Harvey Norman Holdings Limited
Annual Report 2018

Plain-text annual report

A1 RICHMOND ROAD HOMEBUSH WEST, N.S.W 2140 LOCKED BAG 2 SILVERWATER DC, NSW 1811 AUSTRALIA Telephone: (02) 9201 6111 Facsimile: (02) 9201 6250 HARVEY NORMAN HOLDINGS LIMITED A.C.N 003 237 545 28 September 2018 The Manager Announcements Australian Securities Exchange Limited Exchange Centre 20 Bridge Street SYDNEY NSW 2000 Dear Sir Pursuant to listing rule 4.5, we enclose a copy of the 2018 Annual Report for Harvey Norman Holdings Limited, for your attention. We would appreciate if this Annual Report be treated as having been lodged with ASIC pursuant to section 317 of the Corporations Act 2001. We confirm that this Annual Report is the same as those to be sent to shareholders. We expect to have the printed Annual Report for posting to shareholders on 15th October 2018. If you have any queries, please do not hesitate to contact the writer. Yours faithfully Chris Mentis Chief Financial Officer / Company Secretary TEAM HARVEY H A R V E Y N O R M A N A N N U A L R E P O R T 2 0 1 8 2018 A N N U A L R E P O R T HARVAEY NOR M AN HOL DI NG S L I MIT ED ABN 54 0 0 3 237 545 HOLDINGS LIM ITED KEY DATES: 31 August 2018 Announcement of Full-Year Profit to 30 June 2018 Announcement of Final 2018 Dividend 12 October 2018 Record date for Determining Entitlement to Final 2018 Dividend 2 November 2018 Payment of Final 2018 Dividend 27 November 2018 Annual General Meeting of Shareholders The Annual General Meeting of the Shareholders of Harvey Norman Holdings Limited will be held at Tattersalls Club 181 Elizabeth Street, Sydney, at 11:00am 28 February 2019 Announcement of Half-Year Profit to 31 December 2018 Announcement of Interim 2019 Dividend 5 April 2019 Record date for Determining Entitlement to Interim 2019 Dividend 1 May 2019 Payment of Interim 2019 Dividend COMPANY INFORMATION Registered Office: A1 Richmond Road, Homebush West NSW 2140 Ph: 02 9201 6111 Fax: 02 9201 6250 Share Registry: Boardroom Pty Limited Level 12, 225 George Street, Sydney NSW 2000 Ph: 02 9290 9600 Auditors: Ernst & Young Securities Exchange Listing: Shares in Harvey Norman Holdings Limited (“HVN”) are quoted on the Australian Securities Exchange Limited (“ASX”) Solicitors: Brown Wright Stein Company Secretary: Mr Chris Mentis HARVEY NORMAN HOLDINGS LIMITED ACN 003 237 545 2 FRANCHISEE AGGREGATED SALES REVENUE* $5.76bn up 2.6% on previous year COMPANY-OPERATED SALES REVENUE $1.99bn up 8.8% on previous year PROFIT BEFORE TAX $530.17m down 17.1% on previous year PROFIT BEFORE TAX (excluding net property revaluations, Coomboona JV trading losses and Coomboona JV impairment) $532.54m down 0.96% on previous year PROFIT AFTER TAX & NON-CONTROLLING INTERESTS $375.38m down 16.4% on previous year * Sales made by franchisees in Australia do not form part of the financial results of the consolidated entity. Contents Financial Highlights Chairman and CEO’s Report Directors’ Report Operating and Financial Review Remuneration Report Corporate Governance Statement Statement of Financial Position Income Statement 07 08 10 13 32 61 67 68 Statement of Comprehensive Income Statement of Changes in Equity Statement of Cash Flows Notes to the Financial Statements Directors’ Declaration Independent Auditor’s Report Shareholder Information Directory of Harvey Norman ®, Domayne ® and Joyce Mayne ® Shopping Complexes 69 70 72 73 138 139 147 148 3 TEAM HARVEY JUNIOR: BUILDING A BRIGHT FUTURE FOR THE SPORTSWOMEN OF TOMORROW. Harvey Norman® has been a driving force behind the promotion of female athletes for over a decade – ensuring they get the support they need and the recognition they deserve. In 2017, the Team Harvey project was launched as a way to harness corporate sponsorship to highlight the achievements of Australian sportswomen, provide them assistance in achieving their goals, and to help create new pathways for young women to get involved in the sports they love. To continue that work, in 2018 we launched Team Harvey Junior – an initiative that provides sponsorship for junior female sporting teams across the country. Research has shown that girls have fewer opportunities to play sports during their high school years than boys have at that same age. Contributing factors and obstacles include a lack of access to adequate local playing facilities, a cut in school sports budgets, transportation & safety issues, and peer pressure about body image. It is also often the case that the quality level of sports activities offered for girls declines after a certain age, where the availability of coaching and resources may be more focused on boys’ programs that are traditionally better funded. That’s where our sponsorship can help. We started with a call-out to Australian girls in sport with the plan to give ten youth teams a head-start with $5,000 each in sponsorship. The response we received shows just how much work there is to be done in this area, with over 1,500 submissions coming in from 103 different sports, covering all states and territories, and representing young athletes from 8-16 years old. The sponsorship we provide can help with purchasing new uniforms, cover training or travel expenses, and help with resurfacing a court or pitch. It’s a small start, but we’re proud that our sponsorship is playing a part to help ensure a bright future for young girls in sport in Australia. 4 5 6 FINANCIAL HIGHLIGHTS Reconciliation of Reported Profit to Underlying Profit Reported profit before tax Less: Net property revaluation increment Year Ended 30 June 2018 2017 2016 $530.17m $639.81m 2 $493.76m ($51.65m) ($108.05m) ($48.36m) Profit before tax excluding net property revaluation increment $478.53m $531.76m $445.41m Add back: Coomboona JV impairment losses Add back: Coomboona JV trading losses Underlying profit before tax Reported profit after tax & non-controlling interests Less: Net property revaluation increment (after tax) $49.44m - - $4.57m $5.95m $2.71m $532.54m $537.70m $448.11m $375.38m $448.98m $348.61m ($36.15m) ($75.72m) ($33.86m) Profit after tax excluding net property revaluation increment (after tax) $339.23m $373.25m $314.74m Add back: Coomboona JV impairment losses (after tax) Add back: Coomboona JV trading losses (after tax) Underlying profit after tax & non-controlling interests $34.61m - - $3.20m $4.16m $1.90m $377.03m $377.42m $316.64m HARVEY NORMAN HOLDINGS LIMITED | ANNUAL REPORT 2018 7 CHAIRMAN AND CEO’S REPORT Dear Shareholder, The underlying results for the year ended 30 June 2018 have seen us deliver a solid profit before tax of $532.54 million. On an underlying basis, this represents a marginal reduction of 0.96% from the unprecedented, record-breaking underlying profit result that we delivered in the 2017 financial year of $537.70 million. This underlying result is exclusive of net property revaluation adjustments and the impairment losses and joint venture trading losses incurred with respect to our investment in the Coomboona Holdings Pty Limited dairy joint venture in Northern Victoria. Reported profit before tax was $530.17 million for the year ended 30 June 2018, a decrease of $109.63 million, or 17.1%, from $639.81 million for the year ended 30 June 2017. The PBT return on our net assets was 18.05% for the 2018 financial year. These results represent the ongoing strength of our underlying business model, and demonstrate the value of our integrated retail, franchise, property and digital strategy. This integrated approach ensures that we will continue to evolve to meet the needs and demands of both customers and emerging new technologies. Our franchisees and company-operated stores are consistently at the leading edge of Home and Lifestyle retailing – meeting the needs of their customers via an integrated in-store and online engagement model that enables them to effectively anticipate and respond to changes in key product categories. The performance of our overseas Harvey Norman® branded company-operated stores has been outstanding and this segment now represents 22% of the total consolidated profit before tax result. Each offshore region has delivered their best trading result and highest profitability, both individually and in aggregate, since launching overseas. The retail segment result for the Harvey Norman® company- operated stores overseas reached $116.13 million for the current year, up a solid 15.1% from an excellent, unprecedented segment result of $100.86 million in the 2017 financial year. From humble beginnings with the introduction of the Harvey Norman® brand overseas in 1997, the past 20 years of trading outside of the Australian market, has propelled the Harvey Norman® brand to a strong global player with solid results achieved by the 89 company-operated stores across 7 countries. Retail sales in New Zealand were just under $1 BILLION in local currency, whilst sales in Asia were just under $0.500 BILLION for the 2018 financial year. We intend to capitalise on the excellent performance overseas and plan to invest substantially in growing our offshore Harvey Norman® store network, particularly in South East Asia. Our robust balance sheet and strong cash flows enable us to seize on opportunities as they arise. We are actively exploring new sites and there is an expectation to open up to 18 new Harvey Norman® company-operated stores overseas within the next 2 years. We expect to have circa 107 Harvey Norman® company-operated stores overseas by the end of 2020. This anticipated 20% expansion in store locations overseas is likely to be the beginning of our biggest organic growth spurt in over a decade. Our plans for expansion overseas are strong, particularly in Malaysia. Since 2010, the population growth in Malaysia has been in excess of 400,000 per year and currently sits at 32.1 million. There is the potential to increase our retail footprint in Malaysia from 16 Harvey Norman® stores today to over 50 stores by the end of 2023. Country Launch of Flagship Store Current # Stores 30 June 2018 Expected Growth, 2 Yrs Expected # Stores by 2020 Singapore (2000) Millenia Walk, December 2015 Malaysia (2004) Ireland (2003) Ikano, Kuala Lumpur, November 2017 Tallaght, Dublin, July 2017 Ireland (2003) Northern Ireland (2008) Tallaght, Dublin, July 2017 Boucher Road, South Belfast, Nov 2015 13 Slovenia (2002) BTC City, Ljubljana, June 2017 Croatia (2011) Zagreb, TBC September 2018 New Zealand (1997) Wairau Park, Auckland, June 2018 13 16 13 2 5 1 39 89 +3 +9 +2 +3 - - +3 +1 +18 16 25 15 16 2 5 4 40 107 Our Flagship strategy is continuously evolving and we will soon have one Flagship store in each of the eight countries in which we, or our franchisees, operate. These stores will provide customers with the kind of tactile and interactive shopping experience that can’t be found online, and generate excitement in the retail sector as a whole. The Flagship stores are unrivalled in terms of design and technology, showcasing the best global brands and product range available on the market, creating a truly unparalleled shopping experience. On 30 June 2018, we launched our Flagship store at Wairau Park, Auckland (New Zealand) to much acclaim. We have had a delay in the delivery of our Flagship store at Zagreb, Croatia which is on track to be launched by the end of September 2018. In Australia, we have already seen the positive impact of the launch of the first stage of the Auburn Flagship complex in Sydney with the transformation of the Computers and Electrical categories. The final stage of the Auburn Flagship complex will be completed by September 2018 with the launch of the Furniture, Bedding and Floorcoverings categories. Our Flagship strategy further cements the positioning of our brand as an international leader in Home and Lifestyle retailing. In Australia, our franchisee model continues to perform solidly, making them the dominant player in the domestic Home and Lifestyle market. Aggregated franchisee sales revenue increased 2.6% – or $144.28 million – to reach $5.76 billion for the year, and quarterly aggregated franchisee sales revenue continues to grow steadily. Comparable aggregated franchisee sales revenue increased 2.2% - or $124.32 million – to $5.72 billion for the current year. Amid increasing competition within an already competitive market, franchisees performed well, meeting market pressures which had accelerated within the last 6 months of the 2018 financial year. Franchisees have continued to invest in their people and ensure that their staff are equipped with the best skills and tools to seamlessly service their customers. 8 CHAIRMAN AND CEO’S REPORT (CONTINUED) The franchising operations segment result reduced by 7.2% from $304.53 million in the 2017 year to $282.54 million in the 2018 financial year. The franchising operations margin was 4.90% for the 2018 financial year compared to 5.42% for the preceding year. The franchising operations segment was negatively impacted by a combination of lower franchise fees received from franchisees and higher tactical support required during the year to protect, enhance and promote the Harvey Norman®, Domayne® and Joyce Mayne® brands. Tactical support increased by $10.50 million relative to prior year, of which $7.80 million related to tactical support to assist a B2B franchisee with a restructure in Q4 of FY18. Like our franchisees, we have further invested in our people, our brand, and in the development and enhancement of the tools we provide our franchisees to enable them to seamlessly service their customers. This investment has contributed to the reduction in the franchising operations segment result during the 2018 financial year. Our ongoing commitment to ensuring a seamless relationship with the customer has seen the ongoing identification and introduction of new opportunities and the continued development and enhancement of existing capabilities. The ongoing development of the Online-to-Offline (O2O) Strategy and the evolution of delivery services and fulfilment options offered by franchisees in Australia is at the core of the ‘Customer First’ approach. The Click & Collect App is fully operational across Australia and New Zealand, enabling customers to track the status of their order through real-time notifications. The LivePerson digital service platform provides customers with the ability to communicate with franchisees through whichever channel they desire at whatever time suits them best. Franchisees and customers have benefitted from the technological initiatives carried out during the year, including the developments in real-time inventory and delivery-tracking systems, quick reserve options and the evolution of delivery pathways. Our strong property portfolio was valued at $2.86 billion as of 30 June 2018 and still continues to be our driving point of difference and competitive advantage in the Australian market. With emerging or restructured competitors – both big or small, online or physical – our robust investment property portfolio keeps us a step-ahead and ready to anticipate and respond to the evolving and dynamic needs of consumers. Our physical complexes provide the flexible, large footprint needed to showcase the best on offer and demonstrate the maximum capabilities of those products to integrate and connect our busy day-to-day lives. All-in-all, the 2018 financial year has been a strong one, particularly on the back of the previous record-breaking 2017 financial year result. We’d like to thank all of our staff for their continued enthusiasm, and pay tribute to the hard work of our franchisees throughout the year. As a shareholder, your continued support and confidence in our direction ensures a prosperous future for us all. G. HARVEY K.L. PAGE Chairman Chief Executive Officer Sydney Sydney 28 September 2018 28 September 2018 HARVEY NORMAN HOLDINGS LIMITED | ANNUAL REPORT 2018 9 DIRECTORS’ REPORT Directors Unless otherwise indicated, all directors (collectively termed “the Board”) held their position as a director throughout the entire financial year and up to the date of this report. Gerald Harvey Executive Chairman Mr. G. Harvey was the co-founder of Harvey Norman Holdings Limited in 1982 with Mr. I.J. Norman. Mr. G. Harvey has overall executive responsibility for the strategic direction of the consolidated entity, and in particular, property investments. Kay Lesley Page Executive Director and CEO Ms. Page joined Harvey Norman in 1983 and was appointed a director of Harvey Norman Holdings Limited in 1987. Chris Mentis B.Bus., FCA, FGIA, Grad Dip App Fin Executive Director, CFO & Company Secretary John Evyn Slack-Smith Executive Director & COO David Matthew Ackery Executive Director Michael John Harvey B.Com Non-Executive Director Christopher Herbert Brown OAM, LL.M, FAICD, CTA Non-Executive Director Kenneth William Gunderson- Briggs B.Bus., FCA, MAICD Non-Executive Director (Independent) Ms. Page became the Chief Executive Officer of the Company in February 1999 and has overall executive responsibility for the consolidated entity. Ms. Page is a Director of the Trustee of the Sydney Cricket and Sports Ground Trust. On 30 July 2018, Ms. Page was appointed as an independent member of the Place Management NSW Board. Mr. Mentis was appointed a director of Harvey Norman Holdings Limited on 30 August 2007. Mr. Mentis joined Harvey Norman as Financial Controller on 15 December 1997. On 20 April 2006, he became Chief Financial Officer and Company Secretary. Mr. Mentis is a Fellow of the Institute of Chartered Accountants and a Fellow of the Governance Institute of Australia, with extensive experience in financial accounting. Mr. Mentis has overall executive responsibility for the accounting and financial matters of the consolidated entity.  Mr. Slack-Smith was a Harvey Norman® computer franchisee between 1993 and 1999. Mr. Slack-Smith became a director of the Company on 5 February 2001. Mr. Slack-Smith has overall executive responsibility for the operations of the consolidated entity.  Mr. Ackery was appointed a director of Harvey Norman Holdings Limited on 20 December 2005. Mr. Ackery has overall executive responsibility for the relationship between the consolidated entity and Harvey Norman® home appliances, home entertainment and technology franchisees and strategic partners. Mr. Ackery is the Chairman of the public company, St. Joseph’s College Foundation Limited.  Mr. M. Harvey joined Harvey Norman in 1987, having completed a Bachelor of Commerce degree. Mr. M. Harvey gained extensive experience as a Harvey Norman® franchisee from 1989 to 1994. Mr. M. Harvey became a director of the Company in 1993 and was appointed Managing Director in July 1994. Mr. M. Harvey ceased to be an Executive Director and Managing Director on 30 June 1998. Mr. Brown holds the degree of Master of Laws from the University of Sydney. Mr. Brown is the senior partner in Brown Wright Stein Lawyers. Brown Wright Stein Lawyers has acted as lawyers for the consolidated entity since 1982. Mr. Brown was appointed a director of the Company in 1987, when it became a listed public company. Mr. Brown is a member of the Audit, Remuneration and Nomination Committees. Mr. Brown is the Chairman of Windgap Foundation Limited. In 2013 he was awarded the Medal of the Order of Australia (OAM) for service to the community, particularly to people with disability.  Mr. Gunderson-Briggs was appointed a director of Harvey Norman Holdings Limited on 30 June 2003. Mr. Gunderson-Briggs is a chartered accountant and a registered company auditor. Mr. Gunderson- Briggs has been involved in public practice since 1982 and a partner in a chartered accounting firm since 1990. Mr. Gunderson-Briggs’ qualifications include a Bachelor of Business from the University of Technology, Sydney and he is a Fellow of the Institute of Chartered Accountants. Mr. Gunderson- Briggs was appointed Chairman of the Remuneration Committee on 16 December 2015 and is a member of the Audit and Nomination Committees. Mr. Gunderson-Briggs is an independent non-executive director of Australian Pharmaceutical Industries Limited, a company listed on the ASX. Mr. Gunderson-Briggs finished his tenure as the Chairman of Glenaeon Rudolf Steiner School Limited in May 2018. Graham Charles Paton AM, B.Ec, FCPA, MAICD Non-Executive Director (Independent) Mr. Paton holds a Bachelor of Economics degree from the University of Sydney. During his 23 years as a partner of an international chartered accounting practice, he was involved in the provision of professional services to the retail industry. He retired from public practice in July 2001. Mr. Paton is a Fellow and Life Member of CPA Australia and was the National President of that professional accounting body in 1993/1994. In 2001, Mr. Paton was awarded membership of the General Division of the Order of Australia for his services to the accounting profession and for his services to the deaf community through his chairmanship of the Shepherd Centre for Deaf Children for the decade to 2001. Mr. Paton was appointed a director of Harvey Norman Holdings Limited on 20 June 2005 and was appointed the Senior Independent Director on 16 December 2015. Mr. Paton was appointed Chairman of the Nomination Committee on 16 December 2015, Chairman of the Audit Committee on 9 March 2006 and is a member of the Remuneration Committee. Mr. Paton is an independent non-executive director of Gazal Corporation Limited, a company listed on the ASX. 10 DIRECTORS’ REPORT (CONTINUED) Company Secretary Mr. C. Mentis is a chartered accountant and became Company Secretary on 20 April 2006. Mr. Mentis has extensive experience in financial accounting and has been with the consolidated entity since 1997. Mr. Mentis is a Fellow of the Governance Institute of Australia. Committee Membership As at the date of this report, the Company had an Audit Committee, a Remuneration Committee and a Nomination Committee. Members acting on the committees of the board during the year were: Audit Committee:  G.C. Paton AM (Chairman)  C.H. Brown OAM  K.W. Gunderson-Briggs Remuneration Committee:  K.W. Gunderson-Briggs (Chairman)  C.H. Brown OAM  G.C. Paton AM Nomination Committee:  G.C. Paton AM (Chairman)  C.H. Brown OAM  K.W. Gunderson-Briggs   Directors’ Meetings DIRECTOR G. Harvey K.L. Page J.E. Slack-Smith D.M. Ackery C. Mentis M.J. Harvey C.H. Brown K.W. Gunderson-Briggs G.C. Paton Full Board Audit Remuneration Nomination 11 [11] 11 [11] 10 [11] 10 [11] 11 [11] 10 [11] 11 [11] 11 [11] 10 [11] n/a n/a n/a n/a n/a n/a 8 [8] 8 [8] 8 [8] n/a n/a n/a n/a n/a n/a 5 [5] 5 [5] 5 [5] n/a n/a n/a n/a n/a n/a 1 [1] 1 [1] 1 [1] The number of meetings of the Board of Directors and of its Board Committees during the 2018 financial year were:  Full Board: 11  Audit Committee: 8  Remuneration Committee: 5  Nomination Committee: 1 The above table represents the directors’ attendance at meetings of the Board, Audit Committee, Remuneration Committee and Nomination Committee. The number of meetings for which the director was eligible to attend is shown in brackets. In addition, the executive directors held regular meetings for the purpose of signing various documentation. Principal Activities The principal activities of the consolidated entity are that of an integrated retail, franchise, property and digital system including:  Franchisor;  Sale of furniture, bedding, computers, communications and consumer electrical products in New Zealand, Singapore, Malaysia, Slovenia, Ireland, Northern Ireland and Croatia;  Property investment;  Lessor of premises to Harvey Norman®, Domayne® and Joyce Mayne® franchisees and other third parties;  Media placement; and  Provision of consumer finance and other commercial loans and advances. Significant Changes in the State of Affairs In the opinion of the directors, there were no significant changes in the state of affairs of the consolidated entity that occurred during the year ended 30 June 2018. HARVEY NORMAN HOLDINGS LIMITED | ANNUAL REPORT 2018 11 DIRECTORS’ REPORT (CONTINUED) Significant Events After Balance Date On 31 August 2018, the Company announced a renounceable, pro-rata entitlement offer of new fully- paid ordinary shares in the Company to raise approximately $163.85 million (before costs) (Entitlement Offer), with an offer price of $2.50 per share. The Entitlement Offer forms part of the Company’s ongoing capital management program. It is intended that the proceeds of the Entitlement Offer will be used to reduce the amount of Company consolidated entity debt. With the exception of the above, there have been no circumstances arising since balance date which have significantly affected or may significantly affect:    the operations; the results of those operations; or the state of affairs of the entity or consolidated entity in future financial years. Corporate Governance The Company is committed to good corporate governance and disclosure. The Company has substantially adopted the ASX Corporate Governance Council's "Corporate Governance Principles and Recommendations" for the entire financial year. Directors’ Relevant Interests At the date of this report, the relevant direct and indirect interest of each director in the ordinary shares and performance rights instruments of the Company and related bodies corporate are: DIRECTOR G. Harvey K.L. Page J.E. Slack-Smith D.M. Ackery C. Mentis M.J. Harvey C.H. Brown K.W. Gunderson-Briggs G.C. Paton TOTAL Ordinary Shares Options Performance Rights 349,444,821 17,507,642 899,818 489,134 915,341 2,974,897 183,323,726 9,137 15,682 555,580,198 - - - - - - - - - - 187,500 337,500 225,000 225,000 225,000 - - - - 1,200,000 Share Options Performance Rights At the date of this report, there were no unissued ordinary shares under options (2017: 1,134,000). During the year ended 30 June 2018, 1,134,000 options were exercised resulting in the creation of 1,134,000 new shares in the Company. At the date of this report, there were 1,200,000 unissued ordinary shares under performance rights (2017: 800,000), being a right to acquire ordinary shares in the Company at nil exercise price. On 30 November 2015, a total of 400,000 performance rights under Tranche 1 of the 2016 Long-Term Incentive (LTI) Plan were granted to executive directors following Board adoption of the scheme and shareholder approval of the LTI Plan in 2015. On 28 November 2016, a total of 400,000 performance rights under Tranche 2 of the 2016 LTI Plan were granted to executive directors in accordance with the terms and conditions of the LTI Plan. On 1 December 2017, a total of 400,000 performance rights under Tranche 3 of the 2016 LTI Plan were granted to executive directors in accordance with the terms and conditions of the LTI Plan. Dividends The directors recommend a fully franked final dividend of 18.0 cents per share to be paid on 2 November 2018 (total dividend, fully franked - $200,554,004). The following fully franked dividends of the Company have also been paid, declared or recommended since the end of the preceding financial year: Payment Date Amount 2017 final fully-franked dividend 1 December 2017 2018 interim fully-franked dividend 1 May 2018 $133,634,629 $133,702,669 The total dividend in respect of the year ended 30 June 2018 of 30.0 cents per share represents 89.05% (2017: 64.46%) of profit after tax and non-controlling interests, as set out on page 68 of the financial statements. Excluding the non-cash net property revaluation increments, the total dividend in respect of the year ended 30 June 2018 of 30.0 cents per share represents 98.54% (2017: 77.55%) of profit after tax and non-controlling interests, as set out on page 68 of the financial statements. The Dividend Policy of the Company is to pay such dividends as do not compromise the capability of the Company to execute strategic objectives. 12 DIRECTORS’ REPORT (CONTINUED) OPERATING AND FINANCIAL REVIEW Underlying Profit HIGHLIGHTS: UNDERLYING PROFIT The performance of our overseas Harvey Norman® branded company-operated stores has been outstanding and this segment now represents 22% of the total consolidated profit before tax result. Each offshore region has delivered their best trading result and highest profitability, both individually and in aggregate, since launching overseas. The PBT return on net assets was 18.05% for FY2018. Our Flagship Strategy is continuously evolving and we will soon have 1 Flagship store in each of the 8 countries in which we, or our franchisees, operate. A solid result for FY2018, particularly on the back of the previous record-breaking FY2017 result. We plan to invest substantially in growing our offshore Harvey Norman® store network, with an expectation to open up to 18 new stores overseas within the next 2 years, particularly in South East Asia. $532.54 million underlying net profit before tax down by -0.96% from $537.70 million in FY17 (excluding net property revaluation adjustments, Coomboona trading losses and Coomboona impairment losses) Including:   $116.13 million profit from the company-operated offshore retail operations, up +15.1% from $100.86 million in FY17; $282.54 million franchising operations segment profit result, down -7.2% from $304.53 million in FY17, mainly due to a combination of lower franchise fees received from franchisees and higher tactical support required to protect, enhance and promote the brands, in addition to a rise in other costs to operate the franchising operations segment. Franchisees in Australia performed well in the face of increased competition and competitive pricing, which had accelerated in the 2nd half of FY18. Franchisees have continued to invest in their people to ensure that their staff are equipped with the best skills and tools to drive sales growth and seamlessly service their customers; $136.92 million profit from the property segments (excluding net property revaluation adjustments), down -1.8% from $139.42 million in FY17 primarily due to increased borrowing costs for the acquisition and refurbishment of property assets as rents and outgoings remained strong; $5.88 million profit from the equity investments segment, down -3.2% from $6.08 million in FY17, reflecting a reduction in the market value of the listed securities portfolio, net of the dividends and any capital profits or losses generated from the sale of listed securities during the year; and ($8.94) million net loss from non-core joint ventures included in the other segment and other non-franchised retail segment (excluding Coomboona JV trading losses and Coomboona JV impairment losses), an improvement of +32.2% from the net loss of ($13.19) million in FY17 mainly due to an improvement in the trading results of our credit facilities segment (excluding the Coomboona joint venture), lower impairment losses recognised on commercial loans to a non- core retail business by $1.49 million and the impairment loss of $0.43 million recognised in the prior year in respect of a mining camp accommodation joint venture.    HARVEY NORMAN HOLDINGS LIMITED | ANNUAL REPORT 2018 13 DIRECTORS’ REPORT (CONTINUED) OPERATING AND FINANCIAL REVIEW (continued) Reported Profit Before Tax (PBT) HIGHLIGHTS: REPORTED PROFIT BEFORE TAX Profit before tax for the year-ended 30 June 2018 was negatively impacted by two main factors: (1) A reduction in the net property revaluation increment for the property portfolio by $56.41 million, down from $108.05 million in FY17 to $51.65 million in FY18 primarily due to the impact of rezoning potential to medium-density residential leading to a significant increase for a property in NSW in the previous year; and (2) The recognition of impairment losses of $49.44 million in respect of the Coomboona Holdings dairy joint venture (Coomboona JV) comprised of: (i) a $20.67 million write-down of the equity- accounted investment in the Coomboona JV in December 2017, and (ii) an estimated shortfall in the recovery of the loans advanced to the Coomboona JV of $28.78 million. $530.17 million net profit before tax for FY18 compared to $639.81 million for FY17, a decrease of $109.63 million or -17.1% from prior year Main factors contributing to the result:  $15.27 million increase in the profitability of the overseas company-operated retail locations to $116.13 million, up +15.1% from $100.86 million in FY17. The increased contribution from each region included: Singapore & Malaysia +$5.71 million (+29.6%) due to the reformat and launch of the Flagship store at Ikano, Kuala Lumpur (Malaysia) and the new Viva City Mega Mall in Kuching, Sarawak (Malaysia) both in November 2017, the opening of the Viva City Factory Outlet (Singapore) in July 2017, the expansion to full-format stores of the Parkway Parade (Singapore) and North Point (Singapore) stores and the continued growth in the Flagship Millenia Walk (Singapore) store; Ireland & Northern Ireland +$3.90 million (+157%) due to the launch of the Flagship store in Tallaght, Dublin (Ireland) in July 2017 and the ongoing success of the Boucher Road Flagship store in South Belfast (Northern Ireland). During the year there was a realignment of accounting treatment of lease incentives income in Ireland by $1.03 million and a release of the lease incentive relating to the Holywood store in Northern Ireland of $1.08 million; New Zealand +$2.88 million (+3.6%) resulting from modest sales and market share growth in New Zealand during FY18 amidst a slowdown in the NZ economy and a cooling housing market in Auckland; and Slovenia & Croatia +$2.77 million (+60%) due to the launch of the refurbished Flagship store at BTC City Ljubljana (Slovenia) in June 2017 creating a positive ‘halo-effect’ for the other four Harvey Norman® company-operated stores in Slovenia with growth rates in excess of 20%. Pleasingly, the store at Zagreb (Croatia) has performed well, boosting sales by over 17% during the renovation period. The refurbished Zagreb Flagship store will be launched by the end of September 2018. ($58.90) million decrease in the overall property segment profit result to $188.57 million, down -23.8% from $247.47 million in FY17, mainly attributable to a ($56.41) million or -52.2% decrease in the net property revaluation increment from $108.05 million in FY17 to $51.65 million in FY18 and higher borrowing costs (due to the increased utilisation of debt facilities for property acquisitions) offset by higher rent and outgoings collected from property segment assets. ($43.81) million deterioration in the net loss from non-core joint ventures included in the other segment and other non-franchised retail segment to a net loss of ($62.95) million, from a net loss of ($19.14) million in FY17. This is mainly due to higher impairment losses by $47.52 million for the write-down of the equity-accounted investment in the Coomboona JV of $20.67 million in December 2017, the impairment loss for the estimated shortfall in the recovery of loans advanced to the Coomboona JV of $28.78 million, offset by lower impairment losses recognised on commercial loans to a non-core retail business by $1.49 million and the impairment loss of $0.43 million recognised in the prior year in respect of a mining camp accommodation joint venture. ($21.99) million decrease in the franchising operations segment profit result to $282.54 million, down -7.2% from $304.53 million in FY17. Franchisees achieved aggregated franchisee sales growth of 2.6% to $5.76 billion – a solid effort from franchisees despite increased competition and competitive pricing to maintain market share, particularly in the 2nd half of FY18. Despite higher aggregated franchisee sales revenue during the year, there was reduction in gross revenue from franchisees during the year by $2.63 million, or -0.3%, to $1.04 billion. Coupled with the higher tactical support payments by $10.50 million, of which $7.80 million tactical support was paid to assist a B2B franchisee with a restructure in Q4 of FY18, the performance of the franchising operations segment reduced by $21.99 million relative to prior period and the franchising operations margin moderated from 5.42% in FY17 to 4.90% in FY18.    14 DIRECTORS’ REPORT (CONTINUED) OPERATING AND FINANCIAL REVIEW (continued) Reported PBT Return on Net Assets % The consolidated entity attributes the achievement of a consistently strong PBT return on net assets to the following key drivers focussed on creating sustainable growth and maximising value to our stakeholders:  We operate a diversified, unique business model – the consolidated entity operates an integrated retail, franchise, property and digital strategy that continues to deliver strong, stable income streams.  We are not just limited to the Australian market and we have a significant retail footprint across 8 countries – the consolidated entity has 195 franchised complexes in Australia and 89 Harvey Norman® company-operated stores across 7 offshore regions.    Our Board of Directors and management team in Australia and each offshore region are business savvy and experienced in retail and property, who have an in-depth understanding and appreciation of the key drivers of the discretionary retail market – the consolidated entity continues to invest in its leaders and their people and prides itself on the longevity, tenure and breadth of knowledge of the Harvey Norman®, Domayne® and Joyce Mayne® brands of key personnel to effectively position the brand in each of the differing markets. Our retail strategy and retail mix encompasses the entire Home and Lifestyle market - franchisees and company-operated stores continue to be dominant players across all key categories within the Home and Lifestyle market. This diversified offering and the extensive product range is flexible and capable of withstanding changing competitive pressures and headwinds of specific product categories to effectively respond to evolving consumer dynamics and desires. Our robust property portfolio of $2.86 billion continues to be our point of difference and competitive advantage - with emerging or restructured competitors – both big or small, online or physical – the resilient investment property portfolio keeps the consolidated entity a step-ahead and provides the flexible, large footprint needed to showcase the best on offer. Net Profit After Tax & Non-Controlling Interests (PAT&NCI) Net profit after tax and non-controlling interests (NCI) decreased by 16.4%, or $73.60 million, to $375.38 million for the year-ended 30 June 2018, from $448.98 million in the previous year. The effective income tax rate for the year-ended 30 June 2018 was 28.32% compared to an effective income tax rate of 29.20% for the year-ended 30 June 2017. Excluding the after tax net property revaluation increments, the Coomboona JV trading losses and the Coomboona JV impairment loss from the result, underlying net profit after tax and non-controlling interests for the 2018 financial year reduced by 0.1%, or $0.38 million, to $377.03 million, from $377.42 million in the previous year. HARVEY NORMAN HOLDINGS LIMITED | ANNUAL REPORT 2018 15 DIRECTORS’ REPORT (continued) OPERATING AND FINANCIAL REVIEW (continued) PLANNED OFFSHORE GROWTH WITHIN THE NEXT TWO YEARS Ikano, Kuala Lumpur (Malaysia Flagship store) The performance of the overseas Harvey Norman® branded through the utilisation of existing cash reserves in the Asian business company-operated stores has been outstanding and this segment or from external borrowings to be sourced locally in Singapore. The now represents 22% of the total consolidated profit before tax growth in South East Asia will predominantly be in Malaysia where result. Each offshore region has delivered their best trading result there is an expectation to open up to 9 new stores by the end of 2020. and highest profitability, both individually and in aggregate, since This will grow the brand in Malaysia from the 16 stores today to 25 launching overseas. Harvey Norman® stores within a 2-year period. 3 new sites have been The consolidated entity intends to capitalise on the excellent identified for growth in Singapore. performance overseas and plans to invest substantially in growing In Croatia, the consolidated entity has earmarked 3 new locations the offshore Harvey Norman® store network. The robust balance for expansion in the region. We expect to open 1 more store in New sheet and strong cash flows enables the consolidated entity to Zealand and 2 more stores in the Republic of Ireland. seize on opportunities as they arise. The consolidated entity is actively exploring opportunities to expand overseas and there is an expectation to open up to 18 new Harvey Norman® stores offshore within the next 2 years, particularly in South East Asia. The consolidated entity owns an 80.2% controlling interest in Pertama Holdings Pte Limited (Pertama), a company incorporated in Singapore. A subsidiary of Harvey Norman Holdings Limited has granted to Pertama a licence to use the Harvey Norman® trademarks in Singapore and Malaysia. Pertama intends to expand its retail footprint in Singapore and Malaysia through the planned opening of 12 new retail sites. The expansion opportunities will be funded by Pertama The consolidated entity expects to have circa 107 Harvey Norman® branded company-operated stores by the end of the 2020 financial year, a 20% expansion in store locations overseas within a 2-year period. In Malaysia, the consolidated entity has recognised the growth potential of the Harvey Norman® brand in the region. Since 2010, the population growth in Malaysia has been in excess of 400,000 per year and currently sits at 32.1 million. There is the potential to increase the retail footprint in Malaysia from 16 Harvey Norman® stores today to over 50 stores by the end of 2023. 1997 2000 2002 2003 2004 2008 2011 NEW ZEALAND SINGAPORE SLOVENIA IRELAND MALAYSIA NORTHERN IRELAND CROATIA PLANNED OFFSHORE GROWTH (NEXT 2 YEARS) NEW ZEALAND MALAYSIA SINGAPORE IRELAND SLOVENIA 5 CROATIA 1 +3 NORTHERN IRELAND 2 +9 16 +3 13 13 +2 39 +1 16 EXISTING COMPANY-OPERATED STORES PLANNED INCREASE IN COMPANY-OPERATED STORES DIRECTORS’ REPORT (continued) OPERATING AND FINANCIAL REVIEW (continued) HARVEY NORMAN® FLAGSHIP STRATEGY – SETTING A COURSE FOR EXCELLENCE When we decided to create a Flagship store or complex in each of In Australia, we have already seen the positive impact of the launch our territories we had one overarching goal in mind: providing an of the Auburn Flagship complex in Sydney with the transformation industry-leading, immersive customer experience. of the Computers and Electrical categories. The final stage of the We wanted these stores to be nothing short of game-changing the launch of the Furniture, Bedding and Floorcoverings categories. when it came to how our customers engaged with our brand. It was about providing the absolute best shopping experience. Creating a We’re raising expectations while we’re raising the bar. Customers space where the latest innovations and designs combined with the want a better experience, from when they walk in the door to after biggest range of quality brands and products in a truly interactive their purchases have arrived home. The perception of our brand is format. Much more than just a place to buy furniture or appliances, changing, and it’s our Flagship stores and complexes that are leading Auburn Flagship complex will be completed by September 2018 with customers would receive a level of service – both before and after the way forward. sale – that would be unsurpassed in the industry. Our plan was to well and truly set a course for the future of the Harvey Norman® brand on a global scale, and in doing so we have created eight of the best Home and Lifestyle stores in the world. Our Flagship stores will provide our customers with the kind of tactile and interactive shopping experience that can’t be found online – where they can feel an air of excitement when they walk through the door. During the 2018 financial year, 3 Flagship stores were launched: Tallaght, Dublin (Ireland) in July 2017, Ikano, Kuala Lumpur (Malaysia) AUSTRALIA - Auburn, Sydney (targeted launch Sep 2018) CROATIA - Zagreb (targeted launch Sep 2018) IRELAND - Tallaght, Dublin (launched Jul 2017) MALAYSIA - Ikano, Kuala Lumpur (launched Nov 2017) NEW ZEALAND - Wairau Park, Auckland (launched Jun 2018) NORTHERN IRELAND - Boucher Road, South Belfast (launched Nov 2015) in November 2017 and Wairau Park, Auckland (New Zealand) in June SINGAPORE - Millenia Walk (launched Dec 2015) 2018. We are completing the reformat of the Zagreb (Croatia) store and intend to launch it as a Flagship store by the end of September 2018. SLOVENIA - Ljubljana (launched Jun 2017) HARVEY NORMAN HOLDINGS LIMITED | ANNUAL REPORT 2018 Wairau Park, Auckland (New Zealand Flagship store) 17 DIRECTORS’ REPORT (CONTINUED) OPERATING AND FINANCIAL REVIEW (continued) Company-Operated Retail Segment Total aggregated company-operated retail sales revenue is almost at the $2 billion milestone for the 2018 financial year, the strongest-ever sales performance for the retail segment, growing by $157.72 million, or 8.6%, to $1.99 billion relative to $1.83 billion in the previous year. Retail sales for the 39 Harvey Norman® stores in New Zealand alone have almost reached $1 BILLION in local currency, whilst sales in Asia are nearly at $0.500 BILLION for the 2018 financial year. Total company-operated revenue broke the $2 billion barrier in the 2018 financial year hitting $2.03 billion for the year, an increase of $158.53 million, or 8.5%, in aggregate relative to $1.88 billion in the 2017 financial year. Each offshore region has reported stronger sales growth and market share gains during the year with the Flagship stores in each country leading the way and providing increased brand awareness and consumer traction to existing or new stores in the region. The commendable performance of the company-operated retail segment affirms the concerted focus on developing and enhancing the Flagship strategy. The aim of the consolidated entity is nothing short of creating the best Home and Lifestyle retail destinations in the world, with Harvey Norman® being the ‘go to’ brand for an aspirational and interactive shopping experience. The result before tax for the company-operated retail segment increased $14.11 million, or 15.5%, to $104.96 million for the year ended 30 June 2018, from $90.85 million in the 2017 financial year. This is an excellent result considering the overseas company-operated stores grew from a record base in the preceding year. In local currency, the market-leading Harvey Norman® brand in New Zealand was just under the $1 BILLION mark with sales soaring to $NZ987.20 million up by 4.9%, or $NZ46.50 million, from $NZ940.69 million in the previous financial year. This was particularly remarkable due to the headwinds faced by the New Zealand economy during the year, with a slowdown in the housing market, the net migration decrease and a change in government in October 2017, all impacting the retail climate and consumer sentiment in its own way. 18 DIRECTORS’ REPORT (CONTINUED) OPERATING AND FINANCIAL REVIEW (continued) Company-Operated Retail Segment (continued) The 72,000 sq feet Flagship store at Wairau Park, North Auckland has undergone a significant renovation during the year and the store continued to trade strongly throughout the refurbishment period. The Wairau Park Flagship store launched in its new format to much acclaim at the end of June 2018, boosting sales early into the 2019 financial year. No new company-operated stores were opened in the New Zealand market during the 2018 financial year, however sales were assisted by a full year’s trading of the Queenstown store which opened in October 2016. There were sales and market share growth in all key categories, amid an increasingly competitive market. Continued strong supplier collaborations to promote exclusive, high-end product lines and competitive pricing strategies, has given the company-operated stores in New Zealand a noteworthy competitive edge. Translated into Australian dollars, sales revenue increased 2.4%, or $20.99 million, to $909.52 million. The business has continued to focus on cost control to achieve optimal operating leverage, coupled with an unwavering desire to outperform previous performance and surpass the market in general to maintain the clear market leader position. Despite the challenges faced during the 2018 financial year, the retail result in New Zealand increased by $2.88 million, or 3.6%, to $82.31 million for the year ended 30 June 2018, up from $79.43 million in the 2017 financial year. Aggregated sales revenue for the Harvey Norman® and Space Furniture® brands combined was just under the $0.500 BILLION mark with retail sales of $S497.92 million in local currency, up by 14.0%, or $S61.23 million, from $S436.69 million in the 2017 financial year. In Singapore, the 13 Harvey Norman® branded stores increased sales revenue in local currency by $S55.78 million, or 20.3%, to $S330.28 million for the 2018 financial year, from $S274.50 million in the previous year. Growth in sales revenue was assisted by the opening of the new Viva City Factory Outlet in July 2017 and the expansion of the existing stores located at Parkway Parade (in August 2017) and North Point City (in December 2017) to incorporate full-concept stores during the current year. The unrivalled strength of the Millenia Walk Flagship store continued to underpin sales during the year, bolstering the appeal of the Harvey Norman® brand in Singapore. Sales revenue from the 16 Harvey Norman® branded stores in Malaysia were strong, especially during the last 6 months of the 2018 financial year following the launch of the Ikano, Kuala Lumpur Flagship store in November 2017. The successful Flagship launch drove the commendable rise in sales revenue in local currency by $S14.44 million, or 10.5%, to $S152.33 million for the 2018 financial year, from $S137.89 million in the previous year. This was a significant improvement to the Malaysian sales performance reported in the December 2017 half where retail sales had remained consistent with the previous corresponding half. The November 2017 Ikano launch was well-received and pleasingly, overall, the relocation and reformat of the site has delivered strong sales despite a temporary closure during the renovation period which had covered a large part of the first half of 2018. The solid performance of Ikano, coupled with the reinvigorated Harvey Norman® brand in Malaysia, had a positive halo-effect on the other existing stores in Kuala Lumpur. Sales were also assisted by a full year’s trading of the Sunway Velocity store which had opened in the previous year. The consolidated entity has earmarked Malaysia to be the main region for growth over the next 2 years. The consolidated entity expects to continue its investment in Malaysia with an expected expansion of the Harvey Norman® company-store network in Malaysia by an additional 9 sites by the end of 2020. Sales revenue for the Space Furniture® brand in Singapore was lower by $S7.78 million in the 2018 financial year due to a significant reduction in project sales following the sharp slowdown in construction within the prestige property market. Softer consumer sentiment in the high-end retail furniture market had also impacted the Space Furniture® retail sales in Singapore. Sales were lower for the Space Furniture brand in Malaysia by $S1.20 million due to a reduction in project sales. Sales were boosted in the previous financial year by the renovation sale as the Space Furniture® store in Malaysia was reconfigured and refurbished. The segment profit result of the two brands in Asia was $25.01 million for the year-ended 30 June 2018 compared to a segment result of $19.30 million in the previous year, an increase of $5.71 million, or 29.6%. This is an excellent result in a highly competitive market. Sales revenue from the 5 company-operated stores in Slovenia increased €10.23 million, or 18.2%, to €66.56 million for the 2018 financial year, up from €56.33 million in the previous year. Translated into Australian dollars, sales revenue increased $20.99 million, or 25.8%, to $102.40 million. HARVEY NORMAN HOLDINGS LIMITED | ANNUAL REPORT 2018 19 DIRECTORS’ REPORT (CONTINUED) OPERATING AND FINANCIAL REVIEW (continued) Company-Operated Retail Segment (continued) The Flagship store at BTC City, Ljubljana was redeveloped, renovated and was launched in June 2017. The Ljubljana Flagship store provides an unparalleled, all-encompassing and interactive shopping experience in Slovenia and the greater Central European region. The repositioning of the Harvey Norman® brand in Slovenia has had the positive impact of driving sales growth in all stores across all key product categories, boasting growth rates well in excess of 20%. The retail result in Slovenia was a profit of $6.65 million for the year ended 30 June 2018, an increase of $2.19 million, or 49.1%, from $4.46 million profit in the previous year. Sales revenue for the Zagreb, Croatia store increased €1.98 million, or 10.8%, to €20.38 million for the 2018 financial year, from €18.40 million in the previous year. Translated into Australian dollars, sales revenue increased 17.9%, or $4.77 million, to $31.35 million. The renovation of the Zagreb Flagship store is predominantly complete and is due to be relaunched by September 2018. Croatia had reported its first full-year profit in June 2017. This profitable trend has continued with a profit of $0.75 million for the year ended 30 June 2018. We expect this trend to continue after the relaunch of the reinvigorated Zagreb Flagship store next month. Ireland: In Ireland, sales revenue from the 13 company-operated stores increased €21.81 million, or 12.8%, to €192.30 million for the 2018 financial year, up from €170.49 million in the 2017 year. Comparable store sales growth were also good, increasing by €7.11 million or 4.2% during the year. Translated into Australian dollars, sales revenue increased by $49.43 million, or 20.1%, to $295.84 million from $246.41 million in the previous year, partly due to a 6.45% appreciation in the Euro relative to the Australian dollar during the year. Retail sales increased across all key product categories. The 61,000 sq feet Flagship store situated in the Airton Retail Park in Tallaght was launched in July 2017. This Flagship store has reinforced, and significantly enhanced, the Harvey Norman® brand in Ireland and has set a new retailing benchmark in the region. With many global brands having their European headquarters in London, the Tallaght Flagship store serves also as a regional showcase of global capability, raising the bar in terms of the latest shop-fitout, interior design concepts and experiential and value-added retail. The success of the Tallaght Flagship, which is also the first freehold land purchase in the Republic of Ireland, has led to positive flow-on effects to the existing store base with each of the stores in Ireland growing sales during the year. The retail trading environment in Ireland has continued to improve with key indicators in the Irish economy demonstrating that the economy is performing well. Irish consumer confidence has increased along with improved employment rates and net inward migration. Construction activity has picked-up and house completions have increased, however, while the outlook is positive, there are potential headwinds in terms of the continuing uncertainty around Brexit. The retail segment result in Ireland generated a profit of $1.98 million for the 2018 financial year, an improvement of $2.12 million from a loss of $0.14 million in the previous year. This result includes an adjustment of $1.03 million to realign the accounting treatment of lease incentives in Ireland recognised in the current year. Northern Ireland: Sales revenue from the two company operated stores in Northern Ireland contracted by £0.25 million, or -2.5%, to £10.07 million for the 2018 financial year, from £10.33 million in the previous year. Translated into Australian dollars, sales increased marginally by $0.13 million, or 0.7%, to $17.48 million mainly due to a 3.28% appreciation in the British Pound Sterling relative to the Australian dollar during the year. The Flagship store on the iconic Boucher Road in South Belfast has been trading for nearly 3 years and continues to report strong sales each period. The impact of the stronger brand positioning following the launch of the Flagship store can be seen in the robust performance of the second Belfast store at Holywood, with sales growth of 15.3% relative to prior year, supported by the refurbishment and upgrade of the site 12 months ago. The 2 company-operated stores in Northern Ireland incurred a trading loss of $0.57 million for the current year, a solid turnaround from the trading loss incurred in the previous year of $2.35 million. This reduced trading loss incorporates an adjustment to release the remaining lease incentive received in respect of the previous Holywood retail store lease of $1.08 million. 20 DIRECTORS’ REPORT (CONTINUED) OPERATING AND FINANCIAL REVIEW (continued) Company-Operated Retail Segment (continued) Other Non-Franchised Retail The non-franchised retail segment consists primarily of retail and wholesale trading operations in Australia which are wholly-owned, controlled or jointly-controlled by the consolidated entity and does not include the operations of any Harvey Norman®, Domayne® and Joyce Mayne® franchisee. Total revenue for the other non-franchised retail segment was $159.82 million for the year ended 30 June 2018, a marginal reduction of $0.24 million, or 0.1%, from segment revenue of $160.06 million generated in the previous year. The result for the non-franchised retail segment was a loss of $11.17 million for the 2018 financial year, compared with a loss of $10.02 million for the previous year. The segment loss for the current year included an impairment loss of $16.92 million to write-down the commercial loans made to a retail joint venture in Australia compared to a write-down of $18.41 million in the previous year. Other Segment The Other segment is primarily comprised of credit facilities provided to related and unrelated parties, other unallocated income and expense items and the equity-accounted joint venture investment in Coomboona Holdings Pty Limited (CHPL). The Other segment recorded a loss of $51.78 million for the year ended 30 June 2018 compared to a loss of $9.12 million for the year ended 30 June 2017, a deterioration in the losses incurred by $42.66 million. HNM Galaxy Pty Limited, acting in its capacity as trustee of the HNM Galaxy Unit Trust (HN JV Entity), holds 49.9% of the issued shares in CHPL. Eternal Sound Limited, acting in its capacity as trustee for the AAA Settlement Trust (Eternal Sound JV Entity), holds 50.1% of the issued shares in CHPL. CHPL holds all of the issued shares in companies which carry on the business of dairy farm operations, land ownership and a pedigree breeding and genetics division in Northern Victoria (the Coomboona JV). The 49.9% interest of the consolidated entity in the Coomboona JV is equity-accounted. The Coomboona JV commenced trading in September 2015 and the equity-accounted trading losses were $4.57 million for the year ended 30 June 2018 compared to equity-accounted trading losses of $5.95 million for the prior year. In February 2018, a dispute arose between the HN JV Entity and the Eternal Sound JV Entity in relation to a number of matters, including the future direction of the Coomboona JV. On 27 February 2018, the HN JV Entity demanded that the Coomboona JV repay outstanding indebtedness due by the Coomboona JV to the HN JV Entity in the sum of $18.51 million. The poor trading performance of the Coomboona JV, the notice provided by the HN JV Entity to the Coomboona JV to demand repayment of the outstanding indebtedness due to the HN JV Entity of $18.51 million, in addition to the dispute between the HN JV Entity and the Eternal Sound JV Entity regarding the future direction of the Coomboona JV, were indicators of impairment during the December 2017 review period. The impairment assessment performed in respect of the investment in the Coomboona JV as at 31 December 2017 concluded that the entire investment balance of $20.67 million was impaired and should be written-down. This resulted in the recognition of an impairment loss of $20.67 million to write-down the Coomboona JV equity-accounted investment to nil as at 31 December 2017. On 23 March 2018 the directors of CHPL appointed Ferrier Hodgson as administrators of CHPL and subsidiaries of CHPL (Administrators). On the same day, National Australia Bank Limited (NAB), the first-ranking creditor to CHPL, appointed McGrath Nicol as receivers and managers of CHPL and subsidiaries of CHPL (Receivers). As at 9 May 2018, CHPL and subsidiaries of CHPL were indebted to NAB in an amount of approximately $36 million (NAB Debt). The NAB Debt was secured by first ranking mortgages and securities granted by CHPL and subsidiaries of CHPL to NAB (NAB Securities). On 9 May 2018 (Assignment Date), NAB assigned the NAB Debt and NAB Securities to Network Consumer Finance Pty Limited (NCF), a wholly-owned subsidiary of Harvey Norman Holdings Limited, for a price of $36.06 million, with the consent of the Administrators. The total indebtedness of CHPL to its creditors NCF and the HN JV Entity, both wholly-owned subsidiaries of Harvey Norman Holdings Limited, as at 30 June 2018 amounted to $74.99 million as follows:   first-ranking secured creditor (NAB): the total value of commercial loans granted to the Coomboona JV by NCF of $36.28 million; and second-ranking secured creditor (HN JV Entity): the total value of commercial loans granted to the Coomboona JV by the HN JV Entity of $38.71 million, repayable on demand. The recoverable amount of the indebtedness of CHPL to NCF and the HN JV Entity, totalling $74.99 million in aggregate, was assessed as at 30 June 2018. An impairment loss of $28.78 million was recognised in June 2018 to reduce the carrying amount of the Coomboona JV non- trade receivables to its recoverable amount. Each of the key assumptions in the impairment assessment is subject to judgement regarding the estimated shortfall in the repayment of the loans advanced by NCF and the HN JV Entity to CHPL. Combined, the Coomboona JV equity-accounted trading losses of $4.57 million, the impairment of the Coomboona JV investment in December 2017 of $20.67 million and the estimated impairment loss for the shortfall in the recoverability of funds advanced by NCF and the HN JV Entity of $28.78 million, totalled $54.01 million and was recognised as losses in the income statement for the 2018 financial year. HARVEY NORMAN HOLDINGS LIMITED | ANNUAL REPORT 2018 21 DIRECTORS’ REPORT (continued) OPERATING AND FINANCIAL REVIEW (continued) THE FRANCHISING OPERATIONS SEGMENT IN AUSTRALIA Auburn, Sydney (Australia Flagship complex) Harvey Norman Holdings Limited (HNHL) and subsidiaries of HNHL own valuable intellectual property rights, including the trade marks Harvey Norman®, Domayne® and Joyce Mayne®, software and other confidential information to promote and enhance the brands. A subsidiary of HNHL (a franchisor) grants separate franchises to independent franchisees to use the Harvey Norman®, Domayne® or Joyce Mayne® trade marks in Australia and to conduct the retail business of the franchisee at or from a store within a particular branded complex, pursuant to the terms of a franchise agreement. 195 Franchised complexes in Australia trading under the Harvey Norman®, Domayne® and Joyce Mayne® brand names. Each franchisee owns and controls the franchisee business of that franchisee. Each franchisee has control over the day-to-day operations of the franchisee business and has the discretion and power to make the decisions necessary to drive sales, control floor margins and contain operating costs to maximise profitability of the franchisee business. Each franchisee pays franchise fees to a franchisor pursuant to a franchise agreement between that franchisee and that franchisor. The franchising operations segment in Australia captures and records the franchisee fees received from franchisees including gross franchise fees, rent and outgoings for the use of a branded complex and interest on the financial accommodation facility that is made available to each franchisee. 540 Number of franchisees who are responsible for the day-to-day management and control of their respective franchisee businesses The franchising operations segment also includes the costs of operating the franchised system and monitoring and evaluating the performance and compliance of franchisees with their franchise agreements. 22 HN 18 DM 1 HN 2 HN 37 DM 3 JM 4 HN 10 DM 1 HN 57 DM 12 JM 2 HN 38 DM 2 HN 6 ACT HN 1 DM 1 169 FRANCHISED COMPLEXES 20 FRANCHISED COMPLEXES 6 FRANCHISED COMPLEXES DIRECTORS’ REPORT (CONTINUED) OPERATING AND FINANCIAL REVIEW (continued) Franchising Operations Segment The Franchising Operations Margin (%) The franchising operations segment result decreased by $21.99 million, or 7.2%, to $282.54 million in the 2018 financial year from $304.53 million in the previous year. This was a solid result particularly as it was on the back of a strong 13.6% growth in the 2017 financial year and the massive 34% increase in the 2016 financial year. The result generated by the franchising operations segment represented 53% of the total consolidated profit before tax result for the 2018 financial year. Revenue in this segment reduced by $7.64 million, or 0.8%, to $932.67 million primarily due to a decrease in franchise fee income of 1.8%, or $14.41 million, to $768.45 million in the 2018 financial year from $782.86 million in the previous year. Tactical support payments to protect, enhance and promote the brand increased by $10.50 million, or 16.3%, to $74.98 million for the year ended 30 June 2018, up from $64.48 million in the previous year. Higher tactical support payments were required during the year to assist franchisees to better compete in their respective markets. This increase was inclusive of $7.80 million in tactical support payments to assist a B2B franchisee with a restructure in Q4 of the 2018 financial year. Excluding the restructure of the B2B franchisee, tactical support would have been $67.17 million, a minimal increase of $2.70 million or 4.2% from the previous year. Other costs to operate the franchising operations segment, including interest and depreciation costs, have also increased during the year contributing to the reduction in the profitability of the franchising operations segment for the 2018 financial year. The franchising operations margin reduced from 5.42% in the 2017 financial year to 4.90% in the 2018 financial year, a reduction of 52 basis points. If the tactical support payments relating to the B2B franchisee were excluded from the calculation, the franchising operations margin would have been 5.04% for the year ended 30 June 2018. As the below table demonstrates, this reduction was predominantly in the last 6 months of the 2018 financial year. For the December 2017 half, the franchising operations segment result decreased by $4.91 million, or 2.9%, from the December 2016 half. The franchising operations margin was 5.57% for the December 2017 half, compared to 6.01% for the December 2016 half, a reduction of 44 basis points. The franchising operations segment result reduced further in the second half of the year, with a reduction of $17.08 million, or 12.9%, in the June 2018 half relative to the June 2017 half. This resulted in a franchising operations margin of 4.18% for June 2018 half, compared to 4.81% for the June 2017 half, a reduction of 63 basis points. The deterioration in the second half result and margin can primarily be attributed to:   a reduction in franchise fees by $15.83 million, or 4.4%, for the 2nd half of the year (1st half was actually higher by $1.42 million); and an increase in tactical support by $7.67 million, or 21.5%, for the 2nd half of the year, mainly relating to the tactical support provided to the B2B franchisee in Q4 (tactical support for the 1st half was up by $2.83 million). FRANCHISING OPERATIONS SEGMENT ANALYSIS BY HALF YEAR Half Year Ended 31 December Half Year Ended 30 June Full Year Ended 30 June 2015 2016 2017 2016 2017 2018 2016 2017 2018 # Franchised complexes in Australia 191 193 195 192 194 195 192 194 195 Franchising operations segment result $150.42m $172.13m $167.21m $117.73m $132.41m $115.33m $268.15m $304.53m $282.54m Franchisee aggregated sales revenue $2.72bn $2.86bn $3.00bn $2.61bn $2.75bn $2.76bn $5.33bn $5.62bn $5.76bn Franchising Operations Margin (%) 5.53% 6.01% 5.57% 4.51% 4.81% 4.18% 5.03% 5.42% 4.90% HARVEY NORMAN HOLDINGS LIMITED | ANNUAL REPORT 2018 23 DIRECTORS’ REPORT (CONTINUED) OPERATING AND FINANCIAL REVIEW (continued) Franchising Operations Segment (continued) Franchisee Sales Revenue Underpins the Franchising Operations Segment Headline Australian franchisee aggregated sales revenue increased 2.6%, or $144.28 million, to $5.76 billion for the year ended 30 June 2018 from $5.62 billion in the prior year. Comparable Australian franchisee aggregated sales revenue increased 2.2% to $5.72 billion for FY18. Sales made by franchisees in Australia do not form part of the financial results of the consolidated entity. Retail sales in Harvey Norman®, Domayne® and Joyce Mayne® in Australia are made by independently owned franchisee businesses that are not consolidated with the consolidated entity’s results. Australian franchisee aggregated sales revenue is reported to the market as it is a key indicator of the performance of the franchising operations segment. performance of the franchising operations segment. Key Property Statistics and the Impact of the Housing Market on Retail Spending Spending on household goods is fundamentally driven by population growth, household income, consumer confidence and activity in the residential property market. Population growth presently remains robust with the Australian resident population increasing by 400,000 in the 12 months to 30 June 2018 (Australian Bureau of Statistics, cat 3101.0) and the Australian population reached 25 million people in August 2018. Looking ahead, national population growth is expected to remain solid, with the Australian resident population projected to reach 26.5 million by the end of FY22 (BIS Economics forecast). Victoria and NSW will account for the majority of the increase. With the transition from the end of the mining investment boom coming to an end, other states should also see a recovery in resident inflows as economic conditions improve. Over 400,000 new jobs were added between December 2016 and December 2017, the most in 12 years (Commsec Chief Economist Craig James, AFR, 25-28 Jan 2018). The majority of these (just over 300,000) were full time positions, a reversal of the trend in recent years. This shift has helped absorb some of the spare capacity in the labour market, with the unemployment rate falling to 5.4% at 30 June 2018 from 5.8% in the first calendar quarter of 2017 (Australian Bureau of Statistics cat 6202.0) and underemployment rate dropping back to 8.3% at May 2018 from a high of 8.9% in February 2017 (Australian Bureau of Statistics cat 6202.0). Furthermore the participation rate at 65.5% is at the highest level since 2011 (ANZ research paper titled ‘Quick Reaction Australia – another strong jobs report’ 14 December 2017). Moving forward, the volume of renovation activity is forecast to grow by 3.2% in 2019, 5.7% in 2020, and then a further 0.9% in 2021 taking the total value of the renovations market to $35.57 billion (Housing Industry association Renovations Roundup Dec 2017). Although conditions remain somewhat challenging for households with household income rising by only 1.9% in 2017 and house prices now declining in the major capital cities, consumers remain optimistic about the outlook, with the ANZ-Roy Morgan confidence index recording a net positive outlook (as at 30 June 2018) for the next twelve months. 24 DIRECTORS’ REPORT (continued) OPERATING AND FINANCIAL REVIEW (continued) HARVEY NORMAN® THE CONNECTED SMART HOME The Connected Smart Home category continues to grow, with Harvey entertainment experience has also encouraged growth in Norman®, Domayne® and Joyce Mayne® franchisees leading the way franchisees’ audio sales, with minimalistic wireless speakers in high with the latest technological innovations including advancements demand and providing great value to their customers. in smart technology and design, inventive ways of cooking the traditional family meal, TVs with cinematic sound and picture quality – culminating in the evolution of the Connected Smart Home. Voice activation has been a key feature of the Connected Smart Home this year. The launches of ‘Google Home’ and ‘Google Mini’ have brought the Smart Home category to the fore as these devices begin to demonstrate how the Connected Smart Home can work, fuelling growth in the connected categories of security, automation and entertainment. Voice assisted devices are expected to take the Smart Home to the next level and will aspire to seamlessly integrate a consumer’s connected life to their place of abode. Franchisees’ audio-visual category has seen strong growth over the past year, with the latest designs and advancements in picture technology in large-screen televisions making a significant contribution. With more and more consumers desiring ‘king-sized’ screens and undeniably sharper picture quality, the impending launch of the 4K Satellite broadcast is the next evolution of television, and is expected to deliver unprecedented resolution, colour depth and contrast and higher refresh rates than ever before. Harvey Norman® franchisees will be heavily involved in the launch of the 4K broadcast in Australia and franchisees have cleverly positioned themselves as the premium 4K UHD TV destination. Franchisees intend to showcase the 4K broadcast capabilities in-store to give their customers the ultimate immersive viewing experience. The demand for a cinematic-quality home The latest innovations in smart technology have generated growth in the Home Appliance category, with flexible and internet-connected refrigeration leading the way. The increase in demand for self- cleaning appliances and desire for a healthier lifestyle has propelled their cooking range throughout the year, while franchisees continue to have a leading market share in fully-automatic coffee machines. Harvey Norman® franchisees bucked the trend in the flat laptop market, where franchisees led the way and demonstrated solid growth in the laptop category on the back of the recent push towards Modern PCs. The strong demand for online gaming and the rapid rise of ‘E-Sports’ continues to fuel the awareness of gaming and the growth in sales of gaming PCs, accessories and content throughout 2018. The Smartphone category continued to grow strongly and there was significant growth in portable audio with advances in Bluetooth speakers and headphones. Franchisees continue to maintain solid partnerships with leading global designer brands and expect this growth to continue throughout the 2019 financial year. As their consumers continue to live a more mobile and active life, franchisees strive to ensure that their product offering meets this insatiable demand. The need to be ‘thinner, lighter, faster’ continues with customers’ upgrading to keep up with the latest trends. HARVEY NORMAN HOLDINGS LIMITED | ANNUAL REPORT 2018 25 DIRECTORS’ REPORT (continued) OPERATING AND FINANCIAL REVIEW (continued) A BETTER CUSTOMER EXPERIENCE O2O STRATEGY The Online-to-Offline (O2O) Strategy of Harvey Norman®, Domayne® and Joyce Mayne® franchisees continues to develop and enhance the service offering to their customers. The O2O Strategy is well positioned to mitigate any potential disruptions and has been further enhanced over the 2018 financial year. Franchisees are committed to delivering a seamless experience to their customers with the introduction, upgrade or enhancement of the following initiatives: • LivePerson – LivePerson is a digital service platform that gives customers the ability to communicate with Harvey Norman® under whichever channel they desire, whether that be email, SMS, Apple Business Chat, WhatsApp, Facebook Messenger or Livechat. This platform also facilitates after hours and augmented customer support during peak trading periods to respond to commonly asked questions and queries using AI conversational bots. LivePerson brings together the AI and automations necessary to provide a great customer experience across multiple touch points at scale, along with services such as order status updates and reservation changes. These services allow customers of Harvey Norman® franchisees to message in the same “time-shifted” way they message friends and family, moving in and out of conversations to multi-task or go on about their day. Push notifications and history allow the consumer to continue on their own time. • Near Real-Time Inventory – Providing customers with accurate and up-to-date stock information confirming their local franchisee has the product they are interested in purchasing. • Quick Reserve – Allowing customers to quickly reserve a product and know that product will be available when they arrive at their franchised complex. • 2-Hour Click and Collect – At the heart of the Harvey Norman O2O strategy, Click & Collect is a convenient and popular way to shop with over 80% of customer’s orders notified in under 2 hours. • Improved Expert Reviews – Franchisees have access to reports that provide unbiased editorial content and ratings on products, specifications, and user reviews to aid the customer in their selection process. • Improved Site Search – The Harvey Norman® online self-learning search algorithm provides customers with the most relevant and suitable product to assist the search process. • Furniture Collections – Enhancing the Harvey Norman® online Furniture pages to include collections to provide customers an enhanced online experience. Supporting the O2O strategy, several Customer Service initiatives were also introduced, upgraded or enhanced during the 2018 financial year including the following: • Harvey Norman® Voice continues to grow and resonates strongly with customers. This digital platform was created to provide enhanced one-on-one engagement with a cross-section of Harvey Norman® customers to obtain feedback prior to changing processes or investing in system enhancements. Listening to customers is central to the Customer First mindset. • Mobile First – As one of the first retailers in Australia to launch PWA (Progressive Web App) Harvey Norman® franchisees are utilising this cutting-edge technology to optimise the customer experience on mobile to engage and inspire customers and drive franchisee sales growth. • Store Location Management System - Provides a single source of truth across all information services for franchised complexes including location information, contact details, trading hours, and local events, allowing customers to easily obtain information about their nearest Harvey Norman® franchised complex. DELIVERY SERVICES AND FULFILMENT OPTIONS OF FRANCHISEES The delivery services and fulfilment options of franchisees are constantly evolving to provide a better and more seamless customer experience, right from simply booking a delivery at the time of purchase, to the installation of their product and the removal of any packaging – and everything in between. Taking advantage of the latest innovations in smart technology, franchisees are focused on the improvement of Last Mile delivery, specifically to provide products to customers, where, how and when they want the product. The delivery service offering has been enhanced over the 2018 financial year to offer a seamless experience to the customer with the introduction, upgrade and enhancement of the following initiatives: • Same Day and Scheduled Delivery – Enabling customers to order same day or scheduled delivery from franchised complexes located within all metropolitan areas as part of the Harvey Norman® O2O strategy. • Standard Delivery Offering – Enabling customers to choose the delivery service that best suits their needs. Whether customers prefer a quick ‘Store to Door’ drop-off, a ‘Delivery Plus’ for basic connection or a full ‘Premium Delivery’ service. • Bulky Good Deliveries – Franchisees are enhancing the way they communicate after purchase: creating digital delivery booking systems with timely notifications and real-time tracking of deliveries to the customer’s door. It’s all about getting the delivery experience right for each customer and giving them control over their delivery. • Home Installation – The development of an online platform to enhance the customer experience by recommending and connecting franchise customers with quality installation companies. • Branded Trucks – Customers will not only enjoy transparency of the delivery process but will also experience an enhanced service offering with clean branded trucks and uniformed drivers. • Pick Up from Warehouse – Customers can choose to pick up bulky goods from the warehouse immediately after the purchase. Customer pick-up areas at the warehouse are undergoing a major refit to accommodate the increase in customer demand. Courier and bike parking bays have been allocated to facilitate quicker pickup and delivery of goods to customers. 26 DIRECTORS’ REPORT (CONTINUED) OPERATING AND FINANCIAL REVIEW (continued) Review of the Property Segment Composition of the Property Portfolio The robust property portfolio was valued at $2.86 billion as of 30 June 2018 and still continues to be the consolidated entity’s driving point of difference and competitive advantage in the Australian market. With emerging or restructured competitors – both big or small, online or physical – the resilient investment property portfolio keeps us a step-ahead and ready to respond to the evolving and dynamic needs of consumers. The physical complexes provide the flexible, large footprint needed to showcase the best on offer from global brands and demonstrate the maximum capabilities of those products to integrate and connect our busy day-to-day lives. As at 30 June 2018, total property assets amounted to over 62% of the consolidated entity’s total asset base of $4.58 billion. Growth in the property portfolio was mainly due to the continued solid market conditions in the large-format retail sector delivering capital appreciation during the year, the concerted focus on completing the Flagship strategy of the consolidated entity and the acquisition and refurbishment of other investment properties in Australia. The following tables represent the composition of property segment assets at each balance date and the number of owned and leased retail use properties as at 30 June 2018. TOTAL PROPERTY SEGMENT ASSETS AS AT 30 JUNE Investment properties Owner-occupied land & buildings in New Zealand, Singapore, Slovenia, Ireland & Australia 2016 2 $2.046bn 2017 2018 $2.242bn $2.429bn $389.80m $413.85m $432.46m Joint venture assets TOTAL PROPERTY SEGMENT ASSETS OWNED & LEASED RETAIL USE PROPERTIES AS AT 30 JUNE 2018 # of owned retail use properties # of leased retail use properties $2.05m $2.66bn $2.54m $2.86bn $2.54m $2.44bn Total 195 39 5 1 13 2 13 16 95 18 5 - 1 - - - 100 21 - 1 12 2 13 16 119 165 284 Australia: Franchised complexes New Zealand Slovenia Croatia Ireland Northern Ireland Singapore Malaysia TOTAL Net Property Revaluation Adjustments The investment property portfolio in Australia and properties held in joint venture entities are subject to a semi-annual review to fair market value. At each reporting period, one-sixth of the investment property portfolio is independently valued with the remaining five-sixths reviewed for fair value by Directors. The entire portfolio is independently valued every three years. During the year ended 30 June 2018, thirty-seven (37) sites within the investment property portfolio in Australia were independently valued, representing 28.5% of the total number of sites and 22.6% of the fair value of the investment property portfolio in Australia. The balance of the portfolio was reviewed for comparability resulting in the preparation of internal valuations for twenty-one (21) additional sites. The valuation for the current year resulted in a net increase of $51.65 million relating to investment properties in Australia compared to a net increase of $107.38 million in the previous year. The prior year figure had included the impact of rezoning potential to medium-density residential for a property in NSW. NET PROPERTY REVALUATION ADJUSTMENTS AS AT 30 JUNE RECORDED IN THE INCOME STATEMENT (Net Property Revaluation Increment) RECORDED IN EQUITY (Asset Revaluation Reserve) ($ million) AUSTRALIA NEW ZEALAND SLOVENIA SINGAPORE IRELAND TOTAL 2016 2017 2018 2016 2017 2018 $47.79m $107.38m $51.65m - $1.12m - $0.57m - - - - $0.67m - - - - - - $7.61m $16.03m $9.72m $0.04m $2.96m $0.08m $1.31m - - - $0.66m $2.76m $48.36m $108.05m $51.65m $8.96m $20.11m $13.22m HARVEY NORMAN HOLDINGS LIMITED | ANNUAL REPORT 2018 27 DIRECTORS’ REPORT (CONTINUED) OPERATING AND FINANCIAL REVIEW (continued) Review of the Financial Position of the Consolidated Entity The consolidated entity has tangible property assets of $2.86 billion, representing 63% of the total asset base of $4.58 billion. Total assets increased by 9.3%, or $387.90 million, to $4.58 billion as at 30 June 2018, from $4.19 billion in the previous year. The value of the investment property portfolio increased by $187.64 million, or 8.4%, to $2.43 billion as at 30 June 2018 primarily due to the net property revaluation increment of $51.65 million during the current year and the acquisition of other investment property assets during the current year. Cash and cash equivalents increased by $90.32 million relative to the previous year. Property plant and equipment assets increased by $35.23 million, or 5.6%, to $660.34 million due to the development of the Flagship store at Tallaght, Dublin, capital appreciation in the freehold properties located offshore and the refurbishment and upgrades of the company-operated Flagship stores and Flagship complex during the year to finalise the consolidated entity’s Flagship strategy. Total liabilities increased by $262.87 million, or 19.1%, to $1.64 billion as at 30 June 2018 from $1.38 billion in the prior year mainly due to higher utilisation of the Syndicated Facility and other external borrowings to fund development and expansion during the year. The consolidated entity consistently reports a solid net asset base, with robust growth of 4.4% during the year, or an increase of $125.03 million, to $2.94 billion as at 30 June 2018 from $2.81 billion as at 30 June 2017. 28 DIRECTORS’ REPORT (CONTINUED) OPERATING AND FINANCIAL REVIEW (continued) Net Debt to Equity Ratio The overall debt levels of the consolidated entity remain within an acceptable range, with a low net debt to equity ratio of 25.50% as at 30 June 2018 compared to a ratio of 22.59% as at 30 June 2017. Net debt comprises total interest-bearing loans and borrowings, net of cash and cash equivalents. Solid Cash Flows and Operating Cash Conversion Ratio Pleasingly, cash and cash equivalents increased by $90.32 million relative to prior year, with substantial growth in net cash flows from operating activities by $29.03 million, or 6.8%, to $454.17 million for the year ended 30 June 2018. This was primarily achieved by an increase in net receipts from franchisees by $64.58 million, or 7.3%, to $947.06 million during the year. Net receipts from franchisees are affected by the movement in the aggregate amount of financial accommodation provided to franchisees for the current year relative to the movement in the prior year. During the 2018 financial year the movement in the aggregate amount of financial accommodation provided to franchisees was lower than the movement in the aggregate amount of financial accommodation provided in the prior year. This reduction was in line with a reduction in the inventory reserves held by franchisees during the 2018 financial year relative to the 2017 financial year. There was a reduction in the net cash financing outflows by $219.02 million during the 2018 year primarily due to the proceeds received from increased borrowings of the Syndicated Facility to fund the acquisition and refurbishment of investment properties and property, plant and equipment assets. This was offset by higher investing cash flows by $104.72 million to fund expansion, growth and refurbishments and upgrades of existing capital assets. The consolidated entity’s operating cash conversion ratio, calculated as operating cash flows before net interest and tax paid as a proportion of EBITDIA (excluding property revaluations), is strong with an operating cash conversion rate of 97.6% for the 2018 financial year, an increase of 720 basis points on the cash conversion rate of 90.4% for the 2017 financial year. Capital Management Policy create long-term sustainable value for shareholders; The objective of the consolidated entity’s capital management policy is to:   maintain optimal returns to shareholders and benefits to other stakeholders;   source the lowest cost of available capital; and prevent the adverse outcomes that can result from short-term decision making. The Capital Management Policy stipulates a net debt-to-equity target for the consolidated entity of less than 50%. The capital structure of the consolidated entity consists of:    debt, which includes Interest-Bearing Loans and Borrowings disclosed in Notes 18 and 21 of this report; Cash and cash equivalents disclosed in Note 28(a); and Equity attributable to equity holders of the parent, comprising ordinary shares, reserves and retained profits as disclosed in Notes 24, 25 and 26 respectively. The consolidated entity’s borrowings consist primarily of bank debt provided by a syndicate of ten banks (including each of the “Big 4” Australian Banks). Concentration risk is minimised by staggering facility renewals and utilising a range of maturities of up to 3 years. HARVEY NORMAN HOLDINGS LIMITED | ANNUAL REPORT 2018 29 DIRECTORS’ REPORT (CONTINUED) OPERATING AND FINANCIAL REVIEW (continued) Outlook The Flagships that have been launched to date have outperformed expectations. In the first half of the 2019 financial year, we complete the launch of 1 Flagship store in each of the 8 countries in which we, or our franchisees, operate. The Wairau Park Flagship store in New Zealand was launched on 30 June 2018 and is already exceeding expectations. We were disappointed we couldn’t launch our Auburn Flagship complex in Australia and our Zagreb Flagship store in Croatia for the start of the 2019 financial year. These will be completed and launched by the end of September 2018 and, looking at the results of our other Flagship stores, we are confident they will deliver similar results. Each of the Flagship stores is designed to provide an unrivalled customer experience in terms of store design, customer service and premium product offering. The consolidated entity is looking to capitalise on the solid performance of the overseas Harvey Norman® branded company-operated stores and is actively exploring new sites with an expectation to open up to 18 company-operated stores within the next two years. Particular emphasis has been placed on South East Asia with the expectation of opening 9 new stores in Malaysia over the next two years. In Australia, 1 Joyce Mayne® franchised complex in the Northern Territory will open in the 2019 financial year. The consolidated entity will continue to invest in our people, our brands and in the development and enhancement of the tools provided to our franchisees to enable them to seamlessly service their customers. Summary of Key Business Risks The Board is optimistic about the consolidated entity’s future trading performance but acknowledges that there are several factors that may pose a risk to the achievement of the business strategies and future financial performance as outlined above. Every business faces risks with the potential to impair its ability to execute its strategy or achieve its financial objectives. There are a number of key risks, both specific to the Harvey Norman® integrated retail, franchise, property and digital system and external risks, for example the macroeconomic environment, over which the consolidated entity has no control. The consolidated entity acknowledges the existence of these risks, and in the first instance seeks to identify and understand individual risks, and then – to the extent possible – manage and/or minimise risks. Deterioration in macroeconomic conditions resulting in declining consumer sentiment: The consolidated entity has a significant exposure to the economy of the countries in which it operates. There are a number of general economic conditions, including interest and exchange rate movements, overall levels of demand, housing market dynamics, wage growth, employment, economic and political instability and government fiscal, monetary and regulatory policies, that can impact the level of consumer confidence and discretionary retail spending, thereby affecting revenue from sales to customers and franchise fees. The consolidated entity seeks to reduce its exposure to these risks by closely monitoring both internal and external sources of information that provide insights into any changes in demand within the economies in which it operates. Competition resulting in a loss of market share for franchisees in Australia and company- operated stores in overseas markets: The integrated retail, franchise, property and digital system, and diverse category mix assists in maintaining the consolidated entity’s competitive position. Market consolidation and/or acquisition may result in further competition and changes to market share. Franchisees in Australia and company-operated stores in 7 overseas regions operate across a number of categories in the strongly performing Home and Lifestyle market. Diversity mitigates the risk from existing and potential single-category competitors. Emergence of competitors in new channels: The Harvey Norman® Omni Channel Strategy provides customers of franchisees with a diverse, consistent and distinctive Harvey Norman® customer experience through a range of channels. The Harvey Norman® Omni Channel Strategy integrates retail, online, mobile, and social channels. The online operations of franchisees in Australia and the company-operated online operations overseas continue to grow. The digital platform provides new opportunities for growth and new ways to embrace and engage with customers. Data analytics are an important element of the Harvey Norman® Omni Channel Strategy, and are utilised to improve customer experience. The Harvey Norman® Omni Channel Strategy sets the Harvey Norman® brand apart from other online and digital competitors as the digital, physical complex and distribution channels are fully integrated, providing customers of franchisees with a multitude of engagement options to meet their needs. The Harvey Norman® Omni Channel Strategy, supported by the retail property portfolio of the consolidated entity, makes the Harvey Norman® brand a strong competitor in the market. Economic downturn in the property sector leading to softening property asset values, falling market rentals and reduction of future capital returns on property assets: With a property portfolio of $2.86 billion, the consolidated entity is exposed to potential reductions in commercial property values. The consolidated entity has a selective and prudent acquisition and development strategy and maintains high-quality complexes and a solid, dynamic, complementary tenancy mix in order to maximise the profitability of the property segment. 30 DIRECTORS’ REPORT (CONTINUED) OPERATING AND FINANCIAL REVIEW (continued) Summary of Key Business Risks (continued) Counterparty risks of service providers: This risk relates to the inability of service providers to meet their obligations, including compliance obligations. The consolidated entity closely monitors and evaluates the performance of external service providers to mitigate counterparty risk. Counterparty risk associated with the mining camp accommodation joint ventures: Commodity prices are inherently volatile. The provision of services to the mining industry is inherently risky. The consolidated entity has continued its joint ventures with counterparties to provide mining camp accommodation services. The risk in respect of mining camp accommodation joint ventures includes the ability of counterparties to meet financial and other obligations under mining camp accommodation joint venture agreements. The consolidated entity closely monitors and evaluates the performance of counterparties of the mining camp accommodation joint ventures by monitoring compliance with joint venture agreements; adopting a prudent and conservative approach to the review of mining camp accommodation cash flows, including future cash flow projections; and ensuring that an adequate level of security is maintained for any funds advanced to mining camp accommodation joint ventures. Counterparty risk associated with the KEH Partnership retail joint venture: The consolidated entity is a party to a joint venture with counterparties to provide online and retail services. The risk in respect of this retail joint venture includes the ability of counterparties to meet financial and other obligations under the retail joint venture agreement. The consolidated entity closely monitors and evaluates the performance of counterparties of the retail joint venture by monitoring compliance with the joint venture agreement; adopting a prudent and conservative approach to the review of online and retail cash flows, including future cash flow projections; and ensuring that an adequate level of security is maintained for any funds advanced to the retail joint venture. Compliance by franchisees with franchise agreements: The risk relates to franchisees acting in breach of the terms and conditions of their respective franchise agreements. The consequences of non-compliance may include damage to the brand, fines or other sanctions from regulators, and/or a reduction in franchise fees received from franchisees. The franchisor continually monitors and evaluates the financial and operating performance of each franchisee to actively assess compliance with executed franchise agreements. Instances of non-compliance are promptly addressed to protect the Harvey Norman® brand and/or intellectual property of the franchisor. Information Technology (“IT”) security and data security breaches: This risk relates to the potential failure in IT security measures resulting in the loss, destruction or theft of customer, supplier, financial or other commercially-sensitive information including intellectual property. This has the potential to adversely affect our operating results which would lead to lawsuits, damage the reputation of the Harvey Norman® brand, and/or create other liabilities for the consolidated entity. There are a number of key controls either planned or already in place, including an ongoing program of investment in cyber security software; the implementation, maintenance and supervision of operational policies and contracts intended to preserve the confidentiality and integrity of IT systems; regular independent audit and review of IT security; and the ongoing review, practise and updating of a response plan relating to IT systems and incidents. HARVEY NORMAN HOLDINGS LIMITED | ANNUAL REPORT 2018 31 DIRECTORS’ REPORT (CONTINUED) REMUNERATION REPORT (AUDITED) Letter from the Chairman of the Remuneration Committee Dear Shareholders The consolidated entity has delivered a solid result for the 2018 financial year achieving an underlying profit before tax of $532.54 million, representing a marginal reduction of 0.96%, from the unprecedented, record-breaking underlying result of the 2017 financial year of $537.70 million. The reported net profit before tax for the 2018 financial year of $530.17 million was at 83% of the previous year’s record net profit of $639.81 million. The consolidated entity delivered a strong increase of 4.4% in the net asset base for shareholders to $2.94 billion as at 30 June 2018. The profit before tax (PBT) return on net assets was 18.05% for the 2018 financial year. Each of the executive directors have a significant shareholding in the Company, which provides alignment of the executive management with that of shareholders. The directors and other members of the key management personnel team are committed to growing the business and creating long-term sustainable value for all stakeholders of the consolidated entity. Remuneration Outcomes The achievements of the year are reflected in the remuneration outcomes.  Executive directors achieved 81.26% of their 2018 Short Term Incentive (“STI”) targets for performance against a balanced scorecard of measures. Return on Net Assets (“RONA”) of 17.15% for the year resulted in a probable vesting of 40% for the long-term incentives granted in December 2017, under the Tranche 3 of the 2016 LTI Plan. Tranche 2 of the 2016 LTI Plan, granted in November 2016 was reassessed for probable vesting to 60%, down from 80% last year. Tranche 1 of the 2016 LTI Plan, granted in November 2015 was reassessed for probable vesting, remaining unchanged at 60%. The 2015 LTI Plan PCI, assessed in the 2017 financial year to be $3,455,800, was paid to Executive Directors on 4 July 2018. The total at risk compensation expense was $782,864 or 17.3% less than the expense in the 2017 financial year. The total “take-home” pay was $557,648 or 4.7% more than the 2017 financial year, due to the payout of incentives from previous financial periods.       Changes to Remuneration The Framework The Board regularly reviews the executive remuneration structure to ensure it continues to drive shareholder value and to attract and retain the talent needed to achieve its strategic objectives. The framework for the executive remuneration structure remained essentially the same as was in place for the 2017 financial year comprised as follows:   Benchmarked fixed remuneration; At risk short term incentives in the form of performance cash incentives, subject to a balanced scorecard of measures relevant to the given financial year; At risk long term incentives in the form of performance rights as issued under the terms of the 2016 LTI Plan; The use of RONA as the measure of financial performance captures the effect of all impairments and write-downs, apart from property revaluation increments and decrements; and The evaluation of the performance of the executive director cohort as a team.    In respect of the STI, entry at the base level of financial achievement was required before the non-financial performance conditions became activated. This framework was introduced in 2016 to align the executive remuneration structure to best practice with the focus on long-term sustainable returns. 2018 STI Plan The Board adopted an STI Plan for Executive Directors relevant to the desired outcomes of the 2018 financial year. The STI Plan is subject to both financial conditions (calculated exclusively in respect of RONA) as to a 50% weighting and non-financial conditions as to 50% weighting, whereby minimum financial performance conditions (i.e. entry-level achievement) must be achieved prior to the activation of the non- financial performance conditions. With respect to the 2018 STI Plan, the minimum financial performance conditions (entry-level to the 2018 STI Plan) was set at 15% of RONA and the maximum achievement level set at 18% of RONA. Graduated achievement points were set from 15% RONA to 18% RONA. The Board is confident that the remuneration policies continue to support the financial and strategic goals of the consolidated entity. On behalf of the Board, I invite you to review the full report and thank you for your continued interest. Yours sincerely K.W GUNDERSON-BRIGGS Remuneration Committee Chairman 32 DIRECTORS’ REPORT (CONTINUED) REMUNERATION REPORT (AUDITED) (continued) Contents of the 2018 Remuneration Report This remuneration report for the year ended 30 June 2018 outlines the remuneration arrangements of the consolidated entity in accordance with the requirements of the Corporations Act 2001 (Cth), as amended, (the “Act”) and its regulations. This information has been audited as required by section 308(3C) of the Act. The remuneration report is presented under the following sections: Introduction Executive contractual arrangements 1. 2. Remuneration principles and strategy 3. Remuneration governance 4. Remuneration mix - target 5. Details of short-term and long-term incentive plans 6. Performance and executive remuneration outcomes in FY18 7. 8. Non-executive director remuneration arrangements 9. Relationship between remuneration and the performance of the Company 10. Compensation of key management personnel 11. Additional disclosures relating to options, performance rights and shares 12. 13. Loans to key management personnel and their related parties 14. Other transactions and balances with key management personnel and their related parties ‘Take-Home Pay’ for key management personnel Directors of the Company 1. Introduction The remuneration report details the remuneration arrangements for key management personnel (“KMP”) who are defined as those persons having authority and responsibility for planning, directing and controlling the major activities of the consolidated entity, directly or indirectly, including any director (whether executive or otherwise) of the consolidated entity. Details of KMP of the Company and consolidated entity during the 2018 financial year are set out below. Unless otherwise indicated, the individuals were KMP for the entire financial year. For the purposes of this report, the term "executive" includes the chief executive officer (“CEO”), executive directors and senior executives of the consolidated entity. Key Management Personnel Position Term as KMP Executive Directors Gerald Harvey Executive Chairman Full financial year Kay Lesley Page Executive Director & Chief Executive Officer Full financial year John Evyn Slack-Smith Executive Director & Chief Operating Officer Full financial year David Matthew Ackery Executive Director Full financial year Chris Mentis Executive Director, Chief Financial Officer & Company Secretary Full financial year Non-Executive Directors Christopher Herbert Brown OAM Non-Executive Director Michael John Harvey Non-Executive Director Kenneth William Gunderson-Briggs Non-Executive Director (Independent) Graham Charles Paton AM Non-Executive Director (Independent) Senior Executives Martin Anderson General Manager – Advertising Thomas James Scott General Manager – Property Gordon Ian Dingwall Chief Information Officer Full financial year Full financial year Full financial year Full financial year Full financial year Full financial year Full financial year Frank Robinson General Manager – Technology & Entertainment Commenced 1 August 2017 Haydon Ian Myers General Manager – Home Appliances Resigned 31 July 2017 Lachlan Roach Rob Nelson Ajay Calpakam General Manager – Home Appliances Commenced 1 October 2017 General Manager – Audio Visual Resigned 31 July 2017 General Manager – Audio Visual Commenced 1 August 2017 HARVEY NORMAN HOLDINGS LIMITED | ANNUAL REPORT 2018 33 DIRECTORS’ REPORT (CONTINUED) REMUNERATION REPORT (AUDITED) (continued) 2. Remuneration Principles and Strategy The executive remuneration strategy of the consolidated entity in 2018 is designed to attract, motivate and retain high performing individuals and align the interests of executives with shareholders. The relevant factors in determining the suitability of a board member, including the executive directors, are integrity, business savvy, an owner-oriented attitude and a deep genuine interest in the business of the consolidated entity. In applying these principles to the consolidated entity: a) Business savvy requires a deep understanding of one or more of the sectors of retail, property, franchising and digital. b) Integrity requires a level of fundamental honesty, candour and frankness in dealing with colleagues, regulators and other third parties. Integrity necessarily requires a director to bring an open mind and independent judgment to the discussion of any matter of concern to the Board. c) An owner orientation or perspective of an owner requires the individual to either have: i. ii. "skin in the game" by holding, controlling or benefitting from a significant parcel of shares where the financial interests of the director are aligned with the long term beneficial interest of shareholders; or a perspective of advising owners of businesses and understanding that wealth generation is derived from the building of business interests that create long term sustainable value. Directors with an owner orientation retain an open mind to consider diverse views but are not strictly beholden to the whims of fashionable thinking and are able to form their own views as to what constitutes best practice in corporate governance. d) Interest in and time to do the job means: i. ii. the person has an executive role, meaning that the person's career is based on job performance at the company; or the individual has a limited number of outside interests (i.e. the person is not a professional non-executive director), In both cases, the individual has an independence of mind and outlook. Applying these criteria to the current Board, the Board is satisfied that each director, including the executive directors, bring to the Board the necessary skills and attributes specified. The following table illustrates how the remuneration strategy of the consolidated entity in 2018 aligns with the strategic direction and links remuneration outcomes to performance. 34 DIRECTORS’ REPORT (CONTINUED) REMUNERATION REPORT (AUDITED) (continued) 2. Remuneration Principles and Strategy (continued) Objective of the consolidated entity in 2018 To be recognised as a leader in the sectors in which the consolidated entity operates and build long-term sustainable value for shareholders Remuneration strategy linkages to objectives of the consolidated entity in 2018 Align the interests of executives with shareholders The remuneration framework incorporates “at risk” components, through STI and LTI plans Long-term performance is assessed against financial performance conditions calculated exclusively in respect of RONA Attract, motivate and retain high performing individuals Longer-term remuneration encourages retention and multi-year performance focus Short-term performance is assessed against a suite of financial and non- financial measures relevant to the success of the consolidated entity in 2018 and generating returns for shareholders The remuneration offering is competitive for companies of a similar sector, size and complexity Component Vehicle Purpose Link to Performance Fixed Remuneration Comprises base salary, superannuation contributions and other benefits To provide competitive fixed remuneration set with reference to role, market and experience Consolidated entity and individual performance are considered during the annual remuneration review Short-Term Incentive (STI) Paid as cash as performance cash incentive (PCI) Rewards executives for their contribution to achievement of consolidated entity outcomes (1) 50% subject to financial conditions, of which: (a) Entry point at 15% RONA; (b) Maximum achievement at 18% RONA; (c) Graduated achievement points from 15% RONA to 18% RONA as follows; (i) 50% satisfied at 15.0% RONA (ii) 60% satisfied at 15.5% RONA (iii) 70% satisfied at 16.0% RONA (iv) 80% satisfied at 16.5% RONA (v) 85% satisfied at 17.0% RONA (vi) 90% satisfied at 17.5% RONA (vii) 100% satisfied at 18.0% RONA (2) 50% subject to non-financial conditions. Vesting of LTI performance rights is conditional upon achievement, in aggregate, of Minimum RONA over the 2018, 2019 and 2020 financial years of 16% (for 20% vesting) with full vesting (i.e. 100%) achieved at 20% RONA Long-Term Incentive (LTI) Awards under the LTI Plan are granted in the form of performance rights, being a right to acquire one ordinary share in the Company at nil exercise price Rewards executives for their contribution to the financial performance of the consolidated entity and the effective utilisation of net assets to generate wealth for shareholders Where Return on Net Assets (“RONA”) means the fraction APBT (annual net profit before income tax excluding property revaluation increments or decrements) Net Assets (excluding non-controlling interests) at the close of the preceding financial year 3. Remuneration Governance Remuneration Committee The remuneration committee is responsible for making recommendations to the Board on the remuneration arrangements for executive directors and non-executive directors (“NEDs”). The remuneration committee assesses the appropriateness of the nature and amount of remuneration of NEDs and executives on a periodic basis by reference to relevant employment market conditions, with the overall objective of ensuring maximum stakeholder benefit from the retention of a high performing director and executive team. In determining the level and composition of executive remuneration, the remuneration committee has not engaged external consultants to provide independent advice or make any remuneration recommendation in respect of the 2018 financial year. The remuneration committee comprises three NEDs, two of whom are independent NEDs. Further information on the committee’s role, responsibilities and membership is located on the website: www.harveynormanholdings.com.au. HARVEY NORMAN HOLDINGS LIMITED | ANNUAL REPORT 2018 35 DIRECTORS’ REPORT (CONTINUED) REMUNERATION REPORT (AUDITED) (continued) 3. Remuneration Governance (continued) Remuneration Approval Process The Board approves the remuneration arrangements of the chief executive officer (“CEO”) and executives and all awards made under the long-term incentive plans of the Company, following recommendations from, and certain determinations by, the remuneration committee. The Board sets the aggregate remuneration of NEDs, subject to shareholder approval. The remuneration committee approves, having regard to the recommendations made by the CEO, the level of the short term incentive (“STI”) pool, in the form of performance cash incentive (“PCI”), for executive directors. No director participated in deliberations about, or decisions, in respect of the remuneration of that director. No executive director was present at any meeting of directors which considered any long term incentive plan or short term incentive plan of the Company, and no executive director voted on those matters. 4. Remuneration Mix - Target For the 2018 financial year, the executive remuneration framework comprised fixed remuneration, STI and LTI as outlined below. The consolidated entity aims to reward executives with a level and mix of remuneration appropriate to their position and responsibilities, while being market competitive. The policy of the consolidated entity is to position fixed remuneration around the median of comparator groups. Target total remuneration is intended to provide the opportunity to earn top quartile rewards for outstanding performance. During the 2018 financial year, remuneration benchmarking was undertaken with reference to both sector peers and comparator groups comprising companies of a similar financial size. Remuneration levels are considered annually through a remuneration review which considers market data and the performance of the consolidated entity and individual. The following summarises the target remuneration mix of the executives. Fixed remuneration Target STI Target LTI CEO Executive Chairman 64% 78% 24% 12% 22% Other Executive Directors 52%-57% 31%-34% 11%-14% 5. Details of Short-Term and Long-Term Incentive Plans The extent to which the financial condition and non-financial conditions are satisfied will be documented in a Performance Report and an Internal Audit Report, for consideration by the Remuneration Committee in accordance with the terms and conditions of the short-term and long-term incentive plans. The Performance Report is a report prepared for, and on behalf of, the CEO addressing whether each weighted non-financial condition has been satisfied or, where relevant, the extent (expressed as a percentage) to which each weighted non-financial condition has been satisfied. The Internal Audit Report is a report prepared by the Chief Internal Auditor of the Company, which is an objective appraisal of the Performance Report and documents the findings of the audit of the Performance Report. 2018 STI Plan The consolidated entity operates an annual STI program available to executive directors and awards a performance cash incentive (PCI) subject to the achievement of clearly defined measures, targets, initiatives and conditions. 36 DIRECTORS’ REPORT (CONTINUED) REMUNERATION REPORT (AUDITED) (continued) 5. Details of Short – Term and Long – Term Incentive Plans (continued) 2018 STI Plan Who participates? Executive directors How is the STI delivered? STI awards, in the form of a cash bonus or performance cash incentive (“PCI”), have been made When is the STI paid? What is the 2018 STI opportunity? annually to executive directors in order to align remuneration with the achievement of a number of performance measures, targets and initiatives covering both financial and non-financial, corporate and individual measures of performance. The payment of the 2018 STI Plan PCI to an executive under the 2018 STI Plan is to be made on 28 September 2018, or as soon as reasonably practicable after that date, subject to the satisfaction of 2018 STI Plan Performance Conditions and 2018 STI Plan Service Conditions. Executive directors, excluding the Executive Chairman, have a target STI opportunity of between 38% to 64% of fixed remuneration. The target STI opportunity is set at a level so as to provide sufficient incentive to executive directors to achieve the operational targets and such that the cost to the consolidated entity is reasonable in the circumstances. For the year ended 30 June 2018, the aggregate maximum amount of 2018 STI Plan PCI, potentially payable, was $2,800,000 as follows: (i) (ii) (iii) (iv) (v) in respect of Gerald Harvey, nil; in respect of Kay Lesley Page, $800,000; in respect of John Evyn Slack-Smith, $700,000; in respect of David Matthew Ackery, $700,000; and in respect of Chris Mentis, $600,000. What are the STI performance conditions for FY2018? Actual STI payments awarded to each executive depend on the extent to which specific measures, targets, initiatives and conditions for the 2018 financial year (“STI Targets”) are met. STI Targets cover financial and non-financial measures of performance. The primary weighting of the 2018 STI Plan Performance Conditions are as follows: (a) (b) as to 50% - the Financial Condition; and as to 50% - the Non-Financial Conditions (a) 50% Financial Condition (b) 50% Non-Financial Conditions RONA [Aggregate APBT  Aggregate Net Assets] as defined in Section 2 above was selected as the STI performance measure as it:  drives profitable use of assets and provides an alignment between comparative shareholder return and reward for executive directors; and  minimises the effects of market cycles The Non-Financial Conditions are assessed in respect of the year ended 30 June 2018 and include the following non-financial measures in:  Customer experience (12.50%);  Improve productivity (5%);  Flagship Strategy (20%); and  Franchisee learning, development and growth (12.50%). The Financial Condition is calculated in respect of the year ended 30 June 2018 and will be achieved as follows:  Entry point at 15% RONA  Maximum achievement level at 18% RONA  Graduated achievement points from 15% RONA to 18% RONA as follows: (i) 50% satisfied at 15.0% RONA (ii) 60% satisfied at 15.5% RONA (iii) 70% satisfied at 16.0% RONA (iv) 80% satisfied at 16.5% RONA (v) 85% satisfied at 17.0% RONA (vi) 90% satisfied at 17.5% RONA (vii) 100% satisfied at 18.0% RONA How is performance assessed? On an annual basis, after consideration of reports and performance against STI Targets, the remuneration committee makes a final determination of the amount of STI to be paid to the CEO and other executive directors. The extent to which the Financial Condition is satisfied will be documented in the Performance Report and an Internal Audit Report, for consideration by the Remuneration Committee in accordance with the terms and conditions of the 2018 STI Plan. The Remuneration Committee (acting on behalf of the Company) may at any time, in its absolute discretion, decrease the amount of the PCI which is, or may become, payable to an executive under the 2018 STI Plan by serving a written notice to the relevant executive at any time before the payment date. Details of the 2018 STI Targets and levels of achievement in the 2018 financial year are set out in pages 40 and 41 of this report. What happens if an executive leaves? For "Bad Leavers" (defined by the Company as resignation or termination for cause), any STI is forfeited, unless otherwise determined by the Board. For any other reason, the Board has discretion to award STI on a pro-rated basis taking into account time and the current level of performance against performance hurdles. HARVEY NORMAN HOLDINGS LIMITED | ANNUAL REPORT 2018 37 DIRECTORS’ REPORT (CONTINUED) REMUNERATION REPORT (AUDITED) (continued) 5. Details of Short – Term and Long – Term Incentive Plans (continued) Tranche 3 FY2018 of the 2016 LTI Plan LTI grants are made annually to executive directors in order to align remuneration with the creation of sustainable shareholder value over the long-term. Who participates? Executive directors which have an impact on the performance of the consolidated entity against the relevant long-term performance measures. How is the LTI delivered? What is the LTI opportunity? Shareholders at the AGM held on 24 November 2015 approved the terms and conditions of the 2016 LTI Plan that permitted the grant of performance rights to executive directors, being a right to acquire one ordinary share in the Company at nil exercise price, in three separate tranches in the 2016, 2017 and 2018 financial years. The granting of performance rights under the 2016 LTI Plan replaced the previous LTI Plan (that was in place up to the 2015 financial year) that had previously delivered long-term incentives as a performance cash incentive (PCI). A performance right is the right to acquire one ordinary share in the Company at nil exercise price. No amount is payable in respect of the grant of a performance right. If exercised, each performance right will be converted into one ordinary share in the Company. Executive directors have a target LTI opportunity of between 17% to 28% of fixed remuneration. A total of 400,000 performance rights under Tranche 3 FY2018 of the 2016 LTI Plan were granted to executive directors on 1 December 2017. The performance rights were independently valued by Mercer Consulting (Australia) Pty Limited at grant date with a fair value of $3.34 per entitlement share granted under Tranche 3 on 1 December 2017, based on a share price of $4.02. The fair value was derived from a discounted cash flow technique where the value of the performance right is the face value of the share at grant date less the present value of the dividends expected to be paid on the share but not received by the holder during the vesting period. Subject to the satisfaction of the financial performance condition (calculated exclusively based on RONA) and service conditions of the 2016 LTI Plan, the total fair value of Tranche 3 performance rights amounted to $1,336,000 in aggregate. Tranche 3 FY2018 Grant date Vesting date First exercise date Last exercise date Key Dates 1 December 2017 31 December 2020 1 January 2021 30 June 2023 Executive Director Number Granted Fair Value at Grant Date Fair Value of Performance Rights Gerald Harvey Kay Lesley Page John Evyn Slack-Smith David Matthew Ackery Chris Mentis Total 62,500 112,500 75,000 75,000 75,000 400,000 $3.34 $3.34 $3.34 $3.34 $3.34 $208,750 $375,750 $250,500 $250,500 $250,500 $1,336,000 What are the performance conditions for Performance conditions are deemed to be an essential component of all variable reward entitlements. Tranche 3 of the 2016 LTI Plan? 38 The proposed allocation of performance rights will be subject to service conditions and financial performance conditions. The Board (after consideration of the recommendations of the Remuneration Committee), may, in its discretion, impose additional non-financial performance conditions which must be satisfied as a condition of exercise of any performance rights by the Grantee. 100% Financial Condition (viii) With the exception of the service condition, the Board has resolved that the conditions in respect of the achievement of Tranche 3 of the 2016 LTI Plan will be all financial, based exclusively on RONA, where Tranche 3 RONA means the fraction: Tranche 3 Aggregate APBT  Tranche 3 Aggregate Net Assets, expressed as a percentage. Where:  Tranche 3 Financial Years means the financial years ending 30 June 2018, 2019 and 2020;  Tranche 3 Aggregate APBT means the aggregate amounts of the annual net profit before income tax of the consolidated entity for each of the Tranche 3 Financial Years, but excluding property revaluation increments or decrements;  Tranche 3 Aggregate Net Assets means the amounts of the net assets of the consolidated entity, excluding non-controlling interests, as at each of 30 June 2017, 2018 and 2019 as described in the annual report of the consolidated entity in respect of each of the Tranche 3 Financial Years. Full vesting of the Tranche 3 performance rights is conditional upon achievement, of Tranche 3 RONA of at least 20%, with a lesser vesting as set out in the table below: Tranche 3 RONA Achieved Less than 16% 16% 17% 18% 19% 20% Tranche 3 % of Performance Rights that will become exercisable Nil 20% 40% 60% 80% 100% DIRECTORS’ REPORT (CONTINUED) REMUNERATION REPORT (AUDITED) (continued) 5. Details of Short – Term and Long – Term Incentive Plans (continued) Tranche 3 FY2018 of the 2016 LTI Plan (continued) What are the service conditions of Tranche 3 of the 2016 LTI Plan? The service condition in respect of a Grantee in respect of performance rights of that Grantee under a Tranche will be deemed satisfied if at the time of exercise of the performance rights: How will the 2016 LTI Plan be administered? (a) (b) (c) the Grantee has not resigned or provided notice of resignation of employment from the Company, except in order to retire from the workforce; the Company has not terminated the employment of the Grantee for cause; and the Board has not determined that the performance rights should lapse as a result of any fraud, gross misconduct or conduct of the Grantee which brings the Company into disrepute. The LTI Plan will be administered by the Board. The Board has the right (after consideration of any recommendations of the Remuneration Committee), and subject to the Listing Rules and applicable legal requirements, to:  make all determinations required under the LTI Plan; and  waive or modify the application of all or any service conditions, non-financial terms and conditions of the LTI Plan and performance rights granted under the LTI Plan as the Board considers appropriate. How is performance assessed? Level of satisfaction of LTI Plan conditions is monitored by the Remuneration Committee, with assistance from internal audit, each year, with the vesting outcomes ultimately determined at the end of the three year performance period. The LTI award for each of the financial years will be measured over a three year period, with Tranche 3 of the 2016 LTI Plan measured over the period for financial years ending 30 June 2018, 30 June 2019 and 30 June 2020. When does the LTI vest? Performance rights granted under Tranche 3 of the 2016 LTI Plan will vest on 31 December 2020, subject to meeting the financial performance conditions in FY2018, FY2019 and FY2020 and service conditions, and will be capable of exercise between 1 January 2021 and 30 June 2023. How are potential LTI awards treated on termination? How are potential LTI awards treated if a change of control occurs? In general, where a participant resigns or is terminated for cause before a performance right vests, all unvested performance rights will lapse. The Board (after consideration of the recommendations of the Remuneration Committee of the Board), has discretion to determine the treatment of any unvested performance rights where a participant ceases employment in “good leaver” circumstances (such as by reason of death, disability or otherwise in circumstances approved by the Board). In the event of fraud, dishonesty or breach of obligations, the Board may make a determination, including lapsing an award of performance rights, to ensure no unfair benefit is obtained by a participant. In the event of a takeover, scheme of arrangement or other transaction which may result in a person becoming entitled to exercise control over the Company, the Board has a discretion to determine whether any unvested performance rights should vest, lapse or become subject to different performance conditions, or whether any resulting shares that are subject to a restriction period, should become unrestricted. Are executives eligible for dividends? Performance rights will not carry any voting or dividend rights. Performance rights are non- transferable except in limited circumstances or with the consent of the Board. If exercised, each performance right will be converted into one ordinary share in the Company. Executives will then be entitled to dividends on those ordinary shares after conversion. 6. Performance and Executive Remuneration Outcomes in FY18 6A. Actual Remuneration Earned by Key Management Personnel (KMP) in FY18 The compensation expensed in respect of KMP in FY18 is set out in Table 1 (for Directors) and Table 2 (for Executives) on pages 48 and 49 of this report. This provides shareholders with a view of the remuneration earned by KMP for performance in the 2018 financial year and the value of any LTIs expensed during the financial year. The ‘take-home pay’ for KMP Directors of the Board of the Company, representing the benefits paid to each Director during the year ended 30 June 2018, or as soon as practicable after that date, is set out in Section 12 of the Remuneration Report on page 54. 6B. Fixed Remuneration Executive contracts of employment do not include any guaranteed base pay increases. The fixed remuneration of executive directors is reviewed annually by the remuneration committee. The process consists of a review of Company, business unit and individual performance, relevant comparative remuneration internally and externally and, where appropriate, external advice independent of management. The fixed component of the remuneration of executive directors is disclosed in Table 1 on page 48 of this report. HARVEY NORMAN HOLDINGS LIMITED | ANNUAL REPORT 2018 39 DIRECTORS’ REPORT (CONTINUED) REMUNERATION REPORT (AUDITED) (continued) 6C. Actual Performance Against Short Term Incentive (STI) Measures A combination of financial and non-financial measures is used to measure performance for STI awards. The aggregate maximum amount of 2018 STI Plan PCI potentially payable was $2,800,000. 50% of the STI is dependent on the satisfaction of financial performance conditions (exclusively based on RONA) and 50% is measured against the achievement of set non-financial measures. Actual performance against those measures is as follows for FY18: (a) 85.00% achievement of the 50% Financial Condition (score of 42.50%) = $1,190,000 payable for FY18 (b) 77.52% achievement of the 50% Non-Financial Conditions (score of 38.76%) = $1,085,280 payable for FY18 The total 2018 STI Plan PCI payable in respect of the 2018 financial year is $2,275,280, representing a total achievement of 81.26% of the maximum 2018 STI PCI as shown in the tables below. The payment of the 2018 STI Plan PCI is to be made on or before 28 September 2018, or as soon as reasonably practicable after that date, subject to the satisfaction of the 2018 STI Plan Service Conditions. Financial Conditions of the 2018 STI Plan Achievement of 50% Financial Condition Calculation of FY18 RONA FY 18 APBT (net profit excluding property revaluation) FY 17 Net Assets (excluding non-controlling interests) $478.53 million $2,790.46 million = 17.15% RONA Gerald Harvey Kay Lesley Page John Evyn Slack-Smith David Matthew Ackery Chris Mentis Total Maximum 2018 STI PCI % Financial Conditions 2018 STI PCI Financial Condition 2018 RONA % % Financial Condition Satisfied 2018 STI PCI Payable Nil $800,000 $700,000 $700,000 $600,000 n/a 50% 50% 50% 50% Nil n/a n/a Nil $400,000 17.15% 85.0% (42.5% score) $340,000 $350,000 17.15% 85.0% (42.5% score) $297,500 $350,000 17.15% 85.0% (42.5% score) $297,500 $300,000 17.15% 85.0% (42.5% score) $255,000 $2,800,000 $1,400,000 $1,190,000 For the 2018 financial year $1,400,000, being 50% of the aggregate maximum 2018 STI Plan PCI of $2,800,000, was subject to the RONA financial condition. The entry point for the financial condition is at 15% RONA with the maximum achievement level at 18% RONA, with graduated achievement points from 15% RONA to 18% RONA. RONA for the 2018 financial year was 17.15% and therefore 85.00% of the financial condition in respect of the 2018 STI Plan PCI was satisfied. Non-Financial Conditions of the 2018 STI Plan Achievement of 50% Non-Financial Conditions For the 2018 financial year $1,400,000, being 50% of the aggregate maximum 2018 STI Plan PCI of $2,800,000, was subject to set non-financial performance measures including:  Customer experience (12.50%);  Improve productivity (5%);  Flagship Strategy (20%); and  Franchisee learning, development and growth (12.50%) Maximum 2018 STI PCI % Non-Financial Conditions 2018 STI PCI Non- Financial Conditions % Non-Financial Conditions Satisfied 2018 STI PCI Payable Gerald Harvey Kay Lesley Page John Evyn Slack-Smith David Matthew Ackery Chris Mentis Total Nil $800,000 $700,000 $700,000 $600,000 $2,800,000 n/a 50% 50% 50% 50% Nil n/a Nil $400,000 77.52% (38.76% score) $310,080 $350,000 77.52% (38.76% score) $271,320 $350,000 77.52% (38.76% score) $271,320 $300,000 77.52% (38.76% score) $232,560 $1,400,000 $1,085,280 The Remuneration Committee had regard to certificates and reports from officers of the Company, other Board committees and management, including the Performance Report and Internal Audit Report, and noted that 77.52% of the non-financial performance hurdles for the 2018 STI Plan were substantially achieved. Based on a score of 50%, an amount of $1,085,280 representing 38.76% of the aggregate maximum STI amount attributable to the non-financial performance measures will become payable to executive directors. 40 DIRECTORS’ REPORT (CONTINUED) REMUNERATION REPORT (AUDITED) (continued) 6C. Actual Performance Against Short Term Incentive (STI) Measures (continued) Achievement of the Non-Financial Performance Conditions for the 2018 STI Plan are set out in the following table. Assessment of Non-Financial Conditions of the 2018 STI Plan Measure Target Customer Experience Grant licences to use tools to reinforce and enhance the "Shop with Confidence" Harvey Norman® brand positioning through the Customer Service Standards. Primary Weighting 12.5% Improve Productivity Implement productivity improvements that lead to either cost reductions or revenue improvement. 5.0% Initiatives and Conditions Each franchisee in a Harvey Norman® complex to achieve an aggregate satisfaction rating from customer experience surveys of no less than 50% for that complex in Australia (expected achievement of 75%) and, in aggregate, customer satisfaction rating of no less than 50% for company-operated stores in New Zealand (expected achievement of 75%). Each franchisee in Australia and company-operated stores in New Zealand to achieve a reduction in the number of total consumer complaints over the prior year. Full achievement of this initiative is at a 5% reduction in consumer complaints. Implement specified projects and develop the tools to support the “Shop With Confidence” brand positioning during FY2018. All stores in New Zealand to successfully complete the SAM Project by June 2018. Weighting of Initiatives & Conditions Achievement Score 60% 66.8% 5.01% 40% 0%1 0% 100% 100% 5.0% Flagship Strategy 20.0% A Flagship store strategy to be developed and opened in Ireland, Malaysia, Australia and New Zealand to position the Harvey Norman® brand to customers and suppliers for future growth Open a new Flagship store at Tallaght, Ireland Open a new Flagship store at IPC Shopping Centre, Malaysia Open a new Flagship franchised complex at Auburn, Australia Open a new Flagship store at Wairau Park, New Zealand 25% 25% 25% 25% 100% 100% 100% 100% 5.0% 5.0% 5.0% 5.0% Franchisee learning, development and growth Ongoing refinement of the 12.5% process by each franchisee that promotes and encourages measureable improvement in the knowledge and capability of the franchisee and their employees. Franchisees to identify and nominate a minimum number of 50 candidates to attend the “Franchisees in Training (FIT)” development course during FY2018. Achieve a participation rate of female FITs in the FIT course of no less than 40% for the courses run within the 2018 financial year. Achieve a successful completion rate of 75% by participants in the FIT course during FY2018. 30% 100% 3.75% 30% 0%2 0% 40% 100% 5.0% Total 50.0% 38.76% 1 Timetable for execution of specified projects not achieved 2 Achievement of 38% was 2 percentage points below threshold Service Conditions of the 2018 STI Plan The 2018 STI Plan Service Conditions will be deemed to be satisfied, if and only if, as at the relevant payment date being 28 September 2018:  the Executive has not resigned or provided notice of resignation of employment from the Employer, except in order to retire from the workforce; the Employer has not terminated the employment of the Executive for cause; or the Board has not determined that the incentives should be revoked or lapse as a result of any breach of the law, corrupt conduct, bribery, fraud, gross misconduct or conduct of the Executive which brings the Company or the Employer into disrepute.   HARVEY NORMAN HOLDINGS LIMITED | ANNUAL REPORT 2018 41 DIRECTORS’ REPORT (CONTINUED) REMUNERATION REPORT (AUDITED) (continued) 6D. Actual Performance Against Long-Term Incentive (LTI) Measures for Tranche 3 of the 2016 LTI Plan With the exception of the service condition, the Board has resolved that the conditions in respect of Tranche 3 of the 2016 LTI Plan will be all financial, based exclusively on RONA, where Tranche 3 RONA means the fraction Tranche 3 Aggregate APBT  Tranche 3 Aggregate Net Assets, expressed as a percentage. Tranche 3 of the 2016 LTI Plan will be measured over a three-year period for financial years ending 30 June 2018, 30 June 2019 and 30 June 2020. The financial condition of Tranche 3 will be wholly satisfied if the cumulative RONA over the measurement period is 20%, with lesser vesting as set out in the LTI Plan conditions on pages 38 and 39. Tranche 3 will not vest if the RONA is less than 16% on a cumulative basis over the three-year measurement period. A total of 400,000 performance rights were granted to executive directors on 1 December 2017. The performance rights were independently valued by Mercer Consulting (Australia) Pty Limited at a fair value of $3.34 per entitlement share, based on a share price of $4.02 as at grant date, resulting in a total fair value of Tranche 3 of $1,336,000. The Remuneration Committee had regard to certificates and reports from officers of the Company, other Board committees and management, including the Performance Report and Internal Audit Report, and has estimated, based on the available evidence, that the financial performance condition for Tranche 3 of the 2016 LTI Plan will be 40% achieved by the end of the vesting period and 40% of the estimated fair value of the performance rights will meet the performance condition. The probability of 40% vesting has been estimated based on the calculation of Tranche 3 RONA for the 2018 financial year of 17.15% (see table below for the calculation). A 17.15% RONA for FY18 resulted in a 40% vesting for year 1 of the three-year measurement period. A 40% vesting probability will result in an estimated cumulative Tranche 3 fair value of $534,400 over the vesting period. An amount of $100,526 has been recognised as remuneration to executive directors and expensed in the income statement on a straight-line basis for the year ended 30 June 2018. Achievement of 100% Financial Condition for Tranche 3 of 2016 LTI Plan Calculation of FY18 RONA FY 18 APBT (net profit excluding property revaluation) FY 17 Net Assets (excluding non-controlling interests) $478.53 million $2,790.46 million = 17.15% RONA Number of Performance Rights Fair Value per Right Fair Value of Performance Rights Probability of Vesting % Estimated Value of Tranche 3 2016 LTI Plan to Vest Tranche 3 LTI Plan Expense in FY2018 Gerald Harvey Kay Lesley Page John Evyn Slack-Smith David Matthew Ackery Chris Mentis Total 62,500 112,500 75,000 75,000 75,000 $3.34 $3.34 $3.34 $3.34 $3.34 $208,750 $375,750 $250,500 $250,500 $250,500 40% 40% 40% 40% 40% $83,500 $150,300 $100,200 $100,200 $100,200 $15,706 $28,273 $18,849 $18,849 $18,849 400,000 $1,336,000 $534,400 $100,526 Subject to the satisfaction of the financial performance condition and service conditions of the 2016 LTI Plan, Tranche 3 will vest on 31 December 2020. The exercise price for each performance right will be nil. If exercised, each performance right will be converted into one ordinary share of the Company. Unexercised performance rights, will lapse, irrespective of whether they have become exercisable on 1 July 2023 or:   such earlier date specified by the Board; the Board determines the performance rights granted to a Grantee should lapse, as a result of any fraud, gross misconduct or conduct by that Grantee which brings the Company into disrepute; or the Board determines the relevant requirements in relation to performance rights granted to a Grantee, including performance conditions and a service condition, have not and are incapable of being met.  6E. Reassessment of Tranche 2 of the 2016 LTI Plan PCI Performance Conditions and Expense Recognised in FY18 In 2017, a total of 400,000 performance rights were granted to executive directors on 28 November 2016 under Tranche 2 of the 2016 LTI Plan. The performance rights were independently valued by Mercer Consulting (Australia) Pty Limited at a fair value of $3.87 per entitlement share, based on a share price of $4.73 as at grant date, resulting in a total fair value of Tranche 2 of $1,548,000. Tranche 2 of the 2016 LTI Plan will be measured over a three-year period for financial years ending 30 June 2017, 30 June 2018 and 30 June 2019. In the 2017 Remuneration Report, it was reported that the estimated achievement of Tranche 2 of the 2016 LTI Plan would have been 80% by the end of the vesting period and that 80% of the estimated fair value of the performance rights would meet the performance condition. The probability of 80% vesting had been estimated based on the calculation of Tranche 2 RONA for the 2017 financial year of 19.94%. 42 DIRECTORS’ REPORT (CONTINUED) REMUNERATION REPORT (AUDITED) (continued) 6E. Reassessment of Tranche 2 of the 2016 LTI Plan PCI Performance Conditions and Expense Recognised in FY18 (continued) The financial performance condition of Tranche 2 is subject to reassessment during each of the Tranche 2 Financial Years meaning the financial years ending 30 June 2017, 2018 and 2019. A reassessment of the Tranche 2 Aggregate APBT and Tranche 2 Aggregate Net Assets for the 2017 and 2018 financial years resulted in a revised RONA for the two-year aggregated period of 18.51%. A revised aggregated RONA of 18.51% for the Tranche 2 Financial Years has resulted in a revised probability of vesting of 60%. A decrease in the vesting probability from 80% in the prior year to 60% in the current year will result in an estimated cumulative expense in respect of Tranche 2 of $928,800, a decrease of $309,600 from the previous cumulative Tranche 2 expense of $1,238,400. Reassessment of 100% Financial Condition for Tranche 2 of 2016 LTI Plan Calculation of Aggregated RONA for Tranche 2 Financial Years (2017 and 2018) Tranche 2 Aggregated APBT (2017 + 2018) Tranche 2 Aggregated Net Assets (2016 + 2017) $1,010.28 million $5,456.76 million = 18.51% RONA Probability Vesting % in FY17 Tranche 2 Fair Value in FY17 Revised Probability Vesting in FY18 Revised Tranche 2 Fair Value in FY18 Decrease due to Reassessment Tranche 2 LTI Plan Expense in FY2018 Gerald Harvey Kay Lesley Page John Evyn Slack-Smith David Matthew Ackery Chris Mentis Total 80% 80% 80% 80% 80% $193,500 $348,300 $232,200 $232,200 $232,200 $1,238,400 60% 60% 60% 60% 60% $145,125 ($48,375) $261,225 ($87,075) $174,150 ($58,050) $174,150 ($58,050) $174,150 ($58,050) $37,706 $67,871 $45,247 $45,247 $45,247 $928,800 ($309,600) $241,318 6F. Reassessment of Tranche 1 of the 2016 LTI Plan PCI Performance Conditions and Expense Recognised in FY18 In 2016, a total of 400,000 performance rights were granted to executive directors on 30 November 2015 under Tranche 1 of the 2016 LTI Plan. The performance rights were independently valued by Mercer Consulting (Australia) Pty Limited at a fair value of $3.52 per entitlement share, based on a share price of $4.08 as at grant date, resulting in a total fair value of Tranche 1 of $1,408,000. Tranche 1 of the 2016 LTI Plan will be measured over a three-year period for financial years ending 30 June 2016, 30 June 2017 and 30 June 2018. In the 2016 Remuneration Report, it was reported that the estimated achievement of Tranche 1 of the 2016 LTI Plan would have been 40% by the end of the vesting period and that 40% of the estimated fair value of the Tranche 1 performance rights will meet the performance condition. The probability of 40% vesting had been estimated based on the calculation of Tranche 1 RONA for the 2016 financial year of 17.56%. The financial performance condition of Tranche 1 is subject to reassessment during each of the Tranche 1 Financial Years meaning the financial years ending 30 June 2016, 2017 and 2018. A reassessment of the Tranche 1 Aggregate APBT and Tranche 1 Aggregate Net Assets for the 2016, 2017 and 2018 financial years has resulted in a revised RONA for the three-year aggregated period of 18.21%. A revised aggregated RONA of 18.21% for the Tranche 1 Financial Years results in a probability of vesting of 60%. This revised probability of vesting is consistent with the FY 2017 estimate vesting probability of 60%. The cumulative expense in respect of Tranche 1 is $844,800, consistent with the previous cumulative Tranche 1 expense reported in the 2017 Remuneration Report. Reassessment of 100% Financial Condition for Tranche 1 of 2016 LTI Plan Calculation of Aggregated RONA for Tranche 1 Financial Years (2016, 2017 and 2018) Tranche 1 Aggregated APBT (2016 + 2017 + 2018) Tranche 1 Aggregated Net Assets (2015 + 2016 + 2017) $1,455.69 million $7,993.84 million = 18.21% RONA Probability Vesting % in FY17 Tranche 1 Fair Value in FY17 Revised Probability Vesting in FY18 Revised Tranche 1 Fair Value in FY18 Adjustment due to Reassessment Tranche 1 LTI Plan Expense in FY2018 Gerald Harvey Kay Lesley Page John Evyn Slack-Smith David Matthew Ackery Chris Mentis Total 60% 60% 60% 60% 60% $132,000 $237,600 $158,400 $158,400 $158,400 $844,800 60% 60% 60% 60% 60% $132,000 $237,600 $158,400 $158,400 $158,400 $844,800 - - - - - - $42,714 $76,883 $51,255 $51,255 $51,255 $273,362 HARVEY NORMAN HOLDINGS LIMITED | ANNUAL REPORT 2018 43 DIRECTORS’ REPORT (CONTINUED) REMUNERATION REPORT (AUDITED) (continued) 6G. Reassessment of the 2015 LTI Plan PCI Performance Conditions and Expense Recognised in FY18 In previous years up to the 2015 financial year, the LTI was delivered as a performance cash incentive (PCI). The 2015 LTI Plan, adopted by the Board during the 2015 financial year, remained in existence for the assessment of the 2015 LTI award granted to executive directors. The LTI award for the 2015 financial year was measured against financial and non-financial performance conditions measured in the 2015 financial year and reassessed in the 2016 and 2017 financial years, subject to the terms and conditions of the 2015 LTI Plan. In the 2017 financial year, the Remuneration Committee had regard to certificates and reports from officers of the Company, other Board committees and management, including the Performance Report and Internal Audit Report, and had reassessed the probable achievement of the 2015 LTI Plan PCI to be 93.4%, an increase of 3.4% from 90.0% in 2016, due to a further 3.4% achievement of set non-financial performance conditions thereby increasing the non-financial performance conditions score from 40% to 43.4%. A revised assessment of 93.4% vesting probability resulted in the vesting of 93.4% of the 2015 LTI Plan PCI and a payment due of $3,455,800, with a payable date of on or about 30 June 2018, subject to the achievement of the 2015 LTI Plan Service Conditions. An amount of $863,359 has been recognised as remuneration to executive directors in respect of the 2015 LTI Plan PCI and expensed in the income statement for the year ended 30 June 2018. The aggregate value of the 2015 LTI Plan PCI of $3,455,800 was paid on 4 July 2018. Revised 2015 LTI PCI Payable in FY18 2015 LTI Plan PCI Expense in FY2018 $438,980 $109,671 $821,920 $205,339 $747,200 $186,672 $747,200 $186,672 $700,500 $175,005 $3,455,800 $863,359 Reassessment of the 2015 LTI Plan Performance Conditions and Cumulative Expense Maximum 2015 LTI Plan PCI Revised Probability Vesting in FY18 Gerald Harvey Kay Lesley Page $470,000 $880,000 John Evyn Slack-Smith $800,000 David Matthew Ackery $800,000 Chris Mentis Total $750,000 $3,700,000 93.4% 93.4% 93.4% 93.4% 93.4% 44 DIRECTORS’ REPORT (CONTINUED) REMUNERATION REPORT (AUDITED) (continued) 6H. Summary of Performance and Executive Remuneration Outcomes in FY18 Remuneration Component Maximum Amount Achievement Score Amount Payable Vesting Period 2018 Remuneration Amount 2017 Remuneration Amount Value of STI and LTI Disclosed in 2018 and 2017 Remuneration Reports 2018 STI Plan PCI Financial conditions (50%) Non-financial conditions (50%) Total 100% 2017 STI Plan PCI Financial conditions (50%) Non-financial conditions (50%) Total 100% Total Short-Term Incentive PCI $1,400,000 $1,400,000 $2,800,000 $1,175,000 $1,175,000 $2,350,000 85.00% 77.52% 42.50% 38.76% 100% 88.2% 50% 44.1% $1,190,000 $1,085,280 $2,275,280 $1,175,000 $1,036,236 $2,211,236 1 Year 1 Year $1,190,000 $1,085,280 $2,275,280 - - - - - - $1,175,000 $1,036,236 $2,211,236 $2,275,280 $2,211,236 Tranche 3 (FY18) of 2016 LTI Plan Financial conditions (100%) $1,336,000 Non-financial conditions (0%) Total 100% - $1,336,000 Tranche 2 (FY17) of 2016 LTI Plan Financial conditions (100%) $1,548,000 Non-financial conditions (0%) Total 100% - $1,548,000 Tranche 1 (FY16) of 2016 LTI Plan Financial conditions (100%) $1,408,000 Non-financial conditions (0%) Total 100% - $1,408,000 40% - 60% - 60% - 40% - 60% - 60% - $534,400 4 Years $100,526 - (Yr 1 of 4) $534,400 - $100,526 - - - $928,800 4 Years $241,318 $235,834 - (Yr 2 of 4) - - $928,800 $241,318 $235,834 $844,800 4 Years $273,362 $326,785 - (Yr 3 of 4) - - $844,800 $273,362 $326,785 Total LTI Performance Rights 2015 LTI Plan PCI Financial conditions (50%) Non-financial conditions (50%) Total 100% 2014 LTI Plan PCI Financial conditions (20%) Non-financial conditions (80%) Total 100% Total LTI Performance Cash Incentive Total Value of STI and LTI $1,850,000 $1,850,000 $3,700,000 $740,000 $2,960,000 $3,700,000 100% 86.8% 50% 43.4% $1,850,000 4 Years $1,605,800 (Yr 4 of 4) $3,455,800 60% 98.13% 12% 78.5% $444,000 4 Years $2,904,500 $3,348,500 $615,206 $562,619 $462,184 $401,175 $863,359 - - - $462,183 $464,118 $926,301 $110,924 $725,629 $836,553 $863,359 $1,762,854 $3,753,845 $4,536,709 The total value of STI and LTI expensed in the Income Statement for the 2018 financial year and disclosed in this remuneration report was $3.75 million compared to $4.54 million expensed in the 2017 financial year, a decrease of $0.78 million or 17.3%, relative to the previous year. This reduction correlates with the reduction in reported profit before tax by 17.1% during the year, from $639.81 million in the 2017 financial year to $530.17 million in the 2018 financial year. HARVEY NORMAN HOLDINGS LIMITED | ANNUAL REPORT 2018 45 DIRECTORS’ REPORT (CONTINUED) REMUNERATION REPORT (AUDITED) (continued) 7. Executive Contractual Arrangements Remuneration arrangements for KMP are formalised in employment agreements. Details of these contracts are below. Chief Executive Officer The CEO, Ms. K.L. Page is employed under a rolling contract. fixed remuneration of $2,100,000 per annum; Under the terms of the present contract the CEO’s total potential employment cost is $3,275,750 comprised of:   maximum STI opportunity in respect of the year ended 30 June 2018 of $800,000; and  maximum LTI opportunity in respect of the year ended 30 June 2018 of $375,750. The CEO’s termination provisions are as follows: CEO’s Termination Provisions Notice Period Payment in Lieu of Notice Treatment of STI on Termination Treatment of LTI on Termination Employer-initiated termination 5 weeks 5 weeks Pro-rated for time and performance Board discretion Termination for serious misconduct None None Unvested awards forfeited Unvested awards forfeited Employee-initiated termination 5 weeks 5 weeks Unvested awards forfeited, subject to Board discretion Unvested awards forfeited, subject to Board discretion Minimum Shareholding Requirement There are no minimum shareholding requirements imposed on the CEO. Other KMPs All other KMPs have rolling contracts. Standard KMP Termination Provisions Notice Period Payment in Lieu of Notice Treatment of STI on Termination Treatment of LTI on Termination Employer-initiated termination 4-5 weeks 4-5 weeks Pro-rated for time and performance Board discretion Termination for serious misconduct None None Unvested awards forfeited Unvested awards forfeited Employee-initiated termination 4-5 weeks 4-5 weeks Unvested awards forfeited, subject to Board discretion Unvested awards forfeited, subject to Board discretion 8. Non-Executive Director Remuneration Arrangements Remuneration Policy The Board seeks to set aggregate remuneration at a level that provides the consolidated entity with the ability to attract and retain directors of the highest calibre, whilst incurring a cost that is acceptable to shareholders. The amount of aggregate remuneration sought to be approved by shareholders and the fee structure is reviewed annually against fees paid to NEDs of comparable companies. The Board considers published material from external sources and makes its own enquiries when undertaking the annual review process. The Company’s constitution and the ASX listing rules specify that the NED fee pool shall be determined from time to time by a general meeting. The latest determination was at the 2006 annual general meeting (AGM) held on 21 November 2006 when shareholders approved an aggregate NED pool of $1,000,000 per year. The Board will not seek any increase for the NED pool at the 2018 AGM. Structure The remuneration of NEDs consists of directors’ fees. NEDs do not receive retirement benefits, nor do they participate in any incentive programs. Each NED receives a fee for being a director of the Company. The structure of NED remuneration is separate and distinct from executive remuneration. The remuneration of NEDs for the years ended 30 June 2018 and 30 June 2017 are disclosed in Table 1 on page 48 of this report. 46 DIRECTORS’ REPORT (CONTINUED) REMUNERATION REPORT (AUDITED) (continued) 9. Relationship between Remuneration and the Performance of the Company The graphs below illustrate the Company’s performance for the past five financial years. Where: NPAT & NCI = net profit after tax & non-controlling interests APBT = net profit before tax excluding property revaluation adjustments STI PCI = short-term performance cash incentive LTI = long-term incentive EPS = earnings per share AT RISK REM = the sum of STI PCI & LTI HARVEY NORMAN HOLDINGS LIMITED | ANNUAL REPORT 2018 47 DIRECTORS’ REPORT (CONTINUED) REMUNERATION REPORT (AUDITED) (continued) 10. Compensation of Key Management Personnel TABLE 1: Compensation of Key Management Personnel Expensed for the Year Ended 30 June 2018 – Directors of Harvey Norman Holdings Limited: Short Term Benefits Salary & Fees Performance Cash Incentive Other Short Term Non- Monetary Benefits Post Employment Superannuation Long Term Incentives Other Performance Cash Incentive Performance Rights Long Service Leave (a) Total Remuneration % at risk Gerald Harvey Executive Chairman Kay Lesley Page Executive Director/CEO John Evyn Slack-Smith Executive Director/COO David Matthew Ackery Executive Director Chris Mentis Executive Director/CFO Michael John Harvey Non-Executive Director Christopher Herbert Brown Non-Executive Director 2018 2017 2018 2017 2018 2017 2018 2017 2018 2017 2018 2017 2018 2017 Kenneth William Gunderson-Briggs 2018 Non-Executive Director Graham Charles Paton Non-Executive Director 2017 2018 2017 719,551 746,620 2,062,925 2,064,922 1,229,951 1,230,384 1,211,951 1,212,384 897,533 905,799 54,795 54,795 132,420 132,420 158,788 173,377 132,420 132,420 - - 10,400 10,400 650,080 658,666 568,820 541,047 568,820 541,047 487,560 470,476 - - - - - - - - - - - - 18,000 18,000 - - - - - - - - - - - - 17,026 15,462 - - - - 32,418 24,585 - - - - - - - - 20,049 19,616 20,049 19,616 20,049 19,616 20,049 19,616 20,049 19,616 5,205 5,205 12,580 12,580 15,085 16,098 12,580 12,580 109,671 223,930 205,339 419,274 186,672 381,157 186,672 381,157 175,005 357,336 - - - - - - - - 96,126 87,909 173,027 158,237 115,351 105,491 115,351 105,491 115,351 105,491 - - - - - - - - - - - - 20,499 20,506 20,499 20,506 14,959 15,097 - - - - - - - - 955,797 1,088,475 3,128,446 3,336,177 2,141,342 2,298,201 2,141,342 2,298,201 21.5% 28.6% 32.9% 37.1% 40.7% 44.7% 40.7% 44.7% 1,742,875 44.6% 1,898,400 49.2% 60,000 60,000 145,000 145,000 173,873 189,475 145,000 145,000 - - - - - - - - Total for the 2018 Financial Year 2018 6,600,334 2,275,280 28,400 49,444 145,695 863,359 615,206 55,957 10,633,675 35.3% Total for the 2017 Financial Year 2017 6,653,121 2,211,236 28,400 40,047 144,543 1,762,854 562,619 56,109 11,458,929 39.6% (a) Table 1 includes the accrual for long service leave entitlements in respect of the years ended 30 June 2018 and 30 June 2017. The Chairman (G. Harvey) and Chief Executive Officer (K.L. Page) do not have a long service leave accrual as they have elected to forgo this employee entitlement. The listed Parent Company, Harvey Norman Holdings Limited, does not have any employees. HARVEY NORMAN HOLDINGS LIMITED | ANNUAL REPORT 2018 48 DIRECTORS’ REPORT (CONTINUED) REMUNERATION REPORT (AUDITED) (continued) 10. Compensation of Key Management Personnel (continued) TABLE 2: Compensation of Key Management Personnel Expensed for the Year Ended 30 June 2018 – Senior Executives of Harvey Norman Holdings Limited: Short Term Benefits Salary & Fees Performance Cash Incentive Other Short Term Non- Monetary Benefits Post Employment Superannuation Long Term Incentives Other Performance Cash Incentive Perfor- mance Rights Termination Benefits Long Service Leave Total Remuneration % at risk Thomas James Scott GM – Property Martin Anderson GM – Advertising Gordon Ian Dingwall Chief Information Officer Rob Nelson (a) GM – Audio Visual Ajay Calpakam (b) GM – Audio Visual Haydon Ian Myers (c) GM – Home Appliances Lachlan Roach (d) GM – Home Appliances Geoff Van Der Vegt (e) 2018 2017 2018 2017 2018 2017 2018 2017 574,804 521,160 295,936 362,438 464,951 430,384 28,496 342,384 2018 362,083 2017 2018 2017 - 33,252 393,183 2018 293,677 2017 2018 - - GM – Technology & Entertainment 2017 400,722 Frank Robinson (f) 2018 444,583 GM – Technology & Entertainment 2017 - Total for the 2018 Financial Year 2018 2,497,782 Total for the 2017 Financial Year 2017 2,450,271 - - - - - - - - - - - - - - - - - - - - - - - - - - 1,821 9,000 8,250 - - - 6,750 - - - 13,750 - - - 25,034 24,568 - - - - - - - 44,717 - - - 39,630 - - 20,049 19,616 21,828 21,394 20,049 19,616 1,671 19,616 20,049 - 1,671 19,616 15,037 - - 17,981 20,049 - 30,571 25,034 120,403 9,000 108,915 117,839 (a) (b) (c) (d) (e) (f) (g) resigned 31 July 2017 commenced 1 August 2017 resigned 31 July 2017 commenced 1 October 2017 resigned 31 May 2017 commenced 1 August 2017 this amount represents the cash payment of employee leave entitlements upon resignation - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - 40,680(g) - - - 103,385(g) - - - - 11,292 - - 9,580 8,686 4,932 6,041 7,749 7,173 - 5,706 6,035 - - 6,553 4,895 - - - 7,410 - 604,433 549,462 347,730 414,441 492,749 457,173 72,668 376,706 396,417 - 138,308 464,069 320,359 - - 469,625 485,792 - 144,065 40,601 2,858,456 11,292 34,159 2,731,476 - - - - - - - - - - - - - - - - - - - - HARVEY NORMAN HOLDINGS LIMITED | ANNUAL REPORT 2018 49 DIRECTORS’ REPORT (CONTINUED) REMUNERATION REPORT (AUDITED) (continued) 11. Additional Disclosures Relating to Options, Performance Rights and Shares TABLE 3: Options Granted to Executive Directors as Part of Remuneration: The table below discloses the number of share options granted to executive directors as remuneration during the year ended 30 June 2018 as well as the number of options that vested, were exercised or lapsed during the year. Share options do not carry any voting or dividend rights and can be exercised once the vesting conditions have been met until their expiry date. Options Granted as Remuneration During the Year Options Vested During the Year Unvested Options at Options Exercised During the Year 30 June 2018 Grant Number Value of Options Granted $ Number of Options Vested Value of Options Vested $ Number of Unvested Options Value of Unvested Options $ Number of Options Exercised Value of Options Exercised $ Remaining Unexercised Options at 30 June 2018 Number of Remaining Unexercised Options Value of Remaining Unexercised Options $ John Evyn Slack-Smith Chris Mentis Total - - - - - - - - - - - - - - - - - - - 567,000 $159,894 567,000 $159,894 1,134,000 $319,788 - - - - - - - - - Movement in option holdings during the year ended 30 June 2018: There were no share options issued pursuant to the 2010 Share Option Plan during the 2018 financial year. a) b) On 4 September 2017, J.E. Slack-Smith exercised 567,000 options over 567,000 shares representing his full entitlement in respect of the Third Tranche of Options, previously granted on 29 November 2012, at the exercise price of $1.827 per option. The total consideration paid by J.E. Slack-Smith was $1,035,909. c) On 8 March 2018, C. Mentis exercised 567,000 options over 567,000 shares representing his full entitlement in respect of the Third Tranche of Options, previously granted on 29 November 2012, at the exercise price of $1.827 per option. The total consideration paid by C. Mentis was $1,035,909. Movement in option holdings during the year ended 30 June 2017 a) On 3 March 2017, C. Mentis exercised 250,000 options over 250,000 shares representing his full entitlement in respect of the Second Tranche of Options, previously granted on 29 November 2011, at the exercise price of $2.0267 per option. The total consideration paid by C. Mentis was $506,675. b) On 23 March 2017, J.E. Slack-Smith exercised 250,000 options over 250,000 shares representing his full entitlement in respect of the Second Tranche of Options, previously granted on 29 November 2011, at the exercise price of $2.0267 per option. The total consideration paid by J.E. Slack-Smith was $506,675. TABLE 4: Option Holdings of Key Management Personnel for the Year Ended 30 June 2018 1 July 2017 Granted as Remuneration Options Exercised Net Change Other 30 June 2018 Total Exercisable Not Exercisable Vested as at 30 June 2018 John Evyn Slack-Smith Chris Mentis Gerald Harvey Total 567,000 567,000 1,134,000 - - - - (567,000) (567,000) (1,134,000) - - - - - - - - - - - - - - - - Apart from the KMPs disclosed above, no other director or senior executive had any other option holdings during the year ended 30 June 2018. During the 2018 financial year, J.E. Slack-Smith and C. Mentis each exercised 567,000 options over 567,000 shares in respect of the Third Tranche of Options that had vested on 31 December 2015 and were exercisable from 1 January 2016 to 30 June 2018. There were no vested options remaining as at 30 June 2018. HARVEY NORMAN HOLDINGS LIMITED | ANNUAL REPORT 2018 50 DIRECTORS’ REPORT (CONTINUED) REMUNERATION REPORT (AUDITED) (continued) 11. Additional Disclosures Relating to Options, Performance Rights and Shares (continued) TABLE 5: Performance Rights Granted to Executive Directors as Part of Remuneration: The table below discloses the number of performance rights granted to executive directors as remuneration during the year ended 30 June 2018 as well as the number of performance that vested, were exercised or lapsed during the year. Performance rights do not carry any voting or dividend rights and can be exercised once the vesting conditions have been met until their expiry date. Performance Rights Granted as Remuneration During Year Performance Rights Vested During the Year Unvested Performance Rights at 30 June 2018 Performance Rights Exercised During the Year Number of Rights Granted Value of Performance Rights Granted $ Number of Performance Rights Vested Value of Performance Rights Vested $ Gerald Harvey Kay Lesley Page 62,500 $208,750 112,500 $375,750 John Evyn Slack-Smith 75,000 $250,500 David Matthew Ackery 75,000 $250,500 Chris Mentis Total 75,000 $250,500 400,000 $1,336,000 - - - - - - - - - - - - - Movement in performance rights during the year ended 30 June 2018: Number of Unvested Performance Rights Value of Unvested Performance Rights $ 187,500 $670,625 337,500 $1,207,125 225,000 $804,750 225,000 $804,750 225,000 $804,750 1,200,000 $4,292,000 Number of Performance Rights Exercised - - - - - - a) A total of 400,000 performance rights under Tranche 3 FY2018 of the 2016 LTI Plan were granted to executive directors on 1 December 2017. The performance rights were independently valued by Mercer Consulting (Australia) Pty Limited at grant date with a fair value of $3.34 per entitlement share granted under Tranche 3 on 1 December 2017, based on a share price of $4.02. The fair value was derived from a discounted cash flow technique where the value of the performance right is the face value of the share at grant date less the present value of the dividends expected to be paid on the share but not received by the holder during the vesting period. Subject to the satisfaction of the financial performance condition (calculated exclusively based on RONA) and service conditions of the 2016 LTI Plan, the total fair value of Tranche 3 performance rights amounted to $1,336,000 in aggregate. b) As at 30 June 2018, a total of 1,200,000 performance rights under Tranche 1 FY2016 (as to 400,000 performance rights), Tranche 2 FY2017 (as to 400,000 performance rights) and Tranche 3 FY2018 (as to 400,000 performance rights) of the 2016 LTI Plan were outstanding, unvested and not capable of exercise. HARVEY NORMAN HOLDINGS LIMITED | ANNUAL REPORT 2018 51 DIRECTORS’ REPORT (CONTINUED) REMUNERATION REPORT (AUDITED) (continued) 11. Additional Disclosures Relating to Options, Performance Rights and Shares (continued) TABLE 6: Performance Rights of Key Management Personnel for the Year Ended 30 June 2018 1 July 2017 Balance at the Beginning of Year Granted as Remuneration Options Exercised Net Change Other 30 June 2018 Balance at End of the Year Vested as at 30 June 2018 Total Exercisable Not Exercisable 125,000 225,000 150,000 150,000 150,000 800,000 62,500 112,500 75,000 75,000 75,000 400,000 - - - - - - - - - - - - - 187,500 337,500 225,000 225,000 225,000 1,200,000 - - - - - - - - - - - - - - - - - - - KMP: Board of Directors Gerald Harvey Kay Lesley Page John Evyn Slack-Smith David Matthew Ackery Chris Mentis Gerald Harvey Total Apart from the KMPs disclosed above, comprised of the executive directors of the Company, each of the non-executive directors or senior executives of the Company did not have any performance rights during the year ended 30 June 2018. The closing balance of the performance rights in the Company of 1,200,000 as at 30 June 2018 is comprised of: a) Balance at the beginning of year: 400,000 performance options under Tranche 1 FY2016; fair value at grant date of $3.52; to vest on 31 December 2018; exercisable between 1 January 2019 and 30 June 2021; b) Balance at the beginning of year: 400,000 performance options under Tranche 2 FY2017; fair value at grant date of $3.87; to vest on 31 December 2019; exercisable between 1 January 2020 and 30 June 2022; and c) Granted as remuneration during the year: 400,000 performance options under Tranche 3 FY2018; fair value at grant date of $3.34; to vest on 31 December 2020; exercisable between 1 January 2021 and 30 June 2023. HARVEY NORMAN HOLDINGS LIMITED | ANNUAL REPORT 2018 52 DIRECTORS’ REPORT (CONTINUED) REMUNERATION REPORT (AUDITED) (continued) 11. Additional Disclosures Relating to Options, Performance Rights and Shares (continued) TABLE 7: Shareholdings/Relevant Interests of Key Management Personnel for the Year Ended 30 June 2018 KMP: Board of Directors Gerald Harvey Kay Lesley Page 1 July 2017 Balance at the Beginning of Year On Exercise of Options Net Change Other 30 June 2018 Balance at the End of Year 337,889,449 17,507,642 - - 2,267,589 340,157,038 - 17,507,642 John Evyn Slack-Smith 699,818 567,000 (367,000) 899,818 David Matthew Ackery 489,134 - Chris Mentis Gerald Harvey Michael John Harvey Kay Lesley Page Christopher Herbert Brown John Evyn Slack-Smith Kenneth William Gunderson-Briggs Graham Charles Paton KMP: Senior Executives Thomas James Scott 348,341 567,000 2,974,897 183,323,726 3,137 15,682 31,835 - - - - - - - - - 3,000 - - 489,134 915,341 2,974,897 183,323,726 6,137 15,682 31,835 Total 543,283,661 1,134,000 1,903,589 546,321,250 Movement in shareholdings / relevant interests during the year ended 30 June 2018: (a) On 1 September 2017, G. Harvey Nominees Pty Limited, a company associated with G. Harvey, acquired 1,000,000 shares in the Company, on-market, for an average consideration of $3.93 per share or $3,930,200 in total. (b) On 4 September 2017, J.E. Slack-Smith exercised 567,000 options in respect of the Third Tranche of Options at the exercise price of $1.827 per option or $1,035,909 in total. 567,000 new shares in the Company were issued pursuant to this transaction. (c) On 5 September 2017, J.E. Slack-Smith sold 367,000 shares in the Company on-market from Whitewood Investments Pty Limited as trustee for Whitewoods Trust, entities associated with J.E. Slack-Smith, for an average sale price of $3.89 per share or $1,429,170 in total. (d) On 7 September 2017, J.E. Slack-Smith sold 200,000 shares in the Company, off-market, to Whitewood Investments Pty Limited as trustee for Whitewoods Trust, an entity associated with J.E. Slack-Smith, for an average sale price of $3.93 of $786,000 in total. (e) On 6 December 2017, K. Page Pty Limited, a company associated with K.L. Page, sold 241,838 shares in the Company, off-market, to K L Page Superannuation Fund Pty Limited, another company associated with K.L. Page, for an average sale price of $4.14 per share or $1,000,000 in total. (f) On 6 March 2018, Demlon Pty Ltd as trustee for SKGB Trust, a company associated with K. W. Gunderson-Briggs, acquired 3,000 shares in the Company, on-market, for an average consideration of $3.88 per share or $11,640 in total. (g) On 8 March 2018, C. Mentis exercised 567,000 options in respect of the Third Tranche of Options at the exercise price of $1.827 per option or $1,035,909 in total. 567,000 new shares in the Company were issued pursuant to this transaction. (h) On 21 March 2018, G. Harvey as Trustee for Harvey 2003 Option Trust, an entity associated with G. (i) Harvey, acquired 1,000,000 shares in the Company, on-market, for an average consideration of $3.77 per share or $3,766,475 in total. On 27 March 2018, G. Harvey as Trustee for Harvey 2003 Option Trust, an entity associated with G. Harvey, acquired 267,589 shares in the Company, on-market, for an average consideration of $3.64 per share or $974,425 in total. HARVEY NORMAN HOLDINGS LIMITED | ANNUAL REPORT 2018 53 DIRECTORS’ REPORT (CONTINUED) REMUNERATION REPORT (AUDITED) (continued) 12. ‘Take-Home Pay’ for KMP Directors of the Company The below table shows the ‘take-home pay’ for each director of the Company, representing the benefits paid to each director during the year ended 30 June 2018, or as soon as practicable after that date. Total ‘take-home pay’ for the directors of the Company amounted to $12.49 million for the year ended 30 June 2018. The total value of remuneration expensed for directors of the Company in respect of the 2018 financial year was $10.63 million (refer to Table 1 on page 48 of this report). For the 2018 financial year, total ‘take-home pay’ was $1.86 million higher than the value of remuneration expensed to the income statement. KMP: Board of Directors Salary & Fees Other Short Term Non- Monetary Benefits Super- annuation Short-Term Performance Cash Incentive (a) Long-Term Performance Cash Incentive (b) FY2018 Total Take- Home Pay FY2017 Total Take- Home Pay Gerald Harvey 719,551 10,400 - 20,049 - 438,980 1,188,980 1,201,986 Kay Lesley Page 2,062,925 John Evyn Slack-Smith 1,229,951 - - David Matthew Ackery 1,211,951 18,000 Chris Mentis Gerald Harvey Michael John Harvey Kay Lesley Page Christopher Herbert Brown John Evyn Slack-Smith Kenneth William Gunderson- Briggs 897,533 54,795 132,420 158,788 Graham Charles Paton 132,420 - - - - - 17,026 20,049 658,666 821,920 3,580,586 3,407,350 - - 20,049 20,049 541,047 541,047 747,200 2,538,247 2,392,050 747,200 2,538,247 2,392,050 32,418 20,049 470,476 700,500 2,120,976 2,000,350 - - - - 5,205 12,580 15,085 12,580 - - - - - - - - 60,000 60,000 145,000 145,000 173,873 189 189,475 145,000 145,000 Total Take-Home Pay 2018 6,600,334 28,400 49,444 145,695 2,211,236 3,455,800 12,490,909 Total Take-Home Pay 2017 6,653,121 28,400 40,047 144,543 1,718,650 3,348,500 11,933,261 a) The short-term performance cash incentive of $2.21 million represented the payment of the 2017 STI Plan PCI that was earned in respect of the 2017 financial year, and was paid to executive directors in October 2017. b) The long-term performance cash incentive of $3.46 million represented the payment of the 2015 LTI Plan PCI that was earned in respect of the 2015 financial year, and was expensed over a 4-year vesting period for the financial years ending 30 June 2015, 30 June 2016, 30 June 2017 and 30 June 2018. This was paid to executive directors on 4 July 2018. 13. Loans to Key Management Personnel and their Related Parties There were no loans granted to key management personnel during the year ended 30 June 2018 (2017: nil). There were no loans outstanding from key management personnel as at 30 June 2018 (2017: nil). 54 DIRECTORS’ REPORT (CONTINUED) REMUNERATION REPORT (AUDITED) (continued) 14. Other Transactions and Balances with Key Management Personnel and their Related Parties (i) Loans from directors to subsidiaries of Harvey Norman Holdings Limited: Derni Pty Limited (a wholly owned subsidiary of Harvey Norman Holdings Limited) borrowed money from entities and related parties associated with G. Harvey, M.J. Harvey and K.L. Page. Interest is payable at commercial rates. These loans are unsecured and repayable at call. Net amounts (paid to) / received from entities associated with the above mentioned directors and their related parties. Interest paid/payable (ii) Lease of business premises from Ruzden Pty Limited: The consolidated entity leases business premises at Bundall, Queensland from Ruzden Pty Limited. Mr G. Harvey, Ms K.L. Page, Mr M.J. Harvey and I.J. Norman Nominees Pty Limited (C.H. Brown) have an equity interest in Ruzden Pty Limited. The lease arrangements were approved by shareholders in the General Meeting held 25 May 1993, and in the General Meeting held 31 August 1999. The lease is subject to normal commercial terms and conditions. Rent paid by the consolidated entity to Ruzden Pty Limited was: (iii) Legal fees paid to a director-related entity: Legal fees were paid to the firm of which Mr C.H. Brown is a partner for professional services rendered to the consolidated entity in the normal course of business. (iv) Other income derived by related entities of key management personnel: Certain franchises are operated by entities owned or controlled by relatives of key management personnel under normal franchisee terms and conditions. Aggregated net income derived by entities owned or controlled by relatives of key management personnel was: (v) Perth City West Retail Complex CONSOLIDATED June 2018 $000 June 2017 $000 39,566,536 46,139,265 (6,572,729) 897,393 2,823,879 787,533 4,692,124 4,588,056 3,469,948 3,636,482 762,655 1,256,314 By a contract for sale dated 31 October 2000, Gerald Harvey, as to a one-half share as tenant in common, and a subsidiary of Harvey Norman Holdings Limited, as to a one-half share as tenant in common, purchased the Perth City West retail complex for a purchase price of $26.60 million. In the financial statements of the consolidated entity, the day-to-day management of this entity has been accounted for as a joint venture as disclosed in Note 37 to the financial statements. This transaction was executed under terms and conditions no more favourable than those which it is reasonable to expect would have applied if the transaction was at arm’s length. The property was purchased subject to a lease of part of the property in favour of a subsidiary of Harvey Norman Holdings Limited (the "Lessee"). That lease had been granted by the previous owner of the property on arm's length normal terms and conditions. Gerald Harvey is entitled to one-half of the rental paid by the Lessee. The amount of rental and outgoings paid by the Lessee to Gerald Harvey and the subsidiary of Harvey Norman Holdings Limited for the year ended 30 June 2018 was $0.77 million each (2017: $1.67 million). (vi) The Byron at Byron Resort, Spa and Conference Centre By a contract for sale dated 15 May 2002, a company (of which Gerald Harvey was a director) acting in its capacity as trustee of a trust, as to a one-half share as tenant in common (the “GH entity”), and a subsidiary of Harvey Norman Holdings Limited, as to a one- half share as tenant in common, purchased the Byron at Byron Resort, Spa and Conference Centre (the “Byron Bay JV”). In the financial statements of the consolidated entity, the day-to-day management of this entity has been accounted for as a joint venture as disclosed in Note 37 to the financial statements. This transaction was executed under terms and conditions no more favourable than those which it is reasonable to expect would have applied if the transaction was at arm’s length. No capital distribution was received by each of the GH entity and a subsidiary of Harvey Norman Holdings Limited (2017: $0.30 million). A subsidiary of Harvey Norman Holdings Limited held a conference at The Byron at Byron Resort and paid the Byron Bay JV conference fees amounting to $0.12 million for the year ended 30 June 2018 (2017: $0.11 million). HARVEY NORMAN HOLDINGS LIMITED | ANNUAL REPORT 2018 55 DIRECTORS’ REPORT (CONTINUED) REMUNERATION REPORT (AUDITED) (continued) 14. Other Transactions and Balances with Key Management Personnel and their Related Parties (continued) (vii) Gepps Cross Retail Complex By a contract for sale dated 18 December 2007, a subsidiary of the Company (“HNHL G.C. Entity”) and Axiom Properties Fund Limited (“G.C. Co-Owner”) purchased land located in Gepps Cross, South Australia (“G.C. Land”) in equal shares as tenants in common, for the purpose of constructing and subsequently managing a retail complex on the G.C. Land (“the Gepps Cross Joint Venture”). In November 2009, HNHL G.C. Entity and the G.C. Co-Owner granted a lease of part of the G.C. Land and retail complex to a subsidiary of the Company (“G.C. Lessee”) on arm’s length commercial terms (“G.C. Lease”). In August 2010, the G.C. Co-Owner informally advised the Company that the G.C. Co-Owner intended or wished to dispose of its interest in the Gepps Cross Joint Venture, triggering first and last rights of refusal in the HNHL G.C. Entity. At a meeting of the Company held 26 August 2010, it was resolved that the Company not purchase the share of the G.C. Co-Owner in the Gepps Cross Joint Venture (including G.C. Land). On 6 October 2010, HNHL G.C. Entity formally waived the right to purchase the interest of the G.C. Co-Owner in the Gepps Cross Joint Venture (including the G.C. Land). By a contract for sale dated 23 December 2010, GH Gepps Cross Pty Limited, an entity associated with Gerald Harvey (“Gerald Harvey Entity”) and MJH Gepps Cross Pty Limited, an entity associated with Michael Harvey (“Michael Harvey Entity”) and, M&S Gepps Cross Pty Limited, purchased the one-half share as tenant in common of the G.C. Co-Owner in the G.C. Land and retail complex. The sale was subject to the G.C. Lease. The Gerald Harvey Entity is entitled to one-quarter of the rental and outgoings paid by the G.C. Lessee amounting to $0.81 million for the year ended 30 June 2018 (2017: $0.79 million). The Michael Harvey Entity is entitled to one-eighth of the rental and outgoings paid by the G.C. Lessee amounting to $0.40 million for the year ended 30 June 2018 (2017: $0.40 million). In the financial statements of the consolidated entity, the day-to-day management of the Gepps Cross Joint Venture has been accounted for as equity accounted investment as disclosed in Note 37. The Gerald Harvey Entity is entitled to one-quarter of the profits generated by the retail complex on the G.C. Land amounting to $1.54 million for the year ended 30 June 2018 (2017: $1.55 million). The Michael Harvey Entity is entitled to one-eighth of the profits generated by the retail complex on the G.C. Land amounting to $0.77 million for the year ended 30 June 2018 (2017: $0.78 million). (viii) Gazal Corporation Limited Mr. G.C. Paton is an independent, non-executive director of Gazal Corporation Limited, a public company listed on the Australian Stock Exchange. A wholly-owned subsidiary of the consolidated entity previously owned 4.17 million shares in Gazal Corporation Limited with a market value of $9.33 million as at 30 June 2017. In April 2018, following an on-market share buy-back, the consolidated entity disposed of 4.17 million shares in Gazal Corporation Limited for total consideration of $10.41 million. The consolidated entity received dividends during the year amounting to $0.33 million for the year ended 30 June 2018 (2017: $0.67 million). Mr G.C. Paton was not present at, did not direct, manage or otherwise participate in, and did not vote in respect of any of the arrangements between the consolidated entity and Gazal Corporation Limited. 56 DIRECTORS’ REPORT (CONTINUED) ENVIRONMENTAL AND SOCIAL SUSTAINABILITY The consolidated entity acknowledges that integrating sustainable growth into its strategy, business practices and decision making is essential for long-term value creation. The consolidated entity believes that the sustainability of its operations is, in part, linked to the successful monitoring and management of its economic, social and environmental risks and opportunities and therefore the consolidated entity aims to adopt sustainable practices that will generate better long-term returns and benefits for investors and stakeholders, both internal and external. The Board of Directors, as the Company’s highest governance body, alongside management is charged with establishing a business strategy that supports responsible decision making and sustainable value creation. The Company’s Code of Conduct reinforces the consolidated entity’s commitment to honest, fair and transparent business practices and outlines the standards of behaviour that the consolidated entity expects of its employees. In addition, the consolidated entity has adopted other policies such as the Conflicts of Interest Policy, the Gifts and Benefits Policy, the Intellectual Property Policy and a Confidentiality and Privacy Policy, all of which aim to reinforce corporate governance best practices. The consolidated entity is a member of the following organisations and associations:        Consumer Electronics Association Australasia Furniture Research and Development Institute (AFRDI) New Zealand Leather and Shoe Research Association (LASRA) National Retailers Association, including representation on the Technical Standards Committee (NRATSC) Energy Users Association of Australia Soft Landings Product Stewardship Scheme (Founding Member) Diversity Council of Australia Environmental Regulation Performance The consolidated entity submits a National Greenhouse Gas and Emissions Report (NGER) to the Clean Energy Regulator annually. The consolidated entity’s environmental obligations are regulated under both State and Federal Law. There were no environmental breaches notified to the consolidated entity by any Government agency during the year ended 30 June 2018 and up to the date of this report. Actions of the Franchisor The consolidated entity acts as a landlord in a number of retail complexes utilised by Harvey Norman®, Domayne® and Joyce Mayne® franchisees. At those premises, the landlord provides lighting and air conditioning for the utilisation of franchisees at the site and also provides electricity to the site. The consolidated entity has undertaken the following recent actions with respect to solar energy, LED lighting and stormwater harvesting systems: Solar Energy Following an analysis across 13 franchised complexes and 24 months of data, the consolidated entity can report:  A net saving across the franchised complexes that were analysed of 1,308,310KWh of electricity, or 10.59%;  A reduction in C02 emissions across these franchised complexes of 1,209 tonnes, an 11.66% reduction, which is equivalent to taking 200 cars off the road for a 12-month period. Approximately 60% of the previously planned installations are complete. Sites are regularly analysed for participation in the program and it is expected that the program will continue beyond the current scope to franchised complexes that demonstrate appropriate payback. LED Lighting The LED program is in the process of being implemented within 35 franchised complexes in Australia and 13 company-operated stores in New Zealand. Using estimates based on the energy consumption of the existing T8 lighting fittings at these locations, the estimated savings from reduced consumption of energy and repairs and maintenance spend on lighting are in excess of $1.40 million per annum and an average payback of 2.7 years. Further analysis and tracking of savings will be undertaken as the program is rolled-out. Stormwater Harvesting Systems During the 2018 financial year, the consolidated entity has installed rainwater harvesting systems at 3 franchised complexes, with a fourth system to be installed in November 2018. When complete, the four systems will collect rainwater totalling 916,000 litres, which is used for irrigation and reduces the reliance on the mains water supply. Actions of Franchisees Franchisees have taken a product stewardship approach to waste. The Australian Packaging Covenant (“APC”) is a sustainable packaging initiative which aims to change the culture of business to design more sustainable packaging, increase recycling rates and reduce packaging litter. HARVEY NORMAN HOLDINGS LIMITED | ANNUAL REPORT 2018 57 DIRECTORS’ REPORT (CONTINUED) ENVIRONMENTAL AND SOCIAL SUSTAINABILITY (continued) Environmental Regulation Performance (continued) Harvey Norman®, Domayne® and Joyce Mayne® franchisees have improved on their waste management performance and offering to customers during the 2018 financial year as follows: Waste Stream e-Waste Mattresses Polystyrene Cardboard and Plastic Recycling Recycling as a percentage of franchised complex waste (excluding the above initiatives) Percentage Improvement During 2018 Financial Year Description E-waste recycling is available through most Harvey Norman®, Domayne® and Joyce Mayne® franchised complexes. Harvey Norman® and Domayne® franchisees are founding members of the Soft Landings Mattress Product Stewardship Scheme. Approximately 80% of franchised complexes in Australia recycle this separate waste stream. Each franchisee in each franchised complex in Australia carries out cardboard and plastic recycling. 5.7% overall increase on FY2017 volumes 11,848 mattresses recycled via the Soft Landings Product Stewardship and Social Enterprise Scheme. Some franchisees may have used alternate service providers, particularly in Melbourne. 19.3% increase in polystyrene recycling (measured in tonnes) in FY2018. Harvey Norman®, Domayne® and Joyce Mayne® franchised complexes recycled 6,824 tonnes of cardboard and paper and 47.69 tonnes of plastic (LDPE) in FY2018. Average landfill diversion: - - 40% (measured by weight) 47% (measured by volume) Plastic Bag Usage by Customers Net distribution of plastic bags reduced by 7.5% in FY2018. Use of reusable smart bags increased by 2.3%. From February 2018, all plastic bags supplied to Harvey Norman®, Domayne® and Joyce Mayne® franchisees were a minimum of 40 microns. Social Sustainability Maintaining a well-trained, engaged and committed workforce is a key priority for the consolidated entity. The consolidated entity has adopted a well-developed training strategy to ensure that all employees are given opportunities to develop and improve their skills and expertise throughout their careers. The consolidated entity also conducts an Engagement & Diversity Survey on an annual basis. The survey aims to measure the satisfaction levels of employees and collects feedback and comments on topics such as diversity initiatives and flexible working arrangements. Employee Learning and Development The consolidated entity has provided its employees with an increasing range of training opportunities over the years from mandatory sessions and programs (inductions, compliance, customer service, culture awareness etc.) to optional courses providing vocational recognition and certification. The consolidated entity actively encourages employees to participate in these courses. The consolidated entity has appointed a Learning and Development team to support its Learning and Development framework. This team has been engaged to scope, develop, design and implement training programs and strategies. The training conducted throughout the organisation includes, but is not limited to: Online e-learning for all employees through an externally hosted Learning Management System. There is a combination of compulsory training and role-based training allocated and assigned to employees and undertaken in the workplace. Online training modules may include: - Orientation for new employees; - Occupational Health and Safety; - Discrimination, harassment and workplace bullying; and - Cultural Awareness. Professional development for individuals in specialised roles to maintain and update requisite skills and knowledge. This training is conducted by external bodies including: - Accounting (Chartered Accountants of Australia and New Zealand and CPA Australia); - Compliance (Australian Compliance Institute); - Digital Innovation (Data Science and Analytics and User Experience (UX)); - Human Resources (National Retailers Association seminars); - Information Technology; - Legal (College of Law, Law Society of NSW, LegalWise, Australian Corporate Lawyers Association seminars); - Management; - Procurement (Supply Chain School and Chartered Institute of Purchasing and Supply); - Microsoft Office Applications (Excel, Word, Access and PowerPoint);   58 DIRECTORS’ REPORT (CONTINUED) ENVIRONMENTAL AND SOCIAL SUSTAINABILITY (continued) Employee Learning and Development (continued) - - Annual conferences to educate and reinforce knowledge of employees; and Diversity awareness in order to reinforce the Company's commitment to an inclusive culture and diversity in the workplace and to add value to diversity-related initiatives. The Learning Management framework is a comprehensive platform that supports the consolidated entity’s growth and development initiatives. This enables structured learning paths that promote further training and development for employees. The consolidated entity may provide financial reimbursement to employees that obtain a degree relevant to their role and responsibilities, including equipment and travel. Corporate employees are reviewed annually as part of the ‘Salary Review’ process where performance is benchmarked to market rates and career development is discussed as part of employee succession planning. OTHER INFORMATION Indemnification of Officers During the financial year, insurance and indemnity arrangements were continued for officers of the consolidated entity. An indemnity agreement was entered into between the Company and each of the directors of the Company named earlier in this report and with each full-time executive officer, director and secretary of all group entities. Under the agreement, the Company has agreed to indemnify those officers against any claim or for any expenses or costs which may arise as a result of work performed in their respective capacities. Rounding of Amounts The amount contained in the financial statements and the Directors’ Report have been rounded to the nearest thousand dollars (unless specifically stated to be otherwise) under the option available to the Company under Australian Securities and Investments Commission Corporations (Rounding in Financial/Directors’ Reports) Instrument 2016/191. The company is an entity to which this legislative instrument applies. Auditor Independence and Non-Audit Services During the year, the auditors of Harvey Norman Holdings Limited, Ernst & Young, provided non–audit services to the consolidated entity. In accordance with the recommendation from the Audit Committee of the Company, the directors are satisfied that the provision of the non- audit services during the year is compatible with the general standard of independence for auditors imposed by the Corporations Act 2001. Also, in accordance with the recommendation from the Audit Committee, the directors are satisfied that the nature and scope of each type of non–audit service provided means that auditor independence was not compromised. Details of the amounts paid or payable to the auditor, Ernst & Young, for the provision of non–audit services during the year ended 30 June 2018 are as follows:   Tax compliance services $234,984 (2017: $205,823); Other services $42,769 (2017: $71,756) HARVEY NORMAN HOLDINGS LIMITED | ANNUAL REPORT 2018 59 DIRECTORS’ REPORT (CONTINUED) OTHER INFORMATION (continued) Auditor Independence and Non-Audit Services (continued) The directors received the following declaration from the auditor of Harvey Norman Holdings Limited. Ernst & Young 200 George Street Sydney NSW 2000 Australia GPO Box 2646 Sydney NSW 2001 Tel: +61 2 9248 5555 Fax: +61 2 9248 5959 ey.com/au Auditor’s Independence Declaration to the Directors of Harvey Norman Holdings Limited As lead auditor for the audit of Harvey Norman Holdings Limited for the financial year ended 30 June 2018, 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. This declaration is in respect of Harvey Norman Holdings Limited and the entities it controlled during the financial year. Ernst & Young Renay Robinson Partner Sydney 28 September 2018 Signed in accordance with a resolution of directors. A member firm of Ernst & Young Global Limited Liability limited by a scheme approved under Professional Standards Legislation G. HARVEY Executive Chairman Sydney 28 September 2018 K.L. PAGE Executive Director / Chief Executive Officer Sydney 28 September 2018 60 CORPORATE GOVERNANCE STATEMENT Introduction The board of directors (Board) of Harvey Norman Holdings Limited (HVN or the Company) is committed to a high standard of corporate governance, and is responsible for establishing, maintaining and monitoring the corporate governance framework of the consolidated entity. The Board has benchmarked its practices against the ASX Corporate Governance Council's (CGC) published guidelines and the CGC corporate governance principles and recommendations (27 March 2014 edition) (Principles). The Board guides and monitors the business and affairs of the Company on behalf of the shareholders by whom they are elected and to whom they are accountable. This Corporate Governance Statement (Statement) summarises the Company's corporate governance practices including compliance with the Principles for the year ended 30 June 2018. The Statement has been approved by the Board. Further details about corporate governance policies adopted by the Company and the Board and committee charters may be accessed via the Company's website www.harveynormanholdings.com.au (website). The Board Role and Responsibilities The role and responsibility of the Board is to set and approve the strategy of the Company, to identify significant business risks and ensure arrangements are in place in order to manage those risks and review the performance of the CEO. The Board aims to foster a culture of compliance, with an emphasis on ethical behaviour, accountability, corporate and individual integrity and respect for others. The Board has established guidelines for the composition of the Board and meeting processes. The responsibility for implementation of strategy and risk management and operations of the business is delegated, by the Board, to the CEO and the executive management team. The CEO reports to the Board on operational issues that include: a) Recommendations on strategic initiatives and developing and implementing corporate strategies; b) Preparation for approval by the Board of budgets and cash flow forecasts and management of operations within the financial constraints imposed by the Board; c) Maintenance of effective compliance and risk management frameworks; d) Evaluation of the performance of key executives, including succession and learning and growth activities; e) Achievement of financial and non-financial key performance indicators as set by the Board; and f) Information to keep the Board and ASX fully informed having regard to continuous disclosure obligations. The Company's continuous disclosure policy sets out procedures supporting the Company's compliance with its continuous disclosure obligations under the ASX listing rules. The policy is available on the Governance page of the website. Matters which are specifically reserved for the Board are set out in the Board Charter, which is available on the Governance page of the website. Other functions reserved for the Board include: a) Approving the annual and half-yearly financial reports; b) Approving and monitoring the progress of major capital expenditure, capital management, and acquisitions and divestitures; c) Ensuring that any significant risks are identified, assessed, appropriately managed and monitored; and d) Reporting to shareholders. Board Structure and Composition The relevant factors in determining the suitability of a board member are integrity, business savvy, an owner-oriented attitude and a deep genuine interest in the business of the consolidated entity. In applying these principles to the consolidated entity: a) Business savvy requires a deep understanding of one or more of the sectors of retail, property, franchising and digital. b) Integrity requires a level of fundamental honesty, candour and frankness in dealing with colleagues, regulators and other third parties. Integrity necessarily requires a director to bring an open mind and independent judgment to the discussion of any matter of concern to the Board. c) An owner orientation or perspective of an owner requires the individual to either have: i. ii. "skin in the game" by holding, controlling or benefitting from a significant parcel of shares where the financial interests of the director are aligned with the long term beneficial interest of shareholders; or a perspective of advising owners of businesses and understanding that wealth generation is derived from the building of business interests that create long term sustainable value. Directors with an owner orientation retain an open mind to consider diverse views but are not strictly beholden to the whims of fashionable thinking and are able to form their own views as to what constitutes best practice in corporate governance. d) Interest in and time to do the job means: i. ii. the person has an executive role, meaning that the person's career is based on job performance at the company; or the individual has a limited number of outside interests (i.e. the person is not a professional non-executive director), but in both cases the individual has an independence of mind and outlook. Applying these criteria to the current Board, the Board is satisfied that each Director brings to the Board the necessary skills and attributes specified. HARVEY NORMAN HOLDINGS LIMITED | ANNUAL REPORT 2018 61 CORPORATE GOVERNANCE STATEMENT (CONTINUED) Board Structure and Composition (continued) The length of service of each director is set out below. Name Gerald Harvey Kay Lesley Page John Evyn Slack-Smith David Matthew Ackery Chris Mentis Michael John Harvey Christopher Herbert Brown Kenneth William Gunderson-Briggs Graham Charles Paton Position Executive Chairman Executive Director and CEO Executive Director and COO Executive Director Executive Director, CFO and Company Secretary Non-Executive Director Non-Executive Director Independent Non-Executive Director Independent Non-Executive Director Appointed to the Board 1987 1987 2001 2005 2007 1993 1987 2003 2005 Directors of the Company are considered to be independent when they are independent of management and free from any business or other relationship that could interfere materially with, or could reasonably be perceived to interfere materially with, the exercise of their unfettered and independent judgement. A majority of the Board does not consist of independent directors. The majority of the Board consists of executive directors. The Board recognises the CGC's recommendation that a majority of the Board should consist of independent directors. The Board believes that each executive director (and each non-executive director who is not independent) is able to bring, and does bring quality independent judgement to all relevant issues falling within the scope of the role of that executive director and that the Company, as a whole, benefits from the long-standing experience of that director in relation to the operations and business relationships of the Company. The Board notes that while the two independent, non-executive members have each served more than nine years, having regard to the totality of the defining characteristics of an independent director and the specific skills and experience of these directors, the Board still believes each of them are able to bring quality independent judgement to the issues that come before the Board. The Board recognises the CGC's recommendation that the Chair should be an independent director. As Chair, Mr Gerald Harvey is not an independent director. The Board believes that Mr Gerald Harvey is the most appropriate person to lead the Board as Executive Chairman and that he is able to bring, and does bring quality independent judgement to all relevant issues falling within the scope of the role of Chairman and that the Company, as a whole, benefits from his long standing experience of its operations and business relationships. The Company has in place with each Director a written agreement which sets out the terms of their appointment. Board Committees The Board has established specialist Audit, Nomination, Remuneration and Risk Committees. The membership and responsibilities of these Committees are discussed throughout this Statement and in the Board and Committee charters that may be accessed on the Governance page of website. Performance and Board Procedure The performance of the Board and key executives is reviewed regularly against both measurable and qualitative indicators that align with the financial and non-financial objectives of the Company. The Nomination Committee conducted performance evaluations of each director, committee and the Board for the reporting period. Opportunities are made available to Directors to undertake appropriate professional development, to develop and maintain the skills required for them to perform their role as a director of the Company. Directors may seek independent professional advice at the expense of the Company, subject to procedures agreed by the Board. The Company Secretary is responsible for all matters concerning the proper functioning of the Board and its Committees, including convening, conducting and recording of meetings, compliance with policy and charters, and advising the Board and its Committees as to governance matters. The Company Secretary is able to meet with the Chair on any matter regarding the functioning of the Board and its Committees. Nomination Committee The Board has established a Nomination Committee, which meets at least annually, to ensure that the Board continues to operate within the established guidelines, including when necessary, selecting candidates for the position of director and undertaking appropriate checks, including character and qualifications, of any potential candidate. Material information relating to any potential candidate is provided to shareholders before shareholders are asked to vote on the election or re-election of a director. There is an induction program for new directors. The Nomination Committee was comprised of non-executive directors, Graham Charles Paton (Chairman), Christopher Herbert Brown and Kenneth William Gunderson-Briggs for the year. The Nomination Committee recognises the CGC's recommendation that the Chair of the committee should be an independent director. Mr Graham Charles Paton is an independent director. Details of attendance at meetings of the Nomination Committee are set out in the Directors’ Report on page 11 of this report. Additional details regarding the Nomination Committee, including its charter, are available on the Governance page of the website. 62 CORPORATE GOVERNANCE STATEMENT (CONTINUED) Audit Committee The members of the Audit Committee during the year were: Graham Charles Paton (Chairman) Christopher Herbert Brown Kenneth William Gunderson-Briggs    each of whom is a non-executive director and the Chairman is independent. Details of each Audit Committee member's qualifications and their attendance at meetings of the Audit Committee during the past year are set out in the Directors’ Report on pages 10 and 11 of this report. Additional details about the Audit Committee, including its charter, are available on the Governance page of the website. Risk The identification and effective management of risk, including calculated risk-taking is viewed as an essential part of the approach of the Company to creating long-term shareholder value. The Board determines the risk profile of the Company and is responsible for overseeing and approving risk management strategy and policies, internal compliance and internal control. The Board has established a separate Risk Committee, to assist the Board, and has appointed a Chief Risk Officer to collate, monitor, evaluate and report material risks to the Board. The Board recognises the CGC's recommendation that the chair should be an independent director and that the Risk Committee should consist of a majority of independent directors. The Board considers that the frequent reporting to the Audit Committee by both the chairman of the Risk Committee and the Chief Risk Officer (the latter as providing private reports to the Audit Committee) provides an adequate and appropriate level of involvement by the independent directors in the risk management function. The Risk Committee is not comprised of a majority of independent directors and is not chaired by an independent director. The Risk Committee is comprised of four executive directors, including the CEO and CFO. The Chief Risk Officer is required to attend all meetings of the Risk Committee to inform and assist members of the Risk Committee to carry out its functions. The chairman of the Risk Committee and the Chief Risk Officer, both regularly attend meetings of the Audit Committee to inform members of the Audit Committee of risk matters considered by the Risk Committee. The chairman of the Risk Committee regularly reports to the Board on matters considered by the Risk Committee. The Board, in conjunction with the Chief Risk Officer, oversees an annual assessment of the effectiveness of risk management and control. The tasks of undertaking and assessing risk management are delegated to the Chief Risk Officer through the CEO, including responsibility for the day to day design and implementation of the risk management system of the Company. The Chief Risk Officer reports to the Board on the key risks of the Company and the extent to which the Chief Risk Officer believes these risks are being adequately managed. The annual assessment has been undertaken for the year ended 30 June 2018. The key business risks identified by the Board are summarised in the Directors' Report on pages 30 and 31 of this report. The Chief Risk Officer is required by the Board to carry out risk specific management activities in core areas, including strategic risk, operational risk, reporting risk and compliance risk. The Chief Risk Officer is then required to assess risk management and associated internal compliance and control procedures and report to the Board on the efficiency and effectiveness of these efforts by benchmarking performance substantially in accordance with Australian/New Zealand Standard for Risk Management (AS/NZS ISO 31000:2009 Risk Management). The Board has a number of mechanisms in place to ensure that management’s objectives and activities are aligned with the risks identified by the Board. These include: a) Board approval of strategic plans designed to meet stakeholders’ needs and manage business risk; and b) Implementation of Board approved operating plans and budgets and Board monitoring of progress against these budgets, including the establishment and monitoring of financial and non-financial KPIs. The Board has adopted a comprehensive set of policies and procedures directed towards achieving the recognition and management of risks relating to: a) Effectiveness and efficiency in the use of the resources of the Company. b) Compliance with applicable laws and regulations; and c) Preparation of reliable published financial information. Additional details about the Risk Committee, including a copy of its charter, is available on the Governance page of the website. Internal Audit The internal audit function provides an objective assessment of: a) The systems of internal control; b) The risk and control framework; and c) Generally, compliance by the Company with risk management protocols of the Company. The Board has appointed a Head of Internal Audit to monitor and assess the internal control environment of the Company. The tasks of undertaking and assessing internal control effectiveness are delegated to the Head of Internal Audit through the Chief Executive Officer, including responsibility for the day to day design and implementation of the internal control system of the Company. The Head of Internal Audit reports to the Board on the key internal controls of the Company and the extent to which the Head of Internal Audit believes these controls are effective. HARVEY NORMAN HOLDINGS LIMITED | ANNUAL REPORT 2018 63 CORPORATE GOVERNANCE STATEMENT (CONTINUED) Internal Audit (continued) In order to ensure the independence of the internal audit function, the Head of Internal Audit meets privately with the Audit Committee, without management present, on a regular basis. The Audit Committee is responsible for making the final decision on the Head of Internal Audit’s tenure. CEO and CFO Certification The CEO and CFO have provided written statements to the Board in accordance with section 295A of the Corporations Act 2001 and have also certified to the Board in relation to the year ended 30 June 2018, that: a) Their view provided on the Company’s financial report is founded on a sound system of risk management and internal compliance and control which implements the financial policies adopted by the Board; and b) The Company’s risk management and internal compliance and control system is operating effectively in all material respects. The Board agrees with the views of the ASX on this matter and notes that due to its nature, internal control assurance from the CEO and CFO can only be reasonable rather than absolute. This is due to factors such as the need for judgement, the use of testing on a sample basis, the inherent limitations in internal control and because much of the evidence available is persuasive rather than conclusive. CEO and CFO control assurance is not, and cannot, be designed to detect all weaknesses in control procedures. In order to mitigate this risk, internal control questions are required to be answered and completed by the key management personnel of all significant business units, including finance managers, in support of the written statements of the CEO and CFO. Remuneration The Company aspires to maximise shareholder value by retaining a high quality Board and executive team. Directors and key executives are remunerated fairly and appropriately with reference to relevant employment market conditions. To assist in achieving this objective, the Remuneration Committee links the nature and amount of executive directors’ and officers’ remuneration to the Company’s financial and operational performance. The expected outcomes of the remuneration structure are: a) Retention and motivation of key executives; b) Attraction of high quality management to the Company; and c) Performance incentives that allow executives to share in the success of Harvey Norman Holdings Limited. The Remuneration Report (contained with the Directors' Report on pages 32 to 56 of this report) contains a description of the Company’s remuneration philosophy and framework and the remuneration received by directors and executives in the current year. The Remuneration Report also sets out executive contractual arrangements. There is no scheme to provide retirement benefits to non-executive directors. The Board is responsible for determining and reviewing compensation arrangements for the Directors themselves, the Chief Executive Officer and executive team. The Board has established a Remuneration Committee, comprising three non-executive directors. Members of the Remuneration Committee throughout the year were Kenneth William Gunderson-Briggs (Chairman), Christopher Herbert Brown and Graham Charles Paton. No director participates in deliberations about, or decisions, in respect of the remuneration of that director. The Remuneration Committee recognises the CGC's recommendation that the Chair should be an independent director. Mr Kenneth William Gunderson-Briggs is an independent director. Details of attendance of meetings of the Remuneration Committee are set out in the Directors’ Report on page 11 of this report. Additional details about the Remuneration Committee, including its charter, are available on the Governance page of the website. Share Trading Policy A copy of the Share Trading Policy is available on the Governance page of the website. An executive or director of the Company must not trade in any securities of the Company at any time when he or she is in possession of unpublished, price-sensitive information in relation to those securities. If the executive or director is not in possession of unpublished, price-sensitive information, then they are able to trade securities in Trading Windows. Trading Windows apply during each period of 30 days starting: a) One day following the announcement of the half yearly and full year results as the case may be; and b) One day following the holding of the Annual General Meeting. Before commencing to trade outside a Trading Window, an executive must first obtain the approval of the Company Secretary or CEO to do so and a director must first obtain approval of the Chairman. Approval to trade outside Trading Windows will only be granted in exceptional circumstances. As required by the ASX Listing Rules, the Company notifies the ASX of any transaction conducted by directors in the securities of the Company. 64 CORPORATE GOVERNANCE STATEMENT (CONTINUED) Shareholder Communication Policy The Company aims to promote and achieve effective communication with its shareholders at all times. In this pursuit, the Company has a Shareholder Communication Policy which is available on the Governance page of the website. The Company is committed to: a) Ensuring that shareholders and the financial markets are provided with full and timely information about the activities of the Company in a balanced and understandable way; b) Complying with continuous disclosure obligations contained in applicable ASX listing rules and Corporations Act 2001 in Australia; and c) Communicating effectively with its shareholders and making it easier for shareholders to communicate with the Company. Through the release of information to the market via the ASX; To promote effective communication with shareholders and encourage effective participation at general meetings, information is communicated to shareholders: a) b) Through the distribution of the Annual Report and Notice of Annual General Meeting; c) d) Through letters and other forms of communications directly to shareholders; and e) By posting relevant information to the website. Through shareholder meetings and investor relations presentations; Shareholders may receive or send communications to the Company or its share registry electronically. The website has a dedicated Reports and Announcements page for the purpose of publishing all important company information and relevant announcements made to the market. The external auditor is required to attend the Annual General Meeting and be available to answer any shareholder questions about the conduct of the audit and preparation of the audit report. Code of Conduct The Company's Code of Conduct applies to its directors, senior executives and employees and outlines the standards of behaviour the Company expects in order to promote a culture of fair and ethical behaviour, in compliance with applicable laws and standards. The Code of Conduct is published on the Governance page of the website. Diversity The Company is committed to promoting an environment that embraces and promotes diversity. The Company has established a Diversity Policy that aims to create a more competitive and inclusive environment for all of its employees. This policy includes requirements for the Board to establish measurable objectives for achieving gender diversity and for the Board to assess annually both the objectives and progress in achieving them. Diversity Policies The Company has a Board Diversity Policy and an Employee Diversity Policy; these policies are published on the Governance page of the website. The Company recognises the importance of having a diverse workplace and embraces the benefits that a diverse workforce brings to an organisation. The Company believes that increasing diversity in the workplace is essential to producing greater value for its shareholders as it allows the Company to become more innovative, responsive, productive and competitive. The Company is committed to promoting an environment that embraces and promotes diversity. The Company’s Diversity Policy is conducive to the selection of well qualified employees and senior management candidates from diverse backgrounds, experiences and perspectives. The Company recognises that employees of all levels will assume changing domestic responsibilities throughout their careers. The Company is committed to promoting an environment that embraces and promotes diversity and that is conducive of the appointment of well qualified candidates to the Board. The Company recognises that members of the Board will assume changing domestic responsibilities throughout their careers. The number of female and male applicants to advertised positions. Present Measurements The consolidated entity presently measures: a) b) The number of female and male employees. c) d) The number of female and male employees in full time, part time and casual roles. e) The salaries of female and male employees and whether a pay gap exists in the consolidated entity. f) Other measures including the age of employees, the ethnicity of employees and the length of service of employees. The different positions held by female and male employees. HARVEY NORMAN HOLDINGS LIMITED | ANNUAL REPORT 2018 65 CORPORATE GOVERNANCE STATEMENT (CONTINUED) Diversity (continued) Workforce Gender Profile The table below shows the female composition of employees, senior executives* and board members over the last three financial years. Data was taken as at 30 June each year. FEMALE COMPOSITION AT 30 JUNE Female Employees Female Senior Executives* Female Board Members 2016 43.68% 25.89% 11.11% 2017 44.82% 29.81% 11.11% 2018 44.93% 32.69% 11.11% * The holder of a Senior Executive position in the consolidated entity has primary responsibility for a business unit within the consolidated entity. The consolidated entity is a participant in the annual Workplace Gender Equality Report (WGEA Report). Diversity Measures, Targets and Initiatives The consolidated entity is committed to increasing diversity in the workplace and, in particular, increasing the participation of women in the consolidated entity so as to broaden the talent pool from which future leaders of the consolidated entity can be drawn. During the financial year ended 30 June 2018, the following measures, targets and initiatives were undertaken in accordance with the diversity objectives of the consolidated entity: Policies and Procedures a) The Diversity and Reconciliation Intranet page was reviewed and updated, making information and resources available to employees on key diversity areas including gender, culture, generational & mature age, disability and family & work-life balance. In particular the creation of additional resources for expectant parents and to refine “keeping-in-touch” and “flexible work” practices to ensure employees feel supported while on parental leave and returning to work. b) Reviewed and updated Human Resources (“HR”) policies and processes to ensure that they are inclusive in nature and do not expressly or implicitly operate in a manner contrary to the Employee Diversity Policy or the Board Diversity Policy. c) Continued development of role-based training content for the Learning Management System (“LMS”), which assists managers to identify any skill or knowledge gaps of employees and ensures consistency of opportunity across all employees in equivalent roles. d) Wherever possible, included: a) At least one female on a short list of applicants for all senior management roles; and b) At least one woman in the selection panel for all senior management roles. Monitoring a) Delivered the annual employee diversity survey to monitor underlying changes to the composition of the workforce, cultural heritage and caring responsibilities and assess the consolidated entity’s progress in improving workplace diversity and engagement. The results of this survey were made available to employees on the Diversity and Reconciliation Intranet page. b) Annual refresher training was delivered for Bullying, Harassment and Discrimination. An audit was conducted to capture completed training by employees and the Board in an effort to eliminate bullying and harassment in the workplace. c) As part of the annual governance reporting the business created a workplace profile, as at 30 March 2018, and analysed this data to monitor and evaluate any gender pay gaps within the consolidated entity. d) Continued to leverage existing recruitment systems to enable regular reporting and assessment of progress towards the adopted gender diversity objectives. An example of this is the continued rollout of recruitment and on-boarding technology to improve and promote consistent recruitment processes and better enable reporting across the consolidated entity. Community a) Renewed membership of the Diversity Council Australia to reinforce the consolidated entity's commitment to an inclusive culture and diversity in the workplace and to add value to diversity related initiatives. b) Engaged the Diversity Council of Australia to deliver targeted face to face training to Senior Managers showcasing the impact of “Unconscious Bias” and “Words at Work” to encourage the promotion of fair and unbiased people practices. c) Conducted the annual “Taste of Harmony” event in March 2018 to raise awareness and embrace the cultural diversity of the workplace. Money raised as part of this annual diversity event was once again donated to “Fitted for Work”, a local charity with a mission statement to “help women experiencing disadvantage get work and keep it”. d) Once again participated in the “NRL All Stars Youth Summit” in February 2018 to further develop and grow relationships with younger members of the indigenous community and assist in their journey of attaining education and employment. e) Continued to develop the partnership with Australia Indigenous Mentoring Experience (“AIME”) to support in promoting employment opportunities to Indigenous Australians. Harvey Norman and AIME have developed an action plan for the 2019 financial year that includes attending outreach sessions and careers days to build relationships with Indigenous students. 66 STATEMENT OF FINANCIAL POSITION AS AT 30 JUNE 2018 Current Assets Cash and cash equivalents Trade and other receivables Other financial assets Inventories Other assets Intangible assets Total current assets Non-Current Assets Trade and other receivables Investments accounted for using equity method Other financial assets Property, plant and equipment Investment properties Intangible assets Total non-current assets Total Assets Current Liabilities Trade and other payables Interest-bearing loans and borrowings Income tax payable Other liabilities Provisions Total current liabilities Non-Current Liabilities Interest-bearing loans and borrowings Provisions Deferred income tax liabilities Other liabilities Total non-current liabilities Total Liabilities NET ASSETS Equity Contributed equity Reserves Retained profits Parent entity interests Non-controlling interests TOTAL EQUITY Note 28(a) 7 8 9 10 11 12 37 13 14 15 16 17 18 19 20 21 20 5(d) 23 24 25 26 27 CONSOLIDATED June 2018 $000 June 2017 $000 170,544 724,690 31,463 345,287 45,144 490 1,317,618 78,443 4,497 18,283 660,337 2,429,397 69,067 3,260,024 80,224 640,686 29,191 315,968 45,878 486 1,112,433 78,777 26,355 30,076 625,112 2,241,754 75,237 3,077,311 4,577,642 4,189,744 289,986 422,191 15,608 66,825 35,354 829,964 503,203 11,645 280,735 14,163 809,746 238,628 386,651 42,541 41,571 34,034 743,425 333,858 13,052 267,219 19,283 633,412 1,639,710 1,376,837 2,937,932 2,812,907 388,381 185,384 2,337,241 2,911,006 26,926 2,937,932 386,309 174,950 2,229,200 2,790,459 22,448 2,812,907 The above Statement of Financial Position should be read in conjunction with the accompanying notes. HARVEY NORMAN HOLDINGS LIMITED | ANNUAL REPORT 2018 67 INCOME STATEMENT FOR THE YEAR ENDED 30 JUNE 2018 Sales revenue Cost of sales Gross profit Revenues and other income items Distribution expenses Marketing expenses Occupancy expenses Administrative expenses Other expenses Finance costs Share of net profit of joint ventures entities Profit before income tax Income tax expense Profit after tax Attributable to: Owners of the parent Non-controlling interests Earnings Per Share: Basic earnings per share (cents per share) Diluted earnings per share (cents per share) Dividends per share (cents per share) Note 3 3 4 4 4 4 37 5(a) & 5(c) CONSOLIDATED June 2018 $000 1,993,760 (1,326,339) 667,421 1,240,703 (41,602) (374,322) (241,220) (585,683) (114,573) (26,344) 5,792 530,172 (150,122) 380,050 375,378 4,672 380,050 June 2017 $000 1,833,123 (1,235,602) 597,521 1,305,344 (36,189) (384,885) (226,994) (492,453) (107,666) (20,072) 5,200 639,806 (186,840) 452,966 448,976 3,990 452,966 6 6 26 33.71 cents 33.67 cents 40.35 cents 40.30 cents 30.0 cents 26.0 cents The above Income Statement should be read in conjunction with the accompanying notes. 68 STATEMENT OF COMPREHENSIVE INCOME FOR THE YEAR ENDED 30 JUNE 2018 Profit for the year Items that may be reclassified subsequently to profit or loss: Foreign currency translation Net fair value (losses) / gains on available-for-sale investments Net movement on cash flow hedges Income tax effect on net movement on cash flow hedges Items that will not be reclassified subsequently to profit or loss: Fair value revaluation of land and buildings Income tax effect on fair value revaluation of land and buildings Other comprehensive income for the year (net of tax) CONSOLIDATED June 2018 $000 June 2017 $000 380,050 452,966 (221) (1,830) 16 (4) 15,553 (2,693) 10,821 (6,942) 4,050 18 (6) 25,467 (5,362) 17,225 Total comprehensive income for the year (net of tax) 390,871 470,191 Total comprehensive income attributable to: Owners of the parent Non-controlling interests 385,067 5,804 390,871 467,496 2,695 470,191 The above Statement of Comprehensive Income should be read in conjunction with the accompanying notes. HARVEY NORMAN HOLDINGS LIMITED | ANNUAL REPORT 2018 69 STATEMENT OF CHANGES IN EQUITY FOR THE YEAR ENDED 30 JUNE 2018 Attributable to Equity Holders of the Parent Contributed Equity Retained Profits Asset Revaluation Reserve Foreign Currency Translation Reserve Available for Sale Reserve Cash Flow Hedge Reserve Employee Equity Benefits Reserve Acquisition Reserve Non- controlling Interests TOTAL EQUITY $000 $000 $000 $000 $000 $000 $000 $000 $000 $000 At 1 July 2017 386,309 2,229,200 131,304 42,374 13,732 (20) 9,611 (22,051) 22,448 2,812,907 Other comprehensive income: Revaluation of land and buildings Reverse expired or realised cash flow hedge reserves Currency translation differences Fair value of forward foreign exchange contracts Fair value of available for sale financial assets Other comprehensive income Profit for the year Total comprehensive income for the year - - - - - - - - - - - - - 13,222 - - - - - 375,378 13,222 - - - (1,715) - - (1,715) - - - - - (1,830) (1,830) - 375,378 13,222 (1,715) (1,830) Cost of share based payments Shares issued Dividends paid Distribution to members - 2,072 - - - - (267,337) - - - - - - - - - - - - - - 20 - (8) - 12 - 12 - - - - - - - - - - - - 745 - - - - - - - - - - - - - - - (362) - 1,494 - - 1,132 4,672 12,860 20 (221) (8) (1,830) 10,821 380,050 5,804 390,871 - - (976) (350) 745 2,072 (268,313) (350) At 30 June 2018 388,381 2,337,241 144,526 40,659 11,902 (8) 10,356 (22,051) 26,926 2,937,932 The above Statement of Changes in Equity should be read in conjunction with the accompanying notes. HARVEY NORMAN HOLDINGS LIMITED | ANNUAL REPORT 2018 70 STATEMENT OF CHANGES IN EQUITY FOR THE YEAR ENDED 30 JUNE 2018 (CONTINUED) Attributable to Equity Holders of the Parent Contributed Equity Retained Profits Asset Revaluation Reserve Foreign Currency Translation Reserve Available for Sale Reserve Cash Flow Hedge Reserve Employee Equity Benefits Reserve Acquisition Reserve Non-controlling Interests TOTAL EQUITY $000 $000 $000 $000 $000 $000 $000 $000 $000 $000 At 1 July 2016 385,296 2,125,186 111,199 48,021 9,682 (32) 8,995 (22,051) 22,378 2,688,674 Other comprehensive income: Revaluation of land and buildings Reverse expired or realised cash flow hedge reserves Currency translation differences Fair value of forward foreign exchange contracts Fair value of available for sale financial assets Other comprehensive income Profit for the year Total comprehensive income for the year Cost of share based payments Shares issued Dividends paid Distribution to members - - - - - - - - - - - - - 20,105 - - - - - - (5,647) - - - 448,976 20,105 - (5,647) - 448,976 20,105 (5,647) - 1,013 - - - - (344,962) - - - - - - - - - - - - - 4,050 4,050 - 4,050 - - - - - 32 - (20) - 12 - 12 - - - - - - - - - - - - 616 - - - - - - - - - - - - - - - - - (1,295) - - (1,295) 3,990 20,105 32 (6,942) (20) 4,050 17,225 452,966 2,695 470,191 - - (645) (1,980) 616 1,013 (345,607) (1,980) At 30 June 2017 386,309 2,229,200 131,304 42,374 13,732 (20) 9,611 (22,051) 22,448 2,812,907 The above Statement of Changes in Equity should be read in conjunction with the accompanying notes. HARVEY NORMAN HOLDINGS LIMITED | ANNUAL REPORT 2018 71 STATEMENT OF CASH FLOWS FOR THE YEAR ENDED 30 JUNE 2018 Cash Flows from Operating Activities Net receipts from franchisees Receipts from customers Payments to suppliers and employees Distributions received from joint ventures GST paid Interest received Interest and other costs of finance paid Income taxes paid Dividends received CONSOLIDATED June 2018 $000 June 2017 $000 Note 947,058 2,134,595 (2,388,310) 10,125 (66,102) 5,871 (25,619) (166,161) 2,713 882,476 1,992,891 (2,252,918) 11,546 (44,621) 4,971 (19,420) (152,454) 2,669 Net Cash Flows From Operating Activities 28(b) 454,170 425,140 Cash Flows from Investing Activities Payments for purchases of property, plant and equipment and intangible assets Payments for purchase of investment properties Proceeds from sale of property, plant and equipment and properties held for resale Payments for purchase of units in unit trusts and other investments Payments for purchase of equity accounted investments Proceeds from sale of /(payments for purchase of) listed securities Proceeds from insurance claims Loans granted to joint venture entities, joint venture partners and unrelated entities (93,895) (125,661) 2,422 (107) (4,256) 10,436 2,458 (94,882) (89,366) (114,752) 28,592 (161) (8,947) (6,537) - (7,594) Net Cash Flows Used In Investing Activities (303,485) (198,765) Cash Flows from Financing Activities Proceeds from shares issued Proceeds from Syndicated Facility Dividends paid Loans (repaid to) / received from related parties Repayment of other borrowings 2,072 210,000 (267,337) (6,573) (6,266) 1,013 70,000 (344,962) 2,075 (15,250) Net Cash Flows Used In Financing Activities (68,104) (287,124) Net Increase / (Decrease) in Cash and Cash Equivalents Cash and Cash Equivalents at Beginning of the Year Cash and Cash Equivalents at End of the Year 28(a) 82,581 42,882 125,463 (60,749) 103,631 42,882 The above Statement of Cash Flows should be read in conjunction with the accompanying notes. 72 72 NOTES TO THE FINANCIAL STATEMENTS 1. STATEMENT OF SIGNIFICANT ACCOUNTING POLICIES (a) Corporate Information Harvey Norman Holdings Limited (the “Company”) is a for profit company limited by shares incorporated in Australia and operating in Australia, New Zealand, Ireland, Northern Ireland, Singapore, Malaysia, Slovenia and Croatia whose shares are publicly traded on the Australian Securities Exchange (“ASX”) trading under the ASX code HVN. (b) Basis of Preparation The financial report has been prepared on a historical cost basis, except for investment properties, land and buildings, derivative financial instruments, listed shares held for trading and available-for-sale investments, which have been measured at fair value. The carrying values of recognised assets and liabilities that are designated as hedged items in fair value hedges that would otherwise be carried at amortised cost are adjusted to record changes in the fair values attributable to the risks that are being hedged in effective hedge relationships. The financial report is presented in Australian dollars and all values are rounded to the nearest thousand dollars ($000) unless otherwise stated under the option available to the Company under Australian Securities and Investments Commission Corporations (Rounding in Financial/Directors’ Reports) Instrument 2016/191. The Company is an entity to which this legislative instrument applies. The consolidated financial statements of the Company and its subsidiaries (the “consolidated entity”) for the year ended 30 June 2018 was authorised for issue in accordance with a resolution of the directors on 28 September 2018. (c) Statement of Compliance The financial report is a general-purpose financial report, which has been prepared in accordance with the requirements of the Corporations Act 2001, Australian Accounting Standards and Interpretations, and complies with other requirements of the law. The financial report complies with Australian Accounting Standards, as issued by the Australian Accounting Standards Board, and International Financial Reporting Standards (IFRS), as issued by the International Accounting Standards Board. Australian Accounting Standards and Interpretations that have recently been issued or amended but are not yet effective have not been adopted by the consolidated entity for the annual reporting period ended 30 June 2018. For details on the impact of future accounting standards, refer to page 84. (d) Basis of consolidation The consolidated financial statements comprise the financial statements of Harvey Norman Holdings Limited and its controlled entities. Control is achieved when the consolidated entity is exposed, or has rights, to variable returns from its involvement with the investee and has the ability to affect those returns through its power over the investee. Specifically, the consolidated entity controls an investee if and only if the consolidated entity has all of the following:    Power over the investee (i.e. existing rights that give it the current ability to direct the relevant activities of the investee) Exposure, or rights, to variable returns from its involvement with the investee, and The ability to use its power over the investee to affect its returns When the consolidated entity has less than a majority of the voting or similar rights of an investee, the consolidated entity considers all relevant facts and circumstances in assessing whether it has power over an investee, including:    The contractual arrangement with the other vote holders of the investee Rights arising from other contractual arrangements The consolidated entity’s voting rights and potential voting rights The consolidated entity re-assesses whether or not it controls an investee if facts and circumstances indicate that there are changes to one or more of the three elements of control. Consolidation of a subsidiary begins when the consolidated entity obtains control over the subsidiary and ceases when the consolidated entity loses control of the subsidiary. All intercompany balances and transactions, including unrealised profits arising from intra-group transactions, have been eliminated in full. Unrealised losses are eliminated unless costs cannot be recovered. Financial statements of foreign controlled entities presented in accordance with overseas accounting principles are, for consolidation purposes, adjusted to comply with the consolidated entity’s policy and generally accepted accounting principles in Australia. Non-controlling interests are allocated their share of net profit after tax in the income statement and are presented within equity in the consolidated statement of financial position, separately from the equity of the owners of the Parent. Losses are attributed to the non- controlling interest even if that results in a deficit balance. A change in the ownership interest of a subsidiary (without a change in control) is to be accounted for as an equity transaction. (e) Summary of Significant Accounting Policies (i) Changes in accounting policy, disclosures, standards and interpretations The accounting policies adopted are consistent with those of the previous financial year except as discussed below. The consolidated entity applied for the first time certain standards and amendments, which are effective for annual periods beginning on or after 1 January 2017. These new pronouncements do not have a material impact on the annual consolidated financial statements of the consolidated entity. The consolidated entity has not early adopted any other standard, interpretation or amendment that has been issued but is not yet effective. HARVEY NORMAN HOLDINGS LIMITED | ANNUAL REPORT 2018 73 NOTES TO THE FINANCIAL STATEMENTS (CONTINUED) 1. STATEMENT OF SIGNIFICANT ACCOUNTING POLICIES (continued) (ii) Significant accounting judgements, estimates and assumptions In applying the consolidated entity’s accounting policies, management continually evaluates judgements, estimates and assumptions based on experience and other factors, including expectations of future events that may have an impact on the consolidated entity. All judgments, estimates and assumptions made are believed to be reasonable based on the most current set of circumstances available to management. Actual results may differ from the judgments, estimates and assumptions. Significant judgments, estimates and assumptions made by management in the preparation of these financial statements are outlined below: Significant accounting judgements: (a) Assessment of AASB 10 Consolidated Financial Statements in respect of Harvey Norman®, Domayne® and Joyce Mayne® Franchisees in Australia In determining whether the consolidated entity has control over an entity (investee) and should or should not consolidate the results of the investee, the consolidated entity assesses its exposure to / rights to variable returns from its involvement with the investee and whether it has the ability to affect those returns through its power over the investee. The assessment of whether Harvey Norman Holdings Limited (HNHL), or any subsidiary of HNHL, as franchisor, should consolidate or not consolidate the results of a franchisee or business operations of that franchisee, is determined by whether the franchisor has control over the franchisee. The assessment of whether a franchisor controls a franchisee or the business operations of that franchisee, involves significant judgment in assessing whether the franchisor has sufficient power through its rights under arrangements with franchisees and through the practical application of those arrangements, to direct the relevant activities of the franchisee that most significantly affect the returns (profits or losses) of the franchisee. At least on an annual basis, the directors of HNHL will reassess the requirements of control in accordance with AASB 10 Consolidated Financial Statements. During the 2018 financial year, after considering both the legal arrangements in place between the consolidated entity and Harvey Norman®, Domayne® and Joyce Mayne® franchisees and the practical application of those arrangements, the directors have continued to conclude that HNHL, or any subsidiary of HNHL, does not control the business operations of franchisees. In particular, HNHL, or any subsidiary of HNHL, does not have any existing rights that give the consolidated entity the current ability to direct the relevant activities that most significantly affect the returns of the franchisee. The ability to direct the relevant activities that most significantly affect the returns of the franchisee, rest with the franchisee. HNHL, or any subsidiary of HNHL, does not have any voting rights or legal ownership of any equity interest in any franchisee business. Each franchise business is operated by a separate legal entity which is independent of HNHL, or any subsidiary of HNHL. The franchisee has the authority and decision-making responsibility over the day-to-day operation and administration of the franchisee business. The franchisee has the substantive right to control the decisions regarding sales and pricing, inventory purchasing and inventory management, staff management (hiring, termination, staff numbers, remuneration, appointment of management) and employment of personnel including key management. The above assessment has resulted in the conclusion that the assets, liabilities and the results of franchisees in Australia are not consolidated by the consolidated entity because the consolidated entity does not control the business operations of Harvey Norman®, Domayne® and Joyce Mayne® franchisees. (b) Operating lease commitments – consolidated entity as lessor The consolidated entity has entered into commercial property leases in respect of its investment property portfolio. The entity has determined, based on an evaluation of the terms and conditions of the arrangements, that it retains all the significant risks and rewards of ownership of these properties and has classified the leases as operating leases. (c) Recovery of deferred tax assets Deferred tax assets are recognised for deductible temporary differences as management considers that it is probable that future taxable profits will be available to utilise those temporary differences. Deferred tax assets are recognised for unused tax losses to the extent that it is probable that taxable profit will be available against which the losses can be utilised. Significant management judgement is required to determine the amount of deferred tax assets that can be recognised, based upon the likely timing and the level of future taxable profits. Significant accounting estimates and assumptions: The key estimates and assumptions at the reporting date that have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next annual reporting period, are described below. The consolidated entity based its assumptions and estimates on parameters available when the consolidated financial statements were prepared. Existing circumstances and assumptions about future developments, however, may change due to market changes or circumstances arising beyond the control of the consolidated entity. Such changes are reflected in the assumptions when they occur. (a) Revaluation of investment properties The consolidated entity values investment properties at fair value. The valuations are determined by independent external valuers or reviewed internally by the Property Review Committee and the directors of the Company. Independent valuations are performed by external, professionally qualified valuers who hold a recognised, relevant professional qualification and have specialised expertise in the properties valued. The key assumptions used to determine the fair value of the investment properties, and the relevant sensitivity analysis, are disclosed in Note 15. 74 NOTES TO THE FINANCIAL STATEMENTS (CONTINUED) 1. STATEMENT OF SIGNIFICANT ACCOUNTING POLICIES (continued) (ii) Significant accounting judgements, estimates and assumptions (continued) (b) Revaluation of property, plant and equipment The consolidated entity values land and buildings at fair value. The valuations are determined by independent external valuers or reviewed internally by the Property Review Committee and the directors of the Company. The key assumptions used to determine the fair value of owner-occupied land and buildings, and the relevant sensitivity analysis, are disclosed in Note 14. (c) Revaluation of investment properties for development An investment property for development is valued at fair value if it can be reliably determined. If a fair value cannot be reliably determined, then the investment property for development is measured at cost. The key assumptions used to determine the fair value of the investment properties for development and the relevant sensitivity analysis, are disclosed in Note 15. (d) Impairment of financial assets and trade receivables The consolidated entity assesses, at each reporting date, whether there is objective evidence that a financial asset or a group of financial assets is impaired. A financial asset or a group of financial assets is deemed to be impaired if there is objective evidence of impairment as a result of one or more events that has occurred after the initial recognition of the asset (an incurred ”loss event”) and that loss event has an impact on the estimated future cash flows of the financial asset or the group of financial assets that can be reliably estimated. Evidence of impairment may include indications that the debtors or a group of debtors is experiencing significant financial difficulty, default or delinquency in interest or principal payments or the probability that they will enter bankruptcy. The carrying amount of the asset is either directly reduced or reduced through the use of an allowance account and the amount of the loss is recognised in the income statement. Further details on the significant judgements considered by management relating to impairment of financial assets are disclosed in Note 7. The impairment loss is disclosed in Notes 4 and 7. (e) Impairment of equity-accounted investments The consolidated entity determines whether there is objective evidence that the investment in the associate or joint venture is impaired. If there is such evidence, the consolidated entity calculates the amount of impairment as the difference between the recoverable amount of the associate or joint venture and its carrying value. (f) Share-based payment transactions The consolidated entity measures the cost of equity-settled transactions with employees by reference to the fair value of the equity instruments at the date at which they are granted. (g) Make good provisions Provisions are recognised for the anticipated costs of future restoration of leased premises. The provision includes future cost estimates associated with dismantling and removing the assets and restoring the leased premises according to contractual arrangements. These future cost estimates are discounted to their present value. The related carrying amounts are disclosed in Note 20. (h) Onerous lease provisions The provision for onerous lease costs represents the present value of the future lease payments that the consolidated entity is presently obligated to make in respect of onerous lease contracts under non-cancellable operating lease agreements. This obligation may be reduced by the revenue expected to be earned on the lease including estimated future sub-lease revenue, where applicable. The estimate may vary as a result of changes in the utilisation of the leased premises and sub-lease arrangements where applicable. The related carrying amounts are disclosed in Note 20. (iii) Investment in associates and joint ventures An associate is an entity over which the consolidated entity has significant influence. Significant influence is the power to participate in the financial and operating policy decisions of the investee, but does not control or have joint control over those policies. A joint venture is a type of joint arrangement whereby the parties that have joint control of the arrangement have rights to the net assets of the joint venture. Joint control is the contractually agreed sharing of control of an arrangement, which exists only when decisions about the relevant activities require unanimous consent of the parties sharing control. The considerations made in determining significant influence or joint control are similar to those necessary to determine control over subsidiaries. The consolidated entity’s investments in its associate and joint venture are accounted for using the equity method. Under the equity method, the investment in an associate or joint venture is initially recognised at cost. The carrying amount of the investment is adjusted to recognise changes in the consolidated entity’s share of net assets of the associate or joint venture since the acquisition date. After application of the equity method, the consolidated entity determines whether it is necessary to recognise any impairment loss with respect to the consolidated entity’s net investment in the associates and joint ventures. At each reporting date, the consolidated entity determines whether there is objective evidence that the investment in the associate or joint venture is impaired. If there is such evidence, the consolidated entity calculates the amount of impairment as the difference between the recoverable amount of the associate or joint venture and its carrying value. HARVEY NORMAN HOLDINGS LIMITED | ANNUAL REPORT 2018 75 NOTES TO THE FINANCIAL STATEMENTS (CONTINUED) 1. STATEMENT OF SIGNIFICANT ACCOUNTING POLICIES (continued) (iii) Investment in associates and joint ventures (continued) Joint venture land and building assets, primarily relating to the joint ownership of shopping complexes, resort operations and residential/convention developments, are directly owned by each joint venture partner as tenants in common in their respective shares. Joint venture land and buildings assets are classified as joint venture operations and the consolidated entity’s share of land and building assets are proportionately consolidated in the consolidated financial statements within investment properties. (iv) Foreign currency translation Both the functional and presentation currency of Harvey Norman Holdings Limited and its Australian subsidiaries is Australian dollars. Transactions in foreign currencies are initially recorded in the functional currency at exchange rates prevailing at the date of the transaction. Monetary assets and liabilities denominated in foreign currencies are retranslated at the exchange rate prevailing at balance date. Differences arising on settlement or translation of monetary items are recognised in profit or loss with the exception of monetary items that are designated as part of the hedge of the consolidated entity’s net investment in a foreign operation. These are recognised in other comprehensive income until the net investment is disposed of, at which time, the cumulative amount is reclassified to profit or loss. Tax charges and credits attributable to exchange differences on those monetary items are also recorded in other comprehensive income. Non-monetary items that are measured in terms of historical cost in a foreign currency are translated using the exchange rate as at the date of the initial transaction. Non-monetary items measured at fair value in a foreign currency are translated using the exchange rates at the date when the fair value was determined. The functional currency of overseas subsidiaries is the currency commonly used in their respective countries. As at the reporting date the assets and liabilities of these overseas subsidiaries are translated into the presentation currency of the consolidated entity at the rate of exchange prevailing at the balance date and the income statements are translated at the weighted average exchange rates for the year. The exchange differences arising on retranslation for consolidation are recognised in other comprehensive income. On disposal of a foreign entity, the component of other comprehensive income relating to that particular foreign operation is recognised in profit or loss. (v) Property, plant and equipment Plant and equipment assets are stated at historical cost less accumulated depreciation and any accumulated impairment losses. Land, leasehold land and buildings are measured at fair value less accumulated depreciation and any impairment losses recognised after the date of the revaluation. Valuations are performed with sufficient frequency to ensure that the carrying amount of an asset does not differ materially from its fair value. Depreciation is calculated on a straight-line basis over the estimated useful life of the asset as follows:       Land – not depreciated Leasehold land – lease term Buildings under construction – not depreciated Buildings – 20 to 40 years Owned plant and equipment – 3 to 20 years Plant and equipment under finance lease – 1 to 5 years The assets’ residual values, useful lives and amortisation methods are reviewed, and adjusted if appropriate, at each financial year end. Revaluation of owner-occupied properties Following initial recognition at cost, owner-occupied land and buildings (including leasehold land) are carried at fair value less any subsequent accumulated depreciation and accumulated impairment losses. Fair value is determined by reference to market-based evidence, which is the amount for which the assets could be exchanged between a knowledgeable, willing buyer and a knowledgeable, willing seller in an arm’s length transaction as at the valuation date. Owner-occupied properties, upon any revaluation, are valued at fair value, determined by independent licensed valuers, or directors’ valuations where necessary. Any revaluation surplus is recorded in other comprehensive income and credited to the asset revaluation reserve in equity. However, to the extent that it reverses a revaluation decrease of the same asset previously recognised in the income statement, the increase is recognised in the income statement. Any revaluation deficit is recognised in the income statement, except to the extent that it offsets a previous surplus of the same asset in the asset revaluation reserve. Any accumulated depreciation as at revaluation date is eliminated against the gross carrying amount of the asset and the net amount is restated to the fair value of the asset. Upon disposal, any revaluation reserve relating to the particular asset being sold is transferred to retained earnings. Valuations are performed with sufficient regularity to ensure that the carrying amount does not differ materially from the asset’s fair value at the balance date. Derecognition and disposal An item of property, plant and equipment is derecognised upon disposal or when no future economic benefits are expected from its use or disposal. Any gain or loss arising on derecognition of the asset (calculated as the difference between the net disposal proceeds and the carrying amount of the item) is included in the income statement when the asset is derecognised. 76 NOTES TO THE FINANCIAL STATEMENTS (CONTINUED) 1. STATEMENT OF SIGNIFICANT ACCOUNTING POLICIES (continued) (vi) Borrowing costs Borrowing costs directly attributable to the acquisition, construction or production of qualifying assets, which are assets that necessarily take a substantial period of time to get ready for their intended use or sale, are added to the cost of those assets, until such time as the assets are substantially ready for their intended use or sale. All other borrowing costs are recognised as an expense when incurred. Borrowing costs consist of interest and other costs that an entity incurs in connection with the borrowing of funds. (vii) Investment properties Investment properties Investment property, which is property held to earn rentals and / or for capital appreciation are measured initially at cost including transaction costs. Subsequent to initial recognition, investment properties are stated at fair value, which reflects market conditions at the balance date. Gains or losses arising from changes in the fair values of investment properties are included in the income statement in the period in which they arise. Investment property is derecognised when the property has either been disposed of or when the property is permanently withdrawn from use and no future benefit is expected from their disposal. The difference between the net disposal proceeds and the carrying amount of the asset is recognised in the income statement in the period of derecognition. Transfers are made to investment property when, and only when, there is a change in use, evidenced by the ending of owner-occupation, commencement of an operating lease to another party or ending of construction or development. Transfers are made from investment property when, and only when, there is a change in use, evidenced by commencement of owner-occupation. Properties located in the Australian Capital Territory (“ACT”) which are held under a 99 year ground crown land sublease from the Commonwealth Government are not amortised over the remaining life of the lease, as the expectation is that these leases will be renewed at minimal cost once they expire. Properties located in the ACT have been accounted for as investment properties as they are primarily held to earn rental income. Each investment property is valued at fair value. Each investment property is the subject of a lease or licence in favour of independent third parties, including Harvey Norman®, Domayne® and Joyce Mayne® franchisees (“Franchisees”). Franchisees occupy properties pursuant to a licence, terminable upon reasonable notice. The fair value in respect of each investment property has been calculated primarily using the income capitalisation valuation method, against current market rental value, and having regard to, in respect of each property:      the highest and best use quality of construction age and condition of improvements recent market sales data in respect of comparable properties current market rental value, being the amount that could be exchanged between knowledgeable, willing parties in an arm’s length transaction tenure of franchisees and external tenants adaptive reuse of buildings non-reliance on turnover rent the specific circumstances of the property not included in any of the above points     The income capitalisation valuation method is the primary method used for valuations. A discounted cash flow valuation or a direct sale comparison valuation is undertaken as a secondary method, excluding investment property for development. Investment property for development Investment property for development are valued at fair value if fair value can be reliably determined. The direct sale comparison method is used for the valuation of investment property for development. (viii) Intangible assets Intangible assets, consisting of capitalised computer software assets, capitalised development expenditures and licence property, are carried at cost less any accumulated amortisation and accumulated impairment losses. Intangible assets are amortised on a straight line basis over their estimated useful lives but not greater than a period of eight and a half (8.5) years. Intangible assets are tested for impairment where an indicator of impairment exists, either individually or at the cash generating unit level. Useful lives are also examined on an annual basis and adjustments, where applicable, are made on a prospective basis. The amortisation expense on intangible assets with finite lives is recognised in profit or loss in the expense category consistent with the function of the intangible asset. Gains or losses arising from derecognition of an intangible asset are measured as the difference between the net disposal proceeds and the carrying amount of the intangible asset and are recognised in the income statement when the intangible asset is derecognised. Development expenditures on an individual project are recognised as an intangible asset when the consolidated entity can demonstrate:      the technical feasibility of completing the intangible asset so that the asset will be available for use or sale its intention to complete and its ability and intention to use or sell the asset how the asset will generate future economic benefits the availability of resources to complete the asset the ability to measure reliably the expenditure during development Following initial recognition of the development expenditure as an asset, the asset is carried at cost less any accumulated amortisation and accumulated impairment losses. Amortisation of the asset begins when development is complete and the asset is available for use. It is amortised over the period of expected future benefit. During the period of development, the asset is tested for impairment annually. HARVEY NORMAN HOLDINGS LIMITED | ANNUAL REPORT 2018 77 NOTES TO THE FINANCIAL STATEMENTS (CONTINUED) 1. STATEMENT OF SIGNIFICANT ACCOUNTING POLICIES (continued) (ix) Impairment of non-financial assets The consolidated entity assesses, at each reporting date, whether there is an indication that an asset may be impaired. If any indication exists, or when annual impairment testing for an asset is required, the consolidated entity estimates the asset’s recoverable amount. An asset’s recoverable amount is the higher of an asset’s or cash generating unit’s (CGUs) fair value less costs to sell and its value in use. Recoverable amount is determined for an individual asset, unless the asset does not generate cash inflows that are largely independent of those from other assets or groups of assets, in which case, the recoverable amount is determined for the CGU to which the asset belongs. When the carrying amount of an asset or CGU exceeds its recoverable amount, the asset is considered impaired and is written down to its recoverable amount. In assessing value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset. In determining fair value less costs to sell, recent market transactions are taken into account, if available. If no such transactions can be identified, an appropriate valuation model is used. These calculations are corroborated by valuation multiples for publicly traded subsidiaries or other available fair value indicators. The consolidated entity bases its impairment calculation on detailed budgets and forecast calculations, which are prepared separately for each of the consolidated entity’s CGUs to which the individual assets are allocated. These budgets and forecast calculations generally cover a period of five (5) years. For longer periods, a long-term growth rate is calculated and applied to project future cash flows after the fifth year. Impairment losses of continuing operations, including impairment on inventories, are recognised in the income statement in expense categories consistent with the function of the impaired assets, except for a property previously revalued and the revaluation was taken to other comprehensive income. In this case, the impairment is also recognised in other comprehensive income up to the amount of any previous revaluation. An assessment is made at each reporting date to determine whether there is any indication that previously recognised impairment losses may no longer exist or may have decreased. If such indication exists, the consolidated entity estimates the asset’s or CGU’s recoverable amount. A previously recognised impairment loss is reversed only if there has been a change in the assumptions used to determine the asset’s recoverable amount since the last impairment loss was recognised. The reversal is limited so that the carrying amount of the asset does not exceed its recoverable amount, nor exceed the carrying amount that would have been determined, net of depreciation, had no impairment loss been recognised for the asset in prior years. Such reversal is recognised in the income statement unless the asset is carried at a revalued amount, in which case, the reversal is treated as a revaluation increase. (x) Financial assets Financial assets are classified, at initial recognition, as financial assets at fair value through profit or loss, loans and receivables, held-to- maturity investments, available-for-sale financial assets or as derivatives designated as hedging instruments in an effective hedge, as appropriate. All financial assets are recognised initially at fair value plus transaction costs, except in the case of financial assets recorded at fair value through profit or loss. Purchases or sales of financial assets that require delivery of assets within a time frame established by regulation or convention in the market place (regular way trades) are recognised on the trade date, i.e. the date that the consolidated entity commits to purchase or sell the asset. The consolidated entity’s financial assets include cash and short-term deposits, trade and other receivables, quoted financial instruments and derivative financial instruments. For purposes of subsequent measurement, financial assets are classified in four categories:     Financial assets at fair value through profit or loss Held-to-maturity investments Loans and receivables Available-for-sale financial assets Financial assets at fair value through profit or loss Financial assets at fair value through profit or loss include financial assets held for trading and financial assets designated upon initial recognition at fair value through profit or loss. Financial assets are classified as held for trading if they are acquired for the purpose of selling in the near term with the intention of making a profit. Derivatives are also classified as held for trading unless they are designated as effective hedging instruments as defined by AASB 139 Financial Instruments: Recognition and Measurement (AASB 139). Financial assets at fair value through profit or loss are carried in the statement of financial position at fair value with net changes in fair value presented as finance costs (negative net changes in fair value) or finance income (positive net changes in fair value) in the income statement. Held-to-maturity investments Non-derivative financial assets with fixed or determinable payments and fixed maturity are classified as held-to-maturity when the consolidated entity has the positive intention and ability to hold to maturity. After initial measurement, held-to-maturity investments are measured at amortised cost using the effective interest rate (EIR), less impairment. Amortised cost is calculated by taking into account any discount or premium on acquisition and fees or costs that are an integral part of the EIR. The EIR amortisation is included as finance income in the income statement. The losses arising from impairment are recognised in the income statement as finance costs. 78 NOTES TO THE FINANCIAL STATEMENTS (CONTINUED) 1. STATEMENT OF SIGNIFICANT ACCOUNTING POLICIES (continued) (x) Financial assets (continued) Loans and receivables Loans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market. After initial measurement, such financial assets are subsequently measured at amortised cost using the EIR method, less impairment. Amortised cost is calculated by taking into account any discount or premium on acquisition and fees or costs that are an integral part of the EIR. The EIR amortisation is included as finance income in the income statement. The losses arising from impairment are recognised in the income statement as administrative expenses for loans and in other operating expenses for receivables. Available-for-sale financial assets Available-for-sale financial assets include equity investments. Equity investments classified as available-for-sale are those that are neither classified as held for trading nor designated at fair value though profit or loss. After initial recognition, available-for-sale financial assets are measured at fair value with gains or losses recognised as other comprehensive income in the available-for-sale reserve until the investment is derecognised, at which time the cumulative gain or loss is recognised in other operating income, or the investment is determined to be impaired, when the cumulative loss is reclassified from the available-for-sale reserve to the income statement in finance costs. The fair values of investments that are actively traded in organised financial markets are determined by reference to quoted market bid prices at the close of business at balance date. For investments with no active market, fair values are determined using valuation techniques. Dividends on available-for-sale equity instruments are recognised in the income statement when the consolidated entity’s right to receive the dividends is established. Derecognition of financial assets A financial asset (or, where applicable, a part of a financial asset or part of a group of similar financial assets) is derecognised when:   The rights to receive cash flows from the asset have expired. The consolidated entity has transferred its rights to receive cash flows from the asset or has transferred substantially all the risks and rewards of the asset. Impairment of financial assets The consolidated entity assesses, at each reporting date, whether there is objective evidence that a financial asset or a group of financial assets is impaired. A financial asset or a group of financial assets is deemed to be impaired if, and only if, there is objective evidence of impairment as a result of one or more events that has occurred after the initial recognition of the asset (an incurred ”loss event”) and that loss event has an impact on the estimated future cash flows of the financial asset or the group of financial assets that can be reliably estimated. Evidence of impairment may include indications that the debtors or a group of debtors is experiencing significant financial difficulty, default or delinquency in interest or principal payments or the probability that they will enter bankruptcy. The carrying amount of the asset is either directly reduced or reduced through the use of an allowance account and the amount of the loss is recognised in the income statement. Loans together with the associated allowance are written off when there is no realistic prospect of future recovery and all collateral has been realised or has been transferred to the consolidated entity. If, in a subsequent year, the amount of the estimated impairment loss increases or decreases because of an event occurring after the impairment was recognised, the previously recognised impairment loss is increased or reduced by adjusting the allowance account. If a future write-off is later recovered, the recovery is credited in the income statement. For available-for-sale financial investments, the consolidated entity assesses at each reporting date whether there is objective evidence that an investment or a group of investments is impaired. In the case of equity investments classified as available-for-sale, objective evidence would include a significant or prolonged decline in the fair value of the investment below its cost. ”Significant” is evaluated against the original cost of the investment and ”prolonged” against the period in which the fair value has been below its original cost. When there is evidence of impairment, the cumulative loss, measured as the difference between the acquisition cost and the current fair value, less any impairment loss on that investment previously recognised in the income statement, is removed from other comprehensive income and recognised in the income statement. Impairment losses on equity investments are not reversed through the income statement; increases in their fair value after impairment are recognised directly in other comprehensive income. (xi) Financial liabilities Financial liabilities are classified, at initial recognition, as financial liabilities at fair value through profit or loss, loans and borrowings, payables, or as derivatives designated as hedging instruments in an effective hedge, as appropriate. All financial liabilities are recognised initially at fair value and, in the case of loans and borrowings and payables, net of directly attributable transaction costs. The consolidated entity’s financial liabilities include trade and other payables, interest-bearing loans and borrowings and derivative financial instruments. The measurement of financial liabilities depends on their classification, described as follows: Financial liabilities at fair value through profit or loss Financial liabilities at fair value through profit or loss include financial liabilities held for trading and financial liabilities designated upon initial recognition as at fair value through profit or loss. Financial liabilities are classified as held for trading if they are acquired for the purpose of selling in the near term. Gains or losses on liabilities held for trading are recognised in the income statement. Financial liabilities designated upon initial recognition at fair value through profit and loss only if the criteria of AASB 139 are satisfied. Loans and borrowings After initial recognition, interest bearing loans and borrowings are subsequently measured at amortised cost using the EIR method. Gains and losses are recognised in the income statement when the liabilities are derecognised as well as through the EIR amortisation process. Amortised cost is calculated by taking into account any discount or premium on acquisition and fees or costs that are an integral part of the EIR. The EIR amortisation is included in finance costs in the income statement. Derecognition of financial liabilities A financial liability is derecognised when the obligation under the liability is discharged, cancelled or expires. When an existing financial liability is replaced by another from the same lender on substantially different terms, or the terms of an existing liability are substantially HARVEY NORMAN HOLDINGS LIMITED | ANNUAL REPORT 2018 79 NOTES TO THE FINANCIAL STATEMENTS (CONTINUED) 1. STATEMENT OF SIGNIFICANT ACCOUNTING POLICIES (continued) (xi) Financial liabilities (continued) modified, such an exchange or modification is treated as the derecognition of the original liability and the recognition of a new liability. The difference in the respective carrying amounts is recognised in the income statement. (xii) Derivative financial instruments and hedge accounting The consolidated entity uses derivative financial instruments such as forward currency contracts to hedge its risks associated with foreign currency fluctuations. Such derivative financial instruments are initially recognised at fair value on the date on which a derivative contract is entered into and are subsequently remeasured at fair value. The fair value of forward currency contracts is calculated by reference to current forward exchange rates for contracts with similar maturity profiles. Derivatives are carried as assets when their fair value is positive and as liabilities when their fair value is negative. Any gains or losses arising from changes in the fair value of derivatives are taken directly to profit or loss, except for the effective portion of cash flow hedges, which is recognised in other comprehensive income and later reclassified to profit or loss when the hedge item affects profit or loss. For the purposes of hedge accounting, hedges are classified as either fair value hedges when they hedge the exposure to changes in the fair value of a recognised asset or liability or an unrecognised firm commitment; or cash flow hedges where they hedge exposure to variability in cash flows that is either attributable to a particular risk associated with a recognised asset or liability or a highly probable forecast transaction. At the inception of a hedge relationship, the consolidated entity formally designates and documents the hedge relationship to which the consolidated entity wishes to apply hedge accounting and the risk management objective and strategy for undertaking the hedge. The documentation includes identification of the hedging instrument, the hedged item or transaction, the nature of the risk being hedged and how the entity will assess the effectiveness of changes in the hedging instrument’s fair value in offsetting the exposure to changes in the hedged item’s fair value or cash flows attributable to the hedged risk. Such hedges are expected to be highly effective in achieving offsetting changes in fair value or cash flows and are assessed on an ongoing basis to determine that they actually have been highly effective throughout the financial reporting periods for which they were designated. Fair value hedges The change in the fair value of a hedging instrument is recognised in profit or loss. The change in the fair value of the hedged item attributable to the risk hedged is recorded as part of the carrying value of the hedged item and is also recognised in profit or loss. For fair value hedges relating to items carried at amortised cost, any adjustment to carrying value is amortised through profit or loss over the remaining term of the hedge using the EIR method. EIR amortisation may begin as soon as an adjustment exists and no later than when the hedged item ceases to be adjusted for changes in its fair value attributable to the risk being hedged. If the hedged item is derecognised, the unamortised fair value is recognised immediately in profit or loss. When an unrecognised firm commitment is designated as a hedged item, the subsequent cumulative change in the fair value of the firm commitment attributable to the hedged risk is recognised as an asset or liability with a corresponding gain or loss recognised in profit and loss. The consolidated entity uses forward currency contracts to manage the exposure of changes in the fair value of its receivables or payables that are denominated in foreign currencies. Cash flow hedges The effective portion of the gain or loss on the hedging instrument is recognised in other comprehensive income in the cash flow hedge reserve, while any ineffective portion is recognised immediately in the income statement. The consolidated entity uses forward currency contracts as hedges of its exposure to foreign currency risk in forecast transactions and firm commitments. The ineffective portion relating to forward currency contracts is recognised in other operating income or expenses. Amounts recognised as other comprehensive income are transferred to profit or loss when the hedged transaction affects profit or loss. When the hedged item is the cost of a non-financial asset or non-financial liability, the amounts recognised as other comprehensive income are transferred to the initial carrying amount of the non-financial asset or liability. If the hedge instrument expires or is sold, terminated or exercised without replacement or rollover (as part of the hedging strategy), or if its designation as a hedge is revoked, or when the hedge no longer meets the criteria for hedge accounting, any cumulative gain or loss previously recognised in other comprehensive income remains separately in other comprehensive income until the forecast transaction occurs or the foreign currency firm commitment is met. (xiii) Inventories Inventories are valued at the lower of cost and net realisable value and are recorded net of all volume rebates, marketing and business development contributions and settlement discounts. Costs are on a weighted average basis and include the acquisition cost, freight, duty and other inward charges. Net realisable value is the estimated selling price in the ordinary course of business, less estimated costs necessary to make the sale. (xiv) Cash and cash equivalents Cash and cash equivalents in the statement of financial position comprise cash at bank and on hand and short-term deposits with an original maturity of three months or less. For the purposes of the statement of cash flows, cash and cash equivalents consist of cash and cash equivalents as defined above, net of outstanding bank overdrafts. Bank overdrafts are included within interest-bearing loans and borrowings in current liabilities on the statement of financial position. (xv) Provisions Provisions are recognised when the consolidated entity has a present obligation (legal or constructive) as a result of a past event, it is probable that an outflow of resources embodying economic benefits will be required to settle the obligation and a reliable estimate can be made of the amount of the obligation. 80 NOTES TO THE FINANCIAL STATEMENTS (CONTINUED) 1. STATEMENT OF SIGNIFICANT ACCOUNTING POLICIES (continued) (xv) Provisions (continued) If the effect of the time value of money is material, provisions are discounted using a current pre-tax rate that reflects, when appropriate, the risks specific to the liability. Where discounting is used, the increase in the provision due to the passage of time is recognised as a finance cost, in the income statement. The consolidated entity recognises a liability to pay a dividend when the distribution is authorised and the distribution is no longer at the discretion of the consolidated entity. As per the corporate laws of Australia, a distribution is authorised when it is approved by the shareholders. A corresponding amount is recognised directly in other comprehensive income. Provisions are made for benefits accruing to employees in respect of annual leave and long service leave when it is probable that settlement will be required and they are capable of being measured reliably. Provisions made in respect of employee benefits expected to be settled within 12 months, are measured at their nominal values using the remuneration rate expected to apply at the time of settlement. Provisions made in respect of employee benefits which are not expected to be settled within 12 months are measured as the present value of the estimated future cash outflows to be made by the consolidated entity in respect of services provided by employees up to reporting date. Consideration is given to expected future wage and salary levels, experience of employee departures and periods of service. Expected future payments are discounted using market yields at the reporting date on national government bonds with terms to maturity and currencies that match, as closely as possible, the estimated future cash outflows. Expenses for non-accumulating sick leave are recognised when the leave is taken and are measured at the rates paid or payable. (xvi) Share-based payment transactions The consolidated entity provides benefits to certain employees (including executive directors) of the consolidated entity in the form of share-based payment transactions, whereby employees render services in exchange for shares or rights over shares (“equity-settled transactions”). The cost of equity-settled transactions is determined by the fair value at the date when the grant is made using an appropriate valuation model. That cost is recognised in employee benefits expense, together with a corresponding increase in other comprehensive income (employee equity benefits reserve), over the period in which the service and, where applicable, the performance conditions are fulfilled (the vesting period). The cumulative expense recognised for equity-settled transactions at each reporting date until the vesting date reflects the extent to which the vesting period has expired and the consolidated entity’s best estimate of the number of equity instruments that will ultimately vest. The expense or credit in the income statement for a period represents the movement in cumulative expense recognised as at the beginning and end of that period. Service and non-market performance conditions are not taken into account when determining the grant date fair value of awards, but the likelihood of the conditions being met is assessed as part of the consolidated entity’s best estimate of the number of equity instruments that will ultimately vest. Market performance conditions are reflected within the grant date fair value. Any other conditions attached to an award, but without an associated service requirement, are considered to be non-vesting conditions. Non-vesting conditions are reflected in the fair value of an award and lead to an immediate expensing of an award unless there are also service and/or performance conditions. No expense is recognised for awards that do not ultimately vest because non-market performance and/or service conditions have not been met. Where awards include a market or non-vesting condition, the transactions are treated as vested irrespective of whether the market or non-vesting condition is satisfied, provided that all other performance and/or service conditions are satisfied. When the terms of an equity-settled award are modified, the minimum expense recognised is the grant date fair value of the unmodified award, provided the original terms of the award are met. An additional expense, measured as at the date of modification, is recognised for any modification that increases the total fair value of the share-based payment transaction, or is otherwise beneficial to the employee. Where an award is cancelled by the entity or by the counterparty, any remaining element of the fair value of the award is expensed immediately through profit or loss. The dilutive effect of outstanding options is reflected as additional share dilution in the computation of diluted earnings per share. (xvii) Leases Consolidated entity as lessor Amounts due from lessees under finance leases are recorded as receivables. Finance lease receivables are initially recognised at amounts equal to the present value of the minimum lease payments receivable plus the present value of any unguaranteed residual value expected to accrue at the end of the lease term. Finance lease payments are allocated between interest revenue and reduction of the lease receivable over the term of the lease in order to reflect a constant periodic rate of return on the net investment outstanding in respect of the lease. Leases in which the consolidated entity does not transfer substantially all the risks and benefits of ownership of an asset are classified as operating leases. Initial direct costs incurred in negotiating an operating lease are added to the carrying amount of the leased asset and recognised over the lease term on the same basis as rental income. Contingent rents are recognised as revenue in the period in which they are earned. Consolidated entity as lessee A lease is classified at the inception date as a finance lease or an operating lease. A lease that transfers substantially all the risks and rewards incidental to ownership to the consolidated entity is classified as a finance lease. Finance leases are capitalised at the inception of the lease at the fair value of the leased property or, if lower, at the present value of the minimum lease payments. Lease payments are apportioned between the finance charges and reduction of the lease liability so as to achieve HARVEY NORMAN HOLDINGS LIMITED | ANNUAL REPORT 2018 81 NOTES TO THE FINANCIAL STATEMENTS (CONTINUED) 1. STATEMENT OF SIGNIFICANT ACCOUNTING POLICIES (continued) (xvii) Leases (continued) a constant rate of interest on the remaining balance of the liability. Finance charges are recognised in finance costs in the income statement. Capitalised leased assets are depreciated over the shorter of the estimated useful life of the asset or the lease term. An operating lease is a lease other than a finance lease. Operating lease payments are recognised as an expense in the income statement on a straight-line basis over the lease term. Financial incentive contributions received from lessors are recognised at their fair value on receipt as a liability in the financial statements. The liability is reduced and recognised as income, by offsetting against occupancy expenses in the income statement over the period the consolidated entity expects to derive a benefit from the incentive contribution. Lease incentives are normally amortised to the income statement on a straight-line basis over the term of the lease. (xviii) Revenue Revenue is recognised to the extent that it is probable that the economic benefits will flow to the consolidated entity and the revenue can be reliably measured regardless of when the payment is received. Revenue is measured at the fair value of the consideration received or receivable, taking into account contractually defined terms of payment and excluding taxes or duty. The following specific recognition criteria must also be met before revenue is recognised: Sale of goods Revenue is recognised when the significant risks and rewards of ownership of the goods have passed to the buyer, usually on delivery of the goods. Revenue from the sale of goods is measured at the fair value of the consideration received or receivable, net of returns and allowances, trade discounts and volume rebates. Franchise fee income Revenue attributable to franchise fees is recognised in the income statement only when the franchise fees have been earned. Rental income Rental income arising on investment properties is accounted for on a straight-line basis over the lease terms and is included in revenue due to its operating nature. Contingent rental income is recognised as income in the periods in which it is earned. Interest income For all financial instruments measured at amortised cost and interest-bearing financial assets, interest income is recorded using the effective interest rate (EIR). The EIR is the rate that exactly discounts the estimated future cash receipts over the expected life of the financial instrument or a shorter period, where appropriate, to the net carrying amount of the financial asset. Interest income is included in finance income in the income statement. Dividends Revenue is recognised when the shareholders’ right to receive the payment is established, which is generally when shareholders approve the dividend. (xix) Taxes Current income tax Current income tax assets and liabilities are measured at the amount expected to be recovered from or paid to the taxation authorities. The tax rates and tax laws used to compute the amount are those that are enacted or substantively enacted at the reporting date in the countries where the consolidated entity operates and generates taxable income. Current income tax relating to items recognised directly in equity is recognised in equity and not in the income statement. Management periodically evaluates positions taken in the tax returns with respect to situations in which applicable tax regulations are subject to interpretation and establishes provisions where appropriate. Deferred tax Deferred tax is provided using the liability method on temporary differences between the tax bases of assets and liabilities and their carrying amounts for financial reporting purposes at the reporting date. Deferred tax assets are recognised for all deductible temporary differences, the carry forward of unused tax credits and unused tax losses, to the extent that it is probable that taxable profit will be available against which the deductible temporary differences and the carry forward of unused tax credits and unused tax losses can be utilised, except:  when the deferred tax asset relating to the deductible temporary difference arises from the initial recognition of an asset or liability in a transaction that is not a business combination and, at the time of the transaction, affects neither the accounting profit nor taxable profit or loss; and in respect of deductible temporary differences associated with investments in subsidiaries, associates and interests in joint ventures, deferred tax assets are only recognised to the extent that it is probable that the temporary differences will reverse in the foreseeable future and taxable profit will be available against which the temporary differences can be utilised in respect of taxable temporary differences associated with investments in subsidiaries, associates and interests in joint ventures, except where the timing of the reversal of the temporary differences can be controlled and it is probable that the temporary differences will not reverse in the foreseeable future.  Deferred tax liabilities are recognised for all taxable temporary differences except:  when the deferred tax liability arises from the initial recognition of an asset or liability in a transaction that is not a business  combination and, at the time of the transaction, affects neither the accounting profit nor taxable profit or loss; and the carrying amount of deferred tax assets is reviewed at each reporting date and reduced to the extent that it is no longer probable that sufficient taxable profit will be available to allow all or part of the deferred tax asset to be utilised. 82 NOTES TO THE FINANCIAL STATEMENTS (CONTINUED) 1. STATEMENT OF SIGNIFICANT ACCOUNTING POLICIES (continued) (xix) Taxes (continued) Unrecognised deferred tax assets are reassessed at each reporting date and recognised to the extent that it has become probable that future taxable profit will allow the deferred tax asset to be recovered. Deferred tax assets and liabilities are measured at the tax rates that are expected to apply in the year when the asset is realised or the liability is settled, based on tax rates and tax laws that have been enacted or substantively enacted at the reporting date. Deferred tax assets and deferred tax liabilities are offset only if a legally enforceable right exists to set off current tax assets against current tax liabilities and the deferred tax assets and liabilities relate to the same taxable entity and the same taxation authority. Deferred tax relating to items recognised outside profit or loss is recognised outside profit or loss. Deferred tax items are recognised in correlation to the underlying transaction either in other comprehensive income or directly in equity. Goods and services tax (GST) Revenues, expenses and assets are recognised net of the amount of GST, except:  when the GST incurred on a sale or purchase of assets and services is not payable or recoverable from the taxation authority, in which case the GST is recognised as part of the revenue or expense item or as part of the cost of acquisition of the asset as applicable.  when receivables and payables are stated with the amount of GST included. The net amount of GST recoverable from, or payable to, the taxation authority is included as part of receivables or payables in the statement of financial position. Commitments and contingencies are disclosed net of the amount of GST recoverable from, or payable to, the taxation authority. Cash flows are included in the statement of cash flows on a gross basis. The GST component of cash flows arising from operating, investing and financing activities, which is recoverable from, or payable to, the taxation authority, is classified as operating cash flows. Tax consolidation Harvey Norman Holdings Limited (HNHL) and its 100% owned Australian resident subsidiaries are members of a tax consolidated group. HNHL is the head entity of the tax consolidated group. Members of the group have entered into a tax sharing agreement which provides for the allocation of income tax liabilities between the entities should the head entity default on its tax payment obligations. At the balance date, the possibility of default is remote. Wholly owned companies of the tax consolidated group have entered into a tax funding agreement. The funding agreement provides for the allocation of current and deferred taxes on a modified standalone basis in accordance with the principles as outlined in UIG Interpretation 1052 Tax Consolidation Accounting. The allocation of taxes under the tax funding agreement is recognised as an increase/decrease in the subsidiaries’ inter-company accounts with the tax consolidated entity head entity HNHL. (xx) Earnings per share (EPS) Basic EPS is calculated as net profit attributable to members, adjusted to exclude costs of servicing equity (other than dividends), divided by the weighted average number of ordinary shares, adjusted for any bonus elements. Diluted EPS is calculated as net profit attributable to members, adjusted for:   costs of servicing equity (other than dividends); the after tax effect of dividends and interest associated with dilutive potential ordinary shares that have been recognised as expenses; and other non-discretionary changes in revenues or expenses during the year that would result from the dilution of potential shares, divided by the weighted average number of ordinary shares and dilutive potential ordinary shares, adjusted for any bonus element.  (xxi) Contributed Equity Ordinary shares are classified as equity. Incremental costs directly attributable to the issue of new shares or options are shown in equity as a reduction, net of tax, from the proceeds. (xxii) Operating segments An operating segment is a component of an entity that engages in business activities from which it may earn revenues and incur expenses (including revenues and expenses relating to transactions with other components of the same entity), whose operating results are regularly reviewed by the entity's chief operating decision makers to make decisions about resources to be allocated to the segment and assess its performance and for which discrete financial information is available. This includes start up operations which are yet to earn revenues. Management will also consider other factors in determining operating segments such as the existence of a line manager and the level of segment information presented to the Board of directors. Operating segments have been identified based on the information provided to the chief operating decision makers – being the executive management team. The consolidated entity aggregates two or more operating segments when they have similar economic characteristics, and the segments are similar in each of the following respects:     methods used to distribute the products or provide the services; and, if applicable  nature of the products and services; nature of the production processes; type or class of customer for the products and services; nature of the regulatory environment. Operating segments that meet the quantitative criteria as prescribed by AASB 8 Operating Segments are reported separately. However, an operating segment that does not meet the quantitative criteria is still reported separately where information about the segment would be useful to users of the financial statements. Information about other business activities and operating segments that are below the quantitative criteria are combined and disclosed in a separate category as “other segments”. HARVEY NORMAN HOLDINGS LIMITED | ANNUAL REPORT 2018 83 NOTES TO THE FINANCIAL STATEMENTS (CONTINUED) 1. STATEMENT OF SIGNIFICANT ACCOUNTING POLICIES (continued) (f) Future Accounting Standards Certain Australian Accounting Standards have recently been issued or amended but are not yet effective and have not been adopted by the consolidated entity for the year ended 30 June 2018. AASB 9 Financial Instruments AASB 9 replaces AASB 139 Financial Instruments: Recognition and Measurement. The standard includes a single approach for the classification and measurement of financial assets, based on cash flow characteristics and the business model used for the management of the financial instruments. For financial liabilities designated as fair value through profit or loss, the amount of change in the fair value of such financial liabilities that is attributable to changes in credit risk must be presented in other comprehensive income, and the remaining change is presented in profit or loss. The incurred loss model used in AASB 139 has been replaced by the expected credit loss model in AASB 9 for impairment of financial assets. The requirements of hedge accounting have been amended to more closely align hedge accounting with risk management and establish a more principles-based approach to hedge accounting. The consolidated entity will first apply AASB 9 in the financial year beginning 1 July 2018. The consolidated entity is in the process of finalising its assessment of the requirements of the new standard and its impact on the consolidated entity’s financial assets or financial liabilities for the year ended 30 June 2019. AASB 15 Revenue from Contracts with Customers AASB 15 provides a single, principles-based, five-step model to recognise and measure revenues arising from contracts with customers. The core principle of AASB 15 is that an entity recognises revenue related to the transfer of promised goods or services when control of the goods or services passes to customers. The amount of revenue recognised should reflect the consideration to which the entity expects to be entitled in exchange for those goods or services. The consolidated entity has identified the significant performance obligations and revenue streams across the business as part of their detailed assessment of the impact of AASB 15 on the financial statements and related note disclosures of the consolidated entity. Based on the work performed to date, the consolidated entity expects that there would be no material impact on the financial statements of the consolidated entity upon implementation of the new standard for the year ended 30 June 2019. The consolidated entity will first apply AASB 15 in the financial year beginning 1 July 2018 and is expected to apply the standard retrospectively only to the contracts that are not completed at the date of initial application. The impact of the application of the standard is being monitored by the consolidated entity, and the consolidated entity expects to conclude on the impact in due course. AASB 16 Leases From the effective date of the new standard, AASB 16 will replace the existing accounting requirements for leases under AASB 117 Leases and the related interpretations of the current standard. Lessees will no longer distinguish between finance lease contracts and operating lease contracts. From a balance sheet perspective, right-of-use (ROU) assets and the associated lease liabilities, representing the present value of future lease payments, will be recognised on the consolidated Statement of Financial Position for all lease contracts, with the exception of short term (less than 12 months) and low-value leases. From a profit and loss perspective, lease expenses recognised under the current standard will be replaced by the depreciation charge on the ROU assets and the interest expense recognised in respect of the lease liabilities. From a cash flow presentation perspective, lease payments are required to be separated into a principal portion (presented within financing activities) and an interest portion (presented within operating activities, consistent with the consolidated entity’s accounting policy). The consolidated entity will first apply AASB 16 in the financial year beginning 1 July 2019 and is expected to apply the modified retrospective approach. Therefore the cumulative effect of adopting AASB 16 will be recognised as an adjustment to the opening balance of retained earnings at 1 July 2019, with no restatement of comparative information. The consolidated entity is in the process of completing an assessment of the impact of implementing the requirements of AASB 16. The primary impact of AASB 16 will relate to the accounting treatment, presentation and disclosures of rental lease contracts relating to the property leases of externally-leased franchised complexes in Australia and the leased company-operated stores in overseas regions – that is, where the consolidated entity is the named lessee in the lease contract. Where the consolidated entity is a lessor, the application of AASB 16 remains largely unchanged relative to the current accounting treatment. As at 30 June 2018, 100 franchised complexes out of a total 195 franchised complexes in Australia (representing 51.3% of the total) are leased from external landlords and are subject to retail-use property leases. In overseas regions, 65 company-operated stores out of a total 89 company-operated stores (representing 73.0% of the total) are leased from external landlords and are subject to retail-use property leases. Upon adoption of the standard, the consolidated entity will be required to calculate the ROU assets and the lease liabilities in respect of these leased sites, and will recognise these amounts as part of total assets and total liabilities within the consolidated Statement of Financial Position. Upon implementation, these leased sites will be subject to the new accounting treatment, presentation and disclosure requirements as described above. Based on the detailed analysis performed to date, the consolidated entity expects there to be a material increase in total assets and total liabilities on the consolidated Statement of Financial Position. The impact on the net asset position of the consolidated entity and the impact on the Income Statement from transition date will depend on future economic conditions, including the consolidated entity’s borrowing rate at 1 July 2019 and the composition of the consolidated entity’s lease portfolio, including tenure of the lease and the decisions regarding the estimated lease-term for those property leases containing renewal options. 84 NOTES TO THE FINANCIAL STATEMENTS (CONTINUED) 2. OPERATING SEGMENTS Operating Segment Revenue: 30 June 2018 Sales to Customers Outside the Consolidated Entity June 2018 $000 Other Revenues from Outside the Consolidated Entity Segment Revenue FRANCHISING OPERATIONS - 932,669 932,669 Retail – New Zealand Retail – Singapore & Malaysia Retail – Slovenia & Croatia Retail – Ireland & Northern Ireland Other Non-Franchised Retail TOTAL RETAIL Retail Property TOTAL PROPERTY EQUITY INVESTMENTS OTHER 909,524 478,401 133,752 313,325 155,340 1,990,342 99 99 - 20,376 10,687 2,048 5,636 4,480 43,227 304,516 304,516 929,900 489,088 135,800 318,961 159,820 2,033,569 304,615 304,615 6,154 6,154 3,319 14,766 18,085 INTER-COMPANY ELIMINATIONS - (60,629) (60,629) TOTAL SEGMENT REVENUE 1,993,760 1,240,703 3,234,463 Operating Segment Revenue: 30 June 2017 Sales to Customers Outside the Consolidated Entity June 2017 $000 Other Revenues from Outside the Consolidated Entity Segment Revenue FRANCHISING OPERATIONS - 940,311 940,311 Retail – New Zealand Retail – Singapore & Malaysia Retail – Slovenia & Croatia Retail – Ireland & Northern Ireland Other Non-Franchised Retail TOTAL RETAIL Retail Property Property Developments for Resale TOTAL PROPERTY EQUITY INVESTMENTS OTHER INTER-COMPANY ELIMINATIONS 888,537 415,693 107,997 263,763 156,632 1,832,622 125 - 125 - 376 - 20,429 7,912 2,456 8,200 3,425 42,422 352,905 4,578 357,483 6,370 16,769 908,966 423,605 110,453 271,963 160,057 1,875,044 353,030 4,578 357,608 6,370 17,145 (58,011) (58,011) TOTAL SEGMENT REVENUE 1,833,123 1,305,344 3,138,467 HARVEY NORMAN HOLDINGS LIMITED | ANNUAL REPORT 2018 85 NOTES TO THE FINANCIAL STATEMENTS (CONTINUED) 2. OPERATING SEGMENTS (continued) Operating Segment Result: 30 June 2018 Segment Result Before Interest, Taxation, Depreciation, Impairment & Amortisation June 2018 $000 Interest Expense Depreciation Expense Impairment & Amortisation Expense Segment Result Before Tax FRANCHISING OPERATIONS 329,617 (2,471) (27,300) (17,306) 282,540 Retail – New Zealand Retail – Singapore & Malaysia Retail – Slovenia & Croatia Retail – Ireland & Northern Ireland Other Non-Franchised Retail TOTAL RETAIL Retail Property Property Developments for Resale TOTAL PROPERTY 89,926 32,043 9,841 8,499 9,287 149,596 - (116) (392) (2,419) (1,643) (4,570) (7,312) (5,975) (1,862) (4,585) (1,590) (21,324) 218,261 (17,545) (11,758) (73) (12) - 218,188 (17,557) (11,758) (309) (940) (187) (83) (17,223) (18,742) (305) - (305) 82,305 25,012 7,400 1,412 (11,169) 104,960 188,653 (85) 188,568 EQUITY INVESTMENTS 6,084 (200) - - 5,884 OTHER 4,464 (1,823) (4,977) (49,444) (51,780) INTER-COMPANY ELIMINATIONS (277) 277 - - - TOTAL SEGMENT RESULT BEFORE TAX 707,672 (26,344) (65,359) (85,797) 530,172 Operating Segment Result: 30 June 2017 Segment Result Before Interest, Taxation, Depreciation, Impairment & Amortisation June 2017 $000 Interest Expense Depreciation Expense Impairment & Amortisation Expense Segment Result Before Tax FRANCHISING OPERATIONS 348,251 (2,555) (25,873) (15,290) 304,533 Retail – New Zealand Retail – Singapore & Malaysia Retail – Slovenia & Croatia Retail – Ireland & Northern Ireland Other Non-Franchised Retail TOTAL RETAIL Retail Property Retail Property Under Construction Property Developments for Resale 87,509 26,024 6,724 3,083 11,687 135,027 (40) (17) (365) (1,902) (1,656) (3,980) (7,744) (5,784) (1,585) (3,672) (1,443) (20,228) (295) (924) (148) - (18,606) (19,973) 79,430 19,299 4,626 (2,491) (10,018) 90,846 272,856 (12,900) (9,696) (6,476) 243,784 (15) 3,717 - (16) - - - - (15) 3,701 TOTAL PROPERTY 276,558 (12,916) (9,696) (6,476) 247,470 EQUITY INVESTMENTS 6,270 (192) - - 6,078 OTHER (2,741) (1,036) (4,913) (431) (9,121) INTER-COMPANY ELIMINATIONS (607) 607 - - - TOTAL SEGMENT RESULT BEFORE TAX 762,758 (20,072) (60,710) (42,170) 639,806 86 NOTES TO THE FINANCIAL STATEMENTS (CONTINUED) 2. OPERATING SEGMENTS (continued) Operating Segment Assets and Liabilities: 30 June 2018 Segment Assets Inter- company Eliminations Segment Assets After Eliminations Segment Liabilities Inter- company Eliminations Segment Liabilities After Eliminations Segment Assets Segment Liabilities June 2018 $000 FRANCHISING OPERATIONS 3,353,891 (2,460,089) 893,802 545,493 (216,841) 328,652 Retail – New Zealand Retail – Singapore & Malaysia Retail – Slovenia & Croatia Retail – Ireland & Northern Ireland Other Non-Franchised Retail TOTAL RETAIL Retail Property 242,137 173,902 51,776 191,452 123,969 783,236 - (1,287) (2,288) (103,605) (30,495) (137,675) 242,137 172,615 49,488 87,847 93,474 645,561 97,514 111,897 44,931 (3,683) (39,177) (526) 406,360 (262,017) 167,439 828,141 (76,104) (381,507) 93,831 72,720 44,405 144,343 91,335 446,634 2,887,036 (24,493) 2,862,543 2,332,929 (1,830,386) 502,543 Property Developments for Resale 1,850 - 1,850 3,023 (2,628) 395 TOTAL PROPERTY 2,888,886 (24,493) 2,864,393 2,335,952 (1,833,014) 502,938 EQUITY INVESTMENTS 46,848 - 46,848 6,361 - 6,361 OTHER 203,028 (75,990) 127,038 325,667 (266,885) 58,782 TOTAL SEGMENT ASSETS / LIABILITIES BEFORE TAX 7,275,889 (2,698,247) 4,577,642 4,041,614 (2,698,247) 1,343,367* Operating Segment Assets and Liabilities: 30 June 2017 Segment Assets Inter- company Eliminations Segment Assets After Eliminations Segment Liabilities Inter- company Eliminations Segment Liabilities After Eliminations Segment Assets Segment Liabilities June 2017 $000 FRANCHISING OPERATIONS 3,060,662 (2,267,729) 792,933 501,380 (262,061) 239,319 Retail – New Zealand Retail – Singapore & Malaysia Retail – Slovenia & Croatia Retail – Ireland & Northern Ireland Other Non-Franchised Retail TOTAL RETAIL Retail Property 252,802 136,998 45,696 167,171 113,117 - (1,103) (2,540) (98,164) (34,535) 715,784 (136,342) 2,704,437 (60,255) Retail Property Under Construction Property Developments for Resale 10,420 3,052 - - TOTAL PROPERTY 2,717,909 (60,255) EQUITY INVESTMENTS 56,454 - OTHER 152,028 (48,767) 252,802 135,895 43,156 69,007 78,582 579,442 2,644,182 10,420 3,052 2,657,654 56,454 103,261 87,717 95,999 41,549 372,464 168,955 766,684 (3,287) (40,351) (404) (262,981) (94,042) (401,065) 2,115,984 (1,702,836) 10,420 5,056 - - 84,430 55,648 41,145 109,483 74,913 365,619 413,148 10,420 5,056 2,131,460 (1,702,836) 428,624 5,796 - 5,796 174,850 (147,131) 27,719 TOTAL SEGMENT ASSETS / LIABILITIES BEFORE TAX 6,702,837 (2,513,093) 4,189,744 3,580,170 (2,513,093) 1,067,077* * Segment liabilities are exclusive of income tax payable and deferred income tax liabilities. HARVEY NORMAN HOLDINGS LIMITED | ANNUAL REPORT 2018 87 NOTES TO THE FINANCIAL STATEMENTS (CONTINUED) 2. OPERATING SEGMENTS (continued) The consolidated entity operates predominantly in eleven (11) operating segments: Operating Segment Description of Segment Franchising Operations Consists of the franchisor operations of the consolidated entity, but does not include the results, assets, liabilities or operations of any Harvey Norman®, Domayne® and Joyce Mayne® franchisees. Retail – New Zealand Consists of the wholly-owned operations of the consolidated entity in the retail trading operations in New Zealand under the Harvey Norman® brand name. Retail – Singapore & Malaysia Consists of the controlling interest of the consolidated entity in the retail trading operations in Singapore and Malaysia under the Harvey Norman® and Space Furniture® brand names. Retail – Slovenia & Croatia Consists of the wholly-owned operations of the consolidated entity in the retail trading operations in Slovenia and Croatia under the Harvey Norman® brand name. Retail – Ireland & Northern Ireland Consists of the wholly-owned operations of the consolidated entity in the retail trading operations in Ireland and Northern Ireland under the Harvey Norman® brand name. Other Non-Franchised Retail Consists of the retail trading operations in Australia, excluding the operations of the Harvey Norman®, Domayne® and Joyce Mayne® franchisees. Retail Property Consists of land and buildings that are owned by the consolidated entity for each site that are fully operational or are ready for operations. The revenue and results of this segment consists of rental income, outgoings recovered and the net property revaluation increments and/or decrements recognised in the Income Statement. This segment includes the mining camp accommodation joint ventures. Retail Property Under Construction Consists of sites that are currently undergoing construction at balance date intended for retail leasing. It also includes vacant land that has been purchased for the purposes of generating future investment income. Property Developments for Resale Consists of land and buildings acquired by the consolidated entity, to be developed, or currently under development, for the sole purpose of resale at a profit. Equity Investments This segment refers to the investment in, and trading of, listed securities. Other This segment primarily relates to credit facilities provided to related and unrelated parties, other unallocated income and expense items and the joint venture investment in Coomboona Holdings Pty Limited. 88 NOTES TO THE FINANCIAL STATEMENTS (CONTINUED) 3. REVENUES Sales revenue: Revenue from the sale of products Revenues and other income items: GROSS REVENUE FROM FRANCHISEES: - Franchise fees - Rent and outgoings received from franchisees - Interest to implement and administer the financial accommodation facility Total revenue received from franchisees GROSS REVENUE FROM OTHER UNRELATED PARTIES: - Rent and outgoings received from other tenants - Interest received from financial institutions and other parties - Dividends received Total revenue from other unrelated parties OTHER INCOME ITEMS: - Net property revaluation increment on Australian investment properties - Property revaluation increment for overseas controlled entity - Net profit on the revaluation of equity investments to fair value - Net profit on the sale of investment properties and property, plant and equipment assets - Net foreign exchange gains - Other revenue Total other income items CONSOLIDATED June 2018 $000 June 2017 $000 1,993,760 1,833,123 768,453 241,687 30,310 1,040,450 85,314 7,167 2,747 95,228 51,646 - 3,407 - 496 49,476 105,025 782,858 231,733 28,485 1,043,076 82,604 5,142 2,814 90,560 107,382 669 3,556 3,293 771 56,037 171,708 Total revenues and other income items 1,240,703 1,305,344 4. EXPENSES AND LOSSES Tactical support 74,978 64,479 Employee benefits expense: - Wages and salaries - Workers’ compensation - Superannuation contributions - Payroll tax - Share-based payments - Other employee benefits Total employee benefits expense 278,043 1,282 13,904 10,999 761 10,874 315,863 262,059 1,237 13,405 9,644 634 9,980 296,959 Minimum lease payments 171,025 160,487 Finance costs: - Loans from directors and director-related entities - Bank interest paid to financial institutions - Other Total finance costs 905 23,827 1,612 26,344 992 17,675 1,405 20,072 HARVEY NORMAN HOLDINGS LIMITED | ANNUAL REPORT 2018 89 NOTES TO THE FINANCIAL STATEMENTS (CONTINUED) 4. EXPENSES AND LOSSES (continued) CONSOLIDATED Depreciation, amortisation and impairment: Depreciation of: - Buildings - Plant and equipment Amortisation of: - Computer software - Net licence property and other intangible assets Impairment of non-trade debts receivable from related parties (a) (included in administrative expenses line in the Income Statement) Impairment of equity-accounted investment (b) (included in administrative expenses line in the Income Statement) Impairment loss on repayment of external finance facility (c) (included in administrative expenses line in the Income Statement) Total depreciation, amortisation and impairment June 2018 $000 11,157 54,202 18,339 1,093 45,700 20,665 - 151,156 June 2017 $000 9,066 51,644 16,758 401 18,841 1,148 5,022 102,880 (a) As at 30 June 2018, non-trade debts receivable with a carrying value of $173.57 million (June 2017: $104.75 million) was assessed for impairment and the consolidated entity recognised an impairment loss of $45.70 million in the Income Statement (June 2017: $18.84 million). The non-trade debts receivable relate to the Coomboona JV, several mining camp accommodation joint ventures and other commercial loans in Australia. The impairment loss recognised in the current year was comprised of the estimated shortfall in the repayment of loans advanced to the Coomboona JV of $28.78 million (June 2017: nil) and the estimated shortfall on the recovery of the loans advanced to a retail joint venture in Australia of $16.92 million (June 2017: $18.41 million). (b) The impairment loss incurred as at 30 June 2018 included a write-down of the carrying amount of the equity-accounted investment in the Coomboona JV to its estimated recoverable amount totalling $20.67 million (June 2017: Nil). Refer to further information provided on Page 21 regarding the Other Segment. The impairment loss incurred as at 30 June 2017 of $1.15 million related to write-down of the equity accounted investments in mining camp accommodation joint ventures. (c) The impairment loss of $5.02 million recognised as at 30 June 2017 related to an estimated shortfall in the repayment of an external finance facility for a mining camp accommodation joint venture. 5. INCOME TAX (a) Income tax recognised in the Income Statement: The major components of income tax expense are: Current income tax: Current income tax charge Adjustments in respect of current income tax of previous years Deferred income tax: Relating to the origination and reversal of temporary differences Total income tax expense reported in the Income Statement 138,147 (360) 12,335 150,122 148,276 (457) 39,021 186,840 90 NOTES TO THE FINANCIAL STATEMENTS (CONTINUED) 5. INCOME TAX (continued) (b) Income tax recognised in the Statement of Changes in Equity: The following deferred amounts were charged directly to equity during the year: Deferred income tax: Net gain on revaluation of cash flow hedges Net gain on revaluation of land and buildings Total income tax expense reported in equity (c) Reconciliation between income tax expense and prima facie income tax: A reconciliation between tax expense and the product of accounting profit before income tax multiplied by the consolidated entity’s applicable income tax rate is as follows: CONSOLIDATED June 2018 $000 June 2017 $000 4 2,693 2,697 6 5,362 5,368 Accounting profit before tax 530,172 639,806 At the statutory income tax rate of 30% (2017: 30%) 159,052 191,942 Adjustments to arrive at total income tax expense recognised for the year: Tax provision on the notional interest charged on the intercompany receivable from Harvey Norman Holdings (Ireland) Limited as agreed under the terms of an Advance Pricing Arrangement with the Australian Taxation Office dated 6 February 2012 Tax provision on the notional interest charged on the intercompany receivable from Harvey Norman Holdings (Ireland) Limited in respect of the 2016 financial year Adjustments in respect of current income tax of previous years Share-based payment expenses Expenditure not allowable for income tax purposes Income not assessable for income tax purposes Unrecognised tax losses Utilisation of tax losses Tax concession for research and development expenses Difference between tax capital gain and accounting profit on revaluation of pre-CGT properties Non-allowable building and motor vehicle depreciation Receipt of fully franked dividends Sundry items Effect of different rates of tax on overseas income and exchange rate differences Total adjustments 1,583 1,473 - 360 229 1,090 (4,395) 302 (1,300) (359) (371) (90) (830) (1,049) (4,100) (8,930) 1,560 (457) 190 731 (4,195) 804 (771) (229) 365 212 (889) (646) (3,250) (5,102) Total income tax expense reported in the Income Statement 150,122 186,840 HARVEY NORMAN HOLDINGS LIMITED | ANNUAL REPORT 2018 91 NOTES TO THE FINANCIAL STATEMENTS (CONTINUED) 5. INCOME TAX (continued) STATEMENT OF FINANCIAL POSITION INCOME STATEMENT June 2018 $000 June 2017 $000 June 2018 $000 June 2017 $000 (d) Deferred income tax assets and liabilities: Deferred income tax at 30 June relates to the following: Deferred tax liabilities: Revaluations of investment properties to fair value (164,227) (147,054) 16,549 30,665 Revaluations of owner-occupied land and buildings to fair value (36,501) (35,288) - - Non-allowable building depreciation in respect of properties in New Zealand Reversal of building depreciation expense for investment properties Differences between accounting carrying amount and tax cost base of computer software assets Research and development Other items (13,683) (92,370) (16,202) (78,863) (2,040) 12,234 (1,676) 10,215 (479) (479) (16,807) (16,466) (5,487) (4,284) - 178 2,487 - (91) 1,023 Total deferred tax liabilities (329,554) (298,636) Deferred tax assets: Employee provisions Unused tax losses and tax credits Unrealised losses on investments Other provisions Provision for lease makegood Provision for deferred lease expenses Lease incentives Provision for executive remuneration Revaluations of owner-occupied land and buildings to fair value Finance leases Discount interest-free receivables Equity-accounted investments Provisions for onerous leases Revaluation of forward currency contracts to fair value Lease surrender 9,196 219 6,199 26,771 266 1,201 1,341 1,870 1,388 163 15 83 4 5 98 8,347 372 - 15,008 17 1,400 1,362 2,606 1,388 389 15 84 161 2 266 (935) 154 (6,199) (11,396) (241) 199 69 736 - 221 - 1 157 (30) 191 (603) 1,561 - (2,695) 1 290 121 (781) - 686 - - 20 48 237 Total deferred tax assets 48,819 31,417 Total deferred tax (280,735) (267,219) 12,335 39,021 The consolidated entity has not recognised deferred tax assets relating to tax losses of $205.56 million (2017: $210.68 million) which are available for offset against taxable profits of the companies in which the losses arose. At 30 June 2018, no deferred tax liability has been recognised (2017: nil) in respect of the unremitted earnings of certain subsidiaries, associates or joint ventures. 92 NOTES TO THE FINANCIAL STATEMENTS (CONTINUED) CONSOLIDATED June 2018 $000 6. EARNINGS PER SHARE Basic earnings per share (cents per share) Diluted earnings per share (cents per share) The following reflects the income and share data used in the calculations of basic and diluted earnings per share: Profit after tax Less: Profit after tax attributable to non-controlling interests Profit after tax attributable to owners of the parent 33.71c 33.67c 380,050 (4,672) 375,378 NUMBER OF SHARES June 2018 June 2017 $000 40.35c 40.30c 452,966 (3,990) 448,976 June 2017 Weighted average number of ordinary shares used in calculating basic earnings per share (a) Effect of dilutive securities (b) Adjusted weighted average number of ordinary shares used in calculating diluted earnings per share 1,113,699,590 1,032,320 1,112,704,211 1,329,312 1,114,731,910 1,114,033,523 (a) Weighted Average number of Ordinary Shares The weighted average number of ordinary shares used in calculating basic earnings per share is inclusive of the new shares totalling 1,134,000 ordinary shares in the company issued during the year pursuant to the options issued to certain executive directors under the Executive Option Plan granted on 29 November 2012 (the Third Tranche), weighted on a pro-rata basis from issue date to 30 June 2018. (b) Effect of Dilutive Securities On 29 November 2012, the consolidated entity issued 3,000,000 unlisted options to certain executive directors (the “Third Tranche”). These options are capable of exercise from 1 January 2016 to 30 June 2018 at an exercise price of $1.83 per option and a fair value of $0.282 per option at grant date. On 14 November 2013, the consolidated entity announced that a total of 1,299,000 options over 1,299,000 shares in respect of the Third Tranche had lapsed and will never be exercisable by the participants. On 14 March 2016, a total of 567,000 options over 567,000 shares in respect of the Third Tranche were exercised reducing the unexercised portion to 1,134,000 options. On 4 September 2017, a total of 567,000 options over 567,000 shares in respect of the Third Tranche were exercised reducing the unexercised portion to 567,000 options. On 3 March 2018, the remaining 567,000 options over 567,000 shares were exercised. On 30 November 2015, the consolidated entity issued a total of 400,000 performance rights under Tranche 1 of the 2016 LTI Plan to the executive directors. A performance right is the right to acquire one ordinary share in the Company at nil exercise price. If exercised, each performance right will be converted into one ordinary share in the Company. These performance rights are capable of exercise from 1 January 2019 to 30 June 2021. The performance rights were valued at grant date at $3.52 per entitlement share using a discounted cash flow technique. Subject to the satisfaction of the financial performance condition (calculated exclusively based on RONA) and service conditions of the 2016 LTI Plan, the total fair value of Tranche 1 performance rights amounted to $1,408,000 in aggregate. On 28 November 2016, the consolidated entity issued a total of 400,000 performance rights under Tranche 2 of the 2016 LTI Plan to the executive directors. These performance rights are capable of exercise from 1 January 2020 to 30 June 2022. The performance rights were valued at grant date at $3.87 per entitlement share using a discounted cash flow technique. Subject to the satisfaction of the financial performance condition (calculated exclusively based on RONA) and service conditions of the 2016 LTI Plan, the total fair value of Tranche 2 performance rights amounted to $1,548,000 in aggregate. On 1 December 2017, the consolidated entity issued a total of 400,000 performance rights under Tranche 3 of the 2016 LTI Plan to the executive directors. These performance rights are capable of exercise from 1 January 2021 to 30 June 2023. The performance rights were valued at grant date at $3.34 per entitlement share using a discounted cash flow technique. Subject to the satisfaction of the financial performance condition (calculated exclusively based on RONA) and service conditions of the 2016 LTI Plan, the total fair value of Tranche 3 performance rights amounted to $1,336,000 in aggregate. Performance rights issued under Tranche 1, Tranche 2 and Tranche 3 of the 2016 LTI Plan have been included in the calculation of diluted earnings per share. They are considered to be dilutive as their conversion to ordinary shares would decrease the net profit per share. There have been no conversions to, calls of, or subscriptions for ordinary shares or issues of potential ordinary shares since the reporting date. HARVEY NORMAN HOLDINGS LIMITED | ANNUAL REPORT 2018 93 NOTES TO THE FINANCIAL STATEMENTS (CONTINUED) 7. TRADE AND OTHER RECEIVABLES (CURRENT) Receivables from franchisees (a) Trade receivables (b) Consumer finance loans (c) Provision for doubtful debts (b) (c) Receivables from franchisees and trade receivables, net Amounts receivable in respect of finance leases (d) Provision for doubtful debts (d) Finance leases, net Non-trade debts receivable from: (e) - Related entities (including joint ventures and joint venture partners) - Unrelated entities Provision for doubtful debts (e) Non-trade debts receivable, net CONSOLIDATED June 2018 $000 544,003 102,782 2,900 (777) 648,908 3,400 - 3,400 94,721 6,627 (28,966) 72,382 June 2017 $000 535,448 81,667 2,435 (1,195) 618,355 5,548 (2,458) 3,090 15,678 3,714 (151) 19,241 Total trade and other receivables (current) 724,690 640,686 (a) Receivables from franchisees Derni Pty Limited (Derni), a wholly-owned subsidiary of Harvey Norman Holdings Limited (HNHL), may, at the request of a franchisee, provide financial accommodation in the form of a revolving line of credit, to that franchisee. The repayment of the indebtedness of that franchisee to Derni is secured by a security interest over all present and after-acquired property of that franchisee, pursuant to a General Security Deed (GSD). The receivables from franchisees balance of $544 million as at 30 June 2018 comprises the aggregate of the balances due from each franchisee to Derni and is net of uncollectible amounts. The indebtedness of each franchisee to Derni is reduced on a daily basis by an electronic funds transfer process. Each franchisee directs the financial institution of that franchisee to transfer the net cash receipts in the bank account of the franchisee to Derni, in reduction of outstanding indebtedness. At each reporting date, Derni, as a secured creditor of the franchisee, conducts an assessment of recoverability in respect of each individual franchisee financial accommodation facility. This involves an objective appraisal of the franchisee’s capacity to repay amounts owing to Derni, after taking into account all the assets of the franchisee held as security pursuant to the GSD. Receivables from franchisees are current and neither past due nor impaired as at 30 June 2018. (b) Trade receivables and provisions for doubtful debts Trade receivables are non-interest bearing and are generally on 30 day terms. A provision has been made for estimated unrecoverable trade receivable amounts arising from the past sale of goods and rendering of services when there is objective evidence that an individual trade receivable is impaired. An impairment loss of $0.17 million (2017: $0.76 million) has been recognised by the consolidated entity in the current year for trade receivables. This amount has been included in the other expenses line item in the Income Statement. The ageing analysis of current and non-current trade receivables is as follows:  $89.38 million of the trade receivables balance as at 30 June 2018 (2017: $69.71 million) are neither past due nor impaired. It is expected that these balances will be collected by the consolidated entity on, or prior to, the due date. $13.19 million of the trade receivables balance as at 30 June 2018 (2017: $11.29 million) are past due but not impaired as there has not been a significant change in credit quality and the consolidated entity believes that the amounts are still considered recoverable. The consolidated entity does not hold any collateral over these balances as at 30 June 2018 (2017: nil). $0.75 million of the trade receivables balance as at 30 June 2018 (2017: $1.17 million) are past due and impaired which have been fully provided. es. Past due but not impaired Past due and impaired Neither past due nor impaired 31-60 Days 61-90 Days 2018 ($000) 2017 ($000) 89,376 69,708 5,250 5,758 2,776 1,771 +90 Days 5,162 3,756 31-60 Days 61-90 Days 52 - 26 13 +90 Days 673 1,160 Total 103,315 82,166      94 NOTES TO THE FINANCIAL STATEMENTS (CONTINUED) 7. TRADE AND OTHER RECEIVABLES (CURRENT) (continued) (b) Trade receivables and provisions for doubtful debts (continued) Reconciled to: Trade receivables (Current) Trade receivables (Non-current – Note 12) Total trade receivables Movements in the provision for doubtful debts for trade receivables were as follows: At 1 July Charge for the year Foreign exchange translation Amounts written off At 30 June (c) Consumer finance loans and provision for doubtful debts CONSOLIDATED June 2018 $000 102,782 533 103,315 1,173 174 24 (620) 751 June 2017 $000 81,667 499 82,166 842 762 (8) (423) 1,173 The consumer finance loans are non-interest bearing and are generally on 6 to 48 months interest-free terms. The ageing analysis of current and non-current consumer finance loans is as follows:  $3.16 million of the consumer finance loans at 30 June 2018 (2017: $2.59 million) are neither past due nor impaired. It is expected that these balances will be collected by the consolidated entity on, or prior to, the due date. If a customer has missed a repayment in a consumer finance loan, the remaining balance of the consumer finance loan is treated as past due. $0.33 million of the consumer finance loans balance as at 30 June 2018 (2017: $0.33 million) are past due but not impaired. The consolidated entity does not hold any collateral over these balances and believes that these amounts will be recovered. $0.03 million of the consumer finance loans at 30 June 2018 (2017: $0.03 million) are past due and impaired which have been fully provided.   Past due but not impaired Past due and impaired Neither past due nor impaired 31-60 Days 61-90 Days 2018 ($000) 2017 ($000) 3,156 2,590 113 82 48 60 +90 Days 165 189 31-60 Days 61-90 Days +90 Days - - - - 32 27 Reconciled to: Consumer finance loans (current) Consumer finance loans (non-current – Note 12) Total consumer finance loans Movements in the provision for doubtful debts for consumer finance loans were as follows: At 1 July Charge for the year At 30 June CONSOLIDATED June 2018 $000 $000 2,900 614 3,514 27 5 32 Total 3,514 2,948 June 2017 $000 $000 2,435 513 2,948 24 3 27 HARVEY NORMAN HOLDINGS LIMITED | ANNUAL REPORT 2018 95 NOTES TO THE FINANCIAL STATEMENTS (CONTINUED) 7. TRADE AND OTHER RECEIVABLES (CURRENT) (continued) (d) Finance lease receivables and provision for doubtful debts Finance lease receivables are reconciled to amounts receivable in respect of finance leases as follows: Aggregate of minimum lease payments and guaranteed residual values: Not later than one year Later than one year but not later than five years Future finance revenue: Not later than one year Later than one year but not later than five years Net finance lease receivables Reconciled to: Amounts receivable in respect of finance leases (current) Amounts receivable in respect of finance leases (non-current – Note 12) Total finance lease receivables Movements in the provision for doubtful debts for finance lease receivables were as follows: At 1 July Amounts written off At 30 June CONSOLIDATED June 2018 $000 $000 3,515 816 4,331 (115) (84) 4,132 3,400 732 4,132 June 2017 $000 $000 5,701 970 6,671 (153) (86) 6,432 5,548 884 6,432 2,458 (2,458) - 5,897 (3,439) 2,458 The consolidated entity offers finance lease arrangements as part of the consumer finance business. Finance leases are offered in respect of motor vehicles and livestock with lease terms not exceeding 4 years. All finance leases are at fixed rates for the term of the lease. A provision is made for estimated unrecoverable finance lease receivable amounts when there is objective evidence that a finance lease receivable is impaired. No impairment loss has been recognised in the current year (2017: nil). The ageing analysis of current and non-current finance lease receivables is as follows:   $1.41 million of the finance lease receivable balance as at 30 June 2018 (2017: $1.83 million) are neither past due nor impaired. $2.73 million of the finance lease receivable balance as at 30 June 2018 (2017: $2.15 million) are past due but not impaired. These receivables are subject to regular monitoring to ensure that they are recoverable. As at balance date, there were no events that required the consolidated entity to sell or re-pledge the secured leased assets. No finance lease receivable balance as at 30 June 2018 is past due and impaired (2017: $2.46 million).  (e) Non-trade debts receivable and provision for doubtful debts Non-trade debts receivable are generally interest-bearing and are normally payable at call. The aggregate balance of current and non- current non-trade debts receivable as at 30 June 2018 was $211.96 million (2017: $144.43 million) as follows:  $43.16 million of the non-trade debts receivable balance as at 30 June 2018 (2017: $38.76 million) are neither past due nor impaired. It is expected that these balances will be collected by the consolidated entity on, or prior to, the due date. $105.79 million of the non-trade debts receivable balance as at 30 June 2018 (2017: $57.37 million) are past due but not impaired. These receivables are subject to regular monitoring and periodic impairment testing to ensure that they are recoverable. $63.01 million of the non-trade debts receivable balance as at 30 June 2018 (2017: $48.31 million) are past due and impaired and a provision for doubtful debts has been raised in full.   At 30 June, the ageing analysis of non-trade debts receivable is as follows: Neither past due nor impaired 31-60 Days 61-90 Days +90 Days Past due but not impaired Past due and impaired 61-90 Days 31-60 Days +90 Days 2018 ($000) 2017 ($000) 43,158 38,759 - - - - 105,794 57,368 - - - - 63,008 48,305 96 Total 211,960 144,432 NOTES TO THE FINANCIAL STATEMENTS (CONTINUED) 7. TRADE AND OTHER RECEIVABLES (CURRENT) (continued) (e) Non-trade debts receivable and provision for doubtful debts (continued) Reconciled to: Non-trade debts receivable (current) Non-trade debts receivable (non-current – Note 12) Total non-trade debts receivables Movements in the provision for doubtful debts for non-trade debts receivable were as follows: At 1 July Charge for the year (i) (ii) (iii) Amounts written off At 30 June (i) Impairment of non-trade receivables from the KEH Partnership retail joint venture: CONSOLIDATED June 2018 $000 $000 101,348 110,612 211,960 48,305 45,885 (31,182) 63,008 June 2017 $000 $000 19,392 125,040 144,432 30,300 21,099 (3,094) 48,305 The consolidated entity, through a wholly-owned subsidiary, has a 50% interest in KEH Partnership Pty Limited, a retail joint venture in Australia. The primary business of the KEH Partnership retail joint venture is the retail sale of school apparel and educational goods through the brand name of The School Locker. The ‘Big Buys by Harvey Norman®‘ division of the KEH Partnership was closed during the second half of the 2018 financial year. As at 30 June 2018, the consolidated entity had a commercial loan receivable from the KEH Partnership retail joint venture totalling $60.96 million in respect of the amounts advanced to The School Locker business to assist with working capital requirements (2017: $38.68 million). The amounts previously advanced to the Big Buys by Harvey Norman® business were either repaid or written off in full upon closure of that business and was nil as at 30 June 2018 (2017: $34.92 million). As at 30 June 2018, the total balance of the provision for doubtful debts relating to the non-trade receivable from The School Locker business of the KEH Partnership joint venture was $20.82 million (2017: $9.96 million). The provision for doubtful debts previously raised for The Big Buys business was fully utilised upon closure (2017: $24.97 million). During the 2018 financial year, an impairment assessment was conducted resulting in the recognition of an expense of $16.92 million (2017: $18.41 million), with $6.06 million relating to the Big Buys by Harvey Norman® business and $10.86 million relating to The School Locker business. As at 30 June 2018, the present value of future cash flows of The School Locker business was assessed for a five-year period, based on financial budgets and assets held as security. The effective interest rate of 7.5% was applied to the cash flow projections. Cash flow projections were limited to five years. Each of the key assumptions in the impairment assessment were subject to significant accounting estimates and assumptions including the future trading performance of the retail joint venture. Judgement was made based on these accounting estimates and assumptions to assess the recoverable amount of the non-trade receivables as at balance date. (ii) Impairment of the non-trade receivables from mining camp joint ventures: The consolidated entity has made commercial advances to the mining camp joint ventures totalling $37.63 million (2017: $31.15 million) in aggregate as at 30 June 2018. The recoverable amount of non-trade receivables advanced to the mining camp joint ventures was assessed during the year. No impairment loss was recognised in the current year (2017: $0.43 million) to reduce the carrying amount of the non-trade receivable to recoverable amount. The total balance of the provision for doubtful debts as at 30 June 2018 relating to non-trade receivables from the mining camp joint ventures was $13.23 million (2017: $13.23 million). The recoverable amount for these non-trade receivables have been determined based on the present value of estimated cash flow projections as at 30 June 2018 for a five-year period, based on financial budgets and the assets held as security. The effective interest rate applied to the cash flow projections was 7.5%. Cash flow projections were limited to five years due to the inherent risks associated with the mining industry. Each of the key assumptions in the impairment assessment were subject to significant accounting estimates and assumptions about future economic conditions and its impact on the ongoing trading performance of the mining camp joint ventures and the possible commencement of future projects which are currently out to tender. Judgement has been made, based on available information and these accounting estimates and assumptions, to each of these variables to assess the recoverable amount of the non-trade receivables as at balance date. HARVEY NORMAN HOLDINGS LIMITED | ANNUAL REPORT 2018 97 NOTES TO THE FINANCIAL STATEMENTS (CONTINUED) 7. TRADE AND OTHER RECEIVABLES (CURRENT) (continued) (e) Non-trade debts receivable and provision for doubtful debts (continued) (iii) Impairment of non-trade receivables from the Coomboona joint venture: The total indebtedness of the Coomboona joint venture to the consolidated entity amounted to $74.99 million as at 30 June 2018 (2017: $9.86 million). An impairment assessment was conducted resulting in the recognition of an impairment expense of $28.78 million (2017: nil) to reduce the carrying amount of the Coomboona joint venture non-trade receivable to its recoverable amount. The recoverable amount has been determined based on the estimated fair value of the securities granted by Coomboona Holdings Pty Limited (CHPL) and subsidiaries of CHPL. Each of the key assumptions in the impairment assessment was subject to significant accounting estimates and assumptions regarding the estimated shortfall in the repayment of the loans advanced by the consolidated entity to the Coomboona joint venture. Refer to further information provided on Page 21 regarding the Other Segment. 8. OTHER FINANCIAL ASSETS (CURRENT) Listed shares held for trading at fair value Derivatives receivable Other current financial assets Total other financial assets (current) 9. INVENTORIES (CURRENT) Finished goods at cost Provision for obsolescence Total inventories (current) 10. OTHER ASSETS (CURRENT) Prepayments Other current assets Total other assets (current) 11. INTANGIBLE ASSETS (CURRENT) CONSOLIDATED June 2018 $000 29,754 5 1,704 31,463 350,880 (5,593) 345,287 39,220 5,924 45,144 June 2017 $000 27,474 25 1,692 29,191 321,142 (5,174) 315,968 28,383 17,495 45,878 Net licence property 490 486 12. TRADE AND OTHER RECEIVABLES (NON-CURRENT) Trade receivables (a) Consumer finance loans (b) Provision for doubtful debts (b) Trade receivables, net Amounts receivable in respect of finance leases (c) Non-trade debts receivable from: (d) - Related entities (including joint ventures) - Unrelated entities Provision for doubtful debts (d) Non-trade debts receivable, net 533 614 (6) 1,141 732 98,588 12,024 (34,042) 76,570 499 513 (5) 1,007 884 114,605 10,435 (48,154) 76,886 Total trade and other receivables (non-current) 78,443 78,777 98 NOTES TO THE FINANCIAL STATEMENTS (CONTINUED) 12. TRADE AND OTHER RECEIVABLES (NON-CURRENT) (continued) (a) Trade receivables For terms and conditions and provision for doubtful debts for trade receivables refer to Note 7 (b). (b) Consumer finance loans For terms and conditions and provision for doubtful debts for consumer finance loans refer to Note 7 (c). Finance lease receivables (c) For terms and conditions and provision for doubtful debts for finance lease receivables refer to Note 7 (d). (d) Non-trade debts receivable For terms and conditions and provision for doubtful debts for non-trade debts receivable refer to Note 7 (e). 13. OTHER FINANCIAL ASSETS (NON-CURRENT) Listed shares held for trading at fair value Listed shares held as available for sale at fair value Units in unit trust Other current financial assets Total other financial assets (non-current) 14. PROPERTY, PLANT AND EQUIPMENT Land at fair value Buildings at fair value Net land and buildings at fair value (a) Plant and equipment: At cost Accumulated depreciation Net plant and equipment Lease make good asset: At cost Accumulated depreciation Net lease make good asset Total plant and equipment Total property, plant and equipment: Land and buildings at fair value Plant and equipment at cost Total property, plant and equipment Accumulated depreciation Total written down amount CONSOLIDATED June 2018 $000 - 17,094 204 985 18,283 195,490 236,971 432,461 802,107 (576,963) 225,144 6,257 (3,525) 2,732 June 2017 $000 9,331 19,650 219 876 30,076 182,529 231,320 413,849 779,989 (570,902) 209,087 5,083 (2,907) 2,176 227,876 211,263 432,461 808,364 1,240,825 (580,488) 660,337 413,849 785,072 1,198,921 (573,809) 625,112 (a) The net book value of land and buildings (other than land and buildings classified as investment properties) was $237.42 million (2017: $232.49 million) as measured on a historical cost basis. HARVEY NORMAN HOLDINGS LIMITED | ANNUAL REPORT 2018 99 NOTES TO THE FINANCIAL STATEMENTS (CONTINUED) 14. PROPERTY, PLANT AND EQUIPMENT (continued) CONSOLIDATED June 2018 $000 June 2017 $000 Reconciliation of the carrying amounts of property, plant and equipment were as follows: Land at fair value: Opening balance Additions Increase resulting from revaluation Depreciation of leasehold land (b) Reclassification from buildings at fair value Reclassification from plant and equipment Net foreign currency differences arising from foreign operations Closing balance (b) The depreciation charge relates to leasehold land located in Singapore Buildings at fair value: Opening balance Additions Disposals Increase resulting from revaluation Depreciation for the year Reclassification from plant and equipment Reclassification to land at fair value Net foreign currency differences arising from foreign operations Closing balance Plant and equipment at cost: Opening balance Additions Disposals Reclassification to land at fair value Reclassification to buildings at fair value Reclassification to investment property Net foreign currency differences arising from foreign operations Closing balance Plant and equipment accumulated depreciation: Opening balance Depreciation for the year Disposals Reclassification to buildings at fair value Reclassification to investment property Net foreign currency differences arising from foreign operations Closing balance Net book value 182,529 95 11,959 (1,074) - - 1,981 195,490 231,320 10,301 (23) 3,592 (10,013) 2,777 - (983) 236,971 773,676 76,682 (48,749) - (11,032) (55) 5,110 795,632 570,055 52,278 (43,624) (8,255) (20) 4,409 574,843 166,399 5,478 7,423 (998) 6,886 861 (3,520) 182,529 223,401 6,212 - 18,732 (8,037) - (6,886) (2,102) 231,320 770,712 75,672 (67,194) (861) - - (4,653) 773,676 583,745 50,265 (60,912) - - (3,043) 570,055 220,789 203,621 100 NOTES TO THE FINANCIAL STATEMENTS (CONTINUED) 14. PROPERTY, PLANT AND EQUIPMENT (continued) CONSOLIDATED Reconciliation of the carrying amounts of property, plant and equipment (continued) Leased plant and equipment at cost: Opening balance Additions Disposals Closing balance Leased plant and equipment accumulated depreciation: Opening balance Depreciation for the year Disposals Closing balance Net book value Lease make good asset at cost: Opening balance Additions Disposals Net foreign currency differences arising from foreign operations Closing balance Lease make good asset accumulated depreciation: Opening balance Depreciation for the year Disposals Net foreign currency differences arising from foreign operations Closing balance Net book value June 2018 $000 6,313 195 (33) 6,475 847 1,280 (7) 2,120 4,355 5,083 1,094 (289) 369 6,257 2,907 644 (289) 263 3,525 2,732 June 2017 $000 1,467 4,872 (26) 6,313 72 776 (1) 847 5,466 5,526 288 (343) (388) 5,083 2,883 603 (343) (236) 2,907 2,176 Total plant and equipment 227,876 211,263 Total property, plant and equipment 660,337 625,112 HARVEY NORMAN HOLDINGS LIMITED | ANNUAL REPORT 2018 101 NOTES TO THE FINANCIAL STATEMENTS (CONTINUED) 14. (a) PROPERTY, PLANT AND EQUIPMENT (continued) Reconciliation of owner occupied properties – land and buildings at fair value New Zealand Slovenia Retail $000 Retail $000 Warehouse $000 Retail $000 233,460 72,327 3,185 60,367 5,851 (23) 11,077 (7,100) 5,884 - - - (1,679) - - - - (57) - 447 - 2,565 (972) - Singapore Warehouse $000 18,255 - - (1,589) (1,005) - Office $000 8,184 - - (618) (20) - (8,598) 4,359 192 3,083 909 422 Opening balance Additions Disposals Fair value adjustments Depreciation for the year Transfer from / (to) plant and equipment Net foreign currency differences Australia Ireland T Total Retail $000 7,651 50 - - (67) - - Retail $000 10,420 4,048 - 4,116 (187) (3,107) 2018 $000 413,849 10,396 (23) 15,551 (11,087) 2,777 2017 $000 389,800 11,690 - 26,155 (9,035) 861 631 998 (5,622) Closing balance 240,551 75,007 3,320 65,490 16,570 7,968 7,634 15,921 432,461 413,849 (b) Fair value measurement, valuation techniques and inputs Class of property Retail Fair value hierarchy Level 3 Fair value 30 June 2018 $000 Valuation technique Key unobservable inputs Range of unobservable inputs 404,603 Discounted cash flow Income capitalisation Terminal yield Discount rate Net market rent per sqm p.a. Capitalisation rate 4.20% - 8.25% 4.50% - 9.25% $113 - $705 per sqm p.a. 4.20% - 8.88% Direct sale comparison Price per sqm of lettable area $5,800 - $16,895 per sqm Warehouse Level 3 19,890 Discounted cash flow Income capitalisation Terminal yield Discount rate Net market rent per sqm p.a. Capitalisation rate Office Level 3 7,968 Discounted cash flow Income capitalisation Terminal yield Discount rate Net market rent per sqm p.a. Capitalisation rate Direct sale comparison Price per sqm of lettable area Direct sale comparison Price per sqm of lettable area 8.00% 7.25% $87 - $105 per sqm p.a. 6.50% - 7.67% $1,100 per sqm 3.75% 4.00% $248 - $298 per sqm p.a. 3.20% - 3.50% $7,493 - $9,424 per sqm Total 432,461 102 NOTES TO THE FINANCIAL STATEMENTS (CONTINUED) 14. PROPERTY, PLANT AND EQUIPMENT (continued) (b) Fair value measurement, valuation techniques and inputs (continued) The income capitalisation method of valuation was used for the valuation of retail properties in New Zealand. A discounted cash flow method was undertaken in respect of the same properties as a secondary method. There were no material differences between the income capitalisation method result and the discounted cash flow method result. The income capitalisation method of valuation was used for the valuation of one (1) retail owner-occupied property in Australia. A direct sale comparison method was used for the same property as a secondary method. There were no material differences between the income capitalisation method result and the direct sale comparison method result. The income capitalisation method of valuation was used for the valuation of retail and warehouse properties in Slovenia. The income capitalisation method of valuation was used for the valuation of retail property in Ireland. The income capitalisation method, the direct sale comparison method and the discounted cash flow method were used for all properties in Singapore. The table on the previous page includes the following descriptions and definitions relating to valuation techniques and key unobservable inputs used in determining the fair value: Income capitalisation method Under the income capitalisation method, a property’s fair value is estimated based on either net market rent or the normalised net operating income generated by the property, which is divided by the appropriate market capitalisation rate. Discounted cash flow (“DCF”) method Under the DCF method, a property’s fair value is estimated using explicit assumptions about the benefits and liabilities of ownership over the asset’s life, including terminal value. This involves the projection of a series of cash flows and the application of an appropriate market-derived discount rate to establish the present value of the income stream. Direct sale comparison method Under the direct sale comparison method, a property’s fair value is estimated based on comparable transactions. The unit of comparison applied by the consolidated entity is the price per square metre. Net market rent Net market rent is the estimated amount for which a property or space within a property could lease between a willing lessor and a willing lessee on appropriate lease terms in an arm’s length transaction, after proper marketing and wherein the parties have each acted knowledgeably, prudently and without compulsion. In addition, an allowance for recoveries of lease outgoings from tenants is made on a pro-rata basis (where applicable). Capitalisation rate The rate at which net market income is capitalised to determine the value of a property. The rate is determined by reference to market evidence and independent external valuations received. Terminal yield The capitalisation rate used to convert income into an indication of the anticipated value of the property at the end of a given period when carrying out a discounted cash flow calculation. The rate is determined by reference to market evidence and independent external valuations received. Discount rate Rate used to discount the net cash flows generated from rental activities during the period of analysis. The rate is determined by reference to market evidence and independent external valuations received. Price per square metre Price per square metre is obtained based on recent transactions of similar properties around the vicinity. Appropriate adjustments are made between the comparables and the property to reflect the differences in size, tenure, location, condition and prevailing market conditions and all other relevant factors affecting its value. (c) Valuation process The local management team in each geographic location makes recommendations to the Property Review Committee and the directors of the Company for the results of the semi-annual property valuation review. All owner-occupied properties are subject to independent valuation at least every three (3) years unless there is an indication that the carrying amount of the property differs materially from the fair value at balance date. The aim of the valuation process is to ensure that properties held by the consolidated entity are compliant with applicable regulations and the consolidated entity’s valuation policy for owner occupied properties. Independent valuations are performed by external, professionally qualified valuers who hold a recognised, relevant professional qualification and have specialised expertise in the properties valued. The balance of the properties are reviewed internally by the Property Review Committee and the directors of the Company, resulting in internal valuations where necessary. HARVEY NORMAN HOLDINGS LIMITED | ANNUAL REPORT 2018 103 NOTES TO THE FINANCIAL STATEMENTS (CONTINUED) 14. PROPERTY, PLANT AND EQUIPMENT (continued) (d) Sensitivity information Key unobservable inputs Impact on fair value for significant increase in input Impact on fair value for significant decrease in input Net market rent Increase Capitalisation rate Terminal yield Discount rate Decrease Decrease Decrease Price per square metre Increase Decrease Increase Increase Increase Decrease The net market rent of a property and the capitalisation rate are key inputs of the income capitalisation valuation method. The income capitalisation valuation method incorporates a direct interrelationship between the net market rent of a property and its capitalisation rate. This methodology involves assessing the total net market income generated by the property and capitalising this in perpetuity to derive a capital value. Significant increases (or decreases) in rental returns and rent growth per annum in isolation would result in a significantly higher (or lower) fair value of the properties. There is an inverse relationship between the capitalisation rate and the fair value of properties. Significant increases (or decreases) in the capitalisation rate in isolation would result in a significantly lower (or higher) fair value of the properties. The discount rate and terminal yield are key inputs of the discounted cash flow method. The discounted cash flow method incorporates a direct interrelationship between the discount rate and the terminal yield as the discount rate applied will determine the rate in which the terminal value is discounted to present value. Significant increases (or decreases) in the discount rate in isolation would result in a significantly lower (or higher) fair value. Similarly, significant increases (or decreases) in the terminal yield in isolation would result in a significantly lower (or higher) fair value. In general, an increase in the discount rate and a decrease in the terminal yield could potentially offset the impact on the fair value of the properties. (e) Highest and best use For all owner occupied property that is measured at fair value, the current use of the property is considered the highest and best use. 15. INVESTMENT PROPERTIES (a) Reconciliation New Zealand Australia Retail Warehouse Retail Warehouse Office Property for $000 $000 $000 $000 $000 development Opening balance Additions Transfers from property, plant and equipment Change in class of property Fair value adjustments* Disposals Depreciation for the year Net foreign currency differences 1,302 5,139 28 (178) - - (68) (47) 2,431 2,036,449 162,719 35,500 - 7 178 - - (2) (90) 128,741 3,524 - (14,858) 39,976 (590) - - - 15,227 12,160 (1) - - - - - - - - - $000 3,353 557 - (369) (490) (1,201) - - TOTAL June 2018 $000 June 2017 $000 2,241,754 2,046,295 137,961 115,189 35 - 51,646 (1,792) (70) (137) - - 107,382 (27,077) (31) (4) Closing balance 6,176 2,524 2,189,718 193,629 35,500 1,850 2,429,397 2,241,754 * Fair value adjustments totalling $51.65 million in aggregate for the year ended 30 June 2018 are included in other income (2017: $107.38 million). 104 NOTES TO THE FINANCIAL STATEMENTS (CONTINUED) 15. INVESTMENT PROPERTIES (continued) (b) Fair value measurement, valuation techniques and inputs Class of property Fair value hierarchy Fair value Valuation technique Key unobservable inputs Range of unobservable June 2018 $000 inputs Retail Level 3 2,195,894 Income capitalisation Net market rent per sqm p.a. $68 - $277 per sqm p.a. Discounted cash flow Capitalisation rate Terminal yield Discount rate 6.5% - 10.0% 6.0% - 10.0% 6.8% - 10.5% Direct sale comparison Price per sqm of lettable area $715 - $3,533 per sqm Warehouse Level 3 196,153 Income capitalisation Net market rent per sqm p.a. $19 - $189 per sqm p.a. Discounted cash flow Capitalisation rate Terminal yield Discount rate 7.0% - 10.0% 6.8% - 9.3% 7.0% -10.3% Direct sale comparison Price per sqm of lettable area $645 - $2,208 per sqm Office Level 3 35,500 Income capitalisation Net market rent per sqm p.a. $158 - $391 per sqm p.a. Discounted cash flow Direct sale comparison Direct sale comparison Capitalisation rate Terminal yield Discount rate 7.2% - 7.8% 6.3% - 7.8% 6.3% - 8.3% Price per sqm of lettable area $2,151 - $5,216 per sqm Price per sqm of lettable area $180 per sqm Property for development Level 3 1,850 Total 2,429,397 Each investment property is valued at fair value. Each investment property is the subject of a lease or licence in favour of independent third parties, including a Harvey Norman®, Domayne® and Joyce Mayne® franchisee. A franchisee occupies properties pursuant to a licence, terminable upon reasonable notice. The fair value in respect of each investment property has been calculated primarily using the income capitalisation method of valuation, using the current market rental value, and having regard to, in respect of each property:      the highest and best use quality of construction age and condition of improvements recent market sales data in respect of comparable properties current market rental value, being the amount that could be exchanged between knowledgeable, willing parties in an arm’s length transaction tenure of the franchisee and other tenants adaptive reuse of buildings non-reliance on turnover rent the specific circumstances of the property not included in any of the above points     The income capitalisation method of valuation was primarily used for the valuation of all Retail, Warehouse and Office properties in Australia and the investment properties in New Zealand. A discounted cash flow valuation or a direct sale comparison valuation was undertaken, excluding property for development in Australia, as a secondary method. There were no material differences between the income capitalisation method result, the discounted cash flow method result and the direct sale comparison method result. The direct sale comparison method was used for all properties classified as property for development. The descriptions and definitions relating to valuation techniques and key unobservable inputs used in determining the fair value of investment properties are the same as those for owner-occupied properties detailed in Note 14(b). (c) Valuation process All investment properties are subject to a semi-annual review to fair market value at each reporting period by the Property Review Committee, subject to review and final determination by the directors of the Company. The aim of the valuation process is to ensure that investment properties are held at fair value and the consolidated entity is compliant with applicable regulations and the consolidated entity’s investment property valuation policy. At each reporting period, approximately one-sixth of the portfolio is independently valued by external valuers with the remaining five- sixths of the portfolio reviewed for fair value by Directors. The whole portfolio is independently valued every three years. The independent valuations are performed by external, professionally qualified valuers who hold a recognised relevant professional qualification and have specialised expertise in the properties valued. The balance of the property portfolio is reviewed internally by the Property Review Committee and the directors of the Company, which may result in internal valuations where necessary. HARVEY NORMAN HOLDINGS LIMITED | ANNUAL REPORT 2018 105 NOTES TO THE FINANCIAL STATEMENTS (CONTINUED) 15. INVESTMENT PROPERTIES (continued) (c) Valuation process (continued) The selection of sites to be independently valued is based on a pre-determined, fixed schedule that is generally geographically representative of the entire portfolio, where possible. If the results of any of the independently valued sites during the period give rise to indicators of potential fair value issues or inconsistencies with the broader property portfolio, then the revaluation review is extended to include those other potentially affected sites. For those similarly affected sites, a director’s valuation is prepared for review by the Property Review Committee. In addition, the consolidated entity gives consideration to issues that may cause other sites to have varied significantly from the previously recorded fair value. For sites where variations exist, a director’s valuation is performed and adjustment made to the value accordingly. The consolidated entity obtained independent valuations in respect of thirty seven (37) sites within the investment property portfolio during the year ended 30 June 2018. Based on the results of the independent valuations and a consideration of other internal and external factors that may impact the fair value of the overall investment property portfolio, a further twenty-one (21) sites within the investment property portfolio were identified for further review by management. The twenty-one (21) sites had generally been similarly affected by the same factors or characteristics of the properties which had been independently valued, particularly in relation to yields and market rentals. Additionally, the Property Review Committee undertakes a revaluation review of investment properties under construction that are greater than 75% complete. The methodology to value a completed investment property also applies to the investment property under construction. The fair value of the investment property under construction is determined under the income capitalisation valuation method by estimating the fair value of the property at completion date less the remaining costs to complete and allowances for associated risk. As a secondary method, a discounted cash flow valuation is undertaken. The Property Review Committee also performs a valuation for any property less than 75% complete where there is an indication of a substantial change in the risks or benefits to warrant an earlier assessment. In general, direct sale comparison method of valuation is used for properties for future development. (d) Sensitivity information Refer to Note 14(d) for the sensitivity information provided in respect of owner-occupied properties. (e) Rent and outgoings received and operating expenses of investment properties Included in rent and outgoings received from franchisees and rent and outgoings received from other tenants other than franchisees as disclosed in Note 3 is rent and outgoings received from investment properties of $211.48 million for the year ended 30 June 2018 (2017: $202.45 million). Operating expenses, including rates and taxes and repairs and maintenance, recognised in the income statement in relation to investment properties amounted $47.97 million for the year ended 30 June 2018 (2017: $43.75 million). 16. INTANGIBLE ASSETS (NON-CURRENT) Computer software (summary) - At cost - Accumulated amortisation and impairment Net computer software Computer Software (net of accumulated amortisation and impairment) (a): Opening balance Additions Disposals Amortisation Net foreign currency differences arising from foreign operations Net book value Net licence property Other intangible assets CONSOLIDATED June 2018 $000 June 2017 $000 193,529 (127,922) 65,607 71,354 12,685 (143) (18,339) 50 65,607 3,096 364 181,188 (109,834) 71,354 76,812 11,578 (54) (16,758) (224) 71,354 3,549 334 Net intangible assets (non-current) 69,067 75,237 (a) Computer Software Computer software assets are carried at cost less accumulated amortisation and accumulated impairment losses. The intangible assets have been assessed as having a finite life and is amortised using the straight-line method over a period of no greater than eight and a half (8.5) years. If impairment indicators are present, the recoverable amount is estimated and an impairment loss is recognised to the extent that the recoverable amount is lower than the carrying amount. 106 NOTES TO THE FINANCIAL STATEMENTS (CONTINUED) 17. TRADE AND OTHER PAYABLES (CURRENT) Trade and other creditors Accruals Total trade and other payables (current) 18. INTEREST-BEARING LOANS AND BORROWINGS (CURRENT) Secured: Bank overdraft (a) Commercial bills payable (b) Syndicated Facility Agreement (c) Other short-term borrowings (d) Lease liabilities Unsecured: Derivatives payable Non-trade amounts owing to: - Directors (e) - Other related parties (e) - Unrelated parties CONSOLIDATED June 2018 $000 229,267 60,719 289,986 45,081 9,750 240,000 82,190 1,062 52 33,160 10,644 252 June 2017 $000 182,917 55,711 238,628 37,342 9,750 200,000 87,576 1,327 68 36,341 14,036 211 Total interest-bearing loans and borrowings (current) 422,191 386,651 (a) Bank Overdraft Of the total bank overdraft of $45.08 million as at 30 June 2018:  a total of $44.86 million relates to a bank overdraft due by Harvey Norman Trading (Ireland) Limited to Bank of Ireland (“BOI”) (the “BOI Overdraft Facility”). Australia and New Zealand Banking Group Limited (“ANZ”) has provided an Indemnity/Guarantee/Stand-by Letter of Credit Facility in favour of BOI in support of the BOI Overdraft Facility, at the request of the Company (“ANZ-BOI Facility”). The ANZ- BOI Facility is further secured by the Syndicated Facility Agreement described in Note 18(c). a total of $0.22 million relates to a bank overdraft facility with AmBank (M) Berhad in Malaysia which is subject to periodic review. The Company has granted a guarantee to AmBank (M) Berhad in Malaysia in respect of the obligations of Space Furniture Collection Sdn Bhd.  (b) Commercial Bills Payable The commercial bills payable form part of facilities granted by ANZ. The payment of each commercial bill is secured by the securities given pursuant to the Syndicated Facility Agreement (as defined in Note 18(c)), and subject to annual review by ANZ. Each commercial bill has a tenure not exceeding 180 days but is repayable on demand by ANZ, upon the occurrence of any event of default or Relevant Event (as defined in Note 18(c)) under the Syndicated Facility Agreement, or after any annual review date. (c) Syndicated Facility Agreement On 2 December 2009, the Company, a subsidiary of the Company (“Borrower”) and certain other subsidiaries of the Company (“Guarantors”) entered into a Syndicated Facility Agreement with certain banks (“Financiers” and each a “Financier”). On 1 December 2017, the Amending Deed (No. 5) to the Syndicated Facility Agreement was executed with the effect of extending the repayment date of Tranche A2 of the Facility totalling $200 million to 4 December 2019 and providing an additional Tranche A3 of the Facility totalling $200 million with a repayment date of 4 December 2020. The aggregate available facility of the Syndicated Facility Agreement increased from $610 million to $810 million. The utilised amount of the Syndicated Facility Agreement as at 30 June 2018 was $740 million, repayable as set out below, $240 million of which was classified as current interest-bearing loans and borrowings and $500 million classified as non-current interest-bearing loans and borrowings. This Facility is secured by:   fixed and floating charge granted by the Company and each of the Guarantors in favour of a security trustee for the Financiers; real estate mortgages granted by certain Guarantors in favour of the security trustee for the Financiers over various real properties owned by those Guarantors. Under the terms of the Syndicated Facility Agreement, the Facility is repayable:      in respect of Tranche A1 totalling $170 million, on 4 December 2019 ($170 million utilised at 30 June 2018); in respect of Tranche A2 totalling $200 million, on 4 December 2019 ($200 million utilised at 30 June 2018); in respect of Tranche A3 totalling $200 million, on 4 December 2020 ($130 million utilised at 30 June 2018); in respect of Tranche B totalling $240 million, on 4 December 2018 ($240 million utilised at 30 June 2018); and otherwise on demand by or on behalf of the Financiers upon the occurrence of any one of a number of events (each a “Relevant Event”), including events which are not within the control of the Company, the Borrower or the Guarantors. Each of the following is a Relevant Event: HARVEY NORMAN HOLDINGS LIMITED | ANNUAL REPORT 2018 107 NOTES TO THE FINANCIAL STATEMENTS (CONTINUED) INTEREST-BEARING LOANS AND BORROWINGS (CURRENT) (continued) 18. (c) Syndicated Facility Agreement (continued) (i) (ii) an event occurs which has or is reasonably likely to have a material adverse effect on the business, operation, property, condition (financial or otherwise) or prospects of the Borrower or the Company and the subsidiaries of the Company; if any change in law or other event makes it illegal or impractical for a Financier to perform its obligations under the Syndicated Facility Agreement or fund or maintain the amount committed by that Financier to the provision of the Increased Facility ("Commitment"), the Financier may by notice to the Borrower, require the Borrower to repay the secured moneys in respect of the Commitment of that Financier, in full on the date which is forty (40) business days after the date of that notice. (d) Other Short-Term Borrowings Of the total other short-term borrowings of $82.19 million:      a total of $46.36 million is secured by the securities given pursuant to the Syndicated Facility Agreement. The facilities are utilised in Slovenia and Croatia and have a maturity date of 4 December 2018. a total of $28.68 million is secured by the securities given pursuant to the Syndicated Facility Agreement. The facility is utilised in Singapore and has a maturity date of 4 December 2018. a total of $2.48 million relates to a revolving credit facility with ANZ in Singapore. This facility is subject to periodic review and otherwise repayable on demand. The revolving credit facility is secured by the securities given pursuant to the Syndicated Facility Agreement. a total of $1.17 million relates to a revolving credit facility with AmBank (M) Berhad in Malaysia which is subject to periodic review and otherwise repayable on demand. The Company has granted a guarantee to AmBank (M) Berhad in Malaysia in respect of the obligations of Space Furniture Collection Sdn Bhd. a total of $3.50 million relates to a revolving credit facility with ANZ in Australia which is subject to periodic review and otherwise repayable on demand. The Company has granted a guarantee to ANZ in respect of the obligations of the Lighting Partners Australia partnership. (e) Directors and Other Related Parties Interest is payable at a rate equivalent to the 30 day bank bill swap reference rate (BBSY) plus a margin. The total interest rate paid is at all times lower than the consolidated entity’s weighted average cost of debt. The loans are unsecured and repayable at call. (f) Defaults and Breaches The Company has not received notice of the occurrence of any Relevant Event from any Financier. During the 2018 and 2017 financial years, there were no defaults or breaches on any of the interest-bearing loans and borrowings referred to in this note and in Note 21. Interest- Bearing Loans and Borrowings (Non-Current). CONSOLIDATED June 2018 $000 4,037 62,788 66,825 34,096 473 785 - 35,354 1,994 5,785 3,866 11,645 June 2017 $000 3,598 37,973 41,571 31,513 792 1,200 529 34,034 4,768 4,293 3,991 13,052 19. OTHER LIABILITIES (CURRENT) Lease incentives Unearned revenue Total other liabilities (current) 20. PROVISIONS Current: Employee entitlements (Note 29) Lease make good Deferred lease expenses Onerous lease costs Total provisions (current) Non-Current: Employee entitlements (Note 29) Lease make good Deferred lease expenses Total provisions (non-current) 108 NOTES TO THE FINANCIAL STATEMENTS (CONTINUED) 20. PROVISIONS (continued) CONSOLIDATED At 1 July 2017 Arising during the year Utilised Exchange rate variance At 30 June 2018 Current 2018 Non-current 2018 Total provisions 2018 Current 2017 Non-current 2017 Total provisions 2017 Make Good Provision $000 Deferred Lease Expenses $000 Onerous Lease Costs $000 5,085 1,058 (286) 401 6,258 473 5,785 6,258 792 4,293 5,085 5,191 784 (1,358) 34 4,651 785 3,866 4,651 1,200 3,991 5,191 529 22 (551) - - - - - 529 - 529 Total $000 10,805 1,864 (2,195) 435 10,909 1,258 9,651 10,909 2,521 8,284 10,805 Make good provision In accordance with certain lease agreements, the consolidated entity is obligated to restore certain leased premises to a specified condition at the end of the lease term. The make good provision represents the expected costs to be incurred in restoring the leased premises to the condition specified in the lease. Deferred lease expenses Deferred lease expenses represent the present value of the future lease payments that the consolidated entity is presently obligated to make under non-cancellable operating lease agreements to enable the even recognition of lease payments as an expense on a straight-line basis over the lease term. Onerous lease costs The provision for onerous lease costs represents the present value of the future lease payments that the consolidated entity is presently obligated to make in respect of onerous lease contracts under non-cancellable operating lease agreements. This obligation may be reduced by the revenue expected to be earned on the lease including estimated future sub-lease revenue, where applicable. The estimate may vary as a result of changes in the utilisation of the leased premises and sub-lease arrangements where applicable. 21. INTEREST-BEARING LOANS AND BORROWINGS (NON-CURRENT) Secured: Syndicated Facility Agreement (Refer to Note 18(c) and (f)) Lease liabilities Total interest-bearing loans and borrowings (non-current) CONSOLIDATED June 2018 $000 June 2017 $000 500,000 3,203 503,203 330,000 3,858 333,858 HARVEY NORMAN HOLDINGS LIMITED | ANNUAL REPORT 2018 109 NOTES TO THE FINANCIAL STATEMENTS (CONTINUED) 22. FINANCING FACILITIES AVAILABLE At balance date, the following financing facilities had been negotiated and were available: Total facilities: - Bank overdraft - Other borrowings - Commercial bank bills - Syndicated Facility Agreement Total Available Facilities Facilities used at reporting date: - Bank overdraft - Other borrowings (current) - Commercial bank bills (current) - Syndicated Facility Agreement (current) - Syndicated Facility Agreement (non-current) Total Used Facilities Facilities unused at reporting date: - Bank overdraft - Other borrowings - Syndicated Facility Agreement Total Unused Facilities CONSOLIDATED June 2018 $000 June 2017 $000 48,887 112,819 9,750 810,000 981,456 45,081 82,190 9,750 240,000 500,000 877,021 3,806 30,629 70,000 104,435 44,449 114,866 9,750 610,000 779,065 37,342 87,576 9,750 200,000 330,000 664,668 7,107 27,290 80,000 114,397 Refer to Note 18 Interest-Bearing Loans and Borrowings (Current) and Note 21 Interest-Bearing Loans and Borrowings (Non- Current) for details regarding the security provided by the consolidated entity over each of the financing facilities disclosed above. 23. OTHER LIABILITIES (NON-CURRENT) Lease incentives Unearned revenue Total other liabilities (non-current) 24. CONTRIBUTED EQUITY Ordinary shares Total contributed equity 13,625 538 14,163 16,061 3,222 19,283 388,381 388,381 June 2018 Number 386,309 386,309 June 2017 Number Ordinary shares issued and fully paid 1,114,188,911 1,113,054,911 Fully paid ordinary shares carry one vote per share and carry the right to dividends. Movements in ordinary shares on issue At 1 July 2017 Issue of shares under executive share option plan At 30 June 2018 Ordinary Shares – Terms and Conditions June 2018 Number June 2018 $000 1,113,054,911 1,134,000 1,114,188,911 386,309 2,072 388,381 Ordinary shares have the right to receive dividends as declared and, in the event of winding up the Company, to participate in any surplus on winding up in proportion to the number of and amounts paid up on shares held. Each ordinary share entitles the holder to one vote, either in person or by proxy, at a meeting of the Company. 110 NOTES TO THE FINANCIAL STATEMENTS (CONTINUED) 25. RESERVES CONSOLIDATED $000 At 1 July 2016 Revaluation of land and buildings Tax effect of revaluation of land and buildings Unrealised gain on available- for-sale investments Reverse expired or realised cash flow hedge reserves Net loss on forward foreign exchange contracts Tax effect of net loss on forward foreign exchange contracts Currency translation differences Share based payment At 30 June 2017 At 1 July 2017 Revaluation of land and buildings Tax effect of revaluation of land and buildings Unrealised loss on available- for-sale investments Reverse expired or realised cash flow hedge reserves Net loss on forward foreign exchange contracts Tax effect of net loss on forward foreign exchange contracts Currency translation differences Share based payment Tax effect of share based payment Asset revaluation reserve Foreign currency translation reserve Available for sale reserve Cash flow hedge reserve Employee equity benefits reserve Acquisition reserve Total 48,021 9,682 (32) 8,995 (22,051) 111,199 25,467 (5,362) - - - - - - 131,304 131,304 15,915 (2,693) - - - - - - - - - 4,050 - - - - - - - - 32 (28) 8 - - - - - - - - - 616 - - - - - - - - 155,814 25,467 (5,362) 4,050 32 (28) 8 (5,647) 616 - - - - - - (5,647) - 42,374 13,732 (20) 9,611 (22,051) 174,950 42,374 13,732 (20) 9,611 (22,051) 174,950 - - - - - - (1,715) - - - - (1,830) - - - - - - - - - 20 (12) 4 - - - - - - - - - - 741 4 - - - - - - - - - 15,915 (2,693) (1,830) 20 (12) 4 (1,715) 741 4 At 30 June 2018 144,526 40,659 11,902 (8) 10,356 (22,051) 185,384 NATURE AND PURPOSE OF RESERVES: Asset Revaluation Reserve This reserve is used to record increases in the fair value of “owner occupied” land and buildings and decreases to the extent that such decreases relate to an increase of the same asset previously recognised in equity. Foreign Currency Translation Reserve This reserve is used to record exchange differences arising from the translation of the financial statements of foreign subsidiaries. Available For Sale Reserve This reserve is used to record fair value changes on available-for-sale investments. Cash Flow Hedge Reserve This reserve is used to record the portion of the gain or loss on a hedging instrument in a cash flow hedge that is determined to be an effective hedge. Employee Equity Benefits Reserve This reserve is used to record the value of equity benefits provided to executive directors as part of their remuneration. Acquisition Reserve This reserve is used to record the consideration paid in excess of carrying value of non-controlling interests. HARVEY NORMAN HOLDINGS LIMITED | ANNUAL REPORT 2018 111 NOTES TO THE FINANCIAL STATEMENTS (CONTINUED) 26. RETAINED PROFITS AND DIVIDENDS Movements in retained profits were as follows: Balance at beginning of the year Profit for the year Dividends paid Balance at end of the year Dividends declared and paid: Dividends on ordinary shares: Final fully-franked dividend for 2017: 12.0 cents (2016: 17.0 cents) Interim fully-franked dividend for 2018: 12.0 cents (2017: 14.0 cents ) Total dividends paid CONSOLIDATED June 2018 $000 June 2017 $000 2,229,200 375,378 (267,337) 2,337,241 133,635 133,702 267,337 2,125,186 448,976 (344,962) 2,229,200 189,134 155,828 344,962 The final dividend of $133.64 million, fully-franked, for the year ended 30 June 2017 was paid on 1 December 2017. The interim dividend of 12.00 cents per share, totalling $133.70 million fully-franked, for the year ended 30 June 2018 was paid on 1 May 2018. T The final dividend of 18.0 cents per share totalling $200.55 million fully-franked, for the year ended 30 June 2018 will be paid on 2 November 2018. No provision has been made in the Statement of Financial Position for the payment of this final dividend. Franking Account Balance: The amount of franking credits available for the subsequent financial years are: - franking account balance as at the end of the financial year at 30% 590,529 564,369 - franking credits that will arise from the payment of income tax payable as at the end of the financial year - franking credits that will be utilised in the payment of proposed final dividend The amount of franking credits available for future reporting years 4,900 (85,952) 509,477 36,008 (57,243) 543,134 27. NON-CONTROLLING INTERESTS Interest in: - Ordinary shares - Reserves - Retained earnings Total non-controlling interests 2,691 13,848 10,387 26,926 2,691 12,716 7,041 22,448 112 NOTES TO THE FINANCIAL STATEMENTS (CONTINUED) 28. CASH AND CASH EQUIVALENTS (a) Reconciliation to Cash Flow Statement Cash and cash equivalents comprise the following at end of the year: Cash at bank and on hand Short term money market deposits Bank overdraft (Note 18) CONSOLIDATED June 2018 $000 June 2017 $000 124,458 46,086 170,544 65,969 14,255 80,224 (45,081) (37,342) Cash and cash equivalents at end of the year 125,463 42,882 (b) Reconciliation of Profit After Income Tax to Net Operating Cash Flows Profit after tax Adjustments for: Net foreign exchange gains Bad and doubtful debts Share of net profit from joint venture entities Depreciation of property, plant and equipment Amortisation Impairment of equity-accounted investments Impairment loss on repayment of external finance facility Revaluation of investment properties Property revaluation increment for overseas controlled entity Deferred lease expenses Provision for onerous leases Executive remuneration expenses Profit on disposal and sale of property, plant and equipment, and the revaluation of listed securities Movements in provisions Changes in assets and liabilities: (Increase)/decrease in assets: Receivables Inventory Other current assets Increase/(decrease) in liabilities: Payables and other current liabilities Income tax payable Net cash flows from operating activities 380,050 452,966 (496) 46,064 (5,792) 65,359 19,432 20,665 - (51,646) - (663) - 4,173 (771) 21,864 (5,200) 60,710 17,159 1,148 5,022 (107,382) (669) (962) 643 4,992 (2,329) (6,849) (766) 2,229 (29,595) (29,738) 10,303 56,082 (26,933) 454,170 (72,818) 165 (19,175) 72,238 (170) 425,140 HARVEY NORMAN HOLDINGS LIMITED | ANNUAL REPORT 2018 113 NOTES TO THE FINANCIAL STATEMENTS (CONTINUED) 29. EMPLOYEE BENEFITS The number of full-time equivalent employees employed as at 30 June were: The aggregate employee benefit liability was comprised of: Accrued wages, salaries and on-costs Provisions (Current – Note 20) Provisions (Non-current – Note 20) Total employee benefit provisions CONSOLIDATED June 2018 Number 5,420 June 2018 $000 16,822 34,096 1,994 52,912 June 2017 Number 5,200 June 2017 $000 17,132 31,513 4,768 53,413 The consolidated entity makes contributions to complying superannuation funds for the purpose of provision of superannuation benefits for eligible employees of the consolidated entity. The amount of contribution in respect of each eligible employee is not less than the prescribed minimum level of superannuation support in respect of that eligible employee. The complying superannuation funds are independent and not administered by the consolidated entity. Share Options At balance date, the following options over unissued ordinary shares were outstanding and vested (or able to be exercised) by, or for the benefit of, directors of Harvey Norman Holdings Limited: Grant Date Expiry Date Exercise Price 29/12/2012 30/06/2018 $1.83 Number of Options Outstanding 2018 2017 - - - - Number of Options Vested 2018 2017 - - 1,134,000 1,134,000 Refer to Tables 3 and 4 of this report on page 50 for further information. Performance Rights At balance date, the following performance rights over unissued ordinary shares were outstanding and vested (or able to be exercised) by, or for the benefit of, directors of Harvey Norman Holdings Limited: Grant Date Expiry Date Exercise Price Number of Performance Number of Performance 30/11/2015 28/11/2016 01/12/2017 30/06/2021 30/06/2022 30/06/2023 Rights Outstanding Rights Vested 2018 2017 2018 2017 - - - 400,000 400,000 400,000 400,000 400,000 - 1,200,000 800,000 - - - - - - - - Refer to Tables 5 and 6 of this report on pages 51 and 52 for further information. 30. REMUNERATION OF AUDITORS Amounts received or due and receivable by Ernst & Young for: - - - an audit or review of the financial report of the entity and any other entity in the consolidated entity tax services in relation to the entity and any other entity in the consolidated entity other services in relation to the entity and any other entity in the consolidated entity CONSOLIDATED June 2018 $ June 2017 $ 1,926,351 1,955,946 234,984 205,823 42,769 71,756 Total received or due and receivable by Ernst & Young 2,204,104 2,233,525 114 NOTES TO THE FINANCIAL STATEMENTS (CONTINUED) 31. KEY MANAGEMENT PERSONNEL (a) Details of Key Management Personnel Directors Gerald Harvey Kay Lesley Page John Evyn Slack-Smith Title Senior Executives Title Executive Chairman Martin Anderson General Manager – Advertising Executive Director and Chief Executive Officer Executive Director and Chief Operating Officer Thomas James Scott General Manager – Property Gordon Ian Dingwall Chief Information Officer David Matthew Ackery Executive Director Robert Nelson General Manager – Audio Chris Mentis Christopher Herbert Brown OAM Executive Director, Chief Financial Officer and Company Secretary Non-Executive Director [resigned 31 July 2017] Visual Haydon Ian Myers General Manager – Home [resigned 31 July 2017] Appliances Ajay Calpakam General Manager – Audio [commenced 1 August 2017] Visual Michael John Harvey Non-Executive Director Lachlan Roach [commenced 1 October 2017] General Manager – Home Appliances Kenneth William Gunderson-Briggs Non-Executive Director (Independent) Geoff Van Der Vegt [resigned 31 May 2017] General Manager – Technology & Entertainment Graham Charles Paton AM Non-Executive Director Frank Robinson (Independent) [commenced 1 August 2017] General Manager – Technology & Entertainment (b) Compensation of Key Management Personnel The total remuneration paid or payable to Key Management Personnel of the consolidated entity was as follows: Short-term Post employment Long-term (performance cash incentives) Long-term (share-based payments) Other – long service leave accrual Other – termination benefits CONSOLIDATED June 2018 $ 11,506,845 266,098 863,359 615,206 96,558 144,065 June 2017 $ 11,500,990 262,382 1,762,854 562,619 90,268 11,292 13,492,131 14,190,405 Refer to Tables 1 and 2 of this report on pages 48 and 49 for further information. 32. RELATED PARTY TRANSACTIONS (a) Ultimate Controlling Entity The ultimate controlling entity of the consolidated entity is Harvey Norman Holdings Limited, a company incorporated in Australia. (b) Transactions with Other Related Parties (i) (ii) Several controlled entities of Harvey Norman Holdings Limited operate loan accounts with other related parties, mainly consisting of joint ventures and the other joint venture partner of the joint ventures. Refer to Notes 7 and 12. The amount of receivables from related parties at balance date was: The consolidated entity has a payable to other related parties (excluding transactions with KMPs and their related parties) at arm’s length terms and conditions. The amount owing to other related parties at balance date was: 193,309,626 130,283,866 4,237,364 4,237,364 Refer to information provided in Section 14. Other Transactions and Balances with Key Management Personnel and their Related Parties in this report on pages 55 and 56 for further information. HARVEY NORMAN HOLDINGS LIMITED | ANNUAL REPORT 2018 115 NOTES TO THE FINANCIAL STATEMENTS (CONTINUED) 33. COMMITMENTS (a) Capital expenditure contracted but not provided is payable as follows: Not later than one year Later than one year but not later than five years Total capital expenditure commitments CONSOLIDATED June 2018 $000 June 2017 $000 13,587 16,509 30,096 109,254 1,356 110,610 The consolidated entity had contractual obligations to purchase property, plant and equipment and investment properties of $30.10 million (2017: $110.61 million). The contractual obligations are mainly for acquisition of new properties in New Zealand and refurbishment of existing franchised complexes in Australia. There were no contractual obligations relating to joint venture entities for the year ended 30 June 2018 (2017: $4.55 million). (b) (i) Lease expenditure commitments [the consolidated entity as lessee]: Operating lease expenditure contracted for is payable as follows: Not later than one year Later than one year but not later than five years Later than five years Total operating lease liabilities 155,280 386,573 147,366 689,219 147,862 360,923 134,812 643,597 Operating leases are entered into as a means of acquiring access to retail property and warehouse facilities. Rental payments are adjusted annually in line with rental agreements. (ii) Geographic representation of operating lease expenditure: 30 June 2018 Australia New Zealand $000 $000 Singapore and Malaysia $000 Ireland and Northern Ireland $000 Slovenia and Croatia $000 Total $000 Not later than one year 95,332 12,336 26,954 18,538 2,120 155,280 Later than one year but not later than five years Later than five years 247,129 89,751 26,072 5,660 49,812 - 59,410 51,816 4,150 139 386,573 147,366 Total operating lease liabilities 432,212 44,068 76,766 129,764 6,409 689,219 30 June 2017 Australia New Zealand $000 $000 Singapore and Malaysia $000 Ireland and Northern Ireland $000 Slovenia and Croatia $000 Total $000 Not later than one year 88,656 13,030 26,930 17,373 1,873 147,862 Later than one year but not later than five years Later than five years 211,973 70,285 34,271 9,362 50,713 217 58,342 54,704 5,624 360,923 244 134,812 Total operating lease liabilities 370,914 56,663 77,860 130,419 7,741 643,597 Several lease agreements contain provisions that permit the tenant to exit, or break, the lease prior to the lease expiry date, subject to the adherence of the strict terms and conditions stipulated in the lease agreement that gives a tenant the right to terminate the agreement at an earlier date. The operating lease expenditure commitments disclosed in the tables above have been calculated up to exit or break dates. 116 NOTES TO THE FINANCIAL STATEMENTS (CONTINUED) 33. COMMITMENTS (continued) (c) Lease commitments [the consolidated entity as lessor]: Future minimum amounts receivable under non-cancellable operating leases are as follows: Not later than one year Later than one year but not later than five years Later than five years Minimum lease receivable CONSOLIDATED June 2018 $000 June 2017 $000 102,626 191,232 43,483 337,341 82,982 153,998 33,159 270,139 The consolidated entity has entered into commercial leases in respect of its property portfolio and motor vehicles. All leases in the consolidated entity’s property portfolio include a clause to enable upward revision of the rental charge on an annual basis according to prevailing market conditions. CONSOLIDATED 2018 2017 Minimum Payments Present value of payments Minimum Payments Present value of payments $000 $000 $000 $000 1,283 3,490 4,773 (508) 4,265 1,062 3,203 4,265 - 4,265 1,595 4,204 5,799 (614) 5,185 1,327 3,858 5,185 - 5,185 (d) Finance lease commitments [the consolidated entity as lessee]: Not later than one year Later than one year but not later than five years Total minimum lease payments Less: amounts representing finance charges Present value of minimum lease payments 34. CONTINGENT LIABILITIES As at 30 June 2018, Harvey Norman Holdings Limited (the Company) has entered into the following guarantees, however the probability of having to make a payment under these guarantees is considered remote: (a) Guarantees in the normal course of business relating to the payment of lease obligations under an operating lease contract for certain leased franchised complexes in Australia and certain leased company-operated stores in overseas regions. (b) Guarantees in the normal course of business relating to lease makegood obligations under certain operating lease contracts (with the exclusion of those lease makegood payments that are considered to be probable and recognised as a provision in Note 20). Indemnities to financial institutions to support bank guarantees in respect of the performance of contracts. (c) (d) Financial performance guarantees in respect of obligations of certain third parties up to the amount necessary to enable those entities to meet their obligations as and when they fall due, subject to certain conditions. No provision has been made in the financial statements in respect of these contingencies as the possibility of a probable outflow under these guarantees is considered remote. HARVEY NORMAN HOLDINGS LIMITED | ANNUAL REPORT 2018 117 NOTES TO THE FINANCIAL STATEMENTS (CONTINUED) 35. (a) FINANCIAL RISK MANAGEMENT Financial Risk Management Objectives and Policies The consolidated entity’s principal financial liabilities, other than derivatives, comprise of trade and other payables and interest- bearing loans and borrowings. The consolidated entity’s principal financial assets, other than derivatives, include cash and cash equivalents, trade and other receivables, shares held for trading and listed shares available for sale. The consolidated entity manages its exposure to key financial risks, such as interest rate and currency risk in accordance with the consolidated entity’s financial risk management policy, as outlined in the Treasury Policy. The objective of the policy is to support the delivery of the consolidated entity’s financial targets whilst protecting future financial security. The consolidated entity enters into derivative transactions, principally forward currency contracts. The purpose is to manage the currency risks arising from the consolidated entity’s operations and its sources of finance. The main risks arising from the consolidated entity’s financial assets and financial liabilities are:      foreign currency risk interest rate risk equity price risk credit risk; and liquidity risk The consolidated entity uses different methods to measure and manage different types of risks to which it is exposed. These include:  monitoring levels of exposure to interest rate and foreign exchange risk;  monitoring assessments of market forecasts for interest rate and foreign exchange;   monitoring liquidity risk through the future rolling cash flow forecasts. ageing analyses and monitoring of specific credit allowances to manage credit risk; and The Board reviews and endorses policies for managing each of these risks as summarised below:   the setting of limits for trading in derivatives; and hedging cover of foreign currency risk, credit allowances, and future cash flow forecast projections. (b) Market Risk Market risk is the risk that the fair value or future cash flows of a financial instrument will fluctuate because of changes in market prices. Components of market risk to which the consolidated entity are exposed are discussed below. (i) Foreign Currency Risk Management Foreign currency risk refers to the risk that the value of financial instruments, recognised asset or liability will fluctuate due to changes in foreign currency rates. The consolidated entity undertakes certain transactions denominated in foreign currencies, hence exposures to exchange rate fluctuations arise. The consolidated entity’s foreign currency exchange risk arises primarily from:   receivables or payables denominated in foreign currencies; and firm commitments or highly probable forecast transactions for payments settled in foreign currencies. The consolidated entity is exposed to foreign exchange risk from various currency exposures, primarily with respect to:  United States dollars;  New Zealand dollars;  Euro;  British pound;  Singapore dollars;  Malaysian ringgit; and  The consolidated entity minimises its exposure to foreign currency risk by initially seeking contracts effectively denominated in the consolidated entity’s functional currency where possible and economically favourable to do so. Foreign exchange risk that arises from firm commitments or highly probable transactions is managed principally through the use of forward currency contracts. The consolidated entity hedges a proportion of these transactions in each currency in accordance with the Treasury Policy. Croatian kuna CONSOLIDATED Financial assets Cash and cash equivalents Trade and other receivables Derivatives receivable Financial liabilities Trade and other payables Interest-bearing loans and borrowings Derivatives payable Net exposure 118 June 2018 $000 29,682 5,378 5 35,065 28,012 11,481 52 39,545 (4,480) June 2017 $000 17,686 2,579 25 20,290 20,409 10,731 68 31,208 (10,918) NOTES TO THE FINANCIAL STATEMENTS (CONTINUED) 35. (b) (i) FINANCIAL RISK MANAGEMENT (continued) Market Risk (continued) Foreign Currency Risk Management (continued) Sensitivity Analysis The following sensitivity analysis is calculated based on the foreign currency risk exposures that are not denominated in the functional currency of the relevant subsidiary at balance date. At 30 June 2018, if foreign exchange rates were 5% higher or 5% lower (2017: 5% higher or 5% lower), as illustrated in the table below, with all other variables held constant, post tax profit and other comprehensive income would have been affected as follows: Post tax profit increase/(decrease) Other comprehensive income increase/(decrease) Consolidated Australian subsidiaries AUD/EURO + 5% AUD/EURO - 5% AUD/USD + 5% AUD/USD - 5% Slovenia and Ireland subsidiaries EURO/USD + 5% EURO/USD - 5% EURO/GBP + 5% EURO/GBP - 5% EURO/HRK + 5% EURO/HRK - 5% Croatia subsidiaries HRK/EURO + 5% HRK/EURO - 5% HRK/USD + 5% HRK/USD - 5% Singapore and Malaysia subsidiaries SGD/USD + 5% SGD/USD - 5% SGD/EURO + 5% SGD/EURO - 5% SGD/MYR + 5% SGD/MYR - 5% SGD/AUD + 5% SGD/AUD - 5% New Zealand subsidiaries/branches NZD/EURO + 5% NZD/EURO - 5% NZD/USD + 5% NZD/USD - 5% June 2018 $000 June 2017 $000 (34) 38 4 (4) (3) 3 - - 1 (1) 636 (703) - - 17 (19) 32 (35) (683) 755 (2) 2 (5) 6 (3) 3 (10) 11 1 (1) (146) 161 1 (1) - - 595 (658) (1) 1 5 (5) 4 (5) (283) 313 2 (2) (3) 4 (1) 1 June 2018 $000 (82) 91 (17) 18 - - - - - - - - - - - - - - - - - - - - - - June 2017 $000 (76) 84 (22) 24 - - - - - - - - - - - - - - - - - - - - - - The sensitivities of post-tax profit and other comprehensive income in the current year are comparable to the prior year. The movements in post-tax profit are due to changes in the fair value of monetary assets and liabilities including non-designated foreign currency derivatives. The movements in other comprehensive income are due to changes in the fair value of forward exchange contracts designated as cash flow hedges. HARVEY NORMAN HOLDINGS LIMITED | ANNUAL REPORT 2018 119 NOTES TO THE FINANCIAL STATEMENTS (CONTINUED) 35. FINANCIAL RISK MANAGEMENT (continued) (b) Market Risk (continued) (ii) Interest Rate Risk Management Interest rate risk is the risk that the fair value on future cash flows of a financial instrument will fluctuate because of changes in market interest rates. The consolidated entity’s exposure to market interest rates relates primarily to:        Cash and cash equivalents; Non-trade debts receivable from related entities and unrelated entities; Bank overdraft; Non-trade amounts owing to directors and other related parties; Syndicated Facility; Commercial bills; and Other short-term borrowings The consolidated entity manages the interest rate exposure by adjusting the ratio of fixed interest debt to variable interest debt to a desired level based on current market conditions. Where the actual interest rate profile on the physical debt profile differs substantially from the desired target, the consolidated entity uses interest rate swap contracts to adjust towards the target net debt profile. Under the interest rate swap contracts, the consolidated entity agrees with other parties to exchange, at specified intervals, the difference between fixed contract rates and floating rate interest amounts calculated by reference to the agreed notional principal amounts. 30 June 2018 Principal subject to floating interest rate Fixed interest rate maturing in Over 1 to 5 years More than 5 years Non- interest bearing 1 year or less Total Average interest rate $000 $000 $000 $000 $000 $000 Floating Fixed 154,350 6,232 - - - - - - 673 - - - - - 732 - - - - - - - - - 9,962 170,544 0.01% - 4.10% 0.01% - 2.19% 3,514 3,514 2,727 4,132 544,003 103,315 544,003 103,315 49,746 49,746 - - - - - - 10.5% - 12.5% - - - 49,648 81,409 6,839 5,185 68,879 211,960 3.89% - 6.07% 5.00% - 9.50% 203,998 88,314 7,571 5,185 782,146 1,087,214 822,190 - 43,804 45,081 9,750 - - - - - - - - - - - - 1,062 3,203 - - - - - - - - - - 289,986 252 - - 822,190 289,986 44,056 45,081 9,750 0.85% - 6.12% - 2.44% - 3.17% 1.70% - 6.26% 1.64% - 1.91% - - - - - - 4,265 52 52 - - 5.92% - 920,825 1,062 3,203 - 290,290 1,215,380 Financial assets Cash Consumer finance loans Finance lease receivables Receivables from franchisees Trade receivables Other financial assets Non-trade debts receivables & loans Financial liabilities Syndicated Facility and other short- term borrowings Trade creditors Other loans Bank overdraft Bills payable Finance lease liabilities Other financial liabilities 120 NOTES TO THE FINANCIAL STATEMENTS (CONTINUED) 35. FINANCIAL RISK MANAGEMENT (continued) (b) Market Risk (continued) (ii) Interest Rate Risk Management (continued) 30 June 2017 Principal subject to floating interest rate Fixed interest rate maturing in 1 year or less Over 1 to 5 years More than 5 years Non- interest bearing Total Average interest rate $000 $000 $000 $000 $000 $000 Floating Fixed Financial assets Cash Consumer finance loans Finance lease receivables Receivables from franchisees Trade receivables Other financial assets Non-trade debts receivables & loans Financial liabilities Syndicated Facility and other short- term borrowings Trade creditors Other loans Bank overdraft Bills payable Finance lease liabilities Other financial liabilities Sensitivity analysis 59,593 3,242 - - - - - - 926 - - - - - 884 - - - - 17,389 80,224 0.01% - 3.70% 0.01% - - - - - 2,948 2,948 - - 4,622 6,432 - 10.50% - 12.50% 535,448 82,166 535,448 82,166 59,267 59,267 - - - - - - 43,433 3,389 14,497 4,938 78,175 144,432 3.92%-5.07% 7.75% - 12.00% 103,026 7,557 15,381 4,938 780,015 910,917 617,576 - 50,377 37,342 9,750 - - - - - - - - - - - - 1,327 3,858 - - - - - - - - - - 238,628 211 - - 617,576 238,628 50,588 37,342 9,750 0.53% - 5.78% - 2.47% - 3.02% 1.70% - 6.50% 1.67% - 1.90% - - - - - - 68 5,185 68 959,137 - 5.92% - 9.50% - - 715,045 1,327 3,858 - 238,907 The following sensitivity is based on interest rate risk exposures in existence at balance date. At 30 June 2018, if interest rates were 50 basis points higher or 50 basis points lower, with all other variables held constant, post tax profit and other comprehensive income would have been affected as follows: If there was 50 (2017: 50) basis points higher in interest rates with all other variables held constant If there was 50 (2017: 50) basis points lower in interest rates with all other variables held constant CONSOLIDATED Post tax profit Other comprehensive income Increase/(decrease) Increase/(decrease) June 2018 $000 June 2017 $000 (2,642) (2,267) 2,642 2,267 June 2018 $000 - - June 2017 $000 - - The movements in post tax profit are due to higher or lower interest costs from variable rate bank debt, other loans and cash balances. The movements in post tax profit in the current year are comparable to the prior year. HARVEY NORMAN HOLDINGS LIMITED | ANNUAL REPORT 2018 121 NOTES TO THE FINANCIAL STATEMENTS (CONTINUED) 35. FINANCIAL RISK MANAGEMENT (continued) (iii) Equity Price Risk Management The consolidated entity is exposed to equity price risk arising from equity investments. Equity investments are held for strategic rather than trading purposes. The exposure to the risk of a general decline in equity market values is not hedged as the consolidated entity believes such a strategy is not cost effective. The fair value of the equity investments publicly traded on the ASX was $29.75 million as at 30 June 2018 (2017: $36.81 million). The fair value of the equity investments publicly traded on the NZX was $17.09 million as at 30 June 2018 (2017: $19.65 million). Sensitivity Analysis As at 30 June 2018, if equity prices had been 10% higher or 10% lower, with all other variables held constant, post tax profit and other comprehensive income would have been affected as follows: CONSOLIDATED Post tax profit Other comprehensive income Increase/(decrease) Increase/(decrease) June 2018 $000 June 2017 $000 June 2018 $000 June 2017 $000 If there was 10% (2017: 10%) increase movement in equity prices with all other variables held constant If there was 10% (2017: 10%) decrease movement in equity prices with all other variables held constant 2,136 2,606 1,709 1,965 (2,136) (2,606) (1,709) (1,965) The movements in post tax profit are due to changes in the fair value of listed shares held for trading. The movements in other comprehensive income are due to changes in the fair value of listed shares available for sale. (c) Credit Risk Credit risk refers to the loss that the consolidated entity would incur if a debtor or other counterparty fails to perform under its contractual obligations. Credit risk arises from the financial assets of the consolidated entity, which comprise receivables from franchisees, trade and non- trade debts receivables, consumer finance loans and finance lease receivables. The consolidated entity’s exposure to credit risk arises from potential default of the counter party, with a maximum exposure equal to the carrying amount of these financial assets. The consolidated entity’s policies to limit its exposure to credit risks are as follows:   The Franchisor constantly monitors and evaluates the financial position of each franchisee; Conducting appropriate due diligence on counterparties before entering into an arrangement with them. It is the consolidated entity’s policy that all customers who wish to trade on credit terms are subject to credit verification procedures including an assessment of their independent credit rating, financial position, past experience and industry reputation. Risk limits are set for each individual customer in accordance with parameters set by the Board. These risk limits are regularly monitored; and Non-trade debts receivable are subject to regular monitoring and/or periodic impairment testing to ensure that they are recoverable. Finance lease receivables are secured by assets with a value equal to, or in excess of, the counterparties’ obligation to the consolidated entity.   The consolidated entity minimises concentrations of credit risk by undertaking transactions with a large number of debtors in various countries and industries. In addition, receivable balances are monitored on an ongoing basis. The credit risk on liquid funds and derivative financial instruments is limited because the counterparties are banks with high credit- ratings assigned by international credit-rating agencies. The table below represents the financial assets of the consolidated entity by geographic location displaying the concentration of credit risk for each location as at balance date: Location of credit risk Australia New Zealand Singapore and Malaysia Slovenia and Croatia Ireland and Northern Ireland Total 122 CONSOLIDATED June 2018 $000 749,121 28,189 15,973 6,147 3,703 803,133 June 2017 $000 667,695 29,369 14,215 5,232 2,952 719,463 NOTES TO THE FINANCIAL STATEMENTS (CONTINUED) 35. FINANCIAL RISK MANAGEMENT (continued) (d) Liquidity Risk Liquidity risk includes the risk that, as a result of the consolidated entity’s operational liquidity requirements:    the consolidated entity will not have sufficient funds to settle a transaction on the due date; the consolidated entity will be forced to sell financial assets at a value which is less than what they are worth; or the consolidated entity may be unable to settle or recover a financial asset at all. To help reduce these risks, the consolidated entity:   maintains instruments that are tradeable in highly liquid markets. has readily accessible standby facilities and other funding arrangements in place; and The Board reviews this exposure on a monthly basis from a projected 12-month cash flow forecast, listing of banking facilities, explanations of variances from the prior month reports and current funding positions of the overseas controlled entities provided by finance personnel. The following table details the consolidated entity’s remaining contractual maturity for its financial assets and financial liabilities. The financial assets have been disclosed based on the undiscounted contractual maturities of the financial assets including interest that will be earned on those assets. The financial liabilities have been disclosed based on the undiscounted cash flows of the financial liabilities based on the earliest date on which the consolidated entity can be required to pay. Year ended 30 June 2018 CONSOLIDATED Non derivative financial assets Cash and cash equivalents Receivables from franchisees Trade and other receivables Other financial assets Derivative financial assets Forward currency contracts Less than 1 year $000 1 to 2 years $000 2 to 5 years $000 Over 5 years $000 Total $000 170,544 544,003 184,915 31,458 5 - - - - 5,354 79,990 - - - - - - 6,014 18,283 170,544 544,003 276,273 49,741 - 5 Total financial assets 930,925 5,354 79,990 24,297 1,040,566 Non derivative financial liabilities Trade and other payables Interest bearing loans and borrowings Derivative financial liabilities Forward currency contracts 289,986 444,808 - - 380,675 134,138 52 - - Total financial liabilities 734,846 380,675 134,138 - - - - 289,986 959,621 52 1,249,659 Net maturity 196,079 (375,321) (54,148) 24,297 (209,093) Year ended 30 June 2017 CONSOLIDATED Non derivative financial assets Cash and cash equivalents Receivables from franchisees Trade and other receivables Other financial assets Derivative financial assets Forward currency contracts Less than 1 year $000 1 to 2 years $000 2 to 5 years $000 Over 5 years $000 Total $000 80,224 535,448 109,358 29,166 25 - - - - 5,501 81,767 - - - - - - 5,742 30,076 80,224 535,448 202,368 59,242 - 25 Total financial assets 754,221 5,501 81,767 35,818 877,307 Non derivative financial liabilities Trade and other payables Interest bearing loans and borrowings Derivative financial liabilities Forward currency contracts 238,628 401,409 - - 246,994 93,869 68 - - Total financial liabilities 640,105 246,994 93,869 - - - - 238,628 742,272 68 980,968 Net maturity 114,116 (241,493) (12,102) 35,818 (103,661) For detailed information on financing facilities available as at 30 June 2018 refer to Note 22. HARVEY NORMAN HOLDINGS LIMITED | ANNUAL REPORT 2018 123 NOTES TO THE FINANCIAL STATEMENTS (CONTINUED) 35. FINANCIAL RISK MANAGEMENT (continued) (e) Fair Value of Financial Assets and Financial Liabilities The fair value of financial assets and financial liabilities are determined as follows:  The carrying amounts of cash and cash equivalents, receivables from franchisees, trade and other receivables, other financial assets, trade and other payables and interest-bearing loans and borrowings are reasonable approximations of fair value. The fair value of financial assets and financial liabilities with standard terms and conditions and traded on active liquid markets are determined with reference to quoted market prices. The fair value of other financial assets and financial liabilities (excluding derivative instruments) are determined in accordance with generally accepted pricing models based on discounted cash flow analysis using prices from observable current market transactions. The consolidated entity enters into derivative financial instruments with various counterparties, particularly financial institutions with investment grade credit ratings. Forward currency contracts are valued using valuation techniques which employs the use of market observable inputs.    The consolidated entity uses various methods in estimating the fair value of financial instruments. The methods comprise: Level 1 – the fair value is calculated using quoted prices in active markets. Level 2 – the fair value is estimated using inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly (as prices) or indirectly (derived from prices). Level 3 – the fair value is estimated using inputs for the asset or liability that are not based on observable market data. The fair value of the financial instruments as well as the methods used to estimate the fair value are summarised in the table below. Quoted market Valuation technique – market observable inputs (Level 2) $000 Year ended 30 June 2018 CONSOLIDATED price (Level 1) $000 Financial Assets Listed investments Forward currency contracts Total Financial Assets Financial Liabilities Forward currency contracts Total Financial Liabilities 46,848 - 46,848 - - Year ended 30 June 2017 CONSOLIDATED price (Level 1) $000 Financial Assets Listed investments Forward currency contracts Total Financial Assets Financial Liabilities Forward currency contracts Total Financial Liabilities 56,455 - 56,455 - - Quoted market Valuation technique – market observable inputs (Level 2) $000 - 5 5 52 - Valuation technique – non market observable inputs (Level 3) $000 - - - - - Valuation technique – non market observable inputs (Level 3) $000 - 25 25 68 68 - - - - - Total $000 46,848 5 46,853 52 52 Total $000 56,455 25 56,480 68 68 Quoted market price represents the fair value determined based on quoted prices on active markets as at the reporting date without any deduction for transaction costs. The fair value of the listed equity investments are based on quoted market prices and are included in level 1. The fair value of financial instruments that are not traded in an active market is determined using valuation techniques. Forward currency contracts are measured using quoted forward exchange rates. These instruments are included in level 2. 124 NOTES TO THE FINANCIAL STATEMENTS (CONTINUED) 35. FINANCIAL RISK MANAGEMENT (continued) (f) Capital Risk Management Policy When managing capital, the objective is to create long-term sustainable value for shareholders and avoid adverse short-term decision making, whilst maintaining optimal returns to shareholders and benefits to other stakeholders. The aim is to maintain a capital structure utilising the lowest cost of capital available to the entity. The consolidated entity is constantly adjusting the capital structure to take advantage of favourable costs of capital or high returns on assets. As the market is constantly changing, the consolidated entity may change the amount of dividends to be paid to shareholders, return capital to shareholders, issue new shares or sell assets to reduce debt. The capital structure of the consolidated entity consists of debt, which includes the interest-bearing loans and borrowings disclosed in Note 18 and 21, cash and cash equivalents disclosed in Note 28(a) and equity attributable to equity holders of the parent, comprising ordinary shares, reserves and retained profits as disclosed in Notes 24, 25 and 26 respectively. None of the consolidated entity’s entities are subject to externally imposed capital requirements. Capital management is monitored through the net debt to equity ratio. The target for the consolidated entity’s net debt to equity ratio is a tolerance level of up to 50%. The net debt to equity ratio as at 30 June 2018 and 30 June 2017 were as follows: Borrowings (a) Less: Cash and cash equivalents Net Debt (c) Total equity (b) CONSOLIDATED June 2018 $000 925,394 (170,544) 754,850 June 2017 $000 720,509 (80,224) 640,285 2,959,980 2,834,957 Debt to equity ratio [(a)/(b)] 31.26% 25.42% Net debt to equity ratio [(c)/(b)] 25.50% 22.59% (a) Borrowings for the purpose of calculating the debt to equity ratio consists of:        Bank overdraft; Other short-term borrowings; Syndicated facility agreement (current and non-current); Commercial bills payable; Lease liabilities (current and non-current); Derivatives payable; and Non trade amounts owing to directors, other related parties and unrelated parties. (b) For the purpose of calculating the net debt to equity ratio, total equity excludes the negative acquisition reserve of $22.05 million (2017: $22.05 million). HARVEY NORMAN HOLDINGS LIMITED | ANNUAL REPORT 2018 125 NOTES TO THE FINANCIAL STATEMENTS (CONTINUED) 36. DERIVATIVE FINANCIAL INSTRUMENTS Hedging Instruments The following table details the derivative hedging instruments as at balance date. The fair value of a hedging derivative is classified as a non-current asset or liability if the remaining maturity of the hedged item is more than 12 months and as a current asset or liability if the remaining maturity of the hedged item is less than 12 months. Current Assets Forward currency contracts – held for trading Forward currency contracts – cash flow hedges Current liabilities Forward currency contracts – held for trading Forward currency contracts – cash flow hedges (a) Forward currency contracts – held for trading CONSOLIDATED June 2018 $000 - 5 35 17 The consolidated entity has entered into forward currency contracts which are economic hedges but do not satisfy the requirements of hedge accounting. Currency Average Exchange Rate 2018 2017 Euro (0-12 months) US Dollar (0-12 months) 62.77 75.85 67.64 76.03 Total CONSOLIDATED 2018 2017 Buy $000 7,816 1,814 9,630 Sell $000 - - - Buy $000 5,610 3,628 9,238 June 2017 $000 25 - 40 28 Sell $000 - - - These contracts are fair valued by comparing the contracted rate to the market rates at balance date. All movements in fair value are recognised in profit or loss in the period they occur. The net fair value losses on forward currency contracts during the year ended 30 June 2018 was $0.04 million for the consolidated entity (2017: $0.01 million). (b) Forward currency contracts – cash flow hedges The consolidated entity purchases inventories from various overseas countries. As such, the consolidated entity is exposed to foreign exchange risk from various currency exposures, primarily with respect to:   United States dollars; and Euro. In order to protect against exchange rate movements and to manage the inventory costing process, the consolidated entity has entered into forward currency contracts to purchase US dollars and Euro. These contracts are hedging highly probable forecasted purchases and they are timed to mature when payments are scheduled to be made. The following table details the forward currency contracts outstanding as at reporting date: Currency Average Exchange Rate 2017 2018 Euro (0-12 months) US Dollar (0-12 months) 62.99 74.65 66.93 75.11 Total CONSOLIDATED 2018 2017 Buy $000 2,416 483 2,899 Sell $000 - - - Buy $000 2,271 666 2,937 Sell $000 - - - 126 NOTES TO THE FINANCIAL STATEMENTS (CONTINUED) 36. DERIVATIVE FINANCIAL INSTRUMENTS (continued) Forward currency contracts – cash flow hedges (continued) (b) The forward currency contracts are considered to be highly effective hedges as they are matched against forecast inventory purchases and firm committed invoice payments for inventory purchases. During the year ended 30 June 2018, the hedges were 100% effective (2017: 100% effective), therefore the gain or loss on the contracts attributable to the hedged risk is taken directly to other comprehensive income. When the inventory is delivered the amount recognised in equity is adjusted to the inventory account in the statement of financial position. Movement in the forward currency contract cash flow hedge reserve: Opening balance Transferred to inventory Charged to other comprehensive income Closing balance CONSOLIDATED June 2018 $000 Increase/(Decrease) (20) 20 (8) (8) June 2017 $000 (32) 32 (20) (20) HARVEY NORMAN HOLDINGS LIMITED | ANNUAL REPORT 2018 127 NOTES TO THE FINANCIAL STATEMENTS (CONTINUED) 37. INVESTMENTS ACCOUNTED FOR USING EQUITY METHOD CONSOLIDATED Investment June 2018 $000 Share of Profit Before Tax June 2017 $000 June 2018 $000 June 2017 $000 Total joint venture entities accounted for using equity method 4,497 26,355 5,792 5,200 Name and Principal Activities Ownership Interest Contribution to Profit / (Loss) Before Tax Noarlunga (Shopping complex) Perth City West (Shopping complex) June 2018 % 50% 50% June 2017 % 50% 50% Warrawong King St (a) (Shopping complex) 62.5% 62.5% Byron Bay (Residential/convention development) Byron Bay – 2 (Resort operations) Dubbo (Shopping complex) Bundaberg (Land held for investment) Gepps Cross (Shopping complex) QCV (b) (Miners residential complex) KEH Partnership (Retailer) (c) Coomboona Dairy (d) (Dairy farming) Other 50% 50% 50% 50% 50% 50% 50% 49.9% 50% 50% 50% 50% 50% 50% 50% 50% 49.9% - June 2018 $000 1,573 3,806 1,100 (741) 246 631 (234) 3,075 10 - June 2017 $000 1,591 4,023 1,081 (734) 467 651 (3) 3,101 (114) - (4,565) (5,945) 891 5,792 1,082 5,200 (a) This joint venture has not been consolidated as the consolidated entity does not have control over operating and financing decisions and all joint venture parties participate equally in decision making. (b) A number of wholly-owned subsidiaries of Harvey Norman Holdings Limited (“HNHL”) have entered into joint ventures with an unrelated party to provide mining camp accommodation. The respective joint ventures have been granted finance facilities as follows: (i) (ii) a finance facility from ANZ for the amount of $5.15 million plus interest and costs, with a maturity date of 14 June 2019. finance facilities from Network Consumer Finance Pty Limited (“NCF”), a wholly-owned subsidiary of HNHL, for the amount of $35.05 million plus interest and costs, subject to bi-annual review. (c) The consolidated entity, through a wholly-owned subsidiary, has a 50% interest in KEH Partnership Pty Limited, a retail joint venture in Australia. The primary business of the KEH Partnership retail joint venture is the retail sale of school apparel and educational goods through the brand name The School Locker. The ‘Big Buys by Harvey Norman®‘ business was closed during the second half of the 2018 financial year. The consolidated entity has a commercial loan receivable from the KEH Partnership retail joint venture totalling $60.96 million as at 30 June 2018 (Jun 2017: $73.60 million). The commercial loan was used to assist with the working capital of the retail joint venture. An impairment assessment was conducted resulting in the recognition of an expense of $16.92 million (June 2017: $18.41 million) in the 2018 financial year as disclosed in Note 4. Expenses. The present value of future cash flows as at 30 June 2018 was assessed for a five-year period, based on financial budgets and assets held as security for the loan. The effective interest rate of 7.5% was applied to the cash flow projections. Cash flow projections were limited to five years. Each of the key assumptions in the impairment assessment is subject to judgement including the future trading performance of the retail joint venture. Judgement has been applied based on available information to assess the recoverable amount of the non-trade receivables as at balance date. (d) HNM Galaxy Pty Limited, acting in its capacity as trustee of the HNM Galaxy Unit Trust (HN JV Entity), holds 49.9% of the issued shares in Coomboona Holdings Pty Limited. Eternal Sound Limited, acting in its capacity as trustee for the AAA Settlement Trust (Eternal Sound JV Entity), holds 50.1% of the issued shares in Coomboona Holdings Pty Limited. Coomboona Holdings Pty Limited holds all of the issued shares in companies which carry on the business of dairy farm operations, land ownership and a pedigree breeding and genetics division in Northern Victoria (Coomboona JV). The 49.9% interest of the consolidated entity in the Coomboona JV is equity-accounted. The Coomboona JV commenced trading in September 2015 and the equity-accounted trading losses were $4.57 million for the 2018 financial year compared to equity-accounted trading losses of $5.95 million for the previous corresponding year. Refer to further information provided on Page 21 regarding the Other Segment. 128 NOTES TO THE FINANCIAL STATEMENTS (CONTINUED) 38. CONTROLLED ENTITIES AND UNIT TRUSTS Shares held by Harvey Norman Holdings Limited The following companies are 100% owned by Harvey Norman Holdings Limited and incorporated in Australia unless marked otherwise. The financial year of all controlled entities are the same as that of the Parent Company. A.C.N. 098 004 570 Pty Limited Aloku Pty Limited Anwarah Pty Limited Arisit Pty Limited1, 2 Arlenu Pty Limited Arpayo Pty Limited Australian Business Skills Centre Pty Limited22 Balwondu Pty Limited Barrayork Pty Limited Becto Pty Limited Bellevue Hill Pty Limited Bencoolen Properties Pte Limited 11,16 Bestest Pty Limited Bradiz Pty Limited Braxpine Pty Limited Byron Bay Facilities Pty Limited23 Byron Bay Management Pty Limited24 Caesar Mosaics Pty Limited Calardu Albany Pty Limited Calardu Albury Pty Limited Calardu Alexandria DM Pty Limited Calardu Alexandria WH Pty Limited Calardu Alice Springs Pty Limited Calardu Armadale WA Pty Limited Calardu Armidale Pty Limited Calardu Auburn Pty Limited Calardu Ballarat Pty Limited Calardu Ballina No. 1 Pty Limited Calardu Ballina Pty Limited Calardu Bathurst Pty Limited Calardu Belrose DM Pty Limited Calardu Bendigo Pty Ltd Calardu Berri (SA) Pty Limited Calardu Berrimah Pty Limited Calardu Berrimah WH Pty Limited26 Calardu Broadmeadow Pty Limited Calardu Broadmeadows VIC Pty Limited Calardu Browns Plains No. 1 Pty Limited Calardu Browns Plains Pty Limited Calardu Bunbury (WA) Pty Limited Calardu Bundaberg Pty Limited Calardu Bundaberg WH Pty Limited Calardu Bundall Pty Limited Calardu Burnie Pty Limited Calardu Cairns Pty Limited Calardu Cambridge Pty Limited Calardu Campbelltown Pty Limited Calardu Cannington Pty Limited Calardu Caringbah (Taren Point) Pty Limited Calardu Caringbah Pty Limited Calardu Chatswood Pty Limited Calardu Crows Nest Pty Limited Calardu Cubitt Pty Limited Calardu Darwin Pty Limited Calardu Devonport Pty Limited Calardu Dubbo Pty Limited Calardu Emerald Pty Limited Calardu Frankston Pty Limited Calardu Frankston WH Pty Limited Calardu Fyshwick DM Pty Limited Calardu Gepps Cross Pty Limited Calardu Gladstone Pty Limited Calardu Gordon Pty Limited Calardu Guildford Pty Limited Calardu Gympie Pty Limited Calardu Helensvale Pty Limited7 Calardu Hervey Bay Pty Limited Calardu Hobart Pty Limited Calardu Hoppers Crossing Pty Limited Calardu Horsham Pty Limited Calardu Innisfail Pty Limited Calardu Ipswich Pty Limited Calardu Jandakot Pty Limited Calardu Joondalup Pty Limited Calardu Kalgoorlie Oswald St Pty Limited Calardu Kalgoorlie Pty Limited Calardu Karana Downs Pty Limited Calardu Karratha Pty Limited Calardu Kemblawarra Pty Limited Calardu Kingaroy Pty Limited Calardu Kotara Pty Limited Calardu Launceston Pty Limited Calardu Lismore Pty Limited Calardu Loganholme Pty Limited Calardu Macgregor Pty Ltd Calardu Mackay No. 1 Pty Limited Calardu Mackay No. 2 Pty Limited Calardu Maitland Pty Limited Calardu Malaga Pty Limited Calardu Mandurah Pty Limited Calardu Maribyrnong Pty Limited Calardu Marion Pty Limited Calardu Maroochydore Pty Limited Calardu Maroochydore Warehouse Pty Limited Calardu Marsden Park Pty Limited Calardu Maryborough Pty Limited Calardu Melville Pty Limited Calardu Mentone Pty Limited Calardu Midland Pty Limited Calardu Milton Pty Limited Calardu Morayfield Pty Limited Calardu Morwell Pty Limited Calardu Moss Vale Pty Limited Calardu Mount Isa Pty Limited Calardu Mt Gambier Pty Limited Calardu Mudgee Pty Limited Calardu Munno Para Pty Limited Calardu Noarlunga Pty Limited Calardu Noble Park WH Pty Limited Calardu Noosa Pty Limited Calardu North Ryde No. 1 Pty Limited Calardu North Ryde Pty Limited Calardu Northbridge Pty Limited Calardu Nowra Pty Limited Calardu Penrith Pty Limited Calardu Perth City West Pty Limited Calardu Port Macquarie Pty Limited Calardu Preston Pty Limited Calardu Pty Limited Calardu Queensland Pty Limited Calardu Raine Square Pty Limited Calardu Richmond Pty Limited Calardu Rockhampton Pty Limited Calardu Rockingham Pty Limited Calardu Roselands Pty Limited Calardu Rothwell Pty Limited Calardu Rutherford Pty Limited Calardu Rutherford Warehouse Pty Limited Calardu Sale Pty Limited Calardu Silverwater Pty Limited Calardu South Australia Pty Limited Calardu Springvale Pty Limited Calardu Surry Hills Pty Limited Calardu Swan Hill Pty Limited Calardu Taree Pty Limited Calardu Taren Point Pty Limited Calardu Thebarton Pty Limited Calardu Toorak Pty Limited Calardu Toowoomba WH Pty Limited Calardu Townsville Pty Limited Calardu Tweed Heads Pty Limited Calardu Tweed Heads Traders Way Pty Limited Calardu Vicfurn Pty Limited Calardu Victoria Pty Limited Calardu Wangaratta Pty Ltd Calardu Warrawong (Homestarters) Pty Limited Calardu Warrawong Pty Limited Calardu Warrnambool Pty Limited Calardu Warwick Pty Limited Calardu West Gosford Pty Limited Calardu Whyalla Pty Limited Calardu Wivenhoe Pty Limited Calardu Wodonga Pty Limited Cannonel Recovery Pty Limited Carlando Pty Limited Cascade Consolidated Sdn. Bhd. 13,27 Charmela Pty Limited Clambruno Pty Limited Consolidated Design Group Pty Ltd Contemporary Design Group Pty Limited 1,2 CP Aspley Pty Limited CP Belmont Pty Limited CP Bendigo Pty Limited CP Braybrook Pty Limited CP Bundaberg Leasing Pty Limited CP Bundaberg Pty Limited CP Burleigh Waters Pty Limited CP Coburg Pty Limited CP Dandenong Pty Limited CP Joondalup Pty Limited CP Loganholme Pty Limited CP Macgregor Pty Limited CP Mackay Pty Limited CP Malvern Pty Limited CP Mandurah Pty Limited CP Maroochydoore Pty Limited CP Maryborough Leasing Pty Limited CP Maryborough Pty Limited CP Midland Pty Limited CP Moonah Pty Limited CP Moorabbin Pty Limited CP Morayfield Pty Limited CP Mornington Pty Limited CP Mt Druitt Leasing Pty Limited CP Mt Druitt Pty Limited CP O'Connor Pty Limited CP Osborne Park CL Pty Limited CP Osborne Park Pty Limited CP Richmond Pty Limited CP Ringwood Pty Limited CP Thomastown Pty Limited CP Victoria Park Pty Limited CP Welshpool DC Pty Limited Cropp Pty Limited D.M. Alexandria Franchisor Pty Limited D.M. Alexandria Leasing Pty Limited D.M. Alexandria Licencing Pty Limited D.M. Auburn Franchisor Pty Limited D.M. Auburn Leasing Pty Limited D.M. Belrose Franchisor Pty Limited D.M. Belrose Leasing Pty Limited D.M. Bundall Franchisor Pty Limited D.M. Bundall Leasing Pty Limited D.M. Castle Hill Franchisor Pty Limited D.M. Castle Hill Leasing Pty Limited D.M. Fyshwick Franchisor Pty Limited D.M. Fyshwick Leasing Pty Limited D.M. Kotara Franchisor Pty Limited D.M. Kotara Leasing Pty Limited D.M. Liverpool Franchisor Pty Limited D.M. Liverpool Leasing Pty Limited D.M. Marion Franchisor Pty Ltd D.M. Marion Leasing Pty Ltd D.M. Maroochydore Franchisor Pty Limited D.M. Maroochydore Leasing Pty Limited D.M. North Ryde Franchisor Pty Limited D.M. North Ryde Leasing Pty Limited D.M. Obsorne Park Leasing Pty Ltd D.M. Osborne Park Franchisor Pty Ltd D.M. Penrith Franchisor Pty Limited D.M. Penrith Leasing Pty Limited D.M. QVH Franchisor Pty Limited D.M. QVH Leasing Pty Limited D.M. Springvale Franchisor Pty Limited D.M. Springvale Leasing Pty Limited D.M. Warrawong Franchisor Pty Limited D.M. Warrawong Leasing Pty Limited D.M. West Gosford Franchisor Pty Ltd HARVEY NORMAN HOLDINGS LIMITED | ANNUAL REPORT 2018 129 NOTES TO THE FINANCIAL STATEMENTS (CONTINUED) 38. CONTROLLED ENTITIES AND UNIT TRUSTS (continued) Shares held by Harvey Norman Holdings Limited (continued) D.M. West Gosford Leasing Pty Ltd Daldere Pty Limited Dandolena Pty Limited Derni Pty Limited1,2 Divonda Pty Limited DM Online Franchisor Pty Limited DM Online Leasing Pty Limited Domain Holdings Pty Limited Domayne Furnishing Pty Limited Domayne Holdings Limited9, 10 Domayne Online.com Pty Limited Domayne Pty Limited Dubbo JV Pty Limited Durslee Pty Limited Eastern Audio Pte Ltd 11,27 E-Creation Sdn. Bhd. 13,27 Edbrook Everton Park Pty Limited Edbrook Pty Limited6 Elitetrax Marketing Sdn Bhd13,28 Energy Incentive Team Pty Limited29 Farane Pty Limited Flormonda Pty Limited Ganoru Pty Limited Generic Publications Pty Limited Gestco Pty Limited Glo Light Pty Limited21 H.N. Adelaide CK Franchisor Pty Limited H.N. Adelaide CK Leasing Pty Limited H.N. Albany Creek Franchisor Pty Limited H.N. Albany Creek Leasing Pty Limited H.N. Albany Franchisor Pty Limited H.N. Albany Leasing Pty Limited H.N. Albury Franchisor Pty Limited H.N. Albury Leasing Pty Limited H.N. Alexandria Franchisor Pty Limited H.N. Alexandria Leasing Pty Limited H.N. Alice Springs Franchisor Pty Limited H.N. Alice Springs Leasing Pty Limited H.N. Ararat Franchsor Pty Limited H.N. Ararat Leasing Pty Limited H.N. Armadale WA Franchisor Pty Limited H.N. Armadale WA Leasing Pty Limited H.N. Armidale Franchisor Pty Limited H.N. Armidale Leasing Pty Limited H.N. Aspley Franchisor Pty Limited H.N. Aspley Leasing Pty Limited H.N. Atherton Franchisor Pty Limited H.N. Atherton Leasing Pty Limited H.N. Auburn Franchisor Pty Limited H.N. Auburn Leasing Pty Limited H.N. Ayr Franchisor Pty Limited H.N. Ayr Leasing Pty Limited H.N. Bairnsdale Franchisor Pty Limited H.N. Bairnsdale Leasing Pty Limited H.N. Balgowlah Franchisor Pty Limited H.N. Balgowlah Leasing Pty Limited H.N. Ballarat Franchisor Pty Limited H.N. Ballarat Leasing Pty Limited H.N. Ballina Franchisor Pty Limited H.N. Ballina Leasing Pty Limited H.N. Batemans Bay Franchisor Pty Limited H.N. Batemans Bay Leasing Pty Limited H.N. Bathurst Franchisor Pty Limited H.N. Bathurst Leasing Pty Limited H.N. Belmont Franchisor Pty Limited H.N. Belmont Leasing Pty Limited H.N. Belmont North Franchisor Pty Limited H.N. Belmont North Leasing Pty Limited H.N. Bendigo Franchisor Pty Limited H.N. Bendigo Leasing Pty Limited H.N. Bernoth Franchisor Pty Limited H.N. Bernoth Leasing Pty Limited H.N. Bernoth Plant & Equipment Pty Limited H.N. Blacktown Franchisor Pty Limited H.N. Blacktown Leasing Pty Limited H.N. Bondi Junction Franchisor Pty Limited H.N. Bondi Junction Leasing Pty Limited 130 H.N. Braybrook Franchisor Pty Limited H.N. Braybrook Leasing Pty Limited H.N. Broadmeadow (VIC) Franchisor Pty Limited H.N. Broadmeadow (VIC) Leasing Pty Limited H.N. Broadway (Sydney) Franchisor Pty Limited H.N. Broadway (Sydney) Leasing Pty Limited H.N. Broadway on the Mall Franchisor Pty Limited H.N. Broadway on the Mall Leasing Pty Limited H.N. Broken Hill Franchisor Pty Limited H.N. Broken Hill Leasing Pty Limited H.N. Brooklyn Franchisor Pty Limited H.N. Brooklyn Leasing Pty Limited H.N. Broome Franchisor Pty Ltd H.N. Broome Leasing Pty Ltd H.N. Browns Plains Franchisor Pty Limited H.N. Browns Plains Leasing Pty Limited H.N. Bunbury Franchisor Pty Limited H.N. Bunbury Leasing Pty Limited H.N. Bundaberg Franchisor Pty Limited H.N. Bundaberg Leasing Pty Limited H.N. Bundall Franchisor Pty Limited H.N. Bundall Leasing Pty Limited H.N. Burleigh Heads Franchisor Pty Limited H.N. Burleigh Heads Leasing Pty Limited H.N. Burleigh Waters Franchisor Pty Limited H.N. Burleigh Waters Leasing Pty Limited H.N. Busselton Franchisor Pty Limited H.N. Busselton Leasing Pty Limited H.N. Cairns Franchisor Pty Limited H.N. Cairns Leasing Pty Limited H.N. Cambridge Park Franchisor Pty Limited H.N. Cambridge Park Leasing Pty Limited H.N. Campbelltown Franchisor Pty Limited H.N. Campbelltown Leasing Pty Limited H.N. Cannington W.A. Franchisor Pty Limited H.N. Cannington W.A. Leasing Pty Limited H.N. Canonvale Franchisor Pty Limited H.N. Canonvale Leasing Pty Limited H.N. Capalaba Franchisor Pty Limited H.N. Capalaba Leasing Pty Limited H.N. Carindale Franchisor Pty Limited H.N. Carindale Leasing Pty Limited H.N. Caringbah Franchisor Pty Limited H.N. Caringbah Leasing Pty Limited H.N. Castle Hill Franchisor Pty Limited H.N. Castle Hill Leasing Pty Limited H.N. Chadstone Franchisor Pty Limited H.N. Chadstone Leasing Pty Limited H.N. Chatswood Franchisor Pty Limited H.N. Chatswood Leasing Pty Limited H.N. Chirnside Park Franchisor Pty Limited H.N. Chirnside Park Leasing Pty Limited H.N. City Cross Franchisor Pty Limited H.N. City Cross Leasing Pty Limited H.N. City West Franchisor Pty Limited H.N. City West Leasing Pty Limited H.N. Cleveland Franchisor Pty Limited H.N. Cleveland Leasing Pty Limited H.N. Cobar Franchisor Pty Limited H.N. Cobar Leasing Pty Limited H.N. Coburg Franchisor Pty Limited H.N. Coburg Leasing Pty Limited H.N. Coffs Harbour Franchisor Pty Limited H.N. Coffs Harbour Leasing Pty Limited H.N. Coorparoo Franchisor Pty Limited H.N. Coorparoo Leasing Pty Limited H.N. Cranbourne Franchisor Pty Limited H.N. Dalby Franchisor Pty Limited H.N. Dalby Leasing Pty Limited H.N. Dandenong Franchisor Pty Limited H.N. Dandenong Leasing Pty Limited H.N. Darwin Franchisor Pty Limited H.N. Darwin Leasing Pty Limited H.N. Deniliquin Franchisor Pty Limited H.N. Deniliquin Leasing Pty Limited H.N. Dubbo Franchisor Pty Limited H.N. Dubbo Leasing Pty Limited H.N. Edgewater Franchisor Pty Limited H.N. Edgewater Leasing Pty Limited H.N. Education Franchisor Pty Limited H.N. Education Leasing Pty Limited H.N. Emerald Franchisor Pty Limited H.N. Emerald Leasing Pty Limited H.N. Energy IP Licensing Pty Limited H.N. Enfield Franchisor Pty Limited H.N. Enfield Leasing Pty Limited H.N. Everton Park Franchisor Pty Limited H.N. Everton Park Leasing Pty Limited H.N. Forster Franchisor Pty Ltd H.N. Forster Leasing Pty Ltd H.N. Fortitude Valley Franchisor Pty Limited H.N. Fortitude Valley Leasing Pty Limited H.N. Frankston Franchisor Pty Limited H.N. Frankston Leasing Pty Limited H.N. Fremantle Franchisor Pty Limited H.N. Fyshwick Franchisor Pty Limited H.N. Fyshwick Leasing Pty Limited H.N. Geelong Franchisor Pty Limited H.N. Geelong Leasing Pty Limited H.N. Gepps Cross Franchisor Pty Limited H.N. Gepps Cross Leasing Pty Limited H.N. Geraldton Leasing Pty Limited H.N. Geraldton WA Franchisor Pty Limited H.N. Gladstone Franchisor Pty Limited H.N. Gladstone Leasing Pty Limited H.N. Gordon Franchisor Pty Limited H.N. Gordon Leasing Pty Limited H.N. Gosford Leasing Pty Limited H.N. Goulburn Franchisor Pty Limited H.N. Goulburn Leasing Pty Limited H.N. Grafton Franchisor Pty Limited H.N. Grafton Leasing Pty Limited H.N. Great Eastern Highway Franchisor Pty Limited H.N. Great Eastern Highway Leasing Pty Limited H.N. Greensborough Franchisor Pty Limited H.N. Greensborough Leasing Pty Limited H.N. Griffith Franchisor Pty Limited H.N. Griffith Leasing Pty Limited H.N. Gunnedah Franchisor Pty Limited H.N. Gunnedah Leasing Pty Limited H.N. Guthrie Street Franchisor Pty Limited H.N. Guthrie Street Leasing Pty Limited H.N. Gympie Franchisor Pty Limited H.N. Gympie Leasing Pty Limited H.N. Hamilton Franchisor Pty Limited H.N. Hamilton Leasing Pty Limited H.N. Hervey Bay Franchisor Pty Limited H.N. Hervey Bay Leasing Pty Limited H.N. Hoppers Crossing Franchisor Pty Limited H.N. Hoppers Crossing Leasing Pty Limited H.N. Horsham Franchisor Pty Limited H.N. Horsham Leasing Pty Limited H.N. Hyperdome Franchisor Pty Limited H.N. Hyperdome Leasing Pty Limited H.N. Indooroopilly Franchisor Pty Limited H.N. Indooroopilly Leasing Pty Limited H.N. Innisfail Franchisor Pty Limited H.N. Innisfail Leasing Pty Limited H.N. Inverell Franchisor Pty Limited H.N. Inverell Leasing Pty Limited H.N. Ipswich Franchisor Pty Limited H.N. Ipswich Leasing Pty Limited H.N. Joondalup Franchisor Pty Limited H.N. Joondalup Leasing Pty Limited H.N. Kalgoorlie Franchisor Pty Limited H.N. Kalgoorlie Leasing Pty Limited H.N. Karratha Franchisor Pty Limited H.N. Karratha Leasing Pty Limited H.N. Kawana Waters Franchisor Pty Limited H.N. Kawana Waters Leasing Pty Limited H.N. Kingaroy Franchisor Pty Limited H.N. Kingaroy Leasing Pty Limited H.N. Knox Towerpoint Franchisor Pty Limited H.N. Knox Towerpoint Leasing Pty Limited NOTES TO THE FINANCIAL STATEMENTS (CONTINUED) 38. CONTROLLED ENTITIES AND UNIT TRUSTS (continued) Shares held by Harvey Norman Holdings Limited (continued) H.N. Lake Haven Franchisor Pty Limited H.N. Lake Haven Leasing Pty Limited H.N. Leichhardt Franchisor Pty Limited H.N. Lismore Franchisor Pty Limited H.N. Lismore Leasing Pty Limited H.N. Lithgow Franchisor Pty Limited H.N. Lithgow Leasing Pty Limited H.N. Liverpool Franchisor Pty Limited H.N. Liverpool Leasing Pty Limited H.N. Loganholme Franchisor Pty Limited H.N. Loganholme Leasing Pty Limited H.N. Loughran Contracting Pty Limited H.N. Mac 1 Leasing Pty Limited H.N. Mac 1 Pty Limited H.N. Macgregor Franchisor Pty Limited H.N. Macgregor Leasing Pty Limited H.N. Mackay Franchisor Pty Limited H.N. Mackay Leasing Pty Limited H.N. Maddington Franchisor Pty Limited H.N. Maitland Franchisor Pty Limited H.N. Maitland Leasing Pty Limited H.N. Malaga Franchisor Pty Limited H.N. Malaga Leasing Pty Limited H.N. Mandurah Franchisor Pty Limited H.N. Mandurah Leasing Pty Limited H.N. Maribyrnong Franchisor Pty Limited H.N. Maribyrnong Leasing Pty Limited H.N. Marion Franchisor Pty Limited H.N. Marion Leasing Pty Limited H.N. Maroochydore Franchisor Pty Limited H.N. Maroochydore Leasing Pty Limited H.N. Martin Place Sydney Franchisor Pty Limited H.N. Martin Place Sydney Leasing Pty Limited H.N. Mentone Franchisor Pty Limited H.N. Mentone Leasing Pty Limited H.N. Midland Franchisor Pty Limited H.N. Midland Leasing Pty Limited H.N. Mildura Franchisor Pty Limited H.N. Mildura Leasing Pty Limited H.N. Mile End Franchisor Pty Limited H.N. Mile End Leasing Pty Limited H.N. Moe Franchisor Pty Limited H.N. Moe Leasing Pty Limited H.N. Moonah Franchisor Pty Limited H.N. Moonah Leasing Pty Limited H.N. Moorabbin Franchisor Pty Limited H.N. Moorabbin Leasing Pty Limited H.N. Moorabbin SC Franchisor Pty Limited H.N. Moorabbin SC Leasing Pty Limited H.N. Moore Park Franchisor Pty Limited H.N. Moore Park Leasing Pty Limited H.N. Morayfield Franchisor Pty Limited H.N. Morayfield Leasing Pty Limited H.N. Moree Franchisor Pty Limited H.N. Moree Leasing Pty Limited H.N. Morley Franchisor Pty Limited H.N. Mornington Franchisor Pty Limited H.N. Mornington Leasing Pty Limited H.N. Morwell Franchisor Pty Limited H.N. Morwell Leasing Pty Limited H.N. Moss Vale Franchisor Pty Limited H.N. Moss Vale Leasing Pty Limited H.N. Mt Barker Franchisor Pty Limited H.N. Mt Barker Leasing Pty Limited H.N. Mt Gambier Franchisor Pty Limited H.N. Mt Gambier Leasing Pty Limited H.N. Mt Gravatt Franchisor Pty Limited H.N. Mt Gravatt Leasing Pty Limited H.N. Mt Isa Franchisor Pty Limited H.N. Mt Isa Leasing Pty Limited H.N. Mudgee Franchisor Lty Limited H.N. Mudgee Leasing Pty Limited H.N. Munno Para Franchisor Pty Limited H.N. Munno Para Leasing Pty Limited H.N. Muswellbrook Franchisor Pty Limited H.N. Muswellbrook Leasing Pty Limited H.N. Narre Warren Franchisor Pty Limited H.N. Narre Warren Leasing Pty Limited H.N. Newcastle Franchisor Pty Limited H.N. Newcastle Leasing Pty Limited H.N. Newcastle West Franchisor Pty Limited H.N. Newcastle West Leasing Pty Limited H.N. Noarlunga Franchisor Pty Limited H.N. Noarlunga Leasing Pty Limited H.N. Noosa Franchisor Pty Limited H.N. Noosa Leasing Pty Limited H.N. Norwest Franchisor Pty Limited H.N. Nowra Franchisor Pty Limited H.N. Nowra Leasing Pty Limited H.N. Nunawading Franchisor Pty Limited H.N. Nunawading Leasing Pty Limited H.N. O’Connor Franchisor Pty Limited H.N. O’Connor Leasing Pty Limited H.N. Oakleigh CK Franchisor Pty Limited H.N. Oakleigh CK Leasing Pty Limited H.N. Orange Franchisor Pty Limited H.N. Orange Leasing Pty Limited H.N. Osborne Park Franchisor Pty Limited H.N. Osborne Park Leasing Pty Limited H.N. Oxley Franchisor Pty Limited H.N. Oxley Leasing Pty Limited H.N. Pacific Fair Franchisor Pty Limited H.N. Pacific Fair Leasing Pty Limited H.N. Parkes Franchisor Pty Limited H.N. Parkes Leasing Pty Limited H.N. Penrith Franchisor Pty Limited H.N. Penrith Leasing Pty Limited H.N. Peppermint Grove Franchisor Pty Limited H.N. Peppermint Grove Leasing Pty Limited H.N. Port Hedland Franchisor Pty Limited H.N. Port Hedland Leasing Pty Limited H.N. Port Kennedy Franchisor Pty Limited H.N. Port Kennedy Leasing Pty Limited H.N. Port Lincoln Franchisor Pty Limited H.N. Port Lincoln Leasing Pty Limited H.N. Port Macquarie Franchisor Pty Limited H.N. Port Macquarie Leasing Pty Limited H.N. Preston Franchisor Pty Limited H.N. Preston Leasing Pty Limited H.N. Richmond Franchisor Pty Limited H.N. Richmond Leasing Pty Limited H.N. Ringwood Franchisor Pty Limited H.N. Ringwood Leasing Pty Limited H.N. Riverwood Franchisor Pty Limited H.N. Riverwood Leasing Pty Limited H.N. Rockhampton Franchisor Pty Limited H.N. Rockhampton Leasing Pty Limited H.N. Rothwell Franchisor Pty Limited H.N. Rothwell Leasing Pty Limited H.N. Salamander Bay Franchisor Pty Limited H.N. Salamander Bay Leasing Pty Limited H.N. Sale Franchisor Pty Limited H.N. Sale Leasing Pty Limited H.N. Shepparton Franchisor Pty Limited H.N. Shepparton Leasing Pty Limited H.N. South Tweed Franchisor Pty Limited H.N. South Tweed Leasing Pty Limited H.N. Southland Franchisor Pty Limited H.N. Southland Leasing Pty Limited H.N. Springvale Franchisor Pty Limited H.N. Springvale Leasing Pty Limited H.N. Sunshine Franchisor Pty Limited H.N. Sunshine Leasing Pty Limited H.N. Swan Hill Franchisor Pty Limited H.N. Swan Hill Leasing Pty Limited H.N. Tamworth Franchisor Pty Limited H.N. Tamworth Leasing Pty Limited H.N. Taree Franchisor Pty Limited H.N. Taree Leasing Pty Limited H.N. Thomastown Franchisor Pty Limited H.N. Thomastown Leasing Pty Limited H.N. Toowoomba Franchisor Pty Limited H.N. Toowoomba Leasing Pty Limited H.N. Townsville Franchisor Pty Limited H.N. Townsville Leasing Pty Limited H.N. Traralgon Franchisor Pty Limited H.N. Traralgon Leasing Pty Limited H.N. Tura Beach Franchisor Pty Limited H.N. Tura Beach Leasing Pty Limited H.N. Vic/Tas Commercial Project Franchisor Pty Limited H.N. Vic/Tas Commercial Project Leasing Pty Limited H.N. Victoria Park Franchisor Pty Limited H.N. Victoria Park Leasing Pty Limited H.N. Wagga Franchisor Pty Limited H.N. Wagga Leasing Pty Limited H.N. Wangaratta Franchisor Pty Limited H.N. Wangaratta Leasing Pty Limited H.N. Warragul Franchisor Pty Limited H.N. Warragul Leasing Pty Limited H.N. Warrawong Franchisor Pty Limited H.N. Warrawong Leasing Pty Limited H.N. Warrnambool Franchisor Pty Limited H.N. Warrnambool Leasing Pty Limited H.N. Warwick (WA) Franchisor Pty Limited H.N. Warwick (WA) Leasing Pty Limited H.N. Warwick Franchisor Pty Limited H.N. Warwick Leasing Pty Limited H.N. Watergardens Franchisor Pty Limited H.N. Watergardens Leasing Pty Limited H.N. Waurn Ponds Franchisor Pty Limited H.N. Waurn Ponds Leasing Pty Limited H.N. West Gosford Franchisor Pty Limited H.N. West Wyalong Franchisor Pty Limited H.N. West Wyalong Leasing Pty Limited H.N. Whyalla Franchisor Pty Limited H.N. Whyalla Leasing Pty Limited H.N. Wiley Park Franchisor Pty Limited H.N. Wiley Park Leasing Pty Limited H.N. Windsor Franchisor Pty Limited H.N. Windsor Leasing Pty Limited H.N. Woden Franchisor Pty Limited H.N. Woden Leasing Pty Limited H.N. Wonthaggi Franchisor Pty Limited H.N. Wonthaggi Leasing Pty Limited H.N. Woodville Franchisor Pty Limited H.N. Woodville Leasing Pty Limited H.N. Young Franchisor Pty Limited H.N. Young Leasing Pty Limited Hardly Normal Discounts Pty Limited Hardly Normal Limited9,10 Hardly Normal Pty Limited Harvey Cellars Pty Limited Harvey Liquor Pty Limited Harvey Norman (ACT) Pty Limited Harvey Norman (QLD) Pty Limited6 Harvey Norman 2007 Management Pty Limited Harvey Norman Big Buys Pty Limited Harvey Norman Burnie Franchisor Pty Limited Harvey Norman Burnie Leasing Pty Limited Harvey Norman CEI d.o.o. 12 Harvey Norman Commercial Your Solution Provider Pty Ltd Harvey Norman Contracting Pty Limited Harvey Norman Corporate Air Pty Limited Harvey Norman CP Pty Limited Harvey Norman Devonport Franchisor Pty Limited Harvey Norman Devonport Leasing Pty Limited Harvey Norman Education and Training Pty Limited Harvey Norman Europe d.o.o12 Harvey Norman Export Pty Limited Harvey Norman Furnishing Pty Limited Harvey Norman Gamezone Pty Limited Harvey Norman Glenorchy Franchisor Pty Limited Harvey Norman Global Pty Limited Harvey Norman Hobart Franchisor Pty Limited Harvey Norman Hobart Leasing Pty Limited Harvey Norman Holdings (Ireland) Limited15 Harvey Norman Home Cellars Pty Limited Harvey Norman Home Loans Pty Limited Harvey Norman Home Starters Pty Limited Harvey Norman Homemaker Centre Pty Limited Harvey Norman Launceston Franchisor Pty Limited HARVEY NORMAN HOLDINGS LIMITED | ANNUAL REPORT 2018 131 NOTES TO THE FINANCIAL STATEMENTS (CONTINUED) 38. CONTROLLED ENTITIES AND UNIT TRUSTS (continued) Shares held by Harvey Norman Holdings Limited (continued) Harvey Norman Launceston Leasing Pty Limited Harvey Norman Leasing (Blanchardstown) Limited15,18 Harvey Norman Leasing (Carrickmines) Limited 15,18 Harvey Norman Leasing (Castlebar) Limited 15,18 Harvey Norman Leasing (Cork) Limited15,18 Harvey Norman Leasing (Drogheda) Limited15,18 Harvey Norman Leasing (Dublin) Limited15,18 Harvey Norman Leasing (Dundalk) Limited15,18 Harvey Norman Leasing (Eastgate) Limited15,18 Harvey Norman Leasing (Limerick) Limited15,18 Harvey Norman Leasing (Mullingar) Limited15,18 Harvey Norman Leasing (N.Z.) Limited9,10 Harvey Norman Leasing (Naas) Limited15,18 Harvey Norman Leasing (NI) Limited15,18 Harvey Norman Leasing (Rathfarnham) Limited15,18 Harvey Norman Leasing (Tralee) Limited15,18 Harvey Norman Leasing (Waterford) Limited15,18 Harvey Norman Leasing Pty Limited Harvey Norman Limited10 Harvey Norman Mortgage Service Pty Limited Harvey Norman Net. Works Pty Limited Harvey Norman OFIS Pty Limited Harvey Norman Online.com Pty Limited Harvey Norman Ossia (Asia) Pte Limited11,16,17 Harvey Norman Properties (N.Z.) Limited9,10 Harvey Norman Rental Pty Limited Harvey Norman Retailing Pty Limited Harvey Norman Rosney Franchisor Pty Limited Harvey Norman Security Pty Limited Harvey Norman Shopfitting Pty Limited Harvey Norman Singapore Pte Limited11,19,16 Harvey Norman Stores (N.Z.) Pty Limited1,2 Harvey Norman Stores Pty Limited Harvey Norman Superlink Pty Limited Harvey Norman Tasmania Pty Limited Harvey Norman Technology Pty Limited Harvey Norman The Bedding Specialists Pty Limited Harvey Norman The Computer Specialists Pty Limited Harvey Norman The Electrical Specialists Pty Limited Harvey Norman The Furniture Specialists Pty Limited Harvey Norman Trading (Ireland) Limited15,18 Harvey Norman Trading d.o.o.12 Harvey Norman Ulverstone Franchisor Pty Limited Harvey Norman Victoria Pty Limited Harvey Norman Zagreb d.o.o.14 Havrex Pty Limited6 HN Allens Road Leasing Limited9,10 HN Blenheim Leasing Limited9,10 HN Botany Leasing Limited9,10 HN Botany Outlet Leasing Limited9,10,33 HN Bundaberg Markets Pty Limited30 HN Byron No. 2 Pty Limited HN Byron No. 3 Pty Limited HN Commercial Leasing Limited9,10 HN Coomboona Pty Limited HN Downing Street Leasing Limited9,10 HN Edmonton Road Leasing Limited9,10 HN Hamilton Central Leasing Limited9,10 HN Harris Road Leasing Limited9,10 HN Henderson Leasing Limited9,10 HN Hornby Leasing Limited9,10 HN Licensing Pty Limited HN Lincoln Centre Leasing Limited9,10 HN Maleme Street Leasing Limited9,10 HN Manukau Leasing Limited9,10 HN Mowbray Street Leasing Limited9,10 HN Mt Roskill Leasing Limited9,10 HN Napier Leasing Limited9,10 HN Online Franchisor Pty Limited HN Online Leasing Pty Limited HN Paraparaumu Leasing Limited9,10 HN QCV Benaraby No.1 Pty Limited HN QCV Benaraby Pty Limited HN QCV Blackwater Land Pty Limited HN QCV Bottle Tree Pty Limited HN QCV Concepts Pty Limited HN QCV Fairview Pty Limited HN QCV Injune Pty Limited HN QCV LOR Pty Limited HN QCV Pty Limited HN QCV Sarina Land Pty Limited HN QCV Sarina Pty Limited HN QCV Toowoomba Land Pty Limited HN QCV Toowoomba Pty Limited HN Queenstown Leasing Limited9,10 HN Rangitikei Street Leasing Limited9,10 HN Tauranga Commercial Leasing Limited9,10 HN Tauranga Leasing Limited9,10 HN Tory Street Leasing Limited9,10 HN Tower Junction Leasing Limited9,10 HN Westgate Leasing Limited9,10 HN Whakatane Leasing Limited,9,10 HN Wingate Leasing Limited9,10 HN Woolston Leasing Limited9,10 HN Zagreb Investment Pty Limited HNL Pty Limited HNM Galaxy Pty Limited HNZ Retailing NZ Limited9,10,31 Hodberg Pty Limited5 Hodvale Pty Limited5 Home Mart Furniture Pty Limited Home Mart Pty Limited Hoxco Pty Limited6 J.M. Albury Franchisor Pty Limited J.M. Albury Leasing Pty Limited J.M. Alexandria Franchisor Pty Limited J.M. Alexandria Leasing Pty Limited J.M. Ballina Franchisor Pty Limited J.M. Ballina Leasing Pty Limited J.M. Bennetts Green Franchisor Pty Limited J.M. Bennetts Green Leasing Pty Limited J.M. Campbelltown Franchisor Pty Limited J.M. Campbelltown Leasing Pty Limited J.M. Caringbah Franchisor Pty Limited J.M. Caringbah Leasing Pty Limited J.M. Chancellor Park Franchisor Pty Limited J.M. Chancellor Park Leasing Pty Limited J.M. Contracting Services Pty Limited J.M. Darwin Franchisor Pty Limited7 J.M. Darwin Leasing Pty Limited7 J.M. Dubbo Franchisor Pty Limited J.M. Dubbo Leasing Pty Limited J.M. Leasing Pty Limited J.M. Mackay Franchisor Pty Limited J.M. Mackay Leasing Pty Limited J.M. Maitland Franchisor Pty Limited J.M. Maitland Leasing Pty Limited J.M. Maroochydore Franchisor Pty Limited J.M. Maroochydore Leasing Pty Limited J.M. Marrickville Franchisor Pty Limited J.M. McGraths Hill Franchisor Pty Limited J.M. McGraths Hill Leasing Pty Limited J.M. Morayfield Franchisor Pty Limited J.M. Morayfield Leasing Pty Limited J.M. Mudgee Franchisor Pty Limited J.M. Mudgee Leasing Pty Limited J.M. Muswellbrook Franchisor Pty Limited J.M. Muswellbrook Leasing Pty Limited J.M. Nowra Franchisor Pty Limited J.M. Nowra Leasing Pty Limited J.M. Plant & Equipment Hire Pty Limited J.M. Rockhampton Franchisor Pty Limited J.M. Rockhampton Leasing Pty Limited J.M. Share Investment Pty Limited J.M. Toukley Franchisor Pty Limited J.M. Toukley Leasing Pty Limited J.M. Townsville Franchisor Pty Limited J.M. Townsville Leasing Pty Limited J.M. Wagga Wagga Franchisor Pty Limited J.M. Wagga Wagga Leasing Pty Limited J.M. Wallsend Franchisor Pty Limited J.M. Wallsend Leasing Pty Limited J.M. Warners Bay Franchisor Pty Limited J.M. Warners Bay Leasing Pty Limited 132 J.M. Warrawong Franchisor Pty Limited J.M. Warrawong Leasing Pty Limited J.M. West Gosford Franchisor Pty Limited J.M. West Gosford Leasing Pty Limited J.M. Young Franchisor Pty Limited J.M. Young Leasing Pty Limited Jartoso Pty Limited JM Online Franchisor Pty Limited JM Online Leasing Pty Limited Jondarlo Pty Limited Joyce Mayne Furnishing Pty Limited Joyce Mayne Liverpool Leasing Pty Limited Joyce Mayne Penrith Pty Limited Joyce Mayne Shopping Complex Pty Limited Kalinya Development Pty Limited Kambaldu Pty Limited Kita Pty Limited Koodero Pty Limited Korinti Pty Limited Lamino Pty Limited Lesandu Adelaide City Pty Limited Lesandu Albany Pty Limited Lesandu Albury Pty Limited Lesandu Alexandria (JM) Pty Limited Lesandu Alexandria DM Pty Limited Lesandu Alexandria Pty Limited Lesandu Alice Springs Pty Limited Lesandu Ararat Pty Limited Lesandu Aspley Pty Limited Lesandu Atherton Pty Limited Lesandu Auburn Stone Pty Limited Lesandu Ayr Pty Limited Lesandu Bairnsdale Pty Limited Lesandu Balgowlah Pty Limited Lesandu Ballina JM Pty Limited Lesandu Batemans Bay Pty Limited Lesandu Bathurst Pty Limited Lesandu Belmont Pty Limited Lesandu Belrose DM Pty Limited Lesandu Benalla Pty Limited Lesandu Bennetts Green JM Pty Limited Lesandu Bentleigh Pty Limited Lesandu Berrimah JM Pty Limited7 Lesandu Berrimah Pty Limited Lesandu Blacktown Pty Limited Lesandu Bondi Junction Pty Limited Lesandu Brisbane City Pty Limited Lesandu Brisbane Pty Limited Lesandu Broadbeach Pty Limited Lesandu Broadway Pty Limited Lesandu Broken Hill Pty Limited Lesandu Broome Pty Ltd Lesandu Browns Plains No. 1 Pty Limited Lesandu Browns Plains Pty Limited Lesandu Burleigh Heads Flooring Pty Limited Lesandu Busselton Pty Limited Lesandu Cambridge Pty Limited Lesandu Canberra Pty Limited Lesandu Cannington Pty Limited Lesandu Cannonvale Pty Limited Lesandu Capalaba Pty Limited Lesandu Carindale Pty Limited Lesandu Castle Hill DM Pty Limited Lesandu Castle Hill Pty Limited Lesandu Cessnock (JM) Pty Limited Lesandu Chadstone Pty Limited Lesandu Charmhaven Pty Limited Lesandu Chatswood Express Pty Limited Lesandu Chatswood Pty Limited Lesandu Chirnside Park Pty Limited Lesandu Cleveland Pty Limited Lesandu Cobar Pty Limited Lesandu Coffs Harbour Pty Limited Lesandu Coorparoo Pty Limited Lesandu CP Belmont Pty Limited Lesandu CP Burleigh Waters Pty Limited Lesandu CP Coburg Pty Limited NOTES TO THE FINANCIAL STATEMENTS (CONTINUED) CONTROLLED ENTITIES AND UNIT TRUSTS (continued) 38. Shares held by Harvey Norman Holdings Limited (continued) Lesandu CP Joondalup Pty Limited Lesandu CP Macgregor Pty Limited Lesandu CP Macgregor WH Pty Limited Lesandu CP Maryborough Pty Limited Lesandu CP Moonah Pty Limited Lesandu CP Mornington Pty Limited Lesandu CP Osborne Park Pty Limited Lesandu CP Richmond CL Pty Limited Lesandu CP Richmond Pty Limited Lesandu CP Richmond WH Pty Limited Lesandu Cranbourne Pty Limited Lesandu Dalby Pty Limited Lesandu Dandenong Pty Limited Lesandu Deniliquin Pty Limited Lesandu Dubbo JM Pty Limited Lesandu Dubbo Pty Limited Lesandu Eden Pty Limited Lesandu Engadine Pty Limited Lesandu Erina Flooring Pty Limited Lesandu Forster Pty Limited Lesandu Fyshwick Pty Limited Lesandu Gepps Cross Pty Limited Lesandu Gladstone Pty Limited Lesandu Gordon Pty Limited Lesandu Goulburn Pty Limited Lesandu Grafton Pty Limited Lesandu Greensborough Pty Limited Lesandu Griffith Pty Limited Lesandu Gunnedah Pty Limited Lesandu Hamilton (VIC) Pty Limited Lesandu Hamilton Pty Limited Lesandu Hervey Bay Pty Limited Lesandu HN Pty Limited Lesandu Horsham Pty Limited Lesandu Indooroopilly Pty Limited Lesandu Ingham Pty Limited Lesandu Innisfail Pty Limited Lesandu Inverell Pty Limited Lesandu Ipswich Pty Limited Lesandu Jandakot Pty Limited Lesandu Joondalup Pty Limited Lesandu Kalgoorlie Pty Limited Lesandu Karratha Pty Limited Lesandu Kewdale Pty Limited Lesandu Knox Towerpoint Pty Limited Lesandu Kotara DM Pty Limited Lesandu Launceston Pty Limited Lesandu Laverton Pty Limited7 Lesandu Light Street DM Pty Limited Lesandu Lismore Pty Limited Lesandu Lithgow Pty Limited Lesandu Loganholme Pty Limited Lesandu Mackay Pty Limited Lesandu Maitland JM Pty Limited Lesandu Maitland Pty Limited Lesandu Malaga Pty Limited Lesandu Mandurah Pty Limited Lesandu Marion Pty Limited Lesandu Maroochydoore JM Pty Limited Lesandu Maroochydore Flooring Pty Limited Lesandu McGraths Hill (JM) Pty Limited Lesandu Melbourne City DM Pty Limited Lesandu Mentone Pty Limited Lesandu Midland Pty Limited Lesandu Mile End Pty Limited Lesandu Mitchell Pty Limited Lesandu Moe Pty Limited Lesandu Moorabbin Pty Limited Lesandu Moore Park Pty Limited Lesandu Moree Pty Limited Lesandu Mornington Pty Limited Lesandu Morwell WH Pty Limited Lesandu Moss Vale Pty Limited Lesandu Mt Barker Pty Limited Lesandu Mt Gravatt Pty Limited Lesandu Mt Isa Pty Limited Lesandu Munno Para Pty Limited Lesandu Muswellbrook JM Pty Limited Lesandu Muswellbrook Pty Limited Lesandu Narrabri Pty Limited Lesandu Narre Warren Pty Limited Lesandu Newcastle West Pty Limited Lesandu Noarlunga Pty Limited Lesandu Noosa Pty Limited Lesandu North Ryde DM Pty Limited Lesandu Notting Hill Pty Limited Lesandu Nowra Pty Limited Lesandu Oakleigh CK Pty Limited Lesandu O'Connor Pty Limited Lesandu Orange Pty Limited Lesandu Osborne Park Pty Limited Lesandu Oxley Pty Limited Lesandu Penrith DM Pty Limited Lesandu Penrith Pty Limited Lesandu Peppermint Grove Pty Limited Lesandu Perth City West Pty Limited Lesandu Port Lincoln Pty Limited Lesandu Port Macquarie Pty Limited Lesandu Pty Limited Lesandu Raymond Terrace Pty Limited Lesandu Richlands Pty Limited Lesandu Richmond (VIC) Pty Limited Lesandu Riverwood Pty Limited Lesandu Rockhampton Pty Limited Lesandu Rothwell Pty Limited Lesandu S.A. Pty Limited Lesandu Salamander Bay Pty Limited Lesandu Sale Pty Limited Lesandu Shepparton Pty Limited Lesandu Silverwater Pty Limited Lesandu Sippy Downs JM Pty Limited Lesandu Southport Pty Limited Lesandu Stanmore Pty Limited Lesandu Sunshine Pty Limited Lesandu Swan Hill Pty Limited Lesandu Sydenham Pty Limited Lesandu Sydney City SS Pty Limited Lesandu Tamworth Pty Limited Lesandu Taree Home Mart Pty Limited Lesandu Taree Pty Limited Lesandu Taren Point Pty Limited Lesandu Tasmania Pty Limited Lesandu Temora Pty Limited Lesandu Thomastown Pty Limited Lesandu Toukley Pty Limited Lesandu Townsville Pty Limited Lesandu Tura Beach Pty Limited Lesandu Tweed Heads Flooring Pty Limited Lesandu Tweed Heads Pty Limited Lesandu Underwood Pty Limited Lesandu WA Furniture Pty Limited Lesandu WA Pty Limited Lesandu Wagga Wagga JM Pty Limited Lesandu Wagga Wagga Pty Limited Lesandu Wallsend JM Pty Limited Lesandu Wangaratta Pty Limited Lesandu Warana Pty Limited Lesandu Warners Bay JM Pty Limited Lesandu Warragul Pty Limited Lesandu Warrawong Pty Limited Lesandu Warwick (WA) Pty Limited Lesandu Warwick Pty Limited Lesandu Waurn Ponds Pty Limited Lesandu West Gosford DM Pty Limited Lesandu West Wyalong Pty Limited Lesandu Wiley Park Pty Limited Lesandu Windsor Pty Limited Lesandu Wollongong Pty Limited Lesandu Wonthaggi Pty Limited Lesandu Woodville Pty Limited Lesandu Young JM Pty Limited Lexeri Pty Limited Lightcorp Pty Limited Lighting Venture International Pty Limited7 Lighting Venture Pty Limited21 Lodare Pty Limited Loreste Pty Limited Malvis Pty Limited Manutu Pty Limited Maradoni Pty Limited Marinski Pty Limited Murray Street Development Pty Limited Mymasterpiece Pty Limited 5 Nedcroft Pty Limited Network Consumer Finance (Ireland) Limited15,18 Network Consumer Finance (N.Z.) Limited9,10 Network Consumer Finance Pty Limited1,2,32 Nomadale Pty Limited6 Norman Ross Limited 10,34 Norman Ross Pty Limited Oldmist Pty Limited Osraidi Pty Limited P & E Crows Nest Pty Limited P & E Homewest Pty Limited P & E Leichhardt Pty Limited P & E Maddington Pty Limited P & E Shopfitters Pty Limited Packcom Pty Limited PEM Corporate Pty Limited Pertama Holdings Pte Limited 11,16,17 Pertama Mechandising Pte Ltd 11,27 Plezero Pty Limited Poliform Pty Limited25 R.Reynolds Nominees Pty Limited Sarsha Pty Limited1,2 Setto Pty Limited Shakespir Pty Limited Solaro Pty Limited Space Furniture Pte Limited11,16 Space Furniture Pty Limited3 Spacepol Pty Limited Steamstyle Venture Pty Limited Stonetess Pty Limited Stores (NZ) Limited10 Stores Securitisation Pty Limited Strathloro Pty Limited Stupendous Pty Limited20 Swaneto Pty Limited Swanpark Pty Limited6 Tatroko Pty Limited Tessera Stones & Tiles Australia Pty Limited Tessera Stones & Tiles Pty Limited8 The Byron At Byron Pty Limited Tisira Pty Limited Valecomp Recovery Pty Limited Ventama Pty Limited4 Wadins Pty Limited Wanalti Pty Limited Warungi Pty Limited Waytango Pty Limited Webzone Pty Limited Wytharra Pty Limited Yoogalu Pty Limited1,2 Zabella Pty Limited Zavarte Pty Limited Zirdano Pty Limited Zirdanu Pty Limited HARVEY NORMAN HOLDINGS LIMITED | ANNUAL REPORT 2018 133 NOTES TO THE FINANCIAL STATEMENTS (CONTINUED) 38. CONTROLLED ENTITIES AND UNIT TRUSTS (continued) Shares held by Harvey Norman Holdings Limited (continued) Company is a member of the “Closed Group”. Company is relieved under the Class Order described in Note 39. Derni Pty Ltd holds 49% and Kita Pty Ltd holds 51% of the shares in Space Furniture Pty Limited. Shares held by Sarsha Pty Limited. Shares held by Harvey Norman Retailing Pty Limited. Shares held by Harvey Norman Stores Pty Limited. Company incorporated during the year. Shares held by Stonetess Pty Limited. Shares held by Harvey Norman Limited. Company incorporated in New Zealand. Company incorporated in Singapore. Company incorporated in Slovenia. Company incorporated in Malaysia. Company incorporated in Croatia. Company incorporated in Ireland. Harvey Norman Singapore Pte Limited owns 100% of the shares in Bencoolen Properties Pte Limited, 60% of the shares in Harvey Norman Ossia (Asia) Pte Limited, 100% of the shares in Space Furniture Pte Limited, and 50.62% of the shares in Pertama Holdings Pte Limited. Harvey Norman Ossia (Asia) Pte Limited holds 49.38% of the shares in Pertama Holdings Pte Limited. Shares held by Harvey Norman Holdings (Ireland) Limited. Shares held by Setto Pty Limited. Shares held by Calardu Pty Limited. Lighting Venture Pty Limited holds 65% of shares in Glolight Pty Limited. Yoogalu Pty Limited holds 50.5% of the shares in Australian Business Skills Centre Pty Limited. HN Byron No 3 Pty Limited holds 50% of the shares in Byron Bay Facilities Pty Limited. Yoogalu Pty Limited holds 50% of the shares in Byron Bay Management Pty Limited. Derni Pty Limited holds 1% and Kita Pty Limited holds 99% of the shares in Poliform Pty Limited. Former name is Calardu Jandakot No. 1 Pty Limited. Shares held by Pertama Holdings Pte Limited. Shares held by Cascade Consolidated Sdn.Bhd. Shares held by Network Consumer Finance Pty Limited. HN Bundaberg Markets Pty Limited holds 50% of the shares in Lana's Farmers Markets Pty Limited. This entity was incorporated in New Zealand on 29 June 2018. Network Consumer Finance was mistakenly and incorrectly included and described as a Released Group Entity in the Revocation Deed entered into on or about 29 June 2015. This error was rectified by way of a Rectification Deed entered into on or about 10 January 2018. This entity was incorporated in New Zealand on 27 June 2018. Shares held by Harvey Norman Stores (N.Z.) Pty Limited. Note: 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 134 NOTES TO THE FINANCIAL STATEMENTS (CONTINUED) 38. CONTROLLED ENTITIES AND UNIT TRUSTS (continued) Units in Unit Trusts held by Harvey Norman Holdings Limited A.C.N. 098 004 570 No. 2 Trust Calardu A.C.T. No. 2 Trust Calardu ACT No. 3 Trust Calardu ACT Trust Calardu Adderley Street Trust Calardu Albany Trust Calardu Albury Trust Calardu Alexandria DM Trust Calardu Alexandria WH Trust Calardu Alice Springs No. 1 Trust Calardu Alice Springs Trust Calardu Armadale WA Trust Calardu Armidale Trust Calardu Aspley Trust Calardu Auburn No. 1 Trust Calardu Auburn No. 2 Trust Calardu Auburn No. 4 Trust Calardu Auburn No. 5 Trust Calardu Auburn No. 6 Trust Calardu Auburn No. 7 Trust Calardu Auburn No. 8 Trust Calardu Auburn No. 9 Trust Calardu Ballarat Trust Calardu Ballina No. 1 Trust Calardu Ballina Trust Calardu Bathurst Trust Calardu Beaufort Street Trust Calardu Bellevue Hill Trust Calardu Bendigo Trust Calardu Bennetts Green Trust Calardu Bennetts Green Warehouse Trust Calardu Berri Trust Calardu Berrimah Trust Calardu Berrimah WH Trust Calardu Broadmeadow No. 1 Trust Calardu Broadmeadows VIC Trust Calardu Brookvale Trust Calardu Browns Plains No. 1 Trust Calardu Bunbury Trust Calardu Bundaberg No. 1 Trust Calardu Bundaberg Trust Calardu Bundaberg WH Trust Calardu Burnie Trust Calardu Cairns Trust Calardu Cambridge Trust Calardu Campbelltown Trust Calardu Cannington Trust Calardu Caringbah (Taren Point) Trust Calardu Caringbah Trust Calardu Crows Nest Trust Calardu Darwin Trust Calardu Devonport Trust Calardu Dubbo Trust Calardu Emerald Trust Calardu Frankston Trust Calardu Frankston WH Trust Calardu Fyshwick DM Trust Calardu Gepps Cross Trust Calardu Gladstone Trust Calardu Gympie Trust Calardu Hervey Bay Trust Calardu Hobart Trust Calardu Hoppers Crossing Trust Calardu Horsham Trust Calardu Ipswich Trust Calardu Joondalup Trust Calardu Kalgoorlie Oswald St Trust Calardu Kalgoorlie Trust Calardu Karratha Trust Calardu Kingaroy Trust Calardu Launceston Trust Calardu Lismore Trust Calardu Loganholme Trust Calardu Mackay Trust Calardu Malaga Trust Calardu Mandurah Trust Calardu Maribyrnong Trust Calardu Marion Trust Calardu Maroochydore Trust Calardu Maroochydore Warehouse Trust Calardu Melville Trust Calardu Mentone Trust Calardu Midland Trust Calardu Morayfield Trust Calardu Moree Trust Calardu Morwell Trust Calardu Moss Vale Trust Calardu Mt. Gambier Trust Calardu Mudgee Trust Calardu Munno Para Trust Calardu No. 1 Trust Calardu No. 2 Trust Calardu No. 3 Trust Calardu Noarlunga Trust Calardu Noble Park WH Trust Calardu Noosa Trust Calardu North Ryde No. 1 Trust Calardu North Ryde No. 2 Trust Calardu North Ryde No. 3 Trust Calardu North Ryde Trust Calardu Nowra Trust Calardu Oxley Trust Calardu Penrith No 2 Trust Calardu Penrith No. 1 Trust Calardu Penrith Trust Calardu Perth City West Trust Calardu Port Macquarie Trust Calardu Preston Trust Calardu Raine Square Trust Calardu Richmond Trust Calardu Rockhampton No. 2 Trust Calardu Rockhampton Trust Calardu Rockingham Trust Calardu Rosebery Trust Calardu Roselands Trust Calardu Rothwell Trust Calardu Rutherford Trust Calardu Rutherford Warehouse Trust Calardu Sale Trust Calardu Silverwater Trust Calardu Springvale Trust Calardu Stapylton Trust Calardu Surry Hills Trust Calardu Swan Hill Trust Calardu Taree Trust Calardu Taren Point Trust Calardu Toowoomba No. 1 Trust Calardu Toowoomba No. 2 Trust Calardu Toowoomba Trust Calardu Toowoomba WH Trust Calardu Townsville Trust Calardu Tweed Heads No. 1 Trust Calardu Tweed Heads Traders Way Trust Calardu Tweed Heads Trust Calardu Warrawong (Homestarters) No. 1 Trust Calardu Warrawong (Homestarters) Trust Calardu Warrawong No. 1 Trust Calardu Warrawong No. 2 Trust Calardu Warrawong Trust Calardu Warrnambool Trust Calardu Warwick Trust Calardu West Gosford No. 1 Trust Calardu West Gosford Trust Calardu Whyalla Trust Calardu Wodonga Trust Harvey Norman Discounts No. 1 Trust Harvey Norman No. 1 Trust HN QCV Blackwater Land Trust HN QCV Sarina Land Trust HNM Galaxy Unit Trust Lamino Investments No. 1 Trust Lamino Investments No. 2 Trust Lamino Investments No. 3 Trust Lamino Investments No. 4 Trust Lamino Investments No. 5 Trust Lamino Investments No. 6 Trust Oslek Developments Trust The Calardu Trust 39. DEED OF CROSS GUARANTEE Pursuant to ASIC Corporations (Wholly-owned Companies) Instrument 2016/785, relief has been granted to certain controlled entities of Harvey Norman Holdings Limited from the Corporations Act 2001 requirements for the preparation, audit and lodgement of their financial reports. These controlled entities have entered into a Deed of Cross Guarantee with Harvey Norman Holdings Limited (“Closed Group”). The effect of this Deed of Cross Guarantee is that Harvey Norman Holdings Limited has guaranteed to pay any deficiency in the event of winding up a controlled entity within the Closed Group or if the controlled entity does not meet its obligations under the terms of overdrafts, loans, leases or other liabilities subject to the guarantee. The controlled entities within the Closed Group have also given a similar guarantee in the event that Harvey Norman Holdings Limited is wound up or if it does not meet its obligations under the terms of overdrafts, loans, leases or other liabilities subject to the guarantee. The parties to the Deed of Cross Guarantee include Harvey Norman Holdings Limited and the following controlled entities:  Arisit Pty Limited  Contemporary Design Group Pty Limited  Derni Pty Limited  Harvey Norman Stores (N.Z.) Pty Limited  Network Consumer Finance Pty Limited  Sarsha Pty Limited  Yoogalu Pty Limited HARVEY NORMAN HOLDINGS LIMITED | ANNUAL REPORT 2018 135 NOTES TO THE FINANCIAL STATEMENTS (CONTINUED) 39. DEED OF CROSS GUARANTEE (continued) The Statement of Financial Position and Income Statement for the Harvey Norman Holdings Limited Closed Group are as follows: Statement of Financial Position Current Assets Cash and cash equivalents Trade and other receivables Other financial assets Inventories Intangible assets Other assets Total current assets Non-Current Assets Trade and other receivables Other financial assets Property, plant and equipment Intangible assets Total non-current assets Total Assets Current Liabilities Trade and other payables Interest-bearing loans and borrowings Income tax payable Provisions Other liabilities Total current liabilities Non-Current Liabilities Interest-bearing loans and borrowings Provisions Deferred income tax liabilities Other liabilities Total non-current liabilities Total Liabilities NET ASSETS Equity Contributed equity Reserves Retained profits TOTAL EQUITY Income Statement Profit before income tax Income tax Profit after tax Retained Earnings Retained earnings at the beginning of the year Profit after tax from continuing operations Dividends provided for or paid Retained earnings at the end of the year 136 2018 $000 109,170 696,053 31,457 170,830 459 15,878 1,023,847 1,915,235 111,326 28,684 62,104 2,117,349 2017 $000 39,703 602,819 29,166 164,381 455 16,355 852,879 1,861,481 150,440 12,177 67,450 2,091,548 3,141,196 2,944,427 107,624 289,675 9,484 28,734 25,806 461,323 500,217 1,707 60,370 199 562,493 84,975 265,245 39,680 26,701 8,840 425,441 330,272 4,409 74,386 3,242 412,309 1,023,816 837,750 2,117,380 2,106,677 388,381 10,393 1,718,606 2,117,380 332,084 (55,144) 276,940 1,709,003 276,940 (267,337) 1,718,606 386,309 11,365 1,709,003 2,106,677 408,001 (86,840) 321,161 1,732,804 321,161 (344,962) 1,709,003 NOTES TO THE FINANCIAL STATEMENTS (CONTINUED) 40. PARENT ENTITY FINANCIAL INFORMATION Statement of Financial Position Current assets Non-current assets Total assets Current liabilities Non-current liabilities Total liabilities Contributed equity Retained profits Total Equity Income Statement Profit for the Year PARENT ENTITY June 2018 $000 49 2,263,529 2,263,578 6,286 85,053 91,339 388,381 1,783,858 2,172,239 June 2017 $000 36 2,224,829 2,224,865 37,231 78,166 115,397 386,309 1,723,159 2,109,468 328,036 342,924 Total Comprehensive Income 328,036 342,924 Guarantees The Parent Company is party to a Deed of Cross Guarantee (“Deed”) with the following controlled entities:        Arisit Pty Limited Contemporary Design Group Pty Limited Derni Pty Limited Harvey Norman Stores (N.Z.) Pty Limited Network Consumer Finance Pty Limited Sarsha Pty Limited Yoogalu Pty Limited The effect of this Deed is that the Parent Company has guaranteed to pay any deficiency in the event of winding up one of the above controlled entities or if they do not meet their obligations under the terms of overdrafts, loans, leases or other liabilities subject to the guarantee. The above controlled entities have also given a similar guarantee in the event that the Parent Company is wound up or if it does not meet its obligations under the terms of overdrafts, loans, leases or other liabilities subject to the guarantee. Contingent Liabilities Refer to information provided in Note 34. Contingent Liabilities for disclosures relating to the Parent Entity. 41. SIGNIFICANT EVENTS AFTER BALANCE DATE On 31 August 2018, the Company announced a renounceable, pro-rata entitlement offer of new fully-paid ordinary shares in the Company to raise approximately $163.85 million (before costs) (Entitlement Offer), with an offer price of $2.50 per share. The Entitlement Offer forms part of the Company’s ongoing capital management program. It is intended that the proceeds of the Entitlement Offer will be used to reduce the amount of Company consolidated entity debt. With the exception of the above, there have been no circumstances arising since balance date which have significantly affected or may significantly affect:    the operations; the results of those operations; or the state of affairs of the entity or consolidated entity in future financial years. HARVEY NORMAN HOLDINGS LIMITED | ANNUAL REPORT 2018 137 DIRECTORS’ DECLARATION In accordance with a resolution of the directors of Harvey Norman Holdings Limited, we state that: In the opinion of the directors: a) the financial statements, notes and the additional disclosures included in the Directors’ Report designated as audited, of the consolidated entity are in accordance with the Corporations Act 2001, including: (i) giving a true and fair view of the consolidated entity’s financial position as at 30 June 2018 and of its performance for the year ended on that date; and (ii) complying with Accounting Standards and the Corporations Regulations 2001; b) c) the financial statements and notes also comply with International Financial Reporting Standards as disclosed in Note 1; and there are reasonable grounds to believe that the consolidated entity will be able to pay its debts as and when they become due and payable. This declaration has been made after receiving the declarations required to be made to the directors by the Chief Executive Officer and Chief Financial Officer in accordance with section 295A of the Corporations Act 2001 for the financial year ended 30 June 2018. In the opinion of the directors, as at the date of this declaration, there are reasonable grounds to believe that the members of the Closed Group identified in Note 39 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. On behalf of the Board. G. HARVEY Executive Chairman Sydney 28 September 2018 K.L. PAGE Executive Director / Chief Executive Officer Sydney 28 September 2018 138 Ernst & Young 200 George Street Sydney NSW 2000 Australia GPO Box 2646 Sydney NSW 2001 Tel: +61 2 9248 5555 Fax: +61 2 9248 5959 ey.com/au Independent Auditor's Report to the Members of Harvey Norman Holdings Limited Report on the Audit of the Financial Report Opinion We have audited the financial report of Harvey Norman Holdings Limited (the Company) and its subsidiaries (collectively the Group), which comprises the consolidated statement of financial position as at 30 June 2018, 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) giving a true and fair view of the consolidated financial position of the Group as at 30 June 2018 and of its consolidated financial performance for the year ended on that date; and b) 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. Key Audit Matters Key audit matters are those matters that, in our professional judgment, were of most significance in our audit of the financial report of the current year. These matters were addressed in the context of our audit of the financial report as a whole, and in forming our opinion thereon, but we do not provide a separate opinion on these matters. For each matter below, our description of how our audit addressed the matter is provided in that context. We have fulfilled the responsibilities described in the Auditor’s Responsibilities for the Audit of the Financial Report section of our report, including in relation to these matters. Accordingly, our audit included the performance of procedures designed to respond to our assessment of the risks of material misstatement of the financial 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. A member firm of Ernst & Young Global Limited Liability limited by a scheme approved under Professional Standards Legislation 139 1. Assessment of control for the purposes of consolidation Why significant How our audit addressed the key audit matter The Group operates a franchise business model in Australia. There is significant judgement involved in the Group’s determination as to whether it has control over the store franchisees and therefore should consolidate their results. Our audit procedures included the following: • Assessed the judgements and conclusions reached by the Directors that store franchisees are not controlled. • In conjunction with our International Given the significance of the judgment involved in the assessment and importance of this conclusion to the presentation of the financial statements this was considered to be a key audit matter. Note 1(d) and Note 1(e)(ii)(a) describes the accounting policies in relation to the basis of consolidation and control assessment considerations. Financial Reporting Standards specialists, we considered the application of Australian Accounting Standard AASB10 Consolidated Financial Statements, in particular the criteria relating to control, in the context of the franchise agreements and how these arrangements operate in practice. In particular the following areas were considered: - - - termination rights available to the Group; Financial assistance provided to franchisees; and Inventory purchasing arrangements available to franchisees. • Enquired of the Directors and their external lawyers as to whether any changes were made during the year to the standard franchise agreements used by the Group, or the way in which the franchisees and the Group interact in practice. • Confirmed the results of these discussions by reviewing current agreements between franchisees and the Group. • Considered any changes that may impact the control assessment made by the Directors. • Considered the legal application of current franchise agreements with the Group’s external lawyers. • Enquired of a sample of franchisees to confirm our understanding of how the current franchise agreements operate in practice. A member firm of Ernst & Young Global Limited Liability limited by a scheme approved under Professional Standards Legislation 140 2. Recoverability of Receivables from Franchisees Why significant How our audit addressed the key audit matter Receivables from franchisees are significant to the Group, representing 11.9% of total assets at 30 June 2018. Note 7(a) describes the nature of the balances receivable from franchisees, while Note 1(x) outlines the accounting policy in relation to loans and receivables. The assessment of the recoverability of franchisee receivables was a key audit matter given the value of the balance and the judgements exercised by the Group in making this assessment. Our audit procedures included the following: • Considered the Group’s assessment of the recoverability of receivables from individual franchisees. • We selected a sample of franchisee loan receivables and obtained confirmation from the franchisees that they acknowledge the amounts owing at year end. • We reviewed a sample of General Security Deeds between the franchisees and the Group that provides the Group with security over the assets of franchisees. • We considered the value of assets provided as security by each of the franchisees against each franchisee receivable balance. • Enquired of management and considered any evidence arising post year end of adverse performance of the franchisees, which could impact the recoverability of receivables from franchisees. • We considered the adequacy of the disclosures included in Note 7(a) and Note 1 to the financial statements. A member firm of Ernst & Young Global Limited Liability limited by a scheme approved under Professional Standards Legislation 141 3. Valuation of investment properties and owner-occupied properties Why significant How our audit addressed the key audit matter Our audit procedures included the following: • We assessed the Group’s accounting policies with respect to investment properties and owner-occupied properties for compliance with the relevant Australian Accounting Standards. • We assessed whether we could rely on the work of those responsible for the Directors’ valuations and the work of the independent valuation experts by considering their competence, capabilities and objectivity. • We selected a sample of the property valuations performed by both independent valuation experts and the Directors and assessed the reasonableness of the key assumptions (as disclosed in Note 14 and Note 15) used in the valuations with reference to external market evidence. This work included the involvement of Ernst & Young real estate valuation specialists in its execution. • We considered the adequacy of the disclosures included in Note 1, Note 14 and Note 15 of the financial report. Investment properties and owner occupied properties (properties) represent 62.5% of the total assets as at 30 June 2018. Investment properties are carried at fair value with changes in fair value recognised in the income statement. Note 1(vii) and Note 15 of the financial report, describes the basis upon which fair value has been determined. Owner-occupied properties, represented as Land and Buildings, are carried at fair value, with changes in fair value recognised in equity. Note 1(v) and Note 14 of the financial report, describes the basis upon which fair value has been determined. The Group engages independent external valuation experts to conduct valuations of each property at least once every three years. Directors’ valuations are performed where the Group identifies a material change in the fair value of properties not selected for external valuation may have occurred during the year. The valuation of properties was considered a key audit matter given: • the value of the properties relative to total assets of the Group; • • • the judgement exercised by the Group in selecting the sample of properties subject to internal valuations during the period; judgements exercised by both independent valuation specialists and the Directors in determining fair value; and by their nature, the use of Directors’ valuations. A member firm of Ernst & Young Global Limited Liability limited by a scheme approved under Professional Standards Legislation 142 4. Recoverability of Non-trade Receivables from Related Entities Why significant How our audit addressed the key audit matter Included in Notes 7 and 12 to the financial statements are non-trade amounts owing from related entities (including joint ventures and joint venture partners) and associated provisions for doubtful debts. We considered this to be a key audit matter due to the judgements involved in considering recoverability and the adequacy of the associated provision for doubtful debts at 30 June 2018. Our audit procedures included the following: • Considered the Directors’ assessment of the recoverability of non-trade debts receivable from related entities. • Considered the extent to which assets were provided as security against the carrying value of receivables. • Assessed the value of the assets provided as security against the receivables. • Considered the adequacy of the recorded provision for doubtful debts against these receivables. A member firm of Ernst & Young Global Limited Liability limited by a scheme approved under Professional Standards Legislation 143 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 2018 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. A member firm of Ernst & Young Global Limited Liability limited by a scheme approved under Professional Standards Legislation 144     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 145 Report on the Audit of the Remuneration Report Opinion on the Remuneration Report We have audited the Remuneration Report included in pages 32 to 56 of the directors' report for the year ended 30 June 2018. In our opinion, the Remuneration Report of Harvey Norman Holdings Limited for the year ended 30 June 2018, complies with section 300A of the Corporations Act 2001. Responsibilities The directors of the Company are responsible for the preparation and presentation of the Remuneration Report in accordance with section 300A of the Corporations Act 2001. Our responsibility is to express an opinion on the Remuneration Report, based on our audit conducted in accordance with Australian Auditing Standards. Ernst & Young Renay Robinson Partner Sydney 28 September 2018 A member firm of Ernst & Young Global Limited Liability limited by a scheme approved under Professional Standards Legislation 146 SHAREHOLDER INFORMATION DISTRIBUTION OF SHAREHOLDINGS AS AT 26 SEPTEMBER 2018 Size of Holding 1 – 1,000 1,001 – 5,000 5,001 – 10,000 10,001 – 100,000 100,001 and over Number of Shareholders with less than a marketable parcel Ordinary Shareholders 5,265 6,487 1,900 1,693 146 15,491 697 VOTING RIGHTS All ordinary shares issued by Harvey Norman Holdings Limited carry one vote per share. TWENTY LARGEST SHAREHOLDERS AS AT 26 SEPTEMBER 2018 Number of Ordinary Shares Shareholder Percentage of Ordinary Shares 349,439,179 183,323,726 149,801,940 86,699,760 70,598,386 52,262,874 39,665,050 30,929,047 17,896,300 17,507,642 5,213,182 2,974,897 2,065,000 2,033,120 1,887,127 1,547,248 1,536,834 1,260,000 1,233,049 950,000 1,018,824,361 Mr. Gerald Harvey Mr. Christopher Herbert Brown HSBC Custody Nominees Limited Citicorp Nominees Pty Limited J P Morgan Nominees Australia Limited Ms. Margaret Lynette Harvey National Nominees Limited BNP Paribas Nominees Pty Limited, BNP Paribas Noms Pty Limited & BNP Paribas Noms (NZ) Limited Enbeear Pty Limited Ms. Kay Lesley Page Argo Investments Limited Mr. Michael Harvey BKI Investment Company Limited Bond Street Custodians Limited Omnilab Media Investments Pty Limited AMP Life Limited Powerwrap Limited Glenn Hargraves Investments Mr. Arthur Brew Peter & Lyndy White 31.36% 16.45% 13.44% 7.78% 6.34% 4.69% 3.56% 2.78% 1.61% 1.57% 0.47% 0.27% 0.19% 0.18% 0.17% 0.14% 0.14% 0.11% 0.11% 0.09% 91.44% HARVEY NORMAN HOLDINGS LIMITED | ANNUAL REPORT 2018 147 BLACKTOWN Unit C5 Cnr Blacktown & Bungarribee Roads Blacktown NSW 2148 Phone: (02) 8822 8400 CARINGBAH 41 – 49 Willarong Road Taren Point NSW 2229 Phone: (02) 9589 8800 MASCOT 494-504 Gardeners Road Alexandria NSW 2015 Phone: (02) 9693 0666 DIRECTORY OF HARVEY NORMAN®, DOMAYNE® & JOYCE MAYNE® SHOPPING COMPLEXES AUSTRALIAN CAPITAL TERRITORY FYSHWICK Cnr Barrier & Ipswich Streets Fyshwick ACT 2609 Phone: (02) 6283 1200 NEW SOUTH WALES (SYDNEY SUBURBAN) ALEXANDRIA 1/84 O’Riordan Street, Alexandria NSW 2015 Phone: (02) 8339 7000 AUBURN 250 Parramatta Road Auburn NSW 2144 Phone: (02) 9202 4888 AUBURN RENOVATIONS Level 1 250 Parramatta Road Auburn NSW 2144 Phone: (02) 9202 4888 BONDI JUNCTION Shop 5016, Westfield Bondi 500 Oxford Street Bondi Junction NSW 2022 Phone: (02) 8305 8800 BROADWAY Shop 119 Broadway Shopping Centre Bay Street Broadway NSW 2007 Phone: (02) 9219 5200 BALGOWLAH 176 - 190 Condamine Street Balgowlah NSW 2093 Phone: (02) 9949 0100 CAMPBELLTOWN 22A Blaxland Road Campbelltown NSW 2560 Phone: (02) 4621 5200 CASTLE HILL Shop 31 Level 1 North Bldg Home Hub Castle Hill 18 Victoria Avenue Castle Hill NSW 2154 Phone: (02) 9840 8800 McGRATHS HILL McGrath’s Hill Home Shop 6 264 – 272 Windsor Road McGraths Hill NSW 2756 Phone: (02) 4587 6800 GORDON Level 1, Gordon Centre 802 - 808 Pacific Highway Gordon NSW 2072 Phone: (02) 9496 9200 LIVERPOOL The Grove Homemaker Centre 2-18 Orange Grove Road Liverpool NSW 2170 Phone: (02) 9600 3333 MOORE PARK Supa Centa Moore Park Cnr South Dowling Street & Dacey Avenue Moore Park NSW 2021 Phone: (02) 9662 9888 PENRITH Penrith Homemaker Centre Mulgoa Rd & Wolseley St Penrith NSW 2750 Phone: (02) 4737 5111 WILEY PARK 1018 Canterbury Road Wiley Park NSW 2195 Phone: (02) 9740 1100 WILEY PARK (BATHROOMS) 1155 Canterbury Road Wiley Park NSW 2196 Phone: (02) 9784 4400 NEW SOUTH WALES (COUNTRY) ALBURY Unit 7/94 Borella Road East Albury NSW 2640 Phone: (02) 6023 0800 BATHURST 2 Ashworth Drive Kelso NSW 2795 Phone: (02) 6332 8800 ARMIDALE Shop 8, Girraween S/Centre 6 Queen Elizabeth Drive Armidale NSW 2350 Phone: (02) 6771 0800 BROADMEADOW (CLEARANCE CENTER) 35 Lambton Road Broadmeadow NSW 2292 Phone: (02) 4028 4100 COFFS HARBOUR Park Beach Home Base 252 Pacific Highway Coffs Harbour NSW 2450 Phone: (02) 6653 0300 DENILIQUIN Cnr. Hardinge & Harfleur Streets Deniliquin NSW 2710 Phone: (03) 5881 0700 GOSFORD (ERINA) Karalta Lane Shopping Complex Karalta Lane Erina NSW 2250 Phone: (02) 4365 9500 GOULBURN Basement Level 180 - 186 Auburn Street Goulburn NSW 2580 Phone: (02) 4824 3000 GUNNEDAH 82 Conadilly Street Gunnedah NSW 2380 Phone: (02) 6741 7900 INVERELL 50 Evans Street Inverell NSW 2360 Phone: (02) 6720 0700 BALLINA 26 Boeing Avenue Ballina NSW 2478 Phone: (02) 6620 5300 BATEMANS BAY 4 Flora Crescent Bateman’s Bay NSW 2536 Phone: (02) 4412 3200 BROKEN HILL 329-331 Blende Street Broken Hill NSW 2880 Phone: (08) 8084 4900 COBAR 27 Marshall Street Cobar NSW 2835 Phone: (02) 6836 6400 DUBBO 223 Cobra Street Dubbo NSW 2830 Phone: (02) 6826 8800 FORSTER 29 Breese Parade Forster NSW 2428 Phone: (02) 6539 9100 GRAFTON 125 Prince Street Grafton NSW 2460 Phone: (02) 6640 1500 LAKE HAVEN Homemaker Lake Haven 59 – 83 Pacific Highway Charmhaven NSW 2263 Phone: (02) 4394 6000 GRIFFITH Cnr Jondaryan & Willandra Avenues Griffith NSW 2680 Phone: (02) 6961 0300 LISMORE 17 Zadoc Street Lismore NSW 2480 Phone: (02) 6623 1400 148 DIRECTORY OF HARVEY NORMAN®, DOMAYNE® & JOYCE MAYNE® SHOPPING COMPLEXES (CONTINUED) MOREE 103 Balo Street Moree NSW 2400 Phone: (02) 6751 2400 NEWCASTLE (BENNETTS GREEN) 7 Abdon Close Bennetts Green NSW 2290 Phone: (02) 4944 5000 PORT MACQUARIE 160-174 Hastings River Dr Port Macquarie NSW 2444 Phone: (02) 6580 0000 TEMORA 102 Hoskins Street Temora NSW 2666 Phone: (02) 6980 1700 WARRAWONG 157 - 161 King Street Warrawong NSW 2502 Phone: (02) 4223 8800 NEW SOUTH WALES (COUNTRY) (continued) LITHGOW 175 Main Street Lithgow NSW 2790 Phone: (02) 6354 5400 MACLEAN 211 River Street Maclean NSW 2463 Phone: (02) 6603 5100 MOSS VALE 137 – 157 Lackey Road Moss Vale NSW 2577 Phone: (02) 4869 6400 MUDGEE 33 Sydney Road Mudgee NSW 2850 Phone: (02) 6372 8800 NOWRA 193 Princes Highway South Nowra NSW 2541 Phone: (02) 4421 1300 ORANGE Unit 1, Orange Grove Homemakers Centre Cnr Mitchell Highway & Lone Pine Avenue Orange NSW 2800 Phone: (02) 6393 2222 SALAMANDER BAY 270 Sandy Point Road Salamander Bay NSW 2317 Phone: (02) 4919 3100 TAMWORTH 43 The Ringers Road Tamworth NSW 2340 Phone: (02) 6765 1100 TURA BEACH Shop 11, 1 Tura Beach Drive Tura Beach NSW 2548 Phone: (02) 6497 4100 TWEED HEADS 29 - 41 Greenway Drive Tweed Heads South NSW 2486 Phone: (07) 5524 0111 WEST WYALONG 114 Main Street West Wyalong NSW 2671 Phone: (02) 6970 1700 YOUNG 326 Boorowa Street Young NSW 2594 Phone: (02) 6384 1400 MAITLAND Unit 1/366 New England Highway Rutherford NSW 2320 Phone: (02) 4932 2800 MUSWELLBROOK 19 Rutherford Road Muswellbrook NSW 2333 Phone: (02) 6541 6800 PARKES Shop 1 5-11 Saleyards Road Parkes NSW 2870 Phone: (02) 6862 8900 TAREE 9 Mill Close Taree NSW 2430 Phone: (02) 6552 8000 WAGGA WAGGA Homebase Centre 7 - 23 Hammond Avenue Wagga Wagga NSW 2650 Phone: (02) 6933 7000 NORTHERN TERRITORY ALICE SPRINGS Shop 211 1 Colson Street Alice Springs NT 0870 Phone: (08) 8950 4000 DARWIN 644 Stuart Highway Berrimah NT 0828 Phone: (08) 8922 4111 QUEENSLAND (BRISBANE SUBURBAN) CAPALABA Capalaba Central Centre Shop 32 - 33 38-62 Moreton Bay Road Capalaba QLD 4157 Phone: (07) 3362 6200 CARINDALE Westfield Carindale Carindale Street and Old Cleveland Road Carindale QLD 4152 Phone: (07) 3398 0600 LOGANHOLME 3878 - 3892 Pacific Highway Loganholme QLD 4129 Phone: (07) 3440 9200 MACGREGOR 555 Kessels Road Macgregor QLD 4109 Phone: (07) 3849 9500 ASPLEY 1411 - 1419 Gympie Road Aspley QLD 4034 Phone: (07) 3834 1100 BROWNS PLAINS 18 Commerce Drive Browns Plains QLD 4118 Phone: (07) 3380 0600 CLEVELAND Shop 1A 42 Shore Street West and Wellington Street Cleveland QLD 4163 Phone: (07) 3488 8900 MT GRAVATT Westfield Garden City Shop 2135 2049 Logan Street Upper Mt Gravatt QLD 4122 Phone: (07) 3347 7000 EVERTON PARK North-West Homemaker Centre 429 Southpine Road Everton Park QLD 4053 Phone: (07) 3550 4444 OXLEY 2098 Ipswich Road Oxley QLD 4075 Phone: (07) 3332 1100 HARVEY NORMAN HOLDINGS LIMITED | ANNUAL REPORT 2018 149 DIRECTORY OF HARVEY NORMAN®, DOMAYNE® & JOYCE MAYNE® SHOPPING COMPLEXES (CONTINUED) QUEENSLAND (COUNTRY) ATHERTON 57 Tolga Road Atherton QLD 4883 Phone: (07) 4091 0900 BUNDALL 29 - 45 Ashmore Road Bundall QLD 4217 Phone: (07) 5584 3111 AYR 101 Queen Street Ayr QLD 4807 Phone: (07) 4790 4600 BURLEIGH WATERS Burleigh HomeSpace 14/1 Santa Maria Crt Burleigh Waters QLD 4220 Phone: (07) 5586 2000 DALBY 49 Patrick Street Dalby QLD 4405 Phone: (07) 4672 4444 EMERALD 21 Ballard Street Emerald QLD 4720 Phone: (07) 4986 8100 HERVEY BAY 33-45 Maryborough Hervey Bay Road Eli Waters QLD 4655 Phone: (07) 4120 1100 INGHAM Shop 3 57 Herbert Street Ingham QLD 4850 Phone: (07) 4776 3188 MACKAY Cnr Heaths Road & Bruce Highway Mackay QLD 4740 Phone: (07) 4951 8800 MT ISA Overlander Shopping Centre 121 Marian Street Mt Isa City QLD 4825 Phone: (07) 4745 0100 TOOWOOMBA 910 - 932 Ruthven Street Toowoomba QLD 4350 Phone: (07) 4636 7300 MAROOCHYDORE Maroochydore Homemaker Centre 11/55 Maroochy Blvd Maroochydore QLD 4575 Phone: (07) 5452 1500 NOOSA 7 - 9 Gibson Road Noosaville QLD 4566 Phone: (07) 5473 1911 TOWNSVILLE Domain Central Centre 103 - 142 Duckworth Street Garbutt QLD 4814 Phone: (07) 4775 8800 BOOVAL 214 Brisbane Road Booval QLD 4304 Phone: (07) 3280 7400 CAIRNS Cairns Hypermarket 101 - 103 Spence Street Cairns City QLD 4870 Phone: (07) 4050 0300 GLADSTONE Shop 1B Centro Centre 220 Dawson Highway Gladstone QLD 4680 Phone: (07) 4971 5000 INNISFAIL 57 Ernest Street Innisfail QLD 4860 Phone: (07) 4063 5200 BUNDABERG 125 Takalvan Street Bundaberg QLD 4670 Phone: (07) 4154 5000 CANNONVALE Shop B2, Whitsunday Plaza 8 Galbraith Park Drive Cannonvale QLD 4802 Phone: (07) 4969 8800 GYMPIE 35-37 Edwin Campion Drive Gympie QLD 4570 Phone: (07) 5480 1500 KINGAROY 18 - 20 Rogers Drive Kingaroy QLD 4610 Phone: (07) 4160 0400 MARYBOROUGH 72 - 74 Bazaar Street Maryborough QLD 4650 Phone: (07) 4120 2100 MORAYFIELD 245 Morayfield Road Morayfield QLD 4510 Phone: (07) 5428 8000 ROCKHAMPTON Red Hill Homemaker Centre 406-412 Yaamba Road North Rockhampton QLD 4701 Phone: (07) 4923 5000 ROTHWELL Unit 1 439 - 443 Anzac Avenue Rothwell QLD 4022 Phone: (07) 3897 8800 WARWICK Cnr Victoria St & Palmerin St Warwick QLD 4370 Phone: (07) 4666 9000 TASMANIA DEVONPORT Devonport Homemaker Centre 2 Friend Street Devonport TAS 7310 Phone: (03) 6420 7600 HOBART CITY 171 Murray Street Hobart TAS 7000 Phone: (03) 6230 1100 BURNIE Cnr Marine Terrace & Edward St Burnie TAS 7320 Phone: (03) 6436 8800 LAUNCESTON Cnr William and Charles Streets Launceston TAS 7250 Phone: (03) 6337 9400 CAMBRIDGE PARK Cambridge Park Homemaker Centre Unit B10 66 - 68 Kennedy Drive Cambridge Park TAS 7170 Phone: (03) 6248 3300 MOONAH 191-197 Main Rd Cnr, Derwent Park Rd Moonah TAS 7009 Phone: (03) 6277 7777 SOUTH AUSTRALIA (ADELAIDE SUBURBAN) CITY CROSS Rundle Mall, Shop 50 31-33 Rundle Mall Adelaide SA 5000 Phone: (08) 8168 8800 GEPPS CROSS Gepps Cross Home HQ Unit 1, 760 Main North Road Gepps Cross SA 5094 Phone: (08) 8342 8888 MT BARKER Mt Barker Homemaker Centre 6 Dutton Road Mount Barker SA 5251 Phone: (08) 8393 0800 MUNNO PARA Munno Para Shopping City 600 Main North Road Smithfield SA 5114 Phone: (08) 8254 0700 MARION 822 - 826 Marion Road Marion SA 5043 Phone: (08) 8375 7777 NOARLUNGA 3/2 Seaman Drive Noarlunga SA 5168 Phone: (08) 8329 5400 MILE END COMMERCIAL 20 William Street Mile End SA 5031 Phone: (08) 8150 8000 WOODVILLE 853 - 867 Port Road Woodville SA 5011 Phone: (08) 8406 0100 150 DIRECTORY OF HARVEY NORMAN®, DOMAYNE® & JOYCE MAYNE® SHOPPING COMPLEXES (CONTINUED) SOUTH AUSTRALIA (COUNTRY) MT GAMBIER Cnr Kennedy Avenue & Jubilee Highway East Mt Gambier SA 5290 Phone: (08) 8724 6800 PORT LINCOLN Cnr St Andrews Terrace and Verran Terrace Port Lincoln SA 5606 Phone: (08) 8683 7700 WHYALLA Cnr Jamieson St and Kelly Street Whyalla SA 5600 Phone: (08) 8645 6100 VICTORIA (MELBOURNE SUBURBAN) BROADMEADOWS 1185 - 1197 Pascoe Vale Rd Broadmeadows VIC 3047 Phone: (03) 9621 2800 CHADSTONE 699 Warrigal Road Chadstone VIC 3148 Phone: (03) 9567 6666 CHIRNSIDE PARK Chirnside Park Showroom Centre 286 Maroondah Highway Chirnside Park VIC 3116 Phone: (03) 9722 4400 COBURG Shop 8, 64 - 74 Gaffney St Coburg VIC 3058 Phone: (03) 9240 2500 DANDENONG 141 - 165 Frankston - Dandenong Road Dandenong VIC 3175 Phone: (03) 8791 3333 FOUNTAIN GATE Westfield Fountain Gate 8 Overland Drive Narre Warren VIC 3805 Phone: (03) 8796 6777 HOPPERS CROSSING Unit 1, 201 - 219 Old Geelong Road Hoppers Crossing VIC 3029 Phone: (03) 8734 0000 MARIBYRNONG Harvey Norman Centre 169 Rosamond Road Maribyrnong VIC 3032 Phone: (03) 9304 7000 PRESTON 121 Bell Street Preston VIC 3072 Phone: (03) 9269 3300 MELBOURNE QV (& DM) Upper Terrace, Level 4, Shops 9-13, 210 Lonsdale Street Melbourne VIC 3000 Phone: (03) 8664 4300 RICHMOND 479 Bridge Road Richmond VIC 3121 Phone: (03) 8416 4100 THOMASTOWN 308-320 Settlement Road Thomastown VIC 3074 Phone: (03) 9463 4777 VIC / TAS COMMERCIAL 4 Central Blvd Port Melbourne VIC 3204 Phone: (03) 8530 6300 MOORABBIN 420 South Road Moorabbin VIC 3189 Phone: (03) 9269 3400 SPRINGVALE 26/917 Princes Highway Springvale VIC 3171 Phone: (03) 9518 8500 WATERGARDENS Watergardens Town Centre 450 Melton Highway Taylors Lakes VIC 3038 Phone: (03) 9449 6300 VICTORIA (COUNTRY) ARARAT 47-49 Vincent Street Ararat VIC 3377 Phone: (03) 5352 9100 FRANKSTON 87 Cranbourne Road Frankston VIC 3199 Phone: (03) 8796 0600 MILDURA Cnr Fifteenth Street & Etiwanda Ave Mildura VIC 3500 Phone: (03) 5051 2200 BAIRNSDALE 294 Main Street Bairnsdale VIC 3875 Phone: (03) 5153 9700 GEELONG 420 Princes Highway Corio VIC 3214 Phone: (03) 5272 9900 MOE 19 Moore Street Moe VIC 3825 Phone: (03) 5127 9500 SALE 363 - 373 Raymond Street Sale VIC 3850 Phone: (03) 5149 5100 SHEPPARTON Riverside Plaza Bldg A, 8025 Goulburn Valley Hwy Kialla VIC 3630 Phone: (03) 5820 2900 BALLARAT 1322 Howitt Street Wendouree VIC 3355 Phone: (03) 5332 5100 HAMILTON LG2, The Hub 148 Gray Street Hamilton VIC 3300 Phone: (03) 5551 3500 MORNINGTON Building C3 Peninsula Lifestyle Centre Bungower Road Mornington VIC 3931 Phone: (03) 5970 2500 SWAN HILL 68 Nyah Road Swan Hill VIC 3585 Phone: (03) 5032 0500 WANGARATTA 8 - 12 Murphy Street Wangaratta VIC 3677 Phone: (03) 5723 8800 WARRAGUL 33 Victoria Street Warragul VIC 3820 Phone: (03) 5623 9000 WARRNAMBOOL 84 Raglan Parade Warrnambool VIC 3280 Phone: (03) 5564 7700 WONTHAGGI 37 McKenzie Street Wonthaggi VIC 3995 Phone: (03) 5672 0800 KNOX Shop 3105, Knox City Shopping Centre, 425 Burwood Highway Wantirna South VIC 3152 Phone: (03) 9881 3700 NUNAWADING 396-408 Whitehorse Road Nunawading VIC 3131 Phone: (03) 9837 1200 SUNSHINE City West Plaza 484 Ballarat Road Sunshine VIC 3020 Phone: (03) 9334 6000 BENDIGO Cnr High St and Furness St Kangaroo Flat VIC 3555 Phone: (03) 5447 6000 HORSHAM 148-150 Firebrace Street Horsham VIC 3400 Phone: (03) 5381 5000 MORWELL 232 Commercial Road Morwell VIC 3840 Phone: (03) 5120 0200 TRARALGON 123 Argyle Street Traralgon VIC 3844 Phone: (03) 5175 6700 WAURN PONDS Geelong Homemaker Centre 33 Princes Highway Waurn Ponds VIC 3216 Phone: (03) 5240 6200 HARVEY NORMAN HOLDINGS LIMITED | ANNUAL REPORT 2018 151 DIRECTORY OF HARVEY NORMAN®, DOMAYNE® & JOYCE MAYNE® SHOPPING COMPLEXES (CONTINUED) WESTERN AUSTRALIA (PERTH SUBURBAN) ARMADALE 10 Prospect Road Armadale WA 6112 Phone: (08) 9498 4400 CANNINGTON 1363 Albany Highway Cannington WA 6107 Phone: (08) 9311 1100 CITY WEST City West Centre City West Shopping Centre 25 Sutherland Street West Perth WA 6005 Phone: (08) 9215 8600 JOONDALUP 36 Clarke Crescent Joondalup WA 6027 Phone: (08) 9301 3311 MALAGA 27 Kent Way Malaga WA 6090 Phone: (08) 9270 6300 PORT KENNEDY 400-402 Saltaire Way Port Kennedy WA 6172 Phone: (08) 9524 0111 MIDLAND Cnr Clayton and Lloyd Sts Midland WA 6056 Phone: (08) 9374 8600 O’CONNOR 133 Garling Street O’Connor WA 6163 Phone: (08) 9337 0888 OSBORNE PARK 469 - 475 Scarborough Beach Road Osborne Park WA 6017 Phone: (08) 9441 1100 WESTERN AUSTRALIA (COUNTRY) ALBANY Unit 1 / 5 Brooks Garden Blvd Albany WA 6330 Phone: (08) 9892 6800 GERALDTON (Furniture & Bedding) 38 Chapman Road Geraldton WA 6530 Phone: (08) 9964 0111 MANDURAH 9 Gordon Road Mandurah WA 6210 Phone: (08) 9582 5800 BUNBURY Cnr Sandridge and Denning Road East Bunbury WA 6230 Phone: (08) 9722 0100 GERALDTON (Computers) 18 Anzac Terrace Geraldton WA 6530 Phone: (08) 9964 0111 PORT HEDLAND Boulevard Shopping Centre Cnr Anderson St & McGregor St Port Hedland WA 6721 Phone: (08) 9173 8000 BROOME 2 Haynes Street Broome WA 6725 Phone: (08) 9195 3600 BUSSELTON 24 - 26 Bussell Highway Busselton WA 6280 Phone: (08) 9781 0700 KALGOORLIE 29 Davidson Street Kalgoorlie WA 6430 Phone: (08) 9093 5500 KARRATHA Unit 7, Lot 25 Balmoral Road Karratha WA 6174 Phone: (08) 9186 8100 DOMAYNE ALEXANDRIA 84 O’Riordan Street Alexandria NSW 2015 Phone: (02) 8339 7000 AUBURN 103 - 123 Parramatta Road Auburn NSW 2144 Phone: (02) 8748 4200 CARINGBAH 212 Taren Point Road Taren Point NSW 2229 Phone: (02) 8536 5200 CASTLE HILL Home Hub C/Hill South Building Level 1, Shop 82 16 Victoria Avenue Castle Hill NSW 2154 Phone: (02) 9846 8800 BELROSE Homemaker Supa Centa Shop 1, 4 - 6 Niangala Close Belrose NSW 2085 Phone: (02) 9479 8800 FORTITUDE VALLEY Homemaker The Valley Shop 1, 1058 Ann Street Fortitude Valley QLD 4006 Phone: (07) 3620 6600 BUNDALL 29 - 45 Ashmore Road Bundall QLD 4217 Phone: (07) 5553 2100 FYSHWICK 80 Collie Street Fyshwick ACT 2604 Phone: (02) 6126 2500 GOSFORD 400 Manns Road West Gosford NSW 2250 Phone: (02) 4337 4800 KOTARA Kotara Home Unit 1, 1 Kullaiba Rd Kotara NSW 2289 Phone: (02) 4941 3900 LIVERPOOL The Grove Homemaker Centre 2-18 Orange Grove Road Liverpool NSW 2170 Phone: (02) 8778 2222 MAITLAND Unit 6 366 New England Highway Rutherford NSW 2320 Phone: (02) 4932 2300 MARION Unit 2, 919-929 Marion Road Marion SA 5043 Phone: (08) 8198 2400 MAROOCHYDORE Maroochydore Homemaker Centre Unit 14, 11-55 Maroochy Boulevard Maroochydore QLD 4558 Phone: (07) 5452 1400 MELBOURNE QV Upper Terrace, Level 4 QV Shops 9-13, 210 Lonsdale St Melbourne VIC 3000 Phone: (03) 8664 4300 NORTH RYDE 31 - 35 Epping Road North Ryde NSW 2113 Phone: (02) 9888 8888 152 DIRECTORY OF HARVEY NORMAN®, DOMAYNE® & JOYCE MAYNE® SHOPPING COMPLEXES (CONTINUED) DOMAYNE (continued) OSBORNE PARK (& HN) 475 Scarborough Beach Rd Osborne Park WA 6017 Phone: (08) 9416 9100 PENRITH Penrith Homemaker Centre Cnr Wolseley Street and Mulgoa Road Penrith NSW 2750 Phone: (02) 4737 5000 SPRINGVALE 10/917 Princes Highway Springvale VIC 3171 Phone: (03) 9565 8200 WARRAWONG 119 - 121 King Street Warrawong NSW 2502 Phone: (02) 4255 1800 JOYCE MAYNE CHANCELLOR PARK Showroom 2 30 Chancellor Village Blvd Sippy Downs QLD 4556 Phone: (07) 5477 2200 MAROOCHYDORE Maroochydore Homemaker Ctr 15/11-55 Maroochy Blvd Maroochydore QLD 4558 Phone: (07) 5475 1800 NOWRA Unit 2A, Cnr Central Ave & Princes Highway Nowra NSW 2541 Phone: (02) 4448 0000 TOOWOOMBA 675 Ruthven Street Toowoomba QLD 4350 Phone: (07) 4613 7100 TOWNSVILLE Domain Central 18/103 Duckworth Street Garbutt QLD 4814 Phone: (07) 4759 9900 WARRAWONG 113 King Street Warrawong NSW 2502 Phone: (02) 4276 0000 NEW ZEALAND ASHBURTON Cnr West & Moore Streets Ashburton Phone: 0011 643 307 5000 BLENHEIM 19 - 21 Maxwell Road Blenheim Phone: 0011 643 520 9700 BOTANY DOWNS 500 Ti Rakau Drive Botany Downs Phone: 0011 649 272 5700 BOTANY ELECTRICAL OUTLET Unit F, 451 Ti Rakau Drive Botany Auckland Phone: 0011 649 253 9200 CHRISTCHURCH Cnr Moorhouse Ave & Colombo Street Christchurch Phone: 0011 643 367 7500 HAMILTON ELECTRICAL OUTLET Unit 1 - 79 Tristram Street Hamilton Phone: 0011 647 848 2700 DUNEDIN Cnr MacLaggan & Rattray Streets Dunedin Phone: 0011 643 471 6510 GISBORNE 51 Customhouse Street Gisborne Phone: 0011 646 869 2900 HAMILTON 10 - 16 The Boulevard Te Rapa Hamilton Phone: 0011 647 850 7300 HASTINGS 303 East St Aubyn Street Hastings Phone: 0011 646 872 6800 HENDERSON 1 - 12 Ratanui Street Henderson Phone: 0011 649 835 5000 HORNBY 10-14 Chappie Place Hornby Christchurch Phone: 0011 643 344 8100 INVERCARGILL 245 Tay Street Invercargill Phone: 0011 643 219 9100 LINCOLN CENTRE 111 Lincoln Road Henderson Auckland Phone: 0011 649 621 1590 LOWER HUTT 28 Rutherford Street Lower Hutt Wellington Phone: 0011 644 894 8200 MT MAUNGANUI 10 Owens Place Mt Maunganui Phone: 0011 647 572 7200 MT ROSKILL 167-169 Stoddard Road Mt Roskill Auckland Phone: 0011 649 621 1500 MT WELLINGTON 20 - 54 Mt Wellington Hwy Mt Wellington Auckland Phone: 0011 649 570 3440 NELSON 69 St Vincent Street Nelson Phone: 0011 643 539 5000 NEW PLYMOUTH 23 Smart Road New Plymouth Phone: 0011 646 759 2900 PARAPARAUMU Coastlands Shopping Centre State Highway 1 Paraparaumu Phone: 0011 644 296 3100 PORIRUA 19 Parumoana Street Porirua Wellington Phone: 0011 644 230 6100 RANGITIKEI STREET Unit C 210-248 Rangitikei Street Palmerston North Phone: 0011 646 953 3500 ROTORUA 35 Victoria Street Rotorua Phone: 0011 647 343 9800 NORTHWOOD Unit 1, 1 Radcliffe Road Northwood Christchurch Phone: 0011 646 375 9800 PUKEKOHE Pukekohe Mega Centre 182-196 Manukau Road Pukekohe Auckland Phone: 0011 649 237 3500 TAURANGA 683-697 Cameron Road Tauranga Phone: 0011 647 557 9500 MANUKAU Manukau Supa Centre 8/72 Cavendish Drive Manukau City Auckland Phone: 0011 649 261 4300 NAPIER Shop 5 20-60 Wellesley Road Napier Phone: 0011 646 833 9500 PALMERSTON NORTH 361 - 371 Main Street West Palmerston North Phone: 0011 646 355 6500 QUEENSTOWN 2A/12 Hawthorne Drive Remarkables Park Queenstown Phone: 0011 643 901 0900 TIMARU 226 Evans Street Timaru Phone: 0011 643 687 7000 HARVEY NORMAN HOLDINGS LIMITED | ANNUAL REPORT 2018 153 DIRECTORY OF HARVEY NORMAN®, DOMAYNE® & JOYCE MAYNE® SHOPPING COMPLEXES (CONTINUED) NEW ZEALAND (continued) TOWER JUNCTION Clarence Building 66 Clarence Street Tower Junction Christchurch Phone: 0011 643 968 3600 WAIRAU PARK 10 Croftfield Lane Wairau Park Glenfield Auckland Phone: 0011 649 440 6300 WANGANUI 287 Victoria Avenue Wanganui Phone: 0011 646 349 6000 WELLINGTON 77-87 Tory Street Wellington Phone: 0011 644 381 4250 WESTGATE Westgate Lifestyle Centre 63 – 65 Maki Street Westgate Auckland Phone: 0011 649 822 8200 WHAKATANE The Hub State Highway 30 Whakatane Phone: 0011 647 306 0600 WHANGAREI 5 Gumdigger Place Whangarei Phone: 0011 649 470 0300 IRELAND BLANCHARDSTOWN Units 421 - 423 Blanchardstown Retail Park Blanchardstown Dublin 15 Phone: 0011 353 1 824 7400 CARRICKMINES Unit 230 Retail The Park Carrickmines Dublin 18 Phone: 0011 353 1 299 6900 CASTLEBAR Units D - F Castlebar Retail Park Breaffy Road, Castlebar Phone: 0011 353 94 906 3900 CORK Kinsale Road Ballycurreen Cork, Dublin Phone: 0011 353 21 425 0900 DROGHEDA Units 8 - 11 Drogheda Retail Park Donore Road Drogheda, Co Louth Phone: 0011 353 41 987 8200 LIMERICK Units 5 - 7 City East Retail Park Ballysimon Road Limerick Phone: 0011 353 61 422 800 LITTLE ISLAND Units 9 - 11 Eastgate Retail Park Little Island Co Cork Phone: 0011 353 21 500 1500 NAAS Unit G - K New Hall Retail Park Naas, Co Kildane Phone: 0011 353 04 590 7700 SWORDS Units 5 - 7 Airside Retail Park Crowscastle Swords, Co Dublin Phone: 0011 353 1 890 9900 TALLAGHT Airton Retail Park Corner Airton & Greenhills Road Tallaght, Dublin 22 Phone: 0011 353 01 468 4500 TRALEE Unit 8A Manor West Retail Park Tralee, Co Kerry Phone: 0011 353 66 716 4900 RATHFARNHAM Unit 7A-7C Nutgrove Retail Park Rathfarnham Dublin 14 Phone: 0011 353 1 491 6300 WATERFORD Units 5 - 8 Butlerstown Retail Park Butlerstown Roundabout Outer Ring Road Co Waterford Phone: 0011 353 51 319 900 NORTHERN IRELAND BOUCHER ROAD Balmoral Plaza 24 Boucher Road Belfast BT12 6HR Phone: 0011 44 28 903 896 00 HOLYWOOD Units B-D 306 Holywood Exchange Airport Road W, Holywood Belfast BT3 9DY Phone: 0011 44 28 9039 5800 SLOVENIA CELJE Kidričeva ulica 26A 3000 Celje Phone: 0011 386 1585 5000 KOPER Ankaranska Cesta 3C 6000 Koper Phone: 0011 386 5610 0100 LJUBLJANA Letališka Cesta 3D 1000 Ljubljana Phone: 0011 386 1585 5000 MARIBOR Bohova 1A 2311 Hoče Phone: 0011 386 2300 4850 CROATIA NOVO MESTO Ljubljanska Cesta 95B 8000 Novo Mesto Phone: 0011 386 7309 9920 ZAGREB Kings Cross, UI. Velimira Škorpika 34, 10090 Zagreb Crotia Phone: 0011 385 1556 6200 154 DIRECTORY OF HARVEY NORMAN®, DOMAYNE® & JOYCE MAYNE® SHOPPING COMPLEXES (CONTINUED) SINGAPORE BEDOK POINT 799 New Upper Changi Road #B1-01/02, 16/32 and K1/K14 Bedok Point Singapore 467351 Phone: 0011 65 6446 7218 BUKIT PANJANG 1 Jelebu Road Bukit Panjang Plaza #03-06/06A/06B/07A Singapore 677743 Phone: 0011 65 6767 1500 DJITSUN MALL 5 Ang Mo Kio Central 2 #02-01/02 Singapore 569663 Phone: 0011 65 6554 5630 MILLENIA WALK No. 9 Raffles Boulevard #01-59 to 63, #02-37 to 41, #03-02, Millenia Walk Singapore 039596 Phone: 0011 65 6311 9988 NORTHPOINT 1 Northpoint Drive B1-136 to 138 & B2-108 to 112 Northpoint City South Wing Singapore 768019 Phone: 0011 65 6702 5188 HOUGANG MALL 90 Hougang Avenue 10 #02-13 to 15 Hougang Mall Singapore 538766 Phone: 0011 65 6488 2305 ONE KM 11 Tanjong Katong Road #02-41 to 44 Singapore 437157 Phone: 0011 65 6702 5220 SQUARE TWO #B1-06 to 75 10 Sinaran Drive Singapore 307506 Phone: 0011 65 6397 6190 SUNTEC CITY 6 Temasek Boulevard #01-634/640 Suntec City Mall, East Atrium Tower 3/4, Singapore 038986 Phone: 0011 65 6332 2312 VIVACITY 750B Chai Chee Road #01-01 to 06, #01-09 to 12, #02-02 to 06, Viva Business Park Singapore 469000 Phone: 0011 65 6245 1516 JURONG POINT 1 Jurong West Central 2 #03-34 to 39 Jurong Point Shopping Centre Singapore 648886 Phone: 0011 65 6795 2135 PARKWAY 80 Marine Parade Road #01-35/35A/36, #02- 34/34A, 35/36, Parkway Parade Singapore 449269 Phone: 0011 65 6346 4705 WESTMALL No. 1 Bt Batok Central Link #03-06 to 09 West Mall Singapore 658713 Phone: 0011 65 6794 2812 MALAYSIA AMPANG POINT Lot S01, 2nd Floor Ampang Shopping Centre Jalan Mamanda 3, 68000 Ampang, Selangor Darul Ehsan, Malaysia Phone: 0011 603 4260 1020 BUKIT TINGGI 42 1st Floor AEON Bukit Tinggi Shopping Ctre No. 1 Persiaran Batu Nilam 1/KS6 Bandar Bukit Tinggi 2 41200 Klang Selangor Darul Ehsan, Malaysia Phone: 0011 603 3326 2631 CITTA MALL Lot S-32 – Lot S-38, Citta Mall No 1 Jalan PJU 1A/48 PJU 1A, Ara Damansara 47301 Petaling Jaya Selangor Darul Ehsan, Malaysia Phone: 0011 603 7846 1025 GURNEY PARAGON Lot 163D-4-02, Gurney Paragon Mall Persiaran Gurney 10250, Penang, Malaysia Phone: 0011 604 229 8886 IOI CITY MALL LG-27B & 28 Lower Ground Floor, IOI City Mall IOI Resort, Lebuh IRC Putrajaya 62502 Sepang Selangor Darul Ehsan, Malaysia Phone: 0011 603 8957 7918 IKANO POWER CENTRE Unit L1.10 & L2.07, IPC Shopping Centre No 2 Jalan PJU 7/2 Mutiara Damansara 47800 Petaling Jaya Selangor Darul Ehsan, Malaysia Phone: 0011 603 7732 1688 MID VALLEY Lot S-066, 2nd Floor (South Court) Mid Valley Megamall Mid Valley City Lingkaran Syed Putra 59100 Kuala Lumpur, Malaysia Phone: 0011 603 2282 2860 MONT KIARA Lot L2-07 & L2-08,1 Mont’ Kiara No 1 Jalan Kiara 50480 Kuala Lumpur, Malaysia Phone: 0011 603 6203 6380 NU SENTRAL Unit L3.01, Nu Sentral Mall, KL Sentral No. 201, Jalan Tun Sambathan 50470 Kuala Lumpur, Malaysia Phone: 0011 603 2260 7866 PAVILION Lot 5.24.04 Level 5 Pavilion Kuala Lumpur No. 168 Jalan Bukit Bintang 55100 Kuala Lumpur, Malaysia Phone: 0011 603 2142 3735 SETIA CITY MALL L1-MM03, Setia City Mall No. 7 Persiaran Setia Dagang Bandar Setia Alam, Seksyen U13 40170 Shah Alam, Selangor Darul Ehsan, Malaysia Phone: 0011 603 3345 6085 SUNWAY PYRAMID LG2.140 Lower Ground Two Sunway Pyramid Shopping Centre No. 3 Jalan PJS 11/15 Bandar Sunway 46150 Petaling Jaya Selangor Darul Ehsan, Malaysia Phone: 0011 603 5622 1300 PARADIGM MALL Lot 1F-01 & 02, 1st Floor Paradigm Mall No.1 Jalan SS 7/26A, Kelana Jaya 47301 Petaling Jaya Selangor Darul Ehsan, Malaysia Phone: 0011 603 7887 3589 SUNWAY VELOCITY Level 3 & 4, Lot 3-24 Lingkaran SV Sunway Velocity Sunway Velocity Mall 55100 Kuala Lumpur Malaysia Phone: 0011 603 9226 6002 QUEENSBAY Lot 2F-86 South Zone Queensbay Mall No 100 Persiaran Bayan Indah 11900 Bayan Lepas Penang, Malaysia Phone: 0011 604 630 8210 VIVACITY MEGAMALL Unit L1-MA01, L1-MA02, L1-017 & L2-MA02, L2-019, L2-020 Level 1 & Level 2, Vivacity Megamall Jalan Wan Alwi, 93350 Kuching Sarawak, East Malaysia Phone: 0011 60 82 263 433 HARVEY NORMAN HOLDINGS LIMITED | ANNUAL REPORT 2018 155 

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