SOUTHERN CROSS ELECTRICAL ENGINEERING LTD - Annual Report 2020

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2020 Annual Report Southern Cross Electrical Engineering Limited ABN: 92 009 307 046 Established 1978

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CONTENTS
2020 Highlights	1
About SCEE	2
Chairman's Report	7
Managing Director’s Review	8
Directors' Report	12
Renumeration Report	17
Consolidated Statement of Comprehensive Income	25
Consolidated Balance Sheet	26
Consolidated Statement of Changes in Equity	27
Consolidated Statement of Cash Flows	28
Index to Notes to the Financial Statements	29
Notes to the Financial Statements	30
Directors’ Declaration	73
Independent Audit Report	74
Lead Auditor’s Independence Declaration	79
ASX Additional Information	80
Corporate Directory	81

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2020 Annual Report

2020 HIGHLIGHTS

THIRD SUCCESSIVE YEAR OF RECORD REVENUES

REVENUE $415.1m UP 8%

EBIT NPAT $16.4m $10.9M DOWN 16% DOWN 14%

Infrastructure remained as the largest revenue contributor

Strong balance sheet cash of $55.3m and no debt

Fully franked dividend

3.0 cents per share

Order book of $440m including over $330m of work secured for FY21

Significant opportunities presenting in resources and infrastructure stimulus expected

2020 Annual Report

ABOUT SCEE

Southern Cross Electrical Engineering (SCEE) is an ASX listed electrical, instrumentation, communication and maintenance services company recognised for our industry leading capabilities.

Established in 1978 in WA, the combination in 2016 with Datatel Communications (established 1998) and in 2017 with East Coast-based Heyday5 (business established 1978) has created a national group.

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Heyday Group ELECTRICAL | COMMUNICATIONS | SERVICE

SCEE now operates across three sectors:

Infrastructure
Commercial
Resources

SCEE is headquartered in Perth with additional offices across Australia and has talented and committed staff delivering projects and services throughout the country.

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OUR MARKETS
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OUR MARKETS
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2020 Annual Report

LEADING NATIONAL DIVERSIFIED ELECTRICAL CONTRACTOR

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WA

Rio Tinto - Cape Lambert, Dampier EIR, Tom Price, Paraburdoo, Brockman 2, Yandi

COMMERCIAL RESOURCES INFRASTRUCTURE

BHP – Newman, Port Hedland, Mt Whaleback, South Flank Sino Iron Boddington Gold Talison Greenbushes Lithium MARBL JV Kemerton Lithium NorthLink Central Section Forrestfield Airport Link Causarina Prison UWA, City of Belmont, Health Services maintenance Woodman Point Waste-Water Treatment Agnew Windfarm NBN and carrier construction and maintenance Minor social infrastructure works and services

NT

QLD

Rio Tinto Gove ERA Ranger Mine MSA RAAF Tindal

Rio Tinto Amrun Arrow MSA Ergon Energy Agreement NBN and carrier construction and maintenance

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NSW & ACT

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Parramatta Square 3 & 4 and fit-outs Wynyard Place Australian Technology Park Building 4 231 Elizabeth Street Sovereign Resort Expansion Edmondson Park Ribbon Project 32 Smith Street Greenland Tower Republic Sandstone Precinct City 7 Development The Parade Locomotive Sheds Westmead Hospital Westconnex M5 Australian National University RU Data Centre Sydney Metro Pitt Street Station

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VIC & TAS

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NBN and carrier construction and maintenance

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2020 Annual Report

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INFRASTRUCTURE

SCEE recognises the important role that the Federal, State and Local governments play in developing and providing infrastructure to enhance and protect the lives of all Australians.

We work alongside some of Australia’s leading contractors in the construction and maintenance of publicly funded infrastructure and assets in:

Transport including road, rail, air and port facilities
Defence facilities and installations
Social infrastructure including hospitals, medical clinics, aged care and prisons
Education including universities, colleges and schools
Government facilities
Telecommunications and datacentres
Energy, renewables and utilities

We are also members of various works panels in these sectors.

Our flexibility and adaptive commercial approach enables us to competitively bid and deliver these critical works.

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2020 Annual Report

COMMERCIAL

SCEE has the expertise in designing, supplying, installing and maintaining a wide range of commercial building electrical and utility services.

These include a comprehensive range of electrical infrastructure, building controls, energy management, security, communications, networking and structured cabling systems.

We work closely with leading property developers and builders on new builds and with interior design and other specialists on fit-outs, refurbishments and upgrades.

Our focus in the commercial property sector includes:

Offices
Shopping centres and retail
Multi-storey residential developments
Hotels
Sporting, recreation and leisure facilities
Warehouses

We recognise that commercial developments are often bespoke and require significant expertise in optimising design and construction. In addition, clients often require buildings and precincts remain operational during construction. We work closely with our clients and the public to ensure seamless operations continue while the project is delivered safely.

We remain abreast of the latest technologies and industry standards and pride ourselves on developing and installing smart and energy efficient solutions.

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2020 Annual Report

RESOURCES

SCEE provides electrical, instrumentation and communication services to the mining and oil and gas sectors

In the mining sector, we have broad exposure to many commodities including iron ore, gold, lithium, zinc, alumina and coal.

We have extensive experience in the delivery of electrical projects at some of Australia’s largest mining and mineral processing sites and have operated extensively overseas.

Our capability covers the entire construction life-cycle from establishing first power sources at greenfield sites, through to constructing and commissioning major ore handling, processing and transport infrastructure and decommissioning of operations.

We also specialise in designing and installing electrical and communications services to operational centres, mine and camp utilities and administrative buildings, and telecommunication services that support the control and management of mine and transport operations.

Under various framework arrangements we have teams of electricians at clients’ facilities supporting and maintaining their operations.

In the oil and gas sector we offer electrical, instrumentation and communication services for onshore and offshore facilities and for petrochemical refineries.

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2020 Annual Report

CHAIRMAN'S REPORT

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DEAR SHAREHOLDERS,

I am pleased to report that, in a challenging year where the Coronavirus crisis has impacted the economy, SCEE has delivered another year of record revenues.

Our revenues of $415.1m, an increase of 8% on the prior year, were generated predominantly in the infrastructure and commercial sectors which are markets in which SCEE had no presence until embarking on our diversification strategy four years ago. Conversely, revenues in our historic resources sector were the lowest for some years but recent key contract wins at the Albermarle Kemerton Lithium Project and Rio Tinto’s Gove operations will see these grow again in FY21.

EBIT for the year of $16.4m was down 16% and NPAT of $10.9m was down 14% on the prior year, being impacted by Coronavirus disruption, lower average margins on now finished transport infrastructure projects and delay of some project scope into FY21. These matters are discussed in more detail in the Managing Director’s review on the following pages.

We ended the year with cash of $55.3m and no debt. Continuing our diversification through further acquisitions remains a key strategic objective for the Board and our strong financial position gives us the ability to progress this in the year ahead. We have resumed acquisition activity having temporarily paused during the initial phase of the Coronavirus pandemic.

Our order book at 30 June 2020 was $440m and, with $330m already secured for the year ahead, underpins our FY21 revenue target of $400m. We continue to tender at a high level across our three core sectors and see significant opportunities presenting in resources and are well positioned to capitalise on the fast-tracking of infrastructure projects backed by government stimulus spending.

I am delighted to announce that the Board has resolved to pay a fully franked dividend of 3 cents per share in October 2020.

In closing, I would like to take this opportunity to thank our shareholders, clients and employees for your ongoing support.

Derek Parkin

Chairman

Derek Parkin - Chairman

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2020 Annual Report

MANAGING DIRECTOR'S REVIEW

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The second half of FY20 brought the challenge of having to adapt to operating in a global pandemic. Against this backdrop I am pleased to be able to report that SCEE has recorded its third successive year of record revenues, up 8% on the prior year to $415.1m.

However, profitability was negatively impacted by the Coronavirus-related disruption, as well as experiencing lower average margins on now finished transport infrastructure projects and the delay of some project scope into FY21. These items are discussed further below. EBIT for the year of $16.4m was down 16% on the prior year and net profit after tax of $10.9m was down 14%.

IMPACT OF CORONAVIRUS

SCEE’s overarching policy since the commencement of the pandemic has been to follow government guidelines and react accordingly as and when they change. Consequently, measures to protect employee, and subcontractor, supplier and customer staff health and to reduce the likelihood of infection were implemented including various changes to working practices and roster and shift changes. Inter-state and intra-state travel restrictions had some initial impact on remote projects but have since been managed.

Construction work was designated early on as an essential service and has remained so throughout. As a result, SCEE’s operations and activities have continued largely as planned. However, the second half result has been affected by the following items which, whilst individually not material, have had a significant impact on profitability in combination:

Substantial acquisition costs were incurred in the year for which activity had to be suspended;
The changes to working practices outlined above resulted in some loss of productivity, particularly at the early stages of the pandemic;
Whilst no works were cancelled as a result of Coronavirus, some projects had mobilisation delayed at clients’ request resulting in activity being deferred into the following FY21; and
Levels of short-term “win and do” orders were lower than normal from March onwards..

The financial impact of the above has been partially offset by components of the Group qualifying for Jobkeeper payments of $4.1m. The business development pipeline is currently not showing any material impact from Coronavirus.

As we have seen over recent months, the pandemic remains a highly volatile situation and conditions may change. The Board and management continue to monitor this closely.

Graeme Dunn - Managing Director

2018 Annual Report

MANAGING DIRECTOR'S REVIEW (CONTINUED)

FINANCIAL RESULTS

Revenue for the year was $415.1m compared to $386.0m in the prior year, an increase of 8%.

SCEE now operates across the three broad sectors of Infrastructure, Commercial and Resources. Infrastructure now also includes works that in previous years SCEE presented separately as “Telecommunications & Datacentres” and “Industrial, Energy & Utilities”. Key revenue contributors in the year for each sector were as follows:

Infrastructure – revenue for the year was $196.0m compared to $183.3m in the prior year and remained the Group’s largest sector. In transport infrastructure, work finished on the WestConnex M5 motorway tunnel project in New South Wales and the Northlink Central Section Project in WA and is ongoing at the Forrestfield Airport Link project in WA. In the health sector, the Westmead Hospital project in New South Wales is nearing completion and work commenced under the recently awarded maintenance panel arrangements with a number of Metropolitan Health Services in WA. In defence, the RAAF Tindal project in the Northern Territory has now finished. In telecommunications, NBN and carrier network construction and maintenance works continued across Australia. In energy and utilities, work continued under the Ergon Energy Queensland service agreement and was completed on the Agnew Wind Farm project in WA.
Commercial – revenue for the year was $172.8m compared to $114.5m in the prior year. The majority of revenue in the sector continues to be generated in the New South Wales market on a range of large construction and fit-out projects including Parramatta Square 3 and 4 which are nearing completion, Wynyard Place, 231 Elizabeth Street and the Edmondson Square Town Centre Development.
Resources – revenue for the year was $46.2m compared to $88.2m in the prior year as a result of large scale construction projects demobilising in the prior year and significant new projects at the Albemarle Kemerton Lithium Project in WA and Rio Tinto’s Gove Operations in the Northern Territory not commencing until late in the current year. In particular, the Kemerton project saw planned scope deferred into FY21 impacting on the current full year result. The business continued to win and perform minor works projects for Rio Tinto and BHP and secure work under its framework agreements on the Sino Iron and Boddington Gold projects.

Gross margins for the year fell to 10.7% compared to 12.3% in the prior year, primarily due to the Coronavirus impacts discussed above and experiencing lower average margins on finished transport infrastructure projects resulting from delays and disruptions experienced performing this work.

Overheads were $23.4m, down 9% from $25.7m in the prior year due to the impact of efficiency initiatives introduced in the prior year and no Executive STI or LTI awards in the current year.

EBIT for the year was $16.4m, representing a 16% decrease on the EBIT of $19.4m in the prior year. Net profit after tax was $10.9m, down 14% compared to $12.7m in the prior year.

The balance sheet remained strong throughout the period. Net cash at 30 June 2020 increased slightly to $55.3m with no debt. The payment of the final $6.5m tranche of deferred Heyday acquisition consideration was offset by positive operating cashflows whilst the payment of the FY19 dividend was funded by an underwritten Dividend Reinvestment Plan.

During the year SCEE continued to pursue commercial close out of various finished resources and infrastructure projects for which claims and variations have been recognised in contract assets. The Decmil arbitration process, previously disclosed to the ASX, is now at the pleadings stage.

Capital expenditure for the year was $0.6m and is expected to remain at low levels.

The new leasing accounting standard AASB 16 Leases was adopted on 1 July 2019 and resulted in the recognition of $5.6m of right of use assets and $5.6m of lease liabilities in respect of operating leases. The impact that the new standard had on income statement was that EBITDA increased by $2.2m, EBIT increased by $0.1m and there was no change to NPAT.

The Directors have declared a fully franked dividend for the year ended 30 June 2019 of 3.0 cents per share, consistent with the prior year.

2020 Annual Report

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MANAGING DIRECTOR’S REVIEW (CONTINUED)

OUTLOOK

Order Book

The Group continues to win work across its core markets. Significant awards during the year included the Albemarle Kemerton Lithium project ($65m), the Sydney Metro’s Pitt Street Station integrated development ($40m) and the renewal of the Ergon Energy Queensland service agreement for a further five years ($40m).

The order book at 30 June 2020 was $440m, a similar level to the start of the period despite delivering record full year revenues. Over $330m of work is already secured for FY21 representing over 80% of the FY21 target of $400m.

There are currently over $900m of submitted tenders with clients pending decision.

Markets

Infrastructure

This market is primarily driven by government expenditure although some sectors have varying levels of private investment.

With significant investment sanctioned, peak activity is still to come with electrical work generally later in the cycle. Following the Coronavirus outbreak the Federal, NSW and WA governments have all announced the fast tracking of infrastructure projects which are expected to further grow the opportunity pipeline.

Having secured work on the Pitt Street Station during the year we see further opportunities presenting on Sydney Metro. There continues to be a significant pipeline of defence base and hospital work.

Commercial

Commercial remains the largest component of the order book with multiple base-builds and fit-outs in progress in Sydney and Canberra and activity is forecast to remain high in FY21. The current opportunity pipeline is not showing material impact from Coronavirus and significant commercial developments are expected around new infrastructure hubs including the Western Sydney Airport and new Sydney Metro stations. The Group is bidding its first commercial project in Brisbane.

Resources

As forecast, resources activity reached a low point in FY20. However, significant wins at the Kemerton Lithium Plant and Rio Tinto Gove have seen the order book almost double from a year ago. Mining commodity prices have held up well through the Coronavirus outbreak and the resources business development pipeline is increasingly strengthening. A number of tenders for significant iron ore and other opportunities have been submitted and are pending decisions.

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2020 Annual Report

MANAGING DIRECTOR’S REVIEW (CONTINUED)

Strategy

SCEE primarily sees itself as an electrical contractor. Historically focussed in resources, over the last five years we have implemented a strategy to diversify organically and acquisitively into a national Group operating across the three broad sectors of Infrastructure, Commercial and Resources.

Our growth strategy continues so as to deepen our presence in those sectors and broaden our geographic diversity. This includes particularly targeting maintenance and recurring earnings.

We are actively pursuing acquisition opportunities having suspended such activity at the start of the Coronavirus pandemic.

Conclusion

FY20 saw SCEE deliver a third consecutive year of record revenues with growth of 8% on the prior year. While profit in the year was impacted by Coronavirus and other factors, the business remains in a strong position. The order book includes $330m already secured for FY21 which underpins over 80% of our 2021 revenue target and we continue to see a significant pipeline of opportunities across our sectors.

The Board remains committed to our diversification strategy and with over $55m of cash and no debt at 30 June 2020 we have funding available to progress this in the year ahead.

I would like to take this opportunity to thank SCEE’s management and staff for their hard work and commitment during the year, particularly in facing the challenges posed by the Coronavirus pandemic. I would also like to thank our shareholders for their continued support.

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Graeme Dunn Managing Director

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2020 Annual Report

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DIRECTORS’ REPORT

Your Directors submit their report for Southern Cross Electrical Engineering Limited (“SCEE” or “the Company”) for the year ended 30 June 2020.

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David Hammond, Karl Paganin, Simon Buchhorn, Derek Parkin, Graeme Dunn, Chris Douglass and Colin Harper.

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.

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Name and independence status Experience, qualifications, special responsibilities and other directorships
Derek Parkin OAM Derek is a Fellow of the Institute of Chartered Accountants Australia and New Zealand (CAANZ) and a Fellow
Independent Chairman and of the Australian Institute of Company Directors.
Non-Executive Director He is currently Professor of Accounting at the University of Notre Dame Australia, having previously been an
assurance partner with Arthur Andersen and Ernst & Young. Derek’s accounting experience has spanned over
40 years and four continents, primarily in the public company environment.
Derek is a past national Board member of the Institute of Chartered Accountants Australia (“ICAA”) and has
served on a number of the ICAA's national and state advisory committees. In 2011, he was a recipient of the
ICAA's prestigious Meritorious Service Award.
Derek's non-executive directorships to date have been in the non-listed sphere, principally in the oil & gas and
manufacturing sectors. He has also chaired a number of advisory committees in both the government and
not-for-profit sectors.
Derek is the Chairman of the Audit and Risk Management Committee and a member of the Nomination and
Remuneration Committee.
Derek was awarded the Medal of the Order of Australia in the 2015 Australia Day honours list. The award
recognised Derek’s service to accountancy through a range of professional, academic, business and advisory
roles.
Graeme Dunn Graeme has over 25 years international experience in heavy civil infrastructure, mining, oil & gas and building
Managing Director and projects. Graeme’s strong technical knowledge, coupled with his extensive executive management experience,
has seen him hold senior management positions throughout Australasia and the Middle East.
Chief Executive Officer
Graeme has a Bachelor of Civil Engineering from the University of Sydney, an MBA from the University of
Southern Queensland and has completed the Senior Executive Program from the London School of Business.
He is also a graduate of the Australian Institute of Company Directors.
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2020 Annual Report

DIRECTORS’ REPORT (continued)

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Name and independence status Experience, qualifications, special responsibilities and other directorships
Simon Buchhorn Simon has a comprehensive understanding of SCEE’s operations having been employed by the Company for
Independent Non-Executive over 30 years prior to retiring in 2014.
Director During this time he worked in a number of key positions across the business including over 6 years as Chief
Operating Officer and a period as interim Chief Executive Officer. He was also the General Manager of SCEE’s
LNG focused Joint Venture KSJV.
Simon brings to the Board significant experience in contract delivery and operational performance both
domestically and internationally. He is also a graduate of the Australian Institute of Company Directors.
Simon is a member of the Audit and Risk Management Committee and the Nomination and Remuneration
Committee.
Karl Paganin Karl has over 15 years of senior executive experience in Investment Banking, specialising in transaction
Independent Non-Executive structuring, equity capital markets, mergers and acquisitions and providing strategic management advice
to listed public companies. Prior to that, Karl was Director of Major Projects and Senior Legal Counsel for
Director
Heytesbury Pty Ltd (the private company of the Holmes a Court family) which was the proprietor of John
Holland Group Pty Ltd.
Karl is the Chairman of the Nomination and Remuneration Committee and a member of the Audit and Risk
Management Committee.
Karl is also the Non-Executive Chairman of ASX listed Veris Limited and was a Non-Executive Director of
Poseidon Nickel Limited until 30 June 2020.
David Hammond David was a vending shareholder of Heyday5 Pty Ltd and was appointed to SCEE’s Board as an Executive
Executive Director Director on completion of the acquisition of Heyday by SCEE in March 2017.
David has more than 35 years’ electrical contracting experience and has been involved in the Heyday business
for over 20 years. During his tenure, David has held various positions up to and including his current role of
Executive Director where his responsibilities include driving business development.
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Executive Officers

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

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Name Experience and qualifications
Chris Douglass Prior to joining SCEE in 2011 Chris was the Chief Financial Officer at Pacific Energy Ltd and has previously held
Chief Financial Officer and a number of senior finance roles with Clough Ltd.
Chris, a Chartered Accountant and member of the Governance Institute of Australia, commenced his finance
Company Secretary
career with Deloitte. Prior to his time with Deloitte, Chris qualified and practiced as a solicitor in London.
Colin Harper Colin is a Chartered Accountant with over 15 years experience in public company finance. Colin is also a
member of the Governance Institute of Australia.
Company Secretary
Prior to joining SCEE in 2012 Colin was the Chief Financial Officer and Company Secretary of FAR Limited and
previously worked for Ernst & Young in both Australia and the UK.
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2020 Annual Report

DIRECTORS’ REPORT (continued)

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Directors’ interests

As at the date of this report, the relevant interests of the directors in the shares and rights or options over shares issued by the Company are as follows:

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Rights over Options over
Director Ordinary shares
ordinary shares ordinary shares
Derek Parkin 105,492 - -
Graeme Dunn [1 ] 1,561,546 1,737,267 -
Simon Buchhorn 800,000 - -
Karl Paganin 1,467,852 - -
David Hammond 3,729,544 - -
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1 Included in the Performance Rights held by Graeme Dunn are 570,175 2018 Performance Rights which have been performance tested on finalising the 2020 results and which did not vest and will be forfeited.

Directors’ meetings

The number of Directors’ meetings and meetings of committees of Directors held and attended by each of the Directors of the Company during the financial year are:

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Audit and Risk
Management Committee Nomination and Remuneration
Director Board Meetings Meetings Committee Meetings
Held Attended Held Attended Held Attended
Derek Parkin 16 16 4 4 3 3
Graeme Dunn 16 16 - - - -
Simon Buchhorn 16 16 4 4 3 3
Karl Paganin 16 16 4 4 3 3
David Hammond 16 16 - - - -
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The number of meetings held represents the time the director held office or was a member of the committee during the year.

Principal Activities

The principal activities during the year of the entities within the consolidated group were the provision of electrical, instrumentation, communication and maintenance services to a diverse range of sectors across Australia.

Significant Changes in the State of Affairs

There have been no significant changes in the state of affairs of the company or consolidated group during this financial year.

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2020 Annual Report

DIRECTORS’ REPORT (continued)

Operating and Financial Review

A review of operations of the consolidated group during the financial year, the results of those operations and the likely developments in the operations are set out in the Managing Director’s Review on page 8.

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2020 2019
Operating results for the year were:
$’000 $’000
Contract revenue 415,104 386,031
Profit/(loss) after income tax from continuing operations 10,870 12,713
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Dividends	Cents per share	Total amount $’000
Declared and paid during the period (fully franked at 30%)
Final franked dividend for 2019	3.0	7,042
Declared after balance date and not recognised as a liability (fully franked at 30%)
Final franked dividend for 2020	3.0	7,428

Significant Events after Balance Sheet Date

There are no matters or circumstances that have arisen since the end of the financial year which significantly affected or may significantly affect the operations of the consolidated entity, the results of those operations, or the state of affairs of the consolidated entity in subsequent financial years.

Since 30 June 2020, the Group has not had a significant adverse operational or financial impact as a result of the Coronavirus pandemic. The Group’s operations have been classified as essential services and are continuing to run in line with the required safety and health guidelines. The extent of any future impact of the pandemic on the Group’s operational and financial performance will depend on certain developments, including the duration and spread of the outbreak, regulations imposed by governments with respect to the outbreak response and impacts on customers, employees and vendors—all of which are uncertain and cannot be predicted at this time.

Likely Developments and Expected Results

Other than as referred to in this report, further information as to the likely developments in the operations of the consolidated entity would, in the opinion of the directors, be likely to result in unreasonable prejudice to the consolidated entity.

Environmental Regulation

The operations of the Group are subject to the environmental regulations that apply to our clients. During 2020 the Group complied with the regulations.

Share Options and Performance Rights

At the date of this report there are no unissued ordinary shares of the Company under options.

During the reporting period, 655,034 shares were issued from the exercise of options or performance rights previously granted as remuneration.

Further details are contained in note 26 to the accounts.

Indemnification and Insurance of Directors and Officers

During or since the end of the financial year, the Company has paid premiums in respect of a contract insuring all the directors of the Company against a liability incurred in their role as directors of the Company, except where:

a) the liability arises out of conduct involving a wilful breach of duty; or
b) there has been a contravention of Sections 182 or 183 of the Corporations Act 2001.

The total amount of insurance contract premiums paid was $248,552 (2019: $174,963).

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2020 Annual Report

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DIRECTORS’ REPORT (continued)

Proceedings on Behalf of Company

No person has applied for leave of Court to bring proceedings on behalf of the Company or intervene in any proceedings to which the Company is a party for the purpose of taking responsibility on behalf of the Company for all or any part of those proceedings. The Company was not a party to any such proceedings during the year.

Non-audit Services

There were no non-audit services provided by the external auditors during the year.

Auditor’s Independence Declaration

The lead auditor’s independence declaration is set out on page 79 and forms part of the Directors’ report for the financial year ended 30 June 2020.

Remuneration Report

The Remuneration Report is set out on pages 17 to 24 and forms part of this report.

Rounding off

The Company is of a kind referred to in ASIC Instrument 2016/191 dated 24 March 2016 and in accordance with that Class Order, amounts in the consolidated financial statements and directors’ report have been rounded off to the nearest thousand dollars, unless otherwise stated.

Signed in accordance with a resolution of the directors.

Derek Parkin

Chairman

29 September 2020

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2020 Annual Report

REMUNERATION REPORT – AUDITED

This Remuneration Report outlines the Director and executive remuneration arrangements of the Group in accordance with the requirements of the Corporations Act 2001 and its Regulations. For the purposes of this report Key Management Personnel (KMP) of the Group are defined as those persons having authority and responsibility for planning, directing and controlling the major activities of the Company and the Group, directly or indirectly, including any Director (whether executive or otherwise) of the parent Company.

Nomination and Remuneration Committee

The Nomination and Remuneration Committee of the Board of Directors is responsible for determining and reviewing remuneration arrangements for the directors and executives.

The Nomination and Remuneration Committee assesses the appropriateness of the nature and amount of remuneration of executives on a periodic basis by reference to relevant employment market conditions with the overall objective of ensuring maximum stakeholder benefit from the retention of a high quality, high performing director and executive team.

Remuneration Structure

In accordance with best practice corporate governance, the structure of executive and non-executive remuneration is separate and distinct.

Executive Remuneration

Objective

The Group aims to reward executives with a level and mix of remuneration commensurate with their position and responsibilities within the Group so as to:

attract, motivate and retain highly skilled executives;
reward executives for Group, business and individual performance against targets set by reference to appropriate benchmarks;
align the interests of executives with those of shareholders; and
ensure remuneration is competitive by market standards.

Structure

The Company has entered into contracts of employment with the Managing Director and the executives. These contracts contain some or all of the following key elements:

Fixed remuneration;
Variable remuneration - Short term incentive (“STI”); and
Variable remuneration - Long term incentive (“LTI”).

The nature, amount and proportion of remuneration that is performance related for each executive is set out in Table 1.

Fixed Remuneration

Executives are given the opportunity to receive their fixed remuneration in a variety of forms including cash and fringe benefits such as motor vehicles. It is intended that the manner of payment chosen will be optimal for the recipient without undue cost for the Group.

Fixed remuneration is reviewed annually by the Nomination and Remuneration Committee. There are no guaranteed base pay increases for any executive.

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2020 Annual Report

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REMUNERATION REPORT – AUDITED (continued)

Variable Remuneration – Short Term Incentive (STI)

The objective of the STI program is to link the achievement of the Group’s operational targets with the remuneration received by the executives charged with meeting those targets. The total potential STI available is set at a level so as to provide sufficient incentive to the executive to achieve the operational targets and such that the cost to the Group is reasonable in the circumstances.

Actual STI payments granted to each executive depend on the extent to which specific targets as set at the beginning of the financial year are met. The targets consist of a number of Key Performance Indicators (“KPIs”) covering both financial and non-financial measures of performance.

For the year ended 30 June 2020, the financial KPIs accounted for 70% of the executive team’s STI and set specific profit and order book targets.

The non-financial KPIs accounted for 30% of the executive team’s STI and comprised the achievement of strategic objectives. The strategic objectives were chosen to align with the key drivers for the short term success of the business and provide a framework for delivering long term value.

The assessment of performance against KPIs is based on the audited financial results for the company. For each component of the STI against a KPI no award is made where performance falls below the minimum threshold for that KPI. The Nomination and Remuneration Committee recommends the STI to be paid to the individuals for approval by the Board.

Executives can earn up to a maximum of 50% of their fixed remuneration under the STI program. Graeme Dunn and Chris Douglass are the only KMPs that participate in the STI program.

Variable Remuneration – Long Term Incentive (LTI)

The objective of the LTI plan is to retain and reward the members of the executive management team in a manner which aligns this element of remuneration with the creation of shareholder wealth.

LTI grants to executives are delivered at the discretion of the Nomination and Remuneration Committee in the form of performance rights or share options under the Senior Management Long Term Incentive Plan.

The Key Performance Indicators (“KPIs”) used to measure performance for these incentives are earnings per share growth and absolute total shareholder return. These KPIs are measured over a three year performance period and were chosen because they are aligned to shareholder wealth creation.

Executives can be issued with performance rights under the LTI plan up to a maximum of 50% of their fixed remuneration converted at the 5 day volume weighted average price of the Company’s ordinary shares at the start of the three year performance period. Graeme Dunn and Chris Douglass are the only KMPs that participate in the LTI plan.

Non-Executive Director Remuneration

Objective

The Board seeks to set aggregate remuneration at a level that provides the Group with the ability to attract and retain Non-Executive Directors of the highest calibre, whilst incurring a cost that is acceptable to shareholders.

Structure

The Constitution and the ASX Listing Rules specify that the aggregate remuneration of Non-Executive Directors shall be determined from time to time by a general meeting. The aggregate remuneration as approved by shareholders at the annual general meeting held on 26 November 2008 is $600,000 per year.

The Non-Executive Director fee structure is reviewed annually. The Board considers external market surveys as well as the fees paid to NonExecutive Directors of comparable companies in our sector when undertaking the annual review process.

The annual fee paid to the Chairman of the Board is $110,000. The fee paid to other Non-Executive Directors is $80,000 per annum. No additional fees are paid to Directors who sit on Board Committees.

Directors also receive superannuation at the statutory rate in addition to their Director fees.

The Non-Executive Directors do not receive retirement benefits, nor do they participate in any incentive programs.

The remuneration paid to Non-Executive Directors is detailed in Table 1 of this report.

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2020 Annual Report

REMUNERATION REPORT – AUDITED (continued)

Consequences of performance on shareholder wealth

In considering the impact of the Group’s performance on shareholder wealth and the related rewards earned by executives, the Nomination and Remuneration Committee had regard to the following measures over the years below:

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2020 2019 2018 2017 2016
$’000 $’000 $’000 $’000 $’000
Profit/(loss) attributable to owners of the company 10,870 12,713 8,406 (369) 5,051
Dividends declared and paid during the year 7,042 7,022 - 2,152 6,408
Change in share price (19%) (24%) 23% 4% 87%
Return on capital employed 10% 12% 9% 0% 7%
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2020 Annual Report

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REMUNERATION REPORT – AUDITED (continued)

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- - - - - - - - -
% of that is related (6%) 45% (4%) 45% (4%) 35%
remuneration performance
$ -
Total 120,450 120,450 87,600 87,600 87,600 87,600 32,681 635,257 1,188,274 296,686 241,836 380,001 711,508 1,607,594 2,469,949
$ - - - - - - - - - -
payments rights (B) (46,834) 249,303 (15,799) 147,663 (62,633) 396,966
Share-based Options and
$ - -
10,450 10,450 7,600 7,600 7,600 7,600 2,835 25,000 25,000 19,950 25,000 25,000 95,600 78,485
benefits
Post-employment Superannuation
$ -
Total 110,000 110,000 80,000 80,000 80,000 80,000 29,846 657,091 913,971 276,736 241,836 370,800 538,845 1,574,627 1,994,498
$ - - - - - - - - - - - - - - -
Non-
monetary benefits
Short-term $ - - - - - - - - - - - -
(A)
STI cash bonus 288,971 171,160 460,131
$ -
110,000 110,000 80,000 80,000 80,000 80,000 29,846 657,091 625,000 276,736 241,836 370,800 367,685 1,574,627 1,534,367
Salary & fees
Year 2020 2019 2020 2019 2020 2019 2020 2019 2020 2019 2020 2019 2020 2019
Note
1
Retired 30 October 2018.
Non-Executive Directors Derek Parkin, Chairman Simon Buchhorn Karl Paganin Gianfranco Tomasi Executive Directors Graeme Dunn David Hammond Executives Chris Douglass – Chief Financial Officer Total 2020 Total 2019
1
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2020 Annual Report

REMUNERATION REPORT – AUDITED (continued)

Notes in relation to the table of directors’ and executive officers’ remuneration

A. The STI cash bonus is for the achievement of KPIs in respect of the financial year. The amount is finally determined after the results for the year have been audited and performance reviews are completed and approved by the Nomination and Remuneration Committee and Board.
B. The fair value of the performance rights with market related vesting conditions were valued using a Monte Carlo simulation model. The use of a Monte Carlo Simulation model simulates multiple future price projections for both SCEE shares and the shares of the peer group against which they are tested. The performance rights with non-market related vesting conditions were valued using the Black-Scholes option model. The values derived from these models are allocated to each reporting period evenly over the period from grant date to vesting date. The amount recognised as an expense is adjusted to reflect the number of awards for which the related service and non-market performance conditions are expected to be met, such that the amount ultimately recognised as an expense is based on the number of awards that meet the related service and non-market performance conditions at the vesting date. The value disclosed is the fair value of the performance rights recognised in this reporting period. The credit recognised in the current financial year is the result of a reversal of expenses recognised in previous financial years for performance rights which are no longer expected to meet the non-market performance conditions.

Employment Contracts

The following executives have non-fixed term employment contracts. The company may terminate the employment contract by providing the other party notice as follows:

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Executive Notice Period
Graeme Dunn 6 months
Chris Douglass 6 months
David Hammond 3 months
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The Group retains the right to terminate a contract immediately by making a payment in lieu of the notice period. An executive may be terminated immediately for a breach of their employment conditions. Upon termination the executive is entitled to receive their accrued annual leave and long service leave together with any superannuation benefits. There are no other termination payment entitlements.

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2020 Annual Report

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REMUNERATION REPORT – AUDITED (continued)

Options and rights over equity instruments

The movement during the reporting period in the number of options and rights over ordinary shares in Southern Cross Electrical Engineering Limited held, directly, indirectly or beneficially, by each key management person, including their related parties, is as follows:

Performance Rights over equity instruments

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Vested and
Held at 30 Granted as Vested and exercisable at
Executive June 2019 remuneration exercised Forfeited Held at 30 June 2020 30 June 2020
Graeme Dunn 1,636,313 702,806 (300,926) (300,926) 1,737,267 -
Chris Douglass 969,200 403,878 (178,240) (178,241) 1,016,597 -
2,605,513 1,106,684 (479,166) (479,167) 2,763,864 -
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Performance rights granted as remuneration in 2020

During the period performance rights over ordinary shares in the company were granted as remuneration to KMP. These performance rights will vest subject to the meeting of performance set out below. Details on performance rights that were granted during the period are as follows:

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Fair value per
performance right Exercise price per Performance Expiry
Executive Instrument Number Grant date at grant date ($) performance right ($) testing date Date
Graeme Dunn [1] 2020 Rights 351,403 8/11/19 0.49 0.00 30/6/22 8/11/23
Graeme Dunn [2] 2020 Rights 351,403 8/11/19 0.29 0.00 30/6/22 8/11/23
Chris Douglass [1] 2020 Rights 201,939 8/11/19 0.49 0.00 30/6/22 8/11/23
Chris Douglass [2] 2020 Rights 201,939 8/11/19 0.29 0.00 30/6/22 8/11/23
1,106,684
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1 Performance rights granted with EPS growth as the vesting condition

2 Performance rights granted with Absolute TSR as the vesting condition

2020 Financial Year Performance Rights

Up to 100% of the allocated performance rights may vest, subject to the achievement of the performance conditions as set out below. The key terms of the performance rights are:

To be performance tested over a three year period from 1 July 2019 to 30 June 2022 (“Performance Period”);
No performance rights will vest until 30 June 2022;
Performance testing criteria are 50% against Absolute Total Shareholder Return (“TSR”) performance, and 50% against Earnings Per Share (“EPS”) performance; and
Expiry on the 4th anniversary of the grant date unless an earlier lapsing date applies

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2020 Annual Report

REMUNERATION REPORT – AUDITED (continued)

The TSR formula is:

((Share Price at Test Date – Share Price at Start Date) + (Dividends Reinvested))/Share Price at Start Date

TSR will be assessed against targets for threshold performance of 8% per annum compounded over the Performance Period and for stretch performance of 12% per annum compounded over the Performance Period. The vesting schedule is as follows for TSR performance over the Performance Period:

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Less than 8% per annum compounded 0% vesting
8% per annum compounded 50% vesting
Between 8% and 12% per annum compounded Pro-rata vesting between 50% and 100%
At or above 12% per annum compounded 100% vesting
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EPS performance will be measured in the 2022 financial year. For the purposes of performance testing the Performance Rights, EPS in the 2022 financial year will be the Basic EPS for the year, as prescribed by the accounting standards and set out in the Company's Financial Reports, adjusted to remove the following non-cash items from the calculation of profit or loss attributable to ordinary shareholders in the year, in order to reflect the companies underlying profitability:

(a) amortisation of acquired intangibles;
(b) unwinding of interest on deferred acquisition consideration payments;
(c) adjustments to the assessment of deferred consideration payable; and
(d) acquisition costs.

EPS, as described above, will be assessed against targets for threshold performance of 6.8 cents per share in the 2022 financial year and for stretch performance of 7.6 cents per share in the 2022 financial year. The vesting schedule is as follows for EPS performance in the 2022 financial year:

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Less than 6.8 cents per share 0% vesting
6.8 cents per share 50% vesting
Between 6.8 and 7.6 cents per share Pro-rata vesting between 50% and 100%
At or above 7.6 cents per share 100% vesting
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Once the performance measurement calculation has been finalised the company will allot and issue the equivalent number of shares at nil consideration on the basis of one ordinary share per vested performance right for all performance rights exercised.

Where a participant ceases employment prior to the vesting of their share options or performance rights, the share options or performance rights are forfeited unless in the event of retirement, permanent disablement or death the Board, at their absolute discretion, waive the exercise and vesting conditions associated with the performance rights or allow the performance rights to continue to be assessed over the original performance assessment period. In the event of a change of control of the Company, all options and performance rights that have not lapsed may be exercised.

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2020 Annual Report

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REMUNERATION REPORT – AUDITED (continued)

Details of equity incentives affecting current and future remuneration

Details of the vesting profiles of the rights and options held by each key management person are as follows:

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% vested in % forfeited in Performance Expiry
Executive Instrument Number Grant Date year year testing date (A) Date
2017 Rights 601,852 18/11/16 50% 50% 30/6/19 18/11/20
- -
2018 Rights (A) 570,175 7/11/17 30/6/20 7/11/21
Graeme Dunn
- -
2019 Rights (B) 464,286 9/11/18 30/6/21 9/11/22
- -
2020 Rights (C) 702,806 8/11/19 30/6/22 8/11/23
2017 Rights 356,481 18/11/16 50% 50% 30/6/19 18/11/20
- -
2018 Rights (A) 337,719 7/11/17 30/6/20 7/11/21
Chris Douglass
- -
2019 Rights (B) 275,000 9/11/18 30/6/21 9/11/22
- -
2020 Rights (C) 403,878 8/11/19 30/6/22 8/11/23
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A. 50% of the 2018 performance rights have TSR as the vesting condition with a threshold target of 8% per annum compounded and a stretch target of 12% per annum compounded. These performance rights have a fair value of $0.53 each. 50% of the 2018 performance rights have EPS growth as the vesting condition with a threshold target of 5.7 cents per share and a stretch target of 6.1 cents per share. These performance rights have a fair value of $0.75 each. Subsequent to 30 June 2020 the vesting conditions in respect of the 2018 performance rights have been performance tested and it has been determined that none of the performance rights held by Mr Dunn and Mr Douglass have vested and as a result all 2018 performance rights will be forfeited.

B. 50% of the 2019 performance rights have TSR as the vesting condition with a threshold target of 8% per annum compounded and a stretch target of 12% per annum compounded. These performance rights have a fair value of $0.29 each. 50% of the 2019 performance rights have EPS growth as the vesting condition with a threshold target of 6.1 cents per share and a stretch target of 6.8 cents per share. These performance rights have a fair value of $0.59 each.

C. The vesting conditions and fair values of the 2020 performance rights are set out above.

Movements in shares

The movement during the reporting period in the number of ordinary shares in Southern Cross Electrical Engineering Limited held, directly, indirectly or beneficially, by each key management person, including their related parties, is as follows

Ordinary shares

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Exercise of Dividend
Held at Performance Reinvestment Held at
30 June 2019 Purchases Sales Rights [A] Plan 30 June 2020
Directors
Derek Parkin 100,000 - - - 5,492 105,492
Graeme Dunn 1,260,620 - - 300,926 - 1,561,546
Simon Buchhorn 800,000 - - - - 800,000
- -
Karl Paganin 822,668 600,000 45,184 1,467,852
David Hammond 6,870,040 100,000 (3,240,496) - - 3,729,544
Executives
-
Chris Douglass 1,180,743 178,240 74,640 1,433,623
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A. Shares were received during the year on the exercise of vested 2017 Performance Rights issued under the company’s senior management long term incentive scheme as discussed above.

Transactions with key management personnel

There were no transactions between the company and Key Management Personnel during the year. There are no loans between the company and Key Management Personnel.

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2020 Annual Report

CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME For the year ended 30 June 2020

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2020 2019
Note
$’000 $’000
Contract revenue 4 415,104 386,031
Contract expenses (370,579) (338,485)
Gross profit 44,525 47,546
Other income 5 492 353
Employee benefits expenses 6 (13,155) (15,239)
Occupancy expenses (1,235) (2,308)
Administration expenses (7,489) (6,212)
Reduction in earn out payable 5 - 1,489
Amortisation expense 8 (2,153) (797 )
Depreciation expense 8 (3,001) (3,496)
Other expenses from ordinary activities (1,566) (1,983)
Profit from operations 16,418 19,353
Finance income 7 310 530
Finance expenses 7 (1,259) (1,703)
Net finance expense (949) (1,173)
Profit/(loss) before tax 15,469 18,180
Income tax (expense)/benefit 9 (4,599) (5,467)
Profit/(loss) from continuing operations 10,870 12,713
Other comprehensive income
Items that are or may be reclassified to the profit and loss:
- -
Foreign currency translation gain for foreign operations
- -
Other comprehensive income net of income tax
Total comprehensive income 10,870 12,713
Total comprehensive income attributable to:
Owners of the Company 10,870 12,713
Earnings per share:
Basic earnings per share (cents) 10 4.46 5.44
Diluted earnings per share (cents) 10 4.46 5.40
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The above statement of comprehensive income should be read in conjunction with the accompanying notes.

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2020 Annual Report

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CONSOLIDATED BALANCE SHEET

For the year ended 30 June 2020

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2020 2019
Note
$’000 $’000
Assets
Current assets
Cash and cash equivalents 11 55,272 53,257
Trade and other receivables 12 113,073 103,950
Inventories 13 1,588 2,335
Prepayments 901 1,693
Total current assets 170,834 161,235
Non-current assets
Property, plant and equipment 15 11,148 14,827
Right-of-use assets 16 5,967 -
Intangible assets 17 73,792 73,794
Total non-current assets 90,907 88,621
Total assets 261,741 249,856
Liabilities
Current liabilities
Trade and other payables 18 75,278 77,188
Provisions 20 9,114 9,762
Lease liability 19 1,749 -
Deferred acquisition consideration 21 - 6,500
Tax payable 9 4,031 -
Total current liabilities 90,172 93,450
Non-current liabilities
Lease liability 19 4,218 -
Provisions 20 197 416
Deferred tax liability 9 8,781 8,282
Total non-current liabilities 13,196 102,148
Total liabilities 103,368 102,148
Net assets 158,373 147,708
Equity
Share capital 22 109,767 102,873
Reserves 22 108 551
Retained earnings 48,498 44,284
Total equity 158,373 147,708
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The above balance sheet should be read in conjunction with the accompanying notes.

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2020 Annual Report

CONSOLIDATED STATEMENT OF CHANGES IN EQUITY For the year ended 30 June 2020

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Share Retained Share Based
Capital Earnings Payments Reserve Translation Reserve Total Equity
$’000 $’000 $’000 $’000 $’000
Balance as at 1 July 2018 102,873 36,488 2,263 (514) 141,110
Total comprehensive loss for the period
- - -
Profit for the year 12,713 12,713
- - -
Total comprehensive income 12,713 12,713
Transactions with owners, recorded directly in equity
Dividends - (7,022) - - (7,022)
Performance rights (net of tax) - 2,105 (1,744) - 361
Equity-settled share-based payment - - 546 - 546
Total transactions with owners - (4,917) (1,198) - (6,115)
Balance as at 30 June 2019 102,873 44,284 1,065 (514) 147,708
Share Retained Share Based Translation
Capital Earnings Payments Reserve Reserve Total Equity
$’000 $’000 $’000 $’000 $’000
Balance as at 1 July 2019 102,873 44,284 1,065 (514) 147,708
Total comprehensive income for the period
- - -
Profit for the year 10,870 10,870
- - -
Total comprehensive income 10,870 10,870
Transactions with owners, recorded directly in equity
Dividends - (7,042) - - (7,042)
Dividend re-investment and share placements, net 6,894 - - - 6,894
Performance rights (net of tax) - 386 (1,013) - (627)
Equity-settled share-based payment - - 570 - 570
Total transactions with owners 6,894 (6,656) (443) - (205)
Balance as at 30 June 2020 109,767 48,498 622 (514) 158,373
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The above statement of changes in equity should be read in conjunction with the accompanying notes.

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2020 Annual Report

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CONSOLIDATED STATEMENT OF CASH FLOWS

For the year ended 30 June 2020

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2020 2019
Note
$’000 $’000
Cash flows from operating activities
Cash receipts from customers 424,081 366,904
Cash paid to suppliers and employees (415,673) (356,608)
-
Government grants (Job Keeper) received 2,655
Interest received 310 530
Interest paid (1,259) (1,291)
Income taxes received/(paid) (5) 1,195
Net cash from operating activities 27 10,109 10,730
Non-current assets
Payment of deferred acquisition consideration 21 (6,500) (6,500)
Proceeds from the sale of assets 1,362 49
Acquisition of property, plant and equipment 15 (594) (2,076)
Net cash used in investing activities (5,732) (8,527)
Cash flows from financing activities
Proceeds from issue of shares 6,831 -
Dividends paid 22 (7,042) (7,022)
-
Payment of lease liabilities principal (2,151)
Net cash used in financing activities (2,362) (7,022)
Increase/(decrease) in cash and cash equivalents 2,015 (4,819)
Cash and cash equivalents at beginning of period 53,257 58,076
- -
Effect of exchange rate fluctuations on cash held
Cash and cash equivalents at 30 June 11 55,272 53,257
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The above cash flow statement should be read in conjunction with the accompanying notes.

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2020 Annual Report

INDEX TO NOTES TO THE FINANCIAL STATEMENTS

1.	Reporting entity	30	22. Capital and reserves	45
2.	Basis of preparation	30	23. Financial instruments	46
3.	Segment reporting	31	24. Investments in subsidiaries	51
4.	Contract revenue	32	25. Interest in joint operations	52
5.	Other income	33
6. 7.	Employee benefts expenses Finance income and expenses	33 34	26. Share-based payments 27. Reconciliation of cash fows from operating activities	52 55
8.	Depreciation and amortisation expenses	34	28. Contingencies	56
9.	Income tax expense	35	29. Subsequent events	56
10.	Earnings per share	37	30. Auditor’s remuneration	56
11.	Cash and cash equivalents	38	31. Parent entity disclosures	57
12.	Trade and other receivables	38	32. Related parties	57
13.	Inventories	39	33. Signifcant accounting policies	58
14.	Contract assets	39
			34. Determination of fair values	72
15.	Property, plant and equipment	40
16.	Right-of-use assets	41
17.	Intangible assets – goodwill and customer contracts	42
18.	Trade and other payables	43
19.	Lease liability	43
20.	Provisions	44
21.	Deferred acquisition consideration	44

2020 Annual Report 29

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NOTES TO THE FINANCIAL STATEMENTS

1. Reporting entity

Southern Cross Electrical Engineering Limited (“the Company”, “the parent”) is a company incorporated and domiciled in Australia. The company’s shares are publicly traded on the Australian Securities Exchange.

The consolidated financial statements for the year ended 30 June 2020 comprise the Company and its subsidiaries (together referred to as the “Group” and individually as “Group entities”). The Group is a for-profit entity and the nature of the operations and principal activities of the Group are described in the Directors’ Report.

2. Basis of preparation

(a) Statement of compliance

The consolidated financial report is a general purpose financial report which has been prepared in accordance with Australian Accounting Standards (“AASBs”) (including Australian Accounting Interpretations) adopted by the Australian Accounting Standards Board (AASB) and the Corporations Act 2001. The consolidated financial report of the Group complies with International Financial Reporting Standards (IFRSs) and interpretations adopted by the International Accounting Standards Board (IASB). A listing of new standards and interpretations not yet adopted is included in note 33(w).

These financial statements have been rounded to the nearest thousand dollars where permitted by ASIC Instrument 2016/191 dated 24 March 2016.

The consolidated financial statements were authorised for issue by the Board of Directors on 29 September 2020.

(b) Basis of measurement

The consolidated financial statements have been prepared on the historical cost basis except as set out below:

Share-based payment arrangements are measured at fair value.
Assets and liabilities acquired in a business combination are initially recognised at fair value.

The methods used to measure fair values are discussed further in note 34.

(c) Functional and presentation currency

(i) Functional and presentation currency

Both the functional and presentation currency of Southern Cross Electrical Engineering Limited and its Australian subsidiaries are Australian dollars ($). The functional currency for the Peruvian subsidiary is Neuvos Soles. Overseas functional currencies are translated to the presentation currency (see below).

(ii) Transactions and balances

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 translated at the rate of exchange ruling at the balance sheet date.

Non-monetary items that are measured in terms of historical cost in a foreign currency are translated using the exchange rate as at the date of the initial transaction. Non-monetary items measured at fair value in a foreign currency are translated using the exchange rates at the date when the fair value was determined.

(iii) Translation of Group Entities functional currency to presentation currency

The results of the overseas subsidiaries are translated into Australian Dollars as at the date of each transaction. Assets and liabilities are translated at exchange rates prevailing at balance sheet date.

Exchange variations resulting from the translation are recognised in other comprehensive income and presented in the foreign currency translation reserve in equity.

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2020 Annual Report

NOTES TO THE FINANCIAL STATEMENTS

2. Basis of preparation (continued)

(d) Use of estimates and judgements

The preparation of financial statements in conformity with AASBs requires management to make judgements, estimates and assumptions that affect the application of accounting policies and the reported amounts of assets, liabilities, income and expenses. Actual results may differ from these estimates.

The significant judgements made by management in applying the Group’s accounting policies and the key sources of estimation uncertainty were the same as those that applied to the consolidated financial statements as at and for the year ended 30 June 2019 except for the judgement management used for the initial recognition on 1 July 2019 and subsequent measurement of right-of-use asset and lease liability in accordance with the newly adopted AASB 16 Leases (see note 33).

Estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognised in the period in which the estimate is revised and in any future periods affected. Information about these accounting estimates is included in the following notes:

Note 4 and 33 (n) –estimation of total contract cost and measurement of variable consideration;
Note 9 and 33 (p) and (k) – recognition and measurement of deferred tax asset;
Note 15, 17 and 33 (k) – recoverable amount for testing property, plant and equipment and goodwill;
Note 16, 19, 33 and (g) – initial and subsequent measurement of Right-of-use (ROU) assets and Lease liability;
Note 21 and 33 (u) – measurement of deferred consideration;
Note 23 – expected credit losses (“ECLs”) on trade receivables; and
Note 26 – measurement of share-based payments;

Critical judgements in applying accounting policies that have the most significant effect on the amounts recognised in the financial statements relate to contract revenue (note 33(n) and 4) and contract assets (note 33(i) and 14).

Estimates and judgements are made by management with due consideration for the historical and potential impacts of Coronavirus on the Group’s operations and forecast cash flows based on best estimates and reasonably possible scenarios, and taking into account the evolving nature of Coronavirus which makes it inherently difficult to forecast outcomes with more certainty. The impacts of Coronavirus are included in the specific notes such as but not limited to impairment testing and impairment of financial instruments (note 23) and non-financial assets (note 17).

Details of the Group’s accounting policies are included in notes 33 and 34.

3. Segment reporting

Revenue is principally derived by the Group from the provision of electrical services through construction and services contracts to customers in the following sectors: Commercial; Resources; and Infrastructure. During the year, the composition of the operating sectors was realigned to better reflect the Group’s markets. As a result, the Public Infrastructure and Defence, Industrial, Utilities and Energy, and Telecommunications and Data Centres sectors were consolidated into the Infrastructure sector.

The Group identified its operating segments based on the internal reports that are reviewed and used by the Group Managing Director in assessing performance and in determining the allocation of resources, and on the nature of the services provided. Financial information about each of these operating segments is reported to the Group Managing Director on a recurring basis. The Group provides its services through three key segments of SCEE, Datatel and Heyday.

The directors believe that the aggregation of the operating segments is appropriate as to differing extents they:

have similar economic characteristics;
perform similar services using similar business processes;
provide their services to a similar client base;
have a centralised pool of shared assets and services; and
operate in similar regulatory environments.

All segments have therefore been aggregated to form one operating segment.

In presenting information on the basis of geographical location, segment revenue, based on the geographical location of customers and segment assets, based on the geographical location of the assets are all located in Australia.

Revenues from the three largest customers of the Group’s Australian segment generated $169 million of the Group’s total revenue (2019: $64 million generated from the two largest customers).

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2020 Annual Report

NOTES TO THE FINANCIAL STATEMENTS

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4. Contract revenue

Disaggregated revenue information

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2020 2019
Note
$’000 $’000
Operating sectors
Commercial 172,755 114,469
Resources 46,209 88,207
Infrastructure 196,140 183,355
Total Revenue 415,104 386,031
Revenue type
Construction revenue 341,856 297,782
Services revenue 73,248 88,249
Total revenue 415,104 386,031
Timing of revenue recognition
Products and services transferred over time 415,104 386,031
Revenue from contracts with customers 415,104 386,031
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Revenue from the Infrastructure sector amounting to $196.1m (2019: $183.4m) represents the revenues from sectors previously disclosed as three separate sectors namely; Public Infrastructure and Defence, Industrial, Utilities and Energy, and Telecommunications and Data Centres, in the annual report as at and for the year ended 30 June 2019.

in the annual report as at and for the year ended 30 June 2019.
Contract balances
Trade receivables	12	24,324	36,995
Contract assets	14	86,374	64,273
		110,698	101,268

Trade receivables are non-interest bearing and are generally on 30 to 45 days term. In 2020, an additional $32,000 (2019: $ nil) was recognised as provision for expected credit losses on trade receivables.

Contract assets and revenue includes contract modifications recognised in accordance with the Group’s accounting policy (note 33(n)(iii)) for which amounts are not yet finalised with the customer.

The following amounts are included in revenue from contracts for the year ended 30 June 2020:

Revenue recognised as a contract liability in prior period 13,052 15,687

Unsatisfied Performance Obligations

Transaction price expected to be recognised in future years for unsatisfied performance obligations at 30 June 2020:

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Construction revenue 296,540 347,550
Services revenue 59,472 21,868
356,012 369,418
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2020 Annual Report

NOTES TO THE FINANCIAL STATEMENTS

4. Contract revenue (continued)

Disaggregated revenue information (continued)

In line with the Group’s accounting policy described in Note 33 (n), the transaction price expected to be recognised in future years excludes variable consideration that is constrained.

The average duration of contracts is given below. However, some contracts will vary from these typical lengths. Revenue is typically earned over these varying timeframes:

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Construction revenue 1 to 2 years
Services revenue 1 to 5 years
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5. Other income

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2020 2019
Note
$’000 $’000
Other income
Net gain on disposal of assets 90 23
Rebates received 10 36
Other 392 294
492 353
Reduction in earn out payable
Reduction in earn out payable 21 - 1,489
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6. Employee benefits expenses

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2020 2019
Note
$’000 $’000
Remuneration, bonuses and on-costs (12,035) (12,573)
Superannuation contributions (903) (978)
Amounts provided for employee entitlements (1,016) (1,142)
Share-based payments expense 26 56 (546)
Government grant (Job Keeper) applied 743 -
(13,155) (15,239)
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The above employee benefits expenses do not include employee benefits expenses recorded within contract expenses. Employee benefits included in contract expenses were $76.3m (2019: $115.8m), inclusive of Government grant (Job Keeper) applied amounting to $3.3m. The total employee benefits expense is therefore $89.5m (2019: $131.0m).

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2020 Annual Report

NOTES TO THE FINANCIAL STATEMENTS

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7. Finance income and expenses

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2020 2019
Note
$’000 $’000
Interest income on bank deposits 310 530
Finance income 310 530
Interest expense
Bank charges (604) (573)
Bank guarantee fees (406) (573)
Deferred consideration 21 - (411)
-
Lease liability interest unwinding (146)
Other (103) (146)
Finance expenses (1,259) (1,703)
Net finance expense (949) (1,173)
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8. Depreciation and amortisation expenses

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2020 2019
Note
$’000 $’000
Buildings (17) (17)
Leasehold improvements (196) (195)
Plant and equipment (1,115) (1,358)
Motor vehicles (768) (1,015)
Office furniture and equipment (905) (911)
Total depreciation expense for the year 15 (3,001) (3,496)
Amortisation of ROU asset 16 (2,151) -
Amortisation of customer contract intangibles 17 - (795)
Other 17 (2) (2)
Total amortisation expense for the year (2,153) (797)
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2020 Annual Report

NOTES TO THE FINANCIAL STATEMENTS

9. Income tax expense

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2020 2019
(a) Income Statement $’000 $’000
Current tax expense
-
Current period (4,037)
-
Under provision from prior year (2)
(4,037) (2)
Deferred tax expense
Origination and reversal of temporary differences (562) (5,114)
-
Under provision from prior year (351)
Income tax expense reported in the income statement (4,599) (5,467)
(b) Amounts charged or credited directly to equity
-
Expenses in relation to capital raising (63)
-
Income tax expense reported in the income statement (63)
(c) Reconciliation between tax expense and pre-tax accounting profit
Accounting profit before income tax 15,469 18,180
Income tax expense using the Company’s domestic tax rate of 30% (4,641) (5,454)
Change in fair value of deferred consideration - 447
Share based payments 126 419
-
Amortisation of intangibles (239)
Non-deductible deferred consideration interest - (124)
Other (84) (516)
Income tax expense reported in the income statement (4,599) (5,467)
The applicable effective tax rates are: 29.7% 30.1%
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2020 Annual Report

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NOTES TO THE FINANCIAL STATEMENTS

9. Income tax expense (continued)

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Deferred tax assets and liabilities
Balance Sheet Income Statement Equity
2020 2019 2020 2019 2020 2019
$’000 $’000 $’000 $’000 $’000 $’000
Deferred tax liabilities
Retentions receivable (339) (488) (149) 172 - -
Contract assets (12,847) (15,887) (3,040) 5,326 - -
-
Right-of-use assets (1,790) 1,790
- - - - -
Long term contracts adopting estimated profits basis (824)
Sundry debtors (432) - 432 - - -
- - - -
Property, plant and equipment (23) (23)
- -
(15,431) (16,398) (967) 4,674
Deferred tax assets
Provisions 73 63 (10) 71 - -
Employee entitlements 3,203 3,470 267 409 - -
Property, plant and equipment 19 19 - - - -
Unearned revenue 550 125 (425) 215 - -
-
Lease liability 1,790 (1,790)
Tax losses - 3,747 3,747 (214) - -
Other 1,015 692 (260) (41) (63) -
6,650 8,116 1,529 440 (63) -
Net deferred tax liabilities 8,781 (8,282) 562 5,114 (63) -
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2020 Annual Report

NOTES TO THE FINANCIAL STATEMENTS

10. Earnings per share

Basic earnings per share

The calculation of basic earnings per share at 30 June 2020 was based on the profit attributable to ordinary shareholders of $10,870,000 (2019: $12,713,000) and a weighted average number of ordinary shares outstanding of 243,919,677 (2019: 233,583,111), calculated as follows:

Profit/(loss) attributable to ordinary shareholders

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2020 2019
Note
$’000 $’000
Profit/(loss) for the period 10,870 12,713
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Weighted average number of ordinary shares

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Note 2020 2019
Issued ordinary shares at 1 July 22 234,067,408 231,389,097
Effective new balance resulting from issue of shares in the year 9,852,269 2,194,014
Weighted average number of ordinary shares at 30 June 243,919,677 233,583,111
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Diluted earnings per share

Basic earnings per share and diluted earnings per share are the same at 30 June 2020 as there are no dilutive potential shares. In 2019, the calculation of diluted earnings per share was based on the profit attributable to ordinary shareholders of $12,713,000 and a weighted average number of ordinary shares outstanding after adjustment for the effects of all dilutive potential ordinary shares of 235,364,018 as at 30 June 2019.

Profit attributable to ordinary shareholders (diluted)

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2020 2019
Note
$’000 $’000
Profit for the period 10,870 12,713
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Weighted average number of ordinary shares (diluted)

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Note 2020 2019
Weighted average number of ordinary shares for basic earnings per
243,919,677 233,583,111
share
Effect of dilution:
-
Share options and performance rights on issue 1,780,907
Weighted average number of ordinary shares at 30 June 243,919,677 235,364,018
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2020 Annual Report

NOTES TO THE FINANCIAL STATEMENTS

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11. Cash and cash equivalents

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2020 2019
Notes
$’000 $’000
Bank balances 10,544 24,157
Short term deposits 44,728 29,100
Cash and cash equivalents in the statement of cash flows 55,272 53,257
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The effective interest rate on cash and cash equivalents was 0.7% (2019: 1.2%); these deposits are either at call or on short term deposit.

12. Trade and other receivables

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Notes 2020 2019
Trade receivables 24,324 36,995
Sundry debtors 1,358 237
Provision for impairment of trade receivables (112) (80)
Contract assets 14 86,374 64,273
Retentions 1,129 1,628
Loans to vendors - 897
113,073 103,950
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Trade receivables are non-interest bearing and are generally on 30 to 45 day terms. The provision for impairment of trade receivables relates to expected credit losses and is used to record impairment losses. When the Group is reasonably certain that no recovery of the amount owing is possible, the amount is considered irrecoverable and is written off against the financial asset directly. The Group will continue to strongly pursue all debts provided for. The movement in the allowance for impairment in respect of Trade receivables during the year was as follows:

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2020 2019
Notes
$’000 $’000
Balance at start of year 80 317
Impairment losses recognised 502 -
-
Write-offs (470)
Amounts recovered - (237)
Balance at 30 June 112 80
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The ageing of trade receivables and the related provision for expected credit losses are detailed in note 23. All write-offs of bad debts are made when there is no reasonable expectation of recovering the contractual cash flows.

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2020 Annual Report

NOTES TO THE FINANCIAL STATEMENTS

13. Inventories

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2020 2019
Notes
$’000 $’000
Raw materials and consumables – cost 1,588 2,328
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14. Contract assets

14. Contract assets
	Notes	2020 $’000	2019 $’000

Costs incurred to date		237,968	220,421
Recognised proft		70,701	50,178
Progress billings		(222,295)	(206,326)
		86,374	64,273

Contract assets represents the unbilled amount expected to be collected from customers for contract work performed to date. Cost includes all expenditure related directly to specific projects. Recognised profit is based on the percentage completion method and is determined using the costs incurred to date and the total forecast contract costs.

The timing of cash inflows for contract assets is dependent on the status of processes underway to gain acceptance from customers as to the enforceability of recognised modifications resulting from contractual claims and variations. The Group pursues various options with customers to accelerate the inflow of cash including, but not limited to, negotiations, security of payment adjudications and arbitration involving the support of legal counsel and external consultants. Accordingly, there remains a risk that settlement of contract assets takes longer than 12 months.

The period in which revenue has been earned and for which cash is yet to be received included in contract assets at 30 June 2020 is as follows:

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2020 62,131
2019 20,253
2018 3,990
Total 86,374
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On 11 June 2020, the Group announced that it was pursuing Decmil Australia Pty Ltd in relation to amounts it considers entitled pursuant to a contract for electrical services in which the Group had demobilised from site by the end of November 2018. In accordance with its accounting policies, the Group has previously recognised revenue in relation to this contract, applying constraint. The amount is included within contract assets.

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2020 Annual Report

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NOTES TO THE FINANCIAL STATEMENTS

15. Property, plant and equipment

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Land and Leasehold Plant and Motor Office Furniture
Buildings Improvements equipment Vehicles and Equipment Total
Cost
Balance at 1 July 2018 916 2,784 20,427 13,604 10,382 48,113
Additions - 29 627 666 767 2,089
- - -
Disposals (130) (70) (200)
Balance at 30 June 2019 916 2,813 20,924 14,200 11,149 50,002
Balance at 1 July 2019 916 2,813 20,924 14,200 11,149 50,002
Additions - 12 66 149 367 594
- -
Disposals (2,704) (2,480) (166) (5,350)
Balance at 30 June 2020 916 2,825 18,286 11,869 11,350 45,246
Depreciation and impairment losses
Balance at 1 July 2018 (167) (841) (14,736) (9,188) (6,907) (31,839)
Depreciation for the year (17) (195) (1,358) (1,015) (911) (3,496)
Disposals - - 130 30 - 160
Balance at 30 June 2019 (184) (1,036) (15,964) (10,173) (7,818) (35,175)
Balance at 1 July 2019 (184) (1,036) (15,964) (10,173) (7,818) (35,175)
Depreciation for the year (17) (196) (1,115) (768) (905) (3,001)
Disposals - - 2,028 1,884 166 4,078
Balance at 30 June 2020 (201) (1,232) (15,051) (9,057) (8,557) (34,098)
Carrying amounts
At 1 July 2018 749 1,943 5,691 4,416 3,475 16,274
At 30 June 2019 732 1,777 4,960 4,027 3,331 14,827
At 1 July 2019 732 1,777 4,960 4,027 3,331 14,827
At 30 June 2020 715 1,593 3,235 2,812 2,793 11,148
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2020 Annual Report

NOTES TO THE FINANCIAL STATEMENTS

16. Right-of-use assets

The Group leases assets including property, motor vehicles and office furniture and equipment. Information about leased assets for which the Group is a lessee is presented below:

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Land and Office Furniture
Buildings Motor Vehicles and Equipment Total
Note $’000 $’000 $’000 $’000
Recognised on application of AASB 16 33 4,213 1,181 215 5,609
Additions 262 332 0 594
Remeasurement 1,671 244 0 1,915
Amortisation charged for the year 8 (1,238) (836) (77) (2,151)
- - - -
Derecognition during the year (net)
Closing carrying amount at 30 June 2020 4,908 921 138 5,967
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17. Intangible assets – goodwill and customer contracts

Reconciliation of carrying amount

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Customer
Goodwill Contracts Other Total
Note $’000 $’000 $’000 $’000
Cost
Balance as at 1 July 2018 82,169 7,491 19 89,679
- - - -
Acquisitions
Balance as at 30 June 2019 82,169 7,491 19 89,679
Balance as at 1 July 2019 82,169 7,491 19 89,679
- - - -
Acquisitions
Balance as at 30 June 2020 82,169 7,491 19 89,679
Amortisation and impairment losses
Balance as at 1 July 2018 (8,390) (6,696) (2) (15,088)
Amortisation - (795) (2) (797)
Balance as at 30 June 2019 (8,390) (7,491) (4) (15,885)
Balance as at 1 July 2019 (8,390) (7,491) (4) (15,885)
Amortisation 8 - - (2) (2)
Balance as at 30 June 2020 (8,390) (7,491) (6) (15,887)
Carrying amounts
At 30 June 2019 73,779 - 15 73,794
At 30 June 2020 73,779 - 13 73,792
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Impairment testing for cash-generating units containing goodwill

For the purpose of impairment testing, goodwill is allocated to the Group’s operating segments which represent the lowest level within the Group at which goodwill is monitored for internal management purposes.

The aggregate carrying amounts of goodwill allocated to each segment are as follows:

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2020 Annual Report

NOTES TO THE FINANCIAL STATEMENTS

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17. Intangible assets – goodwill and customer contracts (continued)

2020 $’000	2020 $’000	2019 $’000

SCEE	8,784	8,784
Datatel	12,298	12,298
Heyday	52,697	52,697
	73,779	73,779

The recoverable amounts of the above segments were based on their value in use with the group performing its annual impairment test in June 2020. The carrying amount of the operating segments were determined to be lower than their recoverable amounts and therefore no impairment charge has been recognised.

The Group has paid particular attention to those indicators impacted by the Coronavirus pandemic. We have considered the effect of the pandemic on our clients’ activities which may include resources commodity prices, commercial construction activity, awards of new contracts, deferrals of existing contracts, disruptions to supply chain and disruptions to existing operations. The Group’s operations were classified as essential services and whilst experiencing some initial disruption have subsequently continued to operate materially unaffected. The management team continues to monitor and manage the impacts and risks arising from the global pandemic.

Value in use was determined by preparing five year discounted cash flow forecasts, and extrapolating the cash flows beyond the terminal year using a terminal growth-rate. The calculation of value in use was based on the following key assumptions:

Cash flows were projected based on past experience, actual operating results and independent research on the markets in which the segments operate.
The five year cash flow estimates used in assessments for all CGU’s were based on Board approved budgets for the year ending 30 June 2021. Growth assumptions thereafter are SCEE 0.0% (2019: 0.0%), Datatel 3.0% (2019: 4.7%) and Heyday -0.1% (2019: 3.6%) per annum for each future year. The terminal value assumes perpetual growth of 2.5% (2019: 2.5%).
The margins included in the projected cash flow are the same rate that has been achieved by projects commencing in 2020.
A pre-tax discount rate between 12.0% and 13.4% (2019: between 9.4% and 13.2%) was applied. This discount rate was estimated based on past experience and industry average weighted cost of capital.

Sensitivity to changes in assumptions

The value in use assessment for SCEE estimates a recoverable amount $3.2 million in excess of its carrying amount. This estimate is sensitive to the realisation of the budgeted and forecast overall net cash flows to 2025. These forecasts reflect Board and management’s expectations for future growth. In the event that the overall net cash flows are 10% less, year on year, than those which have been assumed in calculating the value in use, then the value in use would be less than the carrying value.

The value in use assessment for Datatel estimates a recoverable amount $1.9 million in excess of its carrying amount. This estimate is sensitive to the realisation of the budgeted and forecast overall net cash flows to 2025. These forecasts reflect the Board and management’s expectations for future growth. Testing of sensitivities performed in isolation from one another showed that:

In the event that the overall net cash flows are 12% less, year on year, than those which have been assumed in calculating the value in use, then the value in use would be less than the carrying value.
An increase in the discount rate of 1.2 percentage points would result in the value in use being less than the carrying value.
A reduction in the long term growth rate for the terminal year of 1.5 percentage points would result in the value in use being less than the carrying value.

Management believes that any reasonable change in the key assumptions for the Heyday segment would not cause the carrying value to exceed its recoverable amount.

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2020 Annual Report

NOTES TO THE FINANCIAL STATEMENTS

18. Trade and other payables

18. Trade and other payables
Current	2020 $’000	2019 $’000

Trade payables	27,990	45,186
Contract liabilities	34,158	13,367
Accrued expenses	11,417	17,436
Retentions payable	1,048	270
Goods and services tax payable	665	929
	75,278	77,188

Due to the short-term nature of these payables, their carrying value is assumed to approximate their fair value.

The Group’s exposure to currency and liquidity risk related to trade and other payables is disclosed in note 23.

Contract liabilities Current	2020 $’000	2019 $’000

Unearned revenue	34,158	13,367

Unearned revenue arises when the Group has invoiced the client in advance of performing the contracted services. Contract liabilities fluctuate based on progress of completion of contracts.

19. Lease liability

Current	2020 $’000	2019 $’000

Current portion	1,749	-
Non-current portion	4,218	-
	5,967	-

Expense relating to short-term and low value leases was $0.1 million. The weighted average discount rate used for the leases is 4.5%. The average remaining lease term for the leased assets per underlying asset class as at 30 June 2020 are as follows:

	2020 (in years)

Land and building	2.43
Motor vehicles	1.37
Ofce equipment	2.04

The Group made its initial application of the new AASB 16 ‘Leases’ on 1 July 2019 (note 33).

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2020 Annual Report

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NOTES TO THE FINANCIAL STATEMENTS

20. Provisions

20. Provisions
	2020 $’000	2019 $’000
Current
Annual leave	6,635	7,021
Long service leave	1,434	1,054
Other employee leave	1,045	1,187
Bonus	-	500
	9,114	9,762
Non-current
Long service leave	197	416
	197	416

A provision has been recognised for employee entitlements relating to long service leave. In calculating the present value of future cash flows in respect of long service leave, the probability of long service leave being taken is based on historical data. The measurement and recognition accounting policy relating to employee benefits have been included in note 33(l) to this report.

21. Deferred acquisition consideration

21. Deferred acquisition consideration
	2020 $’000	2019 $’000

Deferred acquisition consideration movements
Balance at 1 July	6,500	14,078
Finance costs	-	411
Change in fair value of deferred consideration	-	(1,489)
Payments	(6,500)	(6,500)
Balance at 30 June	-	6,500

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2020 Annual Report

NOTES TO THE FINANCIAL STATEMENTS

22. Capital and reserves

Share capital

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2020 2019
Note Number $’000 Number $’000
Ordinary shares
Issued and fully paid 247,614,481 109,767 234,067,408 102,873
Movements in shares on issue
Balance at the beginning of the financial year 234,067,408 102,873 231,389,097 102,873
- -
Exercise of Employee performance rights 655,034 2,678,311
Issue of ordinary shares under dividend reinvestment - -
12,892,039 6,894
plan, net of transaction costs
Balance at the end of the financial year 247,614,481 109,767 234,067,408 102,873
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The Company does not have authorised capital or par value in respect of its issued shares. All shares have voting rights and rights to dividends.

Translation reserve

The translation reserve comprises all foreign currency differences arising from the translation of the financial statements of foreign operations.

Share based payments reserve

The share based payments reserve records the fair value of share based payments provided to employees.

Dividends

Dividends recognised in the current year by the Group are:

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Cents per Total amount Date of
share $’000 Franked payment
2020
Final 2019 ordinary 3.00 7,042 Franked 10 October 2019
Total amount 7,042
2019
Final 2018 ordinary 3.00 7,022 Franked 11 October 2018
Total amount 7,022
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Franked dividends declared or paid during the year were franked at the tax rate of 30%.

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2020 Annual Report

NOTES TO THE FINANCIAL STATEMENTS

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22. Capital and reserves (continued)

Declared after end of year

Subsequent to 30 June 2020, a dividend of 3.00 cents per share in the amount of $7.4 million, including dividends paid to shares anticipated to be issued in respect of vested and exercisable performance rights, was proposed by the directors. The dividend has not been provided in the financial statements.

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Company
2020 2019
$’000 $’000
Franking account balance 14,184 17,202
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The above available amounts are based on the balance of the dividend franking account at year-end adjusted for:

(a) franking credits that will arise from the payment of the current tax liabilities; and
(b) franking debits that will arise from the payment of dividends recognised as a liability at the year end.

The ability to utilise the franking credits is dependent upon there being sufficient available profits to declare dividends.

23. Financial instruments

Overview

The Group has exposure to the following risks from their use of financial instruments:

Credit risk
Liquidity risk
Market risk

This note presents information about the Group’s exposure to each of the above risks, their objectives, policies and processes for measuring and managing risks, and the management of capital. Further quantitative disclosures are included throughout this financial report.

The Board of Directors has overall responsibility for the establishment and oversight of the risk management framework. The Board has established an Audit and Risk Management Committee, which is responsible for overseeing how management monitors risk and for reviewing the adequacy of the risk management framework in relation to the risks faced by the Group. The committee reports regularly to the Board of Directors on its activities.

Risk management policies are established to identify and analyse the risks faced by the Group, to set appropriate risk limits and controls and to monitor risks and adherence to limits. Risk management policies and systems are reviewed regularly to reflect changes in market conditions and the Group’s activities. The Group, through its training and management standards and procedures, aims to develop

a disciplined and constructive control environment in which all employees understand their roles and obligations in relation to the management and mitigation of these risks.

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2020 Annual Report

NOTES TO THE FINANCIAL STATEMENTS

23. Financial instruments (continued)

Credit risk

Credit risk is the risk of financial loss to the Group if a customer or counterparty to a financial instrument fails to meet its contractual obligations and arises principally from the Group’s receivables from customers including contract assets.

Exposure to credit risk

The carrying amount of the Group’s financial assets represents the maximum credit exposure. The Group’s maximum exposure to credit risk at the reporting date was:

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Carrying amount
2020 2019
$’000 $’000
Cash and cash equivalents 55,272 53,257
Trade receivables (net of provision for impairment) 26,699 38,780
Contract assets 86,374 64,273
Loans to vendors - 897
168,345 157,207
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Cash

The Group’s cash and cash equivalents are held with major banks and financial institutions.

Trade receivables and contract assets

The Group’s exposure to credit risk is influenced mainly by the individual characteristics of each customer and contract with customer. The demographics of the Group’s customer base, including the default risk of the industry and country, in which customers operate, has less of an influence on credit risk. Geographically, the concentration of credit risk is within Australia and, by industry, the concentration is within the commercial, infrastructure and resources industries.

When entering into new customer contracts for service, the Group only enters into contracts with credit-worthy companies. Management monitors the Group’s exposure on a monthly basis. In monitoring customer credit risk, customers are grouped according to their credit characteristics, including whether they are an individual or legal entity, aging profile, maturity and existence of previous financial difficulties. The Group does not require collateral in respect of trade receivables and contract assets.

The Group’s maximum exposure to credit risk for trade receivables and contract assets at the reporting date by geographic region was:

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Carrying amount
2020 2019
$’000 $’000
Australia 113,073 103,053
113,073 103,053
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2020 Annual Report

NOTES TO THE FINANCIAL STATEMENTS

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23. Financial instruments (continued)

Impairment losses

The ageing of the Group’s trade receivables and contract assets at the reporting date was:

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Gross Impairment Gross Impairment
Note 2020 2020 2019 2019
$’000 $’000 $’000 $’000
Contract assets – not past due 14 86,374 - 64,273 -
Trade Receivables:
-
Not past due 19,138 (2) 27,081
-
Past due 0-30 days 3,394 (3) 5,775
Past due 30-60 days 602 (0) 2,187 -
-
Past due 60 days and less than 1 year 1,531 (1) 3,600
More than 1 year 2,146 (106) 217 (80)
26,811 (112) 38,860 (80)
113,185 (112) 103,133 (80)
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The provision of $112,000 relates to expected credit losses. Impairment provision related to specific debts that are more than one year overdue pertains to a small number of customers with the 2020 amount owing mostly paid subsequent to 30 June. The Group continues to strongly pursue all debts provided for.

The Group has established an allowance for impairment that represents their expected credit losses in respect of trade receivables and contract assets.

The Group recognises a provision for impairment related to expected credit losses (“ECLs”) for trade receivables, contract assets and other debt financial assets not held at fair value through profit or loss. ECLs are based on the difference between the contractual cash flows due in accordance with the contract and all the cash flows that the Group expects to receive, discounted at an approximation of the original effective interest rate.

For trade receivables and contract assets, the Group applies a simplified approach in calculating ECLs. Therefore, the Group does not track changes in credit risk, but instead recognises a loss allowance based on lifetime ECLs at each reporting date. The Group uses a provision matrix to calculate the ECLs. The provision matrix is established based on Group’s historically observed default rates. The Group calibrates the matrix to adjust historical credit loss experience with forward looking factors specific to debtors and the economic environment where appropriate. At every reporting date, historical default rates are updated and changes in the forward-looking estimates are analysed. To date, the Group has not observed or expects to see material decline in its customers’ abilities to pay as a result of the Coronavirus pandemic due in part to the nature of those customers, which mainly includes large private sector corporations and government organisations, meaning the risk of default of receivables is low. Accordingly, no additional expected credit loss allowance pertaining to the Coronavirus pandemic have been included.

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2020 Annual Report

NOTES TO THE FINANCIAL STATEMENTS

23. Financial instruments (continued)

Impairment losses (continued)

The assessment of the correlation between historical observed default rates, forecast of economic conditions and ECLs is a significant estimate. The amount of ECLs is sensitive to changes in circumstances and of forecasts in economic conditions. The Group’s historical credit loss experience and forecast of economic conditions may also not be representative of customer’s actual default in the future.

The Group considers a financial asset’s potential for default when contractual payments are more than 120 days past due, factoring in other qualitative indicators where appropriate. Exception shall apply to financial assets that relate to entities under common controls or covered by letter of credit or credit insurance. However, in certain cases, the Group may also consider a financial asset to be in default when internal or external information indicates that the Group is unlikely to receive the outstanding contractual amounts in full before taking into account any credit enhancements held by the Group. A financial asset is written off when there is no reasonable expectation of recovering the contractual cash flows.

Liquidity risk

Liquidity risk is the risk that the Group will not be able to meet its financial obligations as they fall due. The Group’s approach to managing liquidity is to ensure, as far as possible, that it will always have sufficient liquidity to meet its liabilities when due, under both normal and stressed conditions, without incurring unacceptable losses or risking damage to the Group’s reputation.

The Group uses project costing to assess the cash flows required for each project currently underway and entered into. Cash flow is monitored by management using rolling forecasts and annual budgets that are reviewed monthly at the Board level.

The following are the contractual maturities of financial liabilities, including estimated interest payments and excluding the impact of netting agreements:

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More than 1 More than
Carrying Contractual More than year up to 2 2 years up More than 5
amount cash flows 6 mths or less 6 mths up years to 5 years years
$’000 $’000 $’000 to 1 year $’000 $’000 $’000
30 June 2020
Non-derivative financial liabilities
Trade and other payables 41,120 41,120 40,905 145 70 - -
Lease liability 5,967 6,765 1,039 856 1,407 2,436 1,027
47,087 47,885 41,944 1,001 1,477 2,436 1,027
30 June 2019
Non-derivative financial liabilities
Trade and other payables 63,821 63,821 63,753 59 9 - -
Deferred consideration 6,500 6,500 6,500 - - - -
70,321 70,321 70,253 59 9 - -
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Market Risk

Market risk is the risk that changes in market prices, such as foreign exchange rates, interest rates and equity prices will affect the Group’s income or the value of its holdings of financial instruments. The objective of market risk management is to manage and control market risk exposures within acceptable parameters, while optimising the return.

Currency risk

The Group is exposed to currency risk on sales, purchases and borrowings that are denominated in a currency other than the functional currency in which they are measured. The Group has no material currency risk exposures at 30 June 2020 or 30 June 2019.

In respect of other monetary assets and liabilities denominated in foreign currencies, the Group ensures that its net exposure is kept to an acceptable level by buying or selling foreign currencies at spot rates when necessary to address short-term imbalances.

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2020 Annual Report

NOTES TO THE FINANCIAL STATEMENTS

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23. Financial instruments (continued)

Interest rate risk

Profile

At the reporting date the interest rate profile of the Company’s and the Group’s interest-bearing financial instruments was:

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Carrying amount
2020 2019
$’000 $’000
Variable rate instruments
Financial assets 55,272 54,154
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Fair value sensitivity analysis for fixed rate instruments

The Group does not account for any fixed rate financial assets and liabilities at fair value through profit or loss. Therefore, a change in interest rates at the reporting date would not affect profit or loss.

Cash flow sensitivity analysis for variable rate instruments

A change of 100 basis points in interest rates at the reporting date would have increased (decreased) equity and profit or loss by the amounts shown below. This analysis assumes that all other variables, in particular foreign currency rates, remain constant. The analysis is performed on the same basis for 2020.

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Profit or loss Equity
100bp increase 100bp decrease 100bp increase 100bp decrease
30 June 2020 $’000 $’000 $’000 $’000
Variable rate instruments 1,093 (1,093) - -
- -
Cash flow sensitivity (net) 1,093 (1,093)
30 June 2019
Variable rate instruments 1,001 (1,001) - -
- -
Cash flow sensitivity (net) 1,001 (1,001)
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Fair values

Fair values versus carrying amounts

The fair values of financial assets and liabilities materially equates to the carrying values shown in the balance sheet.

Other Price Risk

The Group is not directly exposed to any other price risk.

Capital Management

The Board’s policy is to maintain a strong capital base so as to maintain investor, creditor and market confidence and to sustain future development of the business.

The Group intends to make an annual distribution to shareholders in the form of fully franked dividends, subject to the Group’s financial results in a given year, general business and financial conditions, the Group’s taxation position, its working capital and future capital expenditure requirements, the availability of sufficient franking credits and any other factors the Board considers relevant.

There were no changes in the Group’s approach to capital management during the year.

The Group is not subject to externally imposed capital requirements.

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2020 Annual Report

NOTES TO THE FINANCIAL STATEMENTS

24. Investments in subsidiaries

The consolidated financial statements include the financial statements of Southern Cross Electrical Engineering Ltd and the subsidiaries listed in the following table.

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Equity Interest
(%)
Country of Incorporation 2020 2019
Cruz Del Sur Ingeniería Electra (Peru) S.A Peru 100 100
Southern Cross Electrical Engineering (WA) Pty Ltd (i) Australia 100 100
Southern Cross Electrical Engineering Tanzania Pty Ltd Tanzania 100 100
Southern Cross Electrical Engineering Ghana Pty Ltd Ghana 100 100
S&DH Enterprises Pty Ltd (i) Australia 100 100
FMC Corporation Pty Ltd (i) Australia 100 100
Southern Cross Electrical Engineering (Australia) Pty Ltd (i) Australia 100 100
Hazquip Industries Pty Ltd (i) Australia 100 100
Datatel Communications Pty Ltd (i) Australia 100 100
Heyday5 Pty Ltd (i) Australia 100 100
Electrical Data Projects Pty Ltd (i) Australia 100 100
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(i) These wholly-owned subsidiaries have entered into a deed of cross guarantee with Southern Cross Electrical Engineering Limited pursuant to ASIC Corporations (wholly-owned companies) Instrument 2016/785 (Instrument) and are relieved of the requirement to prepare and lodge an audited financial and Directors’ report.

(a) Deed of cross guarantee

The parties to a deed of cross guarantee for the Group as listed in note 24 represent a ‘majority group’ for the purposes of the Instrument, as the parties not subject to the Instrument are non-trading entities. A separate consolidated statement of comprehensive income and consolidated balance sheet of the parties to the deed of cross guarantee have not been disclosed separately as it in not materially different to those of the Group.

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2020 Annual Report

NOTES TO THE FINANCIAL STATEMENTS

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25. Interest in joint operations

The Group has a 50% interest in KSJV Unincorporated and KSJV Australia Pty Ltd, of which the principal activity is to deliver electrical, instrumentation and telecommunication works to onshore processing elements of Australian LNG projects. These joint arrangements are accounted for as joint operations.

The Group’s share of the underlying assets and liabilities as at 30 June 2020 and 2019 and revenues and expenses of the joint operations for the year 30 June 2020 and 2019, which are proportionally consolidated in the consolidated financial statements, is as follows:

	2020 $’000	2019 $’000

Share of the joint operations’ statement of fnancial position:
Current assets	592	705
Current liabilities	(5)	(9)
Equity	587	696

Share of the joint operations’ revenue and proft:
Revenue	-	12,606
Contract expenses	-	(11,750)
Other expenses	(9)	(297)
Proft/(loss) before tax	(9)	559
Income tax expense	-	-
Proft/(loss) for the year from continuing operations	(9)	559

The joint operations have no contingent liabilities or capital commitments as at 30 June 2020 and 30 June 2019.

26. Share-based payments

(a) Expense recognised in profit or loss

Share based payments expenses for the year comprises:

Share based payments expenses for the year comprises:
	2020 $’000		2019 $’000

2020 Performance Rights	(i)	195	-
2019 Performance Rights	(ii)	(50)	153
2018 Performance Rights	(iii)	(201)	265
2017 Performance Rights		-	128
		(56)	546

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2020 Annual Report

NOTES TO THE FINANCIAL STATEMENTS

26. Share-based payments (continued)

The amount recognised is adjusted to reflect the number of awards for which the related service and non-market performance conditions are expected to be met, such that the amount ultimately recognised is based on the number of awards that meet the related service and non-market performance conditions at the vesting date.

(i) 2020 Performance Rights

During the year Performance Rights were offered to key management personnel and senior management under the terms of the Senior Management Long Term Incentive Plan. The terms and conditions of the Performance Rights are as follows. All Performance Rights are to be settled by the physical delivery of shares.

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Number of
Grant date / employees entitled Vesting conditions Contractual life
instruments
Performance rights issued to senior management on 8 Employed on 30 June 2022 and exceed
395,645 31 months
November 2019 performance hurdle
Performance rights issued to key management on 8 Employed on 30 June 2022 and exceed
1,106,684 31 months
November 2019 performance hurdle
Total /performance rights 1,502,329
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Up to 100% of the allocated performance rights may vest, subject to the achievement of the performance conditions. The key terms of the performance rights are as set out below:

Performance testing over a three-year period from 1 July 2019 to 30 June 2022 (“Performance Period”);
No performance rights will vest until 30 June 2022;
Performance testing criteria are 50% against Absolute Total Shareholder Return (“TSR”) performance, and 50% against Earnings Per Share (“EPS”) performance; and
Expiry on the 4th anniversary of the grant date unless an earlier lapsing date applies

The TSR formula is:

((Share Price at Test Date – Share Price at Start Date) + (Dividends Reinvested))/Share Price at Start Date

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(a) amortisation of acquired intangibles;
(b) unwinding of interest on deferred acquisition consideration payments;
(c) adjustments to the assessment of deferred consideration payable; and
(d) acquisition costs.

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2020 Annual Report

NOTES TO THE FINANCIAL STATEMENTS

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26. Share-based payments (continued)

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(ii) 2019 Performance Rights

There were 1,010,625 financial year 2019 Performance Rights on issue at 1 July 2019. No 2019 Performance Rights were granted, none vested and none were forfeited during the year.

The 2019 Performance Rights will be performance tested over a three-year period from 1 July 2018 to 30 June 2021. The hurdles used to determine performance are Absolute Total Shareholder Return (TSR) and Earnings per Share (EPS) performance.

(iii) 2018 Performance Rights

There were 1,241,118 financial year 2018 Performance Rights on issue at 1 July 2018. No 2018 Performance Rights were granted, none vested and none were forfeited during the year.

The 2018 Performance Rights will be performance tested over a three-year period from 1 July 2017 to 30 June 2020. The hurdles used to determine performance are Absolute Total Shareholder Return (TSR) and Earnings per Share (EPS) performance.

(b) Measurement of fair values

The fair value of the TSR Performance Rights has been measured using the Monte-Carlo simulation. The EPS Performance Rights has been measured using the Binomial tree methodology.

The inputs used in the measurement of the fair values at grant date were as follows:

The performance rights issued were granted in one tranche as follows:

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2020 2019
Grant date 8 November 2019 9 November 2018
Vesting date 30 June 2022 30 June 2021
Share price at grant date $0.56 $0.67
Expected life 2.6 years 2.6 years
Volatility 37% 40%
Risk free interest rate 0.88% 2.12%
Dividend yield 4.9% 4.4%
Fair value of TSR component $0.29 $0.29
Fair value of EPS component $0.49 $0.59
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2020 Annual Report

NOTES TO THE FINANCIAL STATEMENTS

26. Share-based payments (continued)

(c) Reconciliation of outstanding performance rights

The number of performance rights under the programmes were as follows:

(c) Reconciliation of outstanding performance rights The number of performance rights under the programmes were as follows:	(c) Reconciliation of outstanding performance rights The number of performance rights under the programmes were as follows:
2020 Number of rights		2019 Number of rights

Outstanding at 1 July	3,561,812	5,229,498
Granted during the year	1,502,329	1,010,625
Exercised during the year	(655,034)	(2,678,311)
Forfeited or withdrawn during the year	(655,035)	-
Outstanding at 30 June	3,754,072	3,561,812
Vested and exercisable at 30 June	-	-

Subsequent to 30 June 2020 the vesting conditions in respect of the 2018 performance rights have been performance tested and it has been determined that no performance rights have vested and that 1,241,118 have been forfeited.

27. Reconciliation of cash flows from operating activities

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2020 2019
$’000 $’000
Profit for the year 10,870 12,713
Adjustments for:
Depreciation and amortisation 5,154 4,293
Profit on sale of property, plant and equipment (90) (23)
Expense recognised in respect of capital raising 63 -
Equity-settled share-based payment transactions (56) 907
(Increase)/decrease in assets:
Trade and other receivables (9,123) (26,948)
Income tax receivable - 1,188
Inventories 746 (165)
Prepayments 792 (1,105)
Increase/(decrease) in liabilities:
Trade and other payables (1,910) 17,277
Provisions and employee benefits (867) (1,443)
Deferred acquisition consideration - (1,078)
-
Income tax payable 4,463
Deferred income tax 67 5,114
Net cash (used in)/from operating activities 10,109 10,730
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2020 Annual Report

NOTES TO THE FINANCIAL STATEMENTS

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28. Contingencies

The directors are of the opinion that provisions are not required in respect of these matters, as it is not probable that a future sacrifice of economic benefits will be required or the amount is not capable of reliable measurement.

	2020 $’000	2019 $’000

Bank Guarantees	20,559	37,536
Surety Bonds	37,355	28,475

Bank Guarantees and Surety Bonds are provided to customers for satisfactory contract performance. Total bank guarantee facilities at 30 June 2020 were $51.0 million (2019: $48.1 million) and the unused portion was $30.4 million (2019: $10.6 million). These facilities are subject to annual review. Total surety bonds facilities at 30 June 2020 were $85.0 million (2019: $69.5 million) and the unused portion was $47.6 million (2019: $41 million). These facilities are subject to annual review. All facilities are set to mature during the 2020/21 year. It is management’s intention to review these facilities at maturity to a level appropriate to support the ongoing business of the Group.

Other contingent liabilities

The Group is currently managing a number of claims, security of payment adjudication and arbitration processes in relation to construction contracts. The Directors are of the opinion that disclosure of any further information relating to these claims, adjudication and arbitration processes would be prejudicial to the interests of the Group.

29. Subsequent events

30. Auditor’s remuneration

30. Auditor’s remuneration	30. Auditor’s remuneration
2020 $’000		2019 $’000
Remuneration of KPMG Australia as the auditor of the parent entity for:
- Auditing or reviewing the fnancial report	358	342
	358	342

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2020 Annual Report

NOTES TO THE FINANCIAL STATEMENTS

31. Parent entity disclosures

As at, and throughout, the financial year ending 30 June 2020 the parent company of the Consolidated entity was Southern Cross Electrical Engineering Limited.

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2020 2019
$’000 $’000
Result of the parent entity
Loss for the period (9,764) (2,839)
Total comprehensive loss for the period (9,764) (2,839)
Financial position of parent entity at year end
Current assets 76,690 78,200
Total assets 177,492 184,782
Current liabilities (61,256) (55,628)
Total liabilities (73,534) (70,856)
Total equity of the parent entity comprising:
Share capital 109,767 102,873
Reserves 288 731
Retained earnings (6,097) 10,322
Total Equity 103,958 113,926
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Parent entity contingencies:

The parent entity has contingent liabilities which are included in note 28. At 30 June 2020, there were in existence guarantees of performance of a subsidiary.

32. Related parties

Transactions with key management personnel

(i) Key management personnel compensation

Key management personnel compensation comprised the following:

Key management personnel compensation comprised the following:	Key management personnel compensation comprised the following:
2020 $’000		2019 $’000

Short-term employee benefts	1,575	1,995
Post-employment benefts	96	78
Share-based payments	(63)	397
	1,608	2,470

Compensation of the Group’s key management personnel includes salaries and non-cash benefits made up of a short-term incentive and long-term incentive scheme (see note 26 (a)(i)).

(ii) Key management personnel transactions

Directors of the Company control 3% of the voting shares of the Company.

The Group has entered into rental agreements over properties in which Gianfranco Tomasi has an ownership interest. During the prior year, Mr Tomasi ceased to be a key management personnel for the Group.

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2020 Annual Report

NOTES TO THE FINANCIAL STATEMENTS

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33. Significant accounting policies

Except as described below the accounting policies applied by the Group in this financial report are the same as those applied by the Group in its consolidated financial report as at and for the year ended 30 June 2019.

The Group has adopted the following new standard and amendments to standards, including any consequential amendments to other standards, with a date of initial application 1 July 2019:

AASB 16 Leases

Impact of transition to AASB 16 Leases

AASB 16 Leases introduces a single, on-balance sheet lease accounting model for lessees. At commencement date of a lease, lessees will recognise a liability to make lease payments arising from lease contract and a right-of-use (ROU) asset representing the right to use the underlying asset during the lease term. Lessees are required to separately recognise the interest expense on the lease liability and depreciation expense on the ROU asset.

Definition of a lease

Previously, the Group determined at contract inception whether an arrangement was or contained a lease under the related interpretations of AASB 117. The Group now assess whether a contract is or contains a lease based on the definition of a lease in AASB 16 Leases (see note 33(g)).

On transition to AASB 16, the Group elected to apply the practical expedient to grandfather the assessment of which transactions are leases. The AASB 16 Leases definition of a lease is applied only to contracts that were previously identified as leases at the date of initial application. Contracts that were not identified as leases under AASB 117 were not reassessed for whether there is a lease under AASB 16. From the date of initial application, lease accounting under AASB 16 is applied to all leases, including those identified in accordance with the requirements of AASB 117.

The Group leases assets including property, motor vehicles and office equipment. The Group previously classifies leases as operating or finance leases based on its assessment of whether the lease transferred substantially all of the risks and rewards incidental to ownership of the underlying asset to the Group. Under AASB 16, the Group recognises ROU assets and lease liabilities on most of these leases. On transition, for these leases, lease liabilities were measured at the present value of the remaining lease payments discounted at the Group’s incremental borrowing rate as at 1 July 2019. ROU assets are measured at an amount equal to the lease liability, adjusted by the amount of any prepaid or accrued lease payments, if any.

The Group has applied AASB 16 using the modified retrospective approach, under which the cumulative effect of the initial application is recognised in retained earnings at 1 July 2019. Accordingly, the comparative information presented in the previous financial year 2019 is not restated – i.e. it is presented as previously reported, under AASB 117 and related interpretations. Additionally, the disclosure requirements of AASB 16 have not generally been applied to comparative information.

The Group has applied a number of practical expedients upon the initial application of AASB 16 to leases previously classified as operating leases under AASB 117. In particular, the Group applied:

Recognition exemptions for short-term leases, i.e. twelve (12) months or less, and/or low-value items, i.e. less than $7,000, on a leaseby-lease basis, in general, hence, the related lease payments are outright recognised in the statement of income as occupancy expenses. This recognition exemption was not applied on the Group’s lease contracts and arrangements wherein motor vehicles are the underlying assets;
Used a single discount rate of 4.5% to a portfolio of leases with reasonably similar characteristics
Exclusion of initial direct costs from the measurement of the ROU asset at the date of initial application; and
The use of hindsight when determining the lease term.

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2020 Annual Report

NOTES TO THE FINANCIAL STATEMENTS

33. Significant accounting policies (Continued)

AASB 16 Leases (continued)

Impact of transition to AASB 16 Leases (continued)

The following is a reconciliation of total operating lease commitments at 30 June 2019 to the lease liabilities recognised at 1 July 2019:

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$’000
Total operating lease commitments disclosed as at 30 June 2019 6,692
Recognition exemptions:
Leases of low value assets (16)
Leases with lease term of 12 months or less (599)
Low-value and short-term leases with motor vehicles as underlying asset 365
(250)
-
Variable lease payments not recognised
Other minor adjustments relating to commitment disclosures (190)
(440)
Operating lease liabilities before discounting 6,252
Discount using incremental borrowing rate (692)
Operating lease liabilities 5,560
Reasonably certain extension options 49
Total lease liabilities recognised under AASB 16 at 1 July 2019 5,609
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As at 30 June 2020, the Group has minimal low-value and short-term lease commitments related to leases of office furniture and equipment.

The following tables summarise the impact of adopting AASB 16 on affected line items, as lessee, in the Group’s consolidated financial statements as at and for the year ended 30 June 2020:

Consolidated Statement of Comprehensive Income for the year ended 30 June 2020

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Before
application of Impact of AASB
AASB 16 16 (as lessee) Reported
$’000 $’000 $’000
Contract expenses (371,760) 1,181 (370,579)
Occupancy expenses (2,351) 1,116 (1,235)
Amortisation (2) (2,151) (2,153)
Finance expenses (1,113) (146) (1,259)
Consolidated Balance Sheet as at 30 June 2020
-
Right-of-use asset 5,967 5,967
-
Lease liability – current portion 1,749 1,749
-
Lease liability – non-current portion 4,218 4,218
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2020 Annual Report

NOTES TO THE FINANCIAL STATEMENTS

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33. Significant accounting policies (Continued)

AASB 16 Leases (continued)

Impact of transition to AASB 16 Leases (continued)

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Before
application of Impact of AASB
AASB 16 16 (as lessee) Reported
$’000 $’000 $’000
Cash flows from operating activities
Interest paid (1,113) (146) (1,259)
Net cash from/(used in) operating activities 10,255 (146) 10,109
Cash flows from financing activities
-
Payment of lease liabilities principal (2,151) (2,151)
Net cash used in financing activities (211) (2,151) (2,362)
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(a) Basis of consolidation

(i) Subsidiaries

Subsidiaries are entities controlled by the Group. The group controls an entity when it is exposed to, or has rights to, variable returns from its involvement with the entity and has the ability to affect these returns through power over the entity. The financial statements of subsidiaries are included in the consolidated financial statements from the date that control commences until the date control ceases. The accounting policies of subsidiaries have been changed when necessary to align them with the policies adopted by the Group.

(ii) Interest in a joint arrangement

The Group has interests in joint arrangements which are classified as joint operations, which are jointly controlled entities, whereby the ventures have a contractual arrangement that establishes joint control over the economic activity of the entities. The Group recognises its right to the underlying assets and obligations for liabilities and are accounted for by recognising the share of those assets and liabilities. The Group combines its proportionate share of each of the assets, liabilities, income and expenses which are accounted for by separately recognising the Group’s share of underlying assets and liabilities of the joint arrangement with similar items, line by line, in its consolidated financial statements.

(iii) Transactions eliminated on consolidation

Intra-group balances and any unrealised income and expenses arising from intra-group transactions are eliminated in preparing the consolidated financial statements. Unrealised gains arising from transactions with equity accounted investees are eliminated against the investments to the extent of the Group’s interest in the investee. Unrealised losses are eliminated in the same way as unrealised gains, but only to the extent that there is no evidence of impairment.

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2020 Annual Report

NOTES TO THE FINANCIAL STATEMENTS

33. Significant accounting policies (Continued)

(b) Foreign currency

(i) Foreign currency transactions

Transactions in foreign currencies are translated to the respective functional currencies of Group entities at exchange rates at the dates of the transactions. Monetary assets and liabilities denominated in foreign currencies at the reporting date are retranslated to the functional currency at the foreign exchange rate at that date. The foreign currency gain or loss on monetary items is the difference between amortised cost in the functional currency at the beginning of the period, adjusted for effective interest and payments during the period, and the amortised cost in foreign currency translated at the exchange rate at the end of the period. Non-monetary assets and liabilities denominated in foreign currencies that are measured at fair value are retranslated to the functional currency at the exchange rate at the date that the fair value was determined. Foreign currency differences arising on retranslation are recognised in profit or loss.

(ii) Foreign operations

The assets and liabilities of foreign operations, including goodwill and fair value adjustments arising on acquisition, are translated to Australian dollars at exchange rates at the reporting date. Income and expenses of foreign operations are translated to Australian dollars at exchange rates at the dates of the transactions.m receivable from or payable to a foreign operation, the settlement of which is neither planned nor likely in the fores eeable future, are considered to form part of a net investment in a foreign operation and are recognised in other comprehensive income and presented in the foreign currency translation reserve in equity.

Foreign currency differences are recognised in other comprehensive income and presented in the foreign currency translation reserve. When a foreign operation is disposed of, in part or in full, the relevant amount in the foreign currency translation reserve is transferred to profit or loss.

Foreign exchange gains and losses arising from a monetary item receivable from or payable to a foreign operation, the settlement of which is neither planned nor likely in the foreseeable future, are considered to form part of a net investment in a foreign operation and are recognised in other comprehensive income and presented in the foreign currency translation reserve in equity.

Cash and cash equivalents in the balance sheet comprise cash at bank and on hand and short term deposits with an original maturity of three months or less that are readily convertible to known amounts of cash and which are subject to an insignificant risk of changes in fair value.

For the purposes of the Statement of Cash Flows, cash and cash equivalents consist of cash and cash equivalents as defined above, net of outstanding bank overdrafts.

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2020 Annual Report

NOTES TO THE FINANCIAL STATEMENTS

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33. Significant accounting policies (Continued)

(d) Financial instruments

(i) Non-derivative financial assets

The Group initially recognises non-derivative financial assets on the date that they are originated. All other financial assets (including assets designated at fair value through profit or loss) are recognised initially on the trade date at which the Group becomes a party to the contractual provisions of the instrument.

The Group derecognises a financial asset when the contractual rights to the cash flows from the asset expire, or it transfers the rights to receive the contractual cash flows on the financial asset in a transaction which substantially all the risks and rewards of ownership of the financial asset are transferred. Any interest in transferred financial assets that is created or retained by the Group is recognised as a separate asset or liability.

Financial assets and liabilities are offset and the net amount presented in the balance sheet when, and only when, the Group has a legal right to offset the amounts and intends either to settle on a net basis or to realise the asset and settle the liability simultaneously.

Financial liabilities are recognised initially at fair value plus any directly attributable transaction costs. Subsequent to initial recognition, these financial liabilities are measured at amortised cost using the effective interest rate method. The Group has the following non-derivative financial assets:

Financial assets at amortised cost
Cash and cash equivalents

Financial assets at amortised cost

Financial assets at amortised cost are receivables with fixed or determinable payments that are not quoted in an active market. Such assets are recognised initially at fair value plus any directly attributable transaction costs. Subsequent to initial recognition, these financial assets are measured at amortised cost using the effective interest method, less any impairment losses.
Financial assets at amortised cost comprise trade and other receivables (see note 12).

(ii) Non-derivative financial liabilities

Financial liabilities are recognised initially on the trade date at which the Group becomes party to the contractual provisions of the instrument. The Group derecognises a financial liability when its contractual obligations are discharged or cancelled or expire. Financial assets and liabilities are offset and the net amount presented in the balance sheet when, and only when, the Group has a legal right to offset the amounts and intends either to settle on a net basis or to realise the asset and settle the liability simultaneously.

The Group’s non-derivative financial liabilities comprise Lease liability, Deferred acquisition consideration and Trade and other payables.

(iii) Share capital

Ordinary shares

Ordinary shares are classified as equity. Incremental costs directly attributable to the issue of ordinary shares and share options are recognised as a deduction from equity, net of any tax effects.

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2020 Annual Report

NOTES TO THE FINANCIAL STATEMENTS

33. Significant accounting policies (Continued)

(e) Property, plant and equipment

(i) Recognition and measurement

Items of property, plant and equipment are measured at cost less accumulated depreciation and accumulated impairment losses.

Cost includes expenditure that is directly attributable to the acquisition of the asset. The cost of self-constructed assets includes the cost of materials and direct labour, any other costs directly attributable to bringing the asset to a working condition for its intended use, and the costs of dismantling and removing the items and restoring the site on which they are located. Purchased software that is integral to the functionality of the related equipment is capitalised as part of that equipment. Borrowing costs related to the acquisition or construction of qualifying assets are recognised as part of the asset.

When parts of an item of property, plant and equipment have different useful lives, they are accounted for as separate items of property, plant and equipment.

Gains and losses on disposal of an item of property, plant and equipment are determined by comparing the proceeds from disposal with the carrying amount of property, plant and equipment and are recognised net within “other income” in profit or loss.

(ii) Subsequent costs

The cost of replacing part of an item of property, plant and equipment is recognised in the carrying amount of the item if it is probable that the future economic benefits embodied within the part will flow to the Group and its cost can be measured reliably. The carrying amount of the replaced part is derecognised. The costs of the day-to-day servicing of property, plant and equipment are recognised in profit or loss as incurred.

(iii) Depreciation

Depreciation is calculated over the depreciable amount, which is the cost of an asset, or other amount substituted for cost, less its residual value.

Depreciation is recognised in profit or loss on a diminishing value basis over the estimated useful life of each part of an item of property, plant and equipment, since this most closely reflects the expected pattern of consumption of the future economic benefits embodied in the asset.

Leasehold assets are depreciated over the shorter of the lease term and their useful lives unless it is reasonably certain that the Group will obtain ownership by the end of the lease term. Land is not depreciated.

The estimated useful lives for the current and comparative periods are as follows:

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

Buildings 40 years
Leasehold improvements 1 – 6 years
Plant and equipment 2 – 20 years
Motor vehicles 2 – 10 years
Office furniture and fittings 2 – 10 years
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Depreciation methods, useful lives and residual values are reviewed at each reporting date.

(f) Intangible assets

(i) Goodwill

Goodwill is measured at cost less accumulated impairment losses. The Group measures goodwill at the acquisition date as:

the fair value of the consideration transferred; plus
the recognised amount of any non-controlling interests in the acquiree; plus if the business combination is achieved in stages, the fair value of the existing equity interest in the acquiree; less
the net recognised amount (generally fair value) of the identifiable assets acquired and liabilities assumed.

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2020 Annual Report

NOTES TO THE FINANCIAL STATEMENTS

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33. Significant accounting policies (Continued)

(f) Intangible assets (continued)

(ii) Other intangible assets

Other intangible assets that are acquired by the Group and have finite useful lives are measured at cost less accumulated amortisation and accumulated impairment losses.

(iii) Subsequent expenditure

Subsequent expenditure is capitalised only when it increases the future economic benefits embodied in the specific asset to which it relates. All other expenditure including expenditure on internally generated goodwill and brands is recognised in profit or loss as incurred.

(iv) Amortisation

Amortisation is calculated over the cost of the asset, or another amount substituted for cost, less its residual value.

Amortisation is recognised in profit or loss on a straight-line basis over the estimated useful lives of intangible assets, other than goodwill, from the date that they are available for use, since this most closely reflects the expected pattern of consumption of the future economic benefits embodied in the asset. The estimated useful lives for the current period are as follows:

2020	2020	2019

Customer contracts 1-5years	1 – 5years	1 – 5years

Amortisation methods, useful lives and residual values are reviewed at each financial year-end and adjusted if appropriate.

(g) Leases

Until 30 June 2019, leases in terms of which the Group assumes substantially all the risks and rewards of ownership were classified as finance leases. Upon initial recognition the leased asset is measured at an amount equal to the lower of its fair value and the net present value of the minimum lease payments. Subsequent to initial recognition, the asset is accounted for in accordance with the accounting policy applicable to that asset. Other leases are operating leases and are not recognised in the Group’s Balance Sheet. Effective from 1 July 2019 the Group adopted AASB 16 recognising lease assets and lease liabilities for those leases previously classified as operating leases.

Leased assets

The right-of-use asset recognised by the Group comprise the initial measurement of the related lease liability, any lease payments made at or before the commencement of the contract, less any lease incentives received and any direct costs. Costs incurred by the Group to dismantle the asset, restore the site or restore the asset are included in the cost of the right-of-use asset.

Subsequently, right-of-use asset is measured at cost less any accumulated amortisation and impairment losses and adjusted for certain remeasurements of the lease liability. The Group amortises the right-of-use assets on a straight-line basis from the lease commencement date to the end of the useful life of the underlying asset or the end of the lease term, whichever is earlier.

If the recoverable amount of a right-of-use asset is less than its carrying value, an impairment charge is recognised in the profit or loss and the carrying value of the asset is written down to its recoverable amount.

Short-term or low-value operating leases subject to recognition exemption under AASB 16 are not recognised in the Balance Sheet. The costs incurred during the period related to these leases are recognised in the profit or loss.

Lease liabilities

The lease liability is initially measured at the present value of the lease payments that are not paid at the commencement date, discounted by using the rate implicit in the lease. If this rate cannot be readily determined, the Group uses its incremental borrowing rate.

The lease liability is separately disclosed on the statement of financial position. The liabilities which will be repaid within twelve months are recognised as current and the liabilities which will be repaid in excess of twelve months are recognised as non-current. The lease liability is subsequently measured by reducing the balance to reflect the principal lease repayments made and increasing the carrying amount by the interest on the lease liability.

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2020 Annual Report

NOTES TO THE FINANCIAL STATEMENTS

33. Significant accounting policies (continued)

(g) Leases (continued)

The Group is remeasures the lease liability and make an adjustment to the right-of-use asset in the following instances:
The term of the lease has been modified or there has been a change in the Group’s assessment of the purchase option being exercised, in which case the lease liability is remeasured by discounting the revised lease payments using a revised discount rate;
A lease contract is modified and the lease modification is not accounted for as a separate lease, in which case the lease liability is remeasured by discounting the revised lease payments using a revised discount rate; and
The lease payments are adjusted due to changes in the index or a change in expected payment under a guaranteed residual value, in which cases the lease liability is remeasured by discounting the revised lease payments using the initial discount rate.

However, if a change in lease payments is due to a change in a floating interest rate, a revised discount rate is used.

Lease and non-lease components of a contract are accounted for separately. Non-lease components of the lease payments are expensed as incurred and are not included in determining the present value.

The Group determines the lease term as the non-cancellable term of the lease, together with any periods covered by an option to extended the lease if it is reasonably certain to be exercised, or any periods covered by an option to terminate the lease, if it is reasonably certain not to be exercised.

The Group has the option, under some of its leases to lease the assets for additional periods. The Group applies judgement in evaluating whether it is reasonably certain to exercise the option to renew and considers all relevant factors that create an economic incentive for it to exercise the renewal. After the commencement date, the Group reassesses the lease term if there is a significant event or change in circumstances that is within its control and affects its ability to exercise (or not to exercise) the option to renew.

(h) Inventories

Inventories are measured at the lower of cost and net realisable value. The cost of inventories is based on the first-in first-out principle, and includes expenditure incurred in acquiring the inventories, production or conversion costs and other costs incurred in bringing them to their existing location and condition. In the case of work in progress, cost includes an appropriate share of production overheads based on normal operating capacity.

Net realisable value is the estimated selling price in the ordinary course of business, less the estimated costs of completion and selling expenses.

(i) Contract assets

Contract assets represents construction work equal to gross unbilled amount expected to be collected from customers for contract work performed to date. It is measured at cost plus profit recognised to date (note 33(n)) less progress billings and recognised losses. Cost includes all expenditure related directly to projects and an allocation of fixed and variable overheads incurred in the Group’s contract activities based on normal operating capacity.

If payments received from customers exceed the income recognised, then the difference is presented as contract liabilities under Trade and other payables in the balance sheet.

Payments from customers are received based on a billing schedule or milestone basis, as established in our contracts.

(j) Assets held for sale

Non-current assets, or disposal groups comprising assets and liabilities, are classified as held-for-sale if it is highly probable that they will be recovered primarily through sale rather than through continuing use.

Such assets, or disposal groups, are generally measured at the lower of their carrying amount and fair value less costs to sell. Any impairment loss on a disposal group is allocated first to goodwill, and then to the remaining assets and liabilities on a pro rata basis, except that no loss is allocated to inventories, financial assets, deferred tax assets, employee benefit assets which continue to be measured in accordance with the Group’s other accounting policies. Impairment losses on initial classification as held-for-sale and subsequent gains and losses on re-measurement are recognised in profit or loss.

Once classified as held-for-sale, intangible assets and property, plant and equipment are no longer amortised or depreciated, and any equity-accounted investee is no longer equity accounted.

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NOTES TO THE FINANCIAL STATEMENTS

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33. Significant accounting policies (continued)

(k) Impairment

(i) Financial assets

A financial asset not carried at fair value through the profit or loss is assessed at each reporting date to determine whether there is objective evidence that it is impaired. A financial asset is impaired if objective evidence indicates that a loss event has occurred after the initial recognition of the asset, and that the loss event had a negative effect on the estimated future cash flows of the asset that can be estimated reliably.

Objective evidence that a financial asset (including equity securities) is impaired can include default or delinquency by a debtor, restructuring of an amount due to the Group on terms that the Group would not consider otherwise, indications that a debtor or issuer will enter bankruptcy, the disappearance of an active market for a security. In addition, for an investment in an equity security, a significant or prolonged decline in its fair value below its cost is objective evidence of impairment.

The Group considers evidence of impairment for receivables at both a specific asset level and collective level (see note 23). All individually significant receivables are assessed for specific impairment. All individually significant receivables found not to be specifically impaired are then collectively assessed for any impairment that has been incurred but not yet identified. Receivables that are not individually significant are collectively assessed for impairment by grouping together receivables with similar risk characteristics.

In assessing collective impairment, the Group uses historical trends of the probability of default, timing of recoveries and the amount of loss incurred, adjusted for management’s judgement as to whether current forward-looking economic and credit conditions are such that actual losses are likely to be greater or less than suggested by historical trends (see note 23).

An impairment loss in respect of a financial asset 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. Losses are recognised in profit or loss and reflected in an allowance account against receivables. When a subsequent event causes the amount of impairment loss to decrease, the decrease in impairment loss is reversed through profit or loss.

(ii) Non-financial assets

The carrying amounts of the Group’s non-financial assets, other than inventories and deferred tax assets, are reviewed at each reporting date to determine whether there is any indication of impairment. If any such indication exists, then the asset’s recoverable amount is estimated. For goodwill, the recoverable amount is estimated each year at the same time.

The recoverable amount of an asset or cash-generating unit is the greater of its value in use and its fair value less costs to sell. 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 the purpose of impairment testing, assets are grouped together into the smallest group of assets that generates cash inflows from continuing use that are largely independent of the cash inflows of other assets or groups of assets (the “cash-generating unit”). The goodwill acquired in a business combination, for the purpose of impairment testing, is allocated to cash-generating units that are expected to benefit from the synergies of the combination.

The Group’s corporate assets do not generate separate cash inflows. If there is an indication that a corporate asset may be impaired, then the recoverable amount is determined for the CGU to which the corporate asset belongs.

An impairment loss is recognised if the carrying amount of an asset or its cash-generating unit exceeds its recoverable amount. Impairment losses are recognised in profit or loss. Impairment losses recognised in respect of cash-generating units are allocated first to reduce the carrying amount of any goodwill allocated to the units and then to reduce the carrying amount of the other assets in the unit (group of units) on a pro rata basis.

An impairment loss in respect of goodwill is not reversed. In respect of other assets, impairment losses recognised in prior periods are assessed at each reporting date for any indications that the loss has decreased or no longer exists. An impairment loss is reversed if there has been a change in the estimates used to determine the recoverable amount. An impairment loss is reversed only to the extent that the asset’s carrying amount does not exceed the carrying amount that would have been determined, net of depreciation or amortisation, if no impairment loss had been recognised.

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2020 Annual Report

NOTES TO THE FINANCIAL STATEMENTS

33. Significant accounting policies (continued)

(l) Employee benefits

(i) Long-term benefits

The Group’s net obligation in respect of long-term employee benefits is the amount of future benefit that employees have earned in return for their service in the current and prior periods plus related on costs; that benefit is discounted to determine its present value. The discount rate is the yield at the reporting date on high quality corporate bonds or government bonds that have maturity dates approximating the terms of the Group’s obligations and that are denominated in the same currency in which the benefits are expected to be paid. The calculation is performed using the Projected Unit Credit method.

(ii) Termination benefits

Termination benefits are recognised as an expense when the Group is demonstrably committed, without realistic possibility of withdrawal, to a formal detailed plan to either terminate employment before the normal retirement date or to provide termination benefits as a result of an offer made to encourage voluntary redundancy. Termination benefits for voluntary redundancies are recognised as an expense if the Group has made an offer encouraging voluntary redundancy, it is probable that the offer will be accepted, and the number of acceptances can be estimated reliably.

(iii) Short-term benefits

Short-term employee benefit obligations are measured on an undiscounted basis and are expensed as the related service is provided.

A liability is recognised for the amount expected to be paid under short-term cash bonus or profit-sharing plans if the Group has a present legal or constructive obligation to pay this amount as a result of past service provided by the employee and the obligation can be estimated reliably.

(iv) Share-based payment transactions

The fair value of performance rights and share options granted to employees is recognised at grant date as an employee expense, with a corresponding increase in equity, over the period that the employees become unconditionally entitled to the performance rights and share options. The amount recognised as an expense is adjusted to reflect the number of awards for which the related service and non-market performance conditions are expected to be met, such that the amount ultimately recognised as an expense is based on the number of awards that meet the related service and non-market performance conditions at the vesting date.

(m) Provisions

A provision is recognised if, as a result of a past event, the Group has a present legal or constructive obligation that can be estimated reliably, and it is probable that an outflow of economic benefits will be required to settle the obligation. Provisions are determined by discounting the expected future cash flows at a pre-tax rate that reflects current market assessments of the time value of money and the risks specific to the liability. The unwinding of the discount is recognised as finance cost.

(n) Revenue

Revenue recognition accounting policy

The Group applies two approaches to recognising revenue to contracts with customers: either at a point in time or over time, depending on the manner the customer obtains control of the goods or services. Revenue is recognised over time if one of the following is met:

The customer simultaneously receives and consumes the benefits as the Group performs;
The customer controls the asset as the Group creates or enhances it; or
The Group's performance does not create an asset for which the Group has an alternative use and there is a right to payment for the performance to date.

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NOTES TO THE FINANCIAL STATEMENTS

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33. Significant accounting policies (continued)

(n) Revenue (continued)

Revenue recognition accounting policy (continued)

Revenue from contracts is recognised in a manner that depicts the transfer of promised goods or services to customers in an amount that reflects the consideration to which the group expects to be entitled in exchange for the goods or services. The following are the steps in determining revenue from contracts as prescribed by Five (5) Step Revenue Recognition Model introduced by AASB 15:

i. Identify the contract(s) with a customer
ii. Identify the performance obligations in the contract
iii. Determine the transaction price
iv. Allocate the transaction price to the performance obligations in the contract
v. Recognise revenue when (or as) the entity satisfies a performance obligation

Judgement is required in determining the timing of the transfer of control, at a point in time or over time, as well as in each of the five enumerated steps in the revenue recognition model above.

(i) Construction revenue

The benefits being provided by the Group's construction work transfer to the customer as the work is performed and as such revenue is recognised over the duration of the project based on percentage complete. Percentage complete is generally measured according to the proportion of contract costs incurred for work performed to date relative to the estimated total contract costs (input method). If this would not be representative of the stage of completion then it is measured by reference to surveys of work performed (output method).

When it is probable that total contract costs will exceed total contract revenue, the unavoidable loss is recognised as an expense immediately.

(ii) Services revenue

The Group performs maintenance and other services for a variety of different sectors. Typically, under the performance obligations of a service contract, the customer consumes and receive the benefit of the service as it is provided. As such, service revenue is recognised over time as the services are provided.

(iii) Contract modifications

Revenue in relation to modifications, such as a change in the scope or price (or both) of the contract, are to be included in the contract price when it is approved by the parties to the contract and the modification is enforceable. Approval of a contract modification can be in writing, by oral agreement or implied by customary business practices.

Revenue estimated and recognised in relation to claims and variations is only included in the contract price to the extent that it is highly probable that a significant reversal in the amount recognised will not occur.

In making this assessment the Group considers a number of factors, including the nature of the claim, formal or informal acceptance by the customer of the validity of the claim, the stage of negotiations, assessments by independent experts and the historical outcome of similar claims to determine whether the enforceable and "highly probable" thresholds have been met.

(iv) Performance obligations

Revenue is allocated to each performance obligation and recognised as the performance obligation is satisfied which may be at a point in time or over time.

AASB 15 requires a detailed and technical approach to identify the different revenue streams (i.e. performance obligations) in a contract. This is done by identifying the different activities that are being undertaken and then aggregating only those where the different activities are significantly integrated or highly interdependent. Revenue is to be continuously recognised, on certain contracts over time, as a single performance obligation when the services are part of a series of distinct goods and services that are substantially integrated with the same pattern of transfer.

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2020 Annual Report

NOTES TO THE FINANCIAL STATEMENTS

33. Significant accounting policies (continued)

(n) Revenue (continued)

(iv) Performance obligations (continued)

The term over which revenue may be recognised is limited to the period for which the parties have enforceable rights and obligations. When the customer can terminate a contract for convenience (without a substantive penalty), the contract term and related revenue is limited to the termination period.

The Group has elected to apply the practical expedient to not adjust the total consideration over the contract term for the effect of a financing component if the period between the transfer of services to the customer and the customer's payment for these services is expected to be one year or less.

(v) Variable consideration

Variable consideration includes performance or other incentive fees or penalties associated with contracts. If the consideration in the contract includes a variable amount, the Group estimates the amount of the consideration to which it is entitled in exchange for transferring the goods and services to the customer. The variable consideration is estimated at contract inception and constrained to the extent that it is highly probable that a significant reversal in the amount recognised will not occur when the associated uncertainty with the variable consideration is subsequently resolved.

All revenue is stated net of the amount of goods and services tax (GST).

(o) Finance income and expenses

Finance income comprises interest income on funds invested. Interest income is recognised as it accrues in profit or loss, using the effective interest method.

Finance expenses comprise interest expense on borrowings, bank charges and lease payments. Borrowing costs that are not directly attributable to the acquisition, construction or production of a qualifying asset are recognised in profit or loss using the effective interest rate method.

Foreign currency gains and losses are reported on a net basis.

(p) Income tax

Income tax expense comprises current and deferred tax. Income tax expense is recognised in profit or loss except to the extent that it relates to items recognised directly in equity, in which case it is recognised in equity. Current tax is the expected tax payable on the taxable income for the year, using tax rates enacted or substantively enacted at the reporting date, and any adjustment to tax payable in respect of previous years.

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Deferred tax is recognised using the balance sheet method, providing for temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for taxation purposes. Deferred tax is not recognised for the following temporary differences: the initial recognition of assets or liabilities in a transaction that is not a business combination and that affects neither accounting nor taxable profit, and differences relating to investments in subsidiaries and jointly controlled entities to the extent that it is probable that they will not reverse in the foreseeable future. In addition, deferred tax is not recognised for taxable temporary differences arising on the initial recognition of goodwill. Deferred tax is measured at the tax rates that are expected to be applied to the temporary differences when they reverse, based on the laws that have been enacted or substantively enacted by the reporting date. Deferred tax assets and liabilities are offset if there is a legally enforceable right to offset current tax liabilities and assets and they relate to income taxes levied by the same tax authority on the same taxable entity, or on different tax entities, but they intend to settle current tax liabilities and assets on a net basis or their tax assets and liabilities will be realised simultaneously.

A deferred tax asset is recognised to the extent that it is probable that future taxable profits will be available against which the temporary difference can be utilised. Deferred tax assets are reviewed at each reporting date and are reduced to the extent that it is no longer probable that the related tax benefit will be realised.

Additional income taxes that arise from the distribution of dividends are recognised at the same time as the liability to pay the related dividend is recognised.

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2020 Annual Report

NOTES TO THE FINANCIAL STATEMENTS

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33. Significant accounting policies (continued)

(q) Goods and services tax

Revenue, expenses and assets are recognised net of the amount of goods and services tax (GST), except where the amount of GST incurred is not recoverable from the taxation authority. In these circumstances, the GST is recognised as part of the cost of acquisition of the asset or as part of the expense.

Receivables and payables are stated with the amount of GST included. The net amount of GST recoverable from, or payable to, the ATO is included as a current asset or liability in the balance sheet.

Cash flows are included in the statement of cash flows on a gross basis. The GST components of cash flows arising from investing and financing activities which are recoverable from, or payable to, the ATO are classified as operating cash flows.

(r) Earnings per share

The Group presents basic and diluted earnings per share (EPS) data for its ordinary shares. Basic EPS is calculated by dividing the profit or loss attributable to ordinary shareholders of the Company by the weighted average number of ordinary shares outstanding during the period. Diluted EPS is determined by adjusting the profit or loss attributable to ordinary shareholders and the weighted average number of ordinary shares outstanding for the effects of all dilutive potential ordinary shares, which comprise performance rights and share options granted to employees.

(s) Segment reporting

An operating segment is a component of the Group that engages in business activities from which it may earn revenues and incur expenses, including revenues and expenses that relate to transactions with any of the Group’s components. All operating segments’ operating results are reviewed regularly by the Group’s Managing Director to make decisions about resources to be allocated to the segment and assess its performance, and for which discrete financial information is available.

Segment results that are reported to the Managing Director include items directly attributable to a segment as well as those that can be allocated on a reasonable basis.

Segment capital expenditure is the total cost incurred during the period to acquire property, plant and equipment, and intangible assets other than goodwill.

(t) Financial guarantees

Financial guarantee contracts are initially measured at their fair values and subsequently measured at the higher of:

the loss allowance determined in accordance with AASB 9 Financial Instruments; and
the amount initially recognised less, when appropriate, the cumulative amount of income recognised in accordance with AASB 15 Revenue from Contracts with Customer.

The fair value of financial guarantee contracts has been assessed using a probability weighted discounted cash flow approach. The probability has been based on:

the likelihood of the guaranteed party defaulting in a year period;
the proportion of the exposure that is not expected to be recovered due to the guaranteed party defaulting; and
the maximum loss exposed if the guaranteed party were to default.

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2020 Annual Report

NOTES TO THE FINANCIAL STATEMENTS

33. Significant accounting policies (continued)

(u) Business combinations

Acquisitions of businesses are accounted for using the acquisition method. The consideration transferred in a business combination is measured at fair value which is calculated as the sum of the acquisition-date fair values of assets transferred by the Group, liabilities incurred by the Group to the former owners of the acquiree and the equity instruments issued by the Group in exchange for control of the acquiree. Acquisition-related costs are recognised in profit or loss as incurred.

At the acquisition date, the identifiable assets acquired and the liabilities assumed are recognised at their fair value at the acquisition date, except that:

deferred tax assets or liabilities and liabilities or assets related to employee benefit arrangements are recognised and measured in accordance with AASB 112 'Income Taxes' and AASB 119 'Employee Benefits' respectively;
liabilities or equity instruments related to share-based payment arrangements of the acquiree or share-based payment arrangements of the Group entered into to replace share-based payment arrangements of the acquiree are measured in accordance with AASB 2 'Share-based Payment' at the acquisition date; and
assets (or disposal groups) that are classified as held for sale in accordance with AASB 5 'Non-current Assets Held for Sale and Discontinued Operations' are measured in accordance with that Standard.

Goodwill is measured as the excess of the sum of the consideration transferred, the amount of any non-controlling interests in the acquiree, and the fair value of the acquirer's previously held equity interest in the acquiree (if any) over the net of the acquisitiondate amounts of the identifiable assets acquired and the liabilities assumed. If, after reassessment, the net of the acquisition-date amounts of the identifiable assets acquired and liabilities assumed exceeds the sum of the consideration transferred, the amount of any non-controlling interests in the acquiree and the fair value of the acquirer's previously held interest in the acquiree (if any), the excess is recognised immediately in profit or loss as a bargain purchase gain.

(v) Government grants

Government grants are recognised only when there is reasonable assurance that the Group will comply with the conditions attaching to them and the grants will be received. When the grant relates to an expense item, it is recognised as income over the period necessary to match the grant on a systematic basis to the costs that it is intended to compensate. When the grant relates to an asset, it is recognised as deferred income and released to income in equal amounts over the expected useful life of the related asset.

(w) New standards and interpretations issued but not yet effective

The new standards and amendments to standards and interpretations effective for annual reporting periods beginning after 30 June 2020, such as those disclosed below, have not been applied in preparing these consolidated financial statements. The Group intends to adopt these new standards and amendment to standards and interpretations, if applicable, when they become effective: AASB 2018-6 Amendments to Australian Accounting Standards – Definition of a Business

AASB 2018-7 Amendment to Australian Accounting Standards – Definition of Material

AASB 2019-3 Amendment to Australian Accounting Standards – Interest Rate Benchmark Reform

AASB 2019-5 Amendments to Australian Accounting Standards – Disclosure of the Effect of New IFRS Standards not yet issued in Australia

AASB 2020-1 Amendments to Australian Accounting Standards – Classification of Liabilities as Current or Non-current

AASB 2020-3 A mendments to Australian Accounting Standards – Annual Improvements 2018-2020 and other Amendments

AASB 2019-1 Amendments to References to the Conceptual Framework in AASB Standard – Conceptual Framework for Financial Reporting

The Group has yet to determine the likely impact of these new standards.

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2020 Annual Report

NOTES TO THE FINANCIAL STATEMENTS

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34. Determination of fair values

A number of the Group’s accounting policies and disclosures require the determination of fair value, for both financial and nonfinancial assets and liabilities. Fair values have been determined for measurement and / or disclosure purposes based on the following methods. Where applicable, further information about the assumptions made in determining fair values is disclosed in the notes specific to that asset or liability.

(i) Property, plant and equipment

The fair value of property, plant and equipment recognised as a result of a business combination is the estimated amount for which a property could be exchanged on the date of acquisition between a willing buyer and a willing seller in an arm’s length transaction after proper marketing wherein the parties had each acted knowledgeably, prudently and without compulsion. The fair value of items of plant, equipment, fixtures and fittings are determined using market comparison technique and cost technique – the valuation model considers quoted market prices for similar items when available and depreciated replacement cost when appropriate.

(ii) Inventories

The fair value of inventories acquired in a business combination is determined based on its estimated selling price in the ordinary course of business less the estimated costs of completion and sale, and a reasonable profit margin based on the effort required to complete and sell the inventories.

(iii) Trade and other receivables

The fair value of trade and other receivables acquired in a business combination, including contract asset as well as service concession receivables, is estimated as the present value of future cash flows, discounted at the market rate of interest at the reporting date.

(iv) Non-derivative financial liabilities

Fair value, which is determined for disclosure purposes, is calculated based on the present value of future principal and interest cash flows, discounted at the market rate of interest at the reporting date. For finance leases the market rate of interest is determined by reference to similar lease agreements.

(v) Share-based payment transactions

The fair value of employee performance rights and share options is measured using an appropriate pricing model. Measurement inputs include share price on measurement date, exercise price of the instrument, expected volatility (based on weighted average historic volatility adjusted for changes expected due to publicly available information), weighted average expected life of the instruments (based on historical experience and general holder behaviour), expected dividends, and the risk-free interest rate (based on government bonds). Service and non-market performance conditions attached to the transactions are not taken into account in determining fair value.

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2020 Annual Report

DIRECTORS’ DECLARATION

In the opinion of the directors of Southern Cross Electrical Engineering Limited (the “Company”):
a. The consolidated financial statements and notes, and the Remuneration report in the Directors’ Report, are in accordance with the Corporations Act 2001, including:
- i. giving a true and fair view of the Group’s financial position as at 30 June 2020 and of its performance for the financial year ended on that date; and
- ii. complying with Australian Accounting Standards (including the Australian Accounting Interpretations) and the Corporations Regulations 2001;
b. the financial report also complies with International Financial Reporting Standards as disclosed in note 2(a),
c. there are reasonable grounds to believe that the Company will be able to pay its debts as and when they become due and payable.
The directors have been given the declarations required by Section 295A of the Corporations Act 2001 from the managing director and chief financial officer for the financial year ended 30 June 2020.

This declaration is made in accordance with a resolution of the Board of Directors.

Signed in accordance with a resolution of the directors:

Derek Parkin

Chairman

29 September 2020

2020 Annual Report 73

INDEPENDENT AUDIT REPORT

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2020 Annual Report

INDEPENDENT AUDIT REPORT

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2020 Annual Report

INDEPENDENT AUDIT REPORT

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2020 Annual Report

INDEPENDENT AUDIT REPORT

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2020 Annual Report

INDEPENDENT AUDIT REPORT

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2020 Annual Report

LEAD AUDITOR’S INDEPENDENCE DECLARATION

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2020 Annual Report 79

ASX ADDITIONAL INFORMATION

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Additional information required by the ASX Limited Listing Rules and not disclosed elsewhere in this report is set out below. The information is current at 21 September 2020.

Distribution of equity security holders

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Number of equity security holders
Category Ordinary shares Options/Performance rights
1 - 1,000 205 -
1,001 - 5,000 534 -
5,001 - 10,000 349 -
10,001 - 100,000 951 -
100,001 and over 137 4
2,176 4
The number of shareholders holding less than a marketable parcel of ordinary shares is 205.
Twenty largest shareholders
Number of ordinary Percentage of
Name shares held capital held
Frank Tomasi Nominees Pty Ltd 46,835,451 18.91
UBS Nominees Pty Ltd 38,779,568 15.66
Citicorp Nominees Pty Limited 36,075,656 14.57
J P Morgan Nominees Australia Pty Limited 20,007,979 8.08
National Nominees Limited 19,292,810 7.79
HSBC Custody Nominees (Australia) Limited 4,878,276 1.97
DHHD5 Pty Ltd 3,629,544 1.47
Chemco Superannuation Fund Pty Ltd 2,030,000 0.82
Carman Super Pty Ltd 2,000,000 0.81
Asgard Capital Management Ltd <1109440 Kaleidoscope a/c> 1,561,546 0.63
Westor Asset Management Pty Ltd 1,307,755 0.53
Alfiedoug Pty Ltd 1,216,581 0.49
Neweconomy Com Au Nominees Pty Limited <900 account> 1,130,801 0.46
Mr Raymond John Wise 1,076,846 0.43
BNP Paribas Noms Pty Ltd 1,038,864 0.42
DPHD5 Pty Ltd 1,000,008 0.40
Mr Andrew McKenzie + Mrs Catherine McKenzie 1,000,000 0.40
BNP Paribas Nominees Pty Ltd Hub24 Custodial Serv Ltd 875,955 0.35
Icon Holdings Pty Ltd 843,939 0.34
Buchhorn Pty Ltd 800,000 0.32
185,381,579 74.87
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Substantial shareholders

The number of shares held by substantial shareholders and their associates are set out below:

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Shareholder Number
Gianfranco Tomasi 46,835,451
TIGA Trading Pty Ltd 45,880,371
Mitsubishi UFJ Financial Group Inc 19,770,442
Perennial Value Management Limited 15,145,527
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Corporate Governance Statement

The Corporate Governance Statement can be found at https://www.scee.com.au/investors/corporate-governance

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2020 Annual Report

CORPORATE DIRECTORY

Directors

Derek Parkin

Chairman Independent Non-Executive Director

Graeme Dunn CEO and Managing Director

Simon Buchhorn Independent Non-Executive Director

Karl Paganin Independent Non-Executive Director

David Hammond Executive Director

Company Secretaries

Chris Douglass

Colin Harper

Auditors

Solicitors

K & L Gates

Level 32, 44 St Georges Terrace Perth WA 6000

Share Registry

Computershare Investor Services Pty Limited

Level 11, 172 St Georges Terrace Perth WA 6000 T: 1300 787 272 F: +618 9323 2033

Registered Office

Southern Cross Electrical Engineering Limited

41 Macedonia Street Naval Base WA 6165 T: +618 9236 8300 F: +618 9410 2504

ASX code: SXE

KPMG 235 St Georges Terrace Perth WA 6000

scee.com.au

2020 Annual Report

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SCEE Perth Office (Head Office) 41 Macedonia Street, Naval Base Western Australia, 6165

E [email protected] T +61 (0)8 9236 8300 F +61 (0)8 9410 2504

scee.com.au

SCEE

WA EC 001681 QLD 12707 Datatel NSW 17066C Heyday NT C 0977 WA EC6606 SA PGE 262507 NSW 249908C QLD 86545 TAS 930255 ACT 2012817 VIC 30407

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ABN: 92 009 307 046 ABN: 85 158 865 091 ABN: 24 082 372 834 Established 1978 Established 1978 Established 1998

AI assistant

SOUTHERN CROSS ELECTRICAL ENGINEERING LTD — Annual Report 2020

65884_rns_2020-09-29_abd0b751-2854-43bf-814f-cdcef018634b.pdf

CONTENTS

2020 HIGHLIGHTS

THIRD SUCCESSIVE YEAR OF RECORD REVENUES

Fully franked dividend

ABOUT SCEE

LEADING NATIONAL DIVERSIFIED ELECTRICAL CONTRACTOR

WA

NT

QLD

NSW & ACT

VIC & TAS

INFRASTRUCTURE

COMMERCIAL

RESOURCES

CHAIRMAN'S REPORT

DEAR SHAREHOLDERS,

Derek Parkin

MANAGING DIRECTOR'S REVIEW

IMPACT OF CORONAVIRUS

MANAGING DIRECTOR'S REVIEW (CONTINUED)

FINANCIAL RESULTS

MANAGING DIRECTOR’S REVIEW (CONTINUED)

OUTLOOK

Order Book

Markets

Infrastructure

Commercial

Resources

Strategy

Conclusion

DIRECTORS’ REPORT

Directors

DIRECTORS’ REPORT (continued)

Executive Officers

Directors’ interests

Directors’ meetings

Principal Activities

Significant Changes in the State of Affairs

Operating and Financial Review

Significant Events after Balance Sheet Date

Likely Developments and Expected Results

Environmental Regulation

Share Options and Performance Rights

Indemnification and Insurance of Directors and Officers

DIRECTORS’ REPORT (continued)

Proceedings on Behalf of Company

Non-audit Services

Auditor’s Independence Declaration

Remuneration Report

Rounding off

Derek Parkin

REMUNERATION REPORT – AUDITED

Nomination and Remuneration Committee

Remuneration Structure

Executive Remuneration

Objective

Structure

Fixed Remuneration

REMUNERATION REPORT – AUDITED (continued)

Variable Remuneration – Short Term Incentive (STI)

Variable Remuneration – Long Term Incentive (LTI)

Non-Executive Director Remuneration

Objective

Structure

Consequences of performance on shareholder wealth

REMUNERATION REPORT – AUDITED (continued)

REMUNERATION REPORT – AUDITED (continued)

Notes in relation to the table of directors’ and executive officers’ remuneration

Employment Contracts

REMUNERATION REPORT – AUDITED (continued)

Options and rights over equity instruments

Performance Rights over equity instruments

Performance rights granted as remuneration in 2020

2020 Financial Year Performance Rights

REMUNERATION REPORT – AUDITED (continued)

The TSR formula is:

REMUNERATION REPORT – AUDITED (continued)

SOUTHERN CROSS ELECTRICAL ENGINEERING LTD Annual Report 2020