Harvey Norman Holdings Limited
Annual Report 2020

Plain-text annual report

ANNUAL REPORT Australia New Zealand Singapore Slovenia Ireland Northern Ireland Malaysia Croatia ANNUAL REPORT Contents Results for Announcement Chairman and CEO’s Report Operating and Financial Review Directors’ Report Remuneration Report Social and Environmental Sustainability Auditor’s Independence Declaration Independent Auditor’s Report Directors’ Declaration Statement of Financial Position Income Statement Statement of Comprehensive Income Statement of Changes in Equity Statement of Cash Flows Notes to the Financial Statements 3 4 8 31 36 64 74 75 81 82 83 84 85 87 88 Shareholder Information 149 KEY DATES: 28 August 2020: Announcement of Full-Year Profit to 30 June 2020 & Announcement of Final 2020 Dividend | 12 October 2020: Record date for Determining Entitlement to Final 2020 Dividend | 2 November 2020: Payment of Final 2020 Dividend | 25 November 2020 at 11:00am: Annual General Meeting of Shareholders | 26 February 2021: Announcement of Half-Year Profit to 31 December 2020 & Announcement of Interim 2021 Dividend | 1 April 2021: Record date for Determining Entitlement to Interim 2021 Dividend | 4 May 2021: Payment of Interim 2021 Dividend 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 (EY) | 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 COMPANY INFORMATION HARVEY NORMAN HOLDINGS LIMITED ACN 003 237 545 2 RESULTS FOR ANNOUNCEMENT TO THE MARKET HARVEY NORMAN® HOLDINGS LIMITED REPORTED PBT PBT Excluding AASB 16 net impact and net property revaluations $661.29m $86.73m ( 15.1%) FROM $574.56m IN 2019 $635.60m $131.35m ( 26.0%) FROM $504.26m IN 2019 REPORTED PROFIT AFTER TAX & NCI PROFIT AFTER TAX & NCI Excluding AASB 16 net impact and net property revaluations $480.54m $78.22m ( 19.4%) FROM $402.32m IN 2019 $462.16m $109.08m ( 30.9%) FROM $353.09m IN 2019 EBITDA EBITDA Excluding AASB 16 net impact and net property revaluations $944.67m $256.07m ( 37.2%) FROM $688.60m IN 2019 $742.47m $124.18m ( 20.1%) FROM $618.30m IN 2019 EBIT EBIT Excluding AASB 16 net impact and net property revaluations $721.08m $117.74m ( 19.5%) FROM $603.34m IN 2019 $654.86m $121.82m ( 22.9%) FROM $533.04m IN 2019 NET DEBT TO EQUITY: NIL NET CASH OF $15.35m vs NET DEBT OF $626.47m in FY19 AN IMPROVEMENT OF $641.83m UNUSED, AVAILABLE FINANCING FACILITIES OF $685m AS AT 30 JUNE 2020 TOTAL SYSTEM SALES REVENUE $8.46 billion AGGREGATED HEADLINE FRANCHISEE SALES REVENUE* . . $6.16bn COMPANY-OPERATED SALES REVENUE . . . . . . . . . . . . . . . . . . $2.29bn * Sales made by franchisees in Australia do not form part of the financial results of the consolidated entity. HNHL CONSOLIDATED REVENUES $3.55 billion SALES OF PRODUCTS TO CUSTOMERS. . . . . . . . . . . . . . . . $2.29bn REVENUE RECEIVED FROM FRANCHISEES . . . . . . . . $1,055.87m REVENUES AND OTHER INCOME ITEMS . . . . . . . . . . . . . $195.00m BASIC EARNINGS PER SHARE 39.19c from 33.94c in 2019 DIVIDENDS PER SHARE (FULLY-FRANKED) 24.0c 539 FRANCHISEES IN AUSTRALIA 194 FRANCHISED COMPLEXES IN AUSTRALIA 96 OFFSHORE COMPANY OPERATED STORES HARVEY NORMAN HOLDINGS LIMITED | ANNUAL REPORT JUNE 2020 3 CHAIRMAN and CEO’s REPORT Dear Shareholder, Globally, the 2020 financial year was a year of unique challenges. The drought and bushfires last summer, followed by COVID-19, had a significant impact in the 8 countries where we, or our franchisees, trade. In Australia, with the ‘Shop Smart’ and ‘Shop Safe’ guidelines, the Harvey Norman®, Domayne® and Joyce Mayne® franchisees bolstered their ability to safely service their customers. With the exception of the mandatory closure of two franchised complexes in Tasmania for a 2-week period, the 194 franchised complexes throughout Australia have remained open during the year. Overseas in the 7 countries in which we operate, the respective governments mandated temporary closures of between 4 to 10 weeks, and staggered re-opening dates. As our company-operated stores overseas began to re-open to the public, sales improved quickly. Pleasingly, customers continued to engage strongly with our brands and importantly, as we are in the lifestyle / home retail space, the customer was appreciative of the shopping experience, spaciousness and easy parking at the physical franchised complexes and stores, whilst embracing the ease of connection to our brands digitally and the important convenience of home delivery and click and collect. The results achieved in 2020, are a testament to the strength of our model. Record Financial Results  Reported earnings before interest, tax, depreciation & amortisation (EBITDA) of $944.67m, up by $256.07m or +37.2%.  Record EBITDA (excluding AASB 16 impact and net property revaluations) of $742.47m, up by $124.18m or +20.1%.  Reported earnings before interest & tax (EBIT) of $721.08m, up by $117.74m or +19.5%.  Record EBIT (excluding AASB 16 impact and net property revaluations) of $654.86m, up by $121.82m or +22.9%.  Reported profit before tax (PBT) of $661.29m, up by $86.73m or +15.1% from prior year, our highest ever PBT on record.  PBT (excluding AASB 16 net impact and net property revaluations) of $635.60m, up by $131.35m or +26.0%, our highest ever since inception.  Reported net profit after tax (NPAT) and non-controlling interests of $480.54m, up by $78.22m or +19.4%.  NPAT (excluding AASB 16 net impact and net property revaluations) of $462.16m, up by $109.08m or +30.9%.  Very strong balance sheet with total assets of $5.83 billion, including tangible freehold property assets of over $3 billion.  Positive net cash position of $15.35m (cash net of interest-bearing loans and borrowings) at the end of FY20, compared to a net debt position of $626.47m at the end of FY19. This equates to a net debt to equity ratio of nil as at 30 June 2020 compared to a net debt to equity ratio of 19.46% as at 30 June 2019. This was achieved through the stronger cash receipts and the stringent measures implemented during FY20 to preserve cash and reduce external debt. As at 30 June 2020, the consolidated entity had $685 million of unused, available financing facilities, and is therefore well-placed to respond to challenges that may arise.  Net Assets of $3.5 billion, up by 8.7% from $3.2 billion. 4 2 CHAIRMAN and CEO’s REPORT (continued) Record Financial Results (continued)  Net cash flows from operating activities of $1.1 billion for FY20, up $684.12 million or +183%, from $372.85 million in FY19.  Earnings per share (EPS) of 39.19 cents, up by 15.5% from 33.94 cents.  PBT return on net assets of 19.02% for FY20, up from 18.0% in FY19. Property  30 June 2020: 194 franchised complexes in Australia and 96 company-operated stores overseas.  Robust $3 billion property portfolio, consisting of freehold investment properties in Australia, owner- occupied land and buildings in New Zealand, Singapore, Slovenia, Ireland and Australia and joint venture assets.   6 new company-operated stores opened during FY20 – 5 in Malaysia during HY20 at Mid Valley Southkey, Johor Bahru (July 2019), AEON Mall, Kota Bahru (October 2019), IPC Toppen, Johor Bahru (November 2019), Ipoh Parade, Ipoh (November 2019) and Batu Kawan, Penang (December 2019); and 1 in New Zealand at Takanini in South Auckland (March 2020). The remaining 5 stores that were due to open in the second half of FY20 in Malaysia (2), Singapore (1), and Ireland (2) did not occur as planned due to the government lockdowns and business closures in response to COVID-19.  We intend to open up to 12 new stores overseas during FY21. In last year’s report, we had disclosed our international expansion plans and our intention to open up to 21 new stores overseas by the end of the 2021 financial year, with 17 of those new stores in Singapore and Malaysia. Of those 21 new stores, 10 stores were planned to open in FY20 and 11 stores were planned for FY21. We were on track with our offshore store opening program in Malaysia and had opened 5 new stores prior to 31 December 2019, in line with our schedule. In addition, we opened an electrical outlet store at Takanini, South Auckland in March 2020. The COVID-19 pandemic halted our overseas expansion plans, and the remaining 5 stores slated for the second half of this year were delayed due to government mandated lockdowns and business closures. We have revised our plans, and we now intend to open up to 12 new stores overseas during the 2021 financial year. We have already opened the Galway City store in Ireland on 22 July 2020, only 3 months behind schedule and the Sligo store is anticipated to open in October 2020. Our second store in the town of Pula in Croatia is on track to open in November 2020, and we intend to open 3 new stores/outlets in New Zealand by December 2020. The remaining 6 stores will be in Southeast Asia, which remains our fastest growing offshore region, with 3 new stores in Singapore to open before December 2020, and 3 new stores in Malaysia to open between October 2020 and May 2021. Our ‘premium refit plan’ announced last year continued throughout FY20, but was scaled back to those refits that were necessary for the safety, comfort and security of customers and for the protection of our brands. We anticipate recommencing the premium refit plan in FY21. COVID-19 Update The coronavirus pandemic (COVID-19) presented different challenges in each of the 8 countries in which we, or our franchisees, operate. In our 8 countries, the primary concern for respective governments was, and is, keeping workers in jobs and businesses in business – building a bridge to recovery on the other side post the pandemic. COVID-19 has been a fast evolving and a significant challenge globally, and governments have supported their economies during this extraordinary time. In our overseas territories, the respective governments mandated temporary closures of between 4 to 10 weeks, and staggered re-opening dates. The temporary closures resulted 3 HARVEY NORMAN HOLDINGS LIMITED | ANNUAL REPORT JUNE 2020 5 CHAIRMAN and CEO’s REPORT (continued) COVID-19 Update (continued) in a significant decline in turnover for each of our overseas businesses, and based on the eligibility criteria of the COVID-19 support and assistance offered by the respective governments, each of our offshore subsidiaries applied for, and were eligible to receive, wages support and assistance of $22.28 million in aggregate. All of the support and assistance was passed onto our employees, and we did not terminate the employment of any employee as a result of the pandemic. Our offshore businesses also received property-related support and assistance (including rent abatements from landlords) of $9.81 million in aggregate. The assistance received from governments and landlords ensured businesses could survive and thrive after the lifting of mandated lockdowns. Importantly, it ensured workers continued to get paid and have been able to meet their personal obligations even though businesses were in hibernation. We own or control other non-franchised retail and wholesale operations under various brand names in Australia (outside of the Harvey Norman®, Domayne® and Joyce Mayne® brands). These other non-franchised businesses applied for, and were eligible to receive, $2.39 million of wages support and assistance during 4Q20, all of which was passed on in order to retain employees. In addition, they received $0.33 million in rent abatements from their landlords. 6 2 CHAIRMAN and CEO’s REPORT (continued) COVID-19 Update (continued): In Australia, certain franchisees were eligible for the government COVID-19 JobKeeper support for the retention of the employees of the respective franchisees. In aggregate, this amounted to $7.6 million. Outlook The continued impact globally because of the fast evolving COVID-19, remains unknown. To date, the biggest consumer change we have seen in our 8 countries, is the elevated importance of family, home, work and study from home, cooking and entertainment from home. Our brands are well placed to take advantage of this trend. The sales uptick we saw in the last quarter in Australia accelerated in July and has continued in August and September - notwithstanding the metropolitan Melbourne Government mandated Stage 4 lockdown. Within our company-operated stores overseas, sales improved quickly as they re-opened to the public following government mandated closures. This improvement continued into the September quarter, notwithstanding the New Zealand Government lockdown of metropolitan Auckland from 11th August 2020 to 30th August 2020. We’d like to thank all 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 Chief Executive Officer Sydney Sydney 30 September 2020 30 September 2020 3 HARVEY NORMAN HOLDINGS LIMITED | ANNUAL REPORT JUNE 2020 7 OPERATING and FINANCIAL REVIEW Reported Profit Before Tax (PBT) and Profit After Tax (PAT) Reported profit before tax (PBT) for FY20 was $661.29 million, an increase of $86.73 million or +15.1%, from $574.56 million in FY19. Excluding the incremental impact of the first-time application of AASB 16 Leases and the net property revaluation adjustments, there was a solid 26.0% or $131.35 million increase in PBT to $635.60 million in FY20, from $504.26 million in FY19. During FY20, the franchising operations segment was the largest contributor to PBT comprising 52.7% of PBT compared to 43.2% of PBT in FY19. Profitability of the franchising operations segment increased by $100.19 million or +40.3%, directly attributable to the growth in aggregated franchisee sales revenue to $6.16 billion in FY20, an increase of $505.65 million or +8.9%, fuelled by growth in the 2nd half of FY20, particularly in 4Q20. The offshore company-operated retail segment delivered solid sales for FY20 of $2.08 billion, up by $71.17 million or +3.5%, despite government-mandated lockdowns and business closures in all of the 7 overseas countries for a 4 to 10 week period, with staggered re-opening dates in 4Q20. Profitability of the offshore company-operated retail segment rose by $22.38 million or +17.3%, to $152.08 million in FY20, from $129.70 million in FY19. NZ was the largest contributor to this growth, increasing by $21.76 million or +28.1% from FY19. The retail result for Ireland and Northern Ireland combined was $16.87 million for FY20, an increase of $9.08 million or +116%, from $7.80 million in FY19. 8 2 OPERATING and FINANCIAL REVIEW (continued) Reported Profit Before Tax (PBT) and Profit After Tax (PAT) (continued) The retail result for Slovenia and Croatia increased by $0.98 million, or +13.1%, to $8.43 million in FY20. This was offset by a reduction in the retail result for Singapore and Malaysia by $9.44 million, or -25.5%, to $27.62 million in FY20 despite 5 new stores in Malaysia in HY20, due to the temporary closures to control the spread of COVID-19 in Southeast Asia, and the prolonged subdued retail, consumer and business sentiment in Singapore. The offshore retail businesses represent 23% of consolidated PBT. The retail property segment delivered a result of $173.19 million in FY20 compared to a result of $204.68 million in FY19, a reduction of $31.49 million or -15.4%, mainly due to a lower net property revaluation increment of $34.96 million in FY20 relative to a net increment of $70.30 million in FY19. The lower net property revaluation increment by $35.35 million was offset by higher rent received from franchisees and other external tenants during the year, net of any COVID-19 rent abatements granted in the June 2020 quarter. The consolidated entity owns and manages a robust freehold property portfolio valued at over $3 billion as at 30 June 2020. These large-format retail properties are characterised by larger retail footprints and generous floor layouts, providing a safer, more spacious and comfortable shopping experience. Property values of large-format retail complexes have been more resilient, despite the softening investment values of some traditional, multi-storey shopping centres in Australia. The ‘Other’ component of PBT, with a loss totalling $12.57 million for the 2020 financial year, is comprised of the remaining operating segments of the consolidated entity. These include the following: Other Non-Franchised Retail segment which incurred a loss of $8.84 million in FY20, compared to a loss of $16.67 million in FY19; Equity Investments which sustained a loss of $2.15 million in FY20 due to the fall in equity prices partially attributable to COVID-19, compared to a profit of $18.40 million in FY19 and the Other Segment which incurred a loss of $1.58 million in FY20, compared to a loss of $9.95 million in FY19. The PBT return on net assets was 19.02% for the 2020 financial year, compared to a PBT return on net assets of 18.0% for the 2019 financial year. Net profit after tax (NPAT) and non-controlling interests increased by $78.22 million, or +19.4%, to $480.54 million for the 2020 financial year, from $402.32 million in the preceding year. Excluding the AASB 16 net impact and the after tax net property revaluation adjustments, NPAT would have been $462.16 million for FY20, up by $109.08 million or +30.9% relative to FY19. The effective tax rate was 26.50% for the 2020 financial year, compared to an effective tax rate of 28.81% for the 2019 financial year. This was primarily due to the recognition of a large credit to deferred tax expense of $14.77 million in FY20 (FY19: nil) in New Zealand resulting from a legislative change as part of the COVID-19 Act (passed in March 2020) to re-introduce tax deductions in NZ for future building depreciation expenses. HARVEY NORMAN HOLDINGS LIMITED | ANNUAL REPORT JUNE 2020 9 OPERATING and FINANCIAL REVIEW (continued) Offshore Company-Operated Retail Segment The Harvey Norman® brand trades under a company-operated retail model overseas, with 96 Harvey Norman® stores in 7 countries outside of the Australian market. Offshore revenue has risen to $2.13 billion in FY20 compared to $2.05 billion in FY19, up by $71.66 million or +3.5%. Offshore profitability has increased to $152.08 million during FY20, representing 23% of total consolidated profit before tax. Last year we had reported our overseas expansion plans, with the intention of opening 21 new stores overseas – 10 stores were proposed to open in FY20 and 11 stores in FY21. We were on track with our expansion plans in Southeast Asia up to December 2019, with the opening of 5 new Harvey Norman® stores in Malaysia during HY20. The government-enforced lockdowns and business closures to flatten the COVID-19 curve, coupled with the strategic measures we have taken to preserve cash, put our expansion plans on hold and the remaining 5 stores slated for opening in the second half did not occur. 4 of those stores will now open in HY21 – with the Galway store in Ireland opening its doors on 22 July 2020, the proposed opening of our Sligo store in Ireland in October 2020, and a store in Singapore and Malaysia expected to open in September and November 2020 respectively. Despite the government mandated temporary closures and staggered re-opening dates, and the prolonged uncertainty around COVID-19, total aggregated company-operated retail sales and other revenue for the 96 Harvey Norman® branded stores overseas and the 2 Space Furniture® branded stores in Asia grew by $71.66 million, or 3.5%, to $2.13 billion for FY20, relative to $2.05 billion in FY19. The result before tax for the overseas company-operated retail segment increased by $22.38 million, or +17.3%, to $152.08 million for FY20, from $129.70 million in FY19. The first-time application of AASB 16 Leases reduced the profitability of offshore operations by $3.79 million for FY20. Excluding the incremental impact of AASB 16, the offshore profit result, in aggregate, would have been $155.87 million, an increase of $26.17 million or +20.2%. 10 OPERATING and FINANCIAL REVIEW (continued) Offshore Company-Operated Retail Segment (continued) New Zealand | 40 Harvey Norman® Company-Operated Stores In the December 2019 half-year report, we disclosed the pleasing, solid sales performance of our business in New Zealand. We had reported another record half, with sales revenue topping over half-a-billion dollars in both local currency and on translation to Australian dollars. Sales in local currency soared to $NZ533.83 million, up by $NZ20.61 million or +4.0% for HY20, from $NZ513.22 million in HY19. Sales continued to show modest growth in January and February and we then saw a spike in March 2020 as New Zealand businesses prepared for temporary closures and mobilised their employees to work-from-home. A new electrical outlet located at Takanini in South Auckland was opened in March 2020, bringing the total number of company- operated stores to 40. In New Zealand, the consolidated entity employs nearly 2,000 full-time and part-time employees across 40 Harvey Norman® company-operated stores. When the pandemic struck in early March, the safety and livelihoods of our New Zealand employees, adherence to the work-safety guidelines and restrictions enforced by the NZ Government, and our dedication to service our loyal customers and support local communities were paramount. Alert Level 3 and 4 restrictions in New Zealand came into effect on the evening of the 25th March 2020, and from 26th March up to the 13th May 2020, each of our 40 stores were closed to the public. When permitted to do so, we concentrated our efforts to our online ‘essential-services’ offering and we worked hard to ensure that our customers in NZ could purchase their essential needs safely and swiftly, in a contactless manner. Despite our refocus to online trade, sales in NZ suffered a significant decline in local currency during the 7-week Alert Level 3 & 4 lockdown periods, relative to the previous corresponding period. As our NZ operations had suffered a significant decline in turnover of more than 30% as a direct result of COVID-19, our 40 company-operated stores were eligible for the ‘Wage Subsidy Scheme’ offered by the New Zealand Government. NZ received wages support and assistance of $NZ12.70 million (or $12.04 million when translated into Australian dollars) up to 9th June 2020 (the end date of the subsidy period). The wages support and assistance in New Zealand assisted in sustaining our NZ operations and retaining all our staff during the period that we were not able to trade at normal capacity. All 40 Harvey Norman® stores re-opened to the public from 14th May 2020 and we saw a significant rebound and surge in the sales trend when the Alert Level 3 restrictions were lifted. In what was a tumultuous year, the New Zealand business generated sales of $NZ1.01 billion for the year ended 30 June 2020, an increase of $NZ14.96 million or 1.50% from $NZ998 million in the 2019 financial year. Translated into Australian dollars, sales revenue increased 2.7%, or $25.09 million, to $960.19 million in the 2020 financial year. There was a 1.17% appreciation of the New Zealand dollar relative to the Australian dollar during the current year. Similar to the trend experienced in Australia, with international travel not an option, NZ consumers focussed on the ‘home’ with home renovations and improvements. The housing market in NZ has remained stable, assisted by supply shortages and lower interest rates. This trend has seen sales and market share growth across all key product categories. Robust sales with strong margins, and an effort to curtail and streamline operating expenses, has resulted in an increase in the retail result in New Zealand by $21.76 million, or 28.1%, to $99.16 million for the year ended 30 June 2020, up from $77.39 million in the previous year. HARVEY NORMAN HOLDINGS LIMITED | ANNUAL REPORT JUNE 2020 11 OPERATING and FINANCIAL REVIEW (continued) Offshore Company-Operated Retail Segment (continued) This segment is comprised of 12 Harvey Norman® stores in Singapore, 23 Harvey Norman® stores in Malaysia and the Space Furniture® branded lifestyle stores in Singapore and Malaysia. Malaysia | Sales Revenue | 23 Harvey Norman® Company-Operated Stores We were on track with our expansion plans in Malaysia in the first half of the 2020 financial year with the opening of 5 Harvey Norman® stores prior to December 2019 located at Mid Valley Southkey, Johor Bahru (July 2019), AEON Mall, Kota Bharu (October 2019), IPC Toppen, Johor Bahru and Ipoh Parade, Ipoh (both in November 2019) and Batu Kawan, Penang (December 2019). The Malaysian economy was growing strongly and we were confident about our aspirational growth target of having 50 Harvey Norman® stores in Malaysia within the next 5 years. HY20 sales in Malaysia were strong at $S112.27 million, an increase of $S13.67 million or 13.9% from $S98.60 million in HY19. On 18th March 2020, the Malaysian government issued a Movement Control Order (MCO) to control the spread of COVID-19, resulting in the temporary closure of all 23 stores, with a phased re-opening from 18th April 2020. Our Malaysian business adhered to the directives of the Malaysian Government and generated nil sales during the temporary full closure of all physical stores and online trade for the period from 18th March to 17th April 2020 inclusive. From 18th April 2020, the Malaysian Government commenced the easing of their restrictions, permitting the staggered re-opening of stores. From the 18th to 30th April 2020, 14 stores re-opened for trade for electrical and computers only. From 1st May to 12th May 2020, the remaining stores and the furniture and bedding categories re-opened. Following the MCO mandated lockdown, sales in Malaysia began to improve. Amid the challenges of the second half, and the higher sales base in early FY19 due to the temporary reprieve from GST obligations, the Malaysian business recorded sales of $S208.20 million for FY20, an increase of $S15.61 million or 8.1%, from $S192.58 million in FY19. Translated to Australian dollars, the sales increase was $27.11 million, or 13.8%, to $224.23 million. Last year we announced that we would open 14 new stores in Malaysia, 7 in FY20 and 7 in FY21. We had opened 5 new stores prior to December 2019, however the remaining 2 stores did not open in the second half of the financial year due to the pandemic. We presently anticipate opening 3 new stores in FY21, deferring the remaining 6 stores to FY22. 12 2 OPERATING and FINANCIAL REVIEW (continued) Offshore Company-Operated Retail Segment (continued) Singapore | Sales Revenue | 12 Harvey Norman® Company-Operated Stores In stark contrast to the stronger retail trading environment in Malaysia, retail, business and consumer sentiment was subdued in Singapore throughout the first half of FY20, which was further exacerbated by the COVID-19 pandemic which saw all 12 Harvey Norman® stores in Singapore closed under the government-enforced “Circuit Breaker” measures from 7th April to 18th June 2020 inclusive. Earlier this year, we reported lower HY20 sales in Singapore by $S20.72 million in local currency or -11.9% to $S153.55 million, down from $S174.27 million in HY19. This sales trend continued throughout the March 2020 quarter due to the adverse conditions of the protracted trade war between the United States and China, the mounting fears around COVID-19 and the progressive restrictions to contain the spread of COVID-19 in Singapore. The Circuit Breaker measures of the Singapore Government came into effect on the 6th April 2020, which was a ‘stay-at-home’ order incorporating the mandatory closure of all non-essential workplaces from 7th April 2020. From 7th April to 18th June 2020, all 12 Harvey Norman® stores in Singapore were closed to the public, however, online trade was permitted to continue. The shift to an online-only model, and the re-positioning of staff to enable contactless online sales and deliveries during Circuit Breaker was insufficient to stem the significant decline in sales, compared to the full-service offering both in-store and online in the previous corresponding period. All 12 Harvey Norman® stores re-opened on 19th June 2020 pursuant to the Phase 2 “Safe Transitioning” re-opening of the economy in Singapore. Sales quickly rebounded upon the resumption of in-store trade. The Jobs Support Scheme (JSS) of the Singapore Government was announced as part of the Solidarity Budget handed down on 6th April 2020. Under the JSS, affected industries were granted wages support and assistance to employers to help them retain their local employees (Singapore citizens and permanent residents) during the period of economic uncertainty. Our Harvey Norman® operations in Singapore recognised $S4.73 million (or $5.09 million in Australian dollars) in wages support and assistance pursuant to the JSS from April to June 2020. In addition, property rental waivers and property tax rebates were offered under the Solidarity Budget and following negotiations with landlords, resulting in the recognition of $S5.11 million (or $5.50 million in Australian dollars) in COVID-19 related property support and assistance in FY20. This support and assistance was integral to the viability of the Singaporean operations during Circuit Breaker to enable the business to continue to pay and retain their staff and maintain the payment of operating expenses. Total sales for the 12 Harvey Norman® stores in Singapore declined by $S66.89 million, or -20.0%, to $S267.21 million in FY20, from $S334.10 million in FY19. Translated to Australian dollars, the reduction in sales was $54.18 million, or -15.8%, to $287.79 million for FY20, from $341.97 million in FY19. Last year we announced that we would open 3 new stores in Singapore, 1 in FY20 and 2 in FY21. No new stores were opened during FY20, with the proposed FY20 store delayed to September 2020 due to the pandemic. We plan to open a further 2 new stores in FY21, bringing the total new stores in Singapore to 3 for FY21. We have also earmarked another site for possible opening in early FY22. Retail – Singapore & Malaysia | Sales and Segment Result Aggregated sales revenue for the Harvey Norman® and Space Furniture® brands in Asia totalled $S487.01 million in local currency for FY20, down by 10.3%, or $S55.68 million, from $S542.69 million in FY19. Translated to Australian Dollars, the reduction in sales was 5.4% or down $29.72 million to $525.75m, from $555.47 million in FY19. Sales were assisted by a 5.22% appreciation of the Singapore dollar relative to the Australian dollar over the past year. Sales revenue for the Space Furniture® brand in Singapore and Malaysia combined decreased by $2.66 million, or -16.2%, due to mandatory closure periods and the cautious outlook of consumers. The segment profit result for the Harvey Norman® and Space Furniture® brands in Asia totalled $27.62 million for FY20, a decrease of $9.44 million or -25.5%, from $37.06 million in FY19. This decrease incorporates the net financial impact of adopting AASB 16 Leases from 1 July 2019 which saw expenses increase by $3.93 million as all Harvey Norman® stores in Southeast Asia are leased from external landlords. Excluding the net impact of AASB 16, the segment profit result for FY20 would have been $31.54 million, a decrease of $5.51 million, or -14.9%. HARVEY NORMAN HOLDINGS LIMITED | ANNUAL REPORT JUNE 2020 13 OPERATING and FINANCIAL REVIEW (continued) Offshore Company-Operated Retail Segment (continued) Slovenia | 5 Harvey Norman® Company-Operated Stores In the December 2019 half-year report, we disclosed that sales revenue from the 5 company-operated stores in Slovenia increased to €39.82 million, up by €1.65 million or +4.3%, from €38.17 million in HY19. Translated into Australian Dollars, sales revenue increased +6.4% or $3.87 million to $64.55 million. This sales growth resulted in a record half-year profit of $5.24 million for HY20. Sales growth was solid throughout January and February before the government mandated lockdown.  The COVID-19 pandemic throughout Europe saw the 5 Harvey Norman® stores in Slovenia close by government decree from 16th March to 19th April 2020, with online trade permitted. Upon re-opening from 20th April 2020, sales have grown significantly. Total sales revenue for FY20 was €73.04 million, up by €0.50 million or +0.7%, from €72.54 million in FY19. Translated into Australian dollars, sales revenue increased $4.66 million, or +4.0%, to $120.35 million, assisted by a 3.31% appreciation of the Euro relative to the Australian dollar during FY20. Retail profit for FY20 was $8.26 million, up by $1.38 million or +20.1%, from $6.88 million in FY19. Similar to the trend experienced in Australia and other offshore locations, the travel restrictions imposed by the COVID-19 pandemic have resulted in people renovating and improving their homes. Croatia | Flagship Harvey Norman® Store located at Zagreb The Zagreb store was relaunched as a Flagship in October 2018. In the December 2019 half-year report, we disclosed that the full 6 month contribution from the reinvigorated Flagship drove sales to €11.56 million in HY20, up by €1.13 million or +10.9%, from €10.43 million in HY19. Translated into Australian dollars, sales revenue increased +13.0% or $2.16 million to $18.74 million. Sales growth was solid throughout January and February before suffering from the government mandated lockdown.  The Zagreb Flagship was closed by government decree from 19th March to 26th April 2020, with online trade permitted. Sales growth has steadily increased upon re-opening the Zagreb Flagship. Sales revenue increased to $34.01 million in FY20, up $0.78 million or +2.4%, from $33.23 million in FY19. However, profit decreased to $0.17 million in FY20, down $0.41 million or -70.6%, from $0.58 million in FY19. The Croatian economy has a significant tourist sector adversely affected by the travel restrictions imposed by the COVID-19 pandemic. We plan to open our second store in the town of Pula in November 2020. 14 2 OPERATING and FINANCIAL REVIEW (continued) Offshore Company-Operated Retail Segment (continued) Ireland | 13 Harvey Norman® Company-Operated Stores In the December 2019 half-year report, we disclosed that sales revenue increased to €143.94 million for HY20, up by €13.07 million or +10.0%, from €130.87 million in HY19. Translated into Australian dollars, sales revenue increased by +12.1% or $25.27 million, to $233.33 million. The retail segment result in Ireland generated a profit of $12.36 million for HY20, a solid improvement of $1.76 million or +16.6% on the $10.60 million profit in HY19. The 13 Harvey Norman® company-operated stores in Ireland outperformed the discretionary retail market, with market share gains across all key product categories.  This sales trajectory continued into 3Q20, with a significant increase in March 2020 as home office and technology sales grew strongly with individuals and businesses looking for home office solutions to work from home. The appliances category grew significantly and, after a strong HY20, the reality of lockdown in Ireland resulted in the swift adaptation to provide an effective online offering. The Irish business continued to innovate, launching contactless Click & Collect and focusing on the online customer experience. The ongoing success of the Tallaght Flagship, complemented by the investment in an effective digital strategy, ensured Harvey Norman® was the first point of call for Irish consumers wanting to set up a home office or reinvigorate their homes. The Irish Government decree resulted in the closure of all Furniture & Bedding departments across the physical store network from 25th March to 7th June, and Electrical & Computer departments across the physical store network from 28th March to 17th May. Online trade was permitted during this period. The government mandated lockdown resulted in a significant sales decrease over the lockdown period. Post lockdown, sales for the Irish business rebounded strongly. Sales revenue increased to €256.76 million for FY20, up by €36.31 million or +16.5%, from €220.44 million in FY19. Translated into Australian dollars, sales revenue increased by +20.3% or $71.47 million, to $423.06 million. The retail segment result in Ireland generated a profit of $17.58 million for FY20, an increase of $9.54 million or +119% on the $8.05 million profit in FY19. The COVID-19 pandemic delayed the opening of new stores at Galway and Sligo. The Galway store opening was initially scheduled for April 2020, but was delayed, and opened on 22nd July 2020. This full-format store is 60,000 sq. ft. and anchors the second phase of the Gateway Retail Park in Knocknacarra on the west side of Galway City. The 43,600 sq. ft. full-format store at Sligo Retail Park, Carraroe, Sligo, was initially expected to open in FY20, but now has been delayed to October 2020. Northern Ireland | 2 Harvey Norman® Company-Operated Stores In the December 2019 half-year report, we disclosed that sales revenue increased to £6.13 million for HY20, up by £0.55 million or +9.8%, from £5.58 million in HY19. Translated into Australian dollars, sales revenue increased by +13.0% or $1.30 million, to $11.27 million. The retail segment result in Northern Ireland generated a profit of $0.09 million for HY20, an improvement of $0.35 million on the ($0.26) million loss in HY19. The Flagship store on the iconic Boucher Road has gone from strength-to- strength, recording double digit sales growth during the half in a very difficult trading environment.   The second half of this year should have seen the Northern Ireland business leverage its position as the number one furniture and bedding destination in Northern Ireland. Instead, the UK Government decree resulted in the closure of the 2 stores at Boucher Road & Holywood from 24th March to 7th June. Online trade was not permitted during the lockdown period. COVID-19, coupled with the existing political challenges in the region, had the impact of decreasing sales revenue to £9.30 million for FY20, down £0.96 million or -9.4%, from £10.26 million in FY19. Translated into Australian dollars, sales revenue decreased by -6.0% or $1.12 million, to $17.45 million. The retail segment result in Northern Ireland generated a loss of ($0.71) million for FY20, a deterioration of $0.46 million on the trading loss of ($0.25) million in FY19. HARVEY NORMAN HOLDINGS LIMITED | ANNUAL REPORT JUNE 2020 15 OPERATING and FINANCIAL REVIEW (continued) Other Non-Franchised Retail The Other 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 $226.47 million for FY20, a decrease of $0.79 million or -0.3%, from segment revenue of $227.26 million in FY19. The result for the non-franchised retail segment was a loss of $8.84 million for FY20, compared with a loss of $16.67 million in FY19, a reduction in the loss by $7.83 million from the loss incurred in FY19. The other non-franchised retail and wholesale businesses in Australia did not close to the public during the second half of FY20. Whilst they remained open throughout, these businesses operate in the retail categories that have been adversely impacted by the COVID-19 pandemic, resulting in significant decreases in turnover, particularly in the months of March and April 2020. Other Segment The Other segment is primarily comprised of credit facilities provided to related and unrelated parties and other unallocated income and expense items. The Other segment incurred a loss of $1.58 million for FY20 compared to a loss of $9.95 million in FY19, a reduction in the loss by $8.37 million. Equity Investments This segment includes the investment in, and trading of, equity investments, including listed securities in Australia and New Zealand that are held at fair value. The equity investments segment incurred a loss of $2.15 million for the 2020 financial year, compared to a profit of $18.40 million in the 2019 financial year. 16 2 OPERATING and FINANCIAL REVIEW (continued) THE FRANCHISING OPERATIONS SEGMENT IN AUSTRALIA Auburn, Sydney (Australia Flagship complex) Harvey Norman Holdings Limited (HNHL) and subsidiaries of HNHL own valuable intellectual property rights, including the trade marks Harvey Norman®, Domayne® and Joyce Mayne®, software and other confidential information to promote and enhance the brands. A subsidiary of HNHL (a franchisor) grants separate franchises to independent franchisees to use the Harvey Norman®, Domayne® or Joyce Mayne® trade marks in Australia and to conduct the retail business of the franchisee at or from a store within a particular branded complex, pursuant to the terms of a franchise agreement. 194 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 franchise 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. 539 Number of independent franchisees carrying on their business under Harvey Norman®, Domayne® and Joyce Mayne® brands. 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. HN 18 DM 1 HN 2 JM 1 HN 36 DM 3 JM 4 HN 10 HN 57 DM 12 JM 2 HN 38 DM 2 HN 6 ACT HN 1 DM 1 168 FRANCHISED COMPLEXES 19 FRANCHISED COMPLEXES 7 FRANCHISED COMPLEXES HARVEY NORMAN HOLDINGS LIMITED | ANNUAL REPORT JUNE 2020 17 17 OPERATING and FINANCIAL REVIEW (continued) Franchising Operations Segment Earlier this year, we reported a reduction in the revenues and profit result generated by our franchising operations segment in Australia for the half-year ended 31 December 2019. For HY20, franchising operations segment revenues were $443.81 million, down by $24.82 million, or -5.3%, from $468.64 million in HY19. The fall in franchising operations segment revenues was directly attributable to the moderation in aggregated franchisee sales revenue which grew by only +0.1% on a headline basis and +0.03% on a comparable basis for the half. For HY20, we had reported that the sales revenues of our Australian Harvey Norman®, Domayne® and Joyce Mayne® franchisees were adversely affected by the challenging and competitive retail environment and the effects of the unforeseen, unprecedented natural disasters. Accordingly, the franchising operations segment result decreased by $34.61 million, or -21.8%, to $123.86 million for HY20, from $158.47 million in HY19. Included in the HY20 result was the first-time adoption of AASB 16 Leases which had an incremental financial impact of increasing expenses by $3.81 million for the half. Excluding AASB 16, the franchising operations segment result would have been $127.67 million for HY20, a reduction of $30.80 million, or -19.4%, relative to HY19. The franchising operations margin fell from 5.37% in HY19 to 4.19% in HY20, a reduction of 118 basis points. Excluding the incremental impact of applying AASB 16 Leases, the franchising operations margin would have been 4.32% for HY20, a reduction of 105 basis points. In January and February, the franchising operations segment continued to follow the same downward trajectory on the back of declining aggregated franchisee sales revenue which fell by approximately 3% for those months, primarily due to the prolonged severe impacts of the natural disasters. The response to the COVID-19 pandemic in March, and the transition to remote working for many employees and remote learning for students, generated strong essential technology and appliances sales by Harvey Norman®, Domayne® and Joyce Mayne® franchisees, reversing the sales reductions in January and February and closing the March 2020 quarter stronger than the previous corresponding period. The quarter from April 2020 to June 2020 saw the growth in franchisee sales revenue increase even further as the Australian public invested in their homes, resulting in a substantial rise across all key product categories. Franchisee sales revenue increased by 18.6% on a headline basis, or 18.9% on a comparable sales basis, to $3.21 billion for second half of the 2020 financial year (2H20), an increase of $502.49 million from $2.71 billion for the second half of the 2019 financial year (2H19). This resulted in a corresponding increase in franchising operations segment revenue which grew by +37% to $505.22 million for 2H20, compared to $370.03 million for 2H19. 2H20 produced significant growth in the franchising operations segment profit result rising by $134.81 million or +150% to $224.73 million, from $89.93 million in 2H19. The franchising operations margin increased to 7.00% for 2H20 compared to 3.32% for 2H19, an increase of 368 basis points. If we excluded the incremental impact of AASB 16, the franchising operations segment result for 2H20 would have been $227.92 million with a franchising operations margin of 7.10%. 18 2 OPERATING and FINANCIAL REVIEW (continued) Franchising Operations Segment (continued) For the 2020 financial year, the franchising operations segment generated revenues of $949.04 million, up by $110.37 million, or +13.2%, from $838.67 million in the 2019 financial year. The franchising operations segment result was $348.59 million for FY20, up by $100.19 million, or +40.3%, from $248.40 million in FY19. Excluding the incremental impact of applying AASB 16 Leases of $7.00 million, the franchising operations segment result would have been $355.59 million for FY20, an increase of $107.19 million, or +43.2%, relative to FY19. The franchising operations margin grew to 5.66% in FY20, compared to 4.39% in FY19, an increase of 127 basis points. Excluding the incremental impact of applying AASB 16 Leases, the franchising operations margin would have been 5.77% for FY20, a rise of 138 basis points. The growth in the franchising operations segment result can be attributed mainly to an increase in revenue received from franchisees by $112.22 million or +11.9%. Net franchise fees increased by $111.31 million, or+16.6%, primarily driven by the robust aggregated franchisee sales growth in the second half of FY20, particularly the substantial franchisee sales growth in 4Q20 relative to 4Q19. Offsetting this growth was a net increase in leasing expenses by $7.00 million due to the adoption of AASB 16 Leases in FY20. Franchisee Sales Revenue Underpins the Franchising Operations Segment 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. 2020 has been a difficult year for Harvey Norman®, Domayne® and Joyce Mayne® franchisees. In the first half of the financial year (1H20), they operated in a challenging and competitive retail environment, influenced by a cautious consumer, changing promotional cycles and unforeseen, unprecedented natural disasters. Aggregated franchisee sales revenue for 1H20 had increased by 0.1% on a headline basis, and 0.03% on a comparable sales basis, relative to 1H19. In January and February, the subdued retail sentiment and prolonged unprecedented natural disasters continued, with aggregated franchisee sales revenue decreasing by 3% as franchisees focused on supporting and protecting local communities. The “Shop · Support · Rebuild” initiatives in January through to early March saw Harvey Norman®, Domayne® and Joyce Mayne® franchisees assist organisations such as the “BizRebuild – Disaster Relief Initiative” and “Good360” to help rebuild affected communities. The natural disasters of droughts, bushfires and floods were swiftly followed by the ongoing COVID-19 pandemic. In March, franchisees faced challenges shared across the globe – a unique combination of a panicked consumer vying for household necessities to bunker down and remain at home for an undefined period, and supply shortages due to ‘panic-buying’ and supply-chain lockdowns. Such challenges were exacerbated by restrictions to domestic and international freight. Strong sales in March 2020 – primarily driven by essential technology and appliance goods – reversed the sales reductions in January and February and closed the March 2020 quarter stronger than the previous corresponding period. Following the directive of the Australian Government to businesses to “keep Australia running”, steps were immediately taken to ensure the Harvey Norman®, Domayne® and Joyce Mayne® franchisees could safely service their customers with the ‘Shop Smart’ and ‘Shop Safe’ guidelines. With the exception of the mandatory closure of two franchised complexes in Tasmania for a 2-week period, the 194 franchised complexes throughout Australia have remained open throughout the year. Appropriate social distancing measures and cleaning practices were applied in order to prioritise customer safety and enable trade to continue, and this was assisted by the fact that Harvey Norman®, Domayne® and Joyce Mayne® franchisees operate their businesses in large-format complexes located in stand-alone retail precincts. HARVEY NORMAN HOLDINGS LIMITED | ANNUAL REPORT JUNE 2020 19 OPERATING and FINANCIAL REVIEW (continued) Franchisee Sales Revenue Underpins the Franchising Operations Segment (continued) Existing online, Click & Collect and contactless delivery offerings were expanded to provide further options for consumers to shop in a way that’s safe for them and their families. With the international and state borders closed, in addition to the mandatory closures of many leisure, sporting, dining and recreational facilities, the Australian public returned ‘home’. From April to June, social interactions were limited, and customers invested in their homes. As an established Home and Lifestyle Retailer, Harvey Norman®, Domayne® and Joyce Mayne® franchisees were well-positioned to service the essential homemaker needs of their customers. Whilst robust sales of essential whitegoods, technology and home office furnishings continued in the June quarter, franchisees saw a good uptick in the audio-visual category, led by large-screen televisions that offered an unparalleled viewing experience at affordable pricing, with 8K technology in televisions continuing to be a sought-after product by consumers. Connected appliances are a natural growth area within consumer electronics, and demand remained strong throughout the period. The physical distancing requirements enforced by the government, local businesses and society in general, has resulted in the desire to be more digitally connected than ever. The necessity of virtual meetings for businesses, school or leisure activities has seen growth in online platforms and mediums to virtually connect with colleagues, relatives and friends. The telecommunications category of franchisees has seen corresponding growth in the June quarter, led by strong offers to connect with the Optus network in Australia and outright mobile phone sales in general. The gaming category has seen solid growth in the June quarter as a natural extension of the need for entertainment within the home throughout this unique period. Technology franchisees have experienced an increased demand for better performance from products and this has driven a faster refresh cycle with consumers choosing to upgrade mid to high end computers. With the strong growth in the setup of home offices, there has also been an increased demand in connected essentials such as monitors, web cams, audio and printers. The message by franchisees throughout the June quarter was simple and consistent: “We’re here for you” and “We’re doing our part to help everyone stay safe”. Through this consistent messaging, franchisees have built trust with the Australian public. Customers know they can rely on the Harvey Norman®, Domayne® and Joyce Mayne® brands to be there to support each local community – regardless of whether they are located in a remote, regional area or within a large metropolitan city. Aggregated franchisee sales revenue for the second half of the 2020 financial year (2H20) increased by 18.6% on a headline basis, or 18.9% on a comparable sales basis, to $3.21 billion, an increase of $502.49 million from $2.71 billion for the second half of the 2019 financial year (2H19). Amid the difficult and unprecedented events of this year, aggregated franchisee sales revenue for FY20 increased by 8.9% on a headline basis, or 9.1% on a comparable sales basis, to $6.16 billion, an increase of $505.65 million from $5.66 billion for FY19. 20 2 OPERATING and FINANCIAL REVIEW (continued) O2O STRATEGY The consolidated entity has continued to invest in technology, digital transformation and infrastructure assets. Franchisees have been provided with the necessary tools to enhance their Online-to-Offline (O2O) Strategy and optimise their service offering. Customers of Harvey Norman®, Domayne® and Joyce Mayne® franchisees are more digitally connected than ever, and are increasingly utilising technology both in-store and in the online marketplaces. Franchisees were agile in adapting to the COVID-19 social distancing requirements, which resulted in a significant increase in the digital expectations of their customers. There has been a strong franchisee focus on ‘contactless’ retail and digital connectivity. 1 H R C L I C K & C O L L E C T 1 Hour Click & Collect and ‘Contactless’ Click & Collect Franchisees continue to improve the Click & Collect experience, where customers want to be connected to their local store. The 1 Hour Click & Collect service enables customers to connect with franchisee in-store experts via Microsoft Teams. Through integrated notifications, the customer can advise the franchisee that they are on their way to collect their order, allowing the franchisee to be fully prepared when they arrive. COVID-19 has expedited the rollout of the new franchisee ‘Contactless In-Car Pickup’ option. Once at the franchised complex, customers can press the “I’m Here” button on their app, and a staff member will bring out the purchase to the customer’s car, contact-free. This option is currently available at the franchised complexes throughout greater Melbourne and regional Victoria, and in the 13 company-operated stores in Ireland. Trak by Harvey Norman® Trak by Harvey Norman® logistics technology, optimises route planning for franchisee deliveries and provides automated customer communication with real-time tracking. Franchisees are continuing their rollout of the Trak platform, and customer feedback to date has been very positive. The Trak platform provides delivery drivers for franchisees with improved capabilities to communicate with the customer. Drivers are equipped with smart devices which enable key events in the delivery process to be monitored and alerts sent to drivers, customers and franchises. This capability is key to providing exceptional service levels at the final stage of the delivery process. Inbound Logistics Reservations Franchisees have implemented a reservations system that enables inbound freight providers to “book in” to a franchisee warehouse, ensuring receiving capabilities with the aim of eliminating failed deliveries and re-scheduling. Additionally, the system provides visibility of purchase order receipting information that contributes to fulfilling the customer’s delivery of products. Franchisees intend to continue the deployment of the Inbound Logistics Reservations System throughout FY21. 21 HARVEY NORMAN HOLDINGS LIMITED | ANNUAL REPORT JUNE 2020 21 OPERATING and FINANCIAL REVIEW (continued) Home Delivery Services Home delivery service standards provide franchisee customers with the delivery service option that best suits their needs. Delivery services need to be flexible and responsive to customers’ needs for a quick ‘Store to Door’ drop-off service, a ‘Delivery Plus’ for a basic connection and assembly or a full ‘Premium Delivery’ for full assembly and trade based services. Implementation of a customer satisfaction framework for franchisee deliveries has focussed attention on the quality of their delivery services. As the overall customer experience is vital, providing feedback to franchisees is critical to ensure continuous improvements during the delivery process. Messaging and Chatbots Franchisee LiveChat continues to be upgraded and enhanced, and is integral in helping answer customer questions online. Franchisees are now moving towards a more sophisticated service solution: ”Conversational Commerce that leverages AI-powered Chatbots” and spans a multitude of messaging channels. With over 90% of people’s day-to-day conversations happening in digital messaging channels, it is imperative to be where consumers already are, resulting in the launch of messaging and customer service platforms on Apple Business Chat, WhatsApp, Facebook Messenger and SMS. 2020 has seen the introduction of franchisee Chatbots to help automate the customer service for customers who connect with Harvey Norman® 24/7. Chatbots can handle a wide range of basic questions, freeing up Live Chat agents to handle more high-value and sophisticated requests - delivering the expertise Harvey Norman® is known for. Adobe Analytics The Adobe Analytics platform provides franchisees with unsampled, real-time data to comprehensively understand the customer journey. Harvey Norman® Store Location Management System The Harvey Norman® location management service (LMS) has been enhanced over the past year, and continues to grow and evolve. This service provides a single source of truth across all information services (Website, StoreFinder, Facebook, Google Maps) for franchisees at each franchised complex including: location information, contact details, trading hours, and local events, allowing customers to easily obtain information about their nearest franchised complex. The LMS is integral to the seamless Click & Collect experience, providing accurate information for franchisee store and warehouse customer pickup locations. The LMS also gives context to customers within notification services by advising customers of pickup hours in real-time, ensuring that franchisees are always available to give them a great experience. Latitude Pay This year, Harvey Norman® partnered with Latitude Financial Services Australia Holdings Pty Ltd (Latitude) to offer an attractive new buy now pay later (BNPL) finance offering both in-store and online called “LatitudePay”. LatitudePay boasts ‘no interest payments’ as well as the ability to combine multiple purchases into one simple payment plan over ten instalments. LatitudePay has a fast 90-second sign up time which includes a credit and ID check and allows instant approval for spending amounts of between $150 and $1,000. H N S T O R E 22 OPERATING and FINANCIAL REVIEW (continued) Review of the Property Segment Our Robust Freehold Property Portfolio Globally, we operate an integrated retail, franchise, property and digital system – and the ownership of a robust property portfolio has always been our strategic, competitive advantage. Our consolidated balance sheet is anchored by over $3 billion in tangible, freehold property segment assets that has appreciated in fair value by $63.34 million during the 2020 financial year. In Australia, our franchisees operate in the large-format retail market, characterised by generous retail footprints and spacious floor layouts, as opposed to the traditional retail market which includes multi-storey shopping centres. The majority of our 194 franchised complexes are located in large-format retail centres as the extensive floorspace is necessary to showcase the vast product range of a home and lifestyle retailer. 94 franchised complexes (48% of total) are owned by the consolidated entity and then leased to external parties, including Harvey Norman®, Domayne® and Joyce Mayne® franchisees pursuant to a licence, terminable upon reasonable notice. 100 franchised complexes (52% of total) are leased by separate subsidiaries of the consolidated entity from external landlords, and then sub-leased to Harvey Norman®, Domayne® and Joyce Mayne® franchisees pursuant to a licence, terminable upon reasonable notice. When the COVID-19 pandemic struck in the March 2020 quarter, these large-format retail centres enabled us to mitigate some of the COVID-19 risks.  Our franchised complexes are primarily located in stand-alone retail precincts, which are constructed around a carpark, allowing customers immediate and safe access to the shopfront. As there are generally no internal malls or dining and entertainment facilities onsite, social interaction is limited and customers feel comfortable and safe to visit and shop. The large showroom floorspace easily accommodates the strict social distancing requirements.  The tenancies within our complexes are primarily the Harvey Norman®, Domayne® or Joyce Mayne® franchisees, and other complementary homemaker, lifestyle and hardware retailers. The COVID-19 restrictions in each state, coupled with the limited ability to travel and socialise, resulted in the Australian public investing in their homes. The swift implementation of ‘COVID-safe’ practices enabled our franchisees to continue to trade to service the significant increase in demand for technology and essential appliances at the commencement of the pandemic, and later, the rising demand in the furniture, bedding and electrical categories as customers sought to refurbish their homes and upgrade their household goods. With the exception of two stores in Tasmania for a two-week period, our franchised complexes remained open throughout, and the composition of the tenancy mix within the home and lifestyle space meant minimal closures and high occupancy rates throughout the June quarter.  Whilst the COVID-19 pandemic has heightened the uncertainty around property fair values in general, there is evidence that the large-format retail market has steady and more resilient fair values, in contrast to the softening values of some traditional, multi- storey shopping centres in Australia. Our freehold property portfolio has recorded $63.34 million in capital appreciation to fair value over the past 12 months, of which $34.27 million was the net property revaluation increment for investment properties recognised in the income statement, $0.69 million increment for an overseas owner-occupied property recognised in the income statement and $28.38 million was the net increment for owner-occupied properties recognised in equity. Net Property Revaluation Adjustments At balance date, the board of directors make an assessment of the fair value of each freehold investment property. This assessment is informed by:  the information and advice contained in the last independent external valuation report for that property prepared by an external, professionally qualified valuer who holds a recognised relevant professional qualification and has specialised expertise in the property being valued (Independent Valuer); the information and advice contained in the last internal valuation report for that property (which was informed by the immediately preceding independent external valuation report for that property); the last management review for that property; and other information and professional or expert advice given or prepared by reliable and competent persons in relation to that property.    Until 31 December 2019, the entire freehold investment property portfolio in Australia was independently valued at least once every three (3) years, on a rotational basis by an Independent Valuer. Under this approach, approximately one-sixth of the portfolio was independently externally valued at least once every six (6) months. It was determined that for the second half of the 2020 financial year and thereafter, the entire freehold investment property portfolio in Australia will be independently valued by an Independent Valuer at least once every two (2) years on a rotational basis. This means that as at 30 June 2020 approximately one-quarter (25%) of the freehold investment property portfolio was valued by an Independent Valuer. 36 HARVEY NORMAN HOLDINGS LIMITED | ANNUAL REPORT JUNE 2020 23 OPERATING and FINANCIAL REVIEW (continued) Net Property Revaluation Adjustments (continued) For the 2020 financial year, sixty-one (61) valuations of freehold investment properties were performed by an Independent Valuer: twenty-five (25) at 31 December 2019 and thirty-six (36) at 30 June 2020. This represents a total of 44.53% of the number of freehold investment properties independently externally valued this year, and 44.72% in terms of the fair value of the freehold investment property portfolio in Australia subject to independent external valuation. Freehold investment properties not independently externally valued as at balance date are subject to an internal valuation or a management review, performed by persons qualified by relevant education, training or experience. Each internal valuation and management review is informed by the last independent external valuation and reliable market evidence. For the 2020 financial year, 17 freehold investment properties had been affected by the same factors as the properties which had been independently externally valued. As a consequence, internal valuations for these 17 properties were undertaken to determine the effect of these factors. The below table shows the composition of freehold property segment assets as at 30 June 2020, the number of owned property assets and the increase in fair value recognised in each country. Leasehold Property Portfolio | AASB 16 Leases On 1 July 2019, the consolidated entity adopted AASB 16 Leases, resulting in the first-time recognition of right-of-use assets on the balance sheet totalling $1.14 billion - representing our right to use an underlying leased asset as at 30 June 2020 - and the recognition of $1.17 billion of lease liabilities - representing the present value of future lease payments. Right-of-Use Assets: Leasehold Investment Properties (Sub-Leased to External Parties) The consolidated entity has a portfolio of property leases primarily for the purposes of being sub-leased to Harvey Norman®, Domayne® and Joyce Mayne® franchisees in Australia. 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. Leasehold investment property: right-of-use asset meet the definition of an investment property. As at 30 June 2020, there were 240 leasehold investment properties. 100 leasehold investment properties (42% of total) were occupied by Harvey Norman®, Domayne® and Joyce Mayne® franchisees in Australia for retail purposes. The remaining 140 leasehold investment properties (58% of total) were primarily used by our franchisees for warehousing. The adoption of AASB 16 Leases has resulted in an increase in expenses of $7.04 million for the leasehold investment properties in the current financial year. 24 2 OPERATING and FINANCIAL REVIEW (continued) Leasehold Property Portfolio | AASB 16 Leases (continued) Right-of-Use Assets: Leasehold Owner-Occupied Properties and Plant and Equipment Assets Leasehold properties occupied by the consolidated entity primarily include company-operated stores, warehouses and offices that are leased from external landlords. Unlike the leasehold investment properties: right-of-use assets which are measured at fair value, the leasehold owner-occupied properties and plant and equipment assets: right-of-use assets are measured at cost, less any accumulated depreciation and impairment losses. The adoption of AASB 16 Leases has resulted in an increase in expenses of $2.23 million for the leasehold Owner-Occupied Properties and Plant and Equipment Assets in the current financial year. The below table shows the composition of right-of-use assets and lease liabilities within our leasehold property portfolio as at balance date, and the number of leased retail properties and other properties leased by the consolidated entity. Review of the Financial Position of the Consolidated Entity The unpredictable challenges and uncertainty of 2020 has reinforced the importance of our fundamental cornerstone principle of developing, maintaining and enhancing our robust asset base and preserving our solid balance sheet. HARVEY NORMAN HOLDINGS LIMITED | ANNUAL REPORT JUNE 2020 25 OPERATING and FINANCIAL REVIEW (continued) OPERATING and FINANCIAL REVIEW (continued) Review of the Financial Position of the Consolidated Entity (continued) Preservation of cash and the repayment of external debt facilities has resulted in a NIL net debt to equity ratio: In the third quarter of FY20, as the COVID-19 pandemic emerged, we moved quickly to bolster our financial position and undertook a cash preservation approach across the consolidated entity. The cancellation of the interim FY20 dividend and the 20% reduction in the remuneration of the Directors for the months of April, May and June 2020 were some of the cash preservation measures taken during the year. As at 30 June 2020, the consolidated entity generated a positive net cash position (cash net of Interest-bearing loans and borrowings) of $15.35 million compared to a net debt position of $626.47 million as at 30 June 2019. As at 30 June 2020, the consolidated entity had unused, available financing facilities of $685 million – only utilising $293 million out of total approved financing facilities of $978 million. The robust cash flows generated by the consolidated entity in 2H20, particularly in 4Q20, resulted in the ability to pay down external debt – including the $520 million repayment of the Syndicated Facility in Australia. This has resulted in a net debt to equity ratio of nil as at 30 June 2020, compared to a net debt to equity ratio of 19.46% as at 30 June 2019. Strong Increase in Total Assets: Total assets increased by +21.5%, or $1.03 billion, to $5.83 billion as at 30 June 2020, from $4.80 billion as at 30 June 2019. $1.14 billion of this increase can be attributed to the first-time application of AASB 16 Leases from the beginning of the 2020 financial year that resulted in the recognition of right-of-use assets for leases of owner-occupied properties and plant and equipment leases of $513.78 million and investment properties (leasehold): right-of-use assets of $621.90 million relating to leases of properties that are sub-leased to external parties. The value of the freehold investment property portfolio increased by $84.38 million, or +3.4%, to $2.59 billion as at 30 June 2020 primarily due to the net property revaluation increment over the past 12 months and the refurbishments of other freehold investment property assets. Cash and cash equivalents increased by $98.15 million to $313.20 million as at 30 June 2020, from $215.05 million as at 30 June 2019, predominantly due to greater receipts from customers – due to stronger sales from company-operated stores – and greater receipts from franchisees – primarily due to the improved profitability of the franchising operations segment. The higher receipts from customers and higher net receipts from franchisees were used to pay down debt. The above increases have been offset by a reduction in trade receivables by $230.41 million due to lower receivables from franchisees by $255.37 million. Franchisee receivables are reduced on a daily basis by an automated process, at the direction of the franchisee, to transfer the net cash receipts in the bank account of the franchisee to Derni, to reduce that franchisee’s indebtedness to Derni. The net cash receipts of franchisees were significantly stronger in the second half of the 2020 financial year – particularly in the 4th quarter. This resulted in higher repayments of franchisee indebtedness and a lower franchisee receivables balance at the end of the year. Property, plant and equipment assets decreased by $33.32 million due to $75.16 million reclassification from property, plant and equipment assets to right-of-use assets upon the first-time adoption of AASB 16 Leases offset by the acquisition of a freehold owner-occupied property in NZ, and the fit-out of the 5 new company-operated stores in Malaysia prior to December 2019, 1 new outlet in New Zealand and the fit-out of 2 new franchised complexes this year. Upgrades and refurbishments to franchised complexes and company-operated stores have continued only where necessary for the safety, comfort and security of the customers and for the maintenance and protection of our brands. The premium refit program that we announced last year (which was to be progressively rolled-out in Australia and overseas) was put on hold. Similarly, our overseas expansion plans have halted since December 2019, and the 5 stores that were planned to open in the second half of the year did not occur due to government mandated lockdowns and business closures.   26 2 HARVEY NORMAN HOLDINGS LIMITED | APPENDIX 4E 30 JUNE 2020 27 HARVEY NORMAN HOLDINGS LIMITED | APPENDIX 4E 30 JUNE 2020 24 HARVEY NORMAN HOLDINGS LIMITED | APPENDIX 4E 30 JUNE 2020 25 OPERATING and FINANCIAL REVIEW (continued) Review of the Financial Position of the Consolidated Entity (continued) Reduction of Total Liabilities (excluding AASB 16 lease liabilities): Total liabilities increased by $750.33 million, or +46.9%, to $2.35 billion as at 30 June 2020 from $1.60 billion as at 30 June 2019 mainly attributable to the recognition of lease liabilities of $1.17 billion resulting from implementing AASB 16 Leases which took effect from 1 July 2019. The increase was offset by a reduction in interest-bearing loans and borrowings of $543.68 million, of which the majority of the reduction related to the repayment of the Syndicated Facility in Australia by $520 million since the end of prior year. Solid Net Assets: The consolidated entity is very pleased to report another solid net asset base, with robust growth of 8.7% during the year, or an increase of $279.53 million, to $3.48 billion as at 30 June 2020, from $3.20 billion as at 30 June 2019. Robust Cash Flows Cash and cash equivalents, net of bank overdraft, as disclosed in the Statement of Cash Flows on page 87, increased by $108.63 million or 58.5% to $294.45 million in FY20, compared to $185.82 million in FY19.   During FY20, the consolidated entity generated $1.06 billion of net cash flows from operating activities. This was primarily achieved by receiving $2.46 billion from customers and $1.30 billion in net receipts from franchisees, offset by $2.47 billion in payments to suppliers and employees. Net receipts from franchisees increased by $445.86 million, or +51.9%, to $1.30 billion, from $858.37 million in FY19 as net receipts from franchisees were affected by the movement in the aggregate amount of financial accommodation provided to franchisees in FY20 relative to the movement in FY19. During FY20, the movement in the aggregate amount of financial accommodation provided to franchisees decreased significantly compared to the movement in FY19, primarily due to improved profitability of the franchising operations segment in the second half of FY20, particularly in 4Q20. Higher net receipts from franchisees are also assisted by an increase in gross revenue from franchisees received in FY20 compared to FY19. Receipts from customers increased by $63.67 million due to higher sales from company-operated stores. Payments to suppliers and employees decreased by $210.28 million as FY19 included lease payments in accordance with the superseded standard AASB 117. Under AASB 16 Leases, only variable lease payments and payments for short term and low- value leases form part of payments to suppliers and employees. All other lease payments under AASB 16 are allocated between interest and principal components and classified within operating and financing cash flows respectively. There was an increase in the net cash flows used in investing activities by $70.76 million during FY20 as the prior year included the receipt of proceeds of $40.50 million pursuant to the completion of the Administrator Sale of the Coomboona JV assets in January 2019. Payment for the purchase of investment properties increased by $23.60 million in FY20 primarily due to the purchase and refurbishments of freehold investment properties in the first half of FY20. The increase in outflows was offset by an increase in proceeds from sale of property, plant and equipment and properties held for resale by $23.60 million predominantly due to the completion of the sale for the Byron at Byron Bay Resort in the first half of this year. There was an increase in the net cash financing outflows by $565.08 million during FY20 primarily due to an increase in net repayment of the Syndicated Facility by $495 million and the inclusion of the principal component of lease payments of $124.77 million in financing activities upon the first-time adoption of AASB 16 Leases in the current year. HARVEY NORMAN HOLDINGS LIMITED | ANNUAL REPORT JUNE 2020 27 OPERATING and FINANCIAL REVIEW (continued) Capital Management Policy The consolidated entity’s capital management policy objectives are to: create long-term sustainable value for shareholders; maintain optimal returns to shareholders and benefits to other stakeholders; source the lowest cost 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%. In this report, the calculation of the net debt to equity ratio excludes the right-of-use assets and lease liabilities recognised under AASB 16 in order to be comparable with ratios calculated in previous periods. As at 30 June 2020, the consolidated entity had unused, available financing facilities of $685 million – only utilising $293 million out of total approved financing facilities of $978 million. This has resulted in a net debt to equity ratio of nil as at 30 June 2020, compared to a net debt to equity ratio of 19.46% as at 30 June 2019. The capital structure of the consolidated entity consists of: debt, which includes interest-bearing loans and borrowings as disclosed in Note 17. Interest-Bearing Loans and Borrowings of this report; cash and cash equivalents; and, equity attributable to equity holders of the parent, comprising ordinary shares, retained profits and reserves as disclosed in Notes 22, 23 and 25 respectively. The consolidated entity’s borrowings consist primarily of bank debt provided by a syndicate of ten banks (including 3 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. Outlook We expect to open up to 12 new Harvey Norman® company-operated stores overseas, with 3 in New Zealand, 3 in Malaysia, 3 in Singapore, 2 in Ireland and 1 in Croatia. The new store at Galway City in Ireland has already opened subsequent to balance date and is trading well. In Australia, we anticipate opening a new Harvey Norman® franchised complex at Hornsby, NSW in October 2020. Upgrades and refurbishments to franchised complexes as part of our premium refit strategy announced last year is expected to recommence in FY21, after being placed on hold temporarily due to COVID-19 disruptions. Subsequent to balance date, eighteen (18) Harvey Norman® and Domayne® complexes in greater Melbourne, Victoria were closed to the public from 6th August 2020 as a direct result of the Stage 4 Restrictions mandated by the State Government of Victoria. Our franchisees quickly moved to service their customers via Click & Collect and contactless deliveries. The sales turnover of our affected franchisees in greater Melbourne will be adversely affected by the mandated closures. It is presently estimated that the easing of Stage 4 Restrictions in Victoria will be commence from 26th October 2020. On 11th August 2020, the New Zealand Government announced Alert Level 3 restrictions for the Auckland region, and Alert Level 2 restrictions for the remainder of the country, resulting in the closure of eleven (11) Harvey Norman® company-operated stores in Auckland to the public from midday 12th August 2020 to Sunday 30th August 2020 inclusive. All 11 stores re-opened to the public from Monday 31st August 2020. The below table shows the aggregated sales increase / (decrease) from 1 July 2020 to 17 September 2020 compared to 1 July 2019 to 17 September 2019. The % increases have been calculated in Australian Dollars $A. COUNTRY (% increase calculated in $AUD) Australian Franchisees New Zealand Slovenia & Croatia Ireland Northern Ireland Singapore Malaysia July 2020 vs July 2019 August 2020 vs August 2019 1 July 2020 to 17 September 2020 vs 1 July 2019 to 17 September 2019 Total % 40.5 24.1 24.8 63.1 31.7 0.8 15.6 Comparable % 40.9 23.5 24.8 59.9 31.7 0.8 2.2 Total % 34.3 14.6 35.3 57.4 19.5 6.1 5.4 Comparable % 35.1 13.9 35.3 49.1 19.5 6.1 (-7.4) Total % 33.8 18.8 27.2 61.7 23.6 (3.7) 7.4 Comparable % (1) 34.5 18.0 27.2 55.1 23.6 (-3.8) (-5.1) (1) Excludes the effect (in the relevant period) of the temporary closures mandated by each local government as a result of their COVID-19 response. 28 2 OPERATING and FINANCIAL REVIEW (continued) Summary of Key Business Risks The Board is cautiously 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 in trading conditions due to the COVID-19 global pandemic: The emergence of COVID-19 at the beginning of 2020 has created widespread panic and disruption to the way in which governments lead their countries across the globe, the approach to business operations and trade, and how individuals carry out their day-to-day lives. The consolidated entity has adapted to adhere to the mandatory social distancing restrictions applicable in the 8 countries in which it, or its franchisees, operate and has temporarily closed to the public when mandated to do so by the relevant government. The consolidated entity expects that the COVID-19 pandemic could impact trading conditions in the year ahead. The response to COVID-19 by government and health services organisations, through regulation and policy, may limit the ability of franchised complexes in Australia and overseas company-operated stores to trade at normal capacity. Strict social distancing measures and ‘COVID-Safe’ work practices may continue to restrict trade in future periods. This risk is mitigated as the majority of the franchised complexes and company-operated stores are located in large-format retail centres, characterised by generous retail footprints and spacious floor layouts, thereby maximising the ability to trade and service the needs of their customers. The uncertainty around the lasting economic, health and social impacts of the COVID-19 pandemic, the risk of further government-mandated retail closures in the near future, changing consumer behaviour and the ability of the supply-chains to meet demand, may impact the sales revenue generated by franchisees in Australia and company-operated stores – thereby impacting the profitability and cash flow of the consolidated entity. This risk is mitigated by the consolidated entity’s robust balance sheet, stringent measures to preserve cash and enhance liquidity, coupled with the continuous monitoring of any changes in COVID-19 regulation and policy as they are announced. The consolidated entity is in a positive net cash position of $15 million as at 30 June 2020 – with $685 million of unused, available debt facilities (refer to Note 18. Financing Facilities Available) – compared to a net debt position of $626.47 million as at 30 June 2019, and is therefore well-placed to tackle COVID-19 challenges as they arise. 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 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. HARVEY NORMAN HOLDINGS LIMITED | ANNUAL REPORT JUNE 2020 29 OPERATING and FINANCIAL REVIEW (continued) Summary of Key Business Risks (continued) 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 over $3 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. Refer to Note 14: Investment Properties: Freehold on pages 119 to 122 of this report. 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 investment cycle. 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 fraud, 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. 30 2 DIRECTORS’ REPORT – THE BOARD OF DIRECTORS Unless otherwise indicated, all directors (collectively termed “the Board”) held their position as a director throughout the entire financial year and up to the date of this report. Gerald Harvey Executive Chairman Mr. G. Harvey was the co-founder of Harvey Norman Holdings Limited in 1982 with Mr. I.J. Norman. Mr. G. Harvey has overall executive responsibility for the strategic direction of the consolidated entity, and in particular, property investments. Kay Lesley Page Executive Director and CEO Ms. Page joined Harvey Norman in 1983 and was appointed a director of Harvey Norman Holdings Limited in 1987. Ms. Page became the Chief Executive Officer of the Company in February 1999 and has overall executive responsibility for the consolidated entity. Ms. Page was an independent member of the Place Management NSW Board, and resigned as a member on 21 February 2020. Ms. Page was a Director of the Trustee of the Sydney Cricket and Sports Ground Trust, and resigned her directorship on 6 March 2020. 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 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, and is the Chair of the Barker College Foundation Limited and a Member of Council at Barker College. David Matthew Ackery Executive Director 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. 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 & Risk and Nomination Committees. Graham Charles Paton AM, B.Ec, FCPA, MAICD Non-Executive Director (Independent) Mr. Gunderson-Briggs is an independent Non-Executive Director of Australian Pharmaceutical Industries Limited, a company listed on the ASX. 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 & Risk Committee on 9 March 2006 and is a member of the Remuneration Committee. Maurice John Craven B.Sc, FAICD Non-Executive Director (Independent) 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, a Member of the Board of Cenitex and a Member of the Board of Social Venture Partners Melbourne. 33 HARVEY NORMAN HOLDINGS LIMITED | ANNUAL REPORT JUNE 2020 31 HARVEY NORMAN HOLDINGS LIMITED | ANNUAL REPORT JUNE 2020 The Board of Directors: Roles and Responsibilities / Structure and Composition DIRECTORS’ REPORT (CONTINUED) Role and Responsibilities It is the role of the Board to:       set and approve the strategy of the Company set the risk appetite of the Company; oversee the risk management framework of the Company; review the risk management framework of the Company at least annually to satisfy itself that the risk management framework of the Company continues to be sound and that the Company is operating with due regard to the risk appetite set by the Board; satisfy itself that the risk management framework of the Company deals adequately with contemporary and emerging risks such as conduct risk, digital disruption, cyber-security, privacy and data breaches, sustainability and climate change; and disclose, in relation to each reporting period, whether such a review has taken place. It is the role of senior management of the Company to design and implement the risk management framework of the Company and controlled entities and to ensure that the Company and each controlled entity operates within the risk appetite(s) set by the Board of the Company. The Board delegates to senior management of the Company, responsibility for the operational effectiveness and efficiency of the management of risk. 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; and c. 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. 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. b. Business savvy requires a deep understanding of one or more of the sectors of retail, property, franchising and digital. 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. 32 32 DIRECTORS’ REPORT (CONTINUED) The Board of Directors: Roles and Responsibilities / Structure and Composition (continued) 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 recommendation of the ASX Corporate Governance Council (CGC) that a majority of the Board should consist of independent directors. 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. Directors’ Meetings DIRECTOR Number of Meetings: Attendance Full Board Audit & Risk Remuneration Nomination 16 13 4 4 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 100% 100% 94% 100% 100% 94% 100% 100% 100% 100% 16 [16] 16 [16] 15 [16] 16 [16] 16 [16] 15 [16] 16 [16] 16 [16] 16 [16] 16 [16] n/a n/a n/a n/a n/a n/a 13 [13] 13 [13] 13 [13] n/a n/a n/a n/a n/a n/a n/a 4 [4] 4 [4] 4 [4] n/a n/a n/a n/a n/a n/a n/a 4 [4] 4 [4] 4 [4] n/a The above table represents the directors’ attendance at meetings of the Board, Audit & Risk 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. 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 Ordinary Shares Performance Rights 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 392,385,265 19,772,685 1,101,443 641,021 1,118,847 3,335,180 205,525,565 10,059 17,582 30,673 193,500 478,500 293,000 293,000 241,000 - - - - - 623,938,320 1,499,000 Performance Rights At the date of this report, there were 1,499,000 performance rights (2019: 1,349,500), being a right to acquire ordinary shares in the Company at nil exercise price.  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 January 2020, 160,000 performance rights representing 40% of Tranche 2 of the 2016 LTI Plan had lapsed and will never be exercisable by the participants. On 5 March 2020, 240,000 performance rights under Tranche 2 of the 2016 LTI Plan were exercised reducing the unissued ordinary shares under Tranche 2 of the 2016 LTI Plan to nil.  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 in accordance with the terms and conditions of the LTI Plan.  On 2 December 2019, a total of 549,500 performance rights under Tranche FY20 of the 2016 LTI Plan were granted to the Executive Directors in accordance with the terms and conditions of the LTI Plan. 33 HARVEY NORMAN HOLDINGS LIMITED | ANNUAL REPORT JUNE 2020 33 HARVEY NORMAN HOLDINGS LIMITED | ANNUAL REPORT JUNE 2020 CEO and CFO Certification DIRECTORS’ REPORT (CONTINUED) 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 2020, 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. 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 & Risk Committee, a Remuneration Committee and a Nomination Committee. Members acting on the committees of the board during the year were: Corporate Governance NON-EXECUTIVE DIRECTOR Audit & Risk Remuneration Nomination C.H. Brown K.W. Gunderson-Briggs G.C. Paton √ √ √ √ (Chairman) √ √ √ (Chairman) √ √ (Chairman) 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 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 2020. 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. Dividends The directors recommend a fully franked final dividend of 18.0 cents per share to be paid on 2 November 2020 to shareholders registered on 12 October 2020 (total dividend, fully franked - $224,281,198). 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 2019 final fully-franked dividend 1 November 2019 $247,744,684 2020 interim fully-franked dividend 4 May 2020 (Proposed) 2020 special fully-franked dividend 29 June 2020 Cancelled $74,760,399 On 1 November 2019, the final dividend in respect of the year ended 30 June 2019 was paid totalling $247.74 million. On 2 April 2020, given the uncertainty regarding the duration of the COVID-19 pandemic and its potential impact on trading, and for the abundance of precaution, the directors announced the decision to revoke the decision to pay, and cancel, the FY20 interim dividend of 12.0 cents per share. The cancellation of the FY20 interim dividend resulted in $149.52 million of cash being retained in the business. On 10 June 2020, the directors announced that the Company would pay a special dividend of 6.0 cents per share, fully-franked, to shareholders registered at the close of business on 23 June 2020. This special dividend was paid on 29 June 2020 totalling $74.76 million. 34 34 Dividends (continued) DIRECTORS’ REPORT (CONTINUED) The total dividend in respect of the year ended 30 June 2020 of 24.0 cents per share represents 62.24% (2019: 96.77%) of profit after tax and non-controlling interests, as set out on page 83 of the financial statements. Excluding the non-cash net property revaluation increments, the total dividend in respect of the year ended 30 June 2020 of 24.0 cents per share represents 65.59% (2019: 110.26%) of profit after tax and non-controlling interests, as set out on page 83 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. 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. 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 2020. Significant Events After Balance Date 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. 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. 35 HARVEY NORMAN HOLDINGS LIMITED | ANNUAL REPORT JUNE 2020 35 HARVEY NORMAN HOLDINGS LIMITED | ANNUAL REPORT JUNE 2020 DIRECTORS’ REPORT – REMUNERATION REPORT Letter from the Chair of the Remuneration Committee Dear Shareholders The consolidated entity delivered a record financial result for the 2020 year increasing reported profit before tax (PBT) by 15.1% to $661.29 million and reported net profit after tax and non-controlling interests (NPAT) by 19.4% to $480.54 million. Comparable profit year-on-year was up 26% on a PBT basis and 30.9% on NPAT. It also delivered a strong increase of 8.7% in the net asset base for shareholders to $3.48 billion as at 30 June 2020. The PBT return on net assets was 19% for the 2020 financial year compared to 18% for 2019. COVID-19 Effects on Remuneration The COVID-19 pandemic struck the Australian and world economies in March 2020. The consolidated entity operates businesses in eight separate countries around the world, with the governments of each of those countries reacting in different ways to the health and economic crisis. In April 2020, each of the Executive Directors forewent 20% of their salaries for the 3 months of April, May and June 2020. Similarly, the Non-Executive Directors elected to voluntarily reduce their director fee by 20% for the same period. Following the end of the 2020 financial year, the Remuneration Committee resolved that in making its decisions and recommendations in respect of remuneration outcomes for the Executive Directors, it would exclude the effect of COVID-19 support and assistance received by the consolidated entity in each of the countries in which it operates, from remuneration outcomes, so as to eliminate unintended windfall gains in remuneration returns for the Executive Directors. COVID-19 support and assistance is detailed on page 6 of this report. Evaluation of Performance of Executive Directors An appraisal of the performance of each Executive Director and the Executive Director team was undertaken following the end of the 2020 year as part of the annual Participant Performance Review by the Remuneration Committee. The appraisal considered matters in respect of performance during the COVID-19 period, including:  The operation of the consolidated entity across the eight separate countries including in both lock-down and reduced trading circumstances, around the management of risks to the business which included employee and stakeholder welfare; The actions of the Executive Directors in protecting the business and reacting to the changes in market demand, including across the key functions of franchising, physical stores, on-line presence, supply chain management, logistics, marketing and advertising, government relations and property across the eight separate countries.  The appraisal was undertaken to ensure that executive remuneration in respect of the record financial result for 2020 was fair and reasonable, was in line with performance, and did not result in unintended windfall gains in remuneration returns for the Executive Directors. Remuneration Considerations following the 2019 AGM At the 2019 AGM held on 27 November 2019, a total of 683.62 million shares were held by key management personnel (KMPs) of HNHL, and their related parties, and were therefore ineligible to vote on the adoption of the 2019 Remuneration Report. The total number of ineligible votes represented 54.86% of total HVN shares on issue as at the date of the 2019 AGM. Out of the remaining 562.39 million shares that were eligible to vote on the adoption of the 2019 Remuneration Report (representing 45.14% of total HVN shares on issue), the Company received 179.65 million votes against the adoption of the 2019 Remuneration Report (representing 31.94% of the eligible votes). In aggregate, the total number of votes against the adoption of the 2019 Remuneration Report was 14.42% of the total number of HVN shares on issue. Benchmarking and External Stakeholders Several external stakeholders were of the view that the 2019 remuneration of the Executive Directors, and in particular, the fixed remuneration of the Executive Directors, including the CEO, was too high relative to the benchmark groups referenced by some proxy advisors to stakeholders. To address this, the Company commissioned an independent remuneration expert review of the level of remuneration of the Executive Directors of the Company during 2020, including analyses and comparison of alternate peer groups, such as those used by the Company and proxy advisors in their prior assessments of executive remuneration. The critical findings of the independent remuneration expert review were as follows:  Prior remuneration benchmark peer groups of the Company and of external stakeholders could be refined in order to validly estimate remuneration applicable to executive positions of the Company by: an increase in peer company numbers to improve statistical reliability; including peer companies that have important operational characteristics necessary to capture expertise required for position matching; and excluding companies with operations that are not comparable.     Prior benchmarking peer groups, including those utilised by external stakeholders, differed, so that there were bound to be differences in assessment. It was found that all stakeholder methods could be improved by matching positions for operational size, focus, breadth, industry, geographic locations and financial accountability. 36 DIRECTORS’ REPORT – REMUNERATION REPORT Letter from the Chair of the Remuneration Committee (continued) Benchmarking and External Stakeholders (continued)     The peer group used by the Company to benchmark executive remuneration should be expanded to include additional companies similar in size and operations, balanced across a greater range of measures and operational characteristics, including:   company size e.g. system revenue, EBIT, net assets, tangible assets and market capitalisation; and operations e.g. franchising, physical stores, on-line presence, overseas operations and property investment. The benchmark group of the Company be reset to a group having sufficient companies to provide matches for the executive director positions, enough data to be reliable over time, with narrower differences in size parameters to reliably compare remuneration, although noting that the number of peers that match in terms of operational scope and financials among ASX listed companies was less than ideal. The statistical analysis indicated that executive pay varied with the size of the operation for which the executive was accountable. Because the Company is larger than most companies in its industry, paying the median level would not attract or retain executives best suited to running larger businesses. The Company should position remuneration around the level that reflects the financial accountability and operational scope of the Company relative to the enlarged and more relevant comparator group, which was around the 75th to 90th percentile of that group. The conclusions reached by the Remuneration Committee, informed by the independent expert review, in respect of the remuneration of Executive Directors for 2019 were that:  The level of fixed remuneration was reasonable;  The level of target and maximum remuneration from the short term incentive (STI) was reasonable; and  The level of target and maximum remuneration from the long term incentive (LTI) was underdone and could have included further long term or extended term incentives. Improving the Framework for Remuneration in 2020 The following improvements were made to the remuneration framework for Executive Directors:     Profit after tax adjusted for the after tax effect of property increments and decrements (APAT) is the measure used for the achievement of the financial conditions for the short term incentive, replacing earnings per share; The 100% short term incentive (STI) pool was increased to $3.0 million from $2.8 million in line with the increase in net assets of the Company over the previous two financial periods, with the 100% STI pool able to be increased if the financial performance conditions for the short term incentives are over-achieved to the maximum extent of 120% i.e. to $3.6 million from $3.36 million. The level of long term incentive (LTI) achievement for the determination of vesting is to be based on a straight line basis as opposed to a gradation basis to remove the risk of calculation bias. The determination of return on net assets (RONA) for the on-foot LTI tranches will exclude the effects of the financial impact of the adoption of the lease accounting standard AASB 16, to allow calculation consistency. Continuing the Framework in 2020 The framework for the Executive Director remuneration structure in the 2020 financial year remained similar to that which was in place for the 2019 financial year in respect of the following:    Benchmarked fixed remuneration; Evaluation of satisfactory performance for each Executive Director required for entry into the STI; Entry into the 2020 STI subject to the Executive Directors having managed risk in accordance with the risk management framework and the risk appetite of the Company; At risk STI subject to a balanced scorecard of measures relevant to the given financial year; Entry at the base level of financial achievement for the STI required before the plan becomes activated; At risk 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.     Things to Note for the 2020 STI Plan The Board adopted a STI Plan for Executive Directors relevant to the desired outcomes of the 2020 financial year. The STI Plan is subject to both financial conditions, calculated exclusively using Profit after tax adjusted for the after tax effect of property increments and decrements (APAT) as to 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 2020 STI Plan, the minimum financial performance conditions (entry-level to the 2020 STI Plan) was set at APAT of $320m, the 100% achievement level at APAT of $378m, with a maximum over-achievement level of 120% at APAT of $424m. The 100% achievement equated to a 4.5% increase of the equivalent APAT for the 2019 year after adjusting for the financial impact of the adoption of the lease accounting standard AASB 16. Achievement between the 50% and 100% targets and the 100% to the 120% targets remains set on a straight line basis. Equivalent to previous STI Plans, each participating Executive Director is subject to the non-financial performance condition that the Executive Directors of the Company managed risk in accordance with the risk management framework and risk appetite of the Company. The Company recognises the critical connection between conduct and reward. The assessment of conduct is informed by the fundamental principles of:      obey the law act fairly do not mislead or deceive provide goods and services that are fit for purpose delivery goods and services with reasonable care and skill HARVEY NORMAN HOLDINGS LIMITED | ANNUAL REPORT JUNE 2020 37 DIRECTORS’ REPORT – REMUNERATION REPORT Letter from the Chair of the Remuneration Committee (continued) Remuneration Outcomes The achievements of the 2020 financial year are reflected in the remuneration outcomes: 1) Executive Directors achieved 116.06% of their 2020 STI targets for performance against a balanced scorecard of measures, as compared to 90.61% for the 2019 financial year. In respect of the financial performance conditions, APAT of $426.78 million, which excluded COVID-19 assistance and support, exceeded the 120% over-achievement maximum of $424 million. The non-financial performance conditions were achieved as to 92.12% compared to 94.32% in 2019. Aggregated STI expense for 2020 was $3,481,651 as compared to $2,537,080 for 2019. The total 2020 STI award was $944,571, or 37.2%, higher than for 2019, aligned with the increase in comparable NPAT of 30.9%. 2) RONA of 18.91% for the year, which excluded COVID-19 assistance and support, resulted in the following: Tranche 3 of the 2016 LTI Plan, granted on 1 December 2017 being assessed for vesting at 56.6%; Tranche FY19 of the 2016 LTI Plan, granted on 4 December 2018 was assessed for probable vesting at 60%; Tranche FY20 of the 2016 LTI Plan, granted on 2 December 2019 was assessed for probable vesting at 60%.       3) The total “at risk” compensation expense for the 2020 financial year was $1,284,308 or 39.5% higher than the “at risk” expense in the 2019 financial year primarily due to the higher level of payment and assessed vesting under the STI awards. 4) The total “take-home” pay for KMP Directors was $142,230 or 1.4% higher than the 2019 financial year. 5) Tranche 2 of the 2016 LTI Plan, granted on 28 November 2016 and subject to performance over the 2017, 2018 and 2019 financial years vested as to 60% with effect from 1 January 2020. All vested performance rights have been exercised. 6) All of the Executive Directors continued to be employed throughout the year. 7) Each of the Executive Directors have a significant shareholding in the Company, each more than their respective total fixed remuneration, which provides alignment of the executive management with that of shareholders. Correlation of Remuneration Outcomes with Performance Over 5 Years Correlation is a calculation of the degree of relationship between two items with 100% being strongest and 0% being weakest. The level of statistically significant correlation remains strong, between both the total remuneration expense and the “at risk” remuneration of the Directors, with all of the performance indicators such as profit before tax, return on net assets, net profit after tax, earnings per share and average share price over a five year period from 2016 to 2020. The correlation factors range between 73% and 97% over the last five financial years from 2016 to 2020. Correlation is detailed at Item 9 of the Remuneration Report. The Board continues to be confident that the remuneration policies support the financial and strategic goals of the consolidated entity. The directors and other members of the key management personnel team continue to be committed to protecting and growing a sustainable business and creating long-term sustainable value for all stakeholders 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 KEN GUNDERSON-BRIGGS Remuneration Committee Chairman Contents of the 2020 Remuneration Report This remuneration report for the year ended 30 June 2020 outlines the remuneration arrangements of the consolidated entity in accordance with the requirements of the Corporations Act 2001 (Cth), as amended, (the “Act”) and its regulations. This information has been audited as required by section 308(3C) of the Act. The remuneration report is presented under the following sections: Introduction 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 FY20 7) Executive contractual arrangements 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 KMP Directors of the Company 38 DIRECTORS’ REPORT – REMUNERATION REPORT (AUDITED) 1. Introduction The remuneration report details the remuneration arrangements for key management personnel (“KMP”) who are defined as those persons having authority and responsibility for planning, directing and controlling the major activities of the consolidated entity, directly or indirectly, including any director (whether executive or otherwise) of the consolidated entity. Details of KMP of the Company and consolidated entity during the 2020 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 (KMP) Position Term as KMP Executive Directors Gerald Harvey Kay Lesley Page Executive Chairman Full financial year Executive Director & Chief Executive Officer Full financial year John Evyn Slack-Smith Executive Director & Chief Operating Officer Full financial year David Matthew Ackery Executive Director Chris Mentis Executive Director, Chief Financial Officer & Company Secretary Non-Executive Directors Christopher Herbert Brown OAM Non-Executive Director Michael John Harvey Non-Executive Director Full financial year Full financial year Full financial year Full financial year Kenneth William Gunderson-Briggs Non-Executive Director (Independent) Full financial year Graham Charles Paton AM Non-Executive Director (Independent) Full financial year Maurice John Craven Non-Executive Director (Independent) Full financial year 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 Glen Gregory General Manager – Technology & Entertainment Resigned 30 September 2019 General Manager – Home Appliances Full financial year General Manager – Audio Visual Resigned 30 April 2020 General Manager – Technology & Entertainment Appointed 9 September 2019 Emmanuel Hohlastos General Manager – Audio Visual Appointed 1 May 2020 2. Remuneration Principles and Strategy The executive remuneration strategy of the consolidated entity in 2020 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. HARVEY NORMAN HOLDINGS LIMITED | ANNUAL REPORT JUNE 2020 39 DIRECTORS’ REPORT – REMUNERATION REPORT (AUDITED) 2. Remuneration Principles and Strategy (continued) 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. 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 2020 aligns with the strategic direction and links remuneration outcomes to performance. Objective of the consolidated entity in 2020 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 2020 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 2020 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 Paid as cash as a performance cash incentive (PCI), subject to minimum shareholding of individual Executive Directors. 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 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. 2. 50% subject to financial conditions, with the financial conditions based on Annual Profit After Tax (APAT); 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 Annual Profit After Tax (APAT) is calculated as follows: Annual Net Profit After Tax (APAT), excluding the after-tax effect of property revaluation increments or decrements and the after-tax effect of COVID-19 support and assistance received 40 DIRECTORS’ REPORT – REMUNERATION REPORT (AUDITED) 2. Remuneration Principles and Strategy (continued) Long-Term Incentive (LTI) Awards under the LTI Plan are granted in the form of performance rights, being a right to acquire one ordinary share in the Company at nil exercise price Rewards executives for their contribution to the financial performance of the consolidated entity and the effective utilisation of net assets to generate wealth for shareholders Vesting of LTI performance rights is conditional upon achievement, in aggregate, of minimum RONA over the 2020, 2021 and 2022 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, the net impact of AASB 16 Leases and any COVID-19 support and assistance received) Net Assets (excluding non-controlling interests) at the close of the preceding financial year 3. Remuneration Governance Remuneration Committee The Remuneration Committee is responsible for making recommendations to the Board on the remuneration arrangements for Executive Directors and Non-Executive Directors (“NEDs”). The Remuneration Committee assesses the appropriateness of the nature and amount of remuneration of NEDs and executives on a periodic basis by reference to relevant employment market conditions, with the overall objective of ensuring maximum stakeholder benefit from the retention of a high performing director and executive team. In 2020, independent remuneration experts 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. 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 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 participates 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. COVID-19 Effects on Remuneration The COVID-19 pandemic struck the Australian and world economies in March 2020. The consolidated entity operates businesses in eight separate countries around the world, with the governments of each of those countries reacting in different ways to the health and economic crisis. In April 2020, each of the Executive Directors forewent 20% of their salaries for the 3 months of April, May and June 2020. Similarly, the Non-Executive Directors elected to voluntarily reduce their director fee by 20% for the same period. Following the end of the 2020 financial year, the Remuneration Committee resolved that in making its decisions and recommendations in respect of remuneration outcomes for the Executive Directors, it would exclude the effect of COVID-19 support and assistance received by the consolidated entity in each of the countries in which it operates, from remuneration outcomes, so as to eliminate unintended windfall gains in remuneration returns for the Executive Directors. In addition, the consolidated entity did not receive or pay any COVID-19 support and assistance in respect of any individual director or key management personnel (KMP). The appraisal of the performance of each Executive Director and the Executive Director team was undertaken following the end of the 2020 year as part of the annual Participant Performance Review by the Chair of the Remuneration Committee with the CEO and Executive Chairman. For the 2020 year, the appraisal considered matters in respect of performance during the COVID-19 period including:  The operation of the consolidated entity across the eight separate countries including in both lock-down and reduced trading circumstances, around the management of risks to the business which included employee and stakeholder welfare; The actions of the Executive Directors in protecting the business and reacting to the changes in market demand, including across the key functions of franchising, physical stores, on-line presence, supply chain management, logistics, marketing and advertising, government relations and property across the eight separate countries.  The appraisal was undertaken to ensure that executive remuneration in respect of the record financial result for 2020 was fair and reasonable, was in line with performance, and did not result in unintended windfall gains in remuneration returns for the Executive Directors. HARVEY NORMAN HOLDINGS LIMITED | ANNUAL REPORT JUNE 2020 41 DIRECTORS’ REPORT – REMUNERATION REPORT (AUDITED) 4. Remuneration Mix - Target For the 2020 financial year, the executive remuneration framework comprised fixed remuneration, STI and LTI. The consolidated entity aims to reward executives with a level and mix of remuneration appropriate to their position and responsibilities, while being market competitive. During the 2020 financial year, a review by an independent remuneration expert was undertaken in respect of the remuneration benchmarking used by the Company in 2019, with reference to both sector peers and comparator groups comprising companies of comparable financial size and operations. As a result of the remuneration review undertaken by the independent remuneration expert, the policy of the Company to position fixed remuneration around the average or median of the previous comparator group changed to position fixed remuneration against the level that reflects the financial accountability and operational scope of the position relative to peer group positions. This was around the 75th to 90th percentile of the enlarged and more relevant comparator group arising from the research. Target total remuneration is intended to provide the opportunity to earn top quartile rewards for outstanding performance. Remuneration levels are considered annually, with consideration of market data and the performance of the consolidated entity and individual. The following summarises the target remuneration mix of the Executive Directors. 5. Details of Short-Term and Long-Term Incentive Plans The extent to which the financial conditions and non-financial conditions have been satisfied will be documented in a Performance Report and an Internal Audit Report, for consideration by the Remuneration Committee in accordance with the terms and conditions of the short-term and long-term incentive plans. The Performance Report is a report prepared for, and on behalf of, the CEO addressing whether each weighted non-financial condition has been satisfied or, where relevant, the extent (expressed as a percentage) to which each weighted non-financial condition has been satisfied. The Internal Audit Report is a report prepared by the Chief Internal Auditor of the Company, which is an objective appraisal of the Performance Report and documents the findings of the audit of the Performance Report. 2020 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. 2020 STI Plan Who participates? Executive Directors How is the STI delivered? STI awards, in the form of a cash bonus or performance cash incentive (PCI) 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. When is the STI paid? The payment of the 2020 STI Plan PCI to an Executive Director under the 2020 STI Plan is to be made on 30 September 2020, or as soon as reasonably practicable after that date, subject to the satisfaction of 2020 STI Plan Performance Conditions and 2020 STI Plan Service Conditions. 42 DIRECTORS’ REPORT – REMUNERATION REPORT (AUDITED) 5. Details of Short-Term and Long-Term Incentive Plans (continued) 2020 STI Plan (continued) What is the 2020 STI opportunity? Executive Directors, excluding the Executive Chairman, have a target STI opportunity of between 43% to 71% 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 2020, the 100% STI Opportunity Pool of the 2020 STI Plan PCI, potentially payable, was $3,000,000 as follows: 1. 2. 3. 4. 5. in respect of Gerald Harvey, nil; in respect of Kay Lesley Page, $860,000; in respect of John Evyn Slack-Smith, $750,000; in respect of David Matthew Ackery, $750,000; and in respect of Chris Mentis, $640,000. The maximum pool for allocation at 120% Over-Achievement Level was $3,600,000 in aggregate. What are the STI performance conditions for FY2020? Actual STI payments awarded to each Executive Director depend on the extent to which specific measures, targets, initiatives and conditions for the 2020 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 2020 STI Plan Performance Conditions are as follows: a. b. as to 50% - the Financial Condition; and as to 50% - the Non-Financial Conditions s (a) STI 50% Financial Condition (b) STI 50% Non-Financial Conditions The Non-Financial Conditions are assessed in respect of the year ended 30 June 2020 and include the following non-financial measures in: Customer experience (10%);   Operations / Improve productivity (15%);  Company-operated store expansion strategy (15%); and People & Culture / Franchisee learning, development and growth (10%).  Full achievement of the non-financial conditions will equate to 50% entitlement to the STI pool i.e. $1.50 million. APAT [Annual Net Profit After Tax] as defined in Section 2 above was selected as the STI performance measure as it:   indicates the level of after tax profit generated adjusted for the after-tax effect of net property revaluation adjustments and the after-tax effect of any COVID-19 support and assistance received; 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 2020 and will be achieved at the following levels:      Entry Level at APAT of $320 million, equating to 25% entitlement to the STI pool (50% opportunity pool = $0.75 million); 100% Level at APAT of $378 million, equating to 50% entitlement to the STI pool (100% opportunity pool = $1.50 million); Straight-line sliding scale between Entry Level and 100% Level; 120% Over-Achievement Level at APAT of $424 million, equating to 70% entitlement to the STI pool (120% opportunity pool = $2.10 million); Straight-line sliding scale for achievement between 100% and 120% Level. How is performance assessed? In respect of the 2020 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. HARVEY NORMAN HOLDINGS LIMITED | ANNUAL REPORT JUNE 2020 43 DIRECTORS’ REPORT – REMUNERATION REPORT (AUDITED) 5. Details of Short-Term and Long-Term Incentive Plans (continued) 2020 STI Plan (continued) How is performance assessed? (continued) To determine whether an individual is eligible for the 2020 STI, in terms of performance, the following process is undertaken:   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 2020. Subject to 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 have been 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 2020 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 2020 STI Plan by serving a written notice to the relevant executive at any time before the payment date. Details of the 2020 STI Targets and levels of achievement in the 2020 financial year are set out in pages 46 to 49 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 FY20 of the 2016 LTI Plan Tranche FY20 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? 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 Total 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 31% to 32% of fixed remuneration. A total of 549,500 performance rights under Tranche FY20 of the 2016 LTI Plan were granted to Executive Directors on 2 December 2019. The performance rights were independently valued by Mercer Consulting (Australia) Pty Limited at grant date with a fair value of $3.47 per entitlement share granted under Tranche FY20 on 2 December 2019, based on a share price of $4.30. What is the LTI opportunity? 44 DIRECTORS’ REPORT – REMUNERATION REPORT (AUDITED) 5. Details of Short-Term and Long-Term Incentive Plans (continued) Tranche FY20 of the 2016 LTI Plan (continued) What is the LTI opportunity? (continued) 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 FY20 performance rights amounted to $1,906,765 in aggregate. Tranche FY20 Grant date Vesting date First exercise date Last exercise date Key Dates 2 December 2019 31 December 2022 1 January 2023 30 June 2025 What are the performance conditions for Tranche FY20 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 With the exception of the service condition, the Board has resolved that the conditions in respect of the achievement of Tranche FY20 of the 2016 LTI Plan will be all financial, based exclusively on RONA, where Tranche FY20 RONA means the fraction: Tranche FY20 Aggregate APBT  Tranche FY20 Aggregate Net Assets, expressed as a percentage. Where: Tranche FY20 Financial Years means the financial years ending 30 June 2020, 2021 and 2022; Tranche FY20 Aggregate APBT means the aggregate amounts of the annual net profit before income tax of the consolidated entity for each of the Tranche FY20 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, the net impact of AASB 16 Leases and any COVID-19 support and assistance received in the Tranche FY20 Financial Years; Tranche FY20 Aggregate Net Assets means the amounts of the net assets of the consolidated entity, excluding non-controlling interests, as at each of 30 June 2019, 2020 and 2021 as described in the annual report of the consolidated entity in respect of each of the Tranche FY20 Financial Years. Full vesting of the Tranche FY20 performance rights is conditional upon achievement, of Tranche FY20 RONA of at least 20%, with a lesser vesting as set out in the table below: Tranche FY20 RONA Achieved Less than 16% 16% 17% 18% 19% 20% Tranche FY20 % of Performance Rights that will become exercisable Nil 20% 40% 60% 80% 100% The level of LTI achievement for the determination of vesting will be based on a straight-line basis between 16% RONA as to 20% achievement and 20% RONA as to 100% achievement. 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 FY20 of the 2016 LTI Plan measured over the period for financial years ending 30 June 2020, 30 June 2021 and 30 June 2022. When does the LTI vest? Performance rights granted under Tranche FY20 of the 2016 LTI Plan will vest on 31 December 2022, subject to meeting the financial performance conditions in the 2020, 2021 and 2022 financial years and service conditions, and will be capable of exercise between 1 January 2023 and 30 June 2025. HARVEY NORMAN HOLDINGS LIMITED | ANNUAL REPORT JUNE 2020 45 DIRECTORS’ REPORT – REMUNERATION REPORT (AUDITED) 5. Details of Short-Term and Long-Term Incentive Plans (continued) Tranche FY20 of the 2016 LTI Plan (continued) 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 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. How are potential LTI awards treated if a change of control occurs? In the event of a takeover, scheme of arrangement or other transaction which may result in a person becoming entitled to exercise control over the Company, the Board has a discretion to determine whether any unvested performance rights should vest, lapse or become subject to different performance conditions, or whether any resulting shares that are subject to a restriction period, should become unrestricted. Are executives eligible for dividends? Performance rights will not carry any voting or dividend rights. Performance rights are non-transferable except in limited circumstances or with the consent of the Board. If exercised, each performance right will be converted into one ordinary share in the Company. Executives will then be entitled to dividends on those ordinary shares after conversion. 6. Performance and Executive Remuneration Outcomes in FY20 6A. Actual Remuneration Earned by Key Management Personnel (KMP) in FY20 The compensation expensed in respect of KMP in FY20 is set out in Table 1 (for Directors) and Table 2 (for Senior Executives) on pages 56 and 57 of this report. This provides shareholders with a view of the remuneration earned by KMP for performance in the 2020 financial year and the value of any LTIs expensed during the financial year. The ‘take-home pay’ for KMP Directors of the Company, representing the benefits paid to each Director during the year ended 30 June 2020, or as soon as practicable after that date, is set out in Section 12 of the Remuneration Report on page 61. 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. During the 2020 financial year, a review of the remuneration benchmarking used by the Company in 2019 was undertaken by an independent remuneration expert, referencing sector peers and companies more similar to the Company in financial size and operations. As a result of the remuneration review:  the policy of the Company was amended to set fixed remuneration against the level that reflects the size of the Company within the peer group of the refined comparator group identified by the research; and this benchmark ranged between the 75th and 90th percentiles because, the Company is larger than most comparable companies, and the position accountabilities of the Company when compared to matched positions in the comparator group.  Target total remuneration is intended to provide the opportunity to earn top quartile rewards for outstanding performance. Remuneration levels are considered annually, with consideration of market data and the performance of the consolidated entity and individual, along with the longevity of the Executive Directors in their respective roles, and the assessment of opportunity costs in respect of replacement. The process undertaken by the Remuneration Committee following the review by the independent remuneration expert consisted of a review of Company, business unit and individual performance, relevant comparative remuneration, and external advice independent of management. The fixed component of the remuneration of Executive Directors is disclosed in Table 1 on page 56 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 2020 STI Plan potentially payable was $3,000,000, an increase of $200,000 from the 2019 STI pool of $2,800,000. The maximum pool for allocation at 120% over-achievement level was $3,600,000 in aggregate. 46 DIRECTORS’ REPORT – REMUNERATION REPORT (AUDITED) 6C. Actual Performance Against Short Term Incentive (STI) Measures (continued) 50% of the STI is dependent on the satisfaction of financial performance conditions (exclusively based on APAT) and 50% is measured against the achievement of set non-financial measures. Actual performance against those measures is as follows for the 2020 financial year: (a) 120% over-achievement of the 50% Financial Condition (score of 70.00%) = $2,100,000 payable for FY20 (b) 92.12% achievement of the 50% Non-Financial Conditions (score of 46.06%) = $1,381,651 payable for FY20 The total 2020 STI Plan payable in respect of the 2020 financial year is $3,481,651, compared to $2,537,080 for the 2019 financial year. This represented a total achievement of 116.06% of the 2020 STI as shown in the tables below. The payment of the 2020 STI Plan is to be made on or before 30 September 2020, or as soon as reasonably practicable after that date, subject to the satisfaction of the 2020 STI Plan Service Conditions. Financial Conditions of the 2020 STI Plan Achievement of 50% Financial Condition Calculation of FY20 APAT Annual Net Profit After Tax (APAT) excluding the after- tax effect of property revaluation increments or decrements and the after-tax effect of any COVID-19 support and assistance received $426.78 million for FY20 Achievement = 120% over- achievement 100% Level 2020 STI PCI % Financial Conditions 2020 STI PCI Financial Condition 2020 APAT % Financial Condition Satisfied 2020 STI PCI Payable Gerald Harvey Nil Kay Lesley Page $860,000 John Evyn Slack-Smith $750,000 David Matthew Ackery $750,000 Chris Mentis Total $640,000 $3,000,000 n/a 50% 50% 50% 50% Nil $426.78 million n/a Nil $430,000 $426.78 million 120% (70% score) $602,000 $375,000 $426.78 million 120% (70% score) $525,000 $375,000 $426.78 million 120% (70% score) $525,000 $320,000 $426.78 million 120% (70% score) $448,000 $1,500,000 $2,100,000 For the 2020 financial year, $1,500,000, being 50% of the aggregate 100% level opportunity pool of the 2020 STI Plan PCI of $3,000,000, was subject to the APAT financial condition. The maximum pool for allocation at 120% over-achievement level was $3,600,000 in respect of the 2020 financial year. The Entry Level point for the financial condition was at APAT of $320 million with the 100% achievement level at APAT of $378 million. Achievement points are set on a straight-line, sliding scale basis between the Entry Level of $320 million APAT to the 100% Level of $378 million APAT. The Over-Achievement Level point for the financial condition was at APAT of $424 million, equating to 120% entitlement to the STI pool. Over-Achievement points are set on a straight-line, sliding scale basis between the 100% Level of $378 million APAT and the 120% Level of $424 million APAT. APAT for the 2020 financial year was $426.78 million resulting in attainment of the Over-Achievement Level of 120% of the financial condition. This translated to an achievement score of 70% in respect of the 2020 STI. Non-Financial Conditions of the 2020 STI Plan Achievement of 50% Non-Financial Conditions For the 2020 financial year $1,500,000, being 50% of the aggregate 100% opportunity pool of the 2020 STI Plan PCI of $3,000,000, was subject to set non-financial performance measures as to: Customer experience (10%);   Operations / Improve productivity (15%);   Company-operated store expansion strategy (15%); and People & culture / Franchisee learning, development and growth (10%). 100% Level 2020 STI PCI % Non-Financial Conditions 2020 STI PCI Non-Financial % Non-Financial Conditions Satisfied 2020 STI PCI Payable Gerald Harvey Nil Kay Lesley Page $860,000 John Evyn Slack-Smith $750,000 David Matthew Ackery $750,000 Chris Mentis Total $640,000 $3,000,000 n/a 50% 50% 50% 50% Nil n/a $430,000 92.12% (46.06% score) $375,000 92.12% (46.06% score) $375,000 92.12% (46.06% score) $320,000 92.12% (46.06% score) $1,500,000 Nil $396,073 $345,413 $345,413 $294,752 $1,381,651 HARVEY NORMAN HOLDINGS LIMITED | ANNUAL REPORT JUNE 2020 47 DIRECTORS’ REPORT – REMUNERATION REPORT (AUDITED) 6C. Actual Performance Against Short Term Incentive (STI) Measures (continued) Non-Financial Conditions of the 2020 STI Plan (continued) 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 92.12% of the non- financial performance hurdles for the 2020 STI Plan were achieved, equating to a score of 46.06%. This resulted in an amount of $1,381,651 in respect of the non-financial performance measures becoming payable to Executive Directors. Achievement of the Non-Financial Performance Conditions for the 2020 STI Plan are set out in the following table. Assessment of Non-Financial Conditions of the 2020 STI Plan Primary Weighting 10% 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. Operations / Improve Productivity 15% 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 FY20 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 FY20 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 FY20 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) Trak by Harvey Norman® to be expanded to 35 franchised complexes during FY20. (2) Tools to expand business scope in respect of ‘Drop Ship’ capability. (3) Optus process improvement to be delivered to franchised complexes. Establish the governance structure for the upgrade of finance platforms of the consolidated entity in Australia. Achievement Score Weighting of Initiatives & Conditions 40% 98.75% 3.95% 40% 100% 4% 10% 98% 0.98% 10% 100% 1% 25% 100% 3.75% 25% 25% 100% 3.75% 100% 3.75% 25% 100% 3.75% Company- Operated Store Expansion Strategy People & Culture / Franchisee Learning, Development and Growth Company-operated store expansion strategy to be developed and executed in Malaysia and Ireland. Ongoing refinement of the process by each franchisee that promotes and encourages measureable improvement in the knowledge and capability of the franchisee and their employees. Total 48 15% (1) Malaysia: Six (6) new stores to be opened during FY20. (2) Ireland: One (1) new store to be opened at Galway 75% 83.33% 9.38% 25% 100% 3.75% 10% (1) Franchisees to identify and nominate a minimum number of 50 candidates to attend the “Franchisees and Proprietor in Training (FIT)” development program during FY20. (2) Franchisees to achieve a successful completion rate of 75% by participants in the FIT development program during FY20. (3) To establish a Lead Proprietor in Training (PIT) program framework in New Zealand. 40% 100% 4% 40% 100% 4% 20% 0% 0% 50% 46.06% DIRECTORS’ REPORT – REMUNERATION REPORT (AUDITED) 6C. Actual Performance Against Short Term Incentive (STI) Measures (continued) Service Conditions of the 2020 STI Plan The 2020 STI Plan Service Conditions will be deemed to be satisfied, if and only if, as at the relevant payment date being 30 September 2020:  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 2020 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 2020 STI Plan held shares in the Company of a value that was in excess of the Benchmark Shareholding Level. The STI benefit under the 2020 STI Plan is to be paid in cash. 6D. Actual Performance Against Long-Term Incentive (LTI) Measures for Tranche FY20 of the 2016 LTI Plan With the exception of the service condition, the Board has resolved that the conditions in respect of Tranche FY20 of the 2016 LTI Plan will be all financial, based exclusively on RONA, where Tranche FY20 RONA means the fraction Tranche FY20 Aggregate APBT  Tranche FY20 Aggregate Net Assets, expressed as a percentage. Tranche FY20 of the 2016 LTI Plan will be measured over a three- year period for financial years ending 30 June 2020, 30 June 2021 and 30 June 2022. The financial condition of Tranche FY20 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 44 to 46. Tranche FY20 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 2 December 2019. The performance rights were independently valued by Mercer Consulting (Australia) Pty Limited at a fair value of $3.47 per entitlement share, based on a share price of $4.30 as at grant date, resulting in a total fair value of Tranche FY20 of $1,906,765. 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 FY20 of the 2016 LTI Plan will be 60% achieved by the end of the vesting period and 60% of the estimated fair value of the performance rights will meet the performance condition. The Remuneration Committee resolved in making its decisions and recommendations in respect of remuneration outcomes for the Executive Directors of the Company, it will exclude the effect of COVID-19 support and assistance in respect of remuneration outcomes, so as to eliminate unintended windfall gains in “at risk” remuneration returns for the Executive Directors. The probability of 60% vesting has been estimated based on the calculation of Tranche FY20 RONA for the 2020 financial year of 18.91%. An 18.91% RONA for FY20 would result in a 60% vesting for year 1 of the three-year measurement period. A 60% vesting probability will result in an estimated cumulative Tranche FY20 fair value of $1,144,059 over the vesting period. An amount of $215,312 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 2020. Achievement of 100% Financial Condition for Tranche FY20 of 2016 LTI Calculation of FY20 RONA: FY20 APBT (net profit excluding property revaluations, the net impact of AASB 16 Leases and any COVID-19 support and assistance received) FY 19 Net Assets (excluding non-controlling interests) $598.93 million $3,167.41 million = 18.91% RONA Number of Performance Rights Fair Value per Right Fair Value of Performance Rights Probability of Vesting % Estimated Value of Tranche FY20 2016 LTI Plan to Vest Tranche FY20 LTI Plan Expense in FY20 Gerald Harvey 65,500 $3.47 $227,285 Kay Lesley Page 183,000 $3.47 $635,010 John Evyn Slack-Smith 109,000 $3.47 $378,230 David Matthew Ackery 109,000 $3.47 $378,230 Chris Mentis 83,000 $3.47 $288,010 60% 60% 60% 60% 60% $136,371 $381,006 $226,938 $226,938 $172,806 $25,665 $71,705 $42,710 $42,710 $32,522 Total 549,500 $1,906,765 $1,144,059 $215,312 HARVEY NORMAN HOLDINGS LIMITED | ANNUAL REPORT JUNE 2020 49 DIRECTORS’ REPORT – REMUNERATION REPORT (AUDITED) 6D. Actual Performance Against Long-Term Incentive (LTI) Measures for Tranche FY20 of the 2016 LTI Plan (continued) Subject to the satisfaction of the financial performance condition and service conditions of the 2016 LTI Plan, Tranche FY20 will vest on 31 December 2022. 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 2025 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 FY19 of the 2016 LTI Plan Performance Conditions and Expense Recognised in FY20 In the 2019 financial year, a total of 549,500 performance rights were granted to Executive Directors on 4 December 2018 under Tranche FY19 of the 2016 LTI Plan. 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. 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. In the 2019 Remuneration Report, it was reported that the estimated achievement of Tranche FY19 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 FY19 performance rights will meet the performance condition. The probability of 40% vesting had been estimated based on the calculation of Tranche FY19 RONA for the 2019 financial year of 17.32%. The financial performance condition of Tranche FY19 is subject to reassessment during each of the Tranche FY19 Financial Years meaning the financial years ending 30 June 2019, 2020 and 2021. A reassessment of the Tranche FY19 Aggregate APBT and Tranche FY19 Aggregate Net Assets for the 2019 and 2020 financial years has resulted in a revised RONA (excluding property revaluations, the net impact of AASB 16 Leases and any COVID-19 support and assistance received) for the two-year aggregated period of 18.15%. A revised aggregated RONA of 18.15% for the Tranche FY19 Financial Years has resulted in a revised probability of vesting of 60%. This revised probability of vesting of 60% is higher than the previously estimated probability of vesting of 40% calculated in FY19 based on Tranche FY19 RONA. The cumulative expense in respect of Tranche FY19 has been reassessed in the 2020 financial year as $853,923, an increase of $284,641 from the previous assessment of cumulative Tranche FY19 expense in the 2019 financial year of $569,282 as reported in the 2019 Remuneration Report. The total value of Tranche FY19 expense recognised in the 2020 financial year was $330,980, comprised of $278,037 relating to the recognition of the Tranche FY19 expense on a straight-line basis for FY20, and $52,943 relating to an adjustment to the Tranche FY19 expense recognised in the previous financial year due to the reassessment of the probability of vesting from 40% to 60%. Reassessment of 100% Financial Condition for Tranche FY19 of 2020 LTI Plan Calculation of Aggregated RONA for Tranche FY19 Financial Years (FY2019 and FY2020) Tranche FY19 Aggregated APBT (2019 + 2020) Tranche FY19 Aggregated Net Assets (2018 + 2019) $1,103.19 million $6,078.42 million = 18.15% RONA Probability Vesting % in FY19 Tranche FY19 Estimated Fair Value in FY19 Revised Probability Vesting in FY20 Revised Estimated Tranche FY19 Fair Value in FY20 Adjustment due to Reassessment Tranche FY19 LTI Plan Expense in FY2020 Gerald Harvey Kay Lesley Page John Evyn Slack-Smith David Matthew Ackery Chris Mentis Total 40% 40% 40% 40% 40% $67,858 $189,588 $112,924 $112,924 $85,988 $569,282 60% 60% 60% 60% 60% $101,787 $33,929 $39,453 $284,382 $94,794 $110,226 $169,386 $56,462 $169,386 $56,462 $128,982 $42,994 $65,654 $65,654 $49,993 $853,923 $284,641 $330,980 6F. Reassessment of Tranche 3 of the 2016 LTI Plan Performance Conditions and Expense Recognised in FY20 In the 2018 financial year, 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. 50 DIRECTORS’ REPORT – REMUNERATION REPORT (AUDITED) 6F. Reassessment of Tranche 3 of the 2016 LTI Plan Performance Conditions and Expense Recognised in FY20 (continued) In the 2019 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 was reassessed in 2019 based on a 2-year aggregated RONA, being the Tranche 3 Aggregate APBT and Tranche 3 Aggregate Net Assets for the 2018 and 2019 financial years. The reassessment in 2019 resulted in a revised RONA of 17.24%. 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, 2019 and 2020 financial years has resulted in a revised RONA (excluding property revaluations, the net impact of AASB 16 Leases and any COVID-19 support and assistance received) for the three-year aggregated period of 17.83%. A revised aggregated RONA of 17.83% for the Tranche 3 Financial Years has resulted in the vesting of 56.6% of the Tranche 3 performance rights as calculated on a linear basis (i.e. a RONA of 17.83% has resulted in an achievement of 56.6% on a pro-rata basis between the 40% and 60% gradation levels). This revised vesting calculation of 56.6% is higher than the previously estimated probability of vesting of 40% calculated in FY19. The cumulative expense in respect of Tranche 3 has been reassessed in the 2020 financial year as $756,177, an increase of $221,777 from the previous assessment of cumulative Tranche 3 expense in the 2019 financial year of $534,400 as reported in the 2019 Remuneration Report. The total value of Tranche 3 expense recognised in the 2020 financial year was $359,118, comprised of $245,573 relating to the recognition of the Tranche 3 expense on a straight-line basis for FY20, and $113,545 relating to an adjustment to the Tranche 3 expense recognised in the 2018 and 2019 financial years due to the reassessment of the probability of vesting from 40% to 56.6%. FY20 was the final year of measurement for Tranche 3. Reassessment of 100% Financial Condition for Tranche 3 of 2020 LTI Plan Calculation of Aggregated RONA for Tranche 3 Financial Years (2018, 2019 and 2020) Tranche 3 Aggregated APBT (2018+2019+2020) Tranche 3 Aggregated Net Assets (2017+2018+2019) $1,581.71 million $8,868.88 million = 17.83% RONA Probability Vesting % in FY19 Tranche 3 Fair Value in FY19 Revised Probability Vesting in FY20 Revised Tranche 3 Fair Value in FY20 Adjustment due to Reassessment Tranche 3 LTI Plan Expense in FY2020 Gerald Harvey Kay Lesley Page John Evyn Slack-Smith David Matthew Ackery Chris Mentis Total 40% 40% 40% 40% 40% $83,500 $150,300 $100,200 $100,200 $100,200 $534,400 56.6% 56.6% 56.6% 56.6% 56.6% $118,153 $212,675 $141,783 $141,783 $141,783 $34,653 $56,112 $62,375 $101,001 $41,583 $67,335 $41,583 $67,335 $41,583 $67,335 $756,177 $221,777 $359,118 6G. Assessment of Tranche 2 of the 2016 LTI Plan Performance Conditions and Expense Recognised in FY20 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. In the 2019 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 was reassessed in 2019 based on a 3-year aggregated RONA, being the Tranche 2 Aggregate APBT and Tranche 2 Aggregate Net Assets for the 2017, 2018 and 2019 financial years. The reassessment in 2019 resulted in a revised RONA of 18.10% and therefore an actual achievement of 60% of the Tranche 2 performance rights. The cumulative expense in respect of Tranche 2 was $928,800 as reported in the 2019 Remuneration Report. The 2019 financial year was the final year of Tranche 2 measurement. During the 2020 financial year, an expense of $151,371 was recognised in respect of Tranche 2 of the 2016 LTI Plan representing the remaining vesting period up to 31 December 2019. Of the 400,000 performance rights granted to Executive Directors during 2017, a total of 60%, or 240,000 performance rights vested on 31 December 2019 and were exercisable from 1 January 2020. HARVEY NORMAN HOLDINGS LIMITED | ANNUAL REPORT JUNE 2020 51 DIRECTORS’ REPORT – REMUNERATION REPORT (AUDITED) 6G. Assessment of Tranche 2 of the 2016 LTI Plan Performance Conditions and Expense Recognised in FY20 (continued) Assessment of 100% Financial Condition for Tranche 2 of 2020 LTI Plan Calculation of Aggregated RONA for Tranche 2 Financial Years (2017, 2018 and 2019) Gerald Harvey Kay Lesley Page John Evyn Slack-Smith David Matthew Ackery Chris Mentis Total 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 Actual Achievement in FY19 Actual Tranche 2 Fair Value Tranche 2 LTI Plan Expense in FY20 60% 60% 60% 60% 60% $145,125 $261,225 $174,150 $174,150 $174,150 $23,652 $42,573 $28,382 $28,382 $28,382 $928,800 $151,371 52 DIRECTORS’ REPORT – REMUNERATION REPORT (AUDITED) 6H. Summary of Performance and Executive Remuneration Outcomes in FY20 Value of STI and LTI Disclosed in 2020 and 2019 Remuneration Reports Remuneration Component 2020 STI Plan Financial conditions (50%) Non-financial conditions (50%) Total 100% 2019 STI Plan 100%-Level Achievement Amount $1,500,000 $1,500,000 $3,000,000 Achieve- ment Score Amount Payable Vesting Period 2020 Remuneration Amount 2019 Remuneration Amount 120.00% 92.12% 70.00% 46.06% 1 Year $2,100,000 $1,381,651 $3,481,651 $2,100,000 $1,381,651 $3,481,651 - - - Financial conditions (50%) Non-financial conditions (50%) Total 100% $1,400,000 $1,400,000 $2,800,000 86.90% 94.32% 43.45% 47.16% 1 Year $1,216,600 $1,320,480 $2,537,080 - - - $1,216,600 $1,320,480 $2,537,080 Total Short-Term Incentive PCI Tranche FY20 (FY20) of 2016 LTI Plan Financial conditions (100%) Non-financial conditions (0%) Total 100% Tranche FY19 (FY19) of 2016 LTI Plan $3,481,651 $2,537,080 $1,906,765 - $1,906,765 60% - 60% - $1,144,059 - $1,144,059 4 Years (Yr 1 of 4) $215,312 - $215,312 - - - Financial conditions (100%) $1,423,205 Non-financial conditions (0%) Total 100% - $1,423,205 60% - 60% - 4 Years (Yr 2 of 4) $853,923 - $853,923 $330,980 $105,887 - - $330,980 $105,887 Tranche 3 (FY18) of 2016 LTI Plan Financial conditions (100%) $1,336,000 Non-financial conditions (0%) Total 100% - $1,336,000 56.6% - 56.6% - 4 Years (Yr 3 of 4) $756,177 - $756,177 $359,118 $173,076 - - $359,118 $173,076 Tranche 2 (FY17) of 2016 LTI Plan Financial conditions (100%) $1,548,000 Non-financial conditions (0%) Total 100% - $1,548,000 60% - 60% - $928,800 - $928,800 4 Years (Yr 4 of 4) $151,371 $300,277 - - $151,371 $300,277 Tranche 1 (FY16) of 2016 LTI Plan Financial conditions (100%) $1,408,000 Non-financial conditions (0%) Total 100% - $1,408,000 60% - 60% - $844,800 n/a - $844,800 Total LTI Performance Rights Total Value of STI and LTI - - - $137,804 - $137,804 $1,056,781 $717,044 $4,538,432 $3,254,124 The total value of STI and LTI expensed in the Income Statement for the 2020 financial year and disclosed in this remuneration report was $4.54 million compared to $3.25 million expensed in the 2019 financial year, an increase of $1.28 million or 39.5%, relative to the previous year. HARVEY NORMAN HOLDINGS LIMITED | ANNUAL REPORT JUNE 2020 53 DIRECTORS’ REPORT – REMUNERATION REPORT (AUDITED) 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 $3,767,010 comprised of:   maximum STI opportunity in respect of the year ended 30 June 2020 of $1,032,000 (at 120% over-achievement level); and  maximum LTI opportunity in respect of the year ended 30 June 2020 of $635,010. The CEO’s termination provisions are as follows: CEO’s Termination Provisions Notice Period Payment in Lieu of Notice Treatment of STI on Termination Treatment of LTI on Termination Employer-initiated termination 5 weeks 5 weeks Pro-rated for time and performance Board discretion Termination for serious misconduct None None Unvested awards forfeited Unvested awards forfeited Employee-initiated termination 5 weeks 5 weeks Unvested awards forfeited, subject to Board discretion Unvested awards forfeited, subject to Board discretion Minimum Shareholding Requirement There are no minimum shareholding requirements imposed on the CEO. There is a Benchmark Shareholding Level in respect of the 2020 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 seek an increase for the NED pool at the 2020 AGM to $1,500,000. 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 2020 and 30 June 2019 are disclosed in Table 1 on page 56 of this report. 54 OPERATI DIRECTORS’ REPORT – REMUNERATION REPORT (AUDITED) 9. Relationship between Remuneration and the Performance of the Company The graphs below illustrate the performance of the Company for the past five financial years and the high level of correlation between remuneration and performance. Correlation is a calculation of the degree of relationship between two items with 100% being strongest and 0% being weakest. Correlation between the indicators of performance and remuneration remain strong. HARVEY NORMAN HOLDINGS LIMITED | ANNUAL REPORT JUNE 2020 55  DIRECTORS’ REPORT – REMUNERATION REPORT (AUDITED) 10. Compensation of Key Management Personnel TABLE 1: Compensation of Key Management Personnel Expensed for the Year Ended 30 June 2020 Directors of Harvey Norman Holdings Limited: Short Term Benefits Post-Employment Salary & Fees Performance Cash Incentive Other Short Term Non- Monetary Benefits Superannuation Long Term Incentives Performance Rights Other Long Service Leave (a) Total Remuneration % earned at risk Gerald Harvey Executive Chairman Kay Lesley Page Executive Director/CEO John Evyn Slack-Smith Executive Director/COO David Matthew Ackery Executive Director Chris Mentis Executive Director/CFO Michael John Harvey Non-Executive Director Christopher Herbert Brown Non-Executive Director 2020 2019 2020 2019 2020 2019 2020 2019 2020 2019 2020 2019 2020 2019 Kenneth William Gunderson-Briggs 2020 Non-Executive Director Graham Charles Paton Non-Executive Director Maurice John Craven Non-Executive Director 2019 2020 2019 2020 2019 682,668 719,069 1,958,198 2,060,306 1,167,547 1,229,469 1,150,447 1,211,469 841,426 885,264 52,055 54,795 138,813 146,119 274,560 251,922 138,813 146,119 125,799 34,828 - - 10,400 10,400 998,073 724,880 870,413 634,270 - - - - 870,413 18,000 634,270 18,000 742,752 543,660 - - - - - - - - - - - - - - - - - - - - - - - - 17,812 19,163 - - - - 43,664 44,205 - - - - - - - - - - 21,003 20,531 21,003 20,531 21,003 20,531 21,003 20,531 21,003 20,531 4,945 5,205 13,187 13,881 18,528 20,531 13,187 13,881 11,951 3,304 144,882 108,115 325,505 207,151 204,081 135,596 204,081 135,596 178,232 130,586 - - - - - - - - - - - - - - 19,459 20,491 19,474 20,491 14,024 14,754 - - - - - - - - - - 858,953 858,115 3,320,591 3,032,031 2,282,503 2,040,357 2,283,418 2,040,357 1,841,101 1,639,000 57,000 60,000 152,000 160,000 293,088 272,453 152,000 160,000 137,750 38,132 Total for the 2020 Financial Year 2020 6,530,326 3,481,651 28,400 61,476 166,813 1,056,781 52,957 11,378,404 Total for the 2019 Financial Year 2019 6,739,360 2,537,080 28,400 63,368 159,457 717,044 55,736 10,300,445 16.9% 12.6% 39.9% 30.7% 47.1% 37.7% 47.1% 37.7% 50.0% 41.1% - - - - - - - - - - 39.9% 31.6% (a) Table 1 includes the accrual for long service leave entitlements in respect of the years ended 30 June 2020 and 30 June 2019. 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 2020 56  DIRECTORS’ REPORT – REMUNERATION REPORT (AUDITED) 10. Compensation of Key Management Personnel (continued) TABLE 2: Compensation of Key Management Personnel Expensed for the Year Ended 30 June 2020 Senior Executives of Harvey Norman Holdings Limited: Short Term Benefits Post-Employment Long Term Incentives Other Salary & Fees Perform- ance Cash Incentive Other Short Term Non- Monetary Benefits Superannuation Performance Rights Termination Benefits (e) Long Service Leave Total Remuneration % earned at risk Thomas James Scott GM – Property Martin Anderson GM – Advertising Gordon Ian Dingwall Chief Information Officer Ajay Calpakam (a) GM – Audio Visual Emmanuel Hohlastos (b) GM – Audio Visual Lachlan Roach GM – Home Appliances Frank Robinson (c) GM – Technology & Entertainment Glen Gregory (d) GM – Technology & Entertainment 2020 2019 2020 2019 2020 2019 2020 2019 2020 2019 2020 2019 2020 2019 2020 2019 573,850 574,322 305,271 299,777 503,997 494,469 307,496 403,017 69,833 - 409,997 403,017 121,012 484,517 346,533 - Total for the 2020 Financial Year 2020 2,637,989 Total for the 2019 Financial Year 2019 2,659,119 - - - - - - - - - - - - - - - - - - - - - - - - 6,750 9,000 - - 9,000 9,000 3,750 15,000 9,733 - - - 27,543 28,057 - - - - - - - - - - - - 21,003 20,531 22,781 22,162 21,003 20,531 15,752 20,531 5,251 - 21,003 20,531 5,251 20,531 17,035 - 29,233 27,543 129,079 33,000 28,057 124,817 (a) (b) (c) (d) (e) resigned 30 April 2020 commenced as GM – Audio Visual on 1 May 2020 resigned 30 September 2019 commenced as GM – Technology & Entertainment on 9 September 2019 this amount represents the cash payment of employee leave entitlements upon resignation - - - - - - - - - - - - - - - - - - - - - - - - 32,765 - - - - - 56,300 - - - 9,564 9,572 5,088 4,996 8,400 8,241 - 6,717 1,164 - 6,833 6,717 - 8,075 5,776 - 604,417 604,425 360,683 354,992 533,400 523,241 362,763 439,265 76,248 - 446,833 439,265 186,313 528,123 379,077 - 89,065 36,825 2,949,734 - 44,318 2,889,311 - - - - - - - - - - - - - - - - - - HARVEY NORMAN HOLDINGS LIMITED | ANNUAL REPORT JUNE 2020 57 DIRECTORS’ REPORT – REMUNERATION REPORT (AUDITED) 11. Additional Disclosures Relating to Options, Performance Rights and Shares Options Granted to Executive Directors as Part of Remuneration: There were no options granted to any Executive Director during the year ended 30 June 2020. There were no movements in option holdings during the year ended 30 June 2020. Option Holdings of Key Management Personnel for the Year Ended 30 June 2020 There were no options held by any director or senior executive during the year ended 30 June 2020. 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 2020 as well as the number of performance rights 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 2020 Performance Rights Exercised During the Year Number of Performance 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 $227,285 Kay Lesley Page 183,000 $635,010 John Evyn Slack-Smith 109,000 $378,230 David Matthew Ackery 109,000 $378,230 83,000 $288,010 Chris Mentis Total 37,500 67,500 45,000 45,000 45,000 $145,125 $261,225 $174,150 $174,150 $174,150 25,000 $96,750 193,500 $605,680 45,000 $174,150 478,500 $1,484,730 30,000 $116,100 293,000 $911,040 30,000 $116,100 293,000 $911,040 30,000 $116,100 241,000 $753,480 37,500 67,500 45,000 45,000 45,000 $145,125 $261,225 $174,150 $174,150 $174,150 549,500 $1,906,765 240,000 $928,800 160,000 $619,200 1,499,000 $4,665,970 240,000 $928,800 HARVEY NORMAN HOLDINGS LIMITED | ANNUAL REPORT JUNE 2020 58 OPERATI DIRECTORS’ REPORT – REMUNERATION REPORT (AUDITED) 11. Additional Disclosures Relating to Options, Performance Rights and Shares (continued) Movement in performance rights during the year ended 30 June 2020: a. A total of 549,500 performance rights under Tranche FY20 of the 2016 LTI Plan were granted to Executive Directors on 2 December 2019. The performance rights were independently valued by Mercer Consulting (Australia) Pty Limited at grant date with a fair value of $3.47 per entitlement on 2 December 2019, based on a share price of $4.30. 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 FY20 performance rights amounted to $1,906,765 in aggregate. b. On 1 January 2020, 160,000 performance rights representing 40% of Tranche 2 of the 2016 LTI Plan had lapsed and will never be exercisable by the participants. On 5 March 2020, 240,000 performance rights under Tranche 2 of the 2016 LTI Plan were exercised reducing the unissued ordinary shares under Tranche 2 of the 2016 LTI Plan to nil. c. As at 30 June 2020, a total of 400,000 performance rights under Tranche 3 of the 2016 LTI Plan (FY18), 549,500 performance rights under Tranche FY19 of the 2016 LTI Plan (FY19) and 549,500 performance rights under Tranche FY20 of the 2016 LTI Plan (FY20) were outstanding, unvested and not capable of exercise. TABLE 4: Performance Rights of Key Management Personnel for the Year Ended 30 June 2020 1 July 2019 Balance at the Beginning of Year Granted as Remuneration Performance Rights Exercised Performance Rights Lapsed 30 June 2020 Balance at End of the Year Due for Vesting during the year ended 30 June 2020 Total Exercised Lapsed KMP: Board of Directors Gerald Harvey Kay Lesley Page John Evyn Slack-Smith David Matthew Ackery Chris Mentis Total 190,500 408,000 259,000 259,000 233,000 65,500 183,000 109,000 109,000 83,000 (37,500) (67,500) (45,000) (45,000) (45,000) (25,000) (45,000) (30,000) (30,000) (30,000) 193,500 478,500 293,000 293,000 241,000 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 1,349,500 549,500 (240,000) (160,000) 1,499,000 400,000 240,000 160,000 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 2020. The closing balance of the performance rights in the Company of 1,499,000 as at 30 June 2020 is comprised of: a. b. 400,000 performance options under Tranche 3 of the 2016 LTI Plan (FY18); fair value at grant date of $3.34; to vest on 31 December 2020; exercisable between 1 January 2021 and 30 June 2023; and 549,500 performance options under Tranche FY19 of the 2016 LTI Plan (FY19); fair value at grant date of $2.59; to vest on 31 December 2021; exercisable between 1 January 2022 and 30 June 2024; and c. Granted as remuneration during the 2020 financial year: 549,500 performance options under Tranche FY20 of the 2016 LTI Plan (FY20); fair value at grant date of $3.47; to vest on 31 December 2022; exercisable between 1 January 2023 and 30 June 2025. HARVEY NORMAN HOLDINGS LIMITED | ANNUAL REPORT JUNE 2020 59  DIRECTORS’ REPORT – REMUNERATION REPORT (AUDITED) 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 2020 1 July 2019 Balance at the Beginning of Year On Exercise of Performance Rights (a) Renounceable Pro- Rata Entitlement Offer (b) Net Change Other (c) 30 June 2020 Balance at the End of Year KMP: Board of Directors Gerald Harvey Kay Lesley Page John Evyn Slack-Smith David Matthew Ackery Chris Mentis Michael John Harvey 369,778,107 18,605,005 997,750 562,908 1,014,186 3,149,892 Christopher Herbert Brown 194,107,477 Kenneth William Gunderson Briggs Graham Charles Paton Maurice John Craven KMP: Senior Executives Thomas James Scott Lachlan Roach Total 9,499 16,605 15,925 33,708 5,000 37,500 67,500 45,000 45,000 45,000 - - - - - - - 21,751,658 593,000 392,160,265 1,094,738 5,442 19,772,685 58,693 33,113 59,661 185,288 11,418,088 560 977 936 1,983 295 - - - - - - - 13,812 (25,691) 4,705 1,101,443 641,021 1,118,847 3,335,180 205,525,565 10,059 17,582 30,673 10,000 10,000 588,296,062 240,000 34,605,990 591,268 623,733,320 a. On 6 January 2020, the Company announced that 240,000 performance rights, representing 60% of the performance rights issued in accordance with Tranche 2 of the 2016 LTI Plan, had vested and was exercisable from 1 January 2020. On 6 January 2020, the Company announced that 160,000 performance rights, representing 40% of the performance rights issued in accordance with Tranche 2 of the 2016 LTI Plan, had lapsed and will never be exercisable by the participants. On 5 March 2020, 240,000 performance rights under Tranche 2 of the 2016 LTI Plan were exercised, reducing the unissued ordinary shares under Tranche 2 of the 2016 LTI Plan to nil. b. On 30 August 2019, 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 $173.49 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 10 September 2019. The Entitlement Offer forms part of the Company’s ongoing capital management program. It was intended that the proceeds from the Entitlement Offer be used to reduce the amount of HVN consolidated debt. On 21 October 2019, the Company announced that the Directors of the Company took up their full entitlement in respect of the Entitlement Offer and acquired 34,603,712 New Shares in HVN in accordance with the Change of Directors’ Interest Notice to the ASX effective 18 October 2019 and the terms and conditions of the Entitlement Offer. 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 2020 60 OPERATI DIRECTORS’ REPORT – REMUNERATION REPORT (AUDITED) 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 2020, or as soon as practicable after that date. Total ‘take-home pay’ for the directors of the Company amounted to $10.25 million for the year ended 30 June 2020. The total value of remuneration expensed for directors of the Company in respect of the 2020 financial year was $11.38 million (refer to Table 1 on page 56 of this report). For the 2020 financial year, total ‘take-home pay’ was $1.13 million lower than the value of remuneration expensed to the income statement. KMP: Board of Directors Salary & Fees Other Short Term Non- Monetary Benefits Super- annuation Short-Term Performance Cash Incentive (a) Exercise of Tranche 1 2016 LTI Plan Exercise of Tranche 2 2016 LTI Plan (b) FY2020 Total Take-Home Pay FY2019 Total Take-Home Pay Gerald Harvey 682,668 10,400 - 21,003 - Kay Lesley Page 1,958,198 1,167,547 - - John Evyn Slack- Smith David Matthew Ackery 1,150,447 18,000 Chris Mentis 841,426 Michael John Harvey 52,055 Christopher Herbert Brown Kenneth William Gunderson-Briggs Graham Charles Paton 138,813 274,560 138,813 Maurice John Craven 125,799 - - - - - - 17,812 21,003 724,880 - - 21,003 634,270 21,003 634,270 43,664 21,003 543,660 - - - - - 4,945 13,187 18,528 13,187 11,951 - - - - - 6,530,326 28,400 61,476 166,813 2,537,080 Total Take-Home Pay 2020 Total Take-Home Pay 2019 - - - - - - - - - - - 145,125 859,196 882,000 261,225 2,983,118 2,987,680 174,150 1,996,970 1,977,220 174,150 1,997,870 1,977,220 174,150 1,623,903 1,595,960 - - - - - 57,000 60,000 152,000 160,000 293,088 272,453 152,000 160,000 137,750 38,132 928,800 10,252,895 6,739,360 28,400 63,368 159,457 2,275,280 844,800 - 10,110,665 a. The short-term incentive of $2.54 million represented the payment of the 2019 STI Plan that was earned in respect of the 2019 financial year, and was paid to Executive Directors in September 2019. b. The aggregate fair value of the performance rights exercised during the 2020 financial year was $928,800, calculated at a fair value of $3.87 per right multiplied by 240,000 performance rights exercised. 13. Other Matters for Disclosure Comments on the Remuneration Report at the 2019 AGM of the Company The previous AGM of the Company was held on 27 November 2019.   At that meeting, questions were answered in respect of the Participant Performance Review process, the allocation of the STI pool amongst Executive Directors, changes to remuneration for the Executive Directors since the 2018 AGM, and the calculation of the RONA return for the 2019 year. The Company received 179.65 million votes against the adoption of the 2019 Remuneration Report representing 31.94% of the total 562.39 million shares that were eligible to vote on that resolution. A total of 683.62 million shares were ineligible to vote on the adoption of the 2019 Remuneration Report as they were held by KMPs or their related parties. The following improvements have been made to the remuneration framework for Executive Directors:     Profit after tax adjusted for the after tax effect of property increments and decrements (APAT) is the measure used for the achievement of the financial conditions for the short term incentive, replacing earning per share; The 100% short term incentive (STI) pool was increased to $3.0 million from $2.8 million in line with increase in net assets of the Company over the previous two financial periods, with the 100% STI pool able to be increased if the financial performance conditions for the short term incentives are over-achieved to the maximum extent of 120% i.e. to $3.6 million from $3.36 million. The level of long term incentive (LTI) achievement for the determination of vesting is to be based on a straight line basis as opposed to a gradation basis to remove the risk of calculation bias. The determination of return on net assets (RONA) for the on-foot LTI tranches will exclude the effects of the financial impact of the adoption of the lease accounting standard AASB 16, to allow calculation consistency. HARVEY NORMAN HOLDINGS LIMITED | ANNUAL REPORT JUNE 2020 61  DIRECTORS’ REPORT – REMUNERATION REPORT (AUDITED) 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 2020 (2019: nil). There were no loans outstanding from key management personnel as at 30 June 2020 (2019: nil). 15. Other Transactions and Balances with Key Management Personnel and their Related Parties CONSOLIDATED (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. Lease payments and outgoings made 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 Complex June 2020 $ - - - June 2019 $ - (39,566,536) 371,695 5,231,401 5,134,607 3,090,533 2,638,587 2,647,890 310,761 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 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 27. 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 lease payments and outgoings paid by the P.C.W. Lessee. The amount of lease payments 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 2020 was $0.74 million (2019: $0.74 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”). 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 Byron Bay Joint Venture, have entered into agreements for sale of the Byron Bay Joint Venture (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 were 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. The Sale Contract was settled during FY20 following the grant of the liquor licence approval by the relevant authority. No conference fee was paid by the consolidated entity to the Byron Bay Joint Venture in the 2020 financial year (2019: $0.11 million). 62 OPERATI DIRECTORS’ REPORT – REMUNERATION REPORT (AUDITED) 15. Other Transactions and Balances with Key Management Personnel and their Related Parties (continued) (vii) Gepps Cross Home HQ 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 27. The Gerald Harvey Entity is entitled to one-quarter of the lease payments and outgoings paid by the G.C. Lessee. The Michael Harvey Entity is entitled to one-eighth of the lease payments and outgoings paid by the G.C. Lessee. The adoption of AASB 16 Leases resulted in the recognition of a lease liability of $18.98 million by the G.C. Lessee as at 30 June 2020. The amount of lease payments and outgoings paid by the G.C. Lessee to the Gepps Cross Joint Venture for the year ended 30 June 2020 was $3.41 million (2019: $3.33 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. HARVEY NORMAN HOLDINGS LIMITED | ANNUAL REPORT JUNE 2020 63 SOCIAL & ENVIRONMENTAL 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 highest governance body of the consolidated entity, alongside management is charged with establishing a business strategy that supports responsible decision making and sustainable value creation. The Code of Conduct of the consolidated entity reinforces the 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. WELL-BEING & SAFETY Creating an environment where our people and customers can work and shop safely has always been our commitment. In the current climate, it has never been more important. During this financial year, we have continued to progress our safety and well-being initiatives including further refinements to our overarching governance and reporting structures globally. Our teams have undertaken various training and education opportunities in health and safety throughout the year, including refresher training on various Work Health and Safety (WHS) focus areas as part of October Safety Month, completion of Mental Health First Aid Accreditation for nominated employees, and BizSAFE Risk Management and Safety training to improve the ability of frontline warehouse, administrative, and retail managers in Singapore to conduct Safety and Health Risk Assessment Plans. MHFAider WHS BizSAFE Harvey Norman® Singapore employees attending a BizSAFE training course As for most businesses, the second half of 2020 saw COVID-19 become the focus of our health and well-being initiatives. At the very start of the pandemic, an Incident Management Team was formed to enable swift and decisive actions and operational implementations in response to the evolving risks and government requirements. The experiences earlier in the year gained from our European and Asian responses meant that the brands were well-placed to act appropriately when the COVID-19 impacts became apparent in Australia. Consumers were encouraged to Shop Smart and Shop Safe, and a wide range of controls including hand sanitiser, increased cleaning and sanitisation, employee training, additional PPE, and improved contactless shopping options were implemented by franchisees to keep their customers and employees safe. Harvey Norman® Malaysia frontline workers preparing COVID-19 packages Harvey Norman® Singapore employees preparing COVID-19 gift packs 64 SOCIAL & ENVIRONMENTAL SUSTAINABILITY Mental wellness continues to be a strong focus of health and safety initiatives. To build awareness and encourage relationship building and connection amongst employees, the consolidated entity participated in R U OK Day and held various events over Mental Health Week that focused around the mental, social, physical and spiritual pillars that affect wellness. The consolidated entity continues a strong focus on mental wellness initiatives as a focus, particularly as a result of the ongoing impacts of COVID-19. As part of these events, a number of employees completed their Accredited Mental Health First Aid course to grow support in the workplace for any employees who may experience mental health concerns. Preparing for R U OK Day TRAINING AND DEVELOPMENT We recognise that training and developing our people is a sound investment and can only lead to better outcomes for the consolidated entity and our stakeholders. This year, investment in training and development has continued, with our people undertaking a variety of role-based and soft-skill courses. Whilst COVID-19 has impacted on the ability for our people to attend face-to-face or in-person meetings and development, an agile shift more towards online options occurred and has become a normal part of day to day engagement. Harvey Norman® Malaysia Bite Sized Learning Programme With a recognition of the increased importance of non-contact communications, a project was initiated at the end of the financial year to upgrade the internal intranet of the consolidated entity, due for completion in the 2021 financial year. The consolidated entity looks forward to this project providing improved opportunities to drive employee engagement, clear and concise communication, and increased interaction between business units, all of which are important to successful business and employee outcomes. Harvey Norman® New Zealand Cooking & Whiteware School Key Development Program of Franchisees* The consolidated entity continues to invest in systems and process improvements to provide franchisees with the necessary tools to promote and enhance the knowledge and capability of the franchisee and their employees. Franchisees can request their employees participate in the Key Development Program, the aim of which is to provide tools for the development of these employees to be future successful leaders as a Harvey Norman®, Domayne® or Joyce Mayne® franchisee. The framework of the program is built upon three pillars – Leadership, Managing & Creating, and Operations. Whilst traditionally provided in a face-to-face setting, the Program has successfully transitioned to an online platform due to COVID-19 restrictions. *Franchisees and employees of franchisees in Australia are not employees of the consolidated entity. HARVEY NORMAN HOLDINGS LIMITED | ANNUAL REPORT JUNE 2020 65 SOCIAL & ENVIRONMENTAL SUSTAINABILITY Some of the participants of a 2019 Key Development Program session I am really enjoying the journey so far and am looking forward to increasing my knowledge and understanding of the back end and reporting side of a franchisee business. – Matthew Smith I enjoy the online learning and being able to apply the newly formed skilled immediately to everyday business. – Jason Platz I thoroughly enjoyed being a part of a like-minded group of individuals. I enjoy being stimulated on subject matter that is of high interest to me and listening to examples of co-workers and mentors being in the situations I am confronted with and how they personally handled the task. Meeting the GM of Home Appliances (even though it wasn’t in person) was a highlight for me as I really enjoy listening and absorbing other people’s “journey”. I definitely enjoyed Lachlan’s energy and ability to visualise, plan and attack. I was inspired to embrace change and just say yes. – Aydin Tezer GRADUATE OPPORTUNITIES Each year, some franchisees within Australia offer opportunities to recent graduates with relevant university qualifications, a unique graduate opportunity to fast-track their development and training to progress their career opportunities with Harvey Norman®. This opportunity can lead to participating in the Key Development Program, and eventually becoming a future Harvey Norman®, Domayne® or Joyce Mayne® franchisee. In the 2020 financial year: 1. 2. 5 franchisee employees completed the Graduate Program and transitioned to participate in the Key Development Program. 7 new franchisee employees commenced the Graduate Program. 2019 Graduates 66 End of Financial Year Partnership Summary End of Financial Year Partnership Summary Financial Year 19 / 20 June 2020 Harvey Norman Partner Since: 2020 June 2020 Harvey Norman Partner Since: 2020 This past year has been huge. Australia has been hit hard by disasters including drought, fire, flood and a global pandemic. There has been a 200% increase in charities accessing support from Good360 and as Australia slowly recovers, demand remains high. Financial Year 19 / 20 This past year has been huge. Australia has been hit hard by disasters including drought, fire, flood and a global pandemic. There has been a 200% increase in charities accessing support from Good360 and as Australia slowly recovers, demand remains high. SOCIAL & ENVIRONMENTAL SUSTAINABILITY Your support through this time is hugely appreciated. Thank you so much for all your help. Your support through this time is hugely appreciated. Thank you so much for all your help. June 2020 Harvey Norman Partner Since: 2020 COMMUNITY & PARTNERSHIPS Harvey Norman's donations to Good360 Harvey Norman's End of Financial Year Partnership Summary FY18 FY17 donations to Good360 Financial Year 19 / 20 Value RRP This past year has been huge. Australia has been hit hard by disasters including drought, fire, flood and a global pandemic. $0 $0 Cash Donated There has been a 200% increase in charities accessing support from Good360 and as Australia slowly recovers, demand remains high. Our communities have faced many challenges over the past 12 months, with the natural disasters of droughts, bushfires $3,083,844 $3,083,844 and floods swiftly followed by the ongoing COVID-19 pandemic – which has touched all our lives in so many ways. $3,083,844 $3,083,844 Lifetime Value Cash Donated Value RRP FY20 FY17 FY19 FY16 FY16 FY20 FY19 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 Lifetime FY18 Value Harvey Norman® has always felt a strong connection to community – both on local and national levels – forming a symbiotic relationship of Your support through this time is hugely appreciated. mutual strength and support. It is times like these that remind us of the importance of giving back and supporting those communities that Harvey Norman's Impact as of June 2020 Thank you so much for all your help. have been our supporters for so many years. Harvey Norman's Impact as of June 2020 Harvey Norman's donations to Good360 FY16 FY17 FY18 FY19 FY20 Lifetime Value Value RRP Cash Donated $0 $0 $0 $0 $0 $0 $0 $0 $0 $3,083,844 $3,083,844 $3.08M Total Goods donated (RRP) $2.98M $3.08M Goods donated to Not for Profit & Total Goods donated (RRP) Schools (RRP) Harvey Norman's Impact as of June 2020 3,251 $2.98M New items connected Goods donated to Not for Profit & with people in need Schools (RRP) $3.08M 0 Goods matched with Total Goods donated (RRP) Local Store Donation Program $2.98M 67 0 Goods donated to Not for Profit & Goods matched with Not for Profits & Schools supported Schools (RRP) Local Store Donation Program 3,251 21 67 New items connected Cause areas supported with people in need Not for Profits & Schools supported Harvey Norman® formed a working partnership with Good360 to help distribute goods to those in need. $0 $0 Good360 help ensure individuals facing challenging life $0 3,251 New items connected Donated to Good360 with people in need circumstances are able to get the goods they need – and this Donated to Good360 important service became more vital than ever in the wake of the devastation of the bushfire season, with many families left without homes and communities stripped of infrastructure. To date, Harvey Norman® has donated a variety of goods - covering everything from fridges and washing machines to 0 beds and furniture – with a retail value of $3.08 million to $0 0 21 Donated to Good360 Hours donated to Good360 Cause areas supported help ensure these communities can get back on their feet. Hours donated to Good360 Not for Profits supported by State Not for Profits supported by State Top causes supported Top causes supported Not for Profits supported by State 7 Top causes supported Homelessness 0 Goods matched with Local Store Donation Program Community 21 Improvement 0 Harvey Norman® continued their partnership with Sky News & Economic Not for Profits & Schools supported Cause areas supported and the Paul Murray Live program to stage a series of monthly Development OUR TOWN - SKY NEWS 67 0 Our Town events in regional Australia. These events were 0 0 0 women’s shelters, emergency accommodation, remote designed to promote and raise funds to support regional organisations such as the Country Women’s Association (CWA) in their efforts towards drought and bushfire relief, providing 48 Community Improvement & Economic Development healthcare solutions and much more. 11 ACT 0 Live events were held in Thredbo, Broome, Alice Springs, 1 Newcastle, Dubbo, Batemans Bay and Hobart, with over 48 11 Migrant & Ethnic Groups ACT 1 0 0 $292,000 in donations and funds raised this financial year. TAS 0 7 7 Community Children & 0 Improvement Youth Hours donated to Good360 & Economic Development Migrant & Ethnic Groups Social or Children & Youth Public Welfare Homelessness Children & Youth Social or Public Welfare TAS 0 Homelessness Paul Murray and Members of the Newcastle CWA 0 TAS 0 48 11 ACT 1 Migrant & Ethnic Groups Social or Public Welfare www.good360.org.au #makegoodhappen On Saturday 29th of February 2020, Harvey Norman® harnessed its significant commercial power to promote a ‘SHOP. SUPPORT. REBUILD.’ event www.good360.org.au #makegoodhappen where a percentage of franchisee sales generated on the day would be donated to Biz Rebuild. This initiative was set up by the Business Council of Australia (BCA) in response to the devastating bushfire season in order to help support the www.good360.org.au #makegoodhappen affected communities. rebuilding of businesses and industries in The Community Rebuilding Initiative surveying the bushfire devastation in Batemans Bay The day was a great success, with an amount of $200,000 being donated – which was the equivalent of 1% of total franchisee sales from franchised complexes throughout Australia. HARVEY NORMAN HOLDINGS LIMITED | ANNUAL REPORT JUNE 2020 67 SOCIAL & ENVIRONMENTAL SUSTAINABILITY DIVERSITY & INCLUSION The consolidated entity is committed to promoting and supporting an environment where our workforce is representative of the communities in which it operates. A diverse workforce generates value for its shareholders by building capabilities for the consolidated entity to become more innovative, responsive, and competitive. Celebrating diversity and building an inclusive culture is part of what we do every day. Women with harvey norman MEET SOME OF THE TALENTED, PASSIONATE AND DETERMINED WOMEN HELPING TO CREATE PATHWAYS OF OPPORTUNITY IN THEIR COMMUNITIES. OUR PEOPLE IN NUMBERS Jessica Sergis JILLAROOS/RUGBY LEAGUE Ali Brigginshaw QRL/RUGBY LEAGUE Belinda Sharpe NRL REFEREE Alicia Eva 2020 GIANTS AFLW CAPTAIN “It isn’t complicated. Harvey Norman® has supported Australian women for as long as we have been in business.” Katie Page Executive Director and CEO HARVEY NORMAN HOLDINGS LIMITED Madison de Rozario PARALYMPIAN WHEELCHAIR RACING Sage Goldsbury WSL AUSTRALIAN SURFER Katie Kelly OAM, PARA-TRIATHLETE FOUNDER, SPORT ACCESS FOUNDATION Abigail Santos GLOBAL FINANCIAL CONTROLLER AT HARVEY NORMAN HNHL WORKPLACE PROFILE 55% (3430) 45% (2798) 45+ 35+ HNHL SENIOR MANAGEMENT 65% (92) 35% (50) Melissa Wilson MANAGING DIRECTOR, HARVEY NORMAN EUROPE Tanya Cameron OAM, NATIONAL PRESIDENT, COUNTRY WOMEN’S ASSOCIATION OF AUSTRALIA Nikia Nolan HARVEY NORMAN® YOUNG FUTURE FARMERS AWARD WINNER Hannah Beder HARVEY NORMAN® 2020 YOUNG WOMAN OF THE YEAR Margy Perkuhn SHINE AWARDS 2019 OVERALL WINNER Tani Bloudell HARVEY NORMAN® 2020 GOLD COAST WOMAN OF THE YEAR MALE FEMALE 7.5 Years 6.5 Years Average Tenure HNHL AU The same support extends to our employees and future employees, via supporting the creation of employment opportunities and emphasising the development and training of females to grow our future talent pool. This year, the consolidated entity was pleased to note continued growth in female representation in Senior Management roles, increasing to 35.2% of total HNHL Senior Management Positions. Working to create a strong talent pool of future leaders is a key part of the DNA at Harvey Norman®. Based on disclosed information by its employees, the consolidated entity in Australia is fortunate to have a workforce that is diverse in background, with employees self-identifying from over 43 different cultural backgrounds. We find ways to celebrate this diversity through events such as Diwali. Given the COVID-19 restrictions, events were cancelled for this financial year however we look forward to further initiatives in the second half of FY 21. All employees undertake a cultural awareness e-learning module and a Discrimination, Bullying & Harassment Prevention Policy e-learning refresher course each year to support employee awareness and knowledge and promote a positive workplace culture. Employees of the consolidated entity are fortunate to participate in sponsored events from time-to-time to bring awareness to people from all backgrounds. For example, employees enjoyed participating in the Para-Tough Cup 2020, and New Zealand employees enjoyed hosting a fundraiser event for the NZ Paralympics Team. For further information on Diversity initiatives, refer to the Corporate Governance Report on the consolidated entity website. *Franchisees and employees of franchisees in Australia are not employees of the consolidated entity. 68 HN/DM/JM FRANCHISEE STAFF* 56% (5804) 44+ 44% (4569) Average Tenure (with Brands) HN/DM/JM FRANCHISEE STAFF* MALE FEMALE 4.8 Years 5.3 Years 55 65 56 SOCIAL & ENVIRONMENTAL SUSTAINABILITY Paralympics Australia Partnership Harvey Norman® is proud to partner with Paralympics Australia and also support the AUS Squad, the official cheer squad of the Australian Paralympic Team. Featuring talented athletes across all disciplines, the Australian Paralympic Team are an inspiring force in the community, and Harvey Norman® is proud to provide support on their journey to achievement. This year saw the the inaugural Harvey Norman® Para Tough Cup, with franchisee suppliers and corporate office staff competing and raising funds – with over $49,000 raised on the day, and a further $10,000 being raised from the sale of AUS Squad merchandise in store. Participants in the Harvey Norman® Para Tough Cup 68 HARVEY NORMAN HOLDINGS LIMITED | ANNUAL REPORT JUNE 2020 69 ATHLETE PROFILEMadison de Rozario PARALYMPIC WHEELCHAIR RACER Not only is Madison de Rozario one of the most promising young athletes in wheelchair racing, but she’s already got the track record of a seasoned veteran. Madison first represented Australia at the Paralympics in Beijing in 2008 at the tender age of 15, and has since gone on to compete at London in 2012 and Rio in 2016.With her sights set firmly on the next Paralympics, Madison’s future in the sport is looking brighter than ever, thanks to her desire for each performance to be a new personal best.SOCIAL & ENVIRONMENTAL SUSTAINABILITY Young Future Farmers Awards For Nikia Nolan, growing up around animals ignited a deep passion for farming - a passion which has seen her take great steps towards a bright career in the industry. A Harvey Norman® Young Future Farmers Ambassador for 2020 and winner of the YFFA 2019 University Award, Nikia is currently studying a Bachelor of Rural Science at the University of New England in Armidale - covering such diverse subject areas as soil science, agronomy, animal nutrition, biochemistry and genetics. Nikia is just one of many Future Farmers who are driving the next wave of innovation in farming. Harvey Norman® Young Farmer of the Year 2019 University Award Winner Nikia Nolan NSW Women of the Year Awards The NSW Women of the Year Awards recognise and celebrate the outstanding contribution made by women across New South Wales. In 2020, Harvey Norman® was the naming partner for the Young Woman of the Year award, which was won by Hannah Beder. Hannah is a computer scientist who is passionate about addressing the historical gender disparity in STEM by mentoring young women to be successful in the tech industry. Since 2015, Hannah has volunteered for Girls Programming Network, an all-female group who run free programming workshops for high school girls. As a successful Software Engineer, Hannah’s visibility in the technology and computing education industries helps to combat the notion that ‘you can’t be what you can’t see’. Harvey Norman® 2020 Young Woman of the Year Winner Hannah Beder (second from right) G W N I T A R B E L E C O M E N OF R U R A L A U S T R A L I A Harvey Norman® Gold Coast Woman of the Year Tani Bloudell (centre) Shine Awards Overall Winner 2019 Margy Perkuhn Gold Coast Women of the Year Shine Awards Harvey Norman® was proud to be a naming rights partner for the Gold Coast Bulletin’s Women of the Year campaign in 2020. The Shine Awards is an annual event that shines a spotlight on regional and rural women who are making a real difference to their In its second year, there were over 250 Gold Coast women nominated communities, businesses and industries. across eight categories - from entrepreneurs and mentors to Produced in partnership with The Weekly Times, and now heading champions of sport and education – in an event that recognises and celebrates the inspiring, influential and innovative women living and working on Queensland’s Gold Coast. 70 into their fourth year, these awards celebrate the vision, dedication, spirit, belief, grace and courage of women across rural and regional Australia. With the past 12 months presenting extreme challenges for so many communities, it feels more important than ever to share stories of hope, celebrate their perseverance, and to recognise the positive impact of these women. SOCIAL & ENVIRONMENTAL SUSTAINABILITY NRL Harvey Norman® All-Stars 2020 saw Harvey Norman® continue in its role as the naming rights partner of the NRL All-Stars match between Indigenous and Maori teams. Prior to the match on 22 February 2020, both male and female representative teams made in-store appearances at Harvey Norman® Bundall, where the local community was able to come and meet some of their favourite players. As the first major Rugby League event of the calendar year, this was a great opportunity to bring the community together in a positive way that celebrates the contribution of Indigenous & Maori players. NRL All-Stars at Harvey Norman Bundall NRLW player Annette Brander Women in Sport Harvey Norman® has long been a proud supporter of women in sport – with sponsorship involvement spanning from juniors and grassroots all the way up to the elite levels. This support is helping these athletes achieve their goals, and by doing so also inspiring the next generation of women - creating pathways for them to pursue their own sporting endeavours. WSL Australian surfer Sage Goldsbury GIANTS AFLW player Nicola Barr HARVEY NORMAN HOLDINGS LIMITED | ANNUAL REPORT JUNE 2020 HARVEY NORMAN HOLDINGS LIMITED | APPENDIX 4E JUNE 2020 71 XX SOCIAL & ENVIRONMENTAL SUSTAINABILITY Environmental Responsibility 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) Soft Landings Product Stewardship Scheme (Founding Member) Energy Users Association of Australia Diversity Council of Australia Environmental Regulation Performance The consolidated entity submits a National Greenhouse Gas and Emissions Report (NGER) to the Clean Energy Regulator annually. The consolidated entity’s environmental obligations are regulated under both State and Federal Law. There were no environmental breaches notified to the consolidated entity by any Government agency during the year ended 30 June 2020 and up to the date of this report. The 2020 financial year saw franchisees in Australia face a new challenge in terms of managing the safety of the environment within their franchised complex. The introduction of regulations in relation to social distancing and capacity restrictions by State Governments, in response to the COVID-19 global pandemic, resulted in a number of changes to how franchisees interact with their customers. Initiatives undertaken at franchised complexes: Social distancing practices for customer interactions The installation and maintenance of hand sanitiser stations The management of the number of customers within the store Increased cleaning practices, particularly around high touch environments like checkouts Implementation of contactless pick-up and delivery from warehouse locations Increased vigilance around staff health and workplace attendance when ill Staff personal protective equipment Harvey Norman®, Domayne® and Joyce Mayne® franchised complexes had a number of visits from police and state based regulators and the overall feedback about the execution of safe practices by franchisees was very positive. Harvey Norman®, Domayne® and Joyce Mayne® Franchised 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 31 franchised complexes, with one further installation awaiting commencement. 72 SOCIAL & ENVIRONMENTAL SUSTAINABILITY Using FY2016 electricity consumption as a baseline, the electricity consumption for the 31 selected franchised complexes has dropped 18.7% as a result of the solar and other energy efficiency initiatives commenced at these complexes (this result is based on comparing FY16 total consumption at participating sites with FY20 total consumption and excluding Auburn Flagship Store, where the configuration has changed dramatically and has resulted in an increase in energy usage. Not all complexes completed in FY20 had the system in operation for the full 12 months period). The supplier of the solar installations has commenced an audit of each installed system to verify its ongoing effectiveness in producing energy for consumption at the site. Total Energy Consumption Using FY2016 as the baseline year of measurement, the consolidated entity and the franchised complexes have reduced energy consumption in Australia by 9.4%. The value of this reduction is equivalent to: More than 23,800 tonnes of C02 avoided; More than 5,000 cars taken off the road annually. Waste Reduction A thorough review of all packaging used by franchisees (including plastic bags, tape, strapping, cardboard boxes, etc.) against the Sustainable Packaging Guidelines was conducted in FY2020. The opportunities identified as part of that review will be implemented in subsequent years. Each Harvey Norman®, Domayne® and Joyce Mayne® franchisee has improved their waste management performance during the 2020 financial year as follows: WASTE STREAM PERCENTAGE IMPROVEMENT DURING 2020 FINANCIAL YEAR DESCRIPTION E-WASTE 13.1% aggregate overall increase on FY2019 volumes E-waste recycling is available through most Harvey Norman®, Domayne® and Joyce Mayne® franchised complexes. MATTRESSES 17,189 mattresses in aggregate recycled via the Soft Landings Product Stewardship and Social Enterprise Scheme, an aggregated 35% increase on the previous financial year. Some franchisees may have used alternate service providers, particularly in Melbourne. Harvey Norman® and Domayne® franchisees are founding members of the Soft Landings Mattress Product Stewardship Scheme. POLYSTYRENE An aggregate 6.7% increase in polystyrene recycling (measured in tonnes) in FY2020. Approximately 80% of franchised complexes in Australia recycle this separate waste stream. CARDBOARD AND PLASTIC RECYCLING AS A PERCENTAGE OF FRANCHISED COMPLEX WASTE (EXCLUDING THE ABOVE INITIATIVES) Harvey Norman®, Domayne® and Joyce Mayne® franchised complexes recycled 7,240 tonnes, in aggregate, of cardboard and paper and 5.71 tonnes of plastic (LDPE), in aggregate, in FY2020. Average landfill diversion: • • 41% (measured by weight) 48% (measured by volume) Each franchisee in each franchised complex in Australia carries out cardboard and plastic recycling. PLASTIC BAG DISTRIBUTION Net distribution of plastic bags decreased by 36% in aggregate in FY2020. Use of reusable smart bags decreased by 6.42% in aggregate. From February 2018, all plastic bags supplied to customers by Harvey Norman®, Domayne® and Joyce Mayne® franchisees were a minimum of 40 microns. HARVEY NORMAN HOLDINGS LIMITED | ANNUAL REPORT JUNE 2020 73 DIRECTORS’ REPORT (CONTINUED) 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 & Risk 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 & Risk 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 2020 are outlined in Note 30. Remuneration of Auditors of this annual report. 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 2020, 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 30 September 2020 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 30 September 2020 30 September 2020 74 74 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 2020, the consolidated income statement, consolidated statement of comprehensive income, consolidated statement of changes in equity and consolidated statement of cash flows for the year then ended, notes to the financial statements, including a summary of significant accounting policies, and the directors' declaration. In our opinion, the accompanying financial report of the Group is in accordance with the Corporations Act 2001, including: a) b) giving a true and fair view of the consolidated financial position of the Group as at 30 June 2020 and of its consolidated financial performance for the year ended on that date; and complying with Australian Accounting Standards and the Corporations Regulations 2001. Basis for Opinion We conducted our audit in accordance with Australian Auditing Standards. Our responsibilities under those standards are further described in the Auditor’s Responsibilities for the Audit of the Financial Report section of our report. We are independent of the Group in accordance with the auditor independence requirements of the Corporations Act 2001 and the ethical requirements of the Accounting Professional and Ethical Standards Board’s APES 110 Code of Ethics for Professional Accountants (including Independence Standards) (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. 75 A member firm of Ernst & Young Global Limited Liability limited by a scheme approved under Professional Standards Legislation 1. Valuation of investment properties and owner-occupied properties Why significant How our audit addressed the key audit matter Investment properties and owner-occupied properties (collectively, “properties”) represent 51% of the Group’s total assets as at 30 June 2020. Investment properties are carried at fair value with changes in fair value recognised in the income statement. Note 14 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 12 of the financial report describes the basis upon which fair value has been determined. Fair value is assessed by the directors with reference to either external independent property valuations or internal valuations and are based on market conditions existing at the reporting date. At 30 June 2020 there is significant valuation uncertainty arising from the COVID-19 pandemic and the response of Governments to it. The valuation of investment properties is inherently subjective given that there are alternative assumptions and valuation methods that may result in a range of values. The impact of COVID- 19 at 30 June 2020 has resulted in a wider range of possible assumptions and values than at past valuation points. In addition, property values may change significantly and unexpectedly over a short period of time. Given the market conditions at balance date, the independent valuers have reported on the basis of the existence of ‘material valuation uncertainty’, noting that less certainty and a higher degree of caution should be attached to the valuations than would normally be the case. The disclosures in the financial statements provide particularly important information about the assumptions made in the property valuations and the market conditions at 30 June 2020. For these reasons we consider it important that attention is drawn to the information in Notes 12 and 14 in assessing the property valuations at 30 June 2020. Our audit procedures included the following: • Assessed the Group’s accounting policies with respect to investment properties and owner-occupied properties for compliance with the relevant Australian Accounting Standards. • Assessed whether we could rely on the work of those responsible for the Director’s valuations and the work of the independent valuation experts by considering their qualifications, competence and objectivity. • Held discussions with management and a sample of independent valuers to understand movements in the Group’s investment property portfolio and the impact that COVID-19 has had on the Group’s property portfolio at 30 June 2020, including trading performance, rent abatements offered to tenants, and tenant occupancy risk. For a sample of properties we: • Assessed the reasonableness of key assumptions used in the valuations with reference to external market evidence. • Assessed whether any relief provided to tenants in connection with COVID-19 had been factored into the valuations and that changes in tenant occupancy risk were considered. • We involved our real estate valuation specialists to assist with the assessment of the valuation assumptions and methodologies for both internal and external valuations, in particular, changes made as a result of COVID-19. • Evaluated the suitability of the valuation methodology across the portfolio based on the type of asset. • Considered whether there have been any indicators of material changes in property valuations from 30 June 2020 up to the date of our audit opinion, or any matters emerging since 30 June 2020 which provide evidence of a material change in valuation at that date. We involved our real estate 76 A member firm of Ernst & Young Global Limited Liability limited by a scheme approved under Professional Standards Legislation valuation specialists to assist us in making this assessment. • Considered whether the financial report disclosures and in particular those relating to the valuation uncertainty are appropriate. For the year ended 30 June 2020, valuation of investment properties and owner-occupied properties was considered a key audit matter given: • the value of the properties relative to total assets of the Group; • • • the number of judgements exercised by both independent valuation specialists and the Directors in determining fair value; by their nature, the use of Directors’ valuations and; uncertainty regarding key valuation assumptions as a result of the COVID-19 economic impact. 2. Adoption of Australian Accounting Standard AASB 16 Leases Why significant How our audit addressed the key audit matter The 30 June 2020 financial year was the first year of adoption of Australian Accounting Standard AASB 16 Leases (“AASB 16”). The Group holds a significant volume of leases by number and value, over retail, warehouse and office sites in Australia (as lessor and lessee) and overseas (as lessee). A large portion of the leases over retail and warehouse sites in Australia involve sub-leases to Harvey Norman, Domayne and Joyce Mayne franchisees. AASB 16 requires that the right-of use assets in respect of these leases be classified as investment properties and measured in line with the Group’s accounting policy, at fair value each reporting period. As a result, on transition (1 July 2019), a lease liability of $1,161.0 million, property, plant and equipment: right-of-use assets of $449.7 million and investment properties (leasehold): right-of- use assets of $608.5 million were recognised by the Group. Note 1(f) of the financial report describes the accounting for the transition and the accounting policy for leases on an ongoing basis. Our audit procedures included the following: • Considered whether the Group’s accounting policies as set out in Note 1(f) satisfied the requirements of AASB 16, including the adoption of any practical expedients selected by the Group as part of the transition process. • Assessed the effectiveness of controls over the computation and recognition of the right of use asset and lease liability on transition. • Assessed the mathematical accuracy of the Group’s AASB 16 lease calculation model. • For a sample of leases, we agreed the Group’s inputs in the AASB 16 lease calculation model in relation to those leases, such as key dates, fixed and variable rent payments, renewal options and incentives, to the relevant terms of the underlying signed lease agreements. • Considered the Group’s assumptions in relation to the treatment of lease renewal options. • Assessed whether the Group had included all of its leases, taking into consideration the modified retrospective transition approach and practical expedients adopted by the Group, by reviewing the reconciliation of the operating lease commitments disclosure in the prior year financial report to the transition disclosures. A member firm of Ernst & Young Global Limited Liability limited by a scheme approved under Professional Standards Legislation 77 Given the financial significance to the Group of its leasing arrangements, the complexity and judgements involved in the application of AASB 16, and the transition requirements of the standard, this was considered to be a key audit matter. • We involved our valuation and financial reporting specialists to assist with: • Assessment of the market rents and market discount rates used in determining the valuation of the Group’s right-of-use asset for leasehold properties classified as investment properties; and • Assessment of the incremental borrowing rates used to discount future lease payments to present value. • Assessed the adequacy of the financial report disclosures contained in Note 1(f). 3. Recoverability of Receivables from Franchisees Why significant How our audit addressed the key audit matter At 30 June 2020, the balance of receivables from franchisees was $352.4 million (30 June 2019: $607.7 million), representing 6% of the Group’s total assets at 30 June 2020. Our audit procedures included the following: • Evaluated the Group’s assessment of the recoverability of receivables from franchisees. Note 7 of the financial report describes the nature of the balances receivable from franchisees and outlines the accounting policy in relation to receivables from franchisees. The recoverability of receivables from franchisee was considered a key audit matter given the value of the balance and the judgements exercised by the Group in making their recoverability assessment. • Performed a range of scenarios to ‘stress test’ assumptions applied by management in determining the recoverability of receivables from franchisees. • For a sample of franchisee receivables, we obtained confirmation from the franchisees acknowledging the amounts owing at year end. • Reviewed a sample of General Security Deeds between the franchisees and the Group that provides the Group with security over the assets of franchisees. • 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. • Considered the adequacy of the disclosures included in Note 7 of the financial report. 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 2020 Annual Report, but does not include the financial report and our auditor’s report thereon. A member firm of Ernst & Young Global Limited Liability limited by a scheme approved under Professional Standards Legislation 78 Our opinion on the financial report does not cover the other information and accordingly we do not express any form of assurance conclusion thereon, with the exception of the Remuneration Report and our related assurance opinion. In connection with our audit of the financial report, our responsibility is to read the other information and, in doing so, consider whether the other information is materially inconsistent with the financial report or our knowledge obtained in the audit or otherwise appears to be materially misstated. If, based on the work we have performed, we conclude that there is a material misstatement of this other information, we are required to report that fact. We have nothing to report in this regard. Responsibilities of the Directors for the Financial Report The directors of the Company are responsible for the preparation of the financial report that gives a true and fair view in accordance with Australian Accounting Standards and the Corporations Act 2001 and for such internal control as the directors determine is necessary to enable the preparation of the financial report that gives a true and fair view and is free from material misstatement, whether due to fraud or error. In preparing the financial report, the directors are responsible for assessing the Group’s ability to continue as a going concern, disclosing, as applicable, matters relating to going concern and using the going concern basis of accounting unless the directors either intend to liquidate the Group or to cease operations, or have no realistic alternative but to do so. Auditor's Responsibilities for the Audit of the Financial Report Our objectives are to obtain reasonable assurance about whether the financial report as a whole is free from material misstatement, whether due to fraud or error, and to issue an auditor’s report that includes our opinion. Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with the Australian Auditing Standards will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of this financial report. As part of an audit in accordance with the Australian Auditing Standards, we exercise professional judgment and maintain professional scepticism throughout the audit. We also: • Identify and assess the risks of material misstatement of the financial report, whether due to fraud or error, design and perform audit procedures responsive to those risks, and obtain audit evidence that is sufficient and appropriate to provide a basis for our opinion. The risk of not detecting a material misstatement resulting from fraud is higher than for one resulting from error, as fraud may involve collusion, forgery, intentional omissions, misrepresentations, or the override of internal control. • Obtain an understanding of internal control relevant to the audit in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Group’s internal control. • Evaluate the appropriateness of accounting policies used and the reasonableness of accounting estimates and related disclosures made by the directors. • Conclude on the appropriateness of the directors’ use of the going concern basis of accounting and, based on the audit evidence obtained, whether a material uncertainty exists related to events or conditions that may cast significant doubt on the Group’s ability to continue as a going concern. If we conclude that a material uncertainty exists, we are required to draw attention in our auditor’s report to the related disclosures in the financial report or, if such disclosures are inadequate, to modify our opinion. Our conclusions are based on the audit evidence obtained up to the date of our auditor’s report. However, future events or conditions may cause the Group to cease to continue as a going concern. 79 A member firm of Ernst & Young Global Limited Liability limited by a scheme approved under Professional Standards Legislation • 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, actions taken to eliminate threats or safeguards applied. 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 39 to 63 of the directors' report for the year ended 30 June 2020. In our opinion, the Remuneration Report of Harvey Norman Holdings Limited for the year ended 30 June 2020, 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 30 September 2020 A member firm of Ernst & Young Global Limited Liability limited by a scheme approved under Professional Standards Legislation 80 DIRECTORS’ DECLARATION In accordance with a resolution of the directors of Harvey Norman Holdings Limited, we state that: In the opinion of the directors: a) the financial statements, notes and the additional disclosures included in the Directors’ Report designated as audited, of the 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 2020 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 2020. 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 37. Deed of Cross Guarantee 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 Chairman Sydney 30 September 2020 Chief Executive Officer K.L. PAGE Sydney 30 September 2020 79 HARVEY NORMAN HOLDINGS LIMITED | ANNUAL REPORT JUNE 2020 81 HARVEY NORMAN HOLDINGS LIMITED | ANNUAL REPORT JUNE 2020 NOTES TO THE FINANCIAL STATEMENTS | JUNE 2020 STATEMENT OF FINANCIAL POSITION as at 30 June 2020 Current Assets Cash and cash equivalents Trade and other receivables Other financial assets Inventories Other assets Intangible assets Assets held for sale Total current assets Non-Current Assets Trade and other receivables Investments accounted for using the equity method Other financial assets Property, plant and equipment Property, plant and equipment: Right-of-use assets Investment properties: Freehold Investment properties (Leasehold) : Right-of-use assets Intangible assets Deferred tax assets Total non-current assets Total Assets Current Liabilities Trade and other payables Interest-bearing loans and borrowings Lease Liabilities Income tax payable Other liabilities Provisions Total current liabilities Non-Current Liabilities Interest-bearing loans and borrowings Lease Liabilities Provisions Deferred 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 26(a) 7 8 9 10 11 28 7 27 8 12 13 14 15 11 16 17 19 20 21 17 19 21 20 22 25 23 24 CONSOLIDATED June 2020 $000 313,195 511,579 30,237 391,984 34,872 278 16,186 June 2019 $000 215,048 741,862 28,888 395,965 37,541 370 36,666 1,298,331 1,456,340 49,269 4,692 18,176 662,889 513,782 2,593,330 621,903 63,003 3,227 49,391 3,854 19,370 696,207 - 2,508,951 - 64,631 - 4,530,271 3,342,404 5,828,602 4,798,744 351,772 102,841 130,280 70,229 96,141 34,181 785,444 195,000 1,042,807 9,226 317,937 863 1,565,833 283,682 494,579 - 12,000 75,819 33,028 899,108 346,942 - 13,025 330,546 11,330 701,843 2,351,277 1,600,951 3,477,325 3,197,793 717,925 216,837 2,511,580 3,446,342 30,983 3,477,325 552,250 217,724 2,397,436 3,167,410 30,383 3,197,793 The above Statement of Financial Position should be read in conjunction with the accompanying notes. The financial position as at 30 June 2019 was not restated upon the adoption of AASB 16 Leases. Refer to Note 1(f) for further information. 82 NOTES TO THE FINANCIAL STATEMENTS | JUNE 2020 INCOME STATEMENT for the year ended 30 June 2020 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) Note 3 3 3 4, 13, 15 4 4, 19 27 5 CONSOLIDATED June 2020 $000 2,294,913 (1,555,271) 739,642 1,055,866 194,995 (45,089) (380,099) (239,041) (554,753) (58,067) (59,794) 7,628 661,288 (175,265) 486,023 480,541 5,482 486,023 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 6 6 23 39.19 cents 39.15 cents 33.94 cents 33.91 cents 24.0 cents 33.0 cents The above Income Statement should be read in conjunction with the accompanying notes. The Income Statement for the year ended 30 June 2019 was not restated upon the adoption of AASB 16 Leases. Refer to Note 1(f) for further information. HARVEY NORMAN HOLDINGS LIMITED | ANNUAL REPORT JUNE 2020 83 STATEMENT OF COMPREHENSIVE INCOME for the year ended 30 June 2020 Profit for the year 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: Net fair value losses on equity investments Fair value revaluation of land and buildings Income tax effect on fair value revaluation of land and buildings Other comprehensive income for the year (net of tax) CONSOLIDATED June 2020 $000 June 2019 $000 486,023 409,002 (9,236) (47) 14 (1,030) 28,384 (4,655) 13,430 26,373 9 (3) (953) 12,234 (3,910) 33,750 Total comprehensive income for the year (net of tax) 499,453 442,752 Total comprehensive income attributable to: Owners of the parent Non-controlling interests 494,391 5,062 499,453 434,888 7,864 442,752 The above Statement of Comprehensive Income should be read in conjunction with the accompanying notes. The Statement of Comprehensive Income for the year ended 30 June 2019 was not restated upon the adoption of AASB 16 Leases. Refer to Note 1(f) for further information. 84 STATEMENT OF CHANGES IN EQUITY for the year ended 30 June 2020 Attributable to Equity Holders of the Parent d e t u b i r t n o C y t i u q E d e n i a t e R s t i f o r P t e s s A n o i t a u l a v e R e v r e s e R i n g e r o F y c n e r r u C e v r e s e R I C O V F e v r e s e R $000 $000 $000 $000 $000 e v r e s e R w o l F h s a C e g d e H $000 s t i f e n e B y t i e v r e s e R e e y o p m E l u q E $000 n o i t i s i u q c A e v r e s e R - n o N g n i l l o r t n o c s t s e r e t n I L A T O T I Y T U Q E $000 $000 $000 552,250 2,397,436 152,850 65,853 10,949 (2) 10,125 (22,051) 30,383 3,197,793 - (43,892) (18,067) - - - - - 80 (61,879) 552,250 2,353,544 134,783 65,853 10,949 (2) 10,125 (22,051) 30,463 3,135,914 - - - - - - - - - - - - - - - - 23,825 - - - - - - (8,912) - - - - - - 2 - (35) - (1,030) - 23,825 (8,912) (1,030) (33) 480,541 - - - - 480,541 23,825 (8,912) (1,030) (33) - - - - - - - - - - - - (322,505) - - - - - - - - - - - - - - - - - - - - - - - - - 739 (859) - - - - - - - - - - - - - - - 3,450 (96) 23,729 - 2 (324) (9,236) - - (35) (1,030) (420) 13,430 5,482 486,023 5,062 499,453 - - - - 739 (859) 165,675 3,450 - - (3,345) (325,850) (1,197) (1,197) At 1 July 2019, as previously reported Transition adjustments arising from adoption of AASB 16 At 1 July 2019, post transition 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 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 Utilisation of employee equity benefits reserve Shares issued 165,675 Disposal of investment Dividends paid Distribution to members - - - At 30 June 2020 717,925 2,511,580 158,608 56,941 9,919 (35) 10,005 (18,601) 30,983 3,477,325 HARVEY NORMAN HOLDINGS LIMITED | ANNUAL REPORT JUNE 2020 85 STATEMENT OF CHANGES IN EQUITY for the year ended 30 June 2020 (continued) Attributable to Equity Holders of the Parent d e t u b i r t n o C y t i u q E d e n i a t e R s t i f o r P t e s s A n o i t a u l a v e R e v r e s e R i n g e r o F y c n e r r u C e v r e s e R r o f l e b a l i a v A e v r e s e R e l a S $000 $000 $000 $000 $000 e v r e s e R I ) a ( C O V F $000 e v r e s e R w o l F h s a C e g d e H $000 s t i f e n e B y t i e v r e s e R e e y o p m E l u q E $000 n o i t i s i u q c A e v r e s e R - n o N g n i l l o r t n o c s t s e r e t n I L A T O T I Y T U Q E $000 $000 $000 At 1 July 2018 388,381 2,337,241 144,526 40,659 11,902 - (8) 10,356 (22,051) 26,926 2,937,932 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 Utilisation of employee equity benefits reserve - - - - - - - - - - - Shares issued 163,869 - - - - - - - - - - Dividends paid Distribution to members - - (342,122) - 8,324 - - - - 25,194 - - - - - - - - - - 8 - (2) - - - - (11,902) 11,902 - - - (953) 8,324 25,194 (11,902) 10,949 402,317 - - - - 402,317 8,324 25,194 (11,902) 10,949 - - - - - - - - - - - - - - - - - - - - - - - - - - - - - 519 (750) - - - - - - - - - - - - - - - - - - - 8,324 8 1,179 26,373 - - - (2) - (953) 1,179 33,750 6,685 409,002 7,864 442,752 - - - 519 (750) 163,869 (2,852) (344,974) (1,555) (1,555) - 6 - 6 - - - - - 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 Statement of Changes in Equity for the year ended 30 June 2019 was not restated upon the adoption of AASB 16 Leases. Refer to Note 1(f) for further information. (a) Upon the application of AASB 9 Financial Instruments on 1 July 2018, 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). 86 STATEMENT OF CASH FLOWS for the year ended 30 June 2020 CONSOLIDATED 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 Interest paid on lease liabilities (a) Income taxes paid Dividends received Note June 2020 $000 1,304,230 2,461,539 (2,471,564) 8,385 (65,501) 8,142 (20,489) (40,538) (128,967) 1,727 Net Cash Flows From Operating Activities 26(b) 1,056,964 Cash Flows from Investing Activities Payments for purchases of property, plant and equipment and intangible assets Payments for purchase of freehold 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 Payments for purchase of equity 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 (93,905) (51,474) 26,510 (215) (2,215) (5,000) - 2,628 - - (13,292) June 2019 $000 858,372 2,397,871 (2,681,840) 10,027 (56,815) 6,625 (29,223) - (135,139) 2,967 372,845 (94,222) (27,878) 2,911 (1,320) (434) - 18,470 903 50 40,500 (5,183) Net Cash Flows Used In Investing Activities (136,963) (66,203) Cash Flows from Financing Activities Lease Payments (principal component) (a) Proceeds from shares issued – renounceable pro-rata Entitlement Offer Repayments of 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 (124,770) 165,675 (520,000) (322,505) (8) (9,763) (811,371) 108,630 185,816 - 163,869 (25,000) (342,122) (39,559) (3,477) (246,289) 60,353 125,463 Cash and Cash Equivalents at End of the Year (a) In the previous financial year, lease payments formed part of payments to suppliers and employees within operating cash flows. Under AASB 16 Leases, lease payments are allocated between interest and principal components and classified within operating and financing cash flows respectively. 294,446 185,816 26(a) In addition, the consolidated entity recognised rent expense of $28.62 million from short-term leases and variable lease payments during the current year which forms part of payments to suppliers and employees within operating cash flows. The above Statement of Cash Flows should be read in conjunction with the accompanying notes. The Statement of Cash Flows for the year ended 30 June 2019 was not restated upon the adoption of AASB 16 Leases. Refer to Note 1(f) for further information. HARVEY NORMAN HOLDINGS LIMITED | ANNUAL REPORT JUNE 2020 87 NOTES TO THE FINANCIAL STATEMENTS | JUNE 2020 1. STATEMENT OF SIGNIFICANT ACCOUNTING POLICIES (a) Corporate Information Harvey Norman Holdings Limited (the “Company”) is a for profit company limited by shares incorporated in Australia and operating in Australia, New Zealand, Ireland, Northern Ireland, Singapore, Malaysia, Slovenia and Croatia whose shares are publicly traded on the Australian Securities Exchange (“ASX”) trading under the ASX code HVN. (b) Basis of Preparation The financial report has been prepared on a historical cost basis, except for freehold investment properties, leasehold investment properties: right-of-use assets, land and buildings, derivative financial instruments and equity investments, which have been measured at fair value. Certain comparative amounts have been re-presented to align with the presentation in the current year. 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 2020 was authorised for issue in accordance with a resolution of the directors on 30 September 2020. (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 2020. For details on the impact of future accounting standards, refer to page 93. (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 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 2019. The consolidated entity has early adopted AASB 2020-4 Amendments to Australian Accounting Standards – COVID-19 Related Rent Concessions which is effective from 1 June 2020. Details of the early adopted standard and new mandatory standards, where material, are disclosed in Note 1(f) Summary of new Standards Adopted by the Consolidated Entity on pages 90 to 93 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. 88 NOTES TO THE FINANCIAL STATEMENTS | JUNE 2020 Statement of Significant Accounting Policies (continued) (ii) Significant accounting judgements and estimates 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 judgements, 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 judgements, estimates and assumptions. Significant judgements and estimates made by management in the preparation of these financial statements are outlined below:  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 judgement 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 assess the requirements of control in accordance with AASB 10 Consolidated Financial Statements. During the 2020 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 or 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.  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. The recoverable amount of an asset or cash generating unit (CGU) is the higher of that asset or CGU’s 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. 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.      Recovery of deferred tax assets – refer to Note 5. Income Tax Expected credit loss assessment for financial assets – refer to Note 7. Trade and Other Receivables Valuation of freehold owner-occupied properties – refer to note 12. Property, Plant and Equipment Valuation of freehold investment properties – refer to Note 14. Investment Properties (Freehold) Valuation of investment properties (leasehold): right-of-use assets – refer to Note 15. Investment Properties (Leasehold): Right-of-Use Assets Determining the incremental borrowing rate and lease term – refer to Note 19. Lease Liabilities Provision for lease make good – refer to Note 21. Provisions    Measurement of the cost of equity–settled transactions – refer to Note 25. Reserves HARVEY NORMAN HOLDINGS LIMITED | ANNUAL REPORT JUNE 2020 89 NOTES TO THE FINANCIAL STATEMENTS | JUNE 2020 Statement of Significant Accounting Policies (continued) (iii) Taxes Refer to Note 5. Income Tax for accounting policy on current income tax and deferred tax. 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. (iv) Foreign currency translation Both the functional and presentation currency of Harvey Norman Holdings Limited and its 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 the income statement. 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. (f) Summary of New Standards Adopted by the Consolidated Entity (i) AASB 16 Leases – application date 1 July 2019 The consolidated entity adopted AASB 16 Leases using the modified retrospective transition approach with the date of initial application of 1 July 2019. Under this method, the standard is applied retrospectively with the cumulative effect of initially applying the standard recognised at the date of initial application. Accordingly, the comparative information presented in this report for previous reporting periods was not restated to reflect the adoption of AASB 16 Leases. 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 twelve (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 over the lease term, and a lease liability, representing the present value of future lease payments. AASB 16 Leases - Transition method: 1 July 2019 Leases of Owner-Occupied Properties and Plant and Equipment Leases Leasehold properties occupied by the consolidated entity primarily include company-operated stores, warehouses and offices that are leased from external landlords. These leasehold properties are primarily located overseas and are occupied by the company- operated stores located in New Zealand, Singapore, Malaysia, Ireland, Northern Ireland, Slovenia and Croatia. On transition, the right-of-use asset was 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 and translated at the rates of exchange at the date of transition (1 July 2019). The right-of-use assets in respect of leases of owner-occupied properties are referred to as Property, plant and equipment: Right-of-use assets in this report. On transition, the lease liability was measured at the net present value of future payables under the lease, including option renewal periods, where the consolidated entity assessed that the probability of exercising the renewal was reasonably certain. The consolidated entity adopted the “modified retrospective” approach as permitted by AASB 16 at the date of transition. Under this approach the cumulative effect of adopting AASB 16 was recognised as an adjustment to the opening balance of retained earnings at 1 July 2019, with no requirement to restate any comparative information. The effect of adopting AASB 16 as at 1 July 2019 for leases of owner-occupied properties and plant and equipment are as follows: Assets Property, plant and equipment: Right-of-use assets Property, plant and equipment (a) 1 July 2019 $000 Increase/(Decrease) 524,497 (74,778) Impact on Total Assets (a) The reclassifications relate to a property which had been previously accounted for under a finance lease arrangement and lease 449,719 make good assets. 90 NOTES TO THE FINANCIAL STATEMENTS | JUNE 2020 (f) Summary of New Standards Adopted by the Consolidated Entity (continued) (i) AASB 16 Leases – application date 1 July 2019 (continued) Liabilities Lease liabilities: Leases of owner-occupied properties and P&E leases Trade and other payables (c) Interest-bearing loans and borrowings (b) Other liabilities (c) Provisions (c) Deferred tax liabilities Impact on Total Liabilities 1 July 2019 $000 Increase/(Decrease) 538,146 (727) (3,564) (11,950) (1,020) (14,231) 506,654 Impact on Net Assets (b) The reclassification of pre-existing balances relates to finance leases previously recognised within interest-bearing loans and (56,935) borrowings. (c) The consolidated entity adopted the modified retrospective approach as permitted by AASB 16 on the date of transition. Under this approach, existing lease payables and provisions were recognised as an adjustment to the opening balance of retained earnings at 1 July 2019. Equity Retained profits Reserves Non-controlling interests Impact on Total Equity 1 July 2019 $000 Increase/(Decrease) (38,948) (18,067) 80 (56,935) Leases of Properties Sub-Leased to External Parties In addition, the consolidated entity has a portfolio of property leases for competitive retail sites primarily for the purposes of being sub-leased to Harvey Norman®, Domayne® and Joyce Mayne® franchisees in Australia. 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. On transition, the adoption of AASB 16 resulted in the recognition of a right-of-use asset which meets the definition of an investment property. The consolidated entity adopted the fair value model in AASB 140 Investment Property and accordingly, the right-of-use asset was measured in accordance with the fair value model in AASB 140. The right-of-use assets in respect of leases of properties sub-leased to external parties are referred to as Investment properties (Leasehold): Right-of-use assets in this report. On transition, the lease liability was 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 was reasonably certain. The effect of adopting AASB 16 as at 1 July 2019 for leases of investment properties sub-leased to external tenants are as follows: Assets Investment properties (Leasehold): Right-of-use assets Property, plant and equipment Impact on Total Assets Liabilities Lease liabilities: Leases of properties sub-leased to external parties Other liabilities (a) Provisions (a) Deferred tax liabilities Impact on Total Liabilities Impact on Net Assets 1 July 2019 $000 Increase/(Decrease) 608,845 (380) 608,465 622,863 (3,417) (3,919) (2,118) 613,409 (4,944) HARVEY NORMAN HOLDINGS LIMITED | ANNUAL REPORT JUNE 2020 91 NOTES TO THE FINANCIAL STATEMENTS | JUNE 2020 (f) Summary of New Standards Adopted by the Consolidated Entity (continued) (i) AASB 16 Leases – application date 1 July 2019 (continued) (a) Leases of properties sub-leased to external parties meets the definition of an investment property, and accordingly, the right-of- use asset was measured in accordance with the fair value model under AASB 140. Under this approach, existing lease payables and provisions were recognised as an adjustment to the opening balance of retained earnings at 1 July 2019. Equity Retained profits Impact on Total Equity 1 July 2019 $000 Increase/(Decrease) (4,944) (4,944) Practical Expedients Applied on Transition The following practical expedients have been applied on transition:    exclusion of leases with remaining terms of less than 12 months from 1 July 2019; exclusion of leases that are considered of low value; the application of a single discount rate to a portfolio of leases with reasonably similar characteristics (such as leases with a similar remaining lease term); and use of hindsight in determining the lease term where lease contracts include options to extend or terminate the lease.  AASB 16: Reconciliation of operating lease commitments to lease liabilities as at transition date The following table reconciles the consolidated entity’s operating lease commitments at 30 June 2019 disclosed in the 2019 Annual Report of the consolidated entity to the lease liabilities recognised upon transition at 1 July 2019. Operating lease commitments as at 30 June 2019 Commitments relating to leases contracted but not commenced Commitments relating to outgoings and service costs Commitments relating to short-term leases and other lease payments Commitments relating to leases previous classified as finance leases Optional extension periods not recognised as at 30 June 2019 Impact of discounting and other adjustments (weighted average rate of 3.39%) Lease liabilities as at 1 July 2019 AASB 16 Leases – Impact on Income Statement for 2020 Financial Year: $000 693,555 (19,986) (29,825) (4,102) 3,564 736,648 (218,845) 1,161,009 Expenses Recognised Under AASB 16 Leases: Property, plant and equipment: Right-of-use asset - Depreciation expense Investment properties (leasehold): Right-of-use asset - Fair value re-measurement Finance costs: Interest on lease liabilities (accretion) Total Expenses Under AASB 16 Leases Less: Lease payments made during FY20 (Note 19) excluding variable lease payments (short-term, low-value leases) Less: Other reclassifications under AASB 16 Leases Less: Foreign currency adjustments Incremental Decrease in Profit Before Tax on Adoption of AASB 16 Leases Leases of Owner- Occupied Properties $000 30 June 2020 Leases of Properties Sub-Leased to External Parties $000 61,769 - 18,314 80,083 (75,916) (1,829) (104) 2,234 - 74,206 22,224 96,430 (89,392) - - 7,038 Total Leases $000 61,769 74,206 40,538 176,513 (165,308) (1,829) (104) 9,272 92 NOTES TO THE FINANCIAL STATEMENTS | JUNE 2020 (f) Summary of New Standards Adopted by the Consolidated Entity (continued) (ii) AASB 2020-4 Amendments to Australian Accounting Standards – COVID-19 Related Rent Concessions (effective 1 June 2020) The standard allows the lessee to account for any COVID-19 related rent concessions received as a variable lease payment with the effect of the rent concession recognised directly in the income statement, rather than a lease modification, which generally requires a lessee to remeasure the lease liability by discounting the revised lease payments using a new discount rate under AASB 16 Leases. Accounting for any COVID-19 related rent concessions directly in the income statement is permissible provided the following conditions are met: 1) The change in lease payments results in revised consideration for the lease that is substantially the same as, or less than, the consideration for the lease immediately preceding the change; 2) Any reduction in lease payments affects only payments originally due on or before 30 June 2021; and 3) There is no substantive change to other terms and conditions of the lease. The consolidated entity has early adopted this standard for the year ended 30 June 2020 and has applied the exemption available in the standard. (g) Future Accounting Standards The table below lists the Australian Accounting Standards which have recently been issued or amended but not yet effective and have not been adopted by the consolidated entity for the year ended 30 June 2020. The consolidated entity does not expect material impact on the application of the below standards. Reference AASB 2018-6 AASB 2018-7 AASB 2019-1 AASB 2019-5 New standard Amendments to the definition of a business Amendments to the definition of material Conceptual framework for financial reporting Amendments to the disclosure of the effect of new IFRS standards not yet issued in Australia AASB 2020-1 AASB 2020-3 AASB 2014-10 Amendments to the classification of liabilities as current or non-current Annual improvements 2018-2020 and other amendments Amendments to sale or contribution of assets between an investor and its Effective Date Application Date 1 January 2020 1 July 2020 1 January 2020 1 July 2020 1 January 2020 1 July 2020 1 January 2020 1 July 2020 1 January 2022 1 July 2022 1 January 2022 1 July 2022 associate or joint venture 1 January 2022 1 July 2022 HARVEY NORMAN HOLDINGS LIMITED | ANNUAL REPORT JUNE 2020 93 NOTES TO THE FINANCIAL STATEMENTS | JUNE 2020 2. OPERATING SEGMENTS Operating Segment Revenue: 30 June 2020 Sales of Products to Customers June 2020 $000 Revenues received from franchisees and other income items Total Revenue by Segment FRANCHISING OPERATIONS - 949,037 949,037 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 960,185 525,746 154,362 440,513 224,780 23,086 11,685 2,399 8,491 4,318 983,271 537,431 156,761 449,004 229,098 2,305,586 49,979 2,355,565 25 25 - 300,507 300,507 300,532 300,532 1,450 1,450 2,229 14,996 17,225 INTER-COMPANY ELIMINATIONS (12,927) (65,108) (78,035) TOTAL SEGMENT REVENUE 2,294,913 1,250,861 3,545,774 Operating Segment Revenue: 30 June 2019 June 2019 $000 Sales of Products to Customers 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) 332,126 332,126 332,159 332,159 18,666 18,666 11,269 14,140 (65,189) (65,513) TOTAL SEGMENT REVENUE 2,234,118 1,186,067 3,420,185 94 NOTES TO THE FINANCIAL STATEMENTS | JUNE 2020 2. OPERATING SEGMENTS (CONTINUED) Operating Segment Result: 30 June 2020 June 2020 $000 Interest Expense Depreciation Expense Depreciation & Fair Value Re- measurement of ROU Asset Impairment & Amortisation Expense Segment Result Before Tax Segment Result Before Interest, Taxation, Depreciation, Impairment & Amortisation FRANCHISING OPERATIONS 495,847 (23,698) (25,197) (78,060) (20,300) 348,592 Retail – New Zealand Retail – Singapore & Malaysia Retail – Slovenia & Croatia Retail – Ireland & Northern Ireland 120,196 73,550 13,908 43,263 (4,282) (6,068) (908) (7,520) (7,059) (6,843) (2,701) (5,186) Other Non-Franchised Retail (2,640) (1,859) (2,525) TOTAL RETAIL 248,277 (20,637) (24,314) Retail Property TOTAL PROPERTY 199,022 (14,099) 199,022 (14,099) (11,430) (11,430) EQUITY INVESTMENTS (2,001) (152) - OTHER 4,874 (1,378) (5,075) (170) 170 - (9,354) (31,818) (1,723) (13,512) (1,508) (57,915) - - - - - (345) (1,206) (143) (172) 99,156 27,615 8,433 16,873 (305) (8,837) (2,171) 143,240 (305) (305) 173,188 173,188 - - - (2,153) (1,579) - INTER-COMPANY ELIMINATIONS TOTAL SEGMENT RESULT BEFORE TAX Operating Segment Result: 30 June 2019 Retail – New Zealand Retail – Singapore & Malaysia Retail – Slovenia & Croatia Retail – Ireland & Northern Ireland Other Non-Franchised Retail TOTAL RETAIL Retail Property TOTAL PROPERTY 945,849 (59,794) (66,016) (135,975) (22,776) 661,288 June 2019 $000 Interest Expense Depreciation Expense Impairment & Amortisation Expense Segment Result Before Tax Segment Result Before Interest, Taxation, Depreciation, Impairment & Amortisation FRANCHISING OPERATIONS 295,771 (3,221) (25,648) (18,502) 248,400 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 (19,463) 235,083 (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 HARVEY NORMAN HOLDINGS LIMITED | ANNUAL REPORT JUNE 2020 95 NOTES TO THE FINANCIAL STATEMENTS | JUNE 2020 2. OPERATING SEGMENTS (CONTINUED) Operating Segment Assets and Liabilities: 30 June 2020 Segment Assets Inter- company Eliminations Segment Assets After Eliminations Segment Liabilities Inter- company Eliminations Segment Liabilities After Eliminations Segment Assets Segment Liabilities June 2020 $000 FRANCHISING OPERATIONS 3,495,462 (2,222,820) 1,272,642 916,694 (139,436) 777,258 Retail – New Zealand Retail – Singapore & Malaysia Retail – Slovenia & Croatia Retail – Ireland & Northern Ireland Other Non-Franchised Retail TOTAL RETAIL Retail Property 434,573 446,675 74,388 243,916 211,721 - 434,573 269,969 (1,671) (3,260) (262) 445,004 298,827 71,128 63,719 243,654 266,188 (4,188) (40,670) (368) (615) (43,627) 168,094 237,933 (144,973) 1,411,273 (48,820) 1,362,453 1,136,636 (190,814) 265,781 258,157 63,351 265,573 92,960 945,822 3,061,520 (63,486) 2,998,034 2,040,088 (1,848,851) 191,237 Property Developments for Resale 16,186 - 16,186 - - - TOTAL PROPERTY 3,077,706 (63,486) 3,014,220 2,040,088 (1,848,851) 191,237 EQUITY INVESTMENTS 45,688 - 45,688 1,737 - 1,737 OTHER 188,513 (58,141) 130,372 261,223 (214,166) 47,057 TOTAL SEGMENT ASSETS / LIABILITIES BEFORE TAX 8,218,642 (2,393,267) 5,825,375* 4,356,378 (2,393,267) 1,963,111* Operating Segment Assets and Liabilities: 30 June 2019 Segment Assets Inter- company Eliminations Segment Assets After Eliminations Segment Liabilities Inter- company Eliminations Segment Liabilities After Eliminations Segment Assets Segment Liabilities June 2019 $000 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 267,981 199,964 56,675 86,553 175,065 786,238 - 267,981 103,973 (1,772) (3,115) (119) (46,765) (51,771) 198,192 119,811 53,560 86,434 46,526 129,126 128,300 220,853 734,467 620,289 (4,031) (40,141) (753) (416) (141,443) (186,784) 99,942 79,670 45,773 128,710 79,410 433,505 2,976,650 (25,319) 2,951,331 2,331,761 (1,820,345) 511,416 Property Developments for Resale 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* * Segment liabilities are exclusive of income tax payable and deferred tax assets and deferred tax liabilities 96 NOTES TO THE FINANCIAL STATEMENTS | JUNE 2020 2. OPERATING SEGMENTS (CONTINUED) The consolidated entity operates predominantly in ten (10) 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 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® franchisees. Retail Property Consists of freehold 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. Property Developments for Resale Consists of freehold 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 and other unallocated income and expense items. An operating segment is a component of an entity that engages in business activities from which it may earn revenues and incur expenses (including revenues and expenses relating to transactions with other components of the same entity), whose operating results are regularly reviewed by the entity's chief operating decision makers to make decisions about resources to be allocated to the segment and assess its performance and for which discrete financial information is available. This includes start-up operations which are yet to earn revenues. Management will also consider other factors in determining operating segments such as the existence of a line manager and the level of segment information presented to the Board of Directors. Operating segments have been identified based on the information provided to the chief operating decision makers – being the executive management team. The consolidated entity aggregates two or more operating segments when they have similar economic characteristics, and the segments are similar in each of the following respects:     methods used to distribute the products or provide the services; and, if applicable  nature of the products and services; nature of the production processes; type or class of customer for the products and services; nature of the regulatory environment. Operating segments that meet the quantitative criteria as prescribed by AASB 8 Operating Segments are reported separately. However, an operating segment that does not meet the quantitative criteria is still reported separately where information about the segment would be useful to users of the financial statements. Information about other business activities and operating segments that are below the quantitative criteria are combined and disclosed in a separate category as “other segments”. HARVEY NORMAN HOLDINGS LIMITED | ANNUAL REPORT JUNE 2020 97 NOTES TO THE FINANCIAL STATEMENTS | JUNE 2020 3. REVENUES Revenue from contracts with customers and franchisees: Sale of products to customers (a) 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 CONSOLIDATED June 2020 $000 June 2019 $000 2,294,913 2,234,118 27,676 780,237 3,102,826 27,536 668,926 2,930,580 Refer to Table 1 on page 99 for a breakdown of revenues and the relationship to the reported operating segments of the consolidated entity - by Types of Contracts. Refer to Table 2 on page 100 for a breakdown of revenues 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 freehold investment properties Property revaluation increment for overseas controlled entity Net revaluation increment of equity investments to fair value 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 247,291 28,338 275,629 98,610 6,388 1,450 106,448 34,268 688 - 25,915 60,871 243,940 30,782 274,722 95,982 5,262 2,711 103,955 69,289 1,012 15,955 24,672 110,928 2,294,913 1,055,866 194,995 2,234,118 943,648 242,419 Revenue from Franchisees The application of AASB 15 Revenue from Contracts with Customers 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. 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. 98 NOTES TO THE FINANCIAL STATEMENTS | JUNE 2020 3. REVENUES (CONTINUED) Table 1. Breakdown of Revenues and the relationship to the reported operating segments of the consolidated entity – by Types of Contracts: Operating Segments 30 June 2020 TYPES OF CONTRACTS 30 June 2020 $000 Sale of Products to Customers Services to Customers Franchise Fees from Franchisees Total Revenue from Contracts with Customers and Franchisees FRANCHISING OPERATIONS - - 780,237 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 960,185 525,746 154,362 440,513 224,780 2,305,586 25 25 - 2,229 (12,927) 13,933 4,818 1,759 6,604 562 27,676 - - - - - - - - - - - - - - - - 780,237 974,118 530,564 156,121 447,117 225,342 2,333,262 25 25 - 2,229 (12,927) TOTAL SEGMENT REVENUE 2,294,913 27,676 780,237 3,102,826 Operating Segments 30 June 2019 TYPES OF CONTRACTS 30 June 2019 $000 Sale of Products to Customers Services to Customers Franchise Fees from Franchisees Total Revenue from Contracts with Customers and Franchisees FRANCHISING OPERATIONS - - 668,926 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 2,231,538 33 33 - 2,871 (324) 13,952 5,206 1,728 5,531 1,119 27,536 - - - - - - - - - - - - - - - - 668,926 949,048 560,673 150,650 375,685 223,018 2,259,074 33 33 - 2,871 (324) TOTAL SEGMENT REVENUE 2,234,118 27,536 668,926 2,930,580 HARVEY NORMAN HOLDINGS LIMITED | ANNUAL REPORT JUNE 2020 99 NOTES TO THE FINANCIAL STATEMENTS | JUNE 2020 3. REVENUES (CONTINUED) Table 2. Breakdown of Revenues and the relationship to the reported operating segments of the consolidated entity – by Primary Geographical Markets: Operating Segments 30 June 2020 PRIMARY GEOGRAPHICAL MARKETS 30 June 2020 $000 Australia New Zealand Asia Europe Total Revenue from Contracts with Customers and Franchisees FRANCHISING OPERATIONS 780,237 - 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 - - - - 213,779 213,779 25 25 - 2,229 - - 530,564 - - - - - - 156,121 447,117 - 780,237 974,118 530,564 156,121 447,117 225,342 974,118 - - - 11,563 985,681 530,564 603,238 2,333,262 - - - - - - - - - - - - - 25 25 - 2,229 (12,927) INTER-COMPANY ELIMINATIONS (1,891) (10,424) (612) TOTAL SEGMENT REVENUE 994,379 975,257 529,952 603,238 3,102,826 Operating Segments 30 June 2019 Australia PRIMARY GEOGRAPHICAL MARKETS 30 June 2019 $000 Asia Europe New Zealand Total Revenue from Contracts with Customers and Franchisees FRANCHISING OPERATIONS 668,926 - 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 - - - - 214,359 214,359 33 33 - 2,871 (324) - - 560,673 - - - - - - 150,650 375,685 - 668,926 949,048 560,673 150,650 375,685 223,018 949,048 - - - 8,659 957,707 560,673 526,335 2,259,074 - - - - - - - - - - - - - - - 33 33 - 2,871 (324) TOTAL SEGMENT REVENUE 885,865 957,707 560,673 526,335 2,930,580 100 NOTES TO THE FINANCIAL STATEMENTS | JUNE 2020 CONSOLIDATED June 2020 $000 June 2019 $000 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 Finance costs: Interest on lease liabilities (accretion) Bank interest paid to financial institutions Other Total finance costs Occupancy expenses: Variable lease payments (including short-term and low-value leases) * Property, plant and equipment: Right-of-use assets - Depreciation expense Investment properties (leasehold): Right-of-use assets - Fair value re-measurement Other occupancy expenses Total occupancy expenses * these amounts are net of any COVID-19 support and assistance received for FY20 Depreciation, amortisation and impairment: (included in administrative expenses in the Income Statement) Depreciation of: (excluding AASB 16 depreciation in occupancy expenses above) - Buildings - Plant and equipment Amortisation of: - Computer software - Net licence property and other intangible assets Impairment of non-trade debts receivable Impairment of non-current assets Impairment of other financial assets Total depreciation, amortisation and impairment Loss on restructure and consolidation of KEH 5. (a) INCOME TAX Income tax recognised in the Income Statement: Current income tax: Current income tax charge Adjustments in respect of current income tax of previous years Deferred income tax: Relating to the origination and reversal of temporary differences Total income tax expense reported in the Income Statement 297,214 3,236 16,612 12,414 745 10,461 340,682 40,538 17,829 1,427 59,794 25,844 61,769 74,206 77,222 239,041 10,983 55,033 19,814 1,786 - 876 300 88,792 - 180,801 (462) (5,074) 175,265 313,124 3,174 16,278 12,107 717 8,523 353,923 - 26,838 1,944 28,782 184,780 - - 73,326 258,106 11,857 52,506 19,721 1,175 8,394 - - 93,653 9,665 128,456 (135) 37,236 165,557 HARVEY NORMAN HOLDINGS LIMITED | ANNUAL REPORT JUNE 2020 101 NOTES TO THE FINANCIAL STATEMENTS | JUNE 2020 CONSOLIDATED June 2020 $000 June 2019 $000 5. INCOME TAX (CONTINUED) (b) Income tax recognised in the Statement of Changes in Equity: Deferred income tax: Net (loss) / gain on revaluation of cash flow hedges Net gain on revaluation of land and buildings Total income tax expense reported in other comprehensive income (14) 4,559 4,545 3 3,910 3,913 (c) Reconciliation between income tax expense and prima facie income tax: Accounting profit before tax 661,288 574,560 At the Australian statutory income tax rate of 30% (2019: 30%) 198,386 172,368 Adjustments to arrive at total income tax expense recognised for the year: Transactions 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 Reversal of non-allowable building depreciation due to a legislative change in New Zealand in FY20 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 (%) 5,793 (462) (36) 1,194 (894) 294 (7,899) (189) (304) 488 (14,766) (424) (382) (5,534) (23,121) 175,265 26.50% 1,630 (135) 158 171 (66) 7 (2,768) (221) (154) 1,348 - (792) (636) (5,353) (6,811) 165,557 28.81% 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 or a decrease in the inter-company accounts of the subsidiaries with the tax consolidated head entity. 102 NOTES TO THE FINANCIAL STATEMENTS | JUNE 2020 STATEMENT OF FINANCIAL POSITION June 2020 $000 June 2019 $000 INCOME STATEMENT June 2020 $000 June 2019 $000 5 INCOME TAX (CONTINUED) (d) Deferred income tax assets and liabilities: Deferred income tax at 30 June relates to the following: Deferred tax liabilities: Revaluations of freehold investment properties to fair value (193,801) (185,556) 9,876 21,102 Revaluations of owner-occupied land and buildings to fair value (39,699) (40,189) - - Non-allowable building depreciation in respect of properties in New Zealand Reversal of non-allowable building depreciation due to a legislative change in New Zealand in FY20 Reversal of building depreciation expense for freehold investment properties Research and development Other items Total deferred tax liabilities Deferred tax assets: Employee provisions Unused tax losses and tax credits Right-of-use assets and lease liabilities 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 (15,389) (13,831) 1,897 (515) 14,766 - (14,766) - (116,570) (105,152) (15,279) (16,531) (5,020) (4,108) (370,992) (365,367) 11,736 (1,123) 830 12,782 (276) 460 9,862 3,444 17,410 11,365 11,451 401 - - 822 1,527 9,817 260 - 11,665 7,959 442 1,273 1,206 811 1,388 (120) (3,206) (8,013) 300 (2,397) (78) - - (10) - (396) (41) - 7,134 (4,093) (44) (72) 136 1,059 - Total deferred tax assets 56,282 34,821 Total deferred tax (314,710) (330,546) (5,074) 37,236 The consolidated entity has not recognised deferred tax assets relating to tax losses of $176.00 million (2019: $195.32 million) which are available for offset against taxable profits of the companies in which the losses arose. At 30 June 2020, no deferred tax liability has been recognised (2019: nil) in respect of the unremitted earnings of certain subsidiaries, associates or joint ventures. 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 are recognised in equity, and not in the income statement. Deferred income 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 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 items recognised outside the income statement are recognised in correlation to the underlying transaction either in other comprehensive income or directly in equity. HARVEY NORMAN HOLDINGS LIMITED | ANNUAL REPORT JUNE 2020 103 NOTES TO THE FINANCIAL STATEMENTS | JUNE 2020 5. INCOME TAX (CONTINUED) Deferred income tax (continued) 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. The carrying amount of deferred tax assets are 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. Deferred tax assets and liabilities are not recognised if temporary differences arise 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. 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. IFRIC Interpretation 23: Uncertainty over Income Tax Treatment The Interpretation addresses the accounting for income taxes when tax treatments involve uncertainty that affects the application of AASB 112 Income Taxes. It does not apply to taxes or levies outside the scope of AASB 112, nor does it specifically include requirements relating to interest and penalties associated with uncertain tax treatments. The consolidated entity determines whether to consider each uncertain tax treatment separately or together with one or more other uncertain tax treatments and uses the approach that better predicts the resolution of the uncertainty. Since the consolidated entity operates in a complex multinational environment, it has assessed whether the Interpretation had an impact on its consolidated financial statements. Upon adoption of the Interpretation, the consolidated entity considered whether it has any uncertain tax positions, particularly those relating to transfer pricing. The tax filings of the Company and its subsidiaries in different jurisdictions include deductions relating to transfer pricing, and the taxation authorities may challenge those tax treatments. The consolidated entity determined that, based on its tax compliance and transfer pricing documentation, it is probable that its tax treatment (including those of its subsidiaries) will be accepted by the relevant taxation authorities. This Interpretation did not have an impact on the consolidated financial statements of the consolidated entity. Recovery of deferred tax assets Deferred tax assets are recognised for deductible temporary differences as the consolidated entity considers that it is probable that future taxable profit 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 future taxable profit will be available against which the losses can be utilised. Significant 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. 6. EARNINGS PER SHARE Basic earnings per share (cents per share) Diluted earnings per share (cents per share) The following reflects the income and HVN shares data used in the calculations of basic and diluted earnings per share: Profit after tax Less: Profit after tax attributable to non-controlling interests Profit after tax attributable to owners of the parent CONSOLIDATED June 2020 $000 39.19c 39.15c 486,023 (5,482) 480,541 June 2019 $000 33.94c 33.91c 409,002 (6,685) 402,317 104 NOTES TO THE FINANCIAL STATEMENTS | JUNE 2020 6 EARNINGS PER SHARE (continued) 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 NUMBER OF SHARES June 2020 Number June 2019 Number 1,226,271,429 1,159,443,029 1,267,770 1,114,644 1,227,539,199 1,160,557,673 (a) (b) Weighted Average Number of Ordinary Shares The weighted average number of ordinary shares used in calculating basic earnings per share is inclusive of the new shares totalling 66,270,064 ordinary shares in the Company issued on 18 October 2019 pursuant to the pro-rata Entitlement Offer, weighted on a pro-rata basis from issue date to 30 June 2020. Effect of Dilutive Securities 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 January 2020, 160,000 performance rights representing 40% of Tranche 2 of the 2016 LTI Plan had lapsed and will never be exercisable by the participants. On 5 March 2020, 240,000 performance rights under Tranche 2 of the 2016 LTI Plan were exercised, reducing the unissued ordinary shares under Tranche 2 of the 2016 LTI Plan to nil. 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. On 2 December 2019, the consolidated entity issued a total of 549,500 performance rights under Tranche FY20 of the 2016 LTI Plan to the Executive Directors. These performance rights are capable of exercise from 1 January 2023 to 30 June 2025. The performance rights were valued at grant date at $3.47 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 FY20 performance rights amounted to $1,906,765 in aggregate. Performance rights issued under Tranche 3, Tranche FY19 and Tranche FY20 of the 2016 LTI Plan have been included in the calculation of diluted earnings 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. 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.  HARVEY NORMAN HOLDINGS LIMITED | ANNUAL REPORT JUNE 2020 105 NOTES TO THE FINANCIAL STATEMENTS | JUNE 2020 7. TRADE AND OTHER RECEIVABLES CURRENT Receivables from franchisees Trade receivables (a) Consumer finance loans (b) Allowance for expected credit loss (a) (b) Trade receivables, net Amount receivable in respect of finance leases (c) Non-trade debts receivable from (d): - Related entities (including joint ventures and joint venture partners) - Unrelated entities Allowance for expected credit loss (d) Non-trade debts receivable, net CONSOLIDATED June 2020 $000 June 2019 $000 352,359 607,731 109,077 2,258 (3,716) 107,619 3,291 23,059 25,745 (494) 48,310 104,359 3,199 (444) 107,114 3,306 21,334 3,096 (719) 23,711 Total trade and other receivables (current) 511,579 741,862 NON-CURRENT Trade receivables (a) Consumer finance loans (b) Allowance for expected credit loss (a) (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 Allowance for expected credit loss (d) Non-trade debts receivable, net 7,276 476 (4) 7,748 912 49,442 19,835 (28,668) 40,609 546 677 (6) 1,217 820 50,939 25,968 (29,553) 47,354 Total trade and other receivables (non-current) 49,269 49,391 Total trade and other receivables 560,848 791,253 Trade and other receivables Trade and other receivables are classified, at initial recognition, and subsequently measured 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 subject to impairment reviews. Gains or losses are recognised in the income statement when the asset is derecognised, modified or impaired. The financial assets at amortised cost of the consolidated entity includes receivables from franchisees, trade receivables, consumer finance loans, non-trade debts receivable from related entities and unrelated entities and finance lease receivables. 106 NOTES TO THE FINANCIAL STATEMENTS | JUNE 2020 7. TRADE AND OTHER RECEIVABLES (CONTINUED) Impairment of financial assets The consolidated entity recognises an allowance for expected credit losses (ECLs) for financial assets 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. For receivables from franchisees, consumer finance loans and non-trade debts receivable from related entities and unrelated entities, the consolidated entity applies the general approach, as prescribed in AASB 9 Financial Instruments, in calculating ECLs. For trade receivables and finance leases, the consolidated entity applies the simplified approach, as prescribed in AASB 9, in calculating ECLs. 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. 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 $352.36 million as at 30 June 2020 comprises the aggregate of the balances due from each franchisee to Derni, and is net of any 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 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 as at 30 June 2020 totalling $352.36 million. Based on the assessment, receivables from franchisees are current and neither past due nor impaired as at 30 June 2020. (a) Trade receivables and allowance for expected credit loss Trade receivables are non-interest bearing and are generally on 30-day terms. An allowance 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 $3.68 million (2019: $0.26 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:  $91.30 million of the trade receivables balance as at 30 June 2020 (2019: $88.76 million) are neither past due nor impaired. It is expected that these balances will be collected by the consolidated entity on, or prior to, the due date. $21.36 million of the trade receivables balance as at 30 June 2020 (2019: $15.73 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 2020 (2019: nil). $3.70 million of the trade receivables balance as at 30 June 2020 (2019: $0.41 million) are past due and impaired, and have been provided for in full as at balance date.   Ageing Analysis 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 2020 ($000) 91,301 8,593 4,087 8,675 2019 ($000) 88,764 4,193 3,486 8,048 78 99 98 111 3,521 204 Total 116,353 104,905 HARVEY NORMAN HOLDINGS LIMITED | ANNUAL REPORT JUNE 2020 107 NOTES TO THE FINANCIAL STATEMENTS | JUNE 2020 7. TRADE AND OTHER RECEIVABLES (CONTINUED) (a) Trade receivables and allowance for expected credit loss (continued) Reconciled to: Trade receivables (Current) Trade receivables (Non-current) Total trade receivables Movements in the allowance for expected credit loss for trade receivables were as follows: At 1 July Charge for the year Foreign exchange translation Amounts written off At 30 June (b) Consumer finance loans and allowance for expected credit loss CONSOLIDATED June 2020 $000 109,077 7,276 116,353 414 3,684 (10) (391) 3,697 June 2019 $000 104,359 546 104,905 751 262 24 (623) 414 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:  $1.70 million of the consumer finance loans at 30 June 2020 (2019: $3.64 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. $1.01 million of the consumer finance loans balance as at 30 June 2020 (2019: $0.20 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. $0.02 million of the consumer finance loans at 30 June 2020 (2019: $0.04 million) are past due and impaired, and have been provided for in full as at balance date.   Ageing Analysis 2020 ($000) 2019 ($000) 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 1,699 3,642 372 132 432 22 208 44 - - - - 23 36 Total 2,734 3,876 CONSOLIDATED June 2020 $000 2,258 476 2,734 36 - (13) 23 June 2019 $000 3,199 677 3,876 32 17 (13) 36 Reconciled to: Consumer finance loans (current) Consumer finance loans (non-current) Total consumer finance loans Movements in the allowance for expected credit loss for consumer finance loans were as follows: At 1 July Charge for the year Amounts written off At 30 June 108 NOTES TO THE FINANCIAL STATEMENTS | JUNE 2020 7. TRADE AND OTHER RECEIVABLES (CONTINUED) (c) Finance lease receivables and allowance for expected credit loss Finance lease receivables are reconciled 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) Total finance lease receivables CONSOLIDATED June 2020 $000 3,438 1,019 4,457 (147) (107) 4,203 3,291 912 4,203 June 2019 $000 3,418 896 4,314 (112) (76) 4,126 3,306 820 4,126 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 was recognised in the FY20 financial year (2019: nil). The ageing analysis of current and non-current finance lease receivables is as follows:   $1.48 million of the finance lease receivable balance as at 30 June 2020 (2019: $1.40 million) are neither past due nor impaired. $2.72 million of the finance lease receivable balance as at 30 June 2020 (2019: $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. There was no finance lease receivable balance as at 30 June 2020 that was past due and impaired (2019: nil).  (d) Non-trade debts receivable and allowance for expected credit loss 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 2020 was $118.08 million (2019: $101.34 million) as follows:  $69.24 million of the non-trade debts receivable balance as at 30 June 2020 (2019: $51.85 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. $19.68 million of the non-trade debts receivable balance as at 30 June 2020 (2019: $19.22 million) are past due but not impaired. These receivables are subject to regular monitoring and periodic impairment testing to ensure that they are recoverable. $29.16 million of the non-trade debts receivable balance as at 30 June 2020 (2019: $30.27 million) are past due and impaired, and have been provided for in full as at balance date.   At 30 June, the ageing analysis of non-trade debts receivable is as follows: Past due but not impaired Past due and impaired Ageing Analysis Neither past due nor impaired 31-60 Days 61-90 Days 2020 ($000) 2019 ($000) 69,241 51,847 - - - - +90 Days 19,678 19,218 31-60 Days 61-90 Days +90 Days Total - - - - 29,162 118,081 30,272 101,337 HARVEY NORMAN HOLDINGS LIMITED | ANNUAL REPORT JUNE 2020 109 NOTES TO THE FINANCIAL STATEMENTS | JUNE 2020 7. TRADE AND OTHER RECEIVABLES (CONTINUED) (d) Non-trade debts receivable and allowance for expected credit loss (continued) Reconciled to: Non-trade debts receivable (current) Non-trade debts receivable (non-current) Total non-trade debts receivables Movements in the allowance for expected credit loss for non-trade debts receivable were as follows: At 1 July Charge for the year (iii) Reversal during the year (i) (ii) Utilisation of allowance for expected credit loss (iii) At 30 June CONSOLIDATED June 2020 $000 48,804 69,277 118,081 30,272 1,335 (2,000) (445) 29,162 June 2019 $000 24,430 76,907 101,337 63,008 3,786 (4,494) (32,028) 30,272 (i) Non-trade debts receivable from the KEH Partnership retail joint venture: 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. 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 KEH. This resulted in a net reversal of $4.49 million in FY19 in respect of the allowance for expected credit loss previously raised. (ii) Non-trade debts receivable from mining camp joint venture: The consolidated entity has made commercial advances to the mining camp joint ventures totalling $32.85 million (2019: $34.95 million) in aggregate as at 30 June 2020. The recoverable amount of non-trade receivables advanced to the mining camp joint ventures was assessed during the year. An impairment reversal of $2.00 million was recognised in the current year. No impairment loss or reversal was recognised in FY19. The total balance of the allowance for expected credit loss as at 30 June 2020 relating to non-trade receivables from the mining camp joint ventures was $11.23 million (2019: $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 2020 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 debts receivable from the Coomboona joint venture: On 16 January 2019, the Administrator Sale of the Coomboona JV assets 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, of which $3.25 million was recognised as an impairment loss in FY19 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 allowance for expected credit loss for Coomboona of $32.03 million was utilised and reversed in full in FY19. 110 NOTES TO THE FINANCIAL STATEMENTS | JUNE 2020 8. OTHER FINANCIAL ASSETS CURRENT Equity investments at fair value through profit or loss Derivatives receivable Other current financial assets Total other financial assets (current) NON-CURRENT Equity investments at fair value through OCI Units in unit trusts Other non-current financial assets Total other financial assets (non-current) Total other financial assets CONSOLIDATED June 2020 $000 30,237 - - 30,237 15,451 414 2,311 18,176 48,413 June 2019 $000 27,483 5 1,400 28,888 16,861 414 2,095 19,370 48,258 Financial assets at fair value through profit or loss Financial assets at fair value through profit or loss include listed shares held for trading and derivative receivables. 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 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 income statement. 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 not recycled to the income statement. Dividends are recognised as other income in the income statement when the right of payment has been established. Equity instruments designated at fair value through OCI are not subject to an impairment assessment. 9. INVENTORIES (CURRENT) Finished goods at cost Provision for obsolescence Total inventories (current) 402,363 (10,379) 391,984 403,154 (7,189) 395,965 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. 10. OTHER ASSETS (CURRENT) Prepayments Other current assets Total other assets (current) 30,723 4,149 34,872 29,901 7,640 37,541 HARVEY NORMAN HOLDINGS LIMITED | ANNUAL REPORT JUNE 2020 111 NOTES TO THE FINANCIAL STATEMENTS | JUNE 2020 CONSOLIDATED 11. INTANGIBLE ASSETS CURRENT Net licence property (current) NON-CURRENT Net licence property (non-current) Other intangible assets (non-current) Computer software: At cost Accumulated amortisation and impairment Net computer software (non-current) Net intangible assets (non-current) Total net intangible assets Reconciliation of non-current computer software is as follows: Opening balance Additions Disposals Amortisation Net foreign currency differences arising from foreign operations Net computer software (non-current) June 2020 $000 278 2,494 156 214,688 (154,335) 60,353 63,003 63,281 61,910 19,167 (921) (19,814) 11 60,353 June 2019 $000 370 2,469 252 204,327 (142,417) 61,910 64,631 65,001 65,607 16,606 (732) (19,721) 150 61,910 Intangible assets Intangible assets, consisting of capitalised computer software assets, capitalised development expenditure 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 there are any indicators of impairment, 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 are recognised in the income statement in the expense category consistent with the function of the intangible asset. Gain or loss arising from the derecognition of an intangible asset is measured as the difference between the net disposal proceeds and the carrying amount of the intangible asset, and is recognised in the income statement when the intangible asset is derecognised. 112 NOTES TO THE FINANCIAL STATEMENTS | JUNE 2020 12. 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 2020 $000 June 2019 $000 150,235 252,681 402,916 837,764 (577,791) 259,973 - - - 199,078 242,135 441,213 828,962 (577,100) 251,862 7,042 (3,910) 3,132 259,973 254,994 402,916 837,764 1,240,680 (577,791) 662,889 441,213 836,004 1,277,217 (581,010) 696,207 195,490 - - 2,962 (1,128) (7,162) - 8,916 199,078 236,971 7,204 (341) 9,272 (10,647) (9,505) - 9,181 242,135 441,213 Reconciliation of the carrying amounts of property, plant and equipment were as follows: Land at fair value (a): Opening balance Additions Disposals Increase resulting from revaluation Depreciation of leasehold land (b) Reclassification to assets held for sale Reclassification to leasehold properties: right-of-use assets Net foreign currency differences arising from foreign operations Closing balance Buildings at fair value (a): Opening balance Additions Disposals Increase resulting from revaluation Depreciation for the year Reclassification to assets held for sale Reclassification to leasehold properties: right-of-use assets Net foreign currency differences arising from foreign operations Closing balance Net land and buildings at fair value 199,078 3,372 (1,809) 8,925 - - (57,641) (1,690) 150,235 242,135 16,471 (1,542) 20,477 (10,897) - (10,930) (3,033) 252,681 402,916 (a) The net book value of land and buildings (other than land and buildings classified as freehold investment properties) would have been $199.36 million (2019: $225.49 million) if it was measured on a historical cost basis. (b) The depreciation charge related to leasehold land located in Singapore. Upon the first time application of AASB 16 Leases, the leasehold property in Singapore was reclassified as a leasehold property: right-of-use asset. HARVEY NORMAN HOLDINGS LIMITED | ANNUAL REPORT JUNE 2020 113 NOTES TO THE FINANCIAL STATEMENTS | JUNE 2020 12. PROPERTY, PLANT AND EQUIPMENT (CONTINUED) Reconciliation of the carrying amounts of property, plant and equipment (continued): Plant and equipment at cost: CONSOLIDATED June 2020 $000 June 2019 $000 Opening balance Additions Disposals Acquisition of a subsidiary 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 Net foreign currency differences arising from foreign operations Closing balance Net book value plant and equipment Leased plant and equipment at cost: Opening balance Additions Acquisition of a subsidiary Disposals Reclassification to leasehold properties: right-of-use assets Closing balance Leased plant and equipment accumulated depreciation: Opening balance Depreciation for the year Acquisition of a subsidiary Disposals Reclassification to leasehold properties: right-of-use assets Closing balance k Net book value leased plant and equipment Lease make good asset at cost: Opening balance Additions Disposals Net foreign currency differences arising from foreign operations Reclassification to leasehold properties: right-of-use assets Closing balance Lease make good asset accumulated depreciation: Opening balance Depreciation for the year Disposals Net foreign currency differences arising from foreign operations Reclassification to leasehold properties: right-of-use assets Closing balance Net book value lease make good asset Total property, plant and equipment 114 822,143 71,773 (53,758) - (2,394) 837,764 573,729 55,033 (48,705) - (2,266) 577,791 259,973 6,819 - - - (6,819) - 3,371 - - - (3,371) - - 7,042 - (17) 18 (7,043) - 3,910 - (17) 11 (3,904) - - 795,632 76,863 (66,005) 5,656 9,997 822,143 574,843 50,548 (59,945) 1,582 6,701 573,729 248,414 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 3,132 662,889 696,207 NOTES TO THE FINANCIAL STATEMENTS | JUNE 2020 12. PROPERTY, PLANT AND EQUIPMENT (CONTINUED) Freehold owner-occupied properties Following initial recognition at cost, owner-occupied land and buildings are carried at fair value less any subsequent accumulated depreciation and accumulated impairment losses. Depreciation is calculated on a straight-line basis over the estimated useful life of the asset as follows:   Land – not depreciated Buildings – 20 to 40 years 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. Valuations are performed with sufficient regularity to ensure that the carrying amount does not differ materially from the fair value of the asset at the balance date. Plant and equipment assets Plant and equipment assets are recognised at historical cost less accumulated depreciation and any accumulated impairment losses. Depreciation is calculated on a straight-line basis over the estimated useful life of the plant and equipment assets (3 to 20 years). The residual values, useful lives and amortisation methods of plant and equipment assets are reviewed, and adjusted if appropriate, at each financial year end. 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. Valuation of freehold owner-occupied properties The consolidated entity values land and buildings at fair value. 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 Board of Directors make an assessment of the fair value of each freehold owner-occupied property as at balance date. This assessment is informed by:  the information and advice contained in the last independent external valuation report for that property prepared by an external professionally qualified valuer who holds a recognised relevant professional qualification and has specialised expertise in the property being valued (Independent Valuer); the information and advice in the last internal valuation report for that property; the last management review for that property; and other information and professional or expert advice given or prepared by reliable and competent persons in relation to that property.    Independent External Valuations Until 31 December 2019, the entire freehold owner-occupied property portfolio was independently valued at least once every three (3) years. It was determined that for the second half of the 2020 financial year and thereafter, the entire freehold owner- occupied property portfolio will be independently valued by an Independent Valuer at least once every two (2) years. Internal Valuation and Reviews Freehold owner-occupied properties not independently externally valued as at balance date are subject to an internal valuation or a management review, performed by persons qualified by relevant education, training or experience. The key assumptions used to determine the fair value of freehold owner-occupied properties, and the relevant sensitivity analysis, are disclosed in 12(b) and 12(c). Financial Reporting Impacts of COVID-19: Land of $150.24 million and buildings of $252.68 million are measured at fair value at 30 June 2020. Land and buildings measured at fair value are also subject to similar valuation uncertainties as described in Note 14. Investment Properties: Freehold. The COVID-19 pandemic has created a higher degree of uncertainty regarding the assessment of fair value, particularly around the critical assumptions regarding market rents, capitalisation rates, terminal yields and discount rates. As a result, estimated fair values may change significantly and unexpectedly over a relatively short period of time. HARVEY NORMAN HOLDINGS LIMITED | ANNUAL REPORT JUNE 2020 115 NOTES TO THE FINANCIAL STATEMENTS | JUNE 2020 12. PROPERTY, PLANT AND EQUIPMENT (CONTINUED) (a) Reconciliation of owner occupied properties – land and buildings at fair value New Zealand Slovenia Singapore Australia Ireland T Total Retail Warehouse Retail Warehouse Opening balance Additions Disposals Fair value adjustments Depreciation for the year Transfer to property: ROU assets Transfer to assets held for sale Change in class of property Net foreign currency differences $000 $000 261,851 17,794 (24) 21,775 (8,480) - - (4,447) (5,672) - 12 - 1,043 (109) - - 4,447 (95) $000 75,342 - - 6,019 (1,819) - - - 772 Closing balance 282,797 5,298 80,314 (b) Fair value measurement, valuation techniques and inputs $000 3,355 - (3,327) - (61) - - - 33 - Retail $000 68,420 - - - - (68,571) - - 151 - Office $000 8,438 - - (249) (23) - - - (73) Retail $000 7,638 2,037 - 463 (88) - - - - Retail $000 2020 $000 2019 $000 16,169 441,213 432,461 - - 351 (317) - - - 19,843 (3,351) 29,402 (10,897) (68,571) - - 7,204 (341) 12,234 (11,775) - (16,667) - 161 (4,723) 18,097 8,093 10,050 16,364 402,916 441,213 Class of property Fair value hierarchy * Fair value Valuation technique Key unobservable inputs Range of unobservable inputs 30 June 2020 $000 Retail Level 3 389,525 Discounted cash flow Terminal yield Discount rate Income capitalisation Net market rent per sqm p.a. Capitalisation rate Direct sale comparison Price per sqm of lettable area Warehouse Level 3 5,298 Income capitalisation Net market rent per sqm p.a. Office Level 3 8,093 Discounted cash flow Capitalisation rate Terminal yield Discount rate Income capitalisation Net market rent per sqm p.a. Capitalisation rate Direct sale comparison Price per sqm of lettable area Total 402,916 * Refer to Note 35 (e) on page 143 for the definition of level 3 fair value hierarchy 4.38% - 8.50% 5.50% - 8.90% $128 - $362 4.75% - 8.63% $7,621 $100 5.60% 3.50% 4.00% $215 - $250 3.30% $7,671 - $9,529 HARVEY NORMAN HOLDINGS LIMITED | ANNUAL REPORT JUNE 2020 116 NOTES TO THE FINANCIAL STATEMENTS | JUNE 2020 12. 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 and warehouse 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 properties in Slovenia. The income capitalisation method of valuation was used for the valuation of one (1) retail property in Ireland. The income capitalisation method, the direct sale comparison method and the discounted cash flow method were used for the valuation of office 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 using the current market rental value 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) 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 Capitalisation rate Terminal yield Discount rate Increase Decrease Decrease Decrease Price per square metre Increase Decrease Increase Increase Increase Decrease HARVEY NORMAN HOLDINGS LIMITED | ANNUAL REPORT JUNE 2020 117 NOTES TO THE FINANCIAL STATEMENTS | JUNE 2020 12. PROPERTY, PLANT AND EQUIPMENT (CONTINUED) (c) Sensitivity Information (continued) 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. (d) Highest and best use For all freehold owner-occupied properties that are measured at fair value, the current use of the property is considered its highest and best use. 13. PROPERTY, PLANT AND EQUIPMENT: RIGHT-OF-USE ASSETS AASB 16 transition adjustments Reclassification of pre-existing balances (b) As at 1 July 2019, post transition Additions Modifications and re-measurements Disposals and lease surrenders Depreciation for the year Foreign currency As at 30 June 2020 RIGHT-OF-USE ASSETS Leasehold properties $000 (a) Plant and equipment $000 447,575 71,330 518,905 53,588 (55) (533) (59,619) (3,066) 509,220 2,144 3,448 5,592 1,102 - - (2,150) 18 4,562 Total $000 449,719 74,778 524,497 54,690 (55) (533) (61,769) (3,048) 513,782 (a) The leasehold properties relate to leases of owner-occupied properties. (b) The reclassifications relate to lease make good assets and a property which was previously accounted for under a finance lease arrangement. The geographical split of Property, Plant and Equipment: Right-of-Use Assets is as follows: Leases of owner-occupied properties and plant and equipment assets: Australia New Zealand Singapore & Malaysia Slovenia & Croatia Ireland & Northern Ireland Total leases of owner-occupied properties and plant and equipment assets 30 June 2020 $000 35,144 109,244 245,443 11,301 112,650 513,782 Property, Plant and Equipment: Right-of-Use Assets The consolidated entity recognises right-of-use assets in respect of leases of property, plant and equipment at the commencement date of the lease (i.e. the date the underlying asset is available for use). The initial measurement of right-of-use assets includes the amount of lease liabilities recognised, initial direct costs incurred, and lease payments made at or before the commencement date, less any lease incentives received. Right-of-use assets are subsequently measured at cost, less any accumulated depreciation and impairment losses, and adjusted for any re-measurement of lease liabilities. The right-of-use assets are depreciated on a straight-line basis over the shorter of its estimated useful life and the lease term. Right-of-use assets are subject to an impairment assessment under AASB 136 Impairment of Assets at each reporting date. 118 NOTES TO THE FINANCIAL STATEMENTS | JUNE 2020 14. INVESTMENT PROPERTIES: FREEHOLD Opening balance at beginning of the year, at fair value Net additions, disposals and transfers Net increase from fair value adjustments Closing balance at end of the year, at fair value CONSOLIDATED June 2020 $000 2,508,951 50,111 34,268 2,593,330 June 2019 $000 2,429,397 9,253 70,301 2,508,951 Below is a list of the top 20 freehold investment properties ranked in order of fair value as at 30 June 2020: Property Last Independent Valuation Date Independent Valuation at last valuation date ($000) Fair Value 30 June 2020 Cap Rate 30 June 2020 ($000) Penrith Homemaker Centre – Harvey Norman® / Domayne® Springvale Homemaker Centre – Harvey Norman® / Domayne® Maroochydore Homemaker Centre – Harvey Norman® / DM® / JM® Alexandria Complex – Domayne® Silverwater Warehouse Complex Toowoomba Centre Complex – Harvey Norman® The Cambridge Park Centre – Harvey Norman® Perth City West Complex – Harvey Norman® / Domayne® (a) Auburn Complex – Domayne® (b) Albury Homemaker Centre – Harvey Norman® Maribyrnong Complex – Harvey Norman® Auburn Flagship Store Complex – Harvey Norman® Rutherford (Maitland) Complex – Harvey Norman® Browns Plains Homemaker Centre – Harvey Norman® Gepps Cross Home HQ – Harvey Norman® (a) Munno Para Shopping City – Harvey Norman® Bendigo Homemaker Centre Harvey Norman® (NSW) Commercial Showroom & Warehouse Devonport Homemaker Centre – Harvey Norman® Balgowlah Complex – Harvey Norman® TOTAL TOP 20 INVESTMENT PROPERTIES 30 Jun 2019 30 Jun 2020 31 Dec 2018 30 Jun 2020 31 Dec 2018 31 Dec 2019 30 Jun 2018 30 Jun 2020 30 Jun 2020 30 Jun 2019 31 Dec 2019 31 Dec 2018 31 Dec 2017 30 Jun 2019 30 Jun 2019 30 Jun 2018 30 Jun 2018 30 Jun 2020 31 Dec 2018 31 Dec 2019 158,000 169,243 142,000 142,000 81,000 63,000 60,700 61,800 56,700 57,500 55,000 52,000 51,500 48,500 42,000 41,800 40,900 40,000 37,000 36,000 34,000 34,500 81,979 63,000 62,600 62,312 58,012 57,500 55,000 52,210 50,000 49,383 43,502 42,754 41,137 41,094 38,440 36,000 35,056 34,602 1,215,824* (%) 6.75 6.75 7.25 6.25 6.75 7.50 8.00 7.00 n/a 7.75 6.50 6.75 7.75 8.00 7.50 7.25 7.25 5.75 7.50 6.50 The fair value of the top 20 freehold investment properties amounted to $1.22 billion as at 30 June 2020, representing 46.9% of the total fair value of freehold investment properties of $2.59 billion. The fair value of the remaining 117 freehold investment properties as at 30 June 2020 totalled $1.37 billion, representing 53.1% of the portfolio as at balance date. (a) Balances represent the consolidated entity’s 50% ownership interest in the investment property. (b) The direct sale comparison method was adopted in the last independent valuation. * The difference between the fair value of the freehold investment property as at 30 June 2020 and the independent valuation as at the last valuation date mainly relates to capital additions in respect of the freehold investment property between the periods. Valuation of Freehold Investment Properties Each freehold investment property, which is property held to earn rentals and/or for capital appreciation is initially measured at cost, including transaction costs, and subsequently valued at fair value. Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Gains and losses arising from changes in fair value of freehold investment properties are recognised in the income statement in the period in which they arise. Investment property is derecognised when the property has been disposed of. 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. Each freehold investment property is the subject of a lease or licence in favour of independent third parties, including Harvey Norman®, Domayne® and Joyce Mayne® franchisees. HARVEY NORMAN HOLDINGS LIMITED | ANNUAL REPORT JUNE 2020 119 NOTES TO THE FINANCIAL STATEMENTS | JUNE 2020 14. INVESTMENT PROPERTIES: FREEHOLD (CONTINUED) Valuation Approach: The board of directors make an assessment of the fair value of each freehold investment property as at balance date. This assessment is informed by:  the information and advice contained in the last independent external valuation report for that property prepared by an external, professionally qualified valuer who holds a recognised relevant professional qualification and has specialised expertise in the property being valued (Independent Valuer); the information and advice contained in the last internal valuation report for that property (which was informed by the immediately preceding independent external valuation report for that property); the last management review for that property; and other information and professional or expert advice given or prepared by reliable and competent persons in relation to that property.    Independent External Valuations Until 31 December 2019, the entire freehold investment property portfolio in Australia was independently valued at least once every three (3) years, on a rotational basis by an Independent Valuer. Under this approach, approximately one-sixth of the portfolio was independently externally valued at least once every six (6) months. It was determined that for the second half of the 2020 financial year and thereafter, the entire freehold investment property portfolio in Australia will be independently valued by an Independent Valuer at least once every two (2) years on a rotational basis. For the 2020 financial year, sixty-one (61) valuations of freehold investment properties were performed by Independent Valuers: twenty-five (25) at 31 December 2019 and thirty-six (36) at 30 June 2020. A total of 44.53% of the number of freehold investment properties were independently externally valued this year. A total of 44.72% of the aggregate fair value of the freehold investment property portfolio in Australia was independently externally valued this year. Internal Valuations and Reviews Freehold investment properties not independently externally valued as at balance date are subject to an internal valuation or a management review, performed by persons qualified by relevant education, training or experience. Each internal valuation and management review is informed by the last independent external valuation and reliable market evidence. For the 2020 financial year, 17 freehold investment properties had been affected by the same factors as the properties which had been independently externally valued. As a consequence, internal valuations for these 17 properties were undertaken to determine the effect of these factors. Valuation Methodologies: The fair value in respect of each freehold 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 of the property the quality of construction the 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 the tenure of franchisees and external tenants adaptive reuse of buildings non-reliance on turnover rent other specific circumstances of the property     As a secondary method, a discounted cash flow valuation or a direct sale comparison valuation is undertaken as a check method. The fair value of a freehold investment property under construction is determined under the income capitalisation method by estimating the fair value of the property as at the relevant completion date less the remaining costs to complete and allowances for associated risk. As a secondary method, a discounted cash flow valuation is undertaken. An internal valuation or management review is performed 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. Normally, the direct sale comparison method of valuation is used for properties for future development. Financial Reporting Impacts of COVID-19: The COVID-19 pandemic has created a higher degree of uncertainty regarding the assessment of fair value of freehold investment properties, particularly around the critical assumptions regarding market rents, capitalisation rates, terminal yields and discount rates. For the 36 sites that were independently externally valued as at 30 June 2020, each of the five (5) independent, qualified valuers engaged in the valuation process were faced with an unprecedented set of circumstances in a COVID-19 affected market on which to base a judgement. As a result, the independent external valuations at 30 June 2020 incorporated a clause regarding ‘significant valuation uncertainty’. This clause implies that valuations are current at the valuation date only, and less certainty and a higher degree of caution should be attached to the valuation. Estimated fair values may change significantly and unexpectedly over a relatively short period of time. However, for the avoidance of doubt, the inclusion of the ‘significant valuation uncertainty’ clause does not mean that the valuation cannot be relied upon. Rather, the clause brings attention to the current extraordinary circumstances arising from COVID-19, and therefore there is less certainty regarding some of the critical assumptions in the valuation process than would otherwise be the case. 120 NOTES TO THE FINANCIAL STATEMENTS | JUNE 2020 14. INVESTMENT PROPERTIES: FREEHOLD (CONTINUED) Financial Reporting Impacts of COVID-19 (continued): To reflect the potential impact of COVID-19, independent valuers may consider and adjust, one or a number of valuation inputs and estimates, where appropriate, including lower probabilities of tenant recoveries, lower market rent growth rates, longer lease up periods, increased leasing allowances and adjustments to capitalisation and discount rates to reflect the uncertainty in the amount and timing of cash flows. Valuations may also include deductions for the cost of estimated rental relief to be provided to tenants, where relevant. Where appropriate, directors have adopted a similar approach in the internal valuation and review process as used for independent external valuations. As at balance date, the fair value of the freehold investment property portfolio incorporates a best estimate of the impact of COVID- 19, using the information available at the time of preparing the valuations. The duration and depth of the pandemic are unknown, and, in the event the impacts of the COVID-19 pandemic are more severe or prolonged than anticipated, this may have an adverse impact on the fair value of the freehold investment property portfolio. The valuation uncertainties described above also applies to the land and buildings measured at fair value, of $150.24 million and $252.68 million respectively, as disclosed in Note 12. Property, Plant and Equipment. (a) Reconciliation of investment properties: freehold New Zealand Australia TOTAL Retail Warehouse Retail Warehouse Office June 2020 June 2019 Opening balance Additions Transfer to assets held for sale Fair value adjustments* Disposals Depreciation for the year Net foreign currency differences $000 6,940 3 - - - (75) (155) - - - - (11) (69) $000 $000 $000 $000 $000 $000 3,075 2,239,761 220,598 38,577 48,351 2,559 120 2,508,951 51,033 2,429,397 30,189 - 19,777 (403) - 14,518 (209) - - - - - (27) - - - - (18,627) 34,268 (612) (86) 70,301 (2,613) (82) (224) 386 Closing balance 6,713 2,995 2,307,486 237,466 38,670 2,593,330 2,508,951 * Fair value adjustments totalling $34.27 million for the year ended 30 June 2020 are included in other income (2019: $70.30 million). (b) Fair value measurement, valuation techniques and inputs Class of property Fair value hierarchy* Fair value June 2020 Valuation technique Key unobservable inputs $000 Range of unobservable inputs Retail Level 3 Metropolitan: 1,369,959 Income capitalisation Regional: 944,240 Total: 2,314,199 Discounted cash flow Direct sale comparison Net market rent/sqm p.a. Capitalisation rate: - Metropolitan - Regional Terminal yield Discount rate Price per sqm of lettable area Warehouse Level 3 240,461 Income capitalisation Net market rent/sqm p.a. Discounted cash flow Capitalisation rate Terminal yield Discount rate Direct sale comparison Price per sqm of lettable area Office Level 3 38,670 Income capitalisation Net market rent/sqm p.a. Discounted cash flow Capitalisation rate Terminal yield Discount rate Direct sale comparison Price per sqm of lettable area $78 - $260 6.0% - 8.5% 6.5% - 9.8% 6.3% - 10.0% 7.0% - 10.5% $607 - $3,615 $25 - $164 5.8% - 10.0% 6.0% - 9.3% 6.8% -10.3% $722 - $2,488 $115 - $385 7.0% - 8.8% 7.3% 7.0% $1,442 - $4,793 Total 2,593,330 * Refer to Note 35 (e) on page 143 for the definition of level 3 fair value hierarchy. HARVEY NORMAN HOLDINGS LIMITED | ANNUAL REPORT JUNE 2020 121 NOTES TO THE FINANCIAL STATEMENTS | JUNE 2020 14. INVESTMENT PROPERTIES: FREEHOLD (CONTINUED) (b) Fair value measurement, valuation techniques and inputs (continued) The income capitalisation method of valuation was primarily used for the valuation of all Retail, Warehouse and Office investment properties in Australia and the Retail and Warehouse 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 freehold owner-occupied properties detailed in Note 12(b). (c) Sensitivity information The sensitivity information for investment properties is the same as those for freehold owner-occupied properties detailed in Note 12(c). (d) 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. Revenues is rent and outgoings received from investment properties of $220.04 million for the year ended 30 June 2020 (2019: $217.09 million). Operating expenses, including rates and taxes and repairs and maintenance, recognised in the income statement in relation to investment properties amounted to $54.13 million for the year ended 30 June 2020 (2019: $50.74 million). 15. INVESTMENT PROPERTIES (LEASEHOLD): RIGHT-OF-USE-ASSETS Opening balance at beginning of the year, at fair value Additions Modifications and re-measurements Disposals and lease surrenders Net decrease from fair value re-measurements Closing balance at end of the year, at fair value (a) Fair value measurement, valuation techniques and inputs Leasehold Properties 30 June 2020 $000 608,465 29,448 73,425 (15,229) (74,206) 621,903 Class of property Fair value hierarchy* Fair value June 2020 $000 Valuation technique Key unobservable inputs Retail Level 3 481,561 Discounted cash flow Warehouse Level 3 140,342 Discounted cash flow Discount Rate Market rent ranges/sqm.pa - Gross - Net Discount Rate Market rent ranges/sqm.pa - Gross - Net Range of unobservable inputs 2.921% to 5.191% $65 to $500 $35 to $775 2.921% to 5.191% $25 to $290 $35 to $210 Total 621,903 * Refer to Note 35(e) on page 143 for the definition of level 3 fair value hierarchy. (b) Sensitivity Information Key unobservable inputs Impact on fair value for significant increase in input Impact on fair value for significant decrease in input Discount rate Market rent ranges Decrease Increase Increase Decrease (c) Rent and outgoings received and operating expenses of leasehold investment properties Included in rent and outgoings received from franchisees as disclosed in Note 3. Revenues is rent and outgoings received from leasehold investment properties of $116.75 million for the year ended 30 June 2020. Operating expenses, excluding interest on lease liabilities and fair value re-measurements on leasehold investment properties: ROU Assets, recognised in the income statement in relation to leasehold investment properties amounted to $24.96 million for the year ended 30 June 2020. 122 NOTES TO THE FINANCIAL STATEMENTS | JUNE 2020 15. INVESTMENT PROPERTIES (LEASEHOLD): RIGHT-OF-USE ASSETS (CONTINUED) Investment Properties (Leasehold): Right-Of-Use Assets Subsidiaries of Harvey Norman Holdings Limited (HNHL) enter into leases of properties in Australia (each a Leasehold Investment Property) with third party landlords. After entry into a lease with an external landlord, the relevant subsidiary of HNHL grants a sub-lease or licence to a Harvey Norman®, Domayne® and Joyce Mayne® franchisee, to occupy an area of that Leasehold Investment Property. The adoption of AASB 16 Leases resulted in the recognition of a right-of-use asset by the consolidated entity in respect of each subsidiary's right to use each Leasehold Investment Property for the respective lease term (each an IP Leasehold ROU Asset). As each IP Leasehold ROU Asset meets the definition of investment property under AASB 140 Investment Property, the consolidated entity is required to measure each IP Leasehold ROU Asset at fair value. The consolidated entity has adopted the fair value model in AASB 140 and each IP Leasehold ROU Asset is measured at fair value. In respect of each lease of a Leasehold Investment Property, the present value of the lease payments is determined and carried as a lease liability and the fair value of the lessee's right to use the Leasehold Investment Property over the lease term is recorded as an IP Leasehold ROU Asset. Gains or losses arising from re-measurement of the fair value of an IP Leasehold ROU Asset are included in the Income Statement of the consolidated entity as a fair value increment or decrement in the period in which they arise. Valuation of Investment Properties (Leasehold): Right-Of-Use Assets Each IP Leasehold ROU Asset is subject to a semi-annual review to fair value at each reporting period. This review is undertaken by persons qualified by relevant education, training or experience, with the assistance of qualified management. As part of the review, an independent, professionally qualified valuer who holds a recognised relevant professional qualification and has relevant specialised expertise (Independent Valuer) is engaged to provide independent verification of key observable inputs. The re-measurement of an IP Leasehold ROU Asset to fair value comprises the following: 1) A reduction in the IP Leasehold ROU Asset to reflect the decrease in its future value due to the usage of the asset during the period, reflecting the passage of time and a reduction in remaining lease tenure. This is recognised as a fair value decrement in the Income Statement. 2) Re-measurement of the IP Leasehold ROU Asset at the prevailing discount rate as at the reporting date. If the discount rate at the end of the period is higher than the discount rate at the beginning of the period, there will be a decrease in the value of the IP Leasehold ROU Asset and a corresponding fair value decrement is recognised in the Income Statement. If the discount rate at the end of the period is lower than the discount rate at the beginning of the period, there will be an increase in the value of the IP Leasehold ROU Asset and a corresponding fair value increment is recognised in the Income Statement. The discount rate used is determined using market data, information on margins available to the consolidated entity, and other adjustments appropriate as at the reporting date. 3) The Independent Valuer provides independent verification of key observable inputs including the current market rent ranges, being the amount that could be exchanged between knowledgeable, willing parties in an arm’s length transaction, at each reporting date. If the current market range increases, there may be an increase in the value of the IP Leasehold ROU Asset and a corresponding fair value increment may be recognised in the Income Statement. If the current market range decreases, there may be a decrease in the value of the IP Leasehold ROU Asset and a corresponding fair value decrement may be recognised in the Income Statement. The results and recommendations of the review and the information or professional advice provided by the Independent Valuer are used to inform each director of the assessment of the fair value of each IP Leasehold ROU Asset at balance date. Discount rate Investment properties (leasehold): right-of-use assets are re-measured to fair value by using the prevailing discount rate as at the reporting date which is determined by taking into accounting the following:    Other adjustments that may be made by market participants over the lease term. External market based rates for a range of maturities as at the reporting date; The lending margins available to the consolidated entity; and As at 30 June 2020, the discount rates used in re-measuring investment properties (leasehold): right-of-use assets range from 2.92% to 5.19%. Market rent ranges As at each balance date, the Independent Valuer provides market rent ranges for each leasehold investment property, being the amount that could be exchanged between knowledgeable, willing parties in an arm’s length transaction at each reporting date. The market rent ranges are used to assess whether future lease payments are representative of what market participants would pay for a particular asset over a similar term. Financial Reporting Impacts of COVID-19: The COVID-19 pandemic has created a higher degree of uncertainty regarding the assessment of fair value of leasehold investment properties, particularly around the critical assumptions regarding market rents and discount rates. Estimated fair values may change significantly and unexpectedly over a relatively short period of time. To reflect the potential impact of COVID-19, adjustments may be made, where appropriate, to one or a number of valuation inputs and estimates, including lower market rent growth rates and adjustments to discount rates, to reflect the uncertainty in the amount and timing of cash flows. As at balance date, the fair value of the leasehold investment property portfolio incorporates a best estimate of the impact of COVID-19. The duration and depth of the pandemic are unknown, and, in the event the impacts of the COVID-19 pandemic are more severe or prolonged than anticipated, this may have an adverse impact on the fair value of the leasehold investment property portfolio. HARVEY NORMAN HOLDINGS LIMITED | ANNUAL REPORT JUNE 2020 123 NOTES TO THE FINANCIAL STATEMENTS | JUNE 2020 CONSOLIDATED 16. TRADE AND OTHER PAYABLES (CURRENT) Trade and other creditors Accruals Total trade and other payables (current) 17. INTEREST-BEARING LOANS AND BORROWINGS CURRENT - Secured: Bank overdraft (a) Commercial bills payable (b) Syndicated Facility Agreement (c) Other short-term borrowings (d) Finance lease liabilities (refer to Note 19) CURRENT - Unsecured: Derivatives payable Non-trade amounts owing to: - Related parties - Unrelated parties Total interest-bearing loans and borrowings (current) NON-CURRENT - Secured: Syndicated Facility Agreement (a) Finance lease liabilities (refer to Note 19) Total interest-bearing loans and borrowings (non-current) June 2020 $000 283,838 67,934 351,772 18,749 9,750 - 69,638 - 187 4,237 280 102,841 195,000 - 195,000 June 2019 $000 221,323 62,359 283,682 29,232 9,750 370,000 79,417 1,622 49 4,245 264 494,579 345,000 1,942 346,942 Total interest-bearing loans and borrowings 297,841 841,521 (a) Bank Overdraft Of the total bank overdraft of $18.75 million as at 30 June 2020:  a total of $18.42 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 17(c). a total of $0.33 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 17(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 17(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 29 November 2019, the Amending Deed (No. 7) to the Syndicated Facility Agreement was executed with the effect of extending the repayment date of Tranche A1 of the Facility totalling $170 million to 4 December 2021 and Tranche A2 of the Facility totalling $200 million to 4 December 2022.  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 2020 was $195 million, repayable as set out below, all of which 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. 124 NOTES TO THE FINANCIAL STATEMENTS | JUNE 2020 17. INTEREST-BEARING LOANS AND BORROWINGS (CONTINUED) (c) Syndicated Facility Agreement (continued) Under the terms of the Syndicated Facility Agreement, the Facility is repayable:      in respect of Tranche A1 totalling $170 million, on 4 December 2021 ($170 million utilised at 30 June 2020); in respect of Tranche A2 totalling $200 million, on 4 December 2022 ($25 million utilised at 30 June 2020); in respect of Tranche A3 totalling $200 million, on 4 December 2020 (nil utilised at 30 June 2020); in respect of Tranche B totalling $240 million, on 4 December 2021 (nil utilised at 30 June 2020); 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: (i) 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. (ii) (d) Other Short-Term Borrowings Of the total other short-term borrowings of $69.64 million:        a total of $35.77 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 2020. a total of $24.65 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 2020. a total of $4.70 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 $1.02 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 2020 and 2019 financial years, there were no defaults or breaches on any of the interest-bearing loans and borrowings referred to in this note. (e) Defaults and Breaches The Company has not received notice of the occurrence of any Relevant Event from any Financier. During the 2020 and 2019 financial years, there were no defaults or breaches on any of the interest-bearing loans and borrowings referred to in this note. Financial liabilities Financial liabilities are classified, at initial recognition, as financial liabilities at fair value through profit or loss, loans and borrowings, payables, or as derivatives designated as hedging instruments in an effective hedge, as appropriate. All financial liabilities are recognised initially at fair value and, in the case of loans and borrowings and payables, net of directly attributable transaction costs. The consolidated entity’s financial liabilities include trade and other payables, 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. After initial recognition, loans and borrowings are subsequently measured at amortised cost. Gains and losses are recognised in the income statement when the liabilities are derecognised. A financial liability is derecognised when the obligation under the liability is discharged or cancelled or expires. HARVEY NORMAN HOLDINGS LIMITED | ANNUAL REPORT JUNE 2020 125 NOTES TO THE FINANCIAL STATEMENTS | JUNE 2020 18. FINANCING FACILITIES AVAILABLE At balance date, the following financing facilities had been negotiated and were available: CONSOLIDATED June 2020 $000 June 2019 $000 Total facilities: Bank overdraft Other borrowings Commercial bank bills Syndicated Facility Total Available Facilities Facilities used at reporting date: Bank overdraft Other borrowings (current) Commercial bank bills (current) Syndicated Facility (current) Syndicated Facility (non-current) Total Used Facilities Facilities unused at reporting date: Bank overdraft Other borrowings Syndicated Facility Total Unused Facilities 51,512 107,018 9,750 810,000 978,280 18,749 69,638 9,750 - 195,000 293,137 32,763 37,380 615,000 685,143 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 Refer to Note 17. Interest-Bearing Loans and Borrowings for details regarding the security provided by the consolidated entity over each of the financing facilities disclosed above. 19. LEASE LIABILITIES (a) The following table sets out the carrying amounts of lease liabilities and movements during the year: 30 June 2020 $000 AASB 16 transition adjustments Reclassification of pre-existing balances (i) Lease Liabilities as at 1 July 2019 New, modified and re-measured leases Interest on lease liabilities (accretion) Lease payments Foreign currency Lease liabilities as at 30 June 2020 1,157,445 3,564 1,161,009 140,044 40,538 (165,308) (3,196) 1,173,087 (i) The reclassification of pre-existing balances relates to finance leases previously recognised within interest-bearing loans and borrowings. Reconciled to: Lease liabilities (current) Lease liabilities (non-current) Lease liabilities as at 30 June 2020 130,280 1,042,807 1,173,087 126 NOTES TO THE FINANCIAL STATEMENTS | JUNE 2020 19. LEASE LIABILITIES (CONTINUED) (b) The geographical split of lease liabilities as at 30 June 2020 is as follows: Leases of owner-occupied properties and plant and equipment assets: Australia New Zealand Singapore & Malaysia Slovenia & Croatia Ireland & Northern Ireland Total lease liabilities of leases of owner-occupied properties and plant and equipment assets Leases of properties sub-leased to external parties: Australia Total lease liabilities of leases of sub-leased to external parties Total lease liabilities (c) The maturity profile of undiscounted lease liabilities as at 30 June 2020 is as follows: Less than 1 year 1 to 2 years 2 to 5 years Over 5 years Total undiscounted lease liabilities 30 June 2020 $000 52,492 126,749 184,544 13,340 152,282 529,407 643,680 643,680 1,173,087 30 June 2020 $000 171,185 168,722 445,904 656,160 1,441,971 (d) Commitments for leases not yet commenced The consolidated entity had committed to leases which had not yet commenced as at 30 June 2020. These leases are not included in the calculation of the consolidated entity’s lease liabilities. The estimated undiscounted lease liabilities for these leases is $13.70 million. Short-term leases and lease of low-value assets The consolidated entity applies a recognition exemption to leases that have a lease term of 12 months or less from the commencement date and do not contain a purchase option. It also applies a recognition exemption to leases that are considered of low value. Lease liabilities At the commencement of a lease, the consolidated entity recognises lease liabilities measured at the present value of lease payments to be made over the lease term. The lease payments include fixed payments (including in-substance fixed payments) less any lease incentives receivable and amounts expected to be paid under residual value guarantees. In determining the lease term, the consolidated entity considers all facts and circumstances that create an economic incentive to exercise a renewal option, or not to exercise a termination option. Renewal options (or periods after termination options) are only included in the lease term if the lease is reasonably certain to be extended (or not terminated). Outgoings and other variable lease payments that do not depend on an index or a rate are recognised as incurred. In calculating the present value of lease payments, the consolidated entity uses the incremental borrowing rate at the lease commencement date if the interest rate implicit in the lease is not readily determinable. After the commencement date, the amount of lease liabilities is increased to reflect the accretion of interest and reduced for the lease payments made. In addition, the carrying amount of lease liabilities is remeasured if there is a change in the lease term, a change in the in-substance fixed lease payments or a change in the assessment to purchase the underlying asset. HARVEY NORMAN HOLDINGS LIMITED | ANNUAL REPORT JUNE 2020 127 NOTES TO THE FINANCIAL STATEMENTS | JUNE 2020 19. LEASE LIABILITIES (CONTINUED) Incremental borrowing rate The incremental borrowing rate is derived by reference to the rate at which a lessee would borrow to acquire the underlying asset, repaying over a similar term to the lease term. If the interest rate in the lease is not readily determinable, the consolidated entity determines the incremental borrowing rate for each lease by taking into account the following:    external market based rate for a similar term to the lease term at the lease commencement date; the lending margins available to the consolidated entity for the respective jurisdiction at the lease commencement date; and other adjustments that may be made by market participants over the lease term. As at 30 June 2020, the incremental borrowing rates applied by the consolidated entity were as follows: Weighted Average Incremental Borrowing Rate (%) Australia New Zealand Singapore & Malaysia Slovenia & Croatia Ireland & Northern Ireland 3.59% 3.46% 2.98% 3.36% 3.66% Lease term The lease term is determined at lease commencement or at the effective date of lease modification, and is reviewed if a significant change in circumstances occurs. In determining the lease term, the consolidated entity considers all facts and circumstances that create an economic incentive to exercise a renewal option, or not to exercise a termination option. Renewal options (or periods after termination options) are only included in the lease term if the lease is reasonably certain to be extended (or not terminated). As at 30 June 2020, the lease terms adopted by the consolidated entity were as follows: Weighted average lease term (years) Australia New Zealand Singapore & Malaysia Slovenia & Croatia Ireland & Northern Ireland 10.70 13.62 6.65 9.46 9.17 As at 30 June 2020, the consolidated entity have assessed that a number of options do not meet the criteria of ‘reasonably certain’ and therefore the lease payments relating to these options have not been included in the lease liability. The undiscounted lease payments for these excluded options would amount to $85.31 million. 20. OTHER LIABILITIES CURRENT Lease incentives (a) Unearned revenue Total other liabilities (current) NON-CURRENT Lease incentives (a) Unearned revenue Total other liabilities (non-current) CONSOLIDATED June 2020 $000 - 96,141 96,141 - 863 863 June 2019 $000 4,101 71,718 75,819 11,223 107 11,330 Total other liabilities (a) Prior to the first-time adoption of AASB 16 Leases, lease incentive liabilities and provisions for deferred leases were separately recognised in accordance with the superseded AASB 117. On transition, existing lease payables and provisions were recognised as an adjustment to the opening balance of retained earnings. 97,004 87,149 128 NOTES TO THE FINANCIAL STATEMENTS | JUNE 2020 21. PROVISIONS CURRENT Employee entitlements Lease make good Deferred lease expenses (refer to Note 20(a)) Total provisions (current) NON-CURRENT Employee entitlements Lease make good Deferred lease expenses (refer to Note 20(a)) Total provisions (non-current) Total provisions CONSOLIDATED June 2020 $000 34,181 - - 34,181 2,213 7,013 - 9,226 43,407 June 2019 $000 31,902 437 689 33,028 2,171 6,604 4,250 13,025 46,053 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. Provision for employee entitlements 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 that are 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 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. Expenses for non-accumulating sick leave are recognised when the leave is taken and are measured at the rates paid or payable. Provision for lease make good 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. 22. CONTRIBUTED EQUITY Ordinary Shares Total contributed equity 717,925 717,925 552,250 552,250 30 June 2020 Number of shares 30 June 2019 Number of shares Number of ordinary shares issued and fully paid 1,246,006,654 1,179,736,590 Fully paid ordinary shares carry one vote per share and carry the right to dividends. Movements in ordinary shares on issue: At 1 July 2019 Issue of shares under renounceable pro-rata Entitlement Offer At 30 June 2020 June 2020 No. of Shares June 2020 $000 1,179,736,590 66,270,064 1,246,006,654 552,250 165,675 717,925 HARVEY NORMAN HOLDINGS LIMITED | ANNUAL REPORT JUNE 2020 129 NOTES TO THE FINANCIAL STATEMENTS | JUNE 2020 22. CONTRIBUTED EQUITY (CONTINUED) 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. 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. 23. RETAINED PROFITS AND DIVIDENDS Movements in retained profits were as follows: Balance at beginning of the year Transition adjustments arising from adoption of AASB 16 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 2019: 21.0 cents (2018: 18.0 cents) Interim fully-franked dividend for 2020: 12.0 cents (2019: 12.0 cents) Special fully-franked dividend for 2020: 6.0 cents Total dividends paid CONSOLIDATED June 2020 $000 2,397,436 (43,892) 480,541 (322,505) 2,511,580 247,745 - 74,760 322,505 June 2019 $000 2,337,241 - 402,317 (342,122) 2,397,436 200,554 141,568 - 342,122 On 1 November 2019, the final dividend in respect of the year ended 30 June 2019 was paid totalling $247.74 million. On 2 April 2020, given the uncertainty regarding the duration of the COVID-19 pandemic and its potential impact on trading, and for the abundance of precaution, the directors announced the decision to revoke the decision to pay, and cancel, the FY20 interim dividend of 12.0 cents per share. The cancellation of the FY20 interim dividend resulted in $149.52 million of cash being retained in the business. On 10 June 2020, the directors announced that the Company would pay a special dividend of 6.0 cents per share, fully- franked, to shareholders registered at the close of business on 23 June 2020. This special dividend was paid on 29 June 2020 totalling $74.76 million. The final dividend of 18.0 cents per share totalling $224.28 million fully-franked, for the year ended 30 June 2020 will be paid on 2 November 2020. 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 Amount of franking credits available for future reporting years 24. NON-CONTROLLING INTERESTS Interest in: - Ordinary shares - Reserves - Retained earnings Total non-controlling interests 130 489,613 539,191 57,126 1,222 (96,121) 450,618 (106,176) 434,237 2,691 14,621 13,671 30,983 2,691 15,027 12,665 30,383 NOTES TO THE FINANCIAL STATEMENTS | JUNE 2020 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 2018 144,526 40,659 11,902 Revaluation of land and buildings Tax effect of revaluation of land and buildings 12,234 (3,910) 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 Cost of share based payments Utilisation of employee equity benefits reserve - - - - - - - - - - - - - - - 25,194 - - At 30 June 2019 152,850 65,853 At 1 July 2019 152,850 65,853 Transition adjustments arising from adoption of AASB 16 (18,067) - At 1 July 2019, post transition 134,783 65,853 Revaluation of land and buildings Tax effect of revaluation of land and buildings 28,384 (4,559) 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 Disposal of investment Cost of share based payments Utilisation of employee equity benefits reserve - - - - - - - - - - - - - - (8,912) - - - At 30 June 2020 158,608 56,941 (11,902) 11,902 - - - (953) - - - - - - (8) 10,356 (22,051) 185,384 - - - - 8 (3) 1 - - - - - - - - - - - 519 (750) - - - - - - - - - - 12,234 (3,910) - (953) 8 (3) 1 25,194 519 (750) 10,949 (2) 10,125 (22,051) 217,724 10,949 (2) 10,125 (22,051) 217,724 - 10,949 - - (1,030) - - - - - - - - (2) - - - 2 (49) 14 - - - - - - (18,067) 10,125 (22,051) 199,657 - - - - - - - - 739 (859) - - - - - - - 28,384 (4,559) (1,030) 2 (49) 14 (8,912) 3,450 3,450 - - 739 (859) 9,919 (35) 10,005 (18,601) 216,837 - - - - - - - - - - - - - - - - - - - - - - - - (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 standard, AASB 9 Financial Instruments from 1 July 2018. HARVEY NORMAN HOLDINGS LIMITED | ANNUAL REPORT JUNE 2020 131 NOTES TO THE FINANCIAL STATEMENTS | JUNE 2020 25. RESERVES (CONTINUED) Asset revaluation reserve Any revaluation increment arising from revaluation of freehold owner-occupied properties is recorded in other comprehensive income (OCI) and credited to the asset revaluation reserve in equity. However, to the extent that it reverses a revaluation decrement of the same asset previously recognised in the income statement, the increase is recognised in the income statement. Any revaluation decrement is recognised in the income statement, except to the extent that it offsets a previous increment of the same asset in the asset revaluation reserve. Foreign currency translation reserve 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 OCI in the foreign currency translation reserve. Fair Value through Other Comprehensive Income (FVOCI) Reserve The consolidated entity elected to classify its non-current equity investments as equity instruments designated at fair value through other comprehensive income. The fair value changes on the non-current equity investments are recorded in OCI in the FVOCI reserve. Cash Flow Hedge Reserve: 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 in the income statement. The effective portion of the gain or loss on the hedging instrument is recognised in OCI in the cash flow hedge reserve. Employee equity benefits reserve 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. Further disclosure relating to equity- settled transactions is also provided in the Remuneration Report, Note 4. Expenses and Losses and Note 29. Employee Benefits. Acquisition Reserve: Changes in the consolidated entity’s ownership interest in a subsidiary that do not result in a loss of control are accounted for as equity transactions. Any difference between the amount by which the non-controlling interests are adjusted and the fair value of the consideration paid or received shall be recognised in OCI in the acquisition reserve. Equity-settled 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 when they are granted by using an appropriate valuation model. 132 NOTES TO THE FINANCIAL STATEMENTS | JUNE 2020 26. 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 CONSOLIDATED June 2020 $000 June 2019 $000 287,043 26,152 313,195 200,877 14,171 215,048 Bank overdraft (Note 17. Interest-Bearing Loans and Borrowings) (18,749) (29,232) Cash and cash equivalents 294,446 185,816 (b) RECONCILIATION OF PROFIT AFTER INCOME TAX TO NET OPERATING CASH FLOWS Profit after tax 486,023 409,002 Adjustments for non-cash items: Net foreign exchange losses Allowance for expected credit loss Share of net profit from joint venture entities Depreciation of property, plant and equipment Depreciation of right-of-use assets Fair value re-measurement of investment properties (leasehold): right-of-use- assets Amortisation Impairment of non-trade debts receivable Impairment of non-current assets Impairment of other financial assets 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 Loss/(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 639 3,019 (7,628) 66,016 61,769 74,206 21,600 - 876 300 (34,956) - - 3,449 3,976 4,541 238,782 791 1,093 76,908 55,560 1,056,964 461 671 (9,787) 64,363 - - 20,896 8,394 - - (70,301) 9,665 239 3,175 (14,125) (1,158) (75,548) (25,080) 7,531 48,056 (3,609) 372,845 HARVEY NORMAN HOLDINGS LIMITED | ANNUAL REPORT JUNE 2020 133 NOTES TO THE FINANCIAL STATEMENTS | JUNE 2020 26. CASH AND CASH EQUIVALENTS (continued) 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 in the statement of financial position. CONSOLIDATED June 2020 $000 June 2019 $000 27. INVESTMENTS ACCOUNTED FOR USING THE EQUITY METHOD Total investments accounted for using the equity method 4,692 3,854 Name and Principal Activities Ownership Interest Contribution to Profit / (Loss) Before Tax Noarlunga Shopping Complex Perth City West Complex Warrawong King St. Shopping Complex (a) Byron Bay (Residential / Convention Development) (c) Byron Bay – 2 (Resort Operations) (c) Dubbo Shopping Complex Bundaberg (Land held for investment) Gepps Cross Home HQ QCV (Miners Residential Complex) (b) Other June 2020 % 50% 50% 62.5% - - 50% 50% 50% 50% 50% June 2019 % 50% 50% 62.5% 50% 50% 50% 50% 50% 50% 50% June 2020 $000 1,437 2,748 1,075 (210) (243) 632 (352) 2,773 12 (244) June 2019 $000 1,447 3,123 1,087 (755) 536 699 (202) 3,117 11 724 7,628 9,787 (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 July 2020. On 30 July 2020, the maturity date of this finance facility from ANZ was extended to 31 January 2021. Finance facilities from Network Consumer Finance Pty Limited (“NCF”), a wholly-owned subsidiary of HNHL, for the amount of $31.09 million plus interest and costs, subject to bi-annual review. (ii) (c) 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. The Sale Contract was settled during FY20 following the grant of the liquor licence approval by the relevant authority. 134 NOTES TO THE FINANCIAL STATEMENTS | JUNE 2020 27. INVESTMENTS ACCOUNTED FOR USING THE EQUITY METHOD (continued) 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 investments in associates and joint ventures of the consolidated entity 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 its 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. 28. ASSETS HELD FOR SALE As at 30 June 2020, the assets held for sale balance of $16.19 million represents the carrying amount of a warehouse in Singapore that is currently held for sale. 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.  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. HARVEY NORMAN HOLDINGS LIMITED | ANNUAL REPORT JUNE 2020 135 NOTES TO THE FINANCIAL STATEMENTS | JUNE 2020 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 21) Provisions (Non-current – Note 21) Total employee benefit provisions CONSOLIDATED June 2020 Number June 2019 Number 5,732 June 2020 $000 20,123 34,181 2,213 56,517 5,510 June 2019 $000 20,152 31,902 2,171 54,225 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. 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: ( Grant Date Expiry Date Number of Performance Rights Outstanding Number of Performance Rights Vested 2020 2019 2020 2019 30/11/2015 28/11/2016 01/12/2017 04/12/2018 02/12/2019 30/06/2021 30/06/2022 30/06/2023 30/06/2024 30/06/2025 - - 400,000 549,500 549,500 - 400,000 400,000 549,500 - - 240,000 240,000 - - - - - - - 1,499,000 1,349,500 240,000 240,000 30. REMUNERATION OF AUDITORS Fees to Ernst & Young Australia: - - - audit or review of the financial reports tax services consulting services Total payable to Ernst & Young Australia Fees to overseas member firms of Ernst & Young Australia: - - - audit or review of the financial reports tax services consulting services CONSOLIDATED June 2020 $ June 2019 $ 1,406,009 151,150 33,250 1,590,409 780,376 213,845 14,348 1,300,774 203,950 - 1,504,724 760,162 272,795 11,164 Total payable to overseas member firms of Ernst & Young Australia 1,008,569 1,044,121 Total Remuneration Payable to Ernst & Young 2,598,978 2,548,845 136 NOTES TO THE FINANCIAL STATEMENTS | JUNE 2020 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 Christopher Herbert Brown OAM Executive Director, Chief Financial Officer and Company Secretary Non-Executive Director Michael John Harvey Non-Executive Director 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) Thomas James Scott General Manager – Property Gordon Ian Dingwall Chief Information Officer Ajay Calpakam [resigned 30 April 2020] Lachlan Roach General Manager – Audio Visual General Manager – Home Appliances Frank Robinson [resigned 30 September 2019] General Manager – Technology & Entertainment Emmanuel Hohlastos [commenced 1 May 2020] General Manager – Audio Visual Glen Gregory [commenced 9 September 2019] General Manager – Technology & Entertainment (b) Compensation of Key Management Personnel The total remuneration paid or payable to Key Management Personnel of the consolidated entity was as follows: Short-term Post-employment Long-term (share-based payments) Other – long service leave accrual Other – termination benefits CONSOLIDATED June 2020 $ 12,796,618 295,892 1,056,781 89,782 89,065 June 2019 $ 12,088,384 284,274 717,044 100,054 - 14,328,138 13,189,756 Refer to Tables 1 and 2 on pages 56 and 57 of this report for further information. 32. RELATED PARTY TRANSACTIONS (a) Ultimate Controlling Entity The ultimate controlling entity of the consolidated entity is Harvey Norman Holdings Limited, a company incorporated in Australia. (b) Transactions with Other Related Parties (i) (ii) Several controlled entities of Harvey Norman Holdings Limited operate loan accounts with other related parties, mainly consisting of joint ventures and the other joint venture partner of the joint ventures. Refer to Note 7. Trade and Other Receivables. 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: 72,500,801 72,273,155 4,237,364 4,244,921 Refer to information provided in Section 15. Other Transactions and Balances with Key Management Personnel and their Related Parties in this report on pages 62 and 63 for further information. HARVEY NORMAN HOLDINGS LIMITED | ANNUAL REPORT JUNE 2020 137 NOTES TO THE FINANCIAL STATEMENTS | JUNE 2020 33. COMMITMENTS (a) Lease commitments [the consolidated entity as a 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 2020 $ June 2019 $ 105,805 191,537 46,694 344,036 102,750 173,457 30,784 306,991 The consolidated entity as a lessor 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. The consolidated entity has entered into commercial leases in respect of its freehold property portfolio and motor vehicles. All leases in the consolidated entity’s freehold property portfolio include a clause to enable upward revision of the rental charge on an annual basis according to prevailing market conditions. (b) 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 16,028 - 16,028 52,186 - 52,186 The consolidated entity had contractual obligations to purchase property, plant and equipment and investment properties of $16.03 million (2019: $52.19 million). The contractual obligations are mainly for the acquisition of new properties and refurbishment of existing franchised complexes in Australia. The contractual obligations relating to joint venture entities for the year ended 30 June 2020 was $0.95 million (2019: $2.52 million). 34. CONTINGENT LIABILITIES As at 30 June 2020, 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 lease make-good obligations under certain operating lease contracts (with the exclusion of those lease make-good payments that are considered to be probable and recognised as a provision in Note 21. Provisions); and Indemnities to financial institutions to support bank guarantees in respect of the performance of contracts. (b) 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. Contingent liabilities The consolidated entity does not recognise liabilities that do not meet the recognition criteria as prescribed in AASB 137 Provisions, Contingent Liabilities and Contingent Assets. Contingent liabilities are not recognised as liabilities if the possibility of a probable outflow is considered remote as their existence will be confirmed only by the occurrence or non-occurrence of one or more uncertain future events not wholly within the control of the consolidated entity. At each reporting date, the consolidated entity assesses whether an outflow of future economic benefits has become probable. If it becomes probable that an outflow of future economic benefits will be required for an item previously dealt with as a contingent liability, a provision is recognised in the financial statements of the period in which the change in probability occurs. 138 NOTES TO THE FINANCIAL STATEMENTS | JUNE 2020 35. (a) FINANCIAL RISK MANAGEMENT Financial Risk Management Objectives and Policies The treasury function of the consolidated entity is responsible for the management of the following risks:  market risk;   credit risk; and liquidity risk. 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 and equity investments at fair value. The consolidated entity manages its exposure to key financial risks, such as interest rate and currency risk in accordance with the consolidated entity’s Treasury Policy which is approved by the Board of Directors. The objective of the Treasury 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, to manage the currency risks arising from the consolidated entity’s operations and its sources of finance. 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  Croatian kuna The consolidated entity minimises its exposure to foreign currency risk by initially seeking contracts effectively denominated in the 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. 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 CONSOLIDATED June 2020 $000 44,375 5,167 - 49,542 34,351 11,742 187 46,280 3,262 June 2019 $000 37,962 7,282 5 45,249 28,807 12,016 49 40,872 4,377 HARVEY NORMAN HOLDINGS LIMITED | ANNUAL REPORT JUNE 2020 139 NOTES TO THE FINANCIAL STATEMENTS | JUNE 2020 FINANCIAL RISK MANAGEMENT (CONTINUED) 35. (b) Market Risk (continued) (ii) Interest Rate Risk Management Interest rate risk is the risk that the fair value on future cash flows of a financial instrument will fluctuate because of changes in market interest rates. The consolidated entity’s exposure to market interest rates relates primarily to cash and cash equivalents, non-trade debts receivable from related entities and unrelated entities, bank overdraft, non-trade amounts owing to 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. Fixed interest rate maturing in 30 June 2020 Principal subject to floating interest rate 1 year or less Over 1 to 5 years More than 5 years Non- interest bearing 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 Other financial liabilities $000 $000 $000 $000 $000 $000 Floating Fixed 203,649 28,998 - - - - - - 570 - - - - - 912 - - - - 1 80,548 313,195 0.00% - 1.92% 0.00% - 3.65% - - - - - 2,734 2,734 2,721 4,203 352,359 352,359 116,353 116,353 48,413 48,413 - - - - - - 11.00% - - - 58,975 24,548 14,836 5,991 13,731 118,081 2.39% - 5.27% 5.00% -10.00% 262,624 54,116 15,748 5,991 616,859 955,338 264,638 - 4,237 18,749 9,750 - 297,374 - - - - - - - - - - - - - - - - - - - - - 264,638 0.95% -5.87% 351,772 351,772 - 280 4,517 2.37% - 3.20% - - 18,749 2.25% - 6.95% 9,750 1.44% -2.57% 187 187 - - 352,239 649,613 - - - - - - Fixed interest rate maturing in 30 June 2019 Principal subject to floating interest rate 1 year or less Over 1 to 5 years More than 5 years Non- interest bearing Total Average interest rate $000 $000 $000 $000 $000 $000 Floating Fixed 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 Cash Consumer finance loans Finance lease receivables Receivables from franchisees Trade receivables Other financial assets Non-trade debts receivables & loans 140 NOTES TO THE FINANCIAL STATEMENTS | JUNE 2020 35. FINANCIAL RISK MANAGEMENT (CONTINUED) (b) Market Risk (continued) (ii) Interest Rate Risk Management Fixed interest rate maturing in 30 June 2019 Principal subject to floating interest rate 1 year or less Over 1 to 5 years More than 5 years Non- interest bearing Total Average interest rate $000 $000 $000 $000 $000 $000 Floating Fixed Syndicated Facility and other short- term borrowings Trade creditors Other loans Bank overdraft Bills payable Finance lease liabilities Other financial liabilities 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 (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 $30.24 million as at 30 June 2020 (2019: $27.48 million). The fair value of the equity investments publicly traded on the NZX was $15.45 million as at 30 June 2020 (2019: $16.86 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. (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 exposure to market interest rates relates primarily to:   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: HARVEY NORMAN HOLDINGS LIMITED | ANNUAL REPORT JUNE 2020 141 NOTES TO THE FINANCIAL STATEMENTS | JUNE 2020 35. FINANCIAL RISK MANAGEMENT (CONTINUED) (c) Credit Risk (continued) Location of credit risk Australia New Zealand Singapore and Malaysia Slovenia and Croatia Ireland and Northern Ireland Total (d) Liquidity Risk CONSOLIDATED June 2020 $000 497,774 35,905 18,321 5,603 3,245 560,848 June 2019 $000 727,060 33,700 20,475 7,033 2,985 791,253 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. 30 June 2020 Non derivative financial assets Cash and cash equivalents Receivables from franchisees Trade and other receivables Other financial assets Total financial assets Non derivative financial liabilities Trade and other payables Interest bearing loans and borrowings Derivative financial liabilities Forward currency contracts Less than 1 year $000 1 to 2 years $000 2 to 5 years $000 Over 5 years $000 Total $000 313,195 352,359 163,859 30,237 859,650 - - 6,452 - 6,452 - - 40,455 - - - 11,047 18,176 313,195 352,359 221,813 48,413 40,455 29,223 935,780 351,772 106,360 - - 171,388 25,155 187 - - - - - - 351,772 302,903 187 654,862 Total financial liabilities 458,319 171,388 25,155 Net maturity 401,331 (164,936) 15,300 29,223 280,918 142 NOTES TO THE FINANCIAL STATEMENTS | JUNE 2020 35. FINANCIAL RISK MANAGEMENT (CONTINUED) (d) Liquidity Risk (continued) 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) (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. 30 June 2020 Financial Assets Listed investments Total financial assets Financial Liabilities Forward currency contracts Total financial liabilities Quoted market price (Level 1) $000 Market observable inputs (Level 2) $000 45,688 45,688 - - - - 187 187 Total $000 45,688 45,688 187 187 HARVEY NORMAN HOLDINGS LIMITED | ANNUAL REPORT JUNE 2020 143 NOTES TO THE FINANCIAL STATEMENTS | JUNE 2020 35. FINANCIAL RISK MANAGEMENT (CONTINUED) (e) Fair Value of Financial Assets and Financial Liabilities (continued) 30 June 2019 Financial Assets Listed investments Forward currency contracts Total financial assets Financial Liabilities Forward currency contracts Total financial liabilities Quoted market price (Level 1) $000 Market observable inputs (Level 2) $000 44,344 - 44,344 - - - 5 5 49 49 Total $000 44,344 5 44,349 49 49 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. (f) Capital Risk Management Policy The consolidated entity’s capital management policy objectives are to: create long-term sustainable value for shareholders; maintain optimal returns to shareholders and benefits to other stakeholders; source the lowest cost available capital; and prevent the adverse outcomes that can result from short-term decision making. 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 17, cash and cash equivalents disclosed in Note 26(a) and equity attributable to equity holders of the parent, comprising ordinary shares, reserves and retained profits as disclosed in Notes 22, 25 and 23 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%. As at 30 June 2020, the consolidated entity had unused, available financing facilities of $685 million – only utilising $293 million out of total approved financing facilities of $978 million. This has resulted in a net debt to equity ratio of nil as at 30 June 2020, compared to a net debt to equity ratio of 19.46% as at 30 June 2019. Borrowings (refer to Note 17. Interest-Bearing Loans and Borrowings) Less: Cash and cash equivalents Net (Cash) / Debt Total equity (a) Net debt to equity ratio (b) CONSOLIDATED June 2020 $000 297,841 313,195 (15,354) June 2019 $000 841,521 215,048 626,473 3,533,326 3,219,841 -0.43% 19.46% (a) For the purpose of calculating the net debt to equity ratio, total equity excludes the negative acquisition reserve of $18.60 million (2019: $22.05 million), the right-of-use assets in respect of property, plant and equipment leases of $513.78 million and investment properties (leasehold): right-of-use assets of $621.90 million and the lease liabilities recognised under AASB 16 Leases of $1,173.09 million. (b) As at 30 June 2020, the consolidated entity had a net cash of $15.35 million and therefore the net debt to equity ratio was disclosed as nil. 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. 144 NOTES TO THE FINANCIAL STATEMENTS | JUNE 2020 36. DERIVATIVE FINANCIAL INSTRUMENTS (CONTINUED) (a) Forward currency contracts – held for trading Current Assets Forward currency contracts – cash flow hedges Current liabilities Forward currency contracts – held for trading Forward currency contracts – cash flow hedges CONSOLIDATED June 2020 $000 - 137 50 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 2020 Euro (0-12 months) US Dollar (0-12 months) 67.29 67.40 61.28 69.41 Total CONSOLIDATED 2020 2019 Buy $000 3,682 4,043 7,725 Sell $000 - - - Buy $000 5,185 848 6,033 June 2019 $000 5 42 7 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 the income statement in the period they occur. The net fair value losses on forward currency contracts during the year ended 30 June 2020 was $0.14 million for the consolidated entity (2019: $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: Sell $000 - - - Currency Average Exchange Rate 2019 2020 Euro (0-12 months) US Dollar (0-12 months) 59.59 64.80 61.86 68.38 CONSOLIDATED 2020 2019 Buy $000 1,293 291 Sell $000 - - Buy $000 2,058 285 Total 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 2020, the hedges were 100% effective (2019: 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 other comprehensive income is adjusted to the inventory account in the statement of financial position. 1,584 2,343 - Movement in the forward currency contract cash flow hedge reserve: CONSOLIDATED June 2020 $000 June 2019 $000 Increase/(Decrease) Opening balance Transferred to inventory Charged to other comprehensive income Closing balance HARVEY NORMAN HOLDINGS LIMITED | ANNUAL REPORT JUNE 2020 (2) 2 (35) (35) (8) 8 (2) (2) 145 NOTES TO THE FINANCIAL STATEMENTS | JUNE 2020 37. DEED OF CROSS GUARANTEE Pursuant to ASIC Corporations (Wholly-owned Companies) Instrument 2016/785, relief has been granted to certain controlled entities of Harvey Norman Holdings Limited from the Corporations Act 2001 requirements for the preparation, audit and lodgement of their financial reports. These controlled entities have entered into a Deed of Cross Guarantee with Harvey Norman Holdings Limited (“Closed Group”). The effect of this Deed of Cross Guarantee is that Harvey Norman Holdings Limited has guaranteed to pay any deficiency in the event of winding up a controlled entity within the Closed Group or if the controlled entity does not meet its obligations under the terms of overdrafts, loans, leases or other liabilities subject to the guarantee. The controlled entities within the Closed Group have also given a similar guarantee in the event that Harvey Norman Holdings Limited is wound up or if it does not meet its obligations under the terms of overdrafts, loans, leases or other liabilities subject to the guarantee. The parties to the Deed of Cross Guarantee include Harvey Norman Holdings Limited and the following controlled entities:     Generic Publications Pty Limited  Harvey Norman Big Buys Pty Limited  Harvey Norman Stores (N.Z.) Pty Limited  Network Consumer Finance Pty Limited   Arisit Pty Limited Contemporary Design Group Pty Limited Derni Pty Limited Sarsha Pty Limited Yoogalu Pty Limited 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 Property, plant and equipment: Right-of-use assets Intangible assets Total non-current assets Total Assets Current Liabilities Trade and other payables Interest-bearing loans and borrowings Lease Liabilities Income tax payable Provisions Other liabilities Total current liabilities Non-Current Liabilities Interest-bearing loans and borrowings Lease Liabilities Provisions Deferred income tax liabilities Other liabilities Total non-current liabilities Total Liabilities NET ASSETS 146 June 2020 $000 188,935 499,955 30,237 207,757 278 24,885 952,047 1,704,045 297,642 33,114 6,538 59,037 June 2019 $000 153,800 718,834 28,886 172,282 370 24,144 1,098,316 1,778,987 281,302 28,387 - 59,110 2,100,376 2,147,786 3,052,423 3,246,102 163,380 10,184 2,293 67,123 29,617 46,291 318,888 195,000 12,654 1,957 99,259 - 308,870 127,699 380,183 - 306 26,841 30,158 565,187 345,144 - 2,017 92,073 300 439,534 627,758 1,004,721 2,424,665 2,241,381 NOTES TO THE FINANCIAL STATEMENTS | JUNE 2020 37. DEED OF CROSS GUARANTEE (CONTINUED) Equity Contributed equity Reserves Retained profits Non-Controlling Interest 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 38. 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 Total Comprehensive Income June 2020 $000 717,925 12,781 1,694,210 (251) 2,424,665 454,855 (114,378) 340,477 1,676,238 340,477 (322,505) 1,694,210 PARENT ENTITY June 2020 $000 93 2,693,100 2,693,193 58,516 118,223 176,739 717,925 1,798,529 2,516,454 June 2019 $000 552,250 12,893 1,676,238 - 2,241,381 385,324 (85,570) 299,754 1,718,606 299,754 (342,122) 1,676,238 June 2019 $000 84 2,428,919 2,429,003 2,469 107,567 110,036 552,250 1,766,717 2,318,967 354,317 324,981 354,317 324,981 Arisit Pty Limited Contemporary Design Group Pty Limited Derni Pty Limited Guarantees The Parent Company is party to a Deed of Cross Guarantee (“Deed”) with the following controlled entities:     Generic Publications Pty Limited  Harvey Norman Big Buys 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. Harvey Norman Big Buys Pty Limited entered into the Deed with the Parent Company during the year ended 30 June 2020. Contingent Liabilities Refer to information provided in Note 34. Contingent Liabilities for disclosures relating to the Parent Entity. HARVEY NORMAN HOLDINGS LIMITED | ANNUAL REPORT JUNE 2020 147 NOTES TO THE FINANCIAL STATEMENTS | JUNE 2020 39. CONTROLLED ENTITIES AND UNIT TRUSTS The listing of controlled entities and unit trusts detailed on this page is not a complete and exhaustive list of all controlled entities and unit trusts held by Harvey Norman Holdings Limited. The financial year of all controlled entities and unit trusts are the same as that of the Parent Company. Shares held by Harvey Norman Holdings Limited A listing of material subsidiaries of Harvey Norman Holdings Limited are detailed below: Arisit Pty Limited 1, 2 Harvey Norman Croatia d.o.o. 16,17 Harvey Norman Trading d.o.o. 15,16 Bencoolen Properties Pte Limited 7,8 Harvey Norman Europe d.o.o. 15, 16 Lighting Venture Pty Limited 1,4 Cascade Consolidated Sdn. Bhd. 10,11 Harvey Norman Holdings (Ireland) Limited 13 Network Consumer Finance Pty Limited 1,2 Consolidated Design Group Pty Limited 1 Harvey Norman Limited 5 Pertama Holdings Pte Limited 7,8,9 Contemporary Design Group Pty Limited 1,2 Harvey Norman Ossia (Asia) Pte Limited 7,8,9 Pertama Mechandising Pte Ltd 7,10 Derni Pty Limited 1,2 Harvey Norman Properties (N.Z.) Limited 5,6 Sarsha Pty Limited 1,2 Elitetrax Marketing Sdn. Bhd. 11,12 Harvey Norman Singapore Pte Limited 7,8 Space Furniture Pte Limited 7,8 Generic Publications Pty Limited 1,2 Harvey Norman Stores (N.Z.) Pty Limited 1,2 Space Furniture Collection Sdn. Bhd. 11 Harvey Norman Big Buys Pty Limited 1,2,3 Harvey Norman Trading (Ireland) Limited 13,14 Yoogalu Pty Limited 1,2 Notes: 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 Company incorporated in Australia. Company is a member of the "Closed Group" relieved under the Class Order described in Note 37. Harvey Norman Big Buys Pty Limited holds 99.02% of the shares in the KEH Partnership. Lighting Venture Pty Limited holds 75% of shares in Glolight Pty Limited. Company incorporated in New Zealand. Shares held by Harvey Norman Limited. Company incorporated in Singapore. Harvey Norman Singapore Pte Limited owns 100% of the shares in Bencoolen Properties Pte Limited, 60% of the shares in Harvey Norman Ossia (Asia) Pte Limited, 100% of the shares in Space Furniture Pte Limited and 50.62% of the shares in Pertama Holdings Pte Limited. Harvey Norman Ossia (Asia) Pte Limited holds 49.38% of the shares in Pertama Holdings Pte Limited. Shares held by Pertama Holdings Pte Limited Company incorporated in Malaysia Shares held by Cascade Consolidated Sdn. Bhd. Company incorporated in Ireland. Shares held by Harvey Norman Holdings (Ireland) Limited. Company incorporated in Slovenia. Harvey Norman Europe d.o.o. owns 100% of the shares in Harvey Norman Trading d.o.o. and 100% of the shares Harvey Norman Croatia d.o.o. 17 Company incorporated in Croatia. Units in Unit Trusts held by Harvey Norman Holdings Limited A listing of material unit trusts of Harvey Norman Holdings Limited are detailed below: Calardu Trust Calardu ACT Trust Calardu Albury Trust Calardu Alexandria DM Trust Calardu Alexandria WH 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 Ballina No. 1 Trust Calardu Bendigo Trust Calardu Brookvale Trust Calardu Midland Trust Calardu Browns Plains No. 1 Trust Calardu Munno Para Trust Calardu Cairns Trust Calardu Penrith No. 1 Trust Calardu Cambridge Trust Calardu Penrith Trust Calardu Campbelltown Trust Calardu Perth City West Trust Calardu Cannington Trust Calardu Preston Trust Calardu Caringbah (Taren Point) Trust Calardu Rutherford Trust Calardu Devonport Trust Calardu Gepps Cross Trust Calardu Silverwater Trust Calardu Springvale Trust Calardu Hoppers Crossing Trust Calardu Toowoomba No. 1 Trust Calardu Loganholme Trust Calardu Tweed Heads No. 1 Trust Calardu Malaga Trust Calardu Wodonga Trust Calardu Maribyrnong Trust Harvey Norman Discounts No. 1 Trust Calardu Maroochydore Trust Harvey Norman No. 1 Trust 40. SIGNIFICANT EVENTS AFTER BALANCE DATE 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. 148 SHAREHOLDER INFORMATION DISTRIBUTION OF SHAREHOLDINGS AS AT 28 SEPTEMBER 2020 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 7,587 8,121 2,323 2,141 168 20,340 504 VOTING RIGHTS All ordinary shares issued by Harvey Norman Holdings Limited carry one vote per share. TWENTY LARGEST SHAREHOLDERS AS AT 28 SEPTEMBER 2020 Number of Ordinary Shares Shareholder Percentage of Ordinary Shares 392,385,265 205,525,565 170,684,000 99,187,484 82,548,243 58,592,289 37,767,238 20,063,673 19,891,305 19,772,685 5,213,182 3,582,234 3,335,180 2,033,309 1,582,730 1,355,181 1,268,491 1,118,847 1,101,443 1,061,450 1,128,069,794 Mr. Gerald Harvey Mr. Christopher Herbert Brown HSBC Custody Nominees Limited J P Morgan Nominees Australia Limited Citicorp Nominees Pty Limited Ms. Margaret Lynette Harvey National Nominees Limited Enbeear Pty Limited BNP Paribas Nominees Pty Limited, BNP Paribas Noms Pty Limited & BNP Paribas Noms (NZ) Limited Ms. Kay Lesley Page Argo Investments Limited BKI Investment Company Limited Mr. Michael Harvey Omnilab Media Investments Pty Limited AMP Life Limited Navigator Australia Ltd Mr. Arthur Brew Mr. Chris Mentis Mr. John Evyn Slack-Smith Mr. Graeme Harvey 31.49% 16.49% 13.70% 7.96% 6.63% 4.70% 3.03% 1.61% 1.60% 1.59% 0.42% 0.29% 0.27% 0.16% 0.13% 0.11% 0.10% 0.09% 0.09% 0.09% 90.55% 149 

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