TransGlobe Energy Corporation
Annual Report 2019

Plain-text annual report

Thorn Group Australia Annual Report 2019 CHAIRMAN AND CEO REPORT Dear shareholders, Thorn Group’s FY19 results highlight the ongoing challenges to the business while continuing to deal with a number of historical issues. The FY19 results were disappointing and saw lower originations in Business Finance, a loss from the Consumer Leasing division and heightened corporate costs while continuing to defend the class action. Revenue from continuing operations was down 5% to $221.9 million. This decrease was due to the loss in the consumer leasing division, trigging a $10m impairment against assets, and the business finance division making an $11.5m provision for a predicted non-recovery of debts. Revenue in consumer leasing was down 9% and equipment finance was up 11%. EBIT was down 99% to $200,000. Net profit after tax fell to a loss of $14.9m (2018: $(2.2m)). In addition to the Company’s goodwill of $20.7 million write off during FY18, the Board resolved to write off an additional $10.0m pretax in relation to software and fixed assets in FY20. Business Finance continued to be constrained by capital availability, with originations declining 28% to $150.5m compared to FY18. The net receivables still grew by 1% to $314.8m compared to FY18, and revenue grew by 11% to $43.2m. However the segment performance was impacted as arrears increased as the book continues to mature and was impacted by the $11.5m provision. Consumer leasing’s performance was impacted by higher discounts and bad debts and lower interest income and fees from a smaller book. Despite continued challenging conditions, the business maintained volumes with a modest 1% increase in installations. During this time the business refurbished some stores, increased the product offering and introduced wider lease terms ensuring that our customers have a broader range of choices. The average price per unit increased from $971 in FY18 to $1,030 in FY 19 which drove lease originations higher to $78.5m ($75m FY18). The business continued to work on debt management. The Corporate facility was paid down to $15m from $41m end FY18, and the securitized warehouse facility increased to $368m in August 2018 setting Business Finance up for future growth. The corporate facility of $30m with a termination date of 30th November 2020 is now subject to a Draw-stop such that all new utilizations, other than rollover loans and those accessing the overdraft and set-off components of the facility, require prior lender approval. Due to the poor underlying financial loss, the Directors declared against paying any Dividend in the interests of retaining cash for balance sheet flexibility. On 22 May 2019, ASIC release a summary of compliance and remediation report after a comprehensive and detailed review was conducted by Deloitte. To date ASIC has issued an interim and final compliance report. The compliance report, shows that Thorns, systems, processes, polices and training procedures are all compliant with our Australia Credit License and our general conduct and responsible lending obligations. An additional interim report has been issued with regards to our remediation activities with the final report on remediation to be issued by 30 August 2019. The business is rapidly working to further reduce corporate costs, close or relocate underperforming stores in the consumer leasing division, improve automation and speed to market, improve productivity and take the necessary steps required to improve the capital position of the company. The Company announced on 1 April 2019, that the Board had initiated a review of the Group’s Strategic options in order to protect and maximize shareholder value. The review encompasses strategic options such as alternative ownership considerations, operational practices, procedures and business profitability amongst other scenarios. The Company has sought input from various stakeholders throughout the review process and has engaged external advisers. The review is ongoing and has taken more time than first anticipated. However, an update will be given to shareholders in the near future. We appreciate the combined efforts of our people around the country and acknowledge the contribution from the Board of Directors and the Management team under difficult circumstances. DAVID FOSTER Chairman and Non-Executive Director TIM LUCE CEO and Managing Director Annual Financial Report 31 March 2019 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 2 20 21 22 23 24 26 56 57 Annual Report 2019 I 1 DIRECTORS’ REPORT For the year ended 31 March 2019 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 2019 and the auditor’s report thereon. STRATEGIC REVIEW The Company announced on 1 April 2019 that it had initiated a review of its strategic options. This review is ongoing and further announcements will be made in due course. One component of the review is an exploration of alternative ownership considerations which would include the potential sale of various divisions of the Group or the Company as a whole (including all of the assets of the Company). There is no certainty the strategic review will result in any offers for either the Company or a division thereof, or that if any offers are received they will be on commercially acceptable terms. Nonetheless, the directors are of the view that if a sale of the Company as a whole (including all of the assets of the Company) or any division thereof were to occur, it is likely such a sale would be at a value (or implied value) lower than the Company’s recorded net assets of $172.0m in these accounts which are presented as a going concern. This differential in value is also reflected in the company’s market valuation. Factors giving rise to this include uncertainty over the company’s future cash flows, the presence of the class action contingent liability, and a recognition that the value of assets realised in an immediate sense may be lower than the value realised in the ordinary course of business. OPERATING AND FINANCIAL REVIEW Principal activities Thorn is a diversified financial services group providing the leasing of household products to consumers, and commercial asset finance to small and medium size enterprises. There were no other significant changes in the nature of the activities of the consolidated entity during the year. Financial performance Revenue decreased in the year to $221.9m (2018: $234.3m), and net profit after tax fell to a loss of $(14.9m) (2018: $(2.2m)). The profit and loss statements include non operating matters which have significantly affected the results. This year asset impairments arose in the Consumer Leasing division as a result of lower reported operating profits and cash flows which prompted the directors to review the carrying value of the assets in that division and to write them down. Last year, the goodwill balance of $20.7m was written off and this year the software and fixed assets balances were written off to a value of $10.0m pre tax. For the purpose only of better explaining the results, these two adjustments have been separated out into one line in the table below. This year a specific provision of $11.5m was taken in the Business Finance division against a group of receivables where the individual lessees for a certain product, introduced via agency arrangements, had defaulted and challenged the enforceability of the leases. There were also a number of accounting policy changes which are explained in the notes. Segment performance A$m Segment revenue Segment EBIT to PAT Consumer Leasing Business Finance Corporate Goodwill and asset impairments Sub-total Net interest expense Profit before tax Tax expense Net loss after tax from continuing operations Profit from discontinued businesses after tax Net loss after tax 2 I Thorn Group 2019 178.7 43.2 - - 221.9 2018 195.4 38.9 234.3 2019 (2.1) 16.1 (13.8) (10.0) (9.8) (15.4) (25.2) 7.1 (18.1) 3.2 (14.9) 2018 28.4 24.3 (14.8) (20.7) 17.2 (15.8) 1.3 (6.4) (5.0) 2.8 (2.2) DIRECTORS’ REPORT For the year ended 31 March 2019 Consumer Leasing The Company’s consumer leasing division, Radio Rentals, continued to experience challenging trading conditions during the year. Retail sales were slow, the consumer leasing industry was in the spotlight with the recent Senate Inquiry, there is continuing publicity around the class action against the Company, the rise of unregulated buy now pay later financiers, and the individual customer’s financial position has been impacted by persistent low income growth and rising household costs. To respond to these challenges, the division refurbished stores and increased its marketing offers and promotions to customers including offering new longer contract terms. These activities were successful in that they served to stabilise sales with 83,299 units being installed in the year which was 1% higher than last year’s 82,371. Revenue for the 2019 financial year reduced by $16.8m to $178.6m (2018: $195.4m). Revenue is a combination of sales revenue from installations under new contracts and the interest and fee income from past written contracts. While sales revenue was up on last year it came with increased promotional and discounting costs. An accounting policy change was enacted where gift cards and similar promotional activity offered upfront has been adjusted to be written off as an immediate expense rather than being amortised over the effective life of the contract. Interest income reduced as the net receivables book, which generates the interest income, fell to $136.2m (2018: $153.2m post AASB 9 adoption). Other fees and charges reduced as legacy products wound off and the volume of other fees and charges reduced. The division’s costs (excluding intangible and asset impairments) increased by $13.8m to $180.8m (2018: $167.0m) due to higher promotional costs and a significant increase in customer arrears in the second half leading to higher provisioning and write off. The arrears position continues to be addressed and is trending down but remains elevated compared to prior periods. Other than the above, all other expenses were in line with or lower than the prior year. The division continues to pursue changes to its operating model with changes having been implemented in collections, servicing and warehousing. The resulting EBIT before intangible and asset impairments was a loss of $(2.1m) (2018: profit of $28.4m) and a loss of $(12.1m). Business Finance Business Finance experienced a year of constrained growth as the availability of credit remained tight. While the new warehouse mezzanine structure raised the gearing of the division, the Group’s declining profitability and cash flow limited the capital availability for the junior notes component. Originations were therefore limited and ended 25% below the prior year at $150.5m (2018: $208.9m). The net receivables book fell marginally to $318.3m (2018: $314.8m post AASB 9 adoption) mostly as a result of the specific provision taken referred to previously. Revenue rose 11% to $43.2m (2018: $38.9m). Arrears and consequent bad debt write offs remained in the acceptable range except for the specific provision which was required to be taken for the industry wide issue where Thorn’s exposure was provided for in full. With costs under control, EBIT before that matter would have been up 13% at $27.6m. After that specific provision, EBIT was $16.1m (2018: $24.3m). Corporate Corporate expenses continue to be elevated due to the legal and compliance costs of the ASIC and class action matters but overheads were cut resulting in the expenses of the corporate centre for the year reducing from $14.8m last year to $13.8m. Interest expense Net borrowing costs decreased by 3% from $15.8m to $15.4m. Borrowings increased during the year as growth in the Business Finance book was funded predominantly by debt and with the introduction of a mezzanine financier into the warehouse from August 2018. Borrowings in the warehouse rose to $288.6m (2018: $243.3m). The corporate facility balance was further reduced during the year down to $15.0m (2018: $41.0m). The price of financing rose mostly because the mezzanine tranches in the warehouse naturally come with higher credit spreads. Tax expense The Group generally pays corporation tax at or slightly above the 30% statutory rate as some expenses are not tax deductible. Discontinued operations Three business divisions were sold over the past two years to reduce debt. There were final payment adjustments and the resolution of provisions set aside for warranty and other claims during this financial year which have given rise to a profit after tax for discontinued businesses of $3.2m. As at the date of this report there are no balances held on the balance sheet in relation to these sold entities and one limited exposure warranty remains in force. Annual Report 2019 I 3 DIRECTORS’ REPORT For the year ended 31 March 2019 Financial position The balance sheet is presented below and has two versions. The first version excludes the securitised warehouse trust borrowings for Business Finance 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. Summarised financial position 31 March 2019 31 March 2018 $m Cash at bank (i) Receivables Investment in unrated notes Inventories 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 30.6 144.8 24.0 24.8 - 224.2 15.0 37.2 52.2 172.0 4.1% 30.6 457.4 - 24.8 - 512.8 303.6 37.2 340.8 172.0 171.9% (9.3) (8.0%) 28.2 187.0 58.7 18.1 5.7 297.7 41.0 57.0 98.0 199.7 16.3% 28.2 489.0 - 18.1 5.7 541.0 284.3 57.0 341.3 199.7 138.2% (1.4) (1.1%) Cash at bank consists of free cash of $7.9m (2018: $8.4m) and restricted cash $22.7m (2018: $19.8m) relating to the operation of the securitised warehouse SPV. (i) (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 and assets impairment excluded ROE would have been (2.6)% (2018: 9.1%). Cash at bank The cash amount includes the free cash available to the Group for its usual working capital balance plus the tied cash held within the securitised warehouse special purpose vehicle. At the year end free cash was $7.9m and tied cash $22.7m. Receivables Consumer leasing receivables reduced by $16.8m to $136.4m (2018: $153.2m post AASB 9 adoption). This was a combination of existing receivables in the book amortising off faster than new volumes could replace them, additional bad debt write offs being experienced, and higher provisioning as a result of the higher arrears and loss given default under AASB 9. Business Finance receivables remained relatively flat at $318.3m (2018: $314.8m post AASB 9 adoption) as constrained origination volumes grew the book but that increase was offset by the specific provision of $10.1m taken against the industry wide matter referred to above. Investment in unrated notes This balance represents the equity notes held by the Group in the securitised warehouse. It has decreased since 31 March 2018 due to the introduction of the mezzanine investor into the warehouse who purchased 60% of the Group’s notes as part of that transaction. Borrowings Borrowings rose to $303.6m (2018: $284.3m). The securitised warehouse funding grew $45.3m from $243.3m to $288.6m. The corporate facility was reduced by $26.0m from $41.0m to $15.0m. Other liabilities Liabilities reduced as the regulatory remediation program proceeded and there were changes in the deferred tax position as a result of the provisions taken and write downs made. 4 I Thorn Group DIRECTORS’ REPORT For the year ended 31 March 2019 Funding The Group has the following debt facility limits: $m Secured Corporate Loan Facilities A and B Securitised Warehouse Facility 2019 30.0 368.0 2018 70.0 250.0 The Company continues to be funded in its corporate facility and the majority of its securitised warehouse facility by one Australian major bank. That bank and the Company entered into facility variation agreements during the year which required the Company to undertake progressive debt repayments and meet new covenants. Progressive repayments were made and the outstanding balance at year end was $15.0m with a further $2.5m earmarked for bank guarantees given to landlords of retail stores occupied by the Company. The consequent available facility headroom is therefore $12.5m but the facility presently has a drawstop placed upon it such that $10.0m of further draw downs can only take place with the lender’s prior approval (the difference is a $2.5m overdraft tranche which is unrestricted). The corporate facilities terminate on 30 November 2020 with the bank having the right to a scheduled annual review of the facility on 30 November 2019. The corporate facilities are secured by a fixed and floating charge over the assets of the consolidated entity. The securitised warehouse facility is a separate special purpose vehicle where the borrowings advanced by the bank and the mezzanine financier are 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. The facility is drawn to $288.6m leaving $79.4m as the undrawn capacity which can be accessed providing the lease and loan receivables to be sold into the warehouse meet the warehouse eligibility criteria and all other terms and conditions of that facility remain met. The facility terminates in 10 August 2025 and the financiers have the right at 10 August 2019 to cease funding new originations whereby the facility would go into run off and be repaid from the underlying cash flows. The facility received a credit rating during the year. DIVIDENDS PAID OR RECOMMENDED There were no dividends declared or paid during the financial year: Cents per share Amount $'000 Franking Date of payment 2019 Final 2018 Interim 2019 Total amount 2018 Final 2017 Interim 2018 Total amount - - 2.5 1.0 - - - 3,956 1,593 5,549 n/a n/a 100% 100% n/a n/a 18-Jul-17 19-Jan-18 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 the reported loss for the year. REGULATORY MATTERS Thorn is complying with the Enforceable Undertaking agreed with ASIC on 23 January 2018. The remediation is substantially completed in compliance with the requirements of the EU and the amounts remain provided for. Deloitte was appointed as the Independent Expert on 12 February 2018 to provide a series of reports in accordance with the EU to assess Thorn’s compliance with its obligations under its Australian Credit Licence and the progress of its consumer remediation program for affected consumers. These reports are available on the ASIC website. The group is not subject to any significant environmental regulation. Annual Report 2019 I 5 DIRECTORS’ REPORT For the year ended 31 March 2019 CONTINGENT LIABILITY The Thorn subsidiary operating Radio Rentals remains a respondent to a class action proceeding commenced by one of its customers in the Federal Court of Australia on 29 March 2017. The allegations relate to misleading and deceptive conduct, unconscionable conduct, false representations and unfair contract terms. The matter is being defended and no provision has been made in these accounts. The proceedings remain ongoing with a hearing scheduled for October 2019. Furthermore, the applicant was successful in its application to join Thorn’s former managing director James Marshall and Thorn’s insurer, AIG, to the proceedings. Legal fees continue to be incurred defending the matter. FINANCING AND GOING CONCERN BASIS FOR THE FINANCIAL REPORT On 9 November 2018, the Group and its bank entered into a revised corporate facility with a tenor out to November 2020 and a facility limit of $30m. In the present circumstances, with the Company announcing a substantial loss for the year, waivers on financial convenants and a strategic review underway, on 29 March 2019 the bank implemented a draw stop to only permit further drawings under the corporate facility with the bank’s prior approval. Accordingly $10m of the corporate facility headroom of $12.5m at year end can only be accessed at the bank’s absolute discretion (the difference is a $2.5m overdraft tranche which is unrestricted). The Group maintains a working relationship with its financier, despite the circumstances noted above. As referred to in Note 27 the Group is defending a class action and legal fees continue to be incurred in defending the matter. The proceedings remain ongoing with the outcome of the matter uncertain as at the date of this report. The continuing viability of the group and its ability to continue as a going concern is dependent upon the Group returning to profitability, maintaining the support of its lender, and progressing the strategic review. In that regard, the Group also has the ability to restrict its originations and cash outflows, including suspending originations, and retains the ability to raise funds via a variety of asset realisation and funding options. As a consequence of the above matters, a material uncertainty exists that may cast significant doubt as to whether Thorn will be able to continue as a going concern and therefore whether Thorn will be able to realise its assets and extinguish its liabilities, and contingent liabilities should they become non-contingent, in the normal course of business and for the amounts recorded in this report. However, the directors believe that there are reasonable grounds to determine that the going concern basis should be adopted in preparing this financial report. The directors refer the reader to note 1 in the financial statements for further details. This Financial Report does not include adjustments relating to the recoverability and classification of recorded asset amounts, or the amounts and classification of liabilities, contingent or non-contingent, which might be necessary should the Group not continue as a going concern. OUTLOOK Challenging trading conditions are expected to persist for Consumer Leasing although volumes are now stable; arrears, bad debts and promotional discounts are all being brought down gradually; and a major competitor has given notice they are exiting the market. Business Finance is expected to perform similarly to this year (excluding a repeat of the specific provision) given similar capital constraints. The corporate centre will continue to suffer ongoing legal and advisory fees for the class action and enforceable undertaking. The Group is expected to return to a trading profit in FY20. 6 I Thorn Group DIRECTORS’ REPORT For the year ended 31 March 2019 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 led 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 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 Getswift Limited Interests in shares and options 20,000 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 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 Stockland Corporation Limited Former ASX directorships MYOB Group Limited Interests in shares and options 15,720 ordinary shares 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 Annual Report 2019 I 7 Company Secretaries David Lines is the Group’s General Counsel having joined the company on 1 June 2017. Mr Lines 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. Peter Forsberg is the Group’s CFO having joined the company on 28 September 2015. 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. DIRECTORS’ REPORT For the year ended 31 March 2019 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 646,460 ordinary shares 1,187,947 performance rights over ordinary shares. 598,803 are sign on bonus performance rights and 589,144 are long term incentive performance rights. Joycelyn Morton Independent, Non-Executive Appointed 1 October 2011, resigned 31 May 2018 Board Chairman 26 August 2014 until 1 February 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 8 I Thorn Group DIRECTORS’ REPORT For the year ended 31 March 2019 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 Committee Meetings Risk & Compliance Committee Meetings Remuneration & Nomination Committee Meetings David Foster Joycelyn Morton1 Belinda Gibson Andrew Stevens Stephen Kulmar Tim Luce A 7 1 7 7 7 7 B 7 1 7 7 7 7 A 5 2 5 5 5 B 5 2 5 5 5 A 4 - 4 4 4 B 4 - 4 4 4 A 3 - 3 3 3 B 3 - 3 3 3 n/a n/a n/a n/a n/a n/a A – Number of meetings attended B – Number of meetings held during the time the director held office during the year 1 Ms Morton resigned on 31 May 2018 before any Risk and Compliance Committee or Remuneration and Nomination Committee meetings. n/a – Mr Luce, as an executive director, attended Committee meetings but as an invitee only 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 $416,426 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. REMUNERATION REPORT 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 Pwc. 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 Annual Report 2019 I 9 DIRECTORS’ REPORT For the year ended 31 March 2019 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 2018 AGM, the Remuneration Report received a vote of approval of 94% 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. 2. NON-EXECUTIVE DIRECTORS AND KEY MANAGEMENT PERSONNEL - AUDITED For the year ended 31 March 2019, the NEDs and KMP were: Non-Executive Directors Position David Foster Joycelyn Morton Stephen Kulmar Director Board Chairman Director Director Chairman of the Remuneration & Nomination Committee Andrew Stevens Director Chairman of Audit Committee Belinda Gibson Director Chairman of Risk & Compliance Committee Executive KMP Tim Luce Peter Forsberg Wendy Yip David Lines Position CEO and Managing Director Chief Financial Officer and Company Secretary Chief Risk Officer General Counsel and Company Secretary Changes to KMP during the year There were no changes in KMP during the year. Director/Committee Chair Term or Date Full Year Full Year Until 31 May 2018 Full Year Full Year Full Year Full Year Full Year Full Year Term or Date Full Year Full Year Full Year Full Year 10 I Thorn Group DIRECTORS’ REPORT For the year ended 31 March 2019 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 2018/19 and the Board does not intend to seek a change to the fee pool at the 2019 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 Chairs of each of the committees receive an additional annual fee of $10,950 inclusive of superannuation. Non-executive directors do not receive performance-related remuneration. 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 Stephen Kulmar Andrew Stevens Belinda Gibson Joycelyn Morton Total Non-Executive Director Remuneration Year 2019 2018 (i) 2019 2018 2019 2018 2019 2018 2019 (i) 2018 (i) 2019 2018 Salary and fees Superannuation 170,980 123,071 95,490 95,490 95,490 86,913 95,490 86,913 16,112 158,814 473,561 551,201 16,243 11,692 9,072 9,071 9,072 8,257 9,072 8,257 1,531 15,087 44,989 52,364 Total 187,223 134,763 104,562 104,561 104,562 95,170 104,562 95,170 17,642 173,901 518,550 603,565 (i) Ms Morton stepped down as Chairman and Mr Foster was elected Chairman on 1 February 2018. Ms Morton resigned on 31 May 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 (cid:1113) 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. (cid:1113) Annual Report 2019 I 11 DIRECTORS’ REPORT For the year ended 31 March 2019 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 Fixed payment reviewed annually and any increases applied from 1 April 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 At-risk wholly dependent upon achieving agreed performance (only paid if targets achieved) Payment is determined by performance against net profit after tax target and individual KPIs Performance rights granted annually at the Board’s discretion Rewards achievement of the Company’s shareholder return targets over a three year period At-risk wholly dependent upon achieving agreed performance Vesting is determined by performance against targets which align to the Company’s long term shareholder return objectives Future remuneration intentions The above described remuneration framework is intended to continue for the FY20 year with the STI now subject to an 85% performance hurdle for EBIT whereon 25% of TFR becomes eligible and then a straight line apportionment up to 50% of the TFR at 100% of EBIT and through to 100% the TFR at 110% of EBIT. Directors advise that with a strategic review underway this may give rise to a requirement to amend the framework to achieve specific company objectives. If necessary, a revised proposal for the LTI may be put to shareholders at the AGM. Summary of executive KMP remuneration outcomes on a statutory basis – audited Name Year Salary Termination STI Other remuneration (a) Superannuation Long Service Leave Total LTI(b) Executive KMP Tim Luce Peter Forsberg Wendy Yip David Lines Former KMP’s Matt Ingram James Marshall Total KMP Remuneration Notes 2019 2018 2019 2018 2019 2018 2019 2018 2019 2018 2019 2018 2019 2018 704,580 67,784 424,967 591,480 329,580 329,676 329,580 210,702 - - 427,279 1,788,707 2,008,577 - 181,250 - - - - - - - - - - - - - - - - - - - - - - - 110,000 - 60,000 - 60,000 - - - - - - 181,250 230,000 339,581 - - 20,411 5,012 20,411 19,563 20,411 19,563 20,411 10,024 - 19,563 - 13,220 81,644 86,945 - - - - - - - - 736,226 1,642,467 88,173 180,358 111,347 115,488 55,552 102,249 87,792 160,969 735,736 722,390 525,479 404,791 512,240 308,518 - - (77,419) 663,381 - - 2,893 (223,775) 219,617 - 1,134,321 3,415,922 2,893 41,670 2,479,666 381,656 339,581 a) b) Other incentives represents retention payments settled in cash The LTI column represents the accounting charge recognised in the Company’s profit and loss account in respect of the long term incentive plan, and also include retention payments settled in equity. 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. 12 I Thorn Group DIRECTORS’ REPORT For the year ended 31 March 2019 It includes benefits attributed to Mr Luce for his sign on bonus of $1m of performance rights 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, plus recurring LTI performance rights issues to KMP. Retention payments The KMP, with the exception of Mr Luce, received no pay rise or short term incentive in 2018 or 2019. The board recognised that retaining the services of several of its key executives was essential to the ongoing success of the Group and accordingly retention offers were made to those executives. Retention payment arrangements were paid in the year to 31 March 2019 to Mr Forsberg, Ms Yip and Mr Lines as set out in the table above. Further arrangements have been entered into subsequent to the year end for all KMP. 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 NPAT against budget as follows: Company PAT against budget STI that can be earned <85% 85% 100% 110% 0% 42.5% 50% 100% 60% 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 40% dependent upon the individual’s performance against their personal KPIs. Annual Report 2019 I 13 DIRECTORS’ REPORT For the year ended 31 March 2019 Features Description 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. Deferral 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. A deferral mechanism is in place whereby 30% of the awarded STI is deferred for one year and subject to forfeiture under two conditions only, 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. 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 2019 - AUDITED The Company reported a loss after tax which did not meet the hurdle and accordingly no STI’s were awarded, except for a payment to Mr Luce who was guaranteed an STI payment with no deferral under his employment contract. STI for 2018-19 Tim Luce Peter Forsberg Wendy Yip David Lines Total Target $ 362,500 222,500 175,000 175,000 935,000 Earned % Earned $ Forfeited % Forfeited $ 50% 0% 0% 0% 0% 181,250 - - - 181,250 50% 100% 100% 100% 100% 181,250 222,500 175,000 175,000 753,750 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 2016, 2017 and 2018 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. 14 I Thorn Group DIRECTORS’ REPORT For the year ended 31 March 2019 Features Description Performance criteria The plans use a Relative Total Shareholder Return (“RTSR”) performance hurdle and an Earnings Per Share (“EPS”) hurdle in equal measure. 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 July 2016, July 2017 and July 2018 Grants < 50th percentile 50th percentile 50th to 75th percentile 75th percentile or greater Thorn Group Limited’s EPS Hurdle July 2016, July 2017 and July 2018 Grants < 5% compound annual growth rate 5% >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% 50% Assessed on straight line basis 100% Performance period and vesting dates (cid:121) (cid:121) (cid:121) 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. July 2018 : 3 years (1 July 2018 to 30 June 2021). Vesting date is 1 September 2021. 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. Annual Report 2019 I 15 DIRECTORS’ REPORT For the year ended 31 March 2019 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 1 July 2016 1 July 2017 1 July 2018 1 September 2019 31 October 2019 1 September 2020 31 October 2020 1 September 2021 31 October 2021 $0.97 $1.00 $0.46 Nil Nil Nil $1.45 $1.42 $0.60 33.0% 37.0% 44.0% 1.4% 1.9% 2.1% 5.9% 5.3% 2.8% Long term incentive outcomes for FY19 The 2015 plan was tested at 1 June 2018, failed the performance criteria, and all performance rights attaching to it lapsed and were adjusted for in the prior year. Performance rights granted as compensation in the year Tim Luce Peter Forsberg Wendy Yip David Lines Performance Rights Granted Number 589,144 361,928 284,414 284,414 Date 1 July 2018 1 July 2018 1 July 2018 1 July 2018 Financial Year in which Grants Vest (ended 31 March) Values Yet to Vest $ Min (a) Max (b) 2022 2022 2022 2022 Nil Nil Nil Nil - - - - 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. The share price as at 31 March 2019 was $0.46. 5. ALIGNMENT BETWEEN REMUNERATION AND PERFORMANCE – AUDITED In considering the consolidated entity’s performance and benefits for shareholders’ wealth, the Board have regard to the following indices in respect of the current financial year and the four previous financial years. Year ending 31 March Profit After Tax (AUD millions) Earnings per share (cents) Dividends per share (cents) Share price at year end ($) Return on capital employed % Return on equity % 2019 (14.9) (9.3) 0.0 0.46 n/a n/a 2018 (2.(cid:1006)) (1.(cid:1008)) 1.0 0.62 n/a n/a 2017 25.3 16.2 8.0 1.31 11.0 12.4 2016 2015* 20.1 13.1 11.5 1.82 11.1 10.4 30.6 20.3 11.75 2.67 18.5 16.9 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. * Opening share price of 2015 was $2.15. 16 I Thorn Group DIRECTORS’ REPORT For the year ended 31 March 2019 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 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 Tim Luce Sign-on 598,803 15 Feb 2018 2019 Peter Forsberg Wendy Yip David Lines Sign-on 598,803 15 Feb 2018 2020 LTI LTI* LTI* 589,144 1 July 2018 2022 143,346 1 July 2016 2020 233,476 1 July 2017 2021 Retention 298,855 1 Dec 2017 2019 LTI LTI* LTI* 361,928 1 July 2018 2022 115,180 1 July 2016 2020 126,692 1 July 2017 2021 Retention 173,913 1 Dec 2017 2019 LTI LTI* 284,414 1 July 2018 2022 126,692 1 July 2017 2021 Retention 173,913 1 Dec 2017 2019 - 598,803 589,144 143,346 233,476 - 361,928 115,180 126,692 - 284,414 126,692 - LTI 284,414 1 July 2018 2022 284,414 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% 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 ‘-’. Management have determined that the EPS hurdle of this tranche may not be met. Annual Report 2019 I 17 DIRECTORS’ REPORT For the year ended 31 March 2019 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 Held at 1 April 2018 Granted as Compensation Vested during the year Lapsed Forfeited Held at 31 March 2019 1,197,606 675,677 415,785 300,605 589,144 361,928 284,414 284,414 (598,803) (298,855) (173,913) (173,913) - - - - - - - - 1,187,947 738,750 526,286 411,106 Shareholdings of the directors and executive KMP 2019 Name David Foster Joycelyn Morton Stephen Kulmar Andrew Stevens Belinda Gibson Tim Luce Peter Forsberg Wendy Yip David Lines Balance at the start of the year Received on vesting of incentives Other changes (bought and sold) Balance at the end of the year 60,270 95,119 68,000 15,720 20,000 - 35,000 10,000 - - - - - - 598,803 298,855 173,913 173,913 - - - - - 47,657 - - - 60,270 95,119 68,000 15,720 20,000 646,460 333,855 183,913 173,913 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. Accordingly Mr Kulmar is considered an independent director. UNISSUED SHARES UNDER OPTIONS At the date of this report there are no unissued ordinary shares of the Company under option. NON-AUDIT SERVICES During the year the Company changed auditors from KPMG to PwC. PwC performed certain other services in addition to their statutory duties.The Board based on advice from the Audit Committee 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: (cid:121) 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; (cid:121) the non-audit services provided do not undermine the general principles relating to auditor independence; and (cid:121) 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, PwC, and its related practices for audit and non-audit services provided during the year are set out in note 26. 18 I Thorn Group DIRECTORS’ REPORT For the year ended 31 March 2019 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 20 and forms part of the directors’ report for financial year ended 31 March 2019. This report is made in accordance with a resolution of the directors: David Foster Chairman Dated at Sydney 30 May 2019 Annual Report 2019 I 19 Auditor’s Independence Declaration As lead auditor for the audit of Thorn Group Limited for the year ended 31 March 2019, I declare that to the best of my knowledge and belief, there have been: (a)(cid:3) no contraventions of the auditor independence requirements of the Corporations Act 2001 in relation to the audit; and (b)(cid:3) no contraventions of any applicable code of professional conduct in relation to the audit. This declaration is in respect of Thorn Group Limited and the entities it controlled during the period. Marcus Laithwaite Partner PricewaterhouseCoopers Sydney 30 May 2019 PricewaterhouseCoopers, ABN 52 780 433 757 One International Towers Sydney, Watermans Quay, Barangaroo, GPO BOX 2650, SYDNEY NSW 2001 T: +61 2 8266 0000, F: +61 2 8266 9999, www.pwc.com.au Level 11, 1PSQ, 169 Macquarie Street, Parramatta NSW 2150, PO Box 1155 Parramatta NSW 2124 T: +61 2 9659 2476, F: +61 2 8266 9999, www.pwc.com.au (cid:47)(cid:76)(cid:68)(cid:69)(cid:76)(cid:79)(cid:76)(cid:87)(cid:92)(cid:3)(cid:79)(cid:76)(cid:80)(cid:76)(cid:87)(cid:72)(cid:71)(cid:3)(cid:69)(cid:92)(cid:3)(cid:68)(cid:3)(cid:86)(cid:70)(cid:75)(cid:72)(cid:80)(cid:72)(cid:3)(cid:68)(cid:83)(cid:83)(cid:85)(cid:82)(cid:89)(cid:72)(cid:71)(cid:3)(cid:88)(cid:81)(cid:71)(cid:72)(cid:85)(cid:3)(cid:51)(cid:85)(cid:82)(cid:73)(cid:72)(cid:86)(cid:86)(cid:76)(cid:82)(cid:81)(cid:68)(cid:79)(cid:3)(cid:54)(cid:87)(cid:68)(cid:81)(cid:71)(cid:68)(cid:85)(cid:71)(cid:86)(cid:3)(cid:47)(cid:72)(cid:74)(cid:76)(cid:86)(cid:79)(cid:68)(cid:87)(cid:76)(cid:82)(cid:81)(cid:17)(cid:3) (cid:3) CONSOLIDATED STATEMENT OF PROFIT OR LOSS AND OTHER COMPREHENSIVE INCOME FOR THE YEAR ENDED 31 MARCH 2019 $’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 property, plant and equipment Impairment of intangibles Total operating expenses Earnings before interest and tax ("EBIT") Finance expenses (Loss)/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 Income tax Other comprehensive income for the year Total comprehensive loss 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 2019 2018 Restated 3 23 9 8 10 22 17 17 17 17 221,857 234,277 (66,695) (53,268) (47,852) (9,220) (10,666) (5,519) (7,502) (1,127) (2,051) (14,568) (3,248) (4,767) (5,210) (231,693) (9,836) (15,392) (25,228) 7,106 (18,122) 3,182 (14,940) (2,784) 835 (1,949) (59,357) (50,062) (30,017) (11,226) (10,566) (5,611) (6,080) (1,450) (2,272) (16,601) (3,218) - (20,658) (217,118) 17,159 (15,827) 1,332 (6,381) (5,049) 2,839 (2,210) 276 (83) 193 (16,889) (2,017) (11.3) (11.3) (9.3) (9.3) (3.2) (3.2) (1.4) (1.4) * Restated to adjust certain line items to enable comparison with 31 March 2019 disclosures. For further details see note 1 (k) The Consolidated Statement of Profit or Loss and Other Comprehensive Income is to be read in conjunction with the accompanying notes. Annual Report 2019 I 21 CONSOLIDATED STATEMENT OF FINANCIAL POSITION AS AT 31 MARCH 2019 $’000 AUD Assets Current assets Cash and cash equivalents Trade and other receivables Prepayments and other assets Inventories Income tax receivable Total current assets Non-current assets Trade and other receivables Deferred tax assets Property, plant and equipment Intangible assets Total non-current assets Total assets Liabilities Current liabilities Trade payables Income tax payable Other payables Loans and borrowings Employee benefits Provisions Total current liabilities Non-current liabilities Loans and borrowings Deferred tax liabilities Employee benefits Derivative financial instruments Provisions Total non-current liabilities Total liabilities Net assets Equity Issued capital Reserves Retained earnings Total equity Note 2019 2018* Restated 1 April 2017* Restated 4 5 6 5 10 9 8 15 14 15 10 12 14 30,627 167,847 4,352 13,638 1,293 217,757 289,547 5,541 - - 295,088 512,845 10,764 - 13,974 122,490 4,777 2,767 154,772 28,227 14,681 173,200 170,484 3,168 11,376 - 5,678 9,472 8,741 215,971 209,056 315,829 307,397 - 3,463 5,702 - 5,058 24,322 324,994 336,777 540,965 545,833 10,377 12,011 407 19,758 77,348 5,050 7,459 - 22,315 46,904 5,414 9,037 120,399 95,681 181,154 206,960 229,559 - 518 3,326 1,035 186,033 340,805 172,040 120,932 (1,424) 52,532 172,040 12,421 13,010 481 542 487 309 807 847 220,891 244,532 341,290 340,213 199,675 205,620 119,951 118,189 181 130 79,543 87,301 199,675 205,620 * Restated to adjust certain line items to enable comparison with 31 March 2019 disclosures. For further details see note 1 (j) and (k) The Consolidated Statement of Financial Position is to be read in conjunction with the accompanying notes. 22 I Thorn Group CONSOLIDATED STATEMENT OF CHANGES IN EQUITY FOR THE YEAR ENDED 31 MARCH 2019 $’000 AUD Share capital Reserves Retained earnings Total Equity* Balance at 1 April 2017 Net loss for the period 118,189 130 - - 87,301 (2,210) Other comprehensive income - 193 - Issue of shares under dividend reinvestment plan 1,762 - - Share based payments transactions - (142) - Dividends to shareholders Balance at 31 March 2018 Balance at 1 April 2018 Changes on initial application of AASB 9 (see note 1) Net loss for the period Other comprehensive income Issue of shares under dividend reinvestment plan Share based payments transactions Dividends to shareholders Balance at 31 March 2019 - - 119,951 119,951 - - - - 981 - 181 181 - - (1,949) - 344 - (5,548) 79,543 79,543 (12,071) (14,940) - - - - 205,620 (2,210) 193 1,762 (142) (5,548) 199,675 199,675 (12,071) (14,940) (1,949) - 1,325 - 120,932 (1,424) 52,532 172,040 * Restated to adjust certain line items to enable comparison with 31 March 2019 disclosures. For further details see note 1 (j) and (k) The Consolidated Statement of Changes in Equity is to be read in conjunction with the accompanying notes. Annual Report 2019 I 23 CONSOLIDATED STATEMENT OF CASH FLOWS FOR THE YEAR ENDED 31 MARCH 2019 $’000 AUD Note 2019 2018 Cash flows from operating activities Cash receipts from customers Cash paid to suppliers and employees Acquisition of inventories 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 369,154 (134,028) 784,696 (544,664) (70,825) (54,194) (155,447) (208,827) 8,854 (22,989) (15,168) (6,563) (15,681) 803 (12,877) (37,867) Acquisition of property, plant and equipment and software (4,060) (3,895) Net cash received on sale of subsidiaries 22 - 51,249 Net cash from investing activities (4,060) 47,354 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 192,898 189,458 (173,561) (181,612) - (3,787) 19,337 2,400 28,227 30,627 4,059 13,546 14,681 28,227 The Consolidated Statement of Cash Flows is to be read in conjunction with the accompanying notes. 24 I Thorn Group CONSOLIDATED STATEMENT OF CASH FLOWS FOR THE YEAR ENDED 31 MARCH 2019 Reconciliation of cash flows from operating activities $’000 AUD Profit after tax Adjustments for: Depreciation, amortisation, asset and goodwill impairment Equity settled transactions (Profit)/loss before tax on sale of subsidiary Loss on disposal of inventories 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 prepayments and other assets (Increase) in inventories (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 2019 2018* (14,940) (2,210) 13,225 1,326 - (389) 14,389 (1,184) (2,262) (11,953) (1,700) (5,397) (4,381) (12,877) 24,064 (142) (512) 98 21,298 (60,876) 2,510 (1,904) (991) 9,148 (3,936) (3,116) (37,867) * Restated to adjust certain line items to enable comparison with 31 March 2019 disclosures. For further details see note 1 (k) The Consolidated Statement of Cash Flows is to be read in conjunction with the accompanying notes. Annual Report 2019 I 25 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS For the year ended 31 March 2019 SIGNIFICANT ACCOUNTING POLICIES 1. Thorn Group Limited (the ‘Company’) is a for profit 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 2019 comprise the Company and its subsidiaries (together referred to as the ‘consolidated entity’). Thorn is a diversified financial services group providing the leasing of household products to consumers, and commercial asset finance to small and medium size enterprises. (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 2019. (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 except for derivative financial instruments which are measured at fair value. 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. 26 I Thorn Group 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 8. Impairment of property, plant and equipment. See note (ii) 9. (iii) Determination of expected credit losses of receivables. See note 13. 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; (iv) It is important for understanding the results of the Group (v) or changes in the Group’s business; and It relates to an aspect of the Group’s operations that is important to its future operations. Financing and going concern basis for the financial report The Group incurred a loss before income tax from continuing operations of $25.2m (2018: $1.3m profit) for the year ended 31 March 2019 and net cash used in operating activities during the same period amounted to a $12.9m (2018: $37.9m) out flow. On 9 November 2018, the Group and its bank entered into a revised corporate facility with a tenor out to November 2020 and a facility limit of $30m. Given the present circumstances, with the Company announcing a loss for the year, waivers on financial covenants and a strategic review underway, on 29 March 2019 the bank implemented a draw stop to only permit further drawings under the corporate facility with the bank’s prior approval. Accordingly $10m of the corporate facility headroom of $12.5m at year end can only be accessed at the bank’s absolute discretion (the difference is a $2.5m overdraft tranche which is unrestricted). The Group maintains a working relationship with its financier, despite the circumstances noted above. As referred to in Note 27 the Group is defending a class action and legal fees continue to be incurred in defending the matter. The proceedings remain ongoing with the outcome of the matter uncertain as at the date of this report. The continuing viability of the group and its ability to continue as a going concern is dependent upon the Group: returning to profitability, - - maintaining the support of its lender, and - progressing the strategic review. The Group also: - has the ability to restrict its originations and cash outflows, including suspending originations, and NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS For the year ended 31 March 2019 - retains the ability to raise funds via a variety of asset realisation and funding options. As a consequence of the above matters, a material uncertainty exists that may cast significant doubt as to whether Thorn will be able to continue as a going concern and therefore whether Thorn will be able to realise its assets and extinguish its liabilities, and contingent liabilities should they become non-contingent, in the normal course of business and for the amounts recorded in this report. However, the directors are confident of being successful in the above matters and accordingly, the directors are satisfied that the going concern basis should be adopted in preparing this financial report. This Financial Report does not include adjustments relating to the recoverability and classification of recorded asset amounts, or the amounts and classification of liabilities, contingent or non-contingent, which might be necessary should the Group not continue as a going concern. 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. (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.. 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 assets 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. 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. (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 2018 have been applied to the consolidated entity effective from their required date of application. Note 1(h) explains the impact of the adoption of AASB 9 Financial Instruments and AASB 15 Revenue from Contracts with Customers and Note 1(i) explains the impact of AASB 16 Leases on the Group's financial statements. (h) New Standards and Interpretations Adopted The following standards, amendments to standards and interpretations have been applied by the consolidated entity for the first time for their annual reporting period commencing 1 April 2018: 1. AASB 9 Financial Instruments 2. AASB 15 Revenue from Contracts with Customers The financial impact of applying these new standards is detailed below. Annual Report 2019 I 27 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS For the year ended 31 March 2019 AASB 9 Financial Instruments AASB 9 was issued in December 2014. This standard replaced AASB 139 Financial Instruments: Recognition and Measurement (AASB 139) and includes requirements for impairment, classification and measurement and general hedge accounting. AASB 9 had a date of initial application for the consolidated entity of 1 April 2018. The classification and measurement, and impairment requirements were applied retrospectively by adjusting the opening balance sheet at the date of initial application, with no requirement to restate comparative periods. The consolidated entity did not 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 Group will continue to apply the hedge accounting requirements of AASB 139. 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 AASB 17. 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 AASB 17. The financial impact of the adoption of AASB 9 is detailed in Note 1(l). Transition As a lessee, the Group can either apply the standard using a: 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 AASB 18 Revenue. AASB 15 has been implemented. The accounting policies for the group’s revenue for contracts with customers are explained in Note 3. Significant estimates and judgements have been made in the adoption of AASB 15. (i) New Standards and Interpretations Not Yet Adopted Certain new accounting standards and interpretations have been published that are not mandatory for 31 March 2019 reporting periods and have not been early adopted by the group. The group’s assessment of the impact of these new standards and interpretations is set out below. AASB 16 Leases AASB 16 replaces existing leases guidance, including AASB 17 Leases. The standard is effective from 1 April 2019 and the consolidated entity is 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 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 28 I Thorn Group – 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 AASB 117, 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 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 2019, the consolidated NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS For the year ended 31 March 2019 entity’s future minimum lease payments under non- cancellable operating leases amounted to $19,684,000 on an undiscounted basis (see note 7). Under AASB16, the Group would recognise a right of use asset and lease liability in the range of $11,000,000 to $18,000,000. The right of use asset will be subject to further impairment consideration yet to be undertaken. 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. (j) Classification and measurement The measurement category and the carrying amount of the financial assets and liabilities in accordance with AASB 139 and AASB 9 at 1 April 2018 are compared as follows: AASB 139 AASB 9 Measurement Category Carrying Amount $’000 AUD Measurement Category Carrying Amount $’000 AUD Amortised cost Amortised cost 28,227 489,235 Amortised cost Amortised cost FVTPL 542 FVTPL Amortised cost 284,308 Amortised cost 28,227 471,990 542 284,308 Financial Assets Cash and cash equivalents Trade and other receivables Financial Liabilities Derivatives Loans and borrowings There are three measurement classifications under AASB 9: Amortised cost, fair value through profit or loss (‘FVTPL’) and 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. (k) Reclassification of comparative financial information During the period, the classification of transactions were reviewed and certain reclassifications were made to financial statement line items to enhance presentation. The comparative information in the statement of profit or loss and other comprehensive income, statement of financial position, segment note and statement of cash flow have been reclassified consistent with the presentation adopted in the 31 March 2019 financial statements. - - - Stock on hand had been accounted for as rental assets. This classification has now been adjusted to inventory which resulted in an increase in the value of stock on hand or inventory from $6,979,000 to $11,376,000, an increase in cost of sales of $4,628,000 and a reduction in rental asset depreciation from $6,204,000 to zero. Opening retained earnings increased by $2,822,000. As result of this change we removed the rental asset note and operating lease as lessor note. Software balances under development, worth $923,000 have been reclassified from property, plant and equipment to intangible assets. This change has been reflected in the comparative of the Statement of financial position and the note 8 Intangible assets. Payments arising from the strategic alliance with Cashflow IT of $923,000 has been reclassified from other expenses to revenue, as this better reflects the substance of the payments under the terms of the alliance. This change has been reflected in the comparative of the Statement of profit and loss and other comprehensive income and the note 2 Operating Segments. Annual Report 2019 I 29 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS For the year ended 31 March 2019 - - - - - Derivative financial instruments have been grossed up for tax with the tax impact of $163,000 recognised in deferred tax liabilities in the Statement of financial position. The derivative financial instruments has also been reclassified from other payables to its own caption, and to shifted to a non-current classification, reflecting the term of the underlying instrument. Thorn Business Finance customer accounts contain some credits which have been netted against the outstanding receivable to better reflect the net outstanding principal balance, resulting in a reduction of $3,065,000 to Trade and other receivables, and were previously disclosed in other payables. This has also impacted Note 2 operating segments. The segment note has been adjusted to place finance expenses and the balance of the securitised warehouse facility against Business Finance as they relate to that division. This has resulted in an interest expense of $9,941,000 and the facility liability balance of $243,308,000 being reallocated to Business Finance from Corporate. Past issues of shares totalling $2,849,000 have been reclassified from reserves to share capital in the opening Statement of Financial Position and the opening Statement of Changes in Equity. Radio Rentals had accounted for rent free incentive periods by capitalising these amounts and amortising against other comprehensive revenue in the statement of comprehensive income. It is now being expensed upfront against sales revenue. Other comprehensive revenue has been adjusted by eliminating amortisation of $5,564,000 and including a reduction in sales revenue of $4,452,000. The rent free deferred cost of $8,682,000 has been reduced against opening retained earnings. This has also impacted Note 2 operating segments. - Where Radio Rentals had replaced or repaired an item on rent that was damaged due to fault of the customer, the replacement good value or repaired costs was charged over a lease term agreed with the customer in addition to the original amounts owing. This had been recognised on a cash basis with no receivable taken up. Other revenue has been increased by $117,000 and a receivable balance of $412,000 included in lease receivable. This has also impacted Note 2 operating segments. - - - - - - - Establishment fees had previously been included in other revenue up front rather than amortised over the period of the lease. Other comprehensive income has been reduced by $185,000 and lease receivables have been reduced by $1,217,000. This has also impacted Note 2 operating segments. Promotional customer gift cards had been capitalised and amortised as an offset to other revenue over the average lease duration. This has now been adjusted as an immediate write off to finance lease cost of sales that resulted in an additional $597,800 expense. Prepayments and other assets reduced by $597,800. Radio Rentals at times will forgive of customer arrears in order to retain their custom. This had been included as a reduction to other revenue. This has now been expensed to impairment losses on loans and receivables. Other revenue and impairment expenses have both increased by $838,400. Costs of $1,156,000 incurred as part of customers changing the finance lease model their contract is under, have been reclassified from impairment losses on loans and receivables to Revenue in the Statement of Profit and Loss and Other Comprehensive Income and note 2 Operating segments as these changes do not relate to impairment losses. Prepayments and other assets of $3,168,000 have been reclassified into its own line in the face of the balance sheet. This have also impacted Note 5 trade and other receivables. Radio Rental had accounted for supplier rebates as other revenue, this has been adjusted to reduce other revenue by $1,513,000 and finance lease cost of goods sold decreased by $1,513,000. Early termination fees charged on disconnection of leases prior to the expiry of the contracted lease term were accounted for as a charge against revenue. An amount of $360,000 has been transferred as a recovery to impairment expense. 30 I Thorn Group NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS For the year ended 31 March 2019 Statement of Financial Position (extract) Assets Trade and other receivables Prepayments and other assets Inventories Total current assets Trade and other receivables Property, plant and equipment Intangible assets Total non-current assets Total assets Liabilities Other payables Income tax payable Total current liabilities Deferred tax liabilities Derivative financial instruments Total non-current liabilities Total liabilities Net assets Equity Issued capital Reserves Retained earnings Total equity 31 March 2018 $’000 AUD Increase/(Decrease) $’000 AUD 31 March 2018 Restated $’000 AUD 173,257 - 6,979 208,463 330,978 4,386 4,779 340,143 548,606 23,202 3,099 126,535 11,265 - 219,193 345,728 202,878 117,102 3,030 82,746 202,878 (57) 3,168 4,397 7,508 (15,149) (923) 923 (15,149) (7,641) (3,444) (2,692) (6,136) 1,156 542 1,698 (4,438) (3,203) 2,849 (2,849) (3,203) (3,203) 173,200 3,168 11,376 215,971 315,829 3,463 5,702 324,994 540,965 19,758 407 120,399 12,421 542 220,891 341,290 199,675 119,951 181 79,543 199,675 Statement of Profit or Loss and Other Comprehensive income (extract) 2018 31 March 2018 $’000 AUD Profit Increase/(Decrease) $’000 AUD 31 March 2018 Restated $’000 AUD Continuing operations Revenue Finance lease cost of sales Impairment losses on loans and receivables Depreciation & amortisation Other expenses Total operating expenses Earnings before interest and tax ("EBIT") Finance expenses Profit before income tax Income tax (Loss)/profit after tax from continuing operations (Loss)/profit after tax for the year 236,193 (1,916) 234,277 (55,635) (30,695) (9,422) (17,524) (221,201) 14,992 (15,681) (689) (5,774) (6,463) (3,624) (3,722) 678 6,204 923 4,083 2,167 (146) 2,021 (607) 1,414 1,414 (59,357) (30,017) (3,218) (16,601) (217,118) 17,159 (15,827) 1,332 (6,381) (5,049) (2,210) Annual Report 2019 I 31 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS For the year ended 31 March 2019 (l) Impact on the financial statements of adoption of AASB 9 As a result of the changes in the entity’s accounting policies, prior year financial statements had to be restated. As explained below, AASB 9 was generally adopted without restating comparative information and the Consolidated entity has elected to continue to adopt AASB 139 in relation to aspects of hedge accounting. The reclassifications and the adjustments arising from the new impairment rules are therefore not reflected in the restated balance sheet as at 31 March 2018, but are recognised in the opening balance sheet on 1 April 2018. The following tables show the adjustments recognised for each individual line item. Line items that were not affected by the changes have not been included. As a result, the sub-totals and totals disclosed cannot be recalculated from the numbers provided. The adjustments are explained in more detail by standard below. Statement of Financial Position (extract) 31 March 2018 Restated $’000 AUD AASB 9 $’000 AUD 1 April 2018 Restated $’000 AUD 173,200 215,971 315,829 324,994 540,965 12,421 220,891 341,290 199,675 79,543 199,675 (7,911) (7,911) (9,335) (9,335) (17,246) (5,175) (5,175) (5,175) (12,071) (12,071) (12,071) 165,289 208,060 306,494 315,659 523,719 7,246 215,716 336,115 187,604 67,472 187,604 Assets Trade and other receivables Total current assets Trade and other receivables Total non-current assets Total assets Liabilities Deferred tax liabilities Total non-current liabilities Total liabilities Net assets Equity Retained earnings Total equity 32 I Thorn Group NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS For the year ended 31 March 2019 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. Interest on the corporate facility 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. 2019 $’000 AUD Sales Revenue Interest Revenue Other Total Segment revenue Operating expenses EBITDA Depreciation and amortisation Impairment EBIT Finance expense Profit before tax Segment assets Segment liabilities 2018 $’000 AUD Sales Revenue Interest Revenue Other Segment revenue Operating expenses EBITDA Depreciation and amortisation Impairment EBIT Finance Expense Profit before tax Segment assets Segment liabilities Consumer Leasing Equipment Finance Discontinued operations Corporate Consolidated 78,512 85,838 14,262 178,612 (179,790) (1,178) (1,018) (9,977) (12,173) - (12,173) 161,099 (37,161) - 42,373 872 43,245 (27,030) 16,215 (108) - 16,107 (13,688) 2,419 336,966 (288,644) - - - - 3,197 3,197 - - 3,197 - 3,197 - - - - - - (11,648) (11,648) (2,122) - (13,770) (1,704) (15,474) 14,780 (15,000) 78,512 128,211 15,134 221,857 (215,271) 6,586 (3,248) (9,977) (6,639) (15,392) (22,031) 512,845 (340,805) Consumer Leasing Equipment Finance Discontinued operations Corporate Consolidated 75,023 96,860 23,524 195,407 (165,930) 29,477 (1,074) - 28,403 - 28,403 - 37,097 1,773 38,870 (14,354) 24,516 (242) - 24,274 (9,941) 14,333 - - 13,510 13,510 (9,266) 4,244 (188) - 4,056 - 4,056 - - - - (12,958) (12,958) (1,902) (20,658) (35,518) (5,886) (41,404) 186,491 (44,154) 346,092 (243,308) - - 8,382 (53,828) 75,023 133,957 38,807 247,787 (203,020) 44,767 (3,406) (20,658) 20,703 (15,827) 4,876 540,965 (341,290) Annual Report 2019 I 33 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS For the year ended 31 March 2019 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 Interest Finance lease sales Other Total Rev 2019 2018 221,857 - 221,857 (22,031) (3,197) (25,228) 2019 128,211 78,512 10,630 221,857 247,787 (13,510) 234,277 5,388 (4,056) 1,332 2018 133,957 75,023 25,846 234,277 The major components of revenue are recognised as follows: (cid:121) 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 or if lower, the present value of the lease payments discounted using a market rate of interest. (cid:121) Interest revenue is calculated and charged on the average outstanding loan or lease balance and recognised on an accrual basis using the effective and implicit interest rate method respectively. (cid:121) Other revenue includes late fees, establishment fees, termination fees and other non-lease related income. 4. CASH AND CASH EQUIVALENTS $’000 AUD Bank balances Call deposits Cash and cash equivalents 2019 30,627 - 30,627 2018 28,227 - 28,227 Included in cash is an amount of $22,681,000 (2018: $19,845,000) 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 $7,947,000 (2018: $8,382,000). 34 I Thorn Group NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS For the year ended 31 March 2019 5. TRADE AND OTHER RECEIVABLES $’000 AUD Current Trade receivables Finance lease receivables Loan receivables Non-current Finance lease receivables Loan receivables 2019 2018 11,711 128,128 28,008 167,847 238,855 50,692 289,547 4,675 142,901 25,624 173,200 261,295 54,534 315,829 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 and loan receivables are stated at their amortised cost less impairment losses. The consolidated entity’s exposure to credit risk and impairment losses related to trade and other receivables is disclosed in note 13. 6. INVENTORIES $’000 AUD Stock held for lease 2019 13,638 2018 11,376 Inventories represent purchased consumer goods held in stores. The costs of individual items of inventory are determined using weighted average costs less volume rebates received. Inventory is valued at the lower of cost or net realisable value. 7. LEASES Finance leases as lessor The consolidated entity has finance lease, hire purchase agreements and chattel mortgage contracts. The consolidated entity classifies Consumer Leasing contracts as finance leases where the term of the contract over 24 months. 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 Unearned interest income on finance leases - less than one year Unearned interest income on finance leases - between one and five years Total unearned interest income on finance leases Impairment provisioning Net Lease receivables 2019 250,173 334,767 585,940 (91,360) (76,934) (168,294) (49,663) 366,983 2018 251,257 353,379 604,636 (97,341) (78,015) (175,356) (25,084) 404,196 Annual Report 2019 I 35 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS For the year ended 31 March 2019 Operating leases as lessee Non-cancellable operating lease rentals are payable as follows: $’000 AUD Less than one year Between one and five years 2019 9,154 10,530 19,684 2018 8,968 13,809 22,777 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. 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 2019 was $10,714,000 (2018: $11,302,000). 8. INTANGIBLE ASSETS $’000 AUD Year ended 31 March 2018 Opening net carrying amount Additions Amortisation charges for the year Impairment charges for the year Closing net book amount At 31 March 2018 Cost Amortisation Impairment Net book amount $’000 AUD Year ended 31 March 2019 Opening net carrying amount Additions Amortisation charges for the year Impairment charges for the year Closing net book amount At 31 March 2019 Cost Amortisation Impairment Net book amount 36 I Thorn Group Goodwill Software 20,658 - (20,658) 3,664 3,301 -1,263 - Total 24,322 3,301 -1,263 -20,658 - 5,702 5,702 - 15,709 15,709 - (10,007) (10,007) - 5,702 - Goodwill Software - - - - - - - 5,702 1,205 (1,697) (5,210) - 16,914 (11,704) (5,210) - - 5,702 Total 5,702 1,205 (1,697) (5,210) - 16,914 (11,704) (5,210) - NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS For the year ended 31 March 2019 Goodwill 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. 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. 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 $5,210,000 has been recognised in the income statement for the year ended 31 March 2019. The circumstances that led to this impairment included lower than expected business performance including origination and collections 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 4.6% 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 post-tax discount rate is assumed at 9.5% (2018: 9.5% post-tax). 9. PROPERTY, PLANT AND EQUIPMENT $’000 AUD Year ended 31 March 2018 Opening net carrying amount Additions Depreciation charges for the year Impairment charges for the year Closing net book amount At 31 March 2018 Cost Accumulated depreciation Impairment Net book amount Total 5,058 360 (1,955) - 3,463 31,333 (27,870) - 3,463 Annual Report 2019 I 37 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS For the year ended 31 March 2019 $’000 AUD Year ended 31 March 2019 Opening net carrying amount Additions Depreciation charges for the year Impairment charges for the year Closing net book amount At 31 March 2019 Cost Accumulated depreciation Impairment Net book amount Property plant and equipment Total 3,463 2,855 (1,551) (4,767) - 34,188 (29,421) (4,767) - Property plant and equipment consist of furniture, fittings, and physical computer equipment. Impairment Testing using a fair value less cost of disposal revealed the carrying amount of the CGU exceeded its recoverable amount and the entire balance of property, plant and equipment was impaired. Refer to note 8 for details. 10. 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 Total income tax (benefit)/ expense in income statement 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% (2018: 30%) Change in income tax expense due to: Non-deductible expenses (Over) / Under provided in prior years Income tax (benefit)/ expense on pre-tax accounting profit 2019 5,612 (919) 2018 9,412 (542) (11,784) (1,272) (15) (7,106) (1,217) 6,381 2019 (25,228) (7,568) 1,380 (919) (7,106) 2018 1,332 400 6,523 (542) 6,381 38 I Thorn Group NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS For the year ended 31 March 2019 11. DEFERRED TAX ASSETS & LIABILITIES Recognised deferred tax assets and liabilities $’000 AUD Inventories Property, plant and equipment Trade, loan and other receivables Finance lease receivables* Accruals Provisions Financial derivative Tax assets / (liabilities) Assets Liabilities Net 2019 2018 2019 2018 2019 2018 69,663 69,846 4,049 698 - - - - 2,640 3,613 1,342 1,417 998 163 - - (2,641) - 69,663 69,846 - (617) 4,049 (2,641) 698 (617) (70,510) (87,541) (70,510) (87,541) - - - - - - 2,640 1,342 998 3,613 1,417 163 78,692 75,737 (72,153) (88,158) 5,541 (12,421) * Movement from 2018 to 2019 includes adoption of AASB 9 $5,174,000 DTA on the 1st April 2018. 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. 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 Annual Report 2019 I 39 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS For the year ended 31 March 2019 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. 12. DERIVATIVE FINANCIAL INSTRUMENTS Derivatives are initially recognised at fair value on the date a derivative contract is entered into and are subsequently re- measured to their fair value at the end of each reporting period. The full fair value of a hedging derivative is classified as a non- current liability as the remaining maturity of the hedged item is more than 12 months from 31 March 2019. The fair value of derivatives are classified as level 2 instruments as they are not traded in an active market and are determined using valuation techniques. These valuation techniques maximise the use of observable market data where it is available and rely as little as possible on entity specific estimates. The interest rate swap creates a cash flow hedge against the variable interest payments on the securitised warehouse facility. This hedge is taken out so that the fixed interest rates committed to at the origination of a Business Finance lease or loan contract are matched by fixing the base lease interest rate on the borrowings in the securitised warehouse. The movement in the fair value of the interest rate swap is recognised through Other Comprehensive Income and reserves in the Statement of Changes in Equity. $’000 AUD Interest rate swap liability 2019 3,326 2018 542 13. 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 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 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. 40 I Thorn Group NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS For the year ended 31 March 2019 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. Credit risk grew in-line with the growth of the loan and lease receivables in all segments. Expected credit loss measurement 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. 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: 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. Significant increase in credit risk (SICR) The Group considers a financial instrument to have experienced a significant increase in credit risk based on quantitative information to identify this on an asset level. Each financial asset will be assessed at the reporting date for significant deterioration where the financial asset is more than 30 days past due. When an account is cured from default status it retains an adjusted and higher probability of default within the impairment model for 6 months. Macroeconomic Scenarios The assessment of SICR and the calculation of ECL both incorporate forward-looking information. The Group has performed historical analysis and identified the key economic variables impacting credit risk and expected credit losses for Consumer Leasing and Business Finance. Expected credit losses are a probability-weighted estimate of credit losses over the expected life of the financial instrument. The Group has a process for developing the forward looking economic scenarios and probability weightings to determine the ECL. The Group prepares a base, best and worst case scenario based on economic variables relevant to Consumer Leasing and Business Finance. The final ECL will be based on the probability weighted caculation based on these three scenarios. Loss allowance The loss allowance recognised in the period is impacted by a variety of factors, as described below: The following table explains the changes in the loss allowance between the beginning and the end of the annual period due to these factors: Consumer Leasing lease receivables Lease receivables Stage 1 Stage 2 Stage 3 12-month ECL Lifetime ECL Lifetime ECL $’000 AUD $’000 AUD $’000 AUD Model risk reserve $’000 AUD Total $’000 AUD Loss allowance as at 1 April 2018 10,924 5,724 3,724 6,111 26,483 Movements with P&L impact Transfers: Transfer from Stage 1 to Stage 2 Transfer from Stage 1 to Stage 3 Transfer from Stage 2 to Stage 1 Transfer from Stage 2 to Stage 3 Transfer from Stage 3 to Stage 1 Transfer from Stage 3 to Stage 2 New financial assets originated or purchased Changes in PDs/LGDs/EADs Changes to model assumptions and methodologies Write-offs Total net P&L charge during the period (865) (304) 369 - 85 - 2,063 (282) - (1,793) (728) 3,514 - (1,573) (345) - 133 996 (413) - (2,429) (117) - 2,509 - 487 (604) (313) 1,109 (37) - (2,643) 509 - - - - - - - - - - - 2,648 2,204 (1,205) 142 (518) (180) 4,168 (732) - (6,865) (337) Annual Report 2019 I 41 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS For the year ended 31 March 2019 The following table further explains changes in the gross carrying amount of the loans and receivables to help explain their significance to the changes in the loss allowance as discussed above: Lease receivables Stage 1 Stage 2 Stage 3 Total 12-month ECL Lifetime ECL Lifetime ECL $’000 AUD $’000 AUD $’000 AUD $’000 AUD Gross carrying amount as at 1 April 2018 161,054 13,656 4,306 179,017 Movements with P&L impact Transfers: Transfer from Stage 1 to Stage 2 Transfer from Stage 1 to Stage 3 Transfer from Stage 2 to Stage 1 Transfer from Stage 2 to Stage 3 Transfer from Stage 3 to Stage 1 Transfer from Stage 3 to Stage 2 New financial assets originated or purchased Changes in PDs/LGDs/EADs Changes to model assumptions and methodologies Write-offs Total net change during the period Business finance loan and lease receivables Loan and lease receivables (9,107) (3,304) 2,438 - 383 - 29,881 (18,489) - (21,153) (19,351) 8,084 - (3,338) (738) - 218 2,135 (1,320) - (5,447) (405) - 3,107 - 603 (698) (362) 1,374 (32) - (3,056) 936 (1,023) (196) (900) (135) (315) (143) 33,390 (19,841) - (29,655) (18,820) Stage 1 Stage 2 Stage 3 12-month ECL Lifetime ECL Lifetime ECL $’000 AUD $’000 AUD $’000 AUD Model risk and seasoning reserves $’000 AUD Total $’000 AUD Loss allowance as at 1 April 2018 4,754 1,059 3,137 7,725 16,676 Movements with P&L impact Transfers: Transfer from Stage 1 to Stage 2 Transfer from Stage 1 to Stage 3 Transfer from Stage 2 to Stage 1 Transfer from Stage 2 to Stage 3 Transfer from Stage 3 to Stage 1 Transfer from Stage 3 to Stage 2 New financial assets originated or purchased Changes in PDs/LGDs/EADs Changes to model assumptions and methodologies Write-offs Total net P&L charge during the period (90) (286) 76 - 54 - 2,121 (573) - (640) 662 696 - (390) (367) - 17 296 (10) - (260) (17) - 3,447 - 508 (282) (40) 339 (139) - (1,917) 1,915 - - - - - - - - (2,460) - (2,460) 606 3,161 (314) 141 (228) (22) 2,756 (722) (2,460) (2,817) 100 The following table further explains changes in the gross carrying amount of the loans and receivables to help explain their significance to the changes in the loss allowance as discussed above: 42 I Thorn Group NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS For the year ended 31 March 2019 Loan and lease receivables Stage 1 Stage 2 Stage 3 Total 12-month ECL Lifetime ECL Lifetime ECL $’000 AUD $’000 AUD $’000 AUD $’000 AUD Gross carrying amount as at 1 April 2018 325,029 4,040 7,256 336,326 Movements with P&L impact Transfers: Transfer from Stage 1 to Stage 2 Transfer from Stage 1 to Stage 3 Transfer from Stage 2 to Stage 1 Transfer from Stage 2 to Stage 3 Transfer from Stage 3 to Stage 1 Transfer from Stage 3 to Stage 2 New financial assets originated or purchased Changes in PDs/LGDs/EADs Changes to model assumptions and methodologies Write-offs Total net change during the period (4,112) (10,664) 1,060 - 413 - 130,467 (76,138) - (43,934) (2,907) 3,016 - (1,547) (1,328) - 51 1,214 (49) - (1,006) 352 - 9,249 - 1,363 (652) (92) 909 (41) - (4,434) 6,302 (1,096) (1,415) (487) 35 (239) (41) 132,590 (76,227) - (49,374) 3,747 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 Leasing lease receivables Business Finance lease receivables Loan receivables Write-off policy 2019 11,711 129,652 237,331 78,700 457,394 2018 4,675 155,239 248,957 80,158 489,029 The Group writes off financial assets in whole or in part, when it has exhausted all practical recovery efforts and has concluded there is no reasonable expectation of recovery. Indicators that there is no reasonable expectation of recovery include (i) ceasing enforcement activity and (ii) where the Group’s recovery method is foreclosing on collateral and the value of the collateral such that there is no reasonable expectation of full recovery. Default is defined as 60 days for Radio Rentals and 90 days for Business Finance. Modification of financial assets The Group sometimes modifies the terms of leases provided to customers due to commercial renegotiations, or for distressed leases, with a view to maximising recovery. Such restructuring activities include extended payment term arrangements, payment holidays, and payment forgiveness. Restructuring policies an practices are based on indicators or criteria which, in the judgement of management, indicate that payment will most likely continue. These policies are kept under continuous review. Impairment losses Consumer Leasing lease receivables $’000 AUD Stage 1 Stage 2 Stage 3 Gross 2019 Impairment 2019 144,947 13,210 5,228 163,385 (14,040) (7,612) (5,228) (26,881) Annual Report 2019 I 43 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS For the year ended 31 March 2019 The Group applies the AASB 9 three-stage approach to measuring expected credit losses which uses a twelve month loss for lease receivables in stage one and lifetime expected loss for lease receivables in stages 2 and 3. To measure the expected credit losses, lease receivables have been grouped based on shared credit risk characteristics and the days past due. The expected loss rates are based on the payment profiles of lease receivables over a period of 36 months before 1 April 2018 respectively and the corresponding historical credit losses experienced within this period. The historical loss rates are adjusted to reflect current and forwardlooking information on macroeconomic factors affecting the ability of the customers to settle the receivables. The group has identified the GDP and the unemployment rate to be the most relevant factors, and accordingly adjusts the historical loss rates based on expected changes in these factors. The net value of consumer finance lease and trade receivables at 31 March 2019 was $136,504,000. The provision reflects the risk to the consolidated entity of the expected credit loss. 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 2019 is $81,647,000. Business Finance lease receivables $’000 AUD Stage 1 Stage 2 Stage 3 Gross 2019 240,638 3,344 20,362 264,344 The net value of commercial finance lease receivables as at 31 March 2019 was $241,540,000. Loan receivables (Business Finance and remaining consumer solar loans) $’000 AUD Stage 1 Stage 2 Stage 3 Gross 2019 79,334 998 3,108 83,440 Impairment 2019 (5,353) (1,190) (16,261) (22,804) Impairment 2019 (2,066) (329) (1,697) (4,092) The net value of loan receivables as at 31 March 2019 was $79,348,000. Liquidity risk Liquidity risk is the risk that the Group’s financial condition is adversely affected by an inability to meet its liabilities 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. 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 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. Liquidity risk is managed through the adequate provision of funding and effective capital management policies. 44 I Thorn Group NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS For the year ended 31 March 2019 The following are the contractual maturities of the consolidated entity’s financial liabilities including, where applicable, future interest payments as at 31 March 2019. 31 March 2019 ($’000 AUD) Secured loan facilities Trade and other payables 31 March 2018 ($’000 AUD) Secured loan facilities Trade and other payables Carrying amount 303,644 24,738 328,382 Contractual Cash flows 336,977 24,738 361,715 1 year or less 1-5 years 119,923 24,738 144,661 217,054 - 217,054 Carrying Amount Contractual Cash flows 284,308 321,195 30,135 314,443 30,135 351,330 1 year or less 1-5 years 89,810 30,135 231,385 - - 119,945 231,385 - 5 years or more - - - 5 years or more - The consolidated entity’s access to financing arrangements is disclosed in note 15. Market risk Market risk is the risk that changes in market prices, such as interest rates and foreign currency, will affect the consolidated entity’s income and cash flow. The objective of market risk management is to manage and control market risk exposures within acceptable parameters. Foreign currency risk The Group is also subject to currency risk related to the direct acquisition of inventories 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 a 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. 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 floating interest bearing financial instruments was: $’000 AUD Free cash Borrowings 2019 7,947 2018 8,382 (303,644) (284,308) A change of one percent in interest rates at the reporting date would have increased or decreased the consolidated entity’s equity and other comprehensive income by $2,070,000 (2018: $1,931,000), net of tax. 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 16 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. Annual Report 2019 I 45 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS For the year ended 31 March 2019 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. Thorn does not apply netting. 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. Fair values Fair value reflects the amount for which an asset could be exchanged or a liability settled, between knowledgeable, willing parties in an arm’s length transaction. Quoted prices or rates are used to determine fair value where an active market exists. If the market for a financial instrument is not active, fair values are estimated using present value or other valuation techniques, using inputs based on market conditions prevailing on the measurement date Uncertainty currently exists in regards to the fair value of the Group's financial assets and liabilities due to the ongoing strategic review. 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 instrument is measured at fair value. The Group’s only Level 2 instrument is the interest rate derivative. 14. PROVISIONS 2019 $’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 46 I Thorn Group Business Finance restitution Regulatory Make good Total - 1,420 - - - 1,420 1,420 - 1,420 6,138 - (3,237) - (2,194) 707 707 - 707 1,808 75 (208) - - 1,675 640 1,035 1,675 7,946 1,495 (3,445) - (2,194) 3,802 2,767 1,035 3,802 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS For the year ended 31 March 2019 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 Business Finance restitution Business Finance restitution Regulatory Make good Total - - - - - - - - - 8,100 450 1,784 9,884 596 1,046 - (481) - (91) - (481) (91) (2,412) 1,808 7,946 1,321 487 7,459 487 6,138 1,808 7,946 (2,412) 6,138 6,138 - A large specific provision of $10.1m was taken up to provide in full for the receivable for the industry wide matter of a group of customers for a specific product who were challenging the enforceability of their leases. The Australian Financial Complaints Authority has issued an initial advice in favour of the customers and setting out terms of further restitution beyond the writing off of their payable balance. This provision is for that purpose. Regulatory Regulatory provision represents amounts set aside in the Consumer Leasing division for potential customer remediation, penalties and administration costs. During the year $2,194,000 was reclassified to accruals and represents actual or specific amounts known to be payable rather than estimated. Make good on leased premises Make good provision represent expected costs of returning leased office, showroom or warehouse premises to the condition specified in the individual lease contracts upon termination of the lease. 15. LOANS AND BORROWINGS $’000 AUD Current liabilities Secured loans Non-Current liabilities Secured loans 2019 2018 122,490 77,348 181,154 206,960 303,645 284,308 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 2019 I 47 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS For the year ended 31 March 2019 Financing loan facilities $’000 AUD Secured corporate loan facility A (Maturity 30 November 2020) Utilised Available headroom Secured corporate loan facility B (Maturity 30 November 2020) Utilised Available headroom Securitised warehouse facility Utilised Available headroom Total loan facilities Utilised Secured loan facilities not utilised at reporting date 2019 25,000 (15,000) 10,000 5,000 (2,146) 2,854 2018 65,000 (41,000) 24,000 5,000 (2,100) 2,900 368,000 250,000 (288,644) (243,308) 79,356 6,692 398,000 (305,790) 92,210 320,000 (286,408) 33,592 The Group continues to be funded by one Australian major bank. That bank and the Company entered into a revised corporate facility in November 2018 with a $30m limit and a two year tenor. The corporate facilities terminate on 30 November 2020. Progressive repayments were made and the outstanding balance at year end was $15.0m with a further $2.5m earmarked for bank guarantees given to landlords of retail stores occupied by the Company. The consequent available facility headroom is therefore $12.5m but the facility presently has a drawstop placed upon it such that $10.0m of further draw downs can only take place with the lender’s prior approval (the difference is a $2.5m overdraft tranche which is unrestricted).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 $250m to $368m and has an availability period to 10 August 2019 and a final maturity date of 10 August 2025. In order for the Group to utilise the available headroom in the Warehouse facility, the Group, as the holder of the residual interest, needs to fund a minimum percentage of the value of receivables sold down into the warehouse facility. For more information about the consolidated entity’s exposure to interest rate risk and liquidity risk see note 13. 16. CAPITAL AND RESERVES Number of shares On issue at the beginning of year Issue of new shares on vesting of performance rights Issue of shares under dividend investment plan 2019 2018 159,929,582 158,246,851 1,245,484 - - 1,682,731 161,175,066 159,929,582 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. (cid:121) 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. (cid:121) (cid:121) 48 I Thorn Group NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS For the year ended 31 March 2019 Reserves The reserves consist of the equity remuneration reserve and the cash flow hedge reserve. The equity remuneration reserve represents the value of performance rights issued. The cash flow hedge reserve consists of the fair value of cash flow hedges after tax. 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: Cents per Share Amount $’000 AUDs Franking % Date of payment 2019 Final 2018 Interim 2019 Total amount 2018 Final 2017 Interim 2018 Total amount - - 2.5 1.0 - - - 3,956 1,593 5,549 - - n/a n/a 100% 100% 18 July 2017 19 January 2018 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 2019 39,608 2018 38,767 The above available amounts are based on the balance of the dividend franking account at year end adjusted for: (cid:121) (cid:121) (cid:121) 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. 17. 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 2019 was based on the loss attributable to ordinary shareholders of $14,940,000 (2018: loss of $2,210,000) and a weighted average number of ordinary shares during the year ended 31 March 2019 of 160,160,631 (2018: 159,094,096). 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 weighted average number of ordinary shares during the year ended 31 March 2019 is 165,042,055 (2018: 160,214,741). The weighted average number of performance rights of 1,908,000 (2018: 1,455,000) was not included because they were anti- dilutive. Annual Report 2019 I 49 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS For the year ended 31 March 2019 $’000 AUD Earnings per share Profit attributable to ordinary shareholders (basic) $’000 AUD Profit attributable to ordinary shareholders (basic) - continuing operations Profit attributable to ordinary shareholders (basic and diluted) - discontinued operations Profit attributable to ordinary shareholders (basic) 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 - discontinued operations Basic earnings per share (cents) Diluted earnings per share (cents) Earnings per share Basic earnings per share (cents) Diluted earnings per share (cents) 2019 2018 (18,122) 3,182 (14,940) 159,930 231 160,161 163,134 1,908 165,042 (11.3) (11.3) 2.0 1.9 (9.3) (9.3) (5,049) 2,839 (2,210) 158,247 847 159,094 158,760 1,455 160,215 (3.2) (3.2) 1.8 1.8 (1.4) (1.4) 18. CONSOLIDATED ENTITIES Parent entity Thorn Group Limited Subsidiaries Thorn Australia Pty Ltd Eclipse Retail Rental Pty Ltd Rent Try Buy Pty Ltd Thorn Equipment Finance Pty Ltd Thorn Finance Pty Ltd Thorn ABS Warehouse Trust No. 1 50 I Thorn Group Country of Incorporation Ownership Interest 2019 2018 Australia Australia Australia Australia Australia Australia Australia 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS For the year ended 31 March 2019 Basis of consolidation 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: (cid:121) 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. (cid:121) The consolidated entity has the decision making powers to obtain the majority of the benefits of the activities of the SPE. (cid:121) 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. 19. 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 18 (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 2019, 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 $22,681,000 and trade and other payables would decrease by $22,681,000, Receivables would decrease by $288,644,000 and loans payable would decrease by $288,644,000. Annual Report 2019 I 51 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS For the year ended 31 March 2019 20. PARENT ENTITY DISCLOSURES As at, and throughout, the financial year ending 31 March 2019 the parent entity of the consolidated entity was Thorn Group Limited. $’000 AUD Result of Parent Entity Profit for the period Other comprehensive income Total comprehensive income for the period 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 2019 - - - 1,293 127,377 - 5,541 120,932 904 121,836 2018 5,549 - 5,549 - 133,339 407 12,828 119,951 560 120,511 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 18 and note 19. 21. SPECIAL PURPOSE ENTITY The Group sells receivables to a warehouse financing facility through its special purpose entity. The SPE is consolidated as set out in note 18 as the Group is exposed or has rights to variable returns and has the ability to affect its returns through its power over the special purpose vehicle. The table below presents assets and the underlying borrowings attributable to the SPE to external funders. $’000 AUD Receivables Cash held by Trust Total Borrowings related to receivables 2019 313,744 22,681 336,425 288,644 2018 304,135 19,845 323,980 243,308 The Group provide additionl support to the special purpose entity including a liquidity facility of $3.3m (2018: $5.3m) and a bill and collect facility of $2.2m (2018: Nil). 52 I Thorn Group NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS For the year ended 31 March 2019 22. DISPOSAL OF SUBSIDIARY Three business divisions were sold over the past two years to reduce debt. There were final payment adjustments, tax finalisation and the resolution of provisions set aside for warranty and other claims during this financial year which have given rise to a profit after tax for discontinued businesses of $3.2m. (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 Profit (loss) from discontinued operations, net of tax (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 23. EMPLOYMENT BENEFITS EXPENSE $’000 AUD Wages and salaries Contributions to defined contribution superannuation funds Termination benefits Equity settled share-based payment transactions 2019 2018 - - - - - 3,197 (15) 3,182 2019 - - - 13,510 (9,966) 3,544 (1,063) 2,481 512 (154) 2,839 2018 (463) 51,249 50,786 2019 2018 - - - - - - - - - - - - (49,587) (323) (97) 255 38 (1,023) (50,737) 51,249 - 51,249 2019 2018 47,823 46,303 3,422 3,474 697 494 1,326 (209) 53,268 50,062 Annual Report 2019 I 53 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS For the year ended 31 March 2019 24. RELATED PARTIES Key management personnel remuneration $ Short-term employee benefits Post-employment benefits Long-term employee benefits Share based payments 2019 2,528,221 126,632 - 1,134,321 3,789,174 2018 2,930,197 478,890 2,893 (328,749) 3,083,231 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 . 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. 25. SHARE BASED PAYMENTS The aggregate transactions and outstanding balances relating to share based payments were as follows: Performance rights granted as compensation in the year Performance rights Performance Rights Granted Number 2,671,908 Date 1 July 2018 Financial Year in which Grants Vest (ended 31 March) 2022 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 the employees is as follows: Held at 1 April 2018 Granted as Compensation Vested during the year Lapsed Forfeited Held at 31 March 2019 Performance rights 3,206,317 2,671,908 (1,245,484) - (242,891) 4,389,850 54 I Thorn Group NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS For the year ended 31 March 2019 26. AUDITORS’ REMUNERATION In whole AUD Audit services Audit and review of financial reports Disposal of subsidiary related audit services Total Audit Services Other services Taxation services – compliance and advice Risk consulting services Compliance assurance services Other services Total other services Total auditor’s remuneration 27. CONTINGENT LIABILITY 2019 PwC Australia 660,240 - 660,240 - - 140,879 - 140,879 801,119 2018 KPMG Australia 574,650 15,000 589,650 234,380 127,285 26,500 109,397 497,562 1,087,212 The Thorn subsidiary operating Radio Rentals remains a respondent to a class action proceeding commenced by one of its customers in the Federal Court of Australia on 29 March 2017. The allegations relate to misleading and deceptive conduct, unconscionable conduct, false representations and unfair contract terms. The matter is being defended and no provision has been made in these accounts. The proceedings remain ongoing with a hearing scheduled for October 2019. Furthermore, the applicant was successful in its application to join Thorn’s former managing director, James Marshall, and Thorn’s insurer, AIG, to the proceedings. Legal fees continue to be incurred defending the matter. 28. SUBSEQUENT EVENTS The Company announced on 1 April 2019 that it had initiated a review of its strategic options. This review is ongoing and further announcements will be made in due course. One component of the review is an exploration of alternative ownership considerations which would include the potential sale of various divisions of the Group or the Company as a whole (including all of the assets of the Company). There is no certainty the strategic review will result in any offers for either the Company or a division thereof, or that if any offers are received they will be on commercially acceptable terms. Nonetheless, the directors are of the view that if a sale of the Company as a whole (including all of the assets of the Company) or any division thereof were to occur, there is a material probability such a sale will be at a value (or implied value) lower than the Company’s recorded net assets of $172.0m in these accounts presented as a going concern. This differential in value is also reflected in the company’s market valuation. Factors giving rise to this include uncertainty over the company’s future cash flows, the presence of the class action contingent liability, and a recognition that the value of assets realised in an immediate sense may be lower than the value realised in the ordinary course of business. Annual Report 2019 I 55 DIRECTORS’ DECLARATION For the year ended 31 March 2019 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 21 to 55 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 2019 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) the financial report also complies with International Financial Reporting Standards as disclosed in note 1(a); and (c) 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 2019. Signed in accordance with a resolution of the directors. David Foster Chairman Dated at Sydney 30 May 2019 56 I Thorn Group Independent auditor’s report To the members of Thorn Group Limited Report on the audit of the financial report Our opinion In our opinion: The accompanying financial report of Thorn Group Limited (the Company) and its controlled entities (together the Group) is in accordance with the Corporations Act 2001, including: (a)(cid:3) giving a true and fair view of the Group's financial position as at 31 March 2019 and of its financial performance for the year then ended (b)(cid:3) complying with Australian Accounting Standards and the Corporations Regulations 2001. What we have audited The Group financial report comprises: (cid:120)(cid:3) (cid:120)(cid:3) (cid:120)(cid:3) (cid:120)(cid:3) (cid:120)(cid:3) (cid:120)(cid:3) the consolidated statement of financial position as at 31 March 2019 the consolidated statement of changes in equity for the year then ended the consolidated statement of cash flows for the year then ended the consolidated statement of profit or loss and other comprehensive income for the year then ended the notes to the consolidated financial statements, which include a summary of significant accounting policies the directors’ declaration. Basis for opinion We conducted our audit in accordance with Australian Auditing Standards. Our responsibilities under those standards are further described in the Auditor’s responsibilities for the audit of the financial report section of our report. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion. Independence We are independent of the Group in accordance with the auditor independence requirements of the Corporations Act 2001 and the ethical requirements of the Accounting Professional and Ethical Standards Board’s APES 110 Code of Ethics for Professional Accountants (the Code) that are relevant to our audit of the financial report in Australia. We have also fulfilled our other ethical responsibilities in accordance with the Code. PricewaterhouseCoopers, ABN 52 780 433 757 One International Towers Sydney, Watermans Quay, Barangaroo, GPO BOX 2650, SYDNEY NSW 2001 T: +61 2 8266 0000, F: +61 2 8266 9999, www.pwc.com.au Level 11, 1PSQ, 169 Macquarie Street, Parramatta NSW 2150, PO Box 1155 Parramatta NSW 2124 T: +61 2 9659 2476, F: +61 2 8266 9999, www.pwc.com.au (cid:47)(cid:76)(cid:68)(cid:69)(cid:76)(cid:79)(cid:76)(cid:87)(cid:92)(cid:3)(cid:79)(cid:76)(cid:80)(cid:76)(cid:87)(cid:72)(cid:71)(cid:3)(cid:69)(cid:92)(cid:3)(cid:68)(cid:3)(cid:86)(cid:70)(cid:75)(cid:72)(cid:80)(cid:72)(cid:3)(cid:68)(cid:83)(cid:83)(cid:85)(cid:82)(cid:89)(cid:72)(cid:71)(cid:3)(cid:88)(cid:81)(cid:71)(cid:72)(cid:85)(cid:3)(cid:51)(cid:85)(cid:82)(cid:73)(cid:72)(cid:86)(cid:86)(cid:76)(cid:82)(cid:81)(cid:68)(cid:79)(cid:3)(cid:54)(cid:87)(cid:68)(cid:81)(cid:71)(cid:68)(cid:85)(cid:71)(cid:86)(cid:3)(cid:47)(cid:72)(cid:74)(cid:76)(cid:86)(cid:79)(cid:68)(cid:87)(cid:76)(cid:82)(cid:81)(cid:17)(cid:3) Material uncertainty related to going concern We draw attention to Note 1(b) in the financial report, which indicates that the Group incurred a loss before income tax from continuing operations of $25.2m for the year ended 31 March 2019 and net cash used in operating activities during the same period amounted to $12.9m. As a result the Group is dependent upon returning to profitability, maintaining support from its financiers and progressing the strategic review. These conditions, along with other matters set forth in Note 1, indicate that a material uncertainty exists that may cast significant doubt on the Group’s ability to continue as a going concern. Our opinion is not modified in respect of this matter. Emphasis of matter: uncertainty regarding outcome of litigation We draw your attention to Note 27 in the financial report which describes the uncertainty related to the outcome of the class action filed against the Group. Our opinion is not modified in respect of this matter. Our audit approach An audit is designed to provide reasonable assurance about whether the financial report is free from material misstatement. Misstatements may arise due to fraud or error. They are considered material if individually or in aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of the financial report. We tailored the scope of our audit to ensure that we performed enough work to be able to give an opinion on the financial report as a whole, taking into account the geographic and management structure of the Group, its accounting processes and controls and the industry in which it operates. Materiality Audit scope Key audit matters (cid:120)(cid:3) For the purpose of our audit we used overall Group materiality of $1,009,000, which represents approximately 4% of the Group’s loss before income tax from continuing operations. (cid:120)(cid:3) Our audit focused on where the Group made subjective judgements; for example, significant accounting estimates involving assumptions and inherently uncertain future events. (cid:120)(cid:3) We applied this threshold, (cid:120)(cid:3) together with qualitative The Group is principally involved in providing leases to (cid:120)(cid:3) Amongst other relevant topics, we communicated the following key audit matters to the Audit Committee: (cid:16)(cid:3) Valuation of intangible assets and property, plant and equipment (cid:16)(cid:3) Recoverability of trade and consumers and to businesses in Australia, through its two key divisions, Radio Rentals and Thorn Business Finance, respectively. (cid:120)(cid:3) The accounting processes are structured around a central Group finance function at the Group's head office in Sydney. other receivables (cid:120)(cid:3) (cid:16)(cid:3) Recognition of revenue These are further described in the Key audit matters section of our report, except for the matter which is described in the Material uncertainty related to going concern section. considerations, to determine the scope of our audit and the nature, timing and extent of our audit procedures and to evaluate the effect of misstatements on the financial report as a whole. (cid:120)(cid:3) We chose Group loss before income tax from continuing operations because, in our view, it is the benchmark against which the performance of the Group is most commonly measured. (cid:120)(cid:3) We utilised a 4% threshold based on our professional judgement, noting it is within the range of commonly acceptable thresholds. Key audit matters Key audit matters are those matters that, in our professional judgement, were of most significance in our audit of the financial report for the current period. The key audit 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. Further, any commentary on the outcomes of a particular audit procedure is made in that context. In addition to the matter described in the Material uncertainty related to going concern section, we have determined the matters described below to be the key audit matters to be communicated in our report. Key audit matter How our audit addressed the key audit matter Valuation of intangible assets and property, plant and equipment (Refer to notes 8 and 9) We inspected the Group’s impairment analysis for Radio Rentals CGU, as disclosed in Note 8 and 9 and developed an understanding of the process by which they were developed. This was a key audit matter because of the level of judgement required in assessing the Group’s assets for impairment. We considered whether the cash flows were based on supportable assumptions by: The recoverable amount of the Intangible assets and Property, plant and equipment was determined through a model based on the Group’s cash flow forecasts from the latest budget. The most significant judgements related to the assumptions supporting the underlying cash flows, in particular, revenue growth (cid:120)(cid:3) (cid:120)(cid:3) comparing the forecasts to latest budgets comparing previous forecasts to actual results to assess the Group’s historic ability to forecast future cash flows Key audit matter How our audit addressed the key audit matter rates, terminal growth rates and discount rate. (cid:120)(cid:3) The Group considered that each reportable operating segment constituted its own Cash Generating Unit (CGU). The Group identified through its annual assessment of impairment that assets were impaired and recorded an impairment charge of $10m against its Intangible assets ($5.2m) and its Property, plant and equipment ($4.8m), reducing their carrying amounts to nil at the balance date. performing sensitivity analysis on the assumed growth rate in revenues and the terminal growth rate used in the cash flow forecasts. In testing the valuation model, we: (cid:120)(cid:3) (cid:120)(cid:3) (cid:120)(cid:3) evaluated the calculations for mathematical accuracy checked that the methodology used to prepare the valuation model was in accordance with the requirements of Accounting Standard AASB 136 Impairment of assets. considered the sensitivity of the calculation by varying assumptions (e.g. discount rate) and applying other values within a reasonably possible range (cid:120)(cid:3) compared the output of the model to the impairment charge recorded. Provision for impairment of trade and other receivables (Refer to note 13) We have performed the following procedures amongst others: This was a key audit matter because it was the first period of reporting under Accounting Standard AASB 9 Financial Instruments (AASB 9) and the determination of the provision for impairment of trade and other receivables was driven by subjective judgements made by the Group in determining the approach for predicting expected credit losses (ECL). The majority of the receivables balances were low value and therefore the ECL was modelled on a collective basis at a portfolio level. Key elements in the provisioning for trade and other receivables under AASB 9 include: (cid:120)(cid:3) the judgements applied in determining customers that have had a significant increase in credit risk, which is assessed by the Group (cid:120)(cid:3) (cid:120)(cid:3) (cid:120)(cid:3) examined the key assumptions in the ECL model developed by the Group, such as the staging, PDs and LGDs. This included using PwC credit modelling experts to assess the appropriateness of the assumptions and whether those assumptions were applied correctly in the ECL model. assessed the appropriateness of the delinquency status and staging applied at customer account level by re-performing the delinquency status calculation and stage assignment on a sample basis. assessed the integrity of the input data used in the ECL model by comparing key data inputs to signed customer contracts and source systems on a sample basis. Key audit matter How our audit addressed the key audit matter based on the delinquency status at a customer account level. (cid:120)(cid:3) (cid:120)(cid:3) judgements applied in setting the assumptions used in the ECL model, such as the probability of default (PDs) and loss given default (LGDs). reserves and overlays included to reflect emerging trends or particular situations which are not otherwise captured by the ECL model. The Group identified certain exposures and provided individually for these, separate to the collectively assessed provision. (cid:120)(cid:3) (cid:120)(cid:3) (cid:120)(cid:3) (cid:120)(cid:3) considered the accuracy of the modelled provision for impairment held by the Group by re-performing the ECL calculation on a portfolio basis. obtained an understanding of and evaluated the appropriateness of the reserves and overlays applied. for receivables which were identified and provisioned for separately, considered the basis of measuring the individually assessed provisions by considering the latest information available to the Group. assessed the integrity of the input data used to compute the individually assessed provisions by comparing key inputs to signed contracts and source systems on a sample basis. Recognition of revenue (Refer to note 3) We performed the following procedures amongst others: The Thorn Group has two main sources of revenue, finance lease interest income and sales revenue. This was a key audit matter because of: (cid:120)(cid:3) (cid:120)(cid:3) the significance of finance lease interest income in the context of the profit of the Group; and the significance of sales revenue recorded at the commencement of the lease contract, and the associated incentives offered to customers. (cid:120)(cid:3) (cid:120)(cid:3) (cid:120)(cid:3) (cid:120)(cid:3) inspected and compared the key contract data inputs in the product system to the signed contract for a sample of leases re-performed the finance lease calculations on a sample basis for a sample of sales during the year, we tested the sales amount recorded to external price lists and internally determined rental rates for a sample of adjustments to sales revenue, tested the incentives offered to customers by agreeing the amount to the signed lease contract. Operation of IT systems and controls The Group is dependent on its IT systems for the processing and recording of significant volumes of transactions. We evaluated the design and implementation of key controls over relevant IT systems, which included assessing: the governance of the Group’s technology control environment, IT change management controls, security and access controls, system development Key audit matter How our audit addressed the key audit matter This was a key audit matter because a number of key financial controls we seek to rely on are related to IT systems and automated controls. Controls relating to the management of IT systems are important because they are intended to ensure changes to applications and data are appropriately implemented and authorised. Ensuring staff have appropriate access to IT systems and that access is monitored are key controls in mitigating the potential for fraud or error as a result of underlying changes to an application or data. controls and IT operations controls. Based on the results of our IT control design assessment, we were required to carry out further direct tests over the accuracy of relevant automated calculations and reports to obtain sufficient evidence for our audit. Other information The directors are responsible for the other information. The other information comprises the information included in the annual report for the year ended 31 March 2019, but does not include the financial report and our auditor’s report thereon. Our opinion on the financial report does not cover the other information and accordingly we do not express any form of assurance conclusion thereon. In connection with our audit of the financial report, our responsibility is to read the other information and, in doing so, consider whether the other information is materially inconsistent with the financial report or our knowledge obtained in the audit, or otherwise appears to be materially misstated. If, based on the work we have performed on the other information that we obtained prior to the date of this auditor’s report, we conclude that there is a material misstatement of this other information, we are required to report that fact. We have nothing to report in this regard. Responsibilities of the directors for the financial report The directors of the Company are responsible for the preparation of the financial report that gives a true and fair view in accordance with Australian Accounting Standards and the Corporations Act 2001 and for such internal control as the directors determine is necessary to enable the preparation of the financial report that gives a true and fair view and is free from material misstatement, whether due to fraud or error. In preparing the financial report, the directors are responsible for assessing the ability of the Group to continue as a going concern, disclosing, as applicable, matters related to going concern and using the going concern basis of accounting unless the directors either intend to liquidate the Group or to cease operations, or have no realistic alternative but to do so. Auditor’s responsibilities for the audit of the financial report Our objectives are to obtain reasonable assurance about whether the financial report as a whole is free from material misstatement, whether due to fraud or error, and to issue an auditor’s report that includes our opinion. Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with the Australian Auditing Standards will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of the 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_responsibilities/ar1.pdf. This description forms part of our auditor's report. Report on the remuneration report Our opinion on the remuneration report We have audited the remuneration report included in pages 10 to 20 of the directors’ report for the year ended 31 March 2019. In our opinion, the remuneration report of Thorn Group Limited for the year ended 31 March 2019 complies with section 300A of the Corporations Act 2001. Responsibilities The directors of the Company are responsible for the preparation and presentation of the remuneration report in accordance with section 300A of the Corporations Act 2001. Our responsibility is to express an opinion on the remuneration report, based on our audit conducted in accordance with Australian Auditing Standards. PricewaterhouseCoopers Marcus Laithwaite Partner Sydney 30 May 2019 SHAREHOLDER INFORMATION DISTRIBUTION OF SHAREHOLDERS AS AT 30 JUNE 2019 1 - 1,000 1,001 - 5,000 5,001 - 10,000 10,001 - 100,000 100,001 - 9,999,999,999 Rounding Total Fully Paid Ordinary Shares (Total) Total Holders 1,330 2,348 1,174 1,508 104 Shares 664,753 6,728,951 9,183,598 41,306,964 103,290,800 6,464 161,175,066 % issued capital 0.41 4.17 5.70 25.63 64.09 0.00 100.00 MARKETABLE PARCELS AS AT 30 JUNE 2019 Minimum $ 500.00 parcel at $ 0.3050 per unit Minimum Parcel Size 1,640 Holders 1,789 Units 1,271,675 THE NAMES OF THE SUBSTANTIAL SHAREHOLDERS LISTED IN THE COMPANY’S REGISTER AS AT 20 JUNE 2019 Rank 1 2 3 Top Investors ICM Limited Forager Funds Management Pty Ltd Investors Mutual Limited VOTING RIGHTS % Issued Capital 19.89% 11.30% 8.63% 32,055,942 18,216,132 13,901,351 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 2019, there were 8,531,012 unlisted Performance Rights on issue held by 12 different persons. Of these Rights, all have no exercise price and vest between 1 September 2019 and 1 September 2022 subject to the fulfilment of the relevant vesting conditions. SHAREHOLDER INFORMATION 20 LARGEST SHAREHOLDERS – ORDINARY SHARES AS AT 30 JUNE 2019 Rank 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13. 14. 15. 16. 17. 18. 19. 20. Top Investors HSBC CUSTODY NOMINEES (AUSTRALIA) LIMITED J P MORGAN NOMINEES AUSTRALIA PTY LIMITED CITICORP NOMINEES PTY LIMITED AUSTRALIAN EXECUTOR TRUSTEES LIMITED MR HONGBIN CHEN CVC LIMITED NATIONAL NOMINEES LIMITED BNP PARIBAS NOMINEES PTY LTD BRAZIL FARMING PTY LTD DRNEWNHAM SUPER PTY LTD DALELAN PTY LIMITED CREATIVE LIVING (QLD) PTY LTD MR TIMOTHY JAMES LUCE NEWECONOMY COM AU NOMINEES PTY LIMITED <900 ACCOUNT> SPORRAN LEAN PTY LTD MORGAN STANLEY AUSTRALIA SECURITIES (NOMINEE) PTY LIMITED MR MICHAEL JOHN HORN PILGRIM PTY LTD TIMENOW PTY LTD MR FRANCIS MAXWELL HOOPER Totals: Top 20 Holders Of Ordinary Fully Paid Shares (Total) Total Remaining Holders Balance % Issued Capital 28.41 13.95 4.51 1.15 1.01 0.91 0.76 0.48 0.43 0.41 0.38 0.37 0.37 0.33 0.31 0.31 0.28 0.28 0.27 0.25 55.18 44.82 45,789,357 22,484,196 7,267,679 1,849,235 1,632,804 1,472,655 1,225,385 768,234 700,000 653,000 618,471 600,000 598,803 528,771 502,000 500,750 454,500 450,000 434,405 400,171 88,930,416 72,244,650 There are 161,175,066 fully paid ordinary shares on issue, all of which are listed on the Australian Securities Exchange. 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 PWC One International Towers Sydney Watermans Quay Barangaroo Sydney, NSW 2000 REGISTRY Computershare Investor Services Pty Limited Level 3 60 Carrington Street Sydney NSW 2000 

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