FLE122 Annual Report 2018

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2. Material events during the year These financial statements include the impact of a number of material events that occurred during the year, including the recognition of additional construction loss provisions, the breach of certain funding covenants, renegotiation of key terms of lending arrangements, the issue of new shares by way of an entitlement offer, the subsequent repayment of borrowings, and a new Group strategy announced on 21 June 2018. In February 2018 the Group announced the recognition of additional provisions associated with the Building + Interiors (B+I) business unit in the half year financial statements such that a loss for the six months ended 31 December 2017 was reported of $631 million (refer to Note 13 for the judgements applied in accounting for construction contracts). As a result of these additional provisions, the Group was in breach of certain covenants in relation to its Syndicated Facility Agreement and its US Private Placement debt (together ‘borrowings’) as at 31 December 2017. This breach was an event of default under the agreements governing those borrowings. The Group obtained temporary waivers in respect of the covenant breaches while negotiating with its debt holders to agree revised terms for the agreements governing the borrowings. Revised terms for all funding arrangements were concluded in May 2018 with new covenant terms agreed (refer to Note 15 for details). The Group incurred additional funding costs associated with the renegotiation of these funding arrangements (refer to Note 14). With the additional B+I provisions and resulting funding negotiations, the Group moved to strengthen the Balance Sheet in support of its new strategy. In April 2018 the Group raised a total of $750 million through an entitlement offer of 1 share for every 4.46 shares held. The costs of the transaction of $23 million were offset in equity in line with NZ IFRS, resulting in a net increase in share capital of $727 million (refer to Note 23). Also in April 2018, the Group announced its intention to divest the Formica and Roof Tile Group businesses. The divestment processes commenced during the year and will continue into FY19. The proceeds from the issue of share capital were used primarily to repay borrowings (refer to Note 15) and led to significantly reduced leverage and gearing ratios for the Group. In June 2018 the Group announced its new strategy. Along with the planned divestment of the Formica and Roof Tile Group businesses (as noted above), the Group reorganised its divisional structure and restructured the Corporate office. As a result, there have been a number of one-off costs incurred in the current year. These are outlined in Note 4 Significant Items.

Other arrangements i) Variable consideration

• Some contracts with customers offer variable consideration such as trade discounts, volume rebates, or loyalty schemes. The Group's assessment did not identify any material impact on the recognition of such arrangements on adoption of NZ IFRS 15. ii) Warranties • Warranties currently offered by the Group will continue to be accounted for under NZ IAS 37 Provisions, Contingent Liabilities and Contingent Assets. Disclosure requirements • NZ IFRS 15 disclosure requirements are more detailed than under current NZ IFRS, particularly with respect to the judgements made and contract asset and liability balances outstanding at period end. The Group is in the process of drafting the disclosures required to be reported for the period ending 31 December 2018 and the year ending 30 June 2019. NZ IFRS 16 Leases NZ IFRS 16 was issued in February 2016 and will be effective for the Group from the period beginning 1 July 2019. The standard sets out the principles for the recognition, measurement, presentation and disclosure of leases for both lessees and lessors. NZ IFRS 16 replaces NZ IAS 17 and the related interpretations. For lessees, NZ IFRS 16 removes distinctions between operating leases and finance leases and introduces a single lessee accounting model. Under this new model, right-of-use assets and lease liabilities are recognised for all lease contracts except for short-term leases and leases of low value assets. The Group is currently in the process of performing an assessment of the impact of NZ IFRS 16, including: • Undertaking a modelling exercise to quantify the impact of transition options; • Developing an approach to key accounting judgements; • Understanding and documenting the requirements for data collection and validation; • Identifying an appropriate system solution which will capture and store all lease data and calculate the required NZ IFRS 16 adjustments and ongoing accounting transactions. The Group has not yet concluded on a transition approach and as such it is not possible to fully quantify the impact of NZ IFRS 16 at this stage, however, the impact on the Group financial statements is expected to be significant. For the year ended 30 June 2018, the Group had an operating lease expense of $187 million and had expected future undiscounted minimum payments on non- cancellable leases of $1,057 million.

61 Fletcher Building Limited Annual Report 2018

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