TransGlobe Energy Corporation
Annual Report 2018

Plain-text annual report

ANNUAL REPORT 2018 CHAIRMAN AND CEO REPORT  Dear shareholders,  Thorn Group’s FY18 has been a challenging year. The Financial results have been disappointing and reflect  the impact of transforming the business over the past year. This includes dealing with a number of historical  issues and establishing a sound platform for the business going forward, particularly in the Group’s  consumer leasing operations.  The Board took decisive action in FY18 in refining Thorn towards a simpler business model comprising two  components – consumer leasing and business equipment finance – where the company has a distinct  competitive advantage. The Board also appointed Tim Luce, an experienced retail executive, as its new CEO  and Managing Director and new members of the management team to ensure the right skills are present to  take the Company forward.  The FY18 results contrasted another strong performance from equipment finance against a lower  contribution from consumer leasing.   Revenue from continuing operations was down 15% to $236.2 million due to tougher conditions in  consumer leasing. Revenue in consumer leasing was down 22% and equipment finance was up 50%. EBIT  was down 12% to $35.8 million.  On a continuing business basis, profit after tax and before the goodwill write down was $14.3 million   (FY17: $21.0m). The Board resolved to write off all the Company’s goodwill of $20.7 million during the year  and, adding back contributions from discontinued operations, the bottom line result for FY18 was a loss of  $3.6 million (FY17: profit of $25.3 million).  The underlying cash profit performance enabled an interim dividend of 1 cent a share fully franked to be  paid but the directors decided to withhold a final dividend in the interests of retaining cash for balance  sheet flexibility.  A significant FY18 achievement was debt management. While total borrowings increased 3% to   $284.3 million due to growth in the equipment finance book, corporate debt was reduced very significantly  and at 31 March 2018 Thorn was in compliance with all covenants.  Thorn is undertaking decisive action to improve the consumer leasing division’s performance. This project is  being led by Tim Luce, our newly appointed Managing Director who has a retail background. Initiatives  include new store concepts, a wider product range, more flexible pricing, an industry leading online credit  assessment system and more extensive promotion, along with commissioning an external review to guide  productivity and development.  These measures will have a positive effect on operations and improved performance over time but in the  short term, the FY19 challenge is to rebuild installation volumes in a tough business environment.  While equipment finance continues to perform strongly, this will only partially offset a reduced consumer  leasing performance and consequently in FY19 Thorn expects operating profit after tax to be in the range of  $7 million to $10 million.          Regarding other corporate issues, Thorn reached a settlement in January 2018 with ASIC, continues to  contest the class action, and operates within possible interest caps that may be imposed by impending  Federal Government legislation.  We are appreciative of the efforts of our people around the country and acknowledge the contribution of  Joycelyn Morton who has retired from the Board after seven years and as chair for three years, and also  Peter Forsberg who acted as CEO whilst the Board recruited Tim Luce.  DAVID FOSTER  Chairman and Non‐Executive Director  TIM LUCE  CEO and Managing Director                   Annual Financial Report 31 March 2018 ACN 072 507 147 CONTENTS Directors’ Report Lead Auditor’s Independence Declaration Consolidated Statement of Profit or Loss and Other 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 Shareholder Information 2 22 23 24 25 26 28 53 54 60 DIRECTORS’ REPORT For the year ended 31 March 2018 The Directors present their report together with the financial report of Thorn Group Limited (the ‘Company’) and its controlled entities (together referred to as ‘Thorn’, the ‘Group’ or the ’consolidated entity’) for the financial year ended 31 March 2018 and the auditor’s report thereon. OPERATING AND FINANCIAL REVIEW Thorn is a diversified financial services group providing financial solutions to consumers and businesses. Business activities are the leasing of household products to consumers and the provision of leasing and other financial services to small and medium size enterprises. The Group also provided trade and debtor finance services and consumer loans during the year but those businesses were sold during the year. Accordingly, those two divisions have been treated as discontinued businesses in the financial statements where they are presented as a one line entry above profit after tax. There were no other significant changes in the nature of the activities of the consolidated entity during the year. Financial performance Revenue from continuing operations decreased from $277.6m in the prior year to $236.2m this year, a reduction of $41.4m or 15%. Profit after tax fell from a profit of $25.3m in 2017 to a loss of $(3.6m) in 2018. The loss included a $20.7m charge to write off goodwill and so the cash profit, defined as the profit excluding that write off, was $17.0m (2017: $25.3m). The lower profit result reflects principally the difficult trading conditions experienced during the year by the Company’s consumer leasing division, Radio Rentals. Equipment Finance enjoyed another year of strong profit growth and the interest expense line rose as debt was used to fund a portion of the growing receivables book. Corporate expenses were elevated due to the legal and compliance costs of the ASIC and class action matters. The Company examined the carrying value of its goodwill balance during the year in response to the declining cash flows and concluded the balance should be written off in its entirety. The Company restructured its portfolio of business units and de-risked its capital structure during the year with the sale of two Group businesses. These sales allowed the Company to meet the progressive debt repayment obligations instituted by the Company’s lender. The Board oversaw changes in its senior management team during the year most notably with the departure of its Chief Executive Officer & Managing Director, its Chief Operating Officer and its General Manager Consumer Leasing. The Company’s Chief Financial Officer, Peter Forsberg, stepped into the CEO role for ten months until the Company’s new CEO & Managing Director, Tim Luce, could commence his employment on 15 February 2018. Segment performance – continuing operations A$m Consumer Leasing Equipment Finance Corporate Goodwill impairment Sub-total Net interest expense Profit before tax Tax expense Segment revenue 2018 196.5 39.7 - - 236.2 2017 251.2 26.4 - - 277.6 (Loss)/profit after tax from continuing operations Profit from discontinued businesses after tax (Loss)/profit after tax Segment EBIT to PAT 2018 26.4 24.2 (14.8) (20.7) 15.1 (15.7) (0.6) (5.8) (6.4) 2.8 (3.6) 2017 36.3 16.1 (11.6) - 40.8 (9.5) 31.3 (10.3) 21.0 4.3 25.3 Annual Report 2018 I 2 DIRECTORS’ REPORT For the year ended 31 March 2018 Consumer Leasing The Company’s consumer Leasing division, Radio Rentals, continued to experience challenging trading conditions due to adverse publicity, the deferral of returning customers caused by the launch of the four year contract three years ago, and operational changes from the launch of its new online customer application and credit assessment system. These matters combined to reduce customer enquiries and installation volumes such that volumes ended the year 33% lower than the prior year. The division responded to these challenges in recent months by increasing promotional activity, widening the product range, and commencing a trial of reformatted store layouts and offers to spur sales activity. The activities to date have served to stabilise sales and further work is underway to lift volumes. The division has also refunded substantially all the excess credit balances held and developed a plain English contract to assist consumers in clearly understanding the contract they are entering into. Revenue for the 2018 financial year reduced by 22% to $196.5m (2017: $251.2m). Revenue is a combination of interest and fee income from past written contracts and sales revenue from installations under new contracts. Installations fell 33% to 82,371 units (2017: 122,189 units) and the receivables book, which generates the interest income, fell $17.6m to $155.2m (2017: $172.8m). Arrears in this book increased over the prior year and are a focus for the business. The division’s costs reduced by 21% to $170.2m (2017: $214.8m) so the EBIT to Revenue percentage fell from 14.5% in the prior year to 13.4% this year. The division continues to seek efficiencies in its operations including changes to its operating model to redress this fall. EBIT was consequently down 27% to $26.4m (2017: $36.3m). Equipment Finance The Thorn Equipment Finance (‘TEF’) business continued its run of strong growth with $208.9m of originations in the year which drove the net receivables book up 36% or $86.9m to $326.2m (2017: $239.3m). As pricing was kept fairly constant the book growth translated into interest and fee revenue growth of 50% to $39.7m (2017: $26.4m). Impairment losses as a percentage of average net receivables were 1.7% compared to the prior year’s 1.8%. Average arrears delinquency over 30 days past due has remained in the 2.0% to 2.5% range. EBIT rose 50% to $24.2m (2017: $16.1m). Corporate Corporate Head Office expenses increased by $3.2m to $14.8m (2017: $11.6m). The increase was due to enhancement of the credit, risk and legal teams and additional legal and advisory costs in administering to the regulatory and class action matters. Finance expense Net borrowing costs increased by 65% from $9.5m to $15.7m. Borrowings increased during the year as growth in the Equipment Finance book was funded predominantly by debt but then reduced in the latter part of the year as proceeds from the business sales were applied to reduce debt. Borrowings ended the year $7.8m or 2.8% up to $284.3m (2017: $276.5m) as the TEF debt warehouse rose $91.3m and the corporate debt facility reduced by $83.5m. The finance expense rate rose as credit spreads ticked up during the period and there were fees for the facility increases and extensions. Tax expense The Group generally pays corporation tax at or slightly above the 30% statutory rate as some expenses are not tax deductible. In this financial year the goodwill impairment charge of $20.7m is a non-deductible expense so the tax rate adjusting for that was 29%. Profit after tax for continuing operations The reported result after tax for continuing operations was a loss of $6.4m. Discontinued operations The Trade & Debtor Finance (“TDF”) business recorded a profit after tax of $0.7m prior to its sale on 26 February 2018. The business was sold for $37.9m and the profit on sale was reduced by the costs of sale and provisioning to record a net loss after tax on sale of $(0.4m). The Consumer Finance business division (“TFS”) was closed in the previous financial year and sold on 1 November 2017 for $13.3m. It recorded a profit after tax of $1.7m prior to its sale. The profit on sale was $0.6m. The NCML Receivables Management business was sold to a third party in September 2016. During the year the group received a further $0.2m following a completion audit. 3 I Thorn Group DIRECTORS’ REPORT For the year ended 31 March 2018 Financial position The balance sheet is presented below and has two versions. The first version excludes the securitised warehouse trust for the Equipment Finance receivables along with those associated receivables (which are non-recourse funding for the warehouse) leaving only the corporate bank debt facility, and the second is as per the statutory accounts format with all debt included. The Company’s lender views their covenants through the first version. The balance sheet for the 2018 year also reflects the sale of the discontinued businesses and the associated reduction in the Group’s debt position. Summarised financial position 31 March 2018 31 March 2017 $m Cash at bank (i) Receivables Investment in unrated notes Rental and other assets Intangible assets Total Assets Borrowings Other liabilities Total Liabilities Total Equity Gearing (net debt/equity) (ii) EPS Return on Equity (iii) excl. Trust incl. Trust excl. Trust incl. Trust 28.2 202.3 58.7 11.4 4.8 305.4 41.0 61.5 102.5 202.9 16.1% 28.2 504.3 - 11.4 4.8 548.7 284.3 61.5 345.8 202.9 135.9% (2.3) (1.8%) 14.7 305.8 35.2 17.6 24.3 397.6 124.5 62.9 187.4 210.2 56.1% 14.7 493.0 - 17.6 24.3 549.6 276.5 62.9 339.4 210.2 128.4% 16.2 12.4% (i) Cash at bank consists of free cash of $8.4m (2017: $6.7m) and restricted cash $19.8m (2017: $8.0m) relating to the operation of the securitised warehouse SPV. (ii) Gearing is calculated as closing net debt (i.e. debt less free cash) divided by closing equity (iii) ROE is calculated as PAT divided by the average of opening and closing equity and annualised. With goodwill impairment excluded ROE would have been 7.8% (2017:12.4%). Receivables Receivables increased by 2.3% or $11.3m to $504.3m during the year. This movement is affected by the sales of TDF and TFS as their receivables balance was a combined $60m in 2017. Consumer leasing receivables fell by 10.2% or $17.6m to $155.2m as the finance leases within it amortised off faster than new volumes could replace it. Equipment Finance lease receivables increased by 36% to $326.2m due to continued strong originations. Borrowings and gearing Borrowings rose by $7.8m from $276.5m last year to $284.3m this year. The securitised warehouse funding TEF grew $91.3m from $152.0m to $243.3m. The corporate facility was reduced by $83.5m from $124.5m to $41.0m as the sale proceeds from the business sales were applied to meet the required progressive repayments. Return on Equity ROE fell from 12.4% to (1.8%) on a statutory accounts profit after tax level and to 7.8% at a cash profit level. Annual Report 2018 I 4 DIRECTORS’ REPORT For the year ended 31 March 2018 Funding The Group has the following debt facility limits: $m Secured Corporate Loan Facilities A and B Secured Loan Facility C Securitised Warehouse Facility 2018 70.0 - 250.0 2017 110.0 65.0 180.0 The Group continues to be funded by one Australian major bank. That bank and the Company entered into a facility variation agreement during the year which required the Company to undertake progressive debt repayments and meet new covenants. These progressive repayments will reduce the facility limit to $50m by 30 September 2018. The corporate facilities terminate on 30 November 2019 with the bank having the right to a scheduled review of the facility on and from 30 September 2018 resulting from which they may issue a change notice for the conditions of the facility including its cost, margin, limit or terms and conditions. The corporate facilities are secured by a fixed and floating charge over the assets of the consolidated entity. The warehouse facility is secured by the rentals and payments receivable from the underlying lease receivable contracts and is non-recourse to the Group beyond Thorn’s subordinated notes in the warehouse. Dividends paid or recommended Dividends paid by the Company to members during the financial year were: Cents per share Amount $'000 Franking Date of payment 2018 Final 2017 Interim 2018 Total amount 2017 Final 2016 Interim 2017 Total amount 2.5 1.0 6.0 5.5 3,956 1,593 5,549 9,268 8,612 17,880 100% 100% 100% 100% 18-Jul-17 19-Jan-18 18-Jul-16 20-Jan-17 Directors have resolved that no final dividend be declared. This decision was taken after considering the need to retain cash to provide balance sheet flexibility for the Company following the changes to its bank financing arrangements and its loss for the year. Regulatory provision Thorn’s consumer leasing division has been engaging with ASIC on matters pertaining to customer credit refunds and the appropriate and necessary extent of verification of items of customer income and expenditure. On 23 January 2018, Thorn advised that this long running investigation had concluded with the imposition of an Enforceable Undertaking including the refunding of an estimated $6.1m to affected customers and a civil penalty of $2.0m which has since been confirmed by the Court. These amounts are provided for in the financial statements. Refunds will commence under the Enforceable Undertaking in coming weeks. Excess credits have been substantially refunded. Contingent Liability Class Action The Thorn subsidiary running Radio Rentals was named on 29 March 2017 as the respondent to a class action proceeding that has been commenced by one of its customers in the Federal Court of Australia. The allegations presently relate to misleading, deceptive and unconscionable conduct, false representations and unfair contract terms. The matter is being defended and no provision has been taken in these accounts. Legal fees are and will be incurred defending the matter. 5 I Thorn Group DIRECTORS’ REPORT For the year ended 31 March 2018 FINANCING AND GOING CONCERN BASIS FOR THE FINANCIAL REPORT At the half year ended 30 September 2017, the Company had breached two of its bank covenant financial ratios. The bank formally waived the breach and instituted a facility variation deed which required the Company to undertake progressive debt repayments and meet new covenants. The facility variation deed reduced the facility limit to $90m by 31 December 2017, $70m by 30 June 2018, and $50m by 30 September 2018. Directors were confident the company could meet these progressive repayments and indeed the corporate debt facility was paid down to $41m in February 2018 utilising operational cash flows and proceeds from the sale of Thorn Financial Services and Trade & Debtor Finance. Subsequent to the financial year end, the bank has instituted a further facility variation deed which has removed one of the previous tightening financial covenants and applied a replacement earnings based covenant. The facility variation deed entered into at the half year provided for the facility termination date to be extended to 30th November 2019 with the bank having the right to conduct an independent review of the facility on 30th September 2018 and to amend the facility terms. The directors are confident the company has a number of alternative funding options available if required. Accordingly, the directors are satisfied that the going concern basis should be adopted in preparing this financial report. SUBSEQUENT EVENTS ASIC The Company attended a Federal Court hearing for the ASIC v Thorn Australia Pty Ltd regulatory matter on 16 May at which the Court ordered Thorn to pay a pecuniary penalty of $2 million and reimburse ASIC’s agreed costs. This was as previously advised to the ASX on 23 January 2018. AASB 9 The Group will implement AASB 9 Financial Instruments in the new financial year commencing 1 April 2018. This standard introduces a new impairment assessment model which has implications for the Group’s assessment of its provision for credit losses. The Group has conducted a preliminary review of the anticipated impact and expects the provision for credit loss on its finance lease and loans receivables book to increase from $26.1m to between $34.1m and $39.1m. After accounting for the tax effect of these provision increases, net assets is expected to reduce by an amount between $5.6m to $9.1m. The net impact of this increased provisioning will be processed through retained earnings in the 2019 financial statements. OUTLOOK The outlook for the Thorn Group will continue to be challenged as the difficulties facing the Radio Rentals division require time to resolve and will not be balanced by the expected continuing strong performance from Equipment Finance. The appointment of the Company’s new CEO, Tim Luce, is expected to deliver a positive impact to the business and the consumer leasing division in particular but Mr Luce is taking over at a point where the significant impacts of the regulatory matters and their flow on effects have reduced installation volumes in Radio Rentals and the size of the interest earning receivables book. These will take time to redress. The Equipment Finance division is growing strongly but this will be subject to the continuing availability of funding. The Group also faces the ongoing publicity and costs from the class action and enforceable undertaking. Consequently, as previously announced, the operating profit after tax for next year will be significantly down from this year’s continuing business $14.2m cash profit after tax. It is expected to be in the range of $7m to $10m. Annual Report 2018 I 6 DIRECTORS’ REPORT For the year ended 31 March 2018 DIRECTORS' INFORMATION David Foster Independent, Non-Executive Appointed 1 December 2014 Appointed Board Chairman 1 February 2018 Qualifications Bachelor of Applied Science MBA, GAICD, SFFIN Experience David is an experienced Independent Non-Executive Director across a range of industries. He has had an extensive career in Financial Services spanning over 25 years. His most recent executive role until December 2013 was CEO of Suncorp Bank, a role he commenced in September 2008. Prior to his role as CEO of Suncorp Bank, David lead Suncorp’s strategy function which included numerous merger and acquisition activities including one of Australia’s largest Financial Services transactions – Promina Limited. Other current ASX directorships G8 Education Limited, MotorCycle Holdings Limited Genworth Mortgage Insurance Australia Limited Former ASX directorships Kina Securities Limited Interests in shares and options 60,270 ordinary shares Joycelyn Morton Independent, Non-Executive Appointed 1 October 2011 Appointed Board Chairman 26 August 2014 until 1 Feb 2018 Qualifications Bachelor of Economics FCA, FCPA, FIPA, FGIA, FAICD Experience Joycelyn has more than 35 years’ experience in finance and taxation having begun her career with Coopers & Lybrand (now PwC), followed by senior management roles with Woolworths Limited and global leadership roles in Australia and internationally within the Shell Group of companies. Joycelyn was National president of both CPA Australia and Professions Australia, she has served on many committees and councils in the private, government and not-for-profit sectors. Other ASX current directorships Argo Investments Limited, Argo Global Listed Infrastructure Limited, Beach Energy Limited Former ASX directorships InvoCare Limited, Crane Group Limited Count Financial Limited, Noni B Limited Interests in shares and options 95,119 ordinary shares 7 I Thorn Group Stephen Kulmar Independent, Non-Executive Appointed 15 April 2014 Chairman of the Remuneration & Nomination Committee Appointed 15 April 2014 Experience Stephen is the former Managing Director and Chairman of IdeaWorks and is currently the Managing Director of Retail Oasis, retail marketing and business consultancy. Stephen has over 40 years’ experience in advertising and has extensive experience in retail strategy, brand strategy, channel to market strategy, digital and social strategy, business re-engineering and new retail business development. Other ASX current directorships Accent Group Ltd Former ASX directorship None Interests in shares and options 68,000 ordinary shares Andrew Stevens Independent, Non-Executive Appointed 1 June 2015 Chairman of the Audit Committee Appointed 1 February 2018 Qualifications Master of Commerce FCA, MAICD Experience Andrew began his career at Price Waterhouse (now PwC) and was a Partner of that firm for 12 years. He also performed a range of senior management and global leadership roles at IBM Corporation, most recently serving as the Managing Director of IBM Australia and New Zealand from 2011-2014. Other ASX current directorships MYOB Group Limited, Stockland Corporation Limited Former ASX directorships None Interests in shares and options 15,720 ordinary shares DIRECTORS’ REPORT For the year ended 31 March 2018 Belinda Gibson Independent, Non-Executive Appointed 1 July 2016 Chairman of the Risk & Compliance Committee Appointed 1 February 2018 Qualifications Bachelor of Economics, LLB (Hons) (Sydney) and LLM (Hons) (Cambridge), FAICD, FGIA Experience Belinda was a Commissioner and then Deputy Chairman of the Australian Securities and Investments Commission (ASIC) from 2007 until May 2013. From 1987 until joining ASIC she was a corporate law partner at the law firm Mallesons Stephen Jaques, specialising in transactional advice and also corporate governance issues. Other ASX current directorships None Former ASX directorships None Interests in shares and options 20,000 ordinary shares James Marshall Managing Director Appointed 5 May 2014, Resigned 21 April 2017 Qualifications Dip. Financial Services MAICD, MFTA Experience James joined the company in 1993 and held several frontline and senior management positions prior to joining the Executive Team which took the company to public listing in 2006. James has extensive knowledge of consumer leasing, receivables management and broader financial services industries, and has been instrumental in driving the development and growth of Thorn’s core business divisions and diversification strategy since the IPO. Other ASX current directorships None Former ASX directorships None Interests in shares and options 10,000 ordinary shares Tim Luce Managing Director Appointed 15 February 2018 Qualifications Bachelor of Commerce Experience Tim has extensive executive experience working with retail brands in Australia and Asia and joins Thorn Group after six years with Courts Asia Ltd, an SGX listed retailer with over 90 stores selling household, technology, furniture, services and consumer finance products, headquartered in Singapore where he was Chief Operating Officer with P&L responsibility for Singapore, Malaysia and Indonesia. Prior to Courts, Tim held General Manager roles for Lovisa and Goldmark Jewellers. Other current ASX directorships None Former ASX directorships None Interests in shares and options 1,197,606 performance rights over ordinary shares awarded as a sign on bonus and held in escrow subject to time based vesting. Annual Report 2018 I 8 DIRECTORS’ REPORT For the year ended 31 March 2018 COMPANY SECRETARIES Peter Forsberg is the Group’s CFO having joined the company on 28 September 2015. He acted as the Group’s CEO from 24 April 2017 until 15 February 2018. Mr Forsberg BSc Hons, FCA, F Fin, GAICD, MFTA is an experienced and qualified CFO and senior executive having worked in healthcare, manufacturing and distribution, FMCG, professional services, and in publicly listed, private equity owned and charitable companies operating both in Australia and internationally. David Lines is the Group’s General Counsel having joined the company on 1 June 2017. David is an experienced and qualified solicitor with extensive legal and business experience having practiced in England, Bermuda and Australia. He was a partner of an international law firm and advised clients in corporate law, corporate finance, corporate structuring and general regulatory matters. DIRECTORS’ MEETINGS The number of directors’ meetings (including meetings of committees of directors) and number of meetings attended by each of the directors of the Company during the financial year are detailed below. Director Board Meetings Audit, Risk & Compliance Committee Meetings** Audit Committee Meetings** Risk & Compliance Committee Meetings** (Until 1 February 2018) (From 1 February 2018) (From 1 February 2018) Remuneration & Nomination Committee Meetings David Foster Joycelyn Morton Belinda Gibson Andrew Stevens Stephen Kulmar Tim Luce James Marshall* A 9 9 9 9 9 2 - B 9 9 9 9 9 2 - A 4 4 4 4 4 n/a - B 4 4 4 4 4 n/a - A 1 1 1 1 1 n/a - B 1 1 1 1 1 n/a - A 1 1 1 1 1 n/a - B 1 1 1 1 1 n/a - A 5 5 5 5 5 n/a - B 5 5 5 5 5 n/a - A – Number of meetings attended B – Number of meetings held during the time the director held office during the year n/a – Mr Tim Luce, as an executive Director, attended Committee meetings but as an invitee only  Mr Marshall departed on the 21 April 2017 which was prior to any meetings being held in the year. ** The Audit, Risk & Compliance Committee was restructured from 1 February 2018 in to a separate Audit Committee and a Risk & Compliance Committee. INDEMNIFICATION AND INSURANCE OF DIRECTORS AND OFFICERS Indemnification The Company has agreed to indemnify the current, former and subsequent directors and officers of the Company, against all liabilities to another person (other than the Company or a related body corporate) that may arise from their position as directors or officers of the Company and its controlled entities, except where the liability arises out of conduct involving a lack of good faith. The agreement stipulates that the Company will meet the full amount of any such liabilities, including costs and expenses. Insurance premiums During the financial year the Company has paid insurance premiums of $220,421 in respect of directors’ and officers’ liability and legal expenses insurance contracts, for current and former directors and officers, including senior executives of the Company and directors, senior executives and secretaries of its controlled entities. The insurance premiums relate to costs and expenses incurred by the relevant officers in defending proceedings, whether civil or criminal and whatever their outcome, and other liabilities that may arise from their position, with the exception of conduct involving misconduct. The insurance policies outlined above do not contain details of the premiums paid in respect of individual officers of the Company. 9 I Thorn Group DIRECTORS’ REPORT For the year ended 31 March 2018 REMUNERATION REPORT – AUDITED The Board of Thorn Group Limited presents the remuneration report which outlines key aspects of the remuneration policy and framework and the remuneration awarded this year. The information provided in this report has been prepared based on the requirements of the Corporations Act 2001 and the applicable accounting standards and has been audited by KPMG. The report is structured as follows: 1. Remuneration governance 2. Non-Executive Directors and Key Management Personnel 3. Non-Executive Director remuneration 4. Key Management Personnel remuneration 5. Alignment between remuneration and performance 6. Service contracts for KMP 7. Other statutory disclosures 1. REMUNERATION GOVERNANCE The Company aims to deliver sustainable and superior returns to shareholders. The remuneration framework is designed to ensure rewards are appropriate for the results achieved and are aligned to the Company’s strategic goals and shareholder wealth creation. The Board provides guidance and oversight to the remuneration strategy and has established a Remuneration & Nomination Committee to ensure the remuneration strategy attracts and retains quality directors and executives, fairly and responsibly rewards them, is equitable and aligned to shareholders’ interests, and complies with the law and high standards of governance. The Committee is made up of independent non-executive directors and its charter is available on the Company website. The Committee makes recommendations to the Board for its consideration and approval. The Committee Chairman will be available at the Annual General Meeting to answer any questions from shareholders on this report. At the 2017 AGM, the Remuneration Report received a vote of approval of 97% of the votes received. The Committee can draw on independent experts where appropriate to provide advice on remuneration levels, trends and structures. Where this occurs the consultants are instructed by and report directly to the Chairman of the Committee and are thereby free of any undue influence by any KMP to whom their recommendations may relate. The Committee took advice from PwC in relation to Mr Luce’s employment arrangements during the year at a cost of $33,660. Annual Report 2018 I 10 DIRECTORS’ REPORT For the year ended 31 March 2018 2. NON-EXECUTIVE DIRECTORS AND KEY MANAGEMENT PERSONNEL - AUDITED For the year ended 31 March 2018, the NEDs and KMP were: Non-Executive Directors Position David Foster Joycelyn Morton Stephen Kulmar Director Board Chairman Chairman of the Audit, Risk & Compliance Committee Director Board Chairman Director Chairman of the Remuneration & Nomination Committee Andrew Stevens Director Chairman of Audit Committee Belinda Gibson Director Director/Committee Chair Term or Date Full Year From 1 February 2018 Until 1 February 2018 Full Year Until 1 February 2018 Full Year Full Year Full Year From 1 February 2018 Full Year Chairman of Risk & Compliance Committee From 1 February 2018 Executive KMP Tim Luce Peter Forsberg Wendy Yip David Lines Matt Ingram James Marshall Position CEO Managing Director Acting CEO Chief Financial Officer Company Secretary Chief Risk Officer General Counsel and Company Secretary Chief Operating Officer CEO and Managing Director Term or Date From 15 February 2018 From 19 February 2018 From 24 April 2017 to 15 February 2018 Full Year Full Year Full Year From 1 June 2017 Until 5 March 2018 Until 21 April 2017 Changes to KMP during the year Mr Marshall resigned from his position as CEO and Managing Director on 21 April 2017. Thorn’s Chief Financial Officer and Company Secretary, Peter Forsberg, was appointed Acting CEO on 24 April 2017. Mr Lines was appointed as General Counsel on 1 June 2017 and Company Secretary on 18 October 2017. Mr Luce was appointed as CEO and Managing Director on 15 February 2018 upon which Mr Forsberg returned to his CFO role. Mr Ingram left the company on 5 March 2018. 11 I Thorn Group DIRECTORS’ REPORT For the year ended 31 March 2018 3. NON-EXECUTIVE DIRECTOR REMUNERATION - AUDITED Non-executive directors’ fees are determined within an aggregate directors’ fee pool as approved by shareholders from time to time. Independent remuneration consultants are employed periodically to provide advice and, where an increase is recommended, this is put to shareholders at the subsequent AGM. The current maximum aggregate fee pool is $650,000 inclusive of superannuation per annum and was last voted upon by shareholders at the 2013 AGM. Director’s individual fees did not increase in 2018 and the Board does not intend to seek a change to the fee pool at the 2018 AGM. The base annual fee for the Chairman is $187,223 per annum including superannuation. Base fees for other non-executive directors are $93,611 per annum including superannuation. The Chair of the Audit, Risk & Compliance Committee was paid an annual fee of $16,425 until the Committee was split at 1 February 2018. Following 1 February 2018, the Chairs of the Audit Committee and the Risk & Compliance Committee will receive an annual fee of $10,950 inclusive of superannuation and the annual fee for chairing the Remuneration & Nomination Committee will continue at $10,950 inclusive of superannuation. Non-executive directors do not receive performance-related remuneration. The Chairman of the Audit, Risk & Compliance Committee received an additional fee of $16,425 for the significant extra duties undertaken. Non-executive directors are not entitled to any additional remuneration upon retirement. Out-of-pocket expenses are reimbursed to directors upon the production of proper documentation. Name David Foster Joycelyn Morton Stephen Kulmar Andrew Stevens Belinda Gibson Peter Henley Total Non-Executive Director Remuneration Year Salary and fees Superannuation 2018 (i) 2017 2018 (i) 2017 2018 2017 2018 2017 2018 2017(ii) 2018 2017(iii) 2018 2017 123,071 100,490 158,814 170,980 95,490 95,490 86,913 85,490 86,913 62,802 - 35,182 551,201 550,434 11,692 9,546 15,087 16,243 9,071 9,071 8,257 8,122 8,257 5,966 - 3,342 52,364 52,290 Total 134,763 110,036 173,901 187,223 104,561 104,561 95,170 93,612 95,170 68,768 - 38,524 603,565 602,724 (i) Ms Morton stepped down as Chairman and Mr Foster was elected Chairman on 1 February 2018. (ii) Ms Gibson was appointed as a director on 1 July 2016. (iii) Mr Henley retired on 23 August 2016. Annual Report 2018 I 12 DIRECTORS’ REPORT For the year ended 31 March 2018 4. EXECUTIVE KMP REMUNERATION - AUDITED The Company’s approach to remuneration is framed by the strategy and operational demands of the business, the desire for superior sustained shareholder returns, the complex and onerous regulatory environment and high standards of governance. The remuneration structure has been designed to balance both shareholder and executive interests. It consists of a mix of fixed and ‘at-risk’ pay where the at-risk element seeks to balance both short and long term performance. The diagram below illustrates the link between the business’ objective and executive KMP remuneration. The Company is committed to providing a ‘fair go’ for consumers and SMEs in a responsible manner while delivering shareholders sustainable and increasing long term value. Business objective ↓ Remuneration strategy objectives 1. Align executive remuneration to Company performance and results delivered to shareholders through the short and long term incentive plans being ‘at-risk’ based on business profit after tax performance and returns to shareholders. 2. Attract, motivate and retain executive talent in a competitive market through a competitive rewards program which attracts quality executives and incorporates a significant at-risk incentive component. ↓ Fixed At-risk Fixed remuneration Short term incentive Long term incentive Base salary and benefits plus statutory superannuation contributions Annual cash payment with deferral mechanism Rewards experience skills and capabilities Rewards performance over a 12 month period Performance rights granted annually at the Board’s discretion Rewards achievement of the Company’s shareholder return targets over a three year period Fixed payment reviewed annually and any increases applied from 1 April At-risk wholly dependent upon achieving agreed performance (only paid if targets achieved) At-risk wholly dependent upon achieving agreed performance (only vests if targets achieved) Set with reference to comparable companies (in terms of industry and size), the scope and nature of the role, and the executive’s qualifications, skills, and experience Payment is determined by performance against net profit after tax target and individual KPIs Vesting is determined by performance against targets which align to the Company’s long term shareholder return objectives 13 I Thorn Group DIRECTORS’ REPORT For the year ended 31 March 2018 Summary of executive KMP remuneration outcomes on a statutory basis – audited Name Year Salary Termination STI Other remuneration (a) Superannuation Long Service Leave LTI(b) Total Executive KMP Tim Luce Peter Forsberg Wendy Yip David Lines Former KMP’s Matt Ingram James Marshall Peter Ryan Total KMP Remuneration 2018 2017 2018 2017 2018 2017 2018 2017 2018 2017 2018 2017 2017 2018 2017 67,784 - 591,480 390,404 329,676 285,997 210,702 - 381,656 353,106 427,279 603,583 334,036 2,008,577 1,967,126 - - - - - - - - 339,581 - - - - 339,581 - - - 88,173 - 130,436 162,539 - - 75,905 134,641 - - - - 129,597 - - - - - 426,777 75,905 - - - - - 37,500 370,419 37,500 5,012 - 19,563 19,533 19,563 19,533 10,024 - 19,563 19,533 13,220 20,275 19,533 86,945 98,407 - - - - - - - - - - - (19,089) 51,239 (20,353) 40,821 11,887 - 160,969 - 722,390 623,715 404,791 480,992 308,518 - (77,419) 663,381 48,244 550,480 2,893 (223,775) 219,617 38,242 110,757 772,857 - (15,869) 375,200 2,893 (328,749) 2,479,666 38,242 235,192 2,803,244 Please refer to the employment period in the KMP section for details of the period during which the executives were employed and the roles they held (including acting positions). Notes a) Other incentives includes benefits attributed to Mr Luce for his sign on bonus of $1million of shares at the 5 day VWAP before his joining date of 15 February 2018 in two tranches, one with a one year vesting period and one with a two year vesting period, and retention payment accruals to the individuals set out below. b) The LTI represents the accounting charge recognised in the Company’s profit and loss account in respect of the long term incentive plan. The charge reflects the fair value of the performance rights calculated at the date of grant using a Monte Carlo simulation model and allocated to each reporting period over the period from grant date to the expected vesting date. The value disclosed is the portion of the fair value of the performance rights allocated to this reporting period. Where grants lapse due to the failure or anticipated failure to achieve non-market condition hurdles then the expense previously recognised can be reversed and result in a negative entry in this column. Retention payments During the year, the board recognised that retaining the services of several of its key executives was essential to the ongoing success of the Group and accordingly a retention offer was made to those executives. The offer rewards continued employment to 1 September 2018 with shares to the value of $200,000 for Peter Forsberg and $120,000 each for Wendy Yip and David Lines with the value of the shares having been fixed at the 5 day VWAP before 1 December 2017. The board retains the right to award cash as an alternative payment mechanism. These proposed payments are being accrued over the time period and are reflected in the remuneration table above. Further retention payment arrangements have been entered into subsequent to the year end with Mr Forsberg, Ms Yip and Mr Lines amounting to a combined $230,000. Annual Report 2018 I 14 DIRECTORS’ REPORT For the year ended 31 March 2018 Remuneration mix The table below represents the target remuneration mix for group executives in the current year: KMP Fixed remuneration At risk Fixed remuneration Short term incentive Long term incentive 50% 25% 25% Fixed remuneration consists of a base salary and benefits plus statutory superannuation contributions. The fixed remuneration is set with reference to the market, the scope and nature of the role, and the executive’s qualifications, skills, performance and experience. In certain cases, the Board may determine that it is appropriate to stretch fixed annual compensation in order to attract critical talent where necessary. Fixed remuneration is reviewed annually and any increase applied from 1 April. The Board may also approve adjustments during the year as recommended by the CEO such as those arising from promotion or the undertaking of additional duties. The benchmark peer group against which the remuneration packages are compared consists of companies within the ASX300 with market characteristics of between 50% and 200% of that of Thorn Group. Independent expert advice may be sought by the Remuneration & Nomination Committee to assist in that exercise. Short term incentive The short term incentive (“STI”) is an annual cash payment subject to achieving performance criteria based both on financial and non-financial key performance indicators. There is a target level of payment with an additional stretch component available for out-performance. The Board has 100% discretion in all matters. Features Purpose Opportunity Description To motivate executives to achieve the short term performance targets. KMP 50% 100% Target (as % of Fixed) Maximum (as % of Fixed) Performance Period 12 months Gateway and performance metrics The STI is subject to a Profit After Tax ‘PAT’ gateway below which no STI payments are made. The maximum STI that can be earned is based on PAT against budget as follows: Company PAT against budget STI that can be earned <85% 85% 100% 110% 0% 42.5% 50% 100% Performance between these levels is rewarded on a straight line basis. 70% of the STI that can be earned (detailed in the table above) is eligible for payment as it is based upon the financial performance against budgeted PAT with the remaining 30% dependent upon the individual’s performance against their personal KPIs. The personal KPIs are individual to the executive’s position and capacity to influence, pre-agreed with the Board, and relate to strategically important initiatives and measures for customer satisfaction, systems, risk and staff development. Assessment, approval and payment At the end of the financial year, the Remuneration & Nomination Committee assesses actual financial performance based on the Company’s audited financial statements, and each executive’s performance against their personal KPIs to determine the value of each executive’s STI reward. The Board has 100% discretion with the STI outcome including the exercising of judgement with regard to any matter, both positive and negative, that may have occurred during the financial period and to adjust the levels of achievement accordingly. Once approved, the STI rewards are paid in the month following the release of the Company’s results to the ASX. 15 I Thorn Group DIRECTORS’ REPORT For the year ended 31 March 2018 Features Deferral Description For the 2017 financial year a deferral mechanism was introduced whereby 15% of the awarded STI is deferred for one year and subject to forfeiture under two conditions, first should a material misstatement or omission in the financial statements become apparent, or second the executive acts in a manner unbecoming of the office held. This deferral percentage will be 30% in the 2019 year. The deferred portion is subject to an election by the KMP as to its method of payment. It can be paid in cash one year later, subject to the restrictions stated, and will earn interest at a suitable deposit rate for that period, or it can be converted into performance share rights at a VWAP for the 5 days prior to the payment date of the initial tranche and receive an uplift by a dividend equivalent for any dividends declared during the deferral period. The performance rights will then be converted to shares on the due date and awarded to the KMP. STI OUTCOMES FOR 2018 - AUDITED The Company reported a loss after tax of $(3.6)m and a cash profit (before goodwill impairment) of $17.0m. This level of profit did not qualify as sufficient to pass the PAT gateway in the above table and accordingly no STI’s were awarded. STI for 2017-18 Tim Luce Peter Forsberg Wendy Yip David Lines Total Target $ 41,610 322,500 175,000 175,000 714,110 Earned % Earned $ Forfeited % Forfeited $ 0% 0% 0% 0% 0% - - - - - 100% 100% 100% 100% 100% 41,610 322,500 175,000 175,000 714,110 Long Term Incentive (LTI) The Long Term Incentive is an annual performance rights plan to which executive KMP are invited to participate at the Board’s discretion. The Company currently has three active LTI plans running which share the same method but differ slightly in their hurdles and vesting criteria detailed in the table below. All of the plans were granted in the form of performance rights directly linked to the performance of the Company, the returns generated, and relative increases in shareholder wealth. This structure was used to ensure appropriate alignment to shareholder value over a specified timeframe. The following table sets out the key features of the plans with specific references to each of the 2015, 2016 and 2017 plans where they differ. Features Instrument Purpose Opportunity Description Performance rights being a right to receive a share subject to performance and vesting conditions. To motivate executives to achieve the long term performance targets. 50% of fixed remuneration The number of performance rights issued is determined by dividing the dollar opportunity by the prevailing share price of the Company at the date of issue. Dividends or share issues No dividends are paid or accrued on unvested awards. Gateway Hurdle Gateway hurdles of the grants across relevant measurement periods are as follows: Plan April 2015 July 2016 July 2017 Gateway 16.0% Return on equity No gateway hurdle No gateway hurdle Annual Report 2018 I 16 DIRECTORS’ REPORT For the year ended 31 March 2018 Features Description The April 2015 plan uses a Relative Total Shareholder Return (“RTSR”) performance hurdle solely while the July 2016 and July 2017 plans have two performance hurdles in equal tranches being the RTSR and an Earnings Per Share (“EPS”) hurdle. The company’s Relative Total Shareholder Return performance is measured against a comparator group of ASX listed companies (available on the website at www.thorn.com.au). RTSR was selected as an objective indicator of shareholder wealth criterion as it includes share price growth, dividends and other capital adjustments. Thorn Group Limited’s TSR Ranking April 2015 Grant < 50th percentile 50th percentile 50th to 90th percentile 90th percentile or greater July 2016 and July 2017 Grants < 50th percentile 50th percentile 50th to 75th percentile 75th percentile or greater Thorn Group Limited’s EPS Hurdle July 2016 and July 2017 Grants < 5% compound annual growth rate 5% to 10% = or > 10% CAGR Percentage of Performance Rights subject to TSR condition that qualify for vesting 0% 50% Assessed on a straight line basis 100% Percentage of Performance Rights subject to EPS condition that qualify for vesting 0% Assessed on straight line basis 100% Performance period and vesting dates  April 2015: 3 years (1 April 2015 to 31 March 2018). Vesting date is 1 June 2018.   July 2016: 3 years (1 July 2016 to 30 June 2019). Vesting date is 1 September 2019. July 2017: 3 years (1 July 2017 to 30 June 2020). Vesting date is 1 September 2020. Assessment, approval and payment At the end of each performance period, the Remuneration & Nomination Committee assesses the relevant performance measures and determines the extent to which the awards should vest. Change of control Termination Claw back provisions Payment is made by the issuing or transfer of shares. If a change of control occurs prior to the vesting of an award, then the Board may determine in its absolute discretion whether all or some of a participant’s unvested award vest, lapse, is forfeited, or continues. Unvested performance rights will lapse if performance conditions are not met. Performance rights will be forfeited on cessation of employment unless the Board determines at its absolute discretion otherwise. There are no specific provisions providing the capacity to clawback a component of remuneration in the event of a matter of significant concern. Calculation of the value of performance rights in the remuneration tables The value of performance rights issued to executives and included in the remuneration tables is a mathematical model calculation designed to show an intrinsic value. This is necessary to show the benefit attributable to the KMP in the year of issue but before that benefit is actually received by the KMP. The number of performance rights to be issued is derived from the relevant percentage of the executive’s fixed remuneration at the time of the grant divided by the share price at that time. This number of performance rights is then input into a Monte Carlo simulation model by an independent expert and which works out the intrinsic value of the performance rights using the expected volatility of the shares, the time period to testing date, and a number of other monetary factors as set out in the table below. The end result is an intrinsic value for each of the performance rights which is recorded in the books of the Company by allocating the expense to each reporting period evenly over the period from grant date to the vesting date. The table below outlines the factors and assumptions used in determining the fair value of performance rights at grant date. 17 I Thorn Group DIRECTORS’ REPORT For the year ended 31 March 2018 Grant date Initial Test date Expiry Date Fair Value Per Performance Right Exercise Price Price of Shares on Grant Date Expected Volatility Risk Free Interest Rate Dividend Yield 31 October 2015 1 June 2018 31 July 2018 1 July 2016 1 July 2017 1 September 2019 31 October 2019 1 September 2020 31 October 2020 $0.81 $0.97 $1.00 Nil Nil Nil $2.12 $1.45 $1.42 31.0% 33.0% 37.0% 1.8% 1.4% 1.9% 6.4% 5.9% 5.3% Long term incentive outcomes for 2018 The LTI plans have been designed to align to shareholder outcomes for earnings and share price. As the performance of the Company has fallen over the past three years, these plans have also fallen with the 2012 plan failing to meet its hurdles and all performance rights lapsing. Performance rights granted as compensation in the year Performance Rights Granted Tim Luce Peter Forsberg Wendy Yip David Lines Number 598,803 598,803 233,476 298,855 126,692 173,913 126,692 173,913 Date 15 February 2018 15 February 2018 1 July 2017 22 December 2017 1 July 2017 22 December 2017 1 July 2017 22 December 2017 Financial Year in which Grants Vest (ended 31 March) 2019 2020 2020 2019 2021 2019 2021 2019 Values Yet to Vest $ Min (a) Nil Max (b) - Nil Nil Nil Nil Nil Nil Nil - - - - - - - a) The minimum value of the performance rights to vest is nil as the performance rights criteria may not be met and consequently the performance rights may not vest. b) The maximum value of the performance rights yet to vest is not accurately determinable as it depends on the market price of shares of the Company on the Australian Securities Exchange at the date the performance rights are exercised. 5. ALIGNMENT BETWEEN REMUNERATION AND PERFORMANCE – AUDITED In considering the consolidated entity’s performance and benefits for shareholders’ wealth, the Board have regard to the following indices in respect of the current financial year and the four previous financial years. Year ending 31 March Profit After Tax (AUD millions) Earnings per share (cents) Dividends per share (cents) Share price at year end ($) Return on capital employed % Return on equity % 2018 (3.6) (2.3) 1.0 0.62 n/a n/a 2017 25.3 16.2 8.0 1.31 11.0 12.4 2016 20.1 13.1 11.5 1.82 11.1 10.4 2015 30.6 20.3 11.75 2.67 18.5 16.9 2014 28.2 18.9 10.5 2.15 21.8 17.2 Return on capital employed is calculated as EBIT divided by average capital employed (net debt plus book equity). Return on equity is calculated as NPAT divided by the average book equity. Annual Report 2018 I 18 DIRECTORS’ REPORT For the year ended 31 March 2018 6. SERVICE CONTRACTS FOR EXECUTIVE KMP - AUDITED The present contractual arrangements with executive KMPs are: Component Contract duration Notice by individual or company CEO Ongoing 6 months Senior executives Ongoing Range between 3 and 6 months Termination without cause Entitlement to pro-rata STI for the year. Termination with cause STI is not awarded and all unvested LTI will lapse Vested and exercised LTI can be exercised within a period of 30 days from termination Unvested LTI is forfeited unless the board decide at its absolute discretion otherwise. Board has discretion to award a greater or lesser amount. 7. OTHER STATUTORY DISCLOSURES - AUDITED LTI and Other performance rights available for vesting Details of the LTI and other performance rights available for vesting are detailed below: Initial Grant Type Number Date Tim Luce Sign-on 598,803 15 Feb 2018 Peter Forsberg Wendy Yip Sign-on 598,803 15 Feb 2018 LTI LTI LTI 72,257 31 Oct 2015 143,346 1 Jul2016 233,476 1 Jul 2017 Retention 298,855 1 Dec 2017 LTI LTI LTI 56,692 31 Oct 2015 115,180 1 Jul 2016 126,692 1 Jul 2017 Retention 173,913 1 Dec 2017 David Lines LTI 126,692 1 Jul 2017 Retention 173,913 1 Dec 2017 Matt Ingram James Marshall LTI LTI LTI LTI LTI LTI LTI LTI LTI 34,150 1 Jul 2014 30,271 31 Oct 2015 130,430 1 Jul 2016 63,291 63,291 63,291 66,556 7 Dec 2012 7 Dec 2012 7 Dec 2012 1 Jul 2014 103,695 1 Jul 2015 218,410 1 Jul 2016 Financial Years in Which Grant Vests (ending 31 March) Remaining Unvested Values Yet to Vest $ 2018 Movements on original grant Number Min (a) Max (b) Vested Forfeited Unvested 2019 2020 2019 2020 2021 2019 2019 2020 2021 2019 2021 2019 2018 2019 2020 2015-18 2016-18 2017-18 2018 2019 2020 598,803 598,803 Nil 143,346 233,476 298,855 Nil 115,180 126,692 173,913 126,692 173,913 - - - Nil Nil Nil Nil Nil Nil Nil Nil Nil Nil Nil Nil Nil Nil Nil Nil Nil Nil Nil Nil Nil Nil Nil Nil Nil Nil Nil - - Nil - - - Nil - - - - - Nil Nil Nil Nil Nil Nil Nil Nil Nil - - - - - - - - - - - - - - - - - - - - - - - 100% - - - 100% - - - - - 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% - 100% 100% 100% - 100% 100% 100% 100% 100% - - - - - - - - - a. b. The minimum value of the performance rights to vest is nil as the performance rights criteria may not be met and consequently the performance rights may not vest. The maximum value of the performance rights yet to vest is not accurately determinable as it depends on the market price of shares of the Company on the Australian Securities Exchange at the date the performance rights are exercised. However, for the purposes of this disclosure as the value of the shares at vesting date is not known, the maximum has not been disclosed and shown as ‘-’. 19 I Thorn Group DIRECTORS’ REPORT For the year ended 31 March 2018 Performance rights over equity instruments granted The movement during the year in the number of performance rights over ordinary shares in Thorn Group Limited held directly, indirectly or beneficially, by each key management person, including their related parties is as follows: Tim Luce Peter Forsberg Wendy Yip David Lines Matt Ingram James Marshall Held at 1 April 2017 Granted as Compensation Vested during the year Lapsed Forfeited Held at 31 March 2018 - 1,197,606 215,603 171,872 - 194,851 538,661 532,331 300,605 300,605 - - - - - - - - - - - - - - - 1,197,606 (72,257) (56,692) - (194,851) (538,661) 675,677 415,785 300,605 - - Shareholdings of the directors and executive KMP 2018 Name David Foster Joycelyn Morton Stephen Kulmar Andrew Stevens Belinda Gibson Tim Luce Peter Forsberg Wendy Yip David Lines Matt Ingram James Marshall Balance at the start of the year Received on vesting of incentives Other changes (bought and sold) Balance at the end of the year 26,970 91,994 68,000 15,720 - - 10,000 - - - 181,543 - - - - - - - - - - - 33,300 3,125 - - 20,000 - 25,000 10,000 - - 60,270 95,119 68,000 15,720 20,000 - 35,000 10,000 - - (171,543) 10,000 Other transactions with Directors or Executive KMP There were no loans made or outstanding to Directors or executive KMP during or at the end of the year. A director, Stephen Kulmar, is the founder of the retail consultancy Retail Oasis, which has the Company as one of its clients. During the year there were no engagements nor fees billed for services rendered but the Company reimbursed Retail Oasis $8,860 for costs incurred on behalf of Thorn employees. Accordingly Mr Kulmar is considered an independent director. LIKELY DEVELOPMENTS For further information about likely developments in the operations of the consolidated entity and the expected results of those operations in future financial years, please refer to the Operating and Financial Review. UNISSUED SHARES UNDER OPTIONS At the date of this report there are no unissued ordinary shares of the Company under option. Annual Report 2018 I 20 DIRECTORS’ REPORT For the year ended 31 March 2018 NON-AUDIT SERVICES During the year KPMG, the Company’s auditor, performed certain other services in addition to their statutory duties. 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 is compatible with, and did not compromise, the auditor independence requirements of the Corporations Act 2001 for the following reasons:  all non-audit services were subject to the corporate governance procedures adopted by the Company to ensure they do not impact the integrity and objectivity of the auditor;  the non-audit services provided do not undermine the general principles relating to auditor independence; and  as set out in APES110 Code of Ethics for Professional Accountants, they did not involve reviewing or auditing the auditor’s own work, acting in a management or decision making capacity for the Company, acting as an advocate for the Company or jointly sharing risks and rewards. Details of the amounts paid to the auditor of the consolidated entity, KPMG, and its related practices for audit and non-audit services provided during the year are set out in note 21. ROUNDING OF FINANCIAL AMOUNTS The Company is of a kind referred to in ASIC Instrument 2016/191 issued by the Australian Securities and Investments Commission and in accordance with that Instrument, amounts in the financial report and directors’ report have been rounded off to the nearest thousand dollars, unless otherwise stated. CORPORATE GOVERNANCE STATEMENT This statement outlines the main corporate governance practices in place throughout the financial year and can be referred to on Thorn Group website http://www.thorn.com.au/irm/content/corporate-governance.aspx?RID=303. AUDITOR’S INDEPENDENCE DECLARATION The Auditor’s independence declaration is set out on page 22 and forms part of the directors’ report for financial year ended 31 March 2018. This report is made in accordance with a resolution of the directors: David Foster Chairman Dated at Sydney 30 May 2018 21 I Thorn Group LEAD AUDITOR’S INDEPENDENCE DECLARATION Lead Auditor’s Independence Declaration under Section 307C of the Corporations Act 2001 Lead Auditor’s Independence Declaration under Section 307C of the Corporations Act 2001 To the Directors of Thorn Group Limited I declare that, to the best of my knowledge and belief, in relation to the audit of Thorn Group Limited for the financial year ended 31 March 2018 there have been: To the Directors of Thorn Group Limited no contraventions of the auditor independence requirements as set out in the Corporations Act 2001 in relation to the audit; and i. ii. I declare that, to the best of my knowledge and belief, in relation to the audit of Thorn Group Limited for the financial year ended 31 March 2018 there have been: no contraventions of any applicable code of professional conduct in relation to the audit. i. ii. no contraventions of the auditor independence requirements as set out in the Corporations Act 2001 in relation to the audit; and no contraventions of any applicable code of professional conduct in relation to the audit. KPMG KPMG KPM_INI_01 Anthony Travers Partner Sydney 30 May 2018 Anthony Travers Partner Sydney PAR_SIG_01 PAR_NAM_01 PAR_POS_01 PAR_DAT_01 PAR_CIT_01 30 May 2018 KPM_INI_01 PAR_SIG_01 PAR_NAM_01 PAR_POS_01 PAR_DAT_01 PAR_CIT_01 22 KPMG, an Australian partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. Liability limited by a scheme approved under Professional Standards Legislation. 22 Annual Report 2018 I 22 KPMG, an Australian partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. Liability limited by a scheme approved under Professional Standards Legislation. CONSOLIDATED STATEMENT OF PROFIT OR LOSS AND OTHER COMPREHENSIVE INCOME FOR THE YEAR ENDED 31 MARCH 2018 $’000 AUD Continuing operations Revenue Finance lease cost of sales Employee benefit expense Impairment losses on loans and receivables Marketing expenses Property expenses Transport expenses Communication & IT expenses Travel expenses Printing, stationery and postage Other expenses Depreciation & amortisation Impairment of intangibles Total operating expenses Earnings before interest and tax ("EBIT") Finance expenses Profit before income tax Income tax (Loss)/profit after tax from continuing operations* Discontinued operations Profit from discontinued operations, net of tax (Loss)/profit after tax for the year Other comprehensive income - items that may be reclassified subsequently to profit or loss Movement in fair value of cash flow hedges Total comprehensive income Earnings per share - continuing operations Basic earnings per share (cents) Diluted earnings per share (cents) Earnings per share Basic earnings per share (cents) Diluted earnings per share (cents) Notes 2018 2017 3 19 8 18 14 14 14 14 236,193 (55,635) (50,062) (30,695) (11,226) (10,566) (5,611) (6,080) (1,450) (2,272) (17,524) (9,422) (20,658) 277,597 (84,013) (54,678) (24,650) (13,228) (9,706) (5,856) (5,774) (1,779) (2,675) (19,770) (14,666) - (221,201) (236,795) 14,992 (15,681) (689) (5,774) (6,463) 2,839 (3,624) 193 (3,431) (4.06) (4.06) (2.28) (2.28) 40,802 (9,478) 31,324 (10,312) 21,012 4,296 25,308 (546) 24,762 13.45 13.45 16.20 16.20 * Restated to redirect the results of discontinued businesses, into one line above (Loss)/profit after tax. For details see note 18. The Consolidated Statement of Profit or Loss and Other Comprehensive Income is to be read in conjunction with the accompanying notes. 23 I Thorn Group CONSOLIDATED STATEMENT OF FINANCIAL POSITION AS AT 31 MARCH 2018 $’000 AUD Assets Cash and cash equivalents Trade and other receivables Income tax receivable Total current assets Trade and other receivables Property, plant and equipment Rental assets Intangible assets Total non-current assets Total assets Liabilities Trade payables Income tax payable Other payables Loans and borrowings Employee benefits Provisions Total current liabilities Loans and borrowings Deferred tax liabilities Employee benefits Provisions Total non-current liabilities Total liabilities Net assets Equity Issued capital Reserves Retained earnings Total equity Note 2018 2017 4 4 6 7 12 11 12 9 11 28,227 14,681 173,257 185,578 - 5,916 201,484 206,175 330,978 307,397 4,386 5,058 6,979 6,651 4,779 24,322 347,122 343,428 548,606 549,603 10,377 12,011 3,099 - 23,202 23,121 77,348 46,904 5,050 5,414 7,459 9,037 126,535 96,487 206,960 229,559 11,265 12,163 481 309 487 847 219,193 242,878 345,728 339,365 202,878 210,238 117,102 115,340 3,030 2,979 82,746 91,919 202,878 210,238 The Consolidated Statement of Financial Position is to be read in conjunction with the accompanying notes. Annual Report 2018 I 24 CONSOLIDATED STATEMENT OF CHANGES IN EQUITY FOR THE YEAR ENDED 31 MARCH 2018 Issue of shares under dividend reinvestment plan 5,486 $’000 AUD Balance at 1 April 2016 Net profit for the period Other comprehensive income Share based payments transactions Dividends to shareholders Balance at 31 March 2017 Balance at 1 April 2017 Net loss for the period Share capital Reserves Retained earnings Total Equity 109,854 - - - - 3,188 - (546) - 337 - 84,491 25,308 - - - (17,880) 197,533 25,308 (546) 5,486 337 (17,880) 115,340 2,979 91,919 210,238 115,340 2,979 91,919 210,238 - - (3,624) (3,624) Other comprehensive income - 193 - 193 Issue of shares under dividend reinvestment plan 1,762 - - 1,762 Share based payments transactions - (142) - (142) Dividends to shareholders Balance at 31 March 2018 - - (5,549) (5,549) 117,102 3,030 82,746 202,878 The Consolidated Statement of Changes in Equity is to be read in conjunction with the accompanying notes. 25 I Thorn Group CONSOLIDATED STATEMENT OF CASH FLOWS FOR THE YEAR ENDED 31 MARCH 2018 $’000 AUD Note 2018 2017* Cash flows from operating activities Cash receipts from customers Cash paid to suppliers and employees Acquisition of rental assets Equipment finance originations Cash generated from operations Net borrowing costs Income tax refund / (paid) Net cash used in operating activities Cash flows from investing activities Proceeds from sale of assets 784,696 621,320 (544,664) (425,366) 6 (54,194) (81,889) (208,827) (178,462) (22,989) (64,397) (15,681) (9,478) 803 (9,118) (37,867) (82,993) - 175 Acquisition of property, plant and equipment and software (3,895) (3,933) Net cash received on sale of subsidiaries 18 51,249 21,185 Net cash from investing activities 47,354 17,427 Cash flows from financing activities Proceeds from borrowings Repayment of borrowings Dividends paid Net cash from financing activities Net increase in cash and cash equivalents Cash and cash equivalents at April 1 Cash and cash equivalents at 31 March 189,458 166,333 (181,612) (87,743) (3,787) (12,392) 4,059 66,198 13,546 632 14,681 14,049 28,227 14,681  Presentation of the statement of cash flows The Group has made a voluntary change in accounting policy and accordingly amended the presentation of the statement of cash flows to reclassify acquisition of rental assets and equipment finance originations from investing activities to operating activities. This has also been reflected in the comparative. Had this change not occurred the operating cash flow in 2018 would have been $225,154,000 and in 2017 $177,358,000. The investing cash flow in 2018 would have been $(215,667,000) and in 2017 $(242,924,000). There has been no change in the fundamentals of the cash received or paid other than disclosure. The Consolidated Statement of Cash Flows is to be read in conjunction with the accompanying notes. Annual Report 2018 I 26 CONSOLIDATED STATEMENT OF CASH FLOWS FOR THE YEAR ENDED 31 MARCH 2018 Cash and cash equivalents $’000 AUD Bank balances Call deposits Cash and cash equivalents 2018 28,227 - 28,227 2017 14,681 - 14,681 Included in cash is an amount of $19,845,000 (2017: $8,043,000) held as part of the consolidated entity’s funding arrangements that are not available to the consolidated entity. This cash is held within the funding warehouse trust and as such is under the control of the Trustee. Free cash is therefore $8,382,000 (2017: $6,638,000). Reconciliation of cash flows from operating activities $’000 AUD Profit after tax Adjustments for: Depreciation, amortisation and goodwill impairment Equity settled transactions (Profit)/loss before tax on sale of subsidiary Loss on disposal of rental assets Operating profit before changes in working capital and provisions Changes in working capital and provisions, net of the effects of the sale of subsidiaries (Increase) in trade and other receivables (Increase) in rental assets (Decrease)/increase in deferred tax liability Decrease/(increase) in income tax receivables (Decrease) in trade and other payables (Decrease)/increase in provisions and employee benefits Net cash from operating activities The Consolidated Statement of Cash Flows is to be read in conjunction with the accompanying notes. 2018 2017 (3,624) 25,308 30,268 (142) (512) 14,843 337 1,033 98 1,559 26,088 43,080 (49,449) (136,773) (4,050) (1,222) 9,015 (5,688) 10,300 (553) (16,122) (2,167) (2,127) 8,808 (37,867) (82,993) 27 I Thorn Group NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS For the year ended 31 March 2018 1. SIGNIFICANT ACCOUNTING POLICIES Thorn Group Limited (the ‘Company’) is a company domiciled in Australia. The address of the Company’s registered office is Level 1, 62 Hume Highway, Chullora, NSW, 2190. The consolidated financial statements of the Company as at and for the financial year ended 31 March 2018 comprise the Company and its subsidiaries (together referred to as the ‘consolidated entity’). The principal activities of the consolidated entity were the leasing of household products, the provision of loans, commercial finance and the provision of receivables management services. (a) Statement of Compliance The consolidated financial statements are general purpose financial statements which have been prepared in accordance with Australian Accounting Standards (‘AASBs’) adopted by the Australian Accounting Standards Board (‘AASB’) and the Corporations Act 2001. The consolidated financial statements comply with International Financial Reporting Standards (‘IFRSs’) adopted by the International Accounting Standards Board (‘IASB’). The consolidated financial statements were approved by the Board of Directors on 30 May 2018. (b) Basis of Preparation The consolidated financial statements are presented in Australian dollars, which is the Company’s functional currency. The consolidated financial statements have been prepared on the historical cost. The Company is of a kind referred to in ASIC Instrument 2016/191 issued by the Australian Securities and Investments Commission and in accordance with that Instrument, amounts in the financial report and directors’ report have been rounded off to the nearest thousand dollars, unless otherwise stated. The preparation of the consolidated financial statements in conformity with Australian Accounting Standards requires management to make judgements, estimates and assumptions that affect the application of accounting policies and the reported amounts of assets, liabilities, income and expenses. The estimates and associated assumptions are based on historical experience and various other factors that are believed to be reasonable under the circumstances, the results of which form the basis of making the judgements about carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates. These accounting policies have been consistently applied by each entity in the consolidated entity. The estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognised in the period in which the estimate is revised if the revision affects only that period or in the period of the revision and future periods if the revision affects both current and future periods. In particular, information about significant areas of estimation, uncertainties and critical judgements in applying accounting policies that have the most significant effect on the amounts recognised in the financial statements include the following: (i) Valuation of goodwill and other intangibles. See note 7. (ii) Impairment of goodwill. See note 7. (iii) Longer term Consumer Rental asset depreciation. See note 6. (iv) Impairment of receivables. See note 10. The notes include information which is required to understand the financial statements and is material and relevant to the operations, financial position and performance of the Group. Information is considered material and relevant if: (i) The amount is significant because of its size or nature; (ii) It is important for understanding the results of the Group or changes in the Group’s business; and (iii) It relates to an aspect of the Group’s operations that is important to its future operations. Accounting Policies Accounting policies have been included within the underlying notes with which they relate where possible. The balance of accounting policies are detailed below: (c) Cost of Sales Finance lease costs of sales comprise the cost of the item sold less any accumulated depreciation. (d) Finance expenses Finance expenses comprise interest expense on borrowings, interest rate hedge costs and the amortisation of deferred borrowing costs. All borrowing costs are recognised in the profit or loss using the effective interest rate method. (e) Impairment Non-Financial Assets The carrying amounts of the consolidated entity’s assets, other than deferred tax assets are reviewed at each balance date to determine whether there is any indication of impairment. If any such indication exists, the asset’s recoverable amount is estimated. For goodwill the recoverable amount was estimated at each balance date. The recoverable amount of an asset or cash-generating unit is the greater of its value in use and its fair value less costs to sell. In assessing value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset. For the purpose of impairment testing, assets are grouped together into the smallest group of assets that generates cash inflows from continuing use that are largely independent of the cash inflows of other assets or groups of assets (the “cash-generating units”). The goodwill acquired in a business combination, for the purpose of impairment testing, is allocated to cash-generating units that are expected to benefit from the synergies of the combination. Annual Report 2018 I 28 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS For the year ended 31 March 2018 An impairment loss is recognised whenever the carrying amount of an asset or its cash-generating unit exceeds its recoverable amount. Impairment losses are recognised in the profit or loss, unless an asset has previously been re-valued, in which case the impairment loss is recognised as a reversal to the extent of that previous revaluation with any excess recognised through profit or loss. Impairment losses recognised in respect of cash-generating units are allocated first to reduce the carrying amount of any goodwill allocated to cash-generating units (group of units) and then, to reduce the carrying amount of the other assets in the unit (group of units) on a pro rata basis. Financial Assets The recoverable amount of the consolidated entity’s receivables carried at amortised cost is calculated as the present value of estimated future cash flows, discounted at the original effective interest rate (i.e. the effective interest rate computed at initial recognition of these financial assets). Impairment of receivables is not recognised until objective evidence is available that a loss event has occurred. Significant receivables are individually assessed for impairment. Impairment testing of receivables that are not assessed as impaired individually is performed by placing them into portfolios with similar risk profiles and undertaking a collective assessment of impairment, based on objective evidence from historical experience adjusted for any effects of conditions existing at each balance date. Reversals of Impairment Impairment losses, other than in respect of goodwill, are reversed when there is an indication that the impairment loss may no longer exist and there has been a change in the estimate used to determine the recoverable amount. An impairment loss in respect of goodwill is not reversed. An impairment loss is reversed only to the extent that the asset’s carrying amount does not exceed the carrying amount that would have been determined, net of depreciation or amortisation, if no impairment loss had been recognised. (f) Goods and Services Tax Revenue, expenses and assets are recognised net of the amount of goods and services tax (GST), except where the amount of GST incurred is not recoverable from the taxation authority. In these circumstances, the GST is recognised as part of the cost of acquisition of the asset or as part of the expense. Receivables and payables are stated with the amount of GST included. The net amount of GST recoverable from, or payable to, the ATO is included as a current asset or liability in the statement of financial position. Cash flows are included in the statement of cash flows on a gross basis. The GST components of cash flows arising from investing and financing activities which are recoverable from, or payable to, the ATO are classified as operating cash flows. (g) Changes in Accounting Policy All new Accounting Standards and Interpretations applicable to annual reporting periods commencing on or before 1 April 2017 have been applied to the consolidated entity effective from their required date of application. The initial application of these Standards and Interpretations has not had a material impact on the financial position or the financial results of the consolidated entity. Presentation of cashflow comparatives The Group has made a voluntary change in accounting policy and accordingly amended the presentation of the statement of cash flows to reclassify acquisition of rental assets and equipment finance originations from investing activities to operating activities. This has also been reflected in the comparative. Had this change not occurred the operating cash flow in 2018 would have been $225,154,000 and in 2017 $177,358,000. The investing cash flow in 2018 would have been $(215,667,000) and in 2017 $(242,924,000). There has been no change in the fundamentals of the cash received or paid other than disclosure. (h) New Standards and Interpretations Not Yet Adopted The following standards, amendments to standards and interpretations have been identified as those which may impact the consolidated entity in the period of initial application. AASB 9 and AASB 15 are effective 1 April 2018 and earlier application is permitted; however, the consolidated entity has not early adopted the new or amended standards in preparing these consolidated financial statements. The consolidated entity will apply the standard and amendments for the reporting periods beginning on the operative dates. The anticipated financial impact of applying these new standards is detailed below. The consolidated entity does not plan to adopt these standards early. AASB 9 Financial Instruments AASB 9 was issued in December 2014. When operative, this standard will replace AASB 139 Financial Instruments: Recognition and Measurement (AASB 139) and includes requirements for impairment, classification and measurement and general hedge accounting. Impairment AASB 9 replaces the incurred loss model under AASB139 with a forward-looking expected loss model. This model will be applied to financial assets measured at amortised cost, lease receivables, and certain loan commitments and financial guarantees. Under AASB 9, a three-stage approach is applied to measuring expected credit losses (‘ECL’) based on credit migration between the stages as follows: Stage 1: At initial recognition, a provision equivalent to 12 months ECL is recognised. 29 I Thorn Group NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS For the year ended 31 March 2018 Stage 2: Where there has been a significant increase in credit risk since initial recognition, a provision equivalent to full lifetime ECL is required. Stage 3: Similar to the current AASB 139 requirements for individual impairment provisions, lifetime ECL is recognised for loans where there is objective evidence of impairment. ECL are probability weighted and determined by evaluating a range of possible outcomes, taking into account the time value of money, past events, current conditions and forecasts of future economic conditions. Classification and measurement There are three measurement classifications under AASB 9: Amortised cost, fair value through profit or loss (‘FVTPL’) and, for financial assets, fair value through other comprehensive income (‘FVOCI’). Financial assets are classified into these measurement classifications taking into account the business model within which they are managed, and their contractual cash flow characteristics. The classification and measurement requirements for financial liabilities under AASB 9 are largely consistent with AASB 139 with the exception that for financial liabilities designated as measured at fair value, gains or losses relating to changes in the consolidated entity’s own credit risk are included in other comprehensive income. General hedge accounting AASB 9 introduces general hedge accounting requirements which more closely align with risk management activities undertaken when hedging financial and non-financial risks. Transition and impact AASB 9 has a date of initial application for the consolidated entity of 1 April 2018. The classification and measurement, and impairment requirements will be applied retrospectively by adjusting the opening balance sheet at the date of initial application, with no requirement to restate comparative periods. The consolidated entity does not intend to restate comparatives. AASB 9 provides an accounting policy choice to continue with AASB 139 Hedge Accounting given the International Accounting Standards Board’s ongoing project on macro hedge accounting. The consolidated entity’s current expectation is that it will continue to apply the hedge accounting requirements of AASB 139. The consolidated entity has assessed the estimated impact that the initial application of IFRS 9 will have on its consolidated financial statements. The impact is estimated to be an increase in the expected credit loss provision of between $8m to $13m which will be adjusted in opening returned earnings on initial application. This estimate is based on assessments undertaken to date, however, the consolidated entity continues to refine its assessment during the initial application period. AASB 15 Revenue from Contracts with Customers The new standard establishes a comprehensive framework for determining whether, how much and when revenue is recognised. It replaces existing revenue recognition guidance, including IAS 18 Revenue, and IFRIC 13 Customer Loyalty Programmes. AASB 15 is effective for annual reporting periods beginning on or after 1 January 2018, with early adoption permitted. The consolidated entity has not early adopted AASB 15. The consolidated entity has performed a review over its existing revenue streams and, applying the framework has not assessed any change in the quantum or timing of revenue recognition. Consequently, there is not expected to be a material impact on the consolidated entity’s financial statements in the period of initial application as of 1 April 2018. AASB 16 Leases AASB 16 replaces existing leases guidance, including IAS 17 Leases, IFRIC 4 Determining whether an Arrangement contains a Lease, SIC-15 Operating Leases – Incentives and SIC-27 Evaluating the Substance of Transactions Involving the Legal Form of a Lease. The standard is effective from 1 April 2019 and the consolidated entity are not early adopting this standard. AASB 16 Leases removes the lease classification test and requires all leases (including operating leases) to be brought onto the balance sheet. The definition of a lease is also amended and is now the new on/off balance sheet test for lessees. AASB 16 is effective for annual reporting periods beginning on or after 1 January 2019. Early adoption will be permitted for entities that also adopt AASB 15 Revenue from contracts with customers. The Consolidated entity is assessing the potential impact on its financial statements resulting from the application of AASB 16. Determining whether an arrangement contains a lease The Consolidated entity has an arrangement that was not in the legal form of a lease, for which it concluded that the arrangement contains a lease of equipment under IFRIC 4, as explained in Note 27(E) (i). On transition to AASB 16, the Consolidated entity can choose whether to: – apply the AASB 16 definition of a lease to all its contracts; or – apply a practical expedient and not reassess whether a contract is, or contains, a lease. The Consolidated entity plans to apply the practical expedient to grandfather the definition of a lease on transition. This means that it will apply AASB 16 to all contracts entered into before 1 January 2019 and identified as leases in accordance with IAS 17 and IFRIC 4. Annual Report 2018 I 30 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS For the year ended 31 March 2018 Transition As a lessee, the Consolidated entity can either apply the standard using a: – retrospective approach; or – modified retrospective approach with optional practical expedients. The lessee applies the election consistently to all of its leases. The Consolidated entity plans to apply AASB 16 initially on 1 April 2019, using the modified retrospective approach. Therefore, the cumulative effect of adopting AASB 16 will be recognised as an adjustment to the opening balance of retained earnings at 1 April 2019, with no restatement of comparative information. When applying the modified retrospective approach to leases previously classified as operating leases under IAS 17, the lessee can elect, on a lease-by-lease basis, whether to apply a number of practical expedients on transition. The consolidated entity is assessing the potential impact of using these practical expedients. The Consolidated entity is not required to make any adjustments for leases in which it is a lessor except where it is an intermediate lessor in a sub-lease. The Consolidated entity has completed an initial assessment of the potential impact on its consolidated financial statements but has not yet completed its detailed assessment. The actual impact of applying AASB 16 on the financial statements in the period of initial application will depend on future economic conditions, including the Consolidated entity’s borrowing rate at 1 April 2019, the composition of the Consolidated entity’s lease portfolio at that date, the Consolidated entity’s latest assessment of whether it will exercise any lease renewal options and the extent to which the Consolidated entity chooses to use practical expedients and recognition exemptions. So far, the most significant impact identified is that the consolidated entity will recognise new assets and liabilities for its operating leases of warehouse and factory facilities. As at 31 March 2018, the consolidated entity’s future minimum lease payments under non-cancellable operating leases amounted to $22,777,000 on an undiscounted basis (see note 5). In addition, the nature of expenses related to those leases will now change as AASB 16 replaces the straight-line operating lease expense with a depreciation charge for right-of-use assets and interest expense on lease liabilities. No significant impact is expected for the consolidated entity’s finance leases. 31 I Thorn Group NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS For the year ended 31 March 2018 2. SEGMENT REPORTING The Board and CEO (the chief operating decision maker) monitor the operating results of the two reportable segments which are the Consumer Leasing division which leases household products and the Equipment Finance division which provides financial products to small and medium enterprises including equipment leasing. Segment performance is evaluated based on operating profit or loss. Finance and income tax expense are not allocated to operating segments, as this type of activity is managed on a group basis. The Trade & Debtor Finance and Consumer Finance businesses were sold in 2018 and Receivables Management was sold in 2017. Comparatives for 2017 have been restated to show the impact of businesses sold in 2018 on the 2017 results. 2018 $’000 AUD Consumer Leasing Equipment Finance Trade & Debtor Finance (Discontinued operation) Consumer Finance (Discontinued operation) Receivables Management (Discontinued in 2017) Segment revenue 196,517 39,676 Operating expenses (162,885) (15,278) EBITDA Depreciation, amortisation and impairment EBIT Finance expense Profit before tax Segment assets Segment liabilities 33,632 24,398 (7,278) (242) 26,354 24,156 - - 26,354 24,156 173,121 (61,420) 326,247 - 9,927 (8,655) 1,272 (188) 1,084 - 1,084 - - 3,583 (1,123) 2,460 - 2,460 - 2,460 - - - - - - - - - - - Corporate Consolidated - 249,703 (12,958) (200,899) (12,958) 48,804 (22,560) (30,268) (35,518) (15,681) 18,536 (15,681) (51,199) 2,855 49,238 548,606 (284,308) (345,728) 2017 $’000 AUD Consumer Leasing Equipment Finance Segment revenue 251,175 26,422 Operating expenses (200,869) (9,828) EBITDA Depreciation, amortisation and impairment EBIT Finance Expense Profit before tax 50,306 16,594 (13,964) (480) 36,342 16,114 - - 36,342 16,114 Segment assets 193,396 239,268 Segment liabilities (61,693) - Trade & Debtor Finance (Discontinued in 2018) Consumer Finance (Discontinued in 2018) Receivables Management (Discontinued in 2017) Corporate Consolidated 11,227 (8,790) 2,437 (110) 2,327 - 2,327 45,852 (1,209) 9,871 (5,900) 3,971 (21) 3,950 - 3,950 21,448 - 7,084 - 305,779 (6,112) (11,432) (242,931) 972 (11,432) 62,848 (97) 875 (222) (14,894) (11,654) 47,954 - (9,478) (9,478) 875 (21,132) 38,476 - - 49,639 549,603 (276,463) (339,365) Annual Report 2018 I 32 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS For the year ended 31 March 2018 Reconciliations of reportable segment to IFRS measures $’000 AUD Revenue Total revenue for reportable segments Elimination of discontinued operations Consolidated Revenue Profit before tax Total profit before tax for reportable segments Elimination of discontinued operations Consolidated profit before tax from continuing operations 3. REVENUE $’000 AUD Operating leases Finance lease sales Interest 2018 2017 249,703 (13,510) 236,193 2,855 (3,544) (689) 2018 22,760 79,476 133,957 236,193 305,779 (28,182) 277,597 38,476 (7,152) 31,324 2017 42,421 116,840 118,336 277,597 Revenues are measured at the fair value of the consideration received or receivable net of the amount of goods and services tax (GST) payable to the taxation authority. The major components of revenue are recognised as follows:  Operating lease rental revenue is recognised on a straight line basis over the lease term, net of discounts. Revenue also arises from charges such as late fees, termination fees and damage liability reduction fees. These revenues are recognised when due and payable.  Finance lease sales revenue is recognised at the time the rental contract is entered into based on the fair value of the leased item, with interest income recognised over the life of the lease.  Interest revenue is calculated and charged on the average outstanding loan and lease balance and recognised on an accrual basis using the effective interest method. 4. TRADE AND OTHER RECEIVABLES $’000 AUD Current Trade receivables Finance lease receivables Other commercial receivables Loan receivables Lease deposits Other receivables and prepayments Non-current Finance lease receivables Loan receivables 2018 2017* 7,740 128,346 - 6,614 108,462 33,873 25,834 22,272 170 11,167 617 13,740 173,257 185,578 276,444 54,534 279,994 27,403 330,978 307,397  An adjustment was made to reclassify $23.6m of lease receivables as loan receivables and which has been reflected as a restatement of 2017 balances. This has resulted in a reduction of finance lease receivables net of impairment provisioning by $23.6m to $388.5m and an increase of loan receivables net of impairment provisioning by $23.6m to $49.7m. 33 I Thorn Group NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS For the year ended 31 March 2018 Finance lease receivables are recognised at the present value of the minimum lease payments less impairment losses. The present value is calculated by discounting the minimum lease payments due, at the interest rate implicit in the lease. Trade receivables, other commercial receivables, loan receivables and other receivables and prepayments are stated at their amortised cost less impairment losses. The other commercial receivables included amounts sold as part of the businesses sold during the year as disclosed in note 18. The consolidated entity’s exposure to credit risk and impairment losses related to trade and other receivables is disclosed in note 10. 5. LEASES Finance leases as lessor The consolidated entity has finance lease, hire purchase agreements and chattel mortgage contracts. The consolidated entity classifies longer term Consumer Rental contracts as finance leases where the term of the contract is 24 months, 36 months or 48 months. The asset rented has an estimated useful life equal to the contract length. The future minimum lease receipts under non-cancellable finance leases are as follows: $’000 AUD Lease receivables - less than one year Lease receivables - between one and five years Total Lease receivables 2018 2017* 251,504 241,137 353,726 370,742 605,230 611,879 Unearned interest income on finance leases - less than one year (97,341) (105,875) Unearned interest income on finance leases - between one and five years (78,015) (91,110) Total unearned interest income on finance leases Impairment provisioning Net Lease receivables  Certain 2017 balances have been restated. Refer to Note 4 for further details (175,356) (196,985) (25,084) (26,438) 404,790 388,456 Operating leases as lessor The consolidated entity leases out its rental assets under operating leases. The future minimum lease receipts under non-cancellable operating leases are as follows: $’000 AUD Less than one year Between one and five years Operating leases as lessee Non-cancellable operating lease rentals are payable as follows: $’000 AUD Less than one year Between one and five years 2018 2017 2,377 3,408 225 886 2,602 4,294 2018 8,968 13,809 2017 7,487 10,831 22,777 18,318 The consolidated entity leases all store and office premises under operating leases. The leases typically run for a period of 3-5 years, with an option to renew the lease after that date. The majority of the lease payments are increased every year to reflect market rentals. The consolidated entity also leases vehicles under operating leases. The lease term for these vehicles normally runs for a period of 4 years. The lease payments are set at the commencement of the lease for the term of the lease. The lease agreements for vehicles do not include contingent rentals. Annual Report 2018 I 34 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS For the year ended 31 March 2018 Payments made under operating leases are recognised in the profit or loss on a straight-line basis over the term of the lease. Lease incentives received are recognised in the profit or loss as an integral part of the total lease expense and spread over the lease term. Operating lease rental expenditure for the year ended 31 March 2018 was $11,302,000 (2017: $11,229,000). 6. RENTAL ASSETS $’000 AUD Opening balance Acquisitions Disposals Depreciation Transfers to finance leases Transfers from finance leases 2018 2017 6,651 13,809 54,194 81,889 (98) (1,559) (6,240) (11,740) (55,362) (85,237) 7,834 9,489 6,979 6,651 Recognition and measurement Rental assets represent purchased consumer goods held in store or delivered to end customers and earning revenue via operating lease arrangements. These assets are stated at cost less accumulated depreciation and accumulated impairment losses. Cost includes expenditure that is directly attributable to the acquisition of the asset. Depreciation is provided on rental assets and is calculated on a straight line basis so as to write-off the net cost of each asset over its estimated useful life. The estimated useful lives in the current and comparative periods are 2 to 6 years. The residual value, the useful life and the depreciation method applied to an asset are reassessed at least annually. Gains and losses on disposal of an item of rental assets are determined by comparing the proceeds from disposal with the carrying amount of the asset and recognised net within revenue in the profit or loss. The procedure for purchasing rental assets involves making deposit payments to suppliers and settling balances when delivery is complete. 7. INTANGIBLE ASSETS $’000 AUD Year ended 31 March 2017 Opening net carrying amount Additions Goodwill Software Total 20,658 4,866 25,524 - 839 839 Amortisation and Impairment charges for the year - (2,041) (2,041) Closing net book amount At 31 March 2017 Cost Amortisation and Impairment Net book amount 20,658 3,664 24,322 27,732 12,408 40,140 (7,074) (8,744) (15,818) 20,658 3,664 24,322 35 I Thorn Group NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS For the year ended 31 March 2018 $’000 AUD Year ended 31 March 2018 Opening net carrying amount Additions Amortisation and Impairment charges for the year Closing net book amount At 31 March 2018 Cost Amortisation and Impairment Net book amount Goodwill Goodwill Software Total 20,658 3,664 24,322 - 2,378 2,378 (20,658) - (1,263) (21,921) 4,779 4,779 - 14,786 14,786 - (10,007) (10,007) - 4,779 4,779 All business combinations are accounted for by applying the purchase method. Goodwill represents the difference between the cost of the acquisition and the fair value of the identifiable assets, liabilities of the acquired business. Goodwill is measured at cost less any accumulated impairment losses. Goodwill is allocated to cash-generating units and is tested annually for impairment. Other intangibles Other intangibles acquired as part of a business combination are recognised separately from goodwill. The assets are measured at fair value at the date of acquisition. Amortisation Amortisation is provided on all intangible assets excluding goodwill. Amortisation is calculated on a straight line basis so as to write-off the cost of each intangible asset over its estimated useful life. The estimated useful lives for software in the current and comparative periods are 3 – 8 years. The residual value, the useful life and the amortisation method applied to an intangible asset are reassessed at least annually. Impairment tests for Cash Generating Units (CGU) containing goodwill Valuation of goodwill and other intangibles Judgements are made with respect to identifying and valuing intangible assets on acquisition of new businesses. Impairment of goodwill Information about the assumptions and their risk factors relating to goodwill impairment is contained below. The consolidated entity assesses whether goodwill is impaired at least annually. The calculations include an estimation of the recoverable amount of the cash generating unit to which the goodwill is allocated. The following units have significant carrying amounts of goodwill: Carrying amount $’000 AUD Consumer leasing Business finance Total 2018 2017 - 15,604 - 5,054 - 20,658 The recoverable amount of the above CGU’s are determined based on a fair value less cost of sale calculation. The fair value measurement was categorised as a Level 3 fair value based on the inputs of the valuation techniques used. This is calculated based on the present value of cash flow projections over a 5 year period plus a terminal value and includes certain future strategic initiatives. The cash flow projections have been approved by the Board. These cash flow projections are derived from budgets submitted and approved by the board. The budget cash flow projections are based on empirical experience, industry trends and other specific expectations in the future. The method of calculation has changed from the previous year end where we used value in use. The change occurred due to the recoverable amount being deemed to be higher than the value in use. Annual Report 2018 I 36 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS For the year ended 31 March 2018 Key assumptions used for fair value less cost of sale calculations Consumer Leasing Testing using a fair value less cost of disposal revealed the carrying amount of the CGU exceeded its recoverable amount. An impairment charge for the total value of the intangible of the CGU of $15.6m has been recognised in the income statement for the year ended 31 March 2018. The impairment amount required the goodwill only to be written off with other assets including rental assets still being carried at book value. The circumstances that led to this impairment included lower than expected business performance since the previous year end which prompted a downgrade to the future outlook in terms of both growth and cash flows. The key assumptions used in the estimation of recoverable amount are set out as follows. Testing included a terminal value calculated using the cash flows for year 5 of the forecast period and a long-term growth rate of 2.0%. During the forecast period, revenue was assumed to grow at an average 0.7% which included installation growth of 13% between 2019 and 2022. Volume related costs have increased according to the increased volume during the testing period. Other costs have been either increased by CPI or contracted arrangements, or where reasonable kept flat with productivity savings assumption. The pre-tax discount rate is assumed at 11.3%. Following the impairment loss recognised in the Consumer Leasing CGU, the recoverable amount was equal to the carrying amount. Therefore, any adverse movement in a key assumption could lead to further impairment. Trade & Debtor Finance Testing using a fair value less cost of disposal revealed the carrying amount of the CGU exceeded its recoverable amount. An impairment charge for the total value of the intangible of the CGU of $5.1m has been recognised in the income statement for the year ended 31 March 2018. The impairment amount required the goodwill only to be written off with other assets still being carried at book value. The circumstances that led to this impairment included lower than expected business performance since the previous year end which prompted a downgrade to the future outlook in terms of both growth and cash flows. The key assumptions used in the estimation of the recoverable amount are set out as follows. Testing included a terminal value calculated using the cash flows for year 5 of the forecast period and a long-term growth rate of 2.0%. During the forecast period, revenue was assumed to grow at an average of 0.9% on the assumption of no book growth during the testing period. The pre-tax discount rate is assumed at 12.7%. Non-volume related costs were forecast flat during the testing period assuming productivity savings offsetting CPI increases. 8. INCOME TAX EXPENSE Recognised in the Income Statement $’000 AUD Current tax expense Current year Adjustment for prior year Deferred tax expense Origination and reversal of temporary differences Tax on discontinued operations 2018 2017 8,805 2,379 (542) (42) (1,272) 9,817 (1,217) (1,842) Total income tax expense in income statement 5,774 10,312 Numerical reconciliation between tax expense and pre-tax accounting profit $’000 AUD Profit before tax Prima facie income tax using the domestic corporation tax rate of 30% (2017: 30%) Change in income tax expense due to: Non-deductible expenses (Over) / Under provided in prior years 2018 2017 (689) 31,324 (207) 9,397 6,523 957 (542) (42) Income tax expense on pre-tax accounting profit 5,774 10,312 37 I Thorn Group NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS For the year ended 31 March 2018 9. DEFERRED TAX ASSETS & LIABILITIES Recognised deferred tax assets and liabilities $’000 AUD Rental assets Assets Liabilities Net 2018 2017 2018 2017 2018 2017 71,165 65,883 - - 71,165 65,883 Property, plant and equipment 698 602 Trade, loan and other receivables - 944 - (617) - 698 602 - (617) 944 Finance lease receivables - - (87,541) (85,972) (87,541) (85,972) Accruals Provisions 3,613 5,000 - - 3,613 5,000 1,417 1,380 - - 1,417 1,380 Tax assets / (liabilities) 76,893 73,809 (88,158) (85,972) (11,265) (12,163) Income tax Income tax expense comprises current and deferred tax. Income tax expense is recognised in the profit or loss except to the extent that it relates to items recognised directly in equity, in which case it is recognised in equity. Current tax is the expected tax payable on the taxable income for the year, using tax rates enacted or substantively enacted at the reporting date, and any adjustment to tax payable in respect of previous years. Deferred tax is recognised in respect of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for taxation purposes. Deferred tax is not recognised for the following temporary differences: initial recognition of goodwill, the initial recognition of assets or liabilities in a transaction that is not a business combination and that affects neither accounting nor taxable profit, and differences relating to investments in subsidiaries to the extent that it is probable that they will not reverse in the foreseeable future. Deferred tax is measured at the tax rates that are expected to be applied to the temporary differences when they reverse, based on the laws that have been enacted or substantively enacted by the reporting date. A deferred tax asset is recognised to the extent that it is probable that future taxable profits will be available against which the temporary difference can be utilised. Deferred tax assets are reviewed at each reporting date and are reduced to the extent that it is no longer probable that the related tax benefit will be realised. Tax consolidation Thorn Group Limited and its wholly-owned Australian resident entities have formed a tax-consolidated group with effect from 1 April 2003 and are therefore taxed as a single entity from that date. The head entity within the tax-consolidated group is Thorn Group Limited. Current tax expense/income, deferred tax liabilities and deferred tax assets arising from temporary differences of the members of the tax consolidated group are recognised in the separate financial statements of the members of the tax consolidated group using the group allocation approach by reference to the carrying amounts of assets and liabilities in the separate financial statements of each entity and the tax values applying under tax consolidation. Any current tax liabilities (or assets) and deferred tax assets arising from unused tax losses of the subsidiaries are assumed by the head entity in the tax-consolidated group and are recognised as amounts payable / (receivable) to / (from) other entities in the tax-consolidated group in conjunction with any tax funding arrangement amounts (refer below). Any difference between these amounts is recognised by the Company as an equity contribution or distribution. Thorn Group Limited recognises deferred tax assets arising from unused tax losses of the tax-consolidated group to the extent that it is probable that future taxable profits of the tax-consolidated group will be available against which the asset can be utilised. Any subsequent period adjustments to deferred tax assets arising from unused tax losses as a result of revised assessments of the probability of recoverability is recognised by the head entity only. Annual Report 2018 I 38 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS For the year ended 31 March 2018 Nature of Tax Funding Arrangements and Tax Sharing Arrangements The head entity, in conjunction with other members of the tax-consolidated group, has entered into a tax funding arrangement which sets out the funding obligations of members of the tax-consolidated group in respect of tax amounts. The tax funding arrangements require payments to/from the head entity equal to the current tax liability (asset) assumed by the head entity and any tax-loss deferred tax asset assumed by the head entity, resulting in the head entity recognising an inter-entity receivable (payable) equal in amount to the tax liability (asset) assumed. The inter-entity receivable (payable) are at call. Contributions to fund the current tax liabilities are payable as per the tax funding arrangement and reflect the timing of the head entity’s obligation to make payments for tax liabilities to the relevant tax authorities. The head entity in conjunction with other members of the tax-consolidated group has also entered into a tax sharing agreement. The tax sharing agreement provides for the determination of the allocation of income tax liabilities between the entities should the head entity default on its tax payment obligations. 10. FINANCIAL RISK MANAGEMENT Financial risk management objectives and policies The consolidated entity is exposed to financial risks through the normal course of its business operations. The key risks arising are credit risk, liquidity risk and market risk. The Board of Directors has overall responsibility for the establishment and oversight of the risk management framework. The Board has established the Audit, Risk & Compliance Committee, which is responsible for developing and monitoring risk management policies. The Committee reports regularly to the Board of Directors on its activities. Risk management policies are established to identify and analyse the risks faced by the consolidated entity, to set appropriate risk limits and controls, and to monitor risks and adherence to limits. Risk management policies and systems are reviewed regularly to reflect changes in market conditions and the consolidated entity’s activities. The consolidated entity, through training and management standards and procedures, aims to develop a disciplined and constructive control environment in which all employees understand their roles and obligations. The Audit, Risk & Compliance Committee oversees how management monitors compliance with the consolidated entity’s risk management policies and procedures and reviews the adequacy of the risk management framework in relation to the risks faced by the consolidated entity. Credit risk Credit risk is the risk of loss that arises when a customer or third party fails to pay an amount owing to the Company and is the most significant risk to the group. The maximum exposure to credit risk is represented by the carrying amount receivables and loans. The Group leases products to consumers (as well as consumer loans that are in run off) and provides business finance to SME’s pursuant to policies and procedures that are intended to ensure that there is no concentration of credit risk with any particular individual, company or other entity. The Group is subject to a higher level of credit risk due to the credit constrained nature of many of the Company’s customers and in circumstances where its policies and procedures are not complied with. The Group maintains a provision for receivable losses. The process for establishing the provision for losses is critical to the Group’s results of operations and financial condition. It is determined by the Group using a calculation that considers the relative maturity of the receivables and loans within the portfolio, the long term expected loss rates based on actual historical performance and the long-term expected losses for a vintage of loans over their life based on actual historical performance. To the extent that such historical data used to develop its allowance for loans losses is not representative or predictive of current book performance, the Group could suffer increased loan losses beyond those provided for on its financial statements. The Group cannot guarantee that delinquency and loss levels will correspond with the historical levels experienced and there is a risk that delinquency and loss rates could increase significantly and have a material adverse effect on the financial results of the Group. Credit risk grew in-line with the growth of the loan and lease receivables in all segments, except Consumer Finance where bad debt provisioning increased as a percentage of the loan receivables due to the proposed liquidation of the book. 39 I Thorn Group NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS For the year ended 31 March 2018 The carrying amount of the consolidated entity’s financial assets represents the maximum credit exposure. The consolidated entity’s net exposure to credit risk at the reporting date was: $’000 AUD Trade receivables Consumer finance lease receivables Business finance lease receivables Other commercial receivables Loan receivables Impairment losses 2018 2017 7,740 6,614 155,145 172,794 249,645 215,662 - 33,873 80,368 49,675 492,898 478,618 Trade receivables The consolidated entity assesses the impairment of receivables monthly. The calculations include an assessment of the expected rates of loss and for consumer lease receivables, also an estimate of collateral. The ageing of the consolidated entity’s trade receivables at the reporting date was: $’000 AUD Not past due Past due 0 - 30 days Past due 31+ days Gross 2018 Impairment 2018 Gross 2017 Impairment 2017 3,680 - 3,949 - 2,164 (544) 1,918 (384) 3,825 (1,385) 2,027 (896) 9,669 (1,929) 7,894 (1,280) The net value of trade receivables as at 31 March 2018 was $7,740,000 (2017: $6,614,000) The consolidated entity invoices its consumer rental customers in advance of the rental period. The revenue is not recognised in the financial statements until the due date of the invoice. Consumer finance lease receivables $’000 AUD Not past due Past due 0 - 30 days Past due 31+ days Gross 2018 Impairment 2018 Gross 2017 Impairment 2017 138,955 - (8,715) 160,603 17,888 (11,092) 16,196 16,147 19,850 - (11,898) (9,995) 174,952 (19,807) 194,687 (21,893) The net value of consumer finance lease receivables at 31 March 2018 was $155,145,000 (2017: $172,794,000). The provision reflects the risk to the consolidated entity of the expected early return or loss of products throughout the life of the contract. Collateral is held against the finance lease receivables in the form of the assets attached to the contract. In the event that the asset is returned due to early termination of the contract, the asset is available for rental on other contracts or disposal via cash sale. The book value of this collateral as at 31 March 2018 is $90,337,000 (2017: $106,581,000). Annual Report 2018 I 40 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS For the year ended 31 March 2018 Thorn Equipment finance lease receivables The ageing of the consolidated entity’s commercial finance lease receivables at the reporting date was: $’000 AUD Not past due Past due 0 - 30 days Past due 31+ days Gross 2018 238,284 9,232 Impairment 2018 Gross 2017* Impairment 2017* - 213,412 - - 4,051 (2,326) 7,406 (5,277) 2,743 254,922 (5,277) 220,206 (2,218) (4,544)  Certain 2017 balances have been restated. Refer to Note 4 for further details The net value of commercial finance lease receivables as at 31 March 2018 was $249,645,000 (2017: $215,662,000). Other commercial receivables The ageing of the consolidated entity’s other commercial receivables at the reporting date was: $’000 AUD Not past due Past due 0 - 30 days Past due 31+ days Gross 2018 - - - Impairment 2018 - - - Gross 2017 13,871 13,265 Impairment 2017 - - 7,745 (1,008) - - 34,881 (1,008) The net value of other commercial receivables as at 31 March 2018 was $nil (2017: $33,873,000). Loan receivables (Thorn Equipment Finance and remaining consumer solar loans) The ageing of the consolidated entity’s loan receivables at the reporting date was: $’000 AUD Not past due Past due 0 - 30 days Past due 31+ days Gross 2018 75,060 4,705 Impairment 2018 Gross 2017* Impairment 2017* - 48,624 - 1,210 1,616 (1,013) 333 - (162) (330) 81,381 (1,013) 50,167 (492)  Certain 2017 balances have been restated. Refer to Note 4 for further details The net value of loan receivables as at 31 March 2018 was $80,368,000 (2017: $49,675,000). Liquidity risk Liquidity risk is the risk that the Group’s financial condition is adversely affected by an inability to meet funding obligations and support its business growth. The Company manages its capital to maintain its ability to continue as a going concern and to provide adequate returns to shareholders by way of share appreciation and dividends. The capital structure of the Group consists of external debt and shareholders’ equity. The Group manages its capital structure and makes adjustments to it in light of economic conditions and the Group’s individual situation. The Group’s debt facilities must be renewed on a periodic basis. These facilities contain restrictions on the Group’s ability to, among other things, pay dividends, sell or transfer assets, incur additional debt, repay other debt, make certain investments or acquisitions, repurchase or redeem shares and engage in alternate business activities. The facilities also contain a number of financial and non-financial covenants. Failure to meet any of these covenants could result in an event of default under these facilities which could, in turn, allow the lender to declare all amounts outstanding to be immediately due and payable or the inability to draw down further. In such a case, the financial condition, liquidity and results of operations of the Group could materially suffer. The Group has been successful in renewing and expanding its debt facilities in the past to meet the needs of its growing equipment finance business. If the Group were unable to renew these facilities or unable to renew on acceptable terms when they became due, there could be a material adverse effect on the Group’s financial condition, liquidity and results of operations. 41 I Thorn Group NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS For the year ended 31 March 2018 Liquidity risk is managed through the adequate provision of funding and effective capital management policies. Thorn will look to diversify its funding sources to further mitigate this risk into the future. The following are the contractual maturities of the consolidated entity’s financial liabilities including, where applicable, future interest payments as at 31 March 2018. 31 March 2018 $’000 AUD Secured loan facilities Trade and other payables 31 March 2017 $’000 AUD Secured loan facilities Trade and other payables Carrying amount Contractual Cash flows 284,308 321,195 39,717 324,025 39,717 360,912 1 year or less 1-5 years 89,810 39,717 231,385 - - 129,527 231,385 - 5 years or more - Carrying amount 276,463 Contractual Cash flows 1 year or less 1-5 years 5 years or more 298,300 57,162 241,138 - 43,232 43,232 43,232 - - 319,695 341,532 100,394 241,138 - The consolidated entity’s access to financing arrangements is disclosed in note 12. Market risk Market risk is the risk that changes in market prices, such as interest rates and foreign currency that will affect the consolidated entity’s income. The objective of market risk management is to manage and control market risk exposures within acceptable parameters, while optimising returns. The consolidated entity has foreign currency risk on the purchase of rental assets directly imported that are denominated in USD. The consolidated entity manages its exposure to foreign currency risk by utilising forward exchange contracts where appropriate. Foreign currency risk The Group is also subject to currency risk related to the direct acquisition of rental assets from overseas suppliers. To mitigate this risk the group operates a foreign exchange risk policy. Group has historically been able to price its lease transactions to compensate for the impact of foreign currency fluctuations on its purchases. However, in periods of rapid change in an exchange rate, the Company may not be able to pass on such changes in the cost of purchased products to its customers which may negatively impact the Company’s financial performance. The Company currently does not actively hedge foreign currency risk and transacts in foreign currencies on a spot basis. Interest rate risk Interest rate risk is the risk the consolidated entity incurs financial loss due to adverse movement in interest rates. The consolidated entity is subject to interest rate risk on both its senior debt facility and the securitised warehouse. The consolidated entity purchases interest rate hedges to effectively fix the securitised warehouse liabilities which have a known term and predictable cash flows on the established book. No interest rate hedges have been purchased on the corporate senior debt facility. At the reporting date the interest rate profile of the consolidated entity’s interest bearing financial instruments was: $’000 AUD Financial assets Financial liabilities 2018 8,382 (284,308) 2017 6,638 (276,463) A change of one percent in interest rates at the reporting date would have increased or decreased the consolidated entity’s equity and profit or loss by $1,931,000 (2017: $1,889,000). Annual Report 2018 I 42 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS For the year ended 31 March 2018 Financial instruments Capital management The Board’s policy is to maintain a strong capital base so as to maintain investor, creditor and market confidence and to sustain future development of the business. The Board of Directors monitors the return on equity, which the consolidated entity defines as net profit after tax divided by the average of opening and closing equity. The Board of Directors also monitors the level of dividends to ordinary shareholders. Refer to note 13 for quantitative data. Non-derivative financial instruments Non-derivative financial instruments comprise trade and other receivables, cash and cash equivalents, loans and borrowings, and trade and other payables. Non-derivative financial instruments excluding financial assets at fair value through profit and loss are recognised initially at fair value plus transaction costs. Subsequent to initial recognition non-derivative financial instruments are measured at amortised cost less impairment losses. A financial instrument is recognised if the consolidated entity becomes a party to the contractual provisions of the instrument. Financial assets are derecognised if the consolidated entity’s contractual rights to the cash flows from the financial assets expire or if the consolidated entity transfers the financial asset to another party without retaining control or substantially all risks and rewards of the asset. Financial liabilities are derecognised if the consolidated entity’s obligation specified in the contract expire or are discharged or cancelled. Financial assets and liabilities are offset and the net amount presented in the statement of financial position when, and only when, the consolidated entity has a legal right to offset the amounts and intends either to settle on a net basis or realise the asset and settle the liability simultaneously. The consolidated entity recognises its financial assets at either amortised cost or fair value, depending on its business model for managing the financial assets and the contractual cash flow characteristics of the financial assets. The classification of financial assets that the consolidated entity held at the date of initial application was based on the facts and circumstances of the business model in which the financial assets were held at that date. Financial assets recognised at amortised cost are measured using the effective interest method, net of any impairment loss. Financial assets other than those classified as financial assets recognised at amortised cost are measured at fair value with any changes in fair value recognised in profit or loss. Financial assets designated at fair value comprise purchased debt ledgers. Fair values The fair values of the Company’s and consolidated entity’s financial assets and liabilities as at the reporting date are considered to approximate their carrying amounts. The fair value hierarchy Financial instruments carried at fair value require disclosure of the valuation method according to the following hierarchy: Level 1 – Quoted prices (unadjusted) in active markets for identical assets or liabilities. Level 2 – Inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly (i.e. as prices) or indirectly (i.e. derived from prices) Level 3 – Inputs for the asset or liability that are not based on observable market data. The consolidated entity’s financial instruments are measured at fair value. The Group’s only Level 2 instruments are forward foreign exchange contracts and an interest rate derivative. Other financial instruments including purchase debt ledgers are classified as Level 3. 43 I Thorn Group NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS For the year ended 31 March 2018 11. PROVISIONS 2018 $’000 AUD Opening balance Provisions made during the year Provisions used during the year Provisions reversed during the year Provisions reclassified to accruals Current Non-current 2017 $’000 AUD Opening balance Provisions made during the year Provisions used during the year Provisions reversed during the year Current Non-current Regulatory Regulatory Make good Total 8,100 450 - - (2,412) 6,138 6,138 - 1,784 596 9,884 1,046 (481) (91) - 1,808 1,321 487 (481) (91) (2,412) 7,946 7,459 487 6,138 1,808 7,946 Regulatory Make good - 8,100 - - 1,700 299 (144) (71) Total 1,700 8,399 (144) (71) 8,100 1,784 9,884 8,100 - 937 847 9,037 847 8,100 1,784 9,884 Regulatory provision represents amounts set aside for potential customer remediation, penalties and costs of engaging expert advice. During the year $2,412,000 was reclassified to accruals and represents actual or specific amounts known to be payable rather than estimated. Make good – lease premises Make good provision represent expected costs of returning lease premises to an appropriate condition upon termination of rental contract. 12. LOANS AND BORROWINGS $’000 AUD Current liabilities Secured loans Non-Current liabilities Secured loans 2018 2017 77,348 46,904 206,960 229,559 284,308 276,463 Borrowings are recognised initially at fair value less attributable transaction costs. Subsequent to initial recognition, borrowings are stated at amortised cost with any difference between cost and redemption value being recognised in the profit or loss over the period of the borrowings on an effective interest basis. Annual Report 2018 I 44 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS For the year ended 31 March 2018 Financing loan facilities $’000 AUD 2018 2017 Secured corporate loan facility A & B (Maturity 30 November 2019) 70,000 110,000 Utilised Available headroom Secured corporate loan facility C Utilised Available headroom Securitised warehouse facility Utilised Available headroom Total loan facilities Utilised (41,000) (94,400) 29,000 15,600 - 65,000 - (30,000) - 35,000 250,000 180,000 (243,308) (152,063) 6,692 27,937 320,000 355,000 (284,308) (276,463) Secured loan facilities not utilised at reporting date 35,692 78,537 The Group continues to be funded by one Australian major bank. That bank and the Company entered into a facility variation agreement during the year which required the Company to undertake progressive debt repayments and meet new covenants. These progressive repayments will reduce the facility limit to $50m by 30 September 2018. The corporate facilities terminate on 30 November 2019 with the bank having the right to a scheduled review of the facility on and from 30 September 2018 resulting from which they may issue a change notice for the conditions of the facility including its cost, margin, limit or terms and conditions. The corporate facilities are secured by a fixed and floating charge over the assets of the consolidated entity. The warehouse facility is secured by rentals and payments receivable from the underlying lease receivable contracts and is non-recourse to the Group. The amounts due and payable on the warehouse loan facility in the next 12 months are disclosed as current. At maturity no further leases are able to be sold down into the facility and the portfolio will amortise off for as long as the underlying leases are payable. The warehouse facility has been extended from $180m to $250m and has an availability period to 16 December 2018 and a final maturity date of 16 December 2021. For more information about the consolidated entity’s exposure to interest rate risk and liquidity risk see note 10. 13. CAPITAL AND RESERVES Number of shares On issue at the beginning of year 2018 2017 158,246,851 154,466,886 Issue of new shares on vesting of performance rights - - Issue of shares under dividend investment plan 1,682,731 3,779,965 159,929,582 158,246,851 Ordinary shares are classified as equity. Incremental costs directly attributable to issue of ordinary shares and performance rights are recognised as a deduction from equity net of any tax effects.  Holders of ordinary shares are entitled to receive dividends as declared from time to time and are entitled to one vote per  share at shareholder’s meetings. In the event of the winding up of the Company ordinary shareholders rank after all other shareholders and creditors and are fully entitled to any proceeds of liquidation.  The Company does not have authorised capital or par value in respect of its issued shares. Equity remuneration reserve The equity remuneration reserve represents the value of performance rights issued. 45 I Thorn Group NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS For the year ended 31 March 2018 Dividends Dividends are recognised as a liability in the period in which they are declared. Dividends recognised in the current year by the Company are: 2018 Final 2017 Interim 2018 Total amount 2017 Final 2016 Interim 2017 Total amount Cents per share Amount $’000 AUDs Franking % Date of payment 2.5 1 6 5.5 3,956 1,593 5,549 9,268 8,612 17,880 100% 100% 18 July 2017 19 January 2018 100% 100% 18 July 2016 20 January 2017 Franked dividends declared or paid during the year were franked at the tax rate of 30%. There was no dividend declared after the balance date. Dividend franking account $’000 AUD 30% franking credits available to shareholders of Thorn Group Limited 2018 36,930 2017 31,559 The above available amounts are based on the balance of the dividend franking account at year end adjusted for:    franking credits that will arise from the payment of the current tax liabilities franking debits that will arise from the payment of dividends recognised as a liability at the year-end; and franking credits that the entity may be prevented from distributing in subsequent years. The ability to utilise the franking credits is dependent upon there being sufficient available profits to declare dividends. Dividend Reinvestment Plan (DRP) The consolidated entity has operated a DRP during the financial year. An issue of shares under the dividend investment plan results in an increase in issued capital. The DRP allows eligible shareholders to elect to invest dividends in ordinary shares which rank equally with the Company’s ordinary shares. All holders of the Company ordinary shares are eligible to participate in the plan. The issue price for the shares acquired under the DRP will be a price derived from the arithmetic average of the daily volume weighted average market price per Company shares during the five trading days commencing on the second trading day following the Record Date for the relevant dividend, less any discount the directors may determine from time to time and announce to the Australian Stock Exchange. In accordance with the Company’s DRP 1,682,731 (2017: 3,779,965) new ordinary shares were issued during this financial year to the value of $1,761,224 (2017: $5,486,179). Annual Report 2018 I 46 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS For the year ended 31 March 2018 14. EARNINGS PER SHARE The consolidated entity presents basic and diluted earnings per share (EPS) data for its ordinary shares. Basic earnings per share Basic EPS is calculated by dividing the profit or loss attributable to ordinary shareholders of the Company by the weighted average number of ordinary shares outstanding during the period. The calculation of basic earnings per share at 31 March 2018 was based on the loss attributable to ordinary shareholders of $3,624,000 (2017: profit $25,308,000) and a weighted average number of ordinary shares during the year ended 31 March 2018 of 159,094,096 (2017: 156,266,756). Diluted earnings per share Diluted EPS is determined by adjusting the profit or loss attributable to ordinary shareholders and the weighted average number of ordinary shares outstanding for the effects of all dilutive potential ordinary shares, which comprise performance rights granted to employees. The calculation of diluted earnings per share at 31 March 2018 was based on the loss attributable to ordinary shareholders of $3,624,000 (2017: profit $25,308,000) and a weighted average number of ordinary shares during the year ended 31 March 2018 of 159,094,096 (2017: 156,266,756) which includes performance rights granted. $’000 AUD Earnings per share 2018 2017 Profit attributable to ordinary shareholders (basic) $’000 AUD Profit attributable to ordinary shareholders (basic and diluted) - continuing operations Profit attributable to ordinary shareholders (basic and diluted) (6,463) (3,624) 21,012 25,308 158,247 847 159,094 158,247 847 159,094 (4.06) (4.06) (2.28) (2.28) 154,467 1,800 156,267 154,467 1,800 156,267 13.45 13.45 16.20 16.20 Weighted average number of ordinary shares (basic) ‘000’s Issued ordinary shares at 1 April Effect of shares issued Weighted average number of ordinary shares for the year Weighted average number of ordinary shares (diluted) ‘000’s Issued ordinary shares at 1 April Effect of shares issued Weighted average number of ordinary shares for the year Earnings per share - continuing operations Basic earnings per share (cents) Diluted earnings per share (cents) Earnings per share Basic earnings per share (cents) Diluted earnings per share (cents) 47 I Thorn Group NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS For the year ended 31 March 2018 15. CONSOLIDATED ENTITIES Parent entity Thorn Group Limited Subsidiaries Thorn Australia Pty Ltd Eclipse Retail Rental Pty Ltd Rent Try Buy Pty Ltd Thorn Personal Finance Pty Ltd 1st Cash Pty Ltd Thorn Equipment Finance Pty Ltd Thorn Finance Pty Ltd Thorn ABS Warehouse Trust No. 1 Cash Resources Australia Pty Ltd Cash Resources Australia Unit Trust Basis of consolidation Country of Incorporation Ownership Interest 2018 2017 Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia 100% 100% 100% - - 100% 100% 100% - - 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% Subsidiaries Subsidiaries are entities (including special purpose entities) controlled by the consolidated entity. The consolidated entity controls an entity when 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 over the entity. The financial statements of subsidiaries are included in the consolidated financial statements from the date that control commences until the date that control ceases. Intra-group balances, and any unrealised income and expenses arising from intra-group transactions, are eliminated in preparing the consolidated financial statements. The consolidated entity has established a special purpose entity (SPE), Thorn ABS Warehouse Trust No.1, for the purpose of securitising finance lease receivables acquired and other receivables it intends to originate. The SPE entity is wholly owned by the consolidated entity and included in the consolidated financial statements, based on the evaluation of the substance of its relationship with the consolidated entity and the SPE’s risks and rewards. The following circumstances indicate a relationship in which the consolidated entity controls and subsequently consolidates the SPE:  The activities of the SPE are being conducted on behalf of the consolidated entity according to its specific business needs so that the consolidated entity obtains benefits from the SPE’s operation.  The consolidated entity has the decision making powers to obtain the majority of the benefits of the activities of the SPE.  The consolidated entity retains the majority of the residual of ownership risks of the SPE or its asset in order to obtain benefits from its activities. Annual Report 2018 I 48 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS For the year ended 31 March 2018 16. DEED OF CROSS GUARANTEE Pursuant to ASIC Corporations Instrument 2016/914 certain wholly owned subsidiaries are relieved from the Corporations Act 2001 requirements for preparation, audit and lodgement of financial reports, and directors’ reports. It is a condition of the Corporates Instrument that the Company and each of the subsidiaries enter into a Deed of Cross Guarantee. The effect of this is that the Company guarantees to each creditor payment in full of any debt in the event of winding up of any of the subsidiaries under certain provisions of the Corporations Act 2001. If a winding up occurs under other provisions of the Act, the Company will only be liable in the event that after six months any creditor has not been paid in full. The subsidiaries have also given similar guarantees in the event that the Company is wound up. The subsidiaries subject to the Deed are listed in note 15 (excluding Thorn ABS Warehouse Trust No. 1). The consolidated Statement of Comprehensive Income comprising of entities which are parties to the Deed, after eliminating all transactions between parties to the Deed of Cross Guarantee, at 31 March 2018, is the same as the consolidated Statement of Comprehensive Income in this financial report. The consolidated Statement of Financial Position in this financial report includes the assets and liabilities of Thorn ABS Warehouse Trust No. 1. Excluding the Thorn ABS Warehouse Trust No. 1, cash and cash equivalents would decrease by $14,517,000 and trade and other payables would decrease by $14,517,000. 17. PARENT ENTITY DISCLOSURES As at, and throughout, the financial year ending 31 March 2018 the parent entity of the consolidated entity was Thorn Group Limited. $’000 AUD Result of Parent Entity Profit for the period Other comprehensive income 2018 2017 5,549 17,880 193 (546) Total comprehensive income for the period 5,742 17,334 Financial position of the parent entity at year end Current assets Total assets Current liabilities Total liabilities Total equity of the parent comprising Share capital Equity remuneration reserve Total Equity 3,099 134,495 3,099 14,363 117,102 3,030 120,132 5,916 136,398 5,916 18,079 115,340 2,979 118,319 The parent entity has entered into a Deed of Cross Guarantee with the subsidiaries. Further details of the Deed of Cross Guarantee and the subsidiaries subject to the deed are disclosed in note 15 and note 16. 49 I Thorn Group NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS For the year ended 31 March 2018 18. DISPOSAL OF SUBSIDIARY With effect from 1 November 2017, the Thorn Financial Services business was sold to a third party. The Group received $13.3m cash on settlement. With effect from 26 February 2018, the Thorn Debtor Finance business was sold to a third party. The Group received $37.9m cash on settlement. The NCML Receivables Management business was sold in the prior year to a third party in September 2016 and during this financial year the Group received a further $293,000 following a completion audit. (a) A. Result of discontinued operations $’000 AUD Revenue Expenses Results from operating activities Income tax Results from operating activities, net of tax Gain/(loss) on sale of discontinued operation Income tax on sale of discontinued operation 2018 13,510 2017 28,182 (9,966) (21,030) 3,544 7,152 (1,063) (2,146) 2,481 5,006 512 (1,014) (154) 304 Profit (loss) from discontinued operations, net of tax 2,839 4,296 (b) Cash flow from /(used in) discontinued operation $’000 AUD Net cash used in operating activities Net cash from investing activities Net cash flows for the year (c) Effect of disposal on the financial position of the Group $’000 AUD Cash and cash equivalents Trade and other receivables Deferred tax asset Property, plant and equipment Trade and other payables Employee benefits Provisions Net assets and liabilities Consideration received, satisfied in cash Cash and cash equivalents disposed of Net cash inflows 2018 (463) 51,249 2017 (2,383) (19) 50,786 (2,402) 2018 2017 - (415) (49,587) (23,685) (323) (519) (97) (216) 255 1,341 38 801 (1,023) 60 (50,737) (22,633) 51,249 21,600 - (415) 51,249 21,185 Annual Report 2018 I 50 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS For the year ended 31 March 2018 19. EMPLOYMENT BENEFITS EXPENSE $’000 AUD Wages and salaries 2018 2017 46,013 49,848 Contributions to defined contribution superannuation funds 3,697 3,775 Termination benefits Equity settled share-based payment transactions 20. RELATED PARTIES Key management personnel remuneration $’000 AUD Short-term employee benefits Post-employment benefits Long-term employee benefits Share based payments 494 718 (142) 337 50,062 54,678 2018 2,930 479 3 (329) 3,083 2017 2,982 151 38 235 3,406 Individual directors and executives compensation disclosures Information regarding individual director’s and executive’s compensation and some equity instruments disclosures as required by Corporations Regulation 2M.3.03 is provided in the remuneration report section of the directors’ report. There were no loans made or outstanding to Directors or executive KMP during or at the end of the year. A director, Stephen Kulmar, is the founder of the retail consultancy Retail Oasis, which has the Company as one of its clients. During the year there were no engagements nor fees billed for services rendered but the Company reimbursed Retail Oasis $8,860 for costs incurred on behalf of Thorn employees. Accordingly Mr Kulmar is considered an independent director. No other director has entered into a material contract with the company or the consolidated entity since the end of the previous financial year and there were no material contracts involving directors’ interests existing at year end. 21. AUDITORS’ REMUNERATION In whole AUD Audit services KPMG Australia: Audit and review of financial reports Compliance assurance services Disposal of subsidiary related audit services Total Audit Services Other services KPMG Australia: Taxation services – compliance and advice Regulatory advisory* Risk consulting services Other services Total Other Services Total Auditor’s Remuneration 2018 2017 574,650 26,500 15,000 616,150 234,380 - 127,285 109,397 471,062 1,087,212 367,000 36,000 33,500 436,500 132,989 180,000 112,848 18,525 444,362 880,862 * In 2017 the regulatory advisory assignment was a one-off non-recurring item and KPMG were contracted as they were best placed for that particular work. 51 I Thorn Group NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS For the year ended 31 March 2018 22. CONTINGENT LIABILITY Class action The Thorn subsidiary running Radio Rentals was named on 29 March 2017 as the respondent to a class action proceeding that has been commenced by one of its customers in the Federal Court of Australia. The statement of claim relates to misleading, deceptive and unconscionable conduct, false representations and unfair contract terms. The matter will be vigorously defended and is expected to take some time, possibly years, to resolve. No provision has been taken in these accounts. Legal fees will be incurred defending the matter over the period of that defence should the matter proceed. 23. FINANCING AND GOING CONCERN BASIS At the half year ended 30 September 2017, the Company had breached two of its bank covenant financial ratios. The bank formally waived the breach and instituted a facility variation deed which required the Company to undertake progressive debt repayments and meet new covenants. The facility variation deed reduced the facility limit to $90m by 31 December 2017, $70m by 30 June 2018, and $50m by 30 September 2018. Directors were confident the company could meet these progressive repayments and indeed the corporate debt facility was paid down to $41m in February 2018 utilising operational cash flows and proceeds from the sale of Thorn Financial Services and Trade & Debtor Finance. Subsequent to the financial year end, the bank has instituted a further facility variation deed which has removed one of the previous tightening financial covenants and applied a replacement earnings based covenant. The facility variation deed entered into at the half year provided for the facility termination date to be extended to 30th November 2019 with the bank having the right to conduct an independent review of the facility on 30th September 2018 and to amend the facility terms. The directors are confident the company has a number of alternative funding options available if required. Accordingly, the directors are satisfied that the going concern basis should be adopted in preparing this financial report. 24. SUBSEQUENT EVENTS ASIC The Company attended a Federal Court hearing for the ASIC v Thorn Australia Pty Ltd regulatory matter on 16 May at which the Court ordered Thorn to pay a pecuniary penalty of $2 million and reimburse ASIC’s agreed costs. This was as previously advised to the ASX on 23 January 2018. Annual Report 2018 I 52 DIRECTORS’ DECLARATION For the year ended 31 March 2018 Directors’ declaration In the opinion of the directors of Thorn Group Limited (the ‘Company’): 1. (a) the financial statements and notes that are set out on pages 23 to 52 and the remuneration disclosures that are contained in the Remuneration Report in the Directors' report are 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 March 2018 and of its performance for the financial year ended on that date; and (ii) complying with Australian Accounting Standards and the Corporations Regulations 2001; (b) (c) the financial report also complies with International Financial Reporting Standards as disclosed in note 1(a); and there are reasonable grounds to believe that the Company will be able to pay its debts as and when they become due and payable. 2. There are reasonable grounds to believe that the Company and the consolidated entities identified in note 15 will be able to meet any obligations or liabilities to which they are or may become subject to by virtue of the Deed of Cross Guarantee between the Company and the consolidated entities pursuant to ASIC Corporations Instrument 2016/914. 3. The directors have been given the declarations required by Section 295A of the Corporations Act 2001 from the Chief Executive Officer and Chief Financial Officer for the financial year ended 31 March 2018. Signed in accordance with a resolution of the directors. David Foster Chairman Dated at Sydney 30 May 2018 53 I Thorn Group Independent Auditor’s Report To the shareholders of Thorn Group Limited, Report on the audit of the Financial Report Opinion We have audited the Financial Report of Thorn Group Limited (the Company). In our opinion, the accompanying Financial Report of the Company is in accordance with the Corporations Act 2001, including: (cid:120) (cid:120) giving a true and fair view of the Group’s financial position as at 31 March 2018 and of its financial performance for the year ended on that date; and complying with Australian Accounting Standards and the Corporations Regulations 2001. The Financial Report comprises the: (cid:120) Consolidated statement of financial position as at 31 March 2018; (cid:120) Consolidated statement of profit or loss and other comprehensive income, consolidated statement of changes in equity, and consolidated statement of cash flows for the year then ended; (cid:120) Notes including a summary of significant accounting policies; and (cid:120) Directors’ Declaration. The Group consists of the Company and the entities it controlled at the year end and from time to time during the financial year. Basis for opinion We conducted our audit in accordance with Australian Auditing Standards. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion. Our responsibilities under those standards are further described in the Auditor’s responsibilities for the audit of the Financial Report section of our report. We are independent of the Group in accordance with the 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 fulfilled our other ethical responsibilities in accordance with the Code. Key Audit Matters The Key Audit Matters we identified are: (cid:120) Going concern basis of accounting; (cid:120) Finance lease receivables impairment provision; (cid:120) Valuation of goodwill; and (cid:120) Regulatory provisions. Key Audit Matters are those matters that, in our professional judgment, 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. KPMG, an Australian partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. Liability limited by a scheme approved under Profession Standards Legislation. Annual Report 2018 I 54 Going concern basis of accounting Refer to Note 23 to the Financial Report The key audit matter How the matter was addressed in our audit Our procedures included: (cid:120) We analysed the cash flow projections by: - - Evaluating the underlying data used to generate the projections. We specifically looked for their consistency with those used by the Directors, and tested by us, as set out in the valuation of goodwill key audit matter, their consistency with the Group’s intentions, as outlined in Director’s minutes and strategy documents, and their comparability to past practices; and Analysing the impact of reasonably possible changes in projected results and their timing. Assessing the resultant impact to the ability of the Group to comply with the revised bank covenants. The specific areas we focused on were informed from our test results of the accuracy of previous Group results projections and sensitivity analysis on key results projection assumptions. (cid:120) We assessed significant non-routine forecast cash inflows for feasibility, quantum and timing, and their impact to going concern and funding conditions. We used our knowledge of the Group, its industry and status to assess the level of associated uncertainty. (cid:120) We read correspondence with existing and potential financiers to understand and assess the options available to the Group including renegotiation of existing debt facilities, waivers related to financial loan covenants and negotiation of additional or revised funding arrangements. (cid:120) We evaluated the Group’s going concern disclosures in the financial report by comparing them to our understanding of the matter, the events or conditions incorporated into the cash flow projection assessment, the Group’s plans to address those events or conditions, and accounting standard requirements. The Group’s use of the going concern basis of accounting and the associated extent of uncertainty is a key audit matter due to the high level of judgement required by us in evaluating the Group’s assessment of going concern and the events or conditions that may cast significant doubt on its ability to continue as a going concern. These are outlined in Note 23. The Directors have determined that the use of the going concern basis of accounting is appropriate in preparing the financial report. Their assessment of going concern was based on cash flow projections. The preparation of these projections incorporated a number of assumptions and significant judgements, and the Directors have concluded that the range of possible outcomes considered in arriving at this judgement does not give rise to a material uncertainty casting significant doubt on the Group’s ability to continue as a going concern. We critically assessed the level of uncertainty, as it related to the Group’s ability to continue as a going concern, within these assumptions and judgements, focusing on the following: (cid:120) (cid:120) (cid:120) the Group’s planned levels of operational revenue and expenditures, and the ability of the Group to manage cash outflows within available funding; the Group’s ability to meet financing commitments and loan covenants. This included the nature of planned methods to achieve this, their feasibility and progress of those plans; and the Group’s plans to undertake certain corporate actions, as options for the projected raising of cash. This included the feasibility, projected timing and quantum of potential proceeds. In assessing this key audit matter, we involved senior audit team members who understand the Group’s business, industry and the economic environment it operates in. 55 I Thorn Group Finance lease and loan receivables impairment provision ($26,097,000) Refer to Note 10 to the Financial Report The key audit matter How the matter was addressed in our audit The Group estimate impaired finance lease and loan receivables collectively, by categorising lease and loan receivables into portfolios with similar risk profiles, and using historical experience of actual-category impairment losses adjusted for any effects of conditions existing at the balance date. We focused on this area as a key audit matter due to the relative magnitude of both finance lease and loan receivable impairment provisions recognised and complexity of the Rent Try Buy 48 month (“RTB 48”) impairment provision which necessitated significant audit effort. We focused on the following significant assumptions: (cid:120) (cid:120) ‘expected loss’ of products in the remaining life of the contract. The expected loss reflects the risk of non-recoverability of the receivable and the risk that the customer has also absconded with an asset after the cancellation of the contract. (cid:120) specifically for the RTB 48 portfolio of receivables, the extended length of maturity, compared to other categories, increases the risk of non-recoverability. This portfolio contains lease contracts, with a limited number that have gone to term, therefore, there is a limited profile of historical impairment losses with which to estimate the impairment provision. Our procedures included: (cid:120) Evaluation of the Group’s finance leasing accounting process. We tested a sample of controls in this process designed to limit the risk of impairment of receivables including the approval of new customer applications, authorisation to write off impaired receivables and review of finance lease and loan receivable impairment provisions. (cid:120) We assessed the total impairment provision for all receivables by: (1) assessing the historical impairment losses, compared to the prior year’s impairment provision; and (2) analysing actual impairment losses compared to gross historical finance lease and loan receivable balances and our experience. Specifically for the RTB 48 portfolio of receivables, we compared the RTB 48 month receivable life curve to prior period life curves, for patterns such as loss of products, length of maturity for expected loss, and nature of products lost, to challenge the profile of the current period RTB 48 month receivables life curve. We checked these considerations in the Group’s impairment provision at balance date. The life curve is a graph showing the average proportion of receivables for a group of RTB 48 month receivables recorded in the same month since they were installed. Annual Report 2018 I 56 Valuation of goodwill ($20,658,000) Refer to Note 7 to the Financial Report The key audit matter How the matter was addressed in our audit Our audit attention focused on the valuation of goodwill as a key audit matter due to the level of significant judgement required by us in evaluating the Group’s assessment of impairment. The assessment of impairment of goodwill is based on a fair value less costs of disposal model, which includes assumptions, including forecast cash flows, discount rate applied, and the forecast growth and terminal growth rates. Reasonably possible changes in these assumptions have a significant impact on the valuation. Estimating the cash flows requires the exercise of judgement as to the likely impact of: (cid:120) (cid:120) competitive pressures in the invoice discounting sector; and potential changes resulting from early adoption of proposed regulatory changes to the consumer leasing sector and lending practices. In addition to the above, the Group recorded an impairment charge of $20,658,000 against goodwill, resulting from the challenging trading conditions and significant reduction in installation volumes. This further increased our audit effort in this key audit area. The significant judgement involved in the annual impairment testing necessitated specialist involvement and experienced senior team member time. Our procedures included: (cid:120) We performed sensitivity analysis, for key assumptions, including terminal growth rate and forecast cash flows to further focus our procedures. (cid:120) Working with our specialists we used our knowledge of the client, and their industry to challenge the Group’s fair value less costs of disposal models and significant assumptions. This included: (1) corroborating the Group’s growth rate assumptions and discount rates for both the Thorn Debtor Finance and Consumer Leasing CGUs to known market trends and comparable entities; and (2) evaluating forecast cashflows in light of recent competitive market pressure and changes to lending practices resulting from proposed regulatory changes. This included comparing revenue growth rates for the consumer leasing and invoice discounting sector to the growth rates incorporated in the Group’s fair value less costs of disposal models. (cid:120) Working with our valuation specialists we compared the implied multiples from comparable market transactions to the implied multiple from the Group’s fair value less costs of disposal models. (cid:120) We assessed the historical accuracy of previous Group forecasts to inform our evaluation of forecasts incorporated in the fair value less costs of disposal models. (cid:120) We recalculated the impairment charge against the recorded amount disclosed. (cid:120) We assessed the disclosures in the financial report using our understanding of the issue obtained from our testing and against the requirements of the accounting standards. 57 I Thorn Group Regulatory provision ($6,138,000) Refer to Note 11 to the Financial Report The key audit matter How the matter was addressed in our audit Our audit attention focused specifically on the regulatory provision as a key audit matter due to the level of judgement required by us in evaluating the Group’s assessment of the provision. The provision relates to matters arising from the Group’s serviceability model and lending practice compliance with the requirements of the National Consumer Credit Protection Act. The component of the provision estimation we focussed on is the, compensation of customers, who are required to be remediated. ASIC’s investigation into the Group’s compliance with responsible lending laws has been finalised. Our judgement involved evaluating the Enfourceable Undertaking and measuring any resulting obligations. We used senior team members to assess these judgements. Our audit procedures included: (cid:120) Evaluating external information regarding the Group’s estimates for claims relating to, their serviceability model and responsible lending practices, as it relates to the compensation of customers. (cid:120) Obtaining the Group’s calculation of the provision related to the compensation of customers and checking on a sample basis the data used in the calculation for consistency to the billing system, as tested by us. (cid:120) Assessing the parameters of the Group’s calculation of the provision related to the compensation of customers, against the parameters detailed within the Enforceable Undertaking, in order to consider the completeness of the provision. We specifically tested the period in which the Group’s serviceability model was in place, financial obligations, and arrears events of the customer. Other Information Other Information is financial and non-financial information in Thorn Group Limited’s annual reporting which is provided in addition to the Financial Report and the Auditor's Report. The Directors are responsible for the Other Information. The Other Information we obtained prior to the date of this Auditor’s Report was the Directors’s Report. The anticipated 2018 Financial Overview, Chair’s Report, Managing Director’s Report, Board of Directors, Leadership Team, Our Businesses, Community, and the Corporate Directory are expected to be made available to us after the date of the Auditor's Report. Our opinion on the Financial Report does not cover the Other Information and, accordingly, we do not and will not express an audit opinion or any form of assurance conclusion thereon, with the exception of the Remuneration Report and our related assurance opinion. In connection with our audit of the Financial Report, our responsibility is to read the Other Information. In doing so, we 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. We are required to report if we conclude that there is a material misstatement of this Other Information, and based on the work we have performed on the Other Information that we obtained prior to the date of this Auditor’s Report we have nothing to report. Annual Report 2018 I 58 Responsibilities of Directors for the Financial Report The Directors are responsible for: (cid:120) preparing the Financial Report that gives a true and fair view in accordance with Australian Accounting Standards and the Corporations Act 2001; (cid:120) (cid:120) implementing necessary internal control to enable the preparation of a Financial Report that gives a true and fair view and is free from material misstatement, whether due to fraud or error; and assessing the Group’s ability to continue as a going concern. This includes disclosing, as applicable, matters related to going concern and using the going concern basis of accounting unless they 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 objective is: (cid:120) (cid:120) 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. They 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. A further description of our responsibilities for the audit of the Financial Report is located at the Auditing and Assurance Standards Board website at: http://www.auasb.gov.au/auditors_files/ar2.pdf. This description forms part of our Auditor’s Report. Report on the Remuneration Report Opinion Directors’ responsibilities In our opinion, the Remuneration Report of Thorn Group Limited for the year ended 31 March 2018, complies with Section 300A of the Corporations Act 2001. The Directors of the Company are responsible for the preparation and presentation of the Remuneration Report in accordance with Section 300A of the Corporations Act 2001. Our responsibilities We have audited the Remuneration Report included in pages 10 to 20 of the Directors’ report for the year ended 31 March 2018. Our responsibility is to express an opinion on the Remuneration Report, based on our Audit conducted in accordance with Australian Auditing Standards. KPMG 59 I Thorn Group Anthony Travers Partner Sydney 30 May 2018 SHAREHOLDER INFORMATION  DISTRIBUTION OF SHAREHOLDERS  1 ‐ 1,000  1,001 ‐ 5,000  5,001 ‐ 10,000  10,001 ‐ 100,000  100,001 ‐ and over  Rounding  Total  Fully Paid Ordinary Shares (Total) as at 30 June 2018  Total Holders 1,545 2,950 1,587 1,889 102 8,073 Shares 806,565 8,451,428 12,395,735 49,421,435 88,854,419 % issued capital  0.50  5.28  7.75  30.90  55.56  159,929,582                       0.01   100.00  MARKETABLE PARCELS  Minimum $ 500.00 parcel at $ 0.60 per unit  Minimum Parcel Size 834 Holders 1129 Units  400,546  THE NAMES OF THE SUBSTANTIAL SHAREHOLDERS LISTED IN THE COMPANY’S  REGISTER AS AT 30 JUNE 2018  Rank  1  2  3  Top Investors  Investors Mutual Limited  Forager Funds Management Pty Ltd  Adam Smith Asset Management Pty Limited  VOTING RIGHTS  % Issued Capital  10.07%  9.26%  7.68%  16,110,353  14,809,429  12,280,578  The Company only has ordinary shares on issue. Each ordinary share is entitled to one vote when a poll is called,  otherwise each member present at a meeting or by proxy has one vote on a show of hands.  UNLISTED EMPLOYEE PERFORMANCE RIGHTS   On 1 July 2018, there were 5,743,171 unlisted Performance Rights on issue held by 13 different persons.   Of these Rights, 3,898,884 have no exercise price and vest between 1 September 2019 and 1 September 2021 subject to  the fulfilment of the relevant vesting conditions.   646,681 of these rights vest on 1 September 2018 subject to the holders being employed by Thorn Group at that time.   The balance of 1,197,606 Rights accrue to the Managing Director, Mr Tim Luce, and vest in two equal tranches, the first  on 15 February 2019 and the second on 15 February 2020. Vesting is dependent on Mr Luce being an employee of Thorn  Group at the time.  Annual Report 2018 I 60                                           SHAREHOLDER INFORMATION  20 LARGEST SHAREHOLDERS – ORDINARY SHARES  Rank  Top Investors  1.  2.  3.  4.  5.  6.  7.  8.  9.  10.  11.  12.  13.  14.  15.  16.  17.  18.  19.  20.  HSBC CUSTODY NOMINEES (AUSTRALIA) LIMITED  J P MORGAN NOMINEES AUSTRALIA LIMITED  CITICORP NOMINEES PTY LIMITED  NATIONAL NOMINEES LIMITED  BOND STREET CUSTODIANS LIMITED   AUSTRALIAN EXECUTOR TRUSTEES LIMITED   BNP PARIBAS NOMS PTY LTD   MR HONGBIN CHEN  BNP PARIBAS NOMS (NZ) LTD   DRNEWNHAM SUPER PTY LTD   CVC LIMITED  BOND STREET CUSTODIANS LIMITED   BNP PARIBAS NOMINEES PTY LTD   LOUIS PIERRE LEDGER  DALELAN PTY LIMITED   MR MICHAEL JOHN HORN  MR FRANCIS MAXWELL HOOPER  CREATIVE LIVING (QLD) PTY LTD   BNP PARIBAS NOMINEES PTY LTD HUB24 CUSTODIAL SERV LTD DRP  WARBONT NOMINEES PTY LTD   Totals: Top 20 Holders Of Ordinary Fully Paid Shares (Total)  Total Remaining Holders Balance  % Issued Capital  17.73  15.33  4.52  1.47  1.26  1.19  1.13  0.43  0.43  0.41  0.40  0.38  0.38  0.37  0.35  0.28  0.25  0.25  0.23  0.23  47.03  52.97  28,363,458  24,521,853  7,228,893  2,355,755  2,009,135  1,898,510  1,813,965  689,273  680,000  653,000  635,000  610,000  600,174  590,761  563,471  454,500  400,171  400,000  374,931  370,388  75,213,238 84,716,344  There are 159,929,582 fully paid ordinary shares on issue, all of which are listed on the Australian Securities Exchange.  61 I Thorn Group                                                   SHAREHOLDER INFORMATION  NON‐EXECUTIVE DIRECTORS  David Foster  Chairman, Non‐Executive Director  Belinda Gibson  Non‐Executive Director  Stephen Kulmar  Non‐Executive Director  Andrew Stevens  Non‐Executive Director  MANAGING DIRECTOR  Tim Luce  COMPANY SECRETARIES  David Lines  Peter Forsberg   REGISTERED OFFICE  Thorn Group Limited  Level 1  62 Hume Highway  Chullora, NSW 2190  www.thorn.com.au  Telephone: +61 2 9101 5000  Facsimile: +61 2 9101 5033  AUDITOR TO THORN GROUP LIMITED  KPMG  Level 38, Tower 3, International Towers Sydney  300 Barangaroo Avenue  Sydney, NSW 2000  REGISTRY  Computershare Investor Services Pty Limited  Level 4  60 Carrington Street  Sydney NSW 2000  Annual Report 2018 I 62               

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