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Contents
2
5
7
8
Performance Highlights
Chairman's Letter
CEO's Report
Directors’ Report
14 Remuneration Report
27 Auditor’s Independence Declaration
28 Consolidated Statement of Financial Position
29 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
30
31
34
66
68
72
74
2
FY14
FY15
FY16
FY17
AFG reported NPAT has
increased by 73% to $39.1M
AFG normalised NPAT has
increased by 33% to $30.2M
FY16
FY17
Broker numbers grew to over
2,875 nationally,
up from 2,650 at 30 June 2016
Non-Majors
35%
35%
of flows to
non-majors Q4 2017
up from 29% Q4 2016
65%
Majors
53%
of Australian
mortgages are
written through a broker
and growing
Australian
mortgages
53%
AFG Home Loans
settlements have
increased by 38% to $2.7B
FY2017 Revenue has
increased by 11% to $605M
ANNUAL REPORT2017 3
3,400+
individual products
up from 1,450 in April 2015
FY17 Residential
settlements of
with the Residential
trail book now
$34.3 billion
$126.5 billion
45+
lenders
1 in 11
Australian residential mortgages
are arranged by an AFG broker
FY17 Commercial
settlements of
with the Commercial
leasing now
$2.84 billion
$445 million
199
employees
up to
10,000
customers per month
Home Loans
ANNUAL REPORT2017
Chairman’s Letter
Australian Finance Group ("AFG") reports a normalised net
profit after tax (NPAT) of $30.2 million for the 2017 financial
year (FY2017). This represents an increase of 33% on
FY2016. These results are a testament to AFG's strategy of
protecting our core business and delivering growth through
a focus on earnings diversification whilst continuing to
ensure great customer outcomes.
5
Tony Gill
Non-Executive Chairman
The Group has achieved significant growth across a number of
key performance measures. Highlights include:
♦ Reported NPAT of $39.1 million, normalised NPAT of
$30.2 million, up 33%
♦ White label AFG Home Loans ("AFGHL") settlements of
$2.7 billion, up 38%
♦ Combined residential and commercial loan book of
$133 billion, up 11%
♦ Residential settlements of $34.3 billion, up 1%
♦ Commercial settlements of $2.8 billion, up 3%
♦ Earnings Per Share (EPS) for FY2017 is 14 cents per share
based on normalised NPAT, up 33%
Market conditions
These results have been achieved in an environment of flat
credit growth and significant regulatory changes impacting
foreign investment and changing credit appetites of the
country’s lenders.
In this environment AFG has succeeded with the targeted
development and delivery of competitive mainstream products
through its own-brand AFGHL business designed to fill a gap
in the market and continue to provide choice and competition
to Australian consumers. The success of that initiative saw
the AFGHL business finish the full year 2017 with settlements
of $2.7 billion, a 38% increase from last year. The AFGHL loan
book is now $5.5 billion, an increase of 44% since the same
time in 2016.
2017 has also been marked by significant regulatory scrutiny
of the Australian lending market. Following an unprecedented
data collection process, ASIC released a report into the
mortgage broking sector earlier this year. That report has made
a number of proposals and ASIC has stated its proposals aim to
strengthen the positive contribution that brokers provide in this
sector, while enhancing consumer outcomes and competition;
the operation of the home loan market more generally; and
the trust and confidence that consumers have in brokers. AFG
supports those aspirations.
Throughout its 23 year history, AFG has been vocal in its
advocacy for the mortgage broking industry. In this role, AFG's
overarching aim is to ensure that mortgage brokers are able
to continue to promote good consumer outcomes and strong
competition in the home loan market.
It is AFG's contention that these aims benefit not just consumers
who choose to seek the assistance of a mortgage broker when
sourcing a home loan, but also all Australian home owners and
potential home owners due to the competitive tensions created by
the broad distribution of home loans beyond the four major banks.
Company update
A highlight of 2017 was the display of strength the organisation
demonstrated at the AFG National Conference in June when
1,200 AFG aligned brokers, lenders and staff came together for
three days in Sydney.
The conference program was structured to enable significant
educational content and networking opportunities. Many
brokers are small business people working around the clock in
their businesses and the opportunity the conference provided
for them to hear from lenders, subject experts and the regulator
was invaluable. This type of event also enables them to meet
their peers from across the country and share their experiences
of running their businesses and of the current conditions
affecting their industry.
After more than 23 years at the helm of AFG, Chief Executive
Officer and Managing Director Brett McKeon stepped back from
his full time executive role in March of this year. Brett was one
of the co-founders of AFG in 1994 and has led the Company
from its beginning through its national expansion and successful
IPO in 2015. Brett remains on the AFG Board as an Executive
Director with a focus on advocacy and support of AFG's broker
network and their customers.
After a period spent as Interim CEO, the Board was pleased
to appoint our Chief Operating Officer David Bailey as the
Company’s new CEO. The smooth transition ensured focus on
our core business was maintained and is reflected in the results.
During the year we saw Jim Minto step down as a Director of
AFG. Jim’s contribution to AFG over a number of years has been
significant. His involvement in the successful listing of AFG
and his advice and support of senior management has been of
tremendous assistance and we wish him well in the future.
On behalf of the Board I would like to thank AFG management,
staff and our loyal brokers for another outstanding year for the
Group.
Yours sincerely,
Tony Gill
Chairman
ANNUAL REPORT2017
6
CEO's Report
AFG's positive results have been driven by the core
business of residential mortgages and commercial
lending, highlighted by continued strong growth in our
own-branded AFG Home Loans business.
David Bailey
CEO
ANNUAL REPORT2017 The most pleasing part for me about AFG's record trading
result is the continued validation of our earnings diversification
strategy – a strategy which had its origins as far back as 2001
when we wrote our first AFG branded home loan.
I would like to thank all AFG aligned brokers for their
contribution in what would have been one of their more
challenging years.
Once again, AFG took the titles of Aggregator of the Year and
Technology Platform of the Year at the 2017 Australian Broking
Awards. Technology is a key strategic focus for AFG and one
of the bedrocks of our business. We invest in the best people,
platforms, systems and tools in order to remain an innovative
leader in the delivery of high quality, resilient and agile
technologies to fuel the business growth of AFG and our brokers.
Lending environment
The complexity of the Australian lending market has increased
significantly in the past 12 months. AFG began its listed life with
around 1,450 products on its lending platform. That number
has now increased to more than 3,400 at the end of the 2017
financial year.
The growth is a reflection of multiple changes by lenders
to their product suites. The introduction of new products,
changes to LVR bands, numerous product splits with differing
rates and repayment options according to loan type, as well
as significant changes to investor and owner occupier pricing
have been rolled out across our platform in the past 12 months.
Whilst a majority of these changes have been driven by
increased regulator activity, they have been delivered at an
unprecedented pace.
These significant changes reaffirm the importance to a
consumer of having an informed broker onside. With 53% of
the flow of home lending now going through the mortgage
broker channel the value consumers continue to place on the
service provided by their mortgage broker is clear.
AFG has achieved another strong year in the recruitment
of high performing brokers to AFG. From 2,650 brokers at
FY2016, those numbers have increased by 8.5% to 2,875
active brokers.
Around the country, the states performed largely in line
with their broader economies. The Victorian market was a
standout for AFG, Queensland is improving and strong broker
recruitment in New South Wales kept that state performing
well. SA and WA have both been affected by downturns in
their economies and Tasmania, the Northern Territory and the
Australian Capital Territory are in line with market conditions.
Each month, more than 10,000 customers seek the assistance
of an AFG broker. The importance of the broker channel
to the delivery of a competitive lending market and choice
for Australian consumers continues to ensure we are well
positioned to support those brokers working with us to provide
that service to their customers.
Commercial lending
In a clear sign of the health of the commercial market for
brokers, AFG Commercial asset financing settlements rose
20% to finish the year at $445 million. AFG Commercial
mortgage settlements for the year were $2.84 billion and the
trail book for this segment of our business now stands at
$6.78 billion.
7
future growth. AFG is poised to harness this growth with the
impending rollout of an Australian-first SME lending platform
developed in conjunction with international fintech company
Biz2Credit Inc. The new platform, AFG Business, will enable
our network of brokers to provide small business borrowers
access to a broad range of options, deliver faster access to
capital and open up the lending landscape for a sector of
the economy which has often struggled to access financing
efficiently and at a competitive price.
AFG Business is a true industry first; matching lenders’ risk
appetite and the customer’s business risk profile. It will deliver
a brand new approach to the traditionally conservative realm
of Australian lending by fully digitising the application process
and is further evidence of our commitment to improved
outcomes for all Australian borrowers.
Outlook
Our positive 2017 financial result has been achieved during a
year of ongoing market headwinds and regulator intervention
in the wider mortgage market.
Markets are largely expecting subdued credit growth however
with more complex products in the market and lenders
continuing to make multiple changes to products, the value a
broker delivers to a consumer navigating their lending options
is clear.
The introduction of a new funder to our AFGHL suite has
further enabled us to harness growth in this part of our
business. A strong net interest margin and the loan book
performing well means we have a very positive outlook for this
part of our business.
AFG will continue to maintain its prominent role as an advocate
for the mortgage broking industry and the benefits the channel
delivers to all Australian mortgage customers. The mortgage
broking industry drives competition amongst lenders by giving
those without a large branch network access to an effective
distribution network. AFG has 45 lenders on its panel with
more than 35% of borrowings going to lenders other than the
four major banks. This competitive tension is vital to keep the
cost of lending down for all Australian borrowers.
As the industry continues to mature, the importance of the
sector to the lending environment has been highlighted by
the scrutiny of the sector by the regulator through the ASIC
Broker Remuneration Review. AFG was pleased to see this
review confirm the value brokers deliver to competition and
consumers. We are now working closely with our peers, the
regulators and our lending partners to ensure the continued
strengthening of the mortgage broking sector.
As we head into the new financial year AFG will continue to
protect our core mortgage broking business and drive further
earnings diversification. I look forward to continuing our
momentum.
Finally, it should go without saying but it is important and
worthwhile to reiterate I am constantly excited and impressed
at the contribution our staff make to the ongoing success of
AFG. The quality of their commitment across the organisation
is an essential ingredient of our success. For this I say a broad
thank you.
Yours sincerely,
The small to medium enterprise (SME) segment of the
commercial market is one where AFG anticipates significant
David Bailey
CEO
ANNUAL REPORT2017
8
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 2017 and the auditor’s report thereon.
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)
(Retired 21 June 2017)
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 was the Chairman of the Remuneration and
Nomination committee for part of the year and then Chairman
of the Risk 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.
He is a Director if the National Disability Insurance Agency, a
Director of Equity Trustees Limited and Chairman of Partners
Life Limited a NZ based life insurer. 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.
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,
most recently with Macquarie Bank for more than 16 years, as
Group Head of the Banking and Securitisation Group. 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)
Resigned 31 May 2017
(Executive Director) Appointed 1 June 2017
Mr McKeon is a founding Director of AFG and the Group’s
former Managing Director. Mr McKeon has worked for
over 30 years in the finance industry and has considerable
management, capital raising, public company and sales
experience and is an experienced Director in both the public
and private arenas. Mr McKeon was awarded The Ernst &
Young Entrepreneur of the Year for WA in 2006. In 2016 Mr
McKeon was appointed to the newly reconstituted Financial
Sector Advisory Council, a non-statutory body that provides
advice to the federal government on policies that will maintain
an efficient, competitive and dynamic financial sector. Mr
McKeon drives AFG's advocacy activity through the company’s
guiding principles of fairness, shared prosperity and the
provision of choice for Australian consumers.
During the past three years Mr McKeon has also served as a
Director of the following listed company:
* Caravel Minerals Limited – appointed in 2012; resigned in 2015
Malcolm Watkins
(Executive Director)
Mr Watkins is a founding Director of AFG and has played a
central role in the strategic direction of the company. With
responsibility for the company’s IT and Marketing divisions,
Mr Watkins has focused on extracting real and tangible returns
on the significant investments AFG has made in information
technology. These divisions have set an industry benchmark
for the delivery of a successful, fully integrated business and
CRM platform for AFG brokers. Most recently, Mr Watkins
has taken a lead role in preparing for the expansion of AFG
Business, a key area of future focus for the Group.
Mr Watkins is a former member of the Board of the Mortgage
and Finance Association of Australia (MFAA).
ANNUAL REPORT2017 10
Craig Carter
(Independent Non-Executive Director)
Mr Carter joined the AFG Board in early 2015, and is the
Chair of the Audit Committee, a member of the Risk and
Compliance Committee, and a member of the Remuneration
and Nominations Committee. Following a prestigious career
spanning 35 years in stockbroking and investment banking,
specialising in Corporate Advice and Equity Capital Markets,
Mr Carter now manages his own diverse business interests
across a portfolio of equities, agriculture and real estate. He is
also a Director of the Fremantle Football Club. Mr Carter was
a Natural Person Member of the Australian Stock Exchange,
has been a member of the ASX’s National Listing Committee,
and is a Fellow of the Financial Services Institute. Mr Carter is
a well-known professional with unique experience in equities,
capital markets and corporate transactions. This experience
provides a platform for robust perspectives and a long
reputation of integrity and good governance across financial
service businesses.
Melanie Kiely
(Independent Non-Executive Director)
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 is currently with the Silver Chain Group as Executive
General Manager, Social Care. She is also currently a Director
of the Black Dog Institute. Prior to this, Ms Kiely held senior
executive positions at HBF Health Fund, nib health funds,
MBF and was an Associate Partner at Accenture. She 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.
Jane Muirsmith
(Independent Non-Executive Director)
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
of the UWA Business School. She is a Fellow with Chartered
Accountants Australia and New Zealand, where she is Chair 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.
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:
Number of
ordinary shares
Number of rights over
ordinary shares
Director
Tony Gill
Brett McKeon
2,250,000
21,179,773
Malcolm Watkins
19,602,689
Kevin Matthews
15,000,000
Craig Carter
James Minto
Melanie Kiely
Jane Muirsmith
500,000
166,666
-
-
-
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
2017 were $20,622k (2016: $6,444k), which included:
♦ An interim fully franked ordinary dividend of $9,022k
(4.2 cents per fully paid share) was declared out of profits
of the Company for 2017 and paid on 31 March 2017.
♦ A final fully franked ordinary dividend of $11,600k
(5.4 cents per fully paid share) was declared out of profits
of the Company for 2016 and paid on 30 September 2016.
A final fully franked ordinary dividend of $11,814k (5.5 cents
per fully paid share) has been declared out of profits of the
Company for the financial year ended 30 June 2017 and is to
be paid on 28 September 2017.
ANNUAL REPORT2017Directors' Report (continued) 11
Principal Activities
The Group’s principal activities in the course of the financial
year continued to be:
♦ Mortgage origination and management of home loans and
commercial loans; and
♦ Distribution of own branded home loan products, funded
via traditional mortgage management products, white label
or its established RMBS programme.
Corporate Governance Statement
The Company’s Corporate Governance Statement can be found at
investors.afgonline.com.au/investor/?page=corporate-governance
Review of Operations
The Group’s NPAT for the year ended 30 June 2017 was
up 73% on the prior comparative period at $39,104k (2016:
$22,644k). The increase in profit was attributable to additional
income derived from settlements in AFGHL products and the
actuarial assessment of the AFGHL white label trail book.
Settlements in these products for FY17 were up 38% to $2.68b
(2016: $1.94b). Other key contributors to the result were
increased settlement volumes in the securitisation programme
while maintaining the strong net interest margin from FY16 and
the continued growth of the asset finance broking business
with settlements up 20% to $445M (2016: $372M).
As disclosed to the market on 19 June 2017 the AFGHL
trail book was actuarially assessed and recognised as an
asset during the year for the first time. The initial actuarial
assessment and asset recognition of AFGHL trail book
contributed additional NPAT of $8,940k relating to prior period
settlements and $3,610k relating to FY17 settlements. After
removing the initial impact of settlements made prior to FY17
from the result, the normalised FY17 operating result is equal to
$30,164k up 33% on 2016.
Net profit for the period
Initial recognition of value of AFGHL
white label trail book relating to prior
years settlements
30 June
2017
$’000
30 June
2016
$’000
39,104
22,644
(8,940)
-
Normalised net profit for the period
30,164
22,644
The carrying value of our residential (including white label)
trail book is influenced amongst other things by the runoff
and discount rates that are applied to this valuation. Excluding
the non-cash entries to recognise the net present value
of the future trailing commission receivable and payable,
the underlying profit after tax is $26,160k (30 June 2016:
$22,466k) after an income tax expense of $17,852k (2016:
$10,282k). The assessment of the trail loan book requires the
use of assumptions which are determined by management,
with the assistance of external actuaries, by reference to
market observable inputs.
The following table reconciles the unaudited underlying
earnings to the reported profit before tax for the period in
accordance with Australian Accounting Standards:
In thousands of AUD
30 June 2017
30 June 2016
Total
Revenue
Profit
after tax
Total
Revenue
Profit
after tax
499,020
26,160
472,602
22,466
88,531
13,959
56,326
178
(1,450)
(1,015)
-
-
586,101
39,104
528,928
22,644
Underlying profit
from continuing
operations
Change in the
present value of
trailing commission
receivable and
payable
Provision for
Clawbacks
Total result
from continuing
operations
Despite a challenging lending environment our total loan book
from our combined residential and commercial businesses
increased 11% to $133.3 billion at year end. The AFGHL loan
book experienced strong growth finishing the year up 44% at
$5.5 billion. AFG also continued to experience strong growth
in the leasing line of the business, with settlements increasing
20% year on year.
AFG has continued to invest in technology which has been the
cornerstone of the Company’s strength and a key differentiator
for our broker partners. AFG Business, a commercial broking
platform initially targeting SME customers across the country
will be launched in Q2 FY18. The platform will simplify the
commercial lending process and help deliver streamlined
efficient business finance solutions.
The Group experienced another strong broker recruitment
year with an 8.5% increase in active broker numbers to 2,875
from 2,650 in 2016. This reflects the ongoing value of the AFG
brand and technology proposition to brokers, our technology
continues to be enhanced with our own and partnered
technology.
The Group’s cash and cash equivalents as at 30 June 2017
amounted to $124,801k, which represents a decrease of 5%
on the 2016 financial year. This is attributable to a $10,754k
decrease in restricted cash (timing on movements of cash in
collateralised standby letters of credit and special purpose
securitised trusts held on behalf of the warehouse funders
and bondholders). Unrestricted cash for the period increased
$4,890k, representing an increase of 6%, due to strong
operating cash flows.
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.
ANNUAL REPORT2017 12
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.
Directors' Meetings
The number of Directors’ meetings (excluding circulatory
resolutions) held during the year and each Director’s
attendance at those meeting is set out in the table below.
Subsequent Events
On 27 July 2017, the Group secured an extension to the term of
the NAB residential warehouse facility that was due to expire
on 10 August 2017. 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 AFG. The maturity date
has been reset to 11 December 2017.
On 4 August 2017, the Group secured an extension to the term
of the ANZ residential warehouse facility that was due to expire
on 14 August 2017. 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 AFG. The maturity date
has been reset to 14 December 2017.
The warehouse term is for a shorter period due to new
warehousing arrangements during the first half of FY2018. This
is in preparation for Prudential Standard APS 120 which comes
into effect on 1 January 2018.
On 24 August 2017 the Directors recommended the payment
of a dividend of 5.5 cents per fully paid ordinary share,
fully franked based on tax paid at 30%. The dividend has a
record date of 4 September 2017 and a payment date of 28
September 2017. The aggregate amount of the proposed
dividend expected to be paid out of retained earnings at 30
June 2017 is $11,814k. The financial effect of these dividends
has not been brought to account in the financial statements for
the year ended 30 June 2017.
On 7 September, AFG successfully funded a $350m RMBS
term out in the new 2017-1 Trust which will be consolidated into
the AFG Group as at this date.
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.
The Directors met as a Board 13 times during the year. 10
meetings were main meetings and 3 meetings were convened
to consider special business. Special meetings are convened
at a time to enable the maximum number of Directors to attend
and are generally held to consider specific items that cannot
be held over to the next scheduled main meeting. Apologies
were received from Directors in all instances where they were
unable to attend a meeting.
Directors Board Meetings
Main Meetings
Special Meetings
Held Attended
Held Attended
Tony Gill
Brett McKeon
Malcolm Watkins
Kevin Matthews
James Minto1
Craig Carter
Melanie Kiely
Jane Muirsmith
10
10
10
10
10
10
10
10
10
10
10
10
9
10
9
10
3
3
3
3
3
3
3
3
3
2
1
2
-
3
3
3
1 James Minto resigned as a Director with effect 21 June 2017.
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:
Audit
Remuneration and
Nomination
Risk and
Compliance
C. Carter (C)
M. Kiely (C)
J. Muirsmith (C)
J. Minto
M. Kiely
C. Carter
J. Minto
J. Muirsmith
J. Muirsmith
J. Minto1
M. Kiely
C. Carter
Share options
There were no options issued or exercised during the financial
year (2016: Nil).
Notes
(C) designates the Chair of the Committee
1 Chair until resignation 21 June 2017.
Indemnification of insurance of
officers and auditors
During the financial year, the Group paid a premium in respect
of a contract insuring the Directors of the Group (as named
above) against a liability incurred as a Director 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.
ANNUAL REPORT2017Directors' Report (continued) 13
The following table sets out the numbers of meetings of the Committees of the Board and the numbers of meetings attended by each
Director who is/was a member of that Committee:
Committee Meetings
Directors
Audit
Remuneration and
Nomination
Risk and Compliance
James Minto
Craig Carter
Melanie Kiely
Jane Muirsmith
Maximum
Possible
Meetings
Attended
Maximum
Possible
Meetings
Attended
Maximum
Possible
Meetings
Attended
5
5
1
5
5
5
1
5
6
1
6
6
5
1
6
6
4
4
4
1
4
4
4
1
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 11 to the Financial Statements do not compromise the external
auditor's 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
$
36,750
68,000
104,750
Auditor’s Independence declaration
The auditor’s independence declaration is included on page 27 of this financial report for the year ended 30 June 2017.
This report is made in accordance with a resolution of the Directors.
ANNUAL REPORT2017 14
Remuneration
Report
Message from the Chair of the
Remuneration & Nomination
Committee
Dear Shareholder,
On behalf of the Board I am pleased to present AFG's Remuneration
Report for FY17.
The AFG Board remains committed to an Executive Remuneration
structure that drives a strong performance culture in line with our
strategy, and delivers satisfactory and sustainable returns for
shareholders in the short term and over time.
Feedback from shareholders, stakeholders and proxy advisors is
valuable to our remuneration process. In line with this and consistent
with last year, the Board has actively sought feedback and where
appropriate, revised the Executive remuneration framework. These
revisions are aimed at providing greater clarity and transparency
with a continued focus on demonstrating the link between strategy,
remuneration, retention and performance. The changes include:
♦ The inclusion of a strategic STI target for FY17 relating to AFGHL
settlement volumes in addition to the Group’s financial target.
We believe this is appropriate given AFGHL settlements were up
38% in the year and were the main contributor to a profit upgrade
during the year. Further information is provided in section 3.
♦ An increase to the compound annual growth rate earnings per
share (EPS) for the FY18 LTI grant to 10% per annum growth target
to achieve 100% payment (FY17: 7.5%). Whilst credit growth in
the Australian residential mortgage market has been slow and is
expected to be modest in the short term this stretching target is
reflective of the Group’s earnings diversification strategy through
higher margin business lines. This change reflects our ongoing
intent to set challenging targets in the context of industry the
outlook and the economic environment.
♦ An increased emphasis on profit relative to strategic target.
In FY17 the STI targets were split 50/50 between profit and
strategic targets to continue to drive the growth in the profitable
AFGHL business. In FY18 the STI target will be 60% profit and
with 40% allocated to strategic targets with a profit gateway for
strategic targets.
FY17 Performance & Remuneration
Outcomes Summary
Looking back at the FY17 performance and associated remuneration
outcomes, it was a successful year marking the completion of AFG's
second full year as a listed company and the increased contribution
of the AFGHL segment of the business. Reported NPAT exceeded
prior year by $16,460k or 73%, normalised profit for FY17 was
$30,164k which was $7,520k or 33% higher than FY16. Normalised
profit removes the impact of the initial recognition of prior period
AFGHL settlements.
Performance against other KPI measures was also strong with the
Group’s loan book ending the year at $133 billion up 11% from FY16.
This demonstrates growth in the core business, generating ongoing
reserves for future investment and growth.
AFGHL settlements in the year grew 38% to $2,680k (FY16: 1,938k)
and represented 7.8% of total AFG residential settlements in FY17.
ANNUAL REPORT2017 A 5-year history of AFG's NPAT, Residential Loan Book,
AFGHL Loan Book and Commercial Loan Book growth is
provided below:
Net Profit After Tax*
0
$5
$10
$15
MILLIONS
$25
$20
$30
$35
$40
$45
FY13
FY14
FY15
FY16
FY17
Residential Loan Book
BILLIONS
$80
$60
$40
$20
0
$100 $120
$140
FY13
FY14
FY15
FY16
FY17
Commercial Loan Book
BILLIONS
$4
$5
$6
$7
$8
0
$1
$2
$3
FY13
FY14
FY15
FY16
FY17
* Grey shading of FY17 profit shows the initial recognition of AFGHL
white label trail book relating to loans settled in prior periods.
AFGHL Portfolio
BILLIONS
$3
$4
$5
$6
0
$1
$2
June 13
June 14
June 15
June 16
June 17
15
AFGHL Settlements
MILLIONS
0
$500
$1,000 $1,500 $2,000 $2,500 $3,000
FY13
FY14
FY15
FY16
FY17
The Group delivered a dividend yield for FY17 of 7.5%
based on the closing share price at 30 June 2017 of $1.285.
In line with this performance, the key remuneration
outcomes, which are detailed further in the Remuneration
Report include:
♦ FY17 STI payments made at 115% reflecting an
outstanding stretch performance when compared
to FY16 results. When considering profit, the Board
considered normalised profit as the most appropriate
number for discussion of current year performance
as it excludes the initial accounting recognition of the
AFGHL settlements relating to prior periods; Regardless
of whether normalised or reported earnings were used
to measure NPAT performance the payment would cap
at 120%.
♦ 100% of the Performance Rights awarded to Key
Management Personnel in FY15 were forfeited in
FY16, despite the strong operational and financial
performance of the Group since the time of listing as
the Total Shareholder Return (TSR) hurdles were not
achieved. The next performance period is the one
ending 30 June 2019.
With regard to CEO transition and remuneration, the
fixed annual remuneration of Mr Bailey was increased as
a reflection of his role as Interim CEO for the period he
was acting in the role (March to June 2017). Upon official
appointment as CEO Mr Bailey’s remuneration for FY18
was determined having regard to market comparisons
and KPMG were engaged to provide recent market data
to the Board to assist with this assessment. The overall
remuneration package for Mr Bailey in FY18 represents a
small increase when compared to our previous CEO Mr
McKeon due primarily to a larger LTI component. Mr McKeon
as a founding shareholder of AFG and holding 9.86% of the
shares in AFG is already significantly tied to the creation
of long term shareholder wealth and therefore was paid a
significantly lower LTI component than market comparisons.
Further detail on the remuneration results are detailed in
section 3 of the report, which reflect the outcomes of a
good year for shareholders and employees.
Yours sincerely,
Melanie Kiely
Chair, Remuneration & Nomination Committee
ANNUAL REPORT2017
16
Introduction
1 )
The Remuneration Report outlines AFG's remuneration philosophy, framework and outcomes for all Non-Executive Directors,
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 ("NED").
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 Carter1
James Minto2
Melanie Kiely3
Jane Muirsmith4
Executive Directors
Brett McKeon5
Malcolm Watkins
Executives
David Bailey6
David Bailey6
Lisa Bevan
Ben Jenkins
Non-Executive Chairman
Appointed 28 August 2008
Non-Executive Director
Non-Executive Director
Non-Executive Director
Non-Executive Director
Non-Executive Director
Managing Director/CEO
Appointed 20 January 1995
Appointed 25 March 2015
Resigned 21 June 2017
Appointed 31 March 2016
Appointed 31 March 2016
Appointed 19 June 1996/
Resigned 31 May 2017
Executive Director
Appointed 8 December 1997
Chief Operating Officer
Chief Executive Officer
Company Secretary
Chief Financial Officer
Appointed 8 March 2004
Appointed 16 June 2017
Appointed 9 March 1998
Appointed 14 December 2015
1 Craig Carter is Chairman of the Audit Committee.
2 Melanie Kiely is Chair of the Remuneration and Nomination Committee and was appointed on 27 October 2016.
3 James Minto was Chairman of the Risk and Compliance Committee through the financial year until his retirement on 21 June 2017.
4 Jane Muirsmith is Chair of the Risk and Compliance Committee and was appointed on 21 June 2017.
5 Brett McKeon stepped down from the MD/CEO role on 3 March 2017 with his notice period ending 31 May 2017 and continues as an Executive Director
effective 1 June 2017.
6 David Bailey was appointed interim CEO on 3 March 2017 and CEO on 16 June 2017.
Other than Kevin Matthews, all Non-Executive Directors listed above are Independent Directors.
3 ) Executive Remuneration Structures
The Group 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 performance through measures based on the operational performance of the business.
ANNUAL REPORT2017Remuneration Report (continued) 17
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
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
♦ External benchmarking
♦ Contribution, competencies and capabilities
♦ Company and individual performance
Short-term incentive (STI)
Paid in cash
Group Financial Measures
FY17 & onwards:
Rewards Executives for their contribution to achievement of Group
outcome and the achievement of key strategic operational targets.
Group Net Profit After Tax
and at least 1 key strategic
operational target with
a clear link to long term
strategy. Allocation to NPAT
target will increase from 50%
to 60% in FY18.
90% NPAT hurdle for any STI
payment including strategic
targets.
Long-term incentive (LTI)
Awards are made in the
form of share rights
FY17 & FY18 grant:
Ensures a strong link to the long-term creation of shareholder value.
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.
♦ CAGR EPS was chosen as a performance hurdle as it is:
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:
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 REPORT2017 19
3.1 ) Executive Remuneration Outcomes
STI award outcomes FY17
The combined cash bonus pool available to be paid to the Executives for on target performance in the 2017 financial year was
$540,020 and the minimum is nil. For the 2017 financial year, 115% of the maximum STI bonus amount was achieved by the Executives
given the Group NPAT of $39,104k.
Profit Reconciliation
Reported Profit
Prior Year AFGHL settlements
Adjusted Profit
000’s
$39,104
$(8,940)
$30,164
Target
FY16
000’s
FY17
000’s
Growth
Target
Assessment
NPAT ($’000)
$22,644
$30,164
33% 120% (capped)
AFGHL
$1,938
$2,680
38%
110.8%
B. McKeon1
M. Watkins
L. Bevan
D. Bailey
B. Jenkins
Total
Target STI
opportunity
As a % of fixed
remuneration
STI outcome
% Achieved
% Forfeited
$250,000
$32,520
$80,000
$120,000
$57,500
$540,020
51%
17%
31%
29%
21%
$288,500
$37,528
$92,320
$138,480
$66,355
$623,183
115%
115%
115%
115%
115%
115%
-
-
-
-
-
1 Mr B. McKeon’s notice period as CEO ended 31 May 2017 though was still an employee at 30 June and therefore entitled to STI payment under plan
rules
3.2 ) Fixed Annual Remuneration
No significant changes to the remuneration structure were required during the financial year other than an increase to Mr Bailey’s
remuneration to reflect his role as interim CEO and subsequent appointment as CEO.
The targeted remuneration mix for:
♦ The CEO is 53% fixed and 47% 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).
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
Participation
STI opportunity
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.
All Executives
The STI available to each Executive is set at a level based on role, responsibilities and market data
for the achievement of stretching targets against specific KPIs. The target STI opportunity for each
Executive in FY17 is listed at 3.1 as an absolute dollar amount and as a percentage of the Executive’s
fixed base.
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
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 strategically relevant KPI relating to the Group’s long
term strategy.
The weightings for each KPI is 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
2018 performance are set out at 3.4.
Assessment of
performance
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.
ANNUAL REPORT2017 20
3.4 ) FY18 STI Opportunity
Offers to participate in STI awards for 2018 were made to Executives under the STI Plan on the terms set out below.
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 (60%), targeted
AFGHL settlement volumes (20%) and AFG Business (AFG's new digital broking platform for commercial SME lending) settlement
volumes (20%). The allocation of these targets is dependent upon the Executive’s role in the business however all have a NPAT target.
In order for any STI award to be payable, a threshold profit target must be satisfied, being 90% of target. 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
AFG Business
Achievement %
Less than 90%
90%-100%
100%-150%
Less than 90%
90-100%
100%-150%
Less than 80%
80%-100%
100%+
STI Award Payable
0%
50%-100%
Straight line between 100%-150%
0%
Straight line between 90%-100%
Straight line between 100%-150%
0%
80-100%
Straight line over 100%
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.
3.5 ) The LTI Plan – 2017 and 2018 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 2017 and 2018 LTI Grants are provided below. Information on the 2018
LTI plan has been included this year to disclose the changes made to reflect shareholder and stakeholder feedback:
2017 LTI Grant
2018 LTI Grant
Instrument
Performance rights to acquire ordinary AFG shares
Performance rights to acquire ordinary AFG shares
Quantum
65% of an Executive’s annual LTI entitlement weighted to
an EPS 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
35% of an Executive’s annual LTI entitlement weighted
to TSR targets
Grant date
1 July 2016, other than those approved at the 2016 AGM 1 July 2017, other than those subject to approval at the
2017 AGM
Grant date fair
value
Gateway
performance
measure
Key
performance
measure
TSR Small Industrials Index $0.66
TSR Small Industrials Index $0.77
TSR Diversified Financials Index $0.67
TSR Diversified Financials Index $0.75
EPS $1.00 (being the 20-day Volume Weighted Average
Price leading up to 30 June 2016)
EPS $1.25 (being the 20-day Volume Weighted
Average Price leading up to 30 June 2017)
TSR – Absolute TSR must be positive
TSR – Absolute TSR must be positive
EPS – 2.5% CAGR EPS
EPS – 5.0% CAGR EPS
TSR
TSR
Relative Total Shareholder Return (pro-rata vesting
between hurdles) 50% measured against the Diversified
Financials Index, 50% against Small Industrials
Relative Total Shareholder Return (pro-rata vesting
between hurdles) 50% measured against the Diversified
Financials Index, 50% against Small Industrials
50th Percentile – 50% vesting
75th Percentile – 100% vesting
50th Percentile – 50% vesting
75th Percentile – 100% vesting
85th Percentile – 125% vesting (stretch target)
85th Percentile – 125% vesting (stretch target)
90th Percentile – 150% vesting (stretch target)
90th Percentile – 150% vesting (stretch target)
EPS accretion
2.5% CAGR – 25% vesting
7.5% CAGR – 100% vesting
EPS accretion
5.0% CAGR – 50% vesting
10% CAGR – 100% vesting
10.0% CAGR – 125% vesting (stretch target)
11.25% CAGR – 125% vesting (stretch target)
12.5% CAGR – 150% vesting (stretch target)
12.5% CAGR – 150% vesting (stretch target)
ANNUAL REPORT2017Remuneration Report (continued) 21
Performance &
Service period
Performance
assessment
2017 LTI Grant
2018 LTI Grant
1 July 2016 – 30 June 2019
1 July 2017 – 30 June 2020
30 June 2019
30 June 2020
Performance period not yet complete.
Performance period not yet complete.
Common LTI Plan Rules & Design Considerations
Link between
performance
and reward
TSR
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.
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 of the businesses strategy over a long term period.
Stretch targets are available giving Executives the opportunity to increase the number of performance rights by
up to 50% for exceptional performance.
Cessation of
employment
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.
The Performance Rights do not carry dividends or voting rights prior to vesting.
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.
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.
Dividends &
voting
Clawback and
preventing
inappropriate
benefits
Change of
control
Restrictions on
dealing
Reconstructions,
corporate action,
rights issues,
bonus issues, etc.
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.
ANNUAL REPORT2017 22
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ANNUAL REPORT2017Remuneration Report (continued)
23
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
considers 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 2017 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 AFG listed 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
NEDs have received non-cash benefits arising from their attendance at AFG's conference. The table below outlines the
NED remuneration for the years ended 30 June 2017 and 30 June 2016:
Year
2017
2016
2017
2016
2017
2016
2017
2016
2017
2016
2017
2016
2017
2016
2017
2016
Board and
Committee Fees
Short-term benefits
(non-monetary)
Superannuation
$
136,986
136,986
82,192
82,192
-
14,542
82,192
82,192
82,192
82,912
82,192
19,600
82,192
19,600
547,946
437,304
$
19,192
18,814
20,008
18,814
-
-
-
-
-
-
-
-
-
-
39,200
37,628
$
13,014
13,014
7,808
7,808
-
1,381
7,808
7,808
7,808
7,808
7,808
1,862
7,808
1,862
52,054
41,543
Total
$
169,192
168,814
110,008
108,814
-
15,923
90,000
90,000
90,000
90,000
90,000
21,462
90,000
21,462
639,200
516,475
T. Gill
K. Matthews
J. Atkins
C. Carter
J. Minto
M. Kiely1
J. Muirsmith1
Total
Total
1 Appointed 31 March 2016
ANNUAL REPORT2017 24
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 FY17 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 FY16 have been forfeited as the performance
condition attached to these rights was not met.
KMP
B. McKeon
M. Watkins
L. Bevan
D. Bailey
B. Jenkins
Year /
Tranches
(T)
Rights awarded
during the year
No.
Grant
date
Fair value
per rights at
award date $
Vesting date
Exercise
price
Expiry date
No. Forfeited
during the
year
2017 / T1
2017 / T2
2017 / T3
2017 / T1
2017 / T2
2017 / T3
2017 / T1
2017 / T2
2017 / T3
2017 / T1
2017 / T2
2017 / T3
2017 / T1
2017 / T2
2017 / T3
97,500
39,179
39,773
19,500
7,836
7,955
46,800
18,806
19,091
91,000
36,567
37,121
32,500
13,060
13,258
1-Jul-16
1-Jul-16
1-Jul-16
1-Jul-16
1-Jul-16
1-Jul-16
1-Jul-16
1-Jul-16
1-Jul-16
1-Jul-16
1-Jul-16
1-Jul-16
1-Jul-16
1-Jul-16
1-Jul-16
$1.00
$0.67
$0.66
$1.00
$0.67
$0.66
$1.00
$0.67
$0.66
$1.00
$0.67
$0.66
$1.00
$0.67
$0.66
30-Jun-19
30-Jun-19
30-Jun-19
30-Jun-19
30-Jun-19
30-Jun-19
30-Jun-19
30-Jun-19
30-Jun-19
30-Jun-19
30-Jun-19
30-Jun-19
30-Jun-19
30-Jun-19
30-Jun-19
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
30-Jun-19
-
30-Jun-19
-
30-Jun-19
-
30-Jun-19
-
30-Jun-19
-
30-Jun-19
-
30-Jun-19
-
30-Jun-19
-
30-Jun-19
-
30-Jun-19
-
30-Jun-19
-
30-Jun-19
-
30-Jun-19
30-Jun-19
30-Jun-19
-
-
-
* T1 – Earnings Per Share allocation
T2 – TSR (Diversified Financials) allocation
T3 – TSR (Small Industrials) allocation
5.4 ) Shareholdings of KMP*
Ordinary shares held in Australian Finance Group Limited ASX:AFG (number)
30 June 2017
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 2016
Granted as
remuneration
Sold during
the period
Net change
other
Balance
30 June 2017
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
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
1,500,000
1,882,151
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
2,250,000
2,250,000
21,179,773
21,179,773
19,602,689
19,602,689
15,000,000
15,000,000
136,364
500,000
166,666
-
-
1,533,333
1,050,000
-
136,364
500,000
166,666
-
-
83,333
530,000
-
*
Includes shares held directly, indirectly and beneficially by the KMP
ANNUAL REPORT2017Remuneration Report (continued) 25
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
Agreement expires
Notice of termination by Company
Employee notice
B. McKeon
No expiry, continuous agreement
12 months (or payment in lieu of notice)
M. Watkins
No expiry, continuous agreement
12 months (or payment in lieu of notice)
D. Bailey
L. Bevan
No expiry, continuous agreement
12 months (or payment in lieu of notice)
No expiry, continuous agreement
12 months (or payment in lieu of notice)
B. Jenkins
No expiry, continuous agreement
6 months (or payment in lieu of notice)
12 weeks
12 weeks
12 weeks
12 weeks
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 2017 the Committee comprised independent Non-Executive Director Melanie Kiely (Chair), independent Non-Executive
Directors Craig Carter and Jane Muirsmith. James Minto was Chair of the Remuneration and Nomination Committee until 27 October
2016 when Melanie Kiely was appointed Chair.
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.
During the financial period ended 30 June 2017 the Company sought advice from KPMG to provide benchmarking for CEO
remuneration. No remuneration recommendations from independent consultants were received during the financial period ended
30 June 2017. KPMG 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 2016 AGM
The 30 June 2016 Remuneration Report was presented to shareholders and was approved at the 2016 Annual General Meeting.
ANNUAL REPORT2017 26
8 ) Other Transactions and Balances with 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 T. 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 $427k (2016: $1,044k). 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 $253k (2016: $207k). 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 $698k (2016: $724k). The payments received are not considered to be
material to the financial results of the Group and therefore did not impact on Mr J. 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 agreement with
Establish Property Group Ltd (EPG). Mr B. McKeon, Ms L. Bevan and Mr D. Bailey, are Directors of EPG and McCabe St. Under the
terms of the shared services agreement, the Group provides premises, administration, accounting and some company secretarial
services to EPG at an agreed arm’s length rate. The agreement was active for the full 2017 financial year and a total of $120k
(2016: $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 arm’s length rates from an investee of EPG, Qube
Havelock Street Development Pty Ltd (Qube). During the 2017 financial year rent of $1,567k has been paid to Qube (2016: $1,539k).
During the year EPG began the process of reducing the level of shared service support provided by AFG. The shared services
agreement will be terminated when EPG moves out of the AFG Office in September 2017. In addition to the above McCabe St has
an outstanding loan owing to AFG amounting to $201k (2016: $193k), this loan is on commercial terms at arms length.
Independent Audit of Remuneration Report
9 )
The Remuneration Report has been audited by Deloitte. Please see page 68 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.
Tony Gill
Chairman
Perth
21 September 2017
ANNUAL REPORT2017Remuneration Report (continued) Independence declaration under Section 307C of the Corporations Act 2001
27
Deloitte Touche Tohmatsu
ABN 74 490 121 060
Tower 2, Brookfield Place
123 St Georges Terrace
Perth WA 6000
GPO Box A46
Perth WA 6837 Australia
Tel: +61 8 9365 7000
Fax: +61 8 9365 7001
www.deloitte.com.au
The Board of Directors
Australian Finance Group Limited
Level 4, 100 Havelock Street
West Perth WA 6005
21 September 2017
Dear Directors
Australian Finance Group Limited
In accordance with section 307C of the Corporations Act 2001, I am pleased to provide the
following declaration of independence to the directors of Australian Finance Group Limited.
As lead audit partner for the audit of the financial statements of Australian Finance Group
Limited for the financial year ended 30 June 2017, I declare that to the best of my knowledge
and belief, there have been no contraventions of:
(i) the auditor independence requirements of the Corporations Act 2001 in relation to
the audit; and
(ii) any applicable code of professional conduct in relation to the audit.
Yours sincerely
DELOITTE TOUCHE TOHMATSU
Leanne Karamfiles
Partner
Chartered Accountants
Liability limited by a scheme approved under Professional Standards Legislation.
Member of Deloitte Touche Tohmatsu Limited
ANNUAL REPORT2017
28
Consolidated Statement
of Financial Position
As at 30 June 2017
In thousands of AUD
Assets
Cash and cash equivalents
Trade and other receivables
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
Provisions
Deferred income
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
14(a)
15
17
28(d)
19
20
16
21
13(b)
22
23
13(c)
25
2017
2016
124,801
737,580
1,152,171
31
1,898
745
130,665
650,059
1,046,412
49
2,379
757
2,017,226
1,830,321
1,164,478
715,803
4,559
1,249
1,667
2,693
19,482
1,072,215
646,113
3,818
1,060
322
4,876
13,397
1,909,931
1,741,801
107,295
88,520
43,541
408
(91)
63,410
107,268
27
107,295
43,541
97
(74)
44,980
88,544
(24)
88,520
The Consolidated Statement of Financial Position should be read in conjunction with the Notes to the Financial Statements.
ANNUAL REPORT2017 29
Consolidated Statement of Profit or Loss
and Other Comprehensive Income
For the year ended 30 June 2017
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
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)
Note
7
8
9
12
12
13
26
26
2017
2016
539,759
46,342
586,101
(474,557)
(31,711)
79,833
16,700
(2,885)
(38,955)
54,693
2,277
(14)
2,263
56,956
(17,852)
39,104
39,053
51
39,104
2
-
2
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
22,667
(23)
22,644
2
-
2
39,106
22,646
39,055
51
39,106
18.20
18.15
22,669
(23)
22,646
10.54
10.54
The Consolidated Statement of Profit or Loss and Other Comprehensive Income should be read in conjunction with the Notes to the
Financial Statements.
ANNUAL REPORT2017 30
Statement of Changes in Equity
For the year ended 30 June 2017
In thousands of AUD
Share
capital
Foreign
currency
translation
reserve
Fair value
reserve
Share-
based
payment
reserve
Retained
earnings
Total
Non-
controlling
interest
Total
equity
Balance at 1 July 2015
43,541
(15)
(61)
9
28,757
72,231
(1)
72,230
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
-
-
-
-
-
-
Balance at 30 June 2016
43,541
Balance at 1 July 2016
43,541
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
-
-
-
-
-
-
-
1
1
-
-
-
(14)
(14)
-
-
-
-
-
-
-
1
1
-
-
-
(60)
(60)
-
(17)
(17)
-
-
-
-
-
-
-
88
88
97
22,667
22,667
(23)
22,644
-
2
-
2
22,667
22,669
(23)
22,646
(6,444)
(6,444)
-
88
(6,444)
(6,356)
-
-
-
(6,444)
88
(6,356)
44,980
88,544
(24)
88,520
97
44,980
88,544
(24)
88,520
-
-
-
-
311
311
39,053
39,053
-
(17)
39,053
39,036
(20,623)
(20,623)
-
311
(20,623)
(20,312)
51
-
51
-
-
-
39,104
(17)
39,087
(20,623)
311
(20,312)
Balance at 30 June 2017
43,541
(14)
(77)
408
63,410
107,268
27
107,295
The Consolidated Statement of Changes in Equity should be read in conjunction with Notes to the Financial Statements.
ANNUAL REPORT2017 Statement of Cash Flows
For the year ended 30 June 2017
Note
2017
In thousands of AUD
Cash flows from operating activities
Cash receipts from customers
Cash paid to suppliers and employees
Interest received
Interest paid
Income taxes paid
Net cash generated by operating activities
14(b)
Cash flows from investing activities
Net interest received
Acquisition of property, plant and equipment
Investment in intangible assets
(Decrease)/Increase in other loans and advances
Loans and advances to customer borrowings
Net cash used in investing activities
Cash flows used in financing activities
(Repayments of)/proceeds from warehouse facilities
Proceeds from/(repayments to) bondholders
Decrease in loans from funders
Dividends paid to equity holders of the parent
25(d)
Net cash generated by financing activities
Net (Decrease) / Increase in cash and cash equivalents
Cash and cash equivalents at 1 July
Cash and cash equivalents at 30 June
14(a)
462,454
(439,031)
46,341
(31,711)
(11,536)
26,517
2,303
(280)
(150)
(539)
(105,608)
(104,274)
(48,905)
141,677
(257)
(20,622)
71,893
(5,864)
130,665
124,801
The Statement of Cash Flows should be read in conjunction with the Notes to the Financial Statements.
31
2016
Restated
440,572
(410,148)
46,598
(33,036)
(7,780)
36,206
2,617
(136)
(205)
718
(23,185)
(20,191)
190,685
(159,839)
(528)
(6,444)
23,874
39,889
90,776
130,665
ANNUAL REPORT2017 Notes to the
Financial Statements
1 )
Reporting entity
2 ) Basis of preparation
3 ) Significant accounting policies
4 ) Determination of fair values
5 )
Financial risk management
6 ) Segment information
7 ) Revenue
8 ) Other income
9 ) Other expenses
10 ) Employee costs
11 ) Auditors’ remuneration
12 ) Finance income and expenses
13 )
Income tax
14 ) Cash and cash equivalents
15 ) Trade and other receivables
16 ) Trade and other payables
17 ) Loans and advances
18 ) Group entities
19 ) Property, plant and equipment
20 )
Interest-bearing liabilities
21 ) Employee benefits
22 ) Provisions
23 ) Deferred income
24 ) Operating leases
25 ) Capital and reserves
26 ) Earnings per share
27 ) Share based payments
28 ) Financial instruments
29 ) Parent entity
30 ) Capital and other commitments
31 ) Contingencies
32 )
Related parties
33 ) Subsequent events
34
1) Reporting entity
The consolidated Financial Statements for the financial
year ended 30 June 2017 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 lending. The Company’s principal place of
business is 100 Havelock Street, West Perth, Western Australia.
2) Basis of preparation
( a ) Statement of compliance
The Financial Report 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 AFG Group of companies.
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 21 September 2017.
( b ) Basis of measurement
The Consolidated Financial Statements have been prepared on
a historical cost basis except for the following material items:
♦ Receivables and payables relating to trailing commission
are initially measured at fair value and subsequently at
amortised cost;
♦ Financial instruments at fair value through profit or loss are
measured at fair value;
♦ Available-for-sale financial assets are measured at fair value
except for equity instruments that do not have a quoted
price in an active market and whose fair value cannot be
reliably measured.
( c ) Functional and presentation currency
These Consolidated Financial Statements are presented in
Australian dollars (“AUD”).
The Group is of a kind referred to in ASIC 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.
( d ) Use of estimates and judgements
The preparation of Financial Statements in conformity with
AASBs requires management to make judgements, estimates
and assumptions that affect the application of accounting
policies and the reported amounts of assets and liabilities,
income and expenses. Actual results may differ from these
estimates.
Estimates and underlying assumptions are reviewed on
an ongoing basis. Revisions to accounting estimates are
recognised in the period in which the estimate is revised and in
any future periods affected.
Information about critical judgements in applying accounting
policies that have the most significant effect on the amounts
recognised in the Financial Statements is included in the
following notes:
♦ Notes 15 and 16 - 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 amortised cost assumptions used
in forecasting and discounting future trailing commissions
♦ Note 27 - Measurement of share-based payments
♦ Note 28 - 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.
ANNUAL REPORT2017Notes to the Financial Statements (continued) 35
( 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 Australian Accounting Standards Board (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.
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 that there will be no significant changes in the Group’s accounting policies.
( ii ) Accounting Standards and Interpretations Issued But Not Yet Effective
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*
Application date for Group
AASB 9 ‘Financial instruments’ and the relevant amending standards
1 January 2018
30 June 2019
AASB 15 ’Revenue from Contracts with Customers’ and AASB 2014-5
‘Amendments to Australian Accounting Standards, arising from AASB 15’, AASB
2015-8 Amendments to Australian Accounting Standards – Effective Date of
AASB 15, AASB 2016-3 Amendments to Australian Accounting Standards –
Clarification of AASB 15
1 January 2018
30 June 2019
AASB 16 ‘Leases’
AASB 2016-2 ‘Amendments to Australian Accounting Standards – Disclosure
Initiative: Amendments to AASB 107’
1 January 2019
30 June 2020
1 January 2017
30 June 2018
Management have performed an assessment of the impact of applying the new standards:
AASB 15 ‘Revenue from Contracts with Customers’ no material impact as a result of the revenue changes to the standard.
AASB 16 ‘Leases’ the Group has a limited number of operating leases which will be brought onto the statement of financial position.
It is not expected that these will result in any material changes to the Group’s financial position.
* Reporting period commences on or after the application date
Management have performed an assessment of the impact of applying the new standards:
AASB 9 ‘Financial Instruments’ and the relevant amending standards introduce new requirements for the classification and
measurement of financial assets and impairment of financial assets.
Key requirements considered most relevant to the Group are:
♦ All recognised financial assets that are within the scope of AASB 9 are required to be subsequently measured at amortised cost
or fair value. Generally, debt investments that are held under a business model to collect the contractual cash flows, which consist
solely of payments of principal and interest are measured at amortised cost at the end of subsequent accounting periods. Most
other debt and equity investments are measured at their fair value at the end of subsequent accounting periods; and
♦ A new model in relation to the credit impairment of financial assets, being an expected credit loss model, as opposed to an incurred
credit loss model under AASB 139. This new model will be adopted by the Group and is expected to result in additional disclosures.
Based off the Group’s preliminary assessment, the amendments are not expected to have a material impact on the financial
statements on implementation.
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.
ANNUAL REPORT2017 36
3) Significant accounting policies
( 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
♦ Right 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 the following special purpose
entities to support the specific funding needs of the Group’s
securitisation programme:
♦ 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, AFG 2014-1 Trust and
AFG 2016-1 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 in 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.
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.
ANNUAL REPORT2017Notes to the Financial Statements (continued) 37
( 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.
( b ) 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.
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.
ANNUAL REPORT2017 38
3) Significant accounting policies
( iv ) Fair value of financial instruments
(continued)
( b ) Financial instruments (continued)
( ii )
Impairment of financial assets (continued)
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.
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.
( c ) 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.
During the current year, there has been a change in accounting
policy in relation to the presentation of the following cash flows
related to the securitisation business:
♦ (Repayments of)/proceeds from warehouse facilities
♦ (Repayments to)/proceeds from bondholders
♦ Loans advanced to (repayments of borrowings) from
borrowers
These cashflows, which have previously been presented within
operating activities, are now presented within financing and
investing activities in the cash flow statement on page 31.
This change in accounting policy has been made to align the
Group’s presentation more closely to industry practice and
provide more relevant information.
ANNUAL REPORT2017Notes to the Financial Statements (continued) ( d ) Property, plant and equipment
( ii ) Other intangible assets
39
( 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(f)).
Purchased software that is integral to the functionality of the
related equipment is capitalised as part of that equipment.
Borrowing costs related to the acquisition or construction of
qualifying assets are capitalised as part of the cost of the assets.
Where parts of an item of property, plant and equipment have
different useful lives, they are accounted for separately.
Gains and losses on disposal of an item of property, plant and
equipment are determined by comparing the proceeds from
disposal with the carrying amount and are recognised net
within “other income” in profit or loss.
( ii ) Subsequent costs
The cost of replacing part of an item of property, plant and
equipment is recognised in the carrying amount of the item if it
is probable that the future economic benefits embodied within
the part will flow to the Group and its costs can be measured
reliably. The costs of the day-to-day servicing of property, plant
and equipment are recognised in profit or loss as incurred.
( iii ) Depreciation
Depreciation is recognised in profit or loss on a straight-line
basis over the estimated useful lives of each part of an item of
property, plant and equipment. Leased assets are depreciated
over the shorter of the lease term and their useful life unless it
is reasonably certain that the Group will obtain ownership by
the end of the lease term. Land is not depreciated.
The estimated useful lives for the current and comparative
periods are as follows:
(i) plant and equipment
2-5 years
(ii) fixtures and fittings
5-20 years
Depreciation methods, useful lives and residual values are
reassessed at each reporting date.
( e ) 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.
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(f)).
( 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
( f )
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.
( g ) 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.
ANNUAL REPORT2017
40
3) Significant accounting policies
(continued)
( g ) Employee benefits (continued)
( ii ) Short-term benefits
Short-term employee benefits are measured on an
undiscounted basis and are expensed as the related service
is provided.
A liability is recognised for employee benefits such as wages,
salaries, annual leave and sick leave if the Group has present
obligations resulting from employees’ services provided to
reporting date.
A provision is recognised for the amount expected to be paid
under short-term and long-term cash bonus or profit sharing
plans if the Group has a present legal or constructive obligation
to pay this amount as a result of past service provided by the
employee and the obligation can be estimated reliably.
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 brokers are also recognised, initially measured at fair
value being the future trailing commission payable to brokers
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.
Where trailing commission does not meet the revenue
recognition criteria to be recognised at fair value they are
recognised in line with the cashflow received.
( iii ) Share-based payment transactions
( ii ) Mortgage management revenues
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.
( h ) 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.
Provision for clawbacks on settlements within the period are
raised on both commission received and commission payable.
Clawbacks will be re-measure each reporting period.
( i ) Revenue
( i ) Commission revenues
The Group provides loan origination services and receives
origination commission on the settlement of loans. Additionally,
the lender normally pays a trailing commission over the life of
the loan. Commission revenue is recognised as follows:
♦ Origination commissions: Origination commissions are
recognised upon the loans being settled and receipt of
commission net of clawbacks.
♦ 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 outstanding. The Group also makes monthly
trailing commission payments to authorised mortgage
originators (brokers) based on the individual loan balance
outstanding.
On initial recognition, trailing commission revenue and
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 brokers 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.
ANNUAL REPORT2017Notes to the Financial Statements (continued) ( j ) 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.
( k ) 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.
Minimum lease payments made under finance leases are
apportioned between the finance expense and the reduction
of the outstanding liability. The finance expense is allocated to
each period during the lease term so as to produce a constant
periodic rate of interest on the remaining balance of the
liability.
( l ) 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.
( m ) 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 the profit or
loss using the effective interest method.
( n ) 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.
41
( o ) 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 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.
ANNUAL REPORT2017 42
3) Significant accounting policies
(continued)
( o ) Income tax expense (continued)
( ii ) Nature of tax funding arrangements and tax
sharing arrangements
The head entity, in conjunction with other members of the
tax-consolidated group, has entered into a tax funding
arrangement which sets out the funding obligations of
members of the tax-consolidated group in respect of tax
amounts. The tax funding arrangements require payments/
(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.
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 brokers when trailing commission is
received from lenders.
The fair value of trailing commission receivable from lenders
and the corresponding payable to brokers is determined by
using a discounted cash flow valuation. These calculations
require the use of assumptions which are determined by
management with the assistance of external actuaries. Further
assumptions are disclosed in Note 28(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.
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.
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.
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.
( p ) Goods and services tax
Revenue, expenses and assets are recognised net of the
amount of goods and services tax (GST), except where the
amount of GST incurred is not recoverable from the taxation
authority. In these circumstances, the GST is recognised as
part of the cost of acquisition of the asset or as part of the
expense.
Receivables and payables are stated with the amount of GST
included. The net amount of GST recoverable from, or payable
to, the 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.
( q ) 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.
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.
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 for the
establishment and oversight of the risk management
framework. The Risk and Compliance Committee is responsible
for developing and monitoring risk management policies.
Risk management policies are established to identify and
analyse the risks faced by the Group, to set appropriate risk
limits and controls, and to monitor risks and adherence to
limits. Risk management policies and systems are reviewed
regularly to reflect changes in market conditions and the
Group’s activities. The Group, through its training and
management standards and procedures, aims to develop a
disciplined and constructive control environment in which all
employees understand their roles and obligations.
The 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.
ANNUAL REPORT2017Notes to the Financial Statements (continued) 43
( 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 brokers.
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 June 2016 all loans
with a loan to value ratio of greater than 80% are 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 incurring unacceptable losses or
risking damage to the Group’s reputation.
To limit this risk, the Group manages assets with liquidity in
mind, and monitors future cash flows and liquidity on a regular
basis. This incorporates an assessment of expected cash flows
and the availability of high grade collateral which could be
used to secure additional funding if required.
The liquidity position is assessed and managed under a variety
of scenarios, giving due consideration to stress factors relating
to both the market in general and specifically to the Group.
( d ) Market risk
Market risk is the risk that changes in market prices, such
as foreign exchange rates, interest rates and equity prices
will affect the Group’s income or the value of its holdings
of financial instruments. The objective of market risk
management is to manage and control market risk exposures
within acceptable parameters, while optimising the return.
Currency risk
The Group is exposed to foreign currency risk on cash assets
that are denominated in a currency other than AUD. The
currencies giving rise to this risk are denominated in US dollars
(USD), New Zealand dollars (NZD) and Euro. The Group elects
not to enter into foreign exchange contracts to hedge this
exposure as the net movements would not be material. The
Group has no significant exposure to currency risk.
Interest rate risk
Interest rate risk is the risk to the Group’s earnings and
equity arising from movements in interest rates. Positions
are monitored on an ongoing basis to ensure risk levels are
maintained within established limits.
The Group’s most significant exposure to interest rate risk is
on the interest-bearing loans within the SPE which fund the
residential mortgage securitisation programme. To minimise its
exposure to increases in cost of funding, the Group only lends
monies on variable interest rate term. Should there be changes
in pricing the Group has the option to review its position and
offset those costs by passing on interest rate changes to the
end customer.
ANNUAL REPORT2017 44
5) Financial risk management
(continued)
( d ) Market risk (continued)
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 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 review and report on the credit ratings of
those insurers as well as the Company’s maximum cash flow
requirements should there be any adverse movement in those
credit ratings.
( e ) Capital management
The Board’s policy is to maintain a strong capital base so as to
maintain investor, creditor and market confidence and to sustain
future development of the business. The Board of Directors
monitors the return on capital, which the Group defines as net
operating income divided by total shareholders’ equity and
aims to maintain a capital structure that ensures the lowest cost
of capital available to the Group. The Board of Directors also
monitors the level of dividends to ordinary shareholders.
The Group’s capital management, amongst other things,
aims to ensure that it meets financial covenants attached to
the interest-bearing loans and borrowings that define capital
structure requirements. Breaches in meeting the financial
covenants would see the Group repaying the shortfall sufficient
to the lenders satisfaction, or alternatively provide additional
security or cash equity. There have been no breaches in
the financial covenants of any interest-bearing loans and
borrowings in the current period.
The SPEs are subject to the external requirements imposed by
the warehouse facility providers. The terms of the warehouse
facilities provide a mechanism for managing the lending
activities of the SPE, and ensure that all outstanding principal
and interest is paid at the end of each reporting period.
Similarly, the SPE-RMBS are subject to external requirements
imposed by the bondholders and the rating agencies. The
terms of the RMBS transactions provide a mechanism for
ensuring that all outstanding principal and interest is paid at
the end of each reporting period. There were no breaches in
the current period.
AFG Securities Pty Ltd 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 2017.
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 contracted brokers with administrative
and infrastructure support as well as access to a panel of
lenders.
The Group receives two types of commission payments on
loans originated through its network;
♦ 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
contracted brokers and are generating trail income.
AFG Home Loans
AFGHL offers the Group’s branded mortgage products,
funded by third party wholesale funding providers (white label
products) or AFG Securities mortgages (Securitised loans
issued by AFG Securities Pty Ltd) that are distributed through
the Group’s distribution network. AFGHL sits on the Group’s
panel of lenders alongside around 45 other residential 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 loans funded
by its securitisation programme
Segment results that are reported to the Board of Directors
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 don’t 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 below.
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 REPORT2017Notes to the Financial Statements (continued) Segment profit/(loss) before income tax
35,999
28,672
(7,715)
Year ended 30 June 2017
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
Year ended 30 June 2016
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
45
AFG Wholesale
Mortgage Broking
AFG Home Loans Other / Unallocated
Total
492,506
22,558
3,857
-
518,921
92,224
-
-
248
92,472
1,371
(22,558)
12,843
2,029
(6,315)
586,101
-
16,700
2,277
605,078
56,956
(17,852)
39,104
528,928
-
15,345
2,708
546,981
32,926
(10,282)
22,644
720,439
713,264
1,228,925
1,184,995
67,862
11,672
2,017,226
1,909,931
(182)
-
(15)
-
(747)
(12)
(944)
(12)
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
(3,288)
651,331
646,430
1,128,774
1,084,750
50,216
10,621
1,830,321
1,741,801
(134)
-
(15)
(34)
(951)
-
(1,100)
(34)
Segment profit before income tax
33,950
6,564
(7,588)
ANNUAL REPORT2017 46
7) Revenue
In thousands of AUD
Commissions
Interest on commission income receivable
Mortgage management services
Securitisation transaction fees
2017
491,358
47,277
305
819
2016
430,465
50,473
566
827
539,759
482,331
Revenue includes the interest income of $47,277k (2016: $50,473k) from the unwinding of the discount in relation to the net present
value of future trailing commission receivable.
8) Other income
In thousands of AUD
Sponsorship and incentive income
Software licence fees
Professional indemnity insurance
Fees for services
Other
9) 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
10) Employee costs
In thousands of AUD
Wages and salaries
Other associated personnel expenses
Change in liabilities for employee benefits
Share-based payment transactions
Superannuation
=
2017
7,544
2,413
2,163
3,904
676
2016
7,357
2,013
1,911
3,328
736
16,700
15,345
Note
2017
5,014
1,972
3,285
400
10
25,285
944
1,975
80
-
2016
4,046
1,481
3,238
414
24,491
1,100
1,940
169
2
38,955
36,881
2017
16,910
6,100
189
311
1,775
25,285
2016
16,567
6,077
25
88
1,734
24,491
ANNUAL REPORT2017Notes to the Financial Statements (continued) 11) 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
Other non-audit services
12) Finance income and expenses
In thousands of AUD
Recognised in profit or loss
Interest income on loans and receivables
Interest income on bank deposits
Net foreign exchange (loss) / 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
Finance expense
47
2017
2016
203,500
203,500
36,750
68,000
104,750
182,700
182,700
91,350
33,000
124,350
2017
2016
202
2,111
(36)
2,277
(2)
(12)
(14)
269
2,396
43
2,708
(1)
(33)
(34)
Net finance income and expense
2,263
2,674
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
13) 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 recognised in other comprehensive income
Unrealised gain/(loss) on available-for-sale financial assets
Income tax charged directly to other comprehensive income
2,314
(12)
2,665
(33)
2017
2016
11,824
(12)
6,040
-
17,852
10,561
(1,014)
(285)
1,020
10,282
2017
2016
-
-
-
-
ANNUAL REPORT2017 48
13) Income tax (continued)
( a ) Current tax expense (continued)
Numerical reconciliation between tax expense and pre-tax accounting profit
In thousands of AUD
Profit before tax from continuing operations
Income tax using the Company’s domestic tax rate of 30% (2016: 30%)
Non-deductible expenses
Over provision in prior periods
Other adjustments
2017
56,956
17,087
952
(12)
(175)
17,852
2016
32,926
9,879
539
(1,014)
878
10,282
( b ) Current tax assets and liabilities
The current tax liability for the Group of $1,249k (2016: $1,060k current tax asset) represents the amount of income taxes payable in
respect of current and prior financial years.
( c ) Deferred tax assets and liabilities
Deferred tax assets and liabilities are attributable to the following:
In thousands of AUD
Assets
Liabilities
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
Net tax liabilities
214,514
188,451
214,514
2017
2016
-
-
-
-
(1,714)
(1,098)
(192,147)
(171,848)
(1,626)
(2,593)
2017
455
2016
431
-
-
-
-
-
54
(195,487)
(175,539)
214,969
188,936
195,487
175,539
(195,487)
(175,539)
Net
2017
455
(1,714)
2016
431
188,451
(1,098)
(192,147)
(171,848)
(1,626)
19,482
-
(2,539)
13,397
-
-
-
19,482
13,397
19,482
13,397
14) Cash and cash equivalents
( a ) Cash and cash equivalents
In thousands of AUD
Cash at bank
Short term deposits
Unrestricted cash
Cash collections accounts1
Restricted cash2
Restricted cash
Cash and cash equivalents
Cash and cash equivalents in the Statement of Cash Flows
2017
89,559
1,276
90,835
27,599
6,367
33,966
124,801
124,801
2016
83,906
2,039
85,945
36,423
8,297
44,720
130,665
130,665
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, liquidity reserve account and cash provided in trust by the warehouse providers to fund pending
settlements.
The effective interest rate on short term deposits in 2017 was 2.14% (2016: 2.22%). The deposits had an average maturity of 85 days
(2016: 91 days).
The Group’s exposure to interest rate risk and a sensitivity analysis for financial assets and liabilities are disclosed in Note 28.
ANNUAL REPORT2017Notes to the Financial Statements (continued) ( b ) Reconciliation of cash flows from operating activities
In thousands of AUD
Cash flows from operating activities
Profit for the period from continuing operations
Adjustments to reconcile the profit to net cash flows:
Income tax expense from continuing operations
Depreciation and amortisation
Net interest income from investing activities
Expense recognised in respect of equity-settled share-based payments
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 in receivables and prepayments
Increase in trade and other payables
(Decrease) in deferred income
Increase in employee entitlements
Increase in provisions
Cash generated from operations
Income tax paid
Net cash generated by operating activities
49
2017
2016
Restated
39,104
22,644
17,852
944
(2,314)
298
(88,531)
68,590
115
36,058
1,315
819
(2,177)
733
1,346
38,094
(11,577)
26,517
10,282
1,100
(2,664)
88
(56,326)
56,148
64
31,336
1,553
10,454
(45)
658
30
43,986
(7,780)
36,206
During the current year, there has been a change in accounting policy in relation to the presentation of the following cash flows related
to the securitisation business:
♦ (Repayments of)/proceeds from warehouse facilities
♦ (Repayments to)/proceeds from bondholders
♦ Loans advanced to (repayments of borrowings) from borrowers
These cashflows, which have previously been presented within operating activities, are now presented within financing and investing
activities in the cash flow statement. This change in accounting policy has been made to align the Group’s presentation more closely
to industry practice and provide more relevant information.
15) 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
2017
909
98
1,007
152,850
1,863
155,720
581,860
581,860
737,580
2016
273
96
369
132,350
3,511
136,230
513,829
513,829
650,059
1 See fair value determinations for trailing commissions – Note 4.
The Company has adopted an actuarial model to estimate future trail revenue relating to AFGHL white label products in FY17. This has
impacted NPAT for FY17 and resulted in the Company recognising a trail revenue receivable for the AFGHL white label programme on
the balance sheet. The recognition of the value of future trail receivable on the AFGHL white label programme is consistent with the
Company’s existing accounting treatment of the trail book from the AFG residential business which has been assessed by actuaries
for many years.
Trade and other receivables are shown net of a provision for impairment of $4k (2016: $6k).
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 28.
ANNUAL REPORT2017 50
16) Trade and other payables
In thousands of AUD
Current
Note
2017
2016
Present value of future trailing commissions payable
4
Other trade payables
Non-trade payables and accrued expenses
Non-current
Net present value of future trailing commissions payable
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 28.
17) Loans and advances
In thousands of AUD
Current
Securitised assets1
Other secured loans2
Capitalised origination cost
Non-current
Securitised assets1
Capitalised origination cost
Other secured loans2
Less: Provision for impairment
135,285
56,676
3,444
195,405
520,398
520,398
119,951
57,937
1,083
178,971
467,142
467,142
715,803
646,113
2017
2016
297,613
180,522
1,268
235
299,116
1,311
-
181,833
851,472
862,956
690
1,134
(241)
1,267
554
(198)
853,055
864,579
1,152,171
1,046,412
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 Brokers secured over future trailing commissions’ payable to the broker and in some cases personal guarantees.
Interest is charged on average at 10.81% p.a. (2016: 10.65% p.a.).
b) Loan and advances to McCabe St Limited are secured over its land and assets. Interest is charged on average at 3.99% p.a. (2016: 4.37% 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 $241k
(2016: $198k).
During the financial year, new loans issued in the Group’s securitisation programme were $385,047k (2016: $297,294k).
The Group’s exposure to credit, currency and interest rate risks related to loans and advances is disclosed in Note 28.
ANNUAL REPORT2017Notes to the Financial Statements (continued) 18) 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
AFG 2016-1 Trust
New Zealand Finance Group Ltd
AFG Home Loans Pty Ltd
Venture Lending Pty Ltd
51
Country of incorporation
Ownership interest
2017
2016
Australia
Australia
Australia
Australia
Australia
Australia
Australia
Australia
Australia
New Zealand
Australia
Australia
100
100
100
100
100
100
100
100
100
100
100
51
100
100
100
100
100
100
100
100
-
100
100
51
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.
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 61%
(2016: 81%) 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 59% (2016: 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
♦ AFG 2016-1
2017
7,414
1,500
750
500
400
2016
6,611
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 or RMBS term structure 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).
ANNUAL REPORT2017 52
19) Property, plant and equipment
In thousands of AUD
Consolidated
Balance at 1 July 2015
Acquisitions
Disposals and write-offs
Depreciation
Balance at 30 June 2016
Balance at 1 July 2016
Acquisitions
Disposals and write-offs
Depreciation
Balance at 30 June 2017
Plant and
equipment
Fixtures and
fittings
320
171
(1)
(221)
269
269
105
(23)
(141)
210
2,678
-
(1)
(567)
2,110
2,110
199
-
(621)
1,688
Total
2,998
171
(2)
(788)
2,379
2,379
304
(23)
(762)
1,898
20) 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 28.
In thousands of AUD
Current
Securitisation warehouse facilities
Loans from funders
Secured bond issues
Non-current
Secured bond issues
Loans from funders
2017
2016
648,541
697,446
84
191,191
839,816
324,636
26
231
65,279
762,956
309,123
136
324,662
309,259
1,164,478
1,072,215
Terms and debt repayment schedule
Terms and conditions of outstanding loans were as follows:
2017
2016
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
2.73%
2017
648,541
648,541
2.94%
2017
697,446
697,446
Secured bond issues
3.02% 2018-2019
513,064
515,826
3.41% 2018-2019
374,586
374,402
Loans from funders
6.00% 2018-2020
111
111
6.25% 2018-2020
367
367
1,161,716
1,164,478
1,072,399
1,072,215
ANNUAL REPORT2017Notes to the Financial Statements (continued) 53
( 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 $2,165,326k
(2016: $1,937,380k).
( 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 or equal to 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 $83,150k (2016: $75,364k). The interest is
recognised at an effective rate 2.73% (2016: 2.94%).
The Group has secured an extension to the term of the NAB residential warehouse facilities that were due to expire, to 11 December
2017. The ANZ residential warehouse facilities that were due to expire have been extended to 14 December 2017. The warehouse term
is for a shorter period due to new warehousing arrangements during the first half of FY2018. This is in preparation for APS 120 which
comes into effect on 1 January 2018.
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 $10,323k (2016: $10,711k).
Additional credit support includes subordinated credit enhancement held by the Company of $7,414k (2016: $5,907k).
( 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 weighted effective rate of 3.02% (2016: 3.41%).
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 $3,200k
(2016: $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 6.00% (2016: 6.25%).
ANNUAL REPORT2017 54
20) Interest-bearing liabilities (continued)
( c ) 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.
21) 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
22) Provisions
In thousands of AUD
Provision for Clawbacks*
Other
*Net provision for Clawbacks on settlements within the period raised.
2017
200
276
476
82
276
358
118
-
118
2016
220
276
496
-
276
276
220
-
220
2017
2016
2,031
1,312
1,141
4,484
75
75
1,480
1,199
1,006
3,685
133
133
4,559
3,818
2017
1,450
217
1,667
2016
-
322
322
ANNUAL REPORT2017Notes to the Financial Statements (continued) 23) Deferred income
In thousands of AUD
Current
Sponsorship income
Lease incentives
Unearned professional indemnity insurance
24) 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
55
2017
2016
1,669
577
447
2,693
2017
2,168
4,143
6,311
2,862
794
1,220
4,876
2016
2,042
6,709
8,751
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 2017 $1,975k was recognised as an expense in the Consolidated Statement of Profit or Loss
and Other Comprehensive Income in respect of operating leases (2016: $1,940k).
25) Capital and reserves
( a ) Share capital
The Company
On issue at 1 July
Issued for cash or nil consideration
On issue at 30 June – fully paid
Share Capital
($’000)
Ordinary shares
($’000)
2017
43,541
-
43,541
2016
43,541
-
43,541
2017
214,813
-
2016
214,813
-
214,813
214,813
The Company does not have authorised capital or par value in respect of its issued shares. All issued shares are fully paid and rank
equally with regard to the Company’s residual assets.
The holders of ordinary shares are entitled to receive dividends as declared from time to time and are entitled to one vote per share at
meetings of the Company.
( b ) Translation reserve
The translation reserve comprises all foreign exchange differences arising from the translation of the Financial Statements of foreign
operations.
( c ) Fair value reserve
The fair value reserve comprises the cumulative net change in fair value of available-for-sale financial assets until the investments are
derecognised or impaired.
ANNUAL REPORT2017 56
25) Capital and reserves (continued)
( d ) Dividends
Dividends paid in the current year by the Group are:
Cents per share
Total amount
($’000)
Franked /
unfranked
Date of payment
2017
Final 2016 ordinary
1st interim 2017 ordinary
2016
1st interim 2016 ordinary
Proposed and unrecognised as a liability:
2017
Final 2017 ordinary
5.4
4.2
3.0
5.5
11,600
9,022
20,622
6,444
6,444
11,814
11,814
Dividends declared or paid during the year or after 30 June 2017 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
100%
100%
30/9/16
7/3/17
100%
29/3/16
100%
28/09/2017
2017
20,998
48,995
2016
18,285
42,664
69,993
60,949
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 $69,993k (2016: $60,949k)
franking credits.
26) 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 Company
Weighted average number of ordinary shares for basic EPS (thousands)
Effect of dilution:
Performance rights
Weighted average number of ordinary shares adjusted for the effect of dilution
30 June 2017
30 June 2016
39,053
22,667
Thousands
Thousands
214,813
214,813
593
215,406
-
214,813
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.
ANNUAL REPORT2017Notes to the Financial Statements (continued) 57
27) Share based payments
( a ) 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 plan 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 the plan are subject to instalment
vesting over a three-year period. The rights are subject to total shareholder return (TSR) and Earnings per share (EPS) performance
hurdles in addition to continuous service vesting conditions. 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. Refer to
section 3.5 of the remuneration report for further detail.
In any event, any rights that remain unvested will lapse immediately after the end of the relevant vesting period.
( b ) Executive Rights plan (Long-Term Incentive Plan) (continued)
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
1/07/2016
30/06/2019
-
593,136
-
-
-
593,136
28) 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
Brokers
Other
Carrying amount
2017
2016
735,291
646,346
446
5
72
34
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 $734,710k (2016: $646,179k).
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.
ANNUAL REPORT2017 58
28) Financial instruments (continued)
( a ) Credit risk (continued)
( i ) Trade and other receivables (continued)
In thousands of AUD
Standard & Poor’s Credit rating
AA+
AA-
A+
A
A-
BBB+
BBB
BBB-
Not rated
Current
Non-Current
Current
Non-Current
2017
2017
2016
2016
12
116,517
-
9,144
8,108
2,044
515
1,508
15,002
152,850
47
15
60
443,550
99,345
385,692
-
34,807
30,866
7,782
1,962
5,742
57,104
581,860
1,525
7,068
1,828
92
656
600
21,221
132,350
5,922
27,440
7,096
359
2,549
2,328
82,383
513,829
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
2017
285
29
22
459
795
Impairment
allowance
2017
-
-
(3)
(2)
(5)
Gross
2016
251
114
2
2
369
Impairment
allowance
2016
-
(2)
(2)
(2)
(6)
During the year ended 30 June 2017 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 amounts 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 this point, the amount is considered irrecoverable and is written off against the
receivable account.
During 2017 and 2016 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
Brokers
Carrying amount
2017
2016
1,149,970
1,043,280
2,201
1,152,171
3,132
1,046,412
ANNUAL REPORT2017Notes to the Financial Statements (continued) 59
Residential mortgage borrowers
The Group minimises credit risk by obtaining security over residential mortgage property for each loan. The estimated value of
collateral held at balance date was $2,165,326k (2016: $1,937,380k). During the year ended 30 June 2017 the Group has taken
possession of two additional residential properties that were held as security for loans issued by the Group. The carrying amount of
the repossessed residential property was $752k (2016: $340k). Two properties have 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.
The table below summarises the Group exposure to residential mortgage borrowers by LVR, with the valuation used determined as at
the time of settlement of the individual loan.
In thousands of AUD
Loan to value ratio
Greater than 95%
Between 90%-95%
Between 80%-90%
Less than 80%
Carrying amount
2017
2016
2,393
55,042
181,976
909,675
1,149,086
1,823
71,026
185,624
785,005
1,043,478
The Group exposure to credit risk by geographic region at reporting date is limited to Australia.
Impairment Losses
The aging of the Group’s loans and advances at the reporting date was:
In thousands of AUD
Not past due
Past due 31-120 days
Past due 121 days to one year
Past due more than one year
Gross
2017
1,143,899
3,519
1,191
477
1,149,086
Impairment
allowance
2017
-
-
-
(477)
(477)
Gross
2016
1,042,557
3,143
712
198
1,046,610
Impairment
allowance
2016
-
-
-
(198)
(198)
The impairment loss provision as at 30 June 2017 of $477k (2016: $198k) 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 securitised loans at reporting date is the carrying amount of subordinated
notes.
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.
The Group’s maximum exposure is the loss of future interest income on its Class C notes investment.
No impairment loss was recognised during 2017 (2016: Nil).
Other secured loans
The Group has minimal exposure to credit risk for loans made during the year.
No impairment loss was recognised during 2017 (2016: Nil).
ANNUAL REPORT2017 60
28) Financial instruments (continued)
( 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 20, 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.
2017
In thousands of AUD
Carrying
amount
Contractual
cash flows
6 months
or less
6-12
months
1-2 years
2-5 years
More than
5 years
Securitisation warehouse facilities
648,541
655,955
655,955
-
-
-
Secured bond issues
Loans from funders
515,827
531,253
68,169
127,096
136,596
199,392
111
114
56
30
25
3
-
-
-
Net present value of future trailing
commissions payable
655,683
796,078
90,408
83,186
145,554
293,515
183,415
Trade and other payables
60,120
60,120
60,120
-
-
-
-
1,880,282
2,043,520
874,708
210,312
282,175
492,910
183,415
2016
In thousands of AUD
Carrying
amount
Contractual
cash flows
6 months
or less
6-12
months
1-2 years
2-5 years
More than
5 years
Securitisation warehouse facilities
697,446
707,698
579,833
127,865
-
-
Secured bond issues
Loans from funders
374,402
392,392
33,180
33,180
131,052
194,980
368
386
137
104
108
37
-
-
-
Net present value of future trailing
commissions payable
587,093
726,255
82,251
75,450
131,517
268,594
168,443
Trade and other payables
59,020
59,020
59,020
-
-
-
-
1,718,329
1,885,751
754,421
236,599
262,677
463,611
168,443
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.
2016
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 27 July 2017, the Group secured an extension to the term of the NAB residential warehouse facility that was due to expire on 10
August 2017. 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 11 December 2017.
On 4 August 2017, the Group secured an extension to the term of the ANZ residential warehouse facility that was due to expire on 14
August 2017. 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 December 2017.
The warehouse term is for a shorter period due to new warehousing arrangements during the first half of FY2018. This is in
preparation for APS 120 which comes into effect on 1 January 2018.
ANNUAL REPORT2017Notes to the Financial Statements (continued) 61
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 16.
( 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 instruments1
Financial assets
Financial liabilities
Variable rate instruments
Financial assets
Financial liabilities
Carrying amount
2017
2016
734,710
655,683
79,027
1,276,738
1,164,478
112,260
646,179
587,093
59,086
1,177,077
1,072,215
104,862
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.
1 Discount rate for trail commission receivable and payable is fixed for the life of the loan.
Cash flow sensitivity analysis for variable rate instruments
Due to the market conditions existing at 30 June 2017, 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 2016.
Effect in thousands of AUD
100bp increase
100bp decrease
100bp increase
100bp decrease
After tax profit
Equity
30 June 2017
Variable rate financial assets
Variable rate financial liabilities
Cash flow sensitivity (net)
30 June 2016
Variable rate financial assets
Variable rate financial liabilities
Cash flow sensitivity (net)
8,922
4,541
4,381
8,226
4,885
3,341
(8,922)
(4,541)
(4,381)
(8,226)
(4,885)
(3,341)
8,922
4,541
4,381
8,226
4,885
3,341
(8,922)
(4,541)
(4,381)
(8,226)
(4,885)
(3,341)
ANNUAL REPORT2017 62
28) Financial instruments (continued)
( c ) Market risk (continued)
( 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 28 (d) for more details.
Sensitivity analysis
Management have engaged the use of actuaries for the purposes of reviewing the run-off rate of the loans under management.
Management does not expect the run-off rate to change in excess of 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
2017
2016
After tax profit
Securitised assets
+5%
(2,939)
-5%
3,122
+5%
(2,072)
-5%
2,192
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 2017 a $2k profit in the fair value of financial assets designated at fair value through profit or loss was recognised in the profit
or loss (2016: $1k).
( 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.
( 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).
ANNUAL REPORT2017Notes to the Financial Statements (continued) 63
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
Valuation technique(s)
and key input(s)
30 June 2017
30 June 2016
Financial assets designated at fair value through
profit or loss and available-for-sale financial assets
$31
$49
Level 1
Quoted bid prices in an
active market
No change in fair value hierarchy levels in 2017.
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
if the respective loans are in good order and not in default. The Group is entitled to the trailing commissions and the Group also
makes trailing commission payments to Brokers when trailing commission is received from lenders. Trail commissions are actuarially
assessed on future cashflow based on a number of assumptions including estimated loan life, discount rate, payout ratio and income
rate. Refer to Note 3 for the accounting policies regarding trail commissions receivables and payables.
Effect in thousands of AUD
Carrying amount
Fair value Carrying amount
Fair value
30 June 2017
30 June 2016
Financial assets
Future Trailing commission receivables
734,710
768,604
646,179
688,898
Financial liabilities
Future Trailing commission payables
655,683
685,316
587,093
624,857
The fair value of trailing commission receivable from lenders and the corresponding payable to brokers is determined by using a
discounted cash flow valuation. These calculations require the use of assumptions which are determined by the management, with
the assistance of external actuaries, 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
brokers at the reporting date is summarised in the following table:
Average loan life
Discount rate per annum1
Percentage paid to brokers2
30 June 2017
30 June 2016
Between 3.1 and 5.0 years
Between 4.3 and 5.2 years
Between 5% and 13.5%
Between 85% and 93%
Between 5% and 13.5%
Between 85% and 93%
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 brokers is fixed by the terms of their respective agreement with the Group. As a consequence, management does not expect
changes to the percentage paid to brokers to be reasonably possible.
ANNUAL REPORT2017 64
29) Parent entity
Throughout the financial year ending 30 June 2017, 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
2017
2016
19,259
2
19,261
17,266
2
17,268
2017
2016
235,504
819,415
202,439
737,157
43,542
298
38,418
82,258
223,077
750,402
186,288
667,070
43,542
8
39,782
83,332
See Notes 30 and 31 for the parent entity capital and other commitments, and contingencies.
Refer to Note 20 (c) for the parent entity’s guarantees.
30) Capital and other commitments
There are no capital commitments as at the reporting date.
31) 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 REPORT2017Notes to the Financial Statements (continued) 65
32) Related parties
( 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:
( i ) During the year the Group made payments to Genworth Mortgage Insurance Australia Limited, one of our providers of Lenders
Mortgage Insurance (LMI). Mr T. 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 $427k (2016: $1,044k). 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 $253k (2016: $207k). 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 $698k (2016: $724k). 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 2015, 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 and McCabe St. 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 agreement was active for the full 2017 financial year and a total of
$120k (2016: $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 arm’s length rates from an investee of EPG,
Qube Havelock Street Development Pty Ltd (Qube). During the 2017 financial year rent of $1,567k has been paid to Qube (2016:
$1,539k). The shared services agreement will be ending when EPG moves out of the AFG Office in September 2017. In addition
to the above McCabe Street has an outstanding loan owing to AFG amounting to $201k (2016: $193k), this loan is on commercial
terms at arms length.
( 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.
33) Subsequent events
On 27 July 2017, the Group secured an extension to the term of the NAB residential warehouse facility that was due to expire on 10
August 2017. 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 AFG. The maturity date has been reset to 11 December 2017.
On 4 August 2017, the Group secured an extension to the term of the ANZ residential warehouse facility that was due to expire on 14
August 2017. 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 AFG. The maturity date has been reset to 14 December 2017.
The warehouse term is for a shorter period due to new warehousing arrangements during the first half of FY2018. This is in
preparation for APS 120 which comes into effect on 1 January 2018.
On 24 August 2017, the Directors recommended the payment of a dividend of 5.5 cents per fully paid ordinary share, fully franked
based on tax paid at 30%. The dividend has a record date of 4 September 2017 and a payment date of 28 September 2017. The
aggregate amount of the proposed dividend expected to be paid out of retained earnings at 30 June 2017 is $11,814k. The financial
effect of these dividends has not been brought to account in the financial statements for the year ended 30 June 2017.
On 7 September 2017, AFG successfully funded a $350m RMBS term out in the new 2017-1 Trust which will be consolidated into the
AFG Group as at this date.
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.
ANNUAL REPORT2017 66
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 2017 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 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 21 September 2017.
ANNUAL REPORT2017 68
Independent Audit Report
to the members of Australian Finance Group Limited
Deloitte Touche Tohmatsu
ABN 74 490 121 060
Tower 2, Brookfield Place
123 St Georges Terrace
Perth WA 6000
GPO Box A46
Perth WA 6837 Australia
Tel: +61 8 9365 7000
Fax: +61 8 9365 7001
www.deloitte.com.au
Independent Auditor’s Report to the members
of Australian Finance Group Limited
Report on the Audit of the Financial Report
Opinion
We have audited the financial report of Australian Finance Group Limited (the “Entity”) and its
subsidiaries (the “Group”) which comprises the consolidated statement of financial position as at
30 June 2017, the consolidated statement of profit or loss and other comprehensive income, the
consolidated statement of changes in equity and the consolidated statement of cash flows for the
year then ended, and notes to the financial statements, including a summary of significant
accounting policies and other explanatory information, and the directors’ declaration.
In our opinion, the accompanying financial report of the Group is in accordance with the Corporations
Act 2001, including:
(i)
giving a true and fair view of the Group’s financial position as at 30 June 2017 and of its
financial performance for the year then ended; and
(ii)
complying with Australian Accounting Standards and the Corporations Regulations 2001.
Basis for Opinion
We conducted our audit in accordance with Australian Auditing Standards. Our responsibilities under
those standards are further described in the Auditor’s Responsibilities for the Audit of the Financial
Report section of our report. We are independent of the Group in accordance with the auditor
independence requirements of the Corporations Act 2001 and the ethical requirements of the
Accounting Professional and Ethical Standards Board’s APES 110 Code of Ethics for Professional
Accountants (the Code) that are relevant to our audit of the financial report in Australia. We have
also fulfilled our other ethical responsibilities in accordance with the Code.
We confirm that the independence declaration required by the Corporations Act 2001, which has
been given to the directors of the Entity, would be in the same terms if given to the directors as at
the time of this auditor’s report.
We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis
for our opinion.
Key Audit Matters
Key audit matters are those matters that, in our professional judgement, were of most significance
in our audit of the financial report for the current period. These matters were addressed in the
context of our audit of the financial report as a whole, and in forming our opinion thereon, and we
do not provide a separate opinion on these matters.
Liability limited by a scheme approved under Professional Standards Legislation.
Member of Deloitte Touche Tohmatsu Limited
ANNUAL REPORT2017
69
Key Audit Matter
Trail commission receivable and
payable
As at 30 June 2017 the Group has
recognised trail commissions receivable of
$734.7 million (2016: $646.2 million) and
trail commissions payable of $655.7 million
(2016: $587.1 million) as disclosed in notes
15 and 16.
As disclosed in note 28, the determination
of the fair value of the trail commissions
receivable and payable at initial recognition
and the subsequent measurement at
amortised cost requires management to
exercise significant judgements including:
(cid:31)
(cid:31)
(cid:31)
the estimation of the discount rate,
the percentage paid to members,
and
run off rate assumptions.
How the scope of our audit responded to the
Key Audit Matter
Our procedures included, but were not limited to:
(cid:31) Evaluating the key controls and process
management have in place to determine the
trail commission receivable and payable;
(cid:31) Challenging the reasonableness of
management’s assumptions in the
determination of the trail commission
receivable and payable based on industry
comparative run off rates, market observable
inputs for the discount rate and agreed
percentage paid to members to member
agreements;
(cid:31) Comparing previously forecast trail
commission income and expense by
management to the actual results to assess
historical accuracy of managements
estimates;
(cid:31) Testing on a sample basis management’s
model for mathematical accuracy; and
(cid:31) Assessing the appropriateness of the prior
and current year accounting treatment of
commission by considering the availability of
historical data and the behaviour of the white
label loan products.
We also assessed the appropriateness of the
related disclosures included in note 28 to the
financial statements.
Other Information
The directors are responsible for the other information. The other information comprises the
information included in the Group’s annual report for the year ended 30 June 2017, but does not
include the financial report and our auditor’s report thereon.
Our opinion on the financial report does not cover the other information and we do not express any
form of assurance conclusion thereon.
In connection with our audit of the financial report, our responsibility is to read the other information
and, in doing so, consider whether the other information is materially inconsistent with the financial
report or our knowledge obtained in the audit, or otherwise appears to be materially misstated. If,
based on the work we have performed, we conclude that there is a material misstatement of this
other information, we are required to report that fact. We have nothing to report in this regard.
Responsibilities of the Directors for the Financial Report
The directors of the Entity are responsible for the preparation of the financial report that gives a true
and fair view in accordance with Australian Accounting Standards and the Corporations Act 2001
and for such internal control as the directors determine is necessary to enable the preparation of
the financial report that gives a true and fair view and is free from material misstatement, whether
due to fraud or error.
In preparing the financial report, the directors are responsible for assessing the ability of the Group
to continue as a going concern, disclosing, as applicable, matters related to going concern and using
the going concern basis of accounting unless the directors either intend to liquidate the
Group or to cease operations, or has no realistic alternative but to do so.
Auditor’s Responsibilities for the Audit of the Financial Report
ANNUAL REPORT2017
70
Independent Audit Report (continued)
to the members of Australian Finance Group Limited
Our objectives are to obtain reasonable assurance about whether the financial report as a whole is
free from material misstatement, whether due to fraud or error, and to issue an auditor’s report that
includes our opinion. Reasonable assurance is a high level of assurance, but is not a guarantee that
an audit conducted in accordance with the Australian Auditing Standards will always detect a material
misstatement when it exists. Misstatements can arise from fraud or error and are considered
material if, individually or in the aggregate, they could reasonably be expected to influence the
economic decisions of users taken on the basis of this financial report.
As part of an audit in accordance with the Australian Auditing Standards, we exercise professional
judgement and maintain professional scepticism throughout the audit. We also:
(cid:31)
Identify and assess the risks of material misstatement of the financial report, whether due
to fraud or error, design and perform audit procedures responsive to those risks, and obtain
audit evidence that is sufficient and appropriate to provide a basis for our opinion. The risk
of not detecting a material misstatement resulting from fraud is higher than for one resulting
from error, as
intentional omissions,
involve collusion,
fraud may
misrepresentations, or the override of internal control.
forgery,
(cid:31) Obtain an understanding of internal control relevant to the audit in order to design audit
procedures that are appropriate in the circumstances, but not for the purpose of expressing
an opinion on the effectiveness of the Group’s internal control.
(cid:31) Evaluate the appropriateness of accounting policies used and the reasonableness of
accounting estimates and related disclosures made by the directors.
(cid:31) Conclude on the appropriateness of the directors’ use of the going concern basis of
accounting and, based on the audit evidence obtained, whether a material uncertainty exists
related to events or conditions that may cast significant doubt on the Group’s ability to
continue as a going concern. If we conclude that a material uncertainty exists, we are
required to draw attention in our auditor’s report to the related disclosures in the financial
report or, if such disclosures are inadequate, to modify our opinion. Our conclusions are
based on the audit evidence obtained up to the date of our auditor’s report. However, future
events or conditions may cause the Group to cease to continue as a going concern.
(cid:31) Evaluate the overall presentation, structure and content of the financial report, including the
disclosures, and whether the financial report represents the underlying transactions and
events in a manner that achieves fair presentation.
(cid:31) Obtain sufficient appropriate audit evidence regarding the financial information of the
entities or business activities within the Group to express an opinion on the financial report.
We are responsible for the direction, supervision and performance of the Group’s audit. We
remain solely responsible for our audit opinion.
We communicate with the directors regarding, among other matters, the planned scope and timing
of the audit and significant audit findings, including any significant deficiencies in internal control
that we identify during our audit.
We also provide the directors with a statement that we have complied with relevant ethical
requirements regarding independence, and to communicate with them all relationships and other
matters that may reasonably be thought to bear on our independence, and where applicable, related
safeguards.
From the matters communicated with the directors, we determine those matters that were of most
significance in the audit of the financial report of the current period and are therefore the key audit
matters. We describe these matters in our auditor’s report unless law or regulation precludes public
disclosure about the matter or when, in extremely rare circumstances, we determine that a matter
should not be communicated in our report because the adverse consequences of doing so would
reasonably be expected to outweigh the public interest benefits of such communication.
ANNUAL REPORT2017
71
Report on the Remuneration Report
Opinion on the Remuneration Report
We have audited the Remuneration Report included in pages 14 to 26 of the directors’ report for the
year ended 30 June 2017.
In our opinion, the Remuneration Report of Australian Finance Group Limited, for the year ended 30
June 3017, complies with section 300A of the Corporations Act 2001.
Responsibilities
The directors of the Entity are responsible for the preparation and presentation of the Remuneration
Report in accordance with section 300A of the Corporations Act 2001. Our responsibility is to express
an opinion on the Remuneration Report, based on our audit conducted in accordance with Australian
Auditing Standards.
DELOITTE TOUCHE TOHMATSU
Leanne Karamfiles
Partner
Chartered Accountants
Perth, 21 September 2017
ANNUAL REPORT2017
72
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 2017.
( a ) Number of holders of equity securities
Ordinary share capital
214,812,671 fully paid ordinary shares are held by 1,946 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
191,317,194
17,846,837
3,808,915
1,735,886
103,839
214,812,671
860
%
No. of holders
89.06
8.31
1.77
0.81
0.05
100
0.00
56
693
468
543
186
1,946
38
%
2.88
35.61
24.05
27.90
9.56
100
1.95
*An unmarketable parcel is considered to be a shareholding of 327 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 2017 of $1.53.
( c ) Substantial shareholders
The names and the number of securities held by substantial shareholders are set out below:
MBM Investments ATF The Brett McKeon Family Trust
MSW Investments ATF The Malcolm Stephen Watkins Family Trust
Commonwealth Bank of Australia and its related bodies corporate
Oceancity Investments ATF The Matthews Family Trust
Banyard Holdings Pty Ltd ATF The B&K McGougan Trust
Henderson Global Investors Limited
Australian Ethical Investment Limited
# Shares % of issues capital
21,179,773
19,602,689
17,529,232
15,000,000
14,788,765
13,663,257
11,182,510
9.86
9.13
8.16
6.98
6.88
6.36
5.21
ANNUAL REPORT2017
73
# Shares % of issues capital
50,537,360
25,447,545
21,179,773
18,886,082
15,950,305
15,000,000
14,788,765
4,577,180
4,469,816
2,863,494
2,000,000
1,668,909
1,450,000
1,126,500
1,110,000
1,000,250
876,574
604,000
505,000
500,000
23.53
11.85
9.86
8.79
7.43
6.98
6.88
2.13
2.08
1.33
0.93
0.78
0.68
0.52
0.52
0.47
0.41
0.28
0.24
0.23
( d ) Twenty largest holders of quoted equity securities
Top holders
HSBC CUSTODY NOMINEES (AUSTRALIA) LIMITED
NATIONAL NOMINEES LIMITED
MBM INVESTMENTS PTY LTD
THE BRETT MCKEON FAMILY
CITICORP NOMINEES PTY LIMITED
BNP PARIBAS NOMS PTY LTD
OCEANCITY INVESTMENTS PTY LTD
THE MATTHEWS FAMILY
BANYARD HOLDINGS PTY LTD
B & K MCGOUGAN
TAL DISTRIBUTION HOLDINGS LIMITED
MRS KAREN JANE MCGOUGAN
JP MORGAN NOMINEES AUSTRALIA LIMITED
ASSURED FINANCIAL SERVICES PTY LTD
ZERO NOMINEES PTY LTD
LISA BEVAN
EDI NOMINEES PTY LTD
ADRIEN MANN (SOUTH PACIFIC) PTY LTD
ANGELA MIDDLETON
CS THIRD NOMINEES PTY LIMTED
BAINPRO NOMINEES PTY LIMITED
DAVID BAILEY
EGMONT PTY LTD
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 REPORT2017 74
Corporate Directory
Directors
Anthony (Tony) Gill
Non-Executive Chairman
Brett McKeon
Executive Director
Malcolm Watkins
Executive Director
Company Secretary
Lisa Bevan
Company Secretary
Notice of AGM
The annual general meeting of
Australian Finance Group Limited will
be held on Friday 24 November 2017 at
9.00am WST at Level 4, 100 Havelock
Street, West Perth WA 6005.
Kevin Matthews
Non-Executive Director
Craig Carter
Non-Executive Director
Melanie Kiely
Non-Executive Director
Jane Muirsmith
Non-Executive Director
Corporate Office
Share Registry
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
Email
investors@afgonline.com.au
Website
www.afgonline.com.au
Link Market Services
Level 12
680 George Street
Sydney NSW 2000
Postal Address
Locked Bag A14
Sydney South NSW 1235
Phone
1300 554 474
Email
registrars@linkmarketservices.com.au
Stock Listing
Australian Finance Group Limited’s
ordinary shares are listed on the
Australian Securities Exchange
(ASX code: AFG).
ANNUAL REPORT2017 afgonline.
Level 4, 100 Havelock Street
West Perth WA 6005
T 08 9420 7888
F 08 9420 7858
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