Turners Automotive Group Limited
Annual Report 2020

Plain-text annual report

RESILIENT BUSINESS TRUSTED BRANDS Turners Cars North Shore, Auckland ANNUAL REPORT FOR THE YEAR ENDED 31 MARCH 2020 On behalf of the Board and management of Turners Automotive Group Limited, we are pleased to present the Annual Report for the financial year ended 31 March 2020. Grant Baker Chairman Todd Hunter Chief Executive Officer FY20 AT A GLANCE OUR CHANGING LANDSCAPE STRATEGIC THEMES FOR FY21 OUR STRATEGY CHAIR AND CEO’S REPORT OUR BUSINESS: RESPONDING TO THE COVID-19 CHALLENGE LEADING CHANGE BUY SAFE FY20 FINANCIAL COMMENTARY THE BOARD SENIOR LEADERSHIP TEAM FINANCIALS 4 6 8 9 10 16 17 18 20 22 24 27 2 3 TURNERS AUTOMOTIVE GROUP ANNUAL REPORT 2020 CONCLUDED STRATEGIC REVIEW OF OXFORD FINANCE, with ownership retained and focus on reshaping and growing the business. REBRANDED BUY RIGHT CARS TO TURNERS: Completed in May 2019, leveraging the high levels of awareness and trust in the Turners brand. CONTINUED FOCUS ON HIGH QUALITY BORROWERS, resulting in improved arrears performance. REFINEMENT OF RISK PRICING: For the insurance and finance businesses. GROW THE BUSINESS DE-RISK THE BUSINESS SIMPLIFY THE BUSINESS SIMPLIFY, DE-RISK AND GROW E LAUNCH OF NEW STRATEGY IN MAY 2019 – C N A L G A T A 0 2 Y F FY20 FINANCIAL SNAPSHOT ■ Underlying NPBT $28.8m, up 11% and Level 4 lockdown ■ Increase in Net Profit Before Tax (NPBT) to $29.1m, in line with pre COVID-19 guidance of $28m to $30m INNOVATION AND VENTURES: Investment into ASX-listed Collaborate Corporation, a tech-focused vehicle subscription business based in Australia. Agreed commercial terms for the launch of Carly vehicle subscription in New Zealand. EXPANDED AUTOSURE DISTRIBUTION NETWORK: Agreed strategic distribution agreement with Heartland Bank to sell Autosure insurance products through Heartland’s consumer intermediary network. EXPANSION OF THE RETAIL NETWORK: Relocated North Shore site to new Wairau Valley location, opened new Hamilton site and committed to development of two new Auckland sites and a large new site in Dunedin. DIGITAL ADVANTAGE: Continued to invest into technology platform, digital marketing and leveraging data assets. ■ Final six weeks of the financial year impacted by COVID-19 pandemic ■ Net Profit After Tax down 8% to $21.0m ■ Solid gains in the finance, insurance & credit management businesses; Auto retail impacted by slowdown in last six weeks of FY20 due to COVID-19 ■ Group revenue decreased 1% on previous year ■ Solid market share gains, within the context of a softening used car market ■ Paid 14.0 cents per share in fully imputed dividends for the FY20 year FINANCIAL SNAPSHOT GROUP REVENUE $332.7M -1% NET PROFIT BEFORE TAX $29.1M 0% I S N O L L M $ I I S N O L L M $ I I S N O L L M $ I 400 350 300 250 200 150 100 50 0 30 25 20 15 10 5 0 400 350 300 250 200 150 100 50 0 I S N O L L M $ I 35 30 25 20 15 10 5 0 FY16 FY17 FY18 FY19 FY20 FY16 FY17 FY18 FY19 FY20 NET PROFIT AFTER TAX $21.0M -8% FULL YEAR DIVIDENDS 14.0 CENTS PER SHARE 18 16 14 12 10 8 6 4 2 0 E R A H S R E P S T N E C FY16 FY17 FY18 FY19 FY20 FY16 FY17 FY18 FY19 FY20 SECTOR REVENUE SECTOR OPERATING PROFIT I S N O L L M $ I 45 40 35 30 25 20 15 10 5 0 FY16 FY17 FY18 FY19 FY20 FY16 FY17 FY18 FY19 FY20 ■ AUTOMOTIVE RETAIL ■ FINANCE AND INSURANCE ■ DEBT MANAGEMENT 4 5 TURNERS AUTOMOTIVE GROUP ANNUAL REPORT 2020 The used car market is evolving and we are positioning ourselves to take advantage of the opportunities this brings. We are excited about our potential in this changing environment. CUSTOMER-CENTRIC: Customers are more informed and delivering great customer outcomes is essential to survive and prosper. E MARKET DYNAMICS AND TRENDS P A C S D N A L DATA AND TECHNOLOGY: Big data and technology are changing how and where we do business. ONLINE EXPERIENCE: More of the customer experience is transitioning online, particularly for finance and insurance. INDUSTRY CONSOLIDATION is inevitable and we are in the midst of this right now. AGGREGATOR AND COMPARISON SITES are proliferating. REGULATION AND COMPLIANCE across all our businesses is increasing. DISRUPTION FROM ALTERNATIVE OWNERSHIP MODELS which could see people moving away from owning one, two or more cars per household, to flexible ownership and subscription models. I G N G N A H C R U O Turners Cars Palmerston North 6 The used car market is evolving and we are positioning ourselves to take advantage of the opportunities this brings. 7 TURNERS AUTOMOTIVE GROUP ANNUAL REPORT 2020 1. Opportunity to Accelerate Market Share We are in a position to realise any new opportunities that arise from a disrupted market and expect to accelerate the market share gains that have been made in recent years. We will concentrate on increasing our market share through optimising our existing branch network, creating new consignment relationships, expanding our retail footprint and taking advantage of market consolidation. 2. Leverage Our Scale and Brand Equity Our scale offers multiple advantages, giving us greater buying power, greater strength and greater access to capital. Our highly trusted Turners brand will become even more relevant in the new economy. Turners is consistently NZ’s leading used auto retail brand, according to independent market research, and recently received the 2020 Readers Digest Trusted Brand Award as New Zealand’s most trusted used car dealer. C I G E T A R T S R U O 1 STRATEGIC THEMES FOR FY21 2 Y F R O F S E M E H T 3. Playing to Our Strengths 4. Digital Advantage Diversified Business: Turners is a purposefully diversified business. Each business has different business cycles and delivers a balance of annuity vs activity based revenue. Geographical diversification also allows the business to redeploy inventory if there are any localised lockdowns going forward or regional demand differences. We are committed to creating competitive advantage from technology investments and will double down on these efforts to further broaden our technology advantage. A key differentiator for our business is the Turners’ digital platform which is the #2 most visited auto website in NZ behind TradeMe. 5. Balance Sheet Capacity to Support Growth Our balance sheet is a major competitive advantage, and will enable continued growth in a consolidating market. We are well positioned from a funding and capital perspective to take advantage of growth opportunities in the future. OUR STRATEGY TURNERS’ STRATEGY IS BASED ON OUR STRENGTHS AND THE OPPORTUNITIES THAT EXIST FOR OUR BUSINESS. The industry is changing and we are taking action to ensure we are well positioned to take advantage of future trends. The Automotive Retail sector remains our primary focus. OUR AMBITION OUR STRENGTHS OUR STRATEGY For Turners to be New Zealand’s best place to buy and sell vehicles, delivering high customer satisfaction every time. ■ Unrivalled reach and scale ■ High profile, trusted Turners’ brand ■ Diversified businesses ■ Strong balance sheet ■ Large customer base ■ Rich data assets ■ Digital advantage SIMPLIFY THE BUSINESS Focus on core products and businesses that deliver value and future opportunities. DE-RISK THE BUSINESS ■ Continue to write high quality loans through early adoption and refinement of comprehensive credit reporting ■ Actively engage with regulators in regards to compliance and regulatory change ■ Focus on low risk loan origination rather than underwriting a broader range of credit risks GROW THE BUSINESS ■ Continue to expand the auto retail footprint across New Zealand ■ Shift marketing investment into digital platforms ■ Leverage data analytics to transact smarter ■ Evolve the customer experience in person and online ■ Look for innovation opportunities within the auto sector OUTCOMES A WINNING CUSTOMER EXPERIENCE, A MORE EFFICIENT AND FOCUSED BUSINESS, HIGHER MARGINS AND LOWER RISK, AND INCREASING VALUE FOR OUR SHAREHOLDERS. 8 9 TURNERS AUTOMOTIVE GROUP ANNUAL REPORT 2020 businesses. Three of our four businesses (Oxford Finance, Autosure Insurance and EC Credit Control) were profitable even during the L3/L4 lockdown period. We launched our new strategy in May 2019, with a focus on three key themes – Simplify, De-Risk and Grow our Business. These directed our actions for most of the year. We are creating a more streamlined and cost efficient business, growing our market share in sectors where we have a dominant position and building on our strengths to position our businesses as the preferred choice for our customers. Key achievements include our investment into ASX-listed Collaborate Corporation, a tech- focused car-sharing and vehicle subscription business based in Australia; the continuation of our property strategy with the development and opening of two new sites with a further four planned for FY21; and the completion of the Oxford Finance strategic review. THE USED CAR ECONOMY The softening noted in the second half of the FY19 year continued into FY20, further compounded by the COVID-19 impact at the end of FY20. However, underlying demand remains robust driven by New Zealand’s aging fleet, with hundreds of thousands of cars needing replacement over the next few years. New Zealand’s vehicle fleet continues to age. Around 950,000 vehicles (20% of light vehicles) are at or very near the scrapping age, which is around 19.5 years for an import and 17.5 years for a New Zealand-new car. More cars are now exiting the fleet due to the cost of repairs and a stricter Warrant of Fitness regime. The NZ used vehicle market is still very fragmented, however, consolidation is underway. Dealer numbers have been in decline for the last two years and we expect this to accelerate further over the next 12 to 24 months. We know this is a good time to be pushing hard for gains in retail market share and we are well positioned to take advantage of this. We will focus on building our market share by growing our customer base and adding value to customers through our ‘one stop shop’ offer and customer experience. OPERATIONAL PERFORMANCE ■ AUTOMOTIVE RETAIL (TURNERS GROUP) Revenue: $224.9m 0% Operating Profit: $13.8m -24% Turners’ strategy of retail optimisation and the continued transition of wholesale to retail is continuing to deliver growth in retail market share. Throughout FY20 we observed a softening of the used car market due to reduced consumer confidence and this decline was suddenly exacerbated during late February and March 2020 due to the COVID-19 pandemic. There was a cyclical reduction in consignment vehicles (down 26%) through the Turners business in FY20, however, this reduction was somewhat offset by an increase in sales of owned inventory (up 6%) with average gross profits per unit up 12% to $529. We have a particular focus on optimisation of our property network. Following year end, a decision was made to leave the main Penrose “supersite” in December 2020. Around the same time, we will bring on stream new retail sites in Westgate and Mt Richmond which will enable a better retail experience for our customers. Penrose was established as a wholesale auction facility twenty years ago and is no longer appropriate both in terms of a cost base or customer experience. We have successfully integrated the Buy Right cars business into the Turners’ car business over the year. We started with the brand consolidation early in FY20 and the integration has now been extended to core IT and operational systems which will enable further efficiencies. BuyNow retail sales were down around 0.5% year on year, which we were pleased with considering the impact of COVID-19. A new Dunedin branch at double the previous footprint, and new sites in Westgate and Mt Richmond, should see further gains made in retail sales over the next one to two years, depending on the speed of recovery in the economy. Damaged vehicle units were up 12% with some good gains from existing insurance vendors and the benefit from one-off events like the Timaru hail storm and flood damaged cars from Sky City. OUT OF CHALLENGE AND ADVERSITY COMES NEW OPPORTUNITIES FOR THOSE BUSINESSES POSITIONED AND READY TO TAKE ADVANTAGE OF IT. Turners is the largest used vehicle retailer in the country, with unrivalled reach, scale and national brand awareness. Our strength is in Automotive Retail and we are the largest and most trusted brand in the industry. Our focus for FY20 was very much on organically growing underlying earnings and we achieved this in three out of our four businesses and were on track for a full house until COVID-19 hit. Given the impact of the pandemic in the last six weeks of the financial year, we were pleased with the results. Year on year, we were slightly ahead on reported Net Profit Before Tax at $29.1m and we delivered strong growth in underlying earnings, which were up 11% to $28.8m. The COVID environment has highlighted the value of a diversified portfolio of businesses, and the inherent “annuity” nature of three of those Chief Executive Officer, Todd Hunter and Chairman, Grant Baker I R A H C T R O P E R S ’ O E C D N A 10 11 TURNERS AUTOMOTIVE GROUP ANNUAL REPORT 2020 All originators have now been transitioned to a new retail policy generation system and we continue to review dealers’ portfolio performance for risk pricing. Our Reserve Bank Culture and Conduct Review work was completed with a number of initiatives implemented, ensuring we are closer to end users and better understand customer outcomes and experience. The distribution partnership announced between Heartland Bank and our respective brands, Autosure and MARAC, is now implemented and working well. We are working on similar models of distribution with a number of other organisations which involve deep integration of our insurance system into their front end sales system. This is an area where we will continue to invest. ■ CREDIT MANAGEMENT (EC CREDIT CONTROL) Revenue: $17.9m -1% Operating Profit: $6.5m +3% EC Credit Control’s performance was in line with the previous year. Although debt load was down 5% for the year, the debt collected was up 14%, driven mostly out of improved collections from Australian SME clients and Corporate NZ clients. Commission earned from debt collected increased 11% to $10.0m. Our traction with customers connecting to EC Credit via Xero and MYOB continues to gather momentum with over 420 customers now connected and loading debt worth over $3m during FY20. The team responded quickly to the COVID situation and all Work From Home systems operated at 100 percent. We worked closely with our large corporate customers to help manage their reputational risk with debt collection work during lockdown and we are expecting a significant increase in debt loaded from these customers in the medium term. We have already seen a lift in debt load from SME customers in the first quarter of FY21. As we did with Oxford Finance, we will also conduct a strategic review of EC Credit in the next 12-24 months. ■ FINANCE (OXFORD FINANCE) Revenue: $45.7m +4% Operating Profit: $12.2m +10% The Finance business had an excellent year with operating profit increasing 10% to $12.2m. This reflects our increasing focus on lending to higher quality borrowers. We introduced 3-tier risk pricing in August 2019 which has enabled us to be much more targeted towards high quality borrowers and tighten up at the lower end of the quality range. Premium Tier risk now accounts for 11% of our total existing book and is around 30-40% of new lending each month. Instalment arrears on Premium Tier business is tracking at around 0.01% compared to Tier 2 instalment arrears at 5.6%. The introduction of comprehensive credit reporting alongside negative reporting is proving to be a strong combination of data to help us profile borrowers. The Turners Cars loan origination is going well and we are earning more margin in the Group as a result of this. Turners Cars’ ledger is now up to $52m and is performing exceptionally well on lending quality metrics. We also completed the strategic review process for Oxford Finance during the year and, whilst there was significant interest above the book value of the business, in the Board’s view, the offers received did not fully reflect the intrinsic value of Oxford Finance, both today and especially factoring in the planned organic growth. We are pleased to have such a strong annuity business within the Group at this time and have funding and equity capacity to continue growing this business over the next few years. ■ INSURANCE (AUTOSURE) Revenue: $44.1m -9% Operating Profit: $6.2m -25% Insurance revenue declined in FY20 reflecting a one-off gain from property sale in the prior year ($3.0m), and further risk optimisation we are running through the portfolio. General Gross Written Premium (GWP) was down 7% to $36.8m as a result of market conditions and focusing on lower risk portfolios and vehicles. Pleasingly, underlying profit (which excludes the gain on property sale in FY19) increased due to continued improvements in risk pricing and reduction in claims loss ratios, resulting from a new insurance software system, as well as procurement initiatives. The combined claims loss ratio for FY20 was 62% (FY19: 64%), while the MBI loss ratio was 66% (FY19: 75%). DIGITAL, DATA AND DISRUPTION In all our businesses, digital initiatives are being prioritised. We are continuing to invest in digital marketing and data. We have several projects underway in the areas of lead management and automated communications. This investment enables us to better identify users on our website and be more targeted in subsequent communications with them. We have also implemented an automated digital communications project which allows a more strategic and targeted approach to people who are looking to buy or sell through Turners. We are working on two major data projects which will help us in the area of pricing vehicles and identifying credit risk. Both these projects leverage “off-the-shelf” cloud-based data tools, including machine-learning. The proof of concept results are promising and we know there is a significant opportunity in vehicle purchasing to help identify and limit our “bad buys”, as there is in the finance business with identifying and limiting our “bad lending”. We were planning to launch a car subscription service in March this year, however, progress has been impeded by COVID-19. We have subsequently made the decision to brand the business under the Turners brand umbrella due to its high trust, strong brand value and recognition. We are working directly with Collaborate in Australia to get the subscription platform set up for NZ and now expect Turners Car Subscription to be up and running in Q2 FY21. DIVIDEND AND SHARE BUY BACK PROGRAMME In March 2020, the Board deferred the Q3 dividend payment as a cautionary step due to the uncertainty surrounding the length of a L4/L3 lockdown. In June 2020, with a better understanding of how the business was tracking, the Board declared a final fully imputed dividend incorporating the Q3 deferred dividend of 6.0 cents per share, resulting in full year dividends of 14.0 cps. The Board believes this level of pay out best ensures our ability to navigate the volatility of the current environment, and also the optionality to take advantage of any upcoming opportunities. The Board’s intention at this stage is to continue dividend payouts for FY21 in line with the current policy level of 60-70% of net profit after tax. The Board continues to believe that the share price does not appropriately reflect the fundamentals of the business and recommenced the share buyback programme in August and September 2019. Approximately, 1.4 million shares were bought and cancelled, equating to 1.6% of shares on issue. RESPONDING TO COVID-19 The impact of the COVID-19 pandemic began to be seen on our business in February 2020. While we have now moved to a ‘new normal’, we would like to acknowledge and thank our team for their efforts during this challenging time. They have been committed, understanding, and prepared to go above and beyond in difficult circumstances. We would also like to thank those landlords and business partners who extended a helping hand during the early part of lockdown…this was greatly appreciated. The sudden change brought about by the COVID-19 lockdown required dynamic planning and execution urgency. The speed at which we were able to respond was a testament to the skills in our IT group but also the technology investments we have made over the last few years. We had a very simple approach to our response to the situation. We reacted to make sure that, as a business, we were in a position to survive a three to six month lockdown and prepare for a potentially longer restricted trading environment. We took a “cash is king” approach to this. We then had to start rethinking the business. Our primary objective was to resume trading as soon as possible, in a way that safely managed the risk to our people and our customers. We initiated a successful contactless, 100% online trading programme and, even during the Level 4 and 3 lockdown, we were able to sell 600 vehicles online. The ability to sell uninspected vehicles online at scale for the first time demonstrates the high trust and awareness of the Turners brand and given its popularity, we plan to continue with this online service. This ability to continue trading allowed us to avoid a dilutive capital raise. We knew that economic conditions were likely to change for some people, so we needed to think about our risk in the finance book and adjust our lending criteria accordingly. We also knew that strong trusted brands would have a sizeable opportunity in a post-lockdown world. 12 13 TURNERS AUTOMOTIVE GROUP ANNUAL REPORT 2020We are now in the rebuilding phase and focusing on the opportunities. This will require disciplined cost control, leveraging our strong online platform, continuing to invest in technology where it makes sense and building our market share in all our respective businesses. We are now in the rebuilding phase and focusing on the opportunities. This will require disciplined cost control, leveraging our strong online platform, continuing to invest in technology where it makes sense and building our market share in all our respective businesses. SOCIAL RESPONSIBILITY Our drive to create a better business encompasses not only delivering returns to our shareholders, but also supporting our people, our communities and our environment. We believe that creating a long lasting, sustainable and profitable business also delivers benefits for our people, by providing employment in regions throughout New Zealand. At no other time has the importance of supporting our people been more evident than during the lockdown. We were able to keep many staff working from home and financially supported those who were unable to work. Health and safety remains a priority and we moved quickly to create new ways of working, to keep our people and our customers safe during this time, with the launch of our BuySafe initiative. We are committed to ethical and fair conduct, which is particularly relevant given the industries we operate in. We believe in not only doing the right thing for business, but also the right thing for our customers and our people. We are conscious that we operate in a sector which has a high carbon footprint. We believe that some of the initiatives we are taking will help reduce this impact, from having more staff working from home, through to car subscription services and offering electric vehicles for sale. We also take sustainability into account when building new sites and premises, with solar panels currently being trialled on the roof of our Hamilton dealership. FY21 OUTLOOK As with many businesses there are many unknowns in our operating environment, over the next 12 to 24 months. However, the long term dynamics of the used car industry remain robust and an attractive opportunity for Turners. We have identified five strategic themes, which will help us navigate this environment and have outlined these on page 8. In summary, we will be looking to: 1. Accelerate market share growth 2. Leverage our scale and brand equity 3. Benefit from the diversification of our business 4. Invest to build our digital advantage 5. Leverage our balance sheet capacity to support growth opportunities We have full confidence in our strategy, our businesses and our teams to deliver an improving performance for all our stakeholders, from our customers through to our shareholders. The pandemic has hastened our move to become a more cost efficient, more resilient and more focused business. This will benefit Turners as we look to grow our business and take advantage of opportunities. Our thanks go to all our customers, suppliers and business partners, and especially to our people, who have helped us overcome the recent challenges and positioned us for an exciting future. We look forward to our shareholders sharing this journey with us. Grant Baker Chairman Todd Hunter Chief Executive Officer 14 15 TURNERS AUTOMOTIVE GROUP ANNUAL REPORT 2020The sudden change brought about by COVID-19 required dynamic planning and execution urgency. The speed at which we were able to adapt our business was a testament to the technology investments we have made over the last few years. REACT ENSURE SURVIVAL OF THE BUSINESS, ‘CASH IS KING’ APPROACH ■ Safety of staff and customers a priority ■ Rapid Working From Home setup completed ■ Hiring freeze implemented ■ Annual leave utilised, where appropriate ■ Accessed Government Wage Subsidy support ■ All permanent team members retained ■ Reduction in pay for senior management and directors for 3-month S RESPONDING TO THE COVID-19 CHALLENGE S E N I S U B R U O RETHINK ASSESS AND EVALUATE, POSITION FOR THE ‘NEW NORMAL’, AVOID A DILUTIVE CAPITAL RAISE ■ Online purchasing and contactless delivery implemented ■ WFH on a more permanent basis ■ Customers reverting to trusted brands ■ Assessing the challenges of growing unemployment, weakening ■ All costs reviewed and discretionary spend halted ■ Deferred capital expenditure ■ Established what was possible eg. Essential service, selling cars ■ Daily reporting on critical KPIs established period online demand and softening prices ■ Close communication with funder ■ Avoided a dilutive capital raise REBUILD EYES ON THE PRIZE AND PREPARE FOR OPPORTUNITIES ■ Disciplined cost control ■ Continue to offer 100% online customer experience ■ Review credit risk scoring ■ Enhance distribution in insurance ■ Push the trust and strength in our brands ■ Significant opportunity to build market share in all our businesses ■ Leverage strong balance sheet to take advantage of opportunities 16 LEADING CHANGE In FY20, we acquired a 12% stake in ASX-listed Collaborate Corp. Collaborate’s core business centres around the rapidly evolving car sharing market with DriveMyCar, Australia’s leading peer-to-peer car rental business, complemented by Carly, Australia’s first truly flexible car subscription offering, which launched in March 2019. This investment provides an exciting opportunity for Turners to participate in the rapid growth of the ‘Sharing Economy’ as it relates to transportation and changing consumer preferences. Alternative vehicle ownership models are on the rise internationally, and vehicle subscription programmes could account for nearly 10% of all new vehicle sales in the US and Europe by 2025. In developed markets like the UK and the US, subscription-based ownership models have already crossed 10% of monthly household incomes, driven in large part by the benefits experienced by consumers such as greater flexibility and a reduction in costs incurred including the purchase of vehicles, parking, insurance, fuel and maintenance1. We are excited about Turner’s future as we position ourselves for the long term projected changes in the traditional retail car market. New concepts such as peer to peer car rentals and car sharing are a part of the future and provide a new revenue opportunity for car dealers and other industry players. https://www.forbes.com/sites/sarwantsingh/2018/07/30/your-next-car-could-be-a-flexible- subscription-model/#2ec7ac4f4ffa “New concepts such as peer to peer car rentals and car sharing are a part of the future and provide a new revenue opportunity for car dealers and other industry players.” I T U R N E R S A U T O M O T V E G R O U P A N N U A L R E P O R T 2 0 2 0 17 As Level Three approached, the opportunity to commence a contactless, safe and trusted online retail service became a reality. Turners’ BuySafe program was designed to sell vehicles under the operational restrictions of Level 3 while keeping our staff and our customers safe. BuySafe builds on the existing online research and buying capabilities of Turners and added in new innovations such as virtual test drives via phone video calling, remote finance approvals, a 5-day money back guarantee and a contactless handover process. A impactful marketing campaign was launched to highlight that customers could purchase vehicles through a safe, 100% contactless process, and to give customers the confidence to do so. Designed to be a simple checklist of the vehicle buying journey, each step of the process was outlined in the online campaign, with the emphasis being on safety. And not just from a health perspective. Buying a car without a physical inspection can be daunting for most. The addition of the 5-Day money back guarantee was made to give customers ‘buying safety’. This gave the ultimate confidence to buy – a no questions asked return policy. The BuySafe program is still running for any who require it. And the 5-Day money back guarantee has been made available on over half our stock for all customers through the retail channel. SAFETY FIRST CHOOSE YOUR CAR VIRTUAL TEST DRIVE * CONTACTLESS ONLINE BUYING MONEY BACK GUARANTEE CONTACTLESS HANDOVER *Not all vehicles have this offer. Terms and conditions apply. 18 A impactful marketing campaign was launched to highlight that customers could purchase vehicles through a safe, 100% contactless process, and to give customers the confidence to do so. I T U R N E R S A U T O M O T V E G R O U P A N N U A L R E P O R T 2 0 2 0 19 REVENUE NET PROFIT BEFORE TAX (NPBT) with the full financial statements and Notes to the Financial Statements in the FY20 Annual Report. Revenues were stable compared to the prior year. The gains being made by Auto Retail prior to February were offset by the COVID-19 impact. Finance revenues increased due to the increase in origination from Turners Cars and third-party originators. Insurance revenues reflected fewer policies sold as a result of market conditions and further tweaks to risk pricing. Y This financial commentary should be read in conjunction R A T N E M M O C Reported NPBT of $29.1m was in line with guidance of $28- $30m and stable on FY19 NPBT of $29.0m. The year on year decrease for Auto Retail reflects the property settlement in the prior year which provided a contribution of $3.4m. The improvement in Finance was driven by higher quality new loans and the resulting improved arrears performance. In addition, a COVID-19 overlay of $1m has been applied to finance receivable provisioning to mitigate any potential increase in credit losses over the next 12 months. The Insurance result reflects the positive progress in claims ratios which have continued to offset reduced policy sales. Excluding IFRS 16 changes and strategic review costs in FY20, and property revaluations/sales and the Buy Right Cars brand write off in FY19, Underlying NPBT was up 11% year on year. This increase was driven by gains made in the Insurance, Finance and Credit divisions, partially offset by a small drop in Auto Retail due to COVID-19. $MILLIONS FY20 FY19 VAR L A I C N A N I F 0 2 Y F Reported profit before tax Oxford strategic review costs IFRS 16 Lease Accounting changes Christchurch property revaluation Property Settlement – Albany site Brand Write-Off (Buy Right Cars) Sale of property 29.1 0.2 (0.5) - - - - Underlying operating result 28.8 29.0 0.3% - - (0.8) (3.4) 4.6 (3.4) 26.0 11% NET PROFIT AFTER TAX (NPAT) Net profit after tax (NPAT) was $21.0m (FY19: $22.7m). Reported earnings per share was down 8% to 24.4 cents per share largely reflecting a higher effective tax rate in FY20. DIVIDEND Turners paid fully imputed dividends for the FY20 year of 14.0 cents per share. In March 2020, the Board deferred the Q3 dividend payment as a cautionary step due to the uncertainty surrounding the length of a L4/L3 lockdown. In June 2020, with a better understanding of the impact on the business and the trading environment, the Board declared a final fully imputed dividend incorporating the Q3 deferred dividend of 6.0 cents per share, resulting in full year dividends of 14.0 cps. BALANCE SHEET Turners has a strong balance sheet and is well positioned from a funding and capital perspective to take advantage of growth opportunities into the future. The primary changes in the balance sheet in FY20 were as follows: • Cash and cash equivalents: Just prior to year end, Turners increased its cash balances by pre- emptively drawing down on facilities to ensure sufficient liquidity through the Level 4 lockdown. These precautionary drawings have now been repaid. • Inventory: The increase in inventory reflects the COVID-19 slowdown and lockdown in March. • The change in Finance Receivables reflects quality growth in Oxford Finance, offset by the rundown in the MTF non-recourse ledger. • The increase in Property, Plant and Equipment is due to the development of new sites in Whangarei and North Shore and the Mt Richmond purchase. • Shareholder equity decreased to $223m as at 31 March 2020 due to the share buyback and impact of IFRS 16 Leases on retained earnings. FUNDING AND LIQUIDITY Turners’ funding remains at conservative levels. As at 31 March 2020, Turners’ funding capacity was $428m with $78m undrawn. Sixty nine percent or $242m of this debt relates to finance receivables funding within Oxford Finance. During March 2020, the BNZ increased the limit for the securitisation warehouse facility from $200m to $250m (including capital contribution from TRA) to provide the headroom for further growth in the finance book. The remaining 31% of debt ($108m) relates to borrowings associated with property, inventory and the $25m Bond program. FIVE YEAR FINANCIAL PERFORMANCE $MILLIONS Operating Revenue FY16 FY17 FY18 FY19 FY20 170.3 251.0 330.5 336.6 332.7 Net Profit Before Tax (Operating Profit) Net Profit After Tax Earnings Per Share Dividends Per Share Financial Position Finance Receivables Total Assets Borrowings Shareholder Funds Shares on issue (millions as at 31 March) 21.6 15.6 24.7 13.0 167.6 367.1 174.8 129.8 24.6 17.6 25.5 14.5 207.1 556.6 265.9 171.7 31.1 23.4 29.3 15.5 289.8 651.7 317.4 214.3 29.0 22.7 26.2 17.0 290.0 654.2 312.9 226.4 29.1 21.0 24.4 14.0 293.0 708.4 350.4 223.1 63.4 74.5 84.8 86.9 85.6 20 21 TURNERS AUTOMOTIVE GROUP ANNUAL REPORT 2020 D R A O B E H T GRANT BAKER Non-executive Chairman | Appointed September 2009 Grant Baker has wide experience at a senior level in both public and private New Zealand companies. He has been involved in a number of successful ventures, including 42 Below vodka and Trilogy International. With a 7.13% shareholding, Grant is a long term committed investor in Turners Automotive Group and has been Chairman of Turners Automotive Group since September 2009. As an avid collector of specialist vehicles and motor racing enthusiast, both as a competitor and as a backer of young up and coming drivers, he is passionate about the strong Turners brand and its focus on cars. PAUL BYRNES Deputy Chairman and Independent Director | Appointed February 2004 Paul Byrnes is a chartered accountant, a professional director and an investor with over 25 years’ experience in senior and CEO roles in private and listed companies. His career has included the management buyout of previously listed Holeproof Industries, consulting and participation in merger and acquisition opportunities and business ‘turnaround’ management. Paul was appointed CEO and Executive Director of Dorchester Pacific in May 2008 (now Turners Automotive Group), handing over the CEO role to Todd Hunter in June 2016. Paul is entrepreneurial at heart but combines this with a wealth of top class governance experience (Top Energy and Hellaby Holdings) and the real world CEO experience of bringing a finance company positively out of the GFC. Paul has a 2.90% shareholding in Turners Automotive Group. MATTHEW HARRISON Non-executive Director | Appointed December 2012 Matthew Harrison has extensive management experience and a background in finance and business administration. He is the former Managing Director of EC Credit Control, the debt recovery business acquired in 2012 and has great experience dealing with credit cycles and credit management. He joined EC Credit Control in 1998, following senior management roles in the courier industry. Matthew joined the Turners Automotive Group Board in 2012 and represents his family interests, which have a 7.65% combined holding in the company. Matthew is a self-confessed “car nut” and has owned some very special cars over the years including a McLaren P1. He is very enthusiastic about the future of Turners and, given his large shareholding and love for automobiles, is strongly committed to seeing Turners continue its successful journey. ALISTAIR PETRIE Non-executive Director | Appointed February 2016 Alistair Petrie has over 15 years of senior management experience in both private and listed companies in the agribusiness sector. He has extensive knowledge in sales and marketing in both international and domestic environments, which is particularly useful for some of the challenges and opportunities Turners has importing vehicles from Japan. He has a number of directorships with companies that have a focus on growth and innovation, and he represents the interests of Bartel Holdings, which has a 11.17% shareholding in Turners Automotive Group. Alistair worked for many years at Turners & Growers, the original parent company of Turners Auctions, which provides a nice connection at Board level back to those foundational brand values of “trust and integrity”. Alistair has a BSC (hons) from Newcastle Upon Tyne university and an EMBA from Melbourne University. JOHN ROBERTS Independent Director | Appointed July 2015 John Roberts has extensive experience in the financial services industry, having held the role of Managing Director of credit bureau Veda International for 10 years, during which time the Veda Advantage business was successfully listed on the ASX. John previously had over 15 years in advertising, with CEO roles with Saatchi & Saatchi in New Zealand and Asia Pacific, before heading up MasterCard in New Zealand for three years. John is currently a director of Centrix, a leading credit rating agency in NZ, and this keeps him connected with the financial sector and the NZ credit cycle. John’s advertising and branding experience has been invaluable across a number of projects within the business and he continues to add value and thought leadership around the use of data and analytics, drawing on his Veda NZ experience. ANTONY VRIENS Independent Director | Appointed January 2015 Antony Vriens has been a director and chairman of Turners’ insurance subsidiary, DPL Insurance (now Autosure), since 2012. He is a highly experienced financial services industry professional, with demonstrated success as a senior executive and consultant in insurance and wealth management businesses across Asia Australia and New Zealand. He brings a hands on, practical and commercial approach and a strong technology focus to his Board role. His relationships across the insurance industry and regulators are highly valuable to the Turners business and his collaborative approach is embraced by both the Board and management. MARTIN BERRY Independent Director | Appointed August 2018 Martin Berry is a seasoned global financial services executive having run large international businesses for the likes of ANZ, Citibank, Barclays and Standard Chartered. He later focused on more entrepreneurial ventures with a successful track record of having built, acquired and sold several companies with values in excess of USD 500m. Martin later founded and now runs venture capital firm d:tribe capital out of Singapore investing in early stage tech companies across Asia-Pacific. 22 23 TURNERS AUTOMOTIVE GROUP ANNUAL REPORT 2020 M A E T P I H S R E D A E L Todd Hunter Chief Executive Officer Aaron Saunders Group Chief Financial Officer Todd Hunter Chief Executive Officer Todd is a strong and experienced senior executive, with a background in marketing, sales and accounting in both large global and domestic businesses. Before joining Turners Auction in 2006 Todd worked for Microsoft NZ and Ernst and Young. He was appointed CEO of NZX listed Turners Auctions in 2013, and took on the CEO role for the wider Turners Automotive Group in 2016. Todd is a chartered accountant and holds a Bachelor and Diploma of Commerce from Auckland University. Aaron Saunders Group Chief Financial Officer Aaron joined Turners Group NZ in 2006. He has a strong background in financial and management accounting, at both a strategic and operating level in local and international markets. Over the last 20 years, Aaron has worked across a broad range of company sizes and industries including vehicle importation and distribution, broadcasting and the finance sector. Aaron is a full member of the New Zealand Institute of Chartered Accountants and holds a Bachelor of Commerce from Auckland University. Simon Gould-Thorpe Group Chief Information Officer Simon joined Turners in 2010. With over 30 years’ experience in IT, he has led dynamic and innovative IT Teams to success across a wide range of industries. His current role has seen the delivery of significant advancements to assist Turners business transformation, including the development of new core systems and the introduction of key business and process automation. Turners IT utilizes leading technologies and follows best practice IT management including DevOps and Agile methodologies. Simon Gould-Thorpe Group Chief Information Officer Greg Hedgepeth CEO Turners Automotive Retail Greg Hedgepeth CEO Turners Automotive Retail Greg joined Turners in 2017 as CEO of the Automotive Retail Division, with responsibility for Turners Cars, Trucks & Machinery and the Damaged & End of Life business. He is an experienced automotive executive and has previously held a number of senior roles with BMW Group NZ and Armstrong Motor Group, one of NZ’s largest private owned retail automotive networks. With a Bachelor of Commerce from Auckland University and a number of years working for Saatchis both in NZ and the US, Greg brings a strong sales and marketing focus to his role. James Searle Group General Manager Insurance James is responsible for operational performance and development of life and consumer (vehicle and finance related) insurance products. James has over 25 years’ experience in the New Zealand insurance industry having worked across underwriting, portfolio management, relationship management and marketing roles for major insurance companies including IAG and Lumley General Insurance. David Wilson CEO EC Credit Control Dave joined EC Credit in 2007 and was appointed to his current role in April 2015. He has over 20 years’ experience in the banking, finance and recruitment industries, and has worked in the credit management industry since 2001. Dave has a Diploma in Business Studies. Jeremy Rooke General Manager Digital Strategy Jeremy joined Turners Automotive Group in 2009. His role involves leading the application of new technologies, business models and channels to enable and expand Turners’ digital capabilities. Jeremey holds degrees in Law and Arts, and prior to Turners, worked as a business analyst and projects manager on several large transformative IT programmes, most notably in the insurance sector. James Searle Group General Manager Insurance David Wilson CEO EC Credit Control Jeremy Rooke General Manager Digital Strategy 24 25 TURNERS AUTOMOTIVE GROUP ANNUAL REPORT 2020 Turners Cars New Lynn 26 FINANCIAL REPORTS FOR THE YEAR ENDED 31 MARCH 2020 28 Independent Auditor’s Report 35 Consolidated Statement of Comprehensive Income 36 Consolidated Statement of Changes in Equity 37 Consolidated Statement of Financial Position 38 Consolidated Statement of Cash Flows 39 Notes to the Financial Statements 27 TURNERS AUTOMOTIVE GROUP ANNUAL REPORT 2020INDEPENDENT AUDITOR’S REPORT for the year ended 31 March 2020 INDEPENDENT AUDITOR’S REPORT cont. for the year ended 31 March 2020 28 29 Level 9, 45 Queen Street, Auckland 1010 PO Box 3899, Auckland 1140 New Zealand T: +64 9 309 0463 F: +64 9 309 4544 E: auckland@bakertillysr.nz W: www.bakertillysr.nz INDEPENDENT AUDITOR’S REPORT To the Shareholders of Turners Automotive Group Limited Report on the Audit of the Consolidated Financial Statements Opinion We have audited the consolidated financial statements of Turners Automotive Group Limited and its subsidiaries ('the Group') on pages 35 to 93, which comprise the consolidated statement of financial position as at 31 March 2020, and the consolidated statement of comprehensive income, consolidated statement of changes in equity and consolidated statement of cash flows for the year then ended, and notes to the consolidated financial statements, including significant accounting policies. In our opinion, the accompanying consolidated financial statements present fairly, in all material respects, the consolidated financial position of the Group as at 31 March 2020, and its consolidated financial performance and its consolidated cash flows for the year then ended in accordance with New Zealand Equivalents to International Financial Reporting Standards ('NZ IFRS') and International Financial Reporting Standards ('IFRS'). Our report is made solely to the Shareholders of the Group. Our audit work has been undertaken so that we might state to the Shareholders of the Group those matters we are required to state to them in an auditor’s report and for no other purpose. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the Shareholders of the Group as a body, for our audit work, for our report or for the opinions we have formed. Basis for Opinion We conducted our audit in accordance with International Standards on Auditing (New Zealand) ('ISAs (NZ)'). Our responsibilities under those standards are further described in the Auditor’s Responsibilities for the Audit of the Consolidated Financial Statements section of our report. We are independent of the Group in accordance with Professional and Ethical Standard 1 (Revised) International Code of Ethics for Assurance Practitioners (including International Independence Standards) (New Zealand) issued by the New Zealand Auditing and Assurance Standards Board and the International Ethics Standards Board for Accountants’ Code of Ethics for Professional Accountants (‘IESBA Code’), and we have fulfilled our other ethical responsibilities in accordance with these requirements and the IESBA Code. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion. Other than in our capacity as auditor and provider of other assurance services we have no relationship with, or interests in, Turners Automotive Group Limited or any of its subsidiaries. The provision of these other assurance services has not impaired our independence. In addition to this, principals and employees of our firm deal with the Group on normal terms within the ordinary course of trading activities of the business of the Group. This has not impaired our independence. Emphasis of Matter – Increased level of inherent uncertainty in the significant accounting estimates and judgments applied by Management in the preparation of these financial statements, arising from the ongoing global pandemic of coronavirus disease 2019 We draw attention to Note 4 of the Group’s consolidated financial statements, which describes the impact of the ongoing global pandemic of the novel coronavirus disease 2019 (‘COVID-19’) and Management’s assessment of and responses to the pandemic. Since March 2020, the COVID-19 pandemic has lowered overall economic activity and confidence, resulting in significant volatility and instability in financial markets and economic uncertainty. Consequently, there has been an increase in the level of inherent uncertainty in the critical accounting estimates and judgements applied by Management in the preparation of these consolidated financial statements, described in Note 4 of the Group’s consolidated financial statements. As at the date of the signing of these consolidated financial statements, all reasonably known and available information with respect to the COVID-19 pandemic has been taken into consideration in the critical accounting estimates and judgements applied by Management, and all reasonably determinable adjustments have been made in preparing these consolidated financial statements. Our opinion is not modified in respect of this matter. Key Audit Matters Key audit matters are those matters that, in our professional judgement, were of most significance in our audit of the consolidated financial statements of the current year. These matters were addressed in the context of our audit of the consolidated financial statements as a whole, and in forming our opinion thereon, and we do not provide a separate opinion on these matters. Key Audit Matter How our audit addressed the key audit matter IImmppaaiirrmmeenntt tteessttiinngg ooff GGooooddwwiillll aanndd OOtthheerr IInnddeeffiinniittee LLiiffee IInnttaannggiibbllee AAsssseettss As disclosed in Note 21 of the Group’s consolidated financial statements the Group has goodwill of $92.5m allocated across four of the Group’s cash-generating units (‘CGUs’) and brand assets of $67.1m allocated across two of those CGUs. Goodwill and brand assets were significant to our audit due to the size of the assets and the subjectivity, complexity and uncertainty inherent in the measurement of the recoverable amount of these CGUs for the purpose of the required annual impairment test. The measurement of a CGUs recoverable amount includes the assessment and calculation of its ‘value in-use’. Management has completed the annual impairment test for each of these four CGUs as at 31 March 2020. During the year ended 31 March 2020, the Buy Right Cars and Turners Group NZ CGUs were amalgamated to reflect the lowest level within the Group at which goodwill is monitored for internal management purposes. Our audit procedures among others included: • Evaluating Management’s determination of the Group’s four CGUs based on our understanding of the nature of the Group’s business and the economic environment in which the segments operate. We also analysed the internal reporting of the Group to assess how the CGUs are monitored and reported. • Evaluating the competence, capabilities, objectivity and expertise of Management's external valuation expert and the appropriateness of the expert's work as audit evidence for the relevant assertions. • Challenging Management’s assumptions and estimates used to determine the recoverable value of its indefinite life intangible assets, including those relating to forecasted revenue, cost, capital expenditure and discount rates, by adjusting for future events and corroborating the key market TURNERS AUTOMOTIVE GROUP ANNUAL REPORT 2020INDEPENDENT AUDITOR’S REPORT cont. for the year ended 31 March 2020 INDEPENDENT AUDITOR’S REPORT cont. for the year ended 31 March 2020 30 31 Key Audit Matter How our audit addressed the key audit matter Management has engaged an external valuation expert to assist in the annual impairment testing of the four CGUs. This annual impairment test involves complex and subjective estimation and judgement by Management on the future performance of the CGUs, discount rates applied to future cash flow forecasts, and future market or economic conditions. related assumptions to external data (including the consideration of the impact of the COVID-19 pandemic). Procedures included: o Evaluating the logic of the value-in-use calculations supporting Management’s annual impairment test and testing the mathematical accuracy of these calculations; o Evaluating Management’s process regarding the preparation and review of forecasts; o Comparing forecasts to Board approved forecasts; o Evaluating the historical accuracy of the Group’s forecasting to actual historical performance; o Challenging and evaluating the forecast growth assumptions; o Evaluating the inputs to the calculation of the discount rates applied; o Engaging our own internal valuation experts to evaluate the logic of the value-in-use calculation and the inputs to the calculation of the discount rates applied; o Evaluating Management’s sensitivity analysis for reasonably possible changes in key assumptions; and o Performing our own sensitivity analyses for reasonably possible changes in key assumptions, the two main assumptions being: the discount rate and forecast growth assumptions. • Evaluating the related disclosures about indefinite life intangible assets which are included in Note 21 in the Group’s consolidated financial statements. VVaalluuaattiioonn ooff FFiinnaannccee RReecceeiivvaabblleess iinncclluuddiinngg tthhee aaddooppttiioonn ooff NNZZ IIFFRRSS 99 FFiinnaanncciiaall IInnssttrruummeennttss As disclosed in Note 14 of the Group’s consolidated financial statements, the Group has finance receivable assets of $293.0m. Finance receivable assets were significant to our audit due to the size of the assets and the subjectivity, complexity and uncertainty inherent in the recognition of expected credit losses and the amount of those expected credit losses. Management has prepared expected credit losses models to complete its assessment of expected credit losses for the Group’s finance receivables as at 31 March 2020. This assessment involves complex and subjective estimation and judgement by Management on credit risk and the future cash flows of the finance receivables. Our audit procedures among others included: • Evaluating the design and operating effectiveness of the key controls over finance receivable origination, ongoing administration and expected credit losses model data and calculations. • Selecting a representative sample of finance receivables and agreeing these finance receivables to the signed loan agreement and client acceptance documents on origination. • Challenging and evaluating Management’s logic, key assumptions, and calculation of its expected credit losses models against the requirements specified in NZ IFRS 9 for recognising expected credit losses on financial assets. • For individually assessed finance receivables, examining those finance receivables and forming our own judgements as to whether the expected credit losses provision recognised by Management was appropriate (including the consideration of the impact of the COVID-19 pandemic on the expected credit losses provision). • For the collectively assessed finance receivables, challenging and evaluating the logic of Management’s expected credit losses models and the key assumptions used with our own experience (including the consideration of the impact of the COVID-19 pandemic on key assumptions). Also, testing key inputs used in the expected credit losses models and the mathematical accuracy of the calculations within the models. Key Audit Matter How our audit addressed the key audit matter • Evaluating the changes made to the provisioning model to capture the effect of the changing economic environment at 31 March 2020 compared to the economic environment at the date when the historical data used to determine the expected credit losses was collected (described in Note 4 to the Group’s consolidated financial statements). • Evaluating the disclosures related to finance receivable assets, and the risks attached to them, which are included in Note 5 and 14 in the Group’s consolidated financial statements. VVaalluuaattiioonn ooff IInnssuurraannccee CCoonnttrraacctt LLiiaabbiilliittiieess As disclosed in Note 35 of the Group’s consolidated financial statements the Group has insurance contract liabilities of $51.4m. The Group’s insurance contract liabilities were significant to our audit due to the size of the liabilities and the subjectivity, complexity and uncertainty inherent in estimating the impact of claims events that have occurred but for which the eventual outcome remains uncertain. Management has engaged an external actuarial expert to estimate the Group’s insurance contract liabilities as at 31 March 2020. Our audit procedures among others included: • Evaluating the design and operating effectiveness of the key controls over insurance contract origination, ongoing administration, claims management and reporting and the integrity of the related data. • Evaluating the competence, capabilities, objectivity and expertise of Management's external actuarial expert and the appropriateness of the expert's work as audit evidence for the relevant assertions. • Agreeing the data provided to Management's external actuarial expert to the Group’s records. • Engaging our own actuarial expert to assist in understanding and evaluating: o the work and findings of the Group’s external actuarial expert engaged by Management; and o the Group’s actuarial methods and assumptions to assist us in challenging the appropriateness of actuarial methods and assumptions used by Management. • Assessing the selection of methods and assumptions with a view to identify management bias. • Evaluating the related disclosures about insurance contract liabilities, and the risks attached to them, which are included in Note 35 in the Group’s consolidated financial statements. AAddooppttiioonn ooff NNZZ IIFFRRSS 1166 LLeeaasseess As disclosed in Note 32 of the Group’s consolidated financial statements, the Group has adopted NZ IFRS 16 Leases from 1 April 2019, using the retrospective approach. This has resulted in the recognition of a right-of-use asset of $24.9m and a lease liability of $32.5m as at 31 March 2020. The adoption of NZ IFRS 16 was significant to our audit due to the size of the assets and liabilities recognised, complexity of applying the new standard and the assumptions required by Management for the calculation of the lease balances. Management has completed calculations of the lease balances for all leases as at 1 April 2019 (upon adoption) and as at 31 March 2020. These calculations require estimates regarding the lease term and the discount rate. Our audit procedures, among others, included: • Assessing Management’s process relating to the identification, recording, recognition and measurement of leases within the scope of NZ IFRS 16. • Assessing Management’s judgements made in applying allowable practical expedients against the requirements of NZ IFRS 16. • Evaluating the key assumptions used by Management, including the incremental borrowing rates applied to the lease portfolio. • For a sample of leases: o Agreeing key inputs in the lease calculation to the underlying lease agreement; o Recalculating the lease liability and right-of-use asset based on the key inputs noted above and TURNERS AUTOMOTIVE GROUP ANNUAL REPORT 2020INDEPENDENT AUDITOR’S REPORT cont. for the year ended 31 March 2020 INDEPENDENT AUDITOR’S REPORT cont. for the year ended 31 March 2020 32 33 Key Audit Matter How our audit addressed the key audit matter compared our recalculations to the balances recognised by the Group; and o Checking the appropriateness of the classification of the lease liability between current and non-current based on the remaining term of the lease. • Evaluating the related disclosures about leases which are included in Note 32 in the Group’s consolidated financial statements. Other Information The Directors are responsible for the other information. The other information comprises the information included in the Group’s annual report for the year ended 31 March 2020 (but does not include the consolidated financial statements and our auditor’s report thereon). Our opinion on the consolidated financial statements does not cover the other information and we do not express any form of audit opinion or assurance conclusion thereon. In connection with our audit of the consolidated financial statements, our responsibility is to read the other information and, in doing so, consider whether the other information is materially inconsistent with the consolidated financial statements or our knowledge obtained in the audit or otherwise appears to be materially misstated. If, based on the work we have performed , we conclude that there is a material misstatement of this other information, we are required to report that fact. We have nothing to report in this regard. Responsibilities of the Directors for the Consolidated Financial Statements The Directors are responsible on behalf of the Group for the preparation and fair presentation of the consolidated financial statements in accordance with NZ IFRS and IFRS, and for such internal control as the Directors determine is necessary to enable the preparation of the consolidated financial statements that are free from material misstatement, whether due to fraud or error. In preparing the consolidated financial statements, the Directors are responsible on behalf of the Group for assessing the Group’s ability to continue as a going concern, disclosing, as applicable, matters related to going concern and using the going concern basis of accounting unless the Directors either intend to liquidate the Group or to cease operations, or have no realistic alternative but to do so. Auditor’s Responsibilities for the Audit of the Consolidated Financial Statements Our objectives are to obtain reasonable assurance about whether the consolidated financial statements as a whole are 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 ISAs (NZ) 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 these consolidated financial statements. As part of an audit in accordance with ISAs (NZ), we exercise professional judgement and maintain professional scepticism throughout the audit. We also: ▪ Identify and assess the risks of material misstatement of the consolidated financial statements, whether due to fraud or error, design and perform audit procedures responsive to those risks, and obtain audit evidence that is sufficient and appropriate to provide a basis for our opinion. The risk of not detecting a material misstatement resulting from fraud is higher than for one resulting from error, as fraud may involve collusion, forgery, intentional omissions, misrepresentations, or the override of internal control. ▪ Obtain an understanding of internal control relevant to the audit in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Group’s internal control. ▪ Evaluate the appropriateness of accounting policies used and the reasonableness of accounting estimates and related disclosures made by management. ▪ Conclude on the appropriateness of the use of the going concern basis of accounting by the Directors and, based on the audit evidence obtained, whether a material uncertainty exists related to events or conditions that may cast significant doubt on the Group’s ability to continue as a going concern. If we conclude that a material uncertainty exists, we are required to draw attention in our auditor’s report to the related disclosures in the consolidated financial statements or, if such disclosures are inadequate, to modify our opinion. Our conclusions are based on the audit evidence obtained up to the date of our auditor’s report. However, future events or conditions may cause the Group to cease to continue as a going concern. ▪ Evaluate the overall presentation, structure and content of the consolidated financial statements, including the disclosures, and whether the consolidated financial statements represent fairly the underlying transactions and events in a manner that achieves fair presentation. ▪ Obtain sufficient appropriate audit evidence regarding the financial information of the entities or business activities within the Group to express an opinion on the consolidated financial statements. We are responsible for the direction, supervision and performance of the group audit. We remain solely responsible for our audit opinion. We communicate with the Directors regarding, among other matters, the planned scope and timing of the audit and significant audit findings, including any significant deficiencies in internal control that we identify during our audit. TURNERS AUTOMOTIVE GROUP ANNUAL REPORT 2020INDEPENDENT AUDITOR’S REPORT cont. for the year ended 31 March 2020 Turners Automotive Group Limited Consolidated statement of comprehensive income for the year ended 31 March 2020 CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME for the year ended 31 March 2020 Notes 2020 $’000 2019 $’000 Revenue Other income Cost of goods sold Interest expense Impairment provision expense Subcontracted services expense Employee benefits (short term) Commission Advertising expense Depreciation and amortisation expense Property and related expenses Systems maintenance Claims Movement in life insurance liabilities Insurance deferred acquisition costs Impairment of intangible brand asset Other expenses Profit before taxation Taxation (expense)/benefit Profit for the year Other comprehensive income for the year (which may subsequently be reclassified to profit/loss), net of tax Cash flow hedges Revaluation of financial assets at fair value through OCI Foreign currency translation differences Total other comprehensive income Total comprehensive income for the year Earnings per share (cents per share) Basic earnings per share Diluted earnings per share 7 7 7 7 7 35 8 9 9 332,174 500 328,358 8,221 (135,003) (133,126) (14,853) (6,044) (17,149) (55,458) (13,368) (2,743) (11,919) (1,688) (1,747) (25,952) (836) (701) - (16,148) 29,065 (8,112) 20,953 (447) (310) (12) (769) (14,952) (7,892) (12,888) (52,756) (14,581) (3,918) (5,785) (10,945) (1,471) (26,804) (718) (423) (4,300) (16,971) 29,049 (6,330) 22,719 (364) - (26) (390) 20,184 22,329 24.35 26.21 24.35 27.28 34 The accompanying notes form part of these financial statements 35 The accompanying notes form part of these financial statements We also provide the Directors with a statement that we have complied with relevant ethical requirements regarding independence, and to communicate with them all relationships and other matters that may reasonably be thought to bear on our independence, and where applicable, related safeguards. From the matters communicated with the Directors, we determine those matters that were of most significance in the audit of the consolidated financial statements of the current year and are therefore the key audit matters. We describe these matters in our auditor’s report unless law or regulation precludes public disclosure about the matter or when, in extremely rare circumstances, we determine that a matter should not be communicated in our report because the adverse consequences of doing so would reasonably be expected to outweigh the public interest benefits of such communication. Matters Relating to the Electronic Presentation of the Audited Consolidated Financial Statements This audit report relates to the consolidated financial statements of Turners Automotive Group Limited and its subsidiaries for the year ended 31 March 2020 included on Turners Automotive Group Limited’s website. The Directors of Turners Automotive Group Limited are responsible for the maintenance and integrity of Turners Automotive Group Limited’s website. We have not been engaged to report on the integrity of Turners Automotive Group Limited’s website. We accept no responsibility for any changes that may have occurred to the consolidated financial statements since they were initially presented on the website. The audit report refers only to the consolidated financial statements named above. It does not provide an opinion on any other information which may have been hyper linked to or from these consolidated financial statements. If readers of this report are concerned with the inherent risks arising from electronic data communication they should refer to the published hard copy of the audited consolidated financial statements and related audit report dated 30 July 2020 to confirm the information included in the audited consolidated financial statements presented on this website. Legislation in New Zealand governing the preparation and dissemination of consolidated financial statements may differ from legislation in other jurisdictions. The engagement partner on the audit resulting in this independent auditor’s report is N S de Frere. BAKER TILLY STAPLES RODWAY AUCKLAND Auckland, New Zealand 30 July 2020 TURNERS AUTOMOTIVE GROUP ANNUAL REPORT 2020Turners Automotive Group Limited Consolidated statement of changes in equity for the year ended 31 March 2020 CONSOLIDATED STATEMENT OF CHANGES IN EQUITY for the year ended 31 March 2020 Turners Automotive Group Limited Consolidated statement of financial position for the year ended 31 March 2020 CONSOLIDATED STATEMENT OF FINANCIAL POSITION TURNERS LIMITED TURNERS LIMITED for the year ended 31 March 2020 Consolidated statement of financial position for the year ended 31 March 2016 Consolidated statement of financial position for the year ended 31 March 2016 2020 Revaluation of financial assets at Cash flow Share Translation fair value hedge Retained options reserve through OCI reserve earnings $’000 701 $’000 (21) $’000 (164) $’000 14,659 214,323 Share capital $’000 199,148 Notes Total $’000 Assets Cash and cash equivalents Financial assets at fair value through profit or loss Notes 10 Notes Notes 11 12 $’000 2016 2016 32,771 $’000 $’000 64,988 8,609 Balance at 31 March 2018 Change in accounting policies Impact of the implementation of NZ IFRS 15 Impact of the implementation of NZ IFRS 9 - - - - - - - - - Balance at 1 April 2018 (restated) 199,148 701 (21) Transactions with shareholders in their capacity as owners Capital contributions (net of issue costs) Capital buy back Employee share based payments Dividend paid 27 27 28 29 13,388 (6,141) - - Total transactions with shareholders in their capacity as owners 7,247 Comprehensive income Profit Other comprehensive income Total comprehensive income for the year, net of tax - - - - - 326 - 326 - - - - - - - - - (26) (26) Balance at 31 March 2019 206,395 1,027 (47) Change in accounting policy Impact of the implementation of NZ IFRS 16 32 - - - Balance at 1 April 2019 (restated) 206,395 1,027 (47) Transactions with shareholders in their capacity as owners Capital contributions (net of issue costs) Capital buy-back Cancellation of options Dividend paid Total transactions with shareholders Comprehensive income Profit Other comprehensive income Total comprehensive income for the year, net of tax 27 27 28 29 97 (3,192) - - 1,027 (1,027) - - (2,068) (1,027) - - - - - - - - - - - - - (12) (12) (59) $’000 - - - - - - - - - - - - - - - - - - - - - - - - (345) (345) (2,292) (2,292) (2,637) (2,637) (164) 12,022 211,686 - - - - - - (364) (364) - - - 13,388 (6,141) 326 (15,214) (15,214) (15,214) (7,641) 22,719 22,719 - (390) 22,719 22,329 (528) 19,527 226,374 - (5,666) (5,666) (528) 13,861 220,708 - - - - - - - - - 97 (3,192) - (14,742) (14,742) (14,742) (17,837) 20,953 20,953 - 20,953 (769) 20,184 (310) (310) (447) (447) Balance at 31 March 2020 204,327 (310) (975) 20,072 223,055 Assets Inventory Trade receivables Finance receivables Cash and cash equivalents Financial assets at fair value through profit or loss Trade receivables Assets Inventories Cash and cash equivalents Finance receivables Financial assets at fair value through profit or loss Other receivables, deferred expenses and contract assets Trade receivables Reverse annuity mortgages Inventory Investment property Finance receivables Financial assets at fair value through OCI Other receivables and deferred expenses Property, plant and equipment Reverse annuity mortgages Right-of-use assets Property, plant and equipment Property, plant and equipment Intangible assets Tax receivables Tax receivables Total assets Deferred tax asset Deferred tax asset Other receivables and deferred expenses Reverse annuity mortgages Intangible assets Intangible assets Liabilities Total assets Total assets Other payables Liabilities Tax payables Financial liability at fair value through profit or loss Liabilities Contract liabilities Other payables Other payables Deferred tax Deferred revenue Deferred revenue Tax payables Tax payables Derivative financial instruments Derivative financial instruments Borrowings Borrowings Lease liabilities Life investment contract liabilities Life investment contract liabilities Insurance contract liabilities Insurance contract liabilities Total liabilities Total liabilities Derivative financial instruments Borrowings Life investment contract liabilities Insurance contract liabilities Total liabilities Shareholders’ equity Share capital Shareholders’ equity Shareholders’ equity Share capital Share capital Other reserves Other reserves Other reserves Retained earnings Retained earnings Retained earnings Total shareholders’ equity Total shareholders’ equity Total shareholders’ equity and liabilities Total shareholders’ equity and liabilities Total shareholders’ equity and liabilities Total shareholders’ equity For and on behalf of the Board For and on behalf of the Board For and on behalf of the Board G.K. Baker G.K. Baker G.K. Baker Chairman Director Chairman Director Chairman Director 2019 $’000 2015 2015 15,866 $’000 $’000 66,252 12,471 142,827 8,984 38,859 12,339 12,339 290,017 17,350 17,350 10,955 7,394 7,394 8,294 8,984 5,650 142,827 - 5,946 5,946 39,084 13,253 - 8,319 8,319 166,734 433 433 654,182 8,532 8,532 13,253 167,598 14,156 44,371 13,810 13,810 293,037 18,455 18,455 8,572 9,575 9,575 4,913 14,156 5,650 167,598 1,000 8,505 8,505 52,788 9,734 9,734 24,850 11,108 11,108 166,843 - 708,392 4,024 4,024 - 105,338 105,338 362,303 362,303 28,048 - 103,595 103,595 328,972 328,972 33,906 116 22,270 2,085 22,270 10,080 6,049 6,049 2,772 990 990 985 49 49 350,364 174,816 32,511 15,629 15,629 7,072 12,688 51,420 232,491 485,337 12,688 174,816 232,491 17,790 2,642 17,790 13,918 7,476 7,476 4,570 71 71 524 - - 312,863 156,995 - 16,378 16,378 7,484 9,260 9,260 51,785 207,970 427,808 156,995 207,970 10 11 12 13 14 15 16 19 13 10 14 11 15 12 16 13 17 14 18 15 20 16 32 19 21 20 20 21 21 22 23 22 23 24 22 25 23 24 32 32 26 24 32 32 35 32 35 135,294 (14,269) 135,294 206,395 (23) (23) 452 (14,269) 19,527 121,002 226,374 328,972 654,182 328,972 121,002 136,127 (6,263) 136,127 204,327 (52) (52) (1,344) (6,263) 20,072 129,812 223,055 362,303 708,392 362,303 129,812 25 25 27 P.A. Byrnes P.A. Byrnes P.A. Byrnes Deputy chairman Executive Director Executive Director The accompanying notes form part of these financial statements The accompanying notes from part of these financial statements The accompanying notes form part of these financial statements The accompanying notes from part of these financial statements Authorised for issue on 30 July 2020 Authorised for issue on 22 June 2016 Authorised for issue on 22 June 2016 36 The accompanying notes form part of these financial statements The accompanying notes form part of these financial statements 37 TURNERS AUTOMOTIVE GROUP ANNUAL REPORT 2020 Turners Automotive Group Limited Consolidated statement of cash flows for the year ended 31 March 2020 CONSOLIDATED STATEMENT OF CASH FLOWS for the year ended 31 March 2020 TURNERS AUTOMOTIVE GROUP LIMITED Notes to financial statements for the year ended 31 March 2020 NOTES TO THE FINANCIAL STATEMENTS for the year ended 31 March 2020 Notes 2020 $’000 2019 $’000 1. REPORTING ENTITY Turners Automotive Group Limited, ('the Company') is incorporated and domiciled in New Zealand. Turners Automotive Group Limited is registered under the Companies Act 1993. Cash flows from operating activities Interest received Receipts from customers Interest paid Payment to suppliers and employees Income tax paid Net cash outflow from operating activities before changes in operating assets and liabilities Net increase in finance receivables Net decrease in reverse annuity mortgages Net (increase)/decrease of financial assets at fair value through profit or loss Net (withdrawals)/contributions from life investment contracts Changes in operating assets and liabilities arising from cash flow movements 43,874 289,275 (12,856) (285,795) (11,460) 45,023 279,472 (12,184) (272,052) (10,752) 23,038 29,507 (27,826) 3,964 704 88 (34,926) 2,545 (12,163) 16 (23,070) (44,528) Net cash (outflow)/inflow from operating activities 31 (32) (15,021) Cash flows from investing activities Proceeds from sale of property, plant, equipment and intangibles Purchase of property, plant, equipment and intangibles Purchase of investments Sale of investments Net cash inflow/(outflow) from investing activities Cash flows from financing activities Net bank loan advances/(repayments) Principal elements of lease payments Proceeds from the issue of shares Proceeds from the issue of bonds Other borrowings Dividend paid Net cash inflow/(outflow) from financing activities Net movement in cash and cash equivalents Add opening cash and cash equivalents Translation difference Closing cash and cash equivalents Represented By: Cash at bank 913 (19,245) (1,310) 473 (19,169) 61,038 (6,998) (3,192) - - (14,742) 36,106 9,388 (12,753) 41 - (3,324) 20,570 - 7,100 (561) (2,837) (15,214) 9,058 16,905 (9,287) 15,866 - 32,771 25,145 8 15,866 10 32,771 15,866 Closing cash and cash equivalents 32,771 15,866 Turners Automotive Group Limited is a FMC reporting entity for the purposes of the Financial Markets Conduct Act 2013. The consolidated financial statements of Turners Automotive Group Limited and its subsidiaries (together ‘the Group’) have been prepared in accordance with the Companies Act 1993 and the Financial Markets Conduct Act 2013. The Group is a for profit entity. The Group's principal activities are: • • • automotive retail (second hand vehicle retailer) finance and insurance (loans and insurance products); and credit management (collection services). The financial statements were authorised for issue by the directors on 30 July 2020. 2. BASIS OF PREPARATION 2.1 Statement of Compliance These financial statements have been prepared in accordance with Generally Accepted Accounting Practice in New Zealand ('NZ GAAP'). They comply with New Zealand Equivalents to International Financial Reporting Standards ('NZ IFRS') and other applicable Financial Reporting Standards, as appropriate for profit oriented entities. These financial statements also comply with International Financial Reporting Standards ('IFRS'). 2.2 Basis of measurement The financial report has been prepared under the historical cost convention, as modified by revaluations for certain classes of assets and liabilities to fair value and life insurance contract liabilities and related assets to net present value as described in the accounting policies below. 2.3 Functional and Presentation Currency and Rounding These financial statements are presented in New Zealand Dollars ($) which is the Company's functional currency. All values are rounded to the nearest thousand ($000), except when otherwise indicated. 3. SIGNIFICANT ACCOUNTING POLICIES Except as detailed in note 32, the accounting policies set out below have been applied consistently to all periods presented in these financial statements, and have been applied consistently by Group entities. 3.1 Adoption of new and revised Standards and Interpretations New standards and amendments and interpretations to existing standards that came into effect during the current accounting period beginning on 1 April 2019 that materially impact the Group’s financial statements are as follows: • NZ IFRS 16 ‘Leases’. The other standards did not have a material impact on the Group’s financial statements and did not require retrospective adjustment. Refer to note 32 for the impact of implementing this new standard. 3.2 New standards and amendments and interpretations to existing standards that are not yet effective for the current accounting period beginning on 1 April 2019 The following relevant standards and interpretations have been issued at the reporting date but are not yet effective. NZ IFRS 17 Insurance Contracts NZ IFRS 17, ‘Insurance Contracts’, will replace NZ IFRS 4, ‘Insurance Contracts’. Under the NZ IFRS 17, insurance contract liabilities will be calculated at the present value of future insurance cash flows with a provision for risk. The discount rate applied will reflect current interest rates. If the present value of future cash flows would produce a gain at the time an insurance contract is issued, the model would also require a "contractual service margin" to offset the day 1 gain. The contractual service margin would be amortised over the life of the insurance contract. There would also be a new income statement presentation for insurance contracts, including a revised definition of revenue and additional disclosure requirements. NZ IFRS 17 will also have accommodations for certain specific types of insurance contracts. Short-duration insurance contracts will be permitted to use a simplified unearned premium liability model until a claim is incurred. For some contracts, in which the cash flows are linked to underlying items, the liability value will reflect that linkage. The effective date is annual reporting periods beginning on or after 1 January 2021. The Group is yet to assess the impact of NZ IFRS 17. The Group intends to adopt NZ IFRS 17 no later than the financial year beginning 1 April 2021. The accompanying notes form part of these financial statements 3.3 Basis of consolidation Subsidiaries Subsidiaries are all entities controlled by the Group. The financial statements of subsidiaries are included in consolidated financial statements from the date that control commences until the date that control ceases. 38 The accompanying notes form part of these financial statements 39 TURNERS AUTOMOTIVE GROUP ANNUAL REPORT 2020 TURNERS AUTOMOTIVE GROUP LIMITED Notes to financial statements for the year ended 31 March 2020 TURNERS AUTOMOTIVE GROUP LIMITED Notes to financial statements for the year ended 31 March 2020 NOTES TO THE FINANCIAL STATEMENTS for the year ended 31 March 2020 NOTES TO THE FINANCIAL STATEMENTS for the year ended 31 March 2020 Transactions eliminated on consolidation Intra-group balances and transactions, and any unrealised income and expenses arising from intra-group transactions, are eliminated in preparing the consolidated financial statements. by the Group. There is no material amount of variable consideration under these contracts nor is there the existence of a significant financing component. Costs to obtain contracts such as commissions are recognised as contract assets and incurred when the related revenue for the contract is released to profit or loss. 3.4 Foreign currency Foreign currency transactions Transactions in foreign currencies are translated to the respective functional currency of Group entities at exchange rates at the dates of the transactions. Monetary assets and liabilities denominated in foreign currencies at the reporting date are retranslated to the functional currency at the exchange rate at that date. The foreign currency gain or loss on monetary items is the difference between amortised cost in the functional currency at the beginning of the year, adjusted for effective interest and payments during the year, and the amortised cost in foreign currency translated at the exchange rate at the end of the year. Non-monetary assets and liabilities denominated in foreign currencies that are measured at fair value are retranslated to the functional currency at the exchange rate at the date that the fair value was determined. Non-monetary items in a foreign currency that are measured based on historical costs are translated using the exchange rate at the date of the transaction. Foreign currency differences arising on retranslation are recognised in profit or loss. Foreign operations The assets and liabilities of foreign operations, including goodwill and fair value adjustments arising on acquisition, are translated to New Zealand Dollars at exchange rates at the reporting date. The income and expenses of foreign operations are translated to New Zealand Dollars at exchange rates at the dates of the transactions. Foreign currency differences are recognised in other comprehensive income, and presented in the foreign currency translation reserve (translation reserve) in equity. When the settlement of a monetary item receivable from or payable to a foreign operation is neither planned nor likely in the foreseeable future, foreign exchange gains and losses arising from such a monetary item are considered to form part of a net investment in a foreign operation and are recognised in other comprehensive income, and are presented in the translation reserve in equity. 3.5 Revenue and expense recognition The principal sources of revenue are sales of goods, sales of service, interest income, fees, commissions, and insurance premium income. 3.5.1 Revenue from contracts with customers Sales of goods Sales of goods comprise sales of motor vehicle and commercial goods owned by the Group. Sales of goods are recognised when the customer gains control of the goods. This normally occurs on receipt of a deposit, full payment or approval of financing. related warranties associated with goods cannot be purchased separately and they serve as an assurance that the products sold comply upon specifications and cover the standard period established by legislation. There is no material amount of variable consideration Sales with agreed ‑ under these contracts nor is there the existence of a significant financing component. ‑ Sales of service Auction commission is recognised at a point in time in the accounting period in which the service is rendered. Payment for services is normally deducted from the proceeds from the sale. Other than those provided by legislation no warranties are provided by the Group. There is no material amount of variable consideration under these contracts nor is there the existence of a significant financing component. Other sales revenue comprises services rendered preparing the asset for sale and commission earned on the sale of third party products. Services rendered while preparing the asset for sale are recognised over time in the accounting period in which the service is rendered, and a contract asset is recognised for amounts relating to services rendered not yet invoiced. Payment for services rendered are either deducted from the proceeds from the sale or raised as a trade receivable. Other than those provided by legislation no warranties are provided by the Group. There are no rebates or volume discounts. Commissions earned on the sale of third party products is recognised at a point in time when the sale is made. Payment is usually received when the sale is made. Other than those provided by legislation no warranties are provided by the Group. There are no rebates or volume discounts. Collection income, which is largely fees and commission earned for collecting debt on behalf of third parties and the sale of customised terms of trade documents, is recognised at a point in time in the accounting period in which the service is rendered, by reference to completion of the specific transaction assessed on the basis of the actual service provided as a proportion of the total service to be provided. Payment is either deducted from the monies collected or raised as trade receivable and therefore a contract liability is recognised over the period in which the services are performed representing the Group’s right to consideration for the services performed to date. If the consideration promised includes a variable amount for rebates, refunds or credit, then the Group estimates the amount of variable consideration, to the extent that it is highly probable that a significant reversal in the amount of cumulative revenue recognised will not occur, and recognises a contract liability. Other than those provided by legislation no warranties are provided by the Group. Costs to obtain contracts such as commissions are recognised as contract assets and incurred when the related revenue for the contract is released to profit or loss. Voucher income Voucher income is the proceeds from the sale of a voucher that on presentation entitles the holder to either load a debt for collection or register of a security on the Personal Property Securities Register (‘PPSR’). Voucher income is recognised, at a point in time, when the voucher is redeemed and the debtor’s information is loaded into the collection system or a security is registered on the PPSR. Payment is normally received when the voucher is sold, and voucher income is initially recognised as a contract liability. For those vouchers that are unredeemed, voucher income is recognised after a period of time based on historical non-redemption patterns. Estimates are readjusted as necessary based on movements in the actual non-redemption patterns. Other than those provided by legislation no warranties are provided 3.5.2 Financial instruments Interest income and expense Interest income and expense is recognised in the profit or loss using the effective interest method. The effective interest method calculates the amortised cost of a financial asset or financial liability and allocates the interest income or interest expense over the relevant period. The calculation includes all fees paid or received and directly related transaction costs that are an integral part of the effective interest rate. The interest income or expense is allocated over the life of the instrument and is measured for inclusion in profit and loss by applying the effective interest rate to the instruments amortised cost. Lending and funding - fees and commissions Lending fee income (such as booking and establishment fees) that is integral to the effective yield of a loan held at amortised cost is capitalised as part of the amortised cost and deferred over the life of the loan using the effective interest method. Lending fees not directly related to the origination of a loan (account maintenance fee) are recognised over the period of service. Incremental and directly attributable costs (such as commissions) associated with the origination of a financial asset (such as loans) and financial liabilities (such as borrowings) are capitalised as part of the amortised cost and deferred over the life of the financial instrument using the effective interest method. 3.5.3 Insurance Contracts Premium income and acquisition costs Recurring premiums on life insurance contracts are recognised as revenue when payable by the policyholder. Where policies provide for the payment of amounts of premiums on specific due dates, such premiums are recognised as revenue when due. Unpaid premiums are only recognised as revenue during the days of grace and are not recognised where policies are deemed to have lapsed at reporting date. General insurance premiums comprise the total premiums payable for the whole period of cover provided by contracts entered into during the reporting period and are recognised on the date on which the policy commences. Premiums include any adjustments arising in the reporting period for premium receivables written in respect of business written in prior accounting periods. Premiums collected by intermediaries, but not yet received, are assessed based on known sales and are included in written premium. Unearned premiums are those proportion of premiums written in a year that relate to periods of risk after the reporting date. Unearned premiums are calculated on a daily pro rata basis. The proportion attributable to subsequent periods is deferred as a provision for unearned premiums. Under life investment contracts deposits are received from policyholders which are then invested on behalf of the policyholders and recognised as Financial assets at fair value through profit or loss. No premium income is recognised as revenue. Fees deducted from members' accounts are accounted for as fee income. Those direct and indirect costs incurred during the financial period arising from the acquiring or renewing of insurance contracts are deferred to the extent that these costs are recoverable out of future premiums from insurance contracts. All other acquisitions costs are recognised as an expense when incurred. Subsequent to initial recognition, the deferred acquisitions cost asset (DAC) for life insurance contracts is amortised over the expected life of the contracts. DAC for general insurance contracts is amortised over the period in which the revenues are earned. An impairment review is performed at each reporting date or more frequently when an indication of impairment arises. When the recoverable amount is less than the carrying value, an impairment loss is recognised in profit or loss. DACs are also considered in the liability adequacy test for each reporting period. DACs are derecognised when the related contracts are either settled or disposed of. Claims expense Claims expenses represent claim payments adjusted for the movement in the outstanding claims liability. General insurance claims expenses are recognised when claims are notified with the exception of claims incurred but not reported for which a provision is estimated. Life insurance contract claims are recognised when a liability has been established. Claims under life investment contracts represent withdrawals of investment deposits and are recognised as a reduction in the life investment contract liabilities. 3.5.4 Other Other income Dividend income is recorded in the profit or loss when the Group’s right to receive the dividend is established. Other expense recognition All other expenses are recognised in profit or loss as incurred. 3.6 Financial instruments Financial assets and financial liabilities are recognised in the Group’s statement of financial position when the Group becomes a party to the contractual provisions of the instrument. 40 41 TURNERS AUTOMOTIVE GROUP ANNUAL REPORT 2020 TURNERS AUTOMOTIVE GROUP LIMITED Notes to financial statements for the year ended 31 March 2020 TURNERS AUTOMOTIVE GROUP LIMITED Notes to financial statements for the year ended 31 March 2020 NOTES TO THE FINANCIAL STATEMENTS for the year ended 31 March 2020 NOTES TO THE FINANCIAL STATEMENTS for the year ended 31 March 2020 Financial assets and financial liabilities are initially measured at fair value. Transaction costs that are directly attributable to the acquisition or issue of financial assets and financial liabilities (other than financial assets and financial liabilities at fair value through profit or loss) are added to or deducted from the fair value of the financial assets or financial liabilities, as appropriate, on initial recognition. Transaction costs directly attributable to the acquisition of financial assets or financial liabilities at fair value through profit or loss are recognised immediately in profit or loss. Financial assets All regular way purchases or sales of financial assets are recognised and derecognised on a trade date basis. Regular way purchases or sales are purchases or sales of financial assets that require delivery of assets within the time frame established by regulation or convention in the marketplace. All recognised financial assets are measured subsequently in their entirety at either amortised cost or fair value, depending on the classification of the financial assets. Classification of financial assets Financial assets that meet the following conditions are measured subsequently at amortised cost: • the financial asset is held within a business model whose objective is to hold financial assets in order to collect contractual cash flows; and the contractual terms of the financial asset give rise on specified dates to cash flows that are solely payments of principal and interest on the principal amount outstanding. • Financial assets that meet the following conditions are measured subsequently at fair value through other comprehensive income (FVTOCI): • the financial asset is held within a business model whose objective is achieved by both collecting contractual cash flows and selling the financial assets; and the contractual terms of the financial asset give rise on specified dates to cash flows that are solely payments of principal and interest on the principal amount outstanding. • By default, all other financial assets are measured subsequently at fair value through profit or loss (FVTPL). Despite the foregoing, the Group may make the following irrevocable election/designation at initial recognition of a financial asset: • the Group may irrevocably elect to present subsequent changes in fair value of an equity investment in other comprehensive income if certain criteria are met; and the Group may irrevocably designate a financial asset that meets the amortised cost or FVTOCI criteria as measured at FVTPL if doing so eliminates or significantly reduces an accounting mismatch. • (i) Amortised cost and effective interest method The effective interest method is a method of calculating the amortised cost of a financial asset and of allocating interest income over the relevant period. For financial assets other than purchased or originated credit impaired on initial recognition), the effective interest rate is the rate that exactly discounts estimated future cash receipts (including all fees and points paid or received that form an integral part of the effective interest rate, transaction costs and other premiums or discounts) excluding expected credit losses, through the expected life of the financial asset, or, where appropriate, a shorter period, to the gross carrying amount of the financial asset on initial recognition. For purchased or originated credit adjusted effective interest rate is calculated by discounting the estimated future cash flows, including expected credit losses, to the amortised cost of the debt instrument on initial recognition. impaired financial assets (i.e. assets that are credit impaired financial assets, a credit ‑ ‑ ‑ ‑ The amortised cost of a financial asset is the amount at which the financial asset is measured at initial recognition minus the principal repayments, plus the cumulative amortisation using the effective interest method of any difference between that initial amount and the maturity amount, adjusted for any expected credit losses. The gross carrying amount of a financial asset is the amortised cost of a financial asset before adjusting for any expected credit losses. Interest income is recognised using the effective interest method for financial assets measured subsequently at amortised cost and at FVTOCI. impaired financial assets, interest income is calculated by applying the effective For financial assets other than purchased or originated credit interest rate to the gross carrying amount of a financial asset, except for financial assets that have subsequently become credit impaired (see below). ‑ ‑ For financial assets that have subsequently become credit the amortised cost of the financial asset. If, in subsequent reporting periods, the credit risk on the credit so that the financial asset is no longer credit amount of the financial asset. impaired, interest income is recognised by applying the effective interest rate to impaired financial instrument improves impaired, interest income is recognised by applying the effective interest rate to the gross carrying ‑ ‑ ‑ Financial assets measured at amortised cost include cash and cash equivalents, trade receivables, finance receivables, reverse annuity mortgages and other receivables. (ii) Financial assets at FVTPL Financial assets that do not meet the criteria for being measured at amortised cost or FVTOCI are measured at FVTPL. Specifically: • Investments in equity instruments are classified as at FVTPL, unless the Group designates an equity investment that is neither held for trading nor a contingent consideration arising from a business combination as at FVTOCI on initial recognition. Financial assets that do not meet the amortised cost criteria or the FVTOCI criteria are classified as at FVTPL. In addition, financial assets that meet either the amortised cost criteria or the FVTOCI criteria may be designated as at FVTPL upon initial recognition if such designation eliminates or significantly reduces a measurement or recognition inconsistency (so called ‘accounting mismatch’) that would • 42 arise from measuring assets or liabilities or recognising the gains and losses on them on different bases. The Group has not designated any financial assets as at FVTPL. Financial assets at FVTPL are measured at fair value at the end of each reporting period, with any fair value gains or losses recognised in profit or loss to the extent they are not part of a designated hedging relationship (see hedge accounting policy). Fair value is determined in the manner described in note 5.5. Financial assets measured at FVTPL include equity securities, unitised funds, fixed interest securities and term deposits. (iii) Finance assets at FVTOCI Equity securities which are not held for trading, and which the Group has irrevocably elected at initial recognition to recognise in this category. These are strategic investments and the Group considers this classification to be more relevant. On disposal of these equity securities, any related balance within the FVOCI reserve is reclassified to retained earnings. Impairment of financial assets The Group recognises a loss allowance for expected credit losses on financial assets that are measured at amortised cost and contract assets. The amount of expected credit losses is updated at each reporting date to reflect changes in credit risk since initial recognition of the respective financial instrument. The Group recognises lifetime ECL for trade receivables and contract assets. The expected credit losses on these financial assets are estimated using a provision matrix based on the Group’s historical credit loss experience, adjusted for factors that are specific to the debtors, general economic conditions and an assessment of both the current as well as the forecast direction of conditions at the reporting date, including time value of money where appropriate. For all other financial instruments, the Group recognises lifetime ECL when there has been a significant increase in credit risk since initial recognition. However, if the credit risk on the financial instrument has not increased significantly since initial recognition, the Group measures the loss allowance for that financial instrument at an amount equal to 12 month ECL. Lifetime ECL represents the expected credit losses that will result from all possible default events over the expected life of a financial instrument. In contrast, 12 month ECL represents the portion of lifetime ECL that is expected to result from default events on a financial instrument that are possible within 12 months after the reporting date. Homogeneous loans are assessed on a collective basis (collective impairment provision) and non-homogeneous loans are assessed individually (specific impairment provision). ‑ ‑ (i) Significant increase in credit risk In assessing whether the credit risk on a financial instrument has increased significantly since initial recognition, the Group compares the risk of a default occurring on the financial instrument at the reporting date with the risk of a default occurring on the financial instrument at the date of initial recognition. In making this assessment, the Group considers both quantitative and qualitative information that is reasonable and supportable, including historical experience and forward looking information that is available without undue cost or effort such as: • • actual or expected changes in economic indicators (ie change in employment rates); and ‑ for non-homogeneous loans significant changes in the value of the collateral supporting the loan or changes in the operating results of the borrower. The nature of the Group’s finance receivables (second tier retail and commercial lending) means there is little or no updated credit risk information that is routinely obtained and monitored on an individual instrument until a customer breaches the contractual terms. Irrespective of the outcome of the above assessment, the Group presumes that the credit risk on a financial asset has increased significantly since initial recognition when contractual payments are more than 30 days past due, unless the Group has reasonable and supportable information that demonstrates otherwise. The Group regularly monitors the effectiveness of the criteria used to identify whether there has been a significant increase in credit risk and revises them as appropriate to ensure that the criteria are capable of identifying significant increase in credit risk before the amount becomes past due. (ii) Definition of default The Group considers that default has occurred when a financial asset is more than 90 days past due unless the Group has reasonable and supportable information to demonstrate that a more lagging default criterion is more appropriate. ‑ impaired financial assets (iii) Credit A financial asset is credit asset have occurred. Evidence that a financial asset is credit a) b) a breach of contract, such as a default or past due event (see (ii) above); and c) significant financial difficulty of the borrower; ‑ ‑ it is becoming probable that the borrower will enter bankruptcy or other financial reorganisation. impaired when one or more events that have a detrimental impact on the estimated future cash flows of that financial impaired includes observable data about the following events: off policy (iv) Write The Group writes off a financial asset when there is information indicating that the borrower is in severe financial difficulty and there is no realistic prospect of recovery, e.g. when the borrower has been placed under liquidation or has entered into bankruptcy proceedings. Financial assets written off may still be subject to enforcement activities under the Group’s recovery procedures, taking into account legal advice where appropriate. Any recoveries made are recognised in profit or loss. ‑ 43 TURNERS AUTOMOTIVE GROUP ANNUAL REPORT 2020 TURNERS AUTOMOTIVE GROUP LIMITED Notes to financial statements for the year ended 31 March 2020 TURNERS AUTOMOTIVE GROUP LIMITED Notes to financial statements for the year ended 31 March 2020 NOTES TO THE FINANCIAL STATEMENTS for the year ended 31 March 2020 NOTES TO THE FINANCIAL STATEMENTS for the year ended 31 March 2020 v) Measurement and recognition of expected credit losses The measurement of expected credit losses is a function of the probability of default, loss given default (i.e. the magnitude of the loss if there is a default) and the exposure at default. The assessment of the probability of default and loss given default is based on historical data adjusted by forward looking information as described above. The effective interest method is a method of calculating the amortised cost of a financial liability and of allocating interest expense over the relevant period. The effective interest rate is the rate that exactly discounts estimated future cash payments (including all fees and points paid or received that form an integral part of the effective interest rate, transaction costs and other premiums or discounts) through the expected life of the financial liability, or (where appropriate) a shorter period, to the amortised cost of a financial liability. As for the exposure at default, for financial assets, this is represented by the assets’ gross carrying amount at the reporting date. No further advances are allowed against financial assets in default. ‑ For financial assets, the expected credit loss is estimated as the difference between all contractual cash flows that are due to the Group in accordance with the contract and all the cash flows that the Group expects to receive, discounted at the original effective interest rate. If the Group has measured the loss allowance for a financial instrument at an amount equal to lifetime ECL in the previous reporting period, but determines at the current reporting date that the conditions for lifetime ECL are no longer met, the Group measures the loss allowance at an amount equal to 12 month ECL at the current reporting date, except for assets for which simplified approach was used. The Group recognises an impairment gain or loss in profit or loss for all financial instruments with a corresponding adjustment to their carrying amount through a loss allowance account. ‑ Derecognition of financial assets The Group derecognises a financial asset only when the contractual rights to the cash flows from the asset expire, or when it transfers the financial asset and substantially all the risks and rewards of ownership of the asset to another entity. If the Group neither transfers nor retains substantially all the risks and rewards of ownership and continues to control the transferred asset, the Group recognises its retained interest in the asset and an associated liability for amounts it may have to pay. If the Group retains substantially all the risks and rewards of ownership of a transferred financial asset, the Group continues to recognise the financial asset and also recognises a collateralised borrowing for the proceeds received. On derecognition of a financial asset measured at amortised cost, the difference between the asset’s carrying amount and the sum of the consideration received and receivable is recognised in profit or loss. Financial liabilities All financial liabilities are measured subsequently at amortised cost using the effective interest method or at FVTPL. However, financial liabilities that arise when a transfer of a financial asset does not qualify for derecognition or when the continuing involvement approach applies are measured in accordance with the specific accounting policies set out below. Financial liabilities at FVTPL Financial liabilities are classified as at FVTPL when the financial liability is (i) contingent consideration of an acquirer in a business combination, (ii) held for trading or (iii) it is designated as at FVTPL. A financial liability is classified as held for trading if: • • it has been acquired principally for the purpose of repurchasing it in the near term; or on initial recognition it is part of a portfolio of identified financial instruments that the Group manages together and has a recent actual pattern of short it is a derivative, except for a derivative that is a financial guarantee contract or a designated and effective hedging instrument. term profit taking; or • ‑ ‑ A financial liability other than a financial liability held for trading or contingent consideration of an acquirer in a business combination may be designated as at FVTPL upon initial recognition if: • • such designation eliminates or significantly reduces a measurement or recognition inconsistency that would otherwise arise; or the financial liability forms part of a group of financial assets or financial liabilities or both, which is managed and its performance is evaluated on a fair value basis, in accordance with the Group’s documented risk management or investment strategy, and information about the grouping is provided internally on that basis; or it forms part of a contract containing one or more embedded derivatives, and IFRS 9 permits the entire combined contract to be designated as at FVTPL. • Financial liabilities at FVTPL are measured at fair value, with any gains or losses arising on changes in fair value recognised in profit or loss to the extent that they are not part of a designated hedging relationship (see Hedge accounting policy). However, for financial liabilities that are designated as at FVTPL, the amount of change in the fair value of the financial liability that is attributable to changes in the credit risk of that liability is recognised in other comprehensive income, unless the recognition of the effects of changes in the liability’s credit risk in other comprehensive income would create or enlarge an accounting mismatch in profit or loss. The remaining amount of change in the fair value of liability is recognised in profit or loss. Changes in fair value attributable to a financial liability’s credit risk that are recognised in other comprehensive income are not subsequently reclassified to profit or loss; instead, they are transferred to retained earnings upon derecognition of the financial liability. Fair value is determined in the manner described in note 5.5. Financial liabilities measured at FVTPL include contingent consideration. Financial liabilities measured subsequently at amortised cost Financial liabilities that are not (i) contingent consideration of an acquirer in a business combination, (ii) held at FVTPL, are measured subsequently at amortised cost using the effective interest method. for trading, or (iii) designated as ‑ ‑ Derecognition of financial liabilities The Group derecognises financial liabilities when, and only when, the Group’s obligations are discharged, cancelled or have expired. The difference between the carrying amount of the financial liability derecognised and the consideration paid and payable is recognised in profit or loss. When the Group exchanges with the existing lender one debt instrument into another one with the substantially different terms, such exchange is accounted for as an extinguishment of the original financial liability and the recognition of a new financial liability. Similarly, the Group accounts for substantial modification of terms of an existing liability or part of it as an extinguishment of the original financial liability and the recognition of a new liability. It is assumed that the terms are substantially different if the discounted present value of the cash flows under the new terms, including any fees paid net of any fees received and discounted using the original effective rate is at least 10 percent different from the discounted present value of the remaining cash flows of the original financial liability. If the modification is not substantial, the difference between: (1) the carrying amount of the liability before the modification; and (2) the present value of the cash flows after modification should be recognised in profit or loss as the modification gain or loss within other gains and losses. Derivative financial instruments The Group enters into derivative financial instruments to manage its exposure to interest rate and foreign exchange rate risks, including foreign exchange forward contracts, and interest rate swaps. Derivatives are recognised initially at fair value at the date a derivative contract is entered into and are subsequently remeasured to their fair value at each reporting date. The resulting gain or loss is recognised in profit or loss immediately unless the derivative is designated and effective as a hedging instrument, in which event the timing of the recognition in profit or loss depends on the nature of the hedge relationship. A derivative with a positive fair value is recognised as a financial asset whereas a derivative with a negative fair value is recognised as a financial liability. Derivatives are not offset in the financial statements unless the Group has both legal right and intention to offset. A derivative is presented as a non and it is not expected to be realised or settled within 12 months. Other derivatives are presented as current assets or current liabilities. current liability if the remaining maturity of the instrument is more than 12 months current asset or a non ‑ ‑ Hedge accounting The Group designates certain derivatives as hedging instruments in respect of interest rate risk in cash flow hedges. At the inception of the hedge relationship, the Group documents the relationship between the hedging instrument and the hedged item, along with its risk management objectives and its strategy for undertaking various hedge transactions. Furthermore, at the inception of the hedge and on an ongoing basis, the Group documents whether the hedging instrument is effective in offsetting changes in cash flows of the hedged item attributable to the hedged risk, which is when the hedging relationships meet all of the following hedge effectiveness requirements: • • • there is an economic relationship between the hedged item and the hedging instrument; the effect of credit risk does not dominate the value changes that result from that economic relationship; and the hedge ratio of the hedging relationship is the same as that resulting from the quantity of the hedged item that the Group actually hedges and the quantity of the hedging instrument that the Group actually uses to hedge that quantity of hedged item. If a hedging relationship ceases to meet the hedge effectiveness requirement relating to the hedge ratio but the risk management objective for that designated hedging relationship remains the same, the Group adjusts the hedge ratio of the hedging relationship (i.e. rebalances the hedge) so that it meets the qualifying criteria again. Cash flow hedges The effective portion of changes in the fair value of derivatives and other qualifying hedging instruments that are designated and qualify as cash flow hedges is recognised in other comprehensive income and accumulated under the heading of cash flow hedging reserve, limited to the cumulative change in fair value of the hedged item from inception of the hedge. The gain or loss relating to the ineffective portion is recognised immediately in profit or loss. Amounts previously recognised in other comprehensive income and accumulated in equity are reclassified to profit or loss in the periods when the hedged item affects profit or loss, in the same line as the recognised hedged item. However, when the hedged forecast transaction results financial liability, the gains and losses previously recognised in other comprehensive income in the recognition of a non and accumulated in equity are removed from equity and included in the initial measurement of the cost of the non financial asset or non financial liability. This transfer does not affect other comprehensive income. Furthermore, if the Group expects that some or all of the loss accumulated in the cash flow hedging reserve will not be recovered in the future, that amount is immediately reclassified to profit or loss. financial asset or a non ‑ ‑ ‑ ‑ The Group discontinues hedge accounting only when the hedging relationship (or a part thereof) ceases to meet the qualifying criteria (after rebalancing, if applicable). This includes instances when the hedging instrument expires or is sold, terminated or exercised. The discontinuation is accounted for prospectively. Any gain or loss recognised in other comprehensive income and accumulated in cash flow hedge reserve at that time remains in equity and is reclassified to profit or loss when the forecast transaction occurs. When a forecast transaction is no longer expected to occur, the gain or loss accumulated in cash flow hedge reserve is reclassified immediately to profit or loss. 3.7 Right of use assets and lease liabilities The Group leases various offices, warehouses, retail stores, equipment and cars. Rental contracts are typically made for fixed periods of 3 to 8 years but may have extension options as described in below. Lease terms are negotiated on an individual basis and contain a wide range 44 45 TURNERS AUTOMOTIVE GROUP ANNUAL REPORT 2020 TURNERS AUTOMOTIVE GROUP LIMITED Notes to financial statements for the year ended 31 March 2020 TURNERS AUTOMOTIVE GROUP LIMITED Notes to financial statements for the year ended 31 March 2020 NOTES TO THE FINANCIAL STATEMENTS for the year ended 31 March 2020 NOTES TO THE FINANCIAL STATEMENTS for the year ended 31 March 2020 of different terms and conditions. The lease agreements do not impose any covenants, but leased assets may not be used as security for borrowing purposes. Until the 2020 financial year, leases of property, plant and equipment were classified as either finance or operating leases. Payments made under operating leases (net of any incentives received from the lessor) were charged to profit or loss on a straight-line basis over the period of the lease. From 1 April 2019, leases are recognised as a right-of-use asset and a corresponding liability at the date at which the leased asset is available for use by the Group. Each lease payment is allocated between the liability and finance cost. The finance cost is charged to profit or loss over the lease period so as to produce a constant periodic rate of interest on the remaining balance of the liability for each period. The right-of-use asset is depreciated over the shorter of the asset's useful life and the lease term on a straight-line basis. Assets and liabilities arising from a lease are initially measured on a present value basis. Lease liabilities include the net present value of the following lease payments: • fixed payments (including in-substance fixed payments), less any lease incentives receivable; • variable lease payment that are based on an index or a rate; • amounts expected to be payable by the lessee under residual value guarantees; • the exercise price of a purchase option if the lessee is reasonably certain to exercise that option; and • payments of penalties for terminating the lease, if the lease term reflects the lessee exercising that option. The lease payments are discounted using the interest rate implicit in the lease. If that rate cannot be determined, the lessee’s incremental borrowing rate is used, being the rate that the lessee would have to pay to borrow the funds necessary to obtain an asset of similar value in a similar economic environment with similar terms and conditions. Right-of-use assets are measured at cost comprising the following: • the amount of the initial measurement of lease liability; • any lease payments made at or before the commencement date less any lease incentives received; • any initial direct costs; and • restoration costs. Payments associated with short-term leases and leases of low-value assets are recognised on a straight-line basis as an expense in profit or loss. Short-term leases are leases with a lease term of 12 months or less. Low-value assets comprise IT-equipment and small items of office furniture. Extension and termination options are included in a number of property and equipment leases across the Group. These terms are used to maximise operational flexibility in terms of managing contracts. The majority of extension and termination options held are exercisable only by the Group and not by the respective lessor. The Group has applied judgement to determine the lease term for some lease contracts that include renewal options. The assessment of whether the Group is reasonably certain to exercise such options impacts the lease term, which significantly affects the amount of lease liabilities and right-of-use assets. A deferred tax asset is raised for the tax impact of the changes in recognised lease related assets and liabilities. A lease is contract that conveys the right to control the use of an identified asset for a period of time in exchange for consideration. In the Statement of cash flow, lessees present: • Short-term lease payments, payments for leases of low-value assets and variable lease payments not included in the measurement of the lease liability as part of operating activities; Cash paid for the interest portion of a lease liability as either operating activities or financing activities, as permitted by NZ IAS 7 Statement of Cash Flows (the Group has opted to include interest paid as part of operating activities, consistent with its presentation of interest paid on financial liabilities); and Cash payments for the principal portion for a lease liability, as part of financing activities. Under NZ IAS 17, all lease payments on operating leases were presented as part of cash flows from operating activities. • • For the accounting policy applied prior to the adoption of IFRS 16 please refer to note 32. Insurance contracts 3.8 Insurance contracts are those contracts that transfer significant insurance risk and are accounted for in accordance with the requirements of NZ IFRS 4 Insurance Contracts. The Group issues the following insurance contracts: • Long-term insurance contracts with fixed and guaranteed terms, these contracts insure events associated with human life (for example, death) over a long duration; Temporary life insurance contracts covering death disablement, disability and redundancy risks; and Short term motor vehicle contracts covering comprehensive, third party and mechanical breakdown risks. • • The Group has determined that all assets of the Group’s subsidiary, DPL Insurance Limited, are assets backing policy liabilities and are managed and reported in accordance with a mandate approved by the DPL Insurance Limited’s Board. The liability for life insurance contracts is determined in accordance with Appendix C of NZ IFRS 4 Insurance Contracts and Professional Standard No 20 of the New Zealand Society of Actuaries. In terms of these standards, the liability is determined using the methodology referred to as Margin on Service (MoS). Under MoS the excess premium received over claims and expenses, 'the profit margin', is recognised over the life of the contract in a manner that reflects the pattern of risk accepted from the policyholder 'the service'. Longer-term lines of business (annuities, funeral plan) are valued using the projection method, and shorter-term life and longer-term life contracts written on yearly renewable premiums, are valued using the accumulation method, as provided for in NZ IFRS 4. General insurance contract liabilities include claims provision and the provision for unearned premium. The outstandings claims provision is based on the estimated ultimate cost of all claims incurred but not settled at the reporting date, whether reported or not, together with related claims handling cost and a reduction for the expected value of salvage and other recoveries. Delays can be experienced in the notification and settlement of claims, therefore the ultimate cost of these cannot be known at reporting date and are estimated based on past experience. The liability is not discounted for the time value of money and is derecognised when the obligation to pay the claim expires, is discharged or is cancelled. The provision for unearned premiums represent the portion of premiums received or receivable that relates to risks that have not yet expired at the reporting date. The provision is recognised when contracts are entered into and premiums are charged, and is recognised as premium income over the term of the contract in accordance with the pattern of insurance service provided under the contract. Liability adequacy testing is performed in terms of NZ IFRS 4 in order to test the adequacy of all insurance liabilities recorded in the statement of financial position, net of deferred acquisition costs. Liability adequacy testing is performed at a portfolio level of contracts that are subject to broadly similar risks and are managed together as a single portfolio. 3.9 Life investment contracts Life investment contracts are those contracts with minimal insurance risk and are accounted for in accordance with NZ IFRS 15 'Revenue from Contracts with Customers' (refer note 3.5.1) and NZ IFRS 9 'Financial Instruments' (refer note 3.5.2). The life investment contacts are unit-linked and fair value of a unit linked contract is determined using the current unit values that reflect the fair value of the financial assets backing the contract, multiplied by the number of units attributable to the contract holder. 3.10 Inventories Inventories comprise primarily motor vehicles held for sale and are stated at the lower of cost or net realisable value. Cost comprises purchase price, shipping cost, compliance cost and other sundry related costs. Estimated selling prices are based upon recent observed vehicle sales prices for comparable vehicles. Net realisable value is the estimated selling price in the ordinary course of business less the estimated costs of completion and the estimated costs necessary to make the sale. 3.11 Investment property Investment property is held for capital appreciation and comprises land that was transferred from finance receivables through the exercise of the Group’s security interest in a finance receivable that was in default. Investment property is initially recognised at fair value on date of transfer or purchase and subsequently carried at fair value. The fair value of investment properties is determined by a qualified independent external valuer (refer note 17). Any gains or losses arising from a change in fair value of the investment property is recognised in profit or loss. Subsequent expenditure is charged to the asset's carrying amount only when it is probable that future economic benefits associated with the item will flow to the Group and the cost of the item can be measured reliably. All other repairs and maintenance costs are charged to profit or loss during the period in which they are incurred. 3.12 Property, plant and equipment Property, plant and equipment are recognised in the statement of financial position at cost less accumulated depreciation and impairment losses. Land is not depreciated. Depreciation is calculated on all other property, plant and equipment on a diminishing value or straight-line basis to allocate the costs, net of any residual amounts, over their useful lives. The rates for the following asset classes are: Diminishing value Straight line Leasehold improvements, furniture and fittings, office equipment Computer equipment Motor vehicles and equipment Signs and flags 7.5 - 60.0% 31.2 - 48.0% 26.0 - 31.2% - 3 - 15 years 3 - 5 years 3 - 7 years 3 - 12 years 3.13 Intangible assets Intangible assets comprise goodwill, acquired separable corporate brands, acquired customer relationships and computer software. Goodwill and corporate brands are indefinite life intangibles subject to annual impairment testing. Goodwill is allocated to cash-generating units for the purpose of impairment testing. The allocation is made to those cash-generating units or groups of cash-generating units that are expected to benefit from the business combination in which the goodwill arose, identified according to operating segment. Corporate brands and customer relationships acquired as part of a business combination are capitalised separately from goodwill as intangible assets if their value can be measured reliably on initial recognition and it is probable that the expected future economic benefits that are attributable to the asset will flow to the Group. Corporate relationship assets are amortised on the straight line basis over the expected life (2 – 10 years) of the relationship and are recognised in the statement of financial position at cost less accumulated amortisation and impairment losses. 46 47 TURNERS AUTOMOTIVE GROUP ANNUAL REPORT 2020 TURNERS AUTOMOTIVE GROUP LIMITED Notes to financial statements for the year ended 31 March 2020 TURNERS AUTOMOTIVE GROUP LIMITED Notes to financial statements for the year ended 31 March 2020 NOTES TO THE FINANCIAL STATEMENTS for the year ended 31 March 2020 NOTES TO THE FINANCIAL STATEMENTS for the year ended 31 March 2020 Computer software is recognised in the statement of financial position at cost less accumulated amortisation and impairment losses. Direct costs associated with the purchase and installation of software licences and the development of software for internal use are capitalised where project success is probable and the capitalisation criteria is met. Cost associated with planning and evaluating computer software and maintaining a system after implementation are expensed. Computer software costs are amortised on a diminishing value basis (rate of 50%) or on a straight-line basis (one to five years). and non-vesting conditions, the transactions are treated as vested irrespective of whether the market or non-vesting conditions is satisfied, provided that all other performance and/or service conditions are satisfied. The dilutive effect of outstanding options is reflected as additional share dilution in the computation of earnings per share (refer note 9). When options are exercised or cancelled, the option reserve relating to the options exercised or cancelled is reclassified to share capital. 3.14 Taxation Income tax for the period comprises current and deferred tax. Current and deferred tax are recognised as an expense or income in the profit or loss, except when they relate to items that are recognised outside profit or loss (whether in other comprehensive income or directly in equity), in which case the tax is also recognised outside profit or loss. Superannuation plans The Group pays contributions to superannuation plans, such as Kiwisaver. The Group has no further payment obligations once the contributions have been paid. The contributions are recognised as an employee benefit expense when they are due. Prepaid contributions are recognised as an asset to the extent that a cash refund or a reduction in the future payments is available. Current tax is the expected tax payable on the taxable income for the period, using tax rates enacted or substantively enacted at balance date after taking advantage of all allowable deductions under current taxation legislation and any adjustment to tax liabilities in respect of previous years. Deferred tax is provided using the liability method, providing for temporary differences between the amounts of assets and liabilities for financial reporting purposes and the amounts used for taxation purposes. The amount of deferred tax provided is based on the expected manner of realisation or settlement of the amount of assets and liabilities, using tax rates enacted or substantively enacted as at balance date. Deferred taxation assets arising from temporary differences or income tax losses, are recognised only to the extent that it is probable that a future taxable profit will be available against which the asset can be utilised. Deferred taxation assets are reduced to the extent that it is no longer probable that the related tax asset will be realised. Any reduction is recognised in profit or loss. 3.15 Impairment of non-financial assets Intangible assets that have an indefinite useful life are not subject to amortisation and are tested for impairment annually or more frequently if events or changes in circumstances indicate that they might be impaired. Intangible assets not yet available for use are tested for impairment annually or more frequently if events or changes in circumstances indicate that they might be impaired. Other assets are tested for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. The Group conducts an annual internal review of asset values, which is used as a source of information to assess for any indicators of impairment. External factors, such as changes in expected future processes, technology and economic conditions, are also monitored for indicators of impairment. If any indication of impairment exists, an estimate of the asset’s recoverable amount is calculated. An impairment loss is recognised for the amount by which the asset’s carrying amount exceeds its recoverable amount. The recoverable amount is the higher of an asset’s fair value less costs to sell and value in use. Value in use is determined by estimating future cash flows from the use and ultimate disposal of the asset and discounting these to their present value using a pre-tax discount rate that reflects current market rates and the risks specific to the asset. For the purposes of assessing impairment, assets are grouped at the lowest levels for which there are separately identifiable cash flows (cash-generating units). Impairment losses directly reduce the carrying amount of assets and are recognised in profit or loss. Non-financial assets other than goodwill that suffered impairment are reviewed for possible reversal of the impairment at each reporting date. 3.16 Managed funds DPL Insurance Limited, a wholly owned subsidiary, has saving plans, which are not open to new members, with assets managed by a third party investment manager. The assets and liabilities of these funds are included in the financial statements. 3.17 Employee benefits Wages, salaries and annual leave Liabilities for wages, salaries and annual leave are recognised in respect of employees' services up to the reporting date. They are measured at the amounts expected to be paid when the liabilities are settled. Long service leave The liability for long service leave is recognised in the provision for employee benefits and measured at the present value of expected future payments to be made in respect of services provided by employees up to the reporting date using the projected unit credit method. Consideration is given to future wage and salary levels, experience of employee departures and periods of service. Expected future payments are discounted using market yields at the reporting date on corporate bonds with terms to maturity and currency that match, as closely as possible, the estimated future cash outflows. Profit sharing and bonus plans The Group recognises a liability and an expense for bonuses and profit-sharing based on a formula that takes into consideration the profit attributable to the Company’s shareholders after certain adjustments. The Group recognises an accrual where contractually obliged or where there is a practice that has created a constructive obligation. Share based payments The cost of options issued to employees under the Group’s share option plan is measured by reference to fair value of the options at the date on which they are granted. Service and non-market performance conditions are not taken into account when determining the grant date fair value, but the likelihood of the conditions being met is assessed as part of the Group’s best estimate of the number of equity instruments that will ultimately vest. Market conditions are reflected within the grant date fair value. The cost of equity settled transactions is recognised over the vesting period. If the service condition is not met during the vesting period, the expense is revised to reflect the best available estimate of the number of equity instruments expected to vest. Where awards include market 3.18 Statement of cash flows The statement of cash flows has been prepared using the direct approach modified by netting certain cash flows in order to provide more meaningful disclosure to better reflect the activities of the Group's customers or the party providing funding to the Group than those of the Group. These include reverse annuity mortgages, finance receivables and borrowings. 3.19 Comparatives Where necessary, comparative information has been reclassified and represented for consistency with current year. Comparative information has not been restated for the impact on application of NZ IFRS 16. 4. USE OF ESTIMATES AND JUDGEMENTS In preparing the financial statements in accordance with NZ IFRS, the Board and management are required to make judgements, estimates and assumptions about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results could differ from those estimates. Estimates and assumptions are continually evaluated and are based on historical experience and other factors, including expectations of future events that are believed to be reasonable under the circumstances. COVID-19 The COVID -19 pandemic and responses has reduced the ability of many businesses to operate and reduced the demand for many goods and services resulting in significant volatility and instability in financial markets. The Group's four businesses experienced significant declines in new business during lockdown level 4 and level 3, however three of the four businesses earn annuity income and were profitable during this period. The COVID-19 pandemic and responses continue to effect general activity and confidence levels in the economy. While the scale and duration of these effects remain uncertain, the Group continues to monitor developments and initiate plans to mitigate adverse impacts and maximise opportunities. These financial statements have been prepared based upon conditions existing as at 31 March 2020 and consider those events occurring subsequent to that date that provide evidence of conditions that existed at the end of the reporting period. As the outbreak of the COVID-19 pandemic occurred before 31 March 2020 its impacts are considered an event that is indicative of conditions that arose prior to reporting period. Accordingly, as at the date of signing these financial statements, all reasonably known and available information with respect to the COVID-19 pandemic has been taken into consideration in the critical accounting estimates and judgements applied by Management and all reasonably determinable adjustments have been made in preparing these financial statements. When assessing the possible future impact of COVID-19 pandemic on the carrying value of assets and liabilities, the Group reviewed past experience, including the impact of the global financial crisis, on the Group's performance and aligned the forecast and estimates with this experience. The principal areas of judgement in preparing these financial statements are set out below. Inventories - impairment provision Inventories comprise primarily motor vehicles held for sale and are stated at the lower of cost or net realisable value. Cost comprises the purchase price, shipping cost, compliance cost and other sundry related costs. Net realisable value is the estimated selling price in the ordinary course of business less the estimated costs of completion and the estimated costs necessary to make the sale. Estimated selling prices are based upon recent observed vehicle sales prices for comparable vehicles. Management has estimated the net realisable value of inventories based on their estimate of the selling price in a post lockdown market. Based on the work done the inventories impairment provision includes $0.5m for any economic uncertainty associated with the COVID-19 pandemic and its potential impact on inventory provisions. Provision for impairment on loan receivables Significant increase in credit risk As explained in note 3.6, ECL are measured as an allowance equal to 12 month ECL for performing assets, or lifetime ECL for doubtful or in default assets. An asset moves to doubtful when its credit risk has increased significantly since initial recognition. The Group presumes a significant increase in credit risk subsequent to initial recognition when contractual payments are more than 30 days overdue. In assessing whether the credit risk of an asset has significantly increased the Group takes into account qualitative and quantitative reasonable and supportable forward looking information. Calculation of loss allowance When measuring ECL the Group has used reasonable and supportable forward looking information, which is based on estimates for the future movement of different economic drivers (i.e. unemployment rates and government stimulus) and how these drivers will affect each other. 48 49 TURNERS AUTOMOTIVE GROUP ANNUAL REPORT 2020 TURNERS AUTOMOTIVE GROUP LIMITED Notes to financial statements for the year ended 31 March 2020 TURNERS AUTOMOTIVE GROUP LIMITED Notes to financial statements for the year ended 31 March 2020 NOTES TO THE FINANCIAL STATEMENTS for the year ended 31 March 2020 NOTES TO THE FINANCIAL STATEMENTS for the year ended 31 March 2020 Loss given default is an estimate of the loss arising on default. It is based on the difference between the contractual cash flows due and those that the Group would expect to receive, taking into account cash flows from collateral and integral credit enhancements. Probability of default constitutes a key input in measuring ECL. Probability of default is an estimate of the likelihood of default over a given time horizon, the calculation of which includes historical data, assumptions and expectations of future conditions. There remains inherent uncertainty of the economic impact of COVID-19 pandemic on the economic drivers used to determine ECL. When assessing the impact of the COVID-19 pandemic, Management determined that the likely impact would be an increase in the estimated probability of default. Management's assessment included reviewing past experience, during the global financial crisis, and a review of loans in at risk related industries. Based on the work done the finance receivables expected credit loss provision includes $1.0m for any economic uncertainty associated with the COVID-19 pandemic and its potential impact on the expected impact on credit losses. If the ECL rates on performing finance receivables increased/(decreased) by 1% higher (lower) as at 31 March 2020, the loss allowance on finance receivables would have been $2.7 million higher/(lower). If the ECL rates on doubtful or in default finance receivables increased/(decreased) 1% higher (lower) as at 31 March 2020, the loss allowance on finance receivables would have been $0.3 million higher/(lower). Impairment of goodwill The carrying value of goodwill is assessed at least annually to ensure that it is not impaired. Performing this assessment generally requires management to estimate future cash flows to be generated by the cash-generating unit, which entails making judgements, including the expected rate of growth of revenues, margins expected to be achieved and the appropriate discount rate to apply when valuing future cash flows (refer note 21). A sensitivity analysis of the recoverable amounts of the CGU’s is disclosed in note 21. When estimating future cash flows, Management considered the impact of the COVID-19 pandemic on the Group’s performance and judgements, including the forecasting of the year-on-year movements in the operating assets of individual CGUs such as: • • • for the Finance and Auto Retail CGUs, the movement in their portfolios of finance receivables and related movement in debt financing; for the Auto Retail CGU, the movement in inventory levels, trade payables and related movement in trade financing; and for the DPL Insurance CGU, the movement in deferred insurance contract premiums and acquisition costs, and solvency capital requirements. Liabilities arising from claims made under insurance contracts Liabilities arising from claims made under insurance contracts are estimated based on the terms of cover provided under an insurance contract. The estimation of the ultimate liability arising from claims made under insurance contracts is based on a number of actuarial techniques that analyse experience, trends and other relevant factors. The estimate process involves using Group specific data, relevant industry data and general economic data, including but not limited to, claim frequencies, average claim sizes and historical trends (refer note 35). Impairment of corporate brands The carrying values of brands are assessed at least annually to ensure that it is not impaired. Performing this assessment generally requires management to estimate future cash flows to be generated by the related investment or a cash-generating unit, which entails making judgements, including the expected rate of growth of revenues, margins expected to be achieved and the appropriate discount rate to apply when valuing future cash flows (refer note 21). Unredeemed voucher liabilities The Group's estimate of the unredeemed voucher liability is based on historic redemption patterns. Changes in the redemption pattern of unredeemed vouchers could affect the reported value of this liability. At year end, the Group readjusted the unredeemed prepaid collection voucher liability write off methodology based on movements in the actual redemption patterns to reflect the continued decline in the redemption of historically issued prepaid collection vouchers. The change in accounting estimate resulted in a $0.1m (2019: $0.2m) decrease in the unredeemed voucher liability (note 24). Determining lease term In determining the lease term, management considers all facts and circumstances that create an economic incentive to exercise an extension option, or not exercise a termination option. Extension options (or periods after termination options) are only included in the lease term if the lease is reasonably certain to be extended (or not terminated). Valuation of investment properties The fair value of the investment property has been determined by an independent qualified valuer. Note 17 sets out the valuation methodology, key assumptions and sensitivity analysis. The fair value of the investment property is subjective and changes to the assumptions can have a significant impact on profit and the fair value. The derecognition of finance receivables The Group follows the guidance in NZ IFRS 9 'Financial Instruments', in transactions where substantially all the risks and rewards of ownership of a financial asset are neither retained nor transferred. The Group derecognises the transferred asset if control over that asset is relinquished. The rights and obligations retained in the transfer, such as servicing assets and liabilities, are recognised separately as assets and liabilities, as appropriate. If control over the asset is retained, the Group continues to recognise the asset to the extent of its continuing involvement, which is determined by the extent to which it remains exposed to changes in the value of the transferred asset. This determination of whether risks and rewards of ownership of a financial asset are neither retained nor transferred requires significant judgement (refer note 3.6). Prior to derecognition, the Group assesses whether the finance receivables qualify for derecognition using the criteria noted above. Fair value measurement The fair value of financial instruments that are not quoted in active markets are determined using discounted cash flow models. To the extent practical, models use observable data however normal volatilities require management to make estimates. Changes in assumptions about these factors could affect the reported fair values of financial instruments (refer note 11 and 23). The fair value of financial instruments traded in active markets is based on quoted market prices at the reporting date. A market is regarded as active if quoted prices are readily and regularly available from an exchange, dealer, broker, industry group, pricing service, or regulatory agency, and those prices represent actual and regularly occurring market transactions on an arm’s length basis. The quoted market price used for financial assets held by the group is the current bid price. These instruments are included in Level 1. The fair value of financial instruments that are not traded in an active market (for example, over-the-counter derivatives) is determined by 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. If all significant inputs required to fair value an instrument are observable, the instrument is included in level 2. If one or more of the significant inputs is not based on observable market data, the instrument is included in Level 3. The fair value of level 3 instruments is determined by using valuation techniques based on a range of unobservable inputs. The Group establishes fair value by using valuation techniques. These include the use of recent arm’s length transactions, reference to other instruments that are substantially the same, discounted cash flow analysis, and option pricing models refined to reflect the issuer’s specific circumstances. Investments in equity instruments that do not have a quoted market price in an active market and whose fair values cannot be reliably measured are recognised and subsequently carried at cost. Specific valuation techniques used to value financial instruments in each level are detailed in notes 5.5 and 17. 5. RISK MANAGEMENT The financial condition and operating results of the Group are affected by a number of key financial and non-financial risks. Financial risks include credit risk, liquidity risk and market risk. The non-financial risks include insurance risk, which is covered in note 35, and fair value risk relating to the Group’s Investment property (refer note 17). 5.1 Financial instrument by category Carryi ng val ue Financial assets Cash and cash equivalents Financial assets at fair value through profit or loss Amortised cost Trade receivables Finance receivables Other receivables and deferred expenses Reverse annuity mortgages Financial liabilities Other payables Financial liability at fair value through profit or loss Borrow ings 2020 $’000 32,771 64,988 8,609 293,037 3,390 4,913 407,708 19,700 - 350,364 370,064 2019 $’000 15,866 66,252 12,471 290,017 3,776 8,294 396,676 25,247 116 312,863 338,226 5.2 Credit risk Credit risk is the risk of financial loss to the Group if a counterparty to a financial instrument fails to meet its contractual obligations, and arises principally from the Group's cash and cash equivalents, financial assets at fair value through profit or loss (excluding equities held in unitised funds), trade receivables, finance receivables, reverse annuity mortgages, and other receivables. The Group’s cash and cash equivalents and financial assets at fair value through profit or loss (excluding equities in unitised funds) are placed with registered banks. Management assesses the credit quality of trade customers, taking into account their financial position, past experience and other factors. Individual risk limits are set based on these assessments. The use of credit limits by trade customers is regularly monitored by management. Sales to public customers are settled in cash, bank cheques or using major credit cards, mitigating the credit risk. 50 51 TURNERS AUTOMOTIVE GROUP ANNUAL REPORT 2020 TURNERS AUTOMOTIVE GROUP LIMITED Notes to financial statements for the year ended 31 March 2020 TURNERS AUTOMOTIVE GROUP LIMITED Notes to financial statements for the year ended 31 March 2020 NOTES TO THE FINANCIAL STATEMENTS for the year ended 31 March 2020 NOTES TO THE FINANCIAL STATEMENTS for the year ended 31 March 2020 To manage credit on finance receivables the Group performs credit evaluations on all customers requiring advances. The approval process considers a number of factors including: borrower’s past performance, ability to repay, amount of money to be borrowed against the security and the creditworthiness of the guarantor/co-borrower involved. The Group operates a lending policy with various levels of authority depending on the size of the loan. A lending and credit committee operates and overdue loans are assessed on a regular basis by this body. Risk grades categorise loans according to the degree of risk of financial loss faced and focuses management on the attendant risks. The current risk grading framework consists of four grades reflecting varying degrees of risk of default and the availability of collateral or other credit risk mitigation. They are as follows: • • • • performing – the counterparty has a low risk of default and does not have any past due amounts greater than 30 days; doubtful –amount is > 30 days past due or there has been a significant increase in credit risk since initial recognition; in default - amount is > 90 days past due or evidence indicating the asset is credit impaired; and write-off – there is evidence indicating the debtor is in severe financial difficulty and the Group has no realistic prospect of recovery. The Group implements guidelines on the acceptability of specific classes of collateral or credit risk mitigation. The principal collateral types for finance receivables are: • • mortgages over properties, with the maximum loan to value rate being 75%; mortgages over houses for reverse annuity mortgages, with a maximum loan to value ratio of 30% at inception (no new reverse annuity mortgages have been advanced since 2009); charges over vehicle stock for dealer floorplans; chattel paper where the Group acts as a wholesale funder; charges over business assets such as equipment; and charges over motor vehicles. • • • • For finance receivables secured by collateral, estimates of the value of collateral are assessed at the time of borrowing, and are not updated unless the receivable is being assessed for specific impairment. The allowance for impairment includes the Group's estimate of the value of collateral held. For Life investment linked contracts the investments credit risk is appropriate for each particular product and the risk is borne by the policy holder. There is no significant risk assumed by the Group. 5.3 Liquidity risk Liquidity risk is the risk that the Group will not be able to meet its obligations associated with financial liabilities as they fall due. The Group endeavours to maintain sufficient funds to meet its commitments based on forecasted cash flow requirements. Due to the dynamic nature of the underlying businesses, flexibility is maintained by having diverse funding sources and adequate committed credit facilities. Management has internal control processes and contingency plans to actively manage the lending and borrowing portfolios to ensure the net exposure to liquidity risk is minimised. The exposure is reviewed on an on-going basis from daily procedures to monthly reporting as part of the Group's liquidity management process. The liquidity risk for cash flows payable on the life investment contracts liabilities that are unit linked contracts is managed by holding a pool of readily tradable investment assets (included in financial assets at fair value through profit or loss) and deposits on call. The liability and supporting assets have been excluded from the maturity analysis below because there is no contractual or expected maturity date for the life investment contracts and the readily tradable investment assets offset any liquidity risk. The liquidity risk on other insurance cash flows is managed by holding designated percentages of insurance reserves in liquid assets such as cash and cash equivalents. The table below analyses the Group’s financial liabilities and net settled derivative financial instruments into relevant maturity groupings based on the remaining period at reporting date to contractual maturity date. The amounts disclosed in the tables are the contractual and the expected undiscounted cash flows. 2020 Contractual undiscounted cash flows: Other payables Derivative financial instruments Borrow ings Lease liabilities Expected undiscounted cash flows: Other payables Derivative financial instruments Borrow ings Lease liabilities 0-6 months $’000 7-12 months $’000 13-24 months $’000 25-60 months $’000 60+ months $’000 Total $’000 19,700 440 34,143 4,042 58,325 19,700 440 34,143 4,042 58,325 - 367 8,568 4,181 13,116 - 367 8,568 4,181 13,116 - 144 317,427 7,796 325,367 - 144 45,039 7,796 52,979 - 34 370 16,324 16,728 - 34 71,802 16,324 88,160 - - - 6,262 6,262 - - 256,880 6,262 263,142 19,700 985 360,508 38,605 419,798 19,700 985 416,432 38,605 475,722 2019 Contractual undiscounted cash flows: Other payables Derivative financial instruments Borrow ings Expected undiscounted cash flows: Other payables Derivative financial instruments Borrow ings 0-6 months $’000 7-12 months $’000 13-24 months $’000 25-60 months $’000 60+ months $’000 Total $’000 25,247 164 35,870 61,281 25,247 164 35,870 61,281 - 142 17,951 18,093 - 142 17,951 18,093 - 175 174,007 174,182 - 175 19,409 19,584 - 43 106,093 106,136 - - - - - 43 94,832 94,875 - - 213,492 213,492 25,247 524 333,921 359,692 25,247 524 381,554 407,325 5.4 Market Risk Market risk is the risk that changes in market prices, such as interest rates, foreign exchange rates and equity prices, will affect the Group's income or the value of its holdings of financial instruments. 5.4.1 Insurance business For the life investment policies market risk is transferred to the policy holder. The Group earns fees on investment linked policies that are based on the amount of assets invested and it may receive lower fees should markets fall. Asset allocation for investment linked policies is decided by the Policy Holder. In the other insurance business, market risk arises when there is a mismatch between the insurance policy liabilities and the assets backing those liabilities. Refer to note 35K for insurance liabilities interest rate sensitivity. The insurance business has no significant currency and equity risk. 5.4.2 Interest rate risk Interest rate risk is the risk of loss to the Group arising from adverse changes in interest rates. The Group's financing activities are exposed to interest rate risk in respect of its interest earning assets and interest bearing liabilities. Changes to interest rates can impact the Group's financial results by affecting the interest spread earned on these assets and liabilities. Interest rates are managed by assessing the demand for funds, new lending, expected debt repayments and maintaining a portfolio of financial assets and liabilities, including derivative financial instruments, with a sufficient spread between the Group's lending and borrowing activities. Exposure to interest rates is monitored by the Board of Directors on a monthly basis. The interest rates earned on finance receivables are fixed over the term of the contract. When approving interest rates for individual loan advances, interest rate risk is measured in accordance with the approved lending policy. The Group uses interest rate swap contracts to convert a portion of its variable rate debt to fixed rate debt. No exchange of principal takes place. The notional principal amount of interest rate swaps at 31 March 2020 was $75m (2019: $74m) and weighted average interest was 1.73% (2019: 2.23%). There was no hedge ineffectiveness recognised in profit or loss during the period (2019: $nil). Turners Finance Limited borrows at fixed rates to fund finance receivables. The terms and the amounts of the finance payables are matched to each corresponding finance receivable, for which the lending rates are also fixed at inception, thus eliminating the cash flow interest rate risk on these financial instruments. The table below summarises the sensitivity of the Group’s financial assets and liabilities to interest rate risk. Carrying amount $’000 -1% Prof it $’000 -1% Equity +1% Profit +1% Equity $’000 $’000 $’000 2020 Financial Assets Cash and cash equivalents Financial assets at f air value through prof it or loss Finance receivables Reverse annuity mortgages Financial Liabilities Derivative financial instruments Borrow ings Total increase/(decrease) 32,771 64,988 293,037 4,913 985 350,364 (328) (650) (2,930) (49) (236) (468) (2,110) (35) 328 650 2,930 49 236 468 2,110 35 - 3,504 (453) (1,983) 2,523 (2,309) - (3,504) 453 (6) (2,523) 320 52 53 TURNERS AUTOMOTIVE GROUP ANNUAL REPORT 2020 TURNERS AUTOMOTIVE GROUP LIMITED Notes to financial statements for the year ended 31 March 2020 TURNERS AUTOMOTIVE GROUP LIMITED Notes to financial statements for the year ended 31 March 2020 NOTES TO THE FINANCIAL STATEMENTS for the year ended 31 March 2020 NOTES TO THE FINANCIAL STATEMENTS for the year ended 31 March 2020 Carrying amount $’000 -1% Prof it $’000 -1% Equity +1% Prof it +1% Equity $’000 $’000 $’000 2019 Cash and cash equivalents Financial assets at fair value through profit or loss Finance receivables Reverse annuity mortgages Financial Liabilities Financial liability at fair value through profit or loss Derivative financial instruments Borrow ings Total increase/(decrease) 15,866 66,252 290,017 8,294 116 524 312,863 (159) (663) (2,900) (83) 1 - 3,129 (675) (114) (477) (2,088) (60) 1 (1,404) 2,253 (1,889) 159 663 2,900 83 (1) - (3,129) 675 114 477 2,088 60 (1) 295 (2,253) 780 5.4.3 Currency risk The Group is exposed to currency risk arising from various currency exposures, primarily with respect to the Australian Dollars (‘AUD’) and Japanese Yen (‘JPY’). Currency risk arises from the future commercial transactions, recognised assets and liabilities and net investment in foreign operations. To ensure the net exposure to EC Credit Control (Aust) Pty Ltd, which has AUD as its functional currency, is kept to an acceptable level, the Group has a comprehensive transfer pricing policy and converts the AUD unredeemed voucher liability (refer note 24) into a NZD liability by selling the AUD liability to the New Zealand entity that will be providing the relevant services to settle the liability when the voucher is redeemed. To limit its exposure to JPY, the Group hedges the anticipated cash flows (mainly purchased inventory) when the commitment is made. All projected purchases qualify as ‘highly probable’ forecast transactions for hedge accounting purposes. The table below summarises the Group’s financial exposure to currency risk. in NZD'000 Net exposure to AUD Net exposure to JPY 2020 NZ$'000 560 2,171 2019 NZ$'000 224 1,560 The table below summaries the Group’s sensitivity to +/- 10% foreign exchange fluctuations. In NZD'000 2020 AUD JPY 2019 AUD JPY -10% Profit -10% Equity +10% Prof it +10% Equity - (82) - (177) 29 170 (25) 129 - 67 - 145 (24) (140) 21 (105) 5.4.4 Equity price risk Equity price risk is the risk that the Group's profit or loss will fluctuate as a result of changes in share prices. The Group is exposed to equity price risk through its investment in MTF Shares (refer note 11). A +1%/-1% movement in the MTF share price will increase/(decrease) profit and equity by $32k/($32k) (2019: $36k/($36k)). 2020 Fair value assets: Financial assets at fair value through profit or loss - Insurance Financial assets at fair value through profit or loss - investment in equities Financial assets at fair value through profit or loss - term deposits Investment property Fair value liabilities: Derivative financial instruments 2019 Fair value assets: Financial assets at fair value through profit or loss - Insurance Financial assets at fair value through profit or loss - investment in equities Financial assets at fair value through profit or loss - term deposits Investment property Fair value liabilities: Financial liability at fair value through profit or loss Derivative financial instruments Level 1 Level 2 Level 3 $’000 $’000 $’000 Total $’000 - - 54,637 - 54,637 7,197 3,154 - - 10,351 - - - 5,650 5,650 7,197 3,154 54,637 5,650 70,638 - - 985 985 - - 985 985 - - 54,999 - 54,999 - - - 7,658 3,595 - - 11,253 - 524 524 - - - 5,650 5,650 116 - 116 7,658 3,595 54,999 5,650 71,902 116 524 640 Fair value insurance The financial assets in this category back life investment contract liabilities and are investments in managed funds. The fair value of the investments in the managed funds are determined by reference to published exit prices, being the redemption price based on the market price quoted by the fund manager, ANZ New Zealand Investments Limited (refer 5.4.1). Fair value assets - investment in equities The fair value of the investment in equities has been estimated by reference to recent transactions with MTF shares (refer 5.4.4). Fair value liability - term deposits and fixed interest securities Term deposits are recognised at fair value based on the interest rate set at inception of the term deposit (refer 5.4.2). Fair value - investment property The fair value of the investment property was determined by an independent registered valuer using the comparable sales methodology (refer note 17). This is a level 3 fair value measurement and the key output used in determining the consideration is the probable sales price. A change in sales price of +/- 5% would increase/(decrease) the total fair value and profit or loss by $0.3m/($0.3m). These financial liabilities are exposed to interest rate risk as disclosed above. Derivative financial instruments The fair value of forward exchange contracts is determined using forward exchange rates at balance date, with the resulting value discounted to present value. The fair value of interest rate swaps is calculated as the present value of estimated future cash flows based on observable yield curves. Reconciliation of recurring level 3 fair value movements: 5.5 Assets and liabilities carried at fair value: The fair value of assets and liabilities carried at fair value as well as the methods used to calculate fair value are summarised in the table below. Assets Level 1 Level 2 Level 3 the fair value is calculated using quoted prices in active markets. the fair value is estimated using inputs other than quoted prices in level 1 that are observable for the assets or liabilities, either directly (as prices) or indirectly (derived from prices). the fair value is estimated using inputs for the asset or liability that are not based on observable market data. Opening balance Revaluation at reporting date - investment property Closing balance Liabilities Opening balance Revaluation at reporting date Closing balance 2020 $'000 5,650 - 5,650 2020 $'000 116 (116) - 2019 $'000 4,820 830 5,650 2019 $'000 226 (110) 116 During the year there were no movements of fair value assets or liabilities between levels of the fair value hierarchy. 54 55 TURNERS AUTOMOTIVE GROUP ANNUAL REPORT 2020 Turners Automotive Group Limited Notes to financial statements for the year ended 31 March 2020 NOTES TO THE FINANCIAL STATEMENTS for the year ended 31 March 2020 Other material non-cash items Automotive retail - impairment provisions Finance - impairment provisions Insurance - reverse annuity mortgage interest Corporate & other - write down of brand and collateral Segment assets and liabilities Automotive retail Finance Credit management Insurance Corporate & other Eliminations Revenue 2020 $’000 - - 613 - 613 Assets 2020 $’000 129,496 308,696 38,268 134,236 216,173 826,870 (118,478) 708,392 2019 $’000 - - 846 - 846 2019 $’000 132,839 276,356 31,685 135,001 195,673 771,554 (117,372) 654,182 Acquisition of property, plant & equipment, intangible assets and other non-current assets Automotive retail Finance Credit management Insurance Corporate & other Eliminations Expenses 2020 $’000 (126) (5,888) - - (6,014) Liabilities 2020 $’000 92,078 241,086 7,585 73,133 91,423 505,305 (19,968) 485,337 Other 2020 $’000 17,085 1,218 197 5,949 236 24,685 (5,440) 19,245 2019 $’000 (503) (7,436) - (4,570) (12,509) 2019 $’000 88,065 216,996 5,686 73,293 83,030 467,070 (39,262) 427,808 2019 $’000 11,478 671 135 14,884 74 27,242 (14,489) 12,753 Turners Automotive Group Limited Notes to financial statements for the year ended 31 March 2020 NOTES TO THE FINANCIAL STATEMENTS for the year ended 31 March 2020 6. SEGMENTAL INFORMATION 6.1 DESCRIPTION OF SEGMENTS Management has determined the operating segments based on the components of Turners Automotive Group Limited and its subsidiaries (the Group) that engage in business activities, which have discrete financial information available and whose operating results are regularly reviewed by the Group's chief operating decision maker. The chief operating decision maker has been identified as the Board of Directors. The Board of Directors makes decisions about how resources are allocated to the segments and assesses their performance. Geographically the Group's business activities are located in New Zealand and Australia. Five reportable segments have been identified as follows: Automotive retail: Finance: Credit management: Remarketing (motor vehicles, trucks, heavy machinery and commercial goods) and purchasing goods for sale. Provides asset based finance to consumers and SME's. Insurance: Corporate & other: Collection services, credit management and debt recovery services to the corporate and SME sectors. Geographically the collections services segment business activities are located in New Zealand and Australia. Marketing and administration of a range of life and consumer insurance products. Corporate centre. OPERATING SEGMENTS Revenue Automotive retail Finance Credit management Insurance Corporate & other Total segment revenue 2020 $’000 229,512 45,744 17,939 45,236 6 338,437 Inter- segment revenue 2020 $’000 (4,634) - - (1129) - (5,763) Revenue from external customers 2020 $’000 224,878 45,744 17,939 44,107 6 332,674 Total segment revenue 2019 $’000 228,672 44,193 18,196 49,206 17 340,284 Inter- segment revenue 2019 $’000 (2,963) - - (742) - (3,705) Revenue from external customers 2019 $’000 225,709 44,193 18,196 48,464 17 336,579 Revenue from external customers reported to the Board of Directors is measured on the same basis as revenue reported in the profit or loss. Inter- segment transactions are done on an arms length basis. The Group has no customers representing 10% or more of the Group's revenues. Operating profit Automotive retail Finance Credit management Insurance Corporate & other Profit/(loss) before taxation Income tax Net profit attributable to shareholders Automotive retail Finance Credit management Insurance Corporate & other Eliminations 2020 $’000 13,829 12,167 6,494 6,215 (9,640) 29,065 (8,112) 20,953 2019 $’000 18,274 11,112 6,321 8,227 (14,885) 29,049 (6,330) 22,719 Depreciation and Interest revenue Interest expense amortisation expense 2020 $’000 3,904 40,579 5 2,276 6 46,770 (86) 46,684 2019 $’000 8,383 38,544 9 2,434 17 49,387 (218) 49,169 2020 $’000 (3,967) (6,912) (39) (91) (3,930) (14,939) 86 (14,853) 2019 $’000 (4,206) (6,596) - - (4,368) (15,170) 218 (14,952) 2020 $’000 (7,960) (717) (249) (2,783) (210) (11,919) - (11,919) 2019 $’000 (2,457) (413) (104) (2,746) (65) (5,785) - (5,785) 56 57 TURNERS AUTOMOTIVE GROUP ANNUAL REPORT 2020Turners Automotive Group Limited Notes to financial statements for the year ended 31 March 2020 NOTES TO THE FINANCIAL STATEMENTS for the year ended 31 March 2020 Turners Automotive Group Limited Notes to financial statements for the year ended 31 March 2020 NOTES TO THE FINANCIAL STATEMENTS for the year ended 31 March 2020 7. PROFIT BEFORE TAX Revenue from continuing operations includes: Interest income Bank accounts, short term deposits and investments Finance receivables Reverse annuity mortgages Total interest income Operating revenue Sales of goods Commission and other sales revenue Finance related insurance commissions Loan fee income Insurance and life investment contract income Collection income Bad debts recovered Other revenue Total operating revenue Revenue from continuing operations Other income comprises: Gain on sale of investments Revaluation gain on investment property Dividend income Gain on sale of property, plant and equipment Gain on compulsory acquisition on leasehold premise by the NZTA Fair value gain on contingent consideration Revenue from contracts with customers Over time Automotive retail Commission and other sales revenue Insurance Motor vehicle insurance commissions At a point in time Automotive retail Sales of goods Auction commissions Credit management Collection income Voucher income Interest expense Bank borrowings and other Bonds Total interest expense Movement in impairment provisions Provisions for: Specific impaired finance receivables Collective impairment provision for finance receivables Collective impairment on reverse annuity mortgages Finance receivables bad debts written off Movement Notes 2020 $’000 2019 $’000 1,743 44,328 613 46,684 167,264 52,714 3,397 2,958 39,676 17,709 591 1,181 285,490 332,174 35 - 367 61 - 37 500 1,791 46,532 846 49,169 159,438 48,965 4,199 2,950 42,968 18,187 897 1,585 279,189 328,358 - 830 391 3,607 3,393 - 8,221 29,401 23,352 1,683 31,084 1,731 25,083 167,264 23,313 10,021 495 13,330 1,523 14,853 2,304 3,641 30 69 6,044 159,438 25,613 16,506 1,681 13,241 1,711 14,952 914 6,890 (47) 135 7,892 14 14 16 Net operating profit includes the following specific expenses Depreciation - Plant, equipment & motor vehicles - Leasehold improvements, furniture, fittings & office equipment - Computer equipment - Signs & flags Intangible amortisation Amortisation of software Amortisation of customer relationships Amorisation of right-of-use asset Insurance contract liabilities amortisation Amortisation of policies in force Tax advisory fees Donations Directors’ fees Post-employment benefits Loss on sale of property, plant and equipment Fees paid to auditor Baker Tilly Staples Rodway Auckland (auditor of the Group) Audit of financial statements Audit of annual financial statements Under accrual in prior year Other services Other assurance services - Audit of DPL Insurance Limited solvency return - Agreed Upon Procedures in relation to the Turners Marque Trust - Agreed Upon Procedures in relation to the EC Credit Control Limited trust account Total other services Total fees paid to Baker Tilly Staples Rodway Auckland 8. TAXATION Net operating profit before taxation Income tax expense at prevailing rates Tax impact of income not subject to tax Tax impact of expenses not deductible for tax purposes Tax assets recognised Under provision in prior years Taxation (expense)/benefit Comprising: Current Deferred Under provision in prior years 2020 $’000 681 828 594 184 1,203 557 6,300 1,572 11,919 329 3 665 1,322 71 452 50 7 - 3 10 512 2020 $’000 29,065 (8,146) 274 (46) - (194) (8,112) (9,817) 1,635 70 (8,112) 2019 $’000 675 864 519 96 1,435 630 - 1,566 5,785 104 5 637 1,164 - 442 - 7 15 3 25 467 2019 $’000 29,049 (8,134) 2,035 (125) - (106) (6,330) (10,030) 3,958 (258) (6,330) 58 59 TURNERS AUTOMOTIVE GROUP ANNUAL REPORT 2020 Turners Automotive Group Limited Notes to financial statements for the year ended 31 March 2020 NOTES TO THE FINANCIAL STATEMENTS for the year ended 31 March 2020 Turners Automotive Group Limited Notes to financial statements for the year ended 31 March 2020 NOTES TO THE FINANCIAL STATEMENTS for the year ended 31 March 2020 9. EARNINGS PER SHARE 11. FINANCIAL ASSETS AT FAIR VALUE THROUGH PROFIT OR LOSS Basic earnings per share The calculation of basic earnings per share at 31 March was based on the profit attributable to ordinary shareholders and weighted average number of ordinary shares outstanding, as follows: Profit for the year ($'000) Weighted average number of ordinary shares at 31 March Basic earnings per share (cents per share) Weighted number of shares Opening balance Shares issued for the conversion of bonds Shares issued for the dealer share scheme Share cancel from the share buy back 2020 20,953 86,055,495 24.35 2019 22,719 86,671,483 26.21 2020 2019 86,888,064 - 23,111 (855,680) 86,055,495 84,802,612 2,303,925 20,766 (455,820) 86,671,483 Diluted earnings per share The calculation of diluted earnings per share at 31 March was based on the diluted profit attributable to shareholders and a diluted weighted average number of ordinary shares outstanding as follows: Continuing operations Add: interest expense relating to optional convertible bonds, net of tax Add: Long term incentive expense relation to options Profit for the year Weighted number of ordinary shares (diluted) Weighted average number of shares (basic) Diluted earnings per share (cents per share) 10. CASH AND CASH EQUIVALENTS The carrying value of cash and cash equivalents are denominated in the following currencies: Australian dollars Japanese yen New Zealand dollars 2020 $’000 20,953 - - 20,953 2019 $’000 22,719 598 326 23,643 86,055,495 86,671,483 24.35 27.28 2020 $’000 365 - 32,406 32,771 2019 $’000 663 142 15,061 15,866 The Group's insurance business is required to comply with the solvency standards for licensed insurers issued by the Reserve Bank of New Zealand. The solvency standards specify the level of assets the insurance business is required to hold in order to meet solvency requirements, consequently all cash and cash equivalents and term deposits, disclosed in financial assets through the profit or loss, held in the insurance business may not be available for use by the wider Group. DPL Insurance's cash and cash equivalents at 31 March 2020 were $1.5m (2019: $2.2m). Cash and cash equivalents at 31 March 2020 of $5.1m (2019: $4.6m) belong to the Turners Marque Trust 1 and are not available to the Group (refer note 14). Insurance: Investments in unitised funds Term deposits Other: Investment in equities Total Investments in unitised funds comprise: New Zealand and overseas equities Fixed Interest securities Cash - deposits New Zealand and overseas property securities Total Investments with external investment managers ANZ New Zealand Investments Limited - Unitised Funds 2020 $’000 7,197 54,637 3,154 64,988 2,935 1,369 1,333 1,560 7,197 2019 $’000 7,658 54,999 3,595 66,252 1,309 1,350 3,141 1,858 7,658 7,197 7,658 The carrying amounts of the financial assets at fair value through profit or loss, excluding investments in unitised funds, are denominated in the following currencies: Australian dollars New Zealand dollars - 57,791 57,791 - 58,594 58,594 All term deposits held in the insurance business may not be available for use by the wider Group (refer note 10). DPL Insurance's term deposits at 31 March 2020 were $54.6m (2019: $55.0m). Investments in unitised funds, disclosed in Financial assets through the profit or loss, underwrite the Life investment policies and are not available for use by the wider Group. Interest rate and currency risk A summarised analysis of the sensitivity of financial assets at fair value through profit or loss, excluding investments in unitised funds (as market risk on unitised funds is transferred to the policy holder), to interest rate risk and currency risk can be found in note 5.4. Credit risk The maximum exposure to credit risk from financial assets at fair value through profit or loss at reporting date, excluding investments in unitised funds, is the carrying value. The financial assets in this category, excluding equity investments, are invested in term deposits with banks. For Life investment linked contracts (investment in unitised funds) the investments credit risk is borne by the policy holder, there is no significant credit risk assumed by the Group. Refer to note 5 for more information on the risk management policies of the Group. 12. TRADE RECEIVABLES Performing Doubtful In default Impairment provision Net trade receivables Trade receivables are a current asset, with terms of trade usually 30 days or less. 2020 $’000 7,643 1,130 231 9,004 (395) 8,609 2019 $’000 11,633 807 323 12,763 (292) 12,471 60 61 TURNERS AUTOMOTIVE GROUP ANNUAL REPORT 2020Turners Automotive Group Limited Notes to financial statements for the year ended 31 March 2020 NOTES TO THE FINANCIAL STATEMENTS for the year ended 31 March 2020 Turners Automotive Group Limited Notes to financial statements for the year ended 31 March 2020 NOTES TO THE FINANCIAL STATEMENTS for the year ended 31 March 2020 Impaired receivables If a trade receivable falls overdue and the Group is unable to enter into an arrangement to recover the amount owed then the receivable is classified as impaired. 14. FINANCE RECEIVABLES Commercial loans Finance leases Consumer loans Property development & investment loans Gross finance receivables Specific impairment provision Collective impairment provision Deferred fee revenue and commission expenses Current Non-current Gross financial receivables are summarised as follows: Performing Doubtful In default Movement in specific impaired receivables Opening balance Additions Amounts moved to collective Amounts recovered Amounts written off The aging of loans specifically assessed are as follows: Past due up to 30 days Past due 30 – 60 days Past due 60 – 90 days Past due 90+ days In default The age of default trade receivables is as follows: Past due up to 30 days Past due 30 – 60 days Past due 60 – 90 days Past due 90+ days The age of doubtful trade receivables is as follows: Past due up to 30 days Past due 30 – 60 days Past due 60 – 90 days Past due 90+ days Movement in the impairment provision: Opening balance Impairment charge/(release) included in other operating expenses Amounts written off 2020 $’000 - - - 231 231 1,009 73 48 - 1,130 292 221 (118) 395 2019 $’000 - - - 323 323 722 59 26 - 807 275 27 (10) 292 The Group recognises lifetime expected credit loss for trade receivables. The expected credit loss rate is 4.4% (2019: 2.3%). Amounts charged to the impairment provision are generally written off when there is no expectation of recovering additional cash. The carrying amounts of the Group's trade receivables are denominated in the following currencies: Australian dollars New Zealand dollars 666 7,943 8,609 1,099 11,372 12,471 Currency risk A summarised analysis of the sensitivity of financial assets included in trade receivables to currency risk can be found in note 5.4. Fair value and credit risk Due to the short-term nature of trade receivables, their carrying value is assumed to approximate their fair value. The maximum exposure to credit risk from trade receivables at the reporting date is the carrying amount of trade receivables. Credit risk is concentrated predominantly in New Zealand within the motor trade sector and private household sector, there is no concentration of credit risk on any individual customer. Refer to note 5 for more information on the risk management policies of the Group. 13. INVENTORY Motor vehicles Commercial goods Less provision for stock obsolescence Inventories are a current asset. Movement in provisions for stock obsolescence Opening balance Movement (included in Cost of goods sold) Closing balance 2020 $’000 45,975 32 46,007 (1,636) 44,371 2019 $’000 40,391 30 40,421 (1,562) 38,859 1,562 74 1,636 1,049 513 1,562 2020 $’000 25,674 4,194 274,773 2,857 307,498 (3,706) (17,999) 7,244 293,037 137,742 155,295 293,037 279,627 5,685 22,186 307,498 2,377 3,168 - (317) (505) 4,723 1,171 935 273 1,833 3,358 7,570 2019 $’000 25,831 6,860 267,616 3,069 303,376 (1,915) (17,680) 6,236 290,017 147,101 142,916 290,017 274,656 7,113 21,607 303,376 2,342 1,179 (283) (422) (439) 2,377 1,944 1,305 572 1,695 2,377 7,893 62 63 TURNERS AUTOMOTIVE GROUP ANNUAL REPORT 2020Turners Automotive Group Limited Notes to financial statements for the year ended 31 March 2020 NOTES TO THE FINANCIAL STATEMENTS for the year ended 31 March 2020 Turners Automotive Group Limited Notes to financial statements for the year ended 31 March 2020 NOTES TO THE FINANCIAL STATEMENTS for the year ended 31 March 2020 The following table details the risk profile of the Group's provision matrix for finance receivables collectively assessed for impairment. As the Group's historical credit loss experience does not show significantly different loss patterns for different customer segments, the provision for loss allowance based on past due status is not further distinguished between the Group's different customer base. The expected loss provision includes $1.0m for any uncertainty associated with the COVID-19 pandemic and its potential impact on credit losses. A review of the Group's experience during the global financial crisis and of loan, in at risk industries was included in the assessment of the COVID 19 expected loss provision. 31 March 2020 Current Past due up to 30 days Past due 30 – 60 days Past due 60 – 90 days Past due 90+ days In default 31 March 2019 Current Past due up to 30 days Past due 30 – 60 days Past due 60 – 90 days Past due 90+ days In default Movement in the impairment provisions: Specific impairment provision Opening balance Impairment charge/(release) through profit or loss Amounts written off Collective impairment provision Opening balance Change in accounting policy Impairment charge/(release) through profit or loss Amounts written off Gross Collective Expected finance impairment loss rate % 1.21 receivables $’000 269,668 provision $’000 3,252 10.39 21.27 31.01 52.33 78.94 0.90 8.72 19.95 29.25 55.72 81.29 8,788 3,042 1,435 2,532 14,463 299,928 262,160 10,552 4,036 1,200 3,943 13,592 295,483 2020 $’000 1,915 2,304 (513) 3,706 2020 $’000 17,680 - 3,641 (3,322) 17,999 913 647 445 1,325 11,417 17,999 2,358 920 805 351 2,197 11,049 17,680 2019 $’000 1,592 914 (591) 1,915 2019 $’000 9,702 3,184 6,890 (2,096) 17,680 Total impairment provision 21,705 19,595 Interest rate and foreign exchange risk A summarised analysis of the sensitivity of finance receivables to interest rate risk can be found in note 5.4.2. The Group's finance receivables are all denominated in NZD. Fair value and credit risk Carrying amount 2020 $’000 Fair value 2020 $’000 Carrying amount 2019 $’000 Fair value 2019 $’000 Finance receivables 293,037 293,594 290,017 290,326 The fair values are based on cash flows discounted using a weighted average interest rate of 13.81% (2019: 14.46%). The maximum exposure to credit risk is represented by the carrying amount of finance receivables which is net of any provision for impairment. The reported credit risk exposure does not take into account the fair value of any collateral, in event of the counterparties failing to meet their contractual obligation. Refer to note 5 for more information on the risk management policies of the Group. Securitisation The Group has a wholesale funding facility with the Bank of New Zealand (BNZ) under which it securitises finance receivables through The Turners Marque Warehouse Trust 1 (the Trust). Under the facility, BNZ provide funding to the Trust secured by finance receivables sold to the Trust from the finance segment. The facility is for a 24 month term that will be renewed annually. The facility is for $230m. The Trust is a special purpose entity set up solely for the purpose of purchasing finance receivables from the finance segment with the BNZ funding up to 92% of the purchase price with the balance funded by sub-ordinated notes from the Group. The New Zealand Guardian Trust Company Limited has been appointed Trustee for the Trust and NZGT Security Trustee Limited as the security trustee. The Company is the sole beneficiary. The Group has the power over the Trust, exposure, and rights, to variable returns from its involvement with the Trust and the ability to use its power over the Trust to affect the amount of the Group's returns from the Trust. Consequently the Group controls the Trust and has consolidated the Trust into the Group financial statements. The Group retains substantially all the risks and rewards relating to the finance receivables sold and therefore the finance receivables do not qualify for derecognition and remain on the Group's consolidated statement of financial position. During the financial year $149.4m finance receivables were sold to the Trust (2019: $114.5m). As at 31 March 2020 the carrying value of finance receivables in the Trust was $210.2m (2019: $175.3m). 15. OTHER RECEIVABLES, DEFERRED EXPENSES AND CONTRACT ASSETS Other receivables and prepayments Insurance deferred acquisition costs Contract assets - Amount relating to services rendered not yet invoiced - Contract fulfilment costs Current Non-current Carrying amount of financial assets included in other receivables The carrying amounts of the financial assets included in other receivables are denominated in the following currencies: Australian dollars New Zealand dollars Expected credit losses on contract assets and other receivables is 0%. 2020 $’000 3,203 3,268 1,996 105 8,572 6,153 2,419 8,572 3,390 72 3,318 3,390 2019 $’000 5,129 4,015 1,538 273 10,955 6,961 3,994 10,955 3,776 3 3,773 3,776 64 65 TURNERS AUTOMOTIVE GROUP ANNUAL REPORT 2020Turners Automotive Group Limited Notes to financial statements for the year ended 31 March 2020 NOTES TO THE FINANCIAL STATEMENTS for the year ended 31 March 2020 Turners Automotive Group Limited Notes to financial statements for the year ended 31 March 2020 NOTES TO THE FINANCIAL STATEMENTS for the year ended 31 March 2020 Fair value and credit risk The carrying value of these receivables is assumed to approximate their fair value. The maximum exposure to credit risk at the reporting date is the fair value of the financial assets included in other receivables. There is no concentration of credit risk to any individual customer or sector. Refer to note 5 for more information on the risk management policies of the Group. 16. REVERSE ANNUITY MORTGAGES Reverse annuity mortgages Provision for impairment Current Non-current Movement in provisions for impairment Opening balance Impairment charge/(release) through profit or loss Closing balance Interest rate 2020 $’000 4,993 (80) 4,913 444 4,469 4,913 50 30 80 A summarised analysis of the sensitivity of reverse annuity mortgages to interest rate risk can be found in note 5.4.2. The Group's reverse mortgage annuities are all denominated in NZD. Fair value and credit risk Reverse annuity mortgages Carrying amount 2020 $’000 4,913 Fair value 2020 $’000 6,021 Carrying amount 2019 $’000 8,294 2019 $’000 8,344 (50) 8,294 - 8,294 8,294 97 (47) 50 Fair value 2019 $’000 9,333 The fair value of reverse annuity mortgages is estimated using a discounted cash flow model based on a current market interest rate for similar products after making allowances for impairment. The maximum exposure to credit risk is represented by the carrying amount of reverse annuity mortgages which is net of any provision for impairment. The reported credit risk exposure does not take into account the fair value of any collateral, in event of the counterparties failing to meet their contractual obligation. All reverse annuity mortgages are secured by residential property in New Zealand. 17. INVESTMENT PROPERTY Investment property Movements in carrying amounts Opening balance Net change in fair value Closing balance 2020 $’000 5,650 5,650 - 5,650 2019 $’000 5,650 4,820 830 5,650 The investment property is 26.8 hectares of residentially zoned land at Sanctuary Hill, 358 Worsleys Road, Christchurch. The investment property was valued at reporting date by a Property Institute of New Zealand registered valuer, Jones Lang LaSalle Limited, Valuation & Advisory. Jones Lang LaSalle Limited is an external independent valuation company with appropriate recognised professional qualifications and recent experience in the location and category of property being valued. Fair values have been determined using a comparable sales approach methodology, having regard to current market conditions and comparable sales within the locality. Subjective adjustments have been applied where necessary to account for variations in location, land, improvements, time adjustment and overall quality. A material valuation uncertainty, due to the COVID 19 pandemic, was included in the valuation report. No income has been earned and no direct operating expenses, other than council rates, have been incurred on the investment property. There are no restrictions on the disposal or the remittance of proceeds on disposal. 18. FNANCIAL ASSETS AT FAIR VALUE THROUGH OCI Investment in Collaborate Corporation Limited Movements in carrying amounts Opening balance Purchase of investment Net change in fair value recognised in OCI Closing balance 19. INVESTMENT IN SUBSIDIARIES Subsidiary Buy Right Cars (2016) Limited Carly NZ Limited DPL Insurance Limited EC Credit Control (Aust) Pty Limited EC Credit Control (NZ) Limited Estate Management Services Limited Oxford Finance Limited Payment Management Services Limited Turners Finance Limited Turners Fleet Limited Turners Group NZ Limited Turners Property Holdings Limited Turners Staff Share Plan Trustees Limited EC Web Services Limited 2020 $’000 1,000 - 1,327 (327) 1,000 Ownership Interest Held 2020 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 66.6% 2019 $’000 - - - - - 2019 100.0% - 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 66.6% Vehicle trade Vehicle subscription services Insurance Collection services Collection services Collection services Finance Collection services Finance Vehicle and commercial goods trade Auctions Property Trustee Dormant All subsidiaries have a balance date of 31 March and, with the exception of EC Credit Control (Aust) Pty Limited (incorporated in Australia), all subsidiaries are incorporated in New Zealand. The Group has a wholesale funding facility with the Bank of New Zealand (BNZ) under which it securitises finance receivables through The Turners Marque Warehouse Trust 1 (the Trust). The Group has the power over the Trust, exposure, or rights, to variable returns from its involvement with the Trust and the ability to use its power over the Trust to affect the amount of the Group's returns from the Trust. Consequently the Group controls the Trust and has consolidated the Trusts into the Group financial statements. 66 67 TURNERS AUTOMOTIVE GROUP ANNUAL REPORT 2020Turners Automotive Group Limited Notes to financial statements for the year ended 31 March 2020 NOTES TO THE FINANCIAL STATEMENTS for the year ended 31 March 2020 Turners Automotive Group Limited Notes to financial statements for the year ended 31 March 2020 NOTES TO THE FINANCIAL STATEMENTS for the year ended 31 March 2020 20. PROPERTY, PLANT AND EQUIPMENT 21. INTANGIBLE ASSETS Buildings, leasehold improvements, furniture, fittings & office equipment Plant, equipment & motor vehicles Computer equipment Signs & flags $’000 $’000 $’000 $’000 4,613 (2,269) 2,344 112 1,493 (676) (681) 2,592 5,494 (2,902) 2,592 3,632 (1,622) 2,010 1,391 (382) (675) 2,344 4,613 (2,269) 2,344 20,495 (3,850) 16,645 (406) 5,514 (307) (828) 20,618 26,413 (5,795) 20,618 12,652 (2,987) 9,665 8,550 (706) (864) 16,645 20,495 (3,850) 16,645 2,467 (1,777) 690 79 534 (10) (594) 699 3,766 (3,067) 699 2,023 (1,257) 766 441 2 (519) 690 2,467 (1,777) 690 729 (415) 314 215 285 (142) (184) 488 1,205 (717) 488 471 (319) 152 264 (6) (96) 314 729 (415) 314 Land $’000 19,091 - 19,091 - 9,300 - - 28,391 28,391 - 28,391 23,352 - 23,352 - (4,261) - 19,091 19,091 - 19,091 Total $’000 47,395 (8,311) 39,084 - 17,126 (1,135) (2,287) 52,788 65,269 (12,481) 52,788 42,130 (6,185) 35,945 10,646 (5,353) (2,154) 39,084 47,395 (8,311) 39,084 2020 At cost Accumulated depreciation Opening carrying amount Reclassifications Additions Disposals & translation difference Depreciation Closing carrying amount At cost Accumulated depreciation Closing carrying amount 2019 At cost Accumulated depreciation Opening carrying amount Additions Disposals & translation difference Depreciation Closing carrying amount At cost Accumulated depreciation Closing carrying amount Brand Opening carrying amount at cost Impairment Closing carrying amount Goodwill Opening carrying amount at cost Foreign exchange adjustment Closing carrying amount Software At cost Accumulated amortisation Opening carrying amount Additions Disposals Amortisation Closing carrying amount At cost Accumulated amortisation Closing carrying amount Corporate relationships At cost Accumulated amortisation Opening carrying amount Amortisation Closing carrying amount At cost Accumulated amortisation and impairment provision Closing carrying amount 2020 $’000 67,100 - 67,100 92,534 7 92,541 8,342 (5,825) 2,517 2,138 (276) (1,203) 3,176 10,204 (7,028) 3,176 6,510 (1,927) 4,583 (557) 4,026 6,510 (2,484) 4,026 2019 $’000 71,400 (4,300) 67,100 92,524 10 92,534 6,235 (4,390) 1,845 2,107 - (1,435) 2,517 8,342 (5,825) 2,517 6,510 (1,297) 5,213 (630) 4,583 6,510 (1,927) 4,583 Total intangible assets carrying amount 166,843 166,734 The impairment and amortisation is recognised in other operating expenses in profit or loss. Impairment testing for cash-generating units (CGU) containing brands and goodwill The aggregate carrying amounts of brands and goodwill allocated to the cash generating units are outlined below. Goodwill primarily relates to growth expectations, expected future profitability and the substantial skill and expertise of the work force of the cash generating unit. Management have assessed that there is no foreseeable limit to the period of time over which the goodwill and brand is expected to generate net cash inflows for the Group, and as such goodwill and brand have been assessed as having an indefinite useful life. Goodwill Allocated to the insurance CGU/segment Allocated to collection services CGU/segment Allocated to the finance CGU/segment Allocated to the automotive retail CGU/segment 12,777 24,005 9,272 46,487 92,541 12,777 23,998 9,272 46,487 92,534 68 69 TURNERS AUTOMOTIVE GROUP ANNUAL REPORT 2020 Turners Automotive Group Limited Notes to financial statements for the year ended 31 March 2020 NOTES TO THE FINANCIAL STATEMENTS for the year ended 31 March 2020 Turners Automotive Group Limited Notes to financial statements for the year ended 31 March 2020 NOTES TO THE FINANCIAL STATEMENTS for the year ended 31 March 2020 Brand Allocated to the insurance CGU/segment Allocated to the automotive retail CGU/segment 2020 $’000 21,500 45,600 67,100 2019 $’000 21,500 45,600 67,100 The recoverable amount of all CGUs has been determined based on value-in-use calculations. These calculations use pre-tax cash flow projections based on financial budgets approved by the Board covering at least a five-year period. Cash flows beyond the projected period are extrapolated using the estimated long term growth rates stated below. The cash flows for the Insurance and Collection services CGUs are free cash flows to the firm, while the Auto retail and Finance CGUs are free cash flows to equity. The Buy Right Cars and Turners Group (NZ) CGUs have been aggregated in the current financial year to align with internal reporting. For each of the CGUs with goodwill and brand the key assumptions, long term growth rate and discount rate used in the value-in-use calculations are as follows: Key assumptions: Sales, price and operating cost assumptions where based on the Board's best estimate of the range of economic conditions the CGUs are likely to experience during the forecast period (including the Group's experience in the global financial crisis). The forecasts for each CGU covering a period of a minimum of 5 years or the period required for the CGU's profitability to return to pre-COVID 19 levels (for Auto retail this is 6 years). Annual capital expenditure, the expected cash costs in CGUs, was based on historical experience and planned expenditure. The forecasts assume that New Zealand will remain at Alert Level 1 or lower and no further restrictions are placed on the business operations during the forecast period. 2020 Forecast growth rates (%) Auto retail CGU (cost of equity) Insurance CGU (Weighted average cost of capital) Finance CGU (cost of capital) Collection services CGU (Weighted average cost of equity) 2019 Forecast growth rates (%) TGNZ CGU (cost of equity) Buy Right Cars CGU (Weighted average cost of capital) Insurance CGU (Weighted average cost of capital) Finance CGU (cost of equity) Collection services CGU (Weighted average cost of capital) Long-term growth rate Pre-tax discount rate Auto retail CGU (cost of capital) Insurance CGU (Weighted average cost of capital) Finance CGU (cost of capital) Collection services CGU (Weighted average cost of capital) Year 2 Year 3 Year 4 Year 5 (16.7) 24.9 (28.3) 74.5 113.5 (8.6) 19.5 (6.3) 21.9 (8.1) 18.0 5.0 Year 2 Year 3 Year 4 Year 5 22.3 14.6 12.7 30.7 0.2 19.3 11.0 3.2 20.4 5.0 15.6 (9.3) 2.5 5.0 5.0 2020 1.25% 16.40% 12.80% 17.70% 15.20% 17.9 3.5 5.0 5.0 2.0 12.8 2.5 5.0 5.0 2019 1.50% 17.10% 13.10% 18.10% 13.60% 22. OTHER PAYABLES Accounts payable Employee entitlements (short term) Employee entitlements (long term) Other payables and accruals Carrying value of financial liabilities in other payables The carrying amounts of the Group's financial liabilities in other payables are denominated in the following currencies: Japanese Yen Australian dollars New Zealand dollars 2020 $’000 13,833 4,500 227 9,488 28,048 2019 $’000 12,743 4,127 225 16,811 33,906 19,700 25,247 734 355 18,611 19,700 1,738 536 22,973 25,247 Currency risk A summarised analysis of the sensitivity of financial liabilities included in other payables to currency risk can be found in note 5.4. Fair value Due to the short-term nature of the financial liabilities in other payables, their carrying value is assumed to approximate their fair value. 23. FINANCIAL LIABILITY AT FAIR VALUE THROUGH PROFIT OR LOSS Contingent consideration 2020 $’000 - 2019 $’000 116 Interest rate and foreign exchange risk A summarised analysis of the sensitivity of the Financial liability at fair value through profit or loss to interest rate risk can be found in note 5.4.2. The Group's deferred consideration liability is denominated in NZD. The long term growth rate is the weighted average growth rate used to extrapolate cash flows beyond the forecast period and is based on the current implied inflation rates and does not exceed the long-term average growth rate for the products, industries, or country or countries in which the CGUs operate. The discount rates were established by taking into account the specific attributes and size of the CGUs. In assessing the impairment of the goodwill and brand value in the CGUs, a sensitivity analysis for reasonably possible changes in key assumptions was performed. This included increasing and reducing the terminal growth rate by 0.25% (2019: +/- 0.5%) and increasing and decreasing the discount rate as follows: Auto retail CGU Insurance CGU Finance CGU Collection services CGU 1.50% 1.10% 1.20% 0.90% 1.00% 1.00% 1.00% 1.00% These reasonably possible changes in rates did not cause any impairment in the Insurance, Finance and Collection services CGUs. For the Auto retail CGU the sensitivity analysis at the upper end of the assessment indicated possible impairment of between $0.9m and $4.0m. Subsequent to 31 March 2020, the Auto retail CGU has been trading ahead forecast, consequently no impairment expense was recognised. 70 71 TURNERS AUTOMOTIVE GROUP ANNUAL REPORT 2020Turners Automotive Group Limited Notes to financial statements for the year ended 31 March 2020 NOTES TO THE FINANCIAL STATEMENTS for the year ended 31 March 2020 Turners Automotive Group Limited Notes to financial statements for the year ended 31 March 2020 NOTES TO THE FINANCIAL STATEMENTS for the year ended 31 March 2020 24. CONTRACT LIABILITIES Unredeemed debt and PPSR voucher liability Motor vehicle insurance rebate liability Movement in contract liabilities Unredeemed debt and PPSR voucher liability Opening balance Change in accounting policy Additions Release to profit or loss Release to profit or loss Income relating to current year Income relating to prior years Motor vehicle insurance rebate liability Opening balance Change in accounting policy Additions Release to profit or loss Release to profit or loss Income relating to current year Income relating to prior years 25. DEFERRED TAXATION 2020 $’000 1,886 199 2,085 2,502 - 31 (647) 1,886 - 647 647 140 - 59 - 199 - - - 2019 $’000 2,502 140 2,642 1,793 617 1,773 (1,681) 2,502 485 1,196 1,681 - 100 - 40 140 (40) - (40) Deferred income tax assets and liabilities are offset when there is a legally enforceable right to offset assets against liabilities and when the deferred income taxes relate to the same fiscal authority. The movement on the deferred tax account is as follows: Opening balance Change in accounting policy (refer note 32) Charge to profit or loss Closing balance The charge to profit or loss is attributable to the following items: Corporate relationships Policy in force asset Loan impairment provision Brand write off Insurance deductible reserves Property, plant and equipment Lease liability Right of use asset Provisions and accruals Deferred tax (assets)/liabilities to be recovered after more than 12 months Deferred tax (assets)/liabilities to be recovered within 12 months Closing balance The deferred tax asset/liabilities have been recognised at 28%, the tax rate at which it is expected to reverse. 2020 $’000 13,918 (2,203) (1,635) 10,080 2020 $’000 (146) (439) (647) - (242) (53) 1,194 (1,030) (272) (1,635) 11,715 (1,635) 10,080 2019 $’000 18,786 (910) (3,958) 13,918 2019 $’000 (146) (438) (1,428) (1,204) (264) 42 - - (520) (3,958) 14,627 (709) 13,918 Deferred tax relates to the following: Deferred tax assets: Loan impairment provision Lease liability Provisions and accruals Total deferred tax asset Deferred tax liabilities: Brand Customer relationships Insurance reserves - policies in force Right of use asset Deferred expenses and accruals Net deferred tax liabilities Imputation credit memorandum account Opening balance Income tax payments/(refunds received) Imputation credits utilised Closing balance 6,209 9,103 2,323 17,635 18,788 1,019 - 6,958 950 27,715 10,080 11,879 11,726 (4,357) 19,248 5,558 - 2,062 7,620 18,788 1,165 439 - 1,146 21,538 13,918 7,010 10,744 (5,875) 11,879 Policy holder tax losses The policy holder tax losses carried forward at 31 March 2020 are $5,180,000 (2019: $4,949,000). The policy holder tax losses are only available to be offset against future policy holder income. 26. BORROWINGS Secured bank borrowings Deferred borrowing costs Non-bank borrowings Motor Trade Finance Bonds Deferred issue costs Total borrowings Current Non-current 2020 $’000 312,320 (116) 312,204 2019 $’000 251,282 (105) 251,177 13,382 37,055 25,000 25,000 (369) 24,631 (222) 24,778 350,364 312,863 213,825 34,981 277,882 136,539 312,863 350,364 Secured bank borrowings In May 2018 the Group entered into a 3 year syndicated funding facility, including a 1 year working capital facility, with the Bank of New Zealand and ASB Bank and a self liquidating trade finance facility with ASB Bank. The facilities replaced the Group's bank borrowing excluding securitisation which remains with the Bank of New Zealand. The bank borrowings, together with trade and lease premise guarantees of $0.9 million (2019: $0.9 million), are secured by a first-ranking general security agreement over the assets of the Company and its subsidiaries, excluding DPL Insurance Limited, Turners Finance Limited and EC Credit (Aust.) Limited. Current interest rates on the bank borrowings are variable and average 2.99% (2019: 3.88%). The Group's securitisation financing arrangement with the Bank of New Zealand as described in note 14. 72 73 TURNERS AUTOMOTIVE GROUP ANNUAL REPORT 2020Turners Automotive Group Limited Notes to financial statements for the year ended 31 March 2020 NOTES TO THE FINANCIAL STATEMENTS for the year ended 31 March 2020 Motor Trade Finance Turners Finance Limited is a shareholder of a motor trade based company called Motor Trade Finance Limited (MTF). MTF provides the services of a finance company, including funding, on a full recourse basis back to its shareholders. MTF provides finance to Turners Finance Limited to fund the finance receivables. The MTF funding is secured by a chattel security over the Turners Finance Limited's customer's asset securing the finance receivable and by a general security over the assets of Turners Finance Limited. Turners Finance Limited has also given undertakings to MTF as the nature and conduct of its business, and overall quality of the finance receivables and aggregate. Turners Finance has complied with these undertakings in the current and prior financial year. Bonds On 1 October 2018 Turners Automotive Group issued secured subordinated fixed rate bonds with a fixed maturity on 30 September 2021. Interest is fixed at 5.5% and is paid quarterly in arrears in equal amounts. The bonds rank behind the indebtedness owing under the bank facilities and are guaranteed by Turners Automotive Group Limited, Oxford Finance Limited, Buy Right Cars (2016) Limited, EC Credit (NZ) Limited, Estate Management Services Limited, Payment Management Services Limited, EC Web Services Limited, Turners Group NZ Limited, Turners Fleet Limited and Turners Property Holdings Limited. Borrowing covenants The Group has complied with all borrowing covenants in the both the current and prior financial year. Foreign currency risk All the Group's borrowings are in NZD. Fair value Borrowings Carrying amount 2020 $’000 350,364 Fair value 2020 $’000 350,781 Carrying amount 2019 $’000 312,863 Fair value 2019 $’000 312,863 The fair values are based on cash flows discounted using a weighted average borrowing rate of 3.26% (2019: 3.91%). Contractual repricing dates 1 year or less Over 1 to 2 years Over 2 to 5 years 2020 $’000 2019 $’000 321,498 269,343 29,204 13,282 - 30,712 350,702 313,337 Reconciliation of borrowings arising from financing activities The table below details changes in the Group's liabilities arising from financing activities, including both cash and non-cash changes. Liabilities arising from financing activities are those for which cash flows were, or future cash flows will be classified in the Group's consolidated statement of cash flows as cash flows from financing activities. Balance at 31 March 2018 Financing cash flows (i) Other - netted off finance receivables Non-cash changes Deferred borrowing costs Balance at 31 March 2019 Financing cash flows (i) Other - netted off finance receivables Non-cash changes Bank borrowings $’000 230,459 20,570 - Motor Trade Finance $’000 58,603 - (21,548) Vendor property funding $’000 2,837 (2,837) - Bonds $’000 25,474 (561) - - 251,177 37,055 148 (282) - 24,631 - 61,038 - - (23,673) - - - - 147 Deferred borrowing costs Balance at 31 March 2020 (i) Financing cash flows make up the net amount of proceeds from borrowings and repayments of borrowings in the statement of cash flows. 312,204 13,382 - - - (11) 24,778 Turners Automotive Group Limited Notes to financial statements for the year ended 31 March 2020 NOTES TO THE FINANCIAL STATEMENTS for the year ended 31 March 2020 27. SHARE CAPITAL Number of ordinary shares Opening balance Shares issued for the dealer share scheme Shares issued for the conversion of bonds Shares cancel for share buy back Total issued and authorised capital Dollar value of ordinary shares Opening balance Transfer of share option reserve Shares issued for the conversion of bonds Shares issued for the dealer share scheme Shares purchased and cancelled under share buy back Share issue costs Total issued capital 2020 2019 86,888,064 40,752 - (1,374,106) 85,554,710 84,802,612 79,050 4,646,037 (2,639,635) 86,888,064 2020 $'000 206,395 1,027 - 97 (3,188) (4) 204,327 2019 $'000 199,148 - 13,241 200 (6,141) (53) 206,395 Ordinary shares are fully paid with no par value. All ordinary shares have equal voting rights and share equally in dividends and surplus on winding up. Capital management The Group’s capital consists of share capital, share option reserve, translation reserve, cash flow reserve and retained earnings. The Board seeks to maintain a balance between the higher returns that might be possible with higher levels of borrowing and the advantages and security afforded by a sound capital position. The allocation of capital between its specific business operations and activities is, to a large extent, driven by optimisation of to specific operations and activities is undertaken independently of those responsible for the operation. The Group’s strategies in respect of capital management and allocation are reviewed regularly by the Board of Directors. the return on the capital allocated. The process of allocating capital The Group's funding covenants include minimum equity ratios. There have been no breaches of covenants. In addition to the above, the life insurance company is required to retain equity for solvency purposes, refer note 35G. 28. SHARE OPTIONS In the financial year ending 31 March 2020 all options granted were cancelled and no option were granted in the years ending 31 March 2020 and 31 March 2019. In July 2017, Senior Executives of the Company were granted 1,700,000 options at an exercise price of $3.60 under the Group's Share Option Plan. The grant is split into four tranches of 425,000 options with the following vesting dates; 1 August 2017, 1 August 2018, 1 August 2019 and 1 August 2020. Each tranche expires two year after the vesting date. In November 2016, the Chief Executive Officer of the Company was granted 1,002,692 options at an exercise price of $2.99195 under the Group's Share Option Plan. The grant is split into four tranches of 250,673 options with the following vesting dates; 1 June 2017, 1 June 2018, 1 June 2019 and 1 June 2020. Each tranche expires two year after the vesting date. If a participant in the Group Share Option Plan leaves (by any means and for any reason) the employment of the Company or any applicable subsidiary, the participant’s options which have reached their vesting date, together with any other options as may be nominated at the discretion of the Board of Directors of the Company in extraordinary circumstances (such as the redundancy, permanent disablement or death of a participant), may be exercised within a period of 60 days (following which they will lapse immediately. lapse) and the participant's other Options will The weighted average fair value of the options granted in the previous financial year, using the Binomial Tree option pricing model, was $0.36 per option. The significant inputs in the model were, the share price at grant date of $3.53, the exercise price of $3.60, volatility of 21.5%, an expected option life for tranche 1 of 2.03 years, tranche 2 of 3.03 years, tranche 3 of 4.03 years, tranche 4 of 5.03 years and an annual risk free rate of 2.63%. Volatility is measured as the standard deviation of changes in the Company's share price over a 12 month period. The share based payment for the current financial year is $nil (2019: $326,000). 74 75 TURNERS AUTOMOTIVE GROUP ANNUAL REPORT 2020 Turners Automotive Group Limited Notes to financial statements for the year ended 31 March 2020 NOTES TO THE FINANCIAL STATEMENTS for the year ended 31 March 2020 Movement in the number of share options outstanding and their related weighted average exercise prices are as follows: Opening balance Granted Cancelled Closing balance Exercise price 2020 $ 3.32316 - Options 2020 000's 2,203 - 3.32316 (2,203) Exercise price 2019 $ 3.32316 - - Options 2019 000's 2,203 - - - - 3.32316 2,203 Share options outstanding at balance sheet have the following expiry dates and exercise prices: Expiry date 31 May 2019 31 July 2019 31 May 2020 31 July 2020 31 May 2021 31 July 2021 31 May 2022 31 July 2022 29. DIVIDENDS Exercise price $ 3.32316 3.60000 3.32316 3.60000 3.32316 3.60000 2.99195 3.60000 Interim dividend for the year ended 31 March 2019 of $0.040 (31 March 2018: $0.045) per fully paid ordinary share, imputed, paid on 30 April 2019 (2018: 20 April 2018). Final dividend for the year ended 31 March 2019 of $0.05 (31 March 2018: $0.05) per fully paid ordinary share, imputed paid on 18 July 2019 (2018: 18 July 2018) Interim dividend for the year ended 31 March 2020 of $0.04 (31 March 2019: $0.04) per fully paid ordinary share, imputed, paid on 22 October 2019 (2019: 30 October 2018). Interim dividend for the year ended 31 March 2020 of $0.04 (31 March 2019: $0.04) per fully paid ordinary share, imputed, paid on 30 January 2020 (2019: 3 January 2019). Dividends not recognised at year end In addition to the above dividends, after year end the directors recommended the payment of the following dividend: Interim dividend for the year ended 31 March 2019 of $0.040 per fully paid ordinary share, imputed, paid on 30 April 2019. Final dividend of $0.06 (31 March 2019: $0.05) per fully paid ordinary share, imputed, payable on 24 July 2020 (2019: 18 July 2019). 30. TRANSACTIONS WITH RELATED PARTIES Major shareholders, directors and closely related persons to them are considered related parties of the Group. Turners Automotive Group Limited Employee Share Scheme As at 31 March 2020, 35,122 shares (2019: 41,746) were issued and allocated to employees under the scheme. Options 2020 000's - - - - - - - - Options 2019 000's 251 300 251 300 251 300 250 300 2020 $’000 2019 $’000 3,489 3,816 4,366 4,240 3,441 3,596 3,446 14,742 3,562 15,214 - 3,489 5,133 4,366 At 31 March 2020 balance on the loans outstanding to the share scheme were $31,606 (2019: $63,458). The loans bear interest at 5%, are for a 3 year term with fortnightly repayments and the Group has unlimited recourse against the participants in the Scheme. Turners Automotive Group Limited Notes to financial statements for the year ended 31 March 2020 NOTES TO THE FINANCIAL STATEMENTS for the year ended 31 March 2020 Key management personnel compensation The key management personnel are all the Directors of the Company and Group General Managers. Compensation of key management personnel for the years ended 31 March 2020 and 31 March 2019 was as follows: ($'000) Short- term benefits $'000 Post- employment benefits $'000 Other long- term benefits $'000 Share-based payments $'000 Total $'000 Year ended 31 March 2020 2,595 - 73 - 2,668 Year ended 31 March 2019 3,004 - 77 326 3,407 Key management personnel that resigned during the year received no termination benefits and were paid only contractual employment obligations. Key management do not have any post employment entitlements. Directors that resigned during the year did not receive any termination benefits and directors do not have any post employment entitlements. The Group has no transactions or loans with key management personnel, other than what is reported above and detailed in the statutory information section on pages 94 to 97. Directors fees are detailed in note 7 and in the shareholder and statutory information section. The details of the director share purchases are included in the statutory and shareholder information section. 31. RECONCILIATION OF NET SURPLUS WITH CASH FLOWS FROM OPERATING ACTIVITIES Profit for the year Adjustment for non-cash and other items Impairment charge on finance receivables, reverse annuity mortgages and other receivables Net profit on sale of property, plant and equipment Depreciation and amortisation Capitalised reverse annuity mortgage interest Deferred revenue Financial assets at fair value through profit and loss Net annuity and premium change to policyholder accounts Non-cash long term employee benefits Non-cash adjustment to finance receivables effective interest rates Deferred expenses Fair value adjustment on investment property Fair value adjustment to contingent consideration Write off of intangible brand asset Adjustment for movements in working capital Net decrease/(increase) in receivables and pre-payments Net increase in inventories Net increase in current tax payable Net decrease in payables Net (decrease)/increase in contract liabilities Net increase in finance receivables Net decrease in reverse annuity mortgages Net decrease/(increase) of insurance assets at fair value through profit or loss Net contributions from life investment contracts Net increase in deferred tax Cash flows from operating activities 2020 $’000 20,953 6,044 (33) 11,919 (613) (2,892) 77 (500) - (226) (2,652) - (116) - 5,251 (5,512) (1,806) (3,544) (1,694) (27,826) 3,964 704 88 (1,618) (32) 2019 $’000 22,719 7,943 (3,660) 5,785 (846) 1,620 (799) 341 330 (209) 2,839 (830) - 4,300 (259) (263) (851) (5,220) 132 (34,926) 2,545 (12,163) 16 (3,565) (15,021) 76 77 TURNERS AUTOMOTIVE GROUP ANNUAL REPORT 2020 TURNERS AUTOMOTIVE GROUP LIMITED Notes to financial statements for the year ended 31 March 2020 TURNERS AUTOMOTIVE GROUP LIMITED Notes to financial statements for the year ended 31 March 2020 NOTES TO THE FINANCIAL STATEMENTS for the year ended 31 March 2020 Impact of the adoption of NZ IFRS 16 in the Statement of financial position as at 1 April 2019: NOTES TO THE FINANCIAL STATEMENTS for the year ended 31 March 2020 32. CHANGE IN ACCOUNTING POLICY Impact of the adoption of NZ IFRS 16. This note explains the impact of the adoption of IFRS 16 Leases on the Group’s financial statements and discloses the new accounting policies that have been applied from 1 April 2019. The Group has adopted IFRS 16 retrospectively from 1 April 2019, but has not restated comparatives for the 2019 reporting period, as permitted under the specific transitional provisions in the standard. The reclassifications and the adjustments arising from the new leasing rules are therefore recognised in the opening statement of financial position on 1 April 2019. Adjustments recognised on adoption of NZ IFRS 16 On adoption of IFRS 16, the Group recognised lease liabilities in relation to leases which had previously been classified as ‘operating leases’ under the principles of NZ IAS 17 Leases. These liabilities were measured at the present value of the remaining lease payments, discounted using the lessee’s incremental borrowing rate as of 1 April 2019. The weighted average lessee’s incremental borrowing rate applied to the lease liabilities on 1 April 2019 was 6.1%. Operating lease commitments disclosed as at 31 March 2019 Discounted using the incremental borrow ing rate as at 1 April 2019 Less: short-terms leases recognised on a straight-line basis as ex pense Add: adjustments as a result of a different treatment of ex tension and termination options Lease liability recognised as at 1 April 2019 $'000 32,511 26,863 (168) 10,080 36,775 The associated right-of-use assets for property leases were measured on a retrospective basis as if the new rules had always been applied. Other right-of use assets were measured at the amount equal to the lease liability, adjusted by the amount of any prepaid or accrued lease payments relating to that lease recognised in the statement of financial position as at 31 March 2019. There were no onerous lease contracts that would have required an adjustment to the right-of-use assets at the date of initial application. 31 March 2020 1 April 2019 Properties Equipment Total right-of-use assets $'000 24,691 159 24,850 The change in accounting policy affected the following items in the Statement of financial position on 1 April 2019: Right-of-use assets Other pay ables Deferred tax Lease liabilities Retained earnings $'000 28,279 250 28,529 1 April 2019 $'000 28,529 (377) (2,203) 36,775 (5,666) Practical expedients applied In applying NZ IFRS 16 for the first time, the Group has used the following practical expedients permitted by the standard: • • • • the use of a single discount rate to a portfolio of leases with reasonably similar characteristics; reliance on previous assessments on whether leases are onerous; the accounting for operating leases with a remaining lease term of less than 12 months as at 1 April 2019 as short-term leases; and the exclusion of initial direct costs for the measurement of the right-of-use asset at the date of initial application. The Group has also elected not to reassess whether a contract is, or contains a lease at the date of initial application. Instead, for contracts entered into before the transition date the Group relied on its assessment made applying NZ IAS 17 and IFRIC 4 Determining whether an Arrangement contains a Lease. Assets Cash and cash equiv alents Financial assets at fair v alue through profit or loss Trade receiv ables Inv entories Finance receiv ables Other receiv ables, deferred ex penses and contract assets Rev erse annuity mortgages Inv estment property Property , plant and equipment Right-of-use assets Intangible assets Total assets Liabilities Other pay ables Contract liabilities Deferred tax Tax pay ables Deriv ativ e financial instruments Borrow ings Lease liabilities Life inv estment contract liabilities Insurance contract liabilities Total liabilities Shareholders' equity Share capital Other reserv es Retained earnings Total shareholders' equity 31 March 2019 As originally presented $'000 1 April 2019 NZ IFRS 16 adjustments $'000 1 April 2019 restated $'000 15,866 66,252 12,471 38,859 290,017 10,955 8,294 5,650 39,084 - 166,734 654,182 33,906 116 2,642 13,918 4,570 524 312,863 - 7,484 51,785 427,808 206,395 452 19,527 226,374 - - - - - - - - 28,529 - 28,529 (377) - - (2,203) - - - 36,775 - - 34,195 - - (5,666) (5,666) 15,866 66,252 12,471 38,859 290,017 10,955 8,294 5,650 39,084 28,529 166,734 682,711 33,529 116 2,642 11,715 4,570 524 312,863 36,775 7,484 51,785 462,003 206,395 452 13,861 220,708 Total shareholders' equity and liabilities 654,182 28,529 682,711 The recognised right-of-use assets relate to the following types of assets: Financial liability at fair v alue through profit or loss 78 79 TURNERS AUTOMOTIVE GROUP ANNUAL REPORT 2020 TURNERS AUTOMOTIVE GROUP LIMITED Notes to financial statements for the year ended 31 March 2020 TURNERS AUTOMOTIVE GROUP LIMITED Notes to financial statements for the year ended 31 March 2020 NOTES TO THE FINANCIAL STATEMENTS for the year ended 31 March 2020 NOTES TO THE FINANCIAL STATEMENTS for the year ended 31 March 2020 Presentation of the Statement of comprehensive income for the year ended 31 March 2020 as if NZ IFRS 16 had not been adopted: Presentation of the Statement of financial position as at 31 March 2020 as if NZ IFRS 16 had not been adopted: Rev enue from continuing operations Other income Cost of goods sold Interest ex pense Impairment prov ision ex pense Subcontracted serv ices ex pense Employ ee benefits (short term) Commission Adv ertising ex pense Depreciation and amortisation ex pense Property and related ex penses Sy stems maintenance Claims Mov ement in life insurance liabilities Insurance deferred acquisition costs Impairment of intangible brand asset Other ex penses Profit before tax ation Tax ation ex pense Profit from continuing operations Other comprehensiv e income for the period (w hich may subsequently be reclassified to profit/loss), net of tax Cash flow hedges Rev aluation of financial assets at fair v alue through OCI Foreign currency translation differences Total comprehensiv e income for the period Earnings per share (cents per share) Basic earnings per share 31 March 2020 Year ended 31 March 2020 reported w ith 31 March 2020 reported w ithout adopting NZ IFRS 16 $'000 NZ IFRS 16 adjustments $'000 adopting NZ IFRS 16 $'000 332,174 500 (135,003) (14,853) (6,044) (17,149) (55,458) (13,368) (2,743) (11,919) (1,688) (1,747) (25,952) (836) (701) - (16,148) 29,065 (8,112) 20,953 (447) (310) (12) 20,184 - - - 2,034 - - - - - 6,300 (8,806) - - - - - - (472) 132 (340) - - - (340) 332,174 500 (135,003) (12,819) (6,044) (17,149) (55,458) (13,368) (2,743) (5,619) (10,494) (1,747) (25,952) (836) (701) - (16,148) 28,593 (7,980) 20,613 (447) (310) (12) 19,844 24.35 (0.40) 23.95 Assets Cash and cash equiv alents Financial assets at fair v alue through profit or loss Trade receiv ables Inv entories Finance receiv ables Other receiv ables, deferred ex penses and contract assets Rev erse annuity mortgages Inv estment property Financial assets at fair v alue through OCI Property , plant and equipment Right-of-use assets Intangible assets Total assets Liabilities Other pay ables Contract liabilities Deferred tax Tax pay ables Deriv ativ e financial instruments Borrow ings Lease liabilities Life inv estment contract liabilities Insurance contract liabilities Total liabilities Shareholders' equity Share capital Other reserv es Retained earnings Total shareholders' equity 31 March 2020 Year ended 31 March 2020 reported w ith 31 March 2020 reported w ithout adopting NZ IFRS 16 $'000 NZ IFRS 16 adjustments $'000 adopting NZ IFRS 16 $'000 32,771 64,988 8,609 44,371 293,037 8,572 4,913 5,650 1,000 52,788 24,850 166,843 708,392 27,340 2,793 10,080 2,772 985 350,364 32,511 7,072 51,420 485,337 204,327 (1,344) 20,072 223,055 - - - - - - - - - - (24,850) - (24,850) 264 - 2,071 - - - (32,511) - - (30,176) - - 5,326 5,326 32,771 64,988 8,609 44,371 293,037 8,572 4,913 5,650 1,000 52,788 - 166,843 683,542 27,604 2,793 12,151 2,772 985 350,364 - 7,072 51,420 455,161 204,327 (1,344) 25,398 228,381 Total shareholders' equity and liabilities 708,392 (24,850) 683,542 Total assets per share ($) Net tangible assets ($) 8.28 0.77 7.99 0.86 80 81 TURNERS AUTOMOTIVE GROUP ANNUAL REPORT 2020 TURNERS AUTOMOTIVE GROUP LIMITED Notes to financial statements for the year ended 31 March 2020 TURNERS AUTOMOTIVE GROUP LIMITED Notes to financial statements for the year ended 31 March 2020 NOTES TO THE FINANCIAL STATEMENTS for the year ended 31 March 2020 NOTES TO THE FINANCIAL STATEMENTS for the year ended 31 March 2020 The Group’s leasing activities and how these are accounted for For the Group’s current accounting policies for leasing activities refer to accounting policy 3.7 on page 45 of the Group’s consolidated financial statements for the year ended 31 March 2020. Until the 2020 financial year, leases of property, plant and equipment were classified as either finance or operating leases. Payments made under operating leases (net of any incentives received from the lessor) were charged to profit or loss on a straight-line basis over the period of the lease. 33. COMMITMENTS AND CONTINGENT LIABILITIES Capital Expenditure: At reporting date, the Group has capital commitments of $1.5m to purchase computer equipment (2019: nil). Future Lease Commitments: The Group has committed to two property leases, the commencement date of both leases is dependent on the Landlord obtaining a Code Compliance Certificate or Certificate of Public Use for agreed works included in the lease agreements. It is anticipated the leases will commence during the financial year ending 31 March 2021. Loan Commitments: The Group has no material undrawn credit commitments at reporting date (2019: nil). Contingent Liabilities: Buy Right Cars The vendor of the business has brought legal action against the Company disputing the quantum of the final earn out. A trial date has been set for 10 August 2020 with both parties seeking payment. The directors consider that on balance of probabilities no payment will be made to the vendor. The Group has no other material contingent liabilities at reporting date. 34. SUBSEQUENT EVENTS AFTER BALANCE DATE In July 2020, the Board approved the grant of 2,300,000 options to Senior Executives of the Group at an exercise price of $2.00 under the Group's Share Option Plan. The grant is split into four tranches of 575,000 options with the following vesting dates; 1 June 2021, 1 June 2022, 1 June 2023 and 1 June 2024. Each tranche expires two years after the vesting date. 2019 In June 2019, all staff options were cancelled for no consideration, resulting in release of $1,027,000 from the share option reserve to retained income. Presentation of the Segment information as at 31 March 2020 as if NZ IFRS 16 had not been adopted: Operating profit Automotiv e retail Finance Credit management Insurance Corporate & other Profit/(loss) before tax ation Income tax Profit attributable to shareholders Interest expense Automotiv e retail Finance Credit management Insurance Corporate & other Eliminations Depreciation and amortisation expense Automotiv e retail Finance Credit management Insurance Corporate & other Segment assets Automotiv e retail Finance Credit management Insurance Corporate & other Eliminations Segment liabilities Automotiv e retail Finance Credit management Insurance Corporate & other Eliminations 31 March 2020 Year ended 31 March 2020 reported w ith 31 March 2020 reported w ithout adopting NZ IFRS 16 NZ IFRS 16 adjustments adopting NZ IFRS 16 $'000 13,829 12,167 6,494 6,215 (9,640) 29,065 (8,112) 20,953 (3,967) (6,912) (39) (91) (3,930) (14,939) 86 (14,853) (7,960) (717) (249) (2,783) (210) (11,919) 129,496 308,696 38,268 134,236 216,173 826,870 (118,478) 708,392 92,078 241,086 7,585 73,133 91,423 505,305 (19,968) 485,337 $'000 (514) (43) 1 55 29 (472) 132 (340) 1,847 43 39 91 14 2,034 - 2,034 5,472 343 153 191 141 6,300 (23,141) (1,165) (589) (1,372) (654) (26,921) 2,071 (24,850) (28,221) (1,221) (660) (1,463) (682) (32,247) 2,071 (30,176) $'000 13,315 12,124 6,495 6,270 (9,611) 28,593 (7,980) 20,613 (2,120) (6,869) - - (3,916) (12,905) 86 (12,819) (2,488) (374) (96) (2,592) (69) (5,619) 106,355 307,531 37,679 132,864 215,519 799,949 (116,407) 683,542 63,857 239,865 6,925 71,670 90,741 473,058 (17,897) 455,161 82 83 TURNERS AUTOMOTIVE GROUP ANNUAL REPORT 2020 TURNERS AUTOMOTIVE GROUP LIMITED Notes to financial statements for the year ended 31 March 2020 TURNERS AUTOMOTIVE GROUP LIMITED Notes to financial statements for the year ended 31 March 2020 NOTES TO THE FINANCIAL STATEMENTS for the year ended 31 March 2020 35. Insurance related disclosures A. Actuarial policies and the methods The actuarial report on insurance contract liabilities and prudential reserves for the current reporting period was prepared as at 31 March 2020 by Peter Davies, a Fellow of the New Zealand Society of Actuaries. Life insurance contract liabilities The value of life insurance contract liabilities has been determined in accordance with Professional Standard No. 20 of the New Zealand Society of Actuaries. After making appropriate checks, the actuary was satisfied as to the accuracy of the data from which the amount of policy liabilities has been determined. The key assumptions used in determining policy liabilities are as follows: a) Discount Rates Discount rates used to determine the life insurance contract liabilities are based on an appropriate risk-free rate of return, taking account of the term of the insurance contracts. Tax was deducted at the rate of 28% on investment earnings net of investment expenses (2019: 28%). The net discount rates assumed were as follows: Whole of Life and Endowment Policies (including Funeral Plan)* Quick Cover term life plan* Term Insurance Policies Caring Plan Funeral Benefit Policies Annuity Policies Consumer Credit and Key Person Loan Protection 2020 Treasury risk-free rates Treasury risk-free rates Not applicable Not applicable Treasury risk-free rates Not applicable 2019 Treasury risk-free rates Treasury risk-free rates Not applicable Not applicable Treasury risk-free rates Not applicable * These rates are provided by Treasury as at 31 January, and are then adjusted to 31 March based on the movement in swap rates, as quoted by the Reserve Bank, between January and March. Illustrative forward rates for the respective valuations are as follows: Cash-flows in year 10: March 2019: March 2020: 1.83% per annum net of tax 1.11% per annum net of tax b) Inflation Rates In determining the future expected rate of return, general inflation was assumed to continue into the future at 2.0% per annum (2019: 2.0%). c) Mortality Rates Rates of mortality were assumed as follows: For underwritten whole of life, endowment and term insurance policies: NZ97 (2019: NZ97). For guaranteed issue regular premium funeral plans: NZ97 (DPL plans), NZ04 (ex-Greenwich plans) multiplied by a factor to reflect higher mortality at younger ages, and the impact of guaranteed issue anti-selection (DPL - no change from 2019). QuickCover plans - NZ04 with additional loadings reflecting the impact of guaranteed issue anti-selection. For annuities the assumed mortality table is 90% of the NZ12-14 population tables. For the Cook Islands Annuity Pension Plan the assumed mortality table is the PA(90) table without adjustment (2019: no change). d) Profit Carriers The policies were divided into major product groups with profit carriers as follows: Major Product Groups Participating Whole of Life and Endowment Policies Non Participating Whole of Life and Endowment Policies Lump Sum Funeral Benefit Policies (Caring Plan) Term Insurance Policies Funeral Plan Policies (Regular premium guaranteed issue) Quick Cover term life plan Annuities Consumer Credit / Lifestyle Motor business Accidental death & redundancy – Stop Gap Accidental death regular & single premium Carrier Premiums Premiums Not Applicable Premiums Gross claims Gross claims Annuity payments Not Applicable Not Applicable Not Applicable Not Applicable e) Investment and Maintenance Expenses The maintenance expense and general growth and development expense allowances assumed for the main classes of business were as follows: Endowments $152 per policy per annum (2019: $149) NOTES TO THE FINANCIAL STATEMENTS for the year ended 31 March 2020 Funeral plans Term life plans (for loss recognition) Consumer credit plans (for loss recognition): Annuity plans $9.20 per policy per annum (2019: $9.00) $9.20 per policy per annum (2019: $9.00) $9.20 per policy per annum (2019: $9.00) $152 per policy per annum (2019: $149) Investment management expenses were assumed to be 1.0% (2019: 1.0%) of policy liabilities. f) Inflation and Automatic Indexation of Benefits Maintenance expenses are assumed to increase 2.0% per annum (2019: 2.0%). Investment management expenses are assumed to remain a constant percentage of funds under management. g) Taxation The assumed future tax rates reflect the corporate tax rate applying in New Zealand with effect from 1 April 2011. The calculations have been carried out on the basis of current life insurance income tax legislation. h) Rates of Discontinuance Rates of discontinuance are assumed to be 5.0% for whole of life, endowment and term insurance business (2019: 5.0%), and nil for annuity pension plan business (2019: nil). For the DPL Funeral plan the rates of discontinuance are based on company experience, beginning at 15% in year 1 and reducing ultimately to 8% per annum (2019: No change). For the Funeral plan (ex Greenwich) product the rates of discontinuance are based on the pricing assumption for this product, beginning at 40% in year 1, and reducing ultimately to 3% per annum (2019: 40% to 6%). For Quick Cover the rates of discontinuance are based on the pricing assumption for this product, beginning at 40% in year 1, and reducing ultimately to 10% per annum (2019: no change). i) Surrender Values The Company's current basis of calculating surrender values is assumed to continue in the future. j) Rates of Future Supportable Participating Benefits Rates of bonus supported by the participating fund are simple annual bonuses of $0.00 (2019: $2.00) per $1,000 of sum assured on endowment policies. k) Impact of changes in assumptions The impact of the change in the discount rate is an increase in policy liabilities of $331,000 (2019: $207,000). The policy liabilities are not affected by the revised expense assumptions (2019: $11,000). l) Crediting Policy Adopted for Future Supportable Participating Benefits For participating business the Company's policy is to distribute profits arising such that over long periods the returns to policy holders are commensurate with the investment returns achieved on relevant assets, together with other sources of profit arising from this business. In applying the policyholders' share of distributions to provide bonuses, consideration is given to achieving equity between generations of policyholders and equity between the various classes and sizes of policies in force. Assumed future bonus rates included in policyholder liabilities were set such that the present value of policyholder liabilities, allowing for the shareholders' right to participate in distributions, equals the value of assets supporting the business. The supportable future bonus rate on this basis is zero. Non-life insurance liabilities The value of non-life outstanding claims and the Liability Adequacy Test of the non-life business, have been carried out in accordance with Professional Standard no. 30. After making appropriate checks, the actuary was satisfied as to the accuracy of the data from which the amount of policy liabilities has been determined. B. Financial strength rating The Insurance (Prudential Supervision) Act 2010 requires all licensed insurers to have a current Financial Strength Rating, given by an approved rating entity. DPL Insurance Limited has been issued a Financial Strength Rating of B+ (Good) and an Issuer Credit Rating of bbb- (Good), with the outlook assigned to both ratings as 'Positive' by A.M. Best. The rating was issued by A.M. Best on 19 July 2019. The A.M Best company rating scale is A++, A+ Superior A, A- Excellent B++, B+ Good Issuer credit rating: Investment grade aaa (Exceptional) aa (Superior) a (Excellent) bbb (Good) B, B- Fair C++, C+ Marginal C, C- Weak D Poor E Under Regular Supervision F In liquidation S Suspended Non-investment grade bb (Fair) b (Marginal) ccc, cc (Weak) c (Poor) rs (Regulatory Supervision / Liquidation) 84 85 TURNERS AUTOMOTIVE GROUP ANNUAL REPORT 2020 Turners Automotive Group Limited Consolidated statement of comprehensive income for the year ended 31 March 2020 NOTES TO THE FINANCIAL STATEMENTS for the year ended 31 March 2020 Turners Automotive Group Limited Consolidated statement of comprehensive income for the year ended 31 March 2020 NOTES TO THE FINANCIAL STATEMENTS for the year ended 31 March 2020 C. Surplus after taxation from insurance activities arose from: E. Insurance related expenses Insurance Contracts Planned margin of revenues over expenses Change in discount rate: 1.83% to 1.11% (2019:2.61% to 1.83%) Difference between actual and assumed experience Life investments contracts Difference between actual and assumed experience Investment returns on assets in excess of insurance contract and investment contract liabilities Surplus after taxation attributable to insurance activities 2020 $’000 339 (331) 3,711 240 982 4,941 2019 $’000 164 (207) 5,745 266 1,022 6,990 The disclosure of the components of operating profit after tax expense are required to be separated between policyholders’ and shareholders’ interests. We have included only one column, as policyholder profits arise only in respect of a small number of participating policies, and the profits arising on these policies over the year were effectively zero. Accordingly all of the profits earned over the year are shareholder profits. It is not currently possible to identify all experience variances separately for life investment contracts. The difference between actual and assumed experience for life insurance contracts therefore includes some variances relating to life investment contracts. D. Insurance and investment contract income Insurance contract premiums Investment revenue Less: investment revenue paid to life insurance investment contracts Other Revenues Total insurance and investment contract income Investment Income Equity securities Fixed interest securities Property investments 2019 $’000 40,416 792 (680) 2,440 39,676 42,968 2020 $’000 39,277 (77) 189 287 (30) 382 127 104 306 792 (174) (77) Included within equity securities is dividend income of $Nil (2019: $Nil) and included within fixed interest securities is interest income of $Nil (2019: $Nil). Included within total Investment Income is net realised and unrealised gains/(losses) on securities at fair value through profit or loss of ($77,000) (2019: $792,000). Insurance contract claims Reinsurance expenses Insurance contracts Policy acquisition expenses - commission costs Deferred acquisition cost amortisation Total insurance contract related expenses Life investment contracts Investment management expenses Movement in life insurance liabilities Net operating profit includes the following specific expenses Audit fees for the audit of financial statements Rental and lease costs Amortisation of policies in force Amortisation of customer relationships Amortisation of other intangible assets Depreciation Employee benefits F. Taxation Net operating profit before taxation Income tax expense at prevailing rates Tax impact of expenses not deductible for tax purposes Prior year adjustment Taxation (expense)/benefit Comprising: Current Deferred Prior year adjustment Deferred tax Opening balance Charge to profit or loss Transition adjustment Deferred tax on intangibles Closing balance The charge to profit or loss is attributable to the following items: Insurance deductible reserves Provisions and accruals Prior year adjustment Income tax losses on policyholder base The policy holder tax losses carried forward at 31 March 2020 are $5,180,385 (2019: $4,948,638). Imputation credit memorandum account The policyholder imputation credit account has a closing balance at 31 March 2020 of $Nil (2019: $Nil). 2020 $’000 23,890 587 2,067 701 2,768 42 836 126 25 1,566 558 218 442 5,934 6,712 1,879 (106) 1 1,774 2,949 (1,176) 1 1,774 (8,369) 1,184 4 - (7,181) 681 487 8 1,176 2019 $’000 25,112 630 2,382 423 2,805 40 718 125 481 1,566 630 262 287 5,912 8,577 2,402 (826) 11 1,587 2,530 (954) 11 1,587 (9,395) 998 28 - (8,369) 702 252 44 998 86 87 TURNERS AUTOMOTIVE GROUP ANNUAL REPORT 2020Turners Automotive Group Limited Consolidated statement of comprehensive income for the year ended 31 March 2020 NOTES TO THE FINANCIAL STATEMENTS for the year ended 31 March 2020 Turners Automotive Group Limited Consolidated statement of comprehensive income for the year ended 31 March 2020 NOTES TO THE FINANCIAL STATEMENTS for the year ended 31 March 2020 G. DPL Insurance Limited solvency calculation In terms of the Insurance (Prudential Supervision) Act 2010, DPL Insurance Limited must comply with the Solvency Standard for Life Insurance Business 2014 and the Solvency Standard for Non-life Business 2014. DPL Insurance Limited is required to hold minimum solvency capital of $5.0 million and have a solvency margin of at least $0. Actual solvency capital Calculated minimum solvency capital Coverage ratio on calculated margin (times) Overall minimum capital requirement Solvency margin on overall minimum requirement Coverage ratio on overall minimum requirement (times) Non-life insurance Actual solvency capital Calculated minimum solvency capital Solvency margin on calculated minimum requirement Life insurance Actual solvency capital Calculated minimum solvency capital Solvency margin on calculated minimum requirement H. Policyholder liabilities Insurance contract liabilities Opening insurance contract liabilities Increase in insurance contract liabilities Amortisation Intangible asset - policies in force Increase in deferred acquisition costs Closing insurance contract liabilities Policyholder liabilities contain the following components: Future policy benefits Future expenses Future profit margins Balance of future premiums Re-insurance Life deferred acquisition costs Intangible asset - policies in force Life insurance contracts with a discretionary participation feature - the amount of the liabilities that relates to guarantees Other contracts with a fixed or guaranteed termination value - current termination value Life investment contracts at fair value through profit or loss Opening life investment contracts at fair value through profit or loss Increase / (decrease) in life investment contract liabilities recognised through profit or loss Deposit premium Withdrawals Activity, plan, and establishment fees Closing life investment contract liabilities 2020 $’000 32,321 16,598 1.95 16,598 15,723 1.95 24,324 14,244 10,080 7,997 2,354 5,643 2020 $’000 51,785 1,032 (1,566) 169 51,420 55,586 6,475 5,880 (22,541) 6,286 (266) - 51,420 221 7,175 2019 $’000 33,284 16,714 1.99 16,714 16,570 1.99 21,557 12,850 8,707 11,727 3,864 7,863 2019 $’000 48,376 4,519 (1,566) 456 51,785 57,964 6,283 5,250 (21,058) 5,348 (435) (1,567) 51,785 262 6,577 (260) 7,484 7,127 607 1,529 1,611 (1,595) (266) 7,072 7,484 (1,441) (240) The benefits offered under the Group's unit-linked investment contracts are based on the returns of selected equities and debt securities. This investment mix is unique, and it cannot be associated to an individual benchmark index with a sufficiently high correlation. All financial liabilities at fair value through profit and loss are designated by the Group to be in this measurement category. The liabilities originated from unit-linked contracts are measured with reference to their respective underlying assets of these contracts. Changes in the credit risk of the underlying assets do not impact the measurement of the unit-linked liabilities. The maturity value of these financial liabilities is determined by the fair value of the linked assets, at maturity date. Policyholder liabilities comprise Annuities Endowment Whole of life, provision for bonus and future margins Consumer Credit Protection & key person loan protection Accidental death/redundancy Term Life General General claims provisions Saving plans Deferred acquisition costs - life Life investment contract liabilities Insurance contract liabilities General outstandings claim provision Gross claims IBNR provision Reconciliation of movement in general gross claims liability Opening Balance Movement Payments Closing Balance 2020 $’000 1,280 232 4,504 5,669 7 53 36,718 3,223 7,072 (266) 58,492 7,072 51,420 58,492 118 2,473 2,591 2019 $’000 1,245 279 3,651 5,093 7 65 38,236 3,644 7,484 (435) 59,269 7,484 51,785 59,269 113 3,020 3,133 3,133 20,277 (20,819) 2,591 3,518 23,012 (23,397) 3,133 The policy liabilities in respect of annuities, endowment, whole of life, term life, super life and life bond have been established in accordance with the policy conditions and maintained at a level equivalent to obligations due to policy holders as maturity or partial benefits. 88 89 TURNERS AUTOMOTIVE GROUP ANNUAL REPORT 2020 Turners Automotive Group Limited Consolidated statement of comprehensive income for the year ended 31 March 2020 NOTES TO THE FINANCIAL STATEMENTS for the year ended 31 March 2020 I. Disaggregated information DPL Insurance Limited has one statutory life fund. The disaggregated income statement and balance sheet between the statutory and shareholder funds is as follows: Statement of income for the year ended 31 March 2020 Insurance contract premiums Outward reinsurance premium Recoveries Other insurance revenue Insurance revenue Claims expense Movement in life insurance liabilities Commission expense Other expenses Underwriting (loss)/profit Fair value gain on revaluation of investment properties Investment income Profit before taxation Taxation Profit after taxation Statement of financial position as 31 March 2020 Assets Investments backing insurance policy liabilities Other assets Total assets Liabilities Life investment contract liabilities Insurance contract liabilities Deferred taxation Other liabilities Total liabilities Solvency Actual Solvency capital Minimum solvency capital Solvency Margin Statement of income for the year ended 31 March 2019 Insurance contract premiums Outward reinsurance premium Recoveries Other insurance revenue Insurance revenue Claims expense Movement in life insurance liabilities Commission expense Other expenses Underwriting (loss)/profit Investment income Fair value gain on revaluation of investment properties Gain on sale of investment properties Profit before taxation Taxation Profit after taxation Statutory $’000 6,447 (587) 419 404 6,683 (2,529) (836) (598) (1,747) 973 - 751 1,724 (455) 1,269 Statutory $’000 27,557 - 27,557 7,072 12,111 - 378 19,561 7,997 2,354 5,643 Statutory $’000 7,598 (630) 324 270 7,562 (1,537) (718) (1,226) (1,819) 2,262 1,216 - - 3,478 (644) 2,834 Shareholder $’000 32,830 - 11 1,865 34,706 (21,361) - (1,469) (9,896) 1,980 500 2,511 4,991 (1,319) 3,672 Shareholder $’000 70,679 37,361 108,040 - 39,309 7,181 7,046 53,536 24,324 14,244 10,080 Shareholder $’000 32,818 - 92 1,819 34,729 (23,575) - (1,157) (10,317) (320) 2,039 900 2,480 5,099 (943) 4,156 Total $’000 39,277 (587) 430 2,269 41,389 (23,890) (836) (2,067) (11,643) 2,953 500 3,262 6,715 (1,774) 4,941 Total $’000 98,236 37,361 135,597 7,072 51,420 7,181 7,424 73,097 32,321 16,598 15,723 Total $’000 40,416 (630) 416 2,089 42,291 (25,112) (718) (2,383) (12,136) 1,942 3,255 900 2,480 8,577 (1,587) 6,990 Turners Automotive Group Limited Consolidated statement of comprehensive income for the year ended 31 March 2020 NOTES TO THE FINANCIAL STATEMENTS for the year ended 31 March 2020 Statement of financial position as 31 March 2019 Assets Investments backing insurance policy liabilities Other assets Total assets Statutory $’000 29,845 - 29,845 Shareholder $’000 68,364 37,694 106,058 Liabilities Life investment contract liabilities Insurance contract liabilities Deferred taxation Other liabilities Total liabilities Solvency Actual Solvency capital Minimum solvency capital Solvency Margin Reconciliation of Profit before tax to Operating profit (note 6) Profit before tax Less: revaluation of investment property disclosed as property, plant and equipment in the Group financial statements at cost Operating profit (note 6) 7,484 10,416 - 218 18,118 11,727 3,864 7,863 - 41,369 8,369 5,437 55,175 21,558 12,850 8,708 2020 $’000 6,715 (500) 6,215 Total $’000 98,209 37,694 135,903 7,484 51,785 8,369 5,655 73,293 33,285 16,714 16,571 2019 $’000 8,577 (350) 8,227 Restriction on assets Access to the retained profits and capital in the statutory fund held for policyholders is restricted by the Insurance (Prudential Supervision) Act 2010. The business undertaken and policies accepted by DPL Insurance Limited are a combination of investment linked and non-investment linked. Investment linked business is business for which the life insurer issues a contract where the benefit amount is directly linked to the market value of the investments held in the particular investment linked fund. Non-investment linked business is life insurance business other than investment linked business. 2020 Premium income Investment income Claims expense Other operating revenue Other operating expenses Investment revenues allocated to policyholders Net profit before taxation Net profit after taxation Policy liabilities Investment assets Other assets Other liabilities Retained earnings Investment linked $’000 Non – investment linked $’000 - (77) - - (73) 261 111 80 38,690 3,839 (23,890) 2,699 (14,734) - 6,604 4,861 Total $’000 38,690 3,762 (23,890) 2,699 (14,807) 261 6,715 4,941 7,072 51,420 58,492 7,197 91,039 98,236 - 37,361 37,361 - 14,605 14,605 1,250 14,900 16,150 90 91 TURNERS AUTOMOTIVE GROUP ANNUAL REPORT 2020TURNERS AUTOMOTIVE GROUP LIMITED Notes to financial statements for the year ended 31 March 2020 TURNERS AUTOMOTIVE GROUP LIMITED Notes to financial statements for the year ended 31 March 2020 NOTES TO THE FINANCIAL STATEMENTS for the year ended 31 March 2020 NOTES TO THE FINANCIAL STATEMENTS for the year ended 31 March 2020 2019 Premium income Investment income Claims expense Other operating revenue Other operating expenses Investment revenues allocated to policyholders Net profit before taxation Net profit after taxation Policy liabilities Investment assets Other assets Other liabilities Retained earnings Investment linked $’000 Non – investment linked $’000 - 792 - - (69) (611) 112 81 39,786 5,901 (25,112) 2,449 (14,559) - 8,465 6,909 Total $’000 39,786 6,693 (25,112) 2,449 (14,628) (611) 8,577 6,990 7,484 51,785 59,269 7,658 90,551 98,209 - 37,694 37,694 - 14,024 14,024 1,170 15,090 16,260 The above information is disclosed prior to the elimination of any related party transactions or balances as the insurance contract disclosures relate to DPL Insurance Limited. J. Managed Funds and other Fiduciary Activities DPL Insurance Limited acted as a promoter for a number of superannuation funds with assets managed by a third party investment manager. The assets and liabilities of these funds are not included in the financial statements. Arrangements exist to ensure the activities of the superannuation funds are managed independently from the other activities of the company. Insurance Risk K. The insurance business of the Group involves a number of financial and non-financial risks. The financial risks are covered in note 5. Key objectives in managing insurance risk are: (i) To ensure sound business practices are in place for underwriting risks and claims management; (ii) To achieve a target return on capital that is invested in order to take on insurance risk; and (iii) To ensure solvency and capital requirements are met. Life insurance The life insurance business of the Group involves a number of non-financial risks concerned with the pricing, acceptance and management of the mortality, and longevity risks accepted from policyholders. These risks are controlled through the use of underwriting procedures and adequate premium rates and policy charges, all of which are approved by the Actuary. Tight controls are also maintained over claims management practices to ensure the correct and timely payment of insurance claims. Terms and conditions of life insurance contracts The nature of the terms of the insurance contracts written by the Group is such that certain external variables can be identified on which related cash flows for claim payments depend. The tables below provide an overview of the key variables upon which the amount of related cash flows are dependent. Type of contract Non-participating life insurance contracts with and fixed guaranteed terms insurance with Life contracts discretionary participating benefits and (endowment whole of life) Life Contracts Annuity Details of the contract workings Benefits paid on death or maturity are fixed and guaranteed and not at the discretion of the issuer initial guaranteed include a clearly These policies defined sum assured which is payable on death. The guaranteed amount is a multiple of the amount that is increased throughout the duration of the policy by the addition of regular bonuses annually which, once added, are not removed. Regular bonuses are also added retrospectively These policies provide guaranteed regular payments to the life assured Nature of compensation for claims Benefits, defined by the insurance contract, are determined by the contract and are not directly affected by the performance of underlying assets or the performance of the contracts as whole Benefits the arising discretionary participation feature are based on the performance of a specified pool of contracts or a specified type of contract. from Key variables affecting cash flows Mortality, lapses, expenses and market earnings on assets backing the liabilities Mortality, lapses, expenses and market earnings on assets backing the liabilities The amount of the payment is set at inception of the policy Longevity, expenses and market earnings on assets backing the liabilities Non-life insurance The risk management activities include prudent underwriting, pricing, and management of risk, together with claims management, reserving and investment management. The objective of these disciplines is to enhance the financial performance of the insurance operations and to ensure sound business practices are in place for underwriting risks and claims management. Claims Variations in claim levels will affect reported profit and equity. The impact may be magnified if the variation leads to a change in actuarial assumptions which cannot be absorbed within the present value of planned margins for a group of related products. Insurance risk may arise through the reassessment of the incidence of claims, the trend of future claims and the effect of unforeseen diseases or epidemics. Insurance risk is controlled by ensuring underwriting standards adequately identify potential risk, retaining the right to amend premiums on risk policies where appropriate. The experience of the Group's life insurance business is reviewed regularly. Concentration of insurance risk The Group does not believe it has any major geographic concentration of insurance risk. The Group's policies aim to reduce concentration risk by maintaining a portfolio of policyholders with a broad spread of insurance risk types, ages, sexes, occupation classes and geographic locations. The group uses reinsurance to limit the insurance risk exposure for any one individual. Sensitivity Analysis The liabilities included in the reported results are calculated using certain assumptions about key variables as disclosed above. Sensitivity analysis is conducted to assess the impact of actual experience being different to that assumed in the calculation of liabilities. Movements in any variable will impact the profit and net assets of the Group. The tables below describe how a change in actual experience relative to that expected will affect next financial year's expected shareholder profit. Variable Expense risk Impact of movement in underlying variable An increase in the level or inflationary growth of expenses over assumed levels will decrease profit and shareholders’ equity Mortality rates Interest rate risk Depending on the profile of the investment portfolio, the investment income of the Group will decrease as interest rates decrease. This may be offset to an extent by changes in the market value of fixed interest investments. The impact on profit and shareholder equity depends on the relative profiles of assets and liabilities, to the extent that these are not matched For insurance contracts providing death benefits, greater mortality rates would lead to higher levels of claims, increasing associated claims cost and therefore reducing profit and shareholder equity The impact of discontinuance rate assumption depends on a range of factors including the type of contract, the surrender value basis (where applicable) and the duration in force. For example, an increase in discontinuance rates at earlier durations of life insurance contracts usually has a negative effect on profit and shareholder equity. However, due to the interplay between the factors, there is not always an adverse outcome from an increase in discontinuance rates For benefits which are not contractually linked to the underlying assets, the Group is exposed to Market Risk Discontinuance Market Risk The table below illustrates how changes in key assumptions would impact the reported profit and liabilities of the Group. Change in key assum ptions ($'000) 2020 Market risks Increase in interest rates of 1% Decrease in interest rates of 1% Insurance risks Increase in expenses of 10% Decrease in expenses of 10% Decrease in mortality by 10% Increase in mortality by 10% Worsening of discontinuance rate by 10% Improvement in discontinuance rate by 10% 2019 Market risks Increase in interest rates of 1% Decrease in interest rates of 1% Insurance risks Increase in expenses of 10% Decrease in expenses of 10% Decrease in mortality by 10% Increase in mortality by 10% Worsening of discontinuance rate by 10% Improvement in discontinuance rate by 10% Ef fect on policy liabilities Ef fect on f uture prof it (238) 265 1 (1) (5) 6 - - (224) 249 1 (1) (4) 5 - - (48) 52 (28) 28 (241) 265 76 (86) (48) 52 (28) 28 (242) 266 76 (86) 92 93 TURNERS AUTOMOTIVE GROUP ANNUAL REPORT 2020 STATUTORY INFORMATION STATUTORY INFORMATION STATUTORY INFORMATION STATUTORY INFORMATION Directors’ remuneration and other benefits Grant Baker Paul Byrnes Martin Berry Matthew Harrison Alistair Petrie John Roberts Antony Vriens Directors’ fees $ 150,000 75,000 75,000 75,000 75,000 75,000 75,000 During the year ended 31 March 2020 Mr Harrison received an additional $15,000 (2019: $15,000) in fees for services as chairman of the Credit and Lending Committee. During the year ended 31 March 2020 Mr Roberts received an additional $15,000 (2019: $15,000) in fees for his services as chairman of the Audit and Risk Management Committee. During the year ended 31 March 2020 Mr Vriens received an additional $35,000 (2019: $35,000) in fees for his services as chairman of DPL Insurance Limited. Disclosure of interests recorded in the interest’s register There were no new specific disclosures of interests entered in the interests’ register in the accounting period ending 31 March 2020. Dealings in Turners Automotive Group Limited shares by Directors Date of transaction Shares acquired/(disposed) Consideration (received)/paid $ Nature of relevant interest Paul Byrnes 07/06/2019 - 10/06/2019 Paul Byrnes 13/06/2019 -17/06/2019 Paul Byrnes Martin Berry 17/06/2019 05/07/2019 (76,951) (703,049) (120,000) 500,000 (185,961) Registered holder and beneficial interest (1,659,992) Registered holder and beneficial interest (278,400) Registered holder and beneficial interest 1,150,000 Registered holder and beneficial interest Directors’ relevant interest in quoted shares as at 31 March 2020 Grant Baker (own shareholding) Paul Byrnes Martin Berry Matthew Harrison Alistair Petrie John Roberts Antony Vriens Shares 6,100,000 2,484,860 500,000 5,179,294 25,011 66,000 - Other Directorships Mr Baker, Mr Byrnes and Mr Harrison are directors of Turners Staff Share Plan Trustees Limited which acts as Trustee of the Employee Share Purchase Scheme Trust. The following represents interests of directors in other companies as disclosed to Turners Automotive Group Limited and entered in the Interests Register: Grant Baker Baker Consultants Limited Montezemolo Holdings Limited Me Today Limited (Chairman) Velocity Capital Liam Lawson Supporters Partnership LP (Chairman) Paul Byrnes Vic Road Restaurant Group Limited Ship to Shore Restaurant Group Limited John Roberts Apollo Foods Limited Centrix Group Limited Matthew Harrison Harrigens Trustees Limited JHFT Trustees Limited GJG Trustees No.2 Limited GJG Trustees Limited MJH Consultants Limited Antony Vriens Me Today Limited Alistair Petrie RH Investment Trust Dossor Trust Bartel Holdings Ltd Henergy Cage Free Ltd Jellicoe St Enterprises Ltd Zeafruit Limited Breadcraft Wai Limited Advisory Board (Chairman) Melita Honey Limited Advisory Board Employee remuneration During the year ended 31 March 2020, the number of employees or former employees of the Group, not being directors of Turners Automotive Group Limited, who received remuneration and other benefits in their capacity as employees, the value of which exceeded $100,000 for the year was as follows: Remuneration range 100,000 - 109,999 110,000 - 119,999 120,000 - 129,999 Number of employees 2020 21 16 14 2019 21 14 13 130,000 - 139,999 140,000 - 149,999 150,000 - 159,999 160,000 - 169,999 170,000 - 179,999 180,000 - 189,999 190,000 - 199,999 200,000 – 209,999 210,000 - 219,999 220,000 - 229,999 230,000 - 239,999 240,000 - 249,999 250,000 – 259,999 260,000 – 269,999 270,000 – 279,999 280,000 – 289,000 290,000 – 299,000 300,000 – 309,999 320,000 – 329,999 330,000 – 339,999 340,000 – 349,999 370,000 – 379,000 400,000 – 409,999 420,000 – 430,000 430,000 – 439,999 640,000 – 645,000 700,000 – 709,000 4 8 4 4 8 3 2 - 2 - 1 - - - - - 3 1 - - - 1 - 1 - 1 - 7 5 4 7 4 4 5 3 1 1 1 2 2 - 1 1 - - 1 1 1 - 1 - 1 - 1 94 95 TURNERS AUTOMOTIVE GROUP ANNUAL REPORT 2020 STATUTORY INFORMATION STATUTORY INFORMATION STATUTORY INFORMATION STATUTORY INFORMATION NZX LISTING The Company's shares are listed on the NZX Main Board (equity securities market) operated by NZX Limited (NZX) and as a foreign exempt entity on the ASX operated by ASX Limited (ASX). Substantial Product Holders The following information is given pursuant to section 293 of the Financial Markets Conduct Act 2013. PRINCIPAL ORDINARY SHAREHOLDERS AS AT 30 June 2020 The following table shows the names and holdings of the 20 largest holdings of quoted ordinary shares (TRA) of the Company. Rank Name Shares % of Issued Capital 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 Bartel Holdings Limited Montezemolo Holdings Limited Harrigens Trustees Limited FNZ Custodians Limited HSBC Nominees (New Zealand) Limited - NZCSD National Nominees Limited - NCSD BNP Paribas Nominees (NZ) Limited - NZCSD JBWere (NZ) Nominees Limited Stephen John Sinclair & Jacqueline Margaret Sinclair & Roger Frederick Wallis Custodial Services Limited Paul Bernard Mora Paul Anthony Byrnes John Jeffers Harrison Accident Compensation Corporation - NZCSD New Zealand Permanent Trustees Limited - NZCSD Glenn Arthur Duncraft Custodial Services Limited Cushla Mary Smithies JPMorgan Chase Bank NA NZ Branch-segregated clients acct - NZCSD John Tomson SPREAD OF ORDINARY SHAREHOLDERS AS AT 30 JUNE 2020 Range 1 – 999 1,000 - 1,999 2,000 - 4,999 5,000 - 9,999 10,000 - 49,999 50,000 - 99,999 100,000 - 499,999 500,000 - 999,000 1,000,000 plus Total 9,552,642 6,100,000 5,179,294 4,153,981 3,427,171 3,288,667 2,543,090 2,491,951 2,171,461 1,863,524 1,700,000 1,484,860 1,363,782 1,361,833 1,000,000 870,000 707,685 542,841 534,487 519,754 11.17 7.13 6.05 4.86 4.01 3.84 2.97 2.91 2.54 2.18 1.99 1.74 1.59 1.59 1.17 1.02 0.83 0.63 0.62 0.61 Total Holders Shares % of Issued Capital 1,812 839 792 458 593 54 61 5 15 817,508 1,145,767 2,440,199 3,037,518 11,618,031 3,406,786 12,231,878 3,174,767 47,682,256 0.96 1.34 2.85 3.55 13.58 3.98 14.30 3.71 55.73 4,629 85,554,710 100.00 Domicile of Ordinary Shareholders Number % Number % Shareholders Shares New Zealand Australia Other Total 96 4,460 77 92 4,629 96.35 1.66 1.99 100.00 84,594,629 98.88 521,055 0.61 439,026 85,554,710 0.51 100.00 As at 31 March 2020 the following shareholders are registered by the company as Substantial Product Holders in the Company, having disclosed a relevant interest in quoted voting products under the Financial Markets Conduct Act 2013. Bartel Holdings Limited Salt Funds Managers Limited Montezemolo Holdings Limited Harrigens Trustees Limited Number of Shares % 11.17 9.32 7.13 6.05 9,552,642 7,974,325 6,100,000 5,179,294 The total number of quoted voting products of the company on issue at 31 March 2020 was 85,554,710 paid ordinary shares. 97 TURNERS AUTOMOTIVE GROUP ANNUAL REPORT 2020 TURNERS LIMITED FY20 GOVERNANCE REPORT TURNERS LIMITED FY20 GOVERNANCE REPORT TURNERS LIMITED FY20 GOVERNANCE REPORT cont. Turners’ Board of Directors has adopted a corporate governance framework which encourages the highest standards of ethical conduct and provides accountability and control systems commensurate with the risks involved. The Board considers that this framework and governance practices for the year ended 31 March 2020 are generally in line with the 1 January 2020 NZX Corporate Governance Code (NZX Code), except as stated below: • • • Recommendation 2.5: Turners has a Diversity Policy which encourages a culture of diversity and inclusiveness at Turners. While no measurable objectives are in place, the board requires management to provide regular reporting and monitoring on diversity within the Turners workforce. The Board also uses tools such as the annual staff engagement survey to measure diversity and how the business is recognising, valuing and respecting differences to establish benchmark measures and progress. Recommendation 2.9: An issuer should have an independent chairperson of the board. The chairperson of the board is Grant Baker, a non-executive director. Grant has a 7.13% shareholding in Turners and therefore the Board has deemed that he is not an independent director. The chair is not the CEO of Turners, is not involved in the day to day running of the business and has no influence over operational decisions. Recommendation 3.3 and 3.4: An issuer should have a Remuneration Committee and a Nomination Committee: Due to the size of the Company's Board, matters normally dealt with by a Remuneration Committee or Nominations Committee are dealt with by the full Board. • • identifies procedures to ensure that the Board meets regularly, conducts its meetings in an efficient and effective manner; and that each Director is fully empowered to perform his or her duties as a director of Turners and to fully participate in meetings of the Board. Day to day management of Turners is undertaken by the executive team under the leadership of the Chief Executive Officer, through a set of delegated authorities which are reviewed annually. In discharging their duties, directors have direct access to and may rely on information, financial data and professional or expert advice provided by Turners’ senior management and external advisers. Directors have the right, with the approval of the Chairman or by resolution of the Board, to seek independent legal or financial advice at the expense of Turners for the proper performance of their duties. Newly elected directors are expected to familiarise themselves with their obligations under the constitution, Board Charter, Turners Corporate Governance Code and the NZX Listing Rules. Training is also provided to new and existing Directors where required to enable directors to understand their obligations. Board Composition and Appointment The Company will continue to monitor best practice in the governance area and update its policies to ensure it maintains the most appropriate standards. The number of elected directors and the procedure for their retirement and re-election at Annual Shareholder Meetings is set out in Turners Constitution. The information in this report is current as at 30 July 2020 and has been approved by the Board of Turners. The Corporate Governance Code and key policies are available on the Turners Automotive Group Limited website: https://www.turnersautogroup.co.nz/About+Us/Corporate+Governance.html. Turners is listed on the NZX’s Main Board and is subject to regulatory control and monitoring by both the NZX and the Financial Markets Authority (FMA). PRINCIPLE 1 – CODE OF ETHICAL BEHAVIOUR Directors should set high standards of ethical behaviour, model this behaviour and hold management accountable for these standards being followed throughout the organisation. The Board recognises that high ethical standards and behaviours are central to good corporate governance and it is committed to the observance of a written Code of Ethics for Turners. The Code of Ethics is the framework of standards by which directors, employees, contractors for personal services and advisers to Turners Automotive Group Limited and its related companies are expected to conduct their professional lives. It has been approved by the Board. It is intended to facilitate decisions that are consistent with Turners values, business goals and legal and policy obligations, thereby enhancing performance outcomes. The Code of Ethics is available on the Company’s website. Employees are expected to report any breaches in line with the processes outlined in the Code of Ethics. The Board believes that all directors conformed to the Code of Ethics during the 2020 financial year. Turners has a Securities Trading Code of Conduct to mitigate the risk of insider trading in Turners financial products by employees and directors. A copy of this is available on Turners’ website. Additional trading restrictions apply to Restricted Persons including directors and certain employees. Details of directors’ share dealings are on page 94 of the 2020 Financial Statements. Turners considers that the nomination process for new Director appointments is the responsibility of the whole Board and it does not have a separate Nomination Committee. The Board takes into consideration tenure, capability, diversity and skills when reviewing Board composition and new appointments. Directors will retire and may stand for re-election by shareholders every three years, in accordance with the NZX Listing Rules. A Director appointed since the previous annual meeting holds office only until the next annual meeting, but is eligible for re- election at that meeting. When a director is newly appointed, Turners will enter into a written agreement with them setting out the terms of their employment. The Board currently comprises of seven directors: a non-executive chairman, four independent directors and two non-executive directors. The non-executive directors are not involved in the day to day running of the business and have no influence over operational decisions. Directors are all elected based on the value they bring to the Board and against set criteria detailed in Turners Corporate Governance Code. In order for a Director to be independent, the Board has determined that he or she must not be an executive of Turners and must have no disqualifying relationships. The Board follows the guidelines of the NZX Listing Rules and the NZX Code. Information on each director is available on the Turners website and on page 22 and 23 of the 2020 Annual Report. Director’s interests are disclosed on pages 94 to 97 of the 2020 Financial Statements. Board Training and Performance The Company encourages all Directors to undertake appropriate training and education so that they may best perform their duties. This includes attending presentations on changes in governance, legal and regulatory frameworks; attending technical and professional development courses; and attending presentations from industry experts and key advisers. In addition, Directors receive updates on relevant industry and Company issues, and briefings from key executives. The Board regularly considers individual and collective performance, together with the skill sets, training and development and succession planning required to govern the business. An external review was conducted in FY20, and the Board is considering the recommendations made before implementing any changes. PRINCIPLE 2 – BOARD COMPOSITION AND PERFORMANCE Diversity To ensure an effective Board, there should be a balance of independence, skills, knowledge, experience and perspectives. The Turners Board is responsible for setting the strategic direction of the Company, overseeing the financial and operational controls of the business, putting in place appropriate risk management strategies and policies and enhancing its value for shareholders in accordance with good corporate governance principles. In addition to the Turners Corporate Governance Code, the Turners Board also operates under a written charter which sets out: • • • the structure of the Board; the role and responsibilities of directors; procedures for the nomination, resignation and removal of directors; Turners believes that diversity and inclusion of background, experiences, thoughts and ways of working lead to greater creative and innovative solutions which ultimately lead to a superior outcome for its stakeholders socially, economically and environmentally. Diversity in Turners includes (but is not limited to) the following: gender, race, ethnicity and cultural background, thinking, physical capability, age, sexual orientation, and religious or political belief. Turners Diversity and Inclusion Policy is available on the Turners website. The Board requires management to provide regular reporting and monitoring on diversity within the Turners workforce. As at 31 March 2020, the gender balance of Turners directors and people was as follows: Directors Females Males 31 March 2020 31 March 2019 - 7 - 7 98 99 TURNERS AUTOMOTIVE GROUP ANNUAL REPORT 2020 TURNERS LIMITED FY20 GOVERNANCE REPORT cont. TURNERS LIMITED FY20 GOVERNANCE REPORT cont. Turners’ people – 31 March 2020 Senior leadership Management Other Employees Total Board Meetings and Attendance 2020 2019 Females 6 37 268 311 Males 26 57 377 460 Females 8 35 279 322 Males 28 55 364 447 The Board has 14 scheduled meetings a year. The table below sets out Directors’ attendance at Board and Committee meetings during FY20. In total, there were 14 Board meetings; 3 Audit and Risk Management Committee meetings; and 4 Lending and Credit Committee meetings. Board Audit and Risk Management Committee Lending and Credit Committee 14 14 12 14 13 14 12 3 3 3 4 4 4 Total number of meetings held Grant Baker Paul Byrnes Martin Berry Matthew Harrison Alistair Petrie John Roberts Antony Vriens PRINCIPLE 3 – COMMITTEES Lending and Credit Committee The Lending and Credit Committee reviews the lending and credit policies of Turners’ Finance subsidiary company. It is also responsible for the approval of lending policies, the approval/decline of loan applications in terms of approval authority and reviews the recovery of overdue loans and doubtful debt provisions in order to ensure that provisioning is satisfactory. The Lending and Credit Committee members as at 31 March 2020 were Matthew Harrison (Chair), Alistair Petrie and John Roberts. It met three times during the financial year. Takeovers Turners Automotive Group Limited is prepared in the event of a takeover. The Board has adopted a written Takeover Response Policy (contained within the Turners Automotive Group Corporate Governance Code) to follow in the event that a takeover notice or scheme of arrangement proposal is imminent. This policy would involve Turners forming an Independent Takeover committee to oversee disclosure and response, and engage expert legal and financial advisors to provide advice on procedure. PRINCIPLE 4 – REPORTING AND DISCLOSURE The Board should demand integrity in financial and non-financial reporting, and in the timeliness and balance of corporate disclosures Turners’ directors are committed to keeping investors and the market informed of all material information about Turners and its performance, and ensuring compliance with applicable legislative and the NZX Listing Rules. The release of material information is guided by the Reporting and Disclosure section in Turners Corporate Governance Code, and the Turners Continuous Disclosure Policy, which are available to view on our website. Copies of other key governance documents are also available on our website. In addition to all information required by law, Turners also seeks to provide sufficiently meaningful information to ensure stakeholders and investors are well informed, including financial and non-financial information. The Board should use committees where this will enhance its effectiveness in key areas, while still retaining Board responsibility. Financial information The Board has constituted two standing Committees being the Audit and Risk Management Committee and the Lending and Credit Committee. Turners will continue to monitor best practice in the governance area and update its policies to ensure it maintains the most appropriate standards. Committees allow issues requiring detailed consideration to be dealt with separately by members of the Board with specialist knowledge and experience, thereby enhancing the efficiency and effectiveness of the Board. However, the Board retains ultimate responsibility for the functions of its Committees and determines their responsibilities. The Committees meet as required and have terms of reference (Charters), which are approved and reviewed by the Board. Minutes of each Committee meeting are forwarded to all members of the Board, who are all entitled to attend any Committee meeting. Management may only attend committee meetings at the invitation of the Committee. Each Committee is empowered to seek any information it requires from employees in pursuing its duties and to obtain independent legal or other professional advice. The membership and performance of each Committee is reviewed annually. From time to time, special purpose committees may be formed to review and monitor specific projects with senior management. Audit and Risk Management Committee The role of the Audit and Risk Management Committee is to assist the Board in carrying out its responsibilities under the Companies Act 1993 and the Financial Reporting Act 2013 regarding accountancy practices, policies and controls relative to the Turner’s financial position and make appropriate enquiry into the audits of the Turner’s financial statements. This responsibility includes providing the Board with additional assurance about the quality and reliability of the financial information issued publicly by Turners. All matters required to be addressed and for which the Committee has responsibility were addressed during the reporting period. The Committee is comprised solely of Directors of Turners, has a minimum of three members, has a majority of independent Directors and has at least one director with an accounting or financial background. The Chair of the committee is not the Chair of the Board and does not have a long-standing association with Turners external audit firm as a current, or retired, audit partner or senior manager at that firm. Management and employees may only attend meetings at the invitation of the Committee and the Committee routinely has Committee-only time with the external and internal auditors without management present. The Committee Charter is available as Appendix B in the Turners Corporate Governance Code. Members as at 31 March 2020 were John Roberts (Chair), Antony Vriens and Alistair Petrie. It met three times during the financial year. The Board is responsible for ensuring that the financial statements give a true and fair view of the financial position of Turners and have been prepared using appropriate accounting policies, consistently applied and supported by reasonable judgements, estimates and for ensuring all relevant financial reporting and accounting standards have been followed. For the financial year ended 31 March 2020, the directors believe that proper accounting records have been kept which enable, with reasonable accuracy, the determination of the financial position of Turners and facilitate compliance with the Financial Reporting Act 1993. The Chief Executive and Chief Financial Officer have confirmed in writing to the Board that Turners’ external financial reports present a true and fair view in all material aspects. Turners’ full financial statements and half year results are available on our website. Non-financial information The Board recognises the importance of non-financial disclosure. Given Turners size, the Board has elected not to adopt a formal environmental, social and governance framework. Turners has an Environmental, Social and Governance Policy in section 14 of Turners Corporate Governance Code. Turners discusses its strategic objectives and its progress against these in the Chair and CEO’s commentary in shareholder reports, and at other investor events during the year including investor presentations and the Annual Shareholders’ Meeting. Turners is committed to using its resources responsibly and will look for opportunities to reduce any negative environmental risk or impact from business operations, products and services. Turners is committed to providing fair and responsible products and services that includes adherence to the Responsible Lending Code, the Responsible Credit-Related Insurance Code, Insurance (Prudential Supervision) Act 2010 and various other Acts. The Board will encourage diversity and will not knowingly participate in business situations where Turners’ could be complicit in human rights and labour standard abuses. PRINCIPLE 5 – REMUNERATION The remuneration of directors and executives should be transparent, fair and reasonable. The Board promotes the alignment of the interests of the directors, the CEO and management with the long term interests of shareholders. Remuneration policies and structure are reviewed regularly to ensure remuneration of management and directors is fair and reasonable in a competitive market for the skills, knowledge and experience required by Turners. The Board recognises that it is desirable that executive (including executive director) remuneration should include an element dependent upon the performance of both Turners and the individual, and should be clearly differentiated from non-executive director remuneration. 100 101 TURNERS AUTOMOTIVE GROUP ANNUAL REPORT 2020 TURNERS LIMITED FY20 GOVERNANCE REPORT cont. TURNERS LIMITED FY20 GOVERNANCE REPORT cont. Details of directors and executives’ remuneration and entitlements for the 2020 financial year are detailed on pages 77 and 94 of the Annual Report. PRINCIPLE 6 – RISK MANAGEMENT The Remuneration Policy is included in section 10 of Turners Corporate Governance Code. Turners does not have a Remuneration Committee and matters pertaining to remuneration are dealt with by the full Board. Director Remuneration The total remuneration pool available for Directors is fixed by shareholders. The Board determines the level of remuneration paid to Directors from the approved collective pool. Directors also receive reimbursement for reasonable travelling, accommodation and other expenses incurred in the course of performing their duties. The annual fee pool limit is $665,000 and was approved by shareholders at the annual meeting in September 2018. Any proposed increases in non-executive Director fees and remuneration will be put to shareholders for approval. If independent advice is sought by the Board, it will be disclosed to shareholders as part of the approval process. Board Remuneration • • • • • • Chairman $150,000 Non-executive Director $75,000 Chair of DPL Insurance Limited $35,000 Chair of DPL Insurance Limited for duties as a non-executive director for TRA $75,000 Chair of Audit & Risk Committee $15,000 Chair of Credit and Lending Committee $15,000 DPL Insurance is legally required to operate a separate board because it holds an insurance license with the Reserve Bank of New Zealand. Antony Vriens is the current chairman of the DPL Insurance board and is also a non-executive director of Turners. Details of individual Directors’ remuneration are detailed on page 94 of the 2020 Annual Report. Executive Remuneration Executive remuneration consists of a fixed base salary, a variable short term bonus paid annually and a long term incentive, being a Share Option Plan. Bonuses are paid against targets agreed with executives at the commencement of the year and are based on profitability, growth and personal objectives. Details of executives’ remuneration and entitlements are detailed under Key Management Compensation on page 77 and Remuneration of Employees information on page 95 of the 2020 Financial Statements. Details of the Group’s Share Option Plan are detailed on page 75 of the 2020 Financial Statements. All outstanding share options were cancelled at the start FY20 and new options were issued in July 2020. CEO Remuneration The review and approval of the CEO’s remuneration is the responsibility of the Board. The CEO’s remuneration comprises a fixed base salary, a variable short term bonus payable annually and a long term incentive, being participation in the Group’s Share Option Plan. The CEO’s remuneration can be summarised as follows: Salary Benefits Subtotal Pay for Performance Total remuneration STI % STI against maximum FY20 FY19 543,761 531,205 50,224 47,520 593,985 578,725 - 101,275 - 46% 593,985 680,000 Short term incentive: A short term bonus is paid against profit targets agreed at the commencement of the year. Long term incentive: In November 2016, the Chief Executive Officer of the Company was granted 1,002,692 options at an exercise price of $2.99195 under the Group's Share Option Plan. The grant is split into four tranches of 250,673 options with the following vesting dates; 1 June 2017, 1 June 2018, 1 June 2019 and 1 June 2020. Each tranche expires two years after the vesting date. The weighted average fair value of the options granted, using the Binomial Tree option pricing model, was $0.75 per option. All options were cancelled at the beginning of FY20. If a participant in the Group Share Option Plan leaves (by any means and for any reason) the employment of the Company or any applicable subsidiary, the participant’s options which have reached their vesting date, together with any other options as may be nominated at the discretion of the Board of Directors of the Company in extraordinary circumstances (such as the redundancy, permanent disablement or death of a Participant), may be exercised within a period of 60 days (following which they will lapse) and the participant's other Options will lapse immediately. Directors should have a sound understanding of the material risks faced by the issuer and how to manage them. The Board should regularly verify that the issuer has appropriate processes that identify and manage potential and material risks. Turners is committed to proactively managing risk. While this is the responsibility of the entire Board, the Audit and Risk Management Committee assists the Board and provides additional oversight in regards to the risk management framework and monitoring compliance with that framework. The Board’s approach to risk management is incorporated into the Audit and Risk Committee Charter which is included as Appendix B in Turners Corporate Governance Code. The Board delegates day to date management of the risk to the Chief Executive. The executive team and senior management are required to regularly identify the major risks affecting the business and develop structures, practices and processes to manage and monitor these risks. Individual risks are discussed with the Board in detail as required. Key financial and non-financial risks are included in note 5 of the financial statements. The Board is satisfied that Turners has in place a risk management process to effectively identify, manage and monitor Turners’ principal risks. Turners maintains insurance policies that it considers adequate to meet its insurable risks. Health and Safety The Board recognises that effective management of health and safety is essential for the operation of a successful business, and its intent is to prevent harm and promote wellbeing for employees, contractors and customers. The Board is responsible for ensuring that the systems used to identify and manage health and safety risks are fit for purpose, being effectively implemented, regularly reviewed and continuously improved. Turners has a Health and Safety Policy which is monitored by a Health and Safety Committee assisted by Health and Safety co- ordinators in each business unit. Health and Safety reports, including incident reports, for all business units are included in the compliance section of Board papers. PRINCIPLE 7 – AUDITORS The Board should ensure the quality and independence of the external audit process. The Board’s approach to the appointment and oversight of the external auditor are outlined in Turners’ External Audit Policy (section 9 of the Turners Corporate Governance Code) and ensures that audit independence is maintained, both in fact and appearance, such that Turners external financial reporting is viewed as being highly reliable and credible. The Audit and Risk Management Committee provides additional oversight of the external auditor, reviews the quality and cost of the audit undertaken by the Company’s external auditors and provides a formal channel of communication between the Board, senior management and external auditors. The Committee also assesses the auditor’s independence on an annual basis. Procedures are detailed in the Audit and Risk Committee Charter (Appendix B of the Turners Corporate Governance Code). For the financial year ended 31 March 2020, Baker Tilly Staples Rodway was the external auditor for Turners Automotive Group Limited. Baker Tilly Staples Rodway were first appointed as external auditor in 1999 and were automatically re-appointed under the Companies Act 1993 at the 2019 Annual Shareholder Meeting. The last audit partner rotation was this year. All audit work at Turners is fully separated from non-audit services, to ensure that appropriate independence is maintained. The amount of fees paid to Baker Tilly Staples Rodway for audit and other services is identified on page 59 of the 2020 Annual Report. Baker Tilly Staples Rodway has provided the Turners’ Board with written confirmation that, in their view, they were able to operate independently during the year. Baker Tilly Staples Rodway attends the Annual Shareholder Meeting, and the lead audit partner is available to answer questions from shareholders at that meeting. Baker Tilly Staples Rodway attended the 2019 Annual Shareholder Meeting. Turners has a number of internal controls overseen by Audit and Risk Management Committee, including controls for computerised information system, security, business continuity management, insurance, health and safety, conflicts of interest, and prevention and identification of fraud. Turners does not have a dedicated Internal Auditor role. 102 103 TURNERS AUTOMOTIVE GROUP ANNUAL REPORT 2020 TURNERS LIMITED FY20 GOVERNANCE REPORT cont. PRINCIPLE 8 – SHAREHOLDER RIGHTS AND RELATIONS The Board should respect the rights of shareholders and foster constructive relationships with shareholders that encourage them to engage with the issuer. The Board is committed to open dialogue and to facilitating engagement with shareholders. Turners has a calendar of communications and events for shareholders, including but not limited to: DIRECTORY DIRECTORY CORPORATE DIRECTORY DIRECTORS Grant Baker Chairman Appointed 10 September 2009 Annual and Interim Reports Annual Shareholder Meeting Financial results calls • • Market announcements • • • Other ad hoc investor presentations • • Easy access to information through the Turners website www.turnersautogroup.co.nz Access to management and the Board via email info@turnersautogroup.co.nz Turners maintains a comprehensive investor relations website which provides access to key corporate governance documents, copies of all major announcements, company reports and presentations. Shareholders are encouraged to attend the Annual Shareholder Meeting and may raise matters for discussion at this event. In accordance with the NZX Code, the Board ensured that the notice of the 2019 Annual Shareholder Meeting was posted to Turners’ website as soon as possible, and at least 20 working days prior to that meeting. Shareholders have the ultimate control in corporate governance by voting directors on or off the Board. Voting is by poll, upholding the ‘one share, one vote’ philosophy. In accordance with the Companies Act 1993, Turners’ constitution and the NZX Listing Rules, Turners refers major decisions which may change the nature of Turners’ to shareholders for approval. REGISTERED OFFICE Level 5, 70 Shortland Street, Auckland, New Zealand PO Box 1232, Shortland Street, Auckland, 1140, New Zealand Freephone: 0800 100 601 Email enquiries: info@turnersautogroup.co.nz Web: www.turnersautogroup.co.nz Paul Byrnes Deputy chairman Appointed 2 February 2004 TURNERS LIMITED Martin Berry Independent Director Consolidated statement of financial position for the year ended 31 March 2016 Appointed 17 August 2018 TURNERS LIMITED Consolidated statement of financial position for the year ended 31 March 2016 AUDITOR Baker Tilly Staples Rodway Matthew Harrison Non-executive director Appointed 12 December 2012 Alistair Petrie Non-executive director Appointed 24 February 2016 Cash and cash equivalents Cash and cash equivalents Assets Assets Financial assets at fair value through profit or loss Financial assets at fair value through profit or loss John Roberts Trade receivables Trade receivables Independent Director Inventory Appointed 1 July 2015 Finance receivables Inventory Other receivables and deferred expenses Other receivables and deferred expenses Finance receivables Antony Vriens Independent Director Reverse annuity mortgages Reverse annuity mortgages Appointed 12 January 2015 Property, plant and equipment Property, plant and equipment BANKERS Bank of New Zealand and ASB Bank 2016 2016 2015 Notes Notes $’000 $’000 $’000 2015 $’000 LAWYERS Chapman Tripp 10 11 12 13 14 15 16 19 10 11 12 13 14 15 16 19 13,810 13,810 12,339 12,339 18,455 18,455 17,350 17,350 9,575 9,575 7,394 14,156 14,156 8,984 7,394 8,984 167,598 167,598 142,827 142,827 8,505 9,734 8,505 5,946 5,946 9,734 13,253 13,253 11,108 11,108 8,319 8,319 All shareholders are given the option to elect to receive electronic communications from us. Tax receivables Tax receivables - - 433 In addition to shareholders, Turners has a wide range of stakeholders and maintains open channels of communication for all audiences, including shareholders, brokers and the investing community, as well as our staff, suppliers and customers. ENDS Deferred tax asset Deferred tax asset SHAREHOLDER INFORMATION Intangible assets Intangible assets Total assets Total assets COMPANY PUBLICATIONS The Company informs investors of the Company’s business and operations by issuing an Annual Report, an Interim Report and releasing announcements on the NZX’s website. Other payables Liabilities Other payables Liabilities Life investment contract liabilities Tax payables Deferred revenue Life investment contract liabilities Deferred revenue Financial calendar Tax payables First quarterly dividend Derivative financial instruments Derivative financial instruments Annual meeting Borrowings Borrowings Half year results announced Second quarterly dividend Insurance contract liabilities Third quarterly dividend Total liabilities End of financial year Annual results announced Annual report Shareholders’ equity Shareholders’ equity Final dividend Insurance contract liabilities Total liabilities Share capital Share capital Other reserves Other reserves Retained earnings Retained earnings October September November January April 31 March May June July 20 20 4,024 4,024 8,532 21 SHARE REGISTER Computershare Investor Services Limited 328,972 Level 2, 159 Hurstmere Road, Takapuna, Auckland Private Bag 92119, Auckland 1142, New Zealand Telephone: +64 9 488 8777 103,595 105,338 362,303 105,338 362,303 21 433 8,532 103,595 328,972 22 23 24 32 32 22 23 24 32 32 22,270 22,270 17,790 17,790 6,049 6,049 7,476 7,476 990 49 990 49 71 - 71 - 174,816 174,816 156,995 156,995 15,629 15,629 16,378 16,378 12,688 12,688 9,260 9,260 232,491 232,491 207,970 207,970 25 25 136,127 136,127 135,294 135,294 (52) (52) (23) (23) (6,263) (6,263) (14,269) (14,269) Total shareholders’ equity Total shareholders’ equity ENQUIRIES Total shareholders’ equity and liabilities Shareholders with enquiries about transactions, change of address or dividend payments should contact Computershare Investor Services on +64 9 488 8777. Other questions should be directed to the Company at the registered address. Total shareholders’ equity and liabilities 362,303 129,812 328,972 362,303 129,812 328,972 121,002 121,002 STOCK EXCHANGE The Company’s shares trade on the NZSX operated by the NZX under the code TRA. The minimum marketable parcel on the NZX is 100 For and on behalf of the Board shares. For and on behalf of the Board This annual report is dated 30 July 2020 and is signed on behalf of the board by: G.K. Baker G.K. Baker Chairman Chairman Director G.K. Baker Chairman Director P.A. Byrnes P.A. Byrnes P.A. Byrnes Deputy chairman Executive Director Executive Director 104 The accompanying notes from part of these financial statements The accompanying notes from part of these financial statements 105 Authorised for issue on 22 June 2016 Authorised for issue on 22 June 2016 TURNERS AUTOMOTIVE GROUP ANNUAL REPORT 2020 106 107 TURNERS AUTOMOTIVE GROUP ANNUAL REPORT 2020Turners Automotive Group Limited Level 5, 70 Shortland Street PO Box 1232, Auckland 1140 T: 0800 100 601 E: info@turnersautogroup.co.nz www.turnersautogroup.co.nz