Healthscope Ltd
Annual Report 2015

Plain-text annual report

Quality-led care. Annual Report 2015 Healthscope is a leading private healthcare provider in Australia, with 45 hospitals and 52 medical centres and skin clinics. We also have market leading pathology operations across New Zealand, Malaysia and Singapore. Contents FY15 highlights Exceptional care Divisional overview Chairman’s message MD & CEO’s message FY15 financial highlights Providing direction Leaders of quality care Consolidated Financial Report Directors’ report Remuneration report Additional information Company directory Healthscope’s Corporate Governance Statement and Sustainability Report are available in the Investor Centre on our website. 3 4 6 8 10 13 14 16 18 20 36 121 123 2 | healthscope annual report 2015 FY15 highlights Group Revenue Group Operating EBItDA Group Operating EBIt 2,000 2,116 2,211 2,326 2,438 $M 3,000 2,500 2,000 1,500 1,000 500 0 388 357 328 303 282 $M 400 300 200 100 0 287 262 219 236 203 $M 300 250 200 150 100 50 0 FY11 FY12 FY13 FY14 FY15 FY11 FY12 FY13 FY14 FY15 FY11 FY12 FY13 FY14 FY15 Healthscope re-listed on the Australian Securities Exchange on 28 July 2014. In FY15, Healthscope delivered strong financial results, invested significantly in future growth, and continued to deliver the highest quality healthcare across its facilities. $2.4b FY15 GROuP REvENuE $388m FY15 GROuP OPERAtING EBItDA $287m FY15 GROuP OPERAtING EBIt Serving our community Employees Quality leader In FY15, we provided healthcare to nearly 10 million patients via our hospital, pathology and medical centre divisions. Our 17,000 employees understand that healthcare is a special business. 24/7, 365 days a year our people provide quality care and positively contribute to the clinical outcomes of our patients. Healthscope hospitals achieved three times more Met with Merit ratings than the industry average for accreditation. Significant capital investment Public Private Partnerships International pathology growth In FY15, over $275 million was invested in hospital expansion projects. In December 2014, we were awarded the contract by the NSW Government to design, build, operate and maintain the new 450 overnight-bed Northern Beaches Hospital. In April 2015, we were awarded the contract to provide pathology services to the Greater Wellington region in New Zealand. healthscope annual report 2015 | 3 Exceptional care Our hospital, international pathology and medical centre divisions play a vital role in their local communities. We are passionate about upholding the highest clinical quality standards and safety outcomes. 45 900k 140k 45 hospitals offering inpatient and outpatient services Provided care for over 900,000 patients in our hospitals Performed over 140,000 inpatient surgical procedures 4 | healthscope annual report 2015 Deliver over 14,000 babies 13k 7m 2m Delivered over 13,000 babies Performed over 7 million pathology tests in New Zealand, Malaysia, Singapore and vietnam Provided over 2 million GP consultations in our medical centres healthscope annual report 2015 | 5 Divisional overview Continuing operations Operations throughout Australia as well as New Zealand, Malaysia, Singapore and vietnam 45Private hospitals1 50 International pathology laboratories 52Medical centres2 victoria New South Wales ACt 18 Private hospitals 12 Medical centres 10 Private hospitals 12 Medical centres 1 Specialist breast diagnostic clinic 1 Private hospital Queensland Private hospitals Medical centres 7 10 1 Skin clinic South Australia Western Australia tasmania Northern territory Private hospitals2 5 1 Medical centre 1 11 4 Private hospital Medical centres Skin clinics 2 Private hospitals 1 Private hospital New Zealand Malaysia Singapore vietnam 19 Pathology laboratories 27 Pathology laboratories 3 Pathology laboratories 1 Pathology laboratory Includes three hospitals under management for the Adelaide Community Healthcare Alliance (ACHA). 1 2 Medical centres include five skin clinics and one specialist breast diagnostic clinic. Map (and related data) and divisional overview prepared as at 31 August 2015. Excludes Brisbane Waters Private Hospital (divested on 21 July 2014), the Australian pathology business (divested on 6 July 2015) and six skin clinics that Healthscope has agreed to divest as part of the sale of the Australian pathology business. Includes La trobe Private Hospital that became part of the hospital portfolio on 20 July 2015. 6 | healthscope annual report 2015 % of operating EBItDA % of operating EBItDA % of operating EBItDA • Significant private hospital operator in Australia with a presence in all Australian states and territories • Largest provider of human pathology services to New Zealand’s District Health Boards (DHBs) • 45 hospitals concentrated in large metropolitan centres – 32 acute hospitals – seven mental health hospitals – six rehabilitation hospitals • Market leading reputation for quality and clinical outcomes • Extensive pipeline of hospital expansion projects to meet growing demand • One of the largest community pathology providers in both Malaysia and Singapore with a smaller presence in vietnam • One of the largest networks of medical centres throughout the country • 46 medical centres • Five skin clinics • One specialist breast diagnostic clinic $1,853m FY15 revenue $243m FY15 revenue $61m FY15 revenue $328m FY15 operating EBItDA $60m FY15 operating EBItDA $15m FY15 operating EBItDA 14,061 Employees 569,160 FY15 admissions 2,541 Employees 578 Employees 8,536,446 FY15 episodes 2,039,585 FY15 consultations On 6 July 2015, Healthscope’s Australian pathology operations were divested and have been excluded from the divisional overview. healthscope annual report 2015 | 7 Chairman’s message Our vision is to be a recognised leader of quality private healthcare services. In delivering our vision, we know that when we provide service excellence for medical professionals and our patients, everything else takes care of itself. Healthscope operates in an environment where safety and quality are paramount, comfortably balanced against our responsibility to shareholders and stakeholders. 8 | healthscope annual report 2015 It gives me great pleasure to present the 2015 Annual Report for Healthscope Limited. In July 2014, Healthscope successfully re-listed on the Australian Securities Exchange following a period of private equity ownership. Over the past year, Healthscope has delivered on its Prospectus earnings forecasts, continued to build on its strong pipeline of growth projects and, most importantly, delivered the highest standards of healthcare to almost 10 million patients in Australia, New Zealand and South East Asia. In response to the growing demand for private hospital services in Australia, we have expanded our pipeline of “brownfield” and “relocate and grow” projects to increase capacity at our existing hospitals. Significant construction activity is currently underway across the portfolio with a range of projects completing in the second half of FY16. Our commitment to excellence in the quality of clinical outcomes and our ability to design, build and operate world-class facilities was also recognised during the year with Healthscope being awarded the contract by the New South Wales Government to design, build, operate and maintain the new 450 overnight bed Northern Beaches Hospital in Sydney. Construction has commenced on this landmark project, with the hospital scheduled to open in December 2018. We are excited to be partnering with the New South Wales Government and we look forward to delivering a state of the art hospital to the Northern Beaches community. FY15 was a successful year for our international pathology division. this division provides exposure to the rapidly developing Asian healthcare markets through our operations in Singapore, Malaysia and vietnam, and is the market leader for the provision of community pathology services in New Zealand. We continued our track record of delivering strong growth in FY15 and in April 2015 we were awarded a new contract in New Zealand to provide pathology services to three District Health Boards in the Greater Wellington area. this new contract will underpin further growth in FY16. In contrast to our international pathology division, our Australian pathology operations continued to face challenging market conditions and its contribution to our underlying earnings in FY15 was limited. Following several years of underperformance, we closed our Queensland pathology operations in February 2015 and, on 6 July 2015, we divested our remaining Australian pathology operations1. this divestment allows the Board and management to focus our time and resources on the areas of our core business where we can deliver the most value to our shareholders Financial highlights Healthscope reported Group Operating Earnings Before Interest, tax and Depreciation (EBItDA) of $388.3m in FY15, representing an increase of 8.7% on FY14 and 0.3% higher than the Prospectus forecast of $387.3m. Operating Net Profit After Tax (NPAT) of $153.1m was significantly higher than FY14 and 4.0% above the Prospectus forecast of $147.2m. Healthscope’s hospitals and international pathology divisions were both strong contributors to the result. Healthscope announced a final unfranked dividend of 3.7 cents per share for the second half of the year, payable on 29 September 2015 for shareholders registered at 14 September 2015. this takes the full year dividend for FY15 to 7.0 cents per share, representing a payout ratio of 70% of Pro-Forma NPAt2. We also delivered a strong cashflow result with Group Operating EBITDA to cashflow conversion of 97.3% and our gearing at year end was 2.47 times Net Debt to Group Operating EBItDA. Healthscope’s commitment to quality Healthscope is proud of its commitment to the quality of clinical outcomes. the standards we set for ourselves are higher than those expected by regulatory bodies or industry benchmarks. through the MyHealthscope initiative, we were the first private hospital operator in Australia to publicly report quality and clinical indicators and we outperform the public sector and our private peers on the vast majority of these indicators. We remain committed to public reporting of quality indicators and look forward to more transparency across the industry. Our highly committed local site based teams, are supported by an experienced head office quality team, and our intensive quality, safety and compliance programs will ensure that we continue to set the benchmark for market leading quality practices into the future. Governance and sustainability the Board is committed to conducting Healthscope’s business in accordance with high standards of corporate governance and with a view to creating and delivering value for Healthscope’s shareholders. Information about the key features of Healthscope’s governance framework, as well as reporting against the Corporate Governance Principles and Recommendations (3rd edition) published by the ASX Corporate Governance Council, is provided in Healthscope’s Corporate Governance Statement, which is available in the Investor Centre on Healthscope’s website. In addition, Healthscope has published for the first time this year its Sustainability Report, which outlines our performance in relation to the key social, environmental and governance areas. this report is available in the Sustainability section on Healthscope’s website. Our people I would like to take this opportunity to thank my fellow Directors, the Healthscope management team led by our Managing Director and Chief Executive Officer, Mr Robert Cooke, and our 17,000 employees for their contribution to Healthscope. the last 12 months have been very successful for Healthscope thanks to the dedication and commitment of our people. I would particularly like to thank the Healthscope staff and doctors for their individual contributions towards the outstanding care and clinical outcomes provided to our patients. the future Healthscope will continue to focus on providing quality services and excellent clinical outcomes across our hospitals, international pathology and medical centre operations. We will also advance the strategies we have in place to drive strong growth and operational efficiencies. In response to the growing demand for private hospital services, the Board is committed to expanding Healthscope’s existing portfolio of hospitals. As the public health system comes under increasing pressure, Healthscope is keen to work with the State and Federal Governments to explore further opportunities where Healthscope can play a role in the delivery of public healthcare services. We are now in our expansion phase, with 10 projects under construction and five projects approved which will deliver 980 new beds and 50 new theatres by the end of calendar year 2018, representing more than a 20% increase on Healthscope’s current bed numbers. We also expect that additional projects will be added to this pipeline over time, given the favourable demand dynamics and significant growth potential within our hospital portfolio. It is intended to fund these projects through the strong operating cashflows generated from our businesses and existing debt capacity. the immediate focus is on expanding our existing operations, including exploring opportunities to add to our established pathology presence in the rapidly growing South East Asian healthcare markets. Leveraging off this base, Healthscope is also exploring hospital management opportunities in the region. I would like to thank shareholders for their support of Healthscope and I invite you to join the Board and the senior leadership team for our Annual General Meeting, which will be held in Melbourne on Monday 23 November 2015. Paula J. Dwyer Chairman 1 this divestment did not include our medical centres, which were previously reported as part of the Australian pathology division. 2 After adjustments for interest and non-operating expenses. healthscope annual report 2015 | 9 MD & CEO’s message Healthscope’s strong FY15 performance reflects the quality of our businesses, a clearly articulated growth strategy, and the commitment of our employees and doctors to delivering high standards of clinical care to patients across our facilities. 10 | healthscope annual report 2015 I am pleased to report that Healthscope has had a successful year following its re-listing on the Australian Securities Exchange on 28 July 2014. We delivered on the FY15 Prospectus earnings forecasts and our well established operational and growth strategies remain unchanged and on track, providing a strong platform for the future. Most importantly, we have continued to provide high quality healthcare to the thousands of patients treated at our facilities each day. In FY15, Healthscope delivered Group revenue growth of 4.8% to $2,438.2m and Group Operating EBItDA growth of 8.7% to $388.3m. Each of our core businesses performed well during the year, achieving organic growth and operational efficiencies. Excluding the impact of Healthscope’s divested Australian pathology operations1, Healthscope’s continuing operations delivered revenue growth of 5.8% to $2,156.6m and Operating EBItDA growth of 10.0% to $380.8m. FY15 was also a period of significant capital investment as we expand Healthscope’s hospital portfolio to meet the growing demand for private hospital services in Australia. Hospitals Over 80% of Healthscope’s FY15 Operating EBItDA from continuing operations was generated by our hospital division, and it was pleasing that this division reported a strong result for FY15, with revenue growth of 5.7% to $1,852.5m, and Operating EBItDA growth of 10.4% to $327.6m. Robust underlying market growth underpinned increased volumes, rate increases from private health insurance funds and changes to case-mix also contributed to overall revenue growth. Whilst this was a good result, FY15 was largely a year of organic growth, only 23 new beds opened over the last two years, resulting in volume growth being limited at some of our key hospitals due to capacity constraints. Where possible, these capacity constraints will be addressed by our current hospital expansion program. the hospital division Operating EBItDA margin increased by 80 basis points to 17.7% for the year. this strong margin uplift reflects revenue growth, combined with continued progress in relation to our labour and procurement initiatives. Labour is the most significant cost for a hospital operator, and we have put considerable effort into labour management in recent years. This has included more effective rostering and an increased focus on nursing recruitment and retention to ensure we have an appropriately skilled and flexible workforce to meet the needs of our patients and doctors. MD & CEO’s message Procurement has also been a major area of focus, with a centralised procurement function responsible for liaising with suppliers and working with individual hospitals and doctors to make the purchasing function more efficient and better aligned to the specific needs of our business. As part of this process, over the last two years, Healthscope has also developed a direct sourcing strategy for a selection of generic consumables from Asia. Whilst this strategy is in its infancy, the quality of the products has been very well received by our doctors and nurses. International pathology Healthscope’s international pathology division consists of pathology businesses in New Zealand, Singapore and Malaysia, with a smaller presence in vietnam. this division’s track record of strong growth continued in FY15, with revenue growth of 8.5% to $243.2m and Operating EBItDA growth of 13.7% to $60.0m. All countries contributed to the positive result, reflecting the attractive industry dynamics and experienced management teams in each region. Healthscope’s New Zealand pathology business comprises a number of long-term contracts with District Health Boards (DHBs), with revenue growth largely reflective of growth in these contracts. this business delivered revenue growth of 5.5% and Operating EBItDA growth of 9.5% during the period2. Revenue growth translated into earnings growth through improved laboratory efficiencies and workflow management. In April 2015, Healthscope was also awarded a new contract to provide hospital and community pathology services to the three DHBs in the Greater Wellington region of New Zealand. Healthscope now holds pathology contracts with 13 of the 20 DHBs in New Zealand. the Singapore pathology business delivered revenue growth of 7.9% and Operating EBItDA growth of 5.9% in FY152, reflecting continued growth in the specialist and commercial contract segments and continued labour efficiencies which were partially offset by increased rent from further laboratory investment. the Malaysian pathology business recorded revenue growth of 0.4% and Operating EBItDA growth of 17.6% for the period2. Episode volume growth was impacted by market factors, including a reduction in health screening for foreign workers and implementation of a GSt policy in April 2015. However, improved cost efficiencies and the benefit of the prior year having been unfavourably impacted by doubtful debts provisioning resulted in strong earnings uplift. Medical centres Healthscope’s medical centre operations recorded revenue growth of 0.8% to $60.9m and Operating EBItDA growth of 0.3% to $15.0m in FY15. Australian pathology the Australian pathology operations recorded a 2.4% decrease in revenue in FY15, to $281.6m, and a decrease in Operating EBItDA of 32.7% to $7.5m. During the year we made the decision to close our loss making Queensland pathology operations and we announced the sale of the remaining Australian pathology operations which completed on 6 July 2015. Our culture and people Healthcare is a special business. What we do at work each day impacts the lives of our patients and, by extension, their families, often significantly. Quality healthcare relies upon the knowledge, skills, empathy and dedication of our people. We know that there are many inspiring examples of remarkable service delivered by our staff every day that truly make a difference to the quality of care that our patients receive and the services and support provided to our doctors. Our people know that we only have a business if we continue to provide high quality clinical outcomes and patient care. Healthscope’s vision reflects this sentiment. Our STAR values (Service Excellence, teamwork & Integrity, Aspiration and Responsibility) underpin everything we do. Over the last three years, we have implemented a decentralised structure to promote grassroots accountability and responsibility. this has been accompanied by a broad range of leadership training programs and other initiatives to enhance skill development and engage Healthscope leaders and staff. The success of these measures is reflected in significant improvements in staff retention, as well as doctor and patient satisfaction. We are also focused on our future workforce, and in FY15, we provided 60,000 placement days for nursing and allied health students. I would like to take this opportunity to acknowledge the tremendous work and commitment of Healthscope’s over 17,000 employees, and the more than 17,000 doctors who provide outstanding care and service in our healthcare facilities. 1 Healthscope’s Australian pathology operations were divested to Crescent Capital Partners on 6 July 2015. 2 Based on results in local currency. healthscope annual report 2015 | 11 MD & CEO’s message continued Healthscope’s commitment to the quality of clinical outcomes At Healthscope, we are extremely proud of our market leading reputation for the quality of clinical outcomes. Healthscope is the industry leader in quality and safety, exceeding our peers on the vast majority of industry benchmarks. We have unique processes and systems around quality, safety, compliance and incident management ensuring that each patient who enters a Healthscope facility receives high quality clinical care and the best possible outcome. the safety and quality agenda is owned by our nursing and allied health staff at the bedside – supported by a highly experienced head office team, responsible for providing leadership, facilitation and monitoring. Healthscope is committed to the transparent reporting of quality outcomes and in 2011 launched the MyHealthscope website, which publicly reports on 22 key performance indicators by hospital, and for the group. Not only does MyHealthscope showcase the exceptional quality of our clinical outcomes, it has been an important tool for attracting medical professionals, nursing staff and patients to our hospitals, and has helped us build deeper strategic relationships with private health insurance funds. Many private health insurance funds are prepared to reward outstanding quality in relation to clinical outcomes, in recognition of the superior experience for their members and the resultant financial benefits for the private health insurance funds. We currently have some Pay for Quality initiatives with private health insurance funds and intend to work with the insurers to further develop links between quality and funding. In conclusion, Healthscope’s strong performance reflects the quality of our businesses, a clearly articulated growth strategy, and the commitment of our employees and doctors to delivering high standards of clinical care to patients across our facilities. I would like to thank you for your support during the year and I look forward to the journey ahead as Healthscope enters a very exciting growth phase. Robert J. Cooke Managing Director and Chief Executive Officer 12 | healthscope annual report 2015 FY15 financial highlights Continuing operations Healthscope’s continuing operations consist of the hospital, international pathology and medical centre divisions. $2.2b FY15 REvENuE FROM CONtINuING OPERAtIONS $381m FY15 OPERAtING EBItDA FROM CONtINuING OPERAtIONS $291m FY15 OPERAtING EBIt MARGIN FROM CONtINuING OPERAtIONS 5.8% 10.0% 11.0% Revenue Operating EBItDA Operating EBIt From continuing operations From continuing operations From continuing operations 2,038 2,156 $M 2,500 2,000 1,500 1,000 500 0 346 381 $M 400 300 200 100 0 $M 300 250 200 150 100 50 0 262 291 FY14 FY15 FY14 FY15 FY14 FY15 Operating Net Profit After Tax From continuing operations Earnings Per Share (EPS) Basic EPS from continuing operations total FY15 Dividend Per Share (DPS) Interim DPS of 3.3 cents and Final DPS of 3.7 cents $156m 9.4c per share 7.0c per share healthscope annual report 2015 | 13 Providing direction the Directors bring to the Board relevant experience and skills, including industry and business knowledge, financial management and corporate governance experience. Paula Dwyer INDEPENDENt NON EXECutIvE CHAIRMAN Robert Cooke MANAGING DIRECtOR AND CHIEF EXECutIvE OFFICER Tony Cipa INDEPENDENt NON EXECutIvE DIRECtOR Mr Antoni (Tony) M. Cipa BBus, Grad Dip Accounting, AGIA Non Executive Director since 2014. Chair of the Audit Risk & Compliance Committee and Member of the Remuneration and Nomination Committees. Skills, experience and expertise tony previously spent 20 years with CSL Limited in various senior finance roles. Tony was Chief Financial Officer, CSL (1994–2010) and was appointed to the Board of CSL Limited as Finance Director in 2000 until his retirement in 2010. Current Directorships Non Executive Director: SKILLED Group Limited (from April 2011), Navitas Limited (from May 2014) and Mansfield District Hospital (from July 2011). Former Directorships include Executive Director: CSL Limited (2000–2010). Ms Paula J. Dwyer BComm, FCA, SF Fin, FAICD Non Executive Chairman and Chair of the Nomination Committee from June 2014. Paula is an ex officio Member of the Audit, Risk & Compliance and Remuneration Committees. Skills, experience and expertise Paula is an established Non Executive Director who had an executive career in finance, holding senior positions in investment management, investment banking and chartered accounting with Ord Minnett (now JP Morgan) and PricewaterhouseCoopers. Current Directorships Chairman: tabcorp Holdings Limited (from 2011, Director from 2005). Director: Australia & New Zealand Banking Group Limited (from 2012) and Lion Pty Limited (from 2012). Member: International Advisory Board of Kirin Holdings of Japan, Business and Economics Board of the university of Melbourne and the ASIC External Advisory Panel. Former Directorships include Deputy Chairman: Leighton Holdings Limited (2013–2014, Director 2012), Baker IDI Heart and Diabetes Research Institute (2003–2013). Director: Suncorp Group Limited (2007–2012), Astro Japan Property Group Limited (2005–2011), Fosters Group Limited (2011), Healthscope Limited (2010), Promina Limited (2002–2007), CCI Investment Management Ltd (1999–2011). Member: Takeovers Panel (2008–2014). Mr Robert J. Cooke Bachelor of Health Administration, Grad Dip (Accounting & Finance) Managing Director & Chief Executive Officer from 2010. Executive Chairman (2010–2014). Skills, experience and expertise Robert has had a 38 year career in the health industry, and has worked in management and corporate leadership positions in the public and private health sectors. Robert’s experience spans executive leadership of publicly listed and private healthcare companies, the management of private and public hospitals in Australia, and involvement in a number of due diligence teams for both Australian and international acquisitions. Current Directorships Managing Director: Healthscope Limited (from 2010). Member: National Board of the Australian Private Hospitals Association. Former Directorships include Chairman: Spire Healthcare Group plc (uK, now listed on the London Stock Exchange) (2008–2010), Healthscope Limited (2010–2014). Managing Director and Chief Executive Officer: Symbion Health Limited (2005–2008). Managing Director: Affinity Health Limited (2003–2005). 14 | healthscope annual report 2015 Deliver over 14,000 babies Aik Meng Eng NON EXECutIvE DIRECtOR Simon Moore NON EXECutIvE DIRECtOR Rupert Myer AO INDEPENDENt NON EXECutIvE DIRECtOR Mr Simon C. Moore BComm (Hons), L.L.B. (Hons) Non Executive Director since 2010. Member of the Audit, Risk & Compliance and Nomination Committees. Skills, experience and expertise Prior to joining the Carlyle Group, Simon was a Managing Director and Investment Committee Member of Investcorp International, Inc. based in New York. Prior to that, Simon worked in private equity investments and investment banking at J.P. Morgan & Co. in New York, Hong Kong and Melbourne. Current Directorships Partner and Managing Director: the Carlyle Group (Sydney). Chairman: Coates Hire Ltd (from 2015, director from 2008). Alternate Director: Qube Holdings Limited (from 2011). Mr Aik Meng Eng BAcct (Hons), MBA Non Executive Director since 2013. Member of the Remuneration and Nomination Committees. Skills, experience and expertise Aik Meng was COO of Fortis Healthcare and responsible for all its international businesses, ranging from dental clinics in Australia to primary care network in Hong Kong to hospitals in Singapore and vietnam. He led business transformation and post-merger activities across the international business as part of Fortis’ growth strategy. Prior to joining the healthcare industry, Aik Meng spent 18 years in the maritime sector. His last position in that industry was as President of APL. APL is a leading container shipping and maritime terminal operator with global revenues of uS$8 billion. Current Directorships Non Executive Director: Jurong Port Pte Ltd (from 2012). As a senior adviser to tPG, Aik Meng also sits as a Non Executive director of some of tPG’s portfolio companies. Adviser: Member of the Advisory Board, Nanyang Business School, Singapore, and ASEAN Advisory to the Human Capital Leadership Institute, Singapore. Mr Rupert H. Myer AO BComm, MA, FAICD Non Executive Director since 2014. Chair of the Remuneration Committee and Member of the Audit Risk & Compliance and Nomination Committees. Skills, experience and expertise Rupert’s background includes roles in the retail and property sector, healthcare, e-commerce, investment, family office, wealth management, philanthropy services, and the community sector. He previously worked as a Manager at Citibank Limited in London and Melbourne. In 2015, Rupert became an Officer of the Order of Australia. Current Directorships Deputy Chairman: Myer Holdings Limited (from 2012, Director from 2006). Director: Amcil Limited (from 2000) and eCargo Holdings Limited (from 2014). Chairman: Australia Council for the Arts and Nuco Pty Ltd. Member: Business and Economics Advisory Board of the university of Melbourne. Board member: the Myer Foundation, Jawun – Indigenous Corporate Partnerships, the Yulgilbar Foundation, and the Felton Bequests’ Committee. Former Directorships include Chairman: the Myer Family Group. Director: Diversified United Investments Limited (2002–2012). healthscope annual report 2015 | 15 Leaders of quality care Our senior leadership team brings outcomes focused leadership and passion for delivering high quality healthcare. Robert Cooke MANAGING DIRECtOR AND CHIEF EXECutIvE OFFICER Michael Sammells CHIEF FINANCIAL OFFICER Mark Briscoe GM OPERAtIONS Michael has over 16 years’ experience in the healthcare industry, having held a number of operational and finance senior executive roles in private hospitals, in the public health and health insurance sectors, at companies including Mayne Group, Southern Health and Medibank. Michael’s most recent position was Chief Financial Officer for Medibank. Michael joined the Healthscope Group as Chief Financial Officer in January 2012. Qualifications: Bachelor of Business Fellow Australian Society of CPAs Prior to joining Healthscope in 2011, Mark was the Director of Operations and Developments at Spire Healthcare Limited in the uK. In Australia, Mark has worked in various healthcare corporate roles at Mayne Group, Affinity Health and Symbion Health. At Healthscope, Mark is responsible for health funding, the medical centre division and group procurement as well as working with the Hospital State Managers and General Managers to deliver efficiencies across Healthscope networks. Qualifications: Bachelor of Accounting Bachelor of Economics Dr Michael Coglin CHIEF MEDICAL OFFICER Andrew Currie HOSPItALS StAtE MANAGER vIC & tAS Stephen Gameren HOSPItALS StAtE MANAGER NSW & ACt Michael joined Healthscope in 1999. His current role involves executive responsibility for clinical governance, clinical risk management, patient safety, quality and compliance, claims and litigation, medical affairs and public affairs/media relations. Michael represents Healthscope on a number of bodies, including the Private Hospital Sector Committee of the Australian Commission on Safety and Quality in Health Care. For the 20 years prior to taking up his current appointment, he held senior posts in medical management in a variety of public hospitals in both metropolitan and regional settings in victoria and the Northern territory. Qualifications: Bachelor of Medicine, Bachelor of Surgery Master of Business Administration Prior to joining Healthscope in 2011, Andrew was the Managing Director of Clear Outcomes Pty Ltd since 2000. He was formerly the CEO of Geelong Private Hospital, Christo Road Private Hospital and Port Macquarie Private Hospital. Andrew has also sat on the boards of many hospitals and has advised on numerous hospital-redevelopment projects. Qualifications: Post Graduate Studies in Computing Bachelor of Science (Adv Nursing, Administration) Critical Care Certifications Stephen has worked with Healthscope since 2004. He has over 20 years’ experience in healthcare management, spanning three countries – New Zealand, the United Kingdom and Australia. Stephen worked as CEO at the Hills Private Hospital and was Project Director and CEO for the Norwest Private Hospital Project, successfully commissioning this new hospital in September 2009. He commenced in the role of NSW/ACt State Manager in February 2010. Qualifications: Bachelor of Commerce, Management and Marketing Studies Postgraduate Studies in Management 16 | healthscope annual report 2015 Deliver over 14,000 babies Anita Healy GM BuSINESS DEv & INvEStOR RELAtIONS Alan Lane HOSPItALS StAtE MANAGER SA & ACHA CEO Richard Lizzio HOSPItALS StAtE MANAGER QLD, Nt & WA Anita joined Healthscope in 2014 and is responsible for business development and investor relations. Prior to joining Healthscope, she worked for Macquarie Group for 15 years and brings with her extensive experience in mergers and acquisitions, equity capital markets and principal investing, both in Australia and internationally. Qualifications: Bachelor of Commerce Graduate Diploma of Applied Finance Alan has worked for 25 years in healthcare, and was appointed by Healthscope in 2004. Alan’s extensive involvement in healthcare spans the market sectors of hospitals, pharmacy, pathology, manufacturing, business development and logistics. As part of his responsibility for South Australia, Alan is the CEO of the Adelaide Community Healthcare Alliance (ACHA) group. Qualifications: Bachelor of Science Master of Business Administration Richard has an extensive commercial background, including roles in the not- for-profit sector in health, aged care and education. Prior to joining Healthscope in 2011, Richard spent eight years working with Ramsay Healthcare in various hospital GM positions in Queensland. Richard started his working life as a chartered accountant with KPMG and later moved into retail stockbroking and financial services. Qualifications: Bachelor of Commerce Chartered Accountant Ingrid Player GENERAL COuNSEL & COMPANY SECREtARY Anoop Singh GM INtERNAtIONAL PAtHOLOGY Jenny Williams GM HuMAN RESOuRCES Ingrid has more than 15 years’ commercial experience and was appointed General Counsel and Company Secretary in 2005. Ingrid has extensive corporate, commercial, litigation and governance experience. Prior to joining Healthscope, Ingrid spent five years working for a Dutch law firm in the Netherlands, working primarily in the mergers and acquisitions space, as well as in capital markets. Previously, she worked in private practice in Melbourne. Qualifications: Bachelor of Laws (Hons) Bachelor of Economics Anoop joined Healthscope in 2011. Over the past 25 years, he has held a number of senior commercial appointments in the healthcare industry in Australia and Asia, including leadership positions in large diversified companies such as Mayne Group and Symbion Health. As vice President of Pathology Australia, Anoop has been involved in key strategic and policy matters in relation to the Australian pathology sector over a number of years. Qualifications: Bachelor of Economics (Hons) Masters of Economics Master of Business Administration Certified Practising Accountant Jenny joined Healthscope in 2011, and was appointed as General Manager, Human Resources, in 2012. Jenny is a proven HR professional with diverse experience across the healthcare and education sectors. Prior to joining Healthscope, Jenny held senior HR positions at the university of Melbourne, Symbion Health and Mayne Group. Qualifications: Bachelor of Science Graduate Diploma, Human Resources Graduate Diploma, Education healthscope annual report 2015 | 17 Healthscope Limited Consolidated Financial Report For the year ended 30 June 2015 Contents Directors’ report Independent Auditor’s report Auditor’s Independence declaration Statement of profit or loss and other comprehensive income Statement of financial position Statement of cash flows Statement of changes in equity Notes to the financial statements Directors’ declaration 20 49 51 52 53 54 56 58 120 18 | healthscope annual report 2015 healthscope annual report 2015 | 19 Directors’ report Overview The Directors present their report for the financial year ended 30 June 2015 accompanied by the financial report of Healthscope Limited (ACN: 144 840 639) and the entities it controlled during the year (‘Healthscope Group’, ‘the Group’). In order to comply with the provisions of the Corporations Act 2001, the Directors report as follows: Directors The names of the directors of the company any time during or since the end of the financial year are: Name Ms Paula J. Dwyer Mr Robert J. Cooke PositioN Chairman Managing Director and Chief Executive Officer Mr Antoni M. Cipa Non Executive Director Mr Aik Meng Eng Non Executive Director Mr Simon C Moore Non Executive Director Director: Suncorp Group Limited (2007–2012), Astro Japan Property Group Limited (2005–2011), Fosters Group Limited (2011), Healthscope Limited (2010), Promina Limited (2002–2007), CCI Investment Management Ltd (1999–2011). Member: Takeovers Panel (2008–2014). mr Robert J. Cooke Bachelor of Health Administration, Grad Dip (Accounting & Finance) Managing Director & Chief Executive Officer from 2010. Executive Chairman from 2010–2014). Skills, experience and expertise Robert has had a 38 year career in the health industry, and has worked in management and corporate leadership positions in the public and private health sectors. Robert’s experience spans executive leadership of publicly listed and private healthcare companies, the management of private and public hospitals in Australia, and involvement in a number of due diligence teams for both Australian and international acquisitions. Mr Rupert H. Myer AO Non Executive Director Current Directorships Board of Directors The details of each current Director’s qualifications, special responsibilities and experience are set out below. ms Paula J. Dwyer BComm, FCA, SF Fin, FAICD Non Executive Chairman and Chair of the Nomination Committee from June 2014. Paula is an ex officio member of the Audit, Risk & Compliance and Remuneration Committees. Skills, experience and expertise Paula is an established Non Executive Director who had an executive career in finance, holding senior positions in investment management, investment banking and chartered accounting with Ord Minnett (now JP Morgan) and PricewaterhouseCoopers. Current Directorships Chairman: Tabcorp Holdings Limited (from 2011, Director from 2005). Director: Australia & New Zealand Banking Group Limited (from 2012) and Lion Pty Limited (from 2012). Member: International Advisory Board of Kirin Holdings of Japan, Business and Economics Board of the University of Melbourne and the ASIC External Advisory Panel. Former Directorships include Deputy Chairman: Leighton Holdings Limited (2013–2014, Director 2012), Baker IDI Heart and Diabetes Research Institute (2003–2013). Managing Director: Healthscope Limited (from 2010). Member: National Board of the Australian Private Hospitals Association. Former Directorships include Chairman: Spire Healthcare Group plc (UK, now listed on the London Stock Exchange) (2008–2010), Healthscope Limited (2010–2014). Managing Director and Chief Executive Officer: Symbion Health Limited (2005–2008). Managing Director: Affinity Health Limited (2003–2005). mr antoni m. Cipa BBus, Grad Dip Accounting, AGIA Non Executive Director since 2014. Chair of the Audit Risk & Compliance Committee and Member of the Remuneration and Nomination Committees. Skills, experience and expertise Tony previously spent 20 years with CSL Limited in various senior finance roles. Tony was Chief Financial Officer, CSL (1994–2010) and was appointed to the Board of CSL Limited as Finance Director in 2000 until his retirement in 2010. Current Directorships Non Executive Director: SKILLED Group Limited (from April 2011), Navitas Limited (from May 2014) and Mansfield District Hospital (from July 2011). Previous Directorships include Executive Director: CSL Limited (2000–2010). 20 | healthscope annual report 2015 mr aik meng eng BAcct (Hons), MBA mr Rupert H. myer ao BComm, MA, FAICD Non Executive Director since 2013. Member of the Remuneration and Nomination Committees. Skills, experience and expertise Aik Meng was COO of Fortis Healthcare and responsible for all its international businesses ranging from dental clinics in Australia to primary care network in Hong Kong to hospitals in Singapore and Vietnam. He led business transformation and post-merger activities across the international business as part of Fortis’ growth strategy. Prior to joining the healthcare industry, Aik Meng spent 18 years in the maritime sector. His last position in that industry was as President of APL. APL is a leading container shipping and maritime terminal operator with global revenues of US$8 billion. Current Directorships Non Executive Director: Jurong Port Pte Ltd (from 2012). As a senior adviser to TPG, Aik Meng also sits as a Non Executive Director of some of TPG’s portfolio companies. Adviser: Member of the Advisory Board, Nanyang Business School, Singapore, and ASEAN Advisory to the Human Capital Leadership Institute, Singapore. mr simon C. moore BComm (Hons), L.L.B. (Hons) Non Executive Director since 2010. Member of the Audit, Risk & Compliance and Nomination Committees. Skills, experience and expertise Prior to joining The Carlyle Group, Simon was a Managing Director and Investment Committee Member of Investcorp International, Inc. based in New York. Prior to that, Simon worked in private equity investments and investment banking at J.P. Morgan & Co. in New York, Hong Kong and Melbourne. Current Directorships Partner and Managing Director: The Carlyle Group (Sydney). Chairman: Coates Hire Ltd (from 2015, director from 2008). Alternate Director: Qube Holdings Limited (from 2011). Non Executive Director since 2014. Chair of the Remuneration Committee and Member of the Audit Risk & Compliance and Nomination Committees. Skills, experience and expertise Rupert’s background includes roles in the retail and property sector, healthcare, e-commerce, investment, family office, wealth management, philanthropy services, and the community sector. He previously worked as a Manager at Citibank Limited in London and Melbourne. In 2015, Rupert became an Officer of the Order of Australia. Current Directorships Deputy Chairman: Myer Holdings Limited (from 2012, director from 2006). Director: Amcil Limited (from 2000) and eCargo Holdings Limited (from 2014). Chairman: Australia Council for the Arts and Nuco Pty Ltd. Member: Business and Economics Advisory Board of the University of Melbourne. Board member: The Myer Foundation, Jawun – Indigenous Corporate Partnerships, the Yulgilbar Foundation and the Felton Bequests’ Committee. Former Directorships include Chairman: The Myer Family Group. Director: Diversified United Investments Limited (2002–2012). Company secretary The Company Secretary is Ingrid Player. Ms Player was appointed to the position of Company Secretary on 8 November 2010. Ms Player is responsible for the legal affairs of the Healthscope Group and for all company secretarial matters. Prior to joining the Healthscope Group, Ms Player had over 10 years of experience working as a lawyer in Australia and overseas. healthscope annual report 2015 | 21 Directors’ report Directors (continued) Meetings of Directors The number of meetings of the Board of Directors and of each Board Committee held during the year, and each Director’s attendance at those meetings, are set out below: (i) Board of Directors Meetings Paula Dwyer (Chair) Robert Cooke Antoni Cipa Aik Meng Eng Simon Moore Rupert Myer AO (ii) Board Committee Meetings sCHeDULeD Number eligible to attend Number attended UNsCHeDULeD Number eligible to attend Number attended 11 11 11 11 11 11 11 11 10 10 11 11 2 2 2 2 2 2 2 2 2 2 2 2 aUDit, Risk & ComPLiaNCe Committee RemUNeRatioN Committee NomiNatioNs Committee Number eligible to attend Number attended Number eligible to attend Number attended Number eligible to attend Number attended 2 – 2 – 2 2 2 – 2 – 2 2 4 – 4 4 – 4 4 – 4 4 – 4 1 – 1 1 1 1 1 – 1 1 1 1 Paula Dwyer1 Robert Cooke Antoni Cipa Aik Meng Eng Simon Moore Rupert Myer AO 1 the Chairman is an ex officio member of the audit risk & Compliance and remuneration Committees. The table above records attendance of Committee members. Any Director is entitled to attend these meetings and from time to time Directors attend meetings of Committees of which they are not a member. The Board also forms and delegates authority to ad hoc Committees of the Board as and when needed to carry out specific tasks. Principal activities The principal activities of the Healthscope Group during the course of the financial year were the provision of healthcare services through the ownership and management of hospitals, medical centres and the provision of pathology diagnostic services. Dividends The interim dividend was recorded on 10 March 2015. The Directors approved the payment of an interim dividend of 3.3 cents per share and the total dividend paid was $57.2 million. The Directors resolved to pay a final dividend of 3.7 cents per share. The record date is 14 September 2015. This dividend has not been included as a liability in these financial statements. The total estimated dividend to be paid is $64.1 million. 22 | healthscope annual report 2015 Operating results The consolidated profit of the Healthscope Group for the year, after income tax expense, was $140.9 million (2014: $183.2 million loss). Review of operations Principal activities Healthscope is one of Australia’s leading healthcare providers, with 451 private hospitals and 52 medical centres and skin clinics across Australia, and is a leading provider of pathology services in New Zealand, Singapore and Malaysia. Healthscope also previously owned and operated an Australian pathology business, which was divested on 6 July 2015. Healthscope was originally formed in 1985 and listed on the Australian Securities Exchange (ASX) in 1994. In October 2010, the Healthscope business was acquired by a consortium of funds advised and managed by TPG and The Carlyle Group and subsequently de-listed from the ASX. On 28 July 2014, Healthscope was re-listed on the ASX. TPG and Carlyle retained a 38% shareholding in Healthscope following the IPO, which was subject to an escrow period concluding on 25 August 2015. Hospitals Healthscope is Australia’s second largest private hospital operator with a portfolio of 451 private hospitals and over 4,400 beds nationwide. Of the 45 hospitals Healthscope operates, 30 facilities are owned by Healthscope, 12 are leased by Healthscope and three are managed on behalf of Adelaide Community Healthcare Alliance (ACHA). Healthscope’s private hospital portfolio comprises 32 acute hospitals, seven psychiatric hospitals and six rehabilitation and extended care facilities. The hospital portfolio includes large high acuity hospitals, with 11 co-located with public teaching hospitals. The hospitals are concentrated in Australia’s large metropolitan centres with a presence in every State and Territory. In 2003, Healthscope entered into an agreement with ACHA to manage three acute hospitals in South Australia. ACHA is a not-for-profit community health organisation based in South Australia, and is the largest private hospital group in that State. Healthscope is responsible for daily management of the hospitals’ operations, while ACHA retains responsibility for strategic direction and governance. 1. Includes latrobe private Hospital, which Healthscope commenced operating on 14 July 2015. Healthscope has over 17,000 Accredited Medical Practitioners registered within our hospital network across Australia. The patients of these Accredited Medical Practitioners are the main source of admissions into Healthscope hospitals, and Healthscope hospitals have a range of attributes that are attractive to Accredited Medical Practitioners, including high quality facilities in attractive locations, high quality nursing staff, industry leading quality and clinical outcomes, on site consulting suites and a number of other support services. All of Healthscope’s hospitals are accredited under the National Safety and Quality Health Services Standards, and Healthscope prides itself on providing market leading quality and clinical outcomes. Healthscope reports 22 quality and clinical outcomes publicly on the MyHealthscope website, and outperforms the industry benchmark and its peers on the vast majority of indicators. International pathology Healthscope’s international pathology division operates in New Zealand, Malaysia and Singapore with a small presence in Vietnam. New Zealand The New Zealand community pathology market is primarily based on exclusive contracts between pathology providers and government funded District Health Boards (DHBs). Healthscope trades under the Labtests, SCL and Northland brands. Healthscope also operates a veterinary pathology business in New Zealand, which trades as Gribbles Veterinary. Healthscope holds DHB contracts in 13 of the 20 DHB regions, including community pathology contracts for the major cities of Auckland, Wellington and Christchurch. Healthscope’s largest contract covers the greater Auckland region through Labtests Auckland which commenced in September 2009 and expires in September 2020. Malaysia Healthscope, operating as Gribbles Pathology, is one of the largest community pathology providers in Malaysia, with 28 laboratories across the country. These laboratories serviced over 1.5 million patient episodes for the year ended 30 June 2015. Revenue is sourced from general practitioners, hospitals and government/corporate programs. healthscope annual report 2015 | 23 Directors’ report Review of operations (continued) Principal activities (continued) Singapore In Singapore, Healthscope, operating as Quest Laboratories, is one of the largest community pathology providers. Healthscope has one central laboratory supported by two satellite laboratories, which serviced approximately 1.5 million patient episodes for the year ended 30 June 2015. The Singaporean operations service General Practitioners, specialists and corporate screening clients. Vietnam In Vietnam, Healthscope manages one laboratory in a private hospital outside Ho Chi Minh City specialising in women’s and children’s health. Given its size, this laboratory is managed as part of the Singaporean business. Medical centres Healthscope owns and operates 47 medical centres and five specialist skin cancer clinics around Australia, providing serviced medical centres to approximately 420 General Practitioners2. General Practitioners that operate in Healthscope’s medical centres are not employed by Healthscope, but instead negotiate a service agreement with each individual medical centre. Under this agreement, Healthscope provides General Practitioners with practice management services which typically include access to a consulting room at a serviced medical centre, nursing staff and other administrative support. As part of that arrangement, General Practitioners pay Healthscope a service fee which is expressed as a percentage of the General Practitioners’ patient billings. Australian pathology Prior to 6 July 2015, Healthscope operated an Australian pathology business which included 30 laboratories and 560 collection centres across Victoria, New South Wales, South Australia and the Northern Territory3. Previously, Healthscope also had pathology operations in Queensland which were closed in February 2015. Comparison to the FY15 statutory forecasts in the Prospectus Group Comparison Revenue Operating EBITDA1 Operating EBIT1 Operating profit/(loss) after tax1 Net profit/(loss) after tax FY15 aCtUaL GRoUP $M 2,438.2 388.3 286.9 153.1 140.9 FY15 PRosPeCtUs statUtoRY VaRiaNCe $M 2,448.4 387.3 284.7 147.2 147.2 % (0.4%) 0.3% 0.8% 4.0% (4.3%) 1. FY15 results have been presented before other income and expense items (“non-operating items”) of $12.2 million (tax effected) in order to present the underlying trading performance of the business. 2. excludes the six skin clinics that Healthscope has agreed to divest as part of the sale of the australian pathology business. 3. as at date of divestment 6 July 2015. 24 | healthscope annual report 2015 Group Operating results delivered on Prospectus forecasts, with Group Operating Profit of $153.1 million – 4.0% above the Prospectus forecasts. Divisional comparison Revenue Hospitals International pathology Medical centres Australian pathology total Revenue operating eBitDa Hospitals International pathology Medical centres Australian pathology Corporate total operating eBitDa operating eBit Hospitals International pathology Medical centres Australian pathology Corporate total operating eBit FY15 aCtUaL FY15 PRosPeCtUs $M $M VaRiaNCe % 1,852.5 1,848.6 243.2 60.9 281.6 234.6 62.5 302.7 2,438.2 2,448.4 327.6 60.0 15.0 7.5 (21.8) 388.3 263.3 45.6 8.7 (4.1) (26.6) 286.9 FY15 $M 325.9 56.4 15.3 11.0 (21.3) 387.3 259.7 43.1 8.6 0.1 (26.8) 284.7 FY14 $M 2,438.2 2,326.1 388.3 286.9 153.1 140.9 8.6 8.5 7.0 357.3 262.3 (120.9) (183.2) (11.1) (11.1) – 0.2% 3.7% (2.6%) (7.0%) (0.4%) 0.5% 6.3% (1.5%) (32.3%) (2.4%) 0.3% 1.4% 5.7% 0.7% NM 0.9% 0.7% moVemeNt % 4.8% 8.7% 9.4% NM NM NM NM NM summary of FY15 financial performance – Group result Revenue Operating EBITDA1 Operating EBIT1 Operating profit/(loss) after tax1 Net profit/(loss) after tax Earnings per Share (EPS) Diluted EPS Dividend per Share (DPS) 1. FY15 results have been presented before other income and expense items (“non-operating items”) of $12.2 million (tax effected) in order to present the underlying trading performance of the business. FY14 results have been presented before non-operating items of $62.9 million (tax effected) on the same basis. The FY15 Operating EBITDA result of $388.3 million represents 8.7% year on year growth, with growth driven by the hospitals and international pathology divisions. Operating EBIT of $286.9 million was recorded, an increase of 9.4% on the previous year. The FY15 Net Profit After Tax of $140.9 million, compares to a net loss after tax of $183.2 million in FY14. The increase in Net Profit After Tax in FY15 represents the operating performance of the business combined with a lower interest expense in FY15 due to the post IPO capital structure. healthscope annual report 2015 | 25 Directors’ report Review of operations (continued) FY15 EPS is 8.6 cents, while the final unfranked dividend is 3.7 cents per share taking the full year dividend to 7.0 cents per share. The full year dividend per share is in line with a payout ratio of 70% based on Pro-forma net profit after tax after adjustment for interest and non-operating expenses. Bridge of continuing operations to group results Revenue Operating EBITDA1 Operating EBIT1 Operating profit/(loss) after tax1 Net profit/(loss) after tax FY15 statUtoRY CoNtiNUiNG oPeRatioNs FY15 statUtoRY DisCoNtiNUeD oPeRatioNs $M 2,156.6 380.8 291.0 155.6 153.7 $M 281.6 7.5 (4.1) (2.5) (12.9) FY15 totaL $M 2,438.2 388.3 286.9 153.1 140.9 1. FY15 results have been presented before other income and expense items (“non-operating items”) of $12.2 million (tax effected) in order to present the underlying trading performance of the business. Divisional FY15 financial performance Hospitals Revenue Operating EBITDA Operating EBIT EBITDA margin (incl. ACHA fee)1 EBIT margin (incl. ACHA fee)1 FY15 $M 1,852.5 327.6 263.3 17.7% 14.2% FY14 $M 1,753.0 296.9 238.1 16.9% 13.6% moVemeNt % 5.7% 10.4% 10.6% +80 bps +60 bps 1. operating eBItDa and eBIt margin includes prosthetics revenue and costs. The hospitals division recorded revenue growth of 5.7% to $1,852.5 million in the year ended 30 June 2015. Revenue growth was principally driven by increases in patient admissions to Healthscope’s hospitals, case mix management and agreed increases in Private Health Insurance rates. The hospitals division Operating EBITDA increased by 10.4% to $327.6 million in the year ended 30 June 2015, with the Operating EBITDA margin increasing by 80 basis points to 17.7%. Operating EBITDA growth and the increase in Operating EBITDA margin were principally driven by the revenue growth referred to above, and further cost efficiencies resulting from labour and procurement initiatives. International pathology Revenue Operating EBITDA Operating EBIT EBITDA margin EBIT margin 26 | healthscope annual report 2015 FY15 $M 243.2 60.0 45.6 24.7% 18.7% FY14 $M 224.2 52.8 40.1 23.5% 17.9% moVemeNt % 8.5% 13.7% 13.7% +120bps +80 bps The international pathology division recorded revenue growth of 8.5% to $243.2 million in the year ended 30 June 2015, and EBITDA growth of 13.7% to $60.0 million. The international pathology EBITDA margin increased by 120 basis points to 24.7% in the year ended 30 June 2015. All countries within the international pathology division contributed to the increase in earnings. New Zealand The New Zealand pathology business delivered revenue growth of 5.5% and EBITDA growth of 9.5% in the year ended 30 June 2015. Revenue growth was principally attributable to an increase in revenue under existing contracts, the full year impact of the Diagnostic Medlab business which was acquired in October 2013 and revenue from services provided to the Greater Wellington region from May 2015. The increase in EBITDA was largely driven by the revenue growth outlined above and improved laboratory efficiencies and procurement benefits. Singapore The Singapore pathology business delivered revenue growth of 7.9% and EBITDA growth of 5.9% in the year ended 30 June 2015, reflecting continued growth in the specialist and commercial contract segments combined with labour efficiencies, partly offset by increased rent from further laboratory investment. Malaysia The Malaysian pathology business recorded revenue growth of 0.4% and EBITDA growth of 17.6% in the year ended 30 June 2015. Revenue growth was reflective of limited growth across the market which was impacted by a reduction in health screening programs and implementation of a GST policy during the year. EBITDA growth was delivered through efficiency improvements and also benefited from FY14 results having been unfavourably impacted by doubtful debts provisioning. Medical centres Revenue Operating EBITDA Operating EBIT EBITDA margin EBIT margin FY15 $M 60.9 15.0 8.7 FY14 moVemeNt $M 60.4 15.0 7.4 % 0.8% 0.3% 16.8% 24.7% 14.3% 24.8% 12.2% (10 bps) +200 bps The medical centres business recorded revenue growth of 0.8% to $60.9 million in the year ended 30 June 2015. The relatively subdued revenue growth was largely a result of Healthscope’s decision to transition away from upfront capital payments resulting in changes to the fee splits for doctors, which largely offset the benefits of fee increases and strong growth in vaccine sales. The medical centres business recorded EBITDA growth of 0.3% to $15.0 million in the year ended 30 June 2015. The benefits from efficiencies realised from labour and procurement initiatives were largely offset by the changes in fee splits with doctors outlined above. The EBIT increase of 16.8% to $8.7 million reflects the operating performance of the business outlined above and lower depreciation as a result of the move away from upfront capital payments to doctors. Australian pathology Revenue Operating EBITDA Operating EBIT EBITDA margin EBIT margin FY15 $M 281.6 7.5 (4.1) 2.7% (1.5%) FY14 $M 288.5 11.1 0.2 3.8% 0.1% moVemeNt % (2.4%) (32.7%) NM (110 bps) (160 bps) healthscope annual report 2015 | 27 Directors’ report Review of operations (continued) Divisional FY15 financial performance (continued) The Australian pathology division revenue decreased by 2.4% to $281.6 million in the year ended 30 June 2015. The decrease in revenue principally reflects the decrease in revenue from the Queensland business which was closed in February 2015 and the impact of the Medicare fee reduction on 1 November 2014, which more than offset the organic volume growth recorded by the business. The Australian pathology division EBITDA decreased by 32.7% to $7.5 million in the year ended 30 June 2015, with continued progress on labour and procurement efficiencies being offset by the Medicare fee reduction and continued rent pressure. These operations were divested on 6 July 2015 for total consideration of $105 million1. Financial position The Group has a strong financial position with $4 billion in assets underpinned by $2.3 billion of shareholder funds. With positive working capital and a gearing ratio of 29.4%, the Group has capacity to fund future growth. There is $155 million in unrestricted cash reserves and $300 million in loans available to fund the Group’s expansion plans. Capital requirements for the Gold Coast and Northern Beaches developments are secured via project finance debt facilities. Cashflow Cash generated from operations of $377.6 million represents an increase of 3.3% on FY14 resulting in cash conversion (cash generated from operations/EBITDA) of 97.3%. Cash conversion on Continuing Operations was 99.2%. Total capital expenditure of $362.8 million was $207.3 million higher than FY14 primarily driven by increased brownfield capital investment associated with the Company’s hospital expansion program. Construction on the Northern Beaches Hospital project also commenced during the year. Business strategies and prospects for future years Healthscope has a range of operational and growth strategies for each of its businesses, and these, together with favourable industry dynamics across each of the markets in which the Company operates, provide a strong outlook for growth. Key strategies for each of Healthscope’s businesses are outlined below. Hospitals 1 2 Organic growth Brownfields 3 “Relocate and Grow” 4 5 Government partnerships and outsourcing International expansion Organic growth Organic growth will continue to benefit from increasing demand for private hospital services, coupled with the delivery of further operational improvements in relation to case mix and continued efficiencies resulting from labour and procurement initiatives. Healthscope will also continue to focus on delivering market leading quality and clinical outcomes and the promotion of transparent reporting of these and will continue to work collaboratively with health funds to explore additional pay for quality opportunities. Brownfields and “Relocate and Grow” projects Healthscope has significant experience in designing and building private hospital facilities, and is well positioned to expand its hospital facilities to meet additional patient demand through brownfield projects and relocate and grow projects. 1. Includes proceeds from Healthscope’s agreement to sell six of its skin clinics as part of the pathology transaction. 28 | healthscope annual report 2015 Brownfield projects are those where an existing hospital is expanded through the addition of new beds and theatres, and in some cases other additional infrastructure such as consulting suites and car parking. “Relocate and Grow” projects involve the construction of a new hospital close to an existing hospital and the transferal of services from the existing hospital to the new facility which typically has increased capacity and higher quality amenities. Healthscope currently has nine brownfield and “Relocate and Grow” projects currently under construction with a total estimated project cost of over $600 million. These projects are expected to start to deliver growth in bed numbers from 2H FY16 and beyond. • National Capital Private Hospital (ACT) – 41 beds, 3 theatres • Knox Private Hospital (VIC) – 60 beds In December 2014, Healthscope entered into a contract with the New South Wales Government to design, build, operate and maintain the new Northern Beaches Hospital in Sydney. The hospital will have 450 overnight beds, of which approximately 60% will be utilised by public patients. Construction of the hospital commenced in March 2015 and the hospital is expected to be operational in late 2018. International expansion With growing demand for healthcare services in Asia, Healthscope is actively assessing opportunities to leverage our hospital management expertise in the region. The most likely entry point into the Asian hospital market for Healthscope would be through a management contract or joint venture, which enables the leveraging of Healthscope’s operational expertise, knowledge and training capabilities. • Norwest Private Hospital (NSW) – 60 beds, 3 theatres International pathology • Gold Coast Private Hospital (QLD) – 284 beds, 13 theatres (net increase 64 beds and 3 theatres) New Zealand • Holmesglen Private Hospital – 144 and 8 theatres • John Fawkner Private Hospital – day surgery and ED upgrade • Geelong Private Hospital – 6 ICU beds • Nepean Private Hospital – Hybrid theatre expansion • Darwin Private Hospital – 2 theatres In addition to projects under construction, Healthscope has a further five projects that are Board approved and in the final stages of planning. • John Fawkner Private Hospital (VIC) – 42 beds, 2 theatres • Sunnybank Private Hospital (QLD) – 2 theatres, consulting suites, car parking, refurb • Northpark Private Hospital (VIC) – Emergency department • Frankston Private Hospital (VIC) – 60 beds, 2 theatres • Brisbane Private Hospital (QLD) – 60 beds, 4 theatres, day surgery and consulting suites Healthscope has a number of other projects in planning stages, and we expect the project pipeline to be added to over time given the strong underlying demand dynamics and the significant development potential within the portfolio. Governments partnerships and outsourcing In response to growing demand for healthcare services and a public system under increasing pressure, it is expected that State and Territory Governments will increasingly seek to partner with private hospital operators for the construction and operation of public hospitals, and outsourcing of some aspects of service delivery to the private hospital sector. As Australia’s second largest private hospital operator, with demonstrated leadership in quality and clinical outcomes, Healthscope is well positioned to capitalise on these opportunities. The priority for Healthscope in New Zealand is to continue to enhance its value proposition of high quality services and superior operational efficiencies to the District Health Boards (“DHBs”). In March 2015, Healthscope was awarded a new contract with three DHBs (Capital and Coast, Hutt Valley and Wairarapa) which will drive additional growth in FY16. Operationally, Healthscope is focused on extracting further economies of scale benefits, including cost synergies, through greater operational integration of its expanded laboratory network. Malaysia In Malaysia, Healthscope has identified a number of growth opportunities including pursuing additional hospital outsourcing contracts and new screening packages for community patients. Healthscope operates 26 laboratories across Malaysia and there are opportunities to improve workflow and efficiency through automation, as well as more centralised testing at the main laboratory. Opportunities for procurement efficiencies are also being explored through leveraging Healthscope’s group buying power. Singapore In Singapore, Healthscope is focused on greater penetration in the hospitals and specialists segments. Healthscope has identified potential for greater laboratory labour efficiencies through benchmarking and increased laboratory automation. In addition to labour efficiencies, further procurement savings are being targeted by leveraging Healthscope’s group purchasing power, consistent with our strategy in Malaysia. healthscope annual report 2015 | 29 Directors’ report Review of operations (continued) Private health insurance funds The majority of Heathscope’s revenue is derived from private health insurance funds. The profitability of Healthscope’s business is influenced by Healthscope’s ability to reach ongoing commercial agreement with private health insurance funds. Failure to reach a satisfactory commercial agreement with a key private health insurance fund has the potential to negatively impact the financial and operational performance of Healthscope. Healthscope maintains a regular dialogue with each of the private health insurance funds and continues to work closely with them on various strategies, including pay for quality initiatives, to deliver mutually beneficial outcomes to both parties as part of our on-going contract negotiations. Private health insurance fund membership and level of cover A worsening economic climate, changes in economic incentives, annual increases in private health insurance premiums and other factors may cause the number of members in private health insurance funds to fall or result in members choosing to decrease their level of private health insurance coverage, which has the potential to reduce demand for Healthscope’s services, resulting in decreased revenues. If the profitability of private health insurance funds deteriorates, there is a risk that private health insurance funds may put increased pricing pressure on private hospital operators such as Healthscope. Healthscope monitors private health insurance participation rates and engages with the private health insurers on a regular basis. Relationships with Accredited Medical Practitioners Accredited Medical Practitioners tend to prefer to work at hospitals that have high quality facilities, equipment, nursing staff and clinical safety outcomes and are conveniently located, amongst other factors. In the event Healthscope’s hospitals become less attractive to Accredited Medical Practitioners, there is a risk that Accredited Medical Practitioners will cease to practice at Healthscope’s hospitals or refer patients to Healthscope’s facilities. This, in turn, would adversely impact Healthscope’s financial and operational performance. Healthscope seeks to maintain a strong relationship with its Accredited Medical Practitioners through regular engagement to understand their preferences and requirements and operates its hospital portfolio within a strict quality and clinical framework to mitigate the risk of poor quality and clinical outcomes. Business strategies and prospects for future years (continued) Medical centres In the medical centres business, additional efficiencies are expected to be gained by maximising the number of patient consultations at existing centres, increasing the focus on cost management and strengthening the links between Healthscope’s medical centres and hospitals divisions, as well as the links between the medical centres and private health insurance funds. material business risks Healthscope has a risk management framework in place that facilitates the identification, assessment and reporting of material business risks at a business and Group level. Healthscope’s risk management framework is reviewed annually by the Audit, Risk and Compliance Committee, and the Committee reports to the Board in relation to its effectiveness. In addition, a Head of Assurance has been recently appointed who is responsible for standardising the approach to financial, strategic, emerging, clinical, operational, safety, environmental and legal risks. The material business risks that have the potential to impact achievement of the Group’s strategic priorities and business objectives, with relevant mitigation strategies, are outlined below. These risks should not be taken to be a complete or exhaustive list of the risks and uncertainties associated with Healthscope. Many of the risks are outside the control of the Directors. There can be no guarantee that Healthscope will achieve its stated objectives, that it will meet trading performance or financial results guidance that it may provide to the market, or that any forward looking statements contained in this report will be realised or otherwise eventuate. We have not included below the more generic risk areas that affect most companies or general economic factors that may impact Healthscope. Government policy and regulation Healthscope operates in healthcare industries which are subject to extensive laws and regulations relating to, among other things, the conduct of operations, the licencing and accreditation of facilities and the addition and development of facilities and services. There are a number of government policies and regulations that, if changed, may have a material adverse impact on the financial and operational performance of Healthscope. Healthscope monitors legislative and regulatory developments and engages appropriately with legislative and regulatory bodies to manage this risk. 30 | healthscope annual report 2015 Licences and accreditation Insurance If Healthscope is unable to secure or retain licences or accreditations for the operation of its hospitals and pathology laboratories (where required) in the future, or any of its existing licences or accreditations are adversely amended or revoked, this may adversely impact Healthscope’s ability to operate its businesses. This risk is mitigated by Healthscope’s comprehensive quality and clinical framework which seeks to ensure that facilities are maintained and operations are conducted to the standards required to retain licences and accreditation. Competition There is a risk that the actions of Healthscope’s current or potential future competitors will negatively affect Healthscope’s ability to: • Attract and retain Accredited Medical Practitioners to practice in Healthscope’s hospitals; • Successfully tender for District Health Board contracts in New Zealand; • Attract community pathology work in Singapore or Malaysia; and • Attract and retain General Practitioners to practice in Healthscope’s medical centres. Healthscope is focused on providing high quality healthcare services across all its businesses and maintaining facilities to a high standard, so it can effectively compete in its each of its markets. Nursing labour The most significant cost in Healthscope’s hospital operations is nursing labour. Increases in the cost of nursing labour or tightening of supply for nursing labour could have a material impact on the financial and operational performance of Healthscope. Healthscope has a comprehensive recruitment program for nurses, including an active graduate recruitment program. Healthscope employs a range of nurses with different levels of experience and qualifications, so that nursing labour is matched to clinical needs. Medical indemnity claims and associated costs Current or former patients may, in the normal course of business, commence or threaten litigation for medical negligence against Healthscope. Subject to indemnity insurance arrangements, future medical malpractice litigation, or threatened litigation, could have an adverse impact on the financial performance and position and future prospects of Healthscope. Healthscope actively monitors and manages potential and actual claims and disputes. Insurance coverage is maintained by Healthscope consistent with industry practice, including workers compensation, business interruption, property damage, public liability and medical malpractice. However, no assurance can be given that such insurance will be available in the future on commercially reasonable terms or that any cover will be adequate and available to cover all or any future claims. Healthscope’s insurance coverage is managed by an experienced team who works closely with respective insurers, and also ensures that any claims are appropriately handled. Development projects Healthscope enters into development projects in its regular course of business such as brownfield and “Relocate and Grow” hospital developments. There are a number of risks associated with development projects, including business disruption during construction, cost overruns, and delays in anticipated revenues flowing from proposed developments. Healthscope has project specific risk management and reporting systems in place and the progress and performance of material projects is regularly reviewed by senior management and the Board. New Zealand pathology contracts Healthscope currently has contracts with 13 District Health Boards for the provision of pathology services in New Zealand. There is a risk that each time a contract becomes due for renewal, the relevant District Health Board enters into a new contract with another party or renews the contract with Healthscope but on less favourable terms. The majority of these contracts are multi-year contracts and Healthscope seeks to maintain strong relationships with each of the District Health Boards to mitigate the risk that a contract is not renewed or renewed on unfavourable terms. International expansion Healthscope is exploring a range of international expansion opportunities. There is no certainty that any of these opportunities will result in new revenue streams and there is a risk that any new business venture may not be successful which could have a negative impact on Healthscope’s financial results and reputation. Healthscope undertakes comprehensive due diligence in relation to any prospective acquisition or partnership and takes a disciplined approach to investment of capital to mitigate these risks. healthscope annual report 2015 | 31 Directors’ report Review of operations (continued) Operating EBITDA The following table reconciles the net profit / (loss) for the year to Operating EBITDA which is the key performance metric used by management to assess the financial performance of each operating segment. YeaR eNDeD 30 JUNe 2015 YeaR eNDeD 30 JUNe 2014 $’000 $’000 153,723 (174,315) 64,762 70,305 89,848 (24,178) 407,513 84,113 293,133 53,035 18,445 Continuing operations Statutory net profit/(loss) for the year Add back Income tax expense / (benefit) Net finance cost Depreciation and amortisation earnings before income tax, finance costs depreciation, and amortisation (eBitDa) 378,638 Add back Other income and expense items Corporate Costs 2,201 21,769 operating earnings before finance costs, income tax, depreciation and amortisation (operating eBitDa) from continuing operations 402,608 364,613 Discontinued operations (Pathology australia) Statutory net profit/(loss) for the year Add back Income tax expense / (benefit) Net finance cost Depreciation and amortisation earnings before income tax, finance costs depreciation, and amortisation (eBitDa) Add back Other income and expense items operating earnings before finance costs, income tax, depreciation and amortisation (operating eBitDa) from discontinued operations (12,875) (8,836) (2,575) 249 11,599 (3,602) (4,954) 316 10,896 (2,578) 11,066 13,675 7,464 11,097 Operating EBITDA by reportable segments The following table provides an analysis of the Operating EBITDA achieved by each reportable segment for the financial year ended 30 June 2015. operating eBitDa Hospitals Australia Medical Centres Pathology International total all segments Corporate Pathology Australia (now discontinued) total all segments after corporate costs 32 | healthscope annual report 2015 YeaR eNDeD 30 JUNe 2015 YeaR eNDeD 30 JUNe 2014 $’000 $’000 327,595 296,858 15,032 59,981 402,608 (21,769) 7,464 388,303 14,984 52,771 364,613 (18,445) 11,097 357,265 Operating EBITDA Operating EBITDA represents profit before income tax expense, net finance costs, depreciation and amortisation adjusted for certain revenue and expense items that are unrelated to the underlying performance of the business. The Company believes that presenting Operating EBITDA provides a better understanding of its financial performance by facilitating a more representative comparison of financial performance between financial periods. Operating EBITDA is presented with reference to the Australian Securities and Investment Commission Regulatory Guide 230 “Disclosing non-IFRS financial information”. Earnings per share (unaudited) The directors have elected to present Earnings per Share (EPS) on both a statutory and pro forma basis. The calculation of “Statutory EPS” is presented in NOTE 19. The calculation of “Pro forma EPS” is presented below. Statutory EPS has been calculated in accordance with the requirements of Accounting Standards based on: • Profit after tax attributable to shareholders (Statutory Profit); and • The weighted average number of ordinary shares outstanding during the year ended 30 June 2015, which have been applied retrospectively in calculating EPS for the comparative period. The diluted average number of ordinary shares includes performance rights issued during the current year. Pro forma EPS is a non-IFRS measure which has been calculated based on: • “Operating EBITDA” which represents earnings before interest, taxation and, depreciation and amortisation, adjusted on a pro forma basis for: − The impacts arising from the change in debt profile upon IPO; − Related income tax effect (Pro forma Profit); and − Other income and expense items. • The weighted average number of ordinary shares outstanding during the financial year ended 30 June 2015, assuming the IPO of Healthscope Limited occurred on or prior to 1 July 2014: − Basic: 1,732,094,838 (30 June 2014: 1,732,094,838) − Diluted: 1,733,801,271 (30 June 2014: 1,732,094,838) The presentation of Pro forma EPS reflects the in-substance continuation of the “Healthscope Aggregated Group” within the financial report of Healthscope Limited, and is consistent with the basis of preparation adopted as disclosed within NOTE 1 under the heading Group reorganisation and comparative information. The Directors consider that the presentation of Pro forma EPS provides users with a better understanding of financial performance and allows for a more relevant comparison of financial performance between financial periods. 30 JUNe 2015 30 JUNe 2014 cents per share cents per share NOTE Continuing and Discontinued operations statutory ePs Basic Diluted Pro forma ePs Basic Diluted 19 19 8.6 8.5 10.0 10.0 (11.1) (11.1) 9.1 9.1 healthscope annual report 2015 | 33 Directors’ report Earnings per share (unaudited) (continued) Reconciliation of earnings used in calculating statutory and Pro forma ePs Statutory Profit / (loss) from continuing and discontinued operations 140,848 (183,151) Pro forma Profit (Unaudited) from continuing and discontinued operations 173,030 156,855 30 JUNe 2015 30 JUNe 2014 $’000 $’000 Statutory net profit / (loss) for the year (i) Add: Other income and expense items (i) Add: Interest expense related to the pre-IPO debt profile (ii) Less: Pro forma interest expense based on the post-IPO debt profile (iii) Less: Related tax effect (iv) Add: One-off tax items (v) Proforma Profit (unaudited) (i) From continuing and discontinued operations. 2015 $’000 2014 $’000 140,848 (183,151) 13,267 70,305 (45,739) 66,710 407,513 (45,739) (8,394) (112,964) 2,743 173,030 24,486 156,855 (ii) represents interest expense incurred during the period 1 July 2014 to 28 July 2014 based on the pre-Ipo debt profile of the Group. (iii) represents pro forma interest expense for the period 1 July 2014 to 28 July 2014 assuming the post-Ipo debt profile had been in place from 1 July 2014. (iv) represents the net tax effect associated with the pro forma interest expense adjustment as well as the tax effect attributable to other income and expense items. (v) one-off tax items relate to non-deductible expenses and one-off adjustments prior to Ipo which are not expected to arise in future years. State of affairs Initial Public Offering of Healthscope Limited On 30 June 2014, Healthscope Hospitals Holdings Pty. Ltd., the ultimate parent entity of the Healthscope Group, lodged a Prospectus with the Australia Securities and Investments Commission (“ASIC”) related to the listing and quotation of its ordinary shares on the Australian Securities Exchange (“ASX”) (the “Initial Public Offering” or “IPO”). On 3 July 2014, Healthscope Hospitals Holdings Pty. Ltd. became an unlisted public company and on 4 July 2014 changed its name to Healthscope Limited. The quotation of Healthscope Limited occurred 28 July 2014 under the ASX code: HSO, with shares trading on a conditional and deferred basis. Normal trading commenced on 4 August 2014. In conjunction with the IPO, a capital raising occurred by way of an issue of 1,073.9 million Fully Paid Ordinary Shares in Healthscope Limited at a price of $2.10 per share, being $2,255.2 million. In addition, Healthscope Limited drew down $995.0 million under its new banking facilities (before transaction costs). Proceeds from the capital raising received by Healthscope Limited and the draw down on the new banking facilities were used to: • Repay existing liabilities of the Healthscope Group including existing bank loans; • Fund the redemption of Healthscope Notes I and Healthscope Notes II (cash settlement portion); • Fund the settlement of liabilities outside of the Healthscope Group including shareholder loans and costs of the IPO; and • Repay equity to shareholders. As a result of the redemption of Healthscope Notes I & II, Healthscope Notes Limited was officially delisted from the ASX on 12 August 2014. Group reorganisation and comparative information In preparation for the IPO of Healthscope Limited, two group reorganisation transactions were undertaken which resulted in Healthscope Limited acquiring 100% of the shares in: − Healthscope Pathology Holdings Pty Ltd and its controlled entities (“Pathology Australia”) on 29 June 2014; and − CT HSP (Dutch) Cooperatief U.A. and its controlled entities (“Pathology International”) on 28 July 2014. 34 | healthscope annual report 2015 These transactions occurred whilst Healthscope Limited, Pathology Australia and Pathology International were under the common control of CT Healthscope Holdings L.P. CT Healthscope Holdings L.P was the legal parent entity of the Healthscope business for the period from 12 October 2010 (the date the Healthscope business was acquired by a consortium of funds advised and managed by TPG and The Carlyle Group) until its IPO on 28 July 2014. For consolidation purposes, the transactions have been accounted for as business combinations between entities under common control at carrying value. Consequently, the assets and liabilities have not been remeasured to fair value nor has any additional goodwill arisen. Accordingly, the assets and liabilities of both Pathology Australia and Pathology International continue to reflect their carrying values as per the accounting records of CT Healthscope Holdings L.P. immediately prior to acquisition by Healthscope Limited. The difference between the consideration given and the carrying value of the assets and liabilities acquired by Healthscope Limited has been recognised within equity as part of the “Group reorganisation reserve”. Hospital acquisitions and disposals On 1 July 2014, the Group acquired Frankston Private Day Surgery and Peninsula Oncology Centre for $5 million. On 22 July 2014, the Group disposed of its interests in the Brisbane Waters Private Hospital for $20 million, representing the carrying amount of the net assets. Subsequent events On 6 July 2015, Healthscope completed the sale of its Australian pathology operations to Crescent Capital Partners for A$105 million. As part of the sale, Healthscope have also agreed to transfer six skin clinics from its Medical Centre operations to Crescent. The consideration of A$105 million comprised cash proceeds of A$92.5 million and a promissory note of A$12.5 million. The resulting profit or loss on sale was not material. As set out in the Prospectus dated 30 June 2014, shares held in Healthscope by CT Healthscope Holdings L.P. (TPG/Carlyle) are subject to voluntary escrow arrangements. The number of shares subject to voluntary escrow was 658,195,966. The voluntary escrow arrangements expired, and the 658,195,966 shares were released from escrow, after the release of this financial report. Future developments Healthscope Limited is well positioned to expand its hospital facilities to meet additional patient demand. Planning is in place for the expansion of major hospital facilities for the next 10 years, with developments planned at a number of key hospitals. Where developments are planned, Healthscope has applied for development approvals, consistent with the hospital’s medium and long-term plans. This is intended to allow hospital expansions (including beds and operating theatres) to be delivered in a staged approach to meet patient demand, without the project delays which are associated with applying for new permits. Development applications typically last for two to four years (depending on the project) and can be extended for a further two to four years. New Zealand The priority for Healthscope in New Zealand is to continue to enhance its value proposition of high quality services and superior operational efficiencies to the District Health Boards (DHBs). Operationally, Healthscope is focused on extracting further economies of scale, including cost synergies, through the operational integration of its expanded laboratory network. Healthscope will seek to secure additional DHB contracts as they become contestable, and is well positioned to replace existing providers given its reputation for quality and service. Malaysia, Singapore and Vietnam In South East Asia, Healthscope is focused on further strengthening its market positions through an enhanced service offering and greater segmental market penetration. Across all its Asian pathology businesses, Healthscope has identified potential for greater laboratory labour efficiencies through benchmarking and increased laboratory automation. In addition to labour efficiencies, procurement savings can be achieved by leveraging Healthscope’s centralised purchasing power. In Malaysia, Healthscope has identified a number of growth opportunities including pursuing additional hospital outsourcing contracts and new screening packages for community patients. Beyond its existing pathology operations, Healthscope will also look to capitalise on its knowledge and experience in the region to actively explore further opportunities for growth. Environmental regulations The Healthscope Group is not subject to any significant environmental regulations under a law of the Commonwealth or of a state or territory. healthscope annual report 2015 | 35 Directors’ report Indemnification and insurance of officers and auditors During the financial year, the Healthscope Group paid a premium in respect of a contract insuring the directors of Healthscope Limited, the Company Secretary and Executives of the Healthscope Group against liability to the extent incurred as such a director, secretary or executive officer to the extent permitted by the Corporations Act 2001. It is a condition of the insurance contract that its limits of indemnity, the nature of the liability indemnified and the amount of the premium are not to be disclosed. The Healthscope Group has not otherwise, during or since the end of the financial year, except to the extent permitted by law, indemnified or agreed to indemnify an officer or auditor of the Healthscope Group or of any related body corporate against liability incurred as such an officer or auditor. Proceedings on behalf of the Healthscope Group No person has applied for leave of Court to bring proceedings on behalf of the Healthscope Group or intervene in proceedings to which the Healthscope Group is a party for the purpose of taking responsibility on behalf of the Healthscope Group for all or any part of those proceedings. The Healthscope Group was not a party to any such proceedings during the year. Rounding off of amounts The Company is an entity to which ASIC Class Order 98/100 applies. Accordingly, amounts in the financial statements and Directors’ Report have been rounded to the nearest thousand dollars, unless otherwise stated. 36 | healthscope annual report 2015 REmunERatiOn REPORt 1 introduction This has been a significant year for Healthscope, with the company’s successful Initial Public Offering seeing Healthscope return to the Australian Securities Exchange on 28 July 2014. The Board believes the company’s success depends on the performance of all Healthscope’s employees. The structure of the remuneration, particularly at the Senior Executive level, is a key component in driving positive outcomes for employees, shareholders and the company as a whole. Healthscope’s remuneration strategy and associated programs have therefore been specifically designed to align Senior Executive reward with the creation of shareholder value. Healthscope has reported a good overall FY15 result, achieving Operating EBIT1 of $286.9 million, an increase of 9.4% over the prior year. Remuneration outcomes in FY15 were consistent with Healthscope’s positive performance against financial targets and, accordingly, awards were made to Senior Executives under the Short-Term Incentive (STI) Plan. The Board considers that FY15 STI outcomes are consistent with shareholder outcomes across the same period. 2 Who does this report cover? This Report sets out the remuneration arrangements for the Healthscope Group’s Key Management Personnel (KMP) (who are listed in the table below). For the remainder of this Remuneration Report, the KMP are referred to as either Senior Executives or Non Executive Directors. Name PositioN Non Executive Directors Paula Dwyer Antoni Cipa Aik Meng Eng Simon Moore Chairman (Non Executive) Non Executive Director Non Executive Director Non Executive Director Rupert Myer AO Non Executive Director Senior Executives Robert Cooke Managing Director and Chief Executive Officer (CEO) Michael Sammells Chief Financial Officer (CFO) Mark Briscoe Anoop Singh General Manager Operations (GM Operations) Chief Operating Officer Pathology (COO Pathology)2 1. operating eBIt represents statutory earnings before interest, tax and other income and expense items (“non-operating items”) of $12.2 million (tax effected). refer to the review of operations section for further details. 2. anoop Singh’s job title changed to General Manager International pathology with the divestment of australian pathology. All Non Executive Directors and Senior Executives have held their positions for the duration of FY15. This Remuneration Report covers the entirety of FY15 (rather than only the period post Healthscope’s IPO) to ensure consistency with the basis of the preparation of the remainder of the financial report. 3.2 senior executive Remuneration The Board is committed to developing and maintaining a remuneration framework that is equitable and aligned with the long-term interests of Healthscope and its shareholders and which enables Healthscope to attract and retain skilled Senior Executives. The particular principles that guide the Board and the Remuneration Committee when setting Senior Executive remuneration and the links to the remuneration framework are illustrated below. In FY15 Senior Executive remuneration was made up of three components; Fixed Remuneration, STI paid in cash and Long Term Incentives (LTI) granted by way of performance rights to Healthscope shares (Performance Rights). 3 FY15 Remuneration policy and guiding principles 3.1 Non executive Director Remuneration Healthscope’s remuneration policy for Non Executive Directors aims to ensure that Healthscope can attract and retain suitably qualified and experienced Non Executive Directors having regard to: • The level of fees paid to Non Executive Directors of other major Australian companies; • The size and complexity of Healthscope’s operations; and • The responsibilities and work requirements of Board members. • Ensure remuneration structures are equitable and aligned with the long-term interests of Healthscope and its RemUNeRatioN PRiNCiPLes shareholders; • Attract and retain skilled Senior Executives; • Structure short and long term incentives that are challenging and linked to the creation of sustainable shareholder returns; and • Ensure any termination benefits are justified and appropriate. RemUNeRatioN FRamewoRk FY15 Fixed Remuneration reflects seniority, complexity, nature and size of the role At risk reward is performance-based, with a mix of STI and LTI aligned with Healthscope’s strategic direction to deliver value to shareholders in both the short and long term. FixeD at Risk total Fixed Remuneration (tFR) – cash • Reviewed annually • Formal benchmarking against peer companies with Senior Executive Fixed Remuneration generally positioned around the peer median Influenced by individual performance • short term incentives (sti) – cash For the CEO and CFO: • Determined based on performance against financial targets • STI target opportunity at 100% of Total Fixed Remuneration (TFR); maximum opportunity set at 200% of TFR For other Senior Executives: • Determined based on financial measures • A ‘gateway’ applied - 90% of overall company EBIT target must be achieved before any STI was earned • STI opportunity set at between 50% and 100% of TFR Long term incentives (Lti) – Performance Rights • The FY15 LTI grant was made in the form of Performance Rights (i.e. rights to receive shares in Healthscope if the TSR and EPS performance measures are satisfied at the end of the measurement period) • For the CEO and CFO, the LTI opportunity set at 117% of TFR • For other Senior Executives, the LTI opportunity set at either 50% or 60% of TFR healthscope annual report 2015 | 37 Directors’ report 4 Remuneration governance framework Healthscope did not receive any ‘remuneration recommendations’ as defined under the Corporations Act 2001 in FY15. 4.1 Role of the Board and Remuneration Committee The Board is responsible for ensuring that Healthscope’s remuneration structures are equitable and aligned with the long-term interests of Healthscope and its stakeholders. The Remuneration Committee, established by the Board, is made up of a majority of independent directors, with responsibility for reviewing key aspects of Healthscope’s remuneration structure and arrangements. The Remuneration Committee reviews and recommends to the Board: • Arrangements for the Executive directors, the Senior Executives and other executives reporting to the CEO (including annual remuneration and participation in incentive plans); • Major changes and developments to employee incentive plans; and • Remuneration arrangements for Non Executive Directors. 4.2 Remuneration consultants and other advisors The Remuneration Committee consulted with various external advisers during the process of developing Healthscope’s remuneration framework. The Committee intends to continue to obtain external independent advice when required, and will use it to guide and inform their considered decision-making. 5 Remuneration changes for FY16 5.1 sti changes Key changes have been made to the STI component of Senior Executive remuneration in FY16 to ensure that the remuneration structure is well suited to the company’s new listed environment. The STI will be restructured from a 100% financial focus, to include strategically aligned, individually focused quantitative KPIs that will account for 30% of the target reward. In addition, Senior Executives receiving an STI award under this new structure will in FY16 have 30% of any reward deferred into Performance Rights to Healthscope shares that will vest after a two-year period. The maximum STI opportunity for the CEO and CFO has been reduced from 200% of TFR to 150% of TFR, whilst stretch targets will be introduced for all other Senior Executive STI Plan participants. The diagram below shows the impact of the introduction of STI deferral in FY16, as compared with the FY15 remuneration structure. FY15 FY16 FY17 FY18 FY19 Total Fixed Remuneration Determined based on: • Market Benchmarking Short Term Incentive At-risk based on financial KPIs Long Term Incentive At-risk based on performance against Relative TSR (25%) and Absolute EPS (75%) measures i r o n e S 5 1 Y F i r o n e S 6 1 Y F n o i t a r e n u m e R e v i t u c e x E n o i t a r e n u m e R e v i t u c e x E Vesting period Total Fixed Remuneration Determined based on: • Market Benchmarking • FY15 Performance Short Term Incentive At-risk based on non-financial KPIs Long Term Incentive At-risk based on performance against Relative TSR and Absolute EPS measures Deferred Short Term Incentive Time based Rights vesting after two years Vesting period Vesting period 38 | healthscope annual report 2015 5.2 Lti changes Participation in Healthscope’s LTI Plan will be broadened to include other executives. 5.3 Remuneration mix changes In addition to the STI and LTI changes above, some rebalancing of remuneration components will also occur in FY16 to ensure greater consistency across the Senior Executive group, as shown in the table below. FY15 FY16 FY15 FY16 FY15 FY16 FY15 FY16 O E C O F C s n o i t a r e p O l y g o o h t a P M G O O C 32 31 32 31 47 47 50 47 32 31 32 31 24 24 24 25 36 38 36 38 29 29 25 29 Fixed Remuneration STI LTI In FY15, the CEO and CFO had a target and stretch STI opportunity while the GM Operations and COO Pathology had a single maximum STI opportunity (i.e. they did not have a stretch opportunity). In FY16, the GM Operations and COO Pathology will also have target and stretch opportunities. Accordingly, for year on year comparative purposes, in this table, the GM Operations and COO Pathology’s maximum STI opportunity in FY15 has been halved so that it mirrors a remuneration mix with a target and stretch opportunity. The Board believes that these changes will provide a competitive remuneration structure that strengthens the alignment of Senior Executives’ interests with the long-term success of Healthscope and its shareholders and serves to retain skilled Senior Executives who are important contributors to the company’s success. 6 non Executive Director remuneration 6.1 Current Non executive Director fee pool The current Non Executive Director fee pool was set by Healthscope at a general meeting on 28 June 2014 at $2,000,000 per annum. 6.2 Non executive Director fee structure Position Chairman Non Executive Director Committee Chairman Committee Member BoaRD Committees Audit Risk and Compliance Committee Remuneration Committee Nominations Committee 1 Board Fees $475,000 2 $150,000 $30,000 $20,000 $30,000 $20,000 notes: all director fees include superannuation, as applicable. until further notice, the non executive Director nominated by the Carlyle Group, Simon Moore, has waived his entitlement to any Board and Committee fees. the non executive Director nominated by tpG, aik Meng eng, has waived his entitlement to any Board and Committee fees from the date of listing. 1. Included in Board fees. 2. Fees include services on all committees. healthscope annual report 2015 | 39 Directors’ report 6 non Executive Director remuneration (continued) Other payments may be made for additional services outside the scope of Board and Board Committee duties. Non Executive Directors are also entitled to be reimbursed for all travel and other expenses reasonably incurred in attending to Healthscope’s affairs. 6.3 iPo specific arrangements As disclosed in Healthscope’s Prospectus, Non Executive Directors, Paula Dwyer, Tony Cipa and Rupert Myer, subscribed for shares in the IPO at the final IPO price of $2.10 per share and were issued with offer bonus shares at no cost. The issue of offer bonus shares to the Non Executive Directors was intended to align their interests with those of shareholders. 7 Senior Executive remuneration in detail 7.1 Fixed Remuneration Fixed Remuneration is made up of cash salary, superannuation and other approved benefits. Benchmarking of Fixed Remuneration of the Senior Executives was conducted during FY15 against peer companies. Fixed Remuneration of Senior Executives is generally positioned around the peer median. 7.2 short term incentive The STI Plan, (including its performance conditions) is designed to provide increased focus on and reward for performance against those areas that most significantly drive the delivery of Healthscope’s strategic initiatives. Targets were set at the commencement of FY15 and assessed at the end of the financial year, based on the company’s audited annual results. Potential awards are expressed as a percentage of Fixed Remuneration. For FY15, awards were paid in cash. For Senior Executives, other than the CEO and CFO, a gateway was in place which means a minimum of 90% of the Group EBIT target must be achieved before any incentives are paid. There was no gateway in place for the CEO and CFO. STI KPIs For FY15, all STI targets for Senior Executives were financial, based on prospective forecasts for Group, and/or Divisional or State EBIT targets. These are set out below: taRGets aND weiGHtiNGs (as a PeRCeNtaGe oF tHe maximUm PoteNtiaL RewaRD) seNioR exeCUtiVe PositioN Robert Cooke MD & CEO Michael Sammells CFO Mark Briscoe Anoop Singh GM Operations COO Pathology GRoUP oPeRatiNG eBit HosPitaL DiVisioN oPeRatiNG eBit PatHoLoGY aUstRaLia oPeRatiNG eBit PatHoLoGY iNteRNatioNaL oPeRatiNG eBit 100% 100% 50% 20% 50% 40% 40% Performance against financial targets is assessed by the Board following the release of the company’s annual audited results to ensure transparency of outcomes. 7.2.1 Cessation of employment On cessation of employment, Senior Executives are not entitled to any unpaid STI, other than where the Senior Executive resigns for illness or other approved reasons, or where employment is terminated due to redundancy. In such cases, the Senior Executive, subject to Board discretion, may receive a pro-rata STI award based on performance over the period of the year that they were employed. For the CEO and CFO, STI is not payable where the CEO or CFO has resigned and employment terminates before the payment becomes payable (as determined at the sole discretion of the Board). STI is payable if the STI becomes due and employment is terminated by the Company. 40 | healthscope annual report 2015 7.2.2 STI Awards for FY15 In relation to the Senior Executive STI KPIs for FY15, all EBIT KPIs were met at target, other than the Pathology Australia EBIT target. The CEO and CFO did not achieve their stretch targets. Details of STI outcomes for the FY15 performance year are set out in the table below. These outcomes were formalised immediately prior to issue of this financial report based on the company’s audited results for FY15. Percentage of STI paid and forfeited for Senior Executives seNioR exeCUtiVe Robert Cooke Michael Sammells Mark Briscoe Anoop Singh 7.3 Long term incentive PositioN MD & CEO CFO GM Operations COO Pathology aCtUaL sti awaRDeD ($) 1,500,000 685,956 398,748 108,397 aCtUaL sti awaRDeD as % oF maximUm sti % oF maximUm sti awaRD FoRFeiteD 50% 50% 100% 60% 50% 50% 0% 40% The LTI Plan is designed to align the interests of Senior Executives with the interests of shareholders by providing the opportunity for participants to receive an equity interest in Healthscope through the granting of Performance Rights. Growth remains a key plank of Healthscope’s strategic plan and it is appropriate that Senior Executives be incentivised around measures which demonstrate sustainable growth. The LTI Plan also acts to retain key executives who have the capacity to influence company strategy and direction and therefore supports company performance and the interests of shareholders over the longer term. Grants pursuant to the LTI Plan are made a face value. Healthscope introduced the LTI Plan at the time of IPO and the FY15 LTI grant delivered awards in the form of Performance Rights. Each Performance Right entitles the holder to acquire one ordinary share in Healthscope on satisfaction of performance conditions. Performance Rights were granted at no cost to the participants as they form part of remuneration. The Performance Rights are subject to two separate performance measures – 75% of the LTI grant is measured against Absolute Earnings Per Share (EPS as defined in section 7.3.3) and 25% of the LTI grant is measured against Relative Total Shareholder Return (RTSR). Performance is tested against these measures at the end of the performance period, being 30 June 2017. Performance Rights do not carry any voting or dividend entitlements. Pursuant to the LTI Plan Rules, the Board also has broad “clawback” powers to determine that Performance Rights lapse or are forfeited, or that amounts are to be repaid in certain circumstances (e.g. in the case of serious misconduct). This protects Healthscope against the payment of LTI benefits where participants have acted inappropriately. Grants under the LTI Plan are expressed as a percentage of Total Fixed Remuneration. Grants for FY15 ranged from 50% to approximately 120% of Fixed Remuneration. The diagram on following page is a snapshot of the terms and conditions applying to the LTI arrangements for all Senior Executives in FY15, with further details of the LTI arrangements outlined in sections 7.3.1–7.3.6 on following page. healthscope annual report 2015 | 41 Directors’ report 7 Senior Executive remuneration in detail (continued) 7.3 Long term incentive (continued) LTI opportunity Performance conditions 25% – TSR component 75% – EPS component Tested based on Earnings Per Share over a three year period Gateway Absolute TSR threshold of 7.5% Tested based on relative TSR against peer group over a 3 year period ASX Peer Group 7.3.1 Participation All Senior Executives participated in the LTI Plan in FY15. 7.3.2 Performance Hurdles The LTI Plan has dual performance hurdles – EPS and RTSR (with an absolute TSR gate or threshold of 7.5% to be achieved before RTSR can be assessed). The mix of measures means that both lead indicators (indicative of Healthscope business operations) and lag indicators (reflecting the market’s reaction to the company’s past performance) are utilised. The EPS measure was selected because of its correlation with long term shareholder return and its lower susceptibility to short term share price volatility. This measure also provides a greater ‘line of sight’ between Senior Executives’ actions and the way in which their performance is measured. Consequently, this component was more heavily weighted in order drive performance and provide an appropriate retention incentive. RTSR measures the performance of an ordinary Healthscope share (including the value of any cash dividend and any other shareholder benefits paid during the period) against total shareholder return performance of a comparator group of companies, comprising a segment of the S&P ASX100 Index, over the same period. The Board believes that RTSR is an appropriate hurdle, as it links Senior Executive reward to Healthscope’s relative share performance which is consistent with creating shareholder value relative to Healthscope’s peer group. No reward is achieved unless Healthscope’s TSR is higher than the median of this comparator group. These hurdles and vesting schedules are set out below: aBsoLUte ePs PeRFoRmaNCe (75% weiGHtiNG) Less than the threshold target Equal to the threshold target Greater than the threshold target, up to maximum target ReLatiVe tsR PeRFoRmaNCe (25% weiGHtiNG) PoRtioN oF PeRFoRmaNCe RiGHts tHat wiLL Vest aGaiNst ReLeVaNt taRGet Less than the 50th percentile At 50th percentile Nil 50% Between 50th and 75th percentile Straight line vesting between 50% and 100% At or above maximum target At or above the 75th percentile 100% 42 | healthscope annual report 2015 7.3.3 Measurement The performance period for the FY15 grant runs from the date that Healthscope was listed on the ASX (28 July 2014) to 30 June 2017. The slightly shorter than three year period was determined so that the end of the period aligns with Healthscope’s financial reporting calendar. Before the RTSR hurdle is measured, the Company must obtain a minimum TSR of 7.5% over the performance period. If this gateway is not achieved, no awards will vest, regardless of the RTSR performance. For the FY15 grant, RTSR performance is independently assessed over the performance period against a peer group comprising constituents of the S&P ASX 100 index (excluding companies classified as banks, energy, metals and mining, trusts and overseas domiciled companies). No retesting is permitted. EPS is calculated using net profit after tax excluding other income and expense items (Operating profit after tax), divided by the weighted average number of shares on issue during the year. For the FY15 grant, two methods have and will be used in setting EPS targets. Healthscope as a newly listed company could not draw upon recent EPS data to use as a basis for setting EPS targets. The EPS target for Year 1 (FY15) was therefore set on the basis of financial forecasts in Healthscope’s Prospectus. Targets for the subsequent two years of the grant will be set annually by the Board, based on budgeted EPS performance for each year. EPS results for the three years will be averaged to provide an overall outcome for the performance period. An average threshold of 50% of target over the performance period must be reached before any Performance Rights measured against the EPS target can vest. 7.3.4 Cessation of Employment Where a participant ceases employment for cause or due to resignation (other than due to death, ill health or disability) all unvested Performance Rights will automatically lapse. In all other circumstances, the Performance Rights will remain on foot and subject to the original performance conditions, as if the participant had not ceased employment. However, pursuant to the LTI Plan Rules, the Board retains absolute discretion to determine, vest or lapse some or all Performance Rights in all circumstances. 7.3.5 Change of Control Where there is likely to be a change of control, the Board has the discretion to accelerate vesting of some or all of the Performance Rights. Where only some of the Performance Rights are vested on a change of control, the remainder of the Performance Rights will immediately lapse. If a change of control occurs before the Board exercises its discretion, a pro-rata portion of the Performance Rights (equal to the portion of the relevant Performance Period that has elapsed up to the change of control) will immediately and automatically vest. 7.3.6 Performance Rights Granted for FY15 seNioR exeCUtiVe Robert Cooke Michael Sammells Mark Briscoe Anoop Singh PositioN MD & CEO CFO GM Operations COO Pathology NUmBeR oF RiGHts GRaNteD 833,334 380,953 113,668 GRaNt Date 28 July 2014 28 July 2014 28 July 2014 85,834 28 July 2014 FaCe VaLUe at GRaNt Date $ 2.10 2.10 2.10 2.10 healthscope annual report 2015 | 43 Directors’ report 7 Senior Executive remuneration in detail (continued) 7.4 Company performance for FY15 The table below provides a snapshot of Healthscope’s performance over FY15. The link between Healthscope’s performance and STI outcomes is considered above at section 7.2.3. sHaRe PeRFoRmaNCe ($) eaRNiNGs PeRFoRmaNCe ($m) LiqUiDitY Closing share price (A$) Dividend p/share (cents) TSR1 (%) EPS (cents) Statutory EBIT ($M) Statutory NPAT ($M) Operating profit after tax ($M) ROE (%) Net cash provided by operating activities ($M) Debt Equity Ratio % 2.72 3.3 31 8.6 288.8 140.9 153.7 6.1 301.8 51 1. the opening share price on 28 July 2014 was $2.10. Dividends include only those amounts declared and paid up to 30 June 2015. In the future, Healthscope will be able to provide comparative metrics for previous financial years during which it was listed. In FY15, Healthscope has delivered on its Prospectus forecasts, continued to invest in its strong pipeline of growth opportunities and has provided the highest standards of healthcare to nearly ten million patients in Australia, New Zealand and South East Asia. 7.5 iPo specific arrangements 7.5.1 Legacy LTI Plan All Senior Executives were previously participants in Healthscope’s legacy 2012 LTI Plan, which provided participants with the capacity to acquire options and zero exercise priced options over shareholder loan notes in entities in the Group (Options). The legacy LTI plan was broadly based, covering approximately 50 participating executives and senior managers. The Options were subject to both performance and service conditions. Under the terms of the Senior Executives’ employment agreements, in the event of an IPO, any unvested Options vested and became exercisable provided that the Senior Executive continued to be employed by Healthscope at the date of the IPO. The Options over shareholder loan notes in Group companies (as outlined below) held by the Senior Executives at 1 July 2014 were: seNioR exeCUtiVe Robert Cooke Michael Sammells Mark Briscoe Anoop Singh PositioN MD & CEO CFO GM Operations COO Pathology oPtioNs iN HeaLtHsCoPe HosPitaLs HoLDiNGs PtY LtD (Now tHe ComPaNY) oPtioNs iN HeaLtHsCoPe PatHoLoGY HoLDiNGs PtY LtD (Now a sUBsiDiaRY oF tHe ComPaNY) 5,042,378 2,779,774 937,365 581,811 541,853 298,715 100,729 62,521 All Options vested prior to the IPO. The Senior Executives were entitled to sell the vested Options and were required to reinvest 50% (in the case of Robert Cooke) and 60% (for other Senior Executives) of the after tax proceeds in Healthscope shares to be issued at the final IPO price of $2.10 per share. These shares cannot be disposed of or otherwise dealt with until two years after completion of the IPO (being 31 July 2016) and are subject to voluntary escrow during this period. If a Senior Executive gives notice of resignation during that period, other than in the case of death, total permanent disability or terminal illness, the shares will be forfeited. See section 8.4 for further details on KMP shareholdings. 44 | healthscope annual report 2015 7.5.2 Retention Payments In order to focus the efforts of Senior Executives on achieving an IPO and to encourage management stability post Healthscope’s IPO, one–off retention payments were made to Senior Executives. These payments (less any amount of taxation payable by the Senior Executive) were applied as a subscription payment for Healthscope shares at the final IPO price of $2.10 per share. These shares cannot be disposed or otherwise dealt with until two years after completion of the IPO (being 31 July 2016) and are subject to voluntary escrow. If a Senior Executive gives notice of resignation during this period, other than in the case of death, total permanent disability or terminal illness, the shares will be forfeited. See section 8.4 for further details on KMP shareholdings. 7.6 key terms of executive service agreements All Senior Executives are party to a written Executive service agreement with Healthscope Operations Pty Ltd (ACN 006 405 152) (a wholly owned subsidiary of Healthscope). 7.6.1 Key terms of Executive Service Agreement for CEO DURatioN oNGoiNG Periods of notice required to terminate Termination payments Restraint of trade 12 months’ notice by either party in writing is required to terminate the contract other than where employment is terminated for dishonesty, fraud, wilful disobedience or misconduct (in which case no notice is payable). Payment in lieu of all or a portion of the notice period may be made at the Company’s discretion. May not exceed the maximum amount which the Company is permitted to pay the CEO under the Corporations Act. STI is not payable where the CEO has resigned and terminates before the payment becomes payable (as determined at the sole discretion of the Board). STI is payable if the STI becomes due and employment is terminated by the Company. Average base salary is payable during any restraint period. Unvested securities will be treated in accordance with the relevant Plan Rules. The CEO is restrained from competing with Healthscope or other members of the Healthscope Group during his employment and for up to 12 months post termination of his employment. 7.6.2 Key terms of Executive Service Agreements for other Senior Executives DURatioN oNGoiNG Periods of notice required to terminate Termination payments CFO – 12 months’ notice by either party in writing is required to terminate the contract other than where employment is terminated for dishonesty, fraud, wilful disobedience or misconduct (in which case no notice is payable). Other Senior Executives have 6 months’ notice periods (other than where employment is terminated for serious misconduct, in which case no notice is payable). Payment in lieu of all or a portion of the notice period may be made at the Company’s discretion. May not exceed the maximum amount which the Company is permitted to pay the Senior Executive under the Corporations Act. CFO – STI is not payable where the CFO has resigned and terminates before the payment becomes payable (as determined at the sole discretion of the Board). STI is payable if the STI becomes due and employment is terminated by the Company. Average base salary is payable during any restraint period. Unvested securities will be treated in accordance with the relevant Plan Rules. Restraint of trade The CFO is restrained from competing with Healthscope or other members of the Healthscope Group during his employment and for up to 12 months post termination of his employment. For other Senior Executives, non-solicitation provisions (relating to employees, contractors and medical officers) of between six and 12 months are in place. The Corporations Act restricts the termination benefits that can be provided to KMP on cessation of their employment, unless shareholder approval is obtained. The shareholders of the Company and Healthscope Operations Pty Ltd approved the termination arrangements of Robert Cooke and Michael Sammells at a general meeting on 28 June 2014. healthscope annual report 2015 | 45 Directors’ report 8 important statutory remuneration disclosures 8.1 senior executive remuneration – statutory disclosures The following table sets out the statutory disclosures required under the Corporations Act 2001 (Cth)^ and in accordance with the Accounting Standards. sHoRt-teRm emPLoYee BeNeFits Post- emPLoYmeNt BeNeFits otHeR LoNG teRm BeNeFits sHaRe-BaseD PaYmeNts Cash Salary BonusesA Non- Monetary BenefitsB Other Super- annuation benefits Other Long Service LeaveC Shares RightsD Total senior executives Robert Cooke 1,442,766 1,500,000 Michael Sammells 650,956 685,956 Mark Briscoe 368,748 398,748 Anoop Singh 342,542 108,397 5,605 6,708 5,605 5,605 total 2,805,012 2,693,101 23,523 – – – – – 35,000 35,000 30,000 18,783 118,783 – – – – – 33,561 – 439,789 3,456,720 8,466 5,156 6,111 53,294 – 201,046 1,588,133 – – – 59,988 868,244 45,299 526,737 746,121 6,439,834 a Bonus payments relate to FY15 StI and will be paid in FY16. B the amounts disclosed as non-monetary benefits relate to car spaces, professional fees and other similar items. C reflects the value of the movement in long service leave entitlement and was not actually paid to the employee. D the value of rights granted to the Senior executives is based on the fair value, measured using a Monte Carlo simulation for the rtSr performance rights and a Black Scholes valuation model for the epS performance rights. the factors and assumptions used in determining the fair value on grant date are set out in note 39 of the financial statements. ^ In accordance with the Corporations act, as this is the first year in which the Company is reporting on remuneration for each of the KMp, the Company is not required to provide comparative information for the prior year (i.e. FY14). 8.2 movements in rights held by senior executives The following table sets out the movement during FY15, by number and value, of rights held by each Senior Executive. BaLaNCe 1 JULY 2014 GRaNteD GRaNteDa VesteD VesteD VesteD LaPseD LaPseD VaLUe LaPseD BaLaNCe 30 JULY 2015 No. value No. value % No. value % executive Directors Robert Cooke senior executives Michael Sammells Mark Briscoe Anoop Singh – – – – 833,334 1,393,751 380,953 637,144 113,668 190,110 85,834 143,557 – – – – – – – – – – – – – – – – – – – – – – – – 833,334 380,953 113,668 85,834 a the value of rights granted in the year is the fair value of the rights calculated at grant date using the Monte Carlo simulation model for the rtSr performance rights and a Black Scholes valuation model for the epS performance rights. 46 | healthscope annual report 2015 8.3 Non executive Director remuneration – statutory disclosures The following table sets out the statutory disclosures required under the Corporations Act 2001 (Cth)^ and in accordance with the Accounting Standards. sHoRt-teRm emPLoYee BeNeFits Post-emPLoYmeNt BeNeFits totaL Board & Committee fees 425,217 170,237 18,150 – 170,237 783,841 Non-Monetary BenefitsA Other Benefits (non-cash) Termination Benefits Superannuation Benefits Remuneration for services as Non Executive Director 100,000 50,001 – – 50,001 200,002 – – – – – – – – – – – – 17,218 16,173 1,724 – 542,435 236,411 19,874 – 16,173 236,411 51,288 1,035,131 Paula Dwyer (Chairman) Tony Cipa Aik Meng Eng Simon Moore Rupert Myer AO total a Value of offer bonus shares received as part of the Ipo. B Board and Committee fees and superannuation benefits were payable to paula Dwyer, tony Cipa and rupert Myer from the date of Ipo on 28 July 2014. Simon Moore has waived his right to fees. aik Meng eng also waived his right to fees from the date of Ipo on 28 July 2014. the $18,150 paid to aik Meng eng in Board and Committee fees represents fees paid in respect of the period from 1 July 2014 to 28 July 2014. ^ In accordance with the Corporations act, as this is the first year in which the Company is reporting on remuneration for each of the KMp, the Company is not required to provide comparative information for the prior year (i.e. FY14). 8.4 kmP shareholdings The following table summarises the movements in the shareholdings of KMP (including their personally related entities) for FY15. No. oF sHaRes HeLD at ListiNG Date HeLD FoLLowiNG iPo ReCeiVeD as RemUNeRatioN otHeR Net CHaNGe HeLD at 30 JUNe 2015 Directors Paula Dwyer Tony Cipa Rupert Myer AO Aik Meng Eng Simon Moore Robert Cooke senior executives Michael Sammells Mark Briscoe Anoop Singh – – – – – – – – – 95,238A 95,238A 238,095A – – 1,799,314B 1,122,154B 399,717B 267,880B – – – – – – – – – 4,762 – – – – – – – – 100,000 95,238 238,095 – – 1,799,314 1,122,154 399,717 267,880 a this includes shares acquired in the Ipo, as well as offer bonus shares. B this is the number of shares the Senior executives subscribed for in the Ipo using the one off retention payments and proceeds from the vested options under the legacy ltI plan. healthscope annual report 2015 | 47 Directors’ report non-audit services Details of amounts paid or payable to the auditor for non-audit services provided during the year are outlined in NOTE 36 to the financial statements. The Directors are satisfied that the non-audit services provided by the auditor are compatible with the general standard of independence for auditors imposed by the Corporations Act 2001. auditor independence The auditor’s independence declaration is included on Page 49 of the financial report. Signed in accordance with a resolution of the Directors Paula J. Dwyer Chairman Melbourne, 25 August 2015 48 | healthscope annual report 2015 Independent Auditor’s report healthscope annual report 2015 | 49 Independent Auditor’s report 50 | healthscope annual report 2015 Auditor’s Independence declaration healthscope annual report 2015 | 51 Consolidated statement of profit or loss and other comprehensive income Continuing operations Revenue Share of profits of joint ventures Employee benefits expense Medical and consumable supplies Prosthetics expenses Occupancy costs Service costs Other income and expense items Profit before finance costs, income tax, depreciation and amortisation Depreciation and amortisation Profit before finance costs and income tax Net finance costs Profit/ (loss) before income tax Income tax benefit / (expense) Profit/ (loss) for the year from continuing operations Discontinued operations Note 5 15 7(b) 8 7(c) 6 9 2015 $’000 2014 $’000 2,156,634 2,037,573 2,032 1,946 (951,474) (915,252) (281,962) (271,585) (271,712) (255,968) (76,111) (73,382) (196,568) (177,174) (2,201) 378,638 (89,848) (53,035) 293,123 (84,103) 288,790 209,020 (70,305) (407,513) 218,485 (198,493) (64,762) 24,178 153,723 (174,315) Net profit / (loss) for the year from discontinued operations 14 (12,875) (8,836) Net PRoFit / (Loss) FoR tHe YeaR 140,848 (183,151) other comprehensive income, net of income tax Items that may be reclassified subsequently to profit or loss Exchanges differences arising on translation of foreign operations Reclassification of hedge reserve through profit or loss Gain / (loss) on cash flow hedges taken directly to equity Income tax benefit relating to other comprehensive income other comprehensive income for the year, net of tax total comprehensive income / (loss) for the year earnings per share From continuing and discontinued operations Basic (cents per share) Diluted (cents per share) From continuing operations Basic (cents per share) Diluted (cents per share) The accompanying notes numbered 1 to 39 form part of this financial report. (6,272) – (7,146) 2,144 (11,274) 129,574 19,484 28,316 17,193 (13,654) 51,339 (131,812) 19 19 19 19 8.6 8.5 9.4 9.3 (11.1) (11.1) (10.6) (10.6) 52 | healthscope annual report 2015 for the year ended 30 June 2015 Consolidated statement of financial position as at 30 June 2015 Note 2015 $’000 2014 $’000 CURReNt assets Cash and cash equivalents Trade and other receivables Inventories Prepayments Assets classified as held for sale totaL CURReNt assets NoN-CURReNt assets Other financial assets Other receivable Investments in joint ventures Property, plant and equipment Intangibles Deferred tax assets totaL NoN-CURReNt assets totaL assets CURReNt LiaBiLities Trade and other payables Current tax liabilities Deferred revenue Borrowings Other financial liabilities Provisions Liabilities directly associated with assets classified as held for sale totaL CURReNt LiaBiLities NoN-CURReNt LiaBiLities Borrowings Other financial liabilities Deferred tax liabilities Provisions totaL NoN-CURReNt LiaBiLities totaL LiaBiLities Net assets eqUitY Issued capital Reserves Accumulated losses totaL eqUitY The accompanying notes numbered 1 to 39 form part of this financial report. 31(a) 217,705 10 11 13 12 10 15 16 17 9 18 9 20 21 22 13 20 21 9 22 23 25 24 96,361 52,854 14,839 140,363 522,122 2,570 43,842 1,001 138,189 108,608 50,621 16,454 21,300 335,172 2,505 – 911 1,414,726 1,238,291 1,803,035 1,852,237 193,780 247,455 3,458,954 3,341,399 3,981,076 3,676,571 229,886 215,183 3,982 949 4,606 1,311 8,592 2,217,773 10,538 112,730 40,387 554,986 115,164 1,703 407,064 3,110,726 1,167,923 11,131 4,252 52,608 43,483 – 54,819 49,265 1,268,266 115,215 1,675,330 3,225,941 2,305,746 450,630 2,697,237 1,219,805 (259,609) (249,236) (131,882) (519,939) 2,305,746 450,630 healthscope annual report 2015 | 53 Consolidated statement of cash flows Continuing and Discontinued operations CasH FLows FRom oPeRatiNG aCtiVities Receipts from customers Payments to suppliers and employees Cash generated from operations Interest received Interest and costs of finance paid Income tax paid Other income and expense items Net cash provided by operating activities CasH FLows FRom iNVestiNG aCtiVities Proceeds from disposal of property, plant and equipment Proceeds from disposal of operations Payments for property, plant and equipment Brownfield facility development payments for plant and equipment Gold Coast facility development payments for plant and equipment Northern Beaches facility development payment for plant and equipment Payments for operating rights Proceeds from ACHA loan Payment of deferred settlement Net payments for business combinations Net cash used in investing activities CasH FLows FRom FiNaNCiNG aCtiVities Repayment of borrowings - Healthscope Notes I & II Proceeds from bank borrowings Repayments of bank borrowings Repayments of other borrowings Repayment of shareholder loans and related costs Proceeds from issue of new shares Transaction costs relating to issue of new shares Interest paid on early redemption of interest rate hedges Proceeds from project finance Net proceeds from / (repayment of) receivables securitisation Finance leasing Dividends paid Facility fees paid Net cash provided by / (used in) finance activities Net increase in cash and cash equivalents Cash and cash equivalents at the beginning of the year Cash and cash equivalents transferred to assets classified as held for sale Effects of exchange rate changes on the balance of cash held in foreign currencies Note 2015 $’000 2014 $’000 2,428,620 2,329,484 (2,050,980) (1,963,874) 31(c) 30 30 377,640 3,679 (58,328) (10,731) (10,446) 301,814 3,153 20,606 (83,351) (90,147) (100,504) (85,250) (3,540) 2,000 (400) (4,555) 365,610 2,578 (177,660) (8,720) (23,899) 157,909 1,597 1,772 (70,036) (56,109) (22,860) – (6,451) 2,000 – (3,283) (341,988) (153,370) (369,287) 995,000 (1,162,401) – (967,185) 1,624,650 (78,482) (28,316) 179,977 (13) (3,899) (57,183) (5,112) 127,749 87,575 138,189 (8,124) 65 – 115,000 (55,585) (10,000) – – – – – 1,783 (3,624) – (952) 46,622 51,161 86,713 – 315 Cash and cash equivalents at the end of the year 31(a) 217,705 138,189 The accompanying notes numbered 1 to 39 form part of this financial report. 54 | healthscope annual report 2015 for the year ended 30 June 2015 This page is left intentionally blank healthscope annual report 2015 | 55 HeDGe $’000 (31,855) 31,855 31,855 (5,002) (5,002) – – – – – – – – – – (282,174) 32,938 (282,174) (282,174) – – – – – – – – – – – – 13,459 19,479 19,479 32,938 (6,272) (6,272) – – – – – – – – (282,174) 26,666 (5,002) – – – – – – – – – – – – – 901 901 624,484 (183,152) 51,334 (131,818) (42,036) 450,630 450,630 140,848 (11,274) 129,574 1,781,719 105 – 901 (57,183) 2,305,746 Consolidated statement of changes in equity issUeD CaPitaL aCCUmULateD Losses $’000 $’000 GRoUP ReoRGaNisatioN ReseRVe $’000 FoReiGN CURReNCY tRaNsLatioN ReseRVe $’000 eqUitY settLeD emPLoYee ReseRVe BeNeFits ReseRVe totaL eqUitY $’000 $’000 2014 opening balance at 1 July 2013 Loss for the year Other comprehensive income/(loss) for the year net of tax total comprehensive income/(loss) for the year Equity raising costs net of tax Balance at 30 June 2014 2015 opening balance at 1 July 2014 Profit for the year Other comprehensive income/(loss) for the year net of tax total comprehensive income/(loss) for the year New shares issued Equity raising costs net of tax Reduction of share capital (i) Recognition of share based payments Dividends Closing balance at 30 June 2015 1,261,841 – – – (42,036) 1,219,805 1,219,805 – – – 1,781,719 105 (304,392) – – 2,697,237 (336,787) (183,152) – (183,152) – (519,939) (519,939) 140,848 – 140,848 – – 304,392 – (57,183) (131,882) (i) on 24 February 2015, the Board resolved to reduce Healthscope’s share capital by $304 million in accordance with Section 258F of the Corporations act. the capital reduction had the effect of reducing the share capital account and reducing Healthscope’s accumulated accounting losses. the number of shares on issue will not change as a result of the capital reduction. there are no fractional entitlements arising from the capital reduction. The accompanying notes numbered 1 to 39 form part of this financial report. 56 | healthscope annual report 2015 for the year ended 30 June 2015issUeD CaPitaL $’000 aCCUmULateD Losses $’000 GRoUP ReoRGaNisatioN ReseRVe FoReiGN CURReNCY tRaNsLatioN ReseRVe $’000 $’000 HeDGe ReseRVe $’000 eqUitY settLeD emPLoYee BeNeFits ReseRVe $’000 totaL eqUitY $’000 Other comprehensive income/(loss) for the year net of tax total comprehensive income/(loss) for the year 2014 opening balance at 1 July 2013 Loss for the year Equity raising costs net of tax Balance at 30 June 2014 2015 opening balance at 1 July 2014 Profit for the year Other comprehensive income/(loss) for the year net of tax total comprehensive income/(loss) for the year New shares issued Equity raising costs net of tax Reduction of share capital (i) Recognition of share based payments Dividends Closing balance at 30 June 2015 1,261,841 (42,036) 1,219,805 1,219,805 1,781,719 105 (304,392) 2,697,237 – – – – – – – – (336,787) (183,152) (183,152) (519,939) (519,939) 140,848 140,848 – – – – – – 304,392 (57,183) (131,882) (i) on 24 February 2015, the Board resolved to reduce Healthscope’s share capital by $304 million in accordance with Section 258F of the Corporations act. the capital reduction had the effect of reducing the share capital account and reducing Healthscope’s accumulated accounting losses. the number of shares on issue will not change as a result of the capital reduction. there are no fractional entitlements arising from the capital reduction. The accompanying notes numbered 1 to 39 form part of this financial report. (282,174) – – – – (282,174) (282,174) – – – – – – – – 13,459 – 19,479 19,479 – 32,938 32,938 – (6,272) (6,272) – – – – – (31,855) – 31,855 31,855 – – – – (5,002) (5,002) – – – – – (282,174) 26,666 (5,002) – – – – – – – – – – – – 901 – 901 624,484 (183,152) 51,334 (131,818) (42,036) 450,630 450,630 140,848 (11,274) 129,574 1,781,719 105 – 901 (57,183) 2,305,746 healthscope annual report 2015 | 57 These transactions occurred whilst Healthscope Limited, Pathology Australia and Pathology International were under common control of CT Healthscope Holdings L.P. CT Healthscope Holdings L.P was the legal parent entity of the Healthscope business for the period from 12 October 2010 (the date the Healthscope business was acquired by a consortium of funds advised and managed by TPG and The Carlyle Group) until its IPO on 28 July 2014. For consolidation purposes, the transactions have been accounted for as business combinations between entities under common control at carrying value. Consequently, the assets and liabilities have not been remeasured to fair value nor has any additional goodwill arisen. Accordingly, the assets and liabilities of both Pathology Australia and Pathology International continue to reflect their carrying values as per the accounting records of CT Healthscope Holdings L.P. immediately prior to acquisition by Healthscope Limited. The difference between the consideration given and the carrying value of the assets and liabilities acquired by Healthscope Limited has been recognised within equity as part of the “Group reorganisation reserve”. The two approaches most commonly used to present consolidated financial statements following a business combination between entities under common control are: • Restatement of comparatives (“Predecessor accounting” method) • No restatement of comparatives (“Acquisition method”). The financial report presents the financial results of Healthscope Limited and its controlled entities using the “Predecessor accounting” method meaning the financial report has been presented as if the combinations with Pathology Australia and Pathology International had occurred prior to 1 July 2013, the beginning of the earliest period presented in the financial report. Basis of preparation The consolidated financial statements have been prepared on the historical cost basis except for certain properties and financial instruments that are measured at revalued amounts or fair values at the end of each reporting period, as explained in the accounting policies below. Historical cost is generally based on the fair value of the consideration given in exchange for goods and services. nOtE 1: General information Healthscope Limited is a public company listed on the Australian Securities Exchange (trading under the code ‘HSO’), incorporated and domiciled in Australia with trading operations in Australia, New Zealand and South East Asia. The principal place of business of the Group is: Level 1 312 St Kilda Road Melbourne VIC 3004 Tel: (03) 9926 7500 The principal activities of the Healthscope Group during the financial year ended 30 June 2015 were the provision of healthcare services through the ownership and management of hospitals, medical centres and the provision of pathology diagnostic services. NOTE 2: Significant accounting policies statement of compliance These financial statements are general purpose financial statements which have been prepared in accordance with the Corporations Act 2001, Accounting Standards and Interpretations, and comply with other requirements of the law. The financial statements comprise the consolidated financial statements of the Healthscope Group. For the purposes of preparing the consolidated financial statements, the Healthscope Group is a for-profit entity. Accounting Standards include Australian Accounting Standards. Compliance with Australian Accounting Standards ensures that the financial statements and notes of the Group comply with International Financial Reporting Standards (IFRS). The financial statements were authorised for issue by the Directors on 25 August 2015. Group reorganisation and comparative information In preparation for the IPO of Healthscope Limited on the ASX, two group reorganisation transactions were undertaken which resulted in Healthscope Limited acquiring 100% of the shares in: • Healthscope Pathology Holdings Pty Ltd and its controlled entities (“Pathology Australia”) on 29 June 2014; and • CT HSP (Dutch) Cooperatief U.A. and its controlled entities (“Pathology International”) on 28 July 2014. 58 | healthscope annual report 2015 Notes to the consolidated financial statementsfor the year ended 30 June 2015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, regardless of whether that price is directly observable or estimated using another valuation technique. In estimating the fair value of an asset or a liability, the Group takes into account the characteristics of the asset or liability if market participants would take those characteristics into account when pricing the asset or liability at the measurement date. Fair value for measurement and/or disclosure purposes in these consolidated financial statements is determined on such a basis, except for share-based payment transactions that are within the scope of AASB 2, leasing transactions that are within the scope of AASB 117, and measurements that have some similarities to fair value but are not fair value, such as net realisable value in AASB 2 or value in use in AASB 136. In addition, for financial reporting purposes, fair value measurements are categorised into Level 1, 2 or 3 based on the degree to which the inputs to the fair value measurements are observable and the significance of the inputs to the fair value measurement in its entirety, which are described as follows: • Level 1 inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities that the entity can access at the measurement date; • Level 2 inputs are inputs, other than quoted prices included within Level 1, that are observable for the asset or liability, either directly or indirectly; and • Level 3 inputs are unobservable inputs for the asset or liability. When the Company has less than a majority of the voting rights of an investee, it has power over the investee when the voting rights are sufficient to give it the practical ability to direct the relevant activities of the investee unilaterally. The Company considers all relevant facts and circumstances in assessing whether or not the Company’s voting rights in an investee are sufficient to give it power, including: • The size of the Company’s holding of voting rights relative to the size and dispersion of holdings of the other vote holders; • Potential voting rights held by the Company, other vote holders or other parties; • Rights arising from other contractual arrangements; and • Any additional facts and circumstances that indicate that the Company has, or does not have, the current ability to direct the relevant activities at the time that decisions need to be made, including voting patterns at previous shareholders’ meetings. Consolidation of a subsidiary begins when the Company obtains control over the subsidiary and ceases when the Company loses control of the subsidiary. Specifically, income and expenses of a subsidiary acquired or disposed of during the year are included in the consolidated statement of profit or loss and other comprehensive income from the date the Company gains control until the date when the Company ceases to control the subsidiary. When necessary, adjustments are made to the financial statements of subsidiaries to bring their accounting policies into line with the Group’s accounting policies. For clarity and relevance, the entity has chosen to report amounts in the financial report rounded off to the nearest thousand dollars, unless otherwise indicated. All intragroup assets and liabilities, equity, income, expenses and cash flows relating to transactions between members of the Group are eliminated in full on consolidation. Basis of consolidation The consolidated financial statements of Healthscope Limited incorporate the financial statements of the Company and entities (including structured entities) controlled by the Company and its subsidiaries. Control is achieved when the Company: • Has power over the investee; • Is exposed, or has rights, to variable returns from its involvement with the investee; and • Has the ability to use its power to affect its returns. The Company reassesses 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 listed above. The following significant accounting policies have been adopted in the preparation and presentation of the financial report. (a) Business combinations Acquisitions of businesses are accounted for using the acquisition method. The consideration transferred in a business combination is measured at fair value which is calculated as the sum of the acquisition-date fair values of assets transferred by the Group, liabilities incurred by the Group to the former owners of the acquiree and the equity instruments issued by the Group in exchange for control of the acquiree. Acquisition-related costs are recognised in profit or loss as incurred. healthscope annual report 2015 | 59 NOTE 2: Significant accounting policies (continued) (a) Business combinations (continued) At the acquisition date, the identifiable assets acquired and the liabilities assumed are recognised at their fair value, except that: • Deferred tax assets or liabilities and assets or liabilities related to employee benefit arrangements are recognised and measured in accordance with AASB 112 ‘Income Taxes’ and AASB 119 ‘Employee Benefits’ respectively; • Liabilities or equity instruments related to share-based payment arrangements of the acquiree or share-based payment arrangements of the Group entered into to replace share-based payment arrangements of the acquiree are measured in accordance with AASB 2 ‘Share-based Payment’ at the acquisition date; and • Assets (or disposal groups) that are classified as held for sale in accordance with AASB 5 ‘Non-current Assets Held for Sale and Discontinued Operations’ are measured in accordance with that Standard. Goodwill is measured as the excess of the sum of the consideration transferred, the amount of any non-controlling interests in the acquiree, and the fair value of the acquirer’s previously held equity interest in the acquiree (if any) over the net of the acquisition-date amounts of the identifiable assets acquired and the liabilities assumed. If, after reassessment, the net of the acquisition-date amounts of the identifiable assets acquired and liabilities assumed exceeds the sum of the consideration transferred, the amount of any non- controlling interests in the acquiree and the fair value of the acquirer’s previously held interest in the acquiree (if any), the excess is recognised immediately in profit or loss as a bargain purchase gain. Where the consideration transferred by the Group in a business combination includes assets or liabilities resulting from a contingent consideration arrangement, the contingent consideration is measured at its acquisition-date fair value. Changes in the fair value of the contingent consideration that qualify as measurement period adjustments are adjusted retrospectively, with corresponding adjustments against goodwill. Measurement period adjustments are adjustments that arise from additional information obtained during the ‘measurement period’ (which cannot exceed one year from the acquisition date) about facts and circumstances that existed at the acquisition date. The subsequent accounting for changes in the fair value of contingent consideration that do not qualify as measurement period adjustments depends on how the contingent consideration is classified. Contingent consideration that is classified as equity is not remeasured at subsequent reporting dates and its subsequent settlement is accounted for within equity. Contingent consideration that is classified as an asset or liability is remeasured at subsequent reporting dates in accordance with AASB 139, or AASB 137 ‘Provisions, Contingent Liabilities and Contingent Assets’, as appropriate, with the corresponding gain or loss being recognised in profit or loss. Where a business combination is achieved in stages, the Group’s previously held interests in the acquired entity are re-measured to fair value at the acquisition date (i.e. the date the Healthscope Group attains control) and the resulting gain or loss, is recognised in profit or loss. Amounts arising from interests in the acquiree prior to the acquisition date that have previously been recognised in other comprehensive income are reclassified to profit or loss, where such treatment would be appropriate if that interest were disposed of. If the initial accounting for a business combination is incomplete by the end of the reporting year in which the combination occurs, the Healthscope Group reports provisional amounts for the items for which the accounting is incomplete. Those provisional amounts are adjusted during the measurement year, or additional assets or liabilities are recognised, to reflect new information obtained about facts and circumstances that existed as of the acquisition date that, if known, would have affected the amounts recognised as of that date. The measurement year is the year from the date of acquisition to the date the Healthscope Group obtains complete information about facts and circumstances that existed as of the acquisition date – and is subject to a maximum of one year. (b) Taxation Income tax expense or benefit represents the sum of the tax currently payable and deferred tax. Current Tax The tax currently payable is based on taxable profit for the year. Taxable profit differs from ‘profit before tax’ as reported in the consolidated statement of comprehensive income because of items of income or expense that are taxable or deductible in other years and items that are never taxable or deductible. The Group’s current tax is calculated using tax rates that have been enacted or substantively enacted by the end of the reporting year. 60 | healthscope annual report 2015 Notes to the consolidated financial statementsfor the year ended 30 June 2015For the purposes of measuring deferred tax liabilities and deferred tax assets for investment properties that are measured using the fair value model, the carrying amounts of such properties are presumed to be recovered entirely through sale, unless the presumption is rebutted. The presumption is rebutted when the investment property is depreciable and is held within a business model whose objective is to consume substantially all of the economic benefits embodied in the investment property over time, rather than through sale. The directors of the Company reviewed the Group’s investment property portfolios and concluded that none of the Group’s investment properties are held under a business model whose objective is to consume substantially all of the economic benefits embodied in the investment properties over time, rather than through sale. Therefore, the directors have determined that the ‘sale’ presumption set out in the amendments to AASB 112 is not rebutted. As a result, the Group has not recognised any deferred taxes on changes in fair value of the investment properties as the Group is not subject to any income taxes on the fair value changes of the investment properties on disposal. Current and deferred tax for the year Current and deferred tax are recognised in profit or loss, except when they relate to items that are recognised in other comprehensive income or directly in equity, in which case, the current and deferred tax are also recognised in other comprehensive income or directly in equity respectively. Where current tax or deferred tax arises from the initial accounting for a business combination, the tax effect is included in the accounting for the business combination. Tax consolidation Healthscope Limited elected to form a multiple entry consolidated group with effect from 22 September 2010. Healthscope Limited and its controlled entities joined the consolidated group with effect from 12 October 2010. As a result of the group reorganisation on 29 June 2014, the Healthscope Group ceased being a multiple entry consolidated group and became a tax consolidated group. Deferred Tax Deferred tax is recognised on temporary differences between the carrying amounts of assets and liabilities in the financial statements and the corresponding tax bases used in the computation of taxable profit. Deferred tax liabilities are generally recognised for all taxable temporary differences. Deferred tax assets are generally recognised for all deductible temporary differences to the extent that it is probable that taxable profits will be available against which those deductible temporary differences can be utilised. Such deferred tax assets and liabilities are not recognised if the temporary difference arises from goodwill or from the initial recognition (other than in a business combination) of other assets and liabilities in a transaction that affects neither the taxable profit nor the accounting profit. The carrying amount of deferred tax assets is reviewed at the end of each reporting year and reduced to the extent that it is no longer probable that sufficient taxable profits will be available to allow all or part of the asset to be recovered. Deferred tax liabilities are recognised for taxable temporary differences associated with investments in subsidiaries and associates, and interests in joint ventures except where the Group is able to control the reversal of the temporary differences and it is probable that the temporary differences will not reverse in the foreseeable future. Deferred tax assets arising from deductible temporary differences associated with these investments and interests are only recognised to the extent that it is probable that there will be sufficient taxable profits against which to utilise the benefits of the temporary differences and they are expected to reverse in the foreseeable future. Deferred tax assets and liabilities are measured at the tax rates that are expected to apply in the year in which the liability is settled or the asset realised, based on tax rates (and tax laws) that have been enacted or substantively enacted by the end of the reporting year. The measurement of deferred tax liabilities and assets reflects the tax consequences that would follow from the manner in which the Group expects, at the end of the reporting year, to recover or settle the carrying amount of its assets and liabilities. Deferred tax assets and liabilities are offset when there is a legally enforceable right to set off current tax assets against current tax liabilities and when they relate to income taxes levied by the same taxation authority and the Group intends to settle its current tax assets and liabilities on a net basis. healthscope annual report 2015 | 61 NOTE 2: Significant accounting policies (continued) (b) Taxation (continued) Tax expense/income, deferred tax liabilities and deferred tax assets arising from temporary differences of the members of the tax-consolidated group are recognised in the separate financial statements of the members of the tax-consolidated group using the ‘separate taxpayer within group’ approach by reference to the carrying amounts in the separate financial statements of each entity and the tax values applying under tax consolidation. Current tax liabilities and assets and deferred tax assets arising from the unused tax losses and relevant tax credits of the members of the tax-consolidated group are recognised by Healthscope Limited (as head entity in the tax-consolidated group). Due to the existence of a tax funding arrangement between the entities in the tax-consolidated group, amounts are recognised as payable to or receivables by the company and each member of the group in relation to the tax contribution amounts paid or payable between the head entity and the other members of the tax-consolidated group in accordance with the arrangement. Where the tax contribution amount recognised by each member of the tax-consolidated group for a particular year is different to the aggregate of the current tax liability or asset and any deferred tax asset arising from unused tax losses and tax credits in respect of that year, the difference is recognised as a contribution from (or distribution to) equity partners. (c) Inventories Inventories are measured at the lower of cost, on a first in first out basis, and net realisable value. Net realisable value represents the estimated selling prices of inventories less all estimated costs of completion and costs necessary to make the sale. (d) Financial assets Financial assets are classified into the following specified categories: financial assets as ‘at fair value through profit or loss (FVTPL)’, ‘held-to-maturity investments’, ‘available- for-sale (AFS)’ financial assets, and ‘loans and receivables’. The classification depends on the nature and purpose of the financial assets and is determined at the time of initial recognition. All regular way purchases or sales of financial assets are recognised and derecognised on a trade date basis. Regular way purchases or sales are purchases or sales of financial assets that require delivery of assets within the time frame established by regulation or convention in the market place. Effective interest method The effective interest method is a method of calculating the amortised cost of a debt instrument and of allocating interest income over the relevant period. The effective interest rate is the rate that exactly discounts estimated future cash receipts (including all fees and points paid or received that form an integral part of the effective interest rate, transaction costs and other premiums or discounts) through the expected life of the debt instrument, or, where appropriate, a shorter period, to the net carrying amount on initial recognition. Income is recognised on an effective interest basis for debt instruments other than those financial assets classified as at FVTPL. Financial assets at fair value through profit or loss Financial assets are classified as at FVTPL when the financial asset is either held for trading or it is designated as at FVTPL. A financial asset is classified as held for trading if: • It has been acquired principally for the purpose of selling it in the near term; or • On initial recognition it is part of a portfolio of identified financial instruments that the Group manages together and has a recent actual pattern of short-term profit- taking; or • It is a derivative that is not designated and effective as a hedging instrument. A financial asset other than a financial asset held for trading may be designated as at FVTPL upon initial recognition if: • Such designation eliminates or significantly reduces a measurement or recognition inconsistency that would otherwise arise; or • The financial asset forms part of a group of financial assets or financial liabilities or both, which is managed and its performance is evaluated on a fair value basis, in accordance with the Group’s documented risk management or investment strategy, and information about the grouping is provided internally on that basis; or • It forms part of a contract containing one or more embedded derivatives, and AASB 139 permits the entire combined contract to be designated as at FVTPL. Financial assets at FVTPL are stated at fair value, with any gains or losses arising on remeasurement recognised in profit or loss. The net gain or loss recognised in profit or loss incorporates any dividend or interest earned on the financial asset and is included in the ‘other gains and losses’ line item. 62 | healthscope annual report 2015 Notes to the consolidated financial statementsfor the year ended 30 June 2015Loans and receivables Loans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market. Loans and receivables are measured at amortised cost using the effective interest method, less any impairment. Interest income is recognised by applying the effective interest rate, except for short-term receivables when the effect of discounting is immaterial. Impairment of financial assets Financial assets, other than those at FVTPL, are assessed for indicators of impairment at the end of each reporting period. Financial assets are considered to be impaired when there is objective evidence that, as a result of one or more events that occurred after the initial recognition of the financial asset, the estimated future cash flows of the investment have been affected. For all other financial assets, objective evidence of impairment could include: • Significant financial difficulty of the issuer or counterparty; or • Breach of contract, such as a default or delinquency in interest or principal payments; or • It becoming probable that the borrower will enter bankruptcy or financial re-organisation; or • The disappearance of an active market for that financial asset because of financial difficulties. For certain categories of financial assets, such as trade receivables, assets are assessed for impairment on a collective basis even if they were assessed not to be impaired individually. Objective evidence of impairment for a portfolio of receivables could include the Group’s past experience of collecting payments, an increase in the number of delayed payments in the portfolio past the average credit period of 28 days, as well as observable changes in national or local economic conditions that correlate with default on receivables. For financial assets carried at amortised cost, the amount of the impairment loss recognised is the difference between the asset’s carrying amount and the present value of estimated future cash flows, discounted at the financial asset’s original effective interest rate. For financial assets that are carried at cost, the amount of the impairment loss is measured as the difference between the asset’s carrying amount and the present value of the estimated future cash flows discounted at the current market rate of return for a similar financial asset. Such impairment loss will not be reversed in subsequent periods. The carrying amount of the financial asset is reduced by the impairment loss directly for all financial assets with the exception of trade receivables, where the carrying amount is reduced through the use of an allowance account. When a trade receivable is considered uncollectible, it is written off against the allowance account. Subsequent recoveries of amounts previously written off are credited against the allowance account. Changes in the carrying amount of the allowance account are recognised in profit or loss. When an AFS financial asset is considered to be impaired, cumulative gains or losses previously recognised in other comprehensive income are reclassified to profit or loss in the period. For financial assets measured at amortised cost, if, in a subsequent period, the amount of the impairment loss decreases and the decrease can be related objectively to an event occurring after the impairment was recognised, the previously recognised impairment loss is reversed through profit or loss to the extent that the carrying amount of the investment at the date the impairment is reversed does not exceed what the amortised cost would have been had the impairment not been recognised. In respect of AFS equity securities, impairment losses previously recognised in profit or loss are not reversed through profit or loss. Any increase in fair value subsequent to an impairment loss is recognised in other comprehensive income and accumulated under the heading of investments revaluation reserve. In respect of AFS debt securities, impairment losses are subsequently reversed through profit or loss if an increase in the fair value of the investment can be objectively related to an event occurring after the recognition of the impairment loss. De-recognition of financial assets The Group derecognises a financial asset when the contractual rights to the cash flows from the asset expire, or when it transfers the financial asset and substantially all the risks and rewards of ownership of the asset to another party. If the Group neither transfers nor retains substantially all the risks and rewards of ownership and continues to control the transferred asset, the Group recognises its retained interest in the asset and an associated liability for amounts it may have to pay. If the Group retains substantially all the risks and rewards of ownership of a transferred financial asset, the Group continues to recognise the financial asset and also recognises a collateralised borrowing for the proceeds received. On derecognition of a financial asset in its entirety, the difference between the asset’s carrying amount and the sum of the consideration received and receivable and the cumulative gain or loss that had been recognised in other comprehensive income and accumulated in equity is recognised in profit or loss. healthscope annual report 2015 | 63 NOTE 2: Significant accounting policies (continued) (d) Financial assets (continued) The ranges of depreciation rates used for each class of depreciable assets are: CLass oF PRoPeRtY, PLaNt aND eqUiPmeNt DePReCiatioN Rate On derecognition of a financial asset other than in its entirety (e.g. when the Group retains an option to repurchase part of a transferred asset), the Group allocates the previous carrying amount of the financial asset between the part it continues to recognise under continuing involvement, and the part it no longer recognises on the basis of the relative fair values of those parts on the date of the transfer. The difference between the carrying amount allocated to the part that is no longer recognised and the sum of the consideration received for the part no longer recognised and any cumulative gain or loss allocated to it that had been recognised in other comprehensive income is recognised in profit or loss. A cumulative gain or loss that had been recognised in other comprehensive income is allocated between the part that continues to be recognised and the part that is no longer recognised on the basis of the relative fair values of those parts. (e) Property, plant and equipment Each class of property, plant and equipment is carried at cost less, where applicable, any accumulated depreciation and accumulated impairment losses. • Freehold land and buildings are measured on the cost basis. • Plant and equipment is measured on the cost basis. • Leasehold improvements are measured on the cost basis. • Finance leases are initially recognised at their fair value or, if lower, at amounts equal to the present value of the minimum lease payments. Each is determined at the inception of the lease. • Assets in the course of construction are carried at cost, less any recognised impairment loss. Cost includes professional fees and, for qualifying assets, borrowing costs capitalised in accordance with the Group’s accounting policy. Depreciation The depreciable amount of all fixed assets, including buildings and capitalised lease assets, but excluding freehold land is depreciated over their useful lives to the Group, commencing from the time the asset is held ready for use. Leasehold improvements are depreciated over the shorter of either the unexpired year of the lease or the estimated useful lives of the improvements. The estimated useful lives, residual values and depreciation method are reviewed at the end of each annual accounting year, with the effect of any changes recognised on a prospective basis. Buildings Leasehold improvements Plant & equipment Leased assets 2% to 5% 2% to 100% 5% to 50% 4% to 20% Freehold land is not depreciated. Fixtures and equipment are stated at cost less accumulated depreciation and accumulated impairment losses. Depreciation is recognised so as to write off the cost or valuation of assets (other than freehold land and properties under construction) less their residual values over their useful lives, using the straight-line method. The estimated useful lives, residual values and depreciation method are reviewed at the end of each reporting period, with the effect of any changes in estimate accounted for on a prospective basis. Assets held under finance leases are depreciated over their expected useful lives on the same basis as owned assets. However, when there is no reasonable certainty that ownership will be obtained by the end of the lease term, assets are depreciated over the shorter of the lease term and their useful lives. An item of property, plant and equipment is derecognised upon disposal or when no future economic benefits are expected to arise from the continued use of the asset. Any gain or loss arising on the disposal or retirement of an item of property, plant and equipment, is determined as the difference between the carrying amount of the asset at the time of disposal and the sale proceeds on disposal, and is recognised in profit or loss. (f) Goodwill Goodwill arising in a business combination is recognised as an asset and carried at cost as established at the date that control is acquired (the acquisition date) less accumulated impairment losses, if any. Goodwill is not amortised but is reviewed for impairment at least annually. For the purpose of impairment testing, goodwill is allocated to each of the Group’s cash-generating units (CGU’s), or groups of CGU’s, expected to benefit from the synergies of the business combination. CGU’s or groups of CGU’s to which goodwill has been allocated are tested for impairment annually or more frequently if events or changes in circumstances indicate that goodwill might be impaired. 64 | healthscope annual report 2015 Notes to the consolidated financial statementsfor the year ended 30 June 2015If the recoverable amount of the CGU or group of CGU’s is less than the carrying amount of the CGU or groups of CGU’s, the impairment loss is allocated first to reduce the carrying amount of any goodwill allocated to the CGU or groups of CGU’s and then to the other assets of the CGU or groups of CGU’s pro-rata on the basis of the carrying amount of each asset in the CGU or groups of CGU’s. An impairment loss recognised for goodwill is recognised immediately in profit or loss and is not reversed in a subsequent year. On disposal of the relevant cash- generating unit, the attributable amount of goodwill is included in the determination of the profit or loss on disposal of the operation. (g) Intangible assets Research & development costs Expenditure on research activities is recognised as an expense in the year in which it is incurred. Where no internally generated intangible asset can be recognised, development expenditure is recognised as an expense in the year it is incurred. An internally generated intangible asset arising from development (or from the development phase of an internal project) is recognised if, and only if, all of the following are demonstrated: • The technical feasibility of completing the intangible asset so that it will be available for use or sale; • The intention to complete the intangible asset and use or sell it; Intangible assets acquired in a business combination • The ability to use or sell the intangible asset; Intangible assets acquired in a business combination and recognised separately from goodwill are initially recognised at their fair value at the acquisition date (which is regarded as their cost). Subsequent to initial recognition, intangible assets acquired in a business combination are reported at cost less accumulated amortisation and accumulated impairment losses, on the same basis as intangible assets that are acquired separately. Intangible assets acquired separately Intangible assets with finite lives that are acquired separately are carried at cost less accumulated amortisation and accumulated impairment losses. Amortisation is recognised on a straight-line basis over their estimated useful lives. The estimated useful life and amortisation method are reviewed at the end of each annual reporting year, with any changes in these accounting estimates being accounted for on a prospective basis. Intangible assets with indefinite useful lives that are acquired separately are carried at cost less accumulated impairment losses. Amortisation of intangible assets The following useful lives are used in the calculation of amortisation: CLass oF iNtaNGiBLe assets Contract management rights Operating rights Contract development costs UseFUL LiFe 3 to 30 years 3 to 6 years 5 to 12 years • How the intangible asset will generate probable future economic benefits; • The availability of adequate technical, financial and other resources to complete the development and to use or sell the intangible asset; and • The ability to measure reliably the expenditure attributable to the intangible asset during its development. The amount initially recognised for internally generated intangible assets is the sum of the expenditure incurred from the date when the intangible asset first meets the recognition criteria listed above. Where no internally- generated intangible asset can be recognised, development expenditure is recognised in profit or loss in the year in which it is incurred. Subsequent to initial recognition, internally-generated intangible assets are stated at cost less accumulated amortisation and accumulated impairment losses, and are amortised on a straight-line basis over their useful lives of no longer than five years. (h) Impairment of tangible and intangible assets excluding goodwill At the end of each reporting year, the Group reviews the carrying amounts of its tangible and intangible assets to determine whether there is any indication that those assets have suffered an impairment loss. If any such indication exists, the recoverable amount of the asset is estimated in order to determine the extent of the impairment loss (if any). Where the asset does not generate cash flows that are independent from other assets, the Group estimates the recoverable amount of the cash-generating unit to which the asset belongs. Intangible assets with indefinite useful lives and intangible assets not yet available for use are tested for impairment at least annually and whenever there is an indication that the asset may be impaired. healthscope annual report 2015 | 65 NOTE 2: Significant accounting policies (continued) (h) Impairment of tangible and intangible assets excluding goodwill (continued) Recoverable amount is the higher of fair value less costs to sell and value in use. In assessing value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset for which the estimates of future cash flows have not been adjusted. If the recoverable amount of an asset (or cash generating unit) is estimated to be less than the carrying amount, the carrying amount of the asset (or cash generating unit) is reduced to its recoverable amount. An impairment loss is recognised in the profit or loss immediately, unless the relevant asset is carried at a re-valued amount in which case the impairment is treated as a revaluation decrease. Where an impairment loss subsequently reverses, the carrying amount of the asset (or cash-generating unit) is increased to the revised estimate of its recoverable amount, but only to the extent that the increased carrying amount does not exceed the carrying amount that would have been determined had no impairment loss been recognised for the asset (or cash-generating unit) in prior years. A reversal of an impairment loss is recognised in profit or loss immediately, unless the relevant asset is carried at a revalued amount in which case the reversal of the impairment loss is treated as a revaluation increase. (i) Leased assets Leases are classified as finance leases whenever the terms of the lease transfer substantially all the risks and rewards of ownership to the lessee. All other leases are classified as operating leases. The Group as lessor Amounts due from lessees under finance leases are recognised as receivables at the amount of the Group’s net investment in the leases. Finance lease income is allocated to accounting periods so as to reflect a constant periodic rate of return on the Group’s net investment outstanding in respect of the leases. Rental income from operating leases is recognised on a straight-line basis over the term of the relevant lease. Initial direct costs incurred in negotiating and arranging an operating lease are added to the carrying amount of the leased asset and recognised on a straight-line basis over the lease term. The Group as lessee Assets held under finance leases are initially recognised as assets of the Group at their fair value at the inception of the lease or, if lower, at the present value of the minimum lease payments. The corresponding liability to the lessor is included in the consolidated statement of financial position as a finance lease obligation. Lease payments are apportioned between finance expenses and reduction of the lease obligation so as to achieve a constant rate of interest on the remaining balance of the liability. Finance expenses are recognised immediately in profit or loss, unless they are directly attributable to qualifying assets, in which case they are capitalised in accordance with the Group’s general policy on borrowing costs. Contingent rentals are recognised as expenses in the periods in which they are incurred. Operating lease payments are recognised as an expense on a straight-line basis over the lease term, except where another systematic basis is more representative of the time pattern in which economic benefits from the leased asset are consumed. Contingent rentals arising under operating leases are recognised as an expense in the period in which they are incurred. In the event that lease incentives are received to enter into operating leases, such incentives are recognised as a liability. The total benefit of incentives is recognised as a reduction of rental expense on a straight-line basis, except where another systematic basis is more representative of the time pattern in which economic benefits from the leased asset are consumed. (j) Employee benefits A liability is recognised for benefits accruing to employees in respect of wages and salaries, annual leave and long service leave when it is probable that settlement will be required and they are capable of being measured reliably. Short-term and other long-term employee benefits A liability is recognised for benefits accruing to employees in respect of wages and salaries, annual leave and sick leave in the period the related service is rendered at the undiscounted amount of the benefits expected to be paid in exchange for that service. Liabilities recognised in respect of short-term employee benefits are measured at the undiscounted amount of the benefits expected to be paid in exchange for the related service. Liabilities recognised in respect of other long-term employee benefits are measured at the present value of the estimated future cash outflows expected to be made by the Group in respect of services provided by employees up to the reporting date. 66 | healthscope annual report 2015 Notes to the consolidated financial statementsfor the year ended 30 June 2015Defined contribution plans Payments to defined contribution retirement benefit plans are recognised as an expense when employees have rendered service entitling them to the contributions. Termination benefit A liability for a termination benefit is recognised at the earlier of when the Group can no longer withdraw the offer of the termination benefit and when the entity recognises any related restructuring costs. (k) Interests in joint operations A joint operation is a joint arrangement whereby the parties that have joint control of the arrangement have rights to the assets, and obligations for the liabilities, relating to the arrangement. 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. When a group entity undertakes its activities under joint operations, the Group as a joint operator recognises in relation to its interest in a joint operation: • Its assets, including its share of any assets held jointly; • • • • Its liabilities, including its share of any liabilities incurred jointly; Its revenue from the sale of its share of the output arising from the joint operation; Its share of the revenue from the sale of the output by the joint operation; and Its expenses, including its share of any expenses incurred jointly. The Group accounts for the assets, liabilities, revenues and expenses relating to its interest in a joint operation in accordance with the AASBs applicable to the particular assets, liabilities, revenues and expenses. When a group entity transacts with a joint operation in which a group entity is a joint operator (such as a sale or contribution of assets), the Group is considered to be conducting the transaction with the other parties to the joint operation, and gains and losses resulting from the transactions are recognised in the Group’s consolidated financial statements only to the extent of other parties’ interests in the joint operation. When a group entity transacts with a joint operation in which a group entity is a joint operator (such as a purchase of assets), the Group does not recognise its share of the gains and losses until it resells those assets to a third party. A joint venture is a joint arrangement whereby the parties that have joint control of the arrangement have rights to the net assets of the joint arrangement. 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 results and assets and liabilities of joint ventures are incorporated in these consolidated financial statements using the equity method of accounting. Under the equity method, an investment in a joint venture is initially recognised in the consolidated statement of financial position at cost and adjusted thereafter to recognise the Group’s share of the profit or loss and other comprehensive income of the joint venture. The financial statements of each joint venture are used by the Group to apply the equity method. The reporting dates of each joint venture and the Group are identical and both use consistent accounting policies. The requirements of AASB 139 are applied to determine whether it is necessary to recognise any impairment loss with respect to the Group’s investment in a joint venture. When necessary, the entire carrying amount of the investment (including goodwill) is tested for impairment in accordance with AASB 136 Impairment of Assets as a single asset by comparing its recoverable amount (higher of value in use and fair value less costs to sell) with its carrying amount, Any impairment loss recognised forms part of the carrying amount of the investment. Any reversal of that impairment loss is recognised in accordance with AASB 136 to the extent that the recoverable amount of the investment subsequently increases. (l) Cash and cash equivalents Cash and cash equivalents comprise cash on hand and demand deposits. Cash equivalents are short-term, highly liquid investments, that are readily convertible to known amounts of cash and which are subject to insignificant risk of changes in value. For the purpose of the statement of cash flows, cash and cash equivalents consist of cash and cash equivalents as defined above, net of outstanding bank overdrafts. (m) Financial liability and equity instruments issued by the Group Debt and equity instruments Debt and equity instruments are classified as either liabilities or as equity in accordance with the substance of the contractual arrangement and the definitions of a financial liability and an equity instrument. An equity instrument is any contract that evidences a residual interest in the assets of an entity after deducting all of its liabilities. Equity instruments issued by the Group are recorded as the proceeds received, net of direct issue costs. healthscope annual report 2015 | 67 NOTE 2: Significant accounting policies (continued) (m) Financial liability and equity instruments issued by the Group (continued) Repurchase of the Group’s own equity instruments is recognised and deducted directly in equity. No gain or loss is recognised in profit or loss on the purchase, sale, issue or cancellation of Group’s own equity instruments. Other financial liabilities Other financial liabilities, including borrowings and trade and other payables, are initially measured at fair value, net of transaction costs and are subsequently measured at amortised cost using the effective interest method, with interest expense recognised on an effective yield basis. The effective interest method is a method of calculating the amortised cost of a financial liability and of allocating interest expense over the relevant year. The effective interest rate is the rate that exactly discounts estimated future cash payments through the expected life of the financial liability, or, where appropriate, a shorter period to the net carrying amount on initial recognition. De-recognition of financial liabilities The Group de-recognises financial liabilities when and only when, the Group’s obligations are discharged, cancelled or they expire. The difference between the carrying amount of the financial liability derecognised and the consideration paid and payable is recognised in profit or loss. Transaction costs on the issue of equity instruments Transaction costs arising on the issue of equity instruments are recognised directly in equity as a reduction of the proceeds of the equity instruments to which the costs relate. Transaction costs are the costs that are incurred directly in connection with the issue of those equity instruments and which would not have been incurred had those instruments not been issued. (n) Foreign currency Foreign currency transactions All foreign currency transactions during the financial year are brought to account using the exchange rate in effect at the date of the transaction. Foreign currency monetary items at reporting date are translated at the exchange rate existing at that date. Exchange differences are recognised in net profit or loss in the year in which they arise. The individual financial information of each Group entity is presented in the currency of the primary economic environment in which the entity operates (its functional currency). For the purposes of the consolidated financial statements, the results and financial position of each group entity are expressed in Australian dollars (‘$’), which is the functional currency of the Group and the presentation currency for the consolidated financial statements. In preparing the financial information of the individual entities, transactions in currencies other than the Group’s functional currency (foreign currencies) are recognised at the rates of exchange prevailing at the dates of the transactions. At the end of each reporting year, monetary items denominated in foreign currencies are retranslated at the rates prevailing at that date. Non-monetary items carried at fair value that are denominated in foreign currencies are retranslated at the rates prevailing at the date when the fair value was determined. Non-monetary items that are measured in terms of historical cost in a foreign currency are not retranslated. On consolidation, the assets and liabilities of the Group’s foreign operations are translated into Australian dollars at exchange rates prevailing at the end of the reporting year. Income and expense items are translated at the average exchange rates for the year, unless exchange rates fluctuated significantly during that year, in which case the exchange rates at the dates of the transactions are used. Exchange differences arising, if any, are recognised in other comprehensive income and accumulated in equity. Such exchange differences are recognised in profit or loss in the year in which the foreign operation is exposed. (o) Provisions Provisions are recognised when the Group has a present obligation (legal or constructive) as a result of a past event, it is probable that the Group will be required to settle the obligation, and a reliable estimate can be made of the amount of the obligation. The amount recognised as a provision is the best estimate of the consideration required to settle the present obligation at the end of the reporting year, taking into account the risks and uncertainties surrounding the obligation. Where a provision is measured using the cash flows estimated to settle the present obligation, its carrying amount is the present value of those cash flows. When some or all of the economic benefits required to settle a provision are expected to be recovered from a third party, a receivable is recognised as an asset if it is virtually certain that the reimbursement will be received and the amount of the receivable can be measured reliably. 68 | healthscope annual report 2015 Notes to the consolidated financial statementsfor the year ended 30 June 2015Onerous contracts/leases Interest income Present obligations arising under onerous contracts are recognised and measured as a provision. An onerous contract is considered to exist where the Group has a contract under which the unavoidable costs of meeting the obligations under the contract exceed the economic benefits expected to be received under it. Insurance claims The provision is based on the schedule of outstanding claims and the costs have been estimated based on currently available data where the Group has no related insurance policy. Provisions are determined by discounting expected future cash outflows at a pre-tax rate that reflects current market assessment of the time value of money and when appropriate, the risks specific to the liability. The provision is reviewed at the end of each reporting year and updated for additional information. Interest income from a financial asset is recognised when it is probable that the economic benefits will flow to the Group and the amount of income can be measured reliably. Interest income is accrued on a time basis, by reference to the principal outstanding and at the effective interest rate applicable, which is the rate that exactly discounts estimated future cash receipts through the expected life of the financial asset to that asset’s net carrying amount on initial recognition. Rental income Rental income from operating leases is recognised on a straight-line basis over the term of the relevant lease. Initial direct costs incurred in negotiating and arranging an operating lease is added to the carrying amount of the leased asset and recognised on a straight-line basis over the lease term. Other provisions (q) Derivative financial instruments Other provisions primarily consist of restructuring and related provisions. A restructuring provision is recognised when the Group has developed a detailed formal plan for the restructuring and has raised a valid expectation in those affected that it will carry out the restructuring by starting to implement the plan or announcing its main features to those affected by it. The measurement of a restructuring provision includes only the direct expenditures arising from the restructuring, which are those amounts that are both necessarily entailed by the restructuring and not associated with the ongoing activities of the entity. (p) Revenue recognition Revenue is measured at the fair value of the consideration received or receivable. Revenue is reduced for estimated customer returns, rebates and other similar allowances. Rendering of services Revenue from a contract to provide services is recognised by reference to the stage of completion of the contract. Dividend income Dividend income from investments is recognised when the shareholder’s right to receive payment has been established (provided that it is probable that the economic benefits will flow to the Group and the amount of income can be measured reliably). The Group enters into interest rate swaps to manage its exposure to interest rate risk. Derivatives are initially recognised at fair value on the date a derivative contract is entered into and are subsequently re-measured to their fair value at the end of each reporting period. The resulting gain or loss is recognised in profit or loss immediately unless the derivative is designated and effective as a hedging instrument, in which event, the timing of the recognition in profit or loss depends on the nature of the hedge relationship. The Group designates certain derivatives as either hedges of the fair value of recognised assets or liabilities or firm commitments (fair value hedges), hedges of highly probable forecast transactions (cash flow hedges), or hedges of net investments in foreign operations. A derivative with a positive fair value is recognised as a financial asset; a derivative with a negative fair value is recognised as a financial liability. A derivative is presented as a non-current asset or a non-current liability if the remaining maturity of the instrument is more than 12 months and it is not expected to be realised or settled within 12 months. Other derivatives are presented as current assets or current liabilities. Hedge accounting The Group designates certain hedging instruments, which include derivatives, embedded derivatives and non-derivatives in respect of foreign currency risk, as either fair value hedges, cash flow hedges, or hedges of net investments in foreign operations. Hedges of foreign exchange risk on firm commitments are accounted for as cash flow hedges. healthscope annual report 2015 | 69 The net amount of GST recoverable from, or payable to, the taxation authority is included as part of receivables or payables. Cash flows are included in the statement of cash flows on a gross basis. The GST component of cash flows arising from investing and financing activities which is recoverable from, or payable to, the taxation authority is classified as operating cash flows. (s) Borrowing costs Borrowing costs directly attributable to the acquisition, construction or production of qualifying assets that necessarily take a substantial period of time to prepare for their intended use or sale, are added to the cost of those assets, until such time as the assets are substantially ready for their intended use or sale. All other borrowing costs are recognised in the profit or loss in the year in which they were incurred. (t) Government grants Government grants are assistance by the government in the form of transfers of resources to the Group in return for past or future compliance with certain conditions relating to the operating activities of the Group. Government grants include government assistance where there are no conditions specifically relating to the operating activities of the Group other than the requirement to operate in certain regions or industry sectors. Government grants are not recognised until there is reasonable assurance that the Group will comply with the conditions attaching to them and the grants will be received. Government grants are recognised as income over the years necessary to match them with the related costs, which they are intended to compensate, on a systematic basis. Government grants that are receivable as compensation for expenses or losses already incurred or for the purpose of giving immediate financial support to the Group with no future related costs are recognised as income of the period in which it becomes receivable. (u) Non-current assets held for sale Non-current assets and disposal groups are classified as held for sale if their carrying amount will be recovered principally through a sale transaction rather than through continuing use. This condition is regarded as met when the sale is highly probable and the non-current asset (or disposal group) is available for immediate sale in its present condition. Management must be committed to the sale, which should be expected to qualify for recognition as a completed sale within one year from the date of classification. NOTE 2: Significant accounting policies (continued) (q) Derivative financial instruments (continued) At the inception of the hedge relationship the Group documents the relationship between the hedging instrument and hedged item, along with its risk management objectives and its strategy for undertaking various hedge transactions. Furthermore, at the inception of the hedge and on an ongoing basis, the Group documents whether the hedging instrument that is used in a hedging relationship is highly effective in offsetting changes in fair values or cash flows of the hedged item. Movements in the hedging reserve in equity are detailed in the Statement of Changes in Equity. Cash flow hedge The effective portion of changes in the fair value of derivatives that are designated and qualify as cash flow hedges are recognised in other comprehensive income and accumulated under the heading of cash flow hedging reserve. The gain or loss relating to the ineffective portion is recognised immediately in profit or loss, and is included in the ‘other income and expense items’ line item. Amounts previously recognised in other comprehensive income and accumulated in equity are reclassified to profit or loss in the years when the hedged item is recognised in profit or loss, in the same line of the statement of comprehensive income as the recognised hedged item. However when the hedged forecast transaction that is hedged results in the recognition of a non-financial asset or a non-financial liability, the gains and losses previously recognised in other comprehensive income and accumulated in equity are transferred from equity and included in the initial measurement of the cost of the non-financial asset or non-financial liability. Hedge accounting is discontinued when the Group revokes the hedging relationship, when the hedging instrument expires or is sold, terminated, or exercised, or no longer qualifies for hedge accounting. Any gain or loss recognised in other comprehensive income and accumulated in equity at that time remains in equity and is recognised when the forecast transaction is ultimately recognised in profit or loss. When a forecast transaction is no longer expected to occur, the cumulative gain or loss that was deferred in equity is recognised immediately in profit or loss. (r) Goods and services tax (GST) Revenues, expenses and assets are recognised net of the amount of goods and services tax (GST), except: • Where the amount of GST incurred is not recoverable from the taxation authority, it is recognised as part of the cost of acquisition of an asset or as part of an item of expense; or • For receivables and payables which are recognised inclusive of GST. 70 | healthscope annual report 2015 Notes to the consolidated financial statementsfor the year ended 30 June 2015When the Group is committed to a sale plan involving loss of control of a subsidiary, all of the assets and liabilities of that subsidiary are classified as held for sale when the criteria described above are met, regardless of whether the Group will retain a non-controlling interest in its former subsidiary after the sale. When the Group is committed to a sale plan involving disposal of an investment, a portion of an investment, in an associate or joint venture, the investment or the portion of the investment that will be disposed of is classified as held for sale when the criteria described above is met, and the Group discontinues the use of equity method in relation to the portion that is classified as held for sale. Any retained portion of an investment in an associate or a joint venture that has not been classified as held for sale continues to be accounted for using the equity method. The Group discontinues the use of the equity method at the time of disposal when disposal results in the Group losing significant influence over the associate or joint venture. After the disposal takes place, the Group accounts for retained interest in the associate or joint venture in accordance with AASB 139 unless the retained interest continues to be an associate or a joint venture, in which case the Group uses the equity method. Non-current assets (and disposal groups) classified as held for sale are measured at the lower of their previous carrying amount and fair vale less costs to sell. (v) Share-based payments transactions Equity-settled share-based payments to employees and others providing similar services are measured at the fair value of the equity instruments at the grant date. The fair value determined at the grant date of the equity- settled share-based payment is expensed on a straight- line basis over the vesting period, based on the Group’s estimate of equity instruments that will eventually vest, with a corresponding increase in equity. At the end of each reporting period, the Group revises its estimate of the number of equity instruments expected to vest. The impact of the revision of the original estimates, if any, is recognised in profit or loss such that the cumulative expense reflects the revised estimate, with a corresponding adjustment to the equity-settled employee benefits reserve. (w) Adoption of new and revised Accounting The Group has adopted all of the new and revised Standards and Interpretations issued by the Australian Accounting Standards Board (the AASB) that are relevant to their operations and effective for the current year. New and revised Standards and amendments thereof and Interpretations effective for the current year that are relevant to the Group include: • AASB 1031 Materiality • AASB 2012-3 Amendments to Australian Accounting Standards – Offsetting Financial Assets and Financial Liabilities • AASB 2013-3 Amendments to AASB 136 – Recoverable Amount Disclosures for Non-Financial Assets • AASB 2013-4 Amendments to Australian Accounting Standards – Novation of Derivatives and Continuation of Hedge Accounting • AASB 2013-9 Amendments to Australian Accounting Standards – Conceptual Framework, Materiality and Financial Instruments • Interpretation 21 ‘Levies’. Impact of the application of AASB 1031 & AASB 2013-9 The revised AASB 1031 is an interim standard that cross- references to other Standards and the ‘Framework for the Preparation and Presentation of Financial Statements’ (issued December 2013) that contain guidance on materiality. The AASB is progressively removing references to AASB 1031 in all standards and Interpretations. Once all these references have been removed, AASB 1031 will be withdrawn. The adoption of AASB 1031, AASB 2013-9 (Part B) and AASB 2014-1 (Part C) does not have any material impact on the disclosures or the amounts recognised in the consolidated financial statements. Impact of the application of AASB 2012-3 The amendments to AASB 132 clarify the requirements relating to the offset of financial assets and financial liabilities. Specifically, the amendments clarify the meaning of ‘currently has a legally enforceable right of set-off’ and ‘simultaneous realisation and settlement’. The amendments have been applied retrospectively. As the Group does not have any financial assets and financial liabilities that qualify for offset, the application of the amendments does not have any material impact on the disclosures or on the amounts recognised in the consolidated financial statements. Impact of the application of AASB 2013-3 The amendments to AASB 136 remove the requirement to disclose the recoverable amount of a cash-generating unit (CGU) to which goodwill or other intangible assets with indefinite useful lives had been allocated when there has been no impairment or reversal of impairment of the related CGU. Furthermore, the amendments introduce additional disclosure requirements applicable to when the recoverable amount of an asset or a CGU is measured at fair value less costs of disposal. These new disclosures include the fair value hierarchy, key assumptions and valuation techniques used which are in line with the disclosure required by AASB 13 ‘Fair Value Measurements’. The application of these amendments does not have any material impact on the disclosures in the consolidated financial statements. healthscope annual report 2015 | 71 NOTE 2: Significant accounting policies (continued) (w) Adoption of new and revised Accounting (continued) Impact of the application of AASB 2013-4 The amendments to AASB 139 provide relief from the requirement to discontinue hedge accounting when a derivative designated as a hedging instrument is novated under certain circumstances. The amendments also clarify that any change to the fair value of the derivative designated as a hedging instrument arising from the novation should be included in the assessment and measurement of hedge effectiveness. As the Group does not have any derivatives that are subject to novation, the application of these amendments does not have any material impact on the disclosures or on the amounts recognised in the consolidated financial statements. Impact of the application of Interpretation 21 ‘Levies’ Interpretation 21 addresses the issue as to when to recognise a liability to pay a levy imposed by a government. The interpretation defines a levy, and specifies that the obligating event that gives rise to the liability is the activity that triggers the payment of the levy, as identified by legislation. The Interpretation provides guidance on how different levy arrangements should be accounted for, in particular, it clarifies that neither economic compulsion nor the going concern basis of financial statements preparation implies that an entity has a present obligation to pay a levy that will be triggered by operating in a future period. Interpretation 21 has been applied retrospectively. The application of this Interpretation does not have any material impact on the disclosures or on the amounts recognised in the Group’s consolidated financial statements. (x) Standards and Interpretations in issue not yet adopted At the date of authorisation of the financial report, the Standards and Interpretations listed below were in issue but not yet effective: staNDaRD/iNteRPRetatioN eFFeCtiVe FoR aNNUaL RePoRtiNG PeRioDs BeGiNNiNG oN oR aFteR exPeCteD to Be iNitiaLLY aPPLieD iN tHe FiNaNCiaL YeaR eNDiNG • AASB 9 ‘Financial Instruments’, and the relevant 1 January 2017 30 June 2018 amending standards1. • AASB 15 ‘Revenue from Contracts with Customers’ and AASB 2014-5 ‘Amendments to Australian Accounting Standards arising from AASB 15’ • AASB 2014-3 ‘Amendments to Australian Accounting Standards – Accounting for Acquisitions of Interests in Joint Operations’ • AASB 2014-4 ‘Amendments to Australian Accounting Standards – Clarification of Acceptable Methods of Depreciation and Amortisation’ 1 January 2017 30 June 2018 1 January 2016 30 June 2017 1 January 2016 30 June 2017 • AASB 2015-1 ‘Amendments to Australian Accounting 1 January 2016 30 June 2017 Standards – Annual Improvements to Australian Accounting Standards 2012–2014 Cycle’ • AASB 2015-2 ‘Amendments to Australian Accounting Standards – Disclosure Initiative: Amendments to AASB 101’ • AASB 2015-3 ‘Amendments to Australian Accounting Standards arising from the Withdrawal of AASB 1031 Materiality’ 1 January 2016 30 June 2017 1 January 2016 30 June 2017 1. the aaSB has issued the following versions of aaSB 9: • AASB 9 ‘Financial Instruments’ (December 2009) and the relevant amending standard; • AASB 9 ‘Financial Instruments’ (December 2010) and the relevant amending standards; • AASB 2013-9 ‘Amendment to Australian Accounting Standards – Conceptual Framework, Materiality and Financial Instruments’, Part C – Financial Instruments • AASB 9 ‘Financial Instruments’ (December 2014) and the relevant amending standards All the standards have an effective date of annual reporting periods beginning on or after 1 January 2018. either aaSB 9 (December 2009) or aaSB 9 (December 2010) can be early adopted if the initial application date is before 1 February 2015. after this date only aaSB 9 (December 2014) can be early adopted. 72 | healthscope annual report 2015 Notes to the consolidated financial statementsfor the year ended 30 June 2015At the date of authorisation of the financial statements, the following IFRIC Interpretations were also in issue but not yet effective, although Australian equivalent Standards and Interpretations have not yet been issued. staNDaRD/iNteRPRetatioN • IFRS 14 Regulatory Deferral Accounts • IFRS 15 Revenue eFFeCtiVe FoR aNNUaL RePoRtiNG PeRioDs BeGiNNiNG oN oR aFteR exPeCteD to Be iNitiaLLY aPPLieD iN tHe FiNaNCiaL YeaR eNDiNG 1 January 2016 1 January 2017 30 June 2017 30 June 2018 The impact of adopting the various Australian Accounting Standards and Interpretations in issue but not yet effective has not been assessed by the Group. The Group does not intend to adopt any of these pronouncements before their effective dates. nOtE 3: Critical accounting judgements Critical accounting judgements and key sources of estimation uncertainty In the application of the Group’s accounting policies, management is required to make judgements, estimates and assumptions about the carrying amounts of assets and liabilities that are not readily apparent from other sources. The estimates and associated assumptions are based on historical experience and various other factors that are believed to be relevant. Actual results may differ from these estimates. The estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognised in the year in which the estimate is revised if the revision affects only that year or in the year of the revision and future years if the revision affects both current and future years. (a) Critical judgements in applying the entity’s accounting policies The following are the critical judgements that the Directors have made in the process of applying the Group’s accounting policies and that have the most significant effect on the amounts recognised in the financial statements: Employee entitlements Management judgement is applied in determining the following key assumptions used in the calculation of long service leave at balance date: • Future increases in wages in salaries; • Future on-cost rates; • Experience of employee departures and year of service; and • Appropriate discount rate to reflect long term liabilities at present value. Fair value measurements and valuation processes Some of the Group’s assets and liabilities are measured at fair value for financial reporting purposes. Management determines the appropriate valuation techniques and inputs for fair value measurements and reports these to the Board of Directors. In estimating the fair value of an asset or liability, the Group uses market observable data to the extent it is available. Where Level 1 inputs are not available, the Group engages third party qualified valuers to perform the valuation. Management works closely with the qualified external valuers to establish the appropriate valuation techniques and inputs to the model. Information about the valuation techniques and inputs used in demining the fair value of various assets and liabilities are disclosed in NOTE 33. Recovery of deferred tax assets Deferred tax assets, including those arising from temporary differences and tax losses, are recognised only when it is considered probable that they will be recovered. Various factors are used to assess the recoverability of deferred tax assets including the nature and timing of their origination, future operating results, operational plans and compliance with relevant tax legislation associated with their recoupment. Recoupment of tax losses recognised in the consolidated statement of financial position is based on justifying tax loss recoupment rules (including the Same Business Test in the year losses are recouped). These judgements and assumptions are subject to risk and uncertainty; hence, there is a possibility that changes in circumstances will alter expectations, which may impact the amount of deferred tax assets recognised on the balance sheet. In such circumstances, some or all, of the carrying amount of recognised deferred tax assets may require adjustment, resulting in a corresponding charge to the statement of profit or loss and other comprehensive income. healthscope annual report 2015 | 73 Impairment of goodwill and other intangible assets Determining whether goodwill and other intangible assets are impaired requires an estimation of recoverable amount for the cash-generating units to which these assets have been allocated. The recoverable amount of each cash-generating unit is the greater of its value in use or fair value less costs to sell. Value in use is determined as the present value of the estimated future cash flows expected to arise from the continued use of the asset in its present form. Value in use is determined by applying assumptions specific to the Group’s continued use and cannot take into account future development. Fair value is determined as the amount that would be obtained from the sale of the asset in an arm’s length transaction between knowledgeable and willing parties. Further details with respect to key assumptions are disclosed in NOTE 17. The carrying amount of goodwill at the end of the year was $1.74 billion (2014: $1.77 billion). The carrying amount of other intangible assets at the end of the reporting year was $66.5 million (2014: $78.1 million). Details of the impairment assessments are set out in NOTE 17. nOtE 3: Critical accounting judgements (continued) (b) Key sources of estimation uncertainty The following are the key assumptions concerning the future, and other key sources of estimation uncertainty at the end of the reporting year, that have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial year: Medical Malpractice Insurance During the year, management performed the regular review of the medical malpractice insurance claims provision across the Group, which is included in the statement of financial position as at 30 June 2015 at $7.1 million (2014: $6.3 million).The provision represents the present value of the estimated future outflow of economic benefits that may be required to be made to meet malpractice claims made against the Group. Onerous lease contracts The onerous lease contract provision has been derived on the basis of the most recent assessment of the likely net unavoidable cost to the end of the contract term. Management have considered the future costs of the contract which can be determined with a high degree of accuracy. However, the future economic benefits expected to be received are based on forecasts. Management consider the liability to be the best estimate of the net unavoidable costs as at 30 June 2015. 74 | healthscope annual report 2015 Notes to the consolidated financial statementsfor the year ended 30 June 2015nOtE 4: Segment information AASB 8 Operating Segments requires operating segments to be identified on the basis of internal reports about components of the Group that are regularly reviewed by the chief operating decision maker in order to allocate resources to the segment and to assess its performance. Accordingly the Group has determined the following operating segments: • Hospitals Australia – the management and provision of surgical and non-surgical private hospitals • Medical Centres – the provision of practice management services • Pathology International – the provision of pathology services overseas. CoNtiNUiNG oPeRatioNs seGmeNt ReVeNUe 2015 $'000 2014 $'000 seGmeNt oPeRatiNG eBitDa (i) 2015 $'000 2014 $'000 seGmeNt PRoFit (ii) 2015 $'000 2014 $'000 Hospitals Australia 1,852,514 1,752,991 327,595 296,858 263,333 238,123 Medical Centres Pathology International 60,882 243,238 60,429 224,153 15,032 59,981 14,984 52,771 total Corporate total after corporate 2,156,634 2,037,573 402,608 364,613 Other income and expense items (NOTE 8) Finance costs (NOTE 6) Profit / (loss) before income tax Income tax benefit / (expense) Net profit / (loss) from continuing operations 8,700 45,575 317,608 (26,617) 290,991 (2,201) (70,305) 218,485 (64,762) 153,723 7,448 40,073 285,644 (23,589) 262,055 (53,035) (407,513) (198,493) 24,178 (174,315) DisCoNtiNUeD oPeRatioNs seGmeNt ReVeNUe oPeRatiNG eBitDa (i) seGmeNt Loss (ii) Pathology Australia 281,609 288,498 2015 $'000 2014 $'000 2015 $'000 7,464 2014 $'000 11,097 2015 $'000 (4,136) 2014 $'000 201 Other income and expense items (iii) Finance costs (NOTE 14) Loss before income tax Income tax benefit Loss from discontinued operations (11,065) (13,675) (249) (316) (15,450) (13,790) 2,575 4,954 (12,875) (8,836) Net profit / (loss) from continuing & discontinued operations 140,848 (183,151) (i) Segment operating eBItDa represents the profit earned by each segment without the allocation of central administrative costs, depreciation, amortisation, investment revenue, finance costs, income tax expense and other items of income and expense. this is the measure reported to the chief operating decision maker for the purposes of resource allocation and assessment of segment performance. (ii) Segment profit represents operating eBIt being the profit earned by each segment without the allocation of central administrative costs, investment revenue, finance costs, income tax expense and other items of income and expense. (iii) other income and expense items for discontinued operations include an impairment charge of $5.6 million for the current year. healthscope annual report 2015 | 75 nOtE 4: Segment information (continued) Other segment information HosPitaLs aUstRaLia meDiCaL CeNtRes PatHoLoGY iNteR- NatioNaL CoRPoRate totaL CoNtiNUiNG seGmeNts PatHoLoGY aUstRaLia (Dis- CoNtiNUeD) $’000 $’000 $’000 $’000 $’000 $’000 totaL $’000 2015 Total assets 3,300,134 Total liabilities (1,520,232) 115,259 (47,693) 365,536 (36,753) 59,605 3,840,534 140,363 3,980,897 (30,265) (1,634,943) (40,387) (1,675,330) Additions to non-current assets Depreciation & amortisation Investments in joint ventures 2014 327,232 4,618 11,939 4,303 348,092 11,896 359,988 64,262 1,001 6,332 14,406 4,848 89,848 11,598 101,446 – – – 1,001 – 1,001 HosPitaLs aUstRaLia meDiCaL CeNtRes PatHoLoGY iNteR- NatioNaL CoRPoRate totaL CoNtiNUiNG seGmeNts PatHoLoGY aUstRaLia (Dis- CoNtiNUeD) $’000 $’000 $’000 $’000 $’000 $’000 totaL $’000 Total assets 3,035,218 117,405 359,591 12,436 3,524,650 151,921 3,676,571 Total liabilities (2,713,898) (61,763) (49,821) – (2,825,482) (400,459) (3,225,941) Additions to non-current assets Depreciation & amortisation Investments in joint ventures 132,541 6,520 9,665 2,660 151,386 8,086 159,472 58,734 7,527 12,698 5,144 84,103 10,905 95,008 911 – – – 911 – 911 76 | healthscope annual report 2015 Notes to the consolidated financial statementsfor the year ended 30 June 2015 nOtE 5: Revenue An analysis of the Group’s revenue for the year is as follows: CoNtiNUiNG oPeRatioNs Revenue from rendering services Rental revenue Management fees Other revenue total revenue nOtE 6: Finance income and expense CoNtiNUiNG oPeRatioNs Finance income Bank deposits Investments Finance expenses Interest on bank overdrafts and loans Amortisation of facility fees Interest capitalised on qualifying assets Interest on obligations under finance leases Unwinding of discount on provisions Net finance costs The weighted average capitalisation rate on funds borrowed is 4.98% p.a. (2014: 9.60% p.a.) 2015 $’000 2014 $’000 2,094,247 1,983,955 23,868 23,802 14,717 21,766 18,260 13,592 2,156,634 2,037,573 2015 $’000 2014 $’000 3,628 47 3,675 2,853 225 3,078 (80,523) (389,395) (3,186) 12,706 (960) (2,017) (73,980) (70,305) (18,978) 1,423 (1,266) (2,375) (410,591) (407,513) healthscope annual report 2015 | 77 NOTE 7: Profit for the year before tax CoNtiNUiNG oPeRatioNs (a) Gains and losses Loss on disposal of property, plant and equipment (20) (59) 2015 $’000 2014 $’000 (b) other expenses Employee benefits expense Post-employment – defined contribution superannuation expense Termination benefits Other employee benefits Share based payments expense total employee benefits expense (c) Depreciation and amortisation expense Depreciation of non-current assets Buildings Leasehold improvements Plant and equipment Leased plant and equipment Total depreciation Amortisation of intangible assets Contract management rights Operating rights Contract acquisition costs Total amortisation total depreciation and amortisation (d) operating lease rental expense Minimum lease payments 68,390 1,895 63,631 887 880,288 850,734 901 – 951,474 915,252 19,819 8,522 46,613 4,618 79,572 4,622 3,643 2,011 10,276 89,848 19,262 8,751 41,681 3,847 73,541 3,970 4,907 1,685 10,562 84,103 41,374 37,898 78 | healthscope annual report 2015 Notes to the consolidated financial statementsfor the year ended 30 June 2015 nOtE 8: Other income and expense items CoNtiNUiNG oPeRatioNs Restructure and other costs (i) Acquisition costs Onerous leases and related costs (ii) Impairment of assets (iii) Costs of the initial public offering process (iv) Tender costs (v) total 2015 $’000 1,213 394 – – – 594 2,201 2014 $’000 23,177 1,386 (2,534) 3,946 20,757 6,303 53,035 (i) restructure and other costs primarily relate to the general reorganisation within the Hospital and International divisions. (ii) the Group has previously recognised certain property lease contracts as having contractual obligations greater than the economic benefits expected to be received from the contracts. the value of the provision was re-assessed at the end of the prior period resulting in a release of $2.5 million to the statement of profit or loss. (iii) In the prior year, the Group was in the process of disposing of its interest in the Brisbane Waters private Hospital. an impairment charge of $3.9 million was recognised reflecting the re-measurement of the assets held for sale to fair value. (iv) relates to the costs paid to advisors as part of the initial public offering process. (v) relates to costs in connection with the development of the northern Beaches Hospital. healthscope annual report 2015 | 79 nOtE 9: income taxes income tax recognised in the profit or loss tax expense from continuing and discontinued operations Current tax expense in respect of the current year (18,461) (3,067) 2015 $’000 2014 $’000 Deferred tax benefit / (expense) relating to the origination and reversal of temporary differences Other adjustments recognised in the current year total tax benefit / (expense) income tax benefit / (expense) from continuing and discontinued operations Tax benefit / (expense) from continuing operations Tax benefit / (expense) from discontinued operations total tax benefit / (expense) The prima facie income tax expense on pre-tax accounting profit from operations reconciles to the income tax expense in the financial statements as follows: income tax recognised in the income statement CoNtiNUiNG oPeRatioNs Profit / (loss) before income tax for continuing operations Income tax calculated at 30% Increase in income tax expense due to: Effect of expenses that are not deductible in determining taxable profit Adjustments recognised in the current year in relation to the current tax of prior years Decrease in income tax expense due to: Effect of tax rate in foreign jurisdictions Effect of non-assessable income Other adjustments recognised in the current year income tax expense relating to continuing operations (44,982) 1,256 (62,187) (64,762) 2,575 (62,187) 31,901 298 29,132 24,178 4,954 29,132 218,485 (198,493) (65,545) 59,548 (3,965) 2,573 (33,994) 173 1,464 609 102 (64,762) 1,603 – (3,152) 24,178 Deferred tax Arising on income and expenses recognised in other comprehensive income: Fair value re-measurement of cash flow hedges 2,144 (13,653) Current tax liabilities Income tax payable income tax recognised directly to equity Equity raising costs 3,982 4,606 23 15,651 80 | healthscope annual report 2015 Notes to the consolidated financial statementsfor the year ended 30 June 2015 This page is left intentionally blank healthscope annual report 2015 | 81 oPeNiNG BaLaNCe $’000 CHaRGeD to iNCome $’000 CHaRGeD to otHeR ComPReHeNsiVe iNCome $’000 CHaRGeD to eqUitY $’000 tRaNsFeRReD to assets CLassiFieD as HeLD FoR saLe CLosiNG BaLaNCe $’000 14,138 21,555 13,984 5,142 54,819 50,236 21,214 8,494 12,060 27,450 123,797 4,204 247,455 13,646 21,971 12,856 5,353 53,826 51,099 5,999 13,653 107 12,906 116,273 4,851 204,888 7,870 (7,170) 1,775 (358) 2,117 3,567 (13,120) (8,494) (12,060) (10,045) (6,530) (949) (47,631) 492 (416) 1,128 (211) 993 (863) 15,215 8,494 11,953 (1,107) 7,524 (647) 40,569 2,144 2,144 – – – – – – – – – – – – – – – – – – – – – – (13,653) 15,651 (13,653) 15,651 23 23 – – – – – – – – – – – – – – – – – – – – – – $’000 (1,611) – (1,386) (1,331) (4,328) (7,313) (523) (375) (8,211) – – – – – – – – – – – – – – – – – 20,397 14,385 14,373 3,453 52,608 46,490 7,571 2,144 – 17,428 117,267 2,880 193,780 14,138 21,555 13,984 5,142 54,819 50,236 21,214 8,494 12,060 27,450 123,797 4,204 247,455 nOtE 9: income taxes (continued) DeFeRReD tax BaLaNCes 2015 Gross Deferred tax Liabilities Property, plant and equipment Intangibles Inventories Other 2015 Gross Deferred tax assets Provisions Accruals Cash flow hedges Borrowing costs Transaction costs Tax losses Other 2014 Gross Deferred tax Liabilities Property, plant and equipment Intangibles Inventories Other 2014 Gross Deferred tax assets Provisions Accruals Cash flow hedges Borrowing costs Transaction costs Tax losses Other 82 | healthscope annual report 2015 Notes to the consolidated financial statementsfor the year ended 30 June 2015 nOtE 9: income taxes (continued) DeFeRReD tax BaLaNCes 2015 Gross Deferred tax Liabilities Property, plant and equipment 2015 Gross Deferred tax assets Intangibles Inventories Other Provisions Accruals Cash flow hedges Borrowing costs Transaction costs Tax losses Other Intangibles Inventories Other Provisions Accruals Cash flow hedges Borrowing costs Transaction costs Tax losses Other 2014 Gross Deferred tax Liabilities Property, plant and equipment 2014 Gross Deferred tax assets 14,138 21,555 13,984 5,142 54,819 50,236 21,214 8,494 12,060 27,450 123,797 4,204 247,455 13,646 21,971 12,856 5,353 53,826 51,099 5,999 13,653 107 12,906 116,273 4,851 204,888 7,870 (7,170) 1,775 (358) 2,117 3,567 (13,120) (8,494) (12,060) (10,045) (6,530) (949) (47,631) 492 (416) 1,128 (211) 993 (863) 15,215 8,494 11,953 (1,107) 7,524 (647) 40,569 oPeNiNG BaLaNCe $’000 CHaRGeD to iNCome $’000 CHaRGeD to otHeR ComPReHeNsiVe iNCome $’000 CHaRGeD to eqUitY $’000 – – – – – – – 2,144 – – – – 2,144 – – – – – – – (13,653) – – – – (13,653) – – – – – – – – – 23 – – 23 – – – – – – – – – 15,651 – – 15,651 tRaNsFeRReD to assets CLassiFieD as HeLD FoR saLe $’000 (1,611) – (1,386) (1,331) (4,328) (7,313) (523) – – – – (375) (8,211) – – – – – – – – – – – – – CLosiNG BaLaNCe $’000 20,397 14,385 14,373 3,453 52,608 46,490 7,571 2,144 – 17,428 117,267 2,880 193,780 14,138 21,555 13,984 5,142 54,819 50,236 21,214 8,494 12,060 27,450 123,797 4,204 247,455 healthscope annual report 2015 | 83 nOtE 9: income taxes (continued) The following deferred tax assets have not been brought to account as assets: – Tax losses – revenue – Tax losses – capital – Unused tax credits 2015 $’000 – 2,210 – 2,210 2014 $’000 – 846 – 846 Unrecognised taxable temporary differences associated with investments Investments within tax-consolidated groups Healthscope Limited calculates deferred taxes in relation to investments within tax-consolidated groups using the ‘change in tax status’ view. Under this view, an entity leaving a tax-consolidated group would be considered a voluntary change in tax status, i.e. the entity no longer is taxed as part of the tax-consolidated group, but is taxed either as a stand-alone taxpayer, or alternatively as part of another tax- consolidated group (with different reset tax values). This view results in no deferred tax being recognised until such time as an entity leaves the tax-consolidated group. Whilst the entity was a member of the group, the investment would be considered to have no tax consequences because all transactions and balances between entities in the tax-consolidated group are ignored for tax purposes. This approach is consistent with the option of treating the pre-implementation effects of tax consolidation as a change in tax status. tax Consolidation Healthscope Limited elected to form a multiple entry consolidated group with effect from 22 September 2010. Healthscope Limited and its controlled entities joined the consolidated group with effect from 12 October 2010. The multiple entry tax consolidated group converted to a tax consolidated group on 29 July 2014. The accounting policy in relation to this legislation is set out in NOTE 2(b). Entities within the tax-consolidated group have entered into a tax funding arrangement, which sets out the funding obligations of members of the tax-consolidated group in respect of tax amounts. The tax funding arrangements require payments to / from the head entity equal to the current tax liability / (asset) assumed by the head entity and any tax-loss deferred tax asset assumed by the head entity, resulting in the head entity recognising an inter-entity receivable / (payable) equal in amounts to the tax liability / (asset) assumed. The inter-entity receivable / (payable) is at call. Contributions to fund the current tax liabilities are payable in accordance with the tax funding arrangement and reflects the timing of the head entity’s obligation to make payments for tax liabilities to the relevant tax authorities. The head entity, in conjunction with other members of the tax-consolidated group, has also entered into a tax sharing agreement. The tax sharing agreement provides for the determination of the allocation of income tax liabilities between the entities should the head entity default on its tax payment obligations. The effect of the tax sharing agreement is that each member’s liability for tax payable by the tax consolidated group is limited to the amount payable to the head entity under the tax funding arrangement. 84 | healthscope annual report 2015 Notes to the consolidated financial statementsfor the year ended 30 June 2015 nOtE 10: trade and other receivables CURReNt Trade receivables Provision for doubtful debts Loan to Adelaide Community Healthcare Alliance Inc. Goods and services tax recoverable Other NoN CURReNt 2015 $’000 92,113 (1,630) 90,483 – 4,564 1,314 2014 $’000 106,457 (5,512) 100,945 2,000 4,135 1,528 96,361 108,608 Receivable from Nsw state Government(i) 43,842 – (i) nSW State Government receivable in relation to the northern Beaches private Hospital. the receivable is due upon the completion of northern Beaches private Hospital in December 2018. movement in the provision for doubtful debts Balance at beginning of the year Amounts written off during the year Amounts recovered during the year Transferred to assets classified as held for sale Increase / (decrease) in allowance recognised in profit and loss Balance at the end of the year age of trade receivables that are past due but not impaired 30 – 60 days 60 – 90 days 90 – 120 days 120 – 150 days 150 – 180 days + Total 2015 $’000 5,512 950 (1,021) (4,179) 368 1,630 7,774 2,671 1,884 928 2,948 2014 $’000 5,438 1,202 (1,673) – 545 5,512 10,524 3,769 2,227 5,568 3,307 16,205 25,395 The average credit period for the provision of services is 28 days (2014: 26 days). No interest is charged on trade receivables. An allowance has been made for estimated irrecoverable trade receivable amounts arising from the past provision of services, determined by reference to past default experience. During the current financial year, the allowance for doubtful debts decreased by $3,882 thousand (2014: decreased by $657 thousand) due to the transfer of the provision balance to liabilities associated to assets classified as held for sale. Included in the Group’s trade receivable balance are debtors with a carrying amount of $14.4 million (2014: $21.1 million) which are past due at the reporting date for which the Group has not provided as there has not been a significant change in credit quality and the Group believes that the amounts are still considered recoverable. The Group does not hold any collateral over these balances. The average age of these receivables is 80 days (2014: 69 days). healthscope annual report 2015 | 85 nOtE 10: trade and other receivables (continued) In determining the recoverability of a trade receivable, the Group considers any change in the credit quality of the trade receivable from the date credit was initially granted up to the reporting date. The concentration of credit risk is limited due to the customer base being large and unrelated. Accordingly the Directors believe that there is no further credit provision in excess of the allowance for doubtful debts. As at 30 June 2015 $113.4 million (2014: $113.4 million) of trade receivables remain sold to our financier under the Receivables Securitisation Program. The proceeds from the sale were used for working capital purposes. nOtE 11: inventories Consumable supplies at cost NOTE 12: Other financial assets NoN CURReNt Loans and receivables carried at amortised cost: Bonds and subordinated debts available-for-sale investments carried at fair value Shares 2015 $’000 2014 $’000 52,854 50,621 2015 $’000 2014 $’000 2,565 2,500 5 2,570 5 2,505 86 | healthscope annual report 2015 Notes to the consolidated financial statementsfor the year ended 30 June 2015 NOTE 13: Assets classified as held for sale As at 30 June 2015, the Group was in the process of disposing its interests in Clinical Laboratories Pty Ltd and Gribbles Information Technology S/B (Malaysia), otherwise referred to as Pathology Australia, to Crescent Capital Partners. The fair value less costs to sell of the business unit was lower than the aggregate carrying amount of the related assets and liabilities. Therefore, an impairment charge of $5.6 million was recognised on reclassification of the asset and liabilities as held for sale as at 30 June 2015. On 6 July 2015, Healthscope completed this divestment. The major classes of assets and liabilities of the intended disposal are: Carrying value of net assets classified as held for sale Impairment loss on re-measurement to fair value less costs to sell Fair value of net assets classified as held for sale Receivables Inventories Property, plant and equipment Intangibles (net of impairment) Cash and bank balances Deferred tax assets Other assets assets held for sale Payables Current tax liabilities Deferred tax liabilities Employee provisions Other liabilities Liabilities associated with assets held for sale The fair value of net assets classified as held for sale have been disclosed in the statement of financial position as follows: Current assets Current liabilities 2015 $’000 105,584 (5,608) 99,976 24,940 4,651 58,638 30,980 8,124 8,211 4,819 2014 $’000 23,543 (3,946) 19,597 1,403 1,080 18,719 – – – 98 140,363 21,300 (13,565) (2) (4,328) (20,274) (2,218) (40,387) 140,363 (40,387) 99,976 (602) – – (1,101) – (1,703) 21,300 (1,703) 19,597 Intangibles include an impairment charge of $5.6 million for the current year. As at 30 June 2014, the Group was in the process of disposing of its interest in the Brisbane Waters Private Hospital. As such, the assets and liabilities relating to Brisbane Waters Private Hospital were presented as held for sale. healthscope annual report 2015 | 87 nOtE 14: Discontinued operations On 23 June 2015, Healthscope executed an agreement to sell the Australian pathology operations to Crescent Capital Partners, the sale completed on 6 July 2015. As part of the sale, Healthscope also agreed to transfer six skin clinics from its medical centre operations to Crescent Capital Partners. The combined results of the discontinued Pathology Australia operations included in the profit for the year are set out below. The comparative loss from discontinued operations has been re-stated to include those operations classified as discontinued in the current year. Revenue Expenses Loss before finance costs and income tax Net finance costs Loss before income tax Income tax benefit Net loss for the year from discontinued operations 2015 $’000 2014 $’000 281,609 288,498 (296,810) (301,972) (15,201) (249) (15,450) 2,575 (12,875) (13,474) (316) (13,790) 4,954 (8,836) The total expenses include an impairment charge of $5.6 million for the current year. The Pathology Australia business has been classified and accounted for at 30 June 2015 as a disposal group held for sale. nOtE 15: investments in joint ventures PRiNCiPaL aCtiVities owNeRsHiP iNteRest CaRRYiNG amoUNt oF iNVestmeNt owNeRsHiP iNteRest CaRRYiNG amoUNt oF iNVestmeNt Name Unlisted: Mount Hospital Cath Labs Pty. Ltd. (incorporated in Australia) Cardiac catheterisation Mount Hospitals Cardiology Services Pty. Ltd. (incorporated in Australia) Cardiac catheterisation Investments in joint ventures 2015 % 50 50 2015 $’000 656 345 1,001 2014 % 50 50 2014 $’000 638 273 911 The above joint ventures are accounted for using the equity method in these consolidated financial statements. All joint venture entities are individually immaterial. 88 | healthscope annual report 2015 Notes to the consolidated financial statementsfor the year ended 30 June 2015 Reconciliation of movement in investments accounted for using the equity method Balance at the beginning of the year Share of profit for the year Dividends received aggregate information of joint ventures that are not individually material Financial Position: Current assets Non-current assets Total assets Current liabilities Non-current liabilities Total liabilities Net assets Group’s share of net assets (50% of total net assets) Financial Performance: Share of joint venture’s profit after income tax Share of joint venture’s other comprehensive income, net of tax Share of joint venture’s total comprehensive income for the year Dividends and distributions received during the year 2015 $’000 911 2,032 (1,942) 1,001 2015 $’000 3,211 695 3,906 (1,349) (555) (1,904) 2,002 1,001 2,032 – 2,032 2014 $’000 586 1,946 (1,621) 911 2014 $’000 2,434 781 3,215 (727) (666) (1,393) 1,822 911 1,946 – 1,946 During the year the Group received dividends of $1.9 million (2014: $1.6 million) from its investments in joint ventures. Capital commitments and contingent liabilities There are no capital commitments or contingent liabilities relating to joint ventures. Joint operations The Group holds a 50% interest in a joint operation, Darwin Cardiac Angiography Laboratory Joint Venture (unincorporated and operating in Australia). As a joint operator, the Group recognises its share of the assets, liabilities, revenue and expenses in the joint operation. healthscope annual report 2015 | 89 nOtE 16: Property, plant & equipment (a) movements in Carrying amounts Movement in the carrying amounts for each class of property, plant and equipment between the beginning and the end of the current and previous financial years: FReeHoLD LaND BUiLDiNGs $’000 $’000 LeaseHoLD imPRoVemeNts PLaNt & eqUiPmeNt LeaseD PLaNt & eqUiPmeNt CaPitaL woRk iN PRoGRess $’000 $’000 $’000 $’000 2014 Balance at 1 July 2013 Acquisitions through business combinations Additions Transfers Depreciation Impairment of assets Disposals Reclassified to assets held for sale Effect of foreign currency exchange differences Balance at 30 June 2014 2015 Balance at 1 July 2014 Acquisitions through business combinations Additions Transfers Depreciation for continuing operations Depreciation associated discontinued operations Net disposals Reclassified to assets held for sale Effect of foreign currency exchange differences Balance at 30 June 2015 Net book value At the beginning of the year At 30 June 2014 Net book value At the beginning of the year At 30 June 2015 236,339 – 3,257 – – – – (3,785) – 235,811 235,811 – – – – – (1,052) (9,855) – 224,904 236,339 235,811 235,811 224,904 595,102 – – 20,075 (19,723) (3,946) (131) (11,306) 297 580,368 580,368 – 9,455 44,330 (19,819) (460) (265) (9,703) (135) 603,771 595,102 580,368 580,368 603,771 During the year ended 30 June 2015, the Group purchased property, plant and equipment to the value of $332.0 million (2014: $149.4 million) and disposed of property, plant and equipment (other than via a business combination) with a written down value of $6.2 million (2014: $1.6 million). The purchase price of property, plant and equipment is considered by the Directors to at least equate to the market value of the assets at 30 June 2015. The Directors believe that the carrying value of property, plant and equipment will be fully recoverable from the assets use and subsequent disposal (refer NOTE 2(e)). 90 | healthscope annual report 2015 69,668 194 8,201 (11,174) – – – (141) 1,107 67,855 67,855 2,937 7,757 298 (8,522) (3,215) (1,542) (12,248) (289) 53,031 69,668 67,855 67,855 53,031 248,314 201 57,236 5,082 (48,932) – (1,011) (3,628) 1,140 258,402 258,402 1,812 63,001 9,830 (46,613) (7,047) (3,111) (26,133) (813) 249,328 248,314 258,402 258,402 249,328 – – – – – – 17,078 1,344 (4,316) (337) (261) 13,508 13,508 3,160 (4,618) (462) (236) (699) 1,227 11,880 17,078 13,508 13,508 11,880 totaL $’000 1,195,036 395 149,007 – (84,145) (3,946) (1,620) (18,719) 2,283 1,238,291 4,749 327,296 – (79,572) (11,184) (6,206) (58,638) (10) 1,195,036 1,238,291 1,238,291 1,414,726 28,535 78,969 (25,157) – – – – – – – – – – – – 82,347 243,923 (54,458) 28,535 82,347 82,347 271,812 82,347 1,238,291 271,812 1,414,726 Notes to the consolidated financial statementsfor the year ended 30 June 2015 nOtE 16: Property, plant & equipment (a) movements in Carrying amounts Movement in the carrying amounts for each class of property, plant and equipment between the beginning and the end of the current and previous financial years: Acquisitions through business combinations 2014 Balance at 1 July 2013 Additions Transfers Depreciation Impairment of assets Disposals Reclassified to assets held for sale Effect of foreign currency exchange differences Balance at 30 June 2014 2015 Balance at 1 July 2014 Additions Transfers Acquisitions through business combinations Depreciation for continuing operations Depreciation associated discontinued operations Net disposals Reclassified to assets held for sale Effect of foreign currency exchange differences Balance at 30 June 2015 Net book value At the beginning of the year At 30 June 2014 Net book value At the beginning of the year At 30 June 2015 FReeHoLD LaND BUiLDiNGs $’000 $’000 236,339 595,102 – – – – – – – – – – – – 3,257 (3,785) 235,811 235,811 (1,052) (9,855) 224,904 236,339 235,811 235,811 224,904 – – 20,075 (19,723) (3,946) (131) (11,306) 297 580,368 580,368 – 9,455 44,330 (19,819) (460) (265) (9,703) (135) 603,771 595,102 580,368 580,368 603,771 During the year ended 30 June 2015, the Group purchased property, plant and equipment to the value of $332.0 million (2014: $149.4 million) and disposed of property, plant and equipment (other than via a business combination) with a written down value of $6.2 million (2014: $1.6 million). The purchase price of property, plant and equipment is considered by the Directors to at least equate to the market value of the assets at 30 June 2015. The Directors believe that the carrying value of property, plant and equipment will be fully recoverable from the assets use and subsequent disposal (refer NOTE 2(e)). LeaseHoLD imPRoVemeNts PLaNt & eqUiPmeNt LeaseD PLaNt & eqUiPmeNt CaPitaL woRk iN PRoGRess $’000 $’000 $’000 $’000 69,668 194 8,201 – (11,174) – (141) – 1,107 67,855 67,855 2,937 7,757 298 (8,522) (3,215) (1,542) (12,248) (289) 53,031 69,668 67,855 67,855 53,031 248,314 201 57,236 5,082 (48,932) – (1,011) (3,628) 1,140 258,402 258,402 1,812 63,001 9,830 (46,613) (7,047) (3,111) (26,133) (813) 249,328 248,314 258,402 258,402 249,328 17,078 – 1,344 – (4,316) – (337) – (261) 13,508 13,508 – 3,160 – (4,618) (462) (236) (699) 1,227 11,880 17,078 13,508 13,508 11,880 totaL $’000 1,195,036 395 149,007 – (84,145) (3,946) (1,620) (18,719) 2,283 28,535 – 78,969 (25,157) – – – – – 82,347 1,238,291 82,347 – 243,923 (54,458) – – – – – 1,238,291 4,749 327,296 – (79,572) (11,184) (6,206) (58,638) (10) 271,812 1,414,726 28,535 82,347 82,347 271,812 1,195,036 1,238,291 1,238,291 1,414,726 healthscope annual report 2015 | 91 nOtE 17: intangibles GooDwiLL $’000 CoNtRaCt maNaGemeNt RiGHts oPeRatiNG RiGHts CoNtRaCt DeVeLoPmeNt Costs $’000 $’000 $’000 totaL $’000 2014 Balance at 1 July 2013 1,754,603 52,850 9,025 18,520 1,834,998 Acquisitions through business combinations Additions Amortisation Effect of foreign currency exchange differences Balance as 30 June 2014 Net book value At 1 July 2013 As at 30 June 2014 2015 3,619 – – 15,961 1,774,183 1,754,603 1,774,183 – 1,251 (3,970) 492 50,623 52,850 50,623 Balance at 1 July 2014 1,774,183 50,623 – 1,408 (4,956) – 5,477 9,025 5,477 5,477 – 2,909 – 3,792 (1,937) 1,579 21,954 18,520 21,954 3,619 6,451 (10,863) 18,032 1,852,237 1,834,998 1,852,237 21,954 1,852,237 – 600 – 6,517 Acquisitions through business combinations Additions Amortisation for continuing operations Amortisation associated with discontinued operations – 1,618 – – Reclassified to held for sale (31,588) Effect of foreign currency exchange differences Balance as 30 June 2015 (7,640) 1,736,573 – 1,390 (4,622) (3,643) (2,011) (10,276) – – (146) 47,245 (50) (30) – 4,663 (361) (4,969) (659) 14,554 (411) (36,587) (8,445) 1,803,035 Allocation of goodwill and other intangibles to cash-generating units Net book value At 1 July 2014 As at 30 June 2015 1,774,183 1,736,573 50,623 47,245 5,477 4,663 21,954 14,554 1,852,237 1,803,035 92 | healthscope annual report 2015 Notes to the consolidated financial statementsfor the year ended 30 June 2015 The gross carrying amount of goodwill and other intangible assets allocated to the Group’s cash generating units or group of cash generating units (CGUs) is provided below. HosPitaLs aUstRaLia $’000 meDiCaL CeNtRes $’000 PatHoLoGY iNteR- NatioNaL (ii) PatHoLoGY aUstRaLia (i) (Now Dis- CoNtiNUeD) $’000 $’000 totaL $’000 Goodwill 2015 2014 other intangibles 2015 2014 1,393,726 1,392,288 43,254 45,747 98,323 98,143 4,677 5,411 244,524 252,164 18,531 22,100 – 31,588 1,736,573 1,774,183 – 4,796 66,462 78,054 (i) on 23 June 2015, Healthscope limited announced the sale of its pathology australia business. the sale completed on 6 July 2015. (ii) pathology International comprises the cash generating units relating to the pathology businesses in new Zealand, Malaysia and Singapore. Impairment of goodwill As required under accounting standard AASB 136 Impairment of Assets, the Healthscope Group performs an impairment assessment when there is an indication or trigger of a possible impairment of its non-current assets. In addition, at least annually, the Healthscope Group performs an impairment review of goodwill and indefinite life intangible assets, regardless of whether an impairment indicator has been identified. The annual review of goodwill and indefinite life intangible assets was performed at 30 June 2015. Impairment indicators After considering the trading performance of each of the Healthscope Group’s CGU’s for the twelve months to 30 June 2015 and the terms of sale related to the Pathology Australia business announced on 23 June 2015, an impairment indicator was identified for the Pathology Australia CGU. No impairment indicators were identified for the Healthscope Group’s other CGU’s. with its recoverable amount based on the higher of its value in use (present value of future cash flows) or fair value less costs to sell (net selling price). Assumptions The assumptions used for determining the recoverable amount of each CGU are based on past experience and expectations for the future. Cash flow projections are based on management’s forecasts. These forecasts require management estimates to determine income, expenses, working capital movements, capital expenditure, and cash flows for each CGU. The projected cash flows for each individual CGU are discounted using an appropriate discount rate and terminal growth rate unique to each CGU. The following assumptions were used in determining the recoverable amount of each cash generation unit based on value in use as at 30 June 2015. • 2015/2016 management approved profit and loss and cash flow budgets for each cash-generating unit; Impairment testing approach Impairment testing compares the carrying value of a CGU • Inherent growth factors consistent with current performance for each CGU. HosPitaLs aUstRaLia meDiCaL CeNtRes PatHoLoGY iNteRNatioNaL 2015 2014 4–5% 4–5% 2.5–3.5% 2.5–3.5% 3.5–4.5% 3.5–4.5% Prevailing market based pre-tax discount rates for both the Group’s debt and equity instruments is: Hospitals 9.9% (2014: 9.9%), Medical Centres 9.9% (2014: 9.9%), Pathology International 9.9% (2014: 9.9%), • Cash flow projections covering a five-year period and terminal value; and • Terminal growth factors have been set at: Hospitals 3.0% (2014: 3.0%), Medical Centres 2.5% (2014: 3.0%) & Pathology International 3.5–4.5% (2014: 3.0–4.0%). For Hospitals Australia, Medical Centres and Pathology International management believes that any reasonable possible change in key assumptions on which recoverable amount has been assessed would not cause the carrying amount of the CGU to exceed its recoverable amount. Management assessed Pathology Australia for impairment with reference to the fair value of consideration expected to arise on sale less cost to sell and recorded an impairment of $5.6 million to goodwill. healthscope annual report 2015 | 93 nOtE 18: trade and other payables CURReNt Trade creditors Sundry creditors and accruals 2015 $’000 2014 $’000 90,868 139,018 229,886 98,884 116,299 215,183 The average credit period on purchases of goods is 30 days (2014: 30 days). No interest is charged on trade payables. The Group has financial risk management policies in place to ensure that all payables are paid within the credit time-frame. nOtE 19: Earnings per share Basic earnings per share (cents per share) From continuing operations From discontinued operations total basic earnings per share Diluted earnings per share (cents per share) From continuing operations From discontinued operations total diluted earnings per share (a) Reconciliation of earnings used in calculating earnings per share Basic earnings per share Profit/ (loss) for the year attributable to owners of the Company – Profit/ (loss) for the year from continuing operations – Profit/ (loss) for the year from discontinuing operations Diluted earnings per share 2015 2014 9.4 (0.8) 8.6 9.3 (0.8) 8.5 2015 $’000 140,848 153,723 (12,875) (10.6) (0.5) (11.1) (10.6) (0.5) (11.1) 2014 $’000 (183,151) (174,315) (8,836) Profit/ (loss) for the year attributable to owners of the Company 140,848 (183,151) (b) Weighted average number of shares used as the denominator in calculation of Statutory EPS Weighted average number of ordinary shares used in calculating basic earnings per share 1,647,003,373 1,647,003,373 Adjustments for calculation of diluted earnings per share: – Performance rights 1,575,529 – Weighted average number of ordinary shares and potential ordinary shares used as denominator in calculating diluted earnings per share 1,648,578,902 1,647,003,373 2015 No. 2014 No. 94 | healthscope annual report 2015 Notes to the consolidated financial statementsfor the year ended 30 June 2015 (c) Information concerning the classification of securities Performance rights granted to employees under the Group’s executive and employee share option plan are considered to be potential ordinary shares and have been included in the determination of diluted earnings per share to the extent to which they are dilutive. The performance rights have not been included in the determination of basic earnings per share. nOtE 20: Borrowings CURReNt secured – at amortised cost Finance lease liabilities (i) Hire purchase facilities Bank loans (ii) Capitalised borrowing costs Debt securities - Healthscope Notes I and II (iii) Shareholder loans (iv) NoN-CURReNt Unsecured – at amortised cost Bank loans (v) Capitalised borrowing costs secured – at amortised cost Finance lease liabilities (i) Project Finance (vi) Capitalised borrowing costs 2015 $’000 2014 $’000 4,491 4,101 – – – – 4,311 5,565 1,162,401 (5,711) 505,000 546,207 8,592 2,217,773 995,000 (3,558) 991,442 9,238 179,977 (12,734) – – – 11,131 – – 1,167,923 11,131 Summary of borrowing arrangements (i) the finance lease liabilities are secured by way of fixed charges over the leased assets to which they relate and have lease terms ranging from 1 to 5 years. (ii) Comparative period bank loans were secured by asset security (in the nature of fixed and floating charges, share and loan mortgages and real property mortgages over certain parcels of material real property interests held by certain wholly owned subsidiaries of Healthscope limited including the subsidiaries who own the key operating assets of the consolidated entity). Bank loans in the comparative period were settled in conjunction with the Ipo of Healthscope limited on 28 July 2014. (iii) Debt securities relate to Healthscope notes I and II that at the time of the Ipo were settled by either being converted to Healthscope shares or paid in cash. the value of the notes that were converted to shares was $154.6 million, while the value of notes that were paid in cash was $350.4 million. (iv) Shareholder loans as presented were settled on Ipo. the cash flow in relation to this settlement is reflected in the financing activities in the statement of cash flows. (v) a new unsecured senior syndicated facility of $1,295 million was put in place on 1 July 2014. the facility is made up of two facilities, facilities a & B. Both are three year facilities which mature on 31 July 2017. Facility a is currently utilised to $995 million. (vi) project finance relates to a 5-year limited recourse syndicated senior debt facility and senior construction facility totalling $156.0 million and $690.0 million which were put in place on 19 September 2013 and 28 January 2015. these debt facilities are in place to fund the development of the Gold Coast private Hospital and northern Beaches private Hospital. these facilities are secured against entities of the Group which are not obligors of the senior syndicated facility. healthscope annual report 2015 | 95 NOTE 21: Other financial liabilities CURReNt Interest rate swaps (i) Accrued interest (ii) Deferred purchase consideration (iii) NoN CURReNt Deferred purchase consideration (iii) Interest rate swaps (i) 2015 $’000 3,320 6,813 405 2014 $’000 28,317 526,269 400 10,538 554,986 425 3,827 4,252 – – – (i) the interest rate swaps related to the hedging of the current borrowings under the project finance facilities. (ii) Balance as at 30 June 2015 represents interest accrued on bank loans. prior year balance represents interest accrued on shareholder loans, debt securities and bank loans. (iii) relates to the consideration payable on business acquisitions outlined in note 30. 96 | healthscope annual report 2015 Notes to the consolidated financial statementsfor the year ended 30 June 2015 nOtE 22: Provisions CURReNt Employee benefits (i) Medical malpractice insurance (ii) Onerous lease contracts and related costs (iii) Other NoN-CURReNt Employee benefits Onerous lease contracts (iii) medical malpractice insurance Balance at the beginning of the year Additional provisions recognised Reductions arising from payments of settlements Additions / (Reductions) resulting from re-measurement or settlement without cost Balance at the end of the year Current Non-current onerous lease contracts Balance at the beginning of the year Additional provisions raised / (released during the year) Reductions arising from payments / other sacrifices of future economic benefits Unwinding of discount on provision Transferred to liabilities associated to assets classified as held for sale Balance at the end of the year Current Non-current 2015 $’000 2014 $’000 93,714 103,464 7,093 7,787 4,136 6,262 4,840 598 112,730 115,164 19,835 23,648 43,483 6,262 1,972 (1,535) 394 7,093 7,093 – 7,093 33,644 4,346 (8,549) 2,017 (23) 31,435 7,787 23,648 31,435 20,461 28,804 49,265 4,875 2,709 (1,285) (37) 6,262 6,262 – 6,262 41,768 (2,533) (8,158) 2,567 - 33,644 4,840 28,804 33,644 (i) the current provision for employee entitlements is calculated using probability models of employees reaching vesting dates. the calculations are based on pattern of leave taken and are grossed up for future rates, discounted to present value at appropriate discount rates. they are inclusive of on-costs. (ii) the provision for medical malpractice insurance represents the present value of the estimated future outflow of economic benefits that may be required to be made to meet malpractice claims made against the Group. (iii) the provision for onerous lease contracts represents the present value of the future lease payments that the Group is presently obligated to make under non-cancellable onerous operating lease contracts, less revenue expected to be earned on the lease including estimated future sub-lease revenue, where applicable. the estimate may vary as a result of changes in the utilisation of the leased premises and sub-lease arrangement where applicable. the unexpired term of the leases range from one to 10 years. healthscope annual report 2015 | 97 nOtE 23: issued capital 2015 2014 Number $’000 Number $’000 Fully paid ordinary shares – Healthscope Limited 1,732,094,838 3,043,560 883,561,760 1,261,841 Equity raising costs related to the IPO of Healthscope Limited net of tax Reduction in share capital (i) – – (41,931) (304,392) – – (42,036) – 1,732,094,838 2,697,237 883,561,760 1,219,805 Fully paid ordinary shares At the start of the financial year New shares issued 883,561,760 1,261,841 883,561,760 1,261,841 848,533,078 1,781,719 – – At the end of the financial year 1,732,094,838 3,043,560 883,561,760 1,261,841 (i) on 24 February 2015, the Board resolved to reduce Healthscope’s share capital by $304 million in accordance with Section 258F of the Corporations act. the capital reduction had the effect of reducing the share capital account and reducing Healthscope’s accumulated accounting losses. the number of shares on issue will not change as a result of the capital reduction. there are no fractional entitlements arising from the capital reduction. Fully paid ordinary shares carry one vote per share and carry the right to dividends. nOtE 24: accumulated losses Balance at the start of the financial year Profit/(Loss) for the year Reduction in accumulated losses Dividends recognised during the financial year Balance at the end of the financial year 2015 $’000 (519,939) 140,848 304,392 (57,183) 2014 $’000 (336,788) (183,151) - - (131,882) (519,939) 98 | healthscope annual report 2015 Notes to the consolidated financial statementsfor the year ended 30 June 2015 The restructure transactions were accounted for as “common control” transactions and as a result no fair value adjustments or goodwill were recognised. Assets and liabilities were consolidated at their existing carrying value with the difference between the consideration paid and the carrying value of net assets recognised within equity as part of the group reorganisation reserve. The Group reorganisation reserve represents the capital contribution received from / capital distribution made to the common parent entity of the transacting entities. (d) employee benefits reserve The above equity-settled employee benefits reserve relates to performance rights granted by the Company to its executives under its executive performance rights plan. Further information about share based payments to employees is set out in NOTE 39. nOtE 25: Reserves (a) Foreign exchange reserve The foreign currency translation reserve comprises all foreign exchange differences arising from the translation of the financial statements of foreign operations where their functional currency is different to the presentation currency of the reporting entity, as well as from the translation of liabilities that hedge the Group’s net investment in a foreign subsidiary. (b) Hedging reserve The cash flow hedging reserve represents the cumulative effective portion of gains or losses arising on changes in fair value of hedging instruments entered into for cash flow hedges. The cumulative gain or loss arising on changes in fair value of the hedging instruments that are recognised and accumulated under the heading of cash flow hedging reserve will be reclassified to profit or loss only when the hedged transaction affects the profit or loss, or is included as a basis adjustment to the non-financial hedged item, consistent with the relevant accounting policy. (c) Group reorganisation reserve The Group reorganisation reserve initially arose through a series of “common control” transactions related to a Group reorganisation following the acquisition of the Healthscope business by funds advised and managed by TPG (TPG FOF VI SPV, LP.) and Carlyle (Carlyle HSP Partners, LP.) on 12 October 2010. In preparation for the IPO of Healthscope Limited, two group reorganisation transactions were undertaken which resulted in Healthscope Limited acquiring 100% of the shares in: • Healthscope Pathology Holdings Pty Ltd and its controlled entities (“Pathology Australia”) on 29 June 2014; and • CT HSP (Dutch) Cooperatief U.A. and its controlled entities (“Pathology International”) on 28 July 2014. These transactions occurred whilst Healthscope Limited, Pathology Australia and Pathology International were under the common control of CT Healthscope Holdings L.P. CT Healthscope Holdings L.P was the legal parent entity of the Healthscope business for the period from 12 October 2010 (the date the Healthscope business was acquired by a consortium of funds advised and managed by TPG and The Carlyle Group) until its IPO on 28 July 2014. healthscope annual report 2015 | 99 nOtE 26: Dividends paid or proposed Fully paid ordinary shares Interim dividend (recognised) Final dividend (unrecognised) 2015 2014 Cents per share $’000 Cents per share $’000 3.3 3.7 57,183 64,088 – – – – On 25 August 2015, the Directors resolved to pay an unfranked dividend of 3.7 cents per share to the holders of fully paid or ordinary share in respect of the financial year ended 30 June 2015, to be paid to shareholders 14 September 2015. This dividend has not been included as a liability if these consolidated financial statements. The total estimated dividend to be paid is $64.0 million. nOtE 27: Commitments for expenditure Capital expenditure commitments: Property, plant and equipment − Not longer than 1 year − Longer than 1 year but no longer than 5 years − Longer than 5 years 2015 $’000 2014 $’000 574,773 536,888 3,305 173,958 71,974 – 1,114,966 245,932 The capital commitments relate to the development of the Gold Coast Private Hospital and Northern Beaches Hospital and various Brownfield developments. nOtE 28: Contingent liabilities Estimates of material amounts of contingent liabilities, not provided for in the financial report: Bank guarantees to various Workcover authorities 4,614 4,783 Bank guarantee in respect of Northern Beaches development 161,809 – Bank guarantees in respect of property leases 13,146 12,017 2015 $’000 2014 $’000 100 | healthscope annual report 2015 Notes to the consolidated financial statementsfor the year ended 30 June 2015 nOtE 29: Leases (a) Finance lease commitments Minimum future lease payments Payable – Not later than 1 year – Later than 1 year but no later than 5 years – Later than 5 years Minimum lease payments Less future finance charges Present value of minimum lease payments 2015 $’000 2014 $’000 5,257 9,711 622 15,590 (1,861) 13,729 5,305 11,543 1,143 17,991 (2,549) 15,442 These commitments represent future payments for various plant and equipment and have been recognised as a liability in the current financial year. No lease has a term greater than 5 years (2014: 5 years) and all leases expire within the next three years (2014: 4 years). The Group has options to purchase the equipment for a nominal amount at the conclusion of the lease agreements. The Group’s obligations under finance leases are secured by the lessor’s title to the leased assets. Present value of minimum lease payments Payable: − Not later than 1 year − Later than 1 year but no later than 5 years − Later than 5 years Present value of minimum lease payments Included in the financial statements: − Current borrowings (NOTE 20) − Non-current borrowings (NOTE 20) Total In relation to finance leases there are no restrictions imposed by lease arrangements. (b) Operating lease commitments Non-cancellable operating leases contracted for but not capitalised in the financial report Payable: − Not later than 1 year − Later than 1 year but no later than 5 years − Later than 5 years Liabilities recognised in respect of non-cancellable operating leases Onerous lease contracts (NOTE 22) − Current − Non-current 4,438 8,698 593 13,729 4,491 9,238 13,729 4,311 10,064 1,067 15,442 4,311 11,131 15,442 39,526 106,808 125,425 271,759 71,805 149,460 114,764 336,029 7,787 23,648 31,435 4,840 28,804 33,644 Operating leases relate to properties leased by the Group with lease terms between 1 and 30 years (2014: 1 and 30 years). All operating leases contain market review clauses in the event that the lessee exercises its option to renew. healthscope annual report 2015 | 101 nOtE 30: Changes in the composition of the Healthscope Group During the year, the following changes to the consolidated group were completed: aCqUisitioNs 2015 Frankston Private Day Surgery Peninsula Oncology Centre Croydon Health Clinic Bed Brokers Aotea Pathology Limited Cash Consideration Deferred purchase consideration - current Deferred purchase consideration - non-current total deferred purchase consideration total 2014 Sydney Breast Clinic Cash consideration Deferred purchase consideration total DisPosaLs 2015 Date oF aCqUisitioN PRoPoRtioN oF owNeRsHiP aCqUiReD Cost oF aCqUisitioN % $’000 01-Jul-14 01-Jul-14 01-Aug-14 14-Apr-15 01-May-15 100% 100% 100% 100% 100% 20-Dec-13 100% 4,696 405 425 830 5,526 3,600 400 4,000 Date oF DisPosaL PRoPoRtioN oF owNeRsHiP DisPoseD CoNsiDeRatioN ReCeiVeD % $’000 Brisbane Waters Private Hospital 22-Jul-14 100% 20,606 In July 2014, the Group disposed of its interest in the Brisbane Waters Private Hospital. Proceeds from disposal were $20.6 million. No gain or loss was recorded on sale as net assets were written down to their recoverable amount in the prior year based on the expected proceeds from sale. 2014 No material disposals. 102 | healthscope annual report 2015 Notes to the consolidated financial statementsfor the year ended 30 June 2015 Assets acquired and liabilities assumed at the date of acquisition 2015 Current assets Trade and other receivables Inventories Cash & cash equivalents Prepayments Current liabilities Trade and other payables Borrowings Provisions Non-current assets Intangible assets Other assets Property, plant and equipment Net assets Goodwill arising on acquisition Cash consideration Deferred purchase consideration Less: fair value of identifiable net assets acquired Net cash outflow on acquisition of businesses Consideration paid in cash Less: cash and cash equivalent balances acquired 2015 $'000 2,879 418 141 85 (1,878) (4) (4,509) 1,360 686 4,730 3,908 4,696 830 (3,908) 1,618 4,696 (141) 4,555 healthscope annual report 2015 | 103 NOTE 31: Notes to the statement of cash flows (a) Reconciliation of cash and cash equivalents For the purposes of the statement of cash flows, cash and cash equivalents includes cash on hand and in banks and investments in money market instruments, net of outstanding bank overdrafts. Cash and cash equivalents at the end of the financial year as shown in the statement of cash flows is reconciled to the related items in the statement of financial position as follows: Cash and cash equivalents Restricted cash(i) Transferred to Assets held for sale Total Cash and Cash Equivalents (b) Finance facilities Unsecured bank overdraft credit facility Amount utilised Unused credit facility Unsecured credit facility(ii) Amount utilised Unused credit facility Secured credit facility(iii) Amount utilised Unused credit facility Secured project finance(iv) Amount utilised Unused credit facility Receivables securitisation facility(v) Amount utilised Unused credit facility 2015 $’000 154,594 71,235 225,829 (8,124) 217,705 – 5,000 5,000 995,000 300,000 1,295,000 2014 $’000 50,835 87,354 138,189 – 138,189 – 5,000 5,000 – – – – – – 1,162,401 122,200 1,284,601 179,977 666,023 846,000 113,427 26,573 140,000 – 156,000 156,000 113,439 26,561 140,000 (i) restricted cash can only be applied towards expenditure on the Gold Coast private Hospital and the northern Beaches Hospital development which are subject to separate funding arrangements. (ii) a new unsecured senior syndicated facility of $1,295 million was put in place on 1 July 2014. the facility is made up of two facilities, facilities a & B. Both are three year facilities which mature on 31 July 2017. Facility a is currently utilised to $995 million. (iii) the comparative period loan facility advances were secured by all asset security (in the nature of fixed and floating charges, share and loan mortgages and real property mortgages over certain parcels of material real property interest held in certain Group members) from certain entities of the Group including the entities who own the key operating assets of the Group. loan facilities in the comparative period were settled in conjunction with the Ipo of Healthscope limited on 28 July 2014. (iv) project finance relates to a 5-year limited recourse syndicated senior debt facility and senior construction facility totalling $156.0 million and $690.0 million which were put in place on 19 September 2013 and 28 January 2015. these debt facilities are in place to fund the development of the Gold Coast private Hospital and northern Beaches private Hospital. these facilities are secured against entities of the Group which are not obligors of the senior syndicated facility. (v) the Group has in place a receivables securitisation facility with its financier. under the terms of the facility, the Group has de-recognised $113,427 thousand (2014: $113,439 thousand) of eligible receivables and used the proceeds for working capital purposes. the facility has a scheduled commitment termination date of 25th october 2017. 104 | healthscope annual report 2015 Notes to the consolidated financial statementsfor the year ended 30 June 2015 (c) Reconciliation of net profit for the year to net cash flows from operating activities Continuing and Discontinued operations Profit/(Loss) for the year Non-cash flows in operating profit − Depreciation and amortisation – Income tax expense recognised in profit or loss − Finance costs recognised in profit or loss − Share of profit of associates and joint ventures − Equity settled share based payments − Other income and expense items – Profit / (loss) on sale of assets Changes in assets and liabilities − (Increase) / decrease in receivables and other assets − (Increase) / decrease in prepayments − (Increase) / decrease in inventories – Increase / (decrease) to trade payables – Increase / (decrease) to provisions Cash generated from operations Interest received Interest paid Other income and expense items Income taxes paid Net cash generated by operating activities 2015 $’000 2014 $’000 140,848 (183,146) 101,447 62,187 70,555 (2,032) 901 13,267 (92) 95,009 (29,131) 407,829 (1,946) - 66,710 23 387,081 355,348 (13,393) (1,135) (6,433) (7,890) 19,411 (2,031) (387) (5,380) 20,419 (2,359) 377,641 365,610 3,678 (58,328) (10,446) (10,731) 301,814 2,578 (177,660) (8,720) (23,899) 157,909 healthscope annual report 2015 | 105 nOtE 32: Parent entity information assets Current assets Non-current assets Total assets Liabilities Current liabilities Non-current liabilities Total liabilities Net assets equity Issued capital (i) Dividends Accumulated profit / (losses) total equity Financial performance Profit / (loss) for the year Other comprehensive income for the year, net of tax Total comprehensive income for the year 2015 $’000 2014 $’000 84,999 512,712 2,677,801 1,400,876 2,762,800 1,913,588 – 998,175 1,700 1,700 2,761,100 – 998,175 915,413 2,697,237 1,219,805 (57,183) 121,046 – (304,392) 2,761,100 915,413 121,046 (149,797) – – 121,046 (149,797) (i) Healthscope limited has entered into a deed of cross guarantee with fifty-one of its wholly owned subsidiaries. Details of which are included in note 38. no liabilities have been assumed by Healthscope limited in relation to this guarantee as it is expected the parties to the deed of cross guarantee will continue to generate positive cash flows. The accounting policies of the parent are the same as the Group’s policies. 106 | healthscope annual report 2015 Notes to the consolidated financial statementsfor the year ended 30 June 2015 The significant movement in net debt to equity ratio is principally due to the IPO of Healthscope Limited on 28 July 2014 as loan facilities in the comparative period were settled in conjunction with the IPO. (b) Significant accounting policies Details of the significant accounting policies and methods adopted, (including the criteria for recognition, the bases of measurement and the bases on which income and expenses are recognised) in respect of each class of financial asset, financial liability and equity instrument are disclosed in NOTE 2 to the financial statements. (c) Financial risk management objectives The Group’s Corporate Treasury function provides services to the business, co-ordinates access to domestic and international financial markets, monitors and manages the financial risks relating to the operations of the Group through internal risk reports which analyses exposures by degree and magnitude of risks. These risks include market risk (including currency risk, fair value interest rate risk and price risk), credit risk, liquidity risk and cash flow interest rate risk. The Group seeks to minimise the effects of these risks by using interest rate swaps to hedge interest rate exposures. The use of financial derivatives is governed by the Directors, which provide written principles on interest rate risk, credit risk, the use of financial derivatives and non-derivative financial instruments, and the investment of excess liquidity. The Group does not enter into or trade financial instruments, including derivative financial instruments, for speculative purposes. The Corporate Treasury function reports regularly to executive management. The Group’s activities expose it primarily to the financial risks of changes in interest rates. To manage its exposure to interest rate risk, the Group enters into interest rate swaps to mitigate the risk of rising interest rates. nOtE 33: Financial instruments (a) Capital risk management The Group manages its capital to ensure that entities in the Group will be able to continue as a going concern while maximising the return to stakeholders through the optimisation of the debt and equity balance. The capital structure of the Group consists of debt, which includes the borrowings disclosed in NOTE 20, cash and cash equivalents and equity attributable to equity holders of the parent, comprising issued capital, accumulated losses and reserves as disclosed in NOTES 23, 24 and 25 respectively. The Group operates within Australia, New Zealand and South East Asia, primarily through subsidiary companies established in the markets in which the Group trades. None of the Group’s entities are subject to externally imposed capital requirements. Operating cash flows are used to maintain and expand the Group’s assets, as well as to make the routine outflows of tax, dividends and repayment of maturing debt. The Group’s policy is to borrow centrally using a variety of capital market issues and borrowing facilities, to meet anticipated funding requirements. The Directors of the Group review the capital structure on an annual basis. As a part of this review, the Directors consider the cost of capital and the risks associated with each class of capital. The gearing ratio at year-end was as follows: Borrowings - Current 2015 $’000 8,592 2014 $’000 2,217,773 Borrowings - Non Current 1,167,923 11,131 Debt (i) 1,176,515 2,228,904 Cash and cash equivalents (217,705) (138,189) Net debt Equity (ii) 958,810 2,090,715 2,305,746 450,630 Net debt to equity ratio 42% 464% (i) Debt is defined as long and short-term borrowings (excluding derivatives and financial guarantee contracts), as detailed in note 20. (ii) equity includes all capital and reserves of the Group that are managed as capital. healthscope annual report 2015 | 107 nOtE 33: Financial instruments (continued) (d) Categories of financial instruments The Group managed the following financial instruments as at the end of the financial year. Financial assets 2015 $’000 2014 $’000 The Group does not have any significant credit risk exposure to any single counter party. The credit risk on liquid funds and derivative financial instruments is limited because the counter parties are banks with high credit ratings assigned by international credit-rating agencies. The carrying amount of financial assets recognised in the financial statements, which is net of impairment losses, represents the Group’s maximum exposure to credit risk without taking account of the value of any collateral or other credit enhancements held. Cash and cash equivalents 217,705 138,189 (f) Foreign currency risk management 96,361 106,608 43,842 – Foreign currency risk refers to the risk that the value of a financial commitment, recognised asset or liability will fluctuate due to changes in foreign currency rates. – 5 2,000 5 The Group is not significantly exposed to transactional foreign currency risk associated with receipts and payments that are required to be settled in foreign currencies. These transactions are minor in value and quantum with the exposure managed on an individual basis usually through the spot rate purchase of foreign currencies. 229,886 215,183 (g) Liquidity risk management Trade and other receivables - at amortised cost Receivable from State Government Loans and lease facilities - at amortised cost Available for sale financial assets Financial liabilities Trade and other payables - at amortised cost Loans and lease facilities - at amortised cost Derivative instruments in designated hedge accounting relationships Financial guarantee contracts Other financial liabilities 1,176,515 2,228,904 7,147 28,316 179,567 7,643 16,800 526,669 (e) Credit risk management Credit risk refers to the risk that a counter party will default on its contractual obligations resulting in financial loss to the Group. The Group has adopted a policy of only dealing with creditworthy counter parties and obtaining sufficient collateral where appropriate, as a means of mitigating the risk of financial loss from defaults. The Group’s exposure and the credit ratings of its counter parties are continuously monitored and the gross value of transactions concluded is spread amongst approved counter parties. Credit exposure is controlled by counter party limits that are reviewed and approved by the risk management committee annually. Trade receivables consist of a large number of customers, spread across diverse industries and geographical areas. Ongoing credit evaluation is performed on the financial condition of accounts receivable and, where appropriate, credit guarantee insurance cover is purchased. 108 | healthscope annual report 2015 Ultimate responsibility for liquidity risk management rests with the Directors, which has established an appropriate liquidity risk management framework for the management of the Group’s short-term, medium-term and long-term funding and liquidity management requirements. The Group manages liquidity risk by maintaining adequate reserves, banking facilities and reserve borrowing facilities by continuously monitoring forecast and actual cash flows and by matching the maturity profiles of financial assets and liabilities. Included in NOTE 31 is a listing of additional undrawn facilities that the Group has at its disposal to further reduce liquidity risk. The Healthscope Group’s finance facilities are subject to certain covenants as outlined in the Syndicated Facility Agreement dated 1 July 2014. The financial covenants comprise: • Interest cover ratio; and • Senior gearing ratio. At the date of this financial report the Directors of the Healthscope Group are satisfied that the minimum requirements of the covenants have been met and are not aware of any event or potential event of default under the Senior Finance Documents. Notes to the consolidated financial statementsfor the year ended 30 June 2015 Liquidity and interest risk table: Non-derivative financial instruments The following table details the Group’s remaining contractual maturity for its non-derivative financial liabilities with agreed repayment years. The table has been drawn up based on the undiscounted cash flows of financial liabilities based on the earliest date on which the Group can be required to pay. The table includes both interest and principal cash flows. weiGHteD aVeRaGe eFFeCtiVe iNteRest Rate Less tHaN 1 YeaR 1-5 YeaRs 5+ YeaRs % $’000 $’000 $’000 6.10% 229,886 4,438 665 – 8,698 172,818 – 593 6,084 totaL $’000 229,886 13,729 179,567 2015 Non-interest bearing Finance lease liability Financial guarantees Variable interest rate instruments Fixed interest rate instruments – – 4.98% 46,943 1,349,321 – – 1,396,264 – 2014 Non-interest bearing Finance lease liability Financial guarantees Variable interest rate instruments Fixed interest rate instruments 281,932 1,530,837 6,677 1,819,446 6.50% 8.21% 10.65% 215,183 4,311 572 1,283,458 1,450,007 2,953,531 – 11,139 7,320 – – – – 8,908 215,183 15,450 16,800 – – 1,283,458 1,450,007 18,459 8,908 2,980,898 Liquidity and interest risk table: Derivative financial instruments The following table details the Group’s liquidity analysis for its derivative financial instruments. The table has been drawn up based on the undiscounted contractual cash flows on derivative instruments that settle on a net basis. Less tHaN 1 moNtH 1–3 moNtHs 3 moNtHs to 1 YeaR 1–5 YeaRs 5+ YeaRs totaL 2015 Net settled: Interest rate swaps 2014 Net settled: Interest rate swaps 183 183 33,909 33,909 423 423 – – 2,588 2,588 4,159 4,159 – – – – – – – – 7,353 7,353 33,909 33,909 (h) Interest rate risk management The Group is exposed to interest rate risk as the Group borrows funds at both fixed and floating interest rates. The Group manages the risk by maintaining an appropriate mix between fixed and floating rate borrowings, through the use of interest rate swap contracts. Hedging activities are evaluated regularly to align with interest rate views and defined risk appetite; ensuring optimal hedging strategies are applied, by either positioning the statement of financial position or protecting interest expense through different interest rate cycles. healthscope annual report 2015 | 109 nOtE 33: Financial instruments (continued) The Group’s exposures to interest rates on financial assets and financial liabilities are detailed in the liquidity risk management section of this Note. Interest rate sensitivity analysis The sensitivity analyses below have been determined based on the exposure to interest rates for both derivative and non- derivative instruments at the reporting date and the stipulated change taking place at the beginning of the financial year and held constant throughout the reporting year. A 100 basis point increase or decrease is used when reporting interest rate risk internally to key management personnel and represents management’s assessment of the possible change in interest rates. At reporting date, if interest rates had been 100 basis points lower or higher and all other variables were held constant, the Group’s: • Net profit/(loss) after tax would increase by $7.07 million (2014: $2.44 million) and decrease by $7.07 million (2014: $2.44 million). This is mainly attributable to the Group’s exposure to interest rates on its variable rate borrowings. Interest rate swap contracts Under interest rate swap contracts, the Group agrees to exchange the difference between fixed and floating rate interest amounts calculated on agreed notional principal amounts. Such contracts enable the Group to mitigate the risk of changing interest rates on the cash flow exposures on the issued variable debt held. The fair value of interest swaps at the reporting date is determined by discounting the future cash flows using the interest rate curves at reporting date and the credit risk inherent in the contract, and is disclosed below. The average interest rate is based on the outstanding balances at the start of the financial year. The following table details the notional principal amounts and the remaining terms of interest rate swap contracts outstanding as at the reporting date. aVeRaGe CoNtRaCteD FixeD Rate NotioNaL PRiNCiPaL amoUNt FaiR VaLUes % – – – 2.99% – $’000 $’000 – – – 787,960 – 787,960 – – – (7,146) – (7,146) 4.73% 1,085,425 (28,316) – – – – – – – – – – – – 1,085,425 (28,316) Cash Flow hedges 2015 Less than 1 year 1 to 2 years 2 to 3 years 3 to 4 years 5 years + 2014 Less than 1 year 1 to 2 years 2 to 3 years 3 to 4 years 5 years + 110 | healthscope annual report 2015 Notes to the consolidated financial statementsfor the year ended 30 June 2015 The interest rate swaps settle on a monthly basis. The floating rate on the interest rate swaps is the Australian BBSW. The Group will settle the difference between the fixed and floating interest rate on a net basis. All interest rate swap contracts exchanging floating rate interest amounts for fixed rate interest amounts are designated as cash flow hedges to reduce the Group’s cash flow exposure resulting from variable interest rates on borrowings. The interest rate swaps and the interest payments on the loan occur simultaneously and the amount deferred in equity is recognised in the profit or loss over the year that the floating interest rate payments on the debt impact profit of loss. (i) Fair value of financial instruments carried at amortised cost Except as detailed below, the Directors consider the carrying amount of financial assets and financial liabilities recorded at amortised cost in the financial statements approximate their fair values. Financial assets Trade receivables Other financial assets Financial liabilities Trade and other payables Loans and lease facilities Other financial liabilities 2015 2014 CaRRYiNG amoUNt FaiR VaLUe CaRRYiNG amoUNt FaiR VaLUe $’000 $’000 $’000 $’000 92,113 2,570 92,113 2,570 106,457 106,457 2,505 2,505 229,886 229,886 215,183 215,183 1,176,515 1,176,515 2,228,904 2,228,904 14,790 14,790 554,986 554,986 The fair values of financial assets and financial liabilities are determined as follows: • The fair value of financial assets and financial liabilities with standard terms and conditions and traded in 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 fair value of derivative instruments, are calculated using quoted prices. Where such prices are not available, use is made of discounted cash flow analysis using the applicable yield curve for the duration of the instruments for non-optional derivatives. • The fair value of financial guarantee contracts is determined using option pricing models where the main assumptions are the probability of default by the specified counterparty extrapolated from market-based credit information and the amount of loss, given the default. Fair value hierarchy The following table provides an analysis of financial instruments that are measured subsequent to initial recognition at fair value, grouped into levels 1 to 3 based on the degree to which the fair value is observable. Level 1 – fair value measurements are those derived from quoted prices (unadjusted) in active markets for identical assets or liabilities. Level 2 – fair value measurements are those derived from inputs other than quoted prices included within Level 1 that are observable for the assets or liability either directly (i.e. as prices) or indirectly (i.e. derived from prices). Level 3 – fair value measurements are those derived from valuation techniques that include inputs for the asset or liability that are not based on observable market data (unobservable inputs). healthscope annual report 2015 | 111 nOtE 33: Financial instruments (continued) 2015 Financial assets Available for sale financial assets Derivative financial assets Financial liabilities Derivative financial liabilities There were no transfers between level 1 and level 2 in the year. 2014 Financial assets Available for sale financial assets Derivative financial assets Financial liabilities Derivative financial liabilities LeVeL 1 LeVeL 2 LeVeL 3 $’000 $’000 $’000 totaL $’000 5 – 5 – – – – – (7,146) (7,146) – – – – – 5 – 5 (7,146) (7,146) LeVeL 1 LeVeL 2 LeVeL 3 $’000 $’000 $’000 totaL $’000 5 – 5 – – – – – (28,316) (28,316) – – – – – 5 – 5 (28,316) (28,316) There were no transfers between level 1 and level 2 in the year. nOtE 34: Related party transactions transactions with key management personnel and their related entities From time to time the company and the Group enter into transactions with Directors’ related parties. These transactions are on normal commercial terms and conditions and are no more favourable than those available to other parties. Accordingly such transactions are not disclosed. In the past, the Group established an ownership-based compensation plan for certain executives and senior employees. Details of the plan are included within the Directors’ report. Other than the ownership-based compensation plan referred to above, the Group does not have any loans payable to or receivable from key management personnel. No loans were issued or repaid with such personnel during the year. Loans payable to related parties are disclosed in NOTE 20. Equity interests in subsidiaries Details of the percentage of ordinary shares held in subsidiaries are disclosed in NOTE 38 to the financial statements. Equity interests in joint ventures Details of interests in joint ventures are disclosed in NOTE 15 to the financial statements. 112 | healthscope annual report 2015 Notes to the consolidated financial statementsfor the year ended 30 June 2015 nOtE 35: Key management personnel compensation The compensation made to key management personnel of the Group is set out below: Short term employment benefits Long term employment benefits Post-employment benefits Termination payments Balance at the end of the year nOtE 36: auditors’ remuneration auditor of the parent entity Audit or review of the financial report Other assurance services − Due diligence assurance services − Equity raising assurance services Agreed upon procedures Network firm of the parent entity auditor Audit or review of the financial statements Other assurance services − Due diligence assurance services 2015 $’000 5,522 172 746 – 2014 $’000 8,743 3,439 93 – 6,440 12,275 2015 ($) 2014 ($) 614,500 581,100 – – 690,000 760,000 84,500 24,000 699,000 2,055,100 210,450 200,500 119,300 - 1,028,750 2,255,600 All amounts were paid to Deloitte or Deloitte affiliated firms. The auditor of the Healthscope Group is Deloitte Touche Tohmatsu. nOtE 37: Subsequent events On 6 July 2015, Healthscope completed the sale of its Australian pathology operations to Crescent Capital Partners for A$105 million. As part of the sale Healthscope have also agreed to transfer six skin clinics from its medical centre operations to Crescent. The consideration of A$105 million comprised cash proceeds of A$92.5 million and a promissory note of A$12.5 million. The resulting profit or loss on sale was not material. As set out in the Prospectus dated 30 June 2014, shares held in Healthscope by CT Healthscope Holdings L.P (TPG/Carlyle) are subject to voluntary escrow arrangements. The number of shares subject to voluntary escrow was 658,195,966. The voluntary escrow arrangements expired, and the 658,195,966 shares were released from escrow, after the release of this financial report. healthscope annual report 2015 | 113 nOtE 38: Entities within the consolidated group % owNeD CoUNtRY oF oRiGiN 2015 % 2014 % Name oF eNtitY % owNeD CoUNtRY oF oRiGiN 2015 % 2014 % 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 – 100 100 100 – – 100 100 100 100 100 100 Name oF eNtitY Parent entity: Healthscope Limited Healthscope Operations Pty Ltd Healthscope Finance Pty. Ltd. Australia Australia Australia Asia Pacific Healthcare Group Pty. Ltd. Australia Healthscope South Australia Pty. Ltd. Australia Healthscope (Tasmania) Pty. Ltd. Australia Healthscope (Tasmania Finance) Pty. Ltd. Australia La Trobe Private Hospital (Healthscope) Pty. Ltd. Australia Darwin Private Hospital Pty. Ltd. Australia Australian Hospital Care (Como) Pty. Ltd. Australia Australian Hospital Care (Dorset) Pty. Ltd. Australia Australian Hospital Care (Knox) Pty. Ltd. Australia Australian Hospital Care (Lady Davidson) Pty. Ltd. Australia Australian Hospital Care (Ringwood) Pty. Ltd. The Victorian Rehabilitation Centre Pty. Ltd. Australia 100 Australia 100 Healthscope Diagnostic Imaging Pty. Ltd. Australia Melbourne Hospital Pty. Limited P.O.W Hospital Pty. Ltd. Brisbane Private Hospital Pty. Ltd. QPH Wickham Pty. Ltd. Newcastle Private Hospital Pty. Ltd. Nova Health Pty. Limited Australia Australia Australia Australia Australia Australia Brisbane Waters Administration Pty. Ltd. Australia Brisbane Waters Equities Pty. Ltd. HCA Holdings (Southport) Pty. Ltd. Australia Australia HCA Management Company Pty. Ltd. Australia Pacific Private Hospital Pty. Ltd. FPH Operations Pty Ltd. Allamanda Private Hospital Pty. Ltd. Sydney Breast Clinic Pty. Ltd. NBH Operator Co Pty Ltd Tweed Surgicentre Pty. Ltd. Histoderm Pty. Ltd. Holmesglen Private Hospital Pty Ltd Gold Coast Private Property Pty. Ltd. Gold Coast Private Hospital Pty. Ltd. GCPH HoldCo Pty. Ltd. Allamanda Surgicentre Pty. Ltd. A.C.N 009 076 555 Pty. Ltd. HCOA Pty. Ltd. FHIC Pty. Ltd. Australia Australia Australia Australia Australia 99.99 Australia 100 Australia Australia Australia Australia Australia Australia Australia Australia – 100 100 100 100 100 100 – Australia 100 A.C.N. 092 626 956 Pty. Ltd. Australia – 114 | healthscope annual report 2015 Parent entity: Healthscope Limited Gribbles Molecular Science Pty. Ltd. Australia Australia Gribbles Administrative Services Pty. Ltd. Australia Gribbles Pathology Pty. Ltd. Mazlin Investments Pty. Ltd. The Gribbles Group Pty. Ltd. 28-050-049-780 Pty. Ltd. 43 065 317 106 Pty. Ltd. 96 002 869 632 Pty. Ltd. Australia Australia Australia Australia Australia Australia Davies, Campbell & de Lambert Pty. Ltd. Australia Medibill Pty. Ltd. Grahame Hookway & James Carroll Medical Practice Company Pty. Ltd. Nextpath Pty. Ltd. Australia Australia Australia – – – 100 100 – – – – – – – Analytical References Laboratories Pty. Ltd. Australia 100 Yarra Ranges Pathology Pty. Ltd. Australia – 100 100 100 100 100 100 100 100 100 100 100 100 100 100 Australian Dermatopathology Laboratory Pty. Ltd. Australia – 100 Bayside Pathology Pty. Ltd. Australia – 100 Advanced Medical Technology Pty. Ltd. Australia Healthscope Hospitals Holdings No.2 Pty. Ltd. Aotea Pathology Limited Wellington SCL Limited Solaris Pathology Pty. Ltd. E-clinic Pty. Ltd. D F G Clinics Pty. Ltd. Skin Alert Pty. Ltd. Australia New Zealand New Zealand Australia Australia Australia Australia Healthscope Medical Centres Pty. Ltd. Australia Hopkins Services Pty. Ltd. Molescan Australia Pty. Ltd. Clinical Laboratories Pty. Ltd1 Healthcare of Australia Pty. Ltd. Australia Australia Australia Australia Healthcare of Australia Holdings Pty. Ltd. Australia Healthbridge Diagnostics Holdings Pty. Limited Diagnostic Finance Pty. Limited Australia Australia Australian Diagnostics Group Pty. Limited Australia Pathology Victoria Pty. Limited Pathology Specialists Pty. Limited Pathology Diagnostics Pty. Limited Pathology NSW Pty. Limited Pathology First Pty. Limited Pathology Vision Pty. Limited Australia Australia Australia Australia Australia Australia 100 100 100 100 – 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 – – 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 99 100 100 100 100 100 100 100 100 100 100 100 Notes to the consolidated financial statementsfor the year ended 30 June 2015% owNeD CoUNtRY oF oRiGiN 2015 % 2014 % Name oF eNtitY % owNeD CoUNtRY oF oRiGiN 2015 % 2014 % Name oF eNtitY Parent entity: Healthscope Limited APHG No. 2 Holdings 3 Pty. Ltd. APHG No. 2 Pty. Ltd. Australia Australia Australia Healthscope Pathology Holdings Pty. Ltd. Australia Healthscope Pathology Holdings No.2 Pty. Ltd. Australia NBH Borrower Pty Ltd Australia 99.99 NBH Carpark Operator Pty Ltd Australia 99.99 100 100 100 100 Parent entity: Healthscope Limited Australia 100 APHG NZ Investments Limited 100 100 100 – – Medlab South Limited Healthscope New Zealand Ltd New Zealand Diagnostic Group Ltd Southern Community Laboratories Ltd New Zealand New Zealand New Zealand New Zealand New Zealand Healthscope Hospitals International Pty Ltd Australia 100 100 Gribbles Pathology (Malaysia) SDN BHD Malaysia SCL Hawkes Bay Ltd Canterbury SCL Ltd SCL Otago Southland Ltd SCL Otago Southland Services Ltd SCL Otago Southland Code Services Ltd Northland Pathology Laboratory Ltd Labtests Limited Lab Tests Auckland Ltd Gribbles Veterinary Pathology Ltd New Zealand New Zealand New Zealand New Zealand New Zealand New Zealand New Zealand New Zealand New Zealand 100 100 100 100 100 100 100 100 100 100 100 100 100 Gribbles Cytology Services SDN BHD Malaysia Gribbles Information Technology SDN BHD1 Quest Laboratories Pte. Ltd. Quest Laboratories Vietnam Co. Ltd Pathology South Coast Pty. Limited Malaysia Singapore Vietnam Australia 100 CT HSP Holdings (Dutch) B.V Netherlands 100 CT HSP Holdings (Dutch) Cooperatif U.A Netherlands 100 NBH HoldCo 1 Pty Ltd Australia 99.99 NBH HoldCo 2 Pty Ltd Australia 100 NBH Operator B Pty Ltd Australia 99.99 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 – – – – The Australian entities listed above2 formed part of the tax consolidation group and Deed of Cross Guarantee3. 1. on 23 June 2015, the Directors signed a sale agreement to sell the australian pathology operations to Crescent Capital partners, expecting to complete the transaction by the end of July 2015. as part of the sale, these entities will be disposed in the next financial year. 2. except for nBH Borrower pty ltd, nBH Carpark operator pty ltd, nBH Holdco 1 pty ltd, nBH operator B pty ltd and nBH operator Co pty ltd. 3. except for GCpH HoldCo pty. ltd, Gold Coast private property pty. ltd, Gold Coast private Hospital pty. ltd, Histoderm pty. ltd, australian Dermatopathology laboratory pty. ltd., Bayside pathology pty. ltd., analytical reference laboratories pty. ltd., Solaris pathology pty. ltd., Yarra ranges pathology pty. ltd., HCoa pty. ltd., Medibill pty. ltd., 96 002 869 632 pty. ltd., 28-050-049-780 pty. ltd., 43 065 317 106 pty. ltd., Davies, Campbell & de lambert pty. ltd., a.C.n 009 076 555 pty. ltd., a.C.n. 092 626 956 pty. ltd., Gribbles pathology pty. ltd., Grahame Hookway & James Carroll Medical practice Company pty. ltd., nextpath pty. ltd., Gribbles administrative Services pty. ltd., Gribbles Molecular Science pty. ltd., nBH Borrower pty ltd, nBH Carpark operator pty ltd, nBH Holdco 1 pty ltd, nBH Holdco 2 pty ltd, nBH operator B pty ltd and nBH operator Co pty ltd. healthscope annual report 2015 | 115 nOtE 38: Entities within the consolidated group (continued) Deed of Cross Guarantee The consolidated statement of financial position and income statements of the entities part to the deed of cross guarantee are: statement of financial position Current assets Cash and cash equivalents Trade and other receivables Inventories Other financial assets Assets classified as held for sale Prepayments total current assets Non-current assets Other financial assets Investments in joint ventures Property, plant and equipment Intangible assets Deferred tax assets total non-current assets total assets Current liabilities Trade and other payables Deferred revenue Borrowings Liabilities associated to assets classified as held for sale Other financial liabilities Provisions total current liabilities Non-current liabilities Borrowings Other financial liabilities Deferred tax liabilities Provisions total non-current liabilities total liabilities Net assets equity Issued capital Reserves Accumulated losses total equity 116 | healthscope annual report 2015 2015 $’000 2014 $’000 127,023 65,929 47,861 – 140,363 13,505 394,681 59,049 82,517 46,645 28,761 – 15,249 232,221 517,892 102,114 1,001 911 1,201,553 1,167,534 1,539,937 1,591,019 186,826 241,971 3,447,209 3,103,549 3,841,890 3,335,770 196,108 196,392 949 – 40,387 26,749 102,638 1,168 2,213,944 – 584,408 109,785 366,831 3,105,697 991,583 425 43,726 42,235 1,077,969 1,025 2,524 44,451 48,030 96,030 1,444,800 3,201,727 2,397,090 134,043 2,697,237 (239,556) 580,831 21,806 (60,591) (468,594) 2,397,090 134,043 Notes to the consolidated financial statementsfor the year ended 30 June 2015 Income Statement Revenue Share of profits of joint ventures Employee benefits expense Medical and consumable supplies Prosthetics expenses Occupancy costs Service costs Other income and expense items Profit before finance costs, income tax, depreciation and amortisation Depreciation and amortisation Profit before finance costs and income tax Net finance costs Profit / (loss) before income tax Income tax benefit / (expense) Net Profit / (loss) for the year other comprehensive income, net of income tax Items that may be reclassified subsequently to profit or loss Reclassification of hedge reserve through profit or loss Gain on cash flow hedges taken directly to equity Income tax expense relating to other comprehensive income other comprehensive income for the year, net of tax 2015 $’000 2014 $’000 2,178,402 1,735,280 2,032 1,946 (1,090,161) (790,171) (221,347) (216,424) (269,021) (254,653) (115,861) (50,787) (156,175) (148,273) 231 (47,545) 328,100 (87,014) 229,373 (63,353) 241,086 (70,349) 166,020 (392,496) 170,737 (52,209) (226,476) 38,068 118,528 (188,408) – – – – 28,316 17,193 (13,654) 31,855 total comprehensive income / (loss) for the year 118,528 (156,553) healthscope annual report 2015 | 117 nOtE 39: Share based payments The LTI Plan is designed to align the interests of Senior Executives with the interests of shareholders by providing the opportunity for participants to receive an equity interest in Healthscope through the granting of Performance Rights. Growth remains a key plank of Healthscope’s strategic plan and it is appropriate that Senior Executives be incentivised around measures which demonstrate sustainable growth. The LTI Plan also acts to retain key executives who have the capacity to influence company strategy and direction and therefore supports company performance and the interests of shareholders over the longer term. Grants pursuant to the LTI Plan are made a face value. Healthscope introduced the LTI Plan at the time of IPO and the FY15 LTI grant delivered awards in the form of Performance Rights. Each Performance Right entitles the holder to acquire one ordinary share in Healthscope on satisfaction of performance conditions. Performance Rights were granted at no cost to the participants as they form part of remuneration. The Performance Rights are subject to two separate performance measures – 75% of the LTI grant is measured against Absolute Earnings Per Share (EPS as defined in section 7.3.3) and 25% of the LTI grant is measured against Relative Total Shareholder Return (RTSR). Performance is tested against these measures at the end of the performance period, being 30 June 2017. Performance Rights do not carry any voting or dividend entitlements. Detail of Performance Hurdles The dual performance hurdles – EPS and RTSR (with an absolute TSR gate or threshold of 7.5% to be achieved before RTSR can be assessed) have been selected to ensure that the mix of measures means that both lead indicators (indicative of Healthscope business operations) and lag indicators (reflecting the market’s reaction to the company’s past performance) are utilised. The EPS measure was selected because of its correlation with long term shareholder return and its lower susceptibility to short term share price volatility. This measure also provides a greater ‘line of sight’ between Senior Executives’ actions and the way in which their performance is measured. Consequently, this component was more heavily weighted in order drive performance and provide an appropriate retention incentive. RTSR measures the performance of an ordinary Healthscope share (including the value of any cash dividend and any other shareholder benefits paid during the period) against total shareholder return performance of a comparator group of companies, comprising a segment of the S&P ASX100 Index, over the same period. The Board believes that RTSR is an appropriate hurdle, as it links Senior Executive reward to Healthscope’s relative share performance which is consistent with creating shareholder value relative to Healthscope’s peer group. No reward is achieved unless Healthscope’s TSR is higher than the median of this comparator group. These hurdles and vesting schedules are set out below: aBsoLUte ePs PeRFoRmaNCe (75% weiGHtiNG) ReLatiVe tsR PeRFoRmaNCe (25% weiGHtiNG) PoRtioN oF PRs tHat wiLL Vest aGaiNst ReLeVaNt taRGet Less than the threshold target Less than the 50th percentile Equal to the threshold target At 50th percentile Nil 50% Greater than the threshold target, up to maximum target Between 50th and 75th percentile Straight line vesting between 50% and 100% At or above maximum target At or above the 75th percentile 100% 118 | healthscope annual report 2015 Notes to the consolidated financial statementsfor the year ended 30 June 2015information with respect to the number of rights: Balance at the beginning of the year − Number issued on 28 July 2014 − Rights cancelled due to termination of employment − Rights forfeited during the year − Rights exercised during the year − Rights expired during the year − Rights lapsed during the year Balance at the end of the year Exercisable at 30 June 2015 Rights held at the end of the reporting period: 2015 Number – 1,706,433 – – – – – 1,706,433 – 2014 Number – – – – – – – – – PeRFoRmaNCe RiGHt seRies NUmBeR oFRiGHts GRaNt Date VestiNG Date exPiRY Date exeRCise PRiCe FaiR VaLUe at GRaNt Date 2014 1,706,433 28/07/2014 30/06/2017 30/06/2017 0 $1.67 Fair value of performance rights The average fair value of the performance rights granted during the financial year is $1.67. Performance rights granted during the financial year were priced using a Monte Carlo simulation for the TSR Performance Rights and a Black Scholes valuation model for the EPS Performance Rights. The expected life used in the model has been adjusted based on management’s best estimate for the effects of exercise restrictions (including the probability of meeting market conditions attached to the option). iNPUts iNto tHe 2015 PeRFoRmaNCe RiGHt PRiCiNG moDeL Grant date share price Exercise price Estimated volatility Option life Risk free interest rate Dividend yield $2.10 $0.00 20% 3 years 2.60% 3.0% The equity volatility estimate is based on the historical enterprise volatility of comparable companies regeared with Healthscope’s expected debt to equity ratio. The equity volatility adopted is broadly in line with the equity volatility of health sector peers within the ASX 100. healthscope annual report 2015 | 119 Directors’ declaration the directors declare that: (a) in the directors’ opinion, there are reasonable grounds to believe that the company will be able to pay its debts as and when they become due and payable; (b) in the directors’ opinion, the attached financial statements are in compliance with International Financial Reporting Standards, as stated in NOTE 2 to the financial statements; and (c) in the directors’ opinion, the attached financial statements and notes thereto are in accordance with the Corporations Act 2001, including compliance with accounting standards and giving a true and fair view of the financial position and performance of the consolidated entity. At the date of this declaration, the company is within the class of companies affected by ASIC Class Order 98/1418. The nature of the deed of cross guarantee is such that each company which is party to the deed guarantees to each creditor payment in full of any debt in accordance with the deed of cross guarantee. In the directors’ opinion, there are reasonable grounds to believe that the company and the companies to which the ASIC Class Order applies, as detailed in NOTE 31 to the financial statements will, as a group, be able to meet any obligations or liabilities to which they are, or may become, subject by virtue of the deed of cross guarantee. Signed in accordance with a resolution of the directors made pursuant to s.295(5) of the Corporations Act 2001. On behalf of the Directors Paula J. Dwyer Chairman Robert J. Cooke Managing Director and Chief Executive Officer Melbourne, 25 August 2015 120 | healthscope annual report 2015 Additional information Class of securities As at 31 August 2015 the only class of security on issue by Healthscope Limited is fully paid ordinary shares (Shares). Distribution of securities The following table summarises the distribution of securities as at 31 August 2015. No. of securities No. of holders No. of securities No. of holders No. of securities sHaRes PeRFoRmaNCe RiGHts(1) 1–1,000 1,001–5,000 5,001–10,000 10,001–100,000 100,001 and over totaL 2,276 7,233 5,142 6,698 262 21,611 1,448,019 22,911,854 41,156,502 165,593,751 1,500,984,712 1,732,094,838 – – – 2 5 7 – – – 164,406 1,542,027 1,706,433 (1) performance rights were issued pursuant to the Company’s long term incentive (ltI) arrangements. refer to section 7.3 of the remuneration report for more information about the Company’s FY15 ltI arrangements. The number of shareholdings in less than marketable parcels is 117, based on the closing market price on 31 August 2015. Voting Rights At a general meeting every ordinary shareholder, present in person or by proxy, attorney or representative has one vote on a show of hands (unless a shareholder has appointed more than one proxy) and one vote on a poll for each Share held (with adjusted voting rights for partly paid shares). If the votes are equal on a proposed resolution, the chairperson of the meeting has a casting vote, in addition to any deliberative vote. Performance Rights do not carry dividends or voting rights prior to vesting. substantial shareholders As at 31 August 2015, the names of substantial holders in the company and the number of shares to which each substantial holder and the substantial holder’s associates have a relevant interest, as disclosed in substantial holding notices given to the Company are as follows: Name CT HSP GP (Dutch) B.V. as general partner for CT Healthscope Holdings L.P. and its associates, CP V Partners L.L.C. as general partner for TCG V (SCOT), L.P., as general partner for Carlyle HSP Partners L.P and its associates TPG Advisors VIC, Inc as general partner for TPG Gibbs Co-invest L.P., TPG SF VI Pte. Ltd. And TPG ASIA SF V Pte. Ltd and their associates No. oF sHaRes HeLD % HeLD oF issUeD sHaRes 658,195,966 38% AustralianSuper Pty Ltd Blackrock Group of Companies (Blackrock Inc. and subsidiaries) 111,014,162 107,347,704 6.41% 6.19% 1 2 3 securities subject to voluntary escrow arrangements As at 31 August 2015, Management Shareholders held a total of 7,930,582 shares pursuant to voluntary escrow arrangements in connection with the legacy LTI plan and the listing of Healthscope. The escrow period ends on 31 July 2016. healthscope annual report 2015 | 121 Additional information the names of the 20 largest shareholders The following table sets out the 20 largest shareholders as at 31 August 2015. RaNk Name UNits % oF UNits 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13. 14. 15. 16. 17. 18. 19. 20. CT Healthscope Holdings L P J P Morgan Nominees Australia Limited HSBC Custody Nominees (Australia) Limited National Nominees Limited Citicorp Nominees Pty Limited RBC Investor Services Australia Nominees Pty Limited BNP Paribas Noms Pty Ltd UBS Wealth Management Australia Nominees Pty Ltd Australian Foundation Investment Company Limited National Nominees Limited HSBC Custody Nominees (Australia) Limited Citicorp Nominees Pty Limited RBC Investor Services Australia Nominees Pty Ltd Bond Street Custodians Limited Invia Custodian Pty Limited The Australian National University Djerriwarrh Investments Limited HSBC Custody Nominees (Australia) Limited AMP Life Limited Robert Cooke 658,195,966 248,647,957 242,838,021 138,913,918 46,448,653 16,892,799 15,593,343 13,746,854 11,784,524 10,070,489 7,089,933 6,975,069 3,666,983 3,594,063 2,914,985 2,600,000 2,527,381 2,152,492 1,986,463 1,799,314 38.00 14.36 14.02 8.02 2.68 0.98 0.90 0.79 0.68 0.58 0.41 0.40 0.21 0.21 0.17 0.15 0.15 0.12 0.11 0.10 Use of Funds The Company confirms that, for the period from admission to the ASX until 30 June 2015, it has used the cash and assets held in a form of readily convertible to cash which it had at the time of admission in a manner consistent with its business objectives. 122 | healthscope annual report 2015 Company directory Healthscope Limited ACN 144 840 639 Registered Office Level 1 312 St Kilda Road Melbourne VIC 3004 Australia t +61(0)3 9926 7500 F +61(0)3 9926 7599 E info@healthscope.com.au Website www.healthscope.com.au Postal address PO Box 7586 Melbourne VIC 8004 Share Registry Computershare Investor Services Pty Limited Yarra Falls 452 Johnston Street Abbotsford VIC 3067 Australia Telephone from within Australia: 1300 850 505 Telephone from outside Australia: +61 3 9415 4000 E web.queries@computershare.com.au Website www.investorcentre.com Postal address GPO Box 2975 Melbourne VIC 3001 Exchange Listing Healthscope’s Shares are quoted on the Australian Securities Exchange (ASX) under the ASX Code ‘HSO’. www.healthscope.com.au 

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