American Financial Group Annual Report 2016

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FY2016 Annual Report · American Financial Group

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ANNUAL REPORT

Contents

PERFORMANCE HIGHLIGHTS

CHAIRMAN'S LETTER

CEO'S REPORT

DIRECTORS’ REPORT

REMUNERATION REPORT

AUDITOR’S INDEPENDENCE DECLARATION

CONSOLIDATED STATEMENT OF FINANCIAL POSITION

CONSOLIDATED STATEMENT OF PROFIT OR LOSS AND OTHER COMPREHENSIVE INCOME

STATEMENT OF CHANGES IN EQUITY

STATEMENT OF CASH FLOWS

NOTES TO THE FINANCIAL STATEMENTS

DIRECTORS’ DECLARATION

INDEPENDENT AUDIT REPORT

SHAREHOLDER INFORMATION

CORPORATE DIRECTORY

ANNUAL REPORT162

OUR
Performance

OUR
BROKERS

OUR

size & scale

OUR Partners

& Products

NPAT

$22.6MILLION FOR THE 2016

FINANCIAL YEAR

$16.1

$19.3

$22.6

17%

COMPARED TO 2015
PROFORMA NPAT

2014

2015

2016

OUR REVENUE

OVER
20%

OF AUSTRALIA’S
MORTGAGE BROKERS
ARE AFG MEMBERS

REVENUE FOR FY2016 WAS

$547MILLION
4%

INCREASE FROM
FY2015 ($526M)

OUR RESIDENTIAL SETTLEMENTS

$33.84BILLION
8%

INCREASE FROM
FY2015 ($31.24B)

OUR COMMERCIAL SETTLEMENTS

$2.76BILLION
15%

INCREASE FROM
FY2015 ($2.39B)

$1.4BILLION

2,650+

BROKERS AROUND
AUSTRALIA

OVER
52%

OF AUSTRALIAN
MORTGAGES ARE
WRITTEN THROUGH A
BROKER AND GROWING

LOAN BOOK

$120BILLION

LOAN BOOK OF OVER

12%

INCREASE FROM

FY2015 ($107B)

45+

MARKET SHARE

1/11

AUSTRALIAN

RESIDENTIAL

MORTGAGES ARE

ARRANGED BY

AN AFG BROKER

FROM 1 IN 12 IN FY2015

CUSTOMERS

10,000 CUSTOMERS

PER MONTH

THE NUMBER OF FINANCIAL PRODUCTS

AVAILABLE TO AFG BROKERS

1,450+

OUR LENDER PANEL

AdelaideBank

AND MORE

THE NUMBER OF LENDERS ON THE AFG PANEL AFG HOME LOANS WHITE LABEL SETTLEMENTS OF OUR EDGE AND ICON PRODUCTSVERSUS THE $460MILLION WE ACHIEVED IN AFG HOME LOANS WHITE LABEL SETTLEMENTS IN FY20153

OUR
size & scale

LOAN BOOK

$120BILLION

LOAN BOOK OF OVER

12%

INCREASE FROM
FY2015 ($107B)

MARKET SHARE

1/11

AUSTRALIAN
RESIDENTIAL
MORTGAGES ARE
ARRANGED BY
AN AFG BROKER

FROM 1 IN 12 IN FY2015

CUSTOMERS

10,000 CUSTOMERS

PER MONTH

OUR Partners
& Products

45+

THE NUMBER OF FINANCIAL PRODUCTS
AVAILABLE TO AFG BROKERS

1,450+

OUR LENDER PANEL

AdelaideBank

AND MORE

THE NUMBER OF LENDERS ON THE AFG PANEL ANNUAL REPORT164

CHAIRMAN’S LETTER

I am pleased to report another very successful full year result for AFG. AFG’s net profit after tax (NPAT) surpassed
Prospectus forecast by 15% and was underpinned by increased sales of AFG branded products, increased residential
and commercial settlements and improved securitisation margins. These results are a testament to the Company’s
focus on its broking business, providing choice to consumers and its ongoing earnings diversification strategy.

After our first full year of operation as a publicly listed company
AFG has achieved a number of highlights;

♦ Combined residential and commercial loan book of $120.4 billion

up 12.6% on prior period

♦ NPAT of $22.6 million up 48% on prior period continuing operations

♦ Residential settlements up 8% to $33.84 billion

♦ Commercial loan book of $5.67 billion up 12.1% on prior period

♦ Continued strong cash flows and balance sheet to drive and

deliver the Group’s growth plans

♦ Final dividend payment of 5.4 cents per share giving yield of 8.4%

per share based on closing share price at 30 June 2016

♦ EPS for FY2016 is 10.54 cents per share up 48% from FY2015
EPS of 7.12 cents per share calculated on profit from continuing
operations and number of shares at the point of listing

The past year has seen the financial services sector under the
spotlight. As Chairman of a diversified financial services company and
one of the country’s largest mortgage broking groups, I am often asked
about the sector. The position a company holds in the community is
guided, and measured, by the ethics and actions of those steering and
representing that company each and every day. Our guiding principles
of fairness, shared prosperity and the provision of choice for Australian
consumers steers our interactions with all stakeholder groups.

The development of effective stakeholder engagement mechanisms
enables AFG to understand and address expectations of groups central
to the success of our operations. I am proud that AFG has been at
the forefront of consultation with our industry, the regulators and the
federal government to explain the value mortgage brokers bring to the
lending landscape and to those Australians seeking to secure finance.

The attention currently focused on corporate culture and risk is
actually refreshing to see. The very essence of AFG’s business is
a basis of trust - the trust an Australian homebuyer places in their
mortgage broker to help them navigate one of the most important
financial decisions they are likely to make. Mortgage brokers are in a
unique position to earn and uphold that trust. Their livelihood is based
upon that shared interest. Without that trust they will not retain that
client or benefit from referrals to grow their business. Brokers are
charged with the task of delivering the right policy for the borrower’s
individual circumstances, at the right price, with a lender that can
provide the best service to meet the needs of their customer.

Broker market penetration of the Australian mortgage market is
now more than 52%. Through their choices, consumers are clearly
indicating a high level of comfort with the mortgage broking model.

AFG brought on additional lenders through the year which saw our
panel grow to more than 45 lenders, delivering more competition to
the market place, securing wider choice for our brokers and further
strengthening the broker value proposition. The major banks
already have a dominant position within the Australian market;
the mortgage broking industry plays a critical role in maintaining
a broad choice of lenders by acting as a distribution channel for
lenders without a branch network. The lack of face to face contact
with representatives of these lenders would have a significant
impact on consumer choice if not for the broker channel.

2016 saw AFG welcome two new Non-Executive Directors to
our board. AFG is fortunate to be able to have the benefit of
the extensive experience of Jane Muirsmith and Melanie Kiely.
Their appointments bring additional diversity of thought and
internationally informed experience to the AFG board. Both are
well placed to guide and support our talented executive team and
they will bring valuable strategic insights to the AFG board.

AFG also expanded its management team with the appointment of its
former Chief Financial Officer (CFO) David Bailey to the newly created
role of Chief Operating Officer (COO). David had been AFG’s CFO for
over 11 years and in this time has gained an exceptional insight into
the business operations of the Group. The introduction of a COO
role to AFG’s management team will further expand capacity and the
transition of David into this role utilises his depth of understanding of
the business to focus on future opportunities for growth.

On behalf of the Board I would like to congratulate AFG
management and staff and thank the loyal AFG brokers who have
helped deliver such a successful year for the company.

Yours sincerely,

Tony Gill
Chairman

Tony Gill
Independent Non-Executive Chairman

ANNUAL REPORT16

CEO'S REPORT

The past year has been a very successful one for AFG for a number of reasons. Our first full year as an ASX listed entity
– and I believe we have made a successful transition from public unlisted to listed. AFG’s excellent profit result was
underpinned by strong sales of AFG branded products, increased residential and commercial settlements and improved
securitisation margins.

Regulatory activity and lender requirements changing by the
minute has meant it has been a very busy year for our brokers and
AFG staff. Whilst there has been a lot of unfavourable discussion
about the housing and the banking sector which has been taken
up by the mainstream media, the business has remained focused
and been able to deliver exceptional results against this backdrop,
culminating in an earnings upgrade in April 2016.

Mortgage brokers have won further market share over the last
12 months as more consumers preference our industry over the
branch structures of days gone by and over some of the newer
online lending models to secure their home finance.

The lending market in Australia is showing credit growth and
mortgage brokers are winning market share. As the largest subset
of that sector, AFG is translating those conditions into earnings
growth. AFG’s residential broking business has had a record year
by volume. Our residential loan book rose from $102.6b at 30 June
2015 to $114.7b at 30 June 2016.

We have also achieved a record year in the recruitment of high
performing brokers to AFG. We have lifted our broker numbers from
just over 2,400 in 2015 to finish the financial year with over 2,650
active brokers working with AFG. Pleasingly this recruitment has
been the result of winning market share in New South Wales and
Victoria, states that have been a core focus of the business. These
results have been obtained in a highly competitive market and are
testament to the commitment of our staff.

Our Commercial loan book grew exceptionally during the year as more
small to medium sized businesses gravitated towards commercial
brokers. Our commercial settlements grew by 15% year on year to
reach $2.76b, exceeding the prospectus FY2016 target of $2.45b.
We expect this trend to continue, predominantly in asset lending.

Motor vehicle finance also had an exceptional year with settlements
increasing 39% and, in part for the same reasons as Commercial,
more consumers are recognizing the value brokers can deliver in
facilitating better service and better pricing and are seeking out
brokers to meet their needs.

Our own AFG Home Loans business also outperformed internal
expectations. From a prospectus forecast of $1.30 billion in
settlements of white label products, we rounded out the financial
year at $1.44 billion. This was driven by the move from a soft launch
to full rollout of our Edge product, and the more recent addition of the
new Icon home loan. These have been well received by our broker
network with the products delivering more choice, competitive
pricing and excellent service to our brokers and their customers; we
expect further growth from this business line in future years.

There is no question technology is one of our key differentiators
and one of the key reasons behind our continued success.
Our technology platform FLEX has the ability to generate additional
revenue for our brokers by accessing the customer data held within the
system. We are able to seamlessly offer building; contents; landlords;
life; and income protection insurances to our brokers' customers.

This year we added the facility to offer our brokers depreciation
reports for investment properties and soft launched a car loan
offering to our broker network in February 2016.

The distribution network our brokers provide is a key driver of
future growth for AFG and of choice for Australian consumers. We
maintain our commitment to invest in the best people, platforms,
systems and tools to remain an innovative leader of high quality,
resilient and agile technology to help our brokers grow and to
continue to attract high quality brokers to our network.

Over the last 12 months AFG has completed a migration of our IT
systems to the cloud. This enables us to scale far beyond current
requirements and the reduction in operational and maintenance
activities allow us to further invest in technology innovation.

In August 2016 AFG formed a strategic alliance with leading
international fintech company Biz2Credit Inc. The exclusive
agreement will
leverage Biz2Credit’s patented analytics
and financial services technology to provide small business
borrowers with a broad range of options and deliver faster
access to capital. This new platform is a first for Australia and will
not only enable existing lenders to reach their target audience
in the small to medium enterprise (SME) market faster but will
also open the door to competition from marketplace lenders not
currently in the mix.

And finally, the performance of any mortgage starts and ends with
credit assessment standards, driven by the risk appetite of the lender.
Our own AFG Securities business has since inception written $2 billion
worth of home loans, 100 per cent broker-introduced, and the overall
performance of these loans has been exemplary. This performance
is a direct reflection of AFG’s credit assessment procedures and
our conservative risk appetite and the Securities book continues to
perform exceptionally well against the Standard & Poors' Mortgage
Performance Index.

AFG’s future growth is focused on protecting and growing our
share of our mortgage broking market by continuing to expand our
broker network and distribution reach, increasing penetration of
own branded product and leveraging our technology investment to
pursue other opportunities. We are on track to deliver on all of these
initiatives and I look forward to another successful year for AFG.

Yours sincerely,

Brett McKeon
CEO

ANNUAL REPORT16

Directors’
Report

The Directors present their report together with the
financial report on the consolidated entity consisting
of Australian Finance Group Limited (‘the Company’
or ‘AFG’), and its controlled entities (‘the Group’),
for the financial year ended 30 June 2016 and the
auditor’s report thereon.

Directors

The Directors and Company Secretary of the Company at any time during or
since the end of the financial year are:

ANTHONY (TONY) GILL
(NON-EXECUTIVE CHAIRMAN)

Mr Gill has been the Chairman of the Board since 2008. Mr Gill has extensive
experience across Australia’s finance industry, including with Macquarie
Bank for more than 16 years, most recently as Group Head of the Banking
and Securitisation Group (BSG). Mr Gill is a director of First Mortgage
Services, First American Title Insurance, Genworth Mortgage Insurance
Australia Limited and sits on the board of the Butterfly Foundation for Eating
Disorders and is a member of ASIC's External Advisory Panel. Mr Gill holds
a Bachelor of Commerce and is a Chartered Accountant (retired).

BRETT MCKEON
(MANAGING DIRECTOR AND CHIEF EXECUTIVE OFFICER)

Mr McKeon is a founding director of the Group and is the Company’s
Managing Director/Chief Executive Officer. He is responsible for the
Group’s strategy, corporate governance and for driving future growth.
Mr McKeon has worked for over 30 years in the finance industry and brings
considerable management, capital raising, public company and sales
experience to the board of AFG. Mr McKeon is a licensed finance broker
and in 2006 he was awarded The Ernst & Young Entrepreneur of the Year
for WA. During the past three years Mr McKeon has also served as a director
of the following listed companies:

♦ Caravel Minerals Limited – appointed in 2012; resigned in 2015

MALCOLM WATKINS
(EXECUTIVE DIRECTOR)

Mr Watkins is a founding director of the Group. He holds strategic
responsibility for the Group’s technology development programs, electronic
delivery systems and national marketing operations. Mr Watkins’ key
focus is extracting real and tangible returns on the investments made and
leveraging the strengths of the Group today to further expand market share,
profitability and brand awareness. Mr Watkins has recently been appointed
to the board of the Mortgage and Finance Association of Australia (MFAA).

ANNUAL REPORT1610

Directors [continued]

KEVIN MATTHEWS
(NON-EXECUTIVE DIRECTOR)

Mr Matthews is a founding director of the Group. He previously held
a role as an Executive Director and was responsible for negotiating
and managing key relationships with banks and lending institutions,
including product development and the Commercial line of business.
Mr Matthews ceased to be an Executive Director and became a
non-executive director on 1 May 2015. Mr Matthews has worked in
the finance industry for more than 35 years and has been a licensed
finance broker for more than 25 years. He is a former director of
the Mortgage and Finance Association of Australia (MFAA) and
served on the MFAA’s National Brokers Committee for 12 years.
Mr Matthews is also a Senior Fellow of the Financial Services
Institute of Australasia (FINSIA) and a life member of the MFAA.

JAMES (JIM) MINTO
(INDEPENDENT NON-EXECUTIVE DIRECTOR)

Mr Minto rejoined the AFG Board in 2015 following his retirement
as Group CEO and Managing Director of life insurer TAL (formerly
TOWER Australia). TAL is 100% owned by Dai-ichi Life, a major
global Japanese-based life insurer. Mr Minto had been in that role
since November 2006 and prior to that was Group CEO of the
Trans-Tasman TOWER Limited Group. Mr Minto has extensive
experience in the financial services sector and an intimate
understanding of the AFG business, having previously been a
member of the AFG board from 2004 until 2013. Mr Minto is the
Chairman of
the Remuneration and Nomination committee.
A Chartered Accountant, Mr Minto recently retired as Chair of
the Association of Superannuation Funds of Australia (ASFA)
and was a panel member of the Australian Government’s 2011
Review of Natural Disasters Insurance. He is also an executive
officer of Dai-ichi Life of Japan, a director of Singapore-based
Dai-ichi Life Asia Pacific. Mr Minto is a Fellow Chartered Accountant
(FCA) with Chartered Accountants Australia and New Zealand.
He is also a member and Graduate of the Australian Institute of
Company Directors.

CRAIG CARTER
(INDEPENDENT NON-EXECUTIVE DIRECTOR)

Mr Carter has 35 years experience in stockbroking, capital
markets and corporate finance. Most recently Mr Carter was
Chairman and Executive Director of Macquarie Capital
in
Western Australia and currently has a diverse range of business
interests. Mr Carter has been involved in many capital raisings
including initial public offerings across many industry groups.
Mr Carter is the Chairman of the Audit Committee and of the
Risk and Compliance Committee. Mr Carter is also currently
a Board member of the Fremantle Football Club. Mr Carter holds
a Bachelor of Business and is a Fellow of FINSIA.

MELANIE KIELY
(INDEPENDENT NON-EXECUTIVE DIRECTOR)
(APPOINTED 31 MARCH 2016)

Ms Kiely is an experienced executive and company director with
over 25 years of experience in health care, financial services
and consulting in Australia, Europe and South Africa. Ms Kiely
commenced with Silver Chain in the role of Executive General
Manager, Social Care, in November 2015. She is currently a Director
of the Black Dog Institute and Intework. Prior to this, Ms Kiely was
the Executive General Manager Strategy, Risk and HealthGuard,
at HBF Health Fund. Prior to joining HBF, Ms Kiely held senior
roles with nib health funds, MBF and Accenture and has also held
a number of Board positions in the financial services and health
sectors. Ms Kiely has an Honours Degree in Business Science from
the University of Cape Town and is a Graduate of the Australian
Institute of Company Directors. Ms Kiely joined the AFG Board as a
Non-Executive Director in March 2016.

Directors’ Report[Continued]11

JANE MUIRSMITH
(INDEPENDENT NON-EXECUTIVE DIRECTOR)
(APPOINTED 31 MARCH 2016)

Ms Muirsmith is an accomplished digital, channel and marketing
strategist with a proven track record of helping companies leverage
digital technologies to drive innovation and business outcomes. She
has broad experience spanning 25 years across many industries
including financial services,
insurance, utilities, Government,
professional services, retail, manufacturing and technology.

Ms Muirsmith is Managing Director of Lenox Hill, a digital strategy
and consulting company and is a Non-Executive Director of
Healthdirect Australia. She is also a member of the Ambassadorial
Council UWA Business School and sits on the AIM UWA Business
School Executive Education board. She is a Fellow with Chartered
Accountants Australia and New Zealand, where she is Vice Chairman
of the WA Business Advisory Committee and is a Graduate of the
Australian Institute of Company Directors.

Ms Muirsmith was appointed to the AFG Board as a Non-Executive
Director in March 2016.

JOHN ATKINS
(INDEPENDENT NON-EXECUTIVE DIRECTOR)
(RESIGNED 31 AUGUST 2015)

Mr Atkins’ background is as a commercial lawyer having been a
partner of leading Australian law firm Freehills and its predecessors
for over 20 years. He held senior management and leadership
positions with that firm prior to his retirement as a partner in 2008.
Mr Atkins is a former Chairman of Lotterywest, Minotaur Exploration
Ltd and BWP Trust; a former director of the Chamber of Commerce
and Industry of WA and Deputy Chairman of the Committee for
Perth. During the past three years Mr Atkins has also served as a
director of the following listed companies:

♦ Breakaway Resources Ltd – appointed November 2006;

resigned 25 June 2014

♦ Aurora oil & Gas Limited – appointed June 2003;

resigned 11 June 2015

Mr Atkins holds a Bachelor of Jurisprudence and a Bachelor of Law
(Masters) and is a Fellow of the Australian Institute of Company
Directors. Mr Atkins resigned from the AFG Board to take up his
appointment as Western Australia’s Agent General based in London.

The above named directors held office during the whole of the
financial year and since the end of the financial year except where
noted otherwise.

Company Secretary

LISA BEVAN
(COMPANY SECRETARY)

Ms Bevan joined AFG in 1998 and was appointed to the position of
Company Secretary in 2001. Ms Bevan is a Chartered Accountant,
holds a Bachelor of Commerce degree and has a Diploma
of Corporate Governance from the Governance
Institute of
Australia. Ms Bevan is responsible for managing AFG’s secretariat,
compliance, governance and risk management programs. Ms Bevan
also oversees the legal and human resources functions.

Interests in the shares and rights of the Company

As at the date of this report, the interests of the directors in the
shares of the Group were:

Director

Tony Gill

Brett McKeon

Malcolm Watkins

Kevin Matthews

Craig Carter

James Minto

John Atkins

Melanie Kiely

Jane Muirsmith

Number
of ordinary
shares

Number
of rights over
ordinary shares

2,250,000

21,179,773

21,102,689

16,882,151

500,000

166,666

136,364

176,452

35,290

Changes in State Of Affairs

Other than matters dealt with in this report there were no significant
changes in the state of affairs of the Group during the financial year.

Dividends

Total dividends paid during the financial year ended 30 June 2016
were $6,444k (2015: $38,000k), which included:

♦ An interim fully franked ordinary dividend of $6,444k (3.00 cents
per fully paid share) was declared out of profits of the Company
for 2016 and paid on 29 March 2016.

A final fully franked ordinary dividend of $11,600k (5.4 cents per
fully paid share) has been declared out of profits of the Company
for the financial year ended 30 June 2016 and is to be paid in
September 2016.

On 22 April 2015, as part of the demerger, a pro-rata distribution
of all of the Company’s shares in Establish Property Group Ltd was
made to the shareholders of the Company. The distribution was in
part a return of capital and in part a dividend to the shareholders,
$1,187k and $27,709k respectively.

Total dividends paid during the financial year ended 30 June 2015
were $38,000k, which included:

♦ A final fully franked ordinary dividend of $10,000k (10.71 cents
per fully paid share) was declared out of profits of the Company
for the year ended 30 June 2014 and paid in October 2014.

♦ An

fully

interim

franked ordinary dividend of $10,000k
(10.71 cents per fully paid share) was declared out of profits of the
Company for 2015 and paid in February 2015.

♦ An

fully

interim

franked ordinary dividend of $10,000k
(5.33 cents per fully paid share) was declared out of profits of the
Company for 2015 and paid on 4 May 2015.

♦ An interim fully franked ordinary dividend of $8,000k (4.26 cents
per fully paid share) was declared out of profits of the Company
for 2015 and paid on 29 May 2015.

ANNUAL REPORT16Directors’ Report[Continued]12

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 and commercial

loans; and

♦ Distribution of own branded home loan products, be they funded via
traditional mortgage management products, white label or its established
Residential Mortgage Backed Securities (RMBS) programme.

Corporate Governance Statement

The Company’s Corporate Governance Statement can be
http://investors.afgonline.com.au/investor/?page=corporate-governance

found at

Review of operations

The Group’s net profit after income tax for the year ended 30 June 2016
was $22,644k (2015: $20,374k); after an income tax expense of $10,282k
(2015: $6,806k).

The Net Profit After Tax result of $22,644k for FY16 is 17.6% ahead of the FY15
underlying Pro forma Net Profit After Tax result which excludes the pro forma
impact of the costs and incomes related to the IPO, together with the demerger
of the former Property Business. A comparison of the pro forma result against
the current year performance is as follows:

Statutory Profit Before Tax

32,926

27,180

FY16 $’000

FY15 $’000

Add/(Less) Pro Forma Adjustments:

Capital Raising Costs

Other

Pro forma Net Profit Before Tax

Statutory Taxation

Taxation on Pro Forma Adjustments

Pro forma Net Profit After Tax

32,926

(10,282)

22,644

5,636

(5,263)

27,553

(6,806)

(1,491)

19,256

The major item within the Other Pro Forma adjustment relates to the gain arising
from the demerger of the Property assets to Establish Property Group Limited
described in Note 7. Prior to the demerger the Company obtained roll over
relief from the Australian Taxation Office with respect to these assets and as a
consequence no tax is payable (and as such no franking credits arise) from the
gain which has been realised.

The Group reflects the fair value of its residential trail book in the financial
report, which is influenced amongst other things by the runoff and discount
rates that are applied to this valuation. The change in assumptions for 2016
has increased statutory earnings above the underlying profit generated by the
Group. Excluding the non cash entries to recognise the present value of the
future trailing commission receivable and payable, the underlying profit after
tax is $22,466k (2015: $12,058k). The assessment of the trail loan book requires
the use of assumptions which are determined by management, by reference to
market observable inputs.

ANNUAL REPORT1614

Review of operations [continued]

The following table reconciles the unaudited underlying earnings
to the reported profit before tax for the period in accordance with
Australian Accounting Standards:

30 June 2016

30 June 2015

In thousands of AUD

Total
Revenue

Profit
after tax

Total
Revenue

Profit
after tax

Underlying profit
from continuing
operations

Change in the
present value
of trailing
commission
receivable and
payable

Total result from
continuing
operations

472,602

22,466

447,258

12,058

56,326

178

78,937

3,238

528,928

22,644

526,195

15,296

The Group’s 2016 result was driven by an excellent performance
by our AFG Home Loans business together with another strong
year of settlement growth by our residential mortgage business
and supported by our commercial business. We have successfully
grown our residential settlements by 8% and our commercial
settlements by 15%, year on year, with both business lines setting
new benchmarks for settlement volumes.

Increasing the size and reach of our distribution network through
broker recruitment and retention has continued to be a focus and
our network has increased to over 2,650 active brokers working
with AFG.

Total loan book from our combined residential and commercial
businesses at year end was $120.4 billion. Settlements volumes in
the commercial business continued to grow through the year, with
an increase in applications driving a 15% year on year settlement
growth. In addition to the traditional commercial broking business,
AFG also continued to experience strong growth in the leasing line
of the business, with settlements increasing 39% year on year.

The AFG Home Loans white label products, Edge and Icon,
continued to achieve strong growth in the 2016 financial year.
Settlements of these products were in excess of $1.4 billion
and above the prospectus forecast of $1.3 billion for the year.
AFG launched the Icon product during the year to complement
our Edge product, providing more choice to consumers and an
alternative funding source.

From a business development perspective, AFG has continued
to invest in technology which has been the cornerstone of the
Company’s strength and a key differentiator for broker partners. In
August 2016 AFG formed a strategic alliance with leading fintech
company Biz2Credit Inc. The exclusive agreement will leverage
Biz2Credit’s patented analytics and financial services technology
to provide small business borrowers with a broad range of options
and deliver faster access to capital. This new platform is a first for
Australia and will not only enable existing lenders to reach their
target audience in the small to medium enterprise (SME) market
faster but will also open the door to competition from marketplace
lenders not currently in the mix.

2016 saw a 20% increase in service fees to $5,341k for access
to and use of our market leading technologies which reflects the
ongoing value of the AFG brand and technology proposition to
brokers. AFG continues to be recognised as a partner of choice by
organisations that possess a technological edge to their business
and are looking to establish a presence in the mortgage market.
AFG continues to evolve its technological capabilities to meet
these new opportunities and has also enhanced the Company’s
bespoke Marketing and CRM suite (SMART) with a number of new
digital initiatives.

The Group’s cash and cash equivalents as at 30 June 2016
amounted to $130,665k, which represents an increase of 44% on
the 2015 financial year. This is largely attributable to the divestment
of AFG Property (which in the 2015 financial year included payment
for inventories of $12,432k), increased net cash receipts from trail
commission resulting from a larger loan book, higher settlements
and therefore higher upfront commissions received in the period,
and a $9,692k increase in restricted cash due to timing on
movements of cash in collateralised standby letters of credit and
special purpose securitised trusts on behalf of the warehouse
funders and bondholders.

Likely Developments and Expected Results

The Group will continue to provide choice and lead the market by building on the strengths of our traditional wholesale mortgage broking
business while developing our significant distribution network to access other areas of the finance market.

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.

Environmental regulation

The Group is not subject to any significant environmental regulation under a law of the Commonwealth or of a State or Territory in respect
of its activities.

Subsequent Events

On 4 August 2016, the Group secured an extension to the term of the NAB residential warehouse facility that was due to expire on
10 August 2016. The funding continues to be provided through the issue of three 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
10 February 2017.

On 11 August 2016, the Group secured an extension to the term of the ANZ residential warehouse facility that was due to expire on
15 August 2016. The funding continues to be provided through the issue of three 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 2017.

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.

Share options

There were no options issued or exercised during the financial year (2015: Nil).

Indemnification of insurance of officers and auditors

During the financial year, the Group paid a premium in respect of a contract insuring the Directors, Officers and the Company Secretary of
the Group (as named above) against liabilities incurred in acting in such capacities to the extent permitted by the Corporations Act 2001.
The contract of insurance prohibits disclosure of the nature of the liability and the amount of the premium.

The Group has not otherwise, during or since the financial year, indemnified or agreed to indemnify an officer or auditor of the Group or of
any related body corporate against a liability incurred as such an officer or auditor.

Directors Meetings

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

Directors

Board Meetings

Audit

Nomination and
Remuneration

Risk and
Compliance

Held

Attended

Held

Attended

Held

Attended

Held

Attended

Meetings of committees

Tony Gill

Brett McKeon

Malcolm Watkins

Kevin Matthews

John Atkins

James Minto

Craig Carter

Melanie Kiely

Jane Muirsmith

ANNUAL REPORT16Directors’ Report[Continued]16

Directors Meetings [continued]

All directors were eligible to attend all meetings held, except for M. Kiely and J. Muirsmith who were eligible to attend four director meetings
(as they were appointed during the financial year) and John Atkins who was eligible to attend two director meetings before he retired from
the Board on 31 August 2015.

COMMITTEE MEMBERSHIP

As at the date of this report, the Company had an audit committee, remuneration and nomination committee and a risk and
compliance committee.

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

Remuneration and Nomination

Risk and Compliance

J. Minto (C)

C. Carter

K. Matthews

M. Kiely

J. Muirsmith

C. Carter (C)

J. Minto

K. Matthews

M. Kiely

J. Muirsmith

Audit

C. Carter (C)

J. Minto

J. Atkins

K. Matthews

M. Kiely

J. Muirsmith

Notes

Rounding

The amounts contained in this report and in the financial report have been rounded to the nearest $1,000 (where rounding is applicable) and
where noted ($000) under the option available to the Company under ASIC Corporations Instrument 2016/191. The Company is an entity to
which the class order applies.

Non–audit services

The following non-audit services were provided by the entity’s auditor, Deloitte Touche Tohmatsu. The directors are satisfied that the
provision of non-audit services is compatible with the general standard of independence for auditors imposed by the Corporations Act
2001 (Cth).

The directors are of the opinion that the services as disclosed in Note 12 to the Financial Statements do not compromise the external
auditors’ independence, based on advice received from the Audit Committee, for the following reasons:

♦ All non-audit services have been reviewed and approved to ensure that they do not impact the integrity and objectivity of the auditor; and

♦ None of the services undermine the general principles relating to auditor independence as set out in APES 110 ‘Code of Ethics for
Professional Accountants’ issued by the Accounting Professional & Ethical Standards Board, including reviewing or auditing the auditor’s
own work, acting in a management or decision-making capacity for the Company, acting as advocate for the company or jointly sharing
economic risks and rewards

The nature and scope of each type of non-audit service provided means that auditor independence was not compromised.

Deloitte Touche Tohmatsu received or is due to receive the following amounts for the provision of non-audit services:

Tax compliance services

Other non-audit services

91,350

33,000

124,350

Auditor’s Independence declaration

The auditor’s independence declaration is included on page 33 of this financial report for the year ended 30 June 2016.

This Report is made with a resolution of the Directors.

Directors’ Report[Continued]17

ANNUAL REPORT16Remuneration Report

MESSAGE FROM THE CHAIRMAN OF THE
REMUNERATION & NOMINATION COMMITTEE

Dear Shareholder,

On behalf of the Board I am pleased to present AFG’s Remuneration
Report for the 2016 financial year (FY16), which is the first full
financial year since listing on the Australian Securities Exchange
(‘ASX’) in May 2015.

The AFG Limited Board is committed to delivering an Executive
remuneration structure that demonstrates clear links to strategy,
drives a strong performance culture and delivers satisfactory and
sustainable returns for shareholders. During the year the Board
reviewed the Executive remuneration framework and made a
number of changes to improve the link to long term performance
and strategy. As the FY16 remuneration structure was already set
during the listing process these changes took effect from 1 July
2016 and include:

♦ Continuing to set challenging Short Term Incentive (STI) and
Long Term Incentive (LTI) targets in the context of industry
outlooks and the economic environment to drive performance
over both the short and long term; including at least 1 operational
STI target in addition to the Group’s financial target. Further
information is provided in Section 3.4 of this report.

♦ New grants of performance rights under LTI plans will be tied
to 3 year performance periods. The LTI plan in place at listing
included a 1 year performance period which ended on 30 June
2016. This period was chosen as a transitionary measure as the
business transitioned from a private to a public environment. It
is now considered appropriate to change this period for all new
plans to 3 year performance periods.

♦ Grants of performance rights at 1 July 2016 have been made
under two separate performance measures. The first being a
compound annual growth rate earnings per share (CAGR EPS)
target for the period to 30 June 2019, weighted at 65% of the
award. The second being a relative Total Shareholder Return
(TSR) target with an absolute TSR gateway hurdle of positive
TSR for the period to 30 June 2019, weighted at 35% of the
annual award. Further detailed information about the 1 July 2016
grants is provided in Section 3.5 of this report.

♦ The business actively engaged with shareholders and
shareholder representatives to consult and seek their feedback
on AFG’s remuneration practices and reporting to understand
how we can improve our structure and reflect the framework
through disclosures in the Remuneration Report. As a result of
this process changes have been made to the format and content
of the Remuneration Report that we believe improves clarity
and transparency with a greater focus on demonstrating the link
between business strategy, remuneration and performance.

FY16 Performance & Remuneration
Outcomes Summary

FY16 marks the completion of AFG’s Prospectus period, a phase
that has been a busy, successful and exciting one for AFG. Reported
NPAT exceeded Prospectus forecast by $2,969k or 15.1% and was
$3,388k or 17.6% higher than pro-forma NPAT in FY15.

FY12

FY13

FY14

FY15

FY16

Performance against other Prospectus KPI measures was also
strong with the Group’s loan book ending the year at $120 billion,
up 12% from FY15 and sets a strong foundation for future investment
and growth. The Group’s loan book provides strong cash flows,
approximately 80% of which flow from A grade credit rated
Australian financial institutions. These cash flows will allow AFG to
fund and drive the Group’s core and diversification growth plans to
add more products and margin to the sales network of over 2,650
brokers.

A 5-year history of AFG’s NPAT, Residential Loan Book and
Commercial Loan Book growth is provided below:

NET PROFIT AFTER TAX

MILLIONS
$10
$15

FY12

FY13

FY14

FY15

FY16

$20

$25

17.6

14.7

16.1

19.3

22.6

RESIDENTIAL LOAN BOOK

$20

$40

BILLIONS
$60

$80 $100 $120 $140

FY12

FY13

FY14

FY15

FY16

103

115

COMMERCIAL LOAN BOOK

BILLIONS
$3

3.4

3.8

4.2

5.1

5.7

Directors’ Report[Continued]
19

The Group delivered a dividend yield for FY16 of 8.4% based on the share price at 30 June 2016.

Key remuneration outcomes, which are detailed further in the Remuneration Report include:

♦ FY16 STI payments were made at 114% for Key Management Personnel (‘KMP’), reflecting an outstanding stretch performance when

compared to the Prospectus NPAT target.

♦ 100% of the Performance Rights awarded to KMP in FY15 have been forfeited, despite the strong operational and financial performance

of the Group since the time of listing as the Total Shareholder Return (TSR) hurdles have not been achieved.

♦ The remuneration of Mr D. Bailey was increased as a reflection of the increased operational responsibilities of his role as Chief Operating

Officer with reference to market comparisons.

Further information on remuneration outcomes is detailed in Section 3.1 of this report.

Yours sincerely

James Minto
Chairman, Remuneration & Nomination Committee

ANNUAL REPORT1620

Remuneration Report (continued)

1 ]

INTRODUCTION

The Remuneration Report outlines AFG’s remuneration philosophy, framework and outcomes for all Non-Executive Directors (‘NEDs’),
Executive Directors and other Key Management Personnel (collectively KMP). The report is written in accordance with the requirements of
the Corporations Act 2001 (Cth) (the Act) and its regulations. This information has been audited as required by Section 308(3C) of the Act.

2 ] KEY MANAGEMENT PERSONNEL

KMP are those persons who have specific responsibility for planning, directing and controlling material activities of the Group. In this report,
“Executives” refers to the KMP excluding the Non-Executive Directors.

The current KMP of the Group for the entire financial year unless otherwise stated are as follows:

Non-Executive Directors

Anthony Gill

Kevin Matthews

Craig Carter

James Minto

Melanie Kiely

Jane Muirsmith

John Atkins

Executive Directors

Brett McKeon

Malcolm Watkins

Executives

David Bailey

Lisa Bevan

Ben Jenkins

Chairman

Non-Executive Director

Appointed 28 August 2008

Appointed 20 January 1995

Appointed 25 March 2015

Appointed 1 April 2015

Appointed 31 March 2016

Resigned 31 August 2015

Managing Director/CEO

Appointed 19 June 1996

Executive Director

Appointed 8 December 1997

Chief Operating Officer

Company Secretary

Chief Financial Officer

Appointed 8 March 2004

Appointed 9 March 1998

Appointed 14 December 2015

*Craig Carter is Chairman of the Audit Committee and the Risk and Compliance Committee
*James Minto is Chairman of the Remuneration and Nomination Committee
*Other than Kevin Matthews, all Non-Executive Directors listed above are Independent Directors.

3 ] EXECUTIVE REMUNERATION STRUCTURES

The Company aims to reward Executives with a level of remuneration commensurate with their responsibilities and position within the Group
and their ability to influence shareholder value creation.

The remuneration framework links rewards with the strategic goals and performance of the Group and provides a market competitive mix of
both fixed and variable rewards including a blend of short and long term incentives. The variable (or “at risk”) remuneration of Executives is
linked to the Group’s performance through measures based on the operational performance of the business.

Directors’ Report[Continued]21

AFG Business Strategy

To provide choice and lead the market by continuing to build on the strengths of our core wholesale
mortgage broking business while developing our significant distribution network to access other
areas of the finance market.

Executive Remuneration Strategy

Remuneration component

Performance measure

Strategic objective/performance link

Fixed annual
remuneration (FAR)

Comprises base
salary, superannuation
contributions and
other benefits

Short-term
incentive (STI)

Paid in cash

Long-term
incentive (LTI)

Awards are made in
the form of share rights

Key result areas for the role:

Key roles and responsibilities as set out in
the individual’s employment contract and
position description

To provide competitive fixed remuneration set with
reference to role, market and experience to attract,
retain and engage key talent.

Considerations:

♦ Role and responsibility

♦ Company and individual performance

♦ External benchmarking

♦ Contribution, competencies and capabilities

Group Financial Measures FY16:

Group Net Profit After Tax per Prospectus

Group Financial Measures FY17 & onwards:

Group Net Profit After Tax and at least 1 key
strategic operational target with a clear link
to long term strategy

Rewards Executives
to achievement of Group outcome and
achievement of key strategic operational targets

contribution
the

their

for

FY16 grant:

Absolute TSR
1 July 2015 to 30 June 2016

target

for

the period

Ensures a strong link to the long term creation of
shareholder value.

♦ CAGR EPS was chosen as a performance

hurdle as it is:

FY17 grant:

65% of a KMPs entitlement allocated to a
3 year CAGR EPS target

35% of a KMPs entitlement allocated to
relative TSR targets, 50% measure against
the ASX Diversified Financials Index and
50% against the ASX Small Industrials
Index. Both TSR targets include a gateway
requirement for absolute TSR to be positive

A key indicator of the creation and growth
in shareholder value over the long term.

Provides a reliable measurement of the
creation of shareholder value and has
been given a higher weighting than the
individual TSR measures due to the difficulty
in identifying appropriate peer groups or
comparison indices’ for comparison against
Company performance.

♦ TSR was chosen as a performance hurdle as

it is:

Provides a
relative, external market
performance measure with a requirement
for TSR to be at least positive even if relative
performance against Indices is on target to
ensure Executive remuneration is clearly
tied to positive shareholder value creation.

ANNUAL REPORT16Directors’ Report[Continued]22

Remuneration Report (continued)

3.1 ] EXECUTIVE REMUNERATION OUTCOMES

STI award outcomes FY16

The combined cash bonus pool available to be paid to the Executives for on target performance in the 2016 financial year was $507,260
and the minimum is nil. For the 2016 financial year, 114% of the maximum STI bonus amount was achieved by the Executives given the Group
NPAT ($22,644k) performance exceeded Prospectus forecast ($19,675k) by 15%. Executives who commenced employment during the year
were not entitled to stretch performance payments.

B. McKeon

M. Watkins

L. Bevan

D. Bailey

B. Jenkins

Total

Target STI
opportunity

As a % of fixed
remuneration

STI outcome

% Achieved

% Forfeited

$250,000

$30,000

$80,000

$120,000

$27,260

$507,260

50%

16%

32%

36%

18%

$287,726

$34,527

$92,072

$138,108

$27,260

$579,693

115%

100%

114%

LTI award outcomes FY16

Final determination of the 2016 LTI award outcomes are set out in the table below, despite significantly exceeding Prospectus forecasts,
poor market sentiment in the Financial Services sector weighed heavily on share prices in our industry, AFG’s share price over the year was
not immune to this. As TSR over the period from listing through 30 June 2016 has not achieved the target of 10%, all performance rights
issued under the 2016 grant have been forfeited. This includes tranches 2 and 3 which were also subject to the TSR hurdle.

B. McKeon

M. Watkins

L. Bevan

D. Bailey

Total

$ Actual LTI outcome

% Achieved

% Forfeited

100%

3.2 ] FIXED ANNUAL REMUNERATION

The listing of the Company necessitated a review of the remuneration structure. As part of the review, it became a requirement to wind up
all existing LTI and STI plans which ultimately required the early payout of all existing entitlements. The financial impact of this early wind
up of the pre IPO remuneration structure is disclosed in Section 4 of this report in the 2015 comparative numbers. No significant changes
to this structure were required during the financial year other than an increase to the Chief Operating Officer’s remuneration to reflect the
increased operational responsibilities of the role upon transitioning from Chief Financial Officer.

The targeted remuneration mix for:

♦ The MD/CEO is 56% fixed and 44% variable (at risk); and

♦ Other members of the Executive team are in the range of 59% to 77% fixed and 41% to 23% variable (at risk).

Directors’ Report[Continued]23

3.3 ] STI PLAN

AFG Executives are entitled to participate in AFG’s STI plan. The amount of the STI award each participant may become entitled to (if any)
will be determined by the Remuneration and Nomination Committee based on achievement against set performance targets.

Objective

The AFG STI plan rewards Executives for the achievement of objectives directly linked to AFG’s business strategy that
is focused on growth and choice.

Participation

All Executives

STI opportunity

The STI available to each Executive for the achievement of stretch targets against specific KPIs and is set at a level
based on role, responsibilities and market data. The target STI opportunity for each Executive in FY16 is listed at
Section 3.1 as an absolute dollar amount and as a percentage of the Executive’s fixed remuneration.

Performance period

The performance period is the relevant Financial Year. KPIs and weightings are set and reviewed each year to ensure
that the STI targets remain relevant for the current environment and Executives remain focused on clear goals for
the period.

Link between
performance and
reward

Assessment of
performance

The KPI targets are selected based on what needs to be achieved over each financial performance period to deliver the
business strategy over the long term. From FY17 onwards the KPIs will include a financial target and current year delivery
of a strategic KPI relevant to the long term business strategy.

The weightings for each KPI are set for each performance period based on the specific business targets set by the Board.
A minimum threshold hurdle is set for each KPI included in the scorecard before any payment is made in respect of that
KPI measure. Further details of the KPIs that will be used to assess 2017 performance are set out at Section 3.4.

The Board reviews and approves the performance assessment and STI payments for the CEO and all other Executives.

Payment method

STI payments are delivered as cash.

3.4 ] FY17 STI OPPORTUNITY

Offers to participate in STI awards for 2017 were made to Executives under the STI Plan on the terms set out below. The Executive will be
entitled to an STI award up to a maximum percentage of the annual fixed remuneration (the maximum amount will differ between individuals,
but not exceed 50% of annual fixed remuneration).

The amount of the STI award each participant may become entitled to (if any) will be determined by the Remuneration and Nomination
Committee and approved by the Board based on achievement against the targeted NPAT as approved by the Board (50%) and targeted AFG
Home Loans settlement volumes (50%).

In order for an STI award to be payable, a threshold target must be satisfied, being 100% of NPAT achievement or in the case of AFG Home
Loans 90% of forecast volumes. The percentage of the STI award that will become payable, if any, will be determined over the performance
period by reference to the following schedule:

Target

Group NPAT

AFG Home Loans
Settlements

Achievement %

Less than 100%

100%

100%-120%

Less than 90%

90-100%

100%-150%

STI Award Payable

100%

Straight line between 100%-120%

Straight line between 90%-100%

Straight line between 100%-150%

The Board has discretion to take into account unbudgeted extraordinary items approved by the Board. From time to time bonuses may
be paid outside this structure in relation to a special project or special circumstances subject to approval from the Remuneration and
Nomination Committee.

ANNUAL REPORT16Directors’ Report[Continued]24

Remuneration Report (continued)

3.5 ] THE LTI PLAN – 2015 AND 2017 GRANTS

AFG has established the LTI Plan to assist in the motivation, retention and reward of senior Executives. The LTI Plan is designed to align the
interests of Executives and senior management with the interests of shareholders by providing an opportunity for the participants to receive
an equity interest in AFG. Details of the 2015 and 2017 LTI Grants are provided below. Information on the 2017 LTI plan has been included
this year to disclose the changes made to reflect shareholder and stakeholder feedback as no rights were granted in FY16, as the 2015 grant
occurred at listing in May 2015:

Instrument

Quantum

Grant date

Grant date fair value

2015 LTI Grant

Performance rights to acquire ordinary AFG
shares. The rights are allocated across three
equal tranches.

2017 LTI Grant

Performance
AFG shares

rights

to acquire ordinary

100% of an Executive’s annual LTI entitlement
weighted to a TSR target

65% of an Executive’s annual LTI entitlement
weighted to an EPS target

35% of an Executive’s annual LTI entitlement
weighted to TSR targets

The LTI award was made
AFG’s listing.

just prior to

1 July 2016, other than those subject to
shareholder approval at the 2016 AGM

2015 LTI Grant

Tranche 1 $0.51

Tranche 2 $0.50

Tranche 3 $0.47

2017 LTI Grant

TSR Small Industrials Index $0.66

TSR Diversified Financials Index $0.67

EPS $1.00 (being the 20-day Volume Weighted
Average Price leading up to 30 June 2016)

Gateway performance measure

Nil

TSR – Absolute TSR must be positive

Key performance measure

The Performance Rights for the first year only
will be subject to a performance condition
based on the total shareholder return as at
30 June 2016 as set out in the table below.
For the first year and subsequent years the
Performance Rights will also be subject to
continuation of employment.

If the total shareholder return vesting condition
is not satisfied in relation to the Performance
Rights for the first year, the Performance
Rights for the subsequent years will lapse.

Performance Conditions

TSR % of LTI Payable

10% 50%

10%-15% Straight line between 50%-100%

EPS – 2.5% CAGR EPS

TSR

Relative Total Shareholder Return (pro-rata
vesting between hurdles) 50% measured
against
Index,
the Diversified Financials
50% against Small Industrials Index

50th Percentile – 50% vesting

75th Percentile – 100% vesting

85th Percentile – 125% vesting (stretch target)

90th Percentile – 150% vesting (stretch target)

Vesting of Performance Rights is granted
on a pro-rata basis for the Company's TSR
performance between the 50th percentile and
90th percentile

EPS accretion

2.5% CAGR – 25% vesting

5.0% CAGR – 62.5% vesting

7.5% CAGR – 100% vesting

10.0% CAGR – 125% vesting (stretch target)

12.5% CAGR – 150% vesting (stretch target)

Vesting of Performance Rights is granted on
a pro-rata basis for the Company's CAGR EPS
performance between 2.5% and 12.5%

Directors’ Report[Continued]Link between performance and reward

2015 LTI Grant

TSR encapsulates performance across the
underlying key performance measures
throughout the business aimed at achieving
targeted business outcomes that will result in
increased shareholder wealth through share
price growth and dividends.

2017 LTI Grant

TSR

Stretch targets are available giving Executives
the opportunity to
increase the number
of performance rights by up to 50% for
exceptional performance.

EPS

Long term EPS accretion targets are set at
levels that are challenging yet achievable
in a sustainable manner. EPS directly links
creation of shareholder wealth to the delivery
long
of the businesses strategy over a
term period.

Stretch targets are available giving Executives
the opportunity to
increase the number
of performance rights by up to 50% for
exceptional performance.

Performance & Service period

Performance period (Tranche 1, 2 & 3)

1 July 2016 – 30 June 2019

1 July 2015 – 30 June 2016

Service periods

Tranche 1 – 1 July 2015 – 30 June 2016

Tranche 2 – 1 July 2015 – 30 June 2017

Tranche 3 – 1 July 2015 – 30 June 2018

Each tranche is equal to one third of the total
grant and vests at the end of the relevant
service period

Performance assessment

30 June 2016

30 June 2019

Common LTI Plan Rules

Cessation of employment

All performance rights issued under the
2015/2016 plan have now been forfeited
as the TSR performance condition has not
been met.

Performance period not yet complete.

If the participant ceases employment for cause or resigns, unless the Board determines
otherwise, any unvested Performance Rights will automatically lapse.

Generally, if the participant ceases employment for any other reason, all of their unvested
Performance Rights will remain on foot and subject to the original performance condition.
However, the Board retains discretion to determine that some of their Rights (up to a pro-rata
portion based on how much of the Performance Period remains) will lapse.

Dividends & Voting

The Performance Rights do not carry dividends or voting rights prior to vesting.

Clawback and preventing
inappropriate benefits

The Plan Rules provide the Board with broad ‘clawback’ powers if, amongst other things, the
participant has acted fraudulently or dishonestly, engaged in gross misconduct or has acted
in a manner that has brought AFG or its related bodies corporate into disrepute, or there is a
material financial misstatement, or AFG is required or entitled under law or company policy
to reclaim remuneration from the participant, or the participant’s entitlements vest as a result
of the fraud, dishonesty or breach of obligations of any other person and the Board is of the
opinion that the incentives would not have otherwise vested.

ANNUAL REPORT16Directors’ Report[Continued]26

Remuneration Report (continued)

Change of control

Restrictions on dealing

Reconstructions, corporate action, rights
issues, bonus issues, etc

2015 LTI Grant

2017 LTI Grant

In a situation where there is likely to be a change of control, the Board has the discretion
to accelerate vesting of some or all of the Performance Rights. Where only some of the
Performance Rights have vested on a change of control, the remainder of the Performance
Rights will immediately lapse. If the change of control occurs before the Board exercises
its discretion:

♦ a pro-rata portion of the Performance Rights equal to the portion of the relevant
Performance Period that has elapsed up to the expected or actual (as appropriate) date
of the change of control will immediately vest; and

♦ the Board may, in its absolute discretion, decide whether the balance should vest

or lapse.

The participant must not sell, transfer, encumber, hedge or otherwise deal with
Performance Rights.

Unless the Board determines otherwise, the participant will be free to deal with the Shares
allocated on vesting of the Performance Rights, subject to the requirements of AFG’s Policy for
Dealing in Securities.

The rules of the LTI Plan include specific provisions dealing with rights issues, bonus issues,
and corporate actions and other capital reconstructions. These provisions are intended to
ensure that there is no material advantage or disadvantage to the participant in respect of their
Performance Rights as a result of such corporate actions.

Directors’ Report[Continued]27

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ANNUAL REPORT16Directors’ Report[Continued]

Remuneration Report (continued)

5 ] NON-EXECUTIVE DIRECTOR REMUNERATION

5.1 ] REMUNERATION POLICY

The Board seeks to set aggregate remuneration at a level that provides the Company with the ability to attract and retain Directors of the
highest calibre, whilst incurring a cost that is acceptable to shareholders. The amount of aggregate remuneration sought to be approved
by shareholders and the fee structure is reviewed annually against fees paid to NEDs of comparable companies. The Board may consider
advice from external consultants when undertaking the annual review process.

The Company’s constitution and the ASX Listing Rules specify that the NED fee pool shall be determined from time to time by a general
meeting. The latest determination was the shareholders meeting held on 24 April 2015 when shareholders approved an aggregate fee pool
of $1,000,000 per year. The Board will not seek any increase to the NED pool at the 2016 AGM.

5.2 ] STRUCTURE

The remuneration of NEDs consists of Directors’ fees, which is inclusive of statutory superannuation and committee fees. The below
summarises the NED fees from the date of AFG listing on the ASX:

♦ Chairman: $150,000 inclusive of superannuation

♦ Non-Executive Directors: $90,000 inclusive of superannuation

NEDs do not receive retirement benefits, other than statutory superannuation contributions, nor do they participate in any
incentive programs.

Directors may also be reimbursed for travel and other expenses incurred in attending to the Company’s affairs. Some of the Non-Executive
Directors receive non cash benefits in the form of off-shore conference entitlements. The table below outlines the NED remuneration for the
years ended 30 June 2016 and 30 June 2015:

Board and
Committee Fees
$

Short-term benefits
(non-monetary)
$

136,986

88,710

82,192

12,645

14,542

61,497

82,192

21,496

82,192

19,916

19,600

437,304

204,264

18,814

57,685

18,814

22,781

37,628

80,466

Superannuation

13,014

7,725

7,808

1,201

1,381

5,842

7,808

2,042

7,808

1,892

1,862

41,543

18,702

Year

2016

2015

2016

2015

2016

2015

2016

2015

2016

2015

2016

2015

2016

2015

2016

2015

Total

168,814

154,120

108,814

13,846

15,923

90,120

90,000

23,538

90,000

21,808

21,462

516,475

303,432

T. Gill

K. Matthews1

J. Atkins2

C. Carter3

J. Minto4

M. Kiely5

J. Muirsmith6

Total

Notes:

1. Mr K Matthews ceased to be an Executive Director and became a Non-Executive Director on 1 May 2015

2. Mr J Atkins resigned on 31 August 2015

3. Mr C Carter was appointed as Non-Executive Director on 25 March 2015

4. Mr J Minto was appointed as Non-Executive Director on 1 April 2015

5. Ms M Kiely was appointed as Non-Executive Director on 31 March 2016

6. Ms J Muirsmith was appointed as Non-Executive Director on 31 March 2016

Directors’ Report[Continued]

ADDITIONAL DISCLOSURES RELATING TO RIGHTS AND SHARES

5.3 ] RIGHTS AWARDED, VESTED AND LAPSED DURING THE YEAR

The table below discloses the number of rights granted to Executives as remuneration during FY15 as well as the number of rights that
vested, lapsed or forfeited during the year.

Rights do not carry any voting or dividend rights and shares can be allocated once the vesting conditions have been met until their
expiry date.

No rights awarded have vested or lapsed during the year. The rights issued during FY15 have been forfeited as the performance condition
attached to these rights was not met.

KMP

B. McKeon

M. Watkins

Year /
Tranches
(T)

Rights
awarded
during the
year No.

Fair value
per rights
at award
date $

Grant date

Vesting date

Exercise
price

Expiry date

No.
Forfeited
during
the year

2015 / T1

41,666

22 May 2015

$0.51

30 June 2016

$0.00

30 June 2016

(41,666)

2015 / T2

2015 / T3

2015 / T1

2015 / T2

2015 / T3

41,667

13,889

22 May 2015

$0.50

30 June 2017

$0.00

30 June 2017

(41,667)

22 May 2015

$0.47

30 June 2018

$0.00

30 June 2018

(41,667)

22 May 2015

$0.51

30 June 2016

$0.00

30 June 2016

(13,889)

22 May 2015

$0.50

30 June 2017

$0.00

30 June 2017

(13,889)

22 May 2015

$0.47

30 June 2018

$0.00

30 June 2018

(13,889)

L. Bevan

2015 / T1

25,000

22 May 2015

$0.51

30 June 2016

$0.00

30 June 2016

(25,000)

2015 / T2

25,000

22 May 2015

$0.50

30 June 2017

$0.00

30 June 2017

(25,000)

2015 / T3

25,000

22 May 2015

$0.47

30 June 2018

$0.00

30 June 2018

(25,000)

D. Bailey

2015 / T1

33,333

22 May 2015

$0.51

30 June 2016

$0.00

30 June 2016

(33,333)

2015 / T2

33,333

22 May 2015

$0.50

30 June 2017

$0.00

30 June 2017

(33,333)

2015 / T3

33,334

22 May 2015

$0.47

30 June 2018

$0.00

30 June 2018

(33,334)

5.4 ] SHAREHOLDINGS OF KMP*

Ordinary shares held in Australian Finance Group Limited ASX:AFG (number)

Directors

T. Gill

B. McKeon

M. Watkins

K. Matthews

J. Atkins

C. Carter

J. Minto

M. Kiely

J. Muirsmith

Executives

L. Bevan

D. Bailey

B. Jenkins

Balance 1 July
2015

Granted as
remuneration

On exercise of
rights

Net change
other

Balance 30 June
2016

Held nominally

2,250,000

21,179,773

21,102,689

16,882,151

136,364

500,000

166,666

1,533,333

1,050,000

2,250,000

21,179,773

21,102,689

16,882,151

136,364

500,000

166,666

1,533,333

1,050,000

2,250,000

21,179,773

21,102,689

16,882,151

136,364

500,000

83,333

530,000

* Includes shares held directly, indirectly and beneficially by the KMP

ANNUAL REPORT16Directors’ Report[Continued]30

Remuneration Report (continued)

6 ] EXECUTIVE SERVICE AGREEMENTS

Remuneration and other terms of employment for Executives are formalised in employment agreements. Each of these employment
agreements provides for the payment of fixed and performance based remuneration and employer superannuation contributions.
The following outlines the details of these agreements:

Name

B. McKeon

M. Watkins

D. Bailey

L. Bevan

B. Jenkins

Agreement expires

Notice of termination by company

Employee notice

No expiry, continuous agreement

12 months (or payment in lieu of notice)

No expiry, continuous agreement

12 months (or payment in lieu of notice)

No expiry, continuous agreement

12 months (or payment in lieu of notice)

No expiry, continuous agreement

12 months (or payment in lieu of notice)

No expiry, continuous agreement

6 months (or payment in lieu of notice)

12 weeks

7 ] REMUNERATION GOVERNANCE

7.1 ] REMUNERATION AND NOMINATION

The Remuneration and Nomination Committee is responsible for ensuring AFG has remuneration strategies and a framework that fairly
and responsibly rewards Executives and Non-Executive Directors with regard to performance, the law and corporate governance.
The Committee ensures that AFG remuneration policies are directly aligned to business strategy, financial performance and support
increased shareholder wealth over the long term.

As at 30 June 2016 the Committee comprised independent Non-Executive Director Jim Minto (Chair), independent Non-Executive
Directors Craig Carter, Melanie Kiely and Jane Muirsmith. Following John Atkins’ resignation, effective 31 August 2015, independent
Non-Executive Director Jim Minto was appointed to Chair this Committee.

Further information on the role of the Remuneration and Nomination Committee is set out in the Committee’s Charter available at
www.afgonline.com.au and in the Corporate Governance Statement also available on the Company’s website.

7.2 ] REMUNERATION PHILOSOPHY

The performance of the Company depends upon the quality of its Directors and Executives. To prosper, the Company must attract, motivate
and retain highly skilled Directors and Executives.

The Board embodies the following principles in its remuneration framework:

♦ Remuneration levels for KMP are set to attract and retain appropriately qualified and experienced Directors and Executives;

♦ Alignment of Executive reward with shareholder interest and strategy;

♦ The relationship between performance and remuneration of Executives is clear and transparent.

7.3 ] USE OF INDEPENDENT CONSULTANTS

In performing its role, the Remuneration and Nomination Committee can directly commission and receive information and advice from
independent external advisors. The Committee has protocols in place to ensure that any advice and recommendations are provided in an
appropriate manner and free from undue influence of Management.

Prior to AFG’s listing, and during the financial period ended 30 June 2015 the Company sought advice from 3 Degree Consulting to
provide comparable listed company remuneration data and assist them to design a post-listing remuneration framework. No remuneration
recommendations from independent consultants were received during the financial period ended 30 June 2016. 3 Degree Consulting did
not provide any “remuneration recommendations” for the purposes of the Corporations Act 2001 (Cth).

7.4 ] POLICY FOR DEALING IN SECURITIES

AFG has a Policy for Dealing In Securities to establish best practice procedures that protect AFG, Directors and employees against the
misuse of unpublished information that could materially affect the value of AFG securities. Directors, Executives and their connected
persons are restricted by trading windows.

7.5 ] REMUNERATION REPORT APPROVAL AT 2015 AGM

The 30 June 2015 Remuneration Report was presented to shareholders and was approved at the 2015 Annual General Meeting.

Directors’ Report[Continued]31

ANNUAL REPORT1632

8 ] OTHER TRANSACTIONS AND BALANCES WITH

9 ]

INDEPENDENT AUDIT OF REMUNERATION REPORT

The Remuneration Report has been audited by Deloitte. Please
see page 82 of this Annual Report for Deloitte’s report on the
Remuneration Report.

This Directors’ Report, including the Remuneration Report, is
signed in accordance with a Resolution of Directors of AFG Limited.

Tony Gill
Chairman

Dated at Perth, Western Australia on 22 September 2016

KMP AND THEIR RELATED PARTIES

[ i ] During the year the Group made payments to Genworth
Mortgage Insurance Australia Limited, one of our providers of
Lenders Mortgage Insurance (LMI). Mr Gill is a Non-Executive
Director of Genworth Mortgage Insurance Australia Limited.
These dealings were in the ordinary course of business and
were on normal terms and conditions. The payments made
for the provision of LMI policies were $1,044k (2015:$ 1,538k).
These payments are not considered to be material to the
financial results of the Group and therefore do not impact on
Mr Gill’s independence as a Director.

[ ii ] Mr 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 $207k (2015:
$192k). These payments are not considered to be material to
the financial results of the Group and therefore do not impact
on Mr Gill’s independence as a Director.

[ iii ] During the year the Group received payments from TAL
Life Ltd. Mr Minto is a Director of Dai-ichi Life Asia Pacific
which is the ultimate parent company of TAL Life Limited.
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 $724k (2015: $747k). The payments
received are not considered to be material to the financial
results of the Group and therefore do not impact on
Mr Minto’s independence as a Director.

[ iv ] As part of the demerger of the property business on
22 April 2015, the Group entered into a shared services
(EPG).
agreement with Establish Property Group Ltd
Mr McKeon, Ms Bevan and Mr Bailey, are Directors of EPG.
Under the terms of the shared services agreement the Group
provides premises, administration, accounting and some
company secretarial services to EPG at an agreed arms length
rate. The shared services agreement was implemented part
way through the prior period (2015: $39k). The agreement
was active for the full 2016 financial year and a total of
$170k was paid by EPG to the Group for these services. In
addition to the above, the Group’s head office is located at
100 Havelock Street West Perth. The Group leases these
premises at commercial arms length rates from an investee of
EPG, Qube Havelock Street Development Pty Ltd (Qube), that
was held by the Group prior to the demerger transaction see
Note 7. During the 2016 financial year rent of $1,539k has
been paid to Qube (2015: $1,633k).

Directors’ Report[Continued]

Independence declaration under Section 307C of the Corporations Act 2001

ANNUAL REPORT16Directors’ Report[Continued]34

Consolidated Statement
of Financial Position

AS AT 30 JUNE 2016

In thousands of AUD

Assets

Cash and cash equivalents

Trade and other receivables

Current tax asset

Loans and advances

Other financial assets

Property, plant and equipment

Intangible assets

Total assets

Liabilities

Interest-bearing liabilities

Trade and other payables

Employee benefits

Current tax payable

Deferred income

Provisions

Deferred tax liability

Total liabilities

Net assets

Equity

Share capital

Share-based payment reserve

Other capital reserves

Retained earnings

Total equity attributable to equity holders of the Company

Non-controlling interest

Total equity

Note

2016

2015

14(b)

30(d)

14(b)

14(c)

130,665

650,059

90,776

593,931

687

1,046,412

1,025,344

2,379

757

2,998

865

1,830,321

1,714,650

1,072,215

1,041,099

646,113

580,341

3,818

1,060

4,876

322

13,397

3,131

4,916

292

12,641

1,741,801

1,642,420

88,520

72,230

43,541

(74)

44,980

88,544

(24)

(76)

28,757

72,231

(1)

88,520

72,230

The Consolidated Statement of Financial Position should be read in conjunction with the Notes to the Financial Statements.

Consolidated Statement of Profit or
Loss and Other Comprehensive Income

FOR THE YEAR ENDED 30 JUNE 2016

In thousands of AUD

Continuing Operations
Commission and other income
Securitisation interest income
Operating income
Commission and other cost of sales
Securitisation interest expense
Gross profit
Other income
Administration expenses
Other expenses
Results from operating activities
Finance income
Finance expenses
Net finance income

Profit before tax from continuing operations
Income tax expense
Profit from continuing operations

Discontinued operations
Profit after tax for the year from discontinued operations
Profit for the year
Attributable to:
Owners of the Company
Non-controlling interests

Other comprehensive income
Items that may be reclassified subsequently to profit or loss
Net change in fair value of available-for-sale financial assets and other
Income tax on other comprehensive income
Other comprehensive income for the year, net of income tax

Total comprehensive income for the year

Total comprehensive income for the year attributable to:
Owners of the Company
Non-controlling interests

Total comprehensive income for the year

Earnings per share
Basic earnings (cents per share)
Diluted earnings (cents per share)

Earnings per share – continuing operations
Basic earnings (cents per share)
Diluted earnings (cents per share)

Note

2016

2015

13
13

482,331
46,597
528,928
(440,790)
(33,036)
55,102
15,345
(3,314)
(36,881)
30,252
2,708
(34)
2,674

32,926
(10,282)
22,644

-
22,644

22,667
(23)
22,644

2
-
2

462,820
48,534
511,354
(421,324)
(38,096)
51,934
12,296
(3,209)
(41,757)
19,264
2,545
(83)
2,462

21,726
(6,430)
15,296

5,078
20,374

20,379
(5)
20,374

(20)
5
(15)

22,646

20,359

22,669
(23)

22,646

20,364
(5)

20,359

28
28

10.54
10.54

10.73
10.71

8.05
8.04

The Consolidated Statement of Profit or Loss and Other Comprehensive Income should be read in conjunction with the Notes to the
Financial Statements.

ANNUAL REPORT1636

Statement of Changes in Equity

FOR THE YEAR ENDED 30 JUNE 2016

In thousands of AUD

Share
capital

Foreign
currency
translation
reserve

Fair value
reserve

Share-
based
payment
reserve

Balance at 1 July 2014

11,434

(15)

(46)

Total comprehensive income
for the period

Profit

Other comprehensive income

Total comprehensive income
for the period

Transactions with owners,
recorded directly in equity

Dividends to equity holders

Issue of share capital

Capital reduction

Non-cash distribution
to owners

Share-based payment
transactions

Total transactions
with owners

Balance at 30 June 2015

Balance at 1 July 2015

Total comprehensive
income for the period

Profit

Other comprehensive income

Total comprehensive income
for the period

Transactions with owners,
recorded directly in equity

Dividends to equity holders

Share-based payment
transactions

Total transactions
with owners

32,035

(1,188)

1,260

32,107

43,541

(15)

(61)

Balance at 30 June 2016

43,541

(14)

(60)

Retained
earnings

Total

Non-
controlling
interest

Total
equity

74,088

85,461

85,465

20,379

(15)

20,379

20,364

(38,000)

32,035

(1,188)

(27,710)

1,269

(65,710)

(33,594)

28,757

72,231

28,757

72,231

22,667

22,669

(6,444)

(6,356)

(5)

(1)

(23)

20,374

(15)

20,359

(38,000)

32,035

(1,188)

(27,710)

1,269

(33,594)

72,230

22,644

22,646

(6,444)

(6,356)

44,980

88,544

(24)

88,520

The Consolidated Statement of Changes in Equity should be read in conjunction with the Notes to the Financial Statements.

Statement of Cash Flows

FOR THE YEAR ENDED 30 JUNE 2016

In thousands of AUD

Note

2016

2015

Cash flows from operating activities

Cash receipts from customers

Cash paid to suppliers and employees

Repayments of customer borrowings

(Repayments) from securitisation

Income taxes paid

440,571

(410,148)

23,414

(2,189)

(7,780)

Net cash generated by operating activities

15(b)

43,868

Cash flows from investing activities

Net interest received

Acquisition of property, plant and equipment

Investment in intangible assets

Dividend received from equity-accounted investees

Increase in other loans and advances

Net cash outflow on disposal of discontinued operations

Net cash generated by/(used in) investing activities

Cash flows used in financing activities

Proceeds from borrowings

Proceeds from issuance of share capital

Transaction costs on issue of shares, net of tax

Decrease in loans from funders

Dividends paid to equity holders of the parent

Net cash (used in)/generated by financing activities

Net increase in cash and cash equivalents

Cash and cash equivalents at 1 July

Cash and cash equivalents at 30 June

2,616

(136)

(205)

718

2,993

(528)

(6,444)

(6,972)

39,889

90,776

15(a)

130,665

399,849

(397,454)

34,025

(19,694)

(8,328)

8,398

2,347

(530)

(242)

459

(113)

(2,689)

(768)

13,805

32,558

(523)

(716)

(38,000)

7,124

14,754

76,022

90,776

The Statement of Cash Flows should be read in conjunction with the Notes to the Financial Statements.

ANNUAL REPORT1638

Notes to the
Financial
Statements

Contents

1 ] REPORTING ENTITY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40

2 ] BASIS OF PREPARATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40

3 ] SIGNIFICANT ACCOUNTING POLICIES . . . . . . . . . . . . . . . . . 42

4 ] DETERMINATION OF FAIR VALUES . . . . . . . . . . . . . . . . . . . . 48

5 ] FINANCIAL RISK MANAGEMENT . . . . . . . . . . . . . . . . . . . . . . 49

6 ] SEGMENT INFORMATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50

7 ] DISCONTINUED OPERATIONS . . . . . . . . . . . . . . . . . . . . . . . . 53

8 ] REVENUE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 55

9 ] OTHER INCOME . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 55

10 ] OTHER EXPENSES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 55

11 ] EMPLOYEE COSTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 55

12 ] AUDITORS’ REMUNERATION . . . . . . . . . . . . . . . . . . . . . . . . . 56

13 ] FINANCE INCOME AND EXPENSES . . . . . . . . . . . . . . . . . . . . 56

14 ] INCOME TA X . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 57

15 ] CASH AND CASH EQUIVALENTS . . . . . . . . . . . . . . . . . . . . . 58

16 ] TRADE AND OTHER RECEIVABLES . . . . . . . . . . . . . . . . . . . . 60

17 ] TRADE AND OTHER PAYABLES . . . . . . . . . . . . . . . . . . . . . . . 60

18 ] LOANS AND ADVANCES . . . . . . . . . . . . . . . . . . . . . . . . . . . . 61

19 ] GROUP ENTITIES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 62

20 ] INVESTMENTS IN EQUITY-ACCOUNTED INVESTEES . . . . . . 63

21 ] PROPERTY, PLANT AND EQUIPMENT . . . . . . . . . . . . . . . . . . 64

22 ] INTEREST-BEARING LIABILITIES . . . . . . . . . . . . . . . . . . . . . . 64

23 ] EMPLOYEE BENEFITS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 66

24 ] PROVISIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 67

25 ] DEFERRED INCOME . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 67

26 ] OPERATING LEASES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 67

27 ] CAPITAL AND RESERVES . . . . . . . . . . . . . . . . . . . . . . . . . . . . 68

28 ] EARNINGS PER SHARE (EPS) . . . . . . . . . . . . . . . . . . . . . . . . . 70

29 ] SHARE BASED PAYMENTS . . . . . . . . . . . . . . . . . . . . . . . . . . . 71

30 ] FINANCIAL INSTRUMENTS . . . . . . . . . . . . . . . . . . . . . . . . . . . 72

31 ] PARENT ENTITY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 79

32 ] CAPITAL AND OTHER COMMITMENTS . . . . . . . . . . . . . . . . . . 79

33 ] CONTINGENCIES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 79

34 ] RELATED PARTIES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 80

35 ] SUBSEQUENT EVENTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 80

ANNUAL REPORT16
40

1 ] Reporting entity

The consolidated Financial Statements for the financial year ended
30 June 2016 comprise 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.

[ D ] USE OF ESTIMATES AND JUDGEMENTS

The preparation of Financial Statements
in conformity with
Australian Accounting Standards Board (‘AASB’) standards requires
Management to make judgements, estimates and assumptions
the
that affect
reported amounts of assets and liabilities, income and expenses.
Actual results may differ from these estimates.

the application of accounting policies and

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.

2 ] Basis of preparation

[ A ] STATEMENT OF COMPLIANCE

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

The Financial Report is a general-purpose financial report, for a
‘for-profit’ entity, which has been prepared in accordance with the
requirements of the Corporations Act 2001 (Cth) and Australian
Accounting Standards and other authoritative pronouncements
of the Australian Accounting Standards Board. The Financial
Report has also been prepared on a historical cost basis, except
where noted.

The Financial Statements comprise the Consolidated Financial
Statements of the Australian Finance Group Limited Group
of companies.

Certain comparative information within the Statement of Financial
Position has been reclassified to be comparable to current year
presentation.

The Financial Report is presented in Australian dollars and all
values are rounded to the nearest thousand dollars ($000’s) unless
otherwise stated.

The Consolidated Financial Statements were authorised for issue
by the Board of Directors on 22 September 2016.

[ 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
Australian dollars (“AUD”).

The Group is of a kind referred to in ASIC Corporations Instrument
2016/191 dated 31 March 2016 and in accordance all financial
information presented in Australian dollars has been rounded to the
nearest thousand dollars unless otherwise stated.

Information about critical judgements in applying accounting
policies that have the most significant effect on the amounts
recognised
in the
following notes:

in the Financial Statements

included

♦ Notes 16 and 17 - Net present value of future trailing commissions:
recognition of future trailing commissions receivable and
payable

♦ Note 3(a)(ii) - Consolidation of special purpose entities

Information about assumptions and estimates 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 24 - Provisions

♦ Note 29 - Measurement of share-based payments

♦ Note 30 - Valuation of financial instruments

♦ Taxation

The Group’s accounting for taxation requires 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 a corresponding credit or charge to the Consolidated Statement
of Profit or Loss and Other Comprehensive Income.

Notes to the Financial Statements[Continued]41

♦

Long service leave provision

The liability for long service leave is recognised and measured at the present value of the estimated future payments to be made in respect
of services provided by employees up to the reporting date. In determining the present value of the liability, consideration is given to
the expected future wage and salary levels, experience of employee departures, and period of service. Expected future payments are
discounted using market yields at the reporting date on national government bonds with terms to maturity that match, as closely as possible,
the estimated future cash outflows.

[ E ] CHANGES IN ACCOUNTING POLICIES AND DISCLOSURES

The accounting policies adopted are consistent with those of the previous financial year except as follows:

[ i ] Adoption of new and revised Accounting Standards

The Group has adopted all of the new and revised Standards and Interpretations, including amendments to the existing standards issued by
the AASB that are relevant to their operations and effective for the current reporting period.

The adoption of these amendments has not resulted in any significant changes to the Group’s accounting policies nor any significant effect
on the measurement or disclosure of the amounts reported for the current or prior periods.

The Group has early adopted AASB 2015-2 ‘Amendments to Australian Accounting Standards – Disclosure Initiative: Amendments to
AASB 101’.

The early adoption of this amendment has not resulted in any significant changes to the Group’s accounting policies nor any significant effect
on the measurement or disclosure of the amounts reported for the current or prior periods.

[ ii ] Accounting Standards and Interpretations Issued But Not Yet Effective

Management assesses the impact of new standards and interpretations. Assessment of the expected impacts of these standards and
interpretations is ongoing, however, it is expected that there will be no significant changes in the Group’s accounting policies.

At the date of authorisation of the Financial Statements, the Standards and Interpretations that were issued but not yet effective, which have
not been early adopted are listed below:

Affected Standards
and Interpretations

Application date
(reporting period
commences on or after)

Application date for Group

AASB 9 ‘Financial instruments’ and the relevant
amending standards

AASB 15 ’Revenue from Contracts with Customers’ and
AASB 2014-5 ‘Amendments to Australian Accounting
Standards, arising from AASB 15’

1 January 2018

30 June 2019

1 January 2018

30 June 2019

AASB 16 ‘Leases’

1 January 2019

30 June 2020

AASB 2014-3 ‘Amendments to Australian Accounting
Standards – Accounting for Acquisitions of Interests in
Joint Operations’

AASB 2014-4 ‘Amendments to Australian Accounting
Standards – Clarification of Acceptable Methods of
Depreciation and Amortisation’

AASB 2015-1 ‘Amendments to Australian Accounting
Standards – Annual Improvements to Australian
Accounting Standards 2012-2014 Cycle’

AASB 2016-2 ‘Amendments to Australian Accounting
Standards – Disclosure Initiative: Amendments
to AASB 107’

1 January 2016

30 June 2017

1 January 2016

30 June 2017

1 January 2016

30 June 2017

1 January 2017

30 June 2018

Management is currently assessing the impact of applying the new AASB 15 ‘Revenue from Contracts with Customers’ standard on the
Group’s Financial Statements, however, it is not expected that it will result in a significant change to the Group’s accounting policies.

ANNUAL REPORT16Notes to the Financial Statements[Continued]42

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

The Consolidated Financial Statements incorporate the Financial
Statements of the Company and entities (including structured
entities) controlled by the Company and its subsidiaries. Control is
achieved when the Company:

♦ Has power over the investee

♦ Is exposed, or has rights, to variable returns from its involvement

with the investee

♦ Has the ability to use its power to affect its returns

When the Group has less than a majority of the voting rights or
similar rights of an investee, the Group considers all relevant facts
and circumstances in assessing whether it has power over an
investee, including:

♦ The contractual arrangement with the other vote holders

of the investee

♦ Rights arising from other contractual arrangements

♦ The Group’s voting rights and potential voting rights

Consolidation of a subsidiary begins when the Group obtains control
over the subsidiary and ceases when the Group loses control of
the subsidiary. Specifically, income and expenses of a subsidiary
acquired or disposed of during the year are included in the
Consolidated Statement of Profit or Loss and Other Comprehensive
Income from the date the Company gains control until the date
when the company ceases to control the subsidiary 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.

When necessary, adjustments are made to the Financial Statements
of subsidiaries to bring their accounting policies in line with the
Group’s accounting policies.

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
intra-group transactions.

Profit or loss and each component of other comprehensive income
are attributed to the owners of the Company and to the non-
controlling interests. Total comprehensive income of subsidiaries is
attributed to the owners of the Company and to the non-controlling
interests even if this results in the non-controlling interests having
a deficit balance.

All 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.

Changes in the Group’s ownership interests in subsidiaries that
do not result in the Group losing control over the subsidiaries are
accounted for as equity transactions. The carrying amounts of the
Group’s interests and the non-controlling interests are adjusted to
reflect the changes in their relative interests in the subsidiaries.
Any difference between the amount by which the non-controlling
interests are adjusted and the fair values of the consideration paid
or received is recognised directly in equity and attributed to the
owners of the Company.

When the Group loses control of a subsidiary, a gain or loss is
recognised in the profit or loss and is calculated as the difference
between (i) the aggregate of the fair value of the consideration
received and the fair value of any retained interest and (ii) the
previous carrying amount of the assets, and liabilities of the
subsidiary and any non-controlling interests. All the amounts
previously recognised in other comprehensive income in relation
to that subsidiary are accounted for as if the Group has directly
disposed of the related assets and liabilities of the subsidiary. The
fair value of any investment retained in the former subsidiary at
the date when control is lost is regarded as the fair value on initial
recognition for subsequent accounting under AASB 139,when
applicable, the cost on initial recognition of an investment in an
associate or a joint venture.

[ i ] 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 the benefits from its operation.

The Group has established
following special purpose
entities to support the specific funding needs of the Group’s
securitisation programme:

the

♦ AFG 2010-1 Trust and its Series (SPE) to conduct securitisation
activities funded by short term warehouse facilities provided by
reputable lenders.

♦ AFG 2013-1 Trust, AFG 2013-2 Trust and AFG 2014-1 Trust (SPE-
RMBS) to hold securitised assets and issue Residential Mortgage
Backed Securities (RMBS).

The special purpose entities meet the criteria of being controlled
entities under AASB 10 – Consolidated Financial Statements.

The elements indicating control include, but not limited to,
the below:

♦ The Group has existing rights that gives it the ability to direct
relevant activities that significantly affect the special purpose
entities’ returns

♦ The Group is exposed, and has rights, to variable returns from its

involvement with the special purpose entities

♦ The Group has all

the residual

interest

the special

purpose entities

♦ Fees received by the Group

from the special purpose
entities vary on the performance, or non performance of the
securitised assets

♦ The Group has the ability to direct decision making accompanied
by the objective of obtaining benefits from the special purpose
entities’ activities.

Notes to the Financial Statements[Continued]
43

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 warehouse facilities providers and
the bondholders. The securitised assets and the corresponding
liabilities are recorded in the Statement of Financial Position and the
interest earned and paid recognised in the Consolidated Statement
of Profit or Loss and Other Comprehensive Income.

[ ii ]

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.
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.

On 22 April 2015 the Group divested its property development
interests to Establish Property Group Ltd, including its investment
in associates (See Discontinued Operations Note 7).

[ B ] FOREIGN CURRENCY

[ i ] 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. 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.

[ C ] FINANCIAL INSTRUMENTS

[ i ] 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
financial 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 the 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.

ANNUAL REPORT16Notes to the Financial Statements[Continued]44

3 ] Significant accounting policies (continued)

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 Profit or Loss and Other
Comprehensive Income.

[ ii ]

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 the
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.

Notes to the Financial Statements[Continued]45

[ iv ] Fair value of financial instruments

[ ii ] Subsequent costs

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.

For financial instruments that are not traded in an active market,
the Group uses valuation techniques that are appropriate in the
circumstances and for which sufficient data is available to measure
fair value, maximising the use of relevant observable inputs
and minimising the use of unobservable inputs. Refer to Notes 4
and 30 for further information on the determination of fair value
of financial instruments.

[ v ] Share capital

Ordinary shares

Ordinary shares are classified as equity. Incremental costs directly
attributable to the issue of ordinary shares and share options are
recognised as a deduction from equity 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 bank and on hand, short term deposits with a
maturity of three months or less, as well as restricted cash such as
proceeds 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 ] PROPERTY, PLANT AND EQUIPMENT

[ i ] 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.

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 ]

plant and equipment 2-5 years

[ ii ]

fixtures and fittings

5-20 years

Depreciation methods, useful
reassessed at each reporting date.

lives and residual values are

[ F ]

INTANGIBLES

[ i ] 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 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 ] Capitalised software development costs 2.5-5 years

[ ii ] Software licenses

2.5-5 years

ANNUAL REPORT16Notes to the Financial Statements[Continued]

3 ] Significant accounting policies (continued)

[ iii ] Share-based payment transactions

[ G ] IMPAIRMENT OF NON-FINANCIAL ASSETS

The carrying amounts of the Group’s non-financial assets, other
than 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 ] 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
to
reporting date.

from employees’ services provided

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.

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.

[ I ] 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.

[ J ] 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:

recognised upon
of commission.

the

Origination commissions are
receipt

loans being settled and

♦ 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 the individual loan balance
trailing commission
outstanding. The Group also makes
payments
(brokers)
based on the individual loan balance outstanding.

to authorised mortgage originators

initial

recognition,

trailing commission

On
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 Consolidated Statement of Profit or Loss and
Other Comprehensive Income.

Notes to the Financial Statements[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
Consolidated Statement of Profit or Loss and Other Comprehensive
Income in proportion to the stage of completion of the transaction
at the reporting date.

[ iii ] Fees for services

Revenue from contracts to provide marketing, compliance and
administration services to the members
is recognised with
reference to the stage of completion for the contract of services.

[ iv ] Rendering of other services

Revenue from contracts to provide other services is recognised by
reference to the stage of completion of the contract.

[ v ] 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.

[ K ]

OTHER INCOME

[ i ] Sponsorship and incentive income

Sponsorship and incentive income is the income generated from
sponsorship and incentive payment arrangements with Lenders.
The income is brought to account when services relating to the
income have been performed.

[ L ] LEASE PAYMENTS

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.

lease payments made under finance

Minimum
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 and
changes in fair value of financial assets at fair value through profit
or loss.

[ N ] BORROWING COSTS

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.

[ O ] CAPITAL RAISING COSTS

Capital raising costs are accounted for as follows:

♦ Costs directly associated with the sale of existing shares are

expensed to the profit or loss

♦ Costs directly attributable to the issue of new shares, raising of
additional equity, are accounted for as a deduction from equity,
net of any income tax benefit

♦ Other costs which include elements of both are apportioned
based on the proportion of existing shares and new shares, and
as such are accounted for in part as an equity deduction and in
part as an expense.

[ P ]

INCOME TAX EXPENSE

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

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

Deferred tax assets are recognised where management consider
that it is probable that future taxable profits will be available
to utilise those temporary differences. The carrying amount of
deferred income tax assets is reviewed at each balance sheet date
and reduced to the extent that it is no longer probable that sufficient
taxable profit will be available to allow all or part of the deferred
income tax asset to be utilised.

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

Deferred income tax assets and liabilities are measured at the tax
rates that are expected to apply to the year when the asset is

ANNUAL REPORT16Notes to the Financial Statements[Continued]48

3 ] Significant accounting policies (continued)

[ Q ] GOODS AND SERVICES TAX

realised or the liability is settled, based on tax rates (and tax laws)
that have been enacted or substantively enacted at the balance
sheet date.

Income taxes relating to items recognised directly in equity are
recognised in equity and not in the profit or loss.

[ i ] Tax consolidation

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.

[ 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/(receipts) 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 intra-group 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.

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.

[ R ] DEFERRED INCOME

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.

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 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.
Further assumptions are disclosed in Note 30(d).

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
and available-for-sale assets is determined by reference to their
quoted closing bid price at reporting date.

Other financial instruments

The carrying amount of all other financial assets and liabilities
recognised in the Statement of Financial Position approximate
their fair value, with the exception of the trailing commission
receivables and payables that are initially recognised at fair value
and subsequently carried at amortised cost.

Notes to the Financial Statements[Continued]49

5 ] Financial risk management

[ A ] OVERVIEW

The Group has exposure to credit, liquidity and market 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
the
establishment and oversight of the risk management framework.
The Risk and Compliance Committee is responsible for developing
and monitoring risk management policies.

for

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 Risk and Compliance 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 Board. 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.

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. Subsequent to July 2015 all loans with a loan to value
ratio of greater than 80% were subject to a lenders mortgage
insurance contract.

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 an
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
losses or risking
incurring unacceptable
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.

ANNUAL REPORT16Notes to the Financial Statements[Continued]50

5 ] Financial risk management (continued)

[ E ] CAPITAL MANAGEMENT

[ 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.

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.

Other market risk

The Group is exposed to an increase in the level of credit support
required within its securitisation programme arising from changes
in the credit rating of mortgage insurers used by the SPE, and the
composition of the available collateral held. The Group regularly
reviews and reports 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.

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 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 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.

imposed by

the warehouse

The Special Purpose Entities (SPE) are subject to the external
requirements
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-Residential Backed Mortgage
Securities 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 is 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 2016.

6 ] Segment information

AASB 8 requires operating segments to be identified on the basis
of internal reports about business activities in which the Group is
engaged and that are regularly received by the chief operating
decision maker, the Board of Directors, in order to allocate resources
to the segment and to assess its performance.

The Group has identified two reportable segments based on the
nature of the products and services, the type of customers for
those products and services, the processes followed to produce,
the method used to distribute those products and services and the
similarity of their economic characteristics.

The following summary describes the operations in each of the
Group’s reportable segments:

AFG Wholesale Mortgage Broking

The mortgage broking segment refers to the operating activities in
which the Group acts as a wholesale mortgage broker that provides
its broker members with administrative and infrastructure support
as well as access to a panel of lenders.

Notes to the Financial Statements[Continued]51

The Group receives two types of commission payments on loans
originated through its network, as described below:

♦ Upfront commissions on settled loans

Upfront commissions are received by the Group from lenders as
a percentage of the total amount borrowed. Once a loan settles,
the Group receives a one-off payment linked to the total amount
borrowed as an upfront commission, a large portion of which is
then paid by the Group to the originating broker.

♦ Trail commissions on the loan book

Trail commissions are received by the Group from lenders over
the life of the loan (if it is in good order and not in default), as
a percentage of the particular loan’s outstanding balance.
The trail book represents the aggregate of residential mortgages
outstanding that have been originated by the Group’s brokers
and are generating trail income

AFG Home Loans

AFG Home Loans offers the Group’s branded mortgage products,
funded by third party wholesale funding providers (white label
products) and AFG Securities mortgages (securitised loans issued
by AFG Securities Pty Ltd) that are distributed through the Group’s
distribution network. AFG Home Loans sits on the Group’s panel
of lenders alongside the other over 45 lenders and competes
with them for home loan customers. The segment earns fees for
services, largely in the form of upfront and trail commissions, and
net interest margin on it securitisation programme.

Segment results that are reported to the Managing Director include
items directly attributable to the relevant segment as well as those
that can be allocated on a reasonable basis. Other/unallocated
items are comprised mainly of other operating activities from
which the Group earns revenues and incurs expenses that are
not required to be reported separately since they do not meet the
quantitative thresholds prescribed by AASB 8 or are not managed
separately and include corporate and taxation overheads, assets
and liabilities.

Information regarding the results of each reportable segment is
included on page 52.

Performance is measured based on segment profit before tax, as
included in the internal management reports that are reviewed by
the Board of Directors.

ANNUAL REPORT1652

6 ] Segment information (continued)

Year ended 30 June 2016

In thousands of AUD

Revenue

External customers

Inter-segment

Other operating income

Interest income

Total segment revenue

Results

AFG Wholesale
Mortgage Broking

AFG Home Loans

Other / Unallocated

Total

460,212

16,719

5,011

481,942

67,423

904

68,327

1,293

(16,719)

10,334

1,804

528,928

15,345

2,708

(3,288)

546,981

Segment profit before income tax

33,950

6,564

(7,588)

Income tax expense

Net profit after tax

Assets and liabilities

Total segment assets

Total segment liabilities

Other segment information

Depreciation and amortisation

Interest expense

Year ended 30 June 2015

In thousands of AUD

Revenue

External customers

Inter-segment

Other operating income

Interest income

Total segment revenue

Results

Income tax expense

Net profit after tax

Assets and liabilities

Total segment assets

Total segment liabilities

Other segment information

Depreciation and amortisation

Interest expense

651,331

646,430

1,128,774

1,084,750

50,216

1,830,321

10,621

1,741,801

(134)

(15)

(34)

(951)

(1,100)

(34)

AFG Wholesale
Mortgage Broking

AFG Home Loans

Other / Unallocated

Total

449,032

61,072

9,239

5,639

463,910

921

61,993

1,250

(9,239)

6,808

1,473

292

32,926

(10,282)

22,644

511,354

12,447

2,394

526,195

21,726

(6,430)

15,296

595,480

581,031

1,082,555

1,052,485

36,615

1,714,650

8,904

1,642,420

(126)

(23)

(76)

(983)

(7)

(1,132)

(83)

Segment profit before income tax

36,949

638

(15,861)

Notes to the Financial Statements[Continued]
53

7 ] Discontinued operations

During the 2015 financial year, the Board of Directors recommended a demerger of the property business, which involved the establishment
of a sale agreement between the Company and Establish Property Group Ltd pursuant to which the Group agreed, amongst other things,
to transfer the Group’s property development interests to Establish Property Group Ltd in consideration for the issue of Establish Property
Group Ltd shares to the Company.

On 26 March 2015 the Group called a General Meeting to pass an ordinary resolution to make a pro-rata distribution of all of its shares in
Establish Property Group Ltd to the shareholders of the Company and to approve the subsequent share capital reduction by divesting its
property development interests to Establish Property Group Ltd.

On 20 April 2015 the ordinary resolution was passed by the shareholders and the demerger became effective on 22 April 2015.

As part of this demerger the Group has also agreed to continue in its role as guarantor under the debt funding arrangements of AFG
Developments 2 Pty Ltd and a former joint venture arrangement in relation to Richmond Quarter development project. This guarantee was
released during the year ended 30 June 2016.

The results of the property development operations for the year are presented below:

In thousands of AUD

Results of discontinued operation

Revenue

Expenses

Finance income

Finance costs

Results from operating activities

Share of profit of equity accounted investees (net of tax)

Gain on sale of discontinued operation

Results before income tax

Income tax (expense) / benefit

Profit for year

Basic earnings (cents per share)

Diluted earnings (cents per share)

The FY15 profit from discontinued operation of $5,078k is attributable entirely to the owners of the Company.

1 July 2014 to
22 April 2015

(59)

1,880

(485)

1,336

322

3,796

5,454

(376)

5,078

2.68

2.67

ANNUAL REPORT16Notes to the Financial Statements[Continued]54

7 ] Discontinued operations (continued)

The effect of disposal on the 2015 financial position of the Group is summarised in the following table:

Effect of disposal on the financial position of the Group

In thousands of AUD

Cash and cash equivalents

Inventories

Trade and other receivables

Loans and advances

Investments in equity-accounted investees

Total assets

Interest bearing liabilities

Trade and other payables

Total liabilities

Net assets distributed to shareholders

Gain on sale of discontinued operation

Distribution to shareholders*

Net assets distributed to shareholders

Gain on sale of discontinued operation

As at
22 April 2015

2,689

36,876

155

13,968

2,537

56,225

26,594

4,530

31,124

25,101

28,897

(25,101)

3,796

* Effective on 22 April 2015 a pro-rata distribution of all of the Company’s shares in Establish Property Group Ltd was made to the shareholders of

the Company. The distribution is in part a return of capital and in part a dividend to the shareholders, of $1,187,623 and $27,709,745 respectively.

Cash flows from (used in) discontinued operation

In thousands of AUD

Net cash used in operating activities

Net cash from investing activities

Net cash from financing activities

Net cash flows for the year

Consideration received, satisfied in cash

Cash and cash equivalents disposed of

1 July 2014 to
22 April 2015

(14,196)

469

15,805

2,078

(2,689)

Notes to the Financial Statements[Continued]55

8 ] Revenue

In thousands of AUD

Commissions

Interest on commission income receivable

Mortgage management services

Securitisation transaction fees

Total

2016

430,465

50,473

566

827

2015

412,775

48,536

713

796

482,331

462,820

Revenue includes the interest income of $50,473k (2015: $48,536k) from the unwinding of the discount in relation to the net present value
of future trailing commission receivable.

9 ] Other income

In thousands of AUD

Sponsorship and incentive income

Software licence fees

Professional indemnity insurance

Fees for services

Other

10 ] 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

Impairment loss/(reversal of impairment) on receivables

Net loss on disposal of property, plant and equipment

Capital raising costs

11 ] Employee costs

In thousands of AUD

Wages and salaries

Other associated personnel expenses

Change in liabilities for employee benefits

Share-based payment transactions

Superannuation

Note

2016

7,357

2,013

1,911

3,328

736

2015

5,639

1,693

1,733

2,743

488

15,345

12,296

2016

4,046

1,481

3,238

414

24,491

1,100

1,940

169

36,881

2016

16,567

6,077

1,734

24,491

2015

3,142

1,732

2,889

386

24,795

1,132

2,117

(75)

5,636

41,757

2015

15,884

5,877

1,269

1,685

24,795

ANNUAL REPORT16Notes to the Financial Statements[Continued]56

12 ] 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

Deloitte Touche Tohmatsu

Other services - Deloitte Touche Tohmatsu

Tax compliance services

Due diligence services

Other non audit services

Other services - Ernst & Young

Other assurance services

13 ] 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 from funders

Interest expense

Finance expense

2016

2015

182,700

146,750

91,350

176,458

465,500

33,000

87,575

124,350

729,533

3,000

2016

269

2,396

2,708

(1)

(33)

(34)

2015

300

2,093

152

2,545

(76)

(7)

(83)

Net finance income and expense

2,674

2,462

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

2,665

(33)

2,393

(83)

Notes to the Financial Statements[Continued]57

14 ] Income tax

[ A ] 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

Adjustments for deferred tax

Income tax expense reported in the statement of profit or loss

Income tax from continuing operations

Income tax expense/(benefit) from discontinued operation (excluding gain on sale)

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 before tax from continuing operations

Profit before tax from discontinued operations

Profit excluding income tax

Income tax using the Company’s domestic tax rate of 30% (2015: 30%)

Non-deductible expenses

Non-assessable gain on disposal of discontinued operations

Over provision in prior periods

Other adjustments

Income tax reported in the statement of profit or loss

Income tax attributable to a discontinued operation

2016

2015

10,561

(1,014)

(285)

1,020

10,282

7,459

(255)

(398)

6,806

6,430

376

6,806

2016

2015

(5)

2016

32,926

9,879

539

(1,014)

878

10,282

2015

21,726

5,454

27,180

8,154

200

(1,139)

(195)

(214)

6,806

6,430

376

6,806

ANNUAL REPORT16Notes to the Financial Statements[Continued]58

14 ] Income tax (continued)

[ B ] CURRENT TAX ASSETS AND LIABILITIES

The current tax liability for the Group of $1,060k (2015: $687k current tax asset) represents the amount of income taxes payable in respect
of current and prior financial periods.

[ C ] DEFERRED TAX ASSETS AND LIABILITIES

Deferred tax assets and liabilities are attributable to the following:

Assets

Liabilities

Net

In thousands of AUD

2016

2015

Property, plant and equipment
and intangibles

Trade and other receivables

Employee benefits

Trade and other payables

Other items

Tax (assets) / liabilities

Set off of tax

(1,098)

(1,045)

(3,126)

(171,848)

(163,668)

(2,593)

(2,648)

2016

431

2015

117

188,451

183,011

(175,539)

(170,487)

188,936

183,128

175,539

170,487

(175,539)

(170,487)

2016

431

188,451

(1,098)

2015

117

181,966

(3,126)

(171,848)

(163,668)

(2,539)

13,397

(2,648)

12,641

Net tax (assets) / liabilities

13,397

12,641

13,397

12,641

15 ] 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

2016

83,906

2,039

36,423

8,297

130,665

2015

48,339

7,409

31,162

3,866

90,776

(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 short term deposits in 2016 was 2.22% (2015: 2.39%). The deposits had an average maturity of 91 days
(2015: 90 days).

The Group’s exposure to interest rate risk and a sensitivity analysis for financial assets and liabilities are disclosed in Note 30.

Notes to the Financial Statements[Continued]
59

[ B ] RECONCILIATION OF CASH FLOWS FROM OPERATING ACTIVITIES

In thousands of AUD

Cash flows from operating activities

Profit for the period from continuing operations

Profit for the period from discontinued operations

Adjustments to reconcile the profit to net cash flows:

Income tax expense from continuing operations

Income tax expense/(benefit) from discontinued operations

Depreciation and amortisation

Net interest income from investing activities

Net interest expense on financing activities

Expense recognised in respect of equity-settled share-based payments

Share of profit of equity accounted investees

Gain on disposal of discontinued operations

Present value of future trailing commission income

Present value of future trailing commission expense

Other non-cash movements

Working capital adjustments:

Changes in assets and liabilities

Increase/(Decrease) in receivables and 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 securitisation lending

(Increase)/Decrease in securitisation borrowings

Cash generated from operations

Interest paid

Income tax paid

Net cash generated by operating activities

Note

2016

2015

22,644

10,282

1,100

(2,664)

(56,326)

56,148

(164)

31,108

1,553

10,454

(45)

658

15,296

5,078

20,374

6,430

376

1,132

(4,198)

493

1,269

(322)

(3,796)

(78,937)

75,699

(89)

18,431

3,215

2,999

(12,432)

616

(93)

(22,467)

(14,509)

30,357

51,648

(7,780)

43,868

18,409

16,733

(7)

(8,328)

8,398

ANNUAL REPORT16Notes to the Financial Statements[Continued]60

16 ] Trade and other receivables

In thousands of AUD

Current

Trade and other receivables

Accrued income

Net present value of future trailing commissions receivable1

Prepayments

Non-current

Net present value of future trailing commissions receivable1

2016

2015

273

369

132,350

3,511

136,230

513,829

774

339

1,113

117,343

2,965

121,421

472,510

650,059

593,931

(1) See fair value determinations for trailing commissions – Note 4.

Trade and other receivables are shown net of a provision for impairment of $6k (2015: $2k).

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.

17 ] Trade and other payables

In thousands of AUD

Current

Note

2016

2015

Present value of future trailing commissions payable

4,30

Other trade payables

Non-trade payables and accrued expenses

Non-current

Net present value of future trailing commissions payable

119,951

57,937

1,083

178,971

467,142

105,364

48,681

715

154,760

425,581

646,113

580,341

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.

Notes to the Financial Statements[Continued]61

18 ] Loans and advances

In thousands of AUD

Current

Securitised assets1

Other secured loans2

Non-current

Securitised assets1

Capitalised origination cost

Other secured loans2

Less: Provision for impairment

2016

2015

180,522

1,311

172,430

1,528

181,833

173,958

862,956

847,864

1,267

554

(198)

2,502

1,053

(33)

864,579

851,386

1,046,412

1,025,344

(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:

(a) 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 10.65% p.a. (2015: 10.97% p.a.).

(b) Loan and advances to McCabe St Limited are secured over its land and assets. Interest is charged on average at 4.37% p.a. (2015: 4.79% p.a.).

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 or impaired status.

At the end of the reporting period, the balance of the Group’s securitised assets includes a provision for impairment of $198k (2015: $33k).

During the financial year, new loans issued in the Group’s securitisation programme were $297,294k (2015: $273,630k).

The Group’s exposure to credit, currency and interest rate risks related to loans and advances is disclosed in Note 30.

ANNUAL REPORT16Notes to the Financial Statements[Continued]

19 ] Group entities

COMPOSITION OF THE GROUP

Parent entity

Australian Finance Group Limited

Significant subsidiaries

Australian Finance Group (Commercial) 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

AFG Home Loans Pty Ltd

Venture Lending Pty Ltd

Lilydale Pastures Estate Pty Ltd

Longford Road 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*

Country of incorporation

Ownership interest

2016

2015

Australia

100

Australia

New Zealand

Australia

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.

*CHANGE IN THE GROUP COMPOSITION

On 20 December 2014 the Group incorporated Establish Property Group Ltd, a wholly owned subsidiary. During the 2015 financial
year the Board recommended a demerger of its property business, which involved the establishment of a sale agreement between the
Company and Establish Property Group Ltd pursuant to which the Group agreed, amongst other things, to transfer the Group’s property
development interests to Establish Property Group Ltd in consideration for the issue of Establish Property Group Ltd shares to the Company.
On 20 April 2015 an ordinary resolution was passed by the shareholders at a General Meeting to make a pro-rata distribution of all of its
shares in Establish Property Group Ltd to the shareholders of the Company and to approve the subsequent share capital reduction from
divesting its property development interests to Establish Property Group Ltd. The demerger became effective on 22 April 2015.

Notes to the Financial Statements[Continued]63

ADDITIONAL DISCLOSURES WITH RESPECT TO CONSOLIDATED STRUCTURED ENTITIES

Subscription of Subordinated Notes within the Trust Structures

As part of the funding arrangement for the Group’s Securitisation business the Company has subscribed for the subordinated note in each
of the independent funding structures. These notes represent the first loss position for each of the funding trusts. In the event that a loss is
incurred in the relevant structure, then the balance of subordinated note is first applied against such losses. A loss would only be incurred
within the respective Trust in the event that the sale of the underlying security was not sufficient to cover the loan balance, there was no
mortgage insurance policy in existence and the loss could not be covered out of the excess spread generated by the respective Trust.

The weighted average loan to value ratio of all loans as at time of settlement was below 70% and as at year end, approximately 81%
(2015: 91%) of the loans (in dollar value) have a lenders mortgage insurance policy which have been individually underwritten by a mortgage
insurer. With respect to those loans which do not have mortgage insurance, the weighted average loan to value ratio for all of these loans is 53%.

At no point since the inception of the Securitisation business has the subordinated note been required to be accessed to cover any lending
losses within the respective Trusts.

In thousands of AUD

Subordinated notes held in AFG 2010-1 Trust and Series1

Subordinated notes held in SPE-RMBS trusts following a term transaction:

♦ AFG 2013-1

♦ AFG 2013-2

♦ AFG 2014-1

2016

5,907

1,500

750

500

2015

5,293

1,500

750

500

(1) The level of subordination subscribed by the Company will increase or decrease over time depending upon a number of factors including the size of the

warehouse as well as the ratings methodology used for these warehouse facilities

Other

Holders of RMBS are limited in their recourse to the assets of the Securitisation vehicle (subject to limited exceptions). AFG Group companies
may however incur liabilities in connection with RMBS which are not subject to the limited recourse restrictions (for example where an AFG
Group company acts as a trust manager or servicer of a Securitisation vehicle).

20 ] Investments in equity-accounted investees

ASSOCIATES

On 22 April 2015 the Group divested its property development interests to Establish Property Group Ltd, including its investment in Qube
(See Note 7). Prior to the demerger of the property business the group had a 35.8% 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 was accounted for
using the equity method in the consolidated Financial Statements.

The Group’s share of profit in its equity-accounted investees, discontinued operations, for the year ended 30 June 2015 was $322k.
No share of profit in equity-accounted investees was received during the year end 30 June 2016 or is expected going forward.

Summary of financial information for equity-accounted investees, based on their Australian Accounting Standards Financial Statements,
is set out below:

2015

In thousands
of AUD

Reporting
date

Ownership

Total
assets

Total
liabilities

Income

Expenses

Profit /
(Loss)

Group
share of
net assets

Group
share of
Profit/(loss)

Qube1

30 June

2,341

1,440

901

322

(1) Associate – demerged during 2015

ANNUAL REPORT16Notes to the Financial Statements[Continued]64

21 ] Property, plant and equipment

In thousands of AUD

Balance at 1 July 2014

Acquisitions

Disposals and write-offs

Depreciation

Balance at 30 June 2015

Balance at 1 July 2015

Acquisitions

Disposals and write-offs

Depreciation

Balance at 30 June 2016

Plant and
equipment

Fixtures and
fittings

Total

3,393

530

(3)

(922)

2,998

2,745

421

(490)

2,678

2,998

(1)

(567)

2,110

171

(2)

(788)

2,379

648

109

(5)

(432)

320

171

(1)

(221)

269

22 ] 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.

In thousands of AUD

Current

Securitisation warehouse facilities

Loans from funders

Secured bond issues

Non-current

Secured bond issues

Loans from funders

2016

2015

697,446

506,739

231

65,279

762,956

429

90,006

597,174

309,123

443,458

136

467

309,259

443,925

1,072,215

1,041,099

TERMS AND DEBT REPAYMENT SCHEDULE

Terms and conditions of outstanding loans were as follows:

2016

2015

In thousands of AUD

Effective
interest rate

Year of
maturity

Face value

Carrying
amount

Effective
interest rate

Year of
maturity

Face value

Carrying
amount

Warehouse facilities

2.94%

2017

Secured bond issues

3.41%

2018-2019

Loans from funders

6.25%

2018-2020

697,446

374,586

367

697,446

374,402

3.36%

2016

506,760

506,739

3.85%

2018-2019

534,425

533,464

367

6.25%

2018-2020

896

1,072,399

1,072,215

1,042,081

1,041,099

Notes to the Financial Statements[Continued]65

[ A ] WAREHOUSE AND SECURED BOND ISSUES

The carrying amount of the collaterals pledged as security for the warehouse facility and the secured bond issues is $1,937,380k
(2015: $1,868,314k).

[ 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. Up until 1 July 2014, all new loans settled irrespective of their LVR were covered
by a separate individual lenders mortgage insurance contract. Subsequent to this date, all new loans settled with an LVR of less than 80%
were settled on the basis that no lenders mortgage insurance policy was required. When taken out, a lender’s mortgage insurance contract
covers 100% of the principal of the loan.

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 $75,364k (2015: $99,947k). The interest is recognised
at an effective rate 2.94% (2015: 3.36%).

The Group has secured an extension to the term of the NAB and ANZ residential warehouse facilities that were due to expire to 10 February
2017 and 14 August 2017 respectively.

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 $10,711k (2015: $7,948k).

Additional credit support includes subordinated credit enhancement held by the Company of $5,907k (2015: $5,293k).

[ ii ] Secured bond issues

SPE-RMBS were established to provide funding for loans and advances (securitised assets) originated by AFG Securities Pty Ltd. The 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
is a combination of fixed and floating charges over all assets of the SPE-RMBS.

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 of 3.41% (2015: 3.85%).

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;

♦ $150k Reserve Account which is an Extraordinary Expense Ledger account; and

♦ Available income.

Additional credit support includes subordinated credit enhancement held by the Company (unrated Class C Notes) of $2,750k
(2015: $2,750k).

During the financial year there were no breaches to the terms of the SPE-RMBS that gave right to the bondholders to demand payment of
the outstanding value.

[ B ] 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% (2015: 6.25%).

ANNUAL REPORT16Notes to the Financial Statements[Continued]66

[ C ] SECURED BANK LOANS

The obligations for the debt facilities (secured bank loans) that were obtained to fund the development of the land owned by AFG
Developments Pty Ltd and AFG Developments 2 Pty Ltd (Land) were transferred to Establish Property Group Ltd subsequent to the Group’s
demerger (see Note 7). As part of this demerger the Group also agreed to continue in its role as a guarantor in relation to the debt funding
arrangements of Richmond Quarter development project undertaken by AFG Developments Pty Ltd and a former joint venture arrangement.
These guarantees were released during the year ended 30 June 2016.

[ D ] REDEEMABLE PREFERENCE SHARES

During the year ended 30 June 2014 AFG Property Investment No.1 Pty Ltd issued 4,500k fully paid $1 redeemable preference shares (RPS)
to sophisticated investors, with 600k 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. On 22 April 2015 the Group divested
its property development interests to Establish Property Group Ltd (see Note 7), including the RPS issued by AFG Property Investment
No.1 Pty Ltd.

During 2015 the interest recognised in the profit or loss amounted to $486k. Accrued interest is payable on redemption of the RPS.
No interest was recognised during FY16.

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.

23 ] Employee benefits

In thousands of AUD

Current

Salaries and wages accrued

Liability for long-service leave

Liability for annual leave

Non Current

Liability for long-service leave

2016

220

276

496

276

220

2015

200

1,438

1,638

900

200

538

738

2016

2015

1,480

1,199

1,006

3,685

133

819

1,259

993

3,071

3,818

3,131

Notes to the Financial Statements[Continued]67

24 ] Provisions

The provisions balance relates primarily to:

♦ Make good provisions where 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.
As at 30 June 2016 the provision is $72k (2015: $42k).

♦ Provisions for the Group’s liability in respect of the excess and the related legal costs on a litigation claim that is being defended

vigorously. As at 30 June 2016 the provision is $250k (2015: $250k).

No significant new provisions have been raised in the year.

25 ] Deferred income

In thousands of AUD

Current

Sponsorship income

Lease incentives

Unearned professional indemnity insurance

26 ] 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

2016

2015

2,862

794

1,220

4,876

2,798

1,011

1,107

4,916

2016

2,042

6,709

8,751

2015

2,284

6,639

8,923

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 2016 $1,940k was recognised as an expense in the Consolidated Statement of Profit or Loss and
Other Comprehensive Income in respect of operating leases (2015: $2,117k).

ANNUAL REPORT16Notes to the Financial Statements[Continued]68

27 ] Capital and reserves

[ A ] SHARE CAPITAL

The Company

Share Capital ($’000)

Ordinary shares (’000)

On issue at 1 July

Issued for cash or nil consideration

Two for one share split1

Issued for cash2

Capital reduction (Demerger)

On issue at 30 June – fully paid

2016

43,541

2015

11,434

1,260

12,694

32,035

(1,188)

43,541

2016

214,812

2015

93,340

500

93,840

27,132

214,812

(1) At a general meeting of shareholders held on 24 April 2015 the shareholders approved a two for one share split of all issued capital. Under the terms of the
share split, shareholders were entitled to one additional share for every Company share they formerly held, and as such the issued capital of the Company
became comprised of 187,680,888 shares.

(2) On 22 May 2015 the Group completed an Initial Public Offer which raised equity capital of $32,558k at a price of $1.20 per share.

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.

Notes to the Financial Statements[Continued]
[ D ] DIVIDENDS

Dividends paid in the current year by the Group are:

2016

1st interim 2016 ordinary

2015

1st interim 2015 ordinary

2nd interim 2015 ordinary

3rd interim 2015 ordinary

Final 2015 ordinary

Proposed and unrecognised as a liability:

2016

Final 2016 ordinary

Cents per
share

Total amount
($’000)

Franked /
unfranked

Date of
payment

3.00

10.71

5.33

4.26

5.40

6,444

10,000

8,000

38,000

11,600

100%

29/3/16

100%

6/10/14

27/2/15

4/5/15

29/5/15

100%

30/9/16

2016

18,285

42,664

2015

13,262

30,945

Dividends declared or paid during the year or after 30 June 2016 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

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 $60,949k (2015: $44,207k)
franking credits.

ANNUAL REPORT16Notes to the Financial Statements[Continued]70

28 ] Earnings per share (EPS)

Basic EPS amounts are calculated by dividing the profit for the year attributable to ordinary equity holders of Australian Finance Group
Limited by the weighted average number of ordinary shares outstanding during the year.

Diluted EPS amounts are calculated by dividing the profit attributable to ordinary equity holders of Australian Finance Group Limited by the
weighted average number of ordinary shares during the year plus the weighted average number of ordinary shares that would be issued on
conversion of all the dilutive potential ordinary shares into ordinary shares.

The following reflects in the income and share data used in the basic and dilutive EPS computations:

In thousands of AUD

Profit attributable to ordinary equity holders of the Parent:

Continuing operations

Discontinued operations

Profit attributable to ordinary equity holders of the Parent

Weighted average number of ordinary shares for basic EPS (thousands)1

Effect of dilution:

Performance rights

Weighted average number of ordinary shares adjusted for the effect of dilution

2016

2015

22,667

15,301

22,667

214,813

5,078

20,379

189,901

342

214,813

190,243

(1) There have been no other transactions involving ordinary shares or potential ordinary shares between the reporting date and the date of authorisation

of these Financial Statements.

At a general meeting of shareholders held on 24 April 2015, shareholders approved a two for one share split of all issued capital. Under the terms of the
share split, shareholders received an additional share for every Company share they formerly held, and as such the issued capital of the Company post
24 April 2015 became comprised of 187,681k shares.

To calculate the EPS amounts for discontinued operations, the weighted average number of ordinary shares for both basic and diluted EPS
is as per the table above. The following table provides the profit / (loss) amount used:

In thousands of AUD

Profit attributable to ordinary equity holders of the Company from discontinued operations for basic and
diluted EPS calculations

2016

2015

5,078

Notes to the Financial Statements[Continued]
71

29 ] Share based payments

[ A ] PRE IPO SHARE ISSUE

Prior to the listing of the Company on the ASX, a one off Key Executive pre-offer share issue of 500,000 shares in recognition of the
contribution of certain key Executives was awarded. The Group ascertained fair value of $2.52 (pre share split) per share by reference
to the midpoint of the price range disclosed in the Prospectus.

In 2016 there was nil employee expenses relating to the fair value of shares issued under the key Executive pre-IPO offer plan
(2015: $1,260k).

No shares were bought back during the financial year from ex-employees, as allowed under the terms of the Scheme (2015: Nil).

[ B ] EXECUTIVE RIGHTS PLAN (LONG-TERM INCENTIVE PLAN)

The Group has in place an Executive Long-Term Incentive Plan (LTIP) which grants rights to certain Executives subject to the achievement
of performance and service requirements. Eligible Executives are granted rights to a value determined by the Board that is benchmarked
against direct industry peers and other Australian listed companies of a similar size and complexity.

Executives participating in the LTIP will not be required to make any payment for the acquisition of rights.

The rights lapse if the performance and service criteria are not met. The rights granted under this plan in FY15 were subject to instalment
vesting over a three year period. The first instalment of rights is subject to an absolute total shareholder return (TSR) performance hurdle in
addition to continuous service vesting conditions. The second and third instalments are not subject to performance hurdle, but lapsed as
the TSR performance hurdle was not satisfied in relation to the first instalment of the rights. The Board has the full discretion to determine
whether some or all of the rights vest or lapse or whether unvested rights remain subject to vesting conditions in the event of a change
of control.

In any event, any rights that remain unvested will lapse immediately after the end of the relevant vesting period.

Upon vesting the Company must issue the number of shares or, at the board’s discretion, settle the entitlement in cash.

In the case of a bona fide termination payment of any pro-rata entitlement will take into account the period of service as at termination date.
Bona fide termination includes death, redundancy, corporate restructure, resignation with an appropriate notice provided and disability.
Rights that remain unvested will lapse immediately after the end of the relevant vesting period

In the event that the employment of an Executive ceases due to a breach of obligations to the Group, serious misconduct, redundancy, poor
performance, fraudulent act and dishonest act, the executive will not be entitled to any pro-rata right. In all other circumstances pro-rata LTIP
payment will be made taking into account the period of service as at termination date.

In 2016 $88k in employee expenses being the fair value of performance rights that vested during the financial year (2015: $9k).

The assessed fair value at grant date of the rights was determined using the final price set out in the prospectus for the initial public offering
of shares in the Company that was lodged with the Australian Securities and Investments Commission on 4 May 2015.

The following table outlines performance rights that are conditionally issued under LTIP:

Offer Date

Vesting
date

Balance at start
of the year

Granted during
the year

Vested during
the year

Expired during
the year

Forfeited during
the year

Balance at end
of the year

22/05/2015

30/06/2016

22/05/2015

30/06/2017

22/05/2015

30/06/2018

103,333

(103,333)

ANNUAL REPORT16Notes to the Financial Statements[Continued]72

30 ] Financial instruments

[ A ] CREDIT RISK

Exposure to credit risk

The carrying amount of the Group financial assets represents the maximum credit exposure.

[ i ] 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

2016

2015

646,346

590,862

100

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 $646,179k (2015: $589,853k).

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-

BBB+

BBB

BBB-

Not rated

Current

Non Current

Current

Non Current

2016

2015

99,345

385,692

78,603

1,525

7,068

1,828

656

600

21,221

132,350

5,922

27,440

7,096

359

2,549

2,328

82,383

513,829

1,392

11,898

5,951

105

537

402

18,438

117,343

316,512

5,606

47,910

23,965

422

2,163

1,616

74,246

472,510

Notes to the Financial Statements[Continued]73

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

2016

251

114

369

Impairment
allowance

2016

(2)

(6)

Gross

Impairment
allowance

2015

435

586

1,115

2015

(1)

(2)

During the year ended 30 June 2016 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 2016 and 2015 there were no individual impairment allowances raised.

[ ii ] Loans and advances

Exposure to credit risk

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

Carrying amount

2016

2015

1,043,280

1,022,762

3,132

2,396

186

1,046,412

1,025,344

Residential mortgage borrowers

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 $1,937,380k (2015: $1,868,314k). During the year ended 30 June 2016 the Group has taken possession of two
residential properties that were held as security for loans issued by the Group. The carrying amount of the repossessed residential property
was $340k (2015: $1,138k). One property has been sold before the end of the financial year, with the shortfall repaid by our lender’s
mortgage insurance.

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.

ANNUAL REPORT16Notes to the Financial Statements[Continued]74

30 ] Financial instruments (continued)

The table below summarises the Group's 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

2016

2015

1,823

71,026

185,624

785,005

57,430

171,881

790,983

1,043,478

1,020,294

The Group's 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

2016

1,042,557

3,143

712

198

1,046,610

Impairment
allowance

2016

(198)

Gross

2015

1,023,783

1,087

322

185

1,025,377

Impairment
allowance

2015

(33)

The impairment loss provision as at 30 June 2016 of $198k (2015: $33k) is a specific provision for loans that are past due.

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 under SPE-RMBS
with an LVR exceeding 80% are insured by a lender’s mortgage insurance contract which covers 100% of the principal. Approximately
81% (2015 91%) of the loans (in dollar value) are insured by a lender's mortgage insurance contract.

The Group’s maximum exposure is the loss of future interest income on its Class C notes investment.

No impairment loss was recognised during 2016 (2015: NIL).

Redeemable preference shares

On 22 April 2015 the Group divested its property development interests to Establish Property Group Ltd, including its redeemable preference
shares (see Note 7).

No impairment loss was recognised during 2016 (2015: NIL).

Other secured loans

The Group has minimal exposure to credit risk for loans made during the year.

No impairment loss was recognised during 2016 (2015: NIL).

Notes to the Financial Statements[Continued]75

[ 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 rolling cash flow 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 proceeding 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 22, the Group
has unused warehouse facilities at the reporting date.

The following are the contractual maturities of financial liabilities based on undiscounted payments, including estimated interest payments
and excluding the impact of netting agreements for the Group.

2016

In thousands of AUD

Securitisation warehouse
facilities

Carrying
amount

Contractual
cash flows

6 months
or less

6-12
months

697,446

707,698

579,833

127,865

1-2
years

2-5
years

More than
5 years

Secured bond issues

374,402

392,392

368

386

33,180

137

33,180

104

131,052

194,980

108

587,093

726,255

82,251

75,450

131,517

268,594

168,443

Trade and other payables

59,020

1,718,329

1,885,751

754,421

236,599

262,677

463,611

168,443

2015

Securitisation warehouse
facilities

506,739

515,281

424,011

91,270

Secured bond issues

533,464

553,233

896

949

46,264

238

46,264

204

78,342

382,363

314

193

530,945

676,853

74,800

69,381

121,402

249,841

161,429

Trade and other payables

49,396

1,621,440

1,795,712

594,709

207,119

200,058

632,397

161,429

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 bi-annually or annually. 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.

On 4 August 2016, the Group secured an extension to the term of the NAB residential warehouse facility that was due to expire on 10 August
2016. The funding continues to be provided through the issue of three 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 10
February 2017.

On 11 August 2016, the Group secured an extension to the term of the ANZ residential warehouse facility that was due to expire on 15 August
2016. The funding continues to be provided through the issue of three 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 2017.

Loans from funders

Net present value
of future trailing
commissions payable

Loans from funders

Net present value
of future trailing
commissions payable

ANNUAL REPORT16Notes to the Financial Statements[Continued]76

30 ] Financial instruments (continued)

Secured bond issues

The securities are issued by the SPE-RMBS with an expected weighted average life of 4 to 5 years. They are pass through 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 Note 17.

[ C ] MARKET RISK

[ i ] Currency risk

Exposure to currency risk

As at reporting date the Group held cash assets denominated in NZD, USD and Euro.

Fluctuations in foreign currencies are not expected to have material impact on the Consolidated Statement of Profit or Loss and Other
Comprehensive Income and equity of the Group and have therefore not formed part of the disclosures.

[ ii ]

Interest rate risk

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

2016

2015

646,179

587,093

59,086

589,853

530,945

58,908

1,177,077

1,116,119

1,072,215

1,041,099

104,862

75,020

The Group’s main interest rate risk arises from securitised assets, cash deposits and interest bearing facilities. All the Group’s borrowings
are issued at variable rates, however the vast majority pertains to the warehouse facility which is arranged as ‘pass through’ facilities, and
therefore the exposure to the interest rate risk is mitigated by passing any rate increases onto borrowers.

Cash flow sensitivity analysis for variable rate instruments

Due to the market conditions existing at 30 June 2016, 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.

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 2015.

Notes to the Financial Statements[Continued]77

After tax profit

Equity

100bp increase

100bp decrease

100bp increase

100bp decrease

8,226

4,885

3,342

7,741

2,882

4,859

(8,226)

(4,885)

(3,342)

(7,741)

(2,895)

(4,846)

8,226

4,885

3,342

7,741

2,882

4,859

(8,226)

(4,885)

(3,342)

(7,741)

(2,895)

(4,846)

Effect in thousands of AUD

30 June 2016

Variable rate financial assets

Variable rate financial liabilities

Cash flow sensitivity (net)

30 June 2015

Variable rate financial assets

Variable rate financial liabilities

Cash flow sensitivity (net)

[ 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 30 (d) for more details.

Sensitivity analysis

Management 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 5% positive or 5% 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

After tax profit

Securitised assets

2016

+5%

(2,072)

-5%

2,192

2015

+5%

(1,605)

-5%

1,685

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.

During 2016 a $1k profit in the fair value of financial assets designated at fair value through profit or loss was recognised in the profit
or loss (2015: nil).

[ v ] 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.

ANNUAL REPORT16Notes to the Financial Statements[Continued]78

30 ] Financial instruments (continued)

[ D ] ACCOUNTING CLASSIFICATIONS AND FAIR VALUES

Fair value hierarchy

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).

Fair value of financial assets and liabilities that are measured at fair value on a recurring basis

Some of the Group’s financial assets and liabilities are measured at fair value at the end of each reporting period.

Financial assets

In thousands of AUD

Fair value as at

Fair value
hierarchy

30 June 2016 30 June 2015

Financial assets designated at fair value through profit or loss and
available-for-sale financial assets

$49

Level 1

Valuation
technique(s)
and key
input(s)

Quoted bid
prices in an
active market

No change in fair value hierarchy levels in 2016.

Fair value of financial assets and liabilities that are not measured at fair value (but fair value disclosures are required)

With the exception of the trailing commission receivables and payables that are initially recognised at fair value and subsequently carried
at amortised cost, the carrying amount of all financial assets and liabilities recognised in the Statement of Financial Position approximate
their fair value.

Trailing commissions are received 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 and the Group also makes trailing commission payments to members when trailing
commission is received from lenders.

In thousands of AUD

Financial assets

30 June 2016

30 June 2015

Carrying
amount

Fair value

Carrying
amount

Fair value

Future Trailing commission receivables

646,179

688,898

589,853

646,341

Financial liabilities

Future Trailing commission payables

587,093

624,857

530,945

580,889

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 the management, by reference to market
observable inputs. The valuation is classified as level 2 in the fair value measurement hierarchy.

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:

Average loan life

Discount rate per annum1

Percentage paid to members2

30 June 2016

30 June 2015

Between 4.3 and 5.2 years

Between 4.4 and 5.3 years

Between 5% and 13.5%

Between 85% and 93%

Between 85% and 91%

(1) Discount rates once set are not adjusted during the life of the loan. The spread in discount rate captures loans settled in previous financial years as well as

the current financial year.

(2) 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.

Notes to the Financial Statements[Continued]79

31 ] Parent entity

Throughout the financial year ending 30 June 2016, 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

2016

2015

17,266

17,268

17,804

(15)

17,789

2016

2015

223,077

750,402

186,288

667,070

43,542

39,782

83,332

186,878

672,344

160,843

599,922

43,542

(80)

28,960

72,422

See Notes 32 and 33 for the parent entity capital and other commitments, and contingencies.

Refer to Note 22 (c) for the parent entity’s guarantees.

As at reporting date the credit support facility provided by the parent entity under the securitisation programme is $8,861k (2015: $8,043k).

32 ] Capital and other commitments

There are no capital commitments as at the reporting date.

33 ] Contingencies

THIRD PARTY GUARANTEES

Bank guarantees have been issued by third party 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.

ANNUAL REPORT16Notes to the Financial Statements[Continued]80

34 ] Related parties

[ B ] 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.

35 ] Subsequent events

On 4 August 2016, the Group secured an extension to the term
of the NAB residential warehouse facility that was due to expire on
10 August 2016. The funding continues to be provided through the
issue of three classes of secured, limited and floating rate notes, with
the senior notes being issued to the lender and the subordination
notes to Australia Finance Group Limited. The maturity date has
been reset to 10 February 2017.

On 11 August 2016, the Group secured an extension to the term
of the ANZ residential warehouse facility that was due to expire on
15 August 2016. The funding continues to be provided through the
issue of three classes of secured, limited and floating rate notes, with
the senior notes being issued to the lender and the subordination
notes to Australia Finance Group Limited. The maturity date has
been reset to 14 August 2017.

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.

[ A ] 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:

(LMI). Mr T Gill

[ i ] During the year the Group made payments to Genworth
Mortgage Insurance Australia Limited, one of our providers
of Lenders Mortgage
is a
Insurance
Non-Executive Director of Genworth Mortgage Insurance
Australia Limited. These dealings were in the ordinary course
of business and were on normal terms and conditions.
The payments made for the provision of LMI policies were
$1,044k (2015:$ 1,538k). These payments are not considered
to be material to the financial results of the Group and therefore
do not impact on Mr T Gill’s independence as a Director.

[ ii ] Mr T 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 $207k (2015:
$192k). These payments are not considered to be material to
the financial results of the Group and therefore do not impact
on Mr T Gill’s independence as a Director.

[ iii ] During the year the Group received payments from TAL
Life Ltd. Mr J Minto is a Director of Dai-ichi Life Asia Pacific
which is the ultimate parent company of TAL Life Limited.
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 $724k (2015: $747k). The payments
received are not considered to be material to the financial
results of the Group and therefore do not impact on
Mr J Minto’s independence as a Director.

[ iv ] As part of the demerger of the property business on
22 April, the Group entered into a shared services agreement
with Establish Property Group Ltd (EPG). Mr B McKeon,
Ms L Bevan and Mr D Bailey, are Directors of EPG. Under the
terms of the shared services agreement the Group provides
premises, administration, accounting and some company
secretarial services to EPG at an agreed arms length rate.
The shared services agreement was implemented part way
through the prior period (2015: $39k). The agreement was
active for the full 2016 financial year and a total of $170k was
paid by EPG to the Group for these services. In addition to
the above, the Group’s head office is located at 100 Havelock
Street West Perth. The Group leases these premises at
commercial arms length rates from an investee of EPG, Qube
Havelock Street Development Pty Ltd (Qube), that was held
by the Group prior to the demerger transaction, see Note 7.
During the 2016 financial year rent of $1,539k has been paid
to Qube (2015: $1,633k).

Notes to the Financial Statements[Continued]81

Directors’ Declaration

In accordance with a resolution of the Directors of Australian Finance Group Limited, I state that:

In the opinion of the Directors:

[ a ] The Financial Statements and Notes to the Financial Statements of Australian Finance Group Limited are in accordance with the

Corporations Act 2001, including:

[ i ] Giving a true and fair view of the consolidated entity’s financial position as at 30 June 2016 and of its performance for the year

ended on that date

[ ii ] Complying with Australian Accounting Standards (including the Australian Accounting Interpretations) and the Corporations

Regulations 2001

[ b ] The Financial Statements and Notes to the Financial Statements also comply with International Financial Reporting Standards as

disclosed in Note 2(a)

[ c ] There are reasonable grounds to believe that the Company will be able to pay its debts as and when they become due and payable.

The Directors have been given the declarations by the Managing Director and Chief Executive Officer, and the Chief Financial Officer
required by Section 295A of the Corporations Act 2001.

On behalf of the board

Tony Gill

Chairman

Dated at Perth, Western Australia on 22 September 2016

ANNUAL REPORT16

Audit Report

[continued]

ANNUAL REPORT1684

Shareholder Information

Additional information required by the Australian Stock Exchange Ltd (ASX) and not disclosed elsewhere in this report is set out below.
The information is current as at 31 August 2016.

[ A ] NUMBER OF HOLDERS OF EQUITY SECURITIES

Ordinary share capital

214,812,671 fully paid ordinary shares are held by 944 individual shareholders

All issued ordinary shares carry one vote per share.

[ B ] DISTRIBUTION OF HOLDERS OF EQUITY SECURITIES

The number of shareholders by size of holding is set out below:

Range

100,001 and Over

10,001 to 100,000

5,001 to 10,000

1,001 to 5,000

1 to 1,000

Total

Unmarketable Parcels*

Securities

200,676,675

93.42

11,581,050

1,868,465

664,016

22,465

214,812,671

433

5.39

0.87

0.31

0.01

100.00

0.00

No. of
holders

409

228

206

944

5.51

43.33

24.15

21.82

5.19

100.00

2.15

*An unmarketable parcel is considered to be a shareholding of 1,599 shares or less, being a value of $500 or less in total, based on the
Company’s last sale price on the ASX at 31 August 2016 of $1.20.

[ C ] SUBSTANTIAL SHAREHOLDERS

The names and the number of securities held by substantial shareholders are set out below:

Australian Finance Group Ltd*

MBM Investments ATF The Brett McKeon Family Trust

MSW Investments ATF The Malcolm Stephen Watkins Family Trust

FIL Limited

Oceancity Investments ATF The Matthews Family Trust

Commonwealth Bank of Australia and its related bodies corporate

Banyard Holdings Pty Ltd ATF The B&K McGougan Trust

Macquarie Group Limited

# Shares

% of issues
capital

105,099,961

48.90%

21,179,773

21,102,689

19,468,411

16,882,151

16,318,804

14,788,765

11,835,646

9.86%

9.82%

9.06%

7.86%

7.59%

6.88%

5.50%

* Restriction on disposal of shares under voluntary escrow arrangements disclosed in Australian Finance Group Ltd's prospectus dated
4 May 2015 gives Australian Finance Group Ltd a technical "relevant interest" in its own shares under section 608(1)(C) of the Corporations
Act 2001 (Cth). However, Australian Finance Group Ltd has no right to acquire or to control the voting rights attaching to these shares.

This information is based on the most recent substantial holder notices lodged with ASX.

Shareholder Information

[Continued]

[ D ] TWENTY LARGEST HOLDERS OF QUOTED EQUITY SECURITIES

Top holders

MBM INVESTMENTS PTY LTD

MSW INVESTMENTS PTY LTD

CITICORP NOMINEES PTY LIMITED

J P MORGAN NOMINEES AUSTRALIA LIMITED

HSBC CUSTODY NOMINEES (AUSTRALIA) LIMITED

THE BRETT MCKEON FAMILY

MALCOLM STEPHEN WATKINS

OCEANCITY INVESTMENTS PTY LTD

THE MATTHEWS FAMILY

NATIONAL NOMINEES LIMITED

BANYARD HOLDINGS PTY LTD

B & K MCGOUGAN

MACQUARIE BANK LIMITED

MRS KAREN JANE MCGOUGAN

B&K MCGOUGAN NO 2

UBS NOMINEES PTY LTD

TAL DISTRIBUTION HOLDINGS LIMITED

ALLIANZ AUSTRALIA INSURANCE LTD

BNP PARIBAS NOMS PTY LTD

ASSURED FINANCIAL SERVICES PTY LTD

GILLFAMILY PTY LTD

LISA BEVAN

ANGELA MIDDLETON

ZERO NOMINEES PTY LTD

GILLFAMILY SUPER FUND

ADRIEN MANN (SOUTH PACIFIC) PTY LTD

EDI NOMINEES PTY LTD

THE BUFFALO CREEK SUPER

[ E ] ESCROWED SHARES

Shareholder

MBM INVESTMENTS PTY LTD

MSW INVESTMENTS PTY LTD

OCEANCITY INVESTMENTS PTY LTD

BANYARD HOLDINGS PTY LTD

MACQUARIE BANK LIMITED

MRS KAREN JANE MCGOUGAN

ALLIANZ AUSTRALIA INSURANCE LTD

TAL DISTRIBUTION HOLDINGS LIMITED

ASSURED FINANCIAL SERVICES PTY LTD

GILLFAMILY PTY LTD

EDI NOMINEES PTY LTD

ANTHONY PETER GILL

TOTAL

# Shares

% of issued capital

21,179,773

21,102,689

20,608,250

19,981,126

17,588,027

16,882,151

15,153,931

14,788,765

11,184,907

5,469,816

5,305,192

4,577,180

2,633,522

2,000,000

1,950,000

1,450,000

1,200,250

1,197,914

1,110,000

1,087,500

9.86

9.82

9.59

9.30

8.19

7.86

7.05

6.88

5.21

2.55

2.47

2.13

1.23

0.93

0.91

0.68

0.56

0.52

0.51

# Shares

21,179,773

21,102,689

16,882,151

14,788,765

11,184,907

5,469,816

4,577,180

2,000,000

1,950,000

1,087,500

300,000

105,099,961

Escrowed shares are subject to voluntary escrow arrangements which prevented the escrowed shareholders from disposing of their
escrowed shares until after the release of these 2016 financial year audited full year results.

Company secretary

Ms L. Bevan

Registered Office
Level 4, 100 Havelock Street, West Perth WA 6005

Share Registry

Link Market Service - Level 12, 680 George Street, Sydney NSW 2000

ANNUAL REPORT16

Corporate Directory

Directors

ANTHONY (TONY) GILL

KEVIN MATTHEWS

MELANIE KIELY

(Non-executive Chairman)

(Non-executive Director)

CRAIG CARTER

JANE MUIRSMITH

(Non-executive Director)

JAMES (JIM) MINTO

(Non-executive Director)

BRETT MCKEON

(Managing Director and
Chief Executive Officer)

MALCOLM WATKINS

(Executive Director)

Company Secretary

LISA BEVAN

(Company Secretary)

Notice of AGM

Corporate Office

Share Registry

The annual general meeting
of Australian Finance Group
Limited will be held on Thursday,
24 November 2016 at 2.00pm
at Level 4, 100 Havelock Street,
West Perth WA 6005.

AUSTRALIAN FINANCE
GROUP LIMITED

Level 4
100 Havelock Street
West Perth WA 6005

POSTAL ADDRESS

PO Box 710
West Perth WA 6872

PHONE

08 9420 7888

LINK MARKET
SERVICES

Level 12
680 George Street
Sydney NSW 2000

POSTAL ADDRESS

Locked Bag A14
Sydney South NSW 1235

PHONE

1300 554 474

investors@afgonline.com.au

registrars@linkmarketservices.com.au

WEBSITE

www.afgonline.com.au

Stock Listing

Australian Finance Group Limited’s
ordinary shares are listed on the
Australian Securities Exchange
(ASX code: AFG).

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ANNUAL REPORT1688

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afgonline.

Level 4, 100 Havelock Street
West Perth WA 6005
T 08 9420 7888
F 08 9420 7858

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