Fundamental Accounting

2000 words

Harvard Referencing

ACC102 Accounting 1B

individual Assignment

Total Mark: 100 marks (20%)

General Rules and Requirements:

· This assignment is weighted to 20%

· Must be confined to 2,000 words.

· Any list of the references actually cited must be included in your assignment paper.

· Font type should be Times New Roman (size 12), paragraph spacing should be equal to 1.5.

· An electronic copy of the assignment must be submitted via Turn-it-in (the link is available on Moodle)

Similarity rate must be lower than 20%, between 20%-40%, you will receive penalty on your report, higher than 40%, you will fail your report immediately.

No excuses including medical certificate will be accepted.

Good luck!

Part A (50 marks)

Refer to the consolidated financial statements and notes in the 2017 financial report of Wesfarmers on its website,

http://www.wesfarmers.com.au/docs/default-source/reports/j000901-ar17_interactive_final ?sfvrsn=4

and answer the following questions:

1. Have the current liabilities of Wesfarmers increased or decreased over the year? By how much? What classes of liabilities are recorded under the classification “Current Liabilities”?

2. What are the major liabilities of Wesfarmers at the end of the financial year?

3. What items are included under the heading ‘Provisions’ in the ‘Current Liabilities’ section of the statement of financial position (balance sheet)? Explain the nature of these items. Do these satisfy the definition of provisions as contained in IAS37/AASB137? By how much have liabilities for employee benefits increased over the year?

4. How much cash has been raised by interest-bearing loans in the most recent financial year? How much of such loans has been repaid? How do these amounts compare with the previous year?

5. Determine whether any of the non-current liabilities are secured.

6. Are there any non-current provisions? If so, what, in very general terms, do these represent?

Part B (50 marks)

Refer to the 2017 annual report of Woolworth on its website, and answer the following questions using the consolidated income statement and balance sheet/ statement of financial position and notes to the consolidated financial statements.

1. The Woolworth income statement shows a deduction (in brackets) for income tax expense. Would this expense item be seen in the income statement of a partnership? Explain your answer.

2. In the statement of changes in equity regarding retained earnings, how is the total profit available appropriated? How does the allocation of the total profit available for appropriation in a partnership differ from that shown for Woolworth Limited? Explain the reasons for any differences.

3. Refer to the balance sheet (statement of financial position) of Woolworth and the note titled ‘issued capital’. How do these differ from that of a typical partnership? Explain.

4. Woolworth is required to produce a statement of cash flows (cash flow statement) and include this in its annual financial statements. Would the typical partnership be required to prepare such a statement? Why or why not? Would a typical partnership prepare such a statement? Explain.

Delivering value today and tomorrow
2017 Annual Report
W
esfarm
ers 2017 A
n
nu
al R
eport

About Wesfarmers
From its origins in 1914 as a Western
Australian farmers’ cooperative,
Wesfarmers has grown into one of
Australia’s largest listed companies.
With headquarters in Western Australia,
its diverse business operations
cover: supermarkets, liquor, hotels
and convenience stores; home
improvement; department stores;
offi ce supplies; and an Industrials
division with businesses in chemicals,
energy and fertilisers, industrial and
safety products and coal. Wesfarmers
is Australia’s largest private sector
employer with around 223,000
employees (including more than 4,200
Indigenous team members) and has
a shareholder base of approximately
515,000.
About this report
This annual report is a summary
of Wesfarmers and its subsidiary
companies’ operations, activities and
fi nancial position as at 30 June 2017. In
this report references to ‘Wesfarmers’,
‘the company’, ‘the Group’, ‘we’, ‘us’ and
‘our’ refer to Wesfarmers Limited (ABN
28 008 984 049) unless otherwise stated.
References in this report to a ‘year’
are to the fi nancial year ended
30 June 2017 unless otherwise stated.
All dollar fi gures are expressed in
Australian dollars (AUD) unless
otherwise stated.
All references to ‘Indigenous’ people
are intended to include Aboriginal
and/or Torres Strait Islander people.
Wesfarmers is committed to reducing
the environmental footprint associated
with the production of the annual
report and printed copies are only
posted to shareholders who have
elected to receive a printed copy. This
report is printed on environmentally
responsible paper manufactured under
ISO 14001 environmental standards.
The primary objective of
Wesfarmers is to provide
a satisfactory return to its
shareholders.
Contents
Operating and
fi nancial review
Sustainability
GovernanceOverview
12 Operating and financial review
22 Retail businesses
22 Coles
28 Home Improvement
34 Department Stores
36 – Kmart
37 – Target
40 Officeworks
44 Industrials
46 – Chemicals, Energy and Fertilisers
48 – Industrial and Safety
50 – Resources
52 Other activities
53 Sustainability
62 Board of directors
64 Corporate Governance Overview
2 The year in review
4 Chairman’s message
6 Managing Director’s report
8 Performance overview
10 Executive Leadership Team Directors’ report
Financial statements
Signed reports
Shareholder and
ASX information
68 Directors’ report
73 – Remuneration report
93 Financial statements
99 Notes to the financial statements
139 Directors’ declaration
140 Independent auditor’s report
145 Annual statement of coal resources and reserves
148 Shareholder information
149 Five-year financial history
150 Investor information
151 Corporate directory
152 Wesfarmers brands
Wesfarmers 2017 Annual Report 9
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fin
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1 The 2016 earnings before interest and tax for Department Stores includes $145 million of restructuring costs and provisions to reset the Target business, but
excludes the non-cash impairment of $1,266 million.
2 The 2016 earnings before interest and tax for Industrials excludes the $850 million non-cash impairment of Curragh.
COLES 2017 2016
Revenue $m 39,217 39,242
Earnings before interest and tax $m 1,609 1,860
Segment assets $m 21,140 22,122
Segment liabilities $m 4,245 4,273
Capital employed (R12) $m 16,586 16,541
Return on capital employed (R12) % 9.7 11.2
HOME IMPROVEMENT 2017 2016
Revenue $m 13,586 11,571
Earnings before interest and tax $m 1,245 1,214
Segment assets $m 6,612 6,620
Segment liabilities $m 2,227 2,186
Capital employed (R12) $m 4,110 3,599
Return on capital employed (R12) % 30.3 33.7
INDUSTRIALS 2017 20162
Revenue $m 5,161 4,672
Earnings before interest and tax $m 915 47
Segment assets $m 4,229 4,220
Segment liabilities $m 1,125 1,221
Capital employed (R12) $m 3,393 4,244
Return on capital employed (R12) % 27.0 1.1
OFFICEWORKS 2017 2016
Revenue $m 1,964 1,851
Earnings before interest and tax $m 144 134
Segment assets $m 1,401 1,379
Segment liabilities $m 488 416
Capital employed (R12) $m 980 994
Return on capital employed (R12) % 14.7 13.5
DEPARTMENT STORES 2017 20161
Revenue $m 8,528 8,646
Earnings before interest and tax $m 543 275
Segment assets $m 3,928 3,970
Segment liabilities $m 1,423 1,336
Capital employed (R12) $m 2,253 3,629
Return on capital employed (R12) % 24.1 7.6
Divisional performance
It was pleasing to report a record level of earnings and operating
cash fl ows and a strong increase in return on equity, demonstrating
the strength of the Group’s conglomerate structure and focus on
cash generation and capital effi ciency.

Wesfarmers 2017 Annual Report 3
Terry Bowen leaves
Wesfarmers in great
fi nancial shape, with a
strong balance sheet and
record cash fl ows. p12
Industrials had a strong
recovery in earnings. p44
Offi ceworks
continues to
drive growth and
productivity. p40
$2.1b
GOVERNMENT TA XES
AND ROYALTIES
p8
Our suppliers
received $46.4b.
p8
Sustainability
matters
Understanding and
managing the ways we
impact our community
and the environment is
important to us. p53
Coles continued to invest in
value, quality and service. p22
We employ around 223,000
people and paid $8.7b in
salaries, wages and other
benefi ts. p8
Wesfarmers 2017 Annual Report2
Overview
Bunnings United Kingdom
and Ireland opened four
pilot stores during the year.
p28
In 2017 Rob Scott will
become Wesfarmers’ eighth
Managing Director. p5
Our community
contributions exceeded
$130m. p60
DIVIDENDS
PER SHARE
p8
Richard Goyder
reflects on his
time as Managing
Director. p6
Kmart growth
Kmart delivered another year of
strong earnings growth. p36
Wesfarmers is a special
company. I often
describe it as fi nancially
focused with a heart.
We are clear on our
objectives of providing
our shareholders with
a satisfactory return,
knowing we can
only do that through
creating value for all our
stakeholders.
The year in review
Delivering value today and tomorrow
$2.23
Wesfarmers 2017 Annual Report 9
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Wesfarmers 2017 Annual Report4
Overview
On a statutory reporting basis,
Wesfarmers recorded a substantial
increase in net profi t for the 2017
fi nancial year compared to that
reported in the 2016 fi nancial
year when profi t was reduced by
impairment charges in Curragh
and Target, as well as signifi cant
restructuring costs in Target.
Excluding those signifi cant
items, underlying net profi t after
tax increased 22.1 per cent to
$2,873 million. Earnings per share
increased 21.6 per cent to a record
$2.55 and return on equity rose from
9.6 per cent to 12.4 per cent.
The directors declared a fully-franked
fi nal dividend of $1.20 per share,
lifting the full-year dividend per
share to $2.23 from $1.86 in 2016.
The company’s results for the year
illustrated the advantages of its
conglomerate structure. Increases in
earnings from the Industrial businesses,
Kmart and Bunnings in Australia and
New Zealand as well as reduced losses
in Target, more than off set the fall in
profi ts in Coles supermarkets and losses
in the United Kingdom and Ireland
home improvement business.
The focus of management and the
Board continues to be on providing
a superior return to shareholders
over the long term. At times this can
mean sacrifi cing short-term profi ts
to support our longer term business
growth; the Coles business today
provides a good example of that.
Chairman’s
message
I am pleased to report on
another successful year for
your company.
— MICHAEL CHANEY AO
CH A IR M A N
Wesfarmers 2017 Annual Report 5
Competition is strong across all of our
markets, with new players entering the
fi eld and new products and processes
challenging the status quo; but that has
always been the case. The pace of change
may be faster today but that simply
highlights the need to keep innovating.
This, I think, has been a strength of
Wesfarmers since it listed in 1984.
In that context it is instructive to
consider the growth of the company
over those 33 years, when its market
value has increased 600-fold, from
$80 million on listing to $48 billion
today. During that period, $22.3 billion
of net new equity has been raised and
$23.3 billion of dividends have been
paid to shareholders, meaning that
the whole $48 billion of increased
shareholder value has come from
business growth.
The task, of course, is to continue that
record of success but I believe we have
the management team, culture and
systems to achieve that.
Several of the challenges facing all
companies doing business in Australia
today occur at the government level. The
increasing tendency of governments to
adopt populist policies counts against
productive economic outcomes.
Examples of this include the
recent changes to Section 46 of the
Competition and Consumer Act and
to the 457 visa regulations. Subsequent
amendments to the original form of
the latter are welcome but the tighter
rules still have the potential to deprive
Australia of the skills it badly needs to
operate eff ectively.
A second concerning issue is the
diffi culty the Federal Government has
in passing legislation in the absence
of a Senate majority. Resolution of this
legislation gridlock requires the Labor
Opposition and minor parties to put
aside considerations of short-term
political interest in the interest of
national prosperity.
A third issue encumbering Australian
business is the very restrictive
workplace relations system under
which we operate.
MICHAEL CHANEY AO
Chairman
The current system is instead serving as
a deterrent to the enterprise bargaining
process, working against the interests
of employers, employees and unions
in seeking to provide fl exible and
appropriate terms of employment. The
uncertainty created by decisions of
the Fair Work Commission in the retail
sector operates as a disincentive to
bargaining and a barrier to building the
fl exibility that would allow businesses
to meet the needs of consumers.
A fourth issue is the increasingly
uncompetitive corporate tax rate
prevailing in Australia. Attempts by
the Federal Government to reduce the
rate to 25 per cent for all companies – a
reduction that would undoubtedly
have resulted in increased employment
and economic activity – were opposed
by Labor and then watered down in
negotiation with the minor parties to the
point where the eff ect will be minimal.
A fi nal issue is the unnecessary
complexity associated with doing
business across Australia through lack
of uniformity in State-based legislation.
For instance, there are widespread
inconsistencies in retail trading laws
across and within States and Territories,
including diff erences in extended
weekday trading hours, Sunday trading,
public holiday trading and restricted
trading days, which may or may not
relate to public holidays. This is further
complicated by additional layers of
legislated retail restrictions depending
on the maximum number of employees
at any one time, selling fl oor size and
type of goods sold.
These legislative diff erences add
signifi cant additional cost and
loss of productivity for businesses,
cause customer inconvenience
and confusion, and impact jobs
and investment. These impacts
are becoming acute as consumers
increasingly purchase products online
at any time with this trading exempt
from the restrictions applying to bricks
and mortar stores.
Succession
The end of the 2017 calendar year sees
major change in senior management
at Wesfarmers.
In November, Rob Scott will succeed
Richard Goyder as Group Managing
Director and Chief Executive Offi cer;
and Anthony Gianotti will succeed
Terry Bowen as Group Chief Financial
Offi cer. The directors are pleased that,
as has been the case historically, these
critical appointments have been able
to be made internally, with people
who understand the company’s values
and culture.
Richard Goyder has been an
outstanding chief executive over his
12-year term in that role. The fact that
the company has outperformed the
general market over the past decade,
in the face of the global fi nancial
crisis occurring soon after the major
acquisition of the Coles Group, is due
in no small part to Richard’s personal
values, his calm in the face of challenge,
his focus on performance and his ability
to inspire his people. He leaves with our
sincere thanks and appreciation.
Terry Bowen has been described
elsewhere as one of Australia’s best chief
fi nancial offi cers. His attention to detail,
in-depth knowledge of our businesses
and outstanding work ethic justify that
accolade. Terry leaves Wesfarmers in
great fi nancial shape, with strong cash
fl ows and the balance sheet potential for
signifi cant new investment.
The directors are confi dent that
Rob Scott, Anthony Gianotti and
the new senior divisional appointees
following Rob and Anthony’s
promotions are well qualifi ed to lead
the company forward.
Outlook
With a strong balance sheet,
shareholder-focused culture and very
capable people, the Board is confi dent
that Wesfarmers can continue to
provide superior shareholder returns.
We acknowledge the eff orts of our
223,000 employees and thank them for
their dedication to the company.
Wesfarmers 2017 Annual Report 9
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Wesfarmers 2017 Annual Report6
Overview
A lot of work goes into ensuring that
our balance sheet is strong and has
capacity to deal with external shocks
and take advantage of opportunities
as they arise. It can be an underrated
asset, but we are very focused on it.
Operationally, we are generally happy
with each business in the Group. Coles
is trading through a challenging period
in a competitive market where we have
had to invest in value and service. We
are pleased that we have been able to
grow customer numbers, transactions
and sales, and excited about a number
of initiatives at Coles which will lead
to even better products and services in
the years ahead.
Pleasingly, our liquor business grew
through the year in both revenue
and earnings. While fuel volumes
fell, our convenience stores were
able to grow sales.
Bunnings Australia and New Zealand
continued its stellar run of growth.
This is a wonderful business for
Wesfarmers to own and we are excited
with the opportunities to grow into
the future. Bunnings’ investment in
the United Kingdom and Ireland is in
the early days of an ambitious plan
to rollout a strong network of stores
through the conversion of Homebase
stores. We have made good progress on
the operational aspects of our plans,
with our new Bunnings-branded stores
performing well.
Managing
Director’s
report
We were pleased to report a
signifi cant increase in our
earnings in the 2016/17
fi nancial year through
improvements in our retail
and industrial businesses.
Cash generation was very
strong refl ecting our culture
of focusing on return
on capital in each of our
businesses.
— RICHARD GOYDER AO
M A NAGING DIR ECTOR
Wesfarmers 2017 Annual Report 7
John Gillam stepped down from
his role as Managing Director of
the division late last year after around
11 years, marked by strong growth and
the building of Bunnings as one of the
most respected brands in Australia.
Offi ceworks had another strong year,
notwithstanding some distractions
as we looked to see if there was
an opportunity to realise value for
shareholders.
Kmart and Target combined increased
earnings and we continue to optimise
property, procurement, ethical
sourcing and other activities between
both businesses. Kmart is in a very
strong position to continue growing
as customers increasingly discover
the great value in its stores. Target
improved performance as the cost
base was appropriately restructured.
We are very pleased with the
performance of our industrial
businesses. Our Chemicals, Energy
and Fertilisers business continues to
expand and deliver strong returns.
The Industrial and Safety business
also delivered a good improvement
in earnings through a strong focus on
our customers, and on new markets.
Our Resources business recorded a
signifi cant increase in earnings on
the back of higher export coal prices,
and improvements in our operating
performance and productivity.
As this is my last chance through
the medium of the annual report to
communicate with shareholders, I
wanted to refl ect on my 12 years as
CEO, and 15 years on the Wesfarmers
Board.
Wesfarmers is a special company. I
often describe it as fi nancially focused
with a heart. We are clear on our
objective of providing our shareholders
with a satisfactory return, knowing we
can only do that through creating value
for all our stakeholders.
Financial performance is the
foundation which then enables us to
grow, provide opportunities, and invest
in the people and communities with
whom we deal.
We have a great set of assets which
collectively welcome more than
20 million Australians each week
through our doors.
You will see elsewhere in this report
just how much value we create in terms
of payments to our 223,000 employees,
suppliers, government, community
contributions and, of course, our
shareholders. Built on the foundation
of fi nancial performance, we care
about our reputation and look to make
decisions through the lens of what
the right thing to do for Wesfarmers is.
The challenge every day in
Wesfarmers is to innovate, create
new opportunities, and look to take
appropriate risk in order to meet
competitive threats, as we always have.
As the Chairman points out in his
report, the economy will be better
if government and policymakers
encourage business to do that and
employ more people – one of my
biggest frustrations is that we still deal
with regulations which are designed
to stop us growing, and protect others
from competition, at a signifi cant cost
to our customers and productivity.
There is a need and a place for
good regulation but our economy
and community are harmed when
regulation is introduced or retained
simply because of political pressures.
I have been very fortunate to work
at Wesfarmers where the Board
consistently takes a long-term
view, looks through cycles, and
accepts that mistakes happen. Each
of the Chairs during my time as CEO,
Trevor Eastwood, Bob Every and
Michael Chaney, have been excellent
to work with and supportive, as have
all the directors I have served with.
At the end of the day, it is the people
at Wesfarmers who drive competitive
advantage and I have been fortunate
to work with wonderful people. My
sincere thanks to all those on the
leadership team for their support and
commitment. I would particularly like to
acknowledge Terry Bowen’s outstanding
contribution as Finance Director since
2009. Terry has played a very signifi cant
role at Wesfarmers and we wish him well
as he moves onto other challenges.
Looking forward, Rob Scott and
Anthony Gianotti have each had
exceptional careers at Wesfarmers, and
will, in my view, be outstanding leaders.
Finally, thanks!
Thank you to:
– our shareholders for your support
– our wonderful employees
– the Board, my senior management
colleagues, and brilliant executive
assistants
– my loving family, and my best mate
and partner Janine who took on the
role as chief supporter, critic, carer
and also wife with unbelievable
energy and passion.
RICHARD GOYDER AO
Managing Director
Wesfarmers 2017 Annual Report 9
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Wesfarmers 2017 Annual Report8
Overview
1 2016 excludes the following pre-tax (post-tax) amounts: $1,266 million ($1,249 million) non-cash impairment of Target; $850 million ($595 million) non-cash
impairment of Curragh; and $145 million ($102 million) of restructuring costs and provisions to reset Target.
2 2016 excludes pre-tax non-cash impairments of $2,116 million relating to Target ($1,266 million) and Curragh ($850 million).
Group performance
KEY FINANCIAL DATA 2017 2016
Revenue from ordinary activities $m 68,444 65,981
Earnings before interest, tax, depreciation and amortisation $m 5,668 2,642
Earnings before interest, tax, depreciation and amortisation (excluding significant items)1 $m 5,668 4,903
Depreciation and amortisation $m 1,266 1,296
Earnings before interest and tax $m 4,402 1,346
Earnings before interest and tax (excluding significant items)1 $m 4,402 3,607
Finance costs and income tax expense $m 1,529 939
Net profit after tax $m 2,873 407
Net profit after tax (excluding significant items)1 $m 2,873 2,353
Operating cash flows $m 4,226 3,365
Net capital expenditure on property, plant and equipment, and intangibles $m 1,028 1,336
Free cash flows $m 4,173 1,233
Equity dividends paid $m 1,998 2,270
Total assets $m 40,115 40,783
Net debt $m 4,809 7,103
Shareholders’ equity $m 23,941 22,949
KEY SHARE DATA
Basic earnings per share cents 254.7 36.2
Basic earnings per share (excluding significant items)1 cents 254.7 209.5
Operating cash flow per share cents 374.1 299.2
Free cash flow per share cents 369.5 109.6
Dividends per share (declared) cents 223.0 186.0
KEY RATIOS
Return on average shareholders’ equity (R12) (excluding significant items)1 % 12.4 9.6
Fixed charges cover (R12)2 times 3.1 2.7
Interest cover (R12) (cash basis)2 times 25.0 16.8
Gearing (net debt to equity) % 20.1 31.0
$6.8b Payments for rent, services and other external costs
Value
distribution
$46.4b Payments to suppliers
Wealth
creation
$ 8.7b Employees (salaries, wages and other benefits)
$2.1b Government (taxes and royalties)
$0.3b Lenders (borrowed funds)
$2.5b Shareholders (dividends)
$1.6b Reinvested in the business
Performance
overview
Creating wealth and adding value
$15.2b$68.4b
Wesfarmers 2017 Annual Report 9
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Wesfarmers 2017 Annual Report10
Overview
RICHARD GOYDER AO
Managing Director, Wesfarmers Limited
Richard was appointed Chief Executive
Offi cer and Managing Director of
Wesfarmers in 2005. He has held a
number of executive positions in
Wesfarmers, including Managing
Director of Wesfarmers Landmark
and Finance Director of Wesfarmers.
Before joining Wesfarmers in 1993,
Richard held a number of senior
positions with Tubemakers of Australia.
As announced in February 2017,
Richard will step down as Managing
Director in November 2017 after more
than 12 years in the role.
MAYA VANDEN DRIESEN
Group General Counsel, Wesfarmers Limited
Maya was appointed Group General
Counsel of Wesfarmers in January 2015.
Prior to this, Maya held a number of
senior roles in the company including
Legal Counsel – Litigation, Senior Legal
Counsel and General Manager Legal
– Litigation. Maya holds Bachelor of
Jurisprudence and Bachelor of Laws
degrees from The University of Western
Australia and was admitted to practise as
a barrister and solicitor in 1990. Prior to
joining Wesfarmers, Maya practised law
at Parker & Parker and Downings Legal.
JOHN DURKAN
Managing Director, Coles
John was appointed Managing Director
of Coles in July 2014. John joined Coles
in July 2008 as Merchandise Director
and was subsequently appointed
Chief Operating Offi cer in June 2013.
He brings a wealth of customer,
product and buying knowledge
having worked for 17 years with
Safeway Stores PLC and as the
Chief Operating Offi cer for Carphone
Warehouse in the United Kingdom.
ANTHONY GIANOTTI
Deputy Chief Financial Offi cer,
Wesfarmers Limited
Anthony was appointed Deputy Chief
Financial Offi cer of Wesfarmers in
July 2017 and will become its Chief
Financial Offi cer on 10 November
2017. Anthony joined Wesfarmers in
2004 in Business Development and
in 2005 became Manager, Investor
Relations and Business Projects. In 2006,
he was appointed Head of Business
Development and Strategy of Wesfarmers
Insurance, then Finance Director in
2009 and Managing Director in 2013. In
August 2015, he was appointed Finance
Director of the Wesfarmers Industrials
division and its Deputy Managing
Director in February 2017.
Executive
Leadership Team
ROB SCOTT
Deputy Chief Executive Offi cer,
Wesfarmers Limited
Rob was appointed Deputy Chief
Executive Offi cer of Wesfarmers in
February 2017 and will become its
Managing Director in November 2017.
Rob joined Wesfarmers in 1993, before
moving into investment banking,
where he held various roles in Australia
and Asia. He rejoined Wesfarmers
in Business Development in 2004,
was appointed Managing Director of
Wesfarmers Insurance in 2007 and then
Finance Director of Coles in 2013. Rob
was appointed Managing Director,
Financial Services in 2014 and then
Managing Director of the Wesfarmers
Industrials division from August 2015
until August 2017.
TERRY BOWEN
Finance Director, Wesfarmers Limited
(to 4 September 2017)
Terry joined Wesfarmers in 1996
and undertook various roles with
Wesfarmers Landmark, including
Chief Financial Offi cer from 2001.
In 2003, he was appointed as Jetstar
Airways’ inaugural Chief Financial
Offi cer before rejoining Wesfarmers in
2005 as Managing Director, Wesfarmers
Industrial and Safety. Terry became
Finance Director, Coles in 2007 before
being appointed Finance Director,
Wesfarmers in 2009. Terry stepped
down as Finance Director in September
2017 after eight years in the role and
12 years on the Wesfarmers Leadership
Team. He will remain in the role
of Chief Financial Offi cer and as a
member of the Executive Leadership
Team until 10 November 2017.
Wesfarmers 2017 Annual Report 11
ALAN CARPENTER
Executive General Manager, Corporate Aff airs,
Wesfarmers Limited
Alan joined Wesfarmers as Executive
General Manager, Corporate Aff airs
in December 2009. Prior to that he
was Premier of Western Australia
from January 2006 to September 2008
and served 13 years in the Western
Australian Parliament. Alan has also
worked as a journalist with the Seven
Network and the ABC and lectured in
Australian politics at the University of
Notre Dame, Fremantle.
JENNY BRYANT
Chief Human Resources Offi cer,
Wesfarmers Limited
Jenny was appointed as Chief Human
Resources Offi cer in September 2016.
She joined Coles as Human Resources
Director in 2011, and became its
Business Development Director in
2015. Her previous work experience
encompasses Mars, Vodafone and
EMI Music in a number of global roles
where she worked in various areas,
including manufacturing, sales and
marketing and human resources.
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LINDA KENYON
Company Secretary, Wesfarmers Limited
Linda was appointed Company
Secretary of Wesfarmers in
April 2002 and is also company
secretary of a number of Wesfarmers
Group subsidiaries. Linda joined
Wesfarmers in 1987 as legal counsel
and held that position until 2000
when she was appointed Manager
of the responsible entity for the
listed BWP Trust (formerly Bunnings
Warehouse Property Trust). She is a
Fellow of the Governance Institute
of Australia.
MICHAEL SCHNEIDER
Managing Director, Bunnings Group
Managing Director, Bunnings Australia
and New Zealand
Michael was appointed Managing
Director, Bunnings Australia and
New Zealand in March 2016, following
the acquisition of the Homebase
business in the United Kingdom and
Ireland. He became Managing Director,
Bunnings Group in May 2017, and
retains responsibility for the Australian
and New Zealand businesses. Michael
joined Bunnings in 2005, and prior
to that he held a range of senior
operational, commercial and human
resource roles across regional and
national markets, both in retail and
fi nancial services.
DAVID BAXBY
Managing Director, Wesfarmers Industrials
David commenced as Managing
Director, Wesfarmers Industrials in
August 2017. Prior to this, he was
President and Chief Executive Offi cer
of international shopping transaction
processing business, Global Blue.
From 2004, David held a number
of commercial and leadership roles
within the Virgin Group, and was
Co-Chief Executive Offi cer from 2011
to 2014. Earlier in his career, David
was a Partner and Executive Director
of Goldman Sachs in both London
and Sydney. Until recently, David was
Chairman of Frontier Digital Ventures,
and a director of Virgin Australia,
Velocity Frequent Flyer, Unlockd and
Workpac Limited.
GUY RUSSO
Chief Executive Offi cer, Department Stores
Managing Director, Target
Guy joined Wesfarmers in 2008 as
Managing Director of Kmart, and was
appointed Chief Executive Offi cer
of the Department Stores division
in February 2016. Prior to this, Guy
worked for McDonald’s, beginning
his career in 1974. He was appointed
Managing Director and Chief Executive
Offi cer at McDonald’s Australia from
1999 before becoming President,
McDonald’s Greater China from 2005
to 2007. He is currently on the Board
of Guzman y Gomez and is President
of global non-profi t, OneSky, for
orphaned and at-risk children.
BACK

Wesfarmers 2017 Annual Report12
Operating and financial review
On behalf of the Board,
I’m very pleased to present
the operating and fi nancial
review of Wesfarmers for
shareholders.
Operating and
financial review
— TERRY BOWEN
FINA NCE DIR ECTOR
In presenting my last operating
and fi nancial review as Wesfarmers’
Finance Director, I would like to take
the opportunity to thank the Board,
Richard and all of the wonderful
colleagues who bring the Wesfarmers
Way to life for the benefi t of all of our
stakeholders.
Wesfarmers’ primary objective is
to deliver satisfactory returns to
shareholders through fi nancial
discipline and exceptional
management of a diversifi ed
portfolio of businesses. A key focus
of the Group is ensuring that each of
its divisions has a strong management
capability that is accountable for
strategy development and execution,
as well as day-to-day operational
performance. Each division is overseen
by a divisional board of directors or
a steering committee that includes
the Wesfarmers Managing Director
and Finance Director, and is guided
by a Group-wide operating cycle and
governance framework.
This operating and fi nancial review sets
out the Group’s objective, values, growth
enablers and strategies. It also outlines
a review of operational performance
for the 2017 fi nancial year, as well as
summarising its risks and prospects.
The 2017 fi nancial performance is also
outlined for each division, together with
its competitive environment, strategies,
risks and prospects.
The review should be read in
conjunction with the fi nancial
statements, which are presented on
pages 93 to 138 of this annual report.
Wesfarmers 2017 Annual Report
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The Wesfarmers Way
From our origins in 1914 as a Western
Australian farmers’ cooperative,
Wesfarmers has grown into one of
Australia’s largest listed companies
and private sector employers, with
more than 223,000 employees and
approximately 515,000 shareholders.
Wesfarmers’ diverse business
operations in this year’s review cover:
supermarkets; home improvement;
department stores; offi ce supplies;
chemicals, energy and fertilisers;
industrial and safety products; and
coal. Wesfarmers’ businesses operate
in Australia, New Zealand, the
United Kingdom and Ireland,
with the portfolio including some
of these countries’ leading brands.
The Wesfarmers Way is the framework
for the company’s business model and
comprises core values, growth enablers
and value-creating strategies directed
at achieving the Group’s primary
objective of providing a satisfactory
return to shareholders.
The Wesfarmers Way
CORE VALUES
OUTSTANDING
PEOPLE
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INNOVATION
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GROW
TH ENABLERS
Our objective
To provide
a satisfactory return
to shareholders
Strengthen existing
businesses through operating
excellence and satisfying
customer needs
Secure growth
opportunities
through
entrepreneurial
initiatives
Renew the portfolio through
value-adding transactions
Ensure
sustainability
through
responsible
long-term
management
VA
LU
E-C
REATING STRATEGIES
TERRY BOWEN
Finance Director (to 4 September 2017)
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Wesfarmers 2017 Annual Report14
Operating and financial review
Cash fl ow generation
Drive long-term earnings growth
Manage working capital eff ectively
Strong capital expenditure processes
Invest above the cost of capital
Financial discipline
Diversity of funding sources
Optimise funding costs
Maintain strong credit metrics
Risk management of maturities
Balance sheet strength
Improve returns on invested capital
Grow dividends over time
Eff ective capital management
Delivery of long-term
shareholder returns
Balance sheet strength
The Group endeavours to achieve a cost of capital advantage while maintaining
balance sheet strength and fl exibility in order to be able to act when
opportunities arise.
This includes maintaining access to diverse sources of funding, including bank
facilities and global bond markets, and optimising funding costs.
The Group maintains strong credit metrics, in line with a strong investment
grade credit rating, supported by good cash fl ow generation and disciplined
capital management.
Risk is managed by smoothing debt maturities over time, limiting the total
repayments in any given year.
Cash fl ow generation
In generating cash fl ow and earnings, the Group seeks to employ excellent
management teams who are empowered to drive long-term earnings growth.
This is achieved through deploying best practice principles in operational
execution and maintaining a long-term focus in regards to strategy and results.
The Group continuously looks to improve the working capital effi ciency of all
of its businesses. In addition, the Group ensures strong discipline in relation to
capital expenditure or any other investment decisions that are made.
The Group seeks to:
– continue to invest in Group businesses where capital investment opportunities exceed return requirements;
– acquire or divest businesses where doing so is estimated to increase long-term shareholder wealth; and
– manage the Group’s balance sheet to achieve an appropriate risk profi le, an optimised cost of capital and
fl exibility to take advantage of opportunities as they arise.
Approach to delivering satisfactory returns to shareholders
Long-term shareholder returns
With a focus on generating strong cash fl ows and maintaining balance sheet
strength, the Group aims to deliver satisfactory returns to shareholders
through improving returns on invested capital. As well as share price
appreciation, Wesfarmers seeks to grow dividends over time commensurate
with performance in earnings and cash fl ow. Dependent upon circumstances,
capital management decisions may also be taken from time to time where this
activity is in shareholders’ interests.
The primary objective of Wesfarmers
is to provide a satisfactory return to
shareholders. The measure used by the
Group to assess satisfactory returns
is total shareholder return (TSR) over
time. We measure our performance by
comparing Wesfarmers’ TSR against
that achieved by the broader Australian
market Index.
Performance measures
Growth in TSR relies on improving
returns from invested capital relative
to the cost of that capital and growing
the capital base at a satisfactory rate of
return on capital (ROC)1.
Our objective
1 ROC = EBIT/(working capital, fi xed assets
and investments less provisions and other
liabilities).
Given a key factor in determining
TSR performance is the movement in
Wesfarmers’ share price, which can be
aff ected by factors outside the control
of the company (including market
sentiment, business cycles, interest
rates and exchange rates), the Group
focuses on return on equity (ROE) as a
key internal performance indicator.
While ROE is recognised as a
fundamental measure of fi nancial
performance at a Group level, ROC
has been adopted as the principal
measure of business unit performance.
ROC focuses divisional businesses on
increasing earnings and/or increasing
capital productivity by managing
existing assets effi ciently, as well as
making an adequate return on any new
capital deployed.
Minimum ROC targets for each
division are set based on their pre-tax
cost of capital, while satisfactory
ROC targets are established based on
the Group’s ROE targets, which are
reviewed annually with reference to the
performance of the broader market.
Wesfarmers 2017 Annual Report
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Acquisition approach
When reviewing the acquisition of businesses
the Group considers various factors, as illustrated
in the adjacent diagram.
Importantly, in applying these fi lters the Group applies a
long-term horizon to investment decisions and remains
very disciplined in its approach to evaluation, with the
most important fi lter being whether the investment is
going to create value for shareholders over time.
Investment approach
– Capacity to act through a strong balance sheet and
focus on cash fl ow
– Flexibility through diff erent ownership models
(e.g., minority interest, full control, partnerships)
– Remain opportunistic to sector, structure and
geography
– Financially disciplined including investment
comparison to capital management alternatives
Growth enablers
A core attribute of the Wesfarmers
operating model is that each of our
businesses operates with a high degree
of autonomy. Rather than mandating
detailed strategies or implementation
plans, the Group focuses on ensuring
that the following six key enablers are
in place in our businesses, with a goal
of driving operating performance to
best practice.
Outstanding people
Wesfarmers seeks to be an employer of
choice. Attracting outstanding people
and utilising their individual talents
is the most critical element in striving
for sustainable success. Wesfarmers
recognises that while great assets and
strategies are critical, it is people who
ultimately drive outcomes.
Commercial excellence
Wesfarmers seeks to ensure that it
employs strong fi nancial discipline in
all of its decisions across the Group.
Wesfarmers has a clear bias towards
promoting strong commercial
capability across its leadership base.
Empowering culture
Wesfarmers recognises that an
empowering culture is critical to
engendering accountability for
Core values
Integrity
– Acting ethically in all dealings
Openness
– Openness and honesty in reporting,
feedback and ideas
– Accepting that mistakes will happen
from time to time and seeking to
learn from them
Accountability
– Signifi cant delegation of authority
and decision-making to divisions
– Accountability for performance
– Protecting and enhancing our
reputation
Boldness
– Strong and ready to make bold
decisions and challenge the status
quo in pursuit of growth and
sustainability
– Supporting and encouraging an
environment free of fear and blame
delivering the results agreed upon
through the Group’s corporate
planning framework. Wesfarmers uses
stretch targets in objective setting
and encourages team members to be
proactive in driving the creation of
value in their businesses.
Innovation
Wesfarmers seeks to develop a culture
that encourages innovation, and
rewards boldness and creativity.
Social responsibility
Respect for employees, customers
and suppliers and a relentless
focus on providing safe workplaces
are fundamental to the way that
Wesfarmers operates. Wesfarmers’
social responsibility extends to
maintaining high standards of ethical
conduct, environmental responsibility
and community contribution.
Robust fi nancial capacity
By maintaining a strong balance
sheet, the Group aims to provide a
competitive cost and access to capital
in order to allow the Group to act when
value-creating opportunities present
themselves.
Acquisition filters
Industry
considerations
Business
considerations
Financial
evaluations
Megatrend exposure
Industry structure
Industry scale
Competitive position
Wesfarmers fi t
Long-term investment horizon
Discipline in fi nancial projections
Risk-adjusted hurdle rates
BACK

Wesfarmers 2017 Annual Report16
Operating and financial review
Our value-creating strategies
Consistent with the Wesfarmers Way, the Group’s primary objective to provide a satisfactory return to shareholders is driven by
four overarching strategies. These are:
– strengthening existing businesses through operating excellence and satisfying customer needs;
– securing growth opportunities through entrepreneurial initiative;
– renewing the portfolio through value-adding transactions; and
– ensuring sustainability through responsible long-term management.
As outlined in the following table, each strategy is underpinned by the Group’s well-established strategic planning framework.
A key attribute of this approach is the maintenance of a long-term focus and acting sustainably in the creation of value and the
building of businesses.
At a divisional level, detailed strategies are developed specifi c to the opportunities to improve each of our individual
businesses. Divisional strategies are discussed within their respective summaries, starting on page 22.
Our strategies Our achievements Our focus for the coming years
Strengthen existing
businesses through
operating excellence
and satisfying
customer needs
– Continued to make improvements
in our customer off ers, including
reinvesting in value to drive
business growth and improving
merchandise ranges.
– Further optimised and invested
in our retail store networks and
digital channels.
– Focused on production plant
effi ciency and maintaining and
growing customer relationships in
our industrial businesses.
– Made further operational
productivity improvements
and reduced costs across our
businesses.
– Coles remains committed to implementing customer-led strategies and
delivering trusted value, quality and service. Continued investment in
value will be supported by simplifying the business end-to-end. The
division has plans to drive further improvement in fresh category sales.
Coles will also maintain a disciplined and returns-focused approach to
network expansion and capital investment, develop new channels and
services, and progress its Liquor transformation.
– Bunnings will maintain its focus on driving long-term value creation
by creating better experiences for customers and the wider community,
investing in new and existing stores, delivering greater digital reach
and strengthening the core of the business. Bunnings United Kingdom
and Ireland will focus on building strong business foundations and
establishing pilot Bunnings Warehouse stores.
– Kmart aims to grow through continued price leadership, better ranges,
store network growth and a high performance culture. The business will
continue to focus on delivering increased operational effi ciency.
– Target will continue to focus on completing the conversion to everyday
low prices, improving the quality of ranges and working capital effi ciency.
These initiatives will be supported by higher levels of direct sourcing,
improved merchandise disciplines and planning systems, and operational
simplifi cation.
– Offi ceworks will continue to deliver a unique ‘one-stop shop’ via its
‘every channel’ strategy while extending reach through new categories
and services, and drive further productivity improvements.
– Chemicals, Energy and Fertilisers (WesCEF) will continue to focus
on maintaining strong operational performance. The business is
well positioned to take advantage of value-generating opportunities
as they arise.
– Industrial and Safety will continue to improve systems and processes
to enhance supply chain effi ciency and customer service, and optimise
category management, pricing and sourcing.
– Resources will maintain a focus on cost control, productivity
improvement and capital discipline. Low-cost plant expansions and
counter-cyclical investments will be implemented where satisfactory
returns can be achieved.
Operating excellence
Wesfarmers 2017 Annual Report
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Our strategies Our achievements Our focus for the coming years
Secure growth
opportunities through
entrepreneurial
initiative
– Provided even greater value for customers
through price reinvestment of innovation-led
productivity gains.
– Continued to innovate product ranges and categories
across all businesses, providing value and quality to
customers.
– Further improved and extended channel and brand
reach in the retail portfolio, focusing on store format
innovation and the expansion of online off ers.
– Expanded customer programs, particularly the
fl ybuys loyalty program and the PowerPass off er at
Bunnings.
– Continued to better leverage data, particularly in the
retail businesses.
– Continue to reinforce innovation and boldness as
growth enablers.
– Continue to rigorously apply fi nancial disciplines
and fi nancial evaluation methodologies.
– Increase and encourage collaboration across
divisions, where appropriate.
Entrepreneurial initiative
Our strategies Our achievements Our focus for the coming years
Renew the portfolio
through value-adding
transactions
– Divested Coles’ credit card receivables and
completed a new 10-year credit card distribution
agreement with Citi, providing a solid platform for
the ongoing strong growth of Coles credit cards.
– Progressed the Resources strategic review. There is no
guarantee that this review will result in a transaction.
– Reviewed a potential initial public off ering for
Offi ceworks. Retaining the business was determined
to be in the best interests of shareholders at the time.
– Maintain a strong focus and capability to evaluate
growth opportunities where long-term shareholder
value can be created.
– Consider innovative investment approaches to
complement traditional growth models and provide
future optionality.
– Ensure a patient, disciplined and broad scanning
approach to investment opportunities is maintained.
– Apply rigorous due diligence and post-acquisition
integration processes.
– Maintain a strong balance sheet to enable the Group
to act opportunistically.
– Consider opportunities to divest assets either in full
or in part, where long-term shareholder value can
be created.
Renewing the portfolio
Our strategies Our achievements Our focus for the coming years
Ensure sustainability
through responsible
long-term management
– Signifi cantly strengthened the Group’s balance sheet.
– Further improved our safety performance.
– Maintained a very strong focus on the development
and management of our teams.
– Continued to focus on diversity in our workplaces,
with 27 per cent more self-identifi ed Indigenous
employees this year, including 1,393 new Indigenous
employees at Coles.
– Advanced our executive development, retention and
succession programs.
– Continued to actively contribute to the communities
in which we operate. In the 2017 fi nancial year, we
made community contributions, both direct and
indirect, of more than $130 million.
– Continue to foster a more inclusive work
environment, with particular focus on diversity
(gender, age and ethnicity).
– Increase the number of women in leadership
positions across the Group.
– Continue to look after the health, safety and
development of our people.
– Contribute positively to the communities in which
we operate.
– Provide appropriate governance structures to
safeguard future value creation.
– Improve the greenhouse gas effi ciency of our
operations, which reduces our own business costs
and risk, as well as contributing to climate change
mitigation.
– Reduce our waste to landfi ll intensity rate and
divert as much as possible to recycling, both in our
operations and for our customers.
Operating sustainably
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Wesfarmers 2017 Annual Report18
Operating and financial review
Year in review
activity in Target and lower capital
expenditure across the Industrials
division. Growth and refurbishment
of retail store networks which deliver
strong incremental returns on capital
were key drivers of capital expenditure.
Proceeds from disposals of $653 million
were $90 million above last year, due
to the divestment of Coles’ interest in
a number of joint venture properties
to ISPT, and the sale of land by WesCEF.
The resulting net capital expenditure
of $1,028 million was $308 million or
23.1 per cent lower than the prior year.
Free cash fl ow
Free cash fl ows of $4,173 million
were $2,940 million above last year,
refl ecting higher operating cash
fl ows, lower net capital expenditure
and proceeds of $947 million from
the divestment of Coles’ credit card
receivables. Excluding the Coles credit
card transaction, and the acquisition of
Homebase in the prior year, free cash
fl ows increased $1,328 million.
Balance sheet
The Group further strengthened
its balance sheet during the year.
Net fi nancial debt, including interest
rate swap assets, was $4,321 million
at 30 June 2017, $2,216 million below
last year.
Overview
The Group reported a record net profi t
after tax (NPAT) of $2,873 million for
the 2017 fi nancial year, an increase of
$2,466 million on the prior year which
included $1,946 million of signifi cant
items. Excluding the signifi cant items
recorded in the prior year, NPAT
increased 22.1 per cent, while earnings
per share increased 21.6 per cent to
a record $2.55 per share. Return on
equity (R12) increased to 12.4 per cent
from 9.6 per cent (excluding signifi cant
items) in the prior year.
The results achieved during the year
demonstrated the strength of the
Group’s conglomerate structure.
In a competitive environment, the
Group’s retail businesses continued
to invest in customer value, service,
stores and online, as well as improved
merchandise ranges to deliver long-
term growth and improved returns.
A strong recovery in Resources’
earnings, driven by higher coal prices
and increased metallurgical coal
production, resulted in a signifi cant
increase in earnings from the
Industrials division during the year.
Retail earnings were also above the
prior year, supported by continued
strong momentum in Bunnings
Australia and New Zealand (BANZ),
Kmart and Offi ceworks.
Divisional fi nancial performances are
outlined in pages 22 to 51.
Operating cash fl ow
The Group’s cash fl ow management
was a highlight for the year, with
operating cash fl ows increasing
$861 million to $4,226 million.
Higher operating cash fl ows mainly
refl ected earnings growth, and
improved inventory management
across the retail divisions which was
partially off set by higher working
capital requirements in the Industrials
division.
Cash realisation for the year was
102.1 per cent, an improvement from
94.9 per cent (excluding non-trading
items (NTIs)) in the prior year, which
further strengthened the Group’s
balance sheet.
Capital expenditure
The Group maintained strict disciplines
in respect to capital expenditure during
the year, with generally conservative
business cases and appropriate hurdle
rates commensurate with project risks.
Gross capital expenditure of $1,681
million was $218 million or 11.5 per cent
lower than last year, mainly due to fewer
store openings in Bunnings Australia and
New Zealand, reduced refurbishment
Net profi t after tax
$2,873m
(excluding signifi cant items)
Earnings per share
254.7 cents
(excluding signifi cant items)
Return on equity
12.4%
(excluding signifi cant items)
1 2016 excludes the following post-tax signifi cant items: $1,249 million non-cash impairment of Target; $595 million non-cash impairment of Curragh; and
$102 million of restructuring costs and provisions to reset Target.
2 2014 includes the following post-tax signifi cant items: $145 million Insurance division contribution to earnings; $939 million gain on disposal of the Insurance
division; $95 million gain on disposal of WesCEF’s interest in Air Liquide WA (ALWA); $677 million impairment of Target’s goodwill; and $66 million Coles
Liquor restructuring provision.
3,000
2,500
2,000
1,500
1,000
500
0
250
300
200
150
100
50
0 0
15
12
9
6
3
13 14 15 2017
2017 254.7
20161 209.5
2015 216.1
20142 234.6
2013 195.9
2017 12.4
20161 9.6
2015 9.8
20142 10.5
2013 8.9
2017 2,873
20161 2,353
2015 2,440
20142 2,689
2013 2,26113 14 15 2017 13 14 15 2017
Excluding signifi cant items Reported
16 16 16
Wesfarmers 2017 Annual Report
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19
Cash capital expenditure
Year ended 30 June
2017
$m
2016
$m
Coles 805 797
Home Improvement 445 538
Kmart 154 163
Target 71 129
Offi ceworks 36 40
WesCEF 44 60
Industrial and Safety 34 52
Resources 91 116
Other 1 4
Total capital expenditure 1,681 1,899
Sale of property, plant and equipment (653) (563)
Net capital expenditure 1,028 1,336
Free cash fl ow
$4,173m
0
4,000
5,000
3,000
2,000
1,000
Year ended 30 June1
2017
$m
2016
$m
Inventories 6,530 6,260
Receivables and prepayments 1,936 1,950
Payables (6,616) (6,492)
Other 410 411
Net working capital 2,260 2,129
Property, plant and equipment 9,440 9,612
Goodwill and intangibles 18,936 19,073
Other assets 622 619
Provisions and other liabilities (3,676) (3,770)
Total capital employed 27,582 27,663
Net fi nancial debt excluding
fi nancial services debt2
(4,321) (5,727)
Net tax balances 680 1,013
Total net assets 23,941 22,949
1 Balances refl ect the management balance sheet, which is based on different
classifi cation and groupings than the balance sheet in the fi nancial statements.
2 Net fi nancial debt excluding the fi nancing of the Coles credit card book and
net of cross-currency interest rate swaps and interest rate swap contracts.
Group capital employed
13 14 15 16 2017
2017 4,173
2016 1,233
2015 1,893
2014 4,178
2013 2,171
Capital employed at year-end was
$27,582 million. This was $81 million
lower than last year mainly due to sales
of property in Coles and WesCEF and
lower intangibles. Intangibles declined
due to the impact of a higher Australian
dollar on the translation of Homebase’s
intangibles and a reduction in goodwill
following the sale of Coles’ credit card
receivables. Provisions and other
liabilities fi nished lower, mainly
due to the utilisation of provisions
recognised at the time of the Homebase
acquisition and the settlement of the
Stanwell litigation.
Lower working capital outfl ows during
the year were primarily driven by
improved inventory management
across the retail businesses. These
were partially off set by an increase in
fertiliser inventory levels in WesCEF
and higher receivables in Resources
due to higher coal prices and
production volumes.
Debt management and
fi nancing
The Group’s strategy is to diversify its
funding sources, pre-fund upcoming
maturities and maintain a presence in
key markets.
In November 2016, $500 million of
domestic medium term notes were
repaid using existing cash balances
and bank facilities. In addition, over
$900 million of debt was repaid
following the completion of the
divestment of Coles’ credit card
receivables in February 2017.
Finance costs decreased 14.3 per cent
to $264 million as a result of a lower
average net debt balance, and a
46 basis point reduction in the Group’s
‘all-in’ eff ective borrowing cost to
4.04 per cent driven by active
management of debt sources. Lower
fi nance costs contributed to strong
liquidity metrics, with cash interest
cover (R12) increasing to 25.0 times and
fi xed charges cover (R12) increasing to
3.1 times.
The Group maintained strong and
stable credit ratings during the year.
Moody’s Investors Services’ rating
remained unchanged at A3 (stable)
and Standard and Poor’s remained
unchanged at A- (negative). In
September 2017, Standard and Poor’s
revised the Group’s outlook from
negative to stable.
BACK

Wesfarmers 2017 Annual Report20
Operating and financial review
1 2014 includes a 10 cents per share special
‘Centenary’ dividend.
Dividends per share
223 cents
250
200
150
100
50
0
13 14 15 16 2017
2017 223
2016 186
2015 200
20141 200
2013 180
BANK BILATERALS 25%
US BONDS 15%
EURO BONDS 33%
DOMESTIC BONDS 27%
1 As at 30 June 2017.
Debt sources1
500
400
300
200
100
0
Our approach
to sustainability
Wesfarmers will only be sustainable
as a corporation if, in addition to
its continued fi nancial success, it
adequately addresses a range of other
issues which are signifi cant in their
own right and ultimately infl uence
fi nancial outcomes.
Each business has identifi ed the key
issues most relevant to its operations
within their summaries as detailed later
in this operating and fi nancial review.
Wesfarmers supports the
recommendations of the Task Force on
Climate-related Financial Disclosures.
Our annual risk review process has
identifi ed climate change as an
emerging risk and our businesses are
taking steps to actively consider and
monitor its potential impact.
Further information on our
sustainability performance can
also be found on pages 53 to 61
of this annual report.
Net fi nancial debt
reduced $2,216 million
to $4,321 million.
Debt maturity profi le1 ($m)
BANK FACILITIES
CAPITAL MARKETS
CASH AT BANK
AND ON DEPOSIT
1500
500
1000
0
(500)
(1000)
191817 20 21 22 23
1 As at 30 June 2017.
Finance costs ($m) and weighted
average cost of debt (%)
FINANCE COSTS (LHS)
WEIGHTED AVERAGE COST OF DEBT (RHS)
8
9
6
4
2
0
13 14 1615 17
TSR: Wesfarmers and ASX 200
WESFARMERS LIMITED TSR INDEX1
ASX 200 ACCUMULATION INDEX
1 Assumes 100 per cent dividend reinvestment
on the ex-dividend date, and full participation
in capital management initiatives (e.g., rights
issues and share buybacks).
Source: Bloomberg.
250
200
150
100
0
50
12090807 14 17
Dividends
A key component of total shareholder
return is the dividends paid to
shareholders.
The Group’s dividend policy considers
current earnings and cash fl ows,
available franking credits and targeted
credit metrics.
In line with this year’s record earnings
and strong cash fl ow performance, the
Board declared a fully-franked fi nal
ordinary dividend of 120 cents per
share, taking the full-year ordinary
dividend to 223 cents per share.
The fi nal dividend will be paid on
28 September 2017, to shareholders on
the company’s register on the record
date for the fi nal dividend.
Given the preference of many
shareholders to receive dividends in
the form of equity, the directors have
decided to continue the operation of the
Dividend Investment Plan (the ‘Plan’).
The allocation price for shares issued
under the Plan will be calculated as the
average of the daily volume weighted
average price of Wesfarmers shares
on each of the 15 consecutive trading
days from and including the third
trading day after the record date, being
28 August 2017 to 15 September 2017.
The last date for receipt of applications
to participate in, or to cease or
vary participation in the Plan, was
24 August 2017. No discount will
apply to the allocation price and the
Plan will not be underwritten. Shares
to be allocated under the Plan will
be transferred to participants on
28 September 2017. Given the Group’s
strong cash fl ow performance for the
year, and strong credit metrics, any
shares to be issued under the Plan will
be acquired on-market and transferred
to participants.
131110 15 16
Wesfarmers 2017 Annual Report
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21
Prospects
Given Wesfarmers’ diverse business
operations and strong balance sheet,
the Group remains generally optimistic
in its outlook. Across the Group’s retail
portfolio, continued growth in earnings
is expected to be driven by ongoing
improvements in merchandising and
service, further enhancements to the
customer experience both in stores
and online, and investments in value
supported by operational effi ciencies.
The Group’s Industrials businesses
will continue to focus on operational
effi ciencies and diversifi cation of
revenues.
In a very competitive environment,
sales and margin pressures in Coles
are expected to persist. Within this
environment, Coles will focus on plans
to further enhance the quality of its
fresh off er, and improve merchandising
and availability, while continuing to
drive operational effi ciencies to support
investments in value and service. Coles
will also seek to grow new channels and
services, while continuing to improve its
store network.
Within Home Improvement, the outlook
for Bunnings Australia and New Zealand
is particularly positive given current
trading momentum across all regions
and categories, and the business’
established market position. Bunnings
Australia and New Zealand has a broad
strategic agenda to drive further growth
by creating better experiences for
customers, strengthening the core of the
business and achieving greater brand
reach, both physically and digitally. In
Bunnings United Kingdom and Ireland,
while store execution in Homebase
is expected to improve, trading is
anticipated to remain challenging,
particularly in the short term, as
customers continue to adjust to the new
off er. Disruption will also continue as
the business progressively transitions
to Bunnings and the store network is
optimised over time.
Within Department Stores, Kmart will
continue to drive growth by delivering
better products at lower prices, and
investing in its store network, while
Target will progress its transformation
plan to deliver further improvements in
its performance.
Offi ceworks will continue to implement
its ‘every channel’ strategy to drive
growth both in stores and online.
WesCEF’s earnings remain subject
to international commodity prices,
exchange rates and seasonal outcomes.
Earnings for the Chemicals business will
be aff ected by an anticipated oversupply
in the Western Australian explosive grade
ammonium nitrate market, although
good work has been undertaken to
secure new contracts for ammonium
nitrate and emulsion.
Following its recent strategic reset,
Industrial and Safety is well positioned
to grow across diff erent market
sectors and drive additional operating
effi ciencies.
The Resources business will remain
focused on strong operational
productivity and cost control in an
environment where coal prices are
expected to remain volatile and higher
obligations to Stanwell are expected to
negatively aff ect the results for the 2018
fi nancial year.
The Group’s cash generative portfolio,
capital disciplines and strong balance
sheet position it well to take advantage
of growth opportunities, if and when
they arise. Wesfarmers will also continue
to evaluate opportunities to create
shareholder value through the proactive
management of its portfolio, including
through the current strategic review
of the Resources business. There is no
certainty that this review will result in
a transaction and an update will be
provided to the market if and when
appropriate.
Risks
Wesfarmers recognises the
importance of, and is committed to,
the identifi cation, monitoring and
management of material risks associated
with its activities across the Group.
The following information sets out
the major Group-wide risks. These are
not in any particular order and do not
include generic risks such as changes
to macroeconomic conditions aff ecting
business and households in Australia,
which would aff ect all companies with
a large domestic presence and which
could have a material aff ect on the future
performance of the Group.
Further information on risk
management, including policies,
responsibility and certifi cation,
can be found on page 67 of this
annual report and in the corporate
governance section of the company’s
website at www.wesfarmers.com.au/cg
Strategic
– Increased competition
– Ineff ective execution of strategy
– Loss of key management personnel
– Damage or dilution to Wesfarmers’
brands
– Digital disruption to industry
structures
Operational
– Loss of critical supply inputs or
infrastructure, including IT systems
– Loss of data security and integrity
– Business interruption arising from
industrial disputes, work stoppages
and accidents
– Risks inherent in distribution and
sale of products
– Climate change
– Ethical sourcing and human rights
Regulatory
– Non-compliance with applicable
laws, regulations and standards
– Adverse regulatory or legislative
change
Financial
– Currency volatility
– Adverse commodity price
movements
– Reduced access to funding
BACK

Wesfarmers 2017 Annual Report22
Operating and financial review — Retail businesses
Coles opened its fi rst store in Collingwood,
Melbourne in 1914, and has grown into
an iconic Australian retailer. Today, it
operates Coles Supermarkets, Coles Express,
Liquorland, Vintage Cellars, First Choice
Liquor, Liquor Market, Spirit Hotels, Coles
Financial Services and Coles Online.
Coles
Clockwise from top: Coles team members
Lovell Penalba, Terry Patterson and
Karen Collyer.
Wesfarmers 2017 Annual Report 23
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— JOHN DURKAN
MANAGING DIRECTOR, COLES
Coles remains committed to being a
customer-led business and continually
providing better value, quality and service
to its customers across Australia.
At a time when Australian household
budgets remain under pressure, Coles will
continue to lower the cost of the weekly
shop for customers to build on its trusted
value position. In addition to lowering
prices for customers, Coles will continue
to invest in improvements to fresh food
quality, in-store availability, customer
service and the store network. Over time,
these investments in the customer off er
are expected to be funded by simplicity
benefi ts.
Coles has commenced the rollout of a
simplicity program which will make stores
easier to shop, increase availability and
allow team members to focus more of their
time on customer service.
Coles will continue to extend into new
channels and services by increasing the
off ering to customers through Coles
Online, Financial Services and Australia’s
number one loyalty program, fl ybuys.
Coles Liquor will continue to progress its
fi ve-year transformation program through
a focus on simplifying ranges, supply
chain and store operations, in addition
to building on positive sales momentum
through an improved customer off er.
Coles Express is focused on providing a
leading shop off er, and a competitive fuel
off er while it deals with the changes in the
commercial terms with its alliance partner.
The business remains focused on network
growth.
Revenue
Coles’ revenue of $39,217 million for
the year was in line with last year, with
earnings before interest and tax declining
13.5 per cent to $1,609 million.
Food and Liquor recorded sales growth
of 2.0 per cent driven by continued
investment in value, quality and service.
The key metrics of transaction volumes
and basket size improved as a result of
continued investment in the customer off er.
Fresh food categories continued to
perform strongly, although there remains
a signifi cant opportunity to improve and
capture further share. A focus on sourcing
quality fresh products and high standards
of availability has driven increased
transactions and units year on year.
In a lower growth and very competitive
market, Coles remained focused on its
customer-led strategy, and during the year
accelerated its investment in enhancing the
customer off er. This proactive investment
resulted in lower prices for customers,
including through the absorption of
infl ationary cost pressures in fresh produce
and meat, increased fresh food quality and
improved customer service.
Trusted value remains paramount for
Coles, and as at 30 June 2017, there were
approximately 4,400 products on ‘Every
Day’ prices. This year marks the eighth
consecutive year that Coles has lowered
prices for customers, with cumulative
defl ation of 8.2 per cent recorded since the
2009 fi nancial year.
The Liquor transformation progressed in line
with expectations. Positive comparable sales
growth was achieved for the 2017 fi nancial
year, and has now been achieved for seven
consecutive quarters, refl ecting investments
made in price, range and the store network.
The transformation program is now past the
half way point of a fi ve-year plan.
Coles Express recorded revenue (including
fuel) of $6,133 million for the year,
8.2 per cent lower than the previous
year due to lower fuel volumes. Despite
a decline in fuel transactions, convenience
store sales increased by 4.6 per cent for
the year.
Coles’ investment in new channels and
services continued this year, with Coles
Online recording double digit sales growth.
Coles Financial Services grew General
Insurance policies and also completed a
10-year credit card distribution agreement
with Citi. Flybuys continued to achieve
growth in active members.
Key fi nancial indicators
¹ 2014 excludes a $94 million provision relating to future Liquor restructuring activities
(reported as an NTI).
EBIT
$39,217m $1,609m
2017 39,217
2016 39,242
2015 38,201
2014 37,391
2013 35,780
2017 1,609
2016 1,860
2015 1,783
2014 1,672
2013 1,533
Performance drivers
For the year ended 30 June 2013 20141 2015 2016 2017
Revenue ($m) 35,780 37,391 38,201 39,242 39,217
Earnings before interest and tax ($m) 1,533 1,672 1,783 1,860 1,609
Capital employed (R12) ($m) 16,114 16,272 16,276 16,541 16,586
Return on capital employed (%) 9.5 10.3 11.0 11.2 9.7
Capital expenditure ($m) 1,181 1,018 937 763 811
ProspectsYear in review
BACK

Wesfarmers 2017 Annual Report24
Operating and financial review — Retail businesses
Coles
Our business
Coles provides fresh food, groceries,
general merchandise, liquor, fuel
and fi nancial services, with more
than 21 million customer transactions
on average each week, via its store
network and online platform. Coles has
more than 106,000 team members and
operates 2,475 retail outlets nationally.
Our market
Coles operates in Australia’s highly
dynamic and evolving food, grocery, liquor
and convenience sector. It has a store
network of 801 supermarkets, 883 liquor
stores, 89 hotels and 702 convenience
outlets across the nation, from as far west
as Geraldton in Western Australia to as
far east as Ocean Shores in the Northern
Rivers region of New South Wales.
Coles also operates in the fi nancial services
market, off ering home, car, landlord
insurance and credit cards. Coles Financial
Services has more than one million
customer accounts.
Sustainability
Coles’ sustainability focus covers
a range of areas, including Australian
sourcing and supplier engagement,
community partnerships, product
quality and safety, ethical sourcing,
environmental impact, diversity, and
health and safety. Information regarding
all of these topics can be found in the
Wesfarmers sustainability report at
sustainability.wesfarmers.com.au
Continued
investment in better
quality, availability,
service and value
for customers
Supermarkets lowered
the cost of the weekly
basket for the eighth
consecutive year
with price defl ation,
excluding fresh and
tobacco, of 2.2 per cent.
Highlights
Coles meat manager Stuart Horne at the new Lakelands supermarket
in Western Australia.
Coles Customer Service Manager
Navdeep Kaur at the Aurora Village
supermarket, in Victoria.
Wesfarmers 2017 Annual Report 25
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Coles continued to support Guide Dogs
Australia with a record $1.2 million raised
by Coles customers and team members
last fi nancial year, taking Coles’ total
contribution to more than $8.2 million
since 1982.
In the lead up to ANZAC Day, Coles ran
a national fundraising campaign, raising
more than $950,000 for Bravery Trust.
Since 2014, Coles has raised more than
$5.2 million for the national charity, which
provides fi nancial support to current and
former members of the Australian Defence
Force and their families.
Coles Express also continued to support
the Cancer Council, raising more than
$660,000 during the year.
Product quality
During the year, Coles Brand products
won 51 industry awards.
More than 100 supply partners have
now been trained in the Coles food
manufacturing supplier requirements,
with 45 supplier sites achieving the highest
rates of compliance.
All Coles Brand suppliers now use a web-
based product and supplier database
which allows for product traceability and
strict adherence to quality compliance
standards such as declarable allergens,
certifi cations and nutritional information.
Ethical sourcing
Coles’ Responsibly Sourced Seafood
Program details the company’s
commitment to independently assess
all wild fi sheries and aquaculture farms
that supply Coles Brand. Coles Brand
seafood products are certifi ed to Marine
Stewardship Council certifi cation,
Aquaculture Stewardship Council
certifi cation or Coles Responsibly Sourced
Seafood criteria.
Coles Brand’s animal welfare policy
focuses on reducing products sourced
from close confi nement systems such as
battery cages and sow stalls. This policy
includes dairy, beef, lamb, poultry, eggs,
pigs and aquaculture species. Coles Farm
Program assessments allow for consistent
monitoring and maintenance of animal
welfare standards.
Australian sourcing
Coles has an Australia fi rst sourcing
policy to source Australian-grown food
whenever and wherever it can. Today,
around 96 per cent of fruit and vegetables
and 100 per cent of Coles’ fresh lamb, pork,
chicken, beef, milk and eggs are produced
in Australia.
Supplier relationships
Coles continues to develop strong
partnerships with suppliers through the
implementation of long-term agreements
which provide certainty around future
demand.
During the year, Coles signed a 10-year
agreement with TOP Pork Pty Ltd. The
agreement paves the way for 12 Victorian
and South Australian farming families to
supply sow stall free pork directly to Coles
each week.
Coles continues to assist small to medium
sized businesses through the $50 million
Coles Nurture Fund, which was established
in April 2015. Since its launch, Coles has
provided close to $9 million in grants and
interest-free loans to 19 producers.
Through the Coles Nurture Fund, the
company also extended $150,000 in direct
fi nancial assistance to fi ve suppliers
severely aff ected by Cyclone Debbie.
Community support
Coles supports national and local charities
with fi nancial contributions, fundraising,
food donations and disaster relief. For
the 2017 fi nancial year, Coles’ direct
support totalled close to $55 million with
an additional $8.9 million contributed by
customers, team members and suppliers.
Coles’ support for national cancer charity
Redkite marked a signifi cant milestone
during the year, with team members
and customers helping to raise more than
$24 million since the partnership began
in 2013.
More than 670 Coles stores now support
SecondBite through the donation of
surplus fresh produce and bakery items.
Since the partnership commenced in
2011, Coles has donated the equivalent of
more than 40 million meals to SecondBite
to distribute to people in need across
Australia.
Environmental impact
In July 2017, Coles announced it would
phase-out single use plastic bags from
all stores over the next year. The move
will bring Coles stores in Queensland,
New South Wales, Victoria and Western
Australia in line with Tasmania, South
Australia, the Northern Territory and ACT,
where Coles already complies with bans
on single-use bags.
Soft plastics recycling bins, currently
located at 670 of our stores, will remain
in place as part of Coles’ REDcycle plastic
packaging recycling program which is the
largest retailer-operated recycling program
of its type in Australia.
Diversity
Coles has developed a 2020 inclusion
strategy aimed at building an inclusive
workplace where all team members feel
supported.
This year, Coles had 2,872 Indigenous
team members, representing 2.7 per cent
of its workforce. The company’s target,
to have 3,000 Indigenous team members
by 2020, is likely to be met during the
next year.
For the fi rst time, Coles participated in the
Australian Workplace Equality Index and
was awarded a Bronze Employer status,
recognising its actions to improve LGBTI
workplace inclusion.
Health and safety
Creating a safe workplace for team
members, suppliers and visitors, and a
safe shopping environment for customers
is a priority for Coles. The total recordable
injury frequency rate (TRIFR) was 38.1 for
the year, a 13.6 per cent improvement on
last year due to a continued focus on safety
leadership, risk reduction, and health and
wellbeing programs.
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Operating and financial review — Retail businesses
Strategy Coles continues to focus on delivering Australia’s best food off ering to customers through greater investment
in prices, continuous improvement in quality, and further investment in customer service. Coles will seek to achieve the
goal of being Australia’s best food retailer and cater for all customer needs by implementing new and improved formats,
accelerating the capability of the online off er, and continuing the expansion of the convenience and liquor outlets.
Coles remains committed to building long-term strategic supplier partnerships and investing in the growth of developing
suppliers through the Coles Nurture Fund. Opportunities exist to increase the effi ciency of the supply chain and a simplicity
program commencing in the 2018 fi nancial year will aim to reduce costs and increase productivity.
Liquor is now over the halfway mark of the fi ve-year turnaround plan. The next phase of the Liquor turnaround will focus on
simplifying ranges, investment in prices, and continued growth of exclusive label brands.
Convenience remains a key focus for Coles and negotiations continue to achieve the best commercial outcomes for the Coles
Express brand. Coles Express will continue with network expansion to ensure all customers have access to a convenient
off ering.
A strong online off ering will form an integral part of the Coles customer proposition and further investment will be made to
optimise the online platform. Coles will continue to unlock effi ciencies in the picking and delivery of online orders and seek
to build on its strong double-digit transaction growth.
Investing in the capability of team members and ensuring Coles is the best and safest workplace will continue to be part
of the Coles culture. Key programs, such as the 400-strong Coles Graduate Program, Women in Leadership Initiative and
increased Indigenous recruitment, will continue to deliver a world-class diverse workforce.
Food and Liquor
Growth strategies Achievements Focus for the coming years
Deliver a better store
network
– 22 supermarkets opened, eight closed
and 46 renewals completed, focusing
on bigger, better stores
– 2.6 per cent growth in supermarkets
net selling area during the year
– 29 new liquor stores were opened,
11 closed
– Build a better store network and continue to target supermarket net
space growth of between two and three per cent per annum
Focus on freshness – High single-digit growth in produce sales
– Continued investment with suppliers to
improve quality
– Deliver better value, quality, availability and the right offer in every
store
– Seek longer-term agreements and deeper collaboration
opportunities with key suppliers
– Continue to invest in team member capabilities to improve service
Extend value leadership – Approximately 4,400 items on ‘Every
Day’ pricing at the end of the year
– Defl ation excluding Fresh and Tobacco
2.2 per cent for the year
– Accelerate price investment in order to drive down the cost of the
weekly basket
– Drive targeted marketing through fl ybuys and customer insights
Simplicity – More than 1,400 SKUs moved to
stockless supply channels
– OneShop now live in all stores
– OneTeam now live in 220 stores
– Rollout a new store simplicity program
– Improve direct sourcing capabilities, customer-led range
simplifi cation and trading terms
Boldly extend into new
channels and services
– Coles Online achieved more than
14.5 per cent transaction growth
– 2.3 per cent more active fl ybuys
customers
– Partnership with Virgin Velocity program
– Deliver profi table growth in Coles Online
– Grow fl ybuys by providing more personalised offers that are
meaningful for customers and provide choice in how customers earn
and convert their points
Transform liquor business – Strong transaction growth delivered with
Liquorland the key driver
– 200 Liquorland renewals during FY17
– Five-year transformation on track
– Continue the fi ve-year turnaround strategy with the rollout of Liquor
Market format and further Liquorland renewals
– Offer more exclusive brands and a liquor-direct offer to allow
customers to shop in a more fl exible way
Build great careers – A graduate program with approximately
400 participants
– 31.4 per cent of women in leadership
roles
– 1,393 Indigenous team members hired
– Build the right culture and capabilities in-store to further engage
customers
– Continue to nurture talent through the Retail Leaders Program and the
Graduate Program
– Increase the percentage of Indigenous team members to three per cent
(representative of the Indigenous population in Australia) by 2020
Coles
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Risk Coles’ risks relate to issues that might aff ect business operations or the competitive dynamics within the market place
moving forward. These include product availability, retention of personnel, regulatory changes, competitive intensity and
entry of new competitors.
Food and Liquor
Risks Mitigation
Increased competitive
intensity limiting Coles’
ability to achieve profi table
growth
Coles will continue to simplify its business and reduce costs to fund further investments in price. It continues to
focus on improving its fresh offer, supported by securing long-term contracts with key suppliers. It has appropriate
lease structures and management practices in place to protect tenure of existing stores. A new store pipeline
focused on priority network gaps is governed by a disciplined approach to capital investment.
Attraction, retention and
succession of key roles
Effective succession planning and career development has ensured a smooth leadership transition following the
initial phase of the turnaround. The expansion of the leadership program has promoted talent within the business
and enabled better alignment of succession.
Regulatory change which
limits growth and value
offer
Coles has worked constructively with government, regulatory and industry bodies in the past in order to promote
good faith commercial conduct and will continue to do so in the future.
Convenience
Risks Mitigation
Changing consumer
preferences leading to
lower fuel consumption
Coles Express will focus on maintaining a convenience store network with high quality sites and will continue to
invest in the store offering to drive continued growth. Coles will continue to review underperforming stores and
assess new opportunities for growth.
Disruption to fuel supply Coles has an exclusive fuel supply agreement with its alliance partner, Viva Energy, until 2024. Either party has the
option to extend for a term up to fi ve years.
Convenience
Growth strategies Achievements Focus for the coming years
Deliver a better store
network
– Opened 17 new Coles Express sites
– Renewed 132 stores to date with big, bold rebranding
– Grow the store network with the alliance partner and
aim to open 100 new stores over the next fi ve years
– Renew between 75 and 100 sites each year with big,
bold rebranding
Inspire customers through
greater value
– Provided greater value to customers by extending
Coles’ ‘Every Day’ value to more products throughout
the store, resulting in stronger sales
– Extend the ‘Every Day’ value offer across a greater
range of products
– Provide a competitive fuel offer to customers
Focus on freshness,
quality and additional
range
– Extended the range of everyday essentials and
convenience products
– Improve product quality and freshness
– Expand product range, including the rollout of Big Yum
format
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Operating and financial review — Retail businesses
Home Improvement
Bunnings’ customer-focused approach
underpinned continued performance gains
in Australia and New Zealand. During the
fi rst full financial year of trading in the
United Kingdom and Ireland, signifi cant
progress was made to build strong
foundations through transformation of the
Homebase business and development of the
Bunnings brand.
Clockwise from top: Bunnings team
members Rodney Boonsinlapa, Mark Jones
and Kim Croker.
Wesfarmers 2017 Annual Report 29
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2017 13,586
2016 11,571
2015 9,534
2014 8,546
2013 7,661
2017 1,245
2016 1,214
2015 1,088
2014 979
2013 904
For the year ended 30 June 2013 2014 2015 2016 2017
Revenue ($m) 7,661 8,546 9,534 11,571 13,586
Earnings before interest and tax ($m) 904 979 1,088 1,214 1,245
Capital employed (R12) ($m) 3,492 3,343 3,244 3,599 4,110
Return on capital employed (%) 25.9 29.3 33.5 33.7 30.3
Capital expenditure ($m) 531 531 711 538 445
— MICHAEL SCHNEIDER
MANAGING DIRECTOR,
BUNNINGS GROUP
In Australia and New Zealand, Bunnings is
focused on driving growth, creating better
experiences for customers and the wider
community, and strengthening the core
of the business. Achieving greater brand
reach, both digitally and physically, is a
core work area which includes further
expansion of Bunnings’ digital ecosystem,
opening new stores and reinvesting in the
existing network.
Positive trading momentum is expected
to continue in the 2018 fi nancial year,
supported by ongoing investments in
lower prices to deliver more customer
value, ongoing range innovation and
increased customer service.
The team in the United Kingdom and
Ireland will continue to build strong
business foundations as work to reposition
Homebase continues. Key areas of focus
include pilot store development, proof of
concept and rollout, and a relaunch of the
kitchen and bathroom off ers.
Recent changes to strengthen the senior
leadership team and realign organisational
structures will support improved
Homebase store execution. This will
also provide additional capacity for the
development of Bunnings in the United
Kingdom and Ireland, with 15 to 20 pilot
stores expected to be trading or nearing
completion by 31 December 2017, subject
to relevant approvals.
Revenue
Revenue for the Home Improvement
division increased 17.4 per cent to
$13,586 million, driven by the full-year
contribution from Bunnings United
Kingdom and Ireland, which was acquired
on 28 February 2016, and strong growth
in Bunnings Australia and New Zealand.
Earnings for the division of $1,245 million
were 2.6 per cent higher than the prior
corresponding period.
Operating revenue from Bunnings
Australia and New Zealand increased
8.9 per cent to $11,514 million. Total store
sales growth of 8.9 per cent was achieved
during the year, underpinned by an
increase of 7.3 per cent in store-on-store
sales. Bunnings Australia and New Zealand
recorded EBIT of $1,334 million, an
increase of 10.0 per cent on last year.
Bunnings United Kingdom and
Ireland reported operating revenue
of £1,229 million ($2,072 million) and a
loss before interest and tax of £54 million
($89 million) in the fi rst full fi nancial
year of trading since acquisition. The
result included £19 million ($33 million)
of transition and restructuring costs,
including costs associated with the
establishment of the Bunnings brand
in the United Kingdom and Ireland and
the pilot store program. During the year,
purchase price adjustments were applied
to the costs of clearing discontinued
ranges, the depreciation associated with
IT-related assets which were written
down to fair value at the time of the
acquisition, and onerous Transitional
Service Agreement contracts with Home
Retail Group.
Key fi nancial indicators
EBIT
$13,586m $1,245m
Performance drivers
ProspectsYear in review
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Operating and financial review — Retail businesses
Home Improvement
Bunnings Australia and New Zealand
and Bunnings United Kingdom and Ireland
Our business
Bunnings is the leading retailer of
home improvement and outdoor living
products in Australia and New Zealand,
and the second largest retailer of home
improvement and garden products in the
United Kingdom and Ireland. Bunnings
is a major supplier to project builders,
commercial tradespeople and the housing
industry.
Bunnings is focused on creating value
for its customers over the long term. The
approach to long-term value creation is
based on four interlinked principles: a
winning off er to customers; an engaged,
focused and committed workforce;
business behaviour that builds trust;
and sustainable satisfactory shareholder
returns.
Bunnings employs more than 40,000
team members across Australia and
New Zealand. Bunnings Australia and
New Zealand stores stock around 45,000
products and an expanded range is
available through a special order service.
In the United Kingdom and Ireland,
Bunnings employs approximately 12,000
team members across its Homebase
and Bunnings Warehouse stores. Work
continues to reposition Homebase to
deliver a core home improvement and
garden off er and the fi rst steps of cultural
change are progressing.
Revenue exceeded
EBIT grew to
$13.5b
$1,245m
Highlights
Bunnings team member Ben Cuthbertson at the Bunnings Warehouse in
Mentone, Victoria.
Bunnings team member Berlinde
Hausmann in the fl ooring department
at the Mentone warehouse, Victoria.
First Bunnings
Warehouse opened in
the United Kingdom.
Return on capital
employed of 30.3%
Wesfarmers 2017 Annual Report 31
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Our market
In Australia and New Zealand, Bunnings
caters for consumers and both light and
heavy commercial customers across the
home improvement and outdoor living
market, operating from a network of large
warehouse stores, smaller format stores,
trade centres, and frame and truss sites.
Bunnings Australia and New Zealand is
expanding its brand reach across its market
through the opening of new stores and
fl exible formats, along with more digital
engagement. The focus is on delivering
the best off er everywhere, whether that be
digital, in-home, in-store or on-site.
The home improvement and garden
market in the United Kingdom and Ireland
is large and highly fragmented, with both
specialists and participants in multiple
categories competing through a variety
of formats. Bunnings is building the
foundations to enable the delivery of a
winning off er in this market.
Sustainability
Bunnings defi nes sustainability within
its operations as actions that are socially
responsible, environmentally aware and
economically viable.
The immediate focus is to use less energy
and to accelerate ways to reduce reliance
on grid-sourced energy. Bunnings is also
committed to reducing water usage and
creating less waste along with increasing
recycling levels.
Bunnings strives to ensure that
product sourcing meets or exceeds the
requirements of local and global standards
and remains committed to growing
community support in a sincere, localised
and meaningful manner.
Bunnings’ highest priority is to maintain
a positive safety performance trend as
the business grows, the store network
increases and more team members
are employed. Safety performance is a
particular focus in the United Kingdom
and Ireland as the Homebase operating
model transitions to heavier and larger
home improvement and garden items.
Bunnings United Kingdom and Ireland
Trading has been aff ected by signifi cant
disruption as Homebase commenced its
repositioning to a core home improvement
and garden off er. This repositioning is
supported by investments in wider product
ranges, price, and greater stock depth.
Signifi cant transition, separation, and
integration activity has been undertaken.
All services have now been separated from
the previous owner with the exception
of the IT Data Centre, which will be
completed in the fi rst quarter of the 2018
fi nancial year.
Four Bunnings Warehouse pilot stores
were opened during the period. Early
performance has been encouraging, with
the stores generating strong engagement
with customers, team members, suppliers
and local communities.
In addition to these four Bunnings
Warehouse stores, there were 251
Homebase stores in the Bunnings United
Kingdom and Ireland network at the end
of the year.
Bunnings Australia and New Zealand
Sales growth was achieved in both
consumer and commercial markets,
across all major trading regions and
product categories. Despite periods of
mixed trading conditions throughout
the year, resulting from adverse weather
and competitor liquidation activity, the
underlying business momentum delivered
strong growth.
Strong business momentum refl ected a
continued focus on delivering a strategic
agenda aimed at creating long-term
customer value. Earnings growth was
supported by disciplined cost control and
continued favourable market conditions
providing further positive outcomes on
property divestments. These benefi ts were
partially off set by higher store closure
provisions within Bunnings’ trading
results, arising from the agreement with
Home Consortium for new Bunnings sites,
together with additional writedowns in
the second half, related to future network
changes and in-store display assets.
Further investment in store upgrades and
category refresh works was supported by a
disciplined capital expenditure program.
The strong earnings growth and capital
management resulted in a signifi cant
increase in return on capital.
During the period, 18 trading locations
were opened, including nine new
Bunnings Warehouse stores, eight smaller
format stores and one trade centre. At the
end of the year, there were 249 warehouses,
77 smaller format stores and 33 trade
centres in the Bunnings Australia and New
Zealand network.
Performance drivers
Homebase team member Helen Jupp at the
Luton store in the United Kingdom.
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Wesfarmers 2017 Annual Report32
Operating and financial review — Retail businesses
Bunnings Australia and New Zealand
Strategy Bunnings Australia and New Zealand provides its customers with the widest range of home improvement and
outdoor living products and is committed to delivering the best service supported by our policy of lowest prices every day. It
sets out to attract high quality team members and to provide them with a safe and rewarding working environment.
Bunnings United Kingdom and Ireland
Strategy Bunnings is building the foundations of a market-leading home improvement and garden off er in the United
Kingdom and Ireland, delivering a wide range of trusted brands, best service, and real customer value as we establish
our policy of lowest prices every day. It is taking a sensibly staged approach through the acquisition and repositioning
of Homebase, building trust and generating strong engagement with customers, team members, suppliers, and the
communities in which it operates.
Growth strategies Achievements Focus for the coming years
More customer value – Continued reinvestment into lower prices – Ongoing focus on delivering even more value
Better customer
experiences
– Consistency in service basics lifted
– Improved stock availability
– Greater product and project knowledge
– Better customer experiences and deeper engagement:
in-store, online and in-home
Greater brand reach – Opened 18 trading locations
– Signifi cantly expanded digital ecosystem
– Existing store reinvestment
– More stores, with increased format innovation
– Expect to further expand the digital ecosystem
including online transaction capability
– Targeted investment into refreshing the existing store
network
Deeper commercial
engagement
– Created more value and deeper relationships
– Leveraged the network for customer convenience –
stores and trade centres
– Improved service with more localised engagement,
easier to deal with
– Continue to leverage core strengths of a total market
capability: stores, trade centres, in-fi eld and digital
– Wider market focus to expand selling opportunities
– Progress near neighbour export opportunities
More merchandise
innovation
– Expanded ranges and products and made DIY easier
– Further product and project innovation with wider
ranges and new products
– Creating, leveraging and responding to lifestyle trends,
technology trends and environmental and economic
changes
– Development and implementation of services that
complement the core DIY offer
Growth strategies Achievements Focus for the coming years
Build strong business
foundations
– Repositioning of Homebase in progress
– Retail basics, core home improvement and garden
offer
– Reduce disruption from repositioning to drive better
execution and improved trading performance
– Improve operational disciplines
Develop Bunnings
Warehouse
– Four pilot stores trading
– Positive customer feedback, pleasing community
engagement
– Continue Bunnings Warehouse pilot program
– Proof of concept, rollout of Bunnings
Extensive digital
engagement
– First steps towards Bunnings digital ecosystem
– Product and project knowledge
– Grow Bunnings digital ecosystem in the United
Kingdom and Ireland
Build trust, generate
engagement
– Investment in team development, engagement and
retention
– Continue to invest in team
– Strategies to drive stronger engagement with
customers and suppliers
Home Improvement
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Risks Bunnings recognises that taking appropriate business risks is a critical aspect of generating acceptable business
returns. In doing so, it seeks to appropriately manage risks to minimise losses and maximise opportunities.
Risks deemed unacceptable in terms of the business’s risk appetite are subject to appropriate control and mitigation
measures to reduce the negative impact on the business.
The level of controls implemented is commensurate with the impact (likelihood and consequence) on the business from the
risk occurring.
Bunnings Australia and New Zealand
Risks Mitigation
Safety – Continued focus and targeted in-store awareness campaigns
Talent recruitment and retention – Strategies directed at creating and maintaining status as employer of choice
– Succession planning, retention and development plans
New and existing competitors – Relentless focus on strategic pillars of ‘lowest price, widest range and best service’
– Ongoing strategies to increase customer centricity and deepen customer engagement
Reputation – Strong culture of ‘doing the right thing’
– Focus on ethical sourcing and product standards
– Ongoing regulatory compliance training
Bunnings United Kingdom and Ireland
Risks Mitigation
Safety – Enhanced training of store team as Homebase operating model transitions to heavier and larger home
improvement and garden items
Talent recruitment,
retention and succession
– Strategies directed at creating status as employer of choice
– Succession planning, retention and development plans
Changed and changing
competitive landscape
– Better execution of repositioned core home improvement and garden offer in Homebase
– Relentless focus on strategic pillars of ‘lowest price, widest range, and best service’ while establishing
Bunnings in the United Kingdom and Ireland
Political and economic
uncertainty
– Develop market-leading offer and fl exible business model
– Build trust, generate strong engagement with customers, team members, suppliers and local
communities
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Operating and financial review — Retail businesses
Department Stores
The Department Stores division was
formed in February 2016 through a
combination of Kmart and Target. The
division operates 774 stores across
Australia and New Zealand and employs
44,000 team members.
Kmart team member Scott Murray and
Target team member Erica Calleja.
Wesfarmers 2017 Annual Report 35
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ProspectsYear in review
2017 8,528
2016 8,646
2015 7,991
2014 7,710
2013 7,825
2017 543
2016 275
2015 522
2014 452
2013 480
For the year ended 30 June 2013 20141 2015 20162 2017
Revenue ($m) 7,825 7,710 7,991 8,646 8,528
Earnings before interest and tax ($m) 480 452 522 275 543
Capital employed (R12) ($m) 4,259 4,340 3,778 3,629 2,253
Return on capital employed (%) 11.3 10.4 13.8 7.6 24.1
Capital expenditure ($m) 182 243 295 293 222
Revenue for the Department Stores
division was $8,528 million for the year,
a decrease of 1.4 per cent due to lower
revenue in Target which was partially off set
by continued strong growth in Kmart.
Target’s sales were driven by the reset of
the Target business, with sales aff ected
by the transition to everyday low prices,
and a reduction in unprofi table events
as well as an exit from loss-making
categories. Kmart’s sales growth was driven
by increased customer transactions and
higher units sold per customer.
Earnings for the division of $543 million
increased 97.5 per cent compared to the
prior year, refl ecting an improvement in
Target’s performance, as well as continued
growth in Kmart. Excluding restructuring
costs in Target incurred in the current
and prior year, earnings for the division
increased 32.4 per cent.
Performance drivers
Revenue
Key fi nancial indicators
¹ 2014 excludes a $677 million impairment of Target’s goodwill (reported as an NTI).
2 The 2016 earnings before interest and tax for Target includes $145 million of restructuring costs
and provisions to reset the business but excludes the non-cash impairment of $1,266 million.
EBIT
$8,528m $543m
— GUY RUSSO
CHIEF EXECUTIVE OFFICER,
DEPARTMENT STORES
Kmart
Kmart will seek to drive sustainable
growth through a focus on making it a
great place to shop that is simple to run
and to deliver better products at lower
prices. Further investments in price will
be made to drive volume and maintain
Kmart’s price leadership position in the
market. The business is well positioned
for the 2018 fi nancial year, with inventory
in good shape and core everyday ranges
performing well.
Continued investment in the store network
is expected to deliver 10 new stores and the
completion of 35 store refurbishments in
the 2018 fi nancial year.
Target
Target will continue to focus on providing
quality fashion and basics to everyone at
low prices and the 2018 fi nancial year will
refl ect the signifi cant transition underway
in the business. Further improvements in
merchandise disciplines are expected to
result in improved fashion and quality of
sales.
The focus on end-to-end costs will
continue, with increased levels of direct
sourcing and continued improvements in
operational effi ciency. Renewal, as well as
space and range trials, will progress and
fi ve new stores will be opened. Working
capital effi ciency and cash fl ow generation
will continue to be focus areas.
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Wesfarmers 2017 Annual Report36
Operating and financial review — Retail businesses
2017 5,578
2016 5,190
2015 4,553
2014 4,209
2013 4,167
2017 553
2016 470
2015 432
2014 366
2013 344
For the year ended 30 June 2013 2014 2015 2016 2017
Revenue ($m) 4,167 4,209 4,553 5,190 5,578
Earnings before interest and tax ($m) 344 366 432 470 553
Capital employed (R12) ($m) 1,329 1,361 1,312 1,246 1,266
Return on capital employed (%) 25.9 26.9 32.9 37.7 43.7
Capital expenditure ($m) 91 162 173 165 154
$5,578m $553m
Department Stores
Kmart
Our business
Kmart was established in 1969, with the
opening of its fi rst store in Burwood,
Victoria. Kmart operates 220 stores
throughout Australia and New Zealand,
off ering customers a wide range of apparel
and general merchandise products at
low prices, every day. Kmart employs
approximately 30,000 team members, who
are focused on delivering the Kmart vision
– where families come fi rst for the lowest
prices on everyday items. Kmart Tyre and
Auto Service has 251 centres in Australia,
providing customers with retail automotive
services, repairs and tyres.
Our market
Kmart operates in the clothing, homewares
and general merchandise retail sector both
locally and internationally. This sector is
competitive and comprises department
stores, specialty retailers and a growing
online channel. The sector is characterised
by an expanding presence of international
retailers, an increasing level of direct
sourcing and online growth.
Kmart sources from both local and overseas
suppliers with product sourcing offi ces in
Hong Kong, China, Bangladesh, India and
Indonesia.
Sustainability
Kmart continues to drive its ‘Better
Together’ sustainability program focused
on people, partners and planet, and has
developed a sustainable materials strategy
and reviewed the environmental risks and
opportunities across the factories where
primary suppliers operate.
Kmart is focused on enhancing working
conditions and empowering workers
throughout the supply chain, shown
through its commitment to the Accord
on Fire and Building Safety in Bangladesh
and the ILO/IFC Better Work program in
Indonesia, Cambodia and Bangladesh.
It was also the fi rst non-European retailer
to join ACT (Action, Collaboration,
Transformation), a collaboration between
international retailers and IndustriALL,
the global union, to address living wage.
Kmart continues to support organisations
such as Salaam Baalak in Delhi and
Gurgaon, Room to Read in Bangladesh, and
OneSky in China, and the Kmart Wishing
Tree Appeal in Australia.
Kmart remains committed to the safety of
its team members, customers and suppliers,
recording a TRIFR of 24.6 for the year. The
lost time injury frequency rate (LTIFR) also
decreased from 6.7 last year to 6.0 this year.
Revenue
Key fi nancial indicators
EBIT
Year in review
Kmart team member Heather Rae Higgins at the Chadstone store in Victoria.
Performance drivers
Kmart delivered revenue of $5,578 million
for the year, an increase of 7.5 per cent
on the prior year, with earnings growing
17.7 per cent to $553 million.
Sales growth was driven by increased
customer transactions and higher units
sold per customer. Product ranges and
everyday low prices continued to resonate
well with customers, with growth delivered
across all categories.
Kmart delivered another year of strong
earnings growth through improved
inventory management, enhanced product
ranges, productivity improvements across
stores and the supply chain and sourcing
benefi ts. Growth in earnings, combined
with a continued focus on working capital
management, resulted in an improvement
of 596 basis points in return on capital to
43.7 per cent.
Wesfarmers 2017 Annual Report 37
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2016 3,456
2015 3,438
2014 3,501
2013 3,658
2017 (10)
2016 (195)
2015 90
2014 86
2013 136
For the year ended 30 June 2013 20141 2015 20162 2017
Revenue ($m) 3,658 3,501 3,438 3,456 2,950
Earnings before interest and tax ($m) 136 86 90 (195) (10)
Capital employed (R12) ($m) 2,930 2,979 2,466 2,383 987
Return on capital employed (%) 4.6 2.9 3.6 (8.2) (1.0)
Capital expenditure ($m) 91 81 122 128 68
Department Stores
Target
Our business
Target operates a national network of
303 stores as well as online. Its objective
is to provide quality, fashion and basics
for everyone at low prices. Target employs
more than 14,000 team members across its
stores, support offi ces and direct sourcing
operations.
Our market
Like Kmart, Target participates in the
Australian clothing, homewares and
general merchandise retail sector. The
addressable market exceeds $80 billion
and within this market Target has a sound
competitive position supported by a
strong brand heritage characterised by
quality and value.
Sustainability
Target is committed to proactively
managing team member safety,
embracing diversity and supporting
the communities in which it operates
in, as well as maintaining a strong focus
on environmental practices and ethical
supply chain transparency.
Ethical sourcing
Target continues to focus on improving
conditions for workers in supplier
factories through a transparent supply
chain. Target is committed to ensuring
the safety and wellbeing of workers
in supplier factories, and is a signatory
to both the Accord on Fire and Building
Safety in Bangladesh and the Responsible
Sourcing Network’s Cotton Pledge. Target
is in its third year of partnership with
CARE to deliver The Safe Motherhood
Program which supports women and their
families in Gazipur by delivering vital
pre- and post-natal education programs
and by connecting them to lifesaving
healthcare services.
Team member safety
Target recorded the safest year in its history,
with the lowest ever LTIFR and number of
injury claims. Target’s LTIFR declined
35.2 per cent on last year to 2.9 and its
TRIFR declined 2.6 per cent to 28.7.
Revenue
Key fi nancial indicators
¹ 2014 excludes a $677 million non-cash impairment of Target’s goodwill (reported as an NTI).
2 The 2016 earnings before interest and tax for Target includes $145 million of restructuring costs
and provisions to reset the business but excludes the non-cash impairment of $1,266 million.
EBIT
$2,950m $(10)m
Year in review
Performance drivers
Decisive actions were taken to transform
Target this year, including a reset of the
sales base and a reduction of the cost base.
Target’s revenue for the year was $2,950
million, a decrease of 14.6 per cent on the
prior year. Reported EBIT increased by $185
million to an operating loss of $10 million.
Excluding the restructuring costs in the
2017 and 2016 fi nancial years of $13 million
and $145 million respectively, underlying
EBIT increased $53 million to $3 million.
During the year, further progress was made
to transition the business to everyday
low prices, with prices lowered, loss-
making products and unprofi table events
exited, and promotional activity reduced.
Improved merchandise disciplines
delivered SKU reductions, lower inventory
levels and increased direct sourcing and
factory consolidation. Good progress was
made to reduce costs across supply chain,
the store support offi ce and stores.
Target team member David Duong at the Chadstone store in Victoria.
BACK

Wesfarmers 2017 Annual Report38
Operating and financial review — Retail businesses
Kmart
Strategy Kmart’s vision is to provide families with everyday products at the lowest prices. Kmart delivers its strategy
through two strategic pillars:
– a great place to shop that is simple to run; and
– better products at even lower prices.
Kmart is focused on delivering growth and improving productivity and effi ciencies to support further investment in lower
prices. It will continue to invest in the store network by opening new stores to extend customer reach and refurbishing
existing stores to optimise category mix and enhance the customer shopping experience. Kmart’s high calibre team and
strong culture supports the success of the business.
Risks Kmart’s risks include foreign exchange rate fl uctuations, maintaining price leadership, new market entrants and the
expansion of existing competitors.
Price is a key diff erentiator between Kmart and its competitors, given high levels of product substitution exist within the
market. Competitors’ pricing strategies may pose a threat to Kmart’s price leadership position. New market entrants will
increase market competitiveness and will continue to create a challenging environment to maintain and grow market share.
Risks Mitigation
Exchange rate volatility Hedging, and product and pricing frameworks will be used to effectively manage foreign exchange
movements
Maintaining price leadership Remain focused on maintaining its lowest price position and ensure the product pricing architecture
continues to deliver value
New market entrants and
expansion of existing competitors
Continue to lead on price and value despite increased competition from new entrants, online and existing
competitors
Growth strategies Achievements Focus for the coming years
A great place to shop
that is simple to run
– Delivered strong sales growth, supported by increased
customer transactions and units sold
– Continued to improve Kmart’s customer reach via the
online platform
– Opened 11 new stores and completed 33 store
refurbishments during the year
– A rewarding self-serve experience
– One simple way of working
– Better availability with less stock
– Kmart products available everywhere
Better products at even
lower prices
– Continued price investment
– Increased focus on customer experience
– Ongoing focus on productivity
– Growth of the online channel
– Desirable, on-trend everyday products
– Quality that matters most to our customers
– Long-term relationships with the right factories
– A relentless pursuit of lowest price
Department Stores
Wesfarmers 2017 Annual Report 39
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Risks Target’s strategy has been reset and the business is now focused on progressing changes to the operating model to
better position the business to grow earnings into the future. This journey will be undertaken in an increasingly competitive
apparel and general merchandise environment.
Target
Strategy Target’s vision is to deliver quality fashion and basics to everyone at low prices.
Target’s strategic framework includes:
– Product: volume, quality, fashion and basics;
– Price: low prices every day;
– Promotion: brand love with mass reach;
– Customer: easiest and most enjoyable customer
experience;
– Place: great stores and locations; and
– People: inspired team living Target’s values.
Growth strategies Achievements Focus for the coming years
Product: volume,
quality, fashion
and basics
– Improved central planning, sourcing and merchandise teams
– Improved direct sourcing
– Further progressed range reduction
– Removed loss-making products and ceased unprofi table events
– Continue to seek to lower end-to-end costs
– Increase direct sourcing
– Increase contribution of better and best ranges
through reset of quality and fashion
Price: low prices
every day
– Lowered prices
– Continued to transition business to everyday low prices
– Embed ‘clear as you go’ markdowns policy
– Implement consistent price and range
architecture across ‘Good, Better, Best’
– Complete everyday low prices conversion
Promotion: brand
love with mass reach
– Reviewed and reset marketing spend
– Focused on developing a consumer insights-led culture
– Continue to evolve marketing mix
– Improve customer engagement at all touch
points
Easiest customer
experience
– Improved store presentation and simplifi ed store environment
– Started trial of assisted check-outs
– Reset renewal stores
– Improved store productivity by 10 per cent through better rostering
and process simplifi cation
– Improved supply chain effi ciency
– Further simplify store processes
– Improve store layout and grading principles
– Drive an inspiring customer experience involving
all elements of the customer journey
Place: great stores
and locations
– Completed review of Target’s store network
– Started trialling formats across different fl eet sizes
– Reset online business
– Improve focus on space profi tability
– Rollout renewal format when economic model
developed
– Increase online’s role in driving traffi c to store
and improve online effi ciency
People: inspired
team, living our
values
– Embedded vision and values
– Further developed safety culture
– Developed clear accountabilities
– Advanced relocation of store support offi ce
– Create talent pipeline, leveraging learning and
development programs
– Further develop diversity strategy
Risks Mitigation
Business reset and
transformation
– New leadership team with previous turnaround experience
– Revised and focused strategy with operational plans that underpin key strategic initiatives
– Clear accountabilities, objectives and performance indicators
– Merchandising and operating discipline, including management of critical path
– Business simplifi cation and cost base reset to reduce activity
Competitor activity – Monitoring of competitor activity and consumer trends
– Clear pricing strategy and reset fashion and style to access and capture large addressable market
– Online proposition advancement to support in-store traffi c and leverage store network
Team member attraction and
retention
– Improved culture, ways of working and values embedded across the business
– Short-term incentive plan launched and implementation of learning and development strategies
Exchange rate volatility – Hedging, and product and pricing frameworks will be used to effectively manage foreign exchange
movements
BACK

Wesfarmers 2017 Annual Report40
Operating and financial review — Retail businesses
Offi ceworks
Offi ceworks opened its fi rst store in
Richmond in 1994 and has grown into
Australia’s leading retailer and supplier of
offi ce products and solutions. Offi ceworks
seeks to be a one-stop shop for micro, small
and medium-sized businesses, students
and households.
Offi ceworks team members Caitlin Fraser
(left) and Tammy Churchill.
Wesfarmers 2017 Annual Report 41
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2017 1,964
2016 1,851
2015 1,714
2014 1,575
2013 1,506
2017 144
2016 134
2015 118
2014 103
2013 93
For the year ended 30 June 2013 2014 2015 2016 2017
Revenue ($m) 1,506 1,575 1,714 1,851 1,964
Earnings before interest and tax ($m) 93 103 118 134 144
Capital employed (R12) ($m) 1,147 1,097 1,034 994 980
Return on capital employed (%) 8.1 9.4 11.4 13.5 14.7
Capital expenditure ($m) 18 26 39 41 36
— MARK WARD
MANAGING DIRECTOR, OFFICEWORKS
Offi ceworks will continue to drive growth
and productivity by executing its strategic
agenda. Competitive intensity is expected
to remain high as the landscape evolves,
but Offi ceworks is well placed to continue
to drive growth in this environment.
Key focus areas in the 2018 fi nancial year
will include strengthening and expanding
the customer off er by adding new
products and ranges. This will strengthen
Offi ceworks’ position as a one-stop shop
for micro, small and medium-sized
businesses, students and households.
Investment in the store network will
continue through more store openings
and ongoing enhancements to
merchandise layouts and store design.
Likewise, enhancements to the online
off er will continue.
Enhancing productivity and effi ciency
across all elements of the business will
remain a priority with the focus on working
capital improvements, better space
utilisation and eff ective cost control.
Offi ceworks remains committed to
investing in the talent, diversity and
safety of the team, and making a positive
diff erence in the community.
Revenue
Offi ceworks’ revenue increased
6.1 per cent to $1,964 million. Earnings
of $144 million were 7.5 per cent higher
than the prior corresponding period.
Offi ceworks’ ‘every channel’ strategy
continued to resonate with customers,
with sales growth achieved across stores
and online.
Growth in sales and earnings was driven
by store layout and design changes,
new and expanded product ranges, and
ongoing enhancements to the online off er.
A relentless focus on providing great
customer service, both in stores and
online, and ongoing price investment
to strengthen the value proposition,
also contributed to the result.
Strong momentum in the business-to-
business segment was maintained as
an increasing number of micro, small
and medium-sized business customers
responded favourably to Offi ceworks’
‘every channel’ off er.
Strong sales growth, eff ective cost control
and disciplined capital management
delivered an increase in return on capital
of 121 basis points to 14.7 per cent.
Ongoing investment in stores and
online to support the future growth
of the business was further refl ected
in a strong capital expenditure program
during the year.
During the year, six new stores were
opened and at the end of June 2017 there
were 164 stores operating across Australia.
Key fi nancial indicators
EBIT
$1,964m $144m
Performance drivers
ProspectsYear in review
BACK

Wesfarmers 2017 Annual Report42
Operating and financial review — Retail businesses
Offi ceworks
Sustainability
Offi ceworks’ Positive Diff erence Plan
encompasses three pillars – environment,
responsible sourcing and people.
Environment
Offi ceworks has continued to improve
energy effi ciency through the rollout of
LED lighting to an additional 35 stores and
installation of energy monitoring systems
to another nine stores.
As part of its Positive Diff erence Plan,
Offi ceworks has continued to reduce the
impact of its products. During the year,
Offi ceworks collected more than one
million printer cartridges for recycling
through the Cartridges 4 Planet Ark
program, over 400 tonnes of computer
equipment through the BringITBack
program and the equivalent of more
than 45,000 mobile phones and batteries
through MobileMuster.
Responsible sourcing
Offi ceworks has increased the sourcing of
100 per cent recycled or Forest Stewardship
Council (FSC) certifi ed private label paper
product to more than 90 per cent.
Offi ceworks has improved ethical sourcing
and gained greater transparency of its
supply chain by mapping 90 per cent of
its purchases back to the manufacturing
location.
People and community
Over the last 12 months, the number of
women in leadership positions (which
includes retail team leaders) increased
from 35.0 per cent to 37.4 per cent. The
number of Indigenous team members
increased to 2.3 per cent of Offi ceworks
team members.
Safety performance continues to improve,
with a reduction in the rolling 12 all injury
frequency rate of 24.5 per cent.
Offi ceworks continued to partner with The
Smith Family and the Australian Literacy
& Numeracy Foundation throughout
the year. During The Smith Family Back
to School Appeal, $235,000 was raised
ensuring that more than 400 students
receive ongoing educational support.
Offi ceworks team member Noyna Busch at the North Lakes store in Queensland.
Our business
Offi ceworks is Australia’s leading
retailer and supplier of offi ce products
and solutions for micro, small and
medium-sized businesses, students
and households. Operating through a
nationwide network of stores, an online
platform, a call centre and a team of
business specialists, Offi ceworks is
focused on delivering a one-stop shop
for customers.
Our market
Offi ceworks’ current addressable market in
Australia is around $20 billion. The market
remains highly competitive, with a wide
variety of participants, some of whom
participate across multiple categories
whilst others seek to specialise in certain
areas.
Offi ceworks has continued to expand
its addressable market through range
and category expansion, and to drive
innovation in core offi ce products.
Sales growth was
achieved both in
stores and online
7.5% increase in
earnings to $144m
Return on capital
increase of 121 basis
points to 14.7%
Highlights
Wesfarmers 2017 Annual Report 43
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Strategy Offi ceworks aims to provide customers with the widest range of products and great service at the lowest prices,
while providing a safe, rewarding and engaging place to work for team members.
Offi ceworks will continue to drive growth by:
– strengthening and expanding the customer off er;
– extending its ‘every channel’ reach;
– enhancing productivity and effi ciency;
– investing in talent, diversity and safety; and
– making a positive diff erence in the community.
Risk Offi ceworks accepts that risk is an important part of exploring opportunities to operate successfully, but there is also
a need to understand and manage risk with a view to minimising unintended consequences. Risks deemed unacceptable to
the business are subject to appropriate control and mitigation measures, including risk transference through contractual
arrangements, insurance or avoidance.
Risks Mitigation
Changing consumer
behaviours
– Regular reviews of product range to ensure it meets the evolving demands and preferences of Offi ceworks’ target
customers
– Innovation within existing product categories and expansion into new categories
– Continued focus on providing great customer service
New and existing
competitors
– Relentless focus on key strategic pillars – lowest prices, widest range, great service
– Continue to build customer loyalty and strengthen the customer offer
– Effective cost control and disciplined inventory management
Unfavourable economic
conditions
– Continued focus on providing a compelling offer to customers
– Effective cost control while continuing to invest for the future
– Relentless focus on driving continuous improvement across all elements of the business to remain competitive
Data and IT security – Dedicated internal capability focused on IT systems and security
– A vast array of IT related controls are in place which include appropriate fi rewalls, disaster recovery plans,
periodic testing to ensure an appropriate level of security is maintained, and a security awareness program to
keep all team members informed of their responsibilities
Growth strategies Achievements Focus for the coming years
Strengthen and
expand the customer
offer
– Introduced new and expanded ranges
– Implemented merchandise layout and store design changes
across selected stores
– Continue to add inspiration, innovation and
differentiation to products
– Invest in services to help more businesses start, run
and grow
– Relentless focus on providing great customer service
– Ongoing investment in lowest prices
Extend our ‘every
channel’ reach
– Six new stores opened
– Ongoing enhancements to the online offer – new
responsive website and mobile app, better product
information and imaging
– More business specialists driving business-to-business
customer growth
– Make customer engagement easier – new stores, new
formats
– Continue to improve the online experience
– Ongoing investment in a seamless multi-channel offer:
‘clicks and bricks’ working together
– Accelerate business-to-business customer growth
Enhance productivity
and effi ciency
– Improvement in working capital metrics
– Improved space utilisation in stores
– Effective cost control
– Invested in supply chain enhancements to support future
growth
– Continue to invest in an effi cient, cost-effective and
agile supply chain which supports the business
strategy
– Improve space utilisation
– Improve cost of doing business and productivity
Invest in talent,
diversity and safety
– Delivered a range of development programs to the team
– Remained committed to diversity, with a specifi c focus on
women in leadership and Indigenous engagement
– Reduced the rolling 12 AIFR by 24.5 per cent
– Ongoing investment in leadership development
programs
– Continued focus on lifting team member diversity,
including women in leadership positions
– Rigorous approach to safety behaviours and outcomes
Make a positive
difference in the
community
– More than 90 per cent of private label paper products from
FSC-certifi ed or 100 per cent recycled sources
– Launched ‘Restoring Australia with Offi ceworks’ initiative:
two trees are planted for every one used
– Collected more than one million printer cartridges
– Installed LED lighting in an additional 35 stores and energy
monitoring systems to an additional nine stores
– Continued to partner with The Smith Family and the
Australian Literacy & Numeracy Foundation
– Lift recycling levels, reduce energy consumption
further
– Continue to fi nd ways to do things that are better for
the environment
– Continue to foster community partnerships
BACK

Wesfarmers 2017 Annual Report44
Operating and financial review — Industrials
The Industrials division includes
Wesfarmers’ three industrial businesses:
Chemicals, Energy and Fertilisers; Industrial
and Safety; and Resources. The aggregation
of these businesses under focused
leadership has streamlined reporting and
decision-making, enhanced sharing of
knowledge and ideas, and better positioned
the division for future growth.
Industrials
Clockwise from top: Workwear Group
team members Maria Italiano and Arthur
Thomasse inspecting sample uniforms for
the 2018 Commonwealth Games.
CSBP process operators Ken Twaddle
(left) and Brad Ripp on site in Kwinana,
Western Australia.
Curragh team member Kerry Lawson at the
coal mine in Blackwater, Queensland.
Wesfarmers 2017 Annual Report
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2017 5,161
2016 4,672
2015 4,985
2014 4,977
2013 4,991
2017 915
2016 47
2015 353
2014 482
2013 562
For the year ended 30 June 2013 2014 2015 2016 2017
Revenue ($m) 4,991 4,977 4,985 4,672 5,161
Earnings before interest and tax ($m) 562 482 353 47 915
Capital employed (R12) ($m) 3,999 4,125 4,245 4,244 3,393
Return on capital employed (%) 14.1 11.7 8.3 1.1 27.0
Capital expenditure ($m) 392 386 258 220 169
Revenue
Key fi nancial indicators1
1 Refer to individual businesses key fi nancial indicators for footnotes.
EBIT
$5,161m $915m
Performance drivers
ProspectsYear in review
Earnings in each of the three Industrials
businesses grew during the period,
producing a record result of $915 million
compared to $47 million in the prior year.
The result was primarily driven by earnings
of $405 million in Resources, which
was $715 million above last year due to
signifi cantly higher export sales revenue.
Earnings growth in Chemicals, Energy
and Fertilisers was driven by strong
performance in the ammonium nitrate
and Kleenheat businesses, as well as the
turnaround in Australian Vinyls following
the cessation of polyvinyl chloride (PVC)
manufacturing in the prior year. Reported
EBIT included $33 million relating to
WesCEF’s share of revaluation gains in
Quadrant Energy and a $22 million profi t
on sale of land.
Industrial and Safety is now benefi ting
from a streamlined operating model
following the business simplifi cation
initiatives implemented under the ‘Fit
for Growth’ program. Blackwoods drove
improvements across merchandising,
customer service and supply chain which
delivered margin improvement; Workwear
Group benefi ted from lower operating
costs following the implementation of a
number of initiatives to reduce the cost of
doing business; and Coregas continued to
grow its business through expansion into
New Zealand and adjacent markets such as
health care.
The Resources business reported
signifi cant increases in revenue and
earnings primarily due to increases in
metallurgical and steaming coal prices and
higher export sales volumes.
— ROB SCOTT
MANAGING DIRECTOR, WESFARMERS
INDUSTRIALS (for the reporting period)
This year saw the Industrials businesses
take advantage of growth opportunities
aff orded by market and customer
dynamics, streamlined operating models
and improved fi nancial disciplines.
Chemicals, Energy and Fertilisers
continues to focus on maintaining strong
operational performance, developing new
business opportunities and deploying new
technologies. A key activity in the 2018
fi nancial year is the commissioning of the
ammonium nitrate emulsion plant.
In Industrial and Safety the reset of
the Blackwoods and Workwear Group
businesses, together with investments
in upgraded systems and management
capability, are expected to provide
a platform to support future growth.
The businesses will continue to improve
systems and processes to enhance supply
chain effi ciency and customer service,
and optimise category management and
sourcing to improve sales and margins.
In Resources, both mines continue to focus
on operational productivity, cost control
and capital discipline. Metallurgical and
thermal coal prices are expected to remain
volatile in the near-term.
David Baxby, Managing Director,
Wesfarmers Industrials, eff ective
August 2017
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Wesfarmers 2017 Annual Report46
Operating and financial review — Industrials
2017 1,639
2016 1,820
2015 1,839
2014 1,812
2013 1,805
2017 395
2016 294
2015 233
2014 221
2013 249
For the year ended 30 June 2013 20141 20152 20163 20174
Revenue ($m) 1,805 1,812 1,839 1,820 1,639
Earnings before interest and tax ($m) 249 221 233 294 395
Capital employed (R12) ($m) 1,400 1,539 1,535 1,554 1,443
Return on capital employed (%) 17.8 14.4 15.2 18.9 27.4
Capital expenditure ($m) 2635 1725 56 60 44
Revenue
Key fi nancial indicators
¹ 2014 excludes a $95 million gain on sale of the 40 per cent interest in ALWA (reported as an NTI).
2 2015 includes a net $10 million gain comprising insurance proceeds and the gain on sale of
Kleenheat’s east coast LPG operations, partially offset by asset writedowns.
3 2016 includes $32 million of one-off restructuring costs associated with the decision to cease PVC
manufacturing.
4 2017 includes $33 million relating to WesCEF’s share of revaluation gains in Quadrant Energy and
profi t on sale of land of $22 million.
5 Excludes capitalised interest.
EBIT
$1,639m $395m
Year in review
From left, Jeff Embleton and Greg Luyt
in the ammonium nitrate control room
in CSBP’s Kwinana works, in Western
Australia.
Industrials
Chemicals, Energy and Fertilisers
Performance drivers
Revenue of $1,639 million was
9.9 per cent below last year due to declines
in Chemicals and Fertilisers revenue.
Chemicals revenue declined due to lower
PVC volumes, following the change to
an import model, and lower ammonia
prices which aff ected ammonium nitrate
sales prices as well as ammonia revenue.
Fertiliser sales volumes were lower due
to a dry start to the 2017 season. Growth
in natural gas and electricity revenue
contributed to growth in Energy revenue.
Reported EBIT of $395 million was
34.4 per cent higher than last year
including $33 million relating to WesCEF’s
share of revaluation gains in Quadrant
Energy and a $22 million profi t on sale of
land in the current year, and $32 million of
costs associated with the cessation of PVC
manufacturing in the prior year. Excluding
these one-off items, underlying EBIT
increased 4.3 per cent to $340 million.
Pleasingly, safety performance improved
signifi cantly during the year.
– Australian Vinyls, which supplies PVC resin
to the Australian industrial sector
– ModWood, which manufactures wood-
plastic composite decking and screening
products
Kleenheat extracts LPG from natural gas
and distributes bulk and bottled LPG to
the residential and commercial markets in
Western Australia and the Northern Territory.
It distributes bulk LNG through its subsidiary,
EVOL LNG, primarily to the remote power
generation market in Western Australia.
Kleenheat is also a retailer of natural gas to
residential and commercial markets, and
electricity to businesses in Western Australia.
CSBP Fertilisers manufactures, imports
and distributes phosphate, nitrogen and
potassium-based fertilisers for the Western
Australian agricultural sector. CSBP Fertilisers
also provides technical support services for
growers through a network of employees
and accredited partners in regional Western
Australia.
Wesfarmers owns a 13.7 per cent interest in
Quadrant Energy, which supplies domestic
gas in Western Australia and oil across
Australia. Earnings from this interest are
included in WesCEF’s results.
Sustainability
WesCEF continues to improve its safety
performance through its ‘Safe Person, Safe
Process, Safe Place’ program, investing in
leadership capability, operating responsibly,
contributing positively to the communities
in which it operates, and maintaining a
commitment to environmental stewardship.
WesCEF supported community organisations
including the Clontarf Gilmore College,
Moorditj Koort, WACA Regional Junior
Cricket Program, and a number of emerging
partnerships (Murdoch University, Edith
Cowan University, Kwinana Industries
Council and local schools) associated with
the development of WesCEF’s STEM (science,
technology, engineering, mathematics) project.
Our business
WesCEF operates eight businesses in
Australia and employs approximately
1,200 team members. WesCEF’s business
units are Chemicals, Energy (Kleenheat),
and CSBP Fertilisers.
Our market
Chemicals includes:
– the manufacture and supply of
ammonia, ammonium nitrate (AN)
and industrial chemicals primarily to
the Western Australian resources and
industrial sectors through CSBP
– Queensland Nitrates (QNP), CSBP’s
50 per cent joint venture with Dyno
Nobel Asia Pacifi c which manufactures
and supplies AN to the resources
sector in the Bowen Basin coal fi elds
– Australian Gold Reagents (AGR),
CSBP’s 75 per cent joint venture
with Coogee Chemicals which
manufactures and supplies sodium
cyanide to the Western Australian and
international gold mining sectors
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Strategy WesCEF’s objective is to develop a portfolio of successful and innovative industrial businesses that deliver
satisfactory shareholder returns and continually strengthen its reputation for the management of health, safety and the
environment.
Risk WesCEF manages risk as an intrinsic part of its business and is committed to conducting its activities in a way that
ensures the continued and sustainable growth of shareholder value. Risks deemed unacceptable are transferred (through
contractual arrangements or insurance), mitigated or avoided.
Risks Mitigation
Serious injury, safety or
environmental incident
– Continue to invest in improving safety culture and performance for the safe operation of facilities and distributing
products in a way that minimises any adverse effect on employees, contractors or local communities
– Maintain a strong focus on operating facilities and distribution systems in a manner which minimises the effect on
the environment
Raw material input
price and exchange rate
volatility
– Earnings volatility from raw material price movements is mitigated through a range of price pass-through
arrangements with customers, and detailed demand planning and forecasting processes including regular mark-
to-market of inventory
– Exchange rate effects on raw material costs are closely monitored and included as a criterion for product pricing
decisions. Where appropriate and aligned with Wesfarmers’ guidelines, foreign exchange hedges are used to
remove earnings volatility
Reducing market demand
for products
– Establishing a balance of long-term contracts with minimum volume requirements and established pricing
mechanisms (predominantly with domestic customers) with short-term spot agreements, including placing
products into export markets from time to time
– Continue to improve brand awareness and focus on satisfying customer needs
Growth strategies Achievements Focus for the coming years
Invest in business capacity
to meet the needs of
customers
– Ammonium nitrate and sodium cyanide plants operated at
full expanded production capacity
– Negotiated a new explosive-grade AN contract, partially
offsetting the expiry of a key contract in July 2017
– Kleenheat won the Canstar Blue Most Satisfi ed Customer
Award
– Entered into an agency agreement with Elders to
distribute CSBP fertilisers
– Secure AN contract extensions and pursue new
volumes
– Continue to focus on plant reliability, process
effi ciency and productivity improvements
– Continue to invest to grow and expand fertiliser
services and natural gas retailing offer
Execute opportunities for
growth in existing and new
markets
– Started construction of AN emulsion plant, underpinned
by a long-term offtake agreement
– Continued market-share growth of natural gas retailing
business in WA
– EVOL LNG successfully entered the LNG bunkering
market
– Launched website for Decipher, CSBP’s new agriculture
technology brand
– Commissioning of AN emulsion plant
– Further development and deployment of Decipher
– Ongoing evaluation of opportunities to grow in
existing and new markets
– Prepare for Full Retail Contestability in the WA
electricity market
Foster a culture that
recognises that people are
central to the success of
the business
– Signifi cant investment in the Aboriginal Engagement and
Employment Plan with an emphasis on job creation, skill
building and creating an inclusive culture
– Delivery of structured leadership programs and the
introduction of a management essentials program for
employees
– Programs for engineering graduates and cadets
– Trialling new ways to attract and retain female employees,
especially in leadership and non-traditional roles
– Development of Wellness@WesCEF, a program to support
employee wellness including mental health
– Implement further targeted programs to attract,
develop and retain an engaged, diverse workforce
– Continue a strong focus on leadership training and
a more inclusive culture
– Ongoing development of technical competence
training and skills enhancement across our
complex operations
– Expand graduate program to include commercial
graduates with a focus on women
Focus on sustainable
operations for the benefi t
of employees, customers
and communities in which
we operate
– Community acceptance and regulatory compliance
– 90 per cent greenhouse gas abatement equating to
1.2 million tonnes of carbon dioxide equivalent
– Direct community contributions of $310,000 supporting
the Clontarf Gilmore College, Moorditj Koort, and the
WACA Regional Junior Cricket Program, as well as
STEM-based initiatives delivered with the Kwinana
Industries Council and various universities
– Ongoing commitment to improve safety
performance and capability
– Continue focus on regulatory compliance and
assessment of operational excellence
– Continue to deliver on community investment
strategies
– Manage contaminated land issues and sell surplus
land at Laverton, Victoria (previous Australian Vinyls
site)
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Wesfarmers 2017 Annual Report48
Operating and financial review — Industrials
Industrials
Industrial and Safety
Revenue
Performance drivers
Revenue of $1,776 million was 3.7 per cent
below last year, with challenging market
conditions aff ecting sales in Blackwoods
and Workwear Group’s industrial wear
business. Blackwoods’ revenue has shown
recent signs of stabilising following a
prolonged period of decline. Coregas
experienced revenue growth as it continued
to increase market share and develop new
market opportunities.
Reported EBIT of $115 million represented
an 82.5 per cent increase on last year.
Excluding restructuring costs of $35 million
in the prior year, underlying EBIT increased
17.3 per cent with higher earnings across
all businesses. Blackwoods delivered
increased earnings supported by higher
gross margins from improved category
management and supplier relationships,
and stronger pricing disciplines. Workwear
Group earnings increased as a result of
cost savings achieved through the ‘Fit for
Growth’ program.
Key fi nancial indicators
EBIT
Year in review
Our business
Industrial and Safety operates three main
businesses: Blackwoods (comprising
Blackwoods Australia and NZ Safety
Blackwoods); Workwear Group; and
Coregas.
Blackwoods is a leading supplier of tools,
safety, workwear and other industrial
supplies to businesses of all sizes across
Australia and New Zealand. It distributes
its products through an extensive national
supply chain and branch network and
online platforms. Its broad product range
is supported by expert technical advice
and solutions.
Workwear Group is Australia’s largest
provider of industrial and corporate
workwear, featuring iconic Australian
brands such as Hard Yakka, King Gee and
Stubbies. Workwear Group also supplies
bespoke and catalogue uniforms to leading
airlines, fi nancial services providers,
retailers and other large corporates
through NNT and Incorporatewear (UK),
as well as specialised garments to defence
and emergency services customers in
Australia and New Zealand.
Coregas is a national industrial gas
distributor in Australia and New Zealand,
serving customers of all sizes through
multiple sales channels and distribution
networks including Blackwoods and
Bunnings.
Our market
In Australia, Blackwoods, Workwear Group
and Coregas service customers across
diverse industries such as construction,
mining, manufacturing, retail, food and
beverage, transport, facilities maintenance
and government.
In New Zealand, NZ Safety Blackwoods’
market is primarily small-to-medium sized
businesses in a wide range of industries,
supplemented by selected large enterprise
customers.
Sustainability
Industrial and Safety established a target-
based sustainability plan during the year,
and progressed key areas of focus such as
gender balance, Indigenous engagement,
ethical sourcing and the health and
wellbeing of team members through a
range of new programs. Employee safety
continued to be a high priority area
with new safety initiatives such as ‘Five
Lifesaving Rules’ implemented across the
distribution centres.
2017 1,776
2016 1,844
2015 1,772
2014 1,621
2013 1,647
2017 115
2016 63
2015 70
2014 131
2013 165
For the year ended 30 June 2013 2014 20151 20162 2017
Revenue ($m) 1,647 1,621 1,772 1,844 1,776
Earnings before interest and tax ($m) 165 131 70 63 115
Capital employed (R12) ($m) 1,119 1,127 1,257 1,339 1,363
Return on capital employed (%) 14.7 11.6 5.5 4.7 8.4
Capital expenditure ($m) 50 51 65 44 34
¹ 2015 includes restructuring costs of $20 million related to branch closures, business consolidation and
organisational redesign.
2 2016 includes $35 million of restructuring costs associated with the ‘Fit for Growth’ transformation.
$1,776m $115m
The number of Indigenous employees in the Industrials business increased from
one per cent in 2016 to three per cent in 2017. Clockwise from left, Jermaine Bropho,
Raymond Winmar, Trudi Chesterton (Blackwoods Western Australian State Supply
Chain Manager), Josh Hansen, James Waghorne and Cedric Cuttabutt at Blackwoods
in Canning Vale, Western Australia.
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Strategy Industrial and Safety continues to drive growth in earnings by leveraging its new, simplifi ed platform to improve
business performance through lowering the cost of doing business, improving the off er to customers and growing the
revenue base.
Across Blackwoods, initiatives focused on the four core areas of sales and service, merchandising, supply chain and digital
are delivering a more customer-centric and competitive business.
Other strategic priorities include continuing the turnaround of Workwear Group and further growing Coregas through new
distribution channels.
Risk As a supplier of industrial, safety and workwear products, the business is exposed to the performance of customers’
industry sectors as well as macro-economic factors such as capital investment, employment, exchange rates and interest
rates.
Risks Mitigation
Subdued investment
activity in traditional
customer segments of
mining and resources
– Implement the new Blackwoods platform in Australia and New Zealand to support growth into different market
sectors
– Continue to execute performance improvement plans in Blackwoods and Workwear Group
– Further develop new distribution channels for Coregas
Growth of new and
existing competitors,
including supplier sales
direct to customer
– Develop a more customer-centric and relevant platform
– Develop and launch new digital capabilities
– Continue to optimise range and price
Safety or environmental
incident
– Continue to focus on quality systems and ensuring compliance with standards
– Fully operational safety program including regular monitoring and the continuation of the safety culture
– Active safety engagement by senior management
Growth strategies Achievements Focus for the coming years
Implementation of a more
customer-centric and
competitive Blackwoods
platform
– Reduced complexity in structure, operations and brand
– Lowered operating costs allowing greater investment in
capabilities
– Channels to market realigned to focus on growth
opportunities
– Improved supply chain processes and performance
– Enhanced digital platforms
– New preferred supplier agreements and range
rationalisation commenced
– Continue to reinvest in improving capabilities
across sales and service, merchandising, supply
chain and digital
– Leverage the Blackwoods platform to grow into
light industrial sectors
– Grow medium-size customer segment in core
heavy industrial markets
– Grow customer base and penetration of adjacent
markets
Turnaround performance in
Workwear Group
– Supply chain optimisation initiated
– Sourcing rationalisation program commenced
– Channels to market realigned
– Reduce complexity and improve speed to market
– Improve range and pricing architecture
– Drive a results-focused culture
Grow Coregas through
new distribution channels
– Increased market share
– Leveraged Blackwoods and Bunnings distribution
channels in Australia and New Zealand
– Acquired Supagas NZ
– Renewed medical gases proposition launched
– Further develop new distribution channels and
market opportunities
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Wesfarmers 2017 Annual Report50
Operating and financial review — Industrials
Industrials
Resources
Revenue
Performance drivers
Revenue of $1,746 million was
73.2 per cent above last year, primarily
due to signifi cantly higher export coal
prices and higher sales volumes.
Reported EBIT was $405 million,
$715 million above last year, primarily due
to signifi cantly higher export sales revenue.
At Curragh, a continued focus on
productivity and a revised mine plan drove
an increase in production, supplemented
by the opportunistic use of contractor
fl eet to take advantage of higher export
metallurgical coal prices.
Key fi nancial indicators
EBIT
Year in review
Our business
Resources has investments in two coal mines.
Both mines are world-scale, low-cost, open-
cut producers. The majority of production is
exported to Asia.
Curragh (100 per cent)
Situated in Queensland’s Bowen Basin, Curragh
is one of the world’s largest metallurgical coal
mines with an operating track record of more
than 30 years. It produces metallurgical coal
for export markets and also supplies steaming
coal to the Queensland Government’s Stanwell
Corporation under a long-term contract
until approximately 2025. Curragh’s baseline
production capacity is 8.5 million tonnes per
annum (mtpa) for export metallurgical coal
and 3.5 mtpa for steaming coal.
Bengalla (40 per cent)
The business has a 40 per cent interest in
the Bengalla mine, located south-west of
Muswellbrook, in the Hunter Valley region of
New South Wales. Bengalla produces steaming
coal for export markets and has a 10.7 mtpa
run-of-mine capacity (100 per cent basis).
Our market
Curragh
Curragh is reliable, fl exible and one of a small
number of independent Australian producers
of metallurgical coal. It has a well-established
and geographically diverse customer portfolio
with a number of long-standing relationships
with world-leading steel-makers. In the 2017
fi nancial year, Curragh’s metallurgical exports
by volume went to Japan (36 per cent), South
Asia (30 per cent), North Asia (22 per cent),
Europe (8 per cent) and other (4 per cent).
Bengalla
Bengalla’s steaming coal is used for power
generation and is exported primarily to
customers based in Japan and North Asia.
Sustainability
Resources strives to be a highly ethical business
that puts the safety and wellbeing of its people
fi rst. This is achieved by focusing on workplace
health and safety to prevent accidents and
injuries. During the 2017 fi nancial year,
Curragh’s TRIFR decreased from 4.8 to 3.7.
The business is committed to operating
in a sustainable manner and takes its
environmental and social responsibilities
seriously. It seeks to make a positive and
lasting contribution to the communities in
which it operates and to the nation through
its economic activity.
Resources continues to support local
communities, particularly in times of hardship
as a result of natural disasters and by providing
improved employment opportunities for
local Indigenous communities.
2017 1,746
2016 1,008
2015 1,374
2014 1,544
2013 1,539
2017 405
2016 (310)
2015 50
2014 130
2013 148
For the year ended 30 June 2013 2014 2015 20161 2017
Revenue ($m) 1,539 1,544 1,374 1,008 1,746
Earnings before interest and tax ($m) 148 130 50 (310) 405
Capital employed (R12) ($m) 1,480 1,459 1,453 1,351 587
Return on capital employed (%) 10.0 8.9 3.4 (22.9) 69.0
Capital expenditure ($m) 79 163 137 116 91
¹ 2016 earnings before interest and tax excludes the $850 million non-cash impairment of Curragh.
$1,746m $405m
Coal mining operations at the Curragh mine at Blackwater, Queensland.
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Strategy The business’s investment time horizon is long-term and each mine seeks to maximise shareholder value
through commodity cycles. In the current environment of volatile export coal prices, both mines continue to respond
with a strong focus on improving operational productivity, cost control and capital discipline. Opportunities to increase
production and extend mine life continue to be assessed, subject to market conditions including export prices.
Risk Resources has direct fi nancial exposure to the global commodity cycle. Curragh is exposed to global steel production
and the fl ow-on demand for export metallurgical coal. Bengalla is exposed to export demand for steaming coal in North Asia.
Risks Mitigation
Revenue – export coal
price movements (upside
and downside risk)
– Both mines maintain established, long-term, close relationships with export customers
– Export sales are diversifi ed by customer and geography
– Currency hedges now fully closed out, in line with major Australian metallurgical coal competitors
Mine operations
(e.g., weather, safety
management, equipment
and performance)
– Resources has detailed operating practices and procedures in place to ensure that both mines are operating
sustainably and effi ciently for the long term. Both Curragh and Bengalla have established track records of
operating performance, safety and reliability
Growth strategies Achievements Focus for the coming years
Business excellence Curragh:
– Development of a revised mine plan to target
opportunities identifi ed by the 2016 Expert Panel Review
– Increased production to take advantage of higher export
coal prices
– Continued focus on safety performance with reduction
in TRIFR
Bengalla:
– Lowest quartile producer
– Continuous improvement of safety performance
– Continue strong focus on operational productivity,
cost control and capital discipline
– Implementation of revised mine plan
Mine expansions Curragh:
– Conditional Commonwealth approval granted for mining
leases within the MDL 162 area adjacent to Curragh and
Curragh North
– Feasibility study completed for a second stage expansion
to 10mtpa export capacity
– Progress MDL 162 Commonwealth approvals
– Investment decision to expand Curragh subject to
market conditions
– Evaluate production expansion options for Bengalla
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Wesfarmers 2017 Annual Report52
Operating and financial review
Wesfarmers is also a major investor in
the BWP Trust, Gresham Partners and
Wespine Industries.
BWP Trust
Wesfarmers’ investment in the BWP Trust
(the Trust) contributed earnings of
$55 million, compared to $77 million
last year.
The Trust was established in 1998 with a
focus on warehouse retailing properties
and, in particular, Bunnings warehouses
leased to Bunnings Group Limited.
BWP Management Limited, the
responsible entity for the Trust, is a
wholly owned subsidiary of Wesfarmers
Limited. Units in the Trust are listed on
the Australian Securities Exchange and
Wesfarmers holds, through a wholly owned
subsidiary, 24.8 per cent of the total units
issued by the Trust as at 30 June 2017.
The Trust performed in line with its
business objectives during the year,
providing a 4.3 per cent increase in full
year distributions and a 5.1 per cent net
increase in the assessed valuation of the
Trust’s property investment portfolio.
The Trust’s portfolio as at 30 June 2017
consisted of a total of 80 properties: 79
established Bunnings warehouses, eight
of which have adjacent retail showrooms
that the Trust owns and are leased to other
retailers; and one fully-leased stand-alone
large format showroom property.
Gresham Partners
Wesfarmers has a 50 per cent shareholding
in Gresham Partners Group Limited, the
holding company for the Gresham Partners
investment house operations. Gresham is
a leading independent fi nancial services
business focused on the provision of
corporate and property advisory services,
funds management, property fi nancing
and debt solutions.
During the year, Gresham participated
in a number of signifi cant advisory
transactions, including mergers and
acquisitions, corporate restructurings
and debt refi nancing on behalf of a range
of domestic and international clients. Its
property funds management business,
which is the manager of established
institutional funds and syndicates,
continued to fi nance a range of Australian
development projects.
Wesfarmers is a participant in the Gresham
Private Equity funds with the remaining
holding being an underground mining
services business operating both in
Australian and overseas markets.
Wespine Industries
The 50 per cent-owned Wespine Industries
operates a plantation softwood sawmill in
Dardanup, Western Australia.
Timber sales for the 2017 fi nancial year
decreased by 11 per cent largely due to
further softening in Western Australian
house building activity. Operating margins
also deteriorated during the year due to
increased competition from imported
timbers and an overall surplus in supply
volumes.
Safety performance improved with
a 32 per cent reduction in the TRIFR
for the year. The management team is
continuing its focus on the identifi cation
and mitigation of occupational risks,
notably manual handling.
Other activities
A BWP Trust development in Harrisdale,
Western Australia.
Sustainability
Our full sustainability report will
be available in October 2017 at
sustainability.wesfarmers.com.au
Wesfarmers has been committed to creating value
for its shareholders, customers, employees and
communities for more than a century.
Long-term value creation is only possible if
we play a positive role in the communities
we serve. At Wesfarmers, sustainability is
about understanding and managing the
ways we impact our community and the
environment, to ensure that we will still be
creating value in the future.
We are committed to working with our
suppliers to adhere to ethical business
conduct and proactively address potential
human rights issues through a range of
actions. Our statement pursuant to the
UK Modern Slavery Act appears in the
Wesfarmers sustainability report.
We acknowledge that the world is
changing and climate change will have
serious implications for our customers,
the economy and the communities in
which we operate. We recognise that
we have a role in investing in Australia’s
response to climate change as this will
deliver signifi cant economic, social and
environmental benefi ts for us all. For
Wesfarmers, this is about good governance,
prudent risk management and positioning
our businesses competitively for the future.
The Dow Jones Sustainability Index
tracks sustainability performance of
leading companies around the world. In
September 2017 Wesfarmers was advised
it had scored 78 out of 100, two points
behind the global leader in the food and
staples sector.
Our full sustainability report will
be available in October 2017 at
sustainability.wesfarmers.com.au
Wesfarmers 2017 Annual Report 53
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ETHICAL SOURCING
AND HUMAN RIGHTS
1 Factories include supplier sites.
2 As at 30 June 2017.
Injury rate
↘ 16%
SAFETY
PEOPLE
DEVELOPMENT
We acknowledge that we can always do better.
WASTE AND
WATER USE
Direct fundingFactories1 in our audit program
5,455 ›$73m
ETHICAL SOURCING
AND HUMAN RIGHTS
COMMUNITY
CONTRIBUTIONS
CLIMATE CHANGE
RESILIENCE
Reduced our Total
Recordable Injury
Frequency Rate by
16 per cent to 28.3.
While Wesfarmers’
workforce is made up
of 54 per cent women
and 46 per cent men, a
key opportunity for the
Group is to increase the
percentage of leadership
positions held by women.
Despite our eff orts,
ongoing reduction in
waste disposed and water
use is hard to maintain as
our businesses continue
to grow. We will continue
to seek opportunities to
do this.
We will continue to focus
on ethical sourcing,
especially supply
chain transparency.
Strengthening our
relationships with
suppliers ensures that we
can contribute positively
in this area.
Contributed more than
$73 million in direct
funding to community
organisations.
We will continue to
focus on climate change
resilience, especially
energy effi ciency.
Wesfarmers is committed
to minimising its
footprint and to deliver
solutions that help
its customers and the
community do the same.
Improved the
transparency of our
supply chain with 5,455
factories in our audit
program.
Our performance
This year we are proud of our progress in the following areas.
Indigenous employees
4,231
DIVERSITY
Worked to promote
diversity in our
workplaces, with 4,231
employees identifying as
Indigenous2.
Wesfarmers 2017 Annual Report54
Sustainability
Safety
We maintain a relentless
focus on providing safe
workplaces.
Keeping our employees, customers,
suppliers and visitors across all our sites
safe is our highest priority. Improvements
to safety are core to all our operations,
whether it is in a department store or at an
industrial site. We are focused on continual
improvements in safety leadership,
strategies targeting risk reduction and
improving physical and mental health.
We are seeing the benefi ts of this relentless
focus on making our workplaces safer but
we acknowledge that if team members are
injured at work, our safety performance
still requires improvement and remains
our highest priority.
People development
We provide opportunities for
our people to enhance their
job performance and develop
their careers.
We employ approximately 223,000 people
globally, including more than 203,000 in
Australia, making Wesfarmers Australia’s
largest private-sector employer. Of our
people, approximately 68 per cent are
employed on a permanent basis and
32 per cent are employed on a casual basis.
Wesfarmers businesses provide
employment to approximately one
in 60 working Australians or one in 14
working Australians under 20 years of age.
In 2017, we distributed $8.7 billion to our
employees in salaries, wages and benefi ts.
The quality of our people is our greatest
competitive advantage and providing
them with opportunities to improve their
performance and their careers is key to
our success.
Training and development
Wesfarmers is committed to providing
strong skills-based training and leadership
development to all employees. In addition
to on-the-job training, Wesfarmers’
divisions provide job-specifi c training
opportunities as well as more general
training opportunities covering areas like
technical skills, customer service, team
work and leadership. These programs are
available to full-time, part-time and casual
employees.
Workplace relations
More than 83 per cent of our workforce
is covered by collective agreements. We
recognise the right of those we employ to
negotiate either individually or collectively,
with or without the involvement of third
parties. We also believe in maximising
the fl exibility of workplace arrangements
available to our employees.
Total recordable injury frequency rate1
28.3
1 TRIFR is the number of lost time injuries and
medical treatment injuries per million hours worked.
2 Restated due to maturation of data.
50
40
30
20
10
0
13 14 15 16 2017
2017 28.3
20162 33.6
2015 39.4
2014 42.7
2013 38.7
This year, workplace relations at Coles
received some attention. The Fair Work
Commission declined to approve a new
enterprise bargaining agreement covering
all Coles store team members. Following
that decision, the majority of Coles team
members are now covered by the 2011
Store Team Enterprise Agreement. Most
meat team members are covered by state-
based agreements and a small number of
team members (Coles Online customer
service agents) are covered by the General
Retail Industry Award.
In July 2016, an individual Coles team
member fi led an application to terminate
the 2011 agreement. This matter is
currently before the Commission.
To monitor our historical safety
performance, we use total recordable
injury frequency rate (TRIFR) and
lost time injury frequency rate (LTIFR),
which show injuries per million hours
worked by employees and long-term
contractors. This year, our TRIFR decreased
Lost time injury frequency rate1
7.4
1 LTIFR is the number of lost time injuries per
million hours worked.
2 Restated due to maturation of data.
13 14 15 16 2017
10
8
6
4
2
0
2017 7.4
2016 7.32
2015 7.3
2014 7.7
2013 9.0
by 16 per cent from 33.6 to 28.3, with
improvements across most divisions.
Our LTIFR increased 1.4 per cent this year
compared to the same period last year.
We were pleased that our workers’
compensation claims decreased by
more than 1,000 to 6,294.
Wesfarmers corporate offi ce team members, from left, John Evans, Alison Bodill
and Justin Laird.
Wesfarmers 2017 Annual Report 55
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The employment of people with
(dis)abilities remained a key
focus for Kmart this year. Kmart
worked with Mylestones and the
Australian Network on Disability,
to ensure people with (dis)abilities
could participate equitably in the
employment process and feel safe
in Kmart stores.
Kmart creates
an inclusive
environment
Diversity
We strive to create an
inclusive work environment,
with particular attention
to gender balance and the
inclusion of Indigenous
people.
Wesfarmers considers building a diverse
and inclusive workforce an opportunity to
drive strong and sustainable shareholder
returns. Creating an environment that
attracts, retains, and promotes talent with
a wide range of strengths and experiences
ensures Wesfarmers is best equipped for
future growth.
Our commitment to diversity across
Wesfarmers extends to all individuals and
all perspectives. Particular focus is paid to
achieving a balance of men and women
in senior management positions across
our divisions and continuing to boost
employment of Indigenous people.
Gender balance
While Wesfarmers’ workforce is made
up of 54 per cent women and 46 per cent
men, a key opportunity for the Group is
to increase the percentage of leadership
positions held by women. Women
hold 47 per cent of salaried roles and
56 per cent of award or enterprise
bargaining agreement (EBA) roles.
The Wesfarmers Diversity Policy outlines
four core objectives which are used to
measure performance in this area. The
objectives are reviewed annually by the
Board, as well as Wesfarmers’ progress
Indigenous employment
As Australia’s largest private sector
employer, we believe we are able to
provide Indigenous people with greater
opportunities to participate in sustainable
employment, and this remains the
primary focus of our RAP. At 30 June 2017,
Wesfarmers had 4,231 Indigenous team
members, representing two per cent of
our current Australian workforce. This is a
27 per cent increase on the previous year.
Wesfarmers has committed to increasing
its procurement from Indigenous suppliers.
We are a founding member of Supply
Nation, Australia’s leading supplier diversity
accreditation organisation.
Our RAP is available at wesfarmers.com.au
2017 4,231
2016 3,327
2015 2,762
2014 1,711
2013 1,302
Indigenous team members
Wesfarmers Limited
Non-Executive Directors
Senior executive positions
(General manager or above)
All management and professional roles
Total workforce
2017
Female representation across the Group
(percentage of employees)
in achieving these objectives. Specifi c
progress targets are linked to senior
executive key performance objectives
under the incentive plan. Given the
diversity of the Wesfarmers portfolio,
each division has developed its own
gender balance plan in line with the
Group objectives.
Indigenous representation in our
workforce
Our vision for reconciliation is an Australia
that aff ords equal opportunities to all.
Wesfarmers aims to ensure that Indigenous
people feel welcome in our businesses
as employees, customers, suppliers
and visitors. We will know that we have
succeeded when we have a workplace that
refl ects the diversity of the communities
we serve.
Wesfarmers produced its fi rst public
Reconciliation Action Plan (RAP)
in 2009. Our RAP outlines specifi c
measurable actions undertaken across
the Group, targeting Indigenous
employment, business engagement,
community partnerships and team
member volunteering with Indigenous
organisations.
During the year
we increased
the employment
of Indigenous
team members
by 27 per cent
38% 38%
24% 23%
32% 30%
54% 55%
2016
Coles team member Dion Patten at the
Coles Aurora Village supermarket in
Victoria.
Kmart team member Louise Crook at the
Kmart store in Toowong, Queensland.
Wesfarmers 2017 Annual Report56
Sustainability
Coles provides more
than $9 million to
support innovation
Cattle producer Bill Crowther will
become the fi rst cattle producer
in Queensland to supply to Coles’
grass-fed GRAZE beef range, using
a $500,000 grant from the Coles
Nurture Fund.
Ethical sourcing and human rights
Suppliers
We commit to strong and
respectful relationships with
our suppliers.
Our relationships with more than
18,000 suppliers across the Group
are very important to us. This year we
incurred costs to suppliers of $46.4 billion.
We want to provide value to our customers
and sustainable growth for our suppliers
and their employees. Striving for better
effi ciency in our consumer supply chains
ensures their continued competitiveness.
Australia fi rst at Coles
Coles has an Australia fi rst sourcing
policy to source Australian-grown food
whenever and wherever it can. Coles
sources more than 96 per cent of fresh fruit
and vegetables from Australian growers,
100 per cent of fresh milk and eggs, and
100 per cent of fresh meat for the meat
department from Australian producers.
Coles is supporting Australian producers
and growers with new and extended
long-term contracts. During the year,
Coles signed a 10-year agreement with
TOP Pork Pty Ltd which paves the way for
12 Victorian and South Australian farming
families to supply sow stall free pork
directly to Coles each week. In 2015,
Coles entered into a 10-year agreement
with Sundrop Farms to supply tomatoes
and in 2016, secured an eight-year
agreement with Manbulloo Mangoes.
Ethical sourcing audit program fi ndings
Approved 2,686
Conditionally Approved 2,416
Expired Audits 287
Critical Breaches 66
5,455
Total number of factories1
Kmart joins
partnership to
improve working
conditions in factories
Kmart is committed to enhancing
the voice, capabilities and quality
of life of workers in its supply chain.
As part of this commitment, in
2017 Kmart joined the Better Work
program in Indonesia, Cambodia
and Bangladesh.
know human rights issues can happen
anywhere and we accept that we cannot
consider suppliers low risk if they operate
in more regulated countries, like Australia.
This year, our audit program covered
5,455 factories (this includes supplier
sites) in Australia and overseas used to
produce products for sale across our retail
businesses.
Factories in the audit program are required
to have undertaken an assessment as
mandated by our business. Factories may
then be required to undertake further
assessments including having a current
audit certifi cate, which means they have
been audited by us or another party whose
audits we accept. Those audits identify
a range of non-compliances, from minor
non-compliances such as minor gaps in
record keeping to critical breaches, such
as incidences of forced labour or bribery.
We strive to source products
in a responsible manner
while working with suppliers
to improve their social and
environmental practices.
Wesfarmers’ businesses source products
from a range of locations. Some of the
major locations we source from outside
Australia include China, Bangladesh,
Europe, Indonesia, India, Thailand,
New Zealand, Vietnam, South Korea and
Malaysia. Buying products from these
regions creates economic benefi ts for
them as well as allowing our businesses to
provide aff ordable products to consumers.
We are committed to working with our
suppliers to adhere to ethical business
conduct and proactively address human
rights through a range of actions.
Ethical sourcing audit programs
To mitigate the risk of unethical practices
occurring in our supply chains, the
relevant Wesfarmers businesses (Coles,
Bunnings, Target, Kmart, Offi ceworks,
and Industrial and Safety) apply an
ethical sourcing audit program to certain
suppliers. Suppliers are considered lower
risk if they are supplying recognised
international brands. While high-risk
jurisdictions mainly correlate to our
suppliers from emerging markets, we
During the year Coles extended its milk
contract with Norco. The original fi ve-year
contract, signed in 2014, has been extended
until 2023 with Coles having an option to
extend until 2026. Under the arrangement,
around 220 New South Wales and
Queensland dairy farmers will supply 60
million litres of Coles Brand milk annually.
Under a supply contract with Simplot,
which has been extended until 2024, Coles
has committed to sourcing an additional
six million kilograms a year of Australian-
grown vegetables which were previously
sourced from overseas.
1 Factories include supplier sites.
Wesfarmers 2017 Annual Report 57
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In a fi rst for Coles in Western Australia, its new supermarket at Byford
installed solar power to generate enough electricity for 50 average
Australian homes. Powered by 770 solar panels, up to 20 per cent of the
supermarket’s annual energy use comes from the 1,260sqm of solar panels
installed on the store’s roof.
Coles invests in renewable energy
Climate change
resilience
We strive to improve the
emissions intensity of our
businesses and improve their
resilience to climate change.
Wesfarmers supports the
recommendations of the Task Force on
Climate-related Financial Disclosures and
is committed to providing stakeholders
with information in relation to how we
are managing climate change risks.
Our position on climate change
Wesfarmers accepts the
Intergovernmental Panel on Climate
Change’s (IPCC) assessment of climate
change science and believes the world
can pursue three objectives: a stable
and reliable energy market; reduce
emissions; and reduce the cost of energy.
We have identifi ed climate change as
the most material environmental and
social sustainability issue relevant to our
businesses and have incorporated it into
our long-term planning.
We recognise that the climate is
changing due to human actions and
we acknowledge that business has a
part to play in mitigating this climate
change. Wesfarmers supports Australia’s
commitments under the Paris Agreement
to limit global warming to 1.5°C – 2°C
above pre-industrial levels. Industry
and governments must work together
to achieve this outcome. Long-term
policy certainty is a prerequisite for
decarbonisation (meaning the economy
reaches net zero carbon emissions) by
2050 to occur effi ciently and aff ordably.
During the year, we met with the Federal
Government to reiterate our position
that stable bipartisan action on climate
change is critical for business to manage
risk and invest in climate mitigation.
Climate change is a critical,
Board-level, governance and strategic
issue at Wesfarmers. Management is
responsible for assessing and managing
climate related risks and opportunities
and the Board of Wesfarmers has
oversight of these risks and opportunities.
Climate change strategy
Climate change is incorporated into
our broader sustainability strategy. The
governance structure we have in place
has been designed so that it is fl exible
enough to cater to the needs of our
diverse conglomerate business model
while remaining clear and practical.
Given the diversity of our businesses
and consequently the range of risks and
opportunities posed by climate change,
we believe this approach is more eff ective
than a stand-alone Group strategy.
Two degree scenario analysis
To understand the longer term impacts
to the Australian economy, including
risks and opportunities for Wesfarmers,
of limiting global warming to less than
two degrees Celsius above pre-industrial
levels, we have undertaken scenario
analysis.
Shadow carbon price
Since 2014, we have put a shadow price
on carbon to help reduce our carbon
footprint cost eff ectively. Shadow pricing
is a method of investment decision
analysis that adds a hypothetical
surcharge to market prices for goods
that involve signifi cant carbon emissions.
Climate change risk management
Our divisions respond to climate
change in two ways. Firstly, we work to
understand the specifi c risks created
by climate change for our businesses
and address those risks. Secondly, we
actively monitor and manage our own
greenhouse gas emissions and reduce
them where possible.
Once again this year we have tested the
robustness of our businesses against
climate change using CSIRO 2030 data
in our annual risk process. Our annual
risk review process confi rmed existing
operational, strategic and compliance
risk controls are adequate for managing
climate change risk in our businesses. We
believe suitable action is being taken and
we are making appropriate disclosures.
Our annual risk review process has
identifi ed climate change as an emerging
risk and our businesses are therefore
taking steps to actively consider and
monitor its potential impact on business
operations, the community and the
broader economy. The climate change
risks we assess are physical, regulatory,
reputational and competitive risks.
Wesfarmers 2017 Annual Report58
Sustainability
Physical risks
Our analysis has found that projected
changes in sea level, storm surge
intensity, temperature, precipitation
and more frequent changes in extreme
weather will exacerbate existing risks
while also exposing our divisions to the
following risks:
– energy infrastructure reliability
– food safety
– energy cost
– store openings
– infrastructure damage.
To mitigate the eff ect of physical risks
for our businesses, we are working to
improve the effi ciency of our electricity
supply which reduces our overall
emissions as well as demands on
distribution networks. Some of our retail
business units are working to include
solar systems into new stores as standard
and on existing stores where feasible
and with landlord agreement. Most of
our stores have detailed equipment-
level energy consumption monitoring
in place. Intelligent management
systems go beyond the equipment level
to optimise overall site operations,
interfacing with preventive maintenance,
proactive energy management and
forward planning of energy effi ciency
opportunities.
Strong business continuity plans are in
place to ensure we can still transport and
provide products to customers living
in areas experiencing extreme weather
events.
We work to educate our customers about
sustainable living choices to reduce their
carbon footprint and provide them with
products which can assist with adapting
to climate change.
Regulatory risks
Our businesses test resilience against a
climate change regulatory risk scenario
where the governments of Australia and
our trading partners implement regulation
to limit global warming to 1.5°C – 2°C
above pre-industrial levels.
We anticipate that there are a number
of policy levers the Federal Government
could use between now and 2030, which
could have an impact on our businesses.
By reducing our emissions as much as
possible through employing innovative
energy effi ciency projects, staying
abreast of any regulatory changes and
incorporating a shadow carbon price into
our capital expenditure decision-making,
we believe our existing controls are
adequate for managing regulatory risk.
Reputational risks
In the context of more frequent severe
weather events and shifting global
attitudes, customers may have changing
expectations of companies, including their
operational effi ciency, environmental
transparency in their supply chain and
product range. While this is diffi cult to
quantify, by reducing emissions as much
as possible through employing innovative
energy effi ciency initiatives and reporting
on our progress to stakeholders, we
believe our existing controls are adequate
for managing reputational risk.
Competitive risks
Emerging business models that take
advantage of climate change opportunities
or are more resilient to climate change
risks may become a threat. Such business
models are considered in the context
of our current business model and
our businesses consider whether any
competitive risk mitigation is required
over the next 10 years.
There is recognition that as our economy
transitions to a low carbon economy as
a result of climate change there will be
opportunities for our businesses. The
Group actively explores opportunities
to support positive environmental
outcomes.
Australian fi rst on LNG refuelling
EVOL LNG successfully conducted Australia’s fi rst commercial liquid natural
gas (LNG) refuelling (or ‘bunkering’ as it is known in the industry) to supply a
vessel near Dampier in Western Australia. This was followed by the fi rst LNG
bunkering at Fremantle Port in February. LNG is a cleaner fuel alternative to
marine diesel, emitting less carbon dioxide and nitrogen oxides, almost zero
sulphur oxides and fewer harmful particulates.
Managing our emissions
The scale of the climate challenge is great
but the IPCC highlights that the world
has the means to address it. Our divisions
are looking for ways to improve energy
effi ciency, reduce emissions across
their operations and supply chains and
invest in low-emissions and renewable
technologies.
This year, we emitted a total of
4,078 thousand tonnes of carbon dioxide
equivalent (CO2e) in scope one and
two emissions, which was 4.2 per cent
higher than last year. This represents an
improvement in emissions intensity of
16 per cent over the past fi ve years. This
year, the increase in our emissions was
driven predominantly by an increase in
mining activity in our Resources business
where production was up 13.7 per cent
on 2016 levels.
Greenhouse gas emissions
4,078
tonnes CO
2
e: ‘000
5,000
4,000
100
3,000
2,000 70
80
90
1,000
0 50
60
13 14 15 16 2017
2017 4,078
2016 3,915
2015 4,012
2014 4,047
2013 4,241
THOUSAND TONNES CO
2
e (LHS)
TONNES CO
2
e PER $M OF REVENUE (RHS)
Wesfarmers 2017 Annual Report 59
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For Wesfarmers Limited, the Board
approves partnerships focused on four
areas: medical research and health;
Indigenous programs, particularly targeting
education and employment outcomes;
community and education initiatives; and
the Wesfarmers Arts program. The majority
of these partnerships are long-term
commitments with West Australian-based
organisations.
Wesfarmers continues to support
organisations in the medical research and
health fi eld, believing that investing in
innovation now benefi ts future generations.
Our support for community and education
was strengthened with a new partnership
with Teach For Australia. Wesfarmers is
also committed to establishing community
partnerships focused on Indigenous
programs. In 2017, our contribution in
this area increased in part due to the
greater funding directed towards Clontarf
Foundation to support its national
expansion.
Wesfarmers Arts
Wesfarmers has supported the arts in
Australia for more than three decades.
Our engagement in the cultural life of the
Western Australian and broader national
community embraces our long-term
support for a wide range of premier
performing and visual arts organisations
and the ongoing development of The
Wesfarmers Collection of Australian Art.
In 2017, the Wesfarmers Arts program
continued to build on the contribution
made by our arts partnerships and our
art collection to the life of the company
and our engagement with the community.
Wesfarmers provided $3.1 million in
support of the activities of 12 leading arts
organisations.
Community contributions
Our community
contributions were
$132m. This includes
$73m in direct
contributions and a
further $59m from
our customers and
team members.
In recognition of our long-term
relationship we announced an
expanded partnership with WASO
which will focus on regional and
international touring, as well as the
development of WASO’s extensive
and award-winning education and
community program.
Wesfarmers Arts
and WASO celebrate
20-year partnership
We make a positive
contribution to the
communities in which
we operate.
Refl ecting the divisional autonomy of
the Group, our approach to community
engagement is driven and managed by
our businesses to ensure value is created
in ways that best fi t with their operations
and geographic spread.
With businesses right across Australia,
New Zealand, United Kingdom and Ireland,
Wesfarmers has a local footprint in many
communities. Many of our divisions have
major, long-term partnerships at a national
level, such as Coles’ support of national
cancer charity Redkite. This partnership
achieved a signifi cant milestone in 2017,
with more than $20 million raised since the
partnership started in 2013.
In addition to these major partnerships,
a signifi cant part of our community
investment is directed to smaller, not-
for-profi t organisations operating locally.
For example, the Bunnings sausage
sizzles and cake stalls enjoyed by many
Bunnings customers every week are
valuable fundraising opportunities for local
community groups, where all of the funds
raised go directly to the group conducting
the fundraiser. Coles, Kmart and Target
provide gift cards to community groups
or facilitate the collection of customer
donations for local fundraising initiatives.
As a result of these locally-driven activities,
there is a signifi cant number of community
programs supported across Australia,
including environmental projects,
education programs and mental health
initiatives.
Wesfarmers 2017 Annual Report60
Sustainability
Since raw water saving initiatives were introduced in 2014, Curragh
mine has cut back consumption by almost one-third. This means the team
is exceeding its target of a fi ve per cent annual reduction.
Waste and water use
Robust governance
We maintain robust
corporate governance
policies in all our businesses.
Wesfarmers is committed to being
transparent with all our stakeholders about
our sustainability risks and opportunities.
We measure and publish our performance
for each of our material issues in our
sustainability report. Our full sustainability
report contains more than 45 case studies,
detailed information about the individual
performance of each of our businesses and
data available for download. It is prepared
in accordance with Global Reporting
Initiative Standards and assured by Ernst &
Young. It will be available in October 2017
at sustainability.wesfarmers.com.au
In July 2017, Coles announced it would
phase out single use plastic bags from all
stores nationwide over the next year.
More than 670 Coles supermarkets across
Australia also donate surplus fresh food to
SecondBite, an organisation redistributing
food to community food programs, with a
total of 23 million kilograms donated since
the partnership began in late 2011.
Reducing water use
This year, the Group’s water use increased
slightly to close to 16,000 megalitres. Of
this, 32 per cent is reclaimed and recycled
water at the Curragh mine site.
Product safety
We are committed to
providing consumers with
safe products.
All consumer products we supply must
be safe and meet consumer guarantees
under the consumer laws of the countries
where we operate. We do not sell banned
products and ensure that all our products
comply with relevant mandatory
standards before they are off ered for sale.
As well as safety testing and compliance
with required standards, our divisions
implement product recalls where possible
safety issues arise.
Curragh reduces water use
We strive to reduce our waste
to landfi ll and water use
where possible.
We are working to reduce our waste
to landfi ll intensity rate and to divert as
much as possible to recycling, both in
our operations and for our customers.
Water use is a material issue in our
industrial businesses and our focus is
on using water more effi ciently, reducing
our water use intensity rate and replacing
scheme water with reclaimed or recycled
water where possible.
Recycling and waste
This year, we increased our waste
to landfi ll by six per cent to close to
160,000 tonnes and increased our waste
recycled by six per cent to 373,000 tonnes.
This was primarily due to an increase
in our store network to include 255
Homebase and Bunnings stores in the
United Kingdom and Ireland.
Water use by source
Municipal supply 57%
Recycled and reclaimed 32%
Ground water 11%
16,000
megalitres
Offi ceworks Global Sourcing Merchandiser,
Leah Coleman, visits a supplier’s factory in
China.
Wesfarmers 2017 Annual Report 61
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Wesfarmers 2017 Annual Report62
Governance
Board of
directors
TERRY BOWEN Age 50
Finance Director (to 4 September 2017)
BAcct, FCPA
Term: Director appointed May 2009 resigned
September 2017.
Skills and experience: Terry held a number of
fi nance positions with Tubemakers of Australia
Limited. Terry joined Wesfarmers in 1996 and
undertook various roles with Wesfarmers
Landmark Limited, including Chief Financial
Offi cer until 2003. He then became Chief
Financial Offi cer for Jetstar Airways, prior to
rejoining Wesfarmers as Managing Director,
Wesfarmers Industrial and Safety in 2005.
Terry became Finance Director, Coles in 2007 and
Wesfarmers Finance Director in 2009. He resigned
as Finance Director in September 2017, and will
remain as the Group’s Chief Financial Offi cer
until 10 November 2017.
Directorships of listed entities (last three years),
other directorships/offi ces (current and recent):
– Director of Gresham Partners Group Limited
(resigned August 2017)
– Director of Gresham Partners Holdings Limited
(resigned August 2017)
– Chairman of the West Australian Opera
Company Incorporated (since April 2014)
– Director of West Coast Eagles Board
(since May 2017)
– President of the National Executive of the Group
of 100 Inc (retired December 2013)
JENNIFER WESTACOTT Age 57
BA (Honours), FAICD, FIPA A
Term: Director since April 2013.
Skills and experience: Jennifer is Chief Executive
of the Business Council of Australia. Prior to that,
she was a Board director and lead partner at
KPMG. Jennifer has extensive experience in critical
leadership positions in the New South Wales and
Victorian governments.
Directorships of listed entities (last three years),
other directorships/offi ces (current and recent):
– Adjunct Professor at the City Futures Research
Centre of the University of New South Wales
– Co-chair, Advisory Board, Australia Sino One
Hundred Year Agricultural and Food Safety
Partnership (since July 2015)
– Chair of the Mental Health Council of Australia
(since January 2013)
– Co-chair of the Australia-Canada Economic
Leadership Forum Organising Committee (since
February 2016)
– Member of the Melbourne School of
Government Advisory Board (since March 2016)
– Member of the Prime Minister’s Expert
Advisory Panel on the Reform of the Federation
(concluded December 2015)
– Member of the Prime Minister’s Cyber Security
Review Panel (concluded April 2016)
MICHAEL CHANEY AO Age 67
Chairman
BSc, MBA, Hon. LLD W.Aust, FTSE
Term: Chairman since November 2015; Director
since June 2015.
Skills and experience: After an early career
in petroleum geology and corporate fi nance,
Michael joined Wesfarmers in 1983 as Company
Secretary and Administration Manager. He
became Finance Director in 1984 and was
appointed Managing Director in July 1992.
He retired from that position in July 2005.
Directorships of listed entities (last three years),
other directorships/offi ces (current and recent):
– Chairman of Woodside Petroleum Limited
(since July 2007)
– Chancellor of The University of Western
Australia (since December 2005)
– Member of Commonwealth Science Council
(since October 2014)
– Chairman of Gresham Partners Holdings
Limited (retired May 2015)
– Chairman of National Australia Bank Limited
(retired December 2015)
– Member of Prime Minister’s Business Advisory
Council (retired December 2015)
RICHARD GOYDER AO Age 57
Managing Director
BCom, FAICD
Term: Director since July 2002.
Skills and experience: Richard joined
Wesfarmers in 1993 after working in various
commercial roles at Tubemakers of Australia
Limited. He was Managing Director of
Wesfarmers Landmark Limited in 1999 until
he became Finance Director of Wesfarmers
Limited in 2002 and then Deputy Managing
Director and Chief Financial Offi cer in 2004.
Richard assumed the role of Managing Director
and Chief Executive Offi cer in July 2005.
Directorships of listed entities (last three years),
other directorships/offi ces (current and recent):
– Director and Chairman-elect of Woodside
Petroleum Limited (since August 2017)
– Director of Gresham Partners Holdings Limited
(since July 2002)
– Director of the Business Council of Australia
(since October 2009)
– Chairman of the Australian Football League
Commission (Commissioner since November
2011, Chairman since April 2017)
– Chairman of JDRF Australia (director since
March 2016, Chairman since June 2016)
Wesfarmers 2017 Annual Report
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TONY HOWARTH AO Age 65
CitWA, Hon.LLD (UWA), SF Fin, FAICD
Term: Director since July 2007.
Skills and experience: Tony has more than
30 years’ experience in the banking and fi nance
industry. He was Chairman of Home Building
Society Limited and Deputy Chairman of Bank
of Queensland Limited. Tony has held several
senior management positions during his career,
including Managing Director of Challenge Bank
Limited and Chief Executive Offi cer of Hartleys
Limited.
Directorships of listed entities (last three years),
other directorships/offi ces (current and recent):
– Director of BWP Management Limited
(since October 2012)
– Chairman of MMA Off shore Limited (director
since July 2001, Chairman since August 2006)
– Chairman of St John of God Health Care Inc.
(since January 2004)
– Chairman of the West Australian Rugby Union
Inc.(since September 2015)
– Director of Alinta Holdings (since March 2011)
– Director Alinta Energy Limited
(since September 2016)
– Chairman of International Chamber
of Commerce, Australia Limited
(retired March 2014)
VANESSA WALLACE Age 54
B.Comm (UNSW), MBA (IMD Switzerland),
MAICD
Term: Director since July 2010.
Skills and experience: Vanessa is an experienced
strategy management consultant who had been
with Strategy& (formerly Booz & Company) for
more than 25 years. She has deep expertise in
the fi nancial services sector across the spectrum
of wealth management, retail banking and
insurance, with particular functional depth in
risk management, post-merger integration and
capturing business opportunities associated with
channels, customers and markets.
Directorships of listed entities (last three years),
other directorships/offi ces (current and recent):
– Director of SEEK Limited (since 1 March 2017)
– Director of AMP Limited (since March 2016)
– Chairman of AMP Capital Holdings Limited
(director since March 2016, Chairman since
August 2016)
– Executive Chairman of Strategy& (Japan) Inc.
(retired June 2015)
WAYNE OSBORN Age 66
Dip Elect Eng, MBA, FAICD, FTSE
Term: Director since March 2010.
Skills and experience: Wayne started working in
the iron ore industry in the mid-1970s and joined
Alcoa in 1979. He worked in various roles across
the Australian business, including accountability
for Alcoa’s Asia Pacifi c operations, prior to being
appointed Managing Director in 2001, retiring
in 2008.
Directorships of listed entities (last three years),
other directorships/offi ces (current and recent):
– Director of South32 Limited (since May 2015)
– Director of Alinta Holdings (retired April 2017)
– Director of Iluka Resources Limited
(retired May 2016)
– Chairman of the Australian Institute of Marine
Science (retired December 2014)
JAMES GRAHAM AM Age 69
BE (Chem)(Hons)(Syd), MBA (UNSW), FIEAust,
FTSE, FAICD, SF Fin
Term: Director since May 1998.
Skills and experience: James has had an active
involvement in the growth of Wesfarmers since 1976
as Chairman and Managing Director of Gresham
Partners Limited, and previously as Managing
Director of Rothschild Australia Limited. James was
also previously Chairman of Rabobank Australia
Limited, Chairman of the Darling Harbour Authority
and a director of Hill Samuel Australia Limited.
Directorships of listed entities (last three years),
other directorships/offi ces (current and recent):
– Chairman of the Advisory Council of the
Institute for Neuroscience and Muscle Research
(since 1999)
– Director of Wesfarmers General Insurance
Limited (resigned June 2014)
PAUL BASSAT Age 49
B.Comm, LL.B. (Melb)
Term: Director since November 2012.
Skills and experience: Paul started his career as
a lawyer in 1991. He co-founded SEEK Limited in
1997, and served as Chief Executive Offi cer and
then as joint Chief Executive Offi cer until 2011. He
is a co-founder and director of Square Peg Capital
Pty Ltd, a venture capital fund that invests in early
stage and growth stage technology companies. He
is also a director of the Peter MacCallum Cancer
Foundation, Mt Scopus College Foundation and
the P&S Bassat Foundation and is a member of
Innovation and Science Australia.
Directorships of listed entities (last three years),
other directorships/offi ces (current and recent):
– Australian Football League Commissioner
(since February 2012)
– Director of AFL Sportsready Pty Ltd
(since August 2015)
DIANE SMITH-GANDER Age 59
B.Ec, MBA, Hon.DEc W.Aust (UWA), FAICD, FGIA
Term: Director since August 2009.
Skills and experience: Diane has extensive
experience in corporate governance and
providing strategic advice to corporations in
Australia and overseas. She was a partner with
McKinsey & Company in the USA, became
a senior adviser to McKinsey & Company in
Australia in 2016 and has more than a decade of
executive experience in the banking industry.
Directorships of listed entities (last three years),
other directorships/offi ces (current and recent):
– Director of AGL Energy Limited (since
September 2016)
– Chairman of Broadspectrum Limited (formerly
known as Transfi eld Services Limited) which
delisted in June 2016 (director since October
2010, Chairman since October 2013, retired
September 2016)
– Chair of Safe Work Australia (since February 2016)
– Trustee and director of CEDA – Committee
for Economic Development of Australia
(trustee since September 2014, director since
November 2015)
– Director of Keystart Home Loans
(since July 2016)
– Board member of Henry Davis York
(since July 2016)
– Chair of the Asbestos Safety and Eradication
Council (since December 2016)
BACK

Wesfarmers 2017 Annual Report64
Governance
Corporate Governance Overview
The Board of Wesfarmers Limited is committed to providing a satisfactory return to its shareholders
and fulfi lling its corporate governance obligations and responsibilities in the best interests of the
company and its stakeholders. This statement details the key aspects of the governance framework
and practices of Wesfarmers. Wesfarmers regularly reviews its governance framework and practices
so as to ensure it consistently refl ects market practice and stakeholder expectations.
Set out below is an overview of selected aspects of Wesfarmers’ corporate governance framework and key focus areas of the Board
and its committees in 2017.
A copy of Wesfarmers’ full 2017 Corporate Governance Statement, which provides detailed information about governance, and a
copy of Wesfarmers’ Appendix 4G which sets out the company’s compliance with the recommendations in the third edition of the
ASX Corporate Governance Council’s Principles and Recommendations (ASX Principles) is available on the corporate governance
section of the company’s website at www.wesfarmers.com.au/cg
The Board believes that the governance policies and practices adopted by Wesfarmers during 2017 are in accordance with the
recommendations contained in the ASX Principles.
Roles and responsibilities of the Board and management
The role of the Board is to approve the strategic direction of the Group, guide and monitor the management of Wesfarmers and
its businesses in achieving its strategic plans and oversee good governance practice. The Board aims to protect and enhance
the interests of its shareholders, while taking into account the interests of other stakeholders, including employees, customers,
suppliers and the wider community.
In performing its role, the Board is committed to a high standard of corporate governance practice and fostering a culture
of compliance which values ethical behaviour, personal and corporate integrity, accountability and respect for others.
The Wesfarmers Group Managing Director has responsibility for the day-to-day management of Wesfarmers and its businesses,
and is supported in this function by the Wesfarmers Leadership Team. Details of the members of the Wesfarmers Leadership Team
are set out under the Wesfarmers Leadership Team profi les in the corporate governance section of the company’s website
(www.wesfarmers.com.au/cg). The Board maintains ultimate responsibility for strategy and control of Wesfarmers and its businesses.
In fulfi lling its roles and responsibilities, some key focus areas for the Board during the 2017 fi nancial year are set out below.
Key focus areas of the Board during the 2017 fi nancial year included:
– Overseeing Group Managing Director succession planning, resulting in the appointment in February 2017 of Mr Rob Scott
as the Group’s Deputy Chief Executive Offi cer, to succeed the current Group Managing Director, Mr Richard Goyder, at the
conclusion of the 2017 Annual General Meeting
– Approving leadership appointments, including Mr Anthony Gianotti who became the Group’s Deputy Chief Financial Offi cer
in July 2017 and will succeed the current Chief Financial Offi cer, Mr Terry Bowen, on 10 November 2017, and senior
management changes
– Overseeing management’s performance in strategy implementation
– Monitoring the Group’s operating and cash fl ow performance, fi nancial position and key metrics, including fi nancial covenants
and credit ratings
– Reviewing business operations and development plans of each division likely to impact long-term shareholder value creation
through portfolio management and consideration of divestment options
– Monitoring the Group’s safety performance and overseeing implementation of strategies to improve safety performance and
enhance workplace safety awareness
– Reviewing talent management and development
– Monitoring and evaluating growth opportunities to complement the existing portfolio
– Approving revisions to the Board and committee charters
– Reviewing policies, reporting and processes to improve the Group’s system of corporate governance
Structure and composition of the Board
Wesfarmers is committed to ensuring that the composition of the Board continues to include directors who bring an appropriate mix
of skills, experience, expertise and diversity (including gender diversity) to Board decision-making.
The Board currently comprises nine directors, including eight non-executive directors. Detailed biographies of the directors as at
30 June 2017 are set out on pages 62 and 63 of this annual report. The current directors possess an appropriate mix of skills,
experience, expertise and diversity to enable the Board to discharge its responsibilities and deliver the company’s strategic priorities
Wesfarmers 2017 Annual Report 65
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Corporate Governance Overview
Skills, experience and expertise
– CEO level experience – Capital markets
– ASX-listed company experience – Finance and banking
– Strategy and risk management – E-commerce and digital
– Governance – Human resources and executive remuneration
– Financial acumen – Marketing/customers/retail
– Regulatory and government policy – Resources and industrial
– International experience – Corporate sustainability
as a diversifi ed corporation with current businesses operating in supermarkets, liquor, hotels and convenience stores; home
improvement; department stores; offi ce supplies; and an Industrials division with businesses in chemicals, energy and fertilisers,
industrial and safety products, and coal.
On 14 February 2017 Wesfarmers announced that Mr Richard Goyder will retire from the Board and his role as Group Managing
Director at the end of the 2017 Annual General Meeting after serving as a director for more than 15 years. Mr Rob Scott was appointed as
Wesfarmers’ Deputy Chief Executive Offi cer in February 2017 and will join the Board as Group Managing Director at the conclusion of the
2017 Annual General Meeting.
On 4 September 2017 Wesfarmers announced that Mr Terry Bowen resigned from the Board after serving as a director for eight years.
Mr Bowen will remain as Wesfarmers Chief Financial Offi cer until 10 November 2017.
The Board skills matrix set out below describes the combined skills, experience and expertise presently represented on the Board.
To the extent that any skills are not directly represented on the Board, they are augmented through management and external advisors.
Mr Archie Norman, who has signifi cant retail experience, was appointed in 2009 as an advisor to the Board on retail issues. In this
role, Mr Norman attends Wesfarmers Board meetings as required and is a director of the Coles and Target boards. Mr Norman is
also an advisor to the Bunnings UK & Ireland business.
Director independence
Directors are expected to bring views and judgement to Board deliberations that are independent of management and free
of any business or other relationship or circumstance that could materially interfere with the exercise of objective, unfettered
or independent judgement, having regard to the best interests of the company as a whole.
The Board’s assessment of independence and the criteria against which it determines the materiality of any facts, information or
circumstances is formed by having regard to the ASX Principles, in particular, the factors relevant to assessing the independence
of a director set out in recommendation 2.3; the materiality guidelines applied in accordance with Australian Accounting
Standards; any independent professional advice sought by the Board at its discretion; and developments in international corporate
governance standards.
The Board has reviewed the position and relationships of all directors in offi ce as at the date of this report and considers that:
– Seven of the eight non-executive directors are independent.
– The Chairman is independent.
– Mr James Graham is not independent, by virtue of his position as Chairman of Gresham Partners Limited (Gresham), which
acts as an investment advisor to the company. Details of Mr Graham’s association with Gresham are set out in note 25 on
pages 134 and 135 of this annual report.
Committees of the Board
The Board has established a Nomination Committee, a Remuneration Committee, an Audit and Risk Committee, and a Gresham
Mandate Review Committee as standing committees to assist with the discharge of its responsibilities. Details of the current
membership and composition of each committee are set out in the 2017 Corporate Governance Statement.
Role of the Nomination Committee
As part of the Nomination Committee’s oversight of Board succession planning, it is responsible for identifying suitable candidates to
fi ll Board vacancies as and when they arise, or to identify candidates to complement the existing Board, and make recommendations
to the Board on their appointment. Where appropriate, external consultants are engaged to assist in searching for candidates. The
Nomination Committee is responsible for scheduling formal performance reviews of the Board and its committees at least every two
years. The Board then undertakes an evaluation process to review its performance which is facilitated by an external consultant. More
details about Wesfarmers’ review process for both the Board and its committees is set out in the 2017 Corporate Governance Statement.
BACK

Wesfarmers 2017 Annual Report66
Governance
Corporate Governance Overview
Role of the Remuneration Committee
The role of the Remuneration Committee is to review and make recommendations to the Board in relation to overall remuneration
policy. Full details of the remuneration paid to non-executive and executive directors, and senior executives are set out in the
remuneration report on pages 73 to 92 of this annual report.
Senior executives comprising members of the Wesfarmers Leadership Team have a variable or ‘at risk’ component as part of their total
remuneration package either under an annual incentive and long-term incentive arrangement or under the Key Executive Equity
Performance Plan (KEEPP). The mix of remuneration components and the performance measures used in the incentive plans have
been chosen to ensure that there is a strong link between remuneration earned and the achievement of the Group’s strategy and
business objectives and, ultimately, generating satisfactory returns for shareholders. Annual performance reviews of each member of the
Wesfarmers Leadership Team, including the executive directors, for the 2017 fi nancial year have been undertaken. More details about
Wesfarmers’ performance and development review process for senior executives is set out in the 2017 Corporate Governance Statement.
Key focus areas of the Nomination Committee during the 2017 fi nancial year included:
– Succession planning for the Group Managing Director
– Consideration of directors to be recommended to shareholders for re-election at the 2016 Annual General Meeting
– Consideration of feedback from major shareholders during the Chairman’s Roadshow conducted prior to the 2016 Annual
General Meeting
Key focus areas of the Remuneration Committee during the 2017 fi nancial year included:
– Reviewing and making a recommendation to the Board in relation to the fi xed remuneration, annual incentive and long-term
incentive awards for the Group Managing Director and his direct reports
– Reviewing the succession and transition plans for the Wesfarmers Leadership Team, including recommending to the Board the
remuneration package and contractual arrangements for the incoming Group Managing Director and Group Chief Financial Offi cer
– Reviewing the senior executive remuneration framework and policies, including terms of employment such as notice periods,
restraint and non-solicitation clauses
– Reviewing and making a recommendation to the Board in relation to the structure of the Wesfarmers variable remuneration
plans, including the approval and implementation of KEEPP and recommending to the Board the vesting outcomes of the 2013
Wesfarmers Long Term Incentive Plan shares, based on the achievement of the performance conditions as at 30 June 2017
– Reviewing and making a recommendation to the Board in relation to non-executive director fees
– Reviewing and monitoring diversity targets and gender pay equity
Key focus areas of the Audit and Risk Committee during the 2017 fi nancial year included:
– Reviewing and assessing the Group’s processes which ensure the integrity of fi nancial statements and reporting, and associated
compliance with accounting, legal and regulatory requirements
– Reviewing the processes and controls around the recognition of commercial income by the retail divisions to ensure recognition is in
accordance with Accounting Standards and accepted industry practice
– Monitoring the ethical sourcing of products for resale through the Group’s retail networks to ensure that there are appropriate safeguards
and processes in place
– Monitoring the Group’s cyber security framework, including data protection management, and the reporting structure and escalation
process on information security risks
– Reviewing and evaluating the adequacy of the Group’s insurance arrangements to ensure appropriate cover for identifi ed operational and
business risks
– Monitoring the retail shrinkage control measures and reporting procedures in the Group’s divisions
– Monitoring the Group’s tax compliance program both in Australia and overseas, including cross-border intra-Group transactions, to ensure
its obligations are met in the jurisdictions in which the Group operates.
Role of Audit and Risk Committee
Wesfarmers is committed to the identifi cation, monitoring and management of material risks associated with its business activities
across the Group.
The Board recognises that a sound culture is fundamental to an eff ective risk management framework. Wesfarmers promotes a culture
which values the principles of honesty, integrity, fairness and accountability, and these values are refl ected in the Group Code of Conduct.
The Audit and Risk Committee monitors internal control policies and procedures designed to safeguard Group assets and to
maintain the integrity of fi nancial reporting.
Wesfarmers 2017 Annual Report 67
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Corporate Governance Overview
Role of the external auditor
The company’s external auditor is Ernst & Young. The eff ectiveness, performance and independence of the external auditor is reviewed
annually by the Audit and Risk Committee. Mr Darren Lewsen is the lead partner for Ernst & Young and was appointed on 1 July 2013.
Ernst & Young provided the required independence declaration to the Board for the fi nancial year ended 30 June 2017. The independence
declaration forms part of the directors’ report and is provided on page 72 of this annual report.
Risk Management Framework
The Risk Management Framework of Wesfarmers is reviewed by the Board on an annual basis and was approved in May 2017.
This framework details the overarching risk management controls that are embedded in the Group’s risk management processes,
procedures and reporting systems, and the division of the key risk management functions between the Board, Wesfarmers Managing
Director and Finance Director, Audit and Risk Committee, divisional management and Group Assurance and Risk, including:
– the Group Code of Conduct;
– established Group and divisional structures, reporting lines and, appropriate authorities and responsibilities, including guidelines
and limits for approval of all expenditure, including capital expenditure and investments, and contractual commitments;
– Operating Cycle and Divisional Reporting Requirements documents that clearly set out the Board, Board committees and divisional
board activities and reports;
– a formal director induction program and a directors’ program of annual site visits to Wesfarmers’ operations to enhance the Board’s
understanding of key and emerging business risks;
– a formal corporate planning process which requires each division to assess trends that are likely to aff ect and shape their industry,
perform scenario planning and prepare a SWOT analysis;
– Group policies and procedures for the management of fi nancial risk and treasury operations, such as exposures to foreign
currencies and movements in interest rates;
– a Group compliance reporting program supported by approved guidelines and standards covering safety; information technology;
the environment; legal liability; taxation compliance; risk identifi cation, quantifi cation and reporting; and fi nancial reporting
controls;
– a comprehensive risk fi nancing program, including risk transfer to external insurers and reinsurers;
– annual budgeting and monthly reporting systems for all businesses which enable the monitoring of progress against performance
targets and the evaluation of trends;
– appropriate due diligence procedures for acquisitions and divestments;
– crisis management systems for all key businesses in the Group; and
– external and internal assurance programs.
Investor engagement
Wesfarmers recognises the importance of providing its shareholders and the broader investment community with facilities to
access up-to-date high quality information, participate in shareholder decisions of the company and provide avenues for two-way
communication between the company, the Board and shareholders. Wesfarmers has developed a program on investor engagement
for engaging with shareholders, debt investors, the media and the broader investment community. In addition, the company’s
shareholders have the ability to elect to receive communications and other shareholder information electronically.
Governance policies
The corporate governance section of the company’s website (www.wesfarmers.com.au/cg) contains access to all relevant
corporate governance information, including Board and committee charters, and Group policies referred to in the 2017
Corporate Governance Statement.
Ethical and responsible behaviour
Wesfarmers’ primary objective is to deliver satisfactory returns to shareholders through fi nancial discipline and exceptional
management of a diversifi ed portfolio of businesses. The Wesfarmers Way is the framework for the company’s business model
and comprises our core values of integrity, openness, accountability and boldness. The Wesfarmers Way, together with the Code
of Conduct and other policies, guide the behaviour of everyone who works at Wesfarmers as we strive to achieve our primary
objective.
Diversity
As a diverse workforce is of signifi cant social and commercial value, Wesfarmers recognises the importance of being an inclusive
employer. Wesfarmers strives to create a work environment which is inclusive of all people regardless of gender, age, race, disability,
sexual orientation, cultural background, religion, family responsibilities or any other areas of potential diff erence. All areas of
diversity are important and Wesfarmers pays particular attention to gender diversity and the inclusiveness of Indigenous people.
Further details on diversity are set out on page 56 of this annual report and in the 2017 Corporate Governance Statement on the
company’s website at www.wesfarmers.com.au/cg
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Wesfarmers 2017 Annual Report68
Directors’ report
Wesfarmers Limited and its controlled entities
Directors’ report
Results and dividends
Principal activities
The principal activities of entities within the consolidated
Group during the year were:
– retailing operations including supermarkets, general
merchandise and specialty department stores;
– fuel, liquor and convenience outlets;
– retailing of home improvement and outdoor living products
and supply of building materials;
– retailing of offi ce and technology products;
– coal mining and production;
– gas processing and distribution;
– industrial and safety product distribution;
– chemicals and fertilisers manufacture; and
– investments.
Directors
The directors in offi ce at the date of this report are:
– M A Chaney (Chairman)
– R J B Goyder (Group Managing Director)
– P M Bassat
– J P Graham
– A J Howarth
– W G Osborn
– D L Smith-Gander
– V M Wallace
– J A Westacott
All directors served on the Board for the period from 1 July
2016 to 30 June 2017. T J Bowen resigned as Finance Director
on 4 September 2017. Mr Bowen will remain as Chief Financial
Offi cer until 10 November 2017.
The qualifi cations, experience, special responsibilities and
other details of the directors in offi ce during the fi nancial year
or as at the date of this report appear on pages 62 and 63 of this
annual report.
The information appearing on pages 4 to 67 forms part of the directors’ report for the fi nancial year ended 30 June 2017 and is to be
read in conjunction with the following information:
$m $m
Year ended 30 June 2017 2016
Profi t
Profi t attributable to members of the parent entity 2,873 407
Dividends
The following dividends have been paid by the company or declared by the directors since the commencement
of the fi nancial year ended 30 June 2017:
(a) out of the profi ts for the year ended 30 June 2016 and retained earnings on the fully-paid ordinary shares:
(i) fully-franked fi nal dividend of 95 cents (2015: 111 cents) per share paid on 5 October 2016 (as disclosed in last year’s
directors’ report)
1,070 1,247
(b) out of the profi ts for the year ended 30 June 2017 on the fully-paid ordinary shares:
(i) fully-franked interim dividend of 103 cents (2016: 91 cents) per share paid on 28 March 2017 1,165 1,025
(ii) fully-franked fi nal dividend of 120 cents (2016: 95 cents) per share to be paid on 28 September 2017 1,361 1,070
Wesfarmers 2017 Annual Report 69
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Directors’ report
Wesfarmers Limited and its controlled entities
Directors’ shareholdings
Securities in the company or in a related body corporate in which directors had a relevant interest as at the date of this report are:
BWP TRUST WESFARMERS LIMITED
Units Performance Rights Shares
P M Bassat – – 19,411
M A Chaney – – 87,597
R J B Goyder* – 247,928 776,150
J P Graham 15,120 – 791,483
A J Howarth 20,000 – 17,848
W G Osborn – – 8,481
D L Smith-Gander – – 12,045
V M Wallace – – 13,483
J A Westacott – – 5,493
* R J B Goyder holds 247,928 performance rights allocated under the 2014 Wesfarmers Long Term Incentive Plan (WLTIP), 2015 and 2016 WLTIP. The 79,186
performance rights issued under the 2014 WLTIP are subject to a four-year performance period, being 1 July 2014 to 30 June 2018. The 87,220 performance
rights issued under the 2015 WLTIP are subject to a four-year performance period, being 1 July 2015 to 30 June 2019. The 81,522 performance rights issued
under the 2016 WLTIP performance rights are subject to a four-year performance period, being 1 July 2016 to 30 June 2020. For the 2014 and 2015 WLTIP
performance rights, if the relative total shareholder return and compound annual growth rate in return on equity performance conditions are met, executives will be
allocated Wesfarmers fully-paid ordinary shares at the end of the performance period. For the 2016 WLTIP performance rights, if the relative total shareholder return
performance conditions are met, executives will be allocated Wesfarmers fully-paid ordinary shares at the end of the performance period. For further details, please
see the remuneration report on pages 73 to 92 of this annual report.
T J Bowen resigned as Finance Director on 4 September 2017. He will remain as Chief Financial Offi cer until 10 November 2017.
At 4 September 2017, Mr Bowen had a relevant interest in 184,172 shares and 217,079 performance rights in Wesfarmers Limited.
He had no relevant interests in BWP Trust units as at his resignation date.
Directors’ meetings
The following table sets out the number of directors’ meetings (including meetings of Board committees) held during the year ended
30 June 2017 and the number of meetings attended by each director:
Board
Audit and Risk
Committee
Remuneration
Committee
Nomination
Committee
Gresham Mandate
Review Committee
(A)1 (B)2 (A) (B) (A) (B) (A) (B) (A) (B)
P M Bassat 13 12 – – 6 5 3 3 – –
T J Bowen 13 12 – – – – – – – –
M A Chaney3 13 13 – – 6 6 – – – –
R J B Goyder 13 13 – – – – 3 3 – –
J P Graham 13 13 – – 6 6 3 3 – –
A J Howarth 13 13 6 6 – – 3 3 – –
W G Osborn 13 13 – – 6 6 3 3 1 1
D L Smith-Gander 13 13 6 6 – – 3 3 1 1
V M Wallace 13 13 – – 6 6 3 3 – –
J A Westacott 13 13 6 6 – – 3 2 1 1
1 (A) = number of meetings held while the director was a member of the Board/Committee.
2 (B) = number of meetings attended.
3 Notwithstanding he is not a member, M A Chaney attended the majority of the meetings of the Audit and Risk Committee held during the year.
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Wesfarmers 2017 Annual Report70
Directors’ report
Wesfarmers Limited and its controlled entities
Directors’ report
Insurance and indemnifi cation of directors and offi cers
During or since the end of the fi nancial year, the company has paid premiums in respect of a contract insuring all directors and
offi cers of Wesfarmers Limited and its related entities against certain liabilities incurred in that capacity. Disclosure of the nature of
the liability covered by the insurance and premiums paid is subject to confi dentiality requirements under the contract of insurance.
In accordance with the company’s constitution, the company has entered into Deeds of Indemnity, Insurance and Access with each
of the directors of the company. These Deeds:
– indemnify a director to the full extent permitted by law against any liability incurred by the director:
– as an offi cer of the company or of a related body corporate; and
– to a person other than the company or a related body corporate, unless the liability arises out of conduct on the part of the
director which involves a lack of good faith;
– provide for insurance against certain liabilities incurred as a director; and
– provide a director with continuing access, while in offi ce and for a specifi c period after the director ceases to be a director, to
certain company documents which relate to the director’s period in offi ce.
In addition, the company’s constitution provides for the indemnity of offi cers of the company or its related bodies corporate from
liability incurred by a person in that capacity.
No indemnity payment has been made under any of the documents referred to above during or since the end of the fi nancial year.
Indemnifi cation of auditors
The company’s auditor is Ernst & Young.
The company has agreed with Ernst & Young, as part of its terms of engagement, to indemnify Ernst & Young against certain
liabilities to third parties arising from the audit engagement. The indemnity does not extend to any liability resulting from a
negligent, wrongful or wilful act or omission by Ernst & Young.
During the fi nancial year:
– the company has not paid any premium in respect to any insurance for Ernst & Young or a body corporate related to
Ernst & Young; and
– there were no offi cers of the company who were former partners or directors of Ernst & Young, whilst Ernst & Young conducted
audits of the company.
Directors’ and other offi cers’ remuneration
Discussion of the Board’s policy for determining the nature and amount of remuneration for directors and senior executives and
the relationship between such policy and company performance are contained in the remuneration report on pages 73 to 92 of this
annual report.
Options
No options over unissued shares in the company were in existence at the beginning of the fi nancial year or granted during, or since
the end of the fi nancial year.
Company Secretary
Linda Kenyon was appointed as Company Secretary of Wesfarmers Limited in April 2002.
Linda holds Bachelor of Laws and Bachelor of Jurisprudence degrees from The University of Western Australia and is a Fellow of
the Governance Institute of Australia (formerly the Chartered Secretaries Australia). She joined Wesfarmers in 1987 as legal counsel
and held that position until 2000 when she was appointed Manager of BWP Management Limited (formerly Bunnings Property
Management Limited), the responsible entity for the listed BWP Trust (formerly Bunnings Warehouse Property Trust). Linda is also
Company Secretary of a number of Wesfarmers Group subsidiaries, and a member of the Wesfarmers Executive Leadership Team.
Wesfarmers 2017 Annual Report 71
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Directors’ report
Wesfarmers Limited and its controlled entities
Signifi cant changes in the state of aff airs
Particulars of the signifi cant changes in the state of aff airs of the consolidated entity during the fi nancial year are as follows:
– revenue from ordinary activities up from $65,981 million to $68,444 million
– profi t for the year up from $407 million (including impairment of Target and Curragh of $1,844 million net of tax) to $2,873 million
– dividends per share of $2.23 (2016: $1.86 per share)
– total assets down from $40,783 million to $40,115 million
– shareholders’ equity up from $22,949 million to $23,941 million
– net debt down from $7,103 million to $4,809 million
– net cash fl ows from operating activities up from $3,365 million to $4,226 million
Review of results and operations
The operations, fi nancial position, business strategies and prospects for future fi nancial years of the consolidated entity are detailed
in the operating and fi nancial review on pages 12 to 52 of this report.
Events after the reporting period
The following signifi cant events have arisen since the end of the fi nancial year:
Dividend
On 17 August 2017, a fully-franked fi nal dividend of 120 cents per share resulting in a total dividend of $1,361 million was declared for
a payment date of 28 September 2017. This dividend has not been provided for in the 30 June 2017 full-year fi nancial statements.
Kmart brand name acquisition
In August 2017, Kmart acquired the Kmart brand name in Australia and New Zealand, which was previously used by the business
under a long-term licence agreement, for $100 million. The transaction is not expected to have a material impact on Kmart’s
earnings.
Non-audit services
Ernst & Young provided non-audit services to the consolidated entity during the year ended 30 June 2017 and received, or is due to
receive, the following amounts for the provision of these services:
$’000
Tax compliance 1,088
Other 1,219
Total 2,307
The total non-audit services fees of $2,307 thousand represents 23.1 per cent of the total fees paid or payable to Ernst & Young
and related practices for the year ended 30 June 2017. Total non-audit services fees and assurance-related services fees was
$3,579 thousand representing 35.8 per cent of the total fees paid or payable to Ernst & Young and related practices for the year
ended 30 June 2017.
The Audit and Risk Committee has, following the passing of a resolution of the Committee, provided the Board with written advice in
relation to the provision of non-audit services by Ernst & Young.
The Board has considered the Audit and Risk Committee’s advice, and the non-audit services provided by Ernst & Young, and is
satisfi ed that the provision of these services during the year by the auditor is compatible with, and did not compromise, the general
standard of auditor independence imposed by the Corporations Act 2001 for the following reasons:
– the non-audit services provided do not involve reviewing or auditing the auditor’s own work or acting in a management or
decision-making capacity for the company;
– all non-audit services were subject to the corporate governance procedures and policies adopted by the company and have been
reviewed by the Audit and Risk Committee to ensure they do not aff ect the integrity and objectivity of the auditor; and
– there is no reason to question the veracity of the auditor’s independence declaration (a copy of which has been reproduced on the
following page).
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Wesfarmers 2017 Annual Report72
Directors’ report
Wesfarmers Limited and its controlled entities
Directors’ report
The directors received the following declaration from Ernst & Young:
A member firm of Ernst & Young Global Limited
Liability limited by a scheme approved under Professional Standards Legislation

DSL:JT:WESFARMERS:019

Ernst & Young
11 Mounts Bay Road
Perth WA 6000 Australia
GPO Box M939 Perth WA 6843
Tel: +61 8 9429 2222
Fax: +61 8 9429 2436
ey.com/au
Independent auditor’s report to the Members of Wesfarmers Limited
Report on the audit of the financial report
Opinion
We have audited the financial report of Wesfarmers Limited (the Company) and its subsidiaries
(collectively the Group), which comprises the consolidated balance sheet as at 30 June 2017, the
consolidated income statement, the consolidated statement of comprehensive income, the consolidated
statement of changes in equity and the consolidated cash flow statement for the year then ended, notes
to the financial statements and the directors’ declaration.
In our opinion, the accompanying financial report of the Group is in accordance with the Corporations Act
2001, including:
a) giving a true and fair view of the consolidated financial position of the Group as at 30 June 2017
and of its consolidated financial performance for the year ended on that date; and
b) complying with Australian Accounting Standards and the Corporations Regulations 2001.
Basis for opinion
We conducted our audit in accordance with Australian Auditing Standards. Our responsibilities under
those standards are further described in the Auditor’s Responsibilities for the Audit of the Financial
Report section of our report. We are independent of the Group in accordance with the auditor
independence requirements of the Corporations Act 2001 and the ethical requirements of the Accounting
Professional and Ethical Standards Board’s APES 110 Code of Ethics for Professional Accountants (the
Code) that are relevant to our audit of the financial report in Australia. We have also fulfilled our other
ethical responsibilities in accordance with the Code.
We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for
our opinion.
Key audit matters
Key audit matters are those matters that, in our professional judgment, were of most significance in our
audit of the financial report of the current year. These matters were addressed in the context of our audit
of the financial report as a whole, and in forming our opinion thereon, but we do not provide a separate
opinion on these matters. For each matter below, our description of how our audit addressed the matter
is provided in that context.
We have fulfilled the responsibilities described in the Auditor’s Responsibilities for the Audit of the
Financial Report section of our report, including in relation to these matters. Accordingly, our audit
included the performance of procedures designed to respond to our assessment of the risks of material
misstatement of the financial report. The results of our audit procedures, including the procedures
performed to address the matters below, provide the basis for our audit opinion on the accompanying
financial report.

Auditor’s Independence Declaration to the Directors of Wesfarmers Limited
As lead auditor for the audit of Wesfarmers Limited for the fi nancial year ended 30 June 2017, I declare 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.
This declaration is in respect of Wesfarmers Limited and the entities it controlled during the fi nancial year.
Ernst & Young D S Lewsen
Partner 19 September 2017
A member fi rm of Ernst & Young Global Limited
Liability limited by a scheme approved under Professional Standards Legislation
Environmental regulation and performance
The activities of the consolidated entity are subject to environmental regulation by various authorities throughout Australia and the
other countries in which the Group operates.
Licences granted to the consolidated entity regulate the management of air and water quality and quantity, the storage and carriage
of hazardous materials, the disposal of wastes and other environmental matters associated with the consolidated entity’s operations.
During the year there have been no known material breaches of the consolidated entity’s licence conditions.
Proceedings on behalf of the company
No proceedings have been brought on behalf of the company, nor have any applications been made in respect of the company under
section 237 of the Corporations Act 2001.
Corporate governance
In recognising the need for high standards of corporate behaviour and accountability, the directors of Wesfarmers Limited
support and have followed the third edition of the ASX Corporate Governance Council’s Corporate Governance Principles and
Recommendations. An overview of the company’s corporate governance statement can be found on pages 64 to 67 of this
annual report. The full corporate governance statement is available on the Corporate Governance section of the company’s
website at www.wesfarmers.com.au/cg
Corporate information
Wesfarmers Limited is a company limited by shares that is incorporated and domiciled in Australia. The company’s registered offi ce
and principal place of business is Level 14, Brookfi eld Place Tower 2, 123 St Georges Terrace, Perth, Western Australia.
Rounding
The amounts contained in this report and in the fi nancial statements have been rounded to the nearest million dollars unless
otherwise stated (where rounding is applicable) under the option available to the company under ASIC Corporations (Rounding in
Financial/Directors’ Reports) Instrument 2016/191. The company is an entity to which the instrument applies.
Wesfarmers 2017 Annual Report 73
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Remuneration report 2017 (audited)
Executive remuneration
1. Introduction
1.1 2017 – a year of transition
The 2017 f inancial year has been one of transition for the
Wesfarmers Group.
Key management personnel (KMP) changes
Having led the Wesfarmers Group for more than 12 years as
the Group’s Managing Director, Richard Goyder will be retiring
at the conclusion of the 2017 Annual General Meeting (AGM).
Demonstrating our strong commitment to developing talent
internally, Rob Scott was appointed Deputy Chief Executive
Off icer in February 2017 to allow for a smooth transition
of leadership responsibilities and will be appointed Group
Managing Director upon Mr Goyder’s retirement.
In May 2017, Wesfarmers announced three senior executive
appointments as part of the Group’s leadership transition.
At a Group level, Anthony Gianotti will be the next Group Chief
F inancial Off icer, succeeding Terry Bowen, who stepped down as
Finance Director in September 2017 after eight years in the role
and 12 years on the Wesfarmers Leadership Team.
At a divisional level, David Baxby was appointed Managing
Director, Wesfarmers Industrials, eff ective August 2017,
succeeding Mr Scott.
Michael Schneider, previously Managing Director, Bunnings
Australia and New Zealand, was promoted to Managing Director,
Bunnings Group, replacing John Gillam who stepped down from
the role in December 2016.
Key Executive Equity Performance Plan (KEEPP)
The Wesfarmers board is committed to an executive
remuneration framework that is focused on driving a
performance culture to refl ect the diversif ied portfolio of
businesses. It seeks to link executive pay to the achievement of
the Group’s strategy and business objectives and, ultimately, to
generate satisfactory returns to shareholders.
After an extensive review of the eff ectiveness and
appropriateness of our reward and retention framework for
the Group’s operating model and the circumstances of our
divisions, engagement with key stakeholders both internally
and externally, and a review of the overarching principles on
which our remuneration is based, the Board has made a major
change to our reward framework.
There are two primary objectives of the new structure:
– f irstly to refl ect our operating model – each of the divisions
has a strong and autonomous management capability that
is accountable for strategy execution, as well as day-to-day
operational performance; and
– secondly to reward our executives for achieving the objectives
for which they are accountable and responsible.
We seek to provide very strong alignment to the interests of the
Group and its shareholders by delivering the major part of that
reward in Wesfarmers shares that are held for the long term.
Key design principles of the KEEPP are:
– To provide focus on the long term with each KEEPP cycle
operating over seven years.
– Annual awards under the plan are determined with respect to
performance against a scorecard that comprises f inancial and
strategic metrics relevant to the role of each participant. For
the divisional managing directors these comprise divisional
f inancial and divisional strategic measures.
– The award is delivered primarily in shares as detailed below,
with a cash component which is lower than under our legacy
incentive schemes and will reduce over time. The shares
comprise 50 per cent Restricted Shares and 50 per cent
Performance Shares. The total award granted for ‘at target’
performance is 200 per cent of f ixed annual remuneration
(FAR) and the maximum award is 300 per cent of FAR.
The Full KEEPP Cycle:
YEAR 1
Annual KEEPP
scorecard agreed
(e.g., in the 2017
f inancial year)
KEEPP scorecard
YEAR 2
Outcome against
KEEPP scorecard
calculated following
the end of Year 1
Cash1
Restricted
Shares
Performance
Shares
YEARS 2 TO 7
Remainder of
KEEPP cycle
Shares not
completely
released
until the end of
full KEEPP cycle
Hurdles set for
Years 2 to 5,
measured at the
end of Year 5
1 There was no cash component for the 2016 KEEPP allocation as the 2016
annual incentives were tested, as reported in the 2016 remuneration report.
Contents
Executive remuneration
Section 1: Introduction 73
Section 2: Executive KMP and
remuneration frameworks 75
Section 3: Outcomes 78
Non-executive director remuneration
Section 4: Framework and outcomes 88
Other remuneration information
Section 5: Remuneration governance 90
Section 6: Further information on remuneration 92
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Wesfarmers 2017 Annual Report74
Remuneration report 2017 (audited)
Directors’ report
The cash and shares awarded under the KEEPP have the
following features:
– The maximum cash component is lower under the KEEPP
than under the legacy annual incentive and is only paid when
performance against the scorecard generates a total award of
more than 100 per cent of FAR. In the 2017 f inancial year,
a maximum of 22.5 per cent of the divisional managing
directors’ at target award may be paid in cash. The maximum
cash component for these participants will reduce over the
next four KEEPP cycles.
– One half of the award (after reduction for the cash
component) is provided in the form of Restricted Shares, with
half (50 per cent) of these shares restricted for f ive years and
half (50 per cent) restricted for six years. These time periods
have been chosen to align the ultimate value of this part of the
award with the long-term experience of our shareholders. The
shares are subject to forfeiture conditions if the participant
resigns within a set period of time following allocation,
resigns to join a competitor or is dismissed for circumstances
such as cause or signif icant underperformance. Otherwise
they will remain in the plan for the balance of the full
restriction period even if employment ceases.
– The other half of the award is provided as Performance Shares
that are subject to a four-year performance period with
performance measures relevant to the role of the participant.
The Performance Shares will forfeit if the participant resigns
during the performance period, subject to Board discretion.
During the 2017 f inancial year, our divisional managing
directors transitioned from our legacy incentive schemes into
the KEEPP. Our divisional managing directors are the leaders
of our four main operating divisions (Managing Director,
Coles; Managing Director, Bunnings Group; Managing
Director, Wesfarmers Industrials; and Chief Executive Off icer,
Department Stores). Due to the timing of Mr Gillam stepping
into an advisory role, neither Mr Gillam nor Mr Schneider
participated in the 2016 KEEPP. Mr Schneider will participate in
the 2017 KEEPP.
KEEPP for the incoming Group Managing Director and the
incoming Group Chief F inancial Off icer
The incoming Group Managing Director and the incoming
Group Chief F inancial Off icer will participate in the 2017 KEEPP.
Following the end of the 2017 f inancial year it was determined
that the performance conditions to apply to the Performance
Shares allocated to the incoming Group Managing Director and
the incoming Group Chief F inancial Off icer under the 2017
KEEPP will be relative total shareholder return against the ASX100
(50 per cent weighting), absolute return on equity (20 per cent
weighting) and strategic measures (30 per cent weighting). The
performance period will be four years, measured from 1 July 2017
until 30 June 2021. The conditions applicable for the Restricted
Shares will be as per other KEEPP participants.
The annual KEEPP scorecards for the incoming Group
Managing Director and the incoming Group Chief F inancial
Off icer will comprise f inancial (Group NPAT and Group ROE)
and strategic measures. As a transitional arrangement, up to
10 per cent of the total ‘at target’ opportunity can be paid in
cash for the 2018 f inancial year outcomes. This is a third of the
amount that would have been paid in cash in a year ‘at target’
to the outgoing Group Managing Director and the outgoing
Group Chief F inancial Off icer under the legacy annual incentive
and long-term incentive arrangements. By the end of year three
of the KEEPP, the incoming Group Managing Director and the
incoming Group Chief F inancial Off icer will not receive any
annual cash amount under the KEEPP.
Further details on the terms of the KEEPP and on how the
KEEPP has been applied for this f inancial year are set out in
section 3.5 of this remuneration report.
1.2 2017 Summary
F ixed remuneration
The FAR of our Group Managing Director, Mr Goyder, was not
increased this year and has not changed since October 2011.
The Board, upon recommendation from the Remuneration
Committee, has continued to exercise restraint in relation to
FAR increases. In the October 2016 remuneration review, the
salaries of the Executive Leadership Team increased on average
by 2.9 per cent.
In February 2017, Mr Scott’s FAR increased to $2,000,000 per
annum on his appointment as Deputy Chief Executive Off icer
in recognition of his greater workload as he transitions to the
Group Managing Director at the conclusion of the 2017 AGM.
Reward arrangements that applied this year
As this is a year of transition, our remuneration report is slightly
more complex than in recent years. In summary, we had three
categories of executive remuneration in place this year:
– The divisional managing directors transitioned to the KEEPP,
replacing both the annual incentive plan and the Wesfarmers
Long Term Incentive Plan (WLTIP). They received their initial
2016 KEEPP allocation in Restricted Shares and Performance
Shares only. Following the end of the 2017 f inancial year, their
2017 KEEPP allocation (comprising cash, Restricted Shares
and Performance Shares) has been determined using their
performance against their 2017 KEEPP scorecard.
– Given the already signif icant tenure of the Group
Managing Director and the Group Chief F inancial Off icer,
both participated in the legacy annual incentive plan and
received a f inal grant under the WLTIP in the 2017 f inancial
year. Mr Scott (as the incoming Group Managing Director)
and Mr Gianotti (as the incoming Group Chief F inancial
Off icer) will participate in the 2017 KEEPP.
– Mr Schneider was designated a KMP during the year
(following Mr Gillam stepping into an advisory role) and
participated in the legacy annual incentive plan during the
2017 f inancial year. He will participate in the 2017 KEEPP.
Incentive outcomes
Annual incentive
For the 2017 f inancial year, the Board, upon recommendation
from the Remuneration Committee, increased the weighting of
the f inancial performance targets under the annual incentive
for the Group Managing Director from 60:40 f inancial/strategic
to 70:30 and for the Group Chief F inancial Off icer from 50:50
f inancial/strategic to 70:30.
Mr Goyder, Mr Bowen and Mr Schneider received greater than
target awards under the annual incentive plan for the 2017
f inancial year due to strong Group results and, for Mr Schneider
specif ically, due to strong results for Bunnings Australia and
New Zealand.
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WLTIP (2013)
The 2013 WLTIP grant was available to vest this year. Following
testing of the relative TSR and relative ROE performance
measures (explained further in section 3.4), 56.7 per cent of the
2013 WLTIP grant vested.
2017 KEEPP scorecards
An annual scorecard (comprising f inancial and strategic
divisional measures agreed between the participant and the
Group Managing Director) is used in determining the KEEPP
award allocation to be recommended by the Group Managing
Director to be made for our divisional managing directors.
Following the end of the 2017 f inancial year and assessment
of the 2017 KEEPP scorecards, Mr Scott achieved a maximum
2017 KEEPP allocation due to the strong results of Wesfarmers
Industrials. Mr Russo achieved an above target award as
the Department Stores division performed well overall.
Mr Durkan faced a challenging trading environment
within Coles and achieved a below target outcome. The 2017
KEEPP cash component for Mr Scott and Mr Russo was paid
on 22 August 2017.
2. Executive KMP and remuneration frameworks
2.1 Executive KMP
The executive KMP includes the Group Managing Director and
the Group Chief F inancial Off icer and those executives
who have authority and responsibility for planning, directing
and controlling the activities of a major prof it generating
division of Wesfarmers. The executive KMP are:
Executive KMP
Group Managing Director (Richard Goyder)
Group Chief F inancial Off icer (Terry Bowen)
Deputy Group Chief Executive Off icer (Rob Scott)1
Managing Director, Coles (John Durkan)
Chief Executive Off icer, Department Stores (Guy Russo)
Newly appointed executive KMP
Managing Director, Bunnings Group (Michael Schneider)2
Former executive KMP
Chief Executive Off icer, Bunnings Group (John Gillam)3
1 R G Scott commenced in the role of Deputy Group Chief Executive Off icer on
14 February 2017.
2 M D Schneider was appointed as an executive KMP on 7 December 2016
and appointed Managing Director, Bunnings Group on 29 May 2017.
3 J C Gillam ceased in the role of CEO, Bunnings Group on 6 December 2016
and from this date his new role as Senior Advisor no longer met the def inition
of a KMP.
F ixed remuneration 33.3%
Variable remuneration 66.7%
Group Managing Director
Group Chief F inancial Off icer
F ixed remuneration 35.7%
Variable remuneration 64.3%
Divisional managing directors
F ixed remuneration 31.8%
Variable remuneration 68.2%
Following the changes announced by Wesfarmers throughout
the 2017 f inancial year, it is anticipated that there will be
changes to the members of the executive KMP for 2018.
Mr Gianotti, as the Group Chief F inancial Off icer, and
David Baxby as Managing Director, Wesfarmers Industrials,
are expected to become executive KMP with Mr Goyder and
Mr Bowen ceasing to be executive KMP during the 2018
f inancial year.
2.2 Remuneration framework and policy
Wesfarmers is committed to an executive remuneration
framework that is focused on:
– driving a performance culture; and
– our autonomous management model which rewards our
executives for achieving the objectives for which they are
accountable and responsible, while providing very strong
alignment to the interests of the Group and its shareholders
by delivering, at target, the vast majority of that reward in
Wesfarmers shares that are held for the long term.
The primary objective is to provide satisfactory returns to
shareholders and the remuneration principles are focused on
driving the leadership performance and behaviours consistent
with achieving this objective.
In this transitional year, our executive remuneration framework
comprises FAR and variable incentives (either participation in
the KEEPP or participation in the annual incentive (STI) and a
long-term incentive (LTI)). The graphs below show each of the
components as a percentage of total target remuneration for the
2017 f inancial year – for the divisional managing directors this is
calculated using a weighted average:
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Component F IXED ANNUAL
REMUNERATION (FAR)
ANNUAL INCENTIVE1 WESFARMERS LONG-TERM INCENTIVE
PLAN (WLTIP)
Salary and other
benef its (including statutory
superannuation).
Cash for target performance.
Restricted shares for performance
above target.
Voluntary deferral (of portion of cash
award into shares).
Performance rights.
Performance
measure
Key result areas for
the role:
As outlined in the individual’s
position description.
For the Group Managing Director and
the Group Chief F inancial Off icer:
70% of the annual incentive comprises
Group f inancial measures:
Group NPAT and ROE.
30% of the annual incentive comprises
Group strategic measures:
Including strategy execution, succession,
gender balance, talent management, safety
and agreed key objectives.
Total Shareholder Return (TSR),
relative to ASX 50 Index (100% weighting).
Measured over a four-year performance
period.
Opportunity Total remuneration levels are
set at competitive levels to
attract, retain and engage key
talent, with FAR set at a level
that is appropriate given the
Group’s focus on long-term
performance.
100-120% of FAR for the Group Managing
Director and the Group Chief F inancial
Off icer.
100-200% of FAR for the Group Managing
Director and 80-160% for the Group Chief
F inancial Off icer.
Strategic
objective/
performance link
Considerations:
– Role and responsibility.
– Business and individual
performance.
– Internal and external
relativities.
– Contribution,
competencies and
capabilities.
– Rewards performance at Group level.
The f inancial performance measures were
chosen principally because Group NPAT
and ROE should drive dividends and
share price growth over time.
– Drives leadership performance and
behaviours consistent with achieving
the Group’s long-term objectives in
areas including safety, gender balance,
succession planning and talent
management.
– Aligns to the Group’s material business
risks, including strategy execution
(earnings delivery) and loss of key
management personnel (succession
planning).
– Provides a link with the creation of
shareholder value.
– TSR was chosen because it provides
a relative, external market performance
measure having regard to Wesfarmers’
ASX 50 peers.
– While the Board and management are
committed to managing the generation
of acceptable levels of ROE, it was not
felt appropriate to use ROE given the
impairment charges taken against Target
and Curragh and the material effect these
had in the 2016 f inancial year ROE (which
would be the starting point from when
performance would be measured).
1 As set out in section 1.2, the Managing Director, Bunnings Group also participated in the legacy annual incentive measured by Bunnings Australia and New Zealand
f inancial measures (Earnings Before Interest and Tax (EBIT) and Return on Capital (ROC)) and strategic measures (including gender balance, talent management,
safety and agreed key objectives) and a target opportunity of 60 per cent of FAR and a maximum opportunity of 120 per cent of FAR.
The following table shows the way in which each element of remuneration has been structured in the 2017 f inancial year to support
our Group business objectives with a view to generate satisfactory returns to shareholders. In this transitional year, executives either
received their FAR and participated in the annual incentive and WLTIP, or received their FAR and participated in the KEEPP.
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KEY EXECUTIVE EQUITY PERFORMANCE PLAN (KEEPP)
2016 KEEPP ALLOCATION
As no annual scorecard was in place prior to the 2017 f inancial year, the
amount of the 2016 KEEPP allocation was determined based on the
recommendation of the Group Managing Director to the Board based on
performance for the 2016 f inancial year. Accordingly there is no ongoing
performance condition for the Restricted Shares but these are subject to a
service condition.
There was no cash component – the 2016 KEEPP allocation consisted
of Restricted Shares (50%) and Performance Shares (50%) only (see
section 3.5).
2017 KEEPP ALLOCATION
For the 2017 KEEPP allocation, the amount of the allocation to current
KEEPP participants has been determined using performance against the
2017 scorecard.
The 2017 KEEPP allocation to these participants consists of:
– cash;
– with the remainder split between Restricted Shares (50%) and
Performance Shares (50%).
The cash component is only paid to the extent that the KEEPP award is
above 100% of FAR and up to a maximum of 22.5% of the participant’s
total at target opportunity.
Restricted Shares:
50% will be released after 5 years and the remaining 50% after 6 years.
Restricted Shares are subject to forfeiture if a participant leaves within
12 months from the date of allocation or leaves Wesfarmers and breaches
the restraint clause in their employment agreement or is dismissed in certain
circumstances including cause or signif icant underperformance.
Performance Shares:
Performance Shares are subject to the following measures:
– Cumulative divisional EBIT targets over a four-year period subject to a
divisional ROC gateway (80% weighting); and
– Total Shareholder Return (TSR), relative to ASX 50 Index (20% weighting).
These are measured over a four-year performance period from the grant date
of the Performance Shares.
2017 KEEPP Scorecard:
60% of the annual scorecard comprises divisional f inancial
measures:
Divisional EBIT, divisional ROC and, where appropriate, store sales growth
and transaction growth.
40% of the annual scorecard comprises divisional strategic
measures:
Including delivery of strategy in line with the approved Corporate Plan,
gender balance, talent management, succession planning, safety
improvement and other agreed key objectives.
2017 KEEPP Allocation (Restricted Shares and Performance
Shares):
As at the date of this report, the service and performance conditions to
determine vesting of the 2017 KEEPP allocation had not yet been f inalised.
200-230% of FAR Target:
200% of FAR
Maximum:
300% of FAR
– Recognises and rewards achievement of divisional goals over both the short term and the long term.
– Aligns to the Group’s material business risks, including strategy execution (earnings delivery) and loss of key management personnel (succession planning).
– Drives leadership performance and behaviours consistent with achieving the Group’s long-term objectives in areas including safety, customer metrics,
gender balance, succession planning and talent management, which are lead indicators of f inancial performance.
– The Restricted Shares and Performance Shares provide long-term alignment with shareholders.
– Performance Shares are measured against the four-year divisional EBIT target (80% weighting), subject to average ROC, to ensure the remuneration of
participants is directly linked to the achievement of long-term f inancial returns for the businesses in which they are directly involved.
– In addition Performance Shares are measured against TSR (20% weighting) to ensure participants are still remunerated against Group results, in addition to
the majority of the KEEPP award being delivered in Wesfarmers shares.
The applicable components of remuneration make up Total Remuneration:
The remuneration mix is designed to refl ect the diversif ied nature of Wesfarmers and is structured to reward executives for performance
at a Group level and, for divisional executives, also at a divisional level, and to align executive and stakeholder interests through share
ownership.
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3. Outcomes
3.1 Overview of company performance
The Group reported NPAT of $2,873 million for the 2017 f inancial year. This is an increase of $2,466 million from the 2016 f inancial
year, which included $1,946 million of signifi cant items being $1,249 million non-cash impairment of Target, $595 million non-cash
impairment of Curragh and $102 million of restructuring costs and provisions to reset Target.
The majority of Wesfarmers’ businesses have continued to demonstrate strong performance against key measures. The 2017
f inancial year has seen strong results from our Industrials division, Bunnings Australia and New Zealand, Off iceworks and Kmart.
The table below summarises details of Wesfarmers’ performance for key f inancial measures over the past f ive f inancial years.
F inancial year ended 30 June 2013 2014 2015 2016 2017
Net prof it after tax (NPAT) ($m) 2,261 2,689 2,440 407 2,873
Adjusted NPAT ($m)1 2,261 2,253 2,440 2,353 2,873
Total dividends per share (declared) (cents) 180 2002 200 186 223
Closing share price ($ as at 30 June) 39.60 41.84 39.03 40.10 40.12
Capital management distribution (paid) (cents) – 50 100 – –
Earnings per share (cents) 195.9 234.63 216.1 36.2 254.7
Return on equity (rolling 12) (%) 8.9 10.5 9.8 1.7 12.4
1 2014 excludes $1,179 million in discontinued operations relating to the disposal of the Insurance division and WesCEF’s interest in Air Liquide WA Pty Ltd along with
($743) million in non-trading items relating to the impairment of Target’s goodwill and Coles Liquor restructuring provision. 2016 excludes $1,249 million non-cash
impairment of Target, $595 million non-cash impairment of Curragh and $102 million of restructuring costs and provisions to reset Target.
2 2014 total dividends per share includes the 10 cent special ‘Centenary’ dividend.
3 2014 earnings per share includes the items outlined in footnote 1 above; excluding these items, earnings per share were 196.6 cents per share.
3.2 F ixed annual remuneration
Wesfarmers’ practice is not to increase f ixed remuneration by reference to infl ation or indexation as a matter of course. Increases are
based on: merit; or where there has been a material change in role or responsibility; or the market rate for comparable roles rising
materially; or as a result of internal relativities.
The f ixed remuneration of the Group Managing Director, Mr Goyder, was not increased this year and has not changed since
October 2011.
During the annual remuneration review, the f ixed remuneration increased by an average of 2.9 per cent for the Executive Leadership
Team to protect the signif icant investment of Wesfarmers in developing its key talent.
Mr Scott’s f ixed remuneration was increased to $2,000,000 per annum on his appointment as Deputy Chief Executive Off icer
in recognition of his greater workload as he transitions to the Group Managing Director role later this year. Upon transitioning,
Mr Scott’s f ixed remuneration will be increased to $2,500,000 per annum, a signif icantly lower amount than the current Group
Managing Director.
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3.3 Annual incentive overview
The details of Wesfarmers’ annual incentive plan are set out in section 3.3(c).
The Board, upon recommendation from the Remuneration Committee, increased the weighting on the f inancial metrics for both the
Group Managing Director and the Group Chief F inancial Off icer for the 2017 f inancial year.
(a) Weighting of performance conditions and outcomes
The table below sets out the performance conditions for the 2017 annual incentive and commentary on the performance outcome
for each participant.
Measure Outcome Performance commentary
Group Managing Director (R J B Goyder)
F inancial measures (70%) Group NPAT (with ROE gate)
Both the 2017 Group NPAT and ROE results were greater
than budget with strong results from most businesses.
Strategic measures (30%)
Succession/transition, gender balance,
talent management and safety
Mr Goyder was judged to have performed well against
each of his objectives, exceeding overall targets.
Group Chief F inancial Off icer (T J Bowen)
F inancial measures (70%) Group NPAT (with ROE gate)
Both the 2017 Group NPAT and ROE results were greater
than budget with strong results from most businesses.
Strategic measures (30%)
Gender balance, talent management and
succession planning
Mr Bowen performed very strongly against each of his
objectives and the maximum score was given.
Managing Director, Bunnings Group and Managing Director, Bunnings Australia and New Zealand (M D Schneider)
F inancial measures (70%) Divisional EBIT and Divisional ROC
Bunnings Australia and New Zealand continued with
another strong year of f inancial results with both divisional
EBIT and ROC exceeding budget.
Strategic measures (30%)
Gender balance, talent management
and key objectives agreed with the
Group Managing Director
Mr Schneider was judged as having made strong
progress against his objectives.
Safety
Safety improved across Bunnings Australia and
New Zealand, and the annual improvement target
was exceeded.
Threshold not met Threshold met or exceeded Target met or exceeded Maximum achieved
(b) Annual incentive outcomes – 2017 f inancial year
The table below sets out specif ic information relating to the actual annual incentive awards for the 2017 f inancial year.
PERCENTAGE
OF MAXIMUM STI
Name
Total award
$1
Awarded
%
Forfeited
%
R J B Goyder 4,073,135 96.8 3.2
T J Bowen 2,179,506 98.2 1.8
M D Schneider 1,178,385 78.6 21.4
1 The Board has agreed to pay the annual incentive for R J B Goyder and T J Bowen wholly in cash with no change in value. These payments were made on
22 August 2017. M D Schneider received the portion of his total award above target in Wesfarmers shares. The deferred restricted shares were allocated on
22 August 2017. On behalf of Mr Schneider $428,385 worth of shares were acquired and the number of shares, 10,359, was determined based upon the allocation
share price on 22 August 2017. The shares were purchased on market at an average price of $41.3512. No voluntary deferred shares were allocated.
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(c) At risk component – annual incentive
Additional details of Wesfarmers’ annual incentive plan are summarised below.
Annual incentive (STI)
Description Annual incentive plan delivered in cash (up to 60 per cent of FAR) and mandatory deferred shares (any amounts awarded above that) restricted
for three years with forfeiture condition.
Opportunity to elect upfront for a longer restriction (up to 15 years from the grant date) and to defer a portion of the cash award into shares
(in addition to the mandatory deferral arrangement).
Conditions
and vesting
F inancial and non-f inancial performance conditions (see section 3.3(a)).
Incentive awards are determined after the preparation of the f inancial statements each year (in respect of the f inancial measures) and after
a review of performance against non-f inancial measures by the Group Managing Director (and in the case of the Group Managing Director,
by the Board) at the end of the f inancial year.
F inancial measures (i.e., NPAT, ROE, EBIT, ROC and other specif ic divisional objectives) and safety measures (i.e., total recordable injury
frequency rate) are calculated based on the achievement of actual results against the targets set for these measures at the start of the f inancial
year. The performance and development review process is used to capture and assess key objectives and outcomes in relation to non-f inancial
measures (i.e., succession/transition, gender balance, talent management, safety and key objectives for the role).
In respect of the f inancial measures, depending on the division, threshold begins at 92.5 per cent or 95 per cent of target and stretch
is awarded at or above 105 per cent or 110 per cent of target. Safety targets are based on an improvement on last year’s results.
The Board conf irms f inal awards based on overall personal and Group performance. In accordance with the terms of the plan, the Board
has discretion to make adjustments to the performance conditions.
Restrictions
upon shares
allocated
Restricted shares are subject to a three-year trading restriction while the executive remains an employee of Wesfarmers and the executive can
elect for an additional restriction of up to 15 years from the grant date. The Board may determine that mandatory restricted shares are forfeited
if an executive resigns or is terminated for cause within one year of the share allocation.
Change
of control
Board discretion to release restricted shares.
Clawback The terms of the annual incentive plan contain a mechanism for the Board to clawback or adjust any incentive awards which vest (or may vest)
as a result of a material misstatement in, or omission from, the f inancial statements or otherwise as a result of fraud, dishonesty or breach of
obligations. The Board has discretion to adjust any conditions applicable to an award, if considered appropriate. The Board may, up to the value
of the overpaid remuneration, reduce or defer or otherwise require the repayment of any amount paid or payable to the executive to ensure no
unfair benef it is derived.
3.4 WLTIP overview
The Group Managing Director and the Group Chief F inancial Off icer received performance rights granted under the WLTIP during
the 2017 f inancial year. While originally a four-year service period, the Group Managing Director and the Group Chief F inancial
Off icer’s WLTIP grants will be left restricted in the plan upon retirement and tested in the normal course.
Key terms of this scheme are detailed in section 3.4(d).
(a) LTI awarded during the year
Performance rights were allocated to Mr Goyder and Mr Bowen under the 2016 WLTIP on 11 November 2016, and are subject to a
four-year performance period but are not subject to any additional trading restrictions. Awards are subject to a relative TSR hurdle
(detailed in section 3.4(d)).
Rights granted1 Face value2 ($) Value at grant3 ($)
R J B Goyder 81,522 3,505,970 1,797,723
T J Bowen 43,016 1,849,964 948,589
1 The number of performance rights allocated is determined based upon the 10-day volume weighted average price (VWAP) of Wesfarmers shares over the period
immediately following the full-year results announced in August 2016 (i.e., 25 August to 7 September 2016) being $43.006422. Performance rights have no exercise
price.
2 Face value represents the number of rights multiplied by the 10-day VWAP.
3 For accounting purposes, the fair value at grant is shown above, in accordance with AASB 2: Share-Based Payment. The rights have been independently valued
using the Monte Carlo simulation using the Black-Scholes framework. The value per right for Mr Goyder and Mr Bowen is $22.052.
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(b) LTI vesting during the year
Vesting condition
Outcome
(2013 – 2017)
Percentile ranking
vs ASX 50
% of maximum
award
Total % of
shares vested
Number of
shares vested
CAGR in ROE (75% of the award) 8.61% 62.80% 75.60%
56.70% 147,007
TSR (25% of the award) 27.03% 31.10% 0.00%
The table above shows the performance of the Group against the targets for the 2013 WLTIP award, whose four-year performance
period ended on 30 June 2017.
The Group outperformed the majority of its peers over the vesting period, with regard to compound annual growth rate (CAGR)
in ROE leading to a majority of the awards vesting (56.7 per cent of the potential total award). None of the awards tested against
TSR vested. The shares vested per individual are shown in section 3.4(c). The shares were released from a trading restriction on
19 September 2017. J C Gillam and G A Russo elected to extend their trading restriction to 8 November 2018 and 8 November 2020
respectively.
(c) Summary of awards held under WLTIP
The table below sets out details of performance rights granted to senior executives under the 2016 WLTIP allocation, rights vested
and lapsed in relation to the 2013 WLTIP allocation as well as details of rights granted under prior year WLTIP awards. As noted in
the table, during the year the Board approved that the unvested WLTIP allocations for Mr Goyder and Mr Bowen would continue to
be restricted in the WLTIP until the end of their original performance period, notwithstanding they are expected to leave the Group
earlier. The Board has approved this treatment on the basis that they are good leavers at the time they leave the Group.
Name
Held at
1 July 20161
Granted
during year2 Vested
Lapsed during
the year3 Net change
Held at
30 June 20174
Executive KMP
R J B Goyder5 254,406 81,522 (49,896) (38,104) (6,478) 247,928
T J Bowen5 174,063 43,016 (31,185) (23,815) (11,984) 162,079
R G Scott 86,774 – (15,628) (11,935) (27,563) 59,211
J P Durkan 174,757 – (28,337) (21,641) (49,978) 124,779
G A Russo 129,466 – (21,961) (16,772) (38,733) 90,733
Former KMP
J C Gillam6 151,906 – (25,681) (19,612) (106,613) –
1 Refl ects prior year WLTIP allocations which are subject to performance conditions at that time which remain unvested (i.e., under the 2013, 2014 and 2015 WLTIP
allocation of performance rights).
2 Due to the introduction of the KEEPP and J C Gillam stepping down from his role as CEO, Bunnings Group, only R J B Goyder and T J Bowen received
performance rights under WLTIP in the 2017 f inancial year.
3 The rights that did not vest under the 2013 WLTIP, as performance hurdles were not met, lapsed.
4 Refl ects the WLTIP allocations subject to performance conditions at that time which remain unvested (i.e., the 2014, 2015 and 2016 WLTIP rights).
5 On 28 June 2017 the Board approved that Mr Goyder and Mr Bowen will be entitled to have their unvested WLTIP rights continue to be restricted in the plan after
they leave the Group, waiving the four-year service period normally required for a WLTIP grant as at the date they cease employment, resulting in an accelerated
expensing prof ile over the revised vesting period. The Wesfarmers Limited share price on that date was $40.77. All other terms of the grant, including the applicable
performance conditions to be satisf ied for vesting, remain the same and will be tested at the end of the applicable performance period. The fair value of these WLTIP
grants has not changed.
6 Refl ects the period until J C Gillam ceased to be a member of the executive KMP on 6 December 2016.
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Directors’ report
(d) At risk component – WLTIP
The key details of WLTIP are summarised below.
Wesfarmers Long-term Incentive Plan (WLTIP)
Description Award of performance rights subject to a four-year performance period.
Performance
period
Four years.
Conditions
and vesting
For the 2016 WLTIP allocation (granted during the 2017 f inancial year) there is one performance hurdle – Wesfarmers’ TSR relative to the TSR
of the ASX 50 Index.
The move to a single measure has been made given the advantageous effect for executives that the impairments made in the 2016 f inancial
year would have made achieving the targets under the relative ROE measure.
The following vesting schedule applies to the performance hurdle:
Percentile ranking Percentage of awards vesting
Below the 50th percentile 0% vesting
Equal to the 50th percentile 50% vesting
Between the 50th and 75th percentile An additional 2% of awards vest for each percentile increase
Equal to the 75th percentile or above 100% vesting
Following testing, any rights that do not vest, lapse.
The number of performance rights allocated is determined based upon the 10-day volume weighted average price of Wesfarmers shares over
the period immediately following the full-year results announced in August 2016.
Restrictions
upon shares
allocated
Vesting will be determined after the end of the four-year performance period.
While the treatment for participants who cease employment with Wesfarmers before the end of the performance period depends upon the
circumstances of cessation, in the case of the Group Managing Director and the Group Chief F inancial Off icer the Board intends treating
them as good leavers and leaving their unvested WLTIP performance rights restricted in the plan to be tested, and, if appropriate, vest at the
end of the applicable performance period.
Change
of control
Board discretion to determine treatment of awards.
Clawback The terms of WLTIP contain a mechanism for the Board to clawback or adjust any incentive awards which vest (or may vest) as a result of a
material misstatement in, or omission from, the f inancial statements or otherwise as a result of fraud, dishonesty or breach of obligations. The
Board has discretion to adjust any conditions applicable to an award, if considered appropriate. The Board may, up to the value of the overpaid
remuneration, reduce or defer or otherwise require the repayment of any amount paid or payable to the executive to ensure no unfair benef it is
derived.
3.5 KEEPP overview
During the 2017 f inancial year, for the f irst time, our divisional managing directors received an allocation of KEEPP awards, being
the ‘2016 KEEPP allocation’ (see section 3.5(a)). In the 2018 f inancial year, they will receive their second KEEPP allocation, being the
‘2017 KEEPP allocation’ determined using the performance outcomes against their 2017 f inancial year scorecard (see section 3.5(b)).
Further key terms of this new reward program are detailed in section 3.5(d).
(a) KEEPP awarded during the year (2016 KEEPP allocation)
As there was no scorecard in place for the 2016 KEEPP allocation, the amount of KEEPP awarded during the year was approved
by the Board on recommendation from the Group Managing Director based on performance in the 2016 f inancial year:
Name Awarded % FAR
R G Scott 230
J P Durkan 200
G A Russo 220
There was no cash component for the 2016 KEEPP allocation as the 2016 annual incentives were tested, as reported in the 2016
remuneration report.
Wesfarmers 2017 Annual Report 83
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Restricted Shares and Performance Shares were allocated to participants under the 2016 KEEPP allocation. One half of the award that
is provided in Restricted Shares are restricted for fi ve years (50 per cent) and six years (50 per cent). The other half of the award that is
provided in Performance Shares are subject to a four-year performance period. Further details are in section 3.5(d).
Name Restricted Shares granted Performance Shares granted Total Share Award value1 ($) Fair value at grant2 ($)
R G Scott 32,088 32,088 2,759,980 2,742,171
J P Durkan 48,830 48,829 4,199,964 4,172,870
G A Russo 47,319 47,318 4,069,999 4,043,740
1 The number of Restricted Shares and Performance Shares allocated is determined based upon the 10-day VWAP of Wesfarmers shares over the period immediately
following the full-year results announced in August 2016 (i.e., 25 August to 7 September 2016) being $43.006422. This amount shown represents the total number
of Restricted Shares and Performance Shares multiplied by the 10-day VWAP.
2 For accounting purposes, the fair value at grant is shown above, in accordance with AASB 2: Share-Based Payment. The Performance Shares subject to market
conditions (TSR hurdle) have been independently valued using the Monte Carlo simulation using the Black-Scholes framework. The Restricted Shares and the
Performance Shares subject to non-market conditions (divisional EBIT and ROC) have been valued using the Black-Scholes option pricing model. The value per
Performance Share for the TSR performance hurdle is $29.94 and the value per Restricted Share and per Performance Share subject to divisional EBIT and ROC
hurdle is $44.15.
(b) Weighting of performance conditions and outcomes for the 2017 f inancial year scorecard
The results of the performance against the annual scorecard for the 2017 KEEPP allocation are outlined below:
Measure Outcome Performance commentary
Deputy Chief Executive Off icer, Wesfarmers Limited (R G Scott)
Divisional f inancial
measures (60%)
Divisional EBIT
Divisional ROC
Very strong f inancial results for Wesfarmers Industrials
resulted in Mr Scott receiving maximum for these measures.
Strategic measures (40%)
Business turnaround and strategic outcome
Succession
Safety
Talent
Gender balance
As Managing Director, Wesfarmers Industrials, Mr Scott
delivered very strong results across each of his objectives,
in addition to taking on Deputy Chief Executive Off icer
duties part way through the year.
Managing Director, Coles (J P Durkan)
Divisional f inancial
measures (60%)
Divisional EBIT
Divisional ROC
Comparative sales
Comparative transactions
Diff icult trading conditions for Coles resulted in below
threshold performance for f inancial measures.
Strategic measures (40%)
Strategic outcome
Succession
Safety
Talent
Gender balance
Mr Durkan achieved good progress in relation to safety,
talent and gender balance and overall was considered to
have exceeded threshold for his strategic measures.
Chief Executive Off icer, Department Stores (G A Russo)
Divisional f inancial
measures (60%)
Divisional EBIT
Divisional ROC
Despite below target f inancial results for Target, the
strong f inancial performance for Kmart and for the
Departments Stores division overall, resulted in above target
performance.
Strategic measures (40%)
Business turnaround and strategic outcome
Succession
Safety
Talent
Gender balance
Although Mr Russo did not meet the target set for safety
improvement for the year, he has performed very well and
achieved good results in relation to his other objectives.
Threshold not met Threshold met or exceeded Target met or exceeded Maximum achieved
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Wesfarmers 2017 Annual Report84
Remuneration report 2017 (audited)
Directors’ report
(c) KEEPP outcomes – 2017 f inancial year scorecard
The table below sets out specif ic information relating to the actual KEEPP outcomes for the 2017 f inancial year, based upon the
2017 f inancial year scorecards.
PERCENTAGE OF
MAXIMUM 2017 KEEPP OPPORTUNITY
Name
Total outcome
2017 KEEPP scorecard
$
Cash
(paid in August 2017)
$
Balance available for
Restricted Shares and
Performance Shares1 $
Awarded
%
Forfeited
%
R G Scott 6,000,000 900,000 5,100,000 100.0 –
J P Durkan 1,870,000 – 1,870,000 28.3 71.7
G A Russo 4,197,234 832,500 3,364,734 75.6 24.4
1 50% allocated as Restricted Shares and 50% allocated as Performance Shares.
The KEEPP cash component for the 2017 f inancial year scorecard was paid on 22 August 2017. The Restricted Shares and
Performance Shares are expected to be allocated in late September 2017 and details of those share grants will be provided in the 2018
remuneration report.
(d) At risk component – KEEPP
The key details of the KEEPP are summarised below.
Description Reward plan designed to refl ect Wesfarmers’ autonomous management model and to reward divisional managing directors for their division’s
results while providing strong long-term alignment with shareholders. This replaces both the annual incentive and WLTIP for participants with
a single plan operating over a total of seven years and delivered (heavily) in Wesfarmers shares (to align with shareholder experience) with long
vesting periods (up to six years from the grant date).
Annual
scorecard
measures
An annual scorecard (agreed between participants and the Group Managing Director and reviewed by the Remuneration Committee) is used in
determining the amount to be recommended by the Group Managing Director as the overall value of the KEEPP allocation.
The annual scorecard comprises divisional f inancial and divisional strategic performance conditions that are quantif iable and measurable and
specif ic to each division (see section 3.5(b)). In respect of the f inancial measures for 2017 which include divisional EBIT and ROC targets,
threshold vesting begins at 95 per cent of target and maximum is awarded at or above 105 per cent of target.
Annual
scorecard
assessment
and award
type
2016 KEEPP Allocation:
As there was no scorecard in place for the 2016 KEEPP allocation, the annual amount awarded during the year was approved by the Board on
recommendation from the Group Managing Director based on performance in the 2016 f inancial year.
There was no cash component for the 2016 KEEPP allocation as the 2016 annual incentives were tested and paid as normal.
2017 KEEPP Allocation (and future allocations):
The value of the full KEEPP award for the f inancial year is determined using performance against the annual scorecard in the preceding f inancial
year, and as recommended by the Group Managing Director.
Performance is assessed after the preparation of the f inancial statements each year (in respect of the f inancial measures) and after a review of
performance against strategic measures by the Group Managing Director at the end of the f inancial year.
In accordance with the terms of the plan, the Board has discretion to make adjustments to the performance conditions, where the Board
considers this appropriate.
Following the determination of the opportunity amount, KEEPP awards are granted in cash, Restricted Shares and Performance Shares.
Cash is only paid where the overall KEEPP award is greater than 100 per cent of FAR and for the divisional managing directors, cash may be
paid up to a maximum of 22.5 per cent of the participant’s total at target opportunity. This cash component will be reduced over the next few
KEEPP cycles as the participant’s shareholding and attached dividend fl ow increases.
The remainder of the KEEPP award is granted as Restricted Shares and Performance Shares as follows:
– 50 per cent will be granted as Restricted Shares for up to six years where half of the shares will be restricted for f ive years and the balance
will be subject to a restriction for six years; and
– the remaining 50 per cent will be performance-based shares (Performance Shares) which will vest subject to divisional performance against
corporate plan EBIT and ROC, and relative TSR over four years.
KEEPP
allocations
KEEPP cash payments are made in late August, and the Restricted Shares and Performance Shares are allocated following the Board deciding
on and communicating the conditions and restrictions to apply to them to the participant. The number of shares allocated is determined using a
face value calculated based upon the 10-day VWAP of Wesfarmers shares over the period immediately following the full-year results announced
in August of that year.
Wesfarmers 2017 Annual Report 85
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Performance
Shares
conditions
and vesting
2016 KEEPP Allocation:
The Performance Shares have f inancial performance conditions over a four-year performance period:
– cumulative EBIT and ROC (80 per cent weighting); and
– Wesfarmers’ TSR relative to the TSR of the ASX 50 Index (20 per cent weighting).
Vesting schedule against EBIT and ROC:
– 50 per cent of the Performance Shares vest if 90 per cent of the cumulative EBIT target is achieved, subject to achieving 90 per cent of the
average ROC target; and
– 100 per cent of the Performance Shares vest if 100 per cent of the cumulative EBIT target is achieved, subject to achieving 90 per cent of
the average ROC target.
Straight-line vesting occurs in between and following testing, any shares that do not vest are forfeited.
Vesting schedule against relative TSR:
Percentile ranking Percentage of awards vesting
Below the 50th percentile 0% vesting
Equal to the 50th percentile 50% vesting
Between the 50th and 75th percentile An additional 2% of awards vest for each percentile increase
Equal to the 75th percentile or above 100% vesting
Following testing, any Performance Shares that do not vest will be forfeited. In accordance with the terms of the plan, the Board has discretion
to make adjustments to the performance conditions where it is considered appropriate to do so.
2017 KEEPP Allocation:
As at the date of this report, the performance conditions to determine vesting of the 2017 KEEPP allocation had not yet been f inalised.
Restrictions
upon shares
allocated
Restricted Shares
2016 KEEPP Allocation:
Restricted Shares are subject to a f ive- or six-year trading restriction.
They will be released from restriction on the day following the full year results announcement for the 2021 and 2022 f inancial years in August
2021 and August 2022 respectively (i.e., the beginning of the trading window) and will not be subject to any trading restrictions on dealing
(subject to complying with Wesfarmers’ Securities Trading Policy). The Board can elect to provide a cash payment as an alternative to the
shares (equivalent in value to the vested shares).
2017 KEEPP Allocation:
As at the date of this report, the service conditions to determine vesting of the 2017 KEEPP Allocation had not yet been f inalised.
Performance Shares
Performance Shares that vest subject to the performance conditions are not subject to any additional trading restrictions although the Board
can elect to provide a cash payment as an alternative to the shares (equivalent in value to the vested shares).
Cessation of
employment
Restricted Shares
Restricted Shares are subject to forfeiture if the executive resigns within 12 months of allocation, breaches the restraint clause in their
employment agreement or is dismissed in certain circumstances including cause or signif icant underperformance. The restriction is intended to
continue even if the executive ceases to be an employee of Wesfarmers. The Board has discretion to lift this restriction early and also to provide
a cash payment as an alternative to the shares (equivalent in value to the vested shares).
Performance Shares
If an executive ceases employment with Wesfarmers before the end of the performance period, their entitlement to the shares (if any)
will depend on the circumstances of cessation. All shares will forfeit in the event of resignation or dismissal for cause or signif icant
underperformance.
If an executive ceases employment during the performance period by reason of redundancy, ill health, death, or other circumstances approved
by the Board, the executive will generally be entitled to have his or her Performance Shares left restricted in the plan to be vested (and vest) at
the end of the applicable performance period.
Change of
control
Board discretion to determine treatment of awards.
Clawback The terms of the KEEPP contain a mechanism for the Board to clawback or adjust any incentive awards which vest (or may vest) as a result of
a material misstatement in, or omission from, the f inancial statements or otherwise as a result of fraud, dishonesty or breach of obligations. The
Board has discretion to adjust any conditions applicable to an award, if considered appropriate. The Board may, up to the value of the overpaid
remuneration, reduce or defer or otherwise require the repayment of any amount paid or payable to the executive to ensure no unfair benef it is
derived.
Dividends Restricted Shares
These will be escrowed until the end of the 12-month forfeiture period and thereafter be paid to the KEEPP participants.
Performance Shares
These will be escrowed for the full four-year performance period and only paid to the KEEPP participants to the extent that the underlying
shares vest.
(d) At risk component – KEEPP (continued)
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Directors’ report
3.6 Executive remuneration (statutory presentation)
How remuneration outcomes are presented
Remuneration outcomes are presented based on the requirements of accounting standards (which has the benef it of being readily
comparable with other companies) rather than a take-home pay basis (being cash and benef its and the value of equity on vesting
during the f inancial year). Examples of this are:
– Annual incentive awards can be paid in restricted shares. These are recognised as an expense over a 12-month period typically
spanning two f inancial years, including the year of the award. This year’s outcome includes expenses relating to this year’s and
last year’s restricted shares as well as this year’s cash award.
– WLTIP awards are recognised over the performance period (four years) based on their assessed value when originally granted
to the executive. This may be signif icantly diff erent to their value, if and when the incentive vests to the executive.
– KEEPP cash component is recognised for the year to which it relates, KEEPP Restricted Shares are recognised as an expense over
a 12-month period typically spanning two f inancial years and KEEPP Performance Shares are recognised over the performance
period (four years) based on their assessed value when originally granted to the executive. The value recognised for the KEEPP
Restricted Shares and Performance Shares may be signif icantly diff erent to their value if and when the incentive vests to the
executive.
– In some circumstances, amounts are recorded as remuneration when no shares or rights vest to the executive and in other cases
there can be negative remuneration from LTIs in a given year due to non-vesting.
Footnotes to remuneration table on the following page
1 Share-based payments: Refer to section 3.3 for detailed disclosures under the annual incentive plan and sections 3.4 and 3.5 for the various long-term incentive
plans. The amounts included for the ‘Value of annual incentive shares’ includes the portion of the 2017 annual incentive that was deferred into shares and is
recognised for accounting purposes over the performance and forfeiture periods, which together are referred to as the ‘service period’. For accounting purposes,
the 2015 and 2016 annual incentive shares continue to be expensed in the 2017 f inancial year based on probability of vesting, as these shares are subject to
performance and forfeiture conditions.
The amounts included for the ‘Value of long-term incentive equity’ for the 2016 WLTIP are detailed in section 3.4 and for the 2016 KEEPP are detailed in section 3.5.
For accounting purposes, the 2013, 2014 and 2015 WLTIP continue to be expensed in the 2017 f inancial year based on probability of vesting, as these shares are
subject to performance and forfeiture conditions, together referred to as the service period.
The expensing for the Restricted Shares and Performance Shares, that are yet to be granted under the 2017 KEEPP, will start to be included in the remuneration
table in the 2018 remuneration report.
2 The percentage performance related for the 2017 f inancial year is the sum of the annual incentive and KEEPP cash and share-based payments divided by the total
remuneration, refl ecting the actual percentage of remuneration at risk for the year.
The percentage of total remuneration that consists of performance rights and KEEPP shares only, being the amount expensed in the 2017 f inancial year for the
2013, 2014, 2015 and 2016 WLTIP and the 2016 KEEPP shares, as applicable, is as follows – R J B Goyder 34.7%, T J Bowen 38.1%, R G Scott 35.5%,
J P Durkan 51.2% and G A Russo 46.8%. M D Schneider does not hold WLTIP performance rights or KEEPP shares.
3 Short-term benef its, non-monetary benef its, include the cost to the company of providing parking, vehicle, life insurance and travel. Short-term benef its, other,
includes the cost of directors and off icer insurance.
4 Long-term benef its relate to leave entitlements accrued for the year.
5 Post-employment benef its, other benef its, include the retention incentive accrual (equal to nine months FAR) from last year to this year, which is payable upon
termination of employment for T J Bowen, J C Gillam and G A Russo. A portion of the retention incentive previously earned for satisfying the applicable service
condition under the legacy retention incentive plan, equal to nine months FAR (at the level of FAR when the executive departs), is payable to these executives at the
time of termination of employment (except in the case of termination for serious misconduct). These amounts were earned in the 2010 f inancial year; however, the
payment is not due to be made until the relevant employee ceases his employment with the Group. Although it will be paid at the time of cessation of employment,
such payments do not constitute a termination benef it for the purposes of the termination payment legislation. Following Mr Scott’s appointment to Deputy Chief
Executive Off icer, the Board resolved to crystallise his retention incentive entitlement in the 2017 f inancial year and this was paid to him in April 2017.
6 For the 2017 fi nancial year, the Board agreed to pay the annual incentive for R J B Goyder and T J Bowen wholly in cash and therefore the total of their FY17 annual
incentive is refl ected under ‘Annual incentive and KEEPP cash’. Further, on 28 June 2017, the Board approved that R J B Goyder and T J Bowen will be entitled to
have their unvested WLTIP rights continue to be restricted in the plan after they leave the Group, waiving the four-year service period normally required for a WLTIP
grant as at the date they cease employment, resulting in an accelerated expensing profi le over the revised vesting period. This accelerated expensing profi le is
refl ected under the ‘Value of long-term incentive equity’.
7 M D Schneider became a member of the KMP, effective 7 December 2016.
8 J C Gillam ceased to be a member of the KMP following his stepping into a Senior Adviser role from his original role of Chief Executive Off icer, Bunnings Group on
6 December 2016.
9 S B Machin ceased to be a member of the KMP following the establishment of the Department Stores division effective 23 February 2016 and resigned on
8 April 2016. Following his resignation, all unvested STI and LTI awards were forfeited.
10 T J P O’Leary ceased to be a member of the KMP following the restructure of the Wesfarmers Industrials division effective 1 September 2015.
Wesfarmers 2017 Annual Report 87
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BACK

Wesfarmers 2017 Annual Report88
Remuneration report 2017 (audited)
Directors’ report
Non-executive director remuneration
4. Framework and outcomes
4.1 Overview of non-executive directors remuneration policy and arrangements
Policy objectives
– To be market competitive: aim to set fees at a level competitive with non-executive directors in comparator companies; and
– To safeguard independence: to not include any performance-related element, to preserve the independence of non-executive
directors.
Aggregate fees approved by shareholders
The current maximum aggregate fee pool for non-executive directors of $3,600,000 was approved by shareholders at the 2015 Annual
General Meeting. Fees paid to Wesfarmers’ non-executive directors for membership of Wesfarmers’ divisional boards, in addition
to Wesfarmers’ Board and Committee fees and superannuation contributions made on behalf of the non-executive directors in
accordance with Wesfarmers’ statutory superannuation obligations, are included in this aggregate fee pool.
Regular reviews of remuneration
The Board periodically reviews the level of fees paid to non-executive directors, including seeking external advice. A review was
undertaken during the 2017 f inancial year with the assistance of 3 degrees consulting.
Main Board non-executive directors fees were increased by 4.5 per cent and the Chairman fee increased by 2.5 per cent eff ective
1 January 2017 in order to remain competitive in the market, having regard to the size, complexity and market position of the Group.
No change was made to the Audit and Risk Committee fees or Remuneration Committee fees, as the current level of fees were
considered appropriate.
4.2 Non-executive director fees and other benef its
The fees shown in the table below (inclusive of superannuation) took eff ect from 1 January 2017. Members of the Nomination
Committee and Gresham Mandate Review Committee do not receive any additional fees.
Fees/benef its Description
2017
$
Included in
shareholder
approved cap
Board fees Main Board
YesChairman – M A Chaney 770,000
Members – all non-executive directors 230,000
Committee fees Audit and Risk Committee
YesChairman – A J Howarth 80,000
Members – D L Smith-Gander, J A Westacott 40,000
Remuneration Committee
YesChairman – W G Osborn 52,000
Members – M A Chaney*, J P Graham, P M Bassat and V M Wallace 26,000
Superannuation Made to the Wesfarmers Group Superannuation Plan or another regulated
superannuation fund. An amount is deducted from gross fees to meet statutory
superannuation obligations.
Yes
Other Group fees Non-executive directors are paid additional fees for participation on Wesfarmers’
divisional boards, where applicable.
Yes
Other benef its Non-executive directors are entitled to reimbursement for business-related expenses,
including travel expenses and also receive the benef it of coverage under a directors and
off icer insurance policy.
No
* From 1 January 2014, the Chairman of the Board no longer receives a separate fee for sitting on any of the Board’s committees.
Wesfarmers 2017 Annual Report 89
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Remuneration report 2017 (audited)
4.3 Non-executive director remuneration
The fees paid or payable to the non-executive directors in relation to the 2017 f inancial year are set out below:
SHORT-TERM BENEF ITS
POST-EMPLOYMENT
BENEF ITS
Non-executive directors
Fees –
Wesfarmers
Limited
$
Fees –
Wesfarmers
Group
$
Other benef its1
$
Superannuation2
$
Total
$
P M Bassat 2017 231,380 – 8,040 19,620 259,040
2016 222,690 – 7,482 19,310 249,482
M A Chaney3 2017 740,380 – 8,040 19,620 768,040
2016 542,150 – 7,482 19,310 568,942
J P Graham4 2017 251,000 – 8,040 – 259,040
2016 242,000 – 7,482 – 249,482
A J Howarth5 2017 285,380 101,900 8,040 19,620 414,940
2016 276,690 99,700 7,482 19,310 403,182
W G Osborn 2017 257,380 – 8,040 19,620 285,040
2016 248,690 – 7,482 19,310 275,482
D L Smith-Gander6 2017 245,380 125,568 8,040 19,620 398,608
2016 236,690 – 7,482 19,310 263,482
V M Wallace 2017 231,380 – 8,040 19,620 259,040
2016 222,690 – 7,482 19,310 249,482
J A Westacott 2017 245,380 – 8,040 19,620 273,040
2016 236,690 – 7,482 19,310 263,482
Former non-executive directors
R L Every7
(retired 12/11/15)
2016 264,311 – 87,301 8,046 359,658
Total remuneration 2017 2,487,660 227,468 64,320 137,340 2,916,788
2016 2,492,601 99,700 147,157 143,216 2,882,674
1 The benef it included in this column is an apportionment of the premium paid on a policy for directors and off icer insurance. In 2016, this benef it included the cost to
the company (inclusive of fringe benef its tax) of a retirement gift for R L Every.
2 Superannuation contributions are made on behalf of non-executive directors in accordance with Wesfarmers’ statutory superannuation obligations. Also included is
any part of a non-executive director’s fees that have been sacrif iced into superannuation.
3 M A Chaney was appointed as Chairman on 12 November 2015.
4 J P Graham’s fees are paid to Gresham Partners Group Limited for participation on the Board of Wesfarmers Limited.
5 A J Howarth receives fees for participation on the board of BWP Management Limited.
6 D L Smith-Gander received fees for participation in the strategic review of Offi ceworks Limited.
7 R L Every retired as Chairman at the conclusion of the 2015 Annual General Meeting on 12 November 2015.
BACK

Wesfarmers 2017 Annual Report 91
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Remuneration report 2017 (audited)
Director and executive share and rights holdings
Name
Balance of shares at
beginning of year
Shares granted as
remuneration
Net change
in shares1
Share balance
at year-end2
Number of shares
and rights not
vested at year-end3
Non-executive directors
P M Bassat 19,411 – – 19,411 –
M A Chaney 87,347 – 250 87,597 –
J P Graham 796,516 – – 796,516 –
A J Howarth 17,184 – 664 17,848 –
W G Osborn 9,988 – – 9,988 –
D L Smith-Gander 12,045 – – 12,045 –
V M Wallace 13,483 – – 13,483 –
J A Westacott 1,957 – 2,000 3,957 –
Executive directors, senior executives and former senior executives
R J B Goyder 795,626 – (35,645) 759,981 247,928
T J Bowen 332,260 – (148,088) 184,172 162,079
R G Scott 240,575 69,603 156 310,334 128,814
J P Durkan 51,848 111,764 (44,728) 118,884 236,543
J C Gillam4 496,073 23,111 – 519,184 129,724
G A Russo 328,576 109,726 (58,776) 379,526 200,459
M D Schneider 5 – – 24,358 24,358 20,786
Total 3,202,889 314,204 (259,809) 3,257,284 1,126,333
1 The net change may include changes due to personal trades, shares granted as remuneration and forfeited shares.
2 Where a director or senior executive has ceased to be a director or senior executive throughout the year, the balance at year-end refl ects the number of shares as at
the date they ceased to be a director or senior executive.
3 This number refl ects the 2016 annual incentive mandatory deferral into shares (which were subject to forfeiture if the executive resigned prior to 26 August 2017), the
2014, 2015 and 2016 WLTIP allocations, which remain subject to performance conditions and the 2016 KEEPP Restricted Shares and Performance Shares, which
remain subject to forfeiture and performance conditions, as applicable.
4 The information for J C Gillam refl ects his time as a member of the KMP, up until 6 December 2016.
5 The information for M D Schneider refl ects his time as a member of the KMP, from 7 December 2016.
5.4 Share trading restrictions
Wesfarmers’ Securities Trading Policy refl ects the Corporations Act prohibition on key management personnel and their closely
related parties entering into any arrangement that would have the eff ect of limiting the key management personnel’s exposure to risk
relating to an element of their remuneration that remains subject to restrictions on disposal.
Wesfarmers directors, the Wesfarmers Leadership Team, and certain members of their immediate family and controlled entities
are also required to obtain clearance from the Wesfarmers Company Secretary for the sale, purchase or transfer of Wesfarmers
securities and for short selling, short-term trading, security interests, margin loans and hedging relating to Wesfarmers securities.
The Wesfarmers Company Secretary refers all requests for clearance to at least two members of the Disclosure Committee. Clearance
from the Chairman is also required for requests from Wesfarmers directors. Clearance cannot be requested for dealings that are
subject to the Corporations Act prohibition referred to above.
The policy is available on the Corporate Governance section of the company’s website at www.wesfarmers.com.au/cg. Breaches of
the policy are subject to disciplinary action, which may include termination of employment.
Wesfarmers 2017 Annual Report90
Remuneration report 2017 (audited)
Directors’ report
Other remuneration information
5. Remuneration governance
5.1 Responsibility for setting remuneration
Responsibility for setting a remuneration policy and determining non-executive director, executive director and senior executive
remuneration rests with the Board.
The Remuneration Committee is delegated responsibility to review and make recommendations to the Board. Management and
remuneration consultants provide information to assist the Board and Remuneration Committee, but do not substitute for the
Board and committee processes.
Details of the composition of the Remuneration Committee is set out on page 88 of this annual report. Further information regarding
the objectives and role of the Remuneration Committee is contained in its charter, which is available on the Corporate Governance
section of the company’s website at www.wesfarmers.com.au/cg
5.2 Use of remuneration advisers during the year
3 degrees consulting was engaged by the Remuneration Committee to provide independent advice to it on a range of matters,
including KMP remuneration. In the 2017 f inancial year, 3 degrees consulting provided remuneration recommendations as def ined
in section 9B of the Corporations Act 2001 in relation to the remuneration of the Deputy Chief Executive Off icer, Mr Scott, and levels
of our non-executive director fees. 3 degrees consulting was paid $37,000 excluding GST and disbursements, for these services.
The Board is satisf ied that the recommendations were made free from any undue infl uence by the member or members of KMP
to whom the recommendations relate. In addition to adhering to Board approved protocols, 3 degrees consulting provided a formal
declaration in this regard.
3 degrees consulting also acted as the independent remuneration adviser to the Remuneration Committee and has been involved in
the design and implementation of the KEEPP program for the divisional managing directors, the incoming Group Managing Director
and the incoming Group Chief F inancial Off icer. 3 degrees consulting also provided a broad range of services to Wesfarmers and
the broader group during this transitional year, including human resources strategy and forward planning, human resources legal
advice, advice regarding senior leadership succession and retirement transition, as well as advice on other aspects of remuneration
of the Group’s senior executives, and related governance and legal advice. Services also included advice regarding senior executive
employment terms, advice relating to executives who ceased employment during the year, internal and external stakeholder
communications (including assistance in relation to the remuneration report), the provision of market data regarding peer
remuneration practices and assistance with various human resources and remuneration planning regarding the potential IPO of
Off iceworks. 3 degrees consulting was paid a total of $972,550 excluding GST and disbursements for these services to the Wesfarmers
Group for the 2017 f inancial year.
During the year, 3 degrees consulting was acquired by KPMG and was rebranded KPMG-3dc. KPMG-3dc did not provide any
remuneration recommendations as def ined in section 9B of the Corporations Act 2001 in the 2017 f inancial year.
5.3 Senior executive and director share ownership
The Board considers it an important foundation of the Wesfarmers executive remuneration framework that the senior executive
team and directors hold a signif icant number of Wesfarmers shares to encourage executives to behave like long-term ‘owners’.
– At the date of this report, all senior executive KMP held approximately one year’s FAR in Wesfarmers shares, with the majority
holding signif icantly more.
– Directors are required to hold a minimum of 1,000 Wesfarmers shares within two months of appointment.
– Directors are also expected to increase their holdings in Wesfarmers shares to the equivalent of their annual main board fee within
a f ive-year period of appointment.
The following table sets out the number of shares held directly, indirectly or benef icially by directors and senior executives (including
their related parties).
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Wesfarmers 2017 Annual Report92
Remuneration report 2017 (audited)
Directors’ report
6. Further information on remuneration
6.1 Service agreements
The remuneration and other terms of employment for the Group Managing Director, the Group Chief F inancial Off icer and
executive KMPs are covered in formal employment contracts. All service agreements are for unlimited duration and may be
terminated immediately for serious misconduct. All executives are entitled to receive pay in lieu of any accrued but untaken annual
and long service leave on cessation of employment.
In the 2017 f inancial year, Wesfarmers amended certain key contractual arrangements for a number of Wesfarmers’ most senior
executives.
Mr Durkan, Mr Russo, Mr Scott and Mr Schneider must give a minimum 12 month’s notice should they wish to resign. In addition,
the restraint and non-solicitation clauses have been strengthened to further protect the business interests of the Wesfarmers Group.
In return, Wesfarmers has agreed to give 12 month’s notice should it wish to terminate employment (other than for cause).
Mr Goyder must give a minimum 12 month’s notice should he wish to resign. Mr Bowen is required to give six month’s notice
should he wish to resign. As previously announced, Mr Goyder and Mr Bowen’s remuneration arrangements on retirement will
be determined in line with their contractual entitlements.
6.2 Other transactions and balances with key management personnel
Mr Bassat, a director of Wesfarmers, is a director of AFL Sportsready Limited which has provided training services to Wesfarmers
Group companies on an arm’s length and normal commercial terms basis and was paid $449,350 in 2017.
Mr Graham, a director of Wesfarmers, has a majority shareholding interest in a company which jointly owns Gresham Partners
Group Limited on an equal basis with a wholly owned subsidiary of Wesfarmers. Partly owned subsidiaries of Gresham Partners
Group Limited have provided off ice accommodation and advisory services to Wesfarmers and were paid fees of $2,356,069 in 2017
(2016: $1,698,838).
From time to time, directors of the company or its controlled entities, or their director-related entities, may purchase goods or
services from the Group. These purchases are on the same terms and conditions as those entered into by other Group employees
or customers and are minor or domestic in nature.
There were no loans made during the year, or remaining unsettled at 30 June 2017, between Wesfarmers and its key management
personnel and/or their related parties.
6.3 Independent audit of remuneration report
The remuneration report has been audited by Ernst & Young. Please see page 144 of this annual report for Ernst & Young’s report on
the remuneration report.
The directors’ report, including the remuneration report, is signed in accordance with a resolution of the directors of
Wesfarmers Limited.
M A Chaney AO R J B Goyder AO
Chairman Managing Director
Perth
19 September 2017
Wesfarmers 2017 Annual Report 93
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Financial statements
For the year ended 30 June 2017 – Wesfarmers Limited and its controlled entities
Contents
Financial statements
Income statement Page 94
Statement of comprehensive income Page 95
Balance sheet Page 96
Cash flow statement Page 97
Statement of changes in equity Page 98
Notes to the financial statements
About this report Page 99
Segment information Page 101
Key numbers
Page 104
Capital
Page 113
Risk
Page 117
Group structure
Page 127
Unrecognised items
Page 132
Other
Page 133
1. Income 10. Capital
management
15. Financial risk
management
18. Associates
and joint
arrangements
20. Commitments
and
contingencies
22. Parent
disclosures
2. Expenses 11. Dividends and
distributions
16. Hedging 19. Subsidiaries 21. Events after the
reporting period
23. Deed of Cross
Guarantee
3. Tax expense 12. Equity and
reserves
17. Impairment of
non-financial
assets
24. Auditors’
remuneration
4. Cash and cash
equivalents
13. Earnings per
share
25. Related party
transactions
5. Receivables 14. Interest-
bearing loans
and borrowings
26. Other
accounting
policies
6. Inventories 27. Share-based
payments
7. Property, plant
and equipment
28. Director and
executive
disclosures
8. Goodwill and
intangible
assets
29. Tax
transparency
disclosures
9. Provisions
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Wesfarmers 2017 Annual Report94
Financial statements
Income statement
For the year ended 30 June 2017
CONSOLIDATED
2017 2016
Note $m $m
68,444 65,981
(46,359) (45,525)
(9,132) (8,847)
(1,096) (1,078)
(3,229) (2,959)
(1,266) (1,296)
(49) (2,172)
(3,346) (3,107)
(64,477) (64,984)
288 235
147 114
435 349
4,402 1,346
(264) (308)
4,138 1,038
(1,265) (631)
2,873 407
254.7 36.2
254.2 36.2
Revenue 1
Expenses
Raw materials and inventory
Employee benefits expense 2
Freight and other related expenses
Occupancy-related expenses 2
Depreciation and amortisation 2
Impairment expenses 2
Other expenses 2
Total expenses
Other income 1
Share of net profits of associates and joint venture 18
Earnings before interest and income tax expense (EBIT)
Finance costs 2
Profit before income tax
Income tax expense 3
Profit attributable to members of the parent
Earnings per share attributable to ordinary equity holders of the parent 13
Basic earnings per share
Diluted earnings per share
Wesfarmers 2017 Annual Report 95
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Statement of comprehensive income
For the year ended 30 June 2017
CONSOLIDATED
2017 2016
Note $m $m
2,873 407
(2) 15
(136) (34)
92 147
84 (257)
– 8
(17) 46
(5) (5)
2 2
18 (78)
2,891 329
Profit attributable to members of the parent
Other comprehensive income
Items that may be reclassified to profit or loss:
Foreign currency translation reserve 12
Exchange differences on translation of foreign operations

Cash flow hedge reserve 12
Unrealised losses on cash flow hedges
Realised losses transferred to net profit
Realised losses/(gains) transferred to non-financial assets
Share of associates and joint venture reserves
Tax effect 3,12
Items that will not be reclassified to profit or loss:
Retained earnings 12
Remeasurement loss on defined benefit plan
Tax effect 3
Other comprehensive income/(loss) for the year, net of tax
Total comprehensive income for the year, net of tax, attributable to members of the parent
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Wesfarmers 2017 Annual Report96
Financial statements
Balance sheet
As at 30 June 2017
CONSOLIDATED
2017 2016
Note $m $m
1,013 611
1,633 1,628
– 835
6,530 6,260
247 54
244 296
9,667 9,684
703 605
971 1,042
2,195 2,396
7,245 7,216
14,360 14,448
4,576 4,625
246 565
152 202
30,448 31,099
40,115 40,783
6,615 6,491
1,347 1,632
292 29
1,743 1,861
154 160
266 251
10,417 10,424
4,066 5,671
1,511 1,554
24 81
156 104
5,757 7,410
16,174 17,834
23,941 22,949
22,268 21,937
(26) (28)
1,509 874
190 166
23,941 22,949
Assets
Current assets
Cash and cash equivalents 4
Receivables – Trade and other 5
Receivables – Finance advances and loans 5
Inventories 6
Derivatives 16
Other
Total current assets
Non-current assets
Investments in associates and joint venture 18
Deferred tax assets 3
Property 7
Plant and equipment 7
Goodwill 8
Intangible assets 8
Derivatives 16
Other
Total non-current assets
Total assets
Liabilities
Current liabilities
Trade and other payables
Interest-bearing loans and borrowings 14
Income tax payable
Provisions 9
Derivatives 16
Other
Total current liabilities
Non-current liabilities
Interest-bearing loans and borrowings 14
Provisions 9
Derivatives 16
Other
Total non-current liabilities
Total liabilities
Net assets
Equity
Equity attributable to equity holders of the parent
Issued capital 12
Reserved shares 12
Retained earnings 12
Reserves 12
Total equity
Wesfarmers 2017 Annual Report 97
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Cash flow statement
For the year ended 30 June 2017
CONSOLIDATED
2017 2016
Note $m $m
74,042 71,157
(68,713) (66,671)
(47) (29)
46 74
83 131
(234) (288)
(951) (1,009)
4,226 3,365
(1,681) (1,899)
653 563
947 1
(2) (2)
(24) (748)
54 (47)
(53) (2,132)
220 2,360
(1,994) (1,424)
1 1
(1,998) (2,270)
(3,771) (1,333)
402 (100)
611 711
1,013 611
Cash flows from operating activities
Receipts from customers
Payments to suppliers and employees
Net movement in finance advances and loans
Dividends and distributions received from associates
Interest received
Borrowing costs
Income tax paid
Net cash flows from operating activities 4
Cash flows from investing activities
Payments for property, plant and equipment and intangibles 4
Proceeds from sale of property, plant and equipment and intangibles 4
Net proceeds from sale of businesses and associates
Net investments in associates and joint arrangements
Acquisition of subsidiaries, net of cash acquired
Net redemption of/(investment in) loan notes
Net cash flows used in investing activities
Cash flows from financing activities
Proceeds from borrowings
Repayment of borrowings
Proceeds from exercise of in-substance options under the employee share plan 12
Equity dividends paid
Net cash flows used in financing activities
Net increase/(decrease) in cash and cash equivalents
Cash and cash equivalents at beginning of year
Cash and cash equivalents at end of year 4
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Wesfarmers 2017 Annual Report98
Financial statements
Statement of changes in equity
For the year ended 30 June 2017
ATTRIBUTABLE TO EQUITY HOLDERS OF THE PARENT
Issued
capital
Reserved
shares
Retained
earnings
Hedging
reserve
Other
reserves
Total
equity
Consolidated Note $m $m $m $m $m $m
21,844 (31) 2,742 (15) 241 24,781
– – 407 – – 407
– – – – 15 15
– – – (90) – (90)
– – (3) – – (3)
– – (3) (90) 15 (78)
– – 404 (90) 15 329
– – – – 15 15
93 – – – – 93
– 1 – – – 1
– 2 (2,272) – – (2,270)
93 3 (2,272) – 15 (2,161)
21,937 (28) 874 (105) 271 22,949
– – 2,873 – – 2,873
– – – – (2) (2)
– – – 23 – 23
– – (3) – – (3)
– – (3) 23 (2) 18
– – 2,870 23 (2) 2,891
– – – – 3 3
331 – – – – 331
– 1 – – – 1
– 1 (2,235) – – (2,234)
331 2 (2,235) – 3 (1,899)
22,268 (26) 1,509 (82) 272 23,941
Balance at 1 July 2015
Net profit for the year
Other comprehensive income
Exchange differences on translation of foreign operations 12
Changes in the fair value of cash flow hedges, net of tax 12
Remeasurement loss on defined benefit plan, net of tax 12
Total other comprehensive income/(loss) for the year, net of tax
Total comprehensive income/(loss) for the year, net of tax
Share-based payment transactions 12
Issue of shares 12
Proceeds from exercise of in-substance options 12
Equity dividends 12,11
Balance at 30 June 2016 and 1 July 2016
Net profit for the year
Other comprehensive income
Exchange differences on translation of foreign operations 12
Changes in the fair value of cash flow hedges, net of tax 12
Remeasurement loss on defined benefit plan, net of tax 12
Total other comprehensive income/(loss) for the year, net of tax
Total comprehensive income/(loss) for the year, net of tax
Share-based payment transactions 12
Issue of shares 12
Proceeds from exercise of in-substance options 12
Equity dividends 12,11
Balance at 30 June 2017
Wesfarmers 2017 Annual Report 99
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Notes to the financial statements: About this report
For the year ended 30 June 2017
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Wesfarmers Limited (referred to as ‘Wesfarmers’) is a for-profit
company limited by shares incorporated and domiciled in Australia
whose shares are publicly traded on the Australian Securities
Exchange. The nature of the operations and principal activities of
Wesfarmers and its subsidiaries (referred to as ‘the Group’) are
described in the segment information.
The consolidated general purpose financial report of the
Group for the year ended 30 June 2017 was authorised for
issue in accordance with a resolution of the directors on
19 September 2017. The Directors have the power to amend and
reissue the financial report.
The financial report is a general purpose financial report which:
– has been prepared in accordance with the requirements of the
Corporations Act 2001, Australian Accounting Standards and
other authoritative pronouncements of the Australian Accounting
Standards Board (AASB) and International Financial Reporting
Standards (IFRS) as issued by the International Accounting
Standards Board (IASB);
– has been prepared on a historical cost basis, except for
investments held by associates and certain financial instruments
which have been measured at fair value. The carrying values of
recognised assets and liabilities that are the hedged items in fair
value hedge relationships, which are otherwise carried at amortised
cost, are adjusted to record changes in the fair values attributable
to the risks that are being hedged;
– is presented in Australian dollars with all values rounded
to the nearest million dollars ($’000,000) unless otherwise
stated, in accordance with ASIC Corporations (Rounding in
Financial/ Directors’ Reports) Instrument 2016/191;
– presents reclassified comparative information where required for
consistency with the current year’s presentation;
– adopts all new and amended Accounting Standards and
Interpretations issued by the AASB that are relevant to the
Group and effective for reporting periods beginning on or before
1 July 2016. Refer to note 26 for further details;
– does not early adopt Accounting Standards and Interpretations
that have been issued or amended but are not yet effective with
the exception of AASB 9 Financial Instruments (December 2010)
as amended by 2013-9 (AASB 9 (2013)) including consequential
amendments to other standards which was adopted on
1 July 2014; and
– equity accounts for associates and joint venture listed at note 18.
The consolidated financial statements comprise the financial
statements of the Group. A list of controlled entities (subsidiaries) at
year-end is contained in note 19.
The financial statements of subsidiaries are prepared for the
same reporting period as the parent company, using consistent
accounting policies. Adjustments are made to bring into line any
dissimilar accounting policies that may exist.
In preparing the consolidated financial statements, all inter-company
balances and transactions, income and expenses and profits and
losses resulting from intra-Group transactions have been eliminated.
Subsidiaries are consolidated from the date on which control is
obtained to the date on which control is disposed. The acquisition
of subsidiaries is accounted for using the acquisition method of
accounting.
Foreign currency
The functional currencies of overseas subsidiaries are listed in
note 19. As at the reporting date, the assets and liabilities of
overseas subsidiaries are translated into Australian dollars at the
rate of exchange ruling at the balance sheet date and the income
statements are translated at the average exchange rates for the
year. The exchange differences arising on the retranslation are taken
directly to a separate component of equity.
Transactions in foreign currencies are initially recorded in the
functional currency at the exchange rates ruling at the date of
the transaction. Monetary assets and liabilities denominated in
foreign currencies are translated at the rate of exchange ruling
at the balance sheet date. Exchange differences arising from the
application of these procedures are taken to the income statement,
with the exception of differences on foreign currency borrowings
that provide a hedge against a net investment in a foreign entity,
which are taken directly to equity until the disposal of the net
investment and are then recognised in the income statement. Tax
charges and credits attributable to exchange differences on those
borrowings are also recognised in equity.
Other accounting policies
Significant and other accounting policies that summarise the
measurement basis used and are relevant to an understanding of
the financial statements are provided throughout the notes to the
financial statements.
About this report Basis of consolidation
Key judgements and estimates
In the process of applying the Group’s accounting policies,
management has made a number of judgements and
applied estimates of future events. Judgements and estimates which
are material to the financial report are found in the following notes:
Page
104 Note 1 Income
106 Note 3 Tax expense
108 Note 6 Inventories
109 Note 7 Property, plant and equipment
110 Note 8 Goodwill and intangible assets
111 Note 9 Provisions
125 Note 17 Impairment of non-financial assets
127 Note 18 Associates and joint arrangements
132 Note 20 Commitments and contingencies
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Wesfarmers 2017 Annual Report100
Financial statements
Notes to the financial statements: About this report
For the year ended 30 June 2017
The notes to the financial statements
The notes include information which is required to understand the
financial statements and is material and relevant to the operations,
financial position and performance of the Group. Information is
considered material and relevant if, for example:
– the amount in question is significant because of its size or nature;
– it is important for understanding the results of the Group;
– it helps to explain the impact of significant changes in the Group’s
business – for example, acquisitions and impairment writedowns;
or
– it relates to an aspect of the Group’s operations that is important
to its future performance.
The notes are organised into the following sections:
– Key numbers: provides a breakdown of individual line items in the
financial statements that the directors consider most relevant and
summarises the accounting policies, judgements and estimates
relevant to understanding these line items;
Significant items in the current reporting period
Funding activities
Borrowings – Proceeds
A number of surplus bank facilities were cancelled during the year,
resulting in a net reduction to available facilities of approximately
$950 million. The remaining bank facilities that matured during the
financial year were renewed and extended for periods ranging from
one to three years.
Borrowings – Repayments
In November 2016, Australian bonds totalling $500 million
matured. This was repaid using existing bank facilities and available
cash balances.
For further details refer to note 14 for the Group’s debt profile.
– Capital: provides information about the capital management
practices of the Group and shareholder returns for the year;
– Risk: discusses the Group’s exposure to various financial risks,
explains how these affect the Group’s financial position and
performance and what the Group does to manage these risks;
– Group structure: explains aspects of the group structure and how
changes have affected the financial position and performance of
the Group;
– Unrecognised items: provides information about items that are
not recognised in the financial statements but could potentially
have a significant impact on the Group’s financial position and
performance; and
– Other: provides information on items which require disclosure
to comply with Australian Accounting Standards and other
regulatory pronouncements. However, these are not considered
critical in understanding the financial performance or position of
the Group.
Coles credit card transaction
The credit card receivables have been derecognised in 2017.
Refer to note 5 for further details.
Business combinations
In February 2016, Wesfarmers acquired 100 per cent
of Home Retail Group plc’s holding in Homebase for
£340 million (A$665 million). Homebase is based in the
United Kingdom (UK) and operates as a home improvement
and garden retail business in the UK and Republic of Ireland.
As at 30 June 2016, the acquisition accounting balances
recognised were provisional due to ongoing work finalising
valuations and tax–related matters which may affect
acquisition accounting entries. There have been no changes
to the provisional fair values of the identifiable assets
acquired and liabilities assumed at the date of acquisition
from those disclosed in the 30 June 2016 financial
statements.
As described in the 2016 financial statements, it was not
practicable to determine the profit of the Group had the
combination taken place at 1 July 2015, as the fair value of
the identifiable assets and liabilities was not known at that
date. Assuming that the same fair values detailed in the
2016 financial statements were applied at 1 July 2015, the
profit for the comparative year ended 30 June 2016 of the
Group would not have been materially different from that
reported.
Wesfarmers 2017 Annual Report 101
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Notes to the financial statements: Segment information
For the year ended 30 June 2017
The Group’s operating segments are organised and managed separately
according to the nature of the products and services provided.
Each segment represents a strategic business unit that offers
different products and operates in different industries and markets.
The Board and executive management team (the chief operating
decision-makers) monitor the operating results of the business
units separately for the purpose of making decisions about
resource allocation and performance assessment.
The types of products and services from which each reportable
segment derives its revenues are disclosed below. Segment
performance is evaluated based on operating profit or loss
(segment result), which in certain respects, is presented differently
from operating profit or loss in the consolidated financial
statements.
Interest income and expenditure are not allocated to operating
segments, as this type of activity is managed on a group basis.
Transfer prices between business segments are set on an
arm’s length basis in a manner similar to transactions with third
parties. Segment revenue, expenses and results include transfers
between business segments. Those transfers are eliminated on
consolidation and are not considered material.
The operating segments and their respective types of products and
services are as follows:
Retail
Coles
– Supermarket and liquor retailer, including a hotel portfolio;
– Retailer of fuel and operator of convenience stores;
– Financial services agent, including insurance and credit cards (Coles
credit card receivables were disposed on 1 February 2017); and
– Coles property business operator.
Home Improvement
– Retailer of building material and home and garden improvement
products; and
– Servicing project builders and the housing industry.
Officeworks
– Retailer and supplier of office products and solutions for home,
small to medium-sized businesses and education.
Department Stores
Kmart
– Retailer of apparel and general merchandise, including toys, leisure,
entertainment, home and consumables; and
– Provision of automotive service, repairs and tyre service.
Target
– Retailer of apparel, homewares and general merchandise, including
accessories, electricals and toys.
Industrials
Resources
– Coal mining and development; and
– Coal marketing to both domestic and export markets.
Industrial and Safety (WIS)
– Supplier and distributor of maintenance, repair and operating
products;
– Manufacturer and marketing of industrial gases and equipment;
– Supplier, manufacturer and distributor of workwear clothing in
Australia and internationally;
– Specialised supplier and distributor of industrial safety products and
services; and
– Provider of risk management and compliance services.
Chemicals, Energy and Fertilisers (WesCEF)
– Manufacturer and marketing of chemicals for industry, mining and
mineral processing;
– Manufacturer and marketing of broadacre and horticultural
fertilisers;
– National marketing and distributor of LPG and LNG; and
– LPG and LNG extraction for domestic and export markets.
Other
Includes:
– Forest products: non-controlling interest in Wespine Pty Ltd;
– Property: non-controlling interest in BWP Trust;
– Investment banking: non-controlling interest in Gresham Partners
Group Limited;
– Private equity investment: non-controlling interests in Gresham Private
Equity Fund No. 2; and
– Corporate: includes treasury, head office, central support functions
and other corporate entity expenses. Corporate is not considered
an operating segment and includes activities that are not allocated
to other operating segments.
Seasonality
Revenue and earnings of various businesses are affected by
seasonality and cyclicality as follows:
– For retail divisions, earnings are typically greater in the December
half of the financial year due to the impact of the Christmas holiday
shopping period;
– For Resources, the majority of the entity’s coal contracted tonnages
are renewed on an annual basis from April each calendar year; and
– For Chemicals, Energy and Fertilisers, earnings are typically greater
in the second half of the financial year due to the impact of the
Western Australian winter season break on fertiliser sales.
Revenues by segment for FY2017
$m
Coles 39,217
Home Improvement 13,586
Department stores 8,528
Officeworks 1,964
Industrials 5,16159+18+13+3+7+L
100
80
40
20
60
0
Retail Resources Chemicals, Energy
Seasonality of revenues in FY2017
% Jul to Dec Jan to Jun
Group
and Fertilisers
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Wesfarmers 2017 Annual Report102
Financial statements
Notes to the financial statements: Segment information
For the year ended 30 June 2017
1 The Home Improvement result includes the UK operation acquired on 27 February 2016.
2 The 2016 Target result includes $145 million of restructuring costs and provisions incurred to reset Target.
3 The Resources result includes Government royalties and Stanwell rebates of $262 million (2016: $143 million) and hedge losses of $92 million (2016: $147 million).
4 The 2017 WesCEF result includes profit on sale of land of $22 million (before tax) and $33 million relating to WesCEF’s share of revaluation gains recognised by its associate,
Australian Energy Consortium Pty Ltd.
5 Adjusted EBITDA represents earnings before interest, tax, depreciation, amortisation and other items not included in the segment results outlined in footnote 6.
6 The 2016 segment result excludes $1,266 million impairment of Target’s goodwill and non-current assets and $850 million impairment of Curragh’s assets.
7 Other net assets relate predominantly to inter-company financing arrangements and segment tax balances.
8 Capital expenditure includes accruals to represent costs incurred during the year. The amount excluding movement in accruals is $1,681 million (2016: $1,899 million).
Segment information (continued)
DEPARTMENT STORES INDUSTRIALS
COLES
HOME
IMPROVEMENT1 KMART TARGET2 OFFICEWORKS RESOURCES3 WIS WesCEF4 OTHER CONSOLIDATED
2017 2016 2017 2016 2017 2016 2017 2016 2017 2016 2017 2016 2017 2016 2017 2016 2017 2016 2017 2016
$m $m $m $m $m $m $m $m $m $m $m $m $m $m $m $m $m $m $m $m
39,217 39,242 13,586 11,571 5,578 5,190 2,950 3,456 1,964 1,851 1,746 1,008 1,776 1,844 1,639 1,820 (12) (1) 68,444 65,981
2,256 2,475 1,463 1,383 665 571 74 (105) 168 156 465 (164) 158 105 472 400 (53) (63) 5,668 4,758
(647) (615) (218) (169) (112) (101) (84) (90) (24) (22) (60) (146) (43) (42) (77) (106) (1) (5) (1,266) (1,296)
1,609 1,860 1,245 1,214 553 470 (10) (195) 144 134 405 (310) 115 63 395 294 (54) (68) 4,402 3,462
– – – – – – (1,266) – – (850) – – – – – – – (2,116)
4,402 1,346
(264) (308)
4,138 1,038
(1,265) (631)
2,873 407
21,140 22,122 6,612 6,620 2,410 2,324 1,518 1,646 1,401 1,379 1,084 1,004 1,661 1,663 1,484 1,553 1,131 825 38,441 39,136
– – 17 17 – – – – – – – – – – 183 150 503 438 703 605
971 1,042 971 1,042
40,115 40,783
(4,245) (4,273) (2,227) (2,186) (955) (857) (468) (479) (488) (416) (470) (498) (385) (420) (270) (303) (961) (1,070) (10,469) (10,502)
(292) (29) (292) (29)
(5,413) (7,303) (5,413) (7,303)
(16,174) (17,834)
(209) (1,409) (4,266) (4,237) 237 168 (379) (488) (25) 31 (1,090) (1,202) (585) (581) (793) (869) 7,110 8,587 – –
16,686 16,440 136 214 1,692 1,635 671 679 888 994 (476) (696) 691 662 604 531 3,049 2,490 23,941 22,949
811 763 445 538 154 165 68 128 36 41 91 116 34 44 44 60 – 2 1,683 1,857
– – – – – – – – – – – – – – 61 33 86 81 147 114
Segment revenue
Adjusted EBITDA5
Depreciation and amortisation
Segment result
Items not included in segment result6
EBIT
Finance costs
Profit before income tax expense
Income tax expense
Profit attributable to members of the parent
Other segment information
Segment assets
Investments in associates and joint venture
Tax assets
Total assets
Segment liabilities
Tax liabilities
Interest-bearing liabilities
Total liabilities
Other net assets7
Net assets
Capital expenditure8
Share of net profit or loss of associates and joint
venture included in EBIT
1,000
2,000
800
1,800
1,600
600
1,400
400
0
Coles Home Improvement Officeworks
Segment result FY2013 to FY2017
Department Stores
$m
200
Industrials
FY2013 to FY2016 FY2017
Wesfarmers 2017 Annual Report 103
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Notes to the financial statements: Segment information
For the year ended 30 June 2017
DEPARTMENT STORES INDUSTRIALS
COLES
HOME
IMPROVEMENT1 KMART TARGET2 OFFICEWORKS RESOURCES3 WIS WesCEF4 OTHER CONSOLIDATED
2017 2016 2017 2016 2017 2016 2017 2016 2017 2016 2017 2016 2017 2016 2017 2016 2017 2016 2017 2016
$m $m $m $m $m $m $m $m $m $m $m $m $m $m $m $m $m $m $m $m
39,217 39,242 13,586 11,571 5,578 5,190 2,950 3,456 1,964 1,851 1,746 1,008 1,776 1,844 1,639 1,820 (12) (1) 68,444 65,981
2,256 2,475 1,463 1,383 665 571 74 (105) 168 156 465 (164) 158 105 472 400 (53) (63) 5,668 4,758
(647) (615) (218) (169) (112) (101) (84) (90) (24) (22) (60) (146) (43) (42) (77) (106) (1) (5) (1,266) (1,296)
1,609 1,860 1,245 1,214 553 470 (10) (195) 144 134 405 (310) 115 63 395 294 (54) (68) 4,402 3,462
– – – – – – (1,266) – – (850) – – – – – – – (2,116)
4,402 1,346
(264) (308)
4,138 1,038
(1,265) (631)
2,873 407
21,140 22,122 6,612 6,620 2,410 2,324 1,518 1,646 1,401 1,379 1,084 1,004 1,661 1,663 1,484 1,553 1,131 825 38,441 39,136
– – 17 17 – – – – – – – – – – 183 150 503 438 703 605
971 1,042 971 1,042
40,115 40,783
(4,245) (4,273) (2,227) (2,186) (955) (857) (468) (479) (488) (416) (470) (498) (385) (420) (270) (303) (961) (1,070) (10,469) (10,502)
(292) (29) (292) (29)
(5,413) (7,303) (5,413) (7,303)
(16,174) (17,834)
(209) (1,409) (4,266) (4,237) 237 168 (379) (488) (25) 31 (1,090) (1,202) (585) (581) (793) (869) 7,110 8,587 – –
16,686 16,440 136 214 1,692 1,635 671 679 888 994 (476) (696) 691 662 604 531 3,049 2,490 23,941 22,949
811 763 445 538 154 165 68 128 36 41 91 116 34 44 44 60 – 2 1,683 1,857
– – – – – – – – – – – – – – 61 33 86 81 147 114
Segment revenue
Adjusted EBITDA5
Depreciation and amortisation
Segment result
Items not included in segment result6
EBIT
Finance costs
Profit before income tax expense
Income tax expense
Profit attributable to members of the parent
Other segment information
Segment assets
Investments in associates and joint venture
Tax assets
Total assets
Segment liabilities
Tax liabilities
Interest-bearing liabilities
Total liabilities
Other net assets7
Net assets
Capital expenditure8
Share of net profit or loss of associates and joint
venture included in EBIT
Capital expenditure by segment for FY2017
$m
Coles 811
HI 445
Kmart 154
Target 68
$m
Officeworks 36
Resources 91
WIS 34
WesCEF 44
Geographical information
The table below provides information on the geographical location
of revenue and non-current assets (other than financial instruments,
deferred tax assets and pension assets). Revenue from external
customers is allocated to a geography based on the location of the
operation in which it was derived. Non-current assets are allocated
based on the location of the operation to which they relate.
REVENUE
NON-CURRENT
ASSETS
2017 2016 2017 2016
$m $m $m $m
Australia 64,532 63,356 27,715 27,933
New Zealand 1,774 1,564 303 278
United Kingdom 2,119 1,052 1,114 1,133
Other foreign countries 19 9 4 4
68,444 65,981 29,136 29,348
49+26+9+4+2+5+2+3+K
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Wesfarmers 2017 Annual Report104
Financial statements
Notes to the financial statements: Key numbers
For the year ended 30 June 2017
CONSOLIDATED
2017 2016
$m $m
68,003 65,500
12 12
84 131
345 338
68,444 65,981
123 61
165 174
288 235
Sale of goods
Rendering of services
Interest revenue
Other
Revenue
Gains on disposal of property, plant and equipment
Other
Other income
Recognition and measurement
Revenue
Revenue is measured at the fair value of the consideration received
or receivable. Revenue is recognised if it meets the criteria outlined
below.
Sale of goods
The Group generates a significant proportion of its revenue from
the sale of the following finished goods:
– Merchandise direct to customers through the Group’s retail
operations;
– Sales to other businesses of products for which the Group has
distribution rights, principally related to industrial maintenance and
industrial safety;
– Fertilisers and specialty gases;
– Coal, both nationally and internationally; and
– LPG and LNG.
Revenue is recognised when the significant risks and rewards of
ownership of the goods have passed to the buyer and it can be
measured reliably. Risks and rewards are considered passed to
the buyer at the time of delivery of the goods to the customer.
Revenue from lay-by transactions is recognised on the date when
the customer completes payment and takes possession of the
merchandise.
Rendering of services
With respect to services rendered, revenue is recognised
depending on the stage of completion of those services.
Interest
The Group generated a significant proportion of its interest revenue
from finance advances and loans through the Group’s financial
services operation. The Group’s finance advances and loans
consisted of the Coles credit card receivables and were disposed
of on 1 February 2017.
Revenue is recognised as the interest accrues on the related
financial asset. Interest is determined using the effective interest
rate method, which applies the interest rate that exactly discounts
estimated future cash receipts over the expected life of the
financial instrument.
Dividends
Revenue from dividends is recognised when the Group’s right to
receive the payment is established.
Operating lease rental revenue
Operating lease revenue consists of rentals from investment
properties and sub-lease rentals. Rentals received under operating
leases and initial direct costs are recognised on a straight-line
basis over the term of the lease.
1. Income
Key estimate: loyalty program
The Group operates a loyalty points program, which allows
customers to accumulate points when they purchase
products in the Group’s retail stores. The points can then
be redeemed for products, subject to a minimum number
of points being obtained. Consideration received on
transactions where points are issued is allocated between
the products sold and the points issued. The fair value of the
points issued is deferred and recognised as revenue when
the points are redeemed. At 30 June 2017, $267 million
of revenue is deferred in relation to the loyalty program
(2016: $246 million). Any reasonably possible change in the
estimate is unlikely to have a material impact.
Key estimate: gift cards
Revenue from the sale of gift cards is recognised when
the card is redeemed and the customers purchase
goods by using the card, or when the customer card is
no longer expected to be redeemed. At 30 June 2017,
$217 million of revenue is deferred in relation to gift cards
(2016: $198 million). The key assumption in measuring
the liability for gift cards and vouchers is the expected
redemption rates by customers, which are reviewed annually
based on historical information. Any reassessment of
expected redemption rates in a particular year impacts the
revenue recognised from expiry of gift cards and vouchers
(either increasing or decreasing). Any reasonably possible
change in the estimate is unlikely to have a material impact.
Total revenue
FY17 68,444
FY16 65,981
FY15 62,447
FY14 60,181
FY13 57,74913 14 15 16 FY17
$68,444m 3.7%
75,000
50,000
$m
From continuing operations
$m
Wesfarmers 2017 Annual Report 105
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Notes to the financial statements: Key numbers
For the year ended 30 June 2017
CONSOLIDATED
2017 2016
$m $m
8,392 8,120
635 624
105 103
9,132 8,847
2,399 2,330
215 91
615 538
3,229 2,959
960 981
158 134
148 181
1,266 1,296
27 954
22 10
– 1,208
49 2,172
262 143
415 405
1,106 1,044
153 179
1,410 1,336
3,346 3,107
213 261
27 26
6 5
18 16
264 308
Remuneration, bonuses and on-costs
Superannuation expense
Share-based payments expense
Employee benefits expense
Minimum lease payments
Contingent rental payments
Other
Occupancy-related expenses
Depreciation
Amortisation of intangibles
Amortisation other
Depreciation and amortisation
Impairment of plant, equipment and other assets
Impairment of freehold property
Impairment of goodwill
Impairment expenses
Mining royalties (including Stanwell rebate)
Repairs and maintenance
Utilities and office expenses
Insurance expenses
Other
Other expenses
Interest expense
Discount rate adjustment
Amortisation of debt establishment costs
Other costs related to finance
Finance costs
Recognition and measurement
Employee benefits expense
The Group’s accounting policy for liabilities associated with
employee benefits is set out in note 9. The policy relating to
share-based payments is set out in note 27.
The majority of employees in Australia and New Zealand are party
to a defined contribution scheme and receive fixed contributions
from Group companies and the Group’s legal or constructive
obligation is limited to these contributions. Contributions to
defined contribution funds are recognised as an expense as they
become payable. Prepaid contributions are recognised as an
asset to the extent that a cash refund or a reduction in the future
payment is available. The Group also operates a defined benefit
superannuation scheme, the membership of which is now closed.

Occupancy-related expenses
Operating leases
Operating lease payments are recognised as an expense in the
income statement on a straight-line basis over the lease term.
Operating lease incentives are recognised as a liability when
received and released to the income statement on a straight-line
basis over the lease term.
Fixed rate increases to lease payments, excluding contingent or
index based rental increases, are recognised on a straight-line
basis over the lease term.
An asset or liability is recognised for the difference between the
amount paid and the lease expense recognised in earnings on a
straight-line basis.
Contingent rental payments
Contingent rental payments are made as a result of either
turnover-based rentals or movements in relevant indices. Such
payments are recognised in the income statement as they are
incurred.
Depreciation and amortisation
Refer to notes 7 and 8 for details on depreciation and amortisation.
Impairment
Impairment expenses are recognised to the extent that the carrying
amounts of assets exceed their recoverable amounts. Refer to
note 17 for further details on impairment.
Finance costs
Finance costs are recognised as an expense when they are
incurred, except for interest charges attributable to major projects
with substantial development and construction phases.
Provisions and other payables are discounted to their present
value when the effect of the time value of money is significant. The
impact of the unwinding of these discounts and any changes to
the discounting is shown as a discount rate adjustment in finance
costs.
Capitalisation of borrowing costs
To determine the amount of borrowing costs to be capitalised
as part of the costs of major construction projects, the Group
uses the weighted average interest rate (excluding non-interest
costs) applicable to its outstanding borrowings during the year.
For 2017, had there been major long-term construction projects,
the weighted average interest rate applicable would have been
3.64 per cent (2016: 4.15 per cent).
2. Expenses
Coles
Home Improvement
Officeworks
Industrials
Department stores
FY2017
$’m
Employee benefits expense by segment
10,000
9,000
8,000
7,000
6,000
5,000
4,000
3,000
2,000
1,000
0
FY2016
Coles
Home Improvement
Officeworks
Industrials
Department stores
FY2017
$’m
Occupancy-related expenses by segment
4,000
3,500
3,000
2,500
2,000
1,500
1,000
500
0
FY2016
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Wesfarmers 2017 Annual Report106
Financial statements
Notes to the financial statements: Key numbers
For the year ended 30 June 2017
CONSOLIDATED
2017 2016
The major components of tax expense are: $m $m
1,228 984
(7) (7)
37 (342)
7 (4)
1,265 631
17 (46)
(2) (2)
15 (48)
4,138 1,038
1,241 311
– (11)
12 362
(18) (22)
20 1
10 (10)
1,265 631
338 315
417 420
141 164
143 159
53 72
98 100
432 344
71 79
1,693 1,653
253 165
148 188
155 122
107 108
59 28
722 611
971 1,042
– (61)
10 (239)
27 (42)
37 (342)
Income statement
Current income tax expense
Current year (paid or payable)
Adjustment for prior years
Deferred income tax expense
Temporary differences
Adjustment for prior years
Income tax reported in the income statement
Statement of changes in equity
Net loss on revaluing cash flow hedges
Other
Income tax reported in equity
Tax reconciliation
Profit before tax
Income tax at the statutory tax rate of 30%
Adjustments relating to prior years
Non-deductible items
Share of results of associates and joint venture
Effect of differences and changes in tax rate in UK
Other
Income tax on profit before tax
Deferred income tax in the balance sheet
relates to the following:
Provisions
Employee benefits
Accrued and other payables
Borrowings
Derivatives
Trading stock
Fixed assets
Other individually insignificant balances
Deferred tax assets
Accelerated depreciation for tax purposes
Derivatives
Accrued income and other
Intangible assets
Other individually insignificant balances
Deferred tax liabilities
Net deferred tax assets
Deferred income tax in the income statement
relates to the following:
Provisions
Depreciation, amortisation and impairment
Other individually insignificant balances
Deferred tax expense
Refer to note 29 for tax transparency disclosures.
Recognition and measurement
Current taxes
Current tax assets and liabilities are measured at the amount
expected to be recovered from or paid to taxation authorities at
the tax rates and tax laws enacted or substantively enacted by the
balance sheet date.
Deferred taxes
Deferred income tax liabilities are recognised for all taxable temporary
differences. Deferred income tax assets are recognised for all
deductible temporary differences, carried forward unused tax assets
and unused tax losses, to the extent it is probable that taxable profit
will be available to utilise them.
The carrying amount of deferred income tax assets is reviewed at
balance sheet date and reduced to the extent that it is no longer
probable that sufficient taxable profit will be available to utilise them.
Deferred income tax assets and liabilities are measured at the tax
rates that are expected to apply to the year when the asset is realised
or the liability is settled, based on tax rates and tax laws that have
been enacted or substantively enacted at the balance sheet date.
Deferred income tax is provided on temporary differences at
balance sheet date between accounting carrying amounts and the
tax bases of assets and liabilities, other than for the following:
– Where they arise from the initial recognition of an asset or liability
in a transaction that is not a business combination and at the time
of the transaction, affects neither the accounting profit nor taxable
profit or loss.
– Where taxable temporary differences relate to investments in
subsidiaries, associates and interests in joint ventures:
1. Deferred tax liabilities are not recognised if the timing of the
reversal of the temporary differences can be controlled and it is
probable that the temporary differences will not reverse in the
foreseeable future.
2. Deferred tax assets are not recognised if it is not probable that
the temporary differences will reverse in the foreseeable future
and taxable profit will not be available to utilise the temporary
differences.
Deferred tax liabilities are also not recognised on recognition of
goodwill.
Income taxes relating to items recognised directly in equity are
recognised in equity and not in the income statement.
Offsetting deferred tax balances
Deferred tax assets and deferred tax liabilities are offset only if a
legally enforceable right exists to set off current tax assets against
current tax liabilities and the deferred tax assets and liabilities relate
to the same taxable entity and the same taxation authority.
3. Tax expense
Key estimate: unrecognised deferred tax assets
Capital losses: The Group has unrecognised benefits
relating to carried forward capital losses, which can only
be offset against eligible capital gains. The Group has
determined that at this stage future eligible capital gains to
utilise the tax assets are not currently sufficiently probable.
The unrecognised deferred tax assets of $127 million
(2016: $130 million) relate wholly to capital losses in Australia.
Key judgement: unrecognised deferred tax liability
A deferred tax liability has not been recognised on indefinite
life intangibles for which the carrying value has been assessed
as recoverable through sale, consistent with the Group’s
practice and strategy to maximise shareholder returns.
Wesfarmers 2017 Annual Report 107
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Notes to the financial statements: Key numbers
For the year ended 30 June 2017
CONSOLIDATED
2017 2016
$m $m
409 411
604 200
1,013 611
2,873 407
1,266 1,296
49 2,172
(83) (22)
(147) (114)
46 74
27 26
29 43
87 17
(47) (29)
(296) (444)
18 (39)
39 (347)
5 (5)
165 259
275 (31)
(146) 101
66 1
4,226 3,365
Cash on hand and in transit
Cash at bank and on deposit
Reconciliation of net profit after tax to net
cash flows from operations
Net profit
Non-cash items
Depreciation and amortisation
Impairment and writedowns of assets
Net gain on disposal of non-current assets
Share of profits of associates and joint venture
Dividends and distributions received from
associates
Discount adjustment in borrowing costs
Other
(Increase)/decrease in assets
Receivables – Trade and other
Receivables – Finance advances and loans
Inventories
Prepayments
Deferred tax assets
Other assets
Increase/(decrease) in liabilities
Trade and other payables
Current tax payable
Provisions
Other liabilities
Net cash flows from operating activities
Net cash capital expenditure
Recognition and measurement
Cash at bank and on deposit
Cash and short-term deposits in the balance sheet comprise cash
at bank and on hand, and short-term deposits with an original
maturity of three months or less and are classified as financial
assets held at amortised cost.
Cash at bank earns interest at floating rates based on daily bank
deposit rates. Short-term deposits are made for varying periods of
between one day and three months, depending on the immediate
cash requirements of the Group, and earn interest at the respective
short-term deposit rates.
CONSOLIDATED
2017 2016
$m $m
1,300 1,288
(60) (64)
393 404
1,633 1,628
64 58
16 18
(15) (8)
(5) (4)
60 64
145 155
25 50
6 7
176 212
– 883
– (48)
– 835
Trade and other
Trade receivables
Allowance for credit losses
Other debtors
Allowance for credit losses
Movements in the allowance for credit losses were
as follows:
Carrying value at the beginning of the year
Allowance for credit losses recognised
Receivables written off as uncollectable
Unused amounts reversed
Allowance for credit losses at year-end
Trade receivables past due but not impaired
Under three months
Three to six months
Over six months
Finance advances and loans
Finance advances and loans
Allowance for credit losses
4. Cash and cash equivalents
308 372
1,251 1,422
122 105
1,681 1,899
653 563
1,028 1,336
Cash capital expenditure
Payment for property
Payment for plant and equipment
Payment for intangibles
Less: Proceeds from sale of property, plant,
equipment and intangibles
Net cash capital expenditure
5. Receivables
On 1 February 2017, Wesfarmers entered into a ten-year
agreement with Citi for the distribution of Coles branded credit
cards in exchange for an ongoing share of risk-adjusted revenues.
As part of the transaction, Citi acquired the Coles credit card
receivables. As of 30 June 2016, the entirety of the finance
advances and loans balance consisted of the Coles credit card
receivables.
41
+7+2+L
36
+12+2+LAging of trade receivables past due but not impaired
Three to six months
2017 2016
Under three months
Over six months
0 0
145
155
170
176 212
205
$’m $’m
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Wesfarmers 2017 Annual Report108
Financial statements
Notes to the financial statements: Key numbers
For the year ended 30 June 2017
Recognition and measurement
Trade receivables, finance advances, loans and other debtors are
all classified as financial assets held at amortised cost.
Trade receivables
Trade receivables generally have terms of up to 30 days. They
are recognised initially at fair value and subsequently at amortised
cost using the effective interest method, less an allowance for
impairment.
Customers who wish to trade on credit terms are subject to
extensive credit verification procedures. Receivable balances are
monitored on an ongoing basis and the Group’s exposure to bad
debts is not significant. With respect to trade receivables that
are neither impaired nor past due, there are no indications as of
the reporting date that the debtors will not meet their payment
obligations.
Impairment of trade receivables
Collectability and impairment are assessed on an ongoing basis at
a divisional level. Impairment is recognised in the income statement
when there is objective evidence that the Group will not be able
to collect the debts. Financial difficulties of the debtor, probability
that the debtor will enter bankruptcy or financial reorganisation
and default or delinquency in payments are considered objective
evidence of impairment. The amount of the impairment loss is
the receivable carrying amount compared to the present value of
estimated future cash flows, discounted at the original effective
interest rate. Cash flows relating to short-term receivables are
not discounted if the effect of discounting is immaterial. Debts
that are known to be uncollectable are written off when identified.
If an impairment allowance has been recognised for a debt that
then becomes uncollectable, the debt is written off against the
allowance account. If an amount is subsequently recovered, it is
credited against profit or loss.
Other debtors
These amounts generally arise from transactions outside the usual
operating activities of the Group. They do not contain impaired
assets and are not past due. Based on the credit history, it is
expected that these other balances will be received when due.
CONSOLIDATED
2017 2016
$m $m
91 92
15 18
6,424 6,150
6,530 6,260
Raw materials
Work in progress
Finished goods
Inventories recognised as an expense for the year ended
30 June 2017 totalled $49,083 million (2016: $48,182 million).
Recognition and measurement
Inventories are valued at the lower of cost and net realisable value.
The net realisable value of inventories is the estimated selling price
in the ordinary course of business less estimated costs to sell.
Costs incurred in bringing each product to its present location and
condition are accounted for as follows:
– Raw materials: purchase cost on a weighted average basis.
– Manufactured finished goods and work in progress: cost of direct
materials and labour and a proportion of manufacturing overheads
based on normal operating capacity, but excluding borrowing
costs. Work in progress also includes run-of-mine coal stocks for
Resources, consisting of production costs of drilling, blasting and
overburden removal.
– Retail and wholesale merchandise finished goods: purchase cost on
a weighted average basis, after deducting any settlement discounts,
supplier rebates and including logistics expenses incurred in
bringing the inventories to their present location and condition.
Volume-related supplier rebates, and supplier promotional rebates
where they exceed spend on promotional activities, are accounted
for as a reduction in the cost of inventory and recognised in the
income statement when the inventory is sold.
Key estimate: net realisable value
The key assumptions, which require the use of management
judgement, are the variables affecting costs recognised in
bringing the inventory to their location and condition for sale,
estimated costs to sell and the expected selling price. These
key assumptions are reviewed at least annually. The total
expense relating to inventory writedowns during the year
was $11 million (2016: $50 million). Any reasonably possible
change in the estimate is unlikely to have a material impact.
5. Receivables (continued) 6. Inventories
Key estimate: supplier rebates
The recognition of supplier rebates in the income statement
requires management to estimate both the volume of
purchases that will be made during a period of time and
the related product that was sold and remains in inventory
at reporting date. Management’s estimates are based on
existing and forecast inventory turnover levels and sales.
Reasonably possible changes in these estimates are unlikely
to have a material impact.
Wesfarmers 2017 Annual Report 109
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Notes to the financial statements: Key numbers
For the year ended 30 June 2017
Recognition and measurement
The carrying value of property, plant and equipment is measured
as the cost of the asset, minus depreciation and impairment. The
cost of the asset also includes the cost of replacing parts that are
eligible for capitalisation, and the cost of major inspections.
Depreciation and amortisation
Items of property, plant and equipment are depreciated on a
straight-line basis over their useful lives. The estimated useful life
of buildings is between 20 and 40 years; plant and equipment is
between 3 and 40 years. Land is not depreciated.
Expenditure on mining areas of interest in which production has
commenced is amortised over the life of the mine, based on the
rate of depletion of the economically recoverable reserves. If
production has not yet commenced, amortisation is not charged.
Leasehold improvements are amortised over the period of the
lease or the anticipated useful life of the improvements, whichever
is shorter.
Derecognition
An item of property, plant and equipment is derecognised when it is
sold or otherwise disposed of, or when its use is expected to bring
no future economic benefits. Any gain or loss from derecognising
the asset (the difference between the proceeds of disposal and the
carrying amount of the asset) is included in the income statement
in the period the item is derecognised.
Impairment
Refer to note 17 for details on impairment testing.
Key estimates: property, plant and equipment
The estimations of useful lives, residual value and amortisation
methods require management judgement and are reviewed
annually. If they need to be modified, the change is accounted
for prospectively from the date of reassessment until the end
of the revised useful life (for both the current and future years).
Such revisions are generally required when there are changes
in economic circumstances impacting specific assets or
groups of assets, such as changes in store performance or
changes in the long-term coal price forecasts. These changes
are limited to specific assets and as such, any reasonably
possible change in the estimate is unlikely to have a material
impact on the estimations of useful lives, residual value or
amortisation methods.
PROPERTY PLANT AND EQUIPMENT
Consolidated
Freehold
land Buildings
Lease hold
improve-
ments
Plant,
vehicles and
equipment
Mineral
lease and
development Total
$m $m $m $m $m $m
1,334 1,035 1,773 13,544 1,010 18,696
– (174) (860) (7,679) (543) (9,256)
1,334 861 913 5,865 467 9,440
1,470 926 925 5,830 461 9,612
57 251 122 1,084 45 1,559
(205) (285) (12) (113) – (615)
– (26) (127) (933) (22) (1,108)
14 8 – – – 22
– (5) 5 – – –
(2) (8) – (3) (17) (30)
1,334 861 913 5,865 467 9,440
– 334 59 448 – 841
1,470 1,082 1,682 12,860 996 18,090
– (156) (757) (7,030) (535) (8,478)
1,470 926 925 5,830 461 9,612
1,547 928 940 6,207 583 10,205
118 272 184 1,108 56 1,738
(247) (252) (81) (684) (182) (1,446)
– (26) (124) (959) (53) (1,162)
49 29 – 163 – 241
– (6) 6 – – –
3 (19) – (5) 57 36
1,470 926 925 5,830 461 9,612
– 249 115 620 – 984
Year ended 30 June 2017
Cost
Accumulated depreciation and impairment
Net carrying amount
Movement
Net carrying amount at the beginning of the year
Additions
Disposals and write-offs
Depreciation and amortisation
Acquisition of controlled entities
Transfers between classes
Other including foreign exchange movements
Net carrying amount at the end of the year
Assets under construction included above:
Year ended 30 June 2016
Cost
Accumulated depreciation and impairment
Net carrying amount
Movement
Net carrying amount at the beginning of the year
Additions
Disposals and write-offs
Depreciation and amortisation
Acquisition of controlled entities
Transfers between classes
Other including foreign exchange movements
Net carrying amount at the end of the year
Assets under construction included above:
7. Property, plant and equipment
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Financial statements
Notes to the financial statements: Key numbers
For the year ended 30 June 2017
GOODWILL INTANGIBLE ASSETS
Consolidated
Goodwill Brand
Contractual
and non-
contractual
relationships1 Software
Gaming
and liquor
licences Total
$m $m $m $m $m $m
16,468 3,836 68 1,331 157 21,860
(2,108) (24) (27) (765) – (2,924)
14,360 3,812 41 566 157 18,936
14,448 3,817 56 596 156 19,073
– – – 123 1 124
(48) – – (12) – (60)
– (3) (15) (140) – (158)
(40) (2) – (1) – (43)
14,360 3,812 41 566 157 18,936
16,556 3,838 84 1,334 156 21,968
(2,108) (21) (28) (738) – (2,895)
14,448 3,817 56 596 156 19,073
14,708 3,801 58 586 156 19,309
– – – 119 1 120
1,018 20 11 20 – 1,069
– (2) (11) (121) – (134)
(1,208) – – (6) (1) (1,215)
(70) (2) (2) (2) – (76)
14,448 3,817 56 596 156 19,073
Year ended 30 June 2017
Cost
Accumulated amortisation and impairment
Net carrying amount
Movement
Net carrying amount at the beginning of the year
Additions
Disposals and write-offs
Amortisation for the year
Other including foreign exchange movements
Net carrying amount at the end of the year
Year ended 30 June 2016
Cost
Accumulated amortisation and impairment
Net carrying amount
Movement
Net carrying amount at the beginning of the year
Additions
Acquisition/(disposal) of controlled entities
Amortisation for the year
Impairment charge
Other including foreign exchange movements
Net carrying amount at the end of the year
8. Goodwill and intangible assets
1 Contractual and non-contractual relationships are intangible assets that have arisen through business combinations. They represent the value of pre-existing
customer relationships in the acquired company.
Recognition and measurement
Goodwill
Goodwill acquired in a business combination is initially measured
at cost. Cost is measured as the cost of the business combination
minus the net fair value of the acquired and identifiable assets,
liabilities and contingent liabilities. Following initial recognition,
goodwill is measured at cost less any accumulated impairment
losses. Refer to note 17 for further details on impairment.
Intangible assets
Intangible assets acquired separately are measured on initial
recognition at cost. The cost of intangible assets acquired in a
business combination is their fair value at the date of acquisition.
Following initial recognition, intangible assets are carried at cost
less amortisation and any impairment losses. Intangible assets
with finite lives are amortised on a straight-line basis over their
useful lives and tested for impairment whenever there is an
indication that they may be impaired. The amortisation period and
method is reviewed at each financial year-end. Intangible assets
with indefinite lives are tested for impairment in the same way as
goodwill.
A summary of the useful lives of intangible assets is as follows:
Intangible asset Useful life
Brand1 Indefinite and finite (up to 20 years)
Contractual and non-contractual
relationships
Finite (up to 15 years)
Software Finite (up to seven years)
Gaming and liquor licences Indefinite
1 Includes trade names and other intangible assets with characteristics of a brand.
Assets with an assumed indefinite useful life are reviewed at each
reporting period to determine whether this assumption continues to
be appropriate. If not, it is changed to a finite life and accounted for
prospectively as a change in accounting estimate.
Key judgement: useful lives of intangible assets
Certain brands have been assessed as having indefinite lives
on the basis of strong brand strength, ongoing expected
profitability and continuing support. The brand incorporates
complementary assets such as store formats, networks and
product offerings.
Gaming and liquor licences have been assessed as having
indefinite lives on the basis that the licences are expected to
be renewed in line with business continuity requirements.
Wesfarmers 2017 Annual Report 111
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Notes to the financial statements: Key numbers
For the year ended 30 June 2017

CONSOLIDATED
2017 2016
$m $m
1 1
160 160
22 22
2,962 2,962
268 268
531 532
3,944 3,945
2 2
1,692 1,733
799 799
686 686
10,375 10,422
759 759
47 47
14,360 14,448
Allocation of indefinite life intangible
assets to groups of cash-generating units
Carrying amount of intangibles
Home Improvement
Officeworks
Industrial and Safety
Coles
Kmart
Target
Allocation of goodwill to groups of
cash-generating units
Carrying amount of goodwill
Chemicals, Energy and Fertilisers
Home Improvement
Officeworks
Industrial and Safety
Coles
Kmart
Target
Impairment
Refer to note 17 for details on impairment testing.
CONSOLIDATED
2017 2016
$m $m
1,150 1,154
277 302
84 119
2 5
52 72
178 209
1,743 1,861
180 180
339 361
269 278
147 179
233 216
182 199
161 141
1,511 1,554
3,254 3,415
Current
Employee benefits
Self-insured risks
Restructuring and make good
Lease provision
Off-market contracts
Other
Non-current
Employee benefits
Self-insured risks
Mine and plant rehabilitation
Restructuring and make good
Lease provision
Off-market contracts
Other
Total provisions
Recognition and measurement
Provisions are recognised when:
– the Group has a present obligation (legal or constructive) as a result
of a past event;
– it is probable that resources will be expended to settle the
obligation; and
– a reliable estimate can be made of the amount of the obligation.
Key estimate: discounting
Provisions are determined by discounting the expected
future cash flows at a pre-tax rate that reflects current
market assessments of the time value of money and the
risks specific to the liability to the extent they are not
included in the cash flows.
Provisions have been calculated using discount rates
of between 2 and 4.5 per cent (2016: between 2 and
4 per cent).
Key estimate: employee benefits
Employee benefit provision balances are calculated using
discount rates derived from the high quality corporate bond
(HQCB) market in Australia provided by Milliman Australia.
9. Provisions8. Goodwill and intangible assets (continued)
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Wesfarmers 2017 Annual Report112
Financial statements
Notes to the financial statements: Key numbers
For the year ended 30 June 2017
Employee benefits
The provision for employee benefits represents annual leave, long
service leave entitlements and incentives accrued by employees.
Wages and salaries
Liabilities for wages and salaries, including non-monetary benefits
expected to be settled within 12 months of the reporting date,
are recognised in provisions and other payables 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.
Annual leave and long service leave
The liability for annual leave and long service leave is recognised in
the provision for employee benefits. It is measured as the present
value of expected future payments for the services provided by
employees up to the reporting date. Expected future payments
are discounted using market yields at the reporting date on HQCB
with terms to maturity and currencies that match, as closely as
possible, the estimated future cash outflows.
Lease provision
The lease provision covers stepped lease arrangements to enable
the lease expenses to be recognised on a straight-line basis over
the lease term. Actual lease payments may vary from the amounts
provided where alternate uses are found for these premises,
including attraction of new tenants.
Off-market contracts
When undertaking business acquisitions, Wesfarmers often takes
on responsibility for contracts that are in place within the acquiree.
Changes in market conditions may result in the original terms of
the contract becoming unfavourable in comparison to market
conditions present at the date of acquisition.
The obligation for discounted future above-market payments are
provided for, calculated using the discount rate determined at
acquisition date. The discounted future above-market provision is
released to earnings over the duration of the contract.
Self-insured risks
The Group is self-insured for workers’ compensation and general
liability claims. Provisions are recognised based on claims
reported, and an estimate of claims incurred but not reported.
These provisions are determined on a discounted basis, using an
actuarially determined method.
Mine and plant rehabilitation
Mining lease agreements and Group policies impose obligations
to remediate areas where mining activity has taken place.
Work is ongoing at various sites and in some cases will extend
for more than 15 years. Provisions for remediation have been
calculated assuming current technologies. As part of the valuation
methodology, the risks are incorporated in the cash flows rather
than the discount rates.
Restructuring and make good
These provisions relate principally to:
– the closure of retail outlets or distribution centres;
– restructuring; and
– associated redundancies.
Provisions for restructuring are recognised where steps have been
taken to implement a detailed plan, including discussions with
affected personnel, with employee-related costs recognised over
the period of any required further service.
Key estimate: self-insured risks
The self-insured risk liability is based on a number of
management estimates including, but not limited to:
– future inflation;
– investment return;
– average claim size;
– claim development; and
– claim administration expenses.
These assumptions are reviewed periodically and any
reassessment of these assumptions will affect workers’
compensation or claims expense (either increasing or
decreasing the expense). Any reasonable change in these
assumptions will not have significant impact on the Group.
9. Provisions (continued)
Consolidated
Lease
provision
Off-market
contracts
Self-
insured
risks
Mine and
plant
rehabilitation
Restructuring
and make
good Other Total
$m $m $m $m $m $m $m
207 47 663 199 107 252 1,475
21 276 165 46 253 244 1,005
(7) (32) (165) (3) (50) (144) (401)
– (20) – 36 (12) (2) 2
221 271 663 278 298 350 2,081
21 10 143 38 77 234 523
(7) (32) (190) (19) (134) (245) (627)
– (15) – (28) (10) – (53)
235 234 616 269 231 339 1,924
Carrying amount at 1 July 2015
Arising and acquired during the year
Utilised
Adjustments
Carrying amount at 30 June 2016 and 1 July 2016
Arising during the year
Utilised
Adjustments
Carrying amount at 30 June 2017
Key estimate: long service leave
Long service leave is measured using the projected unit
credit method. Management judgement is required in
determining the following key assumptions used in the
calculation of long service leave at balance sheet date:
– future increases in salaries and wages;
– future on-cost rates; and
– future probability of employee departures and period of
service.
The total long service leave liability is $606 million
(2016: $586 million). Given the magnitude of the liability and
the nature of the key assumptions, any reasonably possible
change in one or a combination of the estimates is unlikely
to have a material impact.
Wesfarmers 2017 Annual Report 113
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Notes to the financial statements: Capital
For the year ended 30 June 2017
The Group’s capital management objectives
The primary objective of Wesfarmers is to provide a satisfactory
return to its shareholders. The Group aims to achieve this objective
by:
– improving returns on invested capital relative to that cost of
capital; and
– ensuring a satisfactory return is made on any new capital
invested.
Capital is defined as the combination of shareholders’ equity,
reserves and net debt. The Board is responsible for monitoring
and approving the capital management framework within which
management operates. The purpose of the framework is to
safeguard the Group’s ability to continue as a going concern
whilst optimising its debt and equity structure. Wesfarmers aims
to maintain a capital structure that is consistent with a stable
investment grade credit rating.
Note
CONSOLIDATED
2017 2016
$m $m
22,268 21,937
(26) (28)
1,509 874
190 166
23,941 22,949
5,413 7,303
(1,013) (611)
4,400 6,692
28,341 29,641
Equity and reserves
Issued capital 12
Reserved shares 12
Retained earnings 12
Reserves 12

Net financial debt
Total interest-bearing debt 14
Less: Cash and cash equivalents 4

Net capital
The Group manages its capital through various means, including:
– adjusting the amount of ordinary dividends paid to shareholders;
– maintaining a dividend investment plan;
– raising or returning capital; and
– raising or repaying debt for working capital requirements, capital
expenditure and acquisitions.
Wesfarmers regularly monitors its capital requirements using
various benchmarks, with the main internal measures being cash
interest cover, debt cover and fixed charges cover. The principal
external measures are the Group’s credit ratings from Standard &
Poor’s and Moody’s.
CONSOLIDATED
2017 2016
$m $m
4,138 1,038
264 308
1,266 1,296
5,668 2,642
226 283
25.0 9.3
5,668 4,758
25.0 16.8
5,413 7,303
(1,013) (611)
4,400 6,692
5,668 2,642
0.8 2.5
5,668 4,758
0.8 1.4
5,668 2,642
2,399 2,330
8,067 4,972
2,636 2,612
3.1 1.9
5,668 4,758
2,399 2,330
8,067 7,088
3.1 2.7
Cash interest cover
Profit before income tax
Finance costs
Depreciation and amortisation
EBITDA (A)
Net cash interest paid (B)
Cash interest cover (times) (A/B)
Adjusted EBITDA1 (C)
Cash interest cover (times) (C/B)
(applying adjusted EBITDA)
Debt cover
Total interest-bearing debt
Less: cash and cash equivalents
Net financial debt (D)
EBITDA (A)
Debt cover (times) (D/A)
Adjusted EBITDA1 (C)
Debt cover (times) (D/C)
(applying adjusted EBITDA)
Fixed charges cover
EBITDA
Minimum lease payments
EBITDA plus minimum lease payments (E)
Finance costs (net of discount
adjustment), and minimum lease
payments (F)
Fixed charges cover (times) (E/F)
Adjusted EBITDA1 (C)
Minimum lease payments
Adjusted EBITDA plus minimum lease
payments (G)
Fixed charges cover (times) (G/F)
(applying adjusted EBITDA)
Group credit ratings
Standard & Poor’s2 A–(negative) A–(negative)
Moody’s A3(stable) A3(stable)
1 The 2016 adjusted EBITDA excludes pre-tax non-cash impairments relating
to Target ($1,266 million) and Curragh ($850 million).
2 In September 2017, Standard & Poor’s revised the Group’s outlook from
negative to stable.
3.0
2.5
2.0
1.0
0.5
1.5
0.0
2013 2014 2015 2016 2017
Shareholder distributions
Interim dividend
Final dividend (FY17: proposed)
Special dividend
Capital management
10. Capital management
$/share
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Financial statements
Notes to the financial statements: Capital
For the year ended 30 June 2017
CONSOLIDATED
2017 2016
$m $m
1,165 1,025
1,070 1,247
2,235 2,272
1,361 1,070
786 543
(583) (458)
Declared and paid during the year (fully-franked at 30 per cent)
Interim dividend for 2017: $1.03 (2016: $0.91)
Final dividend for 2016: $0.95 (2015: $1.11)
Proposed and unrecognised as a liability (fully-franked at 30 per cent)
Final dividend for 2017: $1.20 (2016: $0.95)
Franking credit balance
Franking credits available for future years at 30 per cent adjusted for the payment of income tax and dividends
receivable or payable
Impact on the franking account of dividends proposed before the financial report was issued but not recognised as a
distribution to equity holders during the period
Wesfarmers’ dividend policy considers free cash flow generation, profit generation, availability of franking credits and seeks to deliver
growing dividends over time.
The Group operates a dividend investment plan which allows eligible shareholders to elect to invest dividends in ordinary shares. All
holders of Wesfarmers ordinary shares with addresses in Australia or New Zealand are eligible to participate in the plan. The allocation
price for shares is based on the average of the daily volume weighted average price of Wesfarmers ordinary shares sold on the Australian
Securities Exchange, calculated with reference to a period of not less than five consecutive trading days as determined by the directors.
An issue of shares under the dividend investment plan results in an increase in issued capital unless the Group elects to purchase the
required number of shares on-market.
12. Equity and reserves
Movement in shares on issue
ORDINARY SHARES RESERVED SHARES
Thousands $m Thousands $m
At 1 July 2015
Exercise of in-substance options
Dividends applied
Issue of ordinary shares under the Wesfarmers Employee Share Acquisition Plan
At 30 June 2016 and 1 July 2016
Exercise of in-substance options
Dividends applied
Issue of ordinary shares under the Wesfarmers Dividend Investment Plan
Issue of ordinary shares under the Wesfarmers Employee Share Acquisition Plan
Transfer from other reserves
At 30 June 2017
11. Dividends and distributions
1,123,753 21,844 (2,515) (31)
– – 221 1
– – – 2
2,378 93 – –
1,126,131 21,937 (2,294) (28)
– – 206 1
– – – 1
5,471 236 – –
2,238 92 – –
– 3 – –
1,133,840 22,268 (2,088) (26)
Wesfarmers 2017 Annual Report 115
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Notes to the financial statements: Capital
For the year ended 30 June 2017
12. Equity and reserves (continued)
The nature of the Group’s contributed equity
Ordinary shares are fully-paid and have no par value. They carry one vote per share and the right to dividends. They bear no special terms
or conditions affecting income or capital entitlements of the shareholders and are classified as equity.
Reserved shares are ordinary shares that have been repurchased by the company and are being held for future use. They include
employee reserved shares, which are shares issued to employees under the share loan plan. Once the share loan has been paid in full,
they are converted to ordinary shares and issued to the employee.
Incremental costs directly attributable to the issue of new shares are shown in equity as a deduction, net of tax, from the proceeds. There
are no shares authorised for issue that have not been issued at reporting date.
Consolidated
Retained
earnings
Restructure
tax reserve
Capital
reserve
Foreign
currency
translation
reserve
Cash flow
hedge
reserve
Financial
assets
reserve
Share-
based
payments
reserve
$m $m $m $m $m $m $m
2,742 150 24 39 (15) 5 23
407 – – – – – –
(2,272) – – – – – –
(3) – – – – – –
– – – – (34) – –
– – – – (110) – –
– – – – 8 – –
– – – – 46 – –
– – – 15 – – –
– – – – – – 15
874 150 24 54 (105) 5 38
2,873 – – – – – –
(2,235) – – – – – –
(3) – – – – – –
– – – – (136) – –
– – – – 176 – –
– – – – (17) – –
– – – (2) – – –
– – – – – – 3
1,509 150 24 52 (82) 5 41
Balance at 1 July 2015
Net profit
Dividends
Remeasurement loss on defined benefit plan
Net loss on financial instruments recognised in
equity
Realised gains transferred to balance sheet/net
profit
Share of associates and joint venture reserve
Tax effect of transfers and revaluations
Currency translation differences
Share-based payment transactions
Balance at 30 June 2016 and 1 July 2016
Net profit
Dividends
Remeasurement loss on defined benefit plan
Net loss on financial instruments recognised in
equity
Realised losses transferred to balance sheet/
net profit
Tax effect of transfers and revaluations
Currency translation differences
Share-based payment transactions
Balance at 30 June 2017
Nature and purpose of reserves
Restructure tax reserve
The restructure tax reserve is used to record the recognition of tax losses arising from the equity restructuring of the Group under the
2001 ownership simplification plan. These tax losses were generated on adoption by the Group of the tax consolidation regime.
Capital reserve
The capital reserve was used to accumulate capital profits. The reserve can be used to pay dividends or issue bonus shares.
Foreign currency translation reserve
The foreign currency translation reserve is used to record exchange differences arising from the translation of the financial statements of
foreign subsidiaries.
Cash flow hedge reserve
The hedging reserve records the portion of the gain or loss on a hedging instrument in a cash flow hedge that is determined to be an
effective hedge relationship.
Financial assets reserve
The financial assets reserve records fair value changes on financial assets designated at fair value through other comprehensive income.
Share-based payments reserve
The share-based payments reserve is used to recognise the value of equity-settled share-based payments provided to employees,
including key management personnel, as part of their remuneration. Refer to note 27 for further details of these plans.
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Wesfarmers 2017 Annual Report116
Financial statements
Notes to the financial statements: Capital
For the year ended 30 June 2017
CONSOLIDATED
2017 2016
2,873 407
1,128 1,123
1,130 1,125
254.7 36.2
254.2 36.2
Profit attributable to ordinary equity holders
of the parent ($m)
WANOS1 used in the calculation of basic EPS2
(shares, million)
WANOS1 used in the calculation of diluted EPS2
(shares, million)
Basic EPS (cents per share)
Diluted EPS (cents per share)
1 Weighted average number of ordinary shares.
2 The variance in the WANOS used in the calculation of the basic EPS and the
diluted EPS is attributable to in-substance options.
There have been no transactions involving ordinary shares between
the reporting date and the date of completion of these financial
statements, apart from the normal conversion of employee-
reserved shares (treated as in-substance options) to unrestricted
ordinary shares.
Calculation of earnings per share
Basic earnings per share
Basic earnings per share is calculated as net profit attributable to
members of the parent, adjusted to exclude any costs of servicing
equity (other than dividends), divided by the weighted average
number of ordinary shares, adjusted for any bonus element.
Diluted earnings per share
Diluted earnings per share is calculated as net profit attributable to
members of the parent, adjusted for:
– costs of servicing equity (other than dividends);
– the after-tax effect of dividends and interest associated with dilutive
potential ordinary shares that have been recognised as expenses;
and
– other non-discretionary changes in revenues or expenses during
the year that would result from the dilution of potential ordinary
shares;
divided by the weighted average number of ordinary shares and
dilutive potential ordinary shares, adjusted for any bonus element.
CONSOLIDATED
2017 2016
$m $m
378 1,132
969 500
1,347 1,632
863 1,450
3,203 4,221
4,066 5,671
5,413 7,303
Current
Unsecured
Bank debt
Capital market debt
Non-current
Unsecured
Bank debt
Capital market debt
Total interest-bearing loans and borrowings
Funding activities
The current year funding activities have been outlined on page 100
in the significant items in the current reporting period. The
illustration below provides details, including the principal repayment
obligations, of all loans and borrowings on issue at 30 June 2017:
Recognition and measurement
All loans and borrowings are initially recognised at fair value of the
consideration received, less directly attributable transaction costs.
After initial recognition, interest-bearing loans and borrowings
are subsequently measured at amortised cost using the effective
interest method. Gains and losses are recognised in profit or loss
when the liabilities are derecognised.
The carrying values of recognised assets and liabilities that are the
hedged items in fair value hedge relationships, which are otherwise
carried at amortised cost, are adjusted to record changes in the fair
values attributable to the risks that are being hedged.
13. Earnings per share 14. Interest-bearing loans and borrowings
2,250
1,800
1,350
900
450
0
FY2018
2,700
A$m
Current: $1,347 m Non-current: $4,066 m
FY2019 FY2020 FY2021 +
Bank debt Capital market debt
Outstanding loans and borrowings
Earnings per share
FY17 254.7
FY161 36.2
FY15 216.1
FY142 234.6
FY13 195.9
275
25 13
14 15 16
cents/share
254.7 cents
14 FY17
1 FY16 includes post-tax impairment of Target and Curragh ($1,844m)
2 FY14 includes post-tax impairment of Target ($677m)
From continuing operations
cents
Wesfarmers 2017 Annual Report 117
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Notes to the financial statements: Risk
For the year ended 30 June 2017
The Group holds financial instruments for the following purposes:
Financing: to raise finance for the Group’s operations or, in
the case of short-term deposits, to invest surplus funds. The
principal types of instruments used include other bank loans, bank
accepted bills, commercial paper, corporate bonds and cash and
short-term deposits.
Operational: the Group’s activities generate financial instruments,
including cash, trade receivables, trade payables and finance
advances.
Risk management: to reduce risks arising from the financial
instruments described above, including forward exchange
contracts and interest rate swaps.
It is, and has been throughout the year, the Group’s policy that no
speculative trading in financial instruments shall be undertaken.
The Group’s holding of these financial instruments exposes it
to risk. The Board reviews and agrees the Group’s policies for
managing each of these risks, which are summarised below:
– liquidity risk (note 15(b));
– market risk, including foreign currency, interest rate and commodity
price risk (note 15(c)); and
– credit risk (note 15(d)).
These risks affect the fair value measurements applied by the
Group. This is discussed further within note 15(e).
15(a) Offsetting financial instruments
The Group presents its derivative assets and liabilities on a gross
basis. Derivative financial instruments entered into by the Group
are subject to enforceable master netting arrangements, such as
an International Swaps and Derivatives Association (ISDA) master
netting agreement. In certain circumstances, for example, when a
credit event such as a default occurs, all outstanding transactions
under an ISDA agreement are terminated, the termination value is
assessed and only a single net amount is payable in settlement of
all transactions.
The amounts set out in note 16 represent the derivative financial
assets and liabilities of the Group, that are subject to the above
arrangements and are presented on a gross basis.
15(b) Liquidity risk
Nature of the risk
Wesfarmers is exposed to liquidity risk primarily due to its capital
management policies, which view debt as a key element of the
Group’s capital structure (see note 10). In addition, Wesfarmers
maintains a flexible financing structure to enable it to take
advantage of new investment opportunities that may arise.
To facilitate effective use of debt as part of the capital structure, the
Group continues to maintain investment grade credit ratings from
Standard & Poor’s and Moody’s.
These policies expose the Group to risk including the sufficiency
of available unused facilities and the maturity profile of existing
financial instruments.
Liquidity risk management
Liquidity risk is managed centrally by Group Treasury, by
considering over a period of time the operating cash flow forecasts
of the underlying businesses and the degree of access to debt and
equity capital markets.
The Group’s objective is to maintain a balance between continuity
of funding and flexibility through the use of bank loans, bank
accepted bills, commercial paper, corporate bonds and the
overnight money market across a range of maturities. Although
the bank debt facilities have fixed maturity dates, from time to time
they are reviewed and extended, thus deferring the repayment
of the principal. The Group aims to spread maturities to avoid
excessive refinancing in any period.
The Group endeavours to maintain funding flexibility by keeping
committed credit lines available with a variety of counterparties.
Surplus funds are generally invested in instruments that are
tradeable in highly liquid markets with highly rated counterparties.
Financing facilities available
CONSOLIDATED
2017 2016
$m $m
– 60
4,245 4,920
4,245 4,980
1,244 2,582
1,244 2,582
– 60
3,001 2,338
3,001 2,398
Total facilities
Commercial paper
Other bank loans
Facilities used at balance date
Other bank loans
Facilities unused at balance date
Commercial paper
Other bank loans
Assets pledged as security
A controlled entity has issued a floating charge over assets,
capped at $80 million (2016: $80 million), as security for payment
obligations to a trade creditor. The assets are excluded from
financial covenants in all debt documentation.
Maturity of financial liabilities
The following tables analyse the Group’s financial liabilities,
including net and gross settled financial instruments, into relevant
maturity periods based on the remaining period at the reporting
date to the contractual maturity date. The amounts disclosed in
the table are the contractual undiscounted cash flows and hence
will not necessarily reconcile with the amounts disclosed in the
balance sheet.
Expected future interest payments on loans and borrowings
exclude accruals already recognised in trade and other payables.
Derivative cash flows exclude accruals recognised in trade and
other payables.
For foreign exchange derivatives and cross-currency interest rate
swaps, the amounts disclosed are the gross contractual cash
flows to be paid.
For interest rate swaps, the cash flows are the net amounts to
be paid at each quarter, excluding accruals included in trade and
other payables, and have been estimated using forward interest
rates applicable at the reporting date.
15. Financial risk management
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Wesfarmers 2017 Annual Report118
Financial statements
Notes to the financial statements: Risk
For the year ended 30 June 2017
15(b) Liquidity risk (continued)
Consolidated
< 3 months, or on demand 3-6 months 6-12 months 1-2 years 2-3 years 3-4 years 4-5 years >5 years
Total
contractual
cash flows
Carrying
amount
(assets)/
liabilities
$m $m $m $m $m $m $m $m $m $m
6,517 53 44 1 – – – – 6,615 6,615
– 100 1,256 1,366 350 500 997 1,100 5,669 5,413
19 10 42 107 73 50 42 30 373 –
6,536 163 1,342 1,474 423 550 1,039 1,130 12,657 12,028
– (1) (2) (2) (1) (1) – – (7) (7)
(6) (3) (987) (39) (40) (41) (1,039) (1,131) (3,286) (481)
9 17 777 86 86 86 931 786 2,778 –
3 14 (210) 47 46 45 (108) (345) (508) (481)
(1,132) (1,102) (1,173) (1,074) (46) – – – (4,527) 173
1,179 1,153 1,226 1,092 46 – – – 4,696 –
47 51 53 18 – – – – 169 173
50 64 (159) 63 45 44 (108) (345) (346) (315)
6,437 43 10 1 – – – – 6,491 6,491
– 995 636 1,130 1,855 350 500 2,111 7,577 7,303
30 29 57 145 117 74 51 73 576 –
6,467 1,067 703 1,276 1,972 424 551 2,184 14,644 13,794
– (1) (2) (2) (2) (3) (1) – (11) (11)
(7) (3) (10) (1,088) (40) (41) (42) (2,185) (3,416) (555)
9 17 53 830 86 86 86 1,718 2,885 –
2 14 43 (258) 46 45 44 (467) (531) (555)
(1,503) (1,387) (1,691) (1,777) (100) – – – (6,458) 188
1,523 1,416 1,744 1,851 102 – – – 6,636 –
20 29 53 74 2 – – – 178 188
22 42 94 (186) 46 42 43 (467) (364) (378)
Year ended 30 June 2017
Non-derivatives
Trade and other payables
Loans and borrowings before
swaps
Expected future interest payments
on loans and borrowings
Total non-derivatives
Derivatives
Hedge interest rate swaps (net
settled)
Cross-currency interest rate swaps
(gross settled)
– (inflow)
– outflow
Net cross-currency interest rate
swaps
Hedge foreign exchange contracts
(gross settled)
– (inflow)
– outflow
Net foreign exchange contracts
Total derivatives
Year ended 30 June 2016
Non-derivatives
Trade and other payables
Loans and borrowings before
swaps
Expected future interest payments
on loans and borrowings
Total non-derivatives
Derivatives
Hedge interest rate swaps (net
settled)
Cross-currency interest rate swaps
(gross settled)
– (inflow)
– outflow
Net cross-currency interest rate
swaps
Hedge foreign exchange contracts
(gross settled)
– (inflow)
– outflow
Net foreign exchange contracts
Total derivatives
Wesfarmers 2017 Annual Report 119
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Notes to the financial statements: Risk
For the year ended 30 June 2017
15(c) Market risk
Nature of foreign currency risk
The Group’s primary currency exposure is to US dollars and arises
from sales or purchases by a division in currencies other than the
division’s functional currency. The Group is also exposed to the
US dollar and Euro through its borrowing facilities.
As a result of operations in New Zealand and the United Kingdom,
the Group’s balance sheet can also be affected by movements in
the AUD/NZD and AUD/GBP exchange rates. The Group mitigates
the effect of its translational currency exposure by borrowing in
NZ dollars in New Zealand and in GBP in the United Kingdom.
Exposure
The Group’s exposure to the US dollar and Euro (prior to hedging
contracts) at the reporting date were as follows:
Consolidated
USD EUR
A$m A$m
12 5
148 3
242 239
– 1
962 43
1,026 1,854
174 –
28 8
87 –
285 270
849 45
1,009 1,862
186 2
2017
Financial assets
Cash and cash equivalents
Trade and other receivables
Cross-currency interest rate swap
Hedge foreign exchange derivative
assets
Financial liabilities
Trade and other payables
Interest-bearing loans and borrowings
Hedge foreign exchange derivative
liabilities
2016
Financial assets
Cash and cash equivalents
Trade and other receivables
Cross-currency interest rate swap
Financial liabilities
Trade and other payables
Interest-bearing loans and borrowings
Hedge foreign exchange derivative
liabilities
Foreign currency risk management
The hedging function of the Group to address foreign currency risk
is managed centrally. The Group requires all divisions to hedge
foreign exchange exposures for firm commitments relating to
sales or purchases or when highly probable forecast transactions
have been identified. Before hedging, the divisions are also
required to take into account their competitive position. The
hedging instrument must be in the same currency as the hedged
item. Divisions are not permitted to speculate on future currency
movements.
The objective of Wesfarmers’ policy on foreign exchange hedging
is to protect the Group from adverse currency fluctuations.
Hedging is implemented for the following reasons:
– protection of competitive position; and
– greater certainty of earnings due to protection from sudden
currency movements.
The Group has hedged a portion of its foreign currency sales for
which firm commitments or highly probable forecast transactions
existed. Such foreign currency sales arose predominantly in
Resources.
The Group aims to hedge approximately 70 to 100 per cent of its
non-capital expenditure-related foreign currency purchases for
which firm commitments or highly probable forecast transactions
exist, up to 24 months forward. The Group currently hedges
100 per cent of capital expenditure-related foreign currency
purchases to match expected payment dates and these may
extend beyond 12 months. The current hedge contracts extend
out to July 2019. The Group has also hedged 100 per cent of its
US dollar and Euro borrowing facilities.
The Wesfarmers Audit and Risk Committee can approve temporary
amendments to this policy, such as the hedging time horizon and
hedge levels, with such amendments reviewed on a regular basis.
The Group’s sensitivity to foreign exchange movements
The sensitivity analysis below shows the impact that a reasonably
possible change in foreign exchange rates over a financial year
would have on profit after tax and equity, based solely on the
Group’s foreign exchange risk exposures existing at the balance
sheet date. The Group has used the observed range of actual
historical rates for the preceding five-year period, with a heavier
weighting placed on recently observed market data, in determining
reasonably possible exchange movements to be used for the
current year’s sensitivity analysis. Past movements are not
necessarily indicative of future movements.
The following exchange rates have been used in performing the
sensitivity analysis:
USD EUR
Actual 2017 0.77 0.67
+10% 0.85 0.74
–10% 0.69 0.60
Actual 2016 0.75 0.67
+10% 0.83 0.74
–10% 0.68 0.60
The impact on profit and equity is estimated by relating the
hypothetical changes in the US dollar and Euro exchange rate to
the balance of financial instruments at the reporting date. Foreign
currency risks, as defined by AASB 7 Financial Instruments:
Disclosures, arise on account of financial instruments being
denominated in a currency that is not the functional currency in
which the financial instrument is measured.
Differences from the translation of financial statements into the
Group’s presentation currency are not taken into consideration in
the sensitivity analysis and as such the NZ dollar and GBP have no
material impact. The results of the foreign exchange rate sensitivity
analysis are driven by three main factors, as outlined below:
– the impact of applying the above foreign exchange movements
to financial instruments that are not in hedge relationships will be
recognised directly in profit;
– to the extent that the foreign currency denominated derivatives
on balance sheet form part of an effective cash flow hedge
relationship, any fair value movements caused by applying the
above sensitivity movements will be deferred in equity and will not
affect profit; and
– movements in financial instruments forming part of an effective
fair value hedge relationship will be recognised in profit. However,
as a corresponding entry will be recognised for the hedged item,
there will be no net effect on profit.
At 30 June 2017, had the Australian dollar moved against the
US dollar and Euro, as illustrated in the table above, with all other
variables held constant, the Group’s profit after tax and other
equity would have been affected by the change in value of its
financial assets and financial liabilities as shown in the table on the
following page.
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Wesfarmers 2017 Annual Report120
Notes to the financial statements: Risk
For the year ended 30 June 2017
Financial statements
15(c) Market risk (continued)
Consolidated
AUD/USD +10% AUD/USD –10% AUD/EUR +10% AUD/EUR –10%
USD
exposure
Impact
on profit
Impact
on
equity
Impact
on profit
Impact
on
equity
EUR
exposure
Impact
on profit
Impact
on
equity
Impact
on profit
Impact
on
equity
A$m A$m A$m A$m A$m A$m A$m A$m A$m A$m
12 (1) – 1 – 5 – – – –
148 (10) – 10 – 3 – – – –
242 (62) (1) 76 1 239 – (131) – 160
– – – – – 1 – (1) – 2
962 67 – (67) – 43 3 – (3) –
1,026 62 – (76) – 1,854 – 169 – (207)
174 (56) (173) 68 211 – – – – –
– (174) 12 212 3 37 (3) (45)
28 (2) – 2 – 8 (1) – 1 –
87 (6) – 6 – – – – – –
285 (64) (1) 79 2 270 – (135) – 165
– – – – – – – – – –
849 59 – (59) – 45 3 – (3) –
1,009 64 – (79) – 1,862 – 170 – (207)
– – – – – – – – – –
186 (49) (223) 60 255 2 – (4) – 4
2 (224) 9 257 2 31 (2) (38)
Year ended 30 June 2017
Financial assets
Cash and cash equivalents
Trade and other receivables
Cross-currency interest rate swap
Hedge foreign exchange derivative assets
Financial liabilities
Trade and other payables
Interest-bearing loans and borrowings
Hedge foreign exchange derivative liabilities
Net impact
Year ended 30 June 2016
Financial assets
Cash and cash equivalents
Trade and other receivables
Cross-currency interest rate swap
Hedge foreign exchange derivative assets
Financial liabilities
Trade and other payables
Interest-bearing loans and borrowings
Cross-currency interest rate swap
Hedge foreign exchange derivative liabilities
Net impact
Nature of interest rate risk
The Group’s exposure to the risk of changes in market interest rates relates primarily to the Group’s debt obligations that have floating
interest rates.
Interest rate risk management
The policy of the Group is to limit the Group’s exposure to adverse fluctuations in interest rates, which could erode the Group’s profitability
and adversely affect shareholder value. The policy requires that an interest rate risk management (IRRM) plan be developed based on cash
flow forecasts. A committee comprising senior management meets periodically to review the IRRM plan and make interest rate hedging
recommendations, which are provided to the Group’s Chief Financial Officer for approval. The Group’s interest rate hedging profile is
regularly reported to the Wesfarmers Board and senior executives.
To manage the interest rate exposure, the Group generally enters into interest rate swaps, in which the Group agrees to exchange, at
specified intervals, the difference between fixed and variable rate interest amounts calculated by reference to an agreed-upon notional
principal amount. These swaps are designated to hedge interest costs associated with underlying debt obligations. At 30 June 2017, after
taking into account the effect of interest rate swaps, economic hedging relationships and early repayment of a portion of core debt facilities,
approximately 40 per cent of the Group’s core borrowings are exposed to movements in variable rates (2016: approximately 54 per cent).
From a Group perspective, any internal contracts are eliminated as part of the consolidation process, leaving only the external contracts in
the name of Wesfarmers Limited.
Although Wesfarmers has issued US and Euro bonds, cross-currency swaps are in place that remove any exposure to US and Euro interest
rates. These cross-currency swaps ensure that the effective interest rate to Wesfarmers is referenced to Australian interest rates.
Exposure
As at the reporting date, the Group had the following financial assets and liabilities with exposure to interest rate risk. Interest on financial
instruments, classified as floating rate, is repriced at intervals of less than one year. Interest on financial instruments, classified as fixed
rate, is fixed until maturity of the instrument. The classification between fixed and floating interest takes into account applicable hedge
instruments. Other financial instruments of the Group that are not included in the following table are non interest-bearing and are therefore
not subject to interest rate risk.
Wesfarmers 2017 Annual Report 121
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Notes to the financial statements: Risk
For the year ended 30 June 2017
2017 2016
Balance
Weighted
average
interest rate Balance
Weighted
average
interest rate
$m % $m %
88 3.93 978 12.46
604 1.30 200 1.09
1.63 10.34
507 1.09 180 0.98
2,697 5.53 3,202 5.65
4.66 5.35
734 1.04 2,402 1.89
1,475 2.95 1,519 3.17
2.31 2.39
3.70 3.76
3.64 4.15
4.04 4.50
Financial assets
Fixed rate
Finance advances and loans
Floating rate
Cash assets
Total weighted average effective interest rate on financial assets at balance date
Financial liabilities
Fixed rate
Other bank loans
Corporate bonds
Weighted average effective interest rate on fixed rate liabilities
Floating rate
Other unsecured bank loans
Corporate bonds
Weighted average effective interest rate on floating rate liabilities
Total weighted average effective interest rate on financial liabilities:
at balance date
during the year
during the year, including bank and liquidity charges
15(c) Market risk (continued)
The Group’s sensitivity to interest rate movements
The following sensitivity analysis shows the impact that a
reasonably possible change in interest rates would have on
Group profit after tax and equity. The impact is determined by
assessing the effect that such a reasonably possible change in
interest rates would have had on the interest income/(expense)
and the impact on financial instrument fair values. This sensitivity
is based on reasonably possible changes over a financial year,
determined using observed historical interest rate movements for
the preceding five-year period, with a heavier weighting given to
more recent market data.
The results of the sensitivity analysis are driven by three main
factors, as outlined below:
– for unhedged floating rate financial instruments, any increase or
decrease in interest rates will impact profit;
– to the extent that derivatives form part of an effective cash flow
hedge relationship, there will be no impact on profit and any
increase/(decrease) in the fair value of the underlying derivative
instruments will be deferred in equity; and
– movements in the fair value of derivatives in an effective fair value
hedge relationship will be recognised directly in profit. However, as
a corresponding entry will be recognised for the hedged item, there
will be no net impact on profit.
The following sensitivity analysis is based on the Australian variable
interest rate risk exposures in existence at balance sheet date.
If interest rates had moved by +/–100bps (basis point(s)) and with
all other variables held constant, profit after tax and equity would
be affected as follows:
Consolidated
Impact on
profit
Impact on
equity
A$m A$m
2017
Australian variable interest rate +100bps (5) 53
Australian variable interest rate –100bps 5 (56)
2016
Australian variable interest rate +100bps (17) 66
Australian variable interest rate –100bps 17 (70)
Commodity price risk
The Group’s exposure to commodity price risk is purely operational
and arises largely from coal price fluctuations, which impact on its
coal mining operations, or in relation to the purchase of inventory
with commodity price as a significant input, such as natural gas.
– the Group entered into a Brent oil future contract on 30 June 2017
to hedge the variability in cash flows arising from movements in the
natural gas price applicable to forecast natural gas purchases over
the three years to 30 June 2020.
– the Group does not enter into any financial instruments that vary
with movements in other commodity prices. Excluding the foreign
exchange risk component, which is managed as part of the Group’s
overall foreign exchange risk management policies and procedures
referred to previously, these exposures are not hedged.
No commodity price sensitivity analysis is provided, as:
– the Brent oil future contract was entered into on the balance sheet
date; and
– the Group’s other commodity ‘own use contracts’ are outside
the scope of AASB 139 Financial Instruments: Recognition and
Measurement.
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Wesfarmers 2017 Annual Report122
Financial statements
Notes to the financial statements: Risk
For the year ended 30 June 2017
15(e) Fair values
The carrying amounts and estimated fair values of all the Group’s
financial instruments recognised in the financial statements are
materially the same, with the exception of the following:
The methods and assumptions used to estimate the fair value of
financial instruments are as follows:
Cash
The carrying amount is fair value due to the asset’s liquid nature.
Receivables/payables
Due to the short-term nature of these financial rights and
obligations, carrying amounts are estimated to represent fair
values.
Other financial assets/liabilities
The fair values of corporate bonds and term deposits held at fair
value have been calculated by discounting the expected future
cash flows at prevailing interest rates using market observable
inputs. The fair values of loan notes and other financial assets
have been calculated using market interest rates.
Derivatives
The Group enters into derivative financial instruments with various
counterparties, principally financial institutions with investment
grade credit ratings. Foreign exchange forward contracts, interest
rate swap contracts, cross-currency interest rate swaps and
commodity future contracts are all valued using forward pricing
techniques. This includes the use of market observable inputs,
such as foreign exchange spot and forward rates, yield curves of
the respective currencies, interest rate curves and forward rate
curves of the underlying commodity. Accordingly, these derivatives
are classified as Level 2.
Interest-bearing loans and borrowings
Quoted market prices or dealer quotes for similar instruments are
used to value long-term debt instruments except corporate bonds.
Valuation of financial instruments
For all fair value measurements and disclosures, the Group uses
the following to categorise the method used:
– Level 1: the fair value is calculated using quoted prices in active
markets.
– Level 2: the fair value is estimated using inputs other than quoted
prices included in Level 1 that are observable for the asset or
liability, either directly (as prices) or indirectly (derived from prices).
– Level 3: the fair value is estimated using inputs for the asset or
liability that are not based on observable market data.
All of the Group’s financial instruments were valued using market
observable inputs (Level 2) with the exception of shares in unlisted
companies at fair value (Level 3) that were valued at under
$1 million (2016: $1 million).
For financial instruments that are carried at fair value on a recurring
basis, the Group determines whether transfers have occurred
between Levels in the hierarchy by reassessing categorisation
(based on the lowest level input that is significant to the fair value
measurement as a whole) at the end of each reporting period.
There were no transfers between Level 1 and Level 2 during the
year. There were no material Level 3 fair value movements during
the year.
Consolidated
2017 2016
$m $m
Corporate bonds: carrying amount 4,172 4,721
Corporate bonds: fair value 4,313 4,867
15(d) Credit risk
Nature of the risk
Credit risk is the risk that a contracting entity will not complete its
obligation under a financial instrument or customer contract that
will result in a financial loss to the Group. The Group is exposed
to credit risk from its operating activities (primarily from customer
receivables) and from its financing activities, including deposits
with financial institutions, foreign exchange transactions and other
financial instruments.
Credit risk management: receivables
Customer credit risk is managed by each division subject to
established policies, procedures and controls relating to customer
credit risk management. The Group trades with recognised,
creditworthy third parties. Depending on the division, credit terms
are generally up to 30 days from date of invoice. The Group’s
exposure to bad debts is not significant and default rates have
historically been very low.
Customers who wish to trade on credit terms are subject to
credit verification procedures, including an assessment of their
independent credit rating, financial position, past experience and
industry reputation. In addition, receivable balances are monitored
on an ongoing basis with the result that the Group’s exposure to
bad debts is not significant.
An ageing of trade receivables past due is included in note 5. The
credit quality of trade receivables neither past due nor impaired
has been assessed as high on the basis of credit ratings (where
available) or historical information about counterparty default.
The carrying amounts of the Group’s trade and other receivables
are denominated in Australian dollars, US dollars, NZ dollars and
GBP. Since the Group trades only with recognised third parties,
no requests or requirement for collateral covering trade and other
receivables balances have been made.
Exposure
The Group’s maximum credit exposure to current receivables,
finance advances and loans are shown below:
Credit risk management: financial instruments and
cash deposits
Credit risk from balances with banks and financial institutions is
managed by Group Treasury in accordance with Board-approved
policy. Investments of surplus funds are made only with approved
counterparties or counterparties rated AA or higher by Standard &
Poor’s. Surplus funds are invested within credit limits assigned to
each counterparty, unless appropriate approval is provided.
The carrying amount of financial assets represents the maximum
credit exposure. There is also exposure to credit risk when the
Group provides a guarantee to another party. Details of contingent
liabilities are disclosed in note 20. There are no significant
concentrations of credit risk within the Group.
2017 2016
% %
Coles 27.4 54.4
Home Improvement 23.7 15.3
Officeworks 2.5 1.6
Kmart 2.0 1.4
Target 0.8 1.1
Resources 11.4 4.5
Industrial and Safety 18.9 13.0
Chemicals, Energy and Fertilisers 11.4 8.0
Corporate 1.9 0.7
100.0 100.0
Wesfarmers 2017 Annual Report 123
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Notes to the financial statements: Risk
For the year ended 30 June 2017
Types of hedging instruments
The Group is exposed to risk from movements in foreign exchange
and interest rates. As part of the risk management strategy set out in
note 15, the Group holds the following types of derivative instruments:
Forward exchange contracts: contracts denominated in US dollar and
Euro to hedge highly probable sale and purchase transactions (cash
flow hedges).
Interest rate swaps: to optimise the Group’s exposure to fixed
and floating interest rates arising from borrowings. These hedges
incorporate cash flow hedges, which fix future interest payments,
and fair value hedges, which reduce the Group’s exposure to
changes in the value of its assets and liabilities arising from interest
rate movements.
Cross-currency interest rate swaps: to either reduce the Group’s
exposure to exchange rate variability in its interest repayments
of foreign currency denominated debt (cash flow hedges) or to
hedge against movements in the fair value of those liabilities due
to exchange and interest rate movements (fair value hedges). The
borrowing margin on Wesfarmers’ cross-currency interest rate
swaps has been treated as a ‘cost of hedging’ and deferred into
equity. These costs are then amortised to the profit and loss as a
finance cost over the remaining life of the borrowing.
Brent oil future contract: to reduce the Group’s exposure to price
variability in its forecast purchases of natural gas.
2017 2016
Notional
$m
Weighted
Average
Asset
$m
Liability
$m
Notional
$m
Weighted
Average
Asset
$m
Liability
$m
Foreign exchange contracts
Cash flow hedge – sales (AUD) US$335 Asset: 0.76
Liability: 0.81
3 (10) US$734 Asset: 0.71
Liability: 0.81
1 (88)
Cash flow hedge – sales (GBP) US$0 Asset: nil
Liability: nil
– – US$35 Asset: nil
Liability: 0.69
– (3)
Cash flow hedge – purchases (AUD) US$2,906 Asset: nil
Liability: 0.74
– (154) US$3,723 Asset: 0.76
Liability: 0.71
39 (135)
Cash flow hedge – purchases (GBP) US$65 Asset: nil
Liability: 1.27
– (2) US$138 Asset: 1.46
Liability: nil
10 –
Cash flow hedge – purchases (NZD) US$156 Asset: nil
Liability: 0.69
– (11) US$145 Asset: 0.72
Liability: 0.66
1 (11)
Cash flow hedge – purchases (AUD) €15 Asset: 0.69
Liability: nil
1 – €40 Asset: nil
Liability: 0.64
– (2)
Interest rate swap contracts
Cash flow hedge £300 1.09% fixed – (1) £100 1.09% fixed – (2)
Fair value hedge A$300 BBSW +0.82%
floating
7 – A$300 BBSW +0.82%
floating
13 –
Cross-currency interest rate swaps
Fair value hedge US$750 BBSW +1.24%
floating
242 – US$750 BBSW +1.24%
floating
285 –
Cash flow hedge €1,250 5.32% fixed 240 – €1,250 5.32% fixed 270 –
Brent oil contracts
Cash flow hedge 1.3m barrels US$68.52 per
barrel
– – – – – –
Total derivative asset/(liability) 493 (178) 619 (241)
Recognition and measurement
Recognition
Derivative financial instruments are initially recognised at fair value
on the date on which a derivative contract is entered into and are
subsequently remeasured to fair value per note 15(e). The method
of recognising any remeasurement gain or loss depends on the
nature of the item being hedged. For hedging instruments, any
hedge ineffectiveness is recognised directly in the income statement
in the period in which it is incurred. This was immaterial in the
current year.
Hedge accounting
At the start of a hedge relationship, the Group formally designates
and documents the hedge relationship, including the risk
management strategy for undertaking the hedge. This includes
identification of the hedging instrument, the hedged item or
transaction, the nature of the risk being hedged and how the
entity will assess the hedging instrument’s effectiveness. Hedge
accounting is only applied where effective tests are met on a
prospective basis.
For the purposes of hedge accounting, hedges are classified as:
– fair value hedges when they hedge the exposure to changes in the
fair value of a recognised asset, liability or firm commitment that
could affect profit or loss; or
– cash flow hedges when they hedge a particular risk associated
with the cash flows of recognised assets and liabilities and highly
probable forecast transactions. A hedge of the foreign currency risk
of a firm commitment is accounted for as a cash flow hedge.
Wesfarmers will discontinue hedge accounting prospectively only
when the hedging relationship, or part of the hedging relationship
no longer qualifies for hedge accounting, which includes where
there has been a change to the risk management objective and
strategy for undertaking the hedge and instances when the hedging
instrument expires or is sold, terminated or exercised. For this
purposes, the replacement or rollover of a hedging instrument into
another hedging instrument is not an expiration or termination if
such a replacement or rollover is consistent with our documented
risk management objective.
16. Hedging
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Wesfarmers 2017 Annual Report124
Financial statements
Notes to the financial statements: Risk
For the year ended 30 June 2017
16. Hedging (continued)
Hedges that meet the criteria for hedge accounting are classified and accounted for as follows:
Fair value hedges
The Group uses fair value hedges to mitigate the risk of changes in the fair value of foreign currency borrowings from foreign currency
and interest rate fluctuations over the hedging period. Where these fair value hedges qualify for hedge accounting, gains or losses from
remeasuring the fair value of the hedging instrument are recognised within finance costs in the income statement, together with gains or
losses in relation to the hedged item where those gains of losses relate to the risk intended to be hedged.
For fair value hedges, the carrying value of the hedged item is adjusted for gains and losses attributable to the risk being hedged. The
derivative is also remeasured to fair value, and gains and losses from both are taken to profit or loss. The net amount recognised in the
income statement in this financial year was less than $1 million.
The maturity profile of the fair value hedges is shown in note 15(b).
If the hedged item is a firm commitment (and therefore not recognised), the subsequent cumulative change in the fair value of the hedged
risk is recognised as an asset or liability with a corresponding gain or loss recognised in profit or loss. The changes in the fair value of the
hedging instrument are also recognised in profit or loss.
The accumulated amount of fair value adjustment which is included in the carrying amount of borrowings in the balance sheet is as
follows:
2017 2016
Foreign
bonds
$m
Domestic
bonds
$m
Foreign
bonds
$m
Domestic
bonds
$m
Face value at inception 2,358 1,350 2,358 1,850
Change arising from revaluation to spot rates at 30 June 476 – 518 –
2,834 1,350 2,876 1,850
Balance of unamortised discount/premium (10) (4) (12) (6)
Amortised cost 2,824 1,346 2,864 1,844
Accumulated amount of fair value hedge adjustment attributable to hedge risk (6) 7 – 13
Carrying amount 2,818 1,353 2,864 1,857
There was no material ineffectiveness relating to financial instruments in designated fair value hedge relationships during the
year (2016: nil).
Cash flow hedges
The Group uses cash flow hedges to mitigate the risk of variability of future cash flows attributable to foreign currency fluctuations over
the hedging period associated with our foreign currency borrowings and our ongoing business activities, predominantly where we have
highly probable purchase or settlement commitments in foreign currencies. The Group also uses cash flow hedges to hedge variability in
cash flows due to interest rate or natural gas price movements associated with some of our domestic borrowings or forecast natural gas
purchases respectively.
For cash flow hedges, the portion of the gain or loss on the hedging instrument that is effective is recognised directly in equity, while the
ineffective portion is recognised in profit or loss. The maturity profile of these hedges is shown in note 15(b), the recognition of the gain or
loss is expected to be consistent with this.
2017 2016
Trade
$m
Foreign
bonds
$m
Foreign
debt
$m
Trade
$m
Foreign
bonds
$m
Foreign
debt
$m
Change in the fair value of the hedge item 15 (30) 1 (189) 54 (2)
Amounts recognised in equity are transferred to the income statement when the hedged transaction affects profit or loss, such as when
hedged income or expenses are recognised or when a forecast sale occurs or the asset is consumed. When the hedged item is the cost
of a non-financial asset or liability, the amounts taken to equity are transferred to the initial carrying amount of the non-financial asset or
liability.
If the forecast transaction is no longer expected to occur, amounts previously recognised in equity are transferred to the income
statement. If the hedging instrument expires or is sold, terminated or exercised without replacement or rollover, or if its designation as a
hedge is revoked, amounts previously recognised in equity remain in equity until the forecast transaction occurs.
Wesfarmers 2017 Annual Report 125
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Notes to the financial statements: Risk
For the year ended 30 June 2017
17. Impairment of non-financial assets
Testing for impairment
The Group tests property, plant and equipment, intangibles and
goodwill for impairment:
– at least annually for indefinite life intangibles and goodwill; and
– where there is an indication that the asset may be impaired (which
is assessed at least each reporting date); or
– where there is an indication that previously recognised impairment
(on assets other than goodwill) may have changed.
If the asset does not generate independent cash inflows and its
value in use cannot be estimated to be close to its fair value, the
asset is tested for impairment as part of the cash-generating unit
(CGU) to which it belongs.
Assets are impaired if their carrying value exceeds their
recoverable amount. The recoverable amount of an asset or CGU
is determined as the higher of its fair value less costs of disposal
(FVLCOD) or value in use (VIU).
Impairment calculations
In assessing VIU, the estimated future cash flows are discounted
to their present value using a discount rate that reflects current
market assessments of the time value of money and the
risks specific to the asset or CGU. In determining FVLCOD, a
discounted cash flow model is used based on a methodology
consistent with that applied by the Group in determining the value
of potential acquisition targets, maximising the use of market
observed inputs. These calculations, classified as Level 3 on the
fair value hierarchy, are compared to valuation multiples, or other
fair value indicators where available, to ensure reasonableness.
Inputs to impairment calculations
For VIU calculations, cash flow projections are based on
Wesfarmers’ corporate plans and business forecasts prepared by
management and approved by the Board. The corporate plans
are developed annually with a five-year outlook and, for these
calculations, are adjusted to exclude the costs and benefits of
expansion capital and on the understanding that actual outcomes
may differ from the assumptions used.
In determining FVLCOD, the valuation model incorporates the cash
flows projected over the balance of the current corporate plan
period, or, in the case of CGUs within the Resources business,
over their respective life-of-mine (LOM). These projections are
discounted using a risk-adjusted discount rate commensurate with
a typical market participant’s assessment of the risk associated
with the projected cash flows.
For both the VIU and FVLCOD models, cash flows beyond the
five-year corporate plan period are extrapolated using estimated
growth rates, which are based on Group estimates, taking into
consideration historical performance as well as expected long-term
operating conditions. Growth rates do not exceed the consensus
forecasts of the long-term average growth rate for the industry in
which the CGU operates.
Discount rates used in both calculations are based on the weighted
average cost of capital determined by prevailing or benchmarked
market inputs, risk adjusted where necessary. Other assumptions
are determined with reference to external sources of information
and use consistent, conservative estimates for variables such as
terminal cash flow multiples. Increases in discount rates or changes
in other key assumptions, such as operating conditions or financial
performance, may cause the recoverable amounts to fall below
carrying values.
Recognised impairment
There was no material impairment recognised during the
2017 financial year.
Previously recognised impairment
During the 2016 financial year, the carrying values of both the Target
CGU and Curragh CGU exceeded their respective recoverable
amounts.
Target CGU
A $1,266 million impairment was recognised in 2016 in respect of
its goodwill ($1,208 million) and plant and equipment ($58 million) in
‘impairment expenses’. The prior year decrease in the recoverable
amount largely reflected, Target’s trading performance, short-term
outlook and changes in its strategic plan. Target’s recoverable value
at 30 June 2017 continues to approximate its carrying value. Details
of the assumptions used in determining the recoverable amount of
Target are provided on the following page.
Curragh CGU
An $850 million impairment was recognised in 2016 in respect
of its non-current assets, predominantly plant and equipment
($607 million) and mineral lease and development assets
($182 million), in ‘impairment expenses’. The reduction in
the recoverable value of Curragh reflected, the continued
deterioration in export coal price forecasts and long-term
exchange rate assumptions. Curragh’s recoverable value as at
30 June 2017 continues to approximate its carrying value. Details
of the assumptions used in determining the recoverable amount of
Curragh are provided on the following page.
Reversal of impairment
Where there is an indication that previously recognised impairment
losses may no longer exist or have decreased, the asset is tested.
If there has been a change to the estimates used to determine
the asset’s recoverable amount since the last impairment loss
was recognised, the carrying value of the asset is increased to its
recoverable amount. That increased amount cannot exceed the
carrying value that would have been determined, net of depreciation,
had no impairment loss been recognised for the asset in prior years.
Such reversal is recognised in profit or loss and the depreciation
charge is adjusted in future periods to allocate the asset’s revised
carrying value, less any residual value, on a systematic basis over its
remaining useful life. Impairments recognised against goodwill are not
reversed.
There were no material reversals of impairment during the
2017 financial year.
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Wesfarmers 2017 Annual Report126
Financial statements
Notes to the financial statements: Risk
For the year ended 30 June 2017
Key assumptions: fair value less costs of disposal calculations
Coles and Target CGUs
The key assumptions used for assessing the recoverable amounts of the Coles CGU (which accounts for over 73 per cent of the
Group’s goodwill and intangible assets with indefinite useful lives at 30 June 2017) and Target CGU, are set out below. Both CGUs
adopt the FVLCOD valuation methodology to determine the recoverable amount.
EBIT growth over the forecast period is based on past experience, expectations of general market conditions and, in the case of
Target, a program of business improvement strategies. The post-tax discount rates incorporate a risk-adjustment relative to the
risks associated with the net post-tax cash flows being achieved, whilst the growth rates beyond the corporate plan are based on
market estimates of the long-term average industry growth rate.
Coles Target
2017 2016 2017 2016
Discount rate (post-tax) 8.9% 8.9% 11.0% 11.0%
Growth rate beyond corporate plan 3.0% 3.0% 2.5% 2.5%
Headroom as a percentage of the CGU’s net carrying value 29.9% 62.4% 4.9% 0%
Terminal value as a percentage of the Target CGU’s recoverable value 77.1% 83.6%
As Target’s recoverable amount is marginally above its carrying value, any adverse movements in key assumptions may lead to
an impairment. Consistent with 30 June 2016, the recoverable amount of Target has been based on assumed improvements in
its operating and financial performance, notwithstanding that the timing of cash flows arising from these improvements will be
influenced by general market conditions. The recoverable value of Target is sensitive to changes in its discount rate and its forecast
long-term EBIT that drives terminal value. A one per cent change in discount rate or a 17 per cent change in its forecast long-term
EBIT approximates a $150 million change in recoverable value.
Curragh CGU
The recoverable value of Curragh was determined using the LOM FVLCOD valuation methodology and considers both JORC
reserves and JORC resources. The key assumptions used for assessing the recoverable amount of the Curragh CGU are set out
below:
– remaining mine life of approximately 17 years;
– long-term export coal price estimates sourced from Wood Mackenzie, a global provider of market intelligence to the energy, metals
and mining industries;
– AUD/USD exchange rates based on the June 2017 forward curve off the spot rate of 0.77;
– mine cash cost escalations of approximately 2.5 per cent per annum; and
– post-tax discount rate of 9.9 per cent (2016: 10 per cent).
The recoverable value of Curragh is sensitive to changes in its discount rate and forecast post-tax cash flows over the LOM.
A 3.6 per cent change in discount rate or a 35 per cent change in forecast pre-tax cash flows over the LOM approximates
a $150 million change in recoverable value. As Curragh’s recoverable amount approximates its carrying value, any adverse
movements in key assumptions may lead to an impairment.
Other CGUs
Based on current economic conditions and CGU performances, no reasonably possible change in a key assumption used in the
determination of the recoverable value of Coles or CGUs other than Curragh or Target would result in a material impairment to the
Group.
17. Impairment of non-financial assets (continued)
Wesfarmers 2017 Annual Report 127
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Notes to the financial statements: Group structure
For the year ended 30 June 2017
18. Associates and joint arrangements
Consolidated
2017 2016
$m $m
686 588
17 17
703 605
117 111
(7) 15
30 3
7 (7)
147 122
Investments in associates
Interests in joint venture
Net profits from operations of associates
Other comprehensive (loss)/income of associates
Profit from operations of joint venture
Other comprehensive income/(loss) of joint venture
Total comprehensive income
Investments in associates
Recognition and measurement
The Group’s investments in its associates, being entities in which
the Group has significant influence and are neither subsidiaries nor
jointly controlled assets, are accounted for using the equity method.
Under this method, the investment in associates is carried in the
consolidated balance sheet at cost plus post-acquisition changes in
the Group’s share of the associates’ net assets.
Goodwill relating to associates is included in the carrying amount
of the investment and is not amortised. After application of the
equity method, the Group determines whether it is necessary to
recognise any additional impairment loss with respect to the Group’s
investment. The Group’s income statement reflects the Group’s
share of the associate’s result.
Where there has been a change recognised directly in the
associate’s equity, the Group recognises its share of any changes
and discloses this in the consolidated statement of comprehensive
income.
Where the reporting dates of the associates and the Group vary,
management accounts of the associate for the period to the Group’s
balance date are used for equity accounting. The associates’
accounting policies are consistent with those used by the Group for
like transactions and events in similar circumstances.
Investment properties owned by associates are initially measured at
cost, including transaction costs. Subsequent to initial recognition,
investment properties are stated at fair value, which reflects market
conditions at the balance sheet date. Gains or losses arising from
changes in the fair values of investment properties are recognised in
profit or loss of the associate, in the year in which they arise. This is
consistent with the Group’s policy.
Interests in joint arrangements
Recognition and measurement
The Group recognises its share of the assets, liabilities, expenses
and income from the use and output of its joint operations. The
Group’s investment in its joint venture is accounted for using the
equity method of accounting.
Key judgement: control and significant influence
The Group has a number of management agreements
with associates and joint arrangements it considers
when determining whether it has control, joint control or
significant influence. The Group assesses whether it has
the power to direct the relevant activities of the investee
by considering the rights it holds to appoint or remove key
management and the decision-making rights and scope of
powers specified in the contract.
Where the Group has the unilateral power to direct the
relevant activities of an investee, the Group then assesses
whether the power it holds is for its own benefit (acting as
principal) or for the benefit of others (acting as agent). This
determination is based on a number of factors including an
assessment of the magnitude and variability of the Group’s
exposure to variable returns associated with its involvement
with the investee. In an agency capacity, the Group is
considered to be acting on behalf of other parties and
therefore does not control the investee when it exercises its
decision-making powers.
BACK

Wesfarmers 2017 Annual Report128
Financial statements
Notes to the financial statements: Group structure
For the year ended 30 June 2017
The consolidated financial statements include the financial statements of Wesfarmers Limited and the subsidiaries listed in the following
table. Refer to page 131 for the respective legend.
Entity
2017 2016
% % Entity
2017 2016
% %
19. Subsidiaries
Interests in associates and joint arrangements 2017 2016
Associates Principal activity Reporting date Country of incorporation % %
Australian Energy Consortium Pty Ltd1 Oil and gas 31 December Australia 27.4 27.4
Bengalla Coal Sales Company Pty Limited Sales agent 31 December Australia 40.0 40.0
Bengalla Mining Company Pty Limited Management company 31 December Australia 40.0 40.0
BWP Trust Property investment 30 June Australia 24.8 24.8
Gresham Partners Group Limited Investment banking 30 September Australia 50.0 50.0
Gresham Private Equity Funds Private equity fund 30 June Australia (a) (a)
iCiX International, Inc. Information technology 31 December USA – 20.0
Queensland Nitrates Management Pty Ltd Chemical manufacture 30 June Australia 50.0 50.0
Queensland Nitrates Pty Ltd Chemical manufacture 30 June Australia 50.0 50.0
Wespine Industries Pty Ltd Pine sawmillers 30 June Australia 50.0 50.0
Joint operations Principal activity Reporting date Country of incorporation % %
Sodium Cyanide Sodium cyanide manufacture 30 June Australia 75.0 75.0
Bengalla Coal mining 31 December Australia 40.0 40.0
ISPT Property ownership 30 June Australia 25.0 25.0
Joint venture Principal activity Reporting date Country of incorporation % %
BPI NO 1 Pty Ltd Property management 30 June Australia (b) (b)
1 Australian Energy Consortium Pty Ltd has a 50.0 per cent interest in Quadrant Energy Holdings Pty Ltd.
(a) Gresham Private Equity Funds: Whilst the Group’s interest in the unit holders’ funds of Gresham Private Equity Fund No. 2 amounts to greater than 50.0 per cent,
it is not a controlled entity as the Group does not have the practical ability to direct their relevant activities. Such control requires a unit holders’ resolution of
75.0 per cent of votes pursuant to the Funds’ trust deeds.
(b) BPI NO 1 Pty Ltd: Whilst the Group owns the only equity share in BPI NO 1 Pty Ltd, the Group’s effective interest approximates 50.0 per cent and joint control is
effected through contractual arrangements with the joint venture partner.
18. Associates and joint arrangements (continued)
A.C.N. 003 921 873 Pty Limited 100 100
A.C.N. 004 191 646 Pty Ltd 100 100
A.C.N. 007 870 484 Pty Ltd 100 100
A.C.N. 008 648 799 Pty Ltd 100 100
A.C.N. 008 734 567 Pty Ltd 100 100
A.C.N. 082 931 486 Pty Ltd 100 100
A.C.N. 092 194 904 Pty Ltd 100 100
A.C.N. 112 719 918 Pty Ltd 100 100
AEC Environmental Pty Ltd 100 100
Andearp Pty Ltd 100 100
Auridiam Botswana (Proprietary) Ltd y 100 100
Australian Gold Reagents Pty Ltd 75 75
Australian Graphics Pty Ltd 100 100
Australian International Insurance Limited + 100 100
Australian Liquor Group Ltd + 100 100
Australian Underwriting Holdings Limited + 100 100
Australian Underwriting Services Pty Ltd 100 100
Australian Vinyls Corporation Pty Ltd + 100 100
AVC Holdings Pty Ltd + 100 100
AVC Trading Pty Ltd + 100 100
BBC Hardware Limited + 100 100
BBC Hardware Properties (NSW) Pty Ltd 100 100
BBC Hardware Properties (Vic) Pty Ltd 100 100
Beddington House (No.4) Limited p 100 100
Beddington House Holdings Limited p 100 100
Bi-Lo Pty Limited + 100 100
Blacksmith Jacks Pty Ltd 100 100
Blackwoods 4PL Pty Ltd (formerly WIS Australia
Pty Ltd) 100 100
Blackwoods Training Pty Ltd (formerly
Integrated Safety Training Pty Ltd) 100 100
Blackwoods Xpress Pty Ltd (formerly GotStock
Pty Ltd) 100 100
BPI Management Pty Ltd 100 100
Brian Pty Ltd 100 100
BUKI (Australia) Pty Ltd + 100 100
Bullivants International Pty Ltd 100 100
Bullivants Pty Limited + 100 100
Bunnings (NZ) Limited n 100 100
Bunnings (UK & I) Holdings Limited p 100 100
Bunnings Group Limited + 100 100
Bunnings Joondalup Pty Ltd 100 100
Bunnings Limited # n 100 100
Bunnings Management Services Pty Ltd 100 100
Bunnings Manufacturing Pty Ltd 100 100
Bunnings Properties Pty Ltd 100 100
Bunnings Pulp Mill Pty Ltd 100 100
Bunnings Services Limited p 100 100
BWP Management Limited < 100 100 C S Holdings Pty Limited + 100 100 Campbells Hardware & Timber Pty Limited 100 100 CGNZ Finance Limited n 100 100 Charlie Carter (Norwest) Pty Ltd + 100 100 Chef Fresh Pty Ltd 100 100 Chemical Holdings Kwinana Pty Ltd + 100 100 Wesfarmers 2017 Annual Report 129 F in a n c ia l s ta te m e n ts C a p ita l G ro u p s tru c tu re U n re c o g n is e d ite m s O th e r K e y n u m b e rs S e g m e n t in fo rm a tio n A b o u t th is re p o rt R is k Notes to the financial statements: Group structure For the year ended 30 June 2017 19. Subsidiaries (continued) Entity 2017 2016 % % Entity 2017 2016 % % CMFL Services Ltd + 100 100 CMNZ Investments Pty Ltd 100 100 CMPQ (CML) Pty Ltd 100 100 Coles Ansett Travel Pty Ltd 97.5 97.5 Coles Financial Services Pty Ltd + 100 100 Coles Group Asia Pty Ltd 100 100 Coles Group Deposit Services Pty Ltd 100 100 Coles Group Finance (USA) Pty Ltd 100 100 Coles Group Finance Limited + 100 100 Coles Group International Pty Ltd 100 100 Coles Group Limited + 100 100 Coles Group New Zealand Holdings Limited n 100 100 Coles Group Properties Holdings Ltd + 100 100 Coles Group Property Developments Ltd + 100 100 Coles Group Superannuation Fund Pty Ltd 100 100 Coles Group Supply Chain Pty Ltd + 100 100 Coles Melbourne Ltd + 100 100 Coles Online Pty Ltd 100 100 Coles Properties WA Ltd + 100 100 Coles Property Management Pty Ltd 100 100 Coles Retail Services Pty Ltd 100 100 Coles Stores (New Zealand) Limited n 100 100 Coles Supermarkets Australia Pty Ltd + 100 100 ConsortiumCo Pty Ltd 100 100 Coo-ee Investments Pty Limited 100 100 Coregas NZ Limited @ n 100 - Coregas Pty Ltd + 100 100 CSA Retail (Finance) Pty Ltd 100 100 CSBP Ammonia Terminal Pty Ltd 100 100 CSBP Limited + 100 100 CTE Pty Ltd 100 100 Cuming Smith and Company Limited + 100 100 Curragh Coal Sales Co Pty Ltd 100 100 Curragh Queensland Mining Pty Ltd 100 100 Dairy Properties Pty Ltd 100 100 Ditchburn Property Investments (UK) Ltd p 100 100 Dowd Corporation Pty Ltd 100 100 e.colesgroup Pty Ltd 100 100 e.tailing (Coles Group) Pty Ltd 100 100 Eastfarmers Pty Ltd 100 100 ECC Pty Ltd 100 100 ENV.Australia Pty Ltd 100 100 Environmental and Licensing Professionals Pty Ltd 100 100 Eureka Operations Pty Ltd + 100 100 FBP Awards Fund Pty Ltd 100 100 FIF Investments Pty Limited 100 100 Fifthgrange Limited p 100 100 Fitzgibbons Hotel Pty Ltd 100 100 Fitzinn Pty Ltd 100 100 Focal Point (Lighting) Limited p 100 100 Fosseys (Australia) Pty Ltd + 100 100 GBPL Pty Ltd 100 100 GPML Pty Ltd 100 100 Greencap Holdings Limited 100 100 Greencap Pty Ltd (formerly Greencap - NAA Pty Ltd) 100 100 Grocery Holdings Pty Ltd + 100 100 Hampden Group Limited p 100 100 HHGL (ROI) Limited (formerly Homebase House and Garden Centre Limited) p 100 100 HHGL Limited (formerly Homebase Limited) p 100 100 Home Charm Group Limited p 100 100 Home Charm Group Trustees Limited p 100 100 Homebase (NI) Limited p 100 100 Homebase Card Handling Services Limited p 100 100 Homebase Direct Limited p 100 100 Homebase Group (2000) Limited p 100 100 Homebase Group Limited p 100 100 Homebase Holdings Limited p 100 100 Homebase Spend & Save Limited p 100 100 Hotel Wickham Investments Pty Ltd 100 100 HouseWorks Co Pty Ltd 100 100 Howard Smith Limited + 100 100 Howard Smith Nominees Pty Limited 100 100 Hunter Property Investments s 100 100 Iconford Limited p 100 100 Incorporatewear Limited p 100 100 Index Limited p 100 100 J Blackwood & Son Pty Ltd + 100 100 James Patrick & Co Pty Ltd (in liquidation) 100 100 KAS Direct Sourcing Private Limited # l 100 100 KAS Global Holdings Pty Ltd (formerly Kmart Australia Sourcing Pty Ltd) + 100 100 KAS Global Trading Pty Ltd t 100 100 KAS International Sourcing Bangladesh PVT Ltd @ x 100 - KAS International Trading (Shanghai) Company Limited u 100 100 KAS Pty Limited t 100 100 Katies Fashions (Aust) Pty Limited 100 100 Kleenheat Gas House Franchising Pty Ltd 100 100 Kleenheat Pty Ltd 100 100 Kmart Australia Limited + 100 100 Kwinana Nitrogen Company Proprietary Limited 100 100 Lawvale Pty Ltd 100 100 Lexden BH (Colchester) Limited @ p 100 - Lexden BH Limited @ p 100 - LHG Pty Ltd + 100 100 LHG2 Pty Ltd + 100 100 LHG3 Pty Ltd 100 100 Liftco Pty Limited + 100 100 Liquorland (Australia) Pty Ltd + 100 100 Liquorland (Qld) Pty Ltd + 100 100 Loggia Pty Ltd + 100 100 Loyalty Pacific Pty Ltd + 100 100 Manacol Pty Limited + 100 100 Masters Hardware Limited n 100 100 Masters Home Improvement Limited n 100 100 MC2 Pacific Pty Ltd 100 100 Meredith Distribution (NSW) Pty Ltd 100 100 Meredith Distribution Pty Ltd 100 100 BACK Wesfarmers 2017 Annual Report130 Financial statements Notes to the financial statements: Group structure For the year ended 30 June 2017 19. Subsidiaries (continued) Entity 2017 2016 % % Entity 2017 2016 % % MI Home Limited p 100 100 Millars (WA) Pty Ltd 100 100 Modern Interiors Limited p 100 100 Modwood Technologies Pty Ltd 100 100 Multimedia Services Pty Ltd ~ - 100 Mycar Automotive Pty Ltd 100 100 Neat N’ Trim Uniforms Pty Ltd 100 100 Newmart Pty Ltd + 100 100 now.com.au Pty Ltd 100 100 NZ Finance Holdings Pty Limited n 100 100 Officeworks Businessdirect Pty Ltd 100 100 Officeworks Ltd + 100 100 Officeworks Property Pty Ltd 100 100 Officeworks Superstores NZ Limited n 100 100 Pailou Pty Ltd + 100 100 Patrick Operations Pty Ltd 100 100 Petersen Bros Pty Ltd 100 100 Powertrain Pty Limited 100 100 Premier Power Sales Pty Ltd 100 100 Procurement Online Pty Ltd 100 100 Protector Alsafe Pty Ltd 100 100 Protex Healthcare (Aus) Pty Ltd 100 100 PT Blackwoods Indonesia m 100 100 Quickinstant Limited p 100 100 R & N Palmer Pty Ltd 100 100 Rapid Evacuation Training Services Pty Ltd 100 100 Relationship Services Pty Limited 100 100 Retail Australia Consortium Pty Ltd 100 100 Retail Investments Pty Ltd 100 100 Retail Ready Operations Australia Pty Ltd + 100 100 Richardson & Richardson, Unipessoal, LDA v 100 100 Richmond Plaza Shopping Centre Pty Ltd 100 100 Ruissellement Limited p 25 25 Sandfords Limited p 100 100 SBS Rural IAMA Pty Limited 100 100 Scones Jam n Cream Pty Ltd 100 100 Sellers (SA) Pty Ltd 100 100 Share Nominees Limited 100 100 Sotico Pty Ltd 100 100 Target Australia Pty Ltd + 100 100 Target Australia Sourcing (Shanghai) Co Ltd # u 100 100 Target Australia Sourcing Limited # t 100 100 Texas (NI) Limited p 100 100 Texas Homecare (Northern Ireland) Limited p 100 100 Texas Homecare Installation Services Limited p 100 100 Texas Homecare Limited p 100 100 Texas Installations Limited p 100 100 Texas Services Limited p 100 100 TGT Sourcing India Private Limited # l 100 100 The Builders Warehouse Group Pty Limited 100 100 The Franked Income Fund 100 100 The Grape Management Pty Ltd + 100 100 The Westralian Farmers Limited + 100 100 The Workwear Group HK Limited (formerly TGT Procurement Asia Limited) # t 100 100 The Workwear Group Holding Pty Ltd + 100 100 The Workwear Group Pty Ltd + 100 100 Tickoth Pty Ltd 100 100 Tooronga Holdings Pty Ltd 100 100 Trend Décor Limited p 100 100 Trimevac Pty Ltd 100 100 Tyre and Auto Pty Ltd + 100 100 Tyremaster (Wholesale) Pty Ltd 100 100 Tyremaster Pty Ltd 100 100 Ucone Pty Ltd + 100 100 Validus Group Pty Ltd 100 100 Valley Investments Pty Ltd + 100 100 Viking Direct Pty Limited 100 100 W4K.World 4 Kids Pty Ltd 100 100 Waratah Cove Pty Ltd 100 100 Wesfarmers Agribusiness Limited + 100 100 Wesfarmers Bengalla Limited + 100 100 Wesfarmers Bengalla Management Pty Ltd 100 100 Wesfarmers Bunnings Limited + 100 100 Wesfarmers Chemical US Holdings Corp z 100 100 Wesfarmers Chemicals, Energy & Fertilisers Limited + 100 100 Wesfarmers Coal Resources Pty Ltd + 100 100 Wesfarmers Curragh Pty Ltd 100 100 Wesfarmers Emerging Ventures Pty Ltd 100 100 Wesfarmers Energy (Gas Sales) Limited + 100 100 Wesfarmers Energy (Industrial Gas) Pty Ltd 100 100 Wesfarmers Fertilizers Pty Ltd + 100 100 Wesfarmers Finance Holding Company Pty Ltd + 100 100 Wesfarmers Finance Pty Ltd + 100 100 Wesfarmers Gas Limited + 100 100 Wesfarmers Holdings Pty Ltd 100 100 Wesfarmers Industrial & Safety Holdings NZ Limited # n 100 100 Wesfarmers Industrial & Safety NZ Limited # n 100 100 Wesfarmers Industrial and Safety Pty Ltd + 100 100 Wesfarmers Insurance Investments Pty Ltd + 100 100 Wesfarmers Investments Pty Ltd 100 100 Wesfarmers Kleenheat Gas Pty Ltd + 100 100 Wesfarmers LNG Pty Ltd + 100 100 Wesfarmers Loyalty Management Pty Ltd + 100 100 Wesfarmers LPG Pty Ltd + 100 100 Wesfarmers Oil & Gas Pty Ltd 100 100 Wesfarmers Private Equity Pty Ltd 100 100 Wesfarmers Provident Fund Pty Ltd 100 100 Wesfarmers Railroad Holdings Pty Ltd 100 100 Wesfarmers Resources Limited + 100 100 Wesfarmers Retail Holdings Pty Ltd + 100 100 Wesfarmers Retail Pty Ltd + 100 100 Wesfarmers Risk Management (Singapore) Pte Ltd z 100 100 Wesfarmers Risk Management Limited # t 100 100 Wesfarmers Securities Management Pty Ltd 100 100 Wesfarmers Sugar Company Pty Ltd 100 100 Wesfarmers Superannuation Pty Ltd 100 100 Wesfarmers Transport Indonesia Pty Ltd 100 100 Wesfarmers Transport Limited + 100 100 Weskem Pty Ltd 100 100 Westralian Farmers Superphosphates Limited + 100 100 Wesfarmers 2017 Annual Report 131 F in a n c ia l s ta te m e n ts C a p ita l G ro u p s tru c tu re U n re c o g n is e d ite m s O th e r K e y n u m b e rs S e g m e n t in fo rm a tio n A b o u t th is re p o rt R is k Notes to the financial statements: Group structure For the year ended 30 June 2017 Entity acquired/incorporated during the year. @ Entity dissolved/deregistered during the year. ~ Audited by firms of Ernst & Young International. # Audited by other firms of accountants. < An ASIC-approved Deed of Cross Guarantee has been entered into by Wesfarmers Limited and these entities. + Refer note 23 for further details. All subsidiaries are incorporated in Australia unless identified with one of the following symbols: Bangladesh x Bermuda t Botswana y Cayman Islands s China u Hong Kong t India l Indonesia m Republic of Ireland p New Zealand n Portugal v Singapore z United Arab Emirates  United Kingdom p United States of America z All entities utilise the functional currency of the country of incorporation with the exception of Wesfarmers Risk Management Limited, which utilises the Australian dollar and KAS International Trading (Shanghai) Company Limited, PT Blackwoods Indonesia and Wesfarmers Oil & Gas Pty Ltd, which utilise the US dollar. 19. Subsidiaries (continued) Entity 2017 2016 % % WEV Capital Investments Pty Ltd 100 100 WFCL Investments Pty Ltd 100 100 WFPL Funding Co Pty Ltd + 100 100 WFPL No 2 Pty Ltd 100 100 WFPL Security SPV Pty Ltd 100 100 WFPL SPV Pty Ltd 100 100 WIS International Pty Ltd 100 100 WIS Solutions Pty Ltd 100 100 WIS Supply Chain Management (Shanghai) Co Ltd u 100 100 WPP Holdings Pty Ltd 100 100 WWG Middle East Apparel Trading LLC  49 49 XCC (Retail) Pty Ltd 100 100 Yakka Pty Limited 100 100 BACK Wesfarmers 2017 Annual Report132 Financial statements Notes to the financial statements: Unrecognised items For the year ended 30 June 2017 20. Commitments and contingencies Consolidated 2017 2016 $m $m Operating lease commitments 2,410 2,456 7,986 8,097 9,158 9,519 19,554 20,072 18 21 37 46 7 6 62 73 266 199 2 2 268 201 63 112 59 114 148 167 270 393 946 983 Group as lessee (i) Within one year Greater than one year but not more than five years More than five years Group as lessor (ii) Within one year Greater than one year but not more than five years More than five years Capital commitments (iii) Within one year Arising from agreements to invest in Gresham Private Equity Funds Other expenditure commitments (iv) Within one year Greater than one year but not more than five years More than five years Contingencies (v) Trading guarantees At 30 June 2017, the Group did not have any commitments relating to its joint arrangements. i. The Group has entered into commercial leases on office, retail and distribution properties, motor vehicles and office equipment. The lease terms and implicit interest rates vary significantly. For the lease of buildings, the lease terms range from one year to 25 years and have various renewal or purchase options, escalation clauses, termination rights and residual liability clauses. Operating lease commitments refer to future undiscounted minimum rentals payable under non- cancellable operating leases not included within this financial report. Operating lease payments are recognised as an expense in the income statement on a straight-line basis over the lease term. Operating lease incentives are recognised as a liability when received and released to earnings on a straight-line basis over the lease term. Fixed rate increases to lease payments, excluding contingent or index-based rental increases, such as Consumer Price Index, turnover rental and other similar increases, are recognised on a straight-line basis over the lease term. ii. Contracted non-cancellable future minimum lease payments expected to be received in relation to non-cancellable sub-leases are not included in this financial report. iii. Commitments arising from contracts for capital expenditure contracted for at balance date are not included in this financial report. iv. Contracted other expenditure commitments are not included in this financial report. v. Contingent liabilities at balance date are not included in this financial report. 2017 2016Within one year One to five years Greater than five years 0 2,000 4,000 6,000 8,000 10,000 Group operating lease commitments as lessee ($m) Guarantees The Group has issued a number of bank guarantees to third parties for various operational and legal purposes. It is not expected that these guarantees will be called on. On acquisition of the Coles group, Wesfarmers assumed responsibility for the guarantees entered into by the Coles group relating to the sale of its Myer business in June 2006, under which Coles group had guaranteed the performance of certain lease agreements held by Myer Ltd. The guarantees amount to $2 million (2016: $4 million). The fair value of these guarantees is not considered to be material and has not been recognised in this financial report. Other Certain companies within the Group are party to various legal actions that have arisen in the normal course of business. It is expected that any liabilities arising from such legal action would not have a material effect on the Group’s financial performance. 21. Events after the reporting period Dividends A fully-franked final ordinary dividend of 120 cents per share resulting in a dividend of $1,361 million was declared for a payment date of 28 September 2017. The dividend has not been provided for in the 30 June 2017 full-year financial statements. Kmart brand name acquisition In August 2017, Kmart acquired the Kmart brand name in Australia and New Zealand, which was previously used by the business under a long-term licence agreement, for $100 million. The transaction is not expected to have a material impact on Kmart’s earnings. Key judgements: leases The Group classifies leases between finance and operating depending on whether the Group holds substantially all of the risks and rewards incidental to ownership or not. In making this assessment, the Group primarily considers the asset ownership at the end of the lease term, any purchase options, the lease term in relation to the asset’s life, the present value of future lease payments in relation to the asset’s fair value and the nature of the asset. The reported lease commitments of the Group excludes rent that was considered contingent at lease inception. The effect of this exclusion on the reported lease commitments is not material. Wesfarmers 2017 Annual Report 133 F in a n c ia l s ta te m e n ts C a p ita l G ro u p s tru c tu re U n re c o g n is e d ite m s O th e r K e y n u m b e rs S e g m e n t in fo rm a tio n A b o u t th is re p o rt R is k Notes to the financial statements: Other For the year ended 30 June 2017 PARENT 2017 2016 $m $m 8,681 9,255 22,639 23,002 31,320 32,257 2,039 1,718 4,017 5,871 6,056 7,589 25,264 24,668 22,239 21,908 - (2) 2,482 6 314 2,549 150 150 37 19 42 38 25,264 24,668 2,474 2,330 2,458 2,328 860 866 Assets Current assets Non-current assets Total assets Liabilities Current liabilities Non-current liabilities Total liabilities Net assets Equity Equity attributable to equity holders of the parent Issued capital Employee reserved shares Retained earnings Dividends reserve Restructure tax reserve Hedging reserve Share-based payments reserve Total equity Profit attributable to members of the parent Total comprehensive income for the year, net of tax, attributable to members of the parent Contingencies Contingent liabilities at balance date, not included in this financial report, were as follows: Trading guarantees Wesfarmers is party to various legal actions that have arisen in the normal course of business. It is expected that any liabilities arising from such legal action would not have a material adverse effect on the Group’s financial report. Dividends reserve The dividends reserve was created by the parent entity for the purposes of segregating profits from which dividends to shareholders can be paid. Guarantees Wesfarmers Limited and certain Australian controlled entities are parties to a Deed of Cross Guarantee (the Deed) as disclosed in note 23. Parent entity financial information The financial information for the parent entity has been prepared on the same basis as the consolidated financial statements, except as set out below. Investments in subsidiaries, associates and joint venture entities Investments in subsidiaries, associates and joint venture entities are accounted for at cost in the financial statements of the parent. Dividends received from associates are recognised in the parent entity’s profit or loss when its right to receive the dividend is established. The subsidiaries identified with a ‘+’ in note 19 are parties to a deed of cross guarantee under which each company guarantees the debts of the others. By entering into the Deed, the wholly owned entities have been relieved from the requirement to prepare a financial report and directors’ report under ASIC Corporations (Wholly-owned Companies) Instrument 2016/785. These subsidiaries and Wesfarmers Limited together referred to as the ‘Closed Group’, either originally entered into the Deed on 27 June 2008 or have subsequently joined the Deed by way of an Assumption Deed. The effect of the Deed is that each party to it has guaranteed to pay any deficiency in the event of the winding up of any of the entities in the Closed Group. No entities joined the Closed Group by way of an Assumption Deed throughout the period. The entities leaving the Closed Group by way of a Revocation Deed are: – Coles Group Asia Pty Ltd, on 13 June 2017 – Protector Alsafe Pty Ltd, on 13 June 2017 – Wesfarmers Curragh Pty Ltd, on 31 January 2017 No entities left the Closed Group by way of a disposal throughout the period. The consolidated income statement and retained earnings of the entities that are members of the Closed Group is as follows: Consolidated income statement and retained earnings DEED DEED 2017 2016 $m $m 4,030 1,329 308 - (1,227) (617) 3,111 712 4,049 4,154 1 (3) (1,136) 1,458 6,025 6,321 (2,235) (2,272) 3,790 4,049 Profit from continuing operations before income tax Profit from discontinued operations before income tax Income tax expense Net profit for the year Retained earnings at beginning of year Remeasurement gain on defined benefit plan, net of tax Adjustment for companies transferred into/out of the Closed Group Total available for appropriation Dividends provided for or paid Retained earnings at end of year Consolidated statement of comprehensive income DEED DEED 2017 2016 $m $m 3,111 712 48 (3) (143) (46) 191 (105) - 8 (17) 46 1 (3) 80 (103) 2,928 609 263 - 3,191 609 Profit for the year Other comprehensive income Items that may be reclassified to profit or loss: Foreign currency translation reserve Exchange differences on translation of foreign operations Cash flow hedge reserve Unrealised losses on cash flow hedges Realised losses/(gains) transferred to non-financial assets/net profit Share of associates and joint venture reserves Tax effect Items that will not be reclassified to profit or loss: Retained earnings Remeasurment loss on defined benefit plan Other comprehensive income/(loss) for the year, net of tax Total comprehensive income for the year, net of tax Continuing operations Discontinued operations 23. Deed of Cross Guarantee22. Parent disclosures BACK Wesfarmers 2017 Annual Report134 Financial statements Notes to the financial statements: Other For the year ended 30 June 2017 The consolidated balance sheet of the entities that are members of the Closed Group is as follows: Consolidated balance sheet DEED DEED 2017 2016 $m $m 1,788 510 1,266 1,457 - 835 5,536 5,407 247 38 221 264 9,058 8,511 548 204 4,579 4,312 262 188 771 1,056 1,556 2,150 6,374 6,913 13,725 13,770 4,539 4,553 246 565 27 28 32,627 33,739 41,685 42,250 5,850 5,743 1,179 439 240 13 1,649 1,768 154 157 306 303 9,378 8,423 1,307 951 3,649 5,402 1,125 1,356 24 81 82 51 6,187 7,841 15,565 16,264 26,120 25,986 22,268 21,937 (26) (28) 3,790 4,049 88 28 26,120 25,986 Assets Current assets Cash and cash equivalents Receivables - Trade and other Receivables - Finance advances and loans Inventories Derivatives Other Total current assets Non-current assets Receivables Investment in controlled entities Investments in associates and joint ventures Deferred tax assets Property Plant and equipment Goodwill Intangible assets Derivatives Other Total non-current assets Total assets Liabilities Current liabilities Trade and other payables Interest-bearing loans and borrowings Income tax payable Provisions Derivatives Other Total current liabilities Non-current liabilities Payables Interest-bearing loans and borrowings Provisions Derivatives Other Total non-current liabilities Total liabilities Net assets Equity Issued capital Reserved shares Retained earnings Reserves Total equity Fees of the auditors of the company for: CONSOLIDATED 2017 2016 $’000 $’000 5,723 5,780 702 577 1,272 2,215 218 112 7,915 8,684 1,088 1,096 1,219 882 2,307 1,978 10,222 10,662 Audit services Audit and review of financial reports Ernst & Young (Australia) Ernst & Young (Overseas network firms) Assurance-related services Ernst & Young (Australian & overseas network firms) Other audit firms Non-audit services Ernst & Young (Australian & overseas network firms): - tax compliance - other Total paid to auditors The total non-audit services fees of $2,307 thousand represents 23.1 per cent of the total fees paid or payable to Ernst & Young and related practices for the year ended 30 June 2017. The total non-audit services fees and assurance-related services fees was $3,579 thousand representing 35.8 per cent of the total fees paid or payable to Ernst & Young and related practices for the year ended 30 June 2017. 25. Related party transactions CONSOLIDATED 2017 2016 $’000 $’000 Associates Management fees received 12,129 11,881 Operating lease rent paid 141,668 141,098 Financial advisory fees paid 2,356 1,699 Amounts receivable from associates 14,549 14,030 Reimbursement for lease upgrades 879 - Amounts owing to associates 17 23 Other related party transactions 509 475 Joint arrangements Management fees received 318 314 Operating lease rent paid 57,598 74,788 Amounts receivable from joint venture 4,981 5,097 Other related party transactions 759 298 Management fees have been paid by associated entity, BWP Trust, to the Group on normal commercial terms and conditions for staff and other services provided to associates. Rent for retail stores and warehouses has been paid by the Group to an associated entity, BWP Trust, and to the ISPT and BPI No. 1 Pty Ltd joint arrangements. During the year, ISPT paid the Group $186,100 thousand (2016: nil from ISPT and $9,200 thousand from BWP Trust) for the acquisition and development of rental properties. Gains and losses were made on disposal, a portion of which was eliminated in the consolidated accounts under equity accounting. Other related party transactions include sales to associates and joint arrangements on normal commercial terms and conditions. 23. Deed of Cross Guarantee (continued) 24. Auditors’ remuneration Wesfarmers 2017 Annual Report 135 F in a n c ia l s ta te m e n ts C a p ita l G ro u p s tru c tu re U n re c o g n is e d ite m s O th e r K e y n u m b e rs S e g m e n t in fo rm a tio n A b o u t th is re p o rt R is k Notes to the financial statements: Other For the year ended 30 June 2017 (a) New and amended accounting standards and interpretations adopted from 1 July 2016 All new and amended Australian Accounting Standards and Interpretations mandatory as at 1 July 2016 to the Group have been adopted, including: 26. Other accounting policies Reference Description The effects of the following Standards were not material: AASB 2014-3 Amendments to Australian Accounting Standards – Accounting for Acquisitions of Interests in Joint Operations This makes amendments to AASB 11 Joint Arrangements to provide guidance on the accounting for acquisitions of interests in joint operations in which the activity constitutes a business. AASB 2014-4 Clarification of Acceptable Methods of Depreciation and Amortisation The IASB has clarified that the use of revenue-based methods to calculate the depreciation of an asset is not appropriate because revenue generated by an activity that includes the use of an asset generally reflects factors other than the consumption of the economic benefits embodied in the asset. The amendment also clarified that revenue is generally presumed to be an inappropriate basis for measuring the consumption of an intangible asset. AASB 2015-1 Amendments to Australian Accounting Standards – Annual Improvements to Australian Accounting Standards 2012–2014 Cycle The amendment makes changes to a number of accounting policies including the methods of disposal in AASB 5 Non-current Assets Held for Sale and Discontinued Operations, disclosure requirements in AASB 7 Financial Instruments: Disclosures and AASB 134 Interim Financial Reporting and clarification of discount rates utilised in AASB 119 Employee Benefits. AASB 2015-2 Amendments to Australian Accounting Standards – Disclosure Initiative: Amendments to AASB 101 The Standard makes amendments to AASB 101 Presentation of Financial Statements arising from the IASB’s Disclosure Initiative project. (b) New and amended standards and interpretations issued but not yet effective The following standards, amendments to standards and interpretations are relevant to current operations. They are available for early adoption but have not been applied by the Group in this financial report. Reference Description Application of Standard Application by Group The effects of the following Standards are not expected to be material: Amendments to AASB 9 Financial Instruments (December 2014) and AASB 2014-7 Amendments to Australian Accounting Standards arising from AASB 9 (December 2014) This Standard makes amendments to a number of Australian Accounting Standards as a result of AASB 9 Financial Instruments (December 2014). The final version of AASB 9 introduces a new expected-loss impairment model that will require more timely recognition of expected credit losses. Specifically, the new Standard requires entities to account for expected credit losses from when financial instruments are first recognised and to recognise full lifetime expected losses on a more timely basis. 1 January 2018 1 July 2018 AASB 2014-10 Amendments to Australian Accounting Standards – Sale or Contribution of Assets between an Investor and its Associate or Joint Venture The amendments require: – a full gain or loss to be recognised when a transaction involves a business (whether it is housed in a subsidiary or not); and – a partial gain or loss to be recognised when a transaction involves assets that do not constitute a business, even if these assets are housed in a subsidiary. 1 January 2018 1 July 2018 AASB 2016-1 Amendments to Australian Accounting Standards – Recognition of Deferred Tax Assets for Unrealised Losses This Standard amends AASB 112 Income Taxes (July 2004) and AASB 112 Income Taxes (August 2015) to clarify the requirements on recognition of deferred tax assets for unrealised losses on debt instruments measured at fair value. 1 January 2017 1 July 2017 AASB 2016-2 Amendments to Australian Accounting Standards – Disclosure Initiative: Amendments to AASB 107 This Standard amends AASB 107 Statement of Cash Flows (August 2015) to require entities preparing financial statements in accordance with Tier 1 reporting requirements to provide disclosures that enable users of financial statements to evaluate changes in liabilities arising from financing activities, including both changes arising from cash flows and non-cash changes. 1 January 2017 1 July 2017 25. Related party transactions (continued) J P Graham, a director of Wesfarmers, has a majority shareholding interest in a company which jointly owns Gresham Partners Group Limited on an equal basis with a wholly owned subsidiary of Wesfarmers. Partly owned subsidiaries of Gresham Partners Group Limited have provided office accommodation and advisory services to Wesfarmers and were paid fees of $2,356,069 in 2017 (2016: $1,698,838). P M Bassat, a director of Wesfarmers, is a director of AFL Sportsready Limited which has provided training services to Wesfarmers Group companies on an arm’s length and normal commercial terms basis and was paid $449,350 in 2017. BACK Wesfarmers 2017 Annual Report136 Financial statements Notes to the financial statements: Other For the year ended 30 June 2017 26. Other accounting policies (continued) Reference Description Application of Standard Application by Group AASB 2016-5 Amendments to Australian Accounting Standards - Classification and Measurement of Share-based Payment Transactions This Standard amends AASB 2 Share-based Payment to clarify accounting for the effects of vesting and non-vesting conditions on the measurement of cash-settled share-based payments, transactions with a net settlement feature for withholding tax obligations and a modification to the terms and conditions that changes the classification of the transaction from cash-settled to equity-settled share-based payments. 1 January 2018 1 July 2018 AASB 2017-2 Amendments to Australian Accounting Standards – Further Annual Improvements 2014-2016 Cycle This Standard clarifies the scope of AASB 12 Disclosure of Interests in Other Entities by specifying that the disclosure requirements apply to an entity’s interests in other entities that are classified as held for sale or discontinued operations in their capacity as owners or discontinued operations in accordance with AASB 5 Non-current Assets Held for Sale and Discontinued Operations. 1 January 2017 1 July 2017 AASB Interpretation 22 – Foreign Currency Transactions and Advance Consideration This interpretation clarifies the determination of the spot exchange rate on initial recognition of related assets, expenses or income on the derecognition of a non-monetary asset or non- monetary liability arising from the payment or receipt of advance considerations. 1 January 2018 1 July 2018 IFRIC 23 Uncertainty over Income Tax Treatments This interpretation clarifies the application of the recognition and measurement criteria in IAS Income Taxes when there is uncertainty over income tax treatments. The interpretation addresses whether an entity considers uncertain tax treatments separately and how an entity determines taxable profit or loss, tax bases, unused tax losses or tax credits and tax rates. 1 January 2019 1 July 2019 AASB 15 Revenue from Contracts with Customers (AASB 15) This Standard establishes new principles for reporting information to users of financial statements about the nature, amount, timing and uncertainty of revenue and cash flows arising from an entity’s contracts with customers and supersedes a number of current Revenue Standards. The core principle of the Standard is that an entity recognises revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. Revenue recognition streams are continually evolving across the Group and management will continue to assess the impact of this Standard accordingly. As at 30 June 2017, the Group does not expect the application of AASB 15 to have a material effect on the consolidated net income, balance sheet or cash flows of the Group. The Group is planning to adopt this standard on 1 July 2018 using the modified transition approach. 1 January 2018 1 July 2018 The effect of the following Standard is expected to be material: AASB 16 Leases (AASB 16) This Standard introduces a single lessee accounting model and requires a lessee to recognise assets and liabilities for all leases with a term of more than 12 months, unless underlying asset is of low value. A lessee is required to recognise a right-of-use asset representing its right to use the underlying leased asset and a lease liability representing its obligations to make lease payments. The Group is currently evaluating the implications of AASB 16. Information on the undiscounted amount of the Group’s operating lease commitments at 30 June 2017 under AASB 117, the current leases standard, is disclosed in note 20. Under AASB 16, the present value of these commitments would be shown as a liability on the balance sheet together with an asset representing the right-of-use. The ongoing income statement classification of what is currently predominantly presented as occupancy-related expenses will be split between amortisation and interest expense. 1 January 2019 1 July 2019 (c) Tax consolidation Wesfarmers and its 100 per cent-owned Australian resident subsidiaries have formed a tax consolidated group with effect from 1 July 2002. Wesfarmers is the head entity of the tax consolidated group. Members of the group have entered into a tax sharing agreement in order to allocate income tax expense to the wholly owned subsidiaries on a stand-alone basis. The tax sharing arrangement provides for the allocation of income tax liabilities between the entities should the head entity default on its tax payment obligations. The possibility of such a default is considered remote at the date of this report. Members of the tax consolidated group have entered into a tax funding agreement. The group has applied the group allocation approach in determining the appropriate amount of current taxes to allocate to members of the tax consolidated group. The tax funding agreement provides for each member of the tax consolidated group to pay a tax equivalent amount to or from the parent in accordance with their notional current tax liability or current tax asset. Such amounts are reflected in amounts receivable from or payable to the parent company in their accounts and are settled as soon as practicable after lodgement of the consolidated return and payment of the tax liability. Wesfarmers 2017 Annual Report 137 F in a n c ia l s ta te m e n ts C a p ita l G ro u p s tru c tu re U n re c o g n is e d ite m s O th e r K e y n u m b e rs S e g m e n t in fo rm a tio n A b o u t th is re p o rt R is k Notes to the financial statements: Other For the year ended 30 June 2017 The Group provides benefits to employees (including executive directors) of the Group through share-based incentives. Employees are paid for their services or incentivised for their performance in part through shares or rights over shares. The expense arising from these transactions is shown in note 2. The total number of ordinary Wesfarmers shares acquired on market during the financial year to satisfy employee incentive schemes was 482,356 (2016: 602,433) at an average price of $42.84 (2016: $40.54) per share. Recognition and measurement Share-based payments can either be equity-settled or cash- settled. If the employee is provided a choice of settlement options then the scheme is considered to be cash-settled. Equity-settled transactions The cost of equity-settled transactions with employees is measured using their fair value at the date at which they are granted. In determining the fair value, no account is taken of any performance conditions other than those linked to the price of the shares of Wesfarmers Limited (market conditions). The cost of equity-settled transactions is recognised, together with a corresponding increase in equity, over the period in which any performance conditions (excluding market conditions) are met, ending on the date on which the employees become fully entitled to the award (vesting date). The cumulative expense recognised for equity-settled transactions at each reporting date until vesting date reflects the extent to which the vesting period has expired and the proportion of the awards that are expected to ultimately vest. No expense is recognised for awards that do not ultimately vest due to a performance condition not being met. The expense is recognised in full if the awards do not vest (or are not exercised) due to a market condition not being met. Where the terms of an equity-settled award are modified, as a minimum, an expense is recognised as if the terms had not been modified. In addition, an expense is recognised for any increase in the value of the transaction as a result of the modification, as measured at the date of modification. Where an equity-settled award is cancelled, it is treated as if it had vested on the date of cancellation, and any expense not yet recognised for the award is recognised immediately. However, if a new award is substituted for the cancelled award, and designated as a replacement award on the date that it is granted, the cancelled and new award are treated as if they were a modification of the original award, as described above. Cash-settled transactions The ultimate expense recognised in relation to cash-settled transactions will be equal to the actual cash paid to the employees, which will be the fair value at settlement date. The expected cash payment is estimated at each reporting date and a liability recognised to the extent that the vesting period has expired and in proportion to the amount of the awards that are expected to ultimately vest. Equity-settled awards outstanding WESP WLTIP KEEPP WESAP (options) (shares) (rights) (shares) (shares) (rights) Outstanding at the beginning of the year 793,443 552,236 1,975,983 - 7,160,218 - Granted during the year - 90,087 124,538 256,472 3,062,317 172,621 Exercised during the year (342,961) (144,770) (42,064) - (2,194,780) - Lapsed during the year - - (560,798) - (281,613) - Other adjustments - - - - (20,274) - Outstanding at the end of the year 450,482 497,553 1,497,659 256,472 7,725,868 172,621 Exercisable at the end of the year 1,091,268 1,569,304 - - 3,666,546 - Additional information on award schemes Wesfarmers Employee Share Plan (WESP) The last issue under the WESP was made in December 2004. Under the plan, employees were invited to apply for ordinary shares in the company, funded by an interest-free loan from the Group. The employees’ obligation for repayment of the loans is limited to the dividends declared and capital returns by the company and, in the event the employee ceases employment, the market price achieved on the sale of the shares. The plan is accounted for as an in-substance equity-settled award, with the contractual life of each option equivalent to the estimated loan life and no maximum term. Wesfarmers Long-Term Incentive Plan (WLTIP) Under the 2016 WLTIP, the Group Managing Director and Finance Director were invited to receive performance rights in the company. The performance hurdle for these performance rights is Wesfarmers’ TSR relative to the TSR of the ASX 50 Index. The fair value of the performance rights are determined using an option pricing model with the following inputs: Grant date 10 Nov 2016 Grant date share price ($) 41.17 Volatility (per cent) 17.21 Dividend yield (per cent) 4.49 Risk-free rate (per cent) 1.85 Fair value ($) 22.05 The Board approved Mr Goyder and Mr Bowen’s unvested WLTIP rights continuing to be restricted in the plan after they leave the Group, waiving the four-year service period required for a WLTIP grant as at the date they cease employment. Key Executive Equity Performance Plan (KEEPP) KEEPP was introduced in September 2016 and under the plan, eligible executives were invited to receive performance shares in the company. There are two performance hurdles divisional EBIT and RoC (80 per cent weighting) and Wesfarmers’ TSR relative to the TSR of the ASX 50 Index (20 per cent weighting). The fair value of the performance shares with a TSR hurdle is determined using an option pricing model with the following inputs: Grant date 29 Sep 2016 Grant date share price ($) 44.15 Volatility (per cent) 16.85 Risk-free rate (per cent) 1.61 Fair value ($) 29.94 27. Share-based payments Weighted average share price in 2017 was $42.33 (2016: $40.56). The following table includes shares subject to trading restrictions. BACK Wesfarmers 2017 Annual Report138 Financial statements Notes to the financial statements: Other For the year ended 30 June 2017 Key Executive Equity Performance Plan (KEEPP) (continued) Eligible executives also received a restricted shares award under the KEEPP. However, if an executive resigns or is terminated for cause within a year, the Board may decide to cancel that share allocation. The fair value of the share at grant date is expensed over the one-year forfeiture period. The grant date share price is the fair value of both the restricted share and the performance share with EBIT and RoC hurdles. Further details of the WLTIP and KEEPP and of the terms of the grants during the year are provided in the remuneration report. Wesfarmers Employee Share Acquisition Plan (WESAP) The WESAP was introduced in October 2009. Under the plan, all eligible employees are invited to acquire fully-paid ordinary shares in the company. The shares are either acquired under a salary sacrifice arrangement or are granted as an award, subject to the Group achieving a net profit after tax performance hurdle. Eligibility for an award of shares is dependent upon an in-service period with a participating division and being a permanent employee. The plan qualifies as a non-discriminatory employee share scheme complying with the requirements of Division 83A of the Income Tax Assessment Act 1997 (as amended) for Australian resident employees. The fair value of the equity instruments granted (2017 average: $42.52 (2016 average: $40.29)) is determined with reference to the share price on the date of grant. Wesfarmers Employee Share Acquisition Plan (WESAP) - Executives In November 2016, WESAP was introduced to eligible executives. Under this offer, eligible executives were invited to receive an award of Wesfarmers’ fully-paid ordinary shares or an equivalent cash payment at the end of a three-year performance period. The Board has discretion to settle the award with shares or cash. If an executive resigns or is terminated for cause within three years, the Board may decide whether to cancel the share allocation or cash payment.The fair value of the equity instruments granted (2017 average: $42.52) is determined with reference to the share price on the date of grant. 28. Director and executive disclosures Compensation of key management personnel The remuneration disclosures are provided in sections one to six of the remuneration report on pages 73 to 92 of this annual report designated as audited and forming part of the directors’ report. CONSOLIDATED 2017 2016 $’000 $’000 Short-term benefits 23,674 22,129 Long-term benefits 203 221 Post-employment benefits 1,271 943 Share-based payments 16,828 4,769 41,976 28,062 Other transactions with key management personnel Refer to note 25 in relation to transactions with Gresham Partners Group Limited and AFL Sportsready Limited in which J P Graham and P M Bassat are directors respectively. From time to time, directors of Wesfarmers or its controlled entities, or their director-related entities, may purchase goods or services from the Group. These purchases are on the same terms and conditions as those entered into by other consolidated entity employees or customers and are trivial or domestic in nature. In February 2016, the Board of Taxation provided its final report to the Australian Government on a voluntary tax transparency code (TTC). The report contained recommendations for additional disclosure of tax information by companies split between Part A and Part B disclosures. The Part B disclosures are publishable in a separate Taxes Paid report. The Part A disclosures are: – a reconciliation of accounting profit to tax expense and to income tax paid or income tax payable; – the identification of material temporary and non-temporary differences; and – the effective company tax rates for Australian and global operations. A reconciliation of Wesfarmers’ accounting profit to its tax expense and material temporary and non-temporary differences are disclosed in note 3. A reconciliation of accounting profit to income tax paid or payable and the effective company tax rates for the Group’s Australian and global operations are tabled below. CONSOLIDATED 2017 2016 $m $m Tax paid or payable reconciliation Accounting profit 4,138 1,038 Income tax at the statutory tax rate of 30% 1,241 311 Non-deductible items 12 362 Temporary differences: deferred tax 37 342 Associates and other (25) (31) Current year tax paid or payable 1,265 984 Effective tax rate Effective tax rate for Australian operations 29.9% 67.8% Effective tax rate for Australian operations (excluding Target goodwill impairment1) 29.9% 28.9% Effective tax rate for global operations 30.6% 60.8% Effective tax rate for global operations (excluding Target goodwill impairment1) 30.6% 28.1% 1 The $1,208 million impairment of Target’s goodwill recognised during FY2016 was a non-deductible item. 27. Share-based payments (continued) 29. Tax transparency disclosures Wesfarmers 2017 Annual Report 139 S u s ta in a b ility S ig n e d re p o rts S h a re h o ld e r a n d A S X in fo rm a tio n F in a n c ia l s ta te m e n ts D ire c to rs ’ re p o rt G o ve rn a n c e O p e ra tin g a n d fin a n c ia l re v ie w O ve rv ie w Directors’ declaration Wesfarmers Limited and its controlled entities In accordance with a resolution of the directors of Wesfarmers Limited, we state that: 1. In the opinion of the directors: 1.1 the fi nancial statements, notes and the additional disclosures included in the directors’ report designated as audited, of the consolidated entity for the full-year ended 30 June 2017 are in accordance with the Corporations Act 2001, including: (a) giving a true and fair view of the consolidated entity’s fi nancial position as at 30 June 2017 and of its performance for the year ended on that date; and (b) complying with Australian Accounting Standards (including the Australian Accounting Interpretations) and the Corporations Regulations 2001; and 1.2 the fi nancial statements and notes comply with International Financial Reporting Standards as disclosed in the notes to the fi nancial statements on page 99 of the 2017 Annual Report; and 1.3 there are reasonable grounds to believe that the company will be able to pay its debts as and when they become due and payable. 2. This declaration has been made after receiving the declaration required to be made to the directors in accordance with section 295A of the Corporations Act 2001 for the fi nancial year ended 30 June 2017. 3. In the opinion of the directors, as at the date of this declaration, there are reasonable grounds to believe that the members of the Closed Group comprising the company and the controlled entities marked ‘+’ as identifi ed in note 19 will be able to meet any obligations or liabilities to which they are or may become subject to by virtue of the Deed of Cross Guarantee referred to in note 23. On behalf of the Board: M A Chaney AO R J B Goyder AO Chairman Managing Director Perth 19 September 2017 BACK Wesfarmers 2017 Annual Report140 Signed reports Independent auditor's report to the Members of Wesfarmers Limited A member fi rm of Ernst & Young Global Limited Liability limited by a scheme approved under Professional Standards Legislation Report on the audit of the fi nancial report Opinion We have audited the fi nancial report of Wesfarmers Limited (the Company) and its subsidiaries (collectively the Group), which comprises the consolidated balance sheet as at 30 June 2017, the consolidated income statement, the consolidated statement of comprehensive income, the consolidated statement of changes in equity and the consolidated cash fl ow statement for the year then ended, notes to the fi nancial statements and the directors' declaration. In our opinion, the accompanying fi nancial report of the Group is in accordance with the Corporations Act 2001, including: a) giving a true and fair view of the consolidated fi nancial position of the Group as at 30 June 2017 and of its consolidated fi nancial performance for the year ended on that date; and b) complying with Australian Accounting Standards and the Corporations Regulations 2001. Basis for opinion We conducted our audit in accordance with Australian Auditing Standards. Our responsibilities under those standards are further described in the Auditor’s Responsibilities for the Audit of the Financial Report section of our report. We are independent of the Group in accordance with the auditor independence requirements of the Corporations Act 2001 and the ethical requirements of the Accounting Professional and Ethical Standards Board’s APES 110 Code of Ethics for Professional Accountants (the Code) that are relevant to our audit of the fi nancial report in Australia. We have also fulfi lled our other ethical responsibilities in accordance with the Code. We believe that the audit evidence we have obtained is suffi cient and appropriate to provide a basis for our opinion. Key audit matters Key audit matters are those matters that, in our professional judgement, were of most signifi cance in our audit of the fi nancial report of the current year. These matters were addressed in the context of our audit of the fi nancial report as a whole, and in forming our opinion thereon, but we do not provide a separate opinion on these matters. For each matter below, our description of how our audit addressed the matter is provided in that context. We have fulfi lled the responsibilities described in the Auditor’s Responsibilities for the Audit of the Financial Report section of our report, including in relation to these matters. Accordingly, our audit included the performance of procedures designed to respond to our assessment of the risks of material misstatement of the fi nancial report. The results of our audit procedures, including the procedures performed to address the matters below, provide the basis for our audit opinion on the accompanying fi nancial report. A member firm of Ernst & Young Global Limited Liability limited by a scheme approved under Professional Standards Legislation DSL:JT:WESFARMERS:019 Ernst & Young 11 Mounts Bay Road Perth WA 6000 Australia GPO Box M939 Perth WA 6843 Tel: +61 8 9429 2222 Fax: +61 8 9429 2436 ey.com/au Independent auditor's report to the Members of Wesfarmers Limited Report on the audit of the financial report Opinion We have audited the financial report of Wesfarmers Limited (the Company) and its subsidiaries (collectively the Group), which comprises the consolidated balance sheet as at 30 June 2017, the consolidated income statement, the consolidated statement of comprehensive income, the consolidated statement of changes in equity and the consolidated cash flow statement for the year then ended, notes to the financial statements and the directors' declaration. In our opinion, the accompanying financial report of the Group is in accordance with the Corporations Act 2001, including: a) giving a true and fair view of the consolidated financial position of the Group as at 30 June 2017 and of its consolidated financial performance for the year ended on that date; and b) complying with Australian Accounting Standards and the Corporations Regulations 2001. Basis for opinion We conducted our audit in accordance with Australian Auditing Standards. Our responsibilities under those standards are further described in the Auditor’s Responsibilities for the Audit of the Financial Report section of our report. We are independent of the Group in accordance with the auditor independence requirements of the Corporations Act 2001 and the ethical requirements of the Accounting Professional and Ethical Standards Board’s APES 110 Code of Ethics for Professional Accountants (the Code) that are relevant to our audit of the financial report in Australia. We have also fulfilled our other ethical responsibilities in accordance with the Code. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion. Key audit matters Key audit matters are those matters that, in our professional judgment, were of most significance in our audit of the financial report of the current year. These matters were addressed in the context of our audit of the financial report as a whole, and in forming our opinion thereon, but we do not provide a separate opinion on these matters. For each matter below, our description of how our audit addressed the matter is provided in that context. We have fulfilled the responsibilities described in the Auditor’s Responsibilities for the Audit of the Financial Report section of our report, including in relation to these matters. Accordingly, our audit included the performance of procedures designed to respond to our assessment of the risks of material misstatement of the financial report. The results of our audit procedures, including the procedures performed to address the matters below, provide the basis for our audit opinion on the accompanying financial report. Wesfarmers 2017 Annual Report 141 S u s ta in a b ility S ig n e d re p o rts S h a re h o ld e r a n d A S X in fo rm a tio n F in a n c ia l s ta te m e n ts D ire c to rs ’ re p o rt G o ve rn a n c e O p e ra tin g a n d fin a n c ia l re v ie w O ve rv ie w Independent auditor's report to the Members of Wesfarmers Limited 1. Impairment of non-current assets including intangible assets A member fi rm of Ernst & Young Global Limited Liability limited by a scheme approved under Professional Standards Legislation How our audit addressed the key audit matter Our audit procedures included an evaluation of the assumptions and methodologies utilised in the assessments, in particular those relating to the determination of CGUs, forecast cash fl ows, growth rates, discount rates, comparative industry valuation multiples and other market evidence. We involved our valuation specialists to evaluate the appropriateness of key inputs, where relevant to the impairment tests, including: – Discount rates – Terminal growth rates – Market evidence of industry earnings valuation multiples – Long-term infl ation and growth rate assumptions – Commodity price assumptions – Forecast exchange rate assumptions. We also considered the adequacy of the fi nancial report disclosures regarding the impairment testing approach, key assumptions and sensitivities. Why signifi cant The determination of the recoverable amounts of property, plant and equipment, goodwill and other intangible assets requires signifi cant judgement by the Group. As required by Australian Accounting Standards, the Group assesses at the end of each reporting period whether there are any triggers indicating that an asset may be impaired. Goodwill is assessed for impairment at least annually. Impairment assessments are typically complex and judgemental, as they include the modelling of a range of assumptions and estimates that will be impacted by future performance and market conditions. There were no material impairments recognised during the 2017 fi nancial year. Key assumptions, judgements and estimates applied in the Group’s assessment are set out in Note 17 Impairment of non- fi nancial assets (Note 17) of the fi nancial report. Target Note 17 includes a statement that Target’s recoverable value is marginally above its carrying value and is sensitive to changes in the discount rate and the terminal value. Based on the disclosed sensitivity analysis, changes to the key assumptions applied in the impairment test could give rise to an impairment of the carrying value of the Target cash generating unit (CGU). Critical to supporting the recoverability of the Target CGU, is the business’ ability to achieve its planned trading results. Curragh As disclosed in Note 17, Curragh’s recoverable value is sensitive to changes in its discount rate and forecast post-tax cash fl ows over the life of the mine. Any adverse movement in these key assumptions may result in impairment whilst a strengthening of key inputs would result in a reversal of previously recognised impairment. BACK Wesfarmers 2017 Annual Report142 Signed reports Independent auditor's report to the Members of Wesfarmers Limited 2. Supplier rebates A member fi rm of Ernst & Young Global Limited Liability limited by a scheme approved under Professional Standards Legislation How our audit addressed the key audit matter Our audit procedures in respect of commercial income included the following: – We gained an understanding of the nature of each material type of commercial income including assessing the signifi cant agreements in place – We assessed the design and operating effectiveness of relevant controls in place relating to the recognition and measurement of rebate amounts – We performed comparisons of the various rebate arrangements against the prior year and budget, including analysis of aging profi les and where material variances were identifi ed, obtained supporting evidence – We tested a sample of supplier rebates to supporting documentation – We analysed suppliers with signifi cant promotional credits, other rebates and agreed balances to supporting documentation – We inspected a sample of material new contracts entered into, both before and after the balance date and assessed whether the treatment adopted by the Group was appropriate – We inquired of legal counsel as to the existence of other rebate contracts or contracts with unusual terms and conditions – We inquired of business representatives including product category merchandisers, supply chain managers and procurement staff as to the existence of any non-standard agreements or side arrangements. 3. Finalisation of the acquisition accounting of Homebase How our audit addressed the key audit matter Our audit procedures in respect of the fi nalisation of the acquisition accounting included the following: – We assessed the Group’s acquisition accounting methodology including assessing all changes to key judgements and estimates supporting the updated fair value assessment of the assets acquired and liabilities assumed – We assessed whether there had been any changes to the provisional fair values of identifi able assets acquired and liabilities assumed at the date of the acquisition from those disclosed in the 30 June 2016 fi nancial report – We involved our valuations, tax and real estate specialists to assess the recognition and valuation of resulting assets and liabilities. Why signifi cant Supplier rebates, also described in the fi nancial report as commercial income, refers to rebates received by the Group from suppliers associated with its retail operations. We have determined this to be a key audit matter due to the quantum of commercial income recognised during the year and the judgement required to be exercised in relation to a number of factors, including: – The commercial terms of each individual rebate – The appropriate timing of recognition – Consideration of the nature of the rebate and whether the amount should be applied against the carrying value of inventory or recognised in the income statement – The accurate recognition and measurement of rebates in accordance with Australian Accounting Standards and the Group’s related processes and controls. Disclosures relating to the measurement and recognition of commercial income can be found in Note 6 Inventories. Why signifi cant The Group accounted for the acquisition of Hampden Group Limited (Homebase) as a business combination under Australian Accounting Standard – AASB 3 Business Combinations (AASB 3) and determined the acquisition date for accounting purposes to be 29 February 2016. AASB 3 permits a 12 month provisional accounting period, during which the initial acquisition accounting can be revised to refl ect the facts and circumstances that existed at the acquisition date. The 12 month provisional accounting period expired on 28 February 2017, by which time the Group fi nalised the acquisition accounting valuations. We have determined this to be a key audit matter due to the size of the acquisition and the judgement involved in determining the fair value of the assets acquired and liabilities assumed. Disclosures relating to the fi nalisation of the acquisition can be found in the Signifi cant items in the current reporting period section of the fi nancial report. Wesfarmers 2017 Annual Report 143 S u s ta in a b ility S ig n e d re p o rts S h a re h o ld e r a n d A S X in fo rm a tio n F in a n c ia l s ta te m e n ts D ire c to rs ’ re p o rt G o ve rn a n c e O p e ra tin g a n d fin a n c ia l re v ie w O ve rv ie w Independent auditor's report to the Members of Wesfarmers Limited A member fi rm of Ernst & Young Global Limited Liability limited by a scheme approved under Professional Standards Legislation Information other than the fi nancial report and auditor’s report thereon 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 30 June 2017, but does not include the fi nancial report and our auditor’s report thereon. Our opinion on the fi nancial report does not cover the other information and accordingly we do not express any form of assurance conclusion thereon, with the exception of the Remuneration Report and our related assurance option. In connection with our audit of the fi nancial report, our responsibility is to read the other information and, in doing so, consider whether the other information is materially inconsistent with the fi nancial report or our knowledge obtained in the audit or otherwise appears to be materially misstated. If, based on the work we have performed, we conclude that there is a material misstatement of this other information, we are required to report that fact. We have nothing to report in this regard. Responsibilities of the directors for the fi nancial report The directors of the Company are responsible for the preparation of the fi nancial report that gives a true and fair view in accordance with Australian Accounting Standards and the Corporations Act 2001 and for such internal control as the directors determine is necessary to enable the preparation of the fi nancial report that gives a true and fair view and is free from material misstatement, whether due to fraud or error. In preparing the fi nancial report, the directors are responsible for assessing the Group’s ability to continue as a going concern, disclosing, as applicable, matters relating 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 fi nancial report Our objectives are to obtain reasonable assurance about whether the fi nancial report as a whole is free from material misstatement, whether due to fraud or error, and to issue an auditor’s report that includes our opinion. Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with the Australian Auditing Standards will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be expected to infl uence the economic decisions of users taken on the basis of this fi nancial report. As part of an audit in accordance with the Australian Auditing Standards, we exercise professional judgement and maintain professional scepticism throughout the audit. We also: – Identify and assess the risks of material misstatement of the fi nancial report, whether due to fraud or error, design and perform audit procedures responsive to those risks, and obtain audit evidence that is suffi cient 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 the directors. – Conclude on the appropriateness of the directors’ use of the going concern basis of accounting and, based on the audit evidence obtained, whether a material uncertainty exists related to events or conditions that may cast signifi cant 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 fi nancial report or, if such disclosures are inadequate, to modify our opinion. Our conclusions are based on the audit evidence obtained up to the date of our auditor’s report. However, future events or conditions may cause the Group to cease to continue as a going concern. – Evaluate the overall presentation, structure and content of the fi nancial report, including the disclosures, and whether the fi nancial report represents the underlying transactions and events in a manner that achieves fair presentation. – Obtain suffi cient appropriate audit evidence regarding the fi nancial information of the entities or business activities within the Group to express an opinion on the fi nancial report. We are responsible for the direction, supervision and performance of the Group audit. We remain solely responsible for our audit opinion. We communicate with the directors regarding, among other matters, the planned scope and timing of the audit and signifi cant audit fi ndings, including any signifi cant defi ciencies in internal control that we identify during our audit. We also provide the directors with a statement that we have complied with relevant ethical requirements regarding independence, and to communicate with them all relationships and other matters that may reasonably be thought to bear on our independence, and where applicable, related safeguards. From the matters communicated to the directors, we determine those matters that were of most signifi cance in the audit of the fi nancial report 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 benefi ts of such communication. BACK Wesfarmers 2017 Annual Report144 Signed reports Independent auditor's report to the Members of Wesfarmers Limited Report on the audit of the Remuneration Report Opinion on the Remuneration Report We have audited the Remuneration Report included on pages 73 to 92 of the directors' report for the year ended 30 June 2017. In our opinion, the Remuneration Report of Wesfarmers Limited for the year ended 30 June 2017 complies with section 300A of the Corporations Act 2001. Responsibilities The directors of the Company are responsible for the preparation and presentation of the Remuneration Report in accordance with section 300A of the Corporations Act 2001. Our responsibility is to express an opinion on the Remuneration Report, based on our audit conducted in accordance with Australian Auditing Standards. Ernst & Young D S Lewsen Partner Perth 19 September 2017 A member fi rm of Ernst & Young Global Limited Liability limited by a scheme approved under Professional Standards Legislation Wesfarmers 2017 Annual Report 145 S u s ta in a b ility S ig n e d re p o rts S h a re h o ld e r a n d A S X in fo rm a tio n F in a n c ia l s ta te m e n ts D ire c to rs ’ re p o rt G o ve rn a n c e O p e ra tin g a n d fin a n c ia l re v ie w O ve rv ie w Annual statement of coal resources and reserves as at 30 June 2017 Coal resources The table below details the coal resources for Wesfarmers, as at 30 June 2017: 2017 COAL RESOURCES TONNES (MILLIONS) RESOURCES QUALITY (IN SITU) Mine Ownership Benefi cial interest Location of tenements Likely mining method Coal type Measured Indicated Inferred Total Ash (%) CV (MJ/kg) Sulphur (%) VM (%) Curragh Wesfarmers Curragh Pty Ltd 100% equity Bowen Basin, Queensland Open cut Metallurgical and steaming 305 251 140 696 19 28 0.6 19 Bengalla Wesfarmers Bengalla Limited 40% equity Hunter Valley, New South Wales Open cut and underground Metallurgical and steaming 57 49 81 187 20 26 0.6 - Comparative resources as at 30 June 2016: 2016 COAL RESOURCES TONNES (MILLIONS) RESOURCES QUALITY (IN SITU) Mine Ownership Benefi cial interest Location of tenements Likely mining method Coal type Measured Indicated Inferred Total Ash (%) CV (MJ/kg) Sulphur (%) VM (%) Curragh Wesfarmers Curragh Pty Ltd 100% equity Bowen Basin, Queensland Open cut Metallurgical and steaming 323 243 145 711 19 28 0.6 19 Bengalla Wesfarmers Bengalla Limited 40% equity Hunter Valley, New South Wales Open cut and underground Metallurgical and steaming 57 49 81 187 20 26 0.6 - Resource notes: 1. Inclusion/exclusion of reserves a) Curragh’s coal resources are reported as being in addition to coal reserves. b) Bengalla’s coal resources are reported as being in addition to coal reserves. 2. Quality a) Curragh’s in situ resource quality parameters are quoted on an air-dried basis. b) Bengalla’s in situ resource quality parameters are quoted on an air-dried basis. c) Tonnage and grades have been rounded and therefore small diff erences may be present in the totals. Curragh a) Curragh's resources, as stated, are 100 per cent of the site resources, including all resources in the Curragh Project mining leases. – Wesfarmers Curragh Pty Ltd (‘WCPL’) and Stanwell Corporation (‘Stanwell’) share in value generated from certain parts of the Curragh Project (being the Curragh and Curragh North mining areas, but excluding the MDL 162 area) pursuant to the terms of a Coal Supply Agreement between them ('Stanwell CSA'). – Resources are reported above on a project basis before any division of economic value under the Stanwell CSA. It is not possible to express the economic entitlements of Stanwell with respect to the Curragh Project as a simple numerical percentage. The reason such a statement is not possible is that the entitlements of Stanwell pursuant to the Stanwell CSA are variable with, and dependent upon, contingent events which include all of the actual export volumes, prices, and the duration of the Stanwell CSA relative to the timing and mine sequencing of production from the various areas of the Curragh Project. It is not necessary for the Competent Person to analyse the Stanwell CSA and respective entitlements of WCPL and Stanwell thereunder given that resources are stated on a total Curragh Project basis before application of the Stanwell CSA. b) In addition to the requirements of the Stanwell CSA, an estimated 318 million tonnes of the resources reported, while within the Curragh North Mining Lease, require further agreement with Stanwell in order for WCPL to access (‘Stanwell Reserved Area’). c) There is a change to the coal resource at Curragh due to changes in the mined footprint. d) Since 30 June 2016, no other activity has taken place which would constitute a material change to the resources for the Curragh Project. Bengalla a) Bengalla’s resources, as stated, are 100 per cent of the site resources, with Wesfarmers Bengalla Limited’s beneficial interest in the Bengalla unincorporated joint venture being 40 per cent. b) Since 30 June 2016, no other activity has taken place which would constitute a material change to the resources for Bengalla. BACK Wesfarmers 2017 Annual Report146 Shareholder and ASX information Annual statement of coal resources and reserves as at 30 June 2017 Coal reserves The table below details the coal reserves for Wesfarmers, as at 30 June 2017: 2017 COAL RESERVES TONNES (MILLIONS) RESERVES QUALITY (INCLUSIVE OF LOSS AND DILUTION) Mine Ownership Benefi cial interest Location of tenements Likely mining method Coal type Proved Probable Total Ash (%) CV (MJ/kg) Sulphur (%) VM (%) Curragh Wesfarmers Curragh Pty Ltd 100% equity Bowen Basin, Queensland Open cut Metallurgical and steaming 240 12 252 26 26 0.6 17 Bengalla Wesfarmers Bengalla Limited 40% equity Hunter Valley, New South Wales Open cut Steaming 137 106 243 25 22 0.6 - Comparative reserves as at 30 June 2016: 2016 COAL RESERVES TONNES (MILLIONS) RESERVES QUALITY (INCLUSIVE OF LOSS AND DILUTION) Mine Ownership Benefi cial interest Location of tenements Likely mining method Coal type Proved Probable Total Ash (%) CV (MJ/kg) Sulphur (%) VM (%) Curragh Wesfarmers Curragh Pty Ltd 100% equity Bowen Basin, Queensland Open cut Metallurgical and steaming 244 24 268 24 26 0.6 19 Bengalla Wesfarmers Bengalla Limited 40% equity Hunter Valley, New South Wales Open cut Steaming 147 106 253 25 22 0.6 - Reserve notes: 1. Quality and quantity a) Curragh’s reserves quality parameters are quoted on an air-dried basis. b) Bengalla’s reserves quality parameters are quoted on an air-dried basis. c) Reserve qualities and quantities are inclusive of mining loss and out-of-seam dilution. d) All tonnes and grade information has been rounded and therefore small diff erences may be present in the totals. 2. Reserves reported on a 100 per cent project basis Curragh a) Curragh’s reserves, as stated, are 100 per cent of the site reserves, including all reserves in the Curragh Project. – Wesfarmers Curragh Pty Ltd (‘WCPL’) and Stanwell Corporation (‘Stanwell’) share in value generated from certain parts of the Curragh Project (being the Curragh and Curragh North mining areas, but excluding the MDL 162 area) pursuant to the terms of a Coal Supply Agreement between them (‘Stanwell CSA’). – Reserves are reported above on a project basis before any division of economic value under the Stanwell CSA. It is not possible to express the economic entitlements of Stanwell from the Curragh Project as a simple numerical percentage. The reason such a statement is not possible is that the entitlements of Stanwell pursuant to the Stanwell CSA are variable with, and dependent upon, contingent events which include all of the actual future export volumes, prices, and the duration of the Stanwell CSA relative to the timing and mine sequencing of production from the various areas of the Curragh Project. It is not necessary for the Competent Person to analyse the Stanwell CSA and respective entitlements of WCPL and Stanwell thereunder given that reserves are stated on a total Curragh Project basis before application of the Stanwell CSA. b) No reserves have been declared with respect to the Stanwell Reserved Area. Bengalla a) Bengalla’s reserves, as stated, are 100 per cent of the site reserves, with Wesfarmers Bengalla Limited’s beneficial interest in the Bengalla unincorporated joint venture being 40 per cent. b) Since 30 June 2016, the coal reserves have been reduced by a quantity equal to the mining depletion for the 12 months to 30 June 2017. No other activity has taken place which would constitute a material change to the reserves for Bengalla. c) Bengalla has development consent to mine within ML1397 and ML1729 until 2039. MACH Energy Australia Pty Ltd holds a surface lease (ML1645) which overlays part of ML1729 for the purpose of locating infrastructure associated with their Mount Pleasant Project. There is an agreement between the holder of ML1645 and Bengalla which provides for the removal of the Mount Pleasant infrastructure in stipulated circumstances, to allow for the mining of coal within ML1729. Due to the presence of the aforementioned consent and agreement, it has been assumed that all economic reserves within ML1397 and ML1729 are recoverable at this point in time. Wesfarmers 2017 Annual Report 147 S u s ta in a b ility S ig n e d re p o rts S h a re h o ld e r a n d A S X in fo rm a tio n F in a n c ia l s ta te m e n ts D ire c to rs ’ re p o rt G o ve rn a n c e O p e ra tin g a n d fin a n c ia l re v ie w O ve rv ie w Annual statement of coal resources and reserves as at 30 June 2017 Characteristics of coal reserves and resources Curragh The coal is bituminous and is used for power generation (principally domestic) and metallurgical processes (primarily steel production overseas). The resource is contained in five seams of varying thickness and quality characteristics. Coal is produced from all of these seams. Coal is extracted by open cut methods and processed through a wash plant using dense medium cyclones and froth flotation. Bengalla The coal is bituminous and used in export markets for power generation. Coal is extracted from eight seams of varying thickness and quality characteristics. The seams occur at relatively shallow depths and dip gently to the west. Coal is extracted by open cut methods. JORC Code compliance The statement of coal resources and coal reserves presented in this report has been produced in accordance with the 2012 edition of the Australasian Code for Reporting of Exploration Results, Mineral Resources and Ore Reserves ( JORC Code). Governance arrangements and internal controls Wesfarmers has put in place governance arrangements and internal controls with respect to its estimates of reserves and resources and the estimation process including: – Oversight and approval of each annual statement by responsible senior officers; – Establishment of internal procedures and controls to meet JORC Code compliance in all external reporting; – Independent external review of new and materially changed estimates at regular intervals; – Annual reconciliation with internal planning to validate reserves estimates for operating mines; and – Internal technical audits of resources and reserves estimates for each asset. For Bengalla, where the Wesfarmers Group is not the managing entity, the Wesfarmers Group relies on the estimates of resources and reserves as reported by the Bengalla Mining Company. General Preparation of this statement requires the Competent Person to adopt certain forward-looking assumptions including export coal price and cost assumptions. These assumptions are commercially confidential. Long-term export price assumptions are considered reasonable but diff er from actual prices prevailing as at the balance date. These types of forward-looking assumptions are necessarily subject to risks, uncertainties and other factors, many of which are outside the control of the Wesfarmers Limited Group. For the avoidance of doubt, neither the Competent Persons nor the Wesfarmers Limited Group makes any undertaking to subsequently update any forward-looking statements in this release to reflect events after the date of this release. The information in this report relating to coal resources and reserves is based on, and fairly represents, information compiled by Competent Persons (as defined in the JORC Code, and listed below). All Competent Persons have at the time of reporting, sufficient experience relevant to the style of mineralisation and type of deposit under consideration and to the activity they are undertaking to qualify as a Competent Person as defined by the JORC Code. Each Competent Person consents to the inclusion in this report of the matters based on their information in the form and context in which it appears. Competent Persons Curragh Mr Barry Saunders, Director of QGESS Pty Ltd Member AusIMM (CP), Member AIG Mr Paul Wood, a full-time employee of Wesfarmers Resources Limited, a wholly owned subsidiary of Wesfarmers Limited Member AusIMM (CP) (Min) Bengalla Mr Patrick Tyrrell, a full-time employee of New Hope Corporation Limited Member AusIMM (CP) Mr Tony O’Connell, a Director of Optimal Mining Solutions Pty Limited Member AusIMM BACK Wesfarmers 2017 Annual Report148 Shareholder and ASX information Shareholder information Substantial shareholders As at the date of this report The Vanguard Group, Inc., holding 5.002 per cent, is a substantial shareholder for the purposes of Part 6C.1 of the Corporations Act 2001. Voting rights Wesfarmers fully-paid ordinary shares carry voting rights of one vote per share. Distribution of members and their holdings Size of holdings Number of shareholdings 1 – 1,000 404,337 1,001 – 5,000 94,071 5,001 – 10,000 10,301 10,001 – 100,000 5,135 100,001 and over 169 There were 13,075 shareholders that held less than a marketable parcel of Wesfarmers ordinary shares. There were 1.22 per cent of shareholders with registered addresses outside Australia. Twenty largest shareholders The 20 largest shareholders of ordinary shares on the company’s register as at 19 September 2017 were: Name Number of shares % of issued capital HSBC Custody Nominees (Australia) Limited 240,962,209 21.25 J P Morgan Nominees Australia Limited 139,338,750 12.29 Citicorp Nominees Pty Limited 65,400,348 5.77 National Nominees Limited 42,999,134 3.79 BNP Paribas Nominees Pty Ltd (Agency Lending DRP A/C) 24,172,893 2.13 BNP Paribas Noms Pty Ltd (DRP) 13,194,650 1.16 HSBC Custody Nominees (Australia) Limited (Nt-Comnwlth Super Corp A/C) 9,144,387 0.81 Citicorp Nominees Pty Limited (Colonial First State Inv A/C) 7,674,753 0.68 Australian Foundation Investment Company Limited 6,722,500 0.59 CPU Share Plans Pty Limited (WESAP DFE Control A/C) 5,845,137 0.52 Argo Investments Limited 5,440,027 0.48 AMP Life Limited 4,761,582 0.42 Goldman Sachs Australia + Nominee Holdings Pty Ltd (WES Ltd Div Inv Plan A/C) 3,155,261 0.28 Milton Corporation Limited 2,835,533 0.25 IOOF Investment Management Limited (IPS Super A/C) 2,818,490 0.25 CPU Share Plans Pty Limited (WES Exu Control A/C) 2,744,763 0.24 Navigator Australia Ltd (MLC Investment Sett A/C) 2,116,927 0.19 CPU Share Plans Pty Limited (WES WLTIP Control A/C) 1,959,392 0.17 Nulis Nominees (Australia) Limited (Navigator Mast Plan Sett A/C) 1,802,080 0.16 Netwealth Investments Limited (Wrap Services A/C) 1,599,084 0.14 The percentage holding of the 20 largest shareholders of Wesfarmers ordinary shares was 51.57. Wesfarmers 2017 Annual Report 149 S u s ta in a b ility S ig n e d re p o rts S h a re h o ld e r a n d A S X in fo rm a tio n F in a n c ia l s ta te m e n ts D ire c to rs ’ re p o rt G o ve rn a n c e O p e ra tin g a n d fin a n c ia l re v ie w O ve rv ie w Five-year fi nancial history 20141 20132 All fi gures in $m unless shown otherwise 2017 2016 2015 Restated Restated Summarised income statement3 Sales revenue 68,099 65,643 62,129 59,903 57,466 Other operating revenue 345 338 318 278 283 Operating revenue 68,444 65,981 62,447 60,181 57,749 Operating profi t before depreciation and amortisation, fi nance costs and income tax 5,668 2,642 4,978 3,877 4,486 Depreciation and amortisation (1,266) (1,296) (1,219) (1,082) (1,033) EBIT 4,402 1,346 3,759 2,795 3,453 Finance costs (264) (308) (315) (346) (417) Income tax expense (1,265) (631) (1,004) (939) (908) Profi t after tax from discontinued operations - - - 1,179 133 Operating profi t after income tax attributable to members of Wesfarmers Limited 2,873 407 2,440 2,689 2,261 Capital and dividends Ordinary shares on issue (number) 000's as at 30 June 1,133,840 1,126,131 1,123,753 1,143,275 1,157,194 Paid up ordinary capital as at 30 June 22,268 21,937 21,844 22,708 23,290 Fully-franked dividend per ordinary share declared (cents) 223 186 200 200 180 Capital management: capital return and fully-franked dividend components - - 100 50 - Financial performance Earnings per share (weighted average) (cents) 254.7 36.2 216.1 234.6 195.9 Earnings per share growth 603.6% (83.2%) (7.9%) 19.8% 6.4% Return on average ordinary shareholders' equity (R12) (excluding signifi cant items4) 12.4% 9.6% 9.8% 10.5% 8.9% Fixed charges cover (R12, times) (excluding signifi cant items4) 3.1 2.7 3.0 3.2 3.0 Interest cover (cash basis) (R12, times) (excluding signifi cant items4) 25.0 16.8 20.5 15.9 12.2 Financial position as at 30 June Total assets 40,115 40,783 40,402 39,727 43,155 Total liabilities 16,174 17,834 15,621 13,740 17,133 Net assets 23,941 22,949 24,781 25,987 26,022 Net tangible asset backing per ordinary share $4.44 $3.45 $4.85 $6.14 $4.69 Net debt to equity 20.1% 31.0% 25.1% 13.1% 20.2% Total liabilities/total assets 40.3% 43.7% 38.7% 34.6% 39.7% Stock market capitalisation as at 30 June 45,490 45,158 43,860 47,835 45,936 1 The 2014 numbers have been restated to refl ect the disposal of WesCEF's interest in Air Liquide WA Pty Ltd as a discontinued operation. 2 The 2013 numbers have been restated to refl ect the classifi cation of the Insurance division as a discontinued operation. 3 The summarised income statement for 2016 includes signifi cant items relating to the following pre-tax (post-tax) items: $1,266 million ($1,249 million) non-cash impairment of Target; $850 million ($595 million) non-cash impairment of Curragh; and $145 million ($102 million) of restructuring costs and provisions to reset Target. 4 The 2016 number excludes the signifi cant items outlined in footnote 3 above. BACK Wesfarmers 2017 Annual Report150 Shareholder and ASX information Investor information Managing your shareholding The company’s share registry is managed by Computershare Investor Services Pty Limited (Computershare). The Investor Centre website is the fastest, easiest and most convenient way to view and manage your shareholding. Investor Centre enables a shareholder to: − view the company share price; − change your banking details; − change your address (for non-CHESS sponsored holdings); − update your dividend instructions; − update your Tax File Number (TFN), Australian Business Number (ABN) or exemption; − select your email and communication preferences; − view your transaction and dividend history; and − generate a holding balance letter. Visit www.wesdirect.com.au and click on ‘Create Login’ for portfolio membership or click on ‘Access a Single Holding’ for holding information. When communicating with Computershare or accessing your holding online you will need your Securityholder Reference Number (SRN) or Holder Identifi cation Number (HIN) as shown on your Issuer Sponsored/CHESS statements. You can also contact Computershare by: Post: GPO Box 2975 Melbourne, Victoria 3001 Australia Telephone Australia: 1300 558 062 International: (+61 3) 9415 4631 Website: www.investorcentre.com/contact Tax File Numbers While it is not compulsory to provide a TFN, if shareholders have not provided a TFN and Wesfarmers pays an unfranked or partly-franked dividend, the company will be required to deduct tax from the unfranked portion of the dividend at the top marginal rate plus the Medicare Levy. Shareholders can go online to update their TFN by visiting www.wesdirect.com.au Change of name or consolidation of holdings Name changes or consolidation of multiple holdings into one single holding must be made in writing by using the required forms, which can be downloaded from www.wesdirect.com.au and clicking on ‘Need a Printable Form?’. Uncertifi cated Share Register: The Wesfarmers share register is uncertifi cated. Two forms of uncertifi cated holdings are available to shareholders: − Issuer sponsored holdings – these holdings are sponsored by Wesfarmers and there is no need for shareholders to be sponsored by a stockbroker; and − Broker sponsored holdings – shareholders may arrange to be sponsored by a stockbroker who will require a signed sponsorship agreement. Holding statements are issued to shareholders within fi ve business days after the end of any month in which transactions occur that alter the balance of their holding. Shareholders can also access details of their shareholdings and dividends paid on their holdings by visiting www.wesdirect.com.au Information on Wesfarmers Wesfarmers website Up-to-date information on the company can be obtained from the company’s website www.wesfarmers.com.au Securities Exchange listing Wesfarmers shares are listed on the Australian Securities Exchange under the code WES. Share prices can be accessed from major Australian newspapers, on the Wesfarmers website or at www.asx.com.au Dividend investment plan The company’s dividend investment plan was reinstated with eff ect from 27 February 2007. Details of the plan can be obtained from the share registry or the Wesfarmers website. Privacy A copy of the Wesfarmers Privacy Policy is available on the Wesfarmers website. Wesfarmers Corporate Aff airs department Further information and publications about the company’s operations are available from the Corporate Aff airs department on (08) 9327 4428 (within Australia) or (+61 8) 9327 4428 (International) or from the Wesfarmers website. Wesfarmers 2017 Annual Report 151 S u s ta in a b ility S ig n e d re p o rts S h a re h o ld e r a n d A S X in fo rm a tio n F in a n c ia l s ta te m e n ts D ire c to rs ’ re p o rt G o ve rn a n c e O p e ra tin g a n d fin a n c ia l re v ie w O ve rv ie w Corporate directory Wesfarmers Limited ABN 28 008 984 049 Registered offi ce Level 14, Brookfi eld Place Tower 2 123 St Georges Terrace Perth, Western Australia 6000 Telephone: (+61 8) 9327 4211 Facsimile: (+61 8) 9327 4216 Website: www.wesfarmers.com.au Email: info@wesfarmers.com.au Executive directors Richard Goyder AO Group Managing Director and Chief Executive Offi cer Terry Bowen Finance Director (to 4 September 2017) Non-executive directors Michael Chaney AO Chairman Paul Bassat James Graham AM Tony Howarth AO Wayne Osborn Diane Smith-Gander Vanessa Wallace Jennifer Westacott Company Secretary Linda Kenyon Share registry Computershare Investor Services Pty Limited Yarra Falls, 452 Johnston Street Abbotsford, Victoria 3067 Telephone Australia: 1300 558 062 International: (+61 3) 9415 4631 Facsimile Australia: (03) 9473 2500 International: (+61 3) 9473 2500 Website: www.investorcentre.com/wes Financial calendar+ Record date for fi nal dividend 23 August 2017 Final dividend paid 28 September 2017 Annual general meeting 16 November 2017 Half-year end 31 December 2017 Half-year profi t announcement February 2018 Record date for interim dividend February 2018 Interim dividend payable April 2018 Year-end 30 June 2018 +Timing of events is subject to change. Annual general meeting The 36th Annual General Meeting of Wesfarmers Limited will be held at the Perth Convention and Exhibition Centre, Mounts Bay Road, Perth, Western Australia on Thursday, 16 November 2017 at 1:00pm (Perth time). Website To view the 2017 annual report, shareholder and company information, news announcements, background information on Wesfarmers’ businesses and historical information, visit the Wesfarmers website at www.wesfarmers.com.au BACK Wesfarmers 2017 Annual Report152 Shareholder and ASX information Wesfarmers brands Coles Home Improvement Department Stores Offi ceworks Other businesses Industrials FSC logos Each of these logos attached to this PDF file as well as being available on the “G” drive in the FSC folder. 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Designed by Clarity Communications BACK wesfarmers.com.au Delivering value today and tomorrow W esfarm ers 2017 A n nu al R eport BACK C1 YIR OVERVIEW MD PERF OVERVIEW EXE LEAD TEAM OFR DIVS HM IPROV DEP STOR TAR & KMAT OFFICE INDUS CEF I&S RES SUS BOD CGS DIR REP REM FINS NOTES FINS 1 FINS 2 FINS 3 FINS 4 FINS 5 FINS 6 FINS 7 FINS 8 FINS 9 SIGNED REP INDEP AUDIT SHARE & ASX COAL SHAREHOLDER FIVE YEAR INVESTOR CORP DIR WESF BRANDS SUS PG 60 BUN PG 28 KMART PG 36 COLES PG 22 OFR PG 12 OFFICE PG 40 PERF PG 8 INDUS PG 44 SUS PG 53 YIR PG 4 AND 5 YIR PG 6 AND 7 S29: Page 2: Page 31: Page 42: Page 53: Page 64: Page 75: Page 86: Page 97: Page 108: Page 119: Page 1210: Page 1311: Page 1412: Page 1513: Page 1614: Page 1715: Page 1816: Page 1917: Page 2018: Page 2119: Page 2220: Page 2321: Page 2422: Page 2523: Page 2624: Page 2725: Page 2826: Page 2927: Page 3028: Page 3129: Page 3230: Page 3331: Page 3432: Page 3533: Page 3634: Page 3735: Page 3836: Page 3937: Page 4038: Page 4139: Page 4240: 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REPORT Governance 26 Board skills and experience 27 Board of Directors 28 Group Executive Committee 30 Directors’ Statutory Report 32 Remuneration Report 34 SECTION 4 FINANCIAL REPORT Auditor's Independence Declaration 52 Financial Report 53 Directors’ Declaration 115 Independent Auditor’s Report 116 SECTION 5 OTHER INFORMATION Five year summary 122 Shareholder information and Corporate Governance Statement 126 Company directory 128 We care deeply about our customers, our team and our communities. Our team members reflect our communities. Their diversity brings rich culture, personality and a vibrant energy to our business. Our report this year features a snapshot of the people who exemplify us. Our team helps us to understand what our customers truly need. We listen and learn, so we can create better experiences together for everyone every day. NUMBER OF "RESOURCING THE FUTURE" PROGRAMS COMPLETED SINCE LAUNCH 150 1 + EMPLOYEES 202,000+ TOTAL RECORDABLE INJURY FREQUENCY RAT E (TRIFR) SCORE FOR FY17 12.97 INCREASE IN CUSTOMER TRANSACTIONS – AUSTRALIAN FOOD 5.2% OVERALL CUSTOMER SATISFACTION AS AT JUNE 2017 78% u 3 pts from June 2016 STORE-CONTROLLABLE VOICE OF CUSTOMER % AS AT JUNE 2017 81% u 4 pts from June 2016 NUMBER OF PROD UCTS IN THE LOW PRICE ALWAYS AND PRIC ES DROPPED PROGRA MS IN AUSTRALIAN FO OD 3,500+ 2017 at a glance Community Our Team Our Customers Our 1 Figures stated relate to the period 11 December 2015 to 7 July 2017. YOUNG EMPLOYEE S 77,000+ WOOLWORTHS OWN BRAND PRODUCTS WITH THE HEALTH STAR RATIN G 2,000+ OWN BRAND PRODUCTS UNDERGONE A NUTRITION RENOVATION 120+ SOLAR POWER GENERATION 1,512Mwh FOOD SAVED FO R MEALS (MILLION MEAL S) 8M STORES WITH UPGRADED HYBRID OR HFC FREE REFRIGERANT SYSTEMS 269WOOLWORTHS RENEWALS COMPLETED IN FY17 91 (including 19 new stores) NUMBER OF INDIGENOUS EMPLOYEES HIRED THROUGH THE PARITY PROGRAM SINCE LAUNCH 952 1 2 HOTELS $1,553M BIG W $3,598M NEW ZEALAND FOOD NZ$6,232M Our Sales Financials Our Shareholders Our For endnotes refer to page 24. EARNINGS PER SHARE FRO M CONTINUING OPERATIONS BEFORE SIGNIFICANT ITEM S 110.8¢ t 5.1% from 2016 FULL YEAR FULLY FRANKED DIVIDEND PER SHARE 84¢ u 9.1% from 2016 TOTAL DIVIDEND PAYOUT IN RELATION TO FY17 $1.1B u 10.6% from 2016 EARNINGS BEFORE INT EREST AND TAX FROM CONTI NUING OPERATIONS BEFORE SIGNIFICANT ITEMS $2,326M t 4.9% from 2016 TOTAL GROUP PROFIT ATTRIBUTABLE TO SHAREHOLDERS OF WOOLWORTHS $1,534M u from 2016 not meaningful FY17 AUSTRALIAN FOOD COMPARABLE SALES GROWTH 3.6% NET CASH PROVIDED BY OPERATING ACTIVITIES $3.1B u 32.4% from 2016 SALES FROM CONTINU ING OPERATIONS $55B u 3.7% from 2016 ENDEAVOUR DRINKS $7,913M AUSTRALIAN FOOD $36,371M 1 2 3 4 5 PERFO RM A N C E H IG H LIG H T S BU SIN ESS REV IEW D IREC TO RS' REPO RT FIN A N C IA L REPO RT O T H ER IN FO RM A T IO N 3 W O O LW O RT H S G R O U P A N N U A L R EPO R T 20 17 FIVE KEY PRIORITIES 1 Customer and store-led culture and team Progress against our A major focus for the year was to embed a customer and store-led culture within our team and establish ways of working that deliver on the goal to have customers put us first. SAFETY PERFORMANCE Our commitment to improving physical safety and mental health has been a key focus throughout the year. We have continued to invest in new programs and systems to improve safety governance, address our critical risks and develop a culture of care across the Woolworths Group. We have seen significant improvements in this safety performance over the year. FY17 saw customer claims reduce by 19%, a Lost Time Injury Frequency Rate (LTIFR) score of 6.76 and a Total Recordable Injury Frequency Rate (TRIFR) of 12.97. TEAM ENGAGEMENT Driving culture change across the Woolworths Group has been assisted BY the establishment of short and long‑term incentive plans that are aligned to our customer first focus. Team engagement has also improved across the year, with an increase of five points on last year to 82%, measured by our Voice of Team survey. We have seen an uplift in morale across the team, especially in regard to recommending Woolworths as a place to work. As morale and team engagement increases, we have seen team turnover reduce. KEY APPOINTMENTS An important part of driving the culture change was to also align our senior leadership and operating model so as to leverage the specialised skills and experience from within the team. New appointments in 2017 included Woolworths Supermarkets Managing Director, Claire Peters, and Chief Information Officer, John Hunt. They also join the reinvigorated Woolworths Group Executive Committee that includes key internal appointments that provide an essential balance of representatives between business, service and group functions. WOOLIESX The Woolworths Group is focused on the importance of digital and what we need to do to better serve our increasingly “connected customers” to create shopping experiences that are personalised, seamless and convenient. In response to this, we have combined our Digital and Loyalty businesses under the new banner of WooliesX. Bringing these two agile and specialist teams together will allow us to focus on accelerating growth from digital and provide a compelling offer to our customers. VOICE OF TEAM ENGAGEMENT SCORE 82% TOTAL RECORDABLE INJURY FREQUENCY RATE (TRIFR) 12.97 TRIFR 4 A key highlight in FY17 was the meaningful improvement in customer scores in Australian Food, which has resulted in positive sales momentum throughout the year. FOOD SALES MOMENTUM Australian Food sales returned to growth in FY17. Momentum accelerated over the year, with a fourth quarter comparable sales growth of 6.4% (Easter adjusted). Our customers have responded positively to the investment across our business with growth driven primarily by a higher number of customer transactions, and more recently, an increase in the number of items our customers are putting in their baskets. We also saw improved New Zealand Food sales in the second half as we fully cycled the bulk sales of gift cards in the first half of the prior year, leading to a growth of 2.1%. Initiatives across the stores, including ranging and price, as well as the new Onecard partnership with AA Smartfuel, have resonated with customers. We are committed to continually improving our offer for our customers with further planned investments in price and service in FY18. VOICE OF CUSTOMER Voice of Customer (VOC) scores are a key indicator for our team to measure our performance from the people who matter the most. In FY17, customers have reacted positively to our initiatives in Australian Food with our store‑controllable VOC score improving significantly to finish the year at record levels of 81%. Team Attitude continues to be one of our highest scores with Time in Queue showing the biggest improvement as a result of our investment in team hours and service focus. Our New Zealand Countdown team also achieved new highs in their customer satisfaction scores throughout the year. STORE RENEWAL PROGRAM Our store Renewal program was a key focus for FY17 with a total of 72 Renewal stores (91 including new stores) launched in the year. June was an especially busy month for our team with 23 Renewal stores launched across the country, including three brand new stores in Wodonga VIC, Eatons Hill QLD and Keysborough South VIC. We also opened six Woolworths Metro stores during the year, with the store’s convenient offer delivering a comparable sales growth of 17%. WOOLWORTHS OWN BRAND FY17 also saw significant progress of our own brand strategy, including the continued transition to the Essentials and Woolworths range from Homebrand. Earlier this year we also launched our new online community ‘The Bunch’ which allows our customers to taste Woolworths own brand products for free and provide us, and the community, with unfiltered reviews. Since the pilot launch of the community late last year, we have seen over 7,000 customers provide their honest opinions across a range of own brand products. 2 Generating sustainable performance in Food AUSTRALIAN FOOD SALES $36.4B NEW ZEALAND FOOD SALES NZ$6.2B 1 Including new stores. TOTAL NUMBER OF RENEWAL STORES 91 1 1 2 3 4 5 PERFO RM A N C E H IG H LIG H T S BU SIN ESS REV IEW D IREC TO RS' REPO RT FIN A N C IA L REPO RT O T H ER IN FO RM A T IO N 5 W O O LW O RT H S G R O U P A N N U A L R EPO R T 20 17 Endeavour Drinks delivered solid sales growth in FY17, retaining its leading position within a competitive market. The Drinks business had a number of highlights in FY17, including record Voice of Customer scores across both our retail brands reflecting the customer first focus. BWS CLICK & COLLECT A key highlight for BWS in FY17 was the launch of one‑hour Click & Collect which has since been rolled out to over 1,200 BWS stores across the network. To further improve the convenience offer to our customers, BWS is currently trialling fast delivery in 50 stores. DAN MURPHY’S ONLINE In FY17 Dan Murphy’s delivered strong double digit sales growth from its online business. The My Dan Murphy’s loyalty program has also reached a record 2.4 million members. BWS “STORE CEOs” BWS’ focus on team engagement in FY17 provided an opportunity to empower and engage store managers to drive the direction of their stores. To embed the culture of autonomy, job titles were amended from "store manager" to "store CEO". As an example, store CEOs have been encouraged to engage smaller craft brewers in each region in order to build on community‑centric relationships and local ranging preferences. STORE NETWORK Endeavour Drinks opened a number of new stores in FY17 putting the total nationwide network at over 1,500 stores by the end of the financial year. In BWS we opened 19 net new stores and renewed a number of stores across the network, including Bondi and Moonee Ponds. Dan Murphy’s opened 12 net new stores including its first Tasmanian store, with Launceston opening in November 2016. It also opened its latest concept store in Mosman NSW in May. DAN MURPHY’S CELEBRATES The Dan Murphy’s team also celebrated two key industry award wins within the year. The launch of the high‑end concept cellar at Prahran VIC was awarded the Customer Experience Store Design Award at the Inside Retail’s 2017 Retailer Awards. Dan Murphy’s was also awarded the 2016 Catalogue Retailer of the year title, acknowledging the high standards set by the team. 3 Evolving our Drinks business ENDEAVOUR DRINKS STORE NETWORK 1,500+ MY DAN MURPHY'S MEMBERS 2.4M Dan Murphy’s newest concept store in Mosman opened in May of this year. 6 4 Empowering our portfolio businesses BIG W’s turnaround plan was agreed earlier this year with a number of changes already underway across the business. BIG W LEADERSHIP TEAM We have put the customer back at the heart of BIG W and leveraged the learnings from our initiatives in the turnaround of Australian Food. The recently appointed BIG W Executive Team includes the combined skills, experience and structure that we believe is best placed to execute the new strategy. Earlier this year David Walker was appointed Managing Director of BIG W after acting in the role from November 2016 and has since built up the core leadership team. HOTELS PERFORMANCE CONTINUES TO IMPROVE Our ALH Hotels business continues to perform with a sales increase of 2.7% on the previous year driven by Bars, Food and Accommodation. We completed a number of key refurbishments in FY17 at venues across the network. Our Hotels also form an important part of our Drinks strategy, with a number of BWS and Dan Murphy’s stores attached to Hotel sites. 1STORE LAUNCHES Earlier this year we launched our 1Store program to deliver a new suite of systems across our stores. 1Store works to improve current processes for our teams and customers by replacing tools such as our point‑of‑sale systems, inventory and ticketing systems. The program focusses on greater end‑to‑end efficiencies and includes time saving features such as easy print functions, streamlined refunds process and greater access and ability to share nutritional information of our products with our customers. SUPPLY CHAIN MEASURES In FY17 our Supply Chain team delivered more than 1.2 billion cartons to our stores across the nation. To ensure the warehouse and transport operations continue to drive a customer first approach, we introduced a new form of measurement, delivery in full, on time, and error free (DIFOTEF). This new measurement aims to ensure our stores receive the perfect order, resulting in the products being in the right place at the right time for our customers. 5 Becoming a lean retailer through end-to-end process and systems excellence Process improvement and systems excellence was a key focus in FY17 as we continue to deliver greater efficiencies and convenience for both our teams and customers. TOTAL NUMBER OF CARTONS DELIVERED TO STORE IN FY17 1.2B HOTEL SALES 2.7% increase on 2016 1 2 3 4 5 PERFO RM A N C E H IG H LIG H T S BU SIN ESS REV IEW D IREC TO RS' REPO RT FIN A N C IA L REPO RT O T H ER IN FO RM A T IO N 7 W O O LW O RT H S G R O U P A N N U A L R EPO R T 20 17 2020 commitments Since the launch of our Corporate Responsibility Strategy 2020 earlier this year, we have been focused on a number of initiatives that work towards the targets set under the pillars of People, Planet and Prosperity. FY17 included a number of key achievements within this space and highlights our commitment to create better experiences for our customers, team and communities. 1 Figures stated relate to the period 11 December 2015 to 7 July 2017. WOOLWORTHS PEOPLE: encouraging diversity Supporting Indigenous Australians During the year the Woolworths Group has continued its commitment to its Indigenous Employment program “Resourcing the Future” in partnership with Diversity Dimensions. We are pleased with the achievements we have made since launching the program and we are focused on continuing to grow this number ahead of our Woolworths Group 2020 targets. Since launching our Indigenous employment program "Resourcing the Future" in December 2015, we have held over 150 1 programs in 328 1 stores and placed 952 1 Indigenous Australian jobseekers into permanent part‑time employment with huge success in regional Australia. As a direct result of the success of the program over the last 12 months, we have seen a significant increase in the number of direct applications through our mainstream recruitment process. Diversity Dimensions General Manager, Mimi Kind, said; “Woolworths has embraced this program with a level of commitment that inspires us – that commitment can be seen at all levels of the organisation, from the board and senior leaders right through to store managers and team members. This is why we are seeing such great results in this program, with a retention rate of over 80% of Indigenous employees that we place.” WA NT SA NSW VIC & TAS QLD 188 SUCCESSFUL PARTICIPANTS 70 SUCCESSFUL PARTICIPANTS 70 SUCCESSFUL PARTICIPANTS 368 SUCCESSFUL PARTICIPANTS 96 SUCCESSFUL PARTICIPANTS 160 SUCCESSFUL PARTICIPANTS 8 Further information on our Corporate Responsibility Strategy 2020 progress will be available in our 2017 Corporate Responsibility Report due to be released 30 September 2017. PLANET: for a healthy Australia PROSPERITY: founded on trusted relationships Working towards Country of origin labelling Zero Food Waste In a recent visit to Australia in May 2017, world‑renowned chef and Woolworths ambassador, Jamie Oliver, hosted a media event at the Food Innovation Centre at the Woolworths Group Support Office to help raise awareness of reducing food waste in Australia. “Food waste is a huge drain on our natural resources, and millions of tonnes of perfectly edible food ends up as landfill every year. Stats suggest that Australian households throw out one in every five bags of their food shopping, which is worth an estimated $1,036 per household each year. That’s massive! ” Jamie Oliver Woolworths Group partners with food rescue organisations, such as OzHarvest, Foodbank and others, to help reduce the amount of edible surplus food going to waste. Food that might once have been wasted, is now feeding Australians in need. The Odd Bunch range of fruits and vegetables was designed to cut waste for Aussie farmers and make healthy food cheaper – you can get lemons, carrots, pears, apples and more deliciously odd-shaped foods every day. At Woolworths, we know our customers love to buy Australian products. The new labelling system makes it easier for our customers to better locate Australian made products and understand what percentage of the ingredients are locally sourced. Earlier this year, Woolworths stores hosted over 350 in‑store country of origin labelling display booths. We invited our customers to learn about the new labelling scheme at the booths and also sample Woolworths own brand products. Senator Arthur Sinodinos AO, Minister for Industry, Innovation and Science, said; “The in‑store demonstrations are an extension of the advertising activity and an excellent opportunity for Australian consumers to hear more about the labels. We appreciate Woolworths’ support for this initiative.” When the Federal Government's country of origin labelling initiative came into effect in July 2016, Woolworths was the first Australian supermarket to introduce the new labels on their own brand products in October of the same year. Jamie Oliver 1 2 3 4 5 PERFO RM A N C E H IG H LIG H T S BU SIN ESS REV IEW D IREC TO RS' REPO RT FIN A N C IA L REPO RT O T H ER IN FO RM A T IO N 9 W O O LW O RT H S G R O U P A N N U A L R EPO R T 20 17 CHAIRMAN'S REPORT This year I wanted to call out three areas the Board has focused on in the last 12 months. The first is strategy. We have focused on fixing Australian Supermarkets as job number one. We have realigned our portfolio by exiting the Masters business, and we have reset our BIG W strategy. We have made good progress but there is much more to do, as we face disruptive threats on three fronts: from traditional competitors, from the discounters, and from the digital entrants. The second area of focus has been culture. We put the customer first and we are building a culture of achievement, where our staff are committed to living the values of the organisation. We care about the health and welfare of our team, demonstrated by a renewed focus and commitment. We are creating greater transparency both in our business and with our investors. And finally we are regaining the community trust that was once a hallmark of our business. Finally, we have as a Board, focused appropriately on capital management. We are committed to a strong investment grade credit rating. We have seen, as a result of this focus, significant improvement in working capital and reduction in net debt during the year. The Woolworths Board has announced a final dividend of 50 cents per share taking the total dividend for the year to 84 cents, a 9.1% increase on the prior year. In determining the final dividend, the Board has considered the improved trading performance in the second half, strong cash generation during the year leading to a significant reduction in net debt and the $134 million net profit after tax for Home Improvement in the second half which is not expected to recur. The Board remains committed to a solid investment grade credit rating. Whilst overall progress is good, there is much to do and we as a Board, are united with Brad and his management team in our mission to transform Woolworths Group. Gordon Cairns CHAIRMAN 10 MANAGING DIRECTOR’S REPORT In last year’s Annual Report, I spoke about our FY17 focus to rebuild trust with our customers and our team and improve the foundations of our business in order to restore shareholder value. We are pleased with the progress we have made over the last 12 months and have addressed a number of key issues. The customer is firmly at the centre of our business and we have improved our team engagement and underlying business culture and processes. Encouragingly, we still see many opportunities to improve our business and look forward to FY18 with energy and optimism. Our transformation has been guided by five key priorities that we established at the beginning of FY17. 1 Our first priority was to build a customer and store‑led culture and team. In FY17 we saw the meaningful improvement in customer scores in Australian Food and Endeavour Drinks as well as our Voice of Team (VOT) scores across the Group. We ended the year with a store‑controllable Voice of Customer (VOC) score in Woolworths Supermarkets of 81% and achieved record NPS and VOC scores in both Dan Murphy’s and BWS. Over 116,000 employees provided feedback in our recent VOT survey with our sustainable engagement scores improving by five points over the last year to 82%. Our commitment to improve both the physical safety and mental health of our team members has been a key focus throughout the year. We have invested in new programs and systems to improve safety governance, address critical risks and develop a culture of care across the Woolworths Group. It is pleasing to see the results from these efforts with a reduction in both Total Recordable Injury Frequency Rate (TRIFR) as well as Lost Time Injury Frequency Rate (LTIFR) from FY16. Earlier this year, we also launched our Corporate Responsibility Strategy 2020. In FY17 we focused on diversity by specifically addressing gender inequality. We completed phase one of the pay parity project with over 17,000 salaries reviewed and the pay gap between male and female team members, carrying out like‑for‑like roles, was reduced to 0.5%. We have also developed a holistic diversity and inclusion strategy that involves such initiatives as increasing Indigenous participation in our workforce and the creation of an LGBTI support network. 2 Our focus on generating sustainable performance in Food saw sales increase by 4.5% over the year with the fourth quarter the strongest of the year at 7.2% (Easter adjusted). Woolworths Supermarkets sales growth continues to be driven by customer transactions with an increase in the number of items per basket in the second half. We continued our focus on optimising our overall store network with 72 Renewals completed in FY17 as well as opening 19 new stores in our Renewal format. We closed 22 stores during the year following an extensive network review in July 2016. Our Metro stores are delivering pleasing sales growth with comparable sales increasing by 17% on the prior year. We opened six new Metro stores and are working hard to continue to refine our convenience food offer. FoodCo had a very busy year, rebranding, repositioning and reformulating approximately 3,000 products into Essentials and the Woolworths food brand. The reformulation of products with improved nutrition also supported our 2020 commitment to inspire our customers to consume all of our products in a healthy, sustainable way. In the fourth quarter, we brought together our Loyalty and Digital businesses to form WooliesX. The new team will allow Woolworths to maximise the combined wealth of insights and technical expertise currently in the two businesses as we look to accelerate our growth from digital. 3 Endeavour Drinks delivered strong results in a competitive market. Dan Murphy’s and BWS both delivered positive comparable sales growth. Online remained a key area of focus during the year with Dan Murphy’s online achieving growth of approximately 25% a highlight. 4 Our fourth priority was to empower our portfolio businesses to pursue strategies to deliver shareholder value. BIG W’s financial result was extremely disappointing but also reflects the investment we began to make in the second half as we implement our new turnaround plan. The plan has been approved by the Board and communicated to our stakeholders and its implementation is underway. David Walker was appointed Managing Director, BIG W, after acting in the role since November 2016. FY18 will continue to be a year of investment for BIG W as we invest to improve price trust, range and shopping experience for our customers. ALH Hotels continues to progress under the newly established Board and governance structure with a 11.7% increase in EBIT for the year with strong second half growth. We exited EziBuy during the year and in August, Lowe’s one third in the Home Improvement joint venture was acquired for $250.8 million, paving the way to complete our exit from the business. 5 We continue to progress on our final priority to become a lean retailer through end‑to‑end process and systems excellence through initiatives such as the 1Store Program roll‑ out, Customer‑Led Rostering and the migration of over 175,000 team members to SuccessFactors Human Capital System. Supply Chain also introduced a new measurement, delivery in full, on time, and error free (DIFOTEF) to ensure that the right stock is in the right place at the right time for our customers. As we move into FY18, we are focused on embedding our new Group purpose, “We create better experiences together” and our new Ways‑of‑Working and Core Values. With the combined goal to deliver “better together” we will leverage off our strength as a Group to achieve better experiences for our customers, teams and communities. In summary, we are pleased with the progress we made in FY17 and are excited about our ability to further improve our business and customer and team experiences in FY18 as we move from a turnaround phase, focused on fixing our business foundations, to a transformation phase, focused on leveraging team work, digital and insights to materially improve our business. I would like to thank our entire team for their efforts over the last 12 months and look forward to their support in FY18. Brad Banducci MANAGING DIRECTOR AND CHIEF EXECUTIVE OFFICER 1 2 3 4 5 PERFO RM A N C E H IG H LIG H T S BU SIN ESS REV IEW D IREC TO RS' REPO RT FIN A N C IA L REPO RT O T H ER IN FO RM A T IO N 11 W O O LW O RT H S G R O U P A N N U A L R EPO R T 20 17 GROUP FINANCIAL PERFORMANCE GROUP SALES – FULL YEAR FY17 52 WEEKS $M FY16 52 WEEKS $M CHANGE 36,371 34,798 4.5% 7,913 7,589 4.3% 5,887 5,592 5.3% 6,232 6,101 2.1% 3,598 3,820 (5.8)% 1,553 1,512 2.7% Continuing operations Australian Food 2 Endeavour Drinks New Zealand Food (AUD) New Zealand Food (NZD) BIG W Hotels Unallocated (EziBuy) 153 163 (6.1)% Sales from continuing operations 55,475 53,474 3.7% Discontinued operations Home Improvement 903 2,100 (57.0)% Petrol 2 4,682 4,612 1.5% Sales from discontinued operations 5,585 6,712 (16.8)% Group sales 61,060 60,186 1.5% EARNINGS/(LOSS) BEFORE INTEREST AND TAX (EBIT/LBIT) FY17 (52 WEEKS) $M FY16 (52 WEEKS) $M CHANGE Continuing operations (before significant items 1) Australian Food 2 1,603.1 1,642.0 (2.4)% Endeavour Drinks 502.5 483.8 3.9% New Zealand Food 292.3 284.4 2.8% New Zealand Food (NZD) 309.4 313.9 (1.4)% BIG W (150.5) (14.9) n.m. Hotels 232.9 208.5 11.7% Central overheads (154.3) (157.8) (2.2)% EBIT continuing operations (before significant items 1) 2,326.0 2,446.0 (4.9)% Significant items 1 (before tax) – (951.1) n.c. EBIT continuing operations (after significant items 1) 2,326.0 1,494.9 55.6% Discontinued operations (before significant items 1) Home Improvement 159.0 (218.8) n.m. Petrol 2 157.9 117.8 34.0% Significant items 1 (before tax) – (3,062.6) n.c. EBIT/(LBIT) discontinued operations (after significant items 1) 316.9 (3,163.6) n.m. Group EBIT/(LBIT) continuing and discontinued operations (after significant items 1) 2,642.9 (1,668.7) n.m. SALES * $55.5B u 3.7% from 2016 Growth of 4.5% and 4.3% in Australian Food and Endeavour Drinks respectively drove the majority of the growth but was somewhat offset by the sales reduction in BIG W. GROSS PROFIT AS A % OF SALES ^ 28.71% u 35 bps from 2016 Driven primarily by the material improvement in stock loss in Australian and New Zealand Food during the year, somewhat offset by continued price investment. COST OF DOING BUSINESS (COBD) AS A % OF SALES ^ 24.52% u 74 bps from 2016 Primarily due to increased investment in Australian and New Zealand Food into our customer offers and higher team performance‑based bonuses. Excluding the incremental performance‑based incentives and $35.3 million BIG W impairment in HY17, CODB before significant items increased by 33 bps for FY17 and decreased by 4 bps in the second half. For endnotes refer to page 24. 12 GROUP PROFIT AND LOSS FOR THE 52 WEEKS ENDED 25 JUNE 2017 FY17 52 WEEKS FY16 52 WEEKS CHANGE Continuing operations – before significant items 1 Earnings before interest, tax, depreciation, amortisation and rent (EBITDAR) ($m) 5,397.9 5,395.2 0.1% Rent ($m) (2,034.3) (1,963.9) 3.6% Earnings before interest, tax, depreciation and amortisation (EBITDA) ($m) 3,363.6 3,431.3 (2.0)% Depreciation and amortisation ($m) (1,037.6) (985.3) 5.3% EBIT ($m) 2,326.0 2,446.0 (4.9)% Net financial expenses ($m) (193.6) (245.6) (21.2)% Income tax expense ($m) (650.4) (677.2) (4.0)% NPAT ($m) 1,482.0 1,523.2 (2.7)% Non‑controlling interests ($m) (59.9) (47.4) 26.4% NPAT from continuing operations attributable to equity holders of the parent entity (before significant items 1) ($m) 1,422.1 1,475.8 (3.6)% NPAT/(NLAT) from discontinued operations attributable to equity holders of the parent entity (before significant items 1) ($m) 111.4 (82.8) n.m. Significant items 1 after tax attributable to equity holders of the parent entity from: Continuing operations ($m) – (749.5) n.c. Discontinued operations ($m) – (1,878.3) n.c. NPAT/(NLAT) attributable to equity holders of the parent entity 1,533.5 (1,234.8) n.m. MARGINS – continuing operations before significant items 1 Gross profit (%) 28.71 28.36 35 bps Cost of doing business (%) 24.52 23.78 74 bps EBIT (%) 4.19 4.57 (38) bps EARNINGS PER SHARE (EPS) AND DIVIDENDS Weighted average ordinary shares on issue (million) 1,283.9 1,263.5 1.6% Basic EPS (cents) – from continuing operations: Before significant items 1 (cents) 110.8 116.8 (5.1)% After significant items 1 (cents) 110.8 57.5 92.7% Diluted EPS – from continuing operations: Before significant items 1 (cents) 110.5 116.8 (5.4)% After significant items 1 (cents) 110.5 57.5 92.2% Interim dividend per share (cents) 34.0 44.0 (22.7)% Final dividend per share ǂ (cents) 50.0 33.0 51.5% Total dividend per share (cents) 84.0 77.0 9.1% * From continuing operations. ^ From continuing operations before significant items. # Attributable to equity holders of the parent entity from continuing operations, before significant items. EBIT ^ $2,326M t 4.9% from 2016 The majority of the reduction is as a result of higher losses in BIG W. In the second half, EBIT from continuing operations (before significant items 1) increased by 11.0%, driven by Australian Food. NET FINANCING COST t21.2% From 2016 This is due to lower average debt and effective borrowing rates. NPAT # $1,422.1M t 3.6% from 2016 With corresponding EPS 2 down 5.1% to 110.8 cents. On a statutory basis, the NPAT attributable to equity holders of the parent entity was $1,533.5 million compared to a NLAT of $1,234.8 million in FY16 after significant items 1. The corresponding EPS was 119.4 compared to a loss per share (LPS) of 97.7 cents in FY16. ǂ Final 2017 dividend payable on 6 October 2017 will be fully franked. For endnotes refer to page 24. 1 2 3 4 5 PERFO RM A N C E H IG H LIG H T S BU SIN ESS REV IEW D IREC TO RS' REPO RT FIN A N C IA L REPO RT O T H ER IN FO RM A T IO N 13 W O O LW O RT H S G R O U P A N N U A L R EPO R T 20 17 The improvements we delivered in Australian Food during FY17 resonated with customers as our Voice of Customer (VOC) scores improved consistently throughout the year, with store- controllable VOC sitting at 81% in June 2017. TRADING PERFORMANCE Australian Food sales momentum continued into the fourth quarter with Easter adjusted sales growth of 7.8% and comparable sales growth (Easter adjusted) of 6.4%. Comparable customer transaction growth of 5.2% (Easter adjusted) and an improvement in items per basket drove comparable item growth of 5.6% in the fourth quarter. Sales for the year of $36.4 billion increased 4.5% on the previous year, while comparable sales increased by 3.6%. Online sales grew by 15.8% for the year with 18.7% growth in the second half. Our VOC scores have continued to improve over the financial year with Overall Customer Satisfaction reaching 78% (FY16: 75%) and store‑controllable VOC increasing to 81% (FY16: 77%). Both have improved on Q3’17. We have seen an improvement on the prior financial year across all seven store‑controllable VOC metrics. On‑shelf availability and Fruit & Vegetables remain our biggest opportunities for further improvement. Sales per square metre increased by 1.3% to $16,213, compared to FY16, driven largely by the improvement in comparable sales growth. During the year we closed 22 stores and opened 25, including six Metros, ending the year with 995 Woolworths Supermarkets and Metro stores. We closed two Thomas Dux stores with three remaining at year end. Despite the store closures, average space growth for the year was 3.1% compared to FY16 due to timing. Average prices declined by 2.1% in FY17 as we continued to lower prices for our customers. Deflation eased in the fourth quarter to 1.2%, as we experienced inflation in Fruit & Vegetables, with deflation ex‑Tobacco and Fruit & Vegetables in the fourth quarter of 3.3%. Customer price perception is beginning to improve but remains a major opportunity and reflects our focus on improving customers’ trust in our prices through lowering shelf prices, with approximately 3,500 products on our Low Price Always or Price Dropped programs at the end of the year. The increase in gross margin of 70 bps to 28.07% is primarily due to material improvements in stock loss and, to a more limited extent, improved product mix and promotional effectiveness offset somewhat by net investment in price. EBIT $1,603.1M t 2.4% from 2016 SALES $36,371M u 4.5% from 2016 “The fruit a nd veggies ar e always fresh and go od quality.” For endnotes refer to page 24. 14 CODB as a percentage of sales increased by 101 bps as we invested in team hours and higher team performance based bonuses compared to the prior year. We have also invested in training and in our IT Foundations and Renewal programs, which contributed to higher depreciation. EBIT declined by 2.4% to $1,603.1 million for the year resulting in a full year EBIT margin of 4.41%. Second half EBIT increased by 13.2% at a margin of 4.48%. Excluding the impact of incremental team incentive payments during the year, EBIT increased by 8.3%. Strong working capital management resulted in a significant reduction in average funds employed, which has more than offset the reduction in underlying earnings and led to an improvement of 32.7 pts in reported ROFE. BEFORE SIGNIFICANT ITEMS 1 FY17 52 WEEKS FY16 52 WEEKS CHANGE Sales ($m) 36,371 34,798 4.5% EBIT ($m) 1,603.1 1,642.0 (2.4)% Gross margin (%) 28.07 27.37 70 bps Cost of doing business (%) 23.66 22.65 101 bps EBIT to sales (%) 4.41 4.72 (31) bps Sales per square metre ($) 16,213 16,000 1.3% ($m) 1,071.0 1,133.6 (5.5)%Funds employed Return on average funds employed (ROFE) 3 (%) 166.1 133.4 32.7 pts For endnotes refer to page 24. “Woolies always has value for money and have a great range of products & excellent weekly specials.” * Adjusted for the timing of Easter which fell in Q4’17 (Q3’16 LY). (1.1) 0.7 3.1 4.5 6.4 Q4 Q1 Q2 Q3* Q4* FY16 FY17 AUSTRALIAN FOOD COMP SALES (% year on year) 1.5 2.5 2.7 4.1 5.2 Q4 Q1 Q2 Q3* Q4* FY16 FY17 COMP TRANSACTION GROWTH (% year on year) (1.9) (2.0) 0.8 0.6 0.4 Q4 Q1 Q2 Q3* Q4* FY16 FY17 COMP ITEMS PER BASKET GROWTH (% year on year) 3 4 5 D IREC TO RS' REPO RT FIN A N C IA L REPO RT O T H ER IN FO RM A T IO N 15 W O O LW O RT H S G R O U P A N N U A L R EPO R T 20 17 BU SIN ESS REV IEW 2 1 PERFO RM A N C E H IG H LIG H T S "The staff are very fr iendly and helpful. There is qu ite a good r ange of spir its, wine & beer brands ava ilable." Endeavour Drinks achieved record Net Promoter Score (NPS) and VOC scores for Dan Murphy’s and BWS during the year, continuing the momentum of solid growth in a competitive market. TRADING PERFORMANCE Endeavour Drinks sales increased by 4.3% to $7,913 million in FY17 with solid growth in comparable sales of 2.8% and a strong contribution from new store openings. Both retail banners, Dan Murphy's and BWS, reported comparable sales growth, with growth in attached BWS stores a particular highlight. In the fourth quarter, Easter adjusted comparable sales increased by 4.6% due to strong execution around seasonal events. The sales improvement was consistent with improvements in NPS and Voice of Customer. Sales per square metre increased by 0.5% with total sales growth of 4.3% offset by net average space growth of 3.7%. Dan Murphy’s delivered another year of strong sales with 12 net new stores opened and strong double digit sales growth in online. My Dan Murphy’s membership has now reached 2.4 million members less than three years after its launch. Dan Murphy’s retained its market leading NPS. BWS reported solid comparable sales growth driven by improved growth in our attached BWS stores and a strong improvement in NPS. We opened 19 net new BWS stores opening in FY17, bringing the network to 1,298 stores at the end of the year. Other key milestones were the launch of BWS Online in October FY17 with one hour Click & Collect available at all stores and we are currently trialling fast delivery in around 50 BWS stores. Endeavour Drinks gross margin declined by 33 bps to 23.1% due to the negative category mix with beer and spirits outgrowing wine as well as targeted price investments. CODB as a percentage of sales decreased by 30 bps due to the gain on sale of a business of $8.4 million, strong cost management despite higher fixed costs associated with store openings during the year and minor reallocations between gross margin and CODB for the Summergate business. EBIT increased 3.9% to $502.5 million in FY17. ROFE improved by 62 bps driven by the increase in EBIT and reduction in funds employed despite a number of new store openings during the year. BEFORE SIGNIFICANT ITEMS 1 FY17 52 WEEKS FY16 52 WEEKS CHANGE Sales ($m) 7,913 7,589 4.3% EBIT ($m) 502.5 483.8 3.9% Gross margin (%) 23.08 23.41 (33) bps Cost of doing business (%) 16.73 17.03 (30) bps EBIT to sales (%) 6.35 6.38 (3) bps Sales per square metre ($) 18,039 17,943 0.5% Funds employed ($m) 3,017.3 3,070.0 (1.7)% ROFE 3 (%) 16.9 16.3 62 bps For endnotes refer to page 24. EBIT $502.5M u 3.9% from 2016 SALES $7,913M u 4.3% from 2016 16 EBIT growth was subdued in New Zealand Food during FY17 as we invested in price and service to improve the offer for our customers. We will continue to invest in our customer offer in FY18 in line with our Customer 1st strategy. TRADING PERFORMANCE New Zealand Food’s sales for the year were NZ$6.2 billion, an increase of 2.1% on the previous year (5.3% increase in AUD). Sales in the first half last year were assisted by the bulk sales of gift cards and excluding the sales of these cards, full year sales growth was 2.8%. Easter adjusted sales in Q3’17 and Q4’17 were 2.2% and 3.4% respectively. Comparable sales increased 1.2% for the year or 1.8% excluding bulk gift card sales. Comparable sales strengthened during the second half (HY17: 0% (1.1% gift card adjusted), H2’17: 2.5%) as customers continued to react positively to our price, service, fresh and local ranging activity, as well as the new partnership between our Onecard loyalty program and AA Smartfuel launched in Q2’17. This was consistent with our improving customer metrics over the course of the year. Sales per square metre was flat for the year, but moved into growth in the second half. Countdown ended the year with customer satisfaction and team engagement at new highs. The Countdown Supermarkets Food Price Index increased by 0.4% driven by a combination of a return to inflation of dairy products and higher levels of inflation in fresh produce impacted by growing conditions and supply. Gross margin increased 42 bps on the previous year due to reduced stock loss through store security and ranging initiatives, changes in fuel discount promotions and fewer low‑margin bulk gift card sales. CODB as a percentage of sales increased 60 bps on the previous year driven by investment in the store team to improve the customer experience, logistics costs (impacted by the Kaikoura earthquake), occupancy and team bonuses. EBIT decreased 1.4% but was up marginally when normalised for team performance‑based bonuses compared to the prior year. ROFE was 21 bps higher than the prior year due to a reduction in average funds employed despite lower EBIT. BEFORE SIGNIFICANT ITEMS 1 FY17 52 WEEKS FY16 52 WEEKS CHANGE Sales (NZ$m) 6,232 6,101 2.1% EBIT (NZ$m) 309.4 313.9 (1.4)% Gross margin (%) 24.00 23.58 42 bps Cost of doing business (%) 19.04 18.44 60 bps EBIT to sales (%) 4.96 5.14 (18) bps Sales per square metre (NZ$m) 15,137 15,178 * (0.3)% Funds employed (NZ$m) 2,934.5 2,906.4 1.0% ROFE 3 (%) 10.5 10.3 21 bps * Sales per square metre has been restated from prior year to be consistent with current Australian Food definition. For endnotes refer to page 24. EBIT NZ$309.4M t 1.4% from 2016 SALES NZ$6,232M u 2.1% from 2016 "I was happy with fruit and vegetable items available and the fact that there was a good choice of berries." 3 4 5 D IREC TO RS' REPO RT FIN A N C IA L REPO RT O T H ER IN FO RM A T IO N 17 W O O LW O RT H S G R O U P A N N U A L R EPO R T 20 17 BU SIN ESS REV IEW 2 1 PERFO RM A N C E H IG H LIG H T S FY18 will continue to be a year of investment for BIG W and we do not expect a reduction in losses as we continue to invest to improve the customer shopping experience, including re-establishing price trust. TRADING PERFORMANCE BIG W reported sales of $3.6 billion, a decrease of 5.8% on the previous year with comparable sales declining 5.7%. The sales decline was primarily a function of a continued multi‑year decline in transaction count, and deflation largely driven by clearance and discounting. Sales in the fourth quarter declined by 4.4% on an Easter adjusted basis, however this was impacted by the change in timing of the annual toy sale which was a week later than last year to align with school holidays. Excluding the impact of the change in toy sale timing, Easter adjusted comparable sales declined by 3.0%. An 87 bps decline in gross margin was driven by an investment in price in the second half as we began to invest to implement our new turnaround plan as well as more aggressive clearance activity in seasonal lines and increased stock loss. CODB was broadly flat in dollar terms, however, increased by 292 bps as a percentage of sales driven by lower sales limiting the ability to fractionalise costs and the 98 bps impact from first half impairment and provisions for onerous leases of $35.3 million. Detailed impairment testing based on the new BIG W turnaround plan has been undertaken with no further impairments currently required. Asset impairment and a reduction in property, plant and equipment due to lower capital expenditure resulted in a reduction in funds employed. The increase in losses for the year more than offset the reduction in funds employed. A significant body of work was undertaken to build out a turnaround plan to stabilise and improve the business. We put the customer back at the heart of BIG W by developing a strategy focused on rebuilding customer trust on price and deliver the right product solutions, while enhancing our customers’ shopping experience in‑store and online. We have started to make a number of changes across the business to rebuild team morale and capability and create a strong platform to re‑establish our price credentials. The BIG W turnaround will be a multi‑year journey and while we hope to stabilise sales in FY18, we do not expect an improvement in trading performance due to the investment required to regain customer trust on price, improve our product offering and enhance the customer shopping experience. BEFORE SIGNIFICANT ITEMS 1 FY17 52 WEEKS FY16 52 WEEKS CHANGE Sales ($m) 3,598 3,820 (5.8)% LBIT ($m) (150.5) (14.9) n.m. Gross margin (%) 30.82 31.69 (87) bps Cost of doing business (%) 35.00 32.08 292 bps LBIT to sales (%) (4.18) (0.39) (379) bps Sales per square metre ($) 3,396 3,602 (5.7)% Funds employed ($m) 514.3 555.2 (7.4)% ROFE 3 (%) (31.6) (2.3) (29.4) pts LBIT $150.5M SALES $3,598M t 5.8% from 2016 "BIG W always have exactly what I want. For the cheapest prices." For endnotes refer to page 24. 18 ALH Hotels reported an increase in EBIT for FY17 with strong second half growth as we cycled a period of higher promotional activity in the prior year. TRADING PERFORMANCE Sales for the year were $1.6 billion, an increase of 2.7% on the previous year with comparable sales increasing by 2.4%. Sales growth was driven by a strong result in Bars, Food and Accommodation. Hotels gross margin increased by 25 bps largely due to an improvement in Bars margins from better trading terms and more effective promotional activity. CODB as a percentage of sales decreased 96 bps on the prior year due to strong cost control and as we cycled the increased spending on promotional activities to drive increased hotel patronage in the prior year. EBIT increased 11.7% on the previous year to $232.9 million. BEFORE SIGNIFICANT ITEMS 1 FY17 52 WEEKS FY16 52 WEEKS CHANGE Sales ($m) 1,553 1,512 2.7% EBIT ($m) 232.9 208.5 11.7% Gross margin (%) 83.10 82.85 25 bps Cost of doing business (%) 68.10 69.06 (96) bps EBIT to sales (%) 15.00 13.79 121 bps “Greeted with a smile and a cheerful hello. They always know the best product for any occasion at the right price." EBIT $232.9M u 11.7% from 2016 SALES $1,553M u 2.7% from 2016 For endnotes refer to page 24. 3 4 5 D IREC TO RS' REPO RT FIN A N C IA L REPO RT O T H ER IN FO RM A T IO N 19 W O O LW O RT H S G R O U P A N N U A L R EPO R T 20 17 BU SIN ESS REV IEW 2 1 PERFO RM A N C E H IG H LIG H T S BEFORE SIGNIFICANT ITEMS 1 FY17 52 WEEKS FY16 52 WEEKS CHANGE Sales Home Improvement ($m) 903 2,100 (57.0)% Petrol ($m) 4,682 4,612 1.5% EBIT/(LBIT) Home Improvement ($m) 159.0 (218.8) n.m. Petrol ($m) 157.9 117.8 34.0% DISCONTINUED OPERATIONS TRADING PERFORMANCE Home Improvement Home Improvement sales declined in FY17 compared to the prior year following the closure of Masters stores in December 2016 and the sale of Home Timber & Hardware Group (HTH) to Metcash in October 2016. Home Improvement EBIT for FY17 reflects the trading losses up until the dates of closure and sale of Masters and Home Timber & Hardware and other operating expenses offset by gains from asset and provision reassessments. On 4 August, Lowe’s one third share in the Home Improvement joint venture was acquired for $250.8 million. We expect to complete the Home Consortium transaction in late September which will finalise the sale of 61 freehold properties and the transfer of 20 leaseholds to Home Consortium. Petrol On 24 December 2016, we entered into a binding agreement to sell 527 Woolworths-owned fuel convenience sites and 16 committed development sites to BP for $1.785 billion. Consequently, the Petrol business has been classified as a discontinued operation. The transaction is subject to certain conditions including, but not limited to, obtaining Australian Competition and Consumer Commission (ACCC) and Foreign Investment Review Board (FIRB) approval. On 10 August, the ACCC released its Statement of Issues on the transaction. This outlined the key areas of focus for the ACCC in considering the transaction. Woolworths and BP will continue to engage with the ACCC to address any issues that may prevent the transactions being approved. Completion is expected to occur no earlier than 2 January 2018. Petrol sales were $4.7 billion, an increase of 1.5% on the previous year (volumes decreased by 0.6%) driven primarily by rising average fuel sell prices (unleaded FY17: 121.6 cpl; FY16: 120.5 cpl). Comparable Petrol sales (dollars) declined 0.4% with comparable fuel volumes declining by 2.4%. Merchandise sales for the year increased 2.7% and comparable Merchandise sales increased 0.1%. EBIT increased by 34% due to higher gross profit, strong cost control and reduction in depreciation following the reclassification of Petrol to ‘net assets held for sale’. Refer to Note 5.1 of the Financial Report for a reconciliation of EBIT/(LBIT) from discontinued operations to profit/(loss) from discontinued operations. For endnotes refer to page 24. 20 CENTRAL OVERHEADS INCLUDING EZIBUY Central overheads before significant items 1, including EziBuy, were $154.3 million for the year. Excluding EziBuy, central overheads were $151.8 million and increased $9.2 million on the prior year, partly driven by higher team performance-based bonuses. The loss before interest and tax for EziBuy was $2.5 million compared to LBIT of $15.2 million in the prior year. EziBuy was sold at the end of June 2017. BALANCE SHEET Closing inventory of $4,080.4 million decreased $478 million with $490 million of the decrease attributable to the exit from Home Improvement and the reclassification of Petrol inventory to ‘net assets held for sale’. Excluding the impact of the above items, inventory increased by only $12 million, despite sales growth from continuing operations of 3.7%, resulting in a one day reduction in closing inventory days (excluding Home Improvement and Petrol) to 37.6 days. Net investment in inventory of $987.8 million declined $737 million on the prior year. Excluding Home Improvement, the reclassification of Petrol to ‘net assets held for sale’ and sale of EziBuy, net investment in inventory decreased $330 million due to business growth and working capital initiatives. Other creditors of $1,928.4 million increased $177 million driven by an increase in accruals for short-term team performance-based bonuses and other trading accruals. Provisions of $2,481.5 million decreased $796 million driven by utilisation of FY16 significant items 1 provisions. Excluding Home Improvement, significant items 1 previously recognised and the reclassification of Petrol to ‘net assets held for sale’, provisions increased $29 million primarily due to an increase in provisions for employee entitlements and onerous lease provisions for BIG W recognised in HY17. Fixed assets and investments of $8,555.7 million increased by $184 million. Excluding the transfer of Petrol and other Group properties to ‘net assets held for sale’, fixed assets and investments increased by $695 million. This was driven by net capital expenditure of $1,754 million relating to new stores, store refurbishments and support assets offset by depreciation charges and asset disposals and retirements in the ordinary course of business. Net assets held for sale of $1,222.9 million represents assets and liabilities primarily relating to Petrol, property, plant and equipment relating to Masters, and other Woolworths Group properties held for sale. The increase on the prior year was largely as a result of the reclassification of Petrol to ‘net assets held for sale’ offset by the disposal of Home Timber & Hardware, EziBuy and other Group properties held for sale. Intangible assets of $6,532.8 million declined marginally driven by the reclassification of Petrol to ‘net assets held for sale’. Total funds employed increased by $301 million, primarily driven by the utilisation of significant items provisions 1 and net investments in stores offset by improvements in working capital. Net tax balances of $291.4 million decreased $167 million primarily due to the revision of net tax benefits associated with Home Improvement business exit costs. Net repayable debt of $1,895.0 million declined by $1,191 million due to the strong free cash flow during the year. Other financial liabilities of $250.8 million increased $231 million, primarily due to the recognition of the Lowe’s put option liability of $250.8 million following the acquisition of Lowe’s one third share of Home Improvement on 4 August 2017. Shareholders’ equity increased $1,055 million to $9,526.0 million primarily reflecting the profits generated from operations attributable to equity holders of the parent entity of $1,533.5 million, offset by dividend payments of $860 million. ROFE before significant items 1 was 25.0%, an increase of 590 bps or excluding Home Improvement and Petrol was 22.3%, a 61 bps increase on the prior year. Lease adjusted ROFE increased 179 bps to 14.0% or declined 16 bps excluding Home Improvement and Petrol. CASH FLOW Cash flow from operating activities before interest and tax increased $529 million to $4,024.1 million. Excluding Home Improvement, cash flow from operating activities before interest and tax increased $287 million primarily driven by the improvement in net investment in inventory as well as general business growth offset by utilisation of significant item 1 provisions. Cash realisation ratio 5 was 117.6% impacted by the Home Improvement business. Excluding Home Improvement, our cash realisation ratio was 122.5% (FY16: 103.6%) primarily driven by the improvement in net investment in inventory. Net interest paid of $234 million decreased $55 million due to a decrease in the net effective interest rate on lower debt. Tax payments decreased to $668.1 million for the year (FY16: $848.5 million) predominately due to the reduction in the income tax instalment rate reflecting lower FY16 earnings. OVERHEADS, BALANCE SHEET & CASH FLOW For endnotes refer to page 24. 3 4 5 D IREC TO RS' REPO RT FIN A N C IA L REPO RT O T H ER IN FO RM A T IO N 21 W O O LW O RT H S G R O U P A N N U A L R EPO R T 20 17 BU SIN ESS REV IEW 2 1 PERFO RM A N C E H IG H LIG H T S CAPITAL MANAGEMENT OVERHEADS, BALANCE SHEET & CASH FLOW (CONTINUED) CASH FLOW (CONTINUED) Cash used in investing activities was $1,431.4 million, an increase of $165 million on the prior year. Cash proceeds of $481 million were received from the sale of property, plant and equipment, businesses and investments including proceeds from the sale of HTH. Payments for the purchase of property, plant and equipment, property development, intangible assets, investments and contingent consideration decreased by $91.5 million, primarily as a result of $220.1 million lower property development expenditure in the current period. This was offset by a $169 million increase in investment in property, plant and equipment of $1,633.6 million which included continued investment in new stores, store renewals and spend associated with supply chain and IT asset initiatives. Our fixed charges cover ratio 6 is 2.5 times. Fixed charges cover ratio from continuing operations is 2.4 times (FY16: 2.4). Woolworths Group manages its capital structure with the objective of enhancing long-term shareholder value through optimising its weighted average cost of capital while retaining financial flexibility to invest in its business in a manner consistent with its key priorities. The Group remains committed to a solid investment grade credit rating7 and a number of actions can be undertaken to support the credit profile, including the sale of non-core assets, further working capital initiatives and adjusting its growth capital expenditure and property leasing profile. In April 2016, the Company introduced a 1.5% discount on the dividend reinvestment plan (“DRP”) and removed the participation limit. This has continued during FY17 and the participation rate for the October 2016 final and April 2017 interim DRPs was approximately 37%. The October 2016 DRP was partially underwritten to 50%, the proceeds of which were used predominantly to replace the Woolworths Notes II and the balance to allow for accelerated investment in the store renewal program. The discount and uncapped participation will remain in place for the October 2017 final dividend. The Company will seek to return capital to shareholders when that is consistent with its long-term capital structure objectives and where it will enhance shareholder value. FINANCING TRANSACTIONS DURING FY17 Maturities The five-year non-call period for the A$700 million Woolworths Notes II ended on 24 November 2016. Pursuant to a replacement capital covenant, the Notes were refinanced by a combination of surplus cash, debt and equity. Eligible equity assigned to the redemption was raised via the DRP during the interim and final FY16 dividends. US$300 million (approximately A$381 million) in US notes matured in April 2017. This was repaid with existing bank facilities previously established for this purpose. New transactions In November 2016, Woolworths Group executed a A$700 million syndicated bank loan facility comprising a three-year and four-year revolving tranche of A$320 million and A$200 million respectively, and a four-year term loan tranche of US$140 million. In May 2017, the Group pre-financed it’s A$400 million bank guarantee facility which matures in November 2017 and upsized it to A$500 million. This facility is for the purpose of Woolworths Group meeting its WorkCover obligations as a ‘self-insurer’ by issuing bank guarantees in favour of Australian WorkCover authorities and is underpinned by the international surety market. The original facility was finalised in 2014 for a three-year commitment to November 2017 and is currently fully drawn. The new facility may be drawn at any time up to November 2017, and will expire in three years following initial drawing. It is currently undrawn. UPCOMING REFINANCING Woolworths Group has no upcoming refinancings during FY18. For endnotes refer to page 24. 22 OUTLOOK The focus of the Woolworths Group in FY18 will continue to be on our five key priorities. Our emphasis is moving from fixing the basics to leveraging team work, digital and insights to transform core business processes and improve the customer experience while sustainably reducing CODB. In the first half, we have a particular focus on improved team scheduling (right team member, right hours, right day), on-shelf availability and the roll-out of Store Pick up (for online orders). In Australian Food, we expect the trading environment to remain competitive in the year ahead but also expect to see continued progress. However, we do not expect sales growth to continue at the same rate as achieved in Q4’17. For the first eights weeks of FY18, Australian Food comparable sales growth has been broadly in line with the FY17 second half growth rate. FY18 will be a year of investment for New Zealand Food which will impact profit in the short-term. Currently, we do not expect an improvement in losses at BIG W in FY18 as we continue to invest across the business to restore growth. While we expect to see a positive customer response to lower prices, better product solutions and a better customer shopping experience, it is still too soon to tell when this will translate into sales momentum and improved profitability. Our Q1’18 sales release is currently scheduled for 31 October 2017. NEW STORE ROLLOUT PLANS BIG W HOTELS (ALH GROUP) WOOLWORTHS SUPERMARKETS NEW ZEALAND FOOD ENDEAVOUR DRINKS FY17 NET STORE OPENINGS (INCLUDING ACQUISITIONS) DAN MURPHY’S 12 COUNTDOWN – BWS (INCLUDING ATTACHED) 19 FRANCHISE STORES 1 3 (1) (2) DAN MURPHY'S 6–10 New stores per annum BWS (INCLUDING ATTACHED) 6–10 New stores per annum (standalone) 10–20 New full range supermarkets per annum Only where previously committed Acquire as appropriate opportunities arise 3–4 New supermarkets per annum MEDIUM TERM TARGET (NET) Space rollout is supported by detailed plans for the next three to five years identifying specific sites. For endnotes refer to page 24. 3 4 5 D IREC TO RS' REPO RT FIN A N C IA L REPO RT O T H ER IN FO RM A T IO N 23 W O O LW O RT H S G R O U P A N N U A L R EPO R T 20 17 BU SIN ESS REV IEW 2 1 PERFO RM A N C E H IG H LIG H T S ENDNOTES n.c. Not comparable n.m. Not meaningful 1 There were no significant items recognised in FY17. In FY16, total significant items of $4,013.7 million before tax ($2,627.8 million after tax attributable to equity holders of the parent entity) were recognised. Details of these costs have been provided in Note 1.4 of the Financial Report. Where noted, profit and loss items have been adjusted to reflect these significant items. 2 In line with the classification of Petrol as a discontinued operation, the financial performance and operating metrics previously disclosed under ‘Australian Food and Petrol’ has been split to disclose Australian Food separately from Petrol in this announcement. Funds employed and ROFE have also been separately presented for Endeavour Drinks. 3 Return on funds employed (ROFE) is calculated as EBIT before significant items for the previous 12 months as a percentage of average (opening, mid and closing) funds employed. This methodology has been adopted for FY17 and FY16. In previous reporting periods, ROFE was calculated as EBIT before significant items for the reporting period as a percentage of average (opening and closing) funds employed. Lease adjusted ROFE adjusts funds employed for the present value of future lease obligations and EBIT for the implied interest on those obligations. 4 Growth for New Zealand Food is quoted in New Zealand dollars. 5 Operating cash flow as a percentage of group net profit after tax before depreciation and amortisation. 6 Group earnings before interest, tax, depreciation, amortisation and rent (EBITDAR) divided by rent and interest costs. Rent and interest costs include capitalised interest but exclude foreign exchange gains/losses and dividend income. 7 The credit ratings referred to in this document have been issued by a credit rating agency which holds an Australian Financial Services Licence with an authorisation to issue credit ratings to wholesale clients only. The credit ratings in this document are published for the benefit of Woolworths Group’s debt providers. This Annual Report contains certain non-IFRS financial measures of historical financial performance, balance sheet or cash flows. Non-IFRS financial measures are financial measures other than those defined or specified under all relevant accounting standards. The measures therefore may not be directly comparable with other companies’ measures. Many of the measures used are common practice in the industry in which the Woolworths Group operates. Non-IFRS financial information should be considered in addition to, and is not intended to be a substitute for, or more important than, IFRS measures. The presentation of non-IFRS measures is in line with Regulatory Guide 230 issued by Australian Security and Investments Commission (ASIC) to promote full and clear disclosure for investors and other users of financial information, and minimise the possibility of those users being misled by such information. These measures are used by management and the directors as the primary measures of assessing the financial performance of the Group and individual segments. The directors also believe that these non-IFRS measures assist in providing additional meaningful information on the underlying drivers of the business, performance and trends, as well as the position of the Woolworths Group. Non-IFRS financial measures are also used to enhance the comparability of information between reporting periods (such as comparable sales), by adjusting for non-recurring or uncontrollable factors which affect IFRS measures, to aid the user in understanding the Woolworths Group’s performance. Consequently, non-IFRS measures are used by the directors and management for performance analysis, planning, reporting and incentive setting purposes and have remained consistent with the prior year. The key non‑IFRS measures used in describing the business performance include: Non‑IFRS measures used in describing the Balance Sheet (or ‘Consolidated Statement of Financial Position’) and cash flow statement (or ‘Consolidated Statement of Cash Flows’) include: • Earnings before interest, tax, depreciation and amortisation (EBITDA) • Cost of doing business • Fixed charges cover ratio • Return on funds employed and lease adjusted return on funds employed • Earnings before interest, tax, depreciation, amortisation and rent (EBITDAR) • Comparable sales • Significant items • Funds employed • Net assets employed • Cash flow from operating activities before interest and tax • Free cash flow • Fixed assets and investments • Net repayable debt • Cash realisation ratio • Net investment in inventory • Free cash flow after equity related financing activities • Net assets held for sale • Net tax balances • Other financial assets and liabilities The above non-IFRS measures have not been subject to audit or review. NON-IFRS FINANCIAL INFORMATION 24 RISK TYPE MITIGATION Strategic The retail trading environment will continue to be competitive, driven by new entrants, technology disruption, as well as be affected by changing customer needs and expectations and other external and internal risk drivers. Failure to successfully respond to these factors, our competitors and the changing marketplace may adversely impact on market share and business performance. The Group is committed to delivering on our strategy through ongoing focus on our customers as well as transformation initiatives. At the same time, we want to play our part in alleviating environmental pressures and promoting social responsibility. Focus areas include diversity, food waste, own brand packaging, ethical and sustainable sourcing and carbon emissions. • Woolworths Group has a board approved strategy driving a Customer 1st culture and investment in growth enablers, including our store network, technology and digital channels. • Delivery offices have been established to drive transformation initiatives. • We have combined our Digital, Loyalty and Data businesses into WooliesX, focused on delivering on our connected customer strategy. • Our short and long-term incentive plans are aligned to our Customer 1st strategy. • Our Corporate Responsibility Strategy 2020 identifies our goals to improve sustainability and minimise the environmental impact of our operations. Financial The availability of funding and management of capital and liquidity are important to fund the Group’s business operations and growth. In addition, a failure to turnaround our general merchandise business or materially adverse interest rates and foreign exchange rate fluctuations could impact on the business' profitability. • Woolworths Group has board approved treasury policies to govern the management of the Group’s financial risks, including liquidity, interest rate and foreign currency risks. • We have a board approved turnaround plan for our general merchandise business which is monitored regularly and we anticipate the proposed sale of the Petrol business will further improve our capital position. Operational The Woolworths Group is subject to operational risk and could be exposed to events, including but not limited to, failures to meet people or product safety standards, information technology, security, asset, data breaches and business disruptions as a result of cyber attacks, natural disasters, weather conditions, industrial disputes, technology failures or supply chain interruptions. • Woolworths Group has established policies, standards and training regarding business operations, including people safety, health and wellbeing, food and product safety. • We continue to invest in our operational capability across processes, technology and cyber security. • A Business Resilience Framework is in place to manage our response to major operational incidents and/or business disruptions. Compliance The Woolworths Group is subject to applicable laws, regulations and contractual arrangements and is exposed to adverse regulatory or legislative changes. Breaches or adverse changes could result in negative impacts on the Group’s reputation and profitability, significant fines or other adverse consequences. • Woolworths Group has a Compliance Framework in place and a variety of policies have been established to facilitate legal, regulatory compliance and internal protocols. We liaise with government and regulatory bodies on proposed legal and regulatory changes. • The Woolworths Group Code of Conduct and training programs promote awareness of legal, regulatory and internal policy requirements. The Woolworths Group consists of complex businesses that are exposed to a range of strategic, financial, operational and compliance related risks that are inherent when operating in retail and online markets. The Group has an enterprise risk management framework which, together with corporate governance, provides a sound framework for managing the material risks. Risks Strategic Fi na nc ia l Operational Co m pl ia nc e MATERIAL BUSINESS RISKS The following table sets out material business risks (excluding generic risks in no particular order) that could adversely affect the Group’s financial performance. The Group’s performance could also be affected by other generic risks that apply to most businesses and Australian households (e.g. unfavourable changes to the macro-economic environment, climate change and emerging risks). Further information in relation to risk management can be found in the Corporate Governance Statement which is available on the Woolworths Group website. 3 4 5 D IREC TO RS' REPO RT FIN A N C IA L REPO RT O T H ER IN FO RM A T IO N 25 W O O LW O RT H S G R O U P A N N U A L R EPO R T 20 17 BU SIN ESS REV IEW 2 1 PERFO RM A N C E H IG H LIG H T S Good corporate governance is central to the Woolworths Group's approach to enhance long-term shareholder value. The Woolworths Group Board and management are committed to policies and practices that meet high levels of disclosure and compliance. The Woolworths Group has followed each of the recommendations of the ASX Corporate Governance Council’s Corporate Governance Principles and Recommendations throughout the reporting period. Further details are set out in the Corporate Governance Statement, which is available on the Woolworths Group website: www.woolworthsgroup.com.au The members of the board of directors are set out below. Further information about their skills and experience is set out on pages 27 to 29. GOVERNANCE Left to right: Holly Kramer, Kathee Tesija, Richard Dammery (Chief Legal Officer and Company Secretary), Gordon Cairns (Chairman), Jillian Broadbent, Michael Ullmer, Brad Banducci (CEO), Siobhan McKenna and Scott Perkins. DIRECTOR MEMBER OF: BOARD AUDIT, RISK, MANAGEMENT & COMPLIANCE COMMITTEE PEOPLE PERFORMANCE COMMITTEE SUSTAINABILITY COMMITTEE NOMINATION COMMITTEE Gordon Cairns Brad Banducci – – – – Jillian Broadbent – Holly Kramer – Siobhan McKenna – Scott Perkins Kathee Tesija – – – Michael Ullmer – Chairman of board/committee. Member of board/committee. 26 The board's diverse range of skills, experience and backgrounds supports the effective governance and robust decision-making of the Group. The board has determined that collectively its directors have extensive experience across the key desired areas listed below. An assessment of the optimum mix of these skills and experience takes place regularly, taking into account the strategic positioning of the Group. Following its most recent review, the board identified that access to greater specialist operating experience in digital, data and technology, and regulatory and public policy would complement the functioning of the board and the Group's strategic focus in those areas. BOARD SKILLS AND EXPERIENCE Retail Markets Retail knowledge and experience of customer‑led transformation in the food, drinks or general merchandise sectors. Governance Experience and a commitment to exceptional corporate governance standards. Strategy Experience defining strategic objectives, assessing business plans and driving execution in large, complex organisations. Corporate Responsibility, Health & Safety Commitment to social responsibility and sustainability initiatives and experience monitoring programs for proactive management of workplace safety, mental health and physical wellbeing. Digital, Data and Technology Expertise and experience in adopting new technologies or implementing technology projects, digital disruption, leveraging digital technologies or understanding the use of data and data analytics. Financial Acumen Understand financial drivers of the business, and experience implementing or overseeing financial accounting, reporting and internal controls. People and Culture Experience monitoring a company’s culture, overseeing people management and succession planning, and setting remuneration frameworks. Regulatory and Public Policy Expertise indentifying and managing legal, regulatory, public policy and corporate affairs issues. Risk Management Experience anticipating and identifying key risks to the organisation and monitoring the effectiveness of risk management frameworks and controls. SKILL/ EXPERIENCE SUMMARY COMBINED LEGEND Extensive Moderate Low BOARD DIVERSITY  Female 50%  Male 50%  0–2 years 62.5%  2–4 years 12.5%  4–6 years 25.0% BOARD TENURE BOARD GLOBAL EXPERIENCE International business experience and exposure to different political, cultural, regulatory and business environments 75% 1 2 3 4 5 PERFO RM A N C E H IG H LIG H T S BU SIN ESS REV IEW D IREC TO RS' REPO RT FIN A N C IA L REPO RT O T H ER IN FO RM A T IO N 27 W O O LW O RT H S G R O U P A N N U A L R EPO R T 20 17 GORDON CAIRNS MA (Hons) INDEPENDENT CHAIRMAN Appointed: 1 September 2015 Background and experience: Gordon has extensive Australian and international experience as a Chairman, director and senior executive. He has over 30 years' of food and retail experience, including his time as Chief Executive Officer of Lion Nathan, and as a senior manager in marketing, operations and finance roles with PepsiCo, Cadbury and Nestle. Other roles: Chairman of Origin Energy (Chairman since October 2013, director since 2007) and a director of Macquarie Group and Macquarie Bank (since November 2014). Previously Chairman of David Jones (March 2014 to August 2014) and Rebel Group, and a director of Westpac Banking Corporation (July 2004 to December 2013). BRAD BANDUCCI MBA, LLB, BComm (Acc) MANAGING DIRECTOR AND CHIEF EXECUTIVE OFFICER Appointed: 26 February 2016 Background and experience: Brad was appointed Managing Director of Woolworths Food Group in March 2015 and Managing Director and Chief Executive Officer of the Group in February 2016. Prior to this appointment, he was Director of the Group’s Drinks business between 2012 and March 2015. Brad joined the Group in 2011 after the acquisition of the Cellarmasters Group, a direct wine retail and production company. He was Chief Executive Officer of Cellarmasters from 2007 to 2011. Prior to this, he was the Chief Financial Officer and Director at Tyro Payments and a Vice President and Director with The Boston Consulting Group, where he was a core member of their retail practice for 15 years. JILLIAN BROADBENT, AO BA (Maths & Economics) INDEPENDENT NON‑EXECUTIVE DIRECTOR Appointed: 28 January 2011 Background and experience: Jillian has extensive experience in corporate banking and finance in both Australia and internationally, primarily with Bankers Trust Australia. Other roles: Chair of the Board of Swiss Re Life & Health Australia and the Clean Energy Finance Corporation, and Chancellor of the University of Wollongong. Previously, a member of the Board of the Reserve Bank of Australia (1998 to 2013) and a director of ASX, Coca‑Cola Amatil, Special Broadcasting Service Corporation (SBS), Qantas Airways, Westfield Property Trusts and Woodside Petroleum. HOLLY KRAMER BA (Hons), MBA INDEPENDENT NON‑EXECUTIVE DIRECTOR Appointed: 8 February 2016 Background and experience: Holly has over 20 years’ experience in general management, marketing and sales, including roles at the Ford Motor Company (in the US and Australia), Pacific Brands and Telstra. She was Chief Executive Officer of Best & Less, a subsidiary of South African retail group Pepkor. Other roles: Director of AMP (since October 2015) and Deputy Chair of Australia Post. Previously director of Nine Entertainment Corporation (May 2015 to February 2017). BOARD OF DIRECTORS 28 SIOBHAN MCKENNA B.Ec (Hons), MPhil INDEPENDENT NON‑EXECUTIVE DIRECTOR Appointed: 8 February 2016 Background and experience: Siobhan has a background in strategy and public policy within the digital and media sectors. She was a Commissioner of the Australian Productivity Commission, a Chairman and Board Member of NBN Co Limited and a partner of McKinsey & Company. Other roles: Director of Amcil (since March 2016) and Group Director, Broadcasting, News Corp Australia. Previously, a director of Ten Network Holdings (2012 to March 2017). SCOTT PERKINS BCom, LLB (Hons) INDEPENDENT NON‑EXECUTIVE DIRECTOR Appointed: 1 September 2014 Background and experience: Scott has extensive Australian and international experience as a leading corporate adviser on strategy, mergers and acquisitions and capital markets matters. He held senior executive leadership positions at Deutsche Bank from 1999 to 2013. These included Managing Director and Head of Corporate Finance for Australia and New Zealand, membership of the Asia Pacific Corporate and Investment Bank Management Committee and Chief Executive Officer of Deutsche Bank New Zealand. Other roles: Director of Origin Energy (since 1 September 2015), and Brambles (since 1 June 2015). KATHRYN (KATHEE) TESIJA BSRMM (Fashion Merchandising) INDEPENDENT NON‑EXECUTIVE DIRECTOR Appointed: 9 May 2016 Background and experience: Kathee has extensive retail experience in the US market, particularly in merchandising and supply chain management. She concluded her 30‑year executive career with Target Corporation in the US in 2015. During this time she was Chief Merchandising and Supply Chain Officer and Executive Vice President, where she led the merchandising and supply chain functions, a role she held since 2008. She continued her involvement in Target as a Strategic Advisor until 2016. Kathee is a US resident. Other roles: Director of Verizon Communications, Inc. (since 2012), and a senior advisor and consultant for Simpactful, a retail consulting agency in the US. MICHAEL ULLMER BSc (Maths) (Hons), FCA, SF Fin INDEPENDENT NON‑EXECUTIVE DIRECTOR Appointed: 30 January 2012 Background and experience: Michael has extensive experience in the accounting and banking sectors. He was the Deputy Group Chief Executive at National Australia Bank (NAB) from October 2007 until he stepped down from the Bank in August 2011. He joined NAB in 2004 as Finance Director. Prior to NAB, Michael was Chief Financial Officer and then Group Executive for Institutional and Business Banking at Commonwealth Bank of Australia. Before that he was a Partner at Accounting Firms KPMG (1982 to 1992) and Coopers & Lybrand (1992 to 1997). Other roles: Director of Lendlease (since December 2011). 1 2 3 4 5 PERFO RM A N C E H IG H LIG H T S BU SIN ESS REV IEW D IREC TO RS' REPO RT FIN A N C IA L REPO RT O T H ER IN FO RM A T IO N 29 W O O LW O RT H S G R O U P A N N U A L R EPO R T 20 17 “Improving working capital outcomes across our businesses.” DAVID MARR “Upgrading over 1,100 legacy self-service checkouts in supermarkets.” JOHN HUNT “Creating value for our shareholders with strategic business transactions.” COLIN STORRIE Establishing the right team culture within the Woolworths Group is a key element of the Customer 1st strategy. Under the new Group purpose of “we create better experiences together”, the Group Executive team is working together to create better experiences for our customers, team and communities every day. “Improving VOC scores across all our businesses.” GROUP EXECUTIVE COMMITTEE “Training and empowering 27,000 service team members.” BRAD BANDUCCI “Reaching 10 million Rewards customers.” AMANDA BARDWELL “Supporting the Equitable Briefing Policy for diversity in the legal community.” RICHARD DAMMERY “Working towards phasing out plastic bags across our businesses.” JAMES GOTH CARYN KATSIKOGIANIS “Calling 20,000 customers from our VOC program to listen and improve.” NATALIE DAVIS “Delivering health star ratings to over 80% of our own brand products.” STEVE GREENTREE “Embracing the Woolies culture to better serve our customers every day.” CLAIRE PETERS “Supporting our local communities during the Kaikoura Earthquake.” DAVE CHAMBERS “Achieving a step-change in team safety across the Group.” PAUL GRAHAM “Creating more convenience for our customers with BWS Click & Collect.” MARTIN SMITH 30 BRAD BANDUCCI MANAGING DIRECTOR AND CHIEF EXECUTIVE OFFICER Biography available in Board of Directors, refer to page 28. AMANDA BARDWELL MANAGING DIRECTOR WOOLIESX WooliesX includes Woolworths Digital, E-Commerce, Customer Loyalty and Customer Services. Amanda joined the Woolworths Group in 2001 and during her time has worked across both the Supermarket and Drinks businesses. Amanda has held positions in both general management and specialist senior executive roles across omni-channel retailing, e-commerce, marketing, buying, private label, and business development. Amanda has an MBA from University of New South Wales and a Bachelor of Business from the University of Technology Queensland and was awarded a Chief Executive Women Scholarship to INSEAD. DAVE CHAMBERS MANAGING DIRECTOR PEL Dave is an experienced retailer and has been with the Woolworths Group for over 30 years. During this time Dave has held a number of senior roles stretched across store, area and divisional management. Prior to taking up the role of Managing Director in 2011, he was General Manager of New Zealand Supermarket Operations from 2008. Dave is also on the Trustee Board of the New Zealand Business and Parliament Trust. RICHARD DAMMERY CHIEF LEGAL OFFICER AND COMPANY SECRETARY Richard joined Woolworths Group in 2014 from Minter Ellison where he was a senior corporate partner. He has over 20 years’ experience practising law, and has held a number of general counsel and commercial general management roles. Richard holds a BA (Hons) and LLB from Monash University, an MBA from the University of Melbourne, a PhD from University of Cambridge, and he is a Fellow of the Australian Institute of Company Directors. NATALIE DAVIS CHIEF CUSTOMER TRANSFORMATION OFFICER Natalie joined the Woolworths Group in 2015 as Director Customer Transformation for Food Group. Prior to that Natalie was a Partner at McKinsey & Co, where she worked in the UK and Australia for 15 years advising on strategy and commercial transformation. Natalie led the McKinsey Women's Initiative in Asia and was a member of the global McKinsey Women leadership team. Natalie holds an MBA from INSEAD France, and Bachelor of Commerce and Law degrees with Honours, from the University of Sydney. JAMES GOTH DIRECTOR OF CORPORATE DEVELOPMENT Prior to joining Woolworths Group in 2014, James was a partner at management consultancy The Boston Consulting Group (BCG). At BCG, James managed the firm's Sydney office and was leader of the Australian retail practice and the Asian strategy practice. Prior to this James was an economic policy advisor in the Department of Prime Minister and Cabinet during the Hawke and Keating governments. James completed a bachelor’s degree with Honours in Economics and Law from the University of Sydney, as well as a Masters of Business Administration from INSEAD. PAUL GRAHAM CHIEF SUPPLY CHAIN OFFICER Paul has spent a significant part of his career living and working in the Asia Pacific region as well as the United Kingdom, Australia and North America. Before joining the Woolworths Group in 2016, Paul was Global COO and CEO for Europe, Middle East and Africa for DHL Supply Chain covering 65 countries, some 170,000 people and $32 billion in revenue. Paul has also been a board member of one of Australia’s largest wholesale and grower produce companies, Executive Chairman of a large multi billion dollar global marketing services business headquartered in the UK and has served on various government and university advisory boards. He was awarded the Public Service Medal by the government of Singapore for services to the logistics industry in 2014. STEVE GREENTREE MANAGING DIRECTOR FOODCO, FUEL AND METRO Steve has had an extensive retail career of over 35 years with the Woolworths Group. During his time Steve has held a number of senior roles within Woolworths Group including Director of Business Development, Chief Operations Officer of Australian Supermarkets and Petrol, Director Woolworths Liquor Group, General Manager of Marketing and State Management roles for Australian Supermarkets. JOHN HUNT CHIEF INFORMATION OFFICER Originally from Cape Town, John spent over 25 years at Woolworths (Pty) Ltd in South Africa where he held a range of senior IT and core retail leadership roles, including CIO and Senior Executive for Food Planning and Value chain. A retailer through and through, John is passionate about how information technology is used in enabling the business to support both the front line team members as well as ensuring our customers have the best shopping experience. John joined the Woolworths Group in February 2017. CARYN KATSIKOGIANIS CHIEF PEOPLE OFFICER Caryn has over 20 years’ experience within HR roles and began her career in the Woolworths Group in 2004. Since joining the Group, she has held a number of senior HR roles across our business, including BIG W, Supply Chain, Supermarkets, Corporate Support and Food Group. Caryn also held the role of General Manager Business Transformation during this time. Originally from South Africa, Caryn holds a Bachelor of Commerce degree from the University of South Africa. DAVID MARR CHIEF FINANCIAL OFFICER David joined Woolworths Group in 2011 as General Manager of Finance for Woolworths Supermarkets followed by Deputy CFO from November 2013. Prior to joining the Group, David was Supply Chain Director – Non Food at Tesco plc, UK, and previously UK Commercial Finance Director for almost three years. David has held a number of senior roles within leading Australian companies including Finance Director then Sales Director at Southcorp Limited, Sales Director – Destination at Foster’s and Chief Financial Officer Australian Pharmaceutical Industries. CLAIRE PETERS MANAGING DIRECTOR WOOLWORTHS SUPERMARKETS Claire is an experienced retailer with over 22 years’ experience. Claire started her retail career in the UK working for grocery retailer, Tesco. During this time she held a variety of senior roles including Regional Retail Director; Managing Director, Large Stores; and Commercial Director, Healthcare & Baby, Beauty and Toiletries. In March 2014 Claire moved to Thailand to take up COO responsibilities for Tesco Thailand. Claire holds a BSC Hons in Economics & Sociology from the University of Loughborough UK. Claire joined the Woolworths Group in June 2017. MARTIN SMITH MANAGING DIRECTOR OF ENDEAVOUR DRINKS Martin Smith has had an extensive career in Retail spanning more than 45 years. Martin came to Australia in 1970 where he joined the Woolworths Group in an operational capacity, leaving in 1987. Martin rejoined Woolworths Group in 1999 working with AIW and later Dan Murphy’s as General Manager from 2008 to 2015. Martin brings significant knowledge, experience and operational excellence to the role of Managing Director, having held senior roles with FAL, Wesfarmers as well as an Independent Supermarket Chain. COLIN STORRIE GROUP PORTFOLIO DIRECTOR Colin Storrie has over 20 years’ experience in senior finance roles in listed companies, investment banking and government. Prior to Colin’s most recent appointment, he joined the Woolworths Group as Deputy Chief Financial Officer in 2015. Colin has also held Group Treasurer, Deputy Chief Financial Officer and Chief Financial Officer positions at both Qantas Airways Ltd and AMP Ltd. He has held a number of listed and non-listed director roles and is currently an independent non-executive director of UNICEF Australia Ltd, AIG Australia Ltd and North Queensland Airports. 1 2 3 4 5 PERFO RM A N C E H IG H LIG H T S BU SIN ESS REV IEW D IREC TO RS' REPO RT FIN A N C IA L REPO RT O T H ER IN FO RM A T IO N 31 W O O LW O RT H S G R O U P A N N U A L R EPO R T 20 17 Directors’ Statutory Report This report is given by the directors in respect of Woolworths Limited (the ‘Company’) and the entities it controlled at the end of, or during the financial period ended 25 June 2017 (together referred to as the ‘Group’). PRINCIPAL ACTIVITIES The Group operates primarily in Australia and New Zealand, with 3,746 stores and approximately 202,000 employees at year end. The principal activities of the Group during the year were retail operations across: • Australian Food: operating 995 Woolworths Supermarkets and three Thomas Dux stores • Endeavour Drinks: operating 1,517 under Dan Murphy’s and BWS brands and two Summergate stores. Woolworths Group also operates Cellarmasters, Langtons and winemarket.com.au online platforms • New Zealand Food: operating 184 Countdown Supermarkets as well as a wholesale operation which supplies a further 65 stores • BIG W: operating 185 BIG W stores • Hotels: operating 329 hotels, including bars, dining, gaming, accommodation and venue hire operations • Petrol: operating 531 canopies. Petrol is reported as a discontinued operation Woolworths Group also has online operations for its primary trading divisions. THE DIRECTORS AND MEETINGS OF DIRECTORS The table below sets out the directors of the Company, and the number of board and committee meetings held and attended by directors, during the financial period ended 25 June 2017. DIRECTOR BOARD MEETINGS AUDIT, RISK MANAGEMENT AND COMPLIANCE COMMITTEE PEOPLE PERFORMANCE COMMITTEE SUSTAINABILITY COMMITTEE NOMINATION COMMITTEE (A) (B) (A) (B) (A) (B) (A) (B) (A) (B) Non-executive Directors G M Cairns 11 11 5 5 5 5 5 5 1 1 J R Broadbent 11 11 5 5 – – 5 5 1 1 H S Kramer 11 11 – – 5 5 5 5 1 1 S L McKenna 11 11 5 5 5 5 – – 1 1 S R Perkins 11 11 5 5 5 5 5 5 1 1 K A Tesija 11 11 – – – – – – 1 1 M J Ullmer 11 11 5 5 – – 5 5 1 1 Executive Director Brad Banducci 11 11 – – – – – – – – (A) Number of meetings eligible to attend (excludes circular resolutions and sub-committee meetings). (B) Number of meetings attended. Directors also attend meetings of committees of which they are not a member. This is not reflected in the table above. Details of the experience, qualifications and other listed company directorships of each of the directors are set out on pages 28 to 29. COMPANY SECRETARIES RICHARD DAMMERY Richard Dammery was appointed Chief Legal Officer and Company Secretary in September 2014. His full biography is available on page 31 of this report. MARCIN FIREK Marcin Firek was appointed Company Secretary in January 2017. Prior to this, he was Company Secretary and a corporate lawyer in a number of large listed companies. Marcin holds a BEc LLB from Macquarie University, and he is a Fellow of the Governance Institute of Australia. ENVIRONMENTAL REGULATION The Group operations are subject to a range of environmental regulations under the law of the Commonwealth of Australia and its states and territories. The Group is also subject to various state and local government food licensing requirements, and may be subject to environmental and town planning regulations incidental to the development of shopping centre sites. The Group has not incurred any significant liabilities under any environmental legislation. 32 DIRECTORS’ AND OFFICERS’ INDEMNITY/INSURANCE (i) The Constitution of the Company provides that the Company will indemnify to the maximum extent permitted by law, any current or former director, secretary or other officer of the Company or a wholly owned subsidiary of the Company against: (a) any liability incurred by the person in that capacity; (b) legal costs incurred in defending, or otherwise in connection with proceedings, whether civil, criminal or of an administrative or investigatory nature in which the person becomes involved because of that capacity; and (c) legal costs incurred in good faith in obtaining legal advice on issues relevant to the performance of their functions and discharge of their duties. (ii) Each director has entered into a Deed of Indemnity, Access and Insurance which provides for indemnity against liability as a director, except to the extent of indemnity under an insurance policy or where prohibited by statute. The Deed also entitles the director to access company documents and records, subject to undertakings as to confidentiality, and to receive directors’ and officers’ insurance cover paid for by the Company. (iii) During or since the end of the financial period, the Company has paid or agreed to pay a premium in respect of a contract of insurance insuring officers and any persons who are officers in the future and employees of the Company and its subsidiaries, against certain liabilities incurred in that capacity. Disclosure of the total amount of the premiums and the nature of the liabilities in respect of such insurance is prohibited by the contract of insurance. NON-AUDIT SERVICES During the year, Deloitte Touche Tohmatsu, the Company’s auditors, have performed certain other services in addition to their statutory duties. The board is satisfied that the provision of those non-audit services during the year by the auditor is compatible with, and did not compromise, the auditor independence requirements of the Corporations Act 2001 (Cth) or as set out in Code of Conduct APES 110 Code of Ethics for Professional Accountants issued by the Accounting Professional & Ethical Standards Board, as they did not involve reviewing or auditing the auditor’s own work, acting in a management or decision making capacity for the Company, acting as an advocate for the Company or jointly sharing risks or rewards. Details of amounts paid or payable to the auditor for non-audit services provided during the year by the auditor are outlined in Note 6.4 to the financial statements. OTHER INFORMATION The following information, contained in other sections of this Annual Report, forms part of this Directors’ Report: • Operating and Financial Review Details on pages 2 to 25 inclusive in the Annual Report; • Details of dividends, including the Dividend Reinvestment Plan (DRP) and shares issued as a result of DRP, as outlined in Note 4.2 and Note 4.3 to the financial statements; • Significant changes in the state of affairs as outlined in Note 5.1 and Note 6.5 to the financial statements; • Matters subsequent to the end of the financial period as outlined in Note 6.5 to the financial statements; • Directors’ interests in shares and performance rights as set out in Table 5.2 and 5.3 of the Remuneration Report. These remain unchanged as at 1 August 2017; • Performance rights granted during the year and subsequent to year end as outlined in Note 6.2 to the financial statements; • Remuneration Report from page 34 to 51; and • Auditor’s independence declaration on page 52. This Report is made in accordance with a Resolution of the Directors of the Company on 23 August 2017. Gordon Cairns Chairman Brad Banducci Managing Director and Chief Executive Officer 1 2 3 4 5 PERFO RM A N C E H IG H LIG H T S BU SIN ESS REV IEW D IREC TO RS' REPO RT FIN A N C IA L REPO RT O T H ER IN FO RM A T IO N 33 W O O LW O RT H S G R O U P A N N U A L R EPO R T 20 17 Remuneration Report Dear Shareholder, On behalf of my Board colleagues, I'm pleased to share with you our Financial Year 2017 remuneration outcomes, which we believe reflect management's performance for the year and are also aligned to shareholder returns. During the year, we changed the name of this committee from People Policy to People Performance in order to reflect the Board and management's significant shift in thinking regarding the centricity of people, performance and culture in driving long-term success at Woolworths Group. FY17 has been an important year for Woolworths Group team members, as it marked the first full year of our transformation journey. This required significant investment in resources to stabilise and turnaround the trajectory of our business performance. Part of this investment was in our people. We made substantial changes to the remuneration structure to incentivise and reward all team members and to create alignment around both leading indicators and financial outcomes. One key change was to the Short Term Incentive (STI) plan. We removed the Group performance gateway and set five key performance measures with targets at each level of the business. This ensured that all team members, from top executives to store managers, were aligned to a common effort but were rewarded for their achievement of business results largely within their own control. The result was that leaders throughout our business had greater motivation and engagement in the transformation journey. This report shares with you the remuneration outcomes for the year, which the Board believes were in line with business performance. STI outcomes across the five measures for Executive Key Management Personnel (KMP) were just above target. The FY12 Long Term Incentive (LTI) plan did not vest, as it did not meet the required performance hurdles. As we are still early in our journey, there are no significant remuneration changes planned for FY18. For the FY18 grant of the Transformation Incentive Plan (TIP), the performance measures will remain the same, and we have set challenging three year targets which reflect our continued focus on turning Woolworths Group into a world class, customer driven business. Holly Kramer Chair – People Performance Committee The main objective of the People Performance Committee is: to provide advice and assistance to the Board in relation to people management, remuneration policies and remuneration decisions for Executive KMP and the direct reports of the Chief Executive Officer (CEO). During FY17 the Committee: • Oversaw the rollout of the new transformation-aligned remuneration framework. • Regularly reviewed business performance and projected remuneration outcomes to ensure that the new framework was driving the appropriate business outcomes and behaviours. • Oversaw the development of refreshed core values and ways of working reinforcing the move towards being a purpose-driven organisation. The Committee’s priorities and actions for FY18 are: To undertake a review of the remuneration strategy for implementation in FY19 as the business transitions to the next phase of our transformation journey. The report has been prepared and audited against the disclosure requirements of the Corporations Act 2001 (Cth). 34 Introduction from the Chair of the People Performance Committee 1 KEY QUESTIONS 2 EXECUTIVE KMP REMUNERATION 2.1 Overview of FY17 remuneration framework 38 2.2 How performance is linked to STI outcomes 39 2.3 What we paid Executive KMP in FY17 – further detail 40 2.4 FY18 outlook 42 2.5 Other share right awards 42 2.6 Five year performance perspective 43 2.7 Terms of Executive KMP service agreements 43 3 NON–EXECUTIVE DIRECTORS’ ARRANGEMENTS 3.1 Non-executive Directors’ remuneration policy and structure 44 3.2 Non-executive Directors’ minimum shareholding requirement 44 4 GOVERNANCE 4.1 Role of the People Performance Committee (PPC) 45 4.2 Use of remuneration advisors 45 4.3 Securities Trading Policy 45 5 KMP STATUTORY DISCLOSURES 5.1 KMP remuneration table 46 5.2 Executive KMP share right movements 48 5.3 KMP share movements 49 5.4 Share rights outstanding for Executive KMP at 25 June 2017 50 MANAGEMENT DEFINITIONS The Remuneration Report outlines Woolworths Group’s remuneration framework and the outcomes for the year ended 25 June 2017 for the Executive Key Management Personnel (KMP). Executive KMP have the authority and responsibility for planning, directing and controlling the activities of Woolworths Group. TABLE OF CONTENTS Remuneration Report 2017 1 2 3 4 5 PERFO RM A N C E H IG H LIG H T S BU SIN ESS REV IEW D IREC TO RS' REPO RT FIN A N C IA L REPO RT O T H ER IN FO RM A T IO N 35 W O O LW O RT H S G R O U P A N N U A L R EPO R T 20 17 Remuneration Report What is our remuneration objective and guiding principles? OBJECTIVE: SUPPORT BUSINESS TRANSFORMATION PR IN C IP LE S Align team member and shareholder interests Reflect the desired Woolworths Group culture and values Deliver competitive advantage in attracting, motivating and retaining talent Support achievement of a diverse workforce Be simple and easily understood, in order to drive optimal behaviours and deliver return on remuneration investment 1 KEY QUESTIONS When is remuneration earned and received? The remuneration components are structured to reward executives progressively across different timeframes. The diagram below shows the period over which FY17 remuneration is delivered and when the awards vest. Sales per Square Metre (33.33%) ROFE (33.33%) Relative TSR with Share Price Hurdle (33.33%) LTI 2017 2018 2019 STI Cash STI Deferred STI TFR Base Salary Superannuation Car Allowance Date awarded Date vested FY17 FY18 FY19 TFR STI LTI KEY Date paid Date earned Vesting date Date granted Cash STI ROFE (33.33%) 2 Sales per trading square metre (33.33%) 2 Deferred STI 2 Relative TSR with share price gateway (33.34%) 2 How is remuneration structured? Woolworths Group’s FY17 remuneration strategy focuses on delivery of the transformation of the business. The diagram below provides an overview of the different remuneration components within the framework. OBJECTIVE Attract and retain the best talent More skewed to performance related remuneration (“at risk”) during transformation Reward current year performance Reward long term sustainable performance REMUNERATION COMPONENT Total Fixed Remuneration (TFR) Short Term Incentive (STI) Long Term Incentive (LTI) PURPOSE TFR is set in relation to the external market and takes into account: • size and complexity of the role • individual responsibilities • experience and skills STI ensures appropriate differentiation of pay for performance and is based on business and individual performance outcomes LTI ensures alignment to long-term overall company performance and is consistent with: • strategic business drivers • long-term shareholder return DELIVERY Base salary, superannuation and car allowance Annual cash payment Deferred into share rights for two years (50% for CEO, 0-25% for other Executive KMP) Performance rights (vesting after three years, subject to performance) FY17 APPROACH Target TFR positioning is Median of Comparator Group Comparators: ASX25 plus additional reference as required to major national and international retailers STI Performance Measures 1 LTI Performance Measures  Sales (20%)  EBIT (20%)  Working Capital (20%)  Customer Satisfaction (20%)  Safety (20%)  Relative TSR with a share price gateway (33.34%)  Sales per trading square metre (33.33%)  Return on Funds Employed (ROFE) (33.33%) 1 With the exception of Mr Storrie who had specific performance measures relating to the Portfolio businesses for FY17. 2 Deferred STI is not subject to any further performance conditions other than continued employment. LTI is subject to performance conditions. 36 What is the remuneration mix for Executive KMP? CEO Performance Dependent Total Fixed Remuneration (25%) Target STI (25%) Maximum LTI (50%) Cash (12.5%) Deferred (12.5%) Relative TSR with share price gateway (16.68%) Sales per trading square metre (16.66%) ROFE (16.66%) Other Executive KMP 2 Performance Dependent Total Fixed Remuneration (25%) Target STI (25%) Maximum LTI (50%) Cash (18.75%) Deferred (6.25%) Relative TSR with share price gateway (16.68%) Sales per trading square metre (16.66%) ROFE (16.66%) 1 Face value represents the volume weighted average price (VWAP) of Woolworths Limited shares traded in the five days up to and including the grant date. 2 With the exception of Mr Storrie. The remuneration mix for Executive KMP is weighted towards variable remuneration to ensure a significant focus on achieving our transformation objectives. CEO: 75% of the CEO’s remuneration is performance-based pay and 62.5% of his remuneration is delivered as share rights. Other Executive KMP: 75% of their remuneration is performance-based pay and 56.25% of their remuneration is delivered as share rights. LTI is granted at face value 1 and Executive KMP have minimum shareholding requirements. How much did you pay your Executive KMP in FY17? EARNED, PAID TO, OR VESTED IN FY17 EXECUTIVE KMP TOTAL FIXED REMUNERATION 1 $ RELOCATION AND OTHER BENEFITS $ CASH STI 2 $ VESTED FY12 LTI $ OTHER SHARE RIGHTS VESTED $ TOTAL $ Brad Banducci Group CEO, Managing Director, Woolworths Food Group 2,500,804 0 1,509,750 n/a 461,181 4,471,735 Richard Dammery Chief Legal Officer and Company Secretary 849,054 25,490 3 698,534 n/a 202,516 1,775,594 David Marr Chief Financial Officer 1,210,304 0 1,095,626 0 336,187 2,642,117 Claire Peters 4 Managing Director, Woolworths Supermarkets 70,804 80,766 531,975 n/a 51,792 735,337 Martin Smith Managing Director, Endeavour Drinks 788,637 0 656,330 0 n/a 1,444,967 Colin Storrie 5 Group Portfolio Director 823,785 0 825,000 n/a 243,878 1,892,663 1 Total Fixed Remuneration includes the deemed premium for Directors' and Officers' Indemnity insurance. 2 Cash STI is the portion of FY17 STI paid as cash. This represents 50% of the FY17 STI for the CEO, and 75-100% of the FY17 STI for other Executive KMP. 3 Non-recurring relocation benefits and associated fringe benefits tax concluded in July 2016. 4 Ms Peters commenced employment on 13 June 2017. She received relocation benefits of $80,766 and a cash sign on payment of $531,975 being compensation for the cash STI she forfeited in FY17 from her previous employer. As part of her LTI arrangements, 1,997 of the share rights awarded to her vested on 19 June 2017. Refer to section 2.5 for further detail. 5 Mr Storrie became an Executive KMP effective 1 July 2016. For FY17 his STI was calculated on base salary (not TFR), his STI performance measures were specific to the portfolio businesses and his STI was not subject to deferral. For FY18, Mr Storrie's remuneration arrangements will align with other Executive KMP. The table below presents the remuneration paid to, or vested for, Executive KMP in FY17. What equity was granted for FY17? The table below presents the equity granted to Executive KMP for FY17. EXECUTIVE KMP EQUITY GRANTED FOR FY17 AT FACE VALUE FY17 LTI 1 $ FY17 DEFERRED STI 2 $ SHARE RIGHTS REPLACING FORFEITED AWARDS $ TOTAL $ Brad Banducci 5,000,000 1,509,750 n/a 6,509,750 Richard Dammery 1,696,500 232,845 n/a 1,929,345 David Marr 2,419,000 365,209 n/a 2,784,209 Claire Peters 3 1,300,000 n/a 2,153,095 3,453,095 Martin Smith 1,484,000 218,777 n/a 1,702,777 Colin Storrie 1,696,500 n/a n/a 1,696,500 1 Subject to performance conditions and due to vest 1 July 2019. 2 Not subject to any further performance conditions except continued employment and will be granted in FY18. 3 Equity granted to Ms Peters represent an agreed proportion of her STI and unvested equity that was forfeited following her resignation from her previous employer. Refer to section 2.5 for further detail. 1 2 3 4 5 PERFO RM A N C E H IG H LIG H T S BU SIN ESS REV IEW D IREC TO RS' REPO RT FIN A N C IA L REPO RT O T H ER IN FO RM A T IO N 37 W O O LW O RT H S G R O U P A N N U A L R EPO R T 20 17 Remuneration Report 2 EXECUTIVE KMP REMUNERATION 2.1 Overview of FY17 remuneration framework As communicated in the FY16 Remuneration Report, the Board undertook a comprehensive review of the company-wide remuneration framework. As a result, changes for FY17 were made to: • Ensure alignment with the transformation strategy • Reinforce a culture of accountability • Ensure Executive KMP (and other senior executives) are appropriately motivated • Incorporate best practice where appropriate. The following table outlines the FY17 Executive KMP remuneration framework and highlights any changes for FY18. COMPONENT FY17 APPROACH REMUNERATION POSITIONING Market position Median for TFR and 75th percentile for total remuneration where outstanding performance is delivered. Comparators ASX25 plus additional reference as required to major national and international retailers. SHORT TERM INCENTIVE Opportunity • All other Executive KMP: Target – 100% of TFR; Colin Storrie: Target – 100% of Base Salary • All other Executive KMP : Maximum – 125% of TFR; Colin Storrie: Maximum – 200% of Target Performance ¹ measures The performance measures are aligned for all Executive KMP with the exception of Colin Storrie. Sales (20%), EBIT (20%), Working Capital (20%), Customer Satisfaction (20%), Safety (20%). Individuals, with the exception of Colin Storrie, can receive between 0% and 125% of the Group STI outcome based on their individual performance. This is subject to the Maximum STI Opportunity set out above. Deferred STI CEO: 50% deferral of STI into share rights for two years. Other Executive KMP: 25% deferral of STI into share rights for two years (with the exception of Colin Storrie). Change for FY18 Move from the use of Total Recordable Injury Frequency Rate (TRIFR) as the Safety measure to a more holistic safety measure including customer safety. TRANSFORMATION LONG TERM INCENTIVE Opportunity (grant value) The LTI % opportunity is aligned for all Executive KMP: • Grant value is 200% of TFR. Performance measures and targets 1. Relative TSR with a share price gateway (33.34%). • The comparator group is the ASX30 excluding metals and mining companies. • The performance targets are: Gateway: Share price equal to or greater than $20.8482 (10 day VWAP up to and including 1 July 2016). Minimum: 50th percentile, Target: 60th percentile, Stretch: 90th percentile. 2. Sales per trading square metre (SQM) (Food Group and Endeavour Drinks) (33.33%). 3. Return on Funds Employed (ROFE) (33.33%). Vesting schedule FY17 LTI PERFORMANCE % OF PERFORMANCE SHARE RIGHTS TO VEST 2 RELATIVE TSR % SALES PER TRADING SQM % ROFE % Below minimum 0 0 0 At minimum 11.68 11.66 11.66 At target 16.68 16.66 16.66 At or above the stretch 33.34 33.33 33.33 Term, allocation method and award vehicle Three year performance/vesting period awarded at face value based on the five-day VWAP up to and including 1 July 2016, as share rights. Disclosure of performance targets Due to commercial sensitivity, the sales per trading sqm and ROFE LTI targets will be published following the end of the performance period. Change of control The Board has discretion to determine whether some or all of the unvested performance share rights held by Executive KMP (and/or any other LTI Plan participant) will vest, remain “on foot” or lapse, having regard to all relevant circumstances. Change for FY18 FY18 TSR Gateway: Share price equal to or greater than $25.3865 (10 day VWAP up to and including the effective date of grant of 1 July 2017). 1 For FY17 Mr Storrie's STI performance measures were specific to the portfolio businesses. For FY18, Mr Storrie's remuneration structure will align with other Executive KMP. 2 Straight-line vesting between each performance level (above minimum performance). Each performance measure operates independently and will be tested separately. 38 2EXECUTIVE KMP REMUNERATION Reflective of Group performance, the FY17 STI outcome is just above target for the Executive KMP: 109.8% of target COMPONENT FY17 APPROACH OTHER Hedging policy Individuals cannot hedge Woolworths Limited equity that is unvested or subject to restrictions. Clawback The Board may determine that any unvested share rights will lapse or be forfeited in certain circumstances such as in the case of fraud, wilful misconduct or dishonesty. Minimum shareholding requirements Group CEO: Equal to 100% base salary over a three-year period. Executive KMP: Equal to 50% base salary over a five-year period (effective from their appointment or the introduction of the policy, whichever is the later). Dividends Shares equivalent to the value of dividends foregone during the period between grant and vesting are provided at the time of vesting. No dividend equivalents are provided on awards (or portion thereof) which do not vest. 2.2 How performance is linked to STI outcomes 2.1 Overview of FY17 remuneration framework (continued) SAFETY The inclusion of safety in our incentive program for FY17 has refocused our safety efforts and led to a step change improvement in safety outcomes across the Group. During FY17 we focused on both physical safety and the physiological safety of our teams. Safety across the Group has improved significantly in FY17 resulting in performance at stretch. We have seen a 20% improvement in our Total Recordable Injury Frequency Rate (TRIFR) and a 29% improvement in our Lost Time Injury Frequency Rate (LTIFR). HURDLE: 14.7 TRIFR TARGET: 14.1 TRIFR STRETCH: 13.0 TRIFR ACTUAL RESULT FY17: 12.9 TRIFR CUSTOMER SATISFACTION We measure customer satisfaction through our Voice of Customer (VOC) program. This program is run by an external provider and surveys thousands of our customers each month on seven key store-controllable measures. Stores are able to see immediate customer feedback on their stores through a VOC portal. In FY17 we have achieved significant improvements in our VOC score as a result of our continued focus on the customer, achieving results between target and stretch. HURDLE: 75% TARGET: 77% STRETCH: 80% ACTUAL RESULT FY17: 78% WORKING CAPITAL The performance of working capital was above stretch for FY17 and was predominantly the result of a significant improvement in inventory management across the Group with good improvement in average inventory days achieved in most businesses. HURDLE: -1.4 DAYS 1 TARGET: -1.8 DAYS 1 STRETCH: -2.6 DAYS 1 ACTUAL RESULT FY17: -5.1 DAYS 11 1 Improvement in working capital days. SA LE S 113.4% 77.1% 125.0% 1 125.0% 1 EB IT W O R K IN G C A PI TA L C U ST O M ER SA T IS FA C T IO N SA FE T Y FY 17 A C T U A L PE R FO R M A N C E HURDLE TARGET STRETCH 108.3% EARNINGS BEFORE INTEREST AND TAX (EBIT) EBIT performance was above hurdle but below target for FY17. EBIT in Australian Food was driven by a turnaround in sales and an improvement in stock loss, offset somewhat by competitive pricing in the market and higher team incentives. Our Petrol and Hotels businesses delivered strong EBIT growth and Endeavour Drinks grew broadly in line with sales. Offsetting these results were substantial trading challenges in BIG W. HURDLE: $2.44B TARGET: $2.53B STRETCH: $2.66B ACTUAL RESULT FY17: $2.48B SALES We delivered strong sales in FY17 across Australian Food and Endeavour Drinks. The sales momentum in Australian Food was driven by investment in price and service over the past 18 months as well as the ramp-up of our supermarket renewals program. Sales performance for the Group was between target and stretch for FY17. HURDLE: $53.8B TARGET: $54.9B STRETCH: $56.0B ACTUAL RESULT FY17: $55.5B 1 STI outcome capped at stretch for each measure. 1 2 3 4 5 PERFO RM A N C E H IG H LIG H T S BU SIN ESS REV IEW D IREC TO RS' REPO RT FIN A N C IA L REPO RT O T H ER IN FO RM A T IO N 39 W O O LW O RT H S G R O U P A N N U A L R EPO R T 20 17 Remuneration Report 2.3 What we paid Executive KMP in FY17 – further detail The following pages compare the target and actual remuneration earned during FY17 and FY16 for the current Executive KMP. Amounts include: • Total fixed remuneration received • Relocation and other benefits received • Cash STI received as a result of business and individual performance (versus the cash target STI value) • Share rights that vested during the year at face value (versus the maximum initial award face value) for each plan. This information differs to the statutory remuneration disclosures presented in Section 5.1 (the main differences are outlined in footnotes 1,2 associated with the following tables). FY16 remuneration outcomes have been restated to exclude share rights that vested on 1 July 2016 and to include share rights that vested on 1 July 2015 in line with the respective financial reporting period as presented in Section 5.2. The only Executive KMP with LTI due to vest in FY17 were David Marr and Martin Smith. This LTI plan lapsed in full. TARGET REMUNERATION TARGET REMUNERATION FY17 FY16 ACTUAL REMUNERATION ACTUAL REMUNERATION Brad Banducci MANAGING DIRECTOR & CHIEF EXECUTIVE OFFICER ($000s) 1,741 1,741 2,501 2,501 1,250 168 573 1,510 111 351 440219 846 242 550 4,492 4,473 3,379 2,400 The ‘FY16 Target remuneration’ and ’FY16 Actual remuneration’ amounts for Mr Banducci include his remuneration for his role as MD Woolworths Food Group up to 25 February 2016, and as Group CEO thereafter. Mr Banducci had 16,912 retention share rights that vested in FY17. The share rights were awarded as part of a retention strategy during the early stages of the transformation of the business. The share rights were subject to continued employment and effective individual performance. TARGET REMUNERATION TARGET REMUNERATION FY17 FY16 ACTUAL REMUNERATION ACTUAL REMUNERATION Richard Dammery CHIEF LEGAL OFFICER & COMPANY SECRETARY ($000s) 849 63625 25 286 646 849 831 469 525 177 831 469 133 699 203 1,796 1,776 2,002 1,433 Mr Dammery had 8,908 retention share rights that vested in FY17. The share rights were awarded as part of a retention strategy during the early stages of the transformation of the business. The share rights were subject to continued employment and effective individual performance. Mr Dammery's FY17 STI target and maximum were increased to align with other Executive KMP. Mr Dammery's relocation benefits concluded in July 2016. The amounts shown above for FY16 and FY17 comprise the relocation benefits provided and the associated fringe benefits tax. 1 In relation to both FY17 and FY16 total fixed remuneration data, no adjustment has been made for the movement in the Executive KMP’s annual leave liability balance for the relevant financial year, or salary sacrifice superannuation cash contributions. 2 All share rights granted and vested are valued using a face value methodology, whereas the statutory disclosures in section 5.1 use a fair value methodology. LEGEND Total Fixed Remuneration Relocation and other benefits STI cash Deferred STI share rights Retention share rights Share rights LTI share rights 40 2EXECUTIVE KMP REMUNERATION David Marr CHIEF FINANCIAL OFFICER TARGET REMUNERATION TARGET REMUNERATION FY17 FY16 ACTUAL REMUNERATION ACTUAL REMUNERATION ($000s) 1,210 1,210 1,185 1,143 188 1,185 170 907 1,096 442 116 336 2,675 2,642 2,516 1,355 Mr Marr had 16,219 retention share rights that vested in FY17. The share rights were awarded as part of a retention strategy during the early stages of the transformation of the business. The share rights were subject to continued employment and effective individual performance. Claire Peters MANAGING DIRECTOR, WOOLWORTHS SUPERMARKETS TARGET REMUNERATION FY17 ACTUAL REMUNERATION ($000s) 532 532 81 81 71 71 52 52 736 736 Ms Peters received relocation benefits of $80,766 and a cash sign on payment of $531,975 in FY17. The relocation benefits will continue until June 2018. She received a cash sign on payment as compensation for the FY17 cash STI she forfeited from her previous employer. She also received share rights as compensation for equity forfeited. Consistent with the vesting schedule for this forfeited equity, 1,997 of these share rights vested in FY17. Refer to section 2.5 for further details. TARGET REMUNERATION TARGET REMUNERATION FY17 FY16 ACTUAL REMUNERATION ACTUAL REMUNERATION Martin Smith MANAGING DIRECTOR, ENDEAVOUR DRINKS ($000s) 789 789 670 369 91 670 83 598 656 51 1,438 1,445 1,130 753 Mr Smith received TFR increases for FY17 and FY18 in the annual remuneration review to better align with the market. TARGET REMUNERATION FY17 ACTUAL REMUNERATION Colin Storrie GROUP PORTFOLIO DIRECTOR ($000s) 824 824 750 208 825 244 1,782 1,893 Mr Storrie had 9,325 retention share rights that vested in FY17. The share rights were awarded as part of a retention strategy during the early stages of the transformation of the business. The share rights were subject to continued employment and effective individual performance. 2.3 What we paid Executive KMP in FY17 – further detail (continued) 1 2 3 4 5 PERFO RM A N C E H IG H LIG H T S BU SIN ESS REV IEW D IREC TO RS' REPO RT FIN A N C IA L REPO RT O T H ER IN FO RM A T IO N 41 W O O LW O RT H S G R O U P A N N U A L R EPO R T 20 17 Remuneration Report LTI Outcomes: The FY12 LTI plan did not vest on 1 July 2016 as it did not meet the performance hurdles required. This is in line with the Relative TSR and EPS performance over the relevant performance period. FY12 LTI Granted 1 July 2011 and lapsed 1 July 2016: • The LTI performance hurdle was not met and therefore no performance share rights vested under the FY12 LTI Plan • Relative TSR performance over the plan period (against a 51st percentile hurdle) was at the 27.5th percentile • Cumulative EPS 1 performance over the plan period (against an 8% hurdle) was negative 8.8%. Vesting outcome Nil Nil 1 Before significant items. 2.4 FY18 outlook The PPC and the Board have reviewed the reward framework for the Executive KMP and determined that it will continue to operate in FY18 with no significant changes other than the two changes described in Section 2.1 on page 38. There will be: • No changes to the Total Fixed Remuneration for Executive KMP, with the exception of Mr Smith • No change to LTI and STI targets and maximums for Executive KMP with the exception of Mr Storrie's remuneration which will align to the current Executive KMP structure. 2.5 Other share right awards Retention share rights No retention share rights were granted in FY17 to any Executive KMP. At this time, the Board does not intend to grant any further retention share rights. The only remaining retention awards were awarded in prior years and will vest in FY18 for David Marr (16,912 share rights) and Colin Storrie (9,855 share rights). Retention awards have only been made in the past where the Board determined there was a significant retention risk. These targeted retention incentives were intended to ensure stable leadership and continuity during times of difficult business performance. These share rights vest at the end of a specified period, provided that the executive remains employed by the Woolworths Group at the vesting date. Share rights for Claire Peters, Managing Director, Woolworths Supermarkets Claire Peters was appointed following a global search. She was a senior executive with Tesco with considerable STI and unvested equity that was forfeited following her resignation. To secure her relocation to Australia, the PPC approved arrangements to compensate her for an approved portion of these forfeited incentives. Woolworths Group assessed the STI and each individual tranche of equity below for the likelihood of vesting. Target performance was assumed for the FY17 STI (the performance was above target), FY14 performance shares and non-performance related shares. These incentives were replaced with share rights to the same value and with the same vesting dates. A discount was applied to the value of the FY15 and FY16 performance shares, which were replaced with the grant of the FY17 Transformation Incentive. Vesting of each tranche of share rights is subject to Claire's continued employment with Woolworths Group over the vesting period, and, for the Transformation Incentive, achievement of performance hurdles. CLAIRE PETERS – SHARE RIGHTS IN RESPECT OF FORFEITED EQUITY AND CASH TOTAL FACE VALUE ($) Non-performance related shares 1 1,377,248 FY14 performance shares 1 243,872 STI FY17 deferred 1 531,975 FY15 & FY16 performance shares 2 1,300,000 Total share rights 3,453,095 STI FY17 forfeited (paid in cash) 531,975 TOTAL 3,985,070 1 Delivered in share rights, matching the original vesting schedule and not subject to any further performance conditions other than continued employment. 2 Delivered as participation in FY17 Transformation Incentive Plan and subject to performance conditions. 2.3 What we paid Executive KMP in FY17 – further detail (continued) 42 2EXECUTIVE KMP REMUNERATION 2.6 Five year performance perspective The following table represents the business performance outcomes over a five-year period which is aligned to the STI and LTI outcomes for Executive KMP. FINANCIAL YEAR FY13 FY14 FY15 FY16 FY17 Basic EPS¹ – Total Group (cents per share) 190.4 196.5 195.2 110.2 119.4 Total dividend (cents per share) 133 137 139 77 84 Share price (closing) ($) 32.81 35.66 27.39 20.56 25.36 TSR 2 (%) 30.9 12.9 (18.5) (22.6) 26.8 STI outcome (average) (% of maximum) 85.5 91.3 0 0 114.2³ LTI (average) (% vested) 87.5 46.25 No LTI No LTI 0 1 Before significant items. 2 TSR represents the total shareholder return over the year, which includes changes in the share price as well as dividends and other capital returns that are assumed to be reinvested into Woolworths Limited shares. 3 Based on the average STI outcome for Executive KMP, including individual performance modifiers. FY17 outcomes are a percentage of target, including individual performance modifiers, consistent with the approach for FY17. For comparative purposes the FY17 STI outcome as a percentage of maximum is 84.8%. 2.7 Terms of Executive KMP service agreements All Executive KMP are employed on service agreements that detail the components of remuneration paid but do not prescribe how remuneration levels are to be modified from year to year. The agreements do not provide for a fixed term, although the service agreements may be terminated on specified notice. The notice period is 12 months for the CEO and six months for all other Executive KMP. Below is a summary of the termination provisions for Executive KMP. TERMINATION BY COMPANY Where the notice period is worked: • Total fixed remuneration is paid in respect of and for the duration of the notice period. Where the notice period is paid in lieu: • Total fixed remuneration in respect of the notice period (and, if appropriate, a reasonable estimate of STI) is paid as a lump sum. In both circumstances: • The extent to which STI and LTI arrangements remain in place will be treated in accordance with the relevant rules for the award. If termination is for cause: • Only accrued leave and unpaid total fixed remuneration for days worked is paid. • STI and LTI are forfeited. TERMINATION BY EXECUTIVE KMP Where the notice period is worked: • Total fixed remuneration is paid in respect of and for the duration of the notice period. Where the notice period is paid in lieu: • Total fixed remuneration in respect of the notice period is paid as a lump sum. In both circumstances, where the Executive KMP has resigned: • For the CEO, cash STI will not be payable; for Other Executive KMP, STI is treated in accordance with the relevant rules for the award. • Unvested deferred STI and LTI are treated in accordance with the relevant rules for the award, and will typically be forfeited unless the Board determines otherwise. In addition, and upon further payment (where required), the Company may invoke a restraint period of up to 12 months following separation, preventing Executive KMP from engaging in any business activity with competitors. 1 2 3 4 5 PERFO RM A N C E H IG H LIG H T S BU SIN ESS REV IEW D IREC TO RS' REPO RT FIN A N C IA L REPO RT O T H ER IN FO RM A T IO N 43 W O O LW O RT H S G R O U P A N N U A L R EPO R T 20 17 Remuneration Report 3 NON-EXECUTIVE DIRECTORS’ ARRANGEMENTS 3.1 Non-executive Directors’ remuneration policy and structure Non-executive Director fees are paid from an aggregate annual fee pool of $4,000,000, as approved by shareholders at the AGM on 18 November 2010. Total Board and committee fees paid during FY17 were $2,655,001 (see Section 5.1). Non-executive Directors do not receive variable pay and no Directors’ fees are paid to Executive Directors. The table below provides a summary of Board and committee fees for FY17: WOOLWORTHS LIMITED BOARD AND COMMITTEE FEES FY17 CHAIR ($) MEMBER ($) Woolworths Limited Board 703,371 234,459 Audit, Risk Management and Compliance Committee (ARMCC) 54,525 27,265 People Performance Committee (PPC) 54,525 27,265 Sustainability Committee (SC) 36,349 18,176 Nomination Committee Nil Nil There has been no increase in Non-executive Directors’ base fees since September 2013. Following a review against the market, the Woolworths Limited Board (in the absence of Mr Cairns) determined to increase the Woolworths Limited Board Chair fee to $770,000, effective 1 September 2017. No changes are proposed to other Non-executive Directors’ base or committee fees in FY18. 3.2 Non-executive Directors’ minimum shareholding requirement Non-executive Directors are required to hold a minimum number of shares with a value equal to or greater than one year’s base fee within three years of their appointment. The shares or share instruments may be held personally or by a close family member either directly, within a self-managed superannuation fund or by a family trust or private company. As of the financial year end, all Non-executive Directors hold, or are on track to hold, the required minimum number of shares within three years of their appointment. Details of the current shareholdings for Non-executive Directors as at 25 June 2017 are provided in section 5.3. 44 4 GOVERNANCE 4.1 Role of the People Performance Committee (PPC) The PPC, which operates under its own Charter and reports to the Board, is chaired by Holly Kramer. The Charter, which the Board reviews annually, was updated in May 2017 resulting in a change in the name of the committee from People Policy to People Performance. This change reflects the Board and management's significant shift in thinking regarding the centricity of people, performance and culture in driving long term success at the Woolworths Group. A copy of the PPC Charter is available on the company’s website: www.woolworthsgroup.com.au 4.2 Use of remuneration advisors Where appropriate, the Board and the PPC consult external remuneration advisors. When such external remuneration advisors are selected, the Board considers potential conflicts of interest. Advisors' terms of engagement regulate their access to, and (where required) set out their independence from, members of Woolworths Group management. The requirement for external remuneration advisors’ services is assessed annually in the context of matters the PPC needs to address. External advisors’ advice is used as a guide, but do not serve as a substitute for directors’ thorough consideration of the relevant matters. The Board and PPC engaged remuneration advisors Ernst & Young during the year, and received remuneration and market practice advice and information in relation to STIs, LTIs, remuneration of Executive KMP and remuneration of Non-executive Directors. No remuneration recommendations, as defined by the Corporations Act 2001 (Cth), were made by remuneration advisors. 4.3 Securities Trading Policy The Securities Trading Policy was reviewed in 2015 and the revised version was released to the ASX in August 2015. Under the policy, senior executives may not enter into any derivative (including hedging) transaction that will protect the value of either unvested securities or vested securities that are subject to a disposal restriction, issued as part of the LTI plan. Compliance with the policy is a condition of participation in the LTI plan. 1 2 3 4 5 PERFO RM A N C E H IG H LIG H T S BU SIN ESS REV IEW D IREC TO RS' REPO RT FIN A N C IA L REPO RT O T H ER IN FO RM A T IO N 45 W O O LW O RT H S G R O U P A N N U A L R EPO R T 20 17 Remuneration Report 5 KMP STATUTORY DISCLOSURES 5.1 KMP remuneration table The table below sets out the remuneration of the KMP of Woolworths Group and its subsidiaries during the financial periods ended 25 June 2017 and 26 June 2016. KMP TENURE AS KMP (FROM-TO) FINANCIAL YEAR SHORT-TERM BENEFITS POST EMPLOYMENT BENEFITS OTHER LONG-TERM BENEFITS SHARE-BASED PAYMENTS 3,4 TOTAL $ % OF REMUNERATION RELATED TO PERFORMANCE 'AT RISK' 5 SALARY AND FEES $ CASH INCENTIVE ¹ $ NON-MONETARY AND OTHER BENEFITS ² $ SUB TOTAL $ SUPERANNUATION $ LONG SERVICE LEAVE $ VALUE OF EQUITY $ Non-executive Directors (NED) G M Cairns – Board Chair 01/09/15 FY17 703,371 – 804 704,175 19,616 – – 723,791 – FY16 586,143 – 856 586,999 19,308 – – 606,307 – J R Broadbent 28/01/11 FY17 279,900 – 804 280,704 19,616 – – 300,320 – FY16 267,783 – 856 268,639 19,308 – – 287,947 – H S Kramer 08/02/16 FY17 307,160 – 804 307,964 19,616 – – 327,580 – FY16 116,815 – 856 117,671 8,629 – – 126,300 – S L McKenna 08/02/16 FY17 288,989 – 804 289,793 19,616 – – 309,409 – FY16 110,758 – 856 111,614 8,485 – – 120,099 – S R Perkins 6 01/09/14 FY17 325,338 – 804 326,142 19,616 – – 345,758 – FY16 302,163 – 856 303,019 19,308 – – 322,327 – K A Tesija 7 09/05/16 FY17 304,459 – 804 305,263 15,300 – – 320,563 – FY16 37,654 – 856 38,510 2,739 – – 41,249 – M J Ullmer 30/01/12 FY17 307,160 – 804 307,964 19,616 – – 327,580 – FY16 306,452 – 856 307,308 19,308 – – 326,616 – Executive Director/KMP B L Banducci 01/05/12 FY17 2,514,456 1,509,750 804 4,025,010 34,167 37,352 1,778,296 5,874,825 56% FY16 1,731,191 – 856 1,732,047 114,623 179,458 322,277 2,348,405 14% Executive KMP R J E Dammery 01/09/14 FY17 865,927 698,534 26,294 1,590,755 34,167 12,404 670,304 2,307,630 59% FY16 818,874 – 469,967 1,288,841 35,000 13,913 220,172 1,557,926 14% D P Marr 26/11/13 FY17 1,159,129 1,095,626 804 2,255,559 29,583 17,986 1,251,857 3,554,985 66% FY16 1,169,161 – 856 1,170,017 30,000 26,306 438,882 1,665,205 26% C E Peters 8, 9 13/06/17 FY17 74,410 531,975 81,570 687,955 – 894 1,187,777 1,876,626 N/A10 M R Smith 29/06/15 FY17 811,255 656,330 804 1,468,389 34,167 26,197 533,658 2,062,411 58% FY16 654,415 – 856 655,271 35,000 51,743 (3,538) 738,476 N/A10 C G Storrie 11 01/07/16 FY17 800,939 825,000 804 1,626,743 69,058 21,202 784,299 2,501,302 64% Former Non–executive Directors and Executive KMP R G Waters 8 – Board Chair 28/01/11– 01/09/15 FY16 117,229 – 856 118,085 4,827 – – 122,912 – C Cross 8 30/01/12– 23/11/15 FY16 125,596 – 856 126,452 9,204 – – 135,656 – C J Hrdlicka 8 10/08/10– 08/02/16 FY16 158,712 – 856 159,568 12,300 – – 171,868 – A D D Mackay 8 30/01/12– 23/10/15 FY16 97,448 – 856 98,304 6,746 – – 105,050 – G O'Brien – Executive KMP 8 04/04/11– 26/02/16 FY16 1,652,054 – 856 1,652,910 446,000 – – 2,098,910 – Total FY17 8,742,493 5,317,215 116,708 14,176,416 334,138 116,035 6,206,191 20,832,780 – FY16 8,252,448 – 482,807 8,735,255 790,785 271,420 977,793 10,775,253 – 1 Represents the cash component of the FY17 STI, of which Mr Banducci received 50% and other Executive KMP received 75%–100% in cash. 2 Non-monetary and other benefits include the deemed premium in respect of the Directors’ and Officers’ Indemnity insurance and where applicable, non-recurring relocation benefits and associated fringe benefits tax. 3 The fair value of share rights with the relative TSR performance measure is calculated at the date of grant using a Monte Carlo simulation model, taking into account the impact of the TSR condition whilst the fair value of other share rights are calculated using a Black-Scholes option pricing model. Prior to FY17, the right holders were not entitled to dividends during the vesting period. The value disclosed is the portion of the fair value of the share rights recognised as an expense in each reporting period. 4 For FY16 a portion of the share-based payment expense was credited back to profit or loss due to a failure to satisfy the relevant non-market vesting conditions. 46 5KMP STATUTORY DISCLOSURES 5 KMP STATUTORY DISCLOSURES 5.1 KMP remuneration table The table below sets out the remuneration of the KMP of Woolworths Group and its subsidiaries during the financial periods ended 25 June 2017 and 26 June 2016. KMP TENURE AS KMP (FROM-TO) FINANCIAL YEAR SHORT-TERM BENEFITS POST EMPLOYMENT BENEFITS OTHER LONG-TERM BENEFITS SHARE-BASED PAYMENTS 3,4 TOTAL $ % OF REMUNERATION RELATED TO PERFORMANCE 'AT RISK' 5 SALARY AND FEES $ CASH INCENTIVE ¹ $ NON-MONETARY AND OTHER BENEFITS ² $ SUB TOTAL $ SUPERANNUATION $ LONG SERVICE LEAVE $ VALUE OF EQUITY $ Non-executive Directors (NED) G M Cairns – Board Chair 01/09/15 FY17 703,371 – 804 704,175 19,616 – – 723,791 – FY16 586,143 – 856 586,999 19,308 – – 606,307 – J R Broadbent 28/01/11 FY17 279,900 – 804 280,704 19,616 – – 300,320 – FY16 267,783 – 856 268,639 19,308 – – 287,947 – H S Kramer 08/02/16 FY17 307,160 – 804 307,964 19,616 – – 327,580 – FY16 116,815 – 856 117,671 8,629 – – 126,300 – S L McKenna 08/02/16 FY17 288,989 – 804 289,793 19,616 – – 309,409 – FY16 110,758 – 856 111,614 8,485 – – 120,099 – S R Perkins 6 01/09/14 FY17 325,338 – 804 326,142 19,616 – – 345,758 – FY16 302,163 – 856 303,019 19,308 – – 322,327 – K A Tesija 7 09/05/16 FY17 304,459 – 804 305,263 15,300 – – 320,563 – FY16 37,654 – 856 38,510 2,739 – – 41,249 – M J Ullmer 30/01/12 FY17 307,160 – 804 307,964 19,616 – – 327,580 – FY16 306,452 – 856 307,308 19,308 – – 326,616 – Executive Director/KMP B L Banducci 01/05/12 FY17 2,514,456 1,509,750 804 4,025,010 34,167 37,352 1,778,296 5,874,825 56% FY16 1,731,191 – 856 1,732,047 114,623 179,458 322,277 2,348,405 14% Executive KMP R J E Dammery 01/09/14 FY17 865,927 698,534 26,294 1,590,755 34,167 12,404 670,304 2,307,630 59% FY16 818,874 – 469,967 1,288,841 35,000 13,913 220,172 1,557,926 14% D P Marr 26/11/13 FY17 1,159,129 1,095,626 804 2,255,559 29,583 17,986 1,251,857 3,554,985 66% FY16 1,169,161 – 856 1,170,017 30,000 26,306 438,882 1,665,205 26% C E Peters 8, 9 13/06/17 FY17 74,410 531,975 81,570 687,955 – 894 1,187,777 1,876,626 N/A10 M R Smith 29/06/15 FY17 811,255 656,330 804 1,468,389 34,167 26,197 533,658 2,062,411 58% FY16 654,415 – 856 655,271 35,000 51,743 (3,538) 738,476 N/A10 C G Storrie 11 01/07/16 FY17 800,939 825,000 804 1,626,743 69,058 21,202 784,299 2,501,302 64% Former Non–executive Directors and Executive KMP R G Waters 8 – Board Chair 28/01/11– 01/09/15 FY16 117,229 – 856 118,085 4,827 – – 122,912 – C Cross 8 30/01/12– 23/11/15 FY16 125,596 – 856 126,452 9,204 – – 135,656 – C J Hrdlicka 8 10/08/10– 08/02/16 FY16 158,712 – 856 159,568 12,300 – – 171,868 – A D D Mackay 8 30/01/12– 23/10/15 FY16 97,448 – 856 98,304 6,746 – – 105,050 – G O'Brien – Executive KMP 8 04/04/11– 26/02/16 FY16 1,652,054 – 856 1,652,910 446,000 – – 2,098,910 – Total FY17 8,742,493 5,317,215 116,708 14,176,416 334,138 116,035 6,206,191 20,832,780 – FY16 8,252,448 – 482,807 8,735,255 790,785 271,420 977,793 10,775,253 – 5 Represents the sum of the cash incentive and share-based payments divided by the total remuneration reflecting the percentage of remuneration 'at risk' for the respective financial year. 6 Mr Perkins was a Director of Hydrox Holdings Pty Ltd in FY16 and received additional fees of $16,114. 7 Ms Tesija received an Overseas Directors’ allowance of $10,000 per eligible flight during the current and prior financial year. 8 Amounts represent the payments relating to the period during which the individuals were KMP, unless otherwise stated. 9 Refer to section 2.5 for further details on Ms Peters' remuneration. 10 Percentage not applicable given the time in the role or the share-based payment expense was negative for the relevant period. 11 Mr Storrie became an Executive KMP on 1 July 2016 and his remuneration package has been disclosed for the entire financial year. He is not subject to STI Deferral in FY17. 1 2 3 4 5 PERFO RM A N C E H IG H LIG H T S BU SIN ESS REV IEW D IREC TO RS' REPO RT FIN A N C IA L REPO RT O T H ER IN FO RM A T IO N 47 W O O LW O RT H S G R O U P A N N U A L R EPO R T 20 17 Remuneration Report 5.2 Executive KMP share right movements The table below summarises the movements during the year in holdings of share right interests in Woolworths Limited for current Executive KMP. A share right entitles the holder to one ordinary fully paid Woolworths Limited share. OPENING BALANCE NO. SHARE RIGHTS GRANTED AS REMUNERATION SHARE RIGHTS VESTED 2 SHARE RIGHTS LAPSED 3 NO. CLOSING BALANCE NO.NO. $ 1 NO. $ B L Banducci FY17 122,680 241,220 4,769,723 (21,330) 461,181 – 342,570 FY16 93,895 53,233 686,351 (24,448) 658,661 – 122,680 R J E Dammery FY17 55,888 81,845 1,666,091 (8,908) 202,516 – 128,825 FY16 28,866 32,022 466,905 (5,000) 132,778 – 55,888 D P Marr FY17 170,020 116,702 2,375,664 (16,219) 336,187 (4,550) 265,953 FY16 101,567 74,844 1,369,650 (6,391) 170,126 – 170,020 C E Peters 4 FY17 – 145,587 3,140,868 (1,997) 51,792 – 143,590 M R Smith FY17 28,741 71,593 1,457,395 – – (2,000) 98,334 FY16 20,862 10,979 141,556 (3,100) 82,521 – 28,741 C G Storrie FY17 19,180 81,845 1,666,091 (9,325) 243,878 – 91,700 Total FY17 396,509 738,792 15,075,832 (57,779) 1,295,554 (6,550) 1,070,972 FY16 245,190 171,078 2,664,462 (38,939) 1,044,086 – 377,329 In addition to the share rights that vested and lapsed in FY17, no share rights held by Executive KMP were forfeited during the year. 1 Share rights granted as remuneration is the total fair value of share rights granted during the year determined by an independent actuary. This will be recognised in employee benefits expense over the vesting period of the share right, in accordance with Australian Accounting Standards. 2 The value of share rights vested during the year is calculated based on the VWAP of Woolworths Limited shares traded in the five days prior to and including the date of vesting. All share rights that could have vested during the financial year, vested at 100% with the exception of Mr Banducci, where his Deferred STI for FY14 vested at 77.5%. 3 The number of share rights which lapsed as a result of failure to meet performance hurdles relates to the FY12 LTIP. 4 Ms Peters was granted 145,587 share rights to replace the awards she forfeited from her previous employer. As at balance date, 1,997 of these share rights had vested consistent with the vesting schedule for her forfeited equity. Refer to section 2.5 for further detail. 48 5KMP STATUTORY DISCLOSURES 5.3 KMP share movements The table below summarises the movements during the year of interests in shares of Woolworths Limited held by current Executive KMP. SHAREHOLDING AT 26 JUNE 2016 NO. SHARES ISSUED UNDER DRP NO. SHARES RECEIVED ON VESTING OF SHARE RIGHTS NO. SHARES PURCHASED NO. SHAREHOLDING AT 25 JUNE 2017 NO. Non-executive Directors G M Cairns 8,700 383 – 11,640 20,723 J R Broadbent 65,138 – – – 65,138 H S Kramer 3,249 – – 3,193 6,442 S L McKenna 4,750 78 – 5,600 10,428 S R Perkins 7,000 197 – 7,000 14,197 K A Tesija 2,660 – – 2,320 4,980 M J Ullmer 20,000 – – – 20,000 Executive Director/KMP B L Banducci 32,308 – 21,330 – 53,638 Executive KMP R J E Dammery 6,694 439 8,908 – 16,041 D P Marr 19,687 1,012 16,219 28 36,946 C E Peters 1 – – 1,997 – 1,997 M R Smith 29,614 – – – 29,614 C G Storrie 2 611 – 9,325 – 9,936 1 Ms Peters was granted 145,587 share rights to replace the awards she forfeited from her previous employer. As at balance date, 1,997 of these share rights had vested consistent with the vesting schedule for her forfeited equity. Refer to section 2.5 for further detail. 2 Mr Storrie held shares prior to his appointment effective 1 July 2016. 1 2 3 4 5 PERFO RM A N C E H IG H LIG H T S BU SIN ESS REV IEW D IREC TO RS' REPO RT FIN A N C IA L REPO RT O T H ER IN FO RM A T IO N 49 W O O LW O RT H S G R O U P A N N U A L R EPO R T 20 17 Remuneration Report 5.4 Share rights outstanding for Executive KMP at 25 June 2017 The table below sets out the grants and outstanding number of share rights for current Executive KMP. No amounts were paid or are payable by the recipient on receipt of the share rights and there are no outstanding vested share rights as at 25 June 2017. EXECUTIVE KMP GRANT DATE 1 PERFORMANCE PERIOD START DATE NO. OF RIGHTS AT 25 JUNE 2017 EXERCISE DATE 2 MAXIMUM VALUE OF AWARD TO VEST ($) 3 FAIR VALUE PER PERFORMANCE RIGHT 4 TSR SALES PER TRADING SQM ROFE EPS RETENTION B L Banducci 07/12/12 01/07/12 11,588 31/08/17 212,292 $14.04 – – $22.60 – 13/12/13 01/07/13 24,386 31/08/18 475,771 $13.46 – – $25.56 – 17/10/14 01/07/14 12,143 31/08/17 261,196 $13.24 – – $29.78 – 20/11/15 01/07/15 53,233 31/08/18 686,351 $9.51 – – $19.66 – 24/11/16 01/07/16 241,220 31/08/19 4,769,723 $11.48 $23.92 $23.92 – – 342,570 6,405,333 R J E Dammery 17/10/14 01/07/14 18,866 31/08/17 405,808 $13.24 – – $29.78 – 20/11/15 01/07/15 28,114 31/08/18 362,483 $9.51 – – $19.66 – 28/10/16 01/07/16 81,845 31/08/19 1,666,091 $11.75 $24.66 $24.66 – – 128,825 2,434,382 D P Marr 07/12/12 01/07/12 9,000 31/08/17 164,880 $14.04 – – $22.60 – 13/12/13 01/07/13 18,024 31/08/18 351,648 $13.46 – – $25.56 – 29/04/14 01/07/13 35,964 5 31/08/18 889,570 $19.08 – – $30.39 – 17/10/14 01/07/14 27,638 31/08/17 594,493 $13.24 – – $29.78 – 14/07/15 01/07/15 16,912 01/07/17 410,623 – – – – $24.28 20/11/15 01/07/15 41,713 31/08/18 537,820 $9.51 – – $19.66 – 28/10/16 01/07/16 116,702 31/08/19 2,375,664 $11.75 $24.66 $24.66 – – 265,953 5,324,698 C E Peters 6 29/09/16 29/09/16 12,515 17/07/17 291,975 – – – – $23.33 29/09/16 29/09/16 6,618 27/05/18 154,398 – – – – $23.33 29/09/16 29/09/16 20,425 20/07/18 476,515 – – – – $23.33 29/09/16 29/09/16 20,839 12/05/19 486,174 – – – – $23.33 29/09/16 29/09/16 62,717 31/08/19 1,207,511 $10.28 $23.74 $23.74 – – 29/09/16 29/09/16 20,476 27/05/20 477,705 – – – – $23.33 143,590 3,094,278 M R Smith 07/12/12 01/07/12 5,119 31/08/17 93,780 $14.04 – – $22.60 – 29/04/14 01/07/13 6,989 5 31/08/18 172,873 $19.08 – – $30.39 – 17/10/14 01/07/14 3,654 31/08/17 78,598 $13.24 – – $29.78 – 20/11/15 01/07/15 10,979 31/08/18 141,556 $9.51 – – $19.66 – 28/10/16 01/07/16 71,593 31/08/19 1,457,395 $11.75 $24.66 $24.66 – – 98,334 1,944,202 C G Storrie 01/03/16 01/03/16 9,855 01/03/18 200,549 – – – – $20.35 28/10/16 01/07/16 81,845 31/08/19 1,666,091 $11.75 $24.66 $24.66 – – 91,700 1,866,640 The minimum value of share rights is assessed as nil and has not been specifically detailed in the table above on the basis that no share rights will vest if the performance criteria are not satisfied. 1 Grant date is the offer acceptance date. 2 With the exception of retention and buyout share rights, exercise of all other share rights will occur the day after the full year results are announced to the market. This may occur before 31 August in each respective year if the performance hurdles are met as outlined in section 2. 3 The maximum value of award to vest represents the total maximum value of employee benefits expense, as based on the value at grant date that would be recorded if all share rights which remain outstanding at 25 June 2017 satisfied all relevant vesting conditions. 4 The fair value of share rights with the relative TSR performance measure is calculated at the date of grant using a Monte Carlo simulation model, taking into account the impact of the TSR condition whilst the fair value of other share rights are calculated using a Black-Scholes option pricing model. Prior to FY17, the right holders were not entitled to dividends during the vesting period. The value disclosed is the portion of the fair value of the share rights recognised as an expense in each reporting period. 50 5KMP STATUTORY DISCLOSURES 5.4 Share rights outstanding for Executive KMP at 25 June 2017 The table below sets out the grants and outstanding number of share rights for current Executive KMP. No amounts were paid or are payable by the recipient on receipt of the share rights and there are no outstanding vested share rights as at 25 June 2017. EXECUTIVE KMP GRANT DATE 1 PERFORMANCE PERIOD START DATE NO. OF RIGHTS AT 25 JUNE 2017 EXERCISE DATE 2 MAXIMUM VALUE OF AWARD TO VEST ($) 3 FAIR VALUE PER PERFORMANCE RIGHT 4 TSR SALES PER TRADING SQM ROFE EPS RETENTION B L Banducci 07/12/12 01/07/12 11,588 31/08/17 212,292 $14.04 – – $22.60 – 13/12/13 01/07/13 24,386 31/08/18 475,771 $13.46 – – $25.56 – 17/10/14 01/07/14 12,143 31/08/17 261,196 $13.24 – – $29.78 – 20/11/15 01/07/15 53,233 31/08/18 686,351 $9.51 – – $19.66 – 24/11/16 01/07/16 241,220 31/08/19 4,769,723 $11.48 $23.92 $23.92 – – 342,570 6,405,333 R J E Dammery 17/10/14 01/07/14 18,866 31/08/17 405,808 $13.24 – – $29.78 – 20/11/15 01/07/15 28,114 31/08/18 362,483 $9.51 – – $19.66 – 28/10/16 01/07/16 81,845 31/08/19 1,666,091 $11.75 $24.66 $24.66 – – 128,825 2,434,382 D P Marr 07/12/12 01/07/12 9,000 31/08/17 164,880 $14.04 – – $22.60 – 13/12/13 01/07/13 18,024 31/08/18 351,648 $13.46 – – $25.56 – 29/04/14 01/07/13 35,964 5 31/08/18 889,570 $19.08 – – $30.39 – 17/10/14 01/07/14 27,638 31/08/17 594,493 $13.24 – – $29.78 – 14/07/15 01/07/15 16,912 01/07/17 410,623 – – – – $24.28 20/11/15 01/07/15 41,713 31/08/18 537,820 $9.51 – – $19.66 – 28/10/16 01/07/16 116,702 31/08/19 2,375,664 $11.75 $24.66 $24.66 – – 265,953 5,324,698 C E Peters 6 29/09/16 29/09/16 12,515 17/07/17 291,975 – – – – $23.33 29/09/16 29/09/16 6,618 27/05/18 154,398 – – – – $23.33 29/09/16 29/09/16 20,425 20/07/18 476,515 – – – – $23.33 29/09/16 29/09/16 20,839 12/05/19 486,174 – – – – $23.33 29/09/16 29/09/16 62,717 31/08/19 1,207,511 $10.28 $23.74 $23.74 – – 29/09/16 29/09/16 20,476 27/05/20 477,705 – – – – $23.33 143,590 3,094,278 M R Smith 07/12/12 01/07/12 5,119 31/08/17 93,780 $14.04 – – $22.60 – 29/04/14 01/07/13 6,989 5 31/08/18 172,873 $19.08 – – $30.39 – 17/10/14 01/07/14 3,654 31/08/17 78,598 $13.24 – – $29.78 – 20/11/15 01/07/15 10,979 31/08/18 141,556 $9.51 – – $19.66 – 28/10/16 01/07/16 71,593 31/08/19 1,457,395 $11.75 $24.66 $24.66 – – 98,334 1,944,202 C G Storrie 01/03/16 01/03/16 9,855 01/03/18 200,549 – – – – $20.35 28/10/16 01/07/16 81,845 31/08/19 1,666,091 $11.75 $24.66 $24.66 – – 91,700 1,866,640 5 This represents a subsequent grant of Deferred STI and LTIP and was made under the same terms and conditions of the main grant during the same year. This was done to align actual remuneration mix with targeted remuneration mix. 6 Ms Peters commenced her position 13 June 2017. Grant date is the offer acceptance date of 29 September 2016. 1 2 3 4 5 PERFO RM A N C E H IG H LIG H T S BU SIN ESS REV IEW D IREC TO RS' REPO RT FIN A N C IA L REPO RT O T H ER IN FO RM A T IO N 51 W O O LW O RT H S G R O U P A N N U A L R EPO R T 20 17 Auditor’s Independence Declaration The Board of Directors Woolworths Limited 1 Woolworths Way Bella Vista NSW 2153 23 August 2017 Dear Board Members Woolworths Limited In accordance with seaction 307C of the Corporations Act 2001, I am pleased to provide the following declaration of independence to the Directors of Woolworths Limited. As lead audit partner for the audit of the financial statements of Woolworths Limited for the financial year ended 25 June 2017, I declare that to the best of my knowledge and belief, there have been no contraventions of: (i) the auditor independence requirements of the Corporations Act 2001 in relation to the audit; and (ii) any applicable code of professional conduct in relation to the audit. Yours sincerely DELOITTE TOUCHE TOHMATSU A V Griffiths Partner Chartered Accountants Deloitte Touche Tohmatsu A.C.N. 74 490 121 060 Grosvenor Place 225 George Street Sydney NSW 2000 PO Box N250 Grosvenor Place Sydney NSW 1217 Australia DX 10307SSE Tel: +61 (0) 2 9322 7000 Fax: +61 (0) 2 9322 7001 www.deloitte.com.au Liability limited by a scheme approved under Professional Standards Legislation. Member of Deloitte Touche Tohmatsu Limited 52 Financial Report 2017 Table of Contents Consolidated Financial Statements Consolidated Statement of Profit or Loss 54 Consolidated Statement of Other Comprehensive Income 55 Consolidated Statement of Financial Position 56 Consolidated Statement of Changes in Equity 57 Consolidated Statement of Cash Flows 58 Notes to the Consolidated Financial Statements 1 BASIS OF PREPARATION 1.1 Basis of preparation 59 1.2 Significant accounting policies 59 1.3 Critical accounting estimates and judgements 62 1.4 Individually significant items from continuing operations 62 2 GROUP PERFORMANCE 2.1 Segment disclosures from continuing operations 63 2.2 Financing costs from continuing operations 65 3 ASSETS AND LIABILITIES 3.1 Trade and other receivables 66 3.2 Other financial assets 67 3.3 Property, plant and equipment 67 3.4 Intangible assets 69 3.5 Impairment of non-financial assets 71 3.6 Income taxes 74 3.7 Trade and other payables 77 3.8 Other financial liabilities 77 3.9 Provisions 78 3.10 Other non-current liabilities 80 4 CAPITAL STRUCTURE, FINANCING AND RISK MANAGEMENT 4.1 Earnings per share 81 4.2 Dividends 81 4.3 Contributed equity 82 4.4 Reserves 83 4.5 Net cash provided by operating activities 85 4.6 Borrowings 85 4.7 Financing arrangements 87 4.8 Financial risk management 87 4.9 Commitments for expenditure and operating lease expense 97 5 GROUP STRUCTURE 5.1 Discontinued operations 98 5.2 Assets held for sale 101 5.3 Subsidiaries 102 5.4 Parent entity information 106 5.5 Related parties 107 6 OTHER 6.1 Contingent liabilities 108 6.2 Employee benefits 108 6.3 Key Management Personnel 114 6.4 Auditors’ remuneration 114 6.5 Subsequent events 114 Directors’ Declaration 115 Independent Auditor’s Report to the Members of Woolworths Limited 116 Condensed five year summary 122 Shareholder information 126 Company directory 128 1 2 3 4 5 PERFO RM A N C E H IG H LIG H T S BU SIN ESS REV IEW D IREC TO RS' REPO RT FIN A N C IA L REPO RT O T H ER IN FO RM A T IO N 53 W O O LW O RT H S G R O U P A N N U A L R EPO R T 20 17 Consolidated Statement of Profit or Loss 2 | WOOLWORTHS LIMITED | FINANCIAL REPORT 2017 NOTE 2017 $M 2016 1 $M Continuing Operations Revenue from the sale of goods and services 55,475.0 53,473.9 Other operating revenue 193.6 189.8 Total operating revenue 55,668.6 53,663.7 Cost of sales (39,739.7) (38,538.6) Gross profit 15,928.9 15,125.1 Other revenue 244.2 275.5 Branch expenses (10,671.4) (10,683.9) Administration expenses (3,175.7) (3,221.8) Earnings before interest and tax 2,326.0 1,494.9 Financing costs 2.2 (193.6) (245.6) Profit before income tax 2,132.4 1,249.3 Income tax expense 3.6 (650.4) (486.4) Profit for the period from continuing operations 1,482.0 762.9 Discontinued Operations Profit/(Loss) from discontinued operations, after tax 5.1 111.4 (3,110.8) Profit/(Loss) for the period 1,593.4 (2,347.9) Profit/(Loss) attributable to: Equity holders of the parent entity 1,533.5 (1,234.8) Non-controlling interests 59.9 (1,113.1) 1,593.4 (2,347.9) Profit/(Loss) attributable to equity holders of the parent entity relates to: Profit from continuing operations 1,422.1 726.3 Profit/(Loss) from discontinued operations 111.4 (1,961.1) 1,533.5 (1,234.8) CENTS CENTS Earnings Per Share (EPS) attributable to equity holders of the parent entity Basic EPS 4.1 119.4 (97.7) Diluted EPS 4.1 119.1 (97.7) EPS attributable to equity holders of the parent entity from continuing operations Basic EPS 4.1 110.8 57.5 Diluted EPS 4.1 110.5 57.5 1 In accordance with AASB 5 Non-current Assets Held for Sale and Discontinued Operations, the comparatives have been restated for discontinued operations that have arisen during the year (refer to Note 5.1). The above Consolidated Statement of Profit or Loss should be read in conjunction with the accompanying Notes to the Consolidated Financial Statements. 54 Consolidated Statement of Profit or Loss 2 | WOOLWORTHS LIMITED | FINANCIAL REPORT 2017 NOTE 2017 $M 2016 1 $M Continuing Operations Revenue from the sale of goods and services 55,475.0 53,473.9 Other operating revenue 193.6 189.8 Total operating revenue 55,668.6 53,663.7 Cost of sales (39,739.7) (38,538.6) Gross profit 15,928.9 15,125.1 Other revenue 244.2 275.5 Branch expenses (10,671.4) (10,683.9) Administration expenses (3,175.7) (3,221.8) Earnings before interest and tax 2,326.0 1,494.9 Financing costs 2.2 (193.6) (245.6) Profit before income tax 2,132.4 1,249.3 Income tax expense 3.6 (650.4) (486.4) Profit for the period from continuing operations 1,482.0 762.9 Discontinued Operations Profit/(Loss) from discontinued operations, after tax 5.1 111.4 (3,110.8) Profit/(Loss) for the period 1,593.4 (2,347.9) Profit/(Loss) attributable to: Equity holders of the parent entity 1,533.5 (1,234.8) Non-controlling interests 59.9 (1,113.1) 1,593.4 (2,347.9) Profit/(Loss) attributable to equity holders of the parent entity relates to: Profit from continuing operations 1,422.1 726.3 Profit/(Loss) from discontinued operations 111.4 (1,961.1) 1,533.5 (1,234.8) CENTS CENTS Earnings Per Share (EPS) attributable to equity holders of the parent entity Basic EPS 4.1 119.4 (97.7) Diluted EPS 4.1 119.1 (97.7) EPS attributable to equity holders of the parent entity from continuing operations Basic EPS 4.1 110.8 57.5 Diluted EPS 4.1 110.5 57.5 1 In accordance with AASB 5 Non-current Assets Held for Sale and Discontinued Operations, the comparatives have been restated for discontinued operations that have arisen during the year (refer to Note 5.1). The above Consolidated Statement of Profit or Loss should be read in conjunction with the accompanying Notes to the Consolidated Financial Statements. Consolidated Statement of Other Comprehensive Income 3 | WOOLWORTHS LIMITED | FINANCIAL REPORT 2017 NOTE 2017 $M 2016 $M Profit/(Loss) for the period 1,593.4 (2,347.9) Other comprehensive income Items that may be reclassified to profit or loss Hedging reserve Movement in the fair value of cash flow hedges 4.4 3.8 (2.7) Income tax effect 4.4 1.0 (1.7) Foreign currency translation reserve (FCTR) Movement in translation of foreign operations taken to equity (3.9) 207.9 Income tax effect (3.0) (24.5) Items that will not be reclassified to profit or loss Equity instrument reserve Movement in the fair value of investments in equity securities 4.4 2.2 13.5 Retained earnings Actuarial gain/(loss) on defined benefit superannuation plans 3.2 (5.6) Income tax effect (1.0) 1.7 Other comprehensive income (net of tax) 2.3 188.6 Total comprehensive income from continuing operations 1,480.0 955.4 Total comprehensive income/(loss) from discontinued operations 115.7 (3,114.7) Total comprehensive income/(loss) for the period 1,595.7 (2,159.3) Total comprehensive income/(loss) attributable to: Equity holders of the parent entity 1,535.8 (1,046.2) Non-controlling interests 59.9 (1,113.1) 1,595.7 (2,159.3) Total comprehensive income from continuing operations attributable to: Equity holders of the parent entity 1,420.1 918.9 Non-controlling interests 59.9 36.5 1,480.0 955.4 The above Consolidated Statement of Other Comprehensive Income should be read in conjunction with the accompanying Notes to the Consolidated Financial Statements. 1 2 3 4 5 PERFO RM A N C E H IG H LIG H T S BU SIN ESS REV IEW D IREC TO RS' REPO RT FIN A N C IA L REPO RT O T H ER IN FO RM A T IO N 55 W O O LW O RT H S G R O U P A N N U A L R EPO R T 20 17 Consolidated Statement of Financial Position 4 | WOOLWORTHS LIMITED | FINANCIAL REPORT 2017 NOTE 2017 $M 2016 $M Current assets Cash and cash equivalents 4.5 909.4 948.1 Trade and other receivables 3.1 744.7 763.9 Inventories 4,080.4 4,558.5 Other financial assets 3.2 16.1 56.0 5,750.6 6,326.5 Assets held for sale 5.2 1,243.6 1,100.5 Total current assets 6,994.2 7,427.0 Non-current assets Trade and other receivables 3.1 72.1 85.9 Other financial assets 3.2 506.9 638.2 Property, plant and equipment 3.3 8,437.5 8,262.8 Intangible assets 3.4 6,532.8 6,590.6 Deferred tax assets 3.6.3 372.3 497.7 Total non-current assets 15,921.6 16,075.2 Total assets 22,915.8 23,502.2 Current liabilities Trade and other payables 3.7 6,684.7 6,266.1 Borrowings 4.6 253.5 490.7 Current tax payable 80.9 39.5 Other financial liabilities 3.8 313.8 120.3 Provisions 3.9 1,470.6 1,873.5 8,803.5 8,790.1 Liabilities directly associated with assets held for sale 5.2 20.7 202.6 Total current liabilities 8,824.2 8,992.7 Non-current liabilities Borrowings 4.6 2,777.0 3,870.9 Other financial liabilities 3.8 115.7 179.8 Provisions 3.9 1,010.9 1,382.4 Other non-current liabilities 3.10 311.9 294.5 Total non-current liabilities 4,215.5 5,727.6 Total liabilities 13,039.7 14,720.3 Net assets 9,876.1 8,781.9 Equity Contributed equity 4.3 5,615.0 5,252.2 Reserves 4.4 113.8 93.9 Retained earnings 3,797.2 3,124.5 Equity attributable to equity holders of the parent entity 9,526.0 8,470.6 Non-controlling interests 350.1 311.3 Total equity 9,876.1 8,781.9 The above Consolidated Statement of Financial Position should be read in conjunction with the accompanying Notes to the Consolidated Financial Statements. 56 Consolidated Statement of Financial Position 4 | WOOLWORTHS LIMITED | FINANCIAL REPORT 2017 NOTE 2017 $M 2016 $M Current assets Cash and cash equivalents 4.5 909.4 948.1 Trade and other receivables 3.1 744.7 763.9 Inventories 4,080.4 4,558.5 Other financial assets 3.2 16.1 56.0 5,750.6 6,326.5 Assets held for sale 5.2 1,243.6 1,100.5 Total current assets 6,994.2 7,427.0 Non-current assets Trade and other receivables 3.1 72.1 85.9 Other financial assets 3.2 506.9 638.2 Property, plant and equipment 3.3 8,437.5 8,262.8 Intangible assets 3.4 6,532.8 6,590.6 Deferred tax assets 3.6.3 372.3 497.7 Total non-current assets 15,921.6 16,075.2 Total assets 22,915.8 23,502.2 Current liabilities Trade and other payables 3.7 6,684.7 6,266.1 Borrowings 4.6 253.5 490.7 Current tax payable 80.9 39.5 Other financial liabilities 3.8 313.8 120.3 Provisions 3.9 1,470.6 1,873.5 8,803.5 8,790.1 Liabilities directly associated with assets held for sale 5.2 20.7 202.6 Total current liabilities 8,824.2 8,992.7 Non-current liabilities Borrowings 4.6 2,777.0 3,870.9 Other financial liabilities 3.8 115.7 179.8 Provisions 3.9 1,010.9 1,382.4 Other non-current liabilities 3.10 311.9 294.5 Total non-current liabilities 4,215.5 5,727.6 Total liabilities 13,039.7 14,720.3 Net assets 9,876.1 8,781.9 Equity Contributed equity 4.3 5,615.0 5,252.2 Reserves 4.4 113.8 93.9 Retained earnings 3,797.2 3,124.5 Equity attributable to equity holders of the parent entity 9,526.0 8,470.6 Non-controlling interests 350.1 311.3 Total equity 9,876.1 8,781.9 The above Consolidated Statement of Financial Position should be read in conjunction with the accompanying Notes to the Consolidated Financial Statements. Consolidated Statement of Changes in Equity 5 | WOOLWORTHS LIMITED | FINANCIAL REPORT 2017 ATTRIBUTABLE TO EQUITY HOLDERS OF THE PARENT ENTITY 2017 SHARE CAPITAL $M SHARES HELD IN TRUST $M RESERVES $M RETAINED EARNINGS $M TOTAL $M NON- CONTROLLING INTERESTS $M TOTAL EQUITY $M Balance at 26 June 2016 5,347.0 (94.8) 93.9 3,124.5 8,470.6 311.3 8,781.9 Profit after income tax expense – – – 1,533.5 1,533.5 59.9 1,593.4 Other comprehensive income (net of tax) – – 0.1 2.2 2.3 – 2.3 Total comprehensive income (net of tax) – – 0.1 1,535.7 1,535.8 59.9 1,595.7 Dividends paid – – – (859.6) (859.6) (21.5) (881.1) Dividends received – Treasury shares – – – 2.2 2.2 – 2.2 Issue of shares under employee long-term incentive plans – 37.1 (37.1) – – – – Issue of shares under the dividend reinvestment plan (DRP) 316.5 – – – 316.5 – 316.5 Issue of shares from underwrite of DRP 55.5 – – – 55.5 – 55.5 Purchase of shares by the Woolworths Employee Share Trust – (46.3) – – (46.3) – (46.3) Share-based payments expense – – 51.6 – 51.6 – 51.6 Other – – 5.3 (5.6) (0.3) 0.4 0.1 Balance at 25 June 2017 5,719.0 (104.0) 113.8 3,797.2 9,526.0 350.1 9,876.1 ATTRIBUTABLE TO EQUITY HOLDERS OF THE PARENT ENTITY 2016 SHARE CAPITAL $M SHARES HELD IN TRUST $M RESERVES $M RETAINED EARNINGS $M TOTAL $M NON- CONTROLLING INTERESTS $M TOTAL EQUITY $M Balance at 28 June 2015 5,064.9 (155.9) 95.1 5,830.1 10,834.2 297.8 11,132.0 Loss after income tax expense – – – (1,234.8) (1,234.8) (1,113.1) (2,347.9) Other comprehensive income/(loss) (net of tax) – – 192.5 (3.9) 188.6 – 188.6 Total comprehensive income/(loss) (net of tax) – – 192.5 (1,238.7) (1,046.2) (1,113.1) (2,159.3) Dividends paid – – – (1,471.2) (1,471.2) (32.4) (1,503.6) Dividends received – Treasury shares – – – 4.3 4.3 – 4.3 Issue of shares under employee long-term incentive plans – 61.1 (61.1) – – – – Issue of shares under the DRP 282.1 – – – 282.1 – 282.1 Issue of shares to non-controlling interests – – – – – 120.0 120.0 Share-based payments expense – – 20.8 – 20.8 – 20.8 Reclassification of non-controlling interests for recognition of financial liability – – – – – 886.5 886.5 Transactions with non-controlling interests – – (153.4) – (153.4) 153.4 – Other – – – – – (0.9) (0.9) Balance at 26 June 2016 5,347.0 (94.8) 93.9 3,124.5 8,470.6 311.3 8,781.9 The above Consolidated Statement of Changes in Equity should be read in conjunction with the accompanying Notes to the Consolidated Financial Statements. 1 2 3 4 5 PERFO RM A N C E H IG H LIG H T S BU SIN ESS REV IEW D IREC TO RS' REPO RT FIN A N C IA L REPO RT O T H ER IN FO RM A T IO N 57 W O O LW O RT H S G R O U P A N N U A L R EPO R T 20 17 Consolidated Statement of Cash Flows 6 | WOOLWORTHS LIMITED | FINANCIAL REPORT 2017 NOTE 2017 1 $M 2016 1 $M Cash flows from operating activities Receipts from customers 65,498.9 65,329.8 Payments to suppliers and employees (61,474.8) (61,834.5) Net interest paid (234.0) (289.3) Income tax paid (668.1) (848.5) Net cash provided by operating activities 4.5 3,122.0 2,357.5 Cash flows from investing activities Proceeds from the sale of property, plant and equipment and assets held for sale 279.8 722.0 Payments for property, plant and equipment – property development (253.2) (473.3) Payments for property, plant and equipment (excluding property development) (1,633.6) (1,465.0) Payments for intangible assets (23.0) (44.6) Proceeds from the sale of subsidiaries and investments, net of cash disposed 200.7 15.0 Payments for the purchase of businesses, net of cash acquired (5.6) (22.7) Payments for the purchase of investments – (1.3) Dividends received 3.5 3.2 Net cash used in investing activities (1,431.4) (1,266.7) Cash flows from financing activities Proceeds from issue of shares – underwrite of DRP 55.5 – Proceeds from the issue of equity securities in subsidiary to non-controlling interest – 120.0 Transactions with non-controlling interests – (12.1) Proceeds from borrowings 184.1 628.5 Repayment of borrowings (1,406.5) (994.1) Dividends paid 4.2 (540.9) (1,184.8) Dividends paid to non-controlling interests (21.5) (32.4) Net cash used in financing activities (1,729.3) (1,474.9) Net decrease in cash and cash equivalents (38.7) (384.1) Effects of exchange rate changes on foreign currency (0.6) 6.7 Cash and cash equivalents at start of period 956.0 1,333.4 Cash and cash equivalents at end of period 4.5 916.7 956.0 1 The above Consolidated Statement of Cash Flows includes both continuing and discontinued operations. Amounts related to discontinued operations are disclosed in Note 5.1. The above Consolidated Statement of Cash Flows should be read in conjunction with the accompanying Notes to the Consolidated Financial Statements. 58 Consolidated Statement of Cash Flows 6 | WOOLWORTHS LIMITED | FINANCIAL REPORT 2017 NOTE 2017 1 $M 2016 1 $M Cash flows from operating activities Receipts from customers 65,498.9 65,329.8 Payments to suppliers and employees (61,474.8) (61,834.5) Net interest paid (234.0) (289.3) Income tax paid (668.1) (848.5) Net cash provided by operating activities 4.5 3,122.0 2,357.5 Cash flows from investing activities Proceeds from the sale of property, plant and equipment and assets held for sale 279.8 722.0 Payments for property, plant and equipment – property development (253.2) (473.3) Payments for property, plant and equipment (excluding property development) (1,633.6) (1,465.0) Payments for intangible assets (23.0) (44.6) Proceeds from the sale of subsidiaries and investments, net of cash disposed 200.7 15.0 Payments for the purchase of businesses, net of cash acquired (5.6) (22.7) Payments for the purchase of investments – (1.3) Dividends received 3.5 3.2 Net cash used in investing activities (1,431.4) (1,266.7) Cash flows from financing activities Proceeds from issue of shares – underwrite of DRP 55.5 – Proceeds from the issue of equity securities in subsidiary to non-controlling interest – 120.0 Transactions with non-controlling interests – (12.1) Proceeds from borrowings 184.1 628.5 Repayment of borrowings (1,406.5) (994.1) Dividends paid 4.2 (540.9) (1,184.8) Dividends paid to non-controlling interests (21.5) (32.4) Net cash used in financing activities (1,729.3) (1,474.9) Net decrease in cash and cash equivalents (38.7) (384.1) Effects of exchange rate changes on foreign currency (0.6) 6.7 Cash and cash equivalents at start of period 956.0 1,333.4 Cash and cash equivalents at end of period 4.5 916.7 956.0 1 The above Consolidated Statement of Cash Flows includes both continuing and discontinued operations. Amounts related to discontinued operations are disclosed in Note 5.1. The above Consolidated Statement of Cash Flows should be read in conjunction with the accompanying Notes to the Consolidated Financial Statements. Notes to the Consolidated Financial Statements for the year ended 25 June 2017 7 | WOOLWORTHS LIMITED | FINANCIAL REPORT 2017 1 BASIS OF PREPARATION 1.1 Basis of preparation Woolworths Limited (the ‘Company’) is a for-profit company which is incorporated and domiciled in Australia. The Financial Report of the Company is for the 52-week period ended 25 June 2017 and comprises the Company and its subsidiaries (together referred to as the ‘Group’). The comparative period is for the 52-week period ended 26 June 2016. The Financial Report was authorised for issue by the directors on 23 August 2017. The Consolidated Financial Statements are presented in Australian dollars and amounts have been rounded to the nearest tenth of a million dollars unless otherwise stated, in accordance with ASIC Corporations Legislative Instrument 2016/191. The Consolidated Financial Statements have been prepared on the historical cost basis except for financial assets at fair value through other comprehensive income, derivative assets and liabilities, and certain financial liabilities which have been measured at fair value, as explained in the accounting policies. The accounting policies have been applied consistently to all periods presented in these financial statements, unless otherwise stated. Changes in accounting policies in the current year are included in the following Notes: • Note 3.6 – Deferred taxes on indefinite life intangible assets; and • Note 3.8 – Put options over non-controlling interests. Certain comparative amounts have been reclassified to conform with the current period’s presentation to better reflect the nature of the financial position and performance of the Group. The comparative financial information in the Consolidated Statement of Profit or Loss and associated Notes and the Consolidated Statement of Other Comprehensive Income have been restated for discontinued operations that have arisen during the year (refer to Note 5.1). STATEMENT OF COMPLIANCE The Consolidated Financial Statements of the Group are general purpose financial statements which have been prepared in accordance with the Corporations Act 2001 (Cth), and Australian Accounting Standards and Interpretations. Compliance with Australian Accounting Standards ensures that the Financial Report complies with International Financial Reporting Standards (IFRS) as issued by the International Accounting Standards Board (IASB). Consequently, this Financial Report has been prepared in accordance with and complies with IFRS as issued by IASB. 1.2 Significant accounting policies This section sets out the significant accounting policies upon which the Group’s Consolidated Financial Statements are prepared as a whole and significant accounting policies not otherwise described in the Notes to the Consolidated Financial Statements. Specific accounting policies are described in their respective Notes to the Consolidated Financial Statements. This section also shows information on new accounting standards, amendments and interpretations, and whether they are effective in 2017 or later years. 1.2.1 Basis of consolidation The Consolidated Financial Statements of the Company incorporate the assets, liabilities and results of all subsidiaries as at 25 June 2017. Subsidiaries are all entities over which the Group has control. The Group controls an entity when it is exposed to, or has rights to, variable returns from its involvement with the entity and has the ability to affect those returns through its power to direct the activities of the entity. Subsidiaries are fully consolidated from the date on which control is transferred to the Group. They are deconsolidated from the date that control ceases. Intra-group balances and transactions, and any unrealised gains and losses arising from intra-group transactions, are eliminated in preparing the Consolidated Financial Statements. 1.2.2 Revenue Revenue is measured as the fair value of consideration received or receivable on the basis that it meets the recognition criteria set out as follows: Sale of goods and services Revenue is recognised when the significant risks and rewards of ownership have been transferred to the customer, when it is probable the revenue will be received and the amount of revenue can be reliably measured. Service revenue is recognised based on the stage of completion of the contract with the customer. 1 2 3 4 5 PERFO RM A N C E H IG H LIG H T S BU SIN ESS REV IEW D IREC TO RS' REPO RT FIN A N C IA L REPO RT O T H ER IN FO RM A T IO N 59 W O O LW O RT H S G R O U P A N N U A L R EPO R T 20 17 Notes to the Consolidated Financial Statements 8 | WOOLWORTHS LIMITED | FINANCIAL REPORT 2017 1.2.3 Cash and cash equivalents Cash and cash equivalents comprise cash balances and call deposits with an original maturity of three months or less. 1.2.4 Inventories Inventories are valued at the lower of cost and net realisable value. Cost is determined on a weighted average basis and includes supplier rebates, settlement discounts and other costs incurred to bring inventory to its present condition and location for sale. For continuing operations, net realisable value of inventory has been determined as the estimated selling price in the ordinary course of business, less estimated selling expenses. For discontinued operations, net realisable value of inventory has been determined using judgement based on the likely recovery rates in an orderly exit scenario. As at the reporting date, all inventories are valued at cost (2016: $447.8 million held at net realisable value). Supplier rebates Supplier rebates represent discounts provided by suppliers. Rebates include standard discounts on the purchase of goods, discounts based on purchase or sales volumes and contributions towards promotional activity for a supplier’s product. 1.2.5 Foreign currency (i) Functional and presentation currency Items included in the financial statements of each of the Group’s entities are measured using the currency of the primary economic environment in which the entity operates (‘the functional currency’). The Consolidated Financial Statements are presented in Australian dollars (AUD), which is the Company’s functional currency. (ii) Transactions and balances (entities with a functional currency of AUD) Foreign currency transactions are translated into Australian dollars using the exchange rates at the dates of the transactions. Assets and liabilities denominated in foreign currencies are translated to Australian dollars at reporting date at the following exchange rates: FOREIGN CURRENCY AMOUNT APPLICABLE EXCHANGE RATE Monetary assets and liabilities Reporting date Non-monetary assets and liabilities measured at historical cost Date of transaction Foreign exchange differences arising on translation are recognised in profit or loss in the period in which they arise except: • Exchange differences on transactions entered to hedge certain foreign currency risks (refer to Note 4.8); and • Items noted within paragraph (iii) below. (iii) Financial statements of foreign operations (entities with a functional currency other than AUD) The results and financial position of foreign operations are translated to Australian dollars at the following exchange rates: FOREIGN CURRENCY AMOUNT APPLICABLE EXCHANGE RATE Revenues and expenses of foreign operations Average for the period Assets and liabilities of foreign operations, including goodwill and fair value adjustments arising on consolidation Reporting date Equity items Historical rates The following foreign exchange differences are recognised in other comprehensive income: • Foreign currency differences arising on translation of foreign operations; and • Exchange differences arising from a monetary item receivable from or payable to a foreign operation, the settlement of which is neither planned nor likely in the foreseeable future. These monetary items and related hedges are considered to form part of the net investment in a foreign operation and are reclassified into profit or loss upon disposal of the net investment. 1.2 Significant accounting policies (continued) 60 Notes to the Consolidated Financial Statements 8 | WOOLWORTHS LIMITED | FINANCIAL REPORT 2017 1.2.3 Cash and cash equivalents Cash and cash equivalents comprise cash balances and call deposits with an original maturity of three months or less. 1.2.4 Inventories Inventories are valued at the lower of cost and net realisable value. Cost is determined on a weighted average basis and includes supplier rebates, settlement discounts and other costs incurred to bring inventory to its present condition and location for sale. For continuing operations, net realisable value of inventory has been determined as the estimated selling price in the ordinary course of business, less estimated selling expenses. For discontinued operations, net realisable value of inventory has been determined using judgement based on the likely recovery rates in an orderly exit scenario. As at the reporting date, all inventories are valued at cost (2016: $447.8 million held at net realisable value). Supplier rebates Supplier rebates represent discounts provided by suppliers. Rebates include standard discounts on the purchase of goods, discounts based on purchase or sales volumes and contributions towards promotional activity for a supplier’s product. 1.2.5 Foreign currency (i) Functional and presentation currency Items included in the financial statements of each of the Group’s entities are measured using the currency of the primary economic environment in which the entity operates (‘the functional currency’). The Consolidated Financial Statements are presented in Australian dollars (AUD), which is the Company’s functional currency. (ii) Transactions and balances (entities with a functional currency of AUD) Foreign currency transactions are translated into Australian dollars using the exchange rates at the dates of the transactions. Assets and liabilities denominated in foreign currencies are translated to Australian dollars at reporting date at the following exchange rates: FOREIGN CURRENCY AMOUNT APPLICABLE EXCHANGE RATE Monetary assets and liabilities Reporting date Non-monetary assets and liabilities measured at historical cost Date of transaction Foreign exchange differences arising on translation are recognised in profit or loss in the period in which they arise except: • Exchange differences on transactions entered to hedge certain foreign currency risks (refer to Note 4.8); and • Items noted within paragraph (iii) below. (iii) Financial statements of foreign operations (entities with a functional currency other than AUD) The results and financial position of foreign operations are translated to Australian dollars at the following exchange rates: FOREIGN CURRENCY AMOUNT APPLICABLE EXCHANGE RATE Revenues and expenses of foreign operations Average for the period Assets and liabilities of foreign operations, including goodwill and fair value adjustments arising on consolidation Reporting date Equity items Historical rates The following foreign exchange differences are recognised in other comprehensive income: • Foreign currency differences arising on translation of foreign operations; and • Exchange differences arising from a monetary item receivable from or payable to a foreign operation, the settlement of which is neither planned nor likely in the foreseeable future. These monetary items and related hedges are considered to form part of the net investment in a foreign operation and are reclassified into profit or loss upon disposal of the net investment. 1.2 Significant accounting policies (continued) 9 | WOOLWORTHS LIMITED | FINANCIAL REPORT 2017 BASIS OF PREPARATION 1 1.2.6 Goods and Services Tax (GST) Revenue, expenses and assets are recognised net of GST, except where the GST incurred is not recoverable from the taxation authority, in which case the GST is recognised as part of the expense or cost of the asset. Receivables and payables are stated with the amount of GST included. The net amounts of GST recoverable from or payable to the taxation authorities are included as a current asset or liability in the Consolidated Statement of Financial Position. Cash flows are included in the Consolidated Statement of Cash Flows on a gross basis. The GST components of cash flows arising from investing and financing activities which are recoverable from or payable to taxation authorities are classified as operating cash flows. 1.2.7 New and amended standards adopted by the Group The Group has adopted all relevant new and amended Accounting Standards and Interpretations issued by the Australian Accounting Standards Board (AASB) which are effective for annual reporting periods beginning on or after 27 June 2016. None of the new standards or amendments to standards that are mandatory for the first time materially affected any of the amounts recognised in the current period or any prior period and are not likely to significantly affect future periods. 1.2.8 Issued standards and interpretations not early adopted The table below lists the standards and amendments to standards on issue but not yet effective that were available for early adoption and were applicable to the Group. The reported results and financial position of the Group are not expected to change on adoption of any of the amendments to current standards listed below, unless stated otherwise, as they do not result in any changes to the Group’s existing accounting policies. However, amendments to AASB 107 will introduce additional disclosures in respect of changes in liabilities from financing activities. EFFECTIVE DATE NEW STANDARDS OR AMENDMENTS REFERENCE NOTE 1 January 2017 Recognition of Deferred Tax Assets for Unrealised Losses (Amendments to AASB 112) AASB 2016-1 Disclosure Initiative (Amendments to AASB 107) AASB 2016-2 1 January 2018 Sale or Contribution of Assets between an Investor and its Associate or Joint Venture (Amendments to AASB 10 and AASB 128) AASB 2014-10 & 2015-10 Revenue from Contracts with Customers and the relevant amending standards AASB 15 1.2.8 (i) Financial Instruments and the relevant amending standards AASB 9 (2014) 1.2.8 (ii) Classification and Measurement of Share-based Payment Transactions (Amendments to AASB 2) AASB 2016-5 1 January 2019 Leases AASB 16 1.2.8 (iii) 1 January 2021 Insurance Contracts AASB 17 (i) AASB 15 Revenue from Contracts with Customers AASB 15 Revenue from Contracts with Customers establishes a principle-based approach for goods, services and construction contracts which requires identification of discrete performance obligations within a transaction and an associated transaction price allocation to these obligations. Revenue is recognised only when the performance obligation is satisfied and the control of goods or services is transferred, typically at the point of sale. AASB 15 is effective for annual reporting periods beginning on or after 1 January 2018. The group will apply AASB 15 in the financial year beginning 25 June 2018. An initial assessment has been performed on existing revenue streams. Based upon this assessment, it is not expected that AASB 15 will have a material impact to the Group’s Consolidated Statement of Profit or Loss. The Group is yet to conclude which transition method will be applied. (ii) AASB 9 Financial Instruments (2014) AASB 9 Financial Instruments is a new standard which replaces AASB 139 Financial Instruments: Recognition and Measurement. In previous years, the Group early adopted AASB 9 Financial Instruments (2009), AASB 9 (2010), and related amendments. The Group is yet to adopt AASB 9 (2014) which supersedes AASB 9 (2009) and AASB 9 (2010) and introduces a new impairment model for financial assets and a new measurement category ‘fair value through other comprehensive income’ for certain debt instruments. AASB 9 (2014) is effective for annual reporting periods beginning on or after 1 January 2018. The Group will apply AASB 9 (2014) in the financial year beginning 25 June 2018. An assessment has been performed and the impact of the credit loss model will not be material to the Group. The Group does not hold any investments in debt securities at the end of the reporting period and, as a result, does not expect to be impacted by the introduction of the new measurement category. 1.2 Significant accounting policies (continued) 1 2 3 4 5 PERFO RM A N C E H IG H LIG H T S BU SIN ESS REV IEW D IREC TO RS' REPO RT FIN A N C IA L REPO RT O T H ER IN FO RM A T IO N 61 W O O LW O RT H S G R O U P A N N U A L R EPO R T 20 17 Notes to the Consolidated Financial Statements 10 | WOOLWORTHS LIMITED | FINANCIAL REPORT 2017 1.2.8 Issued standards and interpretations not early adopted continued (iii) AASB 16 Leases AASB 16 Leases will replace existing accounting requirements for leases under AASB 117 Leases. Under current requirements, leases are classified based on their nature as either finance leases, which are recognised on the Consolidated Statement of Financial Position, or operating leases, which are not recognised on the Consolidated Statement of Financial Position. The Group’s accounting for operating leases as a lessee will result in the recognition of a right-of-use (ROU) asset and an associated lease liability on the Consolidated Statement of Financial Position. The lease liability represents the present value of future lease payments, with the exception of short-term leases. An interest expense will be recognised on the lease liabilities and a depreciation charge will be recognised for the ROU assets. There will also be additional disclosure requirements under the new standard. The Group’s accounting for leases as a lessor remains unchanged under AASB 16. AASB 16 is effective for annual reporting periods beginning on or after 1 January 2019. The Group will apply AASB 16 in the financial year beginning 1 July 2019. A project has been established to ensure a high quality implementation in compliance with the accounting standard. The project has members from finance, treasury and property functions with oversight from the Chief Financial Officer. Key responsibilities of the project include setting accounting policy, finalising an impact assessment, budgeting and costing of implementation, identifying data and system requirements, and finalising the implementation plan. As at the end of the reporting period, the Group has non-cancellable undiscounted operating lease commitments of $24,438.8 million as disclosed in Note 4.9.1. These commitments predominantly relate to its retail premises, warehousing facilities, distribution centres, and support offices which will require recognition of ROU assets and associated lease liabilities. The Group is currently assessing the impact of the new requirements on the Group’s Consolidated Financial Statements; however the impact is expected to materially ‘gross-up’ the Group’s Consolidated Statement of Financial Position impacting key financial ratios. As the project develops further, quantitative and qualitative disclosure will be provided. 1.3 Critical accounting estimates and judgements In applying the Group’s accounting policies, the directors are required to make estimates, judgements and assumptions that affect amounts reported in this Financial Report. The estimates, judgements and assumptions are based on historical experience, adjusted for current market conditions and other factors that are believed to be reasonable under the circumstances and are reviewed on a regular basis. Actual results may differ from these estimates. The estimates and judgements which involve a higher degree of complexity or that have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next period are included in the following Notes: • Notes 3.3 and 3.4 – Estimation of useful life of assets, and carrying value of properties; • Note 3.5 – Impairment of non-financial assets; • Note 3.9 – Provisions including onerous leases; and • Note 5.1 – Discontinued operations including impairments, exit liabilities and associated tax balances. Revisions to accounting estimates are recognised in the period in which the estimate is revised if the revision affects only that period; or in the period and future periods if the revision affects both current and future periods. 1.4 Individually significant items from continuing operations 2017 There are no individually significant items from continuing operations in 2017. 2016 Included in 2016 Consolidated Statement of Profit or Loss were significant expenses before tax of $958.6 million incurred outside the ordinary course of trading operations resulting from a Group-wide review of all aspects of the business. In particular, these items related to operating model and strategic changes of $154.9 million, store network optimisation and property rationalisation of $344.2 million, and General Merchandise impairment of $459.5 million. The total income tax benefit recognised from the significant expenses was $193.1 million, resulting in a $765.5 million impact on profit for the period 1. Individually significant items relating to the impairment of Home Improvement assets and store exit costs are separately presented in Note 5.1 as the Home Improvement business has been classified as a discontinued operation. 1 Comprised of $754.7 million attributable to equity holders of the parent entity and $10.8 million attributable to non-controlling interests. 1.2 Significant accounting policies (continued) 62 Notes to the Consolidated Financial Statements 10 | WOOLWORTHS LIMITED | FINANCIAL REPORT 2017 1.2.8 Issued standards and interpretations not early adopted continued (iii) AASB 16 Leases AASB 16 Leases will replace existing accounting requirements for leases under AASB 117 Leases. Under current requirements, leases are classified based on their nature as either finance leases, which are recognised on the Consolidated Statement of Financial Position, or operating leases, which are not recognised on the Consolidated Statement of Financial Position. The Group’s accounting for operating leases as a lessee will result in the recognition of a right-of-use (ROU) asset and an associated lease liability on the Consolidated Statement of Financial Position. The lease liability represents the present value of future lease payments, with the exception of short-term leases. An interest expense will be recognised on the lease liabilities and a depreciation charge will be recognised for the ROU assets. There will also be additional disclosure requirements under the new standard. The Group’s accounting for leases as a lessor remains unchanged under AASB 16. AASB 16 is effective for annual reporting periods beginning on or after 1 January 2019. The Group will apply AASB 16 in the financial year beginning 1 July 2019. A project has been established to ensure a high quality implementation in compliance with the accounting standard. The project has members from finance, treasury and property functions with oversight from the Chief Financial Officer. Key responsibilities of the project include setting accounting policy, finalising an impact assessment, budgeting and costing of implementation, identifying data and system requirements, and finalising the implementation plan. As at the end of the reporting period, the Group has non-cancellable undiscounted operating lease commitments of $24,438.8 million as disclosed in Note 4.9.1. These commitments predominantly relate to its retail premises, warehousing facilities, distribution centres, and support offices which will require recognition of ROU assets and associated lease liabilities. The Group is currently assessing the impact of the new requirements on the Group’s Consolidated Financial Statements; however the impact is expected to materially ‘gross-up’ the Group’s Consolidated Statement of Financial Position impacting key financial ratios. As the project develops further, quantitative and qualitative disclosure will be provided. 1.3 Critical accounting estimates and judgements In applying the Group’s accounting policies, the directors are required to make estimates, judgements and assumptions that affect amounts reported in this Financial Report. The estimates, judgements and assumptions are based on historical experience, adjusted for current market conditions and other factors that are believed to be reasonable under the circumstances and are reviewed on a regular basis. Actual results may differ from these estimates. The estimates and judgements which involve a higher degree of complexity or that have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next period are included in the following Notes: • Notes 3.3 and 3.4 – Estimation of useful life of assets, and carrying value of properties; • Note 3.5 – Impairment of non-financial assets; • Note 3.9 – Provisions including onerous leases; and • Note 5.1 – Discontinued operations including impairments, exit liabilities and associated tax balances. Revisions to accounting estimates are recognised in the period in which the estimate is revised if the revision affects only that period; or in the period and future periods if the revision affects both current and future periods. 1.4 Individually significant items from continuing operations 2017 There are no individually significant items from continuing operations in 2017. 2016 Included in 2016 Consolidated Statement of Profit or Loss were significant expenses before tax of $958.6 million incurred outside the ordinary course of trading operations resulting from a Group-wide review of all aspects of the business. In particular, these items related to operating model and strategic changes of $154.9 million, store network optimisation and property rationalisation of $344.2 million, and General Merchandise impairment of $459.5 million. The total income tax benefit recognised from the significant expenses was $193.1 million, resulting in a $765.5 million impact on profit for the period 1. Individually significant items relating to the impairment of Home Improvement assets and store exit costs are separately presented in Note 5.1 as the Home Improvement business has been classified as a discontinued operation. 1 Comprised of $754.7 million attributable to equity holders of the parent entity and $10.8 million attributable to non-controlling interests. 1.2 Significant accounting policies (continued) 11 | WOOLWORTHS LIMITED | FINANCIAL REPORT 2017 GROUP PERFORMANCE 2 2 GROUP PERFORMANCE 2.1 Segment disclosures from continuing operations 2.1.1 Operating segment reporting Reportable segments are identified on the basis of internal reports on the business units of the Group that are regularly reviewed by the Chief Executive Officer in order to allocate resources to the segment and assess its performance. These business units offer different products and services and are managed separately. The Group’s reportable segments are as follows: • Australian Food – procurement of food products for resale to customers in Australia; • New Zealand Food – procurement of food and drinks for resale to customers in New Zealand; • Endeavour Drinks – procurement of drinks for resale to customers in Australia; • BIG W – procurement of discount general merchandise products for resale to customers in Australia; and • Hotels – provision of leisure and hospitality services including food and drinks, accommodation, entertainment and gaming in Australia. On 18 January 2016, the Company announced that it intended to pursue an orderly prospective exit of the Home Improvement business. Consequently, the Home Improvement business has been classified as a discontinued operation (refer to Note 5.1) and this segment is not presented in the segment disclosures for 2017 and 2016. On 24 December 2016, the Company entered into a binding agreement to sell the Petrol business to BP for $1.785 billion. Consequently, the Petrol business has been classified as a discontinued operation (refer to Note 5.1). The Petrol business was previously presented together with Australian Food and is no longer included in the segment disclosures for 2017 and 2016. The Unallocated group consists of the Group’s other operating segments that are not separately reportable as well as various support functions including property and other central overhead costs. The revenue from the sale of goods and services included in the Unallocated group relates to EziBuy and is derived from the procurement of general merchandise products for predominately online resale to customers. The sale of EziBuy Holdings Limited and its subsidiaries was completed on 25 June 2017. There are varying levels of integration between the Australian Food, Endeavour Drinks and Hotels reportable segments. This includes the common usage of property and services and administration functions. Inter-segment pricing is determined on an arm’s length basis. Performance is measured based on segment earnings before interest and tax (EBIT) before individually significant items (refer to Note 1.4) which is consistent with the way management monitor and report the performance of these segments. 1 2 3 4 5 PERFO RM A N C E H IG H LIG H T S BU SIN ESS REV IEW D IREC TO RS' REPO RT FIN A N C IA L REPO RT O T H ER IN FO RM A T IO N 63 W O O LW O RT H S G R O U P A N N U A L R EPO R T 20 17 Notes to the Consolidated Financial Statements 12 | WOOLWORTHS LIMITED | FINANCIAL REPORT 2017 2.1.1 Operating segment reporting continued 2017 AUSTRALIAN FOOD 1 $M NEW ZEALAND FOOD $M ENDEAVOUR DRINKS $M BIG W $M HOTELS $M UNALLOCATED 2 $M CONSOLIDATED CONTINUING OPERATIONS $M Revenue from the sale of goods and services 36,370.9 5,887.1 7,912.9 3,598.0 1,553.2 152.9 55,475.0 Other operating revenue 188.4 4.9 – 0.3 – – 193.6 Inter-segment revenue – – – – – 1,009.2 1,009.2 Segment revenue 36,559.3 5,892.0 7,912.9 3,598.3 1,553.2 1,162.1 56,677.8 Eliminations (1,009.2) (1,009.2) Unallocated revenue – other 3 244.2 244.2 Total revenue 36,559.3 5,892.0 7,912.9 3,598.3 1,553.2 397.1 55,912.8 Earnings before interest and tax 4 1,603.1 292.3 502.5 (150.5) 232.9 (154.3) 2,326.0 Financing costs (193.6) Profit before income tax 2,132.4 Income tax expense (650.4) Profit for the period from continuing operations 1,482.0 Depreciation and amortisation 4 561.6 110.9 75.7 76.4 105.1 107.9 1,037.6 Impairment of non-financial assets 5 – – 17.0 21.1 – – 38.1 Capital expenditure 6 917.7 182.4 116.0 31.3 112.0 481.1 1,840.5 2016 AUSTRALIAN FOOD 1 $M NEW ZEALAND FOOD $M ENDEAVOUR DRINKS $M BIG W $M HOTELS $M UNALLOCATED 2 $M CONSOLIDATED CONTINUING OPERATIONS $M Revenue from the sale of goods and services 34,798.0 5,592.2 7,589.3 3,819.7 1,512.2 162.5 53,473.9 Other operating revenue 179.0 10.2 – 0.6 – – 189.8 Inter-segment revenue – – – – – 979.9 979.9 Segment revenue 34,977.0 5,602.4 7,589.3 3,820.3 1,512.2 1,142.4 54,643.6 Eliminations (979.9) (979.9) Unallocated revenue – other 3 275.5 275.5 Total revenue 34,977.0 5,602.4 7,589.3 3,820.3 1,512.2 438.0 53,939.2 Segment earnings/(loss) before interest, tax and significant items 4 1,642.0 284.4 483.8 (14.9) 208.5 (157.8) 2,446.0 Significant items (951.1) Earnings before interest and tax 1,494.9 Financing costs (245.6) Profit before income tax 1,249.3 Income tax expense (486.4) Profit for the period from continuing operations 762.9 Depreciation and amortisation 4 523.6 106.3 74.8 83.1 99.3 98.2 985.3 Impairment of non-financial assets 5 66.8 19.3 – 32.5 23.3 373.9 515.8 Capital expenditure 6 646.1 195.9 94.1 46.7 141.2 673.5 1,797.5 1 Previously reported as Australian Food and Petrol; prior period has been restated to exclude Petrol which is now a discontinued operation. 2 Revenue from the sale of goods in Unallocated group relates to EziBuy. 3 Unallocated revenue is comprised of rent and other revenue from non-operating activities across the Group. 4 Depreciation and amortisation in Unallocated group is in relation to central assets (e.g. Enterprise Resource Planning system) for which a service charge is made to the reportable operating segments and reflected in the segment earnings/loss results. 5 Refer to Note 3.5 for further detail on the impairment of non-financial assets. 6 Capital expenditure is comprised of property, plant and equipment additions and intangible asset acquisitions. 2.1 Segment disclosures from continuing operations (continued) 64 Notes to the Consolidated Financial Statements 12 | WOOLWORTHS LIMITED | FINANCIAL REPORT 2017 2.1.1 Operating segment reporting continued 2017 AUSTRALIAN FOOD 1 $M NEW ZEALAND FOOD $M ENDEAVOUR DRINKS $M BIG W $M HOTELS $M UNALLOCATED 2 $M CONSOLIDATED CONTINUING OPERATIONS $M Revenue from the sale of goods and services 36,370.9 5,887.1 7,912.9 3,598.0 1,553.2 152.9 55,475.0 Other operating revenue 188.4 4.9 – 0.3 – – 193.6 Inter-segment revenue – – – – – 1,009.2 1,009.2 Segment revenue 36,559.3 5,892.0 7,912.9 3,598.3 1,553.2 1,162.1 56,677.8 Eliminations (1,009.2) (1,009.2) Unallocated revenue – other 3 244.2 244.2 Total revenue 36,559.3 5,892.0 7,912.9 3,598.3 1,553.2 397.1 55,912.8 Earnings before interest and tax 4 1,603.1 292.3 502.5 (150.5) 232.9 (154.3) 2,326.0 Financing costs (193.6) Profit before income tax 2,132.4 Income tax expense (650.4) Profit for the period from continuing operations 1,482.0 Depreciation and amortisation 4 561.6 110.9 75.7 76.4 105.1 107.9 1,037.6 Impairment of non-financial assets 5 – – 17.0 21.1 – – 38.1 Capital expenditure 6 917.7 182.4 116.0 31.3 112.0 481.1 1,840.5 2016 AUSTRALIAN FOOD 1 $M NEW ZEALAND FOOD $M ENDEAVOUR DRINKS $M BIG W $M HOTELS $M UNALLOCATED 2 $M CONSOLIDATED CONTINUING OPERATIONS $M Revenue from the sale of goods and services 34,798.0 5,592.2 7,589.3 3,819.7 1,512.2 162.5 53,473.9 Other operating revenue 179.0 10.2 – 0.6 – – 189.8 Inter-segment revenue – – – – – 979.9 979.9 Segment revenue 34,977.0 5,602.4 7,589.3 3,820.3 1,512.2 1,142.4 54,643.6 Eliminations (979.9) (979.9) Unallocated revenue – other 3 275.5 275.5 Total revenue 34,977.0 5,602.4 7,589.3 3,820.3 1,512.2 438.0 53,939.2 Segment earnings/(loss) before interest, tax and significant items 4 1,642.0 284.4 483.8 (14.9) 208.5 (157.8) 2,446.0 Significant items (951.1) Earnings before interest and tax 1,494.9 Financing costs (245.6) Profit before income tax 1,249.3 Income tax expense (486.4) Profit for the period from continuing operations 762.9 Depreciation and amortisation 4 523.6 106.3 74.8 83.1 99.3 98.2 985.3 Impairment of non-financial assets 5 66.8 19.3 – 32.5 23.3 373.9 515.8 Capital expenditure 6 646.1 195.9 94.1 46.7 141.2 673.5 1,797.5 1 Previously reported as Australian Food and Petrol; prior period has been restated to exclude Petrol which is now a discontinued operation. 2 Revenue from the sale of goods in Unallocated group relates to EziBuy. 3 Unallocated revenue is comprised of rent and other revenue from non-operating activities across the Group. 4 Depreciation and amortisation in Unallocated group is in relation to central assets (e.g. Enterprise Resource Planning system) for which a service charge is made to the reportable operating segments and reflected in the segment earnings/loss results. 5 Refer to Note 3.5 for further detail on the impairment of non-financial assets. 6 Capital expenditure is comprised of property, plant and equipment additions and intangible asset acquisitions. 2.1 Segment disclosures from continuing operations (continued) 13 | WOOLWORTHS LIMITED | FINANCIAL REPORT 2017 GROUP PERFORMANCE 2 2.1.2 Geographical information The table below provides information on the geographical location of revenue from continuing operations and non-current assets (excluding financial instruments, deferred tax assets and intercompany receivables). Revenue from external customers is allocated to a geography based on the location in which the sales originated. Non-current assets are allocated based on the location of the operation to which they relate. AUSTRALIA NEW ZEALAND CONSOLIDATED CONTINUING OPERATIONS 2017 A$M 2016 A$M 2017 A$M 2016 A$M 2017 A$M 2016 A$M Revenue from the sale of goods and services 49,400.9 47,674.8 6,074.1 5,799.1 55,475.0 53,473.9 Other operating revenue 188.7 179.6 4.9 10.2 193.6 189.8 Other revenue 200.9 238.5 43.3 37.0 244.2 275.5 Revenue from external customers 49,790.5 48,092.9 6,122.3 5,846.3 55,912.8 53,939.2 Non-current assets 11,873.3 11,847.1 3,287.3 3,200.7 15,160.6 15,047.8 2.2 Financing costs from continuing operations 2017 $M 2016 $M Interest expense (231.5) (298.2) Less: interest capitalised 1 29.9 42.3 Other 2 8.0 10.3 Total (193.6) (245.6) 1 Weighted average capitalisation rate on funds borrowed for continuing operations was 6.77% (2016: 6.75%). 2 Includes interest income and dividend income. SIGNIFICANT ACCOUNTING POLICIES FINANCING COSTS Borrowing costs that are directly attributable to the acquisition, construction or production of a qualifying asset (one that takes a substantial period of time to get ready for its intended use or sale) are capitalised during the period of time that is required to complete and prepare the asset for its intended use or sale. Other borrowing costs are recognised in profit or loss in the period in which they are incurred. 2.1 Segment disclosures from continuing operations (continued) 1 2 3 4 5 PERFO RM A N C E H IG H LIG H T S BU SIN ESS REV IEW D IREC TO RS' REPO RT FIN A N C IA L REPO RT O T H ER IN FO RM A T IO N 65 W O O LW O RT H S G R O U P A N N U A L R EPO R T 20 17 Notes to the Consolidated Financial Statements 14 | WOOLWORTHS LIMITED | FINANCIAL REPORT 2017 3 ASSETS AND LIABILITIES 3.1 Trade and other receivables 2017 $M 2016 $M Current Trade receivables 120.9 135.4 Provision for impairment (14.8) (10.6) 106.1 124.8 Other receivables 323.7 330.3 Provision for impairment (19.3) (21.6) 304.4 308.7 Prepayments 334.2 330.4 Total current trade and other receivables 744.7 763.9 Non-current Prepayments 1.5 5.2 Other receivables 70.6 80.7 Total non-current trade and other receivables 72.1 85.9 Total 816.8 849.8 SIGNIFICANT ACCOUNTING POLICIES TRADE AND OTHER RECEIVABLES Trade and other receivables are recognised initially at fair value and are subsequently measured at amortised cost using the effective interest method, less an allowance for impairment. They generally have terms of up to 30 days. IMPAIRMENT OF TRADE AND OTHER RECEIVABLES The Group assesses at the end of each reporting period whether there is objective evidence that the Group’s receivables are impaired. The recoverable amount of the Group’s receivables is calculated as the present value of estimated future cash flows, discounted at the original effective interest rate (that is, the effective interest rate computed at initial recognition of these financial assets). Receivables with a short duration are not discounted. A provision for impairment of receivables is not recognised until objective evidence is available that a loss event has occurred. 66 Notes to the Consolidated Financial Statements 14 | WOOLWORTHS LIMITED | FINANCIAL REPORT 2017 3 ASSETS AND LIABILITIES 3.1 Trade and other receivables 2017 $M 2016 $M Current Trade receivables 120.9 135.4 Provision for impairment (14.8) (10.6) 106.1 124.8 Other receivables 323.7 330.3 Provision for impairment (19.3) (21.6) 304.4 308.7 Prepayments 334.2 330.4 Total current trade and other receivables 744.7 763.9 Non-current Prepayments 1.5 5.2 Other receivables 70.6 80.7 Total non-current trade and other receivables 72.1 85.9 Total 816.8 849.8 SIGNIFICANT ACCOUNTING POLICIES TRADE AND OTHER RECEIVABLES Trade and other receivables are recognised initially at fair value and are subsequently measured at amortised cost using the effective interest method, less an allowance for impairment. They generally have terms of up to 30 days. IMPAIRMENT OF TRADE AND OTHER RECEIVABLES The Group assesses at the end of each reporting period whether there is objective evidence that the Group’s receivables are impaired. The recoverable amount of the Group’s receivables is calculated as the present value of estimated future cash flows, discounted at the original effective interest rate (that is, the effective interest rate computed at initial recognition of these financial assets). Receivables with a short duration are not discounted. A provision for impairment of receivables is not recognised until objective evidence is available that a loss event has occurred. 15 | WOOLWORTHS LIMITED | FINANCIAL REPORT 2017 ASSETS AND LIABILITIES 3 3.2 Other financial assets 2017 $M 2016 $M Current Derivatives 16.1 56.0 16.1 56.0 Non-current Derivatives 388.7 529.7 Listed equity securities 79.8 77.3 Investments in associates 37.8 30.3 Other 0.6 0.9 506.9 638.2 Total 523.0 694.2 SIGNIFICANT ACCOUNTING POLICIES DERIVATIVES Refer to Note 4.8 for details of derivatives. LISTED EQUITY SECURITIES The Group’s investments in listed equity securities are designated as financial assets at ‘fair value through other comprehensive income’. Investments are initially measured at fair value net of transaction costs and in subsequent periods, are measured at fair value with any change recognised in other comprehensive income. Upon disposal, the cumulative gain or loss recognised in other comprehensive income is transferred within equity. 3.3 Property, plant and equipment 2017 DEVELOPMENT PROPERTIES $M FREEHOLD LAND, WAREHOUSE, RETAIL AND OTHER PROPERTIES $M LEASEHOLD IMPROVEMENTS $M PLANT AND EQUIPMENT $M TOTAL 4 $M Cost 519.0 1,435.4 3,135.1 14,015.4 19,104.9 Less: accumulated depreciation/amortisation (1.3) (117.8) (1,438.9) (9,109.4) (10,667.4) Carrying amount at end of period 517.7 1,317.6 1,696.2 4,906.0 8,437.5 Movement: Carrying amount at start of period 356.7 1,319.5 1,795.5 4,791.1 8,262.8 Additions 198.3 113.5 228.5 1,322.2 1,862.5 Acquisition of businesses – 2.6 – 0.1 2.7 Disposals 1 (6.3) (39.0) (18.7) (47.1) (111.1) Transfer from/(to) assets held for sale 2 51.5 (146.2) (139.5) (276.9) (511.1) Disposal of business – – 0.3 – 0.3 Depreciation expense 3 (0.1) (24.8) – (845.9) (870.8) Amortisation expense 3 – – (172.1) – (172.1) Impairment expense – – 2.0 (23.1) (21.1) Transfers and other (83.1) 89.0 (0.9) (18.7) (13.7) Effect of movements in foreign exchange rates 0.7 3.0 1.1 4.3 9.1 Carrying amount at end of period 517.7 1,317.6 1,696.2 4,906.0 8,437.5 1 Net loss on disposal and write off of property, plant and equipment during the year from continuing operations was $46.6 million. 2 Includes transfer of Home Improvement properties from assets held for sale. 3 Includes $23.3 million relating to discontinued operations. 4 Includes an accumulated provision for impairment of $258.8 million (2016: $193.3 million). 1 2 3 4 5 PERFO RM A N C E H IG H LIG H T S BU SIN ESS REV IEW D IREC TO RS' REPO RT FIN A N C IA L REPO RT O T H ER IN FO RM A T IO N 67 W O O LW O RT H S G R O U P A N N U A L R EPO R T 20 17 Notes to the Consolidated Financial Statements 16 | WOOLWORTHS LIMITED | FINANCIAL REPORT 2017 2016 DEVELOPMENT PROPERTIES $M FREEHOLD LAND, WAREHOUSE, RETAIL AND OTHER PROPERTIES $M LEASEHOLD IMPROVEMENTS $M PLANT AND EQUIPMENT $M TOTAL $M Cost 358.3 1,435.5 3,269.6 13,937.0 19,000.4 Less: accumulated depreciation/amortisation (1.6) (116.0) (1,474.1) (9,145.9) (10,737.6) Carrying amount at end of period 356.7 1,319.5 1,795.5 4,791.1 8,262.8 Movement: Carrying amount at start of period 927.9 2,345.7 1,798.0 4,990.5 10,062.1 Additions 343.9 69.5 241.6 1,187.4 1,842.4 Acquisition of businesses – 1.3 – 1.9 3.2 Disposals 1 (47.3) (44.7) (21.7) (19.0) (132.7) Transfer to assets held for sale (268.6) (501.0) (7.6) (65.5) (842.7) Depreciation expense 2 (0.5) (48.1) – (836.7) (885.3) Amortisation expense 2 – – (167.5) – (167.5) Impairment expense (183.2) (900.6) (55.2) (494.1) (1,633.1) Transfers and other (419.1) 386.9 – (5.3) (37.5) Effect of movements in foreign exchange rates 3.6 10.5 7.9 31.9 53.9 Carrying amount at end of period 356.7 1,319.5 1,795.5 4,791.1 8,262.8 1 Net loss on disposal and write off of property, plant and equipment during the year from continuing operations was $24.0 million. 2 Includes $89.3 million relating to discontinued operations. SIGNIFICANT ACCOUNTING POLICIES CARRYING VALUE The Group’s property, plant and equipment are measured at cost less accumulated depreciation/amortisation and accumulated impairment losses. The cost of self-constructed assets includes the cost of materials, direct labour and a proportion of overheads. The cost of development properties (those being constructed or developed for future use) includes borrowing, holding and development costs until the asset is complete. DEPRECIATION Assets are depreciated on a straight-line basis over their estimated useful lives. Leasehold improvements are amortised over the shorter of the remaining period of the individual leases or the estimated useful life of the improvement to the Group. Useful lives are reassessed each period. Where parts of an item of property, plant and equipment have different useful lives, they are accounted for as separate assets. The expected useful lives are as follows: Buildings 25 – 40 years Plant and equipment 2.5 – 10 years Leasehold improvements Up to a maximum of 25 years (retail properties) or 40 years (hotels) PROCEEDS FROM SALE OF ASSETS The gross proceeds from asset sales are recognised at the date that an unconditional contract of sale is exchanged with the purchaser. The net gain/(net loss) is recognised in the Consolidated Statement of Profit or Loss. IMPAIRMENT Property, plant and equipment are tested for impairment in accordance with the policy for impairment of non-financial assets disclosed in Note 3.5. In 2016, Home Improvement assets were transferred to assets held for sale after impairment recognised in that year. 3.3 Property, plant and equipment (continued) 68 Notes to the Consolidated Financial Statements 16 | WOOLWORTHS LIMITED | FINANCIAL REPORT 2017 2016 DEVELOPMENT PROPERTIES $M FREEHOLD LAND, WAREHOUSE, RETAIL AND OTHER PROPERTIES $M LEASEHOLD IMPROVEMENTS $M PLANT AND EQUIPMENT $M TOTAL $M Cost 358.3 1,435.5 3,269.6 13,937.0 19,000.4 Less: accumulated depreciation/amortisation (1.6) (116.0) (1,474.1) (9,145.9) (10,737.6) Carrying amount at end of period 356.7 1,319.5 1,795.5 4,791.1 8,262.8 Movement: Carrying amount at start of period 927.9 2,345.7 1,798.0 4,990.5 10,062.1 Additions 343.9 69.5 241.6 1,187.4 1,842.4 Acquisition of businesses – 1.3 – 1.9 3.2 Disposals 1 (47.3) (44.7) (21.7) (19.0) (132.7) Transfer to assets held for sale (268.6) (501.0) (7.6) (65.5) (842.7) Depreciation expense 2 (0.5) (48.1) – (836.7) (885.3) Amortisation expense 2 – – (167.5) – (167.5) Impairment expense (183.2) (900.6) (55.2) (494.1) (1,633.1) Transfers and other (419.1) 386.9 – (5.3) (37.5) Effect of movements in foreign exchange rates 3.6 10.5 7.9 31.9 53.9 Carrying amount at end of period 356.7 1,319.5 1,795.5 4,791.1 8,262.8 1 Net loss on disposal and write off of property, plant and equipment during the year from continuing operations was $24.0 million. 2 Includes $89.3 million relating to discontinued operations. SIGNIFICANT ACCOUNTING POLICIES CARRYING VALUE The Group’s property, plant and equipment are measured at cost less accumulated depreciation/amortisation and accumulated impairment losses. The cost of self-constructed assets includes the cost of materials, direct labour and a proportion of overheads. The cost of development properties (those being constructed or developed for future use) includes borrowing, holding and development costs until the asset is complete. DEPRECIATION Assets are depreciated on a straight-line basis over their estimated useful lives. Leasehold improvements are amortised over the shorter of the remaining period of the individual leases or the estimated useful life of the improvement to the Group. Useful lives are reassessed each period. Where parts of an item of property, plant and equipment have different useful lives, they are accounted for as separate assets. The expected useful lives are as follows: Buildings 25 – 40 years Plant and equipment 2.5 – 10 years Leasehold improvements Up to a maximum of 25 years (retail properties) or 40 years (hotels) PROCEEDS FROM SALE OF ASSETS The gross proceeds from asset sales are recognised at the date that an unconditional contract of sale is exchanged with the purchaser. The net gain/(net loss) is recognised in the Consolidated Statement of Profit or Loss. IMPAIRMENT Property, plant and equipment are tested for impairment in accordance with the policy for impairment of non-financial assets disclosed in Note 3.5. In 2016, Home Improvement assets were transferred to assets held for sale after impairment recognised in that year. 3.3 Property, plant and equipment (continued) 17 | WOOLWORTHS LIMITED | FINANCIAL REPORT 2017 ASSETS AND LIABILITIES 3 CRITICAL ACCOUNTING ESTIMATES ESTIMATION OF USEFUL LIFE OF ASSETS Estimates of remaining useful lives require significant management judgement and are reviewed at least annually. Where useful lives are changed, the net written-down value of the asset is depreciated or amortised from the date of the change in accordance with the revised useful life. Depreciation recognised in prior financial years is not changed. CARRYING VALUE OF PROPERTIES An assessment of the carrying amount of the Group’s freehold properties as at 25 June 2017 was performed. The basis of the assessment was a combination of external market assessments and/or valuations and internal value in use (VIU) assessments. External valuations are obtained every three years. 3.4 Intangible assets 3.4.1 Carrying amounts of and movements in intangible assets 2017 GOODWILL $M BRAND NAMES $M LIQUOR, GAMING LICENCES AND OTHER $M TOTAL $M Cost 4,319.9 256.5 2,263.0 6,839.4 Less: accumulated amortisation (103.5) (0.8) (202.3) (306.6) Carrying amount at end of period 4,216.4 255.7 2,060.7 6,532.8 Movement: Carrying amount at start of period 4,249.6 253.9 2,087.1 6,590.6 Acquisition of businesses – – 2.4 2.4 Other acquisitions – – 7.5 7.5 Disposals, transfers and other (43.4) 0.1 (11.7) (55.0) Amortisation – 0.1 (18.1) (18.0) Impairment (9.5) – (7.5) (17.0) Effect of movements in foreign exchange rates 19.7 1.6 1.0 22.3 Carrying amount at end of period 4,216.4 255.7 2,060.7 6,532.8 2016 GOODWILL $M BRAND NAMES $M LIQUOR, GAMING LICENCES AND OTHER $M TOTAL $M Cost 4,343.6 285.4 2,319.5 6,948.5 Less: accumulated amortisation (94.0) (31.5) (232.4) (357.9) Carrying amount at end of period 4,249.6 253.9 2,087.1 6,590.6 Movement: Carrying amount at start of period 4,438.5 272.5 2,145.8 6,856.8 Acquisition of businesses 5.7 – 13.6 19.3 Other acquisitions – – 8.7 8.7 Disposals, transfers and other 4.3 – (0.6) 3.7 Amortisation 1 – – (23.1) (23.1) Impairment (350.9) (30.6) (57.9) (439.4) Effect of movements in foreign exchange rates 152.0 12.0 0.6 164.6 Carrying amount at end of period 4,249.6 253.9 2,087.1 6,590.6 1 Includes $1.3 million relating to discontinued operations (refer to Note 5.1). 3.3 Property, plant and equipment (continued) 1 2 3 4 5 PERFO RM A N C E H IG H LIG H T S BU SIN ESS REV IEW D IREC TO RS' REPO RT FIN A N C IA L REPO RT O T H ER IN FO RM A T IO N 69 W O O LW O RT H S G R O U P A N N U A L R EPO R T 20 17 Notes to the Consolidated Financial Statements 18 | WOOLWORTHS LIMITED | FINANCIAL REPORT 2017 3.4.2 Allocation of indefinite life intangible assets to groups of cash-generating units GOODWILL BRAND NAMES LIQUOR, GAMING LICENCES AND OTHER 2017 $M 2016 $M 2017 $M 2016 $M 2017 $M 2016 $M Australian Food 1 360.2 360.2 0.1 0.1 – – New Zealand Food 2,180.8 2,159.3 248.6 246.8 – – Endeavour Drinks 2 510.2 530.6 7.0 7.0 271.9 269.0 ALH Group 1,164.9 1,164.9 – – 1,697.3 1,702.0 Petrol 1 – 34.3 – – – 0.2 Unallocated 0.3 0.3 – – – – 4,216.4 4,249.6 255.7 253.9 1,969.2 1,971.2 1 The goodwill attributable to Petrol was previously included within Australian Food and Petrol. In 2017, the goodwill balance is held for sale (refer to Note 5.2). 2 Excludes ALH owned retail sites, which are included in ALH Group. SIGNIFICANT ACCOUNTING POLICIES GOODWILL Goodwill represents the excess of the cost of an acquisition over the fair value of the share of the net identifiable assets acquired. Following initial recognition, goodwill is measured at cost less any accumulated impairment losses. OTHER INTANGIBLE ASSETS Other intangible assets are measured at cost less accumulated amortisation and impairment losses (if any). Where acquired in a business combination, cost represents the fair value at the date of acquisition. Intangible assets with finite lives are amortised on a straight-line basis over their estimated useful lives. Useful lives are reassessed each period. The useful lives of intangible assets have been assessed as follows: Brand names Generally indefinite useful life Liquor and gaming licences Indefinite useful life Victorian gaming entitlements Life of the gaming entitlement (10 years) Other (primarily customer relationships and property development rights) Indefinite and finite up to 20 years IMPAIRMENT Intangible assets are tested for impairment in accordance with the policy for impairment of non-financial assets disclosed in Note 3.5. CRITICAL ACCOUNTING ESTIMATES ESTIMATION OF USEFUL LIFE OF ASSETS Assessments of useful lives and estimates of remaining useful lives require significant management judgement. Brand names are generally assessed as having an indefinite useful life on the basis of brand strength, ongoing expected profitability and continuing support. Brand names incorporate complementary assets such as store formats, networks and product offerings. Liquor and gaming licences (excluding Victorian gaming entitlements) have been assessed to have an indefinite useful life on the basis that the licences are expected to be renewed in line with ongoing regulatory requirements. 3.4 Intangible assets (continued) 70 Notes to the Consolidated Financial Statements 18 | WOOLWORTHS LIMITED | FINANCIAL REPORT 2017 3.4.2 Allocation of indefinite life intangible assets to groups of cash-generating units GOODWILL BRAND NAMES LIQUOR, GAMING LICENCES AND OTHER 2017 $M 2016 $M 2017 $M 2016 $M 2017 $M 2016 $M Australian Food 1 360.2 360.2 0.1 0.1 – – New Zealand Food 2,180.8 2,159.3 248.6 246.8 – – Endeavour Drinks 2 510.2 530.6 7.0 7.0 271.9 269.0 ALH Group 1,164.9 1,164.9 – – 1,697.3 1,702.0 Petrol 1 – 34.3 – – – 0.2 Unallocated 0.3 0.3 – – – – 4,216.4 4,249.6 255.7 253.9 1,969.2 1,971.2 1 The goodwill attributable to Petrol was previously included within Australian Food and Petrol. In 2017, the goodwill balance is held for sale (refer to Note 5.2). 2 Excludes ALH owned retail sites, which are included in ALH Group. SIGNIFICANT ACCOUNTING POLICIES GOODWILL Goodwill represents the excess of the cost of an acquisition over the fair value of the share of the net identifiable assets acquired. Following initial recognition, goodwill is measured at cost less any accumulated impairment losses. OTHER INTANGIBLE ASSETS Other intangible assets are measured at cost less accumulated amortisation and impairment losses (if any). Where acquired in a business combination, cost represents the fair value at the date of acquisition. Intangible assets with finite lives are amortised on a straight-line basis over their estimated useful lives. Useful lives are reassessed each period. The useful lives of intangible assets have been assessed as follows: Brand names Generally indefinite useful life Liquor and gaming licences Indefinite useful life Victorian gaming entitlements Life of the gaming entitlement (10 years) Other (primarily customer relationships and property development rights) Indefinite and finite up to 20 years IMPAIRMENT Intangible assets are tested for impairment in accordance with the policy for impairment of non-financial assets disclosed in Note 3.5. CRITICAL ACCOUNTING ESTIMATES ESTIMATION OF USEFUL LIFE OF ASSETS Assessments of useful lives and estimates of remaining useful lives require significant management judgement. Brand names are generally assessed as having an indefinite useful life on the basis of brand strength, ongoing expected profitability and continuing support. Brand names incorporate complementary assets such as store formats, networks and product offerings. Liquor and gaming licences (excluding Victorian gaming entitlements) have been assessed to have an indefinite useful life on the basis that the licences are expected to be renewed in line with ongoing regulatory requirements. 3.4 Intangible assets (continued) 19 | WOOLWORTHS LIMITED | FINANCIAL REPORT 2017 ASSETS AND LIABILITIES 3 3.5 Impairment of non-financial assets The following impairments/(reversals of impairments) were recognised during 2017: 2017 CONTINUING OPERATIONS $M DISCONTINUED OPERATIONS $M TOTAL $M Property, plant and equipment 21.1 – 21.1 Assets held for sale – (23.7) (23.7) Intangible assets 17.0 – 17.0 Total impairment/(reversal of impairment) 38.1 (23.7) 14.4 The following impairments were recognised during 2016: 2016 CONTINUING OPERATIONS $M DISCONTINUED OPERATIONS $M TOTAL $M Property, plant and equipment 195.8 1,437.3 1,633.1 Assets held for sale – 46.4 46.4 Intangible assets 320.0 119.4 439.4 Total impairment 515.8 1,603.1 2,118.9 Continuing operations During the year ended 25 June 2017, a charge of $35.3 million has been recorded in branch expenses, $21.1 million of which relates to impairment of store property, plant and equipment, and $14.2 million relating to provisions for onerous leases in respect of BIG W’s undiscounted lease commitments of approximately $3.0 billion. Refer to the ‘critical accounting estimates’ for further detail on the impairment assessment for BIG W. During the year an impairment of $20.7 million was recorded in relation to Summergate, $17.0 million of which relates to impairment of intangibles, and $3.7 million relates to impairment of trade and other receivables. Discontinued operations On 18 January 2016, the Company announced its planned exit from the Home Improvement market. The recoverable amounts of the assets in the Home Improvement business have been re-assessed at 25 June 2017. Valuations of property assets included in the Home Consortium transaction were determined with regard to the financial impact of the transaction. Valuations of property assets excluded from the transaction were determined with regard to the Group’s asset disposal strategy and investment yields reflective of the characteristics and location of the individual properties based on management’s best estimate of the expected net proceeds. The resulting reversal of impairment of assets held for sale of $23.7 million has been included within ‘Loss from discontinued operations’ during the financial year ended 25 June 2017. Refer to Note 5.1, Note 5.2 and Note 6.5 for further details. SIGNIFICANT ACCOUNTING POLICIES IMPAIRMENT OF NON-FINANCIAL ASSETS The carrying amounts of the Group’s property, plant and equipment (refer to Note 3.3), goodwill and intangible assets (refer to Note 3.4) are reviewed for impairment as follows: Property, plant and equipment and finite life intangibles When there is an indication that the asset may be impaired (assessed at least each reporting date) or when there is an indication that a previously recognised impairment may have changed Goodwill and indefinite life intangibles At least annually and when there is an indication that the asset may be impaired 1 1 2 3 4 5 PERFO RM A N C E H IG H LIG H T S BU SIN ESS REV IEW D IREC TO RS' REPO RT FIN A N C IA L REPO RT O T H ER IN FO RM A T IO N 71 W O O LW O RT H S G R O U P A N N U A L R EPO R T 20 17 Notes to the Consolidated Financial Statements 20 | WOOLWORTHS LIMITED | FINANCIAL REPORT 2017 SIGNIFICANT ACCOUNTING POLICIES CONTINUED CALCULATION OF RECOVERABLE AMOUNT In assessing impairment, the recoverable amount of the asset is estimated in order to determine the extent of the impairment loss (if any). The recoverable amount of an asset is the greater of its value in use (VIU) and its fair value less costs to dispose (FVLCTD). For an asset that does not generate largely independent cash inflows, recoverable amount is assessed at the cash generating unit (CGU) level, which is the smallest group of assets generating cash inflows independent of other CGUs that benefit from the use of the respective asset. Goodwill is allocated to those CGUs or groups of CGUs that are expected to benefit from the business combination in which the goodwill arose, identified according to operating segments and grouped at the lowest levels for which goodwill is monitored for internal management purposes. An impairment loss is recognised whenever the carrying amount of an asset or its CGU exceeds its recoverable amount. Impairment losses are recognised in the Consolidated Statement of Profit or Loss. Impairment losses recognised in respect of a CGU will be allocated first to reduce the carrying amount of any goodwill allocated to the CGU and then to reduce the carrying amount of other assets in the CGU on a pro-rata basis to their carrying amounts. REVERSAL OF IMPAIRMENT An impairment loss in respect of goodwill is not reversed. In respect of other assets, an impairment loss is reversed if there has been a change in the estimates used to determine the recoverable amount. An impairment loss is reversed only to the extent that the asset’s carrying amount does not exceed the carrying amount that would have been determined, net of depreciation or amortisation, if no impairment loss had been recognised. CRITICAL ACCOUNTING ESTIMATES Key assumptions used in determining the recoverable amount of assets include expected future cash flows, long-term growth rates (terminal value assumptions) and discount rates. In assessing VIU, estimated future cash flows are based on the Group’s most recent board approved business plan covering a period not exceeding five years. Cash flows beyond the approved business plan period are extrapolated using estimated long-term growth rates. Long-term growth rates are based on past experience, expectations of external market operating conditions, and other assumptions which take account of the specific features of each business unit. Long-term growth rates do not exceed industry growth rates for the business in which the CGU operates. The recoverable amount has been determined using a VIU discounted cash flow model. In assessing VIU, the estimated future pre-tax cash flows are discounted to their present value using a pre-tax discount rate that reflects the current market assessments of the time value of money and risks specific to the asset. Pre-tax discount rates used vary depending on the nature of the business and the country of operation. The ranges of rates used in determining recoverable amounts are set out below: 2017 % 2016 % Long-term growth rate 2.5 0.5 – 2.5 Pre-tax discount rate 13 – 17.3 13 – 16.5 The Group believes that any reasonably possible change in the key assumptions applied would not cause the carrying value of assets to exceed their recoverable amount and result in a material impairment based on current economic conditions and CGU performance. 3.5 Impairment of non-financial assets (continued) 72 Notes to the Consolidated Financial Statements 20 | WOOLWORTHS LIMITED | FINANCIAL REPORT 2017 SIGNIFICANT ACCOUNTING POLICIES CONTINUED CALCULATION OF RECOVERABLE AMOUNT In assessing impairment, the recoverable amount of the asset is estimated in order to determine the extent of the impairment loss (if any). The recoverable amount of an asset is the greater of its value in use (VIU) and its fair value less costs to dispose (FVLCTD). For an asset that does not generate largely independent cash inflows, recoverable amount is assessed at the cash generating unit (CGU) level, which is the smallest group of assets generating cash inflows independent of other CGUs that benefit from the use of the respective asset. Goodwill is allocated to those CGUs or groups of CGUs that are expected to benefit from the business combination in which the goodwill arose, identified according to operating segments and grouped at the lowest levels for which goodwill is monitored for internal management purposes. An impairment loss is recognised whenever the carrying amount of an asset or its CGU exceeds its recoverable amount. Impairment losses are recognised in the Consolidated Statement of Profit or Loss. Impairment losses recognised in respect of a CGU will be allocated first to reduce the carrying amount of any goodwill allocated to the CGU and then to reduce the carrying amount of other assets in the CGU on a pro-rata basis to their carrying amounts. REVERSAL OF IMPAIRMENT An impairment loss in respect of goodwill is not reversed. In respect of other assets, an impairment loss is reversed if there has been a change in the estimates used to determine the recoverable amount. An impairment loss is reversed only to the extent that the asset’s carrying amount does not exceed the carrying amount that would have been determined, net of depreciation or amortisation, if no impairment loss had been recognised. CRITICAL ACCOUNTING ESTIMATES Key assumptions used in determining the recoverable amount of assets include expected future cash flows, long-term growth rates (terminal value assumptions) and discount rates. In assessing VIU, estimated future cash flows are based on the Group’s most recent board approved business plan covering a period not exceeding five years. Cash flows beyond the approved business plan period are extrapolated using estimated long-term growth rates. Long-term growth rates are based on past experience, expectations of external market operating conditions, and other assumptions which take account of the specific features of each business unit. Long-term growth rates do not exceed industry growth rates for the business in which the CGU operates. The recoverable amount has been determined using a VIU discounted cash flow model. In assessing VIU, the estimated future pre-tax cash flows are discounted to their present value using a pre-tax discount rate that reflects the current market assessments of the time value of money and risks specific to the asset. Pre-tax discount rates used vary depending on the nature of the business and the country of operation. The ranges of rates used in determining recoverable amounts are set out below: 2017 % 2016 % Long-term growth rate 2.5 0.5 – 2.5 Pre-tax discount rate 13 – 17.3 13 – 16.5 The Group believes that any reasonably possible change in the key assumptions applied would not cause the carrying value of assets to exceed their recoverable amount and result in a material impairment based on current economic conditions and CGU performance. 3.5 Impairment of non-financial assets (continued) 21 | WOOLWORTHS LIMITED | FINANCIAL REPORT 2017 ASSETS AND LIABILITIES 3 CRITICAL ACCOUNTING ESTIMATES CONTINUED BIG W As disclosed in the half year ended 1 January 2017, the BIG W business was assessed for impairment using the assumptions included in the business turnaround strategy at that time. As a result, an impairment charge of $35.3 million was recognised for store asset impairments and onerous lease provisions on certain underperforming stores. During the second half of the fiscal year, the board formally approved the revised BIG W turnaround plan. This has been used as the basis for the value in use (VIU) discounted cash model used for determining the recoverable amount of BIG W. The turnaround plan assumes improvements in BIG W’s operating and financial performance as well as working capital improvements over a five-year period. At 25 June 2017, the recoverable amount of the business is higher than its carrying amount of $514.3 million (2016: $555.2 million). Consistent with the half year ended 1 January 2017, management has applied a long-term terminal growth rate of 2.5% and a pre-tax discount rate of 14.3% (post-tax of 10%). The impairment assessment incorporates the planned outcomes of the key initiatives underpinning the turnaround plan and is expected to be implemented over a number of years. A key element of the turnaround plan includes investing across future periods to improve BIG W’s market position and to deliver an improved customer value proposition. As a result, the business is expected to initially remain loss making before returning to profitability and achieving sustained growth in the later years of the turnaround plan. There are a number of risks and uncertainties associated with the execution of the BIG W turnaround plan, including adverse changes in trading conditions, the competitive landscape, and the inability of BIG W to execute the multi-year plan in line with the assumptions made. The assessment of the recoverable amount represents management’s best estimate of the recovery of BIG W over the next five years, taking into account risks, uncertainties and opportunities for improvement in the business. Management will continue to reassess the progress of the BIG W business against these estimates and it is possible that the Company may require further asset impairments and onerous lease provisions in relation to the BIG W store and support network in future periods. Sensitivity analysis was performed to determine the impact on the recoverable amount of reasonably possible changes in key assumptions. Consequently, with all other assumptions remaining the same, a 125 basis point increase in the post-tax discount rate or a 20% reduction in the forecast EBIT that drives the terminal value would result in a 45% reduction to the available headroom. 3.5 Impairment of non-financial assets (continued) 1 2 3 4 5 PERFO RM A N C E H IG H LIG H T S BU SIN ESS REV IEW D IREC TO RS' REPO RT FIN A N C IA L REPO RT O T H ER IN FO RM A T IO N 73 W O O LW O RT H S G R O U P A N N U A L R EPO R T 20 17 Notes to the Consolidated Financial Statements 22 | WOOLWORTHS LIMITED | FINANCIAL REPORT 2017 3.6 Income taxes 3.6.1 Income tax recognised in the Consolidated Statement of Profit or Loss 2017 $M 2016 $M Income tax expense Current tax expense 729.9 796.6 Adjustments recognised in the current year in relation to the current tax of prior years (11.6) 1.2 Deferred tax relating to the origination and reversal of temporary differences 119.4 (383.4) 837.7 414.4 Income tax expense is attributable to: Profit from continuing operations (as reported in the Consolidated Statement of Profit or Loss) 650.4 486.4 Profit/(Loss) from discontinued operations (refer to Note 5.1) 187.3 (72.0) 837.7 414.4 3.6.2 Reconciliation between tax expense and profit before income tax 2017 $M 2016 $M Profit before income tax expense – continuing operations 2,132.4 1,249.3 Profit/(Loss) before income tax expense – discontinued operations (refer to Note 5.1) 298.7 (3,182.8) Profit/(Loss) before income tax expense 2,431.1 (1,933.5) Income tax expense/(benefit) using the Australian corporate tax rate of 30% 729.3 (580.0) Tax effect of amounts which are not deductible/(taxable) in calculating taxable income: Non-deductible expenses 96.2 27.6 Non-deductible impairment expense 5.1 723.6 Tax losses no longer able to be carried forward as a deferred tax asset – 182.5 Unrecognised tax losses from the current year 24.4 74.6 Impact of differences in offshore tax rates (5.0) (4.7) Other (0.7) (10.4) 849.3 413.2 Adjustments relating to prior years (11.6) 1.2 Income tax expense 837.7 414.4 74 Notes to the Consolidated Financial Statements 22 | WOOLWORTHS LIMITED | FINANCIAL REPORT 2017 3.6 Income taxes 3.6.1 Income tax recognised in the Consolidated Statement of Profit or Loss 2017 $M 2016 $M Income tax expense Current tax expense 729.9 796.6 Adjustments recognised in the current year in relation to the current tax of prior years (11.6) 1.2 Deferred tax relating to the origination and reversal of temporary differences 119.4 (383.4) 837.7 414.4 Income tax expense is attributable to: Profit from continuing operations (as reported in the Consolidated Statement of Profit or Loss) 650.4 486.4 Profit/(Loss) from discontinued operations (refer to Note 5.1) 187.3 (72.0) 837.7 414.4 3.6.2 Reconciliation between tax expense and profit before income tax 2017 $M 2016 $M Profit before income tax expense – continuing operations 2,132.4 1,249.3 Profit/(Loss) before income tax expense – discontinued operations (refer to Note 5.1) 298.7 (3,182.8) Profit/(Loss) before income tax expense 2,431.1 (1,933.5) Income tax expense/(benefit) using the Australian corporate tax rate of 30% 729.3 (580.0) Tax effect of amounts which are not deductible/(taxable) in calculating taxable income: Non-deductible expenses 96.2 27.6 Non-deductible impairment expense 5.1 723.6 Tax losses no longer able to be carried forward as a deferred tax asset – 182.5 Unrecognised tax losses from the current year 24.4 74.6 Impact of differences in offshore tax rates (5.0) (4.7) Other (0.7) (10.4) 849.3 413.2 Adjustments relating to prior years (11.6) 1.2 Income tax expense 837.7 414.4 23 | WOOLWORTHS LIMITED | FINANCIAL REPORT 2017 ASSETS AND LIABILITIES 3 3.6.3 Deferred tax balances recognised in the Consolidated Statement of Financial Position 2017 OPENING BALANCE $M CREDITED/ (CHARGED) TO INCOME $M CREDITED/ (CHARGED) TO OCI $M TRANSFERS TO ASSETS HELD FOR SALE $M CLOSING BALANCE $M Deferred tax assets Property, plant and equipment 123.8 (15.3) – 0.6 109.1 Provisions and accruals 1,004.2 (104.2) (1.0) (2.0) 897.0 Cash flow hedges 27.6 – 1.0 – 28.6 Unrealised foreign exchange differences (38.3) (0.5) (3.0) – (41.8) Other 6.8 (2.2) 0.5 – 5.1 1,124.1 (122.2) (2.5) (1.4) 998.0 Deferred tax liabilities Intangible assets (626.3) – – – (626.3) Prepayments (3.6) (0.5) – – (4.1) Other 3.5 3.3 – (2.1) 4.7 (626.4) 2.8 – (2.1) (625.7) Net deferred tax asset/(liability) 497.7 (119.4) (2.5) (3.5) 372.3 2016 OPENING BALANCE $M CREDITED/ (CHARGED) TO INCOME $M CREDITED/ (CHARGED) TO OCI $M TRANSFERS TO ASSETS HELD FOR SALE $M CLOSING BALANCE $M Deferred tax assets Property, plant and equipment 51.5 72.7 – (0.4) 123.8 Provisions and accruals 556.4 455.7 1.7 (9.6) 1,004.2 Cash flow hedges 29.3 – (1.7) – 27.6 Unrealised foreign exchange differences (14.1) 0.3 (24.5) – (38.3) Tax losses (revenue) 182.5 (182.5) – – – Other 3.7 3.1 – – 6.8 809.3 349.3 (24.5) (10.0) 1,124.1 Deferred tax liabilities Intangible assets (626.3) – – – (626.3) Prepayments (3.8) (0.1) – 0.3 (3.6) Other (36.5) 34.2 2.0 3.8 3.5 (666.6) 34.1 2.0 4.1 (626.4) Net deferred tax asset/(liability) 142.7 383.4 (22.5) (5.9) 497.7 3.6 Income taxes (continued) 1 2 3 4 5 PERFO RM A N C E H IG H LIG H T S BU SIN ESS REV IEW D IREC TO RS' REPO RT FIN A N C IA L REPO RT O T H ER IN FO RM A T IO N 75 W O O LW O RT H S G R O U P A N N U A L R EPO R T 20 17 Notes to the Consolidated Financial Statements 24 | WOOLWORTHS LIMITED | FINANCIAL REPORT 2017 SIGNIFICANT ACCOUNTING POLICIES Income tax in the Consolidated Statement of Profit or Loss for the period presented comprises current and deferred tax. CURRENT TAX Income tax payable represents the amount expected to be paid to taxation authorities on taxable income for the period, using tax rates enacted or substantively enacted at the reporting date and any adjustment to tax payable in respect of previous years. DEFERRED TAX Deferred tax is calculated using the balance sheet method, providing for temporary differences between the carrying amounts of assets and liabilities for financial reporting and taxation purposes. Deferred tax is measured at the rates that are expected to apply in the period in which the liability is settled or asset realised, based on tax rates enacted or substantively enacted at the reporting date. Deferred tax assets and liabilities are not recognised if the temporary difference arises from the initial recognition (other than in a business combination) of assets and liabilities in a transaction that affects neither the taxable profit nor the accounting profit or in relation to the initial recognition of goodwill. A deferred tax asset is recognised only to the extent that it is probable that future taxable profits will be available against which the deductible temporary differences or unused tax losses and tax offsets can be utilised. Deferred tax assets are reduced to the extent that it is no longer probable that the related tax benefit will be realised. Deferred tax assets and liabilities are offset when they relate to income taxes levied by the same taxation authority and the Group intends to settle its current tax assets and liabilities on a net basis. Income tax is recognised in the Consolidated Statement of Profit or Loss except to the extent that it relates to items recognised in other comprehensive income or directly in equity, in which case, the tax is also recognised in other comprehensive income or directly in equity, respectively. Deferred taxes on indefinite life intangible assets In November 2016, the IFRS Interpretations Committee (IC) published a summary of its discussions following a request to clarify how an entity determines the expected manner of recovery of an intangible asset with an indefinite useful life for the purpose of measuring deferred taxes in accordance with IAS 12 – Income Taxes. The IC noted that the fact that an entity does not amortise an intangible asset with an indefinite useful life does not mean that it has an infinite life and that the entity will recover the carrying amount of that asset only through sale and not through use. The benefit of intangible assets with an indefinite useful life will flow to the Company on an annual basis, therefore the carrying amount will be recovered through use. In response to this clarification, the Company retrospectively changed its accounting policy for the deferred tax liabilities recorded in relation to these intangibles assets. The following table summarises the impact of this change in accounting policy on the Consolidated Statement of Financial Position. This change did not have an impact on the 2016 comparative figures reported in the Consolidated Statement of Profit or Loss or Consolidated Statement of Other Comprehensive Income and Consolidated Statements of Cash Flows. INCREASE/(DECREASE) OF PREVIOUSLY REPORTED BALANCES NOTE 2016 $M Goodwill 3.4 612.3 Deferred tax liabilities 3.6.3 612.3 TAX CONSOLIDATION The Company and its wholly-owned Australian resident entities formed a tax consolidated group with effect from 1 July 2002. Woolworths Limited is the head entity of the tax consolidated group and has assumed the current tax liabilities of the members in the tax consolidated group. Tax expense/income, deferred tax assets and deferred tax liabilities arising from temporary differences of the members of the tax consolidated group are recognised by each subsidiary where the subsidiary would have been able to recognise the deferred tax asset or deferred tax liability on a standalone basis. 3.6 Income taxes (continued) 76 Notes to the Consolidated Financial Statements 24 | WOOLWORTHS LIMITED | FINANCIAL REPORT 2017 SIGNIFICANT ACCOUNTING POLICIES Income tax in the Consolidated Statement of Profit or Loss for the period presented comprises current and deferred tax. CURRENT TAX Income tax payable represents the amount expected to be paid to taxation authorities on taxable income for the period, using tax rates enacted or substantively enacted at the reporting date and any adjustment to tax payable in respect of previous years. DEFERRED TAX Deferred tax is calculated using the balance sheet method, providing for temporary differences between the carrying amounts of assets and liabilities for financial reporting and taxation purposes. Deferred tax is measured at the rates that are expected to apply in the period in which the liability is settled or asset realised, based on tax rates enacted or substantively enacted at the reporting date. Deferred tax assets and liabilities are not recognised if the temporary difference arises from the initial recognition (other than in a business combination) of assets and liabilities in a transaction that affects neither the taxable profit nor the accounting profit or in relation to the initial recognition of goodwill. A deferred tax asset is recognised only to the extent that it is probable that future taxable profits will be available against which the deductible temporary differences or unused tax losses and tax offsets can be utilised. Deferred tax assets are reduced to the extent that it is no longer probable that the related tax benefit will be realised. Deferred tax assets and liabilities are offset when they relate to income taxes levied by the same taxation authority and the Group intends to settle its current tax assets and liabilities on a net basis. Income tax is recognised in the Consolidated Statement of Profit or Loss except to the extent that it relates to items recognised in other comprehensive income or directly in equity, in which case, the tax is also recognised in other comprehensive income or directly in equity, respectively. Deferred taxes on indefinite life intangible assets In November 2016, the IFRS Interpretations Committee (IC) published a summary of its discussions following a request to clarify how an entity determines the expected manner of recovery of an intangible asset with an indefinite useful life for the purpose of measuring deferred taxes in accordance with IAS 12 – Income Taxes. The IC noted that the fact that an entity does not amortise an intangible asset with an indefinite useful life does not mean that it has an infinite life and that the entity will recover the carrying amount of that asset only through sale and not through use. The benefit of intangible assets with an indefinite useful life will flow to the Company on an annual basis, therefore the carrying amount will be recovered through use. In response to this clarification, the Company retrospectively changed its accounting policy for the deferred tax liabilities recorded in relation to these intangibles assets. The following table summarises the impact of this change in accounting policy on the Consolidated Statement of Financial Position. This change did not have an impact on the 2016 comparative figures reported in the Consolidated Statement of Profit or Loss or Consolidated Statement of Other Comprehensive Income and Consolidated Statements of Cash Flows. INCREASE/(DECREASE) OF PREVIOUSLY REPORTED BALANCES NOTE 2016 $M Goodwill 3.4 612.3 Deferred tax liabilities 3.6.3 612.3 TAX CONSOLIDATION The Company and its wholly-owned Australian resident entities formed a tax consolidated group with effect from 1 July 2002. Woolworths Limited is the head entity of the tax consolidated group and has assumed the current tax liabilities of the members in the tax consolidated group. Tax expense/income, deferred tax assets and deferred tax liabilities arising from temporary differences of the members of the tax consolidated group are recognised by each subsidiary where the subsidiary would have been able to recognise the deferred tax asset or deferred tax liability on a standalone basis. 3.6 Income taxes (continued) 25 | WOOLWORTHS LIMITED | FINANCIAL REPORT 2017 ASSETS AND LIABILITIES 3 SIGNIFICANT ACCOUNTING POLICIES CONTINUED TAX CONSOLIDATION CONTINUED The members of the tax consolidated group have entered into a tax funding agreement with the Company which sets out the funding obligations in respect of income tax amounts. The agreement requires payments by the subsidiary to the Company equal to the income tax liability assumed by the Company. The Company is required to make payment to the subsidiary equal to the current tax asset assumed by the Company. In respect of carried-forward tax losses brought into the group on consolidation by subsidiary members, the Company will pay the subsidiary member for such losses when these losses are transferred to the tax consolidated group, where the subsidiary member would have been entitled to recognise the benefit of these losses on a standalone basis. Income tax expense of $68.0 million (2016: $89.6 million) was charged by the Company to subsidiaries during the period through at-call intercompany accounts. 3.7 Trade and other payables 2017 $M 2016 $M Trade payables 5,068.2 4,809.1 Accruals 1,418.7 1,278.7 Unearned income 197.8 178.3 6,684.7 6,266.1 3.8 Other financial liabilities 2017 $M 2016 $M Current Gaming entitlement liability – 9.0 Derivatives 63.0 109.4 Put option held over non-controlling interest in Hydrox Holdings Pty Ltd 250.8 – Other – 1.9 313.8 120.3 Non-current Derivatives 115.7 148.9 Other – 30.9 115.7 179.8 Total 429.5 300.1 Put option over non-controlling interest in Hydrox Holdings Pty Ltd (Hydrox) As at 25 June 2017, the Company owned 66.7% of Hydrox with the remaining 33.3% held by a subsidiary of Lowe’s Companies, Inc. (Lowe’s). As part of the terms of the Joint Venture Agreement (JVA) between the parties, Lowe’s held a put option, which became exercisable after 20 October 2015. On 16 January 2016, Lowe’s issued a notice setting an exercise date for the option triggering a 13-month notice period after which the option could be exercised. On 18 January 2016, Woolworths announced that it intended to exercise its call option over Lowe’s 33.3% interest in Hydrox. On 16 February 2016, the Company provided Lowe’s with a notice of exercise of its call option. The Group has valued the put option liability as at 25 June 2017 at $250.8 million as a result of the payment to Lowe’s on 4 August 2017 for the acquisition of their 33.3% shareholding (refer to Note 6.5 for further details). 3.6 Income taxes (continued) 1 2 3 4 5 PERFO RM A N C E H IG H LIG H T S BU SIN ESS REV IEW D IREC TO RS' REPO RT FIN A N C IA L REPO RT O T H ER IN FO RM A T IO N 77 W O O LW O RT H S G R O U P A N N U A L R EPO R T 20 17 Notes to the Consolidated Financial Statements 26 | WOOLWORTHS LIMITED | FINANCIAL REPORT 2017 SIGNIFICANT ACCOUNTING POLICIES DERIVATIVES Refer to Note 4.8 for details on derivatives. PUT OPTIONS OVER NON-CONTROLLING INTERESTS Put options held by non-controlling interests are measured at fair value. In 2016 the fair value of the put option in Hydrox of $nil was determined with reference to the valuation provided to the Company by the independent expert it appointed in accordance with the process outlined in the JVA. The Group’s accounting policy was to recognise changes in the fair value of put options over non-controlling interests directly in equity within general reserves, as these related to a transaction with a non-controlling interest. In 2017 the change in valuation of the put option liability during the period has been charged to the Consolidated Statement of Profit or Loss. This change results in the Group’s accounting policy being more consistent with the substance of the Home Improvement exit. The change in accounting policy has been applied in the current year as the impact to the prior year is not considered material to the Group. If the change in accounting policy had been applied retrospectively, the prior year charge to General Reserve of $153.4 million would have been reflected in the 2016 Consolidated Statement of Profit or Loss increasing the total loss for the period from $2,347.9 million to $2,501.3 million. 3.9 Provisions 2017 $M 2016 $M Current Employee benefits 915.0 902.4 Self-insured risks 178.6 170.3 Restructuring, onerous contracts, store exit costs and other 377.0 800.8 1,470.6 1,873.5 Non-current Employee benefits 172.4 165.4 Self-insured risks 415.3 439.5 Restructuring, onerous contracts, store exit costs and other 423.2 777.5 1,010.9 1,382.4 Total 2,481.5 3,255.9 Movements in total self-insured risks, restructuring, onerous contracts, store exit costs, and other provisions SELF-INSURED RISKS RESTRUCTURING, ONEROUS CONTRACTS, STORE EXIT COSTS, AND OTHER 2017 2016 2017 2016 Movement: Balance at start of period 609.8 597.7 1,578.3 69.7 Additional provisions recognised/(reversed) 141.1 160.4 (571.9) 1,705.3 Reductions arising from payments (151.3) (141.6) (309.1) (173.9) Other (5.7) (7.0) 61.7 (24.5) Arising from the disposal of controlled entities – – 41.0 – Effect of movements in foreign exchange rates – 0.3 0.2 1.7 Balance at end of period 593.9 609.8 800.2 1,578.3 Current 178.6 170.3 377.0 800.8 Non-current 415.3 439.5 423.2 777.5 3.8 Other financial liabilities (continued) 78 Notes to the Consolidated Financial Statements 26 | WOOLWORTHS LIMITED | FINANCIAL REPORT 2017 SIGNIFICANT ACCOUNTING POLICIES DERIVATIVES Refer to Note 4.8 for details on derivatives. PUT OPTIONS OVER NON-CONTROLLING INTERESTS Put options held by non-controlling interests are measured at fair value. In 2016 the fair value of the put option in Hydrox of $nil was determined with reference to the valuation provided to the Company by the independent expert it appointed in accordance with the process outlined in the JVA. The Group’s accounting policy was to recognise changes in the fair value of put options over non-controlling interests directly in equity within general reserves, as these related to a transaction with a non-controlling interest. In 2017 the change in valuation of the put option liability during the period has been charged to the Consolidated Statement of Profit or Loss. This change results in the Group’s accounting policy being more consistent with the substance of the Home Improvement exit. The change in accounting policy has been applied in the current year as the impact to the prior year is not considered material to the Group. If the change in accounting policy had been applied retrospectively, the prior year charge to General Reserve of $153.4 million would have been reflected in the 2016 Consolidated Statement of Profit or Loss increasing the total loss for the period from $2,347.9 million to $2,501.3 million. 3.9 Provisions 2017 $M 2016 $M Current Employee benefits 915.0 902.4 Self-insured risks 178.6 170.3 Restructuring, onerous contracts, store exit costs and other 377.0 800.8 1,470.6 1,873.5 Non-current Employee benefits 172.4 165.4 Self-insured risks 415.3 439.5 Restructuring, onerous contracts, store exit costs and other 423.2 777.5 1,010.9 1,382.4 Total 2,481.5 3,255.9 Movements in total self-insured risks, restructuring, onerous contracts, store exit costs, and other provisions SELF-INSURED RISKS RESTRUCTURING, ONEROUS CONTRACTS, STORE EXIT COSTS, AND OTHER 2017 2016 2017 2016 Movement: Balance at start of period 609.8 597.7 1,578.3 69.7 Additional provisions recognised/(reversed) 141.1 160.4 (571.9) 1,705.3 Reductions arising from payments (151.3) (141.6) (309.1) (173.9) Other (5.7) (7.0) 61.7 (24.5) Arising from the disposal of controlled entities – – 41.0 – Effect of movements in foreign exchange rates – 0.3 0.2 1.7 Balance at end of period 593.9 609.8 800.2 1,578.3 Current 178.6 170.3 377.0 800.8 Non-current 415.3 439.5 423.2 777.5 3.8 Other financial liabilities (continued) 27 | WOOLWORTHS LIMITED | FINANCIAL REPORT 2017 ASSETS AND LIABILITIES 3 SIGNIFICANT ACCOUNTING POLICIES A provision is recognised when the Group has a present legal or constructive obligation as a result of a past event, it is probable that an outflow of economic benefits will be required to settle the obligation, and a reliable estimate can be made as to the amount of the obligation. The amount recognised is the best estimate of the consideration required to settle the present obligation at the reporting date, taking into account the risks and uncertainties surrounding the obligation. EMPLOYEE BENEFITS A liability is recognised for benefits accruing to employees in respect of annual leave and long service leave. Liabilities expected to be settled within 12 months are measured at their nominal values using the remuneration rate expected to apply at the time of settlement. Liabilities which are not expected to be settled within 12 months are measured as the present value of the estimated future cash outflows to be made by the Group in respect of services provided by employees up to the reporting date. SELF-INSURANCE The provision for self-insured risks primarily represents the estimated liability for workers’ compensation and public liability claims. RESTRUCTURING Provision for restructuring is recognised when the Group has developed a detailed formal plan for the restructuring and has raised a valid expectation in those affected by the restructuring that the restructuring will occur. ONEROUS CONTRACTS AND STORE EXIT COSTS An onerous contract is a contract in which the unavoidable costs of meeting the obligations under the contract exceed the economic benefits expected to be received under it. The unavoidable costs under a contract reflect the least net cost of exiting from the contract, which is the lower of the cost of fulfilling it and any compensation or penalties arising from failure to fulfil it. CRITICAL ACCOUNTING ESTIMATES DISCOUNT RATES Where a provision is measured using the cash flows estimated to settle the obligation, the cash flows are discounted using a pre-tax rate that reflects current market assessments of the time value of money and the risks specific to the liability. Rates are reviewed periodically and given the nature of the estimate, reasonably possible changes are not considered likely to have a material impact. EMPLOYEE BENEFITS ASSUMPTIONS In estimating the value of employee benefits, consideration is given to expected future salary and wage levels (including on-cost rates), experience of employee departures and periods of service. The assumptions are reviewed periodically and given the nature of the estimate, reasonably possible changes in assumptions are not considered likely to have a material impact. ACTUARIAL ASSUMPTIONS Self-insurance provisions are determined based on independent actuarial assessments, which consider numbers, amounts and duration of claims, and allow for future inflation and investment returns. Allowance is included for injuries which occurred before the balance sheet date, but where the claim is expected to be notified after the reporting date. The assumptions are reviewed periodically and given the nature of the estimate, reasonably possible changes in assumptions are not considered likely to have a material impact 3.9 Provisions (continued) 1 2 3 4 5 PERFO RM A N C E H IG H LIG H T S BU SIN ESS REV IEW D IREC TO RS' REPO RT FIN A N C IA L REPO RT O T H ER IN FO RM A T IO N 79 W O O LW O RT H S G R O U P A N N U A L R EPO R T 20 17 Notes to the Consolidated Financial Statements 28 | WOOLWORTHS LIMITED | FINANCIAL REPORT 2017 CRITICAL ACCOUNTING ESTIMATES CONTINUED RESTRUCTURING, ONEROUS CONTRACTS, AND STORE EXIT COSTS The Group has recognised a provision for store closures and onerous leases based on the lower of the estimated unavoidable net costs of meeting all leases and other obligations under the stores and associated contracts, and management’s best estimate of the compensation expected to be payable to landlords and other third parties as a result of early termination of contracts. Estimates differ depending on the rent, location, the respective lease exit terms, and management’s assessment of the timing and likely termination costs. The estimates and judgements applied with respect to the recognition of onerous leases in relation to the Home Improvement business involve a high degree of complexity and have a risk of causing a material adjustment within subsequent periods. Any changes to carrying values in subsequent periods due to revisions to estimates or assumptions or as a result of the final realisation of the Home Improvement assets and liabilities upon exit of the business will be recognised in the Group’s profit or loss as part of discontinued operations up to the sale of the Home Improvement business and continuing operations subsequent to the sale. The decrease in onerous contract and store exit costs is primarily attributable to the re-assessment of provisions associated with the Group’s planned exit from the Home Improvement business (refer to Note 5.1). 3.10 Other non-current liabilities 2017 $M 2016 $M Straight-line lease, and incentive liability 249.2 232.9 Net defined benefit liability 62.7 61.6 311.9 294.5 3.9 Provisions (continued) 80 Notes to the Consolidated Financial Statements 28 | WOOLWORTHS LIMITED | FINANCIAL REPORT 2017 CRITICAL ACCOUNTING ESTIMATES CONTINUED RESTRUCTURING, ONEROUS CONTRACTS, AND STORE EXIT COSTS The Group has recognised a provision for store closures and onerous leases based on the lower of the estimated unavoidable net costs of meeting all leases and other obligations under the stores and associated contracts, and management’s best estimate of the compensation expected to be payable to landlords and other third parties as a result of early termination of contracts. Estimates differ depending on the rent, location, the respective lease exit terms, and management’s assessment of the timing and likely termination costs. The estimates and judgements applied with respect to the recognition of onerous leases in relation to the Home Improvement business involve a high degree of complexity and have a risk of causing a material adjustment within subsequent periods. Any changes to carrying values in subsequent periods due to revisions to estimates or assumptions or as a result of the final realisation of the Home Improvement assets and liabilities upon exit of the business will be recognised in the Group’s profit or loss as part of discontinued operations up to the sale of the Home Improvement business and continuing operations subsequent to the sale. The decrease in onerous contract and store exit costs is primarily attributable to the re-assessment of provisions associated with the Group’s planned exit from the Home Improvement business (refer to Note 5.1). 3.10 Other non-current liabilities 2017 $M 2016 $M Straight-line lease, and incentive liability 249.2 232.9 Net defined benefit liability 62.7 61.6 311.9 294.5 3.9 Provisions (continued) 29 | WOOLWORTHS LIMITED | FINANCIAL REPORT 2017 CAPITAL STRUCTURE, FINANCING AND RISK MANAGEMENT 4 4 CAPITAL STRUCTURE, FINANCING, AND RISK MANAGEMENT 4.1 Earnings per share 2017 2016 Profit/(loss) for the period attributable to equity holders of the parent entity used in earnings per share ($m) Continuing operations 1,422.1 726.3 Discontinued operations 111.4 (1,961.1) 1,533.5 (1,234.8) Weighted average number of shares used in earnings per share (shares, millions) Basic earnings per share 1 1,283.9 1,263.5 Diluted earnings per share 1, 2 1,287.3 1,263.9 Basic earnings per share (cents per share) 1 Continuing operations 110.8 57.5 Discontinued operations 8.6 (155.2) 119.4 (97.7) Diluted earnings per share (cents per share) 1, 2 Continuing operations 110.5 57.5 Discontinued operations 8.6 (155.2) 119.1 (97.7) 1 Weighted average number of shares has been adjusted to remove Treasury shares held by Woolworths Custodian Pty Ltd (as trustee of various employee share trusts). 2 Includes 3.4 million (2016: 0.4 million) shares deemed to be issued for no consideration in respect of employee options and performance rights. 4.2 Dividends 2017 2016 CENTS PER SHARE TOTAL AMOUNT $M DATE OF PAYMENT CENTS PER SHARE TOTAL AMOUNT $M DATE OF PAYMENT Current year interim 34 437.6 07/04/17 44 559.2 08/04/16 Prior year final 33 422.0 07/10/16 72 912.0 09/10/15 Dividends paid during the year 67 859.6 116 1,471.2 Issue of shares under the DRP (316.5) (282.1) Dividends received on Treasury shares (2.2) (4.3) Net cash outflow 540.9 1,184.8 All dividends are fully franked at a 30% tax rate. On 23 August 2017, the board of directors declared a final dividend in respect of the 2017 year of 50 cents (2016: 33 cents) per share fully franked at a 30% tax rate. The amount will be paid on 6 October 2017 (2016: 7 October 2016) and is expected to be $647.2 million (2016: $422.0 million). As the dividend was declared subsequent to 25 June 2017, no provision has been made as at 25 June 2017. Dividend Reinvestment Plan (DRP) The Dividend Reinvestment Plan remains active. Eligible shareholders may participate in the DRP in respect of all or part of their shareholding. There is currently no limit on the number of shares that can participate in the DRP. The directors have determined that a 1.5% discount will apply to the 2017 final dividend. Shares allocated to shareholders under the DRP for the 2017 final dividend will be allocated at an amount equal to 98.5% of the average of the daily volume weighted average market price of ordinary shares of the Company traded on the ASX over the period of 10 trading days commencing on 12 September 2017. The last date for receipt of election notices for the Dividend Reinvestment Plan is 11 September 2017. During the year, 37% (2016: 19%) of the dividend paid, excluding the impact of underwriting, was reinvested in the shares of the Company. 1 2 3 4 5 PERFO RM A N C E H IG H LIG H T S BU SIN ESS REV IEW D IREC TO RS' REPO RT FIN A N C IA L REPO RT O T H ER IN FO RM A T IO N 81 W O O LW O RT H S G R O U P A N N U A L R EPO R T 20 17 Notes to the Consolidated Financial Statements 30 | WOOLWORTHS LIMITED | FINANCIAL REPORT 2017 Franking credit balance 2017 $M 2016 $M Franking credits available for future financial years (tax paid basis, 30% tax rate) 2,577.2 2,344.3 The above amount represents the balance of the franking accounts as at the end of the period, adjusted for: • Franking credits that will arise from the payment of income tax payable at the end of the period; and • Franking debits that will arise from the payment of dividends provided at the end of the period. The above franking credit balance excludes $134.2 million (2016: $114.1 million) attributable to non-controlling interests. 4.3 Contributed equity 2017 2016 SHARE CAPITAL NUMBER (M) $M NUMBER (M) $M 1,294,416,480 fully paid ordinary shares (2016: 1,278,758,725) Movement: Balance at start of period 1,278.8 5,347.0 1,266.6 5,064.9 Issue of shares as a result of the Dividend Reinvestment Plan 1 15.6 372.0 12.2 282.1 Balance at end of period 1,294.4 5,719.0 1,278.8 5,347.0 SHARES HELD IN TRUST Movement: Balance at start of period (4.1) (94.8) (5.8) (155.9) Issue of shares under employee long-term incentive plans 1.0 37.1 1.7 61.1 Shares acquired by share trust (1.8) (46.3) – – Balance at end of period (4.9) (104.0) (4.1) (94.8) Contributed equity at end of period 1,289.5 5,615.0 1,274.7 5,252.2 1 A net increase in the issued share capital of the Company of 15,657,755 fully paid ordinary shares (2016: 12,143,526) occurred as a result of the dividend issue on 7 October 2016 of 9,404,383 fully paid ordinary shares and the dividend issue on 7 April 2017 of 6,253,372 fully paid ordinary shares pursuant to the Dividend Reinvestment Plan (DRP). Share capital Holders of ordinary shares are entitled to receive dividends as declared and are entitled to one vote per share at shareholders’ meetings. In the event of winding up of the Company, ordinary shareholders rank after all other shareholders and creditors and are fully entitled to any proceeds of liquidation. Share options and performance rights Refer to Note 6.2 for further details of outstanding options and performance rights. Options and performance rights carry no rights to dividends and no voting rights. 4.2 Dividends (continued) 82 Notes to the Consolidated Financial Statements 30 | WOOLWORTHS LIMITED | FINANCIAL REPORT 2017 Franking credit balance 2017 $M 2016 $M Franking credits available for future financial years (tax paid basis, 30% tax rate) 2,577.2 2,344.3 The above amount represents the balance of the franking accounts as at the end of the period, adjusted for: • Franking credits that will arise from the payment of income tax payable at the end of the period; and • Franking debits that will arise from the payment of dividends provided at the end of the period. The above franking credit balance excludes $134.2 million (2016: $114.1 million) attributable to non-controlling interests. 4.3 Contributed equity 2017 2016 SHARE CAPITAL NUMBER (M) $M NUMBER (M) $M 1,294,416,480 fully paid ordinary shares (2016: 1,278,758,725) Movement: Balance at start of period 1,278.8 5,347.0 1,266.6 5,064.9 Issue of shares as a result of the Dividend Reinvestment Plan 1 15.6 372.0 12.2 282.1 Balance at end of period 1,294.4 5,719.0 1,278.8 5,347.0 SHARES HELD IN TRUST Movement: Balance at start of period (4.1) (94.8) (5.8) (155.9) Issue of shares under employee long-term incentive plans 1.0 37.1 1.7 61.1 Shares acquired by share trust (1.8) (46.3) – – Balance at end of period (4.9) (104.0) (4.1) (94.8) Contributed equity at end of period 1,289.5 5,615.0 1,274.7 5,252.2 1 A net increase in the issued share capital of the Company of 15,657,755 fully paid ordinary shares (2016: 12,143,526) occurred as a result of the dividend issue on 7 October 2016 of 9,404,383 fully paid ordinary shares and the dividend issue on 7 April 2017 of 6,253,372 fully paid ordinary shares pursuant to the Dividend Reinvestment Plan (DRP). Share capital Holders of ordinary shares are entitled to receive dividends as declared and are entitled to one vote per share at shareholders’ meetings. In the event of winding up of the Company, ordinary shareholders rank after all other shareholders and creditors and are fully entitled to any proceeds of liquidation. Share options and performance rights Refer to Note 6.2 for further details of outstanding options and performance rights. Options and performance rights carry no rights to dividends and no voting rights. 4.2 Dividends (continued) 31 | WOOLWORTHS LIMITED | FINANCIAL REPORT 2017 CAPITAL STRUCTURE, FINANCING AND RISK MANAGEMENT 4 4.4 Reserves Movements in reserves and reserve balances are detailed in the following table: 2017 $M 2016 $M Hedging reserve Balance at start of period (70.5) (66.1) Movement in the fair value of cash flow hedges 3.8 (2.7) Deferred tax arising on cash flow hedges 1.0 (1.7) Transfers 0.2 – Balance at end of period (65.5) (70.5) Foreign currency translation reserve Balance at start of period 146.2 (37.2) Transfer to the Consolidated Statement of Profit or Loss (30.7) – Movement in translation of foreign operations taken to equity, net of tax 23.8 183.4 Balance at end of period 139.3 146.2 Remuneration reserve Balance at start of period 226.5 266.8 Shares issued by the Woolworths Employee Share Trust (37.1) (61.1) Equity settled share-based payments expense, net of tax 51.6 20.8 Balance at end of period 241.0 226.5 Asset revaluation reserve Balance at start and end of period 16.5 16.5 Equity instrument reserve Balance at start of period 22.8 9.3 Movement in the fair value of investments in equity securities 2.2 13.5 Balance at end of period 25.0 22.8 General reserve Balance at start of period (247.6) (94.2) Transactions with non-controlling interests – (153.4) Disposals of investments 5.4 – Other (0.3) – Balance at end of period (242.5) (247.6) Total reserves 113.8 93.9 1 2 3 4 5 PERFO RM A N C E H IG H LIG H T S BU SIN ESS REV IEW D IREC TO RS' REPO RT FIN A N C IA L REPO RT O T H ER IN FO RM A T IO N 83 W O O LW O RT H S G R O U P A N N U A L R EPO R T 20 17 Notes to the Consolidated Financial Statements 32 | WOOLWORTHS LIMITED | FINANCIAL REPORT 2017 SIGNIFICANT ACCOUNTING POLICIES The nature and purpose of each reserve account is outlined as follows: HEDGING RESERVE The hedging reserve comprises the effective portion of the cumulative net change in the fair value of cash flow hedging instruments related to hedged transactions that have not yet occurred. The cumulative deferred gain or loss on the hedge is recognised in the Consolidated Statement of Profit or Loss when the hedged transaction impacts the profit or loss, consistent with the applicable accounting policy. Refer to Note 4.8 for details of hedging. FOREIGN CURRENCY TRANSLATION RESERVE (FCTR) FCTR comprises all foreign exchange differences arising from the translation of the financial statements of foreign operations where their functional currency is different to the Group’s presentation currency. Gains and losses on hedging instruments that are designated as hedging instruments for hedges of net investments in foreign operations are also included in the FCTR. Refer to Note 4.8 for details of hedging. REMUNERATION RESERVE The employee remuneration reserve comprises the fair value of share-based payment plans recognised as an expense in the Consolidated Statement of Profit or Loss. Refer to Note 6.2 for details of share-based payments. Shares issued by the Woolworths Employee Share Trust are charged against the reserve. ASSET REVALUATION RESERVE The asset revaluation reserve arose on acquisition of the previously equity accounted investment in MGW Hotels Pty Ltd and relates to the change in fair value of the Group’s interest in non-current assets from the date of acquisition of the initial investment to the date control was achieved. EQUITY INSTRUMENT RESERVE The equity instrument reserve arises on the revaluation of investments in equity securities. Subsequent to initial recognition, they are measured at fair value with any changes recognised in other comprehensive income. Upon disposal, the cumulative gain or loss recognised in other comprehensive income is transferred within equity. Refer to Note 3.2 for details of listed equity securities. GENERAL RESERVE The general reserve is used to record the cumulative gain or loss recognised in other comprehensive income which is transferred within equity upon disposal of listed equity securities (refer to Note 3.2). The reserve is also used to record differences which may arise as a result of transactions with non-controlling interests that do not result in loss of control. 4.4 Reserves (continued) 84 Notes to the Consolidated Financial Statements 32 | WOOLWORTHS LIMITED | FINANCIAL REPORT 2017 SIGNIFICANT ACCOUNTING POLICIES The nature and purpose of each reserve account is outlined as follows: HEDGING RESERVE The hedging reserve comprises the effective portion of the cumulative net change in the fair value of cash flow hedging instruments related to hedged transactions that have not yet occurred. The cumulative deferred gain or loss on the hedge is recognised in the Consolidated Statement of Profit or Loss when the hedged transaction impacts the profit or loss, consistent with the applicable accounting policy. Refer to Note 4.8 for details of hedging. FOREIGN CURRENCY TRANSLATION RESERVE (FCTR) FCTR comprises all foreign exchange differences arising from the translation of the financial statements of foreign operations where their functional currency is different to the Group’s presentation currency. Gains and losses on hedging instruments that are designated as hedging instruments for hedges of net investments in foreign operations are also included in the FCTR. Refer to Note 4.8 for details of hedging. REMUNERATION RESERVE The employee remuneration reserve comprises the fair value of share-based payment plans recognised as an expense in the Consolidated Statement of Profit or Loss. Refer to Note 6.2 for details of share-based payments. Shares issued by the Woolworths Employee Share Trust are charged against the reserve. ASSET REVALUATION RESERVE The asset revaluation reserve arose on acquisition of the previously equity accounted investment in MGW Hotels Pty Ltd and relates to the change in fair value of the Group’s interest in non-current assets from the date of acquisition of the initial investment to the date control was achieved. EQUITY INSTRUMENT RESERVE The equity instrument reserve arises on the revaluation of investments in equity securities. Subsequent to initial recognition, they are measured at fair value with any changes recognised in other comprehensive income. Upon disposal, the cumulative gain or loss recognised in other comprehensive income is transferred within equity. Refer to Note 3.2 for details of listed equity securities. GENERAL RESERVE The general reserve is used to record the cumulative gain or loss recognised in other comprehensive income which is transferred within equity upon disposal of listed equity securities (refer to Note 3.2). The reserve is also used to record differences which may arise as a result of transactions with non-controlling interests that do not result in loss of control. 4.4 Reserves (continued) 33 | WOOLWORTHS LIMITED | FINANCIAL REPORT 2017 CAPITAL STRUCTURE, FINANCING AND RISK MANAGEMENT 4 4.5 Net cash provided by operating activities Cash and cash equivalents as presented in the Consolidated Statement of Cash Flows 2017 $M 2016 $M Cash and cash equivalents (as presented in the Consolidated Statement of Financial Position) 909.4 948.1 Cash and cash equivalents (included within assets held for sale) 7.3 7.9 916.7 956.0 Reconciliation of profit for the period to net cash provided by operating activities 2017 $M 2016 $M Profit/(Loss) after income tax expense 1,593.4 (2,347.9) Adjustments for: Depreciation and amortisation 1,060.9 1,075.9 Put option liability 250.8 – Impairment of non-financial assets 14.4 2,118.9 Share-based payments expense 51.6 20.8 Loss/(Profit) on disposal of business 46.6 (11.5) Interest capitalised (29.9) (42.3) Net (profit)/loss on disposal and write-off of property, plant and equipment (3.8) 17.2 Dividends received (3.5) (3.2) Other 31.9 8.2 Changes in: Decrease in inventories 367.6 204.1 Increase/(decrease) in trade payables 260.2 (171.8) (Decrease)/increase in provisions 1 (821.6) 1,655.9 Decrease in trade and other receivables 2.4 29.1 Increase in sundry payables 134.1 225.9 Decrease/(increase) in deferred tax assets 122.3 (362.3) Increase/(decrease) in income tax payable 44.6 (59.5) Net cash provided by operating activities 3,122.0 2,357.5 1 Includes restructuring, onerous contracts and store exit costs. 4.6 Borrowings 2017 $M 2016 $M Current, unsecured Short-term money market loans 170.3 45.6 Bank loans 83.1 37.4 Short-term securities – 407.3 Finance leases 0.1 0.4 253.5 490.7 Non-current, unsecured Bank loans 528.5 853.2 Long-term securities 2,261.7 2,331.4 Woolworths Notes II – 699.1 Unamortised borrowing costs (15.5) (15.7) Finance leases 2.3 2.9 2,777.0 3,870.9 Total 3,030.5 4,361.6 1 2 3 4 5 PERFO RM A N C E H IG H LIG H T S BU SIN ESS REV IEW D IREC TO RS' REPO RT FIN A N C IA L REPO RT O T H ER IN FO RM A T IO N 85 W O O LW O RT H S G R O U P A N N U A L R EPO R T 20 17 Notes to the Consolidated Financial Statements 34 | WOOLWORTHS LIMITED | FINANCIAL REPORT 2017 Composition of borrowings 2017 2016 CARRYING VALUE (NET OF UNAMORTISED BORROWING COSTS) A$M INSTRUMENT CURRENCY (IF NOT AUD) M CARRYING VALUE (NET OF UNAMORTISED BORROWING COSTS) A$M INSTRUMENT CURRENCY (IF NOT AUD) M MATURITY Short-term money market loans Short-term loan, on call 1 30.4 NZ$31.6 45.6 NZ$47.8 At call Short-term loan, on call 128.0 – – – At call Short-term loan, on call 1 11.9 US$9.0 – – At call 170.3 45.6 Bank loans (current) Committed Revolving Credit Facility 1 44.6 CNY230.7 34.7 CNY168.8 At call Committed Revolving Credit Facility 1 38.5 NZ$40.0 – – Nov 2017 Other – – 2.7 – At call 83.1 37.4 Short term securities US Senior Notes (private placement) – – 407.3 US$300.0 Apr 2017 – 407.3 Bank loans (non-current) Syndicated Bank Loan – – 300.0 – Oct 2019 Syndicated Bank Loan – – 100.0 – Apr 2019 Syndicated Bank Loan – – 100.0 – Oct 2021 Syndicated Bank Loan 343.5 US$260.0 353.2 US$260.0 Oct 2021 Syndicated Bank Loan 185.0 US$140.0 – – Nov 2020 528.5 853.2 Long-term securities US Senior Notes (US 144A market) 815.2 US$617.0 837.9 US$617.0 Sep 2020 US Senior Notes (US 144A market) 578.8 US$438.0 594.9 US$438.0 Apr 2021 US Senior Notes (private placement) 132.1 US$100.0 135.8 US$100.0 Apr 2020 Medium Term Notes 498.1 – 497.1 – – European Medium Term Notes 237.1 JPY20,000 265.3 JPY20,000 Nov 2020 Other 0.4 – 0.4 – – 2,261.7 2,331.4 Woolworths Notes II Woolworths Notes II – – 699.1 – 1 Drawn by a subsidiary outside the Woolworths Limited Deed of Cross Guarantee. SIGNIFICANT ACCOUNTING POLICIES BORROWINGS Borrowings are recognised initially at fair value less attributable transaction costs. Subsequently, borrowings are stated at amortised cost. Any difference between cost and redemption value is recognised in the Consolidated Statement of Profit or Loss over the period of the borrowings. 4.6 Borrowings (continued) 86 Notes to the Consolidated Financial Statements 34 | WOOLWORTHS LIMITED | FINANCIAL REPORT 2017 Composition of borrowings 2017 2016 CARRYING VALUE (NET OF UNAMORTISED BORROWING COSTS) A$M INSTRUMENT CURRENCY (IF NOT AUD) M CARRYING VALUE (NET OF UNAMORTISED BORROWING COSTS) A$M INSTRUMENT CURRENCY (IF NOT AUD) M MATURITY Short-term money market loans Short-term loan, on call 1 30.4 NZ$31.6 45.6 NZ$47.8 At call Short-term loan, on call 128.0 – – – At call Short-term loan, on call 1 11.9 US$9.0 – – At call 170.3 45.6 Bank loans (current) Committed Revolving Credit Facility 1 44.6 CNY230.7 34.7 CNY168.8 At call Committed Revolving Credit Facility 1 38.5 NZ$40.0 – – Nov 2017 Other – – 2.7 – At call 83.1 37.4 Short term securities US Senior Notes (private placement) – – 407.3 US$300.0 Apr 2017 – 407.3 Bank loans (non-current) Syndicated Bank Loan – – 300.0 – Oct 2019 Syndicated Bank Loan – – 100.0 – Apr 2019 Syndicated Bank Loan – – 100.0 – Oct 2021 Syndicated Bank Loan 343.5 US$260.0 353.2 US$260.0 Oct 2021 Syndicated Bank Loan 185.0 US$140.0 – – Nov 2020 528.5 853.2 Long-term securities US Senior Notes (US 144A market) 815.2 US$617.0 837.9 US$617.0 Sep 2020 US Senior Notes (US 144A market) 578.8 US$438.0 594.9 US$438.0 Apr 2021 US Senior Notes (private placement) 132.1 US$100.0 135.8 US$100.0 Apr 2020 Medium Term Notes 498.1 – 497.1 – – European Medium Term Notes 237.1 JPY20,000 265.3 JPY20,000 Nov 2020 Other 0.4 – 0.4 – – 2,261.7 2,331.4 Woolworths Notes II Woolworths Notes II – – 699.1 – 1 Drawn by a subsidiary outside the Woolworths Limited Deed of Cross Guarantee. SIGNIFICANT ACCOUNTING POLICIES BORROWINGS Borrowings are recognised initially at fair value less attributable transaction costs. Subsequently, borrowings are stated at amortised cost. Any difference between cost and redemption value is recognised in the Consolidated Statement of Profit or Loss over the period of the borrowings. 4.6 Borrowings (continued) 35 | WOOLWORTHS LIMITED | FINANCIAL REPORT 2017 CAPITAL STRUCTURE, FINANCING AND RISK MANAGEMENT 4 4.7 Financing arrangements Unrestricted access was available to the Group at the reporting date to the following unused lines of credit: 2017 $M 2016 $M Bank overdrafts 37.5 39.7 Bank loan facilities 4,320.2 3,500.1 4,357.7 3,539.8 Bank loan facilities may be drawn at any time, subject to the terms of the lending agreements. The facilities are denominated in Australian dollars, NZ dollars, Chinese yuan and US dollars. The bank overdraft facilities may be drawn at any time. The above facilities are subject to certain financial covenants and undertakings. No covenants have been breached during the period. 4.8 Financial risk management The Group’s Treasury function is responsible for managing the liquidity requirements of the Group and mitigating any financial risks relating to the operations of the Group through continuous monitoring and evaluation. These financial risks include: • Market risk (refer to Note 4.8.1); • Liquidity risk (refer to Note 4.8.2); and • Credit risk (refer to Note 4.8.3). These risks affect the fair value measurements applied by the Group, which is discussed in Note 4.8.4. The Group adheres to a set of policies approved by the board of directors, which provide written principles on liquidity risk, foreign exchange risk, interest rate risk, credit risk and the use of derivative financial instruments for hedging purposes. The Treasury function reports on its compliance with the policy on a monthly basis to the board of directors and such compliance is reviewed periodically by its internal auditors. The Group does not enter into or trade financial instruments, including derivative financial instruments, for speculative purposes. The Group holds various types of derivative financial instruments to hedge its exposures to variability in interest rates and foreign exchange rates. 1 2 3 4 5 PERFO RM A N C E H IG H LIG H T S BU SIN ESS REV IEW D IREC TO RS' REPO RT FIN A N C IA L REPO RT O T H ER IN FO RM A T IO N 87 W O O LW O RT H S G R O U P A N N U A L R EPO R T 20 17 Notes to the Consolidated Financial Statements 36 | WOOLWORTHS LIMITED | FINANCIAL REPORT 2017 SIGNIFICANT ACCOUNTING POLICIES Derivative financial instruments are initially recognised at fair value on the date a derivative contract is entered into. Subsequently, at each reporting date, the gain or loss on remeasurement to fair value is recognised immediately in the Consolidated Statement of Profit or Loss, unless they qualify for hedge accounting. The Group has cash flow hedge relationships as follows. CASH FLOW HEDGE A cash flow hedge is a hedge of an exposure to variability in cash flows that is attributable to a particular risk associated with a recognised asset or liability or a highly probable forecast transaction that could affect profit or loss. The Group’s cash flow hedges include: • Interest rate swap contracts; • Cross currency interest rate swaps; and • Forward foreign exchange contracts and options. Where a derivative financial instrument is designated as a cash flow hedge, the effective part of any gain or loss on the derivative financial instrument is recognised in other comprehensive income and accumulated in a separate cash flow hedge reserve within equity. When the forecast transaction subsequently results in the recognition of a non-financial asset or non-financial liability, the associated cumulative gain or loss is removed from equity and included in the initial cost or other carrying amount of the non-financial asset or liability. If the forecast transaction subsequently results in the recognition of a financial asset or a financial liability, then the associated gains and losses that were accumulated in equity will be reclassified into profit or loss in the same period or periods during which the asset acquired or liability assumed affects profit or loss. The ineffective part of any derivative designated as a hedge is recognised immediately in the Consolidated Statement of Profit or Loss. When a hedging instrument expires or is sold, terminated or exercised, but the hedged forecast transaction is still expected to occur, the cumulative gain or loss at that point remains in equity and is recognised in accordance with the above policy when the transaction occurs. If the hedged transaction is no longer expected to take place, the cumulative unrealised gain or loss accumulated in equity is reclassified immediately into the Consolidated Statement of Profit or Loss. Gains or losses removed from equity during the period in relation to interest rate hedge instruments are recognised within ‘financing costs’ in the Consolidated Statement of Profit or Loss. 4.8.1 Market risk The Group’s activities expose it to the financial risks of changes in foreign currency exchange rates (refer to (i) below), interest rates (refer to Note 4.8.1 (ii)) and equity prices (refer to Note 4.8.1 (iii)). (i) Foreign currency risk The Group has exposure to movements in foreign currency exchange rates through: • Term borrowings denominated in foreign currency (transaction risk); • Anticipated purchases of inventory and equipment (transaction risk); and • Translation of net investments in foreign subsidiaries denominated in foreign currencies (translation risk). To hedge against the majority of the transaction risk exposure, the Group enters into forward exchange contracts and cross currency interest rate swap agreements. All foreign currency term borrowings are 100% hedged by cross currency interest rate swap agreements. Forward exchange contracts and foreign currency options It is the policy of the Group to enter into forward exchange contracts (FEC) and foreign currency options (FCO) to cover foreign currency payments and receipts of up to 100% of the exposure generated. These have been designated as cash flow hedges, hedging foreign currency risk and the Group has established a 100% hedge relationship against the identified exposure. 4.8 Financial risk management (continued) 88 Notes to the Consolidated Financial Statements 36 | WOOLWORTHS LIMITED | FINANCIAL REPORT 2017 SIGNIFICANT ACCOUNTING POLICIES Derivative financial instruments are initially recognised at fair value on the date a derivative contract is entered into. Subsequently, at each reporting date, the gain or loss on remeasurement to fair value is recognised immediately in the Consolidated Statement of Profit or Loss, unless they qualify for hedge accounting. The Group has cash flow hedge relationships as follows. CASH FLOW HEDGE A cash flow hedge is a hedge of an exposure to variability in cash flows that is attributable to a particular risk associated with a recognised asset or liability or a highly probable forecast transaction that could affect profit or loss. The Group’s cash flow hedges include: • Interest rate swap contracts; • Cross currency interest rate swaps; and • Forward foreign exchange contracts and options. Where a derivative financial instrument is designated as a cash flow hedge, the effective part of any gain or loss on the derivative financial instrument is recognised in other comprehensive income and accumulated in a separate cash flow hedge reserve within equity. When the forecast transaction subsequently results in the recognition of a non-financial asset or non-financial liability, the associated cumulative gain or loss is removed from equity and included in the initial cost or other carrying amount of the non-financial asset or liability. If the forecast transaction subsequently results in the recognition of a financial asset or a financial liability, then the associated gains and losses that were accumulated in equity will be reclassified into profit or loss in the same period or periods during which the asset acquired or liability assumed affects profit or loss. The ineffective part of any derivative designated as a hedge is recognised immediately in the Consolidated Statement of Profit or Loss. When a hedging instrument expires or is sold, terminated or exercised, but the hedged forecast transaction is still expected to occur, the cumulative gain or loss at that point remains in equity and is recognised in accordance with the above policy when the transaction occurs. If the hedged transaction is no longer expected to take place, the cumulative unrealised gain or loss accumulated in equity is reclassified immediately into the Consolidated Statement of Profit or Loss. Gains or losses removed from equity during the period in relation to interest rate hedge instruments are recognised within ‘financing costs’ in the Consolidated Statement of Profit or Loss. 4.8.1 Market risk The Group’s activities expose it to the financial risks of changes in foreign currency exchange rates (refer to (i) below), interest rates (refer to Note 4.8.1 (ii)) and equity prices (refer to Note 4.8.1 (iii)). (i) Foreign currency risk The Group has exposure to movements in foreign currency exchange rates through: • Term borrowings denominated in foreign currency (transaction risk); • Anticipated purchases of inventory and equipment (transaction risk); and • Translation of net investments in foreign subsidiaries denominated in foreign currencies (translation risk). To hedge against the majority of the transaction risk exposure, the Group enters into forward exchange contracts and cross currency interest rate swap agreements. All foreign currency term borrowings are 100% hedged by cross currency interest rate swap agreements. Forward exchange contracts and foreign currency options It is the policy of the Group to enter into forward exchange contracts (FEC) and foreign currency options (FCO) to cover foreign currency payments and receipts of up to 100% of the exposure generated. These have been designated as cash flow hedges, hedging foreign currency risk and the Group has established a 100% hedge relationship against the identified exposure. 4.8 Financial risk management (continued) 37 | WOOLWORTHS LIMITED | FINANCIAL REPORT 2017 CAPITAL STRUCTURE, FINANCING AND RISK MANAGEMENT 4 4.8.1 Market risk continued Foreign exchange contracts and options At the reporting date, details of significant outstanding FEC and FCO stated in Australian dollar equivalents for the Group are: AVERAGE EXCHANGE RATE FOREIGN CURRENCY CONTRACT VALUE MARK TO MARKET ASSETS MARK TO MARKET LIABILITIES MATURING 2017 2016 2017 M 2016 M 2017 A$M 2016 A$M 2017 A$M 2016 A$M 2017 A$M 2016 A$M FEC Hedging imports: Within 12 months Buy US dollars 0.75 0.72 401.4 741.8 532.5 1,035.1 1.2 0.1 (2.5) (24.2) Buy US dollars against NZ dollars 0.72 0.67 13.8 58.1 18.6 83.2 – – (0.3) (3.8) Buy US dollars against Chinese yuan 7.00 7.30 4.3 0.9 5.8 1.3 – – (0.1) – Buy Euro 0.66 0.66 32.6 130.6 49.2 197.9 0.4 0.6 (1.4) (0.9) Buy Euro against NZ dollars 0.64 0.60 4.3 1.6 6.4 2.5 – – (0.1) (0.1) Buy Euro against Chinese yuan 7.52 6.54 0.3 1.4 0.5 1.9 – – – – Buy/(sell) NZ dollars 1.07 1.09 (9.5) 2.2 (8.9) 1.8 – 0.4 (0.2) (0.2) Buy HK dollars against US dollars 7.80 – 54.6 – 9.2 – – – – – Buy AU dollars against Chinese yuan 5.15 – 0.8 – 0.8 – – – – – Buy British pounds – 0.46 – 2.6 – 5.6 – – – (0.8) Within one to three years Buy Euro 0.65 0.65 0.1 6.1 0.2 9.3 – 0.1 – – Buy British pounds 0.75 – 7.0 – 9.3 – – – – – Total 623.6 1,338.6 1.6 1.2 (4.6) (30.0) FCO Hedging imports: Within 12 months Buy Euro 0.68 – 8.0 – 11.8 – 0.1 – – – Buy US dollars 0.74 – 50.0 – 67.6 – 0.5 – – – Total 79.4 – 0.6 – – – At the reporting date, the net amount of unrealised losses under forward foreign exchange contracts and options hedging anticipated purchases of inventory and equipment is $2.4 million (2016: $28.8 million unrealised losses). The hedge relationships are all assessed as highly effective with insignificant hedge ineffectiveness and the balance of $2.4 million has been recognised in the hedging reserve (2016: $28.8 million). Foreign currency exposures arising on translation of net investments in foreign subsidiaries are predominantly unhedged. 4.8 Financial risk management (continued) 1 2 3 4 5 PERFO RM A N C E H IG H LIG H T S BU SIN ESS REV IEW D IREC TO RS' REPO RT FIN A N C IA L REPO RT O T H ER IN FO RM A T IO N 89 W O O LW O RT H S G R O U P A N N U A L R EPO R T 20 17 Notes to the Consolidated Financial Statements 38 | WOOLWORTHS LIMITED | FINANCIAL REPORT 2017 4.8.1 Market risk continued Cross currency swap agreements To hedge the risk of adverse movements in foreign exchange rates in relation to borrowings denominated in foreign currency, the Group enters into cross currency swap agreements under which it agrees to exchange specified principal and interest foreign currency amounts at an agreed future date at a specified exchange rate. As at the reporting date, cross currency swaps have a net unrealised gain of $381.1 million (2016: $573.7 million unrealised gain). These cross currency swaps (combined with interest rate swaps hedging the related interest rate exposure – refer to part (ii)) are designated as cash flow hedges, in a 100% hedge relationship with the underlying debt. The unrealised gain of $61.6 million attributable to the interest rate component of the cross currency swaps has been recognised in the hedging reserve (2016: $147.7 million gain), with insignificant hedge ineffectiveness. The following table details the cross currency swaps outstanding for the Group at the reporting date: AVERAGE INTEREST RATE AVERAGE EXCHANGE RATE CONTRACT VALUE FAIR VALUE ASSET FAIR VALUE LIABILITY MATURING 2017 % 2016 % 2017 2016 2017 A$M 2016 A$M 2017 A$M 2016 A$M 2017 A$M 2016 A$M Floating rates – AUD Within 12 months 1 – BBSW +54.6bp – 0.787 – 381.2 – 41.6 – – One to two years 1 – – – – – – – – – – Two to five years 1 BBSW +184.0bp BBSW +175.2bp 0.892 0.959 1,744.1 1,204.2 401.3 509.4 (15.8) – Five years + 1 – BBSW +210.3bp – 0.732 – 355.4 – 0.3 – (5.6) Floating rates – AUD/JPY Two to five years 1 BBSW +201.5bp BBSW +201.5bp 87.51 87.51 228.5 228.5 11.6 45.2 (6.7) (6.7) 1,972.6 2,169.3 412.9 596.5 (22.5) (12.3) 1 These fair value calculations include interest accruals of $9.3 million (2016: $10.5 million). Sensitivity As at the reporting date, the Group’s exposure to foreign currency risk after taking into consideration hedges of foreign currency borrowings, foreign currency payables and forecast foreign currency transactions is not considered material. (ii) Interest rate risk The Group has exposure to interest rate risk as it borrows funds at both fixed and floating interest rates. The risk is managed by maintaining an appropriate mix between fixed and floating rate borrowings and through the use of interest rate swap contracts. Hedging activities are evaluated regularly with regard to board approved policy, which provides a level of cost certainty in the near term by fixing a certain level of interest rate exposure, whilst providing flexibility in the longer term by lower hedge levels. The current hedge portfolio is reflective of a previous risk management policy, which was based on a cash flow at risk approach, taking into account the sensitivity to earnings from a 1% change in interest rates. Interest rate swap contracts Interest rate swap contracts enable the Group to mitigate the risk of adverse movements in interest rates on the debt held. The following table details the floating for fixed interest rate swap contracts outstanding for the Group as at the reporting date: AVERAGE CONTRACTED FIXED INTEREST RATE NOTIONAL PRINCIPAL AMOUNT FAIR VALUE ASSET FAIR VALUE LIABILITY MATURING 2017 % 2016 % 2017 A$M 2016 A$M 2017 A$M 2016 A$M 2017 A$M 2016 A$M Less than one year 1 – 4.90 – 1,081.2 – – – (23.3) One to two years 1 – – – – – – – – Two to five years 1 5.24 5.24 1,431.9 1,431.9 – – (157.5) (202.6) Five years + 1 – – – – – – – – 1,431.9 2,513.1 – – (157.5) (225.9) 1 These fair value calculations include interest accruals as recorded in trade and other payables of $4.9 million (2016: $8.4 million). 4.8 Financial risk management (continued) 90 Notes to the Consolidated Financial Statements 38 | WOOLWORTHS LIMITED | FINANCIAL REPORT 2017 4.8.1 Market risk continued Cross currency swap agreements To hedge the risk of adverse movements in foreign exchange rates in relation to borrowings denominated in foreign currency, the Group enters into cross currency swap agreements under which it agrees to exchange specified principal and interest foreign currency amounts at an agreed future date at a specified exchange rate. As at the reporting date, cross currency swaps have a net unrealised gain of $381.1 million (2016: $573.7 million unrealised gain). These cross currency swaps (combined with interest rate swaps hedging the related interest rate exposure – refer to part (ii)) are designated as cash flow hedges, in a 100% hedge relationship with the underlying debt. The unrealised gain of $61.6 million attributable to the interest rate component of the cross currency swaps has been recognised in the hedging reserve (2016: $147.7 million gain), with insignificant hedge ineffectiveness. The following table details the cross currency swaps outstanding for the Group at the reporting date: AVERAGE INTEREST RATE AVERAGE EXCHANGE RATE CONTRACT VALUE FAIR VALUE ASSET FAIR VALUE LIABILITY MATURING 2017 % 2016 % 2017 2016 2017 A$M 2016 A$M 2017 A$M 2016 A$M 2017 A$M 2016 A$M Floating rates – AUD Within 12 months 1 – BBSW +54.6bp – 0.787 – 381.2 – 41.6 – – One to two years 1 – – – – – – – – – – Two to five years 1 BBSW +184.0bp BBSW +175.2bp 0.892 0.959 1,744.1 1,204.2 401.3 509.4 (15.8) – Five years + 1 – BBSW +210.3bp – 0.732 – 355.4 – 0.3 – (5.6) Floating rates – AUD/JPY Two to five years 1 BBSW +201.5bp BBSW +201.5bp 87.51 87.51 228.5 228.5 11.6 45.2 (6.7) (6.7) 1,972.6 2,169.3 412.9 596.5 (22.5) (12.3) 1 These fair value calculations include interest accruals of $9.3 million (2016: $10.5 million). Sensitivity As at the reporting date, the Group’s exposure to foreign currency risk after taking into consideration hedges of foreign currency borrowings, foreign currency payables and forecast foreign currency transactions is not considered material. (ii) Interest rate risk The Group has exposure to interest rate risk as it borrows funds at both fixed and floating interest rates. The risk is managed by maintaining an appropriate mix between fixed and floating rate borrowings and through the use of interest rate swap contracts. Hedging activities are evaluated regularly with regard to board approved policy, which provides a level of cost certainty in the near term by fixing a certain level of interest rate exposure, whilst providing flexibility in the longer term by lower hedge levels. The current hedge portfolio is reflective of a previous risk management policy, which was based on a cash flow at risk approach, taking into account the sensitivity to earnings from a 1% change in interest rates. Interest rate swap contracts Interest rate swap contracts enable the Group to mitigate the risk of adverse movements in interest rates on the debt held. The following table details the floating for fixed interest rate swap contracts outstanding for the Group as at the reporting date: AVERAGE CONTRACTED FIXED INTEREST RATE NOTIONAL PRINCIPAL AMOUNT FAIR VALUE ASSET FAIR VALUE LIABILITY MATURING 2017 % 2016 % 2017 A$M 2016 A$M 2017 A$M 2016 A$M 2017 A$M 2016 A$M Less than one year 1 – 4.90 – 1,081.2 – – – (23.3) One to two years 1 – – – – – – – – Two to five years 1 5.24 5.24 1,431.9 1,431.9 – – (157.5) (202.6) Five years + 1 – – – – – – – – 1,431.9 2,513.1 – – (157.5) (225.9) 1 These fair value calculations include interest accruals as recorded in trade and other payables of $4.9 million (2016: $8.4 million). 4.8 Financial risk management (continued) 39 | WOOLWORTHS LIMITED | FINANCIAL REPORT 2017 CAPITAL STRUCTURE, FINANCING AND RISK MANAGEMENT 4 4.8.1 Market risk continued As at the reporting date, interest rate swaps have an unrealised loss of $157.5 million (2016: $225.9 million unrealised loss). These fair value calculations include interest accruals as recorded in trade and other payables of $4.9 million (2016: $8.4 million). All interest rate swaps have been designated as cash flow hedges based on a 100% hedge relationship against the identified exposure, with insignificant hedge ineffectiveness and the balance of $152.6 million has been recognised in the hedging reserve (2016: $217.5 million). Sensitivity analysis As at the reporting date, the Group’s exposure to interest rate risk after excluding debts that have been hedged is not considered material. Cash Flow Hedge Reserve The table below details the movements in the cash flow hedge reserve during the year: 2017 $M 2016 $M Balance at beginning of year (70.5) (66.1) Gain/(loss) arising on changes in fair value of hedging instruments entered into for cash flow hedges: Cross currency (86.0) 25.3 Interest rate swaps 64.9 18.6 Forward currency contracts (3.7) (28.8) Income tax related to gains/losses recognised in other comprehensive income 9.6 (7.1) (15.2) 8.0 Transferred to initial carrying amount of hedged item: Forward currency contracts 28.8 (17.8) Income tax related to amounts transferred to initial carrying amount of hedged item (8.6) 5.4 20.2 (12.4) Balance at end of year (65.5) (70.5) 4.8 Financial risk management (continued) 1 2 3 4 5 PERFO RM A N C E H IG H LIG H T S BU SIN ESS REV IEW D IREC TO RS' REPO RT FIN A N C IA L REPO RT O T H ER IN FO RM A T IO N 91 W O O LW O RT H S G R O U P A N N U A L R EPO R T 20 17 Notes to the Consolidated Financial Statements 40 | WOOLWORTHS LIMITED | FINANCIAL REPORT 2017 4.8.1 Market risk continued Maturity profile of financial instruments The following tables detail the Group’s exposure to interest rate risk at 25 June 2017 and 26 June 2016: FIXED INTEREST MATURING IN: 2017 FLOATING INTEREST RATE $M 1 YEAR OR LESS $M 1 TO 2 YEARS $M 2 TO 5 YEARS $M OVER 5 YEARS $M NON- INTEREST BEARING $M TOTAL $M AVERAGE EFFECTIVE INTEREST RATE % Financial assets Cash and cash equivalents 553.6 – – – – 363.1 916.7 1.17 Trade and other receivables 1 – 95.0 0.7 3.4 5.8 376.2 481.1 5.11 Other financial assets – – – – – 523.0 523.0 – 553.6 95.0 0.7 3.4 5.8 1,262.3 1,920.8 – Financial liabilities Trade and other payables 2,3 – – – – – (6,486.9) (6,486.9) – Provisions – – – – – (2,481.5) (2,481.5) – Borrowings (766.6) – (500.4) (1,763.1) – (0.4) (3,030.5) 6.01 Other financial liabilities (0.8) – – 0.8 – (429.5) (429.5) – (767.4) – (500.4) (1,762.3) - (9,398.3) (12,428.4) – Net financial assets/(liabilities) (213.8) 95.0 (499.7) (1,758.9) 5.8 (8,136.0) (10,507.6) – 1 Excludes prepayments. 2 Offset against the accounts payable balance are amounts owing from vendors of $ 1,069.3 million. Gross accounts payable prior to offsetting this balance is $6,137.5 million. 3 Excludes unearned income. FIXED INTEREST MATURING IN: 2016 FLOATING INTEREST RATE $M 1 YEAR OR LESS $M 1 TO 2 YEARS $M 2 TO 5 YEARS $M OVER 5 YEARS $M NON- INTEREST BEARING $M TOTAL $M AVERAGE EFFECTIVE INTEREST RATE % Financial assets Cash and cash equivalents 595.1 – – – – 360.9 956.0 1.44 Trade and other receivables – 1.2 0.7 2.1 7.2 503.0 514.2 6.04 Other financial assets – – – – – 694.2 694.2 – 595.1 1.2 0.7 2.1 7.2 1,558.1 2,164.4 – Financial liabilities Trade and other payables 1 – – – – – (6,087.8) (6,087.8) – Provisions – – – – – (3,255.9) (3,255.9) – Borrowings (1,619.4) (407.8) (500.0) (1,834.0) – (0.4) (4,361.6) 6.26 Other financial liabilities 343.7 (710.8) (30.9) 0.8 355.4 (258.3) (300.1) – (1,275.7) (1,118.6) (530.9) (1,833.2) 355.4 (9,602.4) (14,005.4) – Net financial assets/(liabilities) (680.6) (1,117.4) (530.2) (1,831.1) 362.6 (8,044.3) (11,841.0) – 1 Offset against the accounts payable balance are amounts owing from vendors of $1,009.6 million. Gross accounts payable prior to offsetting this balance is $5,818.7 million. (iii) Equity price risk The Group is exposed to changes in the market price of certain equity investments, being the interests held in the ALE Group and SCA Property Group. Subsequent to initial recognition they are measured at fair value with any change recognised in other comprehensive income. As at the reporting date, the Group’s exposure to equity price risk in respect of its investments in the ALE Group and SCA Property Group is not considered material and as such, no hedging of this risk is undertaken. 4.8 Financial risk management (continued) 92 Notes to the Consolidated Financial Statements 40 | WOOLWORTHS LIMITED | FINANCIAL REPORT 2017 4.8.1 Market risk continued Maturity profile of financial instruments The following tables detail the Group’s exposure to interest rate risk at 25 June 2017 and 26 June 2016: FIXED INTEREST MATURING IN: 2017 FLOATING INTEREST RATE $M 1 YEAR OR LESS $M 1 TO 2 YEARS $M 2 TO 5 YEARS $M OVER 5 YEARS $M NON- INTEREST BEARING $M TOTAL $M AVERAGE EFFECTIVE INTEREST RATE % Financial assets Cash and cash equivalents 553.6 – – – – 363.1 916.7 1.17 Trade and other receivables 1 – 95.0 0.7 3.4 5.8 376.2 481.1 5.11 Other financial assets – – – – – 523.0 523.0 – 553.6 95.0 0.7 3.4 5.8 1,262.3 1,920.8 – Financial liabilities Trade and other payables 2,3 – – – – – (6,486.9) (6,486.9) – Provisions – – – – – (2,481.5) (2,481.5) – Borrowings (766.6) – (500.4) (1,763.1) – (0.4) (3,030.5) 6.01 Other financial liabilities (0.8) – – 0.8 – (429.5) (429.5) – (767.4) – (500.4) (1,762.3) - (9,398.3) (12,428.4) – Net financial assets/(liabilities) (213.8) 95.0 (499.7) (1,758.9) 5.8 (8,136.0) (10,507.6) – 1 Excludes prepayments. 2 Offset against the accounts payable balance are amounts owing from vendors of $ 1,069.3 million. Gross accounts payable prior to offsetting this balance is $6,137.5 million. 3 Excludes unearned income. FIXED INTEREST MATURING IN: 2016 FLOATING INTEREST RATE $M 1 YEAR OR LESS $M 1 TO 2 YEARS $M 2 TO 5 YEARS $M OVER 5 YEARS $M NON- INTEREST BEARING $M TOTAL $M AVERAGE EFFECTIVE INTEREST RATE % Financial assets Cash and cash equivalents 595.1 – – – – 360.9 956.0 1.44 Trade and other receivables – 1.2 0.7 2.1 7.2 503.0 514.2 6.04 Other financial assets – – – – – 694.2 694.2 – 595.1 1.2 0.7 2.1 7.2 1,558.1 2,164.4 – Financial liabilities Trade and other payables 1 – – – – – (6,087.8) (6,087.8) – Provisions – – – – – (3,255.9) (3,255.9) – Borrowings (1,619.4) (407.8) (500.0) (1,834.0) – (0.4) (4,361.6) 6.26 Other financial liabilities 343.7 (710.8) (30.9) 0.8 355.4 (258.3) (300.1) – (1,275.7) (1,118.6) (530.9) (1,833.2) 355.4 (9,602.4) (14,005.4) – Net financial assets/(liabilities) (680.6) (1,117.4) (530.2) (1,831.1) 362.6 (8,044.3) (11,841.0) – 1 Offset against the accounts payable balance are amounts owing from vendors of $1,009.6 million. Gross accounts payable prior to offsetting this balance is $5,818.7 million. (iii) Equity price risk The Group is exposed to changes in the market price of certain equity investments, being the interests held in the ALE Group and SCA Property Group. Subsequent to initial recognition they are measured at fair value with any change recognised in other comprehensive income. As at the reporting date, the Group’s exposure to equity price risk in respect of its investments in the ALE Group and SCA Property Group is not considered material and as such, no hedging of this risk is undertaken. 4.8 Financial risk management (continued) 41 | WOOLWORTHS LIMITED | FINANCIAL REPORT 2017 CAPITAL STRUCTURE, FINANCING AND RISK MANAGEMENT 4 4.8.2 Liquidity risk Liquidity risk is the risk that the Group will not be able to meet its financial obligations as they fall due. This risk arises through the possibility that sales may be reduced due to adverse factors, unusually large amounts may fall due for payment, or existing maturing debt is unable to be refinanced. The Group has established an appropriate liquidity risk management framework for short, medium and long-term funding requirements, which has been approved by the board of directors. The Group maintains a liquidity reserve in the form of undrawn bilateral standby facilities of at least $500 million with unexpired tenures of at least 12 months at all times. To minimise refinancing and re-pricing risk, there are limitations placed upon amounts which may expire in a 12-month period and amounts which may be from a single funding source. Additionally, financing facilities are refinanced at least 6 months prior to maturity. Included in Note 4.7 is a summary of undrawn facilities that the Group has at its disposal to draw upon if required. The following table details the Group’s undiscounted financial liabilities and their contractual maturities: MATURITY ANALYSIS OF FINANCIAL LIABILITIES 2017 1 YEAR OR LESS $M 1 TO 2 YEARS $M 2 TO 5 YEARS $M OVER 5 YEARS $M TOTAL $M Non-derivative liabilities Borrowings (367.0) (615.4) (2,116.5) (0.4) (3,099.3) Other financial liabilities (250.8) – – – (250.8) Trade and other payables 1 (6,486.9) – – – (6,486.9) (7,104.7) (615.4) (2,116.5) (0.4) (9,837.0) Derivative liabilities Foreign exchange contracts pay (614.0) (9.5) – – (623.5) Foreign exchange contracts receive 610.1 9.5 – – 619.6 Net foreign exchange contracts (3.9) – – – (3.9) Cross currency swaps pay floating (70.8) (70.7) (2,090.7) – (2,232.2) Cross currency swaps receive fixed/floating 83.2 83.2 2,116.4 – 2,282.8 Net receive cross currency swaps 12.4 12.5 25.7 – 50.6 Net pay interest rate swaps 2 (50.4) (50.6) (75.9) – (176.9) (41.9) (38.1) (50.2) – (130.2) Total financial liabilities (7,146.6) (653.5) (2,166.7) (0.4) (9,967.2) 1 Includes liabilities held for sale (refer to Note 5.2). 2 Interest rate swaps are net settled. 4.8 Financial risk management (continued) 1 2 3 4 5 PERFO RM A N C E H IG H LIG H T S BU SIN ESS REV IEW D IREC TO RS' REPO RT FIN A N C IA L REPO RT O T H ER IN FO RM A T IO N 93 W O O LW O RT H S G R O U P A N N U A L R EPO R T 20 17 Notes to the Consolidated Financial Statements 42 | WOOLWORTHS LIMITED | FINANCIAL REPORT 2017 4.8.2 Liquidity risk continued MATURITY ANALYSIS OF FINANCIAL LIABILITIES 2016 1 YEAR OR LESS $M 1 TO 2 YEARS $M 2 TO 5 YEARS $M OVER 5 YEARS $M TOTAL $M Non-derivative liabilities Borrowings 1 (1,109.6) (147.9) (2,282.9) (1,626.3) (5,166.7) Other financial liabilities (11.0) (30.8) – – (41.8) Trade and other payables 2 (6,087.8) – – – (6,087.8) (7,208.4) (178.7) (2,282.9) (1,626.3) (11,296.3) Derivative liabilities Foreign exchange contracts pay (1,345.2) (9.1) (0.2) – (1,354.5) Foreign exchange contracts receive 1,310.6 8.9 0.2 – 1,319.7 Net foreign exchange contracts (34.6) (0.2) – – (34.8) Cross currency swaps pay floating (461.4) (69.1) (1,611.9) (361.9) (2,504.3) Cross currency swaps receive fixed 480.6 78.4 1,642.5 359.1 2,560.6 Net receive cross currency swaps 19.2 9.3 30.6 (2.8) 56.3 Net pay interest rate swaps 3 (68.1) (46.2) (116.2) – (230.5) (83.5) (37.1) (85.6) (2.8) (209.0) Total financial liabilities (7,291.9) (215.8) (2,368.5) (1,629.1) (11,505.3) 1 Borrowings with a maturity of one year or less includes $500 million of syndicated borrowings which are expected to be repaid in advance of the contractual maturity (refer to Note 4.6). 2 Includes liabilities held for sale (refer to Note 5.2). 3 Interest rate swaps are net settled. For floating rate instruments, the amount disclosed is determined by reference to the interest rate at the last re-pricing date. Cash flows represented are contractual and calculated on an undiscounted basis, based on current rates at the reporting date. 4.8.3 Credit risk Credit risk is the risk that a counterparty will default on its contractual obligations resulting in financial loss to the Group. In line with board approved policy, the Group can only invest short-term surplus funds or execute derivative financial instruments with approved counterparty banks and financial institutions that are rated A or higher by Standard & Poor’s. This is to mitigate the risk of financial loss due to a default by the counterparty. Each counterparty is assigned a maximum exposure value, based on their credit rating, to limit concentration of credit risk. The Group’s exposure to counterparties and their credit ratings is continuously monitored and compared against the board approved counterparty credit limits. The Group measures credit risk using methodologies customarily used by financial institutions. There were no breaches of credit limits during the reporting period. The recognised financial assets of the Group include amounts receivable arising from unrealised gains on derivative financial instruments. For derivatives which are deliverable, credit risk may also arise from the potential failure of the counterparties to meet their obligations under the respective contracts at maturity. As at the reporting date, no material credit risk exposure existed in relation to potential counterparty failure on such financial instruments (2016: Nil). Other than amounts provided for impairment of receivables in Note 3.1, no financial assets were impaired or past due. 4.8 Financial risk management (continued) 94 Notes to the Consolidated Financial Statements 42 | WOOLWORTHS LIMITED | FINANCIAL REPORT 2017 4.8.2 Liquidity risk continued MATURITY ANALYSIS OF FINANCIAL LIABILITIES 2016 1 YEAR OR LESS $M 1 TO 2 YEARS $M 2 TO 5 YEARS $M OVER 5 YEARS $M TOTAL $M Non-derivative liabilities Borrowings 1 (1,109.6) (147.9) (2,282.9) (1,626.3) (5,166.7) Other financial liabilities (11.0) (30.8) – – (41.8) Trade and other payables 2 (6,087.8) – – – (6,087.8) (7,208.4) (178.7) (2,282.9) (1,626.3) (11,296.3) Derivative liabilities Foreign exchange contracts pay (1,345.2) (9.1) (0.2) – (1,354.5) Foreign exchange contracts receive 1,310.6 8.9 0.2 – 1,319.7 Net foreign exchange contracts (34.6) (0.2) – – (34.8) Cross currency swaps pay floating (461.4) (69.1) (1,611.9) (361.9) (2,504.3) Cross currency swaps receive fixed 480.6 78.4 1,642.5 359.1 2,560.6 Net receive cross currency swaps 19.2 9.3 30.6 (2.8) 56.3 Net pay interest rate swaps 3 (68.1) (46.2) (116.2) – (230.5) (83.5) (37.1) (85.6) (2.8) (209.0) Total financial liabilities (7,291.9) (215.8) (2,368.5) (1,629.1) (11,505.3) 1 Borrowings with a maturity of one year or less includes $500 million of syndicated borrowings which are expected to be repaid in advance of the contractual maturity (refer to Note 4.6). 2 Includes liabilities held for sale (refer to Note 5.2). 3 Interest rate swaps are net settled. For floating rate instruments, the amount disclosed is determined by reference to the interest rate at the last re-pricing date. Cash flows represented are contractual and calculated on an undiscounted basis, based on current rates at the reporting date. 4.8.3 Credit risk Credit risk is the risk that a counterparty will default on its contractual obligations resulting in financial loss to the Group. In line with board approved policy, the Group can only invest short-term surplus funds or execute derivative financial instruments with approved counterparty banks and financial institutions that are rated A or higher by Standard & Poor’s. This is to mitigate the risk of financial loss due to a default by the counterparty. Each counterparty is assigned a maximum exposure value, based on their credit rating, to limit concentration of credit risk. The Group’s exposure to counterparties and their credit ratings is continuously monitored and compared against the board approved counterparty credit limits. The Group measures credit risk using methodologies customarily used by financial institutions. There were no breaches of credit limits during the reporting period. The recognised financial assets of the Group include amounts receivable arising from unrealised gains on derivative financial instruments. For derivatives which are deliverable, credit risk may also arise from the potential failure of the counterparties to meet their obligations under the respective contracts at maturity. As at the reporting date, no material credit risk exposure existed in relation to potential counterparty failure on such financial instruments (2016: Nil). Other than amounts provided for impairment of receivables in Note 3.1, no financial assets were impaired or past due. 4.8 Financial risk management (continued) 43 | WOOLWORTHS LIMITED | FINANCIAL REPORT 2017 CAPITAL STRUCTURE, FINANCING AND RISK MANAGEMENT 4 4.8.4 Fair value measurement of financial instruments Some of the Group’s financial assets and financial liabilities are measured at fair value at the end of each reporting period. The following table gives information about how the fair values of these financial assets and financial liabilities are determined. They are grouped into levels 1 to 3 based on the degree to which the fair value measurement inputs are observable. • Level 1 fair value measurements are those derived from quoted prices (unadjusted) in active markets for identical assets or liabilities; • Level 2 fair value measurements are those derived from inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly (i.e. as prices) or indirectly (i.e. derived from prices); and • Level 3 fair value measurements are those derived from valuation techniques that include inputs for the asset or liability that are not based on observable market data (unobservable inputs). FAIR VALUE AS AT FINANCIAL ASSETS/ FINANCIAL LIABILITIES NOTE 2017 $M 2016 $M FAIR VALUE HIERARCHY VALUATION TECHNIQUE(S) AND KEY INPUT(S) SIGNIFICANT UNOBSERVABLE INPUT(S) RELATIONSHIP OF UNOBSERVABLE INPUTS TO FAIR VALUE Listed equity securities 3.2 Assets 79.8 Assets 77.3 Level 1 Quoted last sale prices in an active market. n/a n/a Forward exchange contracts and foreign currency options 4.8.1 4.8.1 Assets 2.2 Liabilities 4.6 Assets 1.2 Liabilities 30.0 Level 2 Discounted cash flow – Future cash flows are estimated based on market forward exchange rates as at the end of the reporting period and the contract forward rate, discounted by the observable yield curves of the respective currency. Options were valued using the Black Scholes model. n/a n/a Interest rate and cross currency swaps 4.8.1 4.8.1 Assets 412.9 Liabilities 180.0 Assets 584.5 Liabilities 228.3 Level 2 Discounted cash flow – Future cash flows are estimated based on market forward rates 1 as at the end of the reporting period and the contract rates, discounted at a rate that reflects the credit risk of the various respective counterparties. n/a n/a Put options over non- controlling interests 3.8 Liabilities 250.8 Liabilities – Level 2 Contractual obligation paid post balance date – Refer to Note 3.8 for further details. n/a n/a Contingent consideration payable Liabilities – Liabilities 21.8 Level 3 Discounted cash flow – Future cash flows are estimated based on the adjusted cash flows of the acquired business. Probability-adjusted cash flows of the acquired business The higher the probability-adjusted cash flows, the higher the contingent consideration payable. Discount rate The higher the discount rate, the lower the contingent consideration payable. 1 Refers to interest rates for interest rate swaps and foreign exchange rates and interest rates for cross currency swaps. There were no transfers between Level 1 and Level 2 in the period. 4.8 Financial risk management (continued) 1 2 3 4 5 PERFO RM A N C E H IG H LIG H T S BU SIN ESS REV IEW D IREC TO RS' REPO RT FIN A N C IA L REPO RT O T H ER IN FO RM A T IO N 95 W O O LW O RT H S G R O U P A N N U A L R EPO R T 20 17 Notes to the Consolidated Financial Statements 44 | WOOLWORTHS LIMITED | FINANCIAL REPORT 2017 4.8.4 Fair value measurement of financial instruments continued Reconciliation of Level 3 fair value measurements 2017 $M 2016 $M Movement: Balance at start of period (21.8) (918.6) Release of contingent consideration 20.7 – Change in fair value of put options over non-controlling interests – 886.1 Acquisition of non-controlling interest – 12.1 Foreign exchange gain/(losses) recognised in other comprehensive income 1.1 (1.4) Balance at end of period – (21.8) Fair value of financial assets and financial liabilities that are not measured at fair value on a recurring basis The carrying value of cash and cash equivalents, financial assets, bank and other loans and non-interest bearing monetary financial liabilities of the Group approximates their fair value. 4.8.5 Capital management The Company manages its capital structure with the objective of enhancing long-term shareholder value through optimising its weighted average cost of capital while retaining financial flexibility to invest in its business in a manner consistent with its key priorities. The Company remains committed to a solid investment grade credit rating and a number of actions can be undertaken to support the credit profile including the sale of non-core assets, accelerating working capital initiatives and adjusting its growth capital expenditure and property leasing profile. In April 2016, the Company introduced a 1.5% discount on the dividend reinvestment plan (DRP) and removed the participation limit. This has continued during 2017 and the participation rate for the October 2016 final and April 2017 interim DRP’s were approximately 37%. The October 2016 DRP was partially underwritten to 50%, the proceeds of which were used predominantly to replace the Woolworths Notes II and the balance to allow for accelerated investment in its store renewal program. The discount and uncapped participation will remain in place for the October 2017 final dividend. The Company will seek to return capital to shareholders when that is consistent with its long-term capital structure objectives and where it will enhance shareholder value. (i) Financing transactions during 2017 Maturities The five-year non-call period for the A$700 million Woolworths Notes II ended on 24 November 2016. Pursuant to a replacement capital covenant, the Notes were refinanced by a combination of surplus cash, debt and equity. Eligible equity assigned to the redemption was raised via the DRP during the interim and final 2016 dividends. US$300 million (approximately A$381 million) in US notes matured in April 2017. This was repaid with existing bank facilities previously established for this purpose. New transactions In November 2016, Woolworths Group executed an A$700 million syndicated bank loan facility comprising a three-year and four-year revolving tranche of A$320 million and A$200 million respectively, and a four-year term loan tranche of US$140 million. (ii) Upcoming refinancing The Company has no debt maturing during 2018. (iii) Guarantee facility In May 2017, the Company pre-financed its A$400 million bank guarantee facility which matures in November 2017 and increased it to A$500 million. This facility is for the purpose of the Group meeting its WorkCover obligations as a ‘self-insurer’ by issuing bank guarantees in favour of Australian WorkCover authorities and is underpinned by the international surety market. The original facility was finalised in 2014 for a three-year commitment to November 2017 and is currently fully drawn. The new facility may be drawn at any time up to November 2017, and will expire in three years following initial drawing. It is currently undrawn. 4.8 Financial risk management (continued) 96 Notes to the Consolidated Financial Statements 44 | WOOLWORTHS LIMITED | FINANCIAL REPORT 2017 4.8.4 Fair value measurement of financial instruments continued Reconciliation of Level 3 fair value measurements 2017 $M 2016 $M Movement: Balance at start of period (21.8) (918.6) Release of contingent consideration 20.7 – Change in fair value of put options over non-controlling interests – 886.1 Acquisition of non-controlling interest – 12.1 Foreign exchange gain/(losses) recognised in other comprehensive income 1.1 (1.4) Balance at end of period – (21.8) Fair value of financial assets and financial liabilities that are not measured at fair value on a recurring basis The carrying value of cash and cash equivalents, financial assets, bank and other loans and non-interest bearing monetary financial liabilities of the Group approximates their fair value. 4.8.5 Capital management The Company manages its capital structure with the objective of enhancing long-term shareholder value through optimising its weighted average cost of capital while retaining financial flexibility to invest in its business in a manner consistent with its key priorities. The Company remains committed to a solid investment grade credit rating and a number of actions can be undertaken to support the credit profile including the sale of non-core assets, accelerating working capital initiatives and adjusting its growth capital expenditure and property leasing profile. In April 2016, the Company introduced a 1.5% discount on the dividend reinvestment plan (DRP) and removed the participation limit. This has continued during 2017 and the participation rate for the October 2016 final and April 2017 interim DRP’s were approximately 37%. The October 2016 DRP was partially underwritten to 50%, the proceeds of which were used predominantly to replace the Woolworths Notes II and the balance to allow for accelerated investment in its store renewal program. The discount and uncapped participation will remain in place for the October 2017 final dividend. The Company will seek to return capital to shareholders when that is consistent with its long-term capital structure objectives and where it will enhance shareholder value. (i) Financing transactions during 2017 Maturities The five-year non-call period for the A$700 million Woolworths Notes II ended on 24 November 2016. Pursuant to a replacement capital covenant, the Notes were refinanced by a combination of surplus cash, debt and equity. Eligible equity assigned to the redemption was raised via the DRP during the interim and final 2016 dividends. US$300 million (approximately A$381 million) in US notes matured in April 2017. This was repaid with existing bank facilities previously established for this purpose. New transactions In November 2016, Woolworths Group executed an A$700 million syndicated bank loan facility comprising a three-year and four-year revolving tranche of A$320 million and A$200 million respectively, and a four-year term loan tranche of US$140 million. (ii) Upcoming refinancing The Company has no debt maturing during 2018. (iii) Guarantee facility In May 2017, the Company pre-financed its A$400 million bank guarantee facility which matures in November 2017 and increased it to A$500 million. This facility is for the purpose of the Group meeting its WorkCover obligations as a ‘self-insurer’ by issuing bank guarantees in favour of Australian WorkCover authorities and is underpinned by the international surety market. The original facility was finalised in 2014 for a three-year commitment to November 2017 and is currently fully drawn. The new facility may be drawn at any time up to November 2017, and will expire in three years following initial drawing. It is currently undrawn. 4.8 Financial risk management (continued) 45 | WOOLWORTHS LIMITED | FINANCIAL REPORT 2017 CAPITAL STRUCTURE, FINANCING AND RISK MANAGEMENT 4 4.9 Commitments for expenditure and operating lease expense 4.9.1 Commitments for expenditure Capital expenditure and operating lease commitments of the Group at the reporting date are as follows: 2017 $M 2016 $M Capital expenditure commitments Estimated capital expenditure under firm contracts, payable: Not later than one year 360.7 497.4 Later than one year, not later than two years 6.6 43.1 Later than two years, not later than five years 0.1 7.1 367.4 547.6 Operating lease commitments Future minimum rentals under non-cancellable operating leases, payable: Not later than one year 2,090.7 2,073.1 Later than one year, not later than five years 7,678.7 7,468.0 Later than five years 14,669.4 15,188.5 24,438.8 24,729.6 Total commitments for expenditure 24,806.2 25,277.2 Operating lease commitments for onerous lease contracts recognised in the Consolidated Statement of Financial Position (refer to Note 3.9) are also disclosed in the table above. The commitments set out above do not include contingent turnover rentals, which are charged on many retail premises leased by the Group. These rentals are calculated as a percentage of the turnover of the store occupying the premises, with the percentage and turnover threshold at which the additional rentals commence varying with each lease agreement. The Group leases retail premises and warehousing facilities which are generally for periods up to 40 years. The operating lease commitments include leases for the Norwest office and distribution centres. Generally the lease agreements are for initial terms of between five and 25 years and most include multiple renewal options for additional five to 10 year terms. Under most leases, the Group is responsible for property taxes, insurance, maintenance and expenses related to the leased properties. However, many of the more recent lease agreements have been negotiated on a gross or semi-gross basis, which eliminates or significantly reduces the lessee’s exposure to operational charges associated with the properties. 4.9.2 Operating lease expense from continuing operations Operating lease expense recognised in the year is as follows: 2017 $M 2016 $M Minimum lease payments 2,006.1 1,935.5 Contingent rentals 28.2 28.4 2,034.3 1,963.9 SIGNIFICANT ACCOUNTING POLICIES LEASES Leases are classified as finance leases where the terms of the lease transfers substantially all the risks and rewards of ownership to the lessee. All other leases are classified as operating leases. Operating lease payments are recognised as an expense on a straight-line basis over the lease term. Fixed rate increases to lease rental payments, excluding contingent or index-based rental increases, are recognised on a straight-line basis over the lease term. An asset or liability arises for the difference between the amount paid and the lease expense brought to account on a straight-line basis. Operating lease incentives received are initially recognised as a liability and are then recognised as part of the lease expense on a straight-line basis over the lease term. 1 2 3 4 5 PERFO RM A N C E H IG H LIG H T S BU SIN ESS REV IEW D IREC TO RS' REPO RT FIN A N C IA L REPO RT O T H ER IN FO RM A T IO N 97 W O O LW O RT H S G R O U P A N N U A L R EPO R T 20 17 Notes to the Consolidated Financial Statements 46 | WOOLWORTHS LIMITED | FINANCIAL REPORT 2017 5 GROUP STRUCTURE 5.1 Discontinued operations Home Improvement On 18 January 2016, the Company announced that it intended to pursue an orderly prospective exit of the Home Improvement business. Consequently, the Home Improvement business has been classified as a discontinued operation. During the period, the following events have occurred: • On 24 August 2016, Masters Home Improvement Australia Pty Limited (Masters) appointed GA Australia Pty Ltd (GA Australia) as exclusive agent to manage the sell-down of Masters inventory. Under the terms of the appointment, GA Australia provided a guarantee for the recovery of a guaranteed percentage of the cost value of Masters inventory, subject to certain adjustments. The net proceeds received were approximately $492 million. All Masters stores ceased trading on or before 11 December 2016; • On 24 August 2016, the Company granted an exclusive call option over its 66.7% shareholding in Hydrox Holdings Pty Ltd (Hydrox) to Home Investment Consortium Company Pty Ltd as trustee for the Home Investment Consortium Trust (Home Consortium). Additionally, Home Consortium proposed to purchase Masters properties through the acquisition of 100% of the shares in Hydrox, subject to Lowe’s consent. Subsequent to year end, a Share Sale Agreement (SSA) was entered into for a headline sale price of $525 million subject to the sale of Lowe’s shares. The SSA includes a number of freehold trading sites, freehold development sites and leasehold sites. The remaining sites will be acquired by Woolworths prior to completion of the transaction. Refer to Note 6.5 for further details; and • On 2 October 2016, Hydrox Brands Pty Ltd completed the sale of 100% of the shares in Danks Holdings Pty Limited, the holding company for the Home Timber and Hardware Group (HTH) to Metcash for a headline sale price of $165 million (subject to completion adjustments in accordance with the sale agreement). The sale also resulted in the Group taking assignment of three residual leases of HTH. The final outcome of the sale of HTH to Metcash and Masters inventory to GA Australia did not have a material impact on the results of the Group for the period. In addition, on 24 August 2016, the Company purported to terminate the Joint Venture Agreement (JVA) with Lowe’s and Hydrox, and the associated option contracts arising under the JVA. As a result, in the Half-Year Financial Report, Lowe’s non-controlling 33.3% interest in Hydrox was reinstated as of 24 August 2016. In the Half-Year Financial Report, Lowe’s was attributed its 33.3% share of the profit and losses of Hydrox from 24 August 2016 to balance date. Lowe’s challenged the Company’s termination of the JVA, and on 21 April 2017, an award was made in the confidential arbitration between the Company and Lowe’s. As a consequence of the award, the JVA was determined to remain in place, and therefore from 16 January 2016 Lowe’s was no longer entitled to any profits or responsible for any losses of Hydrox. As a result there is no non- controlling interest associated with Lowe’s shares and the fair value of the put option in Hydrox as at the end of the reporting period is $250.8 million (refer to Note 3.8 for further details). Subsequent to balance date, on 4 August 2017 Lowe’s shares were acquired for the $250.8 million. Refer to Note 6.5 for further information. The recoverable amount of assets, including a deferred tax asset relating to future deductions expected to be obtained from payments made for provisions for onerous leases and other exit costs, and recognition and measurement of liabilities of the Home Improvement business were re-assessed as at the end of the year end reporting period. The re-assessment for properties included in the Home Consortium transaction reflects the financial impact of that transaction on the basis that the sale of Lowe’s shares is the last substantive condition precedent for completion of the SSA. The re-assessment for properties and provisions excluded from the Home Consortium transaction is based on management’s best estimate of the expected net proceeds to be realised or payments to be incurred. The estimates and judgements applied with respect to the recognition of impairment of the Home Improvement assets and associated provisions involve complexity. Any changes to carrying values in future periods due to revisions to estimates or assumptions as a result of the final realisation of the Home Improvement assets and liabilities upon exit of the business will be recognised in the Group’s profit or loss as part of discontinued operations up to the sale of Hydrox and continuing operations subsequent to the sale. 98 Notes to the Consolidated Financial Statements 46 | WOOLWORTHS LIMITED | FINANCIAL REPORT 2017 5 GROUP STRUCTURE 5.1 Discontinued operations Home Improvement On 18 January 2016, the Company announced that it intended to pursue an orderly prospective exit of the Home Improvement business. Consequently, the Home Improvement business has been classified as a discontinued operation. During the period, the following events have occurred: • On 24 August 2016, Masters Home Improvement Australia Pty Limited (Masters) appointed GA Australia Pty Ltd (GA Australia) as exclusive agent to manage the sell-down of Masters inventory. Under the terms of the appointment, GA Australia provided a guarantee for the recovery of a guaranteed percentage of the cost value of Masters inventory, subject to certain adjustments. The net proceeds received were approximately $492 million. All Masters stores ceased trading on or before 11 December 2016; • On 24 August 2016, the Company granted an exclusive call option over its 66.7% shareholding in Hydrox Holdings Pty Ltd (Hydrox) to Home Investment Consortium Company Pty Ltd as trustee for the Home Investment Consortium Trust (Home Consortium). Additionally, Home Consortium proposed to purchase Masters properties through the acquisition of 100% of the shares in Hydrox, subject to Lowe’s consent. Subsequent to year end, a Share Sale Agreement (SSA) was entered into for a headline sale price of $525 million subject to the sale of Lowe’s shares. The SSA includes a number of freehold trading sites, freehold development sites and leasehold sites. The remaining sites will be acquired by Woolworths prior to completion of the transaction. Refer to Note 6.5 for further details; and • On 2 October 2016, Hydrox Brands Pty Ltd completed the sale of 100% of the shares in Danks Holdings Pty Limited, the holding company for the Home Timber and Hardware Group (HTH) to Metcash for a headline sale price of $165 million (subject to completion adjustments in accordance with the sale agreement). The sale also resulted in the Group taking assignment of three residual leases of HTH. The final outcome of the sale of HTH to Metcash and Masters inventory to GA Australia did not have a material impact on the results of the Group for the period. In addition, on 24 August 2016, the Company purported to terminate the Joint Venture Agreement (JVA) with Lowe’s and Hydrox, and the associated option contracts arising under the JVA. As a result, in the Half-Year Financial Report, Lowe’s non-controlling 33.3% interest in Hydrox was reinstated as of 24 August 2016. In the Half-Year Financial Report, Lowe’s was attributed its 33.3% share of the profit and losses of Hydrox from 24 August 2016 to balance date. Lowe’s challenged the Company’s termination of the JVA, and on 21 April 2017, an award was made in the confidential arbitration between the Company and Lowe’s. As a consequence of the award, the JVA was determined to remain in place, and therefore from 16 January 2016 Lowe’s was no longer entitled to any profits or responsible for any losses of Hydrox. As a result there is no non- controlling interest associated with Lowe’s shares and the fair value of the put option in Hydrox as at the end of the reporting period is $250.8 million (refer to Note 3.8 for further details). Subsequent to balance date, on 4 August 2017 Lowe’s shares were acquired for the $250.8 million. Refer to Note 6.5 for further information. The recoverable amount of assets, including a deferred tax asset relating to future deductions expected to be obtained from payments made for provisions for onerous leases and other exit costs, and recognition and measurement of liabilities of the Home Improvement business were re-assessed as at the end of the year end reporting period. The re-assessment for properties included in the Home Consortium transaction reflects the financial impact of that transaction on the basis that the sale of Lowe’s shares is the last substantive condition precedent for completion of the SSA. The re-assessment for properties and provisions excluded from the Home Consortium transaction is based on management’s best estimate of the expected net proceeds to be realised or payments to be incurred. The estimates and judgements applied with respect to the recognition of impairment of the Home Improvement assets and associated provisions involve complexity. Any changes to carrying values in future periods due to revisions to estimates or assumptions as a result of the final realisation of the Home Improvement assets and liabilities upon exit of the business will be recognised in the Group’s profit or loss as part of discontinued operations up to the sale of Hydrox and continuing operations subsequent to the sale. 47 | WOOLWORTHS LIMITED | FINANCIAL REPORT 2017 GROUP STRUCTURE 5 Petrol On 24 December 2016, the Company entered into a binding agreement to sell its 527 Woolworths-owned fuel convenience sites and 16 committed development sites to BP for $1.785 billion. Consequently, the Petrol business has been classified as a discontinued operation. The transaction is subject to certain conditions including, but not limited to, obtaining Australian Competition and Consumer Commission (ACCC) approval. Completion is expected to occur no earlier than 2 January 2018. Analysis of profit/(loss) for the period from discontinued operations The results of the Home Improvement and Petrol businesses have been separately disclosed and the comparative financial information in the Consolidated Statement of Profit or Loss and associated Notes and Consolidated Statement of Other Comprehensive Income have been restated to present these businesses as discontinued operations separately from continuing operations. The profit/(loss) for the Home Improvement and Petrol businesses for the reporting period are set out below, including comparative information: HOME IMPROVEMENT 2017 $M 2016 $M Revenue from the sale of goods 903.3 2,100.2 Expenses (1,066.1) (2,319.0) Impairment of Home Improvement assets and store exit costs 1 572.6 (3,055.1) Put option liability (250.8) – 159.0 (3,273.9) Earnings/(Loss) before interest and income tax Net financing costs (18.2) (19.2) Profit/(Loss) before income tax 140.8 (3,293.1) Income tax (expense)/benefit (139.9) 105.1 Profit/(Loss) for the period from Home Improvement discontinued operations 0.9 (3,188.0) PETROL Revenue from the sale of goods 4,682.1 4,611.8 Expenses (4,524.2) (4,501.5) Earnings before interest and income tax 2, 3 157.9 110.3 Net financing costs – – Profit before income tax 157.9 110.3 Income tax expense (47.4) (33.1) Profit for the period from Petrol discontinued operations 110.5 77.2 Total profit/(loss) for the period from discontinued operations 111.4 (3,110.8) Total profit/(loss) from discontinued operations attributable to: Equity holders of the parent entity 111.4 (1,961.1) Non-controlling interests 4 – (1,149.7) 111.4 (3,110.8) 1 2017 relates to the reassessment of the impairment in the recoverable amount of assets and liabilities that was previously recognised as a significant item in 2016 in connection with the Group’s decision to exit the Home Improvement business. The reassessment was predominately a result of the reflection of the financial impact of the transaction with Home Consortium on the basis that the sale of Lowe’s shares enables completion of the SSA with Home Consortium. 2 Included in the Petrol EBIT for the reporting period ended 25 June 2017 are overhead and other costs of $18 million to $24 million that will remain with the Company following the completion of the transaction. A portion of these costs will be recovered in the short term following the sale as a result of a Transition Services Arrangement. The Company plans to minimise the impact of these costs going forward. 3 Included in the Petrol EBIT for the reporting period ended 25 June 2017 is the cost of funding the full 4cpl fuel discount offer of $68.6 million (2016: $71.5 million). Upon sale completion, the Company and BP will equally fund the 4cpl fuel discount offer based on redemption volumes. 4 As part of the terms of the Joint Venture Agreement between the Company, Lowe’s and Hydrox, Lowe’s held a put option, which became exercisable after 20 October 2015. On 16 January 2016, Lowe’s issued a notice setting an exercise date for the option triggering a 13-month notice period after which the option could have been exercised. From this date, in line with the arbitration award on 21 April 2017, Lowe’s was no longer entitled to any profits or responsible for any losses of Hydrox. Subsequent to balance date, on 4 August 2017 Lowe’s sold its shares to Home Consortium for the value determined by the third party independent expert. Refer to Note 6.5 Subsequent Events for further information. 5.1 Discontinued operations (continued) 1 2 3 4 5 PERFO RM A N C E H IG H LIG H T S BU SIN ESS REV IEW D IREC TO RS' REPO RT FIN A N C IA L REPO RT O T H ER IN FO RM A T IO N 99 W O O LW O RT H S G R O U P A N N U A L R EPO R T 20 17 Notes to the Consolidated Financial Statements 48 | WOOLWORTHS LIMITED | FINANCIAL REPORT 2017 Cash flows from/(used in) discontinued operations The results of cash flows from/(used in) the Home Improvement and Petrol businesses during the period are set out below, including comparative information: HOME IMPROVEMENT 2017 $M 2016 $M Net cash outflow from operating activities (122.7) (364.5) Net cash inflow/(outflow) from investing activities 149.2 (98.1) Net cash (outflow)/inflow from financing activities (4.2) 172.1 22.3 (290.5) PETROL Net cash inflow from operating activities 115.0 118.0 Net cash outflow from investing activities (31.4) (61.5) Net cash inflow/(outflow) from financing activities – – 83.6 56.5 SIGNIFICANT ACCOUNTING POLICIES DISCONTINUED OPERATIONS A discontinued operation is a component of the Group that represents a separate major line of business that is part of a disposal plan. The results of discontinued operations are presented separately in the Consolidated Statement of Profit or Loss. CRITICAL ACCOUNTING ESTIMATES The estimates and judgements of impairment of Home Improvement assets and associated costs, that involve a high degree of complexity and have a risk of causing a material adjustment to the carrying amounts of assets and liabilities within subsequent periods, are described above. Any changes to carrying values in subsequent periods due to revisions to estimates or assumptions or as a result of the final realisation of the Home Improvement assets and liabilities upon exit of the business will be recognised in the Group’s profit or loss as part of discontinued operations up to the sale of the Home Improvement business and continuing operations subsequent to the sale. 5.1 Discontinued operations (continued) 100 Notes to the Consolidated Financial Statements 48 | WOOLWORTHS LIMITED | FINANCIAL REPORT 2017 Cash flows from/(used in) discontinued operations The results of cash flows from/(used in) the Home Improvement and Petrol businesses during the period are set out below, including comparative information: HOME IMPROVEMENT 2017 $M 2016 $M Net cash outflow from operating activities (122.7) (364.5) Net cash inflow/(outflow) from investing activities 149.2 (98.1) Net cash (outflow)/inflow from financing activities (4.2) 172.1 22.3 (290.5) PETROL Net cash inflow from operating activities 115.0 118.0 Net cash outflow from investing activities (31.4) (61.5) Net cash inflow/(outflow) from financing activities – – 83.6 56.5 SIGNIFICANT ACCOUNTING POLICIES DISCONTINUED OPERATIONS A discontinued operation is a component of the Group that represents a separate major line of business that is part of a disposal plan. The results of discontinued operations are presented separately in the Consolidated Statement of Profit or Loss. CRITICAL ACCOUNTING ESTIMATES The estimates and judgements of impairment of Home Improvement assets and associated costs, that involve a high degree of complexity and have a risk of causing a material adjustment to the carrying amounts of assets and liabilities within subsequent periods, are described above. Any changes to carrying values in subsequent periods due to revisions to estimates or assumptions or as a result of the final realisation of the Home Improvement assets and liabilities upon exit of the business will be recognised in the Group’s profit or loss as part of discontinued operations up to the sale of the Home Improvement business and continuing operations subsequent to the sale. 5.1 Discontinued operations (continued) 49 | WOOLWORTHS LIMITED | FINANCIAL REPORT 2017 GROUP STRUCTURE 5 5.2 Assets held for sale Following the announcement of the exit from the Home Improvement business (refer to Note 5.1), management is finalising the exit from the Home Improvement business. Management has also entered into a binding agreement to sell its 527 Woolworths-owned fuel convenience sites and 16 committed development sites to BP (refer to Note 5.1). In addition, the Group has a number of property assets that it plans to sell. The sale of Home Timber and Hardware Group was completed during the period (refer to Note 5.1). The associated assets and liabilities were previously classified as held for sale at 26 June 2016. Assets and liabilities relating to the Petrol business, property, plant and equipment relating to Masters and other Group properties held for sale are included in the following table: 2017 $M 2016 $M Property, plant and equipment 1,111.0 769.5 Other assets 132.6 331.0 Total assets classified as held for sale 1,243.6 1,100.5 2017 $M 2016 $M Total liabilities directly associated with assets held for sale 20.7 202.6 SIGNIFICANT ACCOUNTING POLICIES NON-CURRENT ASSETS HELD FOR SALE Non-current assets are classified as held for sale if their carrying amount will be recovered principally through a sale transaction rather than continuing use and a sale is considered highly probable. They are measured at the lower of their carrying amount and fair value less costs to sell, except for assets such as deferred tax assets, assets arising from employee benefits and financial assets which are specifically exempt from this requirement. An impairment loss is recognised for any initial or subsequent write-down of the asset to fair value less costs to sell. A gain is recognised for any subsequent increases in fair value less costs to sell of an asset, but not in excess of any cumulative impairment loss previously recognised. A gain or loss not previously recognised by the date of the sale of the non-current asset is recognised at the date of derecognition. Non-current assets are not depreciated or amortised while they are classified as held for sale. Interest and other expenses attributable to the liabilities classified as held for sale continue to be recognised. 1 2 3 4 5 PERFO RM A N C E H IG H LIG H T S BU SIN ESS REV IEW D IREC TO RS' REPO RT FIN A N C IA L REPO RT O T H ER IN FO RM A T IO N 101 W O O LW O RT H S G R O U P A N N U A L R EPO R T 20 17 Notes to the Consolidated Financial Statements 50 | WOOLWORTHS LIMITED | FINANCIAL REPORT 2017 5.3 Subsidiaries 5.3.1 Deed of cross guarantee Woolworths Limited and each of the wholly-owned subsidiaries set out below (together referred to as the ‘Closed Group’), have entered into a Deed of Cross Guarantee (Deed), as defined in ASIC Corporations Legislative Instrument (Instrument) 2016/785. The effect of the Deed is that each entity in the Closed Group guarantees the payment in full of all debts of the other entities in the Closed Group in the event of their winding up. Pursuant to the Instrument, the wholly-owned subsidiaries within the Closed Group are relieved from the requirement to prepare, audit and lodge separate financial reports. COMPANY ACN 001 259 301 Pty Limited Pinnacle Liquor Group Pty Limited Advantage Supermarkets Pty Ltd Pinnacle Wines Pty Limited Advantage Supermarkets WA Pty Ltd Progressive Enterprises Holdings Limited Andmist Pty. Limited QFD Pty. Limited Australian Independent Retailers Pty Ltd Queensland Property Investments Pty Ltd Australian Liquor & Grocery Wholesalers Pty Ltd Retail FM Pty Ltd Australian Safeway Stores Pty. Ltd. Universal Wholesalers Pty Limited Barjok Pty Ltd V I Packaging Pty Ltd Calvartan Pty. Limited Vincentia Nominees Pty Ltd Cellar Force Pty Ltd Vinpac International Pty. Limited Cellarmaster Wines Pty Limited Weetah Pty. Limited Cenijade Pty. Limited Wine Ark Cellar Club Pty Ltd Charmtex Pty Ltd Wine IQ Holdings Pty Ltd Dentra Pty. Limited Winemarket Pty Ltd Dorrien Estate Winery Pty Ltd Woolies Liquor Stores Pty. Ltd. Drumstar Pty Ltd Woolstar Pty. Limited Fabcot Pty Ltd Woolworths (International) Pty Limited Gembond Pty. Limited Woolworths (Project Finance) Pty. Limited GreenGrocer.com.au Pty Ltd Woolworths (Publishing) Pty Ltd Grocery Wholesalers Pty Ltd Woolworths (Q'land) Pty Limited Hydrogen Nominees Pty. Ltd Woolworths (R & D) Pty Limited Jack Butler & Staff Pty. Ltd. Woolworths (South Australia) Pty Limited Josona Pty Ltd Woolworths (Victoria) Pty Limited Kennedy Corporation Holdings Pty Limited Woolworths (W.A.) Pty Limited Kennedy Corporation Pty Limited Woolworths Australian Communities Foundation Pty Limited Kiaora Lands Pty Limited Woolworths Custodian Pty Ltd Langton's Brokerage Pty Ltd Woolworths Executive Superannuation Scheme Pty Limited Langtons Pty. Ltd. Woolworths Group Superannuation Scheme Pty Ltd Leasehold Investments Pty Ltd Woolworths Management Pty Ltd Mac's Liquor Stores Pty Limited Woolworths Properties Pty Limited Nalos Pty Ltd Woolworths Property Double Bay Pty Limited Nexday Pty. Limited Woolworths Townsville Nominee Pty Ltd Oxygen Nominees Pty. Ltd. Woolworths Trust Management Pty Limited PEH (NZ IP) Pty Ltd Woolworths Trustee No. 2 Pty Limited Philip Leong Stores Pty Limited Zimi Wines Pty Ltd Woolworths Limited has further subsidiaries not listed above which are not party to the Deed of Cross Guarantee. All material subsidiaries with the exception of those disclosed in Note 5.3.2 (non-wholly owned subsidiaries that have material non-controlling interests) are listed above. 102 Notes to the Consolidated Financial Statements 50 | WOOLWORTHS LIMITED | FINANCIAL REPORT 2017 5.3 Subsidiaries 5.3.1 Deed of cross guarantee Woolworths Limited and each of the wholly-owned subsidiaries set out below (together referred to as the ‘Closed Group’), have entered into a Deed of Cross Guarantee (Deed), as defined in ASIC Corporations Legislative Instrument (Instrument) 2016/785. The effect of the Deed is that each entity in the Closed Group guarantees the payment in full of all debts of the other entities in the Closed Group in the event of their winding up. Pursuant to the Instrument, the wholly-owned subsidiaries within the Closed Group are relieved from the requirement to prepare, audit and lodge separate financial reports. COMPANY ACN 001 259 301 Pty Limited Pinnacle Liquor Group Pty Limited Advantage Supermarkets Pty Ltd Pinnacle Wines Pty Limited Advantage Supermarkets WA Pty Ltd Progressive Enterprises Holdings Limited Andmist Pty. Limited QFD Pty. Limited Australian Independent Retailers Pty Ltd Queensland Property Investments Pty Ltd Australian Liquor & Grocery Wholesalers Pty Ltd Retail FM Pty Ltd Australian Safeway Stores Pty. Ltd. Universal Wholesalers Pty Limited Barjok Pty Ltd V I Packaging Pty Ltd Calvartan Pty. Limited Vincentia Nominees Pty Ltd Cellar Force Pty Ltd Vinpac International Pty. Limited Cellarmaster Wines Pty Limited Weetah Pty. Limited Cenijade Pty. Limited Wine Ark Cellar Club Pty Ltd Charmtex Pty Ltd Wine IQ Holdings Pty Ltd Dentra Pty. Limited Winemarket Pty Ltd Dorrien Estate Winery Pty Ltd Woolies Liquor Stores Pty. Ltd. Drumstar Pty Ltd Woolstar Pty. Limited Fabcot Pty Ltd Woolworths (International) Pty Limited Gembond Pty. Limited Woolworths (Project Finance) Pty. Limited GreenGrocer.com.au Pty Ltd Woolworths (Publishing) Pty Ltd Grocery Wholesalers Pty Ltd Woolworths (Q'land) Pty Limited Hydrogen Nominees Pty. Ltd Woolworths (R & D) Pty Limited Jack Butler & Staff Pty. Ltd. Woolworths (South Australia) Pty Limited Josona Pty Ltd Woolworths (Victoria) Pty Limited Kennedy Corporation Holdings Pty Limited Woolworths (W.A.) Pty Limited Kennedy Corporation Pty Limited Woolworths Australian Communities Foundation Pty Limited Kiaora Lands Pty Limited Woolworths Custodian Pty Ltd Langton's Brokerage Pty Ltd Woolworths Executive Superannuation Scheme Pty Limited Langtons Pty. Ltd. Woolworths Group Superannuation Scheme Pty Ltd Leasehold Investments Pty Ltd Woolworths Management Pty Ltd Mac's Liquor Stores Pty Limited Woolworths Properties Pty Limited Nalos Pty Ltd Woolworths Property Double Bay Pty Limited Nexday Pty. Limited Woolworths Townsville Nominee Pty Ltd Oxygen Nominees Pty. Ltd. Woolworths Trust Management Pty Limited PEH (NZ IP) Pty Ltd Woolworths Trustee No. 2 Pty Limited Philip Leong Stores Pty Limited Zimi Wines Pty Ltd Woolworths Limited has further subsidiaries not listed above which are not party to the Deed of Cross Guarantee. All material subsidiaries with the exception of those disclosed in Note 5.3.2 (non-wholly owned subsidiaries that have material non-controlling interests) are listed above. 51 | WOOLWORTHS LIMITED | FINANCIAL REPORT 2017 GROUP STRUCTURE 5 5.3.1 Deed of cross guarantee continued A Statement of Profit or Loss and retained earnings, and statement of financial position for the entities which are party to the Deed at the reporting date are as follows: Statement of Profit or Loss and retained earnings 2017 $M 2016 $M Revenue from the sale of goods and services 49,554.3 47,939.9 Other operating revenue 188.7 180.0 Total revenue 49,743.0 48,119.9 Cost of sales (36,830.7) (35,902.6) Gross profit 12,912.3 12,217.3 Other revenue 173.5 207.4 Branch expenses (8,671.9) (8,608.5) Administration expenses (2,541.4) (5,513.3) Earnings/(Loss) before interest and tax 1,872.5 (1,697.1) Financing income 92.3 292.7 Profit/(Loss) before income tax 1,964.8 (1,404.4) Income tax expense (655.1) (128.9) Profit/(Loss) for the period 1,309.7 (1,533.3) Retained earnings Balance at start of period 1,892.9 4,897.0 Profit/(Loss) attributable to members 1,309.7 (1,533.3) Dividends paid (refer to Note 4.2) (859.6) (1,471.2) Dividends paid on Treasury shares 2.2 4.3 Actuarial gains/(losses) on defined benefit superannuation plans 3.2 (5.6) Tax effect of actuarial (gains)/losses (1.0) 1.7 Balance at end of period 2,347.4 1,892.9 5.3 Subsidiaries (continued) 1 2 3 4 5 PERFO RM A N C E H IG H LIG H T S BU SIN ESS REV IEW D IREC TO RS' REPO RT FIN A N C IA L REPO RT O T H ER IN FO RM A T IO N 103 W O O LW O RT H S G R O U P A N N U A L R EPO R T 20 17 Notes to the Consolidated Financial Statements 52 | WOOLWORTHS LIMITED | FINANCIAL REPORT 2017 5.3.1 Deed of cross guarantee continued Statement of Financial Position 2017 $M 2016 $M Current assets Cash and cash equivalents 595.1 703.8 Trade and other receivables 1,337.4 1,460.1 Inventories 3,386.0 3,423.5 Current tax assets – 13.8 Other financial assets 16.1 56.0 5,334.6 5,657.2 Assets held for sale 646.2 169.1 Total current assets 5,980.8 5,826.3 Non-current assets Trade and other receivables 2,837.6 3,040.2 Other financial assets 2,627.9 2,806.0 Property, plant and equipment 6,363.0 6,240.7 Intangible assets 994.8 988.6 Deferred tax assets 745.0 933.3 Total non-current assets 13,568.3 14,008.8 Total assets 19,549.1 19,835.1 Current liabilities Trade and other payables 5,573.6 5,042.2 Borrowings 197.0 456.0 Other financial liabilities 468.7 979.7 Current tax payable 32.2 – Provisions 1,042.8 1,141.5 Liabilities held for sale 20.7 – Total current liabilities 7,335.0 7,619.4 Non-current liabilities Borrowings 2,776.6 3,870.5 Other financial liabilities 313.8 157.9 Provisions 748.1 656.0 Other non-current liabilities 214.2 201.3 Total non-current liabilities 4,052.7 4,885.7 Total liabilities 11,387.7 12,505.1 Net assets 8,161.4 7,330.0 Equity Contributed equity 5,615.0 5,252.2 Retained earnings 2,347.4 1,892.9 Reserves 199.0 184.9 Total equity 8,161.4 7,330.0 5.3 Subsidiaries (continued) 104 Notes to the Consolidated Financial Statements 52 | WOOLWORTHS LIMITED | FINANCIAL REPORT 2017 5.3.1 Deed of cross guarantee continued Statement of Financial Position 2017 $M 2016 $M Current assets Cash and cash equivalents 595.1 703.8 Trade and other receivables 1,337.4 1,460.1 Inventories 3,386.0 3,423.5 Current tax assets – 13.8 Other financial assets 16.1 56.0 5,334.6 5,657.2 Assets held for sale 646.2 169.1 Total current assets 5,980.8 5,826.3 Non-current assets Trade and other receivables 2,837.6 3,040.2 Other financial assets 2,627.9 2,806.0 Property, plant and equipment 6,363.0 6,240.7 Intangible assets 994.8 988.6 Deferred tax assets 745.0 933.3 Total non-current assets 13,568.3 14,008.8 Total assets 19,549.1 19,835.1 Current liabilities Trade and other payables 5,573.6 5,042.2 Borrowings 197.0 456.0 Other financial liabilities 468.7 979.7 Current tax payable 32.2 – Provisions 1,042.8 1,141.5 Liabilities held for sale 20.7 – Total current liabilities 7,335.0 7,619.4 Non-current liabilities Borrowings 2,776.6 3,870.5 Other financial liabilities 313.8 157.9 Provisions 748.1 656.0 Other non-current liabilities 214.2 201.3 Total non-current liabilities 4,052.7 4,885.7 Total liabilities 11,387.7 12,505.1 Net assets 8,161.4 7,330.0 Equity Contributed equity 5,615.0 5,252.2 Retained earnings 2,347.4 1,892.9 Reserves 199.0 184.9 Total equity 8,161.4 7,330.0 5.3 Subsidiaries (continued) 53 | WOOLWORTHS LIMITED | FINANCIAL REPORT 2017 GROUP STRUCTURE 5 5.3.2 Details of non-wholly owned subsidiaries that have material non-controlling interests PROPORTION OF VOTING RIGHTS HELD BY NON-CONTROLLING INTERESTS PROFIT/(LOSS) ALLOCATED TO NON-CONTROLLING INTERESTS NON-CONTROLLING INTERESTS DIVIDENDS PAID TO NON-CONTROLLING INTERESTS NAME OF SUBSIDIARY PRINCIPAL PLACE OF BUSINESS 2017 % 2016 % 2017 $M 2016 $M 2017 $M 2016 $M 2017 $M 2016 $M ALH Group Pty Ltd Australia 25 25 51.7 30.7 321.7 288.1 18.1 28.8 Hydrox Holdings Pty Ltd 1 Australia 33 33 – (1,149.7) – – – – Individually immaterial subsidiaries 8.2 5.9 28.4 23.2 3.4 3.6 59.9 (1,113.1) 350.1 311.3 21.5 32.4 Summarised financial information in respect of each of the Group’s subsidiaries that has a material non-controlling interest were as follows: ALH GROUP PTY LTD 2017 $M 2016 $M Current assets 433.3 414.0 Non-current assets 4,175.6 4,210.0 Current liabilities (1,754.3) (1,890.5) Non-current liabilities (1,570.8) (1,574.0) Revenue 4,256.1 4,105.9 Profit after tax 206.8 122.8 Total comprehensive income 206.8 122.8 Net cash inflow 4.2 2.7 1 The non-controlling interest in Hydrox is not material to the Group (refer to Note 5.1 for further details). Summarised financial information has therefore not been provided. At 25 June 2017 Lowe’s retained their legal ownership of 33.3% of Hydrox however subsequent to balance date, on 4 August 2017, Lowe’s sold its shares to Home Consortium. Refer to Note 6.5 for further details. 5.3 Subsidiaries (continued) 1 2 3 4 5 PERFO RM A N C E H IG H LIG H T S BU SIN ESS REV IEW D IREC TO RS' REPO RT FIN A N C IA L REPO RT O T H ER IN FO RM A T IO N 105 W O O LW O RT H S G R O U P A N N U A L R EPO R T 20 17 Notes to the Consolidated Financial Statements 54 | WOOLWORTHS LIMITED | FINANCIAL REPORT 2017 5.4 Parent entity information Financial information for the parent entity is as follows: 2017 $M 2016 $M Assets Current assets 5,261.5 5,096.2 Non-current assets 13,230.9 13,666.3 Total assets 18,492.4 18,762.5 Liabilities Current liabilities 7,726.6 9,991.8 Non-current liabilities 4,034.4 4,872.0 Total liabilities 11,761.0 14,863.8 Equity Contributed equity 5,615.0 5,252.2 Reserves Hedging reserve (65.4) (63.1) Remuneration reserve 241.0 226.5 Equity instrument reserve 25.4 23.9 General reserve – – Retained Earnings Profit reserve 2,919.7 463.5 Loss reserve (2,004.3) (2,004.3) Total equity 6,731.4 3,898.7 2017 $M 2016 $M Profit/(Loss) for the period 3,311.4 (2,004.3) Other comprehensive income 2.0 15.7 Total comprehensive income/(loss) for the period 3,313.4 (1,988.6) Guarantees Guarantees arising from the deed of cross guarantee with other entities in the wholly-owned Group (refer to Note 5.3) and agreements held by other subsidiaries are $1,173.7 million (2016: $1,517.1 million). Other guarantees held by the parent entity are the same as those held by the Group as disclosed in Note 6.1. Capital commitments for the acquisition of property, plant and equipment 2017 $M 2016 $M Payable not later than one year 236.0 293.2 Later than one year, not later than two years 3.6 43.0 Later than two years, not later than five years 0.1 7.0 239.7 343.2 SIGNIFICANT ACCOUNTING POLICIES Financial information for the parent entity, Woolworths Limited, has been prepared on the same basis as the Consolidated Financial Statements with the exception of investments in subsidiaries which are accounted for at cost. 106 Notes to the Consolidated Financial Statements 54 | WOOLWORTHS LIMITED | FINANCIAL REPORT 2017 5.4 Parent entity information Financial information for the parent entity is as follows: 2017 $M 2016 $M Assets Current assets 5,261.5 5,096.2 Non-current assets 13,230.9 13,666.3 Total assets 18,492.4 18,762.5 Liabilities Current liabilities 7,726.6 9,991.8 Non-current liabilities 4,034.4 4,872.0 Total liabilities 11,761.0 14,863.8 Equity Contributed equity 5,615.0 5,252.2 Reserves Hedging reserve (65.4) (63.1) Remuneration reserve 241.0 226.5 Equity instrument reserve 25.4 23.9 General reserve – – Retained Earnings Profit reserve 2,919.7 463.5 Loss reserve (2,004.3) (2,004.3) Total equity 6,731.4 3,898.7 2017 $M 2016 $M Profit/(Loss) for the period 3,311.4 (2,004.3) Other comprehensive income 2.0 15.7 Total comprehensive income/(loss) for the period 3,313.4 (1,988.6) Guarantees Guarantees arising from the deed of cross guarantee with other entities in the wholly-owned Group (refer to Note 5.3) and agreements held by other subsidiaries are $1,173.7 million (2016: $1,517.1 million). Other guarantees held by the parent entity are the same as those held by the Group as disclosed in Note 6.1. Capital commitments for the acquisition of property, plant and equipment 2017 $M 2016 $M Payable not later than one year 236.0 293.2 Later than one year, not later than two years 3.6 43.0 Later than two years, not later than five years 0.1 7.0 239.7 343.2 SIGNIFICANT ACCOUNTING POLICIES Financial information for the parent entity, Woolworths Limited, has been prepared on the same basis as the Consolidated Financial Statements with the exception of investments in subsidiaries which are accounted for at cost. 55 | WOOLWORTHS LIMITED | FINANCIAL REPORT 2017 GROUP STRUCTURE 5 5.5 Related parties Transactions within the Group During the financial period and previous financial periods, Woolworths Limited advanced loans to, received and repaid loans from, and provided treasury, accounting, legal, taxation and administrative services to other entities within the Group. Entities within the Group also exchanged goods and services in sale and purchase transactions. All transactions occurred on the basis of normal commercial terms and conditions. Balances and transactions between the Company and its subsidiaries, which are related parties of the Company, have been eliminated on consolidation and are not disclosed in this Note. Directors and Key Management Personnel All transactions with directors and Key Management Personnel (including their related parties) were conducted on an arm’s length basis in the ordinary course of business and under normal terms and conditions for customers and employees. These transactions are considered trivial or domestic in nature. Related parties of Key Management Personnel who are employees received normal employee benefits on standard terms and conditions. Disclosures relating to directors and Key Management Personnel are set out in Note 6.3 and in the Remuneration Report. 1 2 3 4 5 PERFO RM A N C E H IG H LIG H T S BU SIN ESS REV IEW D IREC TO RS' REPO RT FIN A N C IA L REPO RT O T H ER IN FO RM A T IO N 107 W O O LW O RT H S G R O U P A N N U A L R EPO R T 20 17 Notes to the Consolidated Financial Statements 56 | WOOLWORTHS LIMITED | FINANCIAL REPORT 2017 6 OTHER 6.1 Contingent liabilities The Group has entered into guarantees in the normal course of business relating to conditions set out in development applications and for the sale of properties. State WorkCover authorities also require guarantees against workers’ compensation self insurance liabilities. The guarantee is based on independent actuarial advice of the outstanding liability. Workers’ compensation guarantees held at each reporting date do not equal the liability at these dates due to the timing of issuing the guarantees. The probability of having to make a payment under these guarantees is considered remote. No provision has been made in the financial statements in respect of these contingencies, however there is a provision of $593.9 million for self-insured risks (2016: $609.8 million), which includes liabilities relating to workers’ compensation claims, that have been recognised in the Consolidated Statement of Financial Position at the reporting date. 6.2 Employee benefits 6.2.1 Employee benefits expense from continuing operations 2017 $M 2016 $M Remuneration and on-costs 7,336.9 6,937.3 Superannuation expense 535.6 550.8 Share-based payments expense 51.6 20.8 7,924.1 7,508.9 6.2.2 Share-based payments – Woolworths Long-Term Incentive plan Equity settled share-based payments form part of the remuneration of certain employees of the Group. The Group continues to operate the Woolworths Long-Term Incentive plan (LTI plan). Sub-plans within the LTI plan are as follows: DELIVERS A RIGHT TO ACQUIRE: SUBJECT TO PERFORMANCE HURDLES BEING MET, CONTINUED EMPLOYMENT AND: Performance rights sub-plan A share at a future date No monetary payment Performance shares sub-plan A share immediately No monetary payment Cash award sub-plan Cash at a future date No monetary payment No grants have been made under the performance shares or cash award sub-plans. 108 Notes to the Consolidated Financial Statements 56 | WOOLWORTHS LIMITED | FINANCIAL REPORT 2017 6 OTHER 6.1 Contingent liabilities The Group has entered into guarantees in the normal course of business relating to conditions set out in development applications and for the sale of properties. State WorkCover authorities also require guarantees against workers’ compensation self insurance liabilities. The guarantee is based on independent actuarial advice of the outstanding liability. Workers’ compensation guarantees held at each reporting date do not equal the liability at these dates due to the timing of issuing the guarantees. The probability of having to make a payment under these guarantees is considered remote. No provision has been made in the financial statements in respect of these contingencies, however there is a provision of $593.9 million for self-insured risks (2016: $609.8 million), which includes liabilities relating to workers’ compensation claims, that have been recognised in the Consolidated Statement of Financial Position at the reporting date. 6.2 Employee benefits 6.2.1 Employee benefits expense from continuing operations 2017 $M 2016 $M Remuneration and on-costs 7,336.9 6,937.3 Superannuation expense 535.6 550.8 Share-based payments expense 51.6 20.8 7,924.1 7,508.9 6.2.2 Share-based payments – Woolworths Long-Term Incentive plan Equity settled share-based payments form part of the remuneration of certain employees of the Group. The Group continues to operate the Woolworths Long-Term Incentive plan (LTI plan). Sub-plans within the LTI plan are as follows: DELIVERS A RIGHT TO ACQUIRE: SUBJECT TO PERFORMANCE HURDLES BEING MET, CONTINUED EMPLOYMENT AND: Performance rights sub-plan A share at a future date No monetary payment Performance shares sub-plan A share immediately No monetary payment Cash award sub-plan Cash at a future date No monetary payment No grants have been made under the performance shares or cash award sub-plans. 57 | WOOLWORTHS LIMITED | FINANCIAL REPORT 2017 OTHER 6 6.2.2 Share-based payments – Woolworths Long-Term Incentive plan continued LTI plan The performance rights sub-plan has been used to make offers of LTI plan which have the following features: • Upon exercise, each performance right entitles the holder to one ordinary fully paid Woolworths Limited share; and • Prior to FY17, participants did not receive dividends on unvested equity. A summary of the LTI plan performance hurdles for all outstanding grants is as follows: EPS RELATIVE TOTAL SHAREHOLDER RETURN (TSR) SALES PER TRADING SQUARE METRE (SQM) 3 RETURN ON FUNDS EMPLOYED (ROFE) 3 GRANT YEAR VESTING PERIOD (YEARS) WEIGHTING (%) HURDLE/ RANGE (%) WEIGHTING (%) HURDLE/ RANGE (PERCENTILE) WEIGHTING (%) WEIGHTING (%) FY13 – FY14 1 5 50 6 – 8 50 51st – 75th n/a n/a FY15 1 3 50 6 – 8 50 51st – 75th n/a n/a FY16 2 3 33.33 np 3 66.67 51st – 75th n/a n/a FY17 4 3 n/a n/a 33.34 50th – 90th 33.33 33.33 1 EPS component vests progressively upon attaining average annual growth of 6% with the full 50% vesting at an average annual growth of 8%. The TSR component vests progressively where TSR equals or exceeds the 51st percentile of the comparator group up to the full 50% vesting where TSR equals the 75th percentile of the comparator group. 2 EPS component vests progressively, upon attaining certain hurdles, to a maximum weighting of 33.33%. The TSR component vests progressively where TSR equals or exceeds the 51st percentile of the comparator group up to the full 66.67% vesting where TSR equals the 75th percentile of the comparator group. 3 Hurdle/range not published (np) as the Company no longer provides market guidance and the targets are commercially sensitive. The LTI targets and performance will be published following the end of the performance period. 4 The TSR component vests progressively upon attaining the gateway share price and where TSR equals or exceeds the 50th percentile of the comparator group up to the full 33.34% vesting where TSR equals the 90th percentile of the comparator group. Sales per trading sqm and ROFE components vest progressively, upon attaining certain hurdles, to a maximum weighting of 66.66%. Deferred Short-Term Incentive (Deferred STI) The performance rights sub-plan has been used from FY12 to make offers of Deferred STI which has the following features: • For the FY12 to FY15 Deferred STI plans, a one-year performance measure linked to net profit after tax (NPAT) market guidance and for the FY16 Deferred STI plan, a one-year performance measure linked to Group EBIT; • For the FY17 Deferred STI plan, a one-year performance measure linked to sales, EBIT, working capital, customer satisfaction and safety; and • If the performance hurdles are met, participants are required to remain employed for a further two years to gain access to the performance rights, or otherwise forfeit the performance rights unless the board exercises its discretion in accordance with the LTI plan rules. Attraction and retention rights The performance rights sub-plan has also been used to compensate new hires for foregone equity, and ensure that key employees are retained to protect and deliver on the Company’s strategic direction. It has been offered to: • Executives of newly acquired businesses in order to retain intellectual property during transition periods; or • Attract new executives, generally from overseas; or • Middle management or executives deemed to be top talent who had either no or relatively small grants scheduled to vest over the ensuing two years. Attraction and retention rights generally do not have performance measures attached to them due to the objective of retaining key talent and vest subject to the executive remaining employed by the Company, generally for two or more years. 6.2 Employee benefits (continued) 1 2 3 4 5 PERFO RM A N C E H IG H LIG H T S BU SIN ESS REV IEW D IREC TO RS' REPO RT FIN A N C IA L REPO RT O T H ER IN FO RM A T IO N 109 W O O LW O RT H S G R O U P A N N U A L R EPO R T 20 17 Notes to the Consolidated Financial Statements 58 | WOOLWORTHS LIMITED | FINANCIAL REPORT 2017 6.2.2 Share-based payments – Woolworths Long-Term Incentive plan continued Performance rights by grant date The following table summarises movements in outstanding rights for the financial period ended 25 June 2017: FINANCIAL YEAR PERFORMANCE PERIOD START DATE EXERCISE DATE NO. OF RIGHTS AT 26 JUNE 2016 RIGHTS GRANTED DURING YEAR RIGHTS VESTED DURING YEAR RIGHTS LAPSED DURING YEAR NO. OF RIGHTS AT 25 JUNE 2017 Performance rights (LTI plan and Deferred STI) FY12 01/07/11 01/07/16 137,089 – – (137,089) – FY13 01/07/12 01/07/17 191,513 – – (25,410) 166,103 FY14 01/07/13 01/07/18 1,107,669 – (768,440) (51,466) 287,763 FY15 01/07/14 01/07/17 684,339 – – (472,222) 212,117 FY16 01/07/15 01/07/18 1,954,304 – – (1,358,490) 595,814 FY17 01/07/16 01/07/19 – 4,774,661 – (128,342) 4,646,319 Performance rights (attraction and retention) FY14 01/07/13 to 20/06/14 01/07/14 to 02/10/18 40,050 – (36,050) – 4,000 FY15 01/07/14 to 01/06/15 02/09/14 to 07/04/18 77,353 – (58,243) (5,232) 13,878 FY16 01/07/15 to 20/06/16 01/07/16 to 01/10/18 793,241 – (180,699) (58,590) 553,952 FY17 01/07/16 to 14/06/17 31/12/16 to 27/05/20 – 166,625 (22,145) – 144,480 4,985,558 4,941,286 (1,065,577) (2,236,841) 6,624,426 The weighted average share price during the financial period ended 25 June 2017 was $24.42. The following table summarises movements in outstanding rights for the financial period ended 26 June 2016: FINANCIAL YEAR PERFORMANCE PERIOD START DATE EXERCISE DATE NO. OF RIGHTS AT 28 JUNE 2015 RIGHTS GRANTED DURING YEAR RIGHTS VESTED DURING YEAR RIGHTS LAPSED DURING YEAR NO. OF RIGHTS AT 26 JUNE 2016 Performance rights (LTI plan and Deferred STI) FY12 01/07/11 01/07/16 149,389 – – (12,300) 137,089 FY13 01/07/12 01/07/17 1,916,295 – (1,631,419) (93,363) 191,513 FY14 01/07/13 01/07/18 1,401,834 – (36,389) (257,776) 1,107,669 FY15 01/07/14 01/07/17 2,337,550 – – (1,653,211) 684,339 FY16 01/07/15 01/07/18 – 2,114,280 – (159,976) 1,954,304 Performance rights (attraction and retention) FY13 01/07/12 to 03/04/13 01/07/14 to 11/03/16 35,890 – (35,890) – – FY14 01/07/13 to 20/06/14 01/07/14 to 02/10/18 166,850 – (105,400) (21,400) 40,050 FY15 01/07/14 to 01/06/15 02/09/14 to 07/04/18 179,490 – (87,936) (14,201) 77,353 FY16 01/07/15 to 20/06/16 01/07/16 to 01/10/18 – 811,052 (2,016) (15,795) 793,241 6,187,298 2,925,332 (1,899,050) (2,228,022) 4,985,558 The weighted average share price during the financial period ended 26 June 2016 was $24.10. 6.2 Employee benefits (continued) 110 Notes to the Consolidated Financial Statements 58 | WOOLWORTHS LIMITED | FINANCIAL REPORT 2017 6.2.2 Share-based payments – Woolworths Long-Term Incentive plan continued Performance rights by grant date The following table summarises movements in outstanding rights for the financial period ended 25 June 2017: FINANCIAL YEAR PERFORMANCE PERIOD START DATE EXERCISE DATE NO. OF RIGHTS AT 26 JUNE 2016 RIGHTS GRANTED DURING YEAR RIGHTS VESTED DURING YEAR RIGHTS LAPSED DURING YEAR NO. OF RIGHTS AT 25 JUNE 2017 Performance rights (LTI plan and Deferred STI) FY12 01/07/11 01/07/16 137,089 – – (137,089) – FY13 01/07/12 01/07/17 191,513 – – (25,410) 166,103 FY14 01/07/13 01/07/18 1,107,669 – (768,440) (51,466) 287,763 FY15 01/07/14 01/07/17 684,339 – – (472,222) 212,117 FY16 01/07/15 01/07/18 1,954,304 – – (1,358,490) 595,814 FY17 01/07/16 01/07/19 – 4,774,661 – (128,342) 4,646,319 Performance rights (attraction and retention) FY14 01/07/13 to 20/06/14 01/07/14 to 02/10/18 40,050 – (36,050) – 4,000 FY15 01/07/14 to 01/06/15 02/09/14 to 07/04/18 77,353 – (58,243) (5,232) 13,878 FY16 01/07/15 to 20/06/16 01/07/16 to 01/10/18 793,241 – (180,699) (58,590) 553,952 FY17 01/07/16 to 14/06/17 31/12/16 to 27/05/20 – 166,625 (22,145) – 144,480 4,985,558 4,941,286 (1,065,577) (2,236,841) 6,624,426 The weighted average share price during the financial period ended 25 June 2017 was $24.42. The following table summarises movements in outstanding rights for the financial period ended 26 June 2016: FINANCIAL YEAR PERFORMANCE PERIOD START DATE EXERCISE DATE NO. OF RIGHTS AT 28 JUNE 2015 RIGHTS GRANTED DURING YEAR RIGHTS VESTED DURING YEAR RIGHTS LAPSED DURING YEAR NO. OF RIGHTS AT 26 JUNE 2016 Performance rights (LTI plan and Deferred STI) FY12 01/07/11 01/07/16 149,389 – – (12,300) 137,089 FY13 01/07/12 01/07/17 1,916,295 – (1,631,419) (93,363) 191,513 FY14 01/07/13 01/07/18 1,401,834 – (36,389) (257,776) 1,107,669 FY15 01/07/14 01/07/17 2,337,550 – – (1,653,211) 684,339 FY16 01/07/15 01/07/18 – 2,114,280 – (159,976) 1,954,304 Performance rights (attraction and retention) FY13 01/07/12 to 03/04/13 01/07/14 to 11/03/16 35,890 – (35,890) – – FY14 01/07/13 to 20/06/14 01/07/14 to 02/10/18 166,850 – (105,400) (21,400) 40,050 FY15 01/07/14 to 01/06/15 02/09/14 to 07/04/18 179,490 – (87,936) (14,201) 77,353 FY16 01/07/15 to 20/06/16 01/07/16 to 01/10/18 – 811,052 (2,016) (15,795) 793,241 6,187,298 2,925,332 (1,899,050) (2,228,022) 4,985,558 The weighted average share price during the financial period ended 26 June 2016 was $24.10. 6.2 Employee benefits (continued) 59 | WOOLWORTHS LIMITED | FINANCIAL REPORT 2017 OTHER 6 6.2.2 Share-based payments – Woolworths Long-Term Incentive plan continued The contractual performance period of the rights set out in the previous tables is used as an input into the model to determine the fair value of options and performance rights. Other inputs in relation to these rights are: 1 Grant date represents the offer acceptance date. 2 The expected volatility is based on the historical implied volatility calculated based on the weighted average remaining life of the performance rights adjusted for any expected changes to future volatility due to publicly available information. The total shares purchased during the year were 581,692 (2016: 614,415) at an average price per share of $24.71 (2016: $22.85), comprised of purchases under the Executive Management Share Plan and the Employee Share Purchase Plan. Executive Management Share Plan (EMSP) The EMSP allows executive management to forego some of their future pre-tax remuneration to acquire shares in the Company on-market at prevailing market prices on the Australian Securities Exchange (ASX). During the period, 955 shares (2016: 1,496) were purchased under the EMSP. No additional expense is recognised in relation to these shares as they are acquired out of salary sacrificed remuneration. Employee Share Purchase Plan (SPP) The SPP was launched in June 2008 and provides permanent full-time and part-time employees who are Australian tax residents and are aged 18 years or over, with the opportunity to purchase shares from pre-tax income via salary sacrifice. Woolworths Limited pays the associated brokerage costs. During the year, 580,737 (2016: 612,919) shares were purchased on behalf of participating employees. FAIR VALUE ($) GRANT DATE 1 PERFORMANCE PERIOD START DATE EXPECTED VOLATILITY 2 (%) DIVIDEND YIELD (%) RISK FREE INTEREST RATE (%) WEIGHTED AVERAGE FV ($) EPS TSR NPAT/EBIT SALES PER TRADING SQM ROFE 12/12/11 01/07/11 – 4.20 – 22.39 – – 22.39 – – 12/12/11 01/07/11 17 4.20 3.40 16.19 20.05 12.33 – – – 07/12/12 01/07/12 16 4.50 2.70 18.32 22.60 14.04 – – – 07/12/12 01/07/12 – 4.50 – 25.45 – – 25.45 – – 22/03/13 01/07/12 16 4.50 3.10 21.20 26.41 15.99 – – – 22/03/13 01/07/12 – 4.50 – 29.74 – – 29.74 – – 13/12/13 01/07/13 16 4.10 3.40 19.51 25.56 13.46 – – – 13/12/13 01/07/13 – 4.10 – 28.46 – – 28.46 – – 29/04/14 01/07/13 16 4.10 3.20 24.74 30.39 19.08 – – – 29/04/14 01/07/13 – 4.10 – 33.84 – – 33.84 – – 17/10/14 01/07/14 16 4.10 2.50 21.51 29.78 13.24 – – – 17/10/14 01/07/14 – 4.10 – 29.78 – – 29.78 – – 27/11/14 01/07/14 16 4.10 2.50 18.66 27.37 9.94 – – – 19/06/15 01/07/14 20 5.10 1.90 12.50 23.53 1.46 – – – 20/11/15 01/07/15 25 5.10 2.10 12.89 19.66 9.51 – – – 20/11/15 01/07/15 – 5.10 – 19.66 – – 19.66 – – 28/10/16 01/07/16 22 4.00 1.80 11.75 – 11.75 – – – 28/10/16 01/07/16 – 4.00 – 24.66 – – – 24.66 24.66 6.2 Employee benefits (continued) 1 2 3 4 5 PERFO RM A N C E H IG H LIG H T S BU SIN ESS REV IEW D IREC TO RS' REPO RT FIN A N C IA L REPO RT O T H ER IN FO RM A T IO N 111 W O O LW O RT H S G R O U P A N N U A L R EPO R T 20 17 Notes to the Consolidated Financial Statements 60 | WOOLWORTHS LIMITED | FINANCIAL REPORT 2017 6.2.2 Share-based payments – Woolworths Long-Term Incentive plan continued SIGNIFICANT ACCOUNTING POLICIES SHARE-BASED PAYMENTS The grant date fair value of equity-settled share-based payments is recognised as an expense proportionally over the vesting period, with a corresponding increase in equity. The fair value of instruments with market-based performance conditions (e.g. TSR) is calculated at the date of grant using a Monte Carlo simulation model. The probability of achieving market-based performance conditions is incorporated into the determination of the fair value per instrument. The fair value of instruments with non-market-based performance conditions (e.g. EPS, sales per trading SQM, ROFE) and service conditions and retention rights is calculated using a Black-Scholes option pricing model. The amount recognised as an expense over the vesting period is adjusted to reflect the actual number of instruments that vest except where forfeiture is due to failure to achieve market-based performance conditions. 6.2.3 Retirement plans Defined benefit plans The Company sponsors a defined benefit plan, the Woolworths Group Superannuation Plan (WGSP or the Plan) that provides superannuation benefits for employees upon retirement. The defined benefit plan is closed to new members. The assets of the WGSP are held in a sub-plan within AMP SignatureSuper that is legally separated from the Group. The WGSP invests entirely in pooled unit trust products where prices are quoted on a daily basis. The WGSP consists of members with defined benefit entitlements and defined contribution (accumulation) benefits. The Plan also pays allocated pensions to a small number of pensioners. The following disclosures relate only to the Company’s obligation in respect of defined benefit entitlements. The Group contributes to the WGSP at rates as set out in the Trust Deed and Rules and the Participation Deed between the Company and AMP Superannuation Limited. Members contribute to the WGSP at rates dependent upon their membership category. The Plan provides lump sum defined benefits that are defined by salary and period of membership. An actuarial valuation was carried out at both reporting dates by Mr Nicholas Wilkinson, FIAA, Willis Towers Watson. The principal actuarial assumptions used for the purpose of the valuation are as follows: 2017 % 2016 % Discount rate 3.80 3.30 Expected rate of salary increase 2.50 3.00 Rate of price inflation 2.00 2.50 The average duration of the defined benefit obligation at the end of the reporting period is 6.4 years (2016: 7.7 years) which relates wholly to active participants. The amount included in the Consolidated Statement of Financial Position in respect of the defined benefit plan is as follows: 2017 $M 2016 $M Defined benefit obligation (433.6) (467.2) Fair value of plan assets 370.9 405.6 Closing net liability for defined benefit obligations (62.7) (61.6) 6.2 Employee benefits (continued) 112 Notes to the Consolidated Financial Statements 60 | WOOLWORTHS LIMITED | FINANCIAL REPORT 2017 6.2.2 Share-based payments – Woolworths Long-Term Incentive plan continued SIGNIFICANT ACCOUNTING POLICIES SHARE-BASED PAYMENTS The grant date fair value of equity-settled share-based payments is recognised as an expense proportionally over the vesting period, with a corresponding increase in equity. The fair value of instruments with market-based performance conditions (e.g. TSR) is calculated at the date of grant using a Monte Carlo simulation model. The probability of achieving market-based performance conditions is incorporated into the determination of the fair value per instrument. The fair value of instruments with non-market-based performance conditions (e.g. EPS, sales per trading SQM, ROFE) and service conditions and retention rights is calculated using a Black-Scholes option pricing model. The amount recognised as an expense over the vesting period is adjusted to reflect the actual number of instruments that vest except where forfeiture is due to failure to achieve market-based performance conditions. 6.2.3 Retirement plans Defined benefit plans The Company sponsors a defined benefit plan, the Woolworths Group Superannuation Plan (WGSP or the Plan) that provides superannuation benefits for employees upon retirement. The defined benefit plan is closed to new members. The assets of the WGSP are held in a sub-plan within AMP SignatureSuper that is legally separated from the Group. The WGSP invests entirely in pooled unit trust products where prices are quoted on a daily basis. The WGSP consists of members with defined benefit entitlements and defined contribution (accumulation) benefits. The Plan also pays allocated pensions to a small number of pensioners. The following disclosures relate only to the Company’s obligation in respect of defined benefit entitlements. The Group contributes to the WGSP at rates as set out in the Trust Deed and Rules and the Participation Deed between the Company and AMP Superannuation Limited. Members contribute to the WGSP at rates dependent upon their membership category. The Plan provides lump sum defined benefits that are defined by salary and period of membership. An actuarial valuation was carried out at both reporting dates by Mr Nicholas Wilkinson, FIAA, Willis Towers Watson. The principal actuarial assumptions used for the purpose of the valuation are as follows: 2017 % 2016 % Discount rate 3.80 3.30 Expected rate of salary increase 2.50 3.00 Rate of price inflation 2.00 2.50 The average duration of the defined benefit obligation at the end of the reporting period is 6.4 years (2016: 7.7 years) which relates wholly to active participants. The amount included in the Consolidated Statement of Financial Position in respect of the defined benefit plan is as follows: 2017 $M 2016 $M Defined benefit obligation (433.6) (467.2) Fair value of plan assets 370.9 405.6 Closing net liability for defined benefit obligations (62.7) (61.6) 6.2 Employee benefits (continued) 61 | WOOLWORTHS LIMITED | FINANCIAL REPORT 2017 OTHER 6 6.2.3 Retirement plans continued Movements in the present value of the net liability for defined benefit obligations, including the total defined benefit cost, are as follows: 2017 $M 2016 $M Net liability for defined benefit obligations at start of period (61.6) (67.9) Movement: Current service cost (10.1) (11.5) Interest cost (14.4) (21.2) Interest income 1 12.6 18.6 Return on plan assets greater/(less) than discount rate 1,2 24.3 (8.8) Actuarial (loss)/gain due to experience 2 (23.4) 8.5 Actuarial gain/(loss) due to assumption changes 2 2.3 (5.3) Total defined benefit cost (8.7) (19.7) Employer contributions 7.6 26.0 Net liability for defined benefit obligations at end of period (62.7) (61.6) 1 The actual return on plan assets was $36.9 million (2016: $9.8 million). 2 The sum of the components represents total remeasurement effects recognised in other comprehensive income of $3.2 million gain (2016: $5.6 million loss). Significant actuarial assumptions for the determination of the defined benefit obligation are the discount rate and expected rate of salary increase. The sensitivity analysis below has been determined based on reasonably possible changes of the respective assumptions occurring at the end of the reporting period, while holding all other assumptions constant. • If the discount rate is 1% higher (lower), the defined benefit obligation would decrease by $1.7 million (increase by $2.5 million); and • If the rate of salary growth increases (decreases) by 1%, the defined benefit obligation would increase by $2.1 million (decrease by $1.5 million). Company contributions are agreed between the Plan Trustees and Company, following advice from the Plan actuary at least every year. Defined contribution plans The majority of employees in Australia and New Zealand are part of a defined contribution superannuation scheme and receive fixed contributions from the Group in accordance with the rules of the WGSP and/or any statutory obligations. SIGNIFICANT ACCOUNTING POLICIES DEFINED BENEFIT PLAN The net defined benefit obligation recognised in the Consolidated Statement of Financial Position represents the deficit or surplus in the Group’s defined benefit plans which is calculated by estimating the amount of future benefit that employees have earned in the current and prior periods, discounting that amount and deducting the fair value of the plan assets. The calculation of the defined benefit obligation is performed at the end of each annual reporting period by a qualified actuary using the projected unit credit method. Remeasurements of the net defined benefit liability, which comprise actuarial gains and losses and the return on plan assets (excluding interest) are recognised in the period in which they occur, directly in other comprehensive income and will not be reclassified to profit or loss. The Group determines the net interest expense (income) on the net defined benefit liability for the period by applying the discount rate at the beginning of the period to the net defined benefit liability, taking into account any changes during the period as a result of contributions and benefit payments. Net interest expense (income), service cost and other expenses related to defined benefit plans are recognised in the Consolidated Statement of Profit or Loss. DEFINED CONTRIBUTION PLANS Payments to defined contribution retirement benefit plans are recognised as an expense when employees have rendered service entitling them to the contributions. 6.2 Employee benefits (continued) 1 2 3 4 5 PERFO RM A N C E H IG H LIG H T S BU SIN ESS REV IEW D IREC TO RS' REPO RT FIN A N C IA L REPO RT O T H ER IN FO RM A T IO N 113 W O O LW O RT H S G R O U P A N N U A L R EPO R T 20 17 Notes to the Consolidated Financial Statements 62 | WOOLWORTHS LIMITED | FINANCIAL REPORT 2017 6.3 Key Management Personnel The total remuneration for Key Management Personnel of the Group is as follows: 2017 $ 2016 $ Short-term employee benefits 14,176,416 8,735,255 Post employment benefits 334,138 790,785 Other long-term benefits 116,035 271,420 Share-based payments 6,206,191 977,793 20,832,780 10,775,253 Equity instrument disclosures relating to Key Management Personnel Details of equity instruments provided as compensation to Key Management Personnel and shares issued on exercise of these instruments, together with the terms and conditions of the instruments, are disclosed in Section 5.1 of the Remuneration Report. 6.4 Auditors’ remuneration The auditors’ remuneration for the Group is as follows: 2017 $’000 2016 $’000 Auditors of the parent entity – Deloitte Touche Tohmatsu Australia Audit or review of the financial report 3,254 2,748 Regulatory and compliance related services 129 239 Other non-audit related services 1 421 173 Tax compliance services 108 113 3,912 3,273 Other auditors 2 Audit or review of the financial report 305 218 Other non-audit related services 1 83 44 Tax compliance services 154 160 542 422 Total auditors’ remuneration 4,454 3,695 1 Other non-audit related services comprise assistance on various accounting matters, assurance services in relation to debt raisings, regulatory reviews, financial due diligence and other sundry services. 2 Other auditors are international associates of Deloitte Touche Tohmatsu Australia. 6.5 Subsequent events Home Improvement The following events occurred subsequent to year end in relation to the Company’s exit from the Home Improvement business: • On 26 June 2017, the Company entered into a Share Sale Agreement (SSA) to sell its 66.7% share of Hydrox to Home Consortium subject to the sale of Lowe’s shares. The SSA includes 40 Masters freehold trading sites, 21 Masters freehold development sites and 20 Masters leasehold sites, with Woolworths obliged to acquire three Masters freehold sites and take assignment or assume responsibility for the liabilities associated with 11 Masters leases; and • On 4 August 2017, Lowe’s shares in Hydrox were sold to a Trust with Home Consortium as the beneficiary in exchange for the $250.8 million agreed consideration. The JVA has been subsequently terminated. The agreement to sell Hydrox has resulted in crystallisation of capital losses associated with the sale of Hydrox after balance date. When the Home Consortium transaction is completed, these capital losses are estimated to be worth approximately $1.8 billion. The recognition of any deferred tax asset associated with these capital losses is dependent on it being probable that there will be sufficient capital gains available against which these capital losses can be utilised in the foreseeable future. 114 Notes to the Consolidated Financial Statements 62 | WOOLWORTHS LIMITED | FINANCIAL REPORT 2017 6.3 Key Management Personnel The total remuneration for Key Management Personnel of the Group is as follows: 2017 $ 2016 $ Short-term employee benefits 14,176,416 8,735,255 Post employment benefits 334,138 790,785 Other long-term benefits 116,035 271,420 Share-based payments 6,206,191 977,793 20,832,780 10,775,253 Equity instrument disclosures relating to Key Management Personnel Details of equity instruments provided as compensation to Key Management Personnel and shares issued on exercise of these instruments, together with the terms and conditions of the instruments, are disclosed in Section 5.1 of the Remuneration Report. 6.4 Auditors’ remuneration The auditors’ remuneration for the Group is as follows: 2017 $’000 2016 $’000 Auditors of the parent entity – Deloitte Touche Tohmatsu Australia Audit or review of the financial report 3,254 2,748 Regulatory and compliance related services 129 239 Other non-audit related services 1 421 173 Tax compliance services 108 113 3,912 3,273 Other auditors 2 Audit or review of the financial report 305 218 Other non-audit related services 1 83 44 Tax compliance services 154 160 542 422 Total auditors’ remuneration 4,454 3,695 1 Other non-audit related services comprise assistance on various accounting matters, assurance services in relation to debt raisings, regulatory reviews, financial due diligence and other sundry services. 2 Other auditors are international associates of Deloitte Touche Tohmatsu Australia. 6.5 Subsequent events Home Improvement The following events occurred subsequent to year end in relation to the Company’s exit from the Home Improvement business: • On 26 June 2017, the Company entered into a Share Sale Agreement (SSA) to sell its 66.7% share of Hydrox to Home Consortium subject to the sale of Lowe’s shares. The SSA includes 40 Masters freehold trading sites, 21 Masters freehold development sites and 20 Masters leasehold sites, with Woolworths obliged to acquire three Masters freehold sites and take assignment or assume responsibility for the liabilities associated with 11 Masters leases; and • On 4 August 2017, Lowe’s shares in Hydrox were sold to a Trust with Home Consortium as the beneficiary in exchange for the $250.8 million agreed consideration. The JVA has been subsequently terminated. The agreement to sell Hydrox has resulted in crystallisation of capital losses associated with the sale of Hydrox after balance date. When the Home Consortium transaction is completed, these capital losses are estimated to be worth approximately $1.8 billion. The recognition of any deferred tax asset associated with these capital losses is dependent on it being probable that there will be sufficient capital gains available against which these capital losses can be utilised in the foreseeable future. Directors’ Declaration 63 | WOOLWORTHS LIMITED | FINANCIAL REPORT 2017 The directors declare that: (a) in the directors’ opinion, there are reasonable grounds to believe that the Company will be able to pay its debts as and when they become due and payable; (b) in the directors’ opinion, the attached financial statements are in compliance with International Financial Reporting Standards, as stated in Note 1.1 to the financial statements; (c) in the Directors’ opinion, the attached financial statements and notes thereto are in accordance with the Corporations Act 2001 (Cth), including compliance with accounting standards and giving a true and fair view of the financial position and performance of the Group; and (d) the directors have been given the declarations required by s.295A of the Corporations Act 2001 (Cth). At the date of this declaration, the Company is within the class of companies affected by ASIC Corporations Legislative Instrument 2016/785. The nature of the deed of cross guarantee is such that each company which is party to the deed guarantees to each creditor payment in full of any debt in accordance with the deed of cross guarantee. In the directors’ opinion, there are reasonable grounds to believe that the Company and the companies to which the Instrument applies, as detailed in Note 5.3 to the financial statements will, as a Group, be able to meet any obligations or liabilities to which they are, or may become, subject by virtue of the deed of cross guarantee. Signed in accordance with a resolution of the directors made pursuant to s.295(5) of the Corporations Act 2001 (Cth). On behalf of the directors. Gordon Cairns Brad Banducci Chairman Managing Director and Chief Executive Officer 23 August 2017 1 2 3 4 5 PERFO RM A N C E H IG H LIG H T S BU SIN ESS REV IEW D IREC TO RS' REPO RT FIN A N C IA L REPO RT O T H ER IN FO RM A T IO N 115 W O O LW O RT H S G R O U P A N N U A L R EPO R T 20 17 Independent Auditor’s Report 64 | WOOLWORTHS LIMITED | FINANCIAL REPORT 2017 Independent Auditor’s Report to the Members of Woolworths Limited Report on the Audit of the Financial Report Opinion We have audited the financial report of Woolworths Limited (the Company) and its subsidiaries (the Group), which comprises the Consolidated Statement of Financial Position as at 25 June 2017, the Consolidated Statement of Profit or Loss, the Consolidated Statement of Other Comprehensive Income, the Consolidated Statement of Changes in Equity and the Consolidated Statement of Cash Flows for the year then ended, and notes to the financial statements, including a summary of significant accounting policies, and the Directors’ Declaration. In our opinion, the accompanying financial report of the Group is in accordance with the Corporations Act 2001, including: (i) giving a true and fair view of the Group’s financial position as at 25 June 2017 and of its financial performance for the year then ended; and (ii) complying with Australian Accounting Standards and the Corporations Regulations 2001. Basis for Opinion We conducted our audit in accordance with Australian Auditing Standards. Our responsibilities under those standards are further described in the Auditor’s Responsibilities for the Audit of the Financial Report section of our report. We are independent of the Group in accordance with the auditor independence requirements of the Corporations Act 2001 and the ethical requirements of the Accounting Professional and Ethical Standards Board’s APES 110 Code of Ethics for Professional Accountants (the Code) that are relevant to our audit of the financial report in Australia. We have also fulfilled our other ethical responsibilities in accordance with the Code. We confirm that the independence declaration required by the Corporations Act 2001, which has been given to the directors of the Company, would be in the same terms if given to the directors as at the time of this auditor’s report. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion. Key Audit Matters Key audit matters are those matters that, in our professional judgement, were of most significance in our audit of the financial report for the current period. These matters were addressed in the context of our audit of the financial report as a whole, and in forming our opinion thereon, and we do not provide a separate opinion on these matters. Deloitte Touche Tohmatsu A.B.N. 74 490 121 060 Grosvenor Place 225 George Street Sydney NSW 2000 PO Box N250 Grosvenor Place Sydney NSW 1220 Australia DX 10307SSE Tel: +61 (0) 2 9322 7000 Fax: +61 (0) 2 9322 7001 www.deloitte.com.au Liability limited by a scheme approved under Professional Standards Legislation. Member of Deloitte Touche Tohmatsu Limited 116 Independent Auditor’s Report 65 | WOOLWORTHS LIMITED | FINANCIAL REPORT 2017 Key Audit Matter How the scope of our audit responded to the Key Audit Matter Home Improvement exit As disclosed in Note 5.1 Discontinued Operations, during the financial year there has been significant progress in relation to the exit of the Home Improvement business. As set out in Note 6.5 Subsequent Events there have been further developments that have occurred subsequent to balance date which have resulted in the settlement of the Lowe’s put option as well as the sale of Hydrox Holdings Pty Ltd to Home Consortium (the Home Consortium transaction). The Home Improvement exit has a number of interrelated components, each of which required consideration, including: • sale of the Home Timber and Hardware Group • liquidation of Masters inventory • closure of all Masters stores and settlement of trading and employee liabilities • accounting for property costs, including re- measurement of onerous leases and exit costs to be settled by the Group • the Lowe’s put option • accounting for the Home Consortium transaction • taxation implications relating to the Home Improvement exit. The accounting for these interrelated components is complex and there are significant judgements and estimates required in determining the carrying value of the remaining assets and liabilities held at the balance date, particularly in relation to: • assets and liabilities being disposed of in the Home Consortium transaction • assets and liabilities, including onerous lease provisions and other residual liabilities being retained by the Group • accounting treatment of the Lowe’s put option. Given these complexities we have considered the accounting for the Home Improvement exit to be a key audit matter. Our procedures included but were not limited to: • Assessing the appropriateness of the accounting in respect of the sale of Home Timber and Hardware by reference to the sale agreement. • Understanding the terms and conditions in relation to the liquidation of Masters inventory as well as testing that the amounts recorded in revenue and cost of sales are in accordance with the terms of appointment of GA Australia Pty Ltd. • Evaluating and challenging the estimates and judgements within management’s assessment of the assets and liabilities, including onerous lease provisions and residual liabilities to be retained by the Group. This included reviewing contracts and lease agreements, and assessing the recorded amounts against historical trends from previously negotiated settlements, as well as assessing the discount rate applied to the calculation of the onerous lease provision. • Evaluating whether the Lowe’s put option has been appropriately accounted for. • Agreeing the aggregate carrying value of the assets reflected in the financial statements to the Home Consortium Share Sale Agreement. • Consideration of the taxation implications and the accounting consequences of the Home Improvement exit transactions. • Assessing the appropriateness of the disclosures in notes 5.1 and 6.5. 1 2 3 4 5 PERFO RM A N C E H IG H LIG H T S BU SIN ESS REV IEW D IREC TO RS' REPO RT FIN A N C IA L REPO RT O T H ER IN FO RM A T IO N 117 W O O LW O RT H S G R O U P A N N U A L R EPO R T 20 17 Independent Auditor’s Report 66 | WOOLWORTHS LIMITED | FINANCIAL REPORT 2017 Key Audit Matter How the scope of our audit responded to the Key Audit Matter Carrying value of BIG W property, plant and equipment Included in consolidated property, plant and equipment and other non-current assets are assets relating to BIG W with a carrying value of $514.3 million. The trading performance of BIG W has deteriorated in recent years. As a result, there is a risk that the carrying value of stores and related property, plant and equipment and other non-current assets may be higher than their recoverable amount. Management’s approach and results of their testing of the recoverable amount has been described in Notes 3.3 and 3.5. Our audit focused on this area because the assessment of recoverable value requires management to make a number of key judgements and estimates with respect to the future trading performance and profitability of BIG W, including judgements and estimates on future growth rates, the impact of the general economic environment on the sectors in which BIG W operates and the impact of competition on BIG W’s market share. These key judgements and estimates are being made in the context of the multi-year turnaround plan which has recently been approved by the board. As a result of the Group’s impairment review of BIG W, an impairment charge of $35.3 million was recognised in the financial year ended 25 June 2017. Our procedures included but were not limited to: • Understanding management and the board’s controls over the assessment of the carrying value of BIG W’s property, plant and equipment and other non-current assets to determine whether any asset impairment was required. • Understanding management and the board’s methodologies and their documented basis for key assumptions which are described in Note 3.3 in the financial report. • In conjunction with our Corporate Finance specialists, we evaluated the Group’s assumptions and estimates used to determine the recoverable amount of BIG W, including those relating to long-term growth rates, margins and discount rates with reference to external data such as economic and industry forecasts, comparable companies as well as Deloitte developed discount rates. • Testing, on a sample basis, the mathematical accuracy of the cash flow models and agreeing relevant data to approved budgets and latest forecasts. • Performing sensitivity analysis in relation to the key assumptions, with particular focus on drivers of the growth rates, margins and discount rate used in the impairment models. • Having ascertained the extent of sensitivity to change in those assumptions that either individually or collectively would be required for an impairment, we considered the likelihood of such a movement in those key assumptions arising. • Assessing the appropriateness of the disclosures included at Note 3.3 to the financial statements. Inventory provisioning As disclosed in the financial statements at 25 June 2017 the Group held inventories of $4,080.4 million. As set out in the Group’s accounting policies in Note 1.2.4, the Group carries inventory at the lower of cost and net realisable value. The Group provides for obsolescence and shrinkage based on estimates including forecast sales assumptions and historical trends. In addition, for general merchandise inventory consideration is given to seasonal lines and slower moving products. As a result, we have focused our work on these areas in assessing that inventory is carried at the lower of cost and net realisable value. Our procedures included but were not limited to: • Testing the controls associated with inventory valuation. • Evaluating the appropriateness of management’s judgements and assumptions applied in calculating the value of inventory by: o understanding the inventory provisioning policy with specific consideration of aged inventory, seasonality, as well as inventory turn calculations and sell through rates (especially for the non-food and general merchandising businesses) o testing the value of a sample of inventory to confirm it is held at the lower of cost and net realisable value, through comparison to vendor invoices and sales prices o reviewing historical accuracy of inventory provisioning with reference to inventory write-offs during the year o testing the obsolescence and shrink rate and underlying inputs in the inventory provision calculation to supporting documentation and testing the mathematical accuracy of the provision calculations. 118 Independent Auditor’s Report 66 | WOOLWORTHS LIMITED | FINANCIAL REPORT 2017 Key Audit Matter How the scope of our audit responded to the Key Audit Matter Carrying value of BIG W property, plant and equipment Included in consolidated property, plant and equipment and other non-current assets are assets relating to BIG W with a carrying value of $514.3 million. The trading performance of BIG W has deteriorated in recent years. As a result, there is a risk that the carrying value of stores and related property, plant and equipment and other non-current assets may be higher than their recoverable amount. Management’s approach and results of their testing of the recoverable amount has been described in Notes 3.3 and 3.5. Our audit focused on this area because the assessment of recoverable value requires management to make a number of key judgements and estimates with respect to the future trading performance and profitability of BIG W, including judgements and estimates on future growth rates, the impact of the general economic environment on the sectors in which BIG W operates and the impact of competition on BIG W’s market share. These key judgements and estimates are being made in the context of the multi-year turnaround plan which has recently been approved by the board. As a result of the Group’s impairment review of BIG W, an impairment charge of $35.3 million was recognised in the financial year ended 25 June 2017. Our procedures included but were not limited to: • Understanding management and the board’s controls over the assessment of the carrying value of BIG W’s property, plant and equipment and other non-current assets to determine whether any asset impairment was required. • Understanding management and the board’s methodologies and their documented basis for key assumptions which are described in Note 3.3 in the financial report. • In conjunction with our Corporate Finance specialists, we evaluated the Group’s assumptions and estimates used to determine the recoverable amount of BIG W, including those relating to long-term growth rates, margins and discount rates with reference to external data such as economic and industry forecasts, comparable companies as well as Deloitte developed discount rates. • Testing, on a sample basis, the mathematical accuracy of the cash flow models and agreeing relevant data to approved budgets and latest forecasts. • Performing sensitivity analysis in relation to the key assumptions, with particular focus on drivers of the growth rates, margins and discount rate used in the impairment models. • Having ascertained the extent of sensitivity to change in those assumptions that either individually or collectively would be required for an impairment, we considered the likelihood of such a movement in those key assumptions arising. • Assessing the appropriateness of the disclosures included at Note 3.3 to the financial statements. Inventory provisioning As disclosed in the financial statements at 25 June 2017 the Group held inventories of $4,080.4 million. As set out in the Group’s accounting policies in Note 1.2.4, the Group carries inventory at the lower of cost and net realisable value. The Group provides for obsolescence and shrinkage based on estimates including forecast sales assumptions and historical trends. In addition, for general merchandise inventory consideration is given to seasonal lines and slower moving products. As a result, we have focused our work on these areas in assessing that inventory is carried at the lower of cost and net realisable value. Our procedures included but were not limited to: • Testing the controls associated with inventory valuation. • Evaluating the appropriateness of management’s judgements and assumptions applied in calculating the value of inventory by: o understanding the inventory provisioning policy with specific consideration of aged inventory, seasonality, as well as inventory turn calculations and sell through rates (especially for the non-food and general merchandising businesses) o testing the value of a sample of inventory to confirm it is held at the lower of cost and net realisable value, through comparison to vendor invoices and sales prices o reviewing historical accuracy of inventory provisioning with reference to inventory write-offs during the year o testing the obsolescence and shrink rate and underlying inputs in the inventory provision calculation to supporting documentation and testing the mathematical accuracy of the provision calculations. Independent Auditor’s Report 67 | WOOLWORTHS LIMITED | FINANCIAL REPORT 2017 Key Audit Matter How the scope of our audit responded to the Key Audit Matter Accounting for rebates The Group receives significant rebates, incentives and discounts from suppliers and recognises the majority of these as a reduction in value of inventory or as a reduction in cost of sales depending on the nature of the rebate, incentive or discount. Assessing the timing of recognition of these rebates, incentives and discounts is complex requiring both a detailed understanding of the contractual arrangements as well as complete and accurate source data to which the arrangements apply. Given the significance of rebate arrangements, our audit focused on these arrangements as they impact inventory valuation and cost of goods sold. In addition the timeliness and accuracy of the recording of these arrangements may have a significant impact on the Group’s results. Our procedures included but were not limited to: • Obtaining an understanding of the controls that the Group has established in relation to rebates, incentives and discounts for both automated and manually processed rebates. • Testing of rebates, incentives and discounts on a sample basis, by agreeing them to contracts or other supporting documentation with suppliers, including sales reports and promotion information obtained from suppliers or other sources. • Reviewing the appropriateness of rebate receivables, incentives and discounts at the reporting date. • Assessing the appropriateness of the accounting for rebates, incentives and discounts in the financial statements. IT Systems The IT systems across the Group are complex and there are varying levels of integration between them. These systems are vital to the ongoing operations of the business and to the integrity of the financial reporting process and as a result the assessment of IT systems forms a key component of our external audit. Our procedures included but were not limited to: • Discussing with management the IT environment and consideration of the key financial processes to understand where IT systems were integral to the financial reporting process. From this we identified IT systems to include in the scope of our IT testing. • Testing the design of the key IT controls relating to the Group’s financial reporting systems. • In respect of any deficiencies identified, we completed a combination of additional controls and substantive testing in order to determine whether we could place reliance on the completeness and accuracy of system generated information, including: o understanding review level controls in place o assessing the design and operating effectiveness of any controls (including review controls) that mitigated the identified risks. • In addition, and where appropriate, we extended the scope of our substantive audit procedures. Other Information The directors are responsible for the other information. The other information comprises the information included in the annual report, but does not include the financial report and our auditor’s report thereon. Our opinion on the financial report does not cover the other information and we do not express any form of assurance conclusion thereon. In connection with our audit of the financial report, our responsibility is to read the other information and, in doing so, consider whether the other information is materially inconsistent with the financial report or our knowledge obtained in the audit or otherwise appears to be materially misstated. If, based on the work we have performed, we conclude that there is a material misstatement of this other information, we are required to report that fact. We have nothing to report in this regard. 1 2 3 4 5 PERFO RM A N C E H IG H LIG H T S BU SIN ESS REV IEW D IREC TO RS' REPO RT FIN A N C IA L REPO RT O T H ER IN FO RM A T IO N 119 W O O LW O RT H S G R O U P A N N U A L R EPO R T 20 17 Independent Auditor’s Report 68 | WOOLWORTHS LIMITED | FINANCIAL REPORT 2017 Directors’ Responsibilities for the Financial Report The directors of the Company are responsible for the preparation of the financial report that gives a true and fair view in accordance with Australian Accounting Standards and the Corporations Act 2001 and for such internal control as the directors determine is necessary to enable the preparation of the financial report that gives a true and fair view and is free from material misstatement, whether due to fraud or error. In preparing the financial report, the directors are responsible for assessing the ability of the Group to continue as a going concern, disclosing, as applicable, matters related to going concern and using the going concern basis of accounting unless the directors either intend to liquidate the Group or to cease operations, or has no realistic alternative but to do so. Auditor’s Responsibilities for the Audit of the Financial Report Our objectives are to obtain reasonable assurance about whether the financial report as a whole is free from material misstatement, whether due to fraud or error, and to issue an auditor’s report that includes our opinion. Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with the Australian Auditing Standards will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of this financial report. As part of an audit in accordance with the Australian Auditing Standards, we exercise professional judgement and maintain professional scepticism throughout the audit. We also: • Identify and assess the risks of material misstatement of the financial report, whether due to fraud or error, design and perform audit procedures responsive to those risks, and obtain audit evidence that is sufficient and appropriate to provide a basis for our opinion. The risk of not detecting a material misstatement resulting from fraud is higher than for one resulting from error, as fraud may involve collusion, forgery, intentional omissions, misrepresentations, or the override of internal control. • 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 the directors. • Conclude on the appropriateness of the directors’ use of the going concern basis of accounting and, based on the audit evidence obtained, whether a material uncertainty exists related to events or conditions that may cast significant doubt on the Group’s ability to continue as a going concern. If we conclude that a material uncertainty exists, we are required to draw attention in our auditor’s report to the related disclosures in the financial report or, if such disclosures are inadequate, to modify our opinion. Our conclusions are based on the audit evidence obtained up to the date of our auditor’s report. However, future events or conditions may cause the Group to cease to continue as a going concern. • Evaluate the overall presentation, structure and content of the financial report, including the disclosures, and whether the financial report represents the underlying transactions and events in a manner that achieves fair presentation. • Obtain sufficient appropriate audit evidence regarding the financial information of the entities or business activities within the Group to express an opinion on the financial report. We are responsible for the direction, supervision and performance of the Group audit. We remain solely responsible for our audit opinion. We communicate with the directors regarding, among other matters, the planned scope and timing of the audit and significant audit findings, including any significant deficiencies in internal control that we identify during our audit. We also provide the directors with a statement that we have complied with relevant ethical requirements regarding independence, and to communicate with them all relationships and other matters that may reasonably be thought to bear on our independence, and where applicable, related safeguards. From the matters communicated with the directors, we determine those matters that were of most significance in the audit of the financial report of the current period 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. 120 Independent Auditor’s Report 68 | WOOLWORTHS LIMITED | FINANCIAL REPORT 2017 Directors’ Responsibilities for the Financial Report The directors of the Company are responsible for the preparation of the financial report that gives a true and fair view in accordance with Australian Accounting Standards and the Corporations Act 2001 and for such internal control as the directors determine is necessary to enable the preparation of the financial report that gives a true and fair view and is free from material misstatement, whether due to fraud or error. In preparing the financial report, the directors are responsible for assessing the ability of the Group to continue as a going concern, disclosing, as applicable, matters related to going concern and using the going concern basis of accounting unless the directors either intend to liquidate the Group or to cease operations, or has no realistic alternative but to do so. Auditor’s Responsibilities for the Audit of the Financial Report Our objectives are to obtain reasonable assurance about whether the financial report as a whole is free from material misstatement, whether due to fraud or error, and to issue an auditor’s report that includes our opinion. Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with the Australian Auditing Standards will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of this financial report. As part of an audit in accordance with the Australian Auditing Standards, we exercise professional judgement and maintain professional scepticism throughout the audit. We also: • Identify and assess the risks of material misstatement of the financial report, whether due to fraud or error, design and perform audit procedures responsive to those risks, and obtain audit evidence that is sufficient and appropriate to provide a basis for our opinion. The risk of not detecting a material misstatement resulting from fraud is higher than for one resulting from error, as fraud may involve collusion, forgery, intentional omissions, misrepresentations, or the override of internal control. • 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 the directors. • Conclude on the appropriateness of the directors’ use of the going concern basis of accounting and, based on the audit evidence obtained, whether a material uncertainty exists related to events or conditions that may cast significant doubt on the Group’s ability to continue as a going concern. If we conclude that a material uncertainty exists, we are required to draw attention in our auditor’s report to the related disclosures in the financial report or, if such disclosures are inadequate, to modify our opinion. Our conclusions are based on the audit evidence obtained up to the date of our auditor’s report. However, future events or conditions may cause the Group to cease to continue as a going concern. • Evaluate the overall presentation, structure and content of the financial report, including the disclosures, and whether the financial report represents the underlying transactions and events in a manner that achieves fair presentation. • Obtain sufficient appropriate audit evidence regarding the financial information of the entities or business activities within the Group to express an opinion on the financial report. We are responsible for the direction, supervision and performance of the Group audit. We remain solely responsible for our audit opinion. We communicate with the directors regarding, among other matters, the planned scope and timing of the audit and significant audit findings, including any significant deficiencies in internal control that we identify during our audit. We also provide the directors with a statement that we have complied with relevant ethical requirements regarding independence, and to communicate with them all relationships and other matters that may reasonably be thought to bear on our independence, and where applicable, related safeguards. From the matters communicated with the directors, we determine those matters that were of most significance in the audit of the financial report of the current period 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. Independent Auditor’s Report 69 | WOOLWORTHS LIMITED | FINANCIAL REPORT 2017 Report on the Remuneration Report We have audited the Remuneration Report included in pages 34 to 51 of the Directors’ Report for the 52 weeks ended 25 June 2017. In our opinion, the Remuneration Report of Woolworths Limited, for the 52 weeks ended 25 June 2017, complies with section 300A of the Corporations Act 2001. Responsibilities The directors of the Company are responsible for the preparation and presentation of the Remuneration Report in accordance with section 300A of the Corporations Act 2001. Our responsibility is to express an opinion on the Remuneration Report, based on our audit conducted in accordance with Australian Auditing Standards. DELOITTE TOUCHE TOHMATSU A V Griffiths Partner Chartered Accountants Sydney, 23 August 2017 1 2 3 4 5 PERFO RM A N C E H IG H LIG H T S BU SIN ESS REV IEW D IREC TO RS' REPO RT FIN A N C IA L REPO RT O T H ER IN FO RM A T IO N 121 W O O LW O RT H S G R O U P A N N U A L R EPO R T 20 17 Condensed five year summary* 70 | WOOLWORTHS LIMITED | FINANCIAL REPORT 2017 PROFIT OR LOSS * In 2017, the five year summary has been condensed to include financial information and metrics considered key to the Annual Report. The full version of the five year summary can be found on the Woolworths Group website. Visit www.woolworthsgroup.com.au Profit and loss detail 2017 1 52 WEEKS 2016 1 52 WEEKS 2015 1 52 WEEKS 2014 52 WEEKS 2013 1 53 WEEKS Continuing operations before significant items 2 Sales ($m) 55,475.0 53,473.9 58,812.0 60,772.8 58,516.4 Cost of goods sold ($m) (39,546.1) (38,309.3) (42,596.6) (44,295.2) (42,754.9) Gross profit ($m) 15,928.9 15,164.6 16,215.4 16,477.6 15,761.5 Gross profit margin (%) 28.71 28.36 27.57 27.11 26.94 Cost of doing business (CODB) ($m) (13,602.9) (12,718.6) (12,242.3) (12,702.4) (12,108.3) CODB margin (%) 24.52 23.78 20.82 20.90 20.69 Selling, general and administration expenses (excluding, rent, depreciation and amortisation) ($m) (10,531.0) (9,769.4) (9,316.2) (9,807.4) (9,378.6) EBITDAR ($m) 5,397.9 5,395.2 6,899.2 6,670.2 6,382.9 EBITDAR margin (%) 9.73 10.09 11.73 10.98 10.91 Rent (including fitout rent) ($m) (2,034.3) (1,963.9) (1,951.3) (1,898.7) (1,764.2) EBITDA ($m) 3,363.6 3,431.3 4,947.9 4,771.5 4,618.7 EBITDA margin (%) 6.06 6.42 8.41 7.85 7.89 Depreciation and amortisation ($m) (1,037.6) (985.3) (974.8) (996.3) (965.5) EBIT ($m) 2,326.0 2,446.0 3,973.1 3,775.2 3,653.2 EBIT margin (%) 4.19 4.57 6.76 6.21 6.24 Net financing costs ($m) (179.0) (207.7) (212.9) (218.9) (251.1) Woolworths Notes interest ($m) (14.6) (37.9) (40.4) (41.2) (46.4) Profit before tax and significant items 2 ($m) 2,132.4 2,200.4 3,719.8 3,515.1 3,355.7 Taxation ($m) (650.4) (677.2) (1,112.8) (1,056.7) (996.6) Profit after tax and before significant items 2 ($m) 1,482.0 1,523.2 2,607.0 2,458.4 2,359.1 Discontinued operations 1,2 Profit/(Loss) after tax and before significant items 1,2 ($m) 111.4 (117.4) (161.5) – 1.8 Group net profit after tax before significant items 2 ($m) 1,593.4 1,405.8 2,445.5 2,458.4 2,360.9 Significant items after tax 2 ($m) – (3,753.7) (308.1) – (96.3) Group net profit/(loss) after tax ($m) 1,593.4 (2,347.9) 2,137.4 2,458.4 2,264.6 Non-controlling interests ($m) (59.9) 1,113.1 8.6 (6.7) (5.2) Profit/(Loss) attributable to equity holders of the parent entity after tax ($m) 1,533.5 (1,234.8) 2,146.0 2,451.7 2,259.4 122 Condensed five year summary* 70 | WOOLWORTHS LIMITED | FINANCIAL REPORT 2017 PROFIT OR LOSS * In 2017, the five year summary has been condensed to include financial information and metrics considered key to the Annual Report. The full version of the five year summary can be found on the Woolworths Group website. Visit www.woolworthsgroup.com.au Profit and loss detail 2017 1 52 WEEKS 2016 1 52 WEEKS 2015 1 52 WEEKS 2014 52 WEEKS 2013 1 53 WEEKS Continuing operations before significant items 2 Sales ($m) 55,475.0 53,473.9 58,812.0 60,772.8 58,516.4 Cost of goods sold ($m) (39,546.1) (38,309.3) (42,596.6) (44,295.2) (42,754.9) Gross profit ($m) 15,928.9 15,164.6 16,215.4 16,477.6 15,761.5 Gross profit margin (%) 28.71 28.36 27.57 27.11 26.94 Cost of doing business (CODB) ($m) (13,602.9) (12,718.6) (12,242.3) (12,702.4) (12,108.3) CODB margin (%) 24.52 23.78 20.82 20.90 20.69 Selling, general and administration expenses (excluding, rent, depreciation and amortisation) ($m) (10,531.0) (9,769.4) (9,316.2) (9,807.4) (9,378.6) EBITDAR ($m) 5,397.9 5,395.2 6,899.2 6,670.2 6,382.9 EBITDAR margin (%) 9.73 10.09 11.73 10.98 10.91 Rent (including fitout rent) ($m) (2,034.3) (1,963.9) (1,951.3) (1,898.7) (1,764.2) EBITDA ($m) 3,363.6 3,431.3 4,947.9 4,771.5 4,618.7 EBITDA margin (%) 6.06 6.42 8.41 7.85 7.89 Depreciation and amortisation ($m) (1,037.6) (985.3) (974.8) (996.3) (965.5) EBIT ($m) 2,326.0 2,446.0 3,973.1 3,775.2 3,653.2 EBIT margin (%) 4.19 4.57 6.76 6.21 6.24 Net financing costs ($m) (179.0) (207.7) (212.9) (218.9) (251.1) Woolworths Notes interest ($m) (14.6) (37.9) (40.4) (41.2) (46.4) Profit before tax and significant items 2 ($m) 2,132.4 2,200.4 3,719.8 3,515.1 3,355.7 Taxation ($m) (650.4) (677.2) (1,112.8) (1,056.7) (996.6) Profit after tax and before significant items 2 ($m) 1,482.0 1,523.2 2,607.0 2,458.4 2,359.1 Discontinued operations 1,2 Profit/(Loss) after tax and before significant items 1,2 ($m) 111.4 (117.4) (161.5) – 1.8 Group net profit after tax before significant items 2 ($m) 1,593.4 1,405.8 2,445.5 2,458.4 2,360.9 Significant items after tax 2 ($m) – (3,753.7) (308.1) – (96.3) Group net profit/(loss) after tax ($m) 1,593.4 (2,347.9) 2,137.4 2,458.4 2,264.6 Non-controlling interests ($m) (59.9) 1,113.1 8.6 (6.7) (5.2) Profit/(Loss) attributable to equity holders of the parent entity after tax ($m) 1,533.5 (1,234.8) 2,146.0 2,451.7 2,259.4 Condensed five year summary* 71 | WOOLWORTHS LIMITED | FINANCIAL REPORT 2017 BALANCE SHEET 2017 1 52 WEEKS 2016 1 52 WEEKS 2015 1 52 WEEKS 2014 52 WEEKS 2013 2 53 WEEKS Inventory ($m) 4,080.4 4,558.5 4,872.2 4,693.2 4,205.4 Accounts payable ($m) (5,068.2) (4,809.1) (5,040.0) (4,588.4) (4,080.0) Net investment in inventory ($m) (987.8) (250.6) (167.8) 104.8 125.4 Receivables ($m) 816.8 849.8 1,001.9 965.2 985.2 Other creditors 3 ($m) (4,409.9) (5,029.2) (3,123.3) (3,184.9) (3,086.1) Fixed assets and investments ($m) 8,555.7 8,371.3 10,164.0 9,773.9 9,416.1 Net assets held for sale 1 ($m) 1,222.9 897.9 381.6 620.6 148.7 Intangible assets 4 ($m) 6,532.8 6,590.6 6,244.5 6,335.0 5,784.3 Total funds employed 5 ($m) 11,730.5 11,429.8 14,500.9 14,614.6 13,373.6 Net tax balances 4 ($m) 291.4 458.2 654.1 522.9 425.2 Net assets employed ($m) 12,021.9 11,888.0 15,155.0 15,137.5 13,798.8 Cash and borrowings 6 ($m) (2,121.1) (3,413.5) (3,391.3) (3,432.9) (3,602.7) Other financial assets and liabilities 3 ($m) (24.7) 307.4 (631.7) (1,179.2) (895.6) Total net assets ($m) 9,876.1 8,781.9 11,132.0 10,525.4 9,300.5 Non-controlling interests ($m) 350.1 311.3 297.8 272.9 272.1 Shareholders’ equity ($m) 9,526.0 8,470.6 10,834.2 10,252.5 9,028.4 Total equity ($m) 9,876.1 8,781.9 11,132.0 10,525.4 9,300.5 Group ROFE before significant items 2,7 (%) 25.02 19.12 – – – Return on Equity 8 (%) 17.04 14.43 23.27 25.43 27.37 * In 2017, the five year summary has been condensed to include financial information and metrics considered key to the Annual Report. The full version of the five year summary can be found on the Woolworths Group website. Visit www.woolworthsgroup.com.au 1 2 3 4 5 PERFO RM A N C E H IG H LIG H T S BU SIN ESS REV IEW D IREC TO RS' REPO RT FIN A N C IA L REPO RT O T H ER IN FO RM A T IO N 123 W O O LW O RT H S G R O U P A N N U A L R EPO R T 20 17 Condensed five year summary* 72 | WOOLWORTHS LIMITED | FINANCIAL REPORT 2017 CASH FLOW 2017 1 52 WEEKS $M 2016 1 52 WEEKS $M 2015 1 52 WEEKS $M 2014 52 WEEKS $M 2013 1 53 WEEKS $M Continuing and discontinued operations 1 EBITDA 3,703.8 (592.8) 4,464.9 4,771.5 4,572.5 Movement in net investment in inventory 627.8 32.3 245.8 103.2 (490.6) Other operating cash flows and other non cash 9 (307.5) 4,055.8 0.4 98.7 69.8 Net interest paid (234.0) (289.3) (310.3) (338.2) (454.5) Tax paid (668.1) (848.5) (1,055.7) (1,162.5) (977.3) Operating cash flow 3,122.0 2,357.5 3,345.1 3,472.7 2,719.9 Payments for property, plant, equipment and intangible assets (1,909.8) (1,982.9) (2,172.7) (1,898.7) (1,955.3) Proceeds on disposal of property, plant and equipment, subsidiaries and investments 480.5 737.0 925.4 230.9 1,008.9 Other investing cash flows (2.1) (20.8) (86.6) (363.6) (255.3) Cash flow from operations after investing activities 1,690.6 1,090.8 2,011.2 1,441.3 1,518.2 New shares issued 55.5 – 6.0 35.5 193.7 Issue of subsidiary shares to non-controlling interests – 120.0 170.0 183.0 230.0 Movement in gross debt (1,222.4) (365.6) (205.9) (67.3) (527.3) Dividends paid (540.9) (1,184.8) (1,538.6) (1,491.1) (1,396.7) Dividends paid to non-controlling interests (21.5) (32.4) (28.8) (32.0) (20.1) Transactions with non-controlling interests – (12.1) (13.5) – – Effects of exchange rate changes on balance of cash held in foreign currencies (0.6) 6.7 10.4 4.0 6.2 Net cash flow (39.3) (377.4) 410.8 73.4 4.0 SHAREHOLDER VALUE AND FINANCIAL STRENGTH 2017 1 52 WEEKS 2016 1 52 WEEKS 2015 1 52 WEEKS 2014 1 52 WEEKS 2013 1 53 WEEKS Shareholder Value Ordinary share price closing ($) 25.36 20.56 27.39 35.66 32.81 Market capitalisation ($m) 32,826.4 26,291.3 34,692.6 44,925.1 41,018.7 Weighted average shares on issue (m) 1,283.9 1,263.5 1,256.6 1,248.0 1,237.4 Basic EPS continuing operations before significant items 2,10 (cents per share) 110.8 116.8 203.9 196.5 190.2 Total dividend (cents per share) 84.0 77.0 139.0 137.0 133.0 Payout ratio before significant items 2 (%) 70.74 70.44 71.67 70.27 70.42 Financial Strength Fixed charges cover 11 (times) 2.48 2.30 2.90 3.00 3.00 * In 2017, the five year summary has been condensed to include financial information and metrics considered key to the Annual Report. The full version of the five year summary can be found on the Woolworths Group website. Visit www.woolworthsgroup.com.au 124 Condensed five year summary* 72 | WOOLWORTHS LIMITED | FINANCIAL REPORT 2017 CASH FLOW 2017 1 52 WEEKS $M 2016 1 52 WEEKS $M 2015 1 52 WEEKS $M 2014 52 WEEKS $M 2013 1 53 WEEKS $M Continuing and discontinued operations 1 EBITDA 3,703.8 (592.8) 4,464.9 4,771.5 4,572.5 Movement in net investment in inventory 627.8 32.3 245.8 103.2 (490.6) Other operating cash flows and other non cash 9 (307.5) 4,055.8 0.4 98.7 69.8 Net interest paid (234.0) (289.3) (310.3) (338.2) (454.5) Tax paid (668.1) (848.5) (1,055.7) (1,162.5) (977.3) Operating cash flow 3,122.0 2,357.5 3,345.1 3,472.7 2,719.9 Payments for property, plant, equipment and intangible assets (1,909.8) (1,982.9) (2,172.7) (1,898.7) (1,955.3) Proceeds on disposal of property, plant and equipment, subsidiaries and investments 480.5 737.0 925.4 230.9 1,008.9 Other investing cash flows (2.1) (20.8) (86.6) (363.6) (255.3) Cash flow from operations after investing activities 1,690.6 1,090.8 2,011.2 1,441.3 1,518.2 New shares issued 55.5 – 6.0 35.5 193.7 Issue of subsidiary shares to non-controlling interests – 120.0 170.0 183.0 230.0 Movement in gross debt (1,222.4) (365.6) (205.9) (67.3) (527.3) Dividends paid (540.9) (1,184.8) (1,538.6) (1,491.1) (1,396.7) Dividends paid to non-controlling interests (21.5) (32.4) (28.8) (32.0) (20.1) Transactions with non-controlling interests – (12.1) (13.5) – – Effects of exchange rate changes on balance of cash held in foreign currencies (0.6) 6.7 10.4 4.0 6.2 Net cash flow (39.3) (377.4) 410.8 73.4 4.0 SHAREHOLDER VALUE AND FINANCIAL STRENGTH 2017 1 52 WEEKS 2016 1 52 WEEKS 2015 1 52 WEEKS 2014 1 52 WEEKS 2013 1 53 WEEKS Shareholder Value Ordinary share price closing ($) 25.36 20.56 27.39 35.66 32.81 Market capitalisation ($m) 32,826.4 26,291.3 34,692.6 44,925.1 41,018.7 Weighted average shares on issue (m) 1,283.9 1,263.5 1,256.6 1,248.0 1,237.4 Basic EPS continuing operations before significant items 2,10 (cents per share) 110.8 116.8 203.9 196.5 190.2 Total dividend (cents per share) 84.0 77.0 139.0 137.0 133.0 Payout ratio before significant items 2 (%) 70.74 70.44 71.67 70.27 70.42 Financial Strength Fixed charges cover 11 (times) 2.48 2.30 2.90 3.00 3.00 * In 2017, the five year summary has been condensed to include financial information and metrics considered key to the Annual Report. The full version of the five year summary can be found on the Woolworths Group website. Visit www.woolworthsgroup.com.au Condensed five year summary* 73 | WOOLWORTHS LIMITED | FINANCIAL REPORT 2017 Notes to five year summary 1 Discontinued Operations consist of the following: - For statutory reporting, the Petrol business is reported as a discontinued operation from 2017. For comparative purposes, with the exception of the balance sheet, 2016 has been restated to show Petrol as a discontinued operation. In 2015, 2014 and 2013, the Petrol business continues to be shown within continuing operations; - The Home Improvement business is reported as a discontinued operation from 2016. For comparative purposes, with the exception of the balance sheet, 2015 has been restated to show Home Improvement as a discontinued operation. In 2014 and 2013, the Home Improvement business continues to be shown within continuing operations; and - India Wholesale operations were reported as a discontinued operation from 2013. 2 Significant items represent: - In 2016, costs of $951.1 million before tax from continuing operations ($760.3 million after tax, $749.5 million attributable to equity holders of the parent entity and $10.8 million attributable to non-controlling interests) relating to the Operating model and strategic changes, Store network optimisation and property rationalisation, and General Merchandise impairment; - In 2016, the $3,062.6 million before tax from discontinued operations ($2,993.4 million after tax, $1,878.3 million attributable to equity holders of the parent entity and $1,115.1 million attributable to non-controlling interests) impairment of Home Improvement assets and related store exit costs relating to Woolworths intention to sell or wind-up the Home Improvement business; - In 2015, costs of $425.9 million before tax ($308.1 million after tax, $307.3 million attributable to equity holders of the parent entity and $0.8 million attributable to non-controlling interests) relating to the General Merchandise transformation, Business transformation, Redundancy, and Property portfolio review. Note $2.7 million of this significant item related to discontinued operations; - In 2013, profit of $9.9 million before tax ($7.9 million after tax) on sale of the Consumer Electronics businesses; - In 2013, the one-off loss of $32.8 million before tax ($28.5 million after tax) on the Shopping Centres Australasia Property Group transaction; - In 2013, the one-off costs of $25.8 million before tax ($18.1 million after tax) for Victorian transport fleet redundancies; and - In 2013, the one-off costs of $82.3 million before tax ($57.6 million after tax) relating to the US144A bond redemption. Where noted, profit and loss items have been adjusted to reflect these significant items. 3 Other financial assets and liabilities primarily represent put options held by non-controlling interests, Hotels gaming entitlement liability, Hills License and assets and liabilities as a result of hedging per AASB 9 Financial Instruments. In calculating funds employed, the contingent consideration (2016: $21.8 million, 2015: $20.4 million) has been reclassified to other creditors to better reflect the economic nature of this liability to the Group. 2016 and 2015 have also been restated. 4 Due to a change in the Group's income tax accounting policy disclosed in Note 3.6 of the 2017 Financial Report, the Group is required to 'gross up' the balance sheet for goodwill and deferred tax liabilities in relation to historic purchases of indefinite life intangibles (2017: $612.3 million, 2016: $612.3 million). This change does not impact the profit or loss. 5 Total funds employed is net assets excluding net tax balances, cash and borrowings debt, other financial liabilities, and assets and liabilities as a result of hedging per AASB 9 Financial Instruments. 6 Cash and borrowings is gross debt less cash on hand, cash at bank and cash on short term deposit. 7 Return on funds employed (ROFE) is calculated as EBIT for the previous 12 months as a percentage of average (opening, mid and closing) funds employed. ROFE before significant items is calculated as EBIT for the previous 12 months before significant items as a percentage of average (opening, mid and closing) funds employed. This methodology has been adopted for 2017 and 2016. In previous reporting periods, ROFE was calculated as EBIT for the reporting period as a percentage of average (opening and closing) funds employed. As a result of the change in methodology, ROFE for 2015, 2014 and 2013 has not been presented. Due to a change in the Group’s income tax accounting policy disclosed in Note 3.6 of the 2017 Financial Report, the Group is required to ‘gross up’ the balance sheet for goodwill and deferred tax liabilities in relation to historic purchases of indefinite useful life intangibles (2017: $612.3 million, 2016: $612.3m). This change does not impact the profit or loss and has been excluded from the ROFE calculation. 8 Return on equity is profit after income tax (before significant items) attributable to shareholders, divided by average (of opening and closing) shareholders' equity for the year. 9 ‘Other operating cash flows and other non cash’ in 2016 includes $3,789.8 million of significant items recognised in relation to the impairment of non-financial assets, and recognition of onerous lease and other store exit cost provisions. Significant items recognised in relation to the write-down of inventory have been included within the line ‘Movement in net investment in inventory’. 10 Basic earnings per share (EPS) is profit after tax and servicing Hybrid Notes attributable to shareholders divided by the weighted average number of ordinary shares on issue during the year. The weighted average number of shares on issue has been calculated in accordance with AASB 133 Earnings per Share. 11 Fixed charges cover is EBITDAR (before significant items) divided by rent and interest costs. Rent and interest costs include capitalised interest but exclude foreign exchange gains/losses and dividend income. Certain comparative amounts have been reclassified to conform with the current period’s presentation to better reflect the economic nature of the assets and liabilities of the Group. * In 2017, the five year summary has been condensed to include financial information and metrics considered key to the Annual Report. The full version of the five year summary can be found on the Woolworths Group website. Visit www.woolworthsgroup.com.au 1 2 3 4 5 PERFO RM A N C E H IG H LIG H T S BU SIN ESS REV IEW D IREC TO RS' REPO RT FIN A N C IA L REPO RT O T H ER IN FO RM A T IO N 125 W O O LW O RT H S G R O U P A N N U A L R EPO R T 20 17 Shareholder information: (as at 1 August 2017) 74 | WOOLWORTHS LIMITED | FINANCIAL REPORT 2017 The shareholder information set out below was applicable as at 1 August 2017. DISTRIBUTION OF SHARES (a) Analysis of numbers of shareholders by size of holding: RANGE OF SHARES NUMBER OF SHAREHOLDERS NUMBER OF SHARES 1 – 1,000 287,096 102,706,811 1,001 – 5,000 125,045 264,842,515 5,001 – 10,000 11,903 83,926,440 10,001 – 100,000 5,509 105,911,263 100,001 and over 125 737,029,451 Total 429,678 1,294,416,480 All shares above are fully paid ordinary shares. (b) There were 8,959 holders of less than a marketable parcel of shares. TOP 20 LARGEST SHAREHOLDERS NAME NUMBER OF SHARES PERCENTAGE OF TOTAL SHARES ISSUED (%) 1 HSBC Custody Nominees (Australia) Limited 287,648,585 22.22 2 JP Morgan Nominees Australia Limited 154,160,824 11.91 3 Citicorp Nominees Pty Limited 88,339,612 6.82 4 BNP Paribas Nominees Pty Ltd 81,287,758 6.28 5 National Nominees Limited 51,205,005 3.96 6 UBS Nominees Pty Ltd 9,498,239 0.73 7 Australian Foundation Investment Company Limited 5,065,000 0.39 8 Woolworths Custodian Pty Ltd 4,845,845 0.37 9 AMP Life Limited 4,578,071 0.35 10 Argo Investments Limited 4,133,026 0.32 11 IOOF Investment Management Limited 3,020,269 0.23
12 Milton Corporation Limited 2,903,973 0.22
13 Netwealth Investments Limited 2,388,818 0.18
14 Navigator Australia Ltd 2,227,391 0.17
15 Nulis Nominees (Australia) Limited 1,860,431 0.14
16 Pacific Custodian Pty Limited 1,572,511 0.12
17 RBC Investor Services Australia Nominees Ptd Ltd 1,397,787 0.11
18 Australian United Investment Company Limited 1,200,000 0.09
19 BNP Paribas Noms (NZ) Ltd 1,060,330 0.08
20 BKI Investment Company Limited 1,050,244 0.08

SUBSTANTIAL SHAREHOLDERS
Woolworths Limited had received the following substantial shareholder notification. As at 1 August 2017, no other substantial
notices have been received.
HOLDER
SHARES HELD AT
DATE OF NOTICE
PERCENTAGE OF
SHARES HELD AT
DATE OF NOTICE
(%) DATE OF NOTICE
BlackRock Group 64,766,473 5.00 19/06/2017
Perpetual Limited and subsidiaries 64,217,336 5.05 03/03/2016

126

Shareholder information: (as at 1 August 2017)

74 | WOOLWORTHS LIMITED | FINANCIAL REPORT 2017
The shareholder information set out below was applicable as at 1 August 2017.
DISTRIBUTION OF SHARES
(a) Analysis of numbers of shareholders by size of holding:
RANGE OF SHARES
NUMBER OF
SHAREHOLDERS
NUMBER
OF SHARES
1 – 1,000 287,096 102,706,811
1,001 – 5,000 125,045 264,842,515
5,001 – 10,000 11,903 83,926,440
10,001 – 100,000 5,509 105,911,263
100,001 and over 125 737,029,451
Total 429,678 1,294,416,480

All shares above are fully paid ordinary shares.
(b) There were 8,959 holders of less than a marketable parcel of shares.
TOP 20 LARGEST SHAREHOLDERS
NAME NUMBER OF SHARES
PERCENTAGE OF
TOTAL SHARES
ISSUED
(%)
1 HSBC Custody Nominees (Australia) Limited 287,648,585 22.22
2 JP Morgan Nominees Australia Limited 154,160,824 11.91
3 Citicorp Nominees Pty Limited 88,339,612 6.82
4 BNP Paribas Nominees Pty Ltd 81,287,758 6.28
5 National Nominees Limited 51,205,005 3.96
6 UBS Nominees Pty Ltd 9,498,239 0.73
7 Australian Foundation Investment Company Limited 5,065,000 0.39
8 Woolworths Custodian Pty Ltd 4,845,845 0.37
9 AMP Life Limited 4,578,071 0.35
10 Argo Investments Limited 4,133,026 0.32
11 IOOF Investment Management Limited 3,020,269 0.23
12 Milton Corporation Limited 2,903,973 0.22
13 Netwealth Investments Limited 2,388,818 0.18
14 Navigator Australia Ltd 2,227,391 0.17
15 Nulis Nominees (Australia) Limited 1,860,431 0.14
16 Pacific Custodian Pty Limited 1,572,511 0.12
17 RBC Investor Services Australia Nominees Ptd Ltd 1,397,787 0.11
18 Australian United Investment Company Limited 1,200,000 0.09
19 BNP Paribas Noms (NZ) Ltd 1,060,330 0.08
20 BKI Investment Company Limited 1,050,244 0.08

Shareholder information: (as at 1 August 2017)

75 | WOOLWORTHS LIMITED | FINANCIAL REPORT 2017
UNQUOTED EQUITY SECURITIES
As at 1 August 2017, there were 6,535,529 performance
rights over unissued ordinary shares.
DIVIDEND
The final dividend of 50 cents per share is expected
to be paid on 6 October 2017 to eligible shareholders.
A 1.5% discount will apply to the dividend reinvestment
plan for the 2017 final dividend. There is currently no limit
on the number of shares that can participate in the DRP.
STOCK EXCHANGE LISTINGS
Woolworths Limited ordinary shares are listed on the
Australian Securities Exchange (ASX) under code: WOW.
AMERICAN DEPOSITORY RECEIPTS
Woolworths Limited shares may be traded in sponsored
American Depository Receipts form in the United States.
CORPORATE GOVERNANCE STATEMENT
A copy of the Corporate Governance Statement
can be found on our website.
Visit www.woolworthsgroup.com.au

SHAREHOLDER CALENDAR 1
2017
September
7 Ex date for Final Dividend
8 Record date for Final Dividend
October
6 Payment date for Final Dividend
31 Announcement of First quarter sales results
November
23 Annual General Meeting – Melbourne Convention
and Exhibition Centre

2018
February
23 Announcement of half year results
March
1 Ex date for Interim Dividend
2 Record date for Interim Dividend
April
6 Payment date for Interim Dividend

May
2 Announcement of third quarter sales results

1 Dates are subject to change

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Company directory
76 | WOOLWORTHS LIMITED | FINANCIAL REPORT 2017
REGISTERED OFFICE
1 Woolworths Way
Bella Vista NSW 2153
Tel: (02) 8885 0000
Web: www.woolworthsgroup.com.au
COMPANY SECRETARIES
Richard Dammery
Marcin Firek
INVESTOR RELATIONS
Paul van Meurs – Head of Investor Relations
AUDITOR
Deloitte Touche Tohmatsu
225 George Street, Sydney NSW 2000
Tel: (02) 9322 7000
Web: www.deloitte.com.au
SHAREHOLDER ENQUIRIES
Enquiries and correspondence should be directed
to Woolworths Limited’s Share and Share Plans Registrar,
Link Market Services at the following contact details:

Link Market Services
Locked Bag A14, Sydney South NSW 1235
Tel: 1800 111 281
Web: www.linkmarketservices.com.au

For shareholders, please email:
woolworths@linkmarketservices.com.au

For employees, please email:
wow.eps@linkmarketservices.com.au
MEDIA
Woolworths Press Office
Tel: (02) 8885 1033
Email: media@woolworths.com.au

128

Link Market Services
Locked Bag A14, Sydney South NSW 1235
Tel: 1800 111 281
Web: www.linkmarketservices.com.au

For shareholders, please email:
woolworths@linkmarketservices.com.au

For employees, please email:
wow.eps@linkmarketservices.com.au
MEDIA
Woolworths Press Office
Tel: (02) 8885 1033
Email: media@woolworths.com.au

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rs,
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es
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