Washington H. Soul Pattinson and Company Limited ABN 49 000 002 728 ASX Code: SOL Annual R '162017 e p o r t Profile Calendar Washington H. Soul Pattinson and Company Limited (WHSP) was incorporated on 21 January 1903 having previously traded as two separate companies, Pattinson and Co. and Washington H. Soul and Co. Following a public offering of shares, WHSP was listed on the Sydney Stock Exchange (now the Australian Securities Exchange) on 21 January 1903. Over 100 years as a listed public company When Caleb Soul and his son Washington opened their first store at 177 Pitt Street, Sydney, in 1872 neither of them could have envisaged that 145 years later their single pharmacy would have evolved into a company as prominent and diversified as WHSP. WHSP is now a significant investment house with a portfolio encompassing many industries including its traditional field of pharmaceuticals, as well as coal mining, building materials, copper and gold mining and refining, equity investments, property investment, telecommunications and financial services. Final Dividend Record date 20 November 2017 Payment date 11 December 2017 Annual General Meeting AGM date AGM venue 8 December 2017 The Wesley Theatre Wesley Conference Centre 220 Pitt Street, Sydney Group Company displays open 10.45am AGM commences 12.00 noon For more information visit our website www.whsp.com.au DIVERSIFIED PORTFOLIO LONG TERM INVESTOR CONSERVATIVE AND VALUE FOCUSED OVER THE LAST 15 YEARS WHSP HAS CONTINUALLY INCREASED DIVIDENDS GROWING AT A COMPOUND ANNUAL GROWTH RATE OF 9.4% PA DELIVERED A TSR OF 12.8% PER ANNUM OUTPERFORMING THE ALL ORDS ACCUMULATION INDEX BY 3.9% PA Corporate Directory Contents Chairman – Non-Executive Director Key Highlights Chairman’s review Managing Director and Chief Executive Officer Review of group entities Directors Robert D Millner Todd J Barlow Michael J Hawker Thomas C D Millner Warwick M Negus Melinda R Roderick Robert G Westphal David E Wills Non-Executive Director Non-Executive Director Non-Executive Director Finance Director and Chief Financial Officer Non-Executive Director Non-Executive Director to retire 31 October 2017 Tiffany L Fuller Appointed as a Non-executive Director effective 1 December 2017 Company Secretary Ian D Bloodworth Auditors Pitcher Partners Sydney 160 Pitt Street, Sydney Circa 1950 TPG Telecom Limited Brickworks Limited New Hope Corporation Limited Financial Services Portfolio Australian Pharmaceutical Industries Limited CopperChem Limited and Exco Resources Limited Apex Healthcare Berhad TPI Enterprises Limited Other Investments Investment Properties Directors’ report Remuneration report Auditor’s independence declaration Financial report Consolidated income statement Consolidated statement of comprehensive income Consolidated statement of financial position Consolidated statement of changes in equity Consolidated statement of cash flows Notes to the consolidated financial statements Directors’ declaration Independent auditor’s report ASX additional information 2 3 9 10 12 14 17 18 19 20 21 22 22 23 30 49 50 52 53 54 55 56 57 132 133 137 1 Key Highlights MORE THAN DOUBLED NET PROFIT AFTER TAX $333.6m 123.3% 1 HIGHEST EVER REGULAR PROFIT AFTER TAX $282m 59.1% 1 17th YEAR OF INCREASE FULLY FRANKED DIVIDENDS 54 cps 3.8% 1 REGULAR CASH 60 cps 4.5% 1 TOTAL SHAREHOLDERS 17,853 20.3% 1 ENTERED ASX 300 March 2017 ENTERED ASX 200 September 2017 Regular profit after tax is a non-statutory profit measure and represents profit from continuing operations before non-regular items. A reconciliation to statutory profit is included in the Consolidated Financial Statements – Note 3, Segment information. 2 Washington H. Soul Pattinson and Company Limited Annual Report 2017 PROFIT AFTER TAX INCREASED BY 123% Chairman’s Review Dear Shareholders, I am pleased to present the 2017 Annual Report for Washington H. Soul Pattinson and Company Limited (WHSP, Parent Company) on behalf of the Board of Directors of the Company. Consolidated Financial Performance The profit after tax attributable to shareholders for the year ended 31 July 2017 was $333.6 million, an increase of 123.3% compared to the $149.4 million for last year. The regular profit after tax* of $282.0 million was the Group’s highest ever and increased by 59.1% over the $177.2 million for 2016. This increase was attributable to improved regular contributions across the portfolio, notably: 4 New Hope Corporation Limited (up 2,412%) which capitalised on a recovery in coal prices and its new Bengalla joint venture; 4 TPG Telecom Limited (up 14.3%) with growth in both consumer and corporate segments; 4 Brickworks (up 6.1%) on the back of continued east coast building activity and demand for Brickworks’ land portfolio; and 4 Australian Pharmaceutical Industries Limited (up 16.8%) through continued organic growth of the Priceline pharmacies. The net profit on non-regular items was $51.6 million (2016: $27.8 million loss) including: a gain on the recognition of Pengana Capital Group as an associate; gains on the disposal and part disposal of associates; and gains on the sale of long-term equity investments. Comparisons with the prior year are as follows: Profit after tax attributable to shareholders Regular profit after tax* attributable to shareholders Interim Dividend (paid in May each year) Final Dividend (payable 11 December 2017) 2017 $’000 333,611 282,019 22 cents 32 cents 2016 $’000 149,421 177,222 21 cents 31 cents Total Dividends 54 cents 52 cents % Change + 123.3% + 59.1% + 4.8% + 3.2% + 3.8% * Regular profit after tax is a non-statutory profit measure and represents profit from continuing operations before non-regular items. A reconciliation to statutory profit is included in the Consolidated Financial Statements – Note 3, Segment information. 3 Assets of the Parent Company Washington H. Soul Pattinson and Company Limited The assets of WHSP are summarised below. The net asset value at 31 July 2017 was $4.5 billion a decrease of $1.6 billion or 25.9% compared to $6.0 billion as at 31 July 2016. This decrease is mainly attributable to the decrease in TPG Telecom’s share price. As at 31 July 2017 TPG Telecom1 Brickworks1 New Hope Corporation1 Financial Services Portfolio1 & 2 Australian Pharmaceutical Industries1 CopperChem and Exco Resources2 Apex Healthcare Berhad1 TPI Enterprises1 Other Listed Investment Portfolio1 Other Unlisted Investment Portfolio2 Property Portfolio2 (net of borrowings) Cash and other net assets WHSP’s Holding % 25.2% 44.0% 59.6% – 19.4% 100% 30.3% 18.9% Value of WHSP’s Holding $m 1,305 867 793 409 167 84 49 40 447 72 208 25 12 month Movement % $m (1,433) (120) 0 149 (64) 24 4 11 (98) (17) 31 (49) (52.3%) (12.2%) 0% 57.2% (27.7%) 39.1% 8.5% 39.6% (18.0%) (18.7%) 17.9% (65.6%) Net asset value (pre-tax)3 4,466 (1,562) (25.9%) 1 At market value. 2 At Directors’ valuations. 3 The tax payable if all of these assets had been disposed of on 31 July 2017 would have been approximately $787 million. 4 Washington H. Soul Pattinson and Company Limited Annual Report 2017 Brickworks Limited Chairman’s Review During the year, WHSP invested a further $100.7 million in TPG Telecom, via a capital raising, to finance its purchase of mobile network spectrum. WHSP has aggregated its financial services investments into a financial services portfolio. BKI Investment Company (BKI), Milton Corporation (Milton) and Pitt Capital Partners were held at the beginning of the year. Proceeds from the sale of part of the BKI and Milton holdings were $25.1 million with a gain of $9.9 million. Holdings in Pengana Capital Group, Hunter Hall Global Value, URB Investments and Contact Asset Management were acquired during the year for $96.2 million and at 31 July 2017 had a value of $161.9 million, an increase of $65.7 million. The holding in Australian Pharmaceutical Industries was reduced from 24.6% to 19.4% for proceeds of $53.6 million and a profit of $19.1 million. A further $11.8 million was invested in TPI Enterprises and WHSP participated in Ruralco Holdings’ capital raising before selling its entire holding for $56.1 million. While most of WHSP’s investments delivered improved regular contributions this year, the share prices of the listed investments did not consistently reflect their performances. TPG Telecom’s regular profit increased by 15.6% yet its share price decreased by 56.3%. Brickworks’ underlying profit increased by 33.6% to a record $196.4 million while its share price decreased by 12.2%. Proceeds from the sale of other listed investments was $90.4 million for the year while new investments totalled $39.4 million. The gain on disposals was $30.1 million and included Perpetual, Australia and New Zealand Banking Group (ANZ Bank) and Telstra. Unlisted investments decreased in value by $16.7 million, mainly as a result of sales. During the year, two property investments were disposed of for $20.1 million. Investments were made in three new properties totalling $32.9 million and a property was revalued by $8.9 million. Washington H. Soul Pattinson and Company Limited WHSP is a long-term investor with its focus on providing its shareholders with capital growth and increasing fully franked dividends. WHSP has consistently outperformed the ASX All Ordinaries Accumulation Index over the long term. Total shareholder return (TSR) measures share price movement over time and assumes dividends received are reinvested by purchasing additional shares. The table below shows the TSRs for WHSP shares for various periods and compares them to the ASX All Ordinaries Accumulation Index which also includes the reinvestment of dividends. Total Shareholder Returns to 31 July 2017 Annual Return WHSP 1 Year 2 Years 3 Years 5 Years 10 Years 15 Years 4.5% 17.2% 8.8% 9.6% 9.6% 12.8% All Ordinaries Accumulation Index 6.6% 5.3% 5.3% 10.8% 3.7% 8.9% 5 15 YEAR TOTAL SHAREHOLDER RETURN OVER 12% PER ANNUM 600% 500% 400% 300% 200% 100% 0% The following chart shows the total return over time of an initial investment made in WHSP shares in July 2002 compared to the ASX All Ordinaries Accumulation Index. An investment in WHSP over the last 15 years has almost doubled an investment in the index. 15 Year Total Shareholder Return WHSP All Ordinaries Accumulation Index WHSP +511% +259% All Ordinaries Accumulation Index 2 0 0 2 3 0 0 2 4 0 0 2 5 0 0 2 6 0 0 2 7 0 0 2 8 0 0 2 9 0 0 2 0 1 0 2 1 1 0 2 2 1 0 2 3 1 0 2 4 1 0 2 5 1 0 2 6 1 0 2 7 1 0 2 Includes the re-investment of dividends. 6 Washington H. Soul Pattinson and Company Limited Annual Report 2017 New Hope Group Chairman’s Review The following chart shows that the wealth creation is even more pronounced over a longer period. If a shareholder had invested $1,000 in 1977 and reinvested all dividends, the shareholding would have appreciated to nearly $495,000 as at 31 July 2017. This equates to a compound annual growth rate of 16.8% year on year for 40 years. Wealth Creation over 40 years 4 $1,000 invested in 1977 worth $494,808 in 2017 4 Compound annual return of 16.8% for 40 years $500,000 $450,000 $400,000 $350,000 $300,000 $250,000 $200,000 $150,000 $100,000 $50,000 $0 7 7 9 1 2 8 9 1 7 8 9 1 2 9 9 1 7 9 9 1 2 0 0 2 7 0 0 2 2 1 0 2 7 1 0 2 Includes the re-investment of dividends. Dividends The chart below demonstrates WHSP’s exceptional history of paying dividends to shareholders. The compound annual growth rate of the Company’s ordinary dividends is 9.4% PA over the last 15 years and WHSP has not missed paying a dividend since listing in 1903 (including during the Great Depression of the 1930s and the Global Financial Crisis of 2007-08). TOTAL DIVIDEND FOR THE YEAR 54¢ 20 Year Dividend History Cents per Share Total Ordinary Dividends Special Dividends 25 12.5 15 15 5 5 20 17 27 28.5 30 25 32 34 50 52 48 54 46 44 40 3 0 0 2 4 0 0 2 5 0 0 2 6 0 0 2 7 0 0 2 8 0 0 2 9 0 0 2 0 1 0 2 1 1 0 2 2 1 0 2 3 1 0 2 4 1 0 2 5 1 0 2 6 1 0 2 7 1 0 2 4 3.5 10 11 0 0 0 2 1 0 0 2 5 14 2 0 0 2 10 8 9 9 1 12 9 9 9 1 7 Chairman’s Review Final Dividend The Directors have declared a fully franked final dividend of 32 cents per share in respect of the year ended 31 July 2017 (2016: 31 cents fully franked). This brings total dividends for the year to 54 cents fully franked (2016: 52 cents fully franked). The record date for the final dividend will be 20 November 2017 with payment due on 11 December 2017. WHSP is one of only two companies in the ASX All Ordinaries Index to have increased its dividend every year for the last 17 years. The Company receives dividends and distributions from its investments, interest from funds on deposit and gains on property assets. The Directors declare interim and final dividends based on the Company’s regular cash inflows less regular operating costs. This year it will pay out, as dividends, 90.0% of its net regular cash inflows from operations (2016: 90.6%). WHSP’s diversified portfolio continues to deliver reliable cash returns enabling it to provide increasing fully franked dividends to its shareholders. Perpetual litigation During the year, the Company successfully defended litigation brought by funds managed by Perpetual Investment Management Limited (Perpetual). The Federal Court dismissed all allegations made by Perpetual and ordered Perpetual to pay WHSP’s costs. Justice Jagot found that “reasonable directors would not consider maintenance of the cross-shareholding to date to be unfair or oppressive. Accordingly, Perpetual’s claim must be rejected… On any reasonable view of the evidence, the directors of each company have diligently considered the structure of the companies with their obligations to act in the best interests of the company firmly in mind.” The Court’s decision brought to an end Perpetual’s long period of agitation where your Company was subjected to criticism and attacks, some of which were very personal. On behalf of WHSP, I thank shareholders for their patience and support. WHSP is now in a stronger position with an increased number of shareholders, a diverse range of institutional shareholders and increased liquidity, which has led to inclusion in the ASX200 and ASX 300 indices. The Board and management continue to focus all of their efforts on increasing value and growing dividends for shareholders. R D Millner Chairman 8 Washington H. Soul Pattinson and Company Limited Annual Report 2017 Review of Group Entities as at 31 July 2017 TPG Telecom Limited ASX:TPM 10 Brickworks Limited ASX:BKW 12 New Hope Corporation Limited ASX:NHC 14 Financial Services Portfolio 17 Australian Pharmaceutical Industries Limited ASX:API 18 CopperChem Limited and Exco Resources Limited 19 Apex Healthcare Berhad Bursa Malaysia: APEX MK 20 TPI Enterprises Limited ASX:TPE 21 Other Investments and Property 22 9 TPG Telecom Limited Associated entity: 25.2% held Dividends paid to WHSP: $33.1 million Total Market Capitalisation: $5.19 billion Value of WHSP’s Holding: $1.30 billion ASX code: TPM TPG reported the following results for the year ended 31 July 2017: 4 Earnings before interest, tax, depreciation and amortisation (EBITDA) of $890.8 million, an increase of 5%. 4 Net profit after tax (NPAT) of $413.8 million, an increase of 9%. 4 Earnings per share (EPS) 47.9 cents, an increase of 6%. Underlying Results The above results include the following irregular items: 4 $48.8 million profit realised on the sale of equity investments ($35.3 million post tax); and 4 $7.0 million non-recurring revenue earned by TPG’s consumer segment ($4.9 million post tax). Excluding these irregular items and the $74.1 million ($70.7 million post tax) irregular items that benefitted the reported EBITDA last year, TPG’s underlying EBITDA has increased by $59.7 million or 8% to $835.0 million. This is $5 million above the top end of the $820–830 million guidance range provided in September 2016. TPG’s underlying NPAT grew by $56.3 million or 16% to $417.3 million due primarily to the EBITDA growth and a $32.4 million pre-tax decrease in net financing costs. Net financing costs fell due to a reduction in the quantum and cost of TPG’s bank debt. Underlying EPS increased by 12% to 48.3 cents per share. Segment Results The consumer segment’s EBITDA for the year was $530.4 million compared to $467.4 million for 2016. Irregular items affecting this movement were $7.0 million of one-off revenue earned through a key supplier arrangement this year and $6.3 million of iiNet integration costs incurred last year and not repeated this year. Excluding these irregular items, the consumer segment achieved underlying EBITDA growth of $49.7 million. This growth was driven by: an extra 3 weeks contribution from iiNet relative to 2016 of approximately $13.8 million; and organic growth of $35.9 million driven by NBN and fibre to the building subscriber growth and the continued realisation of financial benefits from iiNet integration activities. The corporate segment achieved EBITDA of $312.8 million compared to $300.2 million last year. This growth of $12.6 million was driven by continued strong data and internet sales and margin expansion. 10 Washington H. Soul Pattinson and Company Limited Annual Report 2017 NET PROFIT CONTRIBUTED TO THE GROUP $104 MILLION Review of Group Entities Cash Flow, Capital Expenditure and Gearing TPG delivered another strong cash flow result with $869.7 million of cash generated from operations (pre-tax). TPG’s capital expenditure of $576.3 million included $207.5 million for mobile spectrum purchases, comprising of $124.4 million for Singapore new entrant and general auctions, $73.1 million for Australian 1800MHz spectrum and a $10.0 million prepayment in relation to Australian 700MHz spectrum. Aside from spectrum purchases, there was no significant mobile network expenditure. This expenditure will commence in 2018 financial year. Other capital expenditure for the year of $368.8m was approximately $100 million higher than last year. This was driven by: an acceleration in the fibre expansion for the Vodafone fibre contract which is on schedule to be completed on time and within budget during the 2018 financial year; and the acquisition of additional interna- tional capacity. Cash flows for the year were boosted by proceeds from the sale of equity investments of $124.5 million. These, together with the free cash flow generated in the year and the $400 million equity raise undertaken in April 2017 enabled TPG to reduce its bank debt as at the year end to $900 million. This resulted in a debt to EBITDA leverage ratio of less than 1.1 times. Debt facilities As at the year end TPG had $735 million of undrawn debt facilities. In September 2017, TPG increased its total committed debt facilities by a further $750 million to $2,385 million in order to finance its spectrum commitments and planned mobile network builds. Under the revised September 2017 debt facility agreement the improved pricing that TPG secured when it refinanced in December 2016 was maintained and the maturities of the facilities were extended. The maturity profile of the facilities is now between 3 and 7 years from September 2017 with a weighted average period of 4.5 years. Mobile Strategy Update In addition to achieving the important milestone of securing debt financing to support the mobile strategy, TPG has also made strong progress in the implementation of its mobile network rollouts in both Singapore and Australia. In Singapore, TPG is on track to achieve the first milestone of nationwide outdoor service coverage before the end of 2018. Capital expenditure projections are currently looking to be within initial assumptions. In Australia, where the initial network implementation is concentrated on the most densely populated areas, TPG has already entered into agreements with multiple utility partners to gain access to a large number of sites to provide coverage of major metropolitan areas. Implementation of some initial site clusters in Sydney, Melbourne and Canberra are expected to be completed by mid 2018. Dividend TPG has declared a reduced final dividend of 2 cents per share fully franked and have re-implemented the Dividend Reinvestment Plan for this dividend with a discount of 1.5%. This final dividend brings the total dividends for the year to 10 cents per share fully franked compared to 14.5 cents for last year. Contribution TPG contributed a net profit of $104.1 million to the Group (2016: $97.5 million). 11 Brickworks Limited Associated entity: 44.0% held Dividends paid to WHSP: $32.2 million Total Market Capitalisation: $1.97 billion Value of WHSP’s Holding: $867 million ASX code: BKW RECORD UNDERLYING NET PROFIT AFTER TAX UP 33.6% Brickworks posted a statutory net profit after tax (NPAT) for the year ended 31 July 2017 of $186.2 million, up 138.2% on the prior year. Record underlying NPAT of $196.4 million was up 33.6% from $147.1 million for the year ended 31 July 2016. Statutory earnings per share (EPS) was 124.9 cents, up 137.6% on the prior year, and underlying EPS was 131.8 cents, up 33.2%. Brickworks has declared a fully franked final dividend of 34 cents per share for the year ended 31 July 2017, up 6.3% from 32 cents last year. Together with the interim dividend of 17 cents per share, this brings the total dividends paid for the year to 51 cents per share, up 3 cents or 6.3% on the prior year. Building Products Building Products’ earnings before interest and tax (EBIT) was $65.0 million, down 13.7% on the prior year. Earnings on the east coast were higher, despite the impact of Cyclone Debbie and the associated period of heavy rain that had a significant impact on sales volume and manufacturing operations. This was offset by a decrease in earnings in Western Australia, as a result of the difficult market conditions and subsequent re-structuring activities in that state. 12 Washington H. Soul Pattinson and Company Limited Annual Report 2017 Review of Group Entities Total dwelling commencements for Australia were down 7.9% to 215,144 for the twelve months ended 30 June 2017. Despite the decline, this level of building activity remains elevated compared to historical averages. Detached housing commencements remained at near peak levels, buoyed by growth in New South Wales which partially offset the significant fall in Western Australia. After years of unprecedented growth, non-detached housing commencements decreased by 12.6% in the year to 30 June 2017, with all states except New South Wales experiencing falls. Austral Bricks delivered a 7.3% increase in earnings for the year, with sales revenue up 2.0% to $413.9 million. A focus on innovation and development of premium products continued to drive up sales margins during the year. Unit manufacturing costs improved, primarily as a result of prior period plant upgrades. Property The Property Group produced an EBIT of $90.6 million for the year, up 23.3% from $73.5 million in 2016. The improved result was due primarily to the sale of Oakdale West into the Joint Venture Industrial Property Trust during the first half, which contributed an EBIT of $50.1 million. This 90 hectare site at Eastern Creek in New South Wales will be developed by the Property Trust as an industrial estate over the coming years. The Joint Venture Industrial Property Trust (Property Trust) is a 50/50 partnership between Brickworks and the Goodman Industrial Trust. The net income distributed from the Property Trust was $18.0 million, up 17.6% from $15.3 million last year. In addition to annual rent increases on established properties, new developments at Rochedale and Oakdale Central contributed to this uplift. The total value of assets held within the Property Trust at 31 July 2017 was $1.401 billion with borrowings of $441 million, giving a total net value of $960 million. Brickworks’ share of the Property Trust’s net asset value was $480 million, up $148 million from $332 million at 31 July 2016. Outlook The Building Products Group continues to face mixed market conditions across the country, with the elevated east coast demand being offset by the significant weakness in Western Australia. Brickworks’ pipeline of work is extremely strong in the major east coast states. Brickworks is confident that the significant restructuring activities undertaken in Western Australia during 2017 have positioned its businesses to deliver improved results. The most significant threat to Building Products’ earnings is rising energy prices. Within Austral Bricks, energy prices represent around 26% of non-labour input costs and therefore any increase has a significant impact on margins. Overall, Brickworks remains positive about the short-term outlook for Building Products. Development activity within the Property Trust is currently at record levels, and the completion of further developments at Rochedale and Oakdale Central during the year will continue to increase rental income and asset value. Despite the strong prospects for the Property Trust, 2018 EBIT from Property will be lower than 2017, as no significant land sales are expected to occur within the period. Contribution Brickworks contributed a net profit of $36.3 million (2016: $9.6 million 44.1% held) to the Group. These contributions exclude the WHSP profit taken up by Brickworks under the equity accounting method. Brickworks Limited 13 New Hope Corporation Limited Controlled entity: 59.6% held Dividends paid to WHSP: $29.7 million Total Market Capitalisation: $1.33 billion Value of WHSP’s Holding: $793 million ASX code: NHC REGULAR PROFIT AFTER TAX INCREASED 2,459% New Hope reported a net profit after tax and before non-regular items of $128.7 million for the year ended 31 July 2017. The result comprised: a profit of $133.1 million from coal mining, marketing and logistics operations; and a loss of $4.4 million from oil operations. This result is an increase of 2,459% on the 2016 profit of $5.0 million. The net profit after non-regular items was $140.6 million, comprising of: a profit of $145.0 million from coal mining, marketing and logistics operations and a loss of $4.4 million from oil operations. This is an increase of 362% on the 2016 loss of $53.7 million. Compared to last year, the 2017 full year result benefitted from: 4 Increased production and sales due to the inclusion of the Bengalla Joint Venture for the full year; 4 Increased coal prices in both US Dollar and Australian Dollar terms; and 4 A non-regular recovery of prior period below rail access charges. During the year, New Hope generated a strong operating cash surplus of $313.0 million (before tax payments and interest). Before non-regular items, basic earnings for 2017 were 15.4 cents per share, compared to 0.6 cents per share in 2016. After non-regular items basic earnings per share were 16.9 cents per share for 2017 against 6.5 cents loss in 2016. New Hope has declared a fully franked final dividend of 6 cents per share (2016: 2 cents). Together with the interim dividend of 4 cents per share, this brings the total dividends for the year to 10 cents per share (2016: 4 cents). 14 Washington H. Soul Pattinson and Company Limited Annual Report 2017 Review of Group Entities Mining Operations Coal production for the year was 8.6 million tonnes compared to 6.6 million tonnes produced in 2016. Bengalla contributed 3.4 million tonnes during the year and the Queensland mining operations produced 5.2 million tonnes which was comparable to 2016 production. The New Acland Mine produced 4.6 million tonnes of coal in 2017 which was consistent with 2016 production. The West Moreton operations, comprising the Jeebropilly Mine and rehabilitation sites at New Oakleigh and Chuwar, produced 0.6 million tonnes of coal in 2017 which was in line with 2016. Coal sales for 2017 were 8.5 million tonnes (including 3.4 million tonnes from Bengalla) which was well above the 6.9 million tonnes sold in 2016. New Acland Stage 3 Development (NAC03) On the 31 May 2017 the Queensland Land Court handed down its findings in respect of New Hope’s Mining Lease Application for the Stage 3 continuation project, recommending that the Environmental Authority and Mining Leases for NAC03 not be granted. After careful consideration of the recommendation, New Hope has initiated a Judicial Review of the findings. It is anticipated the Judicial Review will be heard in the Supreme Court during the first quarter of 2018. Queensland Bulk Handling (QBH) QBH, New Hope’s 100% owned coal terminal at the Port of Brisbane. A severe storm event in November 2016 damaged the ship loader resulting in high coal stock levels being built up throughout the logistics chain. Despite this, QBH exported 6.9 million tonnes of coal on 88 vessels, a similar result to last year. QBH remains essentially a demurrage free port. Bengalla Joint Venture The Bengalla joint venture mine (100% basis) produced 8.5 million tonnes of coal in 2017. This was the first full year of production since New Hope acquired its 40% interest in March 2016. The Bengalla Mine is operated by the Bengalla Mining Company Pty Limited of which New Hope has a 40% interest. Rehabilitated Land – Pastoral Operations An additional 100 hectares of rehabilitated land was fenced off from the mining lease during the year and handed to Acland Pastoral for production and grazing activities. Acland Pastoral continued to grow a breeding herd throughout the year with sales of 1,088 head and purchases of 666 head resulting in total herd size of 2,932 at year end. The cropping operation continued with silage production to support the breeding operation. The cattle grazing trial continued with a review of the overall strategy to be completed at the end of the 2018 financial year. Bridgeport Annual oil production totalled 308,959 barrels, a 61% increase on the previous full year of 191,993 barrels, principally due to the October 2016 acquisition of Kenmore-Bodalla and associated fields but also due to improved production performance at other principal assets. In five years Bridgeport has become the fourth largest producer in the Cooper Basin. Sales revenue was $18.7 million compared to $10.5 million for the prior year, an increase of 78%. Bridgeport achieved earnings before interest, tax, depreciation and amortisation (EBITDA) of $1.1 million for the year. Realised oil sales prices averaged $65 per barrel against the previous year’s $57 per barrel. Bridgeport now manages over 140 wells across its ten operated production assets and is one of the most active operators in the Cooper Basin producing approximately 1,000 barrel of oil per day. New Hope continued >>> 15 New Hope Corporation Limited (continued) Outlook During the past year the decision to acquire a 40% interest in the Bengalla coal mine in the Hunter Valley of New South Wales was confirmed by the combination of the mine producing close to expectations and the coal price improving significantly. New Hope’s 40% share of Bengalla resulted in an additional 3.4 million tonnes of sales for the past year, during a period of strong thermal coal prices. It is anticipated that both mine safety and production performance will continue to improve over the course of the 2018 financial year, as the results of current produc- tivity and safety improvement initiatives are realised. Queensland operations at New Acland and Jeebropilly produced 5.2 million tonnes for the year and this level of production is expected to continue during the 2018 financial year. Sales performance for the year of 5.1 million tonnes was impacted by logistical delays caused by damage to the QBH ship loader in November 2016. Sales during the 2018 financial year are expected to match production. The New Acland operation employs several hundred people and many more people are employed by south east Queensland businesses which rely on New Acland to supply their energy needs. New Hope remains committed to delivering the New Acland Stage 3 project and will actively progress this project through the final stages of approval. We look forward to the Queensland Government’s timely and favourable decision regarding the future of this operation. New Hope has a suite of undeveloped open cut coal projects including Lenton, Colton and North Surat. Colton received its Mining Lease during the past financial year. It is expected that significant progress will occur during the next financial year in progressing these projects closer to production. New Hope continues to evaluate open cut thermal and metallurgical coal acquisition opportunities as it has the people, technical and balance sheet capability to expand production. Demand for high quality Australian thermal coal into Asian markets continues to grow. Major thermal coal markets of Japan, Taiwan, Korea and China continue to build new High Efficiency Low Emission (HELE) coal fired power plants as part of their electricity supply. A new wave of HELE coal fired power plants are planned or under construction in southern Asia. Bridgeport increased its production significantly during the past year and achieved a positive EBITDA during a period of challenging oil prices. Bridgeport has many growth options including the potential for an enhanced oil recovery project at the Moonie oil field and the potential to explore for gas within existing tenements. Contribution New Hope contributed a net profit of $83.8 million to the Group (2016: $29.2 million loss). 16 Washington H. Soul Pattinson and Company Limited Annual Report 2017 Acland Pastural (operating on rehabilitated land) Review of Group Entities Financial Services Portfolio Dividends paid to WHSP: $13.8 million Value of WHSP’s Holding: $409 million DIVIDENDS PAID TO THE GROUP $14m Milton CORPORATION LIMITED WHSP has aggregated its financial services investments into a financial services portfolio. The market valuation of the assets in this portfolio at 31 July 2017 was over $400 million. The cost base on these assets is less than $250 million. The assets in the portfolio include investments in funds management, corporate advisory and Listed Investment Companies (LICs). During the year ended 31 July 2017, WHSP actively increased its exposure to the financial services sector through the acquisition of shareholdings in Hunter Hall International and Pengana Capital. These two companies merged their operations and WHSP became the largest shareholder in the merged entity, with 39.2% of Pengana Capital Group (ASX: PCG). The portfolio includes shareholdings in a number of LICs which provide WHSP with exposure to a range of equity strategies which are well managed and cost effective. During the year, WHSP acquired: 4 12.4% of URB Investments (ASX: URB), a LIC which targets long-term value creation through exposure to urban renewal and regeneration; and 4 10.0% of Hunter Hall Global Value (ASX: HHV), which gives WHSP exposure to a managed portfolio of global equities. These new investments in LICs supplement WHSP’s existing exposure to Australian equities through its 4.5% holding in Milton Corporation (ASX: MLT) and 9.5% holding in BKI Investment Company (ASX: BKI). WHSP will continue to look for investments in the financial services sector where it sees long-term growth and attractive industry dynamics. As at 31 July 2017 BKI Investment Company Limited (ASX: BKI) Contact Asset Management Pty Limited Hunter Hall Global Value Limited (ASX: HHV) Milton Corporation Limited (ASX: MLT) Pengana Capital Group Limited (ASX: PCG) Pitt Capital Partners Limited URB Investments Limited (ASX: URB) WHSP’s Holding % 9.5% 20.0% 10.0% 4.5% 39.2% 100% 12.4% The financial services portfolio contributed a net profit of $13.1 million to the Group (2016: $13.5 million). Its contribution to regular profit was $15.4 million (2016: $13.5 million). 17 Australian Pharmaceutical Industries Limited Associated entity: 19.4% held Dividends paid to WHSP: $8.4 million Total Market Capitalisation: $860 million Value of WHSP’s Holding: $167 million ASX code: API NET PROFIT CONTRIBUTED TO THE GROUP $14m API’s financial year ended on 31 August 2017. The results for the full year are not expected to be released to the market until late October 2017. For the six months ended 28 February 2017, API reported the following results which are compared to those of the first half last year: 4 Revenue of $2.02 billion, up 12.7%; 4 Earnings before interest and tax of $48.6 million, up 9.0%; 4 Underlying net profit after tax of $29.1 million, up 15.0%; and 4 Net profit after tax of $29.1 million, up 27.2%. In June API paid a fully franked interim dividend of 3.5 cents per share, an increase of 40% over last year. API commented that it had increased net profit after tax and returns to its shareholders through organic growth in its Priceline Pharmacy network, despite the slower retail conditions in 2017, while generating cash and sustainable returns through its pharmacy distribution business. API released an updated full year profit guidance on 2 August advising that its net profit after tax for the year ended 31 August 2017 was expected to be approximately 5% higher than that of the 2016 financial year. WHSP has equity accounted API’s result for the 12 months to 28 February 2017. API contributed a net profit of $14.2 million (2016: $11.0 million 24.6% held) to the Group. 18 Washington H. Soul Pattinson and Company Limited Annual Report 2017 api Review of Group Entities CopperChem Limited and Exco Resources Limited Controlled entities: 100% held Unlisted entities CopperChem and Exco Resources are copper and gold exploration companies which have processing facilities capable of producing copper sulphate, copper concentrate and gold bullion. Production activities continued at the White Dam mine in South Australia during the year with gold production expected to continue until the middle of the 2018 calendar year. Approval was received for the development of the Wallace Gold Project in north-west Queensland. Further gold deposits are being identified within the broader CopperChem/Exco portfolio for continued gold production. Revenue from gold sales for the year was $18.4 million having increased significantly as gold production ramped up in the 2017 financial year. Exploration activities are continuing on a number of prospective targets for the purpose of identifying additional copper resources for future mining activities within the operating radius of the Cloncurry processing facilities. Exploration activity also focussed on a number of gold prospects in support of the feasibility study for the Wallace Gold Project south-east of Cloncurry. The copper concentrator and operations at Cloncurry remained on care and maintenance throughout the year. The existing crushing and grinding circuits of the plant will be integrated with a gold processing facility under construction. This facility will be utilised to process gold ores in the region along with the gold resources contained in the CopperChem/Exco portfolio. CopperChem has agreed terms to acquire the Stockman copper-zinc project from Independence Group Limited with the transaction expected to be completed early in the 2018 financial year. CopperChem and Exco contributed a net loss of $2.9 million to the Group (2016: $42.2 million loss). The 2016 contribution included non-regular expenses of $33.3 million. Exco 19 Apex Healthcare Berhad Associated entity: 30.3% held Dividends paid to WHSP: $1.3 million Total Market Capitalisation: $162 million Value of WHSP’s Holding: $49 million Listed on Bursa Malaysia, code: APEX MK NET PROFIT CONTRIBUTED TO THE GROUP $3.3m Apex develops, manufactures, markets and distributes: pharmaceuticals; diagnostic products and equipment; consumer healthcare products; and orthopaedic devices. It has operations in Malaysia, Singapore, Vietnam and Myanmar (Burma) and is publicly listed on the Main Board of Bursa Malaysia. Apex’s results are converted from Malaysian Ringgit (MYR) to Australian dollars (AUD). The devaluation of the MYR has negatively affected Apex’s results when they are stated in AUD. For this reason the percentage movements shown below are based on MYR movements. For the six months ended 30 June 2017 Apex generated revenue of $92.7 million, an increase of 5.4% in MYR over the previous corresponding six month period. The net profit after tax attributable to shareholders was $6.1 million, an increase of 23.7% in MYR compared to first half of 2016. An interim dividend of 1.7 cents per share has been declared for the six months ended 30 June 2017, equal to the interim dividend last year in MYR. WHSP has equity accounted Apex’s result for the 12 months to 30 June 2017. Apex contributed a net profit of $3.3 million to the Group (2016: $3.4 million). 20 Washington H. Soul Pattinson and Company Limited Annual Report 2017 Apex Healthcare Berhad Review of Group Entities TPI Enterprises Limited Associated entity: 18.9% held Total Market Capitalisation: $213 million Value of WHSP’s Holding: $40 million ASX code: TPE TPI is one of only eight companies licensed globally to manufacturer narcotic raw material for pain relief medication. TPI has developed an innovative, efficient and environmentally sustainable method for extracting narcotic raw material from opium poppies. This manufacturing cost advantage is central to its strategy to achieve significant market share growth. This advantage combined with TPI’s recent ability to import poppy straw (TPI’s main raw material) and grow on the mainland see TPI well placed to deliver on its potential. TPI continues to achieve a number of milestones on its pathway to significantly increasing production and sales. In the last 12 months, TPI has achieved the following: 4 TPI secured increased volumes and more diverse sources of poppy straw. In addition to successfully sourcing crops in Tasmania and Victoria, TPI has contracted to growing in New South Wales. South Australia has approved growing for future years. TPI also secured licenses to import straw grown in Hungary and has recently announced its intention to import from the United Kingdom. 4 A toll processing agreement was announced with a major global producer of narcotic raw material, thereby indicating the significant price advantage of TPI’s processing technology. 4 TPI’s manufacturing advantage was improved with a number of operating efficiencies identified. In addition, TPI’s investment in an innovative harvesting technology translated into higher alkaloid content in processed straw resulting in higher factory capacity and efficiency. 4 TPI successfully completed negotiations to enter the UK Codeine Phosphate market through the supply of narcotic raw material and toll production with a UK manufacturer. TPI aims to become a significant supplier of Codeine Phosphate as well as a suite of derivative products in the UK. 4 The acquisition of an opiate and tableting business in Norway was announced in July 2017. This transaction will enable TPI to be fully integrated from the processing of narcotic raw material through to the production of pain relief tablets. The acquisition opens up significant sales opportunities to TPI and accelerates its growth and business strategy. WHSP has equity accounted TPI’s result for the 12 months to 30 June 2017. TPI contributed a net loss of $2.9 million to the Group (2016: $4.8 million loss). TPI Enterprises Limited 21 Review of Group Entities Other Investments As at 31 July 2017 Listed Bailador Technology Investments Limited Clover Corporation Limited Heritage Brands Limited Lindsay Australia Limited Quickstep Holdings Limited Verdant Minerals Limited (formerly Rum Jungle Resources) Unlisted Ampcontrol Pty Limited Seven Miles Coffee Roasters Pty Limited (formerly Belaroma Coffee) Specialist Oncology Property Pty Limited WHSP’s Holding % 19.1% 22.6% 25.1% 19.0% 15.9% 38.3% 43.3% 40.0% 23.3% Investment Properties WHSP has added to its property exposure during the year with the addition of three properties. These properties have been purchased in partnership with URB Investments Limited (URB) which was listed on the ASX in April 2017. The properties are held in special purpose trusts each of which is owned 50.1% by WHSP and 49.9% by URB. These properties are: 4 Kingsgrove NSW: a warehouse on 1.8 hectares of land. The building is currently being demolished. The land is in the process of being subdivided and sold in smaller lots. 4 Penrith NSW: a significant retail asset on 0.65 hectares of land located on the main street. This facility houses a hotel, retail shops and a carpark. 4 Prestons NSW: a seven hectare industrial development site. During the year Pitt Street Real Estate Partners (PSRE, 75% owned by WHSP) contracted to construct a 35,000 square metre warehouse facility for a major logistics company. WHSP has maintained its investment in the two office buildings in Pennant Hills NSW and the four hectare site with office and warehouse in Castle Hill, NSW. As previously reported, PSRE was awarded a contract to develop and deliver two bus depots for Transdev Australasia, on behalf of Public Transport Victoria. The Sunshine West depot was completed in July 2016 with settlement in late September 2016 while the Thomastown depot was completed in February 2017 and settled in March 2017. The combined sale proceeds for the two depots was $20.1 million. PSRE continues to investigate opportunities to add to WHSP’s property portfolio, whilst also considering the sale of mature assets. 22 Washington H. Soul Pattinson and Company Limited Annual Report 2017 Directors’ Report The Directors of Washington H. Soul Pattinson and Company Limited (WHSP, Parent Company) present their report and the financial statements of the Consolidated Entity, being the Parent Company and its subsidiaries (the Group), for the financial year ended 31 July 2017. Directors The following persons were Directors of WHSP for the whole of the financial year and up to the date of this report: 4 Mr R D Millner 4 Mr T J Barlow 4 Mr M J Hawker 4 Mr T C D Millner 4 Mr W M Negus 4 Ms M R Roderick 4 Mr R G Westphal The following person was a Director of WHSP for the whole of the financial year and up to the date of this report. He will retire from the Board on 31 October 2017: 4 Mr D E Wills The following person has been appointed as a Director of WHSP with effect from 1 December 2017: 4 Mrs T L Fuller Principal Activities The principal activities of the entities in the Consolidated Entity during the course of the financial year were: ownership of shares; coal mining; gold and copper mining and refining; property investment; and consulting. There were no significant changes in the nature of the Consolidated Entity’s principal activities during the year. Dividends Dividends paid or declared by the Parent Company since the end of the previous financial year were: Cents Per Share cents Total Amount $’000 Franking % Date of Payment Declared and paid during the year Final ordinary dividend 2016 Interim ordinary dividend 2017 Dealt with in the financial report as dividends Declared after the end of the year Final ordinary dividend 2017 31 22 53 32 74,213 52,667 126,880 100% 100% 12 December 2016 11 May 2017 76,607 100% 11 December 2017 23 Directors' Report 24 Review of Operations The profit after tax attributable to shareholders for the year ended 31 July 2017 was $333.6 million, 123.3% higher than the $149.4 million for the prior year. New Hope Corporation Limited contributed $83.8 million to Group profit, capitalising on a recovery in coal prices and its new Bengalla joint venture. Brickworks Limited contributed $36.3 million, an increase of 278.1% on last year. TPG Telecom Limited and Australian Pharmaceutical Industries Limited also increased their contributions and gains from the sale of equities by WHSP were higher. Comparison with the prior year is as follows: Revenue from continuing operations Profit after tax attributable to shareholders Interim Dividend (paid in May each year) Final Dividend (payable 11 December 2017) Total Dividends 2017 $000 967,570 333,611 22 cents 32 cents 54 cents 2016 $000 620,661 149,421 21 cents 31 cents 52 cents Change % + 55.9% + 123.3% + 4.8% + 3.2% + 3.8% For further information regarding the operations of the Group refer to the Chairman’s Review and the Review of Group Entities on pages 3 to 22 of this annual report. State of affairs In the opinion of the Directors there were no significant changes in the state of affairs of the Consolidated Entity that occurred during the financial year under review not otherwise disclosed in this report or the Consolidated Entity’s financial statements. Financial Position, Financial Instruments and Going Concern The Directors believe the Group is in a strong and stable position to grow its current operations. Details of financial risk management objectives and policies are set out in note 20 of the consolidated financial statements. The Directors, having made appropriate enquiries, consider that the Group has adequate resources to continue in its operational businesses for the foreseeable future and have therefore continued to adopt the going concern basis in preparing the financial statements. Litigation In 2013, an entity acting on the directions of Perpetual Investment Management Limited (Perpetual) lodged a claim against WHSP and Brickworks Limited (Brickworks) in the Federal Court of Australia. The claim sought to have the cross shareholding between WHSP and Brickworks unwound. On 10 July 2017, the Federal Court dismissed the claim and ordered Perpetual to pay the costs of WHSP and Brickworks. Justice Jagot found that “reasonable directors would not consider maintenance of the cross-share- holding to date to be unfair or oppressive. Accordingly, Perpetual’s claim must be rejected.” and “On any reasonable view of the evidence, the directors of each company have diligently considered the structure of the companies with their obligations to act in the best interests of the company firmly in mind.” Events Subsequent to the Reporting Date The Directors are not aware of any other event or circumstance since the end of the financial year not otherwise dealt with in this report or the consolidated financial statements that has or may significantly affect the operations of the Consolidated Entity, the results of those operations, or the state of affairs of the Consolidated Entity in subsequent years. Refer to note 7 of the consolidated financial statements. Washington H. Soul Pattinson and Company LimitedAnnual Report 2017 Likely Developments, Business Strategy and Prospects Other than as discussed in the Review of Group Entities, information about likely developments, business strategy and prospects and the expected results in subsequent financial years have not been disclosed because the Directors believe, on reasonable grounds, that to include such information would be likely to result in unreason- able prejudice to the Consolidated Entity. Corporate Governance Statement The Parent Company’s Corporate Governance Statement may be viewed in the Corporate Governance section of the Company’s web site at www.whsp.com.au/whsp/wp-content/uploads/2017/10/WHSP-Corporate- Governance-Statement.pdf Workplace Gender Equality In accordance with the requirements of the Workplace Gender Equality Act 2012, WHSP lodged its annual public report for the year ended 31 March 2017 with the Workplace Gender Equality Agency on 31 May 2017. The report may be viewed in the Employment section of the Company’s web site at www.whsp.com.au. Environmental Compliance The Group was subject to the reporting requirements of the National Greenhouse and Energy Reporting Act 2007 during the year. This Act requires the Group to report its annual greenhouse gas emissions and energy use. The Group has implemented systems and processes for the collection and calculation of the data required and submitted its 2015/16 report to the Greenhouse and Energy Data Officer on 25 October 2016. New Hope Group (NHG) The NHG was not prosecuted for any breach of environmental laws during the year. Environmental performance The majority of the NHG’s operations, which include coal mining operations and exploration tenements, the Jondaryan rail loading facility, the Queensland Bulk Handling coal export port facility and oil and gas operations are in Queensland. The key pieces of environmental legislation are: the Environmental Protection Act 1994; the Water Act 2000; and the Nature Conservation Act 1992, in Queensland and the Commonwealth Environmental Protection and Biodiversity Conservation Act 1999. The NHG’s operations have proactively undertaken initiatives to improve their environmental performance. Environmental systems During the 2017 financial year the NHG adhered to its environmental policy aligned with the requirements of the ISO 14001 standard and the NHG’s operations have continued improvement of the Environmental Management System (EMS). The EMS enables the NHG to effectively manage its environmental performance by increasing environmental awareness, optimising operational control, monitoring compliance and facilitating continuous improvement. Environmental reporting The NHG’s operational sites have submitted reports under the National Pollutant Inventory program. CopperChem Limited (CopperChem) and Exco Resources Limited (Exco) CopperChem’s mining operations and Exco’s Queensland exploration tenements are regulated by the Queensland Department of Environment and Heritage Protection (DEHP) under Queensland’s Environmental Protection Act (1994). Mining operations and exploration tenements each function under a site specific Environmental Authority (EA). The Queensland Operations have a total of 51 licences with the majority being EPM (exploration tenements) and 6 Mining Leases (MLs) which are Site Specific licences. Activities for code compliant licences have reported no non-compliances in the past year. CopperChem continues to consult with DEHP over their legacy concerns with groundwater quality at the Great Australia Operation (GAO) and was provided an enforcement notice in an Environmental Protection Order (EPO) during 2017. An EPO action plan is currently being completed with improvements in groundwater quality related to dewatering of the impacted system expected to provide improved results to groundwater quality in time. 25 Exco’s White Dam Gold Mine, in South Australia, is regulated by the Department of Premier and Cabinet Protection Authority S.A. (the Department) who regularly undertake site inspections. During the year, mining, processing and rehabilitation activities were undertaken at the site. Exco conducts environmental monitoring and annual compliance reporting in accordance with its Mining Licences and Program of Environmental Protection and Rehabilitation. One reportable incident occurred at the adsorption plant during the year but no impacts to the environment resulted. Corrective and preventative actions were undertaken by Exco and communicated to Department. The mine has complied with all conditions of approval, applicable compliance standards and required outcomes. Directors Information regarding the Directors of the Parent Company: Robert Dobson Millner FAICD Chairman Non-executive Director since 1984, appointed Chairman 1998. Chairman of the Investment Committee and member of the Nomination, Remuneration and Risk Committees Mr Millner has extensive experience in the investment industry. Other current listed company directorships: 4 Apex Healthcare Berhad – Appointed 2000 4 Australian Pharmaceutical Industries Limited – Appointed 2000 4 Brickworks Limited – Appointed 1997. Chairman since 1999 4 BKI Investment Company Limited – Appointed Chairman 2003 4 Milton Corporation Limited – Appointed 1998. Chairman since 2002 4 New Hope Corporation Limited – Appointed 1995. Chairman since 1998 4 TPG Telecom Limited – Appointed 2000 Former listed company directorships in the past three years: 4 Hunter Hall Global Value Limited – Appointed as an interim Director April 2017. Resigned June 2017 Todd James Barlow B.Bus, LLB(Hons)(UTS) Managing Director since 2015 Member of the Investment and Risk Committees Mr Barlow was appointed Chief Executive Officer of the Company in April 2014 having previously been the Managing Director of Pitt Capital Partners Limited for five years. Mr Barlow has extensive experience in mergers and acquisitions, equity capital markets and investing and has been responsible for a number of WHSP’s investments since joining the WHSP Group in 2004. His career has spanned positions in law and investment banking in Sydney and Hong Kong. Mr Barlow has a Bachelor of Business and Bachelor of Laws (Honours) from the University of Technology, Sydney. Other current listed company directorships: 4 TPI Enterprises Limited – Appointed 2015 4 New Hope Corporation Limited – Appointed 2015 Former listed company directorships in the past three years: 4 PM Capital Asian Opportunities Fund Limited – Appointed 2015. Resigned March 2017 Directors' Report 26 Washington H. Soul Pattinson and Company LimitedAnnual Report 2017 Michael John Hawker AM B.Sc(Sydney), FAICD, SF Fin Non-executive Director since 2012 Chairman of the Nomination and Risk Committees, member of the Audit and Remuneration Committees Mr Hawker is a professional company director with over 30 years experience in financial markets and investment. He was Chief Executive Officer and Managing Director of Insurance Australia Group from 2001 to 2008. From 1995 to 2001, Mr Hawker held a range of positions at Westpac, including Group Executive of Business and Consumer Banking and General Manager of Financial Markets. Prior to this, he held a number of positions at Citibank, including Deputy Managing Director for Australia and subsequently Executive Director, Head of Derivatives, Europe. Mr Hawker has been: Chairman of the Insurance Council of Australia; Chairman of the Australian Financial Markets Association; a member of the Australian Governments Financial Sector Advisory Committee; and a member of the Business Council of Australia. Other current listed company directorships: 4 Aviva PLC – Appointed 2010 4 Macquarie Group Limited – Appointed 2010 Thomas Charles Dobson Millner B.Des(Industrial), GDipAppFin(Finsia), FFin, GAICD Non-executive Director since 2011 Member of the Investment, Nomination, Remuneration and Risk Committees Mr Millner has more than 15 years experience in investment markets. He is currently a Director and Portfolio Manager of Contact Asset Management (Investment Manager of BKI Investment Company Limited (BKI) and URB Investments Limited). Prior to this, he was the Chief Executive Officer of BKI from 2008 to 2016. Mr Millner has a Bachelor of Industrial Design degree and a Graduate Diploma in Applied Finance. He is a Fellow of the Financial Services Institute of Australasia and a Graduate of the Australian Institute of Company Directors. Other current listed company directorships: 4 New Hope Corporation Limited – Appointed 2015 Former listed company directorships in the past three years: 4 PM Capital Global Opportunities Fund Limited – Appointed 2013. Resigned March 2017 Mr Warwick Martin Negus B.Bus(UTS), M.Com(UNSW), SFFin Non-executive Director since 2014 Chairman of the Remuneration Committee, member of the Audit, Investment, Nomination and Risk Committees Mr Negus has over 30 years experience in the banking and finance sectors including both senior management and director roles. He has extensive experience in managing equity and property portfolios. He has a Bachelor of Business Degree from the University of Technology Sydney and a Master of Commerce from the University of New South Wales. He is a Senior Fellow of the Financial Services Institute of Australasia (FINSIA). Mr Negus is a Director of Terrace Tower Group Pty Limited and a Member of the Council of UNSW. Other current listed company directorships: 4 Bank of Queensland Limited – Appointed September 2016 4 Pengana Capital Group Limited – Chairman Appointed June 2017 4 URB Investments Limited – Chairman Appointed October 2016 4 Virgin Australia Holdings Limited – Appointed January 2017 27 Melinda Rose Roderick B.Econ(Macq), CA, GAICD Finance Director since 2014 Member of the Risk Committee Ms Roderick has over 25 years accounting and operational experience having previously held senior financial roles within the financial services and insurance sectors including eight years as an external auditor within a chartered accounting practice. She joined WHSP in 2006 as the Chief Financial Officer and has a comprehensive understanding of the Company’s complex accounting matters. Ms Roderick is a member of the Institute of Chartered Accountants and a Graduate of the Australian Institute of Company Directors. She holds a Bachelor of Economics Degree from Macquarie University. Robert Gordon Westphal B.Com(UNSW), FCA, FFin, MAICD Non-executive Director since 2006 Chairman of the Audit Committee and member of the Nomination, Remuneration and Risk Committees Mr Westphal is a Chartered Accountant and was a partner of Ernst & Young for 25 years. He has many years of experience in corporate transactions with particular emphasis on mergers and acquisitions, due diligence and valuation across a variety of industry sectors. Mr Westphal was formerly the Chairman of the Board of Governors of Queenwood School for Girls Limited for 10 years. David Edward Wills B.Com(UNSW), FCA, MAICD Non-executive Director since 2006 Member of the Audit, Nomination, Risk and Remuneration Committees Mr Wills is a Chartered Accountant, having been a partner of Coopers & Lybrand and then PricewaterhouseCoopers for 25 years. He was Managing Partner of the Sydney office and Deputy Chairman of the Australian firm immediately prior to his retirement from the firm in 2004. As a result of Mr Wills’ experience and qualifications, he brings financial expertise to the Board. Company Secretary Ian David Bloodworth Mr Bloodworth is a Chartered Accountant with more than 30 years accounting and company secretarial experience and was appointed Company Secretary of WHSP in 2007. He was also the Company Secretary of Clover Corporation Limited from 2007 to 2012. Prior to joining the Company, Mr Bloodworth was Company Secretary of the Garratts Limited Group of Companies for 2 years and Chief Financial Officer of the Group for 6 years. Directors' Report 28 Washington H. Soul Pattinson and Company LimitedAnnual Report 2017 Directors’ Meetings The number of Board meetings and meetings of committees of Directors and the number of meetings attended by each of the Directors of the Company during the financial year were: Board r e b m u N d e d n e t t a d n e t t a Audit Committee Investment Committee Nomination Committee Remuneration Committee Risk Committee o t e b g l i i l E r e b m u N d e d n e t t a d n e t t a o t e b g l i i l E r e b m u N d e d n e t t a d n e t t a o t e b g l i i l E r e b m u N d e d n e t t a d n e t t a o t e b g l i i l E r e b m u N d e d n e t t a d n e t t a o t e b g l i i l E r e b m u N d e d n e t t a d n e t t a o t e b g l i i l E e e t t i m m o C r e b m e M Mr R D Millner Mr T J Barlow Mr M J Hawker Mr T C D Millner Mr W M Negus Ms M R Roderick Mr R G Westphal Mr D E Wills I, N, Re, Ri I, Ri A, N, Re, Ri I, N, Re, Ri A, I, N, Re, Ri Ri A, N, Re, Ri A, N, Re, Ri 15 15 15 15 15 15 15 15 14 15 15 15 13 15 15 15 – – 6 – 6 – 6 6 – – 6 – 5 – 6 6 9 9 – 9 9 – – – 9 9 – 9 9 – – – 1 – 1 1 1 – 1 1 1 – 1 1 1 – 1 1 1 – 1 1 1 – 1 1 1 – 1 1 1 – 1 1 6 6 6 6 6 6 6 6 6 6 6 6 6 6 6 6 A Member of the Audit Committee of Directors during the year. I Member of the Investment Committee of Directors during the year. N Member of the Nomination Committee of Directors during the year. Re Member of the Remuneration Committee of Directors during the year. Ri Member of the Risk Committee of Directors during the year. Directors' Interests Ordinary Shares The relevant interest of each Director in the share capital of the Company, as notified to the Australian Securities Exchange in accordance with section 205G of the Corporations Act 2001, at the date of this report is as follows: Mr R D Millner Mr T J Barlow Mr M J Hawker Mr T C D Millner Mr W M Negus Ms M R Roderick Mr R G Westphal Mr D E Wills Ordinary Shares 19,860,441 5,000 35,300 18,737,977 47,000 5,000 28,739 905,015 Rights to Deferred Shares Mr T J Barlow and Ms M R Roderick have relevant interests in rights to deferred shares in the Company. The holdings at the date of this report are unchanged from the holdings at the end of the year. Refer to page 44 of the following Remuneration Report. Interests in Contracts The Company has entered into a co-investment agreement with URB Investments Limited (URB) (ASX: URB), Contact Asset Management Pty Limited (Contact) (in its capacity as investment manager of URB) and Pitt Street Real Estate Partners Pty Limited. Mr W M Negus is a director of both WHSP and URB. Mr R D Millner is a director of both WHSP and Contact. Mr T C D Millner is a director of both WHSP and Contact and is a 40% shareholder of Contact. No fees are paid to Contact by WHSP. For further information regarding the above contract refer to note 33 of the consolidated financial statements. 29 Directors' Report – Remuneration Report Remuneration Report Letter from the Chair of the Remuneration Committee Dear Shareholders, On behalf of the Remuneration Committee I am pleased to present to you WHSP’s Remuneration Report for the financial year ending 31 July 2017. Our remuneration policy is designed to attract and retain senior management charged with delivering value for our shareholders. In this regard, we believe that it has served WHSP well. For the year ending 31 July 2018, we have made some minor changes to the Long-term Incentive (LTI) plan aimed at improving alignment between shareholders and management over the longer term. Our LTI plans for 2016 and 2017 used a combination of Total Shareholder Return (TSR) and Earnings Per Share (EPS) growth to measure the value of rewards for senior management. TSR continues to be a good measure and we do not seek to change this aspect. The TSR component of the LTI rewards outperformance against the All Ordinaries Accumulation Index. We have selected this Index because it is a proxy for the whole of the market, and given WHSP’s diverse investments across a range of industries, we aim to beat the performance of the whole market. Additionally, we have not identified a narrower set of companies that would provide an adequate comparison for assessing WHSP’s TSR performance. We are recommending a change from EPS to Net Assets Per Share Growth (NAPSG). NAPSG is a direct and accurate reflection of the underlying value of the investments WHSP has made and we believe that, along with TSR, it will prove to be a more accurate measure against which we can judge executive performance. Other key changes proposed to the LTI in future years include: 4 Locking up shares issued under the LTI for the entire period of employment or 15 years (whichever comes first). This will ensure greater alignment between Executives and Shareholders as Executive share ownership increases; 4 Half of the shares issued under the LTI will be locked up for a further period of two years after employment (with half being eligible for sale to meet tax obligations); 4 Further tightening the retesting of the LTI such that retesting can only occur where the LTI award over the initial 3 years was zero. In this event, retesting can occur the following year by rolling forward the test over a 4 year period; and 4 Unvested rights are subject to forfeiture at the Board’s discretion for any action that harms the company (including post-employment). Over time, we will continue to develop our remuneration policies to ensure that WHSP’s practices remain an effective tool for achieving our stated objectives. At its very heart is ensuring that management are delivering outcomes that are valued by you, our shareholders. Yours sincerely, W M Negus Non-Executive Director Chair of the Remuneration Committee 30 Washington H. Soul Pattinson and Company LimitedAnnual Report 2017 Scope of Report This Remuneration Report considers the key management personnel of the Parent Company and the Consolidated Entity. New Hope Corporation Limited (New Hope) forms part of the Consolidated Entity and the remuneration of certain key management personnel of New Hope is included in this Report. New Hope is publicly listed and, accordingly, has its own Remuneration Committee and produces its own Remuneration Report in accordance with the Corporations Act 2001 to be voted on by its shareholders. Abbreviations used in this report ASX CAGR EPS KMP KPI LTI Australian Securities Exchange Compound annual growth rate Earnings per share Key management personnel Key performance indicator Long-term incentive New Hope New Hope Corporation Limited NHRC New Hope Remuneration Committee STI TSR Short-term incentive Total shareholder return VWAP Volume weighted average price Structure of Report This report is structured as follows: 1. KMP included in this report 2. Remuneration policy and framework 3. Elements of remuneration 4. Performance indicators 5. Remuneration expenses for KMP 6. Contractual arrangements for executive KMP 7. Share-based compensation 8. Other statutory information 31 Directors' Report – Remuneration Report 1. KMP included in this report Non-executive Directors Mr Robert D Millner Chairman Mr Michael J Hawker Mr Warwick M Negus Mr Thomas C D Millner Mr Robert G Westphal Mr David E Wills Executive Directors Mr Todd J Barlow Managing Director and Chief Executive Officer Ms Melinda R Roderick Finance Director and Chief Financial Officer Other key management personnel of the Parent Company and Consolidated Entity Mr Ian D Bloodworth Company Secretary Key management personnel of the Consolidated Entity Mr Shane O Stephan Managing Director, New Hope Mr Andrew L Boyd Chief Operating Officer, New Hope Mr Matthew J Busch Chief Financial Officer, New Hope 2. Remuneration policy and framework Remuneration Governance The Remuneration Committee of WHSP consists of Non-executive Directors. The Committee’s role is to make recommendations to the full Board on remuneration matters and other terms of employment for the Executive Directors, senior executives and Non-executive Directors. The Remuneration Committee ensures that remuneration levels for Directors and senior executives are competi- tively set to attract and retain qualified and experienced personnel. The Remuneration Committee is authorised by the Board to obtain independent professional advice on the appropriateness of remuneration packages if deemed necessary. No such advice was received during the year. New Hope has its own Remuneration Committee which reports to the Board of New Hope. Non-executive Directors Board policy is to remunerate Non-executive Directors at comparable market rates. Remuneration levels are reviewed annually by the Remuneration Committee and are not subject to performance based incentives. Executive Directors and Senior Executives Parent Company Remuneration levels are reviewed annually by the Remuneration Committee to reflect individual performance, the overall performance of the Parent Company and Consolidated Entity and prevailing employment market conditions. The Executive Directors and Company Secretary of the Parent Company are remunerated by way of fixed remuneration, STIs and LTIs. Annual STIs are set in order to drive performance without encouraging undue risk taking. LTIs are assessed over a three and/or four year period and are designed to promote long-term stability in shareholder returns. The total value of each remuneration package is approved by the Remuneration Committee based on data obtained from external sources. 32 Washington H. Soul Pattinson and Company LimitedAnnual Report 2017 The Remuneration Committee is responsible for assessing performance against KPIs and determining the extent to which the STI and LTI is to be paid. The STI and LTI have been designed to be payable when value has been created for shareholders. To assist in this assessment, the Committee receives detailed reports on performance from management which are based on independently verifiable data. In the event of serious misconduct or a material misstatement in the Company’s financial statements, the Board may cancel LTI based remuneration and recover LTI remuneration paid in previous financial years. Target remuneration mix (based on entitlement to 100% of the target STIs and LTIs which are at risk and subject to performance hurdles) for the year ended 31 July 2017 was: Target Remuneration Mix Managing Director Finance Director 50% 56% 25% 25% 22% 22% Company Secretary 72% 14% 14% 0% 20% 40% 60% 80% 100% Fixed Remuneration STI LTI New Hope Corporation Limited New Hope aims to ensure that remuneration packages properly reflect the person’s duties, experience and responsibilities and are aligned so that management is rewarded in creating value for shareholders. Remuneration of senior executives is reviewed annually after taking into consideration the executives’ performance, the New Hope Group’s performance, market rates and level of responsibility. Executive remuneration comprises a mix of fixed remuneration, STIs and LTIs. Target remuneration mix (based on the entitlement to 100% of the available STIs and LTIs which are at risk and subject to performance hurdles) for the year ended 31 July 2017 was: New Hope Target Remuneration Mix Managing Director Chief Operating Officer Chief Financial Officer 62% 62% 66% 19% 19% 19% 19% 17% 17% 0% 20% 40% 60% 80% 100% Fixed Remuneration STI LTI 33 Directors' Report – Remuneration Report 3. Elements of remuneration Non-executive Directors Non-executive Directors receive fixed remuneration based on their position on the Board and the Committees on which they sit or chair, at comparable market rates. Remuneration levels are reviewed annually by the Remuneration Committee and are not subject to performance based incentives. The Remuneration Committee reviews market data annually to assist in setting Non-executive Director remuneration. Based on this data for 2016 the remuneration received by Non-executive Directors for the year ended 31 July 2017 was in line with the 50th percentile for ASX listed Companies with a market capitalisation between $3.5 billion and $7.5 billion. The aggregate amount of fees which may be paid to Non-executive Directors by the Parent Company is subject to the approval of Shareholders in general meeting and is currently set at $2,000,000 per annum. Approval for this aggregate amount was given at the 2016 Annual General Meeting. During the year ended 31 July 2017 remuneration of the Non-executive Directors by the Parent Company amounted to $1,290,805. With effect from 31 July 2004 the retiring allowance for Non-executive Directors was frozen at three times the average annual fees for the three years prior to that date. Non-executive Directors appointed after 31 July 2004 do not qualify for a retiring allowance. Executive Directors and Senior Executives Parent Company Fixed Remuneration Fixed remuneration for senior executives is set annually (or on promotion if applicable) by the Remuneration Committee. It is benchmarked against market data for comparable roles in companies with similar characteristics and market capitalisation. Fixed remuneration comprises a cash salary, superannuation and other non-cash benefits where taken. 34 Washington H. Soul Pattinson and Company LimitedAnnual Report 2017 STIs Structure of STIs for the KMP of the Parent Company Feature STI pool Description Based on target performance 50% of Managing Director’s fixed remuneration 40% of Finance Director’s fixed remuneration 20% of Company Secretary’s fixed remuneration 10% of the fixed remuneration of other participants in the plan The size of the pool is determined by the performance metrics below, in the event that the targets are exceeded (performance metrics exceed 100%) the pool will be increased as set out below. Performance metrics The STI metrics align with WHSP’s strategic goals to maximise shareholders’ returns. Objective Weighting Threshold (80%) Target (100%) Outperformance Regular cash to the parent company net of regular expenses 50% > 0% and < 4% higher than last year 4% to < 5% higher than previous year 5% to < 6% = 110% 6% to < 7% = 120% 7% to < 8% = 130% 8% to < 9% = 140% 9% and higher = 150% As dividends are paid out of parent company cash, increasing net cash inflows enable the payment of increasing dividends. Adjusted net asset value (post tax) per share (adjusted by adding back dividends paid by the parent company) 50% > 0% and < 2% higher than ASX200 Accumulation Index 2% to < 3% higher than ASX200 Accumulation Index 3% to <4% = 110% 4% to < 5% = 120% 5% to < 6% = 130% 6% to < 7% = 140% 7% and higher = 150% Increases in net asset value per share drive increases in the WHSP share price. Entitlement to the STI pool Each participant’s entitlement to the STI pool is determined by the Remuneration Committee based on the performance of their duties and their contribution to meeting the objectives of the parent company including performance, efficiency, risk and marketing. The total of all STIs determined by the Remuneration Committee cannot exceed the STI pool. Delivery of STI 100% of the STI awarded is paid in cash following release of the year end results. The STI plan is designed to motivate and reward senior executives to generate increasing net cash flow (to facilitate increasing dividends) and to grow the value of the investment portfolio (measured by net asset value) for the benefit of shareholders. 35 Directors' Report – Remuneration Report LTIs Executive KMP participate, at the Board’s discretion, in the LTI plan comprising annual grants of performance rights as follows. Structure of LTIs for the KMP of the Parent Company Feature Description Opportunity/ Allocation 50% of Managing Director’s fixed remuneration 40% of Finance Director’s fixed remuneration 20% of Company Secretary’s fixed remuneration The above amounts are divided by the VWAP of WHSP shares for the 30 trading days prior to 1 August each year to determine to number of rights issued. TSR rights 50% of rights issued are subject a TSR performance condition EPS rights 50% of rights issued are subject an EPS performance condition TSR performance hurdle TSR is initially assessed over a 3 year period and compared to the ASX All Ordinaries Accumulation Index (Index). Vesting will occur based on the company’s positioning relative to the Index. If less than 100% of the rights vest, performance is reassessed over a 4 year period. This incentive is designed to focus executives on delivering sustainable long-term shareholder returns. TSR performance per annum Rights to vest TSR% < Index TSR% = Index Nil 50% Index < TSR% < (Index + 3% per annum) Progressive pro-rata from 50% to 100% TSR% = (Index + 3% per annum) or higher 100% EPS performance hurdle EPS movement is initially assessed over a 3 year period and compared to the target set out below. Vesting will occur based on the company’s achievement of that target. If less than 100% of the rights vest, performance is reassessed over a 4 year period. This incentive is designed to align the interests of executives with shareholders. Regular EPS Regular EPS is the regular profit after tax of the consolidated WHSP Group, divided by the weighted average number of WHSP shares on issue across the measurement period. Regular profit after tax is a non-statutory profit measure and represents profit from continuing operations before non-regular items. A reconciliation to statutory profit is included in the Consolidated Financial Statements – Note 3, Segment information. Regular EPS CAGR over measurement period Rights to vest Regular EPS CAGR < 5% Regular EPS CAGR = 5% Nil 50% 5% < Regular EPS CAGR < 10% Progressive pro-rata from 50% to 100% Regular EPS CAGR = 10% or higher 100% Payable by participants Nil No amounts are payable by the participants upon the granting or the exercising of the rights. 36 Washington H. Soul Pattinson and Company LimitedAnnual Report 2017 Delivery of LTI Rights vest over the 3 years following the 3 year performance period unless retesting applies. Refer to item 7 ‘Share-based Compensation’ below for further details. Service Condition Board Discretion The participant is to have been in the continuous employment of WHSP from the beginning of the financial year in which the rights are granted to the relevant vesting date. In the event of serious misconduct or a material misstatement in the financial statements, the Board may cancel LTI based remuneration and recover LTI remuneration paid in previous financial years. The Board may waive vesting conditions in the event of a participant leaving employment. Expiry The performance rights issued during the year expire on 30 November 2021. The LTI plan was designed to reward senior executives for above market performance as reflected by the hurdles set above. The plan was effective from 1 August 2015 and the first test period will be for the three years ended 31 July 2018. Total Remuneration Package The total value of each remuneration package is approved by the Remuneration Committee based on market data. Based on this data for 2016, the remuneration received by Executive Directors and the Company Secretary for the year ended 31 July 2017 was under the 50th percentile for ASX listed Companies with a market capitalisa- tion between $3.5 billion and $7.5 billion. New Hope Corporation Limited Fixed Remuneration Fixed remuneration for senior executives is set annually by the NHRC. It comprises a cash salary, superannuation and other non-cash benefits such as a company vehicle. Executives may elect to take a vehicle allowance in lieu of a company vehicle and may salary sacrifice a portion of their cash salary into superannuation or other benefits. STIs Structure of STIs for the KMP of the Consolidated Entity – New Hope executives Feature Description Maximum Opportunity/ Allocation 31% of New Hope Managing Director’s fixed remuneration 31% of New Hope Chief Operating Officer’s fixed remuneration 26% of New Hope Chief Financial Officer’s fixed remuneration Performance metrics STIs are designed to motivate and reward senior executives to achieve the short-term goals of New Hope. Objective New Hope Group Profit, Sales and Investment Performance New Hope Group Compliance: Safety, Environment and Risk Management New Hope Group Production Cost, Project Development and Merger and Acquisition Activities Attributable to individual performance Weighting 30% 10% 10% 50% Delivery of STI 100% of the STI awarded is paid in cash following release of the year end results. At the end of each period the NHRC awards executives a percentage of their maximum allowable STI having regard to the performance of the executive and New Hope during the period. 37 Directors' Report – Remuneration Report LTIs Executive KMP participate, at the NHRC’s discretion, in the LTI plan comprising annual grants of performance rights as follows. Structure of LTIs for the KMP of the Consolidated Entity – New Hope executives Feature Description Maximum Opportunity/ Allocation 31% of New Hope Managing Director’s fixed remuneration 31% of New Hope Chief Operating Officer’s fixed remuneration 26% of New Hope Chief Financial Officer’s fixed remuneration Maximum allowable LTIs are provided for in senior executive employment contracts. At the end of each period the NHRC awards executives a percentage of their maximum allowable LTI having regard to the performance of the executive and New Hope during the period. The value of the executive’s LTIs is converted into Performance Rights by reference to the five day volume weighted average share price of New Hope over the five days immediately preceding issue. KPIs Objective Shareholder Value - TSR Strategic Plan Delivery Weighting 75% 25% Performance and service conditions Performance Rights are issued subject to performance and service conditions. The service condition requires that the executive remain an employee of New Hope for the duration of the three year vesting period. The performance conditions attaching to the rights are measured over three years. The NHRC will determine the percentage of rights that will vest based on the performance of the executive and New Hope during the three year period. LTIs are designed to motivate and reward senior executives to achieve the strategic goals set by New Hope, align shareholder and executive objectives and to retain the services of senior executives. TSR of New Hope expressed as a percentage of the ASX 200 accumulation index (Index) over a three year period. TSR as a % of the Index Rights to vest TSR performance hurdle < 100% 100% to < 105% 105% to < 110% 110% to <115% 115 to < 120% 120 to < 125% > 125% Nil 25% 30% 35% 40% 45% 50% Payable by participants Nil No amounts are payable by the participants upon the granting or the exercising of the rights. Discretion The NHRC has discretion to select alternative equity instruments for the award of LTIs in the event that Performance Rights do not align to the strategic goals set by the NHRC or New Hope. Subject to the employee satisfying the above service and performance conditions, a percentage of the Performance Rights will vest three years after their grant date in accordance with the above table. 38 Washington H. Soul Pattinson and Company LimitedAnnual Report 2017 4. Performance indicators Parent Company Performance against key measures: Metric Target Performance Impact on incentive award STI Regular cash to the parent company net of regular expenses Adjusted net asset value (post tax) per share 4% higher than previous year 5.6% higher than last year Out performance 110% of target STI pool awarded 2% higher than ASX200 Accumulation Index Lower than ASX200 Accumulation Index Under performance No amount of target STI pool awarded LTI The first test period will be for the three years ended 31 July 2018. In its review of remuneration policies of KMP of the Parent Company, the Remuneration Committee has regard to the performance of the Consolidated Entity and Parent Company for the current and previous four financial years, taking into account the following measures: 2013 $’000 2014 $’000 2015 $’000 2016 $’000 2017 $’000 Consolidated Entity Revenue from continuing activities Profit after tax attributable to shareholders 791,315 105,421 658,116 131,729 641,604 83,330 620,661 149,421 967,570 333,611 Parent Company Net regular cash from operations Share price at year end Ordinary dividends paid/declared 140,282 $13.50 46 cents 140,494 $15.13 48 cents 136,204 $13.70 50 cents 137,435 $17.43 52 cents 143,596 $17.64 54 cents 39 Directors' Report – Remuneration Report 5. Remuneration expenses for KMP (i) Remuneration of the KMP of the Consolidated Entity: Short-term Benefits Post- Employment Benefits Long-term Benefits Share-based Payments Parent Entity $ Controlled Entities $ Salary & Fees $ STI $ Non- monetary1 $ Super- annuation $ Long Service Leave $ Termination Benefits $ LTI Rights2 $ Total $ Non-executive Directors – 2017 R D Millner M J Hawker T C D Millner W M Negus R G Westphal D E Wills 336,057 198,583 169,000 186,499 201,084 199,582 367,365 – 147,825 – – 27,375 1,290,805 542,565 630,464 181,354 276,533 170,319 183,638 207,267 Executive Directors – 2017 – – – – – – 28,937 – 13,182 – – – 44,021 17,229 27,110 16,180 17,446 19,690 – – – – – – T J Barlow – Managing Director M R Roderick – Finance Director Other KMP – 2017 I D Bloodworth S O Stephan A L Boyd M J Busch 1,671,731 202,575 1,282,011 343,570 6,308 37,231 47,656 936,293 – 654,224 138,195 8,234 29,525 14,442 430,514 – – – – 1,612,833 673,468 697,326 313,579 1,239,240 622,252 545,709 40,078 – – – 16,265 118,811 4,534 43,503 29,203 19,724 19,612 19,612 7,493 31,115 2,035 9,670 Total 4,329,343 3,728,767 6,306,590 521,843 239,774 296,583 112,411 – – – – – – – – – – – – – – – – – – – 703,422 198,583 316,825 186,499 201,084 226,957 157,530 1,874,306 91,673 936,293 23,896 203,943 25,035 78,832 430,514 1,612,833 673,468 697,326 580,909 8,058,110 1. Non-monetary remuneration includes salary sacrificed fringe benefits and movements in annual leave provisions. 2. The LTI rights expense is determined by amortising the fair value of the rights over the vesting period of the rights. Refer to item 7. Share-based Compensation on page 43 of this report. 40 Washington H. Soul Pattinson and Company LimitedAnnual Report 2017 T J Barlow – Managing Director M R Roderick – Finance Director Other KMP – 2016 I D Bloodworth S O Stephan B D Denney3 A L Boyd4 M J Busch Short-term Benefits Post- Employment Benefits Long-term Benefits Share-based Payments Parent Entity $ Controlled Entities $ Salary & Fees $ STI $ Non- monetary1 $ Super- annuation $ Long Service Leave $ Termination Benefits $ LTI Rights2 $ Total $ Non-executive Directors – 2016 R D Millner M J Hawker T C D Millner W M Negus R G Westphal D E Wills 329,109 181,708 158,583 168,791 191,499 182,291 367,058 – 92,659 – – 27,375 1,211,981 487,092 624,883 165,943 192,404 154,147 174,885 191,476 Executive Directors – 2016 – – – – – – 27,892 – 39,895 – – – 43,392 15,765 18,943 14,644 16,614 18,190 – – – – – – 1,431,363 202,575 1,103,166 350,150 (1,450) 36,909 34,839 896,179 – 610,241 170,082 (1,053) 29,940 19,477 – – – – – – – – – – – – – – 696,167 181,708 251,242 168,791 191,499 209,666 110,324 1,633,938 67,492 896,179 416,224 – – – – – 1,416,052 410,715 465,134 635,825 301,939 1,247,833 312,686 389,709 546,028 44,799 – – – – 16,566 9,740 9,930 38,728 (990) 28,468 19,385 7,111 14,370 19,305 6,801 11,520 10,682 22,327 9,796 – – 136,316 – – 17,651 127,574 (66,010) – 61,686 416,224 1,416,052 410,715 465,134 635,825 Total 3,955,747 3,617,393 6,015,340 565,031 139,258 283,036 115,442 136,316 318,717 7,573,140 1. Non-monetary remuneration includes salary sacrificed fringe benefits and movements in annual leave provisions. 2. The LTI rights expense is determined by amortising the fair value of the rights over the vesting period of the rights. Refer to item 7. Share-based Compensation on page 43 of this report. 3. Mr B D Denney resigned as Chief Operating Officer of New Hope on 18 December 2015. The negative share based payment amount reflects rights forfeited. 4. Mr A L Boyd was appointed as the Chief Operating Officer of New Hope on 21 December 2015. 41 Directors' Report – Remuneration Report 5. Remuneration expenses for KMP continued (ii) Relative proportions of remuneration that are fixed and that are linked to performance Fixed Remuneration At Risk – STI At Risk – LTI 2017 2016 2017 2016 2017 2016 70% 75% 85% 87% – 96% 89% 68% 73% 85% 91% 116% 100% 90% 21% 15% 9% 0% – 0% 0% 24% 19% 11% 0% 0% 0% 0% 9% 10% 6% 13% – 4% 11% 8% 8% 4% 9% (16%) 0% 10% Parent Company T J Barlow M R Roderick I D Bloodworth New Hope Corporation Limited S O Stephan B D Denney A L Boyd M J Busch As the LTIs are provided exclusively by way of rights, the percentages disclosed reflect the value of remuneration consisting of rights, based on the value of rights expensed during the year. (iii) STIs granted and forfeited for the year 2017 Parent Company T J Barlow M R Roderick I D Bloodworth New Hope Corporation Limited S O Stephan A L Boyd M J Busch Target STI $ Awarded % Forfeited % 600,000 276,000 72,000 400,000 199,195 150,000 57% 50% 56% 80% 70% 67% 43% 50% 44% 20% 30% 33% The table above outlines the STIs awarded and forfeited with respect to the year ended 31 July 2017. The 2017 STIs awarded to WHSP’s KMP are reflected in the remuneration expenses in the table on page 40. However, it is the practice of New Hope to expense and record the STIs awarded to its KMPs in the year that they are determined and paid. Consequently, the STIs outlined above to New Hope’s KMP will be reflected in the remuneration expense for the 2018 financial year. 42 Washington H. Soul Pattinson and Company LimitedAnnual Report 2017 6. Contractual arrangements for executive KMP Term of agreement and notice period1 Base remuneration including Superannuation2 Parent Company T J Barlow M R Roderick I D Bloodworth New Hope Corporation Limited S O Stephan A L Boyd M J Busch No fixed term 6 months notice period No fixed term 3 months notice period No fixed term 3 months notice period No fixed term 6 months notice period No fixed term 3 months notice period No fixed term 3 months notice period $1,200,000 $690,000 $360,000 $1,300,000 $650,000 $600,000 Termination Payments3 6 months base remuneration 3 months base remuneration 3 months base remuneration 6 months base remuneration 3 months base remuneration 3 months base remuneration 1. This notice applies equally to either party. 2. Base remuneration including Superannuation as at 31 July 2017. 3. Base salary payable if the company terminates employees with notice, and without cause (e.g. for reasons other than unsatisfactory performance). 7. Share-based compensation Parent Company Rights to deferred shares are granted under the WHSP Long Term Incentive Plan. Rights are granted for nil consideration. Rights are granted in accordance with the plan at the sole discretion of the WHSP Board. They vest and automatically convert to ordinary shares in WHSP following the satisfaction of the relevant performance and service conditions. Performance and service conditions applicable to each issue of Rights are determined by the Board at the time of grant. Rights granted under the plan carry no dividend or voting rights. The assessed fair value of the Rights at grant date is allocated equally over the period from grant date to vesting date and these amounts are included in the remuneration of the executive. The fair value of the rights was independently determined by valuation specialists Lonergan Edwards & Associates Limited based on the market price of WHSP’s shares at the grant date, with an adjustment made to take into account the vesting period, expected dividends during that period that will not be received by the participants and the probability that the market performance conditions will be met. At each reporting date, the Company revises its estimate of the number of EPS rights that are expected to be exercised. The total value of the rights on issue is adjusted accordingly and the employee benefits expense for the period is based on this revised value. 43 Directors' Report – Remuneration Report 7. Share-based Compensation continued Rights affecting the remuneration of KMP in the current or future periods. WHSP Grant Date EPS Rights December 2015 TSR Rights December 2015 EPS Rights December 2016 TSR Rights December 2016 Vesting Date If met over 3 years If re-tested over 4 years Grant Date Value $ 50% September 2018 30% August 2019 20% August 2020 50% September 2018 30% August 2019 20% August 2020 50% September 2019 30% August 2020 20% August 2021 50% September 2019 30% August 2020 20% August 2021 50% September 2019 30% September 2019 20% August 2020 50% September 2019 30% September 2019 20% August 2020 50% September 2020 30% September 2020 20% August 2021 50% September 2020 30% September 2020 20% August 2021 13.86 13.86 13.86 12.25 11.08 10.87 13.10 13.10 13.10 5.22 3.25 2.56 Rights to deferred shares granted, vested and forfeited during the year. WHSP Rights to deferred shares Balance at start of year Granted during the year Vested Forfeited Grant Date Number Number Number T J Barlow M R Roderick I D Bloodworth Dec 2015 Dec 2016 Dec 2015 Dec 2016 Dec 2015 Dec 2016 31,045 – 18,992 – 4,967 – – 29,398 – 15,875 – 4,116 – – – – – – % – – – – – – Number – – – – – – % – – – – – – Balance at end of year Maximum value in future periods1 Number $ 31,045 29,398 18,992 15,875 4,967 4,116 169,027 169,737 103,403 91,658 27,043 23,765 1. The maximum value of the deferred rights in future periods has been determined as the fair value of the rights that is yet to be expensed. The minimum value of the rights yet to vest is nil, as the rights will be forfeited if the vesting conditions are not met. 44 Washington H. Soul Pattinson and Company LimitedAnnual Report 2017 New Hope Corporation Limited Rights to deferred shares are granted under the New Hope Corporation Limited Employee Performance Rights Share Plan. Membership of the plan is open to those senior employees and those Directors of New Hope, its subsidiaries and associated bodies corporate whom the Directors of New Hope believe have a significant role to play in the continued development of the New Hope Group’s activities. Rights are granted for nil consideration at the sole discretion of the Directors of New Hope and in accordance with the New Hope Group’s reward and retention strategy. Rights vest and automatically convert to ordinary shares in New Hope following the satisfaction of the relevant performance and service conditions. Performance and service conditions applicable to each issue of Rights are determined by the New Hope Board at the time of grant. Rights granted under the plan carry no dividend or voting rights. The assessed fair value at grant date of Rights granted to executives is allocated equally over the period from grant date to vesting date and these amounts are included in the remuneration of the executive. The fair value of the Rights is determined based on the market price of New Hope’s shares at the grant date, with an adjustment made to take into account the vesting period, expected dividends during that period that will not be received by the participants and the probability that the market performance conditions will be met. Rights affecting the remuneration of KMP in the current or future periods. NEW HOPE Grant Date December 2012 December 2014 November 2015 November 2015 December 2016 Vesting Date August 2016 August 2017 August 2017 August 2018 August 2019 Grant Date Value $ 4.08 1.58 0.96 1.08 0.80 Rights to deferred shares granted, vested and forfeited during the year. NEW HOPE Rights to deferred shares Balance at start of year Granted during the year Vested Forfeited Balance at end of year Maximum value in future periods1 Number Number Number % Number % Number $ Grant Date Vesting Date S O Stephan Dec 2012 Nov 2015 Nov 2015 Dec 2016 Aug 2016 Aug 2017 Aug 2018 Aug 2019 11,210 134,228 204,082 – – 134,228 204,082 250,000 11,210 – – – 100% – – – A L Boyd Dec 2016 Aug 2019 – 124,497 – – M J Busch Dec 2012 Dec 2014 Nov 2015 Dec 2016 Aug 2016 Aug 2017 Aug 2018 Aug 2019 8,408 50,336 76,531 93,750 – – – 93,750 8,408 – – – 100% – – – – – – – – – – – – – – – – – – – – – – 134,228 204,082 250,000 – – 80,375 150,816 124,497 75,104 – 50,336 76,531 93,750 – – 30,141 56,556 1. The maximum value of the deferred rights in future periods has been determined as the fair value of the rights that is yet to be expensed. The minimum value of the Rights yet to vest is nil, as the rights will be forfeited if the vesting conditions are not met. 45 Directors' Report – Remuneration Report 8. Other statutory information Shareholdings of KMP The following tables show the number of: 4 shares in WHSP; 4 shares in New Hope; and 4 preference shares in Pitt Capital Partners Limited that were held during the financial year by key management personnel of the Group, including their personally related parties. Shares in Washington H. Soul Pattinson and Company Limited Balance at start of year Purchased/ (sold) Received on the vesting of rights Other changes during the Year Balance at end of year 21,098,602 5,000 28,690 18,382,977 47,000 5,000 22,739 396,433 300,000 – 6,610 300,000 – – – – – –3 – – – – – – – – – (1,593,161)1 – – – – – – 508,5822 19,805,441 5,000 35,300 18,682,977 47,000 5,000 22,739 905,015 – – Balance at start of year Purchased/ (sold) Received on the vesting of rights Other changes during the Year Balance at end of year 3,781,962 – 3,774,368 – 90,670 241,021 15,438 711,324 143,867 19,900 – 40,000 – – – – – – – – – 11,210 – 8,408 – – – – – – – – 3,925,829 19,900 3,774,368 40,000 90,670 252,231 15,438 719,732 Directors of Washington H. Soul Pattinson and Company Limited R D Millner T J Barlow M J Hawker T C D Millner W M Negus M R Roderick R G Westphal D E Wills Other key management personnel A L Boyd 1. Distributions by an estate (2,101,744) and from estates 508,583 2. Distributions from estates 3. 1,700 shares purchased and sold during the year Shares in New Hope Corporation Limited Directors of Washington H. Soul Pattinson and Company Limited R D Millner T J Barlow T C D Millner R G Westphal D E Wills Other key management personnel S O Stephan A L Boyd M J Busch 46 Washington H. Soul Pattinson and Company LimitedAnnual Report 2017 Pitt Capital Partners Limited Class RP01 Preference Shares Balance at start of year Purchased/ (sold) Received on the vesting of rights Other changes during the Year Balance at end of year Directors of Washington H. Soul Pattinson and Company Limited T J Barlow 1 – – – 1 None of the shares above are held nominally by the Directors or any of the other KMP. Loans to KMP No loans have been made to the Directors of WHSP or other KMP of the Consolidated Entity. Other transactions with KMP The KMP and their related entities received dividends during the year in respect of their shareholdings in Group companies consistent with other shareholders. Unsecured deposits were previously accepted from some Directors of WHSP and their related entities and interest is paid at normal commercial rates. Interest paid during the current financial year amounted to $734,209 (2016: $1,228,178). There were no funds on deposits at 31 July 2017 (2016: $48,200,787). Deposits were received from Mr R D Millner, Mr T C D Millner and Mr R G Westphal and/or their related entities. Voting on the 2016 Remuneration Report The Parent Company’s Remuneration Report for the 2016 financial year was adopted at its 2016 Annual General Meeting on a show of hands. This is the end of the Remuneration Report Directors’ Report Options The Parent Company did not issue any options over its unissued shares during the financial year or in the period to the date of this report. There are no such options on issue at the date of this report. Indemnification of Officers and Auditors Indemnification The Parent Company’s constitution provides for an indemnity of Directors, Secretaries and Executive Officers (as defined in the Corporations Act 2001) where liability is incurred in the performance of their duties in those roles, other than conduct involving a wilful breach of duty in relation to the Company. The Constitution further provides for an indemnity in respect of any costs and expenses incurred in defending proceedings in which judgement is given in their favour, they are acquitted, or the Court grants them relief under the Corporations Act 2001. Insurance In accordance with the provisions of the Corporations Act, the Parent Company has a Directors’ and Officers’ Liability policy covering Directors and Officers of the Parent Company and some of its controlled entities. The insurance policy prohibits disclosure of the nature of the liability insured against and the amount of the premium. Auditors No indemnities have been given or insurance premiums paid during or since the end of the financial year in respect of any person who is or has been an auditor of the Parent Company or its controlled entities. 47 Proceedings on behalf of the Company No person has applied for leave of Court to bring proceedings on behalf of the Parent Company or to intervene in any proceedings to which the Parent Company is a party for the purpose of taking responsibility on behalf of the Parent Company for all or any part of those proceedings. The Parent Company was not a party to any such proceedings during the year. Non Audit Services During the year, Pitcher Partners Sydney, the Parent Company’s auditor, performed certain other services in addition to their statutory duties. An entity associated with Pitcher Partners Sydney was paid $96,300 for providing tax compliance and other services in respect of the Group. Details of the amounts paid to the auditors are disclosed in note 36 of the financial statements. The Board has considered the non-audit services provided during the year by the auditor and is satisfied that the provision of those non-audit services by the auditor is compatible with, and did not compromise, the auditor independence requirements of the Corporations Act 2001 for the following reasons: 4 All non-audit services were subject to the corporate governance procedures adopted by the Parent Company and have been reviewed by the Audit Committee to ensure they do not impact the integrity and objectivity of the auditor; and 4 The non-audit services provided do not undermine the general principles relating to auditor independence as set out in Professional Statement 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 Parent Company; acting as an advocate for the Parent Company; or jointly sharing risks and rewards. Auditor’s Independence Declaration The lead auditor’s independence declaration for the year ended 31 July 2017 has been received and is included on page 49. Rounding of Amounts The company is of a kind referred to in ASIC Corporations (Rounding in Financial/ Directors’ Reports) Instrument 2016/191, and in accordance with that legislative instrument, amounts in the Directors’ Report and Financial Report have been rounded to the nearest thousand dollars, unless otherwise stated. Signed in accordance with a resolution of the Board of Directors: R D Millner Director – Chairman T J Barlow Managing Director Dated this 24th day of October 2017. Directors' Report 48 Washington H. Soul Pattinson and Company LimitedAnnual Report 2017 Auditor’s Independence Declaration Auditor’s Independence Declaration to the Directors of Washington H. Soul Pattinson and Company Limited ABN 49 000 002 728 In relation to the independent audit for the year ended 31 July 2017, to the best of my knowledge and belief there have been: (i) no contraventions of the auditor independence requirements of the Corporations Act 2001; and (ii) no contraventions of any applicable code of professional conduct. This declaration is in respect of Washington H. Soul Pattinson and Company Limited and the entities it controlled during the year. J Gavljak Partner Pitcher Partners Sydney 23 October 2017 An independent New South Wales Partnership. ABN 17 795 780 962 Level 22 MLC Centre, 19 Martin Place, Sydney NSW 2000 Liability limited by a scheme approved under Professional Standards Legislation Pitcher Partners is an association of independent firms Melbourne | Sydney | Perth | Adelaide | Brisbane | Newcastle An independent member of Baker Tilly International 49 Financial Report for the year ended 31 July 2017 About this report This financial report is for the Consolidated entity consisting of Washington H. Soul Pattinson and Company Limited and its controlled entities for the year ending 31 July 2017. Throughout the report, the Consolidated entity is also referred to as the ‘Group’. We are continuously developing the Group’s financial reporting with the aim to enhance our shareholders understanding of the Group and to highlight the parent company information of Washington H. Soul Pattinson and Company Limited, illustrating the market value of our investments and the cash flows generated by them from which dividends to our shareholders are paid. The notes to the financial statements are ordered so as to focus on the drivers of the Group’s performance. Please refer to the contents page for how the notes are structured and ordered. In addition to the relevant financial information, the notes include a description of the accounting policies applied, and where applicable key judgements and estimates used by management in applying these policies. Consolidated entity perspective This consolidated financial report combines the operating results, financial positions and cash flows of Washington H. Soul Pattinson and Company Limited (the Parent company) and each entity that it controls (subsidiaries), into a single set of financial statements. A controlling stake in a subsidiary often occurs where the parent company owns less than 100% of the subsidiary. The term ‘non-controlling interest’ is used to describe that portion not owned by the parent company. The non-controlling interest’s share of the consolidated profit and net assets is disclosed separately in the consolidated income statement, the consolidated statement of comprehensive income, the consolidated statement of financial position and the consolidated statement of changes in equity. Investments in which the parent company or a subsidiary has significant influence but does not have control are termed ‘associate entities’. Unlike controlled entities, the individual financial reports of associates are not consolidated. Associates are equity accounted with the Group’s share of an associate’s result recorded in profit. The investment in associates is disclosed as a line item (equity accounted associates) in the consolidated statement of financial position and is adjusted for the Group’s share of the associate’s result and decreased by any dividends received. This method treats dividends from associates as if they are a return of capital rather than being recognised in income. Parent company perspective Financial information for Washington H. Soul Pattinson and Company Limited, the ‘Parent company’ has also been provided. In contrast to the consolidated financial report, the Parent company information reflects Washington H. Soul Pattinson and Company Limited’s activities as an ‘investor’ and provides details of its investments (subsidiaries, associate entities and other investments), together with the cash flows generated by them (dividend income). Washington H. Soul Pattinson and Company Limited is a for profit company limited by shares, incorporated and domiciled in Australia. The shares are publicly traded on the Australian Securities Exchange. Its registered office and principal place of business is as follows: Washington H. Soul Pattinson and Company Limited Level 1, 160 Pitt Street, SYDNEY NSW 2000 A description of the nature of the Consolidated entity’s operations and its principal activities is included in the Directors’ report, which is not part of this financial report. This financial report was authorised for issue in accordance with a resolution of the Directors on 24 October 2017. 50 Washington H. Soul Pattinson and Company Limited Annual Report 2017 Contents Financial Statements Consolidated income statement Consolidated statement of comprehensive income Consolidated statement of financial position Consolidated statement of changes in equity Consolidated statement of cash flows Notes to the Financial Statements Basis of preparation Basis of consolidation Parent company information 1 Parent company financial information: • statement of financial position; • income statement; • market value of listed investments; • related cash flows; and • source of shareholder dividends 2 Payment of dividends to shareholders Group structure and performance 3 4 5 6 7 Segment information: • how the Group is organised and managed • business performance Accounting movements in value that are not reflected in profit: Reserves Share capital and capital management Business combinations Events after the reporting date Accounting for our Investments 8 9 Investments in controlled entities (subsidiaries) Investments in jointly controlled entities 10 Investments in Associates 11 Other equity investments 12 Investment properties 13 Term deposits 14 Cash and cash equivalents Financial Report Revenue and expenses 15 Revenue 16 Other income 17 Expenses Taxation 18 Income tax expense 19 Deferred tax assets and deferred tax liabilities Risk management 20 Financial risk management 21 Fair value estimation 22 Derivative financial instruments 23 Interest bearing liabilities 24 Contingent liabilities Fixed assets 25 Property plant and equipment 26 Exploration and evaluation assets 27 Intangible assets Other operating assets and liabilities 28 Trade and other receivables 29 Inventories 30 Trade and other payables 31 Provisions Other notes 32 Share-based payments 33 Related parties 34 Commitments for expenditure 35 Other accounting policies 36 Remuneration of auditors 37 Deed of cross guarantee Directors’ declaration Independent auditor’s report 52 53 54 55 56 57 58 60 60 61 61 61 63 64 66 70 72 73 75 75 76 77 82 84 86 87 88 89 90 93 95 97 100 102 103 106 107 113 114 117 118 119 119 121 123 125 126 129 130 132 133 51 Consolidated Income Statement for the year ended 31 July 2017 Notes 15 16 17 10b 18a Revenue from continuing operations Other income Cost of sales Selling and distribution expenses Administration expenses Acquisition costs expensed Other expenses Impairment expense Finance costs Share of results from equity accounted associates Profit before income tax Income tax (expense) Profit after tax for the year (Profit)/loss after tax attributable to non-controlling interests Profit after tax attributable to members of Washington H. Soul Pattinson and Company Limited 2017 $’000 967,570 164,345 (543,256) (172,992) (37,376) – (7,019) (18,423) (3,577) 162,067 511,339 (119,985) 391,354 (57,743) 2016 $’000 620,661 145,902 (392,308) (153,806) (34,600) (45,604) (13,313) (116,539) (2,535) 122,503 130,361 (902) 129,459 19,962 333,611 149,421 2017 cents 2016 cents Earnings per share Basic and diluted earnings per share attributable to ordinary equity holders of Washington H. Soul Pattinson and Company Limited Earnings per share from all operations 139.36 62.42 Weighted average number of shares used in calculating basic and diluted earnings per share No. of shares No. of shares 239,395,320 239,395,320 The above consolidated income statement should be read in conjunction with the accompanying notes. 52 Washington H. Soul Pattinson and Company LimitedAnnual Report 2017 Consolidated Statement of Comprehensive Income for the year ended 31 July 2017 Profit after tax for the year Other comprehensive income Items that may be reclassified subsequently to the income statement Net movement in the fair value of long term equity investments, net of tax Transfer to profit and loss on disposal of long term equity investments, net of tax Net movement in hedge reserve, net of tax Net movement in foreign currency translation reserve, net of tax Net movement in equity reserve, net of tax Total other comprehensive (expense) for the year, net of tax Total comprehensive income for the year Total comprehensive (income)/expense attributable to non-controlling interests Total comprehensive income attributable to members of Washington H. Soul Pattinson and Company Limited The above consolidated statement of comprehensive income should be read in conjunction with the accompanying notes. 2017 $’000 2016 $’000 391,354 129,459 1,808 (25,397) 10,666 88 3,654 (9,181) 382,173 (62,559) (40,304) (10,692) 17,141 (320) 2,813 (31,362) 98,097 12,761 319,614 110,858 53 Consolidated Statement of Financial Position as at 31 July 2017 Notes 31 July 2017 $’000 31 July 2016 $’000 Current assets Cash and cash equivalents Term deposits Trade and other receivables Inventories Trading equities Derivative financial instruments Current tax asset Total current assets Non-current assets Trade and other receivables Equity accounted associates Long term equity investments Other financial assets Investment properties Property, plant and equipment Exploration and evaluation assets Deferred tax assets Intangible assets Total non-current assets Total assets Current liabilities Trade and other payables Interest bearing liabilities Derivative financial instruments Current tax liabilities Provisions Total current liabilities Non-current liabilities Interest bearing liabilities Deferred tax liabilities Provisions Total non-current liabilities Total liabilities Net assets Equity Share capital Reserves Retained profits Parent entity interest Non-controlling interest Total equity 14 13 28 29 11 22 28 10 11 11 12 25 26 19 27 30 23 22 31 23 19 31 5 4 301,275 1,044 94,770 79,968 46,993 18,075 13,024 126,709 47,660 116,775 79,039 31,605 2,313 1,486 555,149 405,587 3,563 1,415,973 648,105 4,984 165,016 1,370,420 418,582 106,576 60,026 30,187 1,265,214 585,703 11,837 92,932 1,388,735 402,298 100,896 60,478 4,193,245 3,938,280 4,748,394 4,343,867 80,866 42,356 69 736 45,345 75,831 52,167 167 1,677 50,066 169,372 179,908 33,057 394,882 112,773 540,712 710,084 35,558 284,858 96,892 417,308 597,216 4,038,310 3,746,651 43,232 611,226 2,603,186 3,257,644 780,666 43,232 623,684 2,372,467 3,039,383 707,268 4,038,310 3,746,651 The above consolidated statement of financial position should be read in conjunction with the accompanying notes. 54 Washington H. Soul Pattinson and Company LimitedAnnual Report 2017 Consolidated Statement of Changes in Equity for the year ended 31 July 2017 Year ended 31 July 2017 Total equity at the beginning of the year – 1 August 2016 Net profit for the year after tax Other comprehensive income for the year Net movement in asset revaluation reserve, net of tax Net movement in hedge reserve, net of tax Net movement in foreign currency translation reserve, net of tax Net movement in equity reserve, net of tax Total comprehensive income for the year Transactions with owners Dividends declared and paid Net movement in share-based payments reserve Non-controlling interests share of subsidiaries Equity transfer from members on issue of share capital in controlled entity Share capital $’000 Retained profits $’000 Reserves $’000 Total Parent entity interest $’000 Non- controlling interest $’000 Total equity $’000 43,232 2,372,467 623,684 3,039,383 707,268 3,746,651 – – – – – – – – – – 333,611 – 333,611 57,743 391,354 – – – – (23,849) 6,185 (23,849) 6,185 13 3,654 13 3,654 260 4,481 75 – (23,589) 10,666 88 3,654 333,611 (13,997) 319,614 62,559 382,173 (102,993) 101 – – – 1,539 – – (102,993) 1,640 – (22,045) (9) 16 (125,038) 1,631 16 – 32,877 32,877 Total equity at the end of the year – 31 July 2017 43,232 2,603,186 611,226 3,257,644 780,666 4,038,310 Year ended 31 July 2016 Total equity at the beginning of the year – 1 August 2015 Net profit/(loss) for the year after tax Other comprehensive income for the year Net movement in asset revaluation reserve, net of tax Net movement in hedge reserve, net of tax Net movement in foreign currency translation reserve, net of tax Net movement in equity reserve, net of tax Total comprehensive income/(expense) for the year Transactions with owners Dividends declared and paid Net movement in share-based payments reserve Non-controlling interests share of subsidiaries Equity transfer from members on issue of share capital in controlled entity 43,232 2,322,067 661,279 3,026,578 747,857 3,774,435 – – – – – – – – – – 149,421 – 149,421 (19,962) 129,459 – – – – (51,139) 9,979 (216) 2,813 (51,139) 9,979 (216) 2,813 143 7,162 (104) – (50,996) 17,141 (320) 2,813 149,421 (38,563) 110,858 (12,761) 98,097 (99,064) 43 – – – 968 – – (99,064) 1,011 – (27,963) (95) (18) (127,027) 916 (18) – 248 248 Total equity at the end of the year – 31 July 2016 43,232 2,372,467 623,684 3,039,383 707,268 3,746,651 The above consolidated statement of changes in equity should be read in conjunction with the accompanying notes. 55 Consolidated Statement of Cash Flows for the year ended 31 July 2017 Notes 6 14 6 Cash flows from operating activities Receipts from customers inclusive of GST Payments to suppliers and employees inclusive of GST Dividends received Interest received Acquisition costs expensed Finance costs Income taxes paid Net cash inflow from operating activities Cash flows from investing activities Payment for property, plant and equipment and intangibles Proceeds from sale of property, plant and equipment Payments for exploration and evaluation activities Net proceeds from term deposits Payment for acquisition and development of investment properties Payments for equity investments Proceeds from sale of equity investments Proceeds from sale of equity accounted associates Payments to acquire equity accounted associates Loans advanced Loan repayments Payments for acquisition of businesses, net of cash Proceeds on Bengalla acquisition settlement adjustment Net cash (outflow)/inflow from investing activities Cash flows from financing activities Dividends paid to our shareholders Dividends paid by subsidiaries to non-controlling interests Proceeds from interest bearing liabilities (Repayment) of interest bearing liabilities Proceeds from external borrowings (Repayment) of external borrowings Transaction with subsidary’s non-controlling interests 2017 $’000 1,012,326 (696,002) 316,324 106,541 8,705 – (2,317) (29,861) 2016 $’000 598,389 (559,921) 38,468 98,603 32,202 (45,604) (973) (2,869) 399,392 119,827 (77,913) 11,022 (18,255) 46,368 (63,906) (80,482) 145,707 81,708 (167,849) (12,682) 47,269 (800) 1,669 (88,144) (126,880) (22,045) 46,971 (97,554) 95,000 (57,400) 32,797 (68,533) 829 (22,387) 1,161,399 (71,316) (86,149) 49,130 4,108 (6,287) (41,285) 1,701 (849,530) – 71,680 (122,092) (27,963) 45,886 (44,530) 23,358 (988) – Net cash (outflow) from financing activities (129,111) (126,329) Net increase in cash and cash equivalents Cash and cash equivalents at the beginning of the year Effects of exchange rate changes on cash and cash equivalents Cash and cash equivalents at the end of the year 14 182,137 126,709 (7,571) 301,275 65,178 59,424 2,107 126,709 The above consolidated statement of cash flows should be read in conjunction with the accompanying notes. 56 Washington H. Soul Pattinson and Company LimitedAnnual Report 2017 Notes to the Financial Statements Basis of preparation This financial report is a general purpose financial report which: 4 has been prepared in accordance with the requirements of the Corporations Act 2001, Australian Accounting Standards and other authoritative pronouncements of the Australian Accounting Standards Board (AASB); 4 complies with International Financial Reporting Standards (IFRS) as issued by the International Accounting Standards Board (IASB); 4 has been prepared on a for profit basis; 4 is presented in Australian dollars with all values rounded to the nearest thousand dollars ($’000), or in certain cases, to the nearest dollar, unless otherwise stated, in accordance with ASIC Corporations (Rounding in Financial/Directors’ Reports) Instrument 2016/191; 4 presents reclassified comparative information where required for consistency with the current year’s presentation; 4 adopts all new and amended Accounting Standards and Interpretations issued by the AASB that are relevant to the operations of the Group and effective for reporting periods beginning on or after 1 August 2016; 4 does not adopt any Accounting Standards and Interpretations that have been issued or amended but are not yet effective such as AASB 15 Revenue from Contracts with Customers; AASB 9 Financial Instruments (December 2010) as amended by 2013-9 and AASB 16 Leases. Refer to note 35 – Other accounting policies for more information; 4 has been prepared on a historical cost basis except for the following items, which are measured on an alternative basis. Item Measurement basis Long term equity investments Trading equities Investment properties Inventories Fair value Fair value Fair value Lower of cost and net realisable value 4 where Parent company information is disclosed, relevant accounting policies are described when different to the Group accounting policies. 57 Notes to the Financial Statements Basis of consolidation The consolidated financial statements of the Group incorporates the financial statements of Washington H. Soul Pattinson and Company Limited and its subsidiaries, and equity accounts its associates. A diagram is set out in note 3, listing the main subsidiaries and associates. i. Controlled entities (Subsidiaries) Subsidiaries are all entities over which the Group has control. The Group controls an entity when the Group is exposed to, or has rights to, variable returns from its involvement with the entity and has the ability to affect those returns through its power to direct the activities of the entity. Subsidiaries are consolidated from the date on which control is obtained to the date on which control is disposed. The acquisition of subsidiaries is accounted for using the acquisition method of accounting. The financial statements of subsidiaries are prepared for the same reporting period as the parent company, using consistent accounting policies. Adjustments are made to bring into line any dissimilar accounting policies that may exist. Non-controlling interests in the results and equity of subsidiaries are shown separately in the income statement, statement of comprehensive income, statement of changes in equity and statement of financial position respectively. The Group treats transactions with non-controlling interests that do not result in a loss of control as transactions with equity owners of the Group. For purchases from non-controlling interests, the difference between any consideration paid and the relevant share acquired of the carrying value of net assets of the subsidiary is deducted from equity. For disposals to non- controlling interests, differences between any proceeds received and the relevant share of non-controlling interests are also recorded in equity. ii. Joint arrangements A joint arrangement is an arrangement where two or more parties share control. Joint arrangements are classified as either joint operations or joint ventures. The classification depends on the contractual rights and obligations of each investor, rather than the legal structure. Joint operations A joint operation is a joint arrangement in which the parties that share joint control, have rights to the assets, and obligations for the liabilities relating to the arrangement. The Group recognises its direct right to the assets, liabilities; revenues and expenses of joint operations and its share of any jointly held or incurred assets, liabilities, revenues and expenses. These have been incorporated into the Group’s financial statements under the appro- priate headings. Joint ventures A joint venture is a joint arrangement in which the parties that share joint control have rights to the net assets of the arrangement. Interests in joint ventures are accounted for using the equity method, after initially being recognised at cost. iii. Associates Associates are all entities over which the Group has significant influence and are neither subsidiaries nor jointly controlled. This is generally the case where the Group holds between 20% and 50% of the voting rights. Investments in associates are accounted for in the consolidated financial statements using the equity method of accounting, after initially being recognised at cost. The Group’s investment in associates includes goodwill (net of any accumulated impairment loss) identified on acquisition. The Group’s share of its associates’ post-acquisition profits or losses is recognised in the income statement and its share of post-acquisition other comprehensive income is recognised in other comprehensive income. The cumulative post-acquisition movements are adjusted against the carrying amount of the investment. Dividends received/receivable from associates are recognised in the consolidated financial statements by reducing the carrying amount of the investment. When the Group’s share of losses in an associate equals or exceeds its interest in the associate, including any unsecured receivables, the Group does not recognise further losses, unless it has incurred obligations or made payments on behalf of the associate. 58 Washington H. Soul Pattinson and Company LimitedAnnual Report 2017 iv. Transactions eliminated on consolidation Intra-group balances and transactions, and any unrealised income and expenses arising from intra-group transac- tions are eliminated. Unrealised gains arising from transactions with an associate are eliminated to the extent of the Group’s interest in the associate. Unrealised losses are eliminated in the same way as unrealisd gains, but only to the extent that there is no evidence of impairment. Where practical, accounting policies of the associates have been changed to ensure consistency with the policies adopted by the Group. Other accounting policies Significant and other accounting policies relevant to gaining an understanding of the financial statements have been grouped with the relevant notes to the financial statements. Key judgements and estimates The preparation of financial statements requires the use of certain critical accounting estimates. It also requires management to exercise its judgement in the process of applying the Group’s accounting policies. The areas involving a higher degree of judgement or complexity, or areas where assumptions and estimates are significant to the financial statements are disclosed within the following notes: Note reference Key judgements and estimates Note 6 Note 9 Note 10 Note 11 Note 17 Note 18 Note 19 Note 25 Note 25 Note 25 Note 26 Note 27 Note 28 Note 31 Business combinations – acquisition fair value Classification of joint arrangements as a joint operation Recoverable value of investments in Associates Impairment of financial assets Recoverable value and impairment Petroleum resource rent tax (PRRT) Deferred tax assets New Hope Corporation Limited – Queensland Mining Operations 4 Impairment assessment 4 Estimates of reserves and resources – Coal 4 New Acland Coal Stage 3 approvals Impairment of oil producing assets – New Hope Corporation Limited Determination of recoverable value – Copper assets Exploration and evaluation expenditure Impairment of goodwill Recoverability of receivables Mining restoration and site rehabilitation Page 74 76 80 83 92 94 96 110 112 112 113 116 118 120 59 Notes to the Financial Statements Parent Company Information 1 NOTE 1 PARENT COMPANY FINANCIAL INFORMATION Source of shareholders dividends The Board declares dividends having regard to regular operating cash flows before non-regular items. The following information has been provided to demonstrate the underlying value of the Parent company’s investments and the regular profit and cash flows generated by them. Regular profit after tax is a measure of the Parent company’s performance. This measurement excludes the effects of non-regular items of income and expense which by nature are outside the ordinary course of business or are part of ordinary operations but are unusual due to their size. The classification of income and expenses as regular or non-regular is consistent with the Consolidated entity’s measurement of segment results. ACCOUNTING POLICIES Parent company The statement of financial position, profit after tax and total comprehensive income for the Parent company, have been prepared on the same basis as the consolidated financial statements except for Investments in controlled entities (subsidiaries) and Investments in associates. In the Parent company, investments in subsidiaries and associates are carried at the lower of cost or impaired cost. Dividends from these entities are recognised as income within profit. This approach reflects Washington H. Soul Pattinson and Company Limited’s activities as an investor. The consolidated financial statements recognises the individual assets, liabilities, income and expenses of the controlled entities. Associates are equity accounted, with the initial investment being increased/(decreased) by profits/ (losses) recognised in the income statement, movements in other comprehensive income and decreased by dividends received. Dividends from both controlled entities and associates are not recognised in the consolidated financial income statement. Statement of Financial Position Current assets Cash and term deposits Other current assets Total current assets Non-current assets Long term equity investments – measured at market value Other financial assets – Listed controlled and associated entities – measured at the lower of cost or impaired value – Unlisted entities – measured at the lower of cost or impaired value Other non-current assets As at 31 July 2017 $'000 55,876 55,253 As at 31 July 2016 $'000 72,453 36,585 111,129 109,038 645,419 581,432 578,070 562,309 269,355 113,327 265,259 147,318 Total non-current assets 1,606,171 1,556,318 Total assets 1,717,300 1,665,356 Total current liabilities Total non-current liabilities Total liabilities Net assets Equity Share capital Reserves Retained profits Total equity 43,288 74,910 52,134 72,866 118,198 125,000 1,599,102 1,540,356 43,232 583,962 971,908 43,232 571,178 925,946 1,599,102 1,540,356 Income Statement Profit after tax 172,842 98,737 Less: Non-regular items after tax Special dividends received from New Hope Corporation Limited Net gain on disposal of investments Net impairment expense on investments Other – (45,305) 12,506 1,353 (17,349) (11,713) 67,320 441 Regular profit after tax 141,396 137,436 Other comprehensive income Net movement in the fair value of the listed investment portfolio 12,501 (39,363) 60 Washington H. Soul Pattinson and Company Limited Annual Report 2017 Regular Profit after Tax and Regular Operating Cash Flows For the year ended 31 July 2017 Interest income (from cash and loans) Dividend and distribution income Milton Corporation Limited BKI Investment Company Limited Commonwealth Bank of Australia Hunter Hall Global Value Limited National Australia Bank Limited Woolworths Limited Lindsay Australia Limited Wesfarmers Limited Macquarie Group Limited Other listed entities TPG Telecom Limited Brickworks Limited New Hope Corporation Limited Australian Pharmaceutical Industries Ltd Pengana Capital Group Limited A Apex Healthcare Berhad Clover Limited Other controlled and associates Total dividend and distribution income Net pharmacy profit Other revenue Realised and fair value gains on equities Other expenses Finance costs Regular profit before tax Income tax (expense) Regular profit after tax Market value of listed investments as at 31 July 2017 (based on ASX closing prices 31 July 2017) Long term equity investments Milton Corporation Limited BKI Investment Company Limited Commonwealth Bank of Australia Hunter Hall Global Value Limited National Australia Bank Limited Woolworths Limited Lindsay Australia Limited Wesfarmers Limited Bailador Technology Investments Limited Macquarie Group Limited Other listed entities As at 31 July 2017 $'000 134,373 100,336 65,904 28,635 26,109 23,760 23,321 20,418 19,780 18,369 184,414 Market value of long term equity investments 645,419 Listed controlled and associated entities TPG Telecom Limited Brickworks Limited New Hope Corporation Limited Australian Pharmaceutical Industries Ltd Pengana Capital Group Limited A Apex Healthcare Berhad TPI Enterprises Limited Clover Limited Verdant Minerals Limited Holding 25.2% 44.0% 59.6% 19.4% 39.2% 30.3% 18.9% 22.7% 38.3% 1,304,750 866,516 793,114 166,845 123,467 49,108 40,338 17,209 11,437 Market value of listed controlled and associated entities 3,372,784 Non-cash fair value movement in equities Net movements in working capital Total value of WHSP's listed investments 4,018,203 Regular operating cash flows Tax payable if WHSP's listed investments were disposed of: WHSP is a long term equity investor. If WHSP had disposed of its listed investments on 31 July 2017, a capital gains tax liability of approximately $861.1 million would have arisen based on market values as at 31 July 2017. Of this amount, only $67.5 million has been recognised in the Parent company accounts at 31 July 2017. The market values of the listed investments are based on the last sale prices as quoted on the ASX on 31 July 2017 and are therefore subject to price fluctuations. The Board declares dividends having regard to the Parent company's regular operating cash flows. Dividends paid/payable Interim of 22 cents per share paid 11 May 2017 Final of 32 cents per share payable 11 Dec 2017 Total dividends paid/payable Payout ratio Dividends as a percentage of regular operating cash flows Note A Pengana Capital Group Limited was acquired during the 2017 financial year. 2017 $'000 7,017 5,986 4,454 3,313 853 1,726 597 1,055 992 1,006 9,616 33,077 32,166 29,742 8,381 220 1,262 309 9,050 143,805 1,445 2,177 1,240 (10,305) (1,447) 143,932 (2,536) 141,396 282 1,918 143,596 52,667 76,607 129,274 90.0% 61 Parent Company Information 1 NOTE 1 PARENT COMPANY FINANCIAL INFORMATION (continued) a) Interest bearing liabilities of the Parent company During the year, the Parent company accepted deposits from its Directors and Director-related parties under normal commercial terms and conditions. On 31 July 2017, these deposits were transferred to a separate bank account and are held in trust for these Directors and their related parties. As the Parent company no longer has control over these funds, accordingly these funds are no longer included as a liability in the Group’s Statement of Financial Position. Refer note 23 and note 33. During the year, the Parent company utilised short term bank finance. At 31 July 2017, the debt owing was $40 million and is included within current liabilities in the Statement of Financial Position. The debt is secured by certain assets of the Parent company, is repayable upon either the bank or the Parent company providing 30 days notice, and incurs interest at a variable rate. The interest rate at 31 July 2017 was 2.18% per annum. Refer note 23. The Parent company is not subject to any externally imposed capital requirements by financial institutions. b) Guarantees entered into by the Parent company The Parent company provides cash backed guarantees for environmental bonds that are required by the 100% owned subsidiary, CopperChem Limited. As at 31 July 2017 these guarantees totalled $5.279 million (2016: $5.013 million). c) Contingent liabilities of the Parent company The Parent company did not have any contingent liabilities as at 31 July 2017 or 31 July 2016. d) Contractual commitments made by the Parent company, for the acquisition of property, plant or equipment The Parent company did not have any contractual commitments for property, plant or equipment as at 31 July 2017 or 31 July 2016. 62 Notes to the Financial StatementsWashington H. Soul Pattinson and Company LimitedAnnual Report 2017 2 NOTE 2 PAYMENT OF DIVIDENDS TO SHAREHOLDERS Accounting policy A liability is recognised for the amount of any dividend declared on or before the end of the financial year but not distributed at reporting date. As the final dividend was declared by Directors after year end, the final dividend has not been recognised as a liability. a) Dividends paid during the year Final dividend for the year ended 31 July 2016 of 31 cents (2015: 30 cents) per fully paid ordinary share paid on 12 December 2016 (2015: 7 December 2015) fully franked based on tax paid at 30% Interim dividend for the year ended 31 July 2017 of 22 cents (2016: 21 cents) per fully paid ordinary share paid on 11 May 2017 (2016: 12 May 2016) fully franked based on tax paid at 30% Total dividends paid b) Dividends not recognised at year end In addition to the above dividends, since year end the Directors have declared the payment of: A final dividend of 32 cents per fully paid ordinary share, (2016: 31 cents) fully franked based on tax paid at 30% This dividend is due to be paid on 11 December 2017 (2016: 12 December 2016) out of retained profits as at 31 July 2017, and has not been recognised as a liability at year end. c) Franking of dividends The final dividend for 31 July 2017 will be franked out of existing franking credits or out of franking credits arising from the payment of income tax in the year ending 31 July 2017. Franking credits available for future dividend payments Franking credits available for subsequent financial years based on an Australian company tax rate of 30% (2016: 30%). The above amounts represent the balance of the franking account as at the end of the financial year, adjusted for franking credits that will arise from the payment of provision for income tax, franking debits that will arise from the payment of dividends recognised as a liability at the reporting date, and franking credits that will arise from the receipt of dividends recognised as receivables at the reporting date. Subsequent to year end, the franking account will be reduced by the final dividend to be paid on 11 December 2017 (2016:12 December 2016). Balance of franking credits available after payment of the final dividend 2017 $’000 2016 $’000 74,213 71,819 52,667 126,880 50,273 122,092 76,607 74,213 544,915 540,553 (32,831) (31,805) 512,084 508,748 63 Group Structure and Performance 3 NOTE 3 SEGMENT INFORMATION – HOW THE GROUP IS ORGANISED AND MANAGED How the Group is organised – Corporate structure The Parent company invests in a diversified range of entities. Larger holdings in a single entity are classified as follows: Controlled entities: (subsidiaries) The Parent company is able to control the activities of the organisation. Associates: The Parent company has significant influence but does not control the activities of the organisation. During the year, the Group established three property trusts: PSRE Urban Regeneration Trust No.3; PSRE Urban Regeneration Trust No.4; and PSRE Urban Regeneration Trust No.5 to hold investments in industrial and commer- cial properties in Sydney. These properties are classified as investment properties at reporting date. Washington H. Soul Pattinson and Company holds 50.1% of each of these Trusts at 31 July 2017. No controlled entities were acquired or disposed of during the year ended 31 July 2017. For changes in ownership of Associates, refer note 10. How the Group is managed – Segment reporting The Parent company, its subsidiaries and associates operate within four segments. Segments are based on product and service type and are predominately based in Australia. The level of ownership determines the extent to which the Parent company is able to manage the underlying operations of its investment. The Group is managed by operating segment. Operating segments are reported in a manner consistent with the internal reporting provided to the Chief Operating Decision Maker. The Chief Operating Decision Maker, who is responsible for allocating resources and assessing performance of the operating segments, has been identified as the Board. As the Chief Operating Decision Maker is not regularly provided with the operating results from the listed associates (material contributors to reported profit) these associates are included within the Investing activities segment except for Syndicated Metals Limited and Novonix Limited, which are included within the Copper and gold operations segment. Results for listed associates are sourced from publicly available information. Unlisted associates have also been included within the investing segment. The Group’s operating segments are described as: Investing activities The Group invests in cash, term deposits, and diversified equity investments portfolio. Energy The Group engages in coal, oil and gas activities which include exploration, development, production, processing, associated transport infrastructure and ancillary activities. Copper and gold operations The Group engages in copper and gold mining activities which includes exploration, mining and processing of ore into copper concentrate, copper sulphide and gold. Property The Group engages in property investment activities including the identification and management of real estate to be held, sold or developed to earn rental income or capital appreciation, or both. 64 Notes to the Financial StatementsWashington H. Soul Pattinson and Company LimitedAnnual Report 2017 WHSP CONSOLIDATED GROUP CONTROLLED ENTITIES (SUBSIDIARIES) WHSP group percentage ownership of subsidiaries New Hope Corporation Limited WHSP: 59.6% Property Trusts CopperChem Limited Exco Resources Limited WHSP: 100% WHSP: 100% SEGMENTS INVESTING ACTIVITIES ENERGY OPERATIONS PROPERTY ACTIVITIES COPPER AND GOLD OPERATIONS ACTIVITIES ACTIVITIES WHSP Listed Equities Portfolio WHSP Cash and Term Deposits WHSP 100% WHSP 100% Coal Production and Exploration Brisbane Port Coal Loading Oil and Gas Operations ASSOCIATES (SIGNIFICANT INFLUENCE) WHSP group percentage ownership of associates Australian Pharmaceutical Industries Limited Brickworks Limited WHSP: 19.4% WHSP: 44.0% Clover Corporation Limited Pengana Capital Group Limited TPG Telecom Limited WHSP: 22.7% WHSP: 39.2% WHSP: 25.2% Ampcontrol Pty Limited Apex Healthcare Berhad TPI Enterprises Limited Verdant Minerals Limited WHSP: 43.3% WHSP: 30.3% WHSP: 18.9% WHSP: 38.3% Various unlisted associates Syndicated Metals Limited WHSP: 28.8% Novonix Limited WHSP: 15.9% 65 Group Structure and Performance 3 NOTE 3 SEGMENT INFORMATION – HOW THE GROUP IS ORGANISED AND MANAGED (continued) Business performance – measurement of segment results Segment performance is measured by regular profit and regular profit after tax attributable to members. These results are non-statutory profit measures and represent profit from continuing operations before non-regular items. The measurement basis in general, excludes the effects of non-regular items of income and expense which by nature are outside the ordinary course of business or part of ordinary activities but are unusual due to their size. Regular profit after tax attributable to members is the main measure of segment profit. A reconciliation between regular profit after tax attributable to members and profit after tax is set out below, and for each segment is set out in note 3a. The Directors have presented this information which is used by the Chief Operating Decision Maker, as they consider the disclosure enhances the understanding of the results to members and users of the financial statements. Non-regular items are disclosed in note 3b. The allocation of income and expense items between regular and non-regular profit is consistent with the prior year. Transactions between business segments are on an arm’s length basis in a manner similar to transactions with third parties. Segment revenue, expenses and results include transactions between business segments. These transfers are eliminated on consolidation. Reconciliation between regular profit after tax attributable to members and profit after tax: Regular profit after tax attributable to members 282,019 177,222 2017 $’000 2016 $’000 Non-regular items – net of tax Gain on disposal of equity investments Gain on disposal of equity accounted associates Gain/ (loss) on initial recognition of equity accounted associate (Loss)/gain on deemed disposal of equity accounted associates Gain on derecognition as an associate Share of significant (expenses) from associate entities Deferred tax (expense) recognised on equity accounted associate entities Impairment (expense) on equity accounted associates Impairment (expense) on equity investments Impairment (expense) on oil producing and exploration assets Impairment (expense) – copper assets Impairment (expense) on other assets Recovery of prior period rail access charges Acquisition costs expensed Land access compensation Recovery of legal fees Other items Total non-regular profit/(loss) after tax attributable to members Profit after tax attributable to members 25,103 24,059 43,049 (201) 7,169 (10,915) (32,535) – (5,126) – – (7,258) 8,313 – – 1,575 (1,641) 51,592 333,611 11,713 1,489 (1,682) 83,318 – (29,834) (20,900) (7,554) (12,023) (13,277) (22,374) (6,675) – (19,042) 2,982 – 6,058 (27,801) 149,421 66 Notes to the Financial StatementsWashington H. Soul Pattinson and Company LimitedAnnual Report 2017 a) Reporting segments Year ended 31 July 2017 Revenue from external customers Intersegment revenue Total revenue Regular profit/(loss) before income tax Non-regular items before tax (note 3b) Profit/(loss) before income tax Less income tax benefit/(expense) Profit/(loss) after tax Less (profit) attributable to non-controlling interests g n i t s e v n I s e i t i v i t c a $’000 s n o i t a r e p o l d o g d n a r e p p o C y g r e n E y t r e p o r P $’000 $’000 $’000 / t n e m g e s r e t n I d e t a c o l l a n u $’000 d e t a d i l o s n o C $’000 63,501 38,711 844,077 – 102,212 844,077 235,868 97,445 333,313 (54,817) 278,496 (819) 182,215 19,908 202,123 (61,594) 140,529 (56,085) 18,394 – 18,394 (5,445) (63) (5,508) 2,740 (2,768) – 28,309 935 13,289 (39,646) 967,570 – 29,244 (26,357) 967,570 15,839 – 15,839 (5,172) 10,667 (282) (34,428) – (34,428) (1,142) (35,570) (557) 394,049 117,290 511,339 (119,985) 391,354 (57,743) Profit/(loss) after tax attributable to members 277,677 84,444 (2,768) 10,385 (36,127) 333,611 Profit/(loss) after tax attributable to members (as above) Non-regular (profit)/loss after tax attributable to members (note 3b) 277,677 84,444 (2,768) 10,385 (36,127) 333,611 (43,492) (8,313) 213 – – (51,592) Regular profit/(loss) after tax attributable to members 234,185 76,131 (2,555) 10,385 (36,127) 282,019 Profit/(loss) before income tax includes the following items: Interest revenue Interest (expense) Depreciation and amortisation (expense) Impairment (expense)/reversal Share of results from equity accounted associates 7,042 (1,458) (1,770) (18,413) 162,181 2,089 (903) (97,880) – – 41 (411) (1,806) (10) (146) 18 (805) (133) – – 58 – (14) – 32 9,248 (3,577) (101,603) (18,423) 162,067 67 Group Structure and Performance 3 NOTE 3 SEGMENT INFORMATION – HOW THE GROUP IS ORGANISED AND MANAGED (continued) a) Reporting segments (continued) g n i t s e v n I s e i t i v i t c a $’000 s n o i t a r e p o l d o g d n a r e p p o C y g r e n E y t r e p o r P $’000 $’000 $’000 / t n e m g e s r e t n I d e t a c o l l a n u $’000 d e t a d i l o s n o C $’000 86,281 29,708 514,164 – 115,989 514,164 230,288 72,615 302,903 (62,586) 240,317 (3,119) (18,361) (68,750) (87,111) 25,795 (61,316) 24,742 616 – 616 (9,746) (55,515) (65,261) 39,092 (26,169) – 5,867 914 6,781 3,239 – 3,239 (930) 2,309 (51) 13,733 (30,622) 620,661 – (16,889) 620,661 (23,409) – (23,409) (2,273) (25,682) (1,610) 182,011 (51,650) 130,361 (902) 129,459 19,962 Year ended 31 July 2016 Revenue from external customers Intersegment revenue Total revenue Regular profit/(loss) before income tax Non-regular items before tax (note 3b) Profit/(loss) before income tax Less income tax benefit/(expense) Profit/(loss) after tax Less loss/(profit) attributable to non-controlling interests Profit/(loss) after tax attributable to members 237,198 (36,574) (26,169) 2,258 (27,292) 149,421 Profit/(loss) after tax attributable to members (as above) Non-regular loss/(profit) after tax attributable to members (note 3b) 237,198 (36,574) (26,169) 2,258 (27,292) 149,421 (18,654) 29,337 17,118 – – 27,801 Regular profit/(loss) after tax attributable to members 218,544 (7,237) (9,051) 2,258 (27,292) 177,222 Profit/(loss) before income tax includes the following items: Interest revenue Interest (expense) Depreciation and amortisation (expense) Impairment (expense)/reversal Share of results from equity accounted associates 22,484 (1,338) (2,209) (35,001) 124,693 567 (249) (74,905) (28,146) – 273 (304) (2,339) (53,392) (2,183) 15 (644) (143) – (7) 109 – (17) – – 23,448 (2,535) (79,613) (116,539) 122,503 68 Notes to the Financial StatementsWashington H. Soul Pattinson and Company LimitedAnnual Report 2017 b) Analysis of non-regular items excluded from segment results Year ended 31 July 2017 Gain on disposal of equity investments Gain on disposal of associates Gain on initial recognition of an associate Net (loss) on deemed disposals of associates Gain on derecognition as an associate Share of significant (expenses) from associate entities Deferred tax recognised on equity accounted associate entities Net Impairment (expense) of assets Recovery of prior period rail access charges Recovery of legal fees Other Before tax $’000 33,291 21,538 61,499 132 10,507 (10,915) – (18,423) 19,908 2,250 (2,497) Tax $’000 (8,188) 2,521 (18,450) (333) (3,338) – (32,535) 5,220 (5,972) (675) 856 Attributable to: After tax $’000 Non- controlling interest $’000 Members $’000 25,103 24,059 43,049 (201) 7,169 (10,915) (32,535) (13,203) 13,936 1,575 (1,641) – – – – – – – (819) 5,623 – – 25,103 24,059 43,049 (201) 7,169 (10,915) (32,535) (12,384) 8,313 1,575 (1,641) Total non-regular items 117,290 (60,894) 56,396 4,804 51,592 Year ended 31 July 2016 Gain on disposal of equity investments Gain on disposal of associates Loss on initial recognition of an associate Gain on deemed disposal of associates Share of significant (expenses) from associate entities Deferred tax recognised on equity accounted associate entities Impairment (expense) of assets Acquisition costs expensed Land access compensation Significant tax items Other 16,501 2,127 (1,682) 118,850 (29,834) – (116,539) (45,604) 5,000 – (469) (4,788) (638) – (35,532) – (20,900) 43,627 13,681 – 6,413 114 11,713 1,489 (1,682) 83,318 (29,834) (20,900) (72,912) (31,923) 5,000 6,413 (355) – – – – – – (11,009) (12,881) 2,018 – – 11,713 1,489 (1,682) 83,318 (29,834) (20,900) (61,903) (19,042) 2,982 6,413 (355) Total non-regular items (51,650) 1,977 (49,673) (21,872) (27,801) 69 Group Structure and Performance 4 NOTE 4 ACCOUNTING MOVEMENTS IN VALUE THAT ARE NOT REFLECTED IN PROFIT: RESERVES Accounting policies – Reserves Reserves represent the portion of the consolidated entity’s reserves that are attributable to our shareholders. Certain changes in the value of assets and liabilities are not recognised in the income statement but are instead included in other comprehensive income. Also included in reserves is the Group’s share of the reserves of equity accounted associates. Asset Revaluation reserve Changes in the fair value of certain assets including long term equity investments are not recognised in the income statement but instead are recognised in other comprehensive income and accumulated in the asset revaluation reserve within equity. Amounts are reclassified to the profit or loss when investments are sold or impaired. Refer note 11. Hedge Reserve The hedge reserve records the effective portion of changes in the fair value of derivatives that are designated and qualify as cash flow hedges, as described in note 22. The gain or loss relating to the ineffective portion is recognised in the income statement. a) Reserves attributable to members General reserve Asset revaluation reserve Capital profits reserve Hedging reserve Share-based payments reserve Foreign currency translation reserve Equity reserve Balance 31 July b) Major movements in reserves consist of: Asset revaluation reserve 2017 $’000 404,548 196,254 11,368 6,429 3,216 (114) (10,475) 2016 $’000 404,548 220,103 11,368 244 1,677 (126) (14,130) 611,226 623,684 Balance 1 August Revaluation of long term equity investments, gross Revaluation of long term equity investments, deferred tax Transfer on sale of long term equity investments to profit, gross Transfer on sale of long term equity investments to profit, deferred tax Transfer of long term equity investment to associate, gross Transfer of long term equity investment to associate, deferred tax Transfer on impairment of long term equity investments to profit, gross Transfer on impairment of long term equity investments to profit, deferred tax Share of associates (decrements) Balance 31 July 220,103 18,454 (5,963) (34,463) 9,066 (7,486) 2,227 6,023 (1,733) (9,974) 196,254 271,242 (55,960) 18,373 (12,324) 1,844 561 (168) 12,934 (3,880) (12,519) 220,103 Asset revaluation reserve At balance date, the asset revaluation reserve predominately relates to the net unrealised gains of Washington H. Soul Pattinson and Company Limited’s long term equity investments. 70 Notes to the Financial StatementsWashington H. Soul Pattinson and Company LimitedAnnual Report 2017 Hedge reserve Balance 1 August Revaluation, gross Revaluation, deferred tax Transfer to profit, gross Transfer to profit, deferred tax Share of associates (decrements) Balance 31 July 2017 $’000 244 15,018 (4,476) (5,456) 1,637 (538) 6,429 2016 $’000 (9,735) 1,925 (627) 13,032 (3,909) (442) 244 Hedge reserve Movements in the hedge reserve predominately relate to New Hope Corporation Limited’s derivative financial instruments which are used to hedge exposures to foreign currency exchange rates. Refer to note 22 for further details. c) Nature and purpose of other reserves General reserve The general reserve records funds set aside for future requirements of the Group and relate to Washington H. Soul Pattinson and Company Limited (the Parent company). Capital profits reserve This reserve represents amounts allocated from retained profits that were profits of a capital nature. Share-based payments reserve The share-based payments reserve is used to recognise the fair value of options and rights issued to employees, but not yet exercised. Foreign currency translation reserve The foreign currency translation reserve records the foreign currency differences which arise from the translation of self-sustaining foreign operations, and foreign exchange movements. Equity reserve This reserve includes the tax effect of movements in the carrying value of equity accounted associates where this movement has been recognised directly in equity. 71 5 Group Structure and Performance NOTE 5 SHARE CAPITAL AND CAPITAL MANAGEMENT Accounting policy – Share capital Ordinary shares are classified as equity. Incremental costs directly attributable to the issue of new shares or options are shown in equity as a deduction net of tax, from the proceeds. The amounts of any capital return are applied against share capital. Group and Parent company Group and Parent company 2017 No of shares 239,395,320 2017 $’000 2016 No of shares 43,232 239,395,320 2016 $’000 43,232 Fully paid ordinary shares Ordinary shares entitle the holder to participate in dividends and the proceeds on winding up of the Company in proportion to the number of, and amounts paid, on the shares held. On a show of hands every holder of ordinary shares present at a meeting in person or by proxy is entitled to one vote, and upon a poll each share is entitled to one vote. Ordinary shares have no par value. Capital Management The Group’s capital management approach is conservative with the objective to maintain a strong capital base in order to maintain investor, creditor and market confidence and to sustain the future development of the Consolidated entity. There were no changes to the Group’s approach to capital management during the year. The Group’s capital consists of total shareholders’ equity, borrowings and other interest bearing liabilities. The movement in shareholders equity is shown in the statement of changes in equity. Refer to page 55. In the current year, the Parent company utilised short term bank finance. At 31 July 2017, this balance was $40 million. Refer note 23a. In addition, non-recourse debt of $22.825 million has been drawn to finance investment properties held within 100% controlled entities. Refer to note 23a. The Parent company is not subject to any externally imposed capital requirements by financial institutions. The Board declares dividends having regard to the Parent company’s regular operating cash flows, refer to note 1. 72 Notes to the Financial StatementsWashington H. Soul Pattinson and Company LimitedAnnual Report 2017 6 NOTE 6 BUSINESS COMBINATIONS Accounting policy – Business combinations The acquisition method of accounting is used to account for all business combinations. The consideration transferred is the sum of the fair values of the assets transferred, the liabilities incurred and the equity interests issued by the acquirer to former owners of the acquiree and the amount of any non-controlling interest in the acquiree. The consideration transferred also includes the fair value of any contingent consideration arrangement and the fair value of any pre-existing equity interest in the investment. Acquisition-related costs are expensed as incurred. Identifiable assets acquired and liabilities and contingent liabilities assumed in a business combination are, with limited exceptions, measured initially at their fair values at the acquisition date. On an acquisition-by-acquisition basis, the Group recognises any non-controlling interest in the acquiree either at fair value or at the non-con- trolling interest’s proportionate share of the acquiree’s net identifiable assets. The excess of the consideration transferred, the amount of any non-controlling interest in the acquiree and the acquisition-date fair value of any previous equity interest in the acquiree over the fair value of the Group’s share of the net identifiable assets acquired is recorded as goodwill. If those amounts are less than the fair value of the net identifiable assets acquired and the measurement of all amounts has been reviewed, the difference is recognised directly in the income statement as a bargain purchase. Where settlement of any part of cash consideration is deferred, the amounts payable in the future are discounted to their present value as at the date of exchange. The discount rate used is the entity’s incremental borrowing rate, being the rate at which a similar borrowing could be obtained from an independent financier under comparable terms and conditions. Contingent consideration is classified either as equity or a financial liability. Amounts classified as a financial liability are subsequently remeasured to fair value with changes in fair value recognised in the income statement. If the Group recognises previous acquired deferred tax assets after the initial acquisition accounting is completed there will be no adjustment to goodwill. As a consequence, the recognition of the deferred tax asset will increase the Group’s net profit after tax. Acquisitions during the year New Hope Corporation Limited acquisition of Oil producing business During the year ended 31 July 2017, the Group acquired a business constituting the Greater Kenmore and Bodalla Area (GKBA) oil producing and exploration fields. This transaction constitutes a business combination. The Group acquired 100% of the interests in the Kenmore (PL32), Bodalla South (PL31) and Blackstump (PL47) oil producing assets. The acquisition also included two joint ventures: ATP 269 (Coolum/Byrock) JV (93.21%) and ATP 269 (Glenvale/Bargie) JV (93.9%). The Group acquired oil-producing assets of $13.300 million and assumed rehabilitation related provisions of $12.500 million, resulting in a net cash outflow of $800,000. Acquisitions during the prior year New Hope Corporation Limited acquisition of Bengalla Joint Venture On 1 March 2016, a subsidiary of Washington H. Soul Pattinson and Company Limited, New Hope Corporation Limited, acquired a 40% interest in the Bengalla Joint Venture, a coal mining and extraction operation producing thermal coal in the Hunter Valley, New South Wales. The Joint Venture is accounted for as a joint operation, whereby the Group recognises its direct right to the assets, liabilities, revenue and expenses of the joint operation and its share of any jointly held or incurred assets, liabilities, revenues and expenses. These have been incorporated in the financial statements under the appropriate headings. 73 Group Structure and Performance 6 NOTE 6 BUSINESS COMBINATIONS (continued) i) Purchase Consideration Cash Paid Purchase price adjustment receivable Total Purchase Consideration The fair value of assets and liabilities recognised as a result of the acquisition are as follows: Cash Receivables Inventories Property, plant and equipment Intangibles Accounts payables and accruals Provisions Net assets acquired ii) Net cash outflow to acquire Bengalla Joint Venture Outflow of cash to acquire Bengalla Joint Venture, net of cash acquired Total cash consideration Less: Cash balance acquired Outflow of cash – investing activities Stamp duty expensed Other acquisition costs expensed Total net outflow of cash 2016 $’000 850,796 (1,668) 849,128 2016 $’000 4,748 15,079 12,464 829,532 41,500 (18,386) (35,809) 849,128 2016 $’000 850,796 (4,748) 846,048 44,738 737 891,523 Significant judgements and estimates Acquisition fair value The determination of the fair values of net identifiable assets acquired, and of any goodwill, involves significant judgement. The allocation of fair value between intangible assets, and the tangible assets with which they are used, is also judgemental. The Group engages third-party valuers to advise on the purchase price allocation for significant acquisitions. 74 Notes to the Financial StatementsWashington H. Soul Pattinson and Company LimitedAnnual Report 2017 7 8 NOTE 7 EVENTS AFTER THE REPORTING DATE Since the end of the financial year, no matters or circumstances not referred to elsewhere in this report have arisen that have or will significantly affect the operations of the Group, the results of those operations or the state of affairs of the Group in subsequent financial years. Accounting for Our Investments The Group invests in equities (subsidiaries, joint arrangements, associated entities, and other equity investments), investment properties, term deposits and cash. This section describes how each of these investments are recognised and measured in the consolidated financial statements. NOTE 8 INVESTMENTS IN CONTROLLED ENTITIES (SUBSIDIARIES) Accounting policy – Investments in controlled entities Investments in controlled entities such as New Hope Corporation Limited, the PSRE Urban Regeneration Trust, CopperChem Limited and Exco Resources Limited (refer to segment note for a detailed listing of subsidiaries) are not recognised as individual investments in the consolidated financial statements. The assets and liabilities of each controlled entity are instead recognised in the statement of financial position. Dividends from controlled entities are not recognised in the consolidated income statement, instead the results from each controlled entity are included in profit and loss. Washington H. Soul Pattinson and Company Limited, the Parent company has a 59.65% shareholding in its subsidiary, New Hope Corporation Limited. New Hope Corporation Limited is a diversified energy company, with operations covering coal mining and production, coal port operations and oil and gas production and exploration. Operations are mainly based in South East Queensland and most recently in the Hunter Valley region, NSW with the Bengalla Joint Venture. The remaining 40.35% shareholding in New Hope Corporation Limited (non-controlling interests) has a proportional share in the results and equity of New Hope Corporation Limited. The Group consolidates the net assets and results of subsidiaries in full, and discloses separately for each, the amounts not controlled by the Group (non-controlling interests). The following provides a summary of the financial information of New Hope Corporation Limited: 4 Total assets $2.182 billion (2016: $2.019 billion); Total liabilities $328.217 million (2016: $268.137 million); 4 Net assets $1.853 billion (2016; $1.750 billion) and a net increase in cash and cash equivalents $153.294 million (2016: increase $64.266 million), Non-controlling interest share of net assets $747.850 million (2016: $706.289 million), profit after income tax for the year $56.710 million (2016: loss of $20.013 million). 75 Accounting for Our Investments 9 NOTE 9 INVESTMENTS IN JOINTLY CONTROLLED ENTITIES (JOINT OPERATIONS AND JOINT VENTURES) Accounting policy – Investments in Joint arrangements A joint arrangement is an arrangement where two or more parties share control. Joint arrangements are classified as either joint operations or joint ventures. The classification depends on the contractual rights and obligations of each investor, rather than the legal structure. Joint operations A joint operation is a joint arrangement in which the parties that share joint control, have rights to the assets, and obligations for the liabilities relating to the arrangement. The Group recognises its direct right to the assets, liabilities, revenues and expenses of joint operations and its share of any jointly held or incurred assets, liabilities, revenues and expenses. These have been incorporated into the Group’s financial statements under the appropriate headings. Joint ventures A joint venture is a joint arrangement in which the parties that share joint control have rights to the net assets of the arrangement. Interests in joint ventures are accounted for using the equity method, after initially being recognised at cost. Through New Hope Corporation Limited and its subsidiaries, the Group holds interests in the following Joint arrangements, each of which have been accounted for as a Joint operation as described in the accounting policy above. Name Bengalla Joint Venture Lenton Joint Venture Yamala Joint Venture Accounted for as: Group’s interest Segment allocated to: Joint operation Joint operation Joint operation 40% 90% 70% 15% Energy operations Energy operations Energy operations Energy operations Cuisiner Joint Venture – Barta projects Joint operation Cuisiner Joint Venture – Wompi project Joint operation 17.5% Energy operations Key judgement Classification of joint arrangements as a joint operation The Group assesses whether it has the power to direct the relevant activities of the investee by considering the rights it holds with respect to the work programme and budget approval, investment decision approval, voting rights in joint operating committees and changes to the joint arrangement participant holdings. Where the Group has control, judgement is also required to assess whether the arrangement is a joint operation or a joint venture. 76 Notes to the Financial StatementsWashington H. Soul Pattinson and Company LimitedAnnual Report 2017 10 NOTE 10 INVESTMENTS IN ASSOCIATES Accounting policy – Investments in associates Associates are equity accounted, with the initial investment being increased/(decreased) by the Group’s share of the associate’s profits/(losses) as recognised in the income statement, movements in their reserves (other comprehensive income) and decreased by dividends received. Dividends from associates are not recognised in the consolidated income statement. As the accounting policy for Investments in associates is considered key to understanding the Group’s results and financial position, the detailed accounting policy is set out in the basis of consolidation at the beginning of the notes to the financial report (refer to page 58. 2017 $’000 2016 $’000 1,415,973 1,265,214 Non-Current Assets Equity accounted associates The equity accounted carrying amount of an associate does not reflect the fair value of the Group’s investment in the associate. Details of the fair value of investments in listed associates are provided in note 10b. a) Movements in equity accounted carrying values Carrying amount at 1 August New investments during the period Reclassification of long term equity investment to equity accounted associate Fair value gain/(loss) on initial recognition as an equity accounted associate Gains on deemed disposal of equity accounted associates Disposal of equity accounted associates Share of profits after income tax, before write downs Impairment (expense) of equity accounted associates Dividends received/receivable Add back share of dividends received by associate Share of associates (decrement) in reserves 1,265,214 176,495 (123,498) 61,499 132 (60,182) 162,067 – (81,467) 23,880 (8,167) 1,088,592 6,287 2,803 (1,682) 118,850 (1,981) 122,503 (7,554) (72,722) 23,028 (12,910) Equity accounted carrying amount at 31 July 1,415,973 1,265,214 77 Accounting for Our Investments 10 NOTE 10 INVESTMENTS IN ASSOCIATES b) Details of investments and results in associates Name of associated entity Associates – held by WHSP Apex Healthcare Berhad Pharmaceutical manufacturer and distributor Australian Pharmaceutical Industries Limited(i) Pharmaceutical wholesaler BKI Investment Company Limited(ii) Listed investment company Brickworks Limited(iii) Manufacturer of building products Clover Corporation Limited(iv) Refinement and processing of natural oil Pengana Capital Group Limited(v) Funds Management Ruralco Holdings Limited(vi) Rural supplies and services TPG Telecom Limited(vii) Telecommunications and internet provider TPI Enterprises Limited(viii) Manufacturer of narcotic concentrate from poppy straw Verdant Minerals Limited Phosphate and Potash explorer Group’s percentage of holding at balance date* Contribution to Group net profit for the year** 2017 2016 Fair value of listed investments*** July 2017 July 2016 Regular Non-Regular# Regular Non-regular# Balance date 31 Dec 31 Aug 30 June 31 July 31 July 30 June 30 Sept 31 July 31 Dec 30 June % 30.3 19.4 9.5 44.0 22.7 39.2 – 25.2 18.9 38.3 % 30.3 24.6 10.3 44.1 28.6 – 20.1 25.2 19.4 38.3 Associates – held by controlled entities various various various Share of results from equity accounted associates 172,982 (10,915) 162,067 152,338 (29,835) 122,503 Gain on disposal of associates, net of tax Gain/(loss) on initial recognition of an associate, net of tax Gain on derecognition of an associate, net of tax Net loss/(gain) on deemed disposal of associates, net of tax Deferred tax of equity accounted associates carrying values Impairment expense of an associate Total gain on disposals, initial recognition, derecognition, impairment expense of associates and deferred tax on equity accounted associates Share of results, gains and losses and deferred tax on deemed disposals of associates and impairment from equity accounted associate 41,541 41,541 54,671 54,671 172,982 30,626 203,608 152,338 24,836 177,174 * The percentage holding represents the Group’s total holding in each associate. ** Contribution to Group net profit represents the amount included in profit after tax before non-controlling interest. As the Group does not control associates, an associates’ balance date may not be the same as the Group’s balance date. An associate’s contribution to Group profit is based on the annual result reported for each associate, adjusted for any change in the Group’s holding of that associate. 78 $’000 $’000 $’000 $’000 3,757 13,560 (441) 659 4,599 (1,034) 3,565 100,336 100,668 41,212 (4,883) 36,329 38,841 (29,211) 866,516 986,646 Total $’000 3,316 14,219 876 (783) 981 104,076 (2,931) (1,181) 3,600 24,059 43,049 7,169 (201) (32,535) – 3,417 11,611 4,524 632 – 3,787 91,825 (3,128) – 829 – – – – – – – Total $’000 July 2017 July 2016 $’000 $’000 3,417 49,108 45,247 (600) 11,011 166,845 230,813 4,524 9,630 632 – 17,209 19,336 123,467 – (1,572) 2,215 – 52,947 5,699 97,524 1,304,750 2,737,949 (1,631) (4,759) 40,338 28,898 – 11,437 (2,520) (1,691) n/a 8,486 n/a – – – – – 1,489 (1,682) – 83,318 (20,900) (7,554) 1,489 (1,682) – 83,318 (20,900) (7,554) – (1,250) (1,949) (880) (332) (479) (326) 24,059 43,049 7,169 (201) (32,535) – 876 467 2,930 104,956 (2,599) (702) 3,926 – – – – – – – Notes to the Financial StatementsWashington H. Soul Pattinson and Company LimitedAnnual Report 2017 Name of associated entity Associates – held by WHSP Apex Healthcare Berhad Pharmaceutical manufacturer and distributor Australian Pharmaceutical Industries Limited(i) Pharmaceutical wholesaler BKI Investment Company Limited(ii) Listed investment company Brickworks Limited(iii) Manufacturer of building products Clover Corporation Limited(iv) Refinement and processing of natural oil Pengana Capital Group Limited(v) Funds Management Ruralco Holdings Limited(vi) Rural supplies and services TPG Telecom Limited(vii) Telecommunications and internet provider TPI Enterprises Limited(viii) Manufacturer of narcotic concentrate from poppy straw Verdant Minerals Limited Phosphate and Potash explorer Group’s percentage of holding at balance date* July 2017 July 2016 Balance date 31 Dec 31 Aug 30 June 31 July 31 July 30 June 30 Sept 31 July 31 Dec 30 June % 30.3 19.4 9.5 44.0 22.7 39.2 – 25.2 18.9 38.3 % 30.3 24.6 10.3 44.1 28.6 – 20.1 25.2 19.4 38.3 Associates – held by controlled entities various various various Gain on disposal of associates, net of tax Gain/(loss) on initial recognition of an associate, net of tax Gain on derecognition of an associate, net of tax Net loss/(gain) on deemed disposal of associates, net of tax Deferred tax of equity accounted associates carrying values Impairment expense of an associate Total gain on disposals, initial recognition, derecognition, impairment expense of associates and deferred tax on equity accounted associates Share of results, gains and losses and deferred tax on deemed disposals of associates and impairment from equity accounted associate Contribution to Group net profit for the year** 2017 2016 Fair value of listed investments*** Regular Non-regular# $’000 $’000 Total $’000 July 2017 July 2016 $’000 $’000 41,212 (4,883) 36,329 38,841 (29,211) Regular Non-Regular# $’000 $’000 3,757 13,560 (441) 659 Total $’000 3,316 14,219 4,599 (1,034) 3,565 3,417 11,611 4,524 876 467 2,930 104,956 (2,599) (702) 3,926 – (1,250) (1,949) (880) (332) (479) (326) 876 (783) 981 104,076 (2,931) (1,181) 3,600 632 – 3,787 91,825 (3,128) – 829 – 3,417 49,108 45,247 (600) 11,011 166,845 230,813 – – – 4,524 9,630 632 – 100,336 100,668 866,516 986,646 17,209 19,336 123,467 – (1,572) 2,215 – 52,947 5,699 97,524 1,304,750 2,737,949 (1,631) (4,759) 40,338 28,898 – – 11,437 (2,520) (1,691) n/a 8,486 n/a Share of results from equity accounted associates 172,982 (10,915) 162,067 152,338 (29,835) 122,503 – – – – – – – 24,059 43,049 7,169 (201) (32,535) – 24,059 43,049 7,169 (201) (32,535) – 41,541 41,541 – – – – – – – 1,489 (1,682) – 83,318 (20,900) (7,554) 1,489 (1,682) – 83,318 (20,900) (7,554) 54,671 54,671 172,982 30,626 203,608 152,338 24,836 177,174 *** Fair value of listed investments represents the last sale price of listed associates at balance date. These are subject to capital gains tax and other transaction costs. Fair value of listed associates is classified as level 1 in the fair value hierarchy. # Non-regular items defined in note 3. All associates are incorporated in Australia except for Apex Healthcare Berhad (incorporated in Malaysia). 79 Accounting for Our Investments 10 NOTE 10 INVESTMENTS IN ASSOCIATES b) Details of investments and results in associates (continued) (i) During the year, Washington H. Soul Pattinson and Company Limited disposed of shares in Australian Pharmaceutical Industries Limited for an after tax profit of $20.482 million. This resulted in the Group’s interest decreasing from 24.6% to 19.4%. (ii) During the year, Washington H. Soul Pattinson and Company Limited’s investment in BKI Investment Company Limited, decreased from 10.3% to 9.5%. This decrease was a consequence of: 4 Non participation in BKI’s dividend reinvestment plan; 4 The issue of shares by BKI to a third party following the acquisition of a company; and 4 Disposal of 3.26 million shares for an after tax profit of $0.465 million. Further, BKI Investment Company Limited was derecognised from being an equity accounted associate to a long-term equity investment resulting in an after tax profit of $7.788 million. (iii) During the year, Washington H. Soul Pattinson and Company Limited’s interest in Brickworks Limited decreased by 0.11% to 44.03% as a consequence of Washington H. Soul Pattinson and Company Limited’s non participation in the employee share scheme. (iv) Washington H. Soul Pattinson and Company Limited’s interest in Clover Corporation Limited decreased from 28.6% to 22.7%. This was a result of a disposal of shares in Clover Corporation Limited for an after tax profit of $1.708 million. (v) During the year, Washington H. Soul Pattinson and Company Limited acquired shares in Hunter Hall International Limited and Pengana Capital Limited. In June 2017, these two companies merged their operations and Washington H. Soul Pattinson and Company Limited became the largest shareholder in the merged entity with 39.2% of Pengana Capital Group Limited. As a result, Washington H. Soul Pattinson and Company Limited classified its investment in Pengana Capital Group Limited as an equity accounted associate. On initial recognition as an associate, the Group recognised a fair value gain of $61.499 million, net of tax $43.049 million. (vi) By year-end, Washington H. Soul Pattinson and Company Limited had disposed of all of its shares in Ruralco Holdings Limited for an after tax loss of $1.860 million. During the year, Washington H. Soul Pattinson and Company Limited participated in the institutional and retail offers. (vii) Washington H. Soul Pattinson and Company Limited maintained its interest in TPG Telecom Limited of 25.15% after participating in TPG Telecom Limited’s capital raising to part fund the purchase of 700MHz spectrum from the Australian government. (viii) Washington H. Soul Pattinson and Company Limited decreased its interest in TPI Enterprises Limited by 0.45% to 18.92% after participating in the TPI Enterprises Limited capital raisings to institutional and professional investors. Key estimate and judgements Recoverable value of investments in associates The recoverable amount of investments in equity accounted associates is reviewed at each reporting date after taking into consideration any applicable impairment indicators. Significant judgement is used when assessing impairment and the reversal of previously recognised impairment for equity accounted associates. c) Group’s share of associates’ expenditure commitments Capital commitments Lease commitments 2017 $’000 386,199 126,145 2016 $’000 100,596 137,211 80 Notes to the Financial StatementsWashington H. Soul Pattinson and Company LimitedAnnual Report 2017 2017 $’000 2016 $’000 d) Group’s share of associates’ contingent liabilities Share of contingent liabilities incurred jointly with other investors of the associate 15,122 19,179 e) Summarised Group’s share of associates financial information Assets Liabilities Net assets Revenue Profit before income tax Income tax expense Profit after income tax 2,735,115 (981,139) 1,753,976 2,796,095 (1,168,989) 1,627,106 2,652,935 2,312,674 228,857 (66,790) 162,067 176,751 (54,248) 122,503 f ) Extract of financial information as reported by associates that are material to the Group The information disclosed reflects the total amounts reported in the financial statements of Brickworks Limited and TPG Telecom Limited amended to reflect adjustments made by the Group in applying the equity method. Current assets Non-current assets Current liabilities Non-current liabilities Net assets Group’s percentage holding Group’s share of total net assets Goodwill/(discount) Equity accounted carrying value Revenue Profit after tax attributable to members Other comprehensive income Total comprehensive income Dividends received by Washington H. Soul Pattinson and Company Limited from the associate Brickworks Limited TPG Telecom Limited 2017 $’000 356,979 1,129,735 (160,215) (393,321) 933,178 44.03% 410,878 16,552 427,430 841,816 186,210 (1,816) 184,394 2016 $’000 344,168 1,021,450 (145,498) (356,931) 2017 $’000 211,200 3,699,800 (567,600) (944,100) 2016 $’000 358,600 3,412,400 (513,900) (1,477,900) 863,189 2,399,300 1,779,200 44.14% 25.15% 25.15% 381,012 16,054 397,066 603,424 358 603,782 447,469 (433) 447,036 750,985 2,490,700 2,387,800 78,190 (12,851) 65,339 413,800 (59,800) 379,600 (34,700) 354,000 344,900 32,166 30,194 33,077 27,744 Refer to note 10 (b) for associates profit contributions to the Group. 81 11 Accounting for Our Investments NOTE 11 OTHER EQUITY INVESTMENTS Accounting policies – Other equity investments (excluding controlled entities, jointly controlled entities and associates) Recognition Purchases of equity investments are recognised on trade date being the date on which the Group commits to purchase the asset. Classification The Group classifies its equity investments into the following categories: long term equity investments, trading equities and held for sale equities. The classification depends on the purpose for which the investments are acquired. Management determines the classification of its investments at initial recognition. Trading equities Trading equities are initially recognised at fair value and any transaction costs are immediately expensed. The portfolio consists of equity investments that are principally held for the purpose of selling in the short to medium term. Trading equities are included in current assets. Long term equity investments Long term equity investments are initially recognised at fair value plus any transaction costs. These investments are intended to be held for the long term for capital growth and dividend income. These investments are included in non-current assets unless management intends to dispose of the investment within 12 months of the reporting date at which time they are transferred to and disclosed as held for sale equities. Subsequent measurement At each balance date, trading equities and long term equity investments are remeasured to fair value. Gains or losses arising from changes in the fair value of trading equities are recognised in the income statement within other income in the period in which they arise. Changes in the fair value of long term equity investments are recognised in equity through the asset revaluation reserve after allowing for deferred capital gains tax. All long term equities are subject to capital gains tax. Impairment The Group assesses at each reporting date whether there is objective evidence that a financial asset or group of financial assets is impaired. In the case of equity securities classified as long term equity investments, a significant or prolonged decline in the value of a security below its cost is considered an indicator that the security may be impaired. Impairment losses are recognised in the income statement unless the asset has previously been revalued through the asset revaluation reserve, in which case the impairment loss is recognised as a reversal to the extent of that previous revaluation with any excess recognised in the income statement. An impairment recognised for a long term equity investment is prohibited from being reversed through profit and loss. Any future increments in the fair value of these investments will be recognised as a fair value increment in the asset revaluation reserve. Dividend income Dividend income is recognised as revenue when the right to receive the dividend is established, and is generally the ex-dividend date. Derecognition Equity investments are derecognised when the rights to receive cash flows from the equity investments have expired or have been transferred and the Group has transferred substantially all the risks and rewards of ownership. When securities classified as long term equity investments are sold, the accumulated fair value adjustments previously recognised in equity, are transferred to the income statement. 82 Notes to the Financial StatementsWashington H. Soul Pattinson and Company LimitedAnnual Report 2017 Current Assets Trading equities – Listed Trading equities – Unlisted Total trading equities Non-Current Assets Long term equity investments – Listed (refer to note 11a) Long term equity investments – Unlisted Total long term equity investments Other financial assets – unlisted equity investments 2017 $’000 32,509 14,484 46,993 648,102 3 648,105 4,984 2016 $’000 15,459 16,146 31,605 585,700 3 585,703 11,837 a) Long term equity investments pledged as security for short term finance Long term equity investments with a fair value of $48.957 million have been transferred to the bank as security for the $40.000 million equity finance loan. As the Parent company retains the risks and benefits of ownership of the transferred long term equity investments, including the right to receive dividends, these long term equity investments continue to be included as an asset on the Group’s Statement of Financial Position. Refer note 23a. b) Fair value and price risk Information regarding the Group’s exposure to price risk is set out in note 20 and fair value classification is set out in note 21. The fair value of these investments is based on quoted market prices being the last sale price, at the reporting date. Listed equities are traded in an active market, with the majority of the Group’s investments being publicly traded on the Australian Securities Exchange. Unlisted investments do not trade in an active market. The fair value measurement of other financial assets is approximated by the lower of cost price or impaired value. Long term equity investments – Listed At 31 July 2017, Washington H. Soul Pattinson and Company Limited (the Parent company) held $645.419 million (2016: $581.432 million). Listed and unlisted trading equities Represents equities held by Washington H. Soul Pattinson and Company Limited (the Parent company). Key estimate and judgements Impairment of financial assets The Group has made significant judgements about the impairment of a number of its long term equity investments and its unlisted other financial assets. Where there was a decrease in the share price below the cost of a long term equity investments judgement was made as to whether the decrease was ‘significant and prolonged’, and if so the investment was considered to be impaired. 83 12 Accounting for Our Investments NOTE 12 INVESTMENT PROPERTIES Accounting policy – Investment properties Investment properties consist of properties held for long term rentals and/or capital appreciation and properties being constructed or developed for future use as investment properties. Investment properties are initially recognised at cost including transaction costs. Other costs capitalised into the carrying value of investment properties include development, construction, redevelopment, refurbishment (other than repairs and maintenance) and interest (until the property is ready for its intended use). Investment properties are subsequently stated at fair value. Changes in fair values are recognised as gains or losses in the Income Statement as part of ‘Other income’. Valuations are obtained at least every three years from independent Registered Property Valuers who hold recognised and relevant qualifications and have recent valuation experience in the location and categories of each property held. At the end of each reporting period, the Directors update their assessment of the fair value of each property, taking account of the most recent independent valuations. Amounts provided to customers as lease incentives and assets relating to fixed rental income increases in operating lease contracts are included within investment property values. Lease incentives are amortised over the term of the lease on a straight line basis. The amortisation is applied to reduce gross rental income. Rental income is recognised on a straight line basis within revenue. On disposal of an investment property, a gain or loss is recognised in the income statement in the year of disposal. It is calculated as the difference between the carrying amount of the asset at the date of disposal and the net proceeds received. Non-Current Assets Investment properties Industrial property Commercial property Property under development Total investment properties Reconciliation Opening net book amount Acquisitions Capitalised costs Movement in tenant incentives, ‘make good’ contributions, contracted rent uplift balances and leasing fee asset Net fair value gain on investment properties 2017 $’000 46,889 95,689 22,438 165,016 92,932 63,883 178 (871) 8,894 2016 $’000 21,008 71,924 – 92,932 20,720 71,603 146 463 – Closing net book amount 165,016 92,932 In the current year, the Group acquired three investment properties for a total of $63.883 million. WHSP holds a 50.1% interest in these properties, with URB Investments Limited (ASX:URB) holding 49.9%. These properties are all located within the greater Sydney area. In the prior year, the Group acquired two commercial properties in Pennant Hills for a total of $71.603 million. 84 Notes to the Financial StatementsWashington H. Soul Pattinson and Company LimitedAnnual Report 2017 a) Amounts recognised in the income statement for investment properties Rental income Direct operating expenses from property that generated rental income Direct operating expenses from property that did not generate income 2017 $’000 6,929 3,701 287 2016 $’000 4,768 2,652 – Operating expenses for property that generated income includes finance costs of $804,000 (2016: $644,000). b) Measuring investment properties at fair value The basis of valuations for investment properties is fair value, being the amounts for which the assets could be exchanged between knowledgeable willing parties in an arm’s length transaction, based on current prices in an active market for similar properties in the same location and condition and subject to similar leases. In determining fair value, appropriate valuation techniques may be used, including the discounted cashflow and capitalisation methods. Discount rates and capitalisation rates are determined based on industry experience and knowledge and where possible, a direct comparison to third party rates for similar assets in comparable locations. Rental revenue from current leases and assumptions about future leases, as well as any expected operational cash outflows in relation to the property, are reflected in fair value. In relation to properties under development, fair value is determined based on the market value of the property on the assumption it has already been completed at the valuation date less costs to complete the project, including an appropriate adjustment for profit and risk. The fair value hierarchy, as discussed in note 21 to this report, provides an indication about the reliability of the inputs used in determining fair value. All investment properties have been categorised within the Level 3 fair value basis as some of the inputs required to value property are not based on ‘observable market data’. c) Non-current assets pledged as security As at 31 July 2017, $45.705 million of the Group’s investment property was pledged as security. Refer to note 23 for information on non-current assets pledged as security by the Group. d) Leasing arrangements The Group is entitled to receive rental income from non-cancellable operating leases on investment properties. The amounts have not been recognised in the financial statements and are receivable as follows: Within one year Later than one year but not later than five years Later than five years 2017 $’000 2016 $’000 5,947 13,625 1,859 21,431 5,125 8,805 524 14,454 85 13 Accounting for Our Investments NOTE 13 TERM DEPOSITS Accounting policy – Term deposits Term deposit investments are non-derivative financial assets with fixed or determinable payments and fixed maturities that the Group’s management has the positive intention and ability to hold to maturity. Term deposits are included in current assets, except those with maturities of more than 12 months from the reporting date, which are classified as non-current assets. Recognition and derecognition A term deposit is recognised on the date when the cash funds are deposited with the bank. The term deposit is derecognised on the maturity date of the deposit. Subsequent measurement Term deposits are carried at amortised cost using the effective interest method. Current Assets Term deposits 2017 $’000 1,044 2016 $’000 47,660 Term deposits are held to their maturity of less than one year and carry a weighted average interest rate of 2.62% per annum (2016: 2.44%). Term deposits in the statement of financial position at reporting date include term deposits held by the Parent company and its controlled entities. At 31 July 2017, Washington H. Soul Pattinson and Company Limited (the Parent company) held nil (2016: $46.000 million); and Exco Resources Limited, a controlled entity, held $1.044 million (2016: $1.044 million) of the consolidated balance. 86 Notes to the Financial StatementsWashington H. Soul Pattinson and Company LimitedAnnual Report 2017 14 NOTE 14 CASH AND CASH EQUIVALENTS Accounting policy – Cash and cash equivalents Cash and cash equivalents includes cash on hand, cash at bank, and deposits held with financial institutions for which there is a short-term identified use in the operating cash flows of the Group. Bank overdrafts, should they occur, are shown within borrowings in current liabilities in the statement of financial position. Current Assets Cash at bank and on deposit 2017 $’000 2016 $’000 301,275 126,709 Cash at bank and on deposit attracts interest at rates between 0% and 1.50% per annum (2016: 0% and 1.90%). Cash at bank in the statement of financial position at reporting date includes cash held by the Parent company and its controlled entities. At 31 July 2017, Washington H. Soul Pattinson and Company Limited (the Parent company) held $55.876 million (2016: $26.453 million); New Hope Corporation Limited, a controlled entity of Washington H. Soul Pattinson and Company Limited held $236.885 million (2016: $91.162 million) of the consolidated balance. Reconciliation of profit after income tax to net cash inflow from operating activities Profit after tax for the year 2017 $’000 2016 $’000 391,354 129,459 Adjustments for non-cash items: Depreciation and amortisation Impairment charges Net (gain) on disposal of long term equity investments Fair value (gain) on revaluation of trading equities Recovery of prior year rail access charges Net (gain) on sale of non-current assets (Gain) on revaluation of investment property Share of (profits) of associates not received as dividends or distributions Net foreign exchange loss/(gain) Fair value (gain)/loss on initial recognition of an equity accounted associate (Gain) on derecognition of an equity accounted associate (Gains) on deemed disposal of equity accounted associates (Gains) on sale of equity accounted associates Other non-cash items Changes in operating assets and liabilities, net of effects from purchase and sales of businesses: Decrease/(increase) in trade debtors, other debtors and prepayments (Increase) in inventory Increase in trade creditors and accruals Increase/(decrease) in employee entitlements, other liabilities and provisions (Increase)/decrease in current tax asset (Decrease) in current tax payable Increase/(decrease) in deferred tax liability (Increase)/decrease in deferred tax asset 101,603 18,423 (33,291) (1,240) (19,908) (1,470) (8,894) (80,601) 7,571 (61,499) (10,507) (132) (21,538) (212) 12,600 (927) 5,035 11,160 (11,538) (941) 110,024 (5,680) 79,613 116,539 (16,501) (5,140) – – – (48,393) (2,107) 1,682 – (118,850) (2,127) (27) (61,906) (6,169) 66,503 (1,238) 1,486 (3,226) (13,004) 3,233 Net cash inflow from operating activities 399,392 119,827 87 Revenue and Expenses NOTE 15 REVENUE Accounting policy – Revenue Revenue is measured at the fair value of the consideration received or receivable. Amounts disclosed as revenue are net of returns, trade allowances, rebates and amounts collected on behalf of third parties. The Group recognises revenue when the amount of revenue can be reliably measured, it is probable that future economic benefits will flow to the entity and specific criteria have been met for each of the Group’s activities as described below: • Coal sales revenue is recognised at the time the risks and benefits of ownership have been transferred to the customer in accordance with the sale terms. For export sales this is normally at the time of loading the shipment, and for domestic sales this is generally at the time the coal is delivered to the customer. Revenue from the sale of goods (net of returns, discounts and allowances) is recognised when title has transferred to the customer in accordance with the sales terms. Where a sale is settled through instalments, interest revenue is recognised over the contract term, using the effective interest rate method. Service fee income, including consulting and management fee income, is recognised as the services are performed. Interest income is recognised on a time proportion basis using the effective interest method. Dividend income is taken into revenue when the right to receive payment is established. As earnings from controlled entities and associates are included in consolidated profit, dividends from controlled entities and associates are not included in consolidated revenue. Rental income is recognised on a straight-line basis over the lease term. • • • • • From continuing operating activities Sales revenue Sale of goods Services Total Sales revenue Other revenue Dividends received – Other corporations Interest received – Other corporations Rental income Other Total other revenue Total revenue 2017 $’000 2016 $’000 899,612 22,161 921,773 25,144 9,248 8,181 3,224 45,797 526,355 34,071 560,426 28,398 23,448 5,973 2,416 60,235 967,570 620,661 Revenue composition A significant portion of the Group’s sales revenue is derived from New Hope Corporation Limited $824.570 million (2016: $486.220 million) through the sale of: • • Coal, both internationally and domestically; and Oil and gas, domestically. Sales revenue also includes the sale of: • • • • Pharmaceutical products through Washington H. Soul Pattinson and Company Limited’s Pitt Street chemist; Copper concentrate and copper sulphate, domestically and internationally through CopperChem Limited; Gold, domestically through Exco Resources Limited; and Pipe and film, domestically through Cromford Pty Limited. 15 88 Notes to the Financial StatementsWashington H. Soul Pattinson and Company LimitedAnnual Report 2017 16 NOTE 16 OTHER INCOME Accounting policies – Other income Other income represents gains or losses made on: • • • changes in the fair value for certain assets including trading equities, investment properties and where a previously held equity investment becomes an equity accounted associate. the sale of an asset including the sale of equity investments, investment properties and equity accounted associates. With the exception of the long term equity investments, the gain or (loss) is calculated as the difference between the proceeds received and the carrying value of the asset. For the sale of long term equity investments, whilst the gain is calculated in the same manner, it also includes any fair value changes that have previously been recognised in equity (through reserves). As these amounts have not previously been recog- nised in the profit and loss, they are included in the gain when the long term equity investment is sold; and deemed disposals of equity accounted associates. This occurs when the Group’s percentage holding in an associate decreases but there has not been a loss of significant influence. The Group continues to equity account the associate. Gains on sale of long term equity investments Gain on disposal of equity accounted associates Gain/(loss) on initial recognition of an equity accounted associate Gains on deemed disposals of equity accounted associates Gain on derecogition as an associate Gains on trading equities fair valued through profit and loss Gain on revaluation of investment property Recovery of prior period rail access charges Land access compensation Recovery of legal costs Insurance recovery Other items 2017 $’000 33,291 21,538 61,499 132 10,507 1,240 8,894 19,908 – 2,250 2,000 3,086 2016 $’000 16,501 2,127 (1,682) 118,850 – 5,140 – – 5,000 – – (34) Total other income 164,345 145,902 89 Revenue and Expenses 17 NOTE 17 EXPENSES Accounting policies – Expenses Depreciation and amortisation Depreciation and amortisation expenses are non-cash expenses and represent the allocation of the cost of certain fixed assets such as buildings, plant and equipment and mining reserves and development, over the time that the asset is expected to generate revenue for the Group. Different depreciation rates apply to each asset and are included in the notes for each asset. Impairment Impairment charges are non-cash expenses and are recognised when the carrying value of an asset or group of assets is no longer recoverable either through the use or sale of the asset. Recoverable value assessment for each asset class is discussed within the notes for each asset. Impairment losses are expensed to the income statement unless the asset has been previously revalued. Where the asset has been previously revalued, the reduction in value is recognised as a reversal to the extent of the previous revaluation, and any residual is recognised as an impairment expense. An impairment expense recognised on goodwill or a long term equity investment is permanent and is prohibited from being reversed. For all other assets, an assessment is made at each reporting date as to whether an impairment loss recognised in a prior period no longer exists or has decreased. If it is determined that the impairment is no longer required, the carrying value of the asset is increased and the previously recognised impairment expense is reversed in the income statement. Employee benefits expense Employee benefits expense includes the payment of salary and wages (including the value of non-cash benefits such as share-based payments), sick leave and accruals for annual leave and long service leave. Finance costs Finance costs are expensed when incurred, except for interest incurred on borrowings that relate to the construction of Investment properties. This interest was included in the cost of the properties. Exploration costs expensed Exploration costs that do not satisfy the criteria to be capitalised are expensed. Refer note 26 for discussion on the criteria. 90 Notes to the Financial StatementsWashington H. Soul Pattinson and Company LimitedAnnual Report 2017 Profit before income tax expense includes the following specific expenses: Notes 2017 $’000 2016 $’000 Depreciation Buildings Plant and equipment Total depreciation Amortisation Mining reserves and mine development Intangible assets Oil producing assets Lease incentive and leasing fee assets Total amortisation Impairment charges Equity accounted associates (i) Long term equity investments (ii) Oil producing assets (iii) Copper assets (iv) Other assets (v) Total impairment charges Impairment is allocated to asset classes: Equity accounted associates Long term equity investments Property, plant and equipment Exploration and evaluation assets Other operating assets Total impairment charges Employee benefits expense (vi) Finance costs (vii) Operating lease costs expensed Exploration costs expensed (viii) 1,235 56,946 58,181 34,236 2,284 6,769 133 43,422 – 8,052 – – 10,371 18,423 – 8,052 (2,075) – 12,446 18,423 144,672 3,577 12,943 14,735 10 11 25 26 1,374 53,996 55,370 18,795 1,722 3,593 133 24,243 7,554 17,912 28,146 53,392 9,535 116,539 7,554 17,912 48,247 28,192 14,634 116,539 120,185 2,535 7,627 13,820 91 17 Revenue and Expenses NOTE 17 EXPENSES (continued) Impairment (expense)/reversal on equity accounted associates i) The recoverable amount of investments in equity accounted associates has been assessed as at 31 July 2017. Where the carrying value of an investment exceeds the recoverable amount, the investment has been impaired. At each reporting date, an assessment is made as to whether there are any circumstances that would indicate that the impairment recognised has decreased or no longer exists. Where evidence supports a reduction in the impairment, the impairment expense may be reversed through the income statement. Impairment expense required for the current year was nil (2016: $7.554 million). Impairment of long term equity investments ii) In accordance with AASB 139, a ‘prolonged decline in the fair value of an investment in an equity instrument below its cost is objective evidence of impairment’. Where a long term equity investment’s last sale price is lower than the original cost, and the investment is considered by management to be ‘impaired’, the Group has recognised an impairment expense in respect of these investments. Impairments were recognised by WHSP $6.023 million and New Hope Corporation Limited $2.029 million. An impairment recognised for a long term equity investment is prohibited from being reversed through profit and loss. Any future increments in the last sale price of these investments will be recognised as a fair value increment in the asset revaluation reserve. The impairment loss after tax impacted the result attributable to members by $5.126 million (2016: $12.023 million). iii) Impairment of oil producing assets New Hope Corporation Limited have assessed the carrying value of their oil producing and exploration assets. In the current year no impairment was required. In the prior year, due to the decline in global oil prices, an impairment expense of $28.146 million was recognised on the following asset classes: Oil producing assets $15.029 million and Oil exploration assets $13.117 million. The impairment loss after tax impacted the prior year result attributable to members by $13.277 million. Refer to notes 25 and 26. iv) Impairment of copper assets The Group has assessed that no further impairment was required for the current year. An impairment expense of $53.392 million was required in the prior year. These impairment losses after tax impacted the prior year result attributable to members by $22.374 million. Impairment of other assets v) During the year ended 31 July 2017, the Parent company determined that the carrying value of certain unlisted trading equities and loan receivables exceeded their recoverable amount. The Parent company recognised an impairment expense on unlisted trading equities of $8.332 million (2016: nil) and loan receivable of $3.952 million (2016: $6.535 million). In addition, a controlled entity has reversed previously recognised impairment of $2.075 million (in 2016 impairment expense of $3.000 million) on the carrying value of certain property plant and equipment. The net impairment losses after tax impacted the result attributable to members by $7.258 million. vi) Employee benefits expense Employee benefits expense represents expenses paid to all employees within the Group. This amount includes $126.414 million (2016: $100.782 million) paid to employees of New Hope Corporation Limited. vii) Finance costs This amount includes interest of $775,682 (2016: $1,228,178) paid by the Parent company to Directors and their related parties. viii) Exploration costs expensed These amounts relate to New Hope Corporation Limited exploration costs expensed. Key Estimate Recoverable value and impairment The assessments of the recoverable value of non-current assets involves significant areas of estimation and judgement by management. Valuations have an element of uncertainty and therefore may not reflect the actual values of these assets in the future. 92 Notes to the Financial StatementsWashington H. Soul Pattinson and Company LimitedAnnual Report 2017 18 Taxation NOTE 18 INCOME TAX EXPENSE Accounting policy – Income tax expense The income tax expense or benefit for the period represents the tax payable on the current period’s taxable income based on the Australian corporate income tax rate (30%) adjusted by changes in deferred tax assets and liabilities attributable to the temporary differences between the tax bases of assets and liabilities and their carrying amounts in the financial statements, and unused tax losses. The current income tax charge is calculated on the basis of the tax laws enacted or substantively enacted at the end of the reporting period in the countries where the company’s subsidiaries and associates operate and generate taxable income. Management periodically evaluates positions taken in tax returns with respect to situations in which applicable tax regulation is subject to interpretation. It establishes provisions where appropriate on the basis of amounts expected to be paid to the taxation authorities. Income taxes relating to items recognised directly in equity are recognised in equity and not in the income statement. Tax consolidation legislation Some of the entities within the Consolidated entity have formed tax consolidated groups under the tax consolidation regime. The Australian Tax Office has been notified on these decisions. Controlled entities within the relevant tax consolidated groups, continue to be responsible under tax funding agreements, for funding their share of tax payments that are required to be made by the head entity in their tax consolidation group. These tax amounts are measured as if each entity within the tax consolidated group, continues to be a stand-alone tax payer in their own right. Assets or liabilities arising under tax funding agreements with the tax consolidated entities are recognised as amounts receivable from or payable to other entities in the Group. Any differences between the amounts assumed and amounts receivable or payable under the tax funding agreements are recognised as a contribution to (or distribution from) wholly-owned tax consolidated entities. a) Income tax expense comprises: Current income tax expense/(benefit) Current year Adjustments in respect of prior years Deferred income tax expense/(benefit) – Relating to the origination and reversal of temporary differences – Petroleum resource rent tax expense Income tax expense recognised in the income statement Deferred income tax expense included in income tax expense comprises: Decrease/(Increase) in deferred tax assets Increase in deferred tax liabilities 2017 $’000 13,246 2,051 104,688 – 119,985 10,556 94,132 104,688 2016 $’000 2,278 (4,185) (765) 3,574 902 (33,944) 36,753 2,809 93 Taxation NOTE 18 INCOME TAX EXPENSE (continued) 18 b) Reconciliation of prima facie tax expense to income tax expense: Profit before income tax Tax at the Australian tax rate of 30% (2016: 30%) Tax effect of amounts which are not deductible/(taxable) in calculating taxable income: Sale of long term equity investments Net Impairment Franking credits received (excluding controlled and associate entities) Tax effect of entities entering into the Washington H. Soul Pattinson and Company Limited tax consolidated group Deferred tax asset not recognised on current year net losses Net effect of New Hope Corporation Limited’s PRRT* Tax (benefit) on the carrying value of equity accounted associates Other Total income tax expense The effective tax rates are as follows: c) Amounts recognised directly in equity Aggregate current and deferred tax arising in the reporting period and not recognised in net profit or loss but directly charged or credited to equity 2017 $’000 2016 $’000 511,339 153,402 (10,596) 307 (10,598) – – – (16,379) 3,849 119,985 23.5% 130,361 39,108 (172) (11,235) (11,379) (7,379) 2,864 2,502 (15,469) 2,062 902 0.7% Decrease/(increase) to deferred tax assets (Decrease)/increase to deferred tax liabilities Net deferred tax – (credited) directly to equity 4,838 (5,182) (344) 4,917 (17,497) (12,580) d) Unrecognised deferred tax assets Relating to the tax consolidated groups of: Washington H. Soul Pattinson and Company Limited New Hope Corporation Limited Total unrecognised deferred tax assets Potential tax benefit at 30% 42,453 160,423 202,876 60,863 49,220 74,968 124,188 37,256 Key Estimates: *Petroleum resource rent tax (PRRT) – New Hope Corporation Limited As a result of the 100% acquisition of Bridgeport Energy Limited during 2013, the Group is subject to Petroleum resource rent tax (PRRT) effective 1 July 2012 being the date of the extension of the PRRT to onshore petroleum projects. The Group has accounted for the current and deferred tax impact of PRRT in accordance with the requirements outlined in the income tax expense policy. As such, the Group has recorded current and deferred tax assets and liabilities relating to PRRT at the prevailing PRRT rate at 31 July 2017 and 31 July 2016. A subsidiary of the Group, New Hope Corporation Limited (New Hope), as head company of the New Hope income tax consolidated group, has made a PRRT consolidation election and as such the New Hope tax consolidated group includes three PRRT consolidated groups at 31 July 2017 and 31 July 2016. New Hope has accounted for its PRRT tax balances in accordance with the stand alone taxpayer method in alignment with the tax funding arrangements. 94 Notes to the Financial StatementsWashington H. Soul Pattinson and Company LimitedAnnual Report 2017 19 NOTE 19 DEFERRED TAX ASSETS AND DEFERRED TAX LIABILITIES Accounting policy – Deferred tax assets and deferred tax liabilities Deferred tax assets and liabilities are calculated on the differences (temporary differences) between the carrying amount of assets and liabilities as recognised in the consolidated financial statements and their tax cost base multiplied by the tax rate expected to apply when these assets are recovered or liabilities are settled. The current Australian corporate tax rate applicable to the Group is 30%. Deferred tax asset or liabilities are provided in full, using the liability method. An exception is made for certain temporary differences arising from the initial recognition of an asset or liability. No deferred tax asset or liability is recognised in relation to these temporary differences if they arose in a transaction, other than a business combination, that at the time of the transaction did not affect either accounting profit or taxable profit or loss. Deferred tax assets are recognised for deductible temporary differences and unused tax losses only if it is probable that future taxable amounts will be available to utilise those temporary differences and losses. Deferred tax assets and liabilities are offset when there is a legally enforceable right to offset current tax assets and liabilities and when the deferred tax balances relate to the same taxation authority. A current tax asset and liability are offset where the entity has a legally enforceable right to offset and intends either to settle on a net basis, or to realise the asset and settle the liability simultaneously. Deferred tax assets temporary differences attributed to: Amounts recognised in the income statement Provisions Accrued expenses Impairment losses Capitalised exploration Property, plant and equipment Tax value of losses carried-forward Other Amounts recognised directly in equity Long term equity investments Share issue costs Total deferred tax assets Set-off of deferred tax liabilities pursuant to set-off provisions Net deferred tax assets Movements: Opening balance at 1 August (Charged)/credited to the income statement – operating profit (note 18a) (Charged)/credited to equity (note 18c) Amounts recognised on acquisition of businesses Closing balance at 31 July 2017 $’000 47,883 1,024 18,409 9,515 5,509 70,904 11,034 2016 $’000 44,549 973 14,909 7,334 5,509 88,028 10,625 164,278 171,927 717 10 727 165,005 (58,429) 106,576 176,638 (10,556) (4,838) 3,761 165,005 4,701 10 4,711 176,638 (75,742) 100,896 136,756 33,944 (4,917) 10,855 176,638 95 Taxation 19 NOTE 19 DEFERRED TAX ASSETS AND DEFERRED TAX LIABILITIES (continued) Key Estimate Deferred tax assets Deferred tax assets have been recognised relating to carried forward capital losses, income losses and temporary differences, based on current tax rates. Utilisation of capital tax losses and income losses requires the realisation of capital gains and taxable income respectfully, in subsequent years and the ability to satisfy certain tests at the time the losses are recouped. The actual tax results in future periods may differ from the estimate made at the time the deferred taxes are recognised. Deferred tax liabilities temporary differences attributed to: Amounts recognised in the income statement Property, plant and equipment Capitalised exploration Inventories Investments Receivables Other Amounts recognised directly in equity Long term equity investments Property, plant and equipment Cash flow hedges Other investments Total deferred tax liabilities Set-off of deferred tax liabilities pursuant to set-off provisions Net deferred tax liabilities Movements: Opening balance 1 August Charged to the income statement – operating profit (note 18a) (Credited)/charged to equity (note 18c) Amounts recognised on acquisition of businesses Closing balance at 31 July 2017 $’000 2016 $’000 3,675 93,979 6,502 219,896 – 6,012 330,064 69,060 45,729 5,423 3,035 123,247 453,311 (58,429) 394,882 360,600 94,132 (5,182) 3,761 453,311 1,897 92,681 6,619 163,067 44 3,929 268,237 76,640 9,662 694 5,367 92,363 360,600 (75,742) 284,858 330,489 36,753 (17,497) 10,855 360,600 It is important to note, that the deferred tax liability recognised above does not represent the total tax that would be incurred if all assets of the Group were to be disposed. This is predominately due to subsidiaries and the associate entities not being carried at their market value in the consolidated financial statements. The market values of the listed investments together with the estimate of capital gains tax payable thereon is set out in note 1, Parent company financial information. 96 Notes to the Financial StatementsWashington H. Soul Pattinson and Company LimitedAnnual Report 2017 20 Risk Management NOTE 20 FINANCIAL RISK MANAGEMENT The Group’s activities expose it to a variety of financial risks; market risk (including currency risk, price risk and interest risk), credit risk, and liquidity risk. The Group’s overall risk management program focuses on the unpredictability of financial markets and seeks to minimise potential adverse effects on the financial performance of the Group. Entities within the Group use derivative financial instruments such as foreign exchange contracts and interest rate swaps to hedge certain risk exposures. Derivatives are used exclusively for hedging purposes, i.e. not as trading or other speculative instruments. The Group uses different methods to measure different types of risk to which it is exposed. These methods include sensitivity analyses in the case of interest rate, foreign exchange and other price risks and ageing analyses for credit risk. Risk management policies cover specific areas, such as mitigating foreign exchange, interest rate and credit risks, use of forward exchange contracts and investment of excess liquidity. The Group holds the following financial instruments: Financial assets Cash and cash equivalents Term deposits Loans and receivables Trading equities Derivative financial instruments Long term equity investments Equity accounted associates Other financial assets Total financial assets Financial liabilities Trade and other payables Deposits accepted Derivative financial instruments Borrowings Lease liabilities Total financial liabilities a) Market Risk i. Foreign exchange risk 2017 $’000 2016 $’000 301,275 1,044 98,333 46,993 18,075 648,105 1,415,973 4,984 126,709 47,660 146,962 31,605 2,313 585,703 1,265,214 11,837 2,534,782 2,218,003 80,866 – 69 62,825 12,588 75,831 49,861 167 22,825 15,039 156,348 163,723 Foreign exchange risk arises when in local currency terms the value of a financial commitment or a recognised asset or liability, fluctuates due to changes in exchange rates. The Group is exposed to foreign exchange risk arising from currency exposures to the US Dollar through its subsidiary, New Hope Corporation Limited. Forward contracts are used to manage foreign exchange risk. Senior management is responsible for managing exposures in each foreign currency by using external forward currency contracts. Contracts are designated as cash flow hedges. External foreign exchange contracts are designated at Group level as hedges of foreign exchange risk on specific future transactions. The Group’s export coal sales risk management policy is to hedge up to 65% of anticipated transactions in US Dollars for the subsequent year, up to 57% of anticipated revenue beyond a year but less than two years and up to 50% for revenue beyond two years but less than three years. All hedges of projected export coal sales qualify as “highly probable” forecast transactions for hedge accounting purposes. 97 Risk Management 20 a) Market Risk NOTE 20 FINANCIAL RISK MANAGEMENT i. Foreign exchange risk (continued) The Group’s exposure to foreign currency risk at the reporting date was as follows: US Dollar exposure Cash and cash equivalents Trade receivables Trade payables Forward exchange contracts – sell foreign currency (cash flow hedge) Sensitivity analysis 2017 USD $’000 2016 USD $’000 90,848 26,521 538 162,000 9,135 13,501 389 20,000 Based on the trade receivables, cash held and trade payables at 31 July 2017, had the Australian dollar weakened/ strengthened by 10% against the US dollar with all other variables held constant, the Group’s post-tax profit for the year would have increased/(decreased) by $11.377 million/($9.309 million) (2016: $2.300 million/($1.882 million)), mainly as a result of foreign exchange gains/(losses) on translation of US dollar receivables and cash balances as detailed in the above table. The Group’s equity as at reporting date would have increased/(decreased) by the same amounts. Based on the forward exchange contracts held at 31 July 2017, had the Australian dollar weakened/strengthened by 10% against the US dollar with all other variables held constant, the Group’s equity would have increased/ (decreased) by $22.493 million/($18.400 million) (2016: $2.961 million/($2.419 million)). There is no effect on post-tax profits. ii. Price Risk The Group is an investment company and is exposed to equity securities price risk. The majority of the Group’s investments are publicly traded on the Australian Securities Exchange. Investments held for the long-term are classified in the statement of financial position as long term equity investments. As the market value of individual companies fluctuate, the fair value of the portfolio changes with the movement being recognised directly to equity. Where an investment’s value falls below its cost, management may consider the investment to be impaired. An impairment expense is recognised in the income statement. Investments held for the short to medium term are classified in the statement of financial position as trading equities. As the market value of individual companies fluctuate, the fair value of this portfolio changes with the movement being recognised through the income statement. Investments in associates are not carried at fair value in the statement of financial position but are instead equity accounted. The initial investment is increased/(decreased) by the Group’s share of the associate’s profits/(losses) as recognised in the income statement, movements in their reserves (other comprehensive income) and decreased by dividends received. For listed associates the market value is taken into consideration when assessing the recoverable value of an equity accounted associate. Sensitivity analysis The following table summarises the financial impacts of a hypothetical 5% decrease in the market value of those investments (trading equities and long term equity investments) that are carried at fair value as at reporting date. Where this decrease results in an individual security being valued below its cost, the reduction below cost may be recognised in the income statement where Directors consider the investment to be impaired. For long term equity investments, a 5% increase in market values would have no impact on the income statement as all increases are recognised directly in equity. 98 Notes to the Financial StatementsWashington H. Soul Pattinson and Company LimitedAnnual Report 2017 Impact to post-tax profit Impact on reserves 2017 $’000 (1,625) – (1,625) 2016 $’000 (773) – (773) 2017 $’000 – (22,677) 2016 $’000 – (20,503) (22,677) (20,503) Trading equities Long term equity investments Total iii. Fair value interest rate risk Refer to 20e below. b) Credit Risk Exposure to credit risk relating to financial assets arises from the potential non-performance by counterparties of contract obligations that could lead to a financial loss to the Group. Credit risk arises from cash and cash equivalents, derivative financial instruments and deposits with banks and financial institutions, long term equity investments provided to the bank as security for short term debt, as well as credit exposure to export and domestic customers, including outstanding receivables and committed transactions. The Group has no significant concentrations of credit risk. The Group’s derivative counterparties and term deposits are limited to financial institutions with a rating of at least BBB. The Group has policies that limit the maximum amount of credit exposure to any one financial institution. Credit risk further arises in relation to financial guarantees given to certain parties (refer note 23c). Such guarantees are only provided in exceptional circumstances and are subject to specific Board approval. The credit quality of financial assets that are neither past due nor impaired, can be assessed by reference to historical information about counterparty defaults. To mitigate credit risk, management within each of the Group entities apply policies to assess and monitor the credit worthiness of customers and set appropriate credit limits for each customer, taking into account their financial positions, past experience and other factors pertaining to each industry segment. The maximum exposure to credit risk at the reporting date is the carrying amount of assets as stated in the statement of financial position. The following table summarises these assets: Cash and cash equivalents Term deposits Loans and receivables Long term equity investments Derivative financial instruments 2017 $’000 301,275 1,044 98,333 48,957 18,075 467,684 2016 $’000 126,709 47,660 146,962 – 2,313 323,644 The loans and receivables balances as stated above reflect the recoverable value and are net of any impairments or provisions. Refer note 28 for further description on the impairment of receivables. The long term equity investments balance as stated above represents amounts that the bank holds as security against short term debt. Refer note 23. c) Liquidity risk Liquidity risk is the risk that an entity is unable to meet its financial obligations as they fall due. Prudent liquidity risk management is adopted by the Group through maintaining sufficient cash and marketable securities, the ability to borrow funds from credit providers and to close-out market positions. The Group entities manage liquidity risk by continually monitoring forecast and actual cashflows and matching maturity profiles of financial assets and liabilities. Surplus funds are only invested in conservative financial instruments such as term deposits with major banks. Financing arrangements Details of existing financial arrangements are set out in note 23. 99 20 Risk Management NOTE 20 FINANCIAL RISK MANAGEMENT d) Maturity of financial liabilities The Group’s trade and other payables are all payable within one year. The Group’s maturity analysis for derivative financial instrument’s is set out in note 22. e) Cash flow and fair value interest rate risk The Group may from time to time have significant interest-bearing assets which are placed with reputable financial institutions for up to 12 months. The Group has treasury investment policies approved by each of the relevant entity’s Board which stipulates the maximum exposure to each financial institution. Significant changes in market interest rates may have an effect on the Group’s income and operating cash flows. Cash flow interest rate risk is managed by placing excess funds in at call deposits, term deposits and other fixed interest bearing assets. Refer to notes 13 and 14 for details. Based on the deposits held at reporting date, the sensitivity to a hypothetical 1% per annum increase or decrease in interest rates would increase/(decrease) after tax profit by $2.116 million (2016: $1.221 million). This scenario assumes all cash and term deposits at balance date continue to remain invested for the whole year. Investment properties are partly funded by borrowings. The long term borrowings incur interest at variable rates. The Group partially hedges its exposure to interest rate risk by using a derivative financial instrument, an interest rate swap, to effectively convert the variable interest rate facility into a fixed interest rate facility. Refer to note 23a for further details. The Parent company utilises short term bank financing. The balance at year-end was $40.000 million. The debt is exposed to variable interest rates. Interest rate risk is minimised as the outstanding debt can be repaid by providing 30 days notice. Refer note 23a. 21 NOTE 21 FAIR VALUE ESTIMATION Accounting policy – Fair value estimation The fair value of financial assets, financial liabilities and investment properties must be estimated for recognition and measurement or for disclosure purposes. The fair value of financial instruments traded in active markets is based on quoted market prices at the reporting date. The quoted market price used for financial assets and liabilities held by the Consolidated entity is the last sale price. The fair value of financial instruments that are not traded in an active market (for example, over-the-counter derivatives) is determined using valuation techniques. The Group uses a variety of methods and makes assumptions that are based on market conditions existing at each balance date. The fair value of forward exchange contracts is determined using forward exchange market rates at the reporting date. The carrying value less estimated credit adjustments and impairment provision of trade receivables and payables are assumed to approximate their fair values due to their short-term nature. The fair value of financial liabilities for disclosure purposes is estimated by discounting the future contractual cash flows at the current market interest rate that is available to the Group for similar financial instruments. 100 Notes to the Financial StatementsWashington H. Soul Pattinson and Company LimitedAnnual Report 2017 Fair value hierarchy Judgements and estimates are made in determining the fair values of assets and liabilities. To provide an indication of the reliability of the inputs used in determining fair value, the Group categories each asset and liability into one of the following three levels as prescribed by accounting standards: Level 1: Fair value is determined by reference to quoted prices (unadjusted) in active markets for identical assets or liabilities as at the end of the reporting period. Level 2: Fair value is determined by using valuation techniques incorporating observable market data inputs. Level 3: Fair value is determined by using valuation techniques that rely on inputs that are not based on observable market data. Fair value measurements The following table presents the Group’s assets measured and recognised at fair value as at 31 July 2017 and 31 July 2016. As at 31 July 2017 Note Financial assets Trading equities Long term equity investments Other financial assets – equity investments Derivatives – foreign exchange hedge Non-financial assets Investment properties Total assets Financial liabilities Derivatives – interest rate swaps Total liabilities As at 31 July 2016 Financial assets Trading equities Long term equity investments Other financial assets – equity investments Derivatives – foreign exchange hedge Non-financial assets Investment properties Total assets Financial liabilities Derivatives – foreign exchange hedge Total liabilities 11 11 11 22 12 22 11 11 11 22 12 22 Level 1 $’000 32,509 648,102 – – – 680,611 – – 15,459 585,700 – – – 601,159 – – Level 2 $’000 – – – 18,075 – 18,075 69 69 – – – 2,313 – 2,313 167 167 Level 3 $’000 14,484 3 4,984 – 165,016 184,487 – – 16,146 3 11,837 – 92,932 120,918 – – Total $’000 46,993 648,105 4,984 18,075 165,016 883,173 69 69 31,605 585,703 11,837 2,313 92,932 724,390 167 167 101 22 Risk Management NOTE 22 DERIVATIVE FINANCIAL INSTRUMENTS Accounting policy – Derivative financial instruments Derivatives are initially recognised at fair value on the date a derivative contract is entered into and are subse- quently remeasured to their fair value at each reporting date. The method of recognising the resulting gain or loss depends on whether the derivative is designated as a hedging instrument, and if so, the nature of the item being hedged. The Group designates derivatives as hedges of highly probable forecast transactions (cash flow hedges). The Group documents at the inception of the transaction, the relationship between hedging instruments and hedged items, as well as its risk management objectives and strategy for undertaking various hedge transactions. The Group also documents its assessment, both at hedge inception and on an ongoing basis, of whether the derivatives that are used in hedging transactions have been and will continue to be highly effective in offsetting changes in fair values or cash flows of hedged items. The effective portion of changes in the fair value of derivatives that are designated and qualify as cash flow hedges is recognised in the hedging reserve. The gain or loss relating to the ineffective portion is recognised immediately in the income statement. Amounts accumulated in equity are recycled in the income statement in the periods when the hedged item will affect profit or loss (for instance when the forecast sale that is hedged takes place). However, when the forecast transaction that is hedged results in the recognition of a non-financial asset (for example, inventory) or a non-financial liability, the gains and losses previously deferred in equity are transferred from equity and included in the measurement of the initial cost or carrying amount of the asset or liability. When a hedging instrument expires or is sold or terminated, or when a hedge no longer meets the criteria for hedge accounting, any cumulative gain or loss in equity at that time remains in equity and is recognised when the forecast transaction is ultimately recognised in the income statement. When a forecast transaction is no longer expected to occur, the cumulative gain or loss that was reported in equity is immediately transferred to the income statement. At reporting date the outstanding contractual receivables/payables at fair value are (AUD Equivalents): Current Assets – Forward exchange contracts Current Liabilites – Interest rate swaps Fair value measurement 2017 $’000 18,075 2016 $’000 2,313 69 167 The fair value measurement of forward exchange contracts is determined using forward exchange market rates at the reporting date. The fair value of interest rate swaps is determined using forward interest rates at the reporting date. New Hope Corporation Limited and certain of its controlled entities are parties to derivative financial instruments in the normal course of business in order to hedge exposure to fluctuations in foreign currency exchange rates. These instruments are used in accordance with the Group’s financial risk management policies. 102 Notes to the Financial StatementsWashington H. Soul Pattinson and Company LimitedAnnual Report 2017 23 Credit risk exposures of derivative financial instruments – forward exchange contracts Credit risk arises from the potential failure of counterparties to meet their obligations under the respective contracts at maturity. A material exposure arises from forward exchange contracts and the Group is exposed to losses in the event that counterparties fail to deliver the contracted amount. Refer to note 20 for additional information. At balance date the details of outstanding forward exchange contracts are: Maturity 0 to 6 months 6 to 12 months Sell US dollars Buy Australian dollars Average exchange rate 2017 $’000 221,183 – 221,183 2016 $’000 7,297 21,831 29,128 2017 2016 0.73243 – 0.68520 0.68709 NOTE 23 INTEREST BEARING LIABILITIES Accounting policy – Interest bearing liabilities Interest bearing liabilities are initially recognised at fair value, net of any transactions costs incurred. These balances are subsequently measured at amortised cost. Any difference between the proceeds (net of transaction costs) and the redemption amount is recognised in the income statement over the period of the liability using the effective interest method. Interest bearing liabilities are classified as current liabilities unless the Group has an unconditional right to defer settlement of the liability for at least 12 months after the reporting period. Lease liabilities Leases of property, plant and equipment where the Group, as lessee, has substantially all the risks and rewards of ownership are classified as finance leases. Finance leases are capitalised at the lease’s inception at the fair value of the leased property or, if lower, the present value of the minimum lease payments. The corresponding rental obligations, net of finance charges, are included in other short-term and long-term payables. The property, plant and equipment acquired under finance leases is depreciated over the asset’s useful life or over the shorter of the asset’s useful life and the lease term if there is no reasonable certainty that the group will obtain ownership at the end of the lease term. Leases in which a significant portion of the risks and rewards of ownership are not transferred to the Group as lessee are classified as operating leases. Payments made under operating leases (net of any incentives received from the lessor) are charged to the income statement on a straight line basis over the period of the lease. Current Liabilities Equity finance loan (refer to note 23a) Deposits accepted – Directors and Director related parties (refer below) Lease liabilities (refer to note 23b) Non-Current Liabilities Long term borrowings (refer to note 23a) Lease liabilities (refer to note 23b) 2017 $’000 40,000 – 2,356 42,356 22,825 10,232 33,057 2016 $’000 – 49,861 2,306 52,167 22,825 12,733 35,558 103 Risk Management 23 NOTE 23 Fair value disclosures INTEREST BEARING LIABILITIES (continued) The carrying value of financial liabilities as disclosed approximates their fair values. Director deposits During the year, the Parent company accepted deposits from Directors and Director related parties under normal commercial terms. On 31 July 2017, these deposits were transferred to a separate bank account and are held in trust for these Directors and their related parties. As the Parent company no longer has control over these funds, accordingly these funds are no longer included as a liability in the Group’s Statement of Financial Position. These deposits were repayable at call. The effective interest rate earned by the Director’s and their related parties, was consistent with the interest rate that deposits of the Parent company received after ensuring a margin of at least 25 basis points was earned by the Parent company for administering these funds. Refer to note 33 for interest incurred on Director related deposits. a) Borrowings Secured by assets pledged as security The total borrowings secured are as follows: Equity finance loan (i) Long term borrowings (ii) 2017 $’000 40,000 22,825 62,825 2016 $’000 – 22,825 22,825 (i) During the year, the Parent company utilised short term bank finance. This debt incurs interest at a variable rate and is repayable upon either the bank, or the Parent company, providing notice of 30 days. The variable interest rate at balance date was 2.18% per annum. As security, the Parent company transfers ownership of title over certain long term equity investments to the bank. As the Parent company retains the risks and benefits of ownership of the transferred equity investments, including the right to receive dividends, these securities continue to be included as an asset on the Group’s balance sheet. Upon repayment of the debt, ownership of title of the equity investments, is transferred back to the Parent company. At 31 July 2017, Long term equities with a fair value of $48.957 million have been transferred to the bank as security for the outstanding debt of $40 million. Should the fair value of the transferred equity investments fall below 110% of an outstanding debt balance, the Parent company is required to transfer title of additional long term equity investments to make up the shortfall. The Parent company retains the right to substitute any of the transferred equity investments with other long term equity investments, should it require to do so. (ii) On 23 October 2015, the Group entered into a bank loan facility agreement for $22.825 million for the purpose of acquiring a commercial property at Pennant Hills. This property is classified as an Investment property in these financials statements. The loan was fully drawn from the first day of the loan. The loan is for a period of three years and is a variable rate facility. A three year interest rate swap agreement has also been established to manage the fluctuations in interest rates over the term of the facility. The interest rate for 50% of the loan facility is effectively fixed at 3.42% per annum. The variable rate at balance date was 2.845% per annum. The bank loan facility is secured by a first mortgage over this commercial property (refer note 12). 104 Notes to the Financial StatementsWashington H. Soul Pattinson and Company LimitedAnnual Report 2017 b) Secured – finance lease liabilities Commitments in relation to finance leases are payable as follows: Within one year Later than one year but not later than five years Minimum finance lease Future finance charges The present value of finance lease liabilities is as follows: Current Non-current Recognised as a liability Secured liability 2017 $’000 2,767 10,876 13,643 (1,055) 12,588 2,356 10,232 12,588 2016 $’000 2,802 13,813 16,615 (1,576) 15,039 2,306 12,733 15,039 Lease liabilities are effectively secured as the rights to the leased assets recognised in the financial statements revert to the lessor in the event of default. c) Other financing arrangements The Consolidated entity has access to bank overdraft and bank guarantee facilities as follows: Bank overdraft Total facility Used at balance date Unused at balance date Bank guarantees Total facilities Used at balance date Unused at balance date 2017 $’000 1,000 – 1,000 2016 $’000 1,000 – 1,000 146,703 (145,928) 775 141,377 (124,356) 17,021 Bank guarantees include: Unsecured facilities, for no fixed term and bear variable rates: i. Mining restoration and rehabilitation 111,360 91,667 The liability has been recognised by New Hope Corporation Limited in relation to its rehabilitation obligations. ii. Statutory Body suppliers No liability was recognised by New Hope Corporation Limited in relation to these guarantees as no losses are foreseen on these contingent liabilities. Secured, for no fixed term and bear variable rates: iii. Environmental bond The net present value of this liability has been recognised by CopperChem Limited in relation this guarantee. The guarantee has been provided by Washington H. Soul Pattinson and Company Limited (the Parent company). 34,651 33,380 5,279 5,013 151,290 130,060 105 Risk Management 24 NOTE 24 CONTINGENT LIABILITIES Details and estimates of maximum amounts of contingent liabilities for which no provision has been recognised in these financial statements, are as follows: i. Undertakings and guarantees issued by a Controlled entity’s bankers to the Department of Natural Resources and Mines, Statutory Power Authorities and various other entities ii. Undertakings and guarantees issued by a Controlled entity’s bankers for stage 1 of the Wiggins Island Coal Export Terminal expansion project and expansion of rail facilities iii. Undertakings and guarantees issued by the bankers of the Bengalla Joint Venture (of which a Controlled entity is a party) for rail and port suppliers 2017 $’000 20,949 2016 $’000 19,262 12,194 12,494 6,786 6,636 39,929 38,392 The contingent liabilities as described above are not secured by any charges on the Consolidated entity’s assets. For contingent liabilities of the Parent company, refer to note 1c, page 62. For contingent liabilities relating to associates refer to note 10d, page 81. 106 Notes to the Financial StatementsWashington H. Soul Pattinson and Company LimitedAnnual Report 2017 25 Fixed Assets NOTE 25 PROPERTY, PLANT AND EQUIPMENT Accounting policy – Property, plant and equipment Freehold land is carried at the lower of cost and recoverable amount. Property, plant and equipment (excluding investment properties, refer to note 12), are stated at historical cost less accumulated depreciation and impairment losses. Historical cost includes expenditure that is directly attributable to the acquisition of the assets. Cost may also include transfers from equity relating to any gains/ losses on qualifying cash flow hedges of foreign currency purchases of property, plant and equipment. The cost of self-constructed assets includes the cost of materials, direct labour, the initial estimate where relevant, of the cost of dismantling and removing the items and restoring the site under which they are located and an appropriate portion of production overhead. Subsequent costs are included in the asset’s carrying amount or recognised as a separate asset, as appropriate, only when it is probable that future economic benefits associated with the item will flow to the Group and the cost of the item can be measured reliably. All other repairs and maintenance are charged to the income statement during the reporting period in which they are incurred. The depreciable amount of all fixed assets including buildings and capitalised lease assets, but excluding freehold land, is depreciated commencing from the time the asset is held ready for use. Depreciation is calculated so as to write off the cost of each item of property, plant and equipment during its expected economic life to the Consolidated entity. Each item’s useful life has due regard both to its own physical life limitations and to present assessments of economically recoverable resources (when related to mining activities). Estimates of residual values and remaining useful lives are made on an annual basis. The straight line method is predominately used (copper float and solvent extraction plants are depreciated on the units of production method). The expected useful life of plant and equipment is 4 to 20 years, buildings is 25 to 40 years and motor vehicles is 4 to 8 years. Land is not depreciated. The assets residual values and useful lives are reviewed, and adjusted if appropriate, at each reporting date. An asset’s carrying amount is written down immediately to its recoverable amount if the asset’s carrying amount is greater than its recoverable amount. Gains and losses on disposals are determined by comparing proceeds with the carrying amount. These are included in the income statement. Accounting policy – Mine development costs, mining reserves and leases and oil producing assets Development expenditure incurred by the Group is accumulated separately for each area of interest in which economically recoverable mineral and oil resources have been identified to the satisfaction of the Directors. Direct development expenditure, pre-operating mine start-up costs, and an appropriate portion of related overhead expenditure are capitalised as mine development costs up until the relevant mine is in commercial production. Mining reserves, leases and mine development costs are amortised over the estimated productive life of each applicable mine on either a unit of production basis or years of operation basis, as appropriate. Amortisation commences when a mine commences commercial production. The cost of acquiring mineral reserves and mineral resources are capitalised in the statement of financial position as incurred. Oil producing assets are amortised on a unit of production basis. This method uses the actual costs of the asset to date plus all its projected future costs. Amortisation commences when an area of interest is ready for use. Impairment of non-current assets Assets are tested for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. An impairment loss is recognised for the amount by which the asset’s carrying amount exceeds its recoverable amount. The recoverable amount is the higher of an asset’s fair value less cost to sell and its value in use. For the purposes of assessing impairment under value in use testing, assets are grouped at the lowest levels for which there are separately identifiable cash inflows which are largely independent of the cash inflows from other assets or groups of assets (cash-generating units). Annual assessments of impairments reversals are undertaken. All property, plant and equipment allocated to cash generating units (CGU’s) containing goodwill must be tested for impairment at the CGU level on an annual basis. Other property, plant and equipment assets must also be tested for impairment when impairment indicators are identified. 107 Fixed Assets 25 NOTE 25 PROPERTY, PLANT AND EQUIPMENT (continued) Non-current assets 2017 At 1 August 2016 Cost Accumulated depreciation/ amortisation and impairment Land $’000 Buildings $’000 Plant, fixtures, motor vehicles $’000 Oil producing assets $’000 Mining reserves and leases $’000 Mine develop- ment $’000 Total $’000 167,955 48,779 972,612 120,782 663,841 143,234 2,117,203 – (20,359) (489,019) (76,110) (39,529) (103,451) (728,468) Net book amount 167,955 28,420 483,593 44,672 624,312 39,783 1,388,735 Year ended 31 July 2017 Opening net book amount Acquisition of businesses Additions Transfers in/(out) Disposal of assets Reversal of Impairment of assets Depreciation/amortisation charge 167,955 – 1,786 (2,304) (3,522) – 28,420 – 343 2,372 (2,445) 525 483,593 – 58,597 (17,977) (3,726) 1,550 44,672 13,337 12,446 2,972 – – 624,312 – – – – – 39,783 – 780 16,137 – – 1,388,735 13,337 73,952 1,200 (9,693) 2,075 – (1,235) (56,946) (6,769) (25,557) (8,679) (99,186) Closing net book amount 163,915 27,980 465,091 66,658 598,755 48,021 1,370,420 At 31 July 2017 Cost Accumulated depreciation/ amortisation and impairment 163,915 51,820 972,075 149,537 663,841 163,348 2,164,536 – (23,840) (506,984) (82,879) (65,086) (115,327) (794,116) Net book amount 163,915 27,980 465,091 66,658 598,755 48,021 1,370,420 Pledged assets Plant, fixtures and motor vehicles includes assets with a net book value of $12.588 million, which the Group is a lessee under a finance lease. Refer note 23 for details. 108 Notes to the Financial StatementsWashington H. Soul Pattinson and Company LimitedAnnual Report 2017 Land $’000 Buildings $’000 Plant, fixtures, motor vehicles $’000 Oil producing assets $’000 Mining reserves and leases $’000 Mine develop- ment $’000 Total $’000 164,665 37,053 731,851 104,832 30,502 118,263 1,187,166 Non-current assets 2016 At 1 August 2015 Cost Accumulated depreciation/ amortisation and impairment Net book amount 164,665 20,466 305,073 – (16,587) (426,778) (57,488) 47,344 (16,847) 13,655 (84,763) (602,463) 33,500 584,703 Year ended 31 July 2016 Opening net book amount Acquisition of businesses – (refer note 6) Additions Transfers in/(out) Disposal of assets Impairment of assets Depreciation/amortisation charge 164,665 20,466 305,073 47,344 13,655 33,500 584,703 3,290 – – – – 11,694 664 130 (762) (2,398) 163,644 79,013 (1,799) (97) (8,245) 11,483 4,277 190 – (15,029) 633,267 602 (530) – (11,965) 17,932 5,685 1,354 – (10,610) 841,310 90,241 (655) (859) (48,247) – (1,374) (53,996) (3,593) (10,717) (8,078) (77,758) Closing net book amount 167,955 28,420 483,593 44,672 624,312 39,783 1,388,735 At 31 July 2016 Cost Accumulated depreciation/ amortisation and impairment 167,955 48,779 972,612 120,782 663,841 143,234 2,117,203 – (20,359) (489,019) (76,110) (39,529) (103,451) (728,468) Net book amount 167,955 28,420 483,593 44,672 624,312 39,783 1,388,735 Pledged assets Plant, fixtures and motor vehicles includes assets with a net book value of $15.039 million, which the Group is a lessee under a finance lease. Refer note 23 for details. Impairments of Property plant and equipment During the year ended 31 July 2016, impairment charges of Property, plant and equipment include write downs on copper assets of $30.218 million and oil producing assets of $15.029 million. 109 Fixed Assets 25 NOTE 25 PROPERTY, PLANT AND EQUIPMENT (continued) Key estimates – impairment of non-current assets New Hope Corporation Limited - Queensland Mining Operations In accordance with accounting standards, New Hope Corporation Limited has completed an impairment assessment for its Queensland Mining Operations. As a result of this assessment, New Hope Corporation Limited has determined that no impairment is required in relation to these assets for the year ended 31 July 2017. Details of the assessment, the significant judgements and estimates, are as follows: (a) Impairment assessment All property, plant and equipment allocated to cash generating units (CGU’s) containing goodwill must be tested for impairment at the CGU level on an annual basis. Other property, plant and equipment assets must also be tested for impairment when impairment indicators are identified. Judgement is involved in assessing whether there are indicators of impairment of property, plant and equipment including in relation to the impact of events or changes in circumstances. For coal mining and oil production assets, key judgements include external factors such as forecast commodity prices and foreign exchange rates. Judgement is also required in relation to the estimation of coal and oil reserves and resources (refer (b) below for further information in relation to the estimation of coal reserves and resources). Where the recoverable amounts of New Hope Corporation Limited’s CGU’s are tested for impairment using analyses of discounted cash flows, the resulting valuations are also sensitive to changes in estimates of long-term commodity prices, production timing and recovery rates, exchange rates, operating costs, reserve and resource estimates, closure costs and discount rates. Estimates in respect of the timing of project expansions and the cost to complete asset construction are also critical to determining the recoverable amounts for cash-generating units (refer (c) below in relation to specific considerations related to Acland Stage 3 approvals). (b) Estimates of reserves and resources – Coal New Hope Corporation Limited estimates its coal reserves and resources based on information compiled by ‘Competent Persons’ as defined in accordance with the Australasian Code for Reporting of Exploration Results, Mineral Resources and Ore Reserves of December 2012 (the JORC code, which is produced by the Australasian Joint Ore Reserves Committee). The estimation of reserves and resources requires judgment to interpret available geological data and then to select an appropriate mining method and establish an extraction schedule. It also requires assumptions about future commodity prices, exchange rates, production costs, recovery rates and discount rates and, in some instances, the renewal of mining licences. There are many uncertainties in the estimation process and assump- tions that are valid at the time of estimation may change significantly when new information becomes available. Changes in coal reserves could have an impact on: the calculation of depreciation, amortisation and impairment charges; the timing of the payment of closedown and restoration costs; and the recovery of deferred tax assets. Changes in coal resources could have an impact on the recoverability of exploration and evaluation costs capitalised. (c) New Acland Coal Stage 3 approvals In recent years the process to secure mining tenements has become more complex and time consuming, and this has been evident in the New Acland Stage 3 (NAC03) approvals process. As a result, there are a number of uncertainties associated with the approvals timeline and conditionality of the NAC03 project. New Hope Corporation Limited considers that approvals for the NAC03 project will be secured. Any significant delay in the approvals process has the potential to delay the commencement of NAC03 operations and has been assessed to be an indicator of impairment in the year ended 31 July 2017. The financial statements have been prepared on the basis that approvals are granted within a reasonable time period, and as a result, there is no significant impact on the value recoverable from the project and therefore the QLD coal mining cash generating unit (CGU) at 31 July 2017. New Hope Corporation Limited has carefully considered the potential impact that recent developments in the legal and regulatory environment or the possibility of further delays in the approvals process would have on future cash flows. Having due regard to all relevant information, New Hope Corporation Limited has concluded that none of these matters, either individually or in aggregate, result in the recoverable amount for the CGU being below its carrying value. 110 Notes to the Financial StatementsWashington H. Soul Pattinson and Company LimitedAnnual Report 2017 The carrying value of the Queensland Mining Operations CGU’s assets is set out below: Property, plant and equipment Land and buildings – mining Plant and equipment Mining reserves, leases and development assets Mine development Intangibles Software Exploration and evaluation Exploration and evaluation at cost Total carrying value 2017 $’000 47,697 123,849 8,513 55,571 1,487 35,816 272,933 Considerations in respect of changes to the legal and regulatory environment The approval under the Commonwealth Environment Protection and Biodiversity Conservation Act 1999 (EPBC) for the NAC03 project was received in January 2017 which provides positive outcomes to the project. The Queensland Government made amendments to the Water Act 2000 and the Mineral Resources Act 1989 in late 2016 which now requires the NAC03 project to apply for and be granted an Associated Water Licence (AWL). While this is a new approval requirement, it is largely covering matters already dealt with as part of the existing Mining Lease (ML), Environmental Authority (EA) and EPBC approval processes and updated modelling is being undertaken to address issues previously identified by the regulators and during the recent Land Court proceed- ings. As such, New Hope Corporation Limited is confident that an AWL will be secured and the only relevant impact of this new legislation is the time required to secure the AWL. The Land Court hearing was completed during the year with recommendations to the State Minister for Natural Resources and Mines (the Minister) and the Department of Environment and Heritage Protection (DEHP) being made on 31 May 2017. The recommendations were for the Minister to not grant the ML and for the DEHP to not grant the amendment to the existing EA. Both the MLs and the EA are required for the project to proceed. While the Land Court considered many matters, the only matters identified by the Court as leading to the negative recommendations were the perceived impacts that the NAC03 project may have on groundwater and night time noise limits with close neighbours. New Hope Corporation Limited considers that these issues can be appropriately addressed and managed and will not ultimately result in a failure to obtain the ML and EA approvals. The Land Court recommendation is a non-binding recommendation and is not determinative to the outcome of the approval process. In considering whether to grant the MLs and EA amendment, the Minister and the DEHP are required to consider a number of relevant factors including the recommendations of the Land Court. New Hope Corporation Limited is working with the regulators to address the concerns raised by the Land Court and that will enable the approval of the ML and EA. The AWL application referred to above will also deal with the groundwater issues. In addition, New Hope Corporation Limited through its wholly-owned subsidiary New Acland Coal Pty Ltd has commenced a Judicial Review process in respect to the Land Court recommendations. The Judicial Review seeks to address a number of concerns that New Hope Corporation Limited has about the Land Court process and resultant recommendations. If successful, the Judicial Review process may result in the Land Court changing its findings in respect of groundwater and night time noise concerns and ultimately recommending grant of the ML and EA. New Hope Corporation Limited has assessed that, despite the changes to the legal and regulatory environment, the NAC03 approvals will ultimately be received. However, it is acknowledged that the changes to the legal and regulatory environment could result in delays in securing the necessary project approvals and these are discussed separately below. Considerations in respect of approval timing At the time of preparing these financial statements, the Minister has extended the time to make an interim decision relevant to the grant of the ML and EA until 31 January 2018. This does not stop the Minister electing to make the decision earlier or agreeing to extend this date. There is no fixed timing associated with the Minister making a final decision on the grant of the ML but once the Minister makes the interim decision referred to above, the DEHP only has 10 business days to make a decision on the EA amendment. 111 Fixed Assets 25 NOTE 25 PROPERTY, PLANT AND EQUIPMENT (continued) Considerations in respect of approval timing – continued Stage 2 operations at New Acland can continue to operate until all economically recoverable coal has been mined from within the Stage 2 lease boundary. The Queensland coal mining CGU has take or pay agreements for rail, port and water supply. The rail agreement is generally aligned to the recovery of Stage 2 coal while the port and water agreements have a longer term however is not of an amount which for any foreseeable approval delay would constitute a material impact on value. The saleable product is exposed to minimal risk of decline in quality and value over time. The Queensland coal mining operations maintain a cost competitive structure within the mining industry with quality products available for export and domestic sale and this will not be materially influenced by any delay in securing project approvals. The fair value discounted cash flow models prepared for the CGU have confirmed that the recoverable amount exceeds the carrying value. Having due regard to the above factors and the reasonably foreseeable time required to secure project approvals New Hope Corporation Limited considers the basis on which the financial statements have been prepared and assets recognised is appropriate. The models included the typical input assumptions and sensitivities for a coal mining company and were expanded to include a sensitivity analysis for a number of possible approval timelines. The key assumptions underpinning the models and sensitivity analysis are outlined below: Extension of approvals timeline i) Sensitivity analysis included adjusting the commencement of Stage 3 operations at Acland to reflect a range of possible approval scenarios. The scenarios assume that project approvals will be received in 2018 in the earliest instance, or in 2022 at the latest instance. ii) Weighted Average Cost of Capital (WACC) A range of WACC sensitivities were considered between the ranges of 9–11%. iii) Foreign exchange In considering the AUD:USD foreign exchange assumptions, New Hope Corporation Limited had regard to observable market forward curves, consensus market data, reports from reputable financial institutions, as well of the expertise of its senior executive team. The AUD:USD foreign exchange rates assumptions were between 0.73 – 0.75. These estimates are within the range supported by externally sourced data. Impairment of oil producing assets – New Hope Corporation Limited In the prior year it was determined that the recoverable amount of oil producing assets was $7.187 million, resulting in an impairment of $15.029 million. In the current financial year, there are no indicators of impairment or reversal of impairment in relation to these assets. Determination of recoverable value – copper processing plant, equipment and capitalised mine development costs The assessment of recoverable value includes key estimates in relation to quantities of economically recoverable reserves and resources, resource grades and mine plans. These are based upon interpretations of geological models and other matters. It also requires key assumptions to be made regarding a number of factors including short and long-term exchange rates, short and long-term copper prices, future capital expenditure and working capital. Estimates are also required to be made in relation to the economic life of the plant and its residual value. Changes in these estimates and applying different assumptions may impact significantly the assessment of the recoverable value of the plant, equipment and capitalised mine development costs, as well as the amount of depreciation and amortisation charged to the income statement. The directors are satisfied that the estimates and assumptions made are based on observable and other supportable inputs and therefore that the impaired carrying value of the copper processing plant, equipment and capitalised mine development costs at 31 July 2017 is appropriate. 112 Washington H. Soul Pattinson and Company LimitedAnnual Report 2017 26 NOTE 26 EXPLORATION AND EVALUATION ASSETS Accounting policy – Exploration and evaluation assets Exploration, evaluation and relevant acquisition costs are accumulated separately for each area of interest for which a mining tenement is current. They are initially recognised at cost and includes the acquisition of rights to explore, studies, exploratory drilling, trenching, sampling and an appropriate portion of related overhead expenditure. Costs are carried forward only if they relate to an area of interest for which rights of tenure are current and such costs are expected to be recouped through successful development and exploitation or from sale of the area. Exploration and evaluation expenditure which does not satisfy these criteria is written off. Where a decision is made to proceed to the development of a mine, the relevant exploration and evaluation costs for that area of interest are transferred to mine development (disclosed within note 25 – Property, plant and equipment). Non-Current Assets Exploration and evaluation at cost Reconciliation Opening net book amount Additions Impairment (a) Transfers (out)/in Closing net book amount 2017 $’000 2016 $’000 418,582 402,298 402,298 17,583 – (1,299) 418,582 407,831 22,129 (28,192) 530 402,298 (a) In the prior year, an impairment expense of $15.075 million relates to copper exploration assets, which are allocated to the copper cash generating unit for the purpose of assessing recoverable value, and $13.117 million relates to oil exploration assets. Refer to note 25 for details of impairment testing. Exploration and evaluation assets include New Hope Corporation Limited of $392.569 million (2016: $382.048 million) and Exco Resources Limited of $22.205 million (2016: $19.309 million). Key Estimate Exploration and evaluation expenditure During the year, the controlled entities New Hope Corporation Limited, CopperChem Limited and Exco Resources Limited, capitalised various items of expenditure to exploration and evaluation assets. The relevant items of expenditure were deemed to be part of the capital cost of developing future mining operations, which would then be amortised over the useful life of the mine. The key judgement applied in considering whether the costs should be capitalised, is that costs are expected to be recovered through either successful development (through mining operations) or sale of the relevant mining interest. Factors that could impact the exploration and evaluation costs being transferred to future mine operations include the level of reserves and resources, changes in commodity prices and foreign exchange rates, future legal changes and any future technology changes. 113 Fixed Assets 27 NOTE 27 INTANGIBLE ASSETS Accounting policy – Intangible assets Goodwill Goodwill represents the excess of the cost of an acquisition over the fair value of the Group’s share of the net identifiable assets of the acquired subsidiary/associate at the date of acquisition. Goodwill on acquisitions of subsidiaries is included in intangible assets. Goodwill on acquisitions of associates is included in the carrying amount of the investments in associates. Goodwill is not amortised. Instead, goodwill is tested for impairment annually or more frequently if events or changes in circumstances indicate that it may be impaired, and is carried at cost less accumulated impairment losses. Goodwill acquired is allocated to cash generating units for the purpose of impairment testing. The allocation is made to those cash generating units or group of cash generating units that are expected to benefit from the business combination in which the goodwill arose. Cash generating units are discussed in the impair- ment section below. Gains and losses on the disposal of an entity include the carrying amount of goodwill relating to the entity sold. Water rights and mining information The Group benefits from water rights associated with its mining operations through the efficient and cost effec- tive operations of the mine. The value of exploration, pre-feasibility and feasibility costs necessary for regulatory, reporting and internal control purposes have been recognised as a mining information intangible asset. Software Software is stated at historical cost less applicable amortisation. Historical cost includes expenditure that is directly attributable to the acquisition of software. Amortisation is calculated so as to write off the cost of each item of software during its expected economic life to the Group. Other intangible assets Other intangible assets that are acquired by the Group are stated at cost less accumulated amortisation and impairment losses. Subsequent expenditure Subsequent expenditure on capitalised intangible assets is capitalised only when it increases the future economic benefits embodied in the specific asset to which it relates. All other expenditure is expensed as incurred. Amortisation of intangible assets Amortisation is charged to the income statement on a straight line basis, unless otherwise stated, over the estimated useful lives of intangible assets unless such lives are indefinite. Intangible assets with an indefinite useful life are systematically tested for impairment at each balance date. Other intangible assets are amortised from the date they are available for use. The estimated useful lives of intangibles are as follows: Class of intangible Goodwill Water rights and mining information Software Useful life Indefinite life Estimated life of mine 3–5 years Impairment Goodwill and intangible assets that have an indefinite useful life are not subject to amortisation and are tested annually for impairment or more frequently if changes or circumstances indicate that they may be impaired. Other assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. Refer to note 25 for details on impairment testing. An impairment loss is recognised for the amount by which the asset’s carrying amount exceeds its recoverable amount. The recoverable amount is the higher of an asset’s fair value less costs to sell and value in use. For the purposes of assessing impairment, assets are grouped at the lowest levels for which there are separately identifiable cash flows which are largely independent of the cash inflows from other assets or groups of assets (cash-generating units). Intangible assets other than goodwill that suffered impairment are reviewed for possible reversal of the impairment at each reporting date. Goodwill impairments are not reversible. Impairment losses for intangible assets are recognised in the income statement. 114 Notes to the Financial StatementsWashington H. Soul Pattinson and Company LimitedAnnual Report 2017 Non-Current Assets At 1 August 2015 Cost Accumulated amortisation and impairment Net book amount Year ended 31 July 2016 Opening net book amount Additions Asset acquired by purchase of businesses Amortisation (charged) to the income statement (refer note 17) Transfers in Goodwill $’000 22,830 (4,157) 18,673 18,673 – – – – Water rights $’000 – – – – – 6,560 (110) – Mining informa- tion $’000 – – – – – 34,900 (585) – Closing net book amount 18,673 6,450 34,315 At 31 July 2016 Cost Accumulated amortisation and impairment Net book amount Year ended 31 July 2017 Opening net book amount Additions Amortisation (charged) to the income statement (refer note 17) Transfers in Closing net book amount At 31 July 2017 Cost Accumulated amortisation and impairment Net book amount a) Recoverable amount of goodwill 22,830 (4,157) 18,673 18,673 – – – 18,673 22,830 (4,157) 18,673 6,560 (110) 6,450 6,450 – (262) – 6,188 6,560 (372) 6,188 34,900 (585) 34,315 34,315 – (1,396) – 32,919 34,900 (1,981) 32,919 Other $’000 15,121 (13,256) 1,865 1,865 37 40 (1,027) 125 1,040 15,323 (14,283) 1,040 1,040 1,733 (626) 99 2,246 17,155 (14,909) 2,246 Total $’000 37,951 (17,413) 20,538 20,538 37 41,500 (1,722) 125 60,478 79,613 (19,135) 60,478 60,478 1,733 (2,284) 99 60,026 81,445 (21,419) 60,026 Intangible assets, which have indefinite lives are allocated to the Group’s cash generating units (CGU’s) identified according to business segment and country of operation. A segment-level summary of the goodwill allocation is presented below: Energy Carrying amount of Goodwill Consulting Carrying amount of Goodwill Closing net book value Country of operation 2017 $’000 2016 $’000 Australia 18,098 18,098 Australia 575 18,673 575 18,673 115 Fixed Assets 27 NOTE 27 INTANGIBLE ASSETS (continued) The recoverable amount of the cash generating units for which goodwill has been allocated is determined based on the fair value less cost of disposal method. Assumptions and methodology applied to each cash-generating unit are as follows: (i) Energy The brought forward balance of goodwill relates to acquisitions by New Hope Corporation Limited, including Queensland Bulk Handling Pty Limited (goodwill of $5.596 million) and Northern Energy Corporation Limited (goodwill of $12.271 million). The recoverable amount of the cash-generating unit to which the Northern Energy Corporation Limited goodwill is attributable has been based on the fair value less cost of disposal method using a comparable resource transaction multiple multiplied by the resources attributable to this cash generating unit. This assessment is determined under Level 2 of the fair value hierarchy based on observable external market data for reserve and resources transaction multiples, rather than quoted prices (refer note 21 for an explanation on fair value hierarchy). Observable transactions included in the assessment of an appropriate multiple are comparable transactions in the last 4 years for Australian coal exploration projects with the same coal type as the cash-generating unit assets. The estimation of the resources used to determine the recoverable amount requires judgement and assumptions as detailed in note 25. The recoverable amount of Queensland Bulk Handling Pty Limited cash generating units has been based on value in use calculations using discounted cash flow model. The future cash flows have been discounted using a post-tax rate of 9% (2016: 10%). (ii) Consulting Brought forward goodwill relates to obtaining control of Pitt Street Real Estate Partners Pty Limited. Key Estimates Impairment of goodwill At each reporting date the Group considers the recoverable value of goodwill. Goodwill is allocated to cash- generating units for which the recoverable value is determined. The recoverable value may be determined based on fair value less costs to sell and is estimated based on recent market transaction information. These calculations require the use of assumptions. 116 Notes to the Financial StatementsWashington H. Soul Pattinson and Company LimitedAnnual Report 2017 Other Operating Assets and Liabilities 28 NOTE 28 TRADE AND OTHER RECEIVABLES Accounting policy – Trade and other receivables Trade receivables are recognised initially at fair value and subsequently at amortised cost, using the effective interest rate method, less provision for impairment. Trade receivables are due for settlement between 30 and 45 days from the date of recognition. Collectibility of trade receivables is reviewed on an ongoing basis. Debts which are known to be uncollectible are written off by reducing the carrying amount directly. An allowance account (provision for impairment of trade receivables) is used when there is objective evidence that the Group will not be able to collect all amounts due according to the original terms of the receivables. Significant financial difficulties of the debtor, probability that the debtor will enter bankruptcy or financial reorganisation, and default or delinquency in payments (more than 30 to 45 days overdue) are considered indicators that the trade receivable is impaired. The amount of the impairment allowance is the difference between the asset’s carrying amount and the present value of estimated future cash flows, discounted at the original effective interest rate. Cash flows relating to short-term receivables are not discounted if the effect of discounting is immaterial. The amount of any impairment loss is recognised in the income statement. When a trade receivable for which an impairment allowance had been recognised becomes uncollectible in a subsequent period, it is written off against the allowance account. Subsequent recoveries of amounts previously written off are credited to the income statement. Measurement Loans and receivables are carried at amortised cost using the effective interest method. Current Assets Trade receivables Less impairment of receivables Loans to other parties – secured Other receivables Prepayments Total current receivables Non-current Assets Loans to others – secured Other receivables and prepayments Total non-current receivables 2017 $’000 52,170 (5) 52,165 5,000 30,673 6,932 94,770 203 3,360 3,563 2016 $’000 66,203 (6,382) 59,821 25,185 25,410 6,359 116,775 26,877 3,310 30,187 117 Other Operating Assets and Liabilities 28 NOTE 28 TRADE AND OTHER RECEIVABLES (continued) a) Credit, foreign exchange, fair value and interest rate risk Information about the Group’s exposure to these risks in relation to trade and other receivables is provided in note 20. The carrying value less impairment provisions of trade receivables are assumed to approximate their fair value. Key Estimate Recoverability of receivables As at reporting date, trade receivables past due but not impaired were nil (2016: $14.251 million). In 2016, the post due receivable balance relates solely to invoices issued by Queensland Bulk Handling Limited (QBH) (a wholly owned subsidiary of New Hope Corporation) to Peabody (Wilkie Creek) Pty Limited for coal port services. An agreed settlement to recover the full balance not impaired at 31 July 2016 was achieved in September 2016. 29 NOTE 29 INVENTORIES Accounting policy – Inventory Inventories are measured at the lower of cost and net realisable value. Cost comprises direct materials, direct labour and an appropriate portion of variable and fixed overheads, the latter being allocated on the basis of normal operating capacity. Net realisable value is the estimated selling price in the ordinary course of business less the estimated costs of completion and the estimated costs necessary to make the sale. Current Assets Raw materials and stores – at cost Work in progress – at cost Finished goods – at cost Inventory expense 2017 $’000 27,115 14,314 38,539 79,968 2016 $’000 35,050 14,011 29,978 79,039 Inventories recognised as an expense during the year ended 31 July 2017 amounted to $593.691 million (2016: $283.704 million). In the current year, write-down of inventory to net realisable value recognised as an expense was nil (2016: $1.086 million). 118 Notes to the Financial StatementsWashington H. Soul Pattinson and Company LimitedAnnual Report 2017 30 NOTE 30 TRADE AND OTHER PAYABLES Current Liabilities Trade and other payables 2017 $’000 80,866 2016 $’000 75,831 Trade and other payables The balance at 31 July 2017 includes $65.289 million (2016: $64.513 million) relating to New Hope Corporation Limited. 31 NOTE 31 PROVISIONS Accounting policy – Provisions Provisions are recognised when the Group has a present legal or constructive obligation as a result of past events, and it is probable that an outflow of resources will be required to settle the obligation and the amount has been reliably estimated. Provisions are not recognised for future operating losses. Provisions are measured at the present value of management’s best estimate of the expenditure required to settle the present obligation at the end of the reporting period. The discount rate used to determine the present value is a pre-tax rate that reflects current market assessments of the time value of money and the risks specific to the liability. i. Restoration, rehabilitation and environmental expenditure Provisions are raised for restoration, rehabilitation and environmental expenditure as soon as an obligation exists, with the cost being charged progressively to the income statement in respect of ongoing rehabilitation. Where the obligation relates to decommissioning of assets and restoring the sites on which they are located, the costs are carried forward in the value of the asset and amortised over its useful life. The obligations include profiling, stabilisation and revegetation of the completed area, with cost estimates based on current statutory requirements and current technology. ii. Employee entitlements Short-term obligations Liabilities for wages and salaries, including non-monetary benefits, annual leave and vesting sick leave, expected to be settled wholly within 12 months after the end of the period in which the employees render the related service are recognised in respect of employees’ services up to the end of the reporting period and are measured at the amounts expected to be paid when the liabilities are settled. The liability of annual leave and accumulating sick leave is recognised in the provision for employee benefits. All other short-term benefit obligations are presented as payables. Other long-term employee benefit obligations The liabilities for long service leave and annual leave which are not expected to be settled wholly within 12 months after the end of the period in which the employees render the related service, are recognised in the provision for employee benefits and measured as the present value of expected future payments to be made in respect of services provided by employees up to the end of the reporting period using the projected unit credit method. Consideration is given to expected future wage and salary levels, experience of employee departures and periods of service. Expected future payments are discounted using market yields at the end of the reporting period based on national government bonds with terms to maturity and currency that match, as closely as possible, the estimated future cash outflows. 119 Other Operating Assets and Liabilities 31 NOTE 31 PROVISIONS (continued) Current Liabilities Mining restoration and site rehabilitation (ii) Employee benefits (i) Non-Current Liabilities Mining restoration and site rehabilitation (ii) Employment benefits (i) Other 2017 $’000 8,487 36,858 45,345 105,279 7,174 320 112,773 2016 $’000 13,613 36,453 50,066 89,877 6,950 65 96,892 (i) Employee benefits Current liabilities not expected to be settled within the next 12 months The current provision for employee benefits includes accrued annual leave, vested sick leave and long service leave for all unconditional settlements where employees have completed the required period of service and also those where employees are entitled to pro-rata payment in certain circumstances. The entire amount is presented as current, since the Group does not have an unconditional right to defer settlement. However, on past experi- ence, the Group does not expect all employees to take the full amount of accrued long service leave or require payment within the next 12 months. (ii) Mining restoration and site rehabilitation Movements in provision 2017 Carrying amount at beginning of year Provision arising on acquisition of businesses Provisions (written down) Provisions (credited)/charged to income statement Charged to income statement – unwinding of discount Carrying amount at end of year Disclosed as: Current liabilities Non-current liabilities Total provision for mining restoration and site rehabilitation 2017 $’000 103,490 12,537 (4,179) (1,475) 3,393 113,766 8,487 105,279 113,766 2016 $’000 65,436 37,982 (3,118) 53 3,137 103,490 13,613 89,877 103,490 Key Estimate Mining restoration and site rehabilitation The Group makes estimates about the future cost of rehabilitating tenements which are currently disturbed, based on legislative requirements and current costs. Cost estimates take into account past experience and expectations of future events that are expected to alter past experiences. Any changes to legislative requirements could have a significant impact on the expenditure required to restore these areas. 120 Notes to the Financial StatementsWashington H. Soul Pattinson and Company LimitedAnnual Report 2017 32 Other Notes NOTE 32 SHARE-BASED PAYMENTS Accounting policies – Share-based payments Share-based compensation benefits are provided to employees of Washington H. Soul Pattinson and Company Limited (the Parent company) and New Hope Corporation Limited via various employee incentive schemes. A summary of each scheme is provided below. The fair value of options and rights granted under each of these schemes is recognised as an employee benefits expense with a corresponding increase in the share-based payment reserve within equity. The fair value is measured at grant date and the total amount to be expensed is recognised over the period during which the employee becomes unconditionally entitled to the options and rights. The fair value of options and rights granted is based on the market price of the issuing company’s shares, adjusted to reflect any market perfor- mance conditions and the impact of any non-vesting conditions. Non-market vesting conditions are included in assumptions about the number of options and rights that are expected to become exercisable. At each reporting date, the entity revises its estimate of the number of options and rights that are expected to become exercisable. The employee benefits expense each period takes into account the most recent estimate. The impact of the revision to the original estimate, is recognised in profit or loss with a corresponding adjustment to equity. Washington H. Soul Pattinson and Company Limited – Long term incentive plan Washington H. Soul Pattinson and Company Limited (the Parent company) provides share based compensation benefits to its executive team and management team via a Long Term Incentive Plan (LTI plan) whereby rights to shares are granted for nil consideration. Rights are granted in accordance with the plan at the sole discretion of the Washington H. Soul Pattinson and Company Limited Board. Rights vest and automatically convert to ordinary shares in Washington H. Soul Pattinson and Company Limited following the satisfaction of the relevant performance and service conditions. Performance and service conditions applicable to each issue of rights are determined by the Board at the time of the grant. Rights granted under the plan carry no dividend or voting rights until they have vested and have been converted into shares in the Parent company. Detailed vesting conditions are set out in the Remuneration report. Refer to pages 30 to 47. The fair value of services received in return for performance rights granted is based on the fair value of the performance rights granted. The fair value of rights was independently determined by valuation specialists Lonergan Edwards & Associates Limited and was based on the market price of Washington H. Soul Pattinson and Company Limited’s shares at the grant date, with an adjustment made to take into account the vesting period, expected dividends during that period that will not be received by the participants and the probability that the market performance conditions will be met. 121 Other Notes 32 NOTE 32 SHARE-BASED PAYMENTS (continued) Set out below are the summaries of rights granted under the Parent company LTI plan: Grant Date Vest Date Dec 2016 Dec 2016 Dec 2016 Dec 2016 Dec 2016 Dec 2016 Dec 2015 Dec 2015 Dec 2015 Dec 2015 Dec 2015 Dec 2015 Sep 2019 (Sep 2020)* Sep 2019 (Sep 2020)* Aug 2020 (Sep 2020)* Aug 2020 (Sep 2020)* Aug 2021 Aug 2021 Sep 2018 (Sep 2019)* Sep 2018 (Sep 2019)* Aug 2019 (Sep 2019)* Aug 2019 (Sep 2019)* Aug 2020 Aug 2020 Performance hurdle TSR Hurdle or Non TSR Hurdle Movement in number of performance rights granted Fair value at grant date Balance at start of year Granted during the year Vested Forfeited Balance at end of year Non-TSR $13.10 TSR $5.22 Non-TSR $13.10 TSR Non-TSR TSR Non-TSR TSR Non-TSR TSR Non-TSR TSR $3.25 $13.10 $2.56 $13.86 $12.25 $13.86 $11.08 $13.86 $10.87 – – – – – – 14,198 14,197 8,518 8,518 5,679 5,679 12,717 12,716 7,630 7,630 5,086 5,086 – – – – – – 56,789 50,865 – – – – – – – – – – – – – – – – – – – – – – – – – – 12,717 12,716 7,630 7,630 5,086 5,086 14,198 14,197 8,518 8,518 5,679 5,679 107,654 * Certain tranches of performance rights are subject to ‘re-testing dates’. Details of vesting conditions and performance hurdles are set out in the Remuneration report. Refer to pages 30 to 47. For the current year an expense of $281,679 (2016: $201,810) was recognised in the income statement for the rights issued under the Parent company LTI plan. The total fair value of the performance rights outstanding at year end was $1.161 million (2016: $723,577). New Hope Corporation Limited – Employee Share option and Performance rights share plans New Hope Corporation Limited provides share based compensation benefits to its employees via the New Hope Corporation Limited Employee Share Option Plan and the New Hope Corporation Limited Employee Performance Rights Share Plan (Rights plan). Membership of the Rights plan is open to those senior employees and those Directors of New Hope Corporation Limited, its subsidiaries and associated bodies corporate whom, the Directors believe have a significant role to play in the continued development of the Group’s activities. Detailed vesting conditions are set out in the Remuneration report. Refer to pages 30 to 47. Rights are granted for nil consideration. Rights will vest at the nominated vesting date and automatically convert to ordinary shares in New Hope Corporation Limited following the satisfaction of the relevant performance and service conditions. Service and performance conditions applicable to each issue of rights are determined by the New Hope Corporation Limited’s Board at the time of the grant. Total expense arising from rights issued under the New Hope Corporation Limited employee performance share rights plan during the financial year was $309,000 (2016:$123,000). The total fair value of the performance rights outstanding at year end was $1.760 million (2016: $1.024 million). Further details are provided in the published financial report of New Hope Corporation Limited for year ended 31 July 2017 (ASX code: NHC). 122 Notes to the Financial StatementsWashington H. Soul Pattinson and Company LimitedAnnual Report 2017 33 NOTE 33 RELATED PARTIES a) Parent company The ultimate Parent company is Washington H. Soul Pattinson and Company Limited. b) Subsidiaries and Associates Interests in Subsidiaries and Associates are set out in note 3. c) Key management personnel compensation Short-term employee benefits Post-employment benefits Long-term employee benefits Termination benefits Share-based payments Key management personnel of the Consolidated entity Key management personnel of the Parent company 2017 $’000 7,068 297 112 – 581 8,058 2016 $’000 6,720 283 115 136 319 7,573 2017 $’000 4,494 238 69 – 273 5,074 2016 $’000 4,166 223 61 – 195 4,645 Key management personnel remuneration has been included in the Remuneration Report section of the Directors’ Report on pages 30 to 47. d) Related parties transactions and balances Details of loans to and other transactions with key management personnel are included in the Remuneration Report section of the Directors’ Report on page 47. During the year, the Parent company accepted deposits from Director and Director related parties on normal commercial terms and received fees for administering these funds. The Parent company incurred interest of $775,682 (2016: $1,228,178). On 31 July 2017, these deposits were transferred to a separate bank account and are held in trust for these Directors and their related parties. As the Parent company no longer has control over these funds, accordingly these funds are no longer included as a liability in the Group’s Statement of Financial Position. Refer to note 23 for further details. i. Subsidiaries Transactions between the Parent company and its subsidiaries and between subsidiaries are at normal commercial terms and conditions. Transactions consist of the transfer of funds for day to day financing, provision of consulting, management and advisory services, loans advanced and repaid, interest, dividend and rental payments. Transactions between members of the Group which are eliminated on consolidation are not disclosed in this note. ii. Associates Transactions with associates are at normal commercial terms and conditions. Transactions consist of the supply of pharmaceutical products to the Parent company, advisory, consulting, underwriting, management fees, and rent received from/paid to associates, loans advanced and repaid, interest and dividend payments. 123 Other Notes NOTE 33 RELATED PARTIES (continued) 33 Summary of transactions with subsidiaries and associates Advisory, consulting, underwriting, management and other fees: – received by Parent company from associates – received by Parent company from Director related entities (refer below) – received by subsidiaries from associates – received by associates from subsidiaries – rent income received by Parent company from associate Purchases of pharmaceutical products from associate Interest income from associate Purchase of Barbara Copper Project from associate (capitalised) 2017 $’000 461 1,249 1,826 100 13 5,653 1,501 2,300 2016 $’000 – – 999 – 12 5,868 984 – During the year, a controlled entity, Copperchem Limited acquired the remaining 50% share of the Barbara Copper Project from an associate, Syndicated Metals Limited for $2.300 million. This asset is included within Exploration and Evaluation assets within the Group’s Statement of Financial Position. Loans to associates During the year, the Parent company provided a stand-by loan facility to TPI Enterprises Limited. The current facility limit is for $12.500 million. The amount owed at 31 July 2017 was nil. Interest is charged at market rates. The facility matures on 31 August 2018. During the year, the Parent company converted a loan balance of $8.331 million (2016: $7.077 million) owed from TPI Enterprises Limited to equity. All accrued interest was settled in cash. Interest was charged at market rates. Director related entities Transactions with URB Investments Limited (ASX: URB) Mr Warwick M. Negus is a director of both Washington H. Soul Pattinson and Company Limited (WHSP) and URB Investments Limited (URB). During the year, WHSP entered into agreements to acquire three investments properties within NSW (Kingsgrove, Penrith and Prestons). At the time of entering into these purchase agreements, WHSP also granted call options to URB. The call options provided URB the right to acquire a 49.9% interest in these properties. On exercise of these options, WHSP received from URB 49.9% of the total purchase price of the properties (including costs associated with the acquisitions) and $1.249 million of option fees. WHSP has retained 50.1% interest in each of these properties. WHSP and URB have also entered into a co-investment agreement providing each entity with the right to co-invest in future investment property opportunities, which are identified by either party. 124 Notes to the Financial StatementsWashington H. Soul Pattinson and Company LimitedAnnual Report 2017 34 NOTE 34 COMMITMENTS FOR EXPENDITURE 2017 $’000 a) Capital commitments Capital expenditure contracted for at the reporting date payable within one year: Property, plant and equipment Amounts contracted for construction projects classified as inventories 15,716 – 2016 $’000 8,705 5,261 b) Lease commitments: Group as lessee Operating leases Commitments for minimum lease payments in relation to non-cancellable operating leases are payable as follows: Within one year Later than one year but not later than five years Later than five years The Group leases port facilities and has a share in commitments for minimum lease payments relating to property, plant and equipment under non-cancellable operating leases expiring within five to ten years. The leases have varying terms, escalation clauses and renewal rights. On renewal, the terms of the leases are renegotiated. The Group leases office space and small items of office equipment under operating leases. For commitments relating to associates refer to note 10c. 12,109 24,332 30,933 67,374 10,792 28,406 37,188 76,386 125 35 Other Notes NOTE 35 OTHER ACCOUNTING POLICIES a) New accounting standards and interpretations not yet adopted Certain new accounting standards and interpretations have been published that are not mandatory for 31 July 2017 reporting periods and have not been early adopted by the Group. The Group’s assessment of the impact of these new standards and interpretations is set out below: i. AASB 15 Revenue from Contracts with Customers This standard outlines a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers. It supersedes current revenue recognition guidance including AASB 118 Revenues, AASB 111 Construction Contracts and related interpretations. The core principle is that an entity recognises revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. This standard also allows costs associated with obtaining a contract to be capitalised and amortised over the life of the new contract. The Group has not yet assessed how its own revenue recognition would be affected by the new accounting standard. The Group does not intend on adopting the new standard before its operative date, which means that it would be first applied in the annual reporting period ending 31 July 2019. ii. AASB 9 Financial Instruments This standard will be applicable retrospectively and includes revised classification, measurement and derecogni- tion of financial assets and financial liabilities and simplified requirements for hedge accounting. The Group does not intend on adopting the new standard before its operative date, which means that it would be first applied in the annual reporting period ending 31 July 2019. The Group has considered the adoption of AASB 9 with the major impact to long term equity investments. Currently, changes in market value of these investments are recognised in the revaluation reserve. When an invest- ment is disposed of, the gain or loss measured from the original cost is then recognised in the income statement. Under the new standard, no gain or loss on the disposal of long term equity investments would be recognised in the income statement and investments would no longer be subject to impairment reviews as all movements in market value are only recognised in the revaluation reserve. There will be no impact on the Group’s accounting for financial liabilities, as the new requirements only affect the accounting for financial liabilities that are designated at fair value through profit or loss and the Group does not have any such liabilities. The new hedging rules align hedge accounting more closely with the Group’s risk management practices. As a general rule, it will be easier to apply hedging going forward. The new standard also introduces expanded disclosure requirements and changes in presentation. The Group has not yet assessed how its own hedging arrangements would be affected by the new rules. iii. AASB 16 Leases This standard replaces AASB 117 Leases and some lease related Interpretations and requires that all leases to be accounted for ‘on-balance sheet’ by lessees, other than short-term and low value asset leases. The standard provides new guidance on the application of the definition of leases and on sale and lease back accounting. It largely retains the existing lessor accounting requirements in AASB 117. It requires new and different disclosures about leases. The Group is currently undertaking a detailed assessment of the impact of AASB 16. There are no other standards that are not yet effective and that are expected to have a material impact on the Group in the current or future reporting periods and on foreseeable future transactions. 126 Notes to the Financial StatementsWashington H. Soul Pattinson and Company LimitedAnnual Report 2017 b) Foreign currency translation i. Functional and presentation currency Items included in the financial statements of each of the Group’s entities are measured using the currency of the primary economic environment in which the entity operates “the functional currency”. The consolidated financial statements are presented in Australian dollars, which is Washington H. Soul Pattinson and Company Limited’s functional and presentation currency. ii. Transactions and balances Foreign currency transactions are translated into the functional currency using the exchange rates prevailing at the dates of the transactions. Foreign exchange gains and losses resulting from the settlement of such trans- actions and from the translation at year-end exchange rates of monetary assets and liabilities denominated in foreign currencies are recognised in the income statement, except when deferred in equity as qualifying cash flow hedges and qualifying net investment hedges. Non-monetary items that are measured at fair value in a foreign currency are translated using the exchange rates at the date when the fair value was determined. Translation differences on assets and liabilities carried at fair value are reported as part of the fair value gain or loss. For example, differences on non-monetary assets and liabilities such as investments fair valued through profit and loss are recognised in the income statement, as part of the fair value gain or loss and translation differences on non-monetary assets, such as long term equity investments are included in the asset revaluation reserve in equity. iii. Group entities The results and financial position of all of the Group entities that have a functional currency different from the presentation currency are translated into the presentation currency as follows: 4 assets and liabilities are translated at the closing rates at the reporting date; 4 income and expenses are translated at average exchange rates (unless this is not a reasonable approximation of the cumulative effect of the rates prevailing on the transaction dates, in which case income and expenses are translated at the dates of the transactions); and 4 all resulting exchange differences are recognised as a separate component of equity. On consolidation, exchange differences arising from the translation of any net investment in foreign entities, and of borrowings and other financial instruments designated as hedges of such investments, are recognised in other comprehensive income. When a foreign operation is sold or any borrowings forming part of the net investment are repaid, a proportionate share of such exchange differences is reclassified to the income statement, as part of the gain or loss where applicable. c) Deferred stripping costs The Group does not recognise any deferred stripping costs. Based on the nature of the Group’s mining operations and the stripping ratio for the components of its operations, the recognition criteria of a deferred stripping asset are not satisfied. Further, it is anticipated that the operations will maintain a consistent stripping ratio at the component level and as such no overburden in advance should be recognised. In the event that a stripping campaign is undertaken in the future a deferred stripping asset will be recognised at that time and amortised in accordance with the requirements of Australian Interpretation 20. An asset will be recognised for stripping activity where the following criteria are met: 4 it is probable that the future economic benefit (improved access to the ore body) associated with the stripping activity will flow to the entity; 4 the entity can identify the component of the ore body for which access has been improved; and 4 the costs relating to the stripping activity associated with that component can be measured reliably. 127 Other Notes NOTE 35 OTHER ACCOUNTING POLICIES (continued) 35 d) Leases Leases of property, plant and equipment where the Group, as lessee, has substantially all the risks and benefits incidental to the ownership of the asset are classified as finance leases. Finance leases are capitalised by recording an asset and a liability at the lower of the amounts equal to the fair value of the leased property or the present value of the minimum lease payments, including any guaranteed residual values. Lease payments are allocated between the reduction of the lease liability and the lease interest expense for the period. Leased assets are depreciated on a straight line basis over their estimated useful lives where it is likely that the Group will obtain ownership of the asset or over the term of lease. Leases in which a significant portion of the risks and rewards of ownership are not transferred to the Group, as lessee, are classified as operating leases. Payment made under operating leases (net of any incentives received from the lessor) are charged to the income statement on a straight-line basis over the period of the lease. e) Trade and other payables Trade and other payables are stated at their amortised cost. These amounts represent liabilities for goods and services provided to the Group prior to the end of the financial year and which are unpaid. The amounts are unsecured and usually paid within 30 to 45 days of recognition. f ) Borrowing costs Borrowing costs incurred for the construction of any qualifying asset are capitalised during the period of time that is required to complete and prepare the asset for its intended use or sale. Other borrowing costs are expensed. g) Earnings per share Basic earnings per share Basic earnings per share is calculated by dividing: 4 the profit attributable to owners of the Company, excluding any costs of servicing equity other than ordinary shares; and 4 by the weighted average number of ordinary shares outstanding during the financial year, adjusted for bonus elements in ordinary shares issued during the year. Diluted earnings per share Diluted earnings per share adjusts the figures used in the determination of basic earnings per share to take into account: 4 the after income tax effect of interest and other financing costs associated with dilutive potential ordinary shares; and 4 the weighted average number of additional ordinary shares that would have been outstanding assuming the conversion of all dilutive potential ordinary shares. h) Goods and Services Tax (GST) Revenues, expenses and assets are recognised net of the amount of GST, except where the amount of GST incurred is not recoverable from the Australian Taxation Office (ATO). In these circumstances the GST is recognised as part of the cost of acquisition of the asset or is expensed. Receivables and payables in the statement of financial position are shown inclusive of GST receivable or payable. The net amount of GST recoverable from, or payable to the ATO is included with other receivables or payables in the statement of financial position. Cash flows are presented in the statement of cash flows on a gross basis, except for the GST component of investing and financing activities, which are disclosed as operating cash flows. . 128 Notes to the Financial StatementsWashington H. Soul Pattinson and Company LimitedAnnual Report 2017 i) Financial statement presentation The Group has attempted to improve the transparency of its reporting by adopting ‘plain English’ where possible. Key ‘plain English’ phrases and their equivalent AASB terminology are as follows: ‘Plain English’ terminology Share capital Trading equities Long term equity investments Equity accounted associates Term deposits AASB terminology Contributed equity Other financial assets at fair value through profit or loss Available for sale financial assets Investments accounted for using the equity method Held to maturity investments The accounting standards also require the presentation of a statement of comprehensive income which presents all items of recognised income and expenditure either in one statement or in two linked statements. The Group has elected to present two statements. 36 NOTE 36 REMUNERATION OF AUDITORS During the year, the following fees were paid or payable for services provided by the auditor. 2017 $’000 2016 $’000 a) Audit Services Parent Company and Consolidated entity Pitcher Partners Sydney for audit and review of financial reports and other audit work under the Corporations Act 2001 Other Group entities Pitcher Partners Sydney for audit and review of financial reports Other audit firms for the audit or review of financial reports Total remuneration for audit and review services b) Other services Pitcher Partners Sydney Tax compliance services Other auditors of Group entities Other services Total remuneration for other services 306 158 475 939 96 24 120 292 122 454 868 116 57 173 129 37 Other Notes NOTE 37 DEED OF CROSS GUARANTEE During 2012, Washington H. Soul Pattinson and Company Limited and Souls Private Equity Limited entered into a deed of cross guarantee under which each company guarantees the debts of the other. During 2013, Exco Resources Limited and its wholly-owned subsidiaries became party to this deed. Whilst party to this deed, wholly owned entities are relieved from the requirements to prepare a financial report and directors’ report under ASIC Corporations (Wholly-owned Companies) Instrument 2016/785 issued by the Australian Securities and Investments Commission. The parties to this deed are referred to as the ‘Closed Group’. The effect of the deed is that each party to it has guaranteed to pay any deficiency in the event of the winding up of any of the companies in the Closed Group. On 15 June 2017, Exco Resources Limited and its wholly-owned subsidiaries left the Closed Group by way of a ‘Revocation Deed’. i) Consolidated income statement, statement of comprehensive income and summary of movements in consolidated retained profits and consolidated statement of financial position for the members of the Closed Group Consolidated income statement – Closed Group Profit before income tax Income tax benefit/(expense) Profit after tax attributable to Closed Group Consolidated statement of comprehensive income – Closed Group Other comprehensive income Net movement in fair value of long term equity investments, net of tax Share of other comprehensive income movements, net of tax Total other comprehensive income for the year, net of tax 2017 $’000 2016 $’000 331,267 (56,032) 275,235 (23,885) 4,420 (19,465) 254,449 (44,018) 210,431 (51,879) 3,351 (48,528) Total comprehensive income attributable to the Closed Group 255,770 161,903 Summary of movements in consolidated retained earnings – Closed Group Retained profits attributable to the Closed Group Retained profits at the beginning of the year Profit for the year Adjustment for companies transferred out of the Closed Group Dividends declared and paid 1,401,250 275,235 15,619 (102,993) 1,289,883 210,431 – (99,064) Retained profits at the end of the year 1,589,111 1,401,250 130 Notes to the Financial StatementsWashington H. Soul Pattinson and Company LimitedAnnual Report 2017 Consolidated statement of financial position – Closed Group Current assets Cash and cash equivalents Term deposits Trade and other receivables Inventories Trading equities Total current assets Non-current assets Trade and other receivables Equity accounted associates Long term equity investments Other financial assets Property, plant and equipment Exploration and evaluation costs Deferred tax assets Total non-current assets Total assets Current liabilities Trade and other payables Interest bearing liabilities Provisions Total current liabilities Non-current liabilities Deferred tax liabilities Provisions Total non-current liabilities Total liabilities Net assets Equity Share capital Reserves Retained profits Total equity 2017 $’000 56,029 – 14,485 1,024 46,993 2016 $’000 26,530 47,044 28,345 7,571 31,605 118,531 141,095 68,041 1,422,364 645,048 166,064 5,568 – 113,811 66,946 1,272,092 581,061 124,647 10,642 19,309 109,864 2,420,896 2,184,561 2,539,427 2,325,656 10,574 40,000 406 50,980 287,756 952 288,708 339,688 20,563 49,942 3,090 73,595 219,758 960 220,718 294,313 2,199,739 2,031,343 43,232 567,396 1,589,111 43,232 586,861 1,401,250 2,199,739 2,031,343 131 Directors’ Declaration In the opinion of the Directors of the Company: 1. the financial statements and notes, as set out on pages 50 to 131 are in accordance with the Corporations Act 2001, including: a) complying with Accounting Standards and the Corporations Regulations 2001; b) giving a true and fair view of the financial position as at 31 July 2017 and the performance for the year ended on that date of the consolidated entity; 2. 3. there are reasonable grounds to believe that the Company will be able to pay its debts as and when they become due and payable; and at the date of this declaration, there are reasonable grounds to believe that the Company and the wholly owned subsidiaries identified in Note 37 to the financial statements as being parties to a Deed of Cross Guarantee will be able to meet any obligations or liabilities to which they are, or may become subject to, by virtue of the Deed. The Basis of Preparation on page 57 confirms that the financial statements also comply with International Financial Reporting Standards as issued by the International Accounting Standards Board. The Directors have been given the declarations by the Chief Executive Officer and Chief Financial Officer required by section 295A of the Corporations Act 2001. This declaration is made in accordance with a resolution of the Board of Directors. R D Millner Director T J Barlow Managing Director Dated this 24th day of October 2017. 132 Washington H. Soul Pattinson and Company LimitedAnnual Report 2017 Independent Auditor’s Report Independent Auditor’s Report to the Members of Washington H. Soul Pattinson and Company Limited ABN 49 000 002 728 Report on the Financial Report Opinion We have audited the accompanying financial report of Washington H. Soul Pattinson and Company Limited, which comprises the consolidated statement of financial position as at 31 July 2017, the consolidated income statement, the consolidated statement of comprehensive income, the consolidated statement of changes in equity and the consolidated statement of cash flows for the year then ended, notes comprising a summary of significant accounting policies and other explanatory information and the Directors’ Declaration of the consoli- dated entity comprising Washington H. Soul Pattinson and Company Limited (“WHSP”) and the entities it controlled at year end or from time to time during the financial year (“the Group”). In our opinion the financial report of Washington H. Soul Pattinson and Company Limited and its controlled entities 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 31 July 2017 and of its performance for the year then ended; and ii. complying with Australian Accounting Standards and the Corporations Regulations 2001. Basis of Opinion We conducted our audit in accordance with Australian Auditing Standards. Our responsibilities under those standards are further described in the Auditor’s Responsibility section of our report. We are independent of the Group in accordance with the Corporations Act 2001 and the ethical requirements of the Accounting Professional and Ethical Standards Board’s APES 110 Code of Ethics for Professional Accountants (“the Code”) that are relevant to our audit of the financial report in Australia. We have also fulfilled our other ethical responsibilities in accordance with the Code. We confirm that the independence declaration required by the Corporations Act 2001, provided to the Directors of Washington H. Soul Pattinson and Company Limited on 23 October 2017, would be on the same terms if provided to the Directors as at the date of signing this audit report. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion. An independent New South Wales Partnership. ABN 17 795 780 962 Level 22 MLC Centre, 19 Martin Place, Sydney NSW 2000 Liability limited by a scheme approved under Professional Standards Legislation Pitcher Partners is an association of independent firms Melbourne | Sydney | Perth | Adelaide | Brisbane | Newcastle An independent member of Baker Tilly International 133 Independent Auditor’s Report Key Audit Matters Key audit matters are those matters that, in our professional judgement, were of most significance in our audit of the financial report of the current period. These matters were addressed in the context of our audit of the financial report as a whole, and in forming our opinion thereon, and we do not provide a separate opinion on these matters. Key Audit Matter How our audit addressed the key audit matter Consolidation and reliance on the work of other auditors Refer to Basis of consolidation The consolidated financial statements of the Group comprise the financial statements of Washington H. Soul Pattinson and Company Limited, its subsidiaries, and its’ share of results from equity accounted associates. This involves the reporting from subsidiaries and associates (“components”) and reliance is placed on the work of the auditors of those components. Given the number of associates and subsidiaries within the Group, and accounting complexities due to the transactions undertaken by the Group during the year, the key audit matter for us was whether the consolidation process had been accurately and completely performed by management. As a result we focused on: 4 identifying and understanding the components and the significant risks of material misstatement within them; 4 the assessment of each components’ compliance with Group accounting policies; and 4 the consolidation procedures (including consolidation journals and intercompany transactions) undertaken by management. Our procedures included, amongst others: 4 We provided instructions and questionnaires to component auditors and worked with component auditors, to identify risks that are significant to the audit of the Group and to plan relevant audit procedures. 4 We reviewed investment movements during the year for consolidation/equity accounting impacts. 4 We enquired of management about WHSP’s procedures in place in relation to the identification of intercompany transactions. 4 We performed detailed testing of consolidation workpapers, journals and supporting documentation including reconciliations. 4 We tested the financial data used in the consolidation process for consistency with the financial data audited by component auditors. 4 We reviewed the financial reports of significant subsidiaries and associates. 4 We evaluated the accounting policies of subsidiaries to ensure consistency with WHSP policies and the accounting standards. 4 Based on our assessment of risk we met with those selected component auditors to discuss the outcome of their audit procedures and where we deemed necessary review relevant component auditor workpapers. Valuation, existence and classification of other equity investments Refer to Note 11: Other Equity Investments and Note 17: Expenses Other equity investments is a significant asset in the consolidated statement of financial position, representing $700.1 million or 14.7% of total assets. There is significant focus in ensuring the underlying investments are valued appropriately and are owned at year end. The determination of the valuation of financial investments, held at fair value, is based on a range of inputs, the majority of which can be obtained from quoted prices in active markets. Our procedures included, amongst others: 4 We reviewed and tested key controls surrounding investment purchases and disposals. 4 We confirmed the proper recording and ownership of investments. 4 We verified the valuation of the total listed investment portfolio at balance date by reference to external sources. 4 We reviewed the analysis prepared by management for indicators of impairment and assessed the reasonableness of the judgements and estimates of impairments made by reference to market and specific entity conditions. 134 Washington H. Soul Pattinson and Company LimitedAnnual Report 2017 Directors’ Responsibility for the Financial Report The Directors of Washington H. Soul Pattinson and Company Limited 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 controls as the Directors determine are necessary to enable the preparation of the financial report that is free from material misstatement, whether due to fraud or error. In preparing the financial report, the Directors are responsible for assessing the Group’s ability to continue as a going concern, disclosing, as applicable, matters related to going concern and using the going concern basis of accounting unless the Directors either intend to liquidate the Group or to cease operations, or have no realistic alternative but to do so. Auditor’s Responsibilities for the Audit of the Financial Report Our objectives are to obtain reasonable assurance about whether the financial report as a whole is free from material misstatement, whether due to fraud or error, and to issue an auditor’s report that includes our opinion. Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with Australian Auditing Standards will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of this financial report. As part of an audit in accordance with Australian Auditing Standards, we exercise professional judgement and maintain professional scepticism throughout the audit. We also: 4 Identify and assess the risks of material misstatement of the financial report, whether due to fraud or error, design and perform audit procedures responsive to those risks, and obtain audit evidence that is sufficient and appropriate to provide a basis for our opinion. The risk of not detecting a material misstatement resulting from fraud is higher than for one resulting from error, as fraud may involve collusion, forgery, intentional omissions, misrepresentations, or the override of internal control. 4 Obtain an understanding of internal control relevant to the audit in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Group’s internal control. 4 Evaluate the appropriateness of accounting policies used and the reasonableness of accounting estimates and related disclosures made by the Directors. 4 Conclude on the appropriateness of the Directors’ use of the going concern basis of accounting and, based on the audit evidence obtained, whether a material uncertainty exists related to events or conditions that may cast significant doubt on the Group’s ability to continue as a going concern. If we conclude that a material uncertainty exists, we are required to draw attention in our auditor’s report to the related disclosures in the financial report or, if such disclosures are inadequate, to modify our opinion. Our conclusions are based on the audit evidence obtained up to the date of our auditor’s report. However, future events or conditions may cause the Group to cease to continue as a going concern. 4 Evaluate the overall presentation, structure and content of the financial report, including the disclosures, and whether the financial report represents the underlying transactions and events in a manner that achieves fair presentation. 4 Obtain sufficient appropriate audit evidence regarding the financial information of the entities or business activities within the Group to express an opinion on the financial report. We are responsible for the direction, supervision and performance of the Group audit. We remain solely responsible for our audit opinion. We communicate with the Directors regarding, among other matters, the planned scope and timing of the audit and significant audit findings, including any significant deficiencies in internal control that we identify during our audit. We also provide the Directors with a statement that we have complied with relevant ethical requirements regarding independence, and to communicate with them all relationships and other matters that may reasonably be thought to bear on our independence, and where applicable, related safeguards. 135 Independent Auditor’s Report From the matters communicated with the Directors, we determine those matters that were of most significance in the audit of the consolidated financial report of the current period and are therefore key audit matters. We describe these matters in our auditor’s report unless law or regulation precludes public disclosure about the matter or when, in extremely rare circumstances, we determine that a matter should not be communicated in our report because the adverse consequences of doing so would reasonably be expected to outweigh the public interest benefits of such communication. Other information The Directors are responsible for the other information. The other information comprises the information in the Group’s annual report for the year ended 31 July 2017, but does not include the financial report and the auditor’s report thereon. Our opinion on the financial report does not cover the other information and we do not express any form of assurance conclusion thereon. In connection with our audit of the financial report, our responsibility is to read the other information and, in doing so, consider whether the other information is materially inconsistent with the financial report or our knowledge obtained in the audit or otherwise appears to be materially misstated. If, based on the work we have performed, we conclude that there is a material misstatement of this other information, we are required to report that fact. We have nothing to report in this regard. Report on the Remuneration Report Opinion We have audited the Remuneration Report included in pages 30 to 47 of the Directors’ Report for the year ended 31 July 2017. In our opinion, the Remuneration Report of Washington H. Soul Pattinson and Company Limited for the year ended 31 July 2017, complies with section 300A of the Corporations Act 2001. Responsibilities The Directors of Washington H. Soul Pattinson and Company Limited 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. . J Gavljak Partner 24 October 2017 136 Pitcher Partners Sydney Washington H. Soul Pattinson and Company LimitedAnnual Report 2017 ASX Additional Information Distribution of Equity Securities as at 1 October 2017 Size of Holding 1 – 1,000 1,001 – 5,000 5,001 – 10,000 10,001 – 100,000 100,001 and over TOTAL Holding less than a marketable parcel Top 20 Shareholders as at 1 October 2017 1 2 3 4 5 6 7 8 9 10 11 12 13 14 Brickworks Limited HSBC Custody Nominees (Australia) Limited Milton Corporation Limited J S Millner Holdings Pty Limited Dixson Trust Pty Limited J P Morgan Nominees Australia Limited T G Millner Holdings Pty Limited National Nominees Limited Hexham Holdings Pty Limited Citicorp Nominees Pty Limited Argo Investments Limited Australian Foundation Investment Company Limited Farjoy Pty Ltd Dixson Trust Pty Limited (A/C NO 1) 15 Mary Millner Holdings Pty Limited 16 Diversified United Investment Limited 17 Mr Geoffrey Edward Marshall 18 19 Australian United Investment Company Limited BNP Paribas Noms Pty Ltd (DRP) 20 Millane Pty Limited Number of Holders Ordinary Shares Performance Rights 10,164 5,805 1,133 903 89 18,094 305 – 1 1 2 – 4 Ordinary Shares Held % of Issued shares 102,257,830 10,204,782 9,174,640 8,822,859 8,611,540 6,810,826 3,441,051 3,396,087 2,953,127 2,396,891 2,182,606 1,708,571 1,344,463 1,158,190 1,156,860 1,100,000 1,050,612 1,000,000 966,307 887,990 42.72 4.26 3.83 3.69 3.60 2.85 1.44 1.42 1.23 1.00 0.91 0.71 0.56 0.48 0.48 0.46 0.44 0.42 0.40 0.37 137 ASX Additional Information Substantial Shareholders as at 1 October 2017 As disclosed in notices received by the Company. Brickworks Limited and its subsidiaries Mr Robert Dobson Millner Mr Thomas Charles Dobson Millner Ordinary Shares Held % of Issued Shares Notice Received 102,257,830 19,921,975 17,211,350 42.72 8.32 7.19 18 Nov 2013 3 Mar 2014 3 Mar 2014 17,195,965 of the above ordinary shares in which Mr R Millner and Mr T Millner have an interest relate to holdings by the same entities. For further details refer to the notices lodged on 3 March 2014 on the ASX announcements list for WHSP (ASX code: SOL). Unquoted Equity Securities As at 1 October 2017 The Company had the following unquoted equity securities on issue. Performance Rights – issued under the Long-term Incentive Plan 107,654 4 Number of Rights Number of Holders Voting Rights Ordinary shares: (a) on a show of hands, each member has one vote; (b) subject to section 250L(4) of the Corporations Act 2001, on a poll each member has: (i) (ii) for each fully paid share held by the member, one vote; and for each partly-paid share held by the member, a fraction of a vote equivalent to the proportion which the amount paid (not credited nor paid in advance of a call) is of the total amounts paid and payable (excluding amounts credited) for the share. Performance Rights: No voting rights. Australian Securities Exchange Listing Washington H. Soul Pattinson and Company Limited ordinary shares are listed on the Australian Securities Exchange under the ASX Code: SOL. 138 Washington H. Soul Pattinson and Company LimitedAnnual Report 2017 Designed and Produced by APM Graphics Management > 1800 806 930 139 Registered Office Level 1, 160 Pitt Street Mall, Sydney NSW 2000 Telephone: (02) 9232 7166 Facsimile: (02) 9233 1025 www.whsp.com.au Share Register Advanced Share Registry Limited 110 Stirling Highway, Nedlands WA 6009 Telephone: (08) 9389 8033 or +61 8 9389 8033 (outside Australia) (02) 8096 3502 (NSW) (03) 9018 7102 (Vic) (07) 3103 3838 (Qld) Facsimile: (08) 9262 3723 or +61 8 9262 3723 (outside Australia) www.advancedshare.com.au Auditors Pitcher Partners Sydney Level 22, 19 Martin Place, Sydney NSW 2000 GPO Box 1615, Sydney NSW 2001 Telephone: (02) 8236 7700 Facsimile: (02) 9233 4636 Washington H. Soul Pattinson and Company Limited ABN 49 000 002 728 ASX Code: SOL