS @ 31/12/16 is 15% above EPS at 31/12/15.  3 years – 1/3 shares if EPS @ 31/12/17 is 15% above EPS at 31/12/16. During 2016 1/3 of the shares were cancelled due to conditions of performance criteria not being met. Due to the vesting conditions not being met in 2016 shares 1/3 of the shares held in escrow were not released. The Group plans to discontinue the Executive Share Plan, which was in place for the full year in 2016 and will implement the new LTI scheme subject to shareholder approval. 94 G8 Education limited | Annual Report 2016 The table below shows the transactions relating to the plan during the year: Name of Key Management Personnel Plan Shares Loan Amount Christopher Scott Jason Roberts Ann Perriam Chris Sacre 333,333 333,333 40,733 - 1,666,667 1,666,667 203,663 - Share-based payment - - - (105,284) During 2016 the vesting condition was not met resulting in a NIL share based payment for C Scott, J Roberts and A Perriam. C Sacre resigned resulting in a credit to reverse prior period share based payment expense. Under AASB 2 Share-based Payments, the Plan gives rise to a share-based payment expense which is measured by reference to the fair value of the Plan Shares as at the date on which the Share Plan Resolutions were passed. As the Plan Shares were acquired by way of limited recourse loans, the fair value of the Plan Shares was measured using an option pricing model in accordance with AASB 2. The fair value of each share issued under the share loan plan at the date of shareholder approval was $0.515. The company has recognised an after tax, non-cash share- based payment of ($105,284) during the financial year with a corresponding credit to Shareholders’ Equity in the form of a Share Option Reserve. The treatment of the Plan Shares under applicable Accounting Standards as options requires that the value of the loans and issue price of the shares are not recorded as Loans Receivables or Share Capital of the Group until repayment or part repayment of the loans occurs. The Plan Shares were entitled to dividends of $441,996 from the dividends paid on 8 April 2016, 8 July 2016, 7 October 2016 and 6 January 2017. Valuation of instruments issued Value of the financial Benefit The financial benefit has been valued for accounting purposes by the Directors using the Black-Scholes modes (and for comparison purposes, a single step binomial model) to determine the fair value of the financial benefit on the basis that taken as a whole, the arrangements are similar to an option. The option component has been valued using the Black-Scholes Model and the dividends separately valued using a dividend discount model. The value of the interest free component of the loan has been included in the option value. The Directors adopted the following assumptions:  The market price of shares of $3.64 (being the volume weighted average closing price for the month ended 2 April 2015);  The risk free interest rate applicable to three year Commonwealth Bonds of 1.80% (being the monthly average for the month ended 7 April 2015);  A dividend payment rate of 24 cents per share per annum (paid as to 6 cents per share for each of the March, June, September and December quarters);  Volatility of the share price over the expected life of the instrument of 32.809% (being the volatility for the preceding 3 years as a proxy for expected future volatility over the life of the shares);  Volatility of earnings per share (EPS) growth for the years ending 31 December 2016 and 2017 of 59.33% (being the volatility for the years 2008 – 2014);  Average assumed EPS growth for the years ending 31 December 2016 and 2017 of 16.56% (being the average EPS growth for the years 2008 – 2014); and  EPS exhibits similar behavior to share price movements. In other words, EPS follows a lognormal distribution and EPS growth follows a normal distribution. Valuation inputs 95 G8 Education limited | Annual Report 2016 The valuation methodology is a function of the relationship between a number of valuations, including the share price, the strike price, and the time of vesting and the volatility of the share price. The application of the methodology therefore requires a number of inputs, some of which must be assumed. The key inputs used in the valuation methodology are summarised below:  Share price: the volume weighted average share price for the month to 2 April has been adopted;  Issue date: the date of the AGM has been adopted as the effective date;  Time to expiry: The tranches expire on 31 December 2015, 31 December 2016 and 31 December 2017 respectively, if the vesting conditions have not been met for that period;  Strike price: $5.00;  Risk free rate of government bonds with the same maturity as the Shares: the average for the previous month on 3 year Australian government bonds has been adopted;  Volatility of share price: this has been calculated for the preceding three years as a proxy for expected future volatility over the life of the Shares. The valuation methodology also took into consideration:  That the shares are to be issued at an effective exercise price of $5.00 which is a premium to the current volume weighted average of $3.64 for the last month. Accordingly, no financial benefit will accrue to the recipient upon issue of the shares as the shares are secured by a limited recourse loan and restricted pending performance targets being met.  The EPS growth hurdle which is required to be met prior to each tranche of the shares vesting which requires assumptions as to the probability that the performance targets will be met; in respect of the performance targets for 31 December 2015, the probability of meeting the target was assumed to be 60%, for 31 December 2016, and 31 December 2017, the estimate a probability of the EPS growth target being met was assumed to be 51.05%. The basis for these assumptions is that EPS growth follows a normal distribution and in other words, EPS follows a lognormal distribution. This method is a proxy which is consistent with various share and option pricing models on share price movements. The Black-Scholes value is then adjusted to arrive at the expected present value of the option component. Movement in options / share is subject to limited recourse loan Balance at the beginning of the financial year Granted during the year Forfeited during the year Exercised during the year Balance at the end of the financial year * Shares have been issued and are subject to payment of loan Loan Balance ($) Number of Shares* 3,122,198 15,610,990 - - (1,707,399) (8,536,997) - - 7,073,993 1,414,799 In February 2017 the Group plans to discontinue the Executive Share Plan this will result in a NIL balances of share on issue to KMP. (b) Expenses arising from share-based transactions Expenses arising from share-based payment transactions recognised during the year as part of employee benefit expenses were as follows: Share-based payment expense on shares issued to KMP 96 G8 Education limited | Annual Report 2016 Consolidated 2016 $'000 (105) (105) 2015 $'000 344 344 Note 33: Remuneration of Auditors During the year the following fees were paid or payable for services provided by the auditor of the Group: 1. Audit services Ernst & Young Audit and review of financial reports – half year Audit and review of financial reports – year end HLB Mann Judd Audit and review of financial reports – half year Audit and review of financial reports – year end 2. Non-audit service Ernst & Young - accounting advice Total Remuneration for audit services Consolidated 2016 $ 2015 $ 75,000 140,000 - - - - 75,000 140,000 20,000 235,000 - 215,000 97 G8 Education limited | Annual Report 2016 Note 34: Related Party Transactions (a) Parent entity The parent entity within the Group is G8 Education Limited. (b) Subsidiaries Interests in subsidiaries are set out in note 24. (c) Key Management Personnel For details of transactions that Key Management Personnel and their related entities had with the Group during the year refer note 31. (d) Outstanding balance arising from transactions with related parties The following balances are outstanding at the reporting date in relation to transactions with related parties: Current payable (purchase of goods and services) Key Management Personnel Consolidated 2016 $'000 2015 $'000 - - No allowance for doubtful debts was raised in relation to any outstanding balances, and no expenses were recognised in respect of bad or doubtful debts due from related parties. All transactions with related parties during the year were made on normal commercial terms and conditions. Outstanding balances were secured and are repayable in cash. Note 35: Other significant accounting policies The principal accounting policies adopted in the preparation of the consolidated financial statements are set out below. These policies have been consistently applied to all the years presented, unless otherwise stated. The consolidated financial statements are for the consolidated entity consisting of G8 Education Limited and its subsidiaries. (a) Basis of preparation These general purpose financial statements have been prepared in accordance with Australian Accounting Standards (AASB), Australian Accounting Interpretations, other authoritative pronouncements of the Australian Accounting Standards Board and the Corporations Act 2001. The Company is a listed for profit public Company, incorporated in Australia and operating in Australia and Singapore. The Company’s principal activities are operating child care centres and ownership of franchised child care centres. The financial statements were authorised for issue on 20 February 2017. Compliance with IFRS Compliance with AASB ensures that the financial report of G8 Education Limited and the Group complies with International Financial Reporting Standards (IFRS). Historical cost convention These financial statements have been prepared under the historical cost convention as modified, where applicable, by the measurement at fair value of selected non-current assets, financial assets and liabilities (including derivative instruments). 98 G8 Education limited | Annual Report 2016 (b) Principles of consolidation Subsidiaries The consolidated financial statements incorporate the assets and liabilities of all subsidiaries of G8 Education Limited (“Company” or “parent entity”) as at 31 December 2016 and the results of all subsidiaries for the year then ended. G8 Education Limited and its subsidiaries together are referred to in this financial report as the Group or the consolidated entity. Subsidiaries are entities controlled by the Group. The Group controls an entity when it is exposed to, or has rights to, variable returns from its involvement with the entity and has the ability to affect those returns through its power over the entity. Subsidiaries are fully consolidated from the date on which control is transferred to the Group. They are de- consolidated from the date that control ceases. Inter-Company transactions, balances and unrealised gains on transactions between Group companies are eliminated. Unrealised losses are also eliminated unless the transaction provides evidence of the impairment of the asset transferred. Accounting policies of subsidiaries have been changed where necessary to ensure consistency with the policies adopted by the Group. (c) Goods and Services Tax (GST) Revenues, expenses and assets and liabilities are recognised net of the amount of associated GST, unless the GST incurred is not recoverable from the taxation authority. In this case it is recognised as part of the cost of acquisition of the asset or as part of the expense. Receivables and payables are stated inclusive of the amount of GST receivable or payable. The net amount of GST recoverable from, or payable to, the taxation authority is included with other receivables or payables in the balance sheet. Cash flows are presented on a gross basis. The GST components of cash flows arising from investing or financing activities which are recoverable from, or payable to the taxation authority, are presented as operating cash flows. (d) Rounding Amounts The Company is of a kind referred to in ASIC Corporations (Rounding in Financial/Directors’ reports) Instrument 2016/191, relating to the “rounding off” of amounts in the financial reports. Amounts in the financial statements have been rounded off in accordance with that Instrument to the nearest thousand dollars, or in certain cases, the nearest dollar. (e) Going concern The Group has recognised a net profit after tax of $80m for the year ended 31 December 2016 and as at that date, current liabilities exceed current assets by $53m (2015 $33.8m). Management expect the working capital shortfall will be met out of operating cash flows or from finance facilities. The Directors have concluded that there are reasonable grounds to believe that the going concern basis is appropriate, and that assets are likely to be realised, and liabilities are likely to be discharged, at the amounts recognised in the financial statements in the ordinary course of business. 99 G8 Education limited | Annual Report 2016 (f) New accounting standards and interpretations for application in future periods PRONOUNCEMENTS AASB 16 Leases NATURE OF THE CHANGE IN ACCOUNTING POLICY IFRS 16 will cause the majority of leases of an entity to be brought onto the Balance Sheet. There are limited exceptions relating to short-term leases and low value assets which may remain off-balance sheet. The calculation of the lease liability will take into account appropriate discount rates, assumptions about lease term and increases in lease payments. A corresponding right to use asset will be recognised which will be amortised over the term of the lease. Rent expense will no longer be shown, the profit and loss impact of the leases will be through amortisation and interest charges. Annual reporting period beginning on or after 1 January 2019. The Group has made a high level assessment of the standard on the Group's financial statement but has not completed a detailed review of the impact. It is anticipated that the Group’s interest and amortisation expense will increase and rental expense will decrease. EFFECTIVE DATE EXPECTED IMPACT ON THE FINANCIAL STATEMENTS PRONOUNCEMENTS AASB 9 Financial Instruments. NATURE OF THE CHANGE IN ACCOUNTING POLICY AASB 2010-7 Amendments to Australian Accounting Standards arising from AASB 9 (December 2009). AASB 2012-6 Amendments to Australian Accounting Standards – Mandatory Effective Date of AASB 9 and Transitional Disclosures. AASB 2013-9 Amendments to Australian Accounting Standards – Conceptual Framework, Materiality and Financial Instruments. AASB 2014-1 Amendments to Australian Accounting Standards. Significant revisions to the classification and measurement of financial assets, reducing the number of categories and simplifying the measurement choices, including the removal of impairment testing of assets measured at fair value. The amortised cost model is available for debt assets meeting both business model and cash flow characteristics tests. All investments in equity instruments using AASB 9 are to be measured at fair value. Amends measurement rules for financial liabilities that the entity elects to measure at fair value through profit and loss. Changes in fair value attributable to changes in the entity’s own credit risk are presented in other comprehensive income. Chapter 6 Hedge Accounting supersedes the general hedge accounting requirements in AASB 139 Financial Instruments: Recognition and Measurement, which many consider to be too rules-based and arbitrary. Chapter 6 requirements include a new approach to hedge accounting that is intended to more closely align hedge accounting with risk management activities undertaken by entities when hedging financial and non-financial risks. Some of the key changes from AASB 139 are as follows: · to allow hedge accounting of risk components of non-financial items that are identifiable and measurable (many of which were prohibited from being designated as hedged items under AASB 139); 100 G8 Education limited | Annual Report 2016 · changes in the accounting for the time value of options, the forward element of a forward contract and foreign-currency basis spreads designated as hedging instruments; and · modification of the requirements for effectiveness testing (including removal of the ‘bright- line’ effectiveness test that offset for hedging must be in the range 80-125%). Revised disclosures about an entity’s hedge accounting have also been added to AASB 7 Financial Instruments: Disclosures. Impairment of assets is now based on expected losses in AASB 9 which requires entities to measure: · the 12-month expected credit losses (expected credit losses that result from those default events on the financial instrument that are possible within 12 months after the reporting date); or · full lifetime expected credit losses (expected credit losses that result from all possible default events over the life of the financial instrument. Annual reporting periods beginning on or after 1 January 2018. The Group has not yet assessed how its own hedging arrangement would be affected by the new rules, and it has not yet decided whether to early adopt AASB 9. In order to apply the new hedging rules, the Group would have to adopt AASB 9 and the consequential amendments to AASB 7 and AASB 139 in their entirety. EFFECTIVE DATE EXPECTED IMPACT ON THE FINANCIAL STATEMENTS PRONOUNCEMENTS AASB 15 Revenue from contracts with customers NATURE OF THE CHANGE IN ACCOUNTING POLICY AASB 15 introduces a five step process for revenue recognition with the core principle of the new Standard being for entities to recognise revenue to depict the transfer of goods or services to customers in amounts that reflect the consideration (that is, payment) to which the entity expects to be entitled in exchange for those goods or services. Accounting policy changes will arise in timing of revenue recognition, treatment of contracts costs and contracts which contain a financing element. AASB 15 will also result in enhanced disclosures about revenue, provide guidance for transactions that were not previously addressed comprehensively (for example, service revenue and contract modifications) and improve guidance for multiple-element arrangements. Annual reporting periods beginning on or after 1 January 2018 The Group has not yet assessed what impact, if any, this standard will have on the Group’s financial statements EFFECTIVE DATE EXPECTED IMPACT ON THE FINANCIAL STATEMENTS 101 G8 Education limited | Annual Report 2016 Directors’ Declaration In the Directors’ opinion: (a) the financial statements and notes set out on pages 37 to 102 are in accordance with the Corporations Act 2001, including: (i) complying with Accounting Standards, the Corporations Regulations 2001 and other mandatory professional reporting requirements; and (ii) giving a true and fair view of the consolidated entity’s financial position as at 31 December 2016 and of its performance for the financial year ended on that date; (b) there are reasonable grounds to believe that the Company will be able to pay its debts as and when they become due and payable; and (c) at the date of this declaration, there are reasonable grounds to believe that the members of the extended closed Group identified in note 26 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 described in note 26. Note 35(a) confirms that the financial statements also comply with International Financial Reporting Standards as issued by the International Accounting Standards Board. The Directors have been given the declarations by the Managing Director and Chief Financial Officer required by section 295A of the Corporations Act 2001. This declaration is made in accordance with a resolution of the Directors. Gary Carroll Director 20 February 2017 102 G8 Education limited | Annual Report 2016 Ernst & Young 111 Eagle Street Brisbane QLD 4000 Australia GPO Box 7878 Brisbane QLD 4001 Tel: +61 7 3011 3333 Fax: +61 7 3011 3100 ey.com/au INDEPENDENT AUDITOR’S REPORT To the Shareholders of G8 Education Limited Report on the Audit of the Financial Report Opinion We have audited the financial report of G8 Education Limited (the Company), including its subsidiaries (the Group), which comprises the consolidated statement of financial position as at 31 December 2016, the consolidated statement of comprehensive income, the consolidated statement of changes in equity and the consolidated statement of cash flows for the year then ended, notes comprising a summary of significant accounting policies and other explanatory information and the Directors’ Declaration. In our opinion: the accompanying financial report of the Group is in accordance with the Corporations Act 2001, including: (i) giving a true and fair view of the Group’s financial position as at 31 December 2016 and of its consolidated financial performance for the year ended on that date; and (ii) complying with Australian Accounting Standards and the Corporations Regulations 2001. Basis for Opinion We conducted our audit in accordance with Australian Auditing Standards. Our responsibilities under those standards are further described in the Auditor’s Responsibilities for the Audit of the Financial Report section of our report. We are independent of the Group in accordance with the Corporations Act 2001 and the ethical requirements of the Accounting Professional and Ethical Standards Board’s APES110 Code of Ethics for Professional Accountants (the Code) that are relevant to our audit of the financial report in Australia; and we have fulfilled our other ethical responsibilities in accordance with the Code. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion. A member firm of Ernst & Young Global Limited Liability limited by a scheme approved under Professional Standards Legislation Key Audit Matters Key audit matters are those matters that, in our professional judgment, were of most significance in our audit of the financial report of the current year. These matters were addressed in the context of our audit of the financial report as a whole, and in forming our opinion thereon, but we do not provide a separate opinion on these matters. For each matter below, our description of how our audit addressed the matter is provided in that context. We have fulfilled the responsibilities described in the Auditor’s Responsibilities for the Audit of the Financial Report section of our report, including in relation to these matters. Accordingly, our audit included the performance of procedures designed to respond to our assessment of the risks of material misstatement of the financial statements. The results of our audit procedures, including the procedures performed to address the matters below, provide the basis for our audit opinion on the accompanying financial report. 1. Impairment Assessment of Goodwill Why significant How our audit addressed the key audit matter The Group is required under Australian Accounting Standards - AASB 136 ‘Impairment of assets’ to perform an annual impairment test of the carrying value of goodwill. The Group comprises one operating segment and one cash generating unit. The carrying value is supported by a value in use cash flow forecast. The cash flow forecasts depend upon assumptions about future operating and financial performance. These include judgements and estimates over the expectation of future revenues, anticipated EBITDA (which includes assessment as to the costs incurred), growth rates expected for G8 and the discount rate applied. The Group’s disclosures are included in note 16 to the financial statements, which includes the key assumptions applied by the Group. We examined the forecast cash flows which underpin the Group’s impairment model and tested the basis of preparing those forecasts taking into account historical evidence supporting underlying assumptions. Future cash flow assumptions were evaluated through comparison with current trading performance, seeking corroborative evidence and enquiry with the Group in respect of key growth and trading assumptions. We evaluated the Group’s identification of the CGU and tested the mathematical accuracy of the impairment model. We performed sensitivity analysis over the model including in respect of growth rates and discount rates. We assessed other key assumptions including the discount rate and long term growth rate with involvement from EY valuation specialists. We considered the adequacy of the Intangible Assets disclosure in note 16 to the financial statements. A member firm of Ernst & Young Global Limited Liability limited by a scheme approved under Professional Standards Legislation 2. Acquisition Accounting Why significant How our audit addressed the key audit matter The Group acquired a number of childcare centres during 2016. Acquisition accounting requires judgment in identifying and assessing the fair value of the assets and liabilities acquired including contingent consideration payable to the vendors. Contingent consideration is determined based on estimates and assumptions about the future performance of the acquired business. Given the level of judgment in estimating the fair value as well as the contingent consideration that may be paid by G8, we consider this to be a significant audit risk. Refer to note 15 to the financial statements for disclosure relating to acquisition accounting. In obtaining sufficient audit evidence, we: ► ► ► ► ► ► ► Assessed the acquisition accounting entries presented by the Group; Evaluated the methodology applied to identify and value the assets and liabilities (including contingent consideration); Agreed key items to underlying data including contracts and settlement statements; Assessed the terms and conditions of the sale agreement; Assessed the future earnings assumptions impacting the contingent consideration, comparing forecast performance to current and historical trading results; Assessed the amount and accounting treatment of acquisition costs; and Considered the allocation of goodwill to the Cash Generating Unit. A member firm of Ernst & Young Global Limited Liability limited by a scheme approved under Professional Standards Legislation 3. Revenue Recognition Why significant How our audit addressed the key audit matter Revenue is recognised by the Group when the underlying service has occurred (i.e. the provision of childcare services). The Group focuses on revenue as a key performance measure for executives and it is also a key parameter by which the performance of the Group is measured. Due to the significant volume and balance of revenue we consider it a key audit matter. Refer to note 2 to the financial statements for disclosure relating to revenues. Our audit evaluated revenue recognised in accordance with Australian Accounting Standards - AASB 118 ‘Revenue’. To do this, we: ► ► ► ► ► ► ► Assessed the Group’s design and operating effectiveness of key controls over the recognition of revenue; Performed substantive analytical procedures specifically over cut-off at year end; Tested revenue transactions to assess whether revenue was recognised in the appropriate period and that the transactions reconciled to the underlying rates charged; Assessed the completeness of the deferred revenue balance; Tested reconciliations relating to revenue recognised and agreed this to support including receipts of the Child Care Benefit and Child Care Rebate payments; Assessed journal entries for large or unusual entries relating to revenue; and Assessed the adequacy of the Group’s disclosures in respect of the accounting policies on revenue recognition. A member firm of Ernst & Young Global Limited Liability limited by a scheme approved under Professional Standards Legislation 4. Foreign Currency Hedge Transactions Why significant How our audit addressed the key audit matter We tested, on a sample basis, whether the hedge documentation met the requirements of Australian Accounting Standards to assess whether the fixed rate debt instrument, interest rate and foreign currency hedge instruments were eligible for hedge accounting. Furthermore, we considered the prospective and retrospective effectiveness testing to assess whether the hedge relationships were effective. We checked the calculation of the hedge effectiveness with involvement from management’s treasury expert. We reconciled the outcome of the retrospective effectiveness testing to the financial statements, where applicable. We considered the completeness and accuracy of the disclosures relating to derivative financial instruments included in the financial statements. The Group enters into financial instruments to hedge both the interest rate and foreign currency risk in its portfolio of fixed rate debt. For accounting purposes the Group applies both cash flow and fair value hedge accounting. In order to apply hedge accounting, the Group is required to comply with a number of requirements under Australian Accounting Standards, including: • Formally documenting the hedge relationship; • Performing prospective and retrospective (quantitative) ineffectiveness testing; and • Recording any resulting effectiveness in the consolidated statement of comprehensive income. Given the technical requirements that are applicable to the application of hedge accounting and that incorrect application of these requirements can lead to a material effect on the consolidated statement of comprehensive income, we determined this to be a significant item for our audit. Refer to note 20 to the financial statements for disclosure relating to foreign currency hedge transactions. A member firm of Ernst & Young Global Limited Liability limited by a scheme approved under Professional Standards Legislation Information Other than the Financial Statements and Auditor’s Report The Directors are responsible for the other information. The other information comprises the information in the Group’s Annual Report for the year ended 31 December 2016, but does not include the financial report and the auditor’s report thereon. Our opinion on the financial report does not cover the other information and we do not express any form of assurance conclusion thereon. In connection with our audit of the financial report, our responsibility is to read the other information and, in doing so, consider whether the other information is materially inconsistent with the financial report or our knowledge obtained in the audit or otherwise appears to be materially misstated. If, based upon the work we have performed, we conclude that there is a material misstatement of this other information, we are required to report that fact. We have nothing to report in this regard. Directors’ Responsibilities for the Financial Report The Directors of the Company are responsible for the preparation of the financial report that gives a true and fair view in accordance with Australian Accounting Standards and the Corporations Act 2001 and for such internal control as the Directors determine is necessary to enable the preparation of the financial report that gives a true and fair view and is free from material misstatement, whether due to fraud or error. In preparing the financial report, the Directors are responsible for assessing the Group’s ability to continue as a going concern, disclosing, as applicable, matters related to going concern and using the going concern basis of accounting unless the Directors either intend to liquidate the Group or cease operations, or have no realistic alternative but to do so. Auditor’s Responsibilities for the Audit of the Financial Report Our objectives are to obtain reasonable assurance about whether the financial report as a whole is free from material misstatement, whether due to fraud or error, and to issue an auditor’s report that includes our opinion. Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with Australian Auditing Standards will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of this financial report. As part of an audit in accordance with Australian Auditing Standards, we exercise professional judgment and maintain professional scepticism throughout the audit. We also: ► Identify and assess the risks of material misstatement of the financial report, whether due to fraud or error, design and perform audit procedures responsive to those risks, and obtain audit evidence that is sufficient and appropriate to provide a basis for our opinion. The risk of not detecting a material misstatement resulting from fraud is higher than for one resulting from error, as fraud may involve collusion, forgery, intentional omissions, misrepresentations, or the override of internal control. A member firm of Ernst & Young Global Limited Liability limited by a scheme approved under Professional Standards Legislation ► Obtain an understanding of internal control relevant to the audit in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal control. ► ► Evaluate the appropriateness of accounting policies used and the reasonableness of accounting estimates and related disclosures made by the Directors. Conclude on the appropriateness of the Directors’ use of the going concern basis of accounting in the preparation of the financial report. We also conclude, based on the audit evidence obtained, whether a material uncertainty exists related to events and conditions that may cast significant doubt on the entity’s ability to continue as a going concern. If we conclude that a material uncertainty exists, we are required to draw attention in the auditor’s report to the disclosures in the financial report about the material uncertainty or, if such disclosures are inadequate, to modify the opinion on the financial report. However, future events or conditions may cause an entity to cease to continue as a going concern. ► Evaluate the overall presentation, structure and content of the financial report, including the disclosures, and whether the consolidated financial statements represent the underlying transactions and events in a manner that achieves fair presentation. We communicate with the Directors regarding, among other matters, the planned scope and timing of the audit and significant audit findings, including any significant deficiencies in internal control that we identify during our audit. We also provide the Directors with a statement that we have complied with relevant ethical requirements regarding independence, and to communicate with them all relationships and other matters that may reasonably be thought to bear on our independence, and where applicable, related safeguards. From the matters communicated to the Directors, we determine those matters that were of most significance in the audit of the financial report of the current year and are therefore the key audit matters. We describe these matters in our auditor’s report unless law or regulation precludes public disclosure about the matter or when, in extremely rare circumstances, we determine that a matter should not be communicated in our report because the adverse consequences of doing so would reasonably be expected to outweigh the public interest benefits of such communication. Report on the Remuneration Report Opinion on the Remuneration Report We have audited the Remuneration Report included in pages 16 to 32 of the Directors' Report for the year ended 31 December 2016. In our opinion, the Remuneration Report of G8 Education Limited for the year ended 31 December 2016, complies with section 300A of the Corporations Act 2001. A member firm of Ernst & Young Global Limited Liability limited by a scheme approved under Professional Standards Legislation Responsibilities The Directors of the Company are responsible for the preparation and presentation of the Remuneration Report in accordance with section 300A of the Corporations Act 2001. Our responsibility is to express an opinion on the Remuneration Report, based on our audit conducted in accordance with Australian Auditing Standards. Ernst & Young Ric Roach Engagement Partner Brisbane 20 February 2017 A member firm of Ernst & Young Global Limited Liability limited by a scheme approved under Professional Standards Legislation Shareholder Information The total issued capital of the Company as at 31 December 2016 was 382,511,773. On 6 January 2017, 2,976,320 shares were issued pursuant to the dividend reinvestment plan. The total issued capital of the Company as at the date of this annual report is 385,488,093. The Shareholder information set out below was applicable as at 8 February 2017. (a) Distribution of equity securities Analysis of number of equity security holders by size of holding is listed below. 100,001 and Over 10,001 – 100,000 5,001 - 10,000 1,001 - 5,000 1 - 1,000 Class of equity security Shares 264,157,921 57,766,105 28,369,246 31,248,939 3,945,882 385,488,093 Holders 116 2,558 3,817 11,910 7,545 25,946 Options 68.53% 14.99% 7.36% 8.11% 1.01% 100.00% There were 864 holders of less than a marketable parcel of ordinary shares. (b) Quoted equity security holders Twenty largest quoted equity security holders. Name HSBC Custody Nominees J P Morgan Nominees Australia National Nominees Ltd Citicorp Nominees Pty Ltd BNP Paribas Nominees Pty Ltd Geosine Pty Ltd Mrs Kimberley Yin RBC Investor Services Geosine Pty Ltd Brazil Farming Pty Ltd Mr Craig Graeme Chapman Mr Christopher Douglas Passfield & Mrs Rhonda Passfield Mr Duncan Fraser Forrest & Mrs Judy Marie Forrest Mr Garry Ronald Klye & Mrs Robyn Elizabeth Klye Forsyth Barr Custodians Ltd UBS Nominees Pty Ltd Mrs Juwarseh Scott Viss Holdings Pty Ltd Mr Riccardo Pisaturo AMP Life Ltd 112 G8 Education limited | Annual Report 2016 Quoted ordinary shares held 75,990,034 74,553,491 23,511,926 15,983,231 11,727,734 6,003,260 4,854,726 3,693,606 3,174,999 2,870,000 2,300,000 2,000,000 1,901,750 1,710,000 1,615,563 1,585,972 1,300,000 1,270,683 1,200,000 984,466 238,231,441 Percentage of issued shares 19.87 19.49 6.15 4.18 3.07 1.57 1.27 0.97 0.83 0.75 0.60 0.52 0.50 0.45 0.42 0.42 0.34 0.33 0.31 0.26 62.28 (c) Substantial holders] Substantial holders as at 8 February 2017 in the Company are set out below: Ordinary Shares UBS Group AG J P Morgan Nominees Australia Number held 32,280,565 24,202,029 Percentage 8.44% 7.47% (d) Voting rights The voting rights attached to each class of equity securities are set out below. (i) Ordinary shares On a show of hands every member present at a meeting in person or by proxy shall have one vote and upon a poll each share will have one vote. (ii) Options There are no voting rights attached to the options. (iii) Unquoted securities There are no unquoted securities on issue. 113 G8 Education limited | Annual Report 2016 Corporate Directory Directors M Johnson, Chairman G Carroll, Managing Director (appointed 1 January 2017) www.g8education.edu.au Share registry: Advanced Share Registry Limited 150 Stirling Hwy Nedlands, WA 6009 C Scott, Executive Director B Bailison, Non-Executive Director M Reynolds, Non-Executive Director S Forrester, Non-Executive Director D Foster, Non-Executive Director Company Secretary S Zeljko Auditor: Ernst & Young 111 Eagle Street, Brisbane, QLD 4001 Lawyers: Minter Ellison Gold Coast 165 Varsity Parade Varsity Lakes QLD 4217 Principal registered business office in Australia G8 Education Limited is a Company limited by shares, incorporated, and domiciled in Australia. It’s registered office and principal place of business is: Securities exchange listing: G8 Education Limited shares are listed on the Australian Securities Exchange under the ticker code GEM. 159 Varsity Parade, Varsity Lakes Telephone: 07 5581 5300 Facsimile: 07 5581 5311 114 G8 Education limited | Annual Report 2016 www.g8education.edu.au 

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