Harvey Norman Holdings Limited Annual Report 2021

Plain-text annual report

2021 ANNUAL REPORT Key Dates Contents Company Info 31 August 2021 Announcement of Full-Year Proﬁt to 30 June 2021 & Announcement of Final 2021 Dividend 18 October 2021 Record Date for Determining Entitlement to Final 2021 Dividend 15 November 2021 Payment of Final 2021 Dividend 24 November 2021 at 11:00am Annual General Meeting of Shareholders 25 February 2022 Announcement of Half-Year Proﬁt to 31 December 2021 & Announcement of Interim 2022 Dividend 1 April 2022 Record Date for Determining Entitlement to Interim Dividend 3 May 2022 Payment of Interim 2022 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 2021 Financial Highlights Chairman and CEO’s Report Operating and Financial Review Directors’ Report Remuneration Report Environment, Social & Governance (ESG) Report 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 5 6 8 29 34 61 72 73 79 80 81 82 83 85 Notes to the Financial Statements 86 Shareholder Information 148 2 HOLDINGS LIMITED | ACN 003 237 545 ANNUAL REPORT JUNE 2021 2 OPERATING AND FINANCIAL REVIEW (CONTINUED) CHAIRMAN AND CEO’S REPORT (CONTINUED) HOLDINGS LIMITED | ACN 003 237 545 2021 RESULTS EBITDA CHAIRMAN AND CEO’s REPORT $1.457 billion Increase of $512.46 million from FY20 Reported PBT $1.183 billion Increase of $521.24 million from FY20 Income Tax Expense $336 million Increase of $160.42 million from FY20 SYSTEM SALES REVENUE Total System Sales Revenue $9.721 billion Increase of $1.263 billion from FY20 ANNUAL REPORT JUNE 2021 ANNUAL REPORT JUNE 2021 3 3 SUPPORTING WOMEN IN SPORT Harvey Norman® also proudly supports Katie Kelly, who is aiming to become a back-to-back gold medallist at the Tokyo Paralympic Games in the Para-triathlon PT5 classification for athletes with a visual impairment. Katie approaches every challenge as an opportunity, and to help provide opportunities to other athletes with disabilities she started the Sport Access Foundation. Over the last four years the foundation has provided grants to 25 individuals and sporting clubs, with three of the recipients now going on to join Katie as part of the Australian Paralympic Team at Tokyo. For over a decade, Harvey Norman® has built a reputation for a commitment to supporting female athletes in Australia – ensuring they get the support they need and the recognition they deserve. We’ve set up programmes and initiatives to further this commitment, with our Team Harvey project helping Australian sportswomen achieve their professional goals, and Team Harvey Junior providing sponsorship opportunities to the next generation of female champions – helping to remove obstacles for participation at grassroots levels. Supporting women in sport also includes building strong relationships with athletes in brand ambassador partnerships. This year it’s been a privilege to have Ariarne Titmus as a brand ambassador. Ariarne and her family know a thing or two about commitment. While many in the general public may only see the moments of sporting triumph while tuning in to the Olympics, what they don’t see are the years of effort and sacrifice it takes to reach those moments. A family uprooting their lives in Tasmania to move to Queensland to pursue better training opportunities. The early morning sessions before a full day of schooling. The pressures of having the hopes and dreams of a nation on your shoulders while constantly trying to beat your personal best. At the recent Tokyo 2020 Olympics Ariarne has shown what a star she is, winning gold medals in the 400m and 200m Freestyle events, a silver medal in the 800m Freestyle and a bronze in the 4x200m Women’s Freestyle Relay. While only Ariarne can do what she does in the pool, we’re happy we could be part of the team supporting her beyond the lane ropes – finding ways to make life outside training that little bit easier so she could focus on her sporting dreams. KATIE KELLY Paralympian Tokyo 2020 Paralympic Games HARVEY NORMAN® BRAND AMBASSADOR Picture: Chris Chen 4 ANNUAL REPORT JUNE 2021 2021 FINANCIAL HIGHLIGHTS HARVEY NORMAN HOLDINGS LIMITED (HNHL) EBITDA EBITDA Excluding AASB 16 net impact and net property revaluations $1.457bn FROM $944.67m in FY20 UP BY 54.2% $1.147bn FROM $742.47m in FY20 UP BY 54.4% EBIT EBIT Excluding AASB 16 net impact and net property revaluations $1.233bn FROM $721.08m in FY20 UP BY 71.0% $1.059bn FROM $654.86m in FY20 UP BY 61.7% REPORTED PBT PBT Excluding net property revaluations $1.183bn FROM $661.29m in FY20 UP BY 78.8% $1.042bn UP BY 66.4% FROM $626.33m in FY20 REPORTED PROFIT AFTER TAX & NCI PROFIT AFTER TAX & NCI Excluding net property revaluations $841.41m FROM $480.54m in FY20 UP BY 75.1% $743.12m UP BY 63.0% FROM $456.00m in FY20 NET DEBT TO EQUITY: 7.47% NET DEBT OF $295.54m vs NET CASH OF $15.35m in FY20 UNUSED, AVAILABLE FINANCING FACILITIES OF $193.96m TOTAL SYSTEM SALES REVENUE $9.721 billion AGGREGATED HEADLINE FRANCHISEE SALES REVENUE*...$6.952bn COMPANY-OPERATED SALES REVENUE……...………….……$2.768bn *Sales made by franchisees in Australia do not form part of the ﬁnancial results of the consolidated entity. HNHL CONSOLIDATED REVENUES $4.439 billion SALES OF PRODUCTS TO CUSTOMERS…………….....…...$2.768bn REVENUE RECEIVED FROM FRANCHISEES…...…….……...$1.346bn REVENUES AND OTHER INCOME ITEMS…...………....…... $0.325bn NET ASSETS BASIC EARNINGS PER SHARE $3.893 billion 12.0% from $3.477bn at Jun-20 67.53c from 39.19c in FY20 539 FRANCHISEES IN AUSTRALIA 192 FRANCHISED COMPLEXES IN AUSTRALIA REPORTED PBT DIVIDENDS PER SHARE (FULLY FRANKED) 35.0c $643.91m 107 $342.76m ( 113.8%) from $301.15m in 1H20 OFFSHORE COMPANY OPERATED STORES REPORTED PROFIT AFTER TAX & NCI from 24.0c in FY20 ANNUAL REPORT JUNE 2021 5 OPERATING AND FINANCIAL REVIEW (CONTINUED) CHAIRMAN AND CEO’S REPORT Dear Shareholder, As with FY2020, the world continues to be impacted severely this year by the ongoing effects of COVID-19. The 192 franchised complexes in Australia and the 107 company-operated stores in 7 countries continue to be subjected to various Government mandated closures. The number one priority has been to keep our customers safe, protect our staff and enable them to do their job in a safe manner. We thank each and every one of you that has supported us during this prolonged unprecedented uncertainty. It is with your support and trust that we continue to build our brands and provide our customers with an unparalleled retail experience – whichever way you choose to shop with Harvey Norman®. CHAIRMAN AND CEO’s REPORT A common theme in the countries in which we operate has been low interest rates, strong housing prices and strong home renovations, booming stock markets and record household deposits. This has translated to unprecedented sales for the Harvey Norman® brands. Our multiple-channel ecosystem has highlighted the strength of the physical retail and digital touchpoints in which customers engage and transact with Harvey Norman®. We have a competitive advantage with our large format stores, displaying a huge range of technology, home and lifestyle products accompanied by the knowledgeable and friendly staff of franchisees in Australia and our overseas company-operated stores within an easy drive of customers. In addition to multiple payment options, also on offer is express contactless click and collect available at the store or safe delivery to the home in-person. These are the strong foundations of our commitment to being the best retailer by embracing the lifestyle of the customer through our multiple sales channels. The results achieved this year are testament to the resilience of our model. Record Financial Results • Record reported earnings before interest, tax, depreciation & amortisation (EBITDA) of $1.457 billion, up by $512.46 million or +54.2%. • EBITDA (excluding AASB 16 impact and net property revaluations) of $1.147 billion, up by $404.09 million or +54.4%. • Record reported earnings before interest & tax (EBIT) of $1.233 billion, up by $511.66 million or +71.0%. • EBIT (excluding AASB 16 impact and net property revaluations) of $1.059 billion, up by $404.30 million or +61.7%. • Record proﬁt before tax (PBT) of $1.183 billion, up by $521.24 million or +78.8%, delivering a robust return on net assets of 30.4% for FY21 compared to 19.0% for FY20. • PBT (excluding net property revaluations) of $1.042 billion, up by $415.82 million or +66.4%. • Record net proﬁt after tax and non-controlling interests (NPAT&NCI) of $841.41 million, up by $360.87 million or +75.1%. • NPAT&NCI (excluding net property revaluations) of $743.12 million, up by $287.12 million or +63.0%. • Offshore company-operated retail proﬁt result of $240.79 million, up by $88.72 million or +58.3%, amid government imposed lockdowns and restrictions to mobility. • Solid earnings per share of 67.53 cents, up by +72.3% from 39.19 cents for FY20. • Very strong balance sheet with total assets of $6.67 billion, up by $844.33 million or +14.5% primarily driven by organic growth from offshore store expansion and increases in the tangible freehold property portfolio. • Net assets of $3.89 billion, up by $415.69 million, or +12.0%. Property • • • 6 30 June 2021: 192 franchised complexes in Australia and 107 company-operated stores overseas. Strong freehold property portfolio valued at $3.37 billion as at 30 June 2021, up by $355.90 million or +11.8%, consisting of 95 freehold investment properties in Australia and 25 owner-occupied land and buildings in New Zealand, Singapore, Slovenia, Ireland and Australia and joint venture assets. 12 new company-operated stores opened during FY21, all in the ﬁrst half of the ﬁnancial year earlier than expected. New stores were opened as follows: Ireland (2 stores): Galway (Jul-20), Sligo (Nov-20); New Zealand (3 stores): Dunedin Outlet (Aug-20), Grey Lynn Commercial Showroom (Oct-20), Glen Innes Outlet (Oct-20); Singapore (3 stores): Seletar Mall (Sep- 20), The Centrepoint (Sep-20), Westgate (Nov-20); Croatia (1 store): Pula (Nov-20); and Malaysia (3 stores): KL East Mall (Nov-20), Menara (Dec-20), Quayside Mall (Dec-20). ANNUAL REPORT JUNE 2021 OPERATING AND FINANCIAL REVIEW (CONTINUED) CHAIRMAN AND CEO’S REPORT (CONTINUED) Property (continued) • • 1 new franchised complex opened in Australia during FY21 located at Hornsby, New South Wales in Oct-20, a full- format complex boasting a premium ﬁt-out with styling and embellishments derived from the ﬂagship concept. 3 small-format franchised complexes were closed in Australia during FY21 located at West Wyalong (Sep-20), Coburg (Jan-21) and Cleveland (Jun-21). • We recommenced the reﬁt program this ﬁnancial year with the completion of premium reﬁts of franchised complexes located at Cairns, Campbelltown, Aspley, Launceston, Mackay and Maribyrnong. We expect to complete up to 40 premium reﬁts over the next 5 years. CHAIRMAN AND CEO’s REPORT Outlook During the 2022 ﬁnancial year, we intend to open up to 3 franchised complexes in Australia and 3 company-operated stores overseas: 1 in Malaysia, 1 in Croatia and 1 in Ireland. Beyond the upcoming ﬁnancial year, we intend to open up to 2 franchised complexes in Australia during the 2023 ﬁnancial year and we intend to relocate 1 franchised complex from a leased site to a freehold property. We expect our offshore expansion plans to ramp-up towards the end of calendar 2022 and we anticipate opening up to 8 company-operated stores overseas during FY23: 4 in New Zealand, 3 in Malaysia and 1 in Croatia. We are announcing our intention to open 2 leasehold company-operated stores in Budapest, Hungary during calendar year 2023. Hungary borders Slovenia and Croatia, and with the collective population of the 3 countries added together, the Harvey Norman® brand can potentially reach approximately 16 million people. Rolling lockdowns in most States and Territories of Australia have affected sales in July and August 2021, even though Contactless Click & Collect and home delivery are operating for customers from 192 Australian franchised complexes. These rolling lockdowns have continued into September 2021. Over 15 million people, or approximately 58% of the Australian population, are currently in lockdown. However, we expect spending to recover quickly as we saw when lockdown restrictions were eased in our overseas markets due to pent-up demand. Malaysia closed from 1 June 2021 due to large outbreaks of COVID-19 in the country. Malaysian stores commenced limited opening to customers from 21 August 2021. On 18 August 2021, New Zealand went into Level 4 lockdown with no store click and collect permitted, but contactless home delivery allowed. All New Zealand stores outside of Auckland commenced limited opening to customers from 7 September 2021, with click and collect permitted in Auckland from 22 September 2021. Our other 5 countries have been open in July, August and September 2021. Refer to the post-year end retail trading update on page 26 of this report for further information on aggregated sales for Australian franchisees and overseas company-operated stores from 1 July 2021 to 26 August 2021. With the exception of Malaysia which was signiﬁcantly affected by the lockdowns during this period, these reﬂect a continued elevated customer demand with solid headline sales growth rates ahead of the comparable period in July and August 2019. We thank our staff for their continued loyalty and commitment to our long-term vision and strategy, and we thank our franchisees for their exemplary achievements this year and the continued support of their local communities. We value and appreciate the continued support and conﬁdence of our shareholders in the leadership and future direction of our business. ANNUAL REPORT JUNE 2021 7 OPERATING AND FINANCIAL REVIEW (CONTINUED) OPERATING AND FINANCIAL REVIEW Group Results for 30 June 2021 The directors report a record result for the year ended 30 June 2021, with a $521.24 million or +78.8% increase in proﬁt before tax to $1.183 billion, up from $661.29 million in the 2020 ﬁnancial year. Excluding the effects of the net property revaluation adjustments both years, proﬁt before tax increased by $415.82 million or +66.4% to $1.042 billion, up from $626.33 million in the 2020 ﬁnancial year. The PBT return on net assets was 30.4% for the 2021 ﬁnancial year, compared to a PBT return on net assets of 19.0% for the 2020 ﬁnancial year. Reported proﬁt after tax and non-controlling interests increased by $360.87 million or +75.1% to $841.41 million in FY21, up from $480.54 million in FY20. Excluding the after-tax effects of net property revaluation adjustments in both years, proﬁt after tax was $743.12 million for FY21, a $287.12 million or +63.0% increase from FY20. The effective tax rate for the consolidated entity was 28.39% for FY21 compared to an effective tax rate of 26.50% for FY20. The effective tax rate of the consolidated entity is akin to the 30% corporate tax rate in Australia, despite the corporate tax rates of the 7 overseas countries where our company-operated retail stores operate ranging from 17% to 28%. 8 ANNUAL REPORT JUNE 2021 OPERATING AND FINANCIAL REVIEW (CONTINUED) OPERATING AND FINANCIAL REVIEW (CONTINUED) Segment Analysis An Integrated Retail, Franchise, Property and Digital Strategy The consolidated entity operates an integrated retail, franchise, property and digital strategy, comprising three main pillars: 1. Retail - 2. Franchise - 3. Property, complemented by a robust and sustained investment in technology, digital transformation and IT infrastructure assets. 1 2 3 Offshore Company— Operated Retail Segment Franchising Operations Segment Proﬁt before tax $240.79m Representing 20% of PBT or 23.1% (excluding net property revaluations) Proﬁt before tax $628.19m Representing 53% of PBT Property Segment Proﬁt before tax $291.54m Representing 25% of PBT Increase of $88.72m or +58.3% Increase of $279.60m or +80.2% Increase of $118.35m or +68.3% Proﬁtability of the franchising operations segment increased by $279.60 million or +80.2% to $628.19 million for FY21, compared to $348.59 million for FY20. This increase was achieved by strong growth in franchising operations segment revenues to $1,237.71 million for FY21, an increase of $288.67 million, or 30.4%, from $949.04 million in FY20, primarily due to higher franchise fees received from franchisees during the year underpinned by a 12.8% increase in aggregated headline franchisee sales revenue to $6.95 billion for FY21, compared to $6.16 billion for FY20. Robust franchising operations margin of 9.04% for FY21, compared to 5.66% for FY20. The retail property segment delivered a result of $291.79 million in FY21 compared to a result of $173.19 million in FY20, an increase of $118.60 million or +68.5%. This was primarily achieved by a $105.42 million increase in the net property revaluation increment to $140.37 million for FY21, up from a net revaluation increment of $34.96 million for FY20. Strong freehold property portfolio valued at $3.37 billion as at 30 June 2021, up by $355.90 million or +11.8%. Leasehold property portfolio valued at $1.13 billion as at 30 June 2021, $620.46 million relating to leases of investment properties sub-leased to external parties and $511.17 million relating to leases of owner- occupied properties and plant and equipment assets. Offshore company-operated retail segment delivered strong retail revenue for FY21 of $2.61 billion, up by $480.12 million or +22.6% from FY20. Proﬁt of the offshore company- operated retail segment increased by $88.72 million or +58.3%, to $240.79 million in FY21, from $152.08 million in FY20, the highest ever overseas full-year PBT. NZ was the largest contributor to this growth, increasing by $42.45 million or +42.8%, to $141.61 million in FY21. The retail result for Ireland and Northern Ireland increased by $35.01 million or +208%, to $51.89 million in FY21. The retail result for Singapore and Malaysia increased by $8.30 million, or +30.1%, to $35.92 mil- lion in FY21. The retail result for Slovenia and Croatia increased by $2.95 million, or +35.0%, to $11.38 million in FY21. ANNUAL REPORT JUNE 2021 9 The Franchising Operations Segment in Australia The Franchised Opera(cid:415)ng Model in Australia Harvey Norman Holdings Limited (HNHL) and subsidiaries of HNHL own valuable intellectual property rights, including the trade marks Harvey Norman®, Domayne® and Joyce Mayne®, so(cid:332)ware and other conﬁden(cid:415)al informa(cid:415)on 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 par(cid:415)cular branded complex, pursuant to the terms of a franchise agreement. Each franchisee owns and controls the franchisee business of that franchisee. Each franchisee has control over the day-to-day opera(cid:415)ons of the franchisee business and has the discre(cid:415)on and power to make the decisions necessary to drive sales, control ﬂoor margins and contain opera(cid:415)ng costs to maximise the 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 opera(cid:415)ons 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 accommoda(cid:415)on facility that is made available to each franchisee. The franchising opera(cid:415)ons segment also includes the costs of opera(cid:415)ng the franchised system and monitoring and evalua(cid:415)ng the performance and compliance of franchisees with their franchise agreements. With an unrivalled national store and click & collect network, the Harvey Norman®, Domayne® and Joyce Mayne® franchised complexes are an easy drive for 23 million people in towns, regions and capitals cities across Australia, with further growth planned in the coming years. 10 ANNUAL REPORT JUNE 2021 166 Franchised Complexes 19 Franchised Complexes 7 Franchised Complexes 539 Number of independent franchisees carrying on their business under Harvey Norman®, Domayne® and Joyce Mayne® brands. 192 Franchised complexes in Australia trading under the Harvey Norman®, Domayne® and Joyce Mayne® brand names. OPERATING AND FINANCIAL REVIEW (CONTINUED) OPERATING AND FINANCIAL REVIEW (CONTINUED) Franchising Operations Segment Franchisee sales revenue underpins the franchising operations segment. For 1H21, we reported that Australian franchisee sales revenue had increased by $805.09 million or +27.3% to $3.76 billion, up from $2.95 billion in 1H20. This led to a record franchising operations segment result of $383.96 million for 1H21 and a record franchising operations margin of 10.22% for the ﬁrst-half of FY21. Franchisee sales growth moderated in 2H21, primarily due to cycling pandemic-fuelled comparatives in 2H20, decreasing by $15.32 million or –0.5% to $3.194 billion, from $3.21 billion in 2H20. The franchising operations segment result remained solid at $244.23 million, with a strong franchising operations margin of 7.65% - both record achievements for a second-half period. Aggregated franchisee sales revenue reached record highs this year, increasing to $6.95 billion for the 2021 ﬁnancial year, an increase of $789.77 million or +12.8%, from $6.16 billion in the previous year. The higher franchisee sales revenue has driven a $279.60 million, or +80.2%, increase in the franchising operations segment result to a record $628.19 million for FY21, compared to $348.59 million for FY20. This result has generated a record full-year franchising operations margin of 9.04% for FY21, an increase of 338 basis points, from the 5.66% franchising operations margin reported in FY20. The growth in the franchising operations segment result is attributable to the strong growth in franchising operations segment revenues to $1.238 billion for FY21, an increase of $288.67 million, or +30.4%, from $949.04 million in FY20. This was primarily due to higher franchise fees received from franchisees by $295.52 million this year. Growth in rental income received from franchisees for leased franchised complexes was ﬂat due to the rental support and assistance granted by the franchisor to those franchisees affected by the 11-week COVID-19 mandatory store closures in greater Melbourne, Victoria from 6 August to 27 October 2020. Operating expenses were largely consistent with the previous year, despite the large increase in franchising operations revenue, only increasing by 1.5% relative to FY20. FRANCHISING OPERATIONS SEGMENT 1H 2H FY Franchising Operations Segment PBT ($m) Franchisee Aggregated Sales Revenue* ($bn) Franchising Operations Margin (%) FY21 FY20 FY19 $383.96m $244.23m $628.19m $123.86m $224.73m $348.59m $158.47m $89.93m $248.40m FY21 $3.758bn $3.19bn $6.95bn FY20 $2.953bn $3.21bn $6.16bn FY19 $2.950bn $2.71bn $5.66bn 9.04% FY21 FY20 5.66% FY19 4.39% 10.22% 4.19% 5.37% 7.65% 7.00% 3.32% *Sales made by franchisees in Australia do not form part of the ﬁnancial results of the consolidated entity. ANNUAL REPORT JUNE 2021 11 OPERATING AND FINANCIAL REVIEW (CONTINUED) OPERATING AND FINANCIAL REVIEW (CONTINUED) Australian 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 is reported to the market as it is a key indicator of the performance of the franchising operations segment. from consumers looking to upgrade and expand their range of quality appliances at home. Within Audio Visual, demand has remained for big screen in home experiences as the stay at home and entertain at home trend has continued. The latest 8K and 4K TV ranges from premium brands continued to be a primary focus of consumers and underpinned the strong growth overall in this key category. Continuing the home inspired focus of consumers, Furniture and Bedding franchisees have performed strongly throughout the year with solid sales increases in Sleep Surface, lounges and home ofﬁce categories. The upgrade and expansion of outdoor entertaining areas in Australian homes has delivered solid growth in outdoor furniture and BBQ’s, and these lifestyle categories are expected to remain in demand. The home-focused Australian consumer has continued to provide an environment for growth for franchisees throughout the ﬁnancial year. Aggregated franchisee sales revenue was $6.95 billion for the year ended 30 June 2021, an increase of $789.77 million or 12.8%, from $6.16 billion in the previous year ended 30 June 2020. On a comparable basis, franchisee sales were $6.92 billion, an increase of 12.9%. Technology franchisees experienced strong demand for Smart Phones, Gaming Laptops and PCs that provide power and performance. With Australian homes continuing to move quickly to being digitally connected, driven by remote working and learning, categories such as Connected Home, Mobile Technology and Super Wi-Fi have surged. The Telecommunications category had another strong year underpinned by offers to connect to the Optus network throughout Australia. This is a strategic long term growth category for Harvey Norman®, Domayne® and Joyce Mayne® franchisees. Within the Home Appliance category, the strong uptake of the Federal Government’s Homebuilder grants program and the ensuing renovations that have followed has led to strong demand for kitchen products. Smart Refrigeration, smart kitchen appliances and sensor cooking have all beneﬁted 12 ANNUAL REPORT JUNE 2021 Hornsby, NSW Franchised Complex OPERATING AND FINANCIAL REVIEW (CONTINUED) A ‘Customer-Centric’ Strategy The consolidated entity has continued to invest in technology, digital transformation and infrastructure. This investment has enabled Harvey Norman®, Domayne® and Joyce Mayne® franchisees to continue to enhance their capabilities to deliver the Shop Safe experience for their customers, to uphold COVID Safe practices and execute their Customer-Centric strategies. With 192 locations geographically- spread across Australia, customers can Shop Locally With Confidence with stores and inventory within a short drive. Customers can shop in-store or they can opt for Contactless Click & Collect to have goods delivered to their car, safe in the knowledge they are following the guidelines in place for their location. Near Real-Time Inventory provides their customers with accurate, up-to-date stock information, confirming their local franchisee has the products they are looking for. On Demand and Contactless Delivery options help provide the essential products customers need, faster and more cost-effectively — locally. LiveChat Messaging and Chatbot contactless solutions digitally connect Harvey Norman® franchisees with customers across the country, and assist in keeping local communities safe. Each franchisee is committed to delivering Quality, Value & Service to their customers. Highlights Achieved by Harvey Norman®, Domayne® and Joyce Mayne® Australian Franchisees: with any strict COVID-19 mandated restrictions or lockdowns. prepared when they arrive. • Click & Collect services enables customers to connect online with franchisee in-store experts. Through integrated notifications, the customer can, at the press of an ‘On My Way’ button on their device, advise the franchisee that they are on their way to collect their order, and an ‘I’m Here’ button allowing the franchisee to be fully • Tens of thousands of Contactless Click & Collect customers used the integrated notifications in Microsoft Teams. On average, customers travel to their nearest store within approximately 12 minutes and, if they choose Contactless Click & Collect, the average wait time at store for the safe delivery to their car is approximately 6 minutes. • There has been a significant uptake of customers taking advantage of the various flexible Click & Collect options offered by franchisees. • 1-Hour Click & Collect is now common and widespread. Customers can research online — using the myriad of messaging platforms available to them to receive expert product advice — before they head to the franchised complex after using Click & Collect. With over 80% of orders ready within 1-hour and a Customer Satisfaction (CSAT) score of 84%, this has been one of the most attractive options customers have adopted this year. • Since the commencement of the pandemic, approximately 95% of customers still go to their nearest, local franchised complex for either 1-Hour Click & Collect and Express Contactless Click & Collect. The complexes have dedicated Click & Collect parking bays to ensure that customer pick- up is a frictionless experience. Contactless Click & Collect has enabled each Harvey Norman® franchisee to serve their customers while complying Helping you shop safely for your home essentials SHOP SAFE ANNUAL REPORT JUNE 2021 13 OPERATING AND FINANCIAL REVIEW (CONTINUED) A ‘Customer-Centric’ Strategy (continued) • Harvey Norman® customers have embraced LiveChat from the beginning and now messaging is continuing to drive this functionality. LiveChat aims to make life easier for customers wherever they are, fitting into their schedule, and available on all the messaging platforms customers prefer including Messenger, iMessage, WhatsApp, Apple Business Chat and SMS. Chatbots are a milestone in building a powerful customer service platform. Customers wanting order updates and store trading hours are a great example of how Chatbots respond with known information. This frees up LiveChat and Messaging agents to focus on more specific customer needs, delivering on the expertise for which Harvey Norman® is well-known. • Quick Reserve allows customers of Harvey Norman® franchisees to quickly reserve products online to view at their local franchised complex. providing more and more customers of each franchisee with same-day delivery options that are fast and affordable. • The new Harvey Norman® Store Finder, with dedicated hours for Click & Collect as well as Local Government Area information, has recently launched. Improved location management during COVID allows customers to access timely and informative information on all franchised locations including trading hours and available Contactless and Click & Collect services - a highly-utilised informative tool during a pandemic. Locations now include precise pick-up location information at both retail stores and warehouses. In an ever-changing environment, where local stores for essentials have never been more important to customers, it’s critical to provide franchisee customers making the journey to a local store with time-sensitive information. • With faster delivery expected now more than ever, Australia Post on Demand is • Franchisees continue to improve the mobile experience for customers, enabling communication and collaboration between customer and franchisee by combining chat, messaging and location information. The smartphone is the device of choice for customers researching and shopping online. • The rollout of Trak by Harvey Norman® is now complete for Harvey Norman® franchised complexes throughout Australia. This logistics technology optimises route planning for franchisee deliveries and provides automated customer communication, with real-time tracking. Customers receive an SMS link to a live location showing the status of their impending delivery and the expected arrival time at its destination. PHONE YOUR LOCAL STORE Store Finder Helping you shop safely for your home essentials SHOP SAFE 14 ANNUAL REPORT JUNE 2021 OPERATING AND FINANCIAL REVIEW (CONTINUED) OPERATING AND FINANCIAL REVIEW (CONTINUED) Offshore Company-Operated Retail Segment 23.1% OF TOTAL CONSOLIDATED PBT (excluding net property revaluations) Record FY21 Offshore Retail Revenue $2.61bn UP BY $480.12m (+22.6%) Record FY21 Offshore Retail PBT $240.79m UP BY $88.72m (+58.3%) Overseas, the 107 Harvey Norman® branded stores are company-owned and company-operated. During the first half of FY21, we reported opening 12 new stores overseas, with a number of them opened earlier than expected. This was a year of a number of ‘firsts’: the first time offshore aggregated retail profit nudged the $A0.25 Billion milestone, and the first time sales from our NZ stores surpassed the $A1.0 Billion dollar mark. At varying points during the year, our offshore stores were compelled to close under the respective government directives. Where permitted by the respective governments, our offshore stores continued to trade through their digital platforms to meet customer needs. Across the 7 offshore countries in which we operate, our 107 company-operated stores employ over 5,000 full-time and part- time staff. We continue to prioritise the safety and livelihoods of our employees to ensure that they were not disadvantaged by government-mandated closures and can continue to work in a COVID-safe manner. The graph below represents the aggregate value of overseas retail revenue achieved over the past 5 years. Total overseas retail revenue grew by $480.12 million, or 22.6%, to $2.61 billion for FY21, relative to $2.13 billion for FY20, with each country delivering sales growth year–on–year. The graph below shows the proﬁt trajectory of the overseas retail segment. Offshore proﬁtability has grown by 138.7% in the last 5 years and, for FY21, it represents 20.4% of total consolidated proﬁt before tax. Offshore proﬁtability has increased by $88.72 million, or 58.3%, to $240.79 million for FY21, up from $152.08 million for FY20. ANNUAL REPORT JUNE 2021 15 OPERATING AND FINANCIAL REVIEW (CONTINUED) OPERATING AND FINANCIAL REVIEW (CONTINUED) Offshore Company-Operated Retail Segment (continued) New Zealand 43 Harvey Norman® Company-Operated Stores In New Zealand, we were pleased to see the strong momentum in sales growth reported for 1H21 continue into 2H21, with NZ sales far surpassing the billion dollar milestone in Australian dollars for the ﬁrst-time since opening the ﬁrst NZ store in 1997. Robust sales have also enabled the NZ business to achieve another signiﬁcant milestone of reaching a retail proﬁt result of well over $100 million for the ﬁrst time this year. The NZ business was subjected to 3 sharp, targeted lockdowns affecting 11 stores in Auckland for short periods ranging from 3 days to just under 3 weeks in FY21. This was in contrast to the nationwide Alert Level 3 and 4 Restrictions last year that saw all stores in NZ closed to the public for a 7-week period. In local currency, sales grew to NZ$1.23 billion in FY21, up by NZ$220.64 million or +21.8%. When translated to Australian dollars, sales increased to $1.15 billion in FY21, up by $187.97 million or +19.6% from $960.19 million in FY20. In local currency, the retail proﬁt result increased to NZ$152.12 million, up by NZ$47.54 million or +45.5%. When translated to Australian dollars, the retail result increased to $141.61 million in FY21, up by $42.45 million or +42.8% from $99.16 million in FY20. New Zealand Opened 3 new stores • Dunedin Outlet (Aug-20) • Grey Lynn Commercial Showroom (Oct-20) • Glen Innes Outlet (Oct-20) 43 STORES Sales were positively impacted by the opening of 2 new outlets in Auckland located at Dunedin on 8 August 2020 and Glen Innes on 26 October 2020 and the Grey Lynn, Auckland commercial showroom on 15 October 2020, along with a full year’s trade at the Takanini and Northwood outlets opened during the second half of FY20. The Wairau Park ﬂagship store at Auckland continues to perform strongly. The pent-up demand from limited travel and entertainment options, complemented by a strong NZ property market has continued to give consumers the conﬁdence to invest in their homes. All key categories have recorded strong sales growth during the year. The furniture and bedding categories have beneﬁted from the ready availability of NZ made product ranges. The electrical and computer categories have experienced strong consumer demand for whitegoods, cooking appliances and hardware as consumers focus on improving their homes & home ofﬁces. 16 ANNUAL REPORT JUNE 2021 OPERATING AND FINANCIAL REVIEW (CONTINUED) OPERATING AND FINANCIAL REVIEW (CONTINUED) Offshore Company-Operated Retail Segment (continued) Singapore and Malaysia This segment is comprised of 14 Harvey Norman® stores in Singapore, 26 Harvey Norman® stores in Malaysia and the Space Furniture® branded lifestyle stores in Singapore and Malaysia. The performance of our Singapore and Malaysian stores has remained stable during FY21 despite the challenges of the pandemic, with the organic growth of this segment remaining a key focus. This growth is mainly attributed to the increased contributions from new store openings, coupled with the continued strong de- mand for home appliances and computers for working from home arrangements. Sales in our Ikano, Kuala Lumpur ﬂagship store also continued to grow in 2H21, highlighting our strong product range, customer-friendly layout and focus on COVID safety measures so that customers can shop in conﬁdence, safety and comfort, as they manage the evolving COVID situation and changing restrictions. 3 new stores in Malaysia opened in the ﬁrst half of FY21: KL East Mall on 25 November 2020, Menara on 5 December 2020 and Quayside Mall on 19 December 2020. There were also 3 new store openings in Singapore: Seletar Mall on 15 September 2020, The Centrepoint on 22 September 2020 and Westgate on 25 November 2020. One Singaporean store, Kinex Mall closed on 27 September 2020. The Malaysian National Vaccination Program, in addition to the National Recovery Plan announced by the Malaysian Government in June 2021, are expected to restore business conﬁdence and stimulate further trade as the economy grows in a post-COVID world. We remain committed to our expansion plans in Malaysia & anticipate opening 1 new store in FY22 & 3 new stores in FY23. 26 STORES 14 STORES Malaysia | Sales Revenue 26 Harvey Norman® Company-Operated Stores In Malaysia, we had disclosed strong ﬁrst-half sales of S$126.40 million for 1H21, an increase of 12.6% from sales of S$112.27 million in 1H20, leveraging off 3 store openings - KL East Mall (Nov-20), Menara and Quayside Mall (both in Dec-20), and a full 6-months trade from the 5 new stores opened in the ﬁrst half of FY20. 1H21 sales were impacted by lower foot trafﬁc due to inhibited mobility and shortened trading hours throughout many regions, set in force by the Recovery Movement Control Order (RMCO) and the Conditional Movement Control Order (CMCO), although there were no closures and all stores remained open to the public. Solid sales in 1H21 placed the Malaysian business in good stead to have a strong second half, however, on 13 January 2021, a stricter Movement Control Order (MCO) was re-introduced for certain States with a spike in COVID cases, and from May 2021 the MCO was extended to all of Malaysia. Pursuant to the MCO, 12 stores in Kuala Lumpur and Penang were closed for a 3-day period from 9 to 11 May 2021. Surging COVID-19 cases resulted in the re-imposition of the Full Movement Control Order (FMCO) on 28 May 2021 leading to the full closure of all 26 Malaysian stores from 1 June 2021, with all stores reverting to online trade. Malaysian stores commenced limited opening to customers from 21 August 2021. Malaysian sales for the 26 Harvey Norman® company-operated stores for FY21 was S$242.92 million, an increase of S$34.72 million, or +16.7% from S$208.20 million in FY20. When translated to Australian Dollars, the sales increase moderated to $17.41 million, or +7.8%, due to a 7.6% devaluation of the Singaporean dollar relative to the Australian dollar during the year. Singapore | Sales Revenue 14 Harvey Norman® Company-Operated Stores For Singapore, trade continued mostly uninterrupted through FY21. The Singaporean Government’s approach in gradually re-opening malls and other public areas, combined with decisive additional restrictions when required to control the spread of COVID-19, has resulted in only one temporary closure of the Westgate store from 23 May to 4 June 2021, compared to the 10- week closure of all Harvey Norman® stores in Singapore in the second half of the 2020 ﬁnancial year. Sales for the 2021 ﬁnancial year grew to S$324.19 million, an in- crease of S$56.98 million or 21.3%, primarily due to a full 6-months trade of the 3 new stores in 2H21 and due to cycling lower com- paratives in 2H20 due to the prolonged COVID closures last year. Sales in Australian Dollars increased by $34.69 million or 12.1%. Our ﬂagship store at Millennia Walk has continued to perform strongly in FY21, showcasing the impressive range on offer, with its expansive generous showroom facilitating social distancing while continuing to deliver an unparalleled shopping experience to its customers. Retail – Singapore and Malaysia: Sales & Segment Result Aggregated sales revenue for the Harvey Norman® and Space Furniture® brands in Asia totalled S$580.54 million in local currency for FY21, representing an increase of S$93.53 million, or 19.2%, from S$487.01 million in FY20. On translation to Australian dollars, the devaluation of the Singapore dollar relative to the Aus- tralian dollar during the year, resulted in a reduced increase of $51.74 million or 9.8%, from $525.75 million in FY20. Proﬁtability has improved in Singapore and Malaysia through improved margins and carefully targeted cost reductions, despite additional costs incurred in opening 6 new stores during FY21. The segment proﬁt result of the Harvey Norman® and Space Furniture® brands in Asia was $35.92 million, an increase of $8.30 million, or 30.1%, from $27.62 million in FY20. This was inclusive of wages support and assistance received of $3.64 million in Singapore and $0.11 million received in Malaysia in FY21, from their respective governments in response to COVID-19. ANNUAL REPORT JUNE 2021 17 OPERATING AND FINANCIAL REVIEW (CONTINUED) OPERATING AND FINANCIAL REVIEW (CONTINUED) Offshore Company-Operated Retail Segment (continued) Slovenia 5 Harvey Norman® Company-Operated Stores Croatia 2 Harvey Norman® Company-Operated Stores In Slovenia, the COVID pandemic resulted in the imposition of store closures for all 5 stores between October 2020 and February 2021. Stores fully re-opened on 15 February 2021, with trading continuing throughout the remainder of 2H21. In Croatia, there were no retail lockdowns throughout FY21, allowing uninterrupted trade in the ﬂagship store at Zagreb, and the new Pula Store, which opened on 26 November 2020. The pleasing sales growth reported in 1H21 has continued throughout 2H21. Our Slovenian stores, including our flagship at Ljubljana, have delivered double-digit sales growth overall in FY21 and strong growth was achieved across all key product categories. Sales from the 5 company-operated stores in Slovenia increased €9.36 million or 12.8% to €82.40 million for FY21. In Australian Dollars, sales increased $11.28 million or 9.4% to $131.63 million. The result for Slovenia was a profit of $11.27 million for FY21, representing a $3.01 million increase or 36.4%. This was inclusive of government wages support and assistance received in Slovenia of $0.28 million in FY21 in response to COVID-19. 2 STORES 5 STORES We intend to open 2 new stores in Croatia over the next 2 years—a new store at Rijeka in FY22 and a second store in the Croatian capital of Zagreb in FY23. Sales for 1H21 were €13.07 million, an increase of €1.51 million or 13.1% from the previous corresponding period. Sales for the 2021 ﬁnancial year grew to €29.80 million, increasing by €9.15 million or +44.3% for the full year. Growth in 2H21 was largely due to a full 6-months contribution of the new Pula store. In Australian Dollars, sales increased by $13.58 million or 39.9%. The retail result in Croatia was a proﬁt of $0.11 million for FY21, compared to a proﬁt of $0.17 million in the previous ﬁnancial year. Croatia Opened a 2nd store at Pula on 26 November 2020 18 ANNUAL REPORT JUNE 2021 OPERATING AND FINANCIAL REVIEW (CONTINUED) OPERATING AND FINANCIAL REVIEW (CONTINUED) Offshore Company-Operated Retail Segment (continued) Ireland 15 Harvey Norman® Company-Operated Stores Northern Ireland 2 Harvey Norman® Company-Operated Stores In Ireland, two (2) new company-operated stores were opened during 1H21 at Galway on 22 July 2020 and Sligo on 5 November 2020, strengthening the brand in the country’s west and bringing the total store network to 15. During the year, exponential increases in COVID-19 infections resulted in the Irish Government imposing Level 5 lockdowns on two occasions; the ﬁrst in 1H21 from 22 October 2020 to 30 November 2020 and the second in 2H21 from 31 December 2020 to 16 May 2021. On both occasions, the furniture and bedding categories across all stores were closed whilst the electrical and computer categories were permitted to trade in-store. No online restrictions were imposed during the ﬁrst lockdown in 1H21, however, with the second lockdown in 2H21, the online Click & Collect option for furniture and bedding was prohibited, with no online restrictions imposed on electrical and computers. Sales in local currency increased to €391.89 million in FY21, up by €135.13 million or +52.6%, from €256.76 million in FY20. When translated to Australian dollars, sales increased to $626.02 million in FY21, up $202.96 million or +48.0%, from $423.06 million in FY20. Our stores, including our ﬂagship at Tallaght, have continued to beneﬁt from customers investing in their homes. To assist in stimulating consumer demand, the Irish government reduced the VAT rate from 23% to 21% between September 2020 and March 2021. Double digit increases and market share growth was experienced across all key homemaker product categories. The strong sales result has enabled the Irish business to deliver a retail result in Ireland of $49.64 million for FY21, up by $32.06 million or 182.3% from $17.58 million for FY20. Ireland Opened 2 new stores • Galway (Jul-20) • Sligo (Nov-20) In Northern Ireland, we are pleased with the performance of our two company-operated stores despite the dual challenges posed by COVID-19 and Brexit. Sales have been impacted by COVID-19 lockdowns in both the current and prior years. During FY21, our stores were closed to the public from 26 December 2020 to 29 April 2021, with all online sales required to be delivered, as ‘Click & Collect’ was not allowed. Last year, our stores were prohibited from all retail and online trade between 24 March 2020 and 7 June 2020. Sales in local currency increased to £12.14 million for FY21, up by £2.84 million or 30.5% from £9.30 million in FY20. Translated into Australian dollars, sales revenue increased to $21.88 million in FY21, up by $4.43 million or 25.4% from $17.45 million in FY20. We are pleased to deliver our ﬁrst full year proﬁt in Northern Ireland of $2.25 million for FY21, an improvement of $2.96 million on the loss of ($0.71) million for FY20. This was inclusive of government wages support and assistance received in Northern Ireland of $0.40 million in FY21 in response to COVID-19. Our ﬂagship at Boucher Road, South Belfast continues to perform well as it presents an unrivalled shopping experience for furniture and bedding products across Northern Ireland. 2 STORES 15 STORES ANNUAL REPORT JUNE 2021 19 OPERATING AND FINANCIAL REVIEW (CONTINUED) OPERATING AND FINANCIAL REVIEW (CONTINUED) Review of the Property Segment Strategic ‘Large-Format’ Retail Property Portfolio Property ownership is a core pillar underpinning our successful integrated retail, franchise, property and digital strategy. The Australian Large-Format Retail (LFR) Sector The appetite for investment within the Large Format Retail (LFR) sector of the property market has signiﬁcantly strengthened on the back of it being an attractive, resilient asset class. This strong investment is being driven by a combination of factors including demand for quality income streams, the low cost of debt and the uplift in trading perfor- mance across the home improvements sector. Additionally, investors are recognising the positive yield spread of LFR property assets relative to other property investment returns. There are 192 Australian franchised complexes geographically spread throughout metropolitan cities, large regional towns and smaller regional communities to service the Australian population without having to travel long distances to shop at their nearest Harvey Norman®, Domayne® or Joyce Mayne® store. 95 franchised complexes (49.5% of total franchised complexes) are owned by the consolidated entity, inclusive of warehouses that are either adjacent to, or in close proximity of, the retail store, and are leased to external parties, including Harvey Norman®, Domayne® and Joyce Mayne® franchisees. In addition to our franchised complexes, our dominant, well- located freehold properties are LFR centres that accommodate a complimentary mix of over 450 third-party tenants that are diversiﬁed across a variety of different categories including Hardware, Medical, Chemists, Pets and Auto related products. A large proportion of these third-party tenants are ASX-listed and are national retailers that support the underlying value of our properties. Generally, our LFR centres have expansive footprints, easy and direct access points and open-air carparks that enable the efﬁcient execution of COVID-Safe practices. These factors have contributed to cementing the consolidated entity, with its $2.9 billion Australian freehold investment property portfolio, as the largest single owner of LFR real estate in the Australian market. The full impact of momentum in the Australian economy, sparked by targeted ﬁscal and monetary stimulus measures introduced over the past 18 months as part of our COVID- Response, is still materialising, and the LFR sector appears to be a key beneﬁciary of these initiatives. COVID-19 has stimulated a signiﬁcant population shift moving out of capitals to the regions. This bodes well for household goods spending and property values in Regional Australia where we have a strong market coverage with approximately 65% of our franchised complexes located in regional areas. The demand of ﬁrst home buyers, returning expats, ’up-sizers’ and ’down-sizers’ opting to upgrade their existing homes or relocate has supported a strong base for sustained retail growth within the Home and Lifestyle market. The buoyant housing market has contributed to this increased demand. Harvey Norman® Ballina, NSW Franchised Complex 20 ANNUAL REPORT JUNE 2021 OPERATING AND FINANCIAL REVIEW (CONTINUED) OPERATING AND FINANCIAL REVIEW (CONTINUED) Review of the Property Segment (continued) Strategic ‘Large-Format’ Retail Property Portfolio (continued) The COVID-19 HomeBuilder grants program has provided a strong boost to demand for housing construction activity. Over 121,000 applications were received before the scheme closed on 31 March 2021, approximately 80% relating to new builds and 20% for major renovations. Higher house prices, an elevated level of housing construction, high demand for Home and Lifestyle retailing and the unsatisﬁed investor appetite for well-located LFR sites is expected to continue to underpin strong values in our Australian freehold investment property portfolio. More recently, investor demand has surged, triggering a marked increase in capital searching for LFR property investments with strong national lease covenants and lease tenures. In April 2021, the Watergardens Homeplace retail centre located in Taylors Lakes, Melbourne, Victoria was acquired for $97 million. Watergardens Homeplace is anchored by the Harvey Norman® Watergardens franchised complex, Bunnings and six other national large-format tenants alongside two fast-food restaurants. The Geraldton Homemaker Centre in Western Australia was purchased in March 2021 for $28 million. Investor competitiveness for scarce LFR sites, and recent investment transactions, have created a signiﬁcant increase in LFR values and a material uplift in the fair values of our invest- ment properties. The Australian investment property portfolio is valued at $2.89 billion as at 30 June 2021, increasing in value by $310.59 million during the 2021 ﬁnancial year - $171.91 million relating to new property acquisitions, renovations and refurbishments (including the premium reﬁt program) and $138.69 million relating to higher property fair values. Overseas Property Portfolio Globally, we have 107 company-operated stores across 7 countries. 25 of the stores located overseas (23.4% of total) are owned by the consolidated entity. The aggregate value of the overseas owner-occupied and investment property portfolio is $464.68 million, increasing in value by $45.91 million during the year primarily relating to capital appreciation since the end of FY20. Total Property Portfolio and the Performance of the Retail Property Segment Anchoring our consolidated balance sheet is our property segment assets totalling $3.37 billion of tangible, freehold investment properties and freehold owner-occupied properties and joint venture assets. The freehold property segment comprises 50.5% of our total $6.67 billion asset base. Retail property segment revenue has grown to $409.20 million for FY21, up by $108.67 million from $300.53 million in FY20. This was primarily due to the recognition of $140.37 million in net property revaluation increments for FY21 compared to $34.96 million in net increments for FY20, an increase of $105.42 million. Rent and outgoings received from freehold properties have moderated during the year due to $6 million of rent abatements provided to franchisees affected by the pro-longed 11-week mandatory Stage 4 lockdown in greater Melbourne, Victoria and to other external tenants in Australia. The retail property result was $291.79 million for FY21, an increase of $118.60 million or +68.5% from $173.19 million in FY20. Harvey Norman® Maroochydore, QLD Franchised Complex ANNUAL REPORT JUNE 2021 21 OPERATING AND FINANCIAL REVIEW (CONTINUED) OPERATING AND FINANCIAL REVIEW (CONTINUED) Review of the Property Segment (continued) The below table shows the composition of freehold property segment assets as at 30 June 2021, the number of owned property assets and the increase in fair value recognised in each country. COMPOSITION OF FREEHOLD PROPERTY SEGMENT ASSETS June 2021 # of Owned Retail Property Assets # of Owned Other Property Assets Net Increase in Fair Value (Income Statement) Net Increase / (Decrease) in Fair Value (Equity) (1) Investment Properties (Freehold) and Assets Held for Sale - Australia - New Zealand - Singapore (Property asset held for sale) $2,894.22m $11.29m $12.66m Total Investment Properties (Freehold) and Assets Held for Sale $2,918.17m (2) Owner—Occupied Land & Buildings - Australia - New Zealand - Singapore - Slovenia - Ireland Total Owner—Occupied Land & Buildings (3) Joint Venture Assets $10.37m $339.84m $7.65m $77.41m $15.82m $451.09m $1.32m 95 - - 95 - 19 - 5 1 25 - 41 2 1 44 1 1 1 - - 3 7 $138.69m $1.69m - - - ($2.67m) $140.37m ($2.67m) - - - - - - - - $57.54m - - $0.31m $57.85m - Total Freehold Property Segment Assets $3,370.58m 120 54 $140.37m $55.18m Net Property Revaluation Adjustments For the year ended 30 June 2021, the portfolio has recorded $140.37 million in capital appreciation to fair value, which was the net property revaluation increment for investment properties recognised in the income statement. At each balance date, the 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. Last year, we announced that 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 from the second half of the 2020 ﬁnancial year. This means that as at 30 June 2021 approximately 50% of the freehold investment property portfolio was valued by an Independent Valuer. For FY21, 67 valuations of freehold investment properties in Australia were performed by an Independent Valuer. This represents a total of 48.9% of the number of freehold investment properties independently externally valued this year and 44.3% 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 2021 ﬁnancial year, 19 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 19 properties were undertaken to determine the effect of these factors. 22 ANNUAL REPORT JUNE 2021 OPERATING AND FINANCIAL REVIEW (CONTINUED) OPERATING AND FINANCIAL REVIEW (CONTINUED) Leasehold Property Portfolio | AASB 16 Leases 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 meets the deﬁnition of an investment property and are measured at fair value. As at 30 June 2021, there were 263 leasehold investment properties. 97 leasehold investment properties (37% of total) were occupied by Harvey Norman®, Domayne® and Joyce Mayne® franchisees in Australia for retail purposes. The remaining 166 leasehold investment properties (63% of total) were primarily used by our franchisees for warehousing. Right-of-Use Assets: Leasehold Owner-Occupied Properties & 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 table below 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. COMPOSITION OF LEASEHOLD PROPERTY SEGMENT ASSETS Right -of-Use Asset June 2021 Lease Liabilities June 2021 # of Leased Retail Property Assets # of Leased Other Property Assets (1) Leases of Properties Sub-Leased to External Parties $620.46m $647.12m 97 166 - Australia (2) Leases of Owner-Occupied Properties and Plant and Equipment Assets - Australia - New Zealand - Singapore & Malaysia - Slovenia & Croatia - Ireland & Northern Ireland Total Owner—Occupied Properties and Plant and Equipment Assets $30.13m $113.13m $244.16m $19.23m $104.51m $46.19m $130.55m $190.12m $21.27m $143.41m $511.17m $531.55m - 26 40 2 16 84 7 29 14 6 11 67 Total Leasehold Property Segment Assets $1,131.63m $1,178.67m 181 233 The table below shows the ﬁnancial impact of AASB 16 Leases of our leasehold property portfolio on the income statement for the year ended 30 June 2021. Financial Impact of AASB 16 Leases: Leases of Owner- Occupied Properties 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 AASB 16 Expenses Recognised Less: Lease payments made during FY21 (excluding variable lease payments (short-term, low-value leases) Other adjustments AASB 16 Incremental Decrease in PBT for FY21 $000 62,908 - 17,765 80,673 (77,180) (126) 3,367 Leases of Properties Total Leases Sub-Leased to External Parties $000 - 74,076 23,176 97,252 $000 62,908 74,076 40,941 177,925 (92,890) (170,070) - 4,362 (126) 7,729 ANNUAL REPORT JUNE 2021 23 OPERATING AND FINANCIAL REVIEW (CONTINUED) OPERATING AND FINANCIAL REVIEW (CONTINUED) Review of the Financial Position of the Consolidated Entity Net Debt to Equity Ratio Our strong cash position at the end of FY20 had enabled us to reduce our Syndicated Facility – the available external ﬁnancing facilities in Australia - by $200 million, from $810 million to $610 million. The Syndicated Facility amount utilised as at 30 June 2021 was $490 million, up from $195 million utilised at the end of the previous year. During 2H21, $146.82 million was spent on the purchase and refurbishment of freehold investment properties in Australia. Additionally, Australian franchisees requested, and were provided with increased ﬁnancial accommodation. This was to assist the franchisees in their strategy of increasing their inventory reserves in light of anticipated supply chain disruptions ranging from chip shortages, factory delays due to COVID-19, port and shipping issues and global demand pressures. This has resulted in a net debt position of $295.54 million at the end of FY21, compared to a net cash position of $15.35 million at the end of FY20. This equates to a net debt to equity ratio of 7.47% as at 30 June 2021 compared to a net debt to equity ratio of nil as at 30 June 2020. Solid Cash Flows Cash and cash equivalents, net of bank overdraft, as disclosed in the Statement of Cash Flows on page 85, decreased by $45.72 million to $248.73 million as at 30 June 2021, compared to $294.45 million in the prior year. Cash ﬂows from operating activities decreased by $513.10 million to $543.87 million for FY21, from $1,056.96 million in FY20. This was primarily attributable to a decrease in net receipts from franchisees by $417.89 million, from $1,304.23 million in FY20 to $886.34 million in FY21. Despite higher gross revenue received from franchisees by $289.92 million, net receipts from franchisees were affected by the movement in the aggregate amount of ﬁnancial accommodation provided to franchisees in FY21 relative to the movement in FY20. During FY21, the movement in the aggregate amount of ﬁnancial accommodation provided to franchisees increased signiﬁcantly compared to the movement in FY20, aligned with the increased inventory reserves held by purchasing franchisees during the current year in order to avoid future supply chain disruptions and drive higher franchisee sales. Receipts from customers increased by $522.90 million due to higher sales achieved by the company-operated stores, partly attributed to 12 new offshore store openings. In line with the increase in sales and new store openings, payments to suppliers and employees increased by $512.49 million mainly due to additional payments for the purchase of inventories by the company-operated stores in response to the strong sales growth. Net cash investing outﬂows increased by $117.15 million during FY21 primarily due to an increase in payments for the purchase and refurbishments of freehold investment properties by $122.35 million. In addition, balances in FY20 included the proceeds received from the sale of the Byron at Byron Bay Resort. The increase in outﬂows was offset by $15.08 million net proceeds received from the sale of a controlled entity. Net cash ﬁnancing outﬂows decreased by $475.90 million during FY21. There was a net drawdown of the Syndicated Facility by $295 million during the year, compared to a net repayment of $520 million during FY20. The increased drawdowns were offset by higher dividend payments during FY21 totalling $473.48 million, compared to $322.51 million in FY20, an increase of $150.98 million. Prior year ﬁnancial cashﬂows included the proceeds raised from the renounceable pro-rata Entitlement Offer in October 2019 of $165.68 million. 24 ANNUAL REPORT JUNE 2021 OPERATING AND FINANCIAL REVIEW (CONTINUED) OPERATING AND FINANCIAL REVIEW (CONTINUED) Review of the Financial Position of the Consolidated Entity (continued) Strong Balance Sheet The consolidated entity’s net asset base grew by 12.0% during the year, or an increase of $415.69 million, to $3.89 billion as at 30 June 2021, from $3.48 billion as at 30 June 2020. Total assets increased by 14.5%, or $844.33 million, to $6.67 billion as at 30 June 2021, from $5.83 billion as at 30 June 2020. The value of the freehold investment property portfolio increased by $312.18 million, or +12.0%, to $2.91 billion as at 30 June 2021 primarily due to $140.37 million net property revaluation increments over the past 12 months, acquisition of new freehold investment properties and the refurbishments of freehold investment property assets. Property, plant and equipment assets increased by $66.96 million mainly due to the ﬁt-out of 12 new company- operated stores in offshore regions, the premium ﬁt-out of a new Harvey Norman® franchised complex at Hornsby and net property revaluation increments for the owner-occupied freehold properties over the past 12 months. Total liabilities increased by $428.64 million, or 18.2%, to $2.78 billion as at 30 June 2021 from $2.35 billion as at 30 June 2020. Interest-bearing loans and borrowings increased by $262.13 million mainly due to an increase in utilisation of the Syndicated Facility by $295 million, from $195 million utilised as at 30 June 2020 to $490 million utilised as at 30 June 2021. Income tax payable increased by $77.80 million driven by higher proﬁt generated by the consolidated entity during the current year. Receivables from franchisees increased by $440.87 million mainly due to higher ﬁnancial accommodation provided to franchisees to assist franchisees in their strategy of increasing their inventory reserves in light of anticipated supply chain disruptions ranging from chip shortages, factory delays due to COVID- 19, port and shipping issues and global demand pressures. Inventories of company-operated stores increased by $87.11 million mainly due to new overseas store openings and higher inventory holdings in order to satisfy strong sales growth. The above increases have been offset by a reduction in cash and cash equivalents by $48.76 million. ANNUAL REPORT JUNE 2021 25 OPERATING AND FINANCIAL REVIEW (CONTINUED) OPERATING AND FINANCIAL REVIEW (CONTINUED) Outlook During the 2022 ﬁnancial year, we intend to open up to 3 franchised complexes in Australia and 3 company-operated stores overseas: 1 in Malaysia, 1 in Croatia and 1 in Ireland. Beyond the upcoming ﬁnancial year, we intend to open up to 2 franchised complexes in Australia during the 2023 ﬁnancial year and we intend to relocate 1 franchised complex from a leased site to a freehold property. We expect our offshore expansion plans to ramp-up towards the end of calendar 2022 and we anticipate opening up to 8 company- operated stores overseas during FY23: 4 in New Zealand, 3 in Malaysia and 1 in Croatia. We are announcing our intention to open 2 leasehold company-operated stores in Budapest, Hungary during calendar year 2023. Hungary borders Slovenia and Croatia, and with the collective population of the 3 countries added together, the Harvey Norman® brand can potentially reach approximately 16 million people. RETAIL TRADING UPDATE: 1 July 2021 to 26 August 2021 vs 1 July 2020 to 26 August 2020 and 1 July 2021 to 26 August 2021 vs 1 July 2019 to 26 August 2019 Rolling lockdowns in most States and Territories of Australia have affected sales in July and August 2021, even though Contactless Click & Collect and home delivery are operating for customers from 192 Australian franchised complexes. These rolling lockdowns have continued into September 2021. Over 15 million people, or approximately 58% of the Australian population, are currently in lockdown. However, we expect spending to recover quickly as we saw when lockdown restrictions were eased in our over- seas markets due to pent-up demand. Malaysia closed from 1 June 2021 due to large outbreaks of COVID-19 in the country. Malaysian stores commenced limited opening to customers from 21 August 2021. On 18 August 2021, New Zealand went into Level 4 lockdown with no store click and collect permitted, but contactless home delivery allowed. All New Zealand stores outside of Auckland commenced limited opening to customers from 7 September 2021, with click and collect permitted in Auckland from 22 September 2021. Our other 5 countries have been open in July, August and September 2021. Aggregated Sales increase / (decrease) from 1 July 2021 to 26 August 2021 vs 1 July 2020 to 26 August 20201 and 1 July 2021 to 26 August 2021 vs 1 July 2019 to 26 August 20191 (% increases have been calculated in Australian Dollars $A) 1 comparable sales growth has not been adjusted for the temporary closures mandated by each local government as a result of their COVID-19 Response COUNTRY Australian Franchisees New Zealand Slovenia & Croatia Ireland Northern Ireland Singapore Malaysia 1 July 2021 to 26 August 2021 vs 1 July 2020 to 26 August 2020 Comparable % Total % 1 July 2021 to 26 August 2021 vs 1 July 2019 to 26 August 2019 Comparable % Total % (-19.2) (-12.3) 1.4 11.1 2.3 0.4 (-49.2) (-19.1) (-13.0) (-5.9) 4.7 2.3 (-9.8) (-52.4) 11.1 4.6 30.8 78.8 31.9 3.1 (-43.9) 11.9 3.1 21.4 62.0 31.9 (-7.0) (-60.3) Aggregated Sales increase / (decrease) from 1 July 2021 to 26 August 2021 vs 1 July 2020 to 26 August 20201 and 1 July 2021 to 26 August 2021 vs 1 July 2019 to 26 August 20191 COUNTRY (% increase calculated in local currencies) Australian Franchisees New Zealand Slovenia & Croatia Ireland Northern Ireland Singapore Malaysia $A $NZD €Euro €Euro £GBP $SGD MYR 1 July 2021 to 26 August 2021 vs 1 July 2020 to 26 August 2020 Comparable % Total % 1 July 2021 to 26 August 2021 vs 1 July 2019 to 26 August 2019 Comparable % Total % (-19.2) (-13.9) 3.8 13.7 (-1.1) 2.4 (-19.1) (-14.6) (-3.7) 7.1 (-1.1) (-7.9) 11.1 5.6 32.5 81.4 25.9 9.0 (-47.5) (-55.0) (-39.1) 11.9 4.1 23.1 64.3 25.9 (-1.8) (-57.0) (% increases have been calculated in local currencies) 1 comparable sales growth has not been adjusted for the temporary closures mandated by each local government as a result of their COVID-19 Response ANNUAL REPORT JUNE 2021 26 OPERATING AND FINANCIAL REVIEW (CONTINUED) OPERATING AND FINANCIAL REVIEW (CONTINUED) Summary of Key Business Risks The Board remains optimistic about the consolidated entity’s future trading performance but acknowledges that there are several factors that may pose risk to the achievement of the business strategies and future ﬁnancial performance of the consolidated entity. Every business is exposed to 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. Similar to the last few months of FY20, during FY21 the consolidated entity has been subjected to various Government mandated closures. The consolidated entity expects that the COVID-19 pandemic could continue to impact trading conditions in the year ahead. From the onset of the pandemic to date, the COVID-19 Response by various government and health services organisations, through regulation and policy, has limited the ability of franchised complexes in Australia and overseas company-operated stores to trade at normal capacity — with varying levels of restrictions to trade imposed for varying time periods. Spontaneous temporary Government- imposed closures, reduced trading hours, restrictions to consumer mobility and strict social distancing measures may continue to inhibit 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, generally characterised by generous retail footprints and spacious ﬂoor layouts centred around open-air carparks, allowing for the efﬁcient and effective execution of ‘COVID-Safe Plans and Practices’, thereby maximising the ability to trade and service the needs of their customers. The consolidated entity has also continued to invest in technology, digital transformation and infrastructure to enable franchisees and company-operated stores to further enhance ‘contactless’ fulﬁlment measures including “Contactless Click & Collect” and “Contactless Delivery”, to continue to serve their customers while complying with any strict COVID-19 mandated restrictions or lockdowns. 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 has a robust balance sheet with a strong asset base totalling $6.67 billion and net assets of $3.89 billion as at 30 June 2021. From the commencement of the pandemic, the consolidated entity has demonstrated its ability to swiftly respond to COVID-19 challenges, while prioritising the safety of their staff, their customers and their local communities. The consolidated entity remains conﬁdent in its ability to appropriately respond to COVID-19 challenges in the future, as they arise. Information Technology (“IT”) security and data security breaches: This risk relates to the potential failure in IT security measures resulting in fraud and the loss, destruction or theft of customer, supplier, ﬁnancial or other commercially-sensitive information including intellectual property. This has the potential to adversely affect operating results which could lead to lawsuits, damage the reputation of the Harvey Norman® brand, and/or create other liabilities for the consolidated entity. The consolidated entity has seen an elevated risk of potential IT security and data security breaches since the commencement of the pandemic as the remote working environment, sparked by the pandemic, has created perceived opportunities for fraudulent activities. 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. ANNUAL REPORT JUNE 2021 27 OPERATING AND FINANCIAL REVIEW (CONTINUED) OPERATING AND FINANCIAL REVIEW (CONTINUED) Summary of Key Business Risks (continued) Compliance by franchisees with franchise agreements: This 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 intellectual property of the franchisor. 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, and also by closely monitoring both internal and external sources of information that provide insights into any changes in demand within the economies in which it operates. Increased competition resulting in a decline of retail margin or a loss of market share for franchisees in Australia and company-operated stores in overseas markets: The integrated retail, franchise, property and digital system, and diverse category mix assists in maintaining the consolidated entity’s competitive position. Market consolidation and/or acquisition may result in further competition and changes to retail margins and market share. Franchisees in Australia and company-operated stores in 7 overseas regions operate across a number of categories in the strongly performing Home and Lifestyle market. Diversity of category and the ability to identify growth opportunities locally and overseas, mitigates the risk from existing and potential competitors. Emergence of competitors in new channels: The Harvey Norman® Omni Channel Strategy provides customers of franchisees with a diverse, consistent and distinctive Harvey Norman® customer experience through a range of channels. The Harvey Norman® Omni Channel Strategy integrates retail, online, mobile and social channels. The online operations of franchisees in Australia and the company-operated online operations overseas continue to grow. The digital platform provides new opportunities for growth and new ways to embrace and engage with customers. Data analytics are an important element of the Harvey Norman® Omni Channel Strategy, and are utilised to improve customer experience. The Harvey Norman® Omni Channel Strategy sets the Harvey Norman® brand apart from other online and digital competitors as the digital, physical complex and distribution channels are fully integrated, providing customers of franchisees with a multitude of engagement options to meet their needs. The Harvey Norman® Omni Channel Strategy, supported by the retail property portfolio of the consolidated entity, makes the Harvey Norman® brand a strong competitor in the market. A decline in the commercial property sector leading to softening property asset values, falling rental returns and a reduction of future capital returns on property assets: With a property portfolio of 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. 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. 28 ANNUAL REPORT JUNE 2021 OPERATING AND FINANCIAL REVIEW (CONTINUED) DIRECTORS’ REPORT A core philosophy we have maintained throughout the years is the signiﬁcance and focus on the longevity of the Board of Directors with ‘skin in the game’, the experience and skill-set of our various business leaders and their deep understanding and expert-execution of the complex franchised operating model in Australia and the company-operated stores across seven overseas countries. The continuation of the COVID-19 pandemic during the 2021 ﬁnancial year has necessitated the strict implementation of the COVID-Safe framework and COVID-Safe Plans and Practices throughout the consolidated entity. The successful strategies that we enhanced and delivered this year could have only been achieved with formidable leadership with the intimate knowledge of the intricacies of our business, leaders that can be trusted to protect our Brands and navigate us through this period of ongoing uncertainty. This year we bade farewell to our non-executive director, Mr. Graham Charles Paton (AM), who retired at the end of the 2020 Annual General Meeting held on 25 November 2020. We thank Mr. Paton for his invaluable contribution to the consolidated entity over the past 15 years. Mr. Paton has provided wise counsel to management and exercised professional, sound, experienced and independent judgement for the beneﬁt of the consolidated entity. The Board welcomes Ms. Luisa Catanzaro who was appointed as non-executive director on 25 November 2020. Ms Catanzaro has more than 30 years of professional experience in senior ﬁnance executive roles across a range of industries including FMCG and agriculture sectors, and with ASX listed companies. Our Board Unless otherwise indicated, all directors (collectively termed ‘the Board’), held their position as director throughout the entire 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. Directors Kay Lesley Page Executive Director and CEO Chris Mentis B.Bus., FCA, FGIA, Grad Dip App Fin Executive Director, CFO & Company Secretary Mr. G. Harvey has overall executive responsibility for the strategic direction of the consolidated entity, and in particular, property investments. 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 has been a Director of the Bradman Foundation since December 2017 and, on 21 October 2020, Ms. Page was appointed as a Member of the Tourism Australia Board of Directors. 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 the 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 and COO Mr. Slack-Smith was a Harvey Norman® computer franchisee between 1993 and 1999. Mr. Slack-Smith was appointed a director of the Company on 5 February 2001. Mr. Slack-Smith has overall executive responsibility for the operations of the consolidated entity. David Matthew Ackery Executive Director Mr. Slack-Smith is the Chair of the Barker College Foundation Limited and a Member of Council at Barker College. 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. ANNUAL REPORT JUNE 2021 29 OPERATING AND FINANCIAL REVIEW (CONTINUED) DIRECTORS’ REPORT (CONTINUED) 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. Kenneth William Gunderson-Briggs B.Bus., FCA, MAICD Non-Executive Director (Independent) Mr. Brown is the Chairman of Windgap Foundation Limited. In 2013 he was awarded the Medal of the Order of Australia (OAM) for service to the community, particularly to people with disability. Mr. Gunderson-Briggs was appointed a director of Harvey Norman Holdings Limited on 30 June 2003. Mr. Gunderson-Briggs is a chartered accountant and a registered company auditor. Mr. Gunderson-Briggs has been involved in public practice since 1982 and a partner in a chartered accounting ﬁrm since 1990. Mr. Gunderson-Briggs’ qualiﬁcations include a Bachelor of Business from the University of Technology, Sydney and he is a Fellow of the CA ANZ. Mr. Gunderson-Briggs was appointed Chairman of the Remuneration Committee on 16 December 2015 and was appointed Chairman of the Audit & Risk Committee and Nomination Committee on 25 November 2020. Mr. Gunderson-Briggs is an independent Non-Executive Director of Australian Pharmaceutical Industries Limited (API), a company listed on the ASX, from May 2014. On 4 December 2020, he was appointed Chair of the API Board, having previously been the Chair of the Audit & Risk Committee of API. Maurice John Craven B.Sc., FAICD Non-Executive Director (Independent) Directors Mr. Craven was appointed a director of Harvey Norman Holdings Limited on 27 March 2019 and became a member of the Nomination Committee of the Company on 24 June 2021. Mr. Craven holds a Bachelor of Science degree from the University of Melbourne and is a Fellow of the Australian Institute of Company Directors. Graham Charles Paton AM, B.Ec., FCPA, MAICD Non-Executive Director (Independent) Retired 25 November 2020 Luisa Catanzaro B.Com., FCA, GAICD Non-Executive Director (Independent) Appointed 25 November 2020 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. 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 retired as an independent non-executive director on 25 November 2020. Mr Paton was Chairman of the Audit & Risk Committee, Chairman of the Nomination Committee and a member of the Remuneration Committee of the Company. Ms. Catanzaro was appointed a Non-Executive Director of Harvey Norman Holdings Limited on 25 November 2020, and became a member of the Audit & Risk Committee on 25 November 2020 and a member of the Remuneration Committee of the Company on 24 June 2021. Ms. Catanzaro has a Bachelor of Commerce from the University of NSW, is a Fellow of the CA ANZ and is also a Graduate of the Australian Institute of Company Directors. Ms. Catanzaro has more than 30 years of professional experience in senior ﬁnance executive roles across a range of industries including FMCG and agriculture sectors, and with ASX listed companies. Ms. Catanzaro is currently a Non-Executive Director of ASX listed company, Ricegrowers Limited, from September 2018, where Ms. Catanzaro is Chair of the Finance, Risk and Audit Committee and a member of the Remuneration and Nomination Committees. 30 ANNUAL REPORT JUNE 2021 OPERATING AND FINANCIAL REVIEW (CONTINUED) DIRECTORS’ REPORT (CONTINUED) Directors’ Meetings DIRECTOR Number of Meetings: Attendance Full Board 10 Audit & Risk 11 Remuneration 8 Nomination 3 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 L. Catanzaro 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 10 [10] 10 [10] 10 [10] 10 [10] 10 [10] 10 [10] 10 [10] 10 [10] 7 [7] 10 [10] 3 [3] n/a n/a n/a n/a n/a n/a 11 [11] 11 [11] 4 [4] n/a 7 [7] n/a n/a n/a n/a n/a n/a 8 [8] 8 [8] 3 [3] n/a n/a n/a n/a n/a n/a n/a n/a 3 [3] 3 [3] 2 [2] n/a 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 G. Harvey K.L. Page J.E. Slack-Smith D.M. Ackery C. Mentis M.J. Harvey C.H. Brown K.W. Gunderson-Briggs M.J. Craven L. Catanzaro TOTAL Ordinary Shares Performance Rights 392,620,640 19,856,315 1,143,893 683,471 1,161,297 3,335,180 205,525,565 10,059 30,673 - 196,500 549,000 327,000 327,000 249,000 - - - - - 624,367,093 1,648,500 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. Performance Rights At the date of this report, there were 1,648,500 performance rights (2020: 1,499,000), being a right to acquire ordinary shares in the Company at nil exercise price. 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 1 January 2021, 173,600 performance rights representing 43.4% of Tranche 3 of the 2016 LTI Plan had lapsed and will never be exercisable by the participants. On 6 January 2021, 191,025 performance rights under Tranche 3 of the 2016 LTI Plan were exercised. On 26 March 2021, the remaining 35,375 performance rights under Tranche 3 of the 2016 LTI Plan were exercised reducing the unissued ordinary shares under Tranche 3 of the 2016 LTI Plan to nil. 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. On 4 December 2020, a total of 549,500 performance rights under Tranche FY21 of the 2016 LTI Plan were granted to the Executive Directors in accordance with the terms and conditions of the LTI Plan. ANNUAL REPORT JUNE 2021 31 CEO and CFO Certiﬁcation OPERATING AND FINANCIAL REVIEW (CONTINUED) 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 2021, that: • 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 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 questionnaires 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. 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: NON-EXECUTIVE DIRECTOR Audit & Risk Remuneration Nomination C.H. Brown √ √ √ K.W. Gunderson-Briggs √ (Chairman) √ (Chairman) √ (Chairman) L. Catanzaro M.J. Craven √ n/a √ n/a n/a √ Mr. Gunderson-Briggs was appointed Chairman of the Audit & Risk Committee and the Nomination Committee on 25 November 2020. Ms. Catanzaro became a member of the Audit & Risk Committee on 25 November 2020 and became a member of Remuneration Committee on 24 June 2021. Mr. Craven became a member of the Nomination Committee on 24 June 2021. Mr. G.C. Paton retired on 25 November 2020. He was the Chairman of the Audit & Risk Committee, Chairman of the Nomination Committee and a member of the Remuneration Committee of the Company up to 25 November 2020. 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 (February 2019 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 2021. 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. Corporate Governance Dividends The directors recommend a fully franked ﬁnal dividend of 15.0 cents per share to be paid on 15 November 2021 to shareholders registered on 18 October 2021 (total dividend, fully franked - $186,900,998). The following fully franked dividends of the Company have also been paid, declared or recommended since the end of the preceding ﬁnancial year: 2020 ﬁnal fully-franked dividend 2 November 2020 2021 interim fully-franked dividend 3 May 2021 Payment Date Amount $224,281,198 $249,201,331 The total dividend in respect of the year ended 30 June 2021 of 35.0 cents per share (2020: 24.0 cents per share) represents 51.83% (2020: 62.24%) of proﬁt after tax and non-controlling interests, as set out on page 81 of the ﬁnancial statements. Excluding the non-cash net property revaluation increments, the total dividend in respect of the year ended 30 June 2021 of 35.0 cents per share represents 58.69% (2020: 65.59%) of proﬁt after tax and non-controlling interests, as set out on page 81 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. 32 ANNUAL REPORT JUNE 2021 OPERATING AND FINANCIAL REVIEW (CONTINUED) DIRECTORS’ REPORT (CONTINUED) Indemniﬁcation of Ofﬁcers During the ﬁnancial year, 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 Compa- ny 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 2021. Signiﬁcant Events After Balance Date From 26 June 2021, the New South Wales (NSW) government announced stay-at-home orders for the greater Sydney area, with progressive lockdowns after that date for franchised complexes in greater Sydney and regional areas of NSW, in response to the Delta Variant of COVID-19 and rising cases of local transmission. Thereafter, and up to the date of this report, decisions have been made by local governments to impose rolling lockdowns in most States and Territories of Australia. These government mandates have affected franchisee sales in July and August 2021. Apart from the above, there have been no circumstances arising since balance date which have signiﬁcantly affected or may signiﬁcantly affect: • the operations; • • the results of those operations; or the state of affairs of the entity or consolidated entity in future ﬁnancial years. 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. 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 2021, the consolidated entity had unused, available ﬁnancing facilities of $193.96 million out of total approved ﬁnancing facilities of $749.52 million. The net debt to equity ratio as at 30 June 2021 was 7.47%, compared to a net debt to equity ratio of NIL as at 30 June 2020. 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 2 years. ANNUAL REPORT JUNE 2021 33 OPERATING AND FINANCIAL REVIEW (CONTINUED) DIRECTORS’ REPORT — REMUNERATION REPORT Letter from the Chair of the Remuneration Committee Dear Shareholders The consolidated entity delivered a further record ﬁnancial result for the 2021 year increasing reported proﬁt before tax (PBT) by 78.8% to $1.183 billion and reported net proﬁt after tax and non-controlling interests (NPAT) by 75.1% to $841.41 million. It also delivered a strong increase of 12.0% in the net asset base for shareholders to $3.89 billion as at 30 June 2021. The PBT return on net assets was 30% for the 2021 ﬁnancial year compared to 19% for 2020. CHAIRMAN AND CEO’s REPORT The Design of Executive Director Remuneration for a Year of Great Uncertainty At the outset of the 2021 year there was great uncertainty as to the expectation of outcomes. With this in mind the Remuneration Committee applied the following settings to the remuneration framework for the Executive Directors: • Consensus forecasts of market analysts were used to establish the entry point, the full achievement and the over-achievement levels for the Short-Term Incentive (STI) Plan. The maximum outcomes for the STI Plan were capped and did not provide awards on a proportionate basis to the record results. The performance conditions for the STI Plan were not exclusively based on ﬁnancial outcomes, with non-ﬁnancial performance conditions and a discretion to apply malus penalty provisions as necessary in the assessment of achievement. The outcomes for the Long-Term Incentive (LTI) Plan were subject to achievement over a 3-year period, and not speciﬁcally weighted in respect of the record outcome year. The maximum outcomes for the LTI Plan were capped and did not provide awards on a proportionate basis to the record results. • • • • Evaluation of Performance of Executive Directors to Consider Any Windfall Gain Effect An appraisal of the performance of each Executive Director and the Executive Director team was undertaken following the end of the 2021 year as part of the annual Participant Performance Review by the Remuneration Committee. In this year, the appraisal focused on ensuring that executive remuneration in respect of the record ﬁnancial result for 2021 was fair and reasonable, was in line with performance, and did not result in unintended windfall gains in remuneration returns for the Executive Directors. The appraisal considered matters in respect of performance during the COVID-19 period, including: • • • • The evaluation of the performance of Executive Directors linked with the design of the remuneration framework has led the Remuneration Committee to the conclusion that the Executive Directors did not receive any windfall gains in their respective remuneration returns. The Remuneration Committee views the outcome of the 2021 STI Plan and the LTI Plan as appropriate recognition of the performance of the Executive Directors in dealing with the multi-faceted challenges imposed during the year, demonstrating resilience in management of the integrated retail, franchise, property and digital business through much uncertainty. In line with a similar resolution made last year, the Remuneration Committee resolved that in making its decisions and recommendations in respect of remuneration outcomes for the Executive Directors for 2021, 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. Subsequent to the year-end, in August 2021, all of the wages support and assistance received by controlled entities in Australia of $6.02 million (FY21: $3.63 million and FY20: $2.39 million) was repaid to the Federal Government via the Australian Taxation Ofﬁce. Benchmarking for Reasonableness The Company commissioned an independent remuneration expert review of the level and reasonableness of remuneration of the Executive Directors of the Company during 2021, 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, as well as remuneration structure and the components including the level of “at risk” remuneration. The critical ﬁndings of the independent remuneration expert review were as follows: • • • • • 34 The overall remuneration opportunity remains within a reasonable range given executive tenure and position responsibilities. The signiﬁcant shareholdings of the respective Executive Directors align with the long-term interests of shareholders. The remuneration mix is reasonable. The STI framework is reasonable. There is an opportunity to increase the long-term incentives, particularly for the CEO and the Executive Chairman. ANNUAL REPORT JUNE 2021 OPERATING AND FINANCIAL REVIEW (CONTINUED) DIRECTORS’ REPORT — REMUNERATION REPORT (CONTINUED) Letter from the Chair of the Remuneration Committee (continued) Benchmarking for Reasonableness (continued) In respect to the benchmark peer group used by the Company, the independent remuneration expert ﬁndings were as follows: • The benchmark peer group of the Company validly estimates remuneration applicable to executive positions of the Company by including peer companies that have important operational characteristics necessary to capture expertise required for position matching and excludes companies with operations that are not comparable. • As the statistical analysis indicated that executive pay varied with the size of the operation for which the executive was accountable, and as 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 continue to position remuneration around the level that reﬂects the ﬁnancial accountability and operational scope of the Company relative to the benchmark peer group, which was around the 75th to 90th percentile of the benchmark peer group. CHAIRMAN AND CEO’s REPORT • The conclusions reached by the Remuneration Committee, informed by the independent expert review, in respect of the remuneration of Executive Directors for 2021 were that: • • • The level of ﬁxed remuneration was reasonable. The level of target and maximum remuneration from the short term incentive (STI) was reasonable. 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 2021 The following improvements were made to the remuneration framework for Executive Directors informed by the independent remuneration expert report: • The performance conditions for the 100% short term incentive pool were changed from being 50% as to ﬁnancial conditions and 50% as to non-ﬁnancial conditions, to be 80% as to ﬁnancial conditions and 20% as to non-ﬁnancial conditions. • A malus or business modiﬁer reduction of up to 30% of the 100% achievement pool for non-achievement of further non-ﬁnancial conditions. In combination, this increases the overall difﬁculty of achieving maximum STI outcomes with up to 30% contingent on achieving both ﬁnancial performance and business modiﬁer (non-ﬁnancial) outcomes as opposed to only achieving non-ﬁnancial performance in prior years. In line with settings adjusted in prior years: • • • • Proﬁt after tax adjusted for the after-tax effect of property increments and decrements (APAT), continues to be the measure used for the achievement of the ﬁnancial conditions for the short term incentive. The 100% STI pool was increased to $3.25 million from $3.0 million in line with the increase in net assets of the Company over the previous ﬁnancial period, with the 100% STI pool able to be increased if the ﬁnancial performance conditions for the STI are over-achieved to the maximum extent of the over-achievement pool of $4.0 million from $3.6 million. The level of LTI achievement for the determination of vesting continues 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 exclude the effects of the ﬁnancial impact of the adoption of the lease accounting standard AASB 16, to allow calculation consistency year-on-year. Continuing the Framework in 2021 The framework for the Executive Director remuneration structure in the 2021 ﬁnancial year remained similar to that which was in place for the 2020 ﬁnancial year in respect of the following: • Benchmarked ﬁxed remuneration, with no increase in the level of ﬁxed remuneration. Fixed remuneration of the executives has not • • increased since it was reset in FY2014 following the Global Financial Crisis (GFC); Evaluation of satisfactory performance for each Executive Director required for entry into the STI; Entry into the 2021 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 2021 STI Plan The Board adopted a STI Plan for Executive Directors relevant to the desired outcomes of the 2021 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 80% weighting, and non-ﬁnancial conditions as to 20% weighting, and malus or penalty reductions of up to 30%. 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 2021 STI Plan, the minimum ﬁnancial performance conditions (entry-level to the 2021 STI Plan) was set at APAT of $400 million (FY2020 $320 million, up 25%), the 100% achievement level at APAT of $502 million (FY2020 $378 million, up 33%), with a maximum over-achievement level at APAT of $553 million (FY2020 $424 million, up 30%). ANNUAL REPORT JUNE 2021 35 OPERATING AND FINANCIAL REVIEW (CONTINUED) DIRECTORS’ REPORT — REMUNERATION REPORT (CONTINUED) Letter from the Chair of the Remuneration Committee (continued) Things to Note for the 2021 STI Plan (continued) The levels were set by the Remuneration Committee with reference to analyst consensus forecasts compiled by Bloomberg from each of Credit Suisse, Goldman Sachs, Macquarie, Morningstar, JP Morgan, Morgan Stanley, UBS, Jeffries, CLSA and Evans and Partners, updated at the beginning of November 2020. Achievement between the 50% and 100% targets and the 100% to the over-achievement targets re- mained 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: CHAIRMAN AND CEO’s REPORT • obeying the law • acting fairly • not to mislead or deceive • provide goods and services that are ﬁt for purpose • delivery of goods and services with reasonable care and skill Remuneration Outcomes The achievements of the 2021 ﬁnancial year are reﬂected in the remuneration outcomes: 1) Executive Directors achieved 112.86 out of 120 points (94.05%) of their 2021 STI targets for performance against a balanced scorecard of measures, as compared to 116.06 out of 120 points (96.72%) for the 2020 ﬁnancial year. • In respect of the ﬁnancial performance conditions, APAT of $738.44 million (FY2020 $426.78 million), which excluded COVID-19 assistance and support, exceeded the over-achievement maximum of $553 million. • The non-ﬁnancial performance conditions were achieved as to 87.5% compared to 92.12% in 2020. • The malus reduction was 4.64%, i.e. 15.4% of the maximum reduction of 30 points. • Aggregated STI expense for 2021 was $3,767,952 compared to $3,481,651 for 2020. • The total 2021 STI award was $286,301, or 8.2%, higher than for 2020. 2) RONA of 30.09% for the year (FY2020 18.91%), which excluded COVID-19 assistance and support, resulted in the following: • • • Tranche FY19 of the 2016 LTI Plan, granted on 4 December 2018 being assessed for vesting at 100%; Tranche FY20 of the 2016 LTI Plan, granted on 2 December 2019 was assessed for probable vesting at 100%; and Tranche FY21 of the 2016 LTI Plan, granted on 4 December 2020 was assessed for probable vesting at 100%. 3) The total “at risk” compensation expense for the 2021 ﬁnancial year was $1,261,775 or 27.8% higher than the “at risk” expense in the 2020 ﬁnancial year primarily due to the higher level of payment under the STI awards and the higher probability of assessed vesting under the LTI Plan. 4) The total “take-home” pay for Key Management Personnel (KMP) Directors was $1,092,343 or 10.7% higher than the 2020 ﬁnancial year. The total compensation for KMP Directors was $1,584,925 or 13.9% higher than the previous year. 5) Tranche 3 of the 2016 LTI Plan, granted on 1 December 2017 and subject to performance over the 2018, 2019 and 2020 ﬁnancial years, vested as to 56.6% with effect from 1 January 2021. 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 (TFR), which provides alignment of the executive management with 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 and non-controlling interests, earnings per share and average share price over a ﬁve year period from 2017 to 2021. The correlation factors range between 85% and 95% over the last ﬁve ﬁnancial years from 2017 to 2021. Correlation is detailed at Item 10 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 36 ANNUAL REPORT JUNE 2021 OPERATING AND FINANCIAL REVIEW (CONTINUED) DIRECTORS’ REPORT — REMUNERATION REPORT (AUDITED) Contents of the 2021 Remuneration Report This remuneration report for the year ended 30 June 2021 outlines the remuneration arrangements of the consolidated entity in accordance with the requirements of the Corporations Act 2001 (Cth), as amended, (the “Act”) and its regulations. This information has been audited as required by section 308(3C) of the Act. Introduction CHAIRMAN AND CEO’s REPORT The remuneration report is presented under the following sections: 1) 2) Remuneration principles and strategy 3) Remuneration governance 4) Remuneration mix - target 5) Details of the short-term incentive plan 6) Details of the long-term incentive plans 7) Performance and executive remuneration outcomes in FY21 8) Executive contractual arrangements 9) Non-Executive Director remuneration arrangements 10) Relationship between remuneration and the performance of the Company 11) Compensation of key management personnel 12) Additional disclosures relating to options, performance rights and shares 13) ‘Take-Home Pay’ for KMP Directors of the Company 14) Other matters for disclosure 15) Loans to key management personnel and their related parties 16) Other transactions and balances with key management personnel and their related parties 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 2021 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 Executive Director & Chief Executive Ofﬁcer John Evyn Slack-Smith Executive Director & Chief Operating Ofﬁcer 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 Kenneth William Gunderson-Briggs Non-Executive Director (independent) Maurice John Craven Non-Executive Director (independent) Full ﬁnancial year Full ﬁnancial year Full ﬁnancial year Full ﬁnancial year Full ﬁnancial year Full ﬁnancial year Full ﬁnancial year Full ﬁnancial year Full ﬁnancial year Graham Charles Paton AM Non-Executive Director (independent) Retired 25 November 2020 Luisa Catanzaro Senior Executives Martin Anderson Non-Executive Director (independent) Appointed 25 November 2020 General Manager—Advertising Retired 30 June 2021 Thomas James Scott General Manager—Property Gordon Ian Dingwall Chief Information Ofﬁcer Lachlan Roach Glen Gregory General Manager—Home Appliances General Manager—Technology & Entertainment Emmanuel Hohlastos General Manager—Audio Visual ANNUAL REPORT JUNE 2021 Full ﬁnancial year Full ﬁnancial year Full ﬁnancial year Full ﬁnancial year Full ﬁnancial year 37 OPERATING AND FINANCIAL REVIEW (CONTINUED) DIRECTORS’ REPORT — REMUNERATION REPORT (AUDITED) (CONTINUED) 2. Remuneration Principles and Strategy The executive remuneration strategy of the consolidated entity in 2021 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) CHAIRMAN AND CEO’s REPORT b) Business savvy requires a deep understanding of one or more of the sectors of retail, property, franchising and digital. 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. An owner orientation or perspective of an owner requires the individual to either have: i. "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. ii. 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. 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), c) d) e) 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 2021 aligns with the strategic direction and links remuneration outcomes to performance. Objective of the consolidated entity in 2021 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 2021 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 2021 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 38 ANNUAL REPORT JUNE 2021 OPERATING AND FINANCIAL REVIEW (CONTINUED) DIRECTORS’ REPORT — REMUNERATION REPORT (AUDITED) (CONTINUED) 2. Remuneration Principles and Strategy (continued) Component Vehicle Purpose Link to Performance Fixed remuneration CHAIRMAN AND CEO’s REPORT Comprises base salary, superannuation contributions and other beneﬁts To provide competitive ﬁxed remuneration set with reference to role, market and experience Short-term incentive (STI) Paid as cash as a performance cash incentive (PCI), subject to minimum shareholding of individual Executive Directors Rewards executives for their contribution to achievement of consolidated entity outcomes Consolidated entity and individual performance are considered during the annual remuneration review a. b. c. d. e. f. 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 STI pool in respect of 100% achievement level is subject to performance criteria as to: 80% subject to ﬁnancial conditions; i. ii. 20% subject to business critical non-ﬁnancial conditions; and iii. Malus reductions of up to 30% of the pool for non- achievement of further non-ﬁnancial performance conditions. Financial achievement calculated over the 100% achievement level is subject to ﬁnancial conditions only. 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. If shares held are less than the benchmark, beneﬁts are to be provided in the form of shares. Where Annual Proﬁt After Tax is calculated as follows: Annual Net Proﬁt After Tax (APAT), excluding the after-tax effect of property revaluation increments or decrements, the after-tax effect of the net impact of AASB 16 Leases and the after-tax effect of COVID-19 support and assistance received 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 2021, 2022 and 2023 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 ANNUAL REPORT JUNE 2021 39 OPERATING AND FINANCIAL REVIEW (CONTINUED) DIRECTORS’ REPORT — REMUNERATION REPORT (AUDITED) (CONTINUED) 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 2021, independent remuneration experts provided CHAIRMAN AND CEO’s REPORT remuneration benchmark information for consideration and analysis in respect of the level of Executive Director remuneration, including ﬁxed remuneration, the short-term incentives framework and the long-term incentives framework, and the reasonableness of the 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 of the NED remuneration cap. The Remuneration Committee approves, having regard to the recommendations made by the CEO, the level of the 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 short-term incentive plan or long-term incentive plan of the Company, and no Executive Director voted on those matters. The Design of Executive Director Remuneration for a Year of Great Uncertainty At the outset of the 2021 year there was great uncertainty as to the expectation of outcomes. With this in mind the Remuneration Committee applied the following settings to the remuneration framework for the Executive Directors: • Consensus forecasts of market analysts were used to establish the entry point, the full achievement and the over-achievement levels for the Short-Term Incentive (STI) Plan. The maximum outcomes for the STI Plan were capped and did not provide awards on a proportionate basis to the record results. The performance conditions for the STI Plan were not exclusively based on ﬁnancial outcomes, with both non-ﬁnancial performance conditions and malus penalty reductions included in the assessment of achievement. The outcomes for the Long-Term Incentive (LTI) Plan were subject to achievement over a 3-year period, and not speciﬁcally weighted in respect of the record outcome year. The maximum outcomes for the LTI Plan were capped and did not provide awards on a proportionate basis to the record results. • • • • Evaluation of Performance of Executive Directors to consider any Windfall Gain Effect An appraisal of the performance of each Executive Director and the Executive Director team was undertaken following the end of the 2021 year as part of the annual Participant Performance Review by the Remuneration Committee. In this year, the appraisal focused on ensuring that executive remuneration in respect of the record ﬁnancial result for 2021 was fair and reasonable, was in line with performance, and did not result in unintended windfall gains in remuneration returns for the Executive Directors. The appraisal considered matters in respect of performance during the COVID-19 period, including: • • • • The evaluation of the performance of Executive Directors linked with the design of the remuneration framework has led the Remuneration Committee to the conclusion that the Executive Directors did not receive unintended windfall gains in their respective remuneration returns. 40 ANNUAL REPORT JUNE 2021 OPERATING AND FINANCIAL REVIEW (CONTINUED) DIRECTORS’ REPORT — REMUNERATION REPORT (AUDITED) (CONTINUED) 3. Remuneration Governance (continued) Evaluation of Performance of Executive Directors to consider any Windfall Gain Effect (continued) The Remuneration Committee views the outcome of the 2021 STI Plan and the LTI Plan as appropriate recognition of the performance of the Executive Directors in dealing with the multi-faceted challenges imposed during the year, demonstrating resilience in management of the integrated retail, franchise, property and digital business through much uncertainty. In line with a similar resolution made last year, the Remuneration Committee resolved that in making its decisions and recommendations in respect of remuneration outcomes for the Executive Directors for 2021, 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. CHAIRMAN AND CEO’s REPORT Subsequent to the year-end, in August 2021, all of the wages support and assistance received by controlled entities in Australia of $6.02 million (FY21: $3.63 million and FY20: $2.39 million) was repaid to the Federal Government via the Australian Taxation Ofﬁce. No Unfair Beneﬁt Both the annual STI Plan and the ongoing 2016 LTI Plan have provisions to prevent an ‘unfair beneﬁt’ being obtained by any participant in respect of fraud or breach of obligation. 4. Remuneration Mix—Target For the 2021 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 previous ﬁnancial year, a review by an independent remuneration expert was undertaken in respect of the remuneration benchmarking used by the Company, with reference to both sector peers and comparator groups comprising companies of comparable ﬁnancial size and operations. As a result of this independent review, the policy of the Company was changed to position ﬁxed remuneration against the level that reﬂects the ﬁnancial accountability and operational scope of the position relative to peer group positions. The determination of ﬁxed remuneration of Executive Directors was subject to the following principles: a) The performance of the Company, the longevity of the Executive Directors in their respective roles and the assessment of opportunity costs in respect of replacement; Be in line with the remuneration policies of the Company for Executive Directors so as to position ﬁxed remuneration at around 75th to 90th percentile of the peer group; and Target total remuneration to provide the opportunity for Executive Directors to earn top quartile rewards for outstanding performance. b) c) Remuneration levels are considered annually, with consideration of market data and the performance of the consolidated entity and individual. The remuneration mix is considered against the maximum total remuneration for each Executive Director compared to the 75th percentile of the benchmark peer group recommended by the independent remuneration expert. Relationship to Benchmark Peer Group: Below Target Range Below Target Range Within Maximum Range The remuneration expert was commissioned to review the level and reasonableness of the remuneration set for Executive Directors. The independent remuneration expert found the level of the remuneration and the remuneration mix to be reasonable. 5. Details of the Short-Term Incentive (STI) Plan 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 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. ANNUAL REPORT JUNE 2021 41 OPERATING AND FINANCIAL REVIEW (CONTINUED) DIRECTORS’ REPORT — REMUNERATION REPORT (AUDITED) (CONTINUED) 5. Details of the Short-Term Incentive (STI) Plan (continued) 2021 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. Who participates? Executive Directors STI awards, in the form of a cash bonus or performance cash incentive (PCI) or equity, 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. CHAIRMAN AND CEO’s REPORT How is the STI delivered? 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 2021 STI Plan PCI to an Executive Director under the 2021 STI Plan is to be made on 30 September 2021, or as soon as reasonably practicable after that date, subject to the satisfaction of 2021 STI Plan Performance Conditions and 2021 STI Plan Service Conditions. Executive Directors, excluding the Executive Chairman, have a target STI opportunity of between 45% to 72% 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. What is the 2021 STI opportunity? For the year ended 30 June 2021, the 100% STI Pool for the 2021 STI Plan PCI was $3,250,000 allocated as follows: (1) Gerald Harvey nil; (2) Kay Lesley Page $942,500; (3) John Evyn Slack-Smith $812,500; (4) David Matthew Ackery $812,500; and (5) Chris Mentis $682,500. The maximum over-achievement pool for allocation was $750,000, with the maximum STI pool being $4,000,000. The over-achievement pool was allocated in proportion to the 100% STI Pool. What are the STI performance conditions for FY2021? Actual STI payments awarded to each Executive Director depend on the extent to which speciﬁc measures, targets, initiatives and conditions for the 2021 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 2021 STI Plan Performance Conditions are as follows: a. Financial Condition as to 80% entitlement to the 100% STI Pool; b. c. d. Non-Financial Conditions as to 20% entitlement to the 100% STI Pool; Malus reductions of up to 30% for non-achievement of certain other non-ﬁnancial performance conditions; and Financial Condition as to the Over-Achievement Pool. (a) STI 80% Financial Condition (b) STI 20% Non-Financial Conditions APAT was selected as the STI performance measure as it indicates the level of after-tax proﬁt generated adjusted for the after-tax effects of net property revaluation adjustments, the net impact of AASB 16 Leases and 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 2021 and will be achieved at the following levels: • Entry Level at APAT of $400 million, equating to 50% entitlement of the STI subject to the ﬁnancial condition (i.e., 40% entitlement to the 100% STI pool = $1.30 million); The Non-Financial Conditions were assessed in respect of the following: • Productivity improvements equating to 50% entitlement of the STI subject to the non-ﬁnancial conditions (i.e., 10% entitlement to the STI pool = $0.325 million); and • Digital innovations equating to 50% entitlement of the STI subject to the non-ﬁnancial conditions (i.e., 10% entitlement to the STI pool = $0.325 million). Full achievement of the non-ﬁnancial conditions will equate to 20% entitlement to the STI pool i.e., a total of $0.65 million. • • • • 42 100% Level at APAT of $502million, equating to 100% entitlement of the STI subject to the ﬁnancial condition (i.e., 80% entitlement to the 100% STI pool = $2.60 million); Straight-line sliding scale between Entry Level and 100% Level; Over-Achievement Level at APAT of $553 million, equating to 100% entitlement of the 100% STI Pool subject to the ﬁnancial condition (i.e., 80% entitlement to the 100% STI pool = $2.60 million) and 100% entitlement to the Over-Achievement Pool Amount of $0.75 million, resulting in a total Over-Achievement entitlement of $3.35 million; Straight-line sliding scale for achievement between 100% and the Over-Achievement Level. (c) Malus adjustments of up to 30% for non-achievement The malus (ﬁnancial penalty) provisions could reduce the overall achievement of the STI award by 30%. The malus provisions were made up of three main items: • • • Franchisee learning, development and growth = 5% of the 30%; Customer Experience in Australia and NZ = 10% of the 30% Company-operated store expansion strategy = 15% of the 30%. The malus provisions could potentially reduce the overall achievement of the STI award by up to 30% of the 100% STI Pool i.e., a reduction of up to $0.975 million. ANNUAL REPORT JUNE 2021 OPERATING AND FINANCIAL REVIEW (CONTINUED) DIRECTORS’ REPORT — REMUNERATION REPORT (AUDITED) (CONTINUED) 5. Details of the Short-Term Incentive (STI) Plan (continued) 2021 STI Plan (continued) In respect of the 2021 STI, each participating Executive Director will be subject to an additional non-ﬁnancial performance condition in the form of a Participant Performance Review which is to: • 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. CHAIRMAN AND CEO’s REPORT To determine whether an individual is eligible for the 2021 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 2021. How is performance assessed? • 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 2021 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 2021 STI Plan by serving a written notice to the relevant executive at any time before the payment date. 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. 6. Details of the Long-Term Incentive (LTI) Plan There were three active tranches of the 2016 LTI Plan operating in respect of the 2021 ﬁnancial year. The FY19 Tranche was issued in FY2019 and is measured over 2019, 2020 and 2021. The FY20 Tranche was issued in FY2020 and is measured over 2020, 2021 and 2022. The FY21 Tranche was issued in FY2021 as follows: Tranche FY21 of the 2016 LTI Plan Tranche FY21 of the 2016 LTI Plan Who participates? LTI grants are made annually to Executive Directors in order to align remuneration with the creation of sustainable shareholder value over the long-term. Executive Directors which have an impact on the performance of the consolidated entity against the relevant long-term performance measures. 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 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. How is the LTI delivered? 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 ANNUAL REPORT JUNE 2021 43 OPERATING AND FINANCIAL REVIEW (CONTINUED) DIRECTORS’ REPORT — REMUNERATION REPORT (AUDITED) (CONTINUED) 6. Details of the Long-Term Incentive (LTI) Plan (continued) Tranche FY21 of the 2016 LTI Plan (continued) 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 34% of ﬁxed remuneration. A total of 549,500 performance rights under Tranche FY21 of the 2016 LTI Plan were granted to Executive Directors on 4 December 2020. What is the LTI opportunity issued in FY2021? CHAIRMAN AND CEO’s REPORT The performance rights were independently valued by Mercer Consulting (Australia) Pty Limited at grant date, with a fair value of $3.85 per entitlement share based on a share price of $4.66. 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 and service conditions of the 2016 LTI Plan, the total fair value of Tranche FY21 performance rights amounted to $2,115,575 in aggregate. Tranche FY21 Grant date Vesting date First exercise date Last exercise date Key Dates 4 December 2020 31 December 2023 1 January 2024 30 June 2026 What are the performance conditions for Tranche FY21 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 The ﬁnancial condition in respect of the achievement of Tranche FY21 of the 2016 LTI Plan is based on RONA, where Tranche FY21 RONA means the fraction: Tranche FY21 Aggregate APBT ÷ Tranche FY21 Aggregate Net Assets, expressed as a percentage. Where: Tranche FY21 Financial Years means the ﬁnancial years ending 30 June 2021, 2022 and 2023; Tranche FY21 Aggregate APBT means the aggregate amounts of the annual net proﬁt before income tax of the consolidated entity for each of the Tranche FY21 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 FY21 Financial Years; Tranche FY21 Aggregate Net Assets means the aggregate amounts of the net assets of the consolidated entity, excluding non-controlling interests, as at each of 30 June 2020, 2021 and 2022 as described in the annual report of the consolidated entity in respect of each of the Tranche FY21 Financial Years. Full vesting of the Tranche FY21 performance rights is conditional upon achievement of Tranche FY21 RONA of at least 20%, with a lesser vesting as set out in the table below: Tranche FY21 RONA Achieved Tranche FY21 % of Performance Rights that will become Less than 16% 16% 17% 18% 19% 20% 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. 44 ANNUAL REPORT JUNE 2021 OPERATING AND FINANCIAL REVIEW (CONTINUED) DIRECTORS’ REPORT — REMUNERATION REPORT (AUDITED) (CONTINUED) 6. Details of the Long-Term Incentive (LTI) Plan (continued) Tranche FY21 of the 2016 LTI Plan (continued) 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 FY21 of the 2016 LTI Plan measured over the period for ﬁnancial years ending 30 June 2021, 30 June 2022 and 30 June 2023. When does the LTI vest? CHAIRMAN AND CEO’s REPORT Performance rights granted under Tranche FY21 of the 2016 LTI Plan will vest on 31 December 2023, subject to meeting the ﬁnancial performance conditions and service conditions, and will be capable of exercise between 1 January 2024 and 30 June 2026. 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. 7. Performance and Executive Remuneration Outcomes in FY21 7A. Actual Remuneration Earned by Key Management Personnel (KMP) in FY21 The compensation expensed in respect of KMP in FY21 is set out in Table 1 (for Directors) and Table 2 (for Senior Executives) on pages 55 and 56 of this report. This provides shareholders with a view of the remuneration earned by KMP for performance in the 2021 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 2021, or as soon as practicable after that date, is set out in Section 13 of the Remuneration Report on page 59. 7B. 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. In line with the independent review undertaken during the 2020 ﬁnancial year by an independent remuneration expert, the determination of ﬁxed remuneration of Executive Directors was subject to the following principles: a) The performance of the Company, the longevity of the Executive Directors in their respective roles and the assessment of opportunity costs in respect of replacement; Be in line with the remuneration policies of the Company for Executive Directors so as to position ﬁxed remuneration at around 75th to 90th percentile of the peer group; and Target total remuneration to provide the opportunity for Executive Directors to earn top quartile rewards for outstanding performance. b) c) Remuneration levels are considered annually, with consideration of market data and the benchmark peer group. The process undertaken by the Remuneration Committee consisted of a review of Company, business unit and individual performance, relevant comparative remuneration, and external advice independent of management as to the reasonableness of the ﬁxed remuneration of the Executive Directors. For FY2021, there was no increase in the level of ﬁxed remuneration for the Executive Directors. The ﬁxed remuneration of the Executive Directors has not increased since the ﬁxed remuneration was re-set in FY2014 following the Global Financial Crisis (GFC). The ﬁxed component of the remuneration of Executive Directors is disclosed in Table 1 on page 55 of this report. ANNUAL REPORT JUNE 2021 45 OPERATING AND FINANCIAL REVIEW (CONTINUED) DIRECTORS’ REPORT — REMUNERATION REPORT (AUDITED) (CONTINUED) 7. Performance and Executive Remuneration Outcomes in FY21 (continued) 7C. Actual Performance Against Short Term Incentive (STI) Measures A combination of ﬁnancial and non-ﬁnancial measures are used to measure performance for STI awards. The STI 100% opportunity pool was $3,250,000 (2020: $3,000,000). The pool for over-achievement was $750,000 (2020: $600,000). The maximum aggregate pool for allocation was $4,000,000 (2020: $3,600,000). 80% of the STI is dependent on the satisfaction of ﬁnancial performance conditions (based on APAT) and 20% is measured against the achievement of non-ﬁnancial measures. Actual performance against those measures is as follows for the 2021 ﬁnancial year: a) CHAIRMAN AND CEO’s REPORT b) c) d) 100% achievement of the 80% Financial Condition (score of 80 out of 80) of the 100% STI pool = $2,600,000 100% achievement of the Over-Achievement Pool subject to the Financial Condition (score of 20 out of 20) = $750,000 87.5% achievement of the 20% Non-Financial Conditions (score of 17.5 out of 20) = $568,752 15.5% reduction for malus penalties of up to 30% of the STI Pool (score of 4.64 out of 30) = reduction of $150,800 The total 2021 STI Plan payable in respect of the 2021 ﬁnancial year is $3,767,952 (2020: $3,481,651). This represented a total achievement of 112.86 points out of 120 points (94.05%) as shown in the tables below. Financial Conditions of the 2021 STI Plan Achievement of 80% Financial Condition Calculation of FY2021 APAT Annual Net Proﬁt After Tax (APAT) excluding the after-tax effects of property revaluation increments or decrements, the net impact of AASB 16 Leases and any COVID-19 support and assistance received = $738.44 million for FY21 Achievement = 120% Over- Achievement 100% Level 2021 STI PCI % Financial Conditions Gerald Harvey Kay Lesley Page John Evyn Slack-Smith David Matthew Ackery Chris Mentis Total Nil $942,500 $812,500 $812,500 $682,500 $3,250,000 Achievement of Over-Achievement Pool n/a 80% 80% 80% 80% 120% Over- Achievement Pool % Financial Conditions Gerald Harvey Kay Lesley Page John Evyn Slack-Smith David Matthew Ackery Chris Mentis Total Nil $217,500 $187,500 $187,500 $157,500 $750,000 n/a 100% 100% 100% 100% 2021 STI PCI Financial Condition Nil $754,000 $650,000 $650,000 $546,000 $2,600,000 2021 STI PCI Financial Condition Nil $217,500 $187,500 $187,500 $157,500 $750,000 % Financial Condition Satisﬁed n/a 100% (80 out of 80) 100% (80 out of 80) 100% (80 out of 80) 100% (80 out of 80) % Financial Condition Satisﬁed n/a 100% (20 out of 20) 100% (20 out of 20) 100% (20 out of 20) 100% (20 out of 20) 2021 STI PCI Payable Nil $754,000 $650,000 $650,000 $546,000 $2,600,000 2021 STI PCI Payable Nil $217,500 $187,500 $187,500 $157,500 $750,000 APAT for the 2021 ﬁnancial year was $738.44 million resulting in the full achievement of the ﬁnancial conditions for the STI 100% Pool (level required $502 million), and full achievement of the ﬁnancial conditions in respect of the Over-Achievement Pool (level required $553 million). 46 ANNUAL REPORT JUNE 2021 OPERATING AND FINANCIAL REVIEW (CONTINUED) DIRECTORS’ REPORT — REMUNERATION REPORT (AUDITED) (CONTINUED) 7. Performance and Executive Remuneration Outcomes in FY21 (continued) 7C. Actual Performance Against Short Term Incentive (STI) Measures (continued) Non-Financial Conditions of the 2021 STI Plan Achievement of 20% Non- Financial Conditions For 2021, 20% of the 100% opportunity pool i.e., $650,000 was subject to non-ﬁnancial performance measures as to: • • Productivity improvements of 50% for $325,000; and Digital innovations of 50% for $325,000. 100% Level 2021 STI PCI % Non-Financial Conditions 2021 STI PCI Non- Financial % Non-Financial Condition Satisﬁed 2021 STI PCI Payable CHAIRMAN AND CEO’s REPORT Gerald Harvey Nil Kay Lesley Page John Evyn Slack-Smith David Matthew Ackery Chris Mentis Total $942,500 $812,500 $812,500 $682,500 $3,250,000 n/a 20% 20% 20% 20% Nil n/a $188,500 87.5% (17.5 out of 20) $162,500 87.5% (17.5 out of 20) $162,500 87.5% (17.5 out of 20) $136,500 87.5% (17.5 out of 20) $650,000 Nil $164,938 $142,188 $142,188 $119,438 $568,752 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 87.5% of the non-ﬁnancial performance hurdles for the 2021 STI Plan were achieved, equating to a score of 17.5 points out of 20 points. Achievement of the Non-Financial Performance Conditions for the 2021 STI Plan are set out in the following table: Assessment of Non-Financial Conditions of the 2021 STI Plan Primary Weighting 10% Measure Target Implement process improvements and systems to enhance the Online-to- Ofﬂine (020) Strategy of the consolidated entity. Productivity Improvements Initiatives and Conditions Establish and commence the build phase for the up- grade of ﬁnance platforms of the consolidated entity in Australia, with governance established for each stream of the project within approved scope and budget. 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® functionality in no less than 80 franchised complexes with the third phase of the approved program within approved scope and budget. (2) Complete phase 3 of the approved project to replace all end-of-life and at-capacity hardware used by franchisees within approved scope and budget. (3) Establish and commence the security and improve- ment program for franchisees with governance established for each stream of the program within approved scope and budget. Digital Innovations Implement innovation and improvement initiatives to enhance the digital operations of the consolidated entity. 10% Franchisees are to be provided with licences and train- ing to use the digital innovations to improve the proﬁtability of the franchised business: (1) Establish a program of improvement initiatives within franchised complexes and the Marketplace franchisee operational environments including a schedule for scope approval and an execution timetable. (2) Upgrade the digital platform licensed to the Marketplace franchisee with appropriate governance over the approved scope and budget. Total 20% ANNUAL REPORT JUNE 2021 Weighting of initiatives & conditions Achieve- ment Score 25% 80% 2.0% 25% 100% 2.5% 25% 100% 2.5% 25% 100% 2.5% 50% 100% 5.0% 50% 60% 3.0% 17.5% 47 OPERATING AND FINANCIAL REVIEW (CONTINUED) DIRECTORS’ REPORT — REMUNERATION REPORT (AUDITED) (CONTINUED) 7. Performance and Executive Remuneration Outcomes in FY21 (continued) 7C. Actual Performance Against Short Term Incentive (STI) Measures (continued) Malus Reduction in Respect of 2021 STI Plan Malus Reductions of up to 30% of the 2021 STI Malus (ﬁnancial penalty) provisions to reduce the overall achievement of the 100% STI pool by up to 30% i.e., $975,000, in respect of: • • • Customer Experience in Australia and New Zealand, as to 10 points of the 30%; Franchisee learning, development and growth, as to 5 points of the 30%; and Company-operated store expansion strategy, as to 15 points of the 30%. CHAIRMAN AND CEO’s REPORT 100% Level 2021 STI PCI % Malus Reductions 2021 STI PCI Malus Reductions % Malus Reductions (Score) Reduction in 2021 STI PCI Payable Gerald Harvey Kay Lesley Page John Evyn Slack-Smith David Matthew Ackery Chris Mentis Total Nil $942,500 $812,500 $812,500 $682,500 $3,250,000 n/a -30% -30% -30% -30% Nil n/a ($282,750) -15.47% (4.64 out of 30) ($243,750) -15.47% (4.64 out of 30) ($243,750) -15.47% (4.64 out of 30) ($204,750) -15.47% (4.64 out of 30) ($975,000) Nil ($43,732) ($37,700) ($37,700) ($31,668) ($150,800) Total achievement of the 2021 STI was reduced by 4.64% ($150,800) relating to the assessment of malus reductions as indicated in the table below. Primary Weighting -10% Measure Target Grant licences to use tools to reinforce and enhance the "Shop with Conﬁdence" Harvey Norman® brand positioning through the Customer Service Standards. Customer Experience Ongoing reﬁnement of the process by each franchisee that promotes and encourages measure- able improvement in the knowledge and capability of the franchisee and their employees. Company-operated store expansion strategy in Singa- pore, Malaysia, Ireland and Croatia. People & Culture / Franchisee Learning, Development and Growth Company- Operated Store Expansion Strategy Total 48 Assessment of the Malus Provisions Initiatives and Conditions Weighting of initiatives & conditions Achieve- ment / Score (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 FY21 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 FY21 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 FY21 over the prior year on a like-for-like basis. -5% (1) Franchisees to identify and nominate a minimum number of 50 candidates to attend the “Franchisees and Proprietor in Training (FIT)” development program during FY21. (2) Franchisees to achieve a successful completion rate of 75% by participants in the FIT development program during FY21. Malus Reduc- tion 0.0% -3.64% 0.0% -1.0% 0.0% 0.0% 40% 40% 10% 10% 50% 50% 100% (Score of 4.0%) 9.0% (Score of 0.36%) 100% (Score of 1.0%) 0.0% (Score of 0.0%) 100% (Score of 2.5%) 100% (Score of 2.5%) -11.25% (1) Singapore: open 3 new stores during FY21. 75% (2) Malaysia: open 3 new stores during FY21 -1.875% -1.875% (3) Ireland: One (1) new store to be opened at Sligo. (4) Croatia: One (1) new store to be opened at Pula. 12.5% 12.5% -30% ANNUAL REPORT JUNE 2021 100% (11.25%) Both 100% (1.875%) 0.0% 0.0% 0.0% -4.64% OPERATING AND FINANCIAL REVIEW (CONTINUED) DIRECTORS’ REPORT — REMUNERATION REPORT (AUDITED) (CONTINUED) 7. Performance and Executive Remuneration Outcomes in FY21 (continued) 7C. Actual Performance Against Short Term Incentive (STI) Measures (continued) SUMMARY OF TOTAL ACHIEVEMENT OF 2021 STI Gerald Harvey Kay Lesley Page John Evyn Slack-Smith 100% Pool Amount Over-Achievement Pool TOTAL 2021 STI Financial Non-Financial Malus Financial - $754,000 $650,000 - $164,938 $142,188 $142,188 $119,438 - ($43,732) ($37,700) ($37,700) ($31,668) David Matthew Ackery CHAIRMAN AND CEO’s REPORT Chris Mentis $650,000 $546,000 Total $2,600,000 $568,752 ($150,800) - $217,500 $187,500 $187,500 $157,500 $750,000 - $1,092,706 $941,988 $941,988 $791,270 $3,767,952 Service Conditions of the 2021 STI Plan The 2021 STI Plan Service Conditions will be deemed to be satisﬁed, if and only if, as at the relevant payment date (30 September 2021): • 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 2021 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 is 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 2021 STI Plan held shares in the Company of a value that was in excess of the Benchmark Shareholding Level. The STI beneﬁt under the 2021 STI Plan is to be paid in cash. 7D. Actual Performance Against Long Term Incentive (LTI) Measures for Tranche FY21 of the 2016 LTI Plan A total of 549,500 performance rights were granted to Executive Directors on 4 December 2020. 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 FY21 of the 2016 LTI Plan will be 100% achieved by the end of the vesting period and it is probable that 100% 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 in respect of COVID-19 support and assistance. The probability of 100% vesting has been estimated based on the calculation of Tranche FY21 RONA for the 2021 ﬁnancial year of 30.09%. A 30.09% RONA for FY21 would result in a 100% vesting for year 1 of the three-year measurement period. A 100% vesting probability will result in an estimated cumulative Tranche FY21 fair value of $2,115,575 over the vesting period. An amount of $393,726 has been recognised as remuneration to Executive Directors and expensed in the income statement on a straight-line basis for FY2021. Achievement of 100% Financial Condition for Tranche FY21 of 2016 LTI Calculation of FY21 RONA: FY21 APBT (net proﬁt excluding property revaluations, the net impact of AASB 16 Leases and any COVID-19 support and assistance received) FY20 Net Assets (excluding non-controlling interests) $1,036.91 million $3,446.34 million = 30.09% RONA Number of Performance Rights Fair Value Per Right 65,500 183,000 109,000 109,000 83,000 549,500 $3.85 $3.85 $3.85 $3.85 $3.85 Fair Value of Performance Rights $252,175 $704,550 $419,650 $419,650 $319,550 $2,115,575 Gerald Harvey Kay Lesley Page John Evyn Slack-Smith David Matthew Ackery Chris Mentis Total Probability of Vesting % Estimated Value of Tranche FY21 2016 LTI Plan to Vest Tranche FY21 LTI Plan Expense in FY21 100% 100% 100% 100% 100% $252,175 $704,550 $419,650 $419,650 $319,550 $46,932 $131,123 $78,100 $78,100 $59,471 $2,115,575 $393,726 49 ANNUAL REPORT JUNE 2021 OPERATING AND FINANCIAL REVIEW (CONTINUED) DIRECTORS’ REPORT — REMUNERATION REPORT (AUDITED) (CONTINUED) 7. Performance and Executive Remuneration Outcomes in FY21 (continued) 7D. Actual Performance Against Long Term Incentive (LTI) Measures for Tranche FY21 of the 2016 LTI Plan (continued) Subject to the satisfaction of the ﬁnancial performance condition and service conditions of the 2016 LTI Plan, Tranche FY21 will vest on 31 December 2023. 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 the performance rights have become exercisable on 1 July 2026 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. • CHAIRMAN AND CEO’s REPORT 7E. Reassessment of Tranche FY20 of the 2016 LTI Plan Performance Conditions and Expense Recognised in FY21 In the 2020 ﬁnancial year, a total of 549,500 performance rights were granted to Executive Directors on 2 December 2019 under Tranche FY20 of the 2016 LTI Plan. 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. 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. In the 2020 Remuneration Report, it was reported that the estimated achievement of Tranche FY20 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 Tranche FY20 performance rights will meet the performance condition. The probability of 60% vesting had been estimated based on the calculation of Tranche FY20 RONA for the 2020 ﬁnancial year of 18.91%. The ﬁnancial performance condition of Tranche FY20 is subject to reassessment during each of the Tranche FY20 Financial Years being the ﬁnancial years ending 30 June 2020, 2021 and 2022. A reassessment of the Tranche FY20 Aggregate APBT and Tranche FY20 Aggregate Net Assets for the 2020 and 2021 ﬁnancial years has resulted in a revised RONA for the two-year aggregated period of 24.73%. The revised RONA of 24.73% has resulted in a revised probability of vesting of 100%. This revised probability of vesting of 100% is higher than the previously estimated probability of vesting of 60% calculated in FY20 based on Tranche FY20 RONA. The cumulative expense in respect of Tranche FY20 has been reassessed in the 2021 ﬁnancial year as $1,906,765, an increase of $762,706 from the previous assessment of cumulative Tranche FY20 expense in the 2020 ﬁnancial year of $1,144,059 as reported in the 2020 Remuneration Report. The total value of Tranche FY20 expense recognised in the 2021 ﬁnancial year was $761,714, comprised of $618,173 relating to the recognition of the Tranche FY20 expense on a straight-line basis for FY2021, and $143,541 relating to an adjustment to the Tranche FY20 expense recognised in the previous ﬁnancial year due to the reassessment of the probability of vesting from 60% to 100%. Reassessment of 100% Financial Condition for Tranche FY20 of 2016 LTI Plan Calculation of Aggregated RONA for Tranche FY20 Financial Years (FY2020 and FY2021) Tranche FY20 Aggregated APBT (net proﬁt excluding property revaluations, the net impact of AASB 16 Leases and any COVID-19 support and assistance received) (2020 + 2021) Tranche FY20 Aggregated Net Assets (2019 + 2020) $1.635.84 million $6,613.75 million = 24.73% RONA Gerald Harvey Kay Lesley Page John Evyn Slack-Smith David Matthew Ackery Chris Mentis Total Probability Vesting % in FY20 Tranche FY20 Estimated Fair Value in FY20 Revised Probability Vesting in FY21 Revised Estimated Tranche FY20 Fair Value in FY21 Adjustment due to reassessment Tranche FY20 LTI Plan Expense in FY21 60% 60% 60% 60% 60% $136,371 $381,006 $226,938 $226,938 $172,806 $1,144,059 100% 100% 100% 100% 100% $227,285 $635,010 $378,230 $378,230 $288,010 $90,914 $90,796 $254,004 $253,674 $151,292 $151,292 $115,204 $151,095 $151,095 $115,054 $1,906,765 $762,706 $761,714 7F. Reassessment of Tranche FY19 of the 2016 LTI Plan Performance Conditions and Expense Recognised in FY21 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 was measured over a three-year period for ﬁnancial years ending 30 June 2019, 30 June 2020 and 30 June 2021. 50 ANNUAL REPORT JUNE 2021 OPERATING AND FINANCIAL REVIEW (CONTINUED) DIRECTORS’ REPORT — REMUNERATION REPORT (AUDITED) (CONTINUED) 7. Performance and Executive Remuneration Outcomes in FY21 (continued) 7F. Reassessment of Tranche FY19 of the 2016 LTI Plan Performance Conditions and Expense Recognised in FY21 (continued) In the 2020 Remuneration Report, it was reported that the estimated achievement of Tranche FY19 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 Tranche FY19 performance rights will meet the performance condition. The probability of 60% vesting was reassessed in 2020 based on a 2-year aggregated RONA, being the Tranche FY19 Aggregate APBT and Tranche FY19 Aggregate Net Assets for the 2019 and 2020 ﬁnancial years. The reassessment in 2020 resulted in a revised 2-year aggregated RONA of 18.15%. CHAIRMAN AND CEO’s REPORT The ﬁnancial performance condition of Tranche FY19 was subject to reassessment during each of the Tranche FY19 Financial Years being 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, 2020 and 2021 ﬁnancial years has resulted in a revised RONA for the three-year aggregated period of 22.47%. A revised aggregated RONA of 22.47% for the Tranche FY19 Financial Years has resulted in the actual achievement of 100% of the Tranche FY19 performance rights. This revised achievement calculation of 100% is higher than the previously estimated probability of vesting of 60% calculated in FY20. The cumulative expense in respect of Tranche FY19 has been reassessed in the 2021 ﬁnancial year as $1,423,205, an increase of $569,282 from the previous assessment of cumulative Tranche FY19 expense in the 2020 ﬁnancial year of $853,923 as reported in the 2020 Remuneration Report. The total value of Tranche FY19 expense recognised in the 2021 ﬁnancial year was $753,359, comprised of $462,115 relating to the recognition of the Tranche FY19 expense on a straight-line basis for FY21, and $291,244 relating to an adjustment to the Tranche FY19 expense recognised in the 2019 and 2020 ﬁnancial years due to the reassessment of the probability of vesting from 60% to 100%. FY2021 was the ﬁnal year of measurement for Tranche FY19 with the performance rights scheduled to vest at 31 December 2021. Reassessment of 100% Financial Condition for Tranche FY19 of 2016 LTI Plan Calculation of Aggregated RONA for Tranche FY19 Financial Years (2019, 2020 and 2021) Tranche FY19 Aggregated APBT (2019+ 2020 + 2021) $2,140.10 million Tranche FY19 Aggregated Net Assets (2018 + 2019 + 2020) $9,524.76 million = 22.47% RONA Probability Vesting % in FY20 Tranche FY19 Estimated Fair Value in FY20 Revised Probability Vesting in FY21 Revised Tranche FY19 Fair Value in FY21 Adjustment due to Reassessment Tranche FY19 LTI Plan Expense in FY21 Gerald Harvey Kay Lesley Page John Evyn Slack-Smith David Matthew Ackery Chris Mentis Total 60% 60% 60% 60% 60% $101,787 $284,382 $169,386 $169,386 $128,982 $853,923 100% 100% 100% 100% 100% $169,645 $473,970 $282,310 $282,310 $214,970 $67,858 $89,800 $189,588 $250,891 $112,924 $149,438 $112,924 $149,438 $85,988 $113,792 $1,423,205 $569,282 $753,359 7G. Assessment of Tranche 3 of the 2016 LTI Plan Performance Conditions and Expense Recognised in FY21 In 2018, a total of 400,000 performance rights were granted to Executive Directors on 1 December 2017 under Tranche 3 of the 2016 LTI Plan. The performance rights were independently valued by Mercer Consulting (Australia) Pty Limited at a fair value of $3.34 per 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 was measured over a three-year period for ﬁnancial years ending 30 June 2018, 30 June 2019 and 30 June 2020. In the 2020 Remuneration Report, it was reported that the estimated achievement of Tranche 3 of the 2016 LTI Plan would have been 56.6% by the end of the vesting period and that 56.6% of the estimated fair value of the performance rights would meet the performance condition. The cumulative expense in respect of Tranche 3 was $756,177 as reported in the 2020 Remuneration Report. The 2020 ﬁnancial year was the ﬁnal year of Tranche 3 measurement. During the 2021 ﬁnancial year, an expense of $123,456 was recognised in respect of Tranche 3 of the 2016 LTI Plan representing the remaining vesting period up to 31 December 2020. Of the 400,000 performance rights granted to Executive Directors during 2018, a total of 56.6%, or 226,400 performance rights vested on 31 December 2020 and were exercisable from 1 January 2021. On 6 January 2021, 191,025 performance rights under Tranche 3 of the 2016 LTI Plan were exercised and on 26 March 2021, a further 35,375 performance rights under Tranche 3 were exercised, reducing the unissued ordinary shares under Tranche 3 of the 2016 LTI Plan to nil. ANNUAL REPORT JUNE 2021 51 OPERATING AND FINANCIAL REVIEW (CONTINUED) DIRECTORS’ REPORT — REMUNERATION REPORT (AUDITED) (CONTINUED) 7. Performance and Executive Remuneration Outcomes in FY21 (continued) 7G. Assessment of Tranche 3 of the 2016 LTI Plan Performance Conditions and Expense Recognised in FY21 (continued) Assessment of 100% Financial Condition for Tranche 3 of 2016 LTI Plan Calculation of Aggregated RONA for Tranche 3 Financial Years (2018, 2019 and 2020) Tranche 3 Aggregated APBT (2018 + 2019 + 2020) $1,581.71 million Tranche 3 Aggregated Net Assets (2017 + 2018 + 2019) $8,868.88 million = 17.83% RONA Actual Achievement in FY20 Actual Tranche 3 Fair Value Tranche 3 LTI Plan Expense in FY21 Gerald Harvey CHAIRMAN AND CEO’s REPORT Kay Lesley Page John Evyn Slack-Smith David Matthew Ackery Chris Mentis Total 56.6% 56.6% 56.6% 56.6% 56.6% $118,153 $212,675 $141,783 $141,783 $141,783 $756,177 $19,290 $34,722 $23,148 $23,148 $23,148 $123,456 7H. Summary of Performance and Executive Remuneration Outcomes in FY21 Remuneration Component 100%-Level Achievement Amount Achieve- ment Score Amount Payable Vesting Period 2021 Remuneration Amount 2020 Remuneration Amount Value of STI and LTI Disclosed in 2021 and 2020 Remuneration Reports 2021 STI Plan - Financial conditions (80/100) - Over-achievement pool (20/20) - Non-ﬁnancial conditions (20/100) - Malus Adjustments (up to 30/100) Total 2020 STI Plan - Financial conditions (50/100) - Over-achievement pool (20/20) - Non-ﬁnancial conditions (50/100) Total Total Short-Term Incentive PCI Tranche FY21 of 2016 LTI Plan - Financial conditions (100%) - Non-ﬁnancial conditions (0%) Total 100% Tranche FY20 of 2016 LTI Plan - Financial conditions (100%) - Non-ﬁnancial conditions (0%) Total 100% Tranche FY19 of 2016 LTI Plan - Financial conditions (100%) - Non-ﬁnancial conditions (0%) Total 100% Tranche 3 (FY18) of 2016 LTI Plan - Financial conditions (100%) - Non-ﬁnancial conditions (0%) Total 100% Tranche 2 (FY17) of 2016 LTI Plan - Financial conditions (100%) - Non-ﬁnancial conditions (0%) Total 100% Total LTI Performance Rights Total Value of STI and LTI $2,600,000 $750,000 $650,000 $4,000,000 $1,500,000 $600,000 $1,500,000 $3,600,000 $2,115,575 - $2,115,575 $1,906,765 - $1,906,765 $1,423,205 - $1,423,205 $1,336,000 - $1,336,000 $1,548,000 - $1,548,000 100.00% 100.00% 87.50% 15.47% 100.00% 100.00% 92.12% 80.00 20.00 17.50 (4.64) 112.86 50.00 20.00 46.06 116.06 $2,600,000 $750,000 $568,752 ($150,800) $3,767,952 $1,500,000 $600,000 $1,381,651 $3,481,651 1 Year 1 Year $2,600,000 $750,000 $568,752 ($150,800) $3,767,952 - - - - - - - - $1,500,000 $600,000 $1,381,651 $3,481,651 $3,767,952 $3,481,651 100% - 100% - $2,115,575 - $2,115,575 4 Years (Yr 1 of 4) 100% - 100% - $1,906,765 - $1,906,765 4 Years (Yr 2 of 4) 100% - 100% - $1,423,205 - $1,423,205 4 Years (Yr 3 of 4) 56.6% - 56.6% - 60% - 60% - 4 Years (Yr 4 of 4) n/a $756,177 - $756,177 $928,800 - $928,800 $393,726 - $393,726 $761,714 - $761,714 $753,359 - $753,359 $123,456 - $123,456 - - - - - - $215,312 - $215,312 $330,980 - $330,980 $359,118 - $359,118 $151,371 - $151,371 $2,032,255 $1,056,781 $5,800,207 $4,538,432 The total value of STI and LTI expensed in the Income Statement for the 2021 ﬁnancial year and disclosed in this remuneration report was $5.80 million compared to $4.54 million expensed in the 2020 ﬁnancial year, an increase of $1.26 million or 27.8%, relative to the previous year. 52 ANNUAL REPORT JUNE 2021 OPERATING AND FINANCIAL REVIEW (CONTINUED) DIRECTORS’ REPORT — REMUNERATION REPORT (AUDITED) (CONTINUED) 8. 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. Under the terms of the present contract the CEO’s total potential employment cost is $3,964,550 comprised of: • • • CHAIRMAN AND CEO’s REPORT The CEO’s termination provisions are as follows: ﬁxed remuneration of $2,100,000 per annum; maximum STI opportunity in respect of the year ended 30 June 2021 of $1,160,000 (including the 120% over-achievement level); and maximum LTI opportunity in respect of the year ended 30 June 2021 of $704,550. 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 2021 STI Plan to determine whether the reward is to be paid as cash or in shares. The CEO held 19,845,750 shares in the Company at 30 June 2021 equating to a value of $108.75 million. 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 9. 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. At the 2020 annual general meeting (AGM) held on 25 November 2020, shareholders approved an increase of $500,000 to the aggregate NED pool from $1,000,000 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 2021 and 30 June 2020 are disclosed in Table 1 on page 55 of this report. ANNUAL REPORT JUNE 2021 53 OPERATING AND FINANCIAL REVIEW (CONTINUED) DIRECTORS’ REPORT — REMUNERATION REPORT (AUDITED) (CONTINUED) 10. 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. CHAIRMAN AND CEO’s REPORT 54 ANNUAL REPORT JUNE 2021 OPERATING AND FINANCIAL REVIEW (CONTINUED) DIRECTORS’ REPORT — REMUNERATION REPORT (AUDITED) (CONTINUED) 11. Compensation of Key Management Personnel Table 1: Compensation of Key Management Personnel Expensed for the Year Ended 30 June 2021 Directors of Harvey Norman Holdings Limited: Short-term beneﬁts Post Em- ployment Long Term Incentives Other Perfor- CHAIRMAN AND CEO’s REPORT mance Cash Incentive Salary & Fees Other Short Term Non- Monetary Beneﬁts Superan- nuation Performance Rights Long Service Leave (c) Total Remuneration % earned at risk Gerald Harvey Executive Chairman 2021 2020 717,906 682,668 - - 10,400 10,400 - - 21,694 246,818 21,003 144,882 23,675 21,694 670,410 17,812 21,003 325,505 - - - - 996,818 24.8% 858,953 16.9% 3,863,116 45.6% 3,320,591 39.9% - - - - 21,694 401,781 20,472 2,614,241 51.4% 21,003 204,081 19,459 2,282,503 47.1% 21,694 401,781 20,472 2,614,241 51.4% 21,003 204,081 19,474 2,283,418 47.1% 42,213 21,694 311,465 14,768 2,067,503 53.3% 43,664 21,003 178,232 14,024 1,841,101 50.0% - - - - - - - - - - - - 5,205 4,945 13,881 13,187 19,741 18,528 5,784 13,187 12,580 11,951 8,263 - - - - - - - - - - - - - - - - - - - - - - - - - 60,000 57,000 160,000 152,000 280,505 293,088 66,667 152,000 145,000 137,750 95,238 - - - - - - - - - - - - - Kay Lesley Page Executive Director/CEO 2021 2,054,631 1,092,706 2020 1,958,198 998,073 John Evyn Slack-Smith Executive Director/COO 2021 1,228,306 941,988 2020 1,167,547 870,413 - - - - David Matthew Ackery Executive Director 2021 1,210,306 941,988 18,000 2020 1,150,447 870,413 18,000 886,093 791,270 841,426 742,752 54,795 52,055 146,119 138,813 260,764 274,560 60,883 138,813 132,420 125,799 86,975 - - - - - - - - - - - - - - - - - - - - - - - - - - - 2021 2020 2021 2020 2021 2020 2021 2020 2021 2020 2021 2020 2021 2020 Chris Mentis Executive Director/CFO Michael John Harvey Non-Executive Director Christopher Herbert Brown Non-Executive Director Kenneth William Gunderson-Briggs Non-Executive Director Graham Charles Paton (a) Non-Executive Director Maurice John Craven Non-Executive Director Luisa Catanzaro (b) Non-Executive Director Total for the 2021 Financial Year Total for the 2020 Financial Year 6,839,198 3,767,952 28,400 65,888 173,924 2,032,255 55,712 12,963,329 44.7% 6,530,326 3,481,651 28,400 61,476 166,813 1,056,781 52,957 11,378,404 39.9% The listed Parent Company, Harvey Norman Holdings Limited, does not have any employees. (a) (b) (c) Graham Charles Paton retired on 25 November 2020. Luisa Catanzaro was appointed a Non-Executive Director of Harvey Norman Holdings Limited on 25 November 2020. Table 1 includes the accrual for long service leave entitlements in respect of the years ended 30 June 2021 and 30 June 2020. 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. ANNUAL REPORT JUNE 2021 55 OPERATING AND FINANCIAL REVIEW (CONTINUED) DIRECTORS’ REPORT — REMUNERATION REPORT (AUDITED) (CONTINUED) 11. Compensation of Key Management Personnel (continued) Table 2: Compensation of Key Management Personnel Expensed for the Year Ended 30 June 2021 Senior Executives of Harvey Norman Holdings Limited: Short-term beneﬁts Post Em- ployment Other CHAIRMAN AND CEO’s REPORT Perfor- mance Cash Incentive Salary & Fees Other Short Term Non- Monetary Beneﬁts Superan- nuation Termination Beneﬁts (f) Long Service Leave (g) Total Remuneration % earned at risk 2021 2020 2021 2020 2021 2020 2021 2020 2021 2020 2021 2020 2021 2020 2021 2020 Thomas James Scott GM — Property Martin Anderson (e) GM – Advertising Gordon Ian Dingwall Chief Information Ofﬁcer Lachlan Roach GM — Home Appliances Emmanuel Hohlastos (a) GM — Audio Visual Glen Gregory (b) GM — Technology & Entertainment Ajay Calpakam (c) GM – Audio Visual Frank Robinson (d) GM — Technology & Entertainment Total for the 2021 Financial Year Total for the 2020 Financial Year 573,159 573,850 296,281 305,271 511,181 503,997 409,306 409,997 418,306 69,833 422,806 346,533 - 307,496 - 121,012 - - - - - - - - - - - - - - - - - - - - - - 9,000 9,000 - - 12,000 9,733 - 6,750 - 3,750 - - 21,694 21,003 - - 9,553 9,564 27,423 23,422 33,985 4,938 27,543 22,781 21,694 21,003 21,694 21,003 21,694 5,251 21,694 17,035 - - - - - - - - - - - - - 15,752 32,765 - - 5,251 56,300 - - - - - - - - - - 5,088 8,520 8,400 6,822 6,833 6,972 1,164 7,047 5,776 - - - - 604,406 604,417 386,049 360,683 541,395 533,400 446,822 446,833 446,972 76,248 463,547 379,077 - 362,763 - 186,313 2,631,039 - 21,000 27,423 131,892 33,985 43,852 2,889,191 2,637,989 - 29,233 27,543 129,079 89,065 36,825 2,949,734 - - - - - - - - - - - - - - - - - - (a) (b) (c) (d) (e) (f) (g) Commenced as GM – Audio Visual on 1 May 2020 Commenced as GM – Technology & Entertainment on 9 September 2019 Resigned 30 April 2020 Resigned 30 September 2019 Retired on 30 June 2021 This amount represents the cash payment of employee leave entitlements upon resignation or retirement This amount represents the accrual for long service leave entitlements in respect of the years ended 30 June 2021 and 30 June 2020 56 ANNUAL REPORT JUNE 2021 OPERATING AND FINANCIAL REVIEW (CONTINUED) DIRECTORS’ REPORT — REMUNERATION REPORT (AUDITED) (CONTINUED) 12. 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 2021. There were no movements in option holdings during the year ended 30 June 2021. Options Holdings of Key Management Personnel for the Year Ended 30 June 2021: There were no options held by any director or senior executive during the year ended 30 June 2021. Table 3: Performance Rights Granted to Executive Directors as Part of Remuneration: CHAIRMAN AND CEO’s REPORT The table below discloses the number of performance rights granted to Executive Directors as remuneration during the year ended 30 June 2021 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 the Year (a) Performance Rights Vested During the Year (b) Performance Rights Lapsed During the Year (b) Unvested Performance Rights at 30 June 2021 (c) Performance Rights Exercised During the Year Number Granted Fair Value Granted $ Number Vested Fair Value Vested $ Number Lapsed Fair Value Lapsed $ Number Unvested Fair Value Unvested $ Number Exercised Fair Value Exercised $ Gerald Harvey 65,500 $252,175 35,375 $118,153 27,125 $90,597 196,500 $649,105 35,375 $118,153 Kay Lesley Page 183,000 $704,550 63,675 $212,675 48,825 $163,075 549,000 $1,813,530 63,675 $212,675 John Evyn Slack- Smith David Matthew Ackery 109,000 $419,650 42,450 $141,783 32,550 $108,717 327,000 $1,080,190 42,450 $141,783 109,000 $419,650 42,450 $141,783 32,550 $108,717 327,000 $1,080,190 42,450 $141,783 Chris Mentis 83,000 $319,550 42,450 $141,783 32,550 $108,717 249,000 $822,530 42,450 $141,783 Total (a) (b) (c) 549,500 $2,115,575 226,400 $756,177 173,600 $579,823 1,648,500 $5,445,545 226,400 $756,177 A total of 549,500 performance rights under Tranche FY21 of the 2016 LTI Plan were granted to Executive Directors on 4 December 2020. The performance rights were independently valued by Mercer Consulting (Australia) Pty Limited at grant date with a fair value of $3.85 per entitlement on 4 December 2020, based on a share price of $4.66, resulting in a total fair value of Tranche FY21 performance rights of $2,115,575 in aggregate. On 1 January 2021, 226,400 performance rights representing 56.6% of Tranche 3 of the 2016 LTI Plan vested after all ﬁnancial conditions and service conditions were satisﬁed. On that same day, 173,600 performance rights representing 43.4% of Tranche 3 of the 2016 LTI Plan lapsed and will never be exercisable by the participants. On 6 January 2021, 191,025 performance rights under Tranche 3 of the 2016 LTI Plan were exercised and on 26 March 2021, a further 35,375 performance rights under Tranche 3 were exercised, reducing the unissued ordinary shares under Tranche 3 of the 2016 LTI Plan to nil. As at 30 June 2021, a total of 1,648,500 performance rights were outstanding, unvested and not capable of exercise comprised of: i. ii. iii. 549,500 performance rights under Tranche FY19 of the 2016 LTI Plan (FY2019); 549,500 performance rights under Tranche FY20 of the 2016 LTI Plan (FY2020); and 549,500 performance rights under Tranche FY21 of the 2016 LTI Plan (FY2021). Table 4: Performance Rights of Key Management Personnel for the Year Ended 30 June 2021 The table below discloses the number of performance rights granted to Executive Directors as remuneration during the year ended 30 June 2021 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. 1 July 2020 Balance at begin- ning of the year Granted as Remuneration Performance Rights Exercised Performance Rights Lapsed 30 June 2021 Balance at end of the year Due for Vesting during the year ended 30 June 2021 Total Exercised Lapsed Gerald Harvey 193,500 65,500 (35,375) (27,125) 196,500 62,500 35,375 27,125 Kay Lesley Page 478,500 183,000 (63,675) (48,825) 549,000 112,500 63,675 48,825 John Evyn Slack-Smith 293,000 109,000 (42,450) (32,550) 327,000 75,000 42,450 32,550 David Matthew Ackery 293,000 109,000 (42,450) (32,550) 327,000 75,000 42,450 32,550 Chris Mentis 241,000 83,000 (42,450) (32,550) 249,000 75,000 42,450 32,550 Total 1,499,000 549,500 (226,400) (173,600) 1,648,500 400,000 226,400 173,600 ANNUAL REPORT JUNE 2021 57 OPERATING AND FINANCIAL REVIEW (CONTINUED) DIRECTORS’ REPORT — REMUNERATION REPORT (AUDITED) (CONTINUED) 12. Additional Disclosures Relating to Options, Performance Rights and Shares (continued) Table 4: Performance Rights of Key Management Personnel for the Year Ended 30 June 2021 (continued) 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 2021. (b) The closing balance of the performance rights in the Company of 1,648,500 as at 30 June 2021 is comprised of: (a) 549,500 performance options under Tranche FY19 of the 2016 LTI Plan (FY19) at a fair value at grant date of $2.59 to vest on 31 December 2021. The FY19 Tranche is exercisable between 1 January 2022 and 30 June 2024. 549,500 performance options under Tranche FY20 of the 2016 LTI Plan (FY20) at a fair value at grant date of $3.47 to vest on 31 December 2022. The FY20 Tranche is exercisable between 1 January 2023 and 30 June 2025. Granted as remuneration during the 2021 ﬁnancial year: 549,500 performance options under Tranche FY21 of the 2016 LTI Plan (FY21) at a fair value at grant date of $3.85 to vest on 31 December 2023. The FY21 Tranche is exercisable between 1 January 2024 and 30 June 2026. CHAIRMAN AND CEO’s REPORT (c) Table 5: Shareholdings/Relevant Interests of Key Management Personnel for the Year Ended 30 June 2021 1 July 2020 Balance at Beginning of the Year On Exercise of Performance Rights (a) Net Change Other (b) 30 June 2021 Balance at End of the Year Gerald Harvey Kay Lesley Page John Evyn Slack-Smith David Matthew Ackery Chris Mentis Michael John Harvey 392,160,265 19,772,685 1,101,443 641,021 1,118,847 3,335,180 Christopher Herbert Brown 205,525,565 Kenneth William Gunderson-Briggs Graham Charles Paton Maurice John Craven Luisa Catanzaro KMP: Senior Executives Thomas James Scott Lachlan Roach 10,059 17,582 30,673 - 10,000 10,000 35,375 63,675 42,450 42,450 42,450 - - - - - - - - 225,000 392,420,640 9,390 19,845,750 - - - - - - (17,582) - - - - 1,143,893 683,471 1,161,297 3,335,180 205,525,565 10,059 - 30,673 - 10,000 10,000 Total (a) 623,733,320 226,400 216,808 624,176,528 On 4 January 2021, the Company announced that 226,400 performance rights, representing 56.6% of the performance rights issued in accordance with Tranche 3 of the 2016 LTI Plan, had vested and was exercisable from 1 January 2021. On 4 January 2021, the Company announced that 173,600 performance rights, representing 43.4% of the performance rights issued in accordance with Tranche 3 of the 2016 LTI Plan, had lapsed on 1 January 2021 and will never be exercisable by the participants. The consolidated entity acquired 226,400 shares in the Company via an ‘on-market trade’ at an average price of $4.68 per share for the purposes of satisfying the entitlements of each Executive Director to the performance rights in respect of Tranche 3 of the 2016 LTI Plan. (b) 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. The reduction in the shareholding of Graham Charles Paton relates to the removal of disclosures as Mr. Paton is no longer a NED as at 30 June 2021 (retired on 25 November 2020). 58 ANNUAL REPORT JUNE 2021 OPERATING AND FINANCIAL REVIEW (CONTINUED) DIRECTORS’ REPORT — REMUNERATION REPORT (AUDITED) (CONTINUED) 13. ‘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 2021, or as soon as practicable after that date. Total ‘take-home pay’ for the directors of the Company amounted to $11.35 million for the year ended 30 June 2021. The total value of remuneration expensed for directors of the Company in respect of the 2021 ﬁnancial year was $12.96 million (refer to Table 1 on page 55 of this report). For the 2021 ﬁnancial year, total ‘take-home pay’ was $1.62 million lower than the value of remuneration expensed to the income statement. CHAIRMAN AND CEO’s REPORT KMP: Board of Directors Salary & Fees Other Short Term Non- Monetary Beneﬁts Superan- nuation Short-term Performance Cash Incentive (a) Exercise of Tranche 2 2016 LTI Plan Exercise of Tranche 3 2016 LTI Plan (b) FY2021 Total Take- Home Pay FY2020 Total Take- Home Pay Gerald Harvey 717,906 10,400 - 21,694 - Kay Lesley Page 2,054,631 John Evyn Slack-Smith 1,228,306 - - David Matthew Ackery 1,210,306 18,000 23,675 21,694 998,073 - - 21,694 870,413 21,694 870,413 42,213 21,694 742,752 - - - - - - 5,205 13,881 19,741 5,784 12,580 8,263 - - - - - - 886,093 54,795 146,119 260,764 60,883 132,420 86,975 - - - - - - - 6,839,198 28,400 65,888 173,924 3,481,651 - - - - - - - - - - - - 118,153 868,153 859,196 212,675 3,310,748 2,983,118 141,783 2,262,196 1,996,970 141,783 2,262,196 1,997,870 141,783 1,834,535 1,623,903 - - - - - - 60,000 57,000 160,000 152,000 280,505 293,088 66,667 152,000 145,000 137,750 95,238 - 756,177 11,345,238 Chris Mentis Michael John Harvey Christopher Herbert Kenneth William Gunderson-Briggs Graham Charles Paton Maurice John Craven Luisa Catanzaro Total Take-Home Pay 2021 Financial Year Total Take-Home Pay 2020 Financial Year 6,530,326 28,400 61,476 166,813 2,537,080 928,800 - - 10,252,895 (a) (b) The short-term incentive of $3.48 million represented the payment of the 2020 STI Plan that was earned in respect of the 2020 ﬁnancial year, and was paid to Executive Directors in September 2020. The aggregate fair value of the performance rights exercised during the 2021 ﬁnancial year was $756,177, calculated at a fair value of $3.34 per right multiplied by 226,400 performance rights exercised. 14. Other Matters for Disclosure The previous AGM of the Company was held on 25 November 2020. • The Company received 519.24 million votes for the adoption of the 2020 Remuneration Report representing 92.5% of the 561.35 million shares that were eligible to vote on that resolution. A total of 684.65 million shares were ineligible to vote on the adoption of the 2020 Remuneration Report as the shares were held by KMPs or their related parties. The vote against the Remuneration Report represented 7.5% of the eligible votes and 3.3% of the shares on issue. The following improvements were made to the remuneration framework for Executive Directors informed by the independent remuneration expert: • The performance conditions for the 100% short term incentive pool were changed from being 50% as to ﬁnancial conditions and 50% as to non-ﬁnancial conditions, to be 80% as to ﬁnancial conditions and 20% as to non-ﬁnancial conditions. A malus or business modiﬁer reduction of up to 30% of the 100% achievement pool was introduced for non-achievement of further non-ﬁnancial conditions. • In combination, this increases the overall difﬁculty of achieving maximum STI outcomes with up to 30% contingent on achieving both ﬁnancial performance and business modiﬁer (non-ﬁnancial) outcomes as opposed to only achieving non-ﬁnancial performance in prior years. 15. Loans to Key Management Personnel and their Related Parties There were no loans granted to key management personnel and their related parties during the year ended 30 June 2021 (2020: nil). There were no loans outstanding from key management personnel and their related parties as at 30 June 2021 (2020: nil). ANNUAL REPORT JUNE 2021 59 OPERATING AND FINANCIAL REVIEW (CONTINUED) DIRECTORS’ REPORT — REMUNERATION REPORT (AUDITED) (CONTINUED) 16. Other Transactions and Balances with Key Management Personnel and their Related Parties (i) Lease of business premises from Ruzden Pty Limited CHAIRMAN AND CEO’s REPORT 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: (ii) Legal fees paid to a director-related entity CONSOLIDATED June 2021 $ June 2020 $ 5,334,262 5,231,401 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. 2,731,330 3,090,533 (iii) 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: 2,064,758 2,647,890 (iv) Perth City West Complex Gerald Harvey has a 50% equity interest and a subsidiary of Harvey Norman Holdings Limited has a 50% equity interest in the Perth City West Property. 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 2021 was $1.01 million (2020: $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. (v) 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 application of AASB 16 Leases resulted in the recognition of a lease liability of $18.42 million by the G.C. Lessee as at 30 June 2021 (2020: $18.98 million). 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 2021 was $3.48 million (2020: $3.41 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. 60 ANNUAL REPORT JUNE 2021 OPERATING AND FINANCIAL REVIEW (CONTINUED) ENVIRONMENT, SOCIAL & GOVERNANCE (ESG) REPORT Our Approach At Harvey Norman Holdings Limited (the consolidated entity), we are part of the wider community and aspire to make a positive impact within each community that our company-operated stores operate in across 7 countries. Each Australian Harvey Norman®, Domayne® and Joyce Mayne® franchisee is also committed to making a positive impact in the community in which they carry on business. The consolidated entity, and our franchisees, are committed to diversity and inclusion, environmental responsibility and a sustainable future. The consolidated entity has established a new Executive Sustainability Committee to determine ESG-related strategy, assess corporate ESG risks and monitor ESG performance across our global operations. CHAIRMAN AND CEO’s REPORT Our Board of Directors, alongside management, has a business strategy that supports responsible decision making and sustainable long-term value creation. The Code of Conduct of the consolidated entity reinforces our commitment to honest, fair and transparent business practices, and outlines the standards of behaviour expected of all our employees globally and of our franchisees in Australia. As this report outlines, we are committed to and well advanced in terms of diversity and inclusion, as well as our other “people” related ESG initiatives. In particular, this ﬁnancial year, the consolidated entity is pleased to have achieved gender balance (based on 40:40:20) in both our global workforce (of which over 45% are women), and our global senior executive teams, with women now holding 40% of our senior executive roles. This is up on last year’s results of 35%. We are at the start of our journey to disclose climate-related risks and opportunities informed by the Task Force on Climate-Related Financial Disclosures (TCFD) framework. This task will take time to achieve as we build capacity, update internal processes, explore and quantify the ﬁnancial risk of climate change and, design and report on decision useful metrics and targets. Today, we report on the sustainability issues most relevant to the consolidated entity and our value chain. Statement of Values Values set out in this statement below are the embodiment of what the consolidated entity stands for and are the basis for the behaviour of the enterprise and its employees. These values underpin the culture of the consolidated entity. We recognise that behaviour cannot be prescribed or legislated. The culture of any organisation needs to reﬂect its values. The Board will regularly test whether our culture in practice reﬂects the values articulated in this statement. These values guide how the consolidated entity will interact with anyone engaging with us, including colleagues, customers, shareholders, suppliers, independent franchisees and the community generally. Integrity We comply with the law and develop systems that make it easy for our colleagues to comply with the law. We act honestly, ethically and with integrity. We do not mislead or deceive people. Humanity We treat all people with respect. We are tolerant of differences in ethnicity, religion, gender, sexuality, physical and intellectual ability. We are patient when cultural misunderstandings arise. We are inclusive and collaborative. We recognise that sometimes genuine people make honest mistakes. Authenticity We are authentic. We stand up for the things we believe in. We deliver on our promises. We value honesty, candour and frankness. We will act fairly. Optimism We are optimistic. We are passionate about what we do. We search for opportunity and manage risk. We recognise that our environment is constantly evolving. We innovate with product and technology. We believe we can all keep learning – and learn from our failures as well as our successes. Responsibility We are part of a wider community. We aspire to make a positive impact within each community that we conduct business. We are committed to environmental responsibility and a sustainable future. We are proud that we can create jobs and opportunities for people in countries in which we operate. People Our people are the greatest asset of Harvey Norman®, and are central to the success of our business strategy and realisation of our Vision. We recognise that having an engaged, invested, and productive workforce is not only important for our business success, but also for the wellbeing of the over 6,000 individuals that work for us globally. Our business is strong because our people are strong. ANNUAL REPORT JUNE 2021 61 OPERATING AND FINANCIAL REVIEW (CONTINUED) ENVIRONMENT, SOCIAL & GOVERNANCE (ESG) REPORT (CONTINUED) People (continued) With an average employee tenure in Australia of over seven years, our people often tell us that our strong family culture, innovative development opportunities, and working alongside our good, honest and knowledgeable people every day, are key contributing factors to their decision to work for the consolidated entity. We constantly look for ways to improve our attraction, development, recognition and retention strategies as a means to continue building our talent pipelines, encouraging innovation and entrepreneurship, and maximising success and results for our individual company team members. Response to COVID-19 CHAIRMAN AND CEO’s REPORT The ongoing impacts of COVID-19 felt across our global operations in FY2021 and into FY2022 have reinforced our commitment to maintaining an environment where our people, and our franchisees and their staff, can work safely and customers can shop safely. The Incident Management Team of the consolidated entity has communicated regularly to each team member to recommend and enable swift and decisive actions in response to the evolving risks and Government restrictions experienced across many of the different countries and jurisdictions in which we, and our franchisees, operate. The learnings gained from our overseas responses to the emerging Delta variant meant that we were ready to rapidly respond when the Delta variant arrived in Australia. COVID-safe practices implemented since March 2020 were further reﬁned in FY2021. Each franchisee focused on safety controls at their franchised complex including: • • • • • • Personal protective equipment Personal hygiene protocols Sanitisation practices COVID-19 employee training Physical distancing measures Shop Smart and Shop Safe customer offerings (including Contactless Click and Collect, and Contactless Delivery). Along with physical safety, psychological wellbeing has also been an ongoing focus for us during FY2021 as employees, and franchisees and their staff, dealt and continue to deal with varying levels of personal and work impacts due to COVID-19. Our overseas stores continued to engage with and support their teams in order to maintain connections to each other, particularly during periods of lockdowns. Franchisees in Australia have found new and innovative ways to support their staff and remain connected to their businesses during Government-mandated periods of lockdowns or other precautionary measures taken to keep their staff and customers safe. Franchisees and their staff have undertaken a range of training and education opportunities in health and safety throughout the year, including continuous refresher training on various Work Health and Safety (WHS) focus areas, and completion of Family and Domestic Violence Contact Ofﬁcer training for nominated employees. The consolidated entity also undertook a range of training and education opportunities to keep their employees well-informed and safe. During FY2021 we continued work on the development of our renewed Health and Safety Framework and Strategy that will improve and mature the governance, oversight and alignment of our global health and safety initiatives and outcomes. This work will continue into FY2022. Diversity and Inclusion The consolidated entity continues to be an inclusive place to work that is representative of the customers and communities in which we, and our franchisees, carry on business. The consolidated entity is a member of the Diversity Council of Australia. We promote an inclusive environment throughout our global operations in which all colleagues are able to be themselves at work, feel valued for their contribution and are supported to perform their best. The goal is to continue to reinforce this reputation and position. We are passionate about supporting the creation of employment opportunities and promoting the development and training of employees from diverse backgrounds and experiences, to grow and strengthen our talent pool of future leaders. 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 40 different cultural backgrounds. Employee engagement is important to our success as a business. Each year we conduct an employee engagement survey in Australia that provides actionable, anonymised reports at a team level. While this year’s survey in Australia could not be completed in full due to COVID-19 lockdowns and challenges, our New Zealand employees completed the survey with positive results showing: • • • 62 92% of respondents feel safe at work 87% of respondents enjoy their role 87% of respondents feel like they are part of a team. ANNUAL REPORT JUNE 2021 OPERATING AND FINANCIAL REVIEW (CONTINUED) ENVIRONMENT, SOCIAL & GOVERNANCE (ESG) REPORT (CONTINUED) People (continued) Diversity and Inclusion (continued) Harvey Norman® has always been a supporter of women in sports and in the community, and this support is no different when it comes to supporting the women that will or do work for us. Led by Katie Page, our Chief Executive Ofﬁcer for the past 22 years, who is one of only 10 female CEOs in ASX 200 companies (5% of total), conversations and active strategies to build the visible representation of women in leadership across the consolidated entity, and a strong talent pipeline globally, has always been part of our day-to-day. Achievements towards Gender Balance CHAIRMAN AND CEO’s REPORT Following year-on-year improvements, we are pleased to report continued growth in female representation in our Senior Executive roles in FY2021, with women now making up 40% of our Global Senior Executives (up from 35% in FY2020). This is an achievement that brings the consolidated entity to a gender balance within our most senior roles. The breakdown of the HNHL Board and the Group as a whole by gender as at the end of FY2021 was: 30 JUNE 2021 Chair and CEO Board Senior Executives All Employees Male 1 8 90 Number Female 1 2 60 3,617 2,923 The breakdown at the end of FY2020 was: 30 JUNE 2020 Chair and CEO Board Senior Executives All Employees Male 1 9 92 Number Female 1 1 50 3,430 2,798 Total 2 10 150 6,540 Total 2 10 142 6,228 Percentage Female 50% 20% 40% 45% Percentage Female 50% 10% 35% 45% Male 50% 80% 60% 55% Male 50% 90% 65% 55% With 45% of our global workforce made up of women, the consolidated entity is proud to have a diverse, talented employee population from which to draw from and develop its future leaders, and we are committed to continuing the support and development of women into the future. Over the past 12 months we also have implemented several activities to further enhance our already high level of diversity and inclusion, including: • • Ongoing Development of our Discrimination, Harassment and Workplace Bullying Prevention Policy Recognition of Harvey Norman® Ireland in FY21 for the 4th year running as one of the top 20 Best Workplaces™, and Best Workplaces™ for Women, by Great Place To Work® Institute Inaugural Life @ Work Engagement Survey completed by Harvey Norman New Zealand to gain insights into the views of employees Reﬁned employee feedback mechanisms in Australia including informal and formal channels such as employee exit interviews and pulse snapshots, to inform strategies Celebrated our long history of encouraging and supporting Australian women through a sponsorship program celebrating the next generation of women and girls in Sport, Education, Employment & Innovation Created diversity focused projects such as our “Taste of Harmony” family recipes & associated stories e-book Participation in National Reconciliation Week Acting as naming rights partner for two prestigious Women of the Year awards; Gold Coast Bulletin’s Women of the Year 2021 and NSW Women of the Year 2021. • • • • • • Our key priorities for the next 12 months include: • Continue to proactively monitor gender balance outcomes within different levels of the organisation and within our different teams, including Senior Executive positions Proactive engagement with colleagues to increase knowledge of Diversity & Inclusion in the workplace, such as webinars, events, and videos from business leaders Review and consider our Flexible Work Policy and Parental Leave Policy. • • ANNUAL REPORT JUNE 2021 63 SHOP SAFE M O B I L E ENVIRONMENT, SOCIAL & GOVERNANCE (ESG) REPORT (CONTINUED) C O M M U N I T Y & PA R T N E R S H I P S With 192 franchised complexes in Australia, independently operated by 539 franchisees, and 107 company-operated stores in 7 countries across the globe, the Harvey Norman® brand is a truly international business. Harvey Norman® has always felt a strong connection to community – both on local and national levels – forming a symbiotic relationship of mutual strength and support. It is times like these that reinforce the importance of giving back and supporting each local community, and this is something that Harvey Norman® has been doing since its establishment in 1982. I N I T I AT I V E S I N 2 0 2 1 : Good360 Harvey Norman® continued the working partnership with Good360 to help distribute goods to those in need. Good360 help ensure individuals facing challenging life circumstances are able to get the goods they need – this includes flood affected communities as well as those still rebuilding their homes after last year’s bushfires or struggling due to the pandemic. To date, Harvey Norman® has donated a variety of goods - covering everything from fridges and washing machines to beds and furniture - to help ensure these communities can get back on their feet. Our Town - Sky News Harvey Norman® continued their partnership with Sky News and the Paul Murray Live program to stage a series of monthly Our Town shows shining a light on regional Australia. These shows raised awareness and helped support regional organisations and causes such as food manufacturers, thoroughbred farms, frontline health workers, disadvantaged multicultural Australian youth, emergency food relief, grassroots rugby league and female participation and much more. Sydney Zoo In 2021, Harvey Norman® collaborated with Sydney Zoo to enable every Year 2, NSW Public School student the opportunity to receive a FREE self-guided school excursion. Students also learned about conservation and were immersed into the Indigenous Australian culture, as part of the Bungarribee Dreaming Experience! The new Sydney Zoo is a world-class zoo in the heart of Western Sydney and aims to create an amazing experience for the local and international community. With clever habitat design, Sydney Zoo provides an experience that is more immersive and engaging than traditional zoos. The Harvey Norman® Amphitheatre has seen over 25,000 attendees and 140 shows and events including Aboriginal cultural talks, keeper talks and NAIDOC week presentations to thousands of families in NSW. Katie Page & Gerry Harvey at the new Sydney Zoo 64 ANNUAL REPORT JUNE 2021 SHOP SAFE M O B I L E ENVIRONMENT, SOCIAL & GOVERNANCE (ESG) REPORT (CONTINUED) Boys to the Bush mentoring program Boys to the Bush Boys to the Bush (BTTB) offers a variety of mentoring programs to assist disengaged, disadvantaged or ‘at risk’ youth. In 2020, on our Paul Murray Live visit to Albury, Harvey Norman® donated to Boys to the Bush and covered the cost of a camp of 15 disadvantaged young boys. The aim of the camps is to give the young men an opportunity to escape their current environment, surround them with positive adult influences, teach them new skills, experience life on a farm and to also give them the opportunity to connect and belong to something. The camp supported by Harvey Norman® was held on a property 40km south of Forbes and was made up of 15 young men who came together for 4 memorable days. Some of the boys were winners of an online competition which BTTB conducted whilst the majority were nominated by Out of Home Care service providers. The participants came from all over NSW, including regional areas such as Leeton, Dubbo, Bathurst, Wagga Wagga, Forbes, Parkes, Peak Hill and Albury. Sir Roden & Lady Cutler Foundation (SRLCF) Harvey Norman® are proud partners of Sir Roden & Lady Cutler Foundation’s FREE Patient Transport Service with a total of 7 years commitment to the foundation. Established in 1999 the foundation honours a great Australian and humanitarian. Sir Arthur Roden Cutler VC was the longest serving Governor of NSW and a recipient of the Victoria Cross award, serving fellow Australians and providing for the most vulnerable in the community. The foundation has grown rapidly to meet an important community need through its free medical patient transport service. The SRLCF is a self-funded organisation and relies on the support of the local community, sponsors, donors and volunteers. The SRLCF currently has 9 cars in its fleet, 2 of them with wheelchair access, servicing Sydney’s CBD, Eastern Suburbs, South, Inner West, South West, North, West and Hills District. Patient Transport proudly sponsored by Harvey Norman® have successfully made a total of 5,218 free trips this year! Unfortunately, the service has been placed on hold due to the current situation however, the incredible volunteers are dedicated to ensure their clients are not forgotten by adopting the ‘Buddy Program’ and making weekly calls to check in on each other during this difficult time. Harvey Norman® proudly sponsor the SRLCF Annual Golf Day and this year’s event was yet again a fantastic success with over $30,000 after costs raised towards the foundation’s unique and free community medical transport service. A record 140 people attended the event and luncheon at the prestigious Concord Golf course. Lady Cutler presenting the SRLCF Annual Golf Day Trophy ANNUAL REPORT JUNE 2021 65 SHOP SAFE M O B I L E ENVIRONMENT, SOCIAL & GOVERNANCE (ESG) REPORT (CONTINUED) PA R A LY M P I C S A U S T R A L I A PA R T N E R S H I P 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. Against unprecedented odds amid the massive disruption caused by the COVID pandemic from early 2020 in the lead up to Tokyo 2020, Australia’s elite Para-athletes won 80 medals to finish sixth on the overall medal tally and 21 gold to come eighth on the gold medal count. The Australian Paralympic Team produced perhaps the most courageous and successful campaign in the nation’s 61-year Games history with not only an exceptional medal count but also records broken on a world stage and countless awe-inspiring performances that lifted the many Australians watching back home and made incredible progress for the Paralympic movement. In 2021, Harvey Norman® worked closely with Paralympics Australia to develop an Employment Initiative for Para- athletes. The initiative aims to connect Para-athletes looking for employment with opportunities in local stores across the country as well as corporate roles in administration offices. Katie Kelly Paralympian Tokyo 2020 Paralympic Games Harvey Norman® Brand Ambassador Picture: Chris Chen Athlete Profile: Katie Kelly Harvey Norman® have been proud partners of Katie Kelly and her Paratriathlon journey since her Gold at Rio 2016 and have continued to support Katie to the Tokyo 2020 Paralympic Games. Katie Kelly competed in the Para-Triathlon race in Tokyo, where she pushed right through to the very end to come away with an incredible 6th place! The PTVI (para-triathlon vision impaired) category in which Katie competes means she does the entire race with a guide. For the swim and run, they are tethered together with a short rope clipped to their clothing. For the cycling leg, they ride a tandem bike, with the guide taking the front seat. We are proud of the way she used her platform after winning in Rio. Rather than indulge herself, she wondered how she could help others. Not long after that great day on Copacabana Beach in Rio, she set up Sport Access Foundation, which raises money to provide grants to help people with a disability access sport, with which Harvey Norman® are also proud partners. Whatever the future holds for Katie, she will forever be Australia’s first Triathlon gold medallist at a Paralympic Games. 66 ANNUAL REPORT JUNE 2021 SHOP SAFE M O B I L E ENVIRONMENT, SOCIAL & GOVERNANCE (ESG) REPORT (CONTINUED) In its third year, there were over 100 Gold Coast women nominated across seven categories - from entrepreneurs and mentors to champions of sport, entertainers, education and young women – in an event that recognises and celebrates the inspiring, influential and innovative women living and working on Queensland’s Gold Coast. 2021 Winner, Support the Girls Founder Jane Holmes, aims to lift up the plight of marginalised, disenfranchised women, particularly in regional areas with correctly fitted bras and sanitary and beauty care packs. Dr Samantha Wade Jane Holmes N S W W O M E N O F T H E Y E A R AWA R D S The NSW Women of the Year Awards recognise and celebrate the outstanding contribution made by women across New South Wales. In 2021, Harvey Norman® was the naming partner for the Young Woman of the Year award, which was won by Dr Samantha Wade. Dr Wade worked on a team which developed a drug delivery device aimed at improving outcomes for pancreatic cancer patients. Supervised and guided by renowned cancer biologists, oncologists and material scientists, Dr Wade spent six years engineering the device. Although still in the pre-clinical stage of development, it could change how medicine is delivered. Pancreatic cancer has a five-year survival rate of just 10 per cent. The device has the potential to make more cases curable and help patients avoid major surgery. S H I N E AWA R D S The Shine Awards is an annual event that shines a spotlight on regional and rural women who are making a real difference to their communities, businesses and industries. Produced in partnership with The Weekly Times, and now heading 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. 2020 Shine Award Overall Winner, Carmel Beresford lost her 21 year old son Sam in a shock gyrocopter accident. Consumed by sorrow, Carmel poured her anguish to paper, writing the story of Sam’s life; the adventure and challenges of rearing stock in the Outback. She published the book, Unforgiving: The Story of Life and Death of Sam. 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 2020 Carmel Beresford, 2020 Shine Award Overall Winner ANNUAL REPORT JUNE 2021 67 SHOP SAFE M O B I L E ENVIRONMENT, SOCIAL & GOVERNANCE (ESG) REPORT (CONTINUED) C O M M U N I T Y FAT H E R O F T H E Y E A R AWA R D Each year the Australian Father’s Day Council and The Shepherd Centre select a distinguished father who has demonstrated support, guidance and love to his children or other children through his working role or family life to take out the prestigious Australian Father of the Year Award. In 2021, Harvey Norman® was proud to sponsor the Community Father of the Year Award, presented to Dr Mark Cross, best known for his work as The Anxious Shrink. A psychiatrist for over 30 years, Mark is dedicated to breaking the social stigma around mental health issues, encouraging others to speak up by talking about his own anxiety. D E L I C I O U S P R O D U C E AWA R D S The 2021 delicious Harvey Norman® Produce Awards are the country’s most prestigious food industry campaign. Now in its 16th year, the Awards celebrate the new, innovative, native and consistently outstanding Australian ingredients grown, caught, sourced or produced with dedication, passion, knowledge and regard for the environment. Seventeen trophies were awarded by some of Australia’s most renowned chefs. The overall Producer of the Year Award, presented by Harvey Norman®, was awarded to Gary, Jo and Sam Rodely from Tathra Oysters in NSW. N R L H A R V E Y N O R M A N ® A L L - S TA R S 2021 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 20th February 2021, both male and female representatives from each team attended an in-store exclusive event at Harvey Norman® Townsville, where the local community was able to come and hear from some of their favourite players such as local icon Jonathon Thurston, All Stars Founder Preston Campbell and current players Josh Kerr and Shaniah Power. 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. Dr Mark Cross, Awarded Community Father of the Year Award (Left to right) Dallin Watene- Zelezniak & Josh Kerr 68 ANNUAL REPORT JUNE 2021 (Left to right) Jasmine Peters, Botille Vette-Welsh & Shaniah Power (Left to right) Tyrone Roberts, Preston Campbell, Johnathan Thurston, Katrina Fanning SHOP SAFE M O B I L E ENVIRONMENT, SOCIAL & GOVERNANCE (ESG) REPORT (CONTINUED) Ariarne Titmus Australian Olympic Gold Medalist Tokyo 2020 Olympics Harvey Norman® Brand Ambassador Congratulations to Ariarne Titmus who brought Australia to its feet, not once but twice, when she won the gold medal in the women’s 200 and 400m freestyle at the Tokyo Olympic Games. Ariarne, now an Olympic champion and household name, went on to win silver in the 800m and bronze in the 4 x 200m freestyle relay. Harvey Norman® proudly supporting Ariarne since 2020 W O M E N I N S P O R T 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 Isabella Nichols (Left to right) Women’s State of Origin Captains Ali Brigginshaw and Kezie Apps GIANTS AFLW Player Alyce Parker ANNUAL REPORT JUNE 2021 69 OPERATING AND FINANCIAL REVIEW (CONTINUED) ENVIRONMENT, SOCIAL & GOVERNANCE (ESG) REPORT (CONTINUED) People (continued) Learning & Development We recognise that the ongoing training and development of our people is a sound investment and can only lead to better outcomes for our stakeholders. While in-person meetings and development opportunities were limited in FY2021 due to COVID-19, our teams have continued to innovate and invest in training and development initiatives. Online facilitation has become a part of normal, day to day engagement, and has increased our ability and provided scope to offer more frequent targeted initiatives with lower cost impacts to a wider audience, CHAIRMAN AND CEO’s REPORT while also improving collaboration across teams in different regions. Employees have the opportunity to complete a range of courses, from compliance based training, to soft skills such as leadership, management, and mental health training, to technical and professional training in roles such as IT, Digital, Accounting, and HR. With the growing importance of keeping communications and connections in place while we are at times, physically distant, the Connect Intranet was successfully implemented across the consolidated entity in FY2021. Connect allows us to facilitate employee engagement, broadcast clear and concise internal communications, and increases interactions between business units, all of which are important to successful business and employee outcomes. Environment and Climate Change Disclosures and Standards – Environmental The world’s changing climate is a major consideration for the future of the business operations, supply chain, colleagues, franchisees and customers of the consolidated entity. Over the past 12 months we have continued to progress how we manage, report and address climate change issues. The consolidated entity is a member of the following organisations and associations to support our commitment to environmental and social responsibility: • • • • • • Consumer Electronics Association New Zealand Leather and Shoe Research Association (LASRA) Energy Users Association of Australia Australasia Furniture Research and Development Institute (AFRDI) National Retailers Association Australian Bedding Stewardship Council (founding member and Board representation). The consolidated entity has undertaken the following recent actions with respect to energy reduction and waste reduction. Energy Reduction Using FY2016 as the baseline year of measurement, the complexes of the consolidated entity have reduced energy consumption in Australia by 20.2%. The effect of store closures and reduced operations during Government-mandated periods of temporary lockdown has affected this ﬁgure in FY2021. Across the complexes in Australia, solar installations have been completed at 39 complexes, with another 29 complexes awaiting commissioning or being planned for installation and commissioning. Using FY2016 electricity consumption as a baseline, the electricity consumption for 30 selected complexes has dropped 20.5% as a result of the solar and other energy efﬁciency initiatives commenced at these complexes. An audit of the effectiveness of the installed solar panels at each location was undertaken in FY2021, revealing that on average, the installed systems produce over 120,000 kilowatt hours (KWh) of electricity per annum per array, for use at that property. In total, 4,761,563 KWh of electricity was generated by installed solar arrays at properties across Australia in FY2021. Using emission factors for electricity generated in New South Wales, that equates to approximately 3,900 tonnes of Co2e abated by these solar installations. Solar installations at our overseas company-owned stores will be part of the forward planning for emissions reduction. Our Irish operations already have all electricity generated from renewable sources. In FY2021, two company-operated stores in Ireland began trialling energy efﬁcient heating, ventilation and cooling systems, and an LED lighting retroﬁt program is underway across stores and warehouses in Ireland. 70 ANNUAL REPORT JUNE 2021 OPERATING AND FINANCIAL REVIEW (CONTINUED) ENVIRONMENT, SOCIAL & GOVERNANCE (ESG) REPORT (CONTINUED) Environment and Climate Change (continued) Disclosures and Standards – Environmental (continued) Waste Reduction The consolidated entity is committed to an internal circular economy model to ensure minimisation and eradication of landﬁll waste across our company-operated stores and complexes in Australia. Our new Executive Sustainability Committee will further develop a ‘circular waste’ solution and work to reduce waste and improve re-use via store product ‘take-back’ schemes. Waste management performance of the franchisees during FY2021 was as follows: Waste Stream Waste Management Performance CHAIRMAN AND CEO’s REPORT E-Waste E-waste recycling is available through most Harvey Norman®, Domayne® and Joyce Mayne® franchised complexes. Mattresses 15,868 mattresses were recycled through Soft Landing in FY2021. Soft Landing is an accredited supplier to the Australian Bedding Stewardship Council (ABSC). The ABSC is a not-for-proﬁt organisation dedicated to the development of a mattress product stewardship scheme in Australia. Certain Harvey Norman® and Domayne® franchisees are members of the ABSC. Polystyrene Approximately 80% of franchised complexes in Australia recycle this separate waste stream. Cardboard and plastic recycling Each franchisee in each franchised complex in Australia carries out cardboard and plastic recycling. Harvey Norman®, Domayne® and Joyce Mayne® franchisees recycled 7,825 tonnes, in aggregate, of cardboard and paper and 5.30 tonnes of plastic (LDPE), in aggregate, in FY2021. Plastic bag distribution Harvey Norman®, Domayne® and Joyce Mayne® franchisees are currently considering removal of plastic bags and replacement with paper bags. Overseas Company-Operated Retail The following initiatives were implemented at company-owned stores: • • • • • • • All electricity used by operations in Ireland is generated from renewable sources An LED lighting retroﬁt program is underway across stores and warehouses in Ireland Two sites in Ireland are trailing energy efﬁcient heating, ventilation and cooling systems E-waste and battery recycling initiatives are in place in our Irish operations Cardboard, plastic and polystyrene recycling is maximised using compactors in stores. Mattress recycling is available at some of our stores in Ireland Plastic bags are not provided to customers in retail stores in Ireland and Slovenia, with Croatia also phasing these out by the end of the 2021 calendar year The New Zealand operations actively recycle cardboard, paper, polystyrene, plastic and timber from pallets. A new Executive Sustainability Committee has been formed with initial focus on waste diversion, energy emission reduction, packaging and ethical sourcing. • Supply Chain Responsible Sourcing Standards With a signiﬁcant number of suppliers across the globe, supplier obligations are conveyed via robust trading terms which include an obligation to comply with the law in each relevant jurisdiction. Modern Slavery We support the objectives of Governments around the world to eradicate all forms of modern slavery and human trafﬁcking. It is planned that all contracted suppliers to the consolidated entity will have positive obligations on modern slavery and human rights as prescribed by the relevant jurisdiction in which they operate. In FY2021, we continued to build on our position in the 2020 modern slavery statement by surveying suppliers to the consolidated entity, and undertaking additional questioning to some of the suppliers to ensure compliance with relevant standards. We are implementing our internal modern slavery policy with a view to including a risk assessment in the business as usual activities of each subsidiary vendor management program. Our modern slavery training is set to be delivered in November 2021, and our second modern slavery statement will be posted on the website of the Company by the due date of 31 December 2021. Governance and Risk For a description of the governance and risk practices in place at the consolidated entity, please refer to page 32 of this Annual Report and to the Governance section of the website of the Company: www.harveynormanholdings.com.au. ANNUAL REPORT JUNE 2021 71 OPERATING AND FINANCIAL REVIEW (CONTINUED) 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 2021 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 Declara(cid:415)on 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 2021, I declare to the best of my knowledge and belief, there have been: a) no contraven(cid:415)ons of the auditor independence requirements of the Corpora(cid:415)ons Act 2001 in rela(cid:415)on to the audit; and b) no contraven(cid:415)ons of any applicable code of professional conduct in rela(cid:415)on to the audit. This declara(cid:415)on is in respect of Harvey Norman Holdings Limited and the en(cid:415)(cid:415)es it controlled during the ﬁnancial year. Ernst & Young Renay Robinson Partner Sydney 30 September 2021 Signed in accordance with a resolution of the directors. A member ﬁrm of Ernst & Young Global Limited Liability limited by a scheme approved under Professional Standards Legisla(cid:415)on G. HARVEY Chairman Sydney 30 September 2021 K.L. PAGE Chief Executive Ofﬁcer Sydney 30 September 2021 72 ANNUAL REPORT JUNE 2021 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 2021, the consolidated income statement, consolidated statement of comprehensive income, consolidated statement of changes in equity and consolidated statement of cash flows for the year then ended, notes to the financial statements, including a summary of significant accounting policies, and the directors' declaration. In our opinion, the accompanying financial report of the Group is in accordance with the Corporations Act 2001, including: a) giving a true and fair view of the consolidated financial position of the Group as at 30 June 2021 and of its consolidated financial performance for the year ended on that date; and b) complying with Australian Accounting Standards and the Corporations Regulations 2001. Basis for Opinion We conducted our audit in accordance with Australian Auditing Standards. Our responsibilities under those standards are further described in the Auditor’s Responsibilities for the Audit of the Financial Report section of our report. We are independent of the Group in accordance with the auditor independence requirements of the Corporations Act 2001 and the ethical requirements of the Accounting Professional and Ethical Standards Board’s APES 110 Code of Ethics for Professional Accountants (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. 73 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 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. 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. ► 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 subsequent to 30 June 2021. We involved our real estate 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. Investment properties and owner-occupied properties (collectively, “properties”) represent 50.5% of the Group’s total assets as at 30 June 2021. 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 2021 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 2021 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 ‘significant 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 2021. 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 2021. 74 A member firm of Ernst & Young Global Limited Liability limited by a scheme approved under Professional Standards Legislation Why significant How our audit addressed the key audit matter For the year ended 30 June 2021, 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. Recoverability of Receivables from Franchisees Why significant How our audit addressed the key audit matter At 30 June 2021, the balance of receivables from franchisees was $793.2 million representing 12% of the Group’s total assets at 30 June 2021. 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 franchisees was considered a key audit matter given the value of the balance and the judgements exercised by the Group in making their recoverability assessment. Our audit procedures included the following: ► Evaluated the Group’s assessment of the recoverability of receivables from franchisees. ► 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 the franchisees against the franchisee receivable balances. ► 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. A member firm of Ernst & Young Global Limited Liability limited by a scheme approved under Professional Standards Legislation 75 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 2021 Annual Report, but does not include the financial report and our auditor’s report thereon. Our opinion on the financial report does not cover the other information and accordingly we do not express any form of assurance conclusion thereon, with the exception of the Remuneration Report and our related assurance opinion. In connection with our audit of the financial report, our responsibility is to read the other information and, in doing so, consider whether the other information is materially inconsistent with the financial report or our knowledge obtained in the audit or otherwise appears to be materially misstated. If, based on the work we have performed, we conclude that there is a material misstatement of this other information, we are required to report that fact. We have nothing to report in this regard. Responsibilities of the Directors for the Financial Report The directors of the Company are responsible for the preparation of the financial report that gives a true and fair view in accordance with Australian Accounting Standards and the Corporations Act 2001 and for such internal control as the directors determine is necessary to enable the preparation of the financial report that gives a true and fair view and is free from material misstatement, whether due to fraud or error. In preparing the financial report, the directors are responsible for assessing the Group’s ability to continue as a going concern, disclosing, as applicable, matters relating to going concern and using the going concern basis of accounting unless the directors either intend to liquidate the Group or to cease operations, or have no realistic alternative but to do so. Auditor's Responsibilities for the Audit of the Financial Report Our objectives are to obtain reasonable assurance about whether the financial report as a whole is free from material misstatement, whether due to fraud or error, and to issue an auditor’s report that includes our opinion. Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with the Australian Auditing Standards will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of this financial report. As part of an audit in accordance with the Australian Auditing Standards, we exercise professional judgment and maintain professional scepticism throughout the audit. We also: Identify and assess the risks of material misstatement of the financial report, whether due to fraud or error, design and perform audit procedures responsive to those risks, and obtain audit evidence that is sufficient and appropriate to provide a basis for our opinion. The risk of not detecting a material misstatement resulting from fraud is higher than for one resulting from error, as fraud may involve collusion, forgery, intentional omissions, misrepresentations, or the override of internal control ► 76 A member firm of Ernst & Young Global Limited Liability limited by a scheme approved under Professional Standards Legislation ► Obtain an understanding of internal control relevant to the audit in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Group’s internal control ► Evaluate the appropriateness of accounting policies used and the reasonableness of accounting estimates and related disclosures made by the directors ► Conclude on the appropriateness of the directors’ use of the going concern basis of accounting and, based on the audit evidence obtained, whether a material uncertainty exists related to events or conditions that may cast significant doubt on the Group’s ability to continue as a going concern. If we conclude that a material uncertainty exists, we are required to draw attention in our auditor’s report to the related disclosures in the financial report or, if such disclosures are inadequate, to modify our opinion. Our conclusions are based on the audit evidence obtained up to the date of our auditor’s report. However, future events or conditions may cause the Group to cease to continue as a going concern ► Evaluate the overall presentation, structure and content of the financial report, including the disclosures, and whether the financial report represents the underlying transactions and events in a manner that achieves fair presentation ► Obtain sufficient appropriate audit evidence regarding the financial information of the entities or business activities within the Group to express an opinion on the financial report. We are responsible for the direction, supervision and performance of the Group audit. We remain solely responsible for our audit opinion We communicate with the directors regarding, among other matters, the planned scope and timing of the audit and significant audit findings, including any significant deficiencies in internal control that we identify during our audit. We also provide the directors with a statement that we have complied with relevant ethical requirements regarding independence, and to communicate with them all relationships and other matters that may reasonably be thought to bear on our independence, and where applicable, 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. A member firm of Ernst & Young Global Limited Liability limited by a scheme approved under Professional Standards Legislation 77 Report on the Audit of the Remuneration Report Opinion on the Remuneration Report We have audited the Remuneration Report included in pages 37 to 60 of the directors' report for the year ended 30 June 2021. In our opinion, the Remuneration Report of Harvey Norman Holdings Limited for the year ended 30 June 2021, 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 2021 78 A member firm of Ernst & Young Global Limited Liability limited by a scheme approved under Professional Standards Legislation OPERATING AND FINANCIAL REVIEW (CONTINUED) 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. giving a true and fair view of the consolidated entity’s ﬁnancial position as at 30 June 2021 and of its performance for CHAIRMAN AND CEO’s REPORT the year ended on that date; and complying with Accounting Standards and the Corporations Regulations 2001; ii. (b) (c) the ﬁnancial statements and notes also comply with International Financial Reporting Standards as issued by the International Accounting Standards Board; 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 2021. 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 K.L. PAGE Chairman Chief Executive Ofﬁcer Sydney S ydney 30 September 2021 30 September 2021 ANNUAL REPORT JUNE 2021 79 OPERATING AND FINANCIAL REVIEW (CONTINUED) STATEMENT OF FINANCIAL POSITION — 30 JUNE 2021 Cash and cash equivalents Trade and other receivables Other ﬁnancial assets Inventories Other assets Intangible assets Assets held for sale Total 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 s t e s s A t n e r r u C s t e s s A t n e r r u c - n o N Intangible assets Deferred tax assets Total non-current assets Total Assets Trade and other payables Interest-bearing loans and borrowings Lease liabilities Income tax payable Other liabilities Provisions Total current liabilities Interest-bearing loans and borrowings Lease liabilities Provisions Deferred tax liabilities Other liabilities Total non-current liabilities Total Liabilities NET ASSETS Contributed equity Reserves Retained proﬁts Parent entity interests Non-controlling interests TOTAL EQUITY s e i t i l i i b a L t n e r r u C s e i t i l i i b a L t n e r r u C - n o N y t i u q E CONSOLIDATED June 2021 $000 June 2020 $000 264,431 889,201 41,376 479,093 39,555 258 12,662 313,195 511,579 30,237 391,984 34,872 278 16,186 1,726,576 1,298,331 72,560 1,321 33,083 729,847 511,167 49,269 4,692 18,176 662,889 513,782 2,905,509 2,593,330 620,461 621,903 63,668 8,742 63,003 3,227 4,946,358 4,530,271 6,672,934 5,828,602 355,663 359,969 135,389 148,031 108,847 37,162 351,772 102,841 130,280 70,229 96,141 34,181 1,145,061 785,444 200,000 195,000 1,043,276 1,042,807 9,823 380,932 823 9,226 317,937 863 1,634,854 1,565,833 2,779,915 2,351,277 3,893,019 3,477,325 717,925 267,393 717,925 216,837 2,879,511 2,511,580 3,864,829 3,446,342 28,190 30,983 3,893,019 3,477,325 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 The above Statement of Financial Position should be read in conjunction with the accompanying notes. 80 ANNUAL REPORT JUNE 2021 OPERATING AND FINANCIAL REVIEW (CONTINUED) INCOME STATEMENT FOR THE YEAR ENDED 30 JUNE 2021 Sales of products to customers Cost of sales Gross proﬁt Revenues 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 venture 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 2021 $000 June 2020 $000 2,768,328 (1,838,365) 929,963 2,294,913 (1,555,271) 739,642 1,345,782 324,521 (49,971) (377,639) (243,066) (637,583) (67,585) (50,213) 8,320 1,182,529 1 (335,684) 846,845 1 841,414 5,431 846,845 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 6 6 23 67.53 cents 67.45 cents 39.19 cents 39.15 cents 35.0 cents 24.0 cents The above Income Statement should be read in conjunction with the accompanying notes. ANNUAL REPORT JUNE 2021 81 OPERATING AND FINANCIAL REVIEW (CONTINUED) STATEMENT OF COMPREHENSIVE INCOME FOR THE YEAR ENDED 30 JUNE 2021 CONSOLIDATED June 2021 $000 June 2020 $000 Proﬁt for the year 846,845 486,023 Items that may be reclassiﬁed subsequently to proﬁt or loss: Foreign currency translation Net movement on cash ﬂow hedges Income tax effect on net movement on cash ﬂow hedges Items that will not be reclassiﬁed subsequently to proﬁt or loss Fair value revaluation of land and buildings Income tax effect on fair value revaluation of land and buildings Net fair value gains / (losses) on ﬁnancial assets at fair value through other comprehensive income (16,897) 46 (14) 55,616 (5,578) 12,655 (9,236) (47) 14 28,384 (4,655) (1,030) Other comprehensive income for the year (net of tax) 45,828 13,430 Total comprehensive income for the year (net of tax) 892,673 499,453 Total comprehensive income attributable to: Owners of the parent Non-controlling interests 889,249 3,424 892,673 494,391 5,062 499,453 The above Statement of Comprehensive Income should be read in conjunction with the accompanying notes. 82 ANNUAL REPORT JUNE 2021 OPERATING AND FINANCIAL REVIEW (CONTINUED) STATEMENT OF CHANGES IN EQUITY FOR THE YEAR ENDED 30 JUNE 2021 Attributable to Equity Holders of the Parent CONSOLIDATED $000 E q u i t y C o n t r i b u t e d P r o ﬁ t s R e t a n e d i R e s e r v e l R e v a u a t i o n A s s e t R e s e r v e C u r r e n c y F o r e g n i R e s e r v e F V O C I R e s e r v e l F o w H e d g e C a s h R e s e r v e B e n e ﬁ t s E q u i t y l E m p o y e e R e s e r v e A c q u i s i t i o n I n t e r e s t s C o n t r o l l i n g N o n - T o t a l At 1 July 2020 717,925 2,511,580 158,608 56,941 9,919 (35) 10,005 (18,601) 30,983 3,477,325 Revaluation of land and buildings Currency translation differences Reverse expired or realised cash ﬂow hedge reserves Fair value of forward foreign exchange contracts Fair value of ﬁnancial assets at fair value through other comprehensive income Other comprehen- sive income Proﬁt for the year Total comprehensive income for the year Cost of share based payments Utilisation of employee equity beneﬁts reserve - - - - - - - 50,038 - - (14,890) - - - - - - - - - - - - - - 35 (3) - - - 12,655 - - 50,038 (14,890) 12,655 841,414 - - - - 841,414 50,038 (14,890) 12,655 - - - - - - - - - - - - - - - - 32 - 32 - - - - - - - - - - - - 1,453 (1,059) - - - - - - - - - - - - - - 50,038 (2,007) (16,897) - - 35 (3) - 12,655 (2,007) 45,828 5,431 846,845 3,424 892,673 - - 1,453 (1,059) (2,634) (476,117) 2,327 (3,583) (1,256) Dividends paid - (473,483) Disposal of invest- ment - - At 30 June 2021 717,925 2,879,511 208,646 42,051 22,574 (3) 10,399 (16,274) 28,190 3,893,019 The above Statement of Changes in Equity should be read in conjunction with the accompanying notes. ANNUAL REPORT JUNE 2021 83 OPERATING AND FINANCIAL REVIEW (CONTINUED) STATEMENT OF CHANGES IN EQUITY FOR THE YEAR ENDED 30 JUNE 2021 Attributable to Equity Holders of the Parent CONSOLIDATED $000 E q u i t y C o n t r i b u t e d P r o ﬁ t s R e t a n e d i R e s e r v e l R e v a u a t i o n A s s e t R e s e r v e C u r r e n c y F o r e g n i R e s e r v e F V O C I R e s e r v e l F o w H e d g e C a s h R e s e r v e B e n e ﬁ t s E q u i t y l E m p o y e e R e s e r v e A c q u i s i t i o n I n t e r e s t s C o n t r o l l i n g N o n - T o t a l At 1 July 2019 as previously reported Transition adjust- ments arising from adoption of AASB 16 At 1 July 2019, post transition Revaluation of land and buildings Currency translation differences Reverse expired or realised cash ﬂow hedge reserves Fair value of forward foreign exchange contracts Fair value of ﬁnancial assets at fair value through other comprehensive income Other comprehen- sive income Proﬁt for the year Total comprehensive income for the year Cost of share based payments Utilisation of employ- ee equity beneﬁts reserve 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 - - - - - - 2 (35) 23,825 - (8,912) - - - - - - - (1,030) - - 23,825 (8,912) (1,030) (33) 480,541 - - - - 480,541 23,825 (8,912) (1,030) (33) - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - 739 (859) - - - - - - - - - - - - - - - - - - - - - - - 3,450 - - (96) 23,729 (324) (9,236) - - 2 (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) Shares issued 165,675 Sale of a controlled entity - Dividends paid Distribution to members - (322,505) - - 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 84 ANNUAL REPORT JUNE 2021 OPERATING AND FINANCIAL REVIEW (CONTINUED) STATEMENT OF CASH FLOWS FOR THE YEAR ENDED 30 JUNE 2021 s e i t i v i t c A g n i t a r e p O s e i t i v i t c A g n i t s e v n I s e i t i v i t c A g n i c n a n F i Cash Flows from Operating Activities Note 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 Income taxes paid Dividends received Net Cash Flows From Operating Activities 26(b) Cash Flows from Investing Activities Payments for purchases of property, plant and equipment and intangible assets Payments for purchase and refurbishments 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 listed securities Proceeds from sale of listed securities Proceeds from sale of a controlled entity Proceeds from insurance claims Loans repaid from / (granted to) joint venture entities, joint ven- ture partners, related and unrelated entities CONSOLIDATED June 2021 $000 June 2020 $000 886,344 2,984,441 (2,984,050) 9,332 (103,403) 5,496 (8,953) (40,941) (206,595) 2,198 543,869 1,304,230 2,461,539 (2,471,564) 8,385 (65,501) 8,142 (20,489) (40,538) (128,967) 1,727 1,056,964 (100,300) (93,905) (173,822) (51,474) 1,922 (2,312) (409) (2,360) 78 15,082 2,689 5,316 26,510 (215) (2,215) (5,000) - - 2,628 (13,292) Net Cash Flows Used In Investing Activities (254,116) (136,963) Cash Flows from Financing Activities Lease payments (principal component) Proceeds from shares issued — renounceable pro-rata Entitlement Offer Proceeds from / (Repayments of) Syndicated Facility Dividends paid Loans repaid to related parties Repayments of other borrowings Net Cash Flows Used In Financing Activities Net (Decrease) / Increase in Cash and Cash Equivalents Cash and Cash Equivalents at Beginning of the Year Cash and Cash Equivalents at End of the Year 26(a) (130,849) (124,770) - 165,675 295,000 (473,483) - (26,140) (335,472) (45,719) 294,446 248,727 (520,000) (322,505) (8) (9,763) (811,371) 108,630 185,816 294,446 The above Statement of Cash Flows should be read in conjunction with the accompanying notes. ANNUAL REPORT JUNE 2021 85 OPERATING AND FINANCIAL REVIEW (CONTINUED) NOTES TO THE FINANCIAL STATEMENTS — 30 JUNE 2021 1 Statement of Signiﬁcant Accounting Policies Corporate Information (a) 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. Basis of Preparation (b) 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 ﬁnancial assets, 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 2021 were authorised for issue in accordance with a resolution of the directors on 30 September 2021. (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 2021. For details on the impact of future accounting standards, refer to page 89. (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. 86 ANNUAL REPORT JUNE 2021 OPERATING AND FINANCIAL REVIEW (CONTINUED) NOTES TO THE FINANCIAL STATEMENTS (CONTINUED) 1 Statement of Signiﬁcant Accounting Policies (continued) (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 ended 30 June 2020. The consolidated entity has not early adopted any standard, interpretation or amendment that has been issued but is not yet effective. The consolidated entity is currently assessing the impact of the recently published IFRIC agenda decisions in relation to the accounting treatment for cloud computing costs and costs to be included in determining net realisable value of inventories, which was published by IFRIC in April 2021 and June 2021 respectively. The consolidated entity expects to complete its assessment of the above IFRIC agenda decisions by 31 December 2021. (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 2021 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. ANNUAL REPORT JUNE 2021 87 OPERATING AND FINANCIAL REVIEW (CONTINUED) NOTES TO THE FINANCIAL STATEMENTS (CONTINUED) 1 Statement of Signiﬁcant Accounting Policies (continued) (e) Summary of Signiﬁcant Accounting Policies (continued) (ii) Signiﬁcant accounting judgements and estimates (continued) • 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 (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; and 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. 88 ANNUAL REPORT JUNE 2021 OPERATING AND FINANCIAL REVIEW (CONTINUED) NOTES TO THE FINANCIAL STATEMENTS (CONTINUED) 1 Statement of Signiﬁcant Accounting Policies (continued) (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) 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 2021. The consolidated entity does not expect a material impact on the application of the below standards. Reference New Standard Effective Date Application Date AASB 2020-8 Amendments to Australian Accounting Standards — Interest Rate 1 January 2021 1 July 2021 Benchmark Reform—Phase 2 AASB 2021-3 Amendments to Australian Accounting Standards — COVID-19 Related 1 April 2021 1 July 2021 Rent Concessions beyond 30 June 2021 AASB 2020-3 Amendments to Australian Accounting Standards — Annual 1 January 2022 1 July 2022 Improvements 2018-2020 and Other Amendments AASB 2014-10 Amendments to Australian Accounting Standards — Sale or Contribution 1 January 2022 1 July 2022 of Assets between and Investor and its Associate or Joint Venture AASB 2020-1 Amendments to Australian Accounting Standards — Classiﬁcation of 1 January 2023 1 July 2023 Liabilities as Current or Non-current AASB 2021-2 Amendments to Australian Accounting Standards — Disclosure of 1 January 2023 1 July 2023 Accounting Policies and Deﬁnition of Accounting Estimates AASB 2021-5 Amendments to Australian Accounting Standards — Deferred Tax Related to Assets and Liabilities arising from a Single Transaction 1 January 2023 1 July 2023 ANNUAL REPORT JUNE 2021 89 OPERATING AND FINANCIAL REVIEW (CONTINUED) NOTES TO THE FINANCIAL STATEMENTS (CONTINUED) 2 Operating Segments Operating Segment Revenue: 30 June 2021 Sales of products to customers Revenues received from franchisees and other income items Total Revenue by Segment FRANCHISING OPERATIONS - 1,237,706 1,237,706 CONSOLIDATED ($000) 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 1,148,150 577,483 179,223 647,903 224,538 2,777,297 6 6 - 2,805 28,537 10,788 3,274 11,225 5,990 59,814 409,197 409,197 11,103 20,360 1,176,687 588,271 182,497 659,128 230,528 2,837,111 409,203 409,203 11,103 23,165 INTERCOMPANY ELIMINATIONS (11,780) (67,877) (79,657) TOTAL SEGMENT REVENUE 2,768,328 1,670,303 4,438,631 CONSOLIDATED ($000) Operating Segment Revenue: 30 June 2020 Sales of products to customers 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 2,305,586 25 25 - 2,229 23,086 11,685 2,399 8,491 4,318 49,979 300,507 300,507 1,450 14,996 983,271 537,431 156,761 449,004 229,098 2,355,565 300,532 300,532 1,450 17,225 INTERCOMPANY ELIMINATIONS (12,927) (65,108) (78,035) TOTAL SEGMENT REVENUE 2,294,913 1,250,861 3,545,774 90 ANNUAL REPORT JUNE 2021 OPERATING AND FINANCIAL REVIEW (CONTINUED) NOTES TO THE FINANCIAL STATEMENTS (CONTINUED) 2 Operating Segments (continued) Operating Segment Result 30 June 2021 CONSOLIDATED ($000) Interest Expense Depreciation Expense Segment Result Before Interest, Tax, Depreciation & Amortisation Amortisation Expense Segment Result Before Tax Depreciation & Fair Value Re- measure- ment of ROU Asset FRANCHISING OPERATIONS 776,309 (25,218) (26,286) (77,947) (18,670) 628,188 Retail — New Zealand Retail — Singapore & Malaysia Retail — Slovenia & Croatia Retail — Ireland & Northern Ireland Other Non-Franchised Retail TOTAL RETAIL Retail Property Retail Property Under Construction Property Developments for Resale TOTAL PROPERTY EQUITY INVESTMENTS OTHER INTER-COMPANY ELIMINATIONS 163,667 80,465 18,019 78,787 8,492 (4,591) (5,595) (1,032) (6,211) (1,137) (7,307) (7,247) (2,935) (6,531) (2,368) (9,804) (31,315) (2,544) (13,966) (1,408) (355) (393) (126) (193) (255) 141,610 35,915 11,382 51,886 3,324 349,430 (18,566) (26,388) (59,037) (1,322) 244,117 307,647 (5,868) (9,687) (104) (104) (14) (28) - - 307,439 (5,910) (9,687) 10,959 13,026 (26) (77) (468) 26 - (4,753) - - - - - - - - (305) 291,787 - - (118) (132) (305) 291,537 - - - 10,882 7,805 - TOTAL SEGMENT RESULT BEFORE TAX 1,457,137 (50,213) (67,114) (136,984) (20,297) 1,182,529 Operating Segment Result 30 June 2020 CONSOLIDATED ($000) Segment Result Before Interest, Tax, Depreciation, Impairment & Amortisation Interest Expense Depreciation Expense Impairment & Amortisation Expense Segment Result Before Tax Depreciation & Fair Value Re- measure- ment of ROU Asset 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 Other Non-Franchised Retail 120,196 73,550 13,908 43,263 (2,640) (4,282) (6,068) (908) (7,520) (1,859) (7,059) (6,843) (2,701) (5,186) (2,525) (9,354) (31,818) (1,723) (13,512) (1,508) (345) (1,206) (143) (172) (305) 99,156 27,615 8,433 16,873 (8,837) TOTAL RETAIL 248,277 (20,637) (24,314) (57,915) (2,171) 143,240 Retail Property TOTAL PROPERTY 199,022 (14,099) (11,430) 199,022 (14,099) (11,430) EQUITY INVESTMENTS (2,001) (152) - OTHER INTER-COMPANY ELIMINATIONS 4,874 (170) (1,378) (5,075) 170 - - - - - - (305) (305) 173,188 173,188 - - - (2,153) (1,579) - TOTAL SEGMENT RESULT BEFORE TAX 945,849 (59,794) (66,016) (135,975) (22,776) 661,288 ANNUAL REPORT JUNE 2021 91 OPERATING AND FINANCIAL REVIEW (CONTINUED) NOTES TO THE FINANCIAL STATEMENTS (CONTINUED) 2 Operating Segments (continued) CONSOLIDATED ($000) Operating Segment Assets and Liabilities 30 June 2021 Segment Assets Inter- Company Eliminations Segment Assets After Eliminations Segment Liabilities Inter- Company Eliminations Segment Liabilities After Elimina- tions FRANCHISING OPERATIONS 3,981,402 (2,272,596) 1,708,806 850,415 (7,348) 843,067 Retail — New Zealand Retail — Singapore & Malaysia 390,749 475,869 - 390,749 250,246 (2,232) 248,014 (2,451) 473,418 326,132 (40,731) 285,401 Retail — Slovenia & Croatia 85,457 (2,156) 83,301 75,810 Retail — Ireland & Northern Ireland 281,545 - 281,545 267,794 (525) (577) Other Non-Franchised Retail 218,656 (58,705) 159,951 267,252 (154,111) 75,285 267,217 113,141 TOTAL RETAIL Retail Property 1,452,276 (63,312) 1,388,964 1,187,234 (198,176) 989,058 3,339,075 (3,567) 3,335,508 2,334,254 (1,983,024) 351,230 Retail Property Under Construction Property Developments for Resale 7,486 27,662 - - 7,486 27,662 7,562 3,917 (7,562) (2,199) - 1,718 TOTAL PROPERTY 3,374,223 (3,567) 3,370,656 2,345,733 (1,992,785) 352,948 EQUITY INVESTMENTS 69,327 - 69,327 4,861 - 4,861 OTHER 179,604 (53,165) 126,439 255,349 (194,331) 61,018 TOTAL SEGMENT ASSETS/LIABILITIES BEFORE TAX 9,056,832 (2,392,640) 6,664,192* 4,643,592 (2,392,640) 2,250,952* CONSOLIDATED ($000) 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 Elimina- tions FRANCHISING OPERATIONS 3,495,462 (2,222,820) 1,272,642 916,694 (139,436) 777,258 Retail — New Zealand Retail — Singapore & Malaysia 434,573 446,675 - 434,573 269,969 (4,188) (1,671) 445,004 298,827 (40,670) Retail — Slovenia & Croatia 74,388 (3,260) 71,128 63,719 Retail — Ireland & Northern Ireland 243,916 (262) 243,654 266,188 (368) (615) 265,781 258,157 63,351 265,573 Other Non-Franchised Retail 211,721 (43,627) 168,094 237,933 (144,973) 92,960 TOTAL RETAIL Retail Property 1,411,273 (48,820) 1,362,453 1,136,636 (190,814) 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* * Segment assets for FY21 and FY20 are exclusive of deferred tax assets. Segment liabilities for FY21 and FY20 are exclusive of income tax payable and deferred tax liabilities. 92 ANNUAL REPORT JUNE 2021 OPERATING AND FINANCIAL REVIEW (CONTINUED) NOTES TO THE FINANCIAL STATEMENTS (CONTINUED) 2 Operating Segments (continued) The consolidated entity operates predominantly in eleven (11) operating segments: Operating Segment Description of Segment Franchising Operations Consists of the franchisor operations of the consolidated entity, but does not include the results, assets, liabilities or operations of any Harvey Norman®, Domayne® and Joyce Mayne® franchisees. Retail – New Zealand Retail – Singapore & Malaysia Retail – Slovenia & Croatia Retail – Ireland & Northern Ireland Consists of the wholly-owned operations of the consolidated entity in the retail trading operations in New Zealand under the Harvey Norman® brand name. 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. 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. 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 or 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. Retail Property Under Construction Consists of freehold sites that are currently undergoing construction at balance date intended for retail leasing. It also includes vacant land that has been purchased for the purposes of generating future investment income. Property Developments for Resale Consists of 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: • • • • • Nature of the products and services; Nature of the production processes; Type or class of customer for the products and services; Methods used to distribute the products or provide the services; and, if applicable 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”. ANNUAL REPORT JUNE 2021 93 OPERATING AND FINANCIAL REVIEW (CONTINUED) NOTES TO THE FINANCIAL STATEMENTS (CONTINUED) CONSOLIDATED June 2021 $000 June 2020 $000 3 Revenues Revenue from contracts with customers and franchisees: Sale of products to customers (a) Services to customers (c) Franchise fees in accordance with franchise agreements (b) Total revenue from contracts with customers and franchisees Other revenue from franchisees: Rent and outgoings received from franchisees Interest to implement and administer the ﬁnancial accommodation facilities Total other revenue received from franchises (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 other revenue received from 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 2,768,328 33,496 1,075,753 3,877,577 248,598 21,431 270,029 98,006 5,068 2,340 105,414 138,686 1,688 8,763 36,474 185,611 2,768,328 1,345,782 324,521 2,294,913 27,676 780,237 3,102,826 247,291 28,338 275,629 98,610 6,388 1,450 106,448 34,268 688 - 25,915 60,871 2,294,913 1,055,866 194,995 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. 94 ANNUAL REPORT JUNE 2021 OPERATING AND FINANCIAL REVIEW (CONTINUED) NOTES TO THE FINANCIAL STATEMENTS (CONTINUED) 3 Revenues (continued) TYPES OF CONTRACTS $000 Operating Segments 30 June 2021 Sale of Products to Customers Services to Customers Franchisee Fees from Franchisees Total Revenue from Contracts with Customers FRANCHISING OPERATIONS - - 1,075,753 1,075,753 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 1,148,150 16,446 577,483 179,223 647,903 224,538 5,197 2,385 8,983 485 2,777,297 33,496 6 6 - 2,805 (11,780) - - - - - - - - - - - - - - - - 1,164,596 582,680 181,608 656,886 225,023 2,810,793 6 6 - 2,805 (11,780) TOTAL SEGMENT REVENUE 2,768,328 33,496 1,075,753 3,877,577 TYPES OF CONTRACTS $000 Operating Segments 30 June 2020 Sale of Products to Customers Services to Customers Franchisee Fees from Franchisees Total Revenue from Contracts with Customers FRANCHISING OPERATIONS - - 780,237 780,237 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 13,933 4,818 1,759 6,604 562 2,305,586 27,676 25 25 - 2,229 (12,927) - - - - - - - - - - - - - - - - 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 ANNUAL REPORT JUNE 2021 95 OPERATING AND FINANCIAL REVIEW (CONTINUED) NOTES TO THE FINANCIAL STATEMENTS (CONTINUED) 3 Revenues (continued) PRIMARY GEOGRAPHICAL MARKETS $000 Operating Segments 30 June 2021 Australia New Zealand Asia Europe Total Revenue from Contracts with Customers FRANCHISING OPERATIONS 1,075,753 - Retail — New Zealand Retail — Singapore & Malaysia Retail — Slovenia & Croatia Retail — Ireland & Northern Ireland - - - - 1,164,596 - - - Other Non-Franchised Retail 213,191 11,832 - - 582,680 - - - - - - 181,608 656,886 - 1,075,753 1,164,596 582,680 181,608 656,886 225,023 213,191 1,176,428 582,680 838,494 2,810,793 TOTAL RETAIL Retail Property TOTAL PROPERTY EQUITY INVESTMENTS OTHER 6 6 - 2,805 - - - - - - - - - - - - - 6 6 - 2,805 (11,780) INTER-COMPANY ELIMINATIONS - (11,177) (603) TOTAL SEGMENT REVENUE 1,291,755 1,165,251 582,077 838,494 3,877,577 PRIMARY GEOGRAPHICAL MARKETS $000 Operating Segments 30 June 2020 Australia New Zealand Asia Europe Total Revenue from Contracts with Customers FRANCHISING OPERATIONS 780,237 - Retail — New Zealand Retail — Singapore & Malaysia Retail — Slovenia & Croatia Retail — Ireland & Northern Ireland - - - - 974,118 - - - Other Non-Franchised Retail 213,799 11,563 - - 530,564 - - - - - - 156,121 447,117 - 780,237 974,118 530,564 156,121 447,117 225,362 213,799 985,681 530,564 603,238 2,333,282 TOTAL RETAIL Retail Property TOTAL PROPERTY EQUITY INVESTMENTS OTHER 25 25 - 2,229 - - - - - - - - - - - - - 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 96 ANNUAL REPORT JUNE 2021 OPERATING AND FINANCIAL REVIEW (CONTINUED) NOTES TO THE FINANCIAL STATEMENTS (CONTINUED) CONSOLIDATED June 2021 $000 June 2020 $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 Depreciation, amortisation and impairment: 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-current assets Impairment of other ﬁnancial assets Total depreciation, amortisation and impairment 351,110 2,768 16,782 14,828 1,488 12,797 399,773 40,941 7,975 1,297 50,213 30,407 62,908 74,076 75,675 243,066 9,276 57,838 19,777 520 - - 87,411 297,214 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 * These amounts are net of the following COVID-19 wages support and assistance received: • • $4.43 million received overseas, in aggregate, by our overseas company-operated stores in Malaysia, Singapore, Northern Ireland and Slovenia; and $3.63 million received in Australia by controlled non-franchised retail businesses in Australia. Subsequent to the year-end, in August 2021, all of the wages support and assistance received by controlled entities in Australia of $6.02 million (FY21: $3.63 million and FY20: $2.39 million) was repaid to the Federal Government via the Australian Taxation Ofﬁce. No provision has been made in the Statement of Financial Position as at 30 June 2021 for this post year-end repayment. ANNUAL REPORT JUNE 2021 97 OPERATING AND FINANCIAL REVIEW (CONTINUED) NOTES TO THE FINANCIAL STATEMENTS (CONTINUED) CONSOLIDATED June 2021 $000 June 2020 $000 5 Income Tax (a) 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 (b) Income tax recognised in the Statement of Changes in Equity : Deferred income tax: Net gain / (loss) on revaluation of cash ﬂow hedges Net gain on revaluation of land and buildings Total income tax expense reported in other comprehensive income (c) Reconciliation between income tax expense and prima facie income tax: Accounting proﬁt before tax At the Australian statutory income tax rate of 30% (2020: 30%) 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 year 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 reported in the Income Statement Effective income tax rate (%) 98 ANNUAL REPORT JUNE 2021 285,742 (76) 50,018 335,684 14 5,578 5,592 1,182,529 354,759 11,125 (76) 129 1,931 (2,445) 105 (13,196) (189) (334) 266 - (771) (74) (15,546) (19,075) 335,684 28.39% 180,801 (462) (5,074) 175,265 (14) 4,559 4,545 661,288 198,386 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% OPERATING AND FINANCIAL REVIEW (CONTINUED) NOTES TO THE FINANCIAL STATEMENTS (CONTINUED) 5 Income Tax (continued) 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 a 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. (d) Deferred income tax assets and liabilities: Deferred income tax at 30 June relates to the following: Deferred tax liabilities: STATEMENT OF FINANCIAL POSITION INCOME STATEMENT June 2021 $000 June 2020 $000 June 2021 $000 June 2020 $000 Revaluations of freehold investment properties to fair value (233,220) (193,801) 40,982 9,876 Revaluations of owner-occupied land and buildings to fair value (45,125) (39,699) - - 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 Provisions for lease makegood Provision for executive remuneration Revaluations of owner-occupied land and buildings to fair value Total deferred tax assets* Total deferred tax - - (15,389) (760) 1,897 14,766 - (14,766) (130,307) (116,570) 13,969 11,736 (13,548) (15,279) (1,731) (1,123) (8,455) (5,020) 3,795 830 (430,655) (370,992) 10,904 8,875 19,146 9,188 7,416 440 968 1,527 58,464 9,862 3,444 17,410 11,365 11,451 401 822 1,527 56,282 5 (1,221) (5,592) (1,702) 300 2,275 (61) (146) - (120) (3,206) (8,013) 300 (2,397) (78) (10) - (372,191) (314,710) 5 50,018 (5,074) * Of the total deferred tax assets of $58.46 million (30 Jun 2020: $56.28 million), $49.72 million (30 June 2020: $53.06 million) was offset with the deferred tax liabilities in accordance with the deferred income tax accounting policy outlined on page 100. The consolidated entity has not recognised deferred tax assets relating to tax losses of $88.71 million (2020: $176.00 million) which are available for offset against taxable proﬁts of the companies in which the losses arose. At 30 June 2021, no deferred tax liability has been recognised (2020: nil) in respect of the unremitted earnings of certain subsidiaries, associates or joint ventures. ANNUAL REPORT JUNE 2021 99 OPERATING AND FINANCIAL REVIEW (CONTINUED) NOTES TO THE FINANCIAL STATEMENTS (CONTINUED) 5 Income Tax (continued) Current income tax Current income tax assets and liabilities are measured at the amount expected to the 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. 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. 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. 100 ANNUAL REPORT JUNE 2021 OPERATING AND FINANCIAL REVIEW (CONTINUED) NOTES TO THE FINANCIAL STATEMENTS (CONTINUED) 6 Earnings Per Share Basic earnings per share (cents per share) Diluted earnings per share (cents per share) CONSOLIDATED June 2021 $000 June 2020 $000 67.53c 67.45c The following reﬂects the income and number of HVN shares used in the calculation 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 846,845 (5,431) 841,414 39.19c 39.15c 486,023 (5,482) 480,541 NUMBER OF SHARES June 2021 Number June 2020 Number Weighted average number of ordinary shares used in calculating basic earnings per share (a) 1,246,006,654 1,226,271,429 Effect of dilutive securities (b) 1,413,644 1,267,770 Adjusted weighted average number of ordinary shares used in calculating diluted earnings per share (a) Weighted Average Number of Ordinary Shares 1,247,420,298 1,227,539,199 The weighted average number of ordinary shares used in calculating basic earnings per share for the 2020 ﬁnancial year was 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. As there were no new shares issued during the current year, the weighted average number of ordinary shares used in calculating basic earnings per share for the 2021 ﬁnancial year was the number of shares on issue as at 30 June 2021. (b) Effect of Dilutive Securities Performance rights pursuant to Tranche FY19, Tranche FY20 and Tranche FY21 of the 2016 LTI Plan that have been issued to Executive Directors, but have not yet vested as at 30 June 2021, have been included in the calculation of dilutive earnings per share. Refer to Table 4. Performance Rights of Key Management Personnel for the Year Ended 30 June 2021 on page 57 of this report for further information. 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. ANNUAL REPORT JUNE 2021 101 OPERATING AND FINANCIAL REVIEW (CONTINUED) NOTES TO THE FINANCIAL STATEMENTS (CONTINUED) 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 Amounts receivable in respect of ﬁnance leases (c) Non-trade debts receivable from (d): - Related parties (including joint ventures and joint venture partners) - Unrelated parties Allowance for expected credit loss (d) Non-trade debts receivable, net CONSOLIDATED June 2021 $000 June 2020 $000 793,228 78,917 2,094 (3,578) 77,433 3,206 1,824 13,738 (228) 15,334 352,359 109,077 2,258 (3,716) 107,619 3,291 23,059 25,745 (494) 48,310 Total trade and other receivables (current) 889,201 511,579 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 parties (including joint ventures and joint venture partners) - Unrelated parties Allowance for expected credit loss (d) Non-trade debts receivable, net Total trade and other receivables (non-current) 6,703 441 (3) 7,141 713 56,022 29,352 (20,668) 64,706 72,560 7,276 476 (4) 7,748 912 49,442 19,835 (28,668) 40,609 49,269 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 cashﬂows, and • The contractual terms of the ﬁnancial asset give rise on speciﬁc dates to cash ﬂows that are solely payments of principal and interest on the principal amount outstanding. Financial assets at amortised cost are subsequently subjected to an expected credit loss assessment. 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. 102 ANNUAL REPORT JUNE 2021 OPERATING AND FINANCIAL REVIEW (CONTINUED) NOTES TO THE FINANCIAL STATEMENTS (CONTINUED) 7 Trade and Other Receivables (continued) Allowance for expected credit losses 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 $793.23 million as at 30 June 2021 (2020: $352.36 million) 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 a recoverability assessment as at 30 June 2021 to assess whether an allowance for expected credit loss was required in respect of the aggregate franchisee receivables balance. This expected credit loss assessment was conducted by applying the general approach for provisioning for expected credit losses prescribed by AASB 9, and was applied to the carrying value of franchisee receivables as at 30 June 2021 totalling $793.23 million (2020: $352.36 million). Based on the assessment, there is no expected credit loss in respect of receivables from franchisees and therefore no allowance for expected credit loss has been raised as at 30 June 2021 (2020: nil). Receivables from franchisees are neither past due nor impaired as at 30 June 2021. (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 $0.25 million (2020: $3.68 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: • • • $72.08 million of the trade receivables balance as at 30 June 2021 (2020: $91.30 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. $9.98 million of the trade receivables balance as at 30 June 2021 (2020: $21.36 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 2021 (2020: nil). $3.56 million of the trade receivables balance as at 30 June 2021 (2020: $3.70 million) are past due and impaired, and have been provided for in full as at balance date. Past due but not impaired Past due and impaired Ageing Analysis 2021 ($000) 2020 ($000) Neither past due or impaired 31-60 Days 61-90 Days +90 Days 31-60 Days 61-90 Days +90 Days Total 72,077 91,301 2,629 2,193 5,161 8,593 4,087 8,675 507 78 246 98 2,807 3,521 85,620 116,353 ANNUAL REPORT JUNE 2021 103 OPERATING AND FINANCIAL REVIEW (CONTINUED) NOTES TO THE FINANCIAL STATEMENTS (CONTINUED) CONSOLIDATED June 2021 $000 June 2020 $000 7 Trade and Other Receivables (continued) Reconciled to: Trade receivables (Current) Trade receivables (Non-current) Total trade receivables Movement 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 78,917 6,703 85,620 3,697 254 (16) (375) 3,560 109,077 7,276 116,353 414 3,684 (10) (391) 3,697 (b) Consumer ﬁnance loans and allowance for expected credit loss 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: • $0.86 million of the consumer ﬁnance loans at 30 June 2021 (2020: $1.70 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. $1.66 million of the consumer ﬁnance loans balance as at 30 June 2021 (2020: $1.01 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 2021 (2020: $0.02 million) are past due and impaired, and have been provided for in full as at balance date. • • Ageing Analysis 2021 ($000) 2020 ($000) Past due but not impaired Past due and impaired Neither past due or impaired 31-60 Days 61-90 Days +90 Days 31-60 Days 61-90 Days +90 Days Total 858 1,699 393 372 297 432 966 208 - - - - 21 23 2,535 2,734 Reconciled to: Consumer ﬁnance loans (Current) Consumer ﬁnance loans (Non-current) Total consumer ﬁnance loans CONSOLIDATED June 2021 $000 June 2020 $000 2,094 441 2,535 Movement in the allowance for expected credit loss for consumer ﬁnance loans were as follows: At 1 July Amounts written off At 30 June 23 (2) 21 104 ANNUAL REPORT JUNE 2021 2,258 476 2,734 36 (13) 23 OPERATING AND FINANCIAL REVIEW (CONTINUED) NOTES TO THE FINANCIAL STATEMENTS (CONTINUED) CONSOLIDATED June 2021 $000 June 2020 $000 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 Reconciled to: Amounts receivable in respect of ﬁnance leases (current) Amounts receivable in respect of ﬁnance leases (non-current) Total ﬁnance lease receivables 3,365 758 4,123 (135) (69) 3,919 3,230 689 3,919 3,438 1,019 4,457 (147) (107) 4,203 3,291 912 4,203 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. An expected credit loss allowance is made for estimated unrecoverable ﬁnance lease receivable amounts when there is objective evidence that a ﬁnance lease receivable is impaired. No expected credit loss was recognised in the 2021 ﬁnancial year (2020: nil). The ageing analysis of current and non-current ﬁnance lease receivables is as follows: • $1.20 million of the ﬁnance lease receivable balance as at 30 June 2021 (2020: $1.48 million) are neither past due nor impaired. $2.72 million of the ﬁnance lease receivable balance as at 30 June 2021 (2020: $2.72 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. • (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 2021 was $100.94 million (2020: $118.08 million) as follows: • $54.15 million of the non-trade debts receivable balance as at 30 June 2021 (2020: $69.24 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. $25.89 million of the non-trade debts receivable balance as at 30 June 2021 (2020: $19.68 million) are past due but not impaired. These receivables are subject to regular monitoring and periodic impairment testing to ensure that they are recoverable. $20.90 million of the non-trade debts receivable balance as at 30 June 2021 (2020: $29.16 million) are past due and impaired, and have been provided for in full as at balance date. • • Ageing Analysis 2021 ($000) 2020 ($000) Neither past due or impaired 54,150 69,241 Past due but not impaired Past due and impaired 31-60 Days 61-90 Days +90 Days 31-60 Days 61-90 Days +90 Days Total - - - - 25,890 19,678 - - - - 20,896 29,162 100,936 118,081 ANNUAL REPORT JUNE 2021 105 OPERATING AND FINANCIAL REVIEW (CONTINUED) NOTES TO THE FINANCIAL STATEMENTS (CONTINUED) CONSOLIDATED June 2021 $000 June 2020 $000 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 15,562 85,374 100,936 Movement in the allowance for expected credit loss for non-trade debts receivable were as follows: At 1 July Charge for the year Reversal during the year (i) Utilisation of allowance for expected credit loss At 30 June 29,162 35 (8,000) (301) 20,896 48,804 69,277 118,081 30,272 1,335 (2,000) (445) 29,162 (i) Non-trade debts receivable from mining camp joint venture: The consolidated entity has non-trade debts receivable from the mining camp joint ventures totalling $30.69 million (2020: $32.85 million) in aggregate as at 30 June 2021. The recoverable amount of non-trade receivable from the mining camp joint ventures was assessed during the year. An impairment reversal of $8.00 million was recognised in the current year (2020: impairment reversal of $2.00 million). The total balance of the allowance for expected credit loss as at 30 June 2021 relating to non-trade receivables from the mining camp joint ventures was $3.23 million (2020: $11.23 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 2021 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, to each of these variables to assess the recoverable amount of the non-trade receivables as at balance date. 106 ANNUAL REPORT JUNE 2021 OPERATING AND FINANCIAL REVIEW (CONTINUED) NOTES TO THE FINANCIAL STATEMENTS (CONTINUED) 8 Other Financial Assets Current Equity investments at fair value through proﬁt or loss Derivatives receivable Total other ﬁnancial assets (current) Non-Current Equity investments at fair value through other comprehensive income Units in unit trusts Other non-current ﬁnancial assets Total other ﬁnancial assets (non-current) CONSOLIDATED June 2021 $000 June 2020 $000 41,281 95 41,376 28,046 414 4,623 33,083 30,237 - 30,237 15,451 414 2,311 18,176 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 at fair value through other comprehensive income (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) 490,015 (10,922) 479,093 402,363 (10,379) 391,984 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. ANNUAL REPORT JUNE 2021 107 OPERATING AND FINANCIAL REVIEW (CONTINUED) NOTES TO THE FINANCIAL STATEMENTS (CONTINUED) 10 Other Assets (Current) Prepayments Other current assets Total other assets (current) 11 Intangible Assets Current Net licence property (current) Non-Current Net licence property Other intangible assets Computer software: At cost Accumulated amortisation and impairment Net computer software CONSOLIDATED June 2021 $000 June 2020 $000 36,803 2,752 39,555 258 1,981 90 232,571 (170,974) 61,597 30,723 4,149 34,872 278 2,494 156 214,688 (154,335) 60,353 Total net intangible assets (non-current) 63,668 63,003 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) 60,353 20,791 (36) (19,777) 266 61,597 61,910 19,167 (921) (19,814) 11 60,353 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. 108 ANNUAL REPORT JUNE 2021 OPERATING AND FINANCIAL REVIEW (CONTINUED) NOTES TO THE FINANCIAL STATEMENTS (CONTINUED) CONSOLIDATED June 2021 $000 June 2020 $000 12 Property, Plant and Equipment Land at fair value Buildings at fair value Land and buildings at fair value (a) Plant and equipment: At cost Accumulated depreciation Net plant and equipment Total property, plant and equipment: Land and buildings at fair value Plant and equipment at cost Total property, plant and equipment Accumulated depreciation Total written down amount of property, plant and equipment Reconciliation of the carrying amounts of property, plant & equipment were as follows: Land at fair value Opening balance Additions Disposals Increase resulting from revaluation Reclassiﬁcation to leasehold properties: right-of-use assets Net foreign currency differences arising from foreign operations Closing balance Buildings at fair value Opening balance Additions Disposals Increase resulting from revaluation Depreciation for the year 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 (a) 185,916 265,173 451,089 798,335 (519,577) 278,758 451,089 798,335 1,249,424 (519,577) 729,847 150,235 1,685 - 35,910 - (1,914) 185,916 252,681 3,222 (646) 21,938 (9,210) - (2,812) 265,173 451,089 150,235 252,681 402,916 837,764 (577,791) 259,973 402,916 837,764 1,240,680 (577,791) 662,889 199,078 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 $191.43 million (2020: $199.36 million) if measured on a historical cost basis. ANNUAL REPORT JUNE 2021 109 OPERATING AND FINANCIAL REVIEW (CONTINUED) NOTES TO THE FINANCIAL STATEMENTS (CONTINUED) CONSOLIDATED June 2021 $000 June 2020 $000 12 Property, Plant and Equipment (continued) Reconciliation of the carrying amounts of property, plant and equipment (continued): Plant and equipment at cost: Opening balance Additions Disposals Net foreign currency differences arising from foreign operations Closing balance Plant and equipment accumulated depreciation: Opening balance Depreciation for the year Disposals Net foreign currency differences arising from foreign operations Closing balance Net book value plant and equipment Leased plant and equipment at cost: Opening balance Reclassiﬁcation to leasehold properties: right-of-use assets Closing balance Leased plant and equipment accumulated depreciation: Opening balance Reclassiﬁcation to leasehold properties: right-of-use assets Closing balance Net book value leased plant and equipment Lease make good asset at cost: Opening balance 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 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 837,764 83,776 (115,390) (7,815) 798,335 577,791 57,838 (110,938) (5,114) 519,577 278,758 - - - - - - - - - - - - - - - - - - 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) - - Total written down amount of property, plant and equipment 729,847 662,889 110 ANNUAL REPORT JUNE 2021 OPERATING AND FINANCIAL REVIEW (CONTINUED) NOTES TO THE FINANCIAL STATEMENTS (CONTINUED) 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 Commencing from 1 January 2020, the entire freehold owner-occupied property portfolio is being 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 Note 12(b) and Note 12(c). Financial Reporting Impacts of COVID-19: Land of $185.92 million and buildings of $265.17 million are measured at fair value at 30 June 2021. 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 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. ANNUAL REPORT JUNE 2021 111 OPERATING AND FINANCIAL REVIEW (CONTINUED) NOTES TO THE FINANCIAL STATEMENTS (CONTINUED) 12 Property, Plant and Equipment (continued) (a) Reconciliation of owner occupied properties—land and building at fair value New Zealand Slovenia Singapore Ireland Australia Total Retail $000 Warehouse $000 Retail $000 Warehouse $000 Ofﬁce $000 Retail $000 Retail $000 2021 $000 2020 $000 282,797 5,298 80,314 - 8,093 16,364 10,050 402,916 441,213 2,773 (645) 57,544 - - - - - - (6,712) (93) (1,950) - - - (1,104) (21) (2,637) 1,684 - - - - - - - - - - 305 448 4,905 19,843 - - (645) (3,351) 57,849 29,402 (19) (308) (128) (9,210) (10,897) - - (426) (538) - - - (68,571) (4,726) (4,723) 334,653 5,184 75,727 1,684 7,648 15,823 10,370 451,089 402,916 Opening balance Additions Disposals Fair value adjustments Depreciation for the year Transfer to property: ROU assets Net foreign currency differences Closing balance (b) Fair value measurement, valuation techniques and inputs Class of property Fair value hierarchy* Fair value 30 June 2021 $000 Valuation Technique Key unobservable inputs Range of unobservable inputs Retail Level 3 436,573 Warehouse Level 3 6,868 Ofﬁce Level 3 7,648 Discounted cash ﬂow Terminal Yield 3.1% - 7.8% Discount Rate 4.0% - 8.5% Income capitalisation Net market rent per sqm p.a $98 - $362 Capitalisation Rate 4.5% - 7.9% Direct sale comparison Price per sqm of lettable area $7,621 Discounted cash ﬂow Terminal Yield Discount Rate Income Capitalisation Net market rent per sqm p.a 5.9% 6.6% $98 Discounted cash ﬂow Capitalisation Rate 5.60% Terminal Yield Discount Rate 3.5% 4.0% Income capitalisation Net market rent per sqm p.a $215-$250 Capitalisation Rate 3.3% Direct sale comparison Price per sqm of lettable area $7,266 - $9,026 TOTAL 451,089 * Level 3 - fair value is estimated using inputs that are not based on observable market data. 112 ANNUAL REPORT JUNE 2021 OPERATING AND FINANCIAL REVIEW (CONTINUED) NOTES TO THE FINANCIAL STATEMENTS (CONTINUED) 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 and 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 adjust- ments 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 Increase Decrease Capitalisation rate Terminal yield Discount rate Decrease Decrease Decrease Increase Increase Increase Price per square metre Increase Decrease The net market rent of a property and the capitalisation rate are key inputs of the income capitalisation valuation method. The income capitalisation valuation method incorporates a direct interrelationship between the net market rent of a property and its capitalisation rate. This methodology involves assessing the total net market income generated by the property and capitalising this in perpetuity to derive a capital value. Signiﬁcant increases (or decreases) in rental returns and rent growth per annum in isolation would result in a signiﬁcantly higher (or lower) fair value of the properties. There is an inverse relationship between the capitalisation rate and the fair value of properties. Signiﬁcant increases (or decreases) in the capitalisation rate in isolation would result in a signiﬁcantly lower (or higher) fair value of the properties. The discount rate and terminal yield are key inputs of the discounted cash ﬂow method. The discounted cash ﬂow method incorporates a direct interrelationship between the discount rate and the terminal yield as the discount rate applied will determine the rate in which the terminal value is discounted to present value. Signiﬁcant increases (or decreases) in the discount rate in isolation would result in a signiﬁcantly lower (or higher) fair value. Similarly, signiﬁcant increases (or decreases) in the terminal yield in isolation would result in a signiﬁcantly lower (or higher) fair value. In general, an increase in the discount rate and a decrease in the terminal yield could potentially offset the impact on the fair value of the properties. ANNUAL REPORT JUNE 2021 113 OPERATING AND FINANCIAL REVIEW (CONTINUED) NOTES TO THE FINANCIAL STATEMENTS (CONTINUED) 12 Property, Plant and Equipment (continued) (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 (ROUA) CONSOLIDATED Leasehold properties: ROUA $000 Plant and equipment: ROUA $000 Total ROUA $000 AASB 16 transition adjustments Reclassiﬁcation of pre-existing balances 447,575 71,330 2,144 3,448 As at 1 July 2019 New and modiﬁed leases Leases exited Depreciation Foreign currency As at 30 June 2020 As at 1 July 2020 New and modiﬁed leases Leases exited Depreciation Foreign currency As at 30 June 2021 518,905 53,535 (535) (59,619) (3,066) 509,220 509,220 81,116 (5,390) (60,788) (16,868) 507,290 5,592 1,102 - (2,150) 18 4,562 4,562 1,490 - (2,120) (55) 3,877 449,719 74,778 524,497 54,637 (535) (61,769) (3,048) 513,782 513,782 82,606 (5,390) (62,908) (16,923) 511,167 (a) The leasehold properties relate to leases of owner-occupied properties. Australia New Zealand Singapore & Malaysia Slovenia & Croatia Ireland & Northern Ireland Total lease liabilities of leases of owner occupied properties and plant and equipment assets CONSOLIDATED June 2021 $000 June 2020 $000 30,181 113,083 244,163 19,235 104,505 511,167 35,144 109,244 245,443 11,301 112,650 513,782 Property, Plant and Equipment: Right-of-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. 114 ANNUAL REPORT JUNE 2021 OPERATING AND FINANCIAL REVIEW (CONTINUED) NOTES TO THE FINANCIAL STATEMENTS (CONTINUED) 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 2021 $000 June 2020 $000 2,593,330 171,805 140,374 2,905,509 2,508,951 50,111 34,268 2,593,330 Below is a list of the top 20 freehold investment properties ranked in order of fair value as at 30 June 2021: Property Last independent valuation date Independent valuation at last valuation date ($000) Fair value 30 June 2021 ($000) Cap rate 30 June 2021 % Penrith Homemaker Centre — Harvey Norman® / Domayne® 30 Jun 2019 158,000 Springvale Homemaker Centre — Harvey Norman® / Domayne® 30 Jun 2020 142,000 Watergardens Homeplace — Harvey Norman® (a) N/A N/A 197,800 151,800 102,426 6.00% 6.25% n/a Maroochydore Homemaker Centre — Harvey Norman® / Domayne® / Joyce Mayne® 30 Jun 2021 98,000 98,000 6.75% Silverwater Warehouse Complex Alexandria Complex — Domayne® 31 Dec 2020 68,000 30 Jun 2020 63,000 Toowoomba Centre Complex — Harvey Norman® 31 Dec 2019 61,800 The Cambridge Park Centre — Harvey Norman® / Domayne® 31 Dec 2020 61,300 Perth City West Complex — Harvey Norman® / Domayne® (b) 30 Jun 2020 57,500 Auburn Complex — Domayne® (c) 30 Jun 2020 55,000 Albury Homemaker Centre — Harvey Norman® 30 Jun 2021 54,000 Auburn Flagship Store Complex — Harvey Norman® 30 Jun 2021 51,000 Maribyrnong Complex — Harvey Norman® 31 Dec 2020 50,000 Rutherford (Maitland) Complex — Harvey Norman® / Domayne® 31 Dec 2020 47,300 Browns Plains Homemaker Centre — Harvey Norman® 31 Dec 2020 46,000 Gepps Cross Home HQ — Harvey Norman® (b) 30 Jun 2021 42,500 Munno Para Shopping City — Harvey Norman® 31 Dec 2020 42,200 Bendigo Homemaker Centre 30 Jun 2021 41,500 Devonport Homemaker Centre — Harvey Norman® 31 Dec 2018 34,000 Cannington Complex — Harvey Norman® 31 Dec 2020 36,000 68,976 67,700 64,700 61,462 59,077 55,072 54,000 51,000 50,013 47,584 47,400 42,500 42,207 41,500 38,900 36,427 6.50% 6.00% 7.25% 8.00% 7.00% n/a 7.25% 5.75% 6.50% 7.50% 7.25% 6.75% 7.50% 6.50% 7.00% 7.50% TOTAL TOP 20 INVESTMENT PROPERTIES 1,378,544* The fair value of the top 20 freehold investment properties amounted to $1.38 billion as at 30 June 2021, representing 47.4% of the total fair value of freehold investment properties of $2.91 billion. The fair value of the remaining 117 freehold investment properties as at 30 June 2021 totalled $1.53 billion, representing 52.6% of the portfolio as at balance date. (a) (b) (c) The investment property was acquired in April 2021. Balances represent the consolidated entity’s 50% ownership interest in the investment property. 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 2021 and the independent valuation as at the last valuation date mainly relates to Internal Valuations and Reviews and capital additions in respect of the freehold investment property between the periods. ANNUAL REPORT JUNE 2021 115 OPERATING AND FINANCIAL REVIEW (CONTINUED) NOTES TO THE FINANCIAL STATEMENTS (CONTINUED) 14 Investment Properties: Freehold (continued) 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. An 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. 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 Commencing from 1 January 2020, the entire freehold investment property portfolio in Australia is being valued by an Independent Valuer at least once every two (2) years on a rotational basis. For the 2021 ﬁnancial year, sixty-seven (67) valuations of freehold investment properties were performed by an Independent Valuer: thirty-ﬁve (35) at 31 December 2020 and thirty-two (32) at 30 June 2021. This represents a total of 48.9% of the number of freehold investment properties independently externally valued this year, and 44.3% in terms of the fair value of the freehold investment property portfolio in Australia subject to independent external valuation. In addition, two (2) freehold investment properties in New Zealand were subject to independent external valuations 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 current year, nineteen (19) 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 nineteen (19) 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 age and condition of improvements the quality of construction 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 using 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 held for future development. 116 ANNUAL REPORT JUNE 2021 OPERATING AND FINANCIAL REVIEW (CONTINUED) NOTES TO THE FINANCIAL STATEMENTS (CONTINUED) 14 Investment Properties: Freehold (continued) Financial Reporting Impacts of COVID-19 (continued): The large-format retail market in Australia has proven to be a resilient and buoyant asset class, underpinned by the strength of the Home & Lifestyle retail sector, during the COVID-19 pandemic. Investor competitiveness for scarce, well-located large-format property investments, with strong national lease covenants and lease tenures, has contributed to the surge in large-format retail values. Despite the recent buoyancy of the large-format retail market, the pandemic continues to produce a 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. A large portion of the independent external valuation reports received during FY21 continued to contain the ‘signiﬁcant valuation uncertainty’ clauses that were present in independent valuation reports received for the previous year ended 30 June 2020. This clause continues to imply 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. Adjustments may have been made by the independent external valuer to one or a number of valuation inputs and estimates, where appropriate, including lower probabilities of tenant recoveries, lower market rent growth rates, potential estimated rent relief, 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 due to COVID-19. Consistent with June 2020, 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 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. However, it is important to note that some of the independent external valuation reports received during FY21 no longer contained the ‘signiﬁcant valuation uncertainty’ clauses, but instead highlighted the potential short-term income risks, possible increased incentives and the ongoing uncertainties that COVID-19 could continue to present that may impact the global economy. 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 judgement and 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 still 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. A similar approach has been applied to the land and buildings measured at fair value of $451.09 million as disclosed in Note 12. Property, Plant and Equipment. (a) Reconciliation of investment properties: freehold New Zealand Australia Total Retail $000 Warehouse Retail Warehouse Ofﬁce $000 $000 $000 $000 2021 $000 2020 $000 Opening balance 6,713 2,995 2,307,486 237,466 38,670 2,593,330 2,508,951 Additions Disposals 1 - - - (2,334) - 170,577 3,583 81 174,242 51,033 Fair value adjustments* (136) 1,824 123,875 14,811 Depreciation for the year Net foreign currency differences (51) (26) (15) (11) - - - - - - - - (2,334) (612) 140,374 34,268 (66) (37) (86) (224) Closing balance 6,501 4,793 2,599,604 255,860 38,751 2,905,509 2,593,330 * Fair value adjustments totalling $140.37 million for the year ended 30 June 2021 are included in other income (2020: $34.27 million). ANNUAL REPORT JUNE 2021 117 OPERATING AND FINANCIAL REVIEW (CONTINUED) NOTES TO THE FINANCIAL STATEMENTS (CONTINUED) 14 Investment Properties: Freehold (continued) (b) Fair value measurement, valuation techniques and inputs Class of property Fair value hierarchy* Fair value 30 June 2021 $000 Valuation Technique Key unobservable inputs Range of unobservable inputs Retail Level 3 Metropolitan = 1,566,037 Regional = 1,040,068 Total = 2,606,105 Warehouse Level 3 260,653 Ofﬁce Level 3 38,751 Net market rent per sqm p.a $70 - $326 Income capitalisation Discounted cash ﬂow Capitalisation Rate - Metropolitan - Regional Terminal Yield Discount Rate 4.0% - 8.0% 6.5% - 9.8% 4.1% - 9.8% 5.0% - 9.8% Direct sale comparison Price per sqm of lettable area $710 - $5,664 Income Capitalisation Net market rent per sqm p.a Capitalisation Rate Discounted cash ﬂow Terminal Yield Discount Rate $69 - $160 5.8% - 9.5% 6.0% - 8.3% 6.3% - 8.5% Direct sale comparison Price per sqm of lettable area $709 - $3,018 Income capitalisation Net market rent per sqm p.a Capitalisation Rate $115 - $385 $7.0% - 8.8% Discounted cash ﬂow Terminal Yield Discount Rate 7.3% 7.0% Direct sale comparison Price per sqm of lettable area $1,442 - $4,793 TOTAL 2,905,509 * Level 3 - fair value is estimated using inputs that are not based on observable market data. 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 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 Price per square metre Increase Decrease Decrease Decrease Increase Decrease Increase Increase Increase Decrease (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 $223.15 million for the year ended 30 June 2021 (2020: $220.04 million). Operating expenses, including rates and taxes and repairs and maintenance, recognised in the income statement in relation to investment properties amounted to $52.34 million for the year ended 30 June 2021 (2020: $54.13 million). 118 ANNUAL REPORT JUNE 2021 OPERATING AND FINANCIAL REVIEW (CONTINUED) NOTES TO THE FINANCIAL STATEMENTS (CONTINUED) CONSOLIDATED June 2021 $000 June 2020 $000 15 Investment Properties (Leasehold): Right-Of-Use Assets Opening balance at beginning of the year, at fair value New and modiﬁed leases Leases exited 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 Class of property Fair value hierarchy* Fair value 30 June 2021 $000 621,903 85,659 (13,025) (74,076) 620,461 608,465 102,873 (15,229) (74,206) 621,903 Valuation Technique Key unobservable inputs Range of unobservable inputs Retail Level 3 469,623 Discounted cash ﬂow Warehouse Level 3 150,838 Discounted cash ﬂow Discount rate 2.958% to 5.206% Market rental ranges: - Gross - Net $64—$851 per sqm $21—$453 per sqm Discount rate 2.958% to 5.206% Market rental ranges: - Gross - Net $29-$500 per sqm $39-$300 per sqm TOTAL 620,461 * Level 3 - fair value is estimated using inputs that are not based on observable market data. (b) Sensitivity information Key unobservable inputs Discount rate Market rent ranges Impact on fair value for signiﬁcant increase in input Impact on fair value for signiﬁcant decrease in input 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 $115.19 million for the year ended 30 June 2021 (2020: $116.75 million). 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 $24.42 million for the year ended 30 June 2021 (2020: $24.96 million). ANNUAL REPORT JUNE 2021 119 OPERATING AND FINANCIAL REVIEW (CONTINUED) NOTES TO THE FINANCIAL STATEMENTS (CONTINUED) 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 valued by an Independent Valuer at least once every two (2) years. 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. 2) 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. 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 rent 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 rent 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 and professional advice provided by the Independent Valuer are used to inform 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 account the following: • External market based rates for a range of maturities as at the reporting date; • • The lending margins available to the consolidated entity; and Other adjustments that may be made by market participants over the lease term. As at 30 June 2021, the discount rates used in re-measuring investment properties (leasehold): right-of-use asses range from 2.96% to 5.21% (2020: 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 continues to produce a degree of uncertainty regarding the assessment of fair value of leasehold investment properties, particularly around the critical assumptions regarding market rents and discount rates. Similar to the challenges experienced and reported for the June 2020 ﬁnancial year, estimated fair values may change signiﬁcantly and unexpectedly over a relatively short period of time. To reﬂect the ongoing potential impact of COVID-19, adjustments may be made, where appropriate, to one or a number of valuation inputs and esti- mates, 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 judgement and best estimate of the impact of COVID-19. The duration and depth of the pandemic are still 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. 120 ANNUAL REPORT JUNE 2021 OPERATING AND FINANCIAL REVIEW (CONTINUED) NOTES TO THE FINANCIAL STATEMENTS (CONTINUED) 16 Trade and Other Payables Trade and other creditors Accruals Total trade and other payables 17 Interest-Bearing Loans and Borrowings Current Secured: Bank overdraft (a) Commercial bills payable (b) Syndicated Facility Agreement (c) Other short-term borrowings (d) Current Unsecured: Derivatives payable Non-trade amounts owing to: - Related parties - Unrelated parties Total interest-bearing loans and borrowings (current) Non—Current Syndicated Facility Agreement (c) Total interest-bearing loans and borrowings (non-current) CONSOLIDATED June 2021 $000 June 2020 $000 269,959 85,704 355,663 15,704 5,650 290,000 44,202 283,838 67,934 351,772 18,749 9,750 - 69,638 - 187 4,237 176 359,969 200,000 200,000 4,237 280 102,841 195,000 195,000 Bank Overdraft (a) The total bank overdraft of $15.70 million as at 30 June 2021 (2020: $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). In the prior year, a total of $0.33 million related to a bank overdraft facility with AmBank (M) Berhad in Malaysia which is subject to periodic review. Commercial bills payable (b) 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. Syndicated Facility Agreement (c) 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 (the Facility) with certain banks (Financiers and each a Financier). On 26 November 2018, the Amending Deed (No. 6) to the Facility was executed with the effect of extending the repayment date of Tranche B of the Facility totalling $240 million to 4 December 2021. On 29 November 2019, the Amending Deed (No. 7) to the Facility 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. On 26 November 2020, Tranche A3 of the Facility totalling $200 million was cancelled, reducing the aggregate available facility of the Syndicated Facility Agreement from $810 million to $610 million. The utilised amount of the Facility as at 30 June 2021 was $490 million (2020: $195 million), repayable as set out below, with $290 million classiﬁed as current interest bearing loans and borrowings (2020: nil) and $200 million of which was classiﬁed as non-current interest- bearing loans and borrowings (2020: $195 million). ANNUAL REPORT JUNE 2021 121 OPERATING AND FINANCIAL REVIEW (CONTINUED) NOTES TO THE FINANCIAL STATEMENTS (CONTINUED) 17 Interest-Bearing Loans and Borrowings (continued) (c) Syndicated Facility Agreement (continued) This Facility is secured by: • a ﬁxed and ﬂoating charge granted by the Company and each of the Guarantors in favour of a security trustee for the Financiers; and • real estate mortgages granted by certain Guarantors in favour of the security trustee for the Financiers over various real properties owned by those Guarantors. in respect of Tranche A1 totalling $170 million, on 4 December 2021 ($170 million utilised at 30 June 2021); in respect of Tranche A2 totalling $200 million, on 4 December 2022 ($200 million utilised at 30 June 2021); and Under the terms of the Syndicated Facility Agreement, the Facility is repayable: • • • • in respect of Tranche B totalling $240 million, on 4 December 2021 ($120 million utilised at 30 June 2021); 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 Facility, 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 $44.20 million (2020: $69.64 million): • • • • a total of $29.11 million (2020: $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 2021. a total of $9.84 million (2020: $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 2021. a total of $4.45 million (2020: $4.70 million) relates to a revolving credit facility with ANZ in Singapore. This facility is sub- ject 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 $0.80 million (2020: $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. Defaults and Breaches (e) The Company has not received notice of the occurrence of any Relevant Event from any Financier. During the 2021 and 2020 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 attributa- ble 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 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. 122 ANNUAL REPORT JUNE 2021 OPERATING AND FINANCIAL REVIEW (CONTINUED) NOTES TO THE FINANCIAL STATEMENTS (CONTINUED) CONSOLIDATED June 2021 $000 June 2020 $000 18 Financing Facilities Available At balance date, the following ﬁnancing facilities had been negotiated and were available. Total facilities: Bank overdraft Other borrowings Commercial bank bills Syndicated Facility 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 48,415 85,452 5,650 610,000 749,517 15,704 44,202 5,650 290,000 200,000 555,556 32,711 41,250 120,000 193,961 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 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 Lease liabilities at beginning of the year 1,173,087 1,161,009 New and modiﬁed leases Leases exited Interest on lease liabilities (accretion) Lease payments Foreign currency Lease liabilities at the end of the year Disclosed as: Lease liabilities (current) Lease liabilities (non-current) Total lease liabilities 169,828 (19,019) 40,941 (171,790) (14,382) 1,178,665 135,389 1,043,276 1,178,665 155,897 (15,853) 40,538 (165,308) (3,196) 1,173,087 130,280 1,042,807 1,173,087 ANNUAL REPORT JUNE 2021 123 OPERATING AND FINANCIAL REVIEW (CONTINUED) NOTES TO THE FINANCIAL STATEMENTS (CONTINUED) CONSOLIDATED June 2021 $000 June 2020 $000 19 Lease Liabilities (continued) (b) The geographical split of lease liabilities 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 46,190 130,554 190,123 21,272 143,410 531,549 647,116 647,116 52,492 126,749 184,544 13,340 152,282 529,407 643,680 643,680 Total lease liabilities 1,178,665 1,173,087 (c) The maturity proﬁle of undiscounted lease liabilities as at 30 June 2021 is as follows: Less than 1 year 1 to 2 years 2 to 5 years Over 5 years 174,665 166,888 440,412 661,850 171,185 168,722 445,904 656,160 Total undiscounted lease liabilities 1,443,815 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 2021. These leases are not included in the calculation of the consolidated entity’s lease liabilities. The estimated undiscounted lease liabilities for these leases are $0.78 million (2020: $13.70 million). 124 ANNUAL REPORT JUNE 2021 OPERATING AND FINANCIAL REVIEW (CONTINUED) NOTES TO THE FINANCIAL STATEMENTS (CONTINUED) 19 Lease Liabilities (continued) 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. 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 2021, the incremental borrowing rates applied by the consolidated entity were as follows: Location Australia New Zealand Singapore & Malaysia Slovenia & Croatia Ireland & Northern Ireland Weighted average incremental borrowing rate (%) 3.74% 3.41% 2.92% 3.30% 3.57% 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 2021, the lease terms adopted by the consolidated entity were as follows: Location Australia New Zealand Singapore & Malaysia Slovenia & Croatia Ireland & Northern Ireland Weighted average lease term (years) 10.62 13.13 5.72 9.47 8.35 As at 30 June 2021, 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 $33.62 million (2020: $85.31 million). ANNUAL REPORT JUNE 2021 125 OPERATING AND FINANCIAL REVIEW (CONTINUED) NOTES TO THE FINANCIAL STATEMENTS (CONTINUED) 20 Other Liabilities Total unearned revenue (current) Total unearned revenue (non-current) 21 Provisions Employee entitlements Total provisions (current) Employee entitlements Lease make good Total provisions (non-current) CONSOLIDATED June 2021 $000 June 2020 $000 108,847 823 37,162 37,162 2,380 7,443 9,823 96,141 863 34,181 34,181 2,213 7,013 9,226 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 Movements in ordinary shares on issue Balance at 1 July 2020 Issue of shares Balance at end of the year 717,925 717,925 717,925 717,925 June 2021 No. of Shares June 2021 $000 1,246,006,654 - 1,246,006,654 717,925 - 717,925 Number of ordinary shares issued and fully paid as at 30 June 2021 was 1,246,006,654 (2020: 1,246,006,654) 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. 126 ANNUAL REPORT JUNE 2021 OPERATING AND FINANCIAL REVIEW (CONTINUED) NOTES TO THE FINANCIAL STATEMENTS (CONTINUED) 22 Contributed Equity (continued) 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 on ordinary shares: Final fully-franked dividend for 2020: 18.0 cents (2019: 21.0 cents) Interim fully-franked dividend for 2021: 20.0 cents (2020: 12.0 cents*) Special fully-franked dividend for 2020: 6.0 cents Total dividends paid CONSOLIDATED June 2021 $000 June 2020 $000 2,511,580 - 841,414 (473,483) 2,879,511 224,281 249,202 - 473,483 2,397,436 (43,892) 480,541 (322,505) 2,511,580 247,745 - 74,760 322,505 The ﬁnal dividend of $224.28 million, fully franked, for the year ended 30 June 2020 was paid on 2 November 2020. The interim dividend of 20.0 cents per share, totalling $249.20 million fully-franked, for the year ended 30 June 2021 was paid on 3 May 2021. The ﬁnal dividend of 15.0 cents per share totalling $186.90 million, fully franked, for the year ended 30 June 2021 will be paid on 15 November 2021 to shareholders registered at the close of business on 18 October 2021. No provision has been made in the Statement of Financial Position for the payment of this ﬁnal dividend. * The interim dividend previously proposed for the year ended 30 June 2020 of 12.0 cents per share, totalling $149.52 million fully-franked and payable on 4 May 2020, was cancelled on 2 April 2020 given the uncertainties surrounding COVID-19 and to preserve and retain cash in the business. A special dividend of 6.0 cents per share was paid on 29 June 2020, totalling $74.76 million fully-franked. Franking account balance: The amount of franking credits available for 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 the 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 ANNUAL REPORT JUNE 2021 455,197 122,596 (80,100) 497,693 2,591 12,716 12,883 28,190 489,613 57,126 (96,121) 450,618 2,691 14,621 13,671 30,983 127 OPERATING AND FINANCIAL REVIEW (CONTINUED) NOTES TO THE FINANCIAL STATEMENTS (CONTINUED) 25 Reserves CONSOLIDATED $000 Asset Revaluation Reserve Foreign Currency Translation Reserve FVOCI Reserve Cash Flow Hedge Reserve Employee Equity Beneﬁts Reserve Acquisition Reserve Total At 1 July 2019 152,850 65,853 10,949 (2) 10,125 (22,051) 217,724 Transition adjustments arising from adoption of AASB 16 (18,067) - - At 1 July 2019, post transition 134,783 65,853 10,949 Revaluation of land and buildings Tax effect of revaluation of land and buildings Currency translation differences 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 on net loss on forward foreign exchange contracts Cost of share based payments Utilisation of employee equity beneﬁts reserve Sale of a controlled entity 28,384 (4,559) - - - - - - - - - - (8,912) - - - - - - - - - - (1,030) - - - - - - - (2) - - - - 2 (49) 14 - - - - - (18,067) 10,125 (22,051) 199,657 - - - - - - - 739 (859) - - - - - - - - - - 3,450 28.384 (4,559) (8,912) (1,030) 2 (49) 14 739 (859) 3,450 At 30 June 2020 158,608 56,941 9,919 (35) 10,005 (18,601) 216,837 At 1 July 2020 158,608 56,941 9,919 (35) 10,005 (18,601) 216,837 Revaluation of land and buildings Tax effect of revaluation of land and buildings Currency translation differences Unrealised gain 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 on net loss on forward foreign exchange contracts Cost of share based payments Utilisation of employee equity beneﬁts reserve Sale of a controlled entity 55,616 (5,578) - - - - - - - - - - (14,890) - - - - - - - - - - 12,655 - - - - - - - - - - 35 (4) 1 - - - - - - - - - - 1,453 (1,059) - - - - - - - - - 55,616 (5,578) (14,890) 12,655 35 (4) 1 1,453 (1,059) - 2,327 2,327 At 30 June 2021 208,646 42,051 22,574 (3) 10,399 (16,274) 267,393 128 ANNUAL REPORT JUNE 2021 OPERATING AND FINANCIAL REVIEW (CONTINUED) NOTES TO THE FINANCIAL STATEMENTS (CONTINUED) 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 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 in- struments at the date when they are granted by using an appropriate valuation model. ANNUAL REPORT JUNE 2021 129 OPERATING AND FINANCIAL REVIEW (CONTINUED) NOTES TO THE FINANCIAL STATEMENTS (CONTINUED) 26 Cash and Cash Equivalents Reconciliation to the Statement of Cash Flows (a) Cash and cash equivalents comprise the following: Cash at bank and on hand Short-term money market deposits Bank overdraft (refer to Note 17) Cash and cash equivalents (b) Reconciliation of proﬁt after income tax to net operating cash ﬂows Proﬁt after tax 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): ROUA Amortisation Impairment of non-current assets Impairment of other ﬁnancial assets Revaluation of freehold investment properties Executive remuneration expenses (Loss) / proﬁt on disposal and sale of property, plant and equipment and the revaluation of listed securities Changes in assets and liabilities: (Increase)/decrease in assets: Receivables Inventories Other assets Increase/(decrease) in liabilities: Payables and other current liabilities Income tax payable Provisions Net cash ﬂows from operating activities CONSOLIDATED June 2021 $000 June 2020 $000 206,971 57,460 264,431 (15,704) 248,727 287,043 26,152 313,195 (18,749) 294,446 846,845 486,023 268 289 (8,320) 67,114 62,908 74,076 20,296 - - (140,374) 5,648 (8,397) (407,714) (90,162) (5,299) 50,916 80,472 (4,697) 543,869 639 3,019 (7,628) 66,016 61,769 74,206 21,600 876 300 (34,956) 3,449 3,976 238,782 791 1,093 76,908 55,560 4,541 1,056,964 Cash and cash equivalents Cash and cash equivalents in the statement of ﬁnancial position comprise cash at bank and on hand and short-term highly liquid deposits with a maturity of three months or less, that are readily convertible to a known amount of cash and subject to an insigniﬁcant risk of changes in value. 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. 130 ANNUAL REPORT JUNE 2021 OPERATING AND FINANCIAL REVIEW (CONTINUED) NOTES TO THE FINANCIAL STATEMENTS (CONTINUED) 27 Investments Accounted for Using the Equity Method CONSOLIDATED June 2021 $000 June 2020 $000 Total investments accounted for using the equity method 1,321 4,692 Ownership interest Contribution to Proﬁt / (Loss) Before Tax June 2021 % June 2020 % June 2021 $000 June 2020 $000 Noarlunga (Shopping complex) Perth City West (Shopping complex) Warrawong King St (Shopping complex) (a) Byron Bay (Residential/convention development) Byron Bay—2 (Resort operations) Dubbo (Shopping complex) Bundaberg (Land held for investment) Gepps Cross (Shopping complex) QCV (Miners residential complex) (b) Other 50% 50% 62.5% - - 50% 50% 50% 50% 50% 50% 50% 62.5% - - 50% 50% 50% 50% 50% 1,500 2,238 1,056 - - 692 (205) 3,028 13 (2) 8,320 1,437 2,748 1,075 (210) (243) 632 (352) 2,773 12 (244) 7,628 (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 2021. On 30 July 2021, the maturity date of this ﬁnance facility from ANZ was extended to 31 January 2022. (ii) Finance facilities from Network Consumer Finance Pty Limited (“NCF”), a wholly-owned subsidiary of HNHL, for the amount of $31.89 million plus interest and costs, subject to bi-annual review. Investments 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. ANNUAL REPORT JUNE 2021 131 OPERATING AND FINANCIAL REVIEW (CONTINUED) NOTES TO THE FINANCIAL STATEMENTS (CONTINUED) 28 Assets Held for Sale As at 30 June 2021, the assets held for sale balance of $12.66 million (2020: $16.19 million) represents 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 classiﬁca- tion. Property, plant and equipment and intangible assets are not depreciated or amortised once classiﬁed as held for sale. 29 Employee Beneﬁts CONSOLIDATED June 2021 Number June 2020 Number The number of full-time employees employed as at 30 June 6,183 5,732 The aggregate employee beneﬁt liability was comprised of: June 2021 $000 June 2020 $000 Accrued wages, salaries and on-costs Provisions (Current—Note 21) Provisions (Non-current—Note 21) Total employee beneﬁt provisions 24,288 37,162 2,380 63,830 20,123 34,181 2,213 56,517 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 performance rights in the table below were outstanding and vested (or able to be exercised) by, or for the beneﬁt of, directors of Harvey Norman Holdings Limited. Refer to Table 4. Performance Rights of Key Management Personnel for the Year Ended 30 June 2021 on page 57 of this report for further information. Grant date Expiry Date 28/11/2016 30/06/2022 01/12/2017 30/06/2023 04/12/2018 30/06/2024 02/12/2019 30/06/2025 04/12/2020 30/06/2026 Number of Performance Rights Outstanding Number of Performance Rights Vested 2021 - - 549,500 549,500 549,500 2020 - 400,000 549,500 549,500 - 2021 - 226,400 - - - 2020 240,000 - - - - 1,648,500 1,499,000 226,400 240,000 132 ANNUAL REPORT JUNE 2021 OPERATING AND FINANCIAL REVIEW (CONTINUED) NOTES TO THE FINANCIAL STATEMENTS (CONTINUED) 30 Remuneration of Auditors Fees to Ernst & Young Australia: Audit or review of 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 ﬁnancial reports Tax services Consulting services CONSOLIDATED June 2021 $ June 2020 $ 1,346,588 178,800 - 1,525,388 980,660 218,776 14,778 1,406,009 151,150 33,250 1,590,409 780,376 213,845 14,348 Total payable to overseas member ﬁrms of Ernst & Young Australia 1,214,214 1,008,569 Total remuneration payable to Ernst & Young 2,739,602 2,598,978 31 Key Management Personnel (a) Details of Key Management Personnel Title Senior Executives Title Martin Anderson General Manager — Advertising (retired on 30 June 2021) Thomas James Scott General Manager — Property Gordon Ian Dingwall Chief Information Ofﬁcer Lachlan Roach General Manager — Home Appliances Emmanuel Hohlastos General Manager — Audio Visual Glen Gregory General Manager — Technology & Entertainment Directors Gerald Harvey Kay Lesley Page John Evyn Slack-Smith Executive Chairman Executive Director and Chief Executive Ofﬁcer Executive Director and Chief Operating Ofﬁcer David Matthew Ackery Executive Director Chris Mentis Executive Director and Chief Financial Ofﬁcer and Company Secretary Christopher Herbert Brown OAM Non-Executive Director Michael John Harvey Non-Executive Director Kenneth William Gunderson- Briggs Graham Charles Paton AM (retired 25 November 2020) Non-Executive Director (Independent) Non-Executive Director (Independent) Maurice John Craven Non-Executive Director (Independent) Luisa Catanzaro (appointed 25 November 2020) Non-Executive Director (Independent) ANNUAL REPORT JUNE 2021 133 OPERATING AND FINANCIAL REVIEW (CONTINUED) NOTES TO THE FINANCIAL STATEMENTS (CONTINUED) CONSOLIDATED June 2021 $ June 2020 $ 31 Key Management Personnel (continued) (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 lease accrual Other—termination beneﬁt 13,380,900 305,816 2,032,255 99,564 33,985 12,796,618 295,892 1,056,781 89,782 89,065 Total compensation to Key Management Personnel 15,852,520 14,328,138 Refer to Tables 1 and 2 on pages 55 and 56 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) 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. The amount of receivables from related parties at 30 June 2021 were $57,846,269 (30 June 2020: $72,500,801). (ii) 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 30 June 2021 was $4,237,364 (30 June 2020: $4,237,364). Refer to information provided in Section 16. Other Transactions and Balances with Key Management Personnel and their Related Parties in this report on page 60 for further information. CONSOLIDATED June 2021 $000 June 2020 $000 33 Commitment s (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 112,714 208,078 44,847 365,639 105,805 191,537 46,694 344,036 The consolidated entity as 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. 134 ANNUAL REPORT JUNE 2021 OPERATING AND FINANCIAL REVIEW (CONTINUED) NOTES TO THE FINANCIAL STATEMENTS (CONTINUED) CONSOLIDATED June 2021 $000 June 2020 $000 33 Commitments (continued) (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 17,931 949 18,880 16,028 - 16,028 The consolidated entity had contractual obligations to purchase property, plant and equipment and investment properties of $18.88 million (2020: $16.03 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 2021 was $5.96 million (2020: $0.95 million). 34 Contingent Liabilities As at 30 June 2021, 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: Guarantees in the normal course of business relating to lease make-good obligations under certain operating lease a) 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. 35 Financial Risk Management (a) 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 source of ﬁnance. ANNUAL REPORT JUNE 2021 135 OPERATING AND FINANCIAL REVIEW (CONTINUED) NOTES TO THE FINANCIAL STATEMENTS (CONTINUED) 35 Financial Risk Management (continued) Financial Risk Management Objectives and Policies (continued) (a) 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; ageing analyses and monitoring of speciﬁc credit allowances to manage credit risk; and monitoring liquidity risk through the future rolling cash ﬂow forecasts. (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 exchange 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 136 ANNUAL REPORT JUNE 2021 CONSOLIDATED June 2021 $000 June 2020 $000 52,597 4,098 95 56,790 36,441 16,269 - 52,710 4,080 44,375 5,167 - 49,542 34,351 11,742 187 46,280 3,262 OPERATING AND FINANCIAL REVIEW (CONTINUED) NOTES TO THE FINANCIAL STATEMENTS (CONTINUED) 35 Financial Risk Management (continued) (b) Market Risk (continued) ii) Interest Rate Risk Management Interest rate risk is the risk that the fair value on future cash ﬂows of a ﬁnancial instrument will ﬂuctuate because of changes in market interest rates. The consolidated entity’s exposure to market interest rates relates primarily to cash and cash equivalents, non-trade debts receivables from related entities and unrelated entities, ﬁnance lease receivables, 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 Average interest rate Principal sub- ject to ﬂoating interest rate 1 year or less Over 1 to 5 years More than 5 years Non-interest bearing 30 June 2021 $000 $000 $000 $000 $000 Total $000 Floating Fixed Cash 132,842 57,459 - - - 508 689 - - - - - - - - - - - - - - - - - 74,130 264,431 0.00% - 0.60% 0.17% - 3.65% 2,535 2,535 2,722 3,919 793,228 793,228 85,620 85,620 74,459 74,459 - - - - 11.00% - - - Consumer ﬁnance loans Finance lease receivables Receivables from franchisees Trade receivables Other ﬁnancial assets Non-trade debts receivables & loans 55,409 13,161 26,708 3,921 1,737 100,936 2.30% - 4.15% 5.00% - 13.0% Total 188,251 71,128 27,397 3,921 1,034,431 1,325,128 Syndicated Facility and other short-term borrowings Trade creditors Other loans 534,202 - 4,237 Bank overdraft 15,704 Bills payable 5,650 Total 559,793 - - - - - - - - - - - - - - - - - - - 534,202 0.30% - 5.09% 355,663 355,663 - 176 4,413 1.15% - 1.25% - - 15,704 2.01% 5,650 0.06% - 0.14% 355,839 915,632 - - - - - ANNUAL REPORT JUNE 2021 137 OPERATING AND FINANCIAL REVIEW (CONTINUED) NOTES TO THE FINANCIAL STATEMENTS (CONTINUED) 35 Financial Risk Management (continued) (b) Market Risk (continued) ii) Interest Rate Risk Management (continued) Fixed interest rate maturing in Average interest rate Principal sub- ject to ﬂoating interest rate 1 year or less Over 1 to 5 years More than 5 years Non-interest bearing 30 June 2020 $000 $000 $000 $000 $000 Total $000 Floating Fixed Cash 203,649 28,998 Consumer ﬁnance loans Finance lease receivables Receivables from franchisees Trade receivables Other ﬁnancial Non-trade debts receivables & loans - - - 570 912 - - - - - - - - - - - - - - - - - 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% Total 262,624 54,116 15,748 5,991 616,859 955,338 Syndicated Facility and other short- term borrowings Trade creditors Other loans Bank overdraft Bills payable Other ﬁnancial liabilities 264,638 - 4,237 18,749 9,750 - Total 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 - - - - - - 138 ANNUAL REPORT JUNE 2021 OPERATING AND FINANCIAL REVIEW (CONTINUED) NOTES TO THE FINANCIAL STATEMENTS (CONTINUED) 35 Financial Risk Management (continued) (b) Market Risk (continued) iii) Equity Price Risk Management The consolidated entity is exposed to equity price risk arising from equity investments. Equity investments are held for strategic rather than trading purposes. The exposure to the risk of a general decline in equity market values is not hedged as the consolidated entity believes such a strategy is not cost effective. The fair value of the equity investments publicly traded on the ASX was $41.28 million as at 30 June 2021 (2020: $30.24 million). The fair value of the equity investments publicly traded on the NZX was $28.05 million as at 30 June 2021 (2020: $15.45 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 is the risk that a counterparty will not meet its obligations under a ﬁnancial instrument or customer contract, leading to a ﬁnancial loss. 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, with a maximum exposure equal to the carrying amount of these ﬁnancial assets. The consolidated entity manages the credit risk exposure by taking the following measures: • • 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; Minimising concentrations of credit risk by undertaking transactions with a large number of debtors in various countries and industries. Trade receivable balances are monitored on an ongoing basis. 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 credit risk on liquid funds and derivative ﬁnancial instruments is limited because the counterparties are banks with high credit-ratings assigned by international credit-rating agencies. The table below represents the ﬁnancial assets of the consolidated entity by geographic location displaying the concentration of credit risk for each location as at balance date: Location of credit risk Australia New Zealand Singapore and Malaysia Slovenia and Croatia Ireland and Northern Ireland Total CONSOLIDATED June 2021 $000 June 2020 $000 919,136 21,433 14,843 3,308 3,041 961,761 497,774 35,905 18,321 5,603 3,245 560,848 As at 30 June 2021, other than the loss allowance recognised in relation to trade and non-trade debts receivables and consumer ﬁnance loans as disclosed in Note 7, no ﬁnancial assets were impaired. ANNUAL REPORT JUNE 2021 139 OPERATING AND FINANCIAL REVIEW (CONTINUED) NOTES TO THE FINANCIAL STATEMENTS (CONTINUED) 35 Financial Risk Management (continued) (d) Liquidity Risk Liquidity risk includes the risk that, as a result of the consolidated entity’s operational liquidity requirements: • • • the consolidated entity will not have sufﬁcient funds to settle a transaction on the due date; the consolidated entity will be forced to sell ﬁnancial assets at a value which is less than what they are worth; or the consolidated entity may be unable to settle or recover a ﬁnancial asset at all. To help reduce these risks, the consolidated entity: • • has readily accessible standby facilities and other funding arrangements in place; and maintains instruments that are tradeable in highly liquid markets. 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 undiscount- ed cash ﬂows of the ﬁnancial liabilities based on the earliest date on which the consolidated entity can be required to pay. 30 June 2021 Less than 1 year $000 1 to 2 years $000 2 to 5 years $000 Over 5 years $000 Total $000 Non derivative ﬁnancial assets Cash and cash equivalents Receivables from franchisees Trade and other receivables Other ﬁnancial assets Derivative ﬁnancial assets 264,431 793,228 100,911 41,281 - - - - 24,411 46,779 - - 8,846 33,083 264,431 793,228 180,947 74,364 Forward currency contracts 95 - - - 95 Total ﬁnancial assets 1,199,946 24,411 46,779 41,929 1,313,065 Non derivative ﬁnancial liabilities Trade and other payables Interest-bearing loans and borrowings Total ﬁnancial liabilities Net maturity 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 355,663 365,146 720,809 - 201,170 201,170 - - - - - - 355,663 566,316 921,979 479,137 (176,759) 46,779 41,929 391,086 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 30,237 859,650 351,772 106,360 - - 6,452 - 6,452 - - 40,455 - 40,455 - - 171,388 25,155 - - 11,047 18,176 29,223 - - - - 313,195 352,359 221,813 48,413 935,780 351,772 302,903 187 654,862 Forward currency contracts 187 - - Total ﬁnancial liabilities 458,319 171,388 25,155 Net maturity 401,331 (164,936) 15,300 29,223 280,918 140 ANNUAL REPORT JUNE 2021 OPERATING AND FINANCIAL REVIEW (CONTINUED) NOTES TO THE FINANCIAL STATEMENTS (CONTINUED) 35 Financial Risk Management (continued) (e) Fair value of Financial Assets and Financial Liabilities The fair value of ﬁnancial assets and ﬁnancial liabilities are determined as follows: • • • • The carrying amounts of cash and cash equivalents, receivables from franchisees, trade and other receivables, other ﬁnancial assets, trade and other payables and interest-bearing loans and borrowings are reasonable approximations of fair value. The fair value of ﬁnancial assets and ﬁnancial liabilities with standard terms and conditions and traded on active liquid markets are determined with reference to quoted market prices. The fair value of other ﬁnancial assets and ﬁnancial liabilities (excluding derivative instruments) are determined in accordance with generally accepted pricing models based on discounted cash ﬂow analysis using prices from observable current market transactions. The consolidated entity enters into derivative ﬁnancial instruments with various counterparties, particularly ﬁnancial institutions with investment grade credit ratings. Forward currency contracts are valued using valuation techniques which employs the use of market observable inputs. The consolidated entity uses various methods in estimating the fair value of ﬁnancial instruments. The methods comprise: Level 1 – the fair value is calculated using quoted prices in active markets. Level 2 – the fair value is estimated using inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly (as prices) or indirectly (derived from prices). 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 2021 Quoted market price (Level 1) $000 Market observable inputs (Level 2) $000 Financial assets Listed investments Forward currency contracts Total ﬁnancial assets 30 June 2020 Financial assets Listed investments Total ﬁnancial assets Financial liabilities Forward currency contracts Total ﬁnancial liabilities 69,327 69,327 - 95 95 Quoted market price (Level 1) $000 Market observable inputs (Level 2) $000 45,688 45,688 - - - - 187 187 Total $000 69,327 95 69,422 Total $000 45,688 45,688 187 187 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, retained proﬁts and reserves as disclosed in Notes 22, 23 and 25 respectively. None of the consolidated entity’s entities are subject to externally imposed capital requirements. ANNUAL REPORT JUNE 2021 141 OPERATING AND FINANCIAL REVIEW (CONTINUED) NOTES TO THE FINANCIAL STATEMENTS (CONTINUED) 35 Financial Risk Management (continued) (f) Capital Risk Management Policy (continued) Capital management is monitored through the net debt to equity ratio. The Capital Management Policy stipulates a net debt to equity target for the consolidated entity of less than 50%. As at 30 June 2021, the consolidated entity had unused, available ﬁnancing facilities of $193.96 million out of total approved ﬁnancing facilities of $749.52 million. The net debt to equity ratio as at 30 June 2021 was 7.47% (30 June 2020: Nil). Borrowings (refer to Note 17: Interest-Bearing Loans and Borrowings) Less: Cash and Cash equivalents Net Debt / (Cash) Total equity (a) Net debt to equity ratio (b) CONSOLIDATED June 2021 $000 June 2020 $000 559,969 264,431 295,538 3,956,330 7.47% 297,841 313,195 (15,354) 3,533,326 -0.43% (a) For the purpose of calculating the net debt to equity ratio, total equity excludes the negative acquisition reserve of $16.27 million (2020: $18.60 million), the right-of-use assets in respect of property, plant and equipment leases of $511.17 million (2020: $513.78 million) and investment properties (leasehold): right-of-use assets of $620.46 million (2020: $621.90 million) and the lease liabilities recognised under AASB 16 Leases of $1,178.67 million (2020: $1,173.09 million). (b) As at 30 June 2020, the consolidated entity had 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. Current assets Foreign currency contracts—held for trading Foreign currency contracts—cash ﬂow hedges Current liabilities Foreign currency contracts—held for trading Foreign currency contracts—cash ﬂow hedges CONSOLIDATED June 2021 $000 June 2020 $000 91 4 - - - - 137 50 The consolidated entity has entered into forward currency contracts which are economic hedges but do not satisfy the requirements of hedge accounting. 142 ANNUAL REPORT JUNE 2021 OPERATING AND FINANCIAL REVIEW (CONTINUED) NOTES TO THE FINANCIAL STATEMENTS (CONTINUED) 36 Derivative Financial Instruments (continued) (a) Forward currency contracts-held for trading Average Exchange Rate 2021 2020 CONSOLIDATED Currency 2021 2020 Buy $000 Sell $000 Buy $000 Sell $000 Euro (0-12 months) US Dollar (0-12 months) Total 71.44 76.38 67.29 67.40 5,600 5,131 10,731 - - - 3,682 4,043 7,725 - - - 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 gain on forward currency contracts during the year ended 30 June 2021 was $0.09 million for the consolidated entity (2020: net fair value loss of $0.14 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: Average Exchange Rate 2021 2020 CONSOLIDATED Currency 2021 2020 Buy $000 Sell $000 Buy $000 Sell $000 Euro (0-12 months) US Dollar (0-12 months) Total 63.27 - 59.59 64.80 3,386 - 3,386 - - - 1,293 291 1,584 - - - 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 2021, the hedges were 100% effective (2020: 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. Movement in the forward currency contract cash ﬂow hedge reserve: Opening balance Transferred to inventory Charged to other comprehensive income Closing balance ANNUAL REPORT JUNE 2021 CONSOLIDATED June 2021 $000 June 2020 $000 Increase/(Decrease) (35) 35 (3) (3) (2) 2 (35) (35) 143 OPERATING AND FINANCIAL REVIEW (CONTINUED) NOTES TO THE FINANCIAL STATEMENTS (CONTINUED) 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: • • • • Arisit Pty Limited Contemporary Design Group Pty Limited Derni Pty Limited Generic Publications Pty Limited Harvey Norman Stores (N.Z.) Pty Limited Network Consumer Finance Pty Limited Sarsha Pty Limited Yoogalu Pty Limited • • • • • Harvey Norman Big Buys Pty Limited The Statement of Financial Position and Income Statement for the Harvey Norman Holdings Limited Closed Group are as follows: June 2021 $000 June 2020 $000 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 & Equipment Property, Plant & 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 Total non-current liabilities Total liabilities NET ASSETS 131,576 867,574 41,296 235,981 258 25,045 1,301,730 1,712,820 299,666 32,215 175,641 60,557 2,280,899 3,582,629 106,984 295,833 27,181 139,639 32,475 49,340 651,452 200,000 174,911 2,121 111,402 488,434 1,139,886 2,442,743 188,935 499,955 30,237 207,757 278 24,885 952,047 1,704,045 297,642 33,114 6,538 59,037 2,100,376 3,052,423 163,380 10,184 2,293 67,123 29,617 46,291 318,888 195,000 12,654 1,957 99,259 308,870 627,758 2,424,665 144 ANNUAL REPORT JUNE 2021 OPERATING AND FINANCIAL REVIEW (CONTINUED) NOTES TO THE FINANCIAL STATEMENTS (CONTINUED) 37 Deed of Cross Guarantee (continued) Equity Contributed equity Reserves Retained proﬁts Non-controlling interests 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 Dividends provided for or paid Retained earnings at the end of the year 38 Parent Entity Financial Information 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 2021 $000 June 2020 $000 717,925 13,150 1,711,993 (325) 2,442,743 , 639,151 (147,885) 491,266 1,694,210 491,266 (473,483) 1,711,993 717,925 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 2021 $000 June 2020 $000 38 2,838,662 2,838,700 124,093 134,198 258,291 717,925 1,862,484 2,580,409 537,438 537,438 93 2,693,100 2,693,193 58,516 118,223 176,739 717,925 1,798,529 2,516,454 354,317 354,317 Guarantees The Parent Company is party to a Deed of Cross Guarantee (“Deed”) with the following controlled entities: • • • • • Arisit Pty Limited Contemporary Design Group Pty Limited Derni Pty Limited Generic Publications Pty Limited Harvey Norman 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. ANNUAL REPORT JUNE 2021 145 OPERATING AND FINANCIAL REVIEW (CONTINUED) NOTES TO THE FINANCIAL STATEMENTS (CONTINUED) 38 Parent Entity Financial Information (continued) Contingent Liabilities Refer to information provided in Note 34: Contingent Liabilities for disclosures relating to the Parent Entity. 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. 15,16 Harvey Norman Trading d.o.o. 14,15 Bencoolen Properties Pte Limited 6,7 Harvey Norman Europe d.o.o. 14, Network Consumer Finance Pty Limited 1,2 Cascade Consolidated Sdn. Bhd. 9,10 Harvey Norman Holdings (Ireland) Limited 12 Pertama Holdings Pte Limited 6,7,8 Consolidated Design Group Pty Limited 1 Harvey Norman Limited 4 Pertama Mechandising Pte Ltd 6,9 Contemporary Design Group Pty Limited 1,2 Harvey Norman Ossia (Asia) Pte Limited 6,7,8 Sarsha Pty Limited 1,2 Derni Pty Limited 1,2 Harvey Norman Properties (N.Z.) Limited 4,5 Space Furniture Pte Limited 6,7 Elitetrax Marketing Sdn. Bhd. 10,11 Harvey Norman Singapore Pte Limited 6,7 Space Furniture Collection Sdn. Bhd. 10 Generic Publications Pty Limited 1,2 Harvey Norman Stores (N.Z.) Pty Limited 1,2 Yoogalu Pty Limited 1,2 Harvey Norman Big Buys Pty Limited 1,2,3 Harvey Norman Trading (Ireland) Limited 12,13 Notes: 1 2 3 4 5 6 7 8 9 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. 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. 10 Company incorporated in Malaysia. 11 Shares held by Cascade Consolidated Sdn. Bhd. 12 Company incorporated in Ireland. 13 Shares held by Harvey Norman Holdings (Ireland) Limited. 14 Company incorporated in Slovenia. 15 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. 16 Company incorporated in Croatia. 146 ANNUAL REPORT JUNE 2021 OPERATING AND FINANCIAL REVIEW (CONTINUED) NOTES TO THE FINANCIAL STATEMENTS (CONTINUED) 39 Controlled Entities and Unit Trusts (continued) Units in Trusts held by Harvey Norman Holdings Limited A listing of material unit trusts of Harvey Norman Holdings Limited are detailed below: 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 Bendigo Trust Calardu Brookvale Trust Calardu Campbelltown Trust Calardu Penrith No. 2 Trust Calardu Cannington Trust Calardu Perth City West Trust Calardu Caringbah (Taren Point) Trust Calardu Preston Trust Calardu Devonport Trust Calardu Frankston Trust Calardu Gepps Cross Trust Calardu Geraldton Trust Calardu Rutherford Trust Calardu Silverwater Trust Calardu Springvale Trust Calardu Taylors Lakes Trust Calardu Hoppers Crossing Trust Calardu Toowoomba Trust Calardu Loganholme Trust Calardu Toowoomba No. 1 Trust Calardu Malaga Trust Calardu Toowoomba No. 2 Trust Calardu Maribyrnong Trust Calardu Tweed Heads No. 1 Trust Calardu Maroochydore Trust Calardu Wodonga Trust Calardu Midland Trust Harvey Norman Discounts No. 1 Trust Calardu Browns Plains No. 1 Trust Calardu Munno Para Trust Harvey Norman No. 1 Trust Calardu Cairns Trust Calardu Cambridge Trust Calardu Penrith Trust The Calardu Trust Calardu Penrith No. 1 Trust 40 Signiﬁcant Events After Balance Date From 26 June 2021, the New South Wales (NSW) government announced stay-at-home orders for the greater Sydney area, with progressive lockdowns after that date for franchised complexes in greater Sydney and regional areas of NSW, in response to the Delta Variant of COVID-19 and rising cases of local transmission. Thereafter, and up to the date of this report, decisions have been made by local governments to impose rolling lockdowns in most States and Territories of Australia. These government mandates have affected franchisee sales in July and August 2021. Apart from the above, there have been no circumstances arising since balance date which have signiﬁcantly affected or may signiﬁcantly affect: • • • the operations; the results of those operations; or the state of affairs of the entity or consolidated entity in future ﬁnancial years. ANNUAL REPORT JUNE 2021 147 OPERATING AND FINANCIAL REVIEW (CONTINUED) SHAREHOLDER INFORMATION Distribution of shareholdings as at 28 September 2021 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 Voting rights Ordinary Shareholders 11,191 10,395 2,999 2,494 180 27,259 1,096 All ordinary shares issued by Harvey Norman Holdings Limited carry one vote per share. Twenty largest shareholders as at 28 September 2021 Number of Ordinary Shares Shareholder Percentage of Ordinary Shares 392,620,640 Mr. Gerald Harvey 205,525,565 Mr. Christopher Herbert Brown 173,318,703 HSBC Custody Nominees Limited 94,100,077 Citicorp Nominees Pty Limited 72,093,995 J P Morgan Nominees Australia Limited 58,592,289 Ms. Margaret Lynette Harvey 22,264,123 BNP Paribas Nominees Pty Limited 21,066,348 National Nominees Limited 20,063,673 Enbeear Pty Limited 19,856,315 Ms. Kay Lesley Page 5,213,182 Argo Investments Limited 4,150,984 BKI Investment Company Limited 3,335,180 Mr. Michael Harvey 2,033,309 Omnilab Media Investments Pty Limited 1,585,457 Quotidian No 2 Pty Limited 1,312,000 Bond Street Custodians Limited 1,271,126 Merrill Lynch (Australia) Nominees Pty Limited 1,268,491 Mr. Arthur Brew 1,161,297 Mr. Chris Mentis 1,143,893 Mr. John Evyn Slack-Smith 1,101,976,647 148 ANNUAL REPORT JUNE 2021 31.51% 16.50% 13.91% 7.55% 5.79% 4.70% 1.79% 1.69% 1.61% 1.59% 0.42% 0.33% 0.27% 0.16% 0.13% 0.11% 0.10% 0.10% 0.09% 0.09% 88.44%

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