AUSTAL LIMITED - Annual Report 2014

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Austal Limited Appendix 4E for the year ended 30 June 2014

1.	The report ing period is from 1 July 2013 to 30 June 2014.T he previous cor responding perio d is 1 July	The report ing period is from 1 July 2013 to 30 June 2014.T he previous cor responding perio d is 1 July	The report ing period is from 1 July 2013 to 30 June 2014.T he previous cor responding perio d is 1 July	2012	2012	to	30 June 2013 .
2.	Results fo r announcement to the market.						$'000
	2.1 Re venue from ord inary activities	up 24.8 % to				$	1,122,863
	2.2 Pr ofit (loss) fromo rdinary activities after tax	down	1 1% to			$	31,859
	2.3 Ne t profit for thep eriod attributable to members	down	1 2% to			$	31,548
	2.4 D ividend distributio ns
	No dividends is pa yable with respe ct to the year en ded 30 June 20 14.
	2.5 Re cord date for de termining entitle ments to the div idends	N/A
	2.6 Ex planation of figu res in 2.1 to 2.4 that may be req uired	Refer	to Review of Ope		rations within the Annual Report
3.	Statement of comprehensi ve income withn otes	Refer	to Annual Report
4.	Statement of financial pos ition with notes	Refer	to Annual Report
5.	Statement of cash flows an d notes	Refer	to Annual Report
6.	Statement of changes ine quity	Refer	to Annual Report
7.	Details of dividend or distri bution reinvestm ent plans	N/A
8.	Details of dividends or dist ributions	N/A
9.	Net tangib le assets per ord inary security
	9.1 C urrent period ($/ share)	$		1.24
	9.2 Pr evious correspo nding period ($/ share)	$		1.15
10.	Control ga ined or lost over entities during t he period			-
11.	Details of associates and j oint venture enti ties	N/A
12.	Other sign ificant informatio n	Refer	to Annual Report
13.	Accounting standards used by foreign entit ies
	Th e financial state ments of subsid iaries are prepar ed using
	co nsistent accoun ting policies fort he same reportin g period as the
	pa rent company.T he foreign entiti es including Aus tal USA prepare
	th eir accounts und er accounting st andards that are equivalent to
	In ternational Finan cial ReportingS tandards.
14.	Commenta ry on the result
	14.1 Ea rnings per share
	C urrent period –b asic	$		0.09
	Pr evious correspo nding period –b asic	$		0.12
	C urrent period –d iluted	$		0.09
	Pr evious correspo nding period –d iluted	$		0.12
	14.2 Re turns to shareh olders including distributions and buy backs
	No dividends were declared with re spect to the yea r ended 30 June 2014.
	14.3 Si gnificant feature s of operating pe rformance	Refer	to Annual Report
	14.4 Se gment results	Refer	to Annual Report
	14.5 Tr ends in perform ance	Refer	to Annual Report
	14.6 O ther factors affec ting the resultsi n period or futur e	Refer	to Annual Report
15.	Audit / rev iew of accounts upon which this is based	Audited accounts
16.	Accounts not audited or su bject to review	N/A
17.	Qualificatio ns of audit/revie w	No qua lifications

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A U STAL LIMITED 2014 ANN U AL RE P ORT

Contents ..................................................................................................................................................................... 1 Index to the notes to the financial statements ............................................................................................................ 2 Chairman’s report ...................................................................................................................................................... 3 Chief Executive Officer’s report ................................................................................................................................. 5 Review of operations ................................................................................................................................................. 7 Directors’ report ......................................................................................................................................................... 9 Message from the Nomination and Remuneration Committee ................................................................................ 15 Remuneration report (audited) ................................................................................................................................. 16 Auditor independence and non-audit services ......................................................................................................... 28 Consolidated statement of profit or loss and other comprehensive income for the year ended 30 June 2014 ....... 29 Consolidated statement of financial position as at 30 June 2014 ............................................................................ 30 Consolidated statement of changes in equity for the year ended 30 June 2014 ..................................................... 31 Consolidated statement of cash flows for the year ended 30 June 2014 ................................................................ 32 Notes to the financial statements ............................................................................................................................. 33 Directors’ declaration ............................................................................................................................................... 90 Corporate governance statement ............................................................................................................................ 91 Independent audit report to the members of Austal Limited .................................................................................... 98 Shareholder information ......................................................................................................................................... 100 Corporate directory ................................................................................................................................................ 101

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1 | AUSTAL LIMITED ANNUAL REPORT 2014

Index to the notes to the financial statements

Basis of prep aration ....... ..................... .................... .................... ..................... .................... .................... ................	Basis of prep aration ....... ..................... .................... .................... ..................... .................... .................... ................	33
Note 1.	Corporate In formation ..... ...................... ..................... ..................... ...................... ..................... .................	33
Note 2.	Basis of pre paration ........ ...................... ..................... ..................... ...................... ..................... .................	33
Current year performance ................... .................... .................... ..................... .................... .................... ................		39
Note 3.	Operating se gments ....... ...................... ..................... ..................... ...................... ..................... .................	39
Note 4.	Revenue .... ..................... ...................... ..................... ..................... ...................... ..................... .................	43
Note 5.	Other incom e and expens es ................. ..................... ..................... ...................... ..................... .................	45
Note 6.	Earnings pe r share ......... ...................... ..................... ..................... ...................... ..................... .................	47
Note 7.	Reconciliatio n of net profit after tax ton et cash flows from operatio ns ................. ..................... .................	48
Note 8.	Dividends pa id and propo sed ............... ..................... ..................... ...................... ..................... .................	48
Note 9.	Income and other taxes .. ...................... ..................... ..................... ...................... ..................... .................	49
Capital struc ture ............. ..................... .................... .................... ..................... .................... .................... ................		53
Note 10.	Cash and ca sh equivalent s ................... ..................... ..................... ...................... ..................... .................	53
Note 11.	Interest bea ring loans and borrowings .. ..................... ..................... ...................... ..................... .................	54
Note 12.	Contributed equity and res erves ........... ..................... ..................... ...................... ..................... .................	56
Note 13.	Government grants relatin g to assets ... ..................... ..................... ...................... ..................... .................	57
Working cap ital .............. ..................... .................... .................... ..................... .................... .................... ................		58
Note 14.	Trade ando ther receivabl es ................. ..................... ..................... ...................... ..................... .................	58
Note 15.	Construction contracts in progress ....... ..................... ..................... ...................... ..................... .................	60
Note 16.	Inventoriesa nd work in pr ogress .......... ..................... ..................... ...................... ..................... .................	60
Note 17.	Trade ando ther payables ..................... ..................... ..................... ...................... ..................... .................	61
Infrastructur	e & other ass ets ............... .................... .................... ..................... .................... .................... ................	62
Note 18.	Property, pla nt and equipm ent .............. ..................... ..................... ...................... ..................... .................	62
Note 19.	Intangible as sets ............. ...................... ..................... ..................... ...................... ..................... .................	65
Other liabiliti es ............... ..................... .................... .................... ..................... .................... .................... ................		68
Note 20.	Provisions .. ..................... ...................... ..................... ..................... ...................... ..................... .................	68
Financial ris	k manageme nt ................. .................... .................... ..................... .................... .................... ................	70
Note 21.	Fair valuem easurements ..................... ..................... ..................... ...................... ..................... .................	70
Note 22.	Financial ris k managemen t ................... ..................... ..................... ...................... ..................... .................	74
Note 23.	Derivative fin ancial instrum ents and hed ging ............ ..................... ...................... ..................... .................	79
Unrecognise d items ....... ..................... .................... .................... ..................... .................... .................... ................		82
Note 24.	Commitmen ts and conting encies .......... ..................... ..................... ...................... ..................... .................	82
Note 25.	Events after the balanced ate ............... ..................... ..................... ...................... ..................... .................	82
The Group,	management and related parties ......... .................... ..................... .................... .................... ................	83
Note 26.	Parent intere sts in subsidi aries ............. ..................... ..................... ...................... ..................... .................	83
Note 27.	Related part y disclosure . ...................... ..................... ..................... ...................... ..................... .................	83
Note 28.	Key manage ment personn el compensa tion ............... ..................... ...................... ..................... .................	83
Note 29.	Share based payments ... ...................... ..................... ..................... ...................... ..................... .................	84
Note 30.	Parent entity ................... ...................... ..................... ..................... ...................... ..................... .................	88
Note 31.	Business co mbinations ... ...................... ..................... ..................... ...................... ..................... .................	89

2 | AUSTAL LIMITED ANNUAL REPORT 2014

Chairman’s report

It is my pleasure to present the 2014 Annual Report to you on behalf of the Board of Austal Limited.

The past 12 months represented a year of solid operational improvement and strengthening of the balance sheet by generation of cash and repaying of debt. In that time our Group:

Exceeded revenue guidance of $1 billion.
Concluded the sale of surplus assets in Henderson and used proceeds to repay debt.
Maintained a strong focus on cash generation also used to repay debt.
Made operational improvements at our US shipyard, which translated into improved shipbuilding margins and profit growth.
Confirmed funding for two more Littoral Combat Ships under our existing contract with the US Navy.
Secured new shipbuilding contracts with the Royal Navy of Oman and the Abu Dhabi National Oil Company.
Matured delivery of the US Navy and Australian Customs contracts such that the outlook is one of lower risk and more predictable earnings.
Successfully delivered an 80 m high speed ferry from the Philippines Shipyard Operation and grew local capability.
Profitability grew Support activities following the restructure and consolidation in FY2013.

The Chief Executive Officer, Andrew Bellamy, will provide more detail in his report on the operational achievements for the year, and the strategic direction and outlook for Austal.

Financial results

Austal reported a net profit after tax of $31.859 million in FY2014, compared to $35.742 million in FY2013. FY2014 earnings before interest, tax, depreciation and amortisation were $79.338 million for the year compared to $62.575 million in FY2013. The improvement in earnings was driven by stronger shipbuilding margins in our US and Australian shipyards as existing programs matured.
Revenue for the year grew by 24.8 per cent from $899.491 million in FY2013 to $1,122.863 million.
US operations was the largest contributor to revenue, delivering $933.615 million (FY2013: $747.739 million) and $61.682 million in earnings before interest and tax (EBIT) (FY2013: $50.100 million) as Austal continued to perform work on its major Littoral Combat Ships (LCS) and Joint High Speed Vessels (JHSV) contracts for the US Navy.
Australian operations delivered an improved result as the Cape Class program matured with $241.912 million in revenue (FY2013: $144.058) and $16.684 million EBIT (FY2013: $0.041 million).
Philippines Operation reported a $2.703 million EBIT (FY2013: $5.020 million).

Group net debt was reduced to $68.579 million (FY2013: $137.074 million) with proceeds from the sale of surplus assets and cash generated from operations being used to repay long term debt.

Reconciliation of EBITDA:

Profit before income tax Finance costs Finance income EBIT Depreciation Amortisation EBITDA	2014 2013 $’000 $’000 47,144 $ 26,726 $ 8,742 $ 13,571 $ (321) (2,231) 55,565 $ 38,066 $ 21,593 $ 21,914 $ 2,180 2,595 79,338 $ 62,575 $

EBITDA is a non-IFRS measure. The information is unaudited but is extracted from the audited financial statements.

EBITDA is used by management to understand cashflows within the group.

Board and senior management

Giles Everist joined the Board as an Independent Director in November 2013 and brings extensive financial experience to the team.

The senior management team has remained stable during the year and the focus has been on increasing the sustainability of the organisation.

Strategy and governance

The Board has been actively engaged in the strategy development risk assessment process. This has provided clear direction to senior management about growth objectives. These objectives are now incorporated into both short term and long term incentive programs for executives. The Group’s risk management framework has been

3 | AUSTAL LIMITED ANNUAL REPORT 2014

refreshed during the year at both a strategic and corporate level. Both the Audit and Risk committee and Remuneration committee have been involved in that process to ensure that the necessary controls and governance are in place.

Austal has the opportunity to leverage its intellectual property in new markets and new opportunities to expand the engineering services business.

Outlook

The significant steps we took to transform Austal in the year have placed the Group in a stronger position to deliver on our significant order book and progress the operational improvements we have made. The US Navy funded an additional US$680 million of work in the 12 months, taking the Group order book to $2.8 billion as at 30 June 2014. This secures revenue through CY2018. With a record amount of work in hand, our focus is to deliver prudent cash management and continue to drive operational improvements across our businesses, with a near-term view to return dividends to shareholders.

I would like to acknowledge our employees for their loyalty and hard work during the year. The achievements we made would not have been possible without their professionalism and dedication, and to shareholders, thank you for your ongoing support of Austal during the year. I am pleased that we have delivered on the operational and financial performance to drive shareholder value, and your Board will focus on continuing to achieve this objective.

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John Rothwell AO Chairman

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4 | AUSTAL LIMITED ANNUAL REPORT 2014

Chief Executive Officer’s report

Austal was able to sustain and build upon the prior year’s significant operational improvements. This translated into improved operating profit before tax for the Group.

Financial summary

Year ended 30 June Revenue* EBIT Net Interest (Expense) / Income Operating Profit Before Tax Tax (Expense)/Benefit Operating Profit After Tax % EBIT/Revenue Basic Earnings Per Share ($ per share) Net Assets Return on Invested Capital (%)	2014 2013 $’000 $’000 1,122,863 $ 899,491 $ 55,565 $ 38,066 $ (8,421) (11,340) 47,144 $ 26,726 $ (15,285) $ 9,016 $ 31,859 $ 35,742 $ 4.9% 4.2% 0.09 $ 0.12 $ 433,232 $ 407,187 $ 7.8% 5.5%

*Excludes other income

Operational improvements

Management’s focus was to implement further operational improvements to sustain and enhance the turn-around in operating profit which began in the prior year. Improving margins at our state of the art shipyard in the US, where Austal is contracted to construct Littoral Combat Ships (LCS) and Joint High Speed Vessels (JHSV) for the US Navy was the primary driver in improved profitability for the Group. Both programs are maturing well with the number of design changes reducing and the workforce stabilising. Austal delivered JHSV 3 to the US Navy and JHSV 4 was launched. LCS 4 was delivered and LCS 6 was launched. Construction of LCS 6, 8,10 and 12 progressed well. The award of two service and support contracts for the US Navy is an indicator of the future potential for service work.

Operational improvements at our Australian shipyard delivered a profitable result after a difficult few years, as production of the Cape Class Patrol Boats (CCPB) matured. The $330 million contract progressed well with two vessels delivered and a further six CCPB in production. The design of two High Speed Support Vessels (HSSV) for the Royal Navy of Oman is underway following the contract award in March.

The Philippines shipyard delivered an 80m high speed ferry to Tahiti and a further three wind farm support vessels to the UK. A positive financial result is pleasing as we continue to invest in the development of capability in the yard.

This year saw the establishment of a production design team as well as small component manufacture for Australian operations. The two ferries contracted to the Abu Dhabi National Oil Company (ADNOC) in April are being constructed in the Philippines shipyard.

Consolidation of the Henderson Service base into the Henderson shipyard yielded an improved financial performance in the year. All three business units are now generating income from both shipbuilding contracts and from Service and Systems activities.

Strategy

We made significant progress in implementing the strategic plan, which included further reducing gearing through a reduction in net debt to strengthen the balance sheet. This was achieved from the proceeds of the sale of the surplus Henderson Service Base and from cash generated by operations.

The order book grew to $2.8 billion following appropriation of funds in line with US Navy contracts. This secures work through 2018 with two additional LCS funded in the year. The new contract for two HSSV for the Royal Navy of Oman is strategically significant because it is the first example of the JHSV concept being adopted in a new and important region. The ADNOC ferry contract underlines our competitiveness with the establishment of the Philippines shipyard.

Our strategy is clear for the year ahead. Austal will strive to improve margins in the US through operational efficiency. Australian Operations will expand to deliver the Cape Class Patrol Boat and HSSV contracts and continue to target opportunities for domestic and export defence contracts. Technology transfer to the Philippines Operation will continue, and capacity will be expanded in line with market potential. The Philippines shipyard will increase the supply of small components within the Group to increase the competitiveness of the Group as a whole.

All three business units will pursue service and systems opportunities from their well-established shipbuilding operations.

A prudent cash management focus will ensure that costs and inflows are aligned. This will enhance Austal’s ability to deliver on the record amount of work in progress and strategic objectives.

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People

Our Values o f Excellenc e , Customer, Integrity and Teamw o rk have been the basis f o r many tangible an d sustainable business su c cesses throughout the year.

I’d like to th a nk all of our employees and other stakeholder s for their ha r d work, com m itment and loyalty.

We have co n tinued to in v est in our p e ople and developed g reater depth of talent. Thi s has presented o p portunities for many em p loyees to grow and w e have augm e nted this wi t h some important e x ternal recrui t s to increase our skills and experie n ce. The or g anisation is s tronger and more s u stainable as a result.

Future suc c ess will be b uilt upon further improving o perating ma r gins, imple m enting production efficiencies, a nd prudent c ash managem e nt. We will i n crementally increase our sales, mar k eting and re s earch and development spend to e n sure we ma i ntain a strong pipeline of work. These measures w ill ensure that Austal is well positioned to deliv e r its strategi c objectives to generat e returns for s hareholders.

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Andrew Bellamy Executive D irector and C hief Executive Officer

Outlook

Austal is be t ter positione d to deliver on the order book as a r e sult of impro v ed margins and strengtheni n g the Group’s balance sh e et in FY2014.

We will sust a in the oper a tional impro v ements and shipbuilding margin s , delivering on our two major contr a cts for the U S Navy, the L CS and JHSV. We e xpect further LCS to be f u nded in FY2015 as p er the contr a ct. The US N avy has demonstrat e d strong on g oing support to the high performanc e , low-cost L C S despite sequestrati o n. Austal is w ell position e d to win new US Na v y constructi o n and vesse l support contracts.

The translat i on of profits from our US operations are directly impacted by t he USD / A U D exchange r a te. We coul d see a bene f it in profit translation w ith markets f orecasting weakening of the AUD. A weaker AU D also improv e s the internationa l competitive n ess of our Australian business.

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Aremiti Ferry 2 – built in the Phhilippines

We will continue to impr o ve productivity in our Australian o p erations as production o f the remaining Cape Class P a trol Boats matures. We are well pre p ared for the start of cons t ruction for the two HS S V for Oman. A good number of opportunitie s exist to construct similar vessels for both domes t ic and expor t defence m a rkets.

We will inve s t in develop i ng capabiliti e s in the Philippines O perations whilst we purs u e new commercial contracts. F o r the first ti m e we have established a production design team in the Philippines. We will continue to build u pon the successful s upply of sm a ll componen t s from the Philippines a cross the G r oup.

Our Service and System s products h a ve been developed i n preparation for deploym e nt to US and Australi a n defence vessels. This activity grew in FY2014 and will c ontinue to d o so. It is expected th a t these products become a core part of our busin e ss in the m e dium term.

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Review of operations

A financial breakdown for each business unit has been included below, including IFRS and non-IFRS information. This information has been extracted from the audited financial statements and included in order to demonstrate growth across the primary segments.

US operations

Year ended 30 June Revenue EBIT EBIT Margin	2014 2013 $'M $'M 933.615 $ 747.739 $ 61.682 50.100 6.6% 6.7%

program are being effectively incorporated into subsequent vessels.

USNS Coronado (LCS 4), the US Navy’s fourth LCS and second built by Austal USA and General Dynamics, completed acceptance trials and was delivered to the US Navy during FY2014.

USNS Jackson (LCS 6) – the first LCS being built by Austal as the prime contractor under the 10-vessel contract – was launched in January 2014 with delivery scheduled to occur in FY2015. Construction of LCS 8 and LCS 10 continued with the keel laying for LCS 10 performed in April 2014.

Australian operations

Austal’s US operations continued to be the biggest contributor to earnings.

Austal USA enhanced its contract management skills as prime contractor and has delivered improved EBIT margins from shipbuilding activities.

FY2014 was Austal USA’s first full year as a prime contractor to the US Navy for both the LCS and JHSV programs. The pass through revenue related to systems integration which is undertaken by major sub-contractors had a dilutive effect on EBIT margin compared to the prior year.

Continued focus on skills development and stabilisation of the workforce within the target range of 4,100 – 4,200 has produced a tangible improvement in labour productivity which transitions Austal down the learning curve as the programs progress.

Supply chain activities were focussed on improvements to material planning and logistics, reduced inventory levels, optimisation of economic order quantities, and greater alignment with supplier production schedules to realise material cost reductions.

Management maintained a stringent focus on cash management. Capital expenditure was restricted to sustaining activities having completed a major period of investment in FY2013.

Two more vessels were added to the order book after funds for LCS 18 & 20 - the seventh and eighth LCS under the US$3.5 billion contract – were appropriated by Congress in March 2014. These projects added a further US$680 million to the order book and secured funding for the LCS program through until 2018.

Year ended 30 June Revenue EBIT EBIT Margin	2014 2013 $'M $'M 241.912 $ 144.058 $ 16.684 0.041 6.9% 0.0%

Austal’s Australian operations delivered a significant increase in EBIT and EBIT margin in FY2014.

This result was driven by productivity gains and cost optimisation achieved at the Henderson shipyard on the $330 million contract to design, construct and service the Cape Class Patrol Boat for Australian Customs and Border Protection. The second Cape Class Patrol Boat Cape Byron was delivered in May 2014 and there was a further increase in construction activity on subsequent patrol boats, with all eight due to be completed by August 2015.

The margin uplift was also driven by the consolidation of Henderson based service and construction activities into one shipyard which yielded a reduction in overhead cost, increased asset utilisation and increased labour efficiency. Service revenue was underpinned by the docking of two Royal Australian Navy Armidale Class Patrol Boats.

The transition of the Australian business into a Defence organisation has necessitated and supported a build-up of systems integration and sustainment skills and capabilities.

The award of two 72 m HSSV for the Royal Navy of Oman in March 2014 increased the order book for Australia by $142M and extends contracted work until the end of FY2016.

There was significant progress in both the JHSV and LCS programs during the year.

JHSV 3, USNS Millinocket was delivered in March 2014 after successfully completing acceptance trials in January, JHSV 4, USNS Fall River was launched in January and the keel of JHSV 5, USNS Trenton was laid in March 2014. Productivity improvement opportunities identified in the early stages of the

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Philippines operations

Year ended 30 June Revenue EBIT EBIT Margin	2014 2013 $'M $'M 33.767 $ 39.986 $ 2.703 5.020 8.0% 12.6%

The Philippines Operations successfully completed the construction of an 80 metre commercial vehicle / passenger ferry which was delivered to Tahiti in the second quarter of FY2014 and also completed the construction of three wind farm vessels for operation in Europe.

The year on year fall in revenue and EBIT was caused by the reduction in activities following the completion of the 80 metre ferry. Throughput is expected to pick up again in FY2015 after the award of two 48 m crew transfer vessels for delivery to ADNOC.

The award of the two vessels added US$27.8M to the Philippines Order book and provides contracted work through FY2015.

The Philippines Operations entered the Service market in FY2014 by supporting the docking of Austal vessels in Europe and Asia.

The Philippines Operations are playing a pivotal role in cost optimisation of manufacturing activities within the Group by supplying sub-assemblies and components to Australia.

The capital investment program to establish the footprint for infrastructure required to construct larger vessels (80 – 130 m in length) was completed on schedule.

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107.0
65.8
60.1
38.9
17.8 14.3 16.0 19.7 21.7
FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14
Medical Treatment Injury Frequency Rate
(per million hours worked)
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6.35
6.05 5.90
5.38
3.92 3.90
2.20 2.30 2.30
FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14
Lost Time Injury Frequency Rate
(per million hours worked)
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Occupational health and safety policy

Austal’s perpetual focus and leadership on safe people, safe practices and safe work environments is effective in promoting a culture that raises awareness of individual responsibility for safety and health and it instils safety as an accepted workplace practice and the way we do business.

The Group continues to focus on capability development with the objective of the Philippines becoming self-sustaining. The two key areas of focus are on production / project management and the establishment of a Philippines based design team.

Safety performance

Our goal of ZERO Harm means no injuries to anyone, ever and whilst the target is aspirational, it remains a target to strive for.

Safety performance in Austal’s Australian Operations was particularly pleasing in FY2014 with zero lost time injuries (LTIs) incurred whilst labour hours exceeded 1 million hours. Australia received 13 Industrial Foundation for Accident Prevention awards and attained a Gold level Safe Way achiever award for the 4[th] consecutive year.

Austal reports safety performance in accordance with AS1885.1.

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Directors’ report

The Board of Directors of Austal Limited submit their report for the year ended 30 June 2014.

Directors

The names and details of the Company’s Directors in office during the financial year and until the date of this report are as follows. Directors were in office for this entire period unless otherwise stated.

John Rothwell AO – Non-Executive Chairman

With 40 years of experience in boat and shipbuilding, John has played a major role in the development of the Australian aluminium shipbuilding industry. He is the architect responsible for the establishment of Austal and was the Founding Managing Director. John identified markets for high speed ferries throughout Asia which resulted in Austal’s rapid growth. In 1998 he saw the potential for US Defence contracts for high speed aluminium naval ships and he led the formation of a new shipyard in Mobile, Alabama.

John was appointed an Officer of the Order of Australia (AO) in January 2004 for services to the Australian shipbuilding industry, and for significant contributions to vocational education and training. He was named “Australian Entrepreneur of the Year” by Ernst and Young in 2002 and he was awarded the WA Citizen of the Year in the category of Industry and Commerce in 1999.

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John stepped down as Executive Chairman and Chief Executive Officer on 22 August 2008 to continue as Non-Executive Chairman after managing the Company for 20 years.

Dario Amara – Independent Director

Dario is a construction and engineering executive with extensive industry experience and networks gained over 33 plus years in the Australian and international markets, spanning the infrastructure, industrial and property sectors.

He has successfully operated as a CEO for over 16 years with John Holland Asia Limited, GRDMINPROC Limited (now of part AMEC plc), Emerson Stewart Group Limited which he founded and listed on the ASX within 30 months of launching and more recently as CEO of the POSCO-BGC E&C Joint Venture, an initiative to capture billion dollar plus resources projects.

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Concurrent with his executive leadership roles he has successfully served as a Project Director or as Project Board Chairman on large and complex projects delivered by a variety of commercial models.

In addition Dario has served on several arts and cultural boards as Chairman on a pro bono basis for over 22 years and currently serves on the Murdoch University Art Collection Board.

He is a Civil Engineer with a Bachelor of Engineering (Distinction), a Fellow of the Institution of Engineers Australia, a Chartered Professional Engineer, on the National Professional Engineers Register and a Registered Building Practitioner and Contractor (Western Australia.)

9 | AUSTAL LIMITED ANNUAL REPORT 2014

David Singleton – Independent Director

David brings a wealth of highly relevant business expertise and experience to Austal in both the defence and manufacturing and product support sectors.

David has held numerous senior roles with BAE Systems (formerly British Aerospace), which is one of the world’s largest defence companies. He served as Group Head of Strategy and Mergers & Acquisitions in London from 1997 to 1998 and again in 2003. In the intervening years, David was BAE’s Managing Director of Asset Management before spending three years in Rome as the Chief Executive Officer of Alenia Marconi Systems (AMS).

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AMS was a European leader of naval warfare and air defence systems, C4I, ground and naval radars, naval command and control training systems and long term naval support.

David started his career with the UK Ministry of Defence and worked in research, development and manufacturing as well as senior management roles in Royal Ordnance which by then was part of BAE. He has also served as a member of the National Defence Industries Council in the UK, and as a board member and Vice President (Defence) of Intellect, a leading trade association for the UK technology industry.

David is the CEO and Managing Director of Perth-based mineral exploration company Poseidon Nickel Limited. Prior to this role, he served as CEO and Managing Director of Clough Limited between 2003 and 2007. David is also a Non-Executive Director of Quickstep Holdings.

David was appointed to the Board of Directors of Austal Limited on 21 December 2011.

Giles Everist – Independent Director

Giles has a breadth of experience with project and service based businesses gained over more than 25 years, working internationally in Australia, UK and Africa, largely in the resources, engineering and construction industries.

Giles was appointed as Non-Executive Director in November 2013. Giles is a qualified chartered accountant and was formerly the Chief Financial Officer and Company Secretary of Monadelphous Group Limited between 2003 and 2009. He has held senior financial executive roles with Rio Tinto in the United Kingdom and Australia, as well as major US design engineering Group Fluor Corp during his career.

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Giles is currently a Non-Executive Director of Decmil Group Limited, LogiCamms Ltd and Macmahon Holdings Limited.

10 | AUSTAL LIMITED ANNUAL REPORT 2014

Andrew Bellamy BSc (Hons) Material Science, MA (Marketing) – Chief Executive Officer

Mr Bellamy commenced as CEO in February 2011 and has been instrumental in Austal’s emergence as a global defence prime contractor. Mr Bellamy is responsible for the Group’s worldwide operations and is a member of the Board of Austal Limited and the Board of Austal USA.

As CEO, Mr Bellamy has overseen the successful expansion of Austal’s largest shipyard in Mobile, Alabama, and developed and implemented strategies to ensure the efficient delivery of the Group’s multi-billion defence contracts for the US Navy – the Littoral Combat Ship and Joint High Speed Vessels.

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Under Mr Bellamy’s leadership, Austal has successfully transitioned its Henderson, Western Australia shipyard away from commercial vessels to defence vessels, which has included the award of contracts such as the Cape Class Patrol Boat program for the Australian Government and high speed defence vessels for a naval customer in the Middle-East. He has also overseen the growth of Austal’s commercial vessel shipyard in the Philippines into a profitable operation and the positioning of Austal’s global service footprint.

Separately, Mr Bellamy has taken steps to strengthen Austal’s balance sheet, including a reduction in the Group’s debt and a focus on capital management across the business. This has provided Austal with the capacity to successfully and profitably deliver on its existing vessel programs and the ability to win additional work.

Mr Bellamy joined Austal in September 2008 as Head of Global Sales and Marketing. In this role, Mr Bellamy had responsibility for the Sales and Marketing function across all Austal’s international businesses, including the strategically significant US operations. In 2010, Mr Bellamy was appointed Chief Operating Officer of Austal’s Australian businesses and oversaw the growth and expansion of Austal’s international network of locations at a time of significant turbulence in global markets.

Previously, Mr Bellamy held senior positions within the Oil and Gas industry with Honeywell and ICI in North America, Europe, Middle East and Asia.

Mr Bellamy holds a BSc (Hons) in Materials Science from the University of Sunderland and an MA (Marketing) from the University of Lincoln and Humberside.

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JHSV 4

11 | AUSTAL LIMITED ANNUAL REPORT 2014

Interests in the shares and options of the company and related bodies corporate

The interests of the directors in the shares of Austal Limited at the date of this report were as follows:

Director John Rothwell Dario Amara David Singleton Andrew Bellamy Giles Everist		Number
	Ordinary Shares 32,200,745 50,000 28,600 566,928 50,000	Options^ Performance Rights^^ - - - - - - 280,000 287,313 - -

^This represents options granted from the Employee Option Share Plan (ESOP) (refer to Note 29 of the financial statements). There were no additional ordinary shares issued or options granted to directors and exercised between the balance date and the date of this report.

^^This represents performance rights granted from the Long Term Incentive Plan (LTIP). (Refer to Note 29 of the financial statements)

Principal activities

The principal activities during the year of entities within the consolidated entity were the design, manufacture and support of high performance aluminium vessels. These activities are unchanged from the previous year.

Results

The net profit after tax of the consolidated entity for the financial year was $31.859 million after income tax (FY2013: $35.742 million).

Review of operations

A review of the operations and financial position of the consolidated entity is outlined in the Review of Operations on page 7.

Dividends

No dividend has been declared for FY2014 (FY2013: Nil).

Significant events after the balance date

The Group announced the completion of the sale of Hull 270 (102 m stock vessel) on 20 August 2014 for $61.500 million.

Likely developments and future results

A general discussion of the Group outlook is included in the Chairman’s Report on page 3 and the Review of Operations on page 7.

Significant changes in the state of the affairs

There were no significant changes to structure or operations of the Group during the financial year.

12 | AUSTAL LIMITED ANNUAL REPORT 2014

Environmental regulation and performance

The Group has a policy of at least complying with, but in most cases exceeding, environmental performance requirements. No environmental breaches have been notified by any Government Agency during the year ended 30 June 2014.

Share options and performance rights

There were 9,392,329 un-issued ordinary shares under options and 1,049,022 un-vested performance rights at the date of this report. Refer to Note 29 for further details of the options outstanding. There were no options exercised or performance rights that had vested during the year.

Indemnification and insurance of directors and officers

An indemnity agreement has been entered into between the parent entity and each of the Directors named in this report. Under the agreement, the company has agreed to indemnify those Directors against any claim to the extent allowed by the law, for any expenses or costs which may arise as a result of work performed in their respective capacities.

The parent entity has paid premiums during the financial year in respect of a contract insuring the Directors and officers of the Group in respect of liability resulting from these indemnities. The terms of the insurance arrangements and premiums payable are subject to a confidentiality clause.

Indemnification of auditors

To the extent permitted by law, the parent entity has agreed to indemnify its auditors, Ernst & Young, as part of the terms of its audit engagement agreement against claims by third parties arising from the audit (for an unspecified amount). No payment has been made to indemnify Ernst & Young during or since the financial year.

Directors’ meetings

The number of meetings of directors (including meetings of committees of Directors) held during the year and the number of meetings attended by each Director was as follows:

Number of meetings held Number of meetings attended: John Rothwell Dario Amara David Singleton Giles Everist * Andrew Bellamy **		Meeting
	Austal Limted Board 8 8 8 6 3 8	Nomination & Audit & Risk Remuneration Committee Committee 4 2 - 2 4 - 3 2 2 2 4 2

Giles Everist joined the board in November 2013 and both subcommittees in January 2014. Three Board meetings, two Audit & Risk Committee meetings and two Nomination & Remuneration Committee meetings were held after that date.
** Andrew Bellamy attended all Audit & Risk and Nomination & Remuneration committee meetings as a guest of each committee.

13 | AUSTAL LIMITED ANNUAL REPORT 2014

Committee membership

The Company has an Audit and Risk Committee and a Nomination and Remuneration Committee of the Board of Directors.

Members acting on the committees of the Board during the year were:

Audit and Risk Nomination and Remuneration Dario Amara^ David Singleton^ Giles Everist Giles Everist David Singleton John Rothwell

^ Designates the Chairman of the committee.

Rounding

The amounts contained in this report and in the financial report have been rounded to the nearest $1,000 (where rounding is applicable) under the option available to the Company under ASIC Class Order 98/0100. The Company is an entity to which the Class Order applies.

14 | AUSTAL LIMITED ANNUAL REPORT 2014

Message from the Nomination and Remuneration Committee

Dear Share h olders,

The achiev e ments over the past year would not h a ve been pos s ible without the hard wor k and dedica t ion of our people thro u ghout the G r oup. The le a dership sho w n by our C E O and his e x ecutive tea m has been in s trumental to this succes s .

Fundament a l to our on-g o ing success is our ability to attract, re w ard and ret a in talented i n dividuals across our entire busin e ss through the implementation of a c o mprehensiv e human capi t al strategy, o f which rem u neration is an importan t part. Our r e muneration p olicy and pr a ctices need to be sensiti v e to the nee d to preserv e our capital and provide long term sustainable ret u rns to shareholders.

We seek to t ake a leade r ship position in this impor t ant area of g overnance. We have en g aged with s h areholder groups, our executives a n d other stakeholders to e nsure that w e get the bal a nce right in a rriving at our approach. As a global G roup, we h a ve also con s idered remu n eration guid e lines, regul a tions, laws a nd market p r actices in all the major ju r isdictions in which we op e rate, includi n g the USA, w here a number of our ke y personnel a re located, however it i s the ultimate responsibilit y of the Boar d to ensure t h at the remu n eration arra n gements m e et the needs of our busin e ss.

We recogni s e that there i s always room for improv e ment and o n e of our are a s of focus t h is year has b een on shareholder communication in gener a l and our dis c losures in o u r Annual Report in partic u lar. It is with ple a sure that w e set out below our FY2014 Remunera t ion Report. W e hope that you find it b o th clear and concise. I l o ok forward t o engaging w ith you at o u r Annual Ge n eral Meetin g or other su c h opportunit y in the future.

Yours since r ely

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David Singl e ton Chairman, N omination a n d Remuner a tion Commit t ee

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JHSV 3 & LCS 4

15 | AUSTAL LIMITED ANNUAL REPORT 2014

Remuneration report (audited)

This Remuneration Report for the year ended 30 June 2014 outlines the remuneration arrangements of the Company and the Group in accordance with the requirements of the Corporations Act 2001 (the Act) and its regulations. This information has been audited as required by section 308(3C) of the Act.

The remuneration report is presented under the following sections:

Key Management Personnel (KMP)
Relationship between remuneration and Austal Limited’s performance
Remuneration governance
Executive remuneration
Remuneration Structure
Board composition
Non-executive Director remuneration
Remuneration of key management personnel
Details of contractual provisions for KMP
Options granted or vested during the period
Performance rights granted or vested during the period
Shares granted or vested during the period
Equity instruments held by KMP
Loans to KMP
Other transactions with KMP

1. Key Management Personnel (KMP)

This report covers all KMP as defined in Accounting Standards, including all Directors, as well as those Executives who have specific responsibility for planning, directing, and controlling material activities of the Group.

KMP for the year ended 30 June 2014 were as follows:

Executives	Non-executive Directors
Executive directors Mr Andrew Bellamy Chief Executive Officer Executives with no Director duties Mr Graham Backhouse President Australia Mr Greg Jason Group Chief Financial Officer Mr Brian Leathers Chief Financial Officer USA Mr Craig Perciavalle President USA Mr Joselito Turano President Philippines	Mr John Rothwell Non-Executive Chairman Mr Dario Amara Independent Director Mr Giles Everist(1) Independent Director Mr David Singleton Independent Director (1) Mr Giles Everist joined the Board of Directors in November 2013.

2. Relationship between remuneration and Austal Limited’s performance

Our long-term remuneration framework is linked to a number of internal and external performance measures which when achieved provide direct benefits to the shareholders through increased returns.

Two key performance measures we use are:

Total Shareholder Return (TSR) (the capital growth in the value of our share plus dividend paid). We use absolute return as opposed to a relative return due to the lack of a comparable peer group; and
Return on Capital Invested (ROIC) (Net operating profit after tax exclusive of abnormal items / Net Assets (excluding Cash, Debt, Derivatives and Tax Accounts). Actual ROIC results are compared against internal targets).

The current Austal Long Term Incentive Plan was established in CY2013. (Refer to Note 29)

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A summary of the TSR and ROIC metrics over the past three years is set out below as an indication of performance, noting that the actual metrics will be calculated in line with the rules of the plan at vesting date.

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Total Shareholder Returns
71.8%
FY12 FY13 FY14
(39.8%) (38.2%)
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Return on Invested Capital
7.8%
5.5%
3.0%
FY12 FY13 FY14
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Group Performance

The graph below shows share price performance compared to the earnings per share (EPS) over time.

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EPS (cents per Annual Average
18 share) Share Price $3.00
16
$2.50
14
12 $2.00
10
$1.50
8
6 $1.00
4
$0.50
2
0 $0.00
FY10 FY11 FY12 FY13 FY14
Basic EPS Annual Average Share Price
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3. Remuneration governance

Independence of the Nomination and Remuneration Committee

The foundation of the Group’s remuneration governance structure is the independence and competence of the Nomination and Remuneration Committee (NRC).

The NRC Charter provides that a majority of members of the NRC are independent. For the year ended 30 June 2014 the members of the NRC were David Singleton (Independent Chairman) and Giles Everist (Independent Director) and John Rothwell.

As representatives of shareholders, the independence of the NRC is important as it underscores the impartiality in making its recommendations to the Board on remuneration matters. The remuneration report for 30 June 2013 was approved at the 2013 Annual General Meeting.

Use of Independent Remuneration Consultants

The NRC has the ability to engage the services of an Independent Remuneration Consultant. They also have the ability to engage legal counsel, where needed.

The NRC engaged a Remuneration Consultant for the year ended 30 June 2014 to assist with the improvements in remuneration reporting. The Remuneration Consultant was not engaged to provide recommendations in relation to KMP remuneration.

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Share Trading Policy

All equity based remuneration awards granted pursuant to the Group’s policy are subject to the Group’s Share Trading Policy, details of which can be found on our website.

In particular, there is a prohibition on employees entering into contracts to hedge their exposure to the share price movement of the Group.

4. Executive remuneration

Remuneration Framework

The Group is committed to responsible remuneration practices. The need to reward the Group’s employees fairly and competitively based on performance needs to be balanced with the requirement to do so within the context of principled behaviour and action, particular in the area of safety, risk, compliance and control.

Remuneration should contribute to the Group’s achievements in a way that supports the Group’s culture and goals. The Remuneration Policy Framework set out below summarises the key features of the Group’s remuneration approach.

Our Vision:

Maintain a responsible, performance-based Remuneration Policy that is aligned with the long-term interests of our shareholders.

Our Goal:

Strike the right balance between meeting shareholders expectations, paying our employees competitively, and responding appropriately to the regulatory environment.

Our Approach:

							Remuneration Structure and Instruments

	Principles: • Clearly defined and documented governance procedure • Independent Remuneration Committee • Independent Remuneration Consultant • Annual assessment of Remuneration Policy		Principles: • Reward Group annual performance measured relative to its planned key performance indicators • Business performance aligned • Recognize and reward teamwork and development of the culture of the organisation • Award and differentiate based on individual performance and contributions.		Principles: • Total Remuneration based approach • Facilitate competitiveness by paying competitive remuneration levels for comparable roles and experience, subject to performance • Promote meritocracy by recognizing individual performance, with a particular emphasis on contribution, ethics and safety • Equal remuneration opportunity		Principles: • Provide the appropriate balance of fixed and variable remuneration consistent with the position and role in the Group • Significant portion of variable remuneration deferred and aligned with the long-term performance of the Group • Promote ethical behaviour and do not create incentives to expose the Group to inappropriate risk

5. Remuneration structure

The mix of Fixed and Variable Remuneration (short term and long term) is designed to ensure the retention of individuals over the longer term and to ensure that there is adequate consideration of risk in the remuneration decisions.

Fixed remuneration

The level of fixed remuneration, which is most commonly paid in the form of base salary, is set based on the role and experience of the individual, his or her individual sustained long-term performance, and market positioning.

Variable remuneration

The level of variable remuneration (which includes short term and long term incentives) granted is entirely at the discretion of the Board and in the case of substandard performance can be zero.

In addition, a portion of variable remuneration (usually in the form of Long Term Incentive (LTI)) is deferred and is typically subject to forfeiture in the event of certain specific performance targets not being met, or in the case of resignation or detrimental activities by employees.

18 | AUSTAL LIMITED ANNUAL REPORT 2014

Remuneration peer group

From time to time the Group will undertake a detailed review of its remuneration structures and amounts and as part of that review will benchmark against comparable companies. The criteria for selecting the peer Group include: market capitalization, industry segment and location of operations.

Remuneration structure

The target mix of remuneration for KMP is set out below:

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LTI 13%
STI 17%
Fixed 70%
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It is important to note that these remuneration structures are targets only. They do not set out any entitlements to employees or commitments by the Group. The mix of percentages will change in cases where targeted variable remuneration amounts are not paid in full.

Fixed remuneration

The fixed remuneration of the CEO is made up of two components:

Cash – 77%
Shares – 23%

The 77% cash element is paid through payroll in the usual manner and 23% of the CEO’s remuneration is made in shares which are subject to an 18 month holding period from the date at which the shares are released to the CEO and no performance condition exists as it is considered part of his base remuneration. Only the cash component is considered for the purpose of calculating variable compensation potential. The variable compensation does include a performance condition.

The Board is recommending that the issue of shares, which form part of the CEO’s base salary, will be made in 2 equal instalments through the year immediately after the publication of the interim and full year accounts. The number of shares to be issued will be calculated based on the 6 month volume weighted average price (VWAP) of the shares immediately preceding the issue. The Board considers that this best reflects the intention of paying a proportion of the CEO’s salary as shares but avoids the administrative issues of issuing monthly as is the case for the cash component. This arrangement is subject to shareholder approval at the 2014 Annual General Meeting.

The CEO’s salary was reviewed in line with a peer group of listed ‘industrial’ companies some of which are included within the ASX 300.

The Board considered the complexity of Austal’s business, given its geographic diversity having major opportunities in Australia, USA and Philippines, and the complexity of defence contracting across the globe when determining the peer Group comparison data.

19 | AUSTAL LIMITED ANNUAL REPORT 2014

The peer group was selectively compiled from companies within or just below the ASX 300. The peer Group excludes ASX 100 companies which are deemed to be considerably larger in scale for comparison purposes. The focus was on companies that are manufacturing industrial goods, and / or industrial businesses with a contract delivery model for their products/services or selling into international markets (like Austal).
Exclusions have primarily extended to resources, oil & gas, financial services, property, investment funds, consumer goods, technology, healthcare or energy/infrastructure companies for comparison purposes.
Some Perth companies that sit outside the definitions above were included where the market capitalisation was close to that of Austal at the time of compilation for local market comparison purposes.
Perth listed companies of comparable scale are heavily weighted toward mining services or construction based business which has historically attracted a salary premium.
The data was extracted from FY2013 and is therefore dated 12 months. There has been a significant slowdown for many of these businesses over the past 12 months and it is expected that the bonus components awarded to executives will reflect this.

The average and median remuneration data from the peer group is summarised below. The Board is satisfied that the CEO’s remuneration is market competitive having completed the review.

Peer group data:

	Salary including	Short Term	Long Term	Total
Metric Average Median	Superannuation 1,004,480 $ 933,000 $	Incentive 352,520 $ 210,000 $	Incentive 329,560 $ 273,000 $	Remuneration
				1,686,560 $ 1,416,000 $

Fixed remuneration for KMPs being cash and shares for the CEO and cash for other KMPs is targeted at the 50[th] percentile of peer group base salaries for comparable positions. In cases where an individual has critical proprietary knowledge or specific and relevant industry experience, base salary may exceed the 50[th] percentile of peer group, this is particularly the case with regard to high performers.

Variable remuneration - Short Term Incentive program (STI)

All KMPs are eligible to participate in the Group’s Short Term Incentive program.

STI is designed to support the Group’s overall strategy by:

focusing participants on achieving financial year performance goals which contribute to sustainable shareholder value;
providing a significant incentive based on individual performance measured against challenging targets to motivate key employees; and
providing clear correlation between key performance measures that influence business outcomes and the employee’s ability to influence those measures.

The Group uses a range of qualitative and quantitative performance measures to set goals and assess the performance of individuals. These performance measures are specific to each individual’s area of responsibility and include both financial and non-financial measures, such as ethics, health and safety.

The Board reviews and approves performance targets and objectives annually for the CEO and executive management team. Performance targets relate to key business objectives that must be delivered during the current financial year.

Each performance objective may contain multiple targets and initiatives to provide specific milestones for measurement.

The performance objective/s as a part of the STI program are designed to focus employees on adding shareholder value and may be a mixture of financial and non-financial objectives. The objectives will be relative to the most desirable outcomes identified by the CEO.

Financial objectives are to account for a minimum of 50% of the STI objectives and will relate to Board approved budget targets.

20 | AUSTAL LIMITED ANNUAL REPORT 2014

When non ‐ financial performance objectives are used, they will relate to strategic performance such as safety, customer satisfaction, operational improvement, business growth and employee relations. When used, the ‐ weighting allocated to each of the non financial objectives will likely be dependent upon the employee’s job size and role focus.

Performance relative to financial and individual targets set during the annual budget process provides the basis for determining payments made for at ‐ risk remuneration.

STI awards for KMP are generally between 20% and 50% of total fixed cash remuneration and are paid in cash as soon as possible after the performance criteria has been measured and validated and after the Board has approved the recommended amounts.

The FY2014 STI for the CEO was solely focussed on EBIT and the Board has elected to adopt a balanced scorecard approach for assessing the CEO’s performance with respect to the STI plan for FY2015.

Details of STI awards accrued for KMP for the year ended 30 June 2014 are set out below.

Name Andrew Bellamy Graham Backhouse Greg Jason Brian Leathers Craig Perciavalle Joey Turano	Position CEO President - Australia Group CFO CFO - USA President - USA President - Philippines	* Maximum STI Award 50% 30% 30% 30% 40% 30%	*** Accrued Unawarded STI STI* 33% 17% 28% 2% 20% 10% 10% 20% 13% 27% 20% 10%

*Represents percentage of total fixed cash remuneration.

Vested benefits will be paid in the following financial year.

The Board has the discretion not to grant STI performance awards in the event of substandard Group performance, notwithstanding that individuals may have achieved their agreed performance targets.

Variable remuneration - Long Term Incentive plan

The Group’s Long Term Incentive (LTI) plan is a key element of the Group’s remuneration strategy which is designed to retain and rewards executives over the long term. LTI awards are granted purely at the discretion of the Board, based on the performance of the CEO and other KMP.

The objectives of the LTI plan are to:

align key employee behaviour toward the growth and profitability objectives of the Group and reward key employees for sustained contributions to business success; and
attract and retain exceptional employees that have the capacity to significantly impact the growth and profitability of the Group

LTI awards amounts are typically up to 50% of fixed cash remuneration (effective from the start of the financial year) and are in the form of Performance Rights, which convert at zero cost to the employee, on a one for one basis to actual shares in the Company subject to meeting the vesting conditions.

The LTI awards are based on 3-year performance period. Performance periods typically start at 1 July and end at the completion of the third fiscal year other than for a transition period of two years which bridges a gap between the old scheme and the new scheme.

The Performance Rights vest at the end of the performance period, subject to meeting the performance hurdles and continued service with the Group at the time of vesting.

The Board decided to suspend the LTI plan for FY2012, and no awards were granted during the year in light of the concerns raised by shareholders through the vote at the 2012 Annual General Meeting regarding the Remuneration Report and remuneration of KMP. This was despite the LTI plan being approved by shareholders at the 2012 Annual General Meeting.

21 | AUSTAL LIMITED ANNUAL REPORT 2014

The diagram below illustrates the granting, performance period and holding period of LTI awards through the transition period to the new scheme.

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----- Start of picture text -----

First transition year
Grant 30 June 2014 30 June 2015 30 June 2016 30 June 2017
2 Year Performance Period Holding Period
50% Vesting Minimum One Year
3 Year Performance Period Holding Period
50% Vesting Minimum One Year
Second transition year
Grant 30 June 2015 30 June 2016 30 June 2017 30 June 2018
2 Year Performance Period Holding Period
25% Vesting Minimum One Year
3 Year Performance Period Holding Period
75% Vesting Minimum One Year
Third transition year
Grant 30 June 2016 30 June 2017 30 June 2018 30 June 2019
3 Year Performance Period Holding Period
100% Vesting Minimum One Year
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The vesting criteria for awards is linked to the tenure of the individual and Group level quantitative absolute performance measures.

The Group has selected absolute Total Shareholder Return (TSR) and Return on Invested Capital (ROIC) as the most appropriate performance measures to assess executive performance because the Board believes that these performance measures perfectly align the incentives with the objectives of shareholders.

The Performance Rights vest subject to the terms of the plan. An example of performance targets is set out below.

Performance Measure Total Shareholder Return	Percentage of award 30%	Thresholds Percentage vesting <= 15% Zero 15% - 25% Pro-rated on linear basis >=25% 30%
Return on Invested Capital	70%	<= 6% Zero 6% - 10% Pro-rated on linear basis >=10% 70%

6. Board composition

The Nomination and Remuneration sub-committee has undertaken a review of the structure, size and composition of the Board through an investor survey and other inputs from independent advisors during the year. As a result, the sub-committee has recommended that the current practice of maintaining 3 independent non-executive directors should remain. The process to ensure that the skills at Board level are appropriate to the business needs has continued with the appointment of Giles Everist. The sub-committee also undertook an annual review of the position of Chairman at Austal in part because he is now aged over 70 years. The Board (excluding the Chairman) unanimously agreed that the Chairman’s intimate knowledge of the shipbuilding industry, of Austal and its major customers, together with his demonstrated high level of commitment, meant that he remains a significant asset to the Group and he was requested to remain as Chairman, to which he has agreed.

22 | AUSTAL LIMITED ANNUAL REPORT 2014

7. Non-Executive Director remuneration

The remuneration of Non-Executive Directors is determined by other executive members of the Board in accordance with the Group’s Nomination and Remuneration Committee Charter, which also provides that no Director or Manager shall be involved in any decisions as to his or her own remuneration.

Non-Executive Directors receive only fixed remuneration, typically in the form of cash, non-cash benefits and superannuation contributions. Fees may also be paid in the form of equity in the Group.

The remuneration pool limit for Non-Executive Directors is set at $3 million.

The Directors agreed that the Chairman would reduce his time commitment to the Group from 1 January 2014 with a corresponding pro rata reduction to his remuneration.

The Group proposes a review of Non-Executive Director remuneration for the year ending 30 June 2015.

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8. Remuneration of key management personnel

Short-Term Benefits	Post Employment Benefits	Long-Term Benefits	Termination Benefits
Other Non Salary & Cash Monetary Monetary Fees Bonus Benefits Benefits*	Super- annuation / Social Security	Employee Leave
$ 318,182 $ - $ - $ - 93,000 - - - 95,000 - - - 55,833 - - - 782,753 263,040 - - nel 226,151 27,421 7,877 - 268,373 86,427 - - 430,591 54,972 14,021 - 308,822 75,840 - - 298,379 44,454 3,370 -	$ - - - - 17,774 853 25,460 28,764 17,774 24,421	$ - - - - 13,297 - 7,059 - 7,332 -	$ - - - - - - - - - -
$2,877,084$552,154$25,268$-	$115,046	$27,688	$-

(*) Represents the amount accrued for but not paid by the group for services performed in FY14.

(1) Giles Everist joined the Board of Directors in November 2013

Short-Term Benefits	Post Employment Benefits	Long-Term Benefits	Termination Benefits
Other Non Salary & Cash Monetary Monetary Fees Bonus Benefits Benefits**	Super- annuation	Employee Leave
$ 363,636 $ - $ - $ - 90,000 - - - 93,000 - - - 85,000 - - - 750,405 76,690 175,342 - 327,750 - - - nel 108,251 - 2,027 10,246 130,264 9,663 - - 332,024 - 17,296 - 295,263 12,485 - 1,119 330,331 - 6,084 - 124,949 - - - 258,981 - - -	$ - - - - 19,595 -	$ - - - -	$ - - - - - - - - - - - 332,647 -
		- -
	- 11,724 - 18,330 - 16,424	- - - - -
	19,807	-

$3,289,854$98,838$200,749$11,365	$85,880	$-	$332,647

** Represents cash bonus paid for services performed in FY2013 and paid in FY2014.

(1) Mr John Rothwell's and Mr John Poynton's fees were exclusive of GST
(2) Mr John Poynton resigned on the 28 June 2013
(3) Mr Michael Atkinson retired on the 30 June 2013
(4) Mr Joey Turano was appointed to President Philippines on the 5 November 2012
(5) Mr Graham Backhouse was appointed to President Australia on the 3 December 2012
(6) Mr Craig Perciavalle was appointed to President USA on the 13 December 2012
(7) Mr Greg Jason was appointed to the position of Chief Financial Officer on the 15 January 2013
(8) Mr Richard Simons' remuneration for 2013 includes a termination payment following his resignation on the 2 October 2012
(9) Mr Charles McGill's employment ceased on the 28 March 2013

24 | AUSTAL LIMITED ANNUAL REPORT 2014

9. Details of contractual provisions for KMP

Name Andrew Bellamy Greg Jason Graham Backhouse Joey Turano Craig Perciavalle Brian Leathers	Employing Company Austal Limited Austal Limited Austal Ships Pty Ltd Austal Philippines Pty Ltd Austal USA LLC Austal USA LLC	Contract Duration Unlimited Unlimited Unlimited Unlimited Unlimited Unlimited	Termination Notice Period
			Company Executive 3 months 3 months 12 weeks 12 weeks 12 weeks 12 weeks 2 months(3) 3 months 0 months 0 months 3 months 0 months

Termination provisions – Austal may choose to terminate the contract immediately by making a payment equal to the Group Notice Period fixed remuneration in lieu of notice. In the event of termination for serious misconduct or other nominated circumstances, executives are not entitled to this termination payment.
On termination of employment, executives will be entitled to the payment of any fixed remuneration calculated up to the termination date, any leave entitlement accrued at the termination date and any payment or award permitted under the remuneration policy.
Termination period is accrued at a rate of 1 month per year of service.

10. Options granted or vested during the period

Details of options over ordinary shares in the Group provided as remuneration to key management personnel under the Employee Share Option Plan (ESOP) are shown below. Further information on the options is set out in Note 29.

Name Andrew Bellamy Greg Jason Craig Perciavalle Brian Leathers	Award year 2011 2011 2011 2011	Options granted 140,000 140,000 70,000 70,000	Grant date 28 Sep 2010 28 Sep 2010 28 Sep 2010 28 Sep 2010	Fair value per option at award date $ 0.840 $ 0.840 $ 0.840 $ 0.840	Vesting date 28 Sep 2013 28 Sep 2013 28 Sep 2013 28 Sep 2013	No. vested No. forfeited during year during year 140,000 - 140,000 - 70,000 - 70,000 -

11. Performance rights granted or vested during the period

Details of performance rights for shares in the Group provided as remuneration to key management personnel under the Long Term Incentive Plan (LTIP) are shown below. Further information on performance rights is set out in Note 29.

Name Andrew Bellamy Greg Jason Craig Perciavalle Brian Leathers Graham Backhouse Joey Turano	Award year 2014 2014 2014 2014 2014 2014	Performance rights granted 287,313 125,345 168,675 114,235 108,130 93,517	Grant date 18 Nov 2013 18 Nov 2013 13 Dec 2013 13 Dec 2013 18 Nov 2013 18 Nov 2013	Fair value per performance right $ 0.59 $ 0.59 $ 0.73 $ 0.73 $ 0.59 $ 0.59	Value of awards at grant date $ 168,193 $ 73,377 $ 123,065 $ 83,346 $ 63,299 $ 54,745	Vesting date 18 Nov 2016 18 Nov 2016 13 Dec 2016 13 Dec 2016 18 Nov 2016 18 Nov 2016	No. vested No. forfeited during year during year - - - - - - - - - - - -

12. Shares granted or vested during the period

Details of shares in the Group provided as remuneration to key management personnel under fixed remuneration are shown below. Further information is set out in Note 29.

Name Andrew Bellamy	Grant date 27 Nov 2013	Number issued 371,738	Number Fair value per vested share 371,738 $ 0.73

25 | AUSTAL LIMITED ANNUAL REPORT 2014

13. Equity instruments held by key management personnel

The tables included in this section of the report show the number of:

options over ordinary shares in the Group
performance rights to shares granted under the LTIP, and
shares in the Company

that were held during the financial year by key management personnel of the Group, including their close family members and entities related to them.

Options and performance rights

30 June 2014 Directors Andrew Bellamy Options Performance Rights Executives Graham Backhouse Options Performance Rights Greg Jason Options Performance Rights Brian Leathers Options Performance Rights Craig Perciavalle Options Performance Rights Joey Turano Options Performance Rights	Options and rights holdings	Balance at end Vested and ofyear Exercisable Unvested 280,000 280,000 - 287,313 - 287,313 - - - 108,130 - 108,130 437,500 297,500 140,000 125,345 - 125,345 239,000 169,000 70,000 114,235 - 114,235 250,000 180,000 70,000 168,675 - 168,675 - - - 93,517 - 93,517
	Balance Exercised at beginning Granted as (options)/ Net Change ofyear Remuneration Vested(rights) Other 280,000 - - - - 287,313 - - - - - - - 108,130 - - 437,500 - - - - 125,345 - - 239,000 - - - - 114,235 - - 250,000 - - - - 168,675 - - - - - - - 93,517 - -

All vested options are exercisable at the end of the year.

Shareholdings

30 June 2014 Non - Executive Directors John Rothwell Dario Amara Giles Everist David Singleton Executives Andrew Bellamy Graham Backhouse Greg Jason Brian Leathers Craig Perciavalle Joey Turano Total	Shareholdings
	Performance Balance at Granted as Options rights Net Change Balance at 30 June 2013 remuneration exercised vested Other 30 June 2014
	32,200,745 - - - - 32,200,745 50,000 - - - - 50,000 - - - - 50,000 50,000 28,600 - - - - 28,600 799,958 371,738 - - (604,768) 566,928 - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -
	33,079,303 371,738 - - (554,768) 32,896,273

None of the shares held by key management personnel are held nominally.

26 | AUSTAL LIMITED ANNUAL REPORT 2014

14. Loans to key management personnel

There were no loans to Directors or other key management personnel at any time during year ended 30 June 2014.

15. Other transactions with key management personnel

There were no transactions involving key management personnel other than compensation and transactions concerning shares, performance rights and options as discussed in other sections of the remuneration report.

27 | AUSTAL LIMITED ANNUAL REPORT 2014

Auditor independence and non-audit services

The directors received the following d e claration from the audito r of Austal Li m ited.

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Non-audit services

Non-audit s e rvices provi d ed by the e n tity’s auditor , Ernst & Young, during th e year, are d i sclosed in N o te 5. The directors ar e satisfied th a t the provisi o n of non-au d it services is compatible w ith the gene r al standard o f independen c e for audito r s imposed b y the Corpor a tions Act 20 0 1. The nature and scope of each type of non-audit service pro v ided means t hat auditor i n dependenc e was not co m promised.

Signed in a c cordance wi t h a resolutio n of director s .

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_ _ _ _ _ _ _ __ _ _ _ _ _ __ _ __ John Rothw e ll An d rew Bellam y Chairman Ex e cutive Direc t or and Chief Executive O f ficer

26 August 2014

28 | AUSTAL LIMITED ANNUAL REPORT 2014

Consolidated statement of profit or loss and other comprehensive income for the year ended 30 June 2014

Continuing operations Revenue Cost of sales – construction contracts Cost of sales – services Chartering expenses Gross Profit Other Income and expenses Administration expenses Marketing expenses Finance costs Profit before income tax Income tax benefit / (expense) Profit after tax Profit attributable to: Owners of the parent Non-controlling interests Total Other comprehensive income Amounts that may subsequently be reclassified to profit and loss: Cash flow hedges: - Gain / (loss) on cash flow hedges taken to equity - Gain / (loss) recycled out of equity - Income tax benefit / (expense) - Net Foreign currency translations - Gain / (loss) taken to equity - Income tax benefit / (expense) - Net Other comprehensive income for the period, net of tax Total comprehensive income for the year Total comprehensive income attributable to: Owners of the parent Non-controlling interests Total Earnings per share ($ per share) - basic for profit for the year attributable to ordinary equity holders of the parent - diluted for profit for the year attributable to ordinary equity holders of the parent	Notes 4 5 5 9 6 6	2014 ’000 $ 1,122,863 (990,413) (24,119) (14,067) $ 94,264 $ 21,913 (51,895) (8,396) (8,742) $ 47,144 $ (15,285) $ 31,859 $ 31,548 311 $ 31,859 $ 17,231 (20,689) 849 $ (2,609) (4,075) 217 $ (3,858) $(6,467) $ 25,392 $ 25,081 311 $ 25,392 $ 0.09 0.09	2013 ’000
			$ 899,491 (767,858) (30,970) (8,502)
			$ 92,161 $ 29,337 (71,212) (9,989) (13,571)
			$ 26,726 $ 9,016
			$ 35,742
			$ 35,870 (128)
			$ 35,742
			$ 10,644 (18,604) 2,388
			$ (5,572) $ 11,516 7,506
			$ 19,022
			$ 13,450

			$ 49,192

			$ 49,320 (128)

			$ 49,192
			$ 0.12 0.12

The above consolidated statement of profit or loss and other comprehensive income should be read in conjunction with the accompanying notes.

29 | AUSTAL LIMITED ANNUAL REPORT 2014

Consolidated statement of financial position as at 30 June 2014

Assets Current Assets Cash and cash equivalents Restricted cash Trade and other receivables Inventories Prepayments Derivatives Total Non - Current Assets Other financial assets Trade and other receivables Prepayments Derivatives Property, plant and equipment Intangible assets and goodwill Deferred tax assets Total Total Assets Liabilities Current Liabilities Trade and other payables Derivatives Interest-bearing loans and borrowings Provisions Government grants Income tax payable Progress payments received in advance Total Non - Current Liabilities Derivatives Interest-bearing loans and borrowings Provisions Government grants Deferred tax liabilities Total Total Liabilities Net Assets Equity Contributed equity Reserves Retained earnings Equity attributable to owners of the parent Non - Controlling Interests Total Equity	Notes 10 10 14 16 23 14 23 18 19 9 17 23 11 20 13 9 15 23 11 20 13 9 12 12 12	2014 2013 ’000 ’000 $ 77,345 $ 38,030 9,532 69,673 95,753 102,743 328,142 277,888 4,054 7,653 2,701 7,749 $ 517,527 $ 503,736 $ - $ 4,141 1,020 - 1,968 - 5,787 1,651 366,500 399,917 9,473 12,526 9,022 22,647 $ 393,770 $ 440,882 $ 911,297 $ 944,618 $ (183,570) $ (133,813) (1,972) (12,193) (13,192) (243,614) (33,704) (25,128) (3,550) (4,221) (10,980) (24,537) (29,062) (21,790) $ (276,030) $ (465,296) $ (2,229) $ (4,885) (142,264) (1,163) (1,023) (2,217) (49,892) (52,794) (6,627) (11,076) $ (202,035) $ (72,135) $ (478,065) $ (537,431) $ 433,232 $ 407,187 $ 111,598 $ 111,328 27,292 37,309 294,041 258,560 $ 432,931 $ 407,197 $ 301 $ (10) $ 433,232 $ 407,187

The above consolidated statement of financial position should be read in conjunction with the accompanying notes.

30 | AUSTAL LIMITED ANNUAL REPORT 2014

Consolidated statement of changes in equity for the year ended 30 June 2014

Equity at 1 July 2012 Comprehensive Income Profit for the year Other Comprehensive Income Total Other equity transactions Shares issued Transaction costs Cost of share-based payments Acquisition of Subsidiary Total Equity at 1 July 2013 Comprehensive Income Profit for the year Other Comprehensive Income Total Transfers between reserves Other equity transactions Shares issued Cost of share-based payments Total Equity at 30 June 2014	Employee Cash flow Common Asset Issued *Reserved Retained Benefits Hedge Control Reval'n Capital Shares Earnings FCTR Reserve Reserve Reserve Reserve ’000 ’000 ’000 ’000 ’000 ’000 ’000 ’000 41,373 $ (9,612) $ 222,690 $ (10,568) $ 4,948 $ 16,649 $ (15,925) $ 27,491 $ - $ - $ 35,870 $ - $ - $ - $ - $ - $ - - - 19,023 - (5,572) - - - $ - $ 35,870 $ 19,023 $ - $ (5,572) $ - $ - $ 77,891 $ - $ - $ - $ - $ - $ - $ - $ (1,823) - - - - - - - - - - - 1,263 - - - 3,499 - - - - - - - 79,567 $ - $ - $ - $ 1,263 $ - $ - $ - $ 120,940 $ (9,612) $ 258,560 $ 8,455 $ 6,211 $ 11,077 $ (15,925) $ 27,491 $ - $ - $ 31,548 $ - $ - $ - $ - $ - $ - - - (3,858) - (2,609) - - - $ - $ 31,548 $ (3,858) $ - $ (2,609) $ - $ - $ - $ - $ 3,933 $ 3,008 $ (1,508) $ 301 $ - $ (5,734) $ 270 $ - $ - $ - $ - $ - $ - $ - $ - - - - 383 - - - 270 $ - $ - $ - $ 383 $ - $ - $ - $ 121,210 $ (9,612) $ 294,041 $ 7,605 $ 5,086 $ 8,769 $ (15,925) $ 21,757 $	Total ’000 277,046 $ 35,870 $ 13,451 49,321 $ 77,891 $ (1,823) 1,263 3,499 80,830 $ 407,197 $ 31,548 $ (6,467) 25,081 $ - $ 270 $ 383 653 $ 432,931 $	Non Controlling Interest ’000 - $ (128) $ - (128) $ - $ - - 118 118 $ (10) $ 311 $ - 311 $ - $ - $ - - $ 301 $	Total Equity ’000 277,046 $ 35,742 $ 13,451 49,193 $ 77,891 $ (1,823) 1,263 3,617 80,948 $ 407,187 $ 31,859 $ (6,467) 25,392 $ - $ 270 $ 383 653 $ 433,232 $

The above consolidated statement of changes in equity should be read in conjunction with the accompanying notes.

*Reserved shares are in relation to the Austal Group Management Share Plan.

31 | AUSTAL LIMITED ANNUAL REPORT 2014

Consolidated statement of cash flows for the year ended 30 June 2014

Notes
Cash flows from operating activities
Receipts from customers
Payments to suppliers and employees
Interest received
4
Interest paid
5
Income tax received / (paid)
GST refunds / (payments)
Net cash from / (used in) operating activities
7
Cash flows from investing activities
Receipts of government grants
Proceeds from sale of property, plant and equipment
Proceeds from the sale of assets held for sale
Purchase of property, plant and equipment
Purchase of intangible assets
Proceeds from sale of intangible assets
Acquisition of subsidiary / investment
Net cash from / (used in) investing activities
Cash flows from financing activities
Proceeds from issue of shares net of transaction costs
Repayment of borrowings
Loans received
Equity dividends paid
Settlement of derivatives
Net cash from / (used in) financing activities
Net increase / (decrease) in cash and cash equivalents
Cash and cash equivalents
Cash and cash equivalents at beginning of year
Net foreign exchange differences
Net increase / (decrease) in cash and cash equivalents
Cash and cash equivalents at end of year
10

2014
2013
’000
’000
$ 1,112,844
$ 894,029
(1,043,939)
(930,149)
321
2,231
(8,742)
(13,571)
(15,927)
(10,580)
-
2,172
$ 44,557
$ (55,868)
$ 4,506
$ 4,763
24,611
9,351
-
6,898
(11,884)
(21,265)
(1,263)
(3,478)
3,002
-
-
(2,914)
$ 18,972
$ (6,645)
$ -
$ 75,065
(114,238)
(93,368)
24,917
50,244
-
-
(12)
32,227
$ (89,333)
$ 64,168
$(25,804)
$ 1,655
$ 107,703
$ 104,751
4,978
1,297
(25,804)
1,655
$ 86,877
$ 107,703

The above consolidated statement of cash flows should be read in conjunction with the accompanying notes.

32 | AUSTAL LIMITED ANNUAL REPORT 2014

Notes to the financial statements

Basis of preparation

Note 1. Corporate Information

The financi a l report of th e Austal Limi t ed Group of Companies (the Group) f o r the year e n ded 30 Jun e 2014 was authorised f o r issue in a c cordance wi t h a resolutio n of the directors on 26 A u gust 2014. Austal Limit e d is a limite d liability company incorp o rated and d o miciled in Australia whos e shares are p ublicly traded on the Australian s tock exchange. The princip a l activities of the Group d u ring the year were the d e sign, manuf a cture and s u pport of high performanc e aluminium v essels. The s e activities are unchange d from the pr e vious year.

Note 2. Basis of preparation

i. Introduction

The f i nancial repo r t is a gener a l-purpose fin a ncial report, which has been prepare d in accordance with the requi r ements of the Corporatio n s Act 2001 a nd Australian Accounting Standards.

The f i nancial repo r t has also b e en prepared on a histori c al cost basis , except for d e rivative financial instr u ments and l a nd and buildings that hav e been mea s ured at fair value.

The f i nancial repo r t is presented in Australi a n dollars an d all values a r e rounded t o the nearest thousand dolla r s ($’000) unl e ss otherwis e stated und e r the option a vailable to t h e Group un d er ASIC Cla s s Order 98/0100. The Gr o up is an enti t y to which the class orde r applies.

The f i nancial repo r t presents t h e figures of t h e consolida t ed entity onl y , unless oth e rwise state d . Austal Limit e d is a for pr o fit entity.

ii. Reporting structure

The n otes to the consolidated financial stat e ments have been divided into 8 main s ections whi c h is sum m arised as fo l lows:

Current year performance

This s ection focuses on the re s ults and perf o rmance of t h e Group, in c luding profit a bility and th e resultant retur n to sharehol d ers via earnings per sha r e and cash g eneration, a n d the return of cash to shareholders via di v idends.

Capital structure

This s ection focuses on the long term fundi n g of the Gro u p including c ash, interes t bearing loa n s and borro w ings, contri b uted equity a nd reserve s and govern m ent grants.

Working capital

This s ection focuses on shorte r term workin g capital con c epts such a s trade and o ther receiva b les and paya b les, constru c tion contrac t s in progres s , inventories including work in progres s .

Infrastructure & other assets

This s ection focuses on proper t y, plant & e q uipment as w ell as intangible assets o f the Group.

Other liabilities

This s ection focuses on provisi o ns such as e mployee benefits, warra n ty costs etc.

33 | AUSTAL LIMITED ANNUAL REPORT 2014

Financial risk management

This section focuses on the Groups’ approach to financial risk management, fair value measurements and foreign exchange hedging and the associated derivative financial instruments.

Unrecognised items

This section focuses on commitments and contingencies that are not recognised in the financial statements and events occurring after the balance date.

The Group, management and related parties

This section focuses on the corporate structure of the Group, parent entity data, key management personnel compensation and related party transactions.

iii. Basis of consolidation

The consolidated financial statements comprise the financial statements of Austal Limited and its subsidiaries as at and for the year ended 30 June each year (the Group).

Subsidiaries are all those entities over which the Group has power over the investee, exposure or rights to variable returns from its involvement with its investee and the ability to use its power over the investee to affect its returns. The existence and effect of potential voting rights that are currently exercisable or convertible are considered when assessing whether a Group controls another entity.

Financial statements of foreign controlled entities presented in accordance with overseas accounting principles are, for consolidation purposes, adjusted to comply with Group policy and generally accepted accounting principles in Australia. In preparing the consolidated financial statements, all intercompany balances, transactions, unrealised gains and losses resulting from intra-Group transactions and dividends have been eliminated in full.

Subsidiaries are fully consolidated from the date on which control is obtained by the Group and cease to be consolidated from the date on which control is transferred out of the Group.

Investments in subsidiaries held by Austal Limited are accounted for at cost in the separate financial statements of the parent entity less any impairment charges. Dividends received from subsidiaries are recorded as a component of other revenues in the statement of comprehensive income of the parent entity, and do not impact the recorded cost of the investment. Upon receipt of dividend payments from subsidiaries, the parent will assess whether any indicators of impairment of the carrying value of the investment in the subsidiary exist. Where such indicators exist, to the extent that the carrying value of the investment exceeds its recoverable amount, an impairment loss is recognised.

iv. Foreign currency transactions and translation

Both the functional and presentation currency of Austal Limited and its Australian subsidiaries is Australian dollars (A$). Each entity in the Group determines its own functional currency and items included in the financial statements of each entity are measured using that functional currency.

Transactions in foreign currencies are initially recorded in the functional currency by applying the exchange rates ruling at the date of the transaction. Monetary assets and liabilities denominated in foreign currencies are retranslated at the rate of exchange ruling at the balance date. All exchange differences arising from the above procedures are taken to the statement of comprehensive income.

The functional currency of the USA and the Philippines Operations is United States dollars (US$).

As at the reporting date, the assets and liabilities of the overseas subsidiaries are translated into the presentation currency of Austal Limited at the rate of exchange ruling at the balance date and the statement of comprehensive income is translated at the average exchange rates for the period. The exchange differences arising on the translation are taken directly to a separate component of equity. The deferred cumulative amount recognised in equity relating to that particular foreign operation is recognised in the statement of comprehensive income on disposal of a foreign entity.

v.

Statement of compliance

The financial report complies with Australian Accounting Standards and International Financial Reporting Standards (IFRS), as issued by the International Accounting Standards Board.

34 | AUSTAL LIMITED ANNUAL REPORT 2014

vi. New and amended standards adopted by the Group

The accounting policies adopted are consistent with those of the previous financial year except for changes in accounting policies due to implementation of new and amended standards adopted by the Group as discussed below.

The adoption of these standards has impacted the Group’s accounting policies and required disclosures in the notes to the financial statements but did not have any effect on the financial position or performance of the Group.

The Group has applied all new and amended accounting standards and interpretations effective from 1 July 2013:

AASB 10 Consolidated Financial Statements, AASB 11 Joint Arrangements, AASB 12 Disclosure of Interests in Other Entities, AASB 128 Investments in Associates and Joint Ventures, AASB 127 Separate Financial Statements and AASB 2011-7 Amendments to Australian Accounting Standards arising from the Consolidation and Joint Arrangements Standards
AASB 2013-3 Amendments to Australian Accounting Standards – Transition Guidance and other amendments which provides an exemption from the requirement to disclose the impact of the change in accounting policy on the current period
AASB 13 Fair Value Measurement and AASB 2011-8 Amendments to Australian Accounting Standards arising from AASB 13
AASB 119 Employee Benefits (revised 2011) and AASB 2011-10 Amendments to Australian Accounting Standards arising from AASB 119 (September 2011)
AASB 2012-5 Amendments to Australian Accounting Standards arising from Annual Improvements 2009-2011 Cycle, and
AASB 2012-2 Amendments to Australian Accounting Standards – Disclosures – Offsetting Financial Assets and Financial Liabilities

vii. Pronouncements issued and not effective

A number of Australian Accounting Standards and Interpretations have been issued or amended but are not yet effective. A full assessment of the impact of all the new or amended Accounting Standards and interpretations issued but not effective has not yet been completed.

The pronouncements relevant to the Group which have not been adopted by the Group are as follows:

AASB 2012-3: Amendments to Australian Accounting Standards – Offsetting Financial Assets and Financial Liabilities:

AASB 2012-3 adds application guidance to AASB 132 Financial Instruments: Presentation to address inconsistencies identified in applying some of the offsetting criteria of AASB 132, including clarifying the meaning of “currently has a legally enforceable right of set-off” and that some gross settlement systems may be considered equivalent to net settlement. The effective date for the Group will be from 1 July 2014.

Interpretation 21: Accounting for Levies

This Interpretation confirms that a liability to pay a levy is only recognised when the activity that triggers the payment occurs. Applying the going concern assumption does not create a constructive obligation. The effective date for the Group will be from 1 July 2014.

AASB 9: Financial Instruments:

On 24 July 2014 The IASB issued the final version of IFRS 9 which replaces IAS 39 and includes a logical model for classification and measurement, a single, forward-looking ‘expected loss’ impairment model and a substantially-reformed approach to hedge accounting.

IFRS 9 is effective for annual periods beginning on or after 1 January 2018, however, the Standard is available for early application. The own credit changes can be early applied in isolation without otherwise changing the accounting for financial instruments.

35 | AUSTAL LIMITED ANNUAL REPORT 2014

The final version of IFRS 9 introduces a new expected-loss impairment model that will require more timely recognition of expected credit losses. Specifically, the new Standard requires entities to account for expected credit losses from when financial instruments are first recognised and to recognise full lifetime expected losses on a more timely basis.

The AASB is yet to issue the final version of AASB 9. A revised version of AASB 9 (AASB 2013-9) was issued in December 2013 which included the new hedge accounting requirements, including changes to hedge effectiveness testing, treatment of hedging costs, risk components that can be hedged and disclosures.

AASB 9 includes requirements for a simplified approach for classification and measurement of financial assets compared with the requirements of AASB 139.

The main changes are described below.

a. Financial assets that are debt instruments will be classified based on (1) the objective of the entity's business model for managing the financial assets; (2) the characteristics of the contractual cash flows.
b. Allows an irrevocable election on initial recognition to present gains and losses on investments in equity instruments that are not held for trading in other comprehensive income. Dividends in respect of these investments that are a return on investment can be recognised in profit or loss and there is no impairment or recycling on disposal of the instrument.
c. Financial assets can be designated and measured at fair value through profit or loss at initial recognition if doing so eliminates or significantly reduces a measurement or recognition inconsistency that would arise from measuring assets or liabilities, or recognising the gains and losses on them, on different bases.
d. Where the fair value option is used for financial liabilities the change in fair value is to be accounted for as follows:
The change attributable to changes in credit risk are presented in other comprehensive income (OCI)
The remaining change is presented in profit or loss

AASB 9 also removes the volatility in profit or loss that was caused by changes in the credit risk of liabilities elected to be measured at fair value. This change in accounting means that gains caused by the deterioration of an entity’s own credit risk on such liabilities are no longer recognised in profit or loss.

AASB 2013-3: Amendments to AASB 136 – Recoverable Amount Disclosures for Non-Financial Assets

AASB 2013-3 amends the disclosure requirements in AASB 136 Impairment of Assets. The amendments include the requirement to disclose additional information about the fair value measurement when the recoverable amount of impaired assets is based on fair value less costs of disposal. The effective date for the Group will be from 1 July 2014.

AASB 2013-4: Amendments to Australian Accounting Standards – Novation of Derivatives and Continuation of Hedge Accounting (AASB 139)

AASB 2013-4 amends AASB 139 to permit the continuation of hedge accounting in specified circumstances where a derivative, which has been designated as a hedging instrument, is novated from one counterparty to a central counterparty as a consequence of laws or regulations. The effective date for the Group will be from 1 July 2014.

AASB 2014-1 Part A - Annual Improvements 2010–2012 Cycle: Amendments to Australian Accounting Standards - Part A - Annual Improvements to IFRSs 2010–2012 Cycle

Annual Improvements to IFRSs 2010–2012 Cycle addresses the following items:

AASB 2 - Clarifies the definition of 'vesting conditions' and 'market condition' and introduces the definition of 'performance condition' and 'service condition'.

36 | AUSTAL LIMITED ANNUAL REPORT 2014

AASB 3 - Clarifies the classification requirements for contingent consideration in a business combination by removing all references to AASB 137.
AASB 8 - Requires entities to disclose factors used to identify the entity's reportable segments when operating segments have been aggregated. An entity is also required to provide a reconciliation of total reportable segments' asset to the entity's total assets.
AASB 116 & AASB 138 - Clarifies that the determination of accumulated depreciation does not depend on the selection of the valuation technique and that it is calculated as the difference between the gross and net carrying amounts.
AASB 124 - Defines a management entity providing KMP services as a related party of the reporting entity. The amendments added an exemption from the detailed disclosure requirements in paragraph 17 of AASB 124 for KMP services provided by a management entity. Payments made to a management entity in respect of KMP services should be separately disclosed.

The effective date for the Group will be from 1 July 2014.

AASB 2014-1 Part A - Annual Improvements 2011–2013 Cycle: Amendments to Australian Accounting Standards - Part A - Annual Improvements to IFRSs 2011–2013 Cycle

Annual Improvements to IFRSs 2011–2013 Cycle addresses the following items:

AASB13 - Clarifies that the portfolio exception in paragraph 52 of AASB 13 applies to all contracts within the scope of AASB 139 or AASB 9, regardless of whether they meet the definitions of financial assets or financial liabilities as defined in AASB 132.
AASB40 - Clarifies that judgment is needed to determine whether an acquisition of investment property is solely the acquisition of an investment property or whether it is the acquisition of a group of assets or a business combination in the scope of AASB 3 that includes an investment property. That judgment is based on guidance in AASB 3.

The effective date for the Group will be from 1 July 2014.

AASB 1031: Materiality

The revised AASB 1031 is an interim standard that cross-references to other Standards and the Framework (issued December 2013) that contain guidance on materiality. AASB 1031 will be withdrawn when references to AASB 1031 in all Standards and Interpretations have been removed.

AASB 2014-1 Part C issued in June 2014 makes amendments to eight Australian Accounting Standards to delete their references to AASB 1031. The amendments are effective from 1 July 2014.

AASB 2013-9: Amendments to Australian Accounting Standards – Conceptual Framework, Materiality and Financial Instruments

The Standard contains three main parts and makes amendments to a number Standards and Interpretations.

Part A of AASB 2013-9 makes consequential amendments arising from the issuance of AASB CF 2013-1. Part A of the amendments was effective for the Group from 1 July 2013 and did not have any effect on the financial position or performance of the Group.

Part B makes amendments to particular Australian Accounting Standards to delete references to AASB 1031 and also makes minor editorial amendments to various other standards. The effective date for the Group of Part B of the amendments will be from 1 July 2014.

Part C makes amendments to a number of Australian Accounting Standards, including incorporating Chapter 6 Hedge Accounting into AASB 9 Financial Instruments. The effective date for the Group of Part C of the amendments will be from 1 July 2015.

37 | AUSTAL LIMITED ANNUAL REPORT 2014

Amendments to IAS 16 and IAS 38: Clarification of Acceptable Methods of Depreciation and Amortisation (Amendments to IAS 16 and IAS 38)

IAS 16 and IAS 38 both establish the principle for the basis of depreciation and amortisation as being the expected pattern of consumption of the future economic benefits of an asset.

The IASB has clarified that the use of revenue-based methods to calculate the depreciation of an asset is not appropriate because revenue generated by an activity that includes the use of an asset generally reflects factors other than the consumption of the economic benefits embodied in the asset.

The IASB also clarified that revenue is generally presumed to be an inappropriate basis for measuring the consumption of the economic benefits embodied in an intangible asset. This presumption, however, can be rebutted in certain limited circumstances.

The effective date for the Group will be from 1 July 2016.

IFRS 15

In May 2014, the IASB issued IFRS 15 Revenue from Contracts with Customers, which replaces IAS 11 Construction Contracts, IAS 18 Revenue and related Interpretations (IFRIC 13 Customer Loyalty Programmes, IFRIC 15 Agreements for the Construction of Real Estate, IFRIC 18 Transfers of Assets from Customers and SIC-31 Revenue—Barter Transactions Involving Advertising Services)

The core principle of IFRS 15 is that an entity recognises revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. An entity recognises revenue in accordance with that core principle by applying the following steps:

(a) Step 1: Identify the contract(s) with a customer
(b) Step 2: Identify the performance obligations in the contract
(c) Step 3: Determine the transaction price
(d) Step 4: Allocate the transaction price to the performance obligations in the contract
(e) Step 5: Recognise revenue when (or as) the entity satisfies a performance obligation

The effective date for the Group will be from 1 July 2017. Early application of this standard is permitted.

38 | AUSTAL LIMITED ANNUAL REPORT 2014

Current year performance

Note 3. Operating segments

Year ended 30 June
Revenues
External custo
Inter-segment
Finance incom
Total
Segment result
EBIT
Finance incom
Finance expe
Total
Depreciationa
Balance sheet
Segment asse
Segment liabi
Year ended 30 June
Revenues
External custo
Inter-segment
Finance incom
Total
Segment result
EBIT
Finance incom
Finance expe
Total
Depreciationa
Balance sheet
Segment asse
Segment liabi
Inter-segment rev
2014
mers
e
e
nses
nd amortisation
ts
lities
2013
mers
e
e
nses
nd amortisation
ts
lities
enues, investments,

re
Australia
U
’000
’0
153,886
$ $ 88,026
-
241,912
$ $ 16,684
$ $ -
-
16,684
$ $ (1,606)
$ $ 192,119
$ $ (174,198)
(
Australia
U
’000
’0
105,294
$ $ 38,764
-
144,058
$ $ 41
$ $ -
-
41
$ $ (1,030)
$ $ 146,387
$ $ (91,355)
(
ceivables and payabl
SA
Philippine
00
’000
933,615
32,75
$ -
1,00
-
-
933,615
33,76
$ 61,682
2,70
$ -
-
-
-
61,682
2,70
$ (17,937)
(97
$ 662,948
22,26
$ 456,424)
(15,26
SA
Philippine
00
’000
747,739
33,05
$ -
6,92
-
-
747,739
39,98
$ 50,100
5,02
$ -
-
-
-
50,100
5,02
$ (18,708)
(70
$ 604,650
41,62
$ 517,244)
(36,96
es are eliminated on c
El
s
Unallocated
Ad
’000
8
2,609
$ $ 9
-
4,682
7
7,291
$ $ 3
(27,211)
$ $ 4,682
(13,271)
3
(35,800)
$ $ 2)
(3,258)
$ $ 1
577,205
$ $ 3)
(142,867)
El
s
Unallocated
Ad
’000
7
11,160
$ $ 9
2,333
2,231
6
15,724
$ $ 0
(25,894)
$ $ 2,231
(13,571)
0
(37,234)
$ $ 8)
(4,063)
$ $ 1
421,830
$ $ 0)
(72,492)
onsolidation.
imination /
justments
T
’000
(326)
1
$ (89,035)
(4,361)
(93,722)
1
$ 1,707
$ (4,361)
4,529
1,875
$ -
$ (543,236)
$ 310,687
imination /
justments
T
’000
10
$ (48,026)
-
(48,016)
$ 8,799
$ -
-
8,799
$ -
$ (269,870)
$ 180,620
otal
’000
,122,542
-
321
,122,863
55,565
321
(8,742)
47,144
(23,773)
911,297
(478,065)
otal
’000
897,260
-
2,231
899,491
38,066
2,231
(13,571)
26,726
(24,509)
944,618
(537,431)

39 | AUSTAL LIMITED ANNUAL REPORT 2014

Analysis of Unallocated

Revenue
Sale of stock yacht
Rental revenue
Charter vessel revenue
Finance income
Other
Total
Segment result
Profit / (loss) on foreign exchange
Net profit / (loss) on sale of shipyard
Net profit / (loss) on sale of stock yacht
Write down of inventory
Corporate overheads
Sales & marketing costs
Rental profit
Charter vessel profit
Finance income
Finance expenses
Total
Segment assets
Intercompany receivables
Other financial assets (investment in subsidiaries)
Cash and restricted cash
Property, plant and equipment
Inventories
Derivatives
Deferred tax assets
Other
Total
Segment liabilities
Deferred tax liabilities and income tax payable
Interest bearing loans
Derivatives
Intercompany payables
Deferred Income
Other
Total

$ -
$ 9,302
-
2,333
2,419
1,858
4,682
2,231
190
-
$ 7,291
$ 15,724
$ (1,888)
$ (10,024)
3,582
4,839
-
(4,327)
(13,361)
-
(8,618)
(11,163)
(7,312)
(8,007)
-
2,333
386
455
4,682
2,231
(13,271)
(13,571)
$(35,800)
$(37,234)
$ 193,148
$ 150,883
232,860
91,306
26,777
70,698
45,914
48,904
59,159
46,297
8,388
13,742
9,023
-
1,936
-
$ 577,205
$ 421,830
$ (17,293)
$ (34,525)
(12,062)
(17,470)
(4,201)
(12,194)
(99,044)
-
(6,490)
-
(3,777)
(8,303)
$(142,867)
$(72,492)

One customer in the USA segment generated revenue of $938.618 million during FY2014 (FY2013: $736.084 million) and one customer in the Australia segment generated revenue of $100.814 million during FY2014 (FY2013: $59.233 million).

Revenue from external customers by geographical location of customers North America Europe Asia Australia Other Total	2014 2013 $’000 $’000 $ 938,618 $ 746,560 20,150 14,887 15,034 35,478 125,163 86,806 23,898 15,760 $ 1,122,863 $ 899,491

40 | AUSTAL LIMITED ANNUAL REPORT 2014

Non-current assets, other than financial instruments, prepayments and deferred tax assets

Geographical location North America Asia Europe Australia Total Composition Property, plant and equipment Intangible assets Total	$ 300,842 $ 317,799 17,744 13,495 15,187 16,977 42,200 64,172 $ 375,973 $ 412,443 $ 366,500 $ 399,917 9,473 12,526 $ 375,973 $ 412,443

i. Identification of reportable segments:

For management purposes the Group is organised into three business segments based on the location of the production facilities, related sales regions and types of activity.

The Chief Executive Officer monitors the performance of the business segments separately for the purpose of making decisions about resources to be allocated and of assessing performance. Segment performance is evaluated based on operating profit or loss. Finance costs, finance income and income tax are managed on a Group basis.

ii. Reportable segments:

The reportable segments were USA, Philippines, Ships, Service and Systems in FY2013. Service and Systems and Ships have been included under Australian Operation for FY2014 because the two business units were integrated into one operation. Prior year comparative information has been restated to reflect the change of segment structure.

The Group’s reportable segments are as follows:

Australia

The Australia business manufactures high performance aluminium defence vessels for markets worldwide, excluding the USA and provides training and on-going support and maintenance for high performance vessels and includes the chartering of a vessel to the US Navy’s Military Sealift Command.

USA

The USA manufactures high performance aluminium defence vessels for the US Navy and provides training and on-going support and maintenance of these performance vessels for the US Navy.

Philippines

The Philippines business manufactures high performance aluminium commercial vessels for global markets excluding the USA.

iii. Accounting policies and inter-segment transactions

The accounting policies used for reporting segments internally are the same as those utilised for reporting the accounts of the Group.

Inter-entity sales are recognised based on an arm’s length pricing structure.

41 | AUSTAL LIMITED ANNUAL REPORT 2014

iv. Unallocated

The following items and associated assets and liabilities are not allocated to operating segments as they are not considered part of the core operations of any segment:

Cost of Group services
Corporate overheads
Revenue from property leased to other Group segments
Finance revenue and costs
Taxation
Assets held for sale
Derivatives
Commercial vessel charter contracts

42 | AUSTAL LIMITED ANNUAL REPORT 2014

Note 4. Revenue

Revenue Construction co Charter revenue Service revenu Interest from ot Total ntract revenue e her unrelated parties	201 ’00 $ 1,0 $ 1,1 4 20 0 ’0 69,190 $ 17,453 35,899 321 22,863 $ 13 00 849,514 15,459 32,287 2,231 899,491

i. Recognition and measurement

Revenue is recog n ised and m e asured at fai r value of th e consideration received o r receivable to the extent that i t is probable t hat the economic benefit s will flow to the Group an d that the re v enue can be measured relia b ly. The follo w ing specific recognition c riteria must a lso be met before revenu e is recognised:

Construction contract revenue

Cons t ruction cont r act revenue is brought to account on a percentage of completio n basis, based on actual costs incurred as a proportion o f estimated t otal contract costs.

The e stimated tot a l contract costs are deter m ined prior t o commence m ent and ev a luated ever y month there a fter. In the e vent of a ch a nge to the c o st of compl e tion during t h e life of the c ontract, the c onstruction contr a ct revenue i s adjusted a c cordingly an d the remaining life of the contract is c a lculated on t he adjusted value.

Whe r e the contra c t outcome c a nnot be me a sured reliabl y , contract c o sts are reco g nised as an expense as incur r ed and where it is probable that the c o sts will be recovered, rev e nue is reco g nised only t o the extent of th e costs incurr e d.

Charter revenue

Char t er revenue i s operating r e ntals receiv e d on charter of vessels a n d is recogni s ed when the control over the ri g ht to revenue is achieve d .

Service revenue

Servi c e revenue i s brought to a ccount on a p ercentage o f completion basis, base d on actual c o sts incurred as a p roportion of estimated to t al contract c o sts. Where t he contract o utcome can n ot be meas u red reliably, contr a ct costs are recognised a s an expens e as incurre d and where i t is probable t hat the cost will be reco v ered, revenue is recognised only to th e extent of th e costs incur r ed.

Sale of goods and scrap

Revenue is recog n ised when t h e significant risks and re w ards of own e rship of the goods have p assed to the b u yer. Risk a n d rewards o f ownership a re considered passed to t he buyer at the time of d e livery of the good s to the cust o mer.

Interest income

Revenue is recog n ised as inte r est accrues u sing the eff e ctive interes t method. T h is is a method of calculating the amortised cost o f a financial asset and allocating the i n terest income over the relevant period using the effectiv e interest rate, which is th e rate that ex a ctly discoun t s estimated f uture cash r e ceipts throu g h the expected life of the financial as s et to the net carrying am o unt of the financial asset.

43 | AUSTAL LIMITED ANNUAL REPORT 2014

ii. Significant accounting judgements and estimates

Construction contract revenue and expected construction profits at completion.

The assessment of construction contract revenue in accordance with the Group’s accounting policies requires certain estimates to be made of total contract revenues, total contract costs and the current stage of completion.

Contract revenue and contract costs are recognised as revenue and expenses respectively by reference to the stage of completion of the contract activity at the balance sheet date (“percentage-of-completion method”) when the outcome of a construction contact can be estimated reliably. Contract revenue is recognised to the extent of contract costs incurred that are likely to be recoverable when the outcome of a construction contract cannot be estimated reliably.

Management have made estimates in this area, which if ultimately inaccurate will impact the level of revenue recognised in the Consolidated Statement of Comprehensive Income of FY2014 and beyond.

The percentage of completion is calculated on actual costs over the sum of actual costs plus projected costs to complete the contract and profit is recognised from commencement of the project.

44 | AUSTAL LIMITED ANNUAL REPORT 2014

Note 5. Other income and expenses

Other income and
Government gra
Training reimbu
Gain on dispos
Gain on dispos
Net foreign exc
Sale of scrap
Rental income
Other income
Total
Finance costs
Interest paid to
Total
Depreciation and a
Depreciation ex
Amortisation
Total
Employee benefits
Wages and sal
Superannuation
Share based pa
Workers’ comp
Annual leave ex
Long service le
Total
Auditor's remunera
Amounts receiv
An audit or revi
Other services
Tax advice
Total
Amounts receiv
An audit or revi
Other services
Tax advice
Total
expenses
nts
rsement
al of property, plant an
al of intangible assets
hange gains
unrelated parties
mortisation
cluding impairment
expense
aries
yments
ensation costs
pense
ave expense
tion
ed or due and receiva
ew of the financial rep
in relation to the entity
able or due and recei
ew of the financial rep
in relation to the entity
d equipment
ble by Ernst & Young
ort of the entity anda
and any other entity
vable by related pract
ort of the entity anda
and any other entity
for:
ny other entity in the
in the Group
ices of Ernst & Young
ny other entity in the
in the Group
Group
for:
Group

$ $ $ $ $ $ $ $ $ $ $ $ 2014
’000
3,643
$ 8,079
3,582
903
(495)
3,802
198
2,201
21,913
$ (8,742)
$ (8,742)
$ (21,593)
$ (2,180)
(23,773)
$ (284,218)
$ (3,840)
(383)
(7,640)
(8,294)
(239)
(304,614)
$ 2014
$
(317,270)
$ -
-
(317,270)
$ (320,220)
$ (1,302)
-
(321,522)
$ 2013
’000
4,763
6,754
115
-
9,381
500
2,822
5,002
29,337
(13,571)
(13,571)
(21,914)
(2,595)
(24,509)
(218,106)
(4,534)
(1,733)
(6,246)
(7,254)
232
(237,641)
2013
$
(262,881)
-
(33,000)
(295,881)
(297,118)
-
-
(297,118)

45 | AUSTAL LIMITED ANNUAL REPORT 2014

i. Recognition & measurement

The following recognition and measurement criteria must be met before the following specific items are recognised in profit or loss:

Government grants relating to expense items

Government grants are recognised when there is reasonable assurance that the grant will be received and all attaching conditions will be complied with.

A grant is recognised as income when it relates to an expense item. The grant income is recognised over the periods necessary to match the grant to the costs that it is intended to compensate.

Impairment of assets

No impairment charge was recognised by the Group during the period. Refer to Note 19 for details regarding Impairment testing of goodwill and intangible assets with indefinite useful lives.

Finance costs

Finance costs directly attributable to the acquisition, construction or production of a qualifying asset (i.e. an asset that necessarily takes a substantial period of time to get ready for its intended use or sale) are capitalised as part of the cost of that asset. All other finance costs are expensed in the period they occur.

Finance costs include interest payments, amortisation of capitalised loan origination costs and other costs that an entity incurs in connection with the borrowing of funds.

Depreciation and amortisation

Refer to accounting policies for depreciation disclosed in note 18, and to note 19 for accounting policies related to amortisation of intangible assets.

Employee benefits

Refer to accounting policies for employee benefits in note 20.

Leases

The determination of whether an arrangement is or contains a lease is based on the substance of the arrangement and requires an assessment of whether the fulfilment of the arrangement is dependent on the use of a specific asset or assets and the arrangement conveys a right to use the asset.

Operating lease payments are recognised as an expense in the statement of comprehensive income on a straight-line basis over the lease term.

ii. Foreign exchange gains & losses included in profit and loss

Foreign exchange gains and losses included in profit and loss includes:

Mark to market adjustments on non-derivative financial assets such as foreign currency denominated loans.
Mark to market adjustments on foreign currency hedge instruments designated as fair value hedges.
Foreign currency gains and losses on cash flow hedges that were deemed to be ineffective during the accounting period.

46 | AUSTAL LIMITED ANNUAL REPORT 2014

Note 6. Earnings per share

Net profit after tax
Net profit attribut
Weighted average
Weighted averag
Effect of dilution
Options
Performanc
Weighted averag
Earnings per share
Basic earningsp
Diluted earnings
able to ordinary equity
number of ordinary s
e number of ordinary
e Rights
e number of ordinary
er share
per share
holders of the paren
hares
shares (excluding res
shares (excluding res
t from continuing oper
erved shares) for bas
erved shares) adjuste
ations
ic earnings per share
d for the effect of dilu
$’00
Num
Num
Num
tion
Num
$ /s
$ /s
0
ber
ber
ber
ber
hare
hare

$ 3
3
$ $ 2014
31,548
$ 42,042,581
2
294,589
399,105
42,736,275
2
0.09
$ 0.09
$ 2013
35,870
97,166,499
522,537
-
97,689,036
0.12
0.12

i. Measurement

Basi c earnings pe r share amo u nts are calc u lated by divi d ing net profi t for the year attributable to ordinary equit y holders of t h e parent by the weighte d average nu m ber of ordin a ry shares o u tstanding d u ring the year.

Dilut e d earnings p er share am o unts are cal c ulated by di v iding the net profit attribu t able to ordinary equity hold e rs of the par e nt by the weighted avera g e number o f ordinary sh a res outstan d ing during the year plus the w eighted aver a ge number o f ordinary s h ares that would be issue d on the con v ersion of all t he dilutive pote n tial ordinary s hares into ordinary shar e s.

ii. Information concerning the classification of securities

Options

Options granted t o employees under the Austal Group M anagement S hare Plan a n d Employee Share Option Plan are c o nsidered to b e potential o rdinary shar e s and have b een include d in the dete r mination of diluted earnings p e r share to t h e extent that they are dilutive. The options have no t been includ e d in the deter m ination of basic earning s per share. D etails relating to the opti o ns are set o u t in Note 29 9,09 7 ,740 options granted und e r the afore m entioned plans are not in c luded in the calculation of diluted earni n gs per shar e because th e y are not co n sidered to b e dilutive. (F Y 2013: 9,13 9 ,165). Thes e options could potentially dilute basic e a rnings per s h are in the fu t ure.

Performance rights

Performance right s granted to e xecutives u n der the Gro u p’s Long Te r m Incentive P lan are incl u ded in the calculation of dilut e d earnings p er share as s uming all ou t standing rig h ts will vest. T he rights ar e not inclu d ed in the de t ermination o f basic earni n gs per shar e . Further inf o rmation abo u t the perfor m ance rights is pr o vided in Not e 29

Ther e have been n o other tran s actions invo l ving ordinar y shares or p o tential ordin a ry shares b e tween the repor t ing date an d the date of c ompletion o f these finan c ial statements.

47 | AUSTAL LIMITED ANNUAL REPORT 2014

Note 7. Reconciliation of net profit after tax to net cash flows from operations

Net profit
Adjustments for:
Depreciation and
Net (gain) / loss
Net (gain) / loss
Share based pay
Ineffective hedge
Net exchange di
Total
Changes in assets
(Decrease) / incr
Income tax (cu
Workers’ comp
Warranty
Employee ben
Other provision
(Increase) / decr
(Increase) / decr
(Increase) / decr
(Increase) / decr
(Increase) / decr
(Decrease) / incr
(Decrease) / incr
(Decrease) / incr
(Decrease) / incr
Total
Net cash (outflow)/
amortisation
on disposal of proper
on disposal of intangi
ments
gains/losses
fferences
and liabilities:
ease in provisions for
rrent and deferred)
ensation insurance
efits
s
ease in trade & other
ease in inventories
ease in other assets
ease in prepayments
ease in other financia
ease in trade and oth
ease in progress pay
ease in derivative ass
ease in governmentg
inflow from operatin
ty, plant and equipme
ble assets
:
receivables
l assets
er payables
ments in advance
ets & liabilities
rants
g activities
nt

$ $ $ $ $ $ 2014
’000
31,859
$ 23,776
$ (3,582)
(903)
383
12
254
19,940
$ (7,905)
1,695
65
2,530
3,092
5,970
(58,646)
-
2,703
4,141
49,757
7,272
(17,916)
-
(7,242)
$ 44,557
$ 2013
’000
35,742
24,509
114
-
1,263
-
-
25,886
(33,697)
526
3,989
32
2,488
(6,553)
(84,359)
(4,312)
-
-
5,187
(5,498)
-
4,701
(117,496)
(55,868)

==> picture [132 x 89] intentionally omitted <==

Note 8. Dividends paid and proposed

i. Divid ii. Frank Dividend Final Final Opening Frank Frank Move Closing ends on ord ing credit b s on Ordinary Share franked dividend (cen franked dividend Balance ing credits that arose ing credits distributed ment Balance inary shares alance s ts per share) from the payment of income tax instalmen ts during the year	2014 ’000 - - $ 2014 ’000 58 $ 35 $ - 35 $ 93 $ 2013 ’000 - - $ 2013 ’000 3 - $ 0 583 $ - 0 583 $ 3 583 $

48 | AUSTAL LIMITED ANNUAL REPORT 2014

Note 9. Income and other taxes

i. Income tax expense

Major co
Consolid
Curre
C
A
Defe
R
A
Total
Other Co
Curre
C
Total
Other eq
Curre
C
D
Total
A reconc
Acco
Incom
A
O
B
U
R
U
A
O
T
Incom
mponents of tax exp
ated Profit & Loss
nt Income Tax
urrent income tax cha
djustments in respect
rred Income Tax
elating to originationa
djustments in respect
income tax (expens
mprehensive Incom
nt and deferred inco
urrent and deferred ga
(expense) / benefit c
uity items
nt and deferred inco
apital raising costs
eferred gains on reva
(expense) / benefit c
iliation between tax
unting profit / (loss)
e Tax at the Group
djustment for AustalU
ther foreign tax rated
ranch (profit) / loss
S section 199 domest
esearch and developm
nrealised foreign exch
djustments in respect
ther non-assessableo
otal Adjustments
e tax expense / (be
ense for the year s
rge
of current income tax
nd reversal of tempor
of deferred income ta
e) / benefit
e (OCI)
me tax related item
ins and losses on for
harged to OCI
me tax related item
luation of property, pla
harged to other equ
expense and the pr
before income tax fr
’s statutory income t
SA statutory income
ifferences
ic manufacturing dedu
ent and other tax off
ange losses on interc
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r non-deductible item
nefit) reported in the
ended 30 June 2014
of the previous year
ary differences
x of the previous year
s charged or credite
eign currency contrac
s charged or credite
nt and equipment
ity
oduct of accounting
om continuing oper
ax rate of 30% (2013
tax rate of 36.9% (201
ction
sets and credits
ompany loans
d income tax of thep
s
statement of compr
and 2013 are:
d directly to OCI
ts and consolidationa
d directly to other eq
profit before income
ations
: 30%)
2: 36.9%)
revious year
ehensive income
djustments
uity items
tax multiplied by

$
$
$
$
$
$
$
th
$
$
$
$
$
2014
’000
(13,224)
$ 7,863
(1,549)
$ (8,375)
(15,285)
$ 1,082
$ 1,082
$ -
$ -
-
$ e Group’s applicable
47,144
$ (14,142)
$ (2,289)
$ 1,145
(865)
1,313
543
306
(513)
(783)
(1,143)
$ (15,285)
$ 2013
’000
(13,334)
8,686
5,128
8,536
9,016
(9,894)
(9,894)
784
-
784
income tax rate is a
26,726
(8,018)
(809)
(960)
1,714
1,077
-
2,730
17,222
(3,940)
17,034
9,016
s follows:

49 | AUSTAL LIMITED ANNUAL REPORT 2014

ii. Analysis of temporary differences

Statement of Finan 2014 ’000 Deferred income tax - USA Deferred tax assets Payables 17,680 $ Provisions 5,014 Losses available for offset against future taxable income 5,092 Research and development tax credits 19 Work Opportunity Tax Credits - Charitable donations 34 Total 27,839 $ Deferred tax liabilities Property, plant and equipment (18,541) $ Inventories (276) Total (18,817) $ Deferred tax assets - Net 9,022 $ Deferred income tax - Australia Deferred tax assets Trade & other receivables 3,827 $ Payables 284 Provisions 4,859 Deferred gains and losses on foreign currency contracts - Undeducted s.40-880 costs 539 Undeducted borrowing costs - Losses available for offset against future taxable income 218 Research and development and other tax offsets - Total 9,727 $ Deferred tax liabilities Property, plant and equipment (3,404) $ Inventories (11,655) Deferred gains and losses on foreign currency contracts (1,295) Total (16,354) $ Deferred tax assets - Net (6,627) $ Deferred tax (expense) / income booked to Statement of Comprehensive Income	Statement of Finan	cial Position 2013 ’000 27,631 $ 2,919 8,713 3,641 456 34 43,394 $ (18,900) $ (1,847) (20,747) $ 22,647 $ 3,247 $ 108 3,927 2,304 625 - - 202 10,413 $ (6,189) $ (15,300) - (21,489) $ (11,076) $		Statement of Comprehensive Income	Statement of Comprehensive Income
				2014 ’000 9,768 $ (2,051) 3,577 3,662 413 - 15,369 $ (65) $ (1,571) (1,636) $ 13,733 $ (581) $ (176) (932) 2,304 (84) - (218) 202 515 $ (319) $ (3,645) 1,295 (2,669) $ (2,154) $ 11,579 $	2013 ’000
					21,175 $ 906 2,398 (308) 67 2
					24,240 $ (124) $ (1,847)
					(1,971) $
					22,269 $
					- $ (3,153) (213) 13,921 627 (62) (1,053) 202
					10,269 $ (129) $ (1,570) -
					(1,699) $
					8,570 $

					30,839 $

iii. Recognition and measurement

Current tax assets and liabilities for the current and prior periods are measured at the amount expected to be recovered from or paid to the taxation authorities. The tax rates and tax laws used to compute the amount are those that are enacted or substantively enacted by the balance date.

Deferred income tax is provided on all temporary differences at the balance date between the tax bases of assets and liabilities and their carrying amounts for financial reporting purposes.

Deferred income tax liabilities are recognised for all taxable temporary differences except:

when the deferred income tax liability arises from the initial recognition of goodwill or of an asset or liability in a transaction that is not a business combination and, at the time of the transaction, affects neither the accounting profit nor taxable profit or loss; or
when the taxable temporary differences associated with investments in subsidiaries, associates or interests in joint ventures, and the timing of the reversal of the temporary differences can be controlled and it is probable that the temporary differences will not reverse in the foreseeable future.

50 | AUSTAL LIMITED ANNUAL REPORT 2014

deferred income tax assets are recognised for all deductible temporary differences, carry-forward of unused tax assets and unused tax losses, to the extent that it is probable that taxable profit will be available against which the deductible temporary differences, and the carry-forward of unused tax assets and unused tax losses can be utilised except:
when the deferred income tax asset relating to the deductible temporary difference arises from the initial recognition of an asset or liability in a transaction that is not a business combination and, at the time of the transaction, affects neither the accounting profit nor taxable profit or loss; or
when the deductible temporary differences is associated with investments in subsidiaries, associates and interests in joint ventures in which case a deferred tax asset is only recognised to the extent that it is probable that the temporary differences will reverse in the foreseeable future and taxable profit will be available against which the temporary

The carrying amount of deferred income tax assets is reviewed at each balance date and reduced to the extent that it is no longer probable that sufficient taxable profit will be available to allow all or part of the deferred income tax asset to be utilised.

Unrecognised deferred income tax assets are reassessed at each balance date and are recognised to the extent that it has become probable that future taxable profit will allow the deferred tax asset to be recovered.

Deferred income tax assets and liabilities are measured at the tax rates that are expected to apply to the year when the asset is realised or the liability is settled, based on tax rates (and tax laws) that have been enacted or substantively enacted at the balance date.

Income taxes relating to items recognised directly in equity are recognised in equity and not in the statement of comprehensive income.

Deferred tax assets and deferred tax liabilities are offset only if a legally enforceable right exists to set off current tax assets against current tax liabilities and the deferred tax assets and liabilities relate to the same taxable entity and the same taxation authority.

iv. Tax consolidation

Austal Limited (‘the Company’) is the head entity in a tax-consolidated Group comprising the Company and its 100% owned Australian resident subsidiaries. The implementation date of the tax consolidated system for the tax-consolidated Group was 1 July 2002. Members of the Group have entered into a tax sharing arrangement in order to allocate income tax expense to the wholly owned subsidiaries on a pro-rata basis. The agreement provides for the allocation of income tax liabilities between the entities should the head entity default on its tax payment obligations. At the balance date, the possibility of default was remote.

v.

Tax effect by members of the tax consolidated Group

The current and deferred tax amounts for the tax-consolidated Group are allocated among the entities in the Group using a stand-alone taxpayer approach whereby each entity in the tax-consolidated Group measures its current and deferred taxes as if it continued to be a separately taxable entity in its own right. Deferred tax assets and deferred tax liabilities are measured by reference to the carrying amounts of the assets and liabilities in each entity’s statement of financial position and their tax values applying under tax consolidation.

Any current tax liabilities (or assets) and deferred tax assets arising from unused tax losses assumed by the head entity from the subsidiaries in the tax consolidated Group are recognised in conjunction with any tax funding arrangement amounts (refer below).

The Group recognises deferred tax assets arising from unused tax losses of the tax-consolidated Group to the extent that it is probable that future taxable profits of the tax-consolidated Group will be available against which the asset can be utilised.

Any subsequent period adjustments to deferred tax assets arising from unused tax losses assumed from subsidiaries are recognised by the head entity only.

The members of the tax-consolidated Group have entered into a tax funding arrangement which sets out the funding obligations of members of the tax-consolidated Group in respect of tax amounts. The tax funding arrangements require payments to/from the head entity equal to the current tax liability (asset) assumed by the head entity and any tax-loss deferred tax asset assumed by the head entity.

No amounts have been recognised as tax consolidation contribution/distribution adjustments in preparing the accounts for the parent company for the current year.

51 | AUSTAL LIMITED ANNUAL REPORT 2014

vi. Significant accounting judgements and estimates

Deferred tax assets are recognised for deductible temporary differences as management considers that it is probable that future taxable profits will be available to utilise those temporary differences.

Uncertainties exist with respect to the interpretation of complex tax regulations, changes in tax laws, and the amount and timing of future taxable income. Given the wide range of international business relationships and the long-term nature and complexity of existing contractual agreements, differences arising between the actual results and the assumptions made, or future changes to such assumptions, could necessitate future adjustments to tax income and expense already recorded. The Group establishes provisions, based on reasonable estimates, for possible consequences of audits by the tax authorities of the respective counties in which it operates. The amount of such provisions is based on various factors, such as experience of previous tax audits and differing interpretations of tax regulations by the taxable entity and the responsible tax authority. Such differences in interpretation may arise for a wide variety of issues depending on the conditions prevailing in the respective domicile of the Group companies.

Deferred tax assets are recognised for unused tax losses to the extent that it is probable that taxable profit will be available against which the losses can be utilised. Significant management judgement is required to determine the amount of deferred tax assets that can be recognised, based upon the likely timing and the level of future taxable profits together with future tax planning strategies.

vii. Other taxes

Revenues, expenses and assets are recognised net of the amount of GST except:

when the GST incurred on a purchase of goods and services is not recoverable from the taxation authority, in which case the GST is recognised as part of the cost of acquisition of the asset or as part of the expense item as applicable; and
receivables and payables, which are stated with the amount of GST included.

The net amount of GST recoverable from, or payable to, the taxation authority is included as part of receivables or payables in the statement of financial position.

Cash flows are included in the statement of cash flows on a gross profit basis and the GST component of cash flows arising from investing and financing activities, which is recoverable from, or payable to, the taxation authority, are classified as operating cash flows.

Commitments and contingencies are disclosed net of the amount of GST recoverable from, or payable to, the taxation authority.

52 | AUSTAL LIMITED ANNUAL REPORT 2014

Capital structure

Note 10. Cash and cash equivalents

Current Cash at bank an Total Restricted cash: Unutilised Go Zo Cash and termd Total Total Cash per Cas d in hand ne Bond funds (i) eposits (ii) h Flow Statement	20 ’0 $ $ $ $ $ 14 20 00 ’00 77,345 $ 77,345 $ 9,532 $ - 9,532 $ 86,877 1 $ 13 0 38,030 38,030 11,617 58,056 69,673 07,703

(i) Unutilised Go Z o ne Bonds may only b e spent on those cap i tal works projects th a t were specifically id e ntified in the docume n tation issued to inve s tors. (ii) Comparitive bal a nce represented par t ial proceeds from the FY2013 capital raising that were used in F Y 2014 to retire Go Zone debt.

i. Recognition and measurement

Cash and short-term deposits in the statem e nt of financi a l position comprise cash a t bank and in hand and short - term deposi t s with an ori g inal maturity of three mo n ths or less.

For t h e purposes o f the Cash F low Statement, cash and cash equivalents consist o f cash and c ash equi v alents as de f ined above, n et of cash h e ld as a gua r antee.

53 | AUSTAL LIMITED ANNUAL REPORT 2014

Note 11. Interest bearing loans and borrowings

Current Revolving Cred Multi-Option Fa Equipment line Bank Loan (uns Go Zone Bonds Total Non - Current Bank Loan (uns Go Zone Bonds Total Total it Facility cility (1) (2) ecured) (3) (4) ecured) (3) (4)	2014 ’000 (12,000) $ - - (1,192) - (13,192) $ - $ (142,264) (142,264) $ (155,456) $ 2013 ’000 - $ (8,000) (22,283) (8,357) (204,974) (243,614) $ (1,163) $ - (1,163) $ (244,777) $

Cash advan c e was provided under the Multi Option facility. 2. The Equipm e nt line was closed at 30 June 2014.
The Bank lo a n is payable by in s talments until Oct o ber 2014, with an a verage variable i n terest rate betwee n 4.1% to 4.7% in FFY2014. 4. The Go Zon e Bonds are variable rate demand bo n ds and mature on 1 May 2041 and a r e payable in US d o llars with an averagage effective intere s t rate of approximate l y 3.7% in FY2014. 5. The loans a n d facilities incur in t erest at various av e rage rates betwe e n 4% and 5%.

i. Recognition and measurement

All lo a ns and borr o wings are initially recogn i sed at the fair value of th e considerati o n received l e ss directly attrib u table transaction costs. I n terest-beari n g loans and borrowings a re subsequ e ntly measur e d at amor t ised cost using the effect i ve interest m ethod.

Gain s and losses a re recognis e d in the stat e ment of co m prehensive income when the liabilitie s are dere c ognised.

ii. Go Zone Bonds

The G ulf Opportu n ity Zone Bo n ds (Go Zon e Bonds or G Z B) are a for m of indebte d ness that w e re auth o rized by the US Federal G overnment t o incentivise private investment in infr a structure in g eographical area s that were affected by Hurricane Katri n a in 2005. A u stal qualifie d to borrow U S$225M wit h a 30 year matu r ity to invest in the develo p ment of shi p building infr a structure in A ustal USA b etween FY2 0 08 & FY2013.

Go Z o ne Bonds a r e tax-exempt municipal b o nds in the U nited States and attracte d an average coupon rate of 0. 0 54% in FY2 0 14. GZB bo n dholders ar e secured by l etters of cre d it issued by A ustal’s ban k ing syndicate with a m aturity date o f 31 Decem b er 2015. Th e average co s t of the letters of credit in FY2014 was 3 .677%. Aust a l has redee m ed (repaid) a cumulative amount of ~ US$90M of G ZB funds a n d owes US$ 1 35M at 30 June 2014.

Aust a l has the option of redee m ing the outs t anding GZB balance, in w hole or in p a rt, at any time during the term o f the indebt e dness with a 30 day noti c e to bondho l ders. Austal may choose t o redeem these bonds at or be f ore 31 December 2015 or may exten d the debt by o btaining an extension to t he letters of credit prior to th a t date.

54 | AUSTAL LIMITED ANNUAL REPORT 2014

iii. Banking facilities

Facilities used at reporting date
Revolving Credit Facility (1)
Multi-Option Facility (2)
Equipment Line (3)
Bank Loan (unsecured) (4)
Go Zone Bonds (5)
Contingent Instrument Facility (6)
Other unsecured facility
Total
Facilities unused at reporting date
Revolving Credit Facility (1)
Multi-Option Facility (2)
Equipment Line (3)
Bank Loan (unsecured) (4)
Go Zone Bonds (5)
Contingent Instrument Facility (6)
Other unsecured facility
Total
Total Facilities Available
Revolving Credit Facility (1)
Multi-Option Facility (2)
Equipment Line (3)
Bank Loan (unsecured) (4)
Go Zone Bonds (5)
Contingent Instrument Facility (6)
Other unsecured facility
Total

2014
2013
’000
’000
(12,000)
$ -
$ -
(34,933)
-
(22,283)
(1,192)
(9,470)
(142,264)
(204,974)
(41,605)
-
-
(50)
(197,061)
$ (271,710)
$ (38,000)
$ -
$ -
(56,567)
-
-
-
-
-
-
(58,395)
-
-
-
(96,395)
$ (56,567)
$ (50,000)
$ -
$ -
(91,500)
-
(22,283)
(1,192)
(9,470)
(142,264)
(204,974)
(100,000)
-
-
(50)
(293,456)
$ (328,277)
$

The Revolving Credit Facility is provided under a new Syndicated Facility Agreement (SFA) which was executed on 19 July 2013. The maturity of the SFA is 31 December 2015. Funds were borrowed under the Revolving Credit Facility in FY2014 with an average variable interest rate of 4.5% in FY2014.
Cash advance and contingent instruments were provided under the Multi Option facility until 19 July 2013 when the facility was closed and replaced with the SFA.
The Equipment Line was transferred into the SFA at 19 July 2013 and then repaid and closed at 30 June 2014.
The Bank Loan is payable by instalments until October 2014, with an average variable interest rate of 4.8% in FY2014.
The Go Zone Bonds of US$ 135.040 million are variable rate demand bonds that are wrapped by Letters of Credit that are provided under the SFA. The Go Zone Bonds mature on 1 May 2041 whilst the Letters of Credit mature on 31 December 2015. The Bonds are payable in US dollars with an average effective interest rate of approximately 3.7% in FY2014.
The Contingent Instrument Facility is used to support letters of credit (excluding the letters of credit supporting the Go Zone Bonds), performance bonds and other financial and non-financial guarantees (refer to note 23).

iv. Fair value of borrowings

The fair values of all classes of borrowings are not materially different to their carrying amounts since the interest payable on those borrowings is either close to current market rates or the borrowings are of a shortterm nature.

55 | AUSTAL LIMITED ANNUAL REPORT 2014

Note 12. Contributed equity and reserves

Ordinary Shares on 1 July Shares issued du 30 June Reserved Shares 1 July Options exercise 30 June Net Issue ring the year d	Shar	es 2013 188,193,00 157,980,18 346,173,19 (4,350,60 - (4,350,60 341,822,59 7 8 5 1) 1) 4		’000
	2014 346,173,1 371,7 346,544,9 (4,350,6 - (4,350,6 342,194,3 95 38 33 01) 01) 32			2014 120 $ $ 12 $ (9 $ $ (9 $ 11 $ 2013 ,940 41 $ 270 79 $ 1,210 120 $ ,612) (9 $ - $ ,612) (9 $ 1,598 111 $ ,373 ,567 ,940 ,612) - ,612) ,328

i. Recognition and measurement Ordinary shares

Ordi n ary shares a r e classified a s equity. In c remental co s ts directly a t tributable to t he issue of n ew shares or op t ions are sho w n in equity a s a deducti o n, net of tax, from the proceeds of the new shares o r options. Ordi n ary shares h a ve no par v a lue and the c ompany do e s not have a limited amo u nt of authorised capital. Fully paid ordinar y shares carr y one vote p e r share and c arry the righ t to dividend s .

Reserved shares

Own equity instru m ents which a re issued a n d held by a t rustee under Austal Grou p Managem e nt Share Plan a re classifie d as reserved shares and a re deducted from equity. No gain or l o ss is recognised in the state m ent of com p rehensive in c ome on the purchase, s a le, issue or c ancellation o f the Group’ s own equity instr u ments. Refe r to Note 29 f o r more infor m ation in rel a tion to the A u stal Group M anagement Share Plan.

ii. Movements in ordinary share capital

The e ntire movement in ordina r y shares du r ing year end e d 30 June 2014 is comp r ised of shar e s issued to Mr A n drew Bella m y on 26 Nov e mber 2013 a s part of his contract of employment. ( Refer to the Rem u neration Re p ort on page 16) The volu m e weighted average pri c e (VWAP) o n which the s h ares were issue d was $0.83 per share.

iii. Nature & purpose of reserves

Foreign currency translation reserve

The f o reign curre n cy translatio n reserve is u sed to recor d exchange d ifferences a r ising from th e translation of th e financial st a tements of f o reign subsid i aries.

Employee benefits reserve

This r eserve is us e d to record t he value of e quity benefit s provided to employees a nd directors as part of their r emuneratio n . Refer to N o te 29 for fur t her details o f share base d payment pl a ns for the Group.

56 | AUSTAL LIMITED ANNUAL REPORT 2014

Cash flow hedge reserve

This r eserve reco r ds the portio n of the gain or loss on a h edging instr u ment in a c a sh flow hed g e that is deter m ined to be a n effective hedge.

Common control reserve

This r eserve repr e sents the pr e mium paid on the acquisi t ion of the minority intere s t in a control l ed entity.

Asset revaluation reserve

This r eserve is us e d to record increases in t he fair value of land and b uildings.

Note 13. Government grants relating to assets

Deferred Grant Inc Current Infrastructure Total Non - Current Infrastructure Total Total ome Development Development	$ $ $ $ $ 2014 ’000 (3,550) $ (3,550) $ (49,892) $ (49,892) $ (53,442) $ 2013 ’000 (4,221) (4,221) (52,794) (52,794) (57,015)

i. Recognition and measurement

Aust a l has receiv e d grants fro m various go v ernment bo d ies in Alaba m a to fund th e infrastructu r e required for th e expansion o f the Group’s USA oper a tions in Mobile, Alabama.

Whe n the grant relates to an a s set, the fair v alue is credited to a defe r red income l iability acco u nt and is relea s ed to profit a nd loss over the expecte d useful life of the relevan t asset.

Whe n the grant relates to an e x pense item, it is recognised as incom e over the pe r iods necess a ry to match the g r ant on a sys t ematic basi s to the costs that it is inte n ded to com p ensate.

Government gran t s are only re c ognised wh e n received o r when there is reasonable assurance that the grant will be recei v ed and all a t taching con d itions will be complied wit h .

57 | AUSTAL LIMITED ANNUAL REPORT 2014

Working capital

Note 14. Trade and other receivables

Current Trade amountso Allowance accou Total Non - Current Trade amountso Total Total wing by unrelated en nt for doubtful debts wing by unrelated en tities – construction c tities ontracts	20 ’0 $ $ $ $ $ 14 20 00 ’00 95,842 1 $ (89) 95,753 1 $ 1,020 $ 1,020 $ 96,773 1 $ 13 0 04,130 (1,387) 02,743 - - 02,743

i. Recognition and measurement

Trad e receivables which are within the nor m al credit ter m s are recog n ised and ca r ried at origin a l invoice amo u nt less an allowance for a ny uncollecti b le amounts. An allowan c e for doubtf u l debts is m a de when there is objective e vidence tha t the Group w ill not be abl e to collect the debts. Ba d debts are w ritten off when identified.

ii. Impaired trade receivables

Indivi d ual receiva b les which ar e known to b e uncollectible are written off by reduci n g the carryi n g amount direc t ly. The other receivables a re assesse d collectively t o determine whether the r e is objectiv e evidence that a n impairment has been incurred but n o t yet been i d entified. For t hese receiv a bles the estimated impairment losses are recogni s ed in a sepa r ate provisio n for impairm e nt. The Gro u p considers that there is evidence of impai r ment if any o f the followi n g indicators a re present:

significant financial difficulties of the d ebtor
probability t hat the debt o r will enter bankruptcy or financial reo r ganisation, a nd
default or delinquency i n payments ( m ore than 90 days overdue).

Receivables for w h ich an impa i rment provis i on was reco g nised are w r itten off against the provi s ion when there is no expect a tion of reco v ering additional cash. Impa i rment losse s are recogni s ed in profit o r loss within o ther expenses. Subsequ e nt recoveri e s of amo u nts previous l y written off a re credited a gainst other expenses.

58 | AUSTAL LIMITED ANNUAL REPORT 2014

iii. Allowance account for doubtful debts

Trade receivables of an initial value of $0.089 million (FY2013: $2.198 million) were impaired and fully provided for at 30 June 2014. Movements in the provision for impairment of receivables are detailed below:

Provision for Doubtful Debts 1 July Charge for the Year Utilised Unused amounts reversed Movement 30 June	2014 2013 $’000 $’000 (1,387) $ (1,863) $ (89) $ (414) $ 1,387 890 - - 1,298 $ 476 $ (89) $ (1,387) $

The allowance for doubtful debts has been created in relation to specific debtors whose debts were past due. The Group is currently negotiating payment arrangements with these debtors, however there is objective evidence that these debts are impaired.

iv. Ageing analysis of current trade & other receivables at 30 June

==> picture [307 x 47] intentionally omitted <==

----- Start of picture text -----

Days
0-30 31-60 61-90 90+ Impaired Total
2014 ’000 $ 89,580 $ 4,430 $ 435 $ 2,417 $ (89) $ 96,773
2013 ’000 $ 94,422 $ 3,452 $ 677 $ 5,579 $ (1,387) $ 102,743
----- End of picture text -----

Receivable balances are monitored on an ongoing basis.

v. Fair values of current trade and other receivables

Due to the short term nature of the current receivables, their carrying amount is assumed to be the same as their fair value.

59 | AUSTAL LIMITED ANNUAL REPORT 2014

Note 15. Construction contracts in progress

Work in Progress Construction rev less Progress pa Total due fromc Progress Payment Construction rev less Progress pa Total due to cust Total due from / (to enue recognised to d yments received & re ustomers s Received in Advan enue recognised to d yments received & re omers ) customers ate ceivable ce ate ceivable	20 ’0 3,6 $ (3,2 3 $ 2 $ (2 $ 2 $ 14 20 00 ’00 03,494 2,5 $ 75,969) (2,2 27,525 2 $ 04,322 $ 33,384) ( (29,062) ( $ 98,463 2 $ 13 0 03,102 25,910) 77,192 49,848 71,638) 21,790) 55,402

i. Recognition and measurement

Cons t ruction work in progress is valued at c ontract cost incurred to d a te, plus profit recognised to date, less any p rovision for a nticipated fu t ure losses a n d progress b illings. Con s truction profi t s are recog n ised on the perc e ntage of co m pletion basi s . Percentag e of completi o n is determi n ed by refere n ce to actual costs to date a s a proporti o n of estimat e d total contr a ct costs.

ii. Significant accounting judgements and estimates

Refe r to Note 4 fo r details of e s timates mad e regarding c onstruction c ontracts.

Note 16. Inventories and work in progress

==> picture [322 x 73] intentionally omitted <==

----- Start of picture text -----

2014 2013
Notes ’000 ’000
Inventories
Work in progres s 15 $ 327,52 5 $ 277,19 2
Other stock 61 7 69 6
Total $ 328,14 2 $ 277,88 8
----- End of picture text -----

i. Recognition and measurement

Stoc k and finishe d goods are valued at the l ower of cost and net reali s able value, w here costs include prod u ction overheads. Cost of s tock is dete r mined on th e weighted a v erage cost b asis.

60 | AUSTAL LIMITED ANNUAL REPORT 2014

Note 17. Trade and other payables

Current Trade & other pa Total yables owed to unrela ted entities (i)	Notes	2014 ’000 (183,570) $ (183,570) $ 2013 ’000 (133,813) $ (133,813) $

(i) Trade payables are unsecured, no n -interest bearing and are normally settled o n 45 day terms.

i. Recognition and measurement

Trad e payables a n d other pay a bles are car r ied at amorti s ed costs an d represent li a bilities for g o ods and servi c es provided to the Group prior to the e nd of the fin a ncial year that are unpai d and arise when the Grou p becomes o b liged to ma k e future pay m ents in res p ect of the purchase of th e se goods and services. ii. Fair value of trade and other payables

The c arrying amo u nts of trade a nd other pa y ables are a s sumed to be the same a s their fair val u es, due to their s hort-term n a ture.

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Infrastructure & other assets

Note 18. Property, plant and equipment

i. Net carrying amount

Balance Gross at fair at cos Accu NetC Balance Gross at fair at cos Accu NetC 1 July 2013 carrying amount Value t mulated Depreciation arrying Amount 30 June 2014 carrying amount Value t mulated Depreciation arrying Amount & Impairment & Impairment	Freehold Land & Buildings ’000 332,695 $ $ - (8,817) 323,878 $ $ 316,786 $ $ 16,404 (29,370) 303,819 $ $ Plant & Capi Equipment WIP ’000 ’000 - $ 127,250 4 (55,355) 71,895 4 $ - $ 122,974 (61,114) 61,859 $ tal - ,599 (455) ,144 - 822 - 822	Total ’000 332,69 $ 131,84 (64,62 399,91 $ 316,78 $ 140,20 (90,48 366,50 $ 5 9 7) 7 6 0 6) 0

ii. Reconciliation of movement for the year

Balance Addit Trans Dispo Depre Impai Excha Total Balance Addit Trans Dispo Depre Excha Total Balance 1 July 2012 ions fer (in / out) sals ciation charge for the rment nge Adjustment 1 July 2013 ions fer (in / out) sals ciation charge for the nge Adjustment 30 June 2014 year year	Freehold Land & Buildings ’000 273,700 $ $ 5,573 $ $ 29,585 (43) (8,817) - 23,880 50,178 $ $ 323,878 $ $ 2,269 $ $ 7,930 (16,766) (8,707) (4,788) (20,062) $ $ 303,816 $ $ Plant & Capi Equipment WIP ’000 ’000 67,630 29 $ 14,270 1 $ (310) (29 (430) (12,642) - 3,376 3 4,264 (24 $ 71,894 4 $ 5,230 4 $ (205) (7 (1,611) (12,886) (560) (10,032) (3 $ 61,862 $ tal ,053 ,422 ,275) - (455) 324 ,076 ,908) ,145 ,385 ,724) - - 16 ,323) 822	Total ’000 370,38 $ 21,26 $ - (47 (21,91 32 30,33 29,53 $ 399,91 $ 11,88 $ (18,37 (21,59 (5,33 (33,41 $ 366,50 $ 3 5 3) 4) 4 2 4 7 4 1 7) 3) 2) 7) 0 -

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iii. Recognition and measurement

Plant and equipment is stated at cost less accumulated depreciation and any accumulated impairment losses.

Land and buildings are measured at fair value less accumulated depreciation on buildings and any impairment losses recognised after the date of revaluation. Valuations are performed frequently to ensure that the fair value of a revalued asset does not differ materially from its carrying value.

If land and buildings were measured using the cost model, the carrying amount would be as follows:

Land & Buildings valued using cost model Cost Accumulated Depreciation & Impairment Net Carrying Amount	2014 2013 ’000 ’000
	404,029 $ 313,594 $ (84,191) (38,517)
	319,838 $ 275,077 $

Any revaluation surplus is recorded in other comprehensive income and hence credited to the asset revaluation reserve in equity, except to the extent that it reverses a revaluation decrease of the same asset previously recognised in the statement of comprehensive income, in which case, the increase is recognised in the profit and loss. A revaluation deficit is recognised in the statement of comprehensive income except to the extent that it offsets an existing surplus on the same asset recognised in the asset revaluation reserve. Accumulated depreciation as at the revaluation date is eliminated against the gross carrying amount of the asset and the net amount is restated to the revalued amount of the asset. Upon disposal, any revaluation reserve relating to the particular asset being sold is transferred to retained earnings.

iv. Depreciation

Depreciation is calculated on a straight-line or diminishing value basis over the estimated useful life of the asset.

The following useful lives have been adopted as follows:

Buildings – over 20 to 40 years
Plant and equipment – over 2 to 10 years

The assets’ residual values, useful lives and amortisation methods are reviewed, and adjusted if appropriate, at each financial year end.

v. Impairment

The carrying values of plant and equipment are reviewed for impairment at each reporting date, with recoverable amount being estimated when events or changes in circumstances indicate the carrying value of the asset may be impaired.

The recoverable amount of plant and equipment 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 an asset that does not generate largely independent cash inflows, recoverable amount is determined for the cash-generating unit to which the asset belongs, unless the asset’s value in use can be estimated to be close to its fair value.

An impairment exists when the carrying value of an asset or a cash-general unit exceeds its estimated recoverable amount. The asset or cash-generating unit is then written down to its recoverable amount.

Impairment losses on plant and equipment are recognised in profit or loss.

The asset or cash-generating unit that suffered an impairment is tested for possible reversal of the impairment whenever events or changes in circumstances indicate that the impairment may have reversed.

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vi. De-recognition and disposal

An item of property, plant and equipment is derecognised upon disposal or when no further future economic benefits are expected from its use.

Any gain or loss arising on de-recognition of the asset (calculated as the difference between the net disposal proceeds and the carrying amount of the asset) is included in the profit and loss in the year the asset is derecognised.

vii. Key judgements and accounting estimates

Estimation of useful lives of assets

The estimation of the useful lives of assets has been based on historical experience. In addition, the condition of the assets is assessed at least once per year and considered against the remaining useful life. Adjustments to useful life are made when considered necessary.

Revaluation of land and buildings

Information about the valuation of land and buildings is provided in Note 21.iii.

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Note 19. Intangible assets

Balance 1 July 201 Additions Amortisation fort Disposals Exchange Adjust Total Balance 30 June 20 Balance 1 July 201 Cost Accumulated Am Net Carrying Am Balance 30 June 20 Cost Accumulated Am Net Carrying Am 3 he year ment 14 3 ortisation & Impairme ount 14 ortisation & Impairme ount nt nt	Co S $ $ $ $ $ $ $ $ mputer Developm oftware Costs ’000 ’000 4,931 1 $ 729 $ (2,012) (601) (1 (37) (1,921) (1 $ 3,010 $ 13,953 1 $ (9,022) 4,931 1 $ 13,195 $ (10,185) 3,010 $ ent Goodwill ’000 ,132 6,463 $ 534 - $ (168) - ,498) - - - ,132) - $ - 6,463 $ ,200 6,463 $ (68) - ,132 6,463 $ - 6,463 $ - - - 6,463 $	Total ’000 12,526 $ 1,263 $ (2,180) (2,099) (37) (3,053) $ 9,473 $ 21,616 $ (9,090) 12,526 $ 19,658 $ (10,185) 9,473 $

i. Recognition and measurement

Intan g ible assets a cquired sep a rately are in i tially measu r ed at cost. F ollowing initi a l recognitio n , intangible asse t s are carried at cost less a ny accumul a ted amortis a tion and any accumulate d impairment losses. Inter n ally generat e d intangible assets, excl u ding capitali s ed develop m ent costs, a r e not capitalised and expe n diture is ch a rged against profit or loss in the year i n which the expenditure i s incurred.

The u seful lives o f intangible a s sets are assessed to be e ither finite o r indefinite. I n tangible as s ets with finite lives are am o rtised over t h e useful life and assess e d for impair m ent whenev e r there is an indication that t h e intangible asset may b e impaired. T he amortisa t ion period a n d the amorti s ation method for an intan g ible asset w i th a finite us e ful life are r e viewed at le a st at each fi n ancial year- e nd. Chang e s in the expe c ted useful life or the exp e cted pattern of consumpt i on of future e conomic be n efits embodied in the asse t are account e d for by changing the a m ortisation pe r iod or meth o d, as appro p riate, which is a change in ac c ounting esti m ate. The a m ortisation e x pense on in t angible asse t s with finite lives is recognised in the state m ent of com p rehensive in c ome in the e xpense category consist e nt with the f u nction of th e intangible asse t .

A su m mary of the policies applied to the Gr o up’s intangi b le assets is a s follows:

Research and development costs

Research costs a r e expensed a s incurred. D evelopment expenditure on an individual project a r e reco g nised as an i ntangible as s et when the Group can demonstrate:

t he technical feasibility of c ompleting t h e intangible asset so that it will be av a ilable for us e or sale
i ts intention t o complete a n d its ability t o use or sell the asset  h ow the ass e t will genera t e future eco n omic benefits  t he availability of resourc e s to complet e the asset  t he ability to m easure reli a bly the expenditure durin g development

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The asset is carried at cost less any accumulated amortisation and accumulated impairment losses following initial recognition of the development expenditure as an asset. Amortisation of the asset begins when development is complete and the asset is available for use. It is amortised over the period of expected future benefit. Amortisation is recorded in costs of sales. The asset is tested for impairment annually during the period of development.

Other intangibles

Other intangible assets are initially measured at cost and amortised on a straight-line basis over the estimated useful life of the asset. Impairment testing is conducted annually.

The following useful lives have been adopted as follows:

Computer software – straight-line over 2.5 years
Development costs – straight line over 5 years

Goodwill

Goodwill is initially measured at cost, being the excess of the aggregate of the consideration transferred and the amount recognised for non-controlling interest over the net identifiable assets acquired and liabilities assumed in a business combination.

Goodwill is measured at cost less any accumulated impairment losses after initial recognition. For the purpose of impairment testing, goodwill acquired in a business combination is allocated to each of the Group’s cash-generating units that are expected to benefit from the combination from the acquisition date, irrespective of whether other assets or liabilities acquired are assigned to those units.

Impairment is determined for goodwill by assessing the recoverable amount of each CGU (or Group of CGUs) to which the goodwill relates. When the recoverable amount of the CGU is less than its carrying amount, an impairment loss is recognised. Impairment losses relating to goodwill cannot be reversed in future periods.

Where goodwill has been allocated to a cash-generating unit and part of the operation within that unit is disposed of, the goodwill associated with the disposed operation is included in the carrying amount of the operation when determining the gain or loss on disposal. Goodwill disposed in these circumstance is measured based on the relative values of the disposed operation and the portion of the cash-generating unit retained.

ii. Impairment testing of goodwill and intangible assets with indefinite useful lives

Goodwill acquired through business combinations has been allocated to the Darwin CGU, which is part of the Australia segment. (Refer to Note 3 for details.)

The Group tests whether goodwill is recoverable on an annual basis. The recoverable amount of Darwin CGU has been determined based on a value in use calculation using cash flow projections from financial budgets approved by senior management covering a five-year period. It was concluded that the recoverable amount is greater than the carrying amount. As a result of this analysis, management has concluded that no impairment charge is required.

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iii. Significant accounting judgement and estimates

Recoverable amount of the Darwin CGU

The recoverable amount of the Darwin CGU is $15 million and is determined based on value in use calculations using cash from projections from financial budgets approved by senior management covering a five year period. The following table sets out the key assumptions:

==> picture [306 x 35] intentionally omitted <==

----- Start of picture text -----

Budget period gross Growth rate beyond
margins [(1)] budget period [(2)] Discount rate [(3)]
2014 2013 2014 2013 2014 2013
Darwin 10-15% 10-15% 5.0% 5.0% 15.0% 10.5%
----- End of picture text -----

(1) Budgeted gross margin

(2) Weighted average growth rate used to extrapolate cash flows beyond the budget period

(3) In performing the value-in-use calculations for the Darwin CGU, the group has applied post-tax discount rates to discount the forecast future attributable post-tax cash flows. The equivalent pre-tax discount rates are disclosed above.

Management determined budgeted gross margin based on past performance and its expectation for the future. The growth rate beyond the budgeted period is consistent with the long term average growth rate of the ship building industry. The discount rate used reflects specific risks relating to the Australian ship building industry.

iv. Sensitivity to changes in assumptions

The estimated recoverable amount of the Darwin CGU is significantly greater than the carrying value of the assets within the CGU. No reasonably foreseeable changes in any of the key assumptions are likely to result in an impairment loss.

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Other liabilities

Note 20. Provisions

Provisons at 1 J Arising during Utilised Unused amou Effects of fore Movement Provisions at 30 uly 2013 the year nts reversed ign exchange June 2014	Employee Benefits ’000 (11,193) $ (14,912) $ 12,648 (102) (164) (2,530) $ (13,723) $ Workers' Compensation W ’000 (6,449) $ $ (5,400) $ $ 3,648 - 57 (1,695) $ $ (8,144) $ $ arranty Other ’000 ’000 (6,510) (3,1 $ (5,314) (6,2 $ 5,249 2,8 - 2 - (65) (3,0 $ (6,575) (6,2 $ 93) 04) 27 69 16 92) 85)	Total ’000 (27,345) $ (31,830) $ 24,372 167 (91) (7,382) $ (34,727) $

2013 Current Non-Current Total 2014 Current Non-Current Total	Employee Benefits ’000 (10,088) $ $ (1,105) (11,193) $ $ (12,700) $ $ (1,023) (13,723) $ $ Workers' Compensation W ’000 (6,449) $ - (6,449) $ (8,144) $ - (8,144) $ arranty Other ’000 ’000 (6,510) (2,08 $ - (1,11 (6,510) (3,19 $ (6,575) (6,28 $ - - (6,575) (6,28 $ 1) 2) 3) 5) 5)	Total ’000
		(25,128) $ (2,217)
		(27,345) $
		(33,704) $ (1,023)
		(34,727) $

i. Recognition and measurement

Provi s ions are recognised when the Group h as a presen t obligation (legal or cons t ructive) as a result of a past e vent, it is pr o bable that an outflow of r esources e m bodying eco n omic benefi t s will be req u ired to settl e the o b ligation and a reliable es t imate can b e made of th e amount of t h e obligation.

Provi s ions are dis c ounted usin g a current p r e-tax rate th a t reflects th e risks specifi c to the liabil i ty if the effec t of the time v alue of mon e y is material.

The i n crease in th e provision due to the pa s sage of time is recognise d as a financ e cost when d iscounting is us e d.

ii. Information about individual provisions and significant accounting estimates

Wages, salaries, vested sick leave, work safe bonus and other short term benefits

Liabilities for wag e s and salari e s, including n on-monetar y benefits an d accumulati n g sick leave expected to be s e ttled within 12 months of t he reporting date are rec o gnised in ot h er payables in respect of employees’ servi c es up to the reporting da t e. They are measured at the amounts expected to be paid whe n the liabili t ies are settl e d.

Long service leave

The l i ability for long service leave is recogni s ed in the pr o vision for e m ployee ben e fits and measured as the pres e nt value of e x pected futu r e payments t o be made i n respect of services provi d ed by empl o yees up to the r e porting date . Assumptio n s are formul a ted when d e termining th e Group’s long service leave oblig a tions. This r e quires esti m ation of futu r e wage and s alary levels a nd the prob a bility of curr e nt empl o yees attaini n g the servic e period required to qualif y for long ser v ice leave b e nefits. Expe c ted future pay m ents are dis c ounted usin g market yiel d s at the rep o rting date on national go ve rnment bonds with term s to maturity a nd currenci e s that match , as closely as possible, t h e estimated f uture cash o utflows.

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Dividends

A provision for dividends is not recognised as a liability unless the dividends are declared, determined or publicly recommended on or before the reporting date. No provision for dividends has been recognised as at 30 June 2014. (FY2013: nil).

Warranties

Provision for warranty is made upon delivery of the vessels based on the estimated future costs of warranty repairs on vessels.

Workers’ compensation insurance

A provision for workers’ compensation insurance is recognised for the expected costs of current claims and claims incurred but not reported at the balance date.

Other

Other includes a provision for refitting a military vessel to return it to a passenger ferry specification. This is consistent with the comparative period.

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Financial risk management

Note 21. Fair value measurements

i. Financial assets and financial liabilities

The G roup holds the following f inancial inst r uments:

		h Derivatives used for edging at fair value	A amo ssets at rtised cost	T otal
Financia l Assets	Notes	’000	’000	’000
2014
C ash and equivalents	10 10 14 23 10 10 14 23 Notes 17 23 11 17 23 11	$ -	$ 77,345	$ 77,345
R T estricted cash rade & other receivabl es		- - 8,488	9,532 95,753	9,532 95,753
F orward exchange cont racts			-	8,488
T 2013 otal		$ 8,488	$ 182,630	$ 191,118
C R T F ash and equivalents estricted cash rade & other receivabl orward exchange cont es racts		$ - - - 9,400	$ 38,030 69,673 102,743 -	$ 38,030 69,673 102,743 9,400
T Financia 2014 T otal l Liabilities rade & other payables		$ h $ 9,400 Derivatives used for edging at fair value ’000 -	$ Lia amo $ 210,446 bilities at rtised cost ’000 (183,570)	$ T $ 219,846 otal ’000 (183,570)
F In orward exchange cont terest bearing borrow racts ings borrowings		(4,201) -	- (155,456)	(4,201) (155,456)
T 2013 T otal rade & other payables		$ $ (4,201) -	$ $ (339,026) (133,813)	$ $ (343,227) (133,813)
F orward exchange cont racts		(17,078) -	-	(17,078)
In terest bearing borrow ings borrowings			(244,777)	(244,777)
T otal		$ (17,078)	$ (378,590)	$ (395,668)

The G roup’s expo s ure to vario u s risks asso c iated with the financial instruments is d iscussed in note 22. Th e maxi m um exposu r e to credit ri s k at the end of the reporting period is t he carrying a mount of ea c h class of finan c ial asset mentioned abo v e.

The f a ir value of assets and lia b ilities held at amortised c ost is descri b ed in the as s ociated not e referenced in th e table above .

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Recognised fair value measurements - fair value hierarchy

This section explains the judgements and estimates made in determining the fair values of the financial instruments that are recognised and measured at fair value in the financial statements. To provide an indication about the reliability of the inputs used in determining fair value, the Group has classified its financial instruments into the three levels prescribed under the accounting standards. An explanation of each level follows underneath the table.

Recurring fair value measurement		Level 1	Level 2	Level 3	Total
Balance 30 June 2014	Notes	’000	’000	’000	’000
Financial assets
Derivatives used for hedging Total Financial liabilities Derivatives used for hedging Total	23 23	- $ - $ - $ - $	8,488 $ 8,488 $ (4,201) $ (4,201) $	- $ - $ - $ - $	8,488 $ 8,488 $ (4,201) $ (4,201) $
Balance 30 June 2013
Financial assets Derivatives used for hedging Total Financial liabilities Derivatives used for hedging Total	23 23	- $ - $ - $ - $	9,400 $ 9,400 $ (17,078) $ (17,078) $	- $ - $ - $ - $	9,400 $ 9,400 $ (17,078) $ (17,078) $

There were no transfers between any of the levels for recurring fair value measurements during the year.

Level 1: The fair value of financial instruments traded in active markets (such as publicly traded derivatives, and trading and available-for-sale securities) is based on quoted market prices at the end of the reporting period. The quoted market price used for financial assets held by the Group is the current bid price. These instruments are included in level 1.

Level 2: The fair value of financial instruments that are not traded in an active market (for example, overthe-counter derivatives) is determined using valuation techniques which maximise the use of observable market data and rely as little as possible on entity-specific estimates. The instrument is included in level 2 if all significant inputs required to fair value an instrument are observable.

Level 3: The instrument is included in level 3 if one or more of the significant inputs is not based on observable market data.

Valuation techniques used to determine fair values

Specific valuation techniques used to value financial instruments include:

the use of quoted market prices or dealer quotes for similar instruments
the fair value of forward foreign exchange contracts is determined using forward exchange rates at the balance sheet date
the fair value of the remaining financial instruments is determined using discounted cash flow analysis.

For financial instruments that are recognised at fair value on a recurring basis, the Group determines whether transfers have occurred between Levels in the hierarchy by re-assessing categorisation (based on the lowest level input that is significant to the fair value measurement as a whole) at the end of each reporting period.

All of the resulting fair value estimates are included in level 2.

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ii. Impairment – Financial Assets

A financial asset is assessed at each reporting date to determine whether there is any objective evidence that it is impaired. A financial asset is considered to be impaired if objective evidence indicates that one or more events have had a negative effect on the estimated future cash flows of that asset.

An impairment loss in respect of a financial asset which is measured at amortised cost is calculated as the difference between its carrying amount, and the present value of the estimated future cash flows, discounted at the original effective interest rate.

Individually significant financial assets are tested for impairment on an individual basis. The remaining financial assets are assessed collectively in Groups that share similar credit risk characteristics.

All impairment losses are recognised in profit or loss. An impairment loss is reversed if the reversal can be related objectively to an event occurring after the impairment loss was recognised. For financial assets measured at amortised cost, the reversal is recognised in profit or loss.

Impairment testing of trade receivables is described in note 14.

iii. Non-financial assets and liabilities

Recognised fair value measurements - fair value hierarchy

This section explains the judgements and estimates made in determining the fair values of the non-financial instruments that are recognised and measured at fair value in the financial statements. To provide an indication about the reliability of the inputs used in determining fair value, the Group has classified its assets and liabilities measured at fair value into the three levels prescribed under the accounting standards. An explanation of each level is provided in note 21 (i).

		Level 1	Level 2	Level 3	Total
Balance 30 June 2014	Notes	’000	’000	’000	’000
Property, plant and equipment	18
Land & buildings		- $	- $	303,819 $	303,819 $
Total		- $	- $	303,819 $	303,819 $
Balance 30 June 2013

Property, plant and equipment

Land & buildings	18	- $	- $	323,878 $	323,878 $
Total		- $	- $	323,878 $	323,878 $

There were no transfers between any of the levels for recurring fair value measurements during the year.

Valuation techniques used to determine fair values

The Group engages independent accredited valuation specialists on a periodic basis to determine the fair values of these assets. The Group reviews market indicators in the interim periods to ensure that the carrying value of revalued property is not materially different from fair value.

The last revaluation was performed on 29 June 2012.

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Valuation inputs and relationships to fair value

The following table summarises the quantitative information about the significant unobservable inputs used in recurring level 3 fair value measurements.

Description Buildings - Mobile Land - Mobile	Fair value at 30 June 2014 '000	Unobservable inputs Selection of land with similar approximate utility Consumed economic benefit/ obsolescence of asset Cost per square foot floor area (ft2)	Range of inputs (probability-weighted average) Relationship of unobservable inputs to fair value US$1.69 - US$ 2.04 (US$1.70) per ft2 2.22% Greater consumption of economic benefit or increased obsolescence lowers fair value. US$100 - $211 ($185) per ft2 Higher cost per ft2 increases fair value. Higher value of similar land increases estimated fair value
	US$ 304,242 US$ 11,000
Buildings - Henderson Land - Henderson		Selection of land with similar approximate utility Consumed economic benefit/ obsolescence of asset Cost per square meter floor area (m2)	$200-220 ($210) per m2 2.50% Greater consumption of economic benefit or increased obsolescence lowers fair value. $500 - $1,750 ($998) per m2 Higher cost per m2increases fair value. Higher value of similar land increases estimated fair value
	A$ 8,800
	A$ 22,900

iv. Impairment – non-financial assets

Significant accounting judgements

The Group assesses impairment of all assets at each reporting date by evaluating conditions specific to the Group and to the particular asset that may lead to impairment. These include product and manufacturing performance, technology, economic and political environments and future product expectations. If an impairment trigger exists, the recoverable amount of the asset is determined. The recoverable amount of the asset 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 an asset that does not generate largely independent cash inflows, the recoverable amount is determined for the cash-generating unit to which the asset belongs, unless the asset’s value in use can be estimated to be close to its fair value.

Impairment exists when the carrying value of an asset or a cash-general unit exceeds its estimated recoverable amount. The asset or cash-generating unit is then written down to its recoverable amount.

Impairment testing of property, plant and equipment, goodwill and other intangible assets is described in Note 18 and Note 19 respectively.

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Note 22. Financial risk management

This note e x plains the G r oup’s expos u re to financi a l risks and h ow these ris k s could affe c t the Group’ s future financial pe r formance. C u rrent year p r ofit and loss information h as been included where r elevant to a d d further context.

Risk	Exposure a rising from	Mea Sen Cas Sen Age Cred Roll fore surement sitivity analysis h flow forecast, sitivity analysis ing analysis, it ratings ing cash flow casts Management Interest rate sw Forward foreign exchange contr Forward curren options Monitoring cred allowances Availability of committed cred and borrowing facilities aps acts, cy it it lines
Market risk - interest rate Market risk - foreign currency Credit risk Liquidity	Long-termb Future comm Recognised liabilities no currency Cash, short receivables instruments Borrowings, derivative fin orrowings at vari ercial transactio financial assets t denominated in term deposits, tra and derivative fin trade payablesa ancial instrumen able rates ns, and functional de ancial nd ts

Objectives and policy

Ultimate responsibility fo r identificatio n and control of financial risks rests with the Audit & Risk Manag e ment Committee u nder the authority of the B oard. The B oard review s and agrees policies for m anaging ea c h of the risks identifi e d below, in c luding hedgi n g cover of f o reign curren c y, credit allowances, and future cash f low forecast projections.

Details of th e significant a ccounting p o licies and methods adop t ed, including the criteria f o r recognitio n , the basis of measure m ent and the basis on whi c h income a n d expenses are recognis e d, in respec t of each cla s s of financial asset, finan c ial liabilities a nd equity in s trument are disclosed in the relevant n otes to the f inancial stat e ments.

Market risk

i. Capital management

The G roup’s polic y is to maintain a strong a n d flexible c a pital base to provide inve s tor, creditor and market confi d ence to sus t ain future de v elopment o f the busines s . The Grou p monitors th e return on c a pital, which the G roup defines as total shareholders’ eq u ity attributa b le to members of Austal L imited. The Board deter m ines the le v el of dividen d s to shareh o lders.

The G roup monitors statement of financial p osition stren g th and flexi b ility using ca s h flow forec a st analysis and d etailed budg e ting proces s es. The gro s s gearing ratio is monitored and main t ained at a le v el that does not li m it the Grou p ’s growth op p ortunities a n d is in line w ith peers an d industry no r ms.

Ther e were no ch a nges in the G roup’s appr o ach to capital managem e nt during th e year. Risk m anagemen t polici e s and proc e dures are es t ablished wit h regular mo n itoring and r e porting.

Neither the Group nor any of it s subsidiarie s are subject t o externally imposed capital requirem e nts, other than n ormal banking requirem e nts.

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ii. Interest rate risk exposure

The Group’s exposure to market interest rates relates primarily to the Group’s long-term debt obligations and investment in cash funds.

The Group constantly analyses its interest rate exposure. Consideration is given to potential renewals of existing positions and alternative financing.

At the end of the reporting period, the Group had the following variable rate borrowings and interest rate swap contracts outstanding:

Financial Assets Cash and cash equivalents Australian variable rate interest US variable rate interest Total Financial Liabilities Interest bearing loans and borrowings Australian variable rate interest US variable rate interest Total Net Exposure	2014 2013 ’000 ’000 35,324 $ 18,320 $ 51,553 89,383 86,877 $ 107,703 $ (13,192) $ (17,520) $ (142,264) (227,257) (155,456) $ (244,777) $ (68,579) $ (137,074) $

Profit or loss is sensitive to higher/lower interest income from cash and cash equivalents and interest expenses on borrowings as a result of changes in interest rates. There would be no impact on other components of equity as a result of changes in interest rates. The below sensitivity analysis shows the impact on post tax profit had a 1 percentage point movement in interest rates occurred. 1 percentage point was deemed to be a reasonable level of volatility based on FY2014 observations.

Post tax gain / (loss) +1% (100 basis points) -1% (100 basis points)	2014 2013 ’000 ’000 (686) $ (1,371) $ 686 1,371

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iii. Foreign currency risk

Refer to Note 23 for Derivatives.

The Group is exposed to currency risk on sales, purchases or components for construction that are denominated in a currency other than the respective functional currencies of the Group entities, primarily the Australian Dollars (AUD) for the Australian operation and US Dollars (USD) for the US operation. The currencies in which these transactions primarily are denominated are AUD, USD, GBP and Euro.

The Group’s objective in relation to foreign currency risk is to minimise the risk of a variation in the rate of exchange used to convert foreign currency revenues and expenses and assets or liabilities to AUD.

The Group attempts to limit the exposure to adverse movement in exchange rates in the following ways:

negotiation of contracts to adjust for adverse exchange rate movements;
use of natural hedging techniques; and
using financial instruments (refer to Note 23).

Sales contracts are negotiated based at the current market rate on the contract signing date. Where there is a tender involving significant foreign currency exposure, the Group seeks to cover that exposure by a rise and fall clause for exchange rate movements between the date of price calculation to the date the contract becomes effective.

Known foreign exchange transaction exposure, which result from normal operational business activities are hedged.

Tax profit and equity would have been affected as illustrated in the table below had the Australian Dollar, US Dollar and Euro moved relative to one another at balance date with all other variables held constant:

Judgement of reasonable possible movements USD / AUD +5% -5% EUR / AUD +5% -5% EUR / USD +5% -5%	Post taxprofit(higher /(lower) 2014 2013 ’000 ’000 4,727 $ 3,316 $ (4,727) (3,316) 2 $ 17 $ (2) (17) 4,515 $ - $ (4,515) -		Equity (higher /(lower)
	2014 ’000 4,727 $ (4,727) 2 $ (2) 4,515 $ (4,515)		2014 2013 ’000 ’000 17,106 $ 3,764 $ (17,106) (3,764) (1,769) $ (1,172) $ 1,769 1,172 4,515 $ - $ (4,515) -

Derivative financial instruments such as forward currency contracts and currency options are purchased to eliminate the currency exposures so as to maintain a properly hedged position. Timing gaps are mitigated using foreign currency accounts or financial instruments such as swaps.

It is the Group’s policy to negotiate the terms of the hedge derivatives to match the terms of the hedged item to maximise hedge effectiveness.

Trading is specifically prohibited. The financial impact of the derivative instrument is incorporated into the cost of goods acquired or the sales proceeds. General hedges are not undertaken.

Foreign currency contracts designated as cash flow hedges to mitigate the movements in foreign exchange rates are outlined in Note 23.

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iv. Credit risk

The Group trades only with recognised, creditworthy third parties. It is the Group’s policy that all customers who wish to trade on credit terms are subject to credit verification procedures, which are conducted internally. The Group, while exposed to credit related losses in the event of non-performance by counterparties to financial instruments, does not expect counterparties to fail to meet their obligations given their credit ratings.

The Group minimises concentrations of credit risk and the risk of default of counterparties in relation to cash and cash equivalents and financial instruments by spreading them amongst a number of financial institutions.

It is the Group’s policy to minimise the risk that the principle amount will not be recovered and the risk that funds will not be available when required whilst at the same time obtaining the maximum return relative to the risk. To manage this, it is the Group’s policy to restrict its investment of surplus cash funds to financial institutions with a Standard and Poor credit rating of at least A-2, and for a period not exceeding 180 days. The Group undertakes investments in 11am / 24 hour call deposits, term deposits or negotiable certificates of deposit in order to achieve this objective.

In addition, vessel sales contracts are structured to ensure that the Group will be paid on delivery of the vessel through the following measures:

obtaining progress payments from the client to cover the cost of the construction; or
obtaining a letter of credit from a credible bank to cover payment of the contract; or
obtaining a minimum payment of 20% of the contract price and a letter from the bank or financial institution providing finance to the customer that funding has been arranged for the balance of the purchase price.

With respect to credit risk arising from the other financial assets of the Group, which comprise cash and cash equivalents and certain derivative instruments, the Group’s exposure to credit risk arises from default of the counter party, with a maximum exposure equal to the carrying amount of these instruments. The maximum exposure to credit risk at the reporting date is disclosed in Note 10 and Note 23.

Cash and term deposits are predominantly held with two tier one Australian financial institutions, which are considered to be low concentrations of credit risk.

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v. Liquidity risk

The liquidity position of the Group is managed to ensure sufficient liquid funds are available to meet our financial commitments in a timely and cost-effective manner.

It is the Group’s policy to continually review the Group’s liquidity position including cash flow forecasts to determine the forecast liquidity position and maintain appropriate liquidity levels. Austal was in the process of finalising a new syndicated banking facility at the last reporting date (30 June 2013). Execution of the new facility was achieved subsequent to the last reporting date on 19 July 2013 which provides credit until 31 December 2015 and enabled the reclassification of a significant portion of current liabilities as noncurrent liabilities in the current accounting period.

The following are the contractual maturities of financial liabilities, including interest payments:

Balance 30 June 2014 Derivative financial assets / (liabilities) Outflow Inflow Net derivative financial assets / (liabilities) Non Derivative financial liabilities Trade & other payables Bank loan (unsecured) Go Zone Bond facility (i) Revolving Credit Facility Total	Carrying Amount ’000 - $ - - $	Contractual Years to maturity Cash 0 - 1 1 - 2 2 - 5 > 5 Flows ’000 ’000 ’000 ’000 ’000 (154,468) $ (161,766) $ (81,962) $ (172) $ (398,368) $ 155,193 165,183 82,129 172 402,677 725 $ 3,417 $ 167 $ - $ 4,309 $ (183,570) $ - $ - $ - $ (183,570) $ (1,217) - - - (1,217) - (150,171) - - (150,171) (12,019) - - - (12,019) (196,806) $ (150,171) $ - $ - $ (346,977) $
	(183,570) $ (1,192) (142,264) (12,000)
	(339,026) $

(i) Go Zone Bonds are classified with 1 - 2 years to maturity because the letters of credit wrapping the bonds mature on 31 December 2015.

Balance 30 June 2013 Derivative financial assets / (liabilities) Outflow Inflow Net derivative financial assets / (liabilities) Non Derivative financial liabilities Trade & other payables Bank loan (unsecured) Equipment line (secured) Go Zone Bond facility Total	Carrying Amount ’000 - $ - - $ (133,813) $ (9,470) (22,283) (204,974) (370,540) $	Contractual Years to maturity Cash 0 - 1 1 - 2 2 - 5 > 5 Flows ’000 ’000 ’000 ’000 ’000 (155,105) $ (59,776) $ (33,307) $ - $ (248,188) $ 162,502 62,111 38,019 - 262,632 7,397 $ 2,335 $ 4,712 $ - $ 14,444 $ (133,813) $ - $ - $ - $ (133,813) $ (8,529) (1,177) - - (9,706) (23,174) - - - (23,174) (377,151) - - - (377,151) (542,667) $ (1,177) $ - $ - $ (543,844) $

The Group had $38.000 million (FY2013: $56.567 million) of unused credit facilities available for its immediate use at balance date (refer to Note 11). The Group also has a total of $77.345 million (FY2013: $38.030 million) in cash and cash equivalents, which it is able to use to meet its liquidity needs.

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Note 23. Derivative financial instruments and hedging

The Group i s exposed to the risk of a d verse move m ents in the A ustralian D o llar, US Doll a r and Euro relative to each other a rising from r e ceipts from e xport sales a nd the purc h ase of com p onents for c o nstruction.

The Group u ses derivati v e financial instruments s u ch as forwar d exchange c ontracts an d forward currency options to hedge its risks associ a ted with foreign currency fluctuations. These contr a cts are mat c hed to highl y probable receipts an d payments a n d they are timed to matu r e when the r eceipts and p ayments ar e scheduled to be received an d made.

i. Recognition and measurement

Such derivative fi n ancial instru m ents are st a ted at fair v a lue on the d a te on which a derivative c ontract is enter e d into and a re subseque n tly remeasu r ed at fair va l ue. Derivati v es are carri e d as assets w hen the fair value is positive a n d as liabiliti e s when the f a ir value is n e gative. Any g ains or loss e s arising fro m changes in the fair valu e of derivativ e s, except fo r those that qualify as cash flow hedges, are taken to the stateme n t of compre h ensive inco m e.

The f a ir value of f o rward curre n cy contracts is calculated by referenc e to current f o rward exchange rates for contr a cts with sim i lar maturity p rofiles. Credit risk has been included i n foreign cur r ency contra c ts.

The G roup’s deriv a tives are ca t egorised in l e vel 2 of the valuation hierarchy, as th e ir fair value h as been calculated using v a luation techniques wher e the inputs t h at have a si g nificant effe c t on the valuation are direc t ly or indirectly based on m arket obser v able data.

ii. Hedge designation

For t h e purposes o f hedge acc o unting, hed g es are classified as:  f air value he d ges when th e y hedge th e exposure to changes in the fair value o f a recogni s ed asset or l iability or an unrecognise d firm commi t ment other t h an foreign currency risk; or
c ash flow he d ges when they hedge ex p osure to va r iability in cash flows that i s attributable either to a p articular ris k associated w ith a recog n ised asset o r liability or foreign excha n ge risks on firm c ommitment s .

At th e inception of a hedge rel a tionship, the Group form a lly designates and docu m ents the hedge relati o nship to which the Grou p wishes to a p ply hedge a c counting an d the risk ma n agement o b jective and strat e gy for under t aking the he d ge.

The d ocumentation includes id e ntification o f the hedging instrument, t he hedged it e m or transa c tion, the natur e of the risk b eing hedge d and how th e entity will a s sess the he d ging instrum e nt’s effectiv e ness in offse t ting the exp o sure to changes in the h e dged item’s f air value or c ash flows at t ributable to t h e hedged risk.

Such hedges are e xpected to b e highly effe c tive in achieving offsetting changes in fair value or cash flows and a re assessed on an ongoi n g basis to d e termine that they actuall y have been h ighly effecti v e throughou t the fi n ancial repor t ing periods for which the y were desig n ated.

iii. Fair value hedge accounting

Fair v alue hedges are hedges o f the Group’ s exposure t o changes in the fair valu e of a recognised asset or liabili t y or an unre c ognised fir m commitmen t other than f o reign excha n ge rate risk, or an identif i ed portion of such an asset, lia b ility or firm c o mmitment t h at is attribut a ble to a particular risk an d could affect profit or loss. For fair valu e hedges, th e carrying a m ount of the hedged item i s adjusted fo r gains and l o sses attrib u table to the risk being hedged, the de r ivative is re m easured to fair value an d gains and l o sses from both a re taken to t he statemen t of compreh e nsive income.

The G roup discon t inues fair value hedge a c counting if the hedging in s trument exp i res or is sol d , terminated or ex e rcised, the h edge no lon g er meets th e criteria for h edge accou n ting or the G roup revoke s the designation. Any a djustment t o the carryin g amount of a hedged fina n cial instrum e nt for which the effective inter e st method is used is amo r tised to the s tatement of c omprehensi v e income. A mortisation m ay begin as soon as an adj u stment exis t s and shall begin no later than when t h e hedged it e m ceases to be adjusted for c h anges in its f air value attributable to the risk being h edged.

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iv. Cash flow hedge accounting

Cash flow hedges are hedges of the Group’s exposure to variability in cash flows that is attributable to a particular risk associated with a recognised asset or liability or a highly probable forecast transaction and the foreign exchange risks on firm commitments and that could affect profit or loss. The effective portion of the gain or loss on the hedging instrument is recognised directly in other comprehensive income, while the ineffective portion is recognised in the profit and loss.

Amounts taken to other comprehensive income are transferred to the profit and loss when the hedged transaction affects profit or loss, such as when hedged income or expenses are recognised or when a committed and future sale or the asset is consumed. When the hedged item is the cost of a non-financial asset or liability, the amounts taken to equity are transferred to the initial carrying amount of the nonfinancial asset or liability.

Amounts previously recognised in equity are transferred to the profit and loss if the forecast transaction is no longer expected to occur. Amounts previously recognised in equity will remain in equity until the forecast transaction occurs if the hedging instrument expires or is sold, terminated or exercised without replacement or rollover, or if its designation as a hedge is revoked.

v. Summary of forward foreign exchange contracts

The following table summarises by currency the Australian dollar value of the significant forward foreign exchange agreements and forward currency options. Foreign currency amounts are translated at rates current at the reporting date. The ‘buy’ amounts represent the Australian dollar equivalent of commitments to purchase foreign currencies, and the ‘sell’ amount represents the Australian dollar equivalent of commitments to sell foreign currencies.

	201	4		201	3
Average Forward Rate 0.9603 0.9167 0.8775 0.6608 0.7403 0.7343 - - - - 0.5640 0.5511 - 0.5851 0.6160 - - -	Buy '000 $ 897 80,868 131,794 $ 213,559 $ 1,809 203 477 $ 2,489 $ - - - $ - $ - 1,637 3,265 $ 4,902 $ - 1,682 2,026 $ 3,708 $ - - - $ -	Average Forward Rate 1.0012 0.9599 0.9713 - 0.6400 0.6089 1.3322 1.3709 1.3941 0.6222 0.6126 0.5548 - - - 5.6830 5.6138 5.4524	Average Forward Rate 1.0305 1.0139 0.6303 0.5511 0.5434 0.5311 0.9296 - - 0.6360 0.6222 0.6047 0.9730 0.9407 0.9275 - - -	Buy '000 $ 81 492 1,034 $ 1,607 $ 153 310 476 $ 939 $ 34,825 - - $ 34,825 $ 116 154 365 $ 635 $ 836 12,346 2,584 $ 15,766 $ - - - $ -	Average Forward Rate 0.9215 0.9593 0.9190 0.7445 0.7992 0.8019 0.9529 0.9584 0.9813 - 0.5897 0.5548 0.9584 - - - - -	Sell '000
						$ 6,507 95,628 29,231
						$ 131,366
						$ 53 130 2,640
						$ 2,823
						$ 24,824 17,976 26,146
						$ 68,946
						$ - 1,715 4,902
						$ 6,617
						$ 522 - -
						$ 522
						$ - - -
						$ -

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vi. Offsetting financial instruments

The Group presents its assets and liabilities on a gross basis. Derivative financial instruments entered into by the Group are subject to enforceable master netting arrangements such as International Swaps and Derivatives Associations (ISDA) master netting agreement. In certain circumstances, for example, when a credit event such as a default occurs, all outstanding transactions under an ISDA agreement are terminated. The termination value is assessed and only a single net amount is payable in settlement of all transactions.

The amounts set out in the table above represent the derivative financial assets and liabilities of the group that are subject to the above arrangements and are presented on a gross basis.

81 | AUSTAL LIMITED ANNUAL REPORT 2014

Unrecognised items

Note 24. Commitments and contingencies

i. Commitments

The G roup entitie s may have potential financial liabilities that could arise from hist o rical comm e rcial contr a cts. No mat e rial losses are anticipate d in respect o f any of thos e contingenc i es. The fair v alue discl o sed (if any) is the directo r s’ best estimate of amou n ts that woul d be payable b y the Grou p to settle thos e financial lia b ilities.

Operatin Futu Withi After Total Capital c Build Guarant Bank (i) g lease commitmen re minimum rentals n one year one year but not more ommitments ings USA ees performance guarant The bank performa and buildings and fl equipment. ts payable under non-c than five years ees (i) nce guarantees andG oating charges over ancellable leases as o Zone Bonds are s cash, receivables, wo at 30 June are as fo ecured by a mortgag rk in progress andp llows e over th lant and	Operatin Futu Withi After Total Capital c Build Guarant Bank (i) g lease commitmen re minimum rentals n one year one year but not more ommitments ings USA ees performance guarant The bank performa and buildings and fl equipment. ts payable under non-c than five years ees (i) nce guarantees andG oating charges over ancellable leases as o Zone Bonds are s cash, receivables, wo at 30 June are as fo ecured by a mortgag rk in progress andp llows e over th lant and	2014 ’000 (1 $ (1 (3 $ $ (41 $ e land 2013 ’000 ,395) (1 $ ,744) (1 ,139) (2 $ (72) $ ,605) (26 $ ,125) ,496) ,621) (16) ,933)
	The bank performa and buildings and fl equipment. nce guarantees andG oating charges over o Zone Bonds are s cash, receivables, wo ecured by a mortgag rk in progress andp e over th lant and

ii. Other contingent liabilities excluded from the above include:

The p arent comp a ny has guar a nteed the p e rformance o f certain cont r act obligatio n s of a subsi d iary. Aust a l received n o tice of Arbitr a tion procee d ings initiate d by a comm e rcial custom e r in FY2013. The claim is in r espect of co n sequential damages aris i ng from a w a rranty defec t . The shipb u ilding contract between the p a rties specifi c ally exclude s consequen t ial damages in relation to warranty de f ects. The c o mpany inten d s to defend t he claim.

Note 25. Events after the balance date

The Group a nnounced t h e completio n of the sale o f Hull 270 (1 0 2 m stock v e ssel) on 20 A ugust 2014 for $61.500 million.

82 | AUSTAL LIMITED ANNUAL REPORT 2014

The Group, management and related parties

Note 26. Parent interests in subsidiaries

The consoli d ated financi a l statement s include the f inancial stat e ments of Au s tal Limited a nd the subsi d iaries listed in the follow i ng table.

Company
Austal Cyprus Ltd
Austal Egypt LLC
Austal Holdings Inc
Austal Hull 130 Cha
Austal Muscat LLC
Austal PhilippinesP
Austal Service Darw
Austal Service PtyL
Austal Ships Pty Ltd
Austal Systems Pty
Austal UK Ltd
Austal USA LLC
Hydraulink (NT) Pty
Image Marine Pty Lt
KM Engineering (NT
Oceanfast LuxuryY
Oceanfast Pty Ltd
Seastate Pty Ltd
rtering LLC
ty Ltd
in Pty Ltd
td
Ltd
Ltd
d
) Pty Ltd
achts Pty Ltd
Country of
Incorporation
Cyprus
Egypt
USA
USA
Oman
Australia
Australia
Australia
Australia
Australia
United Kingdom
USA
Australia
Australia
Australia
Australia
Australia
Australia

Equity Int
erest

2014
2013

100%
100%
100%
100%
100%
100%
80%
100%
100%
100%
100%
100%
80%
100%
80%
100%
100%
100%
100%
100%
100%
100%
100%
100%
80%
100%
100%
100%
100%
100%
80%
100%
80%
100%
100%
100%

Austal Limited is the ultimate parent of the Group and i s incorporated in P e rth, Western Aust r alia. 100% owned by A ustal Service Dar w in Pty Ltd, which itself is 80% owne d* by Austal Service Pty Ltd.

Note 27. Related party disclosure

It is Group p olicy that all t ransactions w ith related p arties are c o nducted on c ommercial t e rms and conditions. No related p arty transactions occurre d with the co n solidated entity other tha n Directors’ a nd Key Man a gement Personnel r e muneration a nd the matt e rs disclosed in this repor t ,.

Note 28. Key management personnel compensation

Short-term employe Post-employment be Termination benefits Long term benefits Share-based payme Total e benefits nefits nt	2014 ’000 3,454,506 $ 115,046 - 27,688 442,486 4,039,726 $ 2013 ’000 3,600,806 $ 85,880 332,647 - 234,463 4,253,796 $

Detailed re m uneration di s closures ar e provided in t he Remune r ation report c ommencing on page 16.

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Note 29. Share based payments

i. Long Term Incentive Plan

The e stablishmen t of the Aust a l Limited Lo n g Term Ince n tive Plan (L T IP) was app r oved by shareholders at the 2 0 12 Annual G eneral Meeting. The pla n replaced th e previous E m ployee Sha r e Option Pla n (refer belo w ) and aims t o reward KM P with the is s ue of perfor m ance rights c ommensura t e with their p osition and resp o nsibilities wi t hin the Grou p so as to:  attract and retain exceptional employees (‘key employees’) that have the c a pacity to sig n ificantly impact the g rowth and profitability of t he Group;
align key e m ployees’ behaviour towards the grow t h and profitability objecti v es of the Gr o up; and reward key employees f o r sustained c ontributions to business s uccess.

Structure

The p erformance r ights may b e granted to K MP and executives in ac c ordance wit h the LTIP ru l es and set by th e Remuneration Committ e e. The t e rms of each offer to participate in the LTIP may dif f er dependin g on the rele v ant KMP rol e . Shares issue d following t h e vesting of a ny perform a nce rights will generally be subject to a restriction o n trading for at le a st 12 month s , although the holder will b e entitled to any dividen d s paid durin g that restrict e d period.

Entitl e ment to per f ormance rig h ts under the LTIP is bas e d solely on m easures whi c h deliver improved resul t s to shareho l ders, thereb y ensuring th a t the objecti v es of KMP a nd sharehol d ers are alig n ed.

Performance hurdles

The g ranting of p e rformance ri g hts is tied e x clusively to o verall Grou p performanc e , measured against ROI C and TSR ta r gets set peri o dically by t h e Board. Th e targets will b e based on G roup performance, rathe r than busin e ss unit perfo r mance in or d er to maxim i se alignmen t with shareh o lder interests; Performance right s will not ves t unless thes e hurdles, ar e met. Perfo r mance hurdles will be m e asured over a pre s cribed period determine d by the boar d .

The p erformance h urdles for ri g hts granted i n FY2014 a r e as follows:

Return on Invested Capital (ROIC) measure

70% o f the perfor m ance rights that vest un d er the LTIP w ill be tied to the achieve m ent of an av e rage ROIC targe t over the pr e scribed peri o d as per the definition of R OIC in the R emuneratio n Report. To be eligible for th e full entitle m ent of perfor m ance rights under this a s pect of the L TI Plan. An e xample of the ROIC targe t s for FY201 3 is included w ithin the Remuneration report on co m mencing pa g e 16. The L T I entitlement redu c es progressi v ely as ROI C steps down such that th e performanc e rights will n o t vest if RO I C is less than t he threshold target over the prescribe d period.

Total Shareholder Return (TSR) measure

30% o f any LTI a w ard will dep e nd on the a c hievement o f TSR levels p rescribed b y the Board. T o be eligible for th e full entitle m ent of perfor m ance rights under this a s pect of the L TI Plan. An e xample of the TSR targe t s for the FY 2 013 grant is included wit h in the Remuneration rep o rt commencing on page 16. The LTI entitl e ment reduc e s progressiv e ly as TSR s t eps down s u ch that the performance r ights will not vest if TSR is les s than the th r eshold targe t over the pr e scribed peri o d. Maintena n ce of existin g TSR perfo r mance in itself is not enoug h to meet the hurdle requi r ed for performance rights under this m easure. The Board consi d ers this to b e consistent with its obje c tive of impro v ing returns to sharehold e rs.

84 | AUSTAL LIMITED ANNUAL REPORT 2014

Rights issued and valuation

1,049,022 performance rights were issued during the year.

The Group uses the Monte Carlo model to value the performance rights. The following table lists the inputs to the valuation model used:

Performance Rights Valuation Inputs Grant date Spot price ($)* Expected volatility (%) Discount rate (%) Dividend yield (%) Staff turnover Expected life of option (years)	Tranche
	1 2 18 Nov 2013 13 Dec 2013 $ 0.70 $ 0.84 40% 40% 2.90% 2.80% Nil Nil Nil Nil 3 3

ii. Employee Share Option Plan (ESOP)

The ESOP was established in 2006 and replaced by the LTIP in 2012. No options have been issued under this plan since December 2011.

The ESOP aimed to reward executives and senior managers with the issue of share options commensurate with their position and responsibilities within the Group. The Group used Total Shareholder Return (TSR) as the performance hurdle for the ESOP.

Summaries of options granted under ESOP

The following table illustrates the movement in share option holdings and weighted average exercise prices (WAEP) during the year:

Summary of options granted under ESOP Outstanding at the beginning of the year Granted during the year Exercised during the year Forfeited during the year Outstanding at the end of the year Exercisable at the end of the year	201	4 WAEP 2.49 $ - $ - 2.23 2.52 $		2013
	Number 7,190,486 - - (658,750) 6,531,736 4,606,736			Number WAEP 8,273,611 2.46 $ - - $ - - (1,083,125) 2.25 7,190,486 2.49 $ 2,826,736

Share options outstanding at the end of the year have the following expiry dates and exercise prices:

Tranche 2 3 4 5 8 9 10 Total	Grant date 13-Sep-07 24-Oct-07 10-Sep-08 03-Nov-09 27-Sep-10 21-Oct-11 20-Dec-11	Expiry Date 13-Sep-14 24-Oct-14 10-Sep-15 03-Nov-16 27-Sep-17 21-Oct-18 20-Dec-18	3.60 3.60 2.40 2.95 2.34 2.15 2.15 Exercise Price	No. of share options atyear end
				Outstanding Exercisable 311,236 311,236 140,000 140,000 725,500 725,500 1,505,000 1,505,000 1,925,000 1,925,000 1,785,000 - 140,000 - 6,531,736 4,606,736

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iii. Austal Group Management Share Plans (AGMSP)

The trustee holds a total of 4,350,601 shares at balance date on behalf of the plans represented by:

733,539 shares allocated under Plan 1 and Plan 2 with a weighted average price of $1.33 each, with no contractual life, and
3,617,062 share that are unallocated.

Plan 1

The Group established the first Austal Group Management Share Plan (Plan 1) in 1998 so that directors and key managers could participate in owning shares in the Company. The features of the Plan are:

Austal offered loans to participants for up to 100% of the purchase consideration for their shares on a limited recourse basis.
The shares were made available to the participants at market value.
The Board determined the number of shares that were made available to each participant.
The shares are required to be held by a trustee on behalf of the participant. Shares may not be transferred to a participant for at least 12 months. After this period, 20% of a participant’s shares will become eligible to be transferred provided any loan in respect of these shares has been repaid. An additional 20% will become eligible to be transferred to the participant at the end of each 12-month period thereafter on the same terms, so that a participant may hold 100% of the shares at the end of 5 years.
Dividends on shares held under the Plan must be applied to pay interest on the loans. Participants with an interest in shares under the Plan have full voting rights.
Interest on the loans is charged at a fixed rate of 6%, or such other rate as determined by the Board.
Upon termination of employment or contract arrangements the shares must be sold and the loan (if any) repaid.

Plan 2 & 3

Two additional share plans were established by the Group in 2000. (Plan 2 and Plan 3)

All three plans are fundamentally similar in terms of operation with two main points of distinction being:

The interest on loans offered under Plan 1 is calculated as 6% per annum, whilst the interest on loans offered under Plan 2 and Plan 3 is calculated as 60% of any dividends paid on any shares acquired by the person to whom the loan was made.
The definition of an ‘Eligible Person’ differs across the three plans. Plan 2 specifies an Eligible Person as a person who is employed as a Manager and Plan 3 specifies an Eligible Person is a person who is a contractor supplying services as a ‘Contract Worker’. As a point of distinction, Plan 3 does not require the Contract Worker to be in a management position whilst Plan 1 (which covers contractors and employees) and Plan 2 (employee only) specifies that an Eligible Person is a person who is a manager within the Austal Group.

Although they are described as shares offered to the director or employee, they are in substance ‘options’ due to the limited recourse nature of the loan provided. Refer below for a description of the accounting for equity settled share based payments.

Details of the movement in the number of options issued under the Austal Group Management Share Plan are shown below:

Summary of options granted under AGMSP Outstanding at the beginning of the year Granted during the year Exercised during the year Forfeited during the year Outstanding at the end of the year All remaining options were fully vested and exerciseable throughout the year	2014 2013 ’000 ’000 1,351 1,351 - - - - (617) - 734 1,351

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iv. CEO fixed remuneration share issue

23% of the CEO’s fixed remuneration is provided in shares which are subject to an 18 month holding period from the date at which the shares are released to the CEO and no performance condition exists as it is considered part of his base remuneration. 371,738 shares were issued during the year. The fair value of the shares was determined using the closing price on the grant date.

v. Recognition and measurement - equity settled transactions

The Group provides benefits to employees (including executive directors and key management personnel) of the Group in the form of share-based payments, whereby employees render services in exchange for shares or rights over shares (equity-settled transactions).

There are currently two plans in place to provide these benefits, which extend to senior management and directors:

The Austal Group Management Share Plan (AGMSP); and
The Long Term Incentive Plan (LTI Plan).

The cost of these equity-settled transactions with employees is measured by reference to the fair value at the date at which they are granted. The fair value is determined by an external valuer using a Monte Carlo model.

In valuing equity-settled transactions, no account is taken of any performance conditions, other than conditions linked to the price of the shares of Austal Limited (market conditions) if applicable. Where nonmarket performance conditions must be satisfied, the number of entitlements included in expense recognition is adjusted to an estimate of the ultimate number of entitlements expected to vest.

The cost of equity-settled transactions is recognised, together with a corresponding increase in equity, over the period in which the performance conditions are fulfilled, ending on the date on which the relevant employees become fully entitled to the award (the vesting period).

The cumulative expense recognised for equity-settled transactions at each reporting date until vesting date reflects (i) the extent to which the vesting period has expired and (ii) the number of awards that, in the opinion of the directors of the Group, will ultimately vest. This opinion is formed based on the best available information at balance date. No adjustment is made for the likelihood of market performance conditions being met as the effect of these conditions is included in the determination of fair value at grant date. The statement of comprehensive income charge or credit for a period represents the movement in cumulative expense recognised as at the beginning and end of that period.

No expense is recognised for awards that do not ultimately vest, except for awards where vesting is conditional upon a market condition.

If the terms of an equity-settled award are modified, as a minimum an expense is recognised as if the terms had not been modified. In addition, an expense is recognised for any modification that increases the total fair value of the share-based payment arrangement, or is otherwise beneficial to the employee, as measured at the date of modification.

If an equity-settled award is cancelled, it is treated as if it had vested on the date of cancellation, and any expense not yet recognised for the award is recognised immediately. However, if a new award is substituted for the cancelled award and designated as a replacement award on the date that it is granted, the cancelled and new award are treated as if they were a modification of the original award, as described in the previous paragraph.

Shares in the Group held by the AGMSP are classified and disclosed as reserved shares and deducted from equity.

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vi. Recognised share-based payment expenses

The e xpense recognised for share based p a yments duri n g the year is shown in th e table below:

2014 2013 ’000 ’000 Share Based Payments Expense Exp e nse arising from equi t y-settled share-base d payment transactio n s $ (383) $ (1,263)

Note 30. Parent entity

Information r elating to A u stal Limited, the Parent e n tity, is detailed below:

Balance sheet Assets Current Non - Curren Total Liabilities Current Non - Curren Total Net Assets Equity ContributedE Employee be Asset revalua Cash flow he Retained ear Total Income Profit / (Loss Total Compre t t quity nefiit reserve tion reserve dge reserve nings ) after tax hensive Income	$ $ $ $ $ $ $ $ 2014 ’000 239,735 $ 176,776 416,511 $ (28,135) $ (19,980) (48,115) $ 368,396 $ 111,598 $ 6,750 8,247 8,675 233,126 368,396 $ 39,563 $ 39,563 2013 ’000 290,917 112,054 402,971 (46,052) (27,741) (73,793) 329,178 111,328 3,887 14,162 11,340 188,461 329,178 840 840

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Note 31. Business combinations

No busines s combinatio n s have take n place within the Group i n the year en d ed 30 June 2 014. The Group a cquired an 8 0% interest in KM Engineering (NT) P t y Ltd and Hydraulink (NT ) Pty Ltd through its subsidiary A ustal Servic e Darwin Pty L td in the co m parative ye a r ended 30 J une 2013. T h e transaction was not considered t o be material for the Gro u p. Accounting f or business c ombination s in previous p eriods has b een done in accordance w ith the accounting policy below.

i. Accounting for business combinations

Busi n ess combin a tions are ac c ounted for u s ing the acq u isition method. The consi d eration tran s ferred in a business combination shall be measured at fair value, w h ich shall be calculated a s the sum of the acquisition date f a ir values of t h e assets tra n sferred by t h e acquirer, t h e liabilities i n curred by t h e acquirer to form e r owners of t he acquiree a nd the equi t y issued by t h e acquirer, a nd the amo u nt of any no n -controlling inter e st in the acq u iree. For each busines s combinatio n , the acquirer measures the non-contr o lling interes t in the acqui r ee either at fair v a lue or at the proportionat e share of th e acquiree's identifiable n e t assets. Acqu i sition-relate d costs are e x pensed as i n curred, and i ncluded in a d ministrative expenses.

Whe n the Group a cquires a bu s iness, it assesses the financial assets and liabilitie s assumed f o r appr o priate classi f ication and d esignation i n accordance with the con t ractual term s , economic c onditions, the G roup’s operating or accounting policie s and other p e rtinent conditions as at t h e acquisitio n date. This inclu d es the sepa r ation of emb e dded deriv a tives in host contracts by t he acquiree . If the business co m bination is a chieved in s t ages, the acquisition dat e fair value of the acquirer ' s previously held e quity intere s t in the acqu i ree is remeasured to fair v alue at the a cquisition d a te through p r ofit and loss.

Any c ontingent consideration t o be transfer r ed by the ac q uirer will be recognised a t fair value a t the acquisition date. S ubsequent changes to th e fair value o f the conting e nt considera t ion which is deemed to be a n asset or lia b ility will be r e cognised in a ccordance w ith AASB 139 either in p ro fit and loss or as a chan g e to other c o mprehensiv e income. If t h e contingen t considerati o n is classifie d as equity, i t should not be re m easured u n til it is finally settled withi n equity.

Goo d will is recog n ised if the a g gregate of t h e considerat i on transferr e d and the a m ount recognised for noncontr o lling interes t is in excess of the net id e ntifiable ass e ts acquired and liabilitie s assumed. Alternatively a gain is recognised in profit and loss if the fa i r value of th e net assets a cquired is in excess of th e aggregate consi d eration tran s ferred. Refer to Note 19 f or additional information o n goodwill r e cognised by the Group.

Acqu i sitions prior t o July 2009 w ere accoun t ed for using the purchas e method of a ccounting.

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Directors’ declaration

In accordance with a resolution of the directors of Austal Limited, I state that:

In the opinion of the directors:

The financial statements and notes of the consolidated entity are in accordance with the Corporations Act 2001, including:
Giving a true and fair view of the consolidated entity’s financial position as at 30 June 2014 and of its performance for the year ended on that date; and
Complying with Accounting Standards (including the Australian Accounting Interpretations) and Corporations Regulations 2001.
The financial Statements and notes also comply with International Financial Reporting Standards as disclosed in Note 2.

In the opinion of the directors, as at the date of this declaration, there are reasonable grounds to believe that the consolidated entity will be able to pay its debts as and when they become due and payable.

This declaration has been made after receiving the declarations required to be made to the directors in accordance with sections 295A of the Corporations Act 2001 for the financial period ending 30 June 2014.

On behalf of the Board.

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John Rothwell AO Chairman

26 August 2014

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JHSV 3 & LCS 4

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Corporate governance statement

Austal Limited, its Board of directors and senior management are committed to the best practices of corporate governance, ethical standards and risk management and the Group’s approach to corporate governance is summarised in this section of the report. This Corporate Governance Statement should be read in conjunction with the Directors’ Report on page 9.

The Board of Austal Limited is responsible for guiding and monitoring of the consolidated entity on behalf of shareholders. The Board’s Audit and Risk subcommittee is tasked with the oversight and management of the Group’s corporate governance policies and procedures.

The Austal Limited Corporate Governance Statement is now structured to specifically align with the ASX Corporate Governance Council’s (the Council) Principles and Recommendations, which are as follows:

Principle 1. Lay solid foundations for management and oversight Principle 2. Structure the board to add value
Principle 3. Promote ethical and responsible decision making
Principle 4. Safeguard integrity in financial reporting Principle 5. Make timely and balanced disclosure Principle 6. Respect the rights of shareholders Principle 7. Recognise and manage risk Principle 8. Remunerate fairly and responsibly

Principle 1 – Lay solid foundations for management and oversight

The Board gives direction and exercises judgment in setting the Group’s objectives and overseeing their implementation. Responsibility for the operation and administration of the Group is delegated by the Board to the CEO and the executive management team. The Board ensures that this team is appropriately qualified and experienced to discharge their responsibilities and has in place procedures to assess the performance of the CEO and the executive management team.

The Board’s functions include:

adopting a Strategic Plan for the Group, including general and specific goals and reviewing actual results against that plan, which is aimed at meeting stakeholders’ objectives and managing business risk;
establishing and maintaining policies directed to ensuring that the Group complies with the law and conforms to the highest standards of financial and ethical behaviour;
reviewing the Group’s reporting systems and internal controls (both operational and financial) together with appropriate monitoring of compliance activities to determine these systems and controls are adequate and appropriate;
ensuring that significant risks are identified, assessed, appropriately managed and monitored;
the appointment, performance assessment and, if necessary, removal of members of the executive management team;
determining and implementing appropriate delegations of authority from the Board to the management to enable their respective functions to be effectively carried out;
agreeing key performance indicators (both financial and non-financial) with management and monitoring progress against these indicators; and
reporting to shareholders.

The performance of key executives is reviewed regularly against both measurable and qualitative indicators. Each year the Nomination and Remuneration Committee assesses the performance of key executives. The performance criteria against which they are assessed are aligned with the financial and non-financial objectives of the Group.

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Principle 2: Structure the Board to add value

To ensure that the Board is well equipped to discharge its responsibilities it has established guidelines for the nomination and selection of directors and for the operation of the Board. Any proposed new director is nominated by the Nomination and Remuneration Committee and approved by the Board prior to being appointed. The appointment is until the next General Meeting of shareholders at which time the shareholders are required to approve the appointment.

In accordance with the Council’s Recommendation 2.1, a majority of the Board are independent directors. The Board is made up of a Non-Executive Chair, one Executive director and three independent Non-Executive directors. As a result the Board considers those independent directors have a material impact on Board matters and the Group’s direction, and are therefore able to ensure that management acts in the best interests of the Group. The directors believe that the Board is well balanced, with a mix of expertise that ensures value for shareholders.

Each year the Nomination and Remuneration Committee conducts a performance assessment for each Board member against both measurable and qualitative indicators. The performance criteria against which directors are assessed are aligned with the financial and non-financial objectives of the Group. Directors whose performance is consistently unsatisfactory may be asked to retire.

The performance of the directors was assessed during the year in accordance with the above process and the Board is satisfied with the performance of the Company’s directors.

Independence

The Council guidelines provide that directors are considered to be independent when they are independent of management and free from any business or other relationship that could materially interfere with – or could reasonably be perceived to materially interfere with – the exercise of their unfettered and independent judgement.

In the context of director independence, the Board considers ‘materiality’ from both the Group’s and the individual director’s perspective. The determination of materiality is based on the Council’s guidelines which include:

whether a director is a substantial shareholder of the Company, or affiliated with a substantial shareholder of the Company;
whether the director is employed or has previously been employed by the Company, the nature of that employment and the period (if any) between ceasing employment and commencing as a director;
whether the director has been a member or principal of an organisation that has provided services or consulted to the Group within the last 3 years;
whether the director is, or is affiliated with a material supplier to or customer of the Group; and
whether the director has a material contractual relationship with the Group other than as a director.

The above matters, along with any other qualitative factors which point to the actual ability of the Director to have an influence in shaping the direction of the Group, are considered when determining each director’s independence.

Based on the above criteria, the Board considers the following directors are independent:

Name Position Dario Amara Non-Executive Director David Singleton Non-Executive Director Giles Everist Non-Executive Director

Austal’s Non-executive Chairman is not classified as independent (as the term is used in the Council’s recommendations), however he is a founding director of the Company and possesses extensive Australian shipbuilding experience, from which Austal’s shareholders continue to benefit. Mr Rothwell has made a significant contribution to the development of the shipbuilding industry in Australia and continues to draw on his broad experience to add value to the Group.

The Chairman’s position is reviewed regularly by the Nomination and Remuneration Committee. Following the most recent review and in light of the above unique skills and experience he brings to the Group, it remains the Board’s opinion that Mr Rothwell is the best candidate to Chair the Company.

Directors are required to disclose any actual or potential conflicts or material personal interests on their appointment to the Board. These disclosures are required to be kept up to date. Directors with material personal interests in matters that are before the Board are excluded from consideration of the matter and from related voting processes.

All directors are entitled to seek independent professional advice at the Group’s expense if required.

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Outside directorships

The number of outside directorships held by directors is considered as part of his or her appointment and retention. Unless exceptional circumstances apply, the Group follows the Council’s guidelines for acceptance of outside directorships by Executive and Non-Executive Directors.

None of the Company’s current directors have outside directorship commitments that exceed the Council’s guidelines.

Nomination and Remuneration Committee

The Nomination and Remuneration Committee has 3 members, comprised of two independent directors and the Non-executive Chairman. The Nomination and Remuneration Committee is chaired by David Singleton, an independent director. The Committee reviews and makes recommendations to the Board in relation to candidates for vacant Board positions, remuneration of directors and key executives, Board evaluation processes and succession planning.

The Nomination and Remuneration Committee’s functions are described in its charter, which is reviewed and updated regularly and published on the Group’s website.

Principle 3: Promote ethical and responsible decision-making

Ethical standards and performance

The Board acknowledges the need for continued maintenance of the highest standards of corporate governance practice and ethical conduct by all directors and employees of the Austal Group. The Group has adopted a Director Code of Conduct under which directors are expected to:

act honestly and in good faith;
exercise due care and diligence in fulfilling the functions of their office;
use their powers to act in the best interests of the Group as a whole;
avoid conflicts and make full disclosure of any possible conflict of interest;
comply with the law;
be independent in judgement and ensure all reasonable steps are taken to be satisfied as to the soundness of Board decisions;
encourage the reporting and investigating of unlawful and unethical behaviour; and
comply with the share trading rules and other Group policies.

The Group also has an Employee Code of Conduct that applies to all employees across the Austal Group. The Employee Code of Conduct contains requirements that are similar to those contained in the Director Code of Conduct, adjusted to reflect the different roles and expectations arising out of various positions of employment within the Group.

Share trading policy

Directors and key management personnel are required to comply with the Group’s share trading policy, which may from time to time be adjusted by the Board and applies in addition to legislative requirements and the ASX Listing Rules.

The Group’s share trading policy is published on its website and includes:

a restriction on trading in securities of Austal Limited shares to the period of four months following the release of half yearly and preliminary final reports. Directors and executive managers are also restricted from trading in Austal Limited shares for 24 hours following any announcement by the Company to the ASX;
any director or executive manager intending to buy or sell shares in the Company or any company in which the Company has an interest is required to notify the Chairman or the Company Secretary of his/her intentions before proceeding with the transaction; and
directors, managers and staff are not permitted to deal in the Company's securities if they are in possession of material information which is not available to the share market, but if it were, may impact the value at which the securities are traded.

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Diversity at Austal

Austal recognises that developing a diverse workforce is critical in building its organisational capability and maintaining a high level of performance, and values the distinctive skills, experiences and perspectives each individual brings to the workplace. The Group is committed to ensuring all employees are treated with respect and given equal opportunities for employment and development, and the Board has adopted an Equity and Diversity policy which can be found on the Group’s website. Among other things, the Group’s diversity policy:

articulates how the Group considers diversity within the workforce will make a valuable contribution towards the Group’s continuous improvement and the achievement of goals; and
sets out the Board’s commitment to promoting a corporate culture which embraces diversity.

The Group’s ability to achieve diversity within the workforce is restricted by the industry in which it operates, the significant majority of which is male. As there is a limited number of women who hold the particular fabrication, welding and production skills required by the bulk of the Group’s workforce, the ability to meet targets for gender diversity is necessarily restricted. In accordance with the Group’s Code of Conduct, employment and remuneration are based on merit, qualifications, skills and experience so that equally qualified personnel can be confident of their standing in the Group, and value to the Group, regardless of their gender, racial background, age, religious beliefs or other values.

The Board therefore has not set specific targets for diversity requirements, but focuses on improving diversity through workplace practices such as:

the employment of international workers through 457 visas, and assistance in domiciling those workers in Australia upon visa expiry;
employment of personnel with particular needs (for example, persons with hearing impairments), both through the Commonwealth Rehabilitation Service and through direct recruitment ;
offering flexible working hours; and
employment of part time workers:

The Group emphasises equal opportunity for employment. While there are currently no female Board members, in light of the sector in which the Group operates, women are relatively well represented in other roles. Women currently occupy professional, management and senior management roles across the business in the following numbers:

Business unit Australia Operations US Operations Philippines Operations	% of Senior management roles filled by women 21% 4% 13%	% of % of management professional roles filled roles filled by women by women 14% 33% 19% 23% 16% 35%

The Group has obtained certification of compliance with the Workplace Gender Equality Act 2012 (Cwlth) from the Federal Government’s Workplace Gender Equality Agency. A copy of the gender diversity report that the Group submitted to the agency can be found on the Group’s website.

The Board will continue to embrace diversity within the Group’s workforce as the Group and its activities grow and appropriately skilled candidates are available.

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Principle 4: Safeguard integrity in financial reporting

Audit and Risk Management Committee

The Company’s Audit & Risk Management Committee has 3 members, all of whom are independent Nonexecutive directors. The Audit & Risk Management Committee is chaired by Dario Amara. The Committee also obtains advice on corporate governance and related financial matters from an independent academic consultant who attends Committee meetings as required.

The Audit & Risk Management Committee’s functions are described in its charter, which is reviewed and updated regularly and published on the Group’s website. They include:

reviewing the Group’s financial reporting processes to ensure the integrity, accuracy and timeliness of the Group’s financial accounts;
reviewing the internal controls, policies and procedures the Group uses to identify and manage business risks;
the policies and procedures for ensuring compliance with relevant regulatory and legal requirements, and good corporate governance practice;
ensuring compliance with statutory reporting responsibilities;
assessing the effectiveness of the management of business risk and reliability of management reporting; and
reporting any significant deficiencies in the above to the Board.

In addition to the above, the Audit & Risk Management Committee (in accordance with its Charter) annually reviews the performance of the external auditor on behalf of the Board, focussing particularly on:

the scope and rigour of the audit;
the quality of the service provided, considered form the shareholders’ point of view; and
the independence of the auditor.

If the Board considers a change in auditor is necessary, it will make a recommendation to shareholders to do so. Such recommendation would be the subject of shareholder approval in a General Meeting.

Principle 5: Make timely and balanced disclosure

Continuous disclosure

Austal Limited has established written policies and procedures on information disclosure. The focus of these procedures is on compliance with ASX disclosure commitments and improving access to information for all investors. The objective is to ensure information announced by the Company is timely, factual, clear and contains all information relevant to shareholders and potential investors.

The Chief Executive Officer, with oversight from the Audit & Risk Committee, has responsibility for:

making sure that the Group complies with continuous disclosure requirements;
overseeing and co-ordinating disclosure of information to the stock exchange, analysts, brokers, shareholders, the media and the public; and
educating directors and staff on the Group’s disclosure policies and procedures and raising awareness of the principles underlying continuous disclosure.

The Company releases all price sensitive information through the ASX, whether as part of regulatory reporting such as financial results, directors interests and changes in shareholdings, or other operational information that is relevant to shareholders or anyone considering investment in the Company.

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Principle 6: Respect the rights of shareholders

Shareholder communication policy

The Board is ultimately responsible for ensuring that the shareholders are informed of all major developments affecting the Group’s state of affairs.

Information is communicated to shareholders through:

the Annual Report;
the interim financial report;
disclosures made to the ASX;
notices and explanatory memoranda of the Annual General Meeting (AGM); and
the AGM.

The Company posts all ASX announcements on its website immediately after they are published by ASX and maintains that information on the website for 4 years. Announcements include the full content of all presentations made to analysts and industry conferences, which are lodged with ASX and published prior to the presentation being given.

It is Company policy for the auditor’s lead engagement partner to be present at the AGM in the event of questions about the conduct of the audit, the preparation and content of the auditors’ report, accounting policies adopted by the Group or auditor independence. The Company’s legal adviser is also present at the AGM.

Principle 7: Recognise and manage risk

Risk management and internal compliance and control

The Board determines the Group’s ‘risk profile’ and reviews internal processes and procedures to satisfy itself that management has developed and implemented a thorough system of risk management and internal control. The Board delegates responsibility for undertaking and assessing risk management and internal control effectiveness to management, however it retains ultimate responsibility for this function and therefore requires management to regularly assess internal compliance, risk management and control procedures and report back to the Board on the efficiency and effectiveness of those procedures. The Group’s process of risk management and internal compliance and control includes:

continuously identifying and measuring risks that might impact upon the achievement of the Group’s goals and objectives, and monitoring the environment for emerging factors and trends that affect these risks;
formulating risk management strategies to manage identified risks, and designing and implementing appropriate risk management policies and internal controls; and
monitoring the performance, and continuously improving the effectiveness of risk management systems and internal compliance and controls.
The risk management programme addresses risks under the following categories:
business risks inherent to the shipbuilding industry;
operating risks associated with sales, design and production;
financial risks; and
specific vessel risks.

The Board oversees regular assessment of the effectiveness of risk management and internal compliance and control. In the past year, a focus on financial risk has led to the revision and updating of several risk management policies regarding treasury management, financial accounting, financial risk management and taxation and the employment of additional resources to ensure these issues are continually addressed and policies improved.

The Board is satisfied with the executive’s approach to and management of the risks faced by the business, based on the measures adopted for addressing those risks.

The Board receives monthly updates from management about the financial status of the Group and its controlled entities. The Board is comfortable that the declarations made by the CEO and CFO in accordance with s295A are based on a sound process. To ensure the appropriate level of confidence in this process, executives across the business are required to make similar declarations to the CEO before the declaration is made to the Board.

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Principle 8: Remunerate fairly and responsibly

It is the Group’s objective to provide maximum stakeholder benefit from the retention of a high quality Board and executive team by remunerating directors and key executives fairly and appropriately with reference to relevant employment market conditions. The Group has implemented and will maintain a responsible, performance-based remuneration policy that is aligned with the long-term interests of its shareholders as set out in more detail in the Remuneration Report found at page 16. The key objectives of the remuneration policy are to:

strike the right balance between meeting shareholders’ expectations, paying our employees competitively, and responding appropriately to the regulatory environment;
motivate executives to pursue the long term success of the Group; and
clearly demonstrate the relationship between executives’ performance and remuneration, and the alignment of those 2 factors.

The Group’s approach to remuneration, including the structuring of executive remuneration and the role of incentives, is set out in detail in the Remuneration Report. Only executives and employees are eligible to participate in the Group’s incentive schemes (whether those schemes are based on STI, LTI or employee share plans). Non-executive directors are paid a fixed fee which does not include equity-based remuneration, in order to maximise the benefit of their independence and eliminate the potential for conflicts of interest to arise.

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Independent audit report to the members of Austal Limited

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99 | AUSTAL LIMITED ANNUAL REPORT 2014

Shareholder information

The following information was extracted from the Company’s register as at 22 August 2014.

Distribution of shares

1 - 1000 1,001 - 5,000 5,001 - 10,000 10,001 - 100,000 100,001 and over Total	Number of Number of % of Total holders units Issued Capital
	1,406 697,036 0.20% 1,914 5,339,322 1.54% 708 5,499,713 1.59% 834 22,981,871 6.63% 72 312,026,991 90.04%
	4,934 346,544,933 100.00%

Twenty largest shareholders

Rank 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20	Shareholder HSBC Custody Nominees (Australia) Limited J P Morgan Nominees Australia Limited National Nominees Limited Citicorp Nominees Pty Ltd Austro Pty Ltd Navigator Australia Ltd Onyx (WA) Pty Ltd Mr Vincent Michael O’Sullivan UBS Nominees Pty Ltd RBC Investor Services Australia Nominees Pty Limited Austal Group Management Share Plan Pty Ltd BNP Paribas Noms Pty Ltd Garry Heys & Dorothy Heys Mr William Robert Chambers Mirrabooka Investments Limited Lavinia Shipping Ltd Mossisberg Pty Ltd Lujeta Pty Ltd Kenny Nominees (NT) Pty Ltd Gregory McKechnie Total	Number of % of Total holders Issued Capital
		55,850,870 16.12% 54,921,985 15.85% 41,721,882 12.04% 32,841,970 9.48% 32,200,745 9.29% 27,870,610 8.04% 9,817,570 2.83% 8,650,000 2.50% 6,699,324 1.93% 5,535,282 1.60% 4,355,531 1.26% 3,948,971 1.14% 2,844,670 0.82% 2,625,650 0.76% 2,550,000 0.74% 2,280,000 0.66% 1,883,945 0.54% 1,300,000 0.38% 1,240,783 0.36% 1,112,575 0.32%
		300,252,363 86.66%

Substantial shareholders

Rank 1 2 3 4 5 6	Number of % of Total Shareholder holders Issued Capital HSBC Custody Nominees 55,850,870 16.12% J P Morgan Nominees Australia Limited 54,921,985 15.85% National Nominees Limited 41,721,882 12.04% Citicorp Nominees Pty Ltd 32,841,970 9.48% Austro Pty Ltd 32,200,745 9.29% Navigator Australia Ltd 27,870,610 8.04%

Voting rights

All ordinary shares issued by Austal Limited carry one vote per share without restriction.

100 | AUSTAL LIMITED ANNUAL REPORT 2014

Corporate directory

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Cape Byron

Directors

Executive Directors

Andrew Bellamy

Non-Executive Directors

John Rothwell Dario Amara David Singleton Giles Everist

Auditors

Ernst & Young

The Ernst & Young Building 11 Mounts Bay Road Perth 6000 Western Australia

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Company Secretary

Adrian Strang

Registered office

100 Clarence Beach Road Henderson 6166 Western Australia Telephone: +61 8 9410 1111 Facsimile: +61 8 9410 2564

Share registry

Advanced Share Registry Services

110 Stirling Highway Nedlands 6009 Western Australia Telephone: +61 8 9389 8033 Facsimile: +61 8 9389 7871

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101 | AUSTAL LIMITED ANNUAL REPORT 2014

AI assistant

AUSTAL LIMITED — Annual Report 2014

64429_rns_2014-08-26_425de054-4e7f-48ac-9cc5-648f8f3a005d.pdf

Austal Limited Appendix 4E for the year ended 30 June 2014

Contents

Index to the notes to the financial statements

Chairman’s report

Financial results

Reconciliation of EBITDA:

Board and senior management

Strategy and governance

Outlook

Chief Executive Officer’s report

Financial summary

Operational improvements

Strategy

People

Outlook

Review of operations

US operations

Australian operations

Philippines operations

Occupational health and safety policy

Safety performance

Directors’ report

Directors

John Rothwell AO – Non-Executive Chairman

Dario Amara – Independent Director

David Singleton – Independent Director

Giles Everist – Independent Director

Andrew Bellamy BSc (Hons) Material Science, MA (Marketing) – Chief Executive Officer

Interests in the shares and options of the company and related bodies corporate

Principal activities

Results

Review of operations

Dividends

Significant events after the balance date

Likely developments and future results

Significant changes in the state of the affairs

Environmental regulation and performance

Share options and performance rights

Indemnification and insurance of directors and officers

Indemnification of auditors

Directors’ meetings

Committee membership

Rounding

Message from the Nomination and Remuneration Committee

Dear Share h olders,

Remuneration report (audited)

1. Key Management Personnel (KMP)

2. Relationship between remuneration and Austal Limited’s performance

Group Performance

3. Remuneration governance

Independence of the Nomination and Remuneration Committee

Use of Independent Remuneration Consultants

Share Trading Policy

4. Executive remuneration

Remuneration Framework

Our Vision:

Our Goal:

Our Approach:

5. Remuneration structure

Fixed remuneration

Variable remuneration

Remuneration peer group

Remuneration structure

Fixed remuneration

Variable remuneration - Short Term Incentive program (STI)

Variable remuneration - Long Term Incentive plan

6. Board composition

7. Non-Executive Director remuneration

8. Remuneration of key management personnel

9. Details of contractual provisions for KMP

10. Options granted or vested during the period

11. Performance rights granted or vested during the period

12. Shares granted or vested during the period

13. Equity instruments held by key management personnel

Options and performance rights

Shareholdings

14. Loans to key management personnel

AUSTAL LIMITED Annual Report 2014