4E-2007.pdf, Exercises of Accounting

Download 4E-2007.pdf and more Exercises Accounting in PDF only on Docsity! JB….you’ve done it again! Appendix 4E Preliminary Final Report For the Year Ended 30 June 2007 JB Hi-Fi Limited ACN 093 220 136 This preliminary final report is provided to the Australian Stock Exchange (ASX) under ASX Listing Rule 4.3A. In accordance with ASX Listing Rule 4.3C.2, this Preliminary Final Report should be read in conjunction with the most recent annual financial report, being 30 June 2007. Current Reporting Period: Financial year ended 30 June 2007 Previous Corresponding Period: Financial year ended 30 June 2006 F or p er so na l u se o nl y Name of entity JB Hi-Fi Limited DETAILS OF THE REPORTING PERIOD ABN or equivalent company reference Financial year ended ACN 093 220 136 30-June-2007 (Comparative period – 30 June 2006) The June 2007 report represents the JB Hi-Fi consolidated financial statements. RESULTS FOR ANNOUNCEMENT TO THE MARKET Revenue and Net Profit / (Loss) Percentage Change % Amount $’000 Revenue from ordinary activities up 35.53% to $1,281,837 Profit from ordinary activities after tax up 54.12% to $41,376 Net profit attributable to members of the parent entity up 56.47% to $40,389 Dividends (Distributions) Amount per security Franked amount per security Final dividend 6.0¢ 6.0¢ Interim dividend 5.0¢ 5.0¢ Record date for determining entitlements to the dividend: • final dividend • interim dividend 21 August 2007 26 March 2007 Dividend payment date: • final dividend • interim dividend 11 September 2007 16 April 2007 Net Tangible Assets Per Security 2007 $ 2006 $ Net tangible assets per security 0.36 0.16 For a brief explanation of the figures above please refer to the Announcement on the results for the year ended 30 June 2007. The comments should be read in conjunction with the details and explanations provided herewith. F or p er so na l u se o nl y Annual report for the financial year ended 30 June 2007 Page Corporate governance statement 1 Directors' report 6 Auditor's independence declaration 20 Auditor's independent audit report 21 Directors' declaration 23 Income statement 24 Balance sheet 25 Statement of changes in equity 26 Cash flow statement 27 Notes to the financial statements 28 Additional stock exchange information as at 8 August 2007 59 F or p er so na l u se o nl y JB Hi-Fi Limited Corporate governance statement 1 Corporate Governance Statement JB Hi-Fi’s directors and management are committed to ensuring that the company’s business is conducted ethically and in accordance with high standards of corporate governance. This statement describes JB Hi-Fi’s approach to corporate governance. The Board believes that JB Hi-Fi’s policies and practices comply in all substantial respects with the ASX Corporate Governance Council Principles of Good Corporate Governance. JB Hi-Fi respects and values the rigour of the ASX Principles of Good Corporate Governance and Best Practice Recommendation in force as at 30 June 2007. The Board believes that it has been compliant with the spirit of The Corporate Governance Principles and Best Practice Recommendations during the 2007 financial year. The Board has determined having regard to the company’s current size, not to establish a Nominations Committee. The Board has retained this responsibility. In August 2004, the Board completed a process of reviewing and adopting formal policies and procedures with regard to Corporate Governance. The Board continually reviews and monitor developments in respect of corporate governance to ensure compliance with best practice. THE BOARD Role The primary role of the JB Hi-Fi Board is to protect and enhance long-term shareholder value. The Board is accountable to shareholders for the performance of the company, it directs and monitors the business and affairs of the company on behalf of shareholders and is responsible for the company’s overall corporate governance. The Board responsibilities include the corporate governance of the company, overseeing the business and affairs of the company, communicating with the company’s shareholders and the community, evaluating the performance of senior executives, ensuring that appropriate procedures are in place so that company business is conducted in an honest, open and ethical manner and the establishment of a formal and transparent procedure for the selection, appointment and review of Board directors. The Chief Executive Officer, who is accountable to the Board, is responsible for managing, directing and promoting the profitable operation and development of the Group. A copy of the Board Charter can be found on the company’s website at www.jbhifi.com.au Composition The Board seeks to ensure that the combination of its members provides an appropriate range of experience, skills, knowledge and perspective to enable it to carry out its obligations and responsibilities. In reviewing the Board’s composition and in assessing nominations for the appointment of non-executive directors, the Board uses its own internal resources to identify candidates for appointment as directors. External resources may also be used, if suitable candidates are not identified. The Board considers that its current structure, size, focus, experience and use of committees enable it to add value to the company and to operate effectively. The Board regularly reviews this balance. JB Hi-Fi maintains a majority of non-executive directors on its Board. The Board currently comprises six directors, comprising four independent non-executive directors, including the Chairman, and two executive directors, including the Chief Executive Officer. Details of the directors as at the date of this report, including their experience, expertise and term of office are set out in the Directors’ Report in the Annual Report. Independence The JB Hi-Fi Board regards directors as independent directors if they are free from any business or other relationship that could compromise their ability to act in the best interests of the company. If a conflict of interest arises, the director concerned does not receive the relevant Board papers and is not present at the meeting whilst the item is considered. Directors must keep the Board advised, on an ongoing basis, of any interests that could potentially conflict with those of the company. Directors are required to promptly disclose to the Board interests in contracts, other directorships or offices held, possible related party transactions and sales or purchases of the company’s shares. F or p er so na l u se o nl y JB Hi-Fi Limited Corporate governance statement 2 Selection and Appointment of directors In considering Board membership, the directors are conscious of the need to ensure that Board members possess the diversity of skill and experience required to fulfil the Board’s obligations. The Board considers nominations for appointment to the Board. Apart from the Chief Executive Officer, directors are subject to shareholder re-election by rotation at least every three years. A copy of the procedure for the selection and appointment of Directors can be found on the company’s website at www.jbhifi.com.au. Board meetings The Board meets monthly for scheduled meetings. Dependent on business requirements, the Board may have such additional unscheduled meetings as the business of the company may require. Prior to any meeting, the Directors receive all necessary Board papers. As well as holding regular Board meetings, the Board sets aside time to meet to comprehensively review business plans and company strategy. Access to information and Independent advice Each director has the right of access to all relevant company information and to the company’s executives and, subject to prior consultation with the Chairman, may seek independent professional advice at the company’s expense. Pursuant to a deed executed by each director and the company, a director also has the right to have access to all documents which have been presented at Board meetings or made available in relation to their position as director for a term of 7 years after ceasing to be a director or such longer period as is necessary to determine relevant legal proceedings that commenced during this term. Code of Ethics JB Hi-Fi acknowledges the need for directors, executives and employees to observe the highest ethical standards of corporate behaviour. JB Hi-Fi has adopted a Code of Ethics to provide an employee with guidance on what the company deems is acceptable behaviour. The key elements of the code are: As a company: (a) respecting every employee’s dignity, rights, freedoms and individual needs; (b) providing a working environment that is safe, challenging and rewarding; (c) recognising the work of each of our employees; (d) respecting customers’, suppliers’ and employees’ personal and sensitive information; (e) reinforcing JB Hi- Fi’s commitment to the highest standards in business and professional ethics and (f) obeying the law. As employees: (a) treating customers, the public and fellow employees with honesty, courtesy and respect; (b) respecting and safeguarding the property of customers, JB Hi-Fi and fellow workers; (c) maintaining confidentiality of all customers, JB Hi-Fi or other parties’ information gained through our work; (d) performing our duties, as best we can, taking into account our skills, experience, qualifications and position; (e) doing our jobs in a safe, responsible and effective manner; (f) respecting personal and sensitive information in accordance with Privacy Legislation; (g) ensuring our personal business and financial interests do not conflict with our duty to JB Hi-Fi; (h) working within JB Hi-Fi’s policies and rules; and (i) obeying the law. The company has developed appropriate policies and guidelines to assist employees in applying the code in practice. A copy of the Code of Conduct can be found on the company’s website at www.jbhifi.com.au Shareholdings of directors and employees Directors’ current shareholdings are detailed in the company’s Annual Report and as updated by notification to the Australian Stock Exchange as required. The Board has approved a Share Trading Policy for dealing in securities. Directors and employees may only trade in JB Hi-Fi shares and any other JB Hi-Fi securities during designated Trading Periods, which are conducted several times each year. These Trading Periods will follow the release of JB Hi-Fi’s Final Results (Aug/Sept), Interim Results (Feb/March) and the Annual General Meeting (Oct/Nov), for a period of four weeks. Any transaction conducted by directors in shares of the company is notified to the Australian Stock Exchange. A copy of the Share Trading Policy can be found on the company’s website at www.jbhifi.com.au F or p er so na l u se o nl y JB Hi-Fi Limited Corporate governance statement 5 The Audit and Risk Committee meets regularly. Details of the meetings held and members’ attendance during the 2007 Financial Year are listed in the Director’s Report of the Annual Report. Directors who are not members of a committee may attend any committee meeting following consultation with the Chairperson of the relevant committee. Remuneration Committee The Board has established a Remuneration Committee that has a formal charter. The Remuneration Committee is charged with, in part, reviewing and making recommendations to the Board regarding the remuneration and appointment of senior executive officers and non-executive directors, policies for remuneration and compensation programs of the Company generally and administration of remuneration and compensation programs. The Remuneration Committee comprises three directors, two of whom are non-executive directors: • James King: Ongoing member and chairperson of committee; • Richard Uechtritz: Ongoing member of committee; and • Will Fraser: Ongoing member of committee. The Remuneration Committee meets as required. Details of the meetings held and members’ attendance during the 2007 Financial Year are listed in the Director’s Report of the Annual Report. A copy of the Remuneration Committee Charter can be found on the company’s website at www.jbhifi.com.au Nominations Committee The Board, having regard to the size of the company, has not established a Nominations Committee. The Board is charged with, in part, selecting, appointing and regularly evaluating the performance of, determining the remuneration of, and plan for the succession of the Chief Executive Officer; establishing formal and transparent procedures for the selection and appointment of new directors to the Board; regularly reviewing the succession plans in place for Board membership to ensure that an appropriate balance of skills, experience and expertise is maintained; and instituting internal procedures for evaluating Board performance, individual directors and Board Committees. A copy of the Board Charter and the Board’s policy for the appointment of directors can be found on the company’s website at www.jbhifi.com.au F or p er so na l u se o nl y JB Hi-Fi Limited Directors’ report 6 DIRECTORS' REPORT The directors of JB Hi-Fi Limited submit herewith the annual financial report of the company for the financial year ended 30 June 2007. In order to comply with the provisions of the Corporations Act 2001, the directors report as follows: The names and particulars of the directors of the company during or since the end of the financial year are: Name Particulars James King Chairman, Non-Executive Director B.Comm, FAICD Mr King has over 25 years experience in major multi-national corporations in Australia and internationally. He was previously with Foster’s Group Limited as Managing Director Carlton & United Breweries and Managing Director Foster’s Asia. Prior to joining Fosters, he spent six years in Hong Kong as President of Kraft Foods (Asia Pacific). He is currently a non executive director of IBT Education Limited, Babcock & Brown Environmental Investments Limited and Trust Company Ltd. Mr King is also Chairman of Juvenile Diabetes Research Foundation (Victoria) and on the Council of Xavier College. Mr King attended a senior Management Program at Harvard University and is a Fellow of the Australian Institute of Company Directors. Richard Uechtritz Chief Executive Officer and Executive Director Mr Uechtritz has over 20 years experience in retailing. He was co-founder of Australia’s two leading photo chains, Rabbit Photo and Smith Kodak Express. Mr Uechtritz was also a director of Kodak (Australasia) Pty Ltd. Mr Uechtritz led the management buy-in of JB Hi-Fi in July 2000. Terry Smart Chief Operating Officer and Executive Director Mr Smart has over 15 years experience in retailing. He is a former director and General Manager of Kodak’s retail operations. Mr Smart led the implementation of JB Hi-Fi's management information systems. He is responsible for the group’s systems and processes which underpin the store operations. Mr Smart joined the management buy-in of JB Hi-Fi in July 2000. Patrick Elliott Non-Executive Director B.Comm LLB, MBA (Hon), CA Mr Elliott is an executive director of Next Capital Pty Limited, a private equity manager. He is also a non executive director of Steelforce Holdings Pty Limited and RPG Holdings Pty Ltd. Prior to founding Next Capital Pty Limited, Mr. Elliott was an executive director of Macquarie Direct Investment Limited, the private equity division of Macquarie Bank Limited. Gary Levin Non-Executive Director B.Comm, LLB Mr Levin has been a director of JB Hi Fi since November 2000. He is currently Managing Director of Babcock & Brown Environmental Investments Limited and a director of Natural Fuels Australia Limited and Southern Oil Refining Limited. He was formerly the founder and Managing Director of TLC Dry Cleaners and a previous joint Managing Director of Rabbit Photo Holdings Limited. He has over 25 years experience running public and private companies in the retail, real estate and renewable energy fields. Mr Levin holds a Bachelor of Commerce and Bachelor of Laws from the University of New South Wales and is a member of the New South Wales Bar Association. Will Fraser Non-Executive Director PhD Dr Fraser retired in 1999 as Chairman and Managing Director of Kodak Australasia Pty Ltd; an appointment that followed two years in London as a Corporate Vice President of Eastman Kodak and Regional Business General Manager, Consumer Imaging of Europe, Africa, India and the Middle East region. He is currently a member of the Board of Trustees of the Baker Foundation. F or p er so na l u se o nl y JB Hi-Fi Limited Directors’ report 7 Directorships of other listed companies held by directors in the 3 years immediately before the end of the financial year are as follows: Name Company Period of directorship Gary Levin Babcock & Brown Environmental Investments Limited Since 2002 James King IBT Education Limited Since 2004 Tattersalls Limited May 2005 to October 2006 Babcock & Brown Environmental Investments Limited Since September 2006 Trust Company Limited Since February 2007 Company Secretary Richard Murray B.Comm, Grad.Dip. Applied Finance & Investment, CA Mr Murray is a Chartered Accountant with over 10 years experience in finance and accounting. Mr Murray joined JB Hi-Fi as Chief Financial Officer in 2003 and took the business through the IPO (Initial Public Offer) process. Mr Murray is assisted in his role as Company Secretary by an external consultant specialising in company secretarial processes and procedures, who attends all Board and committee meetings. Principal activities The Group’s principal activity in the course of the financial year was the retailing of home consumer products, with particular focus on: • consumer electronics (televisions, Hi-Fi, DVD players, home theatres, digital still, video cameras, mobile phones and accessories) • electrical goods (whitegoods, computing equipment, kitchen equipment, air conditioners and small electrical appliances) • car sound systems (audio and visual) • music, games and movies from stand alone and shopping centre locations, offering a wide range of leading brands. There have been no significant changes in the principal activity of the Group during the financial year. Review of operations The consolidated profit after tax of the Group for the financial year, that was attributable to members of the parent entity was $40,389,000 (2006: $25,813,000) which is 56.5% greater than the consolidated profit after tax for the previous financial year. Consolidated sales for the financial year were $1,281,837,000 (2006: $945,821,000), which is 35.5% greater than the consolidated sales for the previous financial year. In preparing the Review of Operations, the directors have omitted material that would otherwise have been included under s.299A(1)(c) concerning the Group’s business strategies and prospects for future financial years, as they believe it is likely to result in unreasonable prejudice to the Group or any entity that is part of the Group. A. Overview Objectives of the Group are to create shareholder value through a roll out of the Group's branded retail stores across Australia and New Zealand, in both stand alone destination sites and shopping centre locations. The cornerstone of the Group’s success has been, and will continue to be, its ability to consistently offer everyday low prices. The Group is able to do this through the scale of its operations, high stock turnover and low cost of doing business. F or p er so na l u se o nl y JB Hi-Fi Limited Directors’ report 10 F. Discussion of performance Sales and earnings performance: • Consolidated sales for the financial year were $1,281,837,000 which is 35.5% greater than the consolidated sales for the previous financial year. • The consolidated profit after tax for the financial year of $40,389,000 is 56.5% greater than the consolidated profit after tax for the previous financial year. This report only discusses the consequences of the company’s performance on shareholder wealth for the last four financial years, since the company’s listing on the ASX. The following graph plots the closing share price of JB Hi-Fi on a daily basis since listing on the Australian Stock Exchange. $1.00 $3.00 $5.00 $7.00 $9.00 $11.00 Oct-03 Feb-04 Jun-04 Oct-04 Feb-05 Jun-05 Oct-05 Feb-06 Jun-06 Oct-06 Feb-07 Jun-07 The following table details the changes in earnings per share and shareholder wealth since the company listed on the Australian Stock Exchange. Measures of Performance and Shareholder Value Movement FY03(1) FY04(1) FY05 FY06 FY07 FY04 FY05 FY06 FY07 1. Earnings per share 8.4 13.5 19.0 25.0 38.8 61% 41% 33% 55% 2. Shareholder Value Created: Company share price at the end of the reporting period ($) 1.71(2) 2.30 3.56 5.08 10.82 35% 55% 43% 113% Market Capitalisation ($m) 174.6(3) 235.5 366.0 525.6 1,132.1 35% 55% 44% 115% Enterprise Value (4) ($m) 201.7(3) 262.8 442.0 621.7 1,226.8 30% 68% 41% 97% Movement in enterprise value during the financial year ($m) – 61.1 179.2 179.7 605.1 Dividends paid to shareholders during the financial year ($m) – 3.7(5) 7.4 7.4 9.4 Shareholder Value Created(6) - per annum ($m) 64.8 186.6 187.1 614.5 - cumulative ($m) 64.8 251.4 438.5 1,053.0 1. 2003 and 2004 financial analysis is based on AGAAP results, 2005 onwards is based on A-IFRS results. 2. Values are based on a weighted calculation of the retail and institutional IPO issue price applied to total shares on issue. 3. Values are based on 23 October 2003, the date on which the company first listed on the Australian Stock Exchange. Refer to the company’s prospectus dated 18 September 2003 for further details. 4. Measured as the sum of market capitalisation and net debt. 5. The dividends paid in the 2004 financial year exclude a special dividend of $10,000,000 paid to shareholders before the company was listed. 6. Shareholder Value Created is measured as the increase in the enterprise value of the company, plus cash dividends paid during the financial year. F or p er so na l u se o nl y JB Hi-Fi Limited Directors’ report 11 The company has not returned any capital to shareholders since its listing in October 2003. For further discussion of the Company’s performance during the financial year, refer to the Chairman’s and Chief Executive Officer’s Report included in the Annual Report to shareholders. Changes in state of affairs During the financial year there was no significant change in the state of affairs of the Group. Subsequent events The remaining 30% of Clive Anthonys was purchased on 2 July 2007 for circa $7,000,000. There have been no other matters or circumstances occurring subsequent to the end of the financial year, that has significantly affected, or may significantly affect, the operations of the Group, the results of those operations, or the state of affairs of the Group in future financial years. Future developments Disclosure of information regarding likely developments in the operations of the Group in future financial years and the expected results of those operations is likely to result in unreasonable prejudice to the Group. Accordingly, this information has not been disclosed in this report. Environmental regulations The Group is not involved in any activities that have a marked influence on the environment within its area of operation. As such, the Directors are not aware of any material issues affecting the Group or it’s compliance with the relevant environmental agencies or regulatory authorities. Dividends In respect of the financial year ended 30 June 2006, as detailed in the directors’ report for that financial year, a final dividend of 4.0 cents per share franked to 100% at 30% corporate income tax rate was paid to the holders of fully paid ordinary shares on 18 October 2006. In respect of the financial year ended 30 June 2007, an interim dividend of 5.0 cents per share franked to 100% at 30% corporate income tax rate was paid to the holders of fully paid ordinary shares on 16 April 2007. In respect of the financial year ended 30 June 2007, the directors recommend the payment of a final dividend of 6 cents per share franked to 100% at 30% corporate income tax rate, to be paid to the holders of fully paid ordinary shares on 11 September 2007. Indemnification of officers and auditors As provided under the constitution, the company indemnifies directors and senior officers for any loss arising from any claim by reason of any wrongful act committed by them in their capacity as a director or officer. During the financial year, the company has paid a premium in respect of a contract, insuring the directors and senior employees against any liability of this nature. In accordance with normal commercial practices, under the terms of the insurance contracts, the nature of the liabilities insured against and the amount of the premiums paid are confidential. The company has not otherwise, during or since the financial year, except to the extent permitted by law, indemnified or agreed to indemnify an officer or auditor of the company or of any related body corporate against a liability incurred as such an officer or auditor. Directors’ meetings The following table sets out the number of directors’ meetings (including meetings of committees of directors) held during the financial year and the number of meetings attended by each director (while they were a director or committee member). During the financial year, 12 Board meetings, 4 remuneration committee meetings and 5 audit and risk management committee meetings were held. Board of Directors Remuneration Committee Audit & Risk Management Committee Directors Held Attended Held Attended Held Attended J. King 12 12 4 4 5 5 P. Elliott 12 12 – – 5 5 G. Levin 12 12 – – 5 5 W. Fraser 12 12 4 4 – – R. Uechtritz 12 12 4 4 – – T. Smart 12 12 – – – – F or p er so na l u se o nl y JB Hi-Fi Limited Directors’ report 12 Directors’ shareholdings The following table sets out each director’s relevant interest in shares, debentures, and rights or options in shares or debentures of the company or a related body corporate as at the date of this report. Directors Fully paid ordinary shares - direct Number Fully paid ordinary shares – indirect Number Executive share options – direct Number Executive share options – indirect Number J. King – 32,258 – – P. Elliott 238,600 110,000 – – G. Levin 100,000 – – – W. Fraser – 6,451 – – R. Uechtritz(i) 4,000,000 – 763,068 – T. Smart(i) 1,844,345 – 560,258 – (i) Excludes any options that may be approved by the Board in August 2007. The issue of these options is also subject to shareholder approval at the company’s Annual General Meeting in October 2007. Remuneration Report Details of key management personnel (audited) The following persons acted as directors of the company during and since the end of the financial year: J. King Chairman, Board and Remuneration Committee, Non-executive Director P. Elliott Chairman, Audit and Risk Management Committee, Non-executive Director G. Levin Non-executive Director W. Fraser Non-executive Director R. Uechtritz Chief Executive Officer and Executive Director T. Smart Chief Operating Officer and Executive Director The highest remunerated company and Group executives for the 2007 financial year were: R. Uechtritz Chief Executive Officer and Executive Director T. Smart Chief Operating Officer and Executive Director F. Garonzi General Manager R. Murray Chief Financial Officer S. Browning Marketing Director Remuneration policy for directors and executives (audited) The remuneration committee reviews the remuneration packages of all directors and executive officers on an annual basis and makes recommendations to the Board. Remuneration packages are reviewed with due regard to performance, data on remuneration paid by comparable companies and where appropriate, the remuneration committee may receive expert independent advice regarding remuneration levels required to attract and compensate directors and executives, given the nature of their work and responsibilities. The remuneration for the 2007 financial year for non-executive directors was $65,000 per annum and $110,000 per annum for the Chairman. In addition, non executive directors (including the Chairman) receive fees of $5,000 per annum, per Board committee to which they are appointed. The remuneration for the 2006 financial year for non-executive directors was $65,000 per annum and $110,000 per annum for the Chairman It is the policy of the company not to pay lump sum retirement benefits to non-executive directors. Superannuation contributions are made by the company on behalf of non-executive directors in line with legislative requirements. Some non- executive directors, as a result of their personal superannuation circumstances, have notified the company that they would prefer that their superannuation contributions are received as increased Board fees. Directors also have the right to enter into salary packaging arrangements with the company. The result of these arrangements is no net increase to the cost of directors’ remuneration to the company. F or p er so na l u se o nl y JB Hi-Fi Limited Directors’ report 15 Share options (audited) Executive and employee share option plan The Group has an ownership-based remuneration scheme for employees and executives (including non-executive directors). In accordance with the provisions of the scheme, employees and executives within the Group are granted options to purchase parcels of ordinary shares at various issue prices. The options vest a third each, on the second, third and fourth anniversary of issue providing that performance conditions, where they exit, are met. The options expire within five years of their issue, or one month after the executive’s resignation, whichever is earlier. Shares under option Details of interests under option at the date of this report are: Option series Number of shares under option Class of share Grant date Grant date share price Expiry date Exercise price $ Expected volatility Dividend yield Risk- free interest rate Fair value at grant date $ 5 47,999 Ordinary 18/09/03 N/A 18/09/08 1.25 53.0% 5.0% 5.31% 0.56 6 195,000 Ordinary 18/09/03 N/A 18/09/08 1.45 53.0% 5.0% 5.31% 0.51 7 17,212 Ordinary 29/01/04 2.33 29/01/09 2.32 24.0% 3.3% 5.04% 0.45 8 100,000 Ordinary 21/03/04 2.20 21/03/09 2.23 24.0% 3.3% 5.17% 0.45 9 134,000 Ordinary 28/04/04 2.22 28/04/09 2.25 24.0% 3.3% 5.65% 0.48 10 1,249,606 Ordinary 23/07/04 2.57 23/07/09 2.29 24.3% 2.8% 5.54% 0.48 11 33,334 Ordinary 27/10/04 3.47 27/10/09 2.29 23.5% 2.1% 5.20% 0.48 12 33,334 Ordinary 28/01/05 3.70 28/01/10 3.68 25.0% 1.9% 5.34% 0.97 13 50,000 Ordinary 12/04/05 3.52 12/04/10 3.61 26.3% 2.0% 5.54% 0.92 14 513,528 Ordinary 22/07/05 3.38 22/07/10 3.33 28.4% 2.1% 5.29% 0.81 15 50,000 Ordinary 08/08/05 3.44 08/08/10 3.37 28.3% 2.1% 5.34% 0.83 16 50,000 Ordinary 26/09/05 3.39 26/09/10 3.29 28.3% 2.1% 5.25% 0.83 17 203,136 Ordinary 22/07/05 3.38 22/07/10 3.33 28.4% 2.1% 5.29% 0.81 18 50,000 Ordinary 03/04/06 4.94 03/04/11 4.89 28.3% 1.5% 5.37% 1.25 19 50,000 Ordinary 26/06/06 4.85 26/06/11 4.98 29.4% 1.5% 5.85% 1.21 20 285,000 Ordinary 15/08/06 4.79 15/08/11 4.81 29.5% 1.6% 5.98% 1.24 21 168,000 Ordinary 15/08/06 4.79 15/08/11 4.81 29.5% 1.6% 5.98% 1.24 22 72,000 Ordinary 15/08/06 4.79 15/08/11 4.81 29.5% 1.6% 5.98% 1.24 23 60,000 Ordinary 13/09/06 4.81 13/09/11 4.81 29.4% 1.6% 5.74% 1.24 24 245,000 Ordinary 15/08/06 4.79 15/08/11 4.81 29.5% 1.6% 5.98% 1.24 25 105,000 Ordinary 15/08/06 4.79 15/08/11 4.81 29.5% 1.6% 5.98% 1.24 26 30,000 Ordinary 29/11/06 5.82 29/11/11 5.73 29.2% 1.4% 5.75% 1.56 27 50,000 Ordinary 28/12/06 6.55 28/12/11 6.48 29.3% 1.2% 6.04% 1.79 28 50,000 Ordinary 19/04/07 8.05 19/04/12 8.01 29.4% 1.1% 6.11% 2.21 29 30,000 Ordinary 07/05/07 8.75 07/05/12 8.47 29.4% 1.0% 6.01% 2.51 30 90,000 Ordinary 04/07/07 11.36 04/07/12 10.90 29.8% 1.1% 6.32% 3.37 31 30,000 Ordinary 01/08/07 11.20 01/08/12 11.25 30.0% 1.1% 6.16% 3.10 3,992,149 The holders of these options do not have the right, by virtue of the option, to participate in any share issue or interest issue of any other body corporate or registered scheme. The weighted average fair value of the share options granted during the financial year is $1.35 (2006: $0.86). Options were valued using the Black-Scholes model. Volatility is based on: Options Granted before ASX listing on 23 October 2003: • AASB 1046 outlined that where the underlying stock is not publicly traded, “the expected average volatility in the entity’s industry” may be used to determine the price volatility. A search identified Australian listed companies that operated in a similar industry to JB Hi-Fi. After appropriate analysis, Harvey Norman Holding Ltd and Brazin Ltd were considered comparable for the purchase of determining price volatility during the period prior to JB Hi-Fi listing on the ASX. This volatility methodology has been applied to Series 1 to 6. F or p er so na l u se o nl y JB Hi-Fi Limited Directors’ report 16 Options Granted after ASX listing on 23 October 2003: • Series 7 to 9 expected volatility was based on the daily closing share price since listing, which was a period of less than 12 months. • Series 10 to 13, expected volatility is based on the daily closing share price for the 12 months preceding the issues of the series. • Series 14 to 29, expected volatility is based on the daily closing share price since listing. • Series 30 and onwards, expected volatility is based on the daily closing share price for the 3.44 years preceding the issues of the series. All option series have an expiry of five years from grant date. However, from Series 14, expected life was reduced to 3.44 years to allow for the effects of early exercise based on prior years experience. The following share options granted under the employee and executive share option plan were exercised during the financial year. All shares were issued by JB Hi-Fi Limited. 2007 Option Series Grant Date Exercise date Number exercised Number of shares issued Class of shares Amount paid per share Amount unpaid on shares Share price at exercise date $ 1 07/02/2002 23/10/2006 86,667 86,667 Ordinary 0.50 – 5.60 2 19/09/2002 23/10/2006 26,667 26,667 Ordinary 1.25 – 5.60 3 22/10/2002 13/02/2007 26,666 26,666 Ordinary 1.25 – 6.69 4 22/10/2002 23/10/2006 26,666 26,666 Ordinary 1.25 – 5.60 5 18/09/2003 16/08/2006 5,334 5,334 Ordinary 1.25 – 4.75 5 18/09/2003 23/10/2006 32,000 32,000 Ordinary 1.25 – 5.60 5 18/09/2003 13/02/2007 5,333 5,333 Ordinary 1.25 – 6.63 6 18/09/2003 19/02/2007 80,000 80,000 Ordinary 1.45 – 7.62 6 18/09/2003 23/02/2007 115,000 115,000 Ordinary 1.45 – 7.79 7 29/01/2004 23/10/2006 8,606 8,606 Ordinary 2.32 – 5.60 8 23/03/2004 16/08/2006 50,000 50,000 Ordinary 2.23 – 4.68 9 28/04/2004 16/08/2006 41,999 41,999 Ordinary 2.25 – 4.68 9 28/04/2004 23/10/2006 25,001 25,001 Ordinary 2.25 – 5.60 10 23/07/2004 16/08/2006 289,876 289,876 Ordinary 2.29 – 4.68 10 23/07/2004 23/10/2006 17,335 17,335 Ordinary 2.29 – 5.60 10 23/07/2004 19/02/2007 114,345 114,345 Ordinary 2.29 – 7.62 10 23/07/2004 23/02/2007 173,251 173,251 Ordinary 2.29 – 7.79 10 23/07/2004 05/03/2007 5,000 5,000 Ordinary 2.29 – 7.45 11 27/10/2004 05/03/2007 16,666 16,666 Ordinary 2.29 – 7.45 12 28/01/2006 13/02/2007 16,666 16,666 Ordinary 3.68 – 7.10 1,163,078 1,163,078 2006 Option Series Grant Date Exercise date Number exercised Number of shares issued Class of shares Amount paid per share Amount unpaid on shares Share price at exercise date $ 1 07/02/2002 29/8/2005 20,000 20,000 Ordinary 0.50 – 3.37 1 07/02/2002 31/10/2005 667 667 Ordinary 0.50 – 3.37 1 07/02/2002 15/02/2006 266,664 266,664 Ordinary 0.50 – 4.35 2 19/09/2002 31/10/2005 26,667 26,667 Ordinary 1.25 – 3.37 3 22/10/2002 22/02/2006 26,667 26,667 Ordinary 1.25 – 4.50 4 22/10/2002 22/02/2006 53,334 53,334 Ordinary 1.25 – 4.50 5 18/09/2003 31/10/2005 21,334 21,334 Ordinary 1.25 – 3.37 5 18/09/2003 22/02/2006 16,000 16,000 Ordinary 1.25 – 4.50 6 18/09/2003 31/10/2005 80,000 80,000 Ordinary 1.45 – 3.37 6 18/09/2003 22/02/2006 115,000 115,000 Ordinary 1.45 – 4.50 626,633 626,633 F or p er so na l u se o nl y JB Hi-Fi Limited Directors’ report 17 Long Term Incentive 2007 (audited) Since July 2004, certain Group directors and executives have been issued with options under the ESOP as part of the Company’s long term incentive program. Vesting of the options issued is subject to a performance hurdle which requires compound annual earnings per share growth of between 10% and 15% per annum. If the performance hurdle is achieved, a third of the options will vest on each of the second, third and fourth anniversary of issue. The following table details the current options outstanding which feature performance hurdles: Option Series Grant Date Performance Condition – Cumulative EPS Growth per annum Date for testing Performance Condition Relevant Financial Year Vested Subject to Performance Condition Vested due to achievement of Performance Condition 10.1 23/07/2004 10.0% 23/07/2006 2006 Yes Yes 10.2 23/07/2004 10.0% 23/07/2007 2007 Yes Yes 10.3 23/07/2004 10.0% 23/07/2008 2008 No No 14.1 22/07/2005 10.0% 22/07/2007 2007 Yes Yes 14.2 22/07/2005 10.0% 22/07/2008 2008 No No 14.3 22/07/2005 10.0% 22/07/2009 2009 No No 17.1 22/07/2005 10.0% 22/07/2007 2007 Yes Yes 17.2 22/07/2005 10.0% 22/07/2008 2008 No No 17.3 22/07/2005 10.0% 22/07/2009 2009 No No 21.1 15/08/2006 10.0% 15/08/2008 2008 No No 21.2 15/08/2006 10.0% 15/08/2009 2009 No No 21.3 15/08/2006 10.0% 15/08/2010 2010 No No 22.1 15/08/2006 15.0% 15/08/2008 2008 No No 22.2 15/08/2006 15.0% 15/08/2009 2009 No No 22.3 15/08/2006 15.0% 15/08/2010 2010 No No 24.1 15/08/2006 10.0% 15/08/2008 2008 No No 24.2 15/08/2006 10.0% 15/08/2009 2009 No No 24.3 15/08/2006 10.0% 15/08/2010 2010 No No 25.1 15/08/2006 15.0% 15/08/2008 2008 No No 25.2 15/08/2006 15.0% 15/08/2009 2009 No No 25.3 15/08/2006 15.0% 15/08/2010 2010 No No Director and executive equity holdings (audited) Fully paid ordinary shares of JB Hi-Fi Limited 2007 Balance at 1 July 2006 Granted as compensation Received on exercise of options Net other change Balance at 30 June 2007 Balance held nominally No. No. No. No. No. No. J. King 32,258 – – – 32,258 32,258 P. Elliott 498,600 – – (150,000) 348,600 110,000 G. Levin 300,000 – – (200,000) 100,000 – W. Fraser 6,451 – – – 6,451 6,451 R. Uechtritz 4,000,000 – 288,251 (288,251) 4,000,000 – T. Smart 2,080,000 – 194,345 (430,000) 1,844,345 – F. Garonzi 240,000 – 86,625 – 326,625 160,000 R. Murray 21,334 – 119,958 (21,333) 119,959 – S. Browning – – 136,625 – 136,625 – 7,178,643 – 825,804 (1,089,584) 6,914,863 308,709 2006 Balance at 1 July 2005 Granted as compensation Received on exercise of options Net other change Balance at 30 June 2006 Balance held nominally No. No. No. No. No. No. J. King 32,258 – – – 32,258 32,258 P. Elliott 438,600 – – 60,000 498,600 260,000 G. Levin 400,000 – – (100,000) 300,000 – W. Fraser 6,451 – – – 6,451 6,451 R. Uechtritz 5,107,096 – 115,000 (1,222,096) 4,000,000 – T. Smart 2,000,000 – 80,000 – 2,080,000 – F. Garonzi 304,516 – – (64,516) 240,000 160,000 R. Murray 3,225 – 21,334 (3,225) 21,334 – S. Browning – – – – – – 8,292,146 – 216,334 (1,329,837) 7,178,643 458,709 F or p er so na l u se o nl y Liability limited by a scheme approved under Professional Standards Legislation. 20 Deloitte Touche Tohmatsu ABN 74 490 121 060 180 Lonsdale Street Melbourne VIC 3000 GPO Box 78 Melbourne VIC 3001 Australia DX 111 Tel: +61 (0) 3 9208 7000 Fax: +61 (0) 3 9208 7001 www.deloitte.com.au Auditor's Independence Declaration The Board of Directors JB Hi-Fi Limited 14 Spink Street BRIGHTON VIC 3186 14 August 2007 Dear Board Members JB Hi-Fi Limited In accordance with section 307C of the Corporations Act 2001, I am pleased to provide the following declaration of independence to the directors of JB Hi-Fi Limited. As lead audit partner for the audit of the financial statements of JB Hi-Fi Limited for the year ended 30 June 2007, 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 B PORTER Partner Chartered Accountants F or p er so na l u se o nl y Liability limited by a scheme approved under Professional Standards Legislation. 21 Deloitte Touche Tohmatsu ABN 74 490 121 060 180 Lonsdale Street Melbourne VIC 3000 GPO Box 78 Melbourne VIC 3001 Australia DX 111 Tel: +61 (0) 3 9208 7000 Fax: +61 (0) 3 9208 7001 www.deloitte.com.au Independent Auditor’s Report to the members of JB Hi Fi Limited Report on the Financial Report and AASB 124 Compensation Disclosures in the Directors’ Report We have audited the accompanying financial report of JB Hi Fi Limited (the company), which comprises the balance sheet as at 30 June 2007, and the income statement, cash flow statement and statement of changes in equity for the year ended on that date, a summary of significant accounting policies, other explanatory notes and the directors’ declaration of the consolidated entity comprising the company and the entities it controlled at the year’s end or from time to time during the financial year as set out on pages 23 to 58. We have also audited the compensation disclosures contained in the directors’ report. As permitted by the Corporations Regulations 2001, the company has disclosed information about the compensation of key management personnel (“compensation disclosures”) as required by paragraphs Aus 25.4 to Aus 25.7.2 of Accounting Standard AASB 124 Related Party Disclosures (“AASB 124”), under the heading “remuneration report” on pages 12 to 18 of the directors’ report, and not in the financial report. These compensation disclosures are identified in the directors’ report as being subject to audit. Directors’ Responsibility for the Financial Report and the AASB 124 Compensation Disclosures Contained in the Directors’ Report The directors of the company are responsible for the preparation and fair presentation of the financial report in accordance with Australian Accounting Standards (including the Australian Accounting Interpretations) and the Corporations Act 2001. This responsibility includes establishing and maintaining internal control relevant to the preparation and fair presentation of the financial report that is free from material misstatement, whether due to fraud or error; selecting and applying appropriate accounting policies; and making accounting estimates that are reasonable in the circumstances. The directors are also responsible for the compensation disclosures contained in the directors’ report. In Note 2, the directors also state, in accordance with Accounting Standard AASB 101 Presentation of Financial Statements, that compliance with the Australian equivalents to International Financial Reporting Standards ensures that the consolidated financial statements and notes complies with International Financial Reporting Standards. Auditor’s Responsibility Our responsibility is to express an opinion on the financial report and compensation disclosures contained in the directors’ report based on our audit. We conducted our audit in accordance with Australian Auditing Standards. These Auditing Standards require that we comply with relevant ethical requirements relating to audit engagements and plan and perform the audit to obtain reasonable assurance whether the financial report is free from material misstatement and the compensation disclosures comply with AASB 124. F or p er so na l u se o nl y 22 An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial report and the compensation disclosures contained in the directors’ report. The procedures selected depend on the auditor’s judgement, including the assessment of the risks of material misstatement of the financial report and the compensation disclosures contained in the directors’ report, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity’s preparation and fair presentation of the financial report and the compensation disclosures contained in the directors’ report 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 entity’s internal control. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by the directors, as well as evaluating the overall presentation of the financial report and the compensation disclosures contained in the directors’ report. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinions. Auditor’s Independence Declaration In conducting our audit, we have complied with the independence requirements of the Corporations Act 2001. Auditor’s Opinion on the Financial Report In our opinion: (a) the financial report of JB Hi Fi Limited is in accordance with the Corporations Act 2001, including: (i) giving a true and fair view of the company’s and consolidated entity’s financial position as at 30 June 2007 and of their performance for the year ended on that date; and (ii) complying with Australian Accounting Standards (including the Australian Accounting Interpretations) and the Corporations Regulations 2001; and (b) the consolidated financial statements and notes also comply with International Financial Reporting Standards as disclosed in Note 2. Auditor’s Opinion on the AASB 124 Compensation Disclosures Contained in the Directors’ Report In our opinion, the compensation disclosures that are contained on pages 12 to 18 under the heading “remuneration report” of the directors’ report and identified as being subject to audit, comply with paragraphs Aus 25.4 to Aus 25.7.2 of Accounting Standard AASB 124 Related Party Disclosures. DELOITTE TOUCHE TOHMATSU B PORTER Partner Chartered Accountants Melbourne, 14 August 2007 F or p er so na l u se o nl y JB Hi-Fi Limited Balance sheet 25 Balance sheet as at 30 June 2007 Consolidated Company 2007 2006 2007 2006 Note $’000 $’000 $’000 $’000 Current assets Cash and cash equivalents 34 23,707 4,493 – 1 Trade and other receivables 11 45,177 28,282 – 100 Inventories 12 211,311 161,137 – – Other 13 3,549 2,845 – – Total current assets 283,744 196,757 – 101 Non-current assets Investments accounted for using the equity method 14 689 689 450 450 Other financial assets 15 847 674 44,423 39,137 Plant and equipment 16 80,858 57,206 – – Deferred tax assets 7 7,094 4,867 – – Goodwill 17 34,110 20,015 – – Intangible assets 18 46,636 46,636 – – Total non-current assets 170,234 130,087 44,873 39,587 Total assets 453,978 326,844 44,873 39,688 Current liabilities Trade and other payables 19 185,288 122,762 10 8 Borrowings 20 702 519 – – Current tax liabilities 7 7,576 4,453 7,196 4,449 Provisions 21 15,166 9,508 – – Other 22 1,244 1,102 – – Total current liabilities 209,976 138,344 7,206 4,457 Non-current liabilities Borrowings 20 117,732 100,042 – – Provisions 21 682 771 – – Other 22 6,786 4,030 – – Total non-current liabilities 125,200 104,843 – – Total liabilities 335,176 243,187 7,206 4,457 Net assets 118,802 83,657 37,667 35,231 Equity Issued capital 23 35,883 33,036 35,883 33,036 Reserves 24 2,344 2,036 1,711 1,387 Retained earnings 25 74,883 43,880 73 808 Equity attributable to equity holders of the parent 113,110 78,952 37,667 35,231 Minority interest 5,692 4,705 – – Total equity 118,802 83,657 37,667 35,231 Notes to the financial statements are included on pages 28 to 58. F or p er so na l u se o nl y JB Hi-Fi Limited Statement of changes in equity 26 Statement of changes in equity for the financial year ended 30 June 2007 Consolidated Company 2007 2006 2007 2006 Note $’000 $’000 $’000 $’000 (a) Retained earnings 25 Retained earnings at the beginning of the year 43,880 25,494 808 549 Net profit attributable to members of the parent entity 40,389 25,813 8,651 7,687 Dividends (9,386) (7,428) (9,386) (7,428) Retained earnings at the end of the year 74,883 43,880 73 808 (b) Reserves 24 Reserves at the beginning of the year 2,036 644 1,387 644 Movements in reserves: Hedge: - interest rate swap (107) 649 – – - net investment (233) – – – Equity-settled benefits 324 743 324 743 Foreign currency translation 324 – – – Reserves at the end of the year 2,344 2,036 1,711 1,387 (c) Issued capital 23 Issued capital at the beginning of the year 33,036 32,428 33,036 32,428 Issue of shares under share option plan 2,847 608 2,847 608 Share capital at the end of the year 35,883 33,036 35,883 33,036 (d) Total recognised income and expenses for the year Net profit for the year 41,376 26,846 8,650 7,687 Profit attributable to minority interest (987) (1,033) – – Net profit attributable to members of the parent entity 40,389 25,813 8,650 7,687 Net income/(expense) recognised directly in equity: - interest rate swap (107) 649 – – - net investment (233) – – – - foreign currency translation 324 – – – Total recognised income and expenses for the year 40,373 26,462 8,650 7,687 Notes to the financial statements are included on pages 28 to 58. F or p er so na l u se o nl y JB Hi-Fi Limited Cash flow statement 27 Cash flow statement for the financial year ended 30 June 2007 Consolidated Company* 2007 2006 2007 2006 Note $’000 $’000 $’000 $’000 Cash flows from operating activities Receipts from customers 1,397,827 1,038,663 – – Payments to suppliers and employees (1,311,465) (1,006,089) – – Dividend received – 118 9,386 7,718 Interest and bill discounts received 1,289 672 635 2,756 Interest and other costs of finance paid (8,393) (6,410) – (527) Income taxes paid (15,229) (11,333) (14,221) (9,887) Net cash provided by/(used in) operating activities 34(d) 64,029 15,621 (4,200) 60 Cash flows from investing activities Proceeds from repayment of related party loans – – 11,350 63,704 Payments for plant and equipment (34,406) (29,046) – – Proceeds from sale of plant and equipment 180 200 – – Payment for businesses 34(b) (19,231) – – – Net cash (used in)/provided by investing activities (53,457) (28,846) 11,350 63,704 Cash flows from financing activities Borrowing activities: Repayment of lease liabilities – (20,117) – – Proceeds/(repayments) from borrowings 15,793 43,024 – (57,000) Equity activities: Proceeds from issue of equity securities 2,235 608 2,235 608 Dividends paid to members of the parent entity (9,386) (7,428) (9,386) (7,428) Net cash provided by/(used in) financing activities 8,642 16,087 (7,151) (63,820) Net increase/(decrease) in cash and cash equivalents 19,214 2,862 (1) (56) Cash and cash equivalents at the beginning of the financial year 4,493 1,631 1 57 Cash and cash equivalents at the end of the financial year 34(a) 23,707 4,493 – 1 * All cash movements are conducted through the JB Hi-Fi Group Pty Ltd bank account and are included here for disclosure purposes only. Notes to the financial statements are included on pages 28 to 58. F or p er so na l u se o nl y JB Hi-Fi Limited Notes to the financial statements 30 2. Significant accounting policies (cont.) (e) Derivative financial instruments The Group enters into financial instruments, including derivative financial instruments, to manage its exposure to interest rate and foreign exchange risk. Refer to note 35 for further details. Derivatives are initially recognised at fair value on the date a derivative contract is entered into and are subsequently remeasured to their fair value at each reporting date. The resulting gain or loss is recognised in profit or loss immediately unless the derivative is designated and effective as a hedging instrument, in which event, the timing of the recognition in profit or loss depends on the nature of the hedge relationship. The Group designates certain financial Instruments as hedges of highly probable forecast transactions (cash flow hedges) or hedges of net investments in foreign operations. Cash flow hedge The effective portion of charges in the fair value of derivatives that are designated and qualify as cash flow hedges are deferred in equity. The gain or loss relating to the ineffective portion is recognised immediately in profit or loss as part of other expenses or other income. Amounts deferred in equity are recycled in profit or loss in the periods when the hedged item is recognised in profit or loss. However, when the forecast transaction that is hedged results in the recognition of a non-financial asset or a non-financial liability, the gains and losses previously deferred in equity are transferred from equity and included in the initial measurement of the cost of the asset or liability. Hedge accounting is discontinued when the Group revokes the hedging relationship, the hedging instrument expires or is sold, terminated, or exercised, or no longer qualifies for hedge accounting. Any cumulative gain or loss deferred in equity at that time remains in equity and is recognised when the forecast transaction is ultimately recognised in profit or loss. When a forecast transaction is no longer expected to occur, the cumulative gain or loss that was deferred in equity is recognised immediately in profit or loss. Hedges of net investments on foreign operations Hedges of net investments on foreign operations are accounted for similarly to cash flow hedges. Any gain or loss on the hedging instrument relating to the effective portion of the hedge is recognised in the foreign currency translation reserve; the gain or loss relating to the ineffective portion is recognised immediately in profit and loss. Gains and losses deferred in the foreign currency translation reserve are recognised in profit or loss when the foreign operation is disposed. (f) Dividends A provision for dividends is not recognised as a liability unless the dividend is declared, determined or publicly recommended on or before the reporting date. (g) Employee benefits A liability is recognised for benefits accruing to employees in respect of wages and salaries, annual leave and long service leave when it is probable that settlement will be required and they are capable of being measured reliably. Liabilities recognised in respect of employee benefits 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 recognised in respect of employee benefits 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 reporting date. Contributions to defined contribution superannuation plans are expensed when incurred. F or p er so na l u se o nl y JB Hi-Fi Limited Notes to the financial statements 31 2. Significant accounting policies (cont.) (h) Goods and services tax Revenues, expenses and assets are recognised net of the amount of goods and services tax (GST), except: i. where the amount of GST incurred is not recoverable from the taxation authority, it is recognised as part of the cost of acquisition of an asset or as part of an item of expense; or ii. for receivables and payables which are recognised inclusive of GST. The net amount of GST recoverable from, or payable to, the taxation authority is included as part of receivables or payables. Cash flows are included in the cash flow statement on a gross basis. The GST component of cash flows arising from investing and financing activities which is recoverable from, or payable to, the taxation authority, is classified as operating cash flows. (i) Impairment of other tangible and intangible assets At each reporting date, the Group reviews the carrying amounts of its tangible and intangible assets to determine whether there is any indication that those assets have suffered an impairment loss. If any such indication exists, the recoverable amount of the asset is estimated in order to determine the extent of the impairment loss (if any). Where the asset does not generate cash flows that are independent from other assets, the Group estimates the recoverable amount of the cash- generating unit to which the asset belongs. Where a reasonable and consistent basis of allocation can be identified, corporate assets are also allocated to individual cash-generating units, or otherwise they are allocated to the smallest group of cash-generating units for which a reasonable and consistent allocation basis can be identified. Intangible assets with indefinite useful lives are tested for impairment annually and whenever there is an indication that the asset may be impaired. Recoverable amount is the higher of fair value, less costs to sell and value in use. In assessing value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset for which the estimates of future cash flows have not been adjusted. If the recoverable amount of an asset (or cash-generating unit) is estimated to be less than its carrying amount, the carrying amount of the asset (cash-generating unit) is reduced to its recoverable amount. An impairment loss is recognised in profit or loss immediately, unless the relevant asset is carried at fair value in which case the impairment loss is treated as a revaluation decrease. Where an impairment loss subsequently reverses, the carrying amount of the asset (cash-generating unit) is increased to the revised estimate of its recoverable amount, but only to the extent that the increased carrying amount does not exceed the carrying amount that would have been determined had no impairment loss been recognised for the asset (cash- generating unit) in prior years. A reversal of an impairment loss is recognised in profit or loss immediately, unless the relevant asset is carried at fair value, in which case the reversal of the impairment loss is treated as a revaluation income. (j) Income tax Current tax Current tax is calculated by reference to the amount of income taxes payable or recoverable in respect of the taxable profit or tax loss for the period. It is calculated using tax rates and tax laws that have been enacted or substantively enacted by reporting date. Current tax for current and prior periods is recognised as a liability (or asset) to the extent that it is unpaid (or refundable). Deferred tax Deferred tax is accounted for using the balance sheet liability method. Temporary differences are differences between the tax base of an asset or liability and its carrying amount in the balance sheet. The tax base of an asset or liability is the amount attributed to that asset or liability for tax purposes. F or p er so na l u se o nl y JB Hi-Fi Limited Notes to the financial statements 32 2. Significant accounting policies (cont.) (j) Income tax (cont.) In principle, deferred tax liabilities are recognised for all taxable temporary differences. Deferred tax assets are recognised to the extent that it is probable that sufficient taxable amounts will be available against which deductible temporary differences or unused tax losses and tax offsets can be utilised. However, deferred tax assets and liabilities are not recognised if the temporary differences giving rise to them arise from the initial recognition of assets and liabilities (other than as a result of a business combination) which affects neither taxable income nor accounting profit. Furthermore, a deferred tax liability is not recognised in relation to taxable temporary differences arising from the initial recognition of goodwill. Deferred tax liabilities are recognised for taxable temporary difference associated with investments in subsidiaries, branches and associates, and interest in joint ventures except where the Group is able to control the reversal of the temporary differences and it is probable that the temporary differences will not reverse in the foreseeable future. Deferred tax assets arising from deductible temporary differences associated with these investments and interests are only recognised to the extent that it is probable that there will be sufficient taxable profits against which to utilise the benefits of the temporary difference and they are expected to reverse in the foreseeable future. Deferred tax assets and liabilities are measured at the tax rates that are expected to apply to the period(s) when the asset and liability giving rise to them are realised or settled, based on tax rates (and tax laws) that have been enacted or substantively enacted by reporting date. The measurement of deferred tax liabilities and assets reflects the tax consequences that would follow from the manner in which the Group expects, at the reporting date, to recover or settle the carrying amount of its assets and liabilities. Deferred tax assets and liabilities are offset when they relate to income taxes levied by the same taxation authority and the company/Group intends to settle its current tax assets and liabilities on a net basis. Current and deferred tax for the period Current and deferred tax is recognised as an expense or income in the income statement, except when it relates to items credited or debited directly to equity, in which case the deferred tax is also recognised directly in equity, or where it arises from the initial accounting for a business combination, in which case it is taken into account in the determination of goodwill or excess. Tax consolidation The company and all its wholly-owned Australian resident entities are part of a tax-consolidated group under Australian taxation law. JB Hi-Fi Limited is the head entity in the tax-consolidated group. Tax expense/income, deferred tax liabilities and deferred tax assets arising from temporary differences of the members of the tax-consolidated group are recognised in the separate financial statements of the members of the tax-consolidated group using the ‘separate taxpayer within group’ approach by reference to the carrying amounts in the separate financial statements of each entity and the tax values applying under tax consolidation. Current tax liabilities and assets and deferred tax assets arising from unused tax losses and relevant tax credits of the members of the tax-consolidated group are recognised by the company (as head entity in the tax-consolidated group). Due to the existence of a tax funding arrangement between the entities in the tax-consolidated group, amounts are recognised as payable to or receivable by the company and each member of the group in relation to the tax contribution amounts paid or payable between the parent entity and the other members of the tax-consolidated group in accordance with the arrangement. Further information about the tax funding arrangement is detailed in note 7 to the financial statements. Where the tax contribution amount recognised by each member of the tax consolidated group for a particular period is different to the aggregate of the current tax liability or asset and any deferred tax asset arising from unused tax losses and tax credits in respect of that period, the difference is recognised as a contribution from (or distribution to) equity participants. F or p er so na l u se o nl y JB Hi-Fi Limited Notes to the financial statements 35 2. Significant accounting policies (cont.) (t) Financial Instruments Issued by the Company Debt and equity instruments are classified as either liabilities or as equity in accordance with the substance of the contractual arrangement. Transaction costs arising from the issue of equity instruments are recognised directly in equity as a reduction of the proceeds of the equity instruments to which the costs relate. Transaction costs are the costs that are incurred directly in connection with the issue of these equity instruments and which would not have been incurred had those instruments not been issued. Interest and dividends are classified as expenses or as distributions of profit consistent with the balance sheet classification of the related debt or equity instrument or component parts of compound instruments. (u) Share Based Payments Equity-settled share-based payments granted after 7 November 2002, which were unvested as at 1 January 2005, are measured at fair value of the equity instrument at the date of grant. Fair value is measured by use of the Black Scholes model. The expected life used in the model has been adjusted, based on management’s best estimate, for the effects of non-transferability, exercise restrictions, and behavioural considerations. Future details on how the fair value of equity- settled share based transactions has been determined can be found in note 24. The fair value determined at the grant date of the equity-settled share-based payments is expensed on a straight-line basis over the vesting period, based on the Group's estimate of shares that will eventually vest. (v) Goodwill Goodwill acquired in a business combination is initially measured at cost, being the excess of the cost of the business combination over the acquirer's interest in the net fair value of the identifiable assets, liabilities and contingent liabilities recognised. Goodwill is subsequently measured at its cost less any impairment losses. For the purposes of impairment testing, goodwill is allocated to each of the Group's cash-generating units (CGUs), or groups of CGUs, expected to benefit from the synergies of the business combination. CGUs (or groups of CGUs) to which goodwill has been allocated are tested for impairment annually, or more frequently If events or changes in circumstances indicate that goodwill might be impaired. If the recoverable amount of the CGU (or groups of CGUs) is less than the carrying amount of the CGU (or groups of CGUs), the impairment loss is allocated first to reduce the carrying amount of any goodwill allocated to the CGU (or groups of CGUs) and then to the other assets in the CGU (or groups of CGUs) pro-rata on the basis of the carrying amount of each asset in the CGU (or groups of CGUs). An impairment loss recognised for goodwill is recognised immediately in profit or loss and is not reversed in a subsequent period. On disposal of an operation within a CGU, the attributable amount of goodwill is included in the determination of the profit or loss on disposal of the operation. (w) Foreign currency The individual financial statements of each Group entity are presented in the currency of the primary economical environment in which the entity operates (Its functional currency). For the purpose of the consolidated financial statements, the results and financial position of each entity are expressed in Australian dollars, which is the functional currency of JB Hi-Fi Limited, and the presentation currency for the consolidated financial statements. In preparing the financial statements of the individual entities, transactions in currencies other than the entity's functional currency (foreign currencies) are recorded at the rate of exchange prevailing on the dates of the transactions. At each balance sheet date, monetary items denominated in foreign currencies are retranslated at the rates prevailing at the balance sheet date. Non-monetary items carried at fair value that are denominated in foreign currencies are retranslates at the rates prevailing on the date when the fair value was determined. Non-monetary Items that are measured in terms of historical cost in a foreign currency are not retranslated. F or p er so na l u se o nl y JB Hi-Fi Limited Notes to the financial statements 36 2. Significant accounting policies (cont.) (w) Foreign currency (cont.) Exchange differences are recognised in profit or loss in the period in which they arise except that: • exchange differences which relate to assets under construction for future productive use, which are included in the cost of those assets where they are regarded as an adjustment to interest costs on foreign currency borrowings; • exchange differences on transactions entered into in order to hedge certain foreign currency risks; and • exchange differences on monetary items receivable from or payable to a foreign operation for which settlement is neither planned or likely to occur, which form part of the net investment in a foreign operation, and which are recognised in the foreign currency translation reserve and recognised in profit or loss on disposal of the net investment. On consolidation, the assets and liabilities of the Group’s foreign operations (including comparatives) are translated into Australian dollars at exchange rates prevailing on the balance sheet date. Income and expense items (including comparatives) are translated at the average exchange rates for the period, unless exchange rates fluctuate significantly during that period, in which case the exchange rates at the dates of the transactions are used. Exchange differences arising, if any, are classified as equity and transferred to the Group's translation reserve. Such exchange differences are recognised in profit or loss in the period in which the foreign operation is disposed. Goodwill and fair value adjustments arising on the acquisition of a foreign entity on or after the date of transition to A- IFRS are treated as assets and liabilities of the foreign entity and translated at exchange rates prevailing at the reporting date. Goodwill arising on acquisitions before the date of transition to A-IFRS is treated as an Australian dollar denominated asset. (x) Financial assets Investments are recognised and derecognised on trade date where the purchase or sale of an investment is under a contract whose terms require delivery of the investment within the timeframe established by the market concerned, and are initially measured at fair value, net of transaction costs except for those financial assets classified as at fair value through profit or loss which are initially measured at fair value. Subsequent to initial recognition, investments in subsidiaries are measured at cost in the company financial statements. Subsequent to initial recognition, investments in associates are accounted for under the equity method in the consolidated financial statements and the cost method in the company financial statements. F or p er so na l u se o nl y JB Hi-Fi Limited Notes to the financial statements 37 3. Critical accounting judgements and key sources of estimation uncertainty In the application of the Group’s accounting policies, which are described in note 2, management is required to make judgments, estimates and assumptions about carrying values of assets and liabilities that are not readily apparent from other sources. The estimates and associated assumptions are based on historical experience and various other factors that are believed to be reasonable under the circumstance, the results of which form the basis of making the judgments. Actual results may differ from these estimates. The estimates and judgements that have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial year are set out as appropriate in the Notes to the Financial Statements. The estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates and underlying assumptions are recognised in the period in which the estimate is revised if the revision affects only that period, or in the period of the revision and future periods if the revision affects both current and future periods. Consolidated Company 2007 2006 2007 2006 $’000 $’000 $’000 $’000 4. Revenue An analysis of the Group's revenue for the year is as follows: Revenue from the sale of goods 1,281,837 945,821 – – Interest: Loans and receivables – – 635 2,756 Other entities 1,302 672 – – Dividends: Subsidiaries – – 9,386 7,600 Other entities – – – 118 Other income 631 878 12 – 1,933 1,550 10,033 10,474 1,283,770 947,371 10,033 10,474 5. Finance costs Interest on loans 7,305 5,683 – 1,092 Other interest expense 136 279 – 205 Finance lease charge 16 448 – – 7,457 6,410 – 1,297 The weighted average effective interest rate on loans was 6.8% (2006: 6.0%). F or p er so na l u se o nl y JB Hi-Fi Limited Notes to the financial statements 40 7. Income taxes (cont.) Deferred tax balances Deferred tax assets/(liabilities) arise from the following: Consolidated 2007 Opening balance $’000 Charged to income $’000 Acquisitions $’000 Closing balance $’000 Temporary differences Gross deferred tax liabilities Trade and other receivables (798) 72 – (726) Plant and equipment (288) (626) – (914) Cash flow Hedge (200) (52) – (252) (1,286) (606) – (1,892) Gross deferred tax assets Trade and other receivables 85 (22) – 63 Inventories 1,242 385 199 1,826 Plant and equipment 347 (118) 248 477 Tax bases without an asset carrying amount 195 (195) – – Other financial liabilities – 106 – 106 Trade and other payables 642 312 – 954 Provisions 3,644 1,808 108 5,560 6,155 2,276 555 8,986 4,869 1,670 555 7,094 Consolidated 2006 Opening balance $’000 Charged to income $’000 Acquisitions $’000 Closing balance $’000 Temporary differences Gross deferred tax liabilities Trade and other receivables (1,374) 576 – (798) Plant and equipment (334) 46 – (288) Cash flow Hedge – (200) – (200) (1,708) 422 – (1,286) Gross deferred tax assets Trade and other receivables 54 31 – 85 Inventories 268 973 – 1,241 Plant and equipment 125 222 – 347 Tax bases without an asset carrying amount – 195 – 195 Trade and other payables 494 148 – 642 Provisions 2,751 893 – 3,644 3,692 2,462 – 6,155 1,984 2,884 – 4,868 The company has no taxable and deductible temporary differences in the current or prior reporting periods. F or p er so na l u se o nl y JB Hi-Fi Limited Notes to the financial statements 41 7. Income taxes (cont.) Tax consolidation Relevance of tax consolidation to the group The company and its wholly-owned Australian resident entities have formed a tax-consolidated group with effect from 1 July 2003 and are therefore taxed as a single entity from that date. The head entity within the tax-consolidated group is JB Hi-Fi Limited. The members of the tax-consolidated group are identified at note 29. Nature of tax funding arrangements and tax sharing agreements Entities within the tax-consolidated group have entered into a tax funding arrangement and a tax-sharing agreement with the head entity. Under the terms of the tax funding arrangement, JB Hi-Fi Limited and each of the entities in the tax-consolidated group have agreed to pay a tax equivalent payment to or from the head entity, based on the current tax liability or current tax asset of the entity. Such amounts are reflected in amounts receivable from or payable to other entities in the tax-consolidated group. The tax sharing agreement entered into between members of the tax-consolidated group provides for the determination of the allocation of income tax liabilities between the entities should the head entity default on its tax payment obligations or if an entity should leave the tax-consolidated group. The effect of the tax sharing agreement is that each member's liability for tax payable by the tax-consolidated group is limited to the amount payable to the head entity under the tax funding agreement. 8. Key management personnel remuneration Details of key management personnel The following persons acted as directors of the company during and since the end of the financial year: J. King Chairman, Board and Remuneration Committee, Non-executive Director P. Elliott Chairman, Audit and Risk Management Committee, Non-executive Director G. Levin Non-executive Director W. Fraser Non-executive Director R. Uechtritz Chief Executive Officer and Executive Director T. Smart Chief Operating Officer and Executive Director The highest remunerated company and Group executives for the 2007 financial year were: R. Uechtritz Chief Executive Officer and Executive Director T. Smart Chief Operating Officer and Executive Director F. Garonzi General Manager R. Murray Chief Financial Officer S. Browning Marketing Director Key management personnel compensation The aggregate compensation of the key management personnel of the consolidated entity and the company is set out below: Consolidated Company 2007 $ 2006 $ 2007 $ 2006 $ Short term employee benefits 4,252,117 3,217,930 359,700 359,700 Post-employment benefits 228,485 223,726 – – Share-based payments 567,550 507,766 – – 5,048,152 3,949,422 359,700 359,700 F or p er so na l u se o nl y JB Hi-Fi Limited Notes to the financial statements 42 9. Share-based payments Executive and employee share option plan The following reconciles the outstanding share options granted under the employee and executive share option plan at the beginning and end of the financial year: 2007 2006 Number of options Weighted average exercise price $ Number of options Weighted average exercise price $ Balance at beginning of the financial year 4,009,227 1.51 3,688,896 1.91 Granted during the financial year 1,095,000 5.16 946,664 3.50 Exercised/lapsed during the financial year (1,232,078) 1.94 (626,333) 0.97 Balance at end of the financial year (i) 3,872,149 3.36 4,009,227 2.43 Exercisable at end of the financial year 842,077 2.36 228,272 1.51 (i) the share options outstanding at the end of the financial year had a weighted exercise price of $3.36 (2006: $2.43), and a weighted average remaining contractual life of 1,050 days (2006: 1,114 days). Consolidated Company 2007 2006 2007 2006 $ $ $ $ 10. Remuneration of auditors Auditor of the parent entity Audit of the financial report – Current year 266,500 275,000 – – Taxation services including due diligence 128,763 38,570 – – Other non-audit services: Due diligence on business acquired (i) 65,792 – – – Review on transition to A-IFRS – 26,900 Other 5,000 – – – 466,055 340,470 – – Other auditors Audit of the financial report – Current year 24,889 – – – Other non-audit services: Review on business acquired 19,419 – – – 44,308 – – – 510,363 340,470 – – (i) paid to Deloitte NZ The auditor of JB Hi-Fi Limited is Deloitte Touche Tohmatsu. The auditor of JB Hi-Fi Group (NZ) Limited (formerly Hill & Stewart Appliances Limited) is KPMG. 11. Trade and other receivables Trade receivables 13,867 5,946 – – Allowance for doubtful debts (211) (284) – – 13,656 5,662 – – Goods and services tax (GST) recoverable 469 983 – – Non-trade receivables 31,052 21,637 – 100 45,177 28,282 – 100 F or p er so na l u se o nl y JB Hi-Fi Limited Notes to the financial statements 45 18. Other intangible assets Consolidated Company Brand Names $’000 Rights to profit share $’000 Total $’000 Total $’000 Gross carrying amount Balance at 1 July 2005 43,094 3,542 46,636 – Additions – – – – Balance at 1 July 2006 43,094 3,542 46,636 – Additions – – – – Balance at 30 June 2007 43,094 3,542 46,636 – Net book value As at 30 June 2006 43,094 3,542 46,636 – As at 30 June 2007 43,094 3,542 46,636 – Consolidated Company 2007 2006 2007 2006 $’000 $’000 $’000 $’000 19. Trade and other payables Trade payables 168,196 114,650 – – Other creditors and accruals 9,573 4,014 10 8 Deferred income 6,611 4,098 – – Goods and services tax (GST) payable 908 – – – 185,288 122,762 10 8 20. Borrowings Secured - at amortised cost Current Hire purchase lease liabilities (i) (note 28) 67 519 – – Bank overdraft (ii) 635 – – – 702 519 – – Non-current Hire purchase lease liabilities (i) (note 28) 18 – – – Bank loans (iii) 117,714 100,042 – – 117,732 100,042 – – 118,434 100,561 – – (i) Secured by the assets leased, the current market value of which exceeds the value of the hire purchase liability. (ii) Secured by a fixed and floating charge over the assets of JB Hi-Fi Group (NZ) Limited, the current market value of which exceeds the value of the overdraft. (iii) Secured by a fixed and floating charge over the Group's assets, the current market value of which exceeds the value of the loan. F or p er so na l u se o nl y JB Hi-Fi Limited Notes to the financial statements 46 Consolidated Company 2007 2006 2007 2006 $’000 $’000 $’000 $’000 21. Provisions Current Employee benefits 15,166 9,508 – – Non-current Employee benefits 682 771 – – 15,848 10,279 – – 22. Other liabilities Current Lease accrual 291 1,020 – – Lease incentive 953 82 – – 1,244 1,102 – – Non-current Lease accrual 2,125 660 – – Lease incentive 4,661 3,370 – – 6,786 4,030 – – 8,030 5,132 – - 23. Issued capital 104,628,745 fully paid ordinary shares (2006: 103,465,667) 35,883 33,036 35,883 33,036 Changes to the then Corporations Law abolished the authorised capital and par value concept in relation to share capital from 1 July 1998. Therefore, the company does not have a limited amount of authorised capital and issued shares do not have a par value. 2007 2006 No. ’000 $’000 No. ’000 $’000 Fully paid ordinary shares Balance at beginning of the financial year 103,466 33,036 102,840 32,428 Issue of shares under employee & executive share option plan (note 9) 1,163 2,235 626 608 Transfer from equity settled benefits reserve (note 24) – 613 – – Balance at end of the financial year 104,629 35,884 103,466 33,036 Fully paid ordinary shares carry one vote per share and carry the right to dividends. Share options In accordance with the provisions of the employee and executive share option plan, as at 30 June 2007, employees and executives have options over 3,872,149 ordinary shares (of which 3,030,072 were unvested), in aggregate, with various expiry dates. As at 30 June 2006, employees and executives had options over 4,009,227 ordinary shares (of which 3,780,955 were unvested), in aggregate, with various expiry dates. Share options granted under the employee and executive share options plan carry no rights to dividends and no voting rights. Further details of the employee and executive share option plan are contained in the Director's Report. F or p er so na l u se o nl y JB Hi-Fi Limited Notes to the financial statements 47 Consolidated Company 2007 2006 2007 2006 $’000 $’000 $’000 $’000 24. Reserves Equity-settled benefits 1,711 1,387 1,711 1,387 Foreign currency translation 324 – – – Hedge – interest rate swap 542 649 – – Hedge – net investment (233) – – – 2,344 2,036 1,711 1,387 Equity-settled benefits reserve Balance at beginning of the financial year 1,387 644 1,387 644 Share-based payment 937 743 937 743 Transfer to share capital (613) – (613) – Balance at end of the financial year 1,711 1,387 1,711 1,387 The equity-settled benefits reserve arises on the grant of share options to employees and executives under the employee and executive share option plan. Amounts are transferred out of the reserve and into issued capital when the options are exercised. Further information about share-based payments to employees is made in note 9 to the financial statements. Consolidated Company 2007 2006 2007 2006 $’000 $’000 $’000 $’000 Foreign currency translation reserve Balance at beginning of the financial year – – – – Translation of foreign operations 324 – – – Balance at end of the financial year 324 – – – Exchange differences relating to the translation of the Group's foreign controlled entities from their functional currencies into Australian dollars are brought to account directly to the foreign currency translation reserve. Hedging Reserve - Interest rate swaps Balance at beginning of the financial year 649 – – – Gain/(loss) recognised: Interest Rate Swaps 29 669 – – Transferred to profit or loss: Interest Rate Swaps (136) (20) – – Balance at end of the financial year 542 649 – – The hedging reserve - interest rate swaps, represents hedging gains and losses recognised on the effective portion of cash flow hedges with respect to the group's interest rate swaps. The cumulative deferred gain or loss on the interest rate swaps is recognised in the profit or loss when the hedged transaction impacts the profit or loss. Hedging Reserve - net investment Balance at beginning of the financial year – – – – Gain/(loss) recognised: Foreign currency net investment loan (233) – – – Balance at end of the financial year (233) – – – The hedging reserve - net investment, represents hedging gains and losses recognised on the effective portion of foreign currency loans designated as net investment hedges. The gains and losses deferred in the hedging reserve - net investment are recognised in the profit or loss when the foreign operation is disposed. F or p er so na l u se o nl y JB Hi-Fi Limited Notes to the financial statements 50 28. Leases (cont.) Operating leases Leasing arrangements Operating leases relate to stores with new lease terms of between two to ten years, with, in some cases an option to extend. All operating lease contracts contain market review clauses in the event that the company/Group exercises its option to renew. The company/Group does not have an option to purchase the leased asset at the expiry of the lease period. Non-cancellable operating lease commitments Consolidated Company 2007 2006 2007 2006 $’000 $’000 $’000 $’000 Not longer than one year 29,394 18,353 – – Longer than one year and not longer than five years 73,977 46,832 – – Longer than five years 73,845 39,837 – – 177,216 105,022 – – 29. Subsidiaries Ownership Interest Name of Entity Country of Incorporation 2007 % 2006 % Parent entity JB Hi-Fi Limited (i) Australia Subsidiaries JB Hi-Fi Group Pty Ltd (ii) Australia 100 100 JB Hi-Fi (A) Pty Ltd (ii) Australia 100 100 Clive Anthonys Pty Ltd (iii) Australia 70 70 JB Hi-Fi Group (NZ) Limited (iv) New Zealand 100 – JB Hi-Fi NZ Limited (v) New Zealand 100 – (i) JB Hi-Fi Limited is the head entity within the tax consolidated group (ii) These wholly-owned subsidiaries are members of the tax consolidated group. These subsidiaries have also entered into a deed of cross guarantee with JB Hi-Fi Limited pursuant to ASIC Class Order 98/1418 and are relieved from the requirement to prepare and lodge an audited financial report. (iii) Acquired a 70% stake on 1 July 2004 (iv) Formerly known as Hill & Stewart Appliances Limited. Acquired on 1 March 2007. Refer to note 30 for further details. (v) JB Hi-Fi NZ Limited was incorporated in FY07 and is the holding company of JB Hi-Fi Group (NZ) Limited. The consolidated income statement and balance sheet of the entities party to the deed of cross guarantee are: Consolidated 2007 2006 $’000 $’000 Income Statement Revenue 1,148,183 837,544 Cost of sales (894,837) (650,931) Gross profit 253,346 186,613 Other income 1,920 1,172 Sales and marketing expenses (124,492) (98,821) Occupancy expenses (42,492) (30,118) Administration expenses (12,634) (10,474) Finance costs (7,936) (6,389) Other expenses (12,810) (8,249) Profit before tax 54,902 33,734 Income tax expense (16,722) (10,452) Profit for the year 38,180 23,282 F or p er so na l u se o nl y JB Hi-Fi Limited Notes to the financial statements 51 29. Subsidiaries (cont.) Consolidated 2007 2006 $’000 $'000 Balance Sheet Current assets Cash and cash equivalents 13,713 (1,661) Trade and other receivables 43,327 24,132 Inventories 186,244 147,695 Other 3,461 2,678 Total current assets 246,745 172,844 Non-current assets Investments accounted for using the equity method 450 450 Other financial assets 42,977 24,989 Plant and equipment 70,496 51,750 Deferred tax assets 5,729 4,206 Goodwill 1,727 1,727 Intangible assets 46,636 46,636 Total non-current assets 168,015 129,758 Total assets 414,760 302,602 Current liabilities Trade and other payables 162,490 109,675 Borrowings – 314 Current tax liabilities 7,196 4,449 Provisions 13,366 8,419 Other 1,205 1,065 Total current liabilities 184,257 123,922 Non-current liabilities Borrowings 117,714 100,042 Provisions 623 896 Other 6,676 3,876 Total non-current liabilities 125,013 104,814 Total liabilities 309,270 228,736 Net assets 105,490 73,866 Equity Issued capital 35,883 33,036 Reserves 2,020 2,036 Retained earnings 67,587 38,794 Total equity 105,490 73,866 F or p er so na l u se o nl y JB Hi-Fi Limited Notes to the financial statements 52 30. Acquisition of businesses Name of businesses acquired Principal activity Date of acquisition Proportion of shares acquired % Cost of acquisition $’000 Contribution to NPAT $’000 2007 Hill & Stewart Appliances Limited Retailer 1 March 2007 100% 19,231 (93) 19,231 (93) 2006 None – – Hill & Stewart Appliances Limited Book value Fair value adjustment Fair value on acquisition Net assets acquired $’000 $’000 $’000 Current assets: Trade & other receivables 2,701 – 2,701 Inventories 7,589 – 7,589 Other 124 – 124 Non-current assets: Plant & Equipment 2,122 – 2,122 Other 556 – 556 Current liabilities: Trade & other payables (4,383) – (4,383) Provisions – (891) (891) Other (2,427) - (2,427) 6,282 (891) 5,391 Goodwill on acquisition 13,840 The initial accounting for the acquisition of Hill & Stewart Appliance Limited has only been provisionally determined as at the reporting date as the fair value of certain assets and contingent liabilities have yet to be finally determined. 31. Segment information Information on business segments The Group operates in one segment being the home consumer products retail industry including audiovisual equipment, computing equipment, whitegoods, kitchen appliances and other related equipment. Information on geographical segments The Group operates in two principal geographical segments - Australia and New Zealand (2006: Australia). The Group's revenue from external customers and information about its segment assets by geographical location is detailed below: Revenue from external customers Net profit after tax Segment assets Acquisition of segment assets 2007 2006 2007 2006 2007 2006 2007 2006 $'000 $'000 $'000 $'000 $'000 $'000 $'000 $'000 Australia 1,259,908 945,821 41,469 26,846 420,144 326,845 34,585 29,046 New Zealand 21,929* – (93) – 33,834 – 15,962 – * Business was acquired on 1 March 2007. Historical revenue for the 12 months to 30 June 2007 was $61,420,000. F or p er so na l u se o nl y JB Hi-Fi Limited Notes to the financial statements 55 34. Notes to the cash flow statement (cont.) Consolidated Company 2007 2006 2007 2006 $’000 $’000 $’000 $’000 (d) Reconciliation of profit for the period to net cash flows from operating activities Profit for the period 41,376 26,846 8,651 7,687 (Gain)/loss on sale or disposal of non-current assets 1,935 46 – – Share of associates’ profit – (170) – – Depreciation and amortisation 10,854 7,439 – – Equity settled share-based payment 937 743 937 743 Income tax paid in relation to other entities in the tax consolidated group – – (16,637) (9,778) Increase/(decrease) in current tax liability 2,774 2,169 2,747 2,067 Increase/(decrease) in deferred tax balances (1,671) (2,883) – – Changes in net assets and liabilities, net of effects from acquisition of businesses: (Increase)/decrease in assets: Current receivables (14,319) (8,430) 100 (99) Current inventories (42,585) (58,980) – – Other current assets (580) (197) – – Other non-current assets (335) – – 205 Increase/(decrease) in liabilities: Current payables 58,142 44,896 2 (765) Current provisions 4,767 2,380 – – Other current liabilities 141 259 – – Non-current payables – 96 – – Non-current provisions (89) 37 – – Other non-current liabilities 2,682 1,370 – – Net cash from operating activities 64,029 15,621 (4,200) 60 35. Financial instruments (a) Financial risk management objectives The Group's Corporate Treasury function provides services to the business, co-ordinates access to domestic and international financial market monitors and manages the financial risks relating to the operations of the Group. These risks included currency and cash flow interest risk. The Group seeks to minimise the effects of these risks, by using various financial instruments, including derivative financial instruments. The Group does not enter into or trade financial instruments, including derivative financial instruments, for speculative purposes. The use of financial derivatives is governed by the Group’s policies approved by the Board of directors, which provide written principles on the use of financial derivatives. Compliance with policies and exposure limits is reviewed by the Audit and Risk Management committee on a continuous basis. (b) Significant accounting policies Details of the significant accounting policies and methods adopted, including the criteria for recognition, the basis of measurement and the basis on which income and expenses are recognised, in respect of each class of financial asset, financial liability and equity instrument are disclosed in note 1 to the financial statements. (c) Foreign currency risk management The Group operates internationally and is exposed to foreign exchange risk arising, primarily with respect to the NZ dollar. The Group has sought to hedge its net investment in their New Zealand operations. Refer to note 2(e) for further details. F or p er so na l u se o nl y JB Hi-Fi Limited Notes to the financial statements 56 35. Financial instruments (cont.) (d) Interest rate risk management The Group is exposed to interest rate risk as it borrows funds at both fixed and floating interest rates. The risk is managed by the Group by maintaining an appropriate mix between fixed and floating rate borrowings, by the use of interest rate swap contracts and forward interest rate contracts. Hedging activities are evaluated regularly to align with interest rate views and defined risk appetite; ensuring optimal hedging strategies are applied, by either positioning the balance sheet or protecting interest expense through different interest rate cycles. Interest rate swap contracts Under interest rate swap contracts, the Group agrees to exchange the difference between fixed and floating rate interest amounts calculated on agreed notional principal amounts. Such contracts enable the Group to mitigate the risk of changing interest rates on the fair value of issued fixed rate debt held and the cash flow exposures on the issued variable debt held. The fair value of interest rate swaps at the reporting date is determined by discounting the future cash flows using the curves at reporting date and the credit risk inherent in the contract, as disclosed below. The average interest rate is based on the outstanding balances at the start of the financial year. The following tables detail the notional principal amounts and remaining terms of interest rate swap contracts outstanding as at reporting date: Average Contracted Fixed Interest Rate Notional Principal Amount Fair Value Outstanding floating for fixed contracts 2007 % 2006 % 2007 $’000 2006 $’000 2007 $’000 2006 $’000 1 to 2 years 5.7 – 55,000 – 843 – 2 to 5 years – 5.7 – 55,000 – 668 55,000 55,000 843 668 The interest rate swap settles on a quarterly basis and the Group settles the difference on a net basis. The interest rate swap contract is designated a cash flow hedge in order to reduce the Group's cash flow exposure resulting from variable interest rates on borrowings. The interest rate swap and the interest payments on the loan occur simultaneously and the amount deferred in equity is recognised in profit or loss over the loan period. F or p er so na l u se o nl y JB Hi-Fi Limited Notes to the financial statements 57 35. Financial instruments (cont.) Maturity profile of financial instruments The maturity profile of financial assets and financial liabilities held by the company and the Group are detailed below. The following table details the Group's exposure to interest rate risk as at 30 June 2007: Fixed maturity dates 2007 Weighted average effective interest rate Variable interest rate Less than 1 year 1–2 years 2–3 years 3–4 years 4–5 years 5+ years Non interest bearing Total % $’000 $’000 $’000 $’000 $’000 $’000 $’000 $’000 $’000 Financial assets: Cash and cash equivalents 5.8% 23,707 – – – – – – – 23,707 Trade receivables – – – – – – – – 45,177 45,177 Other deposits – – – – – – – – 1,142 1,142 23,707 – – – – – – 46,319 70,026 Financial liabilities: Trade payables – – – – – – – – 168,196 168,196 Bank loans 6.8% 62,714 – 55,000 – – – – – 117,714 Bank overdraft 9.75% 635 – – – – – – – 635 Hire purchase lease liabilities 7.2% – 67 18 – – – – – 85 Employee benefits – – – – – – – – 15,848 15,848 63,349 67 55,018 – – – – 184,044 302,478 The following table details the Group's exposure to interest rate risk as at 30 June 2006: Fixed maturity dates 2006 Weighted average effective interest rate Variable interest rate Less than 1 year 1–2 years 2–3 years 3–4 years 4–5 years 5+ years Non interest bearing Total % $’000 $’000 $’000 $’000 $’000 $’000 $’000 $’000 $’000 Financial assets: Cash and cash equivalents 4.9% 4,493 – – – – – – – 4,493 Trade receivables – – – – – – – – 28,282 28,282 Other deposits – – – – – – – – 1,131 1,131 4,493 – – – – – – 29,413 33,906 F or p er so na l u se o nl y