Example special purpose financial statements. Grant Thornton CLEARR Example Pty Ltd For the year ended 31 December 2018

Transcription

1 Example special purpose financial statements Grant Thornton CLEARR Example Pty Ltd

2 Foreword Welcome to the December 2018 edition of the example Special purpose financial statements. This set of illustrative financial statements is one of many prepared by Grant Thornton to assist you in preparing your own financial statements. This publication is designed to illustrate the financial statements for a company in line with Australian financial reporting and regulatory requirements. It is based on the activities and results of a fictitious IT entity, Grant Thornton CLEARR Example Pty Ltd, which prepares special purpose financial statements. The full year and half-year periods ending 31 December 2018 represent a major change for many Australian businesses due to the first time application of new revenue and financial instruments requirements. AASB 15 Revenue from Contracts with Customers (for-profit entities) and AASB 9 Financial Instruments (for-profit and not-for-profit entities) apply for the first time this reporting period. More significant changes are on their way with AASB 15 and AASB 1058 Income of Not-for-Profit Entities (not-for-profit entities) and AASB 16 Leases (for-profit and not-for-profit entities) coming into effect from 1 January ASIC is also ramping up its surveillance activities with increased focus on the first time application of new major standards and quantification of the expected impact of accounting standards issued but not yet effective. Adding to the complexity in financial reporting, there is uncertainty as to when and how the Australian government will respond to the recommendations arising from the legislative review of the Australian Charities and Not-for-profits Commission (ACNC), particularly with respect to recommended changes to reporting thresholds for not-for-profit entities. In addition, the Australian government has recently introduced proposals to double the financial reporting thresholds for large proprietary companies effective from 1 July Furthermore, the AASB continues to make progress on its project to reform the Australian financial reporting framework which proposes to remove the current definition of reporting entity from Australian Accounting requirements, effectively removing the option to prepare special purpose financial statements if entities are required by legislation or otherwise to comply with Australian Accounting Standards. To navigate through all these complexities and uncertainties, it is important that Australian entities remain focused and proactive with their implementation projects and work closely with their advisors and auditors. Our objective in preparing the example financial statements was to illustrate one possible approach to financial reporting by an entity engaging in transactions that are typical across a range of non-specialist sectors. However, as with any example, this illustration does not envisage every possible transaction and cannot therefore be regarded as comprehensive. Likewise, as a reference tool, this publication illustrates disclosures for many common scenarios without removing disclosures based on materiality. We strongly encourage businesses to get rid of immaterial disclosures and tailor disclosures to their specific circumstances. We have reviewed and updated these financial statements to reflect changes in Australian Accounting Standards that are effective for the year ending 31 December However, no account has been taken of any new developments published after 7 January The Grant Thornton website contains any updates that are relevant for 31 December 2018 financial statements, including our Technical Accounting Alert on What s new for December Grant Thornton Australia Limited. All rights reserved. i

3 We trust this publication will help you work through the upcoming December 2018 reporting season. We welcome your feedback on the format and content of this publication. Please contact us on or get in touch with your local Grant Thornton representative to let us know your thoughts. Andrew Rigele National Head of Audit and Assurance Grant Thornton Australia Limited January Grant Thornton Australia Limited. All rights reserved. ii

4 Contents Foreword i Directors Report 1 Auditor s Independence Declaration 4 Consolidated Statement of Profit or Loss and Other Comprehensive Income 6 Consolidated Statement of Financial Position 8 Consolidated Statement of Changes in Equity 11 Consolidated Statement of Cash Flows 13 Notes to the Consolidated Financial Statements 14 1 Statement of significant accounting policies 14 2 Revenue 32 3 Other income 33 4 Result for the year 33 5 Income tax expense 34 6 Auditors remuneration 34 7 Dividends 34 8 Cash and cash equivalents 35 9 Trade and other receivables Inventories Other assets Property, plant and equipment Intangible assets Trade and other payables Borrowings Taxation Employee benefits Provisions Issued capital Reserves Capital and leasing commitments Contingent assets and contingent liabilities Cash flow information Events after the reporting date Company details 43 Directors Declaration 44 Independent Auditor s Report Grant Thornton Australia Limited. All rights reserved iii

5 Directors Report CA 298(1) Your Directors present their report on Grant Thornton CLEARR Example Pty Ltd (the Company or Grant Thornton CLEARR) for the financial year ended 31 December Directors CA 299 (2)(b) The names of the Directors in office at any time during or since the end of the year are: Mr Blake Smith Ms Beth King Mr Simon Murphy Mrs Alison French Mr William Middleton (appointed 28 November 2018) Review of operations and financial results CA 299(1)(ii) A review of the operations of the Company during the financial year and the results of those operations found that the changes in market demand and competition have seen an increase in sales of 7.1% to $472,149,000. The profit of the Company for the financial year after providing for income tax amounted to $32,757,000 (2017: $21,849,000). Significant changes in state of affairs CA 299(1)(b) No significant changes in the Company s state of affairs occurred during the financial year. Principal activities CA 299(1)(c) The principal activities of the Company during the financial year were: sale, customisation and integration of IT and telecommunication systems maintenance of IT and telecommunications systems; and internet based selling hardware and software products There have been no significant changes in the nature of these activities during the year. Events arising since the end of the reporting period CA 299(1)(d) No matters or circumstances have arisen since the end of the financial year which significantly affected or may significantly affect the operations of the Company, the results of those operations, or the state of affairs of the Company in future financial years. Future development, prospects and business strategies CA 299(1)(e) CA 299(3) Based on the expected growth in online sales, as predicted by a number of prominent economic commentators, and the demand from customers for the latest technology, we expect significant increase in online sales for next few years. We have a number of strategies to benefit from this growth, including: upgrading our online sales portal further expanding our distribution networks further reducing manufacturing costs; and a strong marketing campaign 2019 Grant Thornton Australia Limited. All rights reserved. 1

6 We have instigated an urgent upgrade of the Company s website and online sales portal. We have allocated $3.8m for this upgrade, which will mostly be funded from retained earnings. We expect the upgrade to be completed in the next 12 months, to be followed by a strong marketing campaign. We are continually considering ways of reducing the Company s cost of manufacturing. The Directors are giving consideration to a major upgrade of production-line technology to improve efficiency. The Directors expect to receive the results of a feasibility study within the next six months, and the various options will be considered at that time. Looking ahead, the Company is currently engaged in a competitive tender process to supply the Australian government $50m IT and telecommunication systems and offer integration and maintenance services over the next ten (10) years. If successful, manufacture and supply are expected to commence next year, significantly affecting future revenues. Given both the competitive nature of the tender, and the fact that the process is ongoing, we have utilised the exemption in s299a(3) and have not disclosed further details about the possible impact of the potential contract on the Company s business strategy and future prospects. We are relying on the exemption on the basis that disclosure of the potential financial impact on the Company arising from the outcome of the tender process is premature, and would be likely to result in other tender competitors gaining a commercial advantage, which would jeopardise the Company s prospects. The material business risks faced by the Company that are likely to have an effect on the financial prospects of the Company, and how the Company manages these risks include: 1 Reduction in demand from overseas markets: given our reliance on the United Kingdom, USA and other overseas markets, this could have a significant impact on our financial results. Based on the views of prominent economic commentators, we do not anticipate any significant slowdown in these overseas economies for the next few years, but are currently investigating the option of expanding our sales into other emerging economies, such as China and India; and 2 Technological obsolescence: given the rapidly changing environment in which the Company operates, this could have a very significant impact on our financial results. We address this risk through investment in research and development and by constantly monitoring the market. With competitors constantly seeking to enter our market with improved designs, we see this risk increasing in the future. Environmental issues CA 299(1)(f) The Company s operations are not regulated by any significant environmental regulations under a law of the Commonwealth or of a state or territory of Australia. Dividends paid or recommended CA 300(1)(a) Dividends paid or declared since the start of the financial year are as follows: a fully franked dividend of $4,000,000 was paid during the year as recommended in last year s report Options CA 300(1)(e) No options over issued shares or interests in the Company were granted during or since the end of the financial year and there were no options outstanding at the date of this report Grant Thornton Australia Limited. All rights reserved. 2

7 Indemnities given to, and insurance premiums paid for, auditors and officers Insurance of officers CA 300(1)(g),(8)(b), (9)(a)(f) CA 300(9)(c) During the year, Grant Thornton CLEARR paid a premium to insure officers of the Company. The officers of the Company covered by the insurance policy include all Directors. The liabilities insured are legal costs that may be incurred in defending civil or criminal proceedings that may be brought against the officers in their capacity as officers of the Company, and any other payments arising from liabilities incurred by the officers in connection with such proceedings, other than where such liabilities arise out of conduct involving a wilful breach of duty by the officers or the improper use by the officers of their position or of information to gain advantage for themselves or someone else to cause detriment to the Company. Details of the amount of the premium paid in respect of insurance policies are not disclosed as such disclosure is prohibited under the terms of the contract. The Company has not otherwise, during or since the end of the financial year, except to the extent permitted by law, indemnified or agreed to indemnify any current or former officer of the Company against a liability incurred as such by an officer. Indemnity of auditors CA 300(1)(g), (8)(b),(9)(a),(f) The Company has agreed to indemnify its auditors, Grant Thornton, to the extent permitted by law, against any claim by a third party arising from the Company s breach of its agreement. The indemnity requires the Company to meet the full amount of any such liabilities including a reasonable amount of legal costs. Proceedings on behalf of Company CA 300(14) No person has applied for leave of Court to bring proceedings on behalf of the Company or intervene in any proceedings to which the Company is a party for the purpose of taking responsibility on behalf of the Company for all or any part of those proceedings. The Company was not a party to any such proceedings during the year. Auditor s Independence Declaration CA 298(1)(c) A copy of the Auditor s Independence Declaration as required under section 307C of the Corporations Act 2001 is set out on page 4 and forms part of this Directors Report. Rounding of amounts ASIC Corporations (Rounding in Financial/ Directors Reports) Instrument 2016/191 CA 289(2)(a) Grant Thornton CLEARR is a type of Company referred to in the ASIC Corporations (Rounding in Financial/Directors Reports) Instrument 2016/191 and therefore the amounts contained in this report and in the financial report have been rounded to the nearest $1,000, or in certain cases, to the nearest dollar. Signed in accordance with a resolution of the Directors. CA 298(2)(c) CA 306 (2)(b) Blake Smith Director 28 February Grant Thornton Australia Limited. All rights reserved. 3

8 Auditor s Independence Declaration Grant Thornton Audit Pty Ltd Level Kent Street Sydney, NSW 2000 T F Auditor s Independence Declaration To the Directors of Grant Thornton CLEARR RDR Example Pty Ltd In accordance with the requirements of section 307C of the Corporations Act 2001, as lead auditor for the audit of Grant Thornton CLEARR Example Pty Ltd for the year ended 31 December 2018, I declare that, to the best of my knowledge and belief, there have been: a No contraventions of the auditor independence requirements of the Corporations Act 2001 in relation to the audit; and b No contraventions of any applicable code of professional conduct in relation to the audit. GRANT THORNTON AUDIT PTY LTD Chartered Accountants A B Partner Partner - Audit & Assurance Sydney, 28 February 2019 Grant Thornton Audit Pty Ltd ACN a subsidiary or related entity of Grant Thornton Australia Ltd ABN Grant Thornton refers to the brand under which the Grant Thornton member firms provide assurance, tax and advisory services to their clients and/or refers to one or more member firms, as the context requires. Grant Thornton Australia Ltd is a member firm of Grant Thornton International Ltd (GTIL). GTIL and the member firms are not a worldwide partnership. GTIL and each member firm is a separate legal entity. Services are delivered by the member firms. GTIL does not provide services to clients. GTIL and its member firms are not agents of, and do not obligate one another and are not liable for one another s acts or omissions. In the Australian context only, the use of the term Grant Thornton may refer to Grant Thornton Australia Limited ABN and its Australian subsidiaries and related entities. GTIL is not an Australian related entity to Grant Thornton Australia Limited. Liability limited by a scheme approved under Professional Standards Legislation Grant Thornton Australia Limited. All rights reserved. 4

9 Guidance Note: Statement of Profit or Loss and Other Comprehensive Income AASB 101 Presentation of Financial Statements permits the statement of profit or loss and other comprehensive income to be presented: in a single statement: a statement of profit or loss and other comprehensive income, or in two statements: a statement of profit or loss and a statement of comprehensive income The Example Financial Statements illustrate a statement of profit or loss and other comprehensive income (i.e. a single statement). A two statement presentation is shown in Appendix B of our Example Listed Public Financial Statements. This statement of profit or loss and other comprehensive income format illustrates an example of the nature of expense method. See Appendix A of our Example Listed Public Financial Statements for a format illustrating the function of expense or cost of sales method. AASB 101 requires the entity to disclose reclassification adjustments and related tax effects relating to components of other comprehensive income either on the face of the statement or in the notes. In this example, the entity presents reclassification adjustments and current year gains and losses relating to other comprehensive income on the face of the statement of profit or loss and other comprehensive income (AASB ). An entity may instead present reclassification adjustments in the notes, in which case the components of other comprehensive income are presented after any related reclassification adjustments (AASB ). According to AASB , an entity shall disclose the amount of income tax relating to each component of other comprehensive income either on the face of the statement of profit or loss and other comprehensive income or in the notes. In this example the entity presents components of other comprehensive income before tax with one amount shown for the aggregate amount of income tax relating to all components of other comprehensive income (AASB (b)). Alternatively, the entity may present each component of other comprehensive income net of related tax effects (AASB (a)). If the tax effects of each component of other comprehensive income are not presented on the face of the statement this information shall be presented in the notes Grant Thornton Australia Limited. All rights reserved. 5

10 Consolidated Statement of Profit or Loss and Other Comprehensive Income AASB (e) Notes AASB (a) Revenue 2 472, ,963 Other income Changes in inventories of finished goods and work in progress (3,523) (782) Raw materials and consumables used (137,078) (131,118) Employee benefits expense (227,169) (221,724) Depreciation (18,497) (20,003) Amortisation (375) (360) Other expenses (37,397) (32,844) AASB (b) Finance costs 4 (2,061) (2,979) Profit before income tax 46,791 31,345 AASB (d) Income tax expense 5 (14,034) (9,496) AASB (f) Profit for the year 32,757 21,849 AASB (g) AASB A Other comprehensive income Items that will not be reclassified subsequently to profit or loss: gains on property revaluation, net of income tax - 1,400 AASB A Items that will may be reclassified subsequently to profit or loss: Cash flow hedges: transferred to profit or loss, net of tax - (2) transferred to inventory, net of tax (3) (7) Net change in the fair value of cash flow hedges taken to equity, net of income tax (7) (18) Other comprehensive income for the year, net of income tax (10) 1,373 AASB (i) Total comprehensive income for the year 32,747 23,222 This statement should be read in conjunction with the notes to the financial statements Grant Thornton Australia Limited. All rights reserved. 6

11 Guidance Note: Consolidated Statement of Financial Position The statement of financial position complies with AASB 101. The statement of financial position includes a current/non-current distinction. When presentation based on liquidity is reliable and more relevant, the entity can choose to present the statement of financial position in order of liquidity (AASB ). The entity will then not present a current / noncurrent distinction in the statement of financial position. However the disclosure requirements for amounts expected to be recovered or settled before or after 12 months must still be applied (AASB ). These Example Financial Statements use the terminology in AASB 101; however an entity may use other titles (e.g. balance sheet) for the primary financial statements (AASB ) Grant Thornton Australia Limited. All rights reserved. 7

12 Consolidated Statement of Financial Position As at 31 December 2018 Notes AASB101.60, AASB Current assets AASB101.54(i) Cash and cash equivalents 8 26,136 5,524 AASB101.54(h) Trade and other receivables 9 14,336 13,178 AASB101.54(g) Inventories 10 39,525 43,048 Other current assets 11 3,180 2,788 Total current assets 83,177 64,538 AASB101.60, ASB Non-current assets AASB101.54(h) Trade and other receivables Other assets 11 1,260 1,445 AASB101.54(a) Property, plant and equipment , ,014 AASB101.54(o) Deferred tax assets 17 9,289 8,464 AASB101.54(c) Intangible assets 13 1,741 2,116 Total non-current assets 139, ,184 Total assets 222, ,722 This statement should be read in conjunction with the notes to the financial statements Grant Thornton Australia Limited. All rights reserved. 8

13 Consolidated Statement of Financial Position (continued) As at 31 December 2018 Notes AASB101.60, ASB Current liabilities AASB101.54(k) Trade and other payables 14 20,004 17,306 AASB101.54(m) Financial liabilities 15 6,114 3,337 AASB101.54(m) Derivative liabilities AASB101.54(n) Current tax liabilities 16 9,011 3,492 AASB101.54(l) Employee benefits 17 8,352 8,143 AASB101.54(l) Provisions 18 3,743 2,837 Other liabilities 3,412 3,062 Total current liabilities 50,758 38,284 AASB101.60, ASB Non-current liabilities AASB101.54(m) Financial liabilities 15 8,690 38,338 AASB101.54(o) Deferred tax liabilities 16 3,324 3,205 AASB101.54(l) Employee benefits 17 11,149 10,854 AASB101.54(l) Provisions 18 1,475 1,070 Total non-current liabilities 24,638 53,467 Total liabilities 75,396 91,751 Net assets 147, ,971 Equity AASB101.54(r) Contributed equity 19 80,000 80,000 AASB101.54(r) Reserves 20 4,465 4,475 Retained earnings 63,004 34,496 Total equity 147, ,971 This statement should be read in conjunction with the notes to the financial statements 2019 Grant Thornton Australia Limited. All rights reserved. 9

14 Guidance Note: Consolidated Statement of Changes in Equity Entities may present the required reconciliations for each component of other comprehensive income either in the statement of changes in equity or in the notes to the financial statements (AASB (d)(ii) and AASB A). These Example Financial Statements present the reconciliations for each component of other comprehensive income in the notes to the financial statements. This reduces duplicated disclosures and presents a clearer picture of the overall changes in equity Grant Thornton Australia Limited. All rights reserved. 10

15 Consolidated Statement of Changes in Equity Notes Share capital Retained earnings Reserves Total $ 000 $ 000 AASB (d) Balance at 1 January ,000 15,847 3,102 98,949 Profit for the year - 21,849-21,849 Other comprehensive income ,373 1,373 AASB (a) Total comprehensive income for the year - 21,849 1,373 23,222 AASB Dividends 7 - (3,200) - (3,200) AASB (d)(iii) Total transactions with owners - (3,200) - (3,200) AASB (d) Balance at 31 December ,000 34,496 4, ,971 AASB (d) Balance at 1 January ,000 34,496 4, ,971 Adjustment on adoption of AASB (227) - (227) Adjustment on adoption of AASB (22) - (22) Adjusted balance at 1 January ,000 34,247 4, ,722 Profit for the year - 32,757-32,757 Other comprehensive income (10) (10) AASB (a) Total comprehensive income for the year - 32,757 (10) 32,747 AASB Dividends 7 - (4,000) - (4,000) AASB (d)(iii) Total transactions with owners - (4,000) - (4,000) AASB (d) Balance at 31 December ,000 63,004 4, ,469 This statement should be read in conjunction with the notes to the financial statements Grant Thornton Australia Limited. All rights reserved. 11

16 Guidance Note: Consolidated Statement of Cash Flows This format illustrates the direct method of determining operating cash flows (AASB (a)). An entity may also determine the operating cash flows using the indirect method (AASB (b)) Grant Thornton Australia Limited. All rights reserved. 12

17 Consolidated Statement of Cash Flows Notes AASB Cash flows from operating activities AASB107.14(a) Receipts from customers 516, ,305 AASB107.14(c-d) Payments to suppliers and employees (444,440) (429,638) AASB Interest received 1, AASB107.14(b) Other revenue AASB Finance costs (1,976) (2,917) AASB107.14(f) Income tax paid (9,216) (8,461) Net cash provided by operating activities 23a 62,092 43,877 AASB Cash flows from investing activities AASB107.16(b) Proceeds from sale of property, plant and equipment 1, AASB107.16(a) Purchase of property, plant and equipment (12,275) (3,048) Proceeds from release of security deposits Net cash (used in) investing activities (10,609) (2,798) AASB Cash flows from financing activities AASB107.17(d) Repayment of borrowings (26,871) (37,089) AASB Dividends paid (4,000) (3,200) Net cash (used in) financing activities (30,871) (40,289) Net change in cash and cash equivalents held 20, Cash and cash equivalents at beginning of financial year 5,524 4,734 Cash and cash equivalents at end of financial year 8 26,136 5,524 This statement should be read in conjunction with the notes to the financial statements 2019 Grant Thornton Australia Limited. All rights reserved. 13

18 AASB AASB AASB (a) AASB Notes to the Consolidated Financial Statements 1 Statement of significant accounting policies The Directors have prepared the financial statements on the basis that the Company is a non-reporting entity because there are no users dependent on a general purpose financial report. The financial report is therefore a special purpose financial report that has been prepared in order to meet the requirements of the Corporations Act These financial statements have been prepared in accordance with the recognition and measurement requirements specified by the Australian Accounting Standards and Interpretations and the disclosure requirements of AASB 101 Presentation of Financial Statements, AASB 107 Statement of Cash Flows, AASB 108 Accounting Policies, Changes in Accounting Estimates and Errors and AASB 1054 Australian Additional Disclosures. Grant Thornton CLEARR Example Pty Ltd is a Company limited by shares, incorporated and domiciled in Australia. Grant Thornton CLEARR Example Pty Ltd is a for-profit entity for the purpose of preparing financial statements under Australian Accounting Standards. 1.1 Basis of preparation AASB (a) The financial statements have been prepared on an accruals basis and are based on historical costs modified by the revaluation of selected non-current assets and financial instruments for which the fair value basis of accounting has been applied. 1.2 New and amended standards adopted by the Company AASB 15 Revenue from contracts with customers AASB 15 replaces AASB 118 Revenue, AASB 111 Construction Contracts and several revenue-related Interpretations. The new Standard has been applies as at 1 January 2018 using the modified retrospective approach. Under this method, the cumulative effect of initial application is recognised as an adjustment to the opening balance of retained earnings at 1 January 2018 and comparatives are not restated. In accordance with the transition guidance, AASB 15 has only been applied to contracts that are incomplete as at 1 January The adoption of AASB 15 has mainly affected the following areas: IT services set-up costs Loss contracts IT services set-up costs In preparing to perform under an IT outsourcing contract the Group incurs initial set-up costs replicating client databases and establishing communication linkages with the customer s information systems. On average, these costs represent between 1% and 2% of the total labour and materials costs incurred. As these costs arise from activities that the Group must undertake to fulfil a contract but do not themselves transfer a good or service to a customer, AASB 15 does not consider them to be performance obligations. Accordingly, these costs are excluded from the measure of performance under the contract. Instead, such costs are evaluated for possible capitalisation using the specific criteria in the Standard. If capitalised, the resulting asset is subsequently amortised on a straight-line basis over the estimated period of benefit which includes both the existing contract and any reasonably anticipated renewals based on the company s historical experience with similar arrangements. Under AASB 118, these costs were expensed as incurred. This change of accounting for set-up costs had no impact on the total amount of services revenue recognised under each contract, although the date upon which services revenue is first recognised has 2019 Grant Thornton Australia Limited. All rights reserved. 14

19 been delayed by an average of 6 to 8 days. The total adjustment to the opening balance of retained earnings arising from the initial application of AASB 15 to set-up costs is $267,000. Loss contracts AASB 15 does not include any guidance on how to account for loss contracts. Accordingly, such contracts are accounted for using the guidance in AASB 137 Provisions, Contingent Liabilities and Contingent Assets. Under AASB 137, the assessment of whether a provision needs to be recognised takes place at the contract level and there are no segmentation criteria to apply. As a result, there are some instances where loss provisions recognised in the past have not been recognised under AASB 15 because the contract as a whole is profitable. In addition, when two or more contracts entered into at or near the same time are required to be combined for accounting purposes, AASB 15 requires the Group to perform the assessment of whether the contract is onerous at the level of the combined contracts. The Group also notes that the amount of loss accrued in respect of a loss contract under AASB 111 takes into account an appropriate allocation of construction overheads. This contrasts with AASB 137 where loss accruals may be lower as they are based on the identification of unavoidable costs. As at 1 January 2018, the Group has identified only two loss provisions totalling to $58,500. These provisions have been re-measured under AASB 137 at $18,500. Contracts with multiple performance obligations Many of the Group s contracts comprise a variety of performance obligations including, but not limited to, hardware, software, elements of design and customisation, after-sales services, and installation. Under AASB 15, the Group must evaluate the separability of the promised goods or services based on whether they are distinct. A promised good or service is distinct if both: the customer benefits from the item either on its own or together with other readily available resources; and it is separately identifiable (i.e. the Group does not provide a significant service integrating, modifying or customising it). While this represents significant new guidance, the implementation of this new guidance did not have a significant impact on the timing or amount of revenue recognised by the Group during the year. On the date of initial application of AASB 15, 1 January 2018, the impact to retained earnings of the Group as follows: Impacted area Other equity Retained earnings Total equity $ 000 IT service set up costs - (267) (267) Remeasurement of loss contracts (227) (227) 2019 Grant Thornton Australia Limited. All rights reserved. 15

20 AASB 15.C8 The tables below highlight the impact of AASB 15 on the Group s statement of profit or loss and other comprehensive income and the statement of financial position for the ending 31 December The adoption of AASB 15 did not have a material impact on the Group s statement of cash flows. Statement of Profit or Loss and Other Comprehensive Income (Extract) Amounts under AASB 118 & 111 Adjustments Amounts under AASB 15 $ 000 Revenue 472,484 (335) 472,149 Changes in inventories Employee benefits expense (221,297) 128 (221,169) Other expenses (37,400) 3 (37,397) Profit for the year 32,906 (149) 32,757 Total comprehensive income for the year 32,896 (149) 32,747 Statement of Financial Position (Extract) Amounts under AASB 118 & 111 Adjustments Amounts under AASB 15 $ 000 Current Assets Trade and other receivables 14,606 (270) 14,336 Inventories 39, ,525 Non-current Assets Prepayment and other assets Total Assets 53, ,267 Current Liabilities Current tax liabilities 9,151 (140) 9,011 Non-current Liabilities Trade and other payables 19, ,004 Total Liabilities 29,085 (70) 29,015 Equity Retained earnings 63, , Grant Thornton Australia Limited. All rights reserved. 16

21 AASB 9 Financial Instruments AASB 9 Financial Instruments replaces AASB 139 Financial Instruments: Recognition and Measurement. It makes major changes to the previous guidance on the classification and measurement of financial assets and introduces an expected credit loss model for impairment of financial assets. AASB AASB AASB When adopting AASB 9, the Group has applied transitional relief and opted not to restate prior periods. Differences arising from the adoption of AASB 9 in relation to classification, measurement, and impairment are recognised in opening retained earnings as at 1 January AASB 9 also contains new requirements on the application of hedge accounting. The new hedge accounting looks to the align hedge accounting with entities risk management activities look to align hedge accounting more closely with entities risk management activities by increasing the eligibility of both hedged items and hedging instruments and introducing a more principles-based approach to assessing hedge effectiveness. Impairment of trade receivables and contract assets For trade receivables and contract assets under AASB 15 the Group applies a simplified approach of recognising lifetime expected credit losses as these items do not have a significant financing component. The impairment allowance for trade receivables was increased by $22,000 at 1 January Hedge accounting All of the Group s forward exchange contracts had been designated as hedging instruments in cash flow hedges under AASB 139. All hedging relationships that were hedging relationships under AASB 139 at the 31 December 2017 reporting date, meet AASB 9 s criteria for hedge accounting at 1 January 2018 and are therefore regarded as continuing hedging relationships. Reconciliation of financial instruments on adoption of AASB 9 AASB 7.42I (a),(b) AASB (f) On the date of initial application, 1 January 2018, the financial instruments of the Group were reclassified as follows: Measurement Category Carrying Amount Notes Original AASB 139 category New AASB 9 category Closing balance 31 December 2017 (AASB 139) Adoption of AASB 9 Opening balance 1 January 2018 (AASB 9) $ 000 Assets Current financial assets Trade and other receivables 9 Amortised cost Amortised cost 13,323 (22) 13,301 Cash and cash equivalents 8 Amortised cost Amortised cost 5,524-5,524 Total financial asset balance 18,847 (22) 18, Grant Thornton Australia Limited. All rights reserved. 17

22 Measurement Category Carrying Amount Notes Original AASB 139 category New AASB 9 category Closing balance 31 December 2017 (AASB 139) Adoption of AASB 9 Opening balance 1 January 2018 (AASB 9) $ 000 Liabilities Current financial liabilities Derivative financial instrument Derivatives used for hedging (FV) Derivatives used for hedging (FV) Trade and other payables 14 Amortised cost Amortised cost 15,711-15,711 Other bank borrowings 15 Amortised cost Amortised cost 2,000-2,000 17,818-17,818 Non-current financial liabilities Other bank borrowings 15 Amortised cost Amortised cost 34,901-34,901 34,901-34,901 Total financial liabilities 52,719-52, Accounting standards issued but not yet effective and not been adopted early by the Company AASB AASB Refer to the latest Grant Thornton TA Alert on accounting standards issued but not yet effective, available on our website: The following is a summary of the material accounting policies adopted by the Company in the preparation of the financial statements. The accounting policies have been consistently applied, unless otherwise stated. 1.4 Significant accounting policies Income tax The income tax expense / (revenue) for the year comprises current income tax expense / (income) and deferred tax expense / (income). Current and deferred income tax expense / (income) is charged or credited directly to other comprehensive income instead of the profit or loss when the tax relates to items that are credited or charged directly to other comprehensive income. Current tax Current income tax expense charged to the profit or loss is the tax payable on taxable income calculated using applicable income tax rates enacted, or substantially enacted, as at reporting date. Current tax liabilities / (assets) are therefore measured at the amounts expected to be paid to / (recovered from) the relevant taxation authority Grant Thornton Australia Limited. All rights reserved. 18

23 Current tax assets and liabilities are offset where a legally enforceable right of set-off exists and it is intended that net settlement or simultaneous realisation and settlement of the respective asset and liability will occur. Deferred tax Deferred income tax expense reflects movements in deferred tax asset and deferred tax liability balances during the year as well unused tax losses. Deferred tax assets and liabilities are ascertained based on temporary differences arising between the tax bases of assets and liabilities and their carrying amounts in the financial statements. Deferred tax assets also result where amounts have been fully expensed but future tax deductions are available. No deferred income tax will be recognised from the initial recognition of an asset or liability, excluding a business combination, where there is no effect on accounting or taxable profit or loss. Deferred tax assets and liabilities are calculated at the tax rates that are expected to apply to the period when the asset is realised or the liability is settled, based on tax rates enacted or substantively enacted at reporting date. Their measurement also reflects the manner in which management expects to recover or settle the carrying amount of the related asset or liability. Deferred tax assets relating to temporary differences and unused tax losses are recognised only to the extent that it is probable that future taxable profit will be available against which the benefits of the deferred tax asset can be utilised. Deferred tax assets and liabilities are offset where a legally enforceable right of set-off exists, the deferred tax assets and liabilities relate to income taxes levied by the same taxation authority on either the same taxable entity or different taxable entities where it is intended that net settlement or simultaneous realisation and settlement of the respective asset and liability will occur in future periods in which significant amounts of deferred tax assets or liabilities are expected to be recovered or settled. Inventories AASB (a) Inventories are measured at the lower of cost and net realisable value. The cost of manufactured products includes direct materials, direct labour and an appropriate portion of variable and fixed overheads. Overheads are applied on the basis of normal operating capacity. Costs are assigned on the basis of weighted average costs. Net realisable value represents the estimated selling price for inventories less all estimated costs of completion and costs necessary to make the sale. Property, plant and equipment AASB (a)-(c) Each class of property, plant and equipment is carried at cost or fair value less, where applicable, any accumulated depreciation and impairment losses. Property Freehold land and buildings are shown at their fair value (being the amount for which an asset could be exchanged between knowledgeable willing parties in an arm s length transaction). Valuations are performed whenever the Directors believe there has been a material movement in the value of the assets. Increases in the carrying amount arising on revaluation of land and buildings are credited to a revaluation reserve in equity. Decreases that offset previous increases of the same asset are charged against the related revaluation reserve directly in equity; all other decreases are charged to the statement of profit or loss and other comprehensive income Grant Thornton Australia Limited. All rights reserved. 19

24 Any accumulated depreciation at the date of revaluation is eliminated against the gross carrying amount of the asset and the net amount is restated to the revalued amount of the asset. Plant and equipment Plant and equipment are measured at cost less depreciation and impairment losses. The cost of fixed assets constructed within the Company includes the cost of materials, direct labour, borrowing costs and an appropriate proportion of fixed and variable overheads. Subsequent costs are included in the asset s carrying amount or recognised as a separate asset, as appropriate, only when it is probable that future economic benefits associated with the item will flow to the Company and the cost of the item can be measured reliably. All other repairs and maintenance are charged to the statement of profit or loss and other comprehensive income during the financial period in which they are incurred. Depreciation The depreciable amount of all fixed assets including building and capitalised leased assets, but excluding freehold land, is depreciated on a straight line basis over their useful lives to the Company commencing from the time the asset is held ready for use. Leased assets and leasehold improvements are depreciated over the shorter of either the unexpired period of the lease or the estimated useful lives of the assets. The depreciation rates used for each class of depreciable assets are: Class of fixed asset Depreciation rate Buildings: 2% Leasehold improvements: 10%-33% Plant and equipment: 5%-15% Leased plant and equipment: 10% The assets residual values and useful lives are reviewed, and adjusted if appropriate, at each reporting period date. An asset s carrying amount is written down immediately to its recoverable amount if the asset s carrying amount is greater than its estimated recoverable amount. Gains and losses on disposals are determined by comparing proceeds with the carrying amount. These gains or losses are included in the statement of profit or loss and other comprehensive income. When revalued assets are sold, amounts included in the revaluation reserve relating to that asset are transferred to retained earnings. Leases Leases of fixed assets where substantially all the risks and benefits incidental to the ownership of the asset, but not the legal ownership, are transferred to entities in the Company are classified as finance leases. Finance leases are capitalised by recording an asset and a liability at the lower of the amounts equal to the fair value of the leased property or the present value of the minimum lease payments, including any guaranteed residual values. Lease payments are allocated between the reduction of the lease liability and the lease interest expense for the period. Leased assets are depreciated on a straight-line basis over the shorter of their estimated useful lives or the lease term Grant Thornton Australia Limited. All rights reserved. 20

25 Lease payments for operating leases, where substantially all the risks and benefits remain with the lessor, are charged as expenses in the periods in which they are incurred. Lease incentives under operating leases are recognised as a liability and amortised on a straight-line basis over the life of the lease term. Financial Instruments Recognition, initial measurement and derecognition AASB 7.21 AASB AASB (b) AASB (b) AASB AASB Financial assets and financial liabilities are recognised when the Group becomes a party to the contractual provisions of the financial instrument, and are measured initially at fair value adjusted by transactions costs, except for those carried at fair value through profit or loss, which are measured initially at fair value. Subsequent measurement of financial assets and financial liabilities are described below. Financial assets are derecognised when the contractual rights to the cash flows from the financial asset expire, or when the financial asset and all substantial risks and rewards are transferred. A financial liability is derecognised when it is extinguished, discharged, cancelled or expires. Classification and subsequent measurement of financial assets AASB (a) AASB AASB AASB Except for those trade receivables that do not contain a significant financing component and are measured at the transaction price in accordance with AASB 15, all financial assets are initially measured at fair value adjusted for transaction costs (where applicable) For the purpose of subsequent measurement, financial assets other than those designated and effective as hedging instruments are classified into amortised costs. All income and expenses relating to financial assets that are recognised in profit or loss are presented within finance costs, finance income or other financial items, except for impairment of trade receivables which is presented within other expenses. AASB Classifications are determined by both: The entities business model for managing the financial asset The contractual cash flow characteristics of the financial assets AASB 7.20(a) All income and expenses relating to financial assets that are recognised in profit or loss are presented within finance costs, finance income or other financial items, except for impairment of trade receivables, which is presented within other expenses. Subsequent measurement financial assets Financial assets at amortised cost AASB Financial assets are measured at amortised cost if the assets meet the following conditions (and are not designated as FVPL): they are held within a business model whose objective is to hold the financial assets and collect its contractual cash flows the contractual terms of the financial assets give rise to cash flows that are solely payments of principal and interest on the principal amount outstanding After initial recognition, these are measured at amortised cost using the effective interest method. Discounting is omitted where the effect of discounting is immaterial. The Group s cash and cash equivalents, trade and most other receivables fall into this category of financial instruments Grant Thornton Australia Limited. All rights reserved. 21

26 Impairment of Financial assets AASB AASB 9 s impairment requirements use more forward looking information to recognize expected credit losses - the expected credit losses (ECL) model. Instruments within the scope of the new requirements included loans and other debt-type financial assets measured at amortised cost and FVOCI, trade receivables, contract assets recognised and measured under AASB 15 and loan commitments and some financial guarantee contracts (for the issuer) that are not measured at fair value through profit or loss. The Group considers a broader range of information when assessing credit risk and measuring expected credit losses, including past events, current conditions, reasonable and supportable forecasts that affect the expected collectability of the future cash flows of the instrument. In applying this forward-looking approach, a distinction is made between: financial instruments that have not deteriorated significantly in credit quality since initial recognition or that have low credit risk ( Stage 1 ) and financial instruments that have deteriorated significantly in credit quality since initial recognition and whose credit risk is not low ( Stage 2 ). Stage 3 would cover financial assets that have objective evidence of impairment at the reporting date. 12-month expected credit losses are recognised for the first category while lifetime expected credit losses are recognised for the second category. Measurement of the expected credit losses is determined by a probability-weighted estimate of credit losses over the expected life of the financial instrument. Trade and other receivables and contract assets AASB AASB 9.B The Group makes use of a simplified approach in accounting for trade and other receivables as well as contract assets and records the loss allowance at the amount equal to the expected lifetime credit losses. In using this practical expedient, the Group uses its historical experience, external indicators and forward-looking information to calculate the expected credit losses using a provision matrix. The Group assess impairment of trade receivables on a collective basis as they possess credit risk characteristics based on the days past due. The Group allows 1% for amounts that are 30 to 60 days past due, 1.5% for amounts that are between 60 and 90 days past due and writes off fully any amounts that are more than 90 days past due. Classification and measurement of financial liabilities As the accounting for financial liabilities remains largely unchanged from AASB 139, the Group s financial liabilities were not impacted by the adoption of AASB 9. However, for completeness, the accounting policy is disclosed below. The Group s financial liabilities include borrowings, trade and other payables and derivative financial instruments. AASB AASB 9.B AASB AASB AASB Financial liabilities are initially measured at fair value, and, where applicable, adjusted for transaction costs unless the Group designated a financial liability at fair value through profit or loss. Subsequently, financial liabilities are measured at amortised cost using the effective interest method except for derivatives and financial liabilities designated at FVPL, which are carried subsequently at fair value with gains or losses recognised in profit or loss (other than derivative financial instruments that are designated and effective as hedging instruments). All interest-related charges and, if applicable, changes in an instrument s fair value that are reported in profit or loss are included within finance costs or finance income Grant Thornton Australia Limited. All rights reserved. 22