Innate Pharma
Annual Report 2018

Plain-text annual report

YEAR ENDED 30TH JUNE IPH LImited | ABN 49 169 015 838 Our Story IPH is the leading intellectual property (IP) professional services group in the Asia-Pacific region. As the first IP services group to list on the Australian Securities Exchange in 2014, IPH has always had an eye towards the future. From our foundation and listing, IPH has expanded its business to provide broader access to IP professional services across the Asia-Pacific. IPH companies now operate from 15 offices across eight IP jurisdictions, employing a multidisciplinary team of more than 630 people, including 247 IP professionals. Our group businesses comprise leading IP firms Spruson & Ferguson, AJ Park and Pizzeys, which provide services for the protection, commercialisation, enforcement and management of all forms of intellectual property including patents, trademarks and designs. We also operate in adjacent IP areas through our Practice Insight business. IPH’s success is underpinned by our core values of excellence in service delivery to our clients, innovation in value creation, integrity in business practices, efficiency and effectiveness in our operations and the empowerment and engagement of our people. We are constantly investing in our business to ensure we have the capability, resources and systems to create value for our clients, employees and shareholders both now and into the future. www.iphltd.com.au Contents 1 10 12 FY18 Year In Review Corporate Directory Directors’ Report 36 Financial Statements 91 Independent Auditor’s Report 96 Shareholder Information www.iphltd.com.au 30th June 2018 FY18 Year in Review 2018 Annual Report 2018 Annual Report 1 1 Chairman’s Letter Dear Shareholder, IPH made significant progress in strengthening our business in FY18. While the first half result was impacted by the slight decline in Australian patent filings and the significant appreciation of the Australian dollar, we delivered a strong second half performance from increased earnings in our Asian business, out-performance in the Australian patent market and earnings ahead of expectations in the AJ Park business. This stronger performance in the second half enabled Directors to declare a final dividend of 11 cents per share, 50 per cent franked, bringing the full year dividend to 22.5 cents per share, an increase of 2.3 per cent on the prior year. The Group remains in a very strong financial position and continues to generate strong cashflow to underpin investment in our business and returns to shareholders. In May 2018 the Group commenced an on-market share buy-back program of its ordinary shares of up to $40 million. The program will remain in place for 12 months from commencement (unless concluded earlier or extended) and represents a flexible and efficient capital management initiative that benefits our shareholders. In China, the Spruson & Ferguson business successfully established an exclusive arrangement with an independent Chinese patent agency, Beijing Pat SF intellectual Property Agency, to provide all regulated patent services in China exclusively for Spruson & Ferguson clients. Together, these initiatives continue to strengthen the Group’s operations and support our vision of becoming the leading IP group in secondary IP markets and adjacent areas of IP. We remain committed to delivering sustainable value to our shareholders through a combination of organic growth, margin improvement initiatives and business efficiencies and potential strategic acquisitions. IPH also recognises the importance of ensuring our business is sustainable and we are committed to further defining and communicating the sustainability performance of our business. We believe that a sustainable business is one that provides a safe, rewarding and diverse environment for our people whilst operating in an environmentally and socially responsible manner. I would like to thank David Griffith for his contribution as Managing Director and CEO of IPH until November 2017 and acknowledge David’s contribution to the FY18 results. I would also like to acknowledge IPH’s new CEO, Dr Andrew Blattman, his leadership team and all our people across IPH for their hard work in FY18, and their continued efforts to provide outstanding During the year, we continued to progress strategic initiatives across service to our clients. a number of areas to create a stronger competitive platform. On behalf of the Board of Directors, I would like to thank our A major initiative was the acquisition of AJ Park in New Zealand shareholders for your ongoing support of the Company. in October 2017. AJ Park is the premier IP firm in New Zealand and the acquisition also supports our Asian growth objectives by extending our Asian service offering to AJ Park’s local and international clients. In Australia, we successfully completed the merger of Fisher Adams Kelly Callinans (FAKC), Cullens and Spruson & Ferguson, with all three firms now fully integrated and operating as Spruson & Ferguson. This merger deepens Spruson & Ferguson’s expertise and geographic reach in the Australian market and provides an enhanced platform to support our continued growth in the Asia-Pacific region. Richard Grellman, AM Chairman 2 www.iphltd.com.au Financial Highlights1 Revenue 2 A$226m (cid:50)perating (cid:38)ash(cid:190)ow A$46.5m 226 186 157.5 107.8 250 200 ) m $ ( 150 100 50 0 31.5 ) m $ ( 50 40 30 20 10 0 49.9 46.5 42.1 FY15 FY16 FY17 FY18 FY15 FY16 FY17 FY18 EBITDA 3 A$70.1m Earnings Per Share 4 20.7c 68.7 70.1 59.5 38.5 ) m $ ( 70 60 50 40 30 20 10 0 ) s t n e c ( 25 20 15 10 5 0 19.5 21.7 22.3 20.8 FY15 FY16 FY17 FY18 FY15 FY16 FY17 FY18 NPAT A$40.7m Full Year Dividend 22.5c 42.9 40.7 38.8 30.6 ) m $ ( 50 40 30 20 10 0 13.5 ) s t n e c ( 25 20 15 10 5 0 21 22 22.5 FY15 FY16 FY17 FY18 FY15 FY16 FY17 FY18 1. The Company listed on 17 November 2014. 2. FY15 and FY16 revenue has been restated to include recognition of filing fee revenue per change in the FY17 accounting policy. 3. Earnings before interest, tax, depreciation and amortisation. 4. Diluted earnings per share. 2018 Annual Report 3 CEO’s Report This is my first Annual Report as CEO and Managing Director of The Asian patent market continues to be a significant area of IPH Limited. I am honoured to serve as the CEO of the leading growth, representing a strong opportunity for IPH. Patent filings IP professional services group in the Asia-Pacific region. I would by IPH Asian entities increased by 5.6 per cent in FY18. like to acknowledge David Griffith, IPH’s inaugural Managing Director & CEO who stepped down in November 2017, for his enormous contribution and vision in creating IPH. During FY18, we were able to strengthen our leading position and this was reflected in an improved second half performance and implementation of strategic initiatives to create a strong platform for future growth. The IPH Group’s overall patent and trade mark filings continue to underpin future revenue and earnings growth across our business. Total patent filings by IPH companies increased by approximately 17 per cent in FY18 from a combination of organic and acquisition growth, while trade mark filings increased significantly due to the full year contribution from the substantial trade mark practices of Ella Cheong Hong Kong and China businesses, Financial results Ð strong second half performance acquired in FY17, and AJ Park, acquired in FY18. Revenue increased by 21.5 per cent to $226.0 million, driven by organic growth and the acquisition of AJ Park in October 2017. Creating a stronger platform for growth This was offset by the impact of a stronger Australian dollar in FY18 compared to the prior year. Statutory EBITDA increased by 2.1 per cent to $70.1 million while Underlying EBITDA of $74.0 million increased by 3.3 per cent on the prior year. In FY18 the Group made significant progress in implementing a number of strategic initiatives, which will support future growth. In our Australian and New Zealand IP businesses, the earnings contribution of NZ$6.5 million in FY18 from AJ Park in New Zealand was ahead of expectations, due to a focus on margin Statutory net profit after tax (“NPAT”) declined by 5.2 per cent expansion initiatives. We are now focused on capturing referral to $40.7 million. Statutory NPAT was impacted by increased synergies into Asia, another key area of opportunity for the Group. amortisation charges of acquired assets, restructuring charges and the one-off write-down of intangibles related to the Cullens and Fisher Adams Kelly Callinans (FAKC) brands. Underlying NPAT of $51.9 million increased by 1.4 per cent on the prior year. Fisher Adams Kelly Callinans (FAKC) and Cullens are now fully integrated into the Spruson & Ferguson business. Clients of FAKC and Cullens can now benefit from direct access to Spruson & Ferguson’s service offering across Asia Pacific and Spruson & Ferguson clients now have access to an expanded Market conditions Ð IPH outperforms the market team in Australia. We expect to generate cost synergies from In Australia, while the overall market for patent filings was the integration of approximately $1 million in FY19. broadly steady in FY18, the second half grew by 1.6 per Our Asian IP business continues to be a strong focus of our cent which is in line with the medium-term growth rate growth strategy, leveraging the opening of regional offices and the of approximately 1.5 per cent. IPH group businesses acquisition of Ella Cheong Hong Kong and Beijing (re-branded outperformed the market for both the year (1.7 per cent) and the Spruson & Ferguson) in prior years. second half (5.2 per cent) in terms of patent filing growth. China remains an important growth market for IPH. In FY18 Combined, the IPH group maintained our number one patent Spruson & Ferguson successfully established an exclusive market position in Australia with 23.8 per cent market share. arrangement with an independent Chinese patent agency One of the key leading indicators of future patent filings is the level of US Patent Cooperation Treaty (PCT) filings, which continues to be steady. Similarly, the proportion of PCT filings into Australia also remains stable. In Singapore for the calendar year to 30 June 2018, the overall patent filing market was flat, however, IPH Singapore filings increased by 1.5 per cent. Combined, the IPH Group continues to hold the number one patent market position in Singapore with 24.4 per cent of patents filed for the same period. (Beijing Pat SF Intellectual Property Agency Co Ltd) to undertake all regulated patent work in China exclusively for Spruson & Ferguson clients. This arrangement enables a more streamlined offering for clients, backed by Spruson & Ferguson’s quality, service, reliability and communication standards. It also strengthens our footprint in an addressable market of approximately 130,000 Chinese patent filings annually. 4 www.iphltd.com.au IPH Limited In our Data and Analytics business, the Group’s wholly-owned In Asia, we expect to maintain our leading market share position subsidiary, Practice Insight Pty Limited, completed the sale of in Singapore while seeking to expand market share in other SE two of its products, Filing Analytics and Citation Eagle, to CPA Asian higher growth markets. A core component of our strategy Global for $10 million in August 2018. remains on increasing our share in the Chinese addressable While these products had established a high quality, diverse and loyal customer base, the Board felt the best opportunity market and continuing to leverage our existing network to grow internal filings and case transfers. to maximise their potential was under the ownership of a Practice Insight will concentrate its efforts on the final global organisation with established marketing and software development of its autonomous activity monitoring tool, distribution channels in the IP sector. WiseTime. In FY19, the reshaped Practice Insight sales team The sale will enable our remaining Data and Analytics Software business to focus on the development and sales of its autonomous activity monitoring tool, WiseTime. Continued focus on our people Our people remain critical to delivering our strategy and during FY18 we made significant progress in attracting, motivating and retaining key talent across IPH. Our corporate structure continues to provide us the ability to invest and develop our people which is a key part of our competitive advantage. We appointed 13 new Principals across the Group during the year, bringing the number of new Principal appointments to 28 since listing in November 2014. Excluding retirement, over 80 per cent of Pizzeys and FAKC ex-vendor Principals recommitted to the IPH group (post initial employment agreement minimum terms). will focus on promoting WiseTime into the IP law firm market and progressing partnerships into the broader legal services software providers. At a Group level, IPH will continue to focus on attracting, motivating and retaining talented employees within our organisation. We will maintain our strategic and disciplined approach to the assessment of any potential acquisition opportunities in Asia-Pacific and other secondary IP markets. The IPH group made significant progress during FY18 and I want to acknowledge and thank all of our people across the businesses for their hard work in delivering these results. I also want to thank our shareholders for their continuing support of the Company and assure you of the Board and management’s continued focus and commitment to generating sustainable value for shareholders. Priorities for FY19 For FY19, we remain focused on maintaining and leveraging our leading position in Australia/New Zealand with a continued focus on market share initiatives and achieving margin expansion in AJ Park, and also through the integration of FAKC and Cullens into Spruson & Ferguson. Dr. Andrew Blattman CEO and Managing Director 2018 Annual Report 5 Company Snapshot OUR ASIA PACIFIC REACH 8 IP jurisdictions 15 (cid:50)ffices No1 Patent group in Australia, New Zealand and Singapore1 OUR PEOPLE 630Employees 80 Principals 167 Professional Staff 383 Support Staff Senior Executives and Principals 24% Female 76% Male 6 www.iphltd.com.au Clients10K+ 4 BRANDS PIZZEYS Patent and Trade Mark Attorneys AU S T R A L I A | N E W Z E A L A N D A S I A PAC I F I C IPH Limited 19K+ (cid:51)atent filings4 (FY18) 24 % Patent market share in Australia2 (FY18) 24.5 % Patent market share in Singapore3 (CYTD18) 8.5K+ Trademark filings4 (FY18) 1 Australia (cid:331) FY18 as at 30 June 2018. New Zealand (cid:331) FY18 as at 30 June 2018. Singapore (cid:331) CYTD18 as at approx. 30 June 2018. 2 3 4 IPH management estimate based on share of agents recorded with IP Australia as at 3 August 2018 for FY18. IPH Group market share includes filings by the following entities: Spruson & Ferguson (Australia), FAKC, Pizzeys, Cullens and AJ Park. Acquired companies filings are included from the first day of the relevant period. IPH management estimate based on share of agents recorded with IPOS as at approx. 2 August 2018 and may not reflect any change of agent recorded since filing. CYTD18 IPH’s percentage of market share represents patent filing by Spruson & Ferguson (Asia) and Pizzeys over total number of applications filed in Singapore. IPH management estimate based on internal filing information. FY18 includes filings by AJ Park (acquired in FY18). All incoming/outgoing patent/trademark applications filed either directly or indirectly (through an agent) by IPH companies, including where incoming/outgoing agent is an IPH entity. Applications filed by Spruson & Ferguson (China/HK) and AJ Park are those filed by the firm across the entire financial year. 2018 Annual Report 7 Board of Directors Richard Grellman, AM Dr. Andrew Blattman Independent Non-Executive Chairman CEO and Managing Director FCA Richard was appointed independent Non- Executive Chairman in September 2014. Richard worked for KPMG for 32 years, mostly within the Corporate Recovery Division and was a Partner from 1982 to 2000. Richard is currently the Tribunal of The Statutory and other Officers Remuneration Tribunal (SOORT), appointed by the Governor of NSW. Richard is also Chairman of Fastbrick Robotics Ltd. Richard is a Director of Bisalloy Steel Group Limited and the National Health and Medical Research Council Institute for Dementia Research. 8 www.iphltd.com.au BScAgr (Hons 1), PhD, GraDipIP Dr Andrew Blattman was appointed as Managing Director & Chief Executive Officer of IPH Limited in November 2017. Andrew has more than 20 years’ experience in the intellectual property profession. Previously he was CEO of Spruson & Ferguson, a leading intellectual property (IP) firm in the Asia-Pacific region and the largest entity in the IPH Limited group. Andrew joined Spruson & Ferguson in 1995 and in 1999 he was appointed as a Principal of the firm. In 2015 Andrew was appointed CEO of Spruson & Ferguson. Under his leadership Spruson & Ferguson significantly expanded its footprint in the Australian and Asian IP markets (cid:331) opening new offices in Melbourne, Beijing, Hong Kong SAR, Jakarta and Bangkok. Since Spruson & Ferguson’s incorporation and the listing of IPH on the Australian Stock Exchange in 2014, Andrew has played a key role in the development and growth of the IPH group. He has a deep knowledge and understanding of the IPH business and the environment in which the company operates. IPH Limited John Atkin Robin Low Independent Non-Executive Director Independent Non-Executive Director LLB (1st Class Hons) BA (Pure Mathematics) (1st Class Hons) BCom, FCA Robin was appointed as a Non-Executive Director John was appointed as a Non-Executive Director in September 2014. in September 2014. John is a Non-Executive Director of Integral Diagnostics Limited, Commonwealth Bank SuperFund, Australian Outward Bound Foundation and Outward Bound International Inc. He is a member of the Board of the State Library of NSW Foundation. John is a former CEO & Managing Director of The Trust Company Limited (2009-2013) prior to its successful merger with Perpetual Limited. John was also Managing Partner and Chief Executive of Blake Dawson (2002-2008). John also worked at Mallesons Stephen Jaques as a Mergers & Acquisitions Partner for 15 years (1987-2002). Robin is a Director of AUB Group Limited, CSG Limited, Appen Limited, Primary Ethics, the Public Education Foundation, Australian Reinsurance Pool Corporation and Gordian Runoff Limited/Enstar Australia Holdings Pty Ltd (part of the NASDAQ listed Enstar Group). She is also President of the Sydney Medical School Foundation and Deputy Chairman of the Auditing and Assurance Standards Board. Robin was with PricewaterhouseCoopers for 28 years and was a Partner from 1996 to 2013, specialising in audit and risk. 2018 Annual Report 9 Heading Here Corporate Directory 10 www.iphltd.com.au 10 www.iphltd.com.au Corporate Directory Directors Company secretary Notice of annual general meeting Registered office Principal place of business Share register Auditor Solicitors Stock exchange listing Mr Richard Grellman AM - Chairman Dr Andrew Blattman Mr John Atkin Ms Robin Low Mr Philip Heuzenroeder The details of the annual general meeting of IPH Limited are: Friday 23 November 2018 at 10:30am at the offices of EY 200 George Street, Sydney NSW 2000 Level 24, Darling Park Tower 2 201 Sussex Street, Sydney NSW 2000 Tel: 02 9393 0301 Fax: 02 9261 5486 Level 24, Darling Park Tower 2 201 Sussex Street, Sydney NSW 2000 Link Market Services Limited Level 12, 680 George Street, Sydney NSW 2000 Tel: 1300 554 474 Deloitte Touche Tohmatsu Level 9, Grosvenor Place 225 George Street, Sydney NSW 2000 Watson Mangioni Lawyers Pty Limited Level 23, 85 Castlereagh Street, Sydney NSW 2000 IPH Limited shares are listed on the Australian Securities Exchange (ASX code: IPH) Website www.iphltd.com.au Corporate Governance Statement The Corporate Governance Statement was approved by the Board of Directors on 18 September 2018 and can be found at www.iphltd.com.au 2018 Annual Report 11 Directors’ Report 12 www.iphltd.com.au 12 www.iphltd.com.au 30th June 2018 The Directors present their report, together with the financial statements, of the consolidated entity (referred to hereafter as the ‘Group’) consisting of IPH Limited (referred to hereafter as the ‘Company’ or ‘Parent Entity’) and the entities it controlled at the end of, or during, the year ended 30 June 2018. IPH Limited (“IPH”, ASX:IPH), is the holding company of intellectual property services firms Spruson & Ferguson, Fisher Adams Kelly Callinans, Pizzeys, Cullens and AJ Park and data analytics software development company, Practice Insight. The group employs a multidisciplinary team of approximately 630 people in Australia, New Zealand, Singapore, Malaysia, Thailand, Indonesia, China, Hong Kong and Germany. IPH is the leading intellectual property (“IP”) services group in the Asia-Pacific region offering a wide range of IP services and products to a diverse client base of Fortune Global 500 companies, multinationals, public sector research organisations, SMEs and professional services firms worldwide. 1. Directors The following persons were Directors of IPH Limited during the whole of the financial year and up to the date of this report, unless otherwise stated: Name Office Mr Richard Grellman, AM Non-executive Chairman Dr Andrew Blattman Executive Officer Managing Director and Chief (appointed 20th November 2017) Mr John Atkin Non-executive Director Ms Robin Low Non-executive Director Managing Director and Chief IPH was the first IP services group to list on the Australian Mr David Griffith Executive Officer Securities Exchange. Dr Sally Pitkin (resigned 20th November 2017) Non-executive Director (resigned 20th November 2017) 1.1 Information on Directors The skills, experience, and expertise of each person who is a director of the Company at the end of the financial year is provided below, together with details of the company secretary as at year end. Name: Richard Grellman, AM Title: Non-executive Chairman (appointed 23 September 2014) Qualifications: FCA Experience and expertise: Other current directorships: Richard worked for KPMG for 32 years, mostly within the Corporate Recovery Division and was a Partner from 1982 to 2000. Richard is currently the Tribunal of The Statutory and other Officers Remuneration Tribunal (SOORT), appointed by the Governor of NSW. Richard is Chairman of Fastbrick Robotics Ltd (2018) and is also a Director of Bisalloy Steel Group Limited (2003) and the National Health and Medical Research Council Institute for Dementia Research (2015). Former directorships Chairman of Crowe Horwath Australasia Limited (2011 - 2015), (last 3 years) Chairman of Genworth Mortgage Insurance Limited (2012-2016), Chairman of the AMP Foundation (2012 (cid:331) 2018) Interests in shares: 71,449 Special responsibilities: Chairman. Member (cid:331) Audit Committee, Risk Committee, Nomination and Remuneration Committee 2018 Annual Report 13 Directors’ Report Name: Dr. Andrew Blattman Title: Managing Director and Chief Executive Officer Qualifications: BScAgr (Hons 1), PhD, GraDipIP Experience and expertise: Dr Andrew Blattman was appointed as Managing Director & Chief Executive Officer of IPH Limited in November 2017. Andrew has more than 20 years’ experience in the intellectual property profession. Previously he was CEO of Spruson & Ferguson, a leading intellectual property (IP) firm in the Asia-Pacific region and the largest entity in the IPH Limited group. Andrew joined Spruson & Ferguson in 1995 and in 1999 he was appointed as a Principal of the firm. In 2015 Andrew was appointed CEO of Spruson & Ferguson. Under his leadership Spruson & Ferguson significantly expanded its footprint in the Australian and Asian IP markets (cid:331) opening new offices in Melbourne, Beijing, Hong Kong SAR, Jakarta and Bangkok. Since Spruson & Ferguson’s incorporation and the listing of IPH on the Australian Securities Exchange in 2014, Andrew has played a key role in the development and growth of the IPH group. He has a deep knowledge and understanding of the IPH business and the environment in which the company operates. Memberships of FIPTA, APAA, AIPPI, FICPI and IPSANZ Professional Associations: Other current directorships: No other current directorships Interests in shares: 4,506,166 Special responsibilities: CEO 14 www.iphltd.com.au 30th June 2018 Name: John Atkin Title: Non-executive Director (appointed 23 September 2014) Qualifications: LLB (1st Class Hons), BA (Pure Mathematics) (1st Class Hons) Experience and expertise John is a former Chief Executive Officer and Managing Director of The Trust Company Limited 2009 - 2013). John was also Managing Partner and Chief Executive of Blake Dawson (2002 - 2008). He also worked at Mallesons Stephen Jaques as a Mergers & Acquisitions Partner for 15 years (1987 - 2002). Other current directorships Integral Diagnostics Limited (2015), The Australian Outward Bound Foundation (2007) and the State Library of NSW Foundation (2013), Commonwealth Bank SuperFund (2017) and Outward Bound International Inc (2017). Former directorships Managing Director of The Trust Company Limited (2009 - 2013), Non-executive director Aurizon Holdings Limited (last 3 years) (2010 - 2016), Chairman GPT Metro Office Fund (2014-2016). Interests in shares: 115,829 Special responsibilities: Chairman - Nomination and Remuneration Committee. Member - Audit Committee, Risk Committee Name: Robin Low Title: Non-executive Director (appointed 23 September 2014) Qualifications: BCom, FCA, GAICD Experience and expertise Other current directorships: Robin was with PricewaterhouseCoopers for 28 years and was a Partner from 1996 to 2013, specialising in audit and risk. AUB Group Limited (2014), CSG Limited (2014), Appen Limited (2014), Sydney Medical School Foundation (2012), Auditing and Assurance Standards Board (2013), Primary Ethics (2011), Public Education Foundation (2010), Australian Reinsurance Pool Corporation (2017) and Gordian Runoff Limited/Enstar Australia Holdings Pty Limited (part of the NASDAQ listed Enstar Group) (2017). Interests in shares: 74,214 Special responsibilities: Chairman - Audit Committee, Risk Committee. Member - Nomination and Remuneration Committee The directors hold no interest in options, performance rights or contractual rights to the securities of IPH Limited as at the date of this report. 2018 Annual Report 15 Directors’ Report 1.2 Meetings of Directors The number of meetings of the Company’s Board of Directors (‘the Board’) held during the year ended 30 June 2018, and the number of meetings attended by each Director were: Full Board Nomination and Remuneration Committee Audit Committee Risk Committee Attended Held Attended Held Attended Held Attended Held Richard Grellman, AM Andrew Blattman John Atkin Robin Low David Griffith Sally Pitkin 9 4 9 9 5 5 9 4 9 9 5 5 2 - 3 3 - 1 2 - 3 3 - 1 3 - 5 5 - 2 3 - 5 5 - 2 2 - 4 4 - 2 2 - 4 4 - 2 Held: represents the number of meetings held during the time the Director held office. 2. Company secretary 4. Operational and Financial Review Philip Heuzenroeder, BEc, LLB, LLM, GAICD (Order of Merit). Mr Heuzenroeder was appointed Group General Counsel and Company (cid:23)(cid:17)(cid:20) (cid:50)perations and financial performance Secretary on 29 April 2016. He is a solicitor with over 20 years professional experience working in private practice and in-house, with experience in a broad range of areas of law including commercial law, competition law, ICT and intellectual property, and litigation. Philip was formerly a Principal of Spruson & Ferguson Lawyers and was a director of the Cure Brain Cancer Foundation from 2013 to 2017. 3. Principal activities During the year principal activities of the Group consisted of: The summary financial analysis below shows the results on a statutory and underlying basis. The FY18 underlying earnings of the Group have been determined by adjusting statutory earnings amounts to eliminate the effect of business acquisition adjustments, business acquisition costs, restructuring costs, new business establishment costs and non-cash share based payments expenses. Revenue has grown by $40.0M to $226.0M, up by 21.5%, driven by organic growth and the impact of the acquisition of AJ Park and offset » IP services related to provision of filing, prosecution, enforcement by the impact of a stronger Australian dollar than in the comparative and management of patents, designs, trade marks and other IP in period. Australia, New Zealand, Asia and other countries; and Statutory EBITDA increased by $1.4M to $70.1M, up from $68.7M in » the development and provision of IP data and analytics software FY17. Underlying EBITDA of $74.0M has increased by 3.3% from the under the subscription licence model whereby the software is prior corresponding period. licensed and paid for on a recurring basis. The Group achieved a statutory net profit after tax of $40.7M down There were no significant changes in the nature of activities of the Group 5.2% from $42.9M in FY17. Underlying net profit after tax of $51.9M is during that period. a 1.4% improvement over the prior period. 16 www.iphltd.com.au 30th June 2018 Revenue FY18 Revenue FY17 Chg% EBITDA FY18 EBITDA FY17 Chg% Australia & New Zealand IP 155,367 123,162 26.1% 54,147 50,575 7.1% Asian IP 77,968 68,622 13.6% 31,146 29,579 5.3% 233,335 191,784 21.7% 85,293 80,154 6.4% Data and Analytics Software 1,212 743 (2,709) (2,503) Corporate Office Eliminations (1,209) (218) (8,367) (5,616) (7,312) (6,277) (213) (409) Underlying Revenue / EBITDA 226,026 186,032 21.5% 74,004 71,626 3.3% Business acquisition costs Business combination adjustments New business establishment costs Restructuring expenses Share based payments (982) (2,617) 642 1,181 (786) (207) (2,134) - (676) (1,325) Statutory Revenue / EBITDA 226,026 186,032 21.5% 70,068 68,658 2.1% Interest Income Interest Expense Depreciation and amortisation Impairment of intangible assets Net Profit Before Tax Tax Net Profit After Tax 29 113 (1,537) (1,241) (13,092) (10,329) (2,148) - 53,320 57,201 (6.8%) (12,647) (14,308) 40,673 42,893 (5.2%) 2018 Annual Report 17 Directors’ Report 4.1 Operations and Financial Performance Continued > On the latest available data the Group has maintained its number one patent market share position in Singapore (all patent applications Australian and New Zealand IP filed in Singapore). The ANZ IP segment achieved sales revenue growth of 26.1% to Data and Analytics Software $155.4M of which $33.7M was attributable to the AJ Park acquisition. It was announced on 15 August 2018 that IPH’s wholly-owned The Group has maintained its number one patent market share position subsidiary, Practice Insight Pty Limited, has agreed the sale of two of its (all patent applications filed in Australia) for the year. While the overall market is flat (in terms of number of patent filings) year on year, the second half displayed growth (1.6%) in line with the medium-term trend of 1.5%. The IPH Group outperformed the market for both the year (1.7%) and the second half (5.2%) in terms of its filing growth. products: Filing Analytics and Citation Eagle to CPA Global Management Services Limited for $10 million. The sale will generate an accounting profit in the consolidated accounts of IPH Limited of approximately $2 million in the 2019 financial year after taking into account the assets’ carrying values and transaction costs. Proceeds from the sale will be Underlying EBITDA was up by 7% to $54.1M at a margin of 35% (2017: used to pay down existing debt. 41%). On 30 June 2018 FAKC and Cullens were merged with Spruson & The remaining Data and Analytics Software business will focus on Ferguson Australia. The intangible asset relating to the former FAKC and the final development and sales of its autonomous time keeping Cullens trademarks has been assessed as having no ongoing economic platform “WiseTime”. benefit and hence has been written off. Asian IP It is expected that the transaction will reduce EBITDA losses in the Data and Analytics Software segment by approximately $1 million in FY19. The Asian IP segment achieved sales revenue growth of 15% to $77.8M Movements in FX Rates which includes a full year contribution of the Ella Cheong acquisition. Underlying EBITDA was up by $1.5M, or 5%. Foreign exchange rates used to translate earnings throughout the period were: FY16 FY17 Movement FY18 Movement AUD/USD AUD/EUR AUD/ SGD Year End Average Year End Average Year End Average 0.7426 0.7286 0.6699 0.6564 1.0027 1.0122 0.7692 0.7545 0.6730 0.6919 1.0598 1.0505 (3.5%) (5.4%) (3.8)% 0.7407 0.7754 0.6420 0.6498 1.0095 1.0404 (2.8%) 6.1% 1.0% 4.1.1 Adjustments to Statutory Results The internal reporting that is regularly provided to the chief operating decision makers includes financial information prepared on both a statutory and underlying basis. It is considered important to include the financial information on an underlying basis as this reflects the ongoing or underlying activities of the Group and excludes items that are not expected to occur frequently and do not form part of the core activities of the Group. Adjustments to the statutory EBITDA have been made for: » Business acquisition costs (cid:331) costs incurred in the pursuit of acquisitions which have been completed, not ultimately pursued or » Business combination adjustments (cid:331) the P&L impact of the revaluation of shares issued on acquisition and arises primarily on movements in the share price between the completion date of the transaction and the final settlement. This is a non-cash item. » New business establishment costs (cid:331) in the current year relates predominately to the establishment of an exclusive arrangement with an independent Chinese patent agency late in FY18 for the conduct of regulated patent services. » Restructuring expenses (cid:331) costs of restructuring across the Group. In the current year these predominately relate to two projects: the merger of Cullens and Fisher Adams Kelly Callinans into Spruson & Ferguson; and the restructuring of certain aspects of the AJ Park are currently in progress. In the current year these predominately business post acquisition. relate to the acquisition of AJ Park. 18 www.iphltd.com.au » Share based payments (cid:331) accounting charges for the share-based incentive plans. 30th June 2018 4.2 Statement of Financial Position Balance Sheet as at 30 June 2018 Balance Sheet as at 30 June 2017 $’m Cash and cash equivalents Trade and other receivables Other current assets Total current assets PP&E Acquisition intangibles & goodwill Other Deferred tax asset Total assets Trade and other payables Tax provisions Borrowings Deferred tax liability Other liabilities Total liabilities Net assets Equity Issued capital Reserves Retained profits Total equity 26.2 57.1 5.3 88.6 6.2 266.3 0.2 6.6 367.9 16.7 6.3 40.1 22.9 14.3 100.3 267.6 262.8 (11.5) 16.3 267.6 24.4 38.0 3.4 65.8 3.0 212.9 0.2 5.1 287.0 11.2 6.9 - 18.7 10.5 47.3 239.7 233.6 (12.3) 18.4 239.7 2018 Annual Report 19 Directors’ Report 4.2 Statement of Financial Position Continued > A summary of specific key movements are as follows: » On 23 May 2018 the Company commenced an on-market share buy- back program of its ordinary shares of up to $40m. As at 30 June 2018, 621,816 shares had been acquired at a combined value of $2.7m. Cash & cash equivalents Acquisitions » The cash flow statement within the financial report provides details of the cash movements during the year. The Group generated positive cash flows from operating activities of $46.5m. » The Group derives the majority of its revenue in USD and as such carries a significant amount of cash in USD. As at 30 June 2018 the cash balance was denominated in AUD (26%), USD (42%) and other (32%). Trade and other receivables On 11 October 2017 IPH announced it had reached agreement to acquire the New Zealand intellectual property firm AJ Park by an acquisition of its patent attorney business, the benefit of its trade mark and legal businesses, and its associated Australian operations. AJ Park is the premier New Zealand IP firm operating from offices in Auckland and Wellington. AJ Park become the first New Zealand IP firm to join a publicly listed IP group. The purchase consideration for the acquisition was NZD$66.1m (approximately A$60.5m) of which $38.9m was paid in cash and $21.3m » The increase in the trade receivables balance is a combination of the in IPH shares. At the time of settlement the fair value of the equity acquisition of AJ Park ($10m) as well as the impact of revaluing foreign component of settlement had risen to $27.0m. denominated balances. As at 30 June 2018 the trade receivables balance was denominated in AUD (22%), USD (54%) and other (24%). The acquisition represented a further step in IPH’s strategy to expand its presence in secondary IP markets and, most importantly, supports » The instance of bad debts remains low with $0.4m written off during IPH’s growth in Asia through extension of our Asian service offering to the course of the year. AJ Park’s local and international clients. Acquisition intangibles & goodwill » The increase in intangible assets arises from the acquisition of AJ Park ($63.8m), comprising customer relationships ($20.3m), trademarks ($2.9m) and goodwill ($40.6m). » Identifiable intangible assets (at cost) consist of customer relationships $90.9m, trademarks $4.3m and software of $3.8m. 4.3 Business model, strategy and outlook 4.3.1 Business model IPH Limited is an intellectual property group operating a number of independent professional businesses providing intellectual property services (“IP Services”). It also operates a Data and Analytics Software » As a result of the merger of Cullens and Fisher Adams Kelly Business (“Data Services”) with a range of products focussing on: IP Callinans into Spruson & Ferguson during the year, the value ($1.5m data; time recording; and a document management system. net of the reversal of the related deferred tax liability) of the Cullens and FAKC trademarks was written off. In IPH’s IP services businesses in Australia, New Zealand and Asia, revenue is derived from fees charged for the provision of professional IP » Goodwill recognised on acquisitions is $185.2m. services by each firm as related to securing, enforcing and managing IP Liabilities » Trade and other payables increased by $5.5m including $3.4m resulting from the acquisition of AJ Park. » The deferred tax liabilities related to the identifiable intangible assets on acquisitions and have increased with the acquisition of AJ Park ($6.5m) offset by the writeoff of the balance related to the FAKC and Cullens trademarks ($0.6m). Borrowings rights in the country (directly or through an agent) in which registration is sought by the client. The business model allows IPH to generate recurring revenue streams throughout all stages of the IP lifecycle from its long-standing and diverse client base. IPH’s Data Services business generates revenue from the sale of its products directly or through a third party under a subscription licence model. It was announced on 15 August 2018 that the company would divest the two IP data products within its suite: Filing Analytics and Citation Eagle. The Data Services business will now primarily focus on the development of its autonomous time-keeping platform WiseTime. » The acquisition of AJ Park was partly funded by the drawdown of Factors that affect the performance of both business segments USD26m (AUD35.1m as at 30 June 2018) in debt. In addition, the company has at its disposal a $40m facility to fund a share buy- back, of which $5m is drawn at 30 June 2018. include, amongst others, the performance of the global and Australian economies, client activity levels, competitor activity, and the regulatory environment in which the services are provided. Equity » The increase in issued capital predominately arises on the equity component of the AJ Park acquisition mentioned below. 20 www.iphltd.com.au 30th June 2018 4.3.2 Strategy IPH vision, mission and values Asian IP businesses Asia has been a key part of the Group’s strategy since the opening of the Singapore office in 1997. In recent years IPH has supported its Asian growth From the Company’s foundation and listing on the ASX in November strategy with the opening of offices in Thailand and Indonesia and expanding 2014, IPH has been pursuing its vision of becoming the leading IP group into China and Hong Kong through the acquisition of Ella Cheong Hong Kong in IP secondary1 markets and adjacent areas of IP. IPH’s mission is to provide the highest quality of service to our clients, meeting their needs and exceeding their expectations, whilst delivering sustainable growth and value to all of our stakeholders. and Beijing (re-branded Spruson & Ferguson). The expansion provides a strong platform to extend the provision of IP services to new geographical areas for existing clients and an improved multi-country service offering for potential new clients. The key focus for IPH’s Asian business is to leverage existing infrastructure for further organic growth. IPH will continue to assess From our origins in 1887 as Spruson & Ferguson, IPH’s success potential organic and M&A opportunities in Asia as they arise. continues to be underpinned by the key drivers and values at the core our businesses, which remain unchanged: Other secondary IP markets Excellence in service delivery to our clients IPH has adopted a strategic and disciplined approach to the assessment of any » » » » » Innovation in value creation Integrity in business practices Efficiency and effectiveness in operations Empowerment and engagement of our people Value creating growth strategies IPH’s plan is to achieve its goals through implementation of strategic initiatives in five key areas: » Australian and New Zealand IP businesses » Asia IP business » Other secondary IP markets » Adjacent to IP markets » Business improvements and operations 1 The primary IP markets of USA, Japan and Western Europe generate the majority of IP rights and clients by value. The secondary markets are all countries outside of USA, Japan and Western Europe. Australian and New Zealand IP businesses A key objective of all IPH’s ANZ businesses is to continue to organically grow the volume of filings, market share and revenue across all disciplines, and to invest in providing superior service to global customers consistent with the longstanding strength and reputation of its brands, Spruson & Ferguson, Pizzeys and AJ Park. IPH’s ANZ businesses are also an important part of the Asian growth strategy in that they are a valuable source of filings and revenue into IPH’s Asian business. The initiative to integrate the Cullens and FAKC brands into Spruson & Ferguson during FY18 will better enable professionals in these businesses to offer a pan-Asian filing solution to their clients. potential M&A opportunities in Asia-Pacific and other secondary IP markets. First and foremost, the growth opportunities are evaluated on the extent to which they help to achieve IPH’s strategic objectives. IPH continues to evaluate potential acquisition opportunities in international secondary markets. Adjacent to IP markets Over the past 40 years the IP industry observed the rise of non- traditional IP service providers offering alternative ways of servicing and delivering value to clients through technology and data-driven business models. With the acquisition and further investment in Practice Insight, IPH is well positioned to capitalise on disruptive innovation. IPH continuously considers new developments in this area to ensure it maintains its market leadership position. Business improvements and operations The Spruson & Ferguson business has operated at industry-leading efficiency levels for many years. The Group will continue to focus on the optimisation of all of IPH’s businesses with a view to extract operational efficiencies and improve the quality of service for our clients. 4.3.3 FY19 priorities IPH group remains focused on maintaining and leveraging its leading position in Australia/New Zealand with continued focus on market share initiatives and achieving margin expansion in AJ Park and through the merger of FAKC and Cullens into Spruson & Ferguson. In Asia, IPH expects to maintain its leading market share position in Singapore while seeking to expand its share in other SE Asian higher growth markets. The Group remains focused on increasing its share in the Chinese addressable market and continuing to leverage its existing network to grow internal filings and case transfers. The sale of the Filing Analytics and Citation Eagle products will reduce EBITDA losses in the Data and Analytics Software business to approximately $1.7 million in FY19 and will enable the business to refocus on its autonomous time keeping platform WiseTime. At a Group level, IPH will continue to focus on strategy to attract, motivate and retain key talent. We will also continue to evaluate acquisition and expansion opportunities in a strategic and measured manner. 2018 Annual Report 21 Directors’ Report 4.4 Risks Risk Description Management of Risk Strategic planning and The Company conducts its operations in The Board is closely involved in identifying, reviewing and confirming implementation a market that has undergone significant strategic objectives and reviewing implementation, including assessing changes with the development of corporatised opportunities and risks, and in providing direction to management. service providers, which the market continues to adjust to. This provides the Group with both opportunities and risks requiring development and communication of a clear strategic vision and objectives. Competition and changing market conditions The sectors in which the Company operates Effective client service, comprising a high level of expertise at are subject to vigorous competition, based competitive prices delivered in a timely manner. on factors including price, service, innovation and the ability to provide the customer with an appropriate range of IP services in a timely manner. Scope exists for market conditions to change over time reflecting economic, political or other circumstances. All operations of the IPH Group are now or will be supported by industry leading IT systems. Regular marketing visits to maintain and develop client relationships and understand potential changes in client needs, and internal and external pressures. IPH also provides a broad range of intellectual property services and its operations are geographically widespread, reducing exposure to any one form of intellectual property country or jurisdiction in which it operates. Regulatory environment The Company is subject to significant Senior executives ensure that all regulatory and legal issues affecting regulatory and legal oversight. IPH’s business are monitored and that any changes to the business operations necessary to comply with regulatory and legal changes are undertaken in a timely manner. Careful management and oversight of the Group’s internal case management system. Principal review of all professional work and compliance with a professional work approval process for outgoing work. The approval process is correlated to the complexity and level of potential risk associated with the work. 22 www.iphltd.com.au 30th June 2018 Risk Description Management of Risk Regulatory reforms The Group’s service offerings are subject to The Company is proactive in any review or evaluation of regulations likely changes to government legislation, regulation to affect its operations materially, and works with regulators or review and practices including particularly, if authorities to ensure a clear understanding of facts and circumstances, implemented, proposals to streamline multi- and consideration of all stakeholder perspectives. jurisdictional patent filing and examination processes. The Company seeks to offer its services in a range of secondary markets. Many of these markets have less developed IP regulations and systems, and require translations into languages other than English, and are therefore less likely to be affected by such proposals if they were to be implemented than developed or primary markets. Other factors which help safeguard the Company’s role are effective technology, excellent client service and efficient operations and the likely need for IP applicants to continue to be required to record a local address for service of documents with the local IP office for examination and prosecution purposes. The Company also continues to consider the development of revenue streams from adjacent markets. Personnel The Company depends on the talent and Retention practices including appropriate remuneration, incentive experience of its personnel. The loss of any programmes (both short and long term), retention awards, working key personnel, or a significant number of environment and rewarding work. personnel generally may have an adverse effect on the Company. Employee costs represent a significant component of the Group’s total cost base. Careful management of staff numbers and salary levels and consideration of resourcing requirements as the Company grows. Disintermediation The Group acts as an intermediary agent IPH’s intermediary role is safeguarded by clients’ reliance on the Group’s between its clients and IP offices. The expertise (both general IP expertise and local expertise) and regulatory removal of intermediaries in the IP application barriers such as exclusive rights of patent attorneys to provide various and registration process would have an IP related services and requirements for IP applicants to record a local adverse impact on the Group. address for service of documents with the local IP office. Other factors which help safeguard the Company’s intermediary role are effective technology, excellent client service and efficient operations. The Company also seeks to offer its services in a range of secondary markets. Many of these markets have less developed IP regulations and systems and require translations into languages other than English, and are therefore less likely to be affected by disintermediation. 2018 Annual Report 23 Directors’ Report Risk Description Management of Risk Case management and The Group’s internally customised systems The Company has established business continuity plans and technology systems represent an important part of its operations procedures and maintains system back up and maintenance processes. upon which the Group is reliant. The Company conducts appropriate reviews of its information technology systems, operations and human resourcing, and its management of cyber risk. The Company continually invests in system enhancements and engages quality 3rd party suppliers to assist with its systems development and maintenance. The Company’s transition of its IT systems to offsite ‘cloud-based’ systems enables centralised oversight and standardisation of processes. Technology disruption The increasing use of electronic systems The need for the Company’s services is safeguarded by the reliance of and processes by regulatory authorities in target clients on the Group’s expertise (both general IP expertise and some markets may provide opportunities for local expertise) and regulatory barriers such as exclusive rights of patent technology disruption in the industry. attorneys to provide various IP related services, and requirements for IP applicants to record a local address for service of documents with the local IP office. Other factors which help safeguard the Company against technology disruption include its own investment in awareness of and effective technology development, and in efficiency in operations. The Company also seeks to offer its services in a range of secondary markets. Many of these markets have less developed IP regulations and systems, are less advanced technologically and require technical translations into languages other than English. Foreign exchange risk The Group’s financial reports are prepared The Company monitors the foreign currency exposures that arise from in Australian dollars. However, a substantial its foreign currency revenue, expenditure and cash flows and from the proportion of the Group’s sales revenue, foreign currency assets and liabilities held on its balance sheet. The expenditure and cash flows are generated in, Company undertakes regular sensitivity analyses of these exposures. and assets and liabilities are denominated in The Company has foreign currency hedging facilities available as part of US dollars, Euros and Singapore dollars. its bank facilities and has engaged in appropriate use of foreign currency denominated finance facilities to reduce exposure. The Chief Financial Officer regularly reports to the Board in respect of the Company’s foreign currency exposures. The Board reviews its hedging policy in respect of the foreign currency exposures from time to time. Currently the Group does not directly hedge against its foreign currency exchange risk to a material extent. 24 www.iphltd.com.au 30th June 2018 Risk Description Management of Risk Conflict of duties Patent and trademark attorney are required The Company has been proactive in any review or evaluation of to abide by a code of conduct that requires regulations likely to affect its operations materially, and works with them to act in accordance with the law, regulators or review authorities to ensure a clear understanding of facts in the best interests of their client, in the and circumstances, and consideration of all stakeholder perspectives. public interest, and in the interests of the registered attorney’s profession as a whole. There may be circumstances in with the Company is required to act in accordance with these duties contrary to other corporate responsibilities and against the interests of shareholders and the short term profitability of IPH. An amendment to the Code of Conduct may affect the manner in which the Group conducts its activities. The Company has sought detailed advice on issues of conflict of interest and compliance with related professional obligations. The Company actively assists its business units to implement appropriate processes and procedures for compliance, including relevant professional standards bodies’ Codes of Conduct and Professional Rules. Professional liability and The provision of patent and trademark The Company maintains file management processes which are highly uninsured risks services and legal services by the Company automated, safeguarded, controlled and regularly reviewed. gives rise to the risk of potential liability for negligence or other similar client or third party claims. The Company has comprehensive quality assurance processes to ensure appropriate standards of professional work are maintained. The Group has in place a comprehensive insurance programme which includes professional indemnity insurance. To support its professional indemnity insurance arrangements, the Group has internal processes to ensure timely notification to the underwriters of any potential claim arising from its business activities. Acquisitions The Company’s growth strategy may include The Company assesses potential acquisition opportunities against the the acquisition of other intellectual property Company’s strategic objectives, values and culture. Where an appropriate businesses. Risks arise in ensuring that potential acquisition is identified the Company undertakes extensive potential acquisitions are appropriately due diligence process and where appropriate engages competent selected and issues affecting the value of professional experts to assist with the due diligence process and individual acquisitions are identified and appropriate documentation of the transaction. The Company’s Board is reflected in the purchase considerations. involved in the review of, and approves, all corporate acquisitions. Integration of acquired Following the acquisition of new businesses, The Company seeks to identify potential post-acquisition risks when businesses risks arise in ensuring the business is properly assessing potential acquisitions including for cultural fit and matching of integrated into the IPH Group, that people and expectations, and to mitigate such risks by appropriate transaction and post- culture issues that may arise are addressed, acquisition management structures. Steps are taken following acquisition key staff retained and value maintained. to review and ensure appropriate on-boarding of new acquisitions with IPH governance, policies, processes and practices and levels of financial control and reporting, and to integrate Company and Group approaches to retention of key staff and utilisation of appropriate information technology platforms. The integration of new acquisitions is regularly reviewed by the Company’s Board and relevant Board Committees. 2018 Annual Report 25 Directors’ Report 5. Remuneration report (audited) Introduction from the Nomination and Remuneration Committee Chair Dear Shareholders, Corporate executive remuneration Short and long term incentive measures which were formalised last year, remain in place for the IPH executives. In broad terms, fixed remuneration is set at median market levels compared to peers with similar revenues and market capitalisation. On behalf of the Board, I am pleased to present the Remuneration Fixed remuneration is supplemented with an annual bonus for Report for the 2018 financial year. superior performance awarded at the Board’s discretion having The Company’s remuneration framework has evolved as foreshadowed in last year’s report. Managing the change remains a focus as each acquired business transitions from a private firm to a member of a publicly listed company. Supporting the leaders of regard to the Group’s overall performance and the individual executive’s performance against agreed KPIs. Informed by market data, the Directors have strengthened the bonus opportunity for the CEO and CFO. These changes have taken effect from 1 July 2018. each business as their understanding of corporate remuneration The long term incentive is structured to align the long term interests frameworks matures is a key imperative. Further evolution of of shareholders and executives and is pitched at the upper quartiles the framework is anticipated to ensure ongoing alignment and compared to the same peer group. Long term incentives will vest engagement of our people with the Company. over a three year period with reference to EPS performance hurdles. Professional staff incentive plan CEO transition The Equity Incentive Plan introduced last year has proven to be As foreshadowed last year, Andrew Blattman succeeded David a reward which is valued by eligible staff. The intent of providing Griffith as Managing Director and CEO in November 2017. After a more direct link between individual performance and incentive this initial transition period, Dr Blattman’s remuneration has been achievement is being realised. As anticipated last year, the plan reviewed as of 1 July 2018. is being implemented across other business units for fiscal year 2019. To ensure affordability of the incentive plan with an expanded participation pool, key performance indicators (KPIs) have been strengthened to provide a direct link between individual performance and business performance. In broad terms, half of an incentive achieved (by reference to business unit, practice group and individual targets) in a particular year will be paid in cash and half in IPH Limited shares (issued to the employee and held in trust for a period of three years). It is anticipated that business units operating a cash-based plan this year will transition to the corporate model in the next fiscal year. As the Company continues to evolve as a corporate entity, we will continue to review the remuneration framework for all executives and professional staff, including KMP, to ensure its continued ability to attract, motivate and retain the talent necessary to run the business, and simultaneously drive behaviour that aligns with the creation of sustainable shareholder value. We look forward to your continued support and welcome your feedback on our remuneration report. Yours sincerely, John Atkin Nomination and Remuneration Committee Chair 26 www.iphltd.com.au 30th June 2018 5. Remuneration report (audited) Continued > EY was engaged by the NRC to provide remuneration advice in relation to Key Management Personnel (KMP), but did not provide the NRC with The remuneration report details the key management personnel (‘KMP’) remuneration recommendations as defined under Division 1, Part 1.2, 9B(1) remuneration arrangements for the Group, in accordance with the requirements of the Corporations Act 2001 and its Regulations. KMP are those persons having authority and responsibility for planning, directing and controlling the activities of the Group, directly or indirectly, including all Directors. of the Corporations Act 2001 (Cth). The Board was satisfied that advice received was free from any undue influence by key management personnel to whom the advice may relate because strict protocols were observed and complied with regarding any interaction between EY and management, and because all remuneration advice was provided to the NRC Chair. The remuneration report is set out under the following main topics: » Principles used to determine the nature and amount of remuneration The table below lists consultants who were retained during the year. All consultants are independent and were engaged solely on the basis of their competency in the relevant field. » Details of remuneration » Service agreements » Share-based compensation » Additional disclosures relating to key management personnel 5.1 Principles used to determine the nature and amount of remuneration The objective of the Group’s executive reward framework is to ensure reward for performance is competitive and appropriate for the results delivered. The framework aligns executive reward with the achievement of strategic objectives and the creation of value for shareholders. The Board of Directors (‘the Board’) ensures that executive reward satisfies the following key criteria for good reward governance practices: » » » » competitiveness and reasonableness; acceptability to shareholders; performance linkage / alignment of executive compensation; and transparency. Advisor Services Provided EY Calculation of the fair value of retention rights and performance rights granted under the Long Term Incentive Plan and Retention Rights Plan published on the ASX on 17 November 2014 and subsequently replaced by the IPH Limited Employee Incentive Plan, approved by shareholders at the Annual General Meeting held on 16 November 2016, for the purpose of calculating the value of share based remuneration. Orient Capital Calculation of the total shareholder return achieved by IPH Limited compared to the S&P/ASX 300 Index, for the purpose of determining whether long term incentive criteria have been met. The Nomination and Remuneration Committee (‘NRC’) is responsible for 5.2 Executive remuneration reviewing and making recommendations to the Board on remuneration packages and policies related to the Directors and other KMP and to ensure that the remuneration policies and practices are consistent with the Group’s strategic goals and people objectives. The performance of The Group aims to reward executives with a level and mix of remuneration based on their position and responsibility, which has both fixed and variable components. the Group depends on the quality of its Directors and other KMP. The The executive remuneration and reward framework for KMP for FY18 had remuneration philosophy is to attract and retain high quality people, and the following components: motivate high performance. » base salary, short and long term incentives and non-monetary The NRC has structured an executive remuneration framework that is market benefits; and competitive and complementary to the reward strategy of the Group. » other remuneration such as superannuation and long service leave. Alignment to shareholders’ interests: » focuses on sustained growth in earnings per share as well as focusing the executive on key non-financial drivers of value; and » attracts and retains high calibre executives. Alignment to program participants’ interests: The combination of these comprises the KMP’s total remuneration. Fixed remuneration, consisting of base salary, superannuation and non- monetary benefits, are reviewed annually by the NRC, based on individual and business unit performance, the overall performance of the Group and comparable market remunerations. Executives may receive their fixed remuneration in the form of cash or other fringe benefits (for example, motor vehicle benefits) where it does not create any additional costs to the rewards capability and experience; » » reflects competitive reward for contribution to growth in shareholder Group and provides additional value to the executive. wealth; and » provides a clear structure for earning rewards. 2018 Annual Report 27 Directors’ Report 5.2 Executive remuneration Continued > Short and long term incentives were introduced this year to strengthen The table below outlines how Performance Rights issued in 2018 will vest based on the Company’s EPS performance over the Performance Period (measured by calculating the CAGR between alignment with overall performance of the Group and provide a more EPS for FY17 and EPS for FY20). complete and market-comparable remuneration package. In this first year, the short term incentive was modestly set at 20% for the CEO and 10% for other executives, with a stronger focus alignment through the EPS in FY20 Percentage of Performance Rights that vest long term incentives at 100% for the CEO and 50% for other executives. Incentives are also reviewed annually by the NRC. Long term incentive Less than 7% CAGR in EPS over Nil vesting the Performance Period Under the long term incentive plan, the CEO and CFO are issued Equal to 7% CAGR in EPS over the 20% vesting Performance Rights which entitle the holder at the Vesting Date to an Performance Period equivalent number of Shares subject to satisfying defined vesting conditions. Performance Rights will vest on the Vesting Date subject to the Company’s achievement of a minimum compound annual growth rate (CAGR) in Earnings Per Share over the Performance Period. EPS performance will be assessed on the basis of the Company’s EPS performance during the relevant Performance Period compared to the EPS targets for that period as determined by the Board. The Board will determine a target for EPS for the Performance Period (EPS CAGR in EPS greater than 7%, up Pro-rated vesting (i.e. on a to and including 10% CAGR in EPS straight-line basis) between over the Performance Period 20.01% and 65% CAGR in EPS greater than 10%, up Pro-rated vesting (i.e. on a to and including 15% CAGR in EPS straight-line basis) between over the Performance Period 65.01% and 100% Target) and a minimum target for EPS for the Performance Period (Minimum At or above 15% CAGR in EPS over 100% vesting EPS Target) prior to any issue from year to year. For vesting to occur, EPS for the Performance Period the Performance Period must be at least equal to the Minimum EPS Target. EPS targets for the 2018 Plan are: Dividends will not be paid on Performance Rights. » Minimum EPS Target (cid:331) 7% CAGR in EPS over the three year Performance Period ending on 30 June 2020, and 5.3 Company performance » EPS Target (cid:331) 15% CAGR in EPS over the three year Performance Period ending on 30 June 2020, For the year to 30 June 2018 the Board did not regard the overall performance of the Group to be at a level that justified the payment of any performance bonus or STI to KMP. Accordingly, none were paid. The company’s performance and the consequences on shareholders financial wealth in the last 4 financial years is summarised below: 2015 30,589 19.51 5,514 3.5 $4.70 - 2016 38,843 21.92 36,837 21.0 $6.42 - 2017 42,893 22.46 40,924 22.0 $4.80 - 2018 40,673 20.79 42,823 22.5 $4.45 2,727 NPAT (‘000) EPS (cents per share) Dividends Paid (‘000) Total Dividends (cents per share) Share Price (30 June closing price) Return of Capital (‘000) 28 www.iphltd.com.au 30th June 2018 5.4 Non-executive Directors remuneration Fees and payments to non-executive Directors reflect the demands and responsibilities of their role. Non-executive Directors’ fees and payments are reviewed periodically by the NRC. The NRC may, from time to time, receive advice from independent remuneration consultants to ensure Non-executive Directors’ fees and payments are appropriate and in line with the market. The Chairman’s fees are determined independently from the fees of other non-executive Directors based on comparative roles in the external market. Non-executive Directors do not receive share options or other incentives and their remuneration must not include a commission on, or a percentage of, operating revenue. ASX listing rules require the aggregate non-executive Directors remuneration be determined periodically by a general meeting. Under The non-executive Directors are not entitled to participate in any employee incentive scheme (including the LTIP). Directors may also be reimbursed for expenses reasonably incurred in attending to the Company’s affairs. Non-executive Directors may be paid such additional or special remuneration as the Directors decide is appropriate where a Director performs extra work or services which are not in the capacity as a Director of the Group. There is no contractual redundancy benefit for Directors, other than statutory superannuation contributions. 5.5 Details of remuneration Amounts of remuneration The key management personnel of the Group consisted of the following Directors of IPH Limited: the Company’s Constitution and as set out in the IPO Prospectus, total » Richard Grellman, AM (cid:331) Non-executive Chairman aggregate remuneration available to non-executive Directors is set currently at $750,000 per annum. » Andrew Blattman (cid:331) Managing Director and Chief Executive Officer (from 20 November 2017) Non-executive Director fees paid (Directors’ fees and committee fees) (inclusive of superannuation) for the year ended 30 June 2018 are summarised as follows: » David Griffith (cid:331) Managing Director and Chief Executive Officer (from 1 July 2017 to 20 November 2017) » John Atkin (cid:331) Non-executive Director Name - Position FY 2018 Fees » Robin Low (cid:331) Non-executive Director Richard Grellman AM - Chairman John Atkin - Director Robin Low - Director Sally Pitkin - Director1 1 Fees paid to the time of resignation on 20 Nov 2017 220,000 115,000 115,000 35,000 585,000 » Sally Pitkin (cid:331) Non-executive Director (from 1 July 2017 to 20 November 2017) And the following persons: » John Wadley (cid:331) Chief Financial Officer » Andrew Blattman (cid:331) Chief Executive Officer, Spruson & Ferguson Pty Limited (from 1 July 2017 to 19 November 2017) » Kristian Robinson (cid:331) Managing Director, Spruson & Ferguson Asia Pte Limited (ceased to be a KMP on 20 November 2017) 2018 Annual Report 29 Directors’ Report Short-term benefits Post- employment benefits Long-term benefits Share-based payments Cash salary and fees $ Cash bonus $ Non- monetary $ Super- annuation $ Employee Leave1 $ Equity- settled $ Total $ Non-Executive Directors: Richard Grellman 2018 203,444 2017 177,854 John Atkin 2018 105,023 2017 82,192 Robin Low 2018 105,023 2017 82,192 Sally Pitkin2 2018 31,962 2017 82,192 Executive Directors: Andrew Blattman3 2018 729,946 2017 480,693 David Griffith4 2018 282,908 2017 730,690 Other Key Management Personnel: John Wadley5 2018 435,737 - - - - - - - - - - - - - 2017 278,419 50,000 Former Key Management Personnel: Kristian Robinson6 2018 148,6847 2017 393,3277 - - - - - - - - - - - - - - - - - - 16,556 12,146 9,977 7,808 9,977 7,808 3,038 7,808 - - - - - - - - - - - - - - - - 220,000 190,000 115,000 90,000 115,000 90,000 35,000 90,000 25,155 12,281 242,427 1,009,809 19,615 7,763 7,679 4,812 19,615 12,281 - - - 507,987 295,483 762,586 20,618 16,861 - - 72,728 529,083 - 345,280 11,5137 2,386 16,921 179,504 11,6527 6,140 - 411,119 1. Employee Leave balances represent long service leave accrued during the year. 2. Sally Pitkin ceased to be a Non-Executive Director on 20 November 2017. Balances represent remuneration to this date. 3. Andrew Blattman became an Executive Director on 20 November 2017. Balances represent remuneration for the full year. 4. David Griffith ceased to be an Executive Director on 20 November 2017. Balances represent remuneration to this date. 5. John Wadley became a KMP on 1 September 2016. Balances represent remuneration from this date. 6. Kristian Robinson ceased to be a KMP on 20 November 2017 reflecting changes in the management structure of the expanded Group. Balances represent remuneration to this date. 7. Remuneration received in Singapore Dollars. Translated at the average exchange rate for the period to Nov 17 of S$1.0631 (2017 (cid:331) Full Year: S$1.0505) 30 www.iphltd.com.au 30th June 2018 5.6 Service agreements Remuneration and other terms of employment for KMP are » Remuneration package (inclusive of superannuation) for the year ending 30 June 2019 of $540,000. Annual superior performance bonus of up to 25% of remuneration and a long term incentive formalised in service or employment agreements. Details of these opportunity of 50% of remuneration. agreements are as follows: David Griffith, Managing Director and Chief Executive Officer during the period 1 July 2017 to 20 November 2017. » Agreement concluded 20 November 2017. » Remuneration package (inclusive of superannuation) for the period ended 20 November 2017 of $750,000 (annualised). Andrew Blattman, Managing Director and Chief Executive Officer for the period 20 November 2017 to 30 June 2018. As announced last year, David Griffith retired as CEO in November 2017 and Andrew Blattman assumed that position and is employed by IPH Limited under an employment contract with an indefinite term. KMP may terminate their employment contract by giving six months’ notice in writing. Contracts may be terminated by the Company with six months’ notice. In the event of serious misconduct or other specific circumstances warranting summary dismissal, the Company may terminate the employment contract immediately and without notice or payment in lieu of notice. Upon termination of the employment contract, » New employment agreement commenced 20 November 2017. the KMP will be subject to a restraint of trade period of 12 months » Remuneration package (inclusive of superannuation) for the period ended 30 June 2018 of $750,000. Annual superior performance throughout Australia, New Zealand and Singapore. The enforceability of the restraint is subject to all usual legal requirements. bonus of up to 20% of remuneration and a long term incentive KMP have no entitlement to termination payments in the event of removal opportunity of 100% of remuneration. for misconduct. Andrew Blattman receives five weeks annual leave. » Remuneration package (inclusive of superannuation) for the year ending 30 June 2019 of $900,000. Annual superior performance bonus of up to 33.33% of remuneration and a long term incentive opportunity of 100% of remuneration. 5.7 Additional disclosures relating to key management personnel The following disclosures relate only to equity instruments in the John Wadley, Chief Financial Officer. Company or its subsidiaries. » Remuneration package (inclusive of superannuation) for the year ended 30 June 2018 of $450,000. Annual superior performance Shareholding bonus of up to 10% of remuneration and a long term incentive The number of shares in the Company held during the financial year by opportunity of 50% of remuneration. 30-Jun-18 Ordinary shares Richard Grellman Andrew Blattman John Atkin Robin Low John Wadley Sally Pitkin1 David Griffith2 Kristian Robinson3 each Director and other members of key management personnel of the Group, including their personally related parties, is set out below: Balance at the start of the year Additions Disposals Balance at the end of the year 67,586 4,506,166 97,292 65,804 379 53,841 2,598,765 1,038,991 3,863 - 18,537 8,410 22 - - - - - - - - (53,841) (2,598,765) (1,038,991) 71,449 4,506,166 115,829 74,214 401 - - - 8,428,824 30,832 (3,691,597) 4,768,059 Sally Pitkin ceased to be a Director on 20 November 2017. Disposal represents no longer being designated as a Director, not necessarily a disposal of holding. 1. 2. David Griffith ceased to be a KMP on 19 November 2017. Disposal represents no longer being designated as a KMP, not necessarily a disposal of holding. 3. Kristian Robinson ceased to be a KMP on 20 November 2017. Disposal represents no longer being designated as a KMP, not necessarily a disposal of holding. 2018 Annual Report 31 Directors’ Report 30-Jun-17 Ordinary shares Richard Grellman Andrew Blattman John Atkin Robin Low John Wadley Sally Pitkin David Griffith Kristian Robinson Malcolm Mitchell1 Balance at the start of the year Additions Disposals Balance at the end of the year 54,712 12,874 - 6,006,166 97,292 - - 60,039 5,765 - 379 52,519 1,322 (1,500,000) - - - - 6,098,766 3,938,991 10,000 - - - (3,500,001) (2,900,000) (10,000) 67,586 4,506,166 97,292 65,804 379 53,841 2,598,765 1,038,991 - 1. Malcolm Mitchell ceased to be a KMP on 1 September 2016. Disposal represents no longer being designated as a KMP, not necessarily a disposal of holding. 16,318,485 20,340 (7,910,001) 8,428,824 Option holding No options over ordinary shares in the Company were held during the financial year by each Director and other members of key management personnel of the Group, including their personally related parties. Performance rights holding The number of performance rights issued to KMPs in the year ended 30 June 2018 is set out below: 30 June 2018 Plan1 Grant Date Vesting Date Rights Granted Fair Value per Right Total Fair Value at Grant Date Expense at Year End % Vested % Forfeited Andrew Blattman 2018 Nov-17 Sep-20 156,780 4.91 769,790 242,427 John Wadley 2018 Nov-17 Sep-20 47,034 4.91 230,937 72,728 - - - - 1. Performance Period for the 2018 Plan is from 1 July 2018 to 30 June 2020. This concludes the remuneration report, which has been audited. 203,814 1,000,727 315,155 32 www.iphltd.com.au 30th June 2018 6. Shares under performance and retention rights Details of unissued shares or interests under performance and retention rights at the date of this report are: Issuing entity Type Number of shares Class Exercise Price Expiry Date IPH Limited Performance 509,533 Ordinary IPH Limited Retention 173,688 Ordinary 0.00 0.00 Up to April 2022 Up to June 2019 7. Shares under option There were no unissued ordinary shares of IPH Limited under option at the date of this report. 8. Dividends Dividends paid during the financial year were as follows: Final dividend of 10.5 cents per share for the year ended 30 June 2017, paid on 13 September 2017. (100% franked) Interim dividend of 11.5 cents per share for the year ended 30 June 2018, paid on 14 March 2018. (40% franked) 20,133 22,687 9. Significant changes in the state of affairs 12. Indemnity and insurance of officers There were no other significant changes in the state of affairs of the The Company has indemnified the Directors and executives of the Company Group during the financial year. 10. Matters subsequent to the end of the financial year It was announced on 15 August 2018 that IPH’s wholly-owned subsidiary, Practice Insight Pty Limited, has agreed the sale of two of its products: Filing Analytics and Citation Eagle to CPA Global Management Services Limited for $10 million. The sale will generate an accounting for costs incurred, in their capacity as a Director or executive, for which they may be held personally liable, except where there is a lack of good faith. During the financial year, the Company paid a premium in respect of a contract to insure the Directors and executives of the Company against a liability to the extent permitted by the Corporations Act 2001. The contract of insurance prohibits disclosure of the nature of the liability and the amount of the premium. profit in the consolidated accounts of IPH Limited of approximately $2 13. Indemnity and insurance of auditor million in the 2019 financial year after taking into account the assets’ carrying values and transaction costs. 11. Environmental regulation The Company has not, during or since the end of the financial year, indemnified or agreed to indemnify the auditor of the Company or any related entity against a liability incurred by the auditor. During the financial year, the Company has not paid a premium in respect The Group is not subject to any significant environmental regulation of a contract to insure the auditor of the Company or any related entity. under Australian Commonwealth or State law. 2018 Annual Report 33 Directors’ Report 14. Proceedings on behalf of the Company No person has applied to the Court under section 237 of the 16. Officers of the Company who are former partners of Deloitte Touche Tohmatsu Corporations Act 2001 for leave to bring proceedings on behalf of the There are no officers of the Company who are former partners of Company, or to intervene in any proceedings to which the Company is a Deloitte Touche Tohmatsu. party for the purpose of taking responsibility on behalf of the Company for all or part of those proceedings. 15. Non-audit services 17. Rounding of amounts The Company is of a kind referred to in ASIC Corporations (Rounding in Financial/Directors Reports) Instrument dated 24 March 2016 and in Details of the amounts paid or payable to the auditor for non-audit accordance with that Instrument amounts in the annual financial report are services provided during the financial year by the auditor are outlined in rounded off to the nearest thousand dollars, unless otherwise indicated. note 27 to the financial statements. The Directors are satisfied that the provision of non-audit services during the financial year, by the auditor (or by another person or firm on the auditor’s behalf), is compatible with the general standard of independence for auditors imposed by the Corporations Act 2001. 18. Auditor , s independence declaration A copy of the auditor’s independence declaration as required under section 307C of the Corporations Act 2001 is set out on the following page. The Directors are of the opinion that the services as disclosed in note 27 to the financial statements do not compromise the external 19. Auditor auditor’s independence requirements of the Corporations Act 2001 for Deloitte Touche Tohmatsu continues in office in accordance with section the following reasons: 327 of the Corporations Act 2001. » all non-audit services have been reviewed and approved to ensure This report is made in accordance with a resolution of Directors, that they do not impact the integrity and objectivity of the auditor; and pursuant to section 298(2) (a) of the Corporations Act 2001. » none of the services undermine the general principles relating to auditor independence as set out in APES 110 Code of Ethics for Professional Accountants issued by the Accounting Professional and Ethical Standards Board, including reviewing or auditing the auditor’s own work, acting in a management or decision-making capacity for the Company, acting as advocate for the Company or jointly sharing economic risks and rewards. Dr. Andrew Blattman Managing Director 16 August 2018, Sydney 34 www.iphltd.com.au Auditor’s Independence Declaration Deloitte Touche Tohmatsu ABN 74 490 121 060 Grosvenor Place 225 George Street Sydney NSW 2000 Tel: +61 2 9322 7000 www.deloitte.com.au The Board of Directors IPH Limited Level 24, Tower 2, Darling Park 201 Sussex Street, Sydney 16 August 2018 Dear Board Members IPH Limited In accordance with section 307C of the Corporations Act 2001, I am pleased to provide the following declaration of independence to the directors of IPH Limited. As lead audit partner for the audit of the financial report of IPH Limited for the financial year ended 30 June 2018, I declare that to the best of my knowledge and belief, there have been no contraventions of: (i) the auditor independence requirements of the Corporations Act 2001 in relation to the audit; and (ii) any applicable code of professional conduct in relation to the audit. Yours sincerely DELOITTE TOUCHE TOHMATSU H Fortescue Partner Chartered Accountants Liability limited by a scheme approved under Professional Standards Legislation. Member of Deloitte Touche Tohmatsu Limited 2018 Annual Report 35 Financial Statements 36 www.iphltd.com.au 36 www.iphltd.com.au Statement of (cid:51)rofit or (cid:47)oss and Other Comprehensive Income For the year ended 30th June 2018 Note 30 June 2018 30 June 2017 Consolidated 5 6 7 7 7 7 8 36 36 $’000 221,956 4,100 (65,282) (13,092) (8,511) (1,158) (65,983) (1,010) (1,992) (14,171) (1,537) 53,320 (12,647) 40,673 167 167 40,840 40,673 40,673 40,840 40,840 20.79 20.69 $’000 182,041 4,104 (49,055) (10,329) (5,420) (1,574) (51,033) (657) (1,466) (8,169) (1,241) 57,201 (14,308) 42,893 (438) (438) 42,455 42,893 42,893 42,455 42,455 22.46 22.33 2018 Annual Report 37 Revenue Other income Expenses Employee benefits expense Depreciation and amortisation expenses Rental expenses Business acquisition costs Agent fee expenses Insurance expenses Travel expenses Other expenses Finance costs Profit before income tax expense Income tax expense Profit after income tax expense for the year Other comprehensive income Items that may be reclassified subsequently to profit or loss Foreign currency translation Other comprehensive income for the year, net of tax Total comprehensive income for the year Profit for the year is attributable to: Owners of IPH Limited Total comprehensive income for the year is attributable to: Owners of IPH Limited Earnings per share From continuing operations Basic earnings (cents per share) Diluted earnings (cents per share) These statements should be read in conjunction with the following notes. Statement of Financial Position as at 30TH June 2018 Current assets Cash and cash equivalents Trade and other receivables Other Total current assets Non-current assets Available-for-sale financial assets Property, plant and equipment Intangibles Deferred tax Total non-current assets Total assets Current liabilities Trade and other payables Income tax payable Provisions Other financial liabilities Deferred revenue Total current liabilities Non-current liabilities Borrowings Deferred tax Provisions and other financial liabilities Total non-current liabilities Total liabilities Net assets Equity Issued capital Reserves Retained profits Total equity attributable to owners of IPH Limited These statements should be read in conjunction with the following notes. 38 www.iphltd.com.au Consolidated Note 30 June 2018 30 June 2017 $’000 $’000 9 10 11 12 13 14 15 16 17 18 19 15 20 21 22 23 26,213 57,112 5,342 88,667 180 6,183 24,398 38,020 3,426 65,844 180 3,004 266,303 212,926 6,557 279,223 367,890 16,722 6,316 8,052 402 1,106 32,598 40,102 22,931 4,671 67,704 100,302 267,588 5,077 221,187 287,031 11,244 6,903 6,271 1,570 1,029 27,017 - 18,715 1,605 20,320 47,337 239,694 262,763 233,598 (11,461) 16,286 (12,340) 18,436 267,588 239,694 Statement of Changes in Equity For the year ended 30th June 2018 Issued Capital Foreign Currency Translation Reserve Minority Interest Reserve Equity Settled Employee Benefits Reserve Retained Profits Total equity Balance at 1 July 2016 Profit after income tax expense for the year Effect of foreign exchange differences Total comprehensive income for the year $’000 218,583 - - - Transactions with owners in their capacity as owners: Issue of ordinary shares as 14,498 consideration for a business combination, net of transaction costs (note 32) Dividend Reinvestment plan 517 Share-based payments Dividends paid (note 24) - - $’000 272 - (438) (438) - - - - $’000 (14,850) $’000 $’000 $’000 1,340 16,467 221,812 - - - - - - - - - - - - 1,336 42,893 42,893 - (438) 42,893 42,455 - 14,498 - - 517 1,336 - (40,924) (40,924) Balance at 30 June 2017 233,598 (166) (14,850) 2,676 18,436 239,694 Balance at 1 July 2017 233,598 Profit after income tax expense for the year Effect of foreign exchange differences Total comprehensive income for the year - - - Transactions with owners in their capacity as owners: Issue of ordinary shares as 27,036 consideration for a business combination, net of transaction costs (note 32) Share buy back Dividend Reinvestment plan Share-based payments Dividends paid (note 24) (2,727) 4,856 - - Balance at 30 June 2018 262,763 These statements should be read in conjunction with the following notes. (166) - 167 167 - - - - - 1 (14,850) 2,676 18,436 239,694 - - - 36 - - - - - - - - - - 676 40,673 40,673 - 167 40,673 40,840 - - - - 27,072 (2,727) 4,856 676 - (42,823) (42,823) (14,814) 3,352 16,286 267,588 2018 Annual Report 39 Statement of Cash Flows For the year ended 30th June 2018 (cid:38)ash (cid:190)o(cid:90)s from o(cid:83)erating activities Receipts from customers Payments to suppliers and employees Interest received Interest and other finance costs paid Income taxes paid Net cash from operating activities (cid:38)ash (cid:190)o(cid:90)s from investing activities Payments for purchase of subsidiaries, net of cash acquired Payments for property, plant and equipment Payments for internally developed software Net cash used in investing activities (cid:38)ash (cid:190)o(cid:90)s from financing activities Share buy back Dividends paid Proceeds of borrowings Repayment of borrowings Net cash used in financing activities Net increase/(decrease) in cash and cash equivalents Cash and cash equivalents at the beginning of the financial year Effects of exchange rate changes on cash and cash equivalents Cash and cash equivalents at the end of the financial year These statements should be read in conjunction with the following notes. 40 www.iphltd.com.au Consolidated Note 30 June 2018 30 June 2017 $’000 $’000 6 7 35 32 13 14 21 24 240,447 (175,495) 29 (1,537) (16,987) 46,457 205,480 (136,759) 113 (1,241) (17,671) 49,922 (38,621) (39,088) (745) (3,269) (619) (2,670) (42,635) (42,377) (2,727) (37,967) 46,023 (7,000) (1,671) - (40,407) - - (40,407) 2,151 (32,862) 24,398 58,761 (336) (1,501) 9 26,213 24,398 Notes to the Financial Statements Note 1. General information Basis of preparation The financial statements cover IPH Limited as a Group consisting of IPH The financial statements have been prepared under the historical cost Limited and the entities it controlled at the end of, or during, the year. convention except for certain financial instruments that are measured The financial statements are presented in Australian dollars, which is IPH at revalued amounts or fair values, as explained in the accounting Limited’s functional and presentation currency. policies below. Historical cost is generally based on the fair values of the IPH Limited is a listed public company limited by shares, incorporated and domiciled in Australia. Its registered office and principal place of business is: Level 24, Darling Park, Tower 2 201 Sussex Street, Sydney NSW 2000 consideration given in exchange for assets. Critical accounting estimates The preparation of the financial statements requires the use of certain critical accounting estimates. It also requires management to exercise its judgement in the process of applying the Group’s accounting policies. A description of the nature of the Group’s operations and its principal The areas involving a higher degree of judgement or complexity, or activities are included in the Directors’ report, which is not part of the areas where assumptions and estimates are significant to the financial financial statements. statements, are disclosed in note 3. The financial statements were authorised for issue, in accordance with a resolution of Directors, on 16 August 2018. Parent entity information Note 2. Significant accounting policies The principal accounting policies adopted in the preparation of the financial statements are set out below. These policies have been In accordance with the Corporations Act 2001, these financial statements present the results of the Group only. Supplementary information about the parent entity is disclosed in note 31. consistently applied to all the years presented, unless otherwise stated. Principles of consolidation New, revised or amending Accounting Standards and Interpretations adopted The Group has adopted all of the new, revised or amending Accounting Standards and Interpretations issued by the Australian Accounting Standards Board (‘AASB’) that are mandatory for the current reporting period. The adoption of these Accounting Standards and Interpretations did not have any significant impact on the financial performance or position of the Group. Any new, revised or amending Accounting Standards or Interpretations that are not yet mandatory have not been early adopted. Statement of compliance These general purpose financial statements have been prepared in accordance with Australian Accounting Standards and Interpretations issued by the Australian Accounting Standards Board (‘AASB’) and the Corporations Act 2001, as appropriate for for-profit oriented entities. These financial statements also comply with International Financial Reporting Standards as issued by the International Accounting Standards Board (‘IASB’). The consolidated financial statements are those of the consolidated entity (“the Group”), comprising the financial statements of the parent entity and all of the entities the parent controls. The Company controls an entity when it has power over the investee and the Group is exposed to or has rights to variable returns from its involvement with the entity and has the ability to affect those returns through its power to direct the activities of the entity. 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. External non controlling interests are allocated their share of total comprehensive income and are presented within equity in the consolidated Statement of Financial Position, separately from the equity of shareholders. When necessary, adjustments are made to the financial statements of subsidiaries to bring their accounting policies into line with the Group’s accounting policies. 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. 2018 Annual Report 41 Notes to the Financial Statements Note 2. Significant accounting policies Continued > Changes in the Group’s ownership interests in existing subsidiaries » Assets and liabilities for each Statement of Financial Position presented are translated at the closing rate at the balance date; and Changes in the Group’s ownership interests in subsidiaries that do not result in the Group losing control over the subsidiaries are accounted for » All resulting exchange differences are recognised in other comprehensive income, in the foreign currency translation reserve. as equity transactions. The carrying amounts of the Group’s interests and Goodwill and fair value accounting adjustments arising on the the non-controlling interests are adjusted to reflect the changes in their acquisition of a foreign entity are treated as assets and liabilities of the relative interests in the subsidiaries. Any difference between the amount foreign entity and translated at the closing rate. by which the non-controlling interests are adjusted and the fair value of the consideration paid or received is recognised directly in equity and attributed to owners of the Company. Foreign currency translation The individual financial statements of each Group entity are presented in the currency of the primary economic environment in which the entity operates (its functional currency). For the purpose of the consolidated financial statements, the results and financial position of each Group Revenue recognition Revenue is measured at the fair value of the consideration received or receivable. Revenue recognition relating to the provision of services is determined with reference to the stage of completion of the transaction at the end of the reporting period and where outcome of the contract can be estimated reliably. entity are expressed in Australian dollars (‘$’), which is the functional Dividend revenue is recognised when the right to receive a dividend currency of the Company and the presentation currency for the has been established (provided that it is probable that the economic consolidated financial statements. benefits will flow to the Group and the amount of income can be In preparing the financial statements of each individual group entity, measured reliably). transactions in currencies other than the entity’s functional currency Interest income from a financial asset is recognised when it is probable that (foreign currencies) are recognised at the rates of exchange prevailing at the economic benefits will flow to the Group and the amount of revenue can the dates of the transactions. be measured reliably. Interest income is recognised on an accruals basis. At the end of each reporting period, monetary items denominated in Other revenue, including commission revenue, is recognised when it is foreign currencies are retranslated at the rates prevailing at that date. received or when the right to receive payment is established. 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. Exchange differences on monetary items are recognised in profit or loss in the period in which they arise except for: » exchange differences on transactions entered into in order to hedge certain foreign currency risks; and » exchange differences on monetary items receivable from or payable to a foreign operation for which settlement is neither planned nor likely to occur (therefore forming part of the net investment in the foreign operation), which are recognised initially in other comprehensive income and reclassified from equity to profit or loss on repayment. For the purpose of presenting these consolidated financial statements, the assets and liabilities of the Group’s foreign operations are translated into Australian dollars as follows: All revenue is stated net of the amount of goods and services tax (GST). Work in progress Work in progress (WIP) represents costs incurred and profit recognised on client assignments and services that are in progress at balance date. WIP is valued at net realisable value after providing for any foreseeable losses. WIP older than 90 days is reviewed and any WIP not thought to be recoverable is written off. Disbursements recoverable Recoverable client disbursements recorded in work in progress are recognised when services are provided. The amount recognised is net of any GST payable. Internally generated disbursements are credited directly to the profit & loss as they are charged to a client matter. Disbursements older than 60 days are constantly being reviewed and any not thought to be recoverable are written off. » Income and expense items are translated at the average exchange rates for the period, unless exchange rates fluctuated significantly during that period, in which case the exchange rates at the dates of Income Tax the transactions are used. 42 www.iphltd.com.au The income tax expense or benefit is the tax payable on the current periods taxable income based on the national income tax rate for each jurisdiction adjusted by changes in deferred tax assets and liabilities attributable to temporary differences between the tax bases of assets and liabilities and their carrying amounts in the financial statements. 30th June 2018 Current tax Current tax is calculated by reference to the amount of income taxes payable or recoverable in respect of the taxable profit or tax loss for the period. It is calculated using tax rates and tax laws that have been enacted or substantively enacted by reporting date. Deferred tax Deferred tax is recognised on temporary differences between the carrying amount of assets and liabilities in the financial statements and the corresponding tax base of those items. Deferred tax liabilities are recognised for all taxable temporary differences. Deferred tax assets are recognised to the extent that it is probable that sufficient taxable amounts will be available to utilise those temporary differences and losses. Deferred tax assets and liabilities are not recognised if the temporary differences giving rise to them arise from the initial recognition of assets and liabilities (other than as a result of a business combination) which affects neither taxable income nor accounting profit. Furthermore, a deferred tax liability is not recognised in relation to taxable temporary differences arising from goodwill. The Company and its wholly-owned Australian resident entities are part of a tax-consolidated group which was formed on 3 September 2014. As a consequence, all members of the tax-consolidated group are taxed as a single entity. The head entity within the tax consolidated group is IPH Limited. 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. Current tax liabilities and assets and deferred tax assets arising from unused tax losses and tax credits of the members of the tax-consolidated group are recognised by the Company (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 receivable by the Company and each member of the group in relation to the tax contribution amounts paid or payable between the parent 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 period Deferred tax liabilities are recognised for taxable temporary differences is different to the aggregate of the current tax liability or asset and any arising on investments except where the Group is able to control deferred tax asset arising from unused tax losses and tax credits in the reversal of the temporary differences and it is probable that the respect of that period, the difference is recognised as a contribution temporary differences will not reverse in the foreseeable future. Deferred from (or distribution to) equity participants. 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 to the period(s) when the asset and liability giving rise to them are realised or settled, based on tax rates (and tax laws) that have been enacted or substantively enacted by reporting date. The measurement of deferred tax liabilities and assets reflects the tax consequences that would follow from the manner in which the Company expects, at the reporting date, to recover or settle the carrying amount of its assets and liabilities. Cash and cash equivalents Cash and cash equivalents include cash on hand and at banks, short term deposits with an original maturity of three months or less held at call with financial institutions, and bank overdrafts. Bank overdrafts are shown within borrowings in current liabilities in the consolidated Statement of Financial Position. Trade and other receivables Trade and other receivables include amounts due from customers for services performed in the ordinary course of business. Receivables expected to be collected within 12 months of the end of the reporting Deferred tax assets and liabilities are offset when they relate to income period are classified as current assets. All other receivables are taxes levied by the same taxation authority and the Company intends to classified as non-current assets. settle its current tax assets and liabilities on a net basis. Current and deferred tax for the period Current and deferred tax is recognised as an expense or income in the Statement of Comprehensive Income, except when it relates to items credited or debited directly to equity, in which case the deferred tax is also recognised directly in equity. Trade and other receivables are initially recognised at fair value and subsequently measured at amortised cost using the effective interest method, less any provision for impairment. Trade and other payables Trade and other payables represent the liabilities for goods and services received that remain unpaid at the end of the reporting period. The balance is recognised as a current liability with the amounts normally paid within 90 days of recognition of the liability. 2018 Annual Report 43 Notes to the Financial Statements Note 2. Significant accounting policies Continued > Unearned income is recognised as a liability when received and is recognised Assets held under finance leases are amortised over their expected as revenue once a patent service has been provided or completed. useful lives on the same basis as owned assets. However, when there Financial instruments Loans and receivables Loans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market. They are carried at amortised cost using the effective interest rate method. Gains and losses are recognised in profit or loss when the asset is derecognised or impaired. Available-for-sale financial assets Available for sale financial assets include any financial assets not included in the above categories and are measured at fair value. Unrealised gains and losses arising from changes in fair value are taken directly to equity. The cumulative gain or loss is held in equity until the financial asset is de-recognised, at which time the cumulative gain or loss held in equity is recognised in profit and loss. The carrying amount of financial assets is reviewed annually the directors’ to assess whether there is any objective evidence that a financial asset is impaired. Where such objective evidence exists, the company recognises impairment losses. Financial liabilities 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. Leasehold improvements Plant and equipment Furniture, fixtures and fittings Computer equipment 6-15 years 2-20 years 5-20 years 3-5 years 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 sales proceeds and the carrying amount of the asset and is recognised in profit or loss. Intangible assets Intangible assets acquired as part of a business combination, other than goodwill, are measured at their fair value at the date of the acquisition. Goodwill Financial liabilities include trade payables, other creditors and loans from third parties including inter group balances. Non derivative financial liabilities are recognised at amortised cost using the effective interest method. Goodwill represents the excess of the cost of an acquisition over the fair value of the Group’s share of the net identifiable assets of the acquired subsidiary/associate at the date of acquisition. Goodwill is not amortised. Instead, goodwill is tested annually for impairment, or more frequently of events or changes in circumstances indicate that it Trade accounts payable comprise the original debt less principal might be impaired and it is carried at cost less accumulated impairment payments plus where applicable any accrued interest. losses. Impairment losses on goodwill are taken to profit and loss and Financial liabilities are classified as current liabilities unless the group has an unconditional right to defer settlement of the liability for at least twelve months after the reporting period. not subsequently reversed. Intangible assets acquired separately Property, plant and equipment Intangible assets with finite lives that are acquired separately are carried at cost less accumulated amortisation and accumulated impairment losses. Property, plant and equipment are stated at cost less accumulated depreciation and accumulated impairment losses. Customer Relationships Depreciation is recognised so as to write off the cost or valuation of Customer relationships are the assessed value of the supply of goods and assets less their residual values over their useful lives, using the straight- services that exist at the date of acquisition. In valuing customer relationships, line method. The estimated useful lives, residual values and depreciation consideration is given to historic customer retention and decay statistics, method are reviewed at the end of each reporting period, with the effect projected future cash flows and appropriate capital charges. of any changes in estimate accounted for on a prospective basis. Customer relationships are amortised over a period of 10 years. The estimated useful lives, residual values and amortisation method are reviewed at the end of each reporting period, with the effect of any changes in estimate accounted for on a prospective basis. 44 www.iphltd.com.au 30th June 2018 Trademarks Trademarks are intangible assets with indefinite useful lives that are acquired separately are carried at cost less accumulated impairment losses. Software acquired Impairment of assets Goodwill and other assets that have an indefinite useful life are not amortised but are tested annually for impairment in accordance with AASB 136 ‘Impairment of Assets’. Assets subject to annual depreciation or amortisation are reviewed for impairment whenever events or Software acquired through a business combination is assessed as the circumstances arise that indicates that the carrying amount of the asset identifiable value of that software at the date of acquisition. Acquired may be impaired. software is amortised over a period of 4 years. Internally-generated intangible assets Internally-generated intangible assets, including software, arising from development (or from the development phase of an internal project) is recognised if, and only if, all of the following have been demonstrated: An impairment loss is recognised where the carrying amount of the asset exceeds its recoverable amount. The recoverable amount of an asset is defined as the higher of its fair value less costs to sell and value in use. For the purposes of impairment, assets are grouped at the lowest levels for which there are separately identifiable cash flows (cash generating units). » the technical feasibility of completing the intangible asset so that it will be available for use or sale; Provisions » » » » the intention to complete the intangible asset and use or sell it; the ability to use or sell the intangible asset; 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 how the intangible asset will generate probable future economic benefits; can be made of the amount of the obligation. the availability of adequate technical, financial and other resources to The amount recognised as a provision is the best estimate of the complete the development and to use or sell the intangible asset; and consideration required to settle the present obligation at the end of » the ability to measure reliably the expenditure attributable to the intangible asset during its development. the reporting period, taking into account the risks and uncertainties surrounding the obligation. When a provision is measured using the cash flows estimated to settle the present obligation, its carrying amount The amount initially recognised for internally-generated intangible assets is the present value of those cash flows (where the effect of the time is the sum of the expenditure incurred from the date when the intangible value of money is material). 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 period in which it is incurred. 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 reimbursement will be Subsequent to initial recognition, internally-generated intangible assets received and the amount of the receivable can be measured reliably. are reported at cost less accumulated amortisation and accumulated impairment losses, on the same basis as intangible assets that are acquired separately. Leases The useful lives of internally generated intangible assets are as follows: Leases are classified as finance leases whenever the terms of the lease transfer substantially all the risks and rewards of ownership to the Software 3 years lessee. All other leases are classified as operating leases. Derecognition of intangible assets An intangible asset is derecognised on disposal, or when no future economic benefits are expected from use or disposal. Gains or losses arising from derecognition of an intangible asset, measured as the difference between the net disposal proceeds and the carrying amount of the asset are recognised in profit or loss when the asset is derecognised. 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 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. 2018 Annual Report 45 Notes to the Financial Statements Note 2. Significant accounting policies Continued > 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 aggregate 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 Goods and services tax (GST) Revenues, expenses and assets are recognised net of the amount of GST, except where the amount of GST incurred is not recoverable from the Tax Office. In these circumstances the GST is recognised as part of the cost of acquisition of the asset or as part of an item of the expense. Receivables and payables in the consolidated Statement of Financial Position are shown inclusive of GST. Cash flows are presented in the statement of cash flows on a gross basis, except for the GST component of investing and financing activities, which are disclosed as operating cash flows. leased asset are consumed. Employee benefits Short and long-term employee benefit A liability is recognised for benefits accruing to employees in respect of wages and salaries, annual leave, and long service leave when it is Share based payments Equity settled share based compensation benefits are provided to employees. Equity settled transactions are awards of shares, options or rights, which are provided in exchange for the rendering of services. Equity settled share based payments are measured at the fair value of the equity instruments at the grant date. probable that settlement will be required and they are capable of being The fair value at the grant date of the equity settled share based measured reliably. Liabilities recognised in respect of short-term employee benefits, are measured at their nominal values using the remuneration rate expected to apply at the time of settlement. Liabilities recognised in respect of long term employee benefits are measured at the present value of the estimated future cash outflows to be made by the Group in respect of services provided by the employees up to reporting date. Retirement benefit costs Payments to defined contribution plans are recognised as an expense when employees have rendered service entitling them to the contributions. Borrowing costs Borrowing costs can include interest, amortisation of discounts or premiums relating to borrowings, ancillary costs incurred in connection with arrangement of borrowings, foreign exchange losses net of hedged amounts on borrowings. Borrowings are initially recognised at fair value, net of transaction costs and subsequently measured at amortised cost. Any difference between the proceeds (net of transaction costs) and the redemption amount is recognised in profit or loss over the period of the borrowings using the effective interest method. payments 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. Fair value measurement When an asset or liability, financial or non-financial, is measured at fair value for recognition or disclosure purposes, the fair value is based on 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; and assumes that the transaction will take place either: in the principal market; or in the absence of a principal market, in the most advantageous market. Fair value is measured using the assumptions that market participants would use when pricing the asset or liability, assuming they act in their economic best interests. For non-financial assets, the fair value measurement is based on its highest and best use. Valuation techniques that are appropriate in the circumstances and for which sufficient data are available to measure fair value, are used, maximising the use of relevant observable inputs and minimising the use of unobservable inputs. 46 www.iphltd.com.au 30th June 2018 Assets and liabilities measured at fair value are classified, into three Where the business combination is achieved in stages, the Group levels, using a fair value hierarchy that reflects the significance of the remeasures its previously held equity interest in the acquiree at the inputs used in making the measurements (note 25). Classifications acquisition-date fair value and the difference between the fair value and are reviewed at each reporting date and transfers between levels are the previous carrying amount is recognised in profit or loss. Contingent determined based on a reassessment of the lowest level of input that is consideration to be transferred by the acquirer is recognised at the significant to the fair value measurement. acquisition-date fair value. Subsequent changes in the fair value of the For recurring and non-recurring fair value measurements, external valuers may be used when internal expertise is either not available or when the valuation is deemed to be significant. External valuers are contingent consideration classified as an asset or liability is recognised in profit or loss. Contingent consideration classified as equity is not remeasured and its subsequent settlement is accounted for within equity. selected based on market knowledge and reputation. Where there is a The difference between the acquisition-date fair value of assets significant change in fair value of an asset or liability from one period to acquired, liabilities assumed and any non-controlling interest in the another, an analysis is undertaken, which includes a verification of the acquiree and the fair value of the consideration transferred and the fair major inputs applied in the latest valuation and a comparison, where value of any pre-existing investment in the acquiree is recognised as applicable, with external sources of data. goodwill. If the consideration transferred and the pre-existing fair value Issued capital Ordinary shares are classified as equity. Incremental costs directly attributable to the issue of new shares or is less than the fair value of the identifiable net assets acquired, being a bargain purchase, the difference is recognised as a gain directly in profit or loss on the acquisition-date, but only after a reassessment of the identification and measurement of the net assets acquired, the non- controlling interest in the acquiree, if any, the consideration transferred options are shown in equity as a deduction, net of tax, from the proceeds. and any previously held equity interest. Dividends Dividends are recognised when declared during the financial year and no longer at the discretion of the Company. Business combinations Where settlement of any part of cash consideration is deferred, the amounts payable in the future are discounted to their present value as at the date of exchange. Contingent consideration is classified either as equity or a financial liability. Amounts classified as financial liability are subsequently remeasured to fair value with changes to fair value recognised in profit or loss. Business combinations are initially accounted for on a provisional basis. The The acquisition method of accounting is used to account for business Group retrospectively adjusts the provisional amounts recognised and also combinations regardless of whether equity instruments or other assets recognises additional assets or liabilities during the measurement period, are acquired. The consideration transferred is the sum of the acquisition-date fair values of the assets transferred, equity instruments issued or liabilities incurred. The consideration transferred also includes the fair value of any contingent consideration arrangement and the fair value of any pre-existing equity interest in the subsidiary. Identifiable assets acquired and liabilities and contingent liabilities assumed in a business combination are measured based on new information obtained about the facts and circumstances that existed at the acquisition-date. The measurement period ends on either the earlier of (i) 12 months from the date of the acquisition or (ii) when the Group receives all the information possible to determine fair value. Earnings per share initially at their fair values at the acquisition date. For each business Basic earnings per share combination, the non-controlling interest in the acquiree is measured at either fair value or at the proportionate share of the acquiree’s identifiable net assets. All acquisition costs are expensed as incurred to profit or loss. Basic earnings per share is calculated by dividing the profit attributable to the owners of IPH Limited, excluding any costs of servicing equity other than ordinary shares, by the weighted average number of ordinary shares On the acquisition of a business, the Group assesses the financial outstanding during the financial year, adjusted for bonus elements in assets acquired and liabilities assumed for appropriate classification ordinary shares issued during the financial year. and designation in accordance with the contractual terms, economic conditions, the Group’s operating or accounting policies and other pertinent conditions in existence at the acquisition-date. Diluted earnings per share Diluted earnings per share adjusts the figures used in the determination of basic earnings per share to take into account the after income tax effect of interest and other financing costs associated with dilutive potential ordinary shares and the weighted average number of shares assumed to have been issued for no consideration in relation to dilutive potential ordinary shares. 2018 Annual Report 47 Notes to the Financial Statements Note 2. Significant accounting policies Continued > Rounding of amounts The Group has distinct revenue streams over the life of the Intellectual Property application process. The Group’s assessment of these revenue The Company is of a kind referred to in ASIC Corporations (Rounding streams has concluded that at transition the Group will not be materially in Financial/Directors Reports) Instrument dated 24 March 2016 and impacted upon adoption and no transition adjustment is required. The in accordance with that Instrument amounts in the annual financial application of the requirements of AASB 15 are consistent with the report are rounded off to the nearest thousand dollars, unless Group’s existing accounting policies. otherwise indicated. New Accounting Standards and Interpretations not yet mandatory or early adopted Australian Accounting Standards and Interpretations that have recently been issued or amended but are not yet mandatory, have not been early adopted by the Group for the annual reporting period ended 30 June 2018. The Group’s assessment of the impact of these new or amended Accounting Standards and Interpretations, most relevant to the Group, are set out below. AASB 9 Financial Instruments This standard is applicable to annual reporting periods beginning on or after 1 January 2018. The standard replaces all previous versions of AASB 9 and completes the project to replace IAS 39 ‘Financial Instruments: Recognition and Measurement’. AASB 9 introduces new classification and measurement models for financial assets. New simpler hedge accounting requirements are intended to more closely align the accounting treatment with the risk management activities of the entity. New impairment requirements will use an ‘expected credit loss’ model to recognise an allowance. AASB 16 Leases This standard is currently applicable to annual reporting periods beginning on or after 1 January 2019. AASB 16 replaces the current AASB 117 Leases standard and sets out a comprehensive model for identifying lease arrangements and the subsequent measurement. A contract contains a lease if it conveys the right to control the use of an identified asset for a period of time. The majority of leases from the lessee perspective within the scope of AASB 16 will require the recognition of a “right of use” asset and a related lease liability, being the present value of future lease payments. This will result in an increase in the recognised assets and liabilities in the Statement of Financial Position as well as a change in expense recognition, with interest and depreciation replacing operating lease expense, with the exception of for leases of low value assets and leases with a term of 12 months or less. The Group expects to adopt the standard from 1 July 2019 and the primary impact from adoption will be the treatment of premises and leased office equipment across the Group. The adoption of the standard will increase net current assets and lease liabilities due to the recognition of the lease liability and right of use asset; expense relating to minimum lease payments will reduce and there will be an increase in interest expense. The quantum of these changes is currently being determined. The most significant impact will be the present value of the operating The Group’s assessment of the requirements of AASB 9 has concluded that at transition the Group will not be materially impacted upon lease commitments in note 29. adoption and no transition adjustment is required. AASB 15 Revenue from Contracts with Customers Note 3. Critical accounting judgements, estimates and assumptions This standard is currently applicable to annual reporting periods beginning The preparation of the financial statements requires management to on or after 1 January 2018. AASB 15 replaces all current guidance on revenue recognition from contracts with customers. It requires make judgements, estimates and assumptions that affect the reported amounts in the financial statements. Management continually evaluates identification of discrete performance obligations within a transaction and its judgements and estimates in relation to assets, liabilities, contingent an associated transaction price allocation to these obligations. Revenue liabilities, revenue and expenses. Management bases its judgements, is recognised upon satisfaction of these performance obligations, which estimates and assumptions on historical experience and on other occur when control of the goods or services are transferred to the various factors, including expectations of future events, management customer. Revenue received for a contract that includes a variable amount believes to be reasonable under the circumstances. The resulting is subject to revised conditions for recognition, whereby it must be highly accounting judgements and estimates will seldom equal the related probable that no significant reversal of the variable component may occur actual results. The judgements, estimates and assumptions that have a when the uncertainties around its measurement are removed. significant risk of causing a material adjustment to the carrying amounts of assets and liabilities (refer to the respective notes) within the next financial year are discussed below. 48 www.iphltd.com.au 30th June 2018 Goodwill and other indefinite life intangible assets The Group tests annually, or more frequently if events of changes in circumstances indicate impairment, whether goodwill and other indefinite life intangible assets have suffered any impairment, in accordance with the accounting policy stated in note 2. Customer relationships are finite intangible assets and are amortised over their expected life. Assets subject to amortisation are reviewed for impairment whenever events or circumstances arise that indicates that the carrying amount of the asset may be impaired. Business combinations The fair value of assets acquired, liabilities and contingent liabilities assumed are initially estimated by the Group taking into consideration all available information at the reporting date. Fair value adjustments on the finalisation of the business combination accounting is retrospective, where applicable, to the period the combination occurred and may have an impact on the assets and liabilities, depreciation and amortisation reported. Acquisitions of $60.5m (2017: $28.9m) were made during the year (note 32). Intellectual Property Services Related to the provision of filing, Australia & New Zealand prosecution, enforcement and management of patents, designs, trade marks and other IP in Australia and New Zealand. Intellectual Property Services Asia Related to the provision of filing, prosecution, enforcement and management of patents, designs, trade marks and other IP in Asia. Data and Analytics Software Develops and provides IP data and analytics software under a subscription license model. The CODM reviews earnings before interest, income tax and adjustments to the statutory reported results. The accounting policies adopted for internal reporting to the CODM are consistent with those adopted in the financial statements. The information reported to the Note 4. Operating segments CODM is on at least a monthly basis. Identification of reportable operating segments Intersegment transactions The Group is organised into three segments: Intellectual Property Services Australia & New Zealand; Intellectual Property Services Asia; and Data and Analytics Software. These operating segments are based on the internal There are varying levels of integration between the segments. The integration includes provision of professional services, shared technology and management services. Intersegment transactions reports that are reviewed and used by the senior executive team and Board were made at market rates. Intersegment transactions are of Directors (who are identified as the Chief Operating Decision Makers (‘CODM’)) in assessing performance and in determining the allocation of resources. There is no aggregation of operating segments. eliminated on consolidation. Reliance on major customers Maximum revenue from any customer is less than 2% of overall revenue of the Group. Country of origin of revenue has not been disclosed as this is commercially sensitive information. 2018 Annual Report 49 Notes to the Financial Statements Note 4. Operating segments Continued > 30 June 2018 Consolidated Revenue Sales to external customers Intersegment sales Total sales revenue Other revenue Total revenue Less: Overheads (cid:44)ntellectual Pro(cid:83)erty Services (cid:36)ustralia and NZ1 $’000 146,655 802 147,457 7,910 Asia $’000 75,301 2,539 77,840 128 155,367 77,968 Data and (cid:36)nalytics Soft(cid:90)are (cid:44)ntersegment eliminations (cid:18) unallocated (cid:38)or(cid:83)orate $’000 $’000 $’000 Total $’000 - - - 1,212 1,212 - - - (1,209) (1,209) (7,158) - 221,956 (3,341) (3,341) (3,971) (7,312) - 221,956 4,070 226,026 7,099 (152,022) (101,220) (46,822) (3,921) Earnings before interest, tax, depreciation and amortisation (EBITDA), before adjustments Less: Depreciation Less: Amortisation Less: Management Charges Segment result: (Profit before interest, tax and adjustments) 54,147 31,146 (2,709) (8,367) (213) 74,004 (1,131) (7,716) 3,937 (204) (1,005) (5,491) (24) (1,961) - (139) (934) 1,554 - 22 - (1,498) (11,594) - 49,237 24,446 (4,694) (7,886) (191) 60,912 1. Australia & New Zealand following the acquisition of AJ Park in Oct 2017 Reconciliation of segment result Segment result (cid:36)d(cid:77)ustments to statutory result: » » » » » Business acquisition costs Business acquisition adjustments New business establishment costs Restructuring expenses Share based payments Total adjustments Interest income Finance Costs Impairment of intangible assets Profit for the period before income tax expense Reconciliation of segment revenue Segment revenue Interest income Total revenue 50 www.iphltd.com.au 60,912 (982) 642 (786) (2,134) (676) (3,936) 29 (1,537) (2,148) 53,320 226,026 29 226,056 30 June 2017 Consolidated Revenue Sales to external customers Intersegment sales Total sales revenue Other revenue Total revenue Less: Overheads Earnings before interest, tax, depreciation and amortisation (EBITDA), before adjustments Less: Depreciation Less: Amortisation Segment result: (Profit before interest, tax and adjustments) Reconciliation of segment result Segment result (cid:36)d(cid:77)ustments to statutory result: » » » » Business acquisition costs Business acquisition adjustments New business establishment costs Share based payments Total adjustments Interest income Finance Costs Profit for the period before income tax expense Reconciliation of segment revenue Segment revenue Interest income Total revenue 30th June 2018 (cid:44)ntellectual Pro(cid:83)erty Services (cid:36)ustralia $’000 116,002 362 116,364 6,798 Asia $’000 66,039 1,739 67,778 844 123,162 68,622 Data and (cid:36)nalytics Soft(cid:90)are (cid:44)ntersegment eliminations (cid:18) unallocated (cid:38)or(cid:83)orate $’000 $’000 $’000 Total $’000 - - - 743 743 - - - (218) (218) - 182,041 (2,101) (2,101) (4,176) - 182,041 3,991 (6,277) 186,032 (72,587) (39,043) (3,246) (5,398) 5,868 (114,406) 50,575 29,579 (2,503) (5,616) (409) 71,626 (724) (6,285) (254) (608) (16) (1,548) (90) (823) - 19 (1,084) (9,245) 43,566 28,717 (4,067) (6,529) (390) 61,297 61,297 (2,617) 1,181 (207) (1,325) (2,968) 113 (1,241) 57,201 186,032 113 186,145 2018 Annual Report 51 Notes to the Financial Statements 30 June 2018 $’000 221,956 221,956 30 June 2018 $’000 (270) 826 2,063 1,452 29 4,100 Consolidated 30 June 2017 $’000 182,041 182,041 Consolidated 30 June 2017 $’000 1,050 26 1,367 1,548 113 4,104 Note 5. Sales Revenue Revenue from the rendering of services Note 6. Other Income Net Realised foreign exchange (loss)/gain Net unrealised foreign exchange gain Other income Commission Interest 52 www.iphltd.com.au 30th June 2018 Consolidated 30 June 2018 30 June 2017 $’000 1,498 9,362 2,232 13,092 676 3,780 (642) 2,020 2,471 1,798 5,734 2,148 14,171 9 754 774 1,537 $’000 1,084 7,738 1,508 10,329 1,325 3,418 (1,181) 1,414 1,728 1,328 3,699 - 8,169 26 - 1,215 1,241 Note 7. Expenses Profit before income tax includes the following specific expenses: Depreciation Amortisation - Acquired Intangibles Amortisation - Software Development Share based payments Superannuation expense Deferred acquisition and deferred settlement costs remeasurement Other e(cid:91)(cid:83)enses: Professional fees IT & Communication Office Expenses Other Impairment of FAKC & Cullens trademarks (Note 14) (cid:41)inance costs Interest on bank facilities - Overdraft Interest on bank facilities - loan Other interest expense - Facility fees Rental e(cid:91)(cid:83)ense relating to o(cid:83)erating leases Minimum lease payments 8,511 5,420 2018 Annual Report 53 Notes to the Financial Statements Note 8. Income Tax Expense (cid:44)ncome ta(cid:91) e(cid:91)(cid:83)ense Current tax Deferred tax Under provided in prior years Aggregate income tax expense (cid:39)eferred ta(cid:91) included in income ta(cid:91) e(cid:91)(cid:83)ense com(cid:83)rises: Increase in deferred tax assets (note 15) Decrease in deferred tax liabilities (note 15) Reconciliation of income ta(cid:91) e(cid:91)(cid:83)ense and ta(cid:91) at the statutory rate Profit before income tax expense Tax at the statutory tax rate of 30% Tax effect amounts which are not deductible/(taxable) in calculating taxable income: Permanent adjustments Equity settled share based payments Earn-out revaluations Acquisition costs Difference in overseas tax rates Losses not brought to account Under / (Over) provision with respect to current tax in prior years Other Income tax expense 54 www.iphltd.com.au Consolidated 30 June 2018 30 June 2017 $’000 $’000 16,080 (3,754) 321 12,647 (1,500) (2,254) (3,754) 53,320 15,996 172 (905) - 277 16,565 (2,984) 727 14,308 2,062 985 3,047 57,201 17,160 (191) 279 (343) 805 (3,146) (3,590) 195 340 (282) 12,647 35 9 144 14,308 Note 9. Current assets - cash and cash equivalents Cash on hand Cash at bank Note 10. Current assets - trade and other receivables Trade receivables Less: Provision for impairment of receivables Impairment of receivables The Group has recognised a loss of $381,000 (2017: Impairment reversal of $13,000) in profit or loss in respect of impairment of receivables for the year ended 30 June 2018. The ageing of the impaired receivables provided for above are as follows: Movements in the provision for impairment of receivables are as follows: Past due more than 91 days Opening balance Additions through business combinations (note 32) Additional provisions recognised Receivables written off during the year as uncollectable Closing balance 30th June 2018 Consolidated 30 June 2018 30 June 2017 $’000 89 26,124 26,213 $’000 73 24,325 24,398 Consolidated 30 June 2018 30 June 2017 $’000 57,930 (818) 57,112 $’000 38,759 (739) 38,020 Consolidated 30 June 2018 30 June 2017 $’000 794 $’000 682 Consolidated 30 June 2018 30 June 2017 $’000 739 94 381 (396) 818 $’000 574 334 (13) (156) 739 2018 Annual Report 55 Notes to the Financial Statements Note 10. Current assets - trade and other receivables Continued > Past due but not impaired Customers with receivable balances past due but without provision for impairment, amount to $19,262,000 as at 30 June 2018 (2017: $10,793,000). The Group did not consider there to be a credit risk on the aggregate balances after reviewing the credit terms of customers based on recent collection practices. The ageing of the past due but not impaired receivables are as follows: 31 to 60 days overdue 61 to 90 days overdue Past due more than 91 days Ageing has been calculated with reference to the trading terms of local clients (30 days) and international clients (90 days). The prior period disclosure has been amended to reflect this methodology. Note 11. Current assets - other Prepayments Work in Progress Other current assets 56 www.iphltd.com.au Consolidated 30 June 2018 30 June 2017 $’000 14,913 1,278 3,071 19,262 $’000 8,297 729 1,767 10,793 Consolidated 30 June 2018 30 June 2017 $’000 1,459 2,192 1,691 5,342 $’000 1,122 1,042 1,262 3,426 Note 12. Non-Current assets - Available-For-Sale Financial Assets Unquoted ordinary shares - at fair value Note 13. Non-Current assets - Property, plant and equipment Leasehold improvements - at cost Less: Accumulated depreciation Plant and equipment - at cost Less: Accumulated depreciation Furniture, fixtures and fittings - at cost Less: Accumulated depreciation Computer equipment - at cost Less: Accumulated depreciation 30th June 2018 Consolidated 30 June 2018 30 June 2017 $’000 180 180 $’000 180 180 Consolidated 30 June 2018 30 June 2017 $’000 7,355 (3,545) 3,810 1,258 (984) 274 3,853 (3,024) 829 12,915 (11,645) 1,270 6,183 $’000 3,143 (1,533) 1,610 1,076 (784) 292 1,572 (1,165) 407 6,531 (5,836) 695 3,004 2018 Annual Report 57 Notes to the Financial Statements Note 13. Non-Current assets - Property, plant and equipment Continued > Reconciliations Reconciliations of the written down values at the beginning and end of the current and previous financial year are set out below: Consolidated Leasehold im(cid:83)rovements Plant and e(cid:84)ui(cid:83)ment (cid:41)urniture(cid:15) fi(cid:91)tures and fittings (cid:38)om(cid:83)uter e(cid:84)ui(cid:83)ment Total $’000 $’000 $’000 $’000 $’000 Balance at 1 July 2016 1,680 459 Additions Additions through business combinations (note 32) Disposals / Transfers Exchange differences Depreciation expense Balance at 30 June 2017 Additions Additions through business combinations (note 32) Disposals / Transfers Exchange differences Depreciation expense Balance at 30 June 2018 40 2 96 - (208) 1,610 1,394 1,252 (45) 2 (403) 3,810 10 14 - - (191) 292 180 - - 5 (203) 274 567 114 3 1,644 4,350 455 14 619 33 (157) (847) (908) - (6) (6) (120) (565) (1,084) 407 33 726 (205) 20 (152) 829 695 3,004 673 2,280 686 2,664 (51) 7 (301) 34 (740) (1,498) 1,270 6,183 58 www.iphltd.com.au Note 14. Non Current assets - intangibles Goodwill - at cost Patents and trade marks - at cost Capitalised software development - at cost Less: Accumulated amortisation Software Acquired Less: Accumulated amortisation Customer Relationships Less: Accumulated amortisation 30th June 2018 Consolidated 30 June 2018 30 June 2017 $’000 185,223 4,237 189,460 8,871 (4,648) 4,223 3,805 (3,015) 790 90,950 (19,120) 71,830 266,303 $’000 144,570 3,519 148,089 5,780 (2,612) 3,168 3,805 (2,064) 1,741 70,637 (10,709) 59,928 212,926 2018 Annual Report 59 Notes to the Financial Statements Note 14. Non Current assets - intangibles Continued > Reconciliations Reconciliations of the written down values at the beginning and end of the current and previous financial year are set out below: Consolidated (cid:42)ood(cid:90)ill Patents and trade mar(cid:78)s (cid:38)ustomer relationshi(cid:83)s (cid:38)a(cid:83)italised soft(cid:90)are develo(cid:83)ment Soft(cid:90)are (cid:36)c(cid:84)uired Total Balance at 1 July 2016 124,156 3,511 58,685 $’000 $’000 $’000 Additions Additions through business combinations Disposals / Transfers Amortisation expense 1,100 19,314 - - 8 - - - - 8,028 - Balance at 30 June 2017 144,570 3,519 59,928 Additions - - - Additions through business combinations (note 32) 40,639 2,866 20,313 Exchange differences Impairment1 Amortisation expense 14 - - - (2,148) - - (6,785) (1,508) (952) (9,245) $’000 1,111 2,662 - 903 $’000 $’000 2,693 190,156 - - - 3,770 27,342 903 3,168 3,269 - 18 - 1,741 212,926 - - - - 3,269 63,818 32 (2,148) - (8,411) (2,232) (951) (11,594) Balance at 30 June 2018 185,223 4,237 71,830 4,223 790 266,303 1. On 30 June 2018 FAKC and Cullens were merged with Spruson & Ferguson Australia and will operate under the Spruson & Ferguson name. As a result, the intangible asset relating to the former FAKC and Cullens trademarks has been assessed as having no ongoing economic benefit and hence has been written off. Impairment testing For the purposes of impairment testing, goodwill is allocated to cash generating units (CGU's) that are an identifiable group of assets that generate cash associated with the goodwill. CGU On 30 June 2018 FAKC and Cullens were merged with Spruson & Ferguson Australia. Spruson & Ferguson Australia The goodwill relating to the former FAKC and Practice Insight Cullens CGU's is now assessed within the Spruson & Ferguson Australia CGU. A summary of the goodwill by CGU is set out below: Pizzeys AJ Park1 Consolidated 30 June 2018 30 June 2017 $’000 $’000 52,958 3,834 68,158 40,653 52,958 3,834 68,158 - Spruson & Ferguson (Hong Kong) 19,314 19,314 Other Total 1. AJ Park was acquired on 31 Oct 2017 (Note 32). 306 306 185,223 144,570 60 www.iphltd.com.au 30th June 2018 The recoverable amount of a CGU is determined primarily utilising a rates stated below. After five years a terminal growth rate is assumed value-in-use calculation and secondly based on estimated net selling and terminal value-in-use calculated. The terminal growth rates do not prices. Value-in-use calculations use cash flow projections based on exceed the average growth rates that the business has experienced and financial budgets prepared by management and approved by the Board. are generally lower than the short term growth rates assumed. Cashflows for future years are extrapolated using the estimated growth Key assumptions used for value-in-use calculations (cid:24) yr (cid:40)B(cid:44)(cid:55)(cid:39)(cid:36) (cid:38)(cid:36)(cid:42)R (cid:55)erminal gro(cid:90)th rates (cid:39)iscount rates CGU Spruson & Ferguson Australia1 Pizzeys AJ Park S&F Hong Kong 2018 % 4.4 6.2 6.9 18.6 2017 % 4.9 6.1 5.1 17.7 Pre-(cid:55)a(cid:91) 2018 & 2017 Post-(cid:55)a(cid:91) 2018 & 2017 % 15 15 15 15 % 10.5 10.5 10.5 10.5 % 2.5 2.5 2.5 2.5 1. CGU for testing the former FAKC & Cullens goodwill. Prior year CAGR percentage is the average for FAKC & Cullens. The post-tax discount rate has been applied to discount the future attributable post-tax cash flows. Fair value less cost to sell The fair value less cost to sell method was used to determine the recoverable amount of the Practice Insight CGU at 30 June 2018 as an offer for sale was received post year end (Note 34). In the prior this CGU was valued using value in use calculations with the following assumptions: 5yr EBITDA CAGR 20.8%, terminal growth rate of 2.5% and discount rates of 25% and 17.5% pre-and post tax respectively. At 30 June 2018, the assessed value-in-use for each CGU exceeded the carrying amounts of the CGU and no impairment loss was recognised. Impact of possible change in key assumptions No impairment charge would arise as a result of the following changes in assumptions: » Holding all assumptions constant, if the forecast net cashflows in years 1 to 5 declined by 5% » Holding all assumptions constant, if the discount rate increased by 0.5% » Holding all assumptions constant, if the terminal rate declined by 0.5% In addition to the above sensitivity testing, a decline in expected revenue growth in Pizzeys of 1.2% would result in the carrying value of the Pizzeys CGU to equal the recoverable amount. 2018 Annual Report 61 Notes to the Financial Statements Note 15. Deferred tax assets / liabilities The net deferred tax liability comprises the following balances: Impairment of receivables Property, plant and equipment Provisions Accrued expenses Unbilled revenue Prepayments Foreign exchange Transaction costs Leased assets Software O(cid:83)ening balance Recognised in (cid:83)rofit or loss (cid:36)c(cid:84)uisitions Recognised in equity (cid:38)losing balance $’000 $’000 $’000 $’000 $’000 95 (22) 1,955 178 (134) (29) 93 (29) 157 28 72 (182) 25 (48) 1,248 (490) 385 610 237 365 66 135 1,983 250 (316) (4) 45 758 622 975 Intangible assets - Customer Relationships (Note 32) (16,965) 2,388 (6,490) (21,067) Intangible assets - Trademarks Sundry (1,049) (3) 644 587 (405) 584 (13,638) 3,754 (6,490) - (16,374) Consolidated 30 June 2018 30 June 2017 $’000 $’000 6,557 (22,931) (16,374) 5,077 (18,715) (13,638) Disclosed as: Deferred tax asset Deferred tax liability 62 www.iphltd.com.au Note 16. Current liabilities - trade and other payables Trade payables Sundry creditors and accruals Note 17. Current liabilities - provisions Employee benefits Provision for onerous lease Lease make good Other provisions Note 18. Current liabilities - other financial liabilities Lease Incentive liability Preference shares Foreign exchange derivative financial instruments 30th June 2018 Consolidated 30 June 2018 30 June 2017 $’000 11,104 5,618 16,722 $’000 6,705 4,539 11,244 Consolidated 30 June 2018 30 June 2017 $’000 6,393 750 - 909 $’000 5,479 - 51 741 8,052 6,271 Consolidated 30 June 2018 30 June 2017 $’000 - 200 202 402 $’000 1,370 200 - 1,570 2018 Annual Report 63 Notes to the Financial Statements Note 19. Borrowings Non Current Bank overdraft Multi-option facility Consolidated 30 June 2018 30 June 2017 $’000 $’000 - 40,102 40,102 - - - On 25 August 2014, the Group entered into a facilities agreement On 20 December 2017, the Group amended the Agreement and while (‘Agreement’) with Australian and New Zealand Banking Group Limited maintaining the multi-option acquisition loan facility and multi-option revolving (‘ANZ’). The facilities under the Agreement comprised: loan facility including a bank guarantee and overdraft facility for the general » A multi-option facility with a term of three years for the general corporate purposes of the Group; and » A revolving annual credit facility allowing for financial guarantees and standby letters of credit to be issued for the general corporate purposes of the Group. corporate purposes of the Group, the following changes were made: » » The facility limit was reduced from $97m to $54m. The maturity date was extended by three years to 1 January 2021. On 5 June 2018, the Group amended the Agreement to include an additional $40m facility limit, while maintaining the multi-option On 7 July 2015, the Group amended the agreement to extend the facility acquisition loan facility and multi-option revolving loan facility including to $97m over a three year term maturing on 31 July 2018 comprising: a bank guarantee and overdraft facility for the general corporate » A multi-option acquisition loan facility purposes of the Group. The maturity date remains on 1 January 2021. » A multi-option revolving loan facility including a bank guarantee facility and overdraft facility for the general corporate purposes of the Group. Assets pledged as security The bank facility made available by ANZ is secured by cross guarantee and all assets from IPH Limited and a number of its wholly owned subsidiaries. The value of current and non-current assets pledged as security are as noted on the consolidated statement of financial position. 64 www.iphltd.com.au Financing arrangements Unrestricted access was available at the reporting date to the following lines of credit: (cid:55)otal facilities Bank overdraft1 Multi-option facility1 Standby letter of credit facility Bank guarantees1 (cid:56)sed at the re(cid:83)orting date Bank overdraft Multi-option facility Standby letter of credit facility Bank guarantees (cid:56)nused at the re(cid:83)orting date Bank overdraft Multi-option facility Standby letter of credit facility Bank guarantees 30th June 2018 Consolidated 30 June 2018 30 June 2017 $’000 $’000 - 94,000 - - - 97,000 - - 94,000 97,000 - 40,102 - 5,985 46,087 - 47,913 - - - - - 2,473 2,473 - 94,527 - - 1. The Multi-option facility includes facility sublimits of $7m and $2m which may be used for the issuance of bank guarantees and available overdraft respectively. 47,913 94,527 2018 Annual Report 65 Notes to the Financial Statements Note 20. Non-current liabilities - provisions and other financial liabilities Consolidated 30 June 2018 30 June 2017 $’000 200 4,471 4,671 $’000 278 1,327 1,605 Consolidated Consolidated 30 June 2018 30 June 2017 30 June 2018 30 June 2017 Shares Shares $’000 $’000 197,341,566 191,688,526 262,763 233,598 197,341,566 191,688,526 262,763 233,598 Dates Shares $’000 188,883,320 218,583 19 August 2016 42,187 Employee benefits Lease Incentive liability Note 21. Equity - issued capital Ordinary Class shares - fully paid Movements in ordinary share capital Balance at 1 July 2016 Retention rights exercised Acquisition of Pizzeys Patent & Trademark Attorneys 31 August 2016 1,229,545 Acquisition of Cullens & Cullen Services No 1Pty Ltd 31 August 2016 487,890 Acquisition of Ella Cheong (Hong Kong) Ltd 31 October 2016 737,261 Retention rights exercised 6 December 2016 47,619 Acquisition of Callinans Patent & Trademark Attorneys 31 January 2017 143,248 Dividend reinvestment - interim dividend (Note 24) 15 March 2017 113,155 Retention rights exercised Balance at 30 June 2017 66 www.iphltd.com.au 13 June 2017 4,301 191,688,526 233,598 - 6,787 2,693 4,313 - 705 517 - 30th June 2018 Movements in ordinary share capital Continued > Dates Shares Retention rights exercised 11 July 2017 57,519 Dividend reinvestment - final dividend (Note 24) 13 September 2017 550,929 Performance rights exercised 19 October 2017 310,128 $’000 - 2,479 - Acquisition of AJ Park Ltd1 Retention rights exercised Performance rights exercised 31 October 2017 4,621,547 27,036 22 November 2017 23 February 2018 47,619 4,000 - - 2,377 (2,727) Dividend reinvestment - interim dividend (Note 24) 14 March 2018 683,114 Shares bought back during the period (621,816) Balance at 30 June 2018 197,341,566 262,763 1. Refer note 32 for share issuances arising from business acquisitions. Ordinary shares Capital risk management Ordinary shares entitle the holder to participate in dividends and the The Group’s objectives when managing capital is to safeguard its proceeds on the winding up of the Company in proportion to the ability to continue as a going concern, so that it can provide returns for number of and amounts paid on the shares held. The fully paid ordinary shareholders and benefits for other stakeholders and to maintain an shares have no par value and the Company does not have a limited optimum capital structure to reduce the cost of capital. amount of authorised capital. In order to maintain or adjust the capital structure, the Group may On a show of hands every member present at a meeting in person or by adjust the amount of dividends paid to shareholders, return capital to proxy shall have one vote and upon a poll each share shall have one vote. shareholders, issue new shares or sell assets to reduce debt. Employee Share Trust On 1 July 2017, IPH established the Employee Share Trust for the The Group would look to raise capital when an opportunity to invest in a business or company was seen as value adding relative to the current Company’s share price at the time of the investment. purpose of acquiring and allocating shares granted through the IPH The Group is subject to certain financing arrangements covenants and Employee Incentive Plan. As at 30 June 2018, the number of shares held meeting these is given priority in all capital risk management decisions. by the trust was 88,350. There have been no events of default on the financing arrangements during the financial year. Share buy-back On 8 May 2018 the Group announced a buyback of up to $40m of Dividend reinvestment plan ordinary shares. During the period to 30 June 2018 621,816 shares have The group operates a dividend reinvestment plan. The issue price is been bought back at an average price of $4.38 per share. the average of the daily volume weighted average market price of all shares sold by normal trade during the 10 trading days commencing on the second trading day following the dividend record date. The plan is suspended during the share buy-back period. 2018 Annual Report 67 Notes to the Financial Statements Note 22. Equity - reserves Foreign currency reserve Share-based payments reserve Minority interest reserve Consolidated 30 June 2018 30 June 2017 $’000 1 3,352 (14,814) (11,461) $’000 (166) 2,676 (14,850) (12,340) Foreign currency reserve Minority interest reserve The reserve is used to recognise exchange differences arising from the This reserve represents the difference between the amount by translation of the financial statements of foreign operations to Australian which non-controlling interests are adjusted and the fair value of the dollars. It is also used to recognise gains and losses on hedges of the consideration paid or received, where there is no change in control. net investments in foreign operations. Share-based payments reserve Movements in reserves Movements in each class of reserve during the current and previous The reserve is used to recognise the value of equity benefits provided financial year are presented in the Statement of Changes in Equity. to employees and Directors as part of their remuneration, and other parties as part of their compensation for services. Specifically the reserve relates to performance rights issued by the Company to its employees under its LTIP. Note 23. Equity - retained profits Retained profits at the beginning of the financial year Profit after income tax expense for the year attributable to owners of IPH Limited Dividends paid (note 24) Retained profits at the end of the financial year 68 www.iphltd.com.au Consolidated 30 June 2018 30 June 2017 $’000 18,436 40,673 (42,823) 16,286 $’000 16,467 42,893 (40,924) 18,436 30th June 2018 Note 24. Equity - dividends (cid:44)nterim dividend December 2016 - paid 15 March 2017 December 2017 - paid 14 March 2018 (cid:41)inal dividend June 2016 - paid 14 September 2016 June 2017 - paid 13 September 2017 Consolidated (cid:38)ents (cid:83)er share 30 June 2018 30 June 2017 $’000 $’000 11.5 11.5 10.0 10.5 - 22,689 - 20,134 22,031 - 18,893 - On 16 August 2018, the Company declared an ordinary dividend of 11.00 cents per share (franked at 50%) to be paid on 12 September 2018. The dividend value is $21,708,000. No provision for this dividend has been recognised in the Statement of Financial Position as at 30 June 2018, as it was declared after the end of the financial year. Dividend Reinvestment Plan The Dividend Reinvestment Plan was active during the financial year. 1,234,043 shares were issued to participants totalling $4,856,000. Franking credits Consolidated 30 June 2018 30 June 2017 $’000 $’000 1,500 3,092 Franking credits available for subsequent financial years based on a tax rate of 30% The above amounts represent the balance of the franking account as at the end of the financial year, adjusted for: » franking credits that will arise from the payment of the amount of the provision for income tax at the reporting date. 2018 Annual Report 69 Notes to the Financial Statements Note 25. Financial instruments Financial risk management objectives The Group’s activities expose it to a variety of financial risks: market risk (including foreign currency risk, price risk and interest rate risk), credit risk and liquidity risk. The Group’s overall risk management program focuses on the unpredictability of financial markets and seeks to minimise potential adverse effects on the financial performance of the Group. The Group uses different methods to measure different types of risk to which it is Market risk Foreign currency risk The Group undertakes certain transactions denominated in foreign currency and is exposed to foreign currency risk through foreign exchange rate fluctuations. Foreign exchange risk arises from future commercial transactions and recognised financial assets and financial liabilities denominated in a currency that is not the entity’s functional currency. The risk is measured using sensitivity analysis and cash flow forecasting. exposed. These methods include sensitivity analysis in the case of interest The Group uses derivative financial instruments such as forward foreign rate and foreign exchange and ageing analysis for credit risk. exchange contracts to hedge certain risk exposures which are not significant. Derivatives are not used as trading or other speculative instruments. The Group’s net asset exposure at the reporting date was as follows: A$'000 US$'000 €'000 S$000 NZD$000 Other1 30 June 2018 Net asset exposure (Local Currency) 30 June 2017 Net asset exposure (Local Currency) 1. Australian dollar equivalent 248,892 2,039 1,966 7,773 6,006 1,689 195,890 27,942 1,603 5,349 - 336 Sensitivity analysis The sensitivity of the Group's Australian dollar denominated Profit or Loss account and Statement of Financial Position to foreign currency movements is based on a 10% fluctuation (2017: 10% fluctuation) on the average rates during the financial year. This analysis assumes that all other variables including interest rates remain constant. A 10% movement in the average foreign exchange rates would have impacted the Group's profit after tax and equity as follows: USD Euro SGD NZD Other currencies Net exposure to foreign currency risk (cid:20)(cid:19)(cid:8) (cid:58)ea(cid:78)ening (cid:20)(cid:19)(cid:8) Strengthening 2018 2017 2018 2017 $’000 $’000 $’000 $’000 204 197 777 601 169 3,635 (185) (3,305) 238 505 - 34 (178) (707) (546) (154) (217) (459) - (31) 1,948 4,412 (1,770) (4,012) 70 www.iphltd.com.au 30th June 2018 Price risk The Group is not exposed to any significant price risk. risk. Borrowings issued at fixed rates expose the Group to fair value interest rate risk. The Group does not enter into any derivative financial instruments to manage its exposure to interest rate risk Interest rate risk As at the reporting date, the Group had the following variable rate The Group’s main interest rate risk arises from its borrowings. borrowings outstanding: Borrowings issued at variable rates expose the Group to interest rate Consolidated Multi-option facility Net exposure to cash flow interest rate risk 30 June 2018 30 June 2017 (cid:58)eighted average interest rate Balance (cid:58)eighted average interest rate % 3.85 $’000 40,102 40,102 % - - Balance $’000 - - Credit risk Liquidity risk Credit risk refers to the risk that a counterparty will default on its contractual Liquidity risk management requires the Group to maintain sufficient obligations resulting in financial loss to the Group. The Group may obtain liquid assets (mainly cash and cash equivalents) and available payment in advance or restrict the services offered where appropriate to borrowing facilities to be able to pay debts as and when they become mitigate credit risk. The maximum exposure to credit risk at the reporting due and payable. date to recognised financial assets is the carrying amount, net of any provisions for impairment of those assets, as disclosed in the statement of financial position and notes to the financial statements. The Group does not have any material credit risk exposure to any single debtor or group of debtors and does not hold any collateral. The Group manages liquidity risk by maintaining adequate cash reserves and available borrowing facilities by continuously monitoring actual and forecast cash flows and matching the maturity profiles of financial assets and liabilities. Financing arrangements (unused) Unused borrowing facilities at the reporting date: Bank overdraft Multi-option facility Standby letter of credit facility Bank guarantees The bank overdraft facilities may be drawn at any time and may be terminated by the bank without notice. Subject to the continuance of satisfactory credit ratings, the bank loan facilities may be drawn at any time. Consolidated 30 June 2018 30 June 2017 $’000 - 47,913 - - $’000 - 94,527 - - 47,913 94,527 2018 Annual Report 71 Notes to the Financial Statements Note 25. Financial instruments Continued > Remaining contractual maturities The following tables detail the Group’s remaining contractual maturity for its financial instrument liabilities. The tables have been drawn up based on the undiscounted cash flows of financial liabilities based on the earliest date on which the financial liabilities are required to be paid. The tables include both interest and principal cash flows disclosed as remaining contractual maturities and therefore these totals may differ from their carrying amount in the statement of financial position. The cash flows in the maturity analysis below are not expected to occur significantly earlier than contractually disclosed below. (cid:58)eighted average interest rate (cid:20) year or less Bet(cid:90)een (cid:20) and (cid:21) years Bet(cid:90)een (cid:21) and (cid:24) years Over (cid:24) years Remaining contractual maturities % $’000 $’000 $’000 $’000 $’000 (cid:38)onsolidated - 30 June 2018 (cid:49)on-derivatives Non-interest bearing Trade payables Sundry creditors and accruals Interest-bearing - variable - - 11,104 5,618 - - - - - - - - 11,104 5,618 43,961 60,683 Multi-option facility 3.85% 1,544 Total non-derivatives 18,266 1,544 1,544 40,873 40,873 (cid:58)eighted average interest rate (cid:20) year or less Bet(cid:90)een (cid:20) and (cid:21) years Bet(cid:90)een (cid:21) and (cid:24) years Over (cid:24) years Remaining contractual maturities % $’000 $’000 $’000 $’000 $’000 - - 6,705 4,539 11,244 - - - - - - - - - 6,705 4,539 11,244 (cid:38)onsolidated - 30 June 2017 (cid:49)on-derivatives Non-interest bearing Trade payables Other payables and accruals Total non-derivatives 72 www.iphltd.com.au 30th June 2018 Consolidated 30 June 2018 30 June 2017 $ $ Short-term employee benefits 2,042,727 2,471,711 Post-employment benefits 104,597 91,661 Long-term benefits 19,479 26,100 Share-based payments 332,076 - 2,498,879 2,589,472 Consolidated 30 June 2018 30 June 2017 $’000 $’000 290,500 4,000 294,500 50,709 50,709 266,850 3,990 270,840 52,627 52,627 Note 26. Key management personnel disclosures Compensation The aggregate compensation made to Directors and other members of key management personnel of the Group is set out here: Note 27. Remuneration of auditors During the financial year the following fees were paid or payable for services provided by Deloitte Touche Tohmatsu, the auditor of the Company, and unrelated firms: (cid:36)udit services - (cid:39)eloitte (cid:55)ouche (cid:55)ohmatsu (cid:11)(cid:36)ustralia(cid:12) Audit or review of the financial statements Other assurance services (cid:39)eloitte (cid:55)ouche (cid:55)ohmatsu (cid:11)Singa(cid:83)ore(cid:12) Audit or review of the financial statements (cid:36)udit services - unrelated firms Audit or review of the financial statements 41,524 23,175 Other services - unrelated firms Corporate and taxation services 107,904 149,428 63,082 86,257 2018 Annual Report 73 Consolidated 30 June 2018 30 June 2017 $’000 $’000 7,874 21,567 16,355 45,796 5,055 6,895 2,475 14,425 Notes to the Financial Statements Note 28. Contingent liabilities The Group has given bank guarantees in respect of operating lease commitments for office premises as at 30 June 2018 of $5,985,000 (2017: $1,831,000). Note 29. Commitments (cid:47)ease commitments - o(cid:83)erating Committed at the reporting date but not recognised as liabilities, payable: Within one year One to five years Over five years Operating lease commitments include contracted amounts for offices and plant and equipment under non-cancellable operating leases expiring within 1 to 10 years with, in some cases, options to extend. The leases have various escalation clauses. On renewal, the terms of the leases are renegotiated. Note 30. Related party transactions Parent entity IPH Limited is the parent entity. Subsidiaries Interests in subsidiaries are set out in note 33. Key management personnel Disclosures relating to key management personnel are set out in note 26 and the remuneration report in the Directors’ report. Transactions with related parties There were no additional transactions with related parties. 74 www.iphltd.com.au Note 31. Parent entity information Set out below is the supplementary information about the parent entity. Statement of (cid:83)rofit or loss and other com(cid:83)rehensive income Profit after income tax Total comprehensive income Statement of financial (cid:83)osition Total current assets Total assets Total current liabilities Total liabilities (cid:40)(cid:84)uity Issued capital Share-based payments reserve Retained earnings 30th June 2018 Parent 30 June 2018 30 June 2017 $’000 $’000 61,442 61,442 31,071 326,648 2,208 42,310 262,763 3,353 18,222 284,338 31,893 31,893 14,991 237,773 1,898 1,898 233,598 2,677 (400) 235,875 Guarantees entered into by the parent entity in relation to the debts of its subsidiaries Capital commitments - Property, plant and equipment The parent entity had no capital commitments for property, plant and Other than the security provided for the ANZ Facility Agreement as equipment as at 30 June 2018. disclosed in note 19, the parent entity had no guarantees in relation to the debts of its subsidiaries as at 30 June 2018 apart from being party to the deed of cross guarantee as detailed in Note 38. Contingent liabilities The parent entity had no contingent liabilities as at 30 June 2018. Significant accounting policies The accounting policies of the parent entity are consistent with those of the Group, as disclosed in note 2. 2018 Annual Report 75 Notes to the Financial Statements Note 32. Business combinations AJ Park IP Limited Cash On 31 October 2017, the Group acquired 100% of the ordinary shares Equity instruments of AJ Park IP Limited under the terms of a Share Purchase Agreement (4,621,547 ordinary shares) (SPA). The agreed purchase price was NZ$66,100,000 (A$60,500,000). The consideration was settled by way of issue of 4,621,547 IPH shares Total consideration transferred A$’000 38,890 27,036 65,926 at an issue price of $4.61 and cash of NZ$36,214,635. The acquired business contributed revenues of A$33,700,000 and profit after tax of A$2,148,000 to the Group for the period from 1 November 2017 to 30 June 2018. The profit after tax includes a loss of A$600k relating to the AJ Park Australia business which ceased operations and costs associated with restructuring since acquisition which have been removed for the purpose of calculating the underlying result of the business. If the acquisition occurred on 1 July 2017, the full year contributions would have been revenues of A$47,990,000 and profit after tax of A$3,532,000. Consideration transferred The Group incurred acquisition related costs of $698k. These costs have been included in business acquisition expenses. Equity instruments issued A$21,305,315 of the purchase price was settled by way of the issue of 4,621,547 ordinary shares in IPH to the vendors of AJ Park IP Limited at an issue price of $4.61 per share. The shares issued have been recorded in the financial statements at the acquisition date fair value of $5.85 per share totalling $27,036,052. Identifiable assets ac(cid:84)uired and liabilities assumed The following table summarises the acquisition date fair value of each major class of consideration transferred. The following table summarises the recognised amounts of assets acquired and liabilities assumed at the date of acquisition. 76 www.iphltd.com.au Identifiable assets ac(cid:84)uired and liabilities assumed Continued > Cash and cash equivalents Trade and other receivables Other assets Property, plant and equipment Intangible assets - customer relationships Intangible assets - trademarks Deferred tax liabilities Trade and other payables Provisions Other creditors Net assets acquired Goodwill Acquisition-date fair value of total consideration transferred Cash used to acquire business, net of cash acquired: Acquisition-date fair value of total consideration transferred Less: shares issued by company as part of consideration Less: cash and cash equivalents acquired Net cash used The goodwill is attributable to the profitability of AJ Park and its standing as the market leading Intellectual Property firm in New Zealand. Acquisitions undertaken in the year ended 30 June 2017 Ella Cheong (Hong Kong) Limited On 31 October 2016, the Group acquired 100% of the ordinary shares of Ella Cheong (Hong Kong) Limited and its subsidiary Ella Cheong Intellectual Property Agency (Beijing) Company Limited under the terms of a Share Purchase Agreement (SPA). The final accounting for the acquisition was finalised during the previous financial year. There were no acquisition adjustments recorded during the year ended 30 June 2018. 30th June 2018 (cid:41)air (cid:57)alue $’000 269 10,652 1,047 2,664 20,313 2,866 (6,490) (3,407) (1,739) (888) 25,287 40,639 65,926 65,926 (27,036) (269) 38,621 2018 Annual Report 77 Notes to the Financial Statements Note 33. Interests in subsidiaries The consolidated financial statements incorporate the assets, liabilities and results of the following subsidiaries in accordance with the accounting policies described in note 2: (cid:49)ame Princi(cid:83)al (cid:83)lace of business (cid:18) (cid:38)ountry of incor(cid:83)oration Princi(cid:83)al activities O(cid:90)nershi(cid:83) interest O(cid:90)nershi(cid:83) interest 30 June 2018 30 June 2017 Spruson & Ferguson Pty (NSW) Limited2,3 Australia Non Trading entity Spruson & Ferguson Pty Limited2,3 Spruson & Ferguson Lawyers Pty Limited2,3 Australia Australia Patent attorneys Lawyers Spruson & Ferguson (Asia) Pte Limited Singapore Patent attorneys Spruson & Ferguson SDN BHD Malaysia Patent attorneys IPH Holdings (Asia) Pte Ltd Singapore Non Trading entity PT Spruson Ferguson Indonesia Indonesia Patent attorneys IPH (Thailand) Ltd4 Thailand Non Trading entity Spruson & Ferguson Ltd Thailand Patent attorneys IPH Services Limited2,3 Australia Software development Practice Insight Pty Limited2,3 Australia Data analysis and software Practice Insight GmbH Germany Data analysis and software 100% 100% 100% 100% 100% 100% 100% 49% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 49% 100% 100% 100% 100% 100% 100% 100% Australia Australia Australia Patent attorneys Patent attorneys Patent attorneys Australia Patent attorneys 100% 100% Singapore Patent attorneys 100% 100% China Patent attorneys 100% 100% Fisher Adams Kelly Pty Limited2,3 Pizzeys Patent & Trademark Attorneys Pty Ltd2,3 Cullens Pty Limited2,3 Cullen Services No 1 Pty Limited2,3 Pizzeys Pte Ltd Spruson & Ferguson (Shanghai) Ltd 78 www.iphltd.com.au 30th June 2018 (cid:49)ame Princi(cid:83)al (cid:83)lace of business (cid:18) (cid:38)ountry of incor(cid:83)oration Princi(cid:83)al activities O(cid:90)nershi(cid:83) interest O(cid:90)nershi(cid:83) interest 30 June 2018 30 June 2017 Spruson & Ferguson Limited Hong Kong Non Trading entity Spruson & Ferguson (Beijing) Ltd China Patent attorneys Spruson & Ferguson (Hong Kong) Ltd Hong Kong Patent attorneys 100% 100% 100% 100% 100% 100% Spruson & Ferguson Intellectual Property Agency (Beijing) Company Ltd Beijing Pat SF Intellectual Property Agency Co Ltd6 China China Patent attorneys 100% 100% Patent attorneys 0% AJ Park IP Ltd5 AJ Park Law Ltd5,6 AJ Park IP Pty Ltd5 New Zealand Patent attorneys 100% New Zealand Lawyers 0% Australia Patent attorneys 100% 0% 0% 0% 0% 1. IPH Limited is the head entity within the tax consolidated group. 2.  These companies are members of the tax consolidated group. 3.  These wholly owned subsidiaries entered into a deed of cross guarantee with IPH limited pursuant to ASIC Corporations (Wholly-owned Companies) Instrument 2016/785 and are relieved from the requirements to prepare and lodge an audited financial report (note 38). 4. The Group holds 90.6% of the voting rights and thus has control of this entity. 5. These entities were acquired through the acquisition of AJ Park (Note 32). 6. These entities have Alliance Agreements with Group entities which results in consolidation in the IPH Group for Accounting purposes. Note 34. Events after the reporting period It was announced on 15 August 2018 that IPH's wholly-owned subsidiary, Practice Insight Pty Limited, has agreed the sale of two of its products: Filing Analytics and Citation Eagle to CPA Global Management Services Limited for $10 million. The sale will generate an accounting profit in the consolidated accounts of IPH Limited of approximately $2 million in the 2019 financial year after taking into account the assets' carrying values and transaction costs. 2018 Annual Report 79 Notes to the Financial Statements Note 35. Reconciliation of profit after income tax to net cash from operating activities Consolidated 30 June 2018 30 June 2017 $’000 40,673 13,092 2,148 (826) 676 - (8,416) (3,753) (894) 1,183 (587) (3,190) 77 6,274 46,457 $’000 42,893 10,329 - 1,067 1,332 (1,408) 2,095 (3,047) 768 (4,582) (316) (218) (166) 1,175 49,922 Profit after income tax expense for the year (cid:36)d(cid:77)ustments for: Depreciation and amortisation Impairment of intangible Unrealised foreign exchange Share-based payments Other (cid:38)hange in o(cid:83)erating assets and liabilities: Decrease/(increase) in trade and other receivables (Increase) in deferred tax assets (Increase)/Decrease in other assets Increase/(Decrease) in trade and other payables Decrease in provision for income tax Decrease in other liabilities Increase/(Decrease) in deferred revenue Increase in provisions Net cash from operating activities 80 www.iphltd.com.au Note 36. Earnings per share Profit after income tax Profit after income tax attributable to the owners of IPH Limited 30th June 2018 Consolidated 30 June 2018 30 June 2017 $’000 40,673 40,673 $’000 42,893 42,893 (cid:49)umber (cid:49)umber Weighted average number of ordinary shares used in calculating basic earnings per share 195,636,068 190,953,365 Rights over ordinary shares 966,124 1,164,271 Weighted average number of ordinary shares used in calculating diluted earnings per share 196,602,192 192,117,636 Basic earnings per share Diluted earnings per share Cents 20.79 20.69 Cents 22.46 22.33 Note 37. Share-based payments Retention rights On 24 October 2014, the Long Term Incentive Plan (‘LTIP’) was Each retention right issued under the LTIP converts into one ordinary adopted by the Board of Directors and was established to attract, share of IPH Limited on exercise. No amounts are paid or payable by motivate and retain key staff. Participation in the LTIP is at the the recipient of the retention right, and the retention rights carry neither Board’s discretion and no individual has a contracted right to rights to dividends nor voting rights. The retention rights are treated as in participate in the LTIP or to receive any guaranteed benefits. substance options and accounted for as share-based payments. A portion of the aggregate retention rights granted will vest at each twelve month anniversary of the grant date; vesting is conditional on continued employment. Set out below are summaries of the rights granted under the plan: (cid:42)rant (cid:39)ate (cid:57)esting (cid:39)ate (cid:40)(cid:91)ercise (cid:83)rice Balance at the start of year (cid:42)ranted (cid:40)(cid:91)ercised (cid:40)(cid:91)(cid:83)ired (cid:18) forfeited (cid:18) other Balance at the end of the year 19 Nov 2014 19 Nov 20171 $0.00 47,619 16 Sept 2015 1 July 20172 $0.00 57,519 16 Sept 2015 1 July 2018 $0.00 95,864 19 August 2016 30 June 2019 $0.00 127,930 Total Retention Rights 328,932 - - - - - (47,619) (57,519) - - - - (10,652) (39,454) - - 85,212 88,476 (105,138) (50,106) 173,688 1. Share price at date of exercise $5.71. 2. Share price at date of exercise $4.81. 2018 Annual Report 81 Notes to the Financial Statements Note 37. Share-based payments Continued > Performance rights TSR Rights Each performance right issued under the LTIP converts into one TSR rights will be assessed against the relative performance over the ordinary share of IPH Limited on exercise. No amounts are paid or relevant performance period of a list of companies included in the payable by the recipient of the performance right, and the performance ASX300 Accumulation Index. The relative TSR performance targets rights carry neither rights to dividends nor voting rights. The and corresponding percentages of the maximum number of TSR performance rights are treated as in substance options and accounted Rights that would vest are as follows: for as share-based payments. Performance Rights will vest (and become exercisable) to the extent that the applicable performance, service or other vesting conditions specified at the time of the grant are satisfied (collectively the ‘Performance Criteria’). Performance Criteria may include » Below the 50th percentile: 0% » At the 50th percentile: 25% » Better than the 50th percentile but below the 75th percentile: Pro- rata straight-line between 25% and 100% conditions relating to continuous employment or service, the individual » Equal to or above the 75th percentile: 100% performance of the participant and/or the Group’s performance. Typically, the Performance Criteria must be satisfied within a predetermined performance period. Both the performance Criteria and the performance period are set by the Board at its absolute discretion. The Board has set the following Performance Criteria for the performance period for the Performance Rights granted to employees: » 50% of the Performance Rights granted will vest subject to a relative total shareholder return (‘TSR’) performance hurdle over the relevant vesting period; and » The remaining 50% of the Performance Rights granted will vest subject to an earnings per share (‘EPS’) performance hurdle over the relevant vesting period. For the FY15 award, the TSR performance has exceeded the 75th percentile and the rights vested in full. For the FY16 award, the performance was below the 50th percentile and no rights will vest on 8 September 2018. EPS Rights The absolute EPS performance target (being the compound annual EPS growth over the relevant performance period, adjusted to take into account one-off items, if necessary) and corresponding percentages of the maximum number of EPS Rights that would vest are as follows: » Compound EPS growth of less than 7% per annum: 0% » Compound EPS growth of 7% per annum: 20% » Compound EPS growth of more than 7% per annum but less than 15% per annum: Pro-rata straight line between 20% and 100% » Compound EPS growth equal to or above 15% per annum: 100% (cid:41)(cid:60)(cid:20)(cid:24) (cid:36)(cid:90)ard (cid:11)(cid:49)ov (cid:21)(cid:19)(cid:20)(cid:23)(cid:12) (cid:41)(cid:60)(cid:20)(cid:25) (cid:36)(cid:90)ard (cid:11)Se(cid:83)t(cid:18)(cid:39)ec (cid:20)(cid:24)(cid:12) EPS in the financial year ending 30 June 2017 of 17.3 cents, being the forecast Compound annual growth rate Minimum EPS Target pro forma EPS of IPH for the financial year ending 30 June 2015 with a compound (CAGR) in EPS for the period from 1 annual growth rate of 7% applied to it for the following two financial years. July 2015 to 30 June 2018 of 7% EPS in the financial year ending 30 June 2017 of 20.0 cents, being the forecast Compound annual growth rate EPS Target pro forma EPS of IPH for the financial year ending 30 June 2015 with a compound (CAGR) in EPS for the period from 1 annual growth rate of 15% applied to it for the following two financial years. July 2016 to 30 June 2018 of 15% For the FY15 award, the EPS performance has exceeded the EPS Target and the rights vested in full. For the FY16 award, the EPS performance did not meet the EPS Target and no rights will vest on 8 September 2018. 82 www.iphltd.com.au 30th June 2018 The performance rights are subject to a vesting period from grant date and are detailed below: (cid:42)rant (cid:39)ate (cid:57)esting (cid:39)ate (cid:40)(cid:91)ercise (cid:83)rice Balance at the start of year (cid:42)ranted (cid:40)(cid:91)ercised (cid:40)(cid:91)(cid:83)ired (cid:18) forfeited (cid:18) other Balance at the end of the year TSR - 19 Nov 141 9 Sept 20172 $0.00 110,889 EPS - 19 Nov 141 9 Sept 20172 $0.00 110,889 TSR - 16 Sept 153 8 Sept 2018 $0.00 125,641 EPS - 16 Sept 153 8 Sept 2018 $0.00 125,641 TSR - 2 Dec 153 8 Sept 2018 EPS - 2 Dec 153 8 Sept 2018 $0.00 $0.00 Total Performance Rights 3,528 3,528 480,116 - - - - - - - (110,889) (110,889) - - - - - - (125,641) (125,641) (3,528) (3,528) (221,778) (258,338) 1. These awards have achieved the maximum performance hurdles and vested 100% for both TSR and EPS at the vesting date. 2. Share price at date of exercise $4.65. 3. These awards did not achieve the minimum performance hurdles and will not vest for both TSR and EPS at the vesting date. - - - - - - - IPH Limited Employee Incentive Plan A new incentive plan, the IPH Limited Employee Incentive Plan (the "Incentive Plan"), was approved at the AGM on 16 November 2016. This plan replaces the existing Long Term Incentive Plan and Retention Rights Plan. Each performance right issued under the Incentive Plan converts into one ordinary share of IPH Limited on exercise. No and the performance rights carry neither rights to dividends nor voting rights. The performance rights are treated as in substance options and accounted for as share-based payments. The conditions attached to rights issued under the Incentive Plan can be in the form of a retention requirement, TSR, EPS or other Key Performance Indicator (KPI) metric for the Group, business unit and individual. amounts are paid or payable by the recipient of the performance right, TSR and EPS target and measurement criteria remain the same as per the EPS and TSR Rights under the previous plan. 2018 Annual Report 83 Notes to the Financial Statements Note 37. Share-based payments Continued > Movement in Performance Rights issued under the new Incentive Plan during the financial year were: Final (cid:57)esting (cid:39)ate (cid:40)(cid:91)ercise (cid:83)rice Balance at the start of year (cid:42)ranted (cid:40)(cid:91)ercised2 (cid:40)(cid:91)(cid:83)ired (cid:18) forfeited (cid:18) other Balance at the end of the year (cid:42)rant (cid:39)ate Retention - 23 May 17 Retention - 24 May 17 Retention - 24 May 17 Retention - 7 Jun 17 23 May 20191,3 $0.00 4,770 1 Jan 20201,3 $0.00 20,000 1 May 20201,3 $0.00 21,142 1 June 20201,3 $0.00 21,368 TSR - 23 May 17 1 Sept 2019 EPS - 23 May 17 1 Sept 2019 $0.00 $0.00 EPS - 24 May 17 1 Sept 2020 $0.00 2,235 2,235 7,166 KPI - 26 Jun 17 31 Aug 20173 $0.00 179,743 - - - - - - - - (1,789) (4,000) (4,228) (4,274) - - - - - - - - - - (88,350) (91,393) 2,981 16,000 16,914 17,094 2,235 2,235 7,166 - KPI - Dec 17 and Mar 18 31 Aug 2018 $0.00 Retention - Feb 18 5 Feb 20211 Retention - May 18 9 Apr 20222 $0.00 $0.00 - - - 283,794 4,606 57,972 - - - (190,275) 93,519 - - 4,606 57,972 Total Performance Rights 258,659 346,372 (102,641) (281,668) 220,722 1. Annual vesting at the following rates: 20% first vesting date, 30% second and 50% final vesting date. 2. Annual vesting of 25% of the award. 3. Share price at date of exercise of the each tranche: $4.56 (31 Aug 17); $5.35 (1 Jan 18); $3.84 (1 May 18); $4.39 (23 May 18); $4.41 (1 Jun 18). 84 www.iphltd.com.au 30th June 2018 Long Term Incentive Vesting of Rights is as follows: An executive long term incentive was introduced during FY18. Performance rights vest subject to achievement of a minimum compound annual growth rate in EPS over the performance period. The Board will determine a target for EPS for the performance period. For vesting to occur, EPS for the performance period must be at least equal to the Minimum EPS Target. EPS Targets for the 2018 plan are: » Minimum EPS Target: 7% CAGR in EPS over the three year performance period ending on 30 June 2020; » EPS Target: 15% CAGR in EPS over the three year performance period ending on 30 June 2020. » » Less than 7% CAGR in EPS over the Performance Period - Nil vesting Equal to 7% CAGR in EPS over the performance Period - 20% vesting » Greater than 7% CAGR in EPS up to and including 10% CAGR - straight line vesting between 20% and 65% » Greater than 10% CAGR in EPS up to and including 15% CAGR - straight line vesting between 65% and 100% » At or above 15% CAGR in EPS over the Performance Period - 100% vesting (cid:42)rant (cid:39)ate Final (cid:57)esting (cid:39)ate (cid:40)(cid:91)ercise (cid:83)rice Balance at the start of year (cid:42)ranted (cid:40)(cid:91)ercised (cid:40)(cid:91)(cid:83)ired (cid:18) forfeited Balance at the end of the year LTI - Nov 17 ‘1 Sept 2020 $0.00 Total LTI Performance Rights - - 288,811 288,811 - - - - 288,811 288,811 Fair value of retention and performance rights granted The weighted average share price during the financial year was $4.49 (2017: $5.25). The weighted average remaining contractual life of rights outstanding at the end of the financial year was 1.4 years (2017: 0.9 years). The weighted fair value of the rights granted during the year is $4.33 (2017: $4.80). Valuation model inputs used to determine the fair value of rights at the grant date, are as follows: (cid:42)rant (cid:39)ate (cid:57)esting (cid:39)ate Share (cid:83)rice at grant date (cid:40)(cid:91)ercise (cid:83)rice (cid:40)(cid:91)(cid:83)ected volatility (cid:39)ividend yield Ris(cid:78)-free interest rate (cid:41)air value at grant date Performance rights TSR - 19 Nov 14 9 Sept 2017 EPS - 19 Nov 14 9 Sept 2017 TSR - 16 Sept 15 8 Sept 2018 EPS - 16 Sept 15 8 Sept 2018 TSR - 2 Dec 15 8 Sept 2018 EPS - 2 Dec 15 8 Sept 2018 Retention rights 19 Nov 2014 19 Nov 2017 17 Sept 2015 1 July 2017 17 Sept 2015 1 July 2018 $2.10 $2.10 $6.12 $6.12 $8.20 $8.20 $2.10 $6.12 $6.12 $0.00 35.00% 6.40% $0.00 35.00% 6.40% $0.00 35.00% 3.50% $0.00 35.00% 3.50% $0.00 35.00% 3.50% $0.00 35.00% 3.50% $0.00 35.00% 6.40% $0.00 35.00% 3.50% $0.00 35.00% 3.50% 2.56% 2.56% 2.00% 2.00% 2.00% 2.00% 2.58% 1.93% 1.99% 19 August 20161 30 June 2019 $5.80 $0.00 4.00% 1. Expected volatility and risk free rate not included in this valuation $1.04 $1.75 $4.45 $5.51 $6.66 $7.40 $1.73 $5.75 $5.55 $5.17 2018 Annual Report 85 Notes to the Financial Statements Note 37. Share-based payments Continued > (cid:42)rant (cid:39)ate (cid:57)esting (cid:39)ate Share (cid:83)rice at (cid:40)(cid:91)ercise (cid:83)rice (cid:40)(cid:91)(cid:83)ected volatility (cid:39)ividend yield Ris(cid:78)-free interest rate (cid:41)air value at grant date (cid:44)P(cid:43) (cid:47)imited (cid:40)m(cid:83)loyee (cid:44)ncentive Plan Retention - 23 May 171,2 Retention - 24 May 171,2 Retention - 24 May 171,2 Retention - 7 Jun 171,2 23 May 2019 $4.81 $0.00 35.00% 5.40% 1.58% $4.49 1 Jan 2020 $4.86 $0.00 35.00% 5.40% 1.63% $4.39 1 May 2020 $4.86 $0.00 35.00% 5.40% 1.66% $4.31 1 June 2020 $4.76 $0.00 35.00% 5.40% 1.65% $4.31 TSR - 23 May 17 1 Sept 2019 EPS - 23 May 17 1 Sept 2019 EPS - 24 May 17 1 Sept 2020 KPI - 26 Jun 17 31 Aug 2017 KPI - Dec 17 31 Aug 2018 KPI - Mar 18 31 Aug 2018 $4.81 $4.81 $4.86 $4.83 $5.48 $3.55 $0.00 35.00% 5.40% $0.00 35.00% 5.40% $0.00 35.00% 5.40% $0.00 35.00% 5.40% $0.00 32.00% 5.00% $0.00 37.00% 6.30% 1.65% 1.65% 1.77% 1.57% 1.66% 1.76% $1.21 $4.25 $4.07 $4.78 $5.28 $3.45 Retention - Feb 181,2,4 Retention - May 182,3,4 5 Feb 2021 $3.74 $0.00 6.30% 2.00% $3.25 9 April 2022 $3.86 $0.00 6.30% 2.08% $3.32 1. Annual vesting at the following rates: 20% first vesting date, 30% second and 50% final vesting date. 2. Risk free interest rate and fair value at grant date are at the weighted average of the rights issued. 3. Annual vesting of 25% of the award. 4. Expected volatility not included in this valuation. (cid:40)(cid:91)ecutive - (cid:47)(cid:55)(cid:44) LTI - 2018 1 Sept 2020 $5.64 $0.00 32.00% 5.00% 1.89% $5.64 Amounts recognised in the Financial Statements During the financial year ended 30 June 2018, an expense of $676,000 ww as recognised in the Statement of Profit or Loss in relation to equity settled share based payment awards (June 2017: $1,325,000). 86 www.iphltd.com.au 30th June 2018 Note 38. Deed of cross guarantee The members of the Group party to the deed of cross guarantee are detailed in note 33. The consolidated statement of profit or loss and other comprehensive income and consolidated statement of financial position of the entities party to the deed of cross guarantee are: 30 June 2018 30 June 2017 Revenue Other income (cid:40)(cid:91)(cid:83)enses Employee benefits expense Depreciation and amortisation expense Rental expenses Business acquisition costs Agent fee expenses Insurance expenses Travel expenses Other expenses Finance costs Profit before income tax expense Income tax expense Profit after income tax expense for the year Other com(cid:83)rehensive income Items that may be reclassified subsequently to profit or loss Other comprehensive income for the year, net of tax Total comprehensive income for the year Profit for the year is attributable to: Owners of IPH Limited Profit after income tax expense for the year (cid:55)otal com(cid:83)rehensive income for the year is attributable to: Owners of IPH Limited Profit after income tax expense for the year $’000 113,659 36,648 (35,816) (11,386) (4,536) (1,078) (33,923) (610) (1,205) (8,869) (1,535) 51,349 (7,667) 43,682 - 43,682 43,682 43,682 43,682 43,682 $’000 116,204 24,637 (33,592) (8,515) (3,388) (1,583) (35,064) (513) (986) (7,911) (1,224) 48,066 (9,985) 38,081 - 38,081 38,080 38,080 38,080 38,080 2018 Annual Report 87 Notes to the Financial Statements Note 38. Deed of cross guarantee Continued > (cid:38)urrent assets Cash and cash equivalents Trade and other receivables Other assets Total current assets (cid:49)on-current assets Property, plant and equipment Intangibles Investments in subsidiaries Deferred tax Total non-current assets Total assets (cid:38)urrent liabilities Trade and other payables Borrowings Income tax Provisions Other liabilities Deferred revenue Total current liabilities (cid:49)on-current liabilities Borrowings Provisions Deferred tax liability Total non-current liabilities Total liabilities Net assets (cid:40)(cid:84)uity Issued capital Reserves Retained profits Total equity 88 www.iphltd.com.au 30 June 2018 30 June 2017 $’000 $’000 11,088 37,422 3,714 52,224 3,568 184,104 120,754 5,563 313,989 366,213 8,202 5,000 1,492 6,726 - 872 22,292 35,102 4,670 20,958 60,730 83,022 283,191 262,748 5,026 15,417 283,191 14,008 22,861 2,785 39,654 2,693 186,566 48,064 4,581 241,904 281,558 7,611 - 2,788 6,070 1,370 868 18,707 - 1,605 17,463 19,068 37,775 243,783 233,582 2,669 7,532 243,783 Directors’ Declaration In the Directors , opinion: » the attached financial statements and notes comply with At the date of this declaration, the company is within the class the Corporations Act 2001, the Accounting Standards, of companies affected by ASIC Corporations (Wholly-owned the Corporations Regulations 2001 and other mandatory Companies) Instrument 2016/785. The nature of the deed of professional reporting requirements; » the attached financial statements and notes comply with International Financial Reporting Standards as issued by the 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. International Accounting Standards Board as described in note In the directors’ opinion, there are reasonable grounds to 2 to the financial statements; » the attached financial statements and notes give a true and fair view of the Group’s financial position as at 30 June 2018 and of its performance for the financial year ended on that date; and » there are reasonable grounds to believe that the Company will be able to pay its debts as and when they become due and payable. believe that the company and the companies to which the ASIC Corporations Instrument applies, as detailed in note 38 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. The Directors have been given the declarations required by section 295A of the Corporations Act 2001. Signed in accordance with a resolution of Directors made pursuant to section 295(5)(a) of the Corporations Act 2001. On behalf of the Directors Dr. Andrew Blattman Managing Director 16 August 2018, Sydney 2018 Annual Report 89 90 www.iphltd.com.au 90 www.iphltd.com.au 30th June 2018 Independent Auditor’s Report 2018 Annual Report 2018 Annual Report 91 91 Independent Auditor’s Report Deloitte Touche Tohmatsu ABN 74 490 121 060 Grosvenor Place 225 George Street Sydney NSW 2000 Tel: +61 2 9322 7000 www.deloitte.com.au Independent Auditor’s Report to the Members of IPH Limited Report on the Audit of the Financial Report Opinion We have audited the financial report of IPH Limited (the “Company”) and its subsidiaries (the “Group”) which comprises the consolidated statement of financial position as at 30 June 2018, the consolidated statement of profit or loss and other comprehensive income, the consolidated statement of changes in equity and the consolidated statement of cash flows for the year then ended, and notes to the financial statements, including a summary of significant accounting policies and other explanatory information, and the directors’ declaration. In our opinion, the accompanying financial report of the Group is in accordance with the Corporations Act 2001, including: (i) giving a true and fair view of the Group’s financial position as at 30 June 2018 and of its financial performance for the year then ended; and (ii) complying with Australian Accounting Standards and the Corporations Regulations 2001. Basis for Opinion We conducted our audit in accordance with Australian Auditing Standards. Our responsibilities under those standards are further described in the Auditor’s Responsibilities for the Audit of the Financial Report section of our report. We are independent of the Group in accordance with the auditor independence requirements of the Corporations Act 2001 and the ethical requirements of the Accounting Professional and Ethical Standards Board’s APES 110 Code of Ethics for Professional Accountants (the Code) that are relevant to our audit of the financial report in Australia. We have also fulfilled our other ethical responsibilities in accordance with the Code. We confirm that the independence declaration required by the Corporations Act 2001, which has been given to the directors of the Company, would be in the same terms if given to the directors as at the time of this auditor’s report. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion. Key Audit Matters Key audit matters are those matters that, in our professional judgement, were of most significance in our audit of the financial report for the current period. These matters were addressed in the context of our audit of the financial report as a whole, and in forming our opinion thereon, and we do not provide a separate opinion on these matters. Liability limited by a scheme approved under Professional Standards Legislation. Member of Deloitte Touche Tohmatsu Limited 92 www.iphltd.com.au IPH Limited Key Audit Matter Accounting for Acquisitions As disclosed in Note 32 ‘Business combinations’, during the financial year the Group acquired AJ Park, a New Zealand intellectual property firm. Accounting for the transaction is a complex and judgemental exercise, requiring management to determine: o o the fair value of the total purchase consideration; and the identifiable intangible assets such as customer contracts and relationships, to be recognised separately from goodwill. Valuation and disclosure of Practice Insight As disclosed in Note 14 ‘Non Current assets - intangibles’ and Note 34 ‘Events after the reporting period’, subsequent to 30 June 2018 the Group have entered into an agreement for the sale of certain intangible and tangible assets (and associated liabilities) included in the Practice Insight cash generating unit (“CGU”). As a result management have utilised the agreed sale consideration for the purposes of determining the recoverable amount of this CGU (being fair value less cost to dispose) at 30 June 2018. Management have also considered the requirements of AASB 5 ‘Non-current Assets Held for Sale and Discontinued Operations’ (“AASB 5”) in determining whether the assets and liabilities associated with the Practice Insight CGU should be disclosed as ‘held for sale’ at 30 June 2018 and have determined that this classification was met subsequent to the year end. How the scope of our audit responded to the Key Audit Matter Our procedures performed in conjunction with our valuation specialists, included, but were not limited to: o Obtaining a detailed understanding of the terms and conditions of the purchase contract to enable us to assess management’s accounting treatment. o o o Evaluating the competence, capability and objectivity of management’s external valuation expert and performing a detailed review of their report to understand the scope of their engagement and any limitations in the report. Evaluating the methodology used by management to ascertain the fair value of the purchase consideration at acquisition date. Evaluating the appropriateness of the values attributed to the acquired intangible assets assumed as part of the acquisition:   Assessing the identification and valuation of customer relationships and the appropriateness of the amortisation rate; Performing procedures over the intangible asset valuations, specifically:    analysing cash flow assumptions including revenue growth rates, gross margin and contributory asset charges; assessing the discount rate used; and challenging the reasonableness of the valuation outputs. o Assessing the appropriateness of the disclosures in Note 32 to the financial statements. Our procedures included, but were not limited to: o Obtaining an understanding of the key controls associated with management’s assessment of recoverable amount for the Practice Insight CGU. o Reviewing the signed agreement and relevant terms of the sale. o Reviewing management’s determination of the fair value less costs to dispose for the Practice Insight CGU and the appropriateness of this in light of the terms of the sale. o Reviewing supporting documentation including minutes of Board meetings and signed Heads of Agreement to assess management’s conclusion that the ‘held for sale’ criteria in AASB 5 were met subsequent to 30 June 2018. o Evaluating the appropriateness of the disclosures in Note 14 and Note 34 to the financial statements. 2018 Annual Report 93 INDEPENDENT AUDITOR’S REPORT TO THE MEMBERS OF IPH LIMITED Independent Auditor’s Report Other Information The directors are responsible for the other information. The other information comprises the Directors’ Report, which we obtained prior to the date of this auditor’s report, and also includes the following information which will be included in the annual report (but does not include the financial report and our auditor’s report thereon): the Chairman’s Letter, Chief Executive Officer’s Report, Board of Directors, and Shareholders Information, which is expected to be made available to us after that date. Our opinion on the financial report does not cover the other information and we do not and will not express any form of assurance conclusion thereon. In connection with our audit of the financial report, our responsibility is to read the other information identified above and, in doing so, consider whether the other information is materially inconsistent with the financial report or our knowledge obtained in the audit, or otherwise appears to be materially misstated. If, based on the work we have performed on the other information that we obtained prior to the date of this auditor’s report, we conclude that there is a material misstatement of this other information, we are required to report that fact. We have nothing to report in this regard. When we read the Chairman’s Letter, Chief Executive Officer’s Report, Board of Directors and Shareholders Information, if we conclude that there is a material misstatement therein, we are required to communicate the matter to the directors and use our professional judgement to determine the appropriate action. Responsibilities of the Directors for the Financial Report The directors of the Company are responsible for the preparation of the financial report that gives a true and fair view in accordance with Australian Accounting Standards and the Corporations Act 2001 and for such internal control as the directors determine is necessary to enable the preparation of the financial report that gives a true and fair view and is free from material misstatement, whether due to fraud or error. In preparing the financial report, the directors are responsible for assessing the ability of the Group to continue as a going concern, disclosing, as applicable, matters related to going concern and using the going concern basis of accounting unless the directors either intend to liquidate the Group or to cease operations, or has no realistic alternative but to do so. Auditor’s Responsibilities for the Audit of the Financial Report Our objectives are to obtain reasonable assurance about whether the financial report as a whole is free from material misstatement, whether due to fraud or error, and to issue an auditor’s report that includes our opinion. Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with the Australian Auditing Standards will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of this financial report. As part of an audit in accordance with the Australian Auditing Standards, we exercise professional judgement and maintain professional scepticism throughout the audit. We also:     Identify and assess the risks of material misstatement of the financial report, whether due to fraud or error, design and perform audit procedures responsive to those risks, and obtain audit evidence that is sufficient and appropriate to provide a basis for our opinion. The risk of not detecting a material misstatement resulting from fraud is higher than for one resulting from error, as fraud may involve collusion, forgery, intentional omissions, misrepresentations, or the override of internal control. Obtain an understanding of internal control relevant to the audit in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Group’s internal control. Evaluate the appropriateness of accounting policies used and the reasonableness of accounting estimates and related disclosures made by the directors. Conclude on the appropriateness of the directors’ use of the going concern basis of accounting and, based on the audit evidence obtained, whether a material uncertainty exists related to events or conditions that may cast significant doubt on the Group’s ability to continue as a going concern. If we conclude that a material uncertainty exists, we are required to draw attention in our auditor’s report to the related disclosures in the financial report or, if such disclosures are inadequate, to modify our opinion. Our conclusions are based on the audit evidence obtained up to the date of our 94 www.iphltd.com.au INDEPENDENT AUDITOR’S REPORT TO THE MEMBERS OF IPH LIMITED IPH Limited   auditor’s report. However, future events or conditions may cause the Group to cease to continue as a going concern. Evaluate the overall presentation, structure and content of the financial report, including the disclosures, and whether the financial report represents the underlying transactions and events in a manner that achieves fair presentation. Obtain sufficient appropriate audit evidence regarding the financial information of the entities or business activities within the Group to express an opinion on the financial report. We are responsible for the direction, supervision and performance of the Group’s audit. We remain solely responsible for our audit opinion. We communicate with the directors regarding, among other matters, the planned scope and timing of the audit and significant audit findings, including any significant deficiencies in internal control that we identify during our audit. We also provide the directors with a statement that we have complied with relevant ethical requirements regarding independence, and to communicate with them all relationships and other matters that may reasonably be thought to bear on our independence, and where applicable, related safeguards. From the matters communicated with the directors, we determine those matters that were of most significance in the audit of the financial report of the current period and are therefore the key audit matters. We describe these matters in our auditor’s report unless law or regulation precludes public disclosure about the matter or when, in extremely rare circumstances, we determine that a matter should not be communicated in our report because the adverse consequences of doing so would reasonably be expected to outweigh the public interest benefits of such communication. Report on the Remuneration Report Opinion on the Remuneration Report We have audited the Remuneration Report included in pages 26 to 32 of the Directors’ Report for the year ended 30 June 2018. In our opinion, the Remuneration Report of IPH Limited for the year ended 30 June 2018, complies with section 300A of the Corporations Act 2001. Responsibilities The directors of the Company are responsible for the preparation and presentation of the Remuneration Report in accordance with section 300A of the Corporations Act 2001. Our responsibility is to express an opinion on the Remuneration Report, based on our audit conducted in accordance with Australian Auditing Standards. DELOITTE TOUCHE TOHMATSU H Fortescue Partner Chartered Accountants Sydney, 16 August 2018 2018 Annual Report 95 Shareholder Information 96 www.iphltd.com.au 96 www.iphltd.com.au IPH Limited The shareholder information set out below was applicable as at 31 August 2018. Distribution of equitable securities Analysis of number of equitable security holders by size of holding: Range 100,001 and Over 10,001 to 100,000 5,001 to 10,000 1,001 to 5,000 1 to 1,000 Securities (cid:49)umber of shareholders % 157,018,427 15,861,230 9,463,326 12,998,293 2,000,290 84 79.57 760 8.04 1,299 4.80 4,886 6.59 3,745 1.01 Unmarketable Parcels - 0 0.00 197,341,566 10,774 100.00 2018 Annual Report 97 Shareholder Information Equity security holders Twenty largest quoted equity security holders The names of the twenty largest security holders of quoted equity securities are listed below: Ran(cid:78) (cid:49)ame (cid:36)(cid:18)(cid:38) designation (cid:22)(cid:20) (cid:36)ug (cid:21)(cid:19)(cid:20)(cid:27) %IC HSBC CUSTODY NOMINEES (AUSTRALIA) LIMITED J P MORGAN NOMINEES AUSTRALIA LIMITED CITICORP NOMINEES PTY LIMITED UBS NOMINEES PTY LTD 66,514,669 33.71 28,527,188 14.46 12,577,285 8,017,620 BNP PARIBAS NOMINEES PTY LTD 6,340,826 NATIONAL NOMINEES LIMITED SETDOR PTY LIMITED TALABAH PTY LIMITED HSBC CUSTODY NOMINEES (AUSTRALIA) LIMITED - A/C 2 WOMBEE PTY LTD AMP LIFE LIMITED O'BRIENTRUS PTY LIMITED BNP PARIBAS NOMS PTY LTD AFTRUS PTY LIMITED KIZILE PTY LTD 5,037,276 2,462,963 2,067,175 1,526,204 1,481,654 1,129,850 1,014,814 894,218 818,166 740,741 CURNICK INVESTMENTS PTY LTD 703,704 CS THIRD NOMINEES PTY LIMITED 703,016 CURNTRUS PTY LIMITED TOH BOON YAN CORAL ROSSARD PTY LIMITED 641,976 589,809 561,004 6.37 4.06 3.21 2.55 1.25 1.05 0.77 0.75 0.57 0.51 0.45 0.41 0.38 0.36 0.36 0.33 0.30 0.28 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 Total Balance of register Grand total The above table includes shareholders that may hold shares for the benefit of third parties. 142,350,158 72.13 54,991,408 27.87 197,341,566 100.00 98 www.iphltd.com.au Geography distribution AUSTRALIA BAHRAIN CHINA CYPRUS HONG KONG INDONESIA KUWAIT MALAYSIA MICRONESIA NEW ZEALAND PAPUA NEW GUINEA QATAR SINGAPORE SWITZERLAND THAILAND UNITED KINGDOM UNITED STATES VANUATU Total 1. May not add up to 100 due to rounding. IPH Limited Securities % (cid:49)o(cid:17) of holders 191,438,004 97.01 10,614 (cid:22)(cid:20) (cid:36)ug (cid:21)(cid:19)(cid:20)(cid:27) % 98.51 760 10,652 3,550 749,393 1,193 460 4,050 550 4,857,232 2,380 1,130 183,767 0 7,425 67,238 7,660 6,122 0.00 0.01 0.00 0.38 0.00 0.00 0.00 0.00 2.46 0.00 0.00 0.09 0.00 0.00 0.03 0.00 0.00 1 1 1 6 1 1 3 1 115 1 1 15 0 2 5 4 2 0.01 0.01 0.01 0.06 0.01 0.01 0.03 0.01 1.07 0.01 0.01 0.14 0.00 0.02 0.05 0.04 0.02 197,341,566 100.001 10,774 100.00 2018 Annual Report 99 Shareholder Information Unquoted equity securities Performance Rights over ordinary shares granted under the Long Term Incentive Plan Retention Rights granted under the Long Term Incentive Plan Number on Issue Number of holders 509,533 173,688 43 22 Substantial holders The names of substantial shareholders of the Company’s ordinary shares as at 31 August 2018 (holding no less than 5%) who have notified the Company in accordance with section 671B of the Corporations Act 2001 are: Holder Number of securities Perpetual Limited and its related bodies corporate Marathon Asset Management LLP Commonwealth Bank of Australia and its related bodies corporate Macquarie Group Limited and its controlled bodies corporate 26,350,054 12,235,241 10,643,180 10,040,061 Voting rights The voting rights attached to ordinary shares are set out below: Ordinary shares On a show of hands every member present at a meeting in person or by proxy shall have one vote and upon a poll each share shall have one vote. There are no other classes of equity securities. Restricted securities There are no restricted securities. Securities Subject to Voluntary Escrow Class Ordinary Ordinary 100 www.iphltd.com.au Expiry Date Number of Shares 31/10/2018 31/10/2019 737,261 4,621,547 IPH Limited Annual General Meeting (AGM) The 2018 annual general meeting (AGM) of IPH Limited will be held on Friday 23 November 2018 at 10:30am at the offices of EY, 200 George Street, Sydney NSW 2000. Voting at any meeting of shareholder is by a show of hands unless a poll is demanded in the manner described in the Company’s Constitution. If there are two or more joint holders of a share and more than one of them is present at a general meeting, in person or by proxy, attorney or representative, and tenders a vote in respect of IPH Limited is listed on the ASX and its ordinary shares are quoted under the share, the Company will count only the vote cast by, or on behalf the ASX code ‘IPH’. Annual Report Amendments to the Corporations Act 2001 have changed the obligations of companies regarding the provision of annual reports to shareholders. The default option for receiving annual reports has of, the shareholder by the joint holder whose name appears first in the Company’s register of shareholder. The quorum required for a meeting of members is two shareholders. If the votes are equal on a proposed resolution, the matter is decided in the negative. changed from a printed copy to an electronic copy via IPH’s website at Shareholder questions www.iphltd.com.au. Online voting Shareholders can lodge voting instructions electronically either as a direct vote or by appointing a proxy for the 2018 AGM at www.iphltd.com.au. The information required to log on and use online voting is shown on the voting form distributed to shareholders with the Notice of Annual General meeting. Voting Rights At a general meeting, a shareholder present in person or by proxy, attorney or representative has one vote on a show of hands and on a poll has one vote for each fully paid share held. Shareholders can submit a written question to the Company or the Company’s auditor in regard to the AGM or any of the proposed resolutions to be considered at the AGM, using the form supplied with the Notice of AGM distributed to shareholders. Information about IPH Information about IPH Limited including company announcements, presentations and reports can be accessed at www.iphltd.com.au. 2018 Annual Report 101 Level 24 Tower 2, Darling Park 201 Sussex Street, Sydney, NSW 2000 Australia Phone: +61 2 9393 0301 Email: info@iphltd.com.au Cover image: Bridge of Future Science & Technology Park Beijing, China www.iphltd.com.au 30th June 2018 IPH LImited | ABN 49 169 015 838 2018 Annual Report 103 www.iphltd.com.au 

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