Servcorp Annual Report 2016

Plain-text annual report

SERVCORP ANNUAL REPORT 2016 LIMITED EDITION INTER NATIONA L FASHION MOGUL PARIS NEW YORK LONDON 5 STAR RUNWAY TO THE WORLD Fashion Week is Global Servcorp is Global The most glamorous 5 Star operation that presents in the best light around the world. Servcorp Limited – ABN 97 089 222 506 ANNUAL REPORT 2016 SERVCORP 2016 FASHION PROGRAM LIMITED EDITION Results in review Bespoke locations Chairman’s letter CEO’s message Global footprint Global communications Green initiative Community service 2 4 6 9 11 14 17 19 23 24 36 46 58 59 97 99 Servcorp’s creative team Corporate governance Directors’ report Remuneration report Auditor’s independence declaration Financial report Auditor’s report Shareholder information Business solutions 20 101 Corporate information BE ST FA SH ION SHOWS 2 016 DU B A I HONG KONG T OK YO D OH A L ON D ON Servcorp’s Aim To be the world’s finest Serviced Offices, providing IT and commercial services second to none, giving our clients a commercial advantage, paying our people reasonable wages and giving our shareholders an acceptable return on the funds they invest. Runway to the world 1 DESIGNED FOR SUCCESS Net profit before tax (million) Servcorp Geographic Spread (floors) FY10 $2.9 FY11 $3.0 FY12 FY13 FY14 FY15 FY16 FY17 (projected) $18.3 $27.6 $34.3 $41.2 $48.8 $56.0 2 Servcorp Annual Report 2016 2 Servcorp Annual Report 2016 28 Australia 23 Japan 22 United States 10 China 10 Saudi Arabia 09 UAE 07 Singapore 04 Thailand 04 Qatar 04 United Kingdom 04 New Zealand 03 Malaysia 03 Hong Kong 03 Turkey 03 Belgium 03 Bahrain 03 Iran 02 Philippines 02 France 02 India 01 Lebanon 01 Kuwait 12 months ended 30 June 2012 $’000 2013 $’000 2014 $’000 2015 $’000 2016 $’000 Revenue & other income 200,785 207,995 242,247 277,378 328,601 Net profit before tax Net profit after tax Net operating cash flows Cash & investments Net assets Earnings per share Dividends per share 18,329 14,801 32,003 104,334 198,709 $0.150 $0.150 27,630 21,271 27,092 99,758 207,900 $0.216 $0.150 34,257 26,336 40,214 108,788 217,101 $0.268 $0.200 41,211 48,840 33,141 59,928 39,722 60,575 114,451 114,586 241,898 261,020 $0.337 $0.220 $0.404 $0.220 Revenue (millions) Servcorp floors and locations (as at 30 June) 132 117 136 122 145 131 124 110 157 151 134 139 350 300 250 200 $200.8 $208.0 $328.6 $277.4 $242.2 150 100 50 0 160 140 120 100 80 60 40 20 0 FY12 FY13 FY14 FY15 FY16 FY12 Locations FY13 Floors FY14 FY15 FY16 FY17 Locations forecast Floors forecast Servcorp offices (as at 30 June) 4920 5397 5800 3837 4275 3645 6000 5000 4000 3000 2000 1000 FY12 FY13 FY14 FY15 FY16 FY17 Offices Offices forecast Runway to the world 3 Runway to the world 3 BESPOKE LOCATIONS ACROSS THE GLOBE “Every day IS A FASHION SHOW AND THE WORLD IS THE Runway” COCO CHANEL UNITED KINGDOM LONDON – Level 17, Dashwood House – Level 18, 40 Bank Street, Canary Wharf – Level 30, The Leadenhall Building – Level 1, Devonshire House, One Mayfair Place FRANCE PARIS – Level 5, 101 Avenue des Champs Elysées – Level 2, 21 Boulevard Haussmann BELGIUM BRUSSELS – Levels 20 & 21, Bastion Tower – Level 4, European Quarter – Schuman LEBANON BEIRUT – Level 2, Beirut Souks Louis Vuitton Building TURKEY ISTANBUL – Levels 5 & 6, Louis Vuitton Orjin Building – Level 8, Tekfen Tower QATAR DOHA – Levels 14 & 15, Commercialbank Plaza – Level 22, Tornado Tower – Level 21, Burj Doha KINGDOM OF BAHRAIN MANAMA – Levels 22 & 41, West Tower Bahrain Financial Harbour – Level 12, Diplomatic Commercial Offices Tower(DCO) UNITED STATES OF AMERICA BOSTON – Level 14, One International Place NEW YORK CITY – Level 23, 1330 Avenue of the Americas – Level 26, The Seagram Building – Level 40, 17 State Street – Level 85, One World Trade Center PHILADELPHIA – Level 37, BNY Mellon Center WASHINGTON D.C. – Level 10, 1717 Pennsylvania Avenue – Level 10, 1155 F Street MIAMI – Level 27, Southeast Financial Center ATLANTA – Level 20, Terminus 200 – Level 36, 12th & Midtown TYSONS CORNER – Level 15, Corporate Office Center Tysons II CHICAGO – Level 42, 155 North Wacker Drive – Level 49, 300 North LaSalle HOUSTON – Level 39, Bank of America Center – Level 41, Williams Tower DALLAS – Level 6, JP Morgan International Plaza III – Level 10, Rosewood Court IRVINE – Level 8, Irvine Towers LOS ANGELES – Level 40, Figueroa at Wilshire SAN FRANCISCO – Level 27, 101 California Street – Level 49, 555 California Street 4 Servcorp Annual Report 2016 4 Servcorp Annual Report 2016 KUWAIT KUWAIT CITY – Level 18, Sahab Tower KINGDOM OF SAUDI ARABIA DAMMAM – Levels 20 & 22, Al Hugayet Tower – Level 21, Al Khobar Gate Tower RIYADH – Level 6, Al Akaria Plaza – Level 18, Al Faisaliah Tower – Level 1, The Business Gate – Level 29, Olaya Towers JEDDAH – Level 9, Jameel Square – Level 26, Kings Road Tower – Level 7, Al Murjanah Tower UNITED ARAB EMIRATES DUBAI – Level 23, Boulevard Plaza – Levels 41 & 42, Emirates Towers – Levels 21 & 28, Al Habtoor Business Tower – Level 54, Almas Tower ABU DHABI – Level 4, Al Mamoura – Level 36, Etihad Towers – Level 17, World Trade Center IRAN – Levels 7, 8 and 9, Park Building INDIA MUMBAI – Level 8, Vibgyor Towers HYDERABAD – Level 7, Maximus Towers THAILAND BANGKOK – Levels 8 & 9, 1 Silom Road – Level 29, The Offices at Centralworld – Level 18, Park Ventures Ecoplex MALAYSIA KUALA LUMPUR – Level 36, Menara Citibank – Level 23, NU Tower 2 – Level 33, ILHAM Tower PHILIPPINES MANILA – Level 17, 6750 Ayala Avenue Office Tower – Level 22, Tower One & Exchange Plaza CHINA SHANGHAI – Level 23, Citigroup Tower – Level 29, Shanghai Jing An Kerry Centre – 5/F Somekh Building, Rockbund CHENGDU – Level 18, Shangri-La Office Tower – Level 28, One Aerospace Center BEIJING – Level 24, China Central Place – Level 19, Oriental Plaza – Level 26, Fortune Financial Center HANGZHOU – Level 3, Jiahua International Business Center GUANGZHOU – Level 54, Guangzhou IFC HONG KONG CENTRAL – Level 19, Two International Finance Centre – Level 9, The Hong Kong Club Building KOWLOON – Level 12, One Peking Road JAPAN TOKYO – Level 11, Aoyama Palacio Tower – Level 14, Hibiya Central Building – Level 20, Marunouchi Trust Tower – Main – Level 1, Marunouchi Yusen Building – Level 7, Wakamatsu Building – Level 8, Nittochi Nishi-Shinjuku Building – Level 9, Ariake Frontier Building – Level 28, Shinagawa Intercity Tower A – Level 32, Shinjuku Nomura Building – Level 21, Shiodome Shibarikyu Building – Level 27, Shiroyama Trust Tower – Level 45, Sunshine 60 – Level 27, Tokyo Sankei Building – Level 18, Yebisu Garden Place Tower YOKOHAMA – Level 10, TOC Minato Mirai NAGOYA – Level 40, Nagoya Lucent Tower – Level 4, Nikko Shoken Building OSAKA – Level 9, Edobori Center Building – Levels 18 & 19, Hilton Plaza West – Level 4, Cartier Building Shinsaibashi Plaza FUKUOKA – Level 15, Fukuoka Tenjin Fukoku Seimei Building – Level 2, NOF Hakata Ekimae Building SINGAPORE SINGAPORE – Penthouse Level & Level 42, Suntec Tower Three – Level 30, Six Battery Road – Level 39, Marina Bay Financial Centre – Level 26, PSA Building – Level 8, The Metropolis Tower 2 – Level 24, CapitaGreen AUSTRALIA PERTH – Levels 15 & 28, AMP Tower – Level 11, Brookfield Place ADELAIDE – Levels 24 & 30, Westpac House SYDNEY – Level 29, Chifley Tower – Level 36, Gateway – Levels 56 & 57, MLC Centre – Level 26, 44 Market Street – Level 32, 101 Miller Street North Sydney – Level 22, Tower Two Westfield Bondi Junction – Level 1, The Octagon Parramatta – Level 15, Deloitte Building Parramatta – Level 9, Avaya House North Ryde – Level 5, Nexus Norwest Baulkham Hills WOLLONGONG – Ground floor, iC Enterprise 1, Innovation Campus University of Wollongong BRISBANE – Level 36, Riparian Plaza – Level 19, 10 Eagle Street – Level 27, Santos Place CANBERRA – Level 1, The Realm – Level 9, Nishi Building MELBOURNE – Levels 18 & 27, 101 Collins Street – Level 40, 140 William Street – Level 2, 710 Collins Street Docklands – Level 2, Riverside Quay Southbank HOBART – Level 6, Reserve Bank Building NEW ZEALAND AUCKLAND – Levels 26 & 27, PWC Tower – Level 31, Vero Centre WELLINGTON – Level 16, Vodafone on the Quay Runway to the world 5 Runway to the world 5 The Chairman’s Letter Your Board is pleased with Servcorp’s overall performance in 2016. The year saw record levels for revenue, net profit before tax and net profit after tax. evenue for the year was $328.6 million, an increase of 19% on 2015. Net profit before tax was $48.8 million, an increase of 19%, and above guidance. Net profit after tax was $39.7 million, an increase of 20%, with earnings per share of 40.4 cents. Revenue and profit growth was achieved across most geographic segments. Servcorp continued to expand organically, but with a measured approach, adding 381 offices and increasing capacity by 7%. During the 2016 financial year the business generated record net operating cash surpluses of $60.6 million, up slightly on 2015. Cash and investment balances at 30 June 2016 were $114.6 million; $99.7 million of this balance was unencumbered and the Company has negligible debt. Having R such strong cash balances uniquely positions Servcorp to take advantage of opportunities should they arise, particularly in turbulent markets. Directors have declared a final dividend of 11.0 cents per share, 50% franked. This final dividend brings total dividends for the year to 22.0 cents per share, resulting in a payout to shareholders of approximately $21.65 million. In 2017 we project net profit before tax to increase by not less than 15% to $56 million, and again expect to grow office capacity by approximately 7%. Directors anticipate the level of dividends for the 2017 financial year will be 22.0 cents per share (11.0 cents in each half). Future franking levels are uncertain, but are expected to be similar to current franking levels. These forecasts are subject to currencies remaining constant, global financial markets remaining stable and no unforeseen circumstances. On behalf of the Board I want to acknowledge the outstanding efforts of our CEO, Alf Moufarrige; our COO, Marcus Moufarrige; our leadership group; and all the Servcorp team members, for their dedication and commitment during the past year. Due to their efforts we have a strong global presence and continue to maintain our position as the world’s premium provider of serviced and virtual office solutions. We thank you, our shareholders, for your continuing support. Bruce Corlett AM 6 Servcorp Annual Report 2016 THE PRODUCER 20% INCREASE IN E.P.S. Continuing growth CASH & INVESTMENTS Uniquely positioned Runway to the world 7 Runway to the world 7 THEDESIGNER IT MARKET LEADER It’s NOT just about the rent PROFIT GROWTH Setting the trend 8 Servcorp Annual Report 2016 8 Servcorp Annual Report 2016 N N O O I I T T A A R R T T S S U U L L L L I I R R U U O O L L O O C C CEO’s Message It has taken considerable time and investment, but we still continue to lead the market in the I.T & commercial environment. Our aim is to ensure that Servcorp is not just another business centre operator that makes an arbitrage on the rent it pays but a corporation that adds real value. t has been another successful year and we are projecting in the 2017 financial year free cash of between $78 to $80 million and profits of $56 million. This builds on our recent performances where our profit grew in 2012–2013 by 50%, 2013–2014 by over 20%, 2014–2015 by 20% and this year our profit grew just under 19% and our after tax earnings per share grew by 19.5%. Like for like earnings were up by 37%. If we achieve the $56 million profit before tax next year we should be well positioned from a cash & stability point of view to once again increase our expansion rate. This year we will add only about four hundred offices to our portfolio, but will continue to look for premium opportunities across the 22 countries in which we work. It is also a possibility that we may add one new geographic location. I We have a great global team, supported by an efficient Head Office. I wish to thank all of our General Managers, Senior Managers, Managers and the Board for their help and advice. Servcorp potentially has a great future despite the many new competitors in this field. A G Moufarrige CEO Runway to the world 9 10 Servcorp Annual Report 2016 GLOBAL COUTURE Servcorp has a strong track record of global organic growth since its IPO in 1999. At the time of the IPO, Servcorp operated in 8 countries with 35 floors. By June 2009, Servcorp operated in 14 countries, with 73 floors; in 10 years Servcorp had doubled its size. In 2009 the global market conditions created an opportunity to secure leases on what was expected to be very favourable terms. This represented an attractive opportunity for aggressive expansion. During October and November 2009, Servcorp successfully undertook an equity capital raising of $80 million to fund a global expansion program. During the 2010 and 2011 years Servcorp opened a further 53 floors and expanded into 26 new cities and 7 new countries. Servcorp continues to expand organically; a net 35 floors have been added since 2011, enhancing our footprint and establishing critical mass. At 30 June 2016, Servcorp operated 151 floors in 53 cities across 22 countries. In the 2016 financial year 10 new floors were opened and 2 floors were expanded; with a net 381 offices being added, increasing total office capacity by 7%. 2016 also saw the launch of our new Professional Coworking concept in 4 key locations around the globe. New floors were opened in Singapore, Abu Dhabi, Auckland, Osaka, Kuala Lumpur, Tehran, Bahrain and Wollongong, and existing floors were expanded in Beijing and Chengdu. – In Singapore, we opened in CapitaGreen, an ultra-modern building located in the heart of Singapore’s CBD. The Office tower breaks away from conventional office building designs and seeks to reintroduce lush greenery which once covered the city. It includes numerous state-of-the- art energy saving features. – In Abu Dhabi, The World Trade Center is part of a fully integrated development located in the Old Central Market, one of the capital’s historical landmarks. Our floor offers stunning views of the Abu Dhabi Corniche and the Arabian Sea. – In Kuala Lumpur, ILHAM Tower is a stunning new skyscraper located in Kuala Lumpur’s Golden Triangle. At 274 meters, ILHAM Tower is one of the tallest buildings in the city, offering spectacular views across the Kuala Lumpur skyline. We have committed to open a further 6 floors in the 2017 financial year, adding approximately 7% to our office capacity. Our new floors in 2017 will include Tri-Seven in Tokyo, Schuman Building in Brussels and Barangaroo in Sydney. Runway to the world 11 5,397 TOTAL OFFICES 151 TOTAL FLOORS 134 TOTAL LOCATIONS 10 NEW FLOORS IN FY�6 12 Servcorp Annual Report 2016 12 Servcorp Annual Report 2016 OUR EXPANDING RUNWAYTotal new floors by region for 12 months ended 30 JuneRegion20122013201420152016Total2017 (est)Australia & New Zealand2311291Southeast Asia1211271Greater China4–1––5–Japan––1–121Europe & United Kingdom–––2–22Middle East2425518–United States of America–1–1–21Total91061010456Total offices, floors and locations as at 30 JuneOfficesFloorsLocations20123,64512411020133,83713211720144,2751361222015 4,92014513120165,3971511342017 projected5,800157139NEXT YEAR’S CREATIONS T OK YO BRU S SE L S JA K A RTA JA PA N BE L G I U M I N D ON E SI A S Y DN E Y C H IC AG O AU ST R A L I A U SA Runway to the world 13 GLOBAL COMMUNICATIONS SUPERMODEL The star of the show. 14 Servcorp Annual Report 2016 TehranTLos AngelesIrvineChicagoTysons CornerHoustonDallasAtlantaBostonLondonBrusselsIstanbulBeirutKuwait CityManamaDubaiAbu DhabiMumbaiHyderabadBangkokKuala LumpurSingaporeChengduGuangzhouBeijingManilaHong KongKowloonHangzhouShanghaiOsakaYokohamaTokyoPerthBrisbaneAucklandSydneyCanberraWellingtonHobartMelbourneAdelaideNagoyaFukuokaDohaJeddahRiyadhAl Khobar-dammamParisNew York CityPhiladelphiaWashington D.C.MiamiSan FranciscoJakarta TehranTLos AngelesIrvineChicagoTysons CornerHoustonDallasAtlantaBostonLondonBrusselsIstanbulBeirutKuwait CityManamaDubaiAbu DhabiMumbaiHyderabadBangkokKuala LumpurSingaporeChengduGuangzhouBeijingManilaHong KongKowloonHangzhouShanghaiOsakaYokohamaTokyoPerthBrisbaneAucklandSydneyCanberraWellingtonHobartMelbourneAdelaideNagoyaFukuokaDohaJeddahRiyadhAl Khobar-dammamParisNew York CityPhiladelphiaWashington D.C.MiamiSan FranciscoJakarta Runway to the world 15 TehranTLos AngelesIrvineChicagoTysons CornerHoustonDallasAtlantaBostonLondonBrusselsIstanbulBeirutKuwait CityManamaDubaiAbu DhabiMumbaiHyderabadBangkokKuala LumpurSingaporeChengduGuangzhouBeijingManilaHong KongKowloonHangzhouShanghaiOsakaYokohamaTokyoPerthBrisbaneAucklandSydneyCanberraWellingtonHobartMelbourneAdelaideNagoyaFukuokaDohaJeddahRiyadhAl Khobar-dammamParisNew York CityPhiladelphiaWashington D.C.MiamiSan FranciscoJakarta TehranTLos AngelesIrvineChicagoTysons CornerHoustonDallasAtlantaBostonLondonBrusselsIstanbulBeirutKuwait CityManamaDubaiAbu DhabiMumbaiHyderabadBangkokKuala LumpurSingaporeChengduGuangzhouBeijingManilaHong KongKowloonHangzhouShanghaiOsakaYokohamaTokyoPerthBrisbaneAucklandSydneyCanberraWellingtonHobartMelbourneAdelaideNagoyaFukuokaDohaJeddahRiyadhAl Khobar-dammamParisNew York CityPhiladelphiaWashington D.C.MiamiSan FranciscoJakarta MOR E T H A N 1, 0 0 0 T R E E S PL A N T E D I N 2 016 MOR E T H A N 10 0 , 0 0 0 M ² O C C U PI E D BY SE RVC OR P FOR E ST 8 , 377 T ON . C 0 ² OF FSET 16 Servcorp Annual Report 2016 OUR ENVIRONMENTAL COMMITMENT Servcorp acknowledges the seriousness of climate change and the impact high concentrations of greenhouse gases in the atmosphere are having on our planet. There is growing need for businesses to become sustainable to ensure the protection of the environment from further damage. ince 2007, Servcorp has supported The Green Offices Project as our global platform for proactive initiatives that reduce our impact on the environment and highlights green issues within our teams and client base. As part of The Green Offices Project, Servcorp plants a tree for every Virtual Office sold online through the Servcorp website. Virtual Offices, which are inherently environmentally friendly, continue to be a driving force behind the Green Offices Project. The project aims to reduce our carbon emissions, offset our existing footprint and educate our teams and clients about improving their day-to- day impact on the environment. We have three distinct areas of focus; Reduce, Offset and Educate. S Servcorp has already planted more than 31,000 trees and the ‘Servcorp forest’ now covers more than 100,000 square metres of regional land and is greater than the combined floor space occupied by our network of offices, globally. The Servcorp forest will already remove more than 8,377 tonnes of carbon dioxide from the atmosphere during its lifespan. This is the equivalent to taking more than 1,658 medium sized cars off the road for one year or offsetting our Sydney Head Office greenhouse gas emissions from waste for the equivalent of five years! As a global company, we have a responsibility for taking a leadership role amongst both team members and clients worldwide to educate them on our values and attitude towards the environment. We will endeavour to make everyday changes, such as reducing paper use, recycling waste materials and using energy efficient processes, to help make a difference. As Servcorp continues to grow and open new locations, we choose green buildings as another step in the right direction. Runway to the world 17 Runway to the world 17 18 Servcorp Annual Report 2016 COMMUNITY SERVICE Servcorp supports continuing research into the prevention and cure of cancer and assisting young, seriously or terminally ill members of the community. Servcorp holds charity functions and balls, runs raffles and undertakes donation drives all year round in all our locations. Every dollar that is raised by our teams on the ground is matched dollar for dollar by Servcorp. Over the last two years, Servcorp has raised and donated in excess of $800,000 to help with many organisations around the world. In Australia, Youngcare continues to be the main focus of our fundraising, and non-executive Director, Taine Moufarrige, continues to be heavily involved with this organisation. Servcorp also contributed to many other local charitable organisations around the world, and sponsors and supports the Australian Chamber Orchestra and Sydney Dance Company. Servcorp is a racially diverse company, supporting Christian, Buddhist, Muslim and Jewish causes. Being an Olympic year, Servcorp also supported the Australian Olympic Committee, Australian Sports Foundation and the Sydney Olympic Committee. We are proud of the fact that as a global Company we work with our local communities to bring about real change for good. We’d like to thank our clients and those who contributed to the success of our fundraising for the year. The other organisations we strongly supported globally this year included: – Cancer Patients Assistance Society – Carers Australia – Centenary Institute Medical Research Foundation – Cure the Future – Fred Hollows Foundation – Friends of The Mater Foundation – Ingham Health Research Institute – Lifestart — Kayak for Kids – Mater Lives Committee (Mater Hospital) – Murdoch Children’s Research Institute – National Breast Cancer Foundation – Rotary Club of Sydney – The Salvation Army – St Vincent’s Private Hospital – Syrian Refugees – Breast Cancer Awareness Program ‘Safe & Sound’— Qatar – Children’s Joy Foundation — Philippines – Fill the Shelves (USA food banks) – Look Good Feel Better — United Kingdom – Renewal Centre of Shanghai – Run for the Cure — Japan – Shelter Christian Fellowship for Aid and Welfare Selangor — Malaysia Runway to the world 19 IT’S ALL ABOUT THE BRAND Information & Communication Technology ervcorp continues to invest in our world leading technology services business. We have consolidated many of our voice and data services around the world to improve flexibility and mobility for all Servcorp’s clients. In addition to this, it improves speed to the market and reduces operating costs. The Servcorp development team have deployed our new management system in some trial locations and will continue deployment throughout the year. The new management system greatly reduces administrative tasks for Servcorp managers and enables clients to easily access more services in a self-service way. It also provides Servcorp’s clients with unparalleled transparency in billing. We firmly believe that this new system will take Servcorp into its next level of growth. S Never miss that important call FIND ME FOLLOW ME Run your business more efficiently IT SUPPORT CALL DIVERSION CALL SCREENING Expand your business with ease LOCAL NUMBER Take your office with you anywhere you go ONEFONE – VOIP PROFESSIONAL PHONE GREETINGS GLOBAL DIAL 20 Servcorp Annual Report 2016 Have access to the most advanced global communication system AUTOMATED ATTENDANT EXTENSION RINGS ON MOBILE IP VIDEO PHONE VOICEMAIL NOTIFICATION VOICEMAIL & FAX TO EMAIL CONFERENCE CALLING WIRELESS INTERNET VOICEMAIL TO SMS Runway to the world 21 SERVCORP’S CREATIVE TEAM xxv Servcorp Annual Report 2016 Runway to the world xxvi Runway to the world xxvii OUR TEAM LEADERS The Board and Executives BRUCE CORLETT CHAIRMAN RICK HOLLIDAY-SMITH NON-EXECUTIVE DIRECTOR MARK VAILE NON-EXECUTIVE DIRECTOR TAINE MOUFARRIGE NON-EXECUTIVE DIRECTOR ALF MOUFARRIGE EXECUTIVE DIRECTOR, CEO MARCUS MOUFARRIGE (BCom) CHIEF OPERATING OFFICER ANTON CLOWES (BCom(Hons),CA) CHIEF FINANCIAL OFFICER GREG PEARCE (CA, AGIA, ACIS) COMPANY SECRETARY Operational Executives Jennifer Goodwyn (MBA) ..................................................................................................................................................General Manager USA Liane Gorman ............................................................................................................................. General Manager Australia & New Zealand Laudy Lahdo (BCom) .......................................................................................................................................... General Manager Middle East Olga Vlietstra (BA) ............................................................................................................................................................ General Manager Japan Wilma Wu (BA Hons) .......................................................................................................................................... General Manager Hong Kong Anne Guinebault (BBus, MMR) ........................................................................................................................................ Senior Manager Paris Fabienne Hajjar (PharmD) .............................................................................................................................. Senior Manager Qatar and Iran Krystle Sulway .............................................................................................................................................................................. Senior Manager UK Trinh Danh .......................................................................................................................................................... General Manager Southeast Asia Nicolas Hanna (BBus Finance) ....................................................................................................................................Senior Manager Jeddah Riad Madani Daftardar ..................................................................................................................................................... Senior Manager Riyadh Head Office Executives Simon Smith (MA (Cantab), MBA) ................................................................................................................... Vice President Virtual Office Selene Ng (BCom, BA) ............................................................................................................................... General Manager Serviced Offices Warren James ................................................................................................................................... Manager International Property Portfolio Lachlan Buchanan (BCom) ............................................................................................................................................... Development Director Matthew Baumgartner (BInfTech (SE), CCIE, MBA) ....................................................................................... Chief Information Officer Daniel Kukucka (BE, DipEngPrac) ............................................................................................................................Chief Technology Officer Steve Gainer .............................................................................................................................................................................Senior Manager Japan 23 Servcorp Annual Report 2016 C O R P O R AT E G O V E R NA N C E The Board has responsibility for the long term ﬁ nancial health and prosperity of Servcorp. The Directors are responsible to the shareholders for the performance of the Company and the Consolidated Entity and to ensure that it is properly managed. The Board is committed to the principles underpinning the ASX Corporate Governance Council Principles and Recommendations. The Board is continually working to improve the Company’s governance policies and practices, where such practices will bring beneﬁ ts or efﬁ ciencies to the Company. Details of Servcorp’s compliance are set out below, and in the ASX principles compliance statement on pages 28 to 35 of this annual report. The information in this statement is current as at 17 August 2016 and has been approved by the Board. ROLE OF THE BOARD The Board has adopted a formal statement of matters reserved for the Board. The central role of the Board is to set the Company’s strategic direction and to oversee the Company’s management and business activities. COMPOSITION OF THE BOARD The size and composition of the Board is determined by the Board, subject to the limits set out in Servcorp’s Constitution which requires a minimum of three Directors and a maximum of twelve Directors. Responsibility for management of the Company’s business activities is delegated to the CEO and management. The Board’s primary responsibilities are: – the protection and enhancement of long term shareholder value; – ensuring Servcorp has appropriate corporate governance structures in place; – endorsing strategic direction; – monitoring the Company’s performance within that strategic direction; – appointing the Chief Executive Offi cer and evaluating his performance and remuneration; – monitoring business performance and results; – identifying areas of signiﬁ cant risk and seeking to put in place appropriate and adequate control, monitoring and reporting mechanisms to manage those risks; – establishing appropriate standards of ethical behaviour and a culture of corporate and social responsibility; – approving senior executive remuneration policies; – ratifying the appointment of the Chief Financial Offi cer and the Company Secretary; – monitoring compliance with continuous disclosure policy in accordance with the Corporations Act 2001 and the Listing Rules of the Australian Securities Exchange; – monitoring that the Company acts lawfully and responsibly; – reporting to shareholders; – addressing all matters in relation to issued securities of the Company including the declaration of dividends; – ensuring the Board is, and remains, appropriately skilled to meet the changing needs of the Company. The Board Charter is available on the Company’s website; servcorp.com.au The Board comprises ﬁ ve Directors (one executive and four non-executive). Three non-executive Directors are independent. There has been no change to the Board since the last annual report. The Chairman of the Board, Mr Bruce Corlett, is an independent non-executive Director. The non-executive Directors bring to the Board an appropriate range of skills, experience and expertise to ensure that Servcorp is run in the best interest of all stakeholders. The skills, experience and expertise of each Director in offi ce at the date of this annual report are set out on pages 36 and 37 of this annual report. The Board will continue to be made up of a majority of independent non-executive Directors. The performance of non-executive Directors was reviewed during the year. The names of the Directors of the Company in offi ce at the date of this annual report are set out in the table on the following page. DIRECTORS’ INDEPENDENCE It is important that the Board is able to operate independently of executive management. The non-executive Directors, with the exception of Mr Taine Moufarrige, are considered by the Board to be independent of management. Independence is assessed by determining whether the Director is free of any business interest or other relationship which could materially interfere with the exercise of their unfettered and independent judgement and their ability to act in the best interests of Servcorp. Mr Taine Moufarrige is the only non-executive Director who has been employed by Servcorp. Mr Taine Moufarrige resigned as an executive of Servcorp on 31 December 2011 after 15 years of service. 24 Servcorp Annual Report 2016 24 24 Servcorp Annual Report 2016 C o r p o r a t e G o v e r n a n c e NAMES OF DIRECTORS IN OFFICE AT THE DATE OF THIS ANNUAL REPORT DIRECTOR B Corlett FIRST APPOINTED 19 October 1999 R Holliday-Smith 19 October 1999 A G Moufarrige 24 August 1999 T Moufarrige 25 November 2004 M Vaile 27 June 2011 NON- EXECUTIVE INDEPENDENT RETIRING AT 2016 AGM SEEKING RE-ELECTION AT 2016 AGM Yes Yes No Yes Yes Yes Yes No No Yes Yes No No No No Yes N/A N/A N/A N/A ELECTION OF DIRECTORS The Company’s Constitution speciﬁ es that an election of Directors must take place each year. One-third of the Board (excluding the Managing Director and rounded down to the nearest whole number), and any other Director who has held offi ce for three or more years since they were last elected, must retire from offi ce at each annual general meeting. The Directors are eligible for re-election. Directors may be appointed by the Board during the year. Directors appointed by the Board must retire from offi ce at the next annual general meeting. Any changes to Directorships will be dealt with by the full Board and accordingly a Nomination Committee has not been established. CONFLICT OF INTEREST In accordance with the Corporations Act 2001 and the Company’s Constitution, Directors must keep the Board advised, on an ongoing basis, of any interest that would potentially conﬂ ict with those of Servcorp. Where the Board believes that an actual or potential signiﬁ cant conﬂ ict exists, the Director concerned, if appropriate, will not take part in any discussions or decision making process on the matter and will abstain from voting on the item being considered. Details of Director related entity transactions with the Company and the Consolidated Entity are set out in Note 26 to the Consolidated ﬁ nancial report. INDEPENDENT PROFESSIONAL ADVICE Each Director has the right to seek independent professional advice, at Servcorp’s expense, to help them carry out their responsibilities. Prior approval of the Chairman is required, which will not be unreasonably withheld. A copy of any written advice received by the Director is made available to all other members of the Board. DIRECTOR AND OFFICER DEALINGS IN COMPANY SHARES Servcorp policy prohibits Directors, offi cers and senior executives from dealing in Company shares or exercising options: – in the six weeks prior to the announcement to the ASX of the Company’s half-year and full-year results; or – whilst in possession of non-public price sensitive information. Directors must discuss proposed purchases or sales of shares in the Company with the Chairman before proceeding. If the Chairman proposes to purchase or sell shares in the Company, he must receive approval from the next most senior Director before proceeding. Directors must also notify the Company Secretary when they buy or sell shares in the Company. This is reported to the Board. In accordance with the provisions of the Corporations Act 2001 and the Listing Rules of the ASX, each Director has entered into an agreement with the Company that requires disclosure to the Company of all information needed for it to comply with the obligation to notify the ASX of Directors’ holdings and interests in its securities. The Company’s Securities Trading Policy is available on the Company’s website; servcorp.com.au ETHICAL STANDARDS All Directors, managers and employees are expected to act with the utmost integrity and objectivity, striving at all times to enhance the reputation and performance of Servcorp. Codes of conduct, outlining the standards of personal and corporate behaviour to be observed, form part of Servcorp’s management and team on-line resources. Runway to the World 25 Runway to the world 25 C O R P O R AT E G O V E R NA N C E AUDITOR INDEPENDENCE The Company’s auditor Deloitte Touche Tohmatsu (Deloitte) was appointed at the annual general meeting of the Company on 6 November 2003. Deloitte rotate their audit engagement partner every ﬁ ve years. Deloitte have established policies and procedures designed to ensure their independence, and provide the Audit and Risk Committee with an annual conﬁ rmation as to their independence. CONTINUOUS DISCLOSURE Servcorp is committed to ensuring that all shareholders and investors are provided with full and timely information and that all stakeholders have equal and timely access to material information concerning the Company. Procedures are in place to ensure that all price sensitive information is disclosed to the ASX in accordance with the continuous disclosure requirements of the Corporations Act 2001 and ASX Listing Rules. The Company Secretary has been appointed as the person responsible for communications with the ASX. DIVERSITY The Company has a culture that both embraces and achieves diversity in its global operations. The Company is culturally diverse in its employment practices and has a global culture of employing the best qualiﬁ ed available talent for any position regardless of gender, age or race. The Company beneﬁ ts from the diversity of its team members and has training programs to assist with developing their skills and with career advancement. The Company travels team members to work in its global locations, giving them exposure to and understanding of various diff ering cultures and marketplaces. The Company has a high participation of women across all employment levels. The proportion of women employees in the whole organisation, senior executive positions and on the Board is set out in the following table. FULL TIME EMPLOYEES Consolidated entity Senior executives Board TOTAL NO. WOMEN % 827 26 5 83% 54% 0% MEN % 17% 46% 100% “Senior executive” are general managers, senior managers and Head Offi ce executives who report directly to the CEO or COO. Under the Workplace Gender Equality Act 2012 (WGE Act), any employer with 100 or more employees must submit an Annual Compliance Report detailing the composition of its workplace proﬁ le in Australia. Servcorp has lodged its WGE Report for 2016 with the WGE Agency and has received notice that the Company is compliant with the WGE Act. Shareholders may access the report on the Company’s website; servcorp.com.au COMMITTEES The Board does not delegate major decisions to Committees. Committees are responsible for considering detailed issues and making recommendations to the Board. The Board has established two Committees to assist in the implementation of its corporate governance practices. Audit and Risk Committee The members of the Audit and Risk Committee during the year were: – Mr R Holliday-Smith (Chair) – Mr B Corlett – Mr T Moufarrige All three members are non-executive Directors, with two being independent. Although Mr T Moufarrige is not an independent Director, the Board considers that his appointment adds value due to his depth of knowledge of the Consolidated Entity’s day-to-day operations, especially in its overseas jurisdictions. The Chairman of the Audit and Risk Committee is independent and is not the Chairman of the Board. The primary function of the Audit and Risk Committee is to assist the Board to meet its oversight responsibilities in relation to: – ensuring the Company adopts, maintains and applies appropriate accounting and ﬁ nancial reporting processes and procedures; – reviewing and monitoring the integrity of the Company’s ﬁ nancial reports and statements; – ensuring the Company maintains an eff ective risk management framework and internal control systems; – monitoring the performance and independence of the external audit process and addressing issues arising from the audit process. It is the Committee’s responsibility to maintain free and open communication between the Committee and the external auditor and the management of Servcorp. The external auditors attend all meetings of the Committee. The Chief Executive Offi cer, the Chief Financial Offi cer and other Senior Management may attend Committee meetings by invitation. 26 Servcorp Annual Report 2016 26 26 Servcorp Annual Report 2016 C o r p o r a t e G o v e r n a n c e The Audit and Risk Committee met four times during the year. The Committee meets with the external auditors without management being present before signing off its reports each half year. The Committee Chairman also meets with the auditors at regular intervals during the year. The responsibilities of the Audit and Risk Committee, as stated in its charter, include: – reviewing the ﬁ nancial reports and other ﬁ nancial information distributed externally; – reviewing the Company’s policies and procedures for compliance with Australian equivalents to International Financial Reporting Standards; – monitoring the procedures in place to ensure compliance with the Corporations Act 2001, ASX Listing Rules and all other regulatory requirements; – assisting management in improving the quality of the accounting function; – monitoring the internal control framework and compliance structures and considering enhancements; – overseeing the risk management framework; – reviewing external audit reports to ensure that, where major deﬁ ciencies or breakdown in controls or procedures have been identiﬁ ed, appropriate and prompt remedial action is taken by management; – reviewing reports on any major defalcations, frauds and thefts from the Company; – considering the appointment and fees of the external auditor; – reviewing and approving the terms of engagement and fees of the external auditor at the start of each audit; – considering and reviewing the scope of work, reports and activities of the external auditor; – establishing appropriate policies in regard to the independence of the external auditor and assessing that independence; – liaising with the external auditor to ensure that the statutory annual audit and half-yearly review are conducted in an eff ective manner; – addressing with management any matters outstanding with the auditors, taxation authorities, corporate regulators, Australian Securities Exchange and ﬁ nancial institutions; – monitoring the establishment of appropriate ethical standards. The Audit and Risk Committee Charter is available on the Company’s website; servcorp.com.au Remuneration Committee The Remuneration Committee members during the year were: – The Hon. M Vaile (Chair) – Mr T Moufarrige – Mr B Corlett The primary function of the Remuneration Committee is to assist the Board in adopting remuneration policy and practices that: – supports the Board’s overall strategy and objectives; – attracts and retains key employees; – links total remuneration to ﬁ nancial performance and the attainment of strategic objectives. Speciﬁ cally this will include: – making recommendations to the Board on appropriate remuneration, in relation to both the amount and its composition, for the Chief Executive Offi cer and senior executives who report to the Chief Executive Offi cer; – developing and recommending to the Board short term and long term incentive programs; – monitoring superannuation arrangements for the Company; – reviewing recruitment, retention and termination strategies and procedures; – ensuring the total remuneration policy and practices are designed with proper consideration of accounting, legal and regulatory requirements for both local and foreign jurisdictions; – reviewing the Remuneration Report for the Company and ensuring that publicly disclosed information meets all legal requirements and is accurate. The Remuneration Committee shall ensure the Company is committed to the principles of accountability and transparency and to ensuring that remuneration arrangements achieve a balance between shareholder and executive rewards. During the 2014 year, the Remuneration Committee undertook a comprehensive review of the Company’s executive remuneration structures, and review the executive remuneration structures each year to ensure they continue to be appropriate. Details are included in the Remuneration Report on pages 46 to 57 of this annual report. The Remuneration Committee met three times during the year. The Chief Executive Offi cer may attend Committee meetings by invitation to assist the Committee in its deliberations. The Remuneration Committee Charter is available on the Company’s website; servcorp.com.au Runway to the World 27 Runway to the world 27 C O R P O R AT E G O V E R NA N C E ASX PRINCIPLES COMPLIANCE STATEMENT This table provides a description of the manner in which Servcorp complies with the ASX Corporate Governance Principles and Recommendations or, where applicable, an explanation of any departures from the Principles. Compliance has been measured against the 3rd edition of the Principles and Recommendations. Recommendation Servcorp Board response Principle 1 Lay solid foundations for management and oversight Establish and disclose the respective roles and responsibilities of the Board and management and how their performance is monitored and evaluated. Recommendation 1.1 Disclose: (a) The respective roles and responsibilities of the Board and management; and (b) Those matters expressly reserved to the Board and those delegated to management. Recommendation 1.2 The Board has adopted a charter that sets out the responsibilities reserved for the Board and those delegated to the managing Director and senior executives. Primary responsibilities are set out on page 24 of this annual report. The Board Charter is available on the Company’s website; servcorp.com.au (a) Undertake appropriate checks before appointing a person, or putting forward to security holders a candidate for election, as a Director; and (a) The Board Charter requires appropriate checks be undertaken before appointing a person as a Director. (b) Provide security holders with all material information in its possession relevant to a decision on whether or not to elect or re-elect a Director. (b) All relevant material information to make an informed decision on whether or not to elect or re-elect a Director is provided to shareholders in the notice of meeting. Recommendation 1.3 Have a written agreement with each Director and senior executive setting out the terms of their appointment. The Company has a written agreement with each non-executive Director setting out the terms of their appointment. The Company has a written agreement with all senior executive setting out the terms of their employment. Recommendation 1.4 The Company Secretary should be accountable directly to the Board, through the Chair, on all matters to do with the proper functioning of the Board. The Company Secretary is accountable directly to the Board, through the Chair, on all matters to do with the proper functioning of the Board, including all matters included in the commentary to this recommendation. Recommendation 1.5 (a) Have a diversity policy which includes requirements for the Board or a relevant Committee of the Board to set measurable objectives for achieving gender diversity and to assess annually both the objectives and the entity’s progress in achieving them; (b) Disclose that policy or a summary of it; and (c) Disclose as at the end of each reporting period the measurable objectives for achieving gender diversity set by the Board or a relevant Committee of the Board in accordance with the entity’s diversity policy and its progress towards achieving them, and either: (1) the respective proportions of men and women on the Board, in senior executive positions and across the whole organisation (including how the entity has deﬁ ned “senior executive” for these purposes); or (2) if the entity is a “relevant employer” under the Workplace Gender Equality Act 2012, the entity’s most recent “Gender Equality Indicators”, as deﬁ ned in and published under that Act. The Company has not established a written policy concerning diversity. The Company has a culture that both embraces and achieves diversity in its global operations. The establishment of a written policy with measurable objectives for achieving gender diversity would not, in the Board’s view, bring any effi ciency or greater beneﬁ t to the current diverse culture. The Board has not set measurable objectives for gender diversity. The Company is culturally diverse in its employment practices and has a global culture of employing the best qualiﬁ ed available talent for any position regardless of gender, age or race. The Company beneﬁ ts from the diversity of its team members and has training programs to assist with developing their skills and with career advancement. The Company travels team members to work in its global locations, giving them exposure to, and understanding of, various diff ering cultures and marketplaces. The Company has a high participation of women across all employment levels, including in senior executive positions, however there are no women on the Board. The composition of the current Board is merit based and accordingly, in the view of Directors, is appropriate to maximise commercial returns for the beneﬁ t of shareholders. The respective proportion of men and women employees in the Company is provided in the table on page 26 of this annual report. “Senior executive” are general managers, senior managers and Head Offi ce executives who report directly to the CEO or COO. 28 Servcorp Annual Report 2016 28 28 Servcorp Annual Report 2016 C o r p o r a t e G o v e r n a n c e ASX PRINCIPLES COMPLIANCE STATEMENT (CONTINUED) Recommendation Servcorp Board response Principle 1 (cont) Lay solid foundations for management and oversight Establish and disclose the respective roles and responsibilities of the Board and management and how their performance is monitored and evaluated. Recommendation 1.6 (a) Have and disclose a process for periodically evaluating the performance of the Board, its Committees and individual Directors; and The Board operates under a charter and a code of conduct which recognises that strong ethical values must be at the heart of Director and Board performance. (b) Disclose, in relation to each reporting period, whether a performance evaluation was undertaken in the reporting period in accordance with that process. Recommendation 1.7 (a) Have and disclose a process for periodically evaluating the performance of senior executives; and (b) Disclose, in relation to each reporting period, whether a performance evaluation was undertaken in the reporting period in accordance with that process. The non-executive Directors evaluate individual Director’s performance and also the Board’s performance. As a tool to evaluation, a questionnaire is completed annually by the non-executive Directors with the responses assessed and discussed by the non-executive Directors. A review was undertaken in the current ﬁ nancial year. There is good interaction between all Directors and with senior executives and it is considered that the non-executive Directors have a solid understanding of the culture and values of the Company. The process for evaluating the performance of senior executives is included in the remuneration report on pages 50 to 53 of this annual report. Principle 2 Structure the Board to add value Have a Board of an appropriate size, composition, skills and commitment to enable it to discharge its duties eff ectively. The Board has not established a Nomination Committee. Given the size of the current Board, effi ciencies are not forthcoming from a separate Committee structure. Selection and appointment of new Directors is undertaken by the full Board. Any Director appointed by the Board must retire from offi ce at the next annual general meeting and seek re-election by shareholders. Recommendation 2.1 (a) Have a Nomination Committee which: (1) has at least three members, a majority of whom are independent Directors; and (2) is Chaired by an independent Director, and disclose: (3) the charter of the Committee; (4) the members of the Committee; and (5) as at the end of each reporting period, the number of times the Committee met throughout the period and the individual attendances of the members at those meetings; or (b) If it does not have a Nomination Committee, disclose that fact and the processes it employs to address Board succession issues and to ensure that the Board has the appropriate balance of skills, knowledge, experience, independence and diversity to enable it to discharge its duties and responsibilities eff ectively. Recommendation 2.2 Have and disclose a Board skills matrix setting out the mix of skills and diversity that the Board currently has or is looking to achieve in its membership. A speciﬁ c skills matrix has not been developed, however the current non-executive Directors each bring a mix of skills and experience to the Board. The Board has endeavoured to expand this skills mix when considering new appointments. Runway to the World 29 Runway to the world 29 C O R P O R AT E G O V E R NA N C E ASX PRINCIPLES COMPLIANCE STATEMENT (CONTINUED) Recommendation Servcorp Board response Principle 2 (cont) Structure the Board to add value Have a Board of an appropriate size, composition, skills and commitment to enable it to discharge its duties eff ectively. Recommendation 2.3 Disclose: (a) The names of the Directors considered by the Board to be independent Directors; (b) If a Director has an interest, position, association or relationship of the type described in Box 2.3 but the Board is of the opinion that it does not compromise the independence of the Director, the nature of the interest, position, association or relationship in question and an explanation of why the Board is of that opinion; and (c) The length of service of each Director. Recommendation 2.4 A majority of the Board should be independent Directors. Recommendation 2.5 The names of Directors considered by the Board to be independent, and the length of service of each Director, is disclosed in the Directors’ Report on pages 36 and 37. The Board regularly assesses the materiality of any interest, position, association or relationship each Director has with the Company to determine whether it may interfere with the Director’s capacity to bring independent judgement to bear on issues or to act in the best interest of the Company and its shareholders. - Details of related party transactions are disclosed in note 26 to the Consolidated ﬁ nancial report. - Mr T Moufarrige was an Executive of the Company from 1996 to 2011, and accordingly is not considered to be an independent Director. He is also the son of the CEO and substantial shareholder, Mr A G Moufarrige. The Board considers that these relationships do not interfere with his capacity to bring independent judgement to bear, or to act in the best interests of the Company and its shareholders. - Mr B Corlett and Mr R Holliday-Smith have both been non-executive Directors since 1999. The Board has assessed this length of service and considers that Mr B Corlett and Mr R Holliday-Smith continue to bring independent judgement to bear on all issues and to act in the best interests of the Company and its shareholders. The Board has a majority of independent Directors. Three of the four currently serving non-executive Directors are independent. The chair of the Board should be an independent Director and, in particular, should not be the same person as the CEO. The Chair is an independent Director. The roles of Chair and Managing Director/ CEO are not exercised by the same individual. Recommendation 2.6 Have a program for inducting new Directors and provide appropriate professional development opportunities for Directors to develop and maintain the skills and knowledge needed to perform their role as Directors eff ectively. All newly appointed Directors must undertake an induction program. The Company provides appropriate professional development opportunities to develop and maintain the skills and knowledge required by Directors. 30 Servcorp Annual Report 2016 30 30 Servcorp Annual Report 2016 C o r p o r a t e G o v e r n a n c e ASX PRINCIPLES COMPLIANCE STATEMENT (CONTINUED) Recommendation Servcorp Board response Principle 3 Act ethically and responsibly Act ethically and responsibly. Recommendation 3.1 (a) Have a code of conduct for Directors, senior executives and employees; and (b) Disclose that code or a summary of it. The Company has established codes of conduct and ethical standards which all Directors, executives and employees are expected to uphold and promote. They guide compliance with legal requirements and ethical responsibilities, and also set a standard for employees and Directors dealing with Servcorp’s obligations to external stakeholders. The Company’s codes and standards are contained in online resources which provide continual education for all employees on the expected quality of service, respect for fellow employees, commitment to the community and the environment, responsible dealings with clients and suppliers and upholding of the Servcorp brand. Principle 4 Safeguard integrity in corporate reporting Have formal and rigorous processes that independently verify and safeguard the integrity of corporate reporting. Recommendation 4.1 (a) Have an Audit Committee which: The Board has established an Audit and Risk Committee. (1) has at least three members, all of whom are non-executive (1) all three members of the Audit and Risk Committee are non- Directors and a majority of whom are independent Directors; and executive Directors, and two members are independent Directors. (2) is Chaired by an independent Director, who is not the Chair of the (2) the Chair of the Committee is not the Chair of the Board. Board, and disclose: (3) the Charter of the Committee; (4) the relevant qualiﬁ cations and experience of the members of the Committee; and (5) in relation to each reporting period, the number of times the Committee met throughout the period and the individual attendances of the members at those meetings; or (b) If it does not have an Audit Committee, disclose that fact and the processes it employs that independently verify and safeguard the integrity of corporate reporting, including the processes for the appointment and removal of the external auditor and the rotation of the audit engagement partner. Recommendation 4.2 The Board should, before it approves the entity’s ﬁ nancial statements for a ﬁ nancial period, receive from its CEO and CFO a declaration that, in their opinion, the ﬁ nancial records have been properly maintained and that the ﬁ nancial statements comply with the appropriate accounting standards and give a true and fair view of the ﬁ nancial position and performance and that the opinion has been formed on the basis of a sound system of risk management and internal control which is operating eff ectively. Recommendation 4.3 (3) the Audit and Risk Committee Charter is available on the Company’s website; servcorp.com.au (4) the relevant qualiﬁ cations and experience of the members of the Committee are provided on pages 26, 36 and 37 of this annual report. (5) the Committee met four times during the year. Attendance at meetings is disclosed at page 38 of this annual report. The CEO and CFO provide such assurances. A listed entity that has an AGM should ensure that its external auditor attends its AGM and is available to answer questions from security holders relevant to the audit. The external auditor attends the AGM each year and is available to answer questions from shareholders. Runway to the World 31 Runway to the world 31 C O R P O R AT E G O V E R NA N C E ASX PRINCIPLES COMPLIANCE STATEMENT (CONTINUED) Recommendation Servcorp Board response Principle 5 Make timely and balanced disclosure Make timely and balanced disclosure of all matters concerning the company that a reasonable person would expect to have a material eff ect on the price or value of its securities. Recommendation 5.1 (a) Have a written policy for complying with continuous disclosure obligations under the Listing Rules; and (b) Disclose that policy or a summary of it. The Company has established a continuous disclosure compliance plan. The Board and management continually monitor information and events and their obligation to report any matters. Responsibility for communications to the ASX on all material matters rests with the Company Secretary following consultation with the Chair and Managing Director. Principle 6 Respect the rights of security holders Respect the rights of security holders by providing them with appropriate information and facilities to allow them to exercise those rights eff ectively. Recommendation 6.1 Provide information about the Company and its governance to investors via its website. The Company has a corporate governance page on its website. This page includes copies of the Company’s annual reports, annual and half-year ﬁ nancial reports, announcements to ASX and other governance documents. Recommendation 6.2 Design and implement an investor relations program to facilitate eff ective two-way communication with investors. Servcorp aims to communicate clearly and transparently with shareholders and the community. Recommendation 6.3 Disclose the policies and processes in place to facilitate and encourage participation at meetings of security holders. Servcorp actively engages with security holders by holding brieﬁ ngs following the release of annual and half-year results; the time and location of which are notiﬁ ed to the market. The Company also meets with security holders upon request and responds to any enquiries made from time to time. All shareholders are given a reasonable opportunity to ask questions at the annual general meeting and are encouraged to participate. This includes shareholders present at the meeting and those attending by video or phone conference. Recommendation 6.4 Give security holders the option to receive communications from, and send communications to, the Company and its security registry electronically. All shareholders are given the option to receive communications from, and send communications to, the Company and its security registry electronically. 32 Servcorp Annual Report 2016 32 32 Servcorp Annual Report 2016 C o r p o r a t e G o v e r n a n c e ASX PRINCIPLES COMPLIANCE STATEMENT (CONTINUED) Recommendation Servcorp Board response Principle 7 Recognise and manage risk Establish a sound risk management framework and periodically review the eff ectiveness of that framework. Recommendation 7.1 The Board should: The Company has a combined Audit and Risk Committee. (a) Have a Committee or Committees to oversee risk, each of which: (1) has at least three members, a majority of whom are independent Responses to this recommendation have been provided for the Audit Committee in Recommendation 4.1. Directors; and (2) is Chaired by an independent Director, and disclose: (3) the Charter of the Committee; (4) the members of the Committee; and (5) as at the end of each reporting period, the number of times the Committee met throughout the period and the individual attendances of the members at those meetings; or (b) If it does not have a Risk Committee or Committee that satisfy (a) above, disclose that fact and the processes it employs for overseeing the entity’s risk management framework. Recommendation 7.2 The Board or a Committee of the Board should: (a) Review the entity’s risk management framework at least annually to satisfy itself that it continues to be sound; and (b) Disclose, in relation to each reporting period, whether such a review has taken place. The Board has established an Audit and Risk Committee that is comprised only of non-executive Directors. The Committee reviews the Company’s risk management strategy, its adequacy and eff ectiveness and the communication of risks to the Board. Risk is considered across the ﬁ nancial, operational and organisational aspects of the Company’s aff airs. A review is undertaken in each reporting period. The Committee is satisﬁ ed that the Company and management have a culture of risk control and are gradually formalising the infrastructure of this culture. Although not all policies have been formally documented, the identiﬁ ed risks are tightly controlled and being managed eff ectively. The Company is heavily reliant on ﬁ nancial controls and senior executive controls. Day to day responsibility is delegated to the Chief Executive Offi cer and senior management. The Chief Executive Offi cer and senior management are responsible for: – identiﬁ cation of risk; – monitoring risk; – communication of risk events to the Board; and – responding to risk events, with Board authority. The Audit and Risk Committee is working with management to ensure continuous improvement to the risk management and internal control systems. Runway to the World 33 Runway to the world 33 C O R P O R AT E G O V E R NA N C E ASX PRINCIPLES COMPLIANCE STATEMENT (CONTINUED) Recommendation Servcorp Board response Principle 7 (cont) Recognise and manage risk Establish a sound risk management framework and periodically review the eff ectiveness of that framework. Recommendation 7.3 Disclose: (a) If the Company has an internal audit function, how the function is The Company does not have a formal internal audit function, however the Company has: structured and what role it performs; or – a diversiﬁ ed business; (b) If the Company does not have an internal audit function, that fact and the processes it employs for evaluating and continually improving the eff ectiveness of its risk management and internal control processes. – many individual ﬂ oors run by a small team; – tight accounting policies over those ﬂ oors; – tight cash control over the whole business; – central oversight by head offi ce with systems in place to enable this oversight; and – regular visits and spot checks by business and ﬁ nancial management to all locations. As such, there is a process creating a control framework without a speciﬁ ed, dedicated internal control function. Recommendation 7.4 Disclose whether the Company has any material exposure to economic, environmental and social sustainability risks and, if it does, how it manages or intends to manage those risks. The Board has reviewed and assessed the Company’s exposure to economic, environmental and social sustainability risks, and the application of materiality and risk management processes. The Company operates in 22 countries and as such has economic exposure to the global marketplace. The Board considers that the Company does not have any material exposure to economic, environmental or social sustainability risk within the meaning of the guidelines. Principle 8 Remunerate fairly and responsibly Pay Director remuneration suffi cient to attract and retain high quality Directors and design executive remuneration to attract, retain and motivate high quality senior executives and align their interests with the creation of value for security holders. Recommendation 8.1 (a) Have a remuneration committee which: The Board has established a Remuneration Committee. (1) has at least three members, a majority of whom are independent (1) all three members of the Remuneration Committee are non- Directors and; executive Directors and two members are independent Directors. (2) is Chaired by an independent Director, (2) the Chair of the Committee is an independent non- and disclose: (3) the Charter of the Committee; (4) the members of the Committee; and (5) as at the end of each reporting period, the number of times the Committee met throughout the period and the individual attendances of the members at those meetings; or (b) If it does not have a Remuneration Committee, disclose that fact and the processes it employs for setting the level and composition of remuneration for Directors and senior executives and ensuring that such remuneration is appropriate and not excessive. executive Director. (3) the Remuneration Committee Charter is available on the Company’s website, servcorp.com.au (4) the members of the Committee are disclosed on page 27 of this annual report. (5) the Committee met three times during the year. Attendance at meetings is disclosed on page 38 of this annual report. 34 Servcorp Annual Report 2016 34 34 Servcorp Annual Report 2016 C o r p o r a t e G o v e r n a n c e ASX PRINCIPLES COMPLIANCE STATEMENT (CONTINUED) Recommendation Servcorp Board response Principle 8 Principle 8 (cont) (cont) Remunerate fairly and responsibly Remunerate fairly and responsibly Pay Director remuneration suffi cient to attract and retain high quality Directors and design executive remuneration to attract, retain Pay Director remuneration suffi cient to attract and retain high quality Directors and design executive remuneration to attract, retain and motivate high quality senior executives and align their interests with the creation of value for security holders. and motivate high quality senior executives and align their interests with the creation of value for security holders. Recommendation 8.2 Separately disclose the Company’s policies and practices regarding the remuneration of non-executive Directors and the remuneration of executive Directors and other senior executives. This information is provided in the Remuneration Report on pages 50 to 53 of this annual report. Recommendation 8.3 A company which has an equity- based remuneration scheme should: The Company has an Executive Share Option Scheme. (a) Have a policy on whether participants are permitted to enter into transactions (whether through the use of derivatives or otherwise) which limit the economic risk of participating in the scheme; and (b) Disclose that policy or a summary of it. The Company's Securities Trading Policy prohibits participants from entering into an arrangement that would have the eff ect of limiting their exposure to risk relating to an element of their remuneration that either has not vested or has vested but remains subject to a holding lock (“hedging transactions”). The Company’s Securities Trading Policy is available on the Company’s website; servcorp.com.au Runway to the World 35 Runway to the world 35 D I R E C T O R S ' R E P O R T The Directors of Servcorp Limited (“the Company”) present their report together with the Consolidated ﬁ nancial report of the “Consolidated Entity”, being the Company and its controlled entities, for the ﬁ nancial year ended 30 June 2016. DIRECTORS The Directors of the Company at any time during or since the end of the ﬁ nancial year are: Alf Moufarrige MANAGING DIRECTOR Appointed August 1999 Chief Executive Ofﬁ cer Alf is one of the global leaders in the serviced offi ce industry, with over 38 years of experience. Alf is primarily responsible for Servcorp’s expansion, proﬁ tability, cash generation and currency management. Directorships of listed entities in the last three years: – None. Bruce Corlett AM CHAIR INDEPENDENT NON-EXECUTIVE DIRECTOR BA, LLB Appointed October 1999 Member of Audit and Risk Committee Member of Remuneration Committee For more than 30 years Bruce has been a Director of many public listed and unlisted companies. He has an extensive business background involving a range of industries including banking, property and maritime. Bruce is Chair of Australian Maritime Systems Ltd and a Director of Fortius Funds Management Pty Ltd. Bruce has had a lifetime involvement with charitable and community organisations. He is currently a Trustee of the Mark Tonga Perpetual Relief Trust, an Ambassador of The Australian Indigenous Education Foundation and a Director of The Buildcorp Foundation. Directorships of listed entities in the last three years: – The Trust Company Limited (TRU) from October 2000 to December 2013 (Chair) (The Trust Company was acquired by Perpetual Limited and was removed from the offi cial list of ASX on 19 December 2013). Rick Holliday-Smith INDEPENDENT NON-EXECUTIVE DIRECTOR BA (HONS), CA, FAICD Appointed October 1999 Chair of Audit and Risk Committee Rick spent over 11 years in Chicago in the roles of Divisional President of global trading and sales for NationsBank, N.A. and, prior to that, Chief Executive Offi cer of Chicago Research and Trading Group Limited. Rick also spent over four years in London as Managing Director of Hong Kong Bank Limited, a wholly owned merchant banking subsidiary of HSBC Bank. Rick is currently Chair of ASX Limited and Cochlear Limited. Rick has a Bachelor of Arts (Hons) from Macquarie University, is a Chartered Accountant and is a Fellow of the Australian Institute of Company Directors. Directorships of listed entities in the last three years: – ASX Limited (ASX) since July 2006 (Chair since March 2012); – Cochlear Limited (COH) since March 2005 (Chair since July 2010). 36 Servcorp Annual Report 2016 36 36 Servcorp Annual Report 2016 D i r e c t o r s ' R e p o r t Greg Pearce COMPANY SECRETARY BCOM, CA, AGIA, ACIS Appointed August 1999 Greg joined Servcorp in 1996 as Financial Controller and was appointed to his current role of Company Secretary during the Company’s IPO in 1999. Prior to joining Servcorp, Greg spent 10 years working in the Information Technology business and the 11 years prior to that working in Audit and Business Services. Greg is a Chartered Accountant and is an Associate of the Governance Institute of Australia. Runway to the World 37 Runway to the world 37 Taine Moufarrige NON-EXECUTIVE DIRECTOR BA, LLB Appointed November 2004 Member of Audit and Risk Committee Member of Remuneration Committee Taine started his professional career as a lawyer. Taine joined Servcorp in 1996 as a Trainee Manager. Taine played a key role in establishing Servcorp locations in Europe, the Middle East, China, Turkey, New Zealand and throughout Australia, and in India through the Company’s franchise venture. Taine resigned from his operational role at Servcorp eff ective 31 December 2011, but remains on the Board as a non- executive Director. His experience in the Company’s operations brings important perspective to the Board. Taine also still takes a role in the philanthropic activities of Servcorp. Taine is currently CEO of Nualight ANZ. Taine is also a Board member of the European Australian Business Council and a Board member of Youngcare. He sits on the Funding and Sustainability Committee for Lifeline and he is a patron of the Sydney Symphony Vanguard. Directorships of listed entities in the last three years: – None. The Hon. Mark Vaile AO INDEPENDENT NON-EXECUTIVE DIRECTOR Appointed June 2011 Chair of Remuneration Committee Mark had a distinguished career as an Australian Federal Parliamentarian from 1993 to 2008. Ministerial Portfolios held by Mark during his ﬁ ve terms in Federal Parliament include Minister for Transport and Regional Development, Minister for Agriculture, Fisheries and Forestry, Minister for Trade, and Minister for Transport and Regional Services. Mark also served as Deputy Prime Minister of Australia from July 2005 through to December 2007. He was instrumental in securing or initiating a range of free trade agreements between Australia and the United States, Singapore, Thailand, China, Malaysia and the ASEAN countries. Since leaving the Federal Parliament in July 2008, Mark has embarked on a career in the private sector utilising his extensive experience across a number of portfolio areas. His current Directorships include Virgin Australia Holdings Limited and StamfordLand Limited and Chair of Whitehaven Coal Limited and SmartTrans Holdings Limited. Mark is also a Director/ Trustee of Hostplus Superfund Limited and is a member of Palisade Investment Partners Advisory Board. Mark also provides corporate advice to a number of Australian companies in the international marketplace. In November 2013, at the request of The Hon. Julie Bishop, Mark accepted an appointment to the Council for Australian-Arab Relations (CAAR). Directorships of listed entities in the last three years: – SmartTrans Holdings Limited (SMA) since April 2016 (Chair); – StamfordLand Corporation Ltd (SLC - listed on SGX) since August 2009; – Virgin Australia Holdings Limited (VAH) since September 2008; – Whitehaven Coal Limited (WHC) since May 2012 (Chair). D I R E C T O R S ' R E P O R T DIRECTORS’ MEETINGS HELD AND ATTENDANCES AT MEETINGS The number of Directors’ and Board Committee meetings held, and the number of meetings attended by each of the Directors of the Company during the ﬁ nancial year is set out in the following table. Only those Directors who are members of the relevant Committees have their attendance recorded. Other Directors do attend Committee meetings from time to time. DIRECTOR Number of meetings held Number of meetings attended B Corlett R Holliday-Smith A G Moufarrige T Moufarrige M Vaile BOARD AUDIT & RISK COMMITTEE REMUNERATION COMMITTEE 7 7 7 7 7 7 4 4 4 4 3 3 3 3 The details of the function and membership of the Committees are presented in the Corporate Governance statement on pages 26 and 27. DIRECTORS’ INTERESTS The relevant interest of each Director in the share capital of the companies within the Consolidated Entity, as notiﬁ ed by the Directors to the Australian Securities Exchange in accordance with s205G (1) of the Corporations Act 2001, at the date of this report is set out in the following table. DIRECTOR B Corlett R Holliday-Smith A G Moufarrige (i) T Moufarrige (i) M Vaile Notes: ORDINARY SHARES IN SERVCORP LIMITED DIRECT - - 547,436 - - INDIRECT 413,474 150,000 49,727,451 1,800,000 10,400 OPTIONS OVER ORDINARY SHARES - - - - - i The 1.8 million shares shown as being an indirect interest of T Moufarrige are also included in the indirect interest of A G Moufarrige. DIRECTORS’ BENEFITS Since the end of the previous ﬁ nancial year, no Director of the Consolidated Entity has received or become entitled to receive a beneﬁ t (other than a beneﬁ t included in the aggregate amount of emoluments received or due and receivable by Directors shown in the Consolidated ﬁ nancial report, or the ﬁ xed salary of a full-time employee of the Consolidated Entity or of a related entity) by reason of a contract made by the Consolidated Entity or a related entity with the Director or with a ﬁ rm of which a Director is a member, or with an entity in which a Director has a substantial ﬁ nancial interest. 38 Servcorp Annual Report 2016 38 38 Servcorp Annual Report 2016 D i r e c t o r s ' R e p o r t INDEMNIFICATION AND INSURANCE OF DIRECTORS AND OFFICERS The constitution of the Company provides that the Company must indemnify, on a full indemnity basis and to the full extent permitted by law, each current and former Director, alternate Director or executive offi cer against all losses or liabilities incurred in that capacity in defending any proceedings, whether civil or criminal, in which judgement is given in their favour or in which they are acquitted or in connection with any application in relation to any such proceedings in which relief is granted under the Corporations Act 2001. The Company has agreed to indemnify the following current and former Directors of the Company, Mr A G Moufarrige, Mr B Corlett, Mr R Holliday-Smith, The Hon. M Vaile, Mr T Moufarrige and Mrs J King against any loss or liability that may arise from their position as Directors of the Company and its controlled entities, except where the liability arises out of conduct involving a wilful breach of duty. The agreement stipulates that the Company will meet the full amount of any such liabilities to the extent permitted by law, including reasonable costs and expenses. The Company has not, during or since the ﬁ nancial year, indemniﬁ ed or agreed to indemnify an auditor of the Company. During the ﬁ nancial year the Company has paid insurance premiums in respect of Directors’ and offi cers’ liability and legal expenses insurance contracts, for current and former Directors, secretaries and offi cers of the Company and its controlled entities. The insurance policies prohibit disclosure of the nature of the liability insured against and the amount of the premiums. CORPORATE GOVERNANCE A statement of the Board’s governance practices is set out on pages 24 to 35 of this annual report. OPTIONS GRANTED During the year, or since the end of the ﬁ nancial year, the Company granted options over unissued ordinary shares of the Company, as follows: • Date options granted - 31 March 2016 • Number of shares - 285,000 • • Exercise price - $7.00 Expiry Date - 2 May 2021 • Date options granted - 25 July 2016 • Number of shares - 10,000 Exercise price - $7.00 • Expiry Date - 2 May 2021 • Options granted to Directors or the ﬁ ve most highly remunerated offi cers of the Company as part of their remuneration are detailed in the Remuneration report on page 53. OPTIONS ON ISSUE At the date of this report, unissued ordinary shares of the Company under option are: • Number of shares - 295,000 • • Exercise price - $7.00 Expiry Date - 2 May 2021 The options do not entitle the holder to participate in any share issue of the Company or any other body corporate. OPTIONS EXPIRED During the year, or since the end of the ﬁ nancial year, no options over unissued shares expired or were cancelled (2015: Nil). SHARES ISSUED ON THE EXERCISE OF OPTIONS During the year, or since the end of the ﬁ nancial year, the Company has not issued any shares as a result of the exercise of an option over unissued shares. Runway to the World 39 Runway to the world 39 D I R E C T O R S ' R E P O R T STATE OF AFFAIRS There were no signiﬁ cant changes in the state of aff airs of the Consolidated Entity during the ﬁ nancial year. PRINCIPAL ACTIVITIES The principal activities of the Consolidated Entity during the ﬁ nancial year were the provision of Executive Serviced and Virtual Offi ces and IT, Communications and Secretarial Services. There were no signiﬁ cant changes in the nature of the activities of the Consolidated Entity during the year. CONSOLIDATED RESULTS Net proﬁ t after tax for the ﬁ nancial year was $39.72 million (2015: $33.14 million). Operating revenue was $328.60 million (2015: $277.38 million). Basic and diluted earnings per share was 40.4 cents (2015: 33.7 cents). 2016 $'000 2015 $’000 Revenue & other income 328,601 277,378 Net proﬁ t before tax Net proﬁ t after tax 48,840 39,722 41,211 33,141 Net operating cash ﬂ ows 60,575 59,928 Cash & investment balances 114,586 114,451 Net assets 261,020 241,898 Earnings per share $0.404 $0.337 Dividends per share $0.220 $0.220 DIVIDENDS PAID AND DECLARED Dividends totalling $21.65 million have been paid or declared by the Company in relation to the ﬁ nancial year ended 30 June 2016 (2015: $21.65 million). Information relating to dividends in respect of the prior and current ﬁ nancial year, including dividends paid or declared by the Company since the end of the previous year, is set out in the following table. DIVIDEND In respect of the previous ﬁ nancial year: 2015 Interim Ordinary shares Final Ordinary shares In respect of the current ﬁ nancial year: 2016 Interim Ordinary shares Final Ordinary shares CENTS PER SHARE TOTAL AMOUNT $’000 DATE OF PAYMENT FRANKED % TAX RATE FOR FRANKING CREDIT 11.00 11.00 11.00 11.00 10,828 1 April 2015 10,828 24 September 2015 10,828 10,828 23 March 2016 6 October 2016 20% 40% 50% 50% 30% 30% 30% 30% 40 Servcorp Annual Report 2016 40 40 Servcorp Annual Report 2016 REVIEW OF OPERATIONS Revenue and other income from ordinary activities for the twelve months ended 30 June 2016 was $328.60 million, up 19% from the twelve months ended 30 June 2015. During the year, the Australian dollar weakened against all major currencies. In constant currency terms revenue increased by 10% compared to the 2015 year. Net proﬁ t before tax for the twelve months to 30 June 2016 was $48.84 million, up 19% from $41.21 million in the prior year. When expressed in constant currency terms, net proﬁ t before tax increased by 16% compared to the 2015 year. Cash and investment balances were $114.59 million at 30 June 2016 (30 June 2015: $114.45 million). Of this balance, $14.91 million has been pledged with banks as collateral for bank guarantees and facilities, leaving an unencumbered cash and investment balance of $99.68 million in the business as at 30 June 2016 (30 June 2015: $99.33 million). The business generated strong net operating cash ﬂ ows during the 2016 ﬁ nancial year of $60.58 million, up 1% compared to the 2015 ﬁ nancial year (2015: $59.93 million). Before tax payments, the business produced cash ﬂ ows of $72.86 million (2015: $67.92 million). Servcorp footprint In the 2016 ﬁ nancial year, net capacity increased by 381 offi ces, growing available offi ce stock by 7%. Servcorp’s offi ce expansion in the 2016 ﬁ nancial year has been a measured approach with management continuing to keep focus on increasing overall occupancy of existing offi ce stock. During the 2016 ﬁ nancial year we opened new landmark locations at CapitaGreen in Singapore, World Trade Center in Abu Dhabi and the Diplomatic Commercial Offi ces in Bahrain. We have added 35 (net) new ﬂ oors to our footprint since June 2011. Occupancy of like for like ﬂ oors open at 30 June 2016 was 77% (30 June 2015: 79%). All ﬂ oor occupancy was 75%. There are plans to add approximately 7% to offi ce capacity in the 2017 ﬁ nancial year. As at 30 June 2016, Servcorp operated 151 ﬂ oors in 53 cities across 22 countries. D i r e c t o r s ' R e p o r t Revenue by Region ($ million) 100 80 60 40 20 0 105.0 93.4 87.1 35.1 ANZ/SEA North Asia EME USA Revenue and NPBT ($ million) 328.6 300 277.4 250 200 150 100 50 0 41.2 48.8 Revenue NPBT 2015 2016 Expansion - 84 months to 30 June 2016 Floors by region - 30 June 2016 ANZ/SEA 25 North Asia 17 EME 33 USA 23 ANZ/SEA 48 North Asia 36 India (Franchise) 2 USA 22 EME 43 Runway to the World 41 Runway to the world 41 D I R E C T O R S ' R E P O R T Australia, New Zealand and Southeast Asia On a like for like basis, net profit before tax performance in ANZ/ SEA has increased by 27%, which was primarily driven by a significant improvement in the Sydney market profitability and sales. Perth continues to be challenged by over-supply and lack of demand. Australia and New Zealand occupancy is healthy, at more than 80%. Malaysia and Singapore, on a like for like basis, were profitable but underperformed in the 2016 financial year. ILHAM Tower, Kuala Lumpur and CapitaGreen, Singapore opened in the 2016 financial year and are expected to be profitable in the 2017 financial year. The region has two new floors opening in the first half of the 2017 financial year; one in Barangaroo, Sydney and Servcorp is re-entering Jakarta, Indonesia. North Asia North Asia, as a whole, produced a solid result in the 2016 financial year, reporting like for like net proﬁ t before tax growth of 25%. There was only one new opening in North Asia this year, being Osaka Hilton Plaza. China was proﬁ table but missed its target this year and continues to be a focus area for management. Subsequent to year end, Tokyo opened a new ﬂ oor in the Tri- Seven Building. Revenue ($ million) - ANZ/ SEA Revenue ($ million) - North Asia 81.3 87.1 100 80 60 40 20 105.0 89.4 100 80 60 40 20 2015 2016 2015 2016 NPBT ($ million) - ANZ/ SEA NPBT ($ million) - North Asia 12.2 8.8 15 10 5 0 20 15 10 5 0 17.6 20.8 2015 2016 2015 2016 42 Servcorp Annual Report 2016 42 42 Servcorp Annual Report 2016 D i r e c t o r s ' R e p o r t Europe and the Middle East Like for like ﬂ oors in the Europe and Middle East segment produced a solid result in the 2016 financial year, up 58% compared to the 2015 financial year. All markets performed to expectations with the exception of France. New locations in Abu Dhabi, Tehran and Bahrain were opened during the year. USA The USA underperformed and did not meet its target this year. Like for like net loss before tax for the USA reduced by 66% in the 2016 financial year. USA EBITDA improved year on year, up to $3.8 million compared to $80,000 in the 2015 financial year. Overall USA occupancy is marginally below the group average. Management has a heightened focus on the USA. The USA will see a further mega-ﬂ oor opening in Chicago in the second half of the 2017 ﬁ nancial year. Revenue ($ million) - EME Revenue ($ million) - USA 93.4 73.4 100 80 60 40 20 100 80 60 40 20 24.8 35.1 2015 2016 2015 2016 NPBT ($ million) - EME NPBT ($ million) - USA 15.5 18.5 20 15 10 5 0 0 (5) (10) (15) (20) (5.0) (3.8) 2015 2016 2015 2016 Runway to the World 43 Runway to the world 43 D I R E C T O R S ' R E P O R T NEW LOCATIONS New locations opened by the Consolidated Entity during the course of the ﬁ nancial year are set out in the following table. CITY Singapore Abu Dhabi Auckland Osaka LOCATION Level 24, CapitaGreen Level 17, World Trade Centre Level 26, PWC Tower Level 18, Hilton Plaza West Kuala Lumpur Level 33, ILHAM Tower Tehran Bahrain Levels 7, 8 & 9, Park Building Level 13, Diplomatic Commercial Offi ces Building Wollongong Level 1, Enterprise Building (University of Wollongong) OFFICES 79 61 32 52 64 63 81 35 OPENED July 2015 August 2015 September 2015 September 2015 January 2016 March 2016 April 2016 May 2016 In addition, the following locations were expanded by the Consolidated Entity during the course of the ﬁ nancial year. CITY Beijing Chengdu LOCATION ADDITIONAL OFFICES Level 19, Oriental Plaza Level 28, Aerospace Centre 9 6 EXPANDED January 2016 February 2016 EVENTS SUBSEQUENT TO BALANCE DATE Dividend On 17 August 2016 the Directors declared a 50% franked ﬁ nal dividend of 11.00 cents per share, payable on 6 October 2016. The ﬁ nancial eff ect of the above transaction has not been brought to account in the ﬁ nancial statements for the year ended 30 June 2016. The Directors are not aware of any matter or circumstance, other than that referred to above or in the ﬁ nancial statements or notes thereto, that has arisen since the end of the year that has signiﬁ cantly aff ected, or may signiﬁ cantly aff ect, the operations of the Consolidated Entity, the results of those operations, or the state of aff airs of the Consolidated Entity, in future ﬁ nancial years. 44 Servcorp Annual Report 2016 44 44 Servcorp Annual Report 2016 D i r e c t o r s ' R e p o r t LIKELY DEVELOPMENTS The Consolidated Entity will continue to pursue its policy of seeking to increase the proﬁ tability and market share of its major business sectors during the next ﬁ nancial year. ENVIRONMENTAL MANAGEMENT The Consolidated Entity’s operations are not subject to any particular and signiﬁ cant environmental regulation under a law of the Commonwealth or of a State or Territory. ROUNDING OFF The Company is of a kind referred to in ASIC Corporations (Rounding in Financial/ Directors' Reports) Instrument 2016/191 dated 24 March 2016 and, in accordance with that Instrument, amounts in the Financial Report and the Directors’ Report have been rounded off to the nearest thousand dollars, unless otherwise stated. NON-AUDIT SERVICES During the year Deloitte Touche Tohmatsu, the Company’s auditor, has performed certain “non-audit services” in addition to their statutory duties. The Board of Directors has considered the non-audit services provided during the year by the auditor and, in accordance with written advice provided by resolution of the Audit and Risk Committee, is satisﬁ ed that the provision of those non-audit services, during the year, by the auditor is compatible with the general standard of independence for auditors imposed by, and did not compromise the auditor independence requirements of, the Corporations Act 2001 for the following reasons: – Non-audit services were subject to the corporate governance procedures adopted by the Company and have been reviewed by the Audit and Risk Committee; and – The non-audit services provided do not undermine the general principles relating to auditor independence as set out in APES 110 Code of Ethics for Professional Accountants as they did not involve reviewing or auditing the auditor’s own work, acting in a management or decision making capacity for the Company or jointly sharing risks and rewards. A copy of the auditor’s independence declaration as required under Section 307C of the Corporations Act 2001 is set out on page 58 and forms part of this report. Details of the amounts paid or payable to the auditor of the Company, Deloitte Touche Tohmatsu and its related practices for audit and non-audit services provided during the year are set out in Note 4 to the Consolidated ﬁ nancial report. REMUNERATION REPORT The Remuneration Report for the ﬁ nancial year ended 30 June 2016 is set out on pages 46 to 57 and forms part of this report. Signed in accordance with a resolution of the Directors pursuant to section 298(2) of the Corporations Act 2001. A G Moufarrige Managing Director and CEO Dated at Sydney this 17th day of August 2016. Runway to the World 45 R E M U N E R AT I O N R E P O R T C o n t e n t s 47 I N T R O D U C T I O N Describes the scope of the Remuneration Report and the key management personnel (KMP) whose remuneration details are disclosed. 49 R E M U N E R AT I O N G OV E R N A N C E Describes the role of the Board and the Remuneration Committee, and the use of remuneration consultants when making remuneration decisions. 50 N O N - E X EC U T I V E D I R EC TO R R E M U N E R AT I O N Provides details regarding the fees paid to non-executive Directors. 50 E X EC U T I V E R E M U N E R AT I O N Outlines the principles applied to executive KMP remuneration decisions and the framework used to deliver the various components of remuneration, including an explanation of the linkages between Company performance and remuneration. 53 E M P LOY E E S H A R E S C H E M E A N D OT H E R EQ U I T Y I N C E N T I V E I N FO R M AT I O N Provides details regarding Servcorp’s employee equity plans including that information required by the Corporations Act 2001 and applicable accounting standards. 53 E M P LOY M E N T AG R E E M E N T S Provides details regarding the contractual arrangements between Servcorp and the executives whose remuneration details are disclosed. 54 N O N - E X EC U T I V E D I R EC TO R R E M U N E R AT I O N TA B L E Provides details of the nature and amount of each element of the remuneration of each non-executive Director of Servcorp Limited for the year ended 30 June 2016. 56 E X EC U T I V E K M P R E M U N E R AT I O N TA B L E Provides details of the nature and amount of each element of the remuneration of each executive KMP of Servcorp Limited for the year ended 30 June 2016. 46 Servcorp Annual Report 2016 46 46 Servcorp Annual Report 2016 R e m u n e r a t i o n R e p o r t – selected Board and executive KMP remuneration were benchmarked to relevant local market comparisons to ensure the remuneration of these key positions meets external expectations. This remains an ongoing process; – the Board met with a number of shareholders and proxy advisor CGI GlassLewis, who had reported on our Remuneration Report in the 2013 year, in relation to these matters; – Directors’ fees were increased eff ective from 1 July 2013, as disclosed. Directors’ fees had remained ﬁ xed since 1 January 2010. The response from shareholders to the comprehensive review has been positive. The changes adopted in the 2014 ﬁ nancial year will be reviewed annually. The Board introduced two new executive remuneration components in the 2016 ﬁ nancial year: – an additional STI opportunity was introduced to provide incentive for executive KMP to outperform their targets. Executive KMP with a region target will receive an extra STI amount if they outperform their region target by an amount which will be set each year. Further, if the global target is exceeded by more than a set percentage executive KMP will receive an extra STI amount. – in recognition of the need to have a deferred STI component, the Board issued Options to certain KMP. These were issued under the terms of the Servcorp Limited Executive Share Option Scheme. The Board has reset the global gateway net proﬁ t before tax, whereby any global STI in the 2017 to 2019 ﬁ nancial years will not be paid unless underlying net proﬁ t before tax increases 10% compounded annually from the 2016 ﬁ nancial year base of $48.84 million; The Board believes Servcorp’s approach to non-executive Director and executive KMP remuneration is balanced, fair and equitable and designed to achieve an alignment of interests between executive reward and shareholder expectations and wealth. The Board will continue to welcome feedback from shareholders on Servcorp’s remuneration practices or on the communication of remuneration matters in the Remuneration Report for the ﬁ nancial year ended 30 June 2016 and beyond. INTRODUCTION Servcorp is a geographically diverse business. We have signiﬁ cantly expanded our global footprint in recent years in an eff ort to exploit our brand, take advantage of new market opportunities and diversify our risk. It is acknowledged that the markets in which we operate are subject to changing economic factors and often these may be counter cyclical to the Australian market. For the ﬁ nancial year ended 30 June 2016, the percentage of off shore revenue as a proportion of total revenue was 84%. Directors expect off shore revenue to continue to increase as we consolidate and grow Servcorp’s global platform. Skilled, experienced local management in each jurisdiction, supported by Servcorp’s market leading IT platform and proprietary product off erings, are critical to our continued success. The Board’s philosophy and approach to executive remuneration is to balance fair remuneration for skills and expertise with a risk and reward framework attuned to local market conditions but that supports the growth aspirations of Servcorp as a global business. The Board undertook a comprehensive review of executive remuneration during the 2014 ﬁ nancial year. This review was considered to be necessary in response to the 44% “no” vote recorded against the Remuneration Report for the ﬁ nancial year ended 30 June 2013, representing a ﬁ rst strike. The key initiatives implemented following this review, supported by independent external advice, included: – the Remuneration Report was reformatted with expanded disclosure principles adopted; – the targets for short term incentives (STI) were re- evaluated. There is STI opportunity for executive KMP with the targets aligned to the Consolidated Entity’s global and regional earnings; – a global gateway net proﬁ t before tax has been imposed whereby any global STI in the 2014 to 2016 ﬁ nancial years will not be paid unless underlying net proﬁ t before tax increases 20% compounded annually from the 2013 ﬁ nancial year base of $27.63 million; – the STI opportunity for selected executive KMP was slightly modiﬁ ed; – the deferral of STI was considered but not introduced, because it is an unfamiliar concept in many of the countries in which we operate and the costs of implementation outweigh the beneﬁ ts; – the Board has retained a limited ability to exercise discretion; – the reintroduction of a long term incentive (LTI) scheme was considered but it was decided that the cost / beneﬁ t of off ering equity in multiple taxation and securities law jurisdictions to individual executives was unnecessarily complex and the Board is satisﬁ ed that the Company’s existing incentive and retention strategies are appropriate; Runway to the World 47 Runway to the world 47 R E M U N E R AT I O N R E P O R T INTRODUCTION (CONTINUED) Scope This Remuneration Report sets out, in accordance with the relevant Corporations Act 2001 (Corporations Act) and accounting standard requirements, the remuneration arrangements in place for KMP of Servcorp during the ﬁ nancial year ended 30 June 2016. Key management personnel Key management personnel have authority and responsibility for planning, directing and controlling the activities of Servcorp and comprise the non-executive Directors, and executive KMP (being the Executive Director and other senior executives named in this report). Details of the KMP during the year are provided in the following table. NON-EXECUTIVE DIRECTORS Bruce Corlett Rick Holliday-Smith Taine Moufarrige The Hon. Mark Vaile EXECUTIVE DIRECTOR TITLE CHANGE IN 2016 Chairman Member, Audit & Risk Committee Member, Remuneration Committee Director Chair, Audit & Risk Committee Director Member, Audit & Risk Committee Member, Remuneration Committee Director Chair, Remuneration Committee No change. Full year No change. Full year No change. Full year No change. Full year Alf Moufarrige Chief Executive Offi cer No change. Full year OTHER EXECUTIVE KMP Marcus Moufarrige Chief Operating Offi cer No change. Full year Jennifer Goodwyn Vice President / General Manager - USA No change. Full year Liane Gorman Laudy Lahdo Olga Vlietstra Anton Clowes General Manager - Australia & New Zealand No change. Full year General Manager - Middle East No change. Full year General Manager - Japan No change. Full year Chief Financial Offi cer Appointed 04 April 2016 Thomas Wallace Chief Financial Offi cer Ceased 26 February 2016 48 Servcorp Annual Report 2016 48 48 Servcorp Annual Report 2016 R e m u n e r a t i o n R e p o r t REMUNERATION GOVERNANCE This section explains the role of the Board and the Remuneration Committee, and use of remuneration consultants when making remuneration decisions in respect of non-executive Directors and executive KMP. Role of the Board and the Remuneration Committee The Board is responsible for Servcorp’s global remuneration strategy and policy. Consistent with this responsibility, the Board has established the Remuneration Committee which comprises solely non-executive Directors, with a majority being Independent. The role of the Remuneration Committee is set out in its Charter, which is reviewed annually. In summary, the Remuneration Committee’s role includes: – ensure that the appropriate procedures exist to assess the remuneration levels of the Chairman, other non-executive Directors, executive Directors, direct reports to the CEO, Board Committees and the Board as a whole; – ensure that Servcorp meets the requirements of ASX Corporate Governance Principles and Recommendations, and other relevant guidelines; – ensure that Servcorp adopts, monitors and applies appropriate remuneration policies and procedures; – ensure that reporting disclosures related to remuneration meet the Board’s disclosure objectives and all relevant legal and accounting standard requirements; – develop, maintain and monitor appropriate talent management programs including succession planning, recruitment, development; and retention and termination policies and procedures for senior management; and – develop, maintain and monitor appropriate superannuation and other relevant pension beneﬁ t arrangements for Servcorp as required by law. Further information on the Remuneration Committee’s role, responsibilities and membership are contained in the Corporate Governance section on page 27. Use of remuneration consultants During the 2015 ﬁ nancial year, no remuneration consultancy contracts were entered into by Servcorp. During the 2016 ﬁ nancial year, remuneration consultancy contracts were entered into by Servcorp and accordingly the disclosures required under section 300A(1)(h) of the Corporations Act 2001 are provided in the following tables. ADVISOR / CONSULTANT – 2016 SERVICES PROVIDED REMUNERATION CONSULTANT FOR THE PURPOSE OF THE CORPORATIONS ACT Ian Crichton, Remuneration Consultant Crichton + Associates Pty Ltd Review of the Servcorp Limited Executive Share Option Scheme and general advice on proposed changes to the existing ESOS, participant guides and supporting documentation. No. Key questions regarding use of remuneration consultants QUESTION Did the remuneration consultant provide remuneration recommendations in relation to any of the executive KMP for the 2016 ﬁ nancial year? ANSWER No. How much was the remuneration consultant paid by Servcorp for remuneration related and other services? What arrangements did Servcorp make to ensure that the making of the remuneration recommendations would be free from undue inﬂ uence by the executive KMP? Is the Board satisﬁ ed that the remuneration information provided was free from any such undue inﬂ uence? What are the reasons for the Board being so satisﬁ ed? Remuneration services: Crichton + Associates Pty Ltd $15,423; Other services: Nil Servcorp maintains a protocol which governs the procedure for procuring advice relating to KMP remuneration. The protocol includes a process for the engagement of the remuneration consultant, the provision of information to the remuneration consultant and the communication of remuneration recommendations. Yes, the Board is satisﬁ ed. The reasons are the Chairman of the Remuneration Committee had oversight of all requests for remuneration information, and the protocol with respect to the procurement of remuneration related advice remains in place. Runway to the World 49 Runway to the world 49 R E M U N E R AT I O N R E P O R T NON-EXECUTIVE DIRECTOR REMUNERATION Fees and payments to non-executive Directors reﬂ ect the demands which are made on, and the responsibilities of, the Directors. Non-executive Directors’ fees and payments are reviewed by the Board. The Board ensures non-executive Directors’ fees and payments are appropriate and in line with the market. Non-executive Directors are not employed under a contract and do not receive share options or other equity based remuneration. Directors’ fees Non-executive Directors’ fees are determined by the Board within an aggregate Directors’ fees limit approved by shareholders. The fees limit currently stands at $500,000 per annum inclusive of payments for superannuation. This limit was approved at the 2011 annual general meeting. No change is proposed in the 2017 ﬁ nancial year. The most recent review of Directors’ fees was eff ective 1 July 2013. Directors’ fees had not been increased since 1 January 2010. Eff ective 1 July 2013, Non-executive Directors’ fees were set as: EXECUTIVE REMUNERATION Remuneration philosophy and principles The Board recognises that the Consolidated Entity’s performance is dependent on the quality and contribution of its employees, particularly the executive KMP. To achieve its ﬁ nancial and operating objectives, Servcorp must be able to attract, retain and motivate appropriately qualiﬁ ed and skilled executives. The objective of the executive reward framework is to ensure reward for performance is competitive and appropriate for the results delivered. The framework aligns executive reward with achievement of Servcorp’s strategic objectives particularly its short, medium and long term earnings. Executive remuneration is balanced between ﬁ xed and incentive pay. In determining the appropriate balance, regular reviews are undertaken that involve cross referencing position descriptions to reliable accessible remuneration data in the markets in which Servcorp operates. Servcorp’s executive remuneration policy and principles are designed to ensure that the Consolidated Entity: – provides competitive rewards that attract, retain and – Chair - $175,000 per annum including superannuation; motivate our key executives; – Non-executive - $100,000 per annum including – encourages loyalty and commitment to Servcorp; superannuation; – builds a structure for growth and includes appropriate – Chair of the Audit and Risk Committee - an additional succession planning; $10,000 per annum including superannuation. Additional fees are not paid for membership of Board committees other than as referred to in the previous paragraph. Retirement allowances for Directors Non-executive Directors are not entitled to retirement allowances. Details of remuneration Details of the nature and amount of each element of the remuneration of each non-executive Director of Servcorp Limited for the year ended 30 June 2016 are set out in the table on pages 54 and 55. Minimum shareholding requirement Servcorp does not have a minimum shareholding requirement for non-executive Directors. It is noted, however, that all non- executive Directors are shareholders of the Company. – structures remuneration at a level that reﬂ ects the executive’s duties and accountabilities and is competitive in the markets in which it operates; – complies with applicable legal requirements and appropriate standards of governance. Remuneration structure and elements The executive KMP remuneration and reward framework at Servcorp currently has three components: – Fixed remuneration; – Short term incentives; and – Options The combination of these comprises the executive KMP total targeted remuneration opportunity. Fixed remuneration Fixed remuneration is reviewed each year and adjusted to changes in job role, promotion, market practice, internal relativities and performance. Remuneration for the 2016 ﬁ nancial year and changes from 2015 are set out in the table on pages 56 and 57. 50 Servcorp Annual Report 2016 50 50 Servcorp Annual Report 2016 Short term incentives Short term incentives (STI) are awarded based on achievement against targets set at the beginning of each ﬁ nancial year. As stated in the Remuneration Report for the ﬁ nancial year ended 30 June 2014, the basis of the STI was reviewed and changes were made to the scheme to apply for the 2014 ﬁ nancial year and beyond. It is noted that Alf Moufarrige, the CEO, founder and major shareholder, has elected not to participate in the STI scheme. Under the revised STI scheme, an STI dollar value is set for each executive KMP which represents the target STI that can be awarded for achieving target for the relevant year. The target STI opportunity for the 2016 ﬁ nancial year ranged between $50,000 and $110,000. The target STI opportunity as a percentage of ﬁ xed remuneration ranged between 11.7% and 32% with the average being 18.4%. The target STI opportunity range for achieving target and percentage of ﬁ xed remuneration will be similar for the 2017 ﬁ nancial year. STI targets will be set in advance each year and will be challenging. The STI targets for the 2016 ﬁ nancial year were determined based on a matrix of Consolidated Entity net proﬁ t before tax (global STI target) and region operating proﬁ t (region STI target), where appropriate. Where executive KMP have a direct responsibility for a region, their total STI potential was allocated between their region STI target and the global STI target. Their region STI allocation did not exceed 50% of the total potential STI in any case. A gateway consolidated net proﬁ t before tax, based on a 20% per annum compound increase over the 2013 ﬁ nancial year net proﬁ t before tax, needed to be achieved before any global STI pay out. It is intended that a similar approach to STI, with a minimum 10% per annum compound growth over the 2016 ﬁ nancial year net proﬁ t before tax, will be applied for the next three ﬁ nancial years. The gateway consolidated net proﬁ t before tax is provided in the following table. FINANCIAL YEAR ENDING 30 JUNE 2013 BASE 2014 GATEWAY 2015 GATEWAY 2016 GATEWAY Consolidated net proﬁ t before tax ($ million) 27.63 33.16 39.79 47.75 FINANCIAL YEAR ENDING 30 JUNE 2016 BASE 2017 GATEWAY 2018 GATEWAY 2019 GATEWAY R e m u n e r a t i o n R e p o r t In 2016 an additional STI opportunity was introduced to provide incentive for executive KMP to outperform their targets. Executive KMP with a region target can receive an extra $20,000 if they outperform their region target by in excess of $2.0 million. If they outperform their region target by in excess of $4.0 million they can receive an extra $50,000. Further, if the global target is exceeded by more than 11.5% executive KMP receive an extra STI of $20,000. The total additional STI opportunity if all executive KMP outperform is $200,000. Long term equity incentives The Board, after detailed consideration, has decided not to off er long term equity incentives (LTI) to any executive KMP. The reason for this decision is that: – Servcorp has a small number of executive KMP in many geographic locations and the cost and complexity of off ering equity to these executive KMP outweighs the beneﬁ t to shareholders, in the Board’s opinion; – Servcorp has a very strong culture, and most executive KMP are long serving employees. The Board does not consider off ering an LTI is necessary or desired for executive KMP to achieve the Company’s long term strategic objectives. Deferred short term incentives As stated above, an LTI component is not considered best practice for Servcorp. The Board, following due consideration, has however decided to introduce a deferred STI component for executive KMP. The most eff ective method to achieve this was considered to be the utilisation of the Servcorp Limited Executive Share Option Scheme (ESOS). The Board has amended the ESOS to reﬂ ect current legislation, and granted Options to certain executive. A summary of the terms of the Options are as follows: 31 March 2016 Grant date: 02 May 2016 Issue date: $7.00 per Option Exercise price: Vesting conditions: EPS performance hurdle of 15% growth in the ﬁ nancial year of issue Continuous service until 2 May 2019 02 May 2019 Two years, from vesting date to expiry date 2 May 2021 $0.9589 Vesting date: Exercise period: Expiry date: Option value: Consolidated net proﬁ t before tax ($ million) 48.84 53.72 59.09 65.00 Termination beneﬁ ts Global STI will be calculated as follows: – If consolidated net proﬁ t before tax meets the global gateway - 50% of the global STI opportunity; – If consolidated net proﬁ t before tax meets the global target - 100% of the global STI opportunity; – If consolidated net proﬁ t before tax falls between the global gateway and target - the global STI paid will be calculated as a percentage between 50% and 100% of global STI opportunity on an incremental basis, in the same proportion as the net proﬁ t before tax is to gateway and target. Region STI will only be paid if the region STI target is met. There will be no gateway. There are no employment agreements in place for executive KMP. Any termination beneﬁ t paid to executive KMP would be limited to 12 months remuneration as required by law and in most cases would be determined based on statutory minimum requirements, years of service and the nature of the termination. Clawback Servcorp has no policy on clawback but will ensure compliance with any legal or ASX requirements in this regard. There have been no circumstances where clawback would have applied. Minimum shareholding requirements Servcorp does not have a minimum shareholding requirement for executive KMP. It is noted that the majority of executive KMP are shareholders of the Company. Runway to the World 51 Runway to the world 51 R E M U N E R AT I O N R E P O R T EXECUTIVE REMUNERATION (CONTINUED) Relationship between Consolidated Entity performance and executive KMP remuneration The relationship between Consolidated Entity performance and executive KMP remuneration is important to ensure that there is a clear and appropriate correlation and alignment of interests between shareholders and executive KMP. Key ﬁ nancial indicators Servcorp’s principal activities and ﬁ nancial performance are explained in detail in the Review of Operations section of the Directors' Report on pages 40 to 44. A summary of Servcorp’s ﬁ nancial performance over the last ﬁ ve years is provided in the following table. MEASURE Total revenue ($million) Net proﬁ t before tax ($million) Net proﬁ t after tax ($million) Basic earnings per share (cents) Dividend per share (cents) Share price as at 30 June ($) Offi ces Number of locations 2012 201 18.3 14.8 15.0 15.0 $2.65 3,645 110 FINANCIAL YEAR ENDED 30 JUNE 2013 208 27.6 21.3 21.6 15.0 $3.21 3,837 117 2014 242 34.3 26.3 26.8 20.0 2015 277 41.2 33.1 33.7 22.0 $4.80 $5.84 4,275 4,920 122 131 2016 329 48.8 39.7 40.4 22.0 $6.91 5,397 134 As previously reported, Servcorp began an aggressive expansion program in October 2009 to expand the Servcorp footprint globally. 98 new ﬂ oors representing 3,345 offi ces have opened between July 2009 and June 2016. The large number of immature ﬂ oors as a consequence of the expansion program had a material negative impact on proﬁ tability from the 2010 ﬁ nancial year through to the 2012 ﬁ nancial year. Recovery of proﬁ tability commenced in the 2012 ﬁ nancial year, and has continued each year into the 2016 ﬁ nancial year, showing a year on year increase from 2015 of 20% to $39.7 million. Despite the volatility of net proﬁ t after tax over the initial expansion period, dividends have increased due to the strong underlying cash ﬂ ows. Servcorp’s share price was also volatile over this period, but the Board is pleased to note the share price has shown more stability over the past 12 months and at 30 June 2016 was $6.91, up 18.32% from a year before. This represents a most pleasing total shareholder return (TSR) performance over the 2016 ﬁ nancial year. 52 Servcorp Annual Report 2016 52 52 Servcorp Annual Report 2016 R e m u n e r a t i o n R e p o r t Executive KMP remuneration in comparison to Consolidated Entity performance EMPLOYEE SHARE SCHEME AND OTHER EQUITY INCENTIVE INFORMATION With the continuing strong growth and improvement in earnings in the 2016 ﬁ nancial year, global net proﬁ t before tax targets were achieved in full. Not all individual regions met their targets. As mentioned earlier in this report, the Board introduced a deferred STI component in the 2016 ﬁ nancial year. This was achieved by issuing Options under the Servcorp Limited Executive Share Option Scheme (ESOS). The table below sets out the STI awarded to each executive KMP. One executive KMP met their individual region target and their outperform target, resulting in a payment in excess of their target opportunity. The variable pay opportunity for executive KMP paid out represents 79.0% of the maximum opportunity. The ESOS was introduced in 1999 and was ﬁ rst approved by shareholders on 19 October 1999 and subject to various amendments until November 2008. Options were last granted under the scheme on 22 September 2008, but have since lapsed. The ESOS was amended by the Board on 24 March 2016 to update it to comply with current legislation. In the current ﬁ nancial year, the Directors granted 255,000 Options under the ESOS to executive KMP. Options were issued to KMP taking into account performance and length of service, as recommended by the CEO and adopted by the Remuneration Committee and Board. Details of Options granted and on issue are provided in the Directors' Report on page 39. Other than the Options issued as detailed above, at the date of this report there are no shares, rights, options or other equity incentives held by executive KMP and subject to vesting restrictions. Future off ers under the ESOS or an alternative employee share scheme may be considered by the Board in the future. EMPLOYMENT AGREEMENTS There are no employment agreements in place for any executive KMP. Any termination beneﬁ ts provided to a Servcorp executive KMP would be determined by reference to length of service, the reason for cessation of employment, statutory requirements and generally accepted market practice relevant to the position’s seniority. In any event, termination beneﬁ ts would be restricted to no more than one times ﬁ xed remuneration. The individual 'at risk' rewards paid in the 2016 ﬁ nancial year to executive KMP and the percentage of their maximum opportunity is provided in the following table. EXECUTIVE KMP STI AWARDED $ % OF TARGET OPPORTUNITY OPTIONS AWARDED NO. Marcus Moufarrige 110,000 100% 100,000 Jennifer Goodwyn 25,000 Liane Gorman Laudy Lahdo 80,000 50,000 50% 80% 50% - 50,000 35,000 Olga Vlietstra 150,000 150% 70,000 Thomas Wallace - 0% - Servcorp has a very strong culture focussing on sales and generation of shareholder wealth. Most of the executive KMP are long-serving employees. All but two have been employed for more than 13 years and (excluding the CEO) they have on average more than 15 years’ service. All executive KMP are aware of the need to perform. Each executive is involved in the target setting for the business and accepts the challenging targets set. If our forward net proﬁ t before tax targets are met, then shareholders, in the opinion of the Board, will be satisﬁ ed with the Consolidated Entity’s performance and executive KMP will receive the maximum remuneration opportunity. If executive KMP fail to meet their targets, the ‘at risk’ component of executive KMP remuneration will be heavily discounted. In this way the alignment of Consolidated Entity performance and executive KMP remuneration will be in direct correlation and be unambiguous. Runway to the World 53 Runway to the world 53 R E M U N E R AT I O N R E P O R T NON-EXECUTIVE DIRECTORS’ REMUNERATION NAME AND TITLE YEAR SHORT TERM EMPLOYEE BENEFITS POST-EMPLOYMENT BENEFITS SALARY AND FEES $ 159,818 159,818 100,457 100,457 91,325 91,325 91,325 91,325 442,925 442,925 2016 2015 2016 2015 2016 2015 2016 2015 2016 2015 CASH PROFIT- SHARING AND BONUSES $ – – – – – – – – – – NON- MONETARY BENEFITS OTHER SHORT TERM BENEFITS SUPER BENEFITS OTHER POST- EMPLOYMENT BENEFITS $ – – – – – – – – - - $ – – – – – – – – – – $ 15,182 15,182 9,543 9,543 8,675 8,675 8,675 8,675 42,075 42,075 $ – – – – – – – – – – B Corlett Non–executive director R Holliday–Smith Non–executive director T Moufarrige Non–executive director M Vaile Non–executive director Aggregate Notes: i Directors’ and offi cers’ indemnity insurance has not been included in the above ﬁ gures since it is impractical to determine an appropriate allocation basis. 54 Servcorp Annual Report 2016 54 54 Servcorp Annual Report 2016 R e m u n e r a t i o n R e p o r t SHARE BASED PAYMENTS TERMI- NATION BENEFITS TOTAL PAYMENTS AND BENEFITS EQUITY OPTIONS & SHARES SHORT TERM INCENTIVE GRANTS LONG TERM INCENTIVE GRANTS STI PAID IN CASH STI FORFEITED STI ACCRUED AND NOT YET DUE MAXIMUM FUTURE VALUE OF VESTED STI LTI PAID IN CASH LTI FORFEITED LTI ACCRUED AND NOT YET DUE $ – – – – – – – – – – $ – – – – – – – – – – $ 175,000 175,000 110,000 110,000 100,000 100,000 100,000 100,000 484,000 484,000 % % % – – – – – – – – – – – – – – – – – – – – – – – – - – – – – – $ – – – – - – – – – – % % % – – – – - – – – – – – – – – - – – – – – – – – – - – – – – – Runway to the World 55 Runway to the world 55 R E M U N E R AT I O N R E P O R T KEY MANAGEMENT PERSONNEL REMUNERATION NAME AND TITLE NOTES YEAR SHORT TERM EMPLOYEE BENEFITS POST-EMPLOYMENT BENEFITS NON- MONETARY BENEFITS OTHER SHORT TERM BENEFITS SUPER BENEFITS OTHER POST- EMPLOYMENT BENEFITS $ $ $ SALARY AND FEES $ (iv) 2016 457,418 2015 427,768 CASH PROFIT- SHARING AND BONUSES $ – – 2016 600,000 110,000 2015 600,000 105,000 (v) 2016 418,126 25,000 2015 390,625 2016 281,877 50,000 80,000 2015 249,399 100,000 74,592 81,420 17,883 16,566 4,649 5,138 2,938 9,976 (vi) 2016 365,524 50,000 30,832 2015 353,435 100,000 29,124 (vii) 2016 556,552 150,000 37,056 2015 384,182 150,000 34,616 (viii) 2016 61,698 (ix) 2016 326,749 – – 2015 348,624 65,000 – – – 2016 3,067,944 415,000 167,950 2015 2,754,033 570,000 176,840 A G Moufarrige Chief Executive Offi cer M Moufarrige Chief Operating Offi cer J Goodwyn VP/ GM USA L Gorman GM Australia & NZ L Lahdo GM Middle East O Vlietstra GM Japan A Clowes Chief Financial Offi cer T Wallace Chief Financial Offi cer Aggregate – – – – – – – – – – – – – – – – – 28,500 28,500 57,000 57,000 5,195 4,883 27,312 24,641 30,384 29,453 – – 5,861 21,846 33,119 176,098 177,596 $ – – – – – – – – – – – – – – – – – Notes: i Amounts disclosed as short-term cash proﬁ t-sharing and bonuses in the 2016 year represent STI paid in August 2016 based on 2016 ﬁ nancial year global and region targets. ii Amounts disclosed as short-term cash proﬁ t-sharing and bonuses in the 2015 year represent STI paid in August 2015 based on 2015 ﬁ nancial year global and region targets. iii Amounts disclosed as share based payments relate to Options issued on 2 May 2016. Details are set out on page 51 of this annual report. iv The salary of A G Moufarrige includes a component paid in Yen. The increase in the 2016 year reﬂ ects the change in foreign currency exchange rate, not a change in salary in base currency terms. v The salary of J Goodwyn is paid in USD. Half of the increase in the 2016 year reﬂ ects the change in foreign currency exchange rate, and half is a change in salary in base currency terms. vi The salary of L Lahdo is paid in AED. The increase in the 2016 year reﬂ ects the change in foreign currency exchange rate, not a change in salary in base currency terms. vii The salary of O Vlietstra is paid in JPY. 60% of the increase in the 2016 year reﬂ ects the change in foreign currency exchange rate and 40% is a change in salary in base currency terms. viii A Clowes commenced employment with Servcorp eff ective 04 April 2016. ix T Wallace ceased employment with Servcorp eff ective 26 February 2016. 56 Servcorp Annual Report 2016 56 56 Servcorp Annual Report 2016 R e m u n e r a t i o n R e p o r t SHARE BASED PAYMENTS TERMI- NATION BENEFITS EQUITY OPTIONS & SHARES TOTAL PAYMENTS AND BENEFITS STI PAID IN CASH $ – – 7,828 – – – 3,914 – 2,740 – 5,479 – – – – 19,961 – $ – – – – – – – – – – – – – – – – – $ 560,510 537,688 % – – 792,711 100% 778,566 95.5% 452,970 50.0% 450,646 67.7% 396,041 80.0% 384,016 100% 479,480 50.0% 512,012 749,087 568,798 67,559 348,595 100% 150% 150% – – 446,743 100% 3,846,953 79.0% 3,678,469 94.5% SHORT TERM INCENTIVE GRANTS LONG TERM INCENTIVE GRANTS STI ACCRUED AND NOT YET DUE % – – – – – – – – – – – – – – – – – STI FORFEITED MAXIMUM FUTURE VALUE OF VESTED STI LTI PAID IN CASH LTI ACCRUED AND NOT YET DUE LTI FORFEITED % – – – 4.5% 50.0% 33.3% 20.0% – 50.0% – – – – 100% – 21.0% 5.5% $ – – – – – – – – – – – – – – – – – % % % – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – Runway to the World 57 Runway to the world 57 A U D I T O R ’ S I N D E P E N D E N C E D E C L A R AT I O N Deloitte Touche Tohmatsu ABN 74 490 121 060 Grosvenor Place 225 George Street Sydney NSW 2000 PO Box N250 Grosvenor Place Sydney NSW 1220 Australia DX: 10307SSE Tel: +61 (0) 2 9322 7000 Fax: +61 (0) 2 9322 7021 www.deloitte.com.au The Board of Directors Servcorp Limited Level 63, MLC Centre Martin Place SYDNEY NSW 2000 17 August 2016 Dear Board Members Servcorp Limited In accordance with section 307C of the Corporations Act 2001, I am pleased to provide the following declaration of independence to the directors of Servcorp Limited. As lead audit partner for the audit of the financial statements of Servcorp Limited for the financial year ended 30 June 2016, 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 Stephen Gustafson Partner Chartered Accountants Liability limited by a scheme approved under Professional Standards Legislation. Member of Deloitte Touche Tohmatsu Limited. 58 Servcorp Annual Report 2016 58 58 Servcorp Annual Report 2016 F I NA N C I A L R E P O R T C o n t e n t s F i n a n c i a l R e p o r t 60 S TAT E M E N T O F CO M P R E H E N S I V E I N CO M E 61 S TAT E M E N T O F F I N A N C I A L P O S I T I O N 62 S TAT E M E N T O F C H A N G E S I N EQ U I T Y 63 S TAT E M E N T O F C A S H F LOWS 64 N OT E S TO T H E CO N S O L I DAT E D F I N A N C I A L R E P O RT 96 D I R EC TO R S ' D EC L A R AT I O N Runway to the World 59 Runway to the world 59 Statement of comprehensive income Servcorp Limited and its controlled entities for the ﬁ nancial year ended 30 June 2016 Revenue Other income Service expenses Marketing expenses Occupancy expenses Rent - ﬁ xed annual impact Administrative expenses Share of losses of joint venture Borrowing expenses Total expenses Proﬁ t before income tax expense Income tax expense Proﬁ t for the year OTHER COMPREHENSIVE INCOME Translation of foreign operations (item may be reclassiﬁ ed subsequently to proﬁ t or loss) Other comprehensive income for the period (net of tax) Total comprehensive income for the period EARNINGS PER SHARE Basic earnings per share Diluted earnings per share 2016 $’000 321,966 6,635 328,601 (79,439) (18,721) (154,579) (1,391) (25,340) (169) (122) CONSOLIDATED 2015 $’000 269,157 8,221 277,378 (68,760) (16,354) (122,807) (2,268) (25,569) (245) (164) (279,761) (236,167) 48,840 (9,118) 39,722 1,033 1,033 41,211 (8,070) 33,141 13,312 13,312 40,755 46,453 $0.40 $0.40 $0.34 $0.34 NOTE 2 2 2 2 5 8 8 The Statement of comprehensive income is to be read in conjunction with the notes to the Consolidated ﬁ nancial report. 60 Servcorp Annual Report 2016 60 60 Servcorp Annual Report 2016 Statement of ﬁ nancial position Servcorp Limited and its controlled entities as at 30 June 2016 F i n a n c i a l R e p o r t CURRENT ASSETS Cash and cash equivalents Trade and other receivables Other ﬁ nancial assets Current tax assets Other Total current assets NON-CURRENT ASSETS Other ﬁ nancial assets Property, plant and equipment Deferred tax assets Goodwill Total non-current assets Total assets CURRENT LIABILITIES Trade and other payables Other ﬁ nancial liabilities Current tax liabilities Provisions Total current liabilities NON-CURRENT LIABILITIES Trade and other payables Other ﬁ nancial liabilities Provisions Deferred tax liabilities Total non-current liabilities Total liabilities Net assets EQUITY Issued capital Reserves Retained earnings Equity attributable to equity holders of the parent Total equity NOTE 9 10 11 5 12 11 13 5 14 15 16 5 18 15 16 18 5 19 2016 $’000 95,849 40,264 19,341 - 15,162 170,616 39,874 132,018 35,231 14,805 221,928 392,544 55,331 33,563 8,001 6,664 103,559 21,715 4,372 691 1,187 27,965 131,524 261,020 154,122 (1,422) 108,320 261,020 261,020 CONSOLIDATED 2015 $’000 97,837 39,159 17,764 272 16,666 171,698 28,732 125,805 30,149 14,805 199,491 371,189 50,147 32,518 6,903 5,691 95,259 24,279 7,710 690 1,353 34,032 129,291 241,898 154,122 (2,478) 90,254 241,898 241,898 The Statement of ﬁ nancial position is to be read in conjunction with the notes to the Consolidated ﬁ nancial report. Runway to the World 61 Runway to the world 61 Statement of changes in equity Servcorp Limited and its controlled entities for the ﬁ nancial year ended 30 June 2016 Balance at 1 July 2014 Proﬁ t for the period Translation of foreign operations (net of tax) Total comprehensive gain for the period Payment of dividends Balance at 30 June 2015 Balance at 1 July 2015 Proﬁ t for the period Translation of foreign operations (net of tax) Total comprehensive gain for the period Share based payment Payment of dividends Balance at 30 June 2016 ISSUED CAPITAL FOREIGN CURRENCY TRANSLATION RESERVE $’000 154,122 - - - - $’000 (15,789) - 13,312 13,312 - 154,122 (2,477) 154,122 (2,477) - - - - - - 1,033 1,033 - - 154,122 (1,444) EMPLOYEE EQUITY SETTLED BENEFITS RESERVE $’000 - - - - - - - - - - 22 - 22 RETAINED EARNINGS TOTAL $’000 78,768 33,141 - 33,141 (21,656) 90,253 90,253 39,722 - 39,722 - (21,655) 108,320 $’000 217,101 33,141 13,312 46,453 (21,656) 241,898 241,898 39,722 1,033 40,755 22 (21,655) 261,020 The Statement of changes in equity is to be read in conjunction with the notes to the Consolidated ﬁ nancial report. 62 Servcorp Annual Report 2016 62 62 Servcorp Annual Report 2016 Statement of cash ﬂ ows Servcorp Limited and its controlled entities for the ﬁ nancial year ended 30 June 2016 F i n a n c i a l R e p o r t CASH FLOWS FROM OPERATING ACTIVITIES Receipts from customers Payments to suppliers and employees Franchise fees received Income tax paid Interest and other items of similar nature received Interest and other costs of ﬁ nance paid Net operating cash ﬂ ows CASH FLOWS FROM INVESTING ACTIVITIES Payments for variable rate bonds Payments for property, plant and equipment Payments for lease deposits Proceeds from sale of property, plant and equipment Proceeds from sale of ﬁ xed rate securities Proceeds from refund of lease deposits Net investing cash ﬂ ows CASH FLOWS FROM FINANCING ACTIVITIES Dividends paid Borrowings Landlord capital incentives received Net ﬁ nancing cash ﬂ ows CONSOLIDATED 2016 $’000 2015 $’000 NOTE 25(b) 339,516 (270,417) 619 (12,289) 3,268 (122) 60,575 (2,420) (27,559) (7,367) 128 - 155 289,016 (225,200) 442 (7,995) 3,829 (164) 59,928 (3,033) (39,768) (2,508) 1 1,559 1,167 (37,063) (42,582) (21,655) (6,687) 618 (27,724) (21,656) 3,829 1,955 (15,872) Net (decrease)/increase in cash and cash equivalents (4,212) 1,474 Cash and cash equivalents at the beginning of the ﬁ nancial year Eff ects of exchange rate changes on cash transactions in foreign currencies Cash and cash equivalents at the end of the ﬁ nancial year 25(a) 97,837 2,224 95,849 92,482 3,881 97,837 The Statement of cash ﬂ ows is to be read in conjunction with the notes to the Consolidated ﬁ nancial report. Runway to the World 63 Runway to the world 63 Notes to the Consolidated ﬁ nancial report for the ﬁ nancial year ended 30 June 2016 F i n a n c i a l R e p o r t Contents of the notes to the Consolidated ﬁ nancial report NOTE 1. Signiﬁ cant accounting policies NOTE 2. Proﬁ t from operations NOTE 3. Signiﬁ cant transactions NOTE 4. Remuneration of auditors NOTE 5. Income taxes NOTE 6. Dividends NOTE 7. Segment information NOTE 8. Earnings per share NOTE 9. Cash and cash equivalents NOTE 10. Trade and other receivables NOTE 11. Other ﬁ nancial assets NOTE 12. Other assets NOTE 13. Property, plant and equipment NOTE 14. Goodwill NOTE 15. Trade and other payables NOTE 16. Other ﬁ nancial liabilities NOTE 17. Financing arrangements NOTE 18. Provisions NOTE 19. Issued capital NOTE 20. Financial instruments NOTE 21. Employee beneﬁ ts NOTE 22. Commitments for expenditure NOTE 23. Subsidiaries NOTE 24. Joint venture NOTE 25. Notes to Statement of cash ﬂ ows NOTE 26. Related party disclosures NOTE 27. Parent entity disclosures NOTE 28. Subsequent events 64 Servcorp Annual Report 2016 64 64 Servcorp Annual Report 2016 65 72 73 73 74 76 77 78 78 78 79 79 80 81 81 82 82 83 83 83 89 89 90 91 92 93 95 95 Notes to the Consolidated ﬁ nancial report for the ﬁ nancial year ended 30 June 2016 F i n a n c i a l R e p o r t The Directors are currently in the process of assessing the future period impact of AASB 15 ‘Revenue from Contracts with Customers’ and AASB 16 'Leases' on the ﬁ nancial statements. The remaining Standards and Interpretations on issue not yet eff ective may have a material impact on the ﬁ nancial statements of the entity. a. Basis of consolidation The consolidated ﬁ nancial statements incorporate the ﬁ nancial statements of the Company and entities controlled by the Company (its subsidiaries). Control is achieved when the Company has the power, rights to variable returns and the ability to use its power to aff ect the amount of the returns. Consistent accounting policies are employed in the preparation and presentation of the Consolidated ﬁ nancial statements. On acquisition, the assets, liabilities and contingent liabilities of a subsidiary are measured at their fair values at the date of acquisition. Any excess in the cost of acquisition over the fair value of the identiﬁ able net assets acquired is recognised as goodwill. If, after reassessment, the fair value of the identiﬁ able net assets acquired exceeds the cost of acquisition, the diff erence is credited to the Statement of comprehensive income in the period of acquisition. The consolidated ﬁ nancial statements include the information and results of each subsidiary from the date on which the Company obtains control, and until such time as the Company ceases to control an entity. In preparing the consolidated ﬁ nancial statements, all intercompany balances and transactions, and unrealised proﬁ ts arising within the Consolidated Entity are eliminated in full. 1. SIGNIFICANT ACCOUNTING POLICIES Statement of compliance The ﬁ nancial report is a general purpose ﬁ nancial report which has been prepared in accordance with the Corporations Act 2001, Accounting Standards and Interpretations, and complies with other requirements of the law. The ﬁ nancial report comprises the Consolidated ﬁ nancial statements of Servcorp Limited ('the Company') and its controlled entities ('Consolidated Entity’). For the purposes of preparing the consolidated ﬁ nancial statements, the Company is a for-proﬁ t entity. Accounting Standards include Australian equivalents to International Financial Reporting Standards (‘A-IFRS’). Compliance with A-IFRS ensures that the ﬁ nancial statements and notes of the Group comply with International Financial Reporting Standards (‘IFRS’). The ﬁ nancial statements were authorised for issue by the directors on 17 August 2016. Basis of preparation The ﬁ nancial report has been prepared on the basis of historical cost, except for ﬁ nancial instruments that are measured at their fair value as explained below. Cost is based on the fair value of the consideration given in exchange for assets. All amounts are presented in Australian dollars, unless otherwise noted. The Company is a company of the kind referred to in ASIC Class Order 98/0100, dated 10 July 1998, and in accordance with that Class Order, amounts in the ﬁ nancial report are rounded off to the nearest thousand dollars, unless otherwise indicated. Adoption of new and revised Accounting Standards In the current year, the Consolidated Entity has adopted all of the new and revised Standards and Interpretations issued by the Australian Accounting Standards Board (AASB) that are relevant to its operations and eff ective for the current annual reporting period. The adoption of these new accounting standards did not have any material impact. At the date of authorisation of the ﬁ nancial report, the following Standards and Interpretations relevant to the Consolidated Entity were on issue but not yet eff ective: – AASB 9 'Financial Instruments'. Eff ective for annual reporting periods beginning 1 January 2018. – AASB 15 ‘Revenue from Contracts with Customers’. Eff ective for annual reporting periods beginning 1 January 2018. – AASB 16 ‘Leases’. Eff ective for annual reporting periods beginning 1 January 2019. Runway to the World 65 Runway to the world 65 Notes to the Consolidated ﬁ nancial report for the ﬁ nancial year ended 30 June 2016 F i n a n c i a l R e p o r t d. Revenue recognition Services revenue Services revenue comprises revenue earned net of the amount of goods and services tax from the provision of services to entities outside the Consolidated Entity. Rental, telephone and services revenue are typically invoiced in advance and are recognised in the period in which the services are provided. e. Other income / expense Interest income Interest income is accrued on a time basis, by reference to the principal outstanding and at the eff ective interest rate applicable. Disposal of assets The proﬁ t and loss on disposal of assets is brought to account when the signiﬁ cant risks and rewards of ownership are passed to a party external to the Consolidated Entity. f. Foreign currency Transactions Foreign currency transactions are translated to Australian currency at the rates of exchange ruling at the dates of the transactions. Amounts receivable and payable in foreign currencies at balance date are translated at the rates of exchange ruling on that date. Foreign currency monetary items at reporting date are translated at the exchange rates existing at reporting date. Non-monetary assets and liabilities carried at fair value that are denominated in foreign currencies are translated at the rates prevailing at the date when the fair value was determined. Non- monetary items that are measured in terms of historical cost in a foreign currency are not re-translated. Exchange diff erences are recognised in proﬁ t and loss in the period in which they arise except exchange diff erences on monetary items receivable from or payable to a foreign operation for which settlement is neither planned or likely to occur, which form part of the net investment in a foreign operation. Such exchange diff erences are recognised in the foreign currency translation reserve and in the proﬁ t and loss on disposal of the net investment. 1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) b. Goodwill Goodwill arising on acquisition is recognised as an asset and initially recognised at cost, representing the excess of the cost of acquisition over the net fair value of the identiﬁ able assets, liabilities and contingent liabilities acquired. Goodwill is not amortised, but is tested for impairment at each reporting date and whenever there is an indication that goodwill may be impaired. Any impairment of goodwill is recognised immediately in the Statement of comprehensive income and is not subsequently reversed. For the purpose of impairment testing, goodwill is allocated to each of the Consolidated Entity’s cash-generating units (CGUs), or groups of CGUs, expected to beneﬁ t from the synergies of the business combination. CGUs (or groups of CGUs) to which goodwill has been allocated are tested for impairment annually, or more frequently if events or changes in circumstances indicate that goodwill might be impaired. If the recoverable amount of the CGU (or group of CGUs) is less than the carrying amount of the CGU, the impairment loss is allocated to reduce the carrying amount of any goodwill allocated to the CGU (or group of CGUs) and then to the other assets of the CGUs pro-rata on the basis of the carrying amount of each asset in the CGU (or group of CGUs). An impairment loss for goodwill is immediately recognised in proﬁ t or loss and is not reversed in a subsequent period. On disposal of an operation within a CGU, the attributable amount of goodwill is included in the determination of the proﬁ t or loss on disposal of the operation. c. Impairment of tangible and intangible assets excluding goodwill At each reporting date, the Consolidated Entity reviews the carrying values of its tangible and intangible assets, to determine whether there is any indication that those assets have suff ered an impairment loss. If any such indication exists the recoverable amount of the asset is estimated in order to determine the extent of the impairment loss (if any). Where the asset does not generate cash ﬂ ows that are independent from other assets, the Consolidated Entity estimates the recoverable amount of the cash-generating unit to which the asset belongs. Intangible assets with indeﬁ nite useful lives and intangible assets not yet available for use are tested for impairment at each reporting date and whenever there is an indication that the asset may be impaired. The recoverable amount is the higher of fair value less costs to sell and value in use. In assessing the value in use, the estimated future cash ﬂ ows are discounted to their present value by using a pre-tax discount rate that reﬂ ects the time value of money and the risks speciﬁ c to the asset for which the estimates of future cash ﬂ ows have not been adjusted. If the recoverable amount of an asset (or CGU) is estimated to be less than its carrying amount, the carrying amount of the asset (or CGU) is reduced to its recoverable amount. Where an impairment loss subsequently reverses, the carrying amount of the asset (or CGU) is increased to the revised estimate of its recoverable amount, but only to the extent that the increased carrying amount does not exceed the carrying amount that would have been determined had no impairment loss been recognised for the asset (or CGU) in prior years. A reversal of the impairment loss is recognised in the Statement of comprehensive income immediately. 66 Servcorp Annual Report 2016 66 66 Servcorp Annual Report 2016 Notes to the Consolidated ﬁ nancial report for the ﬁ nancial year ended 30 June 2016 F i n a n c i a l R e p o r t Deferred tax liabilities are recognised for taxable temporary diff erences arising on investments in subsidiaries, branches and associates except where the Consolidated Entity is able to control the reversal of the temporary diff erences and it is probable that the temporary diff erences will not reverse in the foreseeable future. Deferred tax assets arising from deductible temporary diff erences associated with these investments are only recognised to the extent that it is probable that there will be suffi cient taxable proﬁ ts against which to utilise beneﬁ ts of the temporary diff erences and they are expected to reverse in the foreseeable future. Deferred tax assets and liabilities are measured at the tax rates that are expected to apply in the period when the assets and liabilities giving rise to them are realised or settled, based on tax rates and tax laws that have been enacted or substantially enacted by the reporting date. The measurement of deferred tax liabilities and assets reﬂ ects the tax consequences that would follow from the manner in which the Consolidated Entity expects, at the reporting date, to recover or settle the carrying amount of its assets and liabilities. Deferred tax assets and liabilities are off set when they relate to income taxes levied by the same taxation authority and the Consolidated Entity intends to settle its current tax assets and liabilities on a net basis. Current and deferred tax for the period Current and deferred tax is recognised as an expense or income in the Statement of comprehensive income, except when it relates to items credited or debited directly to equity, in which case the deferred tax is also recognised in equity. 1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) f. Foreign currency (continued) Translation of controlled foreign entities The individual ﬁ nancial statements of each controlled foreign entity are presented in its functional currency, being the currency of the primary economic environment in which the entity operates. For the purpose of the Consolidated ﬁ nancial statements, the results and ﬁ nancial position of each entity are expressed in Australian dollars, which is the functional currency of the Company and the presentation currency for the Consolidated ﬁ nancial statements. The assets and liabilities of overseas operations are translated at the rates of exchange ruling at the balance sheet date. Income and expense items are translated at the average exchange rate for the period. Exchange diff erences arising on translation are taken directly to the foreign currency translation reserve. The balance of the foreign currency translation reserve relating to an overseas operation that is disposed of is recognised in the proﬁ t and loss in the period of disposal. Goodwill and fair value adjustments arising on the acquisition of a foreign entity on or after the date of transition to A-IFRS are treated as assets and liabilities of the foreign entity and translated at exchange rates prevailing at the reporting date. Goodwill arising on acquisitions before the date of transition to A-IFRS is treated as an Australian dollar denominated asset. g. Borrowing costs Borrowing costs include interest, amortisation of discounts or premiums relating to borrowings, and amortisation of ancillary costs using the eff ective interest rate method in connection with the arrangement of borrowings. Borrowing costs are expensed to the Statement of comprehensive income as incurred. h. Taxation Current tax Current tax is calculated by reference to the amount of income tax payable or recoverable in respect of the taxable proﬁ t or loss for the period. Income tax is calculated using tax rates and tax laws that have been enacted or substantively enacted by the reporting date. Current tax for current and prior periods is recognised as a liability or asset to the extent that it is unpaid or refundable. Deferred tax Deferred tax is accounted for using the comprehensive balance sheet liability method in respect of temporary diff erences arising from diff erences between the carrying amount of assets and liabilities in the ﬁ nancial statements and the corresponding tax base of those items. In principle, deferred tax liabilities are recognised for all taxable temporary diff erences. Deferred tax assets are recognised to the extent that it is probable that suffi cient taxable amounts will be available against which deductible temporary diff erences or unused tax losses and tax off sets can be utilised. However, deferred tax assets and liabilities are not recognised if the temporary diff erences giving rise to them arises from the initial recognition of assets and liabilities, other than as a result of a business combination, which aff ects neither taxable income nor accounting proﬁ t. Furthermore, a deferred tax liability is not recognised in relation to taxable temporary diff erences arising from goodwill. Runway to the World 67 Runway to the world 67 Notes to the Consolidated ﬁ nancial report for the ﬁ nancial year ended 30 June 2016 F i n a n c i a l R e p o r t 1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) h. Taxation (continued) Tax consolidation The Company and all its wholly-owned Australian resident entities are part of a tax consolidated group under Australian taxation law. Servcorp Limited is the head entity in the tax consolidated group. Tax expense/ income, deferred tax liabilities and deferred tax assets arising from temporary diff erences of the members of the tax consolidated group are recognised in the separate ﬁ nancial statements of the members of the tax consolidated group using the ‘separate tax payer within group’ approach. Current tax liabilities and assets and deferred tax assets arising from unused tax losses and tax credits of the members of the tax consolidated group are recognised by the Company. Under this method, each entity is subject to tax as part of the tax consolidated group. Due to the existence of a tax funding arrangement between entities in the tax consolidated group, amounts are recognised as payable to or receivable by the Company, and each member of the tax consolidated group in relation to the tax contribution amounts paid or payable between the parent entity, and the other members of the tax consolidated group in accordance with the arrangement. Where the tax contribution amount recognised by each member of the tax consolidated group for a particular period is diff erent to the aggregate of the current tax liability or asset and any deferred tax asset arising from unused tax losses and tax credits in respect of that period, the diff erence is recognised as a contribution from (or distribution to) equity participants. Goods and services tax Revenues, expenses and assets are recognised net of the amount of goods and services tax (GST), except where the amount of GST incurred is not recoverable from the Australian Tax Offi ce (ATO). In these circumstances the GST is recognised as part of the cost of acquisition of the asset or as part of an item of expense. Receivables and payables are stated inclusive of GST. The net amount of GST recoverable from or payable to the ATO is included as a current asset or liability in the Statement of ﬁ nancial position. Cash ﬂ ows are included in the Statement of cash ﬂ ows on a gross basis. The GST components of cash ﬂ ows arising from investing and ﬁ nancing activities which are recoverable from or payable to the ATO are classiﬁ ed as operating cash ﬂ ows. i. Receivables Trade debtors to be settled within 30 days are carried at amounts due. The collectability of debts is assessed at balance sheet date and a speciﬁ c allowance is made for any doubtful amounts. j. Derivative ﬁ nancial instruments The Consolidated Entity enters into derivative ﬁ nancial instruments to manage its exposure to ﬂ uctuations in foreign exchange rates. Further details of derivative ﬁ nancial instruments are disclosed in Note 20 to the Consolidated ﬁ nancial report. Derivatives are initially recognised at fair value on the date a derivative contract is entered into and are subsequently remeasured to their fair value at each reporting date. The resulting gain or loss is recognised immediately in the proﬁ t or loss. k. Share based payments The Board may grant options to eligible executives in accordance with the Servcorp Executive Share Option Scheme. These equity-settled-share-based payments are non-market based and have earnings per share performance hurdles for the vesting of options. Equity-settled share-based payments with employees are measured at the fair value of the equity instrument at the grant date. Fair value is measured by use of a Binomial Tree model. The expected life used in the model has been adjusted, based on management’s best estimate for the eff ects of non-transferability, exercise restrictions, and behavioural considerations. The fair value determined at the grant date of the equity-settled share-based payments is expensed on a straight line basis over the vesting period, based on the Company's estimate of equity instruments that will eventually vest. At each reporting date, the Company revises its estimate of the number of equity instruments that are expected to vest. The impact of the revision of the original estimates, if any, is recognised in proﬁ t or loss, with a corresponding adjustment to the equity-settled employee beneﬁ ts reserve. l. Financial assets Subsequent to initial recognition, the Company’s investments in subsidiaries are measured at cost. The classiﬁ cation of ﬁ nancial assets depends on the nature and purpose of the ﬁ nancial assets and is determined at the time of initial recognition. Financial assets at fair value through proﬁ t or loss are stated at fair value, with any gains or losses arising on remeasurement recognised in proﬁ t or loss. The net gain or loss recognised in proﬁ t or loss incorporates any dividend or interest earned on the ﬁ nancial asset. Fair value is determined in the manner described in Note 20e. Other ﬁ nancial assets are classiﬁ ed into the following speciﬁ ed categories: Loans and receivables Trade receivables, loans and other receivables that have ﬁ xed or determinable payments that are not quoted in an active market are classiﬁ ed as ‘Loans and receivables’. Loans and receivables are measured at amortised cost using the eff ective interest method less impairment. 68 Servcorp Annual Report 2016 68 68 Servcorp Annual Report 2016 Notes to the Consolidated ﬁ nancial report for the ﬁ nancial year ended 30 June 2016 F i n a n c i a l R e p o r t 1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) l. Financial assets (continued) Impairment of ﬁ nancial assets Financial assets are assessed for indicators of impairment at each balance sheet date. Financial assets are impaired where there is objective evidence that, as a result of one or more events that occurred after the initial recognition of the ﬁ nancial asset, the estimated future cash ﬂ ow of the investment have been impacted. Eff ective interest method The eff ective interest method is a method of calculating the amortised cost of a ﬁ nancial asset and of allocating interest income over the relevant period. The eff ective interest rate is the rate that will exactly discount estimated future cash receipts (including all fees paid or received that form an integral part of the eff ective interest rate, transaction costs and other premiums or discounts) through the expected life of the ﬁ nancial asset or, where appropriate, a shorter period. m. Property, plant and equipment Acquisition Items of property, plant and equipment acquired are capitalisedwhen it is probable that the future economic beneﬁ ts associated with the item will ﬂ ow to the entity and the cost can be measured reliably. Where these costs represent separate components of a complex asset, they are accounted for as separate assets and are separately depreciated over their useful lives. Rent incurred in bringing ﬂ oors to a state of operational readiness is capitalised to leasehold improvements and depreciated over the useful life of the asset. Costs incurred on property, plant and equipment, which does not meet the criteria for capitalisation are expensed as incurred. n. Leased assets Finance leases Leased plant and equipment Leases of plant and equipment under which the Company or its controlled entities assume substantially all the risks and beneﬁ ts of ownership are classiﬁ ed as ﬁ nance leases. Other leases are classiﬁ ed as operating leases. Lease payments are apportioned between ﬁ nance charges and reduction of the lease obligation so as to achieve a constant rate of interest on the remaining balance of the liability. Lease liabilities are reduced by repayments of principal. The interest components of the lease payments are charged to the Statement of comprehensive income. Operating leases Operating lease payments are recognised as an expense on a straight line basis over the lease term, except where another systematic basis is more representative of the time pattern in which economic beneﬁ ts from the leased asset are consumed. Lease incentives Floor rental is expensed on a straight line basis over the period of the lease term in accordance with lease agreements entered into with landlords. Where a rent free period or other lease incentives exist under the terms of a lease agreement, the aggregate rent payable over the lease term is calculated and a charge is made to the proﬁ t and loss on a straight line basis over the term of the lease. In the event that lease incentives are received to enter into operating leases, such incentives are recognised as a liability. The aggregate beneﬁ t of incentives is recognised as a reduction of rental expense on a straight-line basis. Property, plant and equipment, leasehold improvements and equipment under ﬁ nance lease are stated at cost less accumulated depreciation, less impairment losses. Cost includes expenditure that is directly attributable to the acquisition of the item. o. Payables Liabilities are recognised for amounts payable in the future for goods or services received, whether or not billed to the Consolidated Entity. Trade accounts payable are normally settled within 60 days. Depreciation Items of property, plant and equipment, including buildings and leasehold property but excluding freehold land, are depreciated using the straight line method over their estimated useful lives. Leasehold improvements are depreciated over the useful life of the asset using the straight line method. p. Borrowing costs Borrowings are recorded initially at fair value, net of transaction costs. Any diff erence between the initial recognised amount and the redemption value is recognised in the Statement of comprehensive income over the life of the borrowings using the eff ective interest rate method. The estimated useful lives used for each class of asset are as follows: Buildings Leasehold improvements Offi ce furniture and ﬁ ttings Offi ce equipment Software Motor vehicles 40 years Useful life of the asset 7.7 years 3-4 years 3.7 years 6.7 years Depreciation rates and methods are reviewed annually and, where changed, are accounted for as a change in accounting estimate. Where depreciation rates or methods are changed, the net written down value of the asset is depreciated from the date of the change in accordance with the new depreciation rate or method. Assets are depreciated from the date of acquisition from the time an asset is completed and ready for use. Runway to the World 69 Runway to the world 69 Notes to the Consolidated ﬁ nancial report for the ﬁ nancial year ended 30 June 2016 F i n a n c i a l R e p o r t 1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) q. Employee beneﬁ ts Wages, salaries and annual leave The provision for employee beneﬁ ts in respect of wages, salaries and annual leave represents the amount which the Consolidated Entity has a present obligation to pay resulting from employees’ services provided up to the reporting date. Provisions made in respect of employee beneﬁ ts expected to be settled within twelve months, are measured at their nominal values using the remuneration rate expected to apply at the time of settlement. Long service leave The provision for employee beneﬁ ts in respect of long service leave represents the present value of the estimated future cash outﬂ ows to be made by the Consolidated Entity resulting from employees’ services provided up to the reporting date. Provisions for employee beneﬁ ts which are not expected to be settled within twelve months are discounted using the rates attaching to national government securities at the reporting date which most closely match the terms of maturity of the related liabilities. In determining the provision for employee beneﬁ ts, consideration has been given to future increases in wage and salary rates, and the Consolidated Entity’s experience with staff departures. Related on-costs have also been included in the liability. Contributions to Australian superannuation funds The Company and other Australian controlled entities contribute to deﬁ ned contribution superannuation plans. Contributions are charged to the Statement of comprehensive income as they are incurred. Further information is set out in Note 21. r. Earnings per share (EPS) Basic earnings per share Basic EPS is calculated by dividing the net proﬁ t attributable to members of the Consolidated Entity for the reporting period by the weighted average number of ordinary shares of the Company. Diluted earnings per share Diluted EPS is calculated by adjusting the basic EPS earnings by the eff ect of conversion to ordinary shares of the associated dilutive potential ordinary shares. The notional earnings on the funds that would have been received by the entity had the potential ordinary shares been converted are not included. The diluted EPS weighted average number of shares includes the number of shares assumed to be issued for no consideration in relation to dilutive potential ordinary shares. The identiﬁ cation of dilutive potential ordinary shares is based on net proﬁ t or loss from continuing ordinary operations and is applied on a cumulative basis, taking into account the incremental earnings and incremental number of shares for each series of potential ordinary shares. s. Debt and equity instruments Debt and equity instruments are classiﬁ ed as either liabilities or as equity in accordance with the substance of the contractual arrangement. t. Cash and cash equivalents Cash comprises cash on hand and demand deposits. Cash equivalents are short term, highly liquid investments that are readily convertible to known amounts of cash, which are subject to an insigniﬁ cant risk of changes in value and have a maturity of six months or less. u. Critical accounting issues In the application of the Consolidated Entity’s accounting policies, management is required to make judgments, estimates and assumptions about carrying values of assets and liabilities that are not readily apparent from other sources. The estimates and associated assumptions are based on historical experience and various other factors that are believed to be reasonable under the circumstances, the results of which form the basis of making the judgments. Actual results may diff er from these estimates. These estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognised in the period in which the estimate is revised if the revision aff ects only that period, or in the period of the revision and future periods if the revision aff ects both current and future periods. The following are the critical judgments that management has made in the process of applying the Consolidated Entity’s accounting policies and that have the most signiﬁ cant eff ect on the amounts recognised in the ﬁ nancial statements: Impairment of goodwill Determining whether goodwill is impaired requires an estimation of the value in use of the cash-generating units to which goodwill has been allocated. The value in use calculation requires the entity to estimate the future cash ﬂ ows expected to arise from the cash-generating unit and a suitable discount rate in order to calculate present value. Further information on goodwill impairment is set out in Note 14. Useful lives of property, plant and equipment As described in Note 1m, the Consolidated Entity reviews the estimated useful lives of property, plant and equipment at each reporting period. Make good provisions At each reporting date, management reviews leases that are expected to terminate to determine the present obligation in relation to ﬂ oor closure costs including make good, which is set out in Note 3. Tax losses Deferred tax assets for the carry forward of unused tax losses are recognised to the extent that it is probable that future taxable proﬁ ts will be available against which the unused tax losses and unused tax credits can be utilised. This is assessed at each reporting date. Further information is set out in Note 5. 70 Servcorp Annual Report 2016 70 70 Servcorp Annual Report 2016 Notes to the Consolidated ﬁ nancial report for the ﬁ nancial year ended 30 June 2016 F i n a n c i a l R e p o r t 1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) v. Investment in joint venture A joint venture is a joint arrangement whereby the parties that have joint control of the arrangement have rights to the net assets of the joint arrangement. Joint control is the contractually agreed sharing of control of an arrangement, which exists only when decisions about the relevant activities require unanimous consent of the parties sharing control. The results and assets and liabilities of a joint venture is incorporated in these consolidated ﬁ nancial statements using the equity method of accounting. Under the equity method, an investment in a joint venture is initially recognised in the consolidated Statement of ﬁ nancial position at cost and adjusted thereafter to recognise the Consolidated Entity’s share of proﬁ t or loss and other comprehensive income of the joint venture. An investment in a joint venture is accounted for using the equity method of accounting from the date on which the investee becomes a joint venture. The requirements of AASB139 ‘Financial Instruments: Recognition and Measurement’ are applied to determine whether it is necessary to recognise any impairment loss with respect to the Consolidated Entity’s investment in a joint venture. When necessary, the entire carrying amount of the investment is tested for impairment in accordance with AASB136 ‘Impairment of Assets’ as a single asset by comparing its recoverable amount (higher of value in use and fair value less costs to sell) with its carrying amount. Any impairment loss recognised forms part of the carrying amount of the investment. Any reversal of that impairment loss is recognised in accordance with AASB136 to the extent that the recoverable amount of the investment substantially increases. Runway to the World 71 Runway to the world 71 Notes to the Consolidated ﬁ nancial report for the ﬁ nancial year ended 30 June 2016 F i n a n c i a l R e p o r t 2. PROFIT FROM OPERATIONS A. REVENUE Revenue from continuing operations consisted of the following: Revenue from the rendering of services Franchise fee income B. OTHER INCOME Interest income - bank deposits Net foreign exchange gain Other income Total other income C. EXPENSES Rent - ﬁ xed annual impact (i) D. PROFIT BEFORE INCOME TAX Proﬁ t before income tax was arrived at after charging/ (crediting) the following from/ (to) continuing operations: Interest on bank overdrafts and loans Depreciation of leasehold improvements Depreciation of property, plant and equipment Gain/ (loss) on disposal of property, plant and equipment Change in fair value of ﬁ nancial assets classiﬁ ed as fair value through the proﬁ t and loss Bad debts written off Operating lease payments Notes: 2016 $’000 CONSOLIDATED 2015 $’000 321,347 619 321,966 3,367 2,058 1,210 6,635 268,715 442 269,157 3,872 3,536 813 8,221 1,391 2,268 122 16,583 6,654 23 (3,673) 2,138 129,924 164 12,283 6,062 (52) (766) 1,414 103,410 i The rent ﬁ xed annual impact represents the straight-lining of ﬁ xed annual increases ranging between 3.0% and 4.25% (2015: 3.0% and 4.25% per annum) in accordance with AASB117. 72 Servcorp Annual Report 2016 72 72 Servcorp Annual Report 2016 Notes to the Consolidated ﬁ nancial report for the ﬁ nancial year ended 30 June 2016 F i n a n c i a l R e p o r t 3. SIGNIFICANT TRANSACTIONS Individually signiﬁ cant transactions included in proﬁ t from ordinary activities before income tax expense: Floor closure costs 4. REMUNERATION OF AUDITORS A. AUDITOR OF THE PARENT ENTITY (Deloitte Touche Tohmatsu Australia (DTT)) Audit and review of ﬁ nancial reports Other services - tax B. OTHER AUDITORS (DTT International Associates) Audit and review of ﬁ nancial reports Other services - tax Other services - ﬁ nancial statements preparation The auditor of Servcorp Limited is Deloitte Touche Tohmatsu. 2016 2016 $’000 $’000 - - - - 2016 2016 $ $ 570,076 570,076 93,789 93,789 663,865 663,865 759,994 759,994 158,197 158,197 137,676 137,676 1,055,867 1,055,867 1,719,732 1,719,732 CONSOLIDATED 2015 $’000 345 345 CONSOLIDATED 2015 $ 575,491 93,789 669,280 626,732 93,177 120,235 840,144 1,509,424 Runway to the World 73 Runway to the world 73 Notes to the Consolidated ﬁ nancial report for the ﬁ nancial year ended 30 June 2016 F i n a n c i a l R e p o r t 5. INCOME TAXES A. INCOME TAX RECOGNISED IN THE INCOME STATEMENT Tax expense comprises: Current tax expense Over provision in prior years - current tax Under provision in prior years - deferred tax Deferred tax income relating to the origination and reversal of temporary diff erences and previously unrecognised tax losses Income tax expense 2016 $’000 12,883 459 (1,085) (3,139) 9,118 CONSOLIDATED 2015 $’000 11,461 695 (971) (3,115) 8,070 The prima facie income tax expense on pre-tax accounting proﬁ t from operations reconciles to the income tax expense in the ﬁ nancial statements as follows: Proﬁ t before income tax expense 48,840 41,211 Income tax expense calculated at 30% Deductible local taxes Eff ect of diff erent tax rates of subsidiaries operating in other jurisdictions Other deductible items Tax losses of controlled entities recovered Income tax over provision in prior years Unused tax losses and tax off sets not recognised as deferred tax assets Income tax expense 14,652 (256) (3,842) (560) (286) (626) 36 9,118 12,363 (535) (3,139) (189) (263) (276) 109 8,070 The tax rate used in the above reconciliation is the Australian corporate tax rate of 30% (2015: 30%). B. CURRENT TAX ASSETS AND LIABILITIES - 272 1,473 6,528 8,001 1,653 5,250 6,903 Current tax assets Tax refunds receivable Current tax payables Income tax attributable to: Parent entity Subsidiaries 74 Servcorp Annual Report 2016 74 74 Servcorp Annual Report 2016 Notes to the Consolidated ﬁ nancial report for the ﬁ nancial year ended 30 June 2016 F i n a n c i a l R e p o r t 5. INCOME TAXES (CONTINUED) C. DEFERRED TAX BALANCES Deferred tax assets comprises: Tax losses - revenue Temporary diff erences Deferred tax liabilities comprises: Temporary diff erences Net deferred tax assets The gross movement of the deferred tax accounts are as follows: Balance at the beginning of the ﬁ nancial year Movements in foreign exchange rates Statement of comprehensive income charge/ (credit) Balance at the end of the ﬁ nancial year Deferred tax assets Movements in temporary diff erences: Accruals not currently deductible Doubtful debts Depreciable and amortisable assets Tax losses Foreign exchange Deferred rent incentive Other Deferred tax assets Balance at the beginning of the ﬁ nancial year Movements in foreign exchange rates Statement of comprehensive income charge/ (credit) Balance at the end of the ﬁ nancial year Deferred tax liabilities Movements in temporary diff erences: Depreciable and amortisable assets Accruals and provisions not currently deductible Other Deferred tax liabilities Balance at the beginning of the ﬁ nancial year Movements in foreign exchange rates Statement of comprehensive income (credit)/ charge Balance at the end of the ﬁ nancial year 2016 $’000 13,422 21,809 35,231 (1,187) 34,044 28,796 987 4,261 34,044 757 (45) 844 7 734 1,167 663 4,127 30,149 955 4,127 35,231 (34) 1 (134) (167) 1,353 1 (167) 1,187 CONSOLIDATED 2015 $’000 13,416 16,733 30,149 (1,353) 28,796 21,225 3,484 4,087 28,796 993 303 1,170 (1,107) (3,198) 6,491 79 4,731 21,920 3,498 4,731 30,149 (26) 1 670 645 695 13 645 1,353 Runway to the World 75 Runway to the world 75 Notes to the Consolidated ﬁ nancial report for the ﬁ nancial year ended 30 June 2016 F i n a n c i a l R e p o r t 5. INCOME TAXES (CONTINUED) D. UNRECOGNISED DEFERRED TAX BALANCES The following deferred tax assets have not been brought to account as assets: Temporary diff erences Tax losses - capital Tax losses - revenue 6. DIVIDENDS Dividends proposed (unrecognised) or paid (recognised) by the Company are: 2016 $’000 15 2,086 1,334 3,435 CONSOLIDATED 2015 $’000 - 1,422 1,851 3,273 CENTS PER SHARE TOTAL AMOUNT $’000 DATE OF PAYMENT TAX RATE FOR FRANKING CREDIT PERCENTAGE FRANKED RECOGNISED AMOUNTS 2015 Final Interim 2016 Final Interim Fully paid ordinary shares Fully paid ordinary shares Fully paid ordinary shares Fully paid ordinary shares 11.00 11.00 11.00 11.00 10,828 1 Oct 2014 10,828 1 Apr 2015 10,828 24 Sept 2015 10,827 23 Mar 2016 30% 30% 30% 30% 35% 20% 40% 50% UNRECOGNISED AMOUNTS Since the end of the ﬁ nancial year, the directors have declared the following dividend: Final Fully paid ordinary shares 11.00 10,827 6 Oct 2016 30% 50% In determining the level of future dividends, the Directors will seek to balance growth objectives and rewarding shareholders with income. This policy is subject to the cash ﬂ ow requirements of the Company and its investment in new opportunities aimed at growing earnings. The directors cannot give any assurances concerning the extent of future dividends, or the franking of such dividends, as they are dependent on future proﬁ ts, the ﬁ nancial and taxation position of the Company and the impact of taxation legislation. DIVIDEND FRANKING ACCOUNT 30% franking credit available Impact on franking account balance of dividends not recognised 2016 $’000 2,215 2,320 2015 $’000 2,338 1,856 The balance of the franking account has been adjusted for franking credits that will arise from the payment of income tax provided for in the ﬁ nancial statements, and for franking debits that will arise from the payment of dividends recognised as a liability at reporting date. 76 Servcorp Annual Report 2016 76 76 Servcorp Annual Report 2016 Notes to the Consolidated ﬁ nancial report for the ﬁ nancial year ended 30 June 2016 F i n a n c i a l R e p o r t 7. SEGMENT INFORMATION Servcorp Serviced Offi ces are fully-managed, fully-furnished CBD offi ce suites in prime locations, with a receptionist, meeting rooms, IT infrastructure and support services available. Servcorp Virtual Offi ce provides the services, facilities and IT to businesses without the cost of a physical offi ce. The Consolidated Entity’s information reported to the Board of Directors is based on each segment manager directly responsible for the functioning of the operating segment. The segment manager has regular contact with members of the Board of Directors to discuss operating activities, forecasts and ﬁ nancial results. Segment managers are also responsible for disseminating management planning materials as directed by the Chief Operating Decision Maker. The segment manager motivates and rewards team members who meet or exceed sales targets. Four reportable operating segments have been identiﬁ ed: Australia, New Zealand and Southeast Asia (ANZ/SEA); USA; Europe and Middle East (EME); North Asia and other which reﬂ ect the segment requirements under AASB 8. The Consolidated Entity’s reportable operating segments under AASB 8 are presented below. The accounting policies of the reportable operating segments are the same as the Consolidated Entity’s accounting policies. The following is an analysis of the Consolidated Entity’s revenue and results by reportable operating segment for the periods under audit: SEGMENT REVENUE SEGMENT PROFIT/ (LOSS) CONTINUING OPERATIONS Australia, New Zealand and Southeast Asia USA Europe and Middle East North Asia Other Finance costs Interest revenue Foreign exchange gains Franchise fee income Rent - ﬁ xed rent increase Share of losses of joint venture Unallocated Proﬁ t before tax Income tax expense NOTE 2016 $’000 87,087 35,061 93,411 104,959 829 2015 $’000 81,250 24,795 73,414 89,363 931 2016 $’000 2015 $’000 12,185 8,753 (3,808) (4,955) 18,466 20,842 191 15,545 17,564 225 37,132 (164) 3,872 3,536 (169) (372) 48,840 (9,118) 39,722 (245) 448 41,211 (8,070) 33,141 321,347 269,753 47,876 3,367 2,058 3,872 3,536 (122) 3,367 2,058 619 442 619 442 2 (1,391) (2,268) 1,210 (225) Centralised unrecovered head offi ce overheads (3,026) (1,542) Consolidated segment revenue and proﬁ t for the period 328,601 277,378 The revenue reported above represents revenue generated from external customers. Intersegment sales were eliminated in full. For the 12 months ended 30 June 2016, the Consolidated Entity’s Virtual Offi ce revenue and Serviced Offi ce revenue were $82,336,000 and $239,011,000 respectively (2015: $69,712,000 and $200,041,000, respectively). Runway to the World 77 Runway to the world 77 Notes to the Consolidated ﬁ nancial report for the ﬁ nancial year ended 30 June 2016 F i n a n c i a l R e p o r t 8. EARNINGS PER SHARE EARNINGS RECONCILIATION Net proﬁ t Earnings used in the calculation of basic and diluted EPS Weighted average number of ordinary shares used in the calculation of basic EPS Weighted average number of ordinary shares used in the calculation of diluted EPS Basic earnings per share Diluted earnings per share 9. CASH AND CASH EQUIVALENTS Cash (i) (ii) Bank short term deposits (ii) (iii) Notes: i France has $917,000 (2015: $903,000) in cash which is encumbered. 2016 $’000 39,722 39,722 NO. 98,432,275 98,432,275 $0.40 $0.40 CONSOLIDATED 2015 $’000 33,141 33,141 NO. 98,432,275 98,432,275 $0.34 $0.34 2016 $’000 20,935 74,914 95,849 CONSOLIDATED 2015 $’000 24,157 73,680 97,837 ii Servcorp’s unencumbered cash and investment balance is $99,680,000 as at 30 June 2016 (2015: $99,335,000). iii Bank short term deposits mature within an average of 135 days (2015: 189 days). These deposits and the interest earning portion of the cash balance earn interest at a weighted average rate of 2.83% (2015: 1.73%). 10. TRADE AND OTHER RECEIVABLES CURRENT At amortised cost Trade receivables (i) Less: allowance for doubtful debts Other debtors Notes: 34,337 (825) 6,752 40,264 31,870 (982) 8,271 39,159 i The average credit period allowed on rendering of services is 7 days. An allowance has been made for estimated unrecoverable trade receivable amounts arising from the past rendering of services, determined by reference to past default experience. The Consolidated Entity has fully reviewed all receivables over 90 days. Receivables are assessed for impairment at each reporting date and as at 30 June 2016 the Directors believe no further provisions are required. 78 Servcorp Annual Report 2016 78 78 Servcorp Annual Report 2016 Notes to the Consolidated ﬁ nancial report for the ﬁ nancial year ended 30 June 2016 F i n a n c i a l R e p o r t 11. OTHER FINANCIAL ASSETS CURRENT At fair value through proﬁ t or loss Forward foreign currency exchange contracts Investment in bank hybrid variable rate securities (i) At amortised cost Lease deposits NON-CURRENT At amortised cost Lease deposits Other Notes: i Australia has $13,989,000 in securities which is encumbered (2015: $13,888,000). 12. OTHER ASSETS CURRENT Prepayments Other 2016 $’000 - 18,737 604 19,341 39,799 75 39,874 12,479 2,683 15,162 CONSOLIDATED 2015 $’000 238 16,614 912 17,764 28,672 60 28,732 10,910 5,756 16,666 Runway to the World 79 Runway to the world 79 Notes to the Consolidated ﬁ nancial report for the ﬁ nancial year ended 30 June 2016 F i n a n c i a l R e p o r t 13. PROPERTY, PLANT AND EQUIPMENT LAND AND BUILDINGS AT COST LEASE- HOLD IMPROVE- MENTS OWNED AT COST LEASE- HOLD IMPROVE- MENTS AT COST OFFICE FURNITURE & FITTINGS OWNED AT COST OFFICE FURNITURE & FITTINGS LEASED AT COST $’000 $’000 $’000 $’000 $’000 CONSOLIDATED WIP AT COST TOTAL OFFICE EQUIP- MENT LEASED AT COST MOTOR VEHICLES OWNED AT COST $’000 $’000 $’000 $’000 OFFICE EQUIP- MENT & SOFT- WARE OWNED AT COST $’000 GROSS CARRYING AMOUNTS Balance at 30 June 2015 10,065 186,629 1,023 26,263 118 39,568 102 Additions Disposals Transfers (to)/ from other class of asset Eff ect of foreign currency exchange diff erences – – – 17,511 (1,135) – – – – 4,275 (125) (60) – – – 4,486 (452) 60 – – – 1,329 5,366 237 1,182 28 866 24 815 – (64) – 32 – 264,583 1,287 27,559 – – – (1,776) – 9,064 Balance at 30 June 2016 11,394 208,371 1,260 31,535 146 44,528 126 783 1,287 299,430 ACCUMULATED DEPRECIATION Balance at 30 June 2015 1,059 86,293 977 Depreciation expense 237 16,583 15,921 2,673 (107) (52) 118 33,675 102 – – – 3,693 (423) 52 – – – – – – – – (1,053) – Disposals Transfers (to)/ from other class of asset Eff ect of foreign currency exchange diff erences 74 4,855 237 888 28 908 24 Balance at 30 June 2016 1,370 106,678 1,214 19,323 146 37,905 126 650 633 51 (58) – 24 – – – – – – 138,778 23,237 (1,641) – 7,038 167,412 NET BOOK VALUE Balance at 30 June 2016 10,024 101,693 Balance at 30 June 2015 9,006 100,336 46 46 12,212 10,342 – – 6,623 5,893 – – 133 182 1,287 132,018 – 125,805 This note is to be read in conjunction with Note 1u Signiﬁ cant accounting policies “Useful lives of property, plant and equipment”. 80 Servcorp Annual Report 2016 80 80 Servcorp Annual Report 2016 Notes to the Consolidated ﬁ nancial report for the ﬁ nancial year ended 30 June 2016 F i n a n c i a l R e p o r t 14. GOODWILL ALLOCATION OF GOODWILL TO CASH-GENERATING UNITS The following twenty one countries are cash-generating units: Japan, Australia, New Zealand, China, Hong Kong, Malaysia, Singapore, Thailand, Belgium, United Arab Emirates, Bahrain, Qatar, Saudi Arabia, Philippines, Lebanon, Turkey, France, United States of America, Kuwait, United Kingdom and Iran. Goodwill was allocated to the countries in which goodwill arose. The carrying amounts of goodwill relating to each cash-generating unit as at 30 June 2016 was as follows: Japan France Australia New Zealand Singapore Thailand China 2016 $’000 9,161 1,030 2,636 785 706 326 161 CONSOLIDATED 2015 $’000 9,161 1,030 2,636 785 706 326 161 14,805 14,805 The recoverable amount of goodwill relating to each cash-generating unit was determined based on value in use calculations, which use cash ﬂ ow projections, covering a ﬁ ve year period and terminal value. For the year ended 30 June 2016, the post tax discount rate applied to the above countries, inclusive of country risk premium, was as follows: Japan 13.8%, France 13.7%, Australia 12.9%, New Zealand 12.9%, Singapore 12.9% Thailand 15.4% and China 13.9% (2015: Japan 14.3%, France 13.8%, Australia 13.2%, New Zealand 13.2%, Singapore 13.2% Thailand 15.6% and China 14.1%). 15. TRADE AND OTHER PAYABLES CURRENT At amortised cost Trade creditors Deferred income Deferred lease incentive Other creditors and accruals NON-CURRENT At amortised cost Deferred lease incentive 7,326 23,023 11,791 13,191 55,331 5,989 21,971 9,559 12,628 50,147 21,715 21,715 24,279 24,279 Runway to the World 81 Runway to the world 81 Notes to the Consolidated ﬁ nancial report for the ﬁ nancial year ended 30 June 2016 F i n a n c i a l R e p o r t 16. OTHER FINANCIAL LIABILITIES CURRENT At fair value through proﬁ t or loss Forward foreign currency exchange contracts At amortised cost Security deposits External borrowings (i) NON-CURRENT At fair value through proﬁ t or loss Forward foreign currency exchange contracts At amortised cost External borrowings (i) Notes: i On 21 November 2013 Japan borrowed JPY240,000,000 at 2.42% p.a. ﬁ xed for 5 years. 17. FINANCING ARRANGEMENTS The Consolidated Entity has access to the following lines of credit: TOTAL FACILITIES AVAILABLE Bank guarantees (i) Bank overdrafts and loans (ii) Bill acceptance / payroll / other facilities (iii) FACILITIES UTILISED AT BALANCE SHEET DATE Bank guarantees (i) Bank overdrafts and loans (ii) FACILITIES NOT UTILISED AT BALANCE SHEET DATE Bank guarantees (i) Bank overdrafts and loans (ii) Bill acceptance / payroll / other facilities (iii) 2016 $’000 CONSOLIDATED 2015 $’000 299 - 32,631 633 33,563 3,427 945 4,372 38,983 4,971 4,150 48,104 32,053 1,417 33,470 6,930 3,554 4,150 14,634 32,005 513 32,518 291 7,419 7,710 38,935 8,929 4,150 52,014 33,751 6,141 39,892 5,184 2,788 4,150 12,122 The Consolidated Entity has access to ﬁ nancing facilities at reporting date as indicated above. The Consolidated Entity expects to meet its other obligations from operating cash ﬂ ows and proceeds. Notes: i Bank guarantees have been issued to secure rental bonds over premises. A guarantee has also been established to secure an overdraft limit in the form of a term deposit. ii Bank overdraft limits have been established to fund working capital as required. All bank overdraft facilities are unsecured and payable at call, including any credit card facility utilised. iii Bill acceptance, payroll and other facilities have been established to facilitate the encashment of cheques, and to accommodate direct entry payroll and direct entry supplier payments. 82 Servcorp Annual Report 2016 82 82 Servcorp Annual Report 2016 Notes to the Consolidated ﬁ nancial report for the ﬁ nancial year ended 30 June 2016 F i n a n c i a l R e p o r t 18. PROVISIONS CURRENT Employee beneﬁ ts (i) Other NON-CURRENT Employee beneﬁ ts Notes: 2016 $’000 6,392 272 6,664 691 691 CONSOLIDATED 2015 $’000 5,502 189 5,691 690 690 i The current provision for employee beneﬁ ts includes $5,643,514 of annual leave and vested long service leave entitlements accrued (2015: $4,696,456). 19. ISSUED CAPITAL Fully paid ordinary shares 98,432,275 (2015: 98,432,275) 154,122 154,122 MOVEMENTS IN ISSUED CAPITAL Balance at the beginning of the ﬁ nancial year Balance at the end of the ﬁ nancial year 154,122 154,122 154,122 154,122 20. FINANCIAL INSTRUMENTS The Company’s Audit and Risk Committee oversees the establishment of the capital and ﬁ nancial risk management system which identiﬁ es, evaluates, classiﬁ es, monitors, qualiﬁ es and reports signiﬁ cant risks to the Board of Directors. All controlled entities in the Consolidated Entity apply this risk management system to manage their own risks. a. Financial risk management objectives The ﬁ nancial risks that result from the Consolidated Entity’s activities are credit risk and market risk (interest rate risk and foreign exchange risk). The Consolidated Entity’s corporate treasury function provides services to the business, co-ordinates access to domestic and international ﬁ nancial markets, and manages the ﬁ nancial risks relating to the operations of the Consolidated Entity. The Consolidated Entity does not enter into or trade ﬁ nancial instruments for speculative purposes. The Consolidated Entity does not apply hedge accounting. The use of ﬁ nancial derivatives is governed by the Consolidated Entity’s policies approved by the Board of Directors. The Consolidated Entity’s corporate treasury function reports to the Company’s Audit and Risk Committee, an independent body that monitors risks and policies implemented to mitigate risk exposures. b. Capital management The Company's objective when managing capital is to ensure that entities within the Consolidated Entity will be able to continue as a going concern while maximising the return to stakeholders. The Company’s overall strategy remains unchanged from 2015. The capital structure of the Consolidated Entity consists of equity attributable to equity holders of the parent, company issued capital, reserves and retained earnings. The Consolidated Entity operates globally, primarily through subsidiary companies established in the markets in which the Consolidated Entity operates. Operating cash ﬂ ows are used to maintain and expand the Consolidated Entity, as well as to make routine outﬂ ows of tax and dividend payments. Runway to the World 83 Runway to the world 83 Notes to the Consolidated ﬁ nancial report for the ﬁ nancial year ended 30 June 2016 F i n a n c i a l R e p o r t 20. FINANCIAL INSTRUMENTS (CONTINUED) c. Market risk The Consolidated Entity’s activities expose it primarily to the ﬁ nancial risks of changes in foreign currency exchange rates. The Consolidated Entity enters into forward foreign currency exchange contracts to economically hedge anticipated transactions. i. Foreign exchange risk The Consolidated Entity operates internationally and is exposed to foreign exchange risk arising from various currency exposures. The Consolidated Entity’s foreign exchange risk arises primarily from: – risk of ﬂ uctuations in foreign exchange rates to the Australian dollar (the reporting currency); – ﬁ rm commitments of receipts and payments settled in foreign currencies or with prices dependent on foreign currencies; – investments in foreign operations; and – loans and trading accounts to foreign operations. Foreign currency assets and liabilities For accounting purposes, net foreign operations are revalued at the end of each reporting period with the movement reﬂ ected as a movement in the foreign currency translation reserve. Borrowings and forward exchange contracts not forming part of the net investment in foreign operations are revalued at the end of each reporting period with the fair value movement reﬂ ected in the Statement of comprehensive income as exchange gains or losses. Foreign currency sensitivity analysis The following table summarises the material sensitivity of ﬁ nancial instruments held at balance date to movements in the exchange rate of the Australian dollar to foreign exchange rates, with all other variables held constant. The sensitivity is based on reasonably possible changes, over a ﬁ nancial year, using the observed range of actual historical rates for the preceding ﬁ ve year period. Pre tax gain / (loss) AUD/ USD (i) +7%(2015: +11%) AUD/ USD (i) -7% (2015: -11%) AUD/ JPY +10% (2015: +9%) AUD/ JPY -10% (2015: -9%) AUD/ EUR +5% (2015: +6%) AUD/ EUR -5% (2015: -6%) AUD/ RMB +7% (2015: +11%) AUD/ RMB -7% (2015: -11%) AUD/ SGD +5% (2015: +7%) AUD/ SGD -5% (2015: -7%) AUD/ HKD +7% (2015: +11%) AUD/ HKD -7% (2015: -11%) Notes: IMPACT ON PROFIT CONSOLIDATED IMPACT ON EQUITY CONSOLIDATED 2016 $’000 (949) 1,004 2015 $’000 295 (83) 5,566 (3,998) 3,211 (2,356) 147 (162) (418) 485 (627) 697 266 (261) (528) 658 (356) 408 (1,385) 1,599 (2,099) 2,643 2016 $’000 1,062 (1,225) 1,380 (1,672) 247 (273) 9 (10) - - - - 2015 $’000 3,247 (4,084) 1,438 (1,716) 266 (297) 170 (211) 254 (79) – – i Servcorp is exposed to Dirhams (Dubai), Dinars (Bahrain and Kuwait), Rials (Qatar), Riyals (Saudi Arabia), Pounds (Lebanon) and Hong Kong Dollars (Hong Kong). These currencies are pegged to the USD. 84 Servcorp Annual Report 2016 84 84 Servcorp Annual Report 2016 Notes to the Consolidated ﬁ nancial report for the ﬁ nancial year ended 30 June 2016 F i n a n c i a l R e p o r t 20. FINANCIAL INSTRUMENTS (CONTINUED) c. Market risk (continued) i. Foreign exchange risk (continued) Forward foreign currency exchange contracts The following table sets out the details of forward foreign currency exchange contracts in place as at 30 June 2016. These are Level 2 fair value measurements derived from inputs as deﬁ ned in Note 20(e). Outstanding contracts CONSOLIDATED Sell JPY Not later than one year AVERAGE EXCHANGE RATE FOREIGN CURRENCY FAIR VALUE 2016 2015 2016 MILLION 2015 MILLION 2016 $’000 2015 $’000 83.54 84.52 1,100 600 (1,445) (609) Later than one year and not later than ﬁ ve years 80.13 86.95 1,500 750 (1,938) (156) Sell USD Not later than one year Later than one year and not later than ﬁ ve years 0.7914 0.8156 0.8497 0.8475 Sell EUR Not later than one year ii. Interest rate risk - 0.71 2 2 - 4 3 2 (67) (276) 258 447 - 113 Interest rate risk on cash or short term deposits is not considered to be a material risk due to the short term nature of these ﬁ nancial instruments. The following table summarises the sensitivity of the ﬁ nancial instruments held at balance date, following a movement to interest rates, with all other variables held constant. The sensitivity is based on reasonably possible changes over a ﬁ nancial year, using the observed range of actual historical rates. Pre tax gain/ (loss) AUD balances 125 basis point increase 125 basis point decrease Other balances 250 basis point increase 250 basis point decrease IMPACT ON PROFIT CONSOLIDATED 2015 $’000 927 (915) 194 (109) 2016 $’000 903 (880) 96 (73) Runway to the World 85 Runway to the world 85 Notes to the Consolidated ﬁ nancial report for the ﬁ nancial year ended 30 June 2016 F i n a n c i a l R e p o r t 20. FINANCIAL INSTRUMENTS (CONTINUED) c. Market risk (continued) iii. Liquidity risk Ultimate responsibility for liquidity risk management rests with the Board of Directors, who have built an appropriate liquidity risk management framework for the management of the Consolidated Entity’s short, medium and long term funding. The Consolidated Entity manages liquidity risk by maintaining adequate reserves, banking facilities and borrowing facilities. The following table details the Consolidated Entity’s expected maturity for its ﬁ nancial assets. The table below was drawn up based on the undiscounted contractual maturities of the ﬁ nancial assets including interest that will be earned. LESS THAN 1 MONTH 1 TO 3 MONTHS 3 MONTHS TO 1 YEAR 1 TO 5 YEARS 5 + YEARS TOTAL $’000 $’000 $’000 $’000 $’000 $’000 WEIGHTED AVERAGE EFFECTIVE INTEREST RATE % CONSOLIDATED 2016 NON-INTEREST BEARING Receivables Lease deposits 40,264 – – – – 40,264 154 3,453 7,231 21,074 4,110 36,022 Forward foreign currency exchange contracts – 588 15,435 20,488 INTEREST BEARING Cash and cash equivalents Bank short term deposits Variable rate securities 2015 NON–INTEREST BEARING Receivables Lease deposits 20,935 17,805 18,737 – – 17,999 41,236 – – – – – 97,895 22,040 63,902 41,562 4,110 229,509 39,159 1,051 – – – – 39,159 1,536 7,004 16,692 2,656 28,939 Forward foreign currency exchange contracts 1,596 434 11,059 13,461 – – – – 36,511 20,935 77,040 18,737 – – – – 26,550 24,157 77,506 16,614 2.61% 2.83% 5.40% 2.56% 1.73% 5.57% – – 17,196 50,899 – – – – – 19,166 68,962 30,153 2,656 212,925 INTEREST BEARING Cash and cash equivalents Bank short term deposits Variable rate securities 24,157 9,411 16,614 91,988 86 Servcorp Annual Report 2016 86 86 Servcorp Annual Report 2016 Notes to the Consolidated ﬁ nancial report for the ﬁ nancial year ended 30 June 2016 F i n a n c i a l R e p o r t 20. FINANCIAL INSTRUMENTS (CONTINUED) c. Market risk (continued) iii. Liquidity risk (continued) The following table details the Consolidated Entity’s remaining contractual maturity for its ﬁ nancial liabilities. The table is based on the earliest date on which undiscounted cash ﬂ ows of ﬁ nancial liabilities are contractually to be paid. The table includes both principal and interest cash ﬂ ows. LESS THAN 1 MONTH 1 TO 3 MONTHS 3 MONTHS TO 1 YEAR 1 TO 5 YEARS 5+ YEARS TOTAL $’000 $’000 $’000 $’000 $’000 $’000 WEIGHTED AVERAGE EFFECTIVE INTEREST RATE % CONSOLIDATED 2016 NON–INTEREST BEARING Payables Security deposits Forward foreign currency exchange contracts INTEREST BEARING Bank loans (i) Bank overdrafts (ii) 2015 NON–INTEREST BEARING Payables Security deposits Forward foreign currency exchange contracts INTEREST BEARING Bank loans (i) Bank overdrafts (ii) Notes: i Fixed interest rate instruments. ii Variable interest rate instruments at LIBOR + 2%. 7,326 13,945 – – – 6 – – 32,631 673 38,275 170 – 529 – 7,332 14,788 71,435 – – – 1,051 – 1,051 5,989 13,438 – – – 32,005 – – 1,653 488 10,568 13,075 133 – 10 – 368 – 2,254 6,351 7,775 13,936 42,941 21,680 – – – – – – – – – – – – 21,271 32,631 38,948 1,756 – 94,606 19,427 32,005 25,784 2,765 6,351 86,332 d. Credit risk Credit risk refers to the risk that the counterparty will default on its contractual obligations resulting in ﬁ nancial loss to the Consolidated Entity. The Consolidated Entity has adopted a policy of only dealing with creditworthy counterparties and obtaining suffi cient collateral where appropriate, as a means of mitigating the risk of ﬁ nancial loss from defaults. Trade receivables consist of a large number of customers, spread across diverse industries and geographical areas. Ongoing credit evaluation is performed on the ﬁ nancial condition of accounts receivable. The Consolidated Entity does not have any signiﬁ cant credit risk exposure to any single counterparty or any group of any counterparties having similar characteristics. Details of credit enhancements in the form of serviced offi ce security deposits retained from customers are further disclosed in Note 16. Credit risk on cash and short term ﬁ xed deposits is limited because counterparties are banks with high credit ratings assigned by international credit rating agencies. These liquid funds are managed centrally by The Company’s senior management on a daily basis. Runway to the World 87 Runway to the world 87 Notes to the Consolidated ﬁ nancial report for the ﬁ nancial year ended 30 June 2016 F i n a n c i a l R e p o r t 20. FINANCIAL INSTRUMENTS (CONTINUED) e. Fair value of ﬁ nancial instruments The Directors consider that the carrying amount of ﬁ nancial assets and ﬁ nancial liabilities approximate their fair value other than in respect of the Company’s investment in subsidiaries. Financial instruments are measured subsequent to initial recognition at fair value, grouped into Levels 1 to 3 based on the degree to which fair value is observable: 30 JUNE 2016 30 JUNE 2016 Bank hybrid variable rate Bank hybrid variable rate securities securities Forward foreign currency Forward foreign currency exchange contracts exchange contracts 30 JUNE 2015 Bank hybrid variable rate securities Forward foreign currency exchange contracts LEVEL 1 $’000 18,737 18,737 – – 18,737 18,737 16,614 – 16,614 LEVEL 2 $’000 – – (3,726) (3,726) (3,726) (3,726) – (53) (53) CONSOLIDATED LEVEL 3 $’000 – – – – – – – – – Some of the the Consolidated Entity’s ﬁ nancial assets are measured at fair value at the end of each reporting period. The following table gives information about how the fair values of these ﬁ nancial assets are determined (in particular, the valuation technique(s) and inputs used). FINANCIAL ASSETS Bank hybrid variable rate securities Forward foreign currency exchange contracts FAIR VALUE AS AT 30 JUNE 2016 $’000 FAIR VALUE AS AT 30 JUNE 2015 $’000 FAIR VALUE HIERACHY 18,737 (3,726) 16,614 (53) 1 2 VALUATION TECHNIQUE(S) AND KEY INPUT(S) Quoted prices in an active market Future cash ﬂ ows are estimated based on observable forward exchange rates 88 Servcorp Annual Report 2016 88 88 Servcorp Annual Report 2016 Notes to the Consolidated ﬁ nancial report for the ﬁ nancial year ended 30 June 2016 F i n a n c i a l R e p o r t 21. EMPLOYEE BENEFITS Deﬁ ned contribution fund Contributions to deﬁ ned contribution superannuation plans are expensed when employees have rendered services entitling them to the contributions. The Company’s controlled entities are legally obliged to contribute to employee nominated deﬁ ned contribution superannuation plans. Details of contributions to funds during the year ended 30 June 2016 are as follows: Employer contributions As at 30 June 2016, there were no outstanding employer contributions payable to other funds. 2016 $’000 1,916 CONSOLIDATED 2015 $’000 1,892 22. COMMITMENTS FOR EXPENDITURE CAPITAL EXPENDITURE COMMITMENTS - PROPERTY, PLANT AND EQUIPMENT Contracted but not provided for and payable: Not later than one year Later than one year but not later than ﬁ ve years Later than ﬁ ve years NON-CANCELLABLE OPERATING LEASE COMMITMENTS Future operating lease rentals not provided for in the ﬁ nancial statements and payable: Not later than one year Later than one year but not later than ﬁ ve years Later than ﬁ ve years 15,838 8,047 - - - - 15,838 8,047 137,587 331,456 178,356 647,399 118,951 282,595 190,758 592,304 The Consolidated Entity leases property under operating leases expiring from 1 to 15 years. Liabilities in respect of lease incentives are disclosed in Note 15 to the Consolidated ﬁ nancial report. Operating leases Leasing arrangements Operating leases have been entered into to operate serviced offi ce ﬂ oors. The Consolidated Entity does not have an option to purchase the leased asset at the expiry of the lease period. Runway to the World 89 Runway to the world 89 Notes to the Consolidated ﬁ nancial report for the ﬁ nancial year ended 30 June 2016 F i n a n c i a l R e p o r t 23. SUBSIDIARIES Servcorp has interests in subsidiary companies in the following countries. COUNTRY OF INCORPORATION AND PRINCIPAL PLACE OF BUSINESS NUMBER OF SUBSIDIARIES Australia Bahrain Belgium China and Hong Kong France Indonesia Iran Japan Kuwait Lebanon Malaysia New Zealand Philippines Qatar Saudi Arabia Singapore Thailand Turkey United Arab Emirates United Kingdom United States of America 2016 2016 47 47 2015 46 1 1 1 1 9 9 2 2 1 1 1 1 4 4 1 1 1 1 2 2 5 5 1 1 1 1 1 1 9 9 3 3 1 1 3 3 3 3 1 1 9 2 1 - 4 1 1 2 5 1 1 1 9 3 1 3 3 16 16 15 Movements in the number of subsidiaries are due to the formation and deregistration of subsidiary entities. The following subsidiaries have non-controlling interests that are relevant to the Company: NAME OF SUBSIDIARY PRINCIPAL PLACE OF BUSINESS OWNERSHIP INTEREST HELD BY NON-CONTROLLING INTERESTS Servcorp Aswad Real Estate Company WLL Servcorp Qatar LLC Servcorp LLC Servcorp Administration Services WLL Kuwait Qatar UAE UAE 2016 2016 % % 51 51 51 51 51 51 51 51 2015 % 51 51 51 51 A Company in the Consolidated Entity exercises control over Servcorp Aswad Real Estate Company WLL, Servcorp Qatar LLC, Servcorp LLC and Servcorp Administration Services WLL despite owning 49% of the issued capital. Arrangements are in place that entitle the Company or its controlled entities to all the beneﬁ ts and risks of ownership notwithstanding that the majority shareholding may be vested in another party. 90 Servcorp Annual Report 2016 90 90 Servcorp Annual Report 2016 Notes to the Consolidated ﬁ nancial report for the ﬁ nancial year ended 30 June 2016 F i n a n c i a l R e p o r t 24. JOINT VENTURE NAME OF JOINT VENTURE PRINCIPAL ACTIVITY Etihad Towers Service Offi ces LLC Serviced offi ces and virtual offi ces COUNTRY OF INCORPORATION UAE 2016 % 49 2015 % 49 On 13 March 2014, a company in the Consolidated Entity entered into a joint venture with Emirates Consortium LLC. The name of the joint venture is Etihad Towers Service Offi ces LLC. The above joint venture is accounted for using the equity method in these Consolidated ﬁ nancial statements. Summarised ﬁ nancial information in respect of the Consolidated Entity's material joint venture is set out below. The summarised ﬁ nancial information below represents amounts shown in the joint venture’s ﬁ nancial statements prepared in accordance with AASBs (adjusted by the Consolidated Entity for equity and accounting purposes). FINANCIAL POSITION ASSETS Current assets Non–current assets Total assets LIABILITIES Current liabilities Non–current liabilities Total liabilities Net assets FINANCIAL PERFORMANCE Revenue Loss for the year Other comprehensive loss for the period Total comprehensive loss for the period 2016 $’000 730 2,127 2,857 3,650 - 3,650 (793) 1,409 (345) - (345) THE COMPANY 2015 $’000 592 2,305 2,897 3,341 – 3,341 (444) 168 (490) – (490) Reconciliation of the above summarised information to the carrying amount of the interest in the joint venture recognised in the consolidated ﬁ nancial statements: Share of net assets in joint venture Share of losses in joint venture (389) (169) (222) (245) As at 30 June 2016 the share of losses in the joint venture consists of $169,065 (2015: $244,903) of losses recognised against Servcorp’s contributions totalling $1,431,184 (2015: $1,368,354). Runway to the World 91 Runway to the world 91 Notes to the Consolidated ﬁ nancial report for the ﬁ nancial year ended 30 June 2016 F i n a n c i a l R e p o r t 25. NOTES TO STATEMENT OF CASH FLOWS A. RECONCILIATION OF CASH AND CASH EQUIVALENTS For the purpose of the Statement of cash ﬂ ows, cash and cash equivalents includes cash on hand and at bank, and short term deposits at call, net of outstanding bank overdrafts. Cash and cash equivalents at the end of the ﬁ nancial year as shown in the Statement of cash ﬂ ows are reconciled to the related items in the Statement of ﬁ nancial position as follows: Cash at bank Short term deposits Cash and cash equivalents B. RECONCILIATION OF PROFIT FOR THE PERIOD TO NET CASH FLOWS FROM OPERATING ACTIVITIES Proﬁ t after income tax Add/ (less) non-cash items: Movements in provisions Depreciation of non-current assets Share of losses of joint venture Loss/ (gain) on disposal of non-current assets Increase in current tax liability (Increase) in deferred tax balances Unrealised foreign exchange (gain) (Decrease) in deferred lease incentives Changes in net assets and liabilities during the ﬁ nancial period: (Increase) in prepayments and receivables (Increase) in trade debtors Decrease/ (increase) in current assets Increase in deferred income Increase in client security deposits Increase in accounts payable Net cash provided from operating activities CONSOLIDATED 2016 $’000 2015 $’000 20,935 74,914 95,849 24,157 73,680 97,837 39,722 33,141 974 23,237 (169) 7 1,370 (5,248) (3,271) (332) (1,569) (1,105) 3,381 1,052 626 1,900 60,575 1,056 18,345 (245) (52) 4,457 (7,571) (5,653) - (3,168) (6,916) (1,410) 5,276 7,118 15,550 59,928 92 Servcorp Annual Report 2016 92 92 Servcorp Annual Report 2016 Notes to the Consolidated ﬁ nancial report for the ﬁ nancial year ended 30 June 2016 F i n a n c i a l R e p o r t 26. RELATED PARTY DISCLOSURES Transactions with the Company and its controlled entities From time to time Directors of the Company and its controlled entities, or their director-related entities, may purchase services from or provide services to the Consolidated Entity. These purchases or sales are on the same terms and conditions as those entered into by other employees, suppliers or customers of the Consolidated Entity and are trivial or domestic in nature. All transactions with director-related entities are disclosed to the Board and reviewed to ensure they bring a beneﬁ t to the Consolidated Entity. Mr A G Moufarrige, has an interest in and is a Director of Tekfon Pty Ltd (Tekfon). Servcorp has a lease on arm’s length terms with Tekfon for the use of Tekfon’s premises for storage. Servcorp utilises off -site storage facilities in many of its global locations, for storage of offi ce furniture and retention of records. Tekfon’s premises are in a suburb of Sydney, and have been utilised by Servcorp’s Sydney locations and head offi ce for storage since before the Consolidated Entities IPO in 1999. Research conﬁ rms that the lease is at below the market rate for similar facilities in the area. The Board, with Mr A G Moufarrige absent, reviews the lease with Tekfon on an annual basis to ensure that the terms are at market rate or better. A relative of Mr A G Moufarrige, has an interest in Enideb Pty Ltd (Enideb). Mr A G Moufarrige has no interest in the aff airs of Enideb. Enideb operates the Servcorp franchise in Canberra on arm’s length terms. The Canberra franchise has been operating for more than 27 years, and the Canberra locations bring a beneﬁ t to Servcorp’s operations. The Board reviews the terms of the franchise agreement on a regular basis to ensure that it is conducted on proper commercial terms, consistent with any other franchise operations. Mr A G Moufarrige, has an interest in and is a Director of Air Offi ce Pty Ltd (Air Offi ce). Until June 2015, Air Offi ce was provided IT services by Servcorp, which were reimbursed at arm’s length terms. At various times during the 2015 year, Air Offi ce was also a client of Servcorp, on behalf of its clients, in Adelaide, Brisbane, Hobart, Melbourne and Sydney. Air Offi ce was a new initiative which initially incurred losses; eff ective 1 July 2015, following independent advice, Servcorp took over the Air Offi ce client base. No consideration was paid. The Directors considered that the client base would integrate seamlessly under its Virtual Offi ce off ering, and would bring a positive cash and revenue stream to Servcorp. The Air Offi ce business was proﬁ table in 2016. Mr A G Moufarrige, has an interest in and is a Director of Sovori Pty Ltd (Sovori). Mr T Moufarrige, is also a director of Sovori. Mr A G Moufarrige has personal credit cards which, in the main, are used to pay for Servcorp expenses during his business travels. For convenience, these are paid by Servcorp whilst he travels and they are then reconciled upon his return and personal expenses are repaid to Servcorp by Sovori. The Chairman has oversight over the reconciliations. Mr A G Moufarrige, has an interest in Thru, Inc (Thru). Mr R Holliday-Smith, has an interest in and is a Director of Thru. Thru provides IT services to Servcorp on arm’s length terms. Mr A G Moufarrige and Mr R Holliday- Smith did not have any involvement in the negotiation of the terms of the arrangement with Thru. Thru is also a client of Servcorp in Sydney. Servcorp’s IT management regularly review the terms and conditions of the contract with Thru to ensure it is commercially beneﬁ cial to Servcorp. Since the end of the ﬁ nancial year, the decision has been taken to cease using the IT services provided by Thru as more beneﬁ cial terms were available through another provider. Mr T Moufarrige, has an interest in and is the CEO of Nualight AUSNZ Pty Ltd (Nualight). Nualight is a client of Servcorp in Sydney, Melbourne, Wellington and Beijing. Nualight also provides lighting products to Servcorp on arm’s length terms. The Board, with Mr T Moufarrige absent, reviews the terms of any contract to supply lighting services, to ensure that the terms bring a commercially beneﬁ t to Servcorp. Mr T Moufarrige, has an interest in and is a Director of Spigoli Pty Ltd. Mr T Moufarrige and Spigoli Pty Ltd are clients of Servcorp in Sydney. Servcorp has in excess of 21,000 clients globally. From time to time a client will be an entity which is deﬁ ned as a Director related party, even though the Director has had no involvement in the decision to become a client of Servcorp. The following disclosures fall into this category. Mr B Corlett, has an interest in and is the Chairman of Australian Maritime Systems Limited. Australian Maritime Systems Limited is a client of Servcorp in Perth. Mr B Corlett did not have any involvement in the negotiation of the terms of the arrangement with Australian Maritime Systems Limited. Mr B Corlett, is a Director of Fortius Funds Management Pty Ltd, a related company of Fortius Global Real Estate Securities. Fortius Global Real Estate Securities is a client of Servcorp in Singapore. Mr B Corlett did not have any involvement in the negotiation of the terms of the arrangement with Fortius Global Real Estate Securities. A relative of Mr B Corlett, has an interest in Highbury Partnership. Highbury Partnership was a client of Servcorp in Sydney. Mr B Corlett did not have any involvement in the negotiation of the terms of the arrangement with Highbury Partnership. A relative of Mr B Corlett, has an interest in TDM Asset Management Pty Ltd. TDM Asset Management Pty Ltd was a client of Servcorp in Sydney and is a client in New York. Mr B Corlett has no interest in the aff airs of TDM Asset Management Pty Ltd nor any involvement in the negotiation of the terms of the arrangement with TDM Asset Management Pty Ltd. Mr R Holliday-Smith, has an interest in and is the Chairman of ASX Limited. ASX Operations Pty Ltd, a subsidiary company of ASX Limited, is a client of Servcorp in London. Mr R Holliday-Smith did not have any involvement in the negotiation of the terms of the arrangement with ASX Operations Pty Ltd. Runway to the World 93 Runway to the world 93 Notes to the Consolidated ﬁ nancial report for the ﬁ nancial year ended 30 June 2016 F i n a n c i a l R e p o r t 26. RELATED PARTY DISCLOSURES (CONTINUED) Other transactions with the Company and its controlled entities (continued) The terms and conditions of the transactions with Directors and their director-related entities were no more favourable than those available, or which might reasonably be expected to be available, on similar transactions to non-director-related entities on an arm’s length basis. The value of the transactions during the year with Directors and their director-related entities were as follows: DIRECTOR DIRECTOR-RELATED ENTITY A G Moufarrige Tekfon Pty Ltd A G Moufarrige Enideb Pty Ltd A G Moufarrige Air Offi ce Pty Ltd A G Moufarrige Air Offi ce Pty Ltd TRANSACTION Premises rental Franchisee Client Reimbursements Sovori Pty Ltd Reimbursements A G Moufarrige, T Moufarrige A G Moufarrige, R Holliday–Smith Thru, Inc. T Moufarrige Nualight AUSNZ Pty Ltd T Moufarrige Nualight AUSNZ Pty Ltd T Moufarrige Spigoli Pty Ltd IT services Client Client Supplier Client T Moufarrige Taine Moufarrige Reimbursements B Corlett B Corlett B Corlett B Corlett Australian Maritime Systems Limited Fortius Global Real Estate Securities Highbury Partnership TDM Asset Management Pty Ltd R Holliday–Smith ASX Operations Pty Ltd Client Client Client Client Client 2016 $ 87,889 837,184 - - 344,675 143,491 - 10,368 420,569 7,426 12,448 480 28,341 11,488 8,829 262,421 CONSOLIDATED 2015 $ 86,445 1,002,858 4,404 20,707 320,740 109,719 5,116 7,169 38,337 5,499 2,889 8,112 6,433 87,186 37,653 32,650 Amounts receivable from and payable to Directors and their director-related entities at balance sheet date arising from these transactions were as follows: (7,360) 74,545 - 56,470 - 1,676 568 12,448 - 3,314 - 1,318 28,927 - 47,507 1,851 12,323 (3,007) 511 484 924 683 230 7,291 466 4,403 Current receivable/ (payable) Tekfon Pty Ltd Enideb Pty Ltd Air Offi ce Pty Ltd Sovori Pty Ltd Thru, Inc Nualight AUSNZ Pty Ltd Spigoli Pty Ltd Taine Moufarrige Australian Maritime Systems Limited Fortius Global Real Estate Securities Highbury Partnership TDM Asset Management Pty Ltd ASX Operations Pty Ltd 94 Servcorp Annual Report 2016 94 94 Servcorp Annual Report 2016 Notes to the Consolidated ﬁ nancial report for the ﬁ nancial year ended 30 June 2016 F i n a n c i a l R e p o r t 27. PARENT ENTITY DISCLOSURES FINANCIAL POSITION ASSETS Current assets Non-current assets Total assets LIABILITIES Current liabilities Total liabilities EQUITY Issued capital Retained earnings Total equity FINANCIAL PERFORMANCE Proﬁ t for the year Total comprehensive income As at 30 June 2016: 2016 $’000 210,617 22,789 233,406 60,394 60,394 154,122 18,890 173,012 10,599 10,599 THE COMPANY 2015 $’000 215,622 22,393 238,015 60,432 60,432 154,122 23,461 177,583 26,859 26,859 i Servcorp Limited guaranteed Company Headquarters Limited (a subsidiary) as part of a New Zealand lease. ii In January 2016 Servcorp Limited renewed a Corporate Guarantee and Indemnity with the Australian and New Zealand Banking Group Limited, pursuant to which the bank agreed to make available to the Consolidated Entity a $37,000,000 interchangeable facility for general corporate purposes. The liability under the deed by and between the Australian and New Zealand companies is limited to $52,000,000. As at 30 June 2016 the fair value of these commitments was Nil (2015: Nil). iii There were no contingent liabilities of the parent entity. iv There were no commitments for the acquisition of property, plant and equipment by the parent entity. 28. SUBSEQUENT EVENTS Other than any matters noted below, there has not arisen in the interval between reporting date and the date of this Financial Report, any item, transaction or event of a material and unusual nature likely, in the opinion of the Directors of the Company, to aff ect signiﬁ cantly the operations of the Consolidated Entity, the results of those operations, or the state of aff airs of the Consolidated Entity in future ﬁ nancial years. Dividend On 17 August 2016 the Directors declared a ﬁ nal dividend of 11.00 cents per share, franked to 50%, payable on 6 October 2016. The ﬁ nancial eff ect of the above transaction has not been brought to account in the ﬁ nancial statements for the year ended 30 June 2016. Runway to the World 95 Runway to the world 95 D I R E C T O R S ' D E C L A R AT I O N F i n a n c i a l R e p o r t The Directors declare that: a. in the Directors’ opinion, there are reasonable grounds to believe that the Company will be able to pay its debts as and when they become due and payable; b. the attached Financial Statements, set out on pages 59 to 95 are in compliance with International Financial Reporting Standards, as stated in Note 1 to the Consolidated ﬁ nancial report; c. in the Directors’ opinion, the attached Financial Statements and notes thereto are in accordance with the Corporations Act 2001, including: i. compliance with accounting standards; and ii. giving a true and fair view of the ﬁ nancial position and performance of the Consolidated Entity; d. the Directors have been given the declarations required by section 295A of the Corporations Act 2001. Signed in accordance with a resolution of directors pursuant to section 295(5) of the Corporations Act 2001. A G Moufarrige Managing Director and CEO Dated at Sydney this 17th day of August 2016. 96 Servcorp Annual Report 2016 96 96 Servcorp Annual Report 2016 A U D I T O R ’ S R E P O R T Deloitte Touche Tohmatsu ABN 74 490 121 060 Grosvenor Place 225 George Street Sydney NSW 2000 PO Box N250 Grosvenor Place Sydney NSW 1220 Australia DX: 10307SSE Tel: +61 (0) 2 9322 7000 Fax: +61 (0) 2 9322 7001 www.deloitte.com.au Independent Auditor’s Report to the Members of Servcorp Limited Report on the Financial Report We have audited the accompanying financial report of Servcorp Limited, which comprises the statement of financial position as at 30 June 2016, the statement of comprehensive income, the statement of cash flows and the statement of changes in equity for the year ended on that date, notes comprising a summary of significant accounting policies and other explanatory information, and the directors’ declaration of the consolidated entity, comprising the company and the entities it controlled at the year’s end or from time to time during the financial year as set out on pages 59 to 96. Directors’ Responsibility for the Financial Report The directors of the company are responsible for the preparation of the financial report that gives a true and fair view in accordance with Australian Accounting Standards and the Corporations Act 2001 and for such internal control as the directors determine is necessary to enable the preparation of the financial report that gives a true and fair view and is free from material misstatement, whether due to fraud or error. Auditor’s Responsibility Our responsibility is to express an opinion on the financial report based on our audit. We conducted our audit in accordance with Australian Auditing Standards. Those standards require that we comply with relevant ethical requirements relating to audit engagements and plan and perform the audit to obtain reasonable assurance whether the financial report is free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial report. The procedures selected depend on the auditor’s judgement, including the assessment of the risks of material misstatement of the financial report, whether due to fraud or error. In making those risk assessments, the auditor considers internal control, relevant to the company’s preparation of the financial report that gives a true and fair view, 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 company’s internal control. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by the directors, as well as evaluating the overall presentation of the financial report. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion. Auditor’s Independence Declaration In conducting our audit, we have complied with the independence requirements of the Corporations Act 2001. We confirm that the independence declaration required by the Corporations Act 2001, which has been given to the directors of Servcorp Limited, would be in the same terms if given to the directors as at the time of this auditor’s report. Liability limited by a scheme approved under Professional Standards Legislation Member of Deloitte Touche Tohmatsu Limited Runway to the World 97 Runway to the world 97 A U D I T O R ’ S R E P O R T Opinion In our opinion: (a) the financial report of Servcorp Limited is in accordance with the Corporations Act 2001, including: (i) giving a true and fair view of the consolidated entity’s financial position as at 30 June 2016 and of its performance for the year ended on that date; and (ii) complying with Australian Accounting Standards and the Corporations Regulations 2001; and (b) the consolidated financial statements also comply with International Financial Reporting Standards as disclosed in Note 1. Report on the Remuneration Report We have audited the Remuneration Report included in pages 46 to 57 of the directors’ report for the year ended 30 June 2016. The directors of the company are responsible for the preparation and presentation of the Remuneration Report in accordance with section 300A of the Corporations Act 2001. Our responsibility is to express an opinion on the Remuneration Report, based on our audit conducted in accordance with Australian Auditing Standards. Opinion In our opinion the Remuneration Report of Servcorp Limited for the year ended 30 June 2016, complies with section 300A of the Corporations Act 2001. DELOITTE TOUCHE TOHMATSU Stephen Gustafson Partner Chartered Accountants Sydney, 17 August 2016 98 Servcorp Annual Report 2016 98 98 Servcorp Annual Report 2016 S H A R E H O L D E R I N F O R M AT I O N The shareholder information set out below is provided in accordance with the Listing Rules and was applicable as at 01 September 2016. CLASS OF SHARES AND VOTING RIGHTS Ordinary shares There were 2,564 holders of the ordinary shares of the Company. At a general meeting: – On a show of hands, every member present in person or by direct vote, proxy, attorney or representative has one vote; – On a poll, every member present has one vote for each fully paid share held. Options There were 6 holders of options over 295,000 unissued ordinary shares of the Company, granted to employees under the Servcorp Executive Share Option Scheme. There are no voting rights attached to the options. Voting rights will be attached to the unissued ordinary shares when the options have been exercised. The options are unquoted. ON-MARKET BUY-BACK There is no current on-market buy-back. DISTRIBUTION OF SHAREHOLDERS SIZE OF HOLDING 1 - 1,000 1,001 - 5,000 5,001 - 10,000 10,001 - 100,000 100,001 and over ORDINARY SHARES OPTIONS NUMBER NUMBER OF HOLDERS OF HOLDERS NUMBER NUMBER OF SHARES OF SHARES % % OF SHARES OF SHARES NUMBER OF HOLDERS NUMBER OF OPTIONS % OF OPTIONS 927 927 1,124 1,124 281 281 204 204 28 28 448,850 448,850 2,886,466 2,886,466 2,107,760 2,107,760 4,957,535 4,957,535 0.46% 0.46% 2.93% 2.93% 2.14% 2.14% 5.04% 5.04% 88,031,664 88,031,664 89.43% 89.43% - - - 6 - 6 - - - 295,000 - 295,000 - - - 100% - 100% Totals 2,564 2,564 98,432,275 98,432,275 100.00% 100.00% There were 110 holders of ordinary shares holding less than a marketable parcel, based on the closing market price at the speciﬁ ed date. SUBSTANTIAL SHAREHOLDERS The following organisations have given a substantial shareholder notice to Servcorp. NAME Sovori Pty Ltd Perpetual Limited Commonwealth Bank of Australia NUMBER OF SHARES 49,812,927 8,719,089 5,170,645 % OF VOTING POWER 50.61% 8.86% 5.25% 100 Servcorp Annual Report 2016 100 Runway to the world 99 S H A R E H O L D E R I N F O R M AT I O N TWENTY LARGEST SHAREHOLDERS HOLDER NAME BNP Paribas Nominees Pty Ltd (DRP) BNP Paribas Nominees Pty Ltd (Agency Lending DRP A/C) Citicorp Nominees Pty Limited Citicorp Nominees Pty Limited (Colonial First State Inv A/C) Eniat Pty Ltd HSBC Custody Nominees (Australia) Limited HSBC Custody Nominees (Australia) Limited (Nt-Commonweallth Super Corp A/C) JP Morgan Nominees Australia Limited MFLE Pty Ltd Moufarrige, Alfred George National Nominees Limited Omnioffi ces Pty Limited RBC Investor Services Australia Nominees Pty Limited (Bkcust A/C) RBC Investor Services Australia Nominees Pty Limited (Piselect) RBC Investor Services Australia Nominees Pty Limited (Pi Pooled A/C) RBC Investor Services Australia Nominees Pty Limited (VFA A/C) Sandhurst Trustees Ltd (Wentworth Williamson A/C) Sovori Pty Ltd UBS Nominees Pty Ltd Uvira Superannuation Pty Limited (Uvira Holdings Employees Super Fund Account) Totals for Top 20 NUMBER OF ORDINARY SHARES HELD PERCENTAGE OF CAPITAL HELD 1,334,889 3,043,496 8,050,019 530,582 1,800,000 10,663,360 471,284 6,521,260 1,800,000 547,436 4,229,506 302,808 460,573 476,931 770,239 407,487 235,628 42,224,643 3,128,577 413,474 87,412,192 1.36% 3.09% 8.18% 0.54% 1.83% 10.83% 0.48% 6.63% 1.83% 0.56% 4.30% 0.31% 0.47% 0.48% 0.78% 0.41% 0.24% 42.90% 3.18% 0.42% 88.80% 100 Servcorp Annual Report 2016 Runway to the World 101 S H A R E H O L D E R I N F O R M AT I O N TWENTY LARGEST SHAREHOLDERS HOLDER NAME BNP Paribas Nominees Pty Ltd (DRP) BNP Paribas Nominees Pty Ltd (Agency Lending DRP A/C) Citicorp Nominees Pty Limited Citicorp Nominees Pty Limited (Colonial First State Inv A/C) Eniat Pty Ltd HSBC Custody Nominees (Australia) Limited JP Morgan Nominees Australia Limited MFLE Pty Ltd Moufarrige, Alfred George National Nominees Limited Omnioffi ces Pty Limited HSBC Custody Nominees (Australia) Limited (Nt-Commonweallth Super Corp A/C) RBC Investor Services Australia Nominees Pty Limited (Bkcust A/C) RBC Investor Services Australia Nominees Pty Limited (Piselect) RBC Investor Services Australia Nominees Pty Limited (Pi Pooled A/C) RBC Investor Services Australia Nominees Pty Limited (VFA A/C) Sandhurst Trustees Ltd (Wentworth Williamson A/C) Sovori Pty Ltd UBS Nominees Pty Ltd Totals for Top 20 Uvira Superannuation Pty Limited (Uvira Holdings Employees Super Fund Account) NUMBER OF ORDINARY SHARES HELD PERCENTAGE OF CAPITAL 1,334,889 3,043,496 8,050,019 530,582 1,800,000 10,663,360 471,284 6,521,260 1,800,000 547,436 4,229,506 302,808 460,573 476,931 770,239 407,487 235,628 42,224,643 3,128,577 413,474 87,412,192 HELD 1.36% 3.09% 8.18% 0.54% 1.83% 10.83% 0.48% 6.63% 1.83% 0.56% 4.30% 0.31% 0.47% 0.48% 0.78% 0.41% 0.24% 42.90% 3.18% 0.42% 88.80% C O R P O R AT E I N F O R M AT I O N Directors Bruce Corlett Rick Holliday-Smith Alf Moufarrige Taine Moufarrige Mark Vaile Company secretary Greg Pearce Chairman & non-executive director, independent Non-executive director, independent CEO & Managing director Non-executive director Non-executive director, independent Registered office and principal office Level 63, MLC Centre 19 Martin Place Sydney NSW 2000 Telephone: Facsimile: + 61 (2) 9231 7500 + 61 (2) 9231 7665 Auditor Deloitte Touche Tohmatsu Grosvenor Place 225 George Street Sydney NSW 2000 Share registry Boardroom Pty Limited Level 12 Grosvenor Place 225 George Street Sydney NSW 2000 GPO Box 3993 Sydney NSW 2001 Telephone: 1300 737 760 + 61 (2) 9290 9600 Email: + 61 (2) 9279 0664 enquiries@boardroomlimited.com.au Stock exchange Servcorp Limited shares are quoted on the Australian Securities Exchange under the code SRV. The Home Exchange is Sydney. Annual general meeting The annual general meeting of Servcorp Limited will be held at 4.30pm on Tuesday, 08 November 2016 at: The Westin Level 6, Barnet Room 1 Martin Place Sydney NSW 2000 Runway to the World 101 Runway to the world 101 Runway to the world 101 5 STAR SUCCESS ANNUAL REPORT 2016

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