Invacare
Annual Report 2021

Plain-text annual report

FY21 Annual Report Honouring life, celebrating memories for generations About this report InvoCare’s 2021 Annual Report (‘the report’) is the primary References in this report to a ‘year’ are to the financial year ended statutory and regulatory reporting disclosure of InvoCare Limited 31 December 2021 (previous corresponding period 31 December and its subsidiary companies’ operations, activities and financial 2020) unless otherwise stated. All dollar figures are expressed in performance. In this report references to ‘InvoCare’, ‘the Company’, Australian Dollars (AUD) unless otherwise stated. ‘the Group’, ‘we’, ‘us’ and ‘our’ refer to InvoCare Limited (ABN 42 096 437 393), unless otherwise stated. References to AASB refer to the Australian Accounting Standards Board and IFRS refers to International Financial Reporting This report comprises information about our activities, strategy, Standards. There are references to IFRS and non-IFRS financial our financial and non-financial performance, risk management, information in this report. Non-IFRS financial measures are those remuneration and our financial statements. The financial statements not defined or specified under any relevant accounting standard and are structured to provide prominence to the disclosures that are may not be directly comparable with other companies’ information. considered most material and relevant to the user’s understanding Non-IFRS financial measures are used to enhance the comparability of the operations, results and financial position. of information between reporting periods and should be considered in addition to, and not a substitute for, IFRS financial information and measures. A disclosure is considered material if for example: The dollar amount is significant in size (quantitative factor) The Group’s results cannot be understood without the specific disclosure (qualitative factor) It is critical to allow a user to understand the impact of significant changes in the Group’s business during the period such as business acquisitions (qualitative factor) It relates to an aspect of the Group’s operations that is important to its future performance Corporate reporting suite InvoCare’s corporate reporting suite brings together the Group’s financial, non-financial, risk and sustainability performance for the financial year ended 31 December 2021: Investor Presentation Sustainability Report Our corporate reporting documentation is available for download on the InvoCare Investor Relations page: www.invocare.com.au/investor-relations InvoCare|Positive recovery & momentum in a year of disruption2021FullYearResults28February2022FY21 Sustainability ReportPeople Place Planet Contents InvoCare Limited ABN 42 096 437 393 Section 1 – Overview InvoCare at a glance 2021 performance highlights 2021 sustainability highlights Chairman’s message Our purpose, vision and values Our strategic priorities Chief Executive Officer’s message Executive Leadership Team Section 2 – Operating and financial review Financial review Our businesses: Operating review Outlook Reconciliation of financial information Section 3 – Governance & Directors’ report Board of Directors Directors’ report Auditor’s independence declaration Risks and uncertainties Remuneration report - audited Section 4 – Consolidated financial statements Consolidated financial statements Notes to the consolidated financial statements Section 5 – Signed reports Directors’ declaration Independent auditor’s report Section 6 – Shareholder and other information Five year financial history Shareholder information Glossary Corporate directory InvoCare Annual Report 2021 3 4 6 7 8 11 12 14 16 18 24 33 34 36 39 43 44 48 70 77 132 133 140 141 144 146 Overview12Operating & financial review3Governance & Directors’ report654Shareholder and other informationSigned reportsConsolidated financial statementsInvoCare is a leading provider of funerals, burials and cremations in Australia, New Zealand, and Singapore and operates private memorial parks and crematoria in Australia and New Zealand. It is also a leading provider of pet cremation services in Australia. InvoCare at a glance 45,781 FUNERAL CASES 24,504 CREMATIONS AND BURIALS 87,440 PET CREMATIONS 2025 Strategy Objectives Customer led, people empowered Be customer-centric in everything we do Operational excellence Optimise our foundations to drive sustainable returns Stronger core growth Excel in servicing customer needs and grow share of market value 2025 Ambitions Trusted by client families and communities Great place to work Key measure of success Outstanding NPS High engagement and retention Pre-need Planning At need Funeral Offering products and services along the customer’s lifetime journey InvoCare Annual Report 2021 4 +80.1 NPS c. 1,900 EMPLOYEES 336 LOCATIONS An exceptional result Full time equivalent New growth platforms Innovate and diversify to expand addressable market and meet future customer needs Sustainable leadership Lead company and industry to more sustainable outcomes 29% 29% 5% Funerals 59% Australia 84% Operating EBITDA 42% 42% Recognised industry leader and partner of choice Creating value for all stakeholders Sustainability commitments EPS growth and satisfactory ROCE Pet Cremations 4% 5% Sing 24% 7% NZ 9% 24% Cemeteries & Crematoria 37% At need Funeral Post need Memorialisation InvoCare Annual Report 2021 5 2021 performance highlights Positive momentum on key measures of success Strong delivery and positive performance against all key scorecard measures Customer and team Operational excellence Growth: Operational Growth: Financiala Sustainable leadership NPS +80.1 1.1 on PCP LTIFR 9.8 22% on PCP OPERATING LEVERAGE 2.1x Return to positive FUNERAL CASE VOLUMES 45,781 2.2% on PCP OPERATING REVENUE $527.1m 11% on PCP SUSTAINABILITY REPORT ‘Leading’ ACSI rating DEBT LEVERAGE RATIO FUNERAL CASE AVERAGEb OPERATING EBITDA 1.2x 0.1x on PCP $8,156 3.8% on PCP $125.5m 22% on PCP CASHFLOW CONVERSION MEMORIALISATION REVENUE OPERATING EBIT 105% 5 ppts on PCP +9.7% On PCP sales $77.8m 36% on PCP ROCE 11.2% 2.4 ppts on PCP OPERATING EPS 31.6¢ 51% on PCP PET CREMATION CASE VOLUME 87,440 501% on PCP NB Definition of terms and measures used in this report included in the glossary on page 144 and 145 a For reconciliation of operating to statutory results see page 34 b Group gross funeral case average, including disbursements InvoCare Annual Report 2021 6 2021 sustainability highlights InvoCare’s inaugural materiality assessment identified the Environmental, Social and Governance (ESG) issues relevant to our operations, which are focused on three key themes, People, Place and Planet. Below are some key sustainability highlights and achievements for the year, with further details provided in the Group’s 2021 Sustainability Report available for download at www.invocare.com.au/investor-relations. Planet Sustainable product and service options continued to develop, catering for client interest in eco- friendly offerings and targeting potential reduction of environmental impact from our operations. Solar panel installation was completed at our Malaga operations centre in Western Australia. Electric vehicle trials are under way in Australia and New Zealand. People Health and Safety Strategy launched, aimed at developing and delivering innovative, sustainable interventions that promote team member safety and reduce injury, illness and fatal risk. LTIFR decreased 22% from 2020. Training and development enhanced online, building leadership bench strength and skills. Place Inclusive funerals offering expanded to reflect diversity of our local communities, including a new location for Galaxy Funerals in Burwood, NSW. Ongoing capital investment in asset revitalisation, operational workflows and shared services including new facilities in Albion Park Rail, Cairns, Tullamarine, and Victor Harbor. Design and implementation of our Evolve Frontline Management Development Program, with over 50 participants completing the program in 2021. Memorial parks welcomed community commemoration events for Father’s Day and ANZAC Day, adapting the approach to these due to COVID restrictions. Our customer experience continued to improve with a leading +80.1 NPS and we partnered with Memories to offer client families an innovative digital way to honour and celebrate loved ones. On White Ribbon Day we promoted caring and respect, with local events and a moving tribute from our White Ladies in Sydney’s Martin Place. Launched a partnership with Violet, a not-for-profit working to reduce regretful outcomes in the last stage of life for Australians, caregivers and families. InvoCare Annual Report 2021 7 OverviewShareholder and other informationSigned reportsConsolidated financial statementsGovernance & Directors’ reportOperating & financial review654321Chairman’s message Dear fellow shareholder, On behalf of the Board, thank you for your continued support during the year. In 2021, we welcomed Olivier Chretien as our new Managing Director & CEO. Olivier has certainly hit the ground running and alongside his refreshed Executive Leadership Team we have reset our strategic vision for the next 5 years, embarked on a bold change agenda, delivered growth, returned the business to positive operating leverage, and maintained our strong balance sheet and cash conversion, all against the backdrop of another year of COVID-driven disruption to our industry. The Board would also like to extend our thanks and gratitude to our employees. In 2021, our teams across our Funerals, Cemeteries & Crematoria and Pet Cremation businesses, as well as our support office teams, have continued to step up to the significant challenge of the COVID pandemic (COVID). Their resilience, agility, and commitment to high standards of service and safety has been recognised by our client families, with the Group achieving a record Net Promoter Score (NPS) of +80.1, an exceptional result. At the same time, we have seen a material improvement in the Group’s safety outcomes with LTIFR dropping 22% to 9.8 for the year. The Board is confident about the strength of the business...with future growth supported by both population growth and ageing ,, trends in its markets,, Impact of COVID A year ago, I reported to you that 2020 had been a year of unprecedented challenge, and that our people were truly able to live our mission to support families at the most pivotal time of their lives. In 2021 our flexible COVID response plan is now embedded in the business and continues to serve us well. After near ‘normal’ operating conditions in most of our markets for much of the first half of the year, the arrival of the Delta variant in June and Omicron variant in December led to a tougher second half to navigate across our geographies. InvoCare Annual Report 2021 8 Our teams dealt with various forms of lockdown and restrictions in all our key markets. Our memorial parks experienced dramatically reduced foot traffic and memorialisation revenue momentum, while our funeral teams managed the impacts of bans on funerals that spanned from seven days in South Australia to four weeks in Auckland at the peak of the various outbreaks, and the navigation of various government restrictions on attendee limits, vaccine mandates for mourners and the overall general fatigue of our workforce. Ongoing global supply chain disruptions have impacted some input costs, and, like many companies, we have seen high levels of COVID- related absenteeism impacting our operations. While restrictions have now been lifted in all markets, supply chain and absenteeism issues are expected to persist at least for some of Q1 2022. Despite these challenges, customer satisfaction, measured by NPS, has grown, we maintained our strategic momentum and we’ve delivered solid earnings growth and strong cash conversion. We attribute this to the quality of our teams and the advantages that our breadth of brands, market positions and diversity of operations brings. We have also observed clear customer trend shifts during this second year of the pandemic. The sudden rise in direct cremations is likely to return to normal levels, whilst the demand for digital products and tools has been accelerated in the past year. We have seen an increase in the desire for live streaming of services and for digital tools to allow families to plan more of a funeral service from their home, reducing the need for multiple face to face interactions between funeral arrangers and client People, Place, Planet – our enhanced sustainability commitments During the year the Group reset its purpose – ‘Honouring life, celebrating memories for generations’ - and our strategy, taking a longer term view out to 2025. As I outlined to you in our 2020 AGM held in May of last year, the fifth pillar of this strategy is our commitment to industry leadership in sustainability, which has led to a redoubling of our efforts in this space. The Board, alongside the Executive Leadership Team, has increased focus and investment in our Environment, Social and Governance (ESG) goals and our Sustainability strategy and its programs. This commenced with the appointment of a dedicated member of our Executive Leadership Team, Grace Westdorp, responsible for Safety & Sustainability, in March 2021. We conducted a materiality assessment during the year as part of the new Sustainability Strategy, sharpening our focus on the priority areas where we think we can make a real difference and theming them around three key areas of People, Place and Planet. This strategy was officially launched in early 2022 and we recognise both the huge opportunities and the substantial challenges that go hand-in-hand with achieving genuine ESG progress in our business — an international footprint, hundreds of premises and facilities, large vehicle fleets, energy-intensive operations, a diverse workforce with considerable safety responsibilities and our commitments to families. These trends have influenced our strategic priorities. community. InvoCare Annual Report 2021 9 Chairman’s message continued FY21 financial results and capital management Outlook InvoCare reported statutory revenue of $532.5 million for the year, an The Board is confident about the strength of the business, increase of 11% on the prior corresponding period (PCP) and a notwithstanding the short-term impact of supply chain disruptions return to statutory profit after tax attributed to shareholders of and absenteeism related to COVID, with future growth supported by $80.2 million for the year, a strong turnaround from the $11.5 million both population growth and ageing trends in its markets. The refreshed restated reported loss in the PCP. Recovery in the key value drivers Executive Leadership Team, led by our CEO, Olivier Chretien, the reset of core operating earnings, a strong performance of the new Pet strategy and the momentum achieved in this first year we believe sets Cremations business, as well as a robust recovery in the mark-to- the Company up well for its next phase in meeting the evolving needs market (MTM) valuation of Pre-paid Funds Under Management of our client families and our aim of delivering predictable and growing (FUM) have driven this growth in Reported Profit. returns to our shareholders. Bart Vogel Chairman Sydney The Group delivered an Operating Earnings Per Share (EPS) of 31.6 cents, 51% above the PCP. This strong growth in earnings and continued strong cash conversion has enabled the Board to determine a final fully franked dividend of 11.5 cents per share, which brings the full year dividend to 21.0 cents per share, an increase of 68% in our distributions to shareholders. The resulting dividend payout ratio of 66% reflects an appropriately prudent approach to capital management given the opportunities for investment in growth initiatives set out in our strategy. Board changes In April 2021 the Board announced the retirement of Jackie McArthur as a Non-Executive Director of the Company. Jackie had been on the Board since 2018 and provided invaluable insight and contributions to both the Board and to the Audit, Risk & Compliance and Nomination Committees, both of which she was a member. In May 2021, the Board announced the appointment of Kim Anderson as a Non-Executive Director and Chair of the People, Culture & Remuneration Committee. Kim is an experienced ASX listed company director with more than 30 years’ experience in senior executive roles in a range of companies and she brings extensive digital business experience to the Board. In November 2021, the Board announced the appointment of Kee Wong as a Non-Executive Director of the Company. Kee’s technology industry experience and entrepreneurial background add real diversity to our Board, and his tenure as an ASX listed company director is evident in his contribution to our deliberations. Both new directors complement the Board’s depth and diversity of knowledge on-hand to support the Company in this next phase of our strategy with the aim of driving long term, sustainable growth. We look forward to introducing Kee to our shareholders at our upcoming Annual General Meeting where he will be put forward for election. The Group delivered an Operating Earnings Per Share (EPS) of 31.6 cents, 51% above the PCP. ,, ,, InvoCare Annual Report 2021 10 Our purpose, vision and values ‘Honouring life, celebrating memories for generations’ Our purpose is in ‘honouring life, celebrating memories for generations’, which reflects that, with our team, breadth of offering and strategic assets, InvoCare is uniquely positioned to service our customers’ needs along their lifetime journey. Our vision is: ‘To be entrusted with all lives, as a respected pillar of our communities and a leader in our field’. Garnering community trust in our brands, having offerings that cater to the diversity of our markets and being a valued leader within the death care sector is fundamental to our long-term success and the creation of shareholder value. Underpinning the achievement of our strategic objectives and the culture of InvoCare are our CARES values: Collaboration: We respect one another and achieve more by working together Accountability: We always act with integrity, through honesty, fairness and accountability Responsiveness: We put our clients and community first, by listening, anticipating, supporting and actioning, to exceed their expectations Excellence: We continuously improve the way we do business through innovation, creativity and flexibility Safety: We keep everyone safe, everywhere and every day InvoCare Annual Report 2021 11 OverviewShareholder and other informationSigned reportsConsolidated financial statementsGovernance & Directors’ reportOperating & financial review654321Our strategic priorities In May 2021, InvoCare announced to shareholders its reset strategy to 2025, which is designed to deliver on our purpose and vision. In resetting the strategy, an opportunity was identified to first, extract greater value from the business that InvoCare has today and leverage the investments made in the past five years, and then, use this as a strong and sustainable foundation for growth. There are five pillars to the strategy, the objectives, and ambitions for 2025 are outlined below: Objectives Customer led, people empowered Operational excellence Stronger core growth New growth platforms Sustainable leadership Be customer-centric in everything we do Optimise our foundations to drive sustainable returns Excel in servicing customer needs and grow share of market value Innovate and diversify to expand addressable market and meet future customer needs Lead company and industry to more sustainable outcomes 2025 Ambitions Trusted by client families and communities Great place to work Recognised industry leader and partner of choice Creating value for all stakeholders Key measure of success Outstanding NPS High engagement and retention Sustainability commitments EPS growth and satisfactory ROCE Despite the disruption caused by COVID-19 pandemic (COVID), the Group is making excellent progress in executing on this strategy, with the past year focused on building stronger foundations for the future. A description of these strategic priorities and some Group-level achievements in the year are included below. At a divisional level, detailed strategies are developed specific to the opportunities to improve each of our individual businesses within these five strategic pillars and these are discussed in further detail in the respective performance summaries starting on page 24. InvoCare Annual Report 2021 12 Simplicity Funerals Maclean NSW Customer led, people empowered Stronger core growth This first pillar is about being customer-centric in everything that we Each business will be focusing on its share of value by expanding the do and empowering our frontline teams. By better engaging and range of services offered to client families – rather than focusing on empowering our people we can maintain our exceptional Net Promoter market share in volume (i.e. cases) alone. This includes a renewed Score (NPS) and expand customer advocacy, while building a great, focus on pre-paid funerals to underwrite future long-term growth in the safe, and inclusive place to work. Funeral services business. With a high proportion of sales driven through referrals, InvoCare Further details on what this strategic objective means for each of our prides itself on constantly working to raise the quality of its service businesses and key achievements are located further in this report. standards, as reflected in the NPS, which is +80.1 at the end of 2021, exceeding the target set for the year. InvoCare’s ‘Your Say’ employee engagement survey was conducted in the first half of 2021. The new-look survey received over 7,000 comments, provided baseline data about the employee experience and enabled benchmarking against similar-sized organisations and industries. Insights from the survey have been cascaded across the business, with teams building action plans in support of the feedback provided. One of our first actions in response to feedback was the announcement of a new paid parental leave scheme for Australian and New Zealand employees supporting both primary and secondary carers, another component in our emerging diversity, equality and inclusion strategy. Operational excellence This pillar considers the Group’s operating model, network performance, costs and capital discipline. The Group has focused on rejuvenating its funeral facilities as part of the network and brand optimisation (NBO) facilities upgrade program in recent years, a program that is due for completion in the next 12 months and which will then transition to longer term network project plans. The Group will now focus on execution of a more streamlined operating model to extract efficiencies. The Group has also started developing its use of New growth platforms and innovation The fourth strategic pillar aims at expanding the Group’s addressable market through adjacencies and harnessing the potential of innovation to drive new sources of growth and efficiency. This includes expanding the pet cremations business and positioning the Group to create value for customers along their lifetime journey. The Group has established an Innovation Hub to develop, support and nurture an innovation culture. The hub is a platform for InvoCare to connect with start-ups, researchers, not-for-profits and other partners to bring innovation to the sector. Through the hub, we have already made an investment in Memories Group Limited (Memories), an innovative digital legacy platform, and partnered with The Violet Initiative, an organisation that has the aim of helping carers talk about and prepare for the death of a loved one. Sustainable leadership Finally, the fifth pillar is InvoCare’s commitment to sustainable industry leadership. The Group is redoubling its efforts on sustainability, which, in addition to broader environmental and sustainability goals, involves a clear focus on safety and operational standards of care. Furthermore, our people are fundamental to customer advocacy and the Group continues its focus on diversity and talent development. information technology (IT) to enhance our customer service offerings InvoCare now has an overarching Health and Safety Strategy, aimed via digital platforms. The Group undertook a debt refinancing, which completed in September 2021. This is a key step to ensuring the Group has access to a flexible funding arrangement that will support the execution of the five-year strategy. Its nature as a revolving cash advance facility is also intended to bring further discipline to the Group’s cash management activities and minimise finance costs. at developing and delivering innovative, sustainable interventions that promote team member peak performance and reduce injury, illness and fatal risk. Since growing our Safety and Injury Management teams, and introducing clearer targets and safety management plans, we have made great progress in reducing our Lost Time Injury Frequency Rate (LTIFR) by 22% in a year to 9.8. InvoCare’s inaugural materiality assessment this year identified the environmental, social and governance (ESG) issues relevant to our operations, gave us an understanding of what matters to our stakeholders, and laid the foundations of our new organisation-wide Sustainability Strategy that fits within this fifth pillar, ‘Sustainable leadership’. This assessment process has reframed our ESG focus into three themes, ‘People, Place and Planet’. As the Sustainability Strategy is multi-year, some of our activities and evaluation processes under each theme are still in development. Further detail provided in the Group’s 2021 Sustainability Report. InvoCare Annual Report 2021 13 OverviewShareholder and other informationSigned reportsConsolidated financial statementsGovernance & Directors’ reportOperating & financial review654321Chief Executive Officer’s message Dear Shareholder, This report marks the first year of my tenure as Managing Director & CEO of InvoCare and as our Chairman noted, it has been characterised by positive recovery and momentum, in another year contextualised by COVID-driven disruption. Acknowledgements Travel restrictions allowing, I have spent much of this year meeting with our teams across our countries and regions. I recall my comments this time last year, and from the site visits I’ve done and employees I have met with, I continue to be extremely proud of our teams. Without a doubt, they live our CARES values everyday through their professionalism, extraordinary resilience, and commitment to a single-minded service ethos ensuring the best possible care to client families at all times. Echoing Bart’s message, I would like to thank all our employees in Australia, New Zealand and Singapore for their tireless support of each other and our client families. I also wish to thank my Executive Leadership Team for their dedication and support in my first year at the helm. They have led their teams to deliver a year of strong earnings recovery and positive strategic momentum. Our performance I joined InvoCare because I was inspired by its people, values, and the opportunity benefit the community. In May 2021 we launched our reinvigorated Purpose and Strategy. Our Purpose - Honouring life, celebrating memories for generations - reflects the expanded role we play in meeting the needs of our client families and I believe there are still many more opportunities to improve and expand our services to client families and the community. When we launched our five-pillar strategy in May we highlighted the key measures that will demonstrate our success in delivering on our strategic ambitions. These include continuing to deliver a very high NPS, ensuring high levels of employee engagement and being recognised as a trusted industry leader and preferred partner; and finally if we do all of these things well, we will deliver our key financial measures of success being sustained growth in earnings per share and a satisfactory enterprise return on capital employed. In my recent presentation of the 2021 results to investors I was pleased to report positive performance against all these key performance indicators, including increased customer satisfaction and material improvement in safety outcomes, strong operational and financial growth outcomes, whilst continuing to maintain our strong balance sheet and levels of cash conversion. The Group has successfully navigated another COVID-disrupted year with recovery in the key drivers of value: funeral case average (up 3.8%) and funeral case volume (up 2.2%); continued growth in memorialisation sales in the Australian Cemeteries & Crematoria business (up 9.7%); and a strong contribution from the upscaled Australian Pet Cremations business. As a result, operating revenue increased 11% to $527.1 million. Controlling cost growth has been a particular feature across the year and is reflected in some of the improved profit metrics, including 22% growth in Operating EBITDA to $125.5 million and a return to positive operating leverage of 2.1x. Pleasingly, we saw positive momentum continuing in our key financial measures of success with Operating EPS up 51% to 31.6 cents and our enterprise return on capital employed up 2.4 percentage points to 11.2% InvoCare Annual Report 2021 14 FY21 achievements Outlook Operating conditions may have been disrupted, particularly in the We are confident about the near and long-term potential of the second half, but the strategic momentum during the year was pleasing, business, however we do not know how the impact of the next stage and the Group achieved some important foundational strategic of the pandemic will play out on supply chain, workforce and customer initiatives, which are key to supporting future business growth: demand, as well as the ongoing government response. Customer led, people empowered Exceeding NPS of +80, successfully onboarding new talent in key strategic areas of the business and conducting a new look employee engagement survey, which led to new initiatives to ensure InvoCare is a great place to work Population and ageing trends in our markets support future growth, with reported deaths beginning to rise in Australia and New Zealand after COVID-driven reductions in the prior year. Pet ownership is growing in Australia, and as we move into the growth phase of our strategy, I am confident that we do so on more solid foundations. This year demonstrated that our team and strategy can create meaningful strategic momentum. I am positive about the long-term potential and growth outlook for InvoCare – and our ability to build a great place to work and a more efficient, innovative and sustainable company, that delivers satisfactory returns to shareholders. Operational excellence Finally, I too would like to thank all our shareholders for their ongoing support. Implementing an enhanced Enterprise Reporting Platform (ERP) system in Funerals and selecting a new ERP system for Cemeteries & Crematoria to be implemented in 2022; successfully completing our debt refinancing; and improving capital investment discipline across the Group. Olivier Chretien Managing Director & Chief Executive Officer Sydney Stronger core growth Completing 40 network projects including four best-in-class shared service centres to build operational efficiencies and completing a new long- term Funerals network optimisation plan, as well as master plans for select key memorial parks. New growth platforms Commencing the Group’s new digital and innovation journey with the establishment of an innovation hub, investing and partnering with digital legacy business Memories, going live with a first stage customer digital self-serve portal and pet cremations e-commerce offering; and signing key commercial agreements across our businesses. Sustainable leadership Investing in and increasing focus on safety, reducing our LTIFR by 22% in the year to 9.8; partnering with Violet, a Not-for-Profit providing support through the last stage of life; conducting an inaugural environmental, social and governance (ESG) materiality assessment and establishing the Group’s enhanced sustainability strategy: ‘People, Place, Planet’. InvoCare Annual Report 2021 15 OverviewShareholder and other informationSigned reportsConsolidated financial statementsGovernance & Directors’ reportOperating & financial review654321Executive Leadership Team Olivier Chretien Chief Executive Officer Adrian Gratwicke Chief Financial Officer Heidi Aldred General Counsel / Company Secretary Lynne Gallucci Executive General Manager – Australian Funerals Steve Nobbs Executive General Manager – Cemeteries & Crematoria Tim Higgins * Executive General Manager – International, Strategy & Innovation Victoria Doidge Executive General Manager – Customer Amanda Tober Executive General Manager – Human Resources Grace Westdorp Executive General Manager – Health, Safety & Sustainability Fergus Kelly Executive General Manager – Stakeholder Engagement InvoCare Annual Report 2021 16 * Tim Higgins was promoted to Executive Leadership Team as at 1 January 2022. Section 2 Operating and financial review * Tim Higgins was promoted to Executive Leadership Team as at 1 January 2022. InvoCare Annual Report 2021 17 Financial review To grow earnings per share and total shareholder returns, we seek to complement operational execution of our strategy with financial discipline, strong portfolio management, balance sheet strength and cash flow generation. Set out below is a description of these areas and the financial tools we use to measure success: Generating long term shareholder returns InvoCare seeks to deliver sustainable shareholder returns through earnings per share (EPS) and dividend growth which, if delivered, should support share price performance. Financial discipline – Focus on cost control and efficiency to drive The Board determined a fully franked final dividend of 11.5 cents per positive operating leverage Portfolio management – Act decisively on the allocation of capital and managing returns from investments Balance sheet strength – Maintain funding flexibility and disciplined capital management to support growth aspirations share, increasing full year dividends to 21.0 cents, representing a dividend payout ratio of 66% of Operating EPS, within the Group’s preferred payout range. 2021 cents Restated 2020 cents Movement % 56.1 (8.6) 752.3 Cash flow generation – Pursue working capital efficiency and realisation of profits into cash to reinvest in the business Basic earnings per share (EPS) The Group’s performance in these areas during the year is set out on the following pages. The prior corresponding period (PCP) is the year ended 31 December 2020. Impact of IFRIC guidance on accounting for software-as-a-service contracts (SaaS) Operating EPS 31.6 20.9 51.2 Interim dividend Final dividend 9.5 11.5 5.5 7.0 72.7 64.3 Total dividend (full year) 21.0 12.5 68.0 Following clarifying guidance issued by the IFRS Interpretations Dividend payout ratio (%) 66% 60% 6 ppts Committee (IFRIC) in April 2021, the Group has adopted a change in its accounting policy in relation to the treatment of configuration and customisation costs incurred in implementing SaaS arrangements. This change in accounting policy is to be applied retrospectively resulting in the need to restate the comparative financial statements for the year ended 31 December 2020. The impact of the change in accounting is therefore reflected in the restated financial results for the year ended 31 December 2020 presented on relevant pages of this report. Profit performance for the year The Group delivered Operating net profit after tax of $45.1 million in the year ended 31 December 2021 (FY21), a 61% improvement on the PCP driven by an increase in funeral case average in Australia and New Zealand, continued growth in memorialisation sales in the Group’s Cemeteries & Crematoria business, a strong contribution from the pet cremations businesses acquired in the second half of 2020 and Further details on the impact of the change in accounting policy are disciplined cost control. included in Note 12 of the financial statements. This strong recovery in profits came despite COVID disruptions experienced in the second half of 2021. Until June, Australia and New Zealand had controlled community transmission of COVID, allowing for an easing in government-imposed restrictions on funeral attendee limits and travel in most markets. The emergence of the Delta strain in June and the Omicron strain in December resulted in the reinstatement of these restrictions causing tougher operating conditions for some of our businesses in that period. Reported profit for the year attributable to shareholders of $80.2 million reflects the strong recovery in operating earnings as well as the benefit of a net $44.1 million gain arising from the mark-to-market accounting for pre-paid funeral contracts with a $64.7 million unrealised gain on the revaluation of pre-paid funds under management (FUM) offset by a $20.6 million increase in the associated provision for pre-paid contract liabilities. It should be noted that the provision for pre-paid contract liabilities has increased in line with the estimated change in costs to fulfil the contracts. Further details are provided in the Pre-paid funerals section later in this report. InvoCare considers Operating earnings before interest, tax, depreciation and amortisation and business acquisition costs (Operating EBITDA) and Operating earnings before interest and tax (Operating EBIT) as key performance measures. InvoCare Annual Report 2021 18 metrics: Revenue Expenses EBITDA Operating EBITDA, EBIT and net profit after income tax exclude the The operating revenue result reflects recovery in key value drivers following items: The financial impacts of the pre-paid funerals business with a return to pre-COVID funeral case average (when conditions allowed) in Australia and New Zealand, 2.2% growth in funeral case volumes, and continued growth in memorialisation sales in the Group’s Other non-operating activities, including asset sale gains/losses, impairment gains/losses, accounting for SaaS arrangements Cemeteries & Crematoria businesses. In addition, acquisitions executed in second half (H2) of 2020 contributed $26.7 million to the expensed as incurred and restructuring costs, as relevant increase, with the acquired pet cremations businesses delivering over Net finance costs associated with the pre-paid funerals business The income tax effect of the above items 78,000 private cremations in the year, exceeding expectations. Cost control and a focus on operating expenses (OPEX) to sales % has continued in the year, as reflected in some of the improved A reconciliation of operating to statutory financial results is included on profit metrics. $19.3 million of the $27.9 million increase in operating page 34. Set out in the table below is the operating result and key performance 2021 $’000 Restated 2020 $’000 Movement % 527,096 476,249 10.7 expenses is driven by the inclusion of the H2 2020 acquisitions. The underlying $8.6 million increase in operating expenses includes increases in ‘finished goods, consumables and funeral disbursements’ reflecting increased sales activity and growth in employee expenses. The strong financial performance has driven higher sales incentives in the Cemeteries & Crematoria business and an increase in accruals for both short-term and long-term incentives for employees compared to the PCP. The Group has also experienced wage inflation and undertaken capability investments in our field support (safety, (401,619) (373,684) (7.5) marketing and HR in particular) and IT teams to reflect the strategic focus of the business. Offsetting this, cost savings have been achieved 125,477 102,565 22.3 in advertising, and other expenses, including professional fees. Depreciation and amortisation (47,759) (42,553) (12.2) Pre-paid technology expenses (654) (750) 12.8 Business acquisition costs (743) (1,918) 61.3 Net gain on lease modifications/terminations 1,517 - - EBIT 77,838 57,344 35.7 Net finance costs (15,262) (20,484) 25.5 Profit before income tax 62,576 36,860 69.8 Depreciation and amortisation expense increased $5.2 million or 12% on the PCP driven by the impact of capital investment in the current and prior year and a one-off $1.1milion adjustment arising from the acceleration of depreciation on leasehold improvement assets following the relocation of the North Sydney Support Office as reported in the half year ended 30 June 2021 (HY21). Net finance costs have declined reflecting primarily the benefit of lower borrowings in the year and an improved leverage ratio reducing the interest rate margin charged by our banks. The decrease also reflects the cycling of a $2.1 million charge in the PCP for the early exit of an interest rate hedge and the benefit from a $1.1 million foreign exchange rate gain on the retranslation of New Zealand dollar denominated debt which is drawn down in Australia post the debt refinancing Income tax expense (17,320) (8,699) (99.1) arrangement. The movement in income tax expense reflects improved profit performance but also the corresponding movement in deferred tax liabilities associated with the net revaluation gain on pre-paid FUM. Non-controlling interests (113) (167) 32.3 Operating net profit after income tax attributable to equity holders of InvoCare Limited Operating EPS (cents per share) 45,143 27,994 61.3 31.6 20.9 51.2 OPEX to sales %* 52% 53% (1 ppts) EBITDA margin (%) 24% 22% 2 ppts EBIT margin (%) 15% 12% 3 ppts * For calculating OPEX to sales %, OPEX represents operating expenses excluding finished goods, consumables and funeral disbursements costs InvoCare Annual Report 2021 19 Shareholder and other informationSigned reportsConsolidated financial statementsGovernance & Directors’ report6543Operating & financial review2Overview1 Financial review continued Portfolio management Balance sheet Decisive action to invest, restructure or divest non-core operations InvoCare continues to maintain a strong balance sheet with a while fulfilling the Group’s investment and strategic priorities is vital to disciplined focus on working capital management. The Group’s capital managing InvoCare’s portfolio of operations. employed excluding net debt items is comprised of the following. Acquisitions were limited to the Pet cremations business during the year with the acquisition of the business assets of a small pet cremations business in metro Sydney in H1 and, more materially, the business assets of Pets at Peace Central West New South Wales in H2, both made with the aim of continuing to expand the national footprint of the Pet cremations business. In H2 the Group invested in and signed a commercial partnership Total capital employed at reporting date 2021 $’000 Restated 2020 $’000 Movement % Trade and other receivables 80,630 78,177 3.1 6.2 with an Australian digital memorialisation start-up, Memories. Our Inventories 46,866 44,117 $4.1 million investment, for a 9.6% stake recognised our strategic contribution and the potential of the commercial partnership. The Group disposed of four locations, three in Australia and one in New Zealand for combined proceeds of $10.8 million giving rise to a net gain on disposal of non-current assets recognised through non-operating profit of $6.5 million. These disposals are a consequence of the Network Optimisation review conducted in the year. Trade and other payables (69,226) (60,514) (14.4) Net working capital 58,270 61,780 (5.7) Property, plant and equipment 494,454 464,277 Intangibles 226,913 225,386 6.5 0.7 Net pre-paid funds under management/contract liabilities 109,435 71,822 52.4 Deferred selling costs 35,755 37,712 (5.2) Deferred contract assets 1,963 4,066 (51.7) Net right of use asset and lease liabilitiesa (12,646) (11,346) (11.5) Deferred revenue (127,959) (137,718) 7.1 Net tax items (47,095) (26,301) (79.1) Other itemsb (13,515) (29,340) 53.9 Total capital employed 725,575 660,338 9.9 Net debt Net assets (144,654) (137,468) (5.2) 580,921 522,870 11.1 Average working capital % of salesc 11.4% 13.5% (2.1 ppts) ROCE %d 11.2% 8.8% 2.4 ppts a b c Excludes certain finance leases which are considered ‘debt-like’ and included in net debt balance Includes assets held for sale, other financial assets, derivative financial instruments, pre-paid technology assets, provisions for employee entitlements and contingent considerations Represents the average working capital for the reporting period (average of opening and closing) divided by revenue for the same period d ROCE = Operating EBIT divided by (average Total equity + average Net debt) InvoCare Annual Report 2021 20 A strong sales result in the fourth quarter and disciplined working As part of the reset of the Group’s strategy to 2025, a review of the capital management has driven an improvement in working Group’s financing structure and tenor of the Group’s debt facilities was capital relative to 31 December 2020. This and the improved sales undertaken. On 27 August 2021, InvoCare successfully amended and performance have also driven a 2.1 ppts improvement in average extended its Syndicated Debt Facility. Under the amendment, agreed working capital % of sales to 11.4%. with syndicated lenders, InvoCare: The business has continued to invest capital in property, plant and equipment arising primarily from the Network Optimisation program, Repaid the fully drawn A$67.5 million, NZ$50.0 million and S$35.0 million Facility A Term Loans on 23 September 2021 and increases in intangibles arising from the continued capitalisation and this term facility was subsequently cancelled of IFRIC compliant software development costs, driving an increase in both compared to December 2020, net of depreciation and amortisation. As disclosed in Note 12, the change in accounting policy gives rise to the recognition of a new class of asset with $8.6 million recognised Increased the limit of its Facility B, Multi-Currency Revolving Cash Advance facility from A$200.0 million to A$275.0 million Extended the tenor of Facility B to the end of August 2024 (the facility was previously due to expire in February 2023) as pre-paid technology assets at the end of the year, which will be A simplified and more favourable common pricing grid was agreed unwound through Operating EBIT over the period of the software with syndicate lenders. service. At 31 December 2021, the Group had access to $382.4 million of loan The favourable mark-to-market revaluation of pre-paid FUM in the facilities as follows: year is the largest movement in capital employed, driving the increase in net pre-paid FUM/contract liabilities. It is also the main driver of a $20.8 million increase in net deferred tax balances (from an increase in A ten-year $100.0 million Note Purchase Agreement with Metlife, fully drawn and due for repayment in February 2028 deferred tax liabilities associated with the pre-paid FUM balances). A three-year $275.0 million Syndicated Debt Facility Agreement Despite a 10% increase in total capital employed, the Group’s ROCE has improved, increasing 2.4 ppts to 11.2% compared to the restated year ended 31 December 2020. This reflects the strong growth in Operating EBIT, up 36% to $77.8 million. Net debt at reporting date 2021 $’000 Restated 2020 $’000 Movement % Cash and cash equivalents 53,630 118,781 (54.8) supported by a panel of lenders providing available funds through a Multi-Currency Revolving Cash Advance facility due for repayment in August 2024. $91.4 million of this was drawn at reporting date A one-year $7.4 million working capital overdraft facility provided by transactional banker, ANZ. $Nil drawn at reporting date The financial covenant ratios applicable to the debt facilities differ from the calculations included in the table above as they are calculated on an adjusted Operating EBITDA basis (primarily to include the proforma earnings contributions from acquisitions and to adjust for costs arising from restructuring initiatives). The covenant target ratios are as follows: Leverage ratio (being net debt to adjusted Operating EBITDA) must Borrowings (188,843) (246,039) 23.2 be no greater than 3.5 times Interest cover ratio (being adjusted Operating EBITDA to net interest adjusted to remove interest related to AASB 16 Leases) must be greater than 3.0 times The above ratios continued to be met as of 31 December 2021. Finance lease liabilities (9,441) (10,210) 7.5 Net debt (144,654) (137,468) (5.2) Total shareholders’ equity 580,921 522,870 11.1 Leverage ratio (times) Interest cover ratio (times) 1.2 15.8 1.3 8.3 0.1 7.5 Strong growth in earnings and subsequent cash generation was used to pay down debt but funding the capital investments of the Group including the $4.1 million investment in Memories has driven a 5.2% increase in net debt as at 31 December 2021 to $144.7 million. Despite this, the growth in earnings has driven a further improvement in the Group’s debt metrics. InvoCare Annual Report 2021 21 Shareholder and other informationSigned reportsConsolidated financial statementsGovernance & Directors’ report6543Operating & financial review2Overview1Financial review continued Cash flows InvoCare aims to use cash generated from operations to pay down borrowings, fund capital expenditure and acquisitions and distribute dividends to shareholders. Abridged cash flow statement 2021 $’000 Restated 2020 $’000 Movement % Operating EBITDA 125,477 102,565 22.3 Net change in working capital (23,747) (14,711) (61.4) Net finance costs paid (14,219) (17,046) 16.6 Tax paid (9,771) (14,424) 32.3 Operating cash flows 77,740 56,384 37.9 The Group ended the period with cash on hand of $53.6 million. Stronger sales in the year, disciplined focus on cash collections and a reduction in finance costs paid has led to growth in operating cash flows of 38%. This has also led to improved cash conversion as more earnings were converted into cash. Net investing cash outflows for the year of $38.9 million includes proceeds of $10.8 million from the disposal of certain properties as part of our ongoing portfolio management activities, $4.1 million investment in Memories made as part of the New Growth Platform strategic pillar and $12.6 million primarily related to the payment of deferred acquisition considerations following strong year 1 financial performance of businesses acquired in H2 2020. Capital expenditure (CAPEX) of $62.7 million included $30.9 million of facilities related investment expenditure involving the delivery of 40 projects and $8.0 million of IT and digital related projects. The remainder relates primarily to annual maintenance CAPEX of the Group’s facilities and other plant and equipment purchases. Acquisitions (16,716) (40,581) 58.8 Net financing cash flows includes the impact of the $59.7 million Divestments/sale of assets 11,180 11,908 (6.1) Capital expenditure (62,703) (60,952) (2.9) repayment of debt facilities following the debt refinancing, $23.8 million from the payment of the 2020 final dividend and 2021 interim dividend collectively and $20.2 million from the payment of principal elements of the Group’s leased assets, being property, equipment and motor Net funds from pre-paid contracts 29,306 12,857 127.9 vehicles. Investing cash flows (38,933) (76,768) 49.3 Dividends paid (23,766) (29,514) 19.5 Equity raise (net of issue costs) - 270,875 (100.0) Net draw down/repayment of borrowings (59,680) (106,761) 44.1 Net lease payments (20,196) (11,599) (74.1) Other (117) (3,184) 96.3 Financing cash flows (103,759) 119,817 (186.6) Change in cash held (64,952) 99,433 (165.3) Cash conversion %* 105% 100% 5 ppts Free cash flows* 54,167 54,490 (0.6) * Cash conversion % and Free cash flows are calculated as per tables on opposite page. InvoCare Annual Report 2021 22 Cash conversion % calculation 2021 $’000 Restated 2020 $’000 Operating cash flows 77,740 56,384 Add back: Net finance costs paid 14,219 17,046 Add back: Tax paid 9,771 14,424 Net funds from pre-paid contracts 29,306 12,857 Other cash flows related to pre-paid contracts 877 1,429 Ungeared, tax free operating cash flows 131,913 102,140 Operating EBITDA 125,477 102,565 Cash conversion % 105% 100% The cash conversion ratio calculation and the line items as shown in the table above are all non-IFRS information, however, all financial data is based on the information disclosed in the consolidated financial statements and notes to the financial statements and follows the recognition requirements of Australian Accounting Standards. Free cash flows calculation 2021 $’000 Restated 2020 $’000 Operating cash flows 77,740 56,384 Interest paid 14,521 17,419 CAPEX - maintenance (23,823) (14,398) CAPEX - investment - platform (14,271) (4,915) Free cash flows 54,167 54,490 InvoCare Annual Report 2021 23 Shareholder and other informationSigned reportsConsolidated financial statementsGovernance & Directors’ report6543Operating & financial review2Overview1Our businesses: Operating review Funeral services – Australia We are a leading provider of at need funeral services in Australia and are privileged to deliver over 37,000 funerals annually for Australian families from our diverse footprint of over 235 locations including funeral homes, shop fronts and shared service centre facilities in metropolitan capital cities and regional towns across the country. Our three national brands (White Lady, Simplicity and Value Cremations) and our 60+ regional and local brands are well respected and valued for their long-standing local heritage and contribution to their community. The breadth of our brand portfolio is a key strength and competitive advantage allowing us to cater for all types of client families and customer preferences from simple, direct cremations to high service funeral and memorial services. Our team of over 1,000 put client families at the centre of everything that they do, being there to support them at pivotal and testing times in their lives. They have achieved industry leading net promoter scores (NPS) through their compassion, exceeding expectations, delivering outstanding service and by setting the highest standards in safety and transparent business practice. Our ambition is to be the first-choice funeral service provider in Australia, renowned for our quality of service and choice of brands and people. We drive loyalty and advocacy from our client families and must deliver this proposition through fit-for-purpose facilities and trusted team members. NPS +80.4 1.4 on PCP LTIFR 11.1 22% on PCP FUNERAL CASE VOLUMES 37,193 2% on PCP InvoCare Annual Report 2021 24 Our performance The benefits of our diverse footprint, breadth of brands and positive Key performance indicators 2021 2020 Movement strategic momentum established in the year were evident in the strong recovery in earnings of the Australian funerals business with a return to pre- COVID funeral case average despite various disruptions across the states of Australia at varying times of the year. Operating revenue has grown in all markets with a 4.7% increase in funeral case average, and 2% growth in funeral case volumes, in particular from Queensland and Victoria. As restrictions on funeral attendees were eased, the ‘gathering’ element of funerals has regained its importance with increased spend on higher service funerals and memorials, sales growth driven by our key local and higher service brands such as White Lady Funerals. Simplicity branded locations have also seen strong growth, a brand which has benefitted from several digital strategic initiatives this year and a refresh of its visual brand identity. A strong focus on controlling costs has meant that this top line growth has been realised in earnings with a 5 ppts improvement in OPEX to sales % to 42%, Operating EBITDA up 29% to $80.5 million and a return to positive operating leverage. Funeral case average ($) 8,249 7,882 4.7% Operating revenue ($’000) 311,016 292,282 6.4% Operating EBITDA ($’000) 80,521 62,512 29% EBITDA margin % 26% 21% 5 ppts Operating leverage 4.5x (3.8x) 8.3x OPEX to sales % 42% 47% (5 ppts) Capital expenditure ($’000) 34,702 42,325 (18%) Y G E T A R T S Customer led, people empowered Operational excellence Key achievements Focus for coming year Delivered improved customer experience, NPS +1.4 points to +80.4 Maintain customer-centric focus Your Say action plan execution Your Say action plan in place Four EBA’s negotiated >15,000 hours of learning & development Evolve Leadership program launched Capability and leadership development Talent acquisition & retention Delivered four shared service centres Workforce planning implementation Go-live of ERP platform enhancement project (Compass 2.0), to improve functionality for funeral arrangers Completed Phase 1 of Network Optimisation review Further ERP enhancements for co-ordination activities 3 - 8 shared service centre projects for completion, subject to DA approvals and no construction delays Stronger core growth Delivered 31 network projects Brand value proposition refresh for Value Cremations and Simplicity brands Launched Phase 1 of Inclusive Funerals program Transition to long term network plan to prioritise future investment and fill remaining gaps in clusters and regions Improve customer relationship management and lead capture Product and service range expansion Strategic review of Pre-paid funerals New growth platforms & innovation Go-live of Customer Services Portal to provide self-serve services Investment in Memories and established commercial partnership Further roll out of digital planning tools to improve customer experience across our brands Embed Memories product Expand partnerships Sustainable leadership 22% reduction in LTIFR to 11.1 Solar panel installation program commenced Ongoing commitment to improve safety performance Sustainability strategy Fleet strategy InvoCare Annual Report 2021 25 Shareholder and other informationSigned reportsConsolidated financial statementsGovernance & Directors’ report6543Operating & financial review2Overview1Our businesses: Operating review continued Cemeteries & Crematoria – Australia The Australian Cemeteries & Crematoria business is a leading independent operator of cemeteries and crematoria, overseeing 15 cemeteries and memorial parks in New South Wales and Queensland spanning nearly 300 hectares of open space with long remaining useful lives and a network of over 20 cremators. Our team of nearly 300 put client families at the centre of everything that they do, and we are honoured to support over 23,000 client families annually with their ‘at need’ and ‘post need’ requirements with a wide range of memorial products and services. The business conducts nearly 3,000 burials and over 20,000 cremations annually with the parks and facilities also available for funerals, memorials, and community events. We engage with all funeral directors, InvoCare and independent alike and client families from all community groups and religious backgrounds through our non-denominational memorial parks. Our core focus is on ensuring we develop and maintain beautiful places for the committal and ongoing care of the deceased in their final resting place and for the communities in which they are located. NPS +74.2 1.9 on PCP LTIFR 14.6 59% on PCP BURIALS VOLUME 2,948 9.8% on PCP CREMATION VOLUME 20,171 0.8% on PCP InvoCare Annual Report 2021 26 Our performance Key performance indicators 2021 2020 Movement The Australian Cemeteries & Crematoria business continues to deliver Operating revenue ($’000) 127,602 119,988 6.3% strong growth in memorialisation sales, up 9.7% on the PCP. Despite a strong first half, growth momentum was stalled in the third quarter with Operating EBITDA ($’000) 61,411 56,996 7.7% EBITDA margin % 48% 48% 0 ppts Operating leverage 1.2x (8.2x) 9.4x OPEX to sales % 38% 35% 3 ppts Capital expenditure ($’000) 7,446 3,171 135% the lockdowns in New South Wales as several of our key parks were in local government areas (LGAs) of concern, significantly reducing foot traffic. The easing of COVID restrictions saw a return of client families back to the major metropolitan parks, helping to stimulate and close out deferred sales. The return to more traditional service levels has also seen a 10% increase in burials in the year, while cremations remained relatively stable. This sales growth combined with the growth in memorialisation drove an overall increase in Operating revenue of 6.3% (or $7.6 million) against the PCP. Associated sales incentives expense growth and an increased focus on safety and compliance as well as park grounds maintenance have tempered the impact of top line growth, resulting in 3 ppts increase in OPEX to sales % to 38% and only 7.7% growth in Operating EBITDA to $61.4 million. AASB 15 deferred revenue and cost unwinds contributed $18.8 million to Operating revenue and $14.2 million to Operating EBITDA respectively (FY20: $20.3 million and $15.3 million). Y G E T A R T S Key achievements Focus for coming year Customer led, people empowered Delivered improved customer experience, NPS +2 points to record +74 Your Say action plan in place Completed restructure of parks leadership team Maintain customer-centric focus Talent acquisition & retention Your Say action plan execution Capability and leadership development Operational excellence Cremator training/certification program developed and launched Implement new ERP National cremator network expansion Completed review of ERP options Stronger core growth Design work commenced on major metropolitan parks Master plans for major metropolitan parks Expansion of multicultural offering New growth platforms & innovation Multi-year burial reservation agreements signed with local community groups Continued growth in community burial reservation agreements Memorialisation services expansion Sustainable leadership Increased safety focus but disappointing 59% increase in LTIFR to 14.6 Ongoing commitment to improve safety performance Electric vehicle trial underway, with 20 added to the fleet Feedback drafted and provided to CCNSW on their proposed Interment Industry Scheme Sustainability strategy Investigation of alternative cremator fuel sources Proactive stakeholder engagement InvoCare Annual Report 2021 27 Shareholder and other informationSigned reportsConsolidated financial statementsGovernance & Directors’ report6543Operating & financial review2Overview1Our businesses: Operating review continued Pet cremations Established in 2019, Australia’s only national pet cremations business operates from 16 locations across five states, providing over 87,000 private cremations annually and offers a wide range of memorial products. Being the best in class operationally is a priority for the business. Working closely with veterinary clinics and client families, our growing team of over 170 uses state-of-the-art tracking technology to provide assurances to grieving families and veterinary clinics as to what stage of the cremation process their pet is in. PET CREMATION VOLUME 87,440 501% on PCP PET CASE AVERAGE $338 7% on PCP InvoCare Annual Report 2021 28 Our performance The pet cremations business in Australia continued to grow with strong contribution from the two acquired businesses driving the significant increase in Operating revenue and Operating EBITDA. Key performance indicators 2021 2020 Movement Operating revenue ($’000) 29,613 4,642 538% Operating EBITDA ($’000) 6,973 502 1,289% EBITDA margin % 24% 11% 13 ppts Operating leverage 2.4x (0.3x) 2.7x OPEX to sales % 57% 69% (12 ppts) Capital expenditure ($’000) 2,127 1,119 90% Y G E T A R T S Key achievements Focus for coming year Customer led, people empowered Established national business unit with National Leader Your Say action plan in place Maintain customer-centric focus Talent acquisition & retention Your Say action plan execution Capability and leadership development Operational excellence Investments were made in two new pet cremators Integration of IT and operating platforms nationally Stronger core growth National veterinary supplier agreements Continued growth in veterinary supplier agreements New growth platforms & innovation NSW e-commerce site launched 2 bolt-on acquisitions Expand range of products & services and e-commerce capabilities Consolidate and scale pet cremations operations Sustainable leadership Safety plans established Ongoing commitment to improve safety performance Sustainability strategy Review of alternative to cremation methods InvoCare Annual Report 2021 29 Shareholder and other informationSigned reportsConsolidated financial statementsGovernance & Directors’ report6543Operating & financial review2Overview1Our businesses: Operating review continued International InvoCare is a leading provider of funeral and related services in New Zealand and Singapore. Through its 48 locations (including two memorial parks and crematoria) and 24 locally trusted brands, our dedicated team of over 200 proudly serves the funeral and memorialisation needs of nearly 7,000 client families across New Zealand annually. Our Singapore operations are a leading provider of funeral services in the Singaporean market with two main locations including a six storey specially designed property with 13 newly renovated funeral parlours on Lavender St in the central region of Singapore. Our dedicated team of nearly 70 offer over 1,700 client families a wide variety of pre, at and post need funeral services annually. Our performance: New Zealand Like the Australian funeral services business, the New Zealand Key performance indicators 2021 2020 Movement business has experienced recovery in case average to pre-COVID levels when conditions allowed, and this growth was a key driver of the 2.9% increase in Operating revenue on the PCP. The improved case average, from a return to higher service funerals when conditions allowed, and growth in catering revenue was tempered in the second half of 2021 with New Zealand split across alert levels with varying restrictions. Auckland, our largest market, was heavily impacted, with four weeks of no funerals, then capped at 10 people gatherings. All New Zealand has now moved to the COVID Protection Framework, also known as the traffic light system, from the beginning of December. A tight control of costs has led to improved cost base efficiency metrics and margins and a return to positive operating leverage, with Operating EBITDA increasing 26% to $11.1 million. Funeral case average ($) 7,003 6,775 3.4% Operating revenue ($’000) 53,486 51,990 2.9% Operating EBITDA ($’000) 11,098 8,778 26% EBITDA margin % 21% 17% 4 ppts Operating leverage 9.2x (3.9x) 13.1x OPEX to sales % 50% 52% (2 ppts) Capital expenditure ($’000) 5,241 4,765 10% All figures disclosed are in Australian Dollars. NPS +87.6 1.3 on PCP LTIFR 10.5 39% on PCP FUNERAL CASE VOLUMES 6,859 1.2% on PCP InvoCare Annual Report 2021 30 Our performance: Singapore The contribution of Singapore earnings in Australian dollars to the Group in FY21 has been impacted by the depreciation of the Singapore dollar below AUD$1 equivalent for most of the period. On a local currency basis, Operating revenue for the Singaporean business increased 4.6% to S$19.1 million (declined 2.6% on an Australian dollar basis). Whilst the Singaporean funerals market continues to be negatively impacted by prolonged funeral attendance restrictions as Singapore experiences another wave of COVID infections, the introduction of packages for client families has proved successful. The Singapore police contract won at the beginning of the second half of 2021 has also been successfully implemented, contributing 110 cases in the second half. This uptick in volume as well as increase in direct cremations, a number of which were COVID deaths, are at a lower case average and higher cost to serve, which continues to dampen Singapore funeral case average, down 4% on 2020 (on a local currency basis) and has driven the decline in Operating EBITDA as the business ramped up workforce capacity to manage the increased case volumes. Key performance indicators 2021 2020 Movement Funeral case average ($) 10,732 12,042 (11%) Operating revenue ($’000) 18,907 19,404 (2.6%) Operating EBITDA ($’000) 8,338 9,392 (11%) EBITDA margin % 44% 48% (4 ppts) Operating leverage (4.4x) (0.6x) (3.8x) OPEX to sales % 35% 31% 4 ppts Capital expenditure ($’000) 378 317 19% All figures disclosed are in Australian Dollars. FUNERAL CASE VOLUMES 1,729 12% on PCP Y G E T A R T S Key achievements Focus for coming year Customer led, people empowered Lifted community engagement with outstanding NPS delivered in NZ of +87.6 Your Say action plans in place Maintain customer-centric focus Talent acquisition & retention Your Say action plan execution Capability and leadership development Operational excellence Migration of ringfenced business in NZ to common ERP completed NZ ERP enhancements to be implemented Stronger core growth 5 NBO projects delivered in NZ Expanded spa and floral service offerings deployed in Singapore Transition to long term network plan to prioritise future investment and fill remaining gaps in clusters Product and service range expansion New growth platforms & innovation Sustainable leadership Successful tender of Singapore police contract Execution of Singapore Police contract Signed Memories Reseller agreement inclusive of NZ and Singapore territories Roll out of digital planning tools to improve customer experience across our brands in NZ Expand exposure to larger metropolitan markets in NZ 39% reduction in LTIFR to 10.5 in NZ Ongoing commitment to improve safety performance Sustainability strategy InvoCare Annual Report 2021 31 Shareholder and other informationSigned reportsConsolidated financial statementsGovernance & Directors’ report6543Operating & financial review2Overview1Our businesses: Operating review continued Other businesses Pre-paid funerals Support costs Our pre-paid funerals (pre-need) business allows clients to pre-pay for Supporting the business operations are key selected future funeral services through our national network of funeral functions and capabilities that are recognised locations. separately from the main business units. The benefit of InvoCare pre-paid funerals are that they allow clients to Group Support Corporate are those corporate functions plan and pay in advance for tomorrow’s funeral at today’s prices with that support all operations, Australian and International, no additional fees when the pre-paid contract is redeemed. Contracts primarily Finance, Group Human Resources (HR), Legal can be paid all at once or in instalments over 36 months and are & Compliance, listed company costs and the offices of the redeemable at any of InvoCare’s branded locations across Australia. CEO and CFO. Such costs increased by $1.2 million in the Pre-paid funerals are generally also exempt from pension entitlement year to $23.0 million driven by capability investments made in tests in Australia (although independent financial advice should be stakeholder engagement, Enterprise Project Management and sought) and payments are held securely predominantly by The Over compliance to support strategy execution and an increase in the Fifty’s Guardian Friendly Society. These funds are independently cost of incentives (short and long term) reflecting improved financial invested and managed over the life of the contract and funds are only performance of the Group compared to the PCP. These increases released to the funeral home on redemption. have been partially offset by savings in Senior Management transition costs incurred in the PCP following the change in CEO and CFO. The costs of the in-house IT support team and centralised technology Key performance indicators 2021 2020 Movement Unrealised gain on pre-paid contract funds under management ($’000) Changes pre-paid contract liabilities due to significant financing ($’000) 64,697 3,659 1,668.2% costs such as the software licence fees for Microsoft and Oracle (20,612) (20,277) (1.7%) platforms are included in Group Support IT. Such costs increased by $3.4 million in the year to $10.6 million due to the impact of capability investments in the IT team, including the appointment of a Chief Information Technology Officer (CITO) and general increase in software The key financial statement impact of this business on the Group profit licence expense driven by the ERP roll out and increasing digital and loss is the movements from the revaluation of pre-paid FUM and investments in the current and prior year. Field Support are those functions that directly support the Australian operations including marketing, field HR support, Safety & Sustainability, Procurement and Property & Facilities teams. Capability investment in field safety and HR support teams and in marketing, has driven a $2.8 million increase in such costs in the year. pre-paid contract liabilities, the results of which are captured as non- operating profit and loss items. PRE-PAID % OF AT NEED FUNERALS PRE-PAID CONTRACT VOLUMES SOLD 13.9% 0.3% ppts on PCP 4,195 0.5% on PCP Continuing the trend from half year, pre-paid funds under management values have continued to grow over the second half with strong equity and property value returns resulting in a net $44.1 million accounting gain for the year compared with the COVID impacted net $16.6 million accounting loss recognised in the prior year. The current model of our pre-paid funeral business relies heavily on our team’s ability to speak directly to customers in locations such as aged care homes. With COVID lockdowns in the second half and the recent Omicron outbreak severely limiting our ability to have these conversations, we have seen pre-paid contract sales volumes hold relatively flat on the prior year and not keep pace with redemptions. This highlights the need to accelerate our strategic review of the business, including the role of digital in capturing further sales opportunities. InvoCare Annual Report 2021 32 Outlook The impact that COVID continues to have on our workforce, supply chain, operations, and client families is difficult to predict and presents an ongoing risk through 2022. Notwithstanding these short-term headwinds, the Group remains confident about the near and long-term potential of the business. Population and ageing trends in our markets support future growth, with mortality rates tracking back to long term trends in Australia and New Zealand after COVID-attributed reductions in the prior year; pet ownership is growing in Australia; and the foundational strategic initiatives achieved in the first year of our 5-year strategy have created positive momentum. InvoCare Annual Report 2021 33 Shareholder and other informationSigned reportsConsolidated financial statementsGovernance & Directors’ report6543Operating & financial review2Overview1Reconciliation of financial information InvoCare’s results are reported under Australian Accounting Standards. This report and associated market releases include certain non-IFRS measures including reference to Operating/Non-operating measures of profitability and associated performance measures that are used internally to assess the performance of the business. InvoCare considers Operating EBITDA and Operating profit after income tax as key performance measures. These measures are considered to provide more useful indications of the Group’s recurring earnings base. Accounting standards require net gains and losses from undelivered pre-paid contracts to be included in reported profit; these gains and losses are non-cash and do not impact on InvoCare’s core business operations. The table below presents a reconciliation of statutory results as disclosed in the consolidated statement of comprehensive income and operating results in Note 1 Operating segments. Revenue Expenses* EBITDA 2021 Non- operating results Operating results Restated 2020 Statutory results Operating results Non- operating results Statutory results $’000 $’000 $’000 $’000 $’000 $’000 527,096 5,357 532,453 476,249 1,403 477,652 (401,619) (5,860) (407,479) (373,684) (6,350) (380,034) 125,477 (503) 124,974 102,565 (4,947) 97,618 Depreciation and amortisation (47,759) (7) (47,766) (42,553) (12) (42,565) SaaS arrangements Business acquisition costs (654) (743) (4,594) (5,248) (750) (10,376) (11,126) - (743) (1,918) - (1,918) Net gain/(loss) on pre-paid contracts - 44,085 44,085 Net gain on lease modifications/terminations Asset sales gain Net impairment gain/(loss) on non-current assets 1,517 - - - 6,530 4,000 1,517 6,530 4,000 - - - - (16,618) (16,618) - - 7,383 7,383 (13,324) (13,324) EBIT Net finance costs 77,838 49,511 127,349 57,344 (37,894) 19,450 (15,262) (1,225) (16,487) (20,484) (3,386) (23,870) Income tax (expense)/benefit (17,320) (13,271) (30,591) (8,699) 1,744 (6,955) Non-controlling interests (113) - (113) (167) - (167) Net profit/(loss) after income tax attributable to equity holders of InvoCare Limited EPS (cents per share) OPEX to sales % EBITDA margin (%) EBIT margin (%) 45,143 35,015 80,158 27,994 (39,536) (11,542) 31.6 52% 24% 15% 24.5 56.1 52% 23% 24% 20.9 (29.5) 53% 22% 12% (8.6) 54% 20% 4% * SaaS arrangements is regrouped from expenses before EBITDA as a separate line item in the table above in Non-operating results. The table above summarises the key reconciling items between net profit after tax attributable to InvoCare’s equity holders and Operating EBITDA and EBIT. The Operating EBITDA and EBIT information included in the table above has not been subject to any specific audit or review procedures by the auditor but has been extracted from the accompanying financial report. As well as impairments, recognition of SaaS arrangement expensed as incurred, and gains or losses arising from disposals of assets, items included in the non-operating column also include the financial consequences of all activities related to the administration and financial impacts of the pre-paid funerals business. This has resulted in normalisation adjustments to revenue and operating expenses to reflect the exclusion of the financial impact of this business. The Directors also consider that the presentation of all activities related to the mark-to-market fair value movements in the independently controlled funds under management and pre-paid contract liabilities as non-operating in nature and therefore these are also excluded from Operating EBIT and Operating profit after income tax. This is considered to provide a better reflection of InvoCare’s core business performance and results. It also removes volatility from the reported profit and loss that arises from the fair value activities required by accounting standards on these pre-paid funerals related assets and liabilities. InvoCare Annual Report 2021 34 Section 3 Governance & Directors’ report InvoCare Annual Report 2021 35 Board of Directors Bart Vogel BCom (Hons), FCA, FAICD Independent Non-Executive Chairman Bart Vogel was appointed to the InvoCare Board of Directors on 1 October 2017, and as Chairman of the board from 1 October 2018. Bart’s career includes 20 years in the management consulting industry, as a partner with Deloitte Consulting, A.T. Kearney and Bain & Company, focused on the technology and services sectors. In his consulting roles, Bart has spent extensive time working in global markets with multinational corporates and government bodies. He also spent 13 years in senior executive roles at Asurion Australia, Spherion Limited and as the Asia Pacific leader of Lucent Technologies. Bart is a director of listed companies, Infomedia Ltd (ASX: IFM) (serves as chairman) and Macquarie Telecom Limited (ASX: MAQ). He is also a director of BAI Communications and of the Children’s Cancer Institute Australia and was a director of Salmat Limited (delisted on 3 September 2020). Olivier Chretien MEng, MBA, GAICD Managing Director and Chief Executive Officer Olivier Chretien was appointed as Managing Director and Chief Executive Officer effective from 1 January 2021 and to the InvoCare Board of Directors on 4 January 2021. Olivier was previously Group Chief Strategy Officer with Ramsay Health Care, where he was in charge of Group Strategy, M&A and Ventures, the Australian Pharmacy business, and a director of the European and Asian JV Boards. Prior to this, Olivier spent 12 years with Wesfarmers. His last role was managing director, Business Development for the Group, where he was also a director of the retail divisional Boards (Coles, Bunnings, Kmart, Officeworks). He was previously the managing director of the Wesfarmers Industrial & Safety division for 7 years, with more than 4,000 employees and 250 locations across Australia, New Zealand, China, Indonesia and the United Kingdom. Prior to Wesfarmers, he spent 9 years with Boston Consulting Group in France and Australia, consulting to clients in the pharmaceuticals and travel & tourism services industries. He started his career in engineering. Olivier holds an Executive MBA (AMP) from Harvard Business School (Boston USA), an MBA from INSEAD (France), and a Master of Engineering from Ecole Centrale de Paris (France). InvoCare Annual Report 2021 36 Kim Anderson BA, PGDip Independent Non-Executive Director Kim Anderson was appointed to the InvoCare Board of Directors on 11 May 2021. Kim is the Chair of the People, Culture & Remuneration Committee. Kim has more than 30 years of experience as a chief executive officer and senior executive in a range of media companies including Southern Star Entertainment, PBL and Ninemsn and Reading Room Inc (bookstr.com) of which she was chief executive officer and founder. Kim is a director of listed companies, Infomedia Ltd (ASX: IFM), carsales.com Limited (ASX: CAR), Marley Spoon (ASX: MMM). She is also the director of the Sax Institute, a national leader in promoting the use of research evidence in health policy. She is a former Fellow of the University of Sydney Senate. Kim was a director of WPP AUNZ Ltd until the completion of its takeover by WPP PLC in April 2021. Richard Davis BEc Independent Non-Executive Director Richard Davis was appointed to the InvoCare Board of Directors on 21 February 2012. Richard previously retired as InvoCare’s Chief Executive Officer and Managing Director on 31 December 2008 after 20 years with InvoCare. For the majority of that time, he held the position of Chief Executive Officer and successfully initiated and managed the growth of the business through a number of ownership changes and over 20 acquisitions, including Singapore Casket Company (Private) Limited, the Company’s first international acquisition. Richard is the chairman of listed companies, Australian Vintage Limited (ASX: AVG) and Monash IVF Group Limited (ASX: MVF). Richard is also serving as chairman of Singapore Casket Company (Private) Limited. Megan Quinn GAICD Independent Non-Executive Director Megan Quinn was appointed to the InvoCare Board of Directors on 1 October 2018. Megan is internationally regarded as a disruption, transformation, marketing, retail and business expert and is invited to speak and consult on service, innovation, creativity, strategy, building a global brand, business excellence and customer experience for companies, conferences and media outlets around the world. Named a global game changer and one of Australia’s most powerful women in retail, Megan was a co-founder of the world’s premier online luxury fashion retailer, NET-A-PORTER. She is focused on generating resonance, trust and sustainable growth. Megan is a director of listed companies, City Chic Collective Limited (ASX: CCX) and Reece Limited (ASX: REH). Having previously served on the board and national committee of UNICEF Australia, she is a keen advocate for the Rights of the Child and is a passionate ambassador of Fitted For Work. InvoCare Annual Report 2021 37 Shareholder and other informationSigned reportsConsolidated financial statementsOperating & financial review6542Governance & Directors’ reportOverview13Board of Directors continued Keith Skinner BCom, FCA, GAICD Independent Non-Executive Director Keith Skinner was appointed to the InvoCare Board of Directors on 1 September 2018. Keith is the Chair of Audit, Risk & Compliance Committee. Keith has a strong record in business management, restructuring, finance, accounting, risk and governance. He commenced his career as an auditor with Deloitte Australia in 1974, later moving to the firm’s Restructuring Services division, and was appointed a partner in 1986. He was a leading practitioner for company turnarounds for over a decade, before becoming chief operating officer of Deloitte Australia in 2001. Keith was also a member of the Deloitte Global Board from 2013 to 2015. Since retirement from Deloitte in 2015, Keith has been a director of a number of public and private organisations. Currently he is a director of Emeco Holdings Limited (ASX: EHL). He has been a board member for the North Sydney Local Health Board and the not for profit organisation Lysicrates Foundation. He has also been Independent Chair of the Audit and Risk Committee of the Australian Digital and Health Agency and has consulted to a number of organisations on strategy execution, restructuring and operational improvement. Kee Wong BEng (Hons), MBA, GradDipComp (Distinction), FAICD Independent Non-Executive Director Kee Wong was appointed to the InvoCare Board of Directors on 1 November 2021. Kee is an entrepreneur with a background and qualifications in Engineering, Information Technology and Business. He has started several businesses and was the founder and managing director of e-Centric Innovations, a management and technology consulting company that provides strategic advice and systems integration services in e-business and IT for large enterprises and government in Australia, New Zealand, the United States and South East Asia. Kee has made investments across a number of industries which include technology, services, retail, food and beverage, trading and property. Prior to his career as an entrepreneur Kee’s career included experience in IT and management consulting and he was a senior executive at IBM running part of its e-business group in the Asia Pacific region, including Australia and New Zealand. Kee is director of listed company, carsales.com Limited (ASX: CAR). He is director of the Australian Energy Market Operator, the Institute of Company Directors and Breakthrough Victoria Pty Ltd. Amongst previous board positions, he was chairman of the Australian Information Industry Association (AIIA), a deputy chairman of Asialink and a director of LaunchVic. Kee is Adjunct Professor of Engineering and IT at La Trobe University. He was awarded a Fellow of Monash University in 2010 and Distinguished Alumni in 2014. Company Secretary Heidi Aldred BEc, LLB Heidi Aldred was appointed as Company Secretary on 15 March 2019. Heidi, a qualified lawyer, has over 20 years experience in secretarial and general counsel roles in a wide variety of areas with both listed and unlisted companies. Her early career included working with legal firms Arnold Bloch Leibler and Allens Linklaters (formerly Arthur Robinson & Hedderwicks). InvoCare Annual Report 2021 38 Directors’ report Your Directors present their report, together with the consolidated financial report of InvoCare Limited (the Company) and its subsidiaries (together referred to as InvoCare or the Group) for the financial year ended 31 December 2021, along with the independent audit report. Company overview and principal activities InvoCare Limited (listed on the Australian Securities Exchange, ASX: IVC), head quartered in Sydney, is a leading provider of funeral services in Australia, New Zealand and Singapore, and operates private memorial parks and crematoria in Australia and New Zealand. It is also a leading provider of pet cremation services in Australia. Operating and financial review Details of operating and financial review, which can be found on pages 18 to 34 of this 2021 Annual Report, forms part of the Directors’ report for the financial year ended 31 December 2021. Directors The Directors of InvoCare Limited at any time during or since the end of the financial year are as follows. Directors were in office for the entire period unless otherwise stated: Name Bart Vogel Olivier Chretien Kim Anderson Richard Davis Megan Quinn Keith Skinner Kee Wong Role Chairman Date of appointment/resignation Managing Director and Chief Executive Officer Appointed 4 January 2021 Independent Non-Executive Director Appointed 11 May 2021 Independent Non-Executive Director Independent Non-Executive Director Independent Non-Executive Director Independent Non-Executive Director Appointed 1 November 2021 Former Directors retired/resigned during the financial year Martin Earp Jackie McArthur Robyn Stubbs Chief Executive Officer and Managing Director Resigned 4 January 2021 Independent Non-Executive Director Retired 28 May 2021 Independent Non-Executive Director Resigned 1 February 2021 InvoCare Annual Report 2021 39 Shareholder and other informationSigned reportsConsolidated financial statementsOperating & financial review6542Governance & Directors’ reportOverview13Directors’ report continued Directorship of other listed companies Directorship of other listed companies held by the Directors in the three years preceding the end of the financial year are as follows. Name Bart Vogel Olivier Chretien Kim Anderson Richard Davis Megan Quinn Keith Skinner Kee Wong Company Period of Directorship Macquarie Telecom Limited Infomedia Ltd Salmat Limited None carsales.com Limited Marley Spoon AG Infomedia Ltd WPP AUNZ Ltd Australian Vintage Ltd Monash IVF Group Limited City Chic Collective Limited Reece Limited Emeco Holdings Limited carsales.com Limited Since 2014 Since 2015 From May 2017 to November 2019 Since 2010 Since 2018 Since 2020 From November 2010 to April 2021 Since 2009 Since 2014 Since 2012 Since 2017 Since 2017 Since 2018 Particulars of the Directors’ qualifications and experience are set out under Board of Directors on pages 36 to 38. InvoCare Annual Report 2021 40 Meetings of Directors The number of meetings of the Company’s Board of Directors (the Board) and each Board committee held during the financial year ended 31 December 2021, and the number of meetings attended by each Director were as follows. Board Audit, Risk & Compliance Committeee People, Culture & Remuneration Committeee Nomination Committee Held Attended Held Attended Held Attended Held Attended Name Bart Vogel Olivier Chretiena Kim Andersona Richard Davis Megan Quinn Keith Skinner Kee Wonga 12 12 9 12 12 12 2 12 12 9 12 12 12 2 3 - - 1 3 4 1 Former Directors retired/resigned during the financial year b,c Jackie McArthurb 4 4 2 3 - - 1 2 4 1 2 5 - 3 4 5 - - - 5 - 3 4 5 - - - 1 - - 1 1 1 - 1 1 - - 1 1 1 - 1 a b c d e Olivier Chretien, Kim Anderson and Kee Wong appointed 4 January 2021, 11 May 2021 and 1 November 2021, respectively. The number of meetings they attended only contained those held when they are eligible to attend after the date of their appointment as a Director. Jackie McArthur retired effective 28 May 2021. The number of meetings she attended only contained those held when she was eligible to attend before the effective date of retirement. Martin Earp, the former Chief Executive Office and Managing Director resigned as Director on 4 January 2021. Robyn Stubbs resigned effective 1 February 2021. As there was no meeting held before their resignation date in 2021, they are not included in the above meetings of Directors table. Investment Committee ceased its operation from 31 March 2021. There was no meeting held from 1 January to 31 March 2021. Changes were made to committee memberships effective 1 November 2021. Therefore, the number of meetings the committee members attended only contained those held when they were eligible to attend. In addition to the formal meetings of Directors there were numerous informal meetings of the Non-Executive Directors during the year. Those meetings were concerned, for the most part, with succession planning, environmental, social and governance and customer strategy and site visits. The composition of the Board and Board Committees is a minimum of three Directors. Board Committees consist entirely of Independent Non-Executive Directors. Significant changes in the state of affairs The significant changes in the state of affairs during the financial year were as follows: On 11 August 2021, InvoCare announced a strategic investment and commercial partnership with a global market leader in digital memorisation, Memories Group Limited, to offer customer-focused online memorial products to InvoCare’s client families On 27 August 2021, InvoCare entered into binding documentation to amend and extend its Syndicated Debt Facility resulting in the repayment of $59,680,000 of the debt facilities Other than the matters as stated above, there were no other significant changes in the state of affairs of InvoCare during the financial year. InvoCare Annual Report 2021 41 Shareholder and other informationSigned reportsConsolidated financial statementsOperating & financial review6542Governance & Directors’ reportOverview13Directors’ report continued Dividends Non-audit services Details of dividends paid or determined by the Company during the Details of the amounts paid or payable to the auditor for non-audit financial year ended 31 December 2021 are set out in Note 4. services provided during the financial year by the auditor are outlined in Subsequent events Other than the Board determined a final dividend of 11.5 cents per share, fully franked, there have been no other matter or circumstance arising since 31 December 2021 that has significantly affected 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. InvoCare’s operations, results or state of affairs, or may do so in future The Directors are of the opinion that the services as disclosed in Note financial years. 27 to the financial statements do not compromise the external auditor’s independence requirements of the Corporations Act 2001 for the Indemnification and insurance of officers following reasons: To the extent permitted by law, InvoCare has indemnified the Directors and executives of InvoCare for liability, damages and expenses incurred, in their capacity as a Director or an executive, for which they may be held personally liable, except where there is a lack of good faith. During the financial year, InvoCare paid a premium in respect of an insurance policy to insure Directors and officers of the Company against a liability to the extent permitted by the Corporations Act 2001. The insurance policy specifically prohibits disclosure of the nature and liability covered and the amount of the premium paid. Environmental regulation and performance InvoCare is committed to the protection of the environment, the health and safety of its employees, customers and the general public, as well as compliance with all applicable environmental laws, rules and regulations in the jurisdictions in which InvoCare operates its business. The Group is subject to environmental regulation in respect of its operations, including some regulations covering the disposal of mortuary and pathological waste and the storage of hazardous materials. InvoCare has appropriate risk management systems in place at its locations. All non-audit services have been reviewed and approved to ensure that they do not impact the integrity and objectivity of the auditor; and 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 jointly sharing economic risks and rewards. 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 immediately after the Directors’ report. Rounding of amounts The Company is of a kind referred to in ASIC Corporations (Rounding in Financial/Directors’ Reports) Instrument 2016/191, issued by the Australian Securities and Investments Commission, relating to There have been no claims during the year and the Directors believe the “rounding off” of amounts in the Directors’ report and financial InvoCare has complied with all relevant environmental regulations and report. Amounts in the Directors’ report and financial report have holds all relevant licences. Corporate governance been rounded off to the nearest thousand dollars (where rounding is applicable) in accordance with that instrument. InvoCare and the Board of Directors are committed to achieving and demonstrating the highest standards of corporate governance. The This report is made in accordance with a resolution of Directors, Board adopts a continuance improvement approach and regularly pursuant to section 298(2)(a) of the Corporations Act 2001. reviews corporate governance and reporting practices. For 2021, InvoCare’s Corporate Governance Statement will be published at the time of publication of the 2021 Annual Report. On behalf of the Directors on 28 February 2022. The 2021 InvoCare Corporate Governance Statement is available on the InvoCare website at: www.invocare.com.au/investor-relations/corporate-governance Bart Vogel Chairman Sydney InvoCare Annual Report 2021 42 Deloitte Touche Tohmatsu ABN 74 490 121 060 Grosvenor Place 225 George Street Sydney, NSW, 2000 Australia Phone: +61 2 9322 7000 www.deloitte.com.au 28 February 2022 The Board of Directors InvoCare Limited Level 5, 40 Mount Street North Sydney NSW 2060 Dear Board Members AAuuddiittoorr’’ss IInnddeeppeennddeennccee DDeeccllaarraattiioonn ttoo IInnvvooCCaarree LLiimmiitteedd In accordance with section 307C of the Corporations Act 2001, I am pleased to provide the following declaration of independence to the directors of InvoCare Limited. As lead audit partner for the audit of the financial statements of InvoCare Limited for the year ended 31 December 2021, 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 Sandeep Chadha Partner Chartered Accountants Liability limited by a scheme approved under Professional Standards Legislation. Member of Deloitte Asia Pacific Limited and the Deloitte organisation. 43 InvoCare Annual Report 2021 43 Shareholder and other informationSigned reportsConsolidated financial statementsOperating & financial review6542Governance & Directors’ reportOverview13Risks and uncertainties Risk culture and risk management practices is a critical enabler to InvoCare’s sustainable, long term value creation and protection. Risk culture Underpinning our risk culture is the adoption of the ‘3 lines of accountability’ model. This model clearly articulates organisation-wide roles and responsibilities in relation to the management of risk. BUSINESS – 1st Line Business Operations Generate risk exposures and are accountable for: Identifying, assessing and managing risks on an ongoing basis; Our approach to risk management Our risk management approach continually evolves as we identify, assess, mitigate, and monitor both financial and non-financial risks that may impact our ability to achieve our strategic objectives. Our focus on risk management is anchored to ISO31000 principles to ensure robust foundations support our processes and procedures and in so doing this allows the Board to fulfil its governance responsibilities by making a balanced assessment of the operation of the risk management process. Risks are identified and assessed through workshops with senior leaders of the business on a cyclical basis and monitored constantly. Mitigating actions and controls are designed to limit the impact or likelihood of key risks occurring. Taking risks that fall within lnvoCare’s risk appetite; Risk appetite Risk appetite is the level of risk the Group is willing to take to achieve its strategic objectives and is set by the Board. Risk appetite is reviewed at least annually to ensure it reflects the risks the Board is willing to accept in pursuit of InvoCare’s strategic objectives. The Board looks at the Group’s appetite to risk across the following risk classes. Market/Strategic Business Disruption Financing Operations Regulatory Compliance Culture & Conduct Information Technology Fraud Sourcing Safety People Funds under Management Change Management Those risk classes that contain risks assessed as High or Extreme are included in the following tables. and Maintenance and operation of the internal controls framework to mitigate key risks. RISK & COMPLIANCE – 2nd Line Risk & Compliance Where relevant support the business in their risk management activities and are accountable for: Providing independent oversight, challenge and reporting on the adequacy and effectiveness of the way the business manages risk; and Setting policies related to their remit, monitoring application of policies and advising the business on risk mitigations BUSINESS ASSURANCE - 3rd Line Internal Audit Independent assurance function accountable for: Providing objective assurance over the effectiveness of internal control systems and risk management processes; The internal audit plan, which is driven from the risk management framework and aligned to auditable elements of lnvoCare’s principal risks InvoCare Annual Report 2021 44 Key risks The table below highlights the most significant key risks facing During 2021 we continued with our COVID health and safety protocols, InvoCare and their alignment to our five strategic pillars. Also included which allowed us to continue operating and ensured the safety of in the table below are the high-level mitigation activities we have in our people, client families, suppliers, and contractors. We have place. COVID has created unprecedented challenges for our businesses, further highlighting the importance of having an effective understanding of, and ability to respond quickly to, changing and emerging risks. Throughout the pandemic we have continued to provide our services, despite ever-changing operating environments. also observed some changes in client family behaviours during the pandemic, with digital playing a greater role in the funeral planning and service. Foot traffic through our parks has also been directly impacted by lockdowns. The reset strategic priorities we announced in May 2021 address these and other shifting dynamics in the market (both positive and negative). However, COVID remains a risk for InvoCare and we continue to In assessing which risks should be classified as key, we assess the respond to the emerging health and safety threats the pandemic probability of the risk materialising and the financial or strategic impact presents and the impact it may have on our execution of strategy. of the risk. Where risks link to the five strategic pillars, this is set out in the following table through reference to the following symbols: Customer led people empowered Operational excellence Stronger core growth New growth platforms Sustainable leadership Risk description Safety Risk management/mitigation Appointment of Executive General Manager Health, Safety & Sustainability role The risk of not adequately protecting the wellbeing to the Executive Leadership Team and safety of our staff, customers, vendors and ‘Safety’ added to the InvoCare CARES values to elevate prominence and visitors. importance Increased COVID related health and safety risks Risk-based safety programmes; workplace inspections result in additional steps to keep our staff, visitors, and client families safe, and the increased costs Safety metrics reported monthly by business of operating, including rise in absenteeism from COVID-19 Taskforce in place requirements to isolate and/or recovery from illness. Implementation of real-time safety incidents and reporting platform People Ongoing implementation of leadership development strategies, including The risk of having impactful talent gaps through ‘Evolve’ and ‘Aspire’ programs insufficient and/or ineffective recruitment, training Appointment of business unit dedicated talent acquisition business partners and retention programs and practices. Resulting in resourcing gaps, and/or capability gaps, which negatively impact the businesses ability to operate External review of talent acquisition operating model to ensure current and future state readiness and protect vital industry knowledge and intellectual Bi-annual talent management and succession planning for key executive roles property. and/or critical roles Appropriate incentives and career development opportunities Development of Employment brand and Employee Value Proposition Business continuity Infectious disease procedure in place The risk that a pandemic/epidemic impacts Disaster recovery plan (DRP) in place to manage IT risks InvoCare’s strategic objectives or ability to deliver the full breadth of its services (including spike in deaths to Business Continuity plans routinely refined and amended unserviceable levels, impacts to workforce, mortuary Establishment of a COVID-19 Taskforce capacity, inability to work in certain locations, health and wellbeing of our staff, inability to travel, government-imposed restrictions on funeral service attendance, social distancing and isolation rules). Investment in remote working and deployment of enhanced AV streaming capabilities InvoCare Annual Report 2021 45 Shareholder and other informationSigned reportsConsolidated financial statementsOperating & financial review6542Governance & Directors’ reportOverview13 Risks and uncertainties continued Risk description Risk management/mitigation Information technology IT strategy in place including IT Architecture Roadmap The risk that cyber-attack or IT system failure causes Significant step up in IT security & risk including fit-for-purpose security operational disruption, personal and sensitive data capability, controls, processes and technology and enhanced capability and loss, financial loss and reputation damage. resources Investment in PC refresh program Independent cyber maturity assessment review conducted, and prioritised actions identified Cyber insurance policy Specific training to improve internal understanding and communication of cyber risks Proactive monitoring for breaches Regulatory compliance Appointment of Executive General Manager Stakeholder Management role to The risk that changes in regulation impact InvoCare’s the Executive Leadership Team economics (including increased compliance costs, Consumer Act training for employees price pressure). Group Legal & Compliance team in place, who oversee business compliance The risk that regulatory compliance obligations are not known, recorded or monitored which could result in financial penalties/fines, reputation damage or Where appropriate, specialist external legal advisers engaged to support Continued investment in the management of compliance, including digital business disruption. Financial solutions and an ERM system Short, medium and long term tenor financing in place The risk that InvoCare cannot meet its financial Syndicated lender group providing diversity obligations and the risk that capital/funding constraints impact the ability to capitalise on opportunities. Maintain strong relationships with banking partners and investors Monthly reporting of financial metrics to the Board and Executive Leadership Team Business unit performance reviews and monitoring against budget and forecasts Monitoring of debt covenants and monthly cashflow statements and weekly cash forecasts Market, strategic & competition Routine market analysis of consumer preferences and competitor activity and The risk of market disruption by existing or new environment competitor impacting market share, case average, Diverse brand portfolio resource migration and increase labour costs. The risk that InvoCare responds at a slower pace to changing customer preferences/needs, and/or technology advancements than our competitors impacting case averages and market share. Robust balance sheet and financial capacity to respond to challenges Establishment of an innovation hub Robust annual strategic planning process Operational Adopting a national, centralised approach to the storage of historical unclaimed The risk of unauthorised access to the deceased or and long term cremated remains cremated remains. Appointment of National Accreditation Manager - Funerals The risk that cremated remains, deceased valuables National Funeral Home Accreditation Program that encompasses deceased or pre-paid paper records are destroyed or lost. identification and receipting of client valuables The risk that customer complaints are not addressed Activation of paper records digitisation strategy adequately. Relaunch of the customer feedback platform with improved functionality including severity ratings and escalation Customer Feedback training developed and rolled out (annually) to front line team members InvoCare Annual Report 2021 46 Market disruption by emerging risks InvoCare continues to monitor for emerging risks through our risk management processes and procedures. The key areas where additional risk is appearing, all of which are extensions of risks already identified in our risk taxonomy, are as follows: Risk description Risk management/mitigation Proposed Interment Industry Scheme Appointment of Executive General Manager Stakeholder Management role to Cemeteries and Crematoria NSW (CCNSW) have Executive Leadership Team proposed to regulate the operations of funeral Proactive engagement with CCNSW and InvoCare has issued a formal services providers in the State of NSW by way of an submission to the draft regulation Interment Industry Scheme. Concerns have been raised as to the unintended Members of InvoCare’s senior management are members of the CCNSW Industry Consultation Group (ICG). All proposed changes are tabled with consequences of the scheme, including a the ICG to ensure industry feedback is addressed before implementation/ prospective approach to addressing perpetual care legislation eventuates obligations, and the potential negative impact on consumers. Climate change Like all businesses, InvoCare faces climate change risks. We have committed to identifying, assessing and formalising plans to address a pathway forward and these are outlined in our 2021 Sustainability Report. Appointment of Executive General Manager Health, Safety & Sustainability role to Executive Leadership Team Sustainability Materiality Assessment review undertaken Developed a Sustainability Strategy utilising the three themes – People, Place, Planet InvoCare Annual Report 2021 47 Shareholder and other informationSigned reportsConsolidated financial statementsOperating & financial review6542Governance & Directors’ reportOverview13 Remuneration report – audited Message from the Chair of the People, Culture & Remuneration Committee On behalf of the Board, I am pleased to present the Remuneration Report for FY21. People and culture highlights Throughout the pandemic, our vision and values have guided our FY21 has been a year of transition, with the appointment of our new decision making and actions. The Company has taken a holistic CEO Olivier Chretien, creating opportunity for change. The passion, approach to talent attraction and retention with core improvements to dedication and resilience of our people responding to the ongoing our employee value proposition. This has included: impacts of COVID is greatly appreciated. They have continued to maintain a clear focus on supporting our client families, employees and communities in a challenging environment. The People, Culture & Remuneration (PCR) Committee has oversight of InvoCare’s people strategy, culture and key human resources practices. InvoCare’s remuneration framework is an Supporting our people through COVID with wellbeing initiatives Commencing a review in FY22 of key talent retention and attraction practices, including the use of equity plans, and employee benefits and recognition programs, to remain competitive and increase our attractiveness as an employer integral component of our people strategy and values. This report Launching our new Frontline Management development program highlights the link between remuneration and corporate performance (Evolve) to strengthen our frontline managers capabilities to and provides detailed information on the remuneration for Key support the execution of our strategic business priorities, and offer Management Personnel (KMP). our people career pathways, retaining industry expertise Executive remuneration framework review During FY21, the Board reviewed the appropriateness of the remuneration framework and incentive structures and identified opportunities to simplify and better align them with the Group’s new 5-year strategy. Core elements of the current remuneration framework and incentive structures for FY21 and FY22 remain the same as previous years. In order to better align with the 5-year strategy, the Board approved several amendments to the Long Term Incentive (LTI) plan design. This included moving from measuring return on invested capital (ROIC) to Conducting an externally benchmarked annual employee engagement survey to seek feedback and identify areas for improvement. The importance of engaging our people and developing the talent required to deliver on our strategic priorities is reflected in an employee engagement measure being included as part of our key performance indicators (KPIs) in FY22 Introducing a paid parental leave policy to retain our talent and improve return from parental leave Creating a safer working environment and investing in improvements in our workplace practices, to reduce injuries to our people return on capital employed (ROCE) which is a more relevant operating More detail on our people strategy and its support of the Group’s measure. That portion of the equity grant awarded in the form of options, was removed and replaced with performance rights, to performance can be found in InvoCare’s Sustainability Report. simplify the plan. The 12-month holding period (additional to and post the three-year vesting period) was also removed. It was considered Looking ahead that the clawback policy outlined in the LTI plan rules is sufficient to The Board will continue to review and make improvements to the allow recovery of any vested equity in relevant circumstances. remuneration framework to ensure executive remuneration outcomes The Short Term Incentive (STI) plan has also been amended to create are aligned and balanced with the strategy and shareholder outcomes. better alignment with comparable market practices for ASX listed We welcome your feedback on our FY21 Remuneration Report. companies, with the 12-month deferral quantum being decreased from 50% to 25%.The minimum threshold of $150,000 has been maintained and the minimum deferral amount has been set at $12,500. In assessing the results for FY21 STI outcomes, the Board did not make any adjustments, that is, no negative or positive discretion was applied. Kim Anderson Chair of the People, Culture & Remuneration Committee ,, We appreciate the exceptional effort made by our employees during a very difficult year. Their response embodies InvoCare’s values, purpose and the client families and communities we serve. ,, InvoCare Annual Report 2021 48 Contents 1 Key Management Personnel 2 Remuneration framework 3 Executive KMP remuneration 4 Non-Executive Director remuneration 5 Additional information 49 50 56 65 67 1 Key Management Personnel Changes to KMP The Key Management Personnel (KMP) are those persons who have the authority and responsibility for planning, directing and controlling the activities of the Group or a major operation within the Group as shown in the tables below. Independent Non-Executive Directors (NED) Name Role Date of appointment During FY21, InvoCare had the following KMP changes: Olivier Chretien - appointed to the position of Chief Executive Officer effective 1 January 2021 and Managing Director effective 4 January 2021 Martin Earp – resigned as Managing Director effective 4 January 2021 and ceased as an Executive KMP effective 31 December 2020 (as disclosed in the 2020 Remuneration Report) Bart Vogel Chairman of the Board 1 October 2017 Robyn Stubbs – resigned as Non-Executive Director Kim Anderson Non-Executive Director 11 May 2021 effective 1 February 2021 Kim Anderson – appointed as new Non-Executive Director Richard Davis Non-Executive Director 21 February 2012 effective 11 May 2021 Megan Quinn Non-Executive Director 1 October 2018 Jackie McArthur – retired as Non-Executive Director effective 28 May 2021 Keith Skinner Non-Executive Director 1 September 2018 Kee Wong – appointed as new Non-Executive Director effective 1 November 2021 Kee Wong Non-Executive Director 1 November 2021 Executive Key Management Personnel (Executive KMP) Name Role Date of appointment Olivier Chretien Chief Executive Officer (CEO) 1 January 2021 Adrian Gratwicke Chief Financial Officer (CFO) 3 August 2020 The Board has determined that Executive KMP are those listed in the above table, as they have responsibility for planning, directing and controlling a substantial part of the operations of InvoCare, as reflected in InvoCare’s Delegation of Authority Policy. InvoCare Annual Report 2021 49 Shareholder and other informationSigned reportsConsolidated financial statementsOperating & financial review6542Governance & Directors’ reportOverview13Remuneration report – audited continued 2 Remuneration framework I Remuneration principles aligned to our strategic priorities The remuneration framework is designed to support InvoCare’s strategic priorities. A clear set of principles that guide the remuneration design and outcomes with delivery of the Group’s strategy, rewarding long term sustainable success aligned with shareholders’ interest, and encouraging behaviours reflective of InvoCare’s values. a Strategic priorities Purpose Honouring life, celebrating memories for generations. Vision To be entrusted with all lives, as a respected pillar of the communities and a leader in the field Strategy Customer led; people empowered Operational excellence Stronger core growth New growth platforms Sustainable leadership b Remuneration principles Balance short-term Measure Rewards the Fair and market Rewards aligned and long-term performance at a achievement of competitive to with the consistent performance to level aligned with short-term and attract, retain and demonstration drive value creation driving accountability long-term goals motivate talent and promotion of Simple and transparent and sustainable for the delivery of outcomes business objectives aligned with sustainable shareholder outcomes II Executive remuneration structure InvoCare’s values InvoCare’s executive remuneration framework and the operation of each element, as it applies to the Executive KMP, is detailed below. CEO – Target pay mix CFO - Target pay mix 29% 6% 42% Fixed remuneration Share based remuneration STI – Restricted shares STI – Cash 29% 5% 42% Fixed remuneration Share based remuneration STI – Restricted shares STI – Cash 23% 24% InvoCare Annual Report 2021 50 Total fixed remuneration (TFR) TFR is guaranteed base salary inclusive of superannuation and any other salary sacrificed benefits including fringe benefits tax if applicable e.g. motor vehicle. TFR is targeted at the median of the market for expected performance with the opportunity to earn above median TFR remuneration for exceptional performance. TFR is benchmarked to be competitive to attract and retain experienced individuals to drive InvoCare’s strategy. Changes to TFR are linked to a combination of rewarding high performance, and the capacity to pay. Short term incentive (STI) STI is awarded for achievement of pre-determined financial and non-financial objectives. This variable element of remuneration constitutes part of a market competitive total remuneration package and aims to provide an incentive to deliver on annual business plans that will lead to sustainable returns for shareholders. The STI plan has been developed to reinforce InvoCare’s values and behaviours, while supporting a commercial mindset and alignment to business objectives. STI The STI is measured over a one-year performance period and paid in cash with a potential portion subject to deferral paid in the form of restricted shares (held in trust for 12 months). The STI deferral component aids in KMP retention and aligns with market best practice. The target STI award offered in 2021 was 70% of TFR for the CEO and the CFO. The Board approved amendments to the 2021 STI plan deferral component to ensure alignment with comparable market capped sized companies. The STI deferral quantum applies to outcomes that are greater than $150,000 with a minimum deferral of $12,500. The deferral amount has been decreased from 50% to 25%. Performance period The Group’s financial year is from 1 January to 31 December. Award opportunity In 2021 the target STI as a percentage of TFR was 70% for the CEO and CFO. STI outcomes are directly linked to both individual and Group performance against KPIs. The Board has focused the Executive KMP on the following performance measures: Key performance indicators (KPIs) Financial performance Customers People Safety Personal project objective Relationship between performance scales and outcome For further details of 2021 STI outcome refer to Section V below. Performance scales Below threshold Between threshold and target: STI outcome 0% paid 0% (EBITDA) - 50% (other KPIs) earned on achievement of threshold increasing on a straight-line basis to 100% For the Group EBITDA, threshold is 90% of target for target level performance Target 100% paid Maximum – for financial components only a straight-line basis to 150% earned on achievement of 100% earned at target level performance, increasing on maximum level performance. Over achievement of KPIs An over achievement payment is available on the financial KPIs of the STI and is capped at 150%. Is there a gate to over achievement? Are non-financial components capped? Access to over achievement for all financial components is dependent on the Group achieving the EBITDA target. Non-financial components are capped at 100% payment. What are the plan features of the deferral? 25% of any STI award that exceeds $150,000 will be deferred (subject to a minimum deferral of $12,500) and will be paid in the form of restricted shares. The shares will be held in trust for 12 months. InvoCare Annual Report 2021 51 Shareholder and other informationSigned reportsConsolidated financial statementsOperating & financial review6542Governance & Directors’ reportOverview13Remuneration report – audited continued Short term incentive (STI) There is a one-year deferral period from grant. STI deferral The number of shares to be granted will be calculated by dividing the deferred STI amount by the volume weighted average price (VWAP) transacted for the first 10 days of the trading window immediately after the announcement of InvoCare’s ASX annual financial results for the STI performance year. Cash STI is payable in the first quarter of each year after the announcement of InvoCare’s ASX annual financial STI payment results for the previous year ended 31 December. For deferred STI, restricted shares will be allocated in the first trading window following the release of the financial results of each year after the VWAP price is determined as described in STI deferral item above. All financial performance data relating to the plan is subject to external audit. Potential participants may be disqualified from all or part of the plan if their annual performance is determined to be below the “on track” rating category in the performance management practices. Should a dispute arise regarding a Disqualification provisions potential disqualification, eligibility will be at the discretion of the CEO, or the Board for the CEO. InvoCare reserves the right to suspend or alter STI payments to any participant due to any action which has caused the Group loss or reputational damage. This includes any deferral STI (in the form of restricted shares) in the event of fraud, malfeasance, dismissal for cause, or other misconduct. Board discretion Leadership Team (ELT). The guiding principle will be to ensure fairness in assessing STI outcome and alignment Board discretion (either negative or positive) may be applied to STI outcomes for the Executive KMP and Executive with shareholder interests. Cessation of employment the Company for any reason other than cause, the Board may consider the executive a ‘good leaver’ and use its In the event of cessation of employment due to resignation or dismissal for cause, all entitlements in relation to the performance period, and any deferral, are forfeited. Where an Executive KMP’s employment is terminated by discretion to pay all or part of the award. A good leaver will generally be determined by the Board (or its delegate) at the time of cessation of employment having regard to the circumstances at that time. Long term incentive (LTI) InvoCare’s remuneration structure aims to align long term incentives for Executive KMPs and other senior executives with outcomes for shareholders to ensure participants are rewarded in line with economic value created. LTI awards are currently granted in the form of performance rights. Executive KMP participated in the 2020 and/or 2021 grants of the LTI plan. The following graphic provides a detailed timeline of the 2021 LTI grant throughout its vesting lifecycle. Further details comparing the features of 2021 and 2020 and prior terms and conditions of the LTI plan are provided in the table below. FY20 initial performance period Grant of performance rights March 2021 Baseline Performance period Vesting and exercisable March 2024 FY20 FY21 FY22 FY23 FY24 Jan Dec Jan Dec Jan Dec Jan Dec Jan Dec Purpose of the LTI plan Participation The LTI Plan aims to attract, retain and reward high performing executives who contribute to the overall medium and long term success of InvoCare. Participation is limited to Executive KMP and selected senior management positions by invitation and as approved by the Board. Size of LTI award grant The 2021 LTI target opportunity was 70% of TFR for the Executive KMP. Grant calculation transacted for the first 10 days of the trading window immediately after the announcement of InvoCare’s ASX The number of performance rights granted will be calculated by dividing the LTI dollar value by the VWAP annual financial results for the LTI initial performance year (baseline). InvoCare Annual Report 2021 52 Long term incentive (LTI) 2020 2021 Participants were able to choose a mix of options and To simplify the LTI plan design, only performance rights performance rights but were limited to the following were granted. Plan features combinations: 100% of either options or performance rights 50% each of options and performance rights 25% of one, and 75% of the other The performance hurdles for the 2020 LTI plan were: The performance hurdles for the 2021 LTI plan were: Continued employment condition Continued employment condition Two financial performance hurdles: Two financial performance hurdles: 50% weighting on compound annual growth rate Performance hurdles (CAGR) in normalised EPS 50% weighting on average ROIC 50% weighting on CAGR in normalised EPS 50% weighting on an average ROCE Detailed definitions of CAGR, EPS and ROCE can be EPS is calculated based on the operating EPS found in the glossary (pages 144 and 145). adjusted to reflect constant currency. ROIC in each year is calculated based on operating EBIT divided by the average invested capital. The LTI plan was subject to a 12 month restriction The 12 month LTI plan restriction period after the three period after the three year vesting period. year vesting period was removed. Restriction period Changes to the LTI Plan Performance and vesting periods Performance conditions Why were these measures chosen? The Board believes that the conditions pertaining to malus and clawback policies within the LTI plan rules are sufficient to allow the Board to recover any vested or unvested performance rights in certain circumstances. Performance is measured over three years. Performance is measured over three years. Vesting of the options and performance rights are Vesting of performance rights are tested at the end of this tested at the end of this three-year period, subject to a three-year period. There is no restriction period. further 12 months restriction period. It also permits for malus in the event of governance It also permits for malus in the event of governance concerns and Board discretion to be applied concerns and Board discretion to be applied if performance is impacted by events outside if performance is impacted by events outside management’s control. management’s control. 50% on EPS 6% to 10% CAGR in EPS results in 30% to 100% 50% on EPS 10% to 15% CAGR in EPS results in 30% to 100% of of LTI vesting in straight line LTI vesting in straight line 50% on ROIC 10% to 12% average ROIC over the three year period results in 30% to 100% of LTI vesting in 50% on ROCE 10% to 12% average ROCE over the three year period results in 30% to 100% of LTI vesting in straight line straight line CAGR of normalised EPS was selected as the most CAGR of normalised 2020 EPS. ROCE was selected in line with the new 5 year strategic plan as it is a more relevant measure of effective capital deployment at the enterprise level. suitable and reliable measure of organisational performance, based on independent advice and analysis by the Board. The reasons for this conclusion include: InvoCare is a unique and relatively stable business EPS growth is aligned with InvoCare’s strategic objectives and is intended to underwrite appropriate dividend returns to shareholders ROIC was selected as the second performance measure as it is intended to ensure effective capital deployment InvoCare Annual Report 2021 53 Shareholder and other informationSigned reportsConsolidated financial statementsOperating & financial review6542Governance & Directors’ reportOverview13Remuneration report – audited continued Long term incentive (LTI) Dividends or voting rights period. The number of additional rights granted are calculated by the number of performance rights times the There are no voting rights attached to the performance rights awarded. In accordance with the plan rules, performance rights are entitled to dividends, if determined by the InvoCare Board, during the performance Cessation of employment dividend paid per share divided by the dividend reinvestment plan VWAP price. These additional rights granted – dividend entitlement will only be payable as additional shares on date of vesting of the original grant. For LTI to vest, the executive must be employed at the date of vesting unless determined to be a good leaver. If the Board determines that an executive is a good leaver, and providing the participant has been in continuous employment with InvoCare for at least three years, the Board may at its discretion allow unvested LTI grants to continue to remain on foot and vest subject to the original terms and performance conditions attached to the relevant grants, regardless of whether the participant remains employed by InvoCare at the relevant vesting time. Otherwise all unvested LTI equity held by the participant will lapse upon termination of employment. The Board has the discretion to determine that any LTI benefit payable in the above termination circumstances can be settled in cash. Change in control appropriate for the unvested LTI to continue on foot, the Board has the discretion to determine the extent to In the event of a change in control or other circumstances where the Board determines it is not practical or which all or part of any unvested LTI may vest and the specific performance tests to be applied. Payments or vesting related to performance conditions associated with an LTI are subject to a clawback policy. The Group will seek to clawback all or part of an executive’s incentives that have already been paid to ensure the executive has not been inappropriately rewarded in circumstances including: Clawback policy A material misstatement or omission in the Group’s financial statements Actions or inactions seriously damaging the Group’s reputation or putting the Group at significant risk and/or A material abnormal occurrence resulting in an unintended increase in the award Board discretion (either negative or positive) may be applied to LTI outcomes for the Executive KMP and ELT. The guiding principle will be to ensure fairness in assessing LTI vesting outcome and alignment with shareholder Board discretion interests. Any Board discretion applied will be disclosed at the latest when vesting occurs. In accordance with InvoCare’s Share Trading Policy, senior managers are prohibited from trading in the Company’s shares other than during specified trading windows, or with approval in exceptional circumstances, InvoCare Share Trading Policy provided they do not possess inside information. In addition, senior managers are not permitted to enter into transactions with their shareholding in the Company which operate to limit the economic risk of their shareholding (e.g. margin loans, hedging or cap and collar arrangements), including limiting the economic risk of holdings of unvested entitlements associated with LTI securities. InvoCare Annual Report 2021 54 III. Remuneration governance framework Board of Directors Ensuring the Group’s remuneration framework is aligned with the Group’s purpose, core values, strategic objectives and risk appetite. Approving Non-Executive Directors and People, Culture & Remuneration Committee Approving the Group’s overall remuneration policy and process. Reporting to the Board on corporate culture within the Group and making Executive KMP remuneration. recommendations to the Board regarding Management Implementing of remuneration policies and practices. Providing information relevant to remuneration decisions to assist the PCR Committee to review and make recommendations to the Board with Monitoring Executive KMP and the ELT performance and implementation of the Group’s objectives against measurable and qualitative indicators. Ensuring a succession and leadership and development plans are in place for the ELT. Ensuring the culture of the Company reflects the values and purpose of the Company as outlined in the strategic plan and vision for the Company. corporate governance policies to support respect to remuneration arrangements. Providing information to the PCR Committee in relation to the design and implementation of the remuneration strategy and structure. Ensuring that diversity and equality are reflected in the remuneration of all employees. a strong corporate culture. Reviewing and recommending to the Board arrangements for the Executive KMP and the ELT in relation to their terms of employment, remuneration and incentives (including performance targets). Reviewing and recommending to the Board the remuneration arrangements for the Chair and Non-Executive Directors of the Board. The PCR Committee Charter is available on InvoCare’s website. Independent remuneration advisors From time to time, the PCR Committee engages external remuneration consultants to provide independent benchmarking data and information on best practice and community expectations. During 2021, the PCR Committee commissioned an external consultancy group to assist in the review of InvoCare’s remuneration practices. No remuneration recommendations as defined by the Corporations Act 2001 were provided by the external consultancy group. InvoCare Annual Report 2021 55 Shareholder and other informationSigned reportsConsolidated financial statementsOperating & financial review6542Governance & Directors’ reportOverview13Remuneration report – audited continued 3 Executive KMP remuneration The table below provides a snapshot of the remuneration outcomes for the Executive KMP for FY21. TFR STI outcome LTI outcome There was no KMP increase effective 1 January The average STI outcome for the 2021 year The current Executive KMP did not participate in 2021. for Executive KMP was 93% based on their LTI grants that were tested in FY21. The CFO received a 7.4% increase to TFR balanced scorecard. effective 1 July 2021. For further details of 2021 STI outcome, refer to Section V. I InvoCare’s performance and remuneration outcomes a Group financial performance One of the key principles of the Company’s remuneration framework is to align Executive KMP remuneration outcomes with Company performance. This section provides a summary of the Company’s five year financial performance outcomes and the link to remuneration outcomes over this period. Remuneration performance measures NPAT $m 105 NPAT & EPS trends 90 75 60 45 30 15 0 FY20 EPS ¢ 105 90 75 60 45 30 15 0 175 150 125 100 75 50 25 0 Operating profit trends ($m) 144.4 124.3 119.0 63.5 49.5 59.2 125.5 102.6 45.1 28.0 FY17 FY18 FY19 FY21 FY17 FY18 FY19 FY20 FY21 Reported NPAT $m Basic EPS ¢ Operating EPS ¢ Operating NPAT Operating EBIT Operating EBITDA Footnotes to the graphs above a The Group has changed its accounting policy for software-as-a-service arrangements (SaaS arrangements). Refer to Note 12 for further details. b Operating EBIT was a financial performance indicator only reported from 2018 onwards, no comparative was provided for 2017 in the graph above. Other performance metrics DPS ¢ Ordinary dividend (full year) Ratio % Share price at 31 December ($) 50 40 30 20 10 0 46.0 41.0 37.0 90 80 70 60 50 20 15 10 5 0 21.0 12.5 16.1 13.2 11.5 11.8 10.3 FY17 FY18 FY19 FY20 FY21 FY17 FY18 FY19 FY20 FY21 Dividend per share ¢ Dividend payout ratio % Price per share $ InvoCare Annual Report 2021 56 Five year incentive outcomes Payout % of STI to CEO Average payout % of STI to other Executive KMP LTI vesting outcome (% of maximum) 2021 93% 93% N/A* 2020 27% 27% 66% 2019 62% 57% - 2018 32% 35% 33% 2017 69% 67% 33% * During FY21, there was no LTI held by the current Executive KMP that was due for a vesting test. b 2021 STI outcome The table below sets out the targets and outcomes for the Executive KMP for the financial year. It should be noted that outcomes were directly and indirectly impacted by the COVID. For details of achievements and dollar value of STI awarded for FY21, refer to Section V. Key performance indicators 2021 performance targets Weight 2021 performance outcome Group EBITDA Financial Group case volume Customer People Safety Personal Personal financial objective Net promoter score (NPS) Employee turnover < 12-month tenure Lost time injury frequency rate (LTIFR) Workplace inspections Project objective 30% 10% 10% 10% 10% 15% 5% 10% Target was partially met Target was met Target was met Target was met Target was partially met Target was met Target was partially met Target was met c 2021 LTI outcome The current Executive KMP did not participate in LTI grants that were tested in FY21. InvoCare Annual Report 2021 57 Shareholder and other informationSigned reportsConsolidated financial statementsOperating & financial review6542Governance & Directors’ reportOverview13Remuneration report – audited continued II CEO 2021 remuneration details The remuneration of the CEO places a considerable portion of his remuneration at risk to align with both the Group’s performance and shareholder outcomes. The maximum, at target and actual remuneration outcomes for the CEO for the full year are summarised in the graph below. Maximum remuneration represents total potential remuneration of TFR, STI and LTI. For STI, the amount includes the 150% achievement for financial targets as prescribed by the STI performance targets conditions. Target remuneration represents total potential remuneration including TFR, STI (achieved at 100% for both financial and non-financial targets reflecting both cash and restricted shares components) and LTI awarded at 100% in accordance with performance and employment conditions). 2021 CEO maximum, target and actual take home Maximum Target Actual take home 38.8% 26.9% 7.1% 27.2% $2,639,375 41.6% 23.4% 5.8% 29.2% $2,460,000 65.7% 34.3% $1,566,780 $ 0 300,000 600,000 900,000 1,200,000 1,500,000 1,800,000 2,100,000 2,400,000 2,700,000 Fixed remuneration STI – Cash STI – Restricted shares Share-based payments 2021 CEO remuneration breakdown TFR STI LTI TFR of $1,025,000 per annum. No increase to TFR in FY21. Target STI of $717,500 (70% of TFR). The STI was based on the following performance measures: Financials Customer People Safety Personal project objective For further detail on STI outcomes refer to Section V below. Target LTI of $717,500 (70% of TFR). Sign-on incentive $400,000 in the form of 34,782 share rights granted under the InvoCare Employee Share Plan (ESP), subject to a continuous employment condition of two years (vesting on 1 January 2023). InvoCare Annual Report 2021 58 III CFO 2021 remuneration details The remuneration of the CFO places a considerable portion of his remuneration at risk to align with both the Group’s performance and shareholder outcomes. The maximum, at target and actual remuneration outcomes for the CFO for the full year are summarised in the graph below. Maximum remuneration represents total potential remuneration of TFR, STI and LTI. For STI, the amount includes the 150% achievement for financial targets as prescribed by the STI performance targets conditions. Target remuneration represents total potential remuneration including TFR, STI (achieved at 100% for both financial and non-financial targets reflecting both cash and restricted shares components) and LTI awarded at 100% in accordance with performance and employment conditions) 2021 CFO maximum, target and actual take home Maximum 38.7% 28.4% 6.7% 26.2% $1,806,875 Target 41.7% 24.9% 5.3% 28.1% $1,680,000 Actual take home 58.4% 32.3% 9.3% $1,213,602 $ 0 300,000 600,000 900,000 1,200,000 1,500,000 1,800,000 2,100,000 Fixed remuneration STI – Cash STI – Restricted shares Share-based payments 2021 CFO remuneration breakdown TFR STI LTI TFR of $725,000 per annum at 31 December 2021. The CFO received a 7.4% increase to TFR effective 1 July 2021. Target STI of $507,500 (70% of TFR at 31 December 2021). The STI was based on the following performance measures: Financials Customer People Safety Personal project objective For further detail on STI outcomes refer to Section V below. Target LTI of $472,500 (70% of TFR at 1 January 2021 and does not reflect the TFR increase effective 1 July 2021). InvoCare Annual Report 2021 59 Shareholder and other informationSigned reportsConsolidated financial statementsOperating & financial review6542Governance & Directors’ reportOverview13Remuneration report – audited continued IV Actual reported remuneration outcomes – Executive KMP This section provides details of the cash and value of other benefits received by Executive KMP. This is a voluntary disclosure to provide shareholders with increased clarity and transparency in relation to Executive KMP remuneration. Actual remuneration in the table below represents the pre-tax amounts received by each Executive KMP in 2021 and 2020. This consists of cash salary, non-monetary benefits, STI paid in cash and vested share-based payments exercised or exercisable. Refer to table notes below for further details on how these amounts were determined. In assessing the financial results for 2021 STI outcomes, the Board did not make any adjustments, that is, neither negative nor positive discretion was applied. Executive KMP remuneration details – actual pre-tax received Short-term employee benefits Post-employment benefits Long-term benefits Cash salary1 Short term incentive- cash2 Non- monetary benefits1 Super- annuation1 Termina- tion payments Long service leave accruals Olivier Chretien Appointed 1 January 2021 $ $ $ $ 2021 1,000,000 537,795 3,985 25,000 Adrian Gratwicke 2021 680,353 391,367 3,985 24,597 Appointed 3 August 2020 Table notes: 2020 272,211 63,652 1,949 10,847 $ - - - $ - - - Share- based payments Share- based payments vested3,4 $ Total $ - 1,566,780 113,300 1,213,602 - 348,659 1 2 Cash salary, non-monetary benefits and superannuation represents actual amounts received during the financial year. Cash salary excludes the movement of annual leave accruals. STI awarded based on 2021 and 2020 achievement of performance targets and payable in cash (FY20) or a mix of cash and restricted shares (FY21). For FY21, 25% of the STI awarded that exceeds $150,000 is subject to deferral and has been paid in the form of restricted shares. The shares will be held in trust for 12 months. The 2021 deferred STI will be granted in the next financial year, so no value was included in the total actual remuneration received in the table above. 3 For the financial year ended 31 December 2021, no LTI grants for current Executive KMP were eligible for testing. 4 Adrian Gratwicke received a portion of the sign-on incentive grant as InvoCare’s shares during FY21 in accordance with the vesting rules of this grant. The value of the 10,000 shares received noted in the table above was based on the 12-month VWAP of InvoCare shares for the financial year ended 31 December 2021 times the number of vested and exercised sign-on incentive shares. The 12-month VWAP was $11.33. V STI outcomes – Executive KMP The table below provides details of each Executive KMP’s STI measures, the level of achievement and the financial outcome for the financial year ended 31 December 2021. Target STI potentiala Performance target overall achievement Actual STI awarded as a % of target STI potential $ 717,500 507,500 % 93 93 % 93 93 Actual STI awarded Cash Deferred STIb $ $ Total $ 537,795 129,265 667,060 391,367 80,456 471,823 STI forfeited as a % of target STI potential % 7 7 Executive KMP Olivier Chretien Adrian Gratwicke Footnotes: a Target STI potential and actual STI awarded is based on the total fixed remuneration as at 31 December 2021. b The 2021 deferred STI awarded will be granted as shares in the financial year ending 31 December 2022. InvoCare Annual Report 2021 60 VI Reported remuneration – Executive KMP remuneration details – statutory basis The table below discloses the remuneration for Executive KMP calculated in accordance with statutory requirements and Australian accounting standards. Refer to table notes for the relevant statutory and accounting requirements. Short-term employee benefits Post-employment benefits Long-term benefits Cash salary1 Short term incentive- cash2 Non- monetary benefits3 Super- annuation4 Termina- tion payments Long service leave accruals5 Share- based payments Shares, share rights and perform- ance rights6 Olivier Chretien Appointed 1 January 2021 $ $ $ $ 2021 1,058,415 537,795 3,985 25,000 Adrian Gratwicke 2021 675,563 391,367 3,985 24,597 2020 297,365 63,652 1,949 10,847 Appointed 3 August 2020 Footnotes: a The remuneration mix for the Executive KMP based on the remuneration details in table above are: Olivier Chretien: 52% fixed and 48% at-risk Adrian Gratwicke: 49% fixed and 51% at-risk (2020: 61% fixed and 39% at-risk) b For the following former Executive KMP ceased during the financial year ended 31 December 2020, their total remuneration was: Martin Earp (ceased as Executive KMP effective 31 December 2020): $1,143,930. Mr Earp resigned as Director effective 4 January 2021. As 1 to 3 January 2021 are public holidays or weekend, Mr Earp provided no service as Director and no remuneration is paid/payable for these days when he was holding the office as Director Damien MacRae (ceased as Executive KMP effective 31 December 2020): $1,196,041 Josée Lemoine (ceased as Executive KMP effective 3 August 2020): $354,443 $ $ Total $ 5,556 464,363 2,095,114 5,062 350,017 1,450,591 1,499 137,018 512,330 $ - - - Table notes: 1 2 3 4 5 6 The total cost of cash salary and leave accruals, including annual leave taken and the increase or decrease in the annual leave provision applicable as determined in accordance with the Accounting Standard, AASB 119 Employee Benefits. The amount to be settled in cash relating to performance of the Group and the individual for the financial year from 1 January to 31 December. The proportions of STI awarded and forfeited are set out in Section V above of this Remuneration Report. The 2021 deferred STI awarded, as disclosed in Section V above, will be granted in the next financial year, so no value was included in the total remuneration in the table above. Non-monetary benefits represent the costs to the Group, including any fringe benefits tax, for the provision of car parking and other items. Superannuation contributions are paid in line with legislative requirements. Long service leave accruals are determined in accordance with Accounting Standard, AASB 119 Employee Benefits. The share-based payments value in the table represents the amount of sign-on incentive (in the form of shares or share rights), deferred STI and LTI (in the form of unvested performance rights) grants made in the current and past financial years. They are accounted for in accordance with AASB 2 Share-based Payments. Subject to meeting the vesting conditions of the grants, the shares, share rights or performance rights will vest, or be forfeited, in future financial years. Section VII below provides the further information and breakdown of share-based payments. InvoCare Annual Report 2021 61 Shareholder and other informationSigned reportsConsolidated financial statementsOperating & financial review6542Governance & Directors’ reportOverview13 Remuneration report – audited continued VII Breakdown of share-based payments – Executive KMP Deferred STI in the form of sharesa Sign-on incentive in the form of shares Sign-on incentive in the form of share rights LTI in the form of perform- ance rights Total share-based payments $ - - - $ - 143,509 108,008 $ $ $ 212,652 251,711 464,363 - - 206,508 350,017 29,010 137,018 2021 2021 2020 Olivier Chretien Appointed 1 January 2021b Adrian Gratwicke Appointed 3 August 2020 c,d Footnotes: a b c d The 2021 deferred STI awarded, as disclosed in Section V above, will be granted in the financial year ending 31 December 2022 and there is a one-year deferral period from grant, so no value was recognised for FY21. Olivier Chretien received a sign-on incentive grant in the form of share rights. They will vest on 1 January 2023 provided that Mr Chretien meets the continuous employment condition at the date of vesting. Adrian Gratwicke received a sign-on incentive grant in the form of shares held in trust. One third each of the total number of shares granted will vest on 1 July 2021, 2022 and 2023 respectively provided that Mr Gratwicke meets the continuous employment condition at each vesting date. Adrian Gratwicke was appointed 3 August 2020. The share-based payments for FY20 were only recognised for the period from the date commenced as Executive KMP to 31 December 2020. For FY21, his share-based payments were recognised for the full financial year. a 2020 sign-on incentive grant under the Deferred Employee Share Plan As part of his appointment as CFO during August 2020, Adrian Gratwicke received a one-off sign-on incentive in the form of 30,000 InvoCare’s shares, which will be held in trust within the InvoCare Deferred Employee Share Plan (DESP). The shares will vest in three equal tranches on 1 July 2021, 1 July 2022 and 1 July 2023, respectively, provided that he is still employed by InvoCare at those dates and the applicable vesting conditions are met as described in the DESP rules. The table below provides details of the grant date fair value and maximum value for the sign-on incentive granted. Grant date fair value and maximum value for sign-on incentive Executive KMP Grant date Grant date fair value per sign-on incentive Number of shares granted Vesting period Maximum value to be recognised from grant date Sign-on incentive – shares granted under DESP Adrian Gratwicke 15/06/2020 11.10 30,000 $ 15 June 2020 to 1 July 2023 $ 333,000 b 2021 sign-on incentive grant under the Employee Share Plan As part of his appointment as CEO, Olivier Chretien received a one-off sign-on incentive of $400,000 in the form of 34,782 share rights through the InvoCare Employee Share Plan (ESP), which was approved at the 2020 Annual General Meeting. The number of share rights are calculated by the value of the sign-on incentive divided by the value of a “Share” determined by the VWAP of InvoCare shares traded in the last 10 trading days immediately before Mr Chretien’s commencement date as CEO on 1 January 2021, being $11.50. The share rights will vest on 1 January 2023, two years after Mr Chretien’s appointment date of 1 January 2021, provided that he is still employed by InvoCare on 1 January 2023 and the applicable vesting conditions are met as described in the ESP rules. The table below provides details of the grant date fair value and maximum value for the sign- on incentive granted. Sign-on incentive – shares granted under ESP Executive KMP Grant date Grant date fair value per sign-on incentive Number of share rights granted Vesting period Maximum value to be recognised from grant date Olivier Chretien 18/11/2020 11.57 34,782 $ 18 November 2020 to 1 January 2023 $ 402,428 InvoCare Annual Report 2021 62 c LTI plan The Executive KMP were granted LTI in the form of performance rights under the LTI Plan (LTIP). The key terms and conditions of the LTI granted are disclosed in Note 22 Share-based remuneration Section B and C. The table below summarises the performance to date for the LTI grants under the LTIP since 2020 which impact remuneration in the current or a future financial year. Neither 2020 nor 2021 performance rights granted are due for vesting test during the financial year ended 31 December 2021. Grant/Tranche Performance hurdle* Performance test date EPS baseline for CAGR measure Testing of unvested rights Vesting outcome % 2020 grant One tranche, two performance hurdles 2021 grant One tranche, two performance hurdles 50% of 2020 grant 50% of 2020 grant 50% of 2021 grant 50% of 2021 grant 30% vesting at 6% CAGR EPS 100% vesting at 10% CAGR EPS Pro rata vesting in between 6% and 10% CAGR EPS 0% vesting if less than 6% CAGR EPS 30% vesting at 10% ROIC 100% vesting at 12% ROIC Pro rata vesting in between 10% and 12% ROIC 0% vesting if less than 10% ROIC 30% vesting at 10% CAGR EPS 100% vesting at 15% CAGR EPS Pro rata vesting in between 10% and 15% CAGR EPS 0% vesting if less than 10% CAGR EPS 30% vesting at 10% ROCE 100% vesting at 12% ROCE Pro rata vesting in between 10% and 12% ROCE 0% vesting if less than 10% ROCE March 2023 46.9 ¢ N/A N/A March 2023 N/A N/A March 2024 24.0 ¢ N/A N/A March 2024 N/A N/A * The performance targets are three-year compound annual growth rate (CAGR) in normalised EPS growth and average return on invested capital (ROIC)/return on capital employed (ROCE) from 1 January of grant year. d Grant date fair value and maximum value for LTI grants The table below provides the grant date fair value and the maximum potential value of all outstanding LTI grants at grant date for the Executive KMP. If the performance conditions are not met, the minimum value of the LTI will be nil. Fair value and maximum value for LTI grants Executive KMP Grant date Olivier Chretien 18/11/2020 Grant date fair value per LTIa $ 11.57 Number of LTI granted Performance period Maximum value to be recognised from grant date 63,777 1 January 2021 to 31 December 2023 Performance rights granted under LTIPa Adrian Gratwicke 15/06/2020 9.70 17,107 15 June 2020 to 3 August 2023b 01/01/2021 11.57 42,000 1 January 2021 to 31 December 2023 Footnotes: a The grant date fair value of the performance rights granted under LTIP was determined using Black-Scholes valuation methodology. b The performance hurdles for the 2020 grant to Adrian Gratwicke are based on the 3-years financial outcomes from 1 January 2020 to 31 December 2022 in line with the plan rules. The performance period for this grant is from 15 June 2020 (i.e. the signing date of the employment condition which is deemed to be the commencement date of performance period as per AASB 2). The vesting date will be on 3 August 2023, that is, three-year period effective 3 August 2020, his employment commencement date. InvoCare Annual Report 2021 63 $ 737,900 165,938 485,940 Shareholder and other informationSigned reportsConsolidated financial statementsOperating & financial review6542Governance & Directors’ reportOverview134 Non-Executive Director remuneration The following table outlines the Non-Executive Directors (NEDs) fee policy and changes introduced for 2022. Maximum aggregate fees approved by shareholders Contracts Non-Executive Directors’ base fee for services as Directors is determined within an aggregate Directors’ fee pool cap, which is periodically approved by shareholders. At the date of this report, the pool cap is $1,250,000, being the amount approved by shareholders at the AGM held on 22 May 2015. Upon appointment to the Board, NEDs receive a letter of appointment which summarises the Board policies and terms, including remuneration, relevant to the office of Director. The Board reviews NED fees annually, taking into account the size and scope of InvoCare’s activities and general industry practice. This ensures the Group can attract and retain suitably skilled, experienced and committed individuals to serve on the Board and remunerate them appropriately for their time and expertise, and for their responsibilities and liabilities as public company Directors. NEDs are entitled to be reimbursed for all reasonable costs and expenses incurred by them in performing their duties. NED fee changes FY21 There were no changes to the Board base fees in 2021. Non-Executive Director fee reviews In recognition of the additional workloads for Chairs of committees and alignment, the decision was made to extend the current Chair fee of $11,560 for the Audit, Risk & Compliance (ARC) Committee to the Chair of the PCR Committee and the Chair of the Investment Committee. It should be noted that the Investment Committee was dismantled effective 31 March 2021, with no meeting in 2021, and accountabilities transferred to the ARC Committee and the Board. NED fee changes FY22 The Board base fees and committee fees remain unchanged. The table following details the 2021 base and committee fees. The aggregation of Board and committee fees for 2021 remain below the pool cap of $1,250,000. NED’s base fees exclude any remuneration determined by the Directors where a Director performs additional or special duties for the Company. If a NED performs additional or special duties for the Company, they may be remunerated as determined by the Board and that remuneration can be in addition to the limit mentioned above. There have been no additional payments made to Directors in 2021. The fees set out in the table below include superannuation contributions in accordance with relevant statutory requirements. NEDs may receive options as part of their remuneration, subject only to shareholder approval. No options are held by any NED at the date of this report. Additional or special duties Superannuation Equity participation NEDs of InvoCare Limited are encouraged to acquire a minimum equity interest in the Company equivalent in value to 50% of their annual Director’s fee applying at the time of their appointment as a Director of the Company, and NEDs are allowed up to three years to accumulate the required shareholding. NEDs equity holdings are set out in Section 5. Post employment benefits NEDs are not entitled to any compensation on cessation of appointment. InvoCare Annual Report 2021 65 Shareholder and other informationSigned reportsConsolidated financial statementsOperating & financial review6542Governance & Directors’ reportOverview13Remuneration report – audited continued Non-Executive Director fees (inclusive of superannuation) Board/Committee Role Board base fee Chairman Non-Executive Directors Audit, Risk & Compliance Committee Investment Committeea People, Culture & Remuneration Committee Chairman Chairmanb Chairmanb Total Footnotes: From 1 January 2021 Per role $ Total $ 285,691 285,691 142,840 714,200 11,560 11,560 11,560 11,560 11,560 11,560 1,034,571 a b Investment Committee dismantled effective 31 March 2021. The Chair Committee fee structure was aligned from 1 January 2021 to $11,560 per annum for all committees – previously it was only the Chair of the Audit, Risk & Compliance Committee on a higher fee structure. Reported remuneration – Non-Executive Directors – statutory basis The table below discloses the remuneration for the Non-Executive Directors calculated in accordance with statutory requirements and Australian Accounting Standards. For any Directors appointed during the financial year, their remuneration has been pro-rated from the date of appointment to the end of the financial year. For any Directors who resigned or retired during the financial year, their remuneration has been pro-rated to the date of resignation or retirement. Non-Executive Directors remuneration details Short-term employee benefits Post-employment benefits Board and committee fees Superannuation Bart Vogel Kim Anderson, appointed 11 May 2021 Richard Davis Megan Quinn Keith Skinner Kee Wong, appointed 1 November 2021 2021 2020 2021 2021 2020 2021 2020 2021 2020 2021 Former Non-Executive Directors retired/resigned during the financial year Jackie McArthur, retired 28 May 2021 Robyn Stubbs, resigned 1 February 2021 2021 2020 2021 2020 $ 263,060 240,535 90,325 132,790 119,577 130,151 119,577 140,684 129,254 21,642 54,353 119,577 11,750 119,577 InvoCare Annual Report 2021 66 $ Total $ 22,631 285,691 21,348 261,883 8,932 99,257 12,940 145,730 11,420 130,997 12,689 142,840 11,420 130,997 13,716 154,400 12,279 141,533 2,164 23,806 5,164 59,517 11,420 130,997 1,116 12,866 11,420 130,997 5 Additional information The table below summarises the movement in holdings of InvoCare ordinary shares during the year and the balance at the end of the financial year, both in total and held indirectly by related parties of the KMP. Movement of shareholding interests of Directors in accordance with section 205G of the Corporations Act 2001 and the other Executive KMP Balance as at 1 January 2021 Grant as compensation Exercise of vested share- based payments during 2021 Net other changes during 2021 Total shares held directly and indirectly as at 31 December 2021a Number Number Number Number Number 19,343 - 160,000 - 3,968 - - - 4,480 7,905 - - - - - - - - - - - - - - - - - 10,000 - - - 10,079 19,343 10,079 (40,000) 120,000 - - - - 3,968 - 15,850 15,850 (4) - - 9,996 4,480 7,905 Bart Vogel Kim Andersonb Richard Davis Megan Quinn Keith Skinner Kee Wong b Olivier Chretienb Adrian Gratwicke Jackie McArthur c Robyn Stubbsc Non-Executive Directors Executive KMP Former KMP ceased during the financial year Footnotes: a b c Shares held indirectly are included in the column headed Total shares held at 31 December 2021. Total shares are held directly by the KMP and indirectly by the KMP’s related parties, inclusive of domestic partner, dependants and entities controlled, jointly controlled or significantly influenced by the KMP. For KMP who commenced during FY21, the balance as at 1 January 2021 is shown as no shares. The KMP are Kim Anderson, Kee Wong and Olivier Chretien. For KMP ceased during FY21, movement of shares are only recorded till their effective date ceased as KMP. The KMP are Jackie McArthur and Robyn Stubbs. InvoCare Annual Report 2021 67 Shareholder and other informationSigned reportsConsolidated financial statementsOperating & financial review6542Governance & Directors’ reportOverview13InvoCare Annual Report 2021 68 Section 4 Consolidated financial statements InvoCare Annual Report 2021 69 Consolidated financial statements This is the financial report of InvoCare Limited (the Company) and its subsidiaries (together referred to as InvoCare or the Group). InvoCare Limited (ABN 42 096 437 393) is a listed public company limited by shares, incorporated and domiciled in Australia. Its registered office and principal place of business is: Level 5, 40 Mount Street North Sydney NSW 2060 A description of the nature of the Group’s operations and its principal activities is included in the Directors’ Report. The financial report was authorised for issue by the Directors on 28 February 2022. The Directors have the power to amend and reissue the financial report. About this report Consolidated financial statements Consolidated statement of comprehensive income Consolidated balance sheet Consolidated statement of changes in equity Consolidated statement of cash flows Basis of preparation Notes to the consolidated financial statements Key performance metrics Note 1. Operating segments Note 2. Revenue Note 3. Earnings per share This financial report’s disclosures are split into five distinct groups to Note 4. Dividends enable better understanding of how the Group has performed. Note 5. Significant profit and loss items Accounting policies and critical accounting judgements applied in the Note 6. Income tax preparation of the financial statements are shown together with the related accounting balance and where the financial statement matter Note 7. Cash flow information is disclosed. Significant assets and liabilities Note 8. Trade receivables Note 9. Pre-paid contracts Note 10. Deferred revenue and selling costs Note 11. Non-current operating assets Note 12. Intangibles Note 13. Pre-paid technology assets Capital and risks Note 14. Financial risk management Note 15. Contributed equity Note 16. Contingencies Note 17. Commitments Note 18. Events after reporting period Business portfolios Note 19. Business combinations Note 20. Interests in subsidiaries Note 21. Other financial assets Other statutory disclosures Note 22. Share-based remuneration Note 23. Related party transactions Note 24. Parent entity information Note 25. Deed of cross guarantee Note 26. Economic dependence Note 27. Remuneration of auditors Note 28. Other accounting policies InvoCare Annual Report 2021 70 70 71 72 73 74 75 77 77 77 79 81 82 83 84 87 89 89 90 93 95 99 104 105 105 113 114 115 115 116 116 118 119 120 120 124 125 126 128 128 129 INVOCARE LIMITED AND SUBSIDIARIES Consolidated financial statements Consolidated statement of comprehensive income For the year ended 31 December 2021 Revenue from continuing operations Finished goods, consumables and funeral disbursements Employee benefits expense Advertising and public relations expenses Occupancy and facilities expenses Motor vehicle expenses Technology expenses Other expenses Depreciation and amortisation expenses Impairment loss on intangibles Impairment reversal on cemetery land Loss on disposal of a business Finance costs Interest income Net gain/(loss) on undelivered pre-paid contracts Acquisition related costs Net gain on lease modifications/terminations Net gain on disposal of non-current assets Profit/(loss) before income tax Income tax expense Net profit/(loss) after income tax from continuing activities Net profit/(loss) after income tax for the year Other comprehensive income Items that may be reclassified to profit or loss Changes in the fair value of cash flow hedges, net of tax Total realised loss on early settlement of interest rate swaps reclassified to profit or loss Net changes to cash flow hedges, net of tax Changes in foreign currency translation reserve, net of tax Other comprehensive income for the year, net of tax Notes 2 5 12 11 9 6 2021 $’000 532,453 (128,827) (196,064) (17,095) (23,983) (7,860) (18,925) (19,973) 119,726 (47,766) - 4,000 (278) (17,474) 987 44,085 (743) 1,517 6,808 110,862 (30,591) 80,271 80,271 Restated 2020 $’000 477,652 (122,503) (174,764) (17,725) (22,533) (7,484) (23,862) (22,289) 86,492 (42,565) (19,324) 6,000 - (24,929) 1,059 (16,618) (1,918) - 7,383 (4,420) (6,955) (11,375) (11,375) 763 (320) - 763 (2,082) (1,319) 2,419 2,099 (1,091) 1,008 Total comprehensive income/(loss) for the year, net of tax 78,952 (10,367) Profit/(loss) is attributable to: Equity holders of InvoCare Limited Non-controlling interests Total comprehensive income/(loss) for the year is attributable to: Equity holders of InvoCare Limited Non-controlling interests Earnings per share for profit/(loss) attributable to the ordinary equity holders of InvoCare Limited Basic earnings per share Diluted earnings per share 3 3 80,158 113 80,271 78,839 113 78,952 2021 cents 56.1 56.0 (11,542) 167 (11,375) (10,534) 167 (10,367) 2020 cents (8.6) (8.6) The above consolidated statement of comprehensive income should be read in conjunction with the accompanying notes. 50 InvoCare Annual Report 2021 71 Shareholder and other informationSigned reportsGovernance & Directors’ reportOperating & financial review6532Overview1Consolidated financial statements4 Consolidated financial statements continued INVOCARE LIMITED AND SUBSIDIARIES Consolidated financial statements Consolidated balance sheet As at 31 December 2021 Assets Current assets Cash and cash equivalents Trade receivables Other receivables Inventories Pre-paid contract funds under management Assets held for sale Pre-paid technology assets Deferred selling costs Deferred contract assets Total current assets Non-current assets Trade receivables Other receivables Other financial assets Property, plant and equipment Right of use asset Pre-paid contract funds under management Intangibles Pre-paid technology assets Deferred selling costs Deferred contract assets Total non-current assets Total assets Liabilities Current liabilities Trade and other payables Contingent considerations Lease liabilities Derivative financial instruments Current tax liabilities Pre-paid contract liabilities Deferred revenue Provision for employee entitlements Total current liabilities Non-current liabilities Contingent considerations Borrowings Lease liabilities Derivative financial instruments Deferred tax liabilities Pre-paid contract liabilities Deferred revenue Provision for employee entitlements Total non-current liabilities Total liabilities Net assets Equity Contributed equity Reserves Retained profits Parent entity interests Non-controlling interests Total equity Notes 7 8 9 13 10 8 21 11 11 9 12 13 10 19 11 9 10 19 14 11 6 9 10 15 2021 $’000 53,630 42,451 14,703 46,866 52,959 89 582 6,244 1,811 219,335 23,849 578 4,072 494,454 153,315 596,916 226,913 8,019 29,511 152 1,537,779 1,757,114 69,226 6,282 20,671 76 5,739 44,437 34,076 17,133 197,640 - 188,843 154,731 - 42,307 496,003 93,883 2,786 978,553 1,176,193 580,921 497,780 10,865 70,857 579,502 1,419 580,921 Restated 2020 $’000 118,781 38,757 13,710 44,117 50,268 2,788 637 3,644 1,541 274,243 29,445 670 4 464,277 144,368 562,863 225,386 4,655 34,068 2,525 1,468,261 1,742,504 60,514 9,265 19,465 600 1,874 44,685 28,632 16,613 181,648 7,909 246,039 146,459 548 28,832 496,624 109,086 2,489 1,037,986 1,219,634 522,870 497,005 9,977 14,465 521,447 1,423 522,870 The above consolidated balance sheet should be read in conjunction with the accompanying notes. 51 InvoCare Annual Report 2021 72 INVOCARE LIMITED AND SUBSIDIARIES Consolidated financial statements Consolidated statement of changes in equity For the year ended 31 December 2021 Attributable to equity holders of InvoCare Limited Contri- buted equity $’000 497,005 Share- based payment reserve $’000 3,296 Foreign currency translation reserve $’000 7,436 Hedging reserve $’000 (755) Retained profits $’000 14,465 Non- controlling interests $’000 1,423 Total equity $’000 522,870 - - - - 468 (468) 307 - - 497,780 2,675 5,503 763 (2,082) 80,158 113 78,952 - - - - 8 - - - (23,766) (117) (23,883) - - - - - 307 - 5,354 - 70,857 - 1,419 2,675 580,921 219,826 - 2,055 - (2,854) - 8,527 - 68,169 (6,730) 1,256 - 296,979 (6,730) 219,826 2,055 (2,854) 8,527 61,439 1,256 290,249 - - - - 48 (16) 5,918 270,862 - - 351 2,099 (1,091) (11,542) 167 (10,367) - - - - - - - - (29,514) - (5,918) - - - - - (29,514) 32 - 270,862 351 - 497,005 1,257 3,296 - (755) - 7,436 - 14,465 - 1,423 1,257 522,870 2021 Balance at 1 January 2021 Total comprehensive income/(loss) for the year Transactions with owners in their capacity as owners: Dividends paid (Note 4) Employee share plan shares vested during the year Transfer of shares from treasury shares for grant of shares through the InvoCare Exempt Share Plan Trust Employee shares – value of services Balance at 31 December 2021 Restated 2020 Balance at 1 January 2020 Change in accounting policy Restated balance at the beginning of the year Total comprehensive income/(loss) for the year Transactions with owners in their capacity as owners: Dividends paid (Note 4) Employee share plan shares vested during the year Issue of ordinary shares as part of dividend reinvestment plan (Note 4) Issue of ordinary shares, net of transaction costs Transfer of shares from treasury shares for grant of shares through the InvoCare Exempt Share Plan Trust Employee shares – value of services Balance at 31 December 2020 The above consolidated statement of changes in equity should be read in conjunction with the accompanying notes. 52 InvoCare Annual Report 2021 73 Shareholder and other informationSigned reportsGovernance & Directors’ reportOperating & financial review6532Overview1Consolidated financial statements4 Consolidated financial statements continued INVOCARE LIMITED AND SUBSIDIARIES Consolidated financial statements Consolidated statement of cash flows For the year ended 31 December 2021 Cash flows from operating activities Receipts from customers (including GST) Payments to suppliers and employees (including GST) Other revenue Interest received Finance costs Income tax paid Net cash flows from operating activities Cash flows from investing activities Proceeds from sale of property, plant and equipment Purchase of subsidiaries and other businesses including acquisition costs, net of cash acquired Proceeds from sale of subsidiaries and other businesses, net of restructuring costs Purchase of property, plant and equipment and intangibles Purchase of other financial assets Payments to funds under management for pre-paid contract sales Receipts from funds under management for pre-paid contracts service delivered Net cash flows from investing activities Cash flows from financing activities Share capital issue, net of transaction costs Payments for share option vested and exercised Proceeds from borrowings Repayment of borrowings Payment for early settlement of interest rate swaps Principal elements of lease payments Dividends paid to InvoCare Limited equity holders Dividends paid to non-controlling interests in subsidiaries Net cash flows from financing activities Net (decrease)/increase in cash and cash equivalents Cash and cash equivalents at the beginning of the year Effects of exchange rate changes on cash and cash equivalents Cash and cash equivalents at the end of the year 2021 $’000 534,372 (440,669) 8,027 101,730 302 (14,521) (9,771) 77,740 Restated 2020 $’000 505,716 (429,054) 11,192 87,854 373 (17,419) (14,424) 56,384 10,788 11,908 (12,648) (40,581) 392 (62,703) (4,068) (26,599) 55,905 (38,933) - - - (59,680) - (20,196) (23,766) (117) (103,759) (64,952) 118,781 (199) 53,630 - (60,952) - (32,169) 45,026 (76,768) 270,875 (69) 5,000 (111,761) (3,115) (11,599) (29,514) - 119,817 99,433 19,560 (212) 118,781 The above consolidated statement of cash flows should be read in conjunction with the accompanying notes. 53 InvoCare Annual Report 2021 74 Basis of preparation InvoCare Annual Report 2021 75 INVOCARE LIMITED AND SUBSIDIARIES Basis of preparation 54 This consolidated financial report is a general purpose financial report which: • Has been prepared in accordance with the Corporations Act 2001, Australian Accounting Standards (AASBs) and Interpretations adopted by the Australian Accounting Standards Board, as appropriate for for-profit oriented entities and the Australian Securities Exchange (ASX) Listing Rules • Complies with International Financial Reporting Standards (IFRS) adopted by the International Accounting Standards Board • Is presented in Australian dollars ($) which is the functional currency of InvoCare Is prepared under the historical cost basis except for the following assets and liabilities, which are stated at their fair value: derivative financial instruments; fair value through profit or loss funds under management; and liabilities for cash settled share-based compensation plans. Recognised assets and liabilities that are hedged are stated at fair value in respect of the risk that is hedged. Refer to the specific accounting policies within the notes to the financial statements for the basis of valuation of assets and liabilities measured at fair value Significant accounting policies have been: • Included in the relevant notes to which the policies relate, while other significant accounting policies are discussed in Note 28: Other accounting policies Consistently applied to all financial years presented in the consolidated financial statements and by all entities in the Group, except as explained in Note 28: Other accounting policies – New and revised accounting standards and interpretations not yet mandatory or early adopted Critical accounting estimates and judgements The preparation of a financial report that complies with AASBs requires management to make judgements, estimates and assumptions. This can affect the application of accounting policies and the reported amounts of assets, liabilities, income and expenses. Actual results may differ from these estimates. Estimates and underlying assumptions are reviewed on an on-going basis. Revisions to estimates are recognised prospectively. The significant accounting policies highlight information about accounting judgements in applying accounting policies that have the most significant effects on reported amounts and further information about estimated uncertainties that have a significant risk of resulting in material adjustments within the next financial year. The areas involving a higher degree of judgement or complexity, or areas where assumptions and estimates are significant to the financial statements are disclosed within the notes following the financial information of those transactions or activities. The key ones are: • Note 2 Revenue – recognition of deferred revenue on pre-paid funerals and plaque and miscellaneous merchandise sales on pre-paid cemeteries and crematorium and significant financing • Note 9 Pre-paid contracts – fair value measurements on pre-paid funds under management • Note 11 Non-current operating assets – estimated impairment of non-financial assets and the determination of the lease term • Note 12 Intangibles – assumptions used in the impairment testing on intangibles Note 13 Pre-paid technology assets – determination whether configuration and customisation services are distinct from the SaaS access The on-going COVID-19 pandemic (COVID) has not significantly increased the estimation uncertainty in the preparation of the consolidated financial statements. A thorough consideration of potential COVID impacts on carrying values of assets and liabilities, contracts and potential liabilities has been made, with no material impact to the financial statements, except as recognised in these consolidated financial statements. Current and non-current split The Group presents assets and liabilities in the consolidated balance sheet as current or non-current: • Current assets include assets held primarily for trading purposes, cash and cash equivalents, and assets expected to be realised in, or intended for sale or use in, the course of the Group’s operating cycle (that is 12 months). All other assets are classified as non-current. Current liabilities include liabilities held primarily for trading purposes, liabilities expected to be settled in the course of the Group’s operating cycle and those liabilities due within one year from the reporting date. All other liabilities are classified as non-current where the Group has an unconditional right to defer settlement of the liability for at least 12 months after the reporting period. Shareholder and other informationSigned reportsGovernance & Directors’ reportOperating & financial review6532Overview1Consolidated financial statements4Basis of preparation continued InvoCare Annual Report 2021 76 INVOCARE LIMITED AND SUBSIDIARIES Basis of preparation 55 Comparatives Where necessary, comparatives have been reclassified, repositioned and restated for consistency with current year disclosures. The following disclosures have been changed during the current year: • Note 1 Operating segments – identifiable reportable segments are updated to align with the latest discrete financial information reported to the Chief Operating Decision Maker and the Board of Directors Note 12 Intangibles – adjusted certain capitalised software due to the change in accounting policy in adopting the International Financial Reporting Standards Interpretation Committee (IFRIC) decision Configuration and Customisation Costs in a Cloud Computing Arrangement (AASB 138 Intangible Assets) Restated 2020 comparatives In April 2021, the IFRIC decision Configuration or Customisation Costs in a Cloud Computing Arrangement (AASB 138 Intangible Assets) which considers whether an intangible asset can be recognised in relation to configuration or customisation of application software. The financial impact and additional disclosures required are provided in Note 12 Intangibles. This change in accounting policy is to be applied retrospectively resulting in the need to restate the comparative financial statements for the year ended 31 December 2020. The impact of the change in accounting policy is therefore reflected in the restated financial statements and notes presented on relevant pages of this report. Rounding The Group is of the kind referred to in the ASIC Corporations (Rounding in Financial/Directors’ Reports) Instrument 2016/191 issued by the Australian Securities & Investments Commission. In accordance with that instrument, amounts in the financial report have been rounded to the nearest thousand dollars, unless otherwise indicated. Non-IFRS information Some of the financial data in the notes to the financial statements as listed below are not disclosures in accordance with the current AASBs’ requirements: • EBITDA (earnings before interest, tax, depreciation and amortisation) and EBIT (earnings before interest and tax) in Note 1 Operating segments • Operating EBITDA and EBIT in key performance metrics section • Voluntary tax transparency code disclosure in Note 6 Income tax Cash conversion ratio in Note 7 Cash flow information However, all financial data is based on the information disclosed in the audited financial statements and notes to the financial statements of InvoCare and follow the recognition requirement of AASBs. Notes to the consolidated financial statements InvoCare Annual Report 2021 77 INVOCARE LIMITED AND SUBSIDIARIES Notes to the consolidated financial statements Key performance metrics 56 Operating earnings before interest, tax, depreciation and amortisation (Operating EBITDA) is a key measure used to assess the Group’s performance. This section of the Financial Report focuses on disclosure that enhances a user’s understanding of Operating EBITDA. Operating segment provides a breakdown of revenue and profit by the operational activity. The key line items of the consolidated statement of comprehensive income along with their components provide detail behind the reported balances. Group performance will also impact the earnings per ordinary share capital and dividend payout. Finally, the cash flows reflect the core results of the Group’s capital management strategy and therefore the disclosure on these items has been included in this section. Note 1. Operating segments Note 5. Significant profit and loss items Note 2. Revenue Note 6. Income tax Note 3. Earnings per share Note 7. Cash flow information Note 4. Dividends Note 1. Operating segments A. Identification of reportable segments During the second half of this financial year ended 31 December 2021, the Group re-organised its reportable segments into the following: • Australia – Funeral services • Australia – Cemeteries & Crematoria • Australia – Pet cremations • New Zealand • Singapore Other/unallocated These reportable segments are based on the recent changes in internal reports that are reviewed and used by the Chief Executive Officer & Managing Director (who is identified as the Chief Operating Decision Maker (CODM)) in assessing performance and in determining the allocation of resources. There is no aggregation of reportable segments. The reportable segments are identified by management based on the products sold or services provided in Australia and other countries where their products and services are mainly related to the provision of Funeral services. Discrete financial information about each of these operating segments is reported to CODM and the Board of Directors regularly. The CODM reviews Group and segment performance using, among other key financial and non-financial measures, Operating EBITDA (for each reportable segment) and Operating EBIT (only on consolidated group). The accounting policies adopted for internal reporting to the CODM are consistent with those adopted in the financial statements. As the changes in the reportable segments occurred in second half of this financial year ended 31 December 2021, comparative information are re-organised and disclosed to align with the current reporting period’s disclosure for consistency purposes. INVOCARE LIMITED AND SUBSIDIARIES Basis of preparation 55 Comparatives Where necessary, comparatives have been reclassified, repositioned and restated for consistency with current year disclosures. The following disclosures have been changed during the current year: • Note 1 Operating segments – identifiable reportable segments are updated to align with the latest discrete financial information reported to the Chief Operating Decision Maker and the Board of Directors Note 12 Intangibles – adjusted certain capitalised software due to the change in accounting policy in adopting the International Financial Reporting Standards Interpretation Committee (IFRIC) decision Configuration and Customisation Costs in a Cloud Computing Arrangement (AASB 138 Intangible Assets) Restated 2020 comparatives In April 2021, the IFRIC decision Configuration or Customisation Costs in a Cloud Computing Arrangement (AASB 138 Intangible Assets) which considers whether an intangible asset can be recognised in relation to configuration or customisation of application software. The financial impact and additional disclosures required are provided in Note 12 Intangibles. This change in accounting policy is to be applied retrospectively resulting in the need to restate the comparative financial statements for the year ended 31 December 2020. The impact of the change in accounting policy is therefore reflected in the restated financial statements and notes presented on relevant pages of this report. Rounding The Group is of the kind referred to in the ASIC Corporations (Rounding in Financial/Directors’ Reports) Instrument 2016/191 issued by the Australian Securities & Investments Commission. In accordance with that instrument, amounts in the financial report have been rounded to the nearest thousand dollars, unless otherwise indicated. Non-IFRS information Some of the financial data in the notes to the financial statements as listed below are not disclosures in accordance with the current AASBs’ requirements: • EBITDA (earnings before interest, tax, depreciation and amortisation) and EBIT (earnings before interest and tax) in Note 1 Operating segments • Operating EBITDA and EBIT in key performance metrics section • Voluntary tax transparency code disclosure in Note 6 Income tax Cash conversion ratio in Note 7 Cash flow information However, all financial data is based on the information disclosed in the audited financial statements and notes to the financial statements of InvoCare and follow the recognition requirement of AASBs. Shareholder and other informationSigned reportsGovernance & Directors’ reportOperating & financial review6532Overview1Consolidated financial statements4Notes to the consolidated financial statements continued INVOCARE LIMITED AND SUBSIDIARIES Notes to the consolidated financial statements Key performance metrics B. Reportable segments information 2021 Segment revenuea Segment expensesb Segment EBITDA Depreciation and amortisation Net gain on lease modifications/terminations Business acquisition costs Net gain on prepaid contracts SaaS arrangements Net impairment gain of non-current assets Asset sales gain EBIT Net finance costs Income tax expense Non-controlling interest Net profit after income tax Restated 2020 Segment revenuea Segment expensesb Segment EBITDA Depreciation and amortisation Business acquisition costs Net loss on prepaid contracts SaaS arrangements Net impairment loss of non-current assets Asset sales gain EBIT Net finance costs Income tax expense Non-controlling interest Net loss after income tax Australia Cemeteries & Crematoria $’000 Pet cremations $’000 127,602 (66,191) 61,411 (5,741) 29,613 (22,640) 6,973 (1,884) Funeral services $’000 311,016 (230,495) 80,521 (26,353) New Zealand $’000 53,486 (42,388) 11,098 (5,730) Singapore $’000 Other/ unallocated $’000 18,907 (10,569) 8,338 (1,224) (8,171) (35,196) (43,367) (6,834) 236 - - (22) - 1,303 292,282 (229,770) 62,512 (24,021) 119,988 (62,992) 56,996 (5,779) 4,642 (4,140) 502 (803) 51,990 (43,212) 8,778 (5,362) 19,404 (10,012) 9,392 (1,187) (10,654) (29,908) (40,562) (5,413) Total $’000 532,453 (407,479) 124,974 (47,766) 1,517 (743) 44,085 (5,248) 4,000 6,530 127,349 (16,487) (30,591) (113) 80,158 477,652 (380,034) 97,618 (42,565) (1,918) (16,618) (11,126) (13,324) 7,383 19,450 (23,870) (6,955) (167) (11,542) a Other/unallocated balance includes Non-operating activities’ revenue and intersegment eliminations. b Segment expenses excludes SaaS arrangements The table below provided the reconciliation of the reportable segments’ operating EBITDA to the segment EBITDA as disclosed in the tables above. Operating activities: Australia - Funeral services Australia - Cemeteries & Crematoria Australia - Pet cremations New Zealand Singapore Support costs Operating EBITDA Non-operating activities - EBITDA Segment EBITDA 2021 $'000 2020 $'000 80,521 61,411 6,973 11,098 8,338 (42,864) 125,477 (503) 124,974 62,512 56,996 502 8,778 9,392 (35,615) 102,565 (4,947) 97,618 C. Accounting policy for segment reporting Operating EBITDA is reconciled to profit after tax as disclosed on the consolidated statement of comprehensive income. 57 InvoCare Annual Report 2021 78 INVOCARE LIMITED AND SUBSIDIARIES Notes to the consolidated financial statements Key performance metrics Note 2. Revenue A. Disaggregation of revenue from contracts with customers The tables below provide detailed disaggregation of revenue derived by the Group. 2021 Funeral services Cemeteries & Crematoria Pet cremations Rent Sundry revenue Total revenue from continuing operations 2020 Funeral services Cemeteries & Crematoria Pet cremations Rent Sundry revenue Total revenue from continuing operations Australia $’000 301,401 127,060 29,658 458,119 248 1,693 460,060 278,699 119,463 4,646 402,808 411 3,039 406,258 Singapore New Zealand $’000 50,277 2,408 - 52,685 158 643 53,486 $’000 18,555 - - 18,555 146 206 18,907 18,593 - - 18,593 29 782 19,404 48,004 2,212 - 50,216 121 1,653 51,990 Total $’000 370,233 129,468 29,658 529,359 552 2,542 532,453 345,296 121,675 4,646 471,617 561 5,474 477,652 InvoCare’s New Zealand and Singapore businesses were eligible for government subsidies during periods of government restrictions. The government subsidies were recognised as sundry revenue during the financial year ended 31 December 2021 and 31 December 2020. B. Critical accounting judgements, estimates and assumptions I. Significant financing The Group receives payment from customers for pre-paid funerals, burial and cremation services prior to the transfer of the promised goods or services to the customer. As the period between receipt of the consideration and transfer of the goods or services can exceed one year, the Group adjusts deferred revenue using a discount rate. The Group determines the discount rate that best reflects the at-need funerals price the customers would have paid (that is the cash selling price as if the customer had paid the consideration at the time when the services are performed or the goods delivered). II. Timing of recognition of deferred plaque and miscellaneous merchandise revenue Pre-paid cemetery/crematorium plaque and miscellaneous merchandise sales are currently brought to account over an assumed 15 year period. Unredeemed merchandise sales (included within deferred revenue on the balance sheet) total $56,403,000 at 31 December 2021 (2020: $54,267,000). The 15 year period is based on a periodically updated actuarial assessment of the average period between a customer entering into a pre-paid funeral plan (included within pre-paid contract liabilities on the balance sheet) and the contract becoming at-need. The actual history of a pre-paid cemetery/crematorium contract may differ from the profile of a pre-paid funeral plan; however, in the absence of more specific data being available, the funeral data has been applied. The average 15 year period is an assumption only and therefore subject to uncertainty. It is possible that there will remain unperformed contracts at the end of the 15 year amortisation period, yet all revenue will have been recognised. Offsetting this is the likelihood that contracts performed during the 15 year period will have unrecognised revenue. Actual redemptions information has been collated for a sample of sites in order to determine a more accurate historical pattern of cemetery/crematorium pre-paid sale redemptions. The information collated suggests there is no material misstatement of revenue using the assumed 15 years period. The impact of recognising revenue over five years less (or five years more) than 15 years would be to increase annual revenue by approximately $3,314,000 (2020: $3,500,000) or decrease by $1,657,000 (2019: $1,700,000). 58 InvoCare Annual Report 2021 79 Shareholder and other informationSigned reportsGovernance & Directors’ reportOperating & financial review6532Overview1Consolidated financial statements4 Notes to the consolidated financial statements continued InvoCare Annual Report 2021 80 INVOCARE LIMITED AND SUBSIDIARIES Notes to the consolidated financial statements Key performance metrics 59 C. Accounting policy – revenue recognition The Group derives its revenue from the transfer of goods and services on delivery of the underlying good or service. The Group predominately generates revenue through the following streams: I. Funeral services, including pre-paid funerals, burial and crematorium services II. Cemetery and crematorium memorial products (‘memorial products’) Each of the above goods and services delivered or to be delivered to the customers are considered separate performance obligations even though for some situations they may be governed by a single legal contract with the customer. Refer to Note 9 Pre-paid contracts and Note 10 Deferred revenue and selling costs for further explanation of how pre-paid funerals, burial and crematorium services contracts impact revenue recognition of InvoCare. Revenue recognition for each of the above revenue streams are as follows: I. Funeral services, including pre-paid funerals, burial and crematorium services The Group’s performance obligations under funeral services contracts are: At-need funeral services – Revenue is recognised when the funeral, burial, cremation and other services are performed or the goods supplied. Pre-paid (Pre-need) funerals services – The Group enters into pre-paid contracts to provide funerals, burial and cremation services or other services in the future. For these contracts, the period between payment by the customer and transfer of the promised goods or services to the customer can exceed one year. Revenue relating to unperformed pre-paid funeral services contracts are deferred (included within pre-paid contract liabilities on the balance sheet). The funds received are placed in trust and are not recognised as revenue until the service is performed. As a result, the Group adjusts the deferred revenue and pre-paid contract liabilities using a discount rate that results in revenue being recognised that approximates the cash selling price the customer would have paid if the consideration was paid at the same time as the services are provided. On delivery of a pre-paid funeral service contract, the Group recognises the financing component as a component of revenue. II. Cemetery and crematorium memorial products (‘memorial products’) Revenue relating to undelivered memorials and merchandise are deferred (included within deferred revenue on the balance sheet) until delivered or made ready for use. The Group’s deliverables under memorial contracts are: Interment right – An interment right is the right to be committed in a designated space in a cemetery. The specific site is allocated at the time of signing the contract. Revenue is recognised when control of the interment right and associated memorial passes to the customer. Pre-2018 memorial product contracts For memorial product contracts entered into with customers prior to 1 January 2018, the customer gains control of the interment right on full and final settlement. Post-2018 memorial product contracts For contracts entered into from 1 January 2018, the customer gains control of the interment right at contract inception, thereby allowing revenue to be recognised on delivery. Headstone/monument/gardens – In a memorial products contract, a customer purchases a memorial, such as headstone/heritage garden/monument, to be installed on the interment site. The memorial may be on site at the time of purchase or may be delivered at a future time. Typically, there is a considerable time lag between a contract being signed and the delivery of the memorial. These items are tracked on a contract by contract basis and recognised as revenue upon delivery of products. Plaques (and other associated smaller merchandise) – These products are delivered to the customer on an ‘at-need’ basis (generally when the beneficiary has passed away). The revenue recognised for plaques and other associated smaller merchandise such as ash containers, vases and photos, where actual deliveries are not individually tracked, are managed on a portfolio basis given the small value of the individual items. The revenue is recognised over a 15 year period on a straight line basis. The 15 year period represents an actuarial estimate of when the contracts will be delivered. Billing and collection of memorial products contracts can be immediate and in full upon contract signing. However, most memorial products contracts are paid via instalments over a period of up to five years (although the payment periods do vary). The interment right, memorial products and plaques are each considered to be distinct performance obligations under AASB 15 Revenue from Contracts with Customers (AASB 15) as a customer can use the site without a memorial and there is not a transformative or integrated relationship between the products. The transfer of control of these distinct performance obligations determines when revenue should be recognised. Revenue is measured at the fair value of the consideration received or receivable. Amounts disclosed as revenue are net of returns, allowances, duties and taxes paid. Minor items such as plaques, ash containers and vases where actual deliveries are not individually tracked are released to revenue over 15 years. INVOCARE LIMITED AND SUBSIDIARIES Notes to the consolidated financial statements Key performance metrics Note 3. Earnings per share A. Reported period value Basic earnings per share Diluted earnings per share Operating earnings per share 2021 cents 56.1 56.0 31.6 Restated 2020 cents (8.6) (8.6) 20.9 InvoCare determines the dividends to be paid for any financial periods from Operating earnings after tax. Operating earnings is derived from basic earnings after excluding the impact of significant items such as material impairments, asset sales gains/losses and costs of restructuring operations. Operating earnings also exclude the impact of accounting for the Group’s funds under management and pre- paid funerals business which requires net gains and losses from undelivered pre-paid contracts to be included in reported profit. This is a financial measure which is not prescribed by Australian Accounting Standards and represents the earnings prepared under Australian Accounting Standards adjusted for specific items as per the table below from the statement of comprehensive income. B. Reconciliation of earnings used in calculating earnings per share Net profit/(loss) after income tax Less: Non-controlling interests Net profit/(loss) after income tax attributable to InvoCare Limited's equity holders for calculating statutory basic and diluted earnings per share 2021 $’000 80,271 (113) Restated 2020 $’000 (11,375) (167) 80,158 (11,542) Net profit/(loss) after income tax attributable to InvoCare Limited's equity holders for calculating statutory basic earnings per share 80,158 (11,542) Less: Non-operating activities results Non-operating EBITDA Net (gain)/loss on pre-paid contracts before income tax Depreciation and amortisation SaaS arrangements Impairment (gain)/loss on non-current assets Asset sales gain before income tax Net finance costs (Profit)/loss before income tax on non-operating activities Income tax expense/(benefit) on non-operating activities Net (profit)/loss after income tax on non-operating activities 503 (44,085) 7 4,594 (4,000) (6,530) 1,225 (48,286) 13,271 (35,015) 4,947 16,618 12 10.376 13,324 (7,383) 3,386 41,280 (1,744) 39,536 Operating earnings after income tax for calculating operating earnings per share 45,143 27,994 C. Weighted average number of shares used in calculating basic and diluted earnings per share Weighted average number of shares used in calculating basic and operating earnings per share Adjustments for calculation of diluted earnings per share: Share options and rights* Weighted average number of shares used in calculating diluted earnings per share 2021 Number ’000 2020 Number ’000 142,946 133,927 251 143,197 - 133,927 * For the year ended 31 December 2020, the potential ordinary shares issued under the Performance Long-Term Incentive Plan of the Group were excluded from the calculation because they are anti-dilutive. D. Accounting policy for earnings per share Basic earnings per share is calculated by dividing the profit attributable to the equity holders of InvoCare Limited by the weighted average number of ordinary shares outstanding during the financial year, adjusted for any bonus elements in ordinary shares issued during the financial year and excluding treasury shares. 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 at no consideration received in relation to dilutive potential ordinary shares. 60 InvoCare Annual Report 2021 81 INVOCARE LIMITED AND SUBSIDIARIES Notes to the consolidated financial statements Key performance metrics 59 C. Accounting policy – revenue recognition The Group derives its revenue from the transfer of goods and services on delivery of the underlying good or service. The Group predominately generates revenue through the following streams: I. Funeral services, including pre-paid funerals, burial and crematorium services II. Cemetery and crematorium memorial products (‘memorial products’) Each of the above goods and services delivered or to be delivered to the customers are considered separate performance obligations even though for some situations they may be governed by a single legal contract with the customer. Refer to Note 9 Pre-paid contracts and Note 10 Deferred revenue and selling costs for further explanation of how pre-paid funerals, burial and crematorium services contracts impact revenue recognition of InvoCare. Revenue recognition for each of the above revenue streams are as follows: I. Funeral services, including pre-paid funerals, burial and crematorium services The Group’s performance obligations under funeral services contracts are: At-need funeral services – Revenue is recognised when the funeral, burial, cremation and other services are performed or the goods supplied. Pre-paid (Pre-need) funerals services – The Group enters into pre-paid contracts to provide funerals, burial and cremation services or other services in the future. For these contracts, the period between payment by the customer and transfer of the promised goods or services to the customer can exceed one year. Revenue relating to unperformed pre-paid funeral services contracts are deferred (included within pre-paid contract liabilities on the balance sheet). The funds received are placed in trust and are not recognised as revenue until the service is performed. As a result, the Group adjusts the deferred revenue and pre-paid contract liabilities using a discount rate that results in revenue being recognised that approximates the cash selling price the customer would have paid if the consideration was paid at the same time as the services are provided. On delivery of a pre-paid funeral service contract, the Group recognises the financing component as a component of revenue. II. Cemetery and crematorium memorial products (‘memorial products’) Revenue relating to undelivered memorials and merchandise are deferred (included within deferred revenue on the balance sheet) until delivered or made ready for use. The Group’s deliverables under memorial contracts are: Interment right – An interment right is the right to be committed in a designated space in a cemetery. The specific site is allocated at the time of signing the contract. Revenue is recognised when control of the interment right and associated memorial passes to the customer. Pre-2018 memorial product contracts For memorial product contracts entered into with customers prior to 1 January 2018, the customer gains control of the interment right on full and final settlement. Post-2018 memorial product contracts For contracts entered into from 1 January 2018, the customer gains control of the interment right at contract inception, thereby allowing revenue to be recognised on delivery. Headstone/monument/gardens – In a memorial products contract, a customer purchases a memorial, such as headstone/heritage garden/monument, to be installed on the interment site. The memorial may be on site at the time of purchase or may be delivered at a future time. Typically, there is a considerable time lag between a contract being signed and the delivery of the memorial. These items are tracked on a contract by contract basis and recognised as revenue upon delivery of products. Plaques (and other associated smaller merchandise) – These products are delivered to the customer on an ‘at-need’ basis (generally when the beneficiary has passed away). The revenue recognised for plaques and other associated smaller merchandise such as ash containers, vases and photos, where actual deliveries are not individually tracked, are managed on a portfolio basis given the small value of the individual items. The revenue is recognised over a 15 year period on a straight line basis. The 15 year period represents an actuarial estimate of when the contracts will be delivered. Billing and collection of memorial products contracts can be immediate and in full upon contract signing. However, most memorial products contracts are paid via instalments over a period of up to five years (although the payment periods do vary). The interment right, memorial products and plaques are each considered to be distinct performance obligations under AASB 15 Revenue from Contracts with Customers (AASB 15) as a customer can use the site without a memorial and there is not a transformative or integrated relationship between the products. The transfer of control of these distinct performance obligations determines when revenue should be recognised. Revenue is measured at the fair value of the consideration received or receivable. Amounts disclosed as revenue are net of returns, allowances, duties and taxes paid. Minor items such as plaques, ash containers and vases where actual deliveries are not individually tracked are released to revenue over 15 years. Shareholder and other informationSigned reportsGovernance & Directors’ reportOperating & financial review6532Overview1Consolidated financial statements4 Notes to the consolidated financial statements continued InvoCare Annual Report 2021 82 INVOCARE LIMITED AND SUBSIDIARIES Notes to the consolidated financial statements Key performance metrics 61 Note 4. Dividends A. Dividends paid Cents per share Total amount Tax rate for franking credit Percentage franked 2021 $’000 % % Dividends on InvoCare Limited's ordinary shares 2021 interim dividend 9.5 13,684 30 100 2020 final dividend 7.0 10,082 30 100 23,766 2020 2020 interim dividend 5.5 7,894 30 100 2019 final dividend 23.5 27,538 30 100 35,432 B. Dividends determined and not recognised at year end On 28 February 2022, the Directors determined a final dividend of 11.5 cents per share, fully franked, to be paid on 8 April 2022. As this occurred after the reporting date, the dividends determined have not been recognised in these financial statements and will be recognised in future financial statements. The Company has a Dividend Reinvestment Plan (DRP) that allows equity holders to elect to receive their dividend entitlement in the form of the Company’s ordinary shares. The price of DRP shares is the average market price, less a discount if any (determined by the directors) calculated over the pricing period (which is at least five trading days) as determined by the directors for each dividend payment date. The Company’s DRP operates by acquiring shares on market. Election notices for participation in the DRP in relation to this final dividend must be received by 7 March 2022. C. Franking credits 2021 2020 $’000 $’000 As at 31 December 32,588 35,133 Franking credits available for subsequent financial years include: • Franking credits that will arise from the payment of the amount of the provision for income tax at the reporting date • Any franking debits that will arise from the payment of dividends recognised as a liability at the reporting date Franking credits that will arise from the receipt of dividends recognised as receivables at the reporting date D. Accounting policy for dividends Dividends are recognised when determined during the financial year. INVOCARE LIMITED AND SUBSIDIARIES Notes to the consolidated financial statements Key performance metrics Note 5. Significant profit and loss items The table below provides further details on significant profit and loss items as reported in the consolidated statement of comprehensive income. A. Finance costs Interest paid and payable Interest expense: customer advance payments Interest expense on lease liabilities Other finance costs Realised loss on early settlement of interest rate swaps Interest expense on pre-paid contracts B. Depreciation, amortisation and impairment of non-current assets Buildings Property, plant and equipment Right of use assets Total depreciation Cemetery land Leasehold land and buildings Leasehold improvements Brand names Capitalised software Amortisation of non-current assets Total depreciation and amortisation Impairment of non-current assets Cemetery land impairment reversal Impairment loss on intangibles Impairment (gain)/loss on intangibles Total depreciation, amortisation and impairment C. Impairment loss – financial assets Trade receivables D. Leases expense Expense relating to short term leases Expense relating to leases of low value assets not included in short term leases E. Lease modifications and terminations impact Net gain on lease modifications/terminations Additional accelerated depreciation expense Net gain on lease modifications/terminations F. Employee benefits expense Defined contribution superannuation expense Share-based payments expense G. SaaS arrangements SaaS arrangements expensed as incurred Pre-paid technology expenses Accelerated unwind of pre-paid technology assets 2021 $’000 7,588 2,096 5,718 2,072 - 17,474 20,612 5,957 16,123 17,331 39,411 390 141 4,503 1,197 2,124 8,355 Restated 2020 $’000 11,122 3,232 5,297 3,156 2,122 24,929 20,277 5,927 13,723 16,384 36,034 445 141 2,642 1,457 1,846 6,531 47,766 42,565 (4,000) - (4,000) 43,766 (6,000) 19,324 13,324 55,889 1,599 3,598 484 730 1,214 1,517 (1,079) 438 936 905 1,841 - - - 12,194 2,894 10,993 1,192 4,170 654 424 5,248 7,184 750 3,192 11,126 H. Accounting policies The accounting policies on the above specified expenses are located in the notes where the assets or liabilities are disclosed other than defined contribution superannuation expense disclosed below. Defined contribution superannuation expense Contributions to defined contribution superannuation plans are expensed in the period in which they are incurred. 62 InvoCare Annual Report 2021 83 Shareholder and other informationSigned reportsGovernance & Directors’ reportOperating & financial review6532Overview1Consolidated financial statements4 Notes to the consolidated financial statements continued INVOCARE LIMITED AND SUBSIDIARIES Notes to the consolidated financial statements Key performance metrics Note 6. Income tax A. Income tax expense Current tax Deferred tax (Over)/under provided in prior years Income tax expense B. Reconciliation of income tax expense to prima facie tax payable Profit/(loss) before income tax Prima facie tax at 30% (2020: 30%) on profit/(loss) before income tax Tax effect of amounts which are not deductible/(taxable) in calculation of taxable income: Effect of foreign tax rate differences Acquisition costs Capital gains not subject to tax as offset against capital losses Impairment loss on intangibles Non-deductible interest expense Effect of interest rate swap settlement Other items (net) (Over)/under provision in prior years Income tax expense attributable to continuing operations 2021 $’000 18,155 14,331 (1,895) 30,591 Restated 2020 $’000 7,232 (1,537) 1,260 6,955 110,862 (4,420) 33,259 (1,326) (931) 250 (1,604) - 199 - 1,313 32,486 (1,895) 30,591 (192) 465 (405) 5,850 232 1,005 66 5,695 1,260 6,955 C. Tax expense relating to items of other comprehensive income Cash flow hedges 311 880 D. Deferred tax liability The deferred tax liability balances comprised temporary differences attributable to: Amounts recognised in profit and loss: Cemetery land Property, plant and equipment Deferred selling costs Prepayments and other Pre-paid technology assets Brand names Capitalised software Pre-paid contracts Provisions Receivables Accruals and other Deferred revenue Leased assets Amounts recognised directly in equity: Cash flow hedge reserve The net movement in the deferred tax liability is as follows: Balance at the beginning of the year Net charge/(credit) to statement of comprehensive income – current period Net credit to statement of comprehensive income – prior periods Amounts recognised directly in equity Additions from business combinations Effect of movements in exchange rates Balance at the end of the year 32,180 5,774 10,727 410 2,708 1,534 (6,726) 32,828 (6,877) (2,125) (7,797) (13,769) (6,539) (21) 42,307 28,832 14,331 (2,505) 311 - 1,338 42,307 30,750 3,831 11,938 485 1,588 2,408 (6,272) 21,777 (6,480) (1,923) (3,027) (19,318) (6,593) (332) 28,832 31,942 (1,537) (1,939) 880 544 (1,058) 28,832 63 InvoCare Annual Report 2021 84 INVOCARE LIMITED AND SUBSIDIARIES Notes to the consolidated financial statements Key performance metrics E. Tax losses The Australian Group has nil capital losses (2020: nil) available to offset against capital gains in future years. F. Voluntary tax transparency code disclosure The Tax Transparency Code (TTC) is a set of principles and minimum standards to guide medium and large businesses on public disclosure of tax information. The TTC was developed by the Board of Taxation and endorsed by the Government in the Federal Budget 2016–17. Adoption of the TTC is voluntary and intended to complement Australia’s existing tax transparency measures. The TTC is designed to encourage greater transparency within the corporate sector, particularly by multinationals, and to enhance the community’s understanding of the corporate sector's compliance with Australian’s tax laws. Companies (including entities treated as companies for Australian tax purposes) that are medium or large businesses are encouraged to adopt the TTC. For the purpose of TTC, InvoCare is currently classified as a medium business and elected to adopt TTC. InvoCare has formally submitted to the Board of Tax to be added as a signatory to the TTC. Income tax expense on reported profit of the Group was $30,591,000 (2020: $6,955,000), representing an effective rate of 29.3% (2020: 38.1%). An analysis of tax paid, based on tax residency status, for Australia and the Group is set out below. Profit/(loss) before income tax Tax at nominal rate in relevant country Increase/(decrease) due to non-temporary differences Non-deductible acquisition costs Capital gains offset against capital losses or not subject to tax Impairment loss on intangibles Foreign exempt dividends Non-deductible interest expense Other items Increase/(decrease) due to temporary differences Unrealised pre-paid contract funds under management gains and losses Impairment of capitalised software Impairment of cemetery land Technology expenses capitalised for tax Property, plant and equipment temporary differences Deferred revenue subject to tax in prior years Deferred selling expenses Provisions Accruals Share based payments Other items Current income tax paid or payable Current income tax paid ratea,b Current year income tax expensec Effective tax ratea,d Prior period tax adjustments Australia Group 2021 $'000 108,050 Restated 2020 $'000 16,678 2021 $'000 110,862 Restated 2020 $'000 (4,420) 32,415 5,003 32,328 (1,518) 241 (1,620) - (1,168) - 23 (11,282) - (1,200) 196 (1,834) (4,591) 460 165 2,832 761 (147) 15,251 465 (517) - (2,478) - 165 6,655 895 (1,800) 2,423 (3,914) (4,540) 890 1,075 326 (227) 1,358 5,779 250 (1,604) - - 175 51 (11,282) - (1,200) 196 (2,273) (4,591) 460 232 2,861 761 312 16,676 465 (405) 5,411 - 232 194 6,655 895 (1,800) 2,423 (4,075) (4,540) 1,054 1,129 356 (227) 983 7,232 14.1% 34.7% 15.0% 29.1% 30,766 4,137 32,486 5,695 28.5% 24.8% 29.3% 38.1% (2,029) 1,427 (1,895) 1,260 a 2020 Group current income tax paid rate and effective tax rate disclosed above are calculated after removing the impact of the New Zealand group loss before tax of $21,026,000, which is largely attributable to the impairment loss on intangibles of $19,324,000; and adjusting for the impact of the remaining New Zealand loss and Hong Kong loss on the respective rate b Calculated as the current income tax paid or payable divided by the profit before income tax, subject to footnote a above c Current year tax expense excludes prior period tax adjustments d Calculated as the current year income tax expense divided by the profit before income tax, subject to footnote a above 64 InvoCare Annual Report 2021 85 Shareholder and other informationSigned reportsGovernance & Directors’ reportOperating & financial review6532Overview1Consolidated financial statements4 Notes to the consolidated financial statements continued InvoCare Annual Report 2021 86 INVOCARE LIMITED AND SUBSIDIARIES Notes to the consolidated financial statements Key performance metrics 65 Governance of tax planning for the Group has been delegated by the Board to the Audit, Risk & Compliance Committee (Committee), which pursues a non-aggressive tax planning strategy which is principled, transparent and sustainable in the long term. It oversees the Group’s tax affairs in a pro-active manner that seeks to maximise shareholder value, while operating in accordance with the law, and not participating in any aggressive tax planning activities. The Committee receives a regular report on the Group’s tax compliance. Tax planning initiatives are not implemented until they receive approval from the Committee. Tax risks and opportunities are rated according to their potential impact which determines whether management or the Committee has the delegated authority to resolve the matter. During 2021, $1,459,294 of capital gains were realised on the sale of land and buildings. The Group has a limited number of international related party arrangements in place. They are: • An Australian subsidiary receives dividends from Singapore Casket Company, which is resident in Singapore • The New Zealand group is charged management fees, based on time spent, for management, administration, accounting and other services provided by the Australian operation Loans from the Australian group to subsidiaries outside Australia are made occasionally under documented loan agreements. A loan of NZ$50,000,000 was made by InvoCare Limited to InvoCare Holdings New Zealand Limited on 23 September 2021 In addition to income tax paid, the Australian group paid the following types of taxes and fees during 2021: • Payroll tax of $5,588,000 (2020: $6,779,000) • Fringe benefits tax of $1,480,000 (2020: $1,791,000) • Land tax on owned buildings of $5,159,000 (2020: $5,360,000), to various state governments Council and water rates paid to various authorities of $3,228,000 (2020: $3,330,000) G. Accounting policy for income tax The income tax expense or benefit for the period is the tax payable on that period's taxable income based on the applicable income tax rate for each jurisdiction, adjusted by the changes in deferred tax assets and liabilities attributable to temporary differences, unused tax losses and the adjustment recognised for prior periods, where applicable. Deferred tax assets and liabilities are recognised for temporary differences at the tax rates expected to be applied when the assets are recovered or liabilities are settled, based on those tax rates that are enacted or substantively enacted. Deferred tax assets are recognised for deductible temporary differences and unused tax losses only if it is probable that future taxable amounts will be available to utilise those temporary differences and losses. The carrying amount of recognised and unrecognised deferred tax assets are reviewed at each reporting date. Deferred tax assets recognised are reduced to the extent that it is no longer probable that future taxable profits will be available for the carrying amount to be recovered. Previously unrecognised deferred tax assets are recognised to the extent that it is probable that there are future taxable profits available to recover the asset. Deferred tax assets and liabilities are offset only where there is a legally enforceable right to offset current tax assets against current tax liabilities and deferred tax assets against deferred tax liabilities; and they relate to the same taxable authority on either the same taxable entity or different taxable entities which intend to settle simultaneously. Deferred tax balances are presented as non-current assets/liabilities on the balance sheet. Current and deferred tax balances attributable to amounts recognised directly in equity are also recognised in equity. InvoCare Annual Report 2021 87 INVOCARE LIMITED AND SUBSIDIARIES Notes to the consolidated financial statements Key performance metrics 66 Note 7. Cash flow information A. Reconciliation of cash flows from operations with net profit after income tax Restated 2021 2020 $’000 $’000 Net profit/(loss) from ordinary activities after income tax 80,158 (11,542) Adjustments for non-cash items in (loss)/profit from ordinary activities Depreciation and amortisation 47,766 42,565 Pre-paid technology expenses 654 750 Impairment loss on intangibles - 19,324 Accelerated unwind of pre-paid technology assets 424 3,192 Impairment reversal on cemetery land (4,000) (6,000) Share-based payments expense 2,894 1,192 Loan establishment costs 964 890 Net gain on disposal of property, plant and equipment (6,808) (7,382) Unrealised (gain)/loss on pre-paid contracts (44,085) 16,618 Other pre-paid contract movements 20,564 15,749 Interest expense: customer advance payments 2,096 3,232 Other non-cash deferred revenue/deferred selling costs movements (30,082) (26,120) Foreign exchange gain (1,069) - Loss on disposal of business 278 - Non-cash interest expense on interest rate swaps 839 - Gain on lease modifications/terminations (1,517) - Business acquisition costs classified in investing activities 743 1,918 Changes in assets and liabilities, net of the effects of purchase and disposal of subsidiaries (Increase)/decrease in trade and other receivables 1,001 (1,117) (Increase)/decrease in inventories (2,773) (11) (Increase)/decrease in deferred contract assets 2,104 2,383 (Increase)/decrease in deferred selling expenses 1,956 2,217 Increase/(decrease) in trade and other payables (2,795) (780) Increase/(decrease) in deferred revenue (9,758) (1,583) Increase/(decrease) in income taxes payable 3,866 1,061 Increase/(decrease) in deferred taxes 13,476 (2,565) Increase/(decrease) in provisions 844 2,393 Net cash flows from operating activities 77,740 56,384 B. Non-cash investing and financing activities Non-cash investing and financing activities for the current and prior financial years are: • Dividends satisfied by the issue of shares under the dividend reinvestment plan of $Nil as shares are bought on market (2020: $5,918,000) Performance rights and shares issued to employees under the Employee Share Trusts Plan and employee share scheme for no cash consideration. C. Net debt reconciliation The tables set out below provide an analysis of net debt and the movements in net debt for the current and last financial year. Cash and cash equivalents Borrowings Lease liabilities Net debts 2021 $’000 $’000 $’000 $’000 Net debt as at 1 January 2021 118,781 (246,039) (165,924) (293,182) Cash flows (64,952) 59,680 20,196 14,924 Additions through business combinations - - (237) (237) Additions/variations - - (30,218) (30,218) Surrender/terminations - - 7,197 7,197 Interest expense on lease liabilities - - (5,718) (5,718) Foreign exchange adjustments (199) (2,484) (698) (3,381) Net debt as at 31 December 2021 53,630 (188,843) (175,402) (310,615) 2020 Net debt as at 1 January 2020 19,560 (357,189) (162,901) (500,530) Cash flows 99,433 106,761 11,599 217,793 Additions/variations - - (9,631) (9,631) Interest expense on lease liabilities - - (5,297) (5,297) Foreign exchange adjustments (212) 4,389 306 4,483 Net debt as at 31 December 2020 118,781 (246,039) (165,924) (293,182) Shareholder and other informationSigned reportsGovernance & Directors’ reportOperating & financial review6532Overview1Consolidated financial statements4Notes to the consolidated financial statements continued INVOCARE LIMITED AND SUBSIDIARIES Notes to the consolidated financial statements Key performance metrics D. Cash conversion ratio The cash conversion ratio is one of the key cash performance metrics of the Group, refer to the table below for detail calculation. Operating cash flows Add back: Net finance costs paid Add back: Tax paid Net funds from pre-paid contracts Other cash flows related to pre-paid contracts Ungeared, tax free operating cash flows Operating EBITDA Cash conversion % 2021 $’000 77,740 14,219 9,771 29,306 877 131,913 Restated 2020 $’000 56,384 17,046 14,424 12,857 1,429 102,140 125,477 102,565 105% 100% The conversion ratio calculation and the line items as shown in the table below are all non-IFRS information. However, all financial data is based on the information disclosed in the audited financial statements and notes to the financial statements of InvoCare and follow the recognition requirements of Australian Accounting Standards. Although the adoption of AASB 15 and AASB 16 have significant financial impacts on the Group, they have had no cash impact. E. Cash and cash equivalents Cash on hand Cash at bank 2021 $’000 99 53,531 53,630 2020 $’000 126 118,655 118,781 Cash at bank is non-interest bearing as at 31 December 2020 and 2021. Therefore, the weighted average interest rate for cash at bank is rounded to zero for both 2020 and 2021. 67 InvoCare Annual Report 2021 88 INVOCARE LIMITED AND SUBSIDIARIES Notes to the consolidated financial statements Key performance metrics D. Cash conversion ratio Operating cash flows Add back: Net finance costs paid Add back: Tax paid Net funds from pre-paid contracts Other cash flows related to pre-paid contracts Ungeared, tax free operating cash flows Operating EBITDA Cash conversion % Cash on hand Cash at bank The conversion ratio calculation and the line items as shown in the table below are all non-IFRS information. However, all financial data is based on the information disclosed in the audited financial statements and notes to the financial statements of InvoCare and follow the recognition requirements of Australian Accounting Standards. Although the adoption of AASB 15 and AASB 16 have significant financial impacts on the Group, they have had no cash impact. E. Cash and cash equivalents Cash at bank is non-interest bearing as at 31 December 2020 and 2021. Therefore, the weighted average interest rate for cash at bank is rounded to zero for both 2020 and 2021. 2021 $’000 77,740 14,219 9,771 29,306 877 Restated 2020 $’000 56,384 17,046 14,424 12,857 1,429 131,913 102,140 125,477 102,565 105% 100% 2021 $’000 99 53,531 53,630 2020 $’000 126 118,655 118,781 The cash conversion ratio is one of the key cash performance metrics of the Group, refer to the table below for detail calculation. This section contains the key assets and liabilities in relation to the three main streams of businesses, being funeral business (at-need and pre-need) and the cemeteries and crematoria business. These assets and liabilities are disclosed in: Note 8. Trade receivables Note 9. Pre-paid contracts Note 11. Non-current operating assets Note 12. Intangibles Note 10. Deferred revenue and selling costs Note 13. Pre-paid technology assets INVOCARE LIMITED AND SUBSIDIARIES Notes to the consolidated financial statements Significant assets and liabilities Note 8. Trade receivables Current Trade receivables Less: loss allowance Non-current Trade receivables Less: loss allowance 2021 $’000 49,565 (7,114) 42,451 23,849 - 23,849 2020 $’000 45,230 (6,473) 38,757 29,445 - 29,445 A. Loss allowance The ageing of the impaired trade receivables provided for above are as follows: Expected credit loss rate Carrying amount Allowance for expected credit losses Forward aged (12 - 60 months contracts) Current Over 30 days past due Over 60 days past due Over 90 days past due 2021 % - 0.2 1.5 10.5 49.9 2020 % - 0.2 1.5 10.5 39.5 2021 $’000 38,887 14,738 3,978 2,194 13,617 73,414 2020 $’000 36,482 13,718 5,765 3,535 15,175 74,675 The movements of loss allowance of trade receivables are as follows: As at 1 January Loss allowance recognised during the year Receivables written off as uncollectable As at 31 December 2021 $’000 - 29 60 230 6,795 7,114 2021 $’000 6,473 1,289 (648) 7,114 2020 $’000 - 27 86 371 5,988 6,473 2020 $’000 3,675 3,667 (869) 6,473 67 68 InvoCare Annual Report 2021 89 Shareholder and other informationSigned reportsGovernance & Directors’ reportOperating & financial review6532Overview1Consolidated financial statements4 Notes to the consolidated financial statements continued INVOCARE LIMITED AND SUBSIDIARIES Notes to the consolidated financial statements Significant assets and liabilities B. Accounting policies I. Trade receivables Trade receivables are amounts due from customers for goods sold or services performed in the ordinary course of business. They are initially recognised at the amount of consideration that is unconditional. The Group holds the trade receivables with the objective to collect the contractual cash flows and therefore measures them subsequently at amortised cost using the effective interest method. Trade receivables are usually due for settlement no more than 30 days from the date of recognition, except where extended payment terms (up to a maximum of 60 months) have been made available on cemetery and crematorium memorial contracts for sale of interment rights and associated memorials and other merchandise. Receivables arising from cemetery and crematorium memorial contracts, which are initially expected to be collected over a period exceeding twelve months, are recognised as non-current receivables and measured as the net present value of estimated future cash receipts, discounted at an imputed effective interest rate. Upon initial recognition of the contract receivables, any undelivered portion of the contracts is included in deferred revenue until delivery. II. Loss allowance on trade receivables The Group has applied the simplified approach to measuring expected credit losses which uses a lifetime expected loss allowance for all trade receivables. To measure the expected credit losses, trade receivables have been grouped based on shared credit risk characteristics and the days past due. When a trade receivable is uncollectible, it is written off against the loss allowance account for trade receivables. Subsequent recoveries of amounts previously written off are credited against sundry revenue in the consolidated statement of comprehensive income. During the year, the Group experienced an increase in the number and amount of uncollectible trade receivables, due to both the age of the balances and certain customers’ financial circumstance. At 31 December 2021, the Group’s loss allowance on trade receivables has been increased with all of the increase related to the Cemeteries & Crematoria and New Zealand Funerals businesses. The increase in provision reflects the Group’s assessment of the potential impact of customers’ inability to repay debts due to financial hardship. The Group has implemented a range of initiatives to mitigate any further deterioration in the risk characteristics of its trade receivables, including requiring the payment of up-front deposits and the introduction of key performance metrics focused on collecting outstanding trade receivables. These initiatives have resulted in the increase in the cash conversion ratio in 2021, however as collection of older trade receivables remains challenging, an increase in the provision is required. Note 9. Pre-paid contracts This note provides details on the movements for the pre-paid contract funds under management and liabilities arising from the sales of pre-paid funeral services for the year ended 31 December 2021 with the comparative information for the year ended 31 December 2020. What happens when a pre-paid contract is signed A pre-paid contract is a three-way agreement whereby the Group agrees to deliver to a customer a specified funeral service at a future date, usually greater than one year but which could be more than 20 years after the signing of the pre-paid contract. Pre-paid contracts are either paid in full or via instalments for a period as specified in the contract. The cash received (funds) from the customer is then passed to independently managed trusts to be invested. The Group is the ultimate beneficiary to the invested funds of the pre-paid contracts, that is, the total future value of the invested funds (including the investment returns, either gains or losses), but only receives those funds once the Group has demonstrated it has performed the funeral services. Part of the initial pre-paid contract relates to an administration fee (usually 10% of the contract value). The administration fee is unable to be recognised as revenue at the date of signing the contract as not all of the conditions of the contract have been performed or delivered at that point. Therefore, the administration fee is deferred and recognised as a liability on the balance sheet (disclosed in Note 10 Section A Deferred revenue). Similarly, any commission paid to pre-paid funeral salespersons is also deferred as a deferred selling cost as an asset on the balance sheet (disclosed in Note 10 Section B Deferred selling costs). Sale of new pre-paid contracts (listed in the movement table in Section B and C below) represents cash received from customers for new pre-paid contracts sold during the period. The sale of new pre-paid contracts increases both the pre-paid contract funds under management and pre-paid contract liabilities and represents the value of the remaining 90% of the pre-paid contracts after the deferral of the 10% administration fee as deferred revenue. What happens during the periods when pre-paid contracts remain undelivered Australian Accounting Standards require InvoCare to update the carrying value of the pre-paid contract funds under management and pre-paid contract liabilities, including the need to account for the time value of money. InvoCare uses asset statement reports issued by the trusts to revalue the pre-paid contract funds under management to reflect the current fair value of the invested funds. Such an adjustment may give rise to unrealised gains or losses on these assets. Due to the volatility of such movements, and because these unrealised movements are ‘non-cash revaluations’, the unrealised gains or losses are excluded from the Group’s Operating earnings and disclosed within Non-operating earnings. 69 InvoCare Annual Report 2021 90 InvoCare Annual Report 2021 91 INVOCARE LIMITED AND SUBSIDIARIES Notes to the consolidated financial statements Significant assets and liabilities 70 By entering a pre-paid contract, the customer is benefiting from the ability to lock in the price of their future funeral service at today’s price. The Group receives payment from customers for pre-paid contracts prior to the transfer of the promised goods or services to the customer. As the period between receipt of the consideration and the transfer of the goods or services can exceed one year, the Group adjusts deferred revenue and pre-paid contract liabilities using a discount rate. The Group determines the discount rate that best reflects the current price the customers would have paid (that is the cash selling price as if the customer had paid the consideration at the time when the services are performed or the goods delivered). These adjustments to increase deferred revenue and pre-paid contract liabilities are recognised as finance costs. These financing components are included in the following two items in Note 5 Section A Finance costs: • Interest expense pre-paid contracts – this finance cost is recognised as an increase in pre-paid contract liabilities - Increase due to significant financing as set out in Section C below Interest expense: customer advance payments – this finance cost is reflected as an increase in administration fee in the deferred revenue – Recognition of financing costs on customer advance payments as set out in Note 10 Section A Deferred revenue under Funeral services movement for the period What happens when a pre-paid contract is delivered When the funeral service is delivered, the corresponding amount of deferred revenue relating to the administration fee is released to the income statement, disclosed as Non-operating revenue. Operating revenue – funeral services is recognised in the statement of comprehensive income with the corresponding pre-paid contract liabilities reduced accordingly (being the initial contract value plus the increases in the liability relating to the financing components recognised since contract inception). Once the services have been delivered, the fair value of the pre-paid contract is redeemed from the trusts and the Group receives the cash. The Group’s right to redeem the invested funds only becomes unconditional when the Group demonstrates it has delivered the services specified in the pre-paid contract with the customer. The following diagram details the key activities throughout the life cycle of a pre-paid contract and how these activities are recognised within the pre-paid contract funds under management, pre-paid contract liabilities and deferred revenue for administration fees (disclosed in Note 10 Section A Deferred revenue). Life cycle of a pre-paid funeral contract Financial impact at reporting dates before service delivery Activities/ Financial impact Customer payments - cash received Finance costs Revaluation of FUM* Funeral service delivered Pre-paid FUM redemptions - cash received Balance sheet impact Admin fees (10%) (Note 10) ↑↑ Deferred revenue (Note 10) ↑↑ Deferred revenue (Note 10) N/A ↓↓ Deferred revenue (Note 10) N/A Funds for pre-paid funeral services (90%) ↑↑ Pre-paid FUM ↑↑ Pre-paid contract liabilities ↑↑ Pre-paid contract liabilities ↑↑/↓↓ Pre-paid FUM N/A ↓↓ Pre-paid FUM ↓↓ Pre-paid contract liabilities Profit and loss impact Admin fees (10%) N/A Finance costs - Admin fee N/A Non-operating revenue - Admin fee N/A Funds for pre-paid funeral services (90%) N/A Finance costs - Customers advance payments Unrealised gain/loss on pre-paid FUM N/A Non-operating revenue - Net gain/loss on pre-paid FUM redemptions Revenue - At-need funeral services N/A N/A N/A Operating revenue - Funeral services N/A Cash flows impact Admin fees (10%) ↑↑ InvoCare bank account N/A N/A N/A N/A Funds for pre-paid funeral services (90%) ↑↑ Trust funds bank account N/A N/A N/A ↓↓ Trust funds bank account ↑↑ InvoCare bank account * FUM = Funds under management Shareholder and other informationSigned reportsGovernance & Directors’ reportOperating & financial review6532Overview1Consolidated financial statements4Notes to the consolidated financial statements continued INVOCARE LIMITED AND SUBSIDIARIES Notes to the consolidated financial statements Significant assets and liabilities A. Statement of comprehensive income impact of undelivered pre-paid contracts Unrealised gain on pre-paid contract funds under management Change in pre-paid contract liabilities due to significant financing Net gain/(loss) on undelivered pre-paid contracts B. Movements in pre-paid contract funds under management Balance as at 1 January Sale of new pre-paid contracts Initial recognition of contracts pre-paid by instalment Redemption of pre-paid contract funds following service delivery Movement due to business combinations Increase in fair value of pre-paid contract funds under management Balance at reporting date Current Non-current Balance at reporting date C. Movements in pre-paid contract liabilities Balance as at 1 January Sale of new pre-paid contracts Initial recognition of contracts pre-paid by instalment Decrease following delivery of services Movement due to business combinations Increase due to significant financing Balance at reporting date Current Non-current Balance at reporting date 2021 $’000 64,697 (20,612) 44,085 2021 $’000 613,131 25,715 2,734 (56,402) - 64,697 649,875 52,959 596,916 649,875 2021 $’000 541,309 25,715 2,734 (49,930) - 20,612 540,440 44,437 496,003 540,440 2020 $’000 3,659 (20,277) (16,618) 2020 $’000 619,389 32,169 3,908 (45,026) (968) 3,659 613,131 50,268 562,863 613,131 2020 $’000 525,383 32,169 3,908 (39,460) (968) 20,277 541,309 44,685 496,624 541,309 D. Classification of pre-paid funds under management and liabilities The current and non-current portions of the pre-paid contract assets and liabilities are disclosed separately to more clearly reflect the expected pattern of usage associated with the timing of actual contract redemptions. E. Critical accounting judgements, estimates and assumptions I. Fair value measurements – Pre-paid contract funds under management The fair values of the pre-paid contract funds under management are recognised and measured based on inputs that require judgements and estimates. To provide an indication about the reliability of the inputs used in determining fair value of the pre-paid contract funds under management, the Group has used Level 2 inputs as prescribed under the accounting standards. Level 2 input for fair value is described as observable inputs either directly (as prices) or indirectly (derived from prices) for the asset or liability, other than the unadjusted quoted prices in active markets. II. Current and non-current split The Group determines the classification of current and non-current portions of pre-paid contract asset and liabilities based on the pattern of usage (based on an independent actuarial review) associated with the timing of actual contract redemptions. This pattern of usage is based on historical data, which is reviewed annually and has remained consistent over the past five years. F. Accounting policies for pre-paid contracts The Group records the value of the invested funds as an asset and revalues the invested funds to fair value at the end of each reporting period. The Group initially recognises a liability equal to the value of the undelivered service associated with pre-paid contracts and adjusts the deferred revenue using a discount rate that results in revenue being recognised that approximates the cash selling price the customer would have paid if the consideration is paid at the same time as the services are provided. When the service is delivered, the liability is derecognised and included in revenue. 71 InvoCare Annual Report 2021 92 INVOCARE LIMITED AND SUBSIDIARIES Notes to the consolidated financial statements Significant assets and liabilities Note 10. Deferred revenue and selling costs This note provides details on the movements for the deferred revenue and deferred selling costs arising from the sales of pre-paid funeral, cremation and burial contracts and undelivered memorials and merchandise for the year ended 31 December 2021 with the comparative information for the year ended 31 December 2020. The movements are disclosed according to the activities performed to align with the disclosure in Note 2 Revenue. A. Deferred revenue I. Cemeteries & Crematoria For the Cemeteries & Crematoria business, deferred revenue represents the undelivered contractual obligations relating to burial, cremation and memorial services/merchandise products. The transfer of control of these distinct performance obligations determines when revenue should be recognised. Billing and collection of the pre-paid contracts can be immediate and in full upon contract signing. However, most pre-paid contracts are paid via instalments over a period of up to five years (although the payment periods do vary). The following diagram details the key activities throughout the life cycle of a pre-paid Cemeteries & Crematoria contract and how these activities are recognised within deferred revenue. Life cycle of a prepaid Cemeteries & Crematoria contract Customer payments - by instalments Finance costs* Customer payments - by instalments Finance costs* Services/goods delivered Repeated activities until services/goods delivered ↑↑ Deferred revenue ↑↑ Deferred revenue ↑↑ Deferred revenue ↑↑ Deferred revenue ↓↓ Deferred revenue N/A Finance costs - Customers advance payments N/A Finance costs - Customers advance payments Operating revenue - Cemeteries & Crematoria ↑↑ InvoCare bank account N/A ↑↑ InvoCare bank account N/A N/A Activities/ Financial impact Balance sheet impact Cemeteries & Crematoria services/goods Profit and loss impact Cemeteries & Crematoria services/goods Cash flows impact Cemeteries & Crematoria services/goods * This represents the Australian Accounting Standards requirement to account for the time value of money. II. Funeral services – Pre-paid funeral contracts For the Funeral services business, detailed descriptions of what happens during the life cycle of a pre-paid funeral contract are provided in Note 9 Pre-paid contracts above. The movement table below provides the financial impact of the administration fee of the pre-paid funeral contracts for the year ended 31 December 2021 with the comparative information for the year ended 31 December 2020. 72 InvoCare Annual Report 2021 93 Shareholder and other informationSigned reportsGovernance & Directors’ reportOperating & financial review6532Overview1Consolidated financial statements4 Notes to the consolidated financial statements continued INVOCARE LIMITED AND SUBSIDIARIES Notes to the consolidated financial statements Significant assets and liabilities III. Deferred revenue movement Balance as at 1 January Add/(less): Changes during the period Cash received from customer instalment payments Revenue recognised on service delivery during the period Revenue deferred during the period: Revenue deferred Recognition of financing costs on customer advance payments Balance at reporting date Current Non-current Balance at reporting date Cemeteries & Crematoria $’000 100,276 2021 Funeral services $’000 37,442 Cemeteries & Crematoria $’000 103,507 Total $’000 137,718 2020 Funeral services $’000 35,794 Total $’000 139,301 5,560 - 5,560 9,938 - 9,938 (21,436) (3,277) (24,713) (19,844) (2,667) (22,511) 4,057 3,241 7,298 4,720 3,038 7,758 871 89,328 30,763 58,565 89,328 1,225 38,631 2,096 127,959 1,955 100,276 1,277 37,442 3,232 137,718 3,313 35,318 38,631 34,076 93,883 127,959 28,632 71,644 100,276 - 37,442 37,442 28,632 109,086 137,718 B. Deferred selling costs Deferred selling costs in relation to both Cemeteries & Crematoria and Funeral services businesses represent selling commissions and directly related fulfillment costs which are deferred and recognised as cost of sales in line with the reversal of the related deferred revenue of those businesses (that is, upon delivery/performance of the underlying services/goods). The movement table below provides the financial impact of selling costs arising from the sales of pre-paid funeral, cremation and burial contracts and undelivered memorials and merchandise for the year ended 31 December 2021 with the comparative information for the year ended 31 December 2020. Balance as at 1 January Add/(less): Changes during the period Selling costs recognised in profit and loss related to service delivery during the period Selling costs deferred on sales during the period Balance at reporting date Current Non-current Balance at reporting date Cemeteries & Crematoria $’000 17,179 2021 Funeral services $’000 20,533 Cemeteries & Crematoria $’000 19,265 Total $’000 37,712 2020 Funeral services $’000 20,663 Total $’000 39,928 (2,435) (287) (2,722) (2,605) (130) (2,735) 765 15,509 4,571 10,938 15,509 - 20,246 1,673 18,573 20,246 765 35,755 6,244 29,511 35,755 519 17,179 3,644 13,535 17,179 - 20,533 - 20,533 20,533 519 37,712 3,644 34,068 37,712 C. Accounting policies I. Deferred revenue Revenue relating to undelivered memorials and merchandise are deferred until delivered or made ready for use. II. Deferred selling costs Direct selling costs applicable to deferred revenue on undelivered memorials and merchandise are deferred until the revenue is recognised. Direct selling costs applicable to sale of pre-paid funeral, cremation, and burial contracts are deferred until the underlying service is delivered. 73 InvoCare Annual Report 2021 94 INVOCARE LIMITED AND SUBSIDIARIES Notes to the consolidated financial statements Significant assets and liabilities III. Deferred revenue movement Cemeteries & Crematoria $’000 100,276 2021 Funeral services $’000 37,442 Cemeteries & Crematoria $’000 103,507 Total $’000 137,718 2020 Funeral services $’000 35,794 Total $’000 139,301 5,560 - 5,560 9,938 - 9,938 (21,436) (3,277) (24,713) (19,844) (2,667) (22,511) 4,057 3,241 7,298 4,720 3,038 7,758 871 89,328 30,763 58,565 89,328 1,225 38,631 2,096 127,959 1,955 100,276 1,277 37,442 3,232 137,718 3,313 35,318 38,631 34,076 93,883 127,959 28,632 71,644 100,276 - 37,442 37,442 28,632 109,086 137,718 Balance as at 1 January Add/(less): Changes during the period Cash received from customer instalment payments Revenue recognised on service delivery Revenue deferred during the period: during the period Revenue deferred Recognition of financing costs on customer advance payments Balance at reporting date Current Non-current Balance at reporting date B. Deferred selling costs Deferred selling costs in relation to both Cemeteries & Crematoria and Funeral services businesses represent selling commissions and directly related fulfillment costs which are deferred and recognised as cost of sales in line with the reversal of the related deferred revenue of those businesses (that is, upon delivery/performance of the underlying services/goods). The movement table below provides the financial impact of selling costs arising from the sales of pre-paid funeral, cremation and burial contracts and undelivered memorials and merchandise for the year ended 31 December 2021 with the comparative information for the year ended 31 December 2020. Cemeteries & Crematoria $’000 17,179 2021 Funeral services $’000 20,533 Cemeteries & Crematoria $’000 19,265 Total $’000 37,712 2020 Funeral services $’000 20,663 Total $’000 39,928 (2,435) (287) (2,722) (2,605) (130) (2,735) 765 15,509 4,571 10,938 15,509 - 20,246 1,673 18,573 20,246 765 35,755 6,244 29,511 35,755 519 17,179 3,644 13,535 17,179 20,533 - - 20,533 20,533 519 37,712 3,644 34,068 37,712 Balance as at 1 January Add/(less): Changes during the period Selling costs recognised in profit and loss related to service delivery during Selling costs deferred on sales during the the period period Balance at reporting date Current Non-current Balance at reporting date C. Accounting policies I. Deferred revenue II. Deferred selling costs service is delivered. Revenue relating to undelivered memorials and merchandise are deferred until delivered or made ready for use. Direct selling costs applicable to deferred revenue on undelivered memorials and merchandise are deferred until the revenue is recognised. Direct selling costs applicable to sale of pre-paid funeral, cremation, and burial contracts are deferred until the underlying 73 InvoCare Annual Report 2021 95 INVOCARE LIMITED AND SUBSIDIARIES Notes to the consolidated financial statements Significant assets and liabilities 74 Note 11. Non-current operating assets This note includes the information for the following two categories of non-current operating assets: • Property, plant and equipment Right of use assets and the related lease liability A. Property, plant and equipment Cemetery land Freehold land Buildings Leasehold land and buildings Leasehold Improve- ments Plant and equip- ment Total 2021 $’000 $’000 $’000 $’000 $’000 $’000 $’000 Composition as at 31 December 2021 Cost 122,754 102,082 265,366 4,534 40,736 175,480 710,952 Accumulated depreciation/amortisation (9,958) - (80,323) (3,972) (11,333) (105,613) (211,199) Accumulated impairment (5,299) - - - - - (5,299) Net book value 107,497 102,082 185,043 562 29,403 69,867 494,454 Movement for the year ended 31 December 2021 Opening net book value 103,712 100,478 172,959 703 24,386 62,039 464,277 Additions 196 560 22,312 - 6,694 24,005 53,767 Additions through business combinations - - - - - 102 102 Disposals (34) (1,152) (1,985) - (422) (917) (4,510) Depreciation/amortisation charge (390) - (5,957) (141) (4,503) (16,123) (27,114) Impairment reversal 4,000 - - - - - 4,000 Effect of movement in exchange rates 13 706 (227) - 5 735 1,232 Transfers to/(from) held for sale - 1,490 (2,059) - 3,243 26 2,700 Closing net book value 107,497 102,082 185,043 562 29,403 69,867 494,454 2020 Composition as at 31 December 2020 Cost 122,579 100,478 246,480 4,534 33,574 160,000 667,645 Accumulated depreciation/amortisation (9,568) - (73,521) (3,831) (9,188) (97,961) (194,069) Accumulated impairment (9,299) - - - - - (9,299) Net book value 103,712 100,478 172,959 703 24,386 62,039 464,277 Movement for the year ended 31 December 2020 Opening net book value 97,094 102,503 148,459 844 20,187 57,868 426,955 Additions 1,146 515 32,478 - 6,310 15,939 56,388 Business combinations - - - - 668 1,697 2,365 Disposals - (2,670) (2,090) - (102) 408 (4,454) Depreciation/amortisation charge (445) - (5,927) (141) (2,642) (13,723) (22,878) Impairment reversal 6,000 - - - - - 6,000 Effect of movement in exchange rates (83) (1,671) (1,177) - (35) (150) (3,116) Transfers to held for sale - 1,801 1,216 - - - 3,017 Closing net book value 103,712 100,478 172,959 703 24,386 62,039 464,277 Shareholder and other informationSigned reportsGovernance & Directors’ reportOperating & financial review6532Overview1Consolidated financial statements4 Notes to the consolidated financial statements continued InvoCare Annual Report 2021 96 INVOCARE LIMITED AND SUBSIDIARIES Notes to the consolidated financial statements Significant assets and liabilities 75 I. Assets in the course of construction The carrying amounts of assets disclosed above include the following expenditure recognised in relation to property, plant and equipment which is in the course of construction. 2021 2020 $’000 $’000 Cemetery land improvements - 31 Freehold buildings 7,754 6,945 Leasehold improvements 548 574 Plant and equipment 2,049 696 Total assets in the course of construction 10,351 8,246 II. Impairment All cemetery and crematorium sites were assessed during the year using consistently applied methodology and no changes to the impairment provision were deemed necessary except as noted below. In 2017, the Allambe Gardens Memorial Park was impaired due to a reassessment of the land available for memorialisation plots. In 2018, remediation of the residual land at the Memorial Park commenced. The remediation of the residual land was completed in January 2020. Once all phases of the monumental developments are complete, the Lakeside development will ultimately result in over 3,000 burial spaces, increasing the lifespan of the park. In 2021 the Allambe Gardens Memorial Park continued to deliver improved results allowing for a reversal of $4,000,000 of the previous impairment to be recognised at 31 December 2021 (2020: $6,000,000). The recoverable amount of cash-generating units is based on value-in-use calculations. These calculations use cash flow projections based on financial estimates approved by management based on past performance and future expectations. The cash flows cover an initial five-year period and are then extrapolated beyond five years using estimated growth rates of 2.5% (2020: 2.5%) in revenue and 2.0% (2020: 2.0%) in expenses which are not inconsistent with historical trends and forecasts included in reports prepared by market analysts. A sensitivity analysis has been conducted on the impaired sites by moving the underlying assumptions both up and down 10%, considered to be within the reasonably possible range of long-term outcomes. This analysis demonstrates that changing the assumptions is unlikely to result in a material change in the currently recognised impairment losses. The pre-tax discount rate used was 9.2% (2020: 9.2%), reflecting the risk estimates for the business as a whole. III. Asset held for sale Asset held for sale represents property identified as surplus to the Group’s requirements. B. Right of use assets and lease liabilities The Group leases various properties, cemeteries, equipment and motor vehicles. Rental contracts are typically made for fixed periods of 5 to 10 years, with some leases for periods of 30 years. Extension and termination options are included in a number of property leases across the Group. These terms are used to maximise operational flexibility in terms of managing contracts. The majority of extension and termination options held are exercisable only by the Group and not by the respective lessor. Lease terms are negotiated on an individual basis and contain a wide range of different terms and conditions. The lease agreements do not impose any covenants, and leased assets may not be used as security for borrowing purposes. This section provides information for leases where the Group is a lessee. The consolidated balance sheet shows the following types of assets and liabilities related to leases: • Right of use assets Lease liabilities I. Right of use assets Properties Equipment Motor vehicles Total 2021 $’000 $’000 $’000 $’000 Composition as at 31 December 2021 Cost 172,530 621 18,456 191,607 Accumulated depreciation (30,974) (308) (7,010) (38,292) Net book value 141,556 313 11,446 153,315 Movement for the year ended 31 December 2021 Opening net book value 133,179 356 10,833 144,368 Additions 23,680 - 4,249 27,929 Additions through business combinations 237 - - 237 Lease modifications/terminations (2,435) - - (2,435) Depreciation (13,652) (43) (3,636) (17,331) Effect of movement in exchange rates 547 - - 547 Closing net book value 141,556 313 11,446 153,315 InvoCare Annual Report 2021 97 INVOCARE LIMITED AND SUBSIDIARIES Notes to the consolidated financial statements Significant assets and liabilities 76 Properties Equipment Motor vehicles Total 2020 $’000 $’000 $’000 $’000 Composition as at 31 December 2020 Cost 156,103 721 14,480 171,304 Accumulated depreciation (22,924) (365) (3,647) (26,936) Net book value 133,179 356 10,833 144,368 Movement for the year ended 31 December 2020 Opening net book value 129,359 425 14,217 144,001 Additions 9,309 27 130 9,466 Additions through business combinations 6,978 - - 6,978 Depreciation (12,774) (96) (3,514) (16,384) Effect of movement in exchange rates 307 - - 307 Closing net book value 133,179 356 10,833 144,368 II. Lease liabilities on related right of use assets 2021 2020 $’000 $’000 Current 20,671 19,465 Non-current 154,731 146,459 Balance as at 31 December 175,402 165,924 C. Critical accounting judgements, estimates and assumptions I. Estimated impairment of non-financial assets The Group annually considers if events or changes in circumstances indicate that the carrying value of non-financial assets may not be recoverable. Similarly, at each reporting date, the non-financial assets that suffered a previous impairment are reviewed for possible reversals of the impairment. The recoverable amounts are determined based on value-in-use calculations which require the use of assumptions. Refer to section A.II above for details of these assumptions and the potential impact to changes to the assumptions. II. Determining the lease term In determining the lease term, management considers all facts and circumstances that create an economic incentive to exercise an extension option, or not exercise a termination option. Extension options (or periods after termination options) are only included in the lease term if the lease is reasonably certain to be extended (or not terminated). The Group has assessed it is reasonably certain that it will exercise its option to renew all leases. The assessment is reviewed if a significant event or a significant change in circumstances occurs which affects this assessment and that is within the control of the Group. D. Accounting policies I. Property, plant and equipment Property, plant and equipment are carried at historical cost less depreciation or amortisation. Historical cost includes expenditure that is directly attributable to the acquisition of the items. Subsequent costs are included in the asset’s carrying amount or recognised as a separate asset, as appropriate, only when it is probable that future economic benefits associated with the item will flow to the Group and the cost of the item can be measured reliably. Repairs, maintenance, and minor renewals are charged to the statement of comprehensive income during the financial period in which they are incurred. Cemetery land is carried at cost less accumulated depreciation and impairment write-downs. The Group sells interment and inurnment rights while retaining title to the property. Cemetery land is amortised, as the right to each plot or space is sold, to write off the net cost of the land over the period in which it is utilised and an economic benefit has been received. Other freehold land is not depreciated or amortised. Depreciation of other assets is calculated using the straight line method to allocate their cost or revalued amounts, net of their residual values, over their estimated useful lives, as follows: • Buildings: 40 years Plant and equipment: 3-10 years The cost of improvements to or on leasehold properties is amortised over the unexpired period of the lease or the estimated useful life of the improvement to the Group, whichever is shorter. The assets’ residual values and useful lives are reviewed, and adjusted if appropriate, at each balance sheet date. Gains and losses on disposals are determined by comparing proceeds with the carrying amount. Gains and losses are included in the statement of comprehensive income. Shareholder and other informationSigned reportsGovernance & Directors’ reportOperating & financial review6532Overview1Consolidated financial statements4Notes to the consolidated financial statements continued InvoCare Annual Report 2021 98 INVOCARE LIMITED AND SUBSIDIARIES Notes to the consolidated financial statements Significant assets and liabilities 77 II. Right of use assets and lease liabilities InvoCare recognises a right of use asset and a corresponding liability at the date at which the leased asset is available for use by the Group. Each lease payment is allocated between the liability and finance cost. The finance cost is charged to profit or loss over the lease period so as to produce a constant periodic rate of interest on the remaining balance of the liability for each period. The right of use asset is depreciated over the shorter of the asset's useful life and the lease term on a straight line basis. Assets and liabilities arising from a lease are initially measured on a present value basis. Lease liabilities include the net present value of the following lease payments: • Fixed payments (including in-substance fixed payments), less any lease incentives receivable • Amounts expected to be payable by the Group under residual value guarantees • Exercise price of a purchase option if the Group is reasonably certain to exercise that option Payments of penalties for terminating the lease, if the lease term reflects the Group exercising that option The lease payments are discounted using the interest rate implicit in the lease. If that rate cannot be determined, the Group’s incremental borrowing rate is used, being the rate that the Group would have to pay to borrow the funds necessary to obtain an asset of similar value in a similar economic environment with similar terms and conditions. Right of use assets are measured at cost comprising the following: • Amount of the initial measurement of lease liability • Any lease payments made at or before the commencement date less any lease incentives received • Any initial direct costs Restoration costs Payments associated with short term leases and leases of low-value assets (less than $10,000) are recognised on a straight-line basis as an expense in profit or loss. Short term leases are leases with a lease term of 12 months or less. Low-value assets comprise information technology equipment and small items of office equipment. INVOCARE LIMITED AND SUBSIDIARIES Notes to the consolidated financial statements Significant assets and liabilities Note 12. Intangibles 2021 Composition as at 31 December 2021 Cost Accumulated amortisation Impairment Net book value Movement for the year ended 31 December 2021 Opening net book value Additions Additions through business combinations Finalisation of prior period acquisitions Amortisation charge Effect of movement in exchange rates Closing net book value Restated 2020 Composition as at 31 December 2020 Cost Accumulated amortisation Impairment Net book value Movement for the year ended 31 December 2020 Opening net book value Additions Additions through business combinations Amortisation charge Impairment loss Effect of movement in exchange rates Closing net book value Goodwill $’000 Brand name $’000 Capitalised software $’000 257,386 - (43,518) 213,868 212,706 - 324 289 - 549 213,868 256,066 - (43,360) 212,706 182,469 - 51,676 - (19,324) (2,115) 212,706 19,847 (14,615) - 5,232 21,277 (13,464) - 7,813 6,399 30 - - (1,197) - 5,232 6,281 3,656 - - (2,124) - 7,813 19,748 (13,349) - 6,399 18,374 (12,093) - 6,281 6,465 - 1,491 (1,457) - (100) 6,399 6,002 1,767 366 (1,846) - (8) 6,281 Total $’000 298,510 (28,079) (43,518) 226,913 225,386 3,686 324 289 (3,321) 549 226,913 294,188 (25,442) (43,360) 225,386 194,936 1,767 53,533 (3,303) (19,324) (2,223) 225,386 A. Impairment test Impairment tests are performed annually, or more frequently if events or circumstances indicate that the carrying amount may not be recoverable. The reorganisation of the Group’s Australian-based operations (Funerals, Cemeteries & Crematoria and Pet Cremations) has altered the composition of the cash generating units (CGU) to which goodwill has been previously allocated. The Group has apportioned the goodwill to the three Australian-based operations based on the relative values of the recoverable amounts of each CGU. New Zealand and Singapore operations are separate CGUs and the associated goodwill arising from their acquisition has been allocated to the individual New Zealand or Singapore CGU. As a result, the lowest level within the Group at which goodwill is monitored for management purposes comprises both the lines of business within Australia and for the international operations, the CGUs within a country of operation. The recoverable amounts of the Funerals, Cemetery & Crematoria, Pet Cremations, New Zealand and Singapore CGUs are based on value-in-use calculations. These calculations use cash flow projections based on approved financial estimates covering a five year period. Cash flows beyond the five year period have been extrapolated using estimated growth rates. The assessment also considered the reasonable possible long term shift in key assumptions which may potentially cause an impairment to arise. Funeral services Cemeteries & Crematoria Pet cremations Singapore operations New Zealand operations Total goodwill 2021 $'000 100,273 24,729 46,896 14,936 27,034 213,868 78 InvoCare Annual Report 2021 99 Shareholder and other informationSigned reportsGovernance & Directors’ reportOperating & financial review6532Overview1Consolidated financial statements4 Notes to the consolidated financial statements continued InvoCare Annual Report 2021 100 INVOCARE LIMITED AND SUBSIDIARIES Notes to the consolidated financial statements Significant assets and liabilities 79 I. Goodwill a. Impairment of New Zealand CGU Sensitivity analysis indicates headroom exists in the value-in-use calculation for the New Zealand CGU compared to the carrying value of goodwill for the period ended 31 December 2021. The New Zealand CGU was impaired by $19,324,000 in the period ended 31 December 2020. b. Sensitivity – New Zealand CGU The New Zealand CGU is particularly sensitive to a reasonable possible change in the key assumptions of terminal growth rate and post-tax weighted average cost of capital used to discount the future cash flows. For 2021, if the terminal growth rate decreased by 0.5% and post-tax weighted average cost of capital increased by 0.3% an additional impairment of $1,824,000 would be recognised, while other assumptions are held constant. For 2020, a decrease in the terminal growth rate by 0.5% would have resulted in an additional impairment of $4,800,000. Alternatively, an increase in the post-tax weighted average cost of capital by 0.3% would have resulted in an additional impairment of $3,789,000. c. Key assumptions used for value-in-use calculations Budgeted cash flows have been based on past performance and expectations for the future. The growth rates of 2.5% (2020: 2.5%) in revenue, 2.0% (2020: 2.0%) in expense and 1.0% (2020: 1.0%) in volume growth projections are not inconsistent with historical trends and forecasts included in reports prepared by market analysts. In the calculation of the terminal value, the long term annual growth rate of the real gross domestic product (GDP) of the country is used as a basis for the terminal growth rate. For goodwill, these assumptions are based on the CGU to which the goodwill is attributed. The pre-tax discount rate used for assessing the carrying value of goodwill in each CGU was as follows: 2021 2020 % % Funeral services 9.2 9.2 Cemeteries & Crematoria 9.2 9.2 Pet cremations 9.2 9.2 Singapore operations 9.2 9.2 New Zealand operations 10.0 10.0 These discount rates reflect the risk estimates for each business as a whole. Sensitivity analysis indicates significant headroom exists in the value-in-use calculations for Australian based operations and Singapore CGUs compared to the carrying value of goodwill. There is no reasonable possible long term shift in key assumptions considered likely which will cause impairment of any of these CGUs. B. Changes in accounting policies – capitalised software IFRIC agenda decision Configuration or Customisation Costs in a Cloud Computing Arrangement (AASB 138 Intangible Assets) In April 2021, the IFRS interpretation committee published agenda decision Configuration or Customisation Costs in a Cloud Computing Arrangement (AASB 138 Intangible Assets) (‘IFRIC interpretation’) which considers whether an intangible asset can be recognised in relation to configuration or customisation of application software. The Group has identified several assets that have configuration or customisation costs included in the asset’s cost base. These assets at 31 December 2021 had a written down value of $29,141,000 (31 December 2020: $20,172,000). The decision sets out options for accounting for costs incurred for customisation of cloud computing arrangements: • the customer recognises the costs as an expense when it receives the configuration or customisation services • if the contract to deliver the configuration or customisation services to the customer is with the supplier of the application software (including cases in which the supplier subcontracts services to a third party), the customer determines when the supplier of the application software performs those services in accordance with the contract to deliver them as follows: • if the services the customer receives are distinct, then the customer recognises the costs as an expense when the supplier configures or customises the application software • if the services the customer receives are not distinct (because those services are not separately identifiable from the customer’s right to receive access to the supplier’s application software), then the customer recognises the costs as an expense when the supplier provides access to the application software over the contract term • if the contract to deliver the configuration or customisation services to the customer is with a third-party supplier, the customer determines when the third-party supplier performs those services in accordance with the contract to deliver them. In applying these requirements, the customer recognises the costs as an expense when the third-party supplier configures or customises the application software if the customer pays the supplier of the configuration or customisation services before receiving those services, it recognises the prepayment as an asset. Refer to Note 13 for the accounting policy adopted by the Group for customisation and configuration services which are pre-paid. InvoCare Annual Report 2021 101 INVOCARE LIMITED AND SUBSIDIARIES Notes to the consolidated financial statements Significant assets and liabilities 80 The Group has considered the impact of the accounting policy change on the results reported in the current and comparative reporting periods. The Group has retrospectively adjusted the carrying values of intangibles – capitalised software. As at 31 December 2020 the impact of this change in accounting policy was: Impact on the consolidated balance sheet: • a decrease in capitalised software of $18,129,000 (2019: $15,789,000) • recognition of pre-paid technology assets of $5,292,000 (2019: $6,174,000), refer to Note 13 • decrease in deferred tax liabilities of $3,807,000 (2019: $2,885,000) a decrease in retained earnings of $9,030,000 (2019: $6,730,000) Impact on the consolidated statement of comprehensive income: • an increase in technology expenses of $11,126,000 • decrease in amortisation expense of capitalised software of $1,727,000 • a decrease in the impairment loss on intangibles of $6,176,000 a decrease in tax expense of $923,000 I. Impact on consolidated statement of comprehensive income For the year ended 31 December 2020 Adjustments As for IFRIC previously agenda As reported decision restated Notes $’000 $’000 $’000 Technology expenses [A] (12,736) (11,126) (23,862) Depreciation and amortisation expenses [A] (44,292) 1,727 (42,565) Impairment loss on intangibles [B] (25,500) 6,176 (19,324) Loss before income tax (1,197) (3,223) (4,420) Income tax expense (7,878) 923 (6,955) Net loss after income tax from continuing activities (9,075) (2,300) (11,375) Net loss after income tax for the year (9,075) (2,300) (11,375) Total comprehensive loss for the year, net of tax (8,067) (2,300) (10,367) Loss is attributable to: Equity holders of InvoCare Limited (9,242) (2,300) (11,542) Non-controlling interests 167 - 167 (9,075) (2,300) (11,375) Total comprehensive loss for the year is attributable to: Equity holders of InvoCare Limited (8,234) (2,300) (10,534) Non-controlling interests 167 - 167 (8,067) (2,300) (10,367) cents cents cents Earnings per share for profit/(loss) attributable to the ordinary equity holders of InvoCare Limited Basic earnings per share (6.9) (1.7) (8.6) Diluted earnings per share (6.9) (1.7) (8.6) Operating earnings per share 20.4 0.5 20.9 [A] Adoption of IFRIC interpretation decreases depreciation and amortisation expenses by $1,727,000 and increases technology expenses by $11,126,000. [B] Due to the earlier expensing of capitalised software and the reclassification of pre-paid technology assets upon adoption of the IFRIC interpretation, the impairment loss on intangibles is decreased by $6,176,000 and an expense for the acceleration of the unwind of pre-paid technology assets of $3,192,000 is recognised within the $11,126,000 adjusted technology expenses. Shareholder and other informationSigned reportsGovernance & Directors’ reportOperating & financial review6532Overview1Consolidated financial statements4Notes to the consolidated financial statements continued INVOCARE LIMITED AND SUBSIDIARIES Notes to the consolidated financial statements Significant assets and liabilities II. Impact on consolidated balance sheet As at 31 December 2020 Adjustments for IFRIC agenda decision $’000 5,292 (18,129) 3,807 - (9,030) As previously reported $’000 - 243,515 (32,639) 321,024 531,900 23,495 508,405 531,900 (9,030) - (9,030) As restated $’000 5,292 225,386 (28,832) 321,024 522,870 14,465 508,405 522,870 As at 31 December 2019 Adjustments for IFRIC agenda decision $’000 6,174 (15,789) 2,885 - (6,730) As previously reported $’000 - 210,724 (34,826) 121,081 296,979 68,169 228,810 296,979 (6,730) - (6,730) As restated $’000 6,174 194,935 (31,941) 121,081 290,249 61,439 228,810 290,249 Pre-paid technology assets Intangibles Deferred tax liabilities Other net assets/(liabilities) Net assets Retained earnings Other equity balances Total equity III. Impact on consolidated statement of cash flows Amendments to AASB 138 have no impacts on the total cash flows for the year ended 31 December 2020 or cash and cash equivalents at the end of the same period. Cash outflows related to operating activities increased as operational expenses for SaaS arrangements are no longer recognised as payments for intangibles. Line items that were not affected by the change in accounting policy have not been included below. The difference between the technology expenses of $11,126,000 and the operating cash flows of $7,184,000 relate to the non-cash acceleration of the unwind of the pre-paid technology assets. In 2020, the additional expenses were included within the impairment of capitalised software and depreciation and amortisation expenses. For the year ended 31 December 2020 Adjustments for IFRIC agenda decision $’000 As previously reported $’000 As restated $’000 Cash flows from operating activities Payments to suppliers and employees (including GST) Net cash flows from operating activities Cash flows from investing activities Purchase of property, plant and equipment and intangibles Net cash flows from investing activities Net increase in cash and cash equivalents Cash conversion (421,870) 63,568 (7,184) (7,184) (429,054) 56,384 (68,136) (83,952) 99,433 107% 7,184 7,184 (60,952) (76,768) - 99,433 100% 81 InvoCare Annual Report 2021 102 INVOCARE LIMITED AND SUBSIDIARIES Notes to the consolidated financial statements Significant assets and liabilities C. Critical accounting judgements, estimates and assumptions I. Key assumptions applied in determining recoverable amount The Group annually considers if events or changes in circumstances indicate that the carrying value of goodwill or cash-generating units may not be recoverable. Similarly, at each reporting date, cash-generating units that suffered a previous impairment are reviewed for possible reversals of the impairment. The recoverable amounts are determined based on value-in-use calculations which require the use of assumptions. Refer to section C. above for details of these assumptions and the potential impact to changes to the assumptions. II. Capitalisation of configuration and customisation costs in SaaS arrangements In implementing SaaS arrangements, the Group has developed software code that either enhances, modifies or creates additional capability to the existing owned software. This software is used to connect with the SaaS arrangement cloud-based application. Judgement has been applied in determining whether the changes to the owned software meet the definition of and recognition criteria for an intangible asset in accordance with AASB 138 Intangible Assets. During the financial year, the Group recognised $3,189,000 (2020: $1,246,000) as intangible assets in respect of customisation and configuration costs incurred in implementing SaaS arrangements. D. Accounting policies I. Goodwill Goodwill arises on acquisition of business/subsidiary. Goodwill acquired in business combinations is not amortised. Instead, goodwill is tested for impairment annually or more frequently if events or changes in circumstances indicate that it might be impaired, and is carried at cost less accumulated impairment losses. Impairment losses on goodwill are taken to profit or loss and are not subsequently reversed if the related assets subsequently increases in value. II. Trademarks and brand names Trademarks and brand names recognised through business acquisitions have a finite useful life and are carried at cost less accumulated amortisation and impairment losses. Amortisation is calculated using the straight line method to allocate the cost of trademarks and brand names over their estimated useful lives of ten years. III. Capitalised software Capitalised software is carried at historical cost less accumulated amortisation and impairment write-downs. Historical cost includes expenditure that is directly attributable to the acquisition of the software. Amortisation is calculated using the straight line method to allocate the cost of software over its estimated useful life of ten years. IV. Impairment of assets Assets that have an indefinite useful life are not subject to amortisation and are tested annually for impairment or half yearly only if events or changes in circumstances indicate that the carrying amount may not be recoverable. Assets that are subject to depreciation or amortisation are reviewed for impairment indicators every six months. An impairment loss is recognised for the amount by which the asset’s carrying amount exceeds its recoverable amount. The recoverable amount is the higher of an asset’s fair value less costs to sell and value-in-use. For the purposes of assessing impairment, assets are grouped at the lowest levels for which there are separately identifiable cash flows (cash-generating units). 82 InvoCare Annual Report 2021 103 Shareholder and other informationSigned reportsGovernance & Directors’ reportOperating & financial review6532Overview1Consolidated financial statements4 Notes to the consolidated financial statements continued InvoCare Annual Report 2021 104 INVOCARE LIMITED AND SUBSIDIARIES Notes to the consolidated financial statements Significant assets and liabilities 83 Note 13. Pre-paid technology assets 2021 2020 $’000 $’000 Balance at 31 December Current 582 637 Non-current 8,019 4,655 Balance at 31 December 8,601 5,292 Movement for the year Opening balance at 1 January 5,292 6,173 Additions 4,387 3,061 Less: Amounts recognised within the consolidated statement of comprehensive income Pre-paid technology expenses (654) (750) Accelerated unwind (424) (3,192) Closing balance at 31 December 8,601 5,292 A. Critical accounting judgements, estimates and assumptions Determination whether configuration and customisation services are distinct from the SaaS access Costs incurred to configure or customise the cloud provider's application software are recognised as operating expenses when the services are received. In a contract where the cloud provider provides both the SaaS configuration and customisation, and the SaaS access over the contract term, judgement has been applied to determine whether these services are distinct from each other or not, and therefore, whether the configuration and customisation costs incurred are expensed as the software is configured or customised (i.e. upfront), or over the SaaS contract term. Specifically, where the configuration and customisation activities significantly modify or customise the cloud software, these activities will not be distinct from the access to the cloud software over the contract term. Judgement has been applied in determining whether the degree of customisation and modification of the cloud-based software that would be deemed significant. During the financial year, the Group recognised $3,963,000 (net of accelerated unwind of pre-paid technology assets of $424,000) (2020: $3,060,000) as prepayments in respect of configuration and customisation activities undertaken in implementing SaaS arrangements which are considered not to be distinct from the access to the SaaS application software over the contract term. B. Accounting policies Software-as-a-Service (SaaS) arrangements SaaS arrangements are service contracts providing the Group with the right to access the cloud provider’s application software over the contract period. As such the Group does not receive a software intangible asset at the contract commencement date. A right to receive future access to the supplier’s software does not, at the contract commencement date, give the customer the power to obtain the future economic benefits flowing from the software itself and to restrict others’ access to those benefits. The following outlines the accounting treatment of costs incurred in relation to SaaS arrangements: Recognise as an operating expense over the term of the service contract (pre-paid technology expenses), which is typically 3 – 10 years • Fee for use of application software • Customisation costs Recognise as an operating expense as the service is received (SaaS arrangement expensed as incurred) • Configuration costs • Setting up of standard functionality of the system • Data conversion and migration costs • Testing costs Training costs Costs incurred for the development of software code that enhances or modifies, or creates additional capability to, existing on-premise systems and meets the definition of and recognition criteria for an intangible asset are recognised as capitalised software assets. Refer to Note 12 for an outline of accounting for intangible assets. InvoCare Annual Report 2021 105 INVOCARE LIMITED AND SUBSIDIARIES Notes to the consolidated financial statements Significant assets and liabilities 83 Note 13. Pre-paid technology assets 2021 2020 $’000 $’000 Balance at 31 December Current 582 637 Non-current 8,019 4,655 Balance at 31 December 8,601 5,292 Movement for the year Opening balance at 1 January 5,292 6,173 Additions 4,387 3,061 Less: Amounts recognised within the consolidated statement of comprehensive income Pre-paid technology expenses (654) (750) Accelerated unwind (424) (3,192) Closing balance at 31 December 8,601 5,292 A. Critical accounting judgements, estimates and assumptions Determination whether configuration and customisation services are distinct from the SaaS access Costs incurred to configure or customise the cloud provider's application software are recognised as operating expenses when the services are received. In a contract where the cloud provider provides both the SaaS configuration and customisation, and the SaaS access over the contract term, judgement has been applied to determine whether these services are distinct from each other or not, and therefore, whether the configuration and customisation costs incurred are expensed as the software is configured or customised (i.e. upfront), or over the SaaS contract term. Specifically, where the configuration and customisation activities significantly modify or customise the cloud software, these activities will not be distinct from the access to the cloud software over the contract term. Judgement has been applied in determining whether the degree of customisation and modification of the cloud-based software that would be deemed significant. During the financial year, the Group recognised $3,963,000 (net of accelerated unwind of pre-paid technology assets of $424,000) (2020: $3,060,000) as prepayments in respect of configuration and customisation activities undertaken in implementing SaaS arrangements which are considered not to be distinct from the access to the SaaS application software over the contract term. B. Accounting policies Software-as-a-Service (SaaS) arrangements SaaS arrangements are service contracts providing the Group with the right to access the cloud provider’s application software over the contract period. As such the Group does not receive a software intangible asset at the contract commencement date. A right to receive future access to the supplier’s software does not, at the contract commencement date, give the customer the power to obtain the future economic benefits flowing from the software itself and to restrict others’ access to those benefits. The following outlines the accounting treatment of costs incurred in relation to SaaS arrangements: Recognise as an operating expense over the term of the service contract (pre-paid technology expenses), which is typically 3 – 10 years • Fee for use of application software • Customisation costs Recognise as an operating expense as the service is received (SaaS arrangement expensed as incurred) • Configuration costs • Setting up of standard functionality of the system • Data conversion and migration costs • Testing costs Training costs Costs incurred for the development of software code that enhances or modifies, or creates additional capability to, existing on-premise systems and meets the definition of and recognition criteria for an intangible asset are recognised as capitalised software assets. Refer to Note 12 for an outline of accounting for intangible assets. INVOCARE LIMITED AND SUBSIDIARIES Notes to the consolidated financial statements Capital and risks 84 The Group’s activities expose it to a variety of financial risks. The Group’s overall financial risk management strategy focuses on the unpredictability of financial markets and seeks to minimise adverse effects on the Group’s financial performance. This section contains disclosures of financial risks the Group is exposed to and how the Group manages those risks. The capital management, impact of contingencies, commitments, and events subsequent to reporting period are also considered in this section. Note 14. Financial risk management Note 17. Commitments Note 15. Contributed equity Note 18. Events after reporting period Note 16. Contingencies Note 14. Financial risk management The Group operates in different jurisdictions and markets. Strategic risk management is carried out by the Board of Directors. The Audit, Risk & Compliance Committee, which operates under policies approved by the Board, is responsible for operational and financial risk management. These policies provide written principles for overall risk management, as well as policies covering specific areas such as interest rate risk and currency risk. The table below summarises the key risks identified, exposures, and management of exposures. Risk identified Definition Exposures Management of exposures Market risk – interest rate The risk that the value of a financial asset or liability or cash flow associated with the financial asset or liability will fluctuate due to changes in market interest rates • Financial assets: mainly cash at bank • Financial liabilities: mainly borrowings, pre-paid contract liabilities, lease liabilities Further information for interest rate risk exposure and hedging effectiveness is provided in section A below • Fixed interest rate borrowings • Derivative financial instruments, mainly interest rate swaps Speculative trading is not permitted Market risk – foreign currency The risk in local currency terms that the value of a financial commitment or a recognised asset or liability, will fluctuate due to changes in foreign currency exchange rates • Foreign currency earnings • Net investments in foreign operations • Foreign currency borrowings Further information on foreign currency risk exposures is provided in section B below • Physical financial instruments, including natural hedges from matching foreign assets and liabilities Speculative trading is not permitted Market risk – price The risk that the investment returns of funds under management on pre-paid contracts impact future income • Investment returns of the funds under management of pre-paid contracts • Majority of the funds under management is placed with the Over Fifty Guardian Friendly Society (OFGFS) Further information on pricing risk exposures is provided in section C below • Maintain Board representation in OFGFS Monitor the investment strategy of OFGFS and the investment assets mix Credit risk The risk that a counterparty will not be able to meet its obligations in respect of a financial instrument, resulting in a financial loss to the Group • Recoverability of receivables • Recoverability of other financial assets and cash deposits Further information on credit risk exposures is detailed in section D below • The Group’s policy is to only deal with banks and financial institutions with minimum independent credit ratings • Operations of the Group results in no concentration of customers in any particular region or sector Enhanced alternative payment methods for customers in regional areas Shareholder and other informationSigned reportsGovernance & Directors’ reportOperating & financial review6532Overview1Consolidated financial statements4Notes to the consolidated financial statements continued InvoCare Annual Report 2021 106 INVOCARE LIMITED AND SUBSIDIARIES Notes to the consolidated financial statements Capital and risks 85 Risk identified Definition Exposures Management of exposures Liquidity risk The risk of having insufficient funds to settle financial liabilities as and when they fall due • Insufficient levels of committed credit facilities • Settlement of financial liabilities Further information on liquidity risk exposures is detailed in section E below • Maintaining sufficient levels of cash and committed credit facilities to meet financial commitments and working capital requirements Timely review and renewal of credit facilities The Group holds the following financial assets and liabilities. 2021 2020 $’000 $’000 Financial assets Cash and cash equivalents 53,630 118,781 Trade receivables 66,300 68,202 Pre-paid contract funds under management 649,875 613,131 Other financial assets 4,072 4 773,877 800,118 Financial liabilities Trade and other payables 69,226 60,514 Contingent considerations 6,282 17,174 Borrowings 188,843 246,039 Lease liabilities 175,402 165,924 Derivative financial instruments 76 1,148 439,829 490,799 A. Interest rate risk exposure (cash flow and fair value) The Group’s main interest rate risk arises from long term bank borrowings. Bank borrowings are typically at variable interest rates determined by a margin over the reference rate based on the Group’s leverage ratio. Borrowings issued at variable rates expose the Group to cash flow interest rate risk. The Group’s policy is to limit its exposure to adverse fluctuations in interest rates, which could erode the Group’s profitability and adversely affect shareholder value. The Group reviews interest rate risk exposure on an ongoing basis (at least once each quarter) or whenever a major change in borrowing levels is anticipated. The review includes a reference to ongoing cash flow forecasts and considers future mergers, acquisitions, divestments, capital management and capital expenditure as appropriate. Recommendations in relation to interest rate hedging are provided to the Chief Financial Officer for approval, as required. When applicable, the Group manages interest rate exposure generally by entering into interest rate swap contracts under which it receives interest at variable rates and pays interest at fixed rates. In addition to swaps, the Group has also entered into a note purchase agreement in February 2018 that is denominated in Australian dollars at a fixed interest rate. This assists in minimising the Group’s overall interest rate risk by fixing the interest rate for core level of debt. The interest rate swaps position and the coverage on outstanding bank borrowings as at end of the financial years are set out in the table below. 2021 2020 % % Bank borrowingsa Effective average interest rate as at 31 December 3 3 Interest rate swaps position as at 31 December Weighted average fixed interest rate payable 2.27 2.49 Weighted average variable interest rate receivable 0.61 0.12 Interest rate swaps coverage on outstanding bank borrowings Australia - 39 New Zealand 33 40 Singaporeb Nil Nil Combined Australia and New Zealand 15 30 a The effective average interest rate includes swaps and margins but excluding establishment fees. b Due to the relative stability of Singapore interest rates, Singapore denominated debt has been allowed to stay at floating rates. INVOCARE LIMITED AND SUBSIDIARIES Notes to the consolidated financial statements Capital and risks 86 Hedging for interest rate risk exposure Hedge effectiveness is determined at the inception of the hedge relationship, and through periodic prospective effectiveness assessments to ensure that an economic relationship exists between the hedged item and hedging instrument. The Group enters into interest rate swaps that have similar critical terms as the hedged item, such as reference rate, reset dates, payment dates, maturities and notional amount. The Group does not hedge 100% of its loans; therefore the hedged item is identified as a proportion of the outstanding loans up to the notional amount of the swaps. As all critical terms were matched during the year, the economic relationship was 100% effective. Hedge ineffectiveness for interest rate swaps is assessed by performing a qualitative assessment of effectiveness. If changes in circumstances affect the terms of the hedged item such that the critical terms no longer match exactly with the critical terms of the hedging instrument, the Group uses the hypothetical derivative method to assess effectiveness. Hedge ineffectiveness may occur due to: • The credit value/debit value adjustments on the interest rate swaps which is not matched by the loans Differences in critical terms between the interest rate swaps and loans The following variable rate bank borrowings and interest rate swap contracts are outstanding at the reporting date. 2021 2020 Weighted average interest rate Balance Weighted average interest rate Balance % $'000 % $'000 Variable borrowings 1.76 91,412 2.71 114,308 Interest rate swaps (notional principal) 2.27 (14,114) 2.49 (44,723) Net exposure to cash flow interest rate risk 77,298 69,585 The notional principal amounts and swap liability periods of expiry of the interest rate swap contracts are as follows. Nominal value Swap liability 2021 2020 2021 2020 $’000 $’000 $’000 $’000 Less than one year 14,114 30,681 76 600 One to two years - 14,042 - 548 14,114 44,723 76 1,148 These contracts require settlement of net interest receivable or payable each 90 days. The settlement dates coincide with the dates on which interest is payable on the underlying debt. As a consequence, the Group is exposed to interest rate risks on that portion of total borrowings not swapped to fixed rates and to potential movements in the margin due to changes in the Group’s leverage ratio. Where possible, borrowings are made in the same country as the operation being funded to provide a natural hedge against currency volatility. Where this is not possible, other techniques, such as foreign currency bank accounts, are used to mitigate the profit and loss volatility due to currency movements. Due to the use of floating to fixed interest rate swaps, the Group has fixed interest commitments and the changes in the fair value of the future cash flows of these derivatives are recognised in equity to the extent that the derivative remains effective in accordance with AASB 9 Financial Instruments. The interest rate swap contracts were all judged to be effective at 31 December 2021 and the movements in the fair value of these instruments have been quarantined in equity. The overall impact and sensitivities of the interest bearing assets and liabilities and related derivatives of the Group has been summarised in section G Summarised sensitivity analysis in this note. InvoCare Annual Report 2021 107 INVOCARE LIMITED AND SUBSIDIARIES Notes to the consolidated financial statements Capital and risks 85 Risk identified Definition Exposures Management of exposures Liquidity risk The risk of having insufficient funds to settle financial liabilities as and when they fall due • Insufficient levels of committed credit facilities • Settlement of financial liabilities Further information on liquidity risk exposures is detailed in section E below • Maintaining sufficient levels of cash and committed credit facilities to meet financial commitments and working capital requirements Timely review and renewal of credit facilities The Group holds the following financial assets and liabilities. 2021 2020 $’000 $’000 Financial assets Cash and cash equivalents 53,630 118,781 Trade receivables 66,300 68,202 Pre-paid contract funds under management 649,875 613,131 Other financial assets 4,072 4 773,877 800,118 Financial liabilities Trade and other payables 69,226 60,514 Contingent considerations 6,282 17,174 Borrowings 188,843 246,039 Lease liabilities 175,402 165,924 Derivative financial instruments 76 1,148 439,829 490,799 A. Interest rate risk exposure (cash flow and fair value) The Group’s main interest rate risk arises from long term bank borrowings. Bank borrowings are typically at variable interest rates determined by a margin over the reference rate based on the Group’s leverage ratio. Borrowings issued at variable rates expose the Group to cash flow interest rate risk. The Group’s policy is to limit its exposure to adverse fluctuations in interest rates, which could erode the Group’s profitability and adversely affect shareholder value. The Group reviews interest rate risk exposure on an ongoing basis (at least once each quarter) or whenever a major change in borrowing levels is anticipated. The review includes a reference to ongoing cash flow forecasts and considers future mergers, acquisitions, divestments, capital management and capital expenditure as appropriate. Recommendations in relation to interest rate hedging are provided to the Chief Financial Officer for approval, as required. When applicable, the Group manages interest rate exposure generally by entering into interest rate swap contracts under which it receives interest at variable rates and pays interest at fixed rates. In addition to swaps, the Group has also entered into a note purchase agreement in February 2018 that is denominated in Australian dollars at a fixed interest rate. This assists in minimising the Group’s overall interest rate risk by fixing the interest rate for core level of debt. The interest rate swaps position and the coverage on outstanding bank borrowings as at end of the financial years are set out in the table below. 2021 2020 % % Bank borrowingsa Effective average interest rate as at 31 December 3 3 Interest rate swaps position as at 31 December Weighted average fixed interest rate payable 2.27 2.49 Weighted average variable interest rate receivable 0.61 0.12 Interest rate swaps coverage on outstanding bank borrowings Australia - 39 New Zealand 33 40 Singaporeb Nil Nil Combined Australia and New Zealand 15 30 a The effective average interest rate includes swaps and margins but excluding establishment fees. b Due to the relative stability of Singapore interest rates, Singapore denominated debt has been allowed to stay at floating rates. INVOCARE LIMITED AND SUBSIDIARIES Notes to the consolidated financial statements Capital and risks 86 Hedging for interest rate risk exposure Hedge effectiveness is determined at the inception of the hedge relationship, and through periodic prospective effectiveness assessments to ensure that an economic relationship exists between the hedged item and hedging instrument. The Group enters into interest rate swaps that have similar critical terms as the hedged item, such as reference rate, reset dates, payment dates, maturities and notional amount. The Group does not hedge 100% of its loans; therefore the hedged item is identified as a proportion of the outstanding loans up to the notional amount of the swaps. As all critical terms were matched during the year, the economic relationship was 100% effective. Hedge ineffectiveness for interest rate swaps is assessed by performing a qualitative assessment of effectiveness. If changes in circumstances affect the terms of the hedged item such that the critical terms no longer match exactly with the critical terms of the hedging instrument, the Group uses the hypothetical derivative method to assess effectiveness. Hedge ineffectiveness may occur due to: • The credit value/debit value adjustments on the interest rate swaps which is not matched by the loans Differences in critical terms between the interest rate swaps and loans The following variable rate bank borrowings and interest rate swap contracts are outstanding at the reporting date. 2021 2020 Weighted average interest rate Balance Weighted average interest rate Balance % $'000 % $'000 Variable borrowings 1.76 91,412 2.71 114,308 Interest rate swaps (notional principal) 2.27 (14,114) 2.49 (44,723) Net exposure to cash flow interest rate risk 77,298 69,585 The notional principal amounts and swap liability periods of expiry of the interest rate swap contracts are as follows. Nominal value Swap liability 2021 2020 2021 2020 $’000 $’000 $’000 $’000 Less than one year 14,114 30,681 76 600 One to two years - 14,042 - 548 14,114 44,723 76 1,148 These contracts require settlement of net interest receivable or payable each 90 days. The settlement dates coincide with the dates on which interest is payable on the underlying debt. As a consequence, the Group is exposed to interest rate risks on that portion of total borrowings not swapped to fixed rates and to potential movements in the margin due to changes in the Group’s leverage ratio. Where possible, borrowings are made in the same country as the operation being funded to provide a natural hedge against currency volatility. Where this is not possible, other techniques, such as foreign currency bank accounts, are used to mitigate the profit and loss volatility due to currency movements. Due to the use of floating to fixed interest rate swaps, the Group has fixed interest commitments and the changes in the fair value of the future cash flows of these derivatives are recognised in equity to the extent that the derivative remains effective in accordance with AASB 9 Financial Instruments. The interest rate swap contracts were all judged to be effective at 31 December 2021 and the movements in the fair value of these instruments have been quarantined in equity. The overall impact and sensitivities of the interest bearing assets and liabilities and related derivatives of the Group has been summarised in section G Summarised sensitivity analysis in this note. Shareholder and other informationSigned reportsGovernance & Directors’ reportOperating & financial review6532Overview1Consolidated financial statements4Notes to the consolidated financial statements continued INVOCARE LIMITED AND SUBSIDIARIES Notes to the consolidated financial statements Capital and risks B. Foreign currency risk exposure The Group rarely undertakes significant commercial transactions in currencies other than in the functional currency of the operating subsidiaries in New Zealand and Singapore. Foreign currency risks arise from recognised assets and liabilities that are denominated in a currency other than the Group’s functional currency, the Australian dollar. The major foreign currency risk relates to the investments in subsidiaries in New Zealand and Singapore. This exposes the Group to foreign currency risk on the assets and liabilities. Borrowings have been made by the Group in New Zealand and Singapore dollars to provide a natural hedge against the risk of changes in exchange rates in New Zealand and Singapore. The borrowings are therefore a hedge of the net investment in the foreign subsidiaries. The Group has no significant unhedged foreign exchange exposures at 31 December 2021. Therefore, there was no ineffectiveness to be recorded from net investments in foreign entity hedges. The Group’s exposure to foreign currency risk at the end of the reporting period, expressed in Australian dollars, was as follows. Borrowings Derivatives New Zealand dollars Singapore dollars 2021 $’000 46,000 81 2020 $’000 50,000 678 2021 $’000 30,000 - 2020 $’000 35,000 - C. Price risk exposure The Group is the ultimate beneficiary of pre-paid contract funds under management (Invested Funds) invested in various pre-paid contract trusts, as described in Note 9. There are a several trusts in existence with various investment profiles. Accordingly, the Group’s future income is sensitive to the price risk relating to the investment returns of these funds under management. These funds are invested in a range of asset classes with different price risk variables including cash, fixed interest, Australian and international equities, hybrids and direct and indirect property. The return on these funds (net of the increase in the liability to deliver the future services) are recognised as net gain/loss on undelivered pre-paid contracts in the statement of comprehensive income. Refer to Note 9 Pre-paid contracts for the profit and loss impact of the pre-paid funds under management and the pre-paid contract liabilities for the year ended 31 December 2021. 90% of the funds are managed by the Over Fifty Guardian Friendly Society (OFGFS) which is controlled by a five-member independent Board with two InvoCare representatives. Non OFGFS funds are primarily invested in capital guaranteed funeral bonds managed by a range of APRA regulated institutions. The OFGFS Board has appointed an Investment Committee (GIC) which is responsible for the management of the Invested Funds in accordance with an approved Investment Policy Statement (IPS). The IPS provides guidance on the ongoing prudent and efficient management of the investment arrangements. The principal objective of the Invested Funds is to maximise returns without exceeding risk levels specified in the Investment Guidelines. By pursuing these objectives, the Invested Funds are expected to provide a long- term rate of return sufficient to meet the original plus subsequent increases in retail prices of delivering the promised funeral services after considering all Invested Funds expenses and tax. The GIC regularly sets a target asset allocation to ensure investment activity sits within the stated risk profile and to also ensure that other limits specified in the IPS are being met. External consultants are engaged to review the risk and return forecasts on a regular basis and recommend amendments to the target asset allocation if required. Normally funds are invested for extended periods, with the median life of a pre-paid funeral contract being circa nine years. Liquidity risk is considered low with the flow of funds from the sale of new contracts normally exceeding redemptions in a typical year. The fund can therefore take a long-term view on its investment horizon and absorb short term fluctuations in returns caused by market volatility. 87 InvoCare Annual Report 2021 108 INVOCARE LIMITED AND SUBSIDIARIES Notes to the consolidated financial statements Capital and risks The asset allocation at reporting date of pre-paid contract funds under management is as follows. Equities Property Cash and fixed interest (includes hybrid securities) 2021 % 43 26 31 2020 % 40 28 32 Other than disclosed above, the Group does not hold any investments in equities or commodities and is therefore not subject to price risk. Based on the asset allocation as at 31 December 2021 and 31 December 2020 the following changes in investment returns are reasonably probable. Asset class Equities (plus or minus 10%) Property (plus or minus 3%) Cash and fixed interest (no price risk) 2021 2020 Increase $'000 Decrease $'000 Increase $'000 Decrease $'000 24,093 4,367 - 28,460 (24,093) (4,367) - (28,460) 20,819 4,305 - 25,124 (20,819) (4,305) - (25,124) D. Credit risk exposure Credit risk is managed on a Group basis. Credit risk arises from cash and deposits with banks and financial institutions, derivative financial instruments, as well as credit exposures to customers, including outstanding receivables and committed transactions. For banks and financial institutions, only independently rated parties with a minimum rating of A are accepted. Credit risks in relation to customers are highly dispersed and without concentration on any particular region or sector. The trade receivables are non-interesting bearing. Funeral homes attempt to collect deposits at the time the service is commissioned both as a sign of good faith and in order to cover out-of-pocket expenses. Cemetery and crematorium and pet cremation products are generally not delivered prior to the receipt of all or substantially all of the amounts due. The Group applies the simplified approach to measuring expected credit losses which uses a lifetime expected loss allowance for all trade receivables. To measure the expected credit losses, trade receivables have been grouped based on shared credit risk characteristics and the days past due. The expected loss rates are based on the payment profiles of sales over a period of rolling 24 months before the financial year end 31 December 2021. Refer to Note 8 for details of loss allowance and movement for the financial year. The Group’s own collection activity, which varies based on the nature and relative age of the debt, is routinely applied to all past due accounts. When these activities do not result in a successful recovery of the debt, it is referred to external debt collection agencies. Trade receivables are written off when there is no reasonable expectation of recovery. Indicators include amongst others, the failure of the debtor to engage in a repayment plan with the Group. Once all attempts to recover the debt have been exhausted, then a debt is considered to be in default and written off. Subsequent recoveries of amounts previously written off are credited against sundry revenue in the consolidated statement of comprehensive income. 88 InvoCare Annual Report 2021 109 Shareholder and other informationSigned reportsGovernance & Directors’ reportOperating & financial review6532Overview1Consolidated financial statements4 Notes to the consolidated financial statements continued InvoCare Annual Report 2021 110 INVOCARE LIMITED AND SUBSIDIARIES Notes to the consolidated financial statements Capital and risks 89 E. Liquidity risk exposure Prudent liquidity management implies maintaining sufficient cash, the availability of funding through an adequate amount of committed credit facilities and the ability to close out market positions. Due to the relatively stable nature of the Group’s business, management aims to maintain a large portion of committed credit lines on a long term basis. As part of the reset of the Group’s strategy to 2025, a review of the Group’s financing structure and tenor of the Group’s debt facilities was undertaken. On 27 August 2021, InvoCare successfully entered into binding documentation to amend and extend its Syndicated Debt Facility. Under the amendment, agreed with syndicated lenders, InvoCare: • Repaid the fully drawn A$67,500,000, NZ$50,000,000 and S$35,000,000 Facility A Term Loans on 23 September 2021 and this term facility is subsequently cancelled • Increased the limit of its Facility B, Multi-Currency Revolving Cash Advance facility from A$200,000,000 to A$275,000,000 • Extended the tenor of Facility B to the end of August 2024 (the facility was previously due to expire in February 2023) Agreed a simplified and more favourable common pricing grid with syndicate lenders From 27 August 2021, the Group had access to $382,440,000 of loan facilities as follows: • $100,000,000 Note Purchase Agreement with MetLife, fully drawn at 31 December 2021 and due for repayment in February 2028 $275,000,000 Syndicated Debt Facility Agreement supported by ANZ, Westpac, Mizuho and SMBC providing available funds through a Multi-Currency Revolving Cash Advance facility, with a tenor of three years to the end of August 2024 This $275,000,000 debt facility is currently drawn as follows: A$17,500,000, NZ$46,000,000 and SG$30,000,000. The financial covenant ratios included on the debt facilities are calculated on an adjusted Operating EBITDA basis (primarily to include the proforma earnings contributions from acquisitions and to adjust for costs arising from restructuring and other initiatives). The covenant target ratios are as follows: • Leverage ratio (being net debt to adjusted Operating EBITDA) must be no greater than 3.5 times Interest cover ratio (being adjusted Operating EBITDA to net interest adjusted to remove interest related to AASB 16 Leases) must be greater than 3.0 times The above ratios continued to be met as of 31 December 2021. As at 31 December 2021, the details of the facilities available, drawn down, unused by facility are disclosed in the table below. 2021 2020 $’000 $’000 Total facilities available Working capital facility - expiring within one year 7,440 7,440 Unsecured loan facility - expiring in two to five years 375,000 448,702 382,440 456,142 Drawn down at reporting date Working capital facility - expiring within one year - - Unsecured loan facility - expiring in two to five years 191,412 248,717 191,412 248,717 Unused at reporting date Working capital facility - expiring within one year 7,440 7,440 Unsecured loan facility - expiring in two to five years 183,588 199,985 191,028 207,425 Long-term borrowings outstanding at reporting date Unsecured loan facility 191,412 248,717 Less: Loan establishment costs (2,569) (2,678) 188,843 246,039 InvoCare Annual Report 2021 111 INVOCARE LIMITED AND SUBSIDIARIES Notes to the consolidated financial statements Capital and risks 89 E. Liquidity risk exposure Prudent liquidity management implies maintaining sufficient cash, the availability of funding through an adequate amount of committed credit facilities and the ability to close out market positions. Due to the relatively stable nature of the Group’s business, management aims to maintain a large portion of committed credit lines on a long term basis. As part of the reset of the Group’s strategy to 2025, a review of the Group’s financing structure and tenor of the Group’s debt facilities was undertaken. On 27 August 2021, InvoCare successfully entered into binding documentation to amend and extend its Syndicated Debt Facility. Under the amendment, agreed with syndicated lenders, InvoCare: • Repaid the fully drawn A$67,500,000, NZ$50,000,000 and S$35,000,000 Facility A Term Loans on 23 September 2021 and this term facility is subsequently cancelled • Increased the limit of its Facility B, Multi-Currency Revolving Cash Advance facility from A$200,000,000 to A$275,000,000 • Extended the tenor of Facility B to the end of August 2024 (the facility was previously due to expire in February 2023) Agreed a simplified and more favourable common pricing grid with syndicate lenders From 27 August 2021, the Group had access to $382,440,000 of loan facilities as follows: • $100,000,000 Note Purchase Agreement with MetLife, fully drawn at 31 December 2021 and due for repayment in February 2028 $275,000,000 Syndicated Debt Facility Agreement supported by ANZ, Westpac, Mizuho and SMBC providing available funds through a Multi-Currency Revolving Cash Advance facility, with a tenor of three years to the end of August 2024 This $275,000,000 debt facility is currently drawn as follows: A$17,500,000, NZ$46,000,000 and SG$30,000,000. The financial covenant ratios included on the debt facilities are calculated on an adjusted Operating EBITDA basis (primarily to include the proforma earnings contributions from acquisitions and to adjust for costs arising from restructuring and other initiatives). The covenant target ratios are as follows: • Leverage ratio (being net debt to adjusted Operating EBITDA) must be no greater than 3.5 times Interest cover ratio (being adjusted Operating EBITDA to net interest adjusted to remove interest related to AASB 16 Leases) must be greater than 3.0 times The above ratios continued to be met as of 31 December 2021. As at 31 December 2021, the details of the facilities available, drawn down, unused by facility are disclosed in the table below. 2021 2020 $’000 $’000 Total facilities available Working capital facility - expiring within one year 7,440 7,440 Unsecured loan facility - expiring in two to five years 375,000 448,702 382,440 456,142 Drawn down at reporting date Working capital facility - expiring within one year - - Unsecured loan facility - expiring in two to five years 191,412 248,717 191,412 248,717 Unused at reporting date Working capital facility - expiring within one year 7,440 7,440 Unsecured loan facility - expiring in two to five years 183,588 199,985 191,028 207,425 Long-term borrowings outstanding at reporting date Unsecured loan facility 191,412 248,717 Less: Loan establishment costs (2,569) (2,678) 188,843 246,039 INVOCARE LIMITED AND SUBSIDIARIES Notes to the consolidated financial statements Capital and risks 90 The table below analyses the Group’s financial liabilities into the relevant maturity groupings based on their contractual terms as at the reporting date. Trade and other payables, lease liabilities and borrowings are non derivative liabilities. Less than one year Two to three years More than three years Total 2021 $’000 $’000 $’000 $’000 Trade and other payables 69,226 - - 69,226 Contingent considerations 6,282 - - 6,282 Lease liabilities 20,855 36,454 167,000 224,309 Borrowings - 91,412 100,000 191,412 Derivatives 76 - - 76 2020 $’000 $’000 $’000 $’000 Trade and other payables 60,514 - - 60,514 Contingent considerations 9,265 7,909 - 17,174 Lease liabilities 19,465 36,486 109,973 165,924 Borrowings - 148,717 100,000 248,717 Derivatives 600 548 - 1,148 F. Fair value measurement The Group’s financial assets and liabilities are measured at fair value at the end of each reporting period. They are measured or disclosed at fair value, using a three level hierarchy, based on the lowest level of input that is significant to the entire fair value measurement, being: • Level 1: Quoted prices (unadjusted) in active markets for identical assets or liabilities that the entity can access at the measurement date • Level 2: Inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly Level 3: Unobservable inputs for the asset or liability The following table gives information about how the fair value of financial assets and liabilities are determined, including the valuation technique and inputs used. For the Group’s financial assets and liabilities not measured at fair value, their carrying amount provides a reasonable approximation of their fair values. Financial assets or liabilities Fair value hierarchy Valuation technique Significant unobservable inputs Relationship of unobservable inputs to fair value Pre-paid contract funds under management Level 2 The fair value is calculated based on the number of units multiplied by the unit price of the funds which administers the invested funds. The unit price of the funds is based on the fair value of the underlying investments, which include equities, cash, fixed interest deposits and property. Not applicable Not applicable Derivative financial instruments Level 2 The fair value is calculated as the present value of the estimated future cash flows based on observable yield curves Not applicable Not applicable Contingent consideration Level 3 The fair value is calculated based on the contracted terms of performance measures, eg revenue, EBITDA or net profit Forecast performance measures per the contracts The estimated fair value would increase/decrease if the forecast performance measures per the contracts were higher/lower. Refer to Note 19C for further details There were no transfers between levels during the reporting period. Shareholder and other informationSigned reportsGovernance & Directors’ reportOperating & financial review6532Overview1Consolidated financial statements4Notes to the consolidated financial statements continued INVOCARE LIMITED AND SUBSIDIARIES Notes to the consolidated financial statements Capital and risks G. Summarised sensitivity analysis The following table summarises the sensitivity of the Group’s financial assets and financial liabilities to interest rate risk and foreign exchange risk net of applicable income tax. Interest rate risk -100 basis point +100 basis point Carrying value $’000 Profit/ (loss) $’000 Equity $’000 Profit/ (loss) $’000 Equity $’000 Foreign exchange risk -10% Profit/ (loss) $’000 Equity $’000 +10% Profit/ (loss) $’000 Equity $’000 2021 Financial assets Cash and cash equivalents Trade receivables Pre-paid contract funds under management Other financial assets Financial liabilities Trade and other payables Contingent considerations Lease liabilities Borrowings Derivatives Total increase/ (decrease) 2020 Financial assets Cash and cash equivalents Trade receivables Pre-paid contract funds under management Other financial assets Financial liabilities Trade and other payables Contingent considerations Lease liabilities Borrowings Derivatives Total increase/ (decrease) - - - - - - - 98 - 98 - - - - - - - - - - - - (131) 131 - - - - - - 53,630 66,300 (375) - 649,875 (4,529) - - 4,072 (69,226) (6,282) (175,402) (188,843) (76) - - - - - 375 - 4,529 - - - - - - - - - - - - - - - - - - - 22 (22) - - (1,241) - - - - 102 - - 1,241 - - - - (102) - - (120) - (6,145) 102 6,145 (102) (120) - 118,781 68,202 (831) - 613,131 (188) 4 (60,514) (17,174) (165,924) (246,039) (1,148) - - - - (888) - - - - - - - - - 626 831 - 188 - - - - 888 - - - - - - - - - - - - - - - - - - - (626) - - (179) - - - (520) 520 - - 147 - - - (1,114) 1,114 (1,907) 626 1,907 (626) (179) - 147 - 91 InvoCare Annual Report 2021 112 INVOCARE LIMITED AND SUBSIDIARIES Notes to the consolidated financial statements Capital and risks Note 15. Contributed equity Ordinary shares - fully paid Treasury shares - fully paid A. Ordinary shares Movement during the year Balance as at 1 January Shares issued for Dividend Reinvestment Plan Shares issued for Institutional Placement and Share Purchase Plan, net of transaction costs Balance at reporting date 2021 Number '000 144,061 (1,086) 142,975 2021 Number '000 144,061 - - 144,061 2020 Number '000 144,061 (1,175) 142,886 2020 Number '000 117,185 527 26,349 144,061 2021 2020 $’000 511,293 (13,513) 497,780 $’000 511,293 (14,288) 497,005 2021 2020 $’000 $’000 511,293 - - 511,293 234,513 5,918 270,862 511,293 Ordinary shares entitle the holder to participate in dividends and the proceeds on winding up of the Company in proportion to the number of and amounts paid on the shares held. On a show of hands every holder of ordinary shares present at a meeting in person or by proxy, is entitled to one vote, and upon a poll each share is entitled to one vote. Since 2006, the Company activated its Dividend Reinvestment Plan (DRP) under which equity holders of ordinary shares may elect to have all or part of their dividend entitlements satisfied in ordinary shares rather than by being paid in cash. The ordinary shares to be transferred to the DRP participants would either be by acquiring shares on market or issuing new shares as determined by the Board of Directors for each dividend payable. B. Treasury shares Movement during the year Balance as at 1 January Disposal of shares - vested share rights/options Disposal of shares - transfer to Exempted Employee Share Plan's participants Balance at reporting date 2021 Number '000 2020 Number '000 2021 2020 $’000 $’000 (1,175) 61 28 (1,086) (1,225) 19 31 (1,175) (14,288) 468 307 (13,513) (14,687) 48 351 (14,288) Treasury shares are shares in InvoCare Limited that are held by the InvoCare Deferred Employee Share Plan Trust and Employee Share Plan Trust for the purpose of issuing shares under the InvoCare Deferred Employee Share Plan and InvoCare Employee Share Plan, as set out in Note 22. 92 InvoCare Annual Report 2021 113 Shareholder and other informationSigned reportsGovernance & Directors’ reportOperating & financial review6532Overview1Consolidated financial statements4 Notes to the consolidated financial statements continued InvoCare Annual Report 2021 114 INVOCARE LIMITED AND SUBSIDIARIES Notes to the consolidated financial statements Capital and risks 93 C. Capital management The Group’s capital management objectives and strategies seek to maximise total shareholder returns, while maintaining a capital structure with acceptable debt and financial risk. The capital management goals can be broadly described as: • Manage the amount of equity and the expectation of returns – including dividend distribution policy, dividend reinvestment and share buy-back policies • Maintain debt and gearing that is prudent, cost effective, supports operational needs and provides flexibility for growth and development Avoid excessive exposure to interest rate fluctuations and debt refinancing risk Balance asset maintenance with growth focused investment The goals are actively managed by the use of quantifiable measures. These measures and relevant comments are as follows: • Maximising shareholder returns: Earnings per share (EPS) is a key measure and for 2021, basic EPS was 56.1 cents (2020: (8.6) cents). Operating EPS, which excludes restructuring costs, gains and losses on the disposal or impairment of non-current assets and on undelivered pre-paid contracts, non-controlling interests, disposal of subsidiaries and SaaS costs expensed as incurred, was 31.6 cents (2020: 20.9 cents). Importantly, senior management of the Group have long-term incentives linked to EPS growth, thus aligning employee and shareholder interests. The Group’s aim is to deliver stable, predictable, growing returns to shareholders represented by compound annual growth in Operating EPS in the low to mid-teens through the cycle. • Maintaining a minimum ordinary dividend payout ratio of between 60% to 80% of operating earnings after tax. The aggregate of the interim and final 2021 dividends represents a payout ratio of 66% (2020: 60%) of operating earnings after tax. • Confirming compliance with the debt covenant ratios, as defined in the facility agreements, through bi-annual calculations. The Group has complied with its banking covenants as follows: • Leverage ratio (being net debt to adjusted Operating EBITDA) must be no greater than 3.5 times • Interest cover ratio (being adjusted Operating EBITDA to net interest adjusted to remove interest related to AASB 16 Leases) must be greater than 3.0 times • Maintaining an optimal leverage ratio: The optimal capital structure, which has the lowest cost of capital, is indicatively at a leverage ratio (i.e. Net debt/Adjusted operating EBITDA) of no higher than a range between 2.0 times and 2.5 times through the cycle with an interest cover ratio of greater than 4.0 times. A liquidity buffer of at least $10 million should be maintained. Where the capacity exists, debt financing will be used for small acquisitions and capital expenditure. In the absence of opportunities to invest in growing the business, the Group will consider applying excess debt capacity to make returns to shareholders. Managing refinancing risk: Spreading the tenor of the debt available to the Group minimises its exposure to the risks that all the debt will become due at a single point of time. When allocating capital to drive strategic outcomes, those investment opportunities will be assessed in line with portfolio management criteria depending on the type of opportunity and will be aimed at delivering an enterprise Return on Capital Employed of greater than 12% by 2025. Recurring maintenance CAPEX will approximate depreciation & amortisation (excluding the AASB 16 impact of leases), this in turn will sustain our asset base for the long term. D. Accounting policy for ordinary shares Ordinary shares are classified as equity. Incremental costs directly attributable to the issue of new shares are shown in equity as a deduction, net of tax, from the proceeds. Note 16. Contingencies There were no unrecognised contingent assets as at 31 December 2021 and 31 December 2020. The Group had the following guarantees which are determined to be contingent liabilities at 31 December 2021: • Bank guarantees given for leased premises of subsidiaries to a maximum of $3,289,000 (2020: $2,870,000) Deed of cross guarantee entered into by a number of the Group’s entities. Refer to Note 24 for further details of bank guarantees entered into by the parent entity. INVOCARE LIMITED AND SUBSIDIARIES Notes to the consolidated financial statements Capital and risks Note 17. Commitments As at reporting date, the Group has the following capital and other commitments which are not recognised as liabilities. A. Capital commitments Contracted and conditionally contracted - within one year Building extensions and refurbishments Leasehold improvements Plant and equipment purchases B. Other commitments Documentary letters of credit - within one year 2021 $'000 2020 $'000 2,780 - 5,053 301 1,112 511 169 104 C. Lease commitments The Group leases premises, motor vehicles and sundry office equipment under leases with terms generally from one to five years. The Rookwood Crematorium lease expires in 2025. The Great Southern Garden of Remembrance lease expires in 2047 with an option to renew for a further 50 years. From 1 January 2019, the Group has recognised right of use assets for these leases, except for short term and low value leases, see Note 11. B. Right of use assets for further information. Contracted leases committed at reporting date but not recognised as liabilities or payable are provided in the table below. Within one year One to five years 2021 $'000 669 - 669 2020 $'000 669 137 806 Note 18. Events after reporting period Other than the dividend determined as disclosed in Note 4, no other matter or circumstance has arisen since 31 December 2021 that has significantly affected, or may significantly affect the Group's operations, the results of those operations, or the Group's state of affairs in future financial years. 94 InvoCare Annual Report 2021 115 Shareholder and other informationSigned reportsGovernance & Directors’ reportOperating & financial review6532Overview1Consolidated financial statements4 Notes to the consolidated financial statements continued InvoCare Annual Report 2021 116 INVOCARE LIMITED AND SUBSIDIARIES Notes to the consolidated financial statements Business portfolios 95 This section provides information on how the Group structure affects the financial position and performance of the Group as a whole. The disclosures detail the types of entities and transactions included in the consolidation and those excluded. Note 19. Business combinations A. Acquisition for the year ended 31 December 2021 During the year ended 31 December 2021, the Group acquired the business assets of Pets at Peace Central West, a pet cremation business operating in the Central West region of New South Wales. A summary of the purchase consideration, goodwill and identifiable assets and liabilities acquired for the acquisition is as follows: • Total consideration, only paid in cash: $450,000, with net cash outflow: $423,000 • Fair value of assets and liabilities acquired: • Inventories: $24,000 • Property, plant and equipment: $102,000 • Right of use assets: $237,000 • Lease liabilities: $(181,000) • Provision for employee entitlements: $(27,000) • Other liabilities: $(56,000) Goodwill: $324,000 The accounting for this acquisition is provisional as at 31 December 2021. The goodwill recognised is attributable to the location, workforce and the profitability of the acquired business. It will not be deductible for tax purposes. If new information obtained within one year from the acquisition date about facts and circumstances that existed at the acquisition date identifies adjustments to the above amounts, then the acquisition accounting will be revised. Revenue and profit after tax for the period from the acquisition date are $53,000 and $10,000, respectively. If the acquisition had occurred on 1 January 2021, consolidated revenue and profit after tax for the year ended 31 December 2021 would have increased by approximately $800,000 and $82,000, respectively. Acquisition costs incurred during the year ended 31 December 2021are $743,000. B. Acquisition for the year ended 31 December 2020 For all 3 acquisitions settled during the prior year ended 31 December 2020, the accounting for all of them has been finalised during 2020. There have been no material changes to the financial information disclosed for each acquisition. Refer to 2020 Annual Report for further details of those acquisitions. C. Fair value measurement – contingent consideration For some of the businesses acquired, consideration paid/payable consists contingent component (classified as contingent consideration as shown on face of the consolidated balance sheet) pending for the achievement of the agreed financial performance of the acquired businesses. The contingent consideration are measured and disclosed at fair value. This section provides details on how fair value is determined, including the valuation technique (only Level 3: Unobservable inputs for the contingent consideration) and inputs used and the movement for the financial period. I. Valuation techniques for fair value measurements categorised within level 3 The contingent consideration arose on the business combination related to prior years’ acquisitions. The fair value was determined using an independent expert and is estimated based on a multiple of forecast earnings before interest, tax, depreciation and amortisation (EBITDA) of the acquired business over a two year period. Any settlement of contingent consideration will be in the form of cash. Any variation at the time of settlement will be recognised as income or expense in profit or loss. INVOCARE LIMITED AND SUBSIDIARIES Notes to the consolidated financial statements Business portfolios 96 II. Critical accounting judgements, estimates and assumptions - fair value of contingent consideration The Group’s contingent consideration liability is measured at fair value at the end of each reporting period. The information provided below is about how the fair value of this financial liability is determined, including the valuation technique and inputs used. • Fair value hierarchy: level 3 • Valuation technique: the fair value is calculated based on a multiple of forecast EBITDA of the business over a two year period • Significant unobservable inputs: forecast EBITDA of the business and the discount rate Relationship of unobservable inputs to fair value: the estimated fair value would increase/decrease if the forecast EBITDA or discount rate were higher/lower III. Level 3 – contingent consideration Movements in level 3 – contingent consideration during the current and previous financial year are set out below. 2021 2020 $’000 $’000 Balance at 1 January 17,174 894 Contingent consideration relating to business combinations - 16,780 Payments during the financial year (10,892) (500) Balance at 31 December 6,282 17,174 The contingent consideration is all due and payable within 12 months and is classified as a current liability on the Balance Sheet. Sensitivity analysis on fair value of contingent consideration The carrying value of contingent consideration might be impacted by the changes in discount rate or the forecast EBITDA of the businesses acquired during the financial year. The impact to the carrying value for the following unobservable inputs are as follows: Profitability, adjustments on EBITDA: a 5% decrease in the profitability of each acquired business over the remaining contingent consideration period (all are less than 12 months) would not result in a decrease in the contingent consideration. D. Accounting policies for business combination The purchase method of accounting is used to account for all acquisitions of assets (including business combinations) regardless of whether equity instruments or other assets are acquired. Cost is measured as the fair value of the assets given, shares issued or liabilities incurred or assumed at the date of exchange. Identifiable assets acquired and liabilities and contingent liabilities assumed in a business combination are measured initially at their fair values at the acquisition date. The excess of the cost of acquisition over the fair value of the Group’s share of the identifiable net assets acquired is recorded as goodwill. If the cost of acquisition is less than the fair value of the net identifiable assets of the subsidiary acquired, the difference is recognised directly in the statement of comprehensive income, but only after a reassessment of the identification and measurement of the net assets acquired. 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 acquisition. Any variations in the initial estimates of deferred consideration and the final amount payable are remeasured through the statement of comprehensive income. The present value of contingent consideration is classified as a financial liability and is subsequently remeasured to fair value with changes in fair value recognised in profit or loss. The acquisition-related costs are recorded in the statement of comprehensive income. InvoCare Annual Report 2021 117 INVOCARE LIMITED AND SUBSIDIARIES Notes to the consolidated financial statements Business portfolios 96 II. Critical accounting judgements, estimates and assumptions - fair value of contingent consideration The Group’s contingent consideration liability is measured at fair value at the end of each reporting period. The information provided below is about how the fair value of this financial liability is determined, including the valuation technique and inputs used. • Fair value hierarchy: level 3 • Valuation technique: the fair value is calculated based on a multiple of forecast EBITDA of the business over a two year period • Significant unobservable inputs: forecast EBITDA of the business and the discount rate Relationship of unobservable inputs to fair value: the estimated fair value would increase/decrease if the forecast EBITDA or discount rate were higher/lower III. Level 3 – contingent consideration Movements in level 3 – contingent consideration during the current and previous financial year are set out below. 2021 2020 $’000 $’000 Balance at 1 January 17,174 894 Contingent consideration relating to business combinations - 16,780 Payments during the financial year (10,892) (500) Balance at 31 December 6,282 17,174 The contingent consideration is all due and payable within 12 months and is classified as a current liability on the Balance Sheet. Sensitivity analysis on fair value of contingent consideration The carrying value of contingent consideration might be impacted by the changes in discount rate or the forecast EBITDA of the businesses acquired during the financial year. The impact to the carrying value for the following unobservable inputs are as follows: Profitability, adjustments on EBITDA: a 5% decrease in the profitability of each acquired business over the remaining contingent consideration period (all are less than 12 months) would not result in a decrease in the contingent consideration. D. Accounting policies for business combination The purchase method of accounting is used to account for all acquisitions of assets (including business combinations) regardless of whether equity instruments or other assets are acquired. Cost is measured as the fair value of the assets given, shares issued or liabilities incurred or assumed at the date of exchange. Identifiable assets acquired and liabilities and contingent liabilities assumed in a business combination are measured initially at their fair values at the acquisition date. The excess of the cost of acquisition over the fair value of the Group’s share of the identifiable net assets acquired is recorded as goodwill. If the cost of acquisition is less than the fair value of the net identifiable assets of the subsidiary acquired, the difference is recognised directly in the statement of comprehensive income, but only after a reassessment of the identification and measurement of the net assets acquired. 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 acquisition. Any variations in the initial estimates of deferred consideration and the final amount payable are remeasured through the statement of comprehensive income. The present value of contingent consideration is classified as a financial liability and is subsequently remeasured to fair value with changes in fair value recognised in profit or loss. The acquisition-related costs are recorded in the statement of comprehensive income. Shareholder and other informationSigned reportsGovernance & Directors’ reportOperating & financial review6532Overview1Consolidated financial statements4Notes to the consolidated financial statements continued INVOCARE LIMITED AND SUBSIDIARIES Notes to the consolidated financial statements Business portfolios Note 20. Interests in subsidiaries A. Interests in subsidiaries Set out below are the Group’s principal trading subsidiaries at 31 December 2021. Unless otherwise stated, the subsidiaries as listed below have share capital consisting solely of ordinary shares, which are held directly by the Group, and the proportion of ownership interests held equals to the voting rights held by the Group. The country of incorporation or registration is also their principal place of business. The principal activities of all these subsidiaries are funeral services provider. Name of subsidiaries InvoCare Australia Pty Limited Bledisloe Australia Pty Limited InvoCare PetCare Pty Limited Family Pet Care Pty Limited InvoCare New Zealand Limited Singapore Casket Company (Private) Limited Country of incorporation Australia Australia Australia Australia New Zealand Singapore Ownership interest held by the Group 2021 % 100 100 100 100 100 100 2020 % 100 100 100 100 100 100 Shares in subsidiaries are carried at cost and relate to InvoCare Limited’s ownership interest in InvoCare Australia Pty Limited, InvoCare PetCare Pty Limited, Family Pet Care Pty Limited, InvoCare (Singapore) Pty Limited, InvoCare New Zealand Limited. All shares held are ordinary shares. InvoCare Australia Pty Limited, InvoCare PetCare Pty Limited, Family Pet Care Pty Limited, InvoCare (Singapore) Pty Limited and Bledisloe Australia Pty Ltd have been granted relief from the necessity to prepare financial reports in accordance with ASIC Corporations Instrument 2016/785 issued by the Australian Securities & Investments Commission. For further information refer to Note 25. B. Significant restrictions Other than those imposed by the legislative provisions in the respective country of incorporation, for the subsidiaries listed above, the Group has no significant restriction on its ability to access or use assets and settle liabilities. C. Subsidiaries with non-controlling interests (NCI) One subsidiary, Macquarie Memorial Park Pty Limited, has non-controlling interests of 16.86% (2020: 16.86%). During the year dividends totaling $117,000 were paid to non-controlling interests (2020: $Nil). D. Employee share trust The Group has formed a trust to administer the InvoCare Exempt Employee Share Plan, the Employee Share Plan and the InvoCare Deferred Employee Share Plan. 97 InvoCare Annual Report 2021 118 INVOCARE LIMITED AND SUBSIDIARIES Notes to the consolidated financial statements Business portfolios Note 20. Interests in subsidiaries A. Interests in subsidiaries Set out below are the Group’s principal trading subsidiaries at 31 December 2021. Unless otherwise stated, the subsidiaries as listed below have share capital consisting solely of ordinary shares, which are held directly by the Group, and the proportion of ownership interests held equals to the voting rights held by the Group. The country of incorporation or registration is also their principal place of business. The principal activities of all these subsidiaries are funeral services provider. Name of subsidiaries InvoCare Australia Pty Limited Bledisloe Australia Pty Limited InvoCare PetCare Pty Limited Family Pet Care Pty Limited InvoCare New Zealand Limited Singapore Casket Company (Private) Limited Country of incorporation Australia Australia Australia Australia New Zealand Singapore Ownership interest held by the Group 2021 % 100 100 100 100 100 100 2020 % 100 100 100 100 100 100 Shares in subsidiaries are carried at cost and relate to InvoCare Limited’s ownership interest in InvoCare Australia Pty Limited, InvoCare PetCare Pty Limited, Family Pet Care Pty Limited, InvoCare (Singapore) Pty Limited, InvoCare New Zealand Limited. All shares held are ordinary shares. InvoCare Australia Pty Limited, InvoCare PetCare Pty Limited, Family Pet Care Pty Limited, InvoCare (Singapore) Pty Limited and Bledisloe Australia Pty Ltd have been granted relief from the necessity to prepare financial reports in accordance with ASIC Corporations Instrument 2016/785 issued by the Australian Securities & Investments Commission. For further information refer to Note 25. B. Significant restrictions Other than those imposed by the legislative provisions in the respective country of incorporation, for the subsidiaries listed above, the Group has no significant restriction on its ability to access or use assets and settle liabilities. C. Subsidiaries with non-controlling interests (NCI) One subsidiary, Macquarie Memorial Park Pty Limited, has non-controlling interests of 16.86% (2020: 16.86%). During the year dividends totaling $117,000 were paid to non-controlling interests (2020: $Nil). D. Employee share trust Deferred Employee Share Plan. The Group has formed a trust to administer the InvoCare Exempt Employee Share Plan, the Employee Share Plan and the InvoCare 97 InvoCare Annual Report 2021 119 INVOCARE LIMITED AND SUBSIDIARIES Notes to the consolidated financial statements Business portfolios 98 E. Accounting policies I. Subsidiaries Subsidiaries are all entities (including employee share trust) over which the Group has control. The Group controls an entity when 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. II. Consolidation of subsidiaries Subsidiaries are fully consolidated from the date on which control is transferred to the Group. They are deconsolidated from the date that control ceases. The purchase method of accounting is used to account for the acquisition of subsidiaries by the Group (refer to Note 19.D). Intercompany transactions, balances and unrealised gains on transactions between Group companies are eliminated. Unrealised losses are also eliminated unless the transaction provides evidence of the impairment of the asset transferred. Accounting policies of subsidiaries have been changed where necessary to ensure consistency with the policies adopted by the Group. Non-controlling interests in the results and equity of non-wholly owned subsidiaries are shown separately in the consolidated statement of comprehensive income and balance sheet, respectively. III. Employee share trust The employee share trusts are consolidated, as the substance of the relationship is that the trusts are controlled by the Group. Shares held by the InvoCare Employee Share Plan and InvoCare Deferred Employee Share Plan Trusts are disclosed as treasury shares and deducted from contributed equity. IV. Foreign currency translation on subsidiaries The results and financial positions of all the Group entities (none of which has the currency of a hyperinflationary economy) that have a functional currency different from the presentation currency are translated into the presentation currency as follows: • Assets and liabilities for each balance sheet presented are translated at the closing rate at the date of that balance sheet • Income and expenses for each statement of comprehensive income are translated at average exchange rates All resulting exchange differences are recognised in other comprehensive income On consolidation, exchange differences arising from the translation of any net investment in foreign subsidiaries, and of borrowings and other financial instruments designated as hedges of such investments, are recognised in other comprehensive income. When a foreign operation is sold or any borrowings forming part of the net investment are repaid, a proportionate share of such exchange differences will be recognised in the statement of comprehensive income, as part of the gain or loss on sale where applicable. Goodwill and fair value adjustments arising on the acquisition of a foreign subsidiary are treated as assets and liabilities of the foreign subsidiaries and translated at the closing rate. Note 21. Other financial assets 2021 2020 $’000 $’000 Balance at 1 January 4 4 Addition in investment 4,068 - Balance at 31 December 4,072 4 A. Other financial assets Other financial assets consist mainly the Group’s investment in Memories Group Limited (Memories), a provider of secure digital memorialisation services. The Group’s investment represents 9.6% of Memories total equity. The investment is classified as a financial asset. B. Critical accounting judgements, estimates and assumptions Estimated impairment of financial assets The Group annually considers the loss allowance for financial assets based on assumptions about expected loss rates. The Group applies judgement in making these assumptions and selecting the inputs to the impairment calculation, based on the Group’s past history and existing market conditions as well as forward-looking estimates at the end of each reporting period. C. Accounting policy Other financial assets are measured at fair value through profit and loss, less any expected credit loss. Shareholder and other informationSigned reportsGovernance & Directors’ reportOperating & financial review6532Overview1Consolidated financial statements4 Notes to the consolidated financial statements continued INVOCARE LIMITED AND SUBSIDIARIES Notes to the consolidated financial statements Other statutory disclosures This section provides information on other disclosures which are required by various accounting standards and reporting requirements. They include: Note 22. Share-based remuneration Note 26. Economic dependence Note 23. Related party transactions Note 27. Remuneration of auditors Note 24. Parent entity information Note 28. Other accounting policies Note 25. Deed of cross guarantee Note 22. Share-based remuneration The ultimate objective of share-based remuneration is to align the participants with delivery of shareholder value. Long term incentives, with appropriate performance hurdles, align participants to the long-term strategies, goals and objectives of the Group, and provide greater incentive for senior employees to have broader involvement and participation in the Group beyond their immediate role. Equity participation also assists the Group to attract and retain skilled and experienced senior employees. The obligations under share-based payment arrangements are settled by either issuing new ordinary shares in the Company or acquiring ordinary shares of the Company on market. Overseas participants receive cash equivalent to the value of the equity awarded that vests. Trading in InvoCare’s ordinary shares awarded under the share-based remuneration arrangements is governed by the InvoCare’s Share Trading Policy. The policy restricts employees from trading in InvoCare’s shares when they are in a position to be aware, or are aware, of price sensitive information. The policy also implements blackout periods which prohibit trading in InvoCare’s shares in the lead up to the Group’s half year and annual result announcements, unless Board express approval is obtained. The arrangements are governed by the terms of the Company’s Employee Share Plan Rules. Four plans are currently in operation under the Company’s Employee Share Plan Rules. They include: • • A plan which is available to eligible employees who meet the employment conditions: • Exempt Employee Share Plan (EESP) – in the form of shares to the maximum value of $1,000 instead of cash salary Three plans which are only available to nominated employees: • • • Long-term Incentive Plan (LTIP) – in the forms of options and/or performance rights or cash equivalent, which will vest if the performance and employment conditions are both met Deferred Employee Share Plan (DESP) – in the form of shares or share appreciation rights (SARs) for overseas employees which will vested when employment condition is met Service Based Equity Plan (SEP) – in the form of rights or cash equivalent, which will vest if the employment condition is met A. Exempt Employee Share Plan Australian based permanent employees with more than six months service and a salary less than $180,000 per annum and casual staff with more than two years service routinely working at least 40% of a full time equivalent are annually offered the opportunity to acquire $1,000 worth of InvoCare Limited shares through a salary sacrifice arrangement as permitted by Australian Taxation Legislation. During 2021, 308 employees accepted the offer and at 31 December 2021 a further $166,000 was remaining to be collected via payroll deductions. 99 InvoCare Annual Report 2021 120 INVOCARE LIMITED AND SUBSIDIARIES Notes to the consolidated financial statements Other statutory disclosures B. Long-term Incentive Plan LTIP was introduced during 2016. The plan permits settlement in either equity or cash, at the Board’s discretion. The plan provides options and/or performance rights to senior management team and a selected group of critical roles within the Group, so employees are incentivised to maximise shareholder value in the longer term. Yes Yes 2016 2015 Shares Cash $12.08 $2.40 Key terms and conditions of the LTIP Grant year Base year (financial year ended 31 December Form of granta Performance rights Options Form of settlement when exercising vested LTI Australian participantsb Overseas Grant date fair value Rights – grant date value Options – grant date value Dividend entitlementc Performance rights Performance hurdle(s) and vesting scale CAGR in EPS targetd Maximum (100% vesting) Minimum (30% vesting) Average ROIC targete Maximum (100% vesting) Minimum (30% vesting) Average ROCE targetf Maximum (100% vesting) Minimum (30% vesting) Number of tranches for the grant Performance rights/options Performance testing time for each tranche (T) Feb-18 Feb-19 N/A N/A N/A N/A 3 12% 7% No T1 T2 + PY residue T3 + PY residue Final re-testing All residue Feb-20 Feb-21 Feb-22 Feb-23 Mar-23 Mar-24 2017 2016 Yes Yes Shares Cash $14.06 $2.93 2018 2017 Yes Yes Shares Cash $13.91 $2.78 2019 2018 Yes Yes Shares Cash $12.96 $2.51 2020 2019 Yes Yes Shares Cash $9.70 $2.14 2021 2020 Yes N/A Shares Cash $11.57 N/A No No No Yes Yes 12% 7% N/A N/A N/A N/A 3 T1 T2 + PY residue T3 + PY residue Final re-testing All residue 12% 8% N/A N/A N/A N/A 2 10% 6% 12% 10% NA NA 1 15% 10% N/A N/A 12% 10% 1 12% 8% N/A N/A N/A N/A 2 T1 T2 + PY residue T1 T2 + PY residue Only one testing Only one testing a b c Both options and performance rights are granted for nil consideration, they are not entitled to voting rights during the vesting period For each vested option and performance rights, upon exercise: • • For Australian participants, each option (after paying the options exercise price) and performance right entitle the participant to subscribe for one InvoCare ordinary share For overseas participants, each option (after paying the options exercise price) and performance right entitle the participant to receive cash equivalent value of one InvoCare ordinary share at the market value at date of exercise of the options and performance rights For those performance rights entitled to dividends, if determined and paid by InvoCare Board, during the performance period. Additional performance rights will be granted to the participants of LTIP at the dividend payment date. The number of performance rights granted are calculated by the number of share rights or performance rights times the dividend paid per share divided by the dividend reinvestment plan VWAP price. These additional performance rights granted – dividend entitlement will only be payable as additional shares on date of vesting of the originally granted performance rights 100 InvoCare Annual Report 2021 121 Shareholder and other informationSigned reportsGovernance & Directors’ reportOperating & financial review6532Overview1Consolidated financial statements4 Notes to the consolidated financial statements continued INVOCARE LIMITED AND SUBSIDIARIES Notes to the consolidated financial statements Other statutory disclosures d Normalised EPS means constant currency EPS adjusted to exclude the after tax impacts of funds under management movements, the gain or loss on the sale, disposal or impairment of non-current assets, non-cash movements in derivative financial instruments reported in profit before tax and impacts of changed accounting policies because of changes of accounting standards from the base year. For 2020 grant onwards, EPS is calculated based on operating earnings (normalised for non-operating items) e For 2016 to 2019 grant, vesting of these grants is conditional on meeting a minimum level of ROIC as specified in the invitation, being no LTI vesting will occur if the ROIC for the year does not exceed the weighted average cost of capital (WACC) in that year. For the vesting test on the second anniversary (ie re-testing), the average of years one and two ROIC and WACC are to be used ROIC means return on invested capital and is calculated by dividing the operating earnings by the average invested capital f g ROCE means return on capital employed and is calculated by dividing the operating earnings before interest and tax by the average capital employed h Upon termination of employment, all unvested options and performance rights will be forfeited unless Board approval is granted for the “Good Leaver” i Clawback and malus: the Board, at its sole discretion, may determine that all or part of any vested and unvested options or performance rights may be forfeited in certain circumstances The fair value of the options and performance rights at grant date is estimated using Black-Scholes Pricing model. The model takes into account the exercise price, the term of the option, the share price at grant date and expected price volatility of the underlying share, the expected dividend yield, the risk-free interest rate for the term of the option. The following information related to the options and performance rights issued under the LTIP. Fair value at grant date Grant date Expiry date Options 1/01/2016 22/02/2016 1/01/2017 22/02/2017 1/01/2018 1/01/2019 1/03/2020 1/01/2026 22/02/2026 1/01/2027 22/02/2027 1/01/2028 1/01/2029 1/03/2028 Performance rights 1/01/2016 22/02/2016 1/01/2017 22/02/2017 1/01/2018 1/01/2019 1/03/2020 3/08/2020 1/01/2021 1/01/2026 22/02/2026 1/01/2027 22/02/2027 1/01/2028 1/01/2029 1/03/2035 1/08/2035 1/01/2036 $2.40 $2.40 $2.93 $2.93 $2.78 $2.51 $0.58 $12.08 $12.08 $14.06 $14.06 $13.91 $12.96 $9.70 $9.70 $11.57 Balance at the start of the year Number 449,094 20,946 413,565 16,221 623,232 789,956 513,820 2,826,834 32,477 2,770 43,320 3,380 58,943 69,208 105,068 17,107 - 332,273 Grant - dividend entitlements Number Granted Number Vested Number Lapsed Number Balance at the end of the year Number - - - - - - - - - - - - - - - - 284,872 284,872 - - - - - - - - - - - - - - 1,443 242 2,279 3,964 - - - - - - - - - - - - - - - - - - (174,924) (20,946) (154,786) - (13,822) (25,466) (16,062) (406,006) 274,170 - 258,779 16,221 609,410 764,490 497,758 2,420,828 (32,477) (2,770) (13,739) - (2,762) (4,419) (7,145) - (6,197) (69,509) - - 29,581 3,380 56,181 64,789 99,366 17,349 280,954 551,600 The value of the options and performance rights exercised is based on the VWAP for the year ended 31 December 2021 and was $11.33 (2020: $11.10). 101 InvoCare Annual Report 2021 122 InvoCare Annual Report 2021 123 INVOCARE LIMITED AND SUBSIDIARIES Notes to the consolidated financial statements Other statutory disclosures 102 C. Deferred Employee Share Plan This plan introduced in 2007 is settled by the transfer of InvoCare ordinary shares to participants upon vesting. This plan is for recognising, rewarding and retaining InvoCare’s key talent in critical roles in middle management level. Therefore, from 2016 onwards, this plan has only one vesting condition, being ongoing employment condition met at vesting dates. Eligible employees participate in this plan based on nomination only. The required ordinary shares can be purchased on market and held by the Employee Share Plan Trust or issue of new shares. This plan if in operation, grants normally occur in March following the previous full year results announcement. For new grants, the number of shares to be allocated to eligible employees is based on the volume weighted average price (VWAP) of InvoCare ordinary shares traded during the first 10 days of the trading window that immediately follows the announcement of the previous full year results. The key terms and conditions of this plan: • In the form of shares to be granted as approved by the Board • Shares are granted for nil consideration • The vesting condition is to meet ongoing employment condition • Each grant of shares is divided in three equal tranches • From 2021, the waiting period is shortened by 12 months for ongoing employment condition, the vesting date of the three tranches are: • Tranche 1 – completion of 12 months employment from grant date • Tranche 2 – completion of 24 months employment from grant date • Tranche 3 – completion of 36 months employment from grant date • Prior 2021, the waiting period for ongoing employment condition, the vesting date of the three tranches are: • Tranche 1 – completion of 24 months employment from grant date • Tranche 2 – completion of 36 months employment from grant date • Tranche 3 – completion of 48 months employment from grant date • Entitle to receive any dividends that may become payable on the shares during the vesting period • Entitle to voting rights of the shares during the vesting period • Upon vesting: • For Australian participants, vested shares will be transferred to the vested shares account of the participants • For overseas participants, each shares entitle the participant to receive cash equivalent value of one InvoCare ordinary share at the market value at date of vesting Upon termination of employment, all unvested shares will be forfeited D. Service Based Equity Plan The Service Based Equity Plan (SEP) introduced in 2020. SEP is for recognising, rewarding and retaining InvoCare’s key talent in critical roles in middle management level. This plan has only one vesting condition, being ongoing employment condition met at vesting dates. Eligible employees participate in this plan based on nomination only. The key terms and conditions of this plan: • In the form of rights to be granted as approved by the Board • Rights are granted for nil consideration • The vesting condition is to meet ongoing employment condition • Each grant of rights is divided in six equal tranches • For ongoing employment condition only rights, the vesting date of the six tranches is every six months from the grant date • These rights are entitled to dividends, if determined and paid by InvoCare Board, during the performance period. Additional rights will be granted to the participants of SBP at the dividend payment date. The number of rights granted are calculated by the number of share rights or performance rights times the dividend paid per share divided by the dividend reinvestment plan VWAP price. These additional rights granted – dividend entitlement will only be payable as additional shares on date of vesting of the originally granted rights • For each vested right, upon exercise: • For Australian participants, each right entitles the participant to subscribe for one InvoCare ordinary share • For overseas participants, each right entitles the participant to receive cash equivalent value of one InvoCare ordinary share at the market value at date of exercise Upon termination of employment, all unvested rights and any cumulated dividend (in the form of rights) will be forfeited Shareholder and other informationSigned reportsGovernance & Directors’ reportOperating & financial review6532Overview1Consolidated financial statements4Notes to the consolidated financial statements continued INVOCARE LIMITED AND SUBSIDIARIES Notes to the consolidated financial statements Other statutory disclosures The following information relates to the rights issued under the SEP and shares held in the share plan trust under DESP. Grant date Expiry date Fair value at grant date Rights - ongoing employment condition only $9.70 $10.50 $11.57 $11.57 1/09/2035 1/09/2035 31/12/2035 3/05/2036 1/09/2020 19/10/2020 1/01/2021 3/05/2021 Shares - ongoing employment condition only 1/03/2017 1/03/2018 1/03/2019 1/03/2020 15/06/2020 1/03/2021 1/09/2021 1/03/2032 1/03/2028 21/02/2029 1/03/2035 1/07/2035 1/03/2031 1/09/2036 $14.06 $13.91 $14.46 $10.70 $11.10 $10.70 $11.10 Balance at the start of the year Number 135,948 14,000 - - 149,948 3,662 8,285 29,064 1,758 30,000 - - 72,769 Grant - dividend entitlements Number 1,789 198 - 15 2,002 - - - - - - - - Granted Number - - 34,782 2,000 36,782 - - - - - 12,000 34,421 46,421 Vested Number Lapsed Number (8,106) - - - (8,106) (3,662) (4,128) (9,862) - (10,000) - - (27,652) (16,210) - - - (16,210) - (648) (872) - - - - (1,520) Balance at the end of the year Number 113,421 14,198 34,782 2,015 164,416 - 3,509 18,330 1,758 20,000 12,000 34,421 90,018 The value of the options and performance rights exercised is based on the VWAP for the year ended 31 December 2021 and was $11.33 (2020: $11.10). Note 23. Related party transactions A. Key management personnel compensation Short-term employee benefits Post-employment benefits Other long-term benefits Termination benefits Share based payments 2021 $ 2,671,110 49,597 10,618 - 814,380 3,545,705 2020 $ 3,330,600 156,079 (101,930) 428,909 320,490 4,134,148 B. Parent entity The ultimate parent entity within and for the Group is InvoCare Limited. C. Transactions with subsidiaries All transactions that have occurred among the subsidiaries within the Group have been eliminated for consolidation purposes. D. Transactions with other related parties The contributions to superannuation funds on behalf of employees are disclosed in Note 5.F. 103 InvoCare Annual Report 2021 124 InvoCare Annual Report 2021 125 INVOCARE LIMITED AND SUBSIDIARIES Notes to the consolidated financial statements Other statutory disclosures 104 Note 24. Parent entity information A. Summary financial information The financial information provided in the table below is only for InvoCare Limited, the parent entity of the Group. 2021 2020 $’000 $’000 Statement of comprehensive income Profit after income tax 56,023 59,662 Total comprehensive income 56,382 61,279 Balance sheet Current assets 85 44,936 Total assets 897,139 866,746 Current liabilities 4,854 1,582 Total liabilities 160,574 165,779 Equity Contributed equity 497,780 497,005 Share-based payments reserve 5,503 3,296 Cash flow hedges reserve - (359) Foreign currency reserve 1,080 1,080 Retained profits 232,202 199,945 Total equity 736,565 700,967 B. Guarantees entered into by the parent entity The parent entity provided the following guarantees during the year ended 31 December 2021 and 31 December 2020: • Bank guarantees given for leased premises of subsidiaries to a maximum of $3,289,000 (2020: $2,870,000) Under the terms of a General Security Trust Deed executed on 16 February 2018 the parent entity, InvoCare Limited, and its material wholly-owned subsidiaries (the Guarantors) have individually guaranteed to the financiers the due and punctual payment in full of any liabilities or obligations provided under the terms of the Syndicated Facility Agreement and the Note Purchase Agreement both dated 16 February 2018. The Guarantors have also indemnified the financiers against any loss or damage suffered by the financiers arising from any failure by a borrower or any Guarantor to satisfy the obligations. C. Contingent liabilities Other than the guarantees as disclosed in section B above, there were no unrecognised contingent liabilities as at 31 December 2021 and 31 December 2020. D. Capital commitment – property, plant and equipment The parent entity has no capital commitments for the acquisition of property, plant or equipment at 31 December 2021 and 31 December 2020. E. Tax consolidation group InvoCare Limited (the head entity) and its wholly-owned Australian subsidiaries implemented the tax consolidation legislation from 1 January 2004. On adoption of the tax consolidation legislation, the entities in the tax consolidated group entered into a tax sharing and funding agreement which, in the opinion of the directors, limits the joint and several liability of the wholly-owned subsidiaries in the case of a default by the head entity. This agreement was updated on 5 June 2007 and provides that the wholly-owned subsidiaries will continue to fully compensate InvoCare Limited for any current tax payable assumed and be compensated by InvoCare Limited for any current tax receivable and deferred tax assets relating to unused tax losses or unused tax credits that are transferred to InvoCare Limited under the tax consolidation legislation. The amounts receivable or payable under the tax funding agreement are due upon receipt of the funding advice from the head entity, which is issued as soon as practicable after the end of each financial year. InvoCare Australia Pty Limited, as permitted by the tax funding agreement, acts on behalf of InvoCare Limited for the purpose of meeting its obligations to make tax payments, or receive refunds, and reimburses, or is compensated by, that entity through the intercompany loan account for amounts of tax paid, or received, except for the tax allocated to that entity. F. Accounting policy applicable to parent entity The accounting policies of the parent entity are consistent with those of the Group, except for the following: • Investments in subsidiaries are accounted for at cost, less any impairment, in the parent entity Dividends received from subsidiaries are recognised as other income by the parent entity and its receipt may be an indicator of an impairment of the investment Shareholder and other informationSigned reportsGovernance & Directors’ reportOperating & financial review6532Overview1Consolidated financial statements4Notes to the consolidated financial statements continued INVOCARE LIMITED AND SUBSIDIARIES Notes to the consolidated financial statements Other statutory disclosures Note 25. Deed of cross guarantee InvoCare Limited, InvoCare Australia Pty Limited and InvoCare (Singapore) Pty Limited entered into a Deed of Cross Guarantee on 11 December 2006 under which each company guarantees the debts of the others. Effective from 15 June 2011, Bledone Pty Ltd and Bledisloe Australia Pty Ltd became parties to this Deed of Cross Guarantee. Effective from 19 February 2021, InvoCare PetCare Pty Limited and Family Pet Care Pty Limited became parties to this Deed of Cross Guarantee. By entering into the deed, the wholly-owned subsidiaries have been relieved from the requirement to prepare a Financial Report and Directors’ Report under ASIC Corporations Instrument 2016/785 issued by the Australian Securities & Investments Commission. The above companies represent a “Closed Group” for the purposes of the ASIC Corporations Instrument, and as there are no other parties to the Deed of Cross Guarantee that are controlled by InvoCare Limited, they also represent the “Extended Closed Group”. Set out below is a consolidated statement of comprehensive income, summary of movements in consolidated retained profits and consolidated balance sheet for the year ended 31 December 2021 of the Closed Group. A. Consolidated statement of comprehensive income of the Closed Group Revenue from continuing operations Finished goods, consumables and funeral disbursements Employee benefits expense Advertising and public relations expenses Occupancy and facilities expenses Motor vehicle expenses Technology Other expenses Depreciation and amortisation expenses Pre-paid technology expenses Impairment loss on intangibles Reversal of impairment of cemetery land Finance costs Interest income Acquisition related costs Net gain on undelivered pre-paid contracts Inter-segment revenue Gain on lease termination Net gain on disposal of non-current assets Profit before income tax Income tax expense Net profit after income tax for the year Other comprehensive income Items that may be reclassified to profit and loss Changes in fair value of cash flow hedges, net of tax Total realised loss on early settlement of interest rate swaps reclassified to profit or loss Net changes to cash flow hedges, net of tax Changes in foreign currency translation reserve, net of tax Other comprehensive income for the year, net of tax Total comprehensive income for the year, net of tax 2021 $’000 Restated 2020 $’000 474,679 (101,256) (164,393) (11,235) (20,151) (9,152) (16,761) (17,417) 134,314 (37,965) (654) (424) 4,000 (34,372) 1,943 (743) 64,697 1,616 1,517 6,852 140,781 (27,230) 113,551 (359) - (359) - (359) 113,192 387,544 (96,351) (143,212) (11,921) (18,985) (8,125) (18,134) (18,811) 72,005 (32,903) (750) (3,191) 6,000 (38,573) 1,539 (1,918) 2,691 1,317 - 7,521 13,738 (6,373) 7,365 (1,240) 1,611 371 (1,595) (1,224) 6,141 B. Summary of movements in consolidated retained profits of the Closed Group Retained profits as at 1 January Profit after income tax for the year Dividends paid Retained profits as at 31 December 158,414 113,551 (34,843) 237,122 186,481 7,365 (35,432) 158,414 105 InvoCare Annual Report 2021 126 INVOCARE LIMITED AND SUBSIDIARIES Notes to the consolidated financial statements Other statutory disclosures C. Consolidated balance sheet of the Closed Group Current assets Cash and cash equivalents Trade receivables Other receivables Inventories Pre-paid technology assets Pre-paid contract funds under management Asset held for sale Deferred selling costs Deferred contract assets Total current assets Non-current assets Trade and other receivables Shares in subsidiaries Investment in business assets Property, plant and equipment Right of use asset Pre-paid contract funds under management Pre-paid technology assets Intangible assets Deferred selling costs Deferred contract assets Total non-current assets Total assets Current liabilities Trade and other payables Contingent consideration Lease liabilities Derivative financial instruments Current tax liabilities Pre-paid contract liabilities Deferred revenue Provision for employee benefits Total current liabilities Non-current liabilities Contingent consideration Borrowings Lease liabilities Derivative financial instruments Deferred tax liabilities Pre-paid contract liabilities Deferred revenue Provision for employee entitlements Total non-current liabilities Total liabilities Net assets Equity Contributed equity Reserves Retained profits Total equity 2021 $’000 Restated 2020 $’000 40,467 1,695 16,386 42,592 582 52,959 89 4,571 1,811 161,152 171,376 246,777 4,068 406,138 118,219 596,916 8,019 106,599 10,550 152 1,668,814 1,829,966 58,749 6,187 17,977 - 4,044 44,315 30,758 15,895 177,925 - 188,843 130,278 - 45,933 496,003 56,220 2,560 919,837 1,097,762 732,204 107,219 15,894 15,119 40,000 637 50,268 2,333 3,644 1,541 236,655 81,076 246,777 - 378,461 118,667 562,863 4,655 105,140 13,151 2,525 1,513,315 1,749,970 51,480 9,171 16,786 512 77 44,533 28,627 15,463 166,649 7,909 199,285 121,252 - 32,144 496,624 69,391 2,444 929,049 1,095,698 654,272 497,005 (1,923) 237,122 732,204 497,005 (1,147) 158,414 654,272 106 InvoCare Annual Report 2021 127 Shareholder and other informationSigned reportsGovernance & Directors’ reportOperating & financial review6532Overview1Consolidated financial statements4 Notes to the consolidated financial statements continued INVOCARE LIMITED AND SUBSIDIARIES Notes to the consolidated financial statements Other statutory disclosures Note 26. Economic dependence The parent entity depends on dividend and interest income from, and management fees charged to, its subsidiaries to source the payment of future dividends and fund its operating costs and debt service obligations as borrower under the bank loan facility agreements. The parent entity’s financial position is sound. Adequate cash resources are available to enable it to meet its obligations as and when they fall due, through either drawing on unused finance facilities, which at the reporting date amounted to $191,028,000 as outlined in Note 14.E., or by on-demand repayment of intercompany advances. Note 27. Remuneration of auditors During the year the following fees were paid or payable for services provided by Deloitte Touche Tohmatsu, the auditor of the parent entity, InvoCare Limited, its related practices and non-related audit firms. A. Audit services Deloitte Touche Tohmatsu (2020: PricewaterhouseCoopers) - Australian firm Audit and review of financial reports Deloitte Touche Tohmatsu (2020: PricewaterhouseCoopers) - non-Australian firm Audit and review of financial reports Non-Deloitte Touche Tohmatsu (2020: Non-PricewaterhouseCoopers) - Singaporean firm Audit and review of financial reports Total remuneration for audit services B. Non-audit services Deloitte Touche Tohmatsu (2020: PricewaterhouseCoopers) - Australian firm Assurance services Taxation services Other services Deloitte Touche Tohmatsu (2020: PricewaterhouseCoopers) - non-Australian firm Taxation services Other services Non-Deloitte Touche Tohmatsu (2020: Non-PricewaterhouseCoopers) - Singaporean firm Other services Total remuneration for non-audit services C. Non-audit services prior to appointment as auditors Deloitte Touche Tohmatsu - Australian firm Taxation services Other services Total remuneration for non-audit services 2021 $ 2020 $ 550,000 525,121 - 22,443 29,569 579,569 32,152 579,716 26,741 55,000 246,486 22,400 11,500 - - - 49,033 1,633 - 328,227 11,476 96,042 113,566 121,149 234,715 - - - It is the Company’s policy to employ Deloitte Touche Tohmatsu on assignments additional to their statutory audit duties where Deloitte Touche Tohmatsu’s expertise and experience with the Group are important and auditor independence is not compromised. These assignments are principally tax advice and advisory services, or where Deloitte Touche Tohmatsu is awarded assignments on a competitive basis. It is the Company’s policy to seek competitive tenders for any major consulting projects. 107 InvoCare Annual Report 2021 128 InvoCare Annual Report 2021 129 INVOCARE LIMITED AND SUBSIDIARIES Notes to the consolidated financial statements Other statutory disclosures 108 Note 28. Other accounting policies A. New or amended accounting standards and interpretations adopted The Group has adopted all of the new or amended Accounting Standards and Interpretations issued by the Australian Accounting Standards Board (AASB) that are mandatory for the current reporting period. In April 2021, the IFRS interpretation committee published agenda decision Configuration or customisation costs in a cloud computing arrangement (AASB 138 Intangible Assets) which considers whether an intangible asset can be recognised in relation to configuration or customisation of application software. The financial impact and additional disclosures required are provided in Note 12 Intangibles. B. Other accounting policies applicable I. Foreign currency translation a. Functional and presentation currency Items included in the financial statements of each of the Group’s entities are measured using the currency of the primary economic environment in which the entity operates (the functional currency). The consolidated financial statements are presented in Australian dollars, which is InvoCare Limited’s functional and presentation currency. b. Transactions and balances Foreign currency transactions are translated into the functional currency using the exchange rates prevailing at the dates of the transactions. Foreign exchange gains and losses resulting from the settlement of such transactions and from the translation at year end exchange rates of monetary assets and liabilities denominated in foreign currencies are recognised in the statement of comprehensive income, except when they are deferred in equity as qualifying cash flow hedges and qualifying net investment hedges or are attributable to part of the net investment in a foreign operation. II. Inventories Inventories comprising of funeral merchandise and memorialisation property items in the Cemeteries & Crematoria and Pets Cremation business, primarily held for the purpose of trading, are sold, consumed or realised as part of the normal operating cycle even when they are not expected to be realised within twelve months, and are classified as current. Inventories are stated at the lower of cost and net realisable value. Cost comprises direct materials and, where appropriate, a proportion of variable and fixed overhead. Costs are assigned to individual items of inventory predominantly on the basis of weighted average cost. Net realisable value is the estimated selling price in the ordinary course of business less the estimated costs necessary to make the sale. III. Deferred contract assets Deferred contract assets represent items to be delivered related to the pre-2018 memorial product contracts. These contract assets will be unwind to cost of goods sold as the performance obligations of these contracts are met. IV. Trade and other payables Trade and other payables represent liabilities for goods and services provided to the Group prior to the end of the financial year which had not been settled at balance date. The amounts are unsecured and are usually paid within 60 days of recognition. V. Borrowings Borrowings are initially recognised at fair value, net of transaction costs incurred. Borrowings are subsequently measured at amortised cost. Any difference between the proceeds (net of transaction costs) and the redemption amount is recognised in the statement of comprehensive income over the period of the borrowings using the effective interest rate method. Borrowings 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 balance sheet date. VI. Derivative financial instruments The Group uses derivative financial instruments, interest rate swaps, to hedge its risks associated with exchange and interest rate fluctuations. Derivatives are initially recognised at fair value on the date a derivative contract is entered into and are subsequently re-measured to their fair value at each reporting date. The accounting for subsequent changes in fair value depends on whether the derivative is designated as a hedging instrument, and if so, the nature of the item being hedged. The Group designates certain derivatives as either: • Hedges of the risks associated with the cash flows of recognised assets and liabilities and highly probable forecast transactions (cash flow hedges) Hedges of a net investment in a foreign operation The Group documents at inception the relationship between hedging instruments and hedged items, as well as its risk management objective and strategy for undertaking various hedge transactions. The Group also documents its assessment of whether the derivatives that are used in hedging transactions have been, and will continue to be, highly effective in offsetting changes in fair values or cash flows or hedged items. The fair value of interest rate swap contracts is calculated as the present value of the estimated future cash flows. The full fair value of a hedging derivative is classified as a non-current asset or liability when the remaining maturity of the hedged item is more than twelve months; it is classified as a current asset or liability when the remaining maturity of the hedged item is less than twelve months. Hedges that meet the criteria for hedge accounting are accounted for as follows. Shareholder and other informationSigned reportsGovernance & Directors’ reportOperating & financial review6532Overview1Consolidated financial statements4Notes to the consolidated financial statements continued InvoCare Annual Report 2021 130 INVOCARE LIMITED AND SUBSIDIARIES Notes to the consolidated financial statements Other statutory disclosures 109 a. Cash flow hedges The effective portion of changes in the fair value of derivatives that are designated and qualify as cash flow hedges is recognised in equity in the hedging reserve. The gain or loss relating to the ineffective portion is recognised immediately in the statement of comprehensive income within finance costs. Amounts accumulated in equity are recycled in the statement of comprehensive income within finance costs in the periods when the hedged item affects profit or loss (for instance when the forecast sale that is hedged takes place). When a hedging instrument expires, is sold or terminated, or when a hedge no longer meets the criteria for hedge accounting, any cumulative gain or loss existing in equity at that time remains in equity and is recognised when the forecast transaction is ultimately recognised in the statement of comprehensive income. When a forecast transaction is no longer expected to occur, the cumulative gain or loss that was reported in equity is immediately transferred to the statement of comprehensive income. b. Hedges of a net investment Hedges of a net investment in a foreign operation, including a hedge of a monetary item that is accounted for as part of the net investment, are accounted for in a similar way to cash flow hedges. Gains or losses on the hedging instrument relating to the effective portion of the hedge are recognised directly in equity while any gains or losses relating to the ineffective portion are recognised in the statement of comprehensive income. On disposal of the foreign operation, the cumulative value of any such gains or losses recognised directly in equity is transferred to the statement of comprehensive income. VII. Employee benefits a. Wages and salaries, annual leave and sick leave Liabilities for wages and salaries, including non-monetary benefits and annual leave expected to be settled within 12-months of the reporting date are recognised in other payables and provision for employee benefits in respect of employees’ services up to the reporting date and are measured at the amounts expected to be paid when the liabilities are settled, including appropriate on-costs. b. Long service leave The liability for long service leave is recognised in the provision for employee benefits and is measured as the present value of expected future payments to be made in respect of services provided by employees up to the reporting date, including appropriate on-costs. Consideration is given to expected future wage and salary levels, experience of employee departures and periods of service. Expected future payments are discounted using market yields at the reporting date on corporate bonds with terms to maturity and currency that match, as closely as possible, the estimated future cash outflows. c. Bonus plans The Group recognises a liability in other payables and an expense for bonus plans when there is no realistic alternative but to settle the liability and at least one of the following conditions is met: • There are formal terms in the plan for determining the amount of the benefit • The amounts to be paid are determined before the time of completion of the financial report Past practices give clear evidence of a constructive obligation VIII. New Accounting Standards and Interpretations not yet mandatory or early adopted There are no Australian Accounting Standards and Interpretations that have recently been issued or amended but are not yet mandatory, that have been early adopted by the Group for the annual reporting period ended 31 December 2021. Section 5 Signed reports InvoCare Annual Report 2021 131 INVOCARE LIMITED AND SUBSIDIARIES Notes to the consolidated financial statements Other statutory disclosures 109 a. Cash flow hedges The effective portion of changes in the fair value of derivatives that are designated and qualify as cash flow hedges is recognised in equity in the hedging reserve. The gain or loss relating to the ineffective portion is recognised immediately in the statement of comprehensive income within finance costs. Amounts accumulated in equity are recycled in the statement of comprehensive income within finance costs in the periods when the hedged item affects profit or loss (for instance when the forecast sale that is hedged takes place). When a hedging instrument expires, is sold or terminated, or when a hedge no longer meets the criteria for hedge accounting, any cumulative gain or loss existing in equity at that time remains in equity and is recognised when the forecast transaction is ultimately recognised in the statement of comprehensive income. When a forecast transaction is no longer expected to occur, the cumulative gain or loss that was reported in equity is immediately transferred to the statement of comprehensive income. b. Hedges of a net investment Hedges of a net investment in a foreign operation, including a hedge of a monetary item that is accounted for as part of the net investment, are accounted for in a similar way to cash flow hedges. Gains or losses on the hedging instrument relating to the effective portion of the hedge are recognised directly in equity while any gains or losses relating to the ineffective portion are recognised in the statement of comprehensive income. On disposal of the foreign operation, the cumulative value of any such gains or losses recognised directly in equity is transferred to the statement of comprehensive income. VII. Employee benefits a. Wages and salaries, annual leave and sick leave Liabilities for wages and salaries, including non-monetary benefits and annual leave expected to be settled within 12-months of the reporting date are recognised in other payables and provision for employee benefits in respect of employees’ services up to the reporting date and are measured at the amounts expected to be paid when the liabilities are settled, including appropriate on-costs. b. Long service leave The liability for long service leave is recognised in the provision for employee benefits and is measured as the present value of expected future payments to be made in respect of services provided by employees up to the reporting date, including appropriate on-costs. Consideration is given to expected future wage and salary levels, experience of employee departures and periods of service. Expected future payments are discounted using market yields at the reporting date on corporate bonds with terms to maturity and currency that match, as closely as possible, the estimated future cash outflows. c. Bonus plans The Group recognises a liability in other payables and an expense for bonus plans when there is no realistic alternative but to settle the liability and at least one of the following conditions is met: • There are formal terms in the plan for determining the amount of the benefit • The amounts to be paid are determined before the time of completion of the financial report Past practices give clear evidence of a constructive obligation VIII. New Accounting Standards and Interpretations not yet mandatory or early adopted There are no Australian Accounting Standards and Interpretations that have recently been issued or amended but are not yet mandatory, that have been early adopted by the Group for the annual reporting period ended 31 December 2021. Directors’ declaration InvoCare Annual Report 2021 132 INVOCARE LIMITED AND SUBSIDIARIES Directors’ declaration 110 In the directors’ opinion: The financial statements and Notes 1 to 28 are in accordance with the Corporations Act 2001, including: •complying with Accounting Standards, the Corporations Regulations 2001 and other mandatory professional reportingrequirements•giving a true and fair view of the Company’s and the Group's financial position as at 31 December 2021 and of theirperformance for the financial year ended on that datethere are reasonable grounds to believe that the Company will be able to pay its debts as and when they become due and payable at the date of this declaration, there are reasonable grounds to believe that the members of the Extended Closed Group identified in Note 25 will be able to meet any obligations or liabilities to which they are, or may become, subject by virtue of the deed of cross guarantee described in Note 25 Basis of preparation on page 75 confirms that the financial statements also comply with International Financial Reporting Standards as issued by the International Accounting Standards Board. The directors have been given the declarations by the Chief Executive Officer and Chief Financial Officer required by section 295A of the Corporations Act 2001. This declaration is made in accordance with a resolution of the directors. Bart Vogel Chairman Sydney 28 February 2022Deloitte Touche Tohmatsu ABN 74 490 121 060 Grosvenor Place 225 George Street Sydney, NSW, 2000 Australia Phone: +61 2 9322 7000 www.deloitte.com.au Independent Auditor’s Report to the members of InvoCare Limited Opinion We have audited the financial report of InvoCare Limited (the “Entity”), and its subsidiaries (the “Group”) which(cid:3) comprises the consolidated (cid:271)(cid:258)(cid:367)(cid:258)(cid:374)(cid:272)(cid:286)(cid:3) (cid:400)(cid:346)(cid:286)(cid:286)(cid:410) as at 31 December 2021, the consolidated statement of(cid:3) comprehensive income, consolidated statement of changes in equity and consolidated statement of cash flows for(cid:3) the year then ended, and notes to the financial statements, including a summary of significant accounting policies,(cid:3) and the declaration by the Directors. In our opinion the accompanying financial report of the Group, is in accordance with the(cid:3)Corporations Act 2001,(cid:3) including: (cid:120) (cid:120) giving a true and fair view of the Group’s financial position as at 31 December 2021 and of its financial performance for the year then ended; and complying with Australian Accounting Standards and the Corporations Regulations 2001. Basis for Opinion We conducted our audit in accordance with Australian Auditing Standards. Our responsibilities under those standards are further described in the Auditor’s Responsibilities for the Audit of the Financial Report section of our report. We are independent of the Group in accordance with the auditor independence requirements of the Corporations Act 2001 and the ethical requirements of the Accounting Professional & Ethical Standards Board’s APES 110 Code of Ethics for Professional Accountants (including Independence Standards) (the Code) that are relevant to our audit of the financial report in Australia. We have also fulfilled our other ethical responsibilities in accordance with the Code. We confirm that the independence declaration required by the Corporations Act 2001, which has been given to the Directors of the Entity, 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 of 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 Asia Pacific Limited and the Deloitte organisation. 133 InvoCare Annual Report 2021 133 Key Audit Matter and why it was considered to be a matter of most significance in the audit AAccccoouunnttiinngg ffoorr pprree--ppaaiidd ffuunneerraall ccoonnttrraaccttss How the Key Audit Matter was addressed in the audit As disclosed in note 9, the Group enters into pre-paid funeral contracts whereby it agrees to deliver a specified funeral, cremation or burial service at the time of need. The beneficiary (“customer”) invests the current price of the service to be delivered with a financial institution and conditionally assigns the benefit to the Group. For each pre-paid funeral contract, the Group records an asset for the value of the funds invested (pre-paid contract funds under management) and a liability to deliver the services (pre-paid contract liabilities). For the pre-paid contract funds under management, we performed the following procedures amongst others: - - agreeing a sample of balances recorded by the Group to statements and confirmations received from independent custodians; and testing the valuation of the invested funds under management by comparing a sample of underlying investments to relevant unit prices using market pricing data and custodian confirmations. As at 31 December 2021, the Group had recorded $649.9 million of pre-paid contract funds under management and $540.4 million of pre-paid contract liabilities. We have considered pre-paid funeral contracts to be a key audit matter due to the: - - size of the asset and liability balances; and judgement involved in determining whether the pre-paid funeral contracts include a significant financing component as well as the discount rate used to account for the significant financing component within the contracts, as a result of significant time differences that may arise between receipt of cash from customers and the subsequent recognition of revenue on the delivery of services (redemption date). For the pre-paid contract liabilities, we performed the following procedures amongst others: - - reviewing management’s paper in determining whether or not these pre-paid contract liabilities include a significant financing component; and developing an independent expectation using an appropriate discount rate and applying it to the movements in the year for new contracts and redemptions to assess the reasonableness of the significant financing component recognised during the year. For both the pre-paid contract funds under management and the pre-paid contract liabilities, we performed the following procedures amongst others: evaluating management’s processes and controls in respect of pre-paid funeral contracts; agreeing the date and value of a sample of contracts entered into during the year to the contract; selecting a sample of redeemed contracts (recognised revenue) to assess whether the Group’s performance obligation under the pre- paid funeral contracts had been satisfied. This relevant original included comparing contracts to service delivery documents and investment returns to the amounts received back from the fund; and evaluating the reasonableness of the disclosures requirements of Australian against Accounting Standards, in particular assessing the current and non current classification in line with the allocation as determined by an independent actuarial expert. the the - - - - 134 InvoCare Annual Report 2021 134 Other Information The Directors are responsible for the other information. The other information comprises the information included in the annual report, but does not include the financial report and our auditor’s report thereon. Our opinion on the financial report does not cover the other information and we do 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 and, in doing so, consider whether the other information is materially inconsistent with the financial report or our knowledge obtained in the audit or otherwise appears to be materially misstated. If, based on the work we have performed, we conclude that there is a material misstatement of this other information; we are required to report that fact. We have nothing to report in this regard. The Directors’ Responsibilities for the Financial Report The Directors of the Group are responsible for the preparation of the financial report that gives a true and fair view in accordance with Australian Accounting Standards and the Corporations Act 2001 and for such internal control as the Directors determine is necessary to enable the preparation of the financial report that gives a true and fair view and is free from material misstatement, whether due to fraud or error. In preparing the financial report, the Directors are responsible for assessing the Group’s ability to continue as a going concern, disclosing, as applicable, matters 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 have no realistic alternative but to do so. Auditor’s Responsibilities for the Audit of the Financial Report Our objectives are to obtain reasonable assurance about whether the financial report as a whole is free from material misstatement, whether due to fraud or error, and to issue an auditor’s report that includes our opinion. Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with the Australian Auditing Standards will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of this financial report. As part of an audit in accordance with the Australian Auditing Standards, we exercise professional judgement and maintain professional scepticism throughout the audit. We also: (cid:120) (cid:120) (cid:120) 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. 135 InvoCare Annual Report 2021 135 (cid:120) (cid:120) (cid:120) Conclude on the appropriateness of the Directors’ use of the going concern basis of accounting and, based on the audit evidence obtained, whether a material uncertainty exists related to events or conditions that may cast significant doubt on the Group’s ability to continue as a going concern. If we conclude that a material uncertainty exists, we are required to draw attention in our auditor’s report to the related disclosures in the financial report or, if such disclosures are inadequate, to modify our opinion. Our conclusions are based on the audit evidence obtained up to the date of our auditor’s report. However, future events or conditions may cause the Group to cease to continue as a going concern. Evaluate the overall presentation, structure and content of the financial report, including the disclosures, and whether the financial report represents the underlying transactions and events in a manner that achieves fair presentation. Obtain sufficient appropriate audit evidence regarding the financial information of the entities or business activities within the Group to express an opinion on the financial report. We are responsible for the direction, supervision and performance of the Group’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, actions taken to eliminate threats or safeguards applied. 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 48 to 67 of the Directors’ report for the year ended 31 December 2021. In our opinion, the Remuneration Report of the Group, for the year ended 31 December 2021, complies with section 300A of the Corporations Act 2001. 136 InvoCare Annual Report 2021 136 Responsibilities The Directors of the Group 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 Sandeep Chadha Partner Chartered Accountants Sydney, 28 February 2022 137 InvoCare Annual Report 2021 137 InvoCare Annual Report 2021 138 Section 6 Shareholder and other information InvoCare Annual Report 2021 139 Five year financial history Operating revenue ($’000) Operating EBITDA ($’000) Restateda 2021 2020 2019 2018 2017 527,096 476,249 499,665 480,198 473,879 125,477 102,565 144,433 118,998 124,316 Operating EBITDA margin (%) 24% 22% 29% 25% 26% Operating earnings after tax attributable to equity holders ($’000) 45,143 27,994 59,066 49,496 63,403 Operating earnings per share (cents) 31.6 20.9 51.7 45.2 57.9 Profit/(loss) after tax attributable to equity holders ($’000) 80,158 (11,541) 63,752 41,224 97,439 Basic earnings per share (cents) Total dividend (full year) (cents per share) 56.1 21.0 (8.6) 12.5 55.8 41.0 37.8 37.0 88.8 46.0 Ungeared, tax free operating cash flow ($’000) 131,913 102,140 118,776 104,222 116,891 Cash conversion % 105% 100% 82% 88% 94% Actual capital expenditure ($’000) 62,703 60,952 65,289 84,120 47,471 Net debt ($’000) Interest cover ratiob (times) Leverage ratiob (times) Funeral homes (number) Memorial parks (number) Pet cremation sites (number) 144,654 137,468 349,968 393,469 227,547 15.8 1.2 278 17 16 8.3 1.3 277 17 13 10.1 2.4 280 17 N/A 9.6 3.3 255 16 N/A 13.8 1.8 228 16 N/A a The Group adopted a change in its accounting policies in relation to the treatment of configuration and customisation costs incurred in implementing SaaS arrangements. The change in accounting policies is to be applied retrospectively resulting in the need to restate 2020 financial year data. b Definition of these measures is included in the Glossary on page 144 and 145. InvoCare Annual Report 2021 140 Shareholders information As at 24 March 2022 The following information is presented in compliance with ASX Listing Rules 4.10 (as relevant). The information is current as at 24 March 2022. 1 Corporate Governance Statement The 2021 Corporate Governance Statement can be found on the Company’s website at www.invocare.com.au/investor-relations/corporate-governance. 2 Securities on issue Shares and options as at 24 March 2022 Ordinary shares on issue Unquoted options on issue 3 Voting rights Number 144,060,733 1,533,680 For fully paid 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 shall have one vote for each share represented. For unquoted options - No voting rights apply unless and until the unquoted options are converted into fully paid ordinary shares. 4 Distribution of quoted ordinary shares and small holdings Range 100,001 and over 10,001 to 100,000 5,001 to 10,000 1,001 to 5,000 1 to 1,000 Total Unmarketable parcels Fully paid ordinary shares % Number of holders 81,194,224 17,490,224 13,319,953 26,364,616 5,691,716 144,060,733 11,650 56.36 12.14 9.25 18.30 3.95 100.00 0.01 41 852 1,861 11,197 12,248 26,199 685 InvoCare Annual Report 2021 141 Signed reportsConsolidated financial statementsGovernance & Directors’ reportOperating & financial review5432Shareholder and other information6Overview1 Shareholders information As at 24 March 2022 continued 5 Top 20 registered shareholders Name HSBC Custody Nominees (Australia) Limited J P Morgan Nominees Australia Pty Limited BNP Paribas Noms Pty Ltd Citicorp Nominees Pty Limited Australian Foundation Investment Company Limited Argo Investments Limited National Nominees Limited Milton Corporation Limited BKI Investment Company Limited BNP Paribas Nominees Pty Ltd Hub24 Custodial Serv Ltd Netwealth Investments Limited Australian Executor Trustees Limited Solium Nominees (Australia) Pty Ltd Mirrabooka Investments Limited BNP Paribas Nominees Pty Ltd Netwealth Investments Limited Navigator Australia Ltd Djerriwarrh Investments Limited NULIS Nominees (Australia) Limited BNP Paribas Nominees Pty Ltd SIX SIS Ltd Number of shares Percentage % 20,839,505 14,480,136 10,676,105 9,440,386 3,512,442 2,743,277 2,545,530 2,050,914 1,638,974 1,573,195 1,052,645 1,013,911 1,003,558 948,594 886,608 506,776 495,458 454,000 439,294 428,708 14.47 10.05 7.41 6.55 2.44 1.90 1.77 1.42 1.14 1.09 0.73 0.70 0.70 0.66 0.62 0.35 0.34 0.32 0.30 0.30 Total for top 20 76,730,016 53.26 InvoCare Annual Report 2021 142 6 Substantial shareholders The share balances in this table are extracted from substantial shareholder notices received by the Company. Shareholders Kuang Ming Investments Pte. Limited State Street Corporation and subsidiaries Number of shares Voting power Date of last notice 8,729,098 7,739,880 6.06% 2 June 2021 5.37% 10 March 2022 InvoCare Annual Report 2021 143 Signed reportsConsolidated financial statementsGovernance & Directors’ reportOperating & financial review5432Shareholder and other information6Overview1 Glossary Term AFSL Description Australian Financial Services Licence Average capital employed Average working capital % of sales Average of opening and closing capital employed Average of opening and closing working capital divided by Operating revenue for a 12 month period CAPEX Capital expenditure Capital employed As used in ROCE % calculation. Calculated as Total equity + Net debt Cash conversion % Ungeared, tax free operating cash flows divided by Operating EBITDA COVID COVID-19 pandemic Dividend payout ratio Dividend per share divided by Operating EPS EBITDA margin Operating EBITDA divided by Operating revenue EPS ERP Earnings per share, calculated as Reported profit/(loss) divided by weighted average number of shares Enterprise Resource Planning, e.g. the main Oracle general ledger financial system used by the business Free cash flow Operating cash flow + interest paid less CAPEX - maintenance less CAPEX – investment – platform Funeral case average Calculated as funeral gross revenue divided by funeral case volume Funeral case volume Number of funeral services undertaken FUM IFRIC Funds under management in the pre-paid funerals business International Financial Reporting Interpretations Committee Calculated as Operating EBITDA divided by Net finance costs excluding AASB 16 interest, merchant fees and interest on Interest cover ratio customer advance payments. Interest cover calculation used for bank covenant testing purposes uses an Adjusted EBITDA measure (primarily adjusted to include proforma earnings from acquisitions and costs arising from restructuring initiatives) Investment CAPEX CAPEX undertaken to expand existing operations or further growth prospects, includes platform investments (IT and Shared Service Centre projects) Leverage ratio testing purposes uses an Adjusted EBITDA measure (primarily adjusted to include proforma earnings from acquisitions and Calculated for disclosure purposes as Net debt divided by Operating EBITDA. Leverage calculation used for bank covenant costs arising from restructuring initiatives). r12 measure uses rolling 12-month Operating EBITDA LGA LTIFR Local government area Lost time injury frequency rate InvoCare Annual Report 2021 144 Term Description Maintenance CAPEX Recurring annual CAPEX required to maintain facilities Memorialisation revenue MTM NBO Net debt NPS Revenue earned from the sale of memorials, plaques, burial plots etc. in the Cemeteries & Crematoria business Mark-to-market Network & Brand Optimisation program of projects as part of Protect & Grow Strategy Cash and cash equivalents + Borrowings + Finance leases Net Promoter Score, calculated based on customer feedback with Group score representative of Australia and New Zealand only Operating EBITDA Operating earnings before interest, tax, depreciation & amortisation and business acquisition costs and SaaS arrangements Operating EBIT Operating earnings before interest and tax Operating EPS Operating net profit after tax divided by Weighted average number of shares Operating leverage Means the percentage growth in Operating EBITDA divided by the percentage growth in Operating revenue Operating NPAT Reported profit excluding non-operating items and associated tax Operating revenue Revenue for the Group excluding revenue earned from pre-paid funerals business OPEX to sales % Operating expenses divided by Operating revenue PCP Prior corresponding period Pet case average Pet cremations revenue divided by Pet cremation volume Pet cremation volume The number of pet cremations conducted Reported profit/(loss) Net profit/(loss) attributed to equity holders of InvoCare Limited ROCE ROCE % SaaS TRIFR Return on capital employed Calculated as Operating EBIT divided by Average capital employed Software-as-a-Service Total recordable injury frequency rate Ungeared, tax free cash flows Calculated as operating cash flow excluding net finance costs paid and tax paid adjusted by net funds from pre-paid contracts (Payments to funds under management for pre-paid contract sales and receipts from funds under management for pre-paid contracts performed) sourced from investing cash flows and other cash flows related to pre-paid contracts Working capital Inventories + Trade and other receivables - Trade and other payables InvoCare Annual Report 2021 145 Signed reportsConsolidated financial statementsGovernance & Directors’ reportOperating & financial review5432Shareholder and other information6Overview1Corporate directory InvoCare Limited ABN 42 096 437 393 ASX code: IVC Bart Vogel Chairman Olivier Chretien Managing Director and Chief Executive Officer Kim Anderson Non-Executive Director Directors Richard Davis Non-Executive Director Megan Quinn Non-Executive Director Keith Skinner Non-Executive Director Kee Wong Non-Executive Director Company Secretary Heidi Aldred InvoCare Annual Report 2021 146 Registered office Share registry Level 5, 40 Mount Street North Sydney NSW 2060 Telephone: 02 9978 5200 Facsimile: 02 9978 5299 www.invocare.com.au Link Market Services Limited Level 12, 680 George Street Sydney NSW 2000 Toll free: 1300 854 911 Facsimile: 02 9287 0303 Stock exchange listing InvoCare Limited is a company limited by shares that is incorporated and domiciled in Australia. InvoCare Limited’s shares are listed on the Australian Securities Exchange only. Auditors Deloitte Touche Tohmatsu Grosvenor Place 225 George Street Sydney NSW 2000 invocare.com.au 

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