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2023 ReportAustralian Finance Group Limited ABN 11 066 385 822 Annual Report 30 June 2014 Contents Directors’ Report Statement of Financial Position Statement of Comprehensive Income Statement of Changes in Equity Statement of Cash Flows Notes to the Financial Statements Directors’ Declaration Audit Report Auditor’s Independence Declaration Page 1 5 6 7 8 9 51 52 54 Australian Finance Group Limited Directors’ Report For the year ended 30 June 2014 The Directors present their report together with the financial report on the consolidated entity consisting of Australian Finance Group Limited (‘the Company’), and its controlled entities (‘the Group’), for the financial year ended 30 June 2014 and the auditor’s report thereon. Directors and Company Secretary The Directors and Company Secretary of the Company at any time during or since the end of the financial year are: Tony Gill Chairman Non-Executive Director Age: 61 Mr Gill is based in Sydney and has relevant experience that spans two decades with expertise in banking, mortgage origination and securitisation. Mr Gill was with Macquarie Bank Ltd for 16 years, most recently serving as the Head of the Banking and Securitisation Group. Brett McKeon Managing Director Age: 50 Mr McKeon is responsible for the Group’s strategy and is also responsible for the AFG Home Loans and Securitisation lines of business. Malcolm Watkins Executive Director Kevin Matthews Executive Director Age: 50 Age: 56 James Minto Non-Executive Director Age: 62 John Atkins Non-Executive Director Age: 59 Mr Watkins has responsibility for the Group’s technology development programmes, electronic delivery systems and marketing operations. Mr Matthews is responsible for negotiating and managing relationships with financial institutions, product development and the Commercial line of business. Mr Minto is a Chartered Accountant who joined the board in August 2004. He is currently the Managing Director of TAL Life Ltd having served as the CEO for 10 years. He has also been Managing Director/CEO of other TOWER companies since 1988. Resigned on 28 November 2013. Mr Atkins is the former head of the Perth office of Freehills and a former Chairman Western Australia – ANZ Banking Group Ltd. Mr Atkins was a senior commercial lawyer who has acted for major banks and other financial institutions together with property developers and other commercial enterprises and is an experienced public company director. Company Secretary Lisa Bevan Directors Meetings Age: 42 Ms Bevan is a Chartered Accountant with over 15 years experience. The number of directors’ meetings and number of meetings attended by each of the directors of the Company during the financial year are: Director Board Meetings A B Tony Gill Brett McKeon Malcolm Watkins Kevin Matthews James Minto John Atkins A – Number of meetings attended B – Number of meetings held during the time the director held office during the year 9 11 11 8 6 10 12 12 12 12 6 12 Page 1 Australian Finance Group Limited Directors’ Report (continued) For the year ended 30 June 2014 Principal Activities The Group’s principal activities in the course of the financial year continued to be mortgage origination and management. The principal activities during the year of entities within the Group were: • mortgage origination and management of home loans; • securitisation of mortgages through special purpose entities used to issue residential mortgage backed securities; and property development. • Trading Results The Group’s net profit after income tax for the year ended 30 June 2014 was $17,869 thousand (2013: $$15,259 thousand); after an income tax expense of $8,095 thousand (2013: $7,365 thousand). Operating Results for the Year The 2014 financial year has seen an unexpected, yet welcomed increase in competition within the Australian mortgage market. This combined with a sustained low interest rate environment has meant that it has never been a better time to be a mortgage customer. As a consequence our settlement volumes for the year jumped by over 25% on the volumes achieved in the prior financial year. We have also experienced a solid growth in the volume of our Commercial business and this saw our trail book exceed $4b for the first time during the year. We have witnessed lenders’ appetite for commercial business improving during the year and we have set in place plans to capitalise on this should the appetite continue to expand. The settlement volumes achieved by our core residential mortgage business were also fuelled by a successful 36 month broker recruitment period. Those brokers recruited to AFG over the past three years have continued to grow their own businesses that in turn have grown our own. Whilst the Directors are pleased with the overall performance of the Group for the 2014 financial year they do note that the unprecedented growth in residential mortgage activity may ultimately impact run off rates with respect to our trail book accounting adjustment. We would expect these run off rates to increase from the below historical average levels as consumers continue to look to take advantage of the competitive landscape. The inverse of the intense level of competition in the market place, has meant that our own AFG Home Loans business and in turn AFG Securities business have not been able to compete as effectively with some of the products being offered in the market place, particularly by the Majors. Specific reference here is made to our inability to provide a compelling fixed rate offer. In an environment of low interest rates, consumers are looking to lock in a rate for the future and our inability to compete – like a number of our competitors in the market - has shrunk the relative size of our market. Having said this, the AFG Home Loans and AFG Securities businesses remain an important plank in the future growth of the Group and it was with a significant level of satisfaction that during the financial year the Group was able to execute two new term transactions, with pricing and investor participation improving in each transaction. The success of these transactions further validated the business model that was first demonstrated during the 2013 financial year when we completed our inaugural term transaction. We also welcomed ANZ as an additional warehouse provider to our securitisation program during the year thus ensuring the business was no longer reliant on only one source of warehouse funding. The 2014 financial year also saw further positive steps with our Property Business. We were able to successfully close out our Lillydale development located in the foothills of Perth, and made significant progress on our Richmond Quarter development in East Fremantle. Construction and debt funding via CBA of this development has commenced and as at the date of this report, only 7 out the 119 apartments and 11 of the commercial lots remain unsold. We also commenced a 22 apartment development located in Success which is in the southern corridor of Perth. All 22 apartments were sold in a very short space of time and on the back of this, construction via funding from a St George facility has commenced. The warehouse facility, which was due to expire on 6 September 2014, has been extended after the balance sheet date to 14 August 2015 in substantially the same form as it currently exists.. The security for advances under these facilities is a combination of fixed and floating charges over all assets of the special purpose entity, AFG 2010-1 Trust. If the warehouse facility is not renewed or should there be a default by the trustee under the existing terms and conditions, the warehouse facility funder will not have a right of recourse against the remainder of the Group. Should the warehouse facility not be renewed then the maximum exposure to the group would be the loss of future income streams from excess spread, being the difference between the group's mortgage rate and the underlying cost of funds. The Directors are satisfied that the Group’s ability to continue as a going concern will not be affected. Page 2 Australian Finance Group Limited Directors’ Report (continued) For the year ended 30 June 2014 Financial results for the year The Group’s cash and cash equivalents as at 30 June 2014 amounted to $76,022 thousand, which represents an increase of 17% on 2013. Australian Accounting Standards require us to reflect the fair value of our residential trail book, which is influenced amongst other things by the runoff and discount rates that are applied to this valuation. The change in assumptions for 2014 has increased the earnings beyond the underlying earnings generated by the Group. Excluding the non cash entries to recognise the net present value of the future trailing commission receivable and payable, the underlying profit before tax is $23,619 thousand (2013: $20,046). The assessment of the trail loan book and the associated assumptions was undertaken by independent actuaries. The following table reconciles the underlying earnings to the reported profit before tax for the period in accordance with Australian Accounting Standards: 2014 2013 Total Revenue 333,339 61,412 394,751 Profit before tax Total Revenue Profit before tax 23,619 2,345 25,964 282,770 20,046 49,454 332,224 2,577 22,624 Underlying result from operations Change in the net present value of trailing Commission receivable and payable Total result from operations Likely Developments and Expected Results The Group will continue to focus on its core business whilst also looking to further develop its securitisation and mortgage management business lines with a view to maximizing their long term benefits. Additionally, the Group will look to managing its growing property development interests to maximize returns to the shareholders, and to keep a healthy pipeline of projects in place to maintain a stable longer term earnings contribution from this division. Further information about likely developments in the operations and the expected results of those operations in future financial years have not been included in this report because disclosure of the information would, in the opinion of the Directors, be likely to result in unreasonable prejudice to the Group. Changes in State Of Affairs Total equity increased to $85,470 thousand from $79,091 thousand, an increase of 8%. The movement was largely the result of increased profits. During the year the Group incorporated AFG Property Pty Ltd and AFG Property Investment No.1 Pty Ltd to raise funds through the issue of redeemable preference shares to sophisticated investors. The funds were subsequently used to subscribe for redeemable preference shares in Harold’s Developments Pty Ltd, which is undertaking a residential property development project. The investment amount and the accrued interest are secured by a first mortgage over the land of the project. There were no other significant changes in the state of affairs of the Group, other than as outlined above. Dividends Total dividends paid or declared during the financial year ended 30 June 2014 were $11.5 million (2013: $12 million), which included: A final fully franked ordinary dividend of $3 million (3.21 cents per fully paid share) was declared out of profits of the Company for the year ended 30 June 2013 and paid in July 2013. An interim fully franked ordinary dividend of $4.5 million (4.82 cents per fully paid share) was declared out of profits of the Company for 2014 and paid in November 2013. An interim fully franked ordinary dividend of $4 million (4.29 cents per fully paid share) was declared out of profits of the Company for 2014 and paid in May 2014. Subsequent Events On 14 August 2014, the Group secured an extension to the term of the residential warehouse facility that was due to expire on 6 September 2014. The funding continues to be provided through the issue of two classes of secured, limited and floating rate notes, with the senior notes being issued to the lender and the subordination notes to Australian Finance Group Limited. The maturity date has been reset to 14 August 2015 and the cost of funds has been reviewed favourably to the end to term. Page 3 Australian Finance Group Limited Statement of Financial Position As at 30 June 2014 In thousands of AUD Assets Cash and cash equivalents Other financial assets Trade and other receivables Loans and advances Investments in equity-accounted investees Inventories Property, plant and equipment Intangible assets Total assets Liabilities Interest-bearing liabilities Trade and other payables Employee benefits Current tax payable Deferred income Other financial liabilities Deferred tax liability Provisions Total liabilities Net assets Equity Share capital Reserves Retained earnings Total equity attributable to equity holders of the Company Non-controlling interest Total equity Note 2014 2013 13 17 14 15 18 16 20 21 23 22 24 19 27 28 19 26 29 29 76,022 196 515,741 1,025,191 2,674 24,442 3,394 832 65,145 51 453,956 804,832 3,224 9,515 3,954 752 1,648,492 1,341,429 1,034,685 502,301 2,972 211 4,299 4,690 13,479 385 804,237 436,899 3,137 769 3,955 - 12,398 943 1,563,022 1,262,338 85,470 79,091 11,434 (61) 74,093 11,434 (71) 67,726 85,466 79,089 4 2 85,470 79,091 The Statement of Financial Position should be read in conjunction with the Notes to the financial statements. Page 5 Australian Finance Group Limited Statement of Comprehensive Income For the year ended 30 June 2014 In thousands of AUD Continuing Operations Commission and other income Securitisation interest income Securitisation interest expense Other cost of sales Gross profit Other income Administration expenses Other expenses Results from operating activities Financial income Financial expenses Net finance income Share of profit / (loss) of equity-accounted investees (net of tax) Profit before tax from continuing operations Income tax expense Profit from continuing operations Note 6 7 8 11 11 18 12 Profit for the year Other comprehensive income Net gain change in fair value of available-for-sale financial assets Income tax on other comprehensive income Other comprehensive income for the year, net of income tax 2014 2013 394,751 46,814 (37,411) (355,536) 48,618 10,870 (2,958) (34,164) 22,366 3,669 (327) 3,342 332,224 27,118 (23,952) (290,045) 45,345 9,878 (1,863) (32,567) 20,793 2,722 (170) 2,552 256 25,964 (8,095) 17,869 (721) 22,624 (7,365) 15,259 17,869 15,259 15 (5) 10 - - - Total comprehensive income for the year 17,879 15,259 Profit attributable to: Owners of the Company Non-controlling interests Profit for the year Total comprehensive income for the year attributable to: Owners of the Company Non-controlling interests Total comprehensive income for the year 17,877 2 17,879 15,255 4 15,259 17,877 2 17,879 15,255 4 15,259 The Statement of Comprehensive Income should be read in conjunction with the Notes to the financial statements. Page 6 Australian Finance Group Limited Statement of Changes in Equity For the year ended 30 June 2014 In thousands of AUD Balance at 1 July 2012 Total comprehensive income for the year Profit Other comprehensive income Total comprehensive income for the period Transactions with owners, recorded directly in equity Contributions by and distributions to owners Dividends to equity holders Total contributions by and distributions to owners Total transactions with owners Balance at 30 June 2013 Balance at 1 July 2013 Total comprehensive income for the year Profit /(loss) Other comprehensive income Total comprehensive income for the year Transactions with owners, recorded directly in equity Contributions by and distributions to owners Dividends to equity holders Share-based payment transactions Total contributions by and distributions to owners Total transactions with owners Balance at 30 June 2014 Share capital Foreign currency Fair value translation reserve reserve Retained earnings Total Non- Total equity controlling interest 11,434 (15) (56) 64,467 75,830 (2) 75,828 - - - - - - 11,434 11,434 - - - - - - - - - - - - (15) (15) - - - - - - - - - - - - (56) (56) - 10 10 - - - 11,434 (15) (46) 15,259 - 15,259 15,259 - 15,259 (12,000) (12,000) (12,000) 67,726 (12,000) (12,000) (12,000) 79,089 67,726 79,089 17,867 - 17,867 17,867 10 17,877 (11,500) (11,500) (11,500) (11,500) 74,093 (11,500) (11,500) 85,466 4 - 4 - - - 2 2 2 - 2 - - - 4 15,263 - 15,263 (12,000) (12,000) (12,000) 79,091 79,091 17,869 10 17,879 (11,500) (11,500) (11,500) 85,470 Page 7 The Statement of Changes in Equity should be read in conjunction with the Notes to the financial statements. Australian Finance Group Limited Statement of Cash Flows For the year ended 30 June 2014 In thousands of AUD Note 2014 2013 Cash flows from operating activities Cash receipts from customers Cash paid to suppliers and employees (Advances)/repayments of customer borrowings (Repayments of)/proceeds from warehouse facility (Repayments to)/proceeds from bondholders Income taxes paid Net cash from operating activities Cash flows from investing activities Proceeds from/(Purchase of) investments Interest received Interest paid Acquisition of property, plant and equipment Investment in intangible assets Dividend received from equity-accounted investees Proceeds from / (Acquisition) of equity-accounted investees Increase / (Decrease) in loans from funders Proceeds/(Acquisition of) other investments (Purchase of)/proceeds from preference shares Decrease/(Increase) in other loans and advances Net cash used in investing activities Cash flows used in financing activities Proceeds from borrowings Proceeds from issuance of preference shares Dividends paid to equity holders of the parent Net cash used in financing activities Net increase in cash and cash equivalents Cash and cash equivalents at 1 July Cash and cash equivalents at 30 June 13(b) 18 29 13(a) 345,220 (338,454) (167,662) (278,564) 464,464 (7,576) 17,428 293,774 (286,115) (512,280) 263,129 256,199 (9,012) 5,695 (128) 2,114 (123) (379) (286) 340 465 (764) - (4500) (622) (3,883) 4,932 3,900 (11,500) (2,668) 10,877 65,145 76,022 5,000 2,863 (155) (3,598) (478) - (750) 35 303 (6,000) 80 (2,700) 3,273 - (12,000) (8,727) (5,732) 70,877 65,145 The Statement of Cash Flows should be read in conjunction with the Notes to the financial statements. Page 8 Australian Finance Group Limited Notes to the Financial Statements Contents 1. 2. 3. 4. 5. 6. Reporting entity Basis of preparation Significant accounting policies Determination of fair values Financial risk management Revenue 7. Other income 8. 9. 10. 11. 12. 13. 14 15. 16. Other expenses Employee costs Auditors’ remuneration Finance income and expenses Income tax expense Cash and cash equivalents Trade and other receivables Loans and advances Inventories 17. Other financial assets 18. 19. 20. 21. 22. 23. 24. 25. 26. 27. Investments in equity-accounted investees Tax assets and liabilities Property, plant and equipment Intangible assets Trade and other payables Interest-bearing liabilities Employee benefits Share based payments Provisions Deferred income 28. Other financial liabilities 29. 30. Capital and reserves Financial instruments 31. Operating leases 32. Group entities 33. 34. 35. 36. 37. Parent entity Capital and other commitments Contingencies Related parties Subsequent events Page 9 Australian Finance Group Limited Notes to the Financial Statements 1. Reporting entity The consolidated financial statements for the financial year ended 30 June 2014 comprise of Australian Finance Group Limited (the ‘Company’), which is a for profit entity and a company domiciled in Australia and its subsidiaries (together referred to as the ‘Group’) and the Group’s interest in associates and jointly controlled entities. The Group’s principal activities in the course of the financial year were mortgage origination and management, and property development. The Company’s principal place of business is 100 Havelock Street, West Perth, Western Australia. 2. Basis of preparation (a) Statement of compliance The financial report is a general purpose financial report which has been prepared in accordance with the Corporation Act 2001 and the Australian Accounting Standards (‘AASBs’) (including Australian Interpretations) as issued by the Australian Accounting Standards Board (‘AASB’). The consolidated financial report of the Group also complies with the International Financial Reporting Standards (IFRSs) as issued by the International Accounting Standards Board (IASB). The consolidated financial statements were authorised for issue by the Board of Directors on 30 October, 2014. (b) Basis of measurement The consolidated financial statements have been prepared on a historical cost basis except for the following material items: Receivables and payables relating to trailing commission are initially measured at fair value and subsequently at amortised cost; Financial instruments at fair value through profit or loss are measured at fair value; Available-for-sale financial assets are measured at fair value except for equity instruments that do not have a quoted price in an active market and whose fair value cannot be reliably measured. (c) Functional and presentation currency These consolidated financial statements are presented in Australian dollars (“AUD”). The Group is of a kind referred to in ASIC Class Order 98/100 dated 10 July 1998 and in accordance with that Class Order, all financial information presented in Australian dollars has been rounded to the nearest thousand dollars unless otherwise stated. (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 and liabilities, income and expenses. Actual results may differ from these estimates. 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 critical judgements in applying accounting policies that have the most significant effect on the amounts recognised in the financial statements is included in the following notes: Notes 14 and 22 - Net present value of future trailing commissions: recognition of future trailing commissions receivable and payable. Information about assumptions and estimation that have a significant risk of resulting in a material adjustment within the next financial years are included in the following: Note 4 - Determination of fair values: key assumptions used in forecasting and discounting future trailing commissions. Note 25 - Measurement of share-based payments Note 26 - Provisions Note 30 - Valuation of financial instruments Page 10 Australian Finance Group Limited Notes to the Financial Statements 2. Basis of preparation (continued) (d) Use of estimates and judgements (continued) Taxation The Group’s accounting for taxation require management’s judgment in assessing whether deferred tax assets and certain deferred tax liabilities are recognised on the Statement of Financial Position. Deferred tax assets, including those arising from un-recouped tax losses, capital losses and temporary differences, are recognised only where it is considered more likely than not that they will be recovered, which is dependent on the generation of sufficient future taxable profits. Assumptions about the generation of future taxable profits depend on management’s estimates of future cash flows. These depend on estimates of future income, operating costs, capital expenditure, dividends and other capital management transactions. Judgments and assumptions are also required about the application of income tax legislation. These judgments and assumptions are subject to risk uncertainty, hence there is a possibility that changes in circumstances will alter expectations, which may impact the amount of deferred tax assets and deferred tax liabilities recognised on the Statement of Financial Position and the amount of other tax losses and temporary differences not yet recognised. In such circumstances, some or all of the carrying amounts of recognised deferred tax assets and liabilities may require adjustment, resulting in corresponding credit or charge to charge to the Statement of Comprehensive Income. Long service leave provision The liability for long service leave is recognised and measured at the present value of the estimated future cash flows to be made in respect of all employees at balance date. In determining the present value of the liability, attrition rates and pay increases through inflation have been taken into account. (e) Changes in accounting policies and disclosures The accounting policies adopted are consistent with those of the previous financial year except as follows: (i) New and amended Australian Accounting Standards and AASB Interpretations The Group has adopted the following new and amended Australian Accounting Standards and AASB interpretations as of 1 July 2014: • AASB 10 Consolidated Financial Statements • AASB 11 Joint Arrangements • AASB 13 Fair Value Measurement AASB 119 Employee Benefits: • AASB 7 Financial Instruments: Disclosures – Offsetting Financial Assets and Financial Liabilities – • Amendments to AASB 7 The adoption of the standards or interpretations is described below: AASB 119 Employee Benefits (Revised 2011) In the current year the Group adopted AASB 119 (Revised 2011), which revised the definition of short-term employee benefits to benefits that are expected to be settled wholly within 12 months after the end of the annual reporting period in which the employees render the related service. As a result of the change, the annual leave liability for certain of the Group’s employees is now considered other long-term employee benefit, when previously it was a short term benefit. As the Group does not have an unconditional right to defer settlement for at least twelve months after the reporting period, the obligation for employees continues to be presented as a current liability under AASB 101 Presentation of Financial Statements. The Group has applied the new policy retrospectively; however the impact from the change in the policy had no material impact on the reported results of 2013, and accordingly the comparative figures have not been restated. The Group applied, for the first time, other standards and amendments that require restatement of previous financial statements. These include AASB 10 Consolidated Financial Statements, AASB 11 Joint Arrangements, AASB 13 Fair Value Measurement and amendments to AASB 101 Presentation of Financial Statements. The amendments had no impact on the annual financial statements of the Group. Page 11 Australian Finance Group Limited Notes to the Financial Statements 2. Basis of preparation (continued) (ii) Accounting Standards and Interpretations issued but not yet effective The following standards, amendments to standards and interpretations have been identified as those which may impact the entity in the period of initial application. They are available for early adoption at 30 June 2014, but have not been applied in preparing this financial report: AASB 9 Financial Instruments, which becomes mandatory for the Group’s 30 June 2015 financial statements. It includes requirements for the classification and measurement of financial assets. The Group does not plan to adopt this standard early and the extent of the impact has not been determined. AASB 1031 Materiality. The revised AASB 1031 is an interim standard that cross-references to other Standards and the Framework (issued December 2013) that contain guidance on materiality. AASB 1031 will be withdrawn when references to AASB 1031 in all Standards and Interpretations have been removed. AASB 2012-3 Amendments to Australian Accounting Standards - Offsetting Financial Assets and Financial Liabilities, which becomes mandatory for the Group’s 30 June 2015 financial statements. AASB 2012-3 adds application guidance to AASB 132 Financial Instruments: Presentation to address inconsistencies identified in applying some of the offsetting criteria of AASB 132, including clarifying the meaning of "currently has a legally enforceable right of set-off" and that some gross settlement systems may be considered equivalent to net settlement. The extent of the impact has not been determined. AASB 2013-3 Amendments to AASB 136 – Recoverable Amount Disclosures for Non-Financial Assets, which becomes mandatory for the Group’s 30 June 2015 financial statements. AASB 2013-3 amends the disclosure requirements in AASB 136 Impairment of Assets. The amendments include the requirement to disclose additional information about the fair value measurement when the recoverable amount of impaired assets is based on fair value less costs of disposal. AASB 2013-5 Amendments to Australian Accounting Standards – Investment Entities (AASB 1, AASB 3, AASB 7, AASB 10, AASB 12, AASB 107, AASB 112, AASB 124, AASB 127, AASB 132, AASB 134 & AASB 139). These amendments become mandatory for the Group’s 30 June 2015 financial statements. The amendments define an investment entity and require that, with limited exceptions, an investment entity does not consolidate its subsidiaries or apply AASB 3 Business Combinations when it obtains control of another entity. These amendments require an investment entity to measure unconsolidated subsidiaries at fair value through profit or loss in its consolidated and separate financial statements. These amendments also introduce new disclosure requirements for investment entities to AASB 12 and AASB 127. AASB 2013-7 Amendments to AASB 1038 arising from AASB 10 in relation to Consolidation and Interests of Policyholders [AASB 1038], with an application date for the Group of 30 June 2015. AASB 2013-7 removes the specific requirements in relation to consolidation from AASB 1038, which leaves AASB 10 as the sole source for consolidation requirements applicable to life insurer entities. AASB 2013-9 Amendments to Australian Accounting Standards – Conceptual Framework, Materiality and Financial Instruments. The Standard contains three main parts and makes amendments to a number of Standards and Interpretations. Part A of AASB 2013-9 makes consequential amendments arising from the issuance of AASB CF 2013-1. Part B makes amendments to particular Australian Accounting Standards to delete references to AASB 1031 and also makes minor editorial amendments to various other standards. Part C makes amendments to a number of Australian Accounting Standards, including incorporating Chapter 6 Hedge Accounting into AASB 9 Financial Instruments. Application dates for the Group are: Part A 30 June 2014, Part B 30 June 15 and Part C 30 June 16. Page 12 Australian Finance Group Limited Notes to the Financial Statements 3. Significant accounting policies Except as expressly described in the notes to the financial statements, the accounting policies set out below have been applied consistently to all periods presented in these consolidated financial statements, and have been applied consistently by all Group entities. (a) Basis of consolidation (i) Subsidiaries Subsidiaries are entities controlled by the Group. The financial results of subsidiaries are included in the consolidated financial statements from the date that control commences until the date that control ceases. The accounting policies of subsidiaries have been changed where necessary to align them with the policies adopted by the Group. Non-controlling interests are allocated their share of net profit after tax in the Statement of Comprehensive income and are presented within equity in the Statement of Financial Position, separately from the equity of the owners of the Parent. Total comprehensive income within a subsidiary is attributed to the non-controlling interest even if that results in a deficit balance. (ii) Special purpose entities Special purpose entities are those entities over which the group has no ownership interest but in effect the substance of the relationship is such that the Group controls the entity so as to obtain the majority of benefits from its operation. The Group has established special purpose entities to support its Securitisation and Residential Mortgage Backed Securities issues (RMBS) programmes. Securitisation programme The Group has established a special purpose entity (‘SPE’), AFG 2010-1 Trust, and its Series to conduct securitisation activities on behalf and according to the specific business needs of AFG Securities Pty Ltd, a wholly owned subsidiary of the Company. The SPE is consolidated based on an evaluation of the substance of its relationship with the Group, and the SPE’s risks and rewards. The Group has control over the SPE. The SPE was established under terms that impose strict limitations on the decision-making powers of the SPE’s management that result in the Group receiving the majority of the benefits related to the SPE’s operations and net assets, being exposed to risks incidental to the SPE’s activities, and retaining the majority of the residual or ownership risks related to the SPE or its assets. RMBS programme The special purpose entities (SPE-RMBS) AFG 2013-1, AFG 2013-2 and AFG 2014-1 trusts were established to hold securitised assets and issue Residential Mortgage Backed Securities (RMBS) to support the specific funding needs of the Group’s Securitisation Programme. The SPE-RMBS meet the criteria of being controlled entities under SIC12 and AASB 127 – Consolidated and Separate Financial Statements. The elements indicating control include, but not limited to, the below: the Group has the majority of the residual interest in the SPE-RMBS fees received by the Group from the SPE-RMBS vary on the performance, or non performance of the SPE- RMBS assets the Group has the ability to direct decision making accompanied by the objective of obtaining benefits from the SPE-RMBS' activities. The Group continues to retain control over the financial assets, for which some but not substantially all the risks and rewards have been transferred to the bond holders. The securitised assets and the corresponding liabilities are recorded in the Statement of Financial Position and the interest earned and paid recognised in the Statement of Comprehensive Income. Page 13 Australian Finance Group Limited Notes to the Financial Statements 3. Significant accounting policies (continued) (iii) Investments in associates (equity accounted investee) Associates are those entities in which the Group has significant influence, but not control, over the financial and operating policies. Significant influence is presumed to exist when the Group holds between 20 and 50 percent of the voting power of another entity. Investments in associates are accounted for using the equity method (equity accounted investee) and are initially recognised at cost. The cost of the investment includes transaction costs. The consolidated financial statements include the Group’s share of the profit or loss and other comprehensive income of the investee, after adjustments to align the accounting policies with those of the Group, from the date that significant influence commences until the date that significant influence ceases. When the Group’s share of losses exceeds its interest in an equity accounted investee, the carrying amount of that interest, including any long-term investments, is reduced to zero, and the recognition of further losses is discontinued except to the extent that the Group has an obligation or has made payments on behalf of the investee. Jointly controlled operations A jointly controlled operation is a joint venture carried on by each venturer using its own assets in pursuit of the joint operations. The consolidated financial statements include the assets that the Group controls and the liabilities that it incurs in which there is joint control, in the course of pursuing the joint operation, and the expenses that the Group incurs and its share of the income that it earns from the joint operation. Non-controlling interests Non-controlling interest is determined as the non-controlling interest’s proportion of the fair value of the recognised identifiable assets, liabilities and contingent liabilities at the date of the original acquisition. Post acquisition of non- controlling interest in the identifiable assets and liabilities of a subsidiary comprises the non controlling interest’s share of movements in equity since the date of the original controlling acquisition, after eliminating intragroup transactions. (iv) 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 investment 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. (b) (i) Foreign currency Foreign currency transactions Transactions in foreign currencies are translated to the functional currency of the Group at exchange rates at the date 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 exchange 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 the foreign currency translated at the exchange rate at the end of the period. (ii) Foreign operations The assets and liabilities of foreign operations are translated to Australian dollars at exchange rates at the reporting date. The income and expenses of foreign operations are translated to Australian dollars at the average exchange rates of the relevant period. Foreign currency differences are recognised in other comprehensive income. Since 1 July 2004, the Group’s date of transition to AASBs, such differences have been recognised in the foreign currency translation reserve (“FCTR”) in equity. 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 directly in equity in the FCTR. Page 14 Australian Finance Group Limited Notes to the Financial Statements 3. (c) (i) Significant accounting policies (continued) Financial instruments Non-derivative financial assets Initial recognition and measurement Financial assets within the scope of AASB 139 are classified as financial assets at fair value through profit or loss, loans and receivables, held to maturity investments, or available–for-sale financial assets. The Group determines the classification of its financials assets at initial recognition. All financial assets are recognised initially at fair value plus transaction costs, except in the case of financial assets recorded at fair value through profit or loss. Subsequent measurement The subsequent measurement of financial assets depends on their classification as described below: Financial assets at fair value through profit or loss The Group’s investments in equity securities are classified as financial assets at fair value through profit or loss. An instrument is classified as at fair value through profit or loss if it is held for trading or is designated as such upon initial recognition. Financial instruments are designated at fair value through profit or loss if the Group manages such instruments and makes purchase and sale decisions based on their fair value in accordance with the Group’s risk management and investment strategy. Upon initial recognition, attributable transaction costs are recognised in profit or loss when incurred. Financial instruments at fair value through profit or loss are subsequently measured at fair value, and changes therein are recognised in profit or loss. Loans and receivables Loans and receivables are financial assets with fixed or determinable payments that are not quoted in an active market. Subsequent to initial recognition loans and receivables are measured at amortised cost using the effective interest method, less impairment losses. Loans and receivables comprise trade and other receivables, redeemable preference shares and loans and advances which relate mainly to residential mortgages issued under the securitisation programme. Available-for-sale financial assets Available-for-sale financial assets are non-derivative financial assets that are designated as available-for-sale and that are not classified in any of the previous categories. Subsequent to initial recognition, available-for-sale financial assets are measured at fair value and changes therein, other than impairment losses (see note 3(c)(ii)), are recognised in other comprehensive income and presented within equity in the fair value reserve. When an investment is derecognised, the cumulative gain or loss is transferred to profit or loss. The investments have no quoted prices in an active market and there is insufficient information available to determine fair value. As a result of this cost was deemed to represent the best estimate of fair value. Derecognition A financial asset (or, where applicable, a part of a financial asset or part of a group of similar financial assets) is derecognised when: The rights to receive cash flows from the asset have expired The Group has transferred its rights to receive cash flows from the asset or has assumed an obligation to pay the received cash flows in full without material delay to a third party under a “pass-through” arrangement; and either (a) the Group has transferred substantially all the risks and rewards of the asset, or (b) the Group has neither transferred nor retained substantially all the risks and rewards of the asset, but has transferred control of the asset When the Group has transferred its rights to receive cash flows from an asset or has entered into a pass-through arrangement, it evaluates if and to what extent it has retained the risks and rewards of ownership. When it has neither transferred nor retained substantially all of the risks and rewards of the asset, nor transferred control of the asset, the asset is recognised to the extent of the Group’s continuing involvement in the asset. In that case, the Group also recognises an associate liability. The transferred asset and the associated liability are measured on a basis that reflects the rights and obligations that the Group has retained. The Group utilises SPE-RMBS to hold securitised assets (financial assets) and issue residential mortgage asset backed securities to investors. After the securitisation transaction, the Group continues to retain control of the financial assets for which some but not substantially all the risks and rewards have been transferred to the investors. Consequently, the securitised assets do not meet the requirements of AASB 139 - Financial Instruments: Recognition and Measurement in respect of the derecognition of financial instruments. The securitised assets have been recorded in the Statement of Financial Position with the related interest recognised through the consolidated Statement of Comprehensive Income. Page 15 Australian Finance Group Limited Notes to the Financial Statements 3. (c) (ii) Significant accounting policies (continued) Financial instruments (continued) Impairment of financial assets A financial asset not carried at fair value through profit or loss is assessed at each reporting date to determine whether there is any 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, that has a negative effect on the estimated future cash flows of that asset. Objective evidence that financial assets are impaired can include failure to meet repayment of principal and interest in accordance with the terms of the governing agreement (loans and advances within the SPE), indications that a debtor or issuer will enter bankruptcy, disappearance of an active market for a security, or wider economic and financial market indicators pertaining to a particular industry sector or local economy. 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. Significant financial assets and loans and advances within the special purpose entities are individually assessed and regularly tested for impairment. The remaining financial assets are assessed collectively in groups that share similar credit 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 economic and credit conditions are such that the actual losses are likely to be greater or less than suggested by historical trends. 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. For the SPE loans and advances the present value of estimated cash flows recoverable is determined after taking into account net realisable value from sale of collateral held. When a subsequent event causes the amount of impairment loss to decrease, the decrease in impairment loss is reversed through profit or loss. An impairment loss in respect of an available-for-sale financial asset is recognised by transferring the cumulative loss that has been recognised previously in equity to profit or loss. When a subsequent event causes the fair value of an impaired available-for-sale asset to increase and the increase can be related objectively to an event occurring after the impairment loss was recognised in profit or loss, then the impairment loss is reversed , with the amount of the reversal recognised in profit or loss. However, any subsequent recovery in the fair value is recognised in other comprehensive income. (iii) Non-Derivative financial liabilities Initial recognition and measurement Financial liabilities within the scope of AASB 139 are classified as financial liabilities at fair value through profit or loss, or loans and borrowings. The Group determines the classification of its financial liabilities at initial recognition. All financial liabilities are recognised initially at fair value, in the case of loans and borrowings, net of directly attributable transactions The Group initially recognises financial liabilities (including liabilities designated at fair value through profit or loss) on the trade date at which the Group becomes a party to the contractual provisions of the instrument. The Group derecognises a financial liability when its contractual obligations are discharged, cancelled or expired. The Group’s non-derivative financial liabilities include: interest-bearing liabilities and trade and other payables. Subsequent measurement Subsequent to initial recognition, interest – bearing liabilities are measured at amortised cost using the effective interest rate method. Derecognition A financial liability is derecognised when the obligation under the liability is discharged or cancelled, or expires. When an existing financial liability is replaced by another from the same lender on substantially different terms, or the terms of an existing liability are substantially modified, such an exchange or modification is treated as the derecognition of the original liability and the recognition of a new liability. The difference in respect of the carrying amounts is recognised in the income statement. Page 16 Australian Finance Group Limited Notes to the Financial Statements 3. (c) Significant accounting policies (continued) Financial instruments (continued) (iv) Fair value of financial instruments The fair value of financial instruments that are traded in active markets at each reporting date is determined by reference to quoted market prices (bid price for long positions and ask price for short positions), without any deduction for transaction costs. Refer to accounting policy 4 for the financial instruments not traded in an active market fair value determination. (v) Share capital Ordinary shares Ordinary shares are classified as equity. Incremental costs directly attributable to issue of ordinary shares and share options are recognised as a deduction from equity at the time of issuance, net of any related income tax benefit. Repurchase of share capital When share capital recognised as equity is repurchased, the amount of consideration paid, including directly attributable costs, is recognised as a reduction in equity. Dividends Dividends are recognised as a liability in the period in which they are declared. (d) Cash and short term-deposits Cash and short-term deposits in the Statement of Financial Position comprise cash at banks and on hand, short term deposits with a maturity of three months or less and collections in the special purpose entities’ accounts which are not available to the shareholders. For the purpose of the Statement of cash flows, cash and cash equivalents consist of the cash and term deposits as defined above, net of outstanding bank overdrafts. (e) (i) Property, plant and equipment Recognition and measurement Items of property, plant and equipment are measured at cost less accumulated depreciation (see (iii) below) and impairment losses (see accounting policy 3(g)). 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 capitalised as part of the cost of the assets. Where parts of an item of property, plant and equipment have different useful lives, they are accounted for separately. 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 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 costs can be measured reliably. 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 recognised in profit or loss on a straight-line basis over the estimated useful lives of each part of an item of property, plant and equipment. Leased assets are depreciated over the shorter of the lease term and their useful life 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: (i) (ii) plant and equipment 2-5 years fixtures and fittings 5-20 years Depreciation methods, useful lives and residual values are reassessed at each reporting date. Page 17 Australian Finance Group Limited Notes to the Financial Statements 3. Significant accounting policies (continued) (f) (i) Intangibles Software development costs Software development costs are recognised as an expense when incurred, except to the extent that such costs, together with previous unamortised deferred costs in relation to that project, are expected beyond reasonable doubt, to provide future economic benefits. Any deferred development costs are amortised over the estimated useful lives of the relevant assets. The balance of deferred software development costs is disclosed as such in note 21 to the financial statements. The unamortised balance of software development costs deferred in previous periods is reviewed regularly and at each reporting date, to ensure the criterion for deferral continues to be met. Where such costs are considered to no longer provide future economic benefits they are written-off as an expense in the profit or loss. (ii) Other intangible assets Other intangible assets that are acquired by the Group, which have finite useful lives, are measured at cost less accumulated amortisation (see above (i)) and impairment losses (see accounting policy 3(g)). (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 is recognised in profit or loss when incurred. (iv) Amortisation Amortisation is recognised in profit or loss on a straight line basis over the estimated useful lives of intangible assets from the date that they are available for use. The estimated useful lives for the current and comparative periods are as follows: (i) (ii) Capitalised software development costs 2.5 - 5 years Software licenses 2.5 - 5 years (g) Impairment of 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 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”). An impairment loss is recognised if the carrying amount of an asset or its cash-generating unit exceeds its recoverable amount. A cash-generating unit is the smallest identifiable asset group that generates cash flows that largely are independent from other assets and groups. 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. 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 that have been used to determine the recoverable amount. An impairment loss is reversed only to the extent that the assets carrying amount does not exceed the carrying amount that would have been determined, net of depreciation or amortisation, if no impairment loss has been recognised. (h) Inventories Inventories are measured at the lower of cost and net realisable value. The cost of inventories includes the costs of acquisition, development and holding costs, including such costs as borrowing costs rates and taxes. Holding costs incurred post completion of development are expensed. Net realisable value is the estimated selling price in the ordinary course of business, less estimated costs of completion and the estimated costs necessary to make the sale. Page 18 Australian Finance Group Limited Notes to the Financial Statements 3. (i) Significant accounting policies (continued) Employee benefits i. Long-term employee benefits The Group’s liability in respect of long-term employee benefits is the amount of future benefits that employees have earned in return for their service in the current and prior periods; that benefit is discounted to determine its present value, and the fair value of any related assets is deducted. Consideration is given to the expected future wage and salary levels, and periods of service. The discount rate is the yield at the reporting date on government bonds that have maturity dates approximating the terms of the Group’s obligations and that are denominated in the same currency as the Group’s functional currency. ii. Short term benefits Short-term employee benefits are measured on an undiscounted basis and are expensed as the related service is provided. A liability is recognised for employee benefits such as wages, salaries, annual leave and sick leave if the Group has present obligations resulting from employees’ services provided to reporting date. A provision is recognised for the amount expected to be paid under short-term and long 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. iii. Share-based payment transactions The grant date fair value of options and shares granted to employees is recognised as an employee expense, with a corresponding increase in equity over the period in which the employees become unconditionally entitled to the options or shares. The amount recognised as an expense is adjusted to reflect the actual number of options or shares that vested, except for those that fail to vest due to market conditions not being met. (j) 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 expected future cash flows at a pre-tax discount 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 a finance cost. (k) Revenue i. Commission revenues The Group provides loan origination services and receives origination commission on the settlement of loans. Additionally the lender normally pays a trailing commission over the life of the loan. Commission revenue is recognised as follows: Origination commissions: Origination commissions are recognised upon the loans being settled and receipt of commission. Trailing commissions: The Group receives trailing commissions from lenders on loans they have settled that were originated by the Group. The trailing commissions are received over the life of the loans based on individual loan balance outstanding. The Group also makes trailing commission payments to authorised mortgage originators (members) based on the individual loan balance outstanding. On initial recognition, trailing commission revenue and receivables are recognised at fair value, being the expected future trailing commission receivables discounted to their net present value. In addition, an associated payable and expense to the members are also recognised, initially measured at fair value being the future trailing commission payable to members discounted to their net present value. Subsequent to initial recognition and measurement both the trailing commission asset and trailing commission payable are measured at amortised cost. The carrying amount of the trailing commission asset and trailing commission payable are adjusted to reflect actual and revised estimated cash flows by recalculating the carrying amount by computing the present value of estimated future cash flows at the original effective interest rate. The resulting adjustment is recognised as income or expense in the Statement of Comprehensive Income. Page 19 Australian Finance Group Limited Notes to the Financial Statements Significant accounting policies (continued) 3. (k) Revenue (continued) ii. Mortgage management revenues The Group provides mortgage management services to its clients as an alternative to traditional bank home loans. Revenue generated includes origination commission, trailing commission and fees associated with loans’ settlement and management. Origination commissions are recognised upon the loans being settled and receipt of the commission. Trailing commissions are recognised over the contract of service. Other fees are recognised in the Statement of Comprehensive Income in proportion to the stage of completion of the transaction at the reporting date. iii. Property development services The Group provides project management services for property syndication projects. The Group receives an ongoing management fee for providing these services. Revenue is recognised by reference to the stage of completion of the contract. iv. Sale of goods and disposal of assets Revenue from the sale of goods and disposal of assets is recognised when the Group has passed control of the goods or other assets to the buyer. v. Fees for services Revenue from contracts to provide marketing, compliance and administration services to the members that is recognised with reference to the stage of completion for the contract of services. vi. Rendering of other services and sponsorship income Revenue from contracts to provide other services is recognised by reference to the stage of completion of the contract. Sponsorship income is brought to account when services relating to the income have been performed. vii. Securitisation and residential mortgage backed securities programme Revenue arising from issuing residential loans which are funded by the warehouse facility is initially recognised at the fair value of the consideration received or receivable when it is probable that future economic benefits will flow to the Group and these benefits can be measured reliably. Loans and advances are initially recognised at fair value. Subsequent to initial recognition, the loans are measured at amortised cost using the effective interest method over the estimated actual (but not contractual) life of the mortgage loan, taking into account all income and expenditure directly attributable to the loan. Interest income is the key component of this revenue stream and it is recognised as it accrues using the effective interest method. The rate at which revenue is recognised is referred to as the effective interest rate and is equivalent to the rate that effectively discounts estimated future cash flows throughout the estimated life to the net carrying value of the loan. Acquisition costs are also spread across the estimated life of the loan. Lease payments (l) The determination of whether an arrangement is, or contains, a lease is based on the substance of the arrangement at inception date, whether fulfilment of the arrangement is dependent on the use of a specific asset or assets or the arrangement conveys a right to use the asset, even if that right is not explicitly specified in an arrangement. Payments made under operating leases are recognised in the profit or loss on a straight line basis over the term of the lease. Lease incentives received are recognised as an integral part of the total lease expense, over the term of the lease. Minimum lease payments made under finance leases are apportioned between the finance expense and the reduction of the outstanding liability. The finance expense is allocated to each period during the lease term so as to produce a constant periodic rate of interest on the remaining balance of the liability. (m) Finance income and expenses Finance income comprises interest income on funds invested, changes in the fair value of financial assets at fair value through profit or loss and foreign currency gains. Interest income is recognised as it accrues, using the effective interest method. Finance expenses comprise interest payable on borrowings, unwinding of the discount on provisions, changes in fair value of financial assets at fair value through profit or loss. Page 20 Australian Finance Group Limited Notes to the Financial Statements 3. Significant accounting policies (continued) Borrowing costs (n) Borrowing costs directly attributable to the acquisition, construction or production of a qualifying asset are capitalised as part of the cost of that asset. 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 method. Income tax expense (o) Income tax expense comprises current and deferred tax. Income tax is recognised in profit or loss except to the extent that it relates to a business combination, or items recognised directly in equity or in other comprehensive income. 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. Deferred tax is recognised in respect of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for taxation purposes. Deferred tax in not recognised for: temporary differences on the initial recognition of assets and liabilities in a transaction that is not a business combination and that affects neither accounting nor taxable profit or loss; temporary differences related to investments in subsidiaries and jointly controlled entities to the extent that it is probable that they will not reverse in the foreseeable future; and 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 temporary differences when they reverse, using tax rates enacted or substantively enacted by the reporting date. Deferred tax relating to items recognised outside profit or loss is recognised outside profit or loss. Deferred tax items are recognised in correlation to the underlying transaction either in other comprehensive income or directly to equity 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 set 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 asset can be utilised. Deferred tax assets are reviewed at each reporting date and 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 obligation to pay the related dividend is recognised. Tax consolidation (i) The Company and its wholly-owned Australian resident entities have formed a tax-consolidated group with effect from 1 July 2004 and are therefore taxed as a single entity from that date. The head entity within the tax-consolidated group is the Company. Current tax expenses, deferred tax liabilities and deferred tax assets arising from temporary differences of the members of the tax-consolidated group are recognised in the separate financial statements of the members of the tax-consolidated group using the ‘group allocation’ approach by reference to the carrying amounts of assets and liabilities in the separate financial statements of each entity and the tax values applying under tax consolidation. Any current tax liabilities (or assets) and deferred tax assets arising from unused tax losses of the subsidiaries is assumed by the head entity in the tax-consolidated group and are recognised by the Company as amounts payable (receivable) to (from) other entities in the tax-consolidated group in conjunction with any tax funding arrangement amounts (refer below). Any difference between these amounts is recognised by the Company as an equity contribution or distribution. The Company recognises deferred tax assets arising from unused tax losses of the tax-consolidated group to the extent that it is probable that future taxable profits of the tax-consolidated group will be available against which the asset can be utilised. Any subsequent period adjustments to deferred tax assets arising from unused tax losses as a result of revised assessments of the probability of recoverability is recognised by the head entity only. Page 21 Australian Finance Group Limited Notes to the Financial Statements Significant accounting policies (continued) 3. (o) Income tax expense (continued) (ii) Nature of tax funding arrangements and tax sharing arrangements The head entity, in conjunction with other members of the tax-consolidated group, has entered into a tax funding arrangement which sets out the funding obligations of members of the tax-consolidated group in respect of tax amounts. The tax funding arrangements require payments to/from the head entity equal to the current tax liability (asset) assumed by the head entity and any tax-loss deferred tax asset assumed by the head entity, resulting in the head entity recognising an inter-entity receivable (payable) equal in amount to the tax liability (asset) assumed. The inter-entity receivables (payables) are at call. Contributions to fund the current tax liabilities are payable as per the tax funding arrangement and reflect the timing of the head entity’s obligation to make payments for tax liabilities to the relevant tax authorities. The head entity in conjunction with other members of the tax-consolidated group has also entered into a tax sharing agreement. The tax sharing agreement provides for the determination of the allocation of income tax liabilities between the entities should the head entity default on its tax payment obligations. No amounts have been recognised in the financial statements in respect of this agreement as payment of any amounts under the tax sharing agreement is considered remote. Goods and services tax (p) 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 Australian Taxation Office (ATO) is included as a current asset or liability or as part of the expense. 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 cash flows from operating activities. Deferred income (q) Professional indemnity insurance income is deferred to the extent it gives rise to future economic benefits and recognised as income on the stage of completion of the contract. Sponsorship and other deferred income are brought to account when services relating to the income have been performed. 4. Determination of fair values A number of the Group’s accounting policies and disclosures require the determination of fair value, for both financial and non-financial 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 are disclosed in the notes specific to that asset or liability. Trailing commissions The Group receives trailing commissions from lenders on settled loans over the life of the loan based on the loan book balance outstanding. The Group is entitled to the trailing commissions without having to perform further services. The Group also makes trailing commission payments to Members when trailing commission is received from lenders. The fair value of trailing commission receivable from lenders and the corresponding payable to members is determined by using a discounted cash flow valuation. These calculations require the use of assumptions which are determined by management with the assistance of external actuaries. The key assumptions underlying the fair value calculations of trailing commission receivable and the corresponding payable to members at the reporting date is summarised in the following table: 2014 2013 Average loan life Between 4.4 and 5.3 years Between 4.4 and 5.2 years Discount rate per annum Between 9.15% and 13.5% Between 10% and 13.5% Percentage paid to members Between 85% and 91% Between 85% and 91% The percentage paid to members is fixed by the terms of their agreement with the Group. As a consequence, management does not expect changes to the percentage paid to members to be reasonably possible. Page 22 Australian Finance Group Limited Notes to the Financial Statements 4. Determination of fair values (continued) Fixed rate instruments The carrying amounts of the fixed rate instruments at year end is a reasonable approximation of their fair values with the exception of the net present value of future trailing commissions receivable which are accounted for at amortised cost. At reporting date a change in interest rate will not affect the fair values of the fixed rate instruments. Trade and other receivables/payables All trade and other receivables/payables have a remaining life of less than one year and the notional amount is deemed to reflect the fair value. Investments in equity instruments The fair value of financial assets at fair value through profit or loss is determined by reference to their quoted closing bid price at reporting date. The fair value of available-for-sale asset cannot be measured reliably because it does not have a quoted price in an active market (see note 3(c)(i)). 5. Financial risk management (a) Overview The Group has exposure to credit, liquidity and markets risks from the use of financial instruments. This note presents information about the Group’s exposure to each of the above risks, the objectives, policies and processes for measuring and managing risk, and the management of capital. Further quantitative disclosures are included throughout the financial report. The Board of Directors has overall responsibility for the establishment and oversight of the risk management framework. The Audit and Risk Committee is responsible for developing and monitoring risk management policies. 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. The Audit and Risk Committee oversees how management monitors compliance with the Group’s risk management policies and procedures and reviews the adequacy of the risk management framework in relation to the risks faced by the Company and the Group. (b) 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. Receivables Trade and other receivables The Group’s exposure to credit risk is influenced mainly by the individual characteristics of each 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. The Group’s trade and other receivables relate mainly to high credit quality financial institutions who are the members of the lender panel. New panel entrants are subject to commercial due diligence by the Group’s management prior to joining the panel. The Group bears the risk of non-payment of future trailing commissions by lenders should they not maintain solvency. However, should a lender not meet its obligations as a debtor then the Group is under no obligation to pay out any future trailing commissions to members. Excluding financial institutions on the lender panel, trade and other receivables from other customers are rare given the nature of the Group’s business. In the unlikely event that trade and other receivables arise, limits will be established for each customer that represents the maximum open amount without requiring approval from the Group’s Directors. These limits are reviewed on an ongoing basis by management. The risk limits reflect the business strategy and market environment of the Group as well as the level of risk that the Group is willing to accept. Customers that fail to meet the Group’s benchmark creditworthiness may transact with the Group only on a cash or prepayment basis. The Group does not require collateral in respect of trade and other receivables. Page 23 Australian Finance Group Limited Notes to the Financial Statements 5. Financial risk management (continued) (b) Credit risk (continued) Loans and advances To mitigate exposure to credit risk on loans and advances, the Group has adopted the policy of only dealing with creditworthy counterparties and obtaining sufficient collateral or other security where appropriate. The Group’s loans and advances relate mainly to loans advanced through its residential mortgage securitisation programme. Credit risk management is linked to the origination conditions externally imposed on the Group by the warehouse facility provider including geographical limitations. As a consequence, the Group has no significant concentrations of credit risk. The Group has established a credit quality review process to provide early identification of possible changes in credit worthiness of counterparties by the use of external credit agencies, which assigns each counterparty a risk rating. Risk ratings are subject to regular review. The Group’s maximum exposure is the excess of the net realisable value and the carrying amount of the loans, net of any impairment losses. Importantly, all residential mortgages are covered by a lender’s mortgage insurance contract which covers 100% of the principal. The Group has established an allowance for impairment that represents the estimate of incurred losses in respect of its receivables. The main component of this allowance is a specific loss component that relates to individually significant exposures, and a collective loss component established for groups of similar assets in respect of losses that have been incurred but not yet identified. The collective loss allowance is determined based on historical data of payment statistics and industry data for similar classes of financial assets. Throughout this financial year and the comparative year no loans that would otherwise be past due or impaired have been renegotiated. (c) Liquidity risk Liquidity risk is the risk that the Group will not be able to meet its financial obligations as they fall due or will have to do so at excessive cost. 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. To limit this risk, the Group manages assets with liquidity in mind, and monitors future cash flows and liquidity on a regular basis. This incorporates an assessment of expected cash flows and the availability of high grade collateral which could be used to secure additional funding if required. The liquidity position is assessed and managed under a variety of scenarios, giving due consideration to stress factors relating to both the market in general and specifically to the Group. (d) 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 foreign currency risk on cash assets that are denominated in a currency other than AUD. The currencies giving rise to this risk are denominated in US dollars (USD), New Zealand dollars (NZD) and euro. The Group elects not to enter into foreign exchange contracts to hedge this exposure as the net movements would not be material. The Group has no significant exposure to currency risk. Interest rate risk Interest rate risk is the risk to the Group’s earnings and equity arising from movements in interest rates. Positions are monitored on an ongoing basis to ensure risk levels are maintained within established limits. The Group’s most significant exposure to interest rate risk is on the interest-bearing loans within the SPE which fund the residential mortgage securitisation programme. To minimise its exposure to increases in cost of funding, the Group only lends monies on variable interest rate term. Should there be changes in pricing the Group has the option to review its position and offset those costs by passing on interest rate changes to the end customer. Prepayment risk Prepayment risk is the risk that the Group will incur a financial loss because its customers and counterparties repay or request repayment earlier or later than expected. The Group’s key exposure relates to the net present value of future trailing commissions receivable and payable. The Group uses regression models to project the impact of varying levels of prepayment on its net income. The model makes a distinction between the different reasons for repayment and takes into account the effect of any prepayment penalties. The model is back tested against actual outcomes. Page 24 Australian Finance Group Limited Notes to the Financial Statements 5. Financial risk management (continued) For the loans and advances within the SPE and SPE-RMBS, the Group minimises the prepayment risk by passing back all principal repayments to the warehouse facility providers and bondholders. Deferred establishment fees are charged to the customer on early repayment of loans to minimise losses on the costs of acquisition. Other market risk The Group is exposed to an increase in the securitisation programme credit support loan from changes in the credit rating of mortgage insurers used by the SPE, and the composition of the available collateral held. The Group uses reputable valuers and management to regularly review and report on the credit ratings of those insurers as well as the Company’s maximum cash flow requirements should there be any adverse movement in those credit ratings. (e) 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 Board of Directors monitors the return on capital, which the Group defines as net operating income divided by total shareholders’ equity and aims to maintain a capital structure that ensures the lowest cost of capital available to the Group. The Board of Directors also monitors the level of dividends to ordinary shareholders. The Group’s capital management, amongst other things, aims to ensure that it meets financial covenants attached to the interest-bearing loans and borrowings that define capital structure requirements. Breaches in meeting the financial covenants would see the Group repaying the shortfall sufficient to the lenders satisfaction, or alternatively provide additional security or cash equity. There have been no breaches in the financial covenants of any interest-bearing loans and borrowings in the current period. The SPEs are subject to the external requirements imposed by the warehouse facility providers. The terms of the warehouse facilities provide a mechanism for managing the lending activities of the SPE, and ensure that all outstanding principal and interest is paid at the end of each reporting period. Similarly, the SPE-RMBS are subject to external requirements imposed by the bondholders and the rating agencies. The terms of the RMBS transactions provide a mechanism for ensuring that all outstanding principal and interest is paid at the end of each reporting period. There were no breaches in the current period. AFG Securities Pty Ltd and AFG Property Pty Ltd are subject to externally imposed minimum capital requirements by the Australian Securities and Investments Commission (ASIC) in accordance with the conditions of their Australian Financial Services Licence. There was no breach of the requirements for the year ended 30 June 2014. 6. Revenue In thousands of AUD Commissions Interest on commission income receivable Mortgage management services Property development services Securitisation transaction fees 7. Other income In thousands of AUD Sponsorship and performance bonus income Software licence fees Professional indemnity insurance Fees for services Other 2014 341,635 49,185 1,584 1,561 786 394,751 2014 4,425 1,540 1,556 2,775 574 10,870 2013 280,181 47,177 2,802 1,645 419 332,224 2013 3,541 1,459 1,405 2,463 1,010 9,878 Page 25 Australian Finance Group Limited Notes to the Financial Statements 8. Other expenses In thousands of AUD Advertising and promotion Consultancy and professional fees Information technology Occupancy costs Employee costs Depreciation and amortisation Operating lease costs (Reversal of) /impairment loss on receivables Net loss on disposal of property, plant and equipment 9. Employee costs In thousands of AUD Wages and salaries Other associated personnel expenses Change in liability for long service leave Change in liabilities for annual and sick leave Termination benefits Superannuation 10. Auditors’ remuneration In AUD Audit services Amounts due and receivable for: Audit of the financial report of the Group and other entities of the Group Ernst & Young Other auditors Other services Other assurance services - Ernst & Young 11. Finance income and expenses Recognised in profit or loss In thousands of AUD Interest income on loans and receivables Interest income on bank deposits Net foreign exchange gain Finance income Net change in fair value of financial assets designated at fair value through profit or loss Interest expense on loans and borrowings Interest on loans from funders Unwind of discount on leave provisions Finance expense Note 9 2014 2,965 1,813 2,788 377 23,141 1,141 1,978 (42) 3 34,164 2014 15,700 5,529 (80) (8) 364 1,636 23,141 2013 2,744 1,374 2,391 507 22,553 872 2,095 29 2 32,567 2013 15,503 4,882 46 91 454 1,577 22,553 2014 2013 154,293 2,125 156,418 106,610 1,880 108,490 64,803 64,803 35,000 35,000 2014 1,621 2,089 (41) 3,669 3 (198) (123) (9) (327) 2013 98 2,634 (10) 2,722 (16) - (154) - (170) Net finance income and expense 3,342 2,552 The above financial income and expense include the following in respect of assets (liabilities) (not at fair value through profit or loss): Total interest income on financial assets Total interest expense on financial liabilities 3,710 (123) 2,732 (154) Page 26 Australian Finance Group Limited Notes to the Financial Statements 11. Finance income and expenses (continued) Recognised in other comprehensive income In thousands of AUD Net change in fair value of available-for-sale financial assets Tax on net change in fair value of available-for-sale financial assets Finance income recognised in other comprehensive income, net of tax 2014 2013 15 (5) 10 - - - Other finance income and expenses Revenue includes the interest income of $49,185 thousand (2013: $47,177 thousand) from the unwinding of the discount in relation to the net present value of future trailing commission receivable. Refer to note 6 and 14. Cost of sales includes the interest expense from the unwinding of the discount in relation to the net present value of future trailing commission payable of $43,534 thousand (2013: $41,314 thousand). 12. Income tax expense Current tax expense In thousands of AUD Income tax recognised in profit or loss Current tax expense Current period Adjustments for prior periods Deferred tax expense Origination and reversal of temporary differences Income tax from continuing operations Total income tax expense Income tax recognised in other comprehensive income Unrealised gain/(loss) on available-for-sale financial assets Income tax charged directly to other comprehensive income Numerical reconciliation between tax expense and pre-tax accounting profit In thousands of AUD Profit for the period Total income tax expense Profit excluding income tax Income tax using the Company’s domestic tax rate of 30% (2013: 30%) Non-deductible expenses Prior year temporary differences Under provision in prior periods 2014 2013 7,324 (310) 7,014 1,081 1,081 6,411 374 6,785 580 580 8,095 7,365 8,095 7,365 2014 2013 5 5 - - 2014 17,869 8,095 25,964 7,789 616 (310) 8,095 2013 15,259 7,365 22,624 6,787 550 - 28 7,365 Page 27 Australian Finance Group Limited Notes to the Financial Statements 13. Cash and cash equivalents (a) Cash and cash equivalents In thousands of AUD Cash at bank Short term deposits Cash collections accounts1 Restricted cash2 Cash and cash equivalents Cash and cash equivalents in the Statement of Cash Flows 2014 36,884 4,678 26,602 7,858 76,022 2013 45,490 1,148 10,637 7,870 65,145 76,022 65,145 (1) Discloses amounts held in the special purpose securitised trusts and series on behalf of the warehouse funder and the bondholders (2) Discloses cash collateralised standby letter of credit and cash provided in trust by the warehouse providers to fund pending settlements. The effective interest rate on at short term deposits in 2014 was 3% (2013: 4.57%). The deposits had an average maturity of 414 days (2013: 90 days). Cash and cash equivalents include cash in Collections Account held in the SPE-RMBS on behalf of the bondholders and is not available for use by the shareholders. The Group’s exposure to interest rate risk and a sensitivity analysis for financial assets and liabilities are disclosed in note 30. (b) Reconciliation of cash flows from operating activities In thousands of AUD Cash flows from operating activities Profit for the period Adjustments for: Depreciation Amortisation of intangible assets Loss on sale of property, plant and equipment Non cash movement in impairment losses on receivables Net change in the fair value of financial assets designated at fair value through profit or loss Net interest income from investing activities Net interest expense on financing activities Share of (profit) / loss of equity accounted investees Unwind of discount on leave provisions Net present value of future trailing commission income Net present value of future trailing commission expense Changes in assets and liabilities Increase/(Decrease) in trade and other receivables Increase in prepayments Increase/(Decrease) in trade and other payables Increase/(Decrease) in inventories Increase/(Decrease) in deferred income Increase/(Decrease) for employee entitlements Increase/(Decrease) in provisions Increase/(Decrease) in tax provision Increase in securitisation lending Increase in warehouse facility Increase/(Decrease) in bondholders loan Net cash from operating activities Note 2014 2013 17,869 15,259 20 21 8 8 11 18 935 206 3 (42) (3) (3,586) 198 (256) 9 (61,411) 59,067 12,989 831 (406) 5,210 (10,240) 345 (98) (558) 519 (214,476) (259,427) 482,739 17,428 677 195 2 29 16 (1,504) - 721 - (49,454) 46,878 12,819 (344) (214) (1,540) (6,783) 1,509 (552) (359) (1,648) (539,397) 283,636 258,568 5,695 Page 28 Australian Finance Group Limited Notes to the Financial Statements 14. Trade and other receivables In thousands of AUD Current Trade receivables Other trade receivables Accrued income Net present value of future trailing commissions receivable1 Prepayments Non-current Net present value of future trailing commissions receivable1 2014 2013 582 221 849 1,652 95,281 3,173 100,106 208 68 1,381 1,657 85,473 2,795 89,925 415,635 415,635 364,031 364,031 515,741 453,956 (1) See fair value determinations for trailing commissions – note 4 Trade and other receivables are shown net of a provision for impairment of $2 thousand (2013: $17 thousand). The non-current receivables represent the net present value of future trailing commissions receivable. The Group’s exposure to credit and currency risks and impairment losses related to trade and other receivables are disclosed in note 30. 15. Loans and advances Current In thousands of AUD Securitised assets1 Other secured loans2 Redeemable preference shares (RPS)3 Non-current In thousands of AUD Securitised assets1 Capitalised origination cost Other secured loans2 Redeemable preference shares (RPS)3 Less: Provision for impairment4 2014 168,972 1,140 7,290 177,402 2014 836,813 4,877 1,329 4,808 (38) 847,789 2013 130,566 47 - 130,613 2013 660,743 5,706 1,750 6,075 (55) 674,219 1,025,191 804,832 (1) The securitised assets are held as security for the various debt interests in the special purpose securitised trusts and series. (2) Other secured loans include: (3) i. ii. i. ii. Loans and advances to Members secured over future trailing commissions’ payable to the member and in some cases personal guarantees. Interest is charged on average at 9.42% p.a (2013:10.77% p.a). Loan and advances to McCabe St Limited are secured over its land and assets. Interest is charged on average at 5.01% p.a (2013: 5.38% p.a). During the year the Group acquired $4.5 million RPS in Harold Developments Pty Ltd for the amount of $4.5 million. The RPS are mandatorily redeemable at their face amount and at a determinable date, no later than 9 years from issue, and provide an annual fixed rate of return of 20%. During 2014 the accrued interest recognised in the profit or loss amounted to $1,598 thousand (2013: $75 thousand). Accrued interest is payable on redemption of the RPS. During 2013 the Group acquired 6 million RPS for the amount of $6 million. The RPS are redeemable on completion of the projects at the face amount and at determinable date, and provide an annual fixed rate of return of 20% calculated daily and compounded annually. During 2014 the accrued interest recognised in the profit or loss amounted to $1,215 thousand (2013: $75 thousand). Accrued interest is payable on redemption of the RPS. (4) Refer to note 30(a)(ii) for the split between collective and individual provision. Page 29 Australian Finance Group Limited Notes to the Financial Statements 15. Loans and advances (continued) Loans and advances that are performing in accordance with the underlying contract are classified as neither past due nor impaired. If a customer fails to make payment that is contractually due then the receivable asset is classified as past due. If subsequently all contractually due payments are made the asset reverts to its neither past due nor impaired status. At the end of the reporting period, the balance of the Group’s non-current loans and advances includes a provision for impairment of $38 thousand (2013: $55 thousand). During the financial year, new loans issued in the Group’s securitisation programme were $412,398 thousand (2013: $636,326). The Group’s exposure to credit, currency and interest rate risks related to loans and advances is disclosed in note 30. 16. Inventories In thousands of AUD Current Finished development stock held for sale Inventories carried at lower of cost and net realisable value Non-current Development work in progress Inventories carried at lower of cost and net realisable value 17. Other financial assets In thousands of AUD Current Financial assets designated at fair value through profit or loss Non-current Available-for-sale financial assets Long term deposits 2014 2013 - - 24,442 24,442 1,360 1,360 8,155 8,155 24,442 9,515 2014 2013 22 22 46 128 174 196 20 20 31 - 31 51 The financial assets designated at fair value through profit or loss are equity securities that otherwise would have been classified as available-for-sale. Net change in the fair value of available-for-sale financial assets of $15 thousand has been recognised in 2014 (2013: nil). The Group’s exposure to credit, currency and market risks related to other investments is disclosed in note 30. 18. Investments in equity-accounted investees The Group has a 35.8% (2013: 40%) interest in Qube Havelock Street Development Pty Ltd (Qube), an associate involved in the property development and management of real estate. The Group’s interest in Qube is accounted for using the equity method in the consolidated financial statements. During the year ended 30 June 2014 the Group received dividends of $340 thousand from its investments in equity- accounted investees (2013: nil). During the year ZincFinance Pty Ltd disposed of all its assets and liabilities and ceased trading. The carrying amount of the Group’s investment in this joint venture was subsequently written off to the Statement of Comprehensive Income. None of the Group’s equity-accounted investees are publicly listed entities and consequently do not have published price quotations. The Group’s share of profit in its equity-accounted investees for the year was $256 thousand (2013: loss of $721 thousand), and the carrying amount was $2,674 thousand (2013: $3,224 thousand). Page 30 Australian Finance Group Limited Notes to the Financial Statements 18. Investments in equity-accounted investees (continued) Summary of financial information for equity-accounted investees, based on their Australian Accounting Standards financial statements, are set out below: 2014 In thousands of AUD Reporting Ownership Total Total Income Expenses Profit / Group share Group date assets liabilities (Loss) of net assets share of Profit/(loss ZincFinance Pty Ltd1 30 June 0% - - - 1 (1) - Qube 2 30 June 35.8%* 27,849 20,230 2,534 1,747 787 2,727 27,849 20,230 2,534 1,748 786 2,727 - 256 256 * The Group’s interest in Qube decreased to 35.8% on 1 August 2013. 2013 In thousands of AUD Reporting Ownership Total Total Income Expenses Loss Group Group date assets liabilities share of net share of assets loss ZincFinance Pty Ltd1 30 June 50% 931 - 64 634 (570) 465 (285) Qube Havelock Street Development Pty Ltd 2 30 June 40% (1) Joint Venture (2) Associate 19. (a) Tax assets and liabilities Current tax assets and liabilities 25,655 26,586 18,808 18,808 340 404 1,431 2,065 (1,091) (1,661) 2,739 3,204 (436) (721) The current tax liability for the Group of $211 thousand (2013: $769 thousand) represents the amount of income taxes payable in respect of current and prior financial periods. (b) Deferred tax assets and liabilities Deferred tax assets and liabilities are attributable to the following: In thousands of AUD Property, plant and equipment and intangibles Trade and other receivables Revaluation of available-for-sale- investments to fair value Employee benefits Trade and other payables Other items Tax (assets) / liabilities Set off of tax Net tax (assets) / liabilities Assets Liabilities Net 2014 2013 2014 2013 2014 2013 - (1,045) (35) (1,045) 189 153,328 - 189 134,862 152,283 (35) 133,817 - (2,983) (136,094) (13) (140,135) 140,135 - (3,395) (117,959) (87) (122,521) 5 - - 92 153,614 122,521 (140,135) 5 - - (2,983) - (136,094) 79 13,479 - 57 134,919 (122,521) - (3,395) (117,959) (30) 12,398 - - - 13,479 12,398 13,479 12,398 Page 31 Australian Finance Group Limited Notes to the Financial Statements 20. Property, plant and equipment In thousands of AUD Cost Balance at 1 July 2012 Additions Disposals Balance at 30 June 2013 Balance at 1 July 2013 Additions Disposals Balance at 30 June 2014 Depreciation Balance at 1 July 2012 Depreciation charge for the year Disposals Balance at 30 June 2013 Balance at 1 July 2013 Depreciation charge for the year Disposals Balance at 30 June 2014 Carrying amounts At 30 June 2013 At 30 June 2014 21. Intangible assets In thousands of AUD Cost Balance at 1 July 2012 Acquisitions – internally developed Balance at 30 June 2013 Balance at 1 July 2013 Acquisitions Retirements Balance at 30 June 2014 Amortisation Balance at 1 July 2012 Amortisation for the year Balance at 30 June 2013 Balance at 1 July 2013 Amortisation for the year Retirements Balance at 30 June 2014 Carrying amounts At 30 June 2013 At 30 June 2014 Plant and equipment Fixtures and fittings Total 4,500 488 (174) 4,814 4,814 274 (101) 4,987 4,130 603 (1,220) 3,513 3,513 923 (98) 4,338 1,301 649 Software development 9,623 478 10,101 10,101 286 (73) 10,314 9,154 195 9,349 9,349 206 (73) 9,482 752 832 1,655 3,111 (1,048) 3,718 3,718 105 (118) 3,705 991 74 - 1,065 1,065 12 (117) 960 2,653 2,745 6,155 3,599 (1,222) 8,532 8,532 379 (219) 8,692 5,121 677 (1,220) 4,578 4,578 935 (215) 5,298 3,954 3,394 Page 32 Australian Finance Group Limited Notes to the Financial Statements 22. Trade and other payables In thousands of AUD Current Net present value of future trailing commissions payable Other trade payables Non-trade payables and accrued expenses Note 4 Non-current Net present value of future trailing commissions payable 2014 2013 84,550 44,193 2,861 75,097 37,450 3,270 131,604 115,817 370,697 321,082 370,697 321,082 502,301 436,899 Trade payables are non interest-bearing and are normally settled on 60-day terms. Non trade payables are non interest-bearing and are normally paid on a 60-day basis. The Group’s exposure to liquidity risk related to trade and other payables is disclosed in note 30. 23. Interest-bearing liabilities This note provides information about the contractual terms of the Group’s interest-bearing loans and borrowings. For more information about the Group’s exposure to interest rate risk, see note 30. Current In thousands of AUD Securitisation warehouse facilities Loans from funders Secured bond issues Secured bank loans Non-current In thousands of AUD Secured bond issues Secured bank loans Loans from funders Redeemable preference shares (RPS) 2014 281,316 601 125,894 - 407,811 2014 613,561 8,205 1,010 4,098 626,874 2013 540,852 758 42,664 3,273 587,547 2013 215,072 - 1,618 216,690 1,034,685 804,237 Terms and debt repayment schedule Terms and conditions of outstanding loans were as follows: 2014 2013 In thousands of AUD Nominal Year of interest maturity Face value rate Warehouse facilities 4.12% 2015 Loans from funders Secured bond issues Secured bank loans Redeemable preference shares 6.25% 2015-2018 3.60% 2015-2019 3.94% 2015-2017 15.00% 2017 281,469 1,611 741,308 8,205 4,098 Carrying amount Nominal Year of interest maturity Face value Carrying amount rate 281,316 4.32% 2014 1,611 739,455 8,205 4,098 6.31% 2014-2018 4.22% 2014-2018 3.20% 2014 540,897 2,376 258,569 3,273 - 540,852 2,376 257,736 3,273 - 1,036,691 1,034,685 805,115 804,237 Page 33 Australian Finance Group Limited Notes to the Financial Statements 23. Interest-bearing liabilities (continued) (a) Secured bank loans During the year additional debt facilities (secured bank loans) were obtained to fund the development of the land owned by AFG Developments Pty Ltd and AFG Developments 2 Pty Ltd (Land). As at balance sheet date total debt facilities was $56,190 thousand (2013: $3,273 thousand) with an unused amount of $48,113 (2013: nil).The pledged security includes: first registered mortgage over the Land and first registered general security over the assets and undertakings of the two subsidiaries. Furthermore, the Parent entity provided a project performance guarantee limited to $5 million. The secured bank loans contain covenants in respect of the value of secured property and the loan advance against the development costs (Loan to Value Ratio and Loan to Cost Ratio). Breaches in meeting the financial covenants would see the Group repaying the shortfall sufficient to the lenders satisfaction, or alternatively provide additional security or cash equity. There have been no breaches in the financial covenants of any interest-bearing loans and borrowings in the current period. The carrying amount of the inventories relating to the development of the Land, including the Land, is $24,443 thousand (2013: 8,155 thousand). (b) Redeemable preference shares During the year AFG Property Investment No.1 Pty Ltd issued 4,500 thousand fully paid $1 redeemable preference shares (RPS) to sophisticated investors (2013: nil), with 600 thousand RPS acquired by the Parent entity. The funds raised were used to subscribe for redeemable preference shares in Harold Developments Pty Ltd (Developer) to enable it to acquire land and develop it (see Note 15). The RPS are mandatorily redeemable at their face amount and at determinable date upon the redemption of the preference shares subscribed to by the Group in the Developer, however no later than 9 years from issue. The RPS provide an annual fixed rate of return of 15%. The rights attached to the RPS include: the right to receive a fixed cumulative preferential dividend at the specified rate, priority over all other classes of shares on a reduction of capital or winding up of the issuer, and no right to share in the remaining assets of the Developer on winding up. During 2014 the accrued interest recognised in the profit or loss amounted to $198 thousand (2013: Nil). Accrued interest is payable on redemption of the RPS. (c) Warehouse and secured bond issues The carrying amount of the collaterals pledged as security for the warehouse facility and the secured bond issues is $1,779,647 thousand (2013: $1,335,226 thousand). i. Warehouse facilities The warehouse facilities provide funding for the financing of loans and advances to customers within the SPE and its Series. The security for advances under these facilities is a combination of fixed and floating charges over all assets of the SPE. If the warehouse facility is not renewed or should there be a default by the trustee under the existing terms and conditions, the warehouse facility funder will not have a right of recourse against the remainder of the Group. Borrowings are secured against residential properties only, and each mortgage is covered by a lender’s mortgage insurance contract which covers 100% of the principal of the loan. The carrying amount of the collaterals pledged as security is $487,331 thousand (2013: $895,452 thousand). During the financial year there were no breaches to the agreement that permitted the warehouse facility provider to demand payment of the outstanding value. As at the reporting date the unutilised securitisation warehouse facility for all Series is $214,031 thousand (2013: $152,603 thousand). After the balance sheet date the Group secured an extension to the term of the residential warehouse facility that was due to expire in 9 September 2014 to 14 August 2015. Liquidity facility The Liquidity facility is established by the warehouse facility providers to temporarily fund any excess amount of interest, fees and any other charges which may accrue from the date of cash flows calculation to the date of cash flows payment. As at the reporting date the unutilised facility is $4,960 thousand (2013: $16,000 thousand). Page 34 Australian Finance Group Limited Notes to the Financial Statements 23. Interest-bearing liabilities (continued) ii. Secured bond issues SPE-RMBS were established to provide funding for loans and advances (securitised assets) originated by AFG Securities Pty Ltd. The 2013 and 2014 bond issues have a legal final maturity of 31.5 years from issue, and a weighted average life of up to 5 years. The security for loans and advances under this facility is a combination of fixed and floating charges over all assets of the SPE-RMBS. Importantly, all residential mortgages are covered by a lender’s mortgage insurance contract which covers 100% of the principal of the loan. The carrying amount of the collaterals pledged as security is $1,292,316 thousand (2013: 439,773 thousand). Under the current trust terms, a default by the borrowers will not result in the bondholders having a right of recourse against the Group (as Originator, Trust Manager or Servicer). The interest is recognised at an effective rate 3.6% (2013: 4.22%). Liquidity facility Various mechanisms have been put in place to support liquidity within the transaction to support timely payment of interest, including principal draws which are covered by Redraw Notes for redraws that cannot be covered by normal collections (available principal), a liquidity facility between 1% and 1.3% of the initial invested amount of all notes, $150 thousand Reserve Account which is an Extraordinary Expense Ledger account, and Available income. Additional credit support includes subordinated credit enhancement held by the Group (unrated Class C Notes) which had an aggregate initial invested amount of $2,750 thousand (2013: $1,500 thousand). During the financial year there were no breaches to the terms of the SPE-RMBS that gave right to the bondholder to demand payment of the outstanding value. (d) Loans from funders Some of the upfront commissions received from specific funders at the point of loan origination are refunded by the Group via reduced ongoing management fees over a period of 5 years. The Group recognises the upfront commission from these funders as a loan, and interest is charged on this facility by the funders. The principal and interest will be paid back over the 5 year period. Interest is recognised at an effective rate of 6.25% (2013: 6.31%). Refer to note 30 for further disclosures on interest-bearing liabilities. (e) Other finance facilities In thousands of AUD Standby facility Bank guarantee facility Facilities utilised at reporting date Standby facility Bank guarantee facility Facilities not utilised at reporting date Standby facility Bank guarantee facility The facilities are subject to annual review. 2014 600 1,380 1,980 122 693 815 478 687 1,165 2013 200 500 700 - 492 492 200 8 208 Page 35 Australian Finance Group Limited Notes to the Financial Statements 23. Interest-bearing liabilities (continued) (f) Performance guarantee During the year the Group has provided a performance guarantee to AFG Developments Pty Ltd debt facility provider of $5 million in relation to the due performance of Richmond Quarter development project (Project). In the event that the Project’s costs exceed the facility obtained from the funder of $51,510 thousand and the equity contributed to the project, the Group is obligated to pay for the cost overrun that the Bank will not meet from the loan. In the event of the Group failing to meet its obligations in respect of the cost overrun, or should there be any default on the loan repayment, the funder on demand will request the payment of the guarantee up to a limit of $5 million. In view of the timely progress of the project, the fixed price nature of the construction contract and the presales secured at balance sheet date, the Group expects to meet all of its obligations under the terms of facility. Accordingly, no provision for any liability has been made in these financial statements. 24. Employee benefits In thousands of AUD Current Salaries and wages accrued Liability for sick leave Liability for long service leave Liability for annual leave Non Current Liability for long-service leave 25. Share based payments (a) Options 2014 2013 739 30 944 909 816 20 889 927 2,622 2,652 350 350 485 485 2,972 3,137 At 29 August 2001, the Group established a share option programme that grants key management personnel and employees shares in the entity. No options were issued to key management personnel or employees during 2014 (2013: Nil). (b) Employee share scheme An employee share scheme has been established where the Group may, at the discretion of management, grant ordinary shares in the Group to certain members of staff of the Group. The shares issued for nil consideration, are granted in accordance with the performance guidelines established by the directors of the Group. With respect to the share scheme: (i) Unless the Board otherwise determines, all issues of Plan Shares are made subject to the following restrictions: an Eligible Participant may not deal with 1/2 of the Plan Shares prior to the expiration of 24 months from the issue date. an Eligible Participant may not deal with 1/2 of the Plan Shares prior to the expiration of 12 months from the issue date; and (ii) No issues may be made under the Plan at a time when the number of Plan Shares exceeds 5% of the total number of issued ordinary shares in the capital of the Company. Each Plan Share will rank equally with other fully paid ordinary shares of the Company in respect of voting rights and dividends, and will be entitled to participate in any Bonus Issues and Entitlement Issues made by the Company on the same basis as other issued fully paid ordinary shares in the Company, save as regards any rights attaching to shares by reference to a record date prior to the Issue Date. Page 36 Australian Finance Group Limited Notes to the Financial Statements 25. Share based payments (continued) Issue Date 28 Sep 2001 31 Dec 2001 27 May 2002 30 Sep 2003 31 Oct 2003 8 July 2004 25 Aug 2004 28 July 2005 25 Nov 2005 24 Jan 2006 18 July 2006 4 May 2009 Number Issued 234,000 562,500 50,000 77,000 146,000 53,000 60,000 10,000 95,000 66,667 50,000 650,000 Vested 234,000 562,500 50,000 77,000 146,000 53,000 60,000 10,000 95,000 66,667 50,000 650,000 Non Vested - - - - - - - - - - - - Total 234,000 562,500 50,000 77,000 146,000 53,000 60,000 10,000 95,000 66,667 50,000 650,000 Value per Share $0.031 $0.027 $0.014 $0.011 $0.011 $0.150 $0.150 $0.200 $0.180 $0.200 $0.150 $0.300 Total Value $7,254 $15,187 $700 $847 $1,606 $7,950 $9,000 $2,000 $17,100 $13,333 $7,500 $195,000 The fair values of services received in return for the issue of shares under the Scheme are measured by reference to the fair value of the shares issued under the Scheme. The valuation of the shares issued under the Scheme considered the following factors: The Group is a non listed group and as such the relative liquidity of the shares The number of shares held or controlled by directors, related entities and other significant shareholders The net tangible assets of the Group as at the time of the issue of shares under the scheme No amount was expensed to employee expenses for the fair value of shares issued under the terms of the Employee Share Scheme in 2014 (2013: Nil). No shares were bought back during the financial year from ex-employees, as allowed under the terms of the Scheme (2013: NIL). 26. Provisions In thousands of AUD Balance at 1 July 2013 Provision made during the period Provision reversed during the period Balance at 30 June 2014 Current Non-current Provision for terminated members Terminated members Make good Legal Total 613 9 (553) 69 69 - 69 80 20 (34) 66 - 66 66 250 - - 250 250 - 250 943 29 (587) 385 319 66 385 The provision for terminated members relates mainly to commission currently disputed with terminated members and as such have been withheld. The provision has been raised in certain circumstances where it is expected that there is a possibility of legal action from the terminated member. Provision for make good It is a condition of the lease of the Group’s premises to return the property in its original condition at the end of the lease term. The Group recognises a provision for make good as the expected cost of the refurbishment over the life of the lease. Legal A provision for the Group’s liability in respect of the excess and the related legal costs on a litigation claim that is expected to be fully indemnified by the insurer. Page 37 Australian Finance Group Limited Notes to the Financial Statements 27. Deferred income Current In thousands of AUD Sponsorship income Lease incentives Unearned professional indemnity insurance 28. Other financial liabilities Non-current In thousands of AUD Secured non-interest bearing loans 2014 2,182 1,083 1,034 4,299 2014 4,690 4,690 2013 1,736 1,311 908 3,955 2013 - - The Group has an obligation of $4,690 thousand payable to a terminated joint operator of Richmond Quarter project (Project). The loan, which is repayable on completion of the Project, was obtained to facilitate the acquisition of 30% of the land and interest in the Project that was previously held by the joint operator. This has effectively resulted in the Group securing 100% ownership of the land and all the undertakings of the Project. The loan is non-interest bearing loan and is expected to be repaid in full, in accordance with the terms of Deed of Termination of Joint Venture Agreement, on the earlier of 30 June 2016, 30 months after 30 September 2014, and 6 months after the registration of the strata plan and the issuing of the titles of the project. 29. Capital and reserves (a) Share capital The Company In thousands of shares On issue at 1 July Issued for cash or nil consideration On issue at 30 June – fully paid Ordinary shares (’000) 2014 93,340 - 93,340 2013 93,340 - 93,340 The Company does not have authorised capital or par value in respect of its issued shares. All issued shares are fully paid and rank equally with regard to the Company’s residual assets. The holders of ordinary shares are entitled to receive dividends as declared from time to time and are entitled to one vote per share at meetings of the Company. (b) Translation reserve The translation reserve comprises all foreign exchange differences arising from the translation of the financial statements of foreign operations. (c) Fair value reserve The fair value reserve comprises the cumulative net change in fair value of available-for-sale financial assets until the investments are derecognised or impaired. Page 38 Australian Finance Group Limited Notes to the Financial Statements 29. Capital and reserves (continued) (d) Dividends Dividends paid in the current year by the Group are: 2014 Final 2013 ordinary 1st interim 2014 ordinary 2nd interim 2014 ordinary 2013 Final 2012 ordinary 1st interim 2013 ordinary 2nd interim 2013 ordinary Cents per Total share amount ($’000) Franked / unfranked Date of payment 3.21 4.82 4.29 6.43 3.21 3.21 3,000 4,500 4,000 11,500 6,000 3,000 3,000 12,000 Franked Franked Franked 05/07/13 29/11/13 30/05/14 Franked Franked Franked 04/07/2012 07/12/2012 26/02/2013 After 30 June 2014 the following dividends were declared and paid. The dividends have not been provided for in the financial statements and there are no income tax consequences. Total Cents per Franked / Date of share amount ($’000) unfranked payment Final 2014 ordinary 10,000 10,000 Franked 06/10/2014 Dividends declared or paid during the year or after 30 June 2014 were franked at the rate of 30%. In thousands of AUD Dividend franking account 30 per cent franking credits available to shareholders of Australian Finance Group Limited for subsequent financial years 2014 2013 21,223 19,867 70,744 66,223 The ability to utilise the franking credits is dependent upon the ability to declare dividends. In accordance with the tax consolidation legislation, the Company as the head entity in the tax-consolidated group has also assumed the benefit of $70,744 thousand (2013: $66,223 thousand) franking credits. 30. (a) Financial instruments Credit risk Exposure to credit risk The carrying amount of the Group financial assets represents the maximum credit exposure. Page 39 Australian Finance Group Limited Notes to the Financial Statements 30. (a) (i) Financial instruments (continued) Credit risk (continued) Trade and other receivables Exposure to credit risk The Group’s maximum exposure to credit risk for trade and other receivables by type of customer is detailed below: In thousands of AUD Type of customer Financial institutions Members Other Carrying amount 2014 2013 511,744 147 676 450,469 81 612 All outstanding trade and other receivables are with customers located within Australia. The amounts owing from financial institutions include the net present value of trailing commissions’ receivable of $510,916 thousand (2013: $449,504 thousand). The majority of the Group’s net present value of future trailing commission receivable is from counterparties that are rated between AA+ and A-. The following table provides information on the credit ratings at the reporting date according to the Standard & Poor’s counterparty credit with AAA and BBB being respectively the highest and the lowest possible ratings. In thousands of AUD Standard & Poor’s Credit rating AA+ AA- A+ A A- BBB+ BBB BB+ Not rated In thousands of AUD Standard & Poor’s Credit rating AA+ AA- A+ A A- BBB+ BBB BBB- BB+ Not rated Current Non 2014 Current 2014 19 65,430 1,213 13,120 429 35 316 259 14,460 85 285,418 5,292 57,234 1,871 151 1,380 1,130 63,074 95,281 415,635 Current Non 2013 Current 2013 30 59,685 1,042 11,087 7 40 185 111 220 13,066 128 254,200 4,440 47,220 30 170 787 470 936 55,650 85,473 364,031 Page 40 Australian Finance Group Limited Notes to the Financial Statements 30. (a) (i) Financial instruments (continued) Credit risk (continued) Trade and other receivables (continued) Impairment losses The ageing of the Group’s trade and other receivables (excluding the net present value of future trailing commissions), at the reporting date was: In thousands of AUD Not past due Past due 0-30 days Past due 30-60 days Past due more than 61 days Gross 2014 Impairment allowance 2014 Gross 2013 Impairment allowance 2013 1,070 75 1 508 1,654 - - (1) (1) (2) 1,507 64 14 89 1,674 - - (7) (10) (17) During the year ended 30 June 2014 the Group has not renegotiated or entered into any agreement to renegotiate a trade receivable that would otherwise be past due or impaired. The allowance accounts in respect of trade and other receivables are used to record impairment losses unless the Group is satisfied that no recovery of the amount owing is possible; at that point the amount is considered irrecoverable and is written off against the receivable account. During 2014 and 2013 there were no individual impairment allowances raised. The movement in the allowance for collective impairments in respect of trade and other receivables during the year was as follows: In thousands of AUD Balance at 1 July Impairment loss recognised Amounts written off or Balance at 30 June (ii) Loans and advances Exposure to credit risk 2014 2013 17 - (15) 2 14 3 - 17 The Group’s maximum exposure to credit risk for loans and advances at the reporting date by customer type are summarised as follows: In thousands of AUD Customer type Residential mortgage borrowers Members Other Residential mortgage borrowers Carrying amount 2014 2013 1,010,624 2,330 12,236 1,025,190 796,960 1,797 6,075 804,832 The Group minimises credit risk by obtaining security over residential mortgage property for each loan. The estimated value of collaterals held at balance date was $1,779,647 thousands (2013: 1,335,226 thousands). During the year ended 30 June 2014 the Group has taken possession of 4 residential properties that were held as security for loans issued by the Group. The carrying amount of the repossessed residential property was $1,796 thousand (2013: $200 thousand). One property has been sold before the end of the financial year, and the outstanding loan has been repaid by our lender’s mortgage insurance, except for an expected shortfall of $17k which was provided for during the year. In monitoring the credit risk, mortgage securitisation customers are grouped according to their credit characteristics using credit risk classification systems. This includes the use of the Loan to Value Ratio (LVR) to assess its exposure to credit risk from loans originated through the securitisation programme. Page 41 Australian Finance Group Limited Notes to the Financial Statements 30. (a) (ii) Financial instruments (continued) Credit risk (continued) Loans and advances (continued) The table below summarises the Group exposure to residential mortgage borrowers by LVR, with the valuation used determined as at the time of settlement of the individual loan. In thousands of AUD Loan to value ratio Greater than 95% Between 90%-95% Between 80%-90% Less than 80% Carrying amount 2014 2013 - 52,550 166,199 787,036 1,005,785 367 57,668 127,579 605,695 791,309 The Group exposure to credit risk by geographic region at reporting date is limited to Australia. Impairment Losses The aging of the Group’s loans and advances at the reporting date was: In thousands of AUD Not past due Past due 31-120 days Past due 121 days to one year Past due more than one year Gross 2014 1,020,944 2,910 1,211 163 1,025,228 Impairment allowance 2014 - - (20) (18) (38) Gross 2013 802,002 2,259 617 9 804,887 Impairment allowance 2013 (1) (14) (31) (9) (55) The impairment loss provision as at 30 June 2014 of $38 thousand (2013: $55 thousand) is a specific provision for loans that are past due. The movement in the allowance for impairment in respect of loans and advances for the Group during the year was as follows: In thousands of AUD Balance at 1 July 2012 Charge for the year Utilised Unused amounts reversed Balance as at 30 June 13 Balance as at 1 July 2013 Charge for the year Utilised Unused amounts reversed Balance at 30 June 14 Individual Collective 8 46 - - 54 54 1 - (17) 38 8 - - (7) 1 1 - - (1) - Securitisation loans Loans and advances of SPEs: The Group is required to provide the warehouse facility provider with a level of subordination or Credit Support. The Group’s maximum exposure to credit risk on this securitisation loan at reporting date is the carrying amount. The SPE-RMBS loans and advances: Under the current trust terms, a default by the borrowers will not result in the bond holders having a right of recourse against the Group (as Originator, Trust Manager or Servicer). Importantly, all residential mortgages are covered by a lender’s mortgage insurance contract which covers 100% of the principal. The Group’s maximum exposure is the loss of future interest income on its Class C Notes investment. No impairment loss was recognised during 2014 (2013: NIL). Page 42 Australian Finance Group Limited Notes to the Financial Statements 30. (a) (ii) Financial instruments (continued) Credit risk (continued) Loans and advances (continued) Redeemable preference shares All the RPS were acquired to enable a reputable property developer to fund property projects. The Group limits its exposure to credit risk by only investing in counterparties that are creditworthy with an extensive past experience in property development, and by obtaining sufficient collateral or other security where appropriate and a higher ranking than ordinary shareholders in any proceeds’ distribution. All RPS are mandatorily redeemable and a failure to redeem the RPS within the agreed term will see the counterparties liable to indemnify the Group for the shortfall through either sale of their assets, or any other means in accordance with the agreed terms. As at the balance sheet date all the property projects are on track to agreed key targets in terms of sales, budget and completion date. The Group does not expect any counterparty to fail to meet its obligations in full when due. The likelihood of an exposure by the Group to credit risk for the RPS is assessed to be minimal. No impairment loss was recognised during 2014 (2013: NIL). Other secured loans The Group has minimal exposure to credit risk for loans made during the year. No impairment loss was recognised during 2014 (2013: NIL). (b) Liquidity risk Liquidity risk is the risk that the Group will encounter difficulty in meeting the obligations associated with its financial liabilities that are settled by delivering cash or another financial asset. 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 Board of Directors reviews the cash flows’ rolling forecast on a monthly basis to ensure that the level of its cash and cash equivalents is at an amount in excess of expected cash outflows over the succeeding months. Excess funds are generally invested in at call bank accounts with maturities of less than 90 days. Within the special purpose entities the Group also maintains sufficient cash reserves to fund redraws and additional advances on existing loans. As stated in note 23, the Group has unused warehouse facilities at the reporting date. The following are the contractual maturities of financial liabilities based on contractual undiscounted payments, including estimated interest payments and excluding the impact of netting agreements for the Group. 2014 In thousands of AUD Redeemable preference shares Securitisation warehouse facilities Secured bond issues Secured bank loans Loans from funders Net present value of future trailing commissions payable Trade and other payables 2013 Securitisation warehouse facilities Secured bond issues Secured bank loans Loans from funders Net present value of future trailing Carrying amount 4,098 281,316 739,455 8,205 1,611 Contractual cash flows 5,075 287,273 765,744 8,773 1,725 6 months or less - 111,522 63,626 161 320 6-12 months - 175,751 63,626 160 300 1-2 years 2-5 years 5,075 - 107,745 8,452 540 - - 530,747 - 565 More than 5 years - - - - - 455,247 47,054 1,536,986 615,784 47,054 1,731,428 64,378 47,054 287,061 61,656 - 301,493 110,313 - 232,125 227,851 - 759,163 151,587 - 151,587 540,852 257,736 3,273 2,376 552,589 260,975 3,307 2,562 552,589 21,783 3,307 418 - 21,783 - 364 - 37,129 - 698 - 180,280 - 1,082 - - - - commissions payable Trade and other payables 396,179 40,720 544,907 40,720 58,203 40,570 55,088 150 97,613 - 199,334 - 134,668 - 1,241,136 1,405,060 676,870 77,385 135,440 380,696 134,668 Page 43 Australian Finance Group Limited Notes to the Financial Statements 30. (b) Financial instruments (continued) Liquidity risk (continued) The obligation in respect of the net present value of future trailing commission only arises if and when the Group receives the corresponding trailing commission revenue from the lenders. It is not expected that the cash flows included in the maturity analysis could occur significantly earlier, or at significantly different amounts. Securitisation warehouse facilities The warehouse facilities are short term funding facilities that are generally renewable annually. Post balance sheet date the Group has extended the term of the warehouse facility that was due to expire on 6 September 2014 to 14 August 2015. If the warehouse facility is not renewed or should there be a default by the trustee under the existing terms and conditions, the warehouse facility funder will not have a right of recourse against the remainder of the Group. Should the warehouse facility not be renewed then the maximum exposure to the group would be the loss of future income streams from excess spread, being the difference between the group's mortgage rate and the underlying cost of funds. Secured bond issues The securities are issued by the SPE-RMBS with an expected weighted average life of 5 years. They are a pass through type of securities that may be repaid early (at the call date) by the issuer (the Group) in certain circumstances. The above maturity assumes that the securities will be paid at their respective maturity dates and that the Group will not opt to repay the securities at the call date. The Directors are satisfied that the Group’s ability to continue as a going concern will not be affected. For terms and conditions relating to trade payables and net present value of future trailing commissions payable refer to notes 4 and 22. (c) (i) Exposure to currency risk Market risk Currency risk As at reporting date the Group held cash assets denominated in New Zealand dollars (NZD), USD and euro. Fluctuations in the foreign currencies are not expected to have material impact on the Statement of Comprehensive Income and equity of the Group and have therefore not formed part of the disclosures. Interest rate risk (ii) Profile The table below summarises the profile of the Group’s interest-bearing financial instruments at reporting date. In thousands of AUD Fixed rate instruments Financial assets Financial liabilities Variable rate instruments Financial assets Financial liabilities Carrying amount 2014 2013 525,482 459,345 66,137 1,086,646 1,030,587 56,059 457,377 396,179 61,198 862,105 804,237 57,868 The Group’s main interest rate risk arises from the securitised assets, cash deposits and interest bearing liabilities. All the Group’s borrowings are issued at variable rates, however the vast majority pertains to the warehouse facility which is arranged as a ‘pass through’ facility, and therefore the exposure to the interest rate risk is mitigated by passing any rate increases onto the borrowers. 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 reporting date would not affect profit or loss. Cash flow sensitivity analysis for variable rate instruments Due to the market conditions existing at 30 June 2014, the Group does not expect that interest rates will move in excess of 100 basis points (bps) from current conditions in the next reporting period. This has therefore formed the basis for the sensitivity analysis. Page 44 Australian Finance Group Limited Notes to the Financial Statements 30. (c) (ii) Financial instruments (continued) Market risk interest rate risk 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 2013. Effect in thousands of AUD 30 June 2014 Variable rate financial assets Variable rate financial liabilities Cash flow sensitivity (net) 30 June 2013 Variable rate financial assets Variable rate financial liabilities Cash flow sensitivity (net) After tax profit Equity 100bp increase 100bp decrease 100bp increase 100bp decrease 7,209 3,233 3,976 4,226 2,620 1,606 (7,209) (3,243) (3,966) (4,226) (3,924) (302) 7,209 3,233 3,976 4,226 2,620 1,606 (7,209) (3,243) (3,966) (4,226) (3,924) (302) (iii) Prepayment risk Net present value of future trailing commissions receivable and payable Exposure to prepayment risk The Group will incur financial loss if customers or counterparties repay or request repayment earlier or later than expected. A change in the pattern of repayment by end consumers will have an impact on the fair value of future trailing commissions receivable and payable. Refer to note 4 for more details. Sensitivity analysis Management have engaged the use of actuaries for the purposes of reviewing the run-off rate of the loans under management. Management does not expect the run-off rate to change in excess of 4% positive or 4% negative of the rates revealed from the actuarial analysis. The change estimate is calculated based on historical movements of the prepayment rate. The effect from changes in prepayment rates, with all other variables held constant, is as follows: In thousands of AUD 2014 2013 After tax profit Equity Securitised assets +4% -4% +6% -6% (1,138) (1,138) 1,182 1,182 (1,625) (1,625) 1,717 1,717 The Group is exposed to prepayment risk on its securitised assets. The warehouse facilities and the secured bond issues funding the securitisation operations are pass through funding facilities in nature. All principal amounts prepaid by residential mortgage borrowers are passed through to the warehouse facility provider or the bond holders as part of the monthly payment terms. Consequently, the Group has no material exposure to prepayment risk on its securitised assets. (iv) Equity price risk Exposure to equity price risk The Group’s maximum exposure to this risk, deemed insignificant, is presented by the carrying amounts of its financial assets designated at fair value through profit or loss and available-for-sale financial asset carried in the Statement of Financial Position. At 30 June 2014 an increase in the fair value of financial assets designated at fair value through profit or loss of $2 thousand (2013: $16 thousand decrease) was recognised. Page 45 Australian Finance Group Limited Notes to the Financial Statements 30. (c) (v) Financial instruments (continued) Market risk (continued) Other market risks The Group is exposed to other market risks on the credit support (securitisation loan receivable) provided by the Group in relation to the warehouse facilities. The value of the loan is dynamic in that it can change due to circumstances including the credit ratings of mortgage insurers. The Group has assessed that if this were to occur, it would not have a material impact on the Group’s profit after tax and equity. (d) Accounting classifications and fair values Fair values versus carrying amounts The fair values of financial assets and liabilities, together with the carrying amounts shown in the Statement of Financial Position, are as follows: In thousands of AUD Assets carried at fair value Financial assets designated at fair value through profit or loss Available-for-sale financial assets Assets carried at amortised cost Cash and cash equivalents Trade and other receivables Loans and advances Other financial assets Liabilities carried at amortised cost Trade and other payables Interest-bearing liabilities Other financial liabilities 2014 2013 Note Carrying Fair value Carrying Fair value amount amount 17 17 13(a) 14 15 17 22 46 22 46 20 31 20 31 76,022 512,568 1,025,191 128 76,022 512,568 1,025,191 128 65,145 451,161 804,832 - 65,145 451,161 804,832 - 22 23 28 (502,301) (1,034,685) (4,690) (502,301) (1,034,685) (4,690) (436,899) (804,237) - (436,899) (804,237) - 72,301 72,301 80,053 80,053 Fair value hierarchy The table below analyses financial instruments carried at fair value, by valuation method. The different levels have been defined as follows: Level 1: quoted prices (unadjusted) in active markets for identical assets or liabilities Level 2: inputs other than quoted prices included within level 1 that are observable for the asset or liability, either directly (i.e. as prices) or indirectly (i.e. derived from prices). Level 3: inputs for the asset or liability that are not based on observable market data (unobservable inputs). Effect in thousands of AUD 30 June 2014 Available-for-sale financial assets Financial assets designated at fair value through profit or loss 30 June 2013 Available-for-sale financial assets Financial assets designated at fair value through profit or loss Fair value measurement at end of the reporting period using : Level 1 Level 2 Level 3 Total - 22 22 - 20 20 - - - - - 46 - 46 31 - 31 46 22 68 31 20 51 There have been no transfers between levels during the year ended 30 June 2014 (2013: no transfers in either direction). Page 46 Australian Finance Group Limited Notes to the Financial Statements Financial instruments (continued) Accounting classifications and fair values (continued) 30. (d) Reconciliation of movement per class pertaining to Level 3 financial instruments for the period: In thousands of AUD Balance at 1 July 2013 Total gains and losses recognised in comprehensive income Purchases and disposals Balance at 30 June 2014 Available-for-sale financial assets Financial assets designated at fair value through profit or loss 31 15 - 46 20 2 - 22 31. Operating leases Leases as lessee Non-cancellable operating lease rentals are payable as follows: In thousands of AUD Less than one year Between one and five years 2014 2,033 5,800 7,833 2013 2,048 5,956 8,004 The Group leases a number of office facilities under operating leases. The leases run for a period of up to 6 years, with an option to renew the lease after that date. Lease payments are generally increased every year to at least reflect Consumer Price Index (CPI) movements, with regular adjustments to reflect market rentals. During the financial year ended 30 June 2014, $1,978 thousand was recognised as an expense in the Statement of Comprehensive Income in respect of operating leases (2013: $2,095 thousand). 32. Group entities Country of incorporation Ownership interest 2014 2013 Parent entity Australian Finance Group Limited Significant subsidiaries Australian Finance Group (Commercial) Pty Ltd Australian Finance Group Insurance Brokers Pty Ltd Australian Finance Group Securities Pty Ltd AFG Securities Pty Ltd AFG 2010-1 Trust AFG 2013-1 Trust AFG 2013-2 Trust AFG 2014-1 Trust New Zealand Finance Group Ltd Lilydale Pastures Estate Pty Ltd Longford Road Pty Ltd AFG Home Loans Pty Ltd Venture Lending Pty Ltd Cambridge WA Pty Ltd AFG Developments Pty Ltd AFG Developments 2 Pty Ltd AFG Property Investment No.1 Pty Ltd AFG Property Pty Ltd Australia Australia Australia Australia Australia Australia Australia Australia Australia New Zealand Australia Australia Australia Australia Australia Australia Australia Australia Australia 100 100 100 100 100 100 100 100 100 100 100 100 100 51 100 100 100 100 100 100 100 100 100 100 100 100 - - 100 100 100 100 51 100 100 100 - - The Group holds a 51% interest in Venture Lending Pty Ltd, has majority representation on the entity’s board of directors, and has control over its operating and financial decisions. Consequently, the Group has consolidated this entity into its financial statements. Page 47 Australian Finance Group Limited Notes to the Financial Statements 33. Parent entity Throughout the financial year ending 30 June 2014, the parent Company of the Group was Australian Finance Group Limited. In thousands of AUD Results of the parent entity Profit for the period Other comprehensive income Total comprehensive income for the period In thousands of AUD Financial position of parent entity at year end Current assets Total assets Current liabilities Total liabilities Total equity of the parent entity comprising of: Share capital Reserves Retained earnings Total equity 2014 2013 18,855 10 18,865 18,879 - 18,879 2014 2013 164,975 609,748 136,177 521,522 11,435 (75) 76,866 88,226 147,261 535,953 120,840 455,092 11,435 (85) 69,511 80,861 See notes 34 and 35 for the parent entity capital and other commitments, and contingencies. Refer to note 23 (d) for the parent entity’s guarantees. As at reporting date the credit support facility provided by the parent entity to AFG 2010-1 Trust was $9.5 million (2013: $6.5 million). 34. Capital and other commitments During the year ended 30 June 2014 the Group entered into two construction contracts to develop AFG Developments 2 Pty Ltd and AFG Developments Pty Ltd lands. As at the reporting date the Group is committed to incur additional capital expenditure in respect of these contracts of $2,860 thousand (2013: nil) and $37,803 thousand (2013: nil), respectively. These commitments are expected to be settled in 2016. 35. Contingencies Performance guarantee During the year the Group has provided a performance guarantee to AFG Developments Pty Ltd debt facility provider of $5 million in relation to the due performance of Richmond Quarter development project (Project). In the event that the Project’s costs exceed the facility obtained from the funder of $51,510 thousand and the equity contributed to the project, the Group is obligated to pay for the cost overrun that the Bank will not meet from the loan. In the event of the Group failing to meet its obligations in respect of the cost overrun, or should there be any default on the loan repayment, the funder on demand will request the payment of the guarantee up to a limit of $5 million. Given the timely progress of the project and the presales secured at balance sheet date, the Group expects to meet all of its obligations under the terms of facility. Accordingly, no provision for any liability has been made in these financial statements. Third Party Guarantees Bank guarantees have been issued by third parties financial institutions on behalf of the Group and its subsidiaries for items in the normal course of business such as operating lease contracts. The amounts involved are not considered to be material to the Group. Other than above, no material claims against these warranties have been received by the Group at the date of this report, and the Directors are of the opinion that no material loss will be incurred. Page 48 Australian Finance Group Limited Notes to the Financial Statements 36. (a) Related parties Key management personnel compensation The key management personnel compensation paid and payable as at the reporting date comprised: In AUD Short-term employee benefits1 Other long term benefits – long service and annual leave Termination benefits Post-employment benefits-superannuation 2014 2,522,209 295,936 2013 2,727,595 326,290 185,144 165,686 - 166,046 3,168,975 3,219,931 In addition to their salaries, the Group also provides non-cash benefits to key management personnel. (1) Short-term employee benefits include salaries and other accrued short term entitlements in relation to key management personnel’s services rendered to the Group. Executive officers may also participate in the Group’s employee share scheme (see note 25). The balance of short- term employee benefits outstanding to key management personnel and other related parties at reporting date is a payable amount of $212,112 (2013: $104,330). (b) Other related parties A number of key management personnel held positions in other entities that result in them having control over the financial or operating policies of these entities. A number of these entities transacted with the Group in the reporting period. The terms and conditions of the transactions with the other related parties were no more favourable than those available, or which might reasonably be expected to be available, on similar transactions to non-key management personnel related entities on an arm’s length basis. The aggregate amounts recognised during the year relating to other related parties were as follows: In AUD Transactions value year ended 30 June 2014 2013 Gill Family Pty Ltd - Provision of chairman services 97,000 95,000 (i) (ii) (iii) McCabe Street Limited is a special purpose company incorporated for development of a specific property. Mr B McKeon, Ms L Bevan, and the Chief Financial Officer, Mr Bailey, are directors of McCabe Street Limited. AFG Property division is responsible for the project management of the development. During 2013 the Board of Directors agreed to provide McCabe Street Limited with a loan facility of a maximum amount of $1.2m for a term of 24 months or until alternative financing is sourced whichever is earlier, on commercial arms length terms. The outstanding balance as at reporting date is $138,002 (2013: $49,331) and comprises of administrative costs that the financing facility will not meet. The interest charged during the year is $13,529 (2013: $5,626) During the year the Group received payments from TAL Life Ltd. Jim Minto is a director of TAL Life Ltd and also a non-executive director of the Company. These dealings were in the ordinary course of business and were on normal terms and conditions. These payments were received as commission for life and risk insurance products provided by TAL Life Ltd. Total commissions received during the financial year was $779 thousand (2013 : $706 thousand). During the year the Group made payments to Genworth Financial, one of our providers of Lenders Mortgage Insurance (LMI). Tony Gill is a non-executive director of Genworth Australia. These dealings were in the ordinary course of business and were on normal terms and conditions. The payments made for the provision of LMI products were $2,633 thousand (2013:$ 3,874 thousand). Page 49 Australian Finance Group Limited Notes to the Financial Statements 36. (b) (iv) Related parties (continued) Other related parties (continued) Tony Gill is an Independent Director of First Mortgage Services (FMS), one of our providers of loan settlement services. During the year the Group made payments to FMS. These dealings were in the ordinary course of business and were on normal terms and conditions. The payments made for the provision of the settlement services were $404,417 (2013: $277,300). (e) Subsidiaries Loans are made by the parent entity to wholly owned subsidiaries to fund working capital and purchases of shares from one subsidiary to the other subsidiary. Loans outstanding between the Company and its subsidiaries are unsecured, have no fixed date of repayment and are non-interest bearing. Interest-free loans made by the parent entity to all its subsidiaries are payable on demand. Each of the individual loans owed by / (to) the subsidiaries is detailed below: In AUD Australian Finance Group Securities Pty Ltd AFG Securities Pty Ltd New Zealand Finance Group Ltd (‘NZFG’) Lilydale Pastures Estate Pty Ltd Longford Road Pty Ltd AFG Home Loans Pty Ltd Cambridge Pty Ltd AFG Developments Pty Ltd Venture Lending Pty Ltd AFG Developments 2 Pty Ltd AFG Property Pty Ltd AFG Property Investment No.1 Pty Ltd Less provision for impairment Parent entity 2014 2013 8,162,348 4,123,195 329,596 (654,093) (122) 6,936,604 (21,853) 9,671,990 760 2,133,330 52,732 383 (4,220,898) 5,842,261 7,740,461 329,596 833,634 (122) 3,282,925 (36) 5,167,218 19,534 (100) - - (4,220,898) 26,513,972 18,994,473 37. Subsequent events On 14 August 2014, the Group secured an extension to the term of the residential warehouse facility that was due to expire in 6 September 2014. The funding continues to be provided through the issue of two classes of secured, limited and floating rate notes, with the senior notes being issued to the lender and the subordination notes to Australian Finance Group Limited. The maturity date has been reset to 14 August 2015 and the cost of funds has been reviewed favourably to the end to term. On 26 August 2014 the Directors recommended the payment of a dividend of 10.71 cents per fully paid ordinary share, fully franked based on tax paid at 30%, out of profits of the Company for the year ended 30 June 2014. The aggregate amount of the dividends paid out in October out of retained profits at 30 June 2014 is $10 million. The financial effect of these dividends has not been brought to account in the financial statements for the year ended 30 June 2014. On 1 July 2014, the Group amalgamated the construction warehouse AFG 2010-1 Trust Warehouse Series No.2 into AFG 2010-1 Trust Warehouse Series No.1. Other than the above, there has not been any matter or circumstance, other than that referred to in the financial statements or notes thereto, that has arisen since the end of the financial year, that has significantly affected, or may significantly affect, the operations of the Group, the results of those operations, or the state of affairs of the Group in future financial years. Page 50
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