Harvey Norman Holdings Limited
Annual Report 2019

Plain-text annual report

HOLDINGS LIMITED | ACN 003 237 545 2019 ANNUAL REPORT Kezie Apps Captain - NSW Women’s State of Origin Team Ali Brigginshaw Captain - Queensland Women’s State of Origin Team FRANCHISEE AGGREGATED SALES REVENUE* $5.66bn down 1.8% on previous year on a headline basis down 0.9% on on a comparable sales basis COMPANY-OPERATED SALES REVENUE $2.23bn up 12.1% on previous year PROFIT BEFORE TAX $574.56m up 8.4% on previous year PROFIT AFTER TAX & NON-CONTROLLING INTERESTS $402.32m up 7.2% on previous year * Sales made by franchisees in Australia do not form part of the financial results of the consolidated entity Contents Financial Highlights 05 Chairman and CEO’s Report 08 10 Operating and Financial Review 27 Directors’ Report 31 Remuneration Report 60 Statement of Financial Position Income Statement 61 Statement of Comprehensive Income 62 63 Statement of Changes in Equity Statement of Cash Flows 65 Notes to the Financial Statements 66 134 Directors’ Declaration 135 Independent Auditor’s Report 142 Shareholder Information Directory of Harvey Norman ®, Domayne ® and Joyce Mayne ® Retail Complexes 143 KEY DATES: 30 August 2019: Announcement of Full-Year Profit to 30 June 2019 & Announcement of Final 2019 Dividend | 11 October 2019: Record date for Determining Entitlement to Final 2019 Dividend | 1 November 2019: Payment of Final 2019 Dividend | 27 November 2019: 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 2020: Announcement of Half-Year Profit to 31 December 2019 & Announcement of Interim 2020 Dividend | 3 April 2020: Record date for Determining Entitlement to Interim 2020 Dividend | 1 May 2020: Payment of Interim 2020 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 2 HARVEY NORMAN HOLDINGS LIMITED ACN 003 237 545 SUPPORTING COMMUNITY For over 35 years, Harvey Norman® franchisees and employees have Harvey Norman® is proud to be a key sponsor of the Women’s State not only lived in the communities they work in, they have taken an of Origin. This event not only raises the profile of women’s rugby active part in fostering the spirit of those communities. Whether it’s league and helps foster a level playing field for the sporting stars of supporting schools and community groups, helping out charities or tomorrow, but spreads a strong message of inclusiveness and has a just supplying the gear for a fundraiser barbecue, we’re proud to go positive impact on the attitudes of teenage girls towards body image. the extra mile to do what we can to enrich our local communities. Queensland captain Ali Brigginshaw and NSW captain Kezie Apps are For the past decade we have built a reputation for our commitment amazing athletes and two of the shining lights of the game – but it to supporting female athletes in Australia – ensuring they get the hasn’t been easy to reach this level of success. The 10-hour round support they need and the recognition they deserve. In recent trips for training and games that Kezie endured during her early years we have launched new programmes and initiatives to further days show the dedication these stars have in their drive to succeed. this commitment – with our Team Harvey project in 2017 to help Such dedication is an inspiration for many young female athletes, Australian sportswomen achieve their professional goals, and particularly those from country areas. Team Harvey Junior following in 2018 to provide sponsorship opportunities to the next generation of female champions and remove obstacles to participation at grassroots levels. Our commitment to women’s sport has also seen us continue to provide support for some of the marquee events on the sporting calendar, including the 2019 Women’s State of Origin in rugby league with our role as a major sponsor of both the NSW Blues team and the Queensland Maroons team. While our sporting programmes and sponsorships may get more of the media spotlight, we have been making sure that we are also getting behind the women of rural and regional Australia. Now in its third year, the Shine Awards – our partnership with The Weekly Times – endeavours to shine a light on the women making a difference in rural and regional communities. These women are innovators leading the way in design, marketing, communication, health, education, and food, mineral & textile production. By There are few occasions on the Australia sporting calendar more celebrating their achievements and sharing the stories of these exciting than the NRL State of Origin. It has been the pinnacle of passionate women, we can help push for continued investment and the men’s game at the domestic level for decades, and now it’s the innovation in vital regional communities, industries and services. same for the women’s game. Over 10,000 spectators filled North Sydney Oval to watch the game live in 2019 – its second year as a stand-alone fixture. 3 8 C O UNT RIES, 8 FLAGSHIP S At Harvey Norman®, we strive to continually deliver the highest levels of quality, value and service for our customers. These principles inform every facet of our business, from top to bottom, and it is with these principles in mind that we devised our Flagship strategy. A Flagship store should represent the pinnacle of achievement for a brand, while also setting the course for the future. Our Flagship stores feature the latest innovations and designs, with the biggest range of quality brands and products, and offer a level of customer service that is unsurpassed in the industry. Auburn, Sydney, Australia Ikano, Kuala Lumpur, Malaysia Zagreb, Croatia Wairau Park, Auckland, New Zealand Ljubljana, Slovenia Boucher Road, Belfast, Northern Ireland Millenia Walk, Singapore Tallaght, Dublin, Ireland 4 F L AG S H I P S TO R E S T H E B E S T S TO R E S I N T H E W O R L D F IN AN CI AL H IGH LIGHTS 5 F IN AN CI AL HI GHLIGHTS net as sets of $3.2bn consolidated net asset position of $3.2bn, surpassing the $3bn milestone for the first time during FY19 net debt to equi ty ratio 19.46% as at 30 June 2019, an improvement from 25.50% as at 30 June 2018 PBT ret urn on net assets of 18 % REPORTED PBT YEAR ENDED 30 JUNE 2019 up by net profit before tax $574.56m 8.4% compared to $530.17 million for FY18 The main factors contributing to the $44.39 million (or +8.4%) increase in PBT were: 1. $13.57 million increase in the profitability of the overseas company-operated retail stores to $129.70 million in FY19, up +11.7% from $116.13 million in FY18. The increased contribution from each region included: • Singapore & Malaysia +$12.04 million (+48.1%) - The 18 Harvey Norman® stores in Malaysia are thriving, having benefitted from a full year’s trade of the relaunched Flagship store at Ikano, Kuala Lumpur (Nov 2017) and Viva City Mega Mall in Kuching, Sarawak (Dec 2017) in addition to two new store openings at Paradigm Mall in Johor (Jul 2018) and Miri Times Square at Miri, Sarawak (Apr 2019). The Malaysian business is on track with its expansion plans, with the intention of opening five new sites within the next six months. The Flagship store at Millenia Walk, Singapore, continues to dominate, being the premium, destinational shopping experience in the Home & Lifestyle market in Singapore. There has been a marginal growth in sales in Singapore, despite the closure of the Square Two store in Dec 2018, due to a full year’s trade of the expanded, full- format stores at Parkway Parade and North Point City, in addition to the sustained strong sales performance of the Millenia Walk Flagship since its launch in Dec 2015. Local management remain focussed on improved productivity and cost containment, in light of the macroeconomic challenges in Singapore. IN VESTI NG IN INNOVATION AND FU TURE DEVELOPMENT • Ireland & Northern Ireland +$6.39m (+452%) - Retail sales of the 13 Harvey Norman® stores in Ireland showed double-digit growth across all key product categories, bolstered by the success of the Flagship store at Tallaght, Dublin since July 2017. The consolidated entity is on track to open two new stores in Ireland during FY20 in Galway and Sligo. In Northern Ireland, the Flagship store on the iconic Boucher Road continues to report sales growth in a difficult trading environment. We are people-led and technology empowered. Investing in our technology is important - and investing in our franchisees is a strategic priority - enabling a seamless retail experience. 6 ear ni ngs per sh are of 34.70c up by 4.5% on previous year F IN AN CI AL H IGH LIGHTS • Slovenia & Croatia +$0.06m (+0.8%) - With pleasing market share growth in Croatia, the consolidated entity plans to open three new stores within the next three years. • Offset by New Zealand -$4.91 million (-6.0%) - The Flagship store at Wairau Park, North Auckland, has now been open for a full year, and has seen good sales increases since its relaunch. The New Zealand economy has been challenging, but is showing signs of improvement. Total income margins have moderated, coupled with increased operating expenses, resulting in a reduction in the profitability of the New Zealand retail segment in FY19. 2. $16.11 million increase in the overall property segment result to $204.68 million, up +8.5% from $188.57 million in FY18. This increase is mainly derived from an $18.66 million, or +36.1%, increase in the net property revaluation increment from $51.65 million in FY18 to $70.30 million in FY19, higher rents and outgoings collected from property segment assets, offset by higher borrowing costs due to the increased utilisation of debt facilities for property acquisitions. 3. $12.51 million increase in the profitability of the equity investments segment to $18.40 million in FY19, up +213% from $5.88 million in FY18. The increase relative to prior year primarily related to a realised gain of $17.51 million recognised by the consolidated entity upon the sale of its shareholdings of equity investments during FY19. 4. $36.33 million reduction in the losses incurred by the non-core joint ventures included in the ‘Other’ segment and ‘Other Non-Franchised Retail’ segment to a net loss of ($26.62) million in FY19, from a net loss of ($62.95) million in FY18. This was mainly due to lower impairment losses by $41.20 million recognised in respect of the Coomboona JV, as the consolidated entity divested out of Coomboona during the year. The FY19 result incorporated a final impairment expense of $8.25 million upon the completion of the Administrator sale in January 2019. The FY18 result included Coomboona impairment expenses of $49.44 million, relating to the $20.67 million impairment of the investment in the Coomboona JV in December 2017 and the estimated shortfall in the recoverability of loans advanced to Coomboona of $28.78 million, in addition to the Coomboona JV equity-accounted trading losses of $4.57 million in the previous year. This was offset by a $4.29 million increase in the trading and restructure losses relating to the KEH Partnership Pty Limited (KEH), a retailer of school apparel, education goods and technology equipment through the brand name of The School Locker. Following the restructure of KEH on 1 July 2018, the consolidated entity’s partnership interest was 99.02%. 5. Offset by a ($34.14) million decrease in the profitability of the franchising operations segment to $248.40 million in FY19, down -12.1% from $282.54 million in FY18. Aggregated franchisee headline sales revenue reduced by -1.8% to $5.66 billion in FY19, or down by -0.9% to $5.63 billion on a comparable sales basis - a solid result from franchisees in light of the soft discretionary retail market in Australia. Franchisees have invested in their people, technology and logistics to enhance their operating capabilities and to bolster their future growth and development. The franchising operations segment was negatively impacted by a reduction in revenue received from franchisees by ($21.82) million to $943.65 million in FY19, down by -2.3% from $965.47 million in FY18. There has been a rise in the operating expenses of the franchisor to monitor and evaluate compliance with franchise agreements. offshore retail revenue of over $2b n for the first time of fshore profi t 23 % of consolidate d profit before tax 7 C HA IRM AN an d CEO ’ s RE PORT Dear Shareholder, The 2019 financial year has delivered many significant achievements for our company. Financial Achievements  Reported profit before tax (PBT) of $574.56m, up 8.4%  Reported net profit after tax (NPAT) and non-controlling interests of $402.32m, up by 7.2%  Earnings per share (EPS) of 34.70 cents, up by 4.5% from 33.21 cents  Net Assets of $3.2 billion, up by 8.8% from $2.9 billion  Net debt to equity ratio of 19.46%, an improvement from 25.5%  PBT return on net assets of 18% Reported consolidated PBT has increased by 8.4% to $574.56 million in the 2019 financial year, up from $530.17 million in the 2018 financial year. This was primarily achieved from the continued dominance of our 90 Harvey Norman® company-operated retail stores overseas, the improved profitability of the property segments and the sale of equity investments during the year. 2019 saw us breakthrough the $3 BILLION milestone for consolidated net assets, with $3.20 billion of net assets as at 30 June 2019, a substantial 8.8%, or $259.86 million increase, from $2.94 billion in the previous year. Our integrated retail, franchise, property and digital business model has equipped us with a very strong balance sheet, with total assets of nearly $5 BILLION, including tangible property assets of nearly $3 billion. 2019 delivered a solid 18% PBT return on net assets and we are proud to achieve consistently strong PBT net asset returns each year. We remain committed to delivering sustainable growth year-on-year, via a prudent and measured investment strategy to maximise our value to shareholders. Offshore Achievements  Record offshore retail revenue of $2.05bn, up by 9.7% - milestone $2bn achieved during FY19  Record offshore retail profit of $129.70m, up by 11.7%  Offshore businesses now represent 23% of consolidated PBT  We are on track with our expansion plans overseas, predominantly in Malaysia Our 90 Harvey Norman® company-operated stores overseas continue to thrive and outperform in their respective markets. Total offshore revenue surpassed the $2 BILLION milestone for the first time during the 2019 financial year, with each country reporting significant sales growth on the previous year. Total overseas retail revenue grew by $181.06 million, or 9.7%, to $2.05 billion in the 2019 financial year, up from $1.87 billion in the previous year. Retail sales across 39 stores in New Zealand were just under $1 BILLION in local currency, whilst sales in Asia across 30 stores were over HALF-A-BILLION for the 2019 financial year. The overseas businesses now represent 23% of consolidated 2019 PBT. Combined, the overseas retail operations produced an exceptional profit result of $129.70 million, up by 11.7% on the previous year. We intend to grow our international retail footprint and are on track with our expansion opportunities, particularly in Malaysia. Last year, we reported that we intended to open up to 18 new stores overseas by the end of the 2020 financial year. We have already opened 2 new stores in Malaysia this year, with our second full-format store at Miri, Sarawak, paving the way for further growth in East Malaysia. We have updated our expansion plans and now intend to open up to 21 new stores overseas within the next 2 years, with 17 of those new stores in Singapore and Malaysia. By the end of the 2021 financial year, we anticipate having 111 Harvey Norman® company-operated stores across 7 offshore countries. 8 C HA IRM AN an d CEO ’ s RE PORT Flagship Achievements  2019 delivered the completion of our 8-country Flagship Strategy and each Flagship has performed to expectations For new stores and existing store refits going forward in the 8 countries, we are taking the best elements of the Flagship fitout and design to integrate into these stores. We have seen good sales uplifts in our Malaysian, Singaporean, Slovenian and Irish stores, where this has been executed. We plan to start rolling this premium format out in Australia and New Zealand, as new franchised complex and store refits are due. We are currently underway with the first premium refit in Australia at the Cairns franchised complex and the franchised complexes located at Campbelltown, Balgowlah, Preston and Aspley will commence post- Christmas. Mt. Wellington and Hamilton in New Zealand will also commence post-Christmas. Franchisee Sales Revenue Franchisee sales have continued to be subdued in the second half. We published franchisee sales revenue for January and February 2019 in our 2019 half-year report. We have seen an improvement in aggregated franchisee sales revenue from March to June. Even though their sales have been soft, our franchisees have continued to invest in their people, logistics and technology, in anticipation of Government stimulus via tax credits, stabilising house prices, and an increase in lending by banks for mortgages and small business loans. The recent reduction in interest rates and the relaxing of stringent lending restrictions on banks by APRA, is anticipated to provide the necessary momentum to stimulate residential home loan customers. Franchisee sales for July and August 2019 are showing signs of improvement. Aggregated franchisee sales for the period 1 July 2019 to 29 August 2019 increased by 3.3% compared to the period 1 July 2018 to 29 August 2018, and 3.0% on a comparable sales basis. We’d like to thank all of our staff for their loyalty and commitment to our vision, and pay tribute to the commendable efforts of our franchisees throughout the year. We value and appreciate the continued support and confidence of our shareholders in the leadership and future direction of our business. G. HARVEY K.L. PAGE Chairman Executive Director / Chief Executive Officer Sydney 27 September 2019 27 September 2019 HARVEY NORMAN HOLDINGS LIMITED Annual Report June 2019 9 O PERAT IN G a nd FI NA NC IA L REVIEW Net Profit After Tax (NPAT) & Non-Controlling Interests Net profit after tax (NPAT) and non-controlling interests increased by 7.2%, or $26.94 million, to $402.32 million for the year-ended 30 June 2019, from $375.38 million in the previous year. The effective income tax rate for the year-ended 30 June 2019 was 28.81% compared to an effective income tax rate of 28.32% for the year-ended 30 June 2018. Offshore Company-Operated Retail Segment Overseas Businesses Continue to Thrive and Outperform in their Local Markets Our brand continues to grow and evolve in our overseas territories, with 90 Harvey Norman® branded stores that are company- owned and company-operated – boosting our position as a leader in global retail. With a great strength and diversity of offerings, it’s difficult to find a competitor in the global market that operates as effectively as we do across a similar array of product categories. The Flagship stores in each of these territories have proven their exceptional qualities as a peerless shopping destination and innovators in the retail experience. The Flagships have successfully elevated brand awareness and consumer traction to the existing network of stores in the region, continuing to provide a positive ‘halo-effect’ to other stores near or far. Many of the outcomes from these developments have led to our store reinvigoration strategy, where key elements of the Flagships have been adapted and implemented in a selection of smaller, full-format stores in Singapore, Malaysia, Slovenia and Ireland. With the success of this strategy in Asia, we’ll see future transformations of selected stores around the globe – with locations in Australia, New Zealand and Ireland already earmarked for reinvigoration. The graph below represents the aggregate value of overseas retail revenue achieved over the past five years. Total aggregated company-operated retail sales and other revenue for the 90 Harvey Norman® branded stores overseas and the 2 Space Furniture® branded stores in Asia have surpassed the $2 BILLION milestone during the 2019 financial year, with each country delivering pleasing sales growth year-on-year. Total overseas retail revenue grew by $181.06 million, or 9.7%, to $2.05 billion relative to $1.87 billion in the 2018 financial year. 10 O PERAT IN G and FI NA NC IA L REVIEW Offshore Company-Operated Retail Segment (continued) The result before tax for the overseas company-operated retail segment increased by $13.57 million, or 11.7%, to $129.70 million for 2019 financial year, from $116.13 million in 2018 financial year. The offshore businesses now represent 23% of the total consolidated profit before tax for the 2019 financial year. The overseas retail profit result graph on the previous page shows the profit trajectory of the 90 Harvey Norman® branded stores overseas and the 2 Space Furniture® branded stores over the last 5 years. In 2014, the aggregate offshore result was only $27.61 million representing less than 10% of the profit result in that year. Offshore profitability has grown by 370% over the last 5 years to $129.70 million and now comprises nearly a quarter of profit for the 2019 financial year. During 2019, each country reported an improvement in profitability with the exception of New Zealand, which recorded a moderate decline in profitability predominantly attributable to the challenging macroeconomic conditions in the New Zealand market. The Flagship store at Wairau Park, North Auckland, has now been open for a full year, with notable sales increases over that period. The success of the Flagship concept has resulted in the creation of a retail environment that is second-to-none in Auckland, promoting modest sales growth throughout the existing stores in the New Zealand market. This has resulted in another record sales year in NZ dollars, where the 39 market-leading Harvey Norman® company-operated stores generated sales of just under $NZ 1 BILLION, with retail sales rising to $NZ997.75 million, up by 1.1% or $NZ10.55 million, from $NZ987.20 million in the previous year. This was particularly noteworthy due to the continuing headwinds faced by the New Zealand economy which is still struggling to gain momentum. NZ retail spend has been dampened by the prolonged cooling of the housing market, net migration decrease and subdued consumer and business confidence permeating the economy. Translated into Australian dollars, sales revenue increased 2.8%, or $25.57 million, to $935.10 million in the 2019 financial year. There was a 1.72% appreciation of the New Zealand dollar relative to the Australian dollar during the current year. Focus on cost control, improvements in productivity and strong supplier relationships have been integral to NZ’s success since its commencement in 1997. However, the combination of margin pressure and higher operating expenses to maintain and grow market share has resulted in a reduction in the retail result in New Zealand by $4.91 million, or 6.0%, to $77.39 million for the year ended 30 June 2019, down from $82.31 million in the previous financial year. This segment is comprised of 12 Harvey Norman® stores in Singapore, 18 Harvey Norman® stores in Malaysia and the Space Furniture® branded lifestyle stores in Singapore and Malaysia. We are proud of our successful expansion into Asia and we now have 30 Harvey Norman® stores in Asia that have transformed the brand to new heights, making it synonymous with affordable luxury and a premium, lifestyle offering. Last year, we announced our proposed expansion plans in Southeast Asia, which were predominantly in Malaysia where we had expected to open 9 new Harvey Norman stores by the end of 2020. We have already opened two stores in Malaysia during the 2019 financial year in Paradigm Mall in Johor (July 2018) and Miri Times Square at Miri, Sarawak (April 2019), and we now intend to open a further 7 new stores in Malaysia in the 2020 financial year. The opening of the Miri Times Square store is our second full-format store in East Malaysia, and is expected to pave the way for future growth in that region. Aggregated sales revenue for the Harvey Norman® and Space Furniture® brands combined exceeded the HALF-A-BILLION milestone during the year with retail sales of $S542.69 million in local currency, up by 9.0%, or $S44.77 million, from $S497.92 million in the 2018 financial year. HARVEY NORMAN HOLDINGS LIMITED Annual Report June 2019 11 O PERAT IN G a nd FI NA NC IA L REVIEW Offshore Company-Operated Retail Segment (continued) In Singapore, there were 12 Harvey Norman® stores as at 30 June 2019 with the closure of the Square Two store in December 2018. Despite the closure, there has been a marginal growth in sales in Singapore due to a full year’s trade of the expanded, full-format stores at Parkway Parade and North Point City, with both stores having been augmented with the best elements of the Flagship concept as part of its expansion last year, in addition to the sustained strong sales performance of the Millenia Walk Flagship since its launch in December 2015. Singapore sales revenue increased in local currency by $S3.82 million, or 1.2%, to $S334.10 million for the 2019 financial year, from $S330.28 million in the previous year. The 6.53% appreciation of the Singapore dollar during the year boosted this increase to $24.63 million, or 7.8%, to sales of $341.97 million in Australian dollars. Our Malaysian business is thriving and sales revenue from the 18 Harvey Norman® branded stores in Malaysia were exceptionally strong this year, with the Ikano, Kuala Lumpur Flagship store being the shining light delivering significant double-digit growth since its launch in November 2017. The positive halo-effect of the Ikano Flagship is prominent, elevating the market recognition of the brand and having an encouraging flow-on effect throughout the region. Sales were assisted by the two new store openings and a full-year’s trade of the Viva City Mega Mall in Kuching, Sarawak that opened in December 2017, in addition to the temporary reprieve from GST obligations introduced by the Malaysian government for the first few months of the 2019 financial year. Sales in Malaysia grew by $S40.26 million, or 26.4%, to $S192.58 million for the 2019 financial year, from $S152.33 million in the previous year. Translated to Australian dollars, the sales increase was $50.76 million, or 34.7%, to $197.12 million. Sales revenue for the Space Furniture® brand in Singapore and Malaysia combined remained consistent with the previous year. The segment profit result of the two brands in Asia was $37.06 million for the year ended 30 June 2019 compared to a segment result of $25.01 million in the previous year, an increase of $12.04 million, or 48.1%. This is an excellent result in a highly competitive market. Since the launch of the Flagship store at BTC City, Ljubljana in June 2017, we have seen some of the key innovations and developments of that process filter through to other stores, with marked improvements in the effectiveness of marketing campaigns, improved in-store product displays and merchandising, and a sizable increase in brand awareness. The Ljubljana Flagship store continues to deliver an unparalleled, immersive shopping experience in Slovenia and the greater Central European region. Sales revenue from the 5 company-operated stores in Slovenia increased €5.98 million, or 9.0%, to €72.54 million for the 2019 financial year, up from €66.56 million in the previous year. The positive sales growth was achieved across all stores. Translated into Australian dollars, sales revenue increased $13.29 million, or 13.0%, to $115.69 million, assisted by a 3.67% appreciation of the Euro relative to the Australian dollar during the year. The retail result in Slovenia was a profit of $6.88 million for the year ended 30 June 2019, an increase of $0.23 million, or 3.5%, from $6.65 million profit in the previous year. The relaunch of the Zagreb store in Croatia as a Flagship opened in October 2018. Sales revenue increased €0.46 million, or 2.2%, to €20.83 million for the 2019 financial year, from €20.38 million in the previous year. Translated into Australian dollars, sales revenue increased 6.0%, or $1.88 million, to $33.23 million. Croatia has now been profitable for three full financial years, with a profit of $0.58 million in the 2019 financial year, a slight reduction from the profit of $0.75 million in the 2018 financial year. This year, profitability was impacted by the renovation disruption in the first quarter prior to the launch of the Flagship in October 2018. As there is currently only one store in Croatia, the business could not reap the flow-on benefits of a Flagship as seen in other countries, although it is now in an upward trajectory with pleasing market share growth. There are plans to open three new stores in Croatia within the next three years. 12 O PERAT IN G and FI NA NC IA L REVIEW Offshore Company-Operated Retail Segment (continued) Ireland: In Ireland, sales revenue from the 13 company-operated stores increased €28.15 million, or 14.6%, to €220.44 million for the 2019 financial year, up from €192.30 million in the 2018 financial year. Comparable store sales growth were also strong, increasing by €27.24 million or 14.2% during the year. Translated into Australian dollars, sales revenue increased by $55.74 million, or 18.8%, to $351.59 million, from $295.84 million in the previous year, assisted by a 3.67% appreciation in the Euro relative to the Australian dollar during the year. Retail sales showed double-digit growth across all key product categories, with the associated increases in market share. The ongoing success of the Tallaght Flagship has continued to produce positive flow-on effects to the existing store base with each of the stores in Ireland growing sales during the year. We continued to invest in our store network with the refurbishment of Cork and Limerick showrooms. During the 2020 financial year, we plan to open two new stores in Galway and Sligo. The Galway store will be a 60,000 sq. ft. store and will anchor the second phase of the Gateway Retail Park in Knocknacarra on the west side of Galway city. The store will trade over two levels and will include a modern and vibrant restaurant with stunning views towards Galway Bay. The Sligo store will be 43,600 sq. ft. and will be located at Sligo Retail Park, Carraroe, Sligo. Both stores will provide the large, full-format offering to our customers. We continue to invest in our warehousing and logistics capabilities. We intend to open a state-of-the-art warehouse for the electrical category in Dublin which will provide warehousing, installation and delivery services to our seven Dublin metropolitan electrical categories. One of our key initiatives is to grow the digital capability of the Irish business. Ongoing investment in our digital platform, significant growth year-on-year in online traffic and a focus on engaging, high-quality content on the Irish site has aided both the online and offline businesses. The retail trading environment in Ireland remains upbeat. Employment levels have reached a record high and net inward migration has increased. Construction activity has continued apace with house completions forecasted to grow by 24% in the next 12 months. There are headwinds looming with the extension of the Brexit deadline to 31st October 2019. The heightened uncertainty following the changes in the UK Government has the potential to dampen consumer confidence. The retail segment result in Ireland generated a profit of $8.05 million for the 2019 financial year, compared to $1.98 million in the previous year, a remarkable improvement of $6.07 million or 307% on the previous year’s profit of $1.98 million. Northern Ireland: Sales revenue from the two company operated stores in Northern Ireland increased by £0.19 million, or 1.9%, to £10.26 million for the 2019 financial year, from £10.07 million in the previous year. Translated into Australian dollars, sales increased by $1.09 million, or 6.2%, to $18.57 million. The Flagship store on the iconic Boucher Road continues to report sales growth in a very difficult trading environment. The March 2019 launch of the new Premium Bedding Gallery in the Flagship has shown signs of an uplift in growth, and we will see the full impact of this change in the coming year. The retail trading environment continues to be difficult as the political and economic uncertainty caused by Brexit has negatively impacted consumer confidence. The 2 company-operated stores in Northern Ireland incurred a small trading loss of $0.25 million for the current year, a modest improvement from the trading loss incurred in the previous year of $0.57 million. HARVEY NORMAN HOLDINGS LIMITED Annual Report June 2019 13 O PERAT IN G a nd FI NA NC IA L REVIEW 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 $227.26 million for the year ended 30 June 2019, an increase of $67.44 million, or 42.2%, from segment revenue of $159.82 million in the previous year. The result for the non-franchised retail segment was a loss of $16.67 million for the 2019 financial year, compared with a loss of $11.17 million for the previous year, a deterioration of $5.50 million from the loss recorded in the previous year. The other non-franchised retail segment includes the operations of the KEH Partnership Pty Limited (KEH), a retailer of school apparel, education goods and technology equipment through the brand name of The School Locker. Up to 30 June 2018, the consolidated entity, through a wholly-owned subsidiary, had a 50% interest in the KEH business (Partnership) and had accounted for its interest as an equity-accounted joint venture entity. Effective 1 July 2018, a wholly-owned subsidiary of Harvey Norman Holdings Limited acquired all of the inventory assets of KEH. Subsequently, there was a restructure of the KEH business where, by unanimous agreement in writing, each partner in the Partnership agreed to vary the interest of the respective partners in the Partnership, with the consolidated entity increasing its partnership interest in the Partnership to 99.02%. From 1 July 2018, the consolidated entity’s interest in the Partnership was 99.02% and, from that date, the consolidated entity ceased equity accounting and consolidated the financial statements of KEH, resulting in the following accounting implications for the year ended 30 June 2019:  the line-by-line consolidation of the financial statements of KEH into the financial statements of the consolidated entity from 1 July 2018; the cessation of equity accounting and the unwinding of any equity-accounted transactions from 1 July 2018; for consolidation purposes, the elimination of any commercial loans advanced to KEH and the reversal of any cumulative impairment expenses recognised to date in respect of the expected shortfall on the repayment of the KEH loan receivable.   The financial impact of the KEH restructure on the revenues and results reported in the other non-franchised retail segment were as follows:     the recognition of revenues of $67.00 million in FY19 compared to nil in FY18; the recognition of impairment expenses of $0.15 million in FY19 compared to $16.92 million in FY18; the recognition of the trading losses of The School Locker business of $11.40 million for FY19; and the recognition of a further loss of $9.67 million in FY19 on the restructure and consolidation of KEH, being the difference in the carrying amount of the loan receivable from KEH in the consolidated entity’s financial statements of $40.14 million and the fair value of the loan payable in KEH’s financial statements of $30.47 million. Refer to Note 38. Business Combinations on page 124 for further information regarding the restructure of KEH. 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), that was the subject of the Administrator Sale during the 2019 financial year. The Other segment recorded a loss of $9.95 million for the year ended 30 June 2019 compared to a loss of $51.78 million in the previous financial year, an improvement of $41.83 million. This was mainly due to lower impairment losses by $41.20 million recognised in respect of the Coomboona JV, as the consolidated entity divested out of the Coomboona business during the current year. 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. CHPL holds all of the issued shares in companies which carried on the business of dairy farm operations, land ownership and a pedigree breeding and genetics division in Northern Victoria (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. 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, in addition to the dispute between the HN JV Entity and the other JV partner to the Coomboona JV regarding the future direction of the Coomboona JV, resulted in the appointment of Ferrier Hodgson as administrators of CHPL and subsidiaries of CHPL (Administrators) on 23 March 2018. In the 2018 Annual Report, the consolidated entity reported that the total indebtedness of CHPL to its creditors Network Consumer Finance Pty Limited (NCF) (for the assignment of the commercial loans previously owed by the Coomboona JV to National Australia Bank Limited (NAB)) 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:   NCF - first-ranking secured creditor: the total value of commercial loans granted to the Coomboona JV by NCF of $36.28 million; HN JV Entity - second-ranking secured creditor: the total value of commercial loans granted to the Coomboona JV by the HN JV Entity of $38.71 million, repayable on demand. 14 O PERAT IN G and FI NA NC IA L REVIEW Other Segment (continued) 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. The estimated recoverable amount of the Coomboona JV non- trade receivables, net of any impairment provisions, was $46.21 million as at 30 June 2018. In August 2018, the Administrators commenced an orderly sale process for the sale of the Coomboona JV assets (Administrator Sale). Expressions of interest were received and reviewed by the Administrator. On 31 October 2018, the Administrators advised the consolidated entity that the property, the subject of the NCF Securities and HN JV Entity Securities in respect of the NCF and HN JV Entity receivables, had been sold for $44.10 million to Australian Fresh Milk Holdings Pty Limited. On 16 January 2019, the Administrator Sale was completed and the Contract for Sale settled. The secured creditors received net proceeds on sale of $40.50 million for the full discharge of the NCF receivables and the partial discharge of the HN JV Entity receivables. After taking into account the net sales proceeds, a further impairment expense of $8.25 million was recognised in December 2018 to reduce the value of the HN JV Entity receivables to its estimated recoverable amount. There were no further material transactions pertaining to the Coomboona JV subsequent to the completion of the Administrator Sale. Equity Investments There was an increase in the profitability of the equity investments segment, growing by $12.51 million to $18.40 million in the 2019 financial year, up from $5.88 million in the 2018 financial year. This was primarily due to a $17.51 million realised gain on sale of equity investments in Australia during the year. HARVEY NORMAN HOLDINGS LIMITED Annual Report June 2019 15 OPERATING and FINANCIAL REVIEW 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. 16 HN 18 DM 1 HN 2 JM 1 HN 36 DM 3 JM 4 HN 10 DM 1 HN 57 DM 12 JM 2 HN 38 DM 2 HN 6 ACT HN 1 DM 1 168 FRANCHISED COMPLEXES 20 FRANCHISED COMPLEXES 7 FRANCHISED COMPLEXES O PERAT IN G and FI NA NC IA L REVIEW Franchising Operations Segment The franchising operations segment revenue was $838.67 million in the 2019 financial year, down by $19.03 million, or 2.2%, from $857.69 million in the 2018 financial year, primarily due to a decrease in revenues received from franchisees in 2019 relative to 2018. Revenue received from franchisees decreased by 2.3%, or $21.82 million, to $943.65 million in the current year from $965.47 million in the previous year, mainly attributable to a 1.8% reduction in headline aggregated franchisee sales revenue to $5.66 billion in FY19, or a reduction of 0.9% on a comparable franchisee sales basis. Presentation of Tactical Support Payments Under AASB 15 The first-time application of the new accounting standard, AASB 15 Revenue from Contracts with Customers, required the consolidated entity to recognise revenue received from franchisees based on the amount it expects to receive in exchange for the provision of franchising operations’ activities to franchisees, pursuant to a franchise agreement. AASB 15 required tactical support payments to be netted off against gross franchise fees received. AASB 15 had no impact on the franchising operations segment result with the effect being a reclassification from expenses to a reduction in franchising operations segment revenue. Tactical support payments to franchisees protect, enhance and promote the Harvey Norman®, Domayne® and Joyce Mayne® brands, and are an expense of the franchisor to assist a franchisee, as required from time-to-time at a franchisor’s discretion, to effectively compete in their local markets. The consolidated entity has adopted this standard from 1 July 2018 and has applied the standard retrospectively, adjusting the comparative information for consistency. The Franchising Operations Margin (%) The franchising operations margin is calculated as the segment result before tax of the franchising operations segment over Australian franchisee aggregated sales revenue. The franchising operations segment result decreased by $34.14 million, or 12.1%, to $248.40 million in the year ended 30 June 2019 from $282.54 million in the previous year. This decrease is due to the reduction in franchising operations segment revenue by $19.03 million, or 2.2%, as described above. There has been a rise in operating expenses of the franchisor to monitor and evaluate compliance with franchise agreements. The franchising operations margin moderated from 4.90% in FY18 to 4.39% in FY19, a reduction of 51 basis points. FRANCHISING OPERATIONS SEGMENT ANALYSIS BY HALF YEAR # Franchised complexes in Australia Half Year Ended 31 December Half Year Ended 30 June Full Year Ended 30 June 2016 2 193 2017 2018 195 195 2017 2 194 2018 2019 195 195 2017 2 194 2018 2019 195 195 Franchising operations segment result $172.13m $167.21m $158.47m $132.41m $115.33m $89.93m $304.53m $282.54m $248.40m Franchisee aggregated sales revenue $2.86bn $3.00bn $2.95bn $2.75bn $2.76bn $2.71bn $5.62bn $5.76bn $5.66bn Franchising Operations Margin (%) 6.01% 5.57% 5.37% 4.81% 4.18% 3.32% 5.42% 4.90% 4.39% HARVEY NORMAN HOLDINGS LIMITED Annual Report June 2019 17 O PERAT IN G a nd FI NA NC IA L REVIEW Franchisee Sales Revenue Underpins the Franchising Operations Segment Headline Australian franchisee aggregated sales revenue contracted by 1.8%, or $104.21 million, to $5.66 billion for the 2019 financial year, from $5.76 billion in the previous year. Comparable Australian franchisee aggregated sales revenue reduced by 0.9% to $5.63 billion for current year compared to $5.68 billion in the 2018 financial year. 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 are reported to the market as it is a key indicator of the performance of the franchising operations segment. Retail sales in Australia remain subdued, impacted by the challenges faced by the residential housing market, and this was reflected in the aggregated sales revenue of franchisees in Australia. Innovative Living in Australian Homes 2020 will be a breakout year for the continued growth of smart products in everyday Australian homes with Harvey Norman®, Domayne® and Joyce Mayne® franchisees continuing to invest in trading relationships, innovation and marketing that delivers a leading position with consumers. Voice activation has been a central feature of the Connected Smart Home this year. AI technology on home appliances such as smart refrigeration, laundry, vacuum cleaners have enhanced the Connected Home Ecosystem. Voice assisted devices are growing exponentially and are becoming a key consideration for consumers in their search for modern, integrated and connected products. The audio-visual category of franchisees has again seen strong growth over the past year, with the launch of 8K televisions, which is a whole new viewing experience. 8K resolution offers a barrier-breaking performance from screens with four times the resolution of 4K to provide incredible detail, an outstanding picture quality and the brightest and most vivid colours. The demand for a high- quality home entertainment experience has also enabled growth in franchisees’ audio sales, with voice enabled sound bars in demand. Innovations in smart technology, features and colour have underpinned growth in the Home Appliance category. Slim capacity French Door refrigeration has created new growth in a category that continues to expand and premium cooking brands continued to innovate with steam and colour through their ranges which excited consumers. The importance of the kitchen in Australian homes continues to be reinforced by the comparable expansion of smart, innovative products by premium brand partners and the positive response from Harvey Norman®, Domayne® and Joyce Mayne® franchisees customers. The relationship of Optus with Harvey Norman® franchisees has led to solid growth in the communication category and mobile phones specifically. The impending wave of new growth led by the introduction of 5G in Australia will create opportunity in the year ahead and beyond in this category. Portable Audio and its importance as a category was reinforced again by the emerging category of True Wireless headphones and bluetooth speakers featuring smart connectivity and voice. The relationship of franchisees with leading global designer brands are delivering innovation in product, omni-channel presentation and customer experience. As consumers continue to invest in quality premium products for the home, franchisees are motivated to ensure that their offering exceeds expectation. The experience of connectivity, style, innovation and value in products and services is a roadmap for future growth. Key Statistics and the Impact of the Housing Market on Retail Spending The following key statistics have been provided as discretionary spending on Home and Lifestyle goods – the market in which our Harvey Norman®, Domayne® and Joyce Mayne® franchisees operate in - is fundamentally driven by population growth, household income, consumer confidence and activity in the Australian residential property market. Population growth presently remains robust with the Australian resident population increasing by 411,000 in the 12 months to 30 June 2019 (BIS Oxford Economics estimate), at which point the Australian population reached 25.4 million people. Net Overseas Migration (NOM) is the main driver of growth; over calendar year 2018, the ABS estimates that NOM was 248,400 or 61.4% of the increase in total population over the same period (Australian Bureau of Statistics, cat. 3101.0). 18 O PERAT IN G and FI NA NC IA L REVIEW Franchisee Sales Revenue Underpins the Franchising Operations Segment (continued) Looking ahead, national population growth is expected to remain solid, with the Australian resident population projected to reach 27 million by the end of FY2023 (BIS Economics forecast). Over 296,000 new jobs were added between June 2018 and June 2019 (Australian Bureau of Statistics, cat.6202.0). While growth in employment is above its historical average, it has been matched with a rise in the participation rate to a record high (from 65.7% in June 2018 to 66% in June 2019, Australian Bureau of Statistics, cat.6202.0). The unemployment rate has fallen marginally to 5.2% (June 2019) from 5.3% a year earlier (Australian Bureau of Statistics, cat.6202.0). The RBA forecasted in May 2019 that the unemployment rate will be 4.8% by June 2021. Conditions remain challenging for households with household income rising by only 2.3% year-on-year in the March 2019 quarter (Australian Bureau of Statistics, cat. 5206.0). However it appears that Sydney and Melbourne dwelling prices have reached a trough (CoreLogic monthly dwelling price series), which may limit any further negative wealth effects. Consumers remain moderately optimistic about the outlook, with the ANZ-Roy Morgan confidence index recording a net positive outlook (as at 30 June 2019) for the next twelve months. Franchisees have invested in their people, technology and logistics to enhance their operating capabilities, and to bolster their future growth and development Franchisees have performed solidly in this difficult retail climate and continue to be the dominant player in the domestic Home and Lifestyle market. Franchisees have invested in their people, their physical and digital fulfilment options and their logistical delivery capabilities. Franchisees are focussed on driving customer engagement throughout the customer journey, from the start of the sales process, right through to the final delivery and beyond. Franchisees continue to recognise that the cornerstone of delivering superior experiences for their customers lies in the ongoing development of, and investment in, their people. Franchisees maintain a focus on ensuring their teams are well-equipped with the tools, knowledge and skills to deliver the attention and service their customers expect, from the moment they start their journey in-store or online to well beyond the fulfilment and delivery of their goods. This focus along with concerted efforts to ensure adequate service levels are present across their shop floors, and that their people are both adequately and fairly rewarded, have seen the financial investment in their people continue strongly throughout the 2019 financial year. The delivery and fulfilment capabilities of franchisees have been enhanced, and are constantly evolving to enable a seamless retail experience and provide a multitude of fulfilment options to best suit their customers’ needs. Their digital transformation is a necessary component of their investment strategy, providing real-time visibility and effective communication to optimise customer satisfaction. Investment in their people, technology and logistics is a critical, bedrock component of their strategy to invest in innovation and future growth and development. HARVEY NORMAN HOLDINGS LIMITED Annual Report June 2019 19 OPERATING and FINANCIAL REVIEW A MORE ENRICHED CUSTOMER EXPERIENCE O2O STRATEGY Customers of Harvey Norman®, Domayne® and Joyce Mayne® franchisees are increasingly tech-savvy, and are utilising technology today in ways that are very exciting, both in-store and in the online marketplaces. Franchisees strive to meet and exceed the insatiable digital expectations of their customers, and have embarked on the necessary digital transformations required to ensure that their Online-to-Offline (O2O) Strategy continues to evolve to enhance and optimise their service offering for their customers. Supporting the O2O strategy, several initiatives were introduced, upgraded or enhanced during the 2019 financial year. Delivering these initiatives provides Harvey Norman® customers with a heightened experience, helps remove friction from their experience, and brings franchisees and their people into the technological ecosystems created by providing them with tools that build richer connections and encounters with, and for, their customers. • Buy Now Pay Later (BNPL) Latitude Financial Services Australia Holdings Pty Ltd and its related bodies corporate (Latitude) are a long term key partner of Harvey Norman® in Australia and New Zealand, providing a suite of popular Interest Free financing solutions to consumers. In December 2018, Latitude acquired GenoaPay, a New Zealand based BNPL provider. Following the acquisition, Harvey Norman® New Zealand was the first major national retailer to launch GenoaPay in only available out of a selected 13 franchised complexes. Same Day - Franchisees provide same-day delivery for metro customers across Australia. There is an option to select and receive a 3-hour delivery window between 4pm-10pm Monday to Friday. Orders must be placed prior to 1pm in order to schedule same day delivery. Scheduled - Scheduled delivery provides a flexible service that offers 4 delivery windows throughout the day (10am-1pm), (1pm- 4pm), (4pm-7pm), (7pm-10pm) up to 2 weeks in advance. • 1 Hour Click & Collect Through strong reporting and CSAT (Customer Satisfaction), Harvey Norman® franchisees have successfully taken Click & Collect to a speedy 1-hour. The goal is to further drive this time to notification down with the use of better technology for notifications to and from the customer. Click & Collect is an increasingly popular medium used by Harvey Norman® customers and drives foot traffic to Harvey Norman® franchised complexes. • Mobile First Harvey Norman® continues to invest effort in improving the mobile experience for customers via PWA (Progressive Web App) technology. 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. April 2019, giving customers the ability to convert eligible purchases • Store Location Management System into a 10 week instalment plan, with no interest or extra fees. The Harvey Norman location management service (LMS) continues GenoaPay takes the first instalment when the customer makes a to grow and evolve. An integral part of the O2O strategy, this service purchase, with the remaining balance processed weekly. Latitude provides a single source of truth across all information services is excited to announce that LatitudePay (based on GenoaPay) will (Facebook, Google, Maps) for franchised complexes including be launched exclusively at Harvey Norman®, Domayne® and Joyce location information, contact details, trading hours, and local Mayne® franchisees in Australia in September 2019. events, allowing customers to easily obtain information about their • Shippit Same Day Delivery Expansion Expanding scheduled and same-day delivery of small-to-medium products to approximately 85 franchised complex locations Australia-wide will leverage the advantage of franchised complexes with inventory close to their customers. This service was previously nearest Harvey Norman® franchised complex. Most recently, store finder functionality has been switched over to the LMS, to again leverage the O2O strategy to improve the experience for customers of Harvey Norman® franchise outlets. 20 OPERATING and FINANCIAL REVIEW DELIVERY SERVICES AND FULFILMENT OPTIONS OF FRANCHISEES Franchisees are investing heavily in physical assets in warehousing • Customer Warehouse Pickup and logistics to enhance the Last Mile delivery experience for their Provides customers with an enhanced experience when they customers. Home delivery service standards have been successfully choose to pickup bulky goods from the warehouse immediately implemented across all stores to provide customers with a delivery after the purchase. Franchisees have invested in customer pickup service option to best suit their needs. Franchisees are focused on areas at the warehouse through significant refits to accommodate driving customer engagement throughout the entire journey from the the increase in demand. start of the sales process right through to final fulfilment. In addition, several franchisees have launched the following Concerted efforts have been made by each Franchisee to invest in initiatives: technology that will enhance warehousing capabilities and fulfilment offerings. There has been a focus on digital transformation to optimise their Last Mile delivery capabilities in order to effectively respond to the growth in demand for customer fulfilment services. The delivery service offering of franchisees has been progressed over the 2019 financial year providing a seamless experience to the customer with the introduction, upgrade and enhancement of the following initiatives: • Home Delivery Services Provide customers with a delivery service option to best suit their needs. Whether customers prefer a quick ‘Store to Door’ drop-off, a ‘Delivery Plus’ for a basic connection or a full ‘Premium Delivery’ service. • Delivery Vehicle Branding Standards Ensuring that customers will not only enjoy transparency of the delivery process but will also experience an enhanced service offering with clean, branded trucks. Franchisees will continue to invest in high-quality delivery vehicles over the coming year to improve the quality of their service. • Driver Standards Will complement the newly branded trucks, as delivery vehicle drivers will be uniformed with branded clothing and present themselves in a neat and tidy manner to customers. • Trak by Harvey Norman® An investment by several franchisees in logistics technology to optimise route planning for deliveries and provide automated customer communication with real-time tracking. Additional franchisees in metropolitan areas will be looking to invest in this technology over the course of the coming year. • Delivery Experience Survey Leverages the developing customer satisfaction framework for online to include a customer survey after the delivery through the Trak by Harvey Norman® platform. The quality of service from delivery drivers is critical to the overall customer experience and providing feedback to franchisees is critical to ensure an exceptional customer experience during the overall delivery process. • Connected Driver Facilitates communication between driver and customer, where drivers in metropolitan areas will be equipped with devices during the year to enhance the service quality levels at the final stage of the delivery process. 21 O PERAT IN G a nd FI NA NC IA L REVIEW Review of the Property Segment Composition of the Property Portfolio The robust property portfolio was valued at $2.99 billion as of 30 June 2019 and still continues to be the consolidated entity’s driving point of difference and competitive advantage in the Australian market. With a substantial, stable and diversified mix of tenants underpinning the retail centres, 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 2019, total property assets amounted to over 62% of the consolidated entity’s total asset base of $4.80 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 2019. TOTAL PROPERTY SEGMENT ASSETS AS AT 30 JUNE Investment properties and Assets Held for Sale 2017 2018 2019 2 $2.242bn $2.429bn $2.546bn Owner-occupied land & buildings in New Zealand, Singapore, Slovenia, Ireland & Australia $413.85m $432.46m $441.21 $441.21m Joint venture assets TOTAL PROPERTY SEGMENT ASSETS $2.05m $2.54m $1.17m $2.66bn $2.86bn $2.99bn OWNED & LEASED RETAIL USE PROPERTIES AS AT 30 JUNE 2019 # of owned retail use properties # of leased retail use properties Australia: Franchised complexes New Zealand Slovenia Croatia Ireland Northern Ireland Singapore Malaysia TOTAL 94 18 5 - 1 - - - 118 101 21 - 1 12 2 12 18 167 Total 195 39 5 1 13 2 12 18 285 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 2019, thirty-nine (39) sites within the investment property portfolio in Australia were independently valued, representing 30.0% of the total number of sites and 37.7% 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 eighteen (18) additional sites. The valuation for the current year resulted in a net increase of $69.29 million relating to investment properties in Australia and $1.01 million relating to New Zealand, compared to a net increase of $51.65 million in the previous year. NET PROPERTY REVALUATION ADJUSTMENTS AS AT 30 JUNE RECORDED IN THE INCOME STATEMENT (Net Property Revaluation Increment) RECORDED IN EQUITY (Asset Revaluation Reserve) ($ million) AUSTRALIA NEW ZEALAND SLOVENIA SINGAPORE IRELAND TOTAL 22 2017 2018 2019 $51.65m $69.29m 2017 2 $1.12m 2018 2019 - - - - - - $1.01m $16.03m $9.72m $9.64m - - - $2.96m $0.08m $0.08m - - $0.66m ($1.40m) $2.76m - 2 $107.38m - $0.67m - - $108.05m $51.65m $70.30m $20.11m $13.22m $8.32m O PERAT IN G and FI NA NC IA L REVIEW Review of the Financial Position of the Consolidated Entity The consolidated entity has tangible property assets of $2.99 billion, representing 62% of the total asset base of $4.80 billion. Total assets increased by 4.8%, or $221.10 million, to $4.80 billion as at 30 June 2019, from $4.58 billion in the previous year. The value of the investment property portfolio increased by $79.55 million, or 3.3%, to $2.51 billion as at 30 June 2019 primarily due to the net property revaluation increment of $70.30 million during the current year and the acquisition and refurbishment of other investment property assets during the current year. Inventories increased by $50.68 million, or 14.7%, due to store expansion overseas and the consolidation of The School Locker business of the KEH Partnership that was previously accounted for as an equity-accounted joint venture entity. Cash and cash equivalents increased by $44.50 million, or 26.1% relative to the previous year. Property, plant and equipment assets have increased by $35.87 million due to new and improved offshore retail locations, the refurbishment of Flagship stores and the continued investment in upgrading existing franchised complexes and company-operated stores to a high-quality standard. Total liabilities decreased by $38.76 million, or 2.4%, to $1.60 billion as at 30 June 2019 from $1.64 billion in the prior year mainly due to lower utilisation of the Syndicated Facility and other external borrowings. The consolidated entity is very pleased to report another solid net asset base, with robust growth of 8.8% during the year, or an increase of $259.86 million, to $3.20 billion as at 30 June 2019 from $2.94 billion as at 30 June 2018. HARVEY NORMAN HOLDINGS LIMITED Annual Report June 2019 23 O PERAT IN G a nd FI NA NC IA L REVIEW 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 19.46% as at 30 June 2019, an improvement compared to a ratio of 25.50% as at 30 June 2018. Net debt comprises total interest-bearing loans and borrowings, net of cash and cash equivalents. Solid Cash Flows Cash and cash equivalents, net of bank overdraft, as disclosed in the Statement of Cash Flows on page 65, increased by $60.35 million, or 48.1%, to $185.82 million in FY19, compared to $125.46 million in FY18. During 2019, the consolidated entity generated a solid $372.85 million of net cash flows from operating activities. This was primarily achieved by receiving $2.40 billion from customers, $858.37 million net receipts from franchisees, offset by $2.68 billion payments to suppliers and employees. The decrease in operating cash flows by $81.33 million, or 17.9%, to $372.85 million in FY19 relative to $454.17 million in FY18 can primarily be attributed to a reduction in net receipts from franchisees by $88.69 million to $858.37 million during the year. Net receipts from franchisees are affected by the movement in the aggregate amount of financial accommodation provided to franchisees, which has increased in FY19 compared to the movement in FY18. The higher movement in the aggregate amount of financial accommodation this year was predominantly due to an increase in the inventory reserves acquired by franchisees during the FY19 relative to FY18. Franchisees increased their inventory investment to support sales growth post-balance date, driven by expected improved trading conditions. Lower net receipts from franchisees are also due to a reduction in gross revenue from franchisees received in FY19 compared to prior year. There was a reduction in the net cash flows used in investing activities by $237.28 million during FY19 primarily due to a reduction in the purchase of investment properties by $97.78 million, the receipt of proceeds of $40.50 million pursuant to the completion of the Administrator Sale of the Coomboona JV assets in January 2019 and the reduction in loans granted to joint venture entities, joint venture partners and unrelated entities by $89.70 million between the two comparable years. During FY19, the consolidated entity advanced loans of $5.18 million to joint ventures and unrelated entities compared to a net outflow of $94.88 million in FY18. There was an increase in the net cash financing outflows by $178.19 million during the 2019 year primarily due to the repayment of external borrowings utilising the proceeds raised from the renounceable pro-rata Entitlement Offer in October 2018 of $163.87 million. There was a net repayment of the Syndicated Facility Agreement by $25 million during FY19 compared to a net drawdown of $210 million during FY18, a significant improvement in the utilisation of the Syndicated Loan Facility by $235 million between the two comparable years. Furthermore, there were higher dividend payments during FY19 totalling $342.12 million compared with FY18 dividend payments of $267.34 million, an increase of $74.79 million, mainly due to the higher 2018 final dividend which was paid in December 2018. 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 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, retained profits and reserves as disclosed in Notes 24, 26 and 25 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. 24 O PERAT IN G and FI NA NC IA L REVIEW Outlook We intend to continue growing our international retail footprint and expect to open up to 21 new stores overseas within the next 2 years, with 17 of those new stores in Singapore and Malaysia. By the end of the 2021 financial year, we anticipate having 111 Harvey Norman® company-operated stores across 7 offshore countries. In Australia, 1 Harvey Norman® complex in Victoria will open in the 2020 financial year. For new stores and existing store refits going forward in the 8 countries, we will be taking the best elements of the Flagship fitout and design to integrate into these stores. We plan to start rolling this premium format out in Australia and New Zealand, as new franchised complex and store refits become due. We are currently underway with the first premium refit in Australia at the Cairns franchised complex and the franchised complexes located at Campbelltown, Balgowlah, Preston and Aspley will commence post- Christmas. Mt. Wellington and Hamilton in New Zealand will also commence post-Christmas. Franchisee sales for July and August 2019 are showing signs of improvement. Aggregated franchisee sales for the period 1 July 2019 to 29 August 2019 increased by 3.3% compared to the period 1 July 2018 to 29 August 2018, and 3.0% on a comparable sales basis. Franchisees are yet to see an uplift from the tax credit initiative. Total overseas sales revenue and comparable overseas sales revenue increases/(decreases) for each of our overseas controlled entities for the period 1 July 2019 to 29 August 2019 vs 1 July 2018 to 29 August 2018 is as follows; COUNTRY $A $A Constant Local Total Sales Comparable Sales Currencies Constant Local Currencies New Zealand Slovenia & Croatia Ireland Northern Ireland Singapore Malaysia % 9.8 14.5 12.4 10.9 (-6.7) 14.7 % 9.7 14.3 12.4 10.9 (-4.1) 0.9 Total Sales % Comparable Sales % 5.2 11.2 9.0 9.5 (-12.4) 9.3 5.1 11.0 9.0 9.5 (-10.0) (-3.9) Sales growth from our company-operated stores in New Zealand, Slovenia, Croatia, Ireland and Northern Ireland have been strong for the first 2 months of the 2020 financial year. Sales reported by our company-operated stores in Malaysia are cycling higher comparable sales, relating to the removal of the 6% GST by the Malaysian Government in the months of June, July and August 2018. Sales during that GST-free period last year were exceptionally high, and then from 1 September 2018, sales normalised after the introduction of the 10% sales tax by the Malaysian Government. In Singapore, sales for July and August 2019 were under pressure due to softening economic conditions. The Singaporean Government has indicated that an economic stimulus may be required. Singapore has seen a plunge in exports, partly because of weakening growth in China which has been further exacerbated by the trade war between China and the United States. Harvey Norman® New Zealand launched GenoaPay (Buy Now Pay Later (BNPL)) in April 2019. After the successful NZ launch, a select number of Harvey Norman® franchisees and Latitude Financial Services Australia Holdings Pty Ltd (Latitude) trialled the BNPL offer in Australia (LatitudePay). LatitudePay will now launch nationally in early September 2019. 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. Changes to macroeconomic conditions and policy that may result 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, trade, monetary and regulatory policies, that can HARVEY NORMAN HOLDINGS LIMITED Annual Report June 2019 25 O PERAT IN G a nd FI NA NC IA L REVIEW Summary of Key Business Risks (continued) impact the level of consumer confidence and discretionary retail spending. These conditions may affect revenue from sales to customers and franchise fees. The consolidated entity seeks to reduce its exposure to these risks through appropriate business diversification, also 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. Increased competition resulting in a decline of retail margin or 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 retail margins and 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 of category and the ability to identify growth opportunities locally and overseas, mitigates the risk from existing and potential 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. A decline in the commercial property sector leading to softening property asset values, falling rental returns and a reduction of future capital returns on property assets: With a property portfolio of $2.99 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. 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 dependent on the cycle investment. 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. 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 in place, including an ongoing security improvement program, investment in cyber security resources; the implementation, maintenance and supervision of operational policies and contracts intended to preserve the confidentiality and integrity of IT systems. The Information Technology environment is subject to regular independent audit and review of IT security controls, response plans and incident management practices. 26 D IRECTORS ’ RE PORT T H E B O A R D O F D I R E C T O R S 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. 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. Chris Mentis B.Bus., FCA, FGIA, Grad Dip App Fin Executive Director, CFO & Company Secretary 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 Chartered Accountants Australia & New Zealand (CA ANZ) 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. John Evyn Slack-Smith Executive Director & COO David Matthew Ackery Executive Director  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. Slack-Smith was appointed a non-executive director of the Children’s Tumour Foundation of Australia on 22 July 2019.  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 finished his tenure as the Chairman of the public company, St. Joseph’s College Foundation Limited, on 30 June 2019.  Michael John Harvey B.Com Non-Executive Director 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. Since 2013, Mr. M. Harvey has been a director of CaraCare Limited, a registered charity. Christopher Herbert Brown OAM, LL.M, FAICD, CTA Non-Executive Director 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. Kenneth William Gunderson- Briggs B.Bus., FCA, MAICD Non-Executive Director (Independent) 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 CA ANZ. 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. Graham Charles Paton AM, B.Ec, FCPA, MAICD Non-Executive Director (Independent) Maurice John Craven B.Sc, FAICD 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 was an independent non-executive director of Gazal Corporation Limited, and resigned his directorship on 14 May 2019. Mr. Craven was appointed a director of Harvey Norman Holdings Limited on 27 March 2019. Mr. Craven holds a Bachelor of Science degree from the University of Melbourne and is a Fellow of the Australian Institute of Company Directors. Mr. Craven has been actively involved with innovation and growth in technology empowered industries for the past 20 years and prior to that was a partner for 25 years with Andersen Consulting. Mr. Craven is Chair of Specialisterne Australia and is a member of the Global Board of the Specialisterne Foundation, based in Denmark. He is also a member of the Board of Social Venture Partners Melbourne, a philanthropic investment organisation. HARVEY NORMAN HOLDINGS LIMITED Annual Report June 2019 27 D IRECTORS ’ RE PORT T H E B O A R D O F D I R E C T O R S Corporate Governance The board of directors (Board) of Harvey Norman Holdings Limited (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. The Corporate Governance Statement outlines the Company's corporate governance practices, including compliance with the Principles for the year ended 30 June 2019. The Corporate Governance Statement has been approved by the Board. The full Corporate Governance Statement and 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. The Board of Directors: Role and Responsibilities Roles and Responsibilities / Structure and Composition 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: 1. 2. "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. d) 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. e) Interest in and time to do the job means: 1. 2. 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. 28 The Board of Directors: Roles and Responsibilities / Structure and Composition (continued) Income S atemStatement of Significant Accounting D IRECTORS ’ RE PORT T H E B O A R D O F D I R E C T O R S 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 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. 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 M.J. Craven Attendance Full Board Audit Remuneration Nomination 2 100% 2 8 [8] 100% 100% 88% 100% 88% 100% 100% 100% 100% 8 [8] 8 [8] 7 [8] 8 [8] 7 [8] 8 [8] 8 [8] 8 [8] 2 [2] n/a n/a n/a n/a n/a n/a 10 [10] 10 [10] 10 [10] n/a 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 n/a 5 [5] 5 [5] 5 [5] n/a The number of meetings of the Board of Directors and of its Board Committees during the 2019 financial year were:     Full Board: 8 Audit Committee: 10 Remuneration Committee: 8 Nomination Committee: 5 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. HARVEY NORMAN HOLDINGS LIMITED Annual Report June 2019 29 D IRECTORS ’ RE PORT T H E B O A R D O F D I R E C T O R S 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 M.J. Craven TOTAL Ordinary Shares Performance Rights 369,778,107 18,610,447 997,750 562,908 1,014,186 3,149,892 194,107,477 9,499 16,605 15,925 190,500 408,000 259,000 259,000 233,000 - - - - - 588,262,796 1,349,500 Share Options At the date of this report, there was no unissued ordinary shares under options (2018: Nil). Performance Rights At the date of this report, there were 1,349,500 performance rights (2018: 1,200,000), 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. On 4 December 2018, a total of 549,500 performance rights under Tranche FY19 of the 2016 LTI Plan were granted to the executive directors following shareholder approval of the three new tranches to be granted during FY19, FY20 and FY21 at the 2018 AGM of the Company. On 1 January 2019, 160,000 performance rights representing 40% of Tranche 1 of the 2016 LTI Plan had lapsed and will never be exercisable by the participants. On 1 March 2019, 112,500 performance rights under Tranche 1 of the 2016 LTI Plan were exercised. On 8 March 2019, 45,000 performance rights under Tranche 1 of the 2016 LTI Plan were exercised. On 11 March 2019, 45,000 performance rights under Tranche 1 of the 2016 LTI Plan were exercised. On 21 March 2019, 37,500 performance rights under Tranche 1 of the 2016 LTI Plan were exercised reducing performance rights under Tranche 1 of the 2016 LTI Plan to nil. 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 2019, 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. Dividends The directors recommend a fully franked final dividend of 21.0 cents per share to be paid on 1 November 2019 (total dividend, fully franked - $247,744,684). 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 2018 final fully-franked dividend 2 November 2018 2019 interim fully-franked dividend 1 May 2019 $200,554,004 $141,568,391 The total dividend in respect of the year ended 30 June 2019 of 33.0 cents per share represents 96.77% (2018: 89.05%) of profit after tax and non-controlling interests, as set out on page 61 of the financial statements. Excluding the non-cash net property revaluation increments, the total dividend in respect of the year ended 30 June 2019 of 33.0 cents per share represents 110.26% (2018: 98.54%) of profit after tax and non- controlling interests, as set out on page 61 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. 30 D IRECTORS ’ RE PORT R E M U N E R AT I O N R E P O R T Letter from the Chairman of the Remuneration Committee Dear Shareholders The consolidated entity has delivered another solid result with the 2019 financial year achieving a profit before tax of $574.56 million, an increase of 8.4% on the 2018 financial year of $530.17 million. The reported net profit after tax and non-controlling interests for the 2019 financial year of $402.32 million was up 7.2% on the $375.38 million for the 2018 financial year. The consolidated entity delivered a strong increase of 8.8% in the net asset base for shareholders to $3.20 billion as at 30 June 2019. The profit before tax (PBT) return on net assets was 18% for the 2019 year compared to 18.05% for 2018. Each of the executive directors have a significant shareholding in the Company, each in excess of their respective total fixed remuneration, 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. Changes to Remuneration Changes to the Framework At the 2018 AGM held on 27 November 2018, the Company received a vote of 50.63% of eligible votes against the 2018 Remuneration report. The consolidated entity recognises the critical connection between conduct and reward. The assessment of conduct is informed by the fundamental principles of:      obey the law do not mislead or deceive act fairly provide goods and services that are fit for purpose delivery goods and services with reasonable care and skill The following changes were made to the remuneration framework for executive directors:  The evaluation of the performance of each executive director has been undertaken by means of an individual executive director assessment with satisfactory performance required to qualify for the short term incentive pool; Earnings per share adjusted for the after tax effect of property increments and decrements (AEPS) is the measure used for the achievement of the financial conditions for the short term incentive (STI), replacing return on net assets (RONA); STI’s will only be provided in the form of cash performance incentives if the executive director has a benchmark level of shares held in the Company equating to their individual level of fixed remuneration, otherwise the incentives will be provided as shares; and The STI pool can be increased if the financial performance conditions for the short term incentives are over-achieved to the maximum extent of 120%, otherwise the pool remained the same as the 2018 pool.    The quantum of the performance rights awarded in accordance with the 2016 LTI Plan as approved by shareholders at the 2018 AGM was determined as a proportion of the fixed remuneration of each executive director using the 10-day volume weighted average price (VWAP) of the Company following the announcement of the 2018 result of the Company, basing the award on market value. The Board continued to review 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 similar to that which was in place for the 2018 financial year in respect of the following:  Benchmarked fixed remuneration - Independent remuneration consultants i.e. Guerdon Associates, provided remuneration benchmark information for consideration and analysis in respect of the level of executive director remuneration, including fixed remuneration, and the long term incentives framework; At risk STI subject to a balanced scorecard of measures relevant to the given financial year; Entry at the base level of financial achievement in respect of the STI is required before the non-financial performance conditions became activated; At risk long term incentives (LTI) 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 for LTI capturing the effect of all impairments; and write-downs, apart from property revaluation increments and decrements.     The proportion of the “at-risk” STI remuneration opportunity for the Executive Directors, excluding the Chairman, increased from between 6% to 8% for the 2019 financial year. Changes to the 2019 STI Plan The Board adopted a STI Plan for Executive Directors relevant to the desired outcomes of the 2019 financial year. The STI Plan is subject to both financial conditions, calculated exclusively using Earnings per Share adjusted for the after tax effect of property increments and decrements (AEPS) as to a 50% weighting, and non-financial conditions as to 50% weighting. The 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 2019 STI Plan, the minimum financial performance conditions (entry-level to the 2019 STI Plan) was set at 28 cents AEPS, the 100% achievement level at 33 cents AEPS, with a maximum over-achievement level of 120% at 37 cents AEPS. The 100% achievement equated to an 8.26% increase on the equivalent 100% AEPS achievement level for the 2018 year of 30.48 cents. Achievement between the 50% and 100% targets and the 100% to the 120% targets is set on a straight line basis. HARVEY NORMAN HOLDINGS LIMITED Annual Report June 2019 31 D IRECTORS ’ RE PORT R E M U N E R AT I O N R E P O R T Letter from the Chairman of the Remuneration Committee (continued) In respect of the 2019 STI, each participating Executive Director was subject to an additional non-financial performance condition in the form of a Participant Performance Review which:  Measured the extent of the proper performance and discharge of the executive responsibilities and accountabilities of that Individual Participant Executive Director;  Measured the extent of the proper performance and discharge of the duties of that Individual Participant Executive Director, as an officer and director of the Company. Remuneration Outcomes The achievements of the 2019 financial year are reflected in the remuneration outcomes. 1) Executive Directors achieved 90.61% of their 2019 Short Term Incentive (STI) targets for performance against a balanced scorecard of measures, as compared to 81.26% for the 2018 financial year.     In respect of the financial performance conditions the AEPS of 31.69 cents represented an achievement of 86.90%. The non-financial performance conditions were achieved to the extent of 94.32% compared to 77.52% in the previous financial year. This resulted in the recognition of an aggregated STI expense of $2,537,080 for the 2019 financial year in respect of the 2019 STI Plan as compared to $2,275,280 for the 2018 financial year. The total 2019 STI achievement was $261,800, or 11.5%, higher than the 2018 STI achievement recognised in the 2018 financial year. 2) Return on Net Assets (RONA) of 17.32% for the year resulted in the following:    Tranche 2 of the 2016 LTI Plan, granted on 28 November 2016 being reassessed for vesting, remaining unchanged at 60%; Tranche 3 of the 2016 LTI Plan, granted on 1 December 2017 being reassessed for vesting, remaining unchanged at 40%; Tranche FY19 of the 2016 LTI Plan, granted on 4 December 2018 was assessed for probable vesting at 40%. 3) The total at risk compensation expense for the 2019 financial year was $499,721 or 13.3% less than the expense in the 2018 financial year due to the lower level of payment and assessed vesting under the LTI awards. 4) The total “take-home” pay for directors was $2,380,245 or 19.1% less than the 2018 financial year, due to the payout of long- term performance cash incentives relating to previous financial periods during FY2018. 5) Tranche 1 of the 2016 LTI Plan, granted on 30 November 2015 and subject to performance over the 2016, 2017 and 2018 financial years vested as to 60% with effect from 1 January 2019. All vested performance rights have been exercised. 6) The Executive Directors continued to be employed throughout the year. The Board is confident that the remuneration policies 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 Contents of the 2019 Remuneration Report This remuneration report for the year ended 30 June 2019 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. Introduction Executive contractual arrangements The remuneration report is presented under the following sections: 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 FY19 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. Other matters for disclosure 14. Loans to key management personnel and their related parties 15. Other transactions and balances with key management personnel and their related parties ‘Take-Home Pay’ for key management personnel Directors of the Company 32 D IRECTORS ’ RE PORT R E M U N E R AT I O N R E P O R T (A U D I T E D) 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. Income S atemStatement of Significant Accounting Details of KMP of the Company and consolidated entity during the 2019 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 Executive Directors Gerald Harvey Kay Lesley Page Executive Chairman Executive Director & Chief Executive Officer John Evyn Slack-Smith Executive Director & Chief Operating Officer David Matthew Ackery Executive Director Term as KMP Full financial year Full financial year Full financial year 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) Full financial year Full financial year Full financial year Full financial year Maurice John Craven Non-Executive Director (Independent) Appointed 27 March 2019 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 Frank Robinson Lachlan Roach Ajay Calpakam General Manager – Technology & Entertainment Full financial year General Manager – Home Appliances General Manager – Audio Visual Full financial year Full financial year 2. Remuneration Principles and Strategy The executive remuneration strategy of the consolidated entity in 2019 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. d) 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. e) 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. HARVEY NORMAN HOLDINGS LIMITED Annual Report June 2019 33 D IRECTORS ’ RE PORT R E M U N E R AT I O N R E P O R T ( A U D I T E D) 2. Remuneration Principles and Strategy (continued) 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 2019 aligns with the strategic direction and links remuneration outcomes to performance. Objective of the consolidated entity in 2019 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 2019 Align the interests of executives with shareholders The remuneration framework incorporates “at risk” components, through STI and LTI plans Short-term performance is assessed against a suite of financial and non-financial measures relevant to the success of the consolidated entity in 2019 and generating returns for shareholders 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 The remuneration offering is competitive for companies of a similar sector, size and complexity Component Vehicle Purpose Link to Performance Fixed Remuneration Short-Term Incentive (STI) 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 Paid as cash as performance cash incentive (PCI), subject to minimum shareholding of individual Executive Directors. Rewards executives for their contribution to achievement of consolidated entity outcomes (a) There is no STI award for an Executive Director unless the Executive Director satisfies the Participant Performance Review in terms of the Individual Executive Director Assessment Report. (b) There is no STI award unless the Entry Level financial condition is achieved. (c) The STI pool in respect of 100% achievement level is subject to performance criteria as to: (1) 50% subject to financial conditions, with the financial conditions based on Adjusted Earnings per Share (AEPS); (2) 50% subject to non-financial conditions. (d) Financial achievement calculated over the 100% achievement level is subject to financial conditions only. (e) Executive directors are to hold shares to the value equating to the level of fixed remuneration for that Executive Director at the end of the given financial year. (f) If shares held are less than the benchmark, benefits are to be provided in the form of shares. Where Adjusted Earnings per Share (AEPS) means the fraction Long-Term Incentive (LTI) Annual Net Profit After Tax (APAT) excluding the after-tax effect of property revaluation increments or decrements Number of Shares on issue at the beginning of the financial year 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 Vesting of LTI performance rights is conditional upon achievement, in aggregate, of Minimum RONA over the 2019, 2020 and 2021 financial years of 16% (for 20% vesting) with full vesting (i.e. 100%) achieved at 20% RONA 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”). 34 D IRECTORS ’ RE PORT R E M U N E R AT I O N R E P O R T (A U D I T E D) 3. Remuneration Governance (continued) 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. Independent remuneration consultants, Guerdon Associates, provided remuneration benchmark information for consideration and analysis in respect of the level of executive director remuneration, including fixed remuneration, and the long-term incentives framework during the 2019 financial year. Income S atemStatement of Significant Accounting 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. 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 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 2019 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 2019 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 57% 26% 78% 17% 22% Other Executive Directors 49%-51% 34%-36% 15% 5. Details of Short-Term and Long-Term Incentive Plans The extent to which the financial condition and non-financial conditions are satisfied is 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. 2019 STI Plan The consolidated entity operates an annual STI program available to executive directors and awards a performance cash incentive (PCI), or equity, subject to the achievement of clearly defined measures, targets, initiatives and conditions. HARVEY NORMAN HOLDINGS LIMITED Annual Report June 2019 35 D IRECTORS ’ RE PORT R E M U N E R AT I O N R E P O R T ( A U D I T E D) 5. Details of Short-Term and Long-Term Incentive Plans (continued) 2019 STI Plan Who participates? How is the STI delivered? When is the STI paid? What is the 2019 STI opportunity? What are the STI performance conditions for FY2019? Executive directors STI awards, in the form of a cash bonus or performance cash incentive (PCI) or equity (subject to the below criteria), have been made 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. Executive directors are to hold shares in the Company to the value equating to the level of fixed remuneration for that Executive Director at the end of the given financial year (the Benchmark Shareholding Level), with any STI paid in equity or cash subject to the following: (a) (b) If the Executive Director is under the Benchmark Shareholding Level, the STI reward will be paid in equity, subject to shareholder approval and compliance with the ASX Listing Rules, to the value that increases the holding of the Executive Director to the Benchmark Shareholding Level, with any remaining balance of the STI reward paid in cash. If the Executive Director is over the Benchmark Shareholding Level, the STI reward will be paid in cash. The payment of the 2019 STI Plan PCI to an executive under the 2019 STI Plan is to be made on 27 September 2019, or as soon as reasonably practicable after that date, subject to the satisfaction of 2019 STI Plan Performance Conditions and 2019 STI Plan Service Conditions. Executive directors, excluding the Executive Chairman, have a target STI opportunity of between 46% to 76% 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 2019, the 100% STI Opportunity Pool of the 2019 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. The maximum pool for allocation at 120% Over-Achievement Level was $3,360,000 in aggregate. Actual STI payments awarded to each executive depend on the extent to which specific measures, targets, initiatives and conditions for the 2019 financial year (“STI Targets”) were met. STI Targets cover financial and non-financial measures of performance. There is no STI award for an Executive Director unless the Executive Director satisfies the Participant Performance Review in terms of the Individual Executive Director Assessment Report. There is no STI award unless the Entry Level financial condition is achieved. The primary weighting of the 2019 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 The Non-Financial Conditions are assessed in respect of the year ended 30 June 2019 and include the following non-financial measures in:  Customer experience (10%);  Improve productivity (10%);  Company-operated store expansion strategy (20%); and  Franchisee learning, development and growth (10%). AEPS [Aggregate APAT  Number of Shares] as defined in Section 2 above was selected as the STI performance measure as it:  indicates the level of after tax profit generated on a per share basis; and  provides a basis for comparing growth in profitability year-on-year The Financial Condition is calculated in respect of the year ended 30 June 2019 and will be achieved at the following levels:  Entry Level at 28 cents AEPS, equating to 50% entitlement to the STI pool (50% opportunity pool = $1.40 million); 100% Level at 33 cents AEPS, equating to 100% entitlement to the STI pool (100% opportunity pool; = $2.80 million);   Straight-line sliding scale between Entry  Level and 100% Level; 120% Over-Achievement Level at 37 cents AEPS, equating to 120% entitlement to the STI pool (120% opportunity pool = $3.36 million);  Straight-line sliding scale for achievement between 100% and 120% Level. How is performance assessed? In respect of the 2019 STI, each participating Executive Director will be subject to an additional non- financial performance condition in the form of a Participant Performance Review which would:  Measure the extent of the proper performance and discharge of the executive responsibilities and accountabilities of that Individual Participant Executive Director;  Measure the extent of the proper performance and discharge of the duties of that Individual Participant Executive Director, as an officer and director of the Company. To determine whether an individual is eligible for the 2019 STI, the following process is undertaken: 36 D IRECTORS ’ RE PORT R E M U N E R AT I O N R E P O R T (A U D I T E D) 5. Details of Short-Term and Long-Term Incentive Plans (continued) How is performance assessed? (continued) Income S atemStatement of Significant Accounting  A Report by the CEO in respect to which each Individual Participant Executive Director has satisfied the Participant Performance Review in the form of an Individual Executive Director Assessment Report. In respect of the assessment of the CEO, the Chairman of the Remuneration Committee shall undertake the report and assessment in respect of the CEO.  An objective appraisal by the Internal Auditor of the process and conclusions reached in the Individual Executive Director Assessment Reports, to be provided to the Remuneration Committee promptly after 30 June 2019. In the event of a satisfactory Participant Performance Review, and 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 conditions and non-financial conditions are 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 2019 STI Plan. The Remuneration Committee (acting on behalf of the Company) may at any time, in its absolute discretion, decrease the amount of the STI which is, or may become, payable to an executive under the 2019 STI Plan by serving a written notice to the relevant executive at any time before the payment date. Details of the 2019 STI Targets and levels of achievement in the 2019 financial year are set out in pages 39 to 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. Tranche FY19 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. Shareholders at the AGM held on 27 November 2018, permitted the grant of a further three separate tranches of performance rights to executive directors in the 2019, 2020 and 2021 financial years, subject to the terms and conditions of the 2016 LTI Plan. Executive G. Harvey K.L Page J.E. Slack-Smith D.M. Ackery C. Mentis Tranche FY19 Exercisable between 1 January 2022 and 30 June 2024 Tranche FY20 Exercisable between 1 January 2023 and 30 June 2025 Tranche FY21 Exercisable between 1 January 2024 and 30 June 2026 65,500 183,000 109,000 109,000 83,000 549,500 65,500 183,000 109,000 109,000 83,000 549,500 65,500 183,000 109,000 109,000 83,000 549,500 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 29% to 30% of fixed remuneration. A total of 549,500 performance rights under Tranche FY19 of the 2016 LTI Plan were granted to executive directors on 4 December 2018. The performance rights were independently valued by Mercer Consulting (Australia) Pty Limited at grant date with a fair value of $2.59 per entitlement share granted under Tranche FY19 on 4 December 2018, based on a share price of $3.21. 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 FY19 performance rights amounted to $1,423,205 in aggregate. Tranche FY19 Grant date Vesting date First exercise date Last exercise date Key Dates 4 December 2018 31 December 2021 1 January 2022 30 June 2024 HARVEY NORMAN HOLDINGS LIMITED Annual Report June 2019 37 D IRECTORS ’ RE PORT R E M U N E R AT I O N R E P O R T ( A U D I T E D) 5. Details of Short-Term and Long-Term Incentive Plans (continued) What are the performance conditions for Tranche FY19 of the 2016 LTI Plan? Performance conditions are deemed to be an essential component of all variable reward entitlements. 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 (vi) With the exception of the service condition, the Board has resolved that the conditions in respect of the achievement of Tranche FY19 of the 2016 LTI Plan will be all financial, based exclusively on RONA, where Tranche FY19 RONA means the fraction: Tranche FY19 Aggregate APBT  Tranche FY19 Aggregate Net Assets, expressed as a percentage. Where: Tranche FY19 Financial Years means the financial years ending 30 June 2019, 2020 and 2021; Tranche FY19 Aggregate APBT means the aggregate amounts of the annual net profit before income tax of the consolidated entity for each of the Tranche FY19 Financial Years, but excluding amounts accounted for in the financial statements of the consolidated entity for increments or decrements arising from the revaluation of land or buildings in the Tranche FY19 Financial Years; Tranche FY19 Aggregate Net Assets means the amounts of the net assets of the consolidated entity, excluding non-controlling interests, as at each of 30 June 2018, 2019 and 2020 as described in the annual report of the consolidated entity in respect of each of the Tranche FY19 Financial Years. Full vesting of the Tranche FY19 performance rights is conditional upon achievement, of Tranche FY19 RONA of at least 20%, with a lesser vesting as set out in the table below: Tranche FY19 RONA Achieved Less than 16% 16% 17% 18% 19% 20% Tranche FY19 % of Performance Rights that will become exercisable Nil 20% 40% 60% 80% 100% What are the service conditions of Tranche FY19 of the 2016 LTI Plan? The service condition in respect of Performance Rights of a Participant under each Tranche will be deemed to be satisfied if at the time of exercise of the Performance Rights: How will the 2016 LTI Plan be administered? (a) (b) (c) the Participant 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 Participant 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 Participant 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 FY19 of the 2016 LTI Plan measured over the period for financial years ending 30 June 2019, 30 June 2020 and 30 June 2021. When does the LTI vest? Performance rights granted under Tranche FY19 of the 2016 LTI Plan will vest on 31 December 2021, subject to meeting the financial performance conditions in the 2019, 2020 and 2021 financial years and service conditions, and will be capable of exercise between 1 January 2022 and 30 June 2024. How are potential LTI awards treated on termination? In general, where a participant resigns or is terminated for cause before a performance right vests, all How are potential LTI awards treated if a change of control occurs? 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. 38 D IRECTORS ’ RE PORT R E M U N E R AT I O N R E P O R T (A U D I T E D) 6. Performance and Executive Remuneration Outcomes in FY19 6A. Actual Remuneration Earned by Key Management Personnel (KMP) in FY19 Income S atemStatement of Significant Accounting The compensation expensed in respect of KMP in FY19 is set out in Table 1 (for Directors) and Table 2 (for Senior Executives) on pages 47 and 48 of this report. This provides shareholders with a view of the remuneration earned by KMP for performance in the 2019 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 2019, or as soon as practicable after that date, is set out in Section 12 of the Remuneration Report on page 52. 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 47 of this report. 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 100% opportunity pool of the 2019 STI Plan potentially payable was $2,800,000, the same size pool as the 2018 STI. The maximum pool for allocation at 120% over-achievement level was $3,360,000 in aggregate. 50% of the STI is dependent on the satisfaction of financial performance conditions (exclusively based on AEPS) and 50% is measured against the achievement of set non-financial measures. Actual performance against those measures is as follows for the 2019 financial year: (a) 86.90% achievement of the 50% Financial Condition (score of 43.45%) = $1,216,600 payable for FY19 (b) 94.32% achievement of the 50% Non-Financial Conditions (score of 47.16%) = $1,320,480 payable for FY19 The total 2019 STI Plan payable in respect of the 2019 financial year is $2,537,080, compared to $2,275,280 for the 2018 financial year. This represented a total achievement of 90.61% of the 2019 STI as shown in the tables below. The payment of the 2019 STI Plan is to be made on or before 27 September 2019, or as soon as reasonably practicable after that date, subject to the satisfaction of the 2019 STI Plan Service Conditions. Financial Conditions of the 2019 STI Plan Achievement of 50% Financial Condition Calculation of FY19 AEPS FY19 APAT (profit after tax excl property revaluation) FY 18 HVN Shares on Issue $353.09 million 1,114,188,911 HVN Shares AEPS = 31.69 cents Gerald Harvey Kay Lesley Page John Evyn Slack-Smith David Matthew Ackery Chris Mentis Total 100% Level 2019 STI PCI % Financial Conditions 2019 STI PCI Financial Condition 2019 AEPS % Financial Condition Satisfied 2019 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 31.69 cents 86.9% (43.45% score) $347,600 $350,000 31.69 cents 86.9% (43.45% score) $304,150 $350,000 31.69 cents 86.9% (43.45% score) $304,150 $300,000 31.69 cents 86.9% (43.45% score) $260,700 $2,800,000 $1,400,000 $1,216,600 For the 2019 financial year $1,400,000, being 50% of the aggregate 100% level opportunity pool of the 2019 STI Plan PCI of $2,800,000, was subject to the AEPS financial condition. The Entry Level point for the financial condition was at 28 cents AEPS with the 100% achievement level at 33 cents AEPS. Achievement points are set on a straight-line, sliding scale basis between the Entry Level of 28 cents AEPS to the 100% Level of 33 cents AEPS. AEPS for the 2019 financial year was 31.69 cents resulting in an achievement level of 86.9% of the financial condition on a straight-line sliding scale basis. This translated to an achievement score of 43.45% in respect of the 2019 STI. Non-Financial Conditions of the 2019 STI Plan Achievement of 50% Non-Financial Conditions For the 2019 financial year $1,400,000, being 50% of the aggregate 100% opportunity pool of the 2019 STI Plan PCI of $2,800,000, was subject to set non-financial performance measures as to:  Customer experience (10%);  Improve productivity (10%);  Company-operated store expansion strategy (20%); and  Franchisee learning, development and growth (10%). HARVEY NORMAN HOLDINGS LIMITED Annual Report June 2019 39 D IRECTORS ’ RE PORT R E M U N E R AT I O N R E P O R T ( A U D I T E D) 6C. Actual Performance Against Short Term Incentive (STI) Measures (continued) 100% Level 2019 STI PCI % Non-Financial Conditions 2019 STI PCI Non- Financial Conditions % Non-Financial Conditions Satisfied 2019 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 94.32% (47.16% score) $377,280 $350,000 94.32% (47.16% score) $330,120 $350,000 94.32% (47.16% score) $330,120 $300,000 94.32% (47.16% score) $282,960 $1,400,000 $1,320,480 The Remuneration Committee had regard to certificates and reports from officers of the Company, other Board committees and management, including the Individual Director Assessment Reports and Internal Audit Reports, and noted that 94.32% of the non- financial performance hurdles for the 2019 STI Plan were achieved. This resulted in an amount of $1,320,480 in respect of the non- financial performance measures becoming payable to executive directors. Achievement of the Non-Financial Performance Conditions for the 2019 STI Plan are set out in the following table. Assessment of Non-Financial Conditions of the 2019 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 10.0% Improve Productivity 10.0% Implement process improvements and systems to enhance the Online-to-Offline (020) Strategy of the consolidated entity Initiatives and Conditions (1) 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%). (2) Each franchisee in Australia to achieve a reduction in the number of total consumer complaints of 4% in FY19 over the prior year on a like- for-like basis. (3) Company-operated stores in New Zealand to achieve an aggregate independent rating from the planned and budgeted customer experience surveys during FY19 of at least 50% (expected achievement of 75%). (4) Company-operated stores in New Zealand to achieve a net reduction in total complaints of 3% in FY19 over the prior year on a like- for-like basis. Franchisees are to be provided with licences and training to use tools to improve the profitability of their franchised business. (1) Tools to expand business scope in respect of ‘Drop Ship’ capability. (2) Tools to redesign marketplace websites. (3) Upgrade of e-commerce platforms. (4) Selected franchisees in metropolitan locations to implement customer service and process improvement initiatives as part of the ‘Last Mile’. Weighting of Initiatives & Conditions Achievement Score 40% 96.25% 3.85% 40% 100% 4.0% 10% 81% 0.81% 10% 100% 1.0% 25% 25% 25% 25% 100% 0% 100% 100% 2.5% 0% 2.5% 2.5% 40 D IRECTORS ’ RE PORT R E M U N E R AT I O N R E P O R T (A U D I T E D) 6C. Actual Performance Against Short Term Incentive (STI) Measures (continued) Assessment of Non-Financial Conditions of the 2019 STI Plan (continued) Measure Target Income Company-Operated S Store Expansion atemStatement of Significant Accounting Strategy Company-operated store expansion strategy to be developed and executed in Malaysia, Croatia and Ireland. Primary Weighting 20.0% Franchisee learning, development and growth Ongoing refinement of the 10.0% process by each franchisee that promotes and encourages measureable improvement in the knowledge and capability of the franchisee and their employees. Initiatives and Conditions (1) Malaysia: Two new stores to be opened during FY19. (2) Croatia: Progress with the identification, planning, approval and future land purchases of potential sites. (3) Ireland: Progress with two new stores at Galway and Sligo to the completion of the planning and approval stage. (1) Franchisees to identify and nominate a minimum number of 50 candidates to attend the “Franchisees in Training (FIT)” development course during FY2019. (2) Achieve a participation rate of female FITs in the FIT course of no less than 30% for the courses run during FY2019. (3) Achieve a successful completion rate of 75% by participants in the FIT course during FY2019. Weighting of Initiatives & Conditions 33.33% 33.33% Achievement Score 100% 100% 6.67% 6.67% 33.33% 100% 6.67% 30% 100% 3.0% 30% 100% 3.0% 40% 100% 4.0% Total 50.0% 47.16% Service Conditions of the 2019 STI Plan The 2019 STI Plan Service Conditions will be deemed to be satisfied, if and only if, as at the relevant payment date being 27 September 2019:  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.   Shareholding Benchmark of the 2019 STI Plan Executive directors are to hold shares in the Company to the value equating to the level of fixed remuneration for that executive director at the end of the financial year (the Benchmark Shareholding Level). If shares held by the executive director are less than the Benchmark Shareholding Level, the STI benefit are to be provided in the form of shares, subject to shareholder approval and compliance with ASX Listing Rules, to the value that increases the holding of the executive director to the Benchmark Shareholding Level. Each of the executive directors that participated in the 2019 STI Plan held shares in the Company of a value that was in excess of the Benchmark Shareholding Level. The STI benefit under the 2019 STI Plan is to be paid in cash. 6D. Actual Performance Against Long-Term Incentive (LTI) Measures for Tranche FY19 of the 2016 LTI Plan With the exception of the service condition, the Board has resolved that the conditions in respect of Tranche FY19 of the 2016 LTI Plan will be all financial, based exclusively on RONA, where Tranche FY19 RONA means the fraction Tranche FY19 Aggregate APBT  Tranche FY19 Aggregate Net Assets, expressed as a percentage. Tranche FY19 of the 2016 LTI Plan will be measured over a three- year period for financial years ending 30 June 2019, 30 June 2020 and 30 June 2021. The financial condition of Tranche FY19 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 37 and 38. Tranche FY19 will not vest if the RONA is less than 16% on a cumulative basis over the three-year measurement period. A total of 549,500 performance rights were granted to executive directors on 4 December 2018. The performance rights were independently valued by Mercer Consulting (Australia) Pty Limited at a fair value of $2.59 per entitlement share, based on a share price of $3.21 as at grant date, resulting in a total fair value of Tranche FY19 of $1,423,205. The Remuneration Committee had regard to certificates and reports from officers of the Company, other Board committees and management and Internal Audit Reports, and has estimated, based on the available evidence, that the financial performance condition for Tranche FY19 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 FY19 RONA for the 2019 financial year of 17.32%. A 17.32% RONA for FY19 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 FY19 fair value of $569,282 over the vesting period. An amount of $105,887 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 2019. HARVEY NORMAN HOLDINGS LIMITED Annual Report June 2019 41 D IRECTORS ’ RE PORT R E M U N E R AT I O N R E P O R T ( A U D I T E D) 6D. Actual Performance Against Long-Term Incentive (LTI) Measures for Tranche FY19 of the 2016 LTI Plan (continued) Achievement of 100% Financial Condition for Tranche FY19 of 2016 LTI Plan Calculation of FY19 RONA FY 19 APBT (net profit excluding property revaluation) FY 18 Net Assets (excluding non-controlling interests) $504.26 million $2,911.01 million = 17.32% RONA Number of Performance Rights Fair Value per Right Fair Value of Performance Rights Probability of Vesting % Estimated Value of Tranche FY19 2016 LTI Plan to Vest Tranche FY19 LTI Plan Expense in FY2019 Gerald Harvey Kay Lesley Page John Evyn Slack-Smith David Matthew Ackery Chris Mentis Total 65,500 183,000 109,000 109,000 83,000 549,500 $2.59 $2.59 $2.59 $2.59 $2.59 $169,645 $473,970 $282,310 $282,310 $214,970 40% 40% 40% 40% 40% $67,858 $189,588 $112,924 $112,924 $85,988 $12,622 $35,263 $21,004 $21,004 $15,994 $1,423,205 $569,282 $105,887 Subject to the satisfaction of the financial performance condition and service conditions of the 2016 LTI Plan, Tranche FY19 will vest on 31 December 2021. 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 2024 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 3 of the 2016 LTI Plan Performance Conditions and Expense Recognised in FY19 In 2018, a total of 400,000 performance rights were granted to executive directors on 1 December 2017 under Tranche 3 of the 2016 LTI Plan. 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. 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. In the 2018 Remuneration Report, it was reported that the estimated achievement of Tranche 3 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 3 performance rights will meet the performance condition. The probability of 40% vesting had been estimated based on the calculation of Tranche 3 RONA for the 2018 financial year of 17.15%. The financial performance condition of Tranche 3 is subject to reassessment during each of the Tranche 3 Financial Years meaning the financial years ending 30 June 2018, 2019 and 2020. A reassessment of the Tranche 3 Aggregate APBT and Tranche 3 Aggregate Net Assets for the 2018 and 2019 financial years has resulted in a revised RONA for the two-year aggregated period of 17.24%. A revised aggregated RONA of 17.24% for the Tranche 3 Financial Years results in a probability of vesting of 40%. This revised probability of vesting is consistent with the FY 2018 estimated vesting probability of 40%. The cumulative expense in respect of Tranche 3 is $534,400 consistent with the previous cumulative Tranche 3 expense reported in the 2018 Remuneration Report. Reassessment of 100% Financial Condition for Tranche 3 of 2016 LTI Plan Calculation of Aggregated RONA for Tranche 3 Financial Years (2018 and 2019) Tranche 3 Aggregated APBT (2018 + 2019) Tranche 3 Aggregated Net Assets (2017 + 2018) $982.78 million $5,701.47 million = 17.24% RONA Probability Vesting % in FY18 Tranche 3 Fair Value in FY18 Revised Probability Vesting in FY19 Revised Tranche 3 Fair Value in FY19 Adjustment due to Reassessment Tranche 3 LTI Plan Expense in FY2019 Gerald Harvey Kay Lesley Page John Evyn Slack-Smith David Matthew Ackery Chris Mentis Total 42 40% 40% 40% 40% 40% $83,500 $150,300 $100,200 $100,200 $100,200 $534,400 40% 40% 40% 40% 40% $83,500 $150,300 $100,200 $100,200 $100,200 $534,400 - - - - - - $27,043 $48,677 $32,452 $32,452 $32,452 $173,076 D IRECTORS ’ RE PORT R E M U N E R AT I O N R E P O R T (A U D I T E D) 6F. Reassessment of Tranche 2 of the 2016 LTI Plan Performance Conditions and Expense Recognised in FY19 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 was measured over a three-year period for financial years ending 30 June 2017, 30 June 2018 and 30 June 2019. Income S atemStatement of Significant Accounting In the 2018 Remuneration Report, it was reported that the estimated achievement of Tranche 2 of the 2016 LTI Plan would have been 60% by the end of the vesting period and that 60% of the estimated fair value of the performance rights would meet the performance condition. The probability of 60% vesting had been estimated based on the calculation of Tranche 2 RONA for the 2017 and 2018 financial years of 18.51%. During 2018, the probability of vesting was revised downwards from the previous level of 80% vesting in the 2017 Remuneration Report. The financial performance condition of Tranche 2 was 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, 2018 and 2019 financial years has resulted in a revised RONA for the three-year aggregated period of 18.10%. A revised aggregated RONA of 18.10% for the Tranche 2 Financial Years has resulted in a 60% achievement of the Tranche 2 performance rights. The actual Tranche 2 achievement of 60% is consistent with the FY 2018 estimated vesting probability of 60%. The cumulative expense in respect of Tranche 2 is $928,800 consistent with the previous cumulative Tranche 2 expense reported in the 2018 Remuneration Report. 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 + 2019) Tranche 2 Aggregated Net Assets (2016 + 2017 + 2018) $1,514.54 million $8,367.76 million = 18.10% RONA Probability Vesting % in FY18 Tranche 2 Fair Value in FY18 Revised Probability Vesting in FY19 Revised Tranche 2 Fair Value in FY19 Adjustment due to Reassessment Tranche 2 LTI Plan Expense in FY2019 Gerald Harvey Kay Lesley Page John Evyn Slack-Smith David Matthew Ackery Chris Mentis Total 60% 60% 60% 60% 60% $145,125 $261,225 $174,150 $174,150 $174,150 $928,800 60% 60% 60% 60% 60% $145,125 $261,225 $174,150 $174,150 $174,150 $928,800 - - - - - - $46,918 $84,453 $56,302 $56,302 $56,302 $300,277 6G. Reassessment of Tranche 1 of the 2016 LTI Plan Performance Conditions and Expense Recognised in FY19 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 was measured over a three-year period for financial years ending 30 June 2016, 30 June 2017 and 30 June 2018. In the 2018 Remuneration Report, it was reported that the achievement of Tranche 1 of the 2016 LTI Plan was 60% as at the end of the three-year measurement period ending 30 June 2018. This was based on the calculation of the Tranche 1 Aggregate APBT and Tranche 1 Aggregate Net Assets for the 2016, 2017 and 2018 financial years resulting in a three-year RONA of 18.21%. During the 2019 financial year, an expense of $137,804 was recognised in respect of Tranche 1 of the 2016 LTI Plan representing the remaining vesting period up to 31 December 2018. Of the 400,000 performance rights granted to executive directors during 2016, a total of 60%, or 240,000 performance rights vested on 31 December 2018 and were exercisable from 1 January 2019. The cumulative expense recognised in respect of Tranche 1 was $844,800. Achievement of the 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 Actual Achievement in FY18 Actual Tranche 1 Fair Value Tranche 1 LTI Plan Expense in FY2019 Gerald Harvey Kay Lesley Page John Evyn Slack-Smith David Matthew Ackery Chris Mentis Total HARVEY NORMAN HOLDINGS LIMITED Annual Report June 2019 60% 60% 60% 60% 60% $132,000 $237,600 $158,400 $158,400 $158,400 $21,532 $38,758 $25,838 $25,838 $25,838 $844,800 $137,804 43 D IRECTORS ’ RE PORT R E M U N E R AT I O N R E P O R T ( A U D I T E D) 6H. Summary of Performance and Executive Remuneration Outcomes in FY19 Remuneration Component 2019 STI Plan Financial conditions (50%) Non-financial conditions (50%) Total 100% 2018 STI Plan Financial conditions (50%) Non-financial conditions (50%) Total 100% Total Short-Term Incentive PCI 100%-Level Achievement Amount $1,400,000 $1,400,000 $2,800,000 $1,400,000 $1,400,000 $2,800,000 Tranche FY19 (FY19) of 2016 LTI Plan Financial conditions (100%) $1,423,205 Non-financial conditions (0%) Total 100% - $1,423,205 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% Total LTI Performance Rights 2015 LTI Plan PCI Financial conditions (50%) Non-financial conditions (50%) Total 100% Total LTI Performance Cash Incentive Total Value of STI and LTI - $1,408,000 $1,850,000 $1,850,000 $3,700,000 Value of STI and LTI Disclosed in 2019 and 2018 Remuneration Reports Achievement Score Amount Payable Vesting Period 2019 Remuneration Amount 2018 Remuneration Amount 86.90% 94.32% 43.45% 47.16% 85.00% 77.52% 42.50% 38.76% 1 Year 1 Year $1,216,600 $1,320,480 $2,537,080 $1,190,000 $1,085,280 $2,275,280 $1,216,600 $1,320,480 $2,537,080 - - - - - - $1,190,000 $1,085,280 $2,275,280 $2,537,080 $2,275,280 40% - 40% - 60% - 60% - 40% - 40% - 60% - 60% - $569,282 4 Years $105,887 - (Yr 1 of 4) $569,282 - $105,887 - - - $534,400 4 Years $173,076 $100,526 - (Yr 2 of 4) - - $534,400 $173,076 $100,526 $928,800 4 Years $300,277 $241,318 - (Yr 3 of 4) - - $928,800 $300,277 $241,318 $844,800 4 Years $137,804 - (Yr 4 of 4) $844,800 - $137,804 $235,834 $273,362 - - $235,834 $273,362 $717,044 $615,206 100% 86.8% 50% 43.4% $1,850,000 $1,605,800 $3,455,800 - - - - - $462,184 $401,175 $863,359 $863,359 $3,254,124 $3,753,845 The total value of STI and LTI expensed in the Income Statement for the 2019 financial year and disclosed in this remuneration report was $3.25 million compared to $3.75 million expensed in the 2018 financial year, a decrease of $0.50 million or 13.3%, relative to the previous year. 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 $3,533,970 comprised of:   maximum STI opportunity in respect of the year ended 30 June 2019 of $960,000 (at 120% over-achievement level); and  maximum LTI opportunity in respect of the year ended 30 June 2019 of $473,970. 44 D IRECTORS ’ RE PORT R E M U N E R AT I O N R E P O R T (A U D I T E D) 7. Executive Contractual Arrangements (continued) The CEO’s termination provisions are as follows: CEO’s Termination Provisions Notice Period Income S atemStatement of Significant Accounting Employer-initiated termination 5 weeks Payment in Lieu of Notice Treatment of STI on Termination Treatment of LTI on Termination 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. There is a Benchmark Shareholding Level in respect of the 2019 STI Plan to determine whether the reward is to be paid as cash or in shares. 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 2019 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 2019 and 30 June 2018 are disclosed in Table 1 on page 47 of this report. HARVEY NORMAN HOLDINGS LIMITED Annual Report June 2019 45 D IRECTORS ’ RE PORT R E M U N E R AT I O N R E P O R T ( A U D I T E D) 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 EPS = earnings per share AT RISK REM = the sum of STI PCI & LTI 46 APBT = net profit before tax excluding property revaluation adjustments STI PCI = short-term performance cash incentive D IRECTORS ’ RE PORT R E M U N E R AT I O N R E P O R T (A U D I T E D) 10. Compensation of Key Management Personnel TABLE 1: Compensation of Key Management Personnel Expensed for the Year Ended 30 June 2019 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) 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 Kenneth William Gunderson-Briggs Non-Executive Director Graham Charles Paton Non-Executive Director Maurice John Craven Non-Executive Director 2019 2018 2019 2018 2019 2018 2019 2018 2019 2018 2019 2018 2019 2018 2019 2018 2019 2018 2019 2018 719,069 719,551 2,060,306 2,062,925 1,229,469 1,229,951 1,211,469 1,211,951 885,264 897,533 54,795 54,795 146,119 132,420 251,922 158,788 146,119 132,420 34,828 - - - 10,400 10,400 724,880 650,080 634,270 568,820 634,270 568,820 543,660 487,560 - - - - - - - - - - - - - - 18,000 18,000 - - - - - - - - - - - - - - 19,163 17,026 - - - - 44,205 32,418 - - - - - - - - - - 20,531 20,049 20,531 20,049 20,531 20,049 20,531 20,049 20,531 20,049 5,205 5,205 13,881 12,580 20,531 15,085 13,881 12,580 3,304 - Total for the 2019 Financial Year 2019 6,739,360 2,537,080 28,400 63,368 159,457 - 109,671 - 205,339 - 186,672 - 186,672 - 175,005 - - - - - - - - - - - 108,115 96,126 207,151 173,027 135,596 115,351 135,596 115,351 130,586 115,351 - - - - - - - - - - - - - - 20,491 20,499 20,491 20,499 14,754 14,959 - - - - - - - - - - Total Remuneration % earned at risk 12.6% 21.5% 858,115 955,797 3,032,031 30.7% 3,128,446 32.9% 2,040,357 37.7% 2,141,342 40.7% 2,040,357 37.7% 2,141,342 40.7% 1,639,000 1,742,875 41.1% 44.6% 60,000 60,000 160,000 145,000 272,453 173,873 160,000 145,000 38,132 - - - - - - - - - - - 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% (a) Table 1 includes the accrual for long service leave entitlements in respect of the years ended 30 June 2019 and 30 June 2018. 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 June 2019 47 717,044 55,736 10,300,445 31.6% D IRECTORS ’ RE PORT (c ontinu ed) D IRECTORS ’ RE PORT R E M U N E R AT I O N R E P O R T (A U D I T E D) 10. Compensation of Key Management Personnel (continued) TABLE 2: Compensation of Key Management Personnel Expensed for the Year Ended 30 June 2019 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 % earned 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 Frank Robinson (e) GM – Technology & Entertainment 2019 2018 2019 2018 2019 2018 2019 2018 2019 2018 2019 2018 2019 2018 2019 2018 574,322 574,804 299,777 295,936 494,469 464,951 - 28,496 403,017 362,083 - 33,252 403,017 293,677 484,517 444,583 Total for the 2019 Financial Year 2019 2,659,119 Total for the 2018 Financial Year 2018 2,497,782 - - - - - - - - - - - - - - - - - - - - - - - - - 1,821 9,000 8,250 - - 9,000 6,750 15,000 13,750 - - 28,057 25,034 - - - - - - - - - - - - 33,000 28,057 20,531 20,049 22,162 21,828 20,531 20,049 20,049 - 1,671 20,531 20,049 - 1,671 20,531 15,037 20,531 20,049 124,817 30,571 25,034 120,403 (a) (b) (c) (d) (e) (f) resigned 31 July 2017 commenced 1 August 2017 resigned 31 July 2017 commenced 1 October 2017 commenced 1 August 2017 this amount represents the cash payment of employee leave entitlements upon resignation HARVEY NORMAN HOLDINGS LIMITED Annual Report June 2019 - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - 40,680(f) - - - 103,385(f) - - - - - 9,572 9,580 4,996 4,932 8,241 7,749 - - 6,717 6,035 - - 6,717 4,895 8,075 7,410 604,425 604,433 354,992 347,730 523,241 492,749 - 72,668 439,265 396,417 - 138,308 439,265 320,359 528,123 485,792 44,318 2,889,311 144,065 40,601 2,858,456 - - - - - - - - - - - - - - - - - - 48 D IRECTORS ’ RE PORT R E M U N E R AT I O N R E P O R T (A U D I T E D) 11. Additional Disclosures Relating to Options, Performance Rights and Shares Options Granted to Executive Directors as Part of Remuneration: Income S atemStatement of Significant Accounting There were no options granted to any executive director during the year ended 30 June 2019. Movement in option holdings during the year ended 30 June 2018: 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 There were no share options issued pursuant to the 2010 Share Option Plan during the 2018 financial year. 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. Option Holdings of Key Management Personnel for the Year Ended 30 June 2019 There was no option held by any director or senior executive during the year ended 30 June 2019. TABLE 3: 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 2019 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 Performance Rights Lapsed During the Year Unvested Performance Rights at 30 June 2019 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 $ Number of Performance Rights Lapsed Value of Performance Rights Lapsed $ Number of Unvested Performance Rights Value of Unvested Performance Rights $ Number of Performance Rights Exercised Value of Performance Rights Exercised $ Gerald Harvey 65,500 $169,645 37,500 $132,000 25,000 $88,000 190,500 $620,270 37,500 $132,000 Kay Lesley Page 183,000 $473,970 67,500 $237,600 45,000 $158,400 408,000 $1,285,095 67,500 $237,600 John Evyn Slack-Smith 109,000 $282,310 45,000 $158,400 30,000 $105,600 259,000 $823,060 45,000 $158,400 David Matthew Ackery 109,000 $282,310 45,000 $158,400 Chris Mentis 83,000 $214,970 45,000 $158,400 30,000 3030 30,000 $105,600 259,000 $823,060 45,000 $158,400 $105,600 233,000 $755,720 45,000 $158,400 Total 549,500 $1,423,205 240,000 $844,800 160,000 $563,200 1,349,500 $4,307,205 240,000 $844,800 HARVEY NORMAN HOLDINGS LIMITED Annual Report June 2019 - 49 D IRECTORS ’ RE PORT (c ontinu ed) 11. Additional Disclosures Relating to Options, Performance Rights and Shares (continued) D IRECTORS ’ RE PORT R E M U N E R AT I O N R E P O R T (A U D I T E D) Movement in performance rights during the year ended 30 June 2019: a) A total of 549,500 performance rights under Tranche FY19 of the 2016 LTI Plan were granted to executive directors on 4 December 2018. The performance rights were independently valued by Mercer Consulting (Australia) Pty Limited at grant date with a fair value of $2.59 per entitlement on 4 December 2018, based on a share price of $3.21. 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 FY19 performance rights amounted to $1,423,205 in aggregate. b) On 1 January 2019, 160,000 performance rights representing 40% of Tranche 1 of the 2016 LTI Plan had lapsed and will never be exercisable by the participants. On 1 March 2019, 112,500 performance rights under Tranche 1 of the 2016 LTI Plan were exercised. On 8 March 2019, 45,000 performance rights under Tranche 1 of the 2016 LTI Plan were exercised. On 11 March 2019, 45,000 performance rights under Tranche 1 of the 2016 LTI Plan were exercised. On 21 March 2019, 37,500 performance rights under Tranche 1 of the 2016 LTI Plan were exercised reducing the unissued ordinary shares under Tranche 1 of the 2016 LTI Plan to nil. c) As at 30 June 2019, a total of 1,349,500 performance rights under Tranche 2 FY2017 (as to 400,000 performance rights), Tranche 3 FY2018 (as to 400,000 performance rights) and Tranche FY19 FY2019 (as to 549,500 performance rights) of the 2016 LTI Plan were outstanding, unvested and not capable of exercise. TABLE 4: Performance Rights of Key Management Personnel for the Year Ended 30 June 2019 1 July 2018 Balance at the Beginning of Year Granted as Remuneration Performance Rights Exercised Performance Rights Lapsed 30 June 2019 Balance at End of the Year Due for Vesting during the year ended 30 June 2019 Total Exercised Lapsed KMP: Board of Directors Gerald Harvey Kay Lesley Page John Evyn Slack-Smith David Matthew Ackery Chris Mentis Gerald Harvey Total 187,500 337,500 225,000 225,000 225,000 1,200,000 65,500 183,000 109,000 109,000 83,000 549,500 - (37,500) (67,500) (45,000) (45,000) (45,000) (25,000) (45,000) (30,000) (30,000) (30,000) 190,500 408,000 259,000 259,000 233,000 62,500 112,500 75,000 75,000 75,000 37,500 67,500 45,000 45,000 45,000 25,000 45,000 30,000 30,000 30,000 (240,000) (160,000) 1,349,500 400,000 240,000 160,000 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 2019. The closing balance of the performance rights in the Company of 1,349,500 as at 30 June 2019 is comprised of: a) 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; b) Balance at the beginning of 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; and c) Granted as remuneration during the year: 549,500 performance options under Tranche 1 FY2019; fair value at grant date of $2.59; to vest on 31 December 2021; exercisable between 1 January 2022 and 30 June 2024. HARVEY NORMAN HOLDINGS LIMITED Annual Report June 2019 50 D IRECTORS ’ RE PORT R E M U N E R AT I O N R E P O R T (A U D I T E D) 11. Additional Disclosures Relating to Options, Performance Rights and Shares (continued) TABLE 5: Shareholdings/Relevant Interests of Key Management Personnel for the Year Ended 30 June 2019 Income S atemStatement of Significant Accounting Balance at the Beginning of Year 1 July 2018 On Exercise of Performance Rights (a) 1-for-17 Renounceable Pro- Rata Entitlement Offer (b) Net Change Other (c) 30 June 2019 Balance at the End of Year KMP: Board of Directors Gerald Harvey Kay Lesley Page John Evyn Slack-Smith David Matthew Ackery Chris Mentis Gerald Harvey Michael John Harvey Kay Lesley Page Christopher Herbert Brown John Evyn Slack-Smith Kenneth William Gunderson-Briggs Graham Charles Paton Maurice John Craven KMP: Senior Executives Thomas James Scott Lachlan Roach Total 340,157,038 17,507,642 899,818 489,134 915,341 2,974,897 183,323,726 6,137 15,682 - 31,835 - 37,500 67,500 45,000 45,000 45,000 - - - - - - - 20,295,786 9,287,783 369,778,107 1,029,863 52,932 52,932 28,774 53,845 174,995 10,783,751 362 923 - - 1,873 - - - - - - - 3,000 - 15,925 - 5000 18,605,005 997,750 562,908 1,014,186 3,149,892 194,107,477 9,499 16,605 15,925 33,708 5000 546,321,250 240,000 32,423,104 9,311,708 588,296,062 (a) On 21 December 2018, the Company announced that 240,000 performance rights, representing 60% of the performance rights issued in accordance with Tranche 1 of the 2016 LTI Plan, will vest and become exercisable from 1 January 2019. With effect from 30 June 2018, 160,000 performance rights, representing 40% of Tranche 1 of the 2016 LTI Plan, had lapsed and will never be exercisable by the participants. On 1 March 2019, 112,500 performance rights under Tranche 1 of the 2016 LTI Plan were exercised. On 8 March 2019, 45,000 performance rights under Tranche 1 of the 2016 LTI Plan were exercised. On 11 March 2019, 45,000 performance rights under Tranche 1 of the 2016 LTI Plan were exercised. On 21 March 2019, 37,500 performance rights under Tranche 1 of the 2016 LTI Plan were exercised reducing the unissued ordinary shares under Tranche 1 of the 2016 LTI Plan to nil. (b) On 31 August 2018, the Company announced that it would be offering shareholders the opportunity to participate in a renounceable pro-rata entitlement offer of new fully-paid ordinary shares in the Company (New Shares) to raise approximately $163.85 million (before costs) (Entitlement Offer). The offer price was $2.50 per New Share (Offer Price) The Entitlement Offer was for 1 New Share for every 17 existing ordinary shares in the Company at the Record Date, being 12 September 2018. The Entitlement Offer forms part of the Company’s ongoing capital management program. On 22 October 2018, the Company announced that the Directors of the Company took up their full entitlement in respect of the Entitlement Offer and acquired 34,180,442 New Shares in HVN in accordance with the Change of Directors’ Interest Notice to the ASX on that date and the terms and conditions of the Entitlement Offer. On 5 November 2018, the Company announced the sale of 1,759,211 ‘top up shares’ in HVN as requested by the ASX. The net profit on the sale of the top up shares was donated to the Western Sydney University Scholarship Fund. (c) The ‘Net Change Other’ column discloses the number of shares acquired by each Director of the Company via an ‘on-market trade’ in accordance with the prevailing market conditions on the ASX at the time of the transaction. These trades were on no more favourable terms and conditions than those that would be reasonably expected of an arm’s length transaction. HARVEY NORMAN HOLDINGS LIMITED Annual Report June 2019 51 D IRECTORS ’ RE PORT R E M U N E R AT I O N R E P O R T (A U D I T E D) 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 2019, or as soon as practicable after that date. Total ‘take-home pay’ for the directors of the Company amounted to $10.11 million for the year ended 30 June 2019. The total value of remuneration expensed for directors of the Company in respect of the 2019 financial year was $10.30 million (refer to Table 1 on page 47 of this report). For the 2019 financial year, total ‘take-home pay’ was $0.19 million lower than the value of remuneration expensed to the income statement. KMP: Board of Directors Salary & Fees Other Short Term Non- Monetary Benefits Superan- annuation Short-Term Perform- ance Cash Incentive (a) Long-Term Perform- ance Cash Incentive (b) Exercise of Tranche 1 2016 LTI Plan (c) FY2019 Total Take- Home Pay FY2018 Total Take- Home Pay Gerald Harvey 719,069 10,400 - 20,531 - Kay Lesley Page 2,060,306 John Evyn Slack-Smith 1,229,469 - - David Matthew Ackery 1,211,469 18,000 Chris Mentis Gerald Harvey Michael John Harvey Kay Lesley Page Christopher Herbert Brown John Evyn Slack-Smith Kenneth William Gunderson-Briggs 885,264 54,795 146,119 251,922 Graham Charles Paton 146,119 Maurice John Craven 34,828 - - - - - - 19,163 20,531 650,080 - - 20,531 568,820 20,531 568,820 44,205 20,531 487,560 - - - - - 5,205 13,881 20,531 13,881 3,304 - - - - - 6,739,360 28,400 63,368 159,457 2,275,280 Total Take-Home Pay 2019 Total Take-Home Pay 2018 - - - - - - - - - - - 132,000 882,000 1,188,980 237,600 2,987,680 3,580,586 158,400 1,977,220 2,538,247 158,400 1,977,220 2,538,247 158,400 1,595,960 2,120,976 - - - - - 60,000 60,000 160,000 145,000 272,453 173,873 160,000 145,000 38,132 - 844,800 10,110,665 6,600,334 28,400 49,444 145,695 2,211,236 3,455,800 12,490,909 a) The short-term incentive of $2.28 million represented the payment of the 2018 STI Plan that was earned in respect of the 2018 financial year, and was paid to executive directors in October 2018. 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. c) The fair value of the performance rights exercised during the 2019 financial year of $3.52 resulted in an aggregate fair value of $844,800. 13. Other Matters for Disclosure Comments on the Remuneration Report at the most recent AGM of the Company The previous AGM of the Company was held on 27 November 2018. At that meeting: a) Comments were made in respect of:   The performance review process for the executive directors – the review process of executive directors is noted on pages 36 and 37 under Item 5 2019 STI Plan “How is performance assessed”; and The payment of the STI in cash and not equity - the payment of STI is noted on page 36 under Item 5 2019 STI Plan “How is the STI delivered”. b) When the resolution that the Remuneration Report be adopted, 50.63% of the eligible votes were cast against the resolution. The following changes have been made to the remuneration framework for executive directors:     The evaluation of the performance of each executive director has been undertaken by means of an individual executive director assessment with satisfactory performance required to qualify for the short term incentive pool; Earnings per share adjusted for the after tax effect of property increments and decrements (AEPS) is the measure used for the achievement of the financial conditions for the short term incentive (STI), replacing return on net assets (RONA); STI’s will only be provided in the form of cash performance incentives if the executive director has a benchmark level of shares held in the Company equating to their individual level of fixed remuneration, otherwise the incentives will be provided as shares; and The STI pool can be increased if the financial performance conditions for the short term incentives are over-achieved to the maximum extent of 120%, otherwise the pool remained the same as the 2018 pool. Engagement of Remuneration Consultant While the Remuneration Committee seeks external advice from advisors who are independent of the management of remuneration matters, the Committee did not require a remuneration recommendation as defined under Section 9B of the Corporation Act 2001 by an external advisor during the year ended 30 June 2019. Independent remuneration consultants i.e. Guerdon Associates, provided remuneration benchmark information for consideration and analysis in respect of the level of executive director remuneration, including fixed remuneration, and the long term incentives framework. 52 D IRECTORS ’ RE PORT R E M U N E R AT I O N R E P O R T (A U D I T E D) 14. Loans to Key Management Personnel and their Related Parties There were no loans granted to key management personnel during the year ended 30 June 2019 (2018: nil). There were no loans outstanding from key management personnel as at 30 June 2019 (2018: nil). Income S atemStatement of Significant Accounting 15. 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 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 2019 $000 June 2018 $000 - 39,566,536 (39,566,536) 371,695 (6,572,729) 897,393 5,134,607 4,692,124 2,638,587 3,469,948 310,761 762,655 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. The property was subject to a lease of part of the property in favour of a subsidiary of Harvey Norman Holdings Limited (the "P.C.W. Lessee"). Gerald Harvey is entitled to one-half of the rental and outgoings paid by the P.C.W. Lessee. The amount of rental and outgoings paid by the P.C.W. Lessee to Gerald Harvey and the subsidiary of Harvey Norman Holdings Limited for the year ended 30 June 2019 was $0.74 million (2018: $0.77 million). Each of the above transactions were executed under terms and conditions no more favourable than those which it is reasonable to expect would have applied if the transactions were at arm’s length. (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 Joint Venture”). 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. A subsidiary of Harvey Norman Holdings Limited held a conference at The Byron at Byron Resort and paid the Byron Bay Joint Venture conference fees amounting to $0.11 million for the year ended 30 June 2019 (2018: $0.12 million). Gerald Harvey is entitled to one-half of the conference fees paid to the Byron Bay Joint Venture. The above 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. HARVEY NORMAN HOLDINGS LIMITED Annual Report June 2019 53 D IRECTORS ’ RE PORT R E M U N E R AT I O N R E P O R T (A U D I T E D) D IRECTORS ’ RE PORT (c ont inu ed) 15. Other Transactions and Balances with Key Management Personnel and their Related Parties (continued) Subsequent to balance date on 9 August 2019, the consolidated entity announced that Harvey Norman Holdings Limited (the Company) and certain of its controlled entities, with certain entities controlled by Gerald Harvey, as owners of the property and business known as The Byron at Byron Bay Resort (Resort), have entered into agreements for sale of the Resort (Sale Contract) for the sale price of $41,764,000 (ex GST), subject to terms and conditions for completion. The purchasers under the Sale Contract are GAG Byron on Byron Property Co Pty Ltd ACN 635 158 351 and GAG Byron on Byron Business Company Pty Ltd ACN 635 172 333. Subject to the terms and conditions of the Sale Contract, completion of the Sale Contract will occur on the later of 16 September 2019 and the second Monday following the grant of the liquor licence approval by the relevant authority. If the terms and conditions for completion of the Sale Contract are not satisfied, in certain circumstances, the purchasers have the right to terminate or rescind the Sale Contract. (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, the 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 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, the 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 tenants 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. 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 rental and outgoings paid by the G.C. Lessee. The Michael Harvey Entity is entitled to one-eighth of the rental and outgoings paid by the G.C. Lessee. The amount of rental and outgoings paid by the G.C. Lessee to the Gepps Cross Joint Venture for the year ended 30 June 2019 was $3.33 million (2018: $3.23 million). Each of the above transactions were executed under terms and conditions no more favourable than those which it is reasonable to expect would have applied if the transactions were at arm’s length. Other Information Significant Events After Balance Date On 9 August 2019, the consolidated entity announced that Harvey Norman Holdings Limited (the Company) and certain of its controlled entities, with certain entities controlled by Gerald Harvey, as owners of the property and business known as The Byron at Byron Bay Resort (Resort), have entered into agreements for sale of the Resort (Sale Contract) for the sale price of $41,764,000 (ex GST), subject to terms and conditions for completion. The purchasers under the Sale Contract are GAG Byron on Byron Property Co Pty Ltd ACN 635 158 351 and GAG Byron on Byron Business Company Pty Ltd ACN 635 172 333. Subject to the terms and conditions of the Sale Contract, completion of the Sale Contract will occur on the later of 16 September 2019 and the second Monday following the grant of the liquor licence approval by the relevant authority. If the terms and conditions for completion of the Sale Contract are not satisfied, in certain circumstances, the purchasers have the right to terminate or rescind the Sale Contract. On 30 August 2019, the Company announced a renounceable, pro-rata entitlement offer of new fully-paid ordinary shares in the Company to raise approximately $173.49 million (before costs) (Entitlement Offer) with an offer price of $2.50 per new 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. 54 D IRECTORS ’ RE PORT O T H E R I N F O R M AT I O N 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. In New Zealand, from 1 July 2019 all plastic bags supplied to customers comply with the new legislated requirement of a minimum of 70 microns thickness. 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 2019 and up to the date of this report. Harvey Norman®, Domayne® and Joyce Mayne® Complexes 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 Solar installations have been completed at 15 franchised complexes, with a further 18 installations approved and awaiting commencement. The next round of installations will see a number of franchised complexes in Queensland and South Australia have solar systems installed, building on the New South Wales-centric installations to date. Using FY2016 electricity consumption as a baseline, the electricity consumption for the first 15 franchised complexes has dropped 28% as a result of the solar and other energy efficiency initiatives commenced at these complexes. Total Energy Consumption Over the past 3 Environmental and Social Sustainability reports, the consolidated entity has reported a number of initiatives that have been undertaken. These have included:     Air-conditioning upgrades; Lighting upgrades; LED lighting trials; and Solar energy installations. Using FY2016 as the baseline year of measurement, the consolidated entity and the franchised complexes have reduced energy consumption in Australia by 7%. The value of this reduction is equivalent to:  More than 8,000 tonnes of C02e avoided;  More than 1,300 cars taken off the road annually. HARVEY NORMAN HOLDINGS LIMITED Annual Report June 2019 55 D IRECTORS ’ RE PORT O T H E R I N F O R M AT I O N Environmental Regulation Performance (continued) Waste Reduction 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. Each Harvey Norman®, Domayne® and Joyce Mayne® franchisee has improved waste management performance and offering to customers during the 2019 financial year as follows: Waste Stream e-Waste Mattresses Polystyrene Cardboard and Plastic Recycling as a percentage of franchised complex waste (excluding the above initiatives) Plastic Bag Usage by Customers Social Sustainability Percentage Improvement During 2019 Financial Year Description 11.7% aggregate overall increase on FY2018 volumes 12,743 mattresses in aggregate recycled via the Soft Landings Product Stewardship and Social Enterprise Scheme, an aggregated 7.5% increase on the previous financial year. Some franchisees may have used alternate service providers, particularly in Melbourne. An aggregate 1.7% decrease in polystyrene recycling (measured in tonnes) in FY2019. Harvey Norman®, Domayne® and Joyce Mayne® franchised complexes recycled 7,450 tonnes, in aggregate, of cardboard and paper (9.17% aggregate increase on FY2018) and 33.11 tonnes of plastic (LDPE), in aggregate, in FY2019 (30% aggregate reduction on FY2018). Average landfill diversion: - - 40% (measured by weight) 48% (measured by volume) Net distribution of plastic bags increased by 23% in aggregate in FY2019. Use of reusable smart bags increased by 14.7% in aggregate. 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. From February 2018, all plastic bags supplied to Harvey Norman®, Domayne® and Joyce Mayne® franchisees were a minimum of 40 microns. 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. In 2019, Harvey Norman maintained sponsorship of a number of initiatives supporting Aboriginal and Torres Strait Island people, most notably the consolidated entity’s ongoing support of the Australian Indigenous Mentoring Experience (AIME) program and the NRL All Stars matches, which in 2019, featured the Australian Indigenous All-Stars taking on the New Zealand Maori Kiwis for the first time, won 34-14 by the Australian Indigenous team. 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: 1) 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. 56 D IRECTORS ’ RE PORT O T H E R I N F O R M AT I O N D IRECTORS ’ RE PORT (c ontinu e d) Employee Learning and Development (continued) 2) 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;   Microsoft Office Applications (Excel, Word, Access and PowerPoint);   Procurement (Supply Chain School and Chartered Institute of Purchasing and Supply); 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. Diversity The Company and its executive leaders recognise the value of diversity in their employees and the benefits that diversity brings to their shareholders in building capabilities for the Company to become more innovative, responsive and competitive. The Company is committed to promoting and supporting an environment where their employees are representative of the diverse range of backgrounds, experiences and perspectives present in the communities in which we operate across the globe. The Company’s Employee Diversity Policy and Board Diversity Policy, along with relevant organisational strategies, programs and initiatives are conducive to the selection of well qualified employees, senior management and Board candidates from diverse backgrounds. The full Employee Diversity Policy and Board Diversity Policy may be accessed via the Company’s website www.harveynormanholdings.com.au. Workforce Gender Profile The Company is committed to increasing the participation and development of women in the consolidated entity globally, so as to broaden the talent pool from which future leaders of the consolidated entity can be drawn. There has been continued growth in the representation of females within the workforce of the consolidated entity, particularly at a senior executive level. The Company continues to measure and monitor progress in this area to develop and cultivate a diverse and inclusive workforce. 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 2017 44.82% 29.81% 11.11% 2018 44.93% 32.69% 11.11% 2019 45.60% 34.03% 10.00% * 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 Initiatives for the 2019 Financial Year During the 2019 financial year, the following initiatives were undertaken to support the diversity objectives of the consolidated entity: (a) Approved implementation of Paid Parental Leave Policy from 1 July 2019 for eligible employees. This scheme, accompanied with the continual refinement of organisational policies and practices, ensures the Company is well-placed to recognise and improve support for the changing domestic and carer responsibilities employees may assume throughout their career. (b) Refinement of resources for expectant parents and “keeping-in-touch” and “flexible work” practices to ensure employees feel supported while on parental leave and when returning to work. HARVEY NORMAN HOLDINGS LIMITED Annual Report June 2019 57 D IRECTORS ’ RE PORT O T H E R I N F O R M AT I O N Diversity Initiatives for the 2019 Financial Year (continued) c) Redesign and re-launch of “Life @ Work” employee engagement survey, incorporating survey on diversity, in order to monitor underlying changes including 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 shared with employees and a number of improvement initiatives were identified and schedules for completion in the 2020 financial year. d) As part of the annual WGEA Report the business created a workplace profile, as at 30 March 2019, and analysed this data to monitor and evaluate any gender pay gaps for equivalent roles within the consolidated entity. e) 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. f) Sponsorship, commitment and support of female athletes in Australia to assist Australian sportswomen to achieve their professional and personal goals, including the following specific sponsorships during 2019: 2019 Women’s State of Origin – major sponsor of both the NSW Blues team and QLD Maroons team;   Women in League;     Greater Western Sydney (GWS) Giants AFL Women’s team; The Jillaroos – Australian Women’s NRL team; NRL Women’s Premiership; and NRL Women’s National Championships. g) Participated in the “NRL All Stars Youth Summit” in February 2019 to further develop and grow relationships with younger members of the indigenous community and assist in their journey of attaining education and employment. h) Sponsorship of the Shine Awards which endeavours to shine a light on the women making a difference in rural and regional communities. i) j) Continued to develop the partnership with Australia Indigenous Mentoring Experience (“AIME”) to support in promoting employment opportunities to Indigenous Australians. Participated in R U OK Day to encourage inclusive relationships to be built amongst employees and to develop sense of a supportive workplace community. k) Conducted the annual “Taste of Harmony” event in March 2019 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”. l) A significant number of franchisees have provided support to the following initiatives during the 2019 financial year:    Paralympics Australia; Sir Roden and Lady Cutler Foundation – driving the seriously ill, needy and disabled to and from medical appointments; and Country Women’s Association (CWA) – to support farmers, their families and local businesses impacted by the severity of the drought and other crisis’ including domestic violence and extended illnesses. 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. 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 2019. 58 D IRECTORS ’ RE PORT O T H E R I N F O R M AT I O N D IRECTORS ’ RE PORT (c ontinu e d) 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 2019 are as follows:   Tax compliance services $476,744 (2018: $234,984); Other services $25,971 (2018: $42,769) 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 the financial report of Harvey Norman Holdings Limited for the financial year ended 30 June 2019, 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 27 September 2019 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 K.L. PAGE Chairman Chief Executive Officer Sydney Sydney 27 September 2019 27 September 2019 HARVEY NORMAN HOLDINGS LIMITED Annual Report June 2019 59 STATEME NT of F INA NC IAL POS I T ION a s a t 3 0 J U N E 2 0 1 9 Current Assets Cash and cash equivalents Trade and other receivables Other financial assets Inventories Other assets Intangible assets Subtotal Assets held for sale 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 39 12 37 13 14 15 16 17 18 19 20 21 20 5(d) 23 24 25 26 27 CONSOLIDATED June 2019 $000 215,048 741,862 28,888 395,965 37,541 370 1,419,674 36,666 1,456,340 49,391 3,854 19,370 696,207 2,508,951 64,631 3,342,404 June 2018 $000 170,544 724,690 31,463 345,287 45,144 490 1,317,618 - 1,317,618 78,443 4,497 18,283 660,337 2,429,397 69,067 3,260,024 4,798,744 4,577,642 283,682 494,579 12,000 75,819 33,028 899,108 346,942 13,025 330,546 11,330 701,843 289,986 422,191 15,608 66,825 35,354 829,964 503,203 11,645 280,735 14,163 809,746 1,600,951 1,639,710 3,197,793 2,937,932 552,250 217,724 2,397,436 3,167,410 30,383 3,197,793 388,381 185,384 2,337,241 2,911,006 26,926 2,937,932 The above Statement of Financial Position should be read in conjunction with the accompanying notes. 60 I N COME STATEMEN T f o r t h e y e a r e n d e d 3 0 J U N E 2 0 1 9 OPERATI I nc ome S tate ment fo r th e ye a r en ded 30 Ju ne 20 1 9 Sales of products to customers Cost of sales Gross profit Revenue received from franchisees 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) * CONSOLIDATED June 2019 $000 2,234,118 (1,510,733) 723,385 943,648 242,419 (41,102) (391,044) (258,106) (567,970) (57,676) (28,782) 9,787 574,559 (165,557) 409,002 402,317 6,685 409,002 June 2018 $000 1,993,760 (1,326,339) 667,421 965,472 200,253 (41,602) (374,322) (241,220) (585,683) (39,595) (26,344) 5,792 530,172 (150,122) 380,050 375,378 4,672 380,050 34.70 cents 34.67 cents 33.21 cents 33.18 cents 33.0 cents 30.0 cents Note 3 3 3 4 4 4 4 37 5 6 6 26 * This represents total dividends per share in respect of the year ended 30 June 2019 and the year ended 30 June 2018. The above Income Statement should be read in conjunction with the accompanying notes. HARVEY NORMAN HOLDINGS LIMITED Annual Report June 2019 61 STATEME NT of COM PREHE NS IV E INCO ME f o r t h e y e a r e n d e d 3 0 J U N E 2 0 1 9 CONSOLIDATED June 2019 $000 June 2018 $000 Profit for the year 409,002 380,050 Items that may be reclassified subsequently to profit or loss: Foreign currency translation 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 Net fair value losses on equity investments Other comprehensive income for the year (net of tax) 26,373 9 (3) 12,234 (3,910) (953) 33,750 (221) 16 (4) 15,553 (2,693) (1,830) 10,821 Total comprehensive income for the year (net of tax) 442,752 390,871 Total comprehensive income attributable to: Owners of the parent Non-controlling interests 434,888 7,864 442,752 385,067 5,804 390,871 The above Statement of Comprehensive Income should be read in conjunction with the accompanying notes. 62 STATEME NT of C HA NGES in EQU ITY f o r t h e y e a r e n d e d 3 0 J U N E 2 0 1 9 Attributable to Equity Holders of the Parent Contributed Equity Retained Profits Asset Revaluation Reserve Foreign Currency Translation Reserve Available for Sale Reserve FVOCI Reserve (a) 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 $000 At 1 July 2018 388,381 2,337,241 144,526 40,659 11,902 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 Transfer to financial assets at fair value through other comprehensive income Fair value of financial assets at fair value through other comprehensive income Other comprehensive income Profit for the year Total comprehensive income for the year Cost of share based payments Shares issued Utilisation of employee equity benefits reserve Dividends paid Distribution to members - - - - - - - - - - - - - - 8,324 - - - - - - 25,194 - - (11,902) 11,902 - - 402,317 - 8,324 - - 25,194 - - (11,902) - (953) 10,949 - 402,317 8,324 25,194 (11,902) 10,949 - 163,869 - - - - - - (342,122) - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - (8) 10,356 (22,051) 26,926 2,937,932 - 8 - (2) - - 6 - 6 - - - - - - - - - - - - - - 519 - (750) - - - - - - - - - - - - - - - - - - 8,324 8 1,179 26,373 - - (2) - - 1,179 6,685 (953) 33,750 409,002 7,864 442,752 - - 519 163,869 - (2,852) (1,555) (750) (344,974) (1,555) At 30 June 2019 552,250 2,397,436 152,850 65,853 10,949 (2) 10,125 (22,051) 30,383 3,197,793 The above Statement of Changes in Equity should be read in conjunction with the accompanying notes. (a) Upon the application of AASB 9, the consolidated entity has elected to classify equity investments, which were previously classified as available for sale under AASB 139, as financial assets at fair value through other comprehensive income (FVOCI). HARVEY NORMAN HOLDINGS LIMITED Annual Report June 2019 63 STATEME NT of C HA NGES in EQU ITY f o r t h e y e a r e n d e d 3 0 J U N E 2 0 1 9 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 Cost of share based payments Shares issued Dividends paid Distribution to members - - - - - - - - - - - - - 13,222 - - - - - - (1,715) - - - 375,378 13,222 - (1,715) - - - - - (1,830) (1,830) - 375,378 13,222 (1,715) (1,830) - 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 June 2019 64 STATEME NT of CAS H FLOWS f o r t h e y e a r e n d e d 3 0 J U N E 2 0 1 9 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 Note CONSOLIDATED June 2019 $000 June 2018 $000 858,372 2,397,871 (2,681,840) 10,027 (56,815) 6,625 (29,223) (135,139) 2,967 947,058 2,134,595 (2,388,310) 10,125 (66,102) 5,871 (25,619) (166,161) 2,713 Net Cash Flows From Operating Activities 28(b) 372,845 454,170 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 equity investments Proceeds from insurance claims Cash obtained on consolidation of KEH Partnership Proceeds from the completion of the Administrator Sale of the Coomboona JV assets Loans granted to joint venture entities, joint venture partners and related and unrelated entities Net Cash Flows Used In Investing Activities Cash Flows from Financing Activities Proceeds from shares issued – executive share option plan Proceeds from shares issued – renounceable pro-rata Entitlement Offer (Repayments)/Proceeds from Syndicated Facility Dividends paid Loans repaid to related parties Repayments of other borrowings Net Cash Flows Used In Financing Activities Net Increase in Cash and Cash Equivalents Cash and Cash Equivalents at Beginning of the Year (94,222) (27,878) 2,911 (1,320) (434) 18,470 903 50 40,500 (5,183) (93,895) (125,661) 2,422 (107) (4,256) 10,436 2,458 - - (94,882) (66,203) (303,485) - 163,869 (25,000) (342,122) (39,559) (3,477) (246,289) 60,353 125,463 2,072 - 210,000 (267,337) (6,573) (6,266) (68,104) 82,581 42,882 Cash and Cash Equivalents at End of the Year 28(a) 185,816 125,463 HARVEY NORMAN HOLDINGS LIMITED Annual Report June 2019 65 NOTES t o th e FIN AN CI AL STATEMENTS | 20 19 CO RPORATE GOVER NAN CE STATEME NT (c ontinu e d) STATEMENT OF SIGNIFICANT ACCOUNTING POLICIES 1. (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, debt and equity financial assets, 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 recognise 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 2019 was authorised for issue in accordance with a resolution of the directors on 27 September 2019. (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 2019. For details on the impact of future accounting standards, refer to page 77. (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 for the adoption of new standards mandatory for annual periods beginning on or after 1 July 2018 which require retrospective restatement. New mandatory standards, where material, are disclosed in Note 1 (f) Summary of new standards adopted in the current period on page 76 of this report. The consolidated entity has not early adopted any other standard, interpretation or amendment that has been issued but is not yet effective. 66 NOTES t o th e FIN AN CI AL STATEMENTS | 20 19 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 2019 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 fair values in the financial statements are informed by valuations performed by independent external valuers and reviewed internally by the Property Review Committee and the directors of the Company. 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 market value of an investment property that is subject to an independent external valuation has been adopted as the fair value of that investment property in the financial statements of the consolidated entity. The key assumptions used to determine the fair value of the investment properties, and the relevant sensitivity analysis, are disclosed in Note 15. HARVEY NORMAN HOLDINGS LIMITED Annual Report June 2019 67 NOTES t o th e FIN AN CI AL STATEMENTS | 20 19 CO RPORATE GOVER NAN CE STATEME NT (c ontinu e d) 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 fair values in the financial statements are informed by valuations performed by independent external valuers and reviewed internally by the Property Review Committee and the directors of the Company. 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 market value of an owner-occupied property that is subject to an independent external valuation has been adopted as the fair value of that owner-occupied property in the financial statements of the consolidated entity. The key assumptions used to determine the fair value of owner-occupied properties, 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 recognises an allowance for expected credit losses (ECLs) for debt instruments measured at amortised cost. ECLs are based on the difference between the contractual cash flows due in accordance with the contract and all the cash flows that the consolidated entity expects to receive, discounted at an approximation of the original effective interest rate. The expected cash flows will include cash flows from the sale of collateral held or other credit enhancements that are integral to the contractual terms. ECLs are recognised in two stages. For credit exposures for which there has not been a significant increase in credit risk since initial recognition, ECLs are provided for credit losses that result from default events that are possible within the next 12-months. For those credit exposures for which there has been a significant increase in credit risk since initial recognition, a loss allowance is required for credit losses expected over the remaining life of the exposure, irrespective of the timing of the default. For receivables from franchisees, consumer finance loans and non-trade debts receivable from related entities and unrelated entities, the consolidated entity applies a general approach in calculating ECLs. For trade receivables and finance leases, the consolidated entity applies a simplified approach in calculating ECLs. Therefore, the consolidated entity does not track changes in credit risk, but instead recognises a loss allowance based on lifetime ECLs at each reporting date. The consolidated entity has established a provision matrix that is based on its historical credit loss experience, adjusted for forward-looking factors specific to the debtors and the economic environment. 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 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. (f) 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. 68 NOTES t o th e FIN AN CI AL STATEMENTS | 20 19 Statement of Significant Accounting Policies (continued) (ii) Significant accounting judgements, estimates and assumptions (continued) (g) 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. (h) 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. (iii) Business combinations Business combinations are accounted for using the acquisition method. The cost of an acquisition is measured as the aggregate of the consideration transferred, which is measured at acquisition date fair value, and the amount of any non-controlling interests in the acquiree. The consolidated entity elects to measure the non-controlling interests in the acquiree at the proportionate share of the acquiree’s identifiable net assets. Acquisition-related costs are expensed as incurred and included in administrative expenses. When the consolidated entity acquires a business, it assesses the financial assets and liabilities assumed for appropriate classification and designation in accordance with the contractual terms, economic circumstances and pertinent conditions as at the acquisition date. Any contingent consideration to be transferred by the acquirer will be recognised at fair value at the acquisition date. (iv) Non-current assets held for sale The consolidated entity classifies non-current assets as held for sale if their carrying amounts will be recovered principally through a sale transaction rather than through continuing use. Non-current assets classified as held for sale are measured at the lower of their carrying amount and fair value less costs to sell. Costs to sell are the incremental costs directly attributable to the disposal of an asset, excluding finance costs and income tax expense. The criteria for held for sale classification is regarded as met only when the sale is highly probable and the asset is available for immediate sale in its present condition. Actions required to complete the sale should indicate that it is unlikely that significant changes to the sale will be made or that the decision to sell will be withdrawn. Management must be committed to the plan to sell the asset and the sale expected to be completed within one year from the date of the classification. Property, plant and equipment and intangible assets are not depreciated or amortised once classified as held for sale. (v) 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. HARVEY NORMAN HOLDINGS LIMITED Annual Report June 2019 69 NOTES t o th e FIN AN CI AL STATEMENTS | 20 19 CO RPORATE GOVER NAN CE STATEME NT (c ontinu e d) Statement of Significant Accounting Policies (continued) (v) Investment properties (continued) 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. (vi) 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. 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. 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. (vii) Financial assets Up to 30 June 2018, the recognition and measurement of financial assets was in accordance with the previous accounting standard AASB 139 Financial Instruments: Recognition and Measurement. Please refer to the June 2018 Annual Report for the accounting treatment of financial assets in accordance with AASB 139. From 1 July 2018, the recognition and measurement of financial assets is in accordance with the AASB 9 Financial Instruments. Initial recognition and measurement Financial assets are classified, at initial recognition, and subsequently measured at amortised cost, fair value through other comprehensive income (OCI), and fair value through profit or loss. The classification of financial assets at initial recognition depends on the financial asset’s contractual cash flow characteristics and the consolidated entity’s business model for managing them. In order for a financial asset to be classified and measured at amortised cost or fair value through OCI, it needs to give rise to cash flows that are ‘solely payments of principal and interest (SPPI)’ on the principal amount outstanding. This assessment is referred to as the SPPI test and is performed at an instrument level. The consolidated entity’s business model for managing financial assets refers to how it manages its financial assets in order to generate cash flows. The business model determines whether cash flows will result from collecting contractual cash flows, selling the financial assets, or both. 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. 70 NOTES t o th e FIN AN CI AL STATEMENTS | 20 19 Statement of Significant Accounting Policies (continued) (vii) Financial assets (continued) Subsequent measurement For purposes of subsequent measurement, financial assets are classified in three categories:   Financial assets at amortised cost (debt instruments) Financial assets designated at fair value through OCI with no recycling of cumulative gains and losses upon derecognition (equity instruments) Financial assets at fair value through profit or loss  Financial assets at amortised cost (debt instruments) The consolidated entity measures financial assets at amortised cost if both of the following conditions are met:  The financial asset is held within a business model with the objective to hold financial assets in order to collect contractual cash flows, and The contractual terms of the financial asset give rise on specified dates to cash flows that are solely payments of principal and interest on the principal amount outstanding.  Financial assets at amortised cost are subsequently measured using the effective interest (EIR) method and are subject to impairment. Gains and losses are recognised in profit or loss when the asset is derecognised, modified or impaired. The consolidated entity’s financial assets at amortised cost includes receivables from franchisees, trade receivables, consumer finance loans, non- trade debts receivable from related entities and unrelated entities and finance leases. Financial assets designated at fair value through OCI (equity instruments) Upon initial recognition, the consolidated entity can elect to classify irrevocably its equity investments as equity instruments designated at fair value through OCI when they meet the definition of equity under AASB 132 Financial Instruments: Presentation and are not held for trading. The classification is determined on an instrument-by-instrument basis. Gains and losses on these financial assets are never recycled to profit or loss. Dividends are recognised as other income in the statement of profit or loss when the right of payment has been established, except when the consolidated entity benefits from such proceeds as a recovery of part of the cost of the financial asset, in which case, such gains are recorded in OCI. Equity instruments designated at fair value through OCI are not subject to impairment assessment. The consolidated entity elected to classify irrevocably its non-current equity investments under this category. Financial assets at fair value through profit or loss Financial assets at fair value through profit or loss include listed shares held for trading, derivative receivables and financial assets designated upon initial recognition at fair value through profit or loss, or financial assets mandatorily required to be measured at fair value. Financial assets are classified as held for trading if they are acquired for the purpose of selling or repurchasing in the near term. Derivatives are also classified as held for trading unless they are designated as effective hedging instruments. Financial assets with cash flows that are not solely payments of principal and interest are classified and measured at fair value through profit or loss, irrespective of the business model. 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 recognised in the statement of profit or loss. (viii) Financial liabilities Initial recognition and measurement 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, derivative payable and loans and borrowings including bank overdrafts, commercial bills payable, Syndicated Facility Agreement, short-term borrowings, non-trade amounts owing to directors, related parties and unrelated parties. Subsequent measurement After initial recognition, loans and borrowings are subsequently measured at amortised cost using the EIR method. Gains and losses are recognised in profit or loss 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 as finance costs in the statement of profit or loss. For more information, refer to Notes 18 and 21. (ix) Derivative financial instruments and hedge accounting Initial recognition and subsequent measurement The consolidated entity uses forward currency contracts. 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. Derivatives are carried as financial assets when the fair value is positive and as financial liabilities when the fair value is negative. For the purpose of hedge accounting, hedges are classified as:   Fair value hedges when hedging the exposure to changes in the fair value of a recognised asset or liability or an unrecognised firm commitment. Cash flow hedges when hedging the 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 or the foreign currency risk in an unrecognised firm commitment. HARVEY NORMAN HOLDINGS LIMITED Annual Report June 2019 71 NOTES t o th e FIN AN CI AL STATEMENTS | 20 19 CO RPORATE GOVER NAN CE STATEME NT (c ontinu e d) Statement of Significant Accounting Policies (continued) (ix) Derivative financial instruments and hedge accounting (continued) At the inception of a hedge relationship, the consolidated entity formally designates and documents the hedge relationship to which it wishes to apply hedge accounting and the risk management objective and strategy for undertaking the hedge. From 1 July 2018, the documentation includes identification of the hedging instrument, the hedged item, the nature of the risk being hedged and how the consolidated entity will assess whether the hedging relationship meets the hedge effectiveness requirements. A hedging relationship qualifies for hedge accounting if it meets all of the following effectiveness requirements:  There is ‘an economic relationship’ between the hedged item and the hedging instrument.  The effect of credit risk does not ‘dominate the value changes’ that result from that economic relationship.  The hedge ratio of the hedging relationship is the same as that resulting from the quantity of the hedged item that the consolidated entity actually hedges and the quantity of the hedging instrument that the consolidated entity actually uses to hedge that quantity of hedged item. Hedges that meet all the qualifying criteria for hedge accounting are accounted for, as described below: Fair value hedges The change in the fair value of a hedging instrument is recognised in the statement of profit or loss as other expense. 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 the statement of profit or loss as other expense. 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. 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 or loss. Cash flow hedges The effective portion of the gain or loss on the hedging instrument is recognised in OCI in the cash flow hedge reserve, while any ineffective portion is recognised immediately in the statement of profit or loss. The cash flow hedge reserve is adjusted to the lower of the cumulative gain or loss on the hedging instrument and the cumulative change in fair value of the hedged item. 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 foreign currency contracts is recognised as other expense. From 1 July 2018, the consolidated entity designates only the spot element of forward contracts as a hedging instrument. The forward element is recognised in OCI and accumulated in a separate component of equity under cash flow hedge reserve. The amounts accumulated in OCI are accounted for, depending on the nature of the underlying hedged transaction. If the hedged transaction subsequently results in the recognition of a non-financial item, the amount accumulated in equity is removed from the separate component of equity and included in the initial cost or other carrying amount of the hedged asset or liability. For any other cash flow hedges, the amount accumulated in OCI is reclassified to profit or loss as a reclassification adjustment in the same period or periods during which the hedged cash flows affect profit or loss. (x) 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. (xi) 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. 72 NOTES t o th e FIN AN CI AL STATEMENTS | 20 19 Statement of Significant Accounting Policies (continued) (xi) Foreign currency translation (continued) 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. (xii) 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. (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) 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. 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. HARVEY NORMAN HOLDINGS LIMITED Annual Report June 2019 73 NOTES t o th e FIN AN CI AL STATEMENTS | 20 19 Statement of Significant Accounting Policies (continued) CO RPORATE GOVER NAN CE STATEME NT (c ontinu e d) (xv) 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. (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 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. 74 NOTES t o th e FIN AN CI AL STATEMENTS | 20 19 Statement of Significant Accounting Policies (continued) (xviii) Borrowing costs 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. (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. 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. HARVEY NORMAN HOLDINGS LIMITED Annual Report June 2019 75 NOTES t o th e FIN AN CI AL STATEMENTS | 20 19 Statement of Significant Accounting Policies (continued) CO RPORATE GOVER NAN CE STATEME NT (c ontinu e d) (xx) 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”. (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) 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.  (f) Summary of New Standards Adopted in the Current Period The consolidated entity applied for the first time certain standards and amendments, which are effective for annual periods beginning on or after 1 January 2018. AASB 15 Revenue from Contracts with Customers AASB 15 establishes a five-step model to account for revenue arising from contracts with customers. Under AASB 15, revenue is recognised at an amount that reflects the consideration to which an entity expects to be entitled in exchange for transferring goods or services to customers. Entities are required to exercise more judgement in developing revenue recognition policies, taking into consideration all the relevant facts and circumstances when applying each step of the model. The consolidated entity has adopted this standard from 1 July 2018 and has applied the standard retrospectively. The adoption of this standard did not have a material impact on the consolidated entity’s financial statements. With the exception of the set-off of tactical support payments against franchise fees received, the adoption of AASB 15 with respect to franchise agreements did not have any implication on the quantum and timing of the recognition of revenue from franchisees. Revenue from Franchisees The application of AASB 15 to franchise agreements with franchisees requires the consolidated entity to recognise revenue from franchisees based on the amount it expects to receive in exchange for the provision of franchising operations’ activities to franchisees, pursuant to a franchise agreement. Upon application of AASB 15, tactical support payments have been netted off against franchise fees received. AASB 15 had nil impact on the franchising operations segment result with the effect being a reclassification from expenses to a reduction in franchising operations segment revenue. Tactical support payments to franchisees protect, enhance and promote the Harvey Norman®, Domayne® and Joyce Mayne® brands, and are an expense of the franchisor to assist a franchisee, as required from time-to-time at a franchisor’s discretion, to effectively compete in their local markets. For the year ended 30 June 2019, the reduction in revenues from franchisees attributable to tactical support payments was $74.88 million compared to $74.98 million for the year ended 30 June 2018. With the exception of the set-off of tactical support payments, the adoption of AASB 15 with respect to franchise agreements did not have any implication on the quantum and timing of the recognition of revenue from franchisees. The following are the revenue accounting policies that apply to the consolidated entity in accordance with AASB 15. 76 NOTES t o th e FIN AN CI AL STATEMENTS | 20 19 Statement of Significant Accounting Policies (continued) (f) Summary of New Standards Adopted in the Current Period (continued) Sale of goods The customer obtains control over the product upon delivery and revenue is therefore recognised at the point in time the product is delivered or handed over to the customer. Revenue is measured based on the consideration expected to be received, net of trade rebates and discounts paid. Revenue from services The consolidated entity provides repair services, installation services and delivery services to customers. These services are sold either in their own contracts with the customers or bundled together with the sale of products. The consolidated entity recognises revenue when the service is rendered. For bundled packages, the consolidated entity accounts for individual products and services separately if they are distinct. AASB 9 Financial Instruments AASB 9 sets a new model for classifying and measuring financial assets based on the financial asset’s contractual cash flow characteristics and the entity’s business model for managing the financial assets. The standard also introduces a new expected credit loss model for impairment of financial assets and new rules for hedge accounting. The consolidated entity has adopted this standard from 1 July 2018 without restating comparative information. The key changes to the consolidated entity’s financial statements arising from this standard are in relation to the classification and measurement of financial assets and the impairment of financial assets. The adoption of AASB 9 has no impact on the classification and measurement of financial liabilities and financial instruments qualifying for hedge accounting. Upon first-time implementation of AASB 9 Financial Instruments, receivables from franchisees have been measured at amortised cost. The consolidated entity has performed an assessment of the franchisee receivables and has calculated the expected credit loss by applying the general approach for provisioning for expected credit losses prescribed by AASB 9. The expected credit loss assessment was conducted on the carrying value of franchisee receivables upon the initial application of the standard as at 30 June 2018 totalling $544.00 million, and on the carrying value of franchisee receivables as at 30 June 2019 totalling $607.73 million. Based on the assessment conducted in both periods, the expected credit losses on receivables from franchisees are not material to the result of the consolidated entity and, as such, no adjustment has been recognised to opening retained profits as at 1 July 2018 and the income statement for the year ended 30 June 2019. The calculation of the expected credit losses pursuant to AASB 9 produces a materially similar result to the previous recoverability assessment under AASB 139 Financial Instruments: Recognition and Measurement. Previously under AASB 139, Derni, as a secured creditor of the franchisee, conducted an assessment of recoverability in respect of each individual franchisee financial accommodation facility. This involved 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. Apart from the impact on receivables from franchisees described above, the adoption of AASB 9 did not have a material impact on other financial instruments of the consolidated entity. (g) Future Accounting Standards AASB 16 Leases AASB 16 Leases is applicable to the consolidated entity effective from 1 July 2019 (transition date). AASB 16 replaces the current AASB 117 Leases standard. AASB 16 provides a single lease accounting model for identifying and measuring lease arrangements and requires a lessee to recognise assets and liabilities for all leases with a term of more than 12 months, unless the underlying asset is of low value. The consolidated entity, as a lessee, will be required to recognise a right-of-use asset, representing its right to use the underlying asset, and a lease liability, representing the present value of future lease payments. Transition method (a) Leases of Owner-Occupied Properties The consolidated entity has elected to apply the “modified retrospective” approach as permitted by AASB 16 at the date of transition. Under this approach 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 requirement to restate any comparative information. Leasehold properties occupied by the consolidated entity primarily include company-operated stores, warehouses and offices that are leased from external landlords. For these properties, the balance sheet will be adjusted to recognise a depreciating right-of-use asset and associated lease liability. On transition, the right-of-use asset will be measured at its carrying amount as if AASB 16 had been applied since the lease commencement date, but discounted using the lessee’s incremental borrowing rate at the date of initial application. The lease liability will be measured at the net present value of future payables under the lease, including option renewal periods, where the consolidated entity assesses that the probability of exercising the renewal is reasonably certain. HARVEY NORMAN HOLDINGS LIMITED Annual Report June 2019 77 NOTES t o th e FIN AN CI AL STATEMENTS | 20 19 CO RPORATE GOVER NAN CE STATEME NT (c ontinu e d) Statement of Significant Accounting Policies (continued) (g) Future Accounting Standards (continued) The estimated impact on the consolidated balance sheet, before tax, as at 1 July 2019 is expected to be as follows:    Recognition of right-of-use asset between $500 million and $550 million; Recognition of lease liability between $505 million and $555 million; Derecognition and reclassification of amounts currently recorded on the balance sheet including deferred lease liabilities. In the income statement, lease expense will be replaced by depreciation of the right-of-use asset and interest expense on the lease liability. The impact on profit before tax for the year of adoption in respect of leases of owner-occupied properties is not estimated to be material. However, the actual impact on initial application on 1 July 2019 may differ materially due to changes in the application of practical expedients, recognition exemptions and changes to material judgemental areas. (b) Leases of Properties Sub-Leased to External Parties In addition, the consolidated entity has a portfolio of property leases which secure competitive retail sites to be subleased to Harvey Norman®, Domayne® and Joyce Mayne® franchisees. For these properties, the consolidated entity enters into property leasing arrangements with external landlords and then subsequently subleases these sites to franchisees pursuant to a licence, terminable upon reasonable notice and, as such, is classified as an operating lease. The adoption of AASB 16 will therefore result in the recognition of a right-of-use asset which meets the definition of an investment property. The consolidated entity has elected to apply the fair value model in AASB 140 Investment Property and accordingly the right-of-use asset will be measured in accordance with the fair value model in AASB 140. The lease liability will be measured at the net present value of future payables under the lease, including option renewal periods, where the consolidated entity assesses that the probability of exercising the renewal is reasonably certain. The impact on the consolidated balance sheet as at 1 July 2019, before tax, is expected to be as follows:    Recognition of right-of-use asset between $585 million and $635 million; Recognition of lease liability between $585 million and $635 million; Derecognition and reclassification of amounts currently recorded on the balance sheet including deferred lease liabilities. In the income statement, lease expense will be replaced by depreciation of the right-of-use asset, interest expense on the lease liability and fair value movements of the right-of-use asset. The estimated impact on profit before tax for the year ending 30 June 2020, excluding the impact of any fair value movements on the right-of-use asset, would be a decrease of between $9 million and $12 million. The above estimates may be materially different to the actual impact on initial application on 1 July 2019 due to changes in the application of practical expedients, recognition exemptions and changes to material judgemental areas. 78 NOTES t o th e FIN AN CI AL STATEMENTS | 20 19 2. OPERATING SEGMENTS Operating Segment Revenue: 30 June 2019 Sales of Products to Customers June 2019 $000 Revenues received from franchisees and other income items Total Revenue by Segment FRANCHISING OPERATIONS - 838,665 838,665 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 INTER-COMPANY ELIMINATIONS 935,096 555,467 148,922 370,154 221,899 21,877 12,937 2,256 8,098 5,362 956,973 568,404 151,178 378,252 227,261 2,231,538 50,530 2,282,068 33 33 - 2,871 (324) 332,126 332,126 18,666 11,269 332,159 332,159 18,666 14,140 (65,189) (65,513) TOTAL SEGMENT REVENUE 2,234,118 1,186,067 3,420,185 Operating Segment Revenue: 30 June 2018 Sales of Products to Customers June 2018 $000 Revenues received from franchisees and other income items Total Revenue by Segment FRANCHISING OPERATIONS - 857,691 857,691 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 - 3,319 20,376 10,687 2,048 5,636 4,480 43,227 304,516 304,516 6,154 14,766 929,900 489,088 135,800 318,961 159,820 2,033,569 304,615 304,615 6,154 18,085 INTER-COMPANY ELIMINATIONS - (60,629) (60,629) TOTAL SEGMENT REVENUE 1,993,760 1,165,725 3,159,485 HARVEY NORMAN HOLDINGS LIMITED Annual Report June 2019 79 NOTES t o th e FIN AN CI AL STATEMENTS | 20 19 CO RPORATE GOVER NAN CE STATEME NT (c ontinu e d) OPERATING SEGMENTS (continued) 2. Operating Segment Result: 30 June 2019 Segment Result Before Interest, Taxation, Depreciation, Impairment & Amortisation June 2019 $000 Interest Expense Depreciation Expense Impairment & Amortisation Expense Segment Result Before Tax FRANCHISING OPERATIONS 295,771 (3,221) (25,648) (18,502) 248,400 Retail – New Zealand Retail – Singapore & Malaysia Retail – Slovenia & Croatia Retail – Ireland & Northern Ireland Other Non-Franchised Retail TOTAL RETAIL Retail Property TOTAL PROPERTY 84,598 44,674 10,487 15,255 (12,200) 142,814 - (87) (416) (2,424) (1,531) (4,458) (6,851) (6,483) (2,447) (4,867) (2,443) (355) (1,049) (167) (167) (497) (23,091) (2,235) 235,083 235,083 (19,463) (19,463) (10,634) (10,634) (305) (305) - 77,392 37,055 7,457 7,797 (16,671) 113,030 204,681 204,681 18,398 (9,950) EQUITY INVESTMENTS 18,595 (197) - OTHER 4,999 (1,711) (4,990) (8,248) INTER-COMPANY ELIMINATIONS (268) 268 - - - TOTAL SEGMENT RESULT BEFORE TAX 696,994 (28,782) (64,363) (29,290) 574,559 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 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) Property Developments for Resale (73) (12) - TOTAL PROPERTY 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 80 NOTES t o th e FIN AN CI AL STATEMENTS | 20 19 2. OPERATING SEGMENTS (continued) Operating Segment Assets and Liabilities: 30 June 2019 June 2019 $000 Segment Assets Segment Liabilities Segment Assets Inter- company Eliminations Segment Assets After Eliminations Segment Liabilities Inter- company Eliminations Segment Liabilities After Eliminations FRANCHISING OPERATIONS 3,006,917 (2,078,590) 928,327 234,661 (10,340) 224,321 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 267,981 199,964 56,675 86,553 175,065 786,238 - (1,772) (3,115) (119) (46,765) (51,771) 267,981 198,192 53,560 86,434 103,973 119,811 46,526 129,126 (4,031) (40,141) (753) (416) 128,300 220,853 (141,443) 99,942 79,670 45,773 128,710 79,410 734,467 620,289 (186,784) 433,505 2,976,650 (25,319) 2,951,331 2,331,761 (1,820,345) 511,416 36,666 - 36,666 - - - TOTAL PROPERTY 3,013,316 (25,319) 2,987,997 2,331,761 (1,820,345) 511,416 EQUITY INVESTMENTS 44,344 - 44,344 5,470 - 5,470 OTHER 161,871 (58,262) 103,609 280,166 (196,473) 83,693 TOTAL SEGMENT ASSETS / LIABILITIES BEFORE TAX 7,012,686 (2,213,942) 4,798,744 3,472,347 (2,213,942) 1,258,405* Operating Segment Assets and Liabilities: 30 June 2018 June 2018 $000 Segment Assets Segment Liabilities Segment Assets Inter- company Eliminations Segment Assets After Eliminations Segment Liabilities Inter- company Eliminations Segment Liabilities After Eliminations 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 Property Developments for Resale 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 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* * Segment liabilities are exclusive of income tax payable and deferred income tax liabilities. HARVEY NORMAN HOLDINGS LIMITED Annual Report June 2019 81 NOTES t o th e FIN AN CI AL STATEMENTS | 20 19 CO RPORATE GOVER NAN CE STATEME NT (c ontinu e d) OPERATING SEGMENTS (continued) 2. 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 which are controlled by the consolidated entity and does not include the operations of any 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. This segment includes land and buildings held for sale, which were previously reported in the Retail Property segment. Equity Investments This segment refers to the investment in, and trading of, equity investments. 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. 82 NOTES t o th e FIN AN CI AL STATEMENTS | 20 19 N otes t o the Fi nanc ial S t atem ents (c ontinu ed) CONSOLIDATED June 2019 $000 June 2018 $000 3. REVENUES Revenue from contracts with customers and franchisees: Sale of products to customers (a) 2,234,118 1,993,760 Services to customers (c) (included in revenues and other income items line in the Income Statement) Franchise fees in accordance with franchise agreements (b) (included in Revenue received from franchisees in the Income Statement) Total revenue from contracts with customers and franchisees 27,536 668,926 2,930,580 24,474 693,475 2,711,709 Refer to Table 1 on page 84 for a breakdown of revenues under AASB 15 and the relationship to the reported operating segments of the consolidated entity - by Types of Contracts. Refer to Table 2 on page 85 for a breakdown of revenues under AASB 15 and the relationship to the reported operating segments of the consolidated entity - by Primary Geographical Markets. Other revenue from franchisees: - Rent and outgoings received from franchisees - Interest to implement and administer the financial accommodation facilities Total other revenue received from franchisees (b) Gross revenue from other unrelated parties: - Rent and outgoings received from external tenants - Interest received from financial institutions and other parties - Dividends received Total revenue from other unrelated parties (c) Other income items: - Net property revaluation increment on Australian investment properties - Property revaluation increment for overseas controlled entity - Net revaluation increment of equity investments to fair value - Net foreign exchange gains - Other income Total other income items (c) Disclosed in the Income Statement as follows: (a) Sale of products to customers (b) Revenue received from franchisees (c) Revenues and other income items 243,940 30,782 274,722 95,982 5,262 2,711 103,955 69,289 1,012 15,955 - 24,672 110,928 241,687 30,310 271,997 85,314 7,167 2,747 95,228 51,646 - 3,407 496 25,002 80,551 2,234,118 943,648 242,419 1,993,760 965,472 200,253 HARVEY NORMAN HOLDINGS LIMITED Annual Report June 2019 83 NOTES t o th e FIN AN CI AL STATEME NTS | 20 19 3. REVENUES (continued) Table 1. Breakdown of Revenues under AASB 15 and the relationship to the reported operating segments of the consolidated entity - by Types of Contracts: Franchising Operations Retail – New Zealand Retail – Singapore & Malaysia Retail – Slovenia & Croatia Retail – Ireland & Northern Ireland Other Non- Franchised Retail Retail Property Property Developments for Resale Equity Investments Other Inter- Company Eliminations Total Segment Revenue $000 $000 $000 $000 $000 $000 $000 $000 $000 $000 $000 $000 Year Ended 30 June 2019 June 2019 Types of Contracts: Sale of products to customers Services to customers Franchise fees from franchisees Total revenue from contracts with customers and franchisees - - 668,926 935,096 13,952 - 555,467 5,206 - 148,922 1,728 - 370,154 5,531 - 221,899 1,119 - 668,926 949,048 560,673 150,650 375,685 223,018 33 - - 33 - - - - - - - - 2,871 - - 2,871 (324) - - 2,234,118 27,536 668,926 (324) 2,930,580 Franchising Operations Retail – New Zealand Retail – Singapore & Malaysia Retail – Slovenia & Croatia Retail – Ireland & Northern Ireland Other Non- Franchised Retail Retail Property Property Developments for Resale Equity Investments Other Inter-Company Eliminations Total Segment Revenue Year Ended 30 June 2018 $000 $000 $000 $000 $000 $000 $000 $000 $000 $000 $000 $000 - - 693,475 909,524 13,206 - 478,401 4,065 - 133,752 1,794 - 313,325 3,764 - 155,340 1,645 - 693,475 922,730 482,466 135,546 317,089 156,985 99 - - 99 - - - - - - - - 3,319 - - 3,319 - - - - 1,993,760 24,474 693,475 2,711,709 84 June 2018 Types of Contracts: Sale of products to customers Services to customers Franchise fees from franchisees Total revenue from contracts with customers and franchisees HARVEY NORMAN HOLDINGS LIMITED Annual Report June 2019 NOTES t o th e FIN AN CI AL STATEME NTS | 20 19 3. N otes t o the Fi nanc ial S tatem ents (c ontinu ed) REVENUES (continued) Table 2. Breakdown of Revenues under AASB 15 and the relationship to the reported operating segments of the consolidated entity - by Primary Geographical Markets: Franchising Operations Retail – New Zealand Retail – Singapore & Malaysia Retail – Slovenia & Croatia Retail – Ireland & Northern Ireland Other Non- Franchised Retail Retail Property Property Developments for Resale Equity Investments Other Inter- Company Eliminations Total Segment Revenue $000 $000 $000 $000 $000 $000 $000 $000 $000 $000 $000 $000 Year Ended 30 June 2019 668,926 - - - - 949,048 - - - - 560,673 - - - - 150,650 - - - 375,685 214,359 8,659 - - 668,926 949,048 560,673 150,650 375,685 223,018 33 - - - 33 - - - - - - - - - - 2,871 - - - 2,871 (324) - - - 885,865 957,707 560,673 526,335 (324) 2,930,580 Franchising Operations Retail – New Zealand Retail – Singapore & Malaysia Retail – Slovenia & Croatia Retail – Ireland & Northern Ireland Other Non- Franchised Retail Retail Property Property Developments for Resale Equity Investments Other Inter- Company Eliminations Total Segment Revenue $000 $000 $000 $000 $000 $000 $000 $000 $000 $000 $000 $000 Year Ended 30 June 2018 693,475 - - - - 922,730 - - - - 482,466 - - - - 135,546 - - - 317,089 148,689 8,296 - - 693,475 922,730 482,466 135,546 317,089 156,985 99 - - - 99 - - - - - - - - - - 3,319 - - - 3,319 - - - - - 845,582 931,026 482,466 452,635 2,711,709 June 2019 Primary geographical markets: Australia New Zealand Asia Europe Total revenue from contracts with customers and franchisees June 2018 Primary geographical markets: Australia New Zealand Asia Europe Total revenue from contracts with customers and franchisees HARVEY NORMAN HOLDINGS LIMITED Annual Report June 2019 85 NOTES t o th e FIN AN CI AL STATEMENTS | 20 19 4. EXPENSES AND LOSSES Employee benefits expense: - Wages and salaries - Workers’ compensation - Superannuation contributions - Payroll tax - Share-based payments - Other employee benefits Total employee benefits expense CONSOLIDATED June 2019 $000 313,124 3,174 16,278 12,107 717 8,523 353,923 June 2018 $000 278,043 1,282 13,904 10,999 761 10,874 315,863 Minimum lease payments 184,780 171,025 Finance costs: - Bank interest paid to financial institutions - Other Total finance costs 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 KEH (a) (included in administrative expenses line in the Income Statement) Impairment of non-trade debts receivable from Coomboona JV (c) (included in administrative expenses line in the Income Statement) Impairment of equity-accounted investment (d) (included in administrative expenses line in the Income Statement) Total depreciation, amortisation and impairment Loss on restructure and consolidation of KEH (b) KEH Partnership Pty Limited (KEH) 26,838 1,944 28,782 11,857 52,506 19,721 1,175 146 8,248 - 93,653 9,665 23,827 2,517 26,344 11,157 54,202 18,339 1,093 16,921 28,779 20,665 151,156 - (a) As at 30 June 2018, the consolidated entity had a commercial loan receivable from the KEH Partnership retail joint venture (KEH) totalling $60.96 million in respect of the amounts advanced to The School Locker business to assist with working capital requirements. The Big Buys by Harvey Norman® business was closed during the second half of the 2018 financial year. 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. As at 30 June 2018, the total provision for doubtful debts relating to The School Locker business of KEH was $20.82 million. The provision for doubtful debts previously raised for The Big Buys business was fully utilised upon closure. During the 2018 financial year, an impairment assessment was conducted resulting in the recognition of an expense of $16.92 million, with $6.06 million relating to the Big Buys by Harvey Norman® business and $10.86 million relating to The School Locker business. (b) Up to 30 June 2018, the consolidated entity, through a wholly-owned subsidiary, had a 50% interest in the KEH business (Partnership) and had accounted for its interest as an equity-accounted joint venture entity. Effective 1 July 2018, the consolidated entity’s interest in the Partnership was 99.02% and, from that date, the consolidated entity ceased equity accounting and consolidated the financial statements of KEH. The loss on the restructure and consolidation of KEH was $9.67 million, being the difference in the carrying amount of the loan receivable from KEH in the consolidated entity’s financial statements of $40.14 million and the fair value of the loan payable in KEH’s financial statements of $30.47 million. Refer to Note 38. Business Combinations on page 124. 86 NOTES t o th e FIN AN CI AL STATEMENTS | 20 19 N otes t o the Fi nanc ial S t atem ents (c ontinu ed) EXPENSES AND LOSSES (continued) 4. Coomboona JV (c) In the previous financial year, the recoverable amount of the loans advanced to the Coomboona JV were assessed as at 30 June 2018 based on the information provided by the Administrator as to the expected terms and conditions of the Administrator Sale. During the year ended 30 June 2019, upon exchange of contracts for the Administrator Sale and the subsequent settlement of the Administrator Sale on 16 January 2019, the secured creditors were advised that the expected net proceeds on settlement would be $8.25 million less than the expected recoverable amount to discharge those receivables. The reduced proceeds were due to matters regarding the finalisation of the Administrator Sale that arose during the current year. (d) The impairment loss recognised for the year ended 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. 5. (a) INCOME TAX 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: CONSOLIDATED June 2019 $000 June 2018 $000 128,456 (135) 138,147 (360) Relating to the origination and reversal of temporary differences 37,236 12,335 Total income tax expense reported in the Income Statement 165,557 150,122 (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 3 3,910 3,913 4 2,693 2,697 HARVEY NORMAN HOLDINGS LIMITED Annual Report June 2019 87 NOTES t o th e FIN AN CI AL STATEMENTS | 20 19 5. INCOME TAX (continued) CONSOLIDATED June 2019 $000 June 2018 $000 (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: Accounting profit before tax 574,560 530,172 At the statutory income tax rate of 30% (2018: 30%) 172,368 159,052 Adjustments to arrive at total income tax expense recognised for the year: Transitions undertaken by Harvey Norman Holdings Limited and Harvey Norman Holdings (Ireland) Limited as agreed under the terms of an Advance Pricing Arrangement with the Australian Taxation Office dated 6 February 2012 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 previously unrecognised 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 Total income tax expense reported in the Income Statement Effective income tax rate (%) 1,630 (135) 158 171 (66) 7 (2,768) (221) (154) 1,348 (792) (636) (5,353) (6,811) 165,557 28.81% 1,583 360 229 1,090 (4,395) 302 (1,300) (359) (371) (90) (830) (1,049) (4,100) (8,930) 150,122 28.32% 88 NOTES t o th e FIN AN CI AL STATEMENTS | 20 19 N otes t o the Fi nanc ial S t atem ents (c ontinu ed) INCOME TAX (continued) 5. STATEMENT OF FINANCIAL POSITION INCOME STATEMENT June 2019 $000 June 2018 $000 June 2019 $000 June 2018 $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 (185,556) (164,227) 21,102 16,549 Revaluations of owner-occupied land and buildings to fair value (40,189) (36,501) - - Non-allowable building depreciation in respect of properties in New Zealand Reversal of building depreciation expense for investment properties Research and development Other items (13,831) (105,152) (13,683) (92,370) (16,531) (16,807) (4,108) (3,419) (515) 12,782 (276) 460 (2,040) 12,234 178 3,027 Total deferred tax liabilities (365,367) (327,007) Deferred tax assets: Employee provisions Unused tax losses and tax credits Losses in respect of the Coomboona joint venture 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 9,817 260 11,665 7,959 442 1,273 1,206 811 1,388 9,196 219 18,798 11,993 266 1,201 1,341 1,870 1,388 (396) (41) 7,134 (935) 154 (6,199) (4,093) (11,396) (44) (72) 136 1,059 - (241) 199 69 736 - Total deferred tax assets 34,821 46,272 Total deferred tax (330,546) (280,735) 37,236 12,335 The consolidated entity has not recognised deferred tax assets relating to tax losses of $195.32 million (2018: $205.56 million) which are available for offset against taxable profits of the companies in which the losses arose. At 30 June 2019, no deferred tax liability has been recognised (2018: nil) in respect of the unremitted earnings of certain subsidiaries, associates or joint ventures. HARVEY NORMAN HOLDINGS LIMITED Annual Report June 2019 89 NOTES t o th e FIN AN CI AL STATEMENTS | 20 19 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 to the parent 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 (a) Weighted Average number of Ordinary Shares CONSOLIDATED June 2019 $000 34.70c 34.67c 409,002 (6,685) 402,317 NUMBER OF SHARES June 2019 Number June 2018 $000 33.21c 33.18c 380,050 (4,672) 375,378 June 2018 Number 1,159,443,029 1,130,182,344 1,114,644 1,032,320 1,160,557,673 1,131,214,664 The weighted average number of ordinary shares used in calculating basic earnings per share is inclusive of the new shares totalling 65,547,679 ordinary shares in the Company issued on 22 October 2018 pursuant to the pro-rata Entitlement Offer, weighted on a pro-rata basis from issue date to 30 June 2019. (b) Effect of Dilutive Securities 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 31 December 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 the Tranche 1 performance rights amounted to $1,408,000 in aggregate. On 1 January 2019, 160,000 performance rights representing 40% of Tranche 1 of the 2016 LTI Plan had lapsed and will never be exercisable by the participants. On 1 March 2019, 112,500 performance rights under Tranche 1 of the 2016 LTI Plan were exercised. On 8 March 2019, 45,000 performance rights under Tranche 1 of the 2016 LTI Plan were exercised. On 11 March 2019, 45,000 performance rights under Tranche 1 of the 2016 LTI Plan were exercised. On 21 March 2019, 37,500 performance rights under Tranche 1 of the 2016 LTI Plan were exercised reducing the unissued ordinary shares under Tranche 1 of the 2016 LTI Plan to nil. 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 31 December 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 31 December 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. On 4 December 2018, the consolidated entity issued a total of 549,500 performance rights under Tranche FY19 of the 2016 LTI Plan to the executive directors. These performance rights are capable of exercise from 1 January 2022 to 30 June 2024. The performance rights were valued at grant date at $2.59 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 FY19 performance rights amounted to $1,423,205 in aggregate. Performance rights issued under Tranche 2 (FY17), Tranche 3 (FY18) and Tranche FY19 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. 90 NOTES t o th e FIN AN CI AL STATEMENTS | 20 19 N otes t o the Fi nanc ial S t atem ents (c ontinu ed) CONSOLIDATED June 2019 $000 June 2018 $000 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 607,731 104,359 3,199 (444) 714,845 544,003 102,782 2,900 (777) 648,908 Amount receivable in respect of finance leases, net (d) 3,306 3,400 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 21,334 3,096 (719) 23,711 94,721 6,627 (28,966) 72,382 Total trade and other receivables (current) 741,862 724,690 (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 $607.73 million as at 30 June 2019 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. Receivables from franchisees are current and neither past due nor impaired as at 30 June 2019. Upon first-time implementation of AASB 9 Financial Instruments, receivables from franchisees have been measured at amortised cost. The consolidated entity has performed an assessment of the franchisee receivables and has calculated the expected credit loss by applying the general approach for provisioning for expected credit losses prescribed by AASB 9. The expected credit loss assessment was conducted on the carrying value of franchisee receivables upon the initial application of the standard as at 30 June 2018 totalling $544.00 million, and on the carrying value of franchisee receivables as at 30 June 2019 totalling $607.73 million. Based on the assessment conducted in both periods, the expected credit losses on receivables from franchisees are not material to the result of the consolidated entity and, as such, no adjustment has been recognised to opening retained profits as at 1 July 2018 and the income statement for the year ended 30 June 2019. The calculation of the expected credit losses pursuant to AASB 9 produces a materially similar result to the previous recoverability assessment under AASB 139 Financial Instruments: Recognition and Measurement. Previously under AASB 139, Derni, as a secured creditor of the franchisee, conducted an assessment of recoverability in respect of each individual franchisee financial accommodation facility. This involved 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. (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 $0.26 million (2018: $0.17 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:  $88.76 million of the trade receivables balance as at 30 June 2019 (2018: $89.38 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. $15.73 million of the trade receivables balance as at 30 June 2019 (2018: $13.19 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 2019 (2018: nil). $0.41 million of the trade receivables balance as at 30 June 2019 (2018: $0.75 million) are past due and impaired which have been fully provided.   Neither past due nor impaired Past due but not impaired 61-90 Days 31-60 Days +90 Days Past due and impaired 61-90 Days 31-60 Days +90 Days 2019 ($000) 88,764 4,193 3,486 8,048 2018 ($000) 89,376 5,250 2,776 5,162 99 52 111 26 204 673 Total 104,905 103,315 HARVEY NORMAN HOLDINGS LIMITED Annual Report June 2019 91 NOTES t o th e FIN AN CI AL STATEMENTS | 20 19 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 2019 $000 104,359 546 104,905 751 262 24 (623) 414 June 2018 $000 102,782 533 103,315 1,173 174 24 (620) 751 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:  $3.64 million of the consumer finance loans at 30 June 2019 (2018: $3.16 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. $0.20 million of the consumer finance loans balance as at 30 June 2019 (2018: $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. $0.04 million of the consumer finance loans at 30 June 2019 (2018: $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 +90 Days 31-60 Days 61-90 Days +90 Days 2019 ($000) 2018 ($000) 3,642 3,156 132 113 22 48 44 165 - - - - 36 32 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 Amounts written off At 30 June CONSOLIDATED June 2019 $000 $000 3,199 677 3,876 32 17 (13) 36 Total 3,876 3,514 June 2018 $000 $000 2,900 614 3,514 27 5 - 32 92 NOTES t o th e FIN AN CI AL STATEMENTS | 20 19 N otes t o the Fi nanc ial S t atem ents (c ontinu ed) TRADE AND OTHER RECEIVABLES (CURRENT) (continued) 7. (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 2019 $000 $000 3,418 896 4,314 (112) (76) 4,126 3,306 820 4,126 - - - June 2018 $000 $000 3,515 816 4,331 (115) (84) 4,132 3,400 732 4,132 2,458 (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 (2018: nil). The ageing analysis of current and non-current finance lease receivables is as follows:   $1.40 million of the finance lease receivable balance as at 30 June 2019 (2018: $1.41 million) are neither past due nor impaired. $2.73 million of the finance lease receivable balance as at 30 June 2019 (2018: $2.73 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 2019 is past due and impaired (2018: nil).  (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 2019 was $101.34 million (2018: $211.96 million) as follows:  $51.85 million of the non-trade debts receivable balance as at 30 June 2019 (2018: $43.16 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. $19.22 million of the non-trade debts receivable balance as at 30 June 2019 (2018: $105.79 million) are past due but not impaired. These receivables are subject to regular monitoring and periodic impairment testing to ensure that they are recoverable. $30.27 million of the non-trade debts receivable balance as at 30 June 2019 (2018: $63.01 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 2019 ($000) 2018 ($000) 51,847 43,158 - - - - 19,218 105,794 - - - - 30,272 63,008 Total 101,337 211,960 HARVEY NORMAN HOLDINGS LIMITED Annual Report June 2019 93 NOTES t o th e FIN AN CI AL STATEMENTS | 20 19 TRADE AND OTHER RECEIVABLES (CURRENT) (continued) 7. (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) (iii) Reversal due to restructure of KEH business (i) Utilisation of doubtful debts provision (i) (iii) At 30 June (i) Non-trade receivables from the KEH Partnership retail joint venture: CONSOLIDATED June 2019 $000 $000 24,430 76,907 101,337 63,008 3,786 (4,494) (32,028) 30,272 June 2018 $000 $000 101,348 110,612 211,960 48,305 45,885 - (31,182) 63,008 As at 30 June 2018, the consolidated entity, through a wholly-owned subsidiary, had a 50% interest in KEH Partnership Pty Limited (KEH), a retail joint venture in Australia. The primary business of KEH is the retail sale of school apparel and educational goods through the brand name of The School Locker. The ‘Big Buys by Harvey Norman®‘ (Big Buys) division of KEH was closed during the second half of the 2018 financial year. At 30 June 2018, the aggregate non-trade receivable from KEH was $60.96 million in respect of the amounts advanced to The School Locker business to assist with working capital requirements. The amounts previously advanced to Big Buys were either repaid or written off in full upon closure, utilising the provision for doubtful debts previously raised in respect of that business. During the 2018 financial year, an impairment assessment was conducted resulting in the recognition of an expense of $16.92 million, with $6.06 million relating to Big Buys and $10.86 million relating to The School Locker. As at 30 June 2018, the total provision for doubtful debts relating to The School Locker was $20.82 million with a nil provision balance relating to Big Buys. Effective 1 July 2018, a wholly-owned subsidiary of Harvey Norman Holdings Limited acquired all of the inventory assets of KEH. Subsequently, there was a restructure of the KEH business where, by unanimous agreement in writing, each partner in the Partnership agreed to vary the interest of the respective partners in the Partnership, with the consolidated entity increasing its partnership interest in the Partnership to 99.02%. The effect of this restructure was the consolidation and elimination of the commercial loans advanced to The School Locker. This resulted in a net reversal of $4.49 million in respect of the provision for doubtful debts previously raised for The School Locker non-trade receivables. (ii) Non-trade receivables from mining camp joint ventures: The consolidated entity has made commercial advances to the mining camp joint ventures totalling $34.95 million (2018: $37.63 million) in aggregate as at 30 June 2019. 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 (2018: nil) 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 2019 relating to non-trade receivables from the mining camp joint ventures was $13.23 million (2018: $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 2019 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. (iii) Non-trade receivables from the Coomboona joint venture: As at 30 June 2018, the total indebtedness of the Coomboona joint venture to the consolidated entity amounted to $74.99 million. An impairment assessment was conducted resulting in the recognition of an impairment expense of $28.78 million to reduce the carrying amount of the Coomboona joint venture non-trade receivable to its recoverable amount. The estimated recoverable amount of the Coomboona JV non-trade receivables, net of any impairment provisions, was $46.21 million as at 30 June 2018. On 16 January 2019, the Administrator Sale of the Coomboona JV assets was completed and the Contract for Sale settled. Refer to further information provided on Page 14 regarding the Other Segment regarding the Administrator Sale. The secured creditors received net proceeds on sale of $40.50 million for the full discharge of the NCF receivables and the partial discharge of the HN JV Entity receivables. After taking into account the net sales proceeds, a further impairment expense of $8.25 million was recognised in December 2018, of which $3.25 million was recognised as a provision for doubtful debts to reduce the value of the HN JV Entity receivables to its estimated recoverable amount. Upon completion of the Administrator Sale and receipt of the net proceeds on sale, the total balance of the Coomboona doubtful debt provision of $32.03 million was utilised and reversed in full. 94 NOTES t o th e FIN AN CI AL STATEMENTS | 20 19 N otes t o the Fi nanc ial S t atem ents (c ontinu ed) CONSOLIDATED 8. OTHER FINANCIAL ASSETS (CURRENT) Equity investments 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) June 2019 $000 27,483 5 1,400 28,888 403,154 (7,189) 395,965 29,901 7,640 37,541 June 2018 $000 29,754 5 1,704 31,463 350,880 (5,593) 345,287 39,220 5,924 45,144 Net licence property (current) 370 490 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 and joint venture partners) - Unrelated entities Provision for doubtful debts (d) Non-trade debts receivable, net Total trade and other receivables (non-current) 546 677 (6) 1,217 820 50,939 25,968 (29,553) 47,354 49,391 533 614 (6) 1,141 732 98,588 12,024 (34,042) 76,570 78,443 (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). (c) Finance lease receivables 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). HARVEY NORMAN HOLDINGS LIMITED Annual Report June 2019 95 NOTES t o th e FIN AN CI AL STATEMENTS | 20 19 13. OTHER FINANCIAL ASSETS (NON-CURRENT) Equity investments at fair value Units in unit trusts Other non-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 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 and amortisation Total written down amount CONSOLIDATED June 2019 $000 16,861 414 2,095 19,370 199,078 242,135 441,213 828,962 (577,100) 251,862 7,042 (3,910) 3,132 254,994 441,213 836,004 1,277,217 (581,010) 696,207 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) 2,732 227,876 432,461 808,364 1,240,825 (580,488) 660,337 (a) The net book value of land and buildings (other than land and buildings classified as investment properties) was $225.49 million (2018: $237.42 million) as measured on a historical cost basis. 96 NOTES t o th e FIN AN CI AL STATEMENTS | 20 19 N otes t o the Fi nanc ial S t atem ents (c ontinu ed) 14. PROPERTY, PLANT AND EQUIPMENT (continued) CONSOLIDATED June 2019 $000 June 2018 $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 to assets held for sale 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 assets held for sale Net foreign currency differences arising from foreign operations Closing balance Plant and equipment at cost: Opening balance Additions Disposals Acquisition of a subsidiary 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 Acquisition of a subsidiary Reclassification to buildings at fair value Reclassification to investment property Net foreign currency differences arising from foreign operations Closing balance Net book value 195,490 - 2,962 (1,128) (7,162) 8,916 199,078 236,971 7,204 (341) 9,272 (10,647) - (9,505) 9,181 242,135 795,632 76,863 (66,005) 5,656 - - 9,997 822,143 574,843 50,548 (59,945) 1,582 - - 6,701 573,729 182,529 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) 4,409 574,843 248,414 220,789 HARVEY NORMAN HOLDINGS LIMITED Annual Report June 2019 97 NOTES t o th e FIN AN CI AL STATEMENTS | 20 19 14. PROPERTY, PLANT AND EQUIPMENT (continued) Reconciliation of the carrying amounts of property, plant and equipment (continued) Leased plant and equipment at cost: Opening balance Additions Acquisition of a subsidiary Disposals Closing balance Leased plant and equipment accumulated depreciation: Opening balance Depreciation for the year Acquisition of a subsidiary 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 CONSOLIDATED June 2019 $000 6,475 443 69 (168) 6,819 2,120 1,364 14 (127) 3,371 3,448 6,257 908 (429) 306 7,042 3,525 594 (377) 168 3,910 3,132 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 Total plant and equipment 254,994 227,876 Total property, plant and equipment 696,207 660,337 98 NOTES t o th e FIN AN CI AL STATEMENTS | 20 19 14. (a) PROPERTY, PLANT AND EQUIPMENT (continued) Reconciliation of owner occupied properties – land and buildings at fair value New Zealand Slovenia Opening balance Additions Disposals Fair value adjustments Depreciation for the year Transfer to assets held for sale Transfer from plant and equipment Retail $000 240,551 7,017 (341) 12,234 (7,598) - - Retail $000 75,007 - - - (1,740) - - Net foreign currency differences 9,988 2,075 Warehouse $000 3,320 - - - (59) - - 94 Singapore Warehouse $000 16,570 - - - (901) (16,667) - 998 Retail $000 65,490 - - - (1,081) - - 4,011 Office $000 7,968 - - - (21) - - 491 Australia Ireland T Total Retail $000 7,634 73 - - (69) - - - Retail $000 15,921 114 - - (306) - - 440 2019 $000 2018 $000 432,461 413,849 7,204 (341) 12,234 (11,775) (16,667) - 18,097 10,396 (23) 15,551 (11,087) - 2,777 998 Closing balance 261,851 75,342 3,355 68,420 - 8,438 7,638 16,169 441,213 432,461 (b) Fair value measurement, valuation techniques and inputs Class of property Retail Fair value hierarchy * Level 3 Fair value 30 June 2019 $000 Valuation technique Key unobservable inputs Range of unobservable inputs 429,420 Discounted cash flow Income capitalisation Terminal yield Discount rate Net market rent per sqm p.a. Capitalisation rate 4.20% - 8.50% 4.50% - 8.75% $118 - $748 per sqm p.a. 4.20% - 8.63% Direct sale comparison Price per sqm of lettable area $5,800 - $17,938 per sqm Warehouse Level 3 3,355 Income capitalisation Net market rent per sqm p.a. $89 per sqm p.a. Office Level 3 8,438 Discounted cash flow Capitalisation rate Terminal yield Discount rate 7.67% 3.75% 4.00% Income capitalisation Net market rent per sqm p.a. $263 - $317 per sqm p.a. Capitalisation rate 3.20% - 3.50% Direct sale comparison Price per sqm of lettable area $7,956 - $10,005 per sqm Total 441,213 * Please refer to Note 35 (e) on page 120 for the definition of level 3 fair value hierarchy. HARVEY NORMAN HOLDINGS LIMITED Annual Report June 2019 99 NOTES t o th e FIN AN CI AL STATEMENTS | 20 19 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. 100 NOTES t o th e FIN AN CI AL STATEMENTS | 20 19 N otes t o the Fi nanc ial S t atem ents (c ontinu ed) 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 Opening balance Additions Transfers from property, plant and equipment Transfer to assets held for sale Change in class of property Fair value adjustments* Disposals Depreciation for the year Net foreign currency differences New Zealand Australia Retail Warehouse Retail Warehouse Office Property for $000 $000 $000 $000 $000 development $000 6,176 2,524 2,189,718 193,629 35,500 1,850 27,086 3,103 - - - - 568 - (74) 270 - - - - 443 - (8) 116 - (18,627) (5,827) 48,174 (763) - - - - - - - 1,250 4,577 22,616 (1,500) - - - - - - (1,850) - - TOTAL June 2019 $000 June 2018 $000 2,429,397 30,189 2,241,754 137,961 - (18,627) - 70,301 (2,613) (82) 35 - - 51,646 (1,792) (70) 386 (137) - - - - - Closing balance 6,940 3,075 2,239,761 220,598 38,577 - 2,508,951 2,429,397 * Fair value adjustments totalling $70.30 million in aggregate for the year ended 30 June 2019 are included in other income (2018: $51.65 million). HARVEY NORMAN HOLDINGS LIMITED Annual Report June 2019 101 NOTES t o th e FIN AN CI AL STATEMENTS | 20 19 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 June 2019 $000 Range of unobservable inputs Retail Level 3 Metropolitan - 1,335,898 Income capitalisation Net market rent/sqm p.a. $70 - $256 / sqm p.a. Regional – 910,803 Total – 2,246,701 Capitalisation rate: - Metropolitan - Regional Discounted cash flow Terminal yield Direct sale comparison Discount rate Price per sqm of lettable area 6.0% - 8.8% 7.0% - 9.8% 6.8% - 10.0% 7.0% - 10.5% $607 - $3,533 per sqm Warehouse Level 3 223,673 Income capitalisation Net market rent/sqm p.a. $26 - $189 / sqm p.a. Discounted cash flow Terminal yield Capitalisation rate Direct sale comparison Discount rate Price per sqm of lettable area Office Level 3 38,577 Income capitalisation Net market rent/sqm p.a. Discounted cash flow Capitalisation rate Terminal yield Discount rate 6.3% - 10.0% 6.8% - 9.3% 7.0% -10.3% $322 - $2,208 per sqm $128 - $385 / sqm p.a. 7.0% - 9.3% 7.3% - 8.5% 7.0% Direct sale comparison Price per sqm of lettable area $1,492 - $4,793 per sqm Total 2,508,951 * Please refer to Note 35 (e) on page 120 for the definition of level 3 fair value hierarchy. 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. 102 NOTES t o th e FIN AN CI AL STATEMENTS | 20 19 N otes t o the Fi nanc ial S t atem ents (c ontinu ed) INVESTMENT PROPERTIES (continued) 15. (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 nine (39) sites within the investment property portfolio during the year ended 30 June 2019. 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 eighteen (18) sites within the investment property portfolio were identified for further review by management. The eighteen (18) 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 The sensitivity information for investment properties is the same as those for owner-occupied properties detailed in Note 14(d). (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 $217.09 million for the year ended 30 June 2019 (2018: $211.48 million). Operating expenses, including rates and taxes and repairs and maintenance, recognised in the income statement in relation to investment properties amounted $50.74 million for the year ended 30 June 2019 (2018: $47.97 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 2019 $000 June 2018 $000 204,327 (142,417) 61,910 65,607 16,606 (732) (19,721) 150 61,910 2,469 252 193,529 (127,922) 65,607 71,354 12,685 (143) (18,339) 50 65,607 3,096 364 Net intangible assets (non-current) 64,631 69,067 (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. HARVEY NORMAN HOLDINGS LIMITED Annual Report June 2019 103 NOTES t o th e FIN AN CI AL STATEMENTS | 20 19 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: Non-trade amounts owing to: - 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 Total interest-bearing loans and borrowings (current) (a) Bank Overdraft CONSOLIDATED June 2019 $000 221,323 62,359 283,682 29,232 9,750 370,000 79,417 1,622 49 - 4,245 264 494,579 June 2018 $000 229,267 60,719 289,986 45,081 9,750 240,000 82,190 1,062 52 33,160 10,644 252 422,191 Of the total bank overdraft of $29.23 million as at 30 June 2019:  a total of $29.14 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 $0.09 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 26 November 2018, the Amending Deed (No. 6) to the Syndicated Facility Agreement was executed with the effect of extending the repayment date of Tranche B of the Facility totalling $240 million to 4 December 2021. The aggregate available facility of the Syndicated Facility Agreement remained at $810 million. The utilised amount of the Syndicated Facility Agreement as at 30 June 2019 was $715 million, repayable as set out below, $370 million of which was classified as current interest-bearing loans and borrowings and $345 million was 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 2019); in respect of Tranche A2 totalling $200 million, on 4 December 2019 ($200 million utilised at 30 June 2019); in respect of Tranche A3 totalling $200 million, on 4 December 2020 ($200 million utilised at 30 June 2019); in respect of Tranche B totalling $240 million, on 4 December 2021 ($145 million utilised at 30 June 2019); 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: 104 NOTES t o th e FIN AN CI AL STATEMENTS | 20 19 N otes t o the Fi nanc ial S t atem ents (c ontinu ed) INTEREST-BEARING LOANS AND BORROWINGS (CURRENT) (continued) Syndicated Facility Agreement (continued) 18. (c) (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 $79.42 million:      a total of $46.02 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 2019. a total of $25.18 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 2019. a total of $3.69 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 $1.03 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. The Company has not received notice of the occurrence of any Relevant Event from any Financier. During the 2019 and 2018 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). (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 2019 and 2018 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 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 Total provisions (current) Non-Current: Employee entitlements (Note 29) Lease make good Deferred lease expenses Total provisions (non-current) June 2019 $000 4,101 71,718 75,819 31,902 437 689 33,028 2,171 6,604 4,250 13,025 June 2018 $000 4,037 62,788 66,825 34,096 473 785 35,354 1,994 5,785 3,866 11,645 HARVEY NORMAN HOLDINGS LIMITED Annual Report June 2019 105 NOTES t o th e FIN AN CI AL STATEMENTS | 20 19 20. PROVISIONS (continued) CONSOLIDATED At 1 July 2018 Arising during the year Utilised Exchange rate variance At 30 June 2019 Current 2019 Non-current 2019 Total provisions 2019 Current 2018 Non-current 2018 Total provisions 2018 Make Good Provision $000 Deferred Lease Expenses $000 6,258 893 (417) 307 7,041 437 6,604 7,041 473 5,785 6,258 4,651 1,144 (874) 18 4,939 689 4,250 4,939 785 3,866 4,651 Total $000 10,909 2,037 (1,291) 325 11,980 1,126 10,854 11,980 1,258 9,651 10,909 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. 21. INTEREST-BEARING LOANS AND BORROWINGS (NON-CURRENT) Secured: Syndicated Facility Agreement (Refer to Note 18(c)) Lease liabilities Total interest-bearing loans and borrowings (non-current) CONSOLIDATED June 2019 $000 June 2018 $000 345,000 1,942 346,942 500,000 3,203 503,203 106 NOTES t o th e FIN AN CI AL STATEMENTS | 20 19 N otes t o the Fi nanc ial S t atem ents (c ontinu ed) CONSOLIDATED June 2019 $000 June 2018 $000 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 50,260 110,896 9,750 810,000 980,906 29,232 79,417 9,750 370,000 345,000 833,399 21,028 31,479 95,000 147,507 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 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 11,223 107 11,330 13,625 538 14,163 552,250 552,250 388,381 388,381 Number of Shares Number of Shares Ordinary shares issued and fully paid 1,179,736,590 1,114,188,911 Fully paid ordinary shares carry one vote per share and carry the right to dividends. Movements in ordinary shares on issue At 1 July 2018 Issue of shares under renounceable pro-rata Entitlement Offer At 30 June 2019 June 2019 Number of Shares June 2019 $000 1,114,188,911 65,547,679 1,179,736,590 388,381 163,869 552,250 Ordinary Shares – Terms and Conditions 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. HARVEY NORMAN HOLDINGS LIMITED Annual Report June 2019 107 NOTES t o th e FIN AN CI AL STATEMENTS | 20 19 25. RESERVES CONSOLIDATED $000 Asset revaluation reserve Foreign currency translation reserve Available for sale reserve FVOCI reserve Cash flow hedge reserve Employee equity benefits reserve Acquisition reserve Total - - - - - - - - - - - - - - At 1 July 2017 131,304 42,374 13,732 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 15,915 (2,693) - - - - - - - - - - - - - (1,715) - - - - (1,830) - - - - - - At 30 June 2018 144,526 40,659 11,902 At 1 July 2018 144,526 40,659 11,902 Revaluation of land and buildings Tax effect of revaluation of land and buildings Transfer to financial assets at fair value through other comprehensive income (a) Unrealised loss on financial assets at fair value through other comprehensive income 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 Utilisation of employee equity benefits reserve At 30 June 2019 12,234 (3,910) - - - - - - - - - - - - - - 25,194 - - 152,850 - 65,853 - - (11,902) 11,902 - - - - - - - - (953) - - - - - - 10,949 (20) 9,611 (22,051) 174,950 - - - 20 (12) 4 - - - - - - - - - - 741 4 - - - - - - - - - 15,915 (2,693) (1,830) 20 (12) 4 (1,715) 741 4 (8) 10,356 (22,051) 185,384 (8) 10,356 (22,051) 185,384 - - - - 8 (3) 1 - - - (2) - - - - - - - - 519 - - - - - - - - - 12,234 (3,910) - (953) 8 (3) 1 25,194 519 (750) 10,125 - (22,051) (750) 217,724 (a) The listed shares held as available for sale at fair value as at 30 June 2018 were classified as listed shares held at fair value through other comprehensive income (FVOCI) upon first-time application of the new standard, AASB 9 Financial Instruments from 1 July 2018. As such, the amounts previously recognised in the available for sale reserve within equity have been transferred to the financial assets at FVOCI reserve. 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. Fair Value through Other Comprehensive Income (FVOCI) Reserve This reserve is used to record fair value changes on equity investments classified as financial assets at fair value through other comprehensive income. Available for Sale Reserve This reserve was previously 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. 108 NOTES t o th e FIN AN CI AL STATEMENTS | 20 19 N otes t o the Fi nanc ial S t atem ents (c ontinu ed) CONSOLIDATED June 2019 $000 June 2018 $000 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 2018: 18.0 cents (2017: 12.0 cents) Interim fully-franked dividend for 2019: 12.0 cents (2018: 12.0 cents ) Total dividends paid 2,337,241 402,317 (342,122) 2,397,436 200,554 141,568 342,122 2,229,200 375,378 (267,337) 2,337,241 133,635 133,702 267,337 The final dividend of $200.55 million, fully-franked, for the year ended 30 June 2018 was paid on 2 November 2018. The interim dividend of 12.0 cents per share, totalling $141.57 million fully-franked, for the year ended 30 June 2019 was paid on 1 May 2019. The final dividend of 21.0 cents per share totalling $247.74 million fully-franked, for the year ended 30 June 2019 will be paid on 1 November 2019. 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% - 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 27. NON-CONTROLLING INTERESTS Interest in: - Ordinary shares - Reserves - Retained earnings Total non-controlling interests 539,191 1,222 (106,176) 434,237 2,691 15,027 12,665 30,383 590,529 4,900 (85,952) 509,477 2,691 13,848 10,387 26,926 HARVEY NORMAN HOLDINGS LIMITED Annual Report June 2019 109 NOTES t o th e FIN AN CI AL STATEMENTS | 20 19 28. CASH AND CASH EQUIVALENTS (a) RECONCILIATION TO CASH FLOW STATEMENT Cash and cash equivalents comprise the following: Cash at bank and on hand Short term money market deposits Bank overdraft (Note 18) CONSOLIDATED June 2019 $000 June 2018 $000 200,877 14,171 215,048 124,458 46,086 170,544 (29,232) (45,081) Cash and cash equivalents 185,816 125,463 (b) RECONCILIATION OF PROFIT AFTER INCOME TAX TO NET OPERATING CASH FLOWS Profit after tax Adjustments for: Net foreign exchange losses / (gains) Bad and doubtful debts Share of net profit from joint venture entities Depreciation of property, plant and equipment Amortisation Impairment of non-trade debts receivable Impairment of equity-accounted investments Revaluation of Australian investment properties and investment properties of overseas controlled entity Loss on restructure and consolidation of KEH Partnership Deferred lease expenses 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 409,002 380,050 461 671 (9,787) 64,363 20,896 8,394 - (70,301) 9,665 239 3,175 (14,125) (496) 364 (5,792) 65,359 19,432 45,700 20,665 (51,646) - (663) 4,173 (2,329) (1,158) (766) (75,548) (25,080) 7,531 48,056 (3,609) 372,845 (29,595) (29,738) 10,303 56,082 (26,933) 454,170 110 NOTES t o th e FIN AN CI AL STATEMENTS | 20 19 N otes t o the Fi nanc ial S t atem ents (c ontinu ed) CONSOLIDATED June 2019 Number June 2018 Number 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 5,510 June 2019 $000 20,152 31,902 2,171 54,225 5,420 June 2018 $000 16,822 34,096 1,994 52,912 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, there were no options over unissued ordinary shares outstanding and vested (or able to be exercised) by, or for the benefit of, directors of Harvey Norman Holdings Limited. Performance Rights At balance date, the following performance rights were outstanding and vested (or able to be exercised) by, or for the benefit of, directors of Harvey Norman Holdings Limited: (i) Grant Date Expiry Date Number of Performance Number of Performance 30/11/2015 28/11/2016 01/12/2017 04/12/2018 30/06/2021 30/06/2022 30/06/2023 30/06/2024 Rights Outstanding Rights Vested 2019 2018 2019 2018 - 400,000 400,000 549,500 400,000 400,000 400,000 - 240,000 - - - 1,349,500 1,200,000 240,000 - - - - - 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 Total received or due and receivable by Ernst & Young CONSOLIDATED June 2019 $ June 2018 $ 2,060,936 1,926,351 476,744 234,984 25,971 2,563,651 42,769 2,204,104 HARVEY NORMAN HOLDINGS LIMITED Annual Report June 2019 111 NOTES t o th e FIN AN CI AL STATEMENTS | 20 19 31. KEY MANAGEMENT PERSONNEL (a) Details of Key Management Personnel Directors Title Senior Executives Title Executive Chairman Martin Anderson General Manager – Advertising Gerald Harvey Kay Lesley Page John Evyn Slack-Smith Executive Director and Chief Executive Officer Executive Director and Chief Operating Officer David Matthew Ackery Executive Director Chris Mentis Executive Director, Chief Financial Officer and Company Secretary Thomas James Scott General Manager – Property Gordon Ian Dingwall Chief Information Officer Robert Nelson [resigned 31 July 2017] Haydon Ian Myers [resigned 31 July 2017] General Manager – Audio Visual General Manager – Home Appliances Christopher Herbert Brown OAM Non-Executive Director Ajay Calpakam [commenced General Manager – Audio 1 August 2017] Visual Michael John Harvey Non-Executive Director Lachlan Roach [commenced General Manager – Home Kenneth William Gunderson- Briggs Graham Charles Paton AM Maurice John Craven (commenced 27 March 2019) Non-Executive Director (Independent) Non-Executive Director (Independent) Non-Executive Director (Independent) 1 October 2017] Frank Robinson Appliances General Manager – Technology [commenced 1 August 2017] & 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 2019 $ 12,088,384 284,274 - 717,044 100,054 - June 2018 $ 11,506,845 266,098 863,359 615,206 96,558 144,065 13,189,756 13,492,131 Refer to Tables 1 and 2 of this report on pages 47 and 48 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 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: 72,273,155 193,309,626 4,244,921 4,237,364 Refer to information provided in Section 15. Other Transactions and Balances with Key Management Personnel and their Related Parties in this report on pages 53 and 54 for further information. (i) (ii) 112 NOTES t o th e FIN AN CI AL STATEMENTS | 20 19 N otes t o the Fi nanc ial S t atem ents (c ontinu ed) CONSOLIDATED June 2019 $000 June 2018 $000 33. COMMITMENTS (a) (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 166,582 388,691 138,281 693,554 155,280 386,573 147,366 689,219 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 2019 Australia New Zealand $000 $000 Singapore and Malaysia $000 Ireland and Northern Ireland $000 Slovenia Total and Croatia $000 $000 Not later than one year 103,762 11,371 30,930 18,325 2,194 166,582 Later than one year but not later than five years Later than five years 249,072 73,944 23,715 4,093 46,128 240 63,011 51,698 6,765 8,306 388,691 138,281 Total operating lease liabilities 426,778 39,179 77,298 133,034 17,265 693,554 30 June 2018 Australia New Zealand $000 $000 Singapore and Malaysia $000 Ireland and Northern Ireland $000 Slovenia Total and Croatia $000 $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 (i) 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. HARVEY NORMAN HOLDINGS LIMITED Annual Report June 2019 113 NOTES t o th e FIN AN CI AL STATEMENTS | 20 19 33. COMMITMENTS (continued) (b) 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 2019 $000 June 2018 $000 102,750 173,457 30,784 306,991 102,626 191,232 43,483 337,341 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. (c) 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 52,186 - 52,186 13,587 16,509 30,096 The consolidated entity had contractual obligations to purchase property, plant and equipment and investment properties of $52.19 million (2018: $30.10 million). The contractual obligations are mainly for acquisition of new properties in New Zealand and refurbishment of existing franchised complexes in Australia. The contractual obligations relating to joint venture entities for the year ended 30 June 2019 was $2.52 million (2018: nil). CONSOLIDATED 2019 2018 Minimum Payments Present value of payments Minimum Payments Present value of payments $000 $000 $000 $000 1,787 2,031 3,818 (254) 3,564 1,622 1,942 3,564 - 3,564 1,283 3,490 4,773 (508) 4,265 1,062 3,203 4,265 - 4,265 (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 2019, Harvey Norman Holdings Limited (the Company) and its wholly-owned subsidiaries have 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); and Indemnities to financial institutions to support bank guarantees in respect of the performance of contracts. (c) 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. 114 35. (a) NOTES t o th e FIN AN CI AL STATEMENTS | 20 19 N otes t o the Fi nanc ial S t atem ents (c ontinu ed) 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 HARVEY NORMAN HOLDINGS LIMITED Annual Report June 2019 June 2019 $000 37,962 7,282 5 45,249 28,807 12,016 49 40,872 4,377 June 2018 $000 29,682 5,378 5 35,065 28,012 11,481 52 39,545 (4,480) 115 NOTES t o th e FIN AN CI AL STATEMENTS | 20 19 35. (b) FINANCIAL RISK MANAGEMENT (continued) 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. Fixed interest rate maturing in 30 June 2019 Principal subject to floating interest rate 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 169,617 2,675 - - - - - - 579 - - - - - 820 - - - - - - - - - 42,756 215,048 0.01% - 3.15% 0.00% - 2.24% 3,876 3,876 2,727 4,126 607,731 607,731 104,905 104,905 48,258 48,258 - - - - - - 11.00% - - - 62,191 2,469 21,573 5,388 9,716 101,337 3.52% - 6.10% 5.00% - 9.50% 231,808 5,723 22,393 5,388 819,969 1,085,281 794,417 - 4,245 29,232 9,750 - - - - - - - - - - - - 1,622 1,942 - - - - - - - - - - 794,417 1.27% - 6.12% 283,682 283,682 - 264 4,509 2.37% - 3.20% 29,232 1.20% - 6.95% 9,750 1.47% - 2.10% - - - 3,564 - 3.30% - 10.21% 49 49 - - - - - - - 837,644 1,622 1,942 - 283,995 1,125,203 Cash Consumer finance loans Finance lease receivables Receivables from franchisees Trade receivables Other financial assets Non-trade debts receivables & loans Syndicated Facility and other short- term borrowings Trade creditors Other loans Bank overdraft Bills payable Finance lease liabilities Other financial liabilities 116 NOTES t o th e FIN AN CI AL STATEMENTS | 20 19 N otes t o the Fi nanc ial S t atem ents (c ontinu ed) 35. FINANCIAL RISK MANAGEMENT (continued) (b) Market Risk (continued) (ii) Interest Rate Risk Management (continued) Fixed interest rate maturing in 30 June 2018 Principal subject to floating interest rate Over 1 to 5 years More than 5 years Non- interest bearing 1 year or less Total Average interest rate Cash Consumer finance loans Finance lease receivables Receivables from franchisees Trade receivables Other financial assets Non-trade debts receivables & loans Syndicated Facility and other short- term borrowings Trade creditors Other loans Bank overdraft Bills payable Finance lease liabilities Other financial liabilities $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 4,132 544,003 544,003 103,315 103,315 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 - - - - - - - - - - 822,190 0.85% - 6.12% 289,986 289,986 - 252 44,056 2.44% - 3.17% 45,081 1.70% - 6.26% 9,750 1.64% - 1.91% - - - 4,265 52 52 - - 5.92% - - - - - - 920,825 1,062 3,203 - 290,290 1,215,380 (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 $27.48 million as at 30 June 2019 (2018: $29.75 million). The fair value of the equity investments publicly traded on the NZX was $16.86 million as at 30 June 2019 (2018: $17.09 million). (iv) Sensitivity analysis At the reporting date, the consolidated entity’s exposure to interest rate risk, foreign currency risk (after taking into consideration the hedge of foreign currency payables) and equity price risk are not considered material. HARVEY NORMAN HOLDINGS LIMITED Annual Report June 2019 117 NOTES t o th e FIN AN CI AL STATEMENTS | 20 19 35. FINANCIAL RISK MANAGEMENT (continued) (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; Non-trade debts receivable are subject to regular monitoring and/or periodic impairment testing to ensure that they are recoverable; and 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 (d) Liquidity Risk CONSOLIDATED June 2019 $000 727,060 33,700 20,475 7,033 2,985 791,253 June 2018 $000 749,121 28,189 15,973 6,147 3,703 803,133 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. 118 NOTES t o th e FIN AN CI AL STATEMENTS | 20 19 N otes t o the Fi nanc ial S t atem ents (c ontinu ed) FINANCIAL RISK MANAGEMENT (continued) Liquidity Risk (continued) 35. (d) 30 June 2019 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 $000 215,048 607,731 138,350 28,883 5 - - - - 6,976 51,085 - - - - - - 6,200 19,370 215,048 607,731 202,611 48,253 - 5 Total financial assets 990,017 6,976 51,085 25,570 1,073,648 Non derivative financial liabilities Trade and other payables Interest bearing loans and borrowings Derivative financial liabilities Forward currency contracts 283,682 509,145 - - 205,555 149,252 49 - - Total financial liabilities 792,876 205,555 149,252 - - - - 283,682 863,952 49 1,147,683 Net maturity 197,141 (198,579) (98,167) 25,570 (74,035) 30 June 2018 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) For detailed information on financing facilities available as at 30 June 2019 refer to Note 22. HARVEY NORMAN HOLDINGS LIMITED Annual Report June 2019 119 NOTES t o th e FIN AN CI AL STATEMENTS | 20 19 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 30 June 2019 price (Level 1) $000 Financial Assets Listed investments Forward currency contracts Total Financial Assets Financial Liabilities Forward currency contracts Total Financial Liabilities 44,344 - 44,344 - - 30 June 2018 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 - - Quoted market Valuation technique – market observable inputs (Level 2) $000 Total $000 44,344 5 44,349 49 49 Total $000 46,848 5 46,853 52 52 - 5 5 49 49 - 5 5 52 52 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. 120 NOTES t o th e FIN AN CI AL STATEMENTS | 20 19 N otes t o the Fi nanc ial S t atem ents (c ontinu ed) FINANCIAL RISK MANAGEMENT (continued) 35. (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 2019 and 30 June 2018 were as follows: Borrowings (a) Less: Cash and cash equivalents Net Debt (c) Total equity (b) CONSOLIDATED June 2019 $000 841,521 (215,048) 626,473 June 2018 $000 925,394 (170,544) 754,850 3,219,841 2,959,980 Debt to equity ratio [(a)/(b)] 26.14% 31.26% Net debt to equity ratio [(c)/(b)] 19.46% 25.50% (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 (2018: $22.05 million). 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 – cash flow hedges Current liabilities Forward currency contracts – held for trading Forward currency contracts – cash flow hedges HARVEY NORMAN HOLDINGS LIMITED Annual Report June 2019 CONSOLIDATED June 2019 $000 5 42 7 June 2018 $000 5 35 17 121 NOTES t o th e FIN AN CI AL STATEMENTS | 20 19 36. DERIVATIVE FINANCIAL INSTRUMENTS (continued) Forward currency contracts – held for trading (a) 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 2019 2018 Euro (0-12 months) US Dollar (0-12 months) 61.28 69.41 62.77 75.85 Total CONSOLIDATED 2019 2018 Buy $000 5,185 848 6,033 Sell $000 - - - Buy $000 7,816 1,814 9,630 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 2019 was $0.04 million for the consolidated entity (2018: $0.04 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 2018 2019 Euro (0-12 months) US Dollar (0-12 months) 61.86 68.38 62.99 74.65 Total CONSOLIDATED 2019 2018 Buy $000 2,058 285 2,343 Sell $000 - - - Buy $000 2,416 483 2,899 Sell $000 - - - 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 2019, the hedges were 100% effective (2018: 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: CONSOLIDATED June 2019 $000 Increase/(Decrease) (8) 8 (2) (2) June 2018 $000 (20) 20 (8) (8) Opening balance Transferred to inventory Charged to other comprehensive income Closing balance 122 NOTES t o th e FIN AN CI AL STATEMENTS | 20 19 N otes t o the Fi nanc ial S t atem ents (c ontinu ed) INVESTMENTS ACCOUNTED FOR USING EQUITY METHOD 37. Total joint venture entities accounted for using equity method CONSOLIDATED Investment June 2019 $000 June 2018 $000 3,854 4,497 Name and Principal Activities Ownership Interest Contribution to Noarlunga (Shopping complex) Perth City West (Shopping complex) Warrawong King St (a) (Shopping complex) 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) Other Subtotal KEH Partnership (c) (Retailer) Coomboona Dairy (d) (Dairy farming) June 2019 % 50% 50% 62.5% 50% 50% 50% 50% 50% 50% 50% 99.02% 49.9% June 2018 % 50% 50% 62.5% 50% 50% 50% 50% 50% 50% 50% 50% 49.9% Profit / (Loss) Before Tax June 2018 June 2019 $000 $000 1,447 3,123 1,087 (755) 536 699 (202) 3,117 11 724 1,573 3,806 1,100 (741) 246 631 (234) 3,075 10 891 9,787 10,357 - - - (4,565) 9,787 5,792 (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) a finance facility from ANZ for the amount of $5.15 million plus interest and costs, with a maturity date of 31 January 2020. finance facilities from Network Consumer Finance Pty Limited (“NCF”), a wholly-owned subsidiary of HNHL, for the amount of $32.69 million plus interest and costs, subject to bi-annual review. (ii) (c) Prior to 1 July 2018, the consolidated entity, through a wholly-owned subsidiary, had a 50% interest in KEH Partnership Pty Limited (KEH), a retailer of school apparel, education goods and technology equipment through the brand name of The School Locker. Effective 1 July 2018, the KEH business was restructured and the consolidated entity’s interest in the Partnership was 99.02% and, from that date, the consolidated entity ceased equity accounting and consolidated the financial statements of KEH. Refer to further information provided on page 14 regarding the Other Non-Franchised Retail Segment and Note 38. Business Combinations on page 124. (d) In August 2018, the Administrators commenced an orderly sale process for the sale of the Coomboona JV assets (Administrator Sale). Expressions of interest were received and reviewed by the Administrator. On 31 October 2018, the Administrators advised the consolidated entity that the property, the subject of the NCF Securities and HN JV Entity Securities in respect of the NCF and HN JV Entity receivables, had been sold for $44.10 million to Australian Fresh Milk Holdings Pty Limited. On 16 January 2019, the Administrator Sale was completed and the Contract for Sale settled. The only secured creditors were NCF and the HN JV Entity and both are wholly-owned subsidiaries of HNHL. The secured creditors received net proceeds on sale of $40.50 million for the full discharge of the NCF receivables and the partial discharge of the HN JV Entity receivables. Upon completion of the Administrator Sale, a further impairment expense of $8.25 million was recognised for the year ended 30 June 2019 to reduce the value of the HN JV Entity receivables to its estimated recoverable amount. Refer to further information provided on Page 14 regarding the Other Segment. HARVEY NORMAN HOLDINGS LIMITED Annual Report June 2019 123 NOTES t o th e FIN AN CI AL STATEMENTS | 20 19 38. BUSINESS COMBINATIONS KEH Partnership Pty Limited (KEH) is a retailer of school apparel, education goods and technology equipment through the brand name of The School Locker. Effective 1 July 2018, a wholly-owned subsidiary of Harvey Norman Holdings Limited acquired all of the inventory assets of KEH. Subsequently, there was a restructure of the KEH business (Partnership) where, by unanimous agreement in writing, each partner in the Partnership agreed to vary the interest of the respective partners in the Partnership, with the consolidated entity increasing its partnership interest in the Partnership to 99.02%. Up to 30 June 2018, the consolidated entity, through a wholly-owned subsidiary, had a 50% interest in the Partnership and had accounted for its interest as an equity-accounted joint venture entity. Effective 1 July 2018, the consolidated entity’s interest in the Partnership was 99.02% and, from that date, the consolidated entity ceased equity accounting and consolidated the financial statements of KEH. Assets acquired and liabilities assumed Assets Cash and cash equivalents Trade and other receivables Inventories Property, plant and equipment Total assets Liabilities Trade and other payables Interest-bearing loans and borrowings Total liabilities Total identifiable net assets at fair value Purchase consideration transferred Loss on restructure and consolidation of KEH Fair value 1 July 2018 $000 50 2,966 25,199 2,831 31,046 571 30,475 31,046 - - 9,665 The loss on the restructure and consolidation of KEH was $9.67 million, being the difference in the carrying amount of the loan receivable from KEH in the consolidated entity’s financial statements of $40.14 million as at 30 June 2018 and the fair value of the loan payable in KEH’s financial statements of $30.47 million. The net cash flow on consolidation was a cash inflow of $0.05 million, which was included in cash flows from investing activities. From 1 July 2018, The School Locker business of the consolidated entity contributed $67.00 million of revenue and incurred a trading loss before tax of $11.40 million, resulting in a reduction in profit before tax for the consolidated entity by that amount for the year ended 30 June 2019. 39. ASSETS HELD FOR SALE The Sale of The Byron at Byron Bay Resort Subsequent to balance date on 9 August 2019, the consolidated entity announced that Harvey Norman Holdings Limited (the Company) and certain of its controlled entities, with certain entities controlled by Gerald Harvey, as owners of the property and business known as The Byron at Byron Bay Resort (Resort), have entered into agreements for sale of the Resort (Sale Contract) for the sale price of $41,764,000 (ex GST), subject to terms and conditions for completion. The purchasers under the Sale Contract are GAG Byron on Byron Property Co Pty Ltd ACN 635 158 351 and GAG Byron on Byron Business Company Pty Ltd ACN 635 172 333. Subject to the terms and conditions of the Sale Contract, completion of the Sale Contract will occur on the later of 16 September 2019 and the second Monday following the grant of the liquor licence approval by the relevant authority. If the terms and conditions for completion of the Sale Contract are not satisfied, in certain circumstances, the purchasers have the right to terminate or rescind the Sale Contract. Assets Held for Sale as at 30 June 2019 As at 30 June 2019, the carrying amounts of two (2) retail property assets were classified as current assets held for sale:  The carrying amount of the consolidated entity’s 50% asset ownership of The Byron at Byron Resort comprising its 50% shareholding of the Byron Bay (residential / convention development) land and building assets and its 50% shareholding of the Byron Bay (resort operations) plant and equipment assets; and The carrying amount of a warehouse in Singapore that is currently held for sale.  124 NOTES t o th e FIN AN CI AL STATEMENTS | 20 19 N otes t o the Fi nanc ial S t atem ents (c ontinu ed) 40. 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 Limited 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 HARVEY NORMAN HOLDINGS LIMITED Annual Report June 2019 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 Taylors Beach Pty Limited7 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 D.M. West Gosford Leasing Pty Ltd Daldere Pty Limited 125 NOTES t o th e FIN AN CI AL STATEMENTS | 20 19 40. CONTROLLED ENTITIES AND UNIT TRUSTS (continued) Shares held by Harvey Norman Holdings Limited (continued) 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-Creations (M) Sdn. Bhd. 13,27, 32 Edbrook Everton Park Pty Limited Edbrook Pty Limited6 Elitetrax Marketing Sdn. Bhd.13, 28 Energy Incentive Team Pty Limited29 Farane Pty Limited Flormonda Pty Limited Furnishing Ventre Pty Limited7 Ganoru Pty Limited Generic Publications Pty Limited1,2 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. Auburn Seconds World Leasing Pty Limited7 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 H.N. Bowermans Leasing Parramatta Pty Limited7 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. Castle Hill Seconds World 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 126 NOTES t o th e FIN AN CI AL STATEMENTS | 20 19 N otes t o the Fi nanc ial S t atem ents (c ontinu ed) 40. CONTROLLED ENTITIES AND UNIT TRUSTS (continued) Shares held by Harvey Norman Holdings Limited (continued) H.N. Knox Towerpoint Franchisor Pty Limited H.N. Knox Towerpoint Leasing Pty Limited 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 HARVEY NORMAN HOLDINGS LIMITED Annual Report June 2019 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 Factory Outlet 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 P/L Harvey Norman Contracting Pty Limited Harvey Norman Corporate Air Pty Limited Harvey Norman CP Pty Limited Harvey Norman Croatia d.o.o.14, 33 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 127 NOTES t o th e FIN AN CI AL STATEMENTS | 20 19 40. CONTROLLED ENTITIES AND UNIT TRUSTS (continued) Shares held by Harvey Norman Holdings Limited (continued) 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 Launceston Leasing Pty Limited Harvey Norman Leasing (Blanchardstown) Limited18,15 Harvey Norman Leasing (Carrickmines) Limited 18,15 Harvey Norman Leasing (Castlebar) Limited 18,15 Harvey Norman Leasing (Cork) Limited18,15 Harvey Norman Leasing (Drogheda) Limited18,15 Harvey Norman Leasing (Dublin) Limited18,15 Harvey Norman Leasing (Dundalk) Limited18,15 Harvey Norman Leasing (Eastgate) Limited18,15 Harvey Norman Leasing (Galway) Ltd 15, 36 Harvey Norman Leasing (Limerick) Limited18,15 Harvey Norman Leasing (Mullingar) Limited18,15 Harvey Norman Leasing (N.Z.) Limited9,10 Harvey Norman Leasing (Naas) Limited18,15 Harvey Norman Leasing (NI) Limited18,15 Harvey Norman Leasing (Rathfarnham) Limited18,15 Harvey Norman Leasing (Sligo) Ltd15,36 Harvey Norman Leasing (Tralee) Limited18,15 Harvey Norman Leasing (Waterford) Limited18,15 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 Limited11,16,38 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 Limited11,16, 39 Harvey Norman Stores (N.Z.) Pty Limited1,2 Harvey Norman Stores Pty Limited Harvey Norman Superlink Pty Limited Harvey Norman Tallaght Limited15, 34 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) Limited18,15 Harvey Norman Trading d.o.o.12 Harvey Norman Ulverstone Franchisor Pty Limited Harvey Norman Victoria Pty Limited Havrex Pty Limited6 HN Allens Road Leasing Limited10,9 HN Ashburton Leasing Limited9,10,19 HN Blenheim Leasing Limited9,10 HN Botany Leasing Limited10,9 HN Botany Outlet Leasing Limited10,9 HN Bundaberg Markets Pty Limited31 HN Byron No. 2 Pty Limited HN Byron No. 3 Pty Limited HN Commercial Leasing Limited10,9 HN Coomboona Pty Limited HN Downing Street Leasing Limited10,9 HN Edmonton Road Leasing Limited10,9 HN Hamilton Central Leasing Limited9,10 HN Harris Road Leasing Limited9,10 HN Henderson Leasing Limited9,10 HN Hornby Leasing Limited10,9 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 Limited10,9 HN Napier Leasing Limited9,10 HN Napier Warehouse Leasing Limited8,9,10 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 Whangarei Leasing Limited9,10,30 HN Wingate Leasing Limited9,10 HN Wiri Leasing Limited9,10,17 HN Woolston Leasing Limited9,10 HN Zagreb Investment Pty Limited HNL Pty Limited HNM Galaxy Pty Limited HNZ Retailing NZ Limited9,10,32 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 Limited J.M. Darwin Leasing Pty Limited 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 128 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 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 Limited 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 NOTES t o th e FIN AN CI AL STATEMENTS | 20 19 N otes t o the Fi nanc ial S t atem ents (c ontinu ed) 40. CONTROLLED ENTITIES AND UNIT TRUSTS (continued) Shares held by Harvey Norman Holdings Limited (continued) 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 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 Echuca Leasing 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 Limited 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 HARVEY NORMAN HOLDINGS LIMITED Annual Report June 2019 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 Parramatta Pty Limited7 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 Rosebery DM WH Pty Limited7 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 Limited 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) Limited18,15 Network Consumer Finance (N.Z.) Limited9,10 Network Consumer Finance Pty Limited1,2 Nomadale Pty Limited6 Norman Ross Limited 35,10 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 11,16,38 Pertama Mechandising Pte Ltd 11,27 Plezero Pty Limited Poliform Pty Limited25 R.Reynolds Nominees Pty Limited Sarsha Pty Limited1 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 Limited37 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 129 NOTES t o th e FIN AN CI AL STATEMENTS | 20 19 40. CONTROLLED ENTITIES AND UNIT TRUSTS (continued) Shares held by Harvey Norman Holdings Limited (continued) Note: 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. Company incorporated in New Zealand on 9 December 2016 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. Company incorporated in New Zealand on 30 November 2016 Shares held by Harvey Norman Holdings (Ireland) Limited. Company incorporated in New Zealand on 18 October 2016 Shares held by Calardu Pty Limited. Lighting Venture Pty Limited holds 75.1% of shares in Glolight Pty Limited. Yoogalu Pty Ltd 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 Ltd holds 50% of the shares in Byron Bay Management Pty Limited. Derni Pty Ltd holds 1% and Kita Pty Ltd holds 99% of the shares in Poliform Pty Ltd. Former name is Calardu Jandakot Pty Ltd Shares held by Pertama Holdings Pte Limited Shares held by Cascade Consolidated Sdn.Bhd. Shares held by Network Consumer Finance Pty Limited This entity was incorporated in New Zealand on 30 June 2019. HN Bundaberg Markets Pty Ltd holds 50% of the shares in Lana's Farmers Markets Pty Ltd. Previously noted as E-Creations Sdn. Bhd. Company renamed from Harvey Norman Zagreb d.o.o on 24 February 2019. This entity was incorporated in Ireland on 4 October 2015. Shares held by Harvey Norman Stores (N.Z.) Pty Ltd This entity was incorporated in Ireland on 24 January 2018. 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 35 36 130 NOTES t o th e FIN AN CI AL STATEMENTS | 20 19 N otes t o the Fi nanc ial S t atem ents (c ontinu ed) 40. CONTROLLED ENTITIES AND UNIT TRUSTS (continued) Units in Unit Trusts held by Harvey Norman Holdings Limited 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 Taylors Beach 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 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 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 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 Ballarat Trust Calardu Ballina No. 1 Trust Calardu Ballina Trust Calardu Bendigo Trust Calardu Bennetts Green Trust Calardu Bennetts Green Warehouse Trust Calardu Berrimah 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 Devonport Trust Calardu Dubbo Trust Calardu Emerald Trust Calardu Frankston Trust Calardu Frankston WH Trust Calardu Fyshwick DM Trust Calardu Gepps Cross No 2 Trust Calardu Gepps Cross Trust Calardu Gladstone Trust Calardu Gympie Trust Calardu Hervey Bay Trust Calardu Hobart Trust 41. DEED OF CROSS GUARANTEE 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 Kotara Trust Calardu Launceston Trust Calardu Loganholme Trust Calardu Mackay Trust Calardu Maitland Trust Calardu Malaga Trust Calardu Mandurah Trust Calardu Maribyrnong Trust Calardu Marion Trust Calardu Maroochydore Trust Calardu Maroochydore Warehouse Trust Calardu Melville 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 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 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 Generic Publications 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 June 2019 131 NOTES t o th e FIN AN CI AL STATEMENTS | 20 19 41. DEED OF CROSS GUARANTEE (continued) The Statement of Financial Position and Income Statement for the Harvey Norman Holdings Limited Closed Group are as follows: 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 132 2019 $000 153,800 718,834 28,886 172,282 370 24,144 2018 $000 109,170 696,053 31,457 170,830 459 15,878 1,098,316 1,023,847 1,778,987 281,302 28,387 59,110 2,147,786 1,915,235 111,326 28,684 62,104 2,117,349 3,246,102 3,141,196 127,699 380,183 306 26,841 30,158 565,187 345,144 2,017 92,073 300 439,534 107,624 289,675 9,484 28,734 25,806 461,323 500,217 1,707 60,370 199 562,493 1,004,721 1,023,816 2,241,381 2,117,380 552,250 12,893 1,676,238 2,241,381 385,324 (85,570) 299,754 1,718,606 299,754 (342,122) 1,676,238 388,381 10,393 1,718,606 2,117,380 332,084 (55,144) 276,940 1,709,003 276,940 (267,337) 1,718,606 NOTES t o th e FIN AN CI AL STATEMENTS | 20 19 N otes t o the Fi nanc ial S t atem ents (c ontinu ed) 42. 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 Profit for the Year PARENT ENTITY June 2019 $000 84 2,428,919 2,429,003 2,469 107,567 110,036 552,250 1,766,717 2,318,967 324,981 June 2018 $000 49 2,263,529 2,263,578 6,286 85,053 91,339 388,381 1,783,858 2,172,239 328,036 Total Comprehensive Income 324,981 328,036 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 Generic Publications 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. Generic Publications Pty Limited entered into the Deed with the Parent Company during the year. Contingent Liabilities Refer to information provided in Note 34. Contingent Liabilities for disclosures relating to the Parent Entity. 43. SIGNIFICANT EVENTS AFTER BALANCE DATE On 9 August 2019, the consolidated entity announced that Harvey Norman Holdings Limited (the Company) and certain of its controlled entities, with certain entities controlled by Gerald Harvey, as owners of the property and business known as The Byron at Byron Bay Resort (Resort), have entered into agreements for sale of the Resort (Sale Contract) for the sale price of $41,764,000 (ex GST), subject to terms and conditions for completion. The purchasers under the Sale Contract are GAG Byron on Byron Property Co Pty Ltd ACN 635 158 351 and GAG Byron on Byron Business Company Pty Ltd ACN 635 172 333. Subject to the terms and conditions of the Sale Contract, completion of the Sale Contract will occur on the later of 16 September 2019 and the second Monday following the grant of the liquor licence approval by the relevant authority. If the terms and conditions for completion of the Sale Contract are not satisfied, in certain circumstances, the purchasers have the right to terminate or rescind the Sale Contract. On 30 August 2019, the Company announced a renounceable, pro-rata entitlement offer of new fully-paid ordinary shares in the Company to raise approximately $173.49 million (before costs) (Entitlement Offer) with an offer price of $2.50 per new 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 June 2019 133 D IRECTORS ’ DEC LA RATION 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 Company and its subsidiaries (collectively the consolidated entity) are in accordance with the Corporations Act 2001, including: (i) (ii) giving a true and fair view of the consolidated entity’s financial position as at 30 June 2019 and of its performance for the year ended on that date; and 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 2019. 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 41 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 27 September 2019 K.L. PAGE Executive Director / Chief Executive Officer Sydney 27 September 2019 134 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 2019, 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 2019 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 135 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 internal and 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 136 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 12.7% of total assets at 30 June 2019. Note 7(a) describes the nature of the balances receivable from franchisees, while Note 1(e)(vii) outlines the accounting policy in relation to loans and receivables. The assessment of the recoverability of franchisee receivables was considered 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 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(e)(vii) to the financial statements. A member firm of Ernst & Young Global Limited Liability limited by a scheme approved under Professional Standards Legislation 137 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 61.5% of the total assets as at 30 June 2019. Investment properties are carried at fair value with changes in fair value recognised in the income statement. Note 1(e)(v) 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(e)(vi) 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 138 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 2019. 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. 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 2019 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. A member firm of Ernst & Young Global Limited Liability limited by a scheme approved under Professional Standards Legislation 139 Auditor's Responsibilities for the Audit of the Financial Report Our objectives are to obtain reasonable assurance about whether the financial report as a whole is free from material misstatement, whether due to fraud or error, and to issue an auditor’s report that includes our opinion. Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with the Australian Auditing Standards will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of this financial report. As part of an audit in accordance with the Australian Auditing Standards, we exercise professional judgment and maintain professional scepticism throughout the audit. We also: • • • • • • Identify and assess the risks of material misstatement of the financial report, whether due to fraud or error, design and perform audit procedures responsive to those risks, and obtain audit evidence that is sufficient and appropriate to provide a basis for our opinion. The risk of not detecting a material misstatement resulting from fraud is higher than for one resulting from error, as fraud may involve collusion, forgery, intentional omissions, misrepresentations, or the override of internal control. Obtain an understanding of internal control relevant to the audit in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Group’s internal control. Evaluate the appropriateness of accounting policies used and the reasonableness of accounting estimates and related disclosures made by the directors. Conclude on the appropriateness of the directors’ use of the going concern basis of accounting and, based on the audit evidence obtained, whether a material uncertainty exists related to events or conditions that may cast significant doubt on the Group’s ability to continue as a going concern. If we conclude that a material uncertainty exists, we are required to draw attention in our auditor’s report to the related disclosures in the financial report or, if such disclosures are inadequate, to modify our opinion. Our conclusions are based on the audit evidence obtained up to the date of our auditor’s report. However, future events or conditions may cause the Group to cease to continue as a going concern. Evaluate the overall presentation, structure and content of the financial report, including the disclosures, and whether the financial report represents the underlying transactions and events in a manner that achieves fair presentation. Obtain sufficient appropriate audit evidence regarding the financial information of the entities or business activities within the Group to express an opinion on the financial report. We are responsible for the direction, supervision and performance of the Group audit. We remain solely responsible for our audit opinion. We communicate with the directors regarding, among other matters, the planned scope and timing of the audit and significant audit findings, including any significant deficiencies in internal control that we identify during our audit. We also provide the directors with a statement that we have complied with relevant ethical requirements regarding independence, and to communicate with them all relationships and other matters that may reasonably be thought to bear on our independence, and where applicable, related safeguards. A member firm of Ernst & Young Global Limited Liability limited by a scheme approved under Professional Standards Legislation 140 From the matters communicated to the directors, we determine those matters that were of most significance in the audit of the financial report of the current year and are therefore the key audit matters. We describe these matters in our auditor’s report unless law or regulation precludes public disclosure about the matter or when, in extremely rare circumstances, we determine that a matter should not be communicated in our report because the adverse consequences of doing so would reasonably be expected to outweigh the public interest benefits of such communication. Report on the Audit of the Remuneration Report Opinion on the Remuneration Report We have audited the Remuneration Report included in pages 33 to 54 of the directors' report for the year ended 30 June 2019. In our opinion, the Remuneration Report of Harvey Norman Holdings Limited for the year ended 30 June 2019, 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 27 September 2019 A member firm of Ernst & Young Global Limited Liability limited by a scheme approved under Professional Standards Legislation 141 S HA REHO LDE R INFORMAT ION DISTRIBUTION OF SHAREHOLDINGS AS AT 25 SEPTEMBER 2019 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 5,281 6,169 1,726 1,624 139 14,939 549 VOTING RIGHTS All ordinary shares issued by Harvey Norman Holdings Limited carry one vote per share. TWENTY LARGEST SHAREHOLDERS AS AT 25 SEPTEMBER 2019 Number of Ordinary Shares Shareholder Percentage of Ordinary Shares 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 Warbont Nominees Pty Ltd Omnilab Media Investments Pty Limited Navigator Australia Ltd AMP Life Limited Mr. Arthur Brew Mr. Chris Mentis Mr. Graeme Harvey 31.34% 16.45% 15.58% 7.59% 7.16% 4.69% 2.68% 1.73% 1.61% 1.58% 0.44% 0.27% 0.22% 0.19% 0.17% 0.15% 0.12% 0.10% 0.09% 0.08% 92.25% 369,778,107 194,107,477 183,791,246 89,489,980 84,460,334 55,337,161 31,623,442 20,447,598 18,949,024 18,610,447 5,213,182 3,149,892 2,647,782 2,285,834 1,998,135 1,814,785 1,458,347 1,155,665 1,014,186 1,002,480 1,088,335,104 142 D i recto ry of Ha rvey Nor ma n ®, D o may ne ® & J oyce May ne ® Reta il C o mpl exes N otes t o the Fi nanc ial S t atem ents (c ontinu ed) AUSTRALIAN CAPITAL TERRITORY FYSHWICK Cnr Barrier & Ipswich Streets Fyshwick ACT 2609 Phone: (02) 6283 1200 ALEXANDRIA 1/84 O’Riordan Street, Alexandria NSW 2015 Phone: (02) 8339 7000 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 WILEY PARK 1018 Canterbury Road Wiley Park NSW 2195 Phone: (02) 9740 1100 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 NEW SOUTH WALES (SYDNEY SUBURBAN) AUBURN RENOVATIONS Level 1 250 Parramatta Road Auburn NSW 2144 Phone: (02) 9202 4888 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 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 AUBURN 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 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 WILEY PARK (BATHROOMS) 1155 Canterbury Road Wiley Park NSW 2196 Phone: (02) 9784 4400 NEW SOUTH WALES (COUNTRY) 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 DUBBO 223 Cobra Street Dubbo NSW 2830 Phone: (02) 6826 8800 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 COBAR 27 Marshall Street Cobar NSW 2835 Phone: (02) 6836 6400 FORSTER 29 Breese Parade Forster NSW 2428 Phone: (02) 6539 9100 GRIFFITH Cnr Jondaryan & Willandra Avenues Griffith NSW 2680 Phone: (02) 6961 0300 LISMORE 17 Zadoc Street Lismore NSW 2480 Phone: (02) 6623 1400 HARVEY NORMAN HOLDINGS LIMITED Annual Report June 2019 143 D i recto ry of Ha rvey Nor ma n ®, D o may ne ® & J oyce May ne ® Reta il C o mpl exe s NEW SOUTH WALES (COUNTRY) (continued) LITHGOW 175 Main Street Lithgow NSW 2790 Phone: (02) 6354 5400 MOSS VALE 137 – 157 Lackey Road Moss Vale NSW 2577 Phone: (02) 4869 6400 NOWRA 193 Princes Highway South Nowra NSW 2541 Phone: (02) 4421 1300 SALAMANDER BAY 270 Sandy Point Road Salamander Bay NSW 2317 Phone: (02) 4919 3100 TURA BEACH Shop 11, 1 Tura Beach Drive Tura Beach NSW 2548 Phone: (02) 6497 4100 MACLEAN 211 River Street Maclean NSW 2463 Phone: (02) 6603 5100 MUDGEE 33 Sydney Road Mudgee NSW 2850 Phone: (02) 6372 8800 ORANGE Unit 1, Orange Grove Homemakers Centre Cnr Mitchell Highway & Lone Pine Avenue Orange NSW 2800 Phone: (02) 6393 2222 TAMWORTH 43 The Ringers Road Tamworth NSW 2340 Phone: (02) 6765 1100 TWEED HEADS 29 - 41 Greenway Drive Tweed Heads South NSW 2486 Phone: (07) 5524 0111 MAITLAND Unit 1/366 New England Highway Rutherford NSW 2320 Phone: (02) 4932 2800 MOREE 103 Balo Street Moree NSW 2400 Phone: (02) 6751 2400 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 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 WEST WYALONG 114 Main Street West Wyalong NSW 2671 Phone: (02) 6970 1700 YOUNG 326 Boorowa Street Young NSW 2594 Phone: (02) 6384 1400 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) 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 EVERTON PARK North-West Homemaker Centre 429 Southpine Road Everton Park QLD 4053 Phone: (07) 3550 4444 CLEVELAND Shop 1A 42 Shore Street West and Wellington Street Cleveland QLD 4163 Phone: (07) 3488 8900 OXLEY 2098 Ipswich Road Oxley QLD 4075 Phone: (07) 3332 1100 CAPALABA Capalaba Central Centre Shop 32 - 33 38-62 Moreton Bay Road Capalaba QLD 4157 Phone: (07) 3362 6200 LOGANHOLME 3878 - 3892 Pacific Highway Loganholme QLD 4129 Phone: (07) 3440 9200 CARINDALE Westfield Carindale Carindale Street and Old Cleveland Road Carindale QLD 4152 Phone: (07) 3398 0600 MT GRAVATT Westfield Garden City Shop 2135 2049 Logan Street Upper Mt Gravatt QLD 4122 Phone: (07) 3347 7000 144 D i recto ry of Ha rvey Nor ma n ®, D o may ne ® & J oyce May ne ® Reta il C o mpl exes N otes t o the Fi nanc ial S t atem ents (c ontinu ed) 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 DALBY 49 Patrick Street Dalby QLD 4405 Phone: (07) 4672 4444 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 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 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 MACKAY Cnr Heaths Road & Bruce Highway Mackay QLD 4740 Phone: (07) 4951 8800 MAROOCHYDORE Maroochydore Homemaker Centre 11/55 Maroochy Blvd Maroochydore QLD 4575 Phone: (07) 5452 1500 MARYBOROUGH 72 - 74 Bazaar Street Maryborough QLD 4650 Phone: (07) 4120 2100 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 MORAYFIELD 245 Morayfield Road Morayfield QLD 4510 Phone: (07) 5428 8000 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 NOOSA 7 - 9 Gibson Road Noosaville QLD 4566 Phone: (07) 5473 1911 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 TOWNSVILLE Domain Central Centre 103 - 142 Duckworth Street Garbutt QLD 4814 Phone: (07) 4775 8800 WARWICK Cnr Victoria St & Palmerin St Warwick QLD 4370 Phone: (07) 4666 9000 TASMANIA BURNIE Cnr Marine Terrace & Edward St Burnie TAS 7320 Phone: (03) 6436 8800 CAMBRIDGE PARK Cambridge Park Homemaker Centre Unit B10 66 - 68 Kennedy Drive Cambridge Park TAS 7170 Phone: (03) 6248 3300 LAUNCESTON Cnr William and Charles Streets Launceston TAS 7250 Phone: (03) 6337 9400 MOONAH 191-197 Main Rd Cnr, Derwent Park Rd Moonah TAS 7009 Phone: (03) 6277 7777 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 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 HARVEY NORMAN HOLDINGS LIMITED Annual Report June 2019 145 D i recto ry of Ha rvey Nor ma n ®, D o may ne ® & J oyce May ne ® Reta il C o mpl exe s 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 DANDENONG 141 - 165 Frankston - Dandenong Road Dandenong VIC 3175 Phone: (03) 8791 3333 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 FOUNTAIN GATE Westfield Fountain Gate 8 Overland Drive Narre Warren VIC 3805 Phone: (03) 8796 6777 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 CHIRNSIDE PARK Chirnside Park Showroom Centre 286 Maroondah Highway Chirnside Park VIC 3116 Phone: (03) 9722 4400 HOPPERS CROSSING Unit 1, 201 - 219 Old Geelong Road Hoppers Crossing VIC 3029 Phone: (03) 8734 0000 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 COBURG Shop 8, 64 - 74 Gaffney St Coburg VIC 3058 Phone: (03) 9240 2500 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 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 VICTORIA (COUNTRY) 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 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 SWAN HILL 68 Nyah Road Swan Hill VIC 3585 Phone: (03) 5032 0500 WARRAGUL 33 Victoria Street Warragul VIC 3820 Phone: (03) 5623 9000 WARRNAMBOOL 84 Raglan Parade Warrnambool VIC 3280 Phone: (03) 5564 7700 WANGARATTA 8 - 12 Murphy Street Wangaratta VIC 3677 Phone: (03) 5723 8800 WONTHAGGI 37 McKenzie Street Wonthaggi VIC 3995 Phone: (03) 5672 0800 146 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 D i recto ry of Ha rvey Nor ma n ®, D o may ne ® & J oyce May ne ® Reta il C o mpl exes N otes t o the Fi nanc ial S t atem ents (c ontinu ed) 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 MIDLAND Cnr Clayton and Lloyd Sts Midland WA 6056 Phone: (08) 9374 8600 CITY WEST City West Centre City West Shopping Centre 25 Sutherland Street West Perth WA 6005 Phone: (08) 9215 8600 O’CONNOR 133 Garling Street O’Connor WA 6163 Phone: (08) 9337 0888 JOONDALUP 36 Clarke Crescent Joondalup WA 6027 Phone: (08) 9301 3311 OSBORNE PARK 469 - 475 Scarborough Beach Road Osborne Park WA 6017 Phone: (08) 9441 1100 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 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 WESTERN AUSTRALIA (COUNTRY) 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 BROOME 2 Haynes Street Broome WA 6725 Phone: (08) 9195 3600 KALGOORLIE 29 Davidson Street Kalgoorlie WA 6430 Phone: (08) 9093 5500 PORT HEDLAND Boulevard Shopping Centre Cnr Anderson St & McGregor St Port Hedland WA 6721 Phone: (08) 9173 8000 DOMAYNE BUSSELTON 24 - 26 Bussell Highway Busselton WA 6280 Phone: (08) 9781 0700 KARRATHA Unit 7, Lot 25 Balmoral Road Karratha WA 6174 Phone: (08) 9186 8100 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 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 HARVEY NORMAN HOLDINGS LIMITED Annual Report June 2019 147 D i recto ry of Ha rvey Nor ma n ®, D o may ne ® & J oyce May ne ® Reta il C o mpl exe s CHANCELLOR PARK Showroom 2 30 Chancellor Village Blvd Sippy Downs QLD 4556 Phone: (07) 5477 2200 TOOWOOMBA 675 Ruthven Street Toowoomba QLD 4350 Phone: (07) 4613 7100 DARWIN 660 Stuart Hwy, Berrimah NT 0828 Phone: (08) 8928 1500 TOWNSVILLE Domain Central 18/103 Duckworth Street Garbutt QLD 4814 Phone: (07) 4759 9900 JOYCE MAYNE 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 WARRAWONG 113 King Street Warrawong NSW 2502 Phone: (02) 4276 0000 NEW ZEALAND ASHBURTON Cnr West & Moore Streets Ashburton Phone: 0011 643 307 5000 CHRISTCHURCH Cnr Moorhouse Ave & Colombo Street Christchurch Phone: 0011 643 367 7500 BLENHEIM 19 - 21 Maxwell Road Blenheim Phone: 0011 643 520 9700 DUNEDIN Cnr MacLaggan & Rattray Streets Dunedin Phone: 0011 643 471 6510 HAMILTON ELECTRICAL OUTLET Unit 1 - 79 Tristram Street Hamilton Phone: 0011 647 848 2700 HASTINGS 303 East St Aubyn Street Hastings Phone: 0011 646 872 6800 INVERCARGILL 245 Tay Street Invercargill Phone: 0011 643 219 9100 LINCOLN CENTRE 111 Lincoln Road Henderson Auckland Phone: 0011 649 621 1590 BOTANY DOWNS 500 Ti Rakau Drive Botany Downs Phone: 0011 649 272 5700 GISBORNE 51 Customhouse Street Gisborne Phone: 0011 646 869 2900 HENDERSON 1 - 12 Ratanui Street Henderson Phone: 0011 649 835 5000 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 BOTANY ELECTRICAL OUTLET Unit F, 451 Ti Rakau Drive Botany Auckland Phone: 0011 649 253 9200 HAMILTON 10 - 16 The Boulevard Te Rapa Hamilton Phone: 0011 647 850 7300 HORNBY 10-14 Chappie Place Hornby Christchurch Phone: 0011 643 344 8100 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 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 WANGANUI 287 Victoria Avenue Wanganui Phone: 0011 646 349 6000 WELLINGTON 77-87 Tory Street Wellington Phone: 0011 644 381 4250 WHANGAREI 5 Gumdigger Place Whangarei Phone: 0011 649 470 0300 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 RANGITIKEI STREET Unit C 210-248 Rangitikei Street Palmerston North Phone: 0011 646 953 3500 TOWER JUNCTION Clarence Building 66 Clarence Street Tower Junction Christchurch Phone: 0011 643 968 3600 WESTGATE Westgate Lifestyle Centre 63 – 65 Maki Street Westgate Auckland Phone: 0011 649 822 8200 PORIRUA 19 Parumoana Street Porirua Wellington Phone: 0011 644 230 6100 ROTORUA 35 Victoria Street Rotorua Phone: 0011 647 343 9800 WAIRAU PARK 10 Croftfield Lane Wairau Park Glenfield Auckland Phone: 0011 649 440 6300 WHAKATANE The Hub State Highway 30 Whakatane Phone: 0011 647 306 0600 148 D i recto ry of Ha rvey Nor ma n ®, D o may ne ® & J oyce May ne ® Reta il C o mpl exes CORK Kinsale Road Ballycurreen Cork, Dublin Phone: 0011 353 21 425 0900 NAAS Unit G - K New Hall Retail Park Naas, Co Kildane Phone: 0011 353 04 590 7700 TRALEE Unit 8A Manor West Retail Park Tralee, Co Kerry Phone: 0011 353 66 716 4900 N otes t o the Fi nanc ial S t atem ents (c ontinu ed) 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 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 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 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 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 CROATIA 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 SINGAPORE DJITSUN MALL 5 Ang Mo Kio Central 2 #02-01/02 Singapore 569663 Phone: 0011 65 6554 5630 JURONG POINT 1 Jurong West Central 2 #03-34 to 39 Jurong Point Shopping Centre Singapore 648886 Phone: 0011 65 6795 2135 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 HARVEY NORMAN HOLDINGS LIMITED Annual Report June 2019 149 D i recto ry of Ha rvey Nor ma n ®, D o may ne ® & J oyce May ne ® Reta il C o mpl exe s SINGAPORE (continued) PARKWAY 80 Marine Parade Road #01-35/35A/36, #02-34/34A, 35/36, Parkway Parade Singapore 449269 Phone: 0011 65 6346 4705 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 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 MIRI TIMES SQUARE C-G-01, Block C Miri Times Square Marina Park City Jalan Bendahara 98000 Miri, Sarawak, Malaysia Phone: 0011 603 8532 0008 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 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 8532 0008 QUEENSBAY Lot 2F-86 South Zone Queensbay Mall No 100 Persiaran Bayan Indah 11900 Bayan Lepas Penang, Malaysia Phone: 0011 604 630 8210 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 SOUTHKEY LG-014 & 015 The Mall Mid Valley Southkey No 1 Persiaran Southkey 1 Johor Bahru 80150 Johor, Malaysia Phone: 0011 60 7336 1178 SUNWAY VELOCITY Level 3 & 4, Lot 3-24 Lingkaran SV Sunway Velocity Sunway Velocity Mall 55100 Kuala Lumpur Malaysia Phone: 0011 603 9226 6002 VIVACITY MEGAMALL Unit L1-MA01, L1-MA02, L1-017 & L2-MA02, L2-019, L2-020 Level 1 & Level 2, Vivacity Megamall Jalan Wan Alw50 i, 93350 Kuching Sarawak, East Malaysia Phone: 0011 60 82 263 433 PARADIGM MALL Unit No. 1F-42-51 & 2F-43A-53 1st & 2nd Floor Paradigm Mall Johor Bahru, Jalan Skudai, 81200 Johor Bahru Malaysia Phone: 0011 603 7231 4368 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 150 

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