A N N U A L R E P O R T www.g8education.edu.au 2017 OUR MISSION TO PROVIDE EARLY EDUCATION & CARE SERVICES TO CHILDREN UNDER 12 YEARS OLD, WITH A DIFFERENTIATED & LEADING SERVICE OFFERING, UNDERPINNED BY OPERATIONAL EXCELLENCE CONTENTS OUR MISSION OUR VISION OUR PURPOSE AT A GLANCE OUR PORTFOLIO CHAIRMAN’S REPORT CEO REPORT SUSTAINABILITY PEOPLE DIRECTORS’ REPORT REMUNERATION REPORT 5 6 7 8 12 14 16 18 19 22 28 SECTION TWO FINANCIAL REPORT 47 SHAREHOLDER INFORMATION 109 CORPORATE DIRECTORY 111 4 5 OUR VISION G8 WILL BE KNOWN AS THE PEOPLE THAT PARENTS & POLICY MAKERS PREFER TO PARTNER IN NURTURING & INSPIRING THE NEXT GENERATION OUR PURPOSE WE CREATE SPACES THAT SHAPE GENERATIONS NOW & NEXT 6 7 A T A G L A N C E 21.8 CENTS/SHARE NUMBER OF 516 CENTRES OWNED $156.0 MILLION 9,927 $92.9 MILLION $796.8 MILLION 8 9 UNDERLYING EPSTOTAL NUMBER OFEMPLOYEESUNDERLYING EBITUNDERLYING NPAT2017TOTAL REVENUE 6 1 0 2 REVENUE REVENUE REVENUE REVENUE REVENUE $179.9M $275.2M $497.3M $706.2M $778.5M REVENUE $796.8M UNDERLYING EBIT $30.0M $19.7M UNDERLYING NPAT UNDERLYING EBIT $50.5M $32.2M UNDERLYING NPAT UNDERLYING EBIT $101.4M $60.6M UNDERLYING NPAT UNDERLYING EBIT $146.4M $87.1M UNDERLYING NPAT UNDERLYING EBIT $160.6M $93.3M UNDERLYING NPAT UNDERLYING EBIT $156.0M $92.9M UNDERLYING NPAT 9.2CENTS UNDERLYING EPS 11.72CENTS UNDERLYING EPS 18.57CENTS UNDERLYING EPS 23.87CENTS UNDERLYING EPS 24.68CENTS UNDERLYING EPS 21.8CENTS UNDERLYING EPS 10 11 20122013201420152017AT A GLANCE Casa Bambini Early Education Centre OUR P O RTFOLIO 12 WESTERN AUSTRALIA CENTRES66 SOUTH AUSTRALIA CENTRES28 SINGAPORE CENTRES21 TOTAL CENTRES QUEENSLAND CENTRES72 NSW 187 CENTRES ACT CENTRES10 VICTORIA CENTRES132 13 516 C H A IR MAN’S REPORT Dear Shareholders, returning $77 million in dividends to shareholders. On behalf of the Board, I am pleased to present the G8 Education Limited 2017 Annual Report. We are privileged to be operating in a sector that has the potential to have a profound impact on Australia’s future, with all the research highlighting the enormous benefits of quality early education on a child’s social, cognitive and educational development. During 2017, the Group made significant progress in building solid foundations across its people, asset and capital bases to ensure sustained growth well into the future, while continuing to grow and optimise its network of child care centres. In 2017 we acquired a total of 37 early education centres and disposed of 22 centres in Australia. This brought our total number of centres as at 31 December 2017 to 495 in Australia and 21 in Singapore. These centres provide a total combined licenced capacity of 40,561 places. The Group’s Vision is for G8 to be the people that parents and policy makers prefer to partner in nurturing and inspiring the next generation. To deliver against this vision, we need to ensure that our centres are of high quality and that our centre-based teams are appropriately resourced, trained and supported to meet the needs of children and parents. In that regard I am pleased to report capital investment in our centres was very strong in 2017 with 130 refurbishment or improvement activities being completed across the network during the year. We also continued to invest significantly in our professional and leadership development programs across both centre and support office teams. As a result of this activity, the Group improved its overall quality during the year. With 32% of centres being assessed as exceeding National Quality Standards, our average portfolio quality continues to improve. From a financial perspective, 2017 was a challenging year with record levels of supply negatively impacting on occupancy levels across the market. This impacted the Group’s Revenues, which were $797 million, an increase of $18 million. Despite the challenging market conditions, the Group’s reported NPAT was in line with PCP at $81 million, while generating $92 million of cash from operations and The Group significantly strengthened its Balance Sheet during 2017. As well as raising approximately $200 million in additional equity, we finalised a $200 million club bank facility during the year. These funds will be used to repay higher-cost bond financing as well as assisting in funding the Group’s pipeline of committed future acquisitions, which are forecast to contribute strongly to profit growth in the future. There were a number of changes to the Group’s Board during 2017. After assisting Gary Carroll to transition to the CEO in early 2017, Chris Scott retired as a Director in May 2017. As the founding Managing Director, Chris’s vision and energy to build a business from scratch to be the leading for profit provider in the sector was outstanding and I would like to join all team members and shareholders in thanking Chris for his outstanding contribution. The Board underwent further change with Matthew Reynolds retiring as a Director in August 2017 and Julie Cogin and Margaret Zabel joining the Board in September 2017. I thank Matt for his fantastic contribution as a director and look forward to Julie and Margaret adding their skills and experience to the Board as we continue to support management in delivering against the Group’s strategic goals. As we look forward to 2018, we expect the market environment to be challenging for a number of months yet, as the impact of recent supply increases continues to be felt. The new Government funding package is expected to drive demand in the sector from July 2018. With the investments that have been made over the last 2 years, 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. 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 2018. Yours sincerely, Mark Johnson Chairman 14 15 C EO REPO RT Dear Shareholders, 2017 was a year in which G8 Education endured challenging market conditions to deliver good levels of underlying profit growth while making solid progress on transforming the Group to enable sustainable growth in future years. G8 Education is the leading for profit early education provider in Australia, with around 65,000 children attending our services in any given week and 10,000 employees educating and caring for those children. This scale is broadly three times greater than our nearest for profit competitors. We believe that we have a real opportunity to use our scale advantage to provide a differentiated market leading offer to our families, centred on the quality of education and care, breadth of offer and through the provision of a highly engaging experience for our families. We also believe that our scale affords us the opportunity to provide a market-leading employment offer, with our engaged and capable team members reinforcing the quality and experience for our families. The key to our success as an organisation is the quality, skill and commitment of our team members. 2017 saw significant activities in three key cultural areas. Firstly, there was the embedding of our core values – Passion, Integrity, Compassion, Innovation and Dedication – across the Group. We also conducted a formal engagement survey and implemented engagement actions plans to drive engagement across all teams. Finally, we recruited some outstanding executive leaders and established senior leadership development programs to build leadership capability throughout the Group. As well as building on our cultural foundation, 2017 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 37 early education centres (36 Australia and 1 in Singapore) in 2017. It is pleasing to report that the acquisitions completed in 2017 are performing in line with expectations. 2017 was a challenging year from a market perspective, where increases in supply over the last 2 years had a negative impact on the market. The Group managed to generate a 2.2% ($3.5m) increase in underlying EBIT further adjusted for the one-off impact of Long Day Care Professional Development Funding Program costs. This was a creditable result in a challenging environment. The Group’s ability to convert earnings before interest, tax, depreciation and amortisation (“EBITDA”) to cash remained strong with 96% underlying cash conversion in 2017, generating operating cash flows of $92 million. OUTLOOK FOR 2018 We expect the operating environment to be challenging during the first half of 2018, driven by the current supply overhang in many areas throughout Australia. We will be responding to such an environment by driving occupancy focus throughout the network, assisted by the customer relationship management system that was implemented during the second half of 2017. This system is expected to improve our conversion of inquiries due to enhanced visibility and automation of key steps in the process. We will also be piloting a centralised contact centre during the first half of the year to further drive customer conversion. • • In July 2018, the Federal Government will be rolling out an enhanced funding package to the sector, focused on increasing affordability of early education, particularly for low- to middle-income families. This package is expected to be positive for the vast majority of the Group’s existing families, although the timing and quantum of the resulting impact on occupancy is unknown. 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 quality and education, value, as well as customer experience. To facilitate this, the Group will continue to invest in improving asset and curriculum quality, while also developing new revenue streams for existing and new centres that deliver enhanced value to our families and better utilise our existing assets; Being the employer of choice by engaging and developing our team through a series of initiatives such as enhanced professional and leadership training and re-engineering our incentive framework. 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. We continue to believe this strategy, supported by a passionate and capable team, will leave us well placed to deliver sustainable value to children, families and our shareholders in the years ahead. Yours sincerely, Gary Carroll CEO and Managing Director 16 17 S USTAI NABILITY At G8 Education, we recognise the importance of Corporate Social Responsibility and are working on a range of engagement programs and partnerships. ENVIRONMENT With a clear purpose of shaping generations now and next, G8 Education takes the responsibility and importance of supporting children to ‘become environmentally responsible and show respect for the environment’ (Element 3.3.2) of the National Quality Framework (NQF) very seriously. G8 Education believes sustainability is not just about conservation but also about the related issues of fairness and equity and the importance of taking action on these issues that will impact the lives of our future generations. This responsibility is reflected in the NQF, which asks that each service take ‘an active role in caring for its environment and contributing to a sustainable future’ (NQS Standard 3.3). More specifically, services are asked to embed sustainable practices into their operations (Element 3.3.1) G8 Education’s environmental approach toward operations includes: minimising consumption of materials, recycling and re-using consumables, and supporting the awareness of environmental issues. OUR CHILDCARE CENTRES With 516 Centres in our portfolio, G8 Education is continually looking at ways to educate and action the reduction of our environmental impacts using initiatives such as: CENTRE SUSTAINABILITY • Participating in recycling, use of recycled and reclaimed materials, energy saving initiatives, gardening • Teaching sustainability as part of the Early Years Learning Framework CENTRE COMMUNITY • Visits to senior citizens / aged care, special services • Community gardens • Numerous fundraising activities OUR SUPPORT OFFICE As our organisation has grown rapidly, so has our Support Office and so this year, the G8 Education Support Office enthusiastically implemented the following initiatives: • upgraded communication equipment to enable virtual meetings and reduce business travel between G8 Education offices • upgraded intranet and file sharing technology to enhance the ability to store and present documents electronically 18 PEO PLE G8 Education has continued to see its people as the most valued asset within the organisation. 2017 saw a year of incredible work in the Learning and Development space, with a commitment to investing further into the development and capability of our valued team members. With an investment of around $6.5million, the team enjoyed a significant variety of comprehensive learning opportunities including a range of programs that catered for every level, from Educator to Executive. In addition to G8 team members being supported in sector specific pedagogy and practice courses as well as training across areas such as First Aid and Safety, 2017 saw the entire organisation go through its first ever structured Development Planning process. Each and every team member was afforded an individual development plan that was designed to both identify and address skill gaps as well as to recognise areas for growth and progression. These Development plans were supported by G8’s internal Learning and Development offerings, which included almost 300 face to face workshops across a range of topics and the delivery of online learning modules via the ‘Learning Lounge’ – our new and innovative Learning Management System. Included on the Learning Lounge are courses developed and delivered by some of our strategic learning partners, whose expertise lies in teachings on current and emerging practices and theories. The strategic learning partnership group was expanded in 2017 to include a national partnership with Swinburne Online (a part of Swinburne University of Technology), in which an Early Childhood Teacher placement program and graduate program exists. This partnership, which is on a national scope, will provide an exclusive pipeline of candidates to G8 centres across the country and is the start of an exciting strategic journey to attract and retain the highest calibre of Early Childhood Teachers. Leadership maintained a strong focus in the Learning & Development space in 2017, as our Leaders embarked on a journey into their respective versions of G8’s Leadership programs. Assistant Centre Managers, Centre Managers and Area Managers worked towards nationally accredited qualifications in Leadership and Management, while other Leaders participated in tailored leadership sessions and both the Executive and Senior Leadership teams commenced their first leadership and coaching programs. A robust Competency Framework has been developed to connect every level of leadership with the core behavioural elements that will drive organisational success. Connected to our organisational values, the framework lays the foundation for our organisational success, and works to drive us to achieve our vision and mission. The Framework will become embedded into the organisation’s daily behaviour and language throughout 2018 and will become a fundamental pillar on which the organisation will rely, to achieve its vision and mission. 19 KEY OPER ATIONA L 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 516 40,561 9,927 7,730 20 21 Underlying Net Profit After Tax Reconciliation (Unaudited, Non IFRS)Consolidated Year end 31 December2017 $’0002016 $’000VarianceRevenue#795,759777,4702%Expenses(644,881)(616,779)5%Net Financing Cost(33,097)(46,022)(28%)Net Profit Before Tax117,781114,6693%Net Profit After Tax80,58180,2650%Add/(Less) non-operating transactions:Contingent consideration not paid*(243)(2,500)Acquisition related expenses3,9652,574Share based payment expense *(108)(105)Write off of borrowing costs*^5,2017,474(Gain)/loss on disposal of assets/centres1,542-Foreign currency translation loss*^1,9365,634Underlying Net Profit After Tax92,87493,342(1%)Underlying EPS (cents per share)^^21.8024.68(12%)Earnings Before Interest and Tax150,878160,691Add/(Less) non-operating transactions:Contingent consideration not paid*(243)(2,500)Acquisition related expenses3,9652,574Share based payment expense(108)(105)(Gain)/loss on disposal of assets/centres1,542-Underlying Earnings Before Interest and Tax^^^156,034160,660(3%)#Adjustment for interest income of $1.0m excluded from revenue and included in financing costs (2016 $1.0m). *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 D I R EC TO R’ S 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 2017. 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. Susan Forrester BA, LLB (Hons) EMBA, FAICD Independent Non-Executive Director since 1 November 2011 Mark Johnson 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 David Foster B.App.Sci, MBA, GAICD, SFFin Independent Non-Executive Director since 1 February 2016 Professor Julie Cogin PhD, M.Ed., BBus, FAICD, Independent Non-Executive Director since 1 September 2017 Brian Bailison B.Com., B.Acc (Cum Laude), ACA Independent Non-Executive Director Audit Committee Chair since 25 March 2010 Margaret Zabel BMath, MBA, GAICD Independent Non-Executive Director since 1 September 2017 22 23 D I R EC TO RS’ REPORT Mark Johnson is an experienced chairman and company director with a diverse portfolio, including Director of Westfield Corporation, Director of Aurecon Group Pty Limited, Director of Coca-Cola Amatil Limited, Director of The Hospitals Contribution Fund of Australia Limited (HCF) and Councillor – St Aloysius’ College Council Inc.; the Smith Family and the Advisory Council to the UNSW Australia School of Business. 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: Member of the Audit and Risk Management Committee, Nomination Committee and People and Culture Committee. Other current listed public Company Directorships: Westfield Corporation Limited (appointed 30 June 2014) and 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 has 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: Nil Other current listed public Company Directorships: Nil Former listed public Company Directorships in the last three years: Nil 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 Rand-Merchant Bank Limited (investment banking), the Ivany Investment Group (diversified investment group) and PAYCE Consolidated Limited (diversified property development group). 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 Thorn Group Limited, Director of Genworth Mortgage Insurance Australia Limited and Director of Kina Securities Limited. Special responsibilities: Member of Audit and Risk Management Committee and Chair of 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 Julie Cogin was appointed as Non-Executive Director on 1 September 2017. Julie is the Dean & Head of UQ Business School, University of Queensland. Prior to this position, Julie held numerous senior leadership roles at the University of New South Wales. Julie is a recognised thought leader in high performing workplaces, leadership and corporate culture, having authored several books and published in the world’s top academic journals. As an educator she has received national and international teaching awards and spoken extensively about disruption in education. Julie has over 25 years’ experience leading education and consulting engagements for many leading companies throughout Australia, Asia and in the USA. In 2016 Julie was named as one of Australia’s 100 women of influence for her work to address the gender leadership imbalance. Special responsibilities: Member of the Nomination Committee and People and Culture Committee Other current listed public Company Directorships: Nil Former listed public Company Directorships in the last three years: Nil Margaret Zabel was appointed as Non-Executive Director on 1 September 2017. Margaret is a specialist in customer centred business transformation, brand strategy, innovation, digital communications, customer experience and change leadership. She has 20 years senior executive experience working across major companies and brands in FMCG, food, technology and communications industries including multinationals, ASX 100 and not-for-profits. Her previous roles include National Marketing Director Lion Nathan, VP Marketing for McDonald’s Australia and CEO and Board Director of The Communications Council. Margaret has also served as a non-executive board director for the mental health charity R U OK? for 5 years. Special responsibilities: Member of the Nomination Committee Other current listed public Company Directorships: Nil Special responsibilities: Chair Audit and Risk Management Committee and Member of the Nomination Committee Former listed public Company Directorships in the last three years: Nil Other current listed public Company Directorships: Nil 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 is a non-executive director of Over the Wire Group Ltd, Xenith IP Ltd and Uniting Care Qld and South Bank Corporation. 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 Christopher Scott(resigned) Chris Scott was Managing Director from 25 March 2010 to 31 December 2016 when he became an Executive Director. Chris resigned as an Executive Director on 29 May 2017. Special responsibilities: Member Nomination Committee Matthew Reynoldsresigned) Matthew Reynolds was an Independent Non-Executive Director from 17 March 2015 to 31 August 2017. Special responsibilities: Member of the Nomination Committee and People and Culture Committee 24 25 Chief Executive Officer Matters subsequent to the end of the financial year Dividends The following material matters have taken place subsequent to year end: Dividends declared or paid during the financial year were as follows: • • • • 50,359 performance rights were issued to J Ball under the Employee Incentive Plan (GEIP) on the 4 January 2018. The Board has declared on 23 February 2018 that a 10 cent fully franked interim dividend for the FY18 year would be paid on 23 March 2018. The Group completed the acquisition of 2 centres for $2.6 million and divested 1 centre post 31 December 2017. The initial accounting has not yet been completed as completion accounts have yet to be finalised. All remaining shares sold under the prior employee share plan leaving a nil balance. 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. 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. 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. Gary has over 15 years’ experience in senior leadership roles covering a number of industries. Company Secretary Sarah Zeljko was appointed as Company Secretary and General Counsel on 16 January 2017. She is responsible for the Legal, Compliance, Safety, Facilities Management, Risk Management, Insurance and Company Secretarial functions for the Group. 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 2017. 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 37 additional child care centres in Australia and Singapore. In May 2017, $195 million of equity raised through a domestic institutional placement ($100 million) and share placement to CFCG Investment Partners International (Australia) Pty Ltd ($95 million). • On 7 August 2017 $70 million of 7.65% fixed unsecured notes due to for redemption in August 2019 were redeemed using funds from equity raised. An early repayment fee of $1.4 million was incurred upon repayment. • • • In August 2017 a $200 million three year club bank facility and $45 million bank guarantee facility were entered into on commercial terms. A Dividend Policy to payout 70 to 80% of underlying NPAT to commence in 2019 was announced. Shareholders approved the new G8 Education Executive Incentive Plan (GEIP) at the 2016 AGM. Dividend for the quarter ended 31 March 2017 of 6.0 cents per share (2016: 6.0 cents per share) paid on 7 April 2017 (2016: Paid on 8 April 2016) Dividend for the quarter ended 30 June 2017 of 6.0 cents per share (2016: 6.0 cents per share) paid on 7 July 2017 (2016: Paid on 8 July 2016) Dividend for the quarter ended 30 September 2017 of 6.0 cents per share (2016: 6.0 cents per share) paid on 6 October 2017 (2016: Paid on 7 October 2016) No dividend declared for the quarter ended 31 December 2017 (2016: 6.0 cents per share paid 6 January 2017) 2017 $’000 24,117 2016 $’000 22,481 26,599 22,616 26,741 22,772 - 22,950 77,457 90,819 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 2017, and the number of meetings attended by each Director were: Full meetings of Directors Audit and Risk Management Committee Nomination Committee People and Culture Committee A 9 8 9 9 9 3 3 4 6 B 9 9 9 9 9 3 3 4 6 A 4 - 4 - 4 - - - - B 4 - 4 - 4 - - - - A 3 - 2 3 3 1 1 - 1 B 3 - 3 3 3 1 1 1 2 A 4 - - 4 - 2 - - 2 B 4 - - 4 - 2 - - 2 M Johnson G Carroll B Bailison S Forrester D Foster J Cogin M Zabel C Scott M Reynolds 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 (Managers) 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 include legal costs that may be incurred in defending civil or criminal proceedings that may be brought against the Managers in their capacity as Managers of entities in the Group alleging a wrongful act, and other payments arising from liabilities incurred by the Managers in connection with such proceedings. This does not include such liabilities that arise from conduct involving willful breach of duty of the Managers or the improper use by the Managers 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. 26 27 RE MUN ERATION REPORT AUDITED TITLE SECTION DESCRIPTION Introduction from the People & Culture Chair Who is covered Remuneration Governance KMP Executive reward Remuneration details for 2017 KMP Equity Interests Employment agreements Non-executive director remuneration 1 2 3 4 5 6 7 8 1.INTRODUCTION FROM THE PEOPLE & CULTURE CHAIR Dear Shareholders 2017 saw the comprehensive implementation of the Strategic Remuneration Framework and Policies that were introduced for the first time to G8 Education in 2016. We made a strategic decision to make no changes to our approach to executive remuneration, as we were mindful of the benefit to our executives of consistency and of allowing our new scheme to run its course for the first year. G8 Education has a firm belief that increasing the focus on our people will provide a sustainable advantage over the long term. Our refresh of the Strategic Plan in September 2017 brought with it a greater recognition of our values and the embedding of the four core pillars comprising of our families, our people, quality (including safety) and performance. In terms of our increased commitment to our people, we focused our energies on attraction, learning and development, engagement, workplace health and safety, talent and succession management, and remuneration and benefits. The following key initiatives were implemented in 2017: • Year one of our new short-term Incentive (STI) and long-term incentive (LTI) scheme for the CEO and other executive KMP which includes a claw back policy and potential STI deferral for selected executives. 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. KMP consist of senior executives and Non executive Directors. Describes the role of the Board and the People and Culture Committee, and the use of remuneration consultants when making remuneration decisions. • Underpinning the STI scheme was the introduction of a new Key Performance Indicator (“KPI”) framework, combined with a performance gate whereby STI is capped at 10% if the Board approved financial budget is not met. However there is some discretion of the Board to award higher amounts in some circumstances (as outlined below). Our Strategy, Vision and Values and link to KMP Executive reward. Outlines the principles and strategy applied to executive remuneration decisions and the framework used to deliver rewards including the performance and remuneration linkages. Provides details regarding shareholdings in G8 Education Limited of KMP. Provides details regarding the contractual arrangements between the G8 Education and the executives whose remuneration details are disclosed. Provide details regarding the fees paid to Non executive Directors. • • • • • • The creation of a separate Nominations Committee and the appointment of David Foster as Chairman of that Committee. The review and alignment of our Board Skills Matrix, resulting in a national search for two Non- Executive Directors to fulfil our skills and competencies requirements with the appointment of Margaret Zabel and Julie Cogin in September 2017. The achievement of a significantly improved gender balance on our board (women now represent 50% of our independent non-executive directors and 42% of the full Board including the Managing Director). A Remuneration benchmarking exercise was completed for all KMP and senior management roles. The discontinuation of our former Executive Share Plan with all outstanding shares sold. A minimum shareholding requirement for our Non-Executive Directors was introduced. It is our view that this new governance policy will ensure greater alignment with the interests of our shareholders. You will find more details of our achievements, ongoing initiatives and expectations for 2018 in these areas comprehensively explained in the following Remuneration Report. In 2017 we have laid the foundations to deliver to our shareholder value proposition via the significant strengthening of our balance sheet and the substantial improvements in the quality of our early education centre network as well as team engagement and retention. This is in line with our strategy to provide both a market-leading customer and employment offer to drive occupancy and profitability of the Group, which in turn provides sustainable growth for shareholders. The Board and the People Committee believe the annual incentive outcomes for each of our disclosed executives reflects our performance in 2017. The minimum financial performance requirements of the Short-Term Incentive Plan were not met as we fell short of the target of 8% growth in Reported NPAT from the prior year. However, in light of the disclosed executives’ achievements of their non-financial performance requirements, the Board decided to exercise its discretion and award an amount equivalent to 20% of their base salary. The Board did not increase Directors’ fees in 2017. In 2018, we will continue to monitor the effectiveness of our reward approach and we will refine and improve over the coming years as needed. The Board and the People and Culture Committee hope you find this report informative. 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 the key management personnel (KMP) during 2017. Susan Forrester People and Culture Committee Chair Brisbane 24 February 2018 29 2. WHO IS COVERED BY THE REPORT 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 during the year are set out in the table below: Title (at year end)/Committees Change in 2017 Non-executive directors Mark Johnson Chairman No Change. Full Year Member, Audit & Risk Management Member, 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 David Foster Director No Change. Full Year Chairman, Nomination Member, Audit & Risk Management Julie Cogin Director Member, Nomination Member, People & Culture Commenced with Group as a Non-Executive Director on 1 September 2017 Margaret Zabel Director Member, Nomination Commenced with Group as a Non-Executive Director on 1 September 2017 Matthew Reynolds Director Member, Nomination Member, People & Culture Executive directors Gary Carroll CEO and Managing Director Christopher Scott Executive Director, Member, Nomination Other executive KMP Sharyn Williams Chief Financial Officer Jason Ball General Manager Operations Jason Roberts General Manager Development Resigned as a Non-Executive Director on 31 August 2017 Appointed CEO and MD on 1 January 2017, commenced with Group as KMP 25 July 2016 Resigned as Managing Director 1 January 2017 and as Executive Director 29 May 2017 Commenced with Group and as KMP on 6 February 2017 Commenced with Group and KMP on 26 June 2017 Ceased as KMP on 1 January 2017 and resigned from Group effective 18 January 2018 Terry King Ann Perriam General Manager Operations Ceased as KMP and resigned 12 April 2017 Executive Officer Ceased as KMP on 1 January 2017 and resigned from Group effective 10 April2017 30 3. REMUNERATION GOVERNANCE AT G8 EDUCATION 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 September 2017. 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, 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 Consultants Further information on the PCC’s role, responsibilities and membership is contained in the Corporate Governance Report set out in the Corporate Governance section of the G8 Education website 31 USE OF REMUNERATION CONSULTANTS THE COMPONENTS OF KMP SENIOR EXECUTIVE LEADERSHIP REMUNERATION AT G8 EDUCATION 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. Overview of components EXECUTIVE KMP REMUNERATION The Board directly engages external advisors to provide input to the process of reviewing executive KMP and Non- executive Director remuneration. A Use of Remuneration Consultants Policy was approved by the Board on 21 August 2017. During the 2017 financial year, Crichton and Associates Pty Limited (Crichton and Associates) were engaged by the Board to provide a remuneration benchmark assessment, including recommendations in relation to the Board and selected executive KMP. Crichton and Associates were paid $11,660 for these services. The following arrangements were made to ensure that the remuneration recommendations have been made free from undue influence: • Crichton and Associates received written instructions from an independent Non-executive Director on behalf the PCC and were accountable to the Board; • During the course of this assignment, Crichton and Associates received limited input from management. Crichton and Associates reported its findings, in writing, to the independent Non-executive Director and the Board; and • A fixed fee arrangement was agreed in advance directly with the independent Non-executive Director on behalf of the PCC. The Board was satisfied that the limited remuneration recommendations provided were made free from undue influence from any member of the KMP. In addition to providing remuneration consulting services, Crichton and Associates also provided services relating to other aspects of remuneration of the Group’s employees, including ad hoc advice in respect of various policies and the provision of ESS documentation and related services. For these services Crichton and Associates was paid $26,201 during 2017. 4. OUR STRATEGY, VISION AND VALUES AND LINK TO KMP SENIOR EXECUTIVE REWARD Our Executive KMP remuneration has been designed to support and reinforce G8 Education’s strategy, Purpose and Values. The at-risk components of the Executive KMP remuneration are therefore closely linked to the successful execution of the organisations strategy. OUR PURPOSE OUR STRATEGIC PRIORITIES OUR VALUES Create spaces that shape generations now and next Team, Quality and Safety, Families and Performance Passion, Innovation, Dedication, Compassion, Integrity The strategic priorities are translated into performance objectives and KPIs SHORT TERM INCENTIVE PLAN (STIP) Measurable performance objectives are set across all strategic priorities and are closely aligned to our purpose and values. This ensures a balanced focus across all key strategic areas. Our Values are considered as we assess how performance has been achieved Net Profit after Tax is the performance measure that applies to over 65% of the incentive OUR SHAREHOLDER VALUE PROPOSITION Deliver sustainable double-digit growth in earnings for shareholders LONG TERM INCENTIVE PLAN (LTIP) Earnings per Share growth over the vesting period accounts for 100% of the award. The purpose of the incentive is to align executive KMP remuneration opportunity with shareholder value and provide retention stimulus. 32 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. 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 out performance is achieved. The remuneration structure is designed to ensure top quartile executive KMP remuneration is only achieved if G8 Education outperforms. 33 REMUNERATION COMPOSITION MIX TOTAL FIXED REMUNERATION EXPLAINED 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. 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. REMUNERATION MIX 2017 The intended mix of remuneration for the CEO and executive KMP for 2017 resulted in the following remuneration mix: 40% CEO 30% 30% 50% OTHER EXECUTIVES 25% 25% TFR STI LTI Executive KMP TFR is tested regularly for market competitiveness 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 “at risk” component of the (STI) and (LTI) of this mix represents the intended remuneration opportunity for these executives assuming the performance requirements set for each component is satisfied. The change in mix compared to 2016 allows the remuneration to be linked more to the performance and at risk. The key aspects are summarised below: Short-term incentives (STI) TOTAL TARGET REMUNERATION (TTR) In the opinion of the Board, the TTR under the remuneration mix adopted by G8 education delivers on overall risk adjusted reward opportunity which is intended to ensure both fair and market competitive remuneration is awarded. TOTAL FIXED REMUNERATION (TFR) G8 Education’s approach continues to position all executives at between the median and 62.5th percentile of the market. This positioning is confirmed regularly by reference to remuneration surveys and independent benchmark assessments from time to time. The comparator group used to benchmark executive KMP remuneration is ASX listed companies of a similar size. A description of the 2017 short-term and long-term incentive schemes are set out below REMUNERATION – “AT RISK” 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. The three complementary components of executive KMP remuneration are ‘earned’ over multiple time ranges. This is illustrated in the following chart: YEAR 1 TFR STI Cash Opportunity F17 YEAR 2 YEAR 3 YEAR 4 YEAR 5 STI Equity Deferral LTI TFR F18 STI Cash Opportunity STI Equity Deferral LTI TFR F19 STI Cash Opportunity STI Equity Deferral LTI 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. 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. The intention is that not more than 10% is awarded if the Board approved Budget is not reached. There are eight individual KPIs that are split into four areas – Team (2), Quality (2), Performance (2) and Customer (2). These KPIs are yet to be finalised for 2018. Any anomalies or discretionary elements are approved and validated by the Board. An Individual’s STI cannot be higher than 10% if the Group financial target is not met. Rewarding performance The STI performance ratings are determined under a predetermined matrix with the Board determination final. Deferral of STI Effective from 1 January 2017 a deferral of a portion of STI was introduced to reinforce alignment with shareholder interests. Where the Board determines a portion will be deferred, 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. For the 2017 awarded STI’s the Board has elected to not defer amounts. The deferred STI component for 2018 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. The deferred component is granted as service rights. Once the STI awarded as service rights has been granted, there are no further performance measures attached to the rights other than continued tenure for the vesting period (one year). 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 To align executive KMP remuneration opportunity with shareholder value and provide retention stimulus. 34 35 Types of equity awarded 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 executive KMP and other executives 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. Performance hurdles and vesting schedule Equity grants to executive KMP and other executives are subject to one performance condition, as follows. The hurdles are set based on relevant market benchmarks. Compound annual growth in Underlying EPS (3 years) Performance p.a. < 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. 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. 5. REMUNERATION DETAILS FOR 2017 ACTUAL REMUNERATION RECEIVED IN 2017 2017 SHORT TERM INCENTIVE PLAN OUTCOMES - PROFIT The profit targets in the 2017 Short Term Incentive Plan were aligned to our shareholder value proposition providing sustainable double-digit earnings growth for shareholders. These profit targets form 90% of the total STI for 2017. The minimum financial performance requirements of the Short-Term Incentive Plan were not met as we fell short of the target 8% of growth of our reported NPAT from the prior year. Accordingly, the profit component of the STI was not awarded to any Executive KMP. LTI allocation The size of individual LTI grants for the executive KMP and other executives is determined in accordance with the Board approved remuneration strategy mix. 2017 SHORT TERM INCENTIVE PLAN OUTCOMES – INDIVIDUAL OBJECTIVES 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 5-day VWAP calculation. G8 EDUCATION EXECUTIVE INCENTIVE PLAN (GEIP) Equity granted under the short term and long term incentive schemes is granted by way of performance or service rights issued in accordance with the GEIP. Shareholders approved the GEIP at the Annual General Meeting (AGM) in May 2017. The Company has established the GEIP to assist the retention and motivation of executives of G8 Education (Participants). It is intended that the Performance Rights Plan, will enable the Company to retain and attract the skilled and experienced executives and provide them with the motivation to enhance the success of the Company. Under the Performance Rights Plan, rights may be offered to Participants selected by the Board. Unless otherwise determined by the Board, no payment is required for the grant of rights under the GEIP. Each right is an option to subscribe for one Share. Upon the exercise of a right by a Participant, each Share issued will rank equally with other Shares of the Company. The remaining 10% was determined based on the achievement of agreed annual objectives, which as described earlier are a mix of quantitative and qualitative objectives. These annual objectives for KMP Senior Executives are intended to ensure continued focus on strategic priorities and to raise the bar on performance year on year. At the outset of 2017, clear performance objectives were set for the KMP Senior Executives that were critical to the delivery of the 2017 plan and fundamental to the success of the long-term strategy while addressing the ongoing challenges of our competitive operating environment. The overall assessment of Executive KMP took into account performance against the achievement of individual objectives and how the performance was achieved (i.e. through demonstrating good leadership aligned to our values) which ensures a holistic and full assessment of performance. Detailed assessments were prepared by the Managing Director and discussed with the People and Culture Committee. The Board and the People and Culture Committee believe that the performance in 2017 has been appropriately reflected in the Short Term Incentive Plan outcomes. The diagram below summarises the performance and resulting Short Term Incentive Plan outcomes. There were differentiated outcomes both in terms of the profit component and the achievement of individual business objectives. EXECUTIVE SHARE PLAN – DISCONTINUED WITH EFFECT 31 DECEMBER 2016 The table below summarises the 2017 results for the Managing Director. The Group’s previous Executive Share Plan, whereby selected KMP were granted the right to acquire shares at a nominated exercise price subject to agreed service and performance criteria (i.e. vesting conditions) was discontinued with effect on 31 December 2016. There are no shares on issue under this plan at the date of this report. 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. This policy was implemented in May 2017 and is on the G8 Education website. 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 36 37 MANAGING DIRECTOR REMUNERATION RECEIVED BY KMP SENIOR EXECUTIVES KPIs Team Area of Focus Achievements consistent with shareholder value proposition Engagement Development Plans Engagement survey and listening groups rolled out and engagement action plan milestones achieved by 31/12/17 Development plans in place for all eligible team members and all development plan milestones completed by 31/12/17 Safety Safety Result Safety Process 20% reduction in Group LTIFR by 31/12/17 – not achieved – 10% reduction All Safety action plan milestones completed by 31/12/17 Performance Governance Strategic Plan Re-engineered Board reporting framework, covering both operations and strategy, to be in place by 31/5/17 Establishment of KPI Framework 85% of Group Strategic Plan milestones to be achieved, both in terms of timing and benefits – achieved, with projects being implemented on schedule and project-related benefits being achieved Customer Improvement in customer service Relationship management KPI framework rolled out in line with the project timetable and 90% of KPI’s achieved by 31/12/17 Customer NPS to increase from 50% to 55% by 31/12/17 – partially achieved with the NPS result for October 2017 of 51% being an 11% improvement from January 2017 baseline of 46%, in line with KPI target Conduct visits to 80 centres during the year to 31/12/17, with agreed actions from the visits being completed on time – achieved – 89 visits and all actions completed The Board decided to award the full 10% available to the Managing Director for successful achievement of the KPIs set out above. OTHER KMP The Chief Financial Officer’s 2017 focus was aligned to most of the Managing Director’s focus areas, but with a greater emphasis on the financial elements. In addition, there was a significant focus on strengthening the finance function across G8 Education during her first full year in the role. The Board awarded the full 10% available with the STI being pro-rated for eligibility. Similarly, in the part of the year he was employed in the role, the GM Operation’s focus was to drive performance in the Group’s centre network, with particular emphasis on improving occupancy, wage control, customer service and asset quality. The Board awarded the full 10% available with the STI being pro-rated for eligibility. The Board decided to exercise its discretion and award an additional 10% as a Short Term Incentive taking into account the Managing Director, Chief Financial Officer’s and GM of Operations concerted efforts and successful outcomes in: • Establishing the foundations for success and growth. G8 Education has now assembled an executive team with substantial levels of experience from both a functional and leadership perspective. The recruitment of the leadership team, coupled with the strengthening of the balance sheet (both equity and debt) and good progress made in delivering our strategic plan has us very well placed to deliver against our goals for families, team members and shareholders in coming years • Acquisition of the Oxanda portfolio 19 existing early education and childcare centres from a single vendor. The acquisition represents a positive opportunity for the Group to grow its portfolio by acquiring high quality operating centres in complementary locations at an attractive multiple. • Completion of a comprehensive review of the Group’s capital management strategy which will ensure the Group has access to committed debt and equity funding to enable it to implement its strategy and growth activities, while ensuring the right balance between financial flexibility and providing good levels of ongoing earnings for shareholders. The key outcomes of the capital management strategy review were a reduction in current and targeted gearing levels, implementation of a new club bank facility and a transition to a proportionate dividend policy. • Reduction in Gearing Levels during the half, the Group raised $195m via a $100m domestic institutional placement (at $3.20 per share) and a $95m private placement to CFCG Investment Partners International (Australia) Pty Ltd (at $3.88 per share). This decreased the Group’s Net Leverage from 2.2x at 31 December 2016 to 1.64x at 31 December 2017. The Group’s target Net Leverage level has been reset from 2.0x to 1.5-1.7x, ensuring the Group has sufficient financial flexibility to execute its strategy. • Execution of a $200m 3-year club bank debt facility which will increase the Group’s committed debt facilities by $150m, has market standard financial ratios covering Fixed Charges Cover, Net Leverage and Gearing. 38 The following table sets out the value of the remuneration received by KMP Senior Executives during the year. The figures in this table differ from those shown in the statutory table later in Section 5 mainly because the statutory table includes an apportioned accounting value for all unvested Long Term Incentive Plan grants (which remain subject to the satisfaction of performance and service conditions and may not ultimately vest). The values disclosed in the below table, while not in accordance with the accounting standards, are intended to be helpful for shareholders in better demonstrating the linkages between performance and the remuneration realised by the KMP Senior Executives. The table below shows: Fixed remuneration Short Term Incentive Any vesting of Long Term Incentive Plan awards Termination Payments G Carroll S Williams J Ball C Scott resigned 29 May 2017 T King resigned 12 April 2017 Fixed Remuneration (1) STI (2) LTI vested (3) Termination payments (4) Total actual remuneration earned 743,188 50,000 388,280 209,928 - - 371,031 157,926 95,462 - - - - - - - - - 282,934 149,428 793,188 388,280 209,928 811,891 244,890 1) 2) 3) 4) Base Salary, superannuation and non-monetary benefits such as motor vehicle and travel STI paid during the financial year for discretionary bonus awarded on the prior year Intrinsic value of LTI that vested during the financial year Termination payments paid during the financial year 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 2013 $’000 2014 $’000 2015 $’000 2016 $’000 2017 $’000 275,165 491,288 706,164 778,513 795,759 47,350 105,965 160,423 160,691 150,878 Net Profit After Tax 31,072 52,731 88,581 80,265 80,581 Underlying EBIT (unaudited, Non IFRS) 50,593 100,248 145,438 160,660 156,034 Underlying NPAT (unaudited, Non IFRS) 32,276 60,613 87,131 93,342 92,874 Underlying EPS (cents) Average annual dividend per share (cents) Share price as at 31 December ($) 11.72 12.0 3.16 18.57 23.87 24.68 21.80 19.0 4.17 24.0 3.57 24.0 3.59 3,031 18.0 3.45 2,558 Total Remuneration Executive KMP 1,489 1,999 2,968 Since 2013 underlying EPS has increased by 88%, dividends per share have increased by 50% and the share price has increased by 9% demonstrating a balance between strategic growth and shareholder value. During the same period, total remuneration paid to KMP has increased by 71%. Total remuneration paid to KMP as a proportion of underlying Net profit After Tax was 4.6% in 2013 and has decreased to 2.7% in 2017. Underlying EBIT equals NPBT plus finance costs plus non-operating costs as per page 21 Underlying NPAT equals NPAT plus non-operating costs as per page 21 39 YEAR Fixed Remuneration Proportion of total remuneration Short-term POST EMPLOYMENT COSTS Performance Rights Total Performance related Share Plan related Amount $ G Carroll S Williams J Ball C Scott^ T King^^ Former KMP J Roberts^^^ A Perriam* C Sacre** Total Total 2017 2016 2017 2016 2017 2016 2017 2016 2017 2016 2016 2016 2016 2017 2016 Salary 725,000 199,110 368,448 - 199,904 - 364,207 889,218 95,462 290,385 546,834 243,923 141,814 1,753,021 2,311,284 STI Dividends from Share Plan Superannuation benefits Termination payment Total Share based payment 145,000 50,000 54,666 - 19,250 - - 168,750 - 70,000 108,750 30,625 - 218,916 428,125 - - - - - - 80,000 90,000 - - 90,000 10,998 100,000 80,000 290,998 18,188 11,452 19,832 - 10,024 - 6,824 7,564 8,675 19,681 19,864 19646 12,876 63,543 91,083 - - - - - - 282,934 - 149,428 - - - 14,870 432,362 14,870 888,188 260,562 442,946 - 229,178 - 733,965 1,155,532 253,565 380,066 765,448 305,192 269,560 2,547,842 3,136,360 77,611 - 965,799 260,562 19,426 462,372 - - - - 229,178 - (85,889) 648,076 - - - - - (105,284) 1,155,532 253,565 380,066 765,448 305,192 164,276 11,148 2,558,990 (105,284) 3,031,076 % 23% 19% 16% - 8% - (13%) 15% - 18% 14% 10% (64%) % 8% - 4% - - - (13%) - - - - - (64%) C Scott resigned 29 May 2017 J Roberts resigned 18 January 2018 and ceased as KMP 1 January 2017 T King resigned 12 April 2017 A Perriam resigned 10 April 2017 and ceased as KMP 1 January 2017 C Sacre resigned 27 May 2016 6. KMP EQUITY INTERESTS The tables below set out the equity interests held by Non-executive Directors (“NEDs”) and executive KMP. The movement during the reporting period in the number of performance rights over ordinary shares in the Company held directly or beneficially, by each KMP, including their related parties is as tabled below: 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 Tranche Grant Date 2017 Fair Value at Grant Date Balance at the start of the year Granted during the year Balance at the end of the year Value of Performance Rights granted in year Financial year in which grant vests SHARES Directors of G8 Education Limited Ordinary Shares M Johnson B Bailison S Forrester D Foster G Carroll M Zabel J Cogin C Scott Directly Directly Directly Directly Directly Directly Directly Beneficially M Reynolds Directly KMP of G8 Education Limited Ordinary Shares S Williams J Ball T King Directly Directly Indirectly 25,000 - 15,423 14,587 - - - 333,333 24,195 - - 631,329 - - - - - - - (333,333) - - - - 5,000 13,000 24,105 - 30,000 13,000 39,528 14,587 100,000 100,000 - - - (24,195) 12,500 - (631,329) - - - - 12,500 - - $ Number Number Number $ Year G Carroll Tranche 1 20-July 3.19 S Williams Tranche 2 6-Oct 3.70 TOTAL - - - 142,249 142,249 453,774 2020 53,629 53,629 198,427 2020 195,878 195,878 652,202 Determined at the time of the grant per AASB 2. For details on the valuation of performance rights, including model and assumption used, please refer to note 30. The Performance rights are expensed over the vesting conditions which are measured from grant date. Plan participants may not enter into any transaction designed to remove the at risk aspect of the Performance Rights before they vest. The value at the exercise date for Performance Rights is the Group share price. 41 40 C Scott resigned 29 May 2017 M Reynolds resigned 31 August 2017 T King resigned 12 April 2017 7. 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 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: 8. NON-EXECUTIVE DIRECTOR (NED) REMUNERATION (AUDITED) NED REMUNERATION Principle Comment Fees are set by reference to key considerations Fees for NEDs are based on the nature of the NEDs’ work and their responsibilities. The Remuneration is structured to preserve independence whilst creating alignment. 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. There was no change to the NED remuneration in 2017. Remuneration is structured to preserve independence whilst creating alignment 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. Aggregate Board and committee fees are approved by shareholders The total amount of fees paid to NEDs in 2017 is within the aggregate amount approved by shareholders at the AGM in May 2017 of $1,1 million per annum including superannuation. At the AGM on 29 May 2017, the Chairman confirmed that it was not intended to exceed $1 million in non-executive director payments in the next two years. 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. Elements Details NED FEES AND OTHER BENEFITS EXPLAINED 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. Board fee per annum Board Chairman Fee Board NED Base fee 2017 225,000 110,000 2016 225,000 95,000 Committee fees 2017 Committee Fees Committee Chair Committee member Audit Nomination People and Culture 25,000 17,000* 17,000 10,000 No Fee 9,000 *Reflects the creation of a formal Nomination Committee in 2017 Post-employment benefits Superannuation Superannuation contributions have been made at a rate of 9.5% of the board fee except in cases where the Australian Government’s prescribed maximum contributions limit has been applied. The limit will apply to all Directors and KMP from 1 January 2018. The contribution rate will increase in future years in line with mandated legislative increases. Contributions are not included in the base fee. Retirement schemes There are no retirement schemes in place for NED other than Statutory Superannuation. 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 2017 for travel allowances, extra services or special exertions. 42 43 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. • • 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 46. NON-AUDIT SERVICES AUDITOR 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 2017, 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 in note 31, did not compromise the auditor independence requirements of the Corporations Act 2001 for the following reasons: 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 24 February 2018 NED TOTAL REMUNERATION PAID (AUDITED) Short-term Benefits Post-employment Benefits YEAR FEES SUPERANNUATION BENEFITS TOTAL M Johnson (Chairman) B Bailison S Forrester D Foster M Zabel (appointed 1 September 2017) J Cogin (appointed 1 September 2017) M Reynolds (resigned 31 August 2017) Total Total 2017 2016 2017 2016 2017 2016 2017 2016 2017 2016 2017 2016 2017 2016 2017 2016 225,000 21,375 246,375 225,865 135,000 121,923 21,457 247,322 12,825 147,825 11,583 133,506 127,000 12,065 139,065 116,539 129,423 104,519 36,385 - 11,071 127,610 12,295 141,718 9,929 114,448 3,457 39,842 - - 39,362 3,739 43,101 - 79,638 111,153 - - 7,827 87,465 10,560 121,713 771,808 73,583 845,391 679,999 64,600 744,599 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 relevant executives are requested to accumulate a minimum shareholding in G8 Education shares equivalent to one year’s fixed remuneration. The Board believes that this requirement will ensure alignment with shareholders interests. The guidelines were implemented in January 2017, with NEDs and relevant executives required to accumulate the required holding over the next 5 years or from appointment. DIRECTORS TENURE The Directors shall retire from office in accordance with the constitution of G8 Education Limited and/or the applicable sections of the Corporations Act. The Board has established a policy that in general the maximum term of service for a Non-executive Director should be approximately ten years. However, this term may be extended for reasons such as Board or Committee chairmanship, providing continuity or a particular capability of a Non-executive Director. 44 45 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 SECTION TWO FINANCIAL REPORT 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 2017, 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 24 February 2018 Consolidated Income Statement Consolidated Statement of Comprehensive Income Consolidated Balance Sheet Consolidated Statement of Changes in Equity 48 48 49 50 Consolidated Statement of Cash Flows 51 Notes to the Financial Statements 52 Directors’ Declaration Independent Auditor’s Report 102 103 A member firm of Ernst & Young Global Limited Liability limited by a scheme approved under Professional Standards Legislation 46 47 CONSOLIDATED INCOME STATEMENT For the year ended 31 December 2017 CONSOLIDATED BALANCE SHEET As at 31 December 2017 Revenue Revenue from continuing operations Other income 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 Notes 2 3 4 4 4 5 6 6 2017 $’000 789,043 7,763 2016 $’000 771,715 6,798 796,806 778,513 (445,841) (432,126) (97,846) (58,568) (13,959) (28,667) (34,144) (88,396) (59,348) (11,707) (25,202) (47,065) (679,025) (663,844) 117,781 (37,200) 80,581 Cents 18.92 18.91 114,669 (34,404) 80,265 Cents 21.22 21.22 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 2017 Profit for the year Other comprehensive income, net of income tax Items that are or may be reclassified to the income statement: Exchange differences on translation of foreign operations Reclassify to income statement for prior period hedges Effective portion of changes in fair value of cash flow hedges Total other comprehensive income Total comprehensive income for the year 2017 $’000 80,581 2016 $’000 80,265 (23) - 1,921 1,898 82,479 (455) (3,559) (1,042) (5,056) 75,209 The above Consolidated Statement of Comprehensive Income should be read in conjunction with the accompanying notes. 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 Total current liabilities Non-current liabilities Other payables Borrowings Provisions Derivative financial instruments Total non-current liabilities Total liabilities Net assets EQUITY Contributed equity Reserves Retained earnings Total equity Notes 16 7 8 9 5 14 8 18 10 17 28 10 17 11 18 19 2017 $’000 49,209 30,366 12,361 250 92,186 63,906 16,220 2016 $’000 26,467 22,948 9,234 2,923 61,572 54,845 15,415 1,087,969 1,015,002 32,273 622 1,200,990 1,293,176 75,057 49,905 26,096 151,058 1,067 253,589 8,321 13,806 276,783 427,841 865,335 876,394 44,552 (55,611) 865,335 23,022 3,359 1,111,643 1,173,215 88,847 - 25,956 114,803 754 410,649 4,783 16,351 432,537 547,340 625,875 641,848 35,649 (51,622) 625,875 The above Consolidated Balance Sheet should be read in conjunction with the accompanying notes. 48 49 CONSOLIDATED STATEMENT OF CHANGES IN EQUITY For the year ended 31 December 2017 CONSOLIDATED STATEMENT OF CASH FLOWS For the year ended 31 December 2017 Notes Contributed Equity Hedging Reserve Translation Reserve Share Based Payment Reserve Profits Reserve Retained Earnings Total $’000 $’000 $’000 $’000 $’000 $’000 $’000 Cash flows from Operating Activities Receipts from customers (inclusive of GST) Notes Balance 1 January 2016 603,043 3,559 6,026 344 33,706 (43,893) 602,785 Payments to suppliers and employees (inclusive of GST) - - - - - (4,601) (455) (4,601) (455) 87,994 (7,729) 80,265 - - (5,056) Interest received Interest paid Income taxes paid 87,994 (7,729) 75,209 Net cash inflows from operating activities 21 - - - - (105) - - - - (108) - - - - 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 Share based payment expense Dividends provided for or paid 20 Total 19 38,805 - - 38,805 - - - - - - - - - (90,819) (105) (90,819) - - - - 38,805 (105) (90,819) (52,119) Cash flows from Investing Activities Payments for purchase of businesses (net of cash acquired) Payments for divestments Payments for property plant and equipment Net cash outflows from investing activities (86,212) (107,149) Balance 31 December 2016 641,848 (1,042) 5,571 239 30,881 (51,622) 625,875 Cash flows from Financing Activities Balance 1 January 2017 641,848 (1,042) 5,571 239 30,881 (51,622) 625,875 Share issue costs Debt issue costs Dividends paid 20 Profit for the year Other comprehensive income (net of tax) Total comprehensive income for the year - - - - 1,921 1,921 Transactions with owners in their capacity as owners Contributions of equity, net of transaction cost Share based payment expense Dividends provided for or paid 19 30 20 234,546 - - Total 234,546 - - - - - (23) (23) - - - - 84,570 (3,989) 82,479 - - - - 234,546 (108) (77,457) 156,981 - (77,457) (108) (77,457) Balance 31 December 2017 876,394 879 5,548 131 37,994 (55,611) 865,335 84,570 (3,989) 80,581 Proceeds from issue of corporate note - - 1,898 Repayment of corporate note Proceeds from issue of shares Inflows from Borrowings Outflows of Borrowings Premium paid on FX option Proceeds from sale of FX option Net increase/ (decrease) in cash and cash equivalents Cash and cash equivalents at the beginning of the financial year Effects of exchange rate changes on cash Net cash inflows (cash outflows) from financing activities 16,970 (168,905) The above Consolidated Statement of Changes in Equity should be read in conjunction with the accompanying notes. Cash and cash equivalents at the end of the financial year 16 50 51 The above Consolidated Statement of Cash Flows should be read in conjunction with the accompanying notes. 2017 $’000 777,833 (626,525) 1,004 (26,199) (34,102) 92,011 (67,422) (358) (18,432) 2016 $’000 769,277 (601,491) 1,198 (25,431) (34,970) 108,583 (82,140) - (25,009) (5,357) (4,357) (62,787) - (70,000) 200,675 10,000 (51,204) - - (57) (12,747) (57,964) 269,281 (411,208) 6,537 40,000 - (11,028) 8,281 22,769 26,453 (27) 49,195 (167,471) 193,826 98 26,453 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 AND DEFERRED TAX ASSETS NOTE 6: EARNINGS PER SHARE NOTE 7: CURRENT ASSETS – TRADE AND OTHER RECEIVABLES NOTE 8: CURRENT ASSETS – OTHER NOTE 9: NON-CURRENT ASSETS – PROPERTY, PLANT AND EQUIPMENT NOTE 10: CURRENT AND NON-CURRENT LIABILITIES – TRADE AND OTHER PAYABLES NOTE 11: NON-CURRENT LIABILITIES – PROVISIONS 2. Business Combinations, Goodwill & Impairment NOTE 12: CRITICAL ACCOUNTING ESTIMATES AND JUDGEMENTS NOTE 13: BUSINESS COMBINATIONS NOTE 14: NON-CURRENT ASSETS – GOODWILL 3. Capital Structure & Financial Risk Management NOTE 15: FINANCIAL RISK MANAGEMENT NOTE 16: CURRENT ASSETS – CASH AND CASH EQUIVALENTS NOTE 17: CURRENT AND NON – CURRENT LIABILITIES - BORROWINGS NOTE 18: DERIVATIVE FINANCIAL INSTRUMENTS NOTE 19: CONTRIBUTED EQUITY NOTE 20: DIVIDENDS NOTE 21: RECONCILIATION OF NET CASH FLOWS FROM OPERATING AND FINANCING ACTIVITIES 4. Group Structure NOTE 22: SUBSIDIARIES NOTE 23: PARENT ENTITY DISCLOSURES NOTE 24: DEED OF CROSS GUARANTEE 5. Unrecognised Items NOTE 25: COMMITMENTS NOTE 26: CONTINGENCIES NOTE 27: EVENTS OCCURRING AFTER THE BALANCE SHEET DATE 6. Other NOTE 28: EMPLOYEE ENTITLEMENTS NOTE 29: KEY MANAGEMENT PERSONNEL DISCLOSURES NOTE 30: SHARE-BASED PAYMENTS NOTE 31: REMUNERATION OF AUDITORS NOTE 32: RELATED PARTY TRANSACTIONS NOTE 33: OTHER SIGNIFICANT ACCOUNTING POLICIES 53 53 54 54 55 58 58 60 61 63 63 64 65 68 69 76 77 79 80 82 83 84 86 87 89 89 89 90 91 94 96 96 96 1. FINANCIAL OVERVIEW Note 1: Segment Information (a) Description of segments The Executive Team (the Chief Operating Decision maker that makes strategic decisions) considers the business as one Group of centres and regularly reviews operating results at this level to assist and make decisions about the allocation of resources. The Executive Team 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. Australia Foreign Country $’000 16,506 31,643 Total $’000 789,043 1,184,148 2017 Revenue from external customers Non-current assets* 2016 Revenue from external customers Non-current assets* $’000 772,537 1,152,506 756,948 1,061,052 *Non-current assets exclude deferred tax assets and derivative financial instruments 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 Accounting Policy 14,767 31,817 771,715 1,092,869 CONSOLIDATED 2017 $’000 2016 $’000 773,516 13,269 751,502 18,203 786,785 769,705 2,258 2,010 789,043 771,715 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 10). (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. (iii) Management fee Income Fees paid by franchisees are recognised in accordance with the franchise agreement and once the operational support service has been performed. 52 53 1. FINANCIAL OVERVIEW Note 3: Other Income Deferred consideration not payable Licence and other fees Interest Accounting Policy (i) Deferred consideration Refer note 13. (ii) Licence and other fees 1. FINANCIAL OVERVIEW CONSOLIDATED Note 5: Income Tax - Expense CONSOLIDATED 2017 $’000 243 6,473 1,047 7,763 2016 $’000 2,500 3,255 1,043 6,798 (a) Income tax expense Current Tax Deferred Tax Prior Period Adjustment 2017 $’000 36,708 425 67 2016 $’000 27,349 6,840 215 Licence fees are recognised to the extent that it is probable that the economic benefits will flow to the Group and the revenue can be reliably measured over the term of the licence period. (iii) Interest income Interest income is recognised using the effective interest method Note 4: Expenses Profit before income tax includes the following specific expenses: Depreciation Employment Costs Wages and salaries Post-employment benefits Share-based payment expense Finance Costs Interest and finance charges Foreign Exchange Loss (refer note 15) Property rental expenses relating to operating leases Minimum lease payments Bad & doubtful debts CONSOLIDATED 2017 $’000 2016 $’000 13,959 11,707 410,807 35,142 (108) 445,841 31,379 2,765 34,144 88,300 727 397,898 34,333 (105) 432,126 39,017 8,048 47,065 79,876 671 Income tax expense is attributable to profit from continuing operations 37,200 34,404 Deferred income tax expense included in income tax expense comprises: Decrease / (increase) in deferred tax assets 425 6,840 (b) Numerical reconciliation of income tax expense to prima facie tax payable CONSOLIDATED Profit from continuing operations before income tax expense Tax on operations at the Australian tax rate of 30% (2016: 30%) Tax effect of amounts which are not deductible (taxable) in calculating taxable income Adjustment relating to prior year Entertainment Deferred consideration not payable Acquisition related costs - not deductible Other non-allowable items Difference in overseas tax rates Income tax expense Weighted average tax rate (c) Amounts recognised directly in equity 2017 $’000 117,781 35,334 67 140 (73) 1,336 218 178 37,200 31.6% 2016 $’000 114,669 34,401 215 139 (750) 622 37 (260) 34,404 30.0% Aggregate current and deferred tax arising in the reporting year and not recognised in profit or loss but directly debited or credited to equity Net deferred tax - debited (credited) directly to equity 1,230 577 54 55 1. FINANCIAL OVERVIEW 1. FINANCIAL OVERVIEW Note 5: Income Tax - Non-Current Assets – Deferred Tax Assets CONSOLIDATED Deferred tax asset The balance comprises temporary differences attributable to: Employee benefits Cash Flow Hedging 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 2017 $’000 8,764 838 1,861 11,463 194 282 3,038 1,670 298 5,482 16,945 (217) (508) (725) 16,220 Employee Benefits Share Issue Transaction Costs OTHER $’000 7,143 1,367 - 8,510 254 - 8,764 $’000 $’000 2,132 (855) 18 1,295 (1,041) 1,607 1,861 12,403 (7,352) 559 5,610 363 (377) 5,595 At 1 January 2016 Charged to the consolidated income statement Charged directly to equity At 31 December 2016 Charged to the consolidated income statement Charged directly to equity At 31 December 2017 2016 $’000 8,510 - 1,295 9,805 402 185 2,396 2,050 1,199 6,232 16,037 (216) (406) (622) 15,415 TOTAL $’000 21,678 (6,840) 577 15,415 (425) 1,230 16,220 Note 5: Income Tax - Non-Current Assets – Deferred Tax Assets (continued) Tax consolidation (iii) Tax related contingencies At 31 December 2017 there are no tax related contingencies (2016; Nil). 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. 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. (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 installments. 56 57 Profit attributable to the ordinary equity holders of the Company used in calculating basic earnings per share 80,581 80,265 31-60 days 61+ days Total 1. FINANCIAL OVERVIEW 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 Diluted earnings per share Profit attributable to the ordinary equity holders of the Company used in calculating diluted earnings per share (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 Adjustments for calculation of diluted earnings per share: Performance Rights Weighted average number of ordinary shares and potential ordinary shares used as the denominator in calculating diluted earnings per share Accounting Policy (i) Basic Earnings Per Share Basic Earnings Per Share is calculated by dividing: 1. FINANCIAL OVERVIEW CONSOLIDATED Note 7: Current Assets - Trade and Other Receivables (continued) 2017 CPS 18.92 2016 CPS 21.22 (a) Impaired trade receivables As at 31 December 2017 current trade receivables of the Group with a nominal value of $2,026,155 (2016: $1,435,288) were assessed for impairment. The amount of the allowance for impairment was $1,013,345 (2016: $718,486). 18.91 21.22 The ageing of these receivables is as follows: $’000 $’000 80,581 80,265 Movements in the allowance for impairment of receivables are as follows: CONSOLIDATED Number Number 425,942,976 378,206,976 Opening balance Allowance for impairment recognised during the year Receivables written off during the year as uncollectable 141,348 - 426,084,323 378,206,976 Exchange differences Closing balance 2017 $’000 718 727 (432) - 1,013 CONSOLIDATED 2017 $’000 408 1,618 2,026 2016 $’000 247 1,188 1,435 2016 $’000 618 671 (571) - 718 • • 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. Note 7: Current Assets - Trade and Other Receivables Trade receivables Allowance for impairment of receivables (note (a) below) GST receivable Other debtors CONSOLIDATED 2017 $’000 26,884 (1,013) 25,871 1,007 3,488 2016 $’000 20,113 (718) 19,395 1,237 2,316 Total trade and other receivables 30,366 22,948 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. (b) Past due but not impaired As at 31 December 2017, trade receivables of $6,241,527 (2016: $6,294,399) 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 (c) Fair value and credit risk CONSOLIDATED 2017 $’000 6,064 14 164 6,242 2016 $’000 5,827 47 420 6,294 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 15. 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. 58 59 1. FINANCIAL OVERVIEW 1. FINANCIAL OVERVIEW Note 7: Current Assets - Trade and Other Receivables (continued) Note 9: Non-Current Assets - Property, Plant and Equipment Parent fees are required to be paid one week in advance. The parent fees receivable relates 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. Note 8: Current and Non-Current Assets - Other Current Prepayments Inventory Deposits Total other current assets Non- Current Deposits on acquisitions Prepayments Deposits Total other non-current assets Total other current and non-current assets Accounting Policy CONSOLIDATED 2017 $’000 5,500 4,463 2,398 12,361 2016 $’000 2,352 3,129 3,753 9,234 29,443 23,022 1,456 1,374 32,273 44,634 - - 23,022 32,256 Deposits on acquisitions relate to deposits made for the purchase of centres. Once settled the amount transferred forms part of the business combination accounting. Effect of foreign exchange on depreciation Closing net book amount Inventories relate to childcare centre consumables. These are measured at the lower of cost and the current replacement cost. Any write down in the value of the inventory due to obsolescence is booked as an expense when the inventory becomes obsolete. Current replacement cost is the cost the Group would incur to acquire or replace inventories held for distribution at balance date. At 31 December 2016 Cost Accumulated depreciation Net Book amount 60 Buildings Vehicles Furniture, fittings & equipment Make Good Total $’000 $’000 $’000 $’000 $’000 CONSOLIDATED Year ended 31 December 2017 Opening net book amount 4,298 312 50,235 Additions through business combinations (refer note 13) Initial Provision Additions - other Disposals Depreciation charge Effect of foreign exchange on depreciation Closing net book amount At 31 December 2017 Cost Accumulated depreciation Net Book amount - - - - (152) - 4,146 5,046 (900) 4,146 - - - (5) (56) - 251 815 - 18,187 (1,050) (13,751) (7) - - 5,080 - - - - 54,845 815 5,080 18,187 (1,055) (13,959) (7) 54,429 5,080 63,906 1,179 (928) 251 101,812 (47,383) 54,429 5,080 - 5,080 113,117 (49,211) 63,906 Buildings Vehicles Furniture, fittings & equipment Make Good Total $’000 $’000 $’000 $’000 $’000 CONSOLIDATED Year ended 31 December 2016 Opening net book amount 4,450 581 36,339 Additions through business combinations (refer note 13) Additions - other Disposals Depreciation charge - - - (152) - 4,298 5,046 (748) 4,298 - - (202) (67) - 312 1,184 (872) 312 270 25,141 (13) (11,488) (14) 50,235 83,867 (33,632) 50,235 - - - - - - - - - - 41,370 270 25,141 (215) (11,707) (14) 54,845 90,097 (35,252) 54,845 61 1. FINANCIAL OVERVIEW 1. FINANCIAL OVERVIEW Note 9: Non-Current Assets - Property, Plant and Equipment (continued) (a) Leasehold Improvements Furniture, fittings and equipment includes the following amounts that are leasehold improvements: Cost Accumulated depreciation Net book amount CONSOLIDATED 2017 $’000 64,894 (21,448) 43,446 2016 $’000 50,676 (14,361) 36,315 (b) Non-current assets pledged as security Refer to note 17 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. Note 10: Current and Non-Current Liabilities - Trade and Other Payables CONSOLIDATED Trade payables (i) Deferred centre acquisitions Dividends payable Centre enrolment advances (i) Other payables and accruals (i) Deferred income Total Current Lease accounting liability Deferred centre acquisitions Total Non-Current Accounting Policy Notes 13 20 13 2017 $’000 9,343 13,546 2016 $’000 7,534 3,998 - 22,950 5,845 37,168 9,155 8,260 35,872 10,233 75,057 88,847 312 755 1,067 - 754 754 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. (i) Trade and other payables are non-interest bearing and are normally settled on 30-day terms. Note 11: Non-Current Liabilities - Provisions Employee benefits Make good provision Total Employee benefits refer to note 28 Accounting Policy Make good provision CONSOLIDATED 2017 $’000 3,241 5,080 8,321 2016 $’000 4,783 - 4,783 Costs required to return certain leased premises to their original condition as set out in the lease agreements are recognised as a provision in the financial statements. The provision has been calculated as an estimate of future costs and discounted to present value. 62 63 2. BUSINESS COMBINATIONS, GOODWILL & IMPAIRMENT 2. BUSINESS COMBINATIONS, GOODWILL & IMPAIRMENT Note 12: 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 14. The recoverable amounts of goodwill have been determined based on value-in-use calculations. These calculations require the use of assumptions. Refer to note 14 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. Where outside the measurement period under AASB 3 Business combinations, 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. (iii) Long service leave The liability for long service leave is recognised as a provision for employee benefits and measured at the present value of estimated future payments to be made in respect of services provided by employees up to the end of the reporting period. The provision is calculated using expected future increases in wage and salary rates including related on-costs and expected settlement dates based on staff turnover history. Note 13: 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 37 centres from various vendors as outlined below: Number of centres 24 1 1 1 1 2 2 3 2 37 State NSW/VIC/ WA/QLD/ Singapore VIC SA ACT NSW VIC VIC VIC VIC TOTAL Purchase Consideration $’000 $’000 $’000 $’000 $’000 $’000 $’000 $’000 $’000 $’000 Cash consideration 24,245 3,175 954 900 1,096 6,913 5,683 10,554 5,664 59,184 Purchase price adjustments (to cash) (318) - - - (20) 43 (21) (30) (329) (675) Contingent consideration 3,873 1,058 1,738 2,563 1,873 - 2,842 - - 13,947 Total purchase consideration 27,800 4,233 2,692 3,463 2,949 6,956 8,504 10,524 5,335 72,456 Assets & Liabilities acquired at fair value Property, Plant & equipment 509 81 39 56 4 34 51 31 10 815 Lease Liability (1,357) Employee benefit liabilities (483) - - - - - - Net identifiable assets/ (liabilities) acquired (1,331) 81 39 56 - - 4 - (40) - - - (81) - - (1,357) (604) (6) 51 (50) 10 (1,146) Goodwill 29,131 4,152 2,653 3,407 2,945 6,962 8,453 10,574 5,325 73,602 27,800 4,233 2,692 3,463 2,949 6,956 8,504 10,524 5,335 72,456 Revenue & profit contribution from the date of acquisition to period end 31 December 2017 Revenue 9,867 707 746 794 1,031 2,187 745 1,185 155 17,417 Profit/(Loss) before tax 1,144 (380) (111) (108) 180 482 (117) 328 44 1,462 FY revenue could not be reliably measured, however profit contribution from 1 January 2017 would be approximately $7.7 million. Acquisition costs of $3,422,860 (2016: $2,574,323) are included in other expenses in the consolidated income statement. As at 31 December 2017 accounting for the 2017 acquisitions are provisional in nature due to final completion statements not being received at year end. 64 The above amounts relate to accounting adjustments for assets and liabilities taken on at acquisition date but not finalised at 31 December 2016 65 2. BUSINESS COMBINATIONS, GOODWILL & IMPAIRMENT 2. BUSINESS COMBINATIONS, GOODWILL & IMPAIRMENT Note 13: Business Combinations (continued) Note 13: Business Combinations (continued) No goodwill deductible for tax purposes. During the year accounting adjustments were made to provisional amounts recognised in 2016 as outlined below: A reconciliation of the fair value of the contingent consideration liability is provided below: Financial liability for contingent consideration as at 31 December Write back of contingent consideration to P&L performance condition not met - other income (note 3) Fair value adjustments Paid contingent consideration performance condition met Contingent consideration for new acquisitions Total contingent consideration payable as at 31 December CONSOLIDATED 2017 $’000 4,752 (243) 76 (4,231) 13,947 14,301 2016 $’000 4,367 (2,500) 42 (1,155) 3,998 4,752 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. 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. Purchase Consideration Cash consideration Contingent consideration Purchase price adjustments Total purchase consideration Assets & Liabilities acquired at fair value Property, Plant & equipment Payables Employee benefit liabilities Net identifiable assets/(liabilities) acquired Goodwill Total asset and liabilities acquired 2016 Provisional 2016 Adjustments Final WA/NSW/QLD/VIC WA/NSW/QLD/VIC WA/NSW/QLD/VIC $’000 $’000 $’000 62,874 3,998 (748) 66,124 270 (147) (376) (253) 66,377 66,124 - 76 284 360 125 - 10 135 225 360 62,874 4,074 (464) 66,484 395 (147) (366) (118) 66,602 66,484 The above amounts relate to accounting adjustments for assets and liabilities taken on at acquisition date but not finalised at 31 December 2016 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 2017 Acquisition of 7 centres* Acquisition of 3 centres* Acquisition of 2 centres* Acquisition of 1 centre Total potential contingent consideration payable Carrying value Conditions $’000 7,961 2,315 3,270 1,125 $’000 7,961 2,315 3,270 24 month performance hurdle based on EBIT 24 month performance hurdle based on EBIT 24 month performance hurdle based on EBIT 755 19 years occupancy hurdle based on licence capacity Total 14,671 14,301 *The Group has assessed these hurdles will be reached within 12 months and accordingly have recorded these amounts as current. 66 67 2. BUSINESS COMBINATIONS, GOODWILL & IMPAIRMENT 3. CAPITAL STRUCTURE & FINANCIAL RISK MANAGEMENT Note 14: Non-Current Assets - Goodwill Note 15: Financial Risk Management Opening net book amount Additions Adjustments in respect of prior year acquisitions Disposal of centres Exchange differences Closing net book amount Cost Accumulated impairment Net book amount CONSOLIDATED 2017 $’000 1,015,002 73,602 225 (851) (9) 2016 $’000 944,604 66,377 4,311 - (290) 1,087,969 1,015,002 1,099,021 (11,052) 1,087,969 1,026,054 (11,052) 1,015,002 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: Financial assets at fair value Financial assets at amortised cost $’000 $’000 The Group divested 22 centres during 2017. (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 2018 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 the historically established wage cost as a percentage of revenue which is driven by future growth in occupancy; Centre occupancy expenses – based on current operating leases and increased by a historically established occupancy cost a percentage of revenue which is driven by future growth in occupancy ; 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: • • • Pre-tax discount rate of 13% (2016; 13%); Full support office costs allocation; and Forecast period of 3 years plus a terminal growth calculation with a growth rate of 0% (2016;0%). (c) Impairment charge No significant changes to the underlying assumptions from 31 December 2016. As a result, management have determined no impairment was required. 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. 2017 Financial Assets Cash and Cash equivalents Trade and other receivables Deposits on acquisitions Derivative Financial Instruments 2016 Financial Assets Cash and Cash equivalents Trade and other receivables Deposits on acquisitions Derivative Financial Instruments 2017 Financial Liabilities Trade and other payables Borrowings Derivative financial instrument 2016 Financial Liabilities Trade and other payables Borrowings Derivative financial instrument 107,950 108,572 Total $’000 49,209 29,298 29,443 622 26,467 21,711 23,022 3,359 74,559 Total $’000 35,030 303,494 13,806 352,330 73,628 410,649 16,351 49,209 29,298 29,443 - 26,467 21,711 23,022 - 71,200 35,030 303,494 - 338,524 73,628 410,649 - - - - 622 622 - - - 3,359 3,359 - - 2,793 2,793 - - 1,042 1,042 - - 11,013 11,013 - - 15,309 15,309 Derivatives used for Cash Flow Hedges Derivatives used for Fair Value Hedges Liabilities at amortised cost $’000 $’000 $’000 68 The Group also has contingent consideration measured at the fair value as disclosed in Note 13. 484,277 500,628 69 3. CAPITAL STRUCTURE & FINANCIAL RISK MANAGEMENT 3. CAPITAL STRUCTURE & FINANCIAL RISK MANAGEMENT Note 15: Financial Risk Management (continued) Note 15: Financial Risk Management (continued) 2) the foreign exchange exposure on the coupon payments associated with the SGD$270m corporate notes where the group pays 6.54% on AUD$269,892,043 and receives 5.50% on SGD$270m. Translation of foreign operations (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 SGD$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$600m Multi-currency Issuance Program); and In the prior year, the Group closed out an AUD/SGD put option that was purchased to hedge against the currency risk of the SGD$260m unsecured May 2017 notes. The gain on this put option has been reflected through the income statement in the prior year. On the 18 May 2016, the Group purchased an AUD/SGD call option with a notional value of through the income statement in the prior year SGD$270m, 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 counter-party security that ultimately eliminated collateral posting requirements. The movement in the value of this option is recognised through the income statement (refer note 4). 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 2017 SGD 2016 SGD $’000 $’000 2,333 572 3,565 319 (265,748) (262,977) (324) (240) (263,167) (259,333) *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 2017 was 0.9581 (2016: 0.9584). Amounts recognised in the income statement and other comprehensive income (refer note 4). During the year, the following foreign-exchange related amounts were recognised in the income statement and other comprehensive income: Amounts recognised in income statement 2017 $’000 2016 $’000 Exchange losses on foreign currency borrowing included in finance costs (10,985) (10,080) 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 Net revaluation of foreign exchange contract from prior period and recognition in income statement Net revaluation of the cross currency swap - SGD borrowings 11,013 2,737 2,765 (23) - 1,921 1,921 15,309 2,819 8,048 (455) (3,559) (1,042) (4,601) 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. 70 71 3. CAPITAL STRUCTURE & FINANCIAL RISK MANAGEMENT 3. CAPITAL STRUCTURE & FINANCIAL RISK MANAGEMENT Note 15: Financial Risk Management (continued) (iii) Group companies Note 15: Financial Risk Management (continued) Amounts recognised in other comprehensive income 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 (Losses)/gains recognised as a result of cross currency swap designated as cash flow hedge 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 Gains recycled to income statement Group sensitivity 2017 $’000 (1,921) 2016 $’000 1,042 - 3,559 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 2017 and 2016, 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 In the prior year the group entered into a cross currency swap as set out in note 15(a). As at the reporting date, the Group had the following variable rate borrowings outstanding: 31 December 2017 31 December 2016 Weighted avg interest rate Balance % of Total Loans Weighted avg interest rate Balance % of Total Loans $’000 5.66% 50,000 - - - 50,000 16% - 16% 5.98% 2.44% $’000 50,000 40,000 - 90,000 12% 10% 22% Corporate Note Bankwest facility Net exposure to cash flow interest rate risk An analysis by maturities is provided in 15(d) following. Amounts recognised in profit or loss and other comprehensive income At 31 December 2017, 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 $87,260 higher or $87,260 lower respectively (net profit for 2016: $88,291 higher or $88,291 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. Trade receivables Counter-parties with external credit rating AAA Counter-parties without external credit rating Receivables (current and non-current) Total receivables Cash at bank and short term deposits Counter-parties with external credit rating - AA (d) Liquidity risk 2017 $’000 2016 $’000 14,343 13,620 16,023 30,366 9,328 22,948 49,209 26,467 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 17. 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. 72 73 3. CAPITAL STRUCTURE & FINANCIAL RISK MANAGEMENT 3. CAPITAL STRUCTURE & FINANCIAL RISK MANAGEMENT Note 15: Financial Risk Management (continued) Contractual maturities of Financial Liabilities Note 15: Financial Risk Management (continued) At 31 December 2017 $000 Level 1 Level 2 Level 3 CONSOLIDATED 2017 $’000 0 to 6 months 6 to 12 months Between 1 and 2 years Between 2 and 5 years >5 years Total contractual cash flows Carrying Amount 56,649 8,946 278,693 - - - - - - 344,288 308,268 - - Non Derivative Corporate Note Bank facility Deferred centre acquisition - - Asset Derivative financial asset Liabilities Derivatives used for hedging Contingent consideration (refer note 13) - - - 622 13,806 - - - 14,301 Total 622 13,806 14,301 2,390 11,306* 225 750 14,671 14,301 At 31 December 2016 $000 Level 1 Level 2 Level 3 Total Trade and other payables 35,030 - - Derivatives Net settled (FX hedge) 1,662 1,678 10,853 - - - - 35,030 35,030 Asset Derivative financial asset Liabilities Derivatives used for hedging 14,193 13,806 Contingent consideration (refer note 13) - - - 3,359 16,351 - - 3,359 4,752 16,351 4,752 The Group made an early redemption of the non-current $70m 7.65% fixed Australian notes on 7 August 2017. An early repayment fee of $1.4m was incurred upon repayment. *Refer note 13 Contractual maturities of Financial Liabilities CONSOLIDATED 2016 $’000 0 to 6 months 6 to 12 months Between 1 and 2 years Between 2 and 5 years >5 years Total contractual cash flows Carrying Amount Non Derivative Corporate Note Bank facility Deferred centre acquisition Trade and other payables 73,628 Derivatives 11,537 11,895 107,092 378,704 623 - 623 4,073 - 623 40,623 75 - 225 - Net settled (FX hedge) 1,783 1,839 7,943 8,342 - - 509,228 378,021 42,492 40,000 825 5,198 4,752 - - 73,628 73,628 19,907 16,351 (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 2016 and 31 December 2017: 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. (i) Cross Currency Swap 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. (ii) Foreign exchange option On 18 May 2016, the Group purchased an AUD/SGD call option with a notional value of SGD$270m 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 counter-party security that ultimately eliminated collateral posting requirements. The movement in the value of this option is recognised through the income statement. 74 75 3. CAPITAL STRUCTURE & FINANCIAL RISK MANAGEMENT 3. CAPITAL STRUCTURE & FINANCIAL RISK MANAGEMENT Note 16: Current Assets - Cash and Equivalents Note 17: Current and Non-Current Liabilities - Borrowings (continued) Cash at bank and in hand Deposits at call Total Cash and Cash Equivalents (a) Reconciliation to cash at the end of the year CONSOLIDATED (a) Corporate Notes 2017 $’000 24,611 24,598 49,209 2016 $’000 26,448 19 26,467 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 3 March 2014 50,000 AUD 3 March 2018 390bps + 90 day Bank Bill Rate Variable 18 May 2019 270,000 SGD 18 May 2019 5.5%* Fixed *SGD bonds are fully hedged at a fixed interest rate of 6.54% on AUD $269m 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 CONSOLIDATED 2017 $’000 49,209 (14) 2016 $’000 26,467 (14) Balance as per Statement of Cash Flows 49,195 26,453 G8 Education Limited has complied with the financial covenants relating to the AUD and SGD Corporate Notes and Bank Facility during 2017 and 2016 reporting periods. During 2017 the Group entered into a $200m club bank facility and bank guarantee facility of $45m. The club bank facility was successfully executed on 18 August 2017 and is for a 3 year term. The interest rate payable is based on the base rate (BBSW) plus each lender’s margin, which is determined by reference to the Net Leverage Ratio calculate using market standard financial ratios. In the event the facility remains undrawn a commitment fee is payable on the unused and uncancelled amount of the facility. Details of the Group’s exposure to foreign exchange on Singapore denominated borrowings terms are set out in note 15(a) and (e). 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. (b) Interest rate risk exposures Details of the Group’s exposure to interest rate changes on borrowings are set out in note 15(b). (c) Assets pledged as security The carrying amounts of assets pledged as security for current and non-current borrowings are: Note 17: Current and Non-Current Liabilities - Borrowings 2017 2016 Current Non-current Total Current Non-current Total $’000 $’000 $’000 $’000 $’000 $’000 Unsecured Corporate Notes (a) 50,000 258,268 308,268 Total Unsecured Borrowings 50,000 258,268 308,268 Secured Bank Facility Total Secured Borrowings - - - - - - Borrowing Costs (95) (4,679) (4,774) Total Borrowings 49,905 253,589 303,494 - - - - - - 378,021 378,021 378,021 378,021 40,000 40,000 40,000 40,000 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 Other non-current assets (7,372) (7,372) Vehicles, plant and equipment 410,649 410,649 Total non-current assets pledged as security Total assets pledged as security Notes 16 7 8 9 8 9 CONSOLIDATED 2017 $’000 49,209 30,366 12,361 91,936 2016 $’000 26,467 22,948 9,234 58,649 4,146 4,298 32,273 54,680 91,099 183,035 23,022 50,547 77,867 136,516 76 77 3. CAPITAL STRUCTURE & FINANCIAL RISK MANAGEMENT 3. CAPITAL STRUCTURE & FINANCIAL RISK MANAGEMENT Note 17: Current and Non-Current Liabilities - Borrowings (continued) Note 18: Derivative Financial Instruments (d) Financing arrangements As at 31 December 2017 the following lines of credit were in place: CONSOLIDATED 2017 $’000 2016 $’000 Non-Current Asset Foreign exchange option 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 500 (158) 342 500 (25) 475 200,000 - 200,000 50,000 (40,000) 10,000 45,000 (36,663) 8,337 35,000 (33,557) 1,443 308,268 (308,268) - 378,021 (378,021) - 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 CONSOLIDATED 2017 $’000 622 622 2,793 11,013 13,806 2016 $’000 3,359 3,359 1,042 15,309 16,351 Total non-current derivative financial instrument asset Non-Current Liability Cross currency swap contracts - cash flow hedges Cross currency swap contracts - fair value hedge Total non-current derivative financial instrument liability 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 15). 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 18. 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. The carrying amounts and fair values of borrowings at balance dates are as reflected in the Balance Sheet. The SGD bond carrying amount is AUD$258m which represents fair value. AUD$269m is payable to satisfy this liability. Fair Value Hedge 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 the income statement 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. 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 2017. 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 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 the income statement. When a forecast transaction is no longer expected to occur, the cumulative gain or loss that was reported in equity is immediately reclassified to the income statement. 78 79 3. CAPITAL STRUCTURE & FINANCIAL RISK MANAGEMENT 3. CAPITAL STRUCTURE & FINANCIAL RISK MANAGEMENT Note 19: Contributed Equity (a) Share capital Note 19: Contributed Equity (continued) (e) Dividend reinvestment plan Ordinary shares fully paid 448,536,926 382,511,733 876,394 641,848 (f) Capital risk management CONSOLIDATED CONSOLIDATED 2017 2016 SHARES SHARES 2017 $’000 2016 $’000 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. (b) Movements in ordinary share capital DETAILS 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 Dividend reinvestment plan Equity Placement Issuance of shares (see Note 19(c)) Transaction costs of shares issued Deferred tax credit recognised directly in equity 31 December 2017 Balance (c) Shares held in escrow under the executive share plan Balance at the beginning of the financial year Shares transferred to the Group under the plan* Total outstanding at the end of the financial year *Shares forfeited and sold on market in current year (d) Ordinary shares 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 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: 381,097 641,848 Borrowings Less: cash and cash equivalents Net debt Total equity Total capital Gearing ratio Notes 17 16 CONSOLIDATED 2017 $’000 303,494 (49,209) 254,285 865,335 2016 $’000 410,649 (26,467) 384,182 625,875 1,119,620 1,010,057 23% 38% 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. Number of Shares ‘000 $’000 369,698 603,043 9,692 1,707 - - 32,272 6,537 (22) 18 10,121 37,621 55,904 195,658 1,374 - - 5,007 (5,347) 1,607 448,496 876,394 CONSOLIDATED 2017 SHARES 2016 SHARES 1,415 (1,374) 41 3,122 (1,707) 1,415 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. 80 81 3. CAPITAL STRUCTURE & FINANCIAL RISK MANAGEMENT 3. CAPITAL STRUCTURE & FINANCIAL RISK MANAGEMENT Note 20: Dividends (a) Ordinary Shares Note 21: Reconciliation of Net Cash Flows from Operating and Financing Activities Dividends Declared or paid during the financial year were as follows: Reconciliation of Profit After Tax to Net Cash Flows from Operating Activities CONSOLIDATED Dividend for the quarter ended 31 March 2017 of 6.0 cents per share (2016: 6.0 cents per share) paid on 7 April 2017 (2016: Paid on 8 April 2016) 2017 $’000 24,117 2016 $’000 22,481 Dividend for the quarter ended 30 June 2017 of 6.0 cents per share 26,599 22,616 Profit for the year Depreciation (2016: 6.0 cents per share) paid on 7 July 2017 (2016: Paid on 8 July 2016) Foreign exchange gain/(loss) on Singapore corporate notes Dividend for the quarter ended 30 September 2017 of 6.0 cents per share 26,741 22,772 Fair value adjustment to derivatives (2016: 6.0 cents per share) paid on 6 October 2017 (2016: Paid on 7 October 2016) No dividend declared for the quarter ended 31 December 2017 - 22,950 (2016: 6.0 cents per share) paid 6 January 2017) Net loss on sale of assets Write back of deferred consideration not payable 77,457 90,819 Increase in borrowings cost prepayments 2017 $’000 80,581 13,959 1,921 (23) 1,547 (243) 4,145 1,160 805 (13,355) (75) (1,402) (108) 2,673 426 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) Brokerage fees treated as financing cashflows (Increase)/decrease in deferred tax asset (Increase) in trade and other debtors Increase/(decrease) 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 Net exchange differences Net cash inflows from operating activities 92,011 108,583 Changes in liability arising from financing activities: Opening Balance 1 Jan 2017 Cash Flows Foreign Exchange Movement Change in Fair Value Other Closing Balance 31 Dec 2017 $’000 $’000 $’000 $’000 $’000 $’000 Current Interest bearing loans and borrowing Non-current interest bearing loans and borrowings - - - 410,649 (111,204) 11,013 Dividends payable 22,950 (12,846) Derivative liability 16,351 - - - - - - 49,905 49,905 (56,869) 253,589 (10,104) - (2,545) - 13,806 Dividends paid in cash or satisfied by the issue of shares under the dividend reinvestment plan during the year 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 (b) Franked credits 2017 $’000 49,940 - 27,517 77,457 12,846 49,941 62,787 2016 $’000 41,497 12,846 36,476 90,819 16,467 41,497 57,964 CONSOLIDATED PARENT ENTITY 2017 $’000 2016 $’000 2017 $’000 2016 $’000 Franking credits available for subsequent financial years based on a tax rate of 30% (2016: 30%) 1,698 7,983 1,698 7,983 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. 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. 82 83 4. GROUP STRUCTURE Note 22: Subsidiaries 4. GROUP STRUCTURE The consolidated financial statements incorporate the assets, liabilities and results of the following subsidiaries in accordance with the accounting policy set out in Note 33(b). Kindy Kids Village Pty Ltd** Kindy Kids Long Day Care and Preschool Pty Ltd** 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** Jellybeans Attadale (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** Country of incorporation Class of Shares/Units 2017 % 2016 % 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 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 Three Little Pigs Pty Ltd** 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 Chatswood Pty Ltd** GW Macquarie Park Pty Ltd** GW Brookvale Pty Ltd** GW Bronte Pty Ltd** GW Katoomba Pty Ltd** GW Gladesville Pty Ltd** GW Frenchs Forest Pty Ltd** GW 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 G8 Education 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 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 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 Ordinary Ordinary Ordinary 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 84 85 * 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 ASIC Legislative Instrument 2016/785 by the Australian Securities and Investment Commission. For further information please refer to note 24. 4. GROUP STRUCTURE Note 23: Parent Entity Disclosures 4. GROUP STRUCTURE Note 24: Deed of Cross Guarantee All Australia subsidiaries listed in Note 22 are considered to be in the closed group and have been relieved from the requirement to prepare a Financial Report and Directors’ Report Under ASIC Legislative Instrument 2016/785 (As Amended) issued by the Australian Securities and Investments Commission. Below is a consolidated statement of comprehensive income for the year ended 31 December 2017 of the closed group: (a) Consolidated statements of comprehensive income Revenue Revenue from continuing operations Other income Total Revenue 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 Reclassify to income statement for prior period hedges Effective portion of changes in fair value of cash flow hedges Total Comprehensive income for the year 2017 $’000 2016 $’000 779,489 760,048 809 1,459 780,298 761,507 (435,947) (423,780) (94,810) (56,532) (13,566) (27,123) (34,144) (85,639) (57,603) (11,333) (25,092) (45,750) (662,122) (649,197) 118,176 (37,139) 81,037 - 1,921 82,958 112,310 (34,581) 77,729 (3,559) (1,042) 73,128 As at, and throughout the financial year ended 31 December 2017 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 2017 $’000 81,035 1,898 82,933 2016 $’000 79,811 (5,056) 74,755 80,055 36,542 1,176,690 1,080,209 1,256,745 1,116,751 156,633 238,913 395,546 876,394 39,005 (54,200) 861,199 125,239 376,090 501,329 641,848 30,079 (56,505) 615,422 Parent entity contingencies Refer to note 26 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 24. 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 refer to note 5. 86 87 4. GROUP STRUCTURE 4. GROUP STRUCTURE Note 24: Deed of Cross Guarantee (continued) (b) Balance Sheets Set out below is a consolidated balance sheet as at 31 December 2017 of the Closed Group. 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 Provisions Total current liabilities Non-current liabilities Other payables Borrowings Provisions Derivative financial instruments Total non-current liabilities Total liabilities Net assets Equity Contributed equity Reserves Accumulated losses Total equity 5. UNRECOGNISED ITEMS Note 25: Commitments (a) Capital commitments There is no capital expenditure unconditionally contracted for at the reporting date but not recognised as a liability. The Group has contracted arrangements that give the Group the ability to acquire centres conditional on various hurdles and criteria that the vendors must meet. (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 (i) Finance Leases The Group had no finance leases during 2017 or 2016. Accounting Policy CONSOLIDATED 2017 $’000 2016 $’000 83,153 327,047 218,878 629,078 86,406 242,078 164,788 493,272 629,078 493,272 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 term of the lease. Note 26: Contingencies (a) Contingent liabilities The Group had no contingent liabilities as at 31 December 2017 (2016: Nil). Note 27: Events occurring after the balance sheet date The following material matters have taken place subsequent to year end: 2017 $’000 46,974 30,005 31,693 313 108,985 139 63,193 16,220 1,057,040 33,509 622 1,170,723 1,279,708 55,374 14,934 49,905 28,425 148,638 1,067 253,589 8,321 13,806 276,783 425,421 2016 $’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 - 25,826 112,476 754 410,649 4,783 16,351 432,537 545,013 854,287 613,846 876,394 42,224 (64,331) 854,287 641,848 29,714 (57,716) 613,846 • • • • 50,359 performance rights were issued to J Ball under the Employee Incentive Plan (GEIP) on the 4 January 2018. The Board has declared on 23 February 2018 that a 10 cent fully franked interim dividend for the FY18 year would be paid on 23 March 2018. The Group completed the acquisition of 2 centres for $2.6 million and divested 1 centre post 31 December 2017. The initial accounting has not yet been completed as completion accounts have yet to be finalised. All remaining shares sold under the prior employee share plan leaving a nil balance. 88 89 6. OTHER 6. OTHER Note 28: Employee Entitlements Note 29: Key Management Personnel Disclosures CONSOLIDATED (a) Directors Employee benefits 2017 $’000 26,096 26,096 2016 $’000 25,956 25,956 The following persons were directors of G8 Education Limited during the financial year: (i) Chairperson –Independent Non-Executive M Johnson (ii) Executive Directors G Carroll (appointed 1 January 2017) (a) Amounts not expected to be settled within the next 12 months (iii) Non-Executive Directors 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. C Scott (resigned 29 May 2017) B Bailison S Forrester D Foster J Cogin (appointed1 September 2017) M Zabel (appointed 1 September 2017) M Reynolds (resigned 31 August 2017) Leave obligations expected to be settled after 12 months Accounting Policy (i) Short term obligations CONSOLIDATED (b) Other Key Management Personnel 2017 $’000 4,743 4,743 2016 $’000 4,597 4,597 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 S Williams Chief Financial Officer (appointed 6 February 2017) J Ball General Manager Operations (appointed 26 June 2017) T King General Manager Operations (resigned 12 April 2017 and ceased as KMP) 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 (c) Key Management Personnel compensation 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. Short term employee benefits Post employment benefits Share based payments* Dividend payments on escrow shares Termination payments (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. 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. *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 28 to 44. (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 30 for details of options issued to Key Management Personnel. (ii) Option holdings Refer to note 30 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. CONSOLIDATED 2017 $ 2016 $ 2,743,745 3,419,408 137,126 11,148 80,000 432,362 155,683 (105,284) 290,998 14,870 3,404,381 3,775,675 90 91 6. OTHER 6. OTHER Note 29: Key Management Personnel Disclosures (continued) Balance at the start of the year Shares to be cancelled under limited recourse loans disclosed as share options Shares cancelled under limited recourse loans disclosed as share options Number of Shares Other changes during the year Balance at the end of the year C Scott (resigned 29 May 2017) 333,333 M Reynolds (resigned 31 August 2017) 24,195 Other Key Management Personnel of the Group 2017 Directors of G8 Education Limited Ordinary Shares M Johnson G Carroll B Bailison S Forrester D Foster J Cogin M Zabel Ordinary Shares S Williams J Ball T King (resigned 12 April 2017) A Perriam (resigned 10 April 2017) 2016 Directors of G8 Education Limited Ordinary Shares M Johnson C Scott B Bailison M Reynolds S Forrester D Foster 25,000 - - 15,423 14,587 - - - - 631,329 40,733 - - - - - - - - - - - - - - - - - - - - - - (333,333) - - - - - - 1,000,000 (333,333) (333,333) - 24,195 5,423 - - - - - - - - - Other Key Management Personnel of the Group Ordinary Shares J Roberts G Carroll T King A Perriam 1,000,000 (333,333) (333,333) - - - - - - 122,198 (40,733) (40,733) C Sacre (resigned 27 May 2016) 1,848,000 - (1,000,000) (848,000) 5,000 100,000 13,000 24,105 - - - - (24,195) 30,000 100,000 13,000 39,528 14,587 - - - - 12,500 12,500 - (631,329) (40,733) - - - 25,000 - - - 10,000 14,587 - - 631,329 - 25,000 333,333 - 24,195 15,423 14,587 333,333 - 631,329 40,733 - Note 29: Key Management Personnel Disclosures (continued) (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 2017 2016 Balance at the start of the year Other changes during the year Balance at the end of the year $ $ $ 3,536,997 15,610,990 (3,536,997) (12,073,993) - 3,536,997 (ii) Individuals with loans above $100,000 during the financial year Refer to note 30(f) 2017 Name Balance at the start of the year Limited recourse loans cancelled due to vesting condition not being met Limited recourse loans to be cancelled due to vesting condition not being met Forfeiture due to resignation Balance at the end of the year Highest Indebtedness during the year $ $ $ $ $ $ C Scott 1,666,667 (1,666,667) - - - 1,666,667 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 2017 is nil (2016;$3,536,997). During the year the remaining KMP shares were forfeited as the conditions were not met. Due to vesting conditions not being met in 2016, one third of the shares in escrow were forfeited. In February 2017 the Group discontinued the Executive Share Plan effective 31 December 2016. Refer to note 30 for the share based payments disclosure to Key Management Personnel 2016 Name Balance at the start of the year Limited recourse loans cancelled due to vesting condition not being met Limited recourse loans to be cancelled due to vesting condition not being met Forfeiture due to resignation Balance at the end of the year Highest Indebtedness during the year $ $ C Scott J Roberts C Sacre A Perriam 5,000,000 5,000,000 5,000,000 610,990 (1,666,667) (1,666,667) (1,666,667) (203,663) $ (1,666,667) (1,666,667) $ - - - (3,333,333) $ 1,666,667 1,666,667 - (203,663) - 203,663 $ 3,333,333 3,333,333 3,333,333 407,327 92 93 6. OTHER 6. OTHER Note 30: Share–based payments Expenses arising from share-based transactions Note 30: Share–based payments (continued) Executive Share Plan Expenses arising from share-based payment transactions recognised during the year as part of employee benefit expenses were as follows: Share-based payment expense (write back) on shares and rights issued CONSOLIDATED 2017 $’000 (108) (108) 2016 $’000 (105) (105) G8 Education Executive Incentive Plan (GEIP) Shareholders approved the GEIP at the Annual General Meeting (AGM) in May 2017. The Company has established the GEIP to assist the retention and motivation of executives of G8 Education (Participants). It is intended that the Performance Rights will enable the Company to retain and attract the skilled and experienced executives and provide them with the motivation to enhance the success of the Company. Under the Performance Rights, rights may be offered to Participants selected by the Board. Unless otherwise determined by the Board, no payment is required for the grant of rights under the GEIP. Subject to any adjustment in the event of a bonus issue, each right is an option to subscribe for one Share. Upon the exercise of a right by a Participant, each Share issued will rank equally with other Shares of the Company. Performance Rights issued under the plan may not be transferred unless approved by the Board. The table below summarises rights granted under the plan. Grant Date 20 July 2017 6 October 2017 Balance at the start of the year Granted during the year Exercised during the year Forfeited during the year Balance at the end of the year Unvested at the end of the year Number of Performance Rights - - - 238,063 53,629 291,692 - - - - - - 238,063 53,629 291,692 238,063 53,629 291,692 Unissued ordinary shares of G8 Education Limited under the GEIP at the date of this report are set out in the table below. Grant Date 20 July 2017 6 October 2017 Vesting Date (a) (a) Value of Performance Right at Grant Date ($) Number of Performance Rights 3.19 3.70 238,063 53,629 291,692 Expiry Date 30 May 2020 30 May 2020 (a) Performance rights vest on achievement of performance and service conditions by the vesting date of March 2020. Valuation of instruments issued Value of the financial Benefit The table lists the inputs to the models used Share price on respective grant dates Share Price Volatility Risk Free Rate Time to Maturity Annual Dividend Yield Model used 94 Tranche 1 | 20 July 2017 Tranche 2 | 6 October 2017 $3.77 30% 2.31% 2.62 years 6.37% $3.83 30% 2.17% 2.57 years 6.27% Black Scholes Black Scholes In February 2017 the Executive Share Plan was discontinued for current employees and replaced with the new LTI scheme. Movements in options/shares is subject to limited recourse loan. The table below shows the movement in the loan balance. Balance at the beginning of the financial year Granted during the year Forfeited during the year Exercised during the year Balance at the end of the financial year Number of Shares* Loan Balance ($) 1,414,799 7,073,993 - - (1,414,799) (7,073,993) - - - - 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. Shares during the period were forfeited due to vesting conditions not being met and the related expenses were reversed as a result. 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 company has recognised an after tax, non-cash share- based payment of $108,643 (2016; $105,284) during the financial year with a corresponding credit to Shareholders’ Equity in the form of a Share Option Reserve. Accounting Policy Share-based compensation benefits are provided to certain employees via the GEIP and the Executive Share Plan (discontinued February 2017). The fair value of options and performance rights are granted under the GEIP are recognised as an employee benefit expense with a corresponding increase in equity. The fair value is measured at grant date and recognised over the period during which the employees become unconditionally entitled to the options. For share options and performance rights, the fair value at grant date is determined using a Binomial option pricing model that takes into account the exercise price, the term of the option, the vesting and performance criteria, the impact of dilution, the non-tradeable nature of the option, the share price at grant date and expected price volatility of the underlying share, the expected dividend yield and the risk-free interest rate for the term of the option. The fair value of the options granted excludes the impact of any non-market vesting conditions (for example, profitability and sale growth targets). Non-market vesting conditions are included in assumptions about the number of options that are expected to become exercisable. At each statement of financial position date, the entity revises its estimate of the number of options and performance rights that are expected to become exercisable. The employee benefit expense recognised each period takes into account the most recent estimate. Upon exercise of the options and performance rights, the balance of the share-based payments reserve relating to those options remains in the share based payments reserve. 95 6. OTHER 6. OTHER Note 31: Remuneration of Auditors Note 33: Other significant accounting policies (continued) During the year the following fees were paid or payable for services provided by the auditor of the Group: (b) Principles of consolidation CONSOLIDATED Subsidiaries 2017 $ 2016 $ The consolidated financial statements incorporate the assets and liabilities of all subsidiaries of G8 Education Limited (“Company” or “parent entity”) as at 31 December 2017 and the results of all subsidiaries for the year then ended. 1. Audit services Ernst & Young Audit and review of financial reports – half year Audit and review of financial reports – year end Audit and review of financial reports – other assurance services 2. Non-audit service Ernst & Young - other advisory services Total Remuneration for audit services Note 32: 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 22. 75,000 140,000 127,800 75,000 140,000 20,000 145,300 - 488,100 235,000 (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 29. 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. During the year 2017 the Group engaged in $8,251 of related party transactions with Key Management Personnel. There were nil balances outstanding at the reporting date in relation to transactions with related parties. (d) Rounding Amounts The Group continues to have a preferred broker relationship with CCLP Pty Ltd, an entity the former CFO C Sacre is a Director of, and this is conducted on arm’s length terms. Note 33: 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 24 February 2018. 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). 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 $80.6m for the year ended 31 December 2017 and as at that date, current liabilities exceed current assets by $59m (2016 $53m). In addition, the Group has generated net operating cash flows of $92m and has undrawn facilities of $200m. 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 (f) Reserves (i) Share-based payments 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 15 and accumulated in a separate reserve within equity. The cumulative amount is reclassified to profit or loss when the net investment is disposed of. 96 97 6. OTHER 6. OTHER Note 33: Other significant accounting policies (continued) (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 18. 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 $77.5 million (2016: $90.8 million) were distributed from the profits reserve during the year. The amount transferred to profits reserve comprises the transfer from net profit for the current year for profit making entities within the Group and characterises profits available for distribution as dividends in the future years. (g) 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. EFFECTIVE DATE Annual reporting period beginning on or after 1 January 2019 EXPECTED IMPACT ON THE FINANCIAL STATEMENTS This standard will materially impact on the Group’s consolidated financial statements at transition and in future years, as the Group’s operating leases are recognised on the balance sheet. Rental expense currently recognised in the statement of financial performance will be replaced with depreciation and interest. The likely impact on the first time adoption of the Standard for the year ending 31 December 2019 includes a significant increase in lease assets and financial liabilities recognised on the balance sheet. Initial assessment activities have been undertaken on the Group’s current leases, however the impact of the standard will depend on the leases in place on transition. Detailed review of contracts, financial reporting impacts and system requirements will continue. NATURE OF THE CHANGE IN ACCOUNTING POLICY 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 amortized 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); · 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. PRONOUNCEMENTS AASB 9 Financial Instruments EFFECTIVE DATE Annual reporting periods beginning on or after 1 January 2018. AASB 2010-7 Amendments to Australian Accounting Standards arising from AASB 9 (December 2009). EXPECTED IMPACT ON THE FINANCIAL STATEMENTS Classification and measurement 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. Financial assets AASB 9 contains three principal classification categories for financial assets: : amortised cost, Fair value through Other Comprehensive Income (FVOCI),and fair value through profit and loss (FVTPL) The standard eliminates the existing AASB 139 categories of held to maturity, loans and receivables. Based on its preliminary assessment, G8 does not believe that the new classification requirements will have a material impact on its existing. financial assets, being cash and cash equivalents, trade and other receivables, deposits on acquisition or derivative financial instruments. 98 99 6. OTHER 6. OTHER As at the end of the current reporting period, the group did not hold any other debt instruments or any investments in equity instruments. The accounting for debt instruments depends on the business purposes of holding such instruments, whether they have solely payments of principal and interest. Investment in equity instruments would be recognised at fair value at profit and loss unless designated at inception as fair value through other comprehensive income Financial liabilities AASB 9 requires financial liabilities to be measured on the same basis as AASB 139,with the only change being gains or losses on financial liabilities designated at inception to be measured at fair value are recognised in profit or loss, except that the effects of changes in the liability’s credit risk are recognised in other comprehensive income. Based on its preliminary assessment, G8 does not believe that the new classification requirements will have a material impact on its existing financial liabilities, that is trade payables and borrowings, and contingent considerations. Impairment AASB 9 replaces the ‘incurred loss’ model in AASB 139 with a forward-looking ‘expected credit loss’ (ECL) model. This will require considerable judgement about how changes in economic factors affect ECLs, which will be determined on a probability-weighted basis. The new impairment model will apply to financial assets measured amortised cost or FVOCI, except for investments in equity instruments, and to contract assets. Based on its preliminary assessment, G8 has identified that the application of the new guidance requires an earlier assessment of the likelihood of credit losses than its existing losses for its financial assets Management’s initial assessment is that the impairment losses are not likely to materially increase for assets in the scope of the AASB 9 impairment model. The swap has been designated as a fair value hedge of the highly probable repayment of SGD$270 million Series 003 5.50% unsecured notes relating to the principal repayment of SGD denominated borrowings (senior unsecured notes under G8 Education’s SGD$600 million multi-currency issuance program) and as a cash flow hedge from 1 July 2016 for the coupon payments associated with the Series 003 notes. On adoption of AASB 9, the Group has elected to separately account for the currency basis as a cost of hedging. Consequently, currency basis will be recognised in OCI and accumulated in a cost of hedging reserve as a separate component within equity and accounted for subsequently as gains and losses accumulated in the cash flow hedge reserve. Under AASB 139, for all cash flow hedges, the amounts accumulated in the cash flow hedge reserve are reclassified to profit or loss as a reclassification adjustment in the same period as the hedged expected cash flows affect profit or loss. The types of hedge accounting relationships that the Group currently designates meet the requirements of AASB 9 and are aligned with the Group’s risk management strategy and objective. 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 recognize 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. Hedge accounting EFFECTIVE DATE Annual reporting periods beginning on or after 1 January 2018 EXPECTED IMPACT ON THE FINANCIAL STATEMENTS When initially applying AASB 9, the Group may choose as its accounting policy to continue to apply the hedge accounting requirements of AASB 139 instead of the requirements in AASB 9. The Group has chosen to apply the new requirements of AASB 9. AASB 9 requires the Group to ensure that hedge accounting relationships are aligned with its risk management objectives and strategy and to apply a more qualitative and forward-looking approach to assessing hedge effectiveness. AASB 9 also introduces new requirements on rebalancing hedge relationships and prohibiting voluntary discontinuation of hedge accounting. Under the new model, it is possible that more risk management strategies, particularly those involving hedging a risk component (other than foreign currency risk) of a non-financial item, will be likely to qualify for hedge accounting. The Group does not currently undertake hedges of such risk components. 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 Group has undertaken an analysis of how AASB 15 should be implemented. This analysis has been performed in respect of revenue from the following major business activities being (i) Child care fees and (ii) Management fee income. Government funding/grants are accounted for outside of AASB 15 and as such were not included in the analysis. In respect of revenue from contracts with parents/carers for the provision of child care, revenue will continue to be recognised as and when a child attends a child care service, as this is when the Group transfers control of this service (satisfies its performance obligation) to the customer. In respect of management fee income, revenue will continue to be recognised as G8 performs the operational support services, as this is when the Group transfers control of this service (satisfies its performance obligation) to the franchisee. When AASB 15 is adopted in the year ending 31 December 2018, entities are required to select either the modified retrospective (comparatives are not restated) or the full retrospective (comparatives are restated) approach. Given there is no change to the measurement and recognition criteria, there is no difference between the modified retrospective and full retrospective approaches for the Group. Disclosure impacts will not be significant given there is no impact on recognition and measurement of revenue. The Groups existing disclosure meets the requirements under AASB 15 in respect of the disaggregation of revenue into categories that depict how the nature, amount, timing and uncertainty of revenue and cash flows are effected by economic factors. The Group currently discloses a current liability in respect of ‘Centre enrolment advances’. Under AASB 15, this liability is a contract liability. The Group will be required to disclose revenue recognised in reporting periods that was included in contract liability balances at the beginning of the period. In most cases, this will equate to the balance of the liability itself. Any new agreements for the provision of goods or services will be assessed as they arise throughout the year ended 31 December 2018 and beyond. 100 101 DIRECTORS DECLARATION In the Directors’ opinion: (a) the financial statements and notes set out on pages 48 to 101 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 2017 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 24 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 24. 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 Members of G8 Education Limited Note 33(a) confirms that the financial statements also comply with International Financial Reporting Standards as issued by the International Accounting Standards Board. Report on the Audit of the Financial Report The Directors have been given the declarations by the Managing Director and Chief Financial Officer required by section 295A of the Corporations Act 2001. Opinion This declaration is made in accordance with a resolution of the Directors. Gary Carroll Director 24 February 2018 We have audited the financial report of G8 Education Limited (the Company) and its subsidiaries (collectively the Group), which comprises the consolidated balance sheet as at 31 December 2017, the consolidated income statement, consolidated statement of comprehensive income, consolidated statement of changes in equity and consolidated statement of cash flows for the year then ended, notes to the financial statements, including a summary of significant accounting policies, and the directors' declaration. In our opinion, the accompanying financial report of the Group is in accordance with the Corporations Act 2001, including: a) b) giving a true and fair view of the consolidated financial position of the Group as at 31 December 2017 and of its consolidated financial performance for the year ended on that date; and complying with Australian Accounting Standards and the Corporations Regulations 2001. Basis for Opinion We conducted our audit in accordance with Australian Auditing Standards. Our responsibilities under those standards are further described in the Auditor’s Responsibilities for the Audit of the Financial Report section of our report. We are independent of the Group in accordance with the auditor independence requirements of the Corporations Act 2001 and the ethical requirements of the Accounting Professional and Ethical Standards Board’s APES 110 Code of Ethics for Professional Accountants (the Code) that are relevant to our audit of the financial report in Australia. We have also fulfilled our other ethical responsibilities in accordance with the Code. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion. 102 A member firm of Ernst & Young Global Limited Liability limited by a scheme approved under Professional Standards Legislation 103 Key Audit Matters Acquisition Accounting 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 report. 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. 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 forecast is based on assumptions as to the Group’s future operating and financial performance. These include judgements and estimates relating to future revenues, anticipated costs, growth rates expected, and the discount rate applied. As such, impairment testing of goodwill was considered to be a key audit matter. The Group’s disclosures are included in note 14 to the financial statements, which includes the key assumptions applied by the Group. In obtaining sufficient audit evidence we: ► Agreed the cash flow forecasts to Board approved budgets; ► Evaluated the Group’s identification of the CGU and tested the mathematical accuracy of the impairment model; ► Assessed future cash flow assumptions through comparison with current trading performance, externally derived data (where applicable) and other evidence and enquiry with the Group in respect of key growth and trading assumptions; ► Assessed other key assumptions including the discount rate and long term growth rate with involvement from EY valuation specialists; ► Considered the market capitalisation of the Group relevant to the recorded net asset amount at 31 December 2017; ► Performed sensitivity analyses over the model in relation to key assumptions including growth rates and discount rates; and ► Considered the adequacy of the Intangible Assets disclosure in note 14 to the financial statements. Why significant How our audit addressed the key audit matter The Group acquired a number of childcare centres during 2017. 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. Acquisition costs such as broker costs are often directly paid by the vendor and may require judgement to estimate the amount paid. Given the level of judgment in estimating the fair value as well as the contingent consideration that may be paid by G8, this was considered to be a key audit matter. Refer to note 13 to the financial statements for disclosure relating to acquisition accounting. In obtaining sufficient audit evidence, we: ► ► ► ► ► ► Assessed the terms and conditions of the sale agreements; 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 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 adequacy of the business combinations disclosure in note 13 to the financial statements. Revenue Recognition Why significant How our audit addressed the key audit matter Revenue is recognised by the Group when the underlying childcare service has been provided. Revenue from childcare services and related grant revenue for the Group for the financial year was $ 786.8 million. Customers are generally invoiced in advance and adjustments made through processing of Childcare Benefits and Childcare Rebates by the Department of Human Services. Accordingly there is a risk that revenue is recognised in the incorrect period. 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. As a result, we consider revenue to be a key audit matter. Refer to note 2 to the financial statements for disclosure relating to revenue. 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 and tested revenue transactions to assess whether revenue was recognised in the appropriate period; Assessed the completeness of the deferred revenue balance by testing parents fees in advance bookings; Tested reconciliations relating to revenue recognised and agreed this to support for Child Care Benefit and Child Care Rebate payments; Assessed journal entries for large or unusual entries relating to revenue, in particular those near the year end; and Assessed the adequacy of the Group’s disclosures revenue and related accounting policies. A member firm of Ernst & Young Global Limited Liability limited by a scheme approved under Professional Standards Legislation A member firm of Ernst & Young Global Limited Liability limited by a scheme approved under Professional Standards Legislation 104 105 Information Other than the Financial Report and Auditor’s Report Thereon The directors are responsible for the other information. The other information comprises the information included in the Company’s 2017 Annual Report, but does not include the financial report and our auditor’s report thereon. Our opinion on the financial report does not cover the other information and accordingly we do not express any form of assurance conclusion thereon, with the exception of the Remuneration Report and our related assurance opinion. In connection with our audit of the financial report, our responsibility is to read the other information and, in doing so, consider whether the other information is materially inconsistent with the financial report or our knowledge obtained in the audit or otherwise appears to be materially misstated. If, based on the work we have performed, we conclude that there is a material misstatement of this other information, we are required to report that fact. We have nothing to report in this regard. Responsibilities of the Directors for the Financial Report The directors of the Company are responsible for the preparation of the financial report that gives a true and fair view in accordance with Australian Accounting Standards and the Corporations Act 2001 and for such internal control as the directors determine is necessary to enable the preparation of the financial report that gives a true and fair view and is free from material misstatement, whether due to fraud or error. In preparing the financial report, the directors are responsible for assessing the Group’s ability to continue as a going concern, disclosing, as applicable, matters relating to going concern and using the going concern basis of accounting unless the directors either intend to liquidate the Group or to cease operations, or have no realistic alternative but to do so. Auditor's Responsibilities for the Audit of the Financial Report Our objectives are to obtain reasonable assurance about whether the financial report as a whole is free from material misstatement, whether due to fraud or error, and to issue an auditor’s report that includes our opinion. Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with the Australian Auditing Standards will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of this financial report. As part of an audit in accordance with the 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. • • • • • 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 Group’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 and, based on the audit evidence obtained, whether a material uncertainty exists related to events or conditions that may cast significant doubt on the Group’s ability to continue as a going concern. If we conclude that a material uncertainty exists, we are required to draw attention in our auditor’s report to the related disclosures in the financial report or, if such disclosures are inadequate, to modify our opinion. Our conclusions are based on the audit evidence obtained up to the date of our auditor’s report. However, future events or conditions may cause the Group 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 financial report represents the underlying transactions and events in a manner that achieves fair presentation. Obtain sufficient appropriate audit evidence regarding the financial information of the entities or business activities within the Group to express an opinion on the financial report. We are responsible for the direction, supervision and performance of the Group audit. We remain solely responsible for our audit opinion. 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. A member firm of Ernst & Young Global Limited Liability limited by a scheme approved under Professional Standards Legislation A member firm of Ernst & Young Global Limited Liability limited by a scheme approved under Professional Standards Legislation 106 107 Report on the Audit of the Remuneration Report Report on the Audit of the Remuneration Report Opinion on the Remuneration Report Opinion on the Remuneration Report We have audited the Remuneration Report included in pages 28 to 43 of the directors' report for the year ended 31 December 2017. We have audited the Remuneration Report included in pages 28 to 43 of the directors' report for the year ended 31 December 2017. In our opinion, the Remuneration Report of G8 Education Limited for the year ended 31 December 2017, complies with section 300A of the Corporations Act 2001. In our opinion, the Remuneration Report of G8 Education Limited for the year ended 31 December 2017, complies with section 300A of the Corporations Act 2001. Responsibilities Responsibilities The directors of the Company are responsible for the preparation and presentation of the 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 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 responsibility is to express an opinion on the Remuneration Report, based on our audit conducted in accordance with Australian Auditing Standards. accordance with Australian Auditing Standards. Ernst & Young Ernst & Young Ric Roach Ric Roach Partner Partner Brisbane Brisbane 24 February 2018 24 February 2018 A member firm of Ernst & Young Global Limited Liability limited by a scheme approved under Professional Standards Legislation A member firm of Ernst & Young Global Limited Liability limited by a scheme approved under Professional Standards Legislation 108 SHAREHOLDER INFORMATION The total issued capital of the Company as at 31 December 2017 and as at the date of this annual report is 448,536,926. The Shareholder information set out below was applicable as at 1 February 2018. (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 Holders Options 340,702,104 51,432,209 26,105,609 26,961,361 3,335,643 98 2,298 3,529 10,169 6,903 68.53% 14.99% 7.36% 8.11% 1.01% 448,536,926 22,997 100.00% 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 Citicorp Nominees Pty Ltd National Nominees Ltd BNP Paribas Nominees Pty Ltd Investorlink Securities Limited Geosine Pty Ltd Mrs Kimberley Yin RAP Investments Pty Ltd SBN Nominess Pty Ltd Mr Christopher Douglas Passfield & Mrs Rhonda Passfield Mr Craig Graeme Chapman Mr Riccardo Pisaturo Viss Holdings Pty Ltd Warbont Nominees Pty Ltd Australian Executor Trustees Ltd AMP Life Ltd Bainpro Nominees Pty Ltd Netwealth Investments Limited Gwynvill Trading Pty Ltd Quoted ordinary shares held Percentage of issued shares 115,900,304 70,482,589 44,894,673 26,776,916 22,810,951 16,003,633 9,178,259 3,604,726 1,850,000 1,745,052 1,500,000 1,400,000 1,200,000 1,170,683 1,106,336 980,439 907,697 839,647 828,146 750,000 25.84 15.71 10.01 5.97 5.09 3.57 2.05 0.80 0.41 0.39 0.33 0.31 0.27 0.26 0.25 0.22 0.20 0.19 0.18 0.17 323,930,051 72.22 109 Directors M Johnson, Chairman G Carroll, Managing Director B Bailison, Non-Executive Director S Forrester, Non-Executive Director D Foster, Non-Executive Director M Zabel, Non-Executive Director J Cogin, Non-Executive Director Company Secretary S Zeljko 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: 159 Varsity Parade, Varsity Lakes P: 07 5581 5300 F: 07 5581 5311 www.g8education.edu.au Share registry: Advanced Share Registry Limited 110 Stirling Hwy Nedlands, WA 6009 Auditor: Ernst & Young 111 Eagle Street, Brisbane, QLD 4001 Lawyers: Minter Ellison Gold Coast 165 Varsity Parade Varsity Lakes QLD 4217 Securities exchange listing: G8 Education Limited shares are listed on the Australian Securities Exchange under the ticker code GEM. 111 (c) Substantial holders There were no substantial holders as at 1 February 2018 in the Company. (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 and performance rights There are no voting rights attached to the options and performance rights. (iii) Unquoted securities There are no unquoted securities on issue. 110