2018
2018 Annual Report
Annual Report
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2018
ANNUAL REPORT
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Annual Report 2018
Contents
10
35
36
Directors’ Report
Auditor’s Independence Declaration
Consolidated Statement of Financial Position
37 Consolidated Statement of Profit or Loss and Other Comprehensive Income
38 Statement of Changes in Equity
39 Statement of Cash Flows
40 Notes to the Financial Statements
85 Directors’ Declaration
87
91
93
Independent Audit Report
Shareholder Information
Corporate Directory
2018 Annual Report
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4
Annual Report
2018
31%
33%
28%
$33.3m
$30.2m
FY16
FY17
FY18
FY17
FY18
AFG normalised return
on equity ROE has
increased to 33%
Normalised NPAT
up 10% to $33.3M
Non-Majors
41%
59%
Majors
41% of flows to non-majors
Q4 2018
up from 35% Q4 2017
Broker numbers grew to over
2,950 nationally
up from 2,875 at
30 June 2017
FY2018 Residential
settlements of
$35.3B
with trail book now up 9% to
$137.8B
up to
10,000
customers
per month
209
employees
55%
2018
Annual Report
5
5.4
3.0
FY16
5.5
4.2
FY17
5.7
4.7
FY18
Ordinary Dividends
(cents per share)
Interim
Final
$
Investment of 30.4% (fully
diluted) of Think Tank Group
Pty Ltd for $10.9 million
FY2018 Commercial
settlements of
$2.62B
with the Asset
Finance now up 21% to
$537M
Strong bedrock for AFG Business
AFG Home Loans
settlements have
increased from $2.7B to
$3.2B
4,000 +
individual products
50 +
lenders
1 in 11
Australian residential mortgages are
arranged by an AFG broker
55% of Australian mortgages
are written through a broker
and growing
Broker & consumer advocacy
Responsible, strong and active voice for
consumers. Participating in industry and
regulatory debates and developments.
6
Annual Report 2018
Chairman’s Letter
On behalf of the Board of Directors,
it gives me great pleasure to present
Australian Finance Group (AFG) results
for the 2018 financial year (FY18).
The company continues to successfully deliver
earnings diversification through the core residential
and commercial aggregation business, the higher
margin AFG Home Loans business line, and has
commenced increasing the volume of applications
through its AFG Business platform. AFG’s strategic
focus on the under-served small to medium
enterprise (SME) market also saw the company
acquire a significant stake in leading commercial
SME lender Think Tank Group Pty Ltd (Thinktank).
I am very pleased to report that the company has
delivered significant progress across a number of
key performance measures.
Company update
Strong organic growth and cash flow generation
capabilities of the business has resulted in AFG
reporting net profit after tax (NPAT) of $33.3 million
for FY18. This figure represents an increase of 10.4%
on FY17 normalised profit.
The growth in AFG’s profit is reflective of our resilient
core business with residential settlements of $35.3
billion representing growth of 3% in a benign credit
environment. The earnings diversification strategy
of AFG Home Loans continues to deliver results for
shareholders with settlements of $3.2 billion up 20%
on FY17.
The growth in normalised earnings of 10.4% in FY18
was achieved whilst retaining a robust balance
sheet and strong cash flows. This delivered a
dividend yield of 15.9% (including a 12 cent per share
special dividend) and a healthy 7.4% excluding the
special dividend. In addition, return on equity for
shareholders remains a highlight at 33% in FY18, up
from 31% in FY17.
Tony Gill
Chairman
The strength of AFG’s cash flows and balance
sheet provides the company with significant
financial resilience. AFG’s lack of corporate debt
continues to allow the company to take advantage
of merger and acquisition opportunities should they
present without significant strain on its balance
sheet. Alternatively, it provides for a flexible capital
management policy to be maintained, while still
pursuing strategic opportunities and maintaining a
capital light business model.
AFG continues to generate consistent growth in
sustainable earnings despite challenging regulatory
and economic conditions. This reinforces our
strategy of earnings diversification to maintain an
extensive footprint across the financial services
industry whilst also enjoying the resilience provided
by a $145.4 billion loan book and a distribution
network of over 2,950 brokers across Australia.
Acquisition
A highlight of FY18 has been our 30.4% (fully diluted)
investment in Thinktank. Established in 2005,
Thinktank operates nationally and has a loan book
in excess of $800 million.
This investment provides an opportunity for AFG
to broaden its product offering to the SME sector
via a white label commercial property mortgage.
Thinktank’s penetration of the SME market will also
be enhanced through its access to AFG’s extensive
broker network.
AFG has appointed two Directors to the Thinktank
Board and they are working with Thinktank to
deliver value to both businesses.
2018 Annual Report
7
Looking ahead
For the past three years the financial sector has been
the focus of a number of regulatory reviews. With the
mortgage broking sector being the dominant channel
for the country’s largest asset class, it is unsurprising
the examination of the industry includes brokers.
In this environment AFG is focused on acting with
integrity to enhance competition and drive positive
outcomes for consumers.
An effectively functioning financial system requires
an appropriate balance of regulation and self-
regulation. With this as a cornerstone of our thinking,
AFG will continue to work with industry, regulators
and government and strive to deliver a market
leading value proposition for our brokers within a
sound governance framework.
I would like to thank my fellow board members for
what has been a very productive and successful
year for the company. Each Director has made
significant contributions to the development, growth
and governance of AFG.
Finally, I have once again been enormously impressed
by the effort, dedication and ability of our brokers and
AFG staff to ensure the needs of their customers are
at the forefront of everything they do. AFG’s annual
results are a testament to their hard work, and on
behalf of the board, I thank them for that commitment.
Yours sincerely,
Tony Gill
Chairman
8
Annual Report 2018
CEO’s Report
It is with great pleasure I report on
another successful year for AFG,
my second as Chief Executive Officer.
Our core residential business continues to perform
solidly. Regulatory reviews of the financial sector
and tightened lending conditions have impacted
product mix with investor and refinance volumes
falling, offset by first home buyers and upgraders
increasing in H1 FY18. These trends have been
maintained in the final two quarters of FY18. In
further evidence that the broker channel delivers a
vital distribution base for lenders with and without
the broad branch network possessed by the big
four Banks, the flows of business to the non-major
lenders on AFG’s panel is now at around 40%.
In a competitive environment, AFG now has over
2,950 active brokers, further extending AFG’s
national distribution network providing quality
lending solutions and service to consumers. The
growth was led by NSW and Victoria with weaker
economic conditions evident in other states
reflecting the challenges being experienced by
those economies.
Our diversified funding partners continue to deliver
choice to consumers and we have achieved strong
settlement volumes in our own-branded AFG Home
Loans business. We have five core prime mortgage
funders which will continue to protect the business
against individual lender appetite that may vary over
time. AFG Home Loans has now grown to service
more than 19,000 retail customers.
A highlight for our AFG Securities business was the
finalisation and close out of AFG 2013-1 and 2014-1
evidencing AFG’s ability over the entire RMBS
life cycle. All investors in these trusts generated
returns in accordance with the original Information
Memorandum and no losses were experienced
over the life of the investments. In addition, we
launched our residential mortgage backed security
(RMBS) funded AFG Home Loans Link product in
the latter half of FY18. The Link product targets the
growing near prime or ‘used to be prime’ segment
whilst maintaining AFG’s high quality credit decision
making process.
The AFG Securities business grew strongly in the
second half of FY18 to produce full year settlements
David Bailey
CEO
of $509.8 million - up 33%, and lodgements of $1.0
billion - up 50% on FY17.
Our strategic investment in commercial property
lender Thinktank represents the next evolutionary
step for AFG to diversify its earnings base.
Thinktank is a competitive non-major commercial
property lender, with a focus on the sub $3 million
market and has a loan book in excess of $800 billion.
The opportunity to blend Thinktank’s commercial
property lending expertise with AFG’s distribution
and securitisation capability will benefit both
businesses. In connection with the investment, AFG
will distribute a white label Commercial Property
product through our network of brokers. AFG aims
to bring the same discipline to this white label
proposition as we have successfully demonstrated
with our residential white label program.
It will also enable us to deliver further competition
and choice to the SME market place at a time when
it is most needed.
Commercial lending
The AFG Business platform was rolled out with a
soft launch during H1 FY18. Commercial mortgages
are the main offering on the platform as well as
unsecured finance product offerings. We are also
currently piloting asset finance. The panel has
now expanded to 15 lenders with more currently
undergoing development and integration.
The platform allows new-to-commercial brokers to
lodge applications in a common format across all
lenders. It is backed by a new accreditation process
that is as quick and simple as the platform itself. The
platform comes with in-built training materials and
sales tools, plus a dedicated commercial help desk
to support our brokers.
2018 Annual Report
9
Lending environment
Outlook
Australian mortgage brokers continue to win
market share by providing value, choice and
competition to consumers. Brokers fill vital roles
in areas that the banks have vacated: helping
vulnerable customers, regional and remote
borrowers, first home buyers and those with
complex borrowing needs. Providing assistance
in these areas takes a lot of time – time that the
bigger lenders are often not prepared to give.
The past 12 months has seen a significant
examination of the lending sector in Australia.
The government has stated they will consider
the findings of the ASIC Broker Remuneration
Review, the Royal Commission into Misconduct
in the Banking & Financial Services Industry, the
Productivity Commission Inquiry into Competition
in the Australian Financial System and advice from
Treasury before making any decisions that may
affect the sector.
Industry regulator, ASIC, spent considerable time
examining significant amounts of data to evaluate
broker remuneration and did not recommend
wholesale changes to the model. They made a
series of proposals for a way forward.
Our industry has come together, and positive steps
are being taken as we work to address those
proposals to improve consumer outcomes and
confidence in the finance industry.
Treasury, in its submission to the financial services
royal commission, recognised the value brokers
provide to consumers’ understanding and access
to lending, particularly in regional areas. They also
recognised the importance of brokers to non-major
lenders and the downward pressure on home loan
pricing more generally that is delivered by the
broker channel.
Ultimately, the findings of these inquiries should
assist the government to promote a competitive and
stable financial industry that contributes to Australia’s
productivity. The mortgage broking sector provides
vital competition to deliver on that aim.
The broker value proposition is strong, and broker
introduced business now represents over 55% of
the home lending market. Australian consumers and
lenders are clearly comfortable with the channel.
A mortgage broker’s business depends upon
delivering a good outcome for their clients– more
than 70% of their business is referred from existing
customers.
It is pleasing that regulators and government have
acknowledged the important role brokers play in the
lending market. A recent Deloitte Access Economics
report, “The Value of Mortgage Broking”, showed that
the mortgage broking industry contributes $2.9 billion
to the Australian economy each year, supporting
more than 27,100 (full-time equivalent) jobs. The
channel is continuing to grow at a strong rate which
is testament to the value Australian consumers derive
from the use of a broker. With size, however, comes
responsibility and the need to ensure the customer
remains front and centre in everything we do.
With competition and consumers at the core of our
business AFG will continue to work with regulators
to remove any perceived conflicts within the largest
distribution channel in the Australian mortgage
market. We will remain a first-choice partner for
lenders and broking groups as we deliver a market
leading offering whilst maintaining high standards of
compliance and governance.
The industry will continue to evolve and as an
agile business in the sector with access to broad
distribution and funding, we see the future direction
will provide opportunity for AFG and look forward
to another successful year for the company. I
would like to thank the brokers across the country
who make up our extensive distribution network
and the AFG staff who work with them to provide
choice and support for Australian consumers
seeking informed and fair access to finance.
Yours sincerely,
David Bailey
CEO
10
Directors' Report
Annual Report 2018
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 2018 and the auditor’s report thereon.
Directors
The Directors and Company Secretary of the
Company at any time during or since the end of
the financial year are:
Malcolm Watkins
(Executive Director)
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 and sits on the Board of
the Butterfly Foundation for Eating Disorders and
is a member of ASIC’s External Advisory Panel. Mr
Gill is a former member of the Board of Genworth
Mortgage Insurance Limited (GMI). 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 provided 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.
Founding Director Mr Watkins plays a key role in the
strategic direction of AFG. Across the past
24 years Mr Watkins has driven the company’s
tactical development of market-leading IT and
Marketing divisions, which have long set the
company apart from competitors. Mr Watkins is
now stewarding the expansion of the AFG Business
portfolio and will oversee the extraction of value
from AFG’s recent acquisition of a 30% stake in
leading commercial property lender, Thinktank,
through a seat on the lender’s board. Mr Watkins
is tasked with ensuring the opportunity to blend
Thinktank’s commercial property lending expertise
with AFG’s broad distribution and securitisation
capabilities will deliver strategic value to both
businesses. Mr Watkins is a former member of the
Board of the Mortgage and Finance Association of
Australia (MFAA).
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 40 years and has
been a licensed finance broker for more than 30
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.
2018 Annual Report
Directors' Report (continued)
11
12
Directors' Report (continued)
Annual Report 2018
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 Nomination
Committee. Following a career spanning 35 years in
stockbroking and investment banking, specialising
in Corporate Advice and Equity Capital Markets,
Mr Carter now actively manages his own business
interests across a portfolio of equities, agriculture
and real estate. He is also Vice President of the
Fremantle Football Club. Mr Carter was a Member
of the Australian Stock Exchange 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.
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 also currently a
Director of the Black Dog Institute and was recently
with the Silver Chain Group as Executive General
Manager, Social Care. 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 and is Chair
of the Remuneration and Nomination Committee, a
member of the Audit Committee and a member of
the Risk and Compliance Committee.
Jane Muirsmith
(Independent Non-Executive Director)
Ms Muirsmith is an accomplished digital and
marketing strategist, having held several executive
positions in Sydney, Melbourne, Singapore and New
York. Jane is Managing Director of Lenox Hill,
a digital strategy and advisory firm and is a
Non-Executive Director of Cedar Woods Properties
Ltd, HealthDirect Australia and the Telethon Kids
Institute. She is a Graduate of the Australian Institute
of Company Directors and a Fellow of Chartered
Accountants Australia and New Zealand, where she
is Chair of the WA Business Advisory Committee.
Ms Muirsmith is also a member of the Ambassadorial
Council UWA Business School. Ms Muirsmith was
appointed to the AFG Board in March 2016 and
is Chair of the Risk and Compliance Committee, a
member of the Audit Committee and a member of
the Remuneration and Nomination Committee.
The above-named Directors held office during the
whole of the financial year and since the end of the
financial year except where noted otherwise.
Company Secretary
Lisa Bevan
(Company Secretary)
Ms Bevan joined AFG in 1998 and was appointed
to the position of Company Secretary in 2001.
Ms Bevan is a Chartered Accountant, holds a
Bachelor of Commerce degree and has a Diploma
of Corporate Governance from the Governance
Institute of Australia. Ms Bevan is responsible
for managing AFG’s secretariat, compliance,
governance and risk management programs.
Ms Bevan also oversees the legal and human
resources functions.
Interests in the shares and rights of
the Company
As at the date of this report, the interests of the
Directors in the shares of the Group were:
Director
Number of
ordinary shares
Number of
rights over
ordinary
shares
Tony Gill
1,125,000
-
Brett McKeon
21,179,773
196,064
Malcolm Watkins
19,602,689
64,708
Kevin Matthews
15,029,516
Craig Carter
Melanie Kiely
Jane Muirsmith
500,000
67,164
65,000
-
-
-
-
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.
2018 Annual Report
Directors' Report (continued)
13
Dividends
Total dividends paid during the financial year ended 30 June 2018 were $47,690k (2017: $20,622k),
which included:
•
•
•
A final fully franked ordinary dividend of $11,816k (5.5 cents per fully paid share) was declared out
of profits of the Company for 2017 and paid on 28 September 2017.
An interim fully franked ordinary dividend of $10,096k (4.7 cents per fully paid share) was declared out
of profits of the Company for 2018 and paid on 29 March 2018.
A special fully franked ordinary dividend of $25,778k (12.0 cents per fully paid share) was declared out
of profits of the Company for 2018 and paid on 29 March 2018.
A final fully franked ordinary dividend of $12,244k (5.7 cents per fully paid share) has been declared
out of profits of the Company for the financial year ended 30 June 2018 and is to be paid on
27 September 2018.
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 and business loan products, funded via traditional mortgage
management products, white label and its established RMBS programme.
14
Directors' Report (continued)
Annual Report 2018
Corporate Governance Statement
The Company’s Corporate Governance Statement can be found at investors.afgonline.com.au/investor/?page=
corporate-governance
Review of Operations
For the year ended 30 June 2018 the Group recorded a net profit after tax of $33,309k, a decrease of 14.8%
over the same period in 2017. The comparative period included the initial recognition of the AFGHL trail book
which for the first time recognised loans settled prior to FY17. Prior year net profit after tax has been normalised
to reflect the impact of FY17 settlements in relation to the additional commissions earned on the AFG Home
Loan (‘AFGHL’) white label trail book. Normalised net profit was $33,309k an increase of 10.4% over the same
period in 2017 ($30,164k).
Net profit for the period
Initial recognition of value of AFGHL white label trail book
relating to prior years’ settlements
30 June 2018
$’000
30 June 2017
$’000
% change
33,309
-
39,104
(8,940)
(14.8%)
Normalised net profit for the period
33,309
30,164
10.4%
The increase in normalised profit was attributable to the following:
•
•
•
•
An increase in AFGHL settlements of 20% to $3.21B (2017: $2.68B).
$125.8M increase in settlement volumes in the securitisation programme to $509.8M (2017: $384M) and
the loan book increasing 20% to $1.37B (2017: $1.14B);
Increased residential trail book of $11.3B to $137.8B (2017: $126.5B); and
Increased residential settlements of $1.0B to $35.3B (2017: $34.3B).
Net cash flows from operating activities increased 22.5% to $32,486k (2017: $26,517k) driven by normalised
profit growth and positive working capital movements compared to prior period.
The following table reconciles the unaudited underlying earnings to the reported profit after tax for the period in
accordance with Australian Accounting Standards:
In thousands of AUD
30 June 2018
30 June 2017
Operating
Income
Profit
after tax
Operating
Income
Profit
after tax
Underlying profit from continuing operations
Change in the present value of trail commission
receivable and payable
533,053
70,343
28,052
5,257
499,020
88,531
Provision for clawbacks
-
-
Total result from continuing operations
603,396
33,309
(1,450)
586,101
26,160
13,959
(1,015)
39,104
On 29th March 2018 AFG paid a special dividend of $25,778k to shareholders. Strong organic growth and cash
flow generation of the business allowed AFG to pay a Special Dividend of 12 cents per share. The strength
of AFG’s cash flows and balance sheet provides the company with significant financial resilience. AFG’s lack
of corporate debt and low capital intensity continues to allow the company to take advantage of merger
and acquisition opportunities should they arise without significant strain on its balance sheet. Alternatively, it
provides for a flexible dividend policy to be maintained, while AFG continues to evaluate financially material
strategic opportunities.
2018 Annual Report
Directors' Report (continued)
15
On 19th April 2018 AFG announced that it had made
a strategic investment of 30.4% (fully diluted) in Think
Tank Group Pty Ltd (“Thinktank”) for $10.9 million
in cash consideration, with additional contingent
consideration payable of $1,488k. In connection
with the investment, AFG will distribute a white label
Commercial Property product through its network
of brokers. The strategic investment in Thinktank
represents the next evolutionary step for AFG to
diversify its earnings base. The ongoing success
of AFGHL and the introduction of AFG Business
are important parts of AFG’s overall strategy. The
investment in Thinktank allows AFG to participate
further in commercial property lending - both directly
through the white label opportunity and indirectly
through AFG’s shareholding to generate further
earnings for AFG.
Likely Developments and
Expected Results
The Group will continue to provide choice and
lead the market by building on the strengths of our
traditional wholesale mortgage broking business
while developing our significant distribution network
to access other areas of the finance market.
Further information about likely developments in
the operations and the expected results of those
operations in future financial years have not been
included in this report because disclosure of the
information would, in the opinion of the Directors,
be likely to result in unreasonable prejudice to the
Group.
Environmental regulation
The Group is not subject to any significant
environmental regulation under a law of the
Commonwealth or of a State or Territory in
respect of its activities.
Subsequent events
On 10 August 2018, the Group secured a new
residential warehouse facility, replacing its existing
NAB warehouse. The new warehouse comprises
four classes of secured, limited and floating rate
notes, with the senior note being issued to NAB,
mezzanine notes issued to Deutsche Bank AG
Sydney Branch and AFG holding the subordinated
notes. The maturity date for this new facility is
31 December 2018.
On 23 August 2018, the Directors recommended
the payment of a dividend of 5.7 cents per fully
paid ordinary share, fully franked based on tax
paid at 30%. The dividend has a record date of
3 September 2018 and a payment date of 27
September 2018. The aggregate amount of the
declared dividend expected to be paid out of
retained earnings at 30 June 2018 is $12,244k.
The financial effect of this dividend has not been
brought to account in the financial statements for the
year ended 30 June 2018.
On 14 September 2018 AFG Trust 2013-2 was
successfully redeemed with all investors having
been repaid in full. AFG Trust 2013-2 will be
shutdown.
There has not been any matter or circumstance,
other than that referred to in the financial statements
or notes thereto, that has arisen since the end of the
financial year, that has significantly affected, or may
significantly affect, the operations of the Group, the
results of those operations, or the state of affairs of
the Group in future financial years.
Share options
There were no options issued or exercised during
the financial year (2017: Nil).
Indemnification of
insurance of officers
and auditors
During the financial year, the Group paid a premium
in respect of a contract insuring the Directors 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.
16
Directors' Report (continued)
Annual Report 2018
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.
The Directors met as a Board 12 times during the year. 11 meetings were main meetings and 1 meeting was
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
Tony Gill
Brett McKeon
Malcolm Watkins
Kevin Matthews
Craig Carter
Melanie Kiely
Jane Muirsmith
Main Meetings
Held
Main Meetings
Attended
Special
Meetings Held
Special Meetings
Attended
11
11
11
11
11
11
11
11
10
11
11
11
11
11
1
1
1
1
1
1
1
1
1
1
1
1
1
1
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
Craig Carter (C)
Melanie Kiely
Jane Muirsmith
Notes
Remuneration and Nomination
Risk and Compliance
Melanie Kiely (C)
Craig Carter
Jane Muirsmith
Jane Muirsmith (C)
Craig Carter
Melanie Kiely
(C) designates the Chair of the Committee
The following table sets out the number of meetings of the Committees of the Board and the number of
meetings attended by each Director who is/was a member of that Committee:
Committee Meetings
Directors
Craig Carter
Melanie Kiely
Jane Muirsmith
Audit
Remuneration and
Nomination
Risk and Compliance
Maximum
Possible
Meetings
Attended Maximum
Possible
Meetings
Attended Maximum
Possible
Meetings
Attended
5
5
5
5
5
5
5
5
5
5
5
5
4
4
4
4
4
4
2018 Annual Report
Directors' Report (continued)
17
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:
Other non-audit services
$
162,600
162,600
Auditor’s Independence declaration
The auditor’s independence declaration is included on page 35 of this financial report for the year ended
30 June 2018.
This report is made in accordance with a resolution of the Directors.
18
Directors' Report (continued)
Annual Report 2018
2018 Annual Report
Directors' Report (continued)
19
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 FY18.
The AFG Board remains committed to an Executive Remuneration structure that drives a strong performance
culture in line with our strategy and delivers sustainable returns for shareholders in the short and longer term.
At the same time, it is important to focus on conduct, responsible lending and ensuring positive customer
outcomes.
Feedback from shareholders, stakeholders and proxy advisors is valuable to our remuneration process. In
line with this and consistent with prior years, the Board has actively sought feedback. To continue to provide a
clear link between strategy, sustainable returns and customer outcomes with employee retention, conduct and
performance, we have made the following changes:
•
•
•
The inclusion of a strategic STI target for FY18 relating to AFG Business settlement volumes in
addition to the Group’s financial target and AFGHL settlement target. AFGHL has been a key driver of the
company’s profit growth over the last two financial years. AFG Business is an important element in the
earnings diversification strategy and therefore alignment of Executive remuneration to its success is also
important. Further information is provided in section 3.
An increase in FY18 to the compound annual growth rate earnings per share (EPS) for the LTI grant
to 10% per annum growth target to achieve 100% payment (FY17: 7.5%). The 10% growth target has also
been retained for FY19, notwithstanding our view that credit growth in the Australian residential mortgage
market will continue to be benign, a stretch 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 outlook and the economic environment.
An increased emphasis on profit relative to the strategic targets. 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 was 60% profit and with 40% allocated to strategic targets with a profit
gateway for strategic targets. This change has been retained in FY19.
Key Management Personnel (KMP) changes
Mr Sanger was appointed as Chief Operating Officer during the year, this role was previously held by Mr Bailey prior
to his appointment as Chief Executive Officer.
The Chief Operating Officer role takes responsibility for information technology, marketing, customer service
and AFG Securities credit and operations teams. Mr Sanger joined AFG in March 2018 following 17 years of
senior experience in telecommunications. Mr Sanger’s previous role focussed on strategy and maintained an
‘outward in’ focus with respect to customers which will help facilitate our overall strategy across all aspects of
the business.
FY18 Performance & Remuneration Outcomes Summary
FY18 was a successful year with strong growth in normalised NPAT of 10.4% to $33.3m. Normalised NPAT removes
the recognition impact in FY17 relating to the initial actuarial assessment and asset recognition of the AFGHL trail
book.
AFGHL settlements grew strongly again in FY18 up 20% to $3,223k (FY17: $2,680k) and continues to be a strong
driver of the company’s profit growth.
20
Directors' Report (continued)
Annual Report 2018
AFG Business successfully launched during the year
and has expanded to a lender panel of 15 from the
initial launch panel of 5 lenders. The asset finance
module will be added during the first half of FY19
providing brokers with access to additional lenders
of this asset class. Whilst settlements through the
platform did not meet expectations AFG Business
remains an important part of strategy and will remain
a remuneration target for executives in FY19.
Performance against other KPI measures was also
strong with the Group’s loan book ending the year at
$145.4 billion up 9.2% from FY17. This demonstrates
growth in the core business generating ongoing
stability for future investment and growth.
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*
MILLIONS
0
$5
$10
$15
$20
$25
$30
$35
$40
$45
FY14
FY15
FY16
FY17
FY18
* Grey shading of FY17 profit shows the initial recognition of AFGHL
white label trail book relating to loans settled in prior periods.
Residential Loan Book
BILLIONS
0
$20
$40
$60
$80
$100
$120
$140
FY14
FY15
FY16
FY17
FY18
Commercial Loan Book
0
$1
$2
$3
BILLIONS
$4
$5
$6
$7
$8
FY14
FY15
FY16
FY17
FY18
AFGHL Portfolio
0
$1
$2
$3
BILLIONS
$4
$5
$6
$7
$8
FY14
FY15
FY16
FY17
FY18
AFGHL Settlements
MILLIONS
0
$500
$1,000 $1,500 $2,000 $2,500 $3,000 $3,500
FY14
FY15
FY16
FY17
FY18
Including the special dividend the Group delivered
a dividend yield for FY18 of 15.9% based on the
closing share price at 30 June 2018 of $1.41. Based
on ordinary dividends alone the yield was 7.4%.
In line with this performance, the key remuneration
outcomes, which are detailed further in the
Remuneration Report include:
•
•
•
Total FY18 STI payments made at 89%,
reflecting stretch performance when
compared to FY17 results for NPAT (108%) and
AFGHL (115%), offset by AFG Business not
achieving target.
STI payments relating to AFG Business
(20% allocation) were forfeited.
No performance rights vested during the
year with the first measurement date under
existing plans being 30 June 2019.
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
2018 Annual Report
Directors' Report (continued)
21
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 KMPs of the Group for the entire financial year unless otherwise stated are as follows:
Non-Executive Directors
Tony Gill
Kevin Matthews
Craig Carter1
Melanie Kiely2
Jane Muirsmith3
Executive Directors
Brett McKeon
Malcolm Watkins
Executives
David Bailey
Lisa Bevan
Ben Jenkins
John Sanger
Non-Executive Chairman
Appointed 28 August 2008
Non-Executive Director
Non-Executive Director
Non-Executive Director
Non-Executive Director
Appointed 20 January 1995
Appointed 25 March 2015
Appointed 31 March 2016
Appointed 31 March 2016
Executive Director
Executive Director
Appointed 19 June 1996
Appointed 8 December 1997
Chief Executive Officer
Appointed 16 June 2017
Company Secretary
Chief Financial Officer
Appointed 9 March 1998
Appointed 14 December 2015
Chief Operating Officer
Appointed 6 March 2018
1 Craig Carter is Chairman of the Audit Committee.
2 Melanie Kiely is Chair of the Remuneration and Nomination Committee.
3 Jane Muirsmith is Chair of the Risk and Compliance Committee.
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 within the context of
appropriate conduct, and consumer outcomes.
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 and is subject to a gateway for appropriate conduct.
22
Directors' Report (continued)
Annual Report 2018
AFG Business Strategy
To provide customer choice and competition, expand our core wholesale
mortgage broking business while diversifying earnings with complimentary
businesses.
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.
Short-term incentive (STI)
paid in cash
Group Financial Measures FY18 &
onwards:
Group Net Profit After Tax and at
least 1 key strategically relevant
KPI target with a clear link to long
term strategy. Allocation to NPAT
target will remain the same at
60% in FY19.
90% NPAT hurdle for any STI
payment including strategic targets.
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
Rewards Executives for their contribution
to achievement of Group outcome and the
achievement of strategically relevant KPI
targets in the given financial year.
Long-term incentive (LTI)
awards are made in the
form of performance
rights
FY18 & FY19 grant:
• 65% of a KMP’s entitlement
allocated to a 3-year CAGR
EPS target
Ensures a strong link to the long-term creation
of shareholder value.
• CAGR EPS was chosen as a performance
hurdle as it is:
• 35% of a KMP’s entitlement
allocated to relative TSR
targets, 50% measure
against the ASX Diversified
Financials Index and 50%
against the ASX Small
Industrials Index. Both TSR
targets include a gateway
requirement for absolute TSR
to be positive.
• A key indicator of the creation and
growth in shareholder value over the
long term.
• Provides a reliable measurement
of the creation of shareholder
value and has been given a higher
weighting than the individual TSR
measures due to the difficulty in
identifying appropriate peer groups
or comparison indices for comparison
against Company performance.
• TSR was chosen as a performance hurdle
as it:
• 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. This will
help to ensure Executive remuneration
is clearly tied to positive shareholder
value creation.
2018 Annual Report
Directors' Report (continued)
23
3.1 ) Executive Remuneration Outcomes
STI award outcomes FY18
The combined cash bonus pool available to be paid to the Executives for on-target performance in the 2018
financial year was $451,757 and the minimum is nil. For the 2018 financial year, 89% of the target STI bonus
amount was achieved by the Executives as outlined below.
Target
NPAT ($’000)
AFGHL settlements
AFGB settlements
FY17
000’s
FY18
000’s
Growth
Target
Assessment
*$30,164
$33,309
$2,680,000
$3,223,000
-
$11,792
10%
20%
100%
108%
103%
0%
* FY17 result normalised to remove prior year impact of actuarial assessment of AFGHL trail book. FY17 NPAT component of STI was paid using this
normalised number to remove the accounting uplift relating to prior year settlements.
Target STI
opportunity
As a % of fixed
remuneration
STI outcome
% Achieved
% Forfeited
David Bailey
Brett McKeon
Malcolm Watkins
Lisa Bevan
Ben Jenkins
John Sanger
Total
$220,000
$21,680
$27,517
$84,800
$62,500
$35,2601
$451,757
40%
16%
17%
33%
23%
36%
$192,681
$18,988
$24,100
$74,270
$54,739
$36,904
$401,682
88%
88%
88%
88%
88%
105%
89%
12%
12%
12%
12%
12%
0%
1 John Sanger STI was allocated 60% to NPAT and 40% to individual KPI given his start date. In FY19 his allocation is aligned to other KMP.
3.2 ) Fixed Annual Remuneration
No significant changes to the remuneration structure were required during the financial year.
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 61% to 75% fixed and 25%
to 39% variable (at risk).
24
Directors' Report (continued)
Annual Report 2018
3.3 ) STI Plan
AFG Executives are entitled to participate in the AFG STI plan. The amount of the STI award each participant
may become entitled to (if any) will be determined by the Remuneration and Nomination Committee based on
achievement against set performance targets.
Objective
The AFG STI plan rewards Executives for the achievement of objectives directly linked
to AFG’s business strategy that is focused on growth and choice.
Participation
All Executives
STI opportunity
The STI available to each Executive 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 FY18 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
FY18 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 2019 performance are set
out at 3.4.
In order for any STI award to be payable, a conduct gateway must also be achieved.
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.
3.4 ) FY19 STI Opportunity
Offers to participate in STI awards for 2019 were made to Executives under the STI Plan on the terms
set out on the next page.
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.
2018 Annual Report
Directors' Report (continued)
25
In order for any STI award to be payable, a conduct gateway must be achieved and 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 %
STI Award Payable
Less than 90%
90%-100%
100%-150%
Less than 70%
70-100%
100%-150%
Less than 75%
75%-100%
100%+
0%
50%-100%
Straight line between 100%-150%
0%
Straight line between 70%-100%
Straight line between 100%-150%
0%
75%-100%
Straight line over 100%
The Board has discretion to take into account unbudgeted extraordinary items as part of its overall assessment.
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 – 2018 and 2019 Grants
AFG has established the LTI Plan to assist in the longer term motivation, retention and reward of KMP and
certain senior employees. 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 and to ensure a focus on long term sustainable growth. Details of the LTI Grants are provided below.
2017 LTI Grant
2018 & 2019 LTI Grant
Instrument
Quantum
Performance rights to acquire ordinary AFG
shares
Performance rights to acquire ordinary AFG
shares
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; and
1 July 2018, other than those approved at
the 2018 AGM; and
1 July 2017, other than those approved at
the 2017 AGM
TSR Small Industrials Index $0.66
TSR Diversified Financials Index $0.67
EPS $1.00 (being the 20-day Volume
Weighted Average Price leading up to
30 June 2016)
TSR – Absolute TSR must be positive
1 July 2019 other than those subject to
approval at the 2019 AGM
TSR Small Industrials Index 2018 $0.77;
2019 $0.84
TSR Diversified Financials Index 2018
$0.75; 2019 $0.79
EPS $1.25 (being the 20-day Volume
Weighted Average Price leading up to
30 June 2018)
TSR – Absolute TSR must be positive
EPS – 2.5% CAGR EPS
EPS – 5.0% CAGR EPS
Grant date fair
value
Gateway
performance
measure
26
Directors' Report (continued)
Annual Report 2018
Key performance
measure
Performance &
Service period
Performance
assessment
2017 LTI Grant
TSR
2018 & 2019 LTI Grant
TSR
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
85th Percentile – 125% vesting
(stretch target)
90th Percentile – 150% vesting
(stretch target)
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
85th Percentile – 125% vesting
(stretch target)
90th Percentile – 150% vesting
(stretch target)
EPS accretion
EPS accretion
2.5% CAGR – 25% vesting
7.5% CAGR – 100% vesting
10.0% CAGR – 125% vesting (stretch target)
12.5% CAGR – 150% vesting (stretch target)
5.0% CAGR – 50% vesting
10% CAGR – 100% vesting
11.25% CAGR – 125% vesting (stretch target)
12.5% CAGR – 150% vesting (stretch target)
1 July 2016 – 30 June 2019
1 July 2018 – 30 June 2021
30 June 2019 and 30 June 2020
Performance period not yet complete.
30 June 2021
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.
Dividends &
voting
Clawback and
preventing
inappropriate
benefits
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.
2018 Annual Report
Directors' Report (continued)
27
Change of control
2017 LTI Grant
2018 & 2019 LTI Grant
In a situation where there is likely to be a change of control, the Board has the discretion
to accelerate vesting of some or all of the Performance Rights. Where only some of
the Performance Rights have vested on a change of control, the remainder of the
Performance Rights will immediately lapse. If the change of control occurs before the
Board exercises its discretion:
•
A pro-rata portion of the Performance Rights equal to the portion of the relevant
Performance Period that has elapsed up to the expected or actual (as appropriate)
date of the change of control will immediately vest; and
the Board may, in its absolute discretion, decide whether the balance should vest or
lapse.
Restrictions on
dealing
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.
Reconstructions,
corporate action,
rights issues,
bonus issues, etc.
The rules of the LTI Plan include specific provisions dealing with rights issues,
bonus issues, 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.
28
Directors' Report (continued)
Annual Report 2018
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2018 Annual Report
Directors' Report (continued)
29
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 2018 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 NED’s 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 2018 and 30 June 2017:
Year
2018
2017
2018
2017
2018
2017
2018
2017
2018
2017
2018
2017
2018
2017
Tony Gill
Kevin Matthews
Craig Carter
James Minto
Melanie Kiely
Jane Muirsmith
Total
Total
Board and
Committee Fees
$
Short-term benefits
(non-monetary)
$
136,986
136,986
82,192
82,192
82,192
82,192
-
82,192
82,192
82,192
82,192
82,192
465,754
547,946
-
19,192
-
20,008
-
-
-
-
-
-
-
-
-
39,200
Superannuation
$
13,014
13,014
7,808
7,808
7,808
7,808
-
7,808
7,808
7,808
7,808
7,808
44,246
52,054
Total
$
150,000
169,192
90,000
110,008
90,000
90,000
-
90,000
90,000
90,000
90,000
90,000
510,000
639,200
30
Directors' Report (continued)
Annual Report 2018
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 and FY18 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.
Following the FY15 plan the Group moved to a 3-year performance period being the 2017 year below, the 2017
plan does not vest until 30 June 2019.
KMP
Year /
Tranches
(T)
Rights
awarded
during the
year
Grant
date
Fair value
per rights at
award date $
Vesting
date
Exercise
price
Expiry
date
No.
forfeited
during the
year
Brett
McKeon
Malcolm
Watkins
2017 / T1
97,500
1-Jul-16
$1.00
30-Jun-19
2017 / T2
39,179
1-Jul-16
$0.67
30-Jun-19
2017 / T3
39,773
1-Jul-16
$0.66
30-Jun-19
-
-
-
30-Jun-19 -
30-Jun-19 -
30-Jun-19 -
2018 / T1
11,274
1-Jul-17
$1.25
30-Jun-20
- 30-Jun-20 -
2018 / T2
5,059
1-Jul-17
$0.75
30-Jun-20
- 30-Jun-20 -
2018 / T3
4,927
1-Jul-17
$0.77
30-Jun-20
- 30-Jun-20 -
2017 / T1
19,500
1-Jul-16
$1.00
30-Jun-19
2017 / T2
7,836
1-Jul-16
$0.67
30-Jun-19
2017 / T3
7,954
1-Jul-16
$0.66
30-Jun-19
-
-
-
30-Jun-19 -
30-Jun-19 -
30-Jun-19 -
2018 / T1
16,910
1-Jul-17
$1.25
30-Jun-20
- 30-Jun-20 -
2018 / T2
7,588
1-Jul-17
$0.75
30-Jun-20
- 30-Jun-20 -
2018 / T3
7,391
1-Jul-17
$0.77
30-Jun-20
- 30-Jun-20 -
2017 / T1
46,800
1-Jul-16
$1.00
30-Jun-19
2017 / T2
18,806
1-Jul-16
$0.67
30-Jun-19
Lisa Bevan
2017 / T3
19,091
1-Jul-16
$0.66
30-Jun-19
-
-
-
30-Jun-19 -
30-Jun-19 -
30-Jun-19 -
2018 / T1
43,680
1-Jul-17
$1.25
30-Jun-20
- 30-Jun-20 -
2018 / T2
19,600
1-Jul-17
$0.75
30-Jun-20
- 30-Jun-20 -
2018 / T3
19,091
1-Jul-17
$0.77
30-Jun-20
- 30-Jun-20 -
2018 Annual Report
Directors' Report (continued)
31
KMP
Year /
Tranches
(T)
Rights
awarded
during the
year
Grant
date
Fair value
per rights at
award date $
Vesting
date
Exercise
price
Expiry
date
No.
forfeited
during the
year
2017 / T1
91,000
1-Jul-16
$1.00
30-Jun-19
2017 / T2
36,567
1-Jul-16
$0.67
30-Jun-19
2017 / T3
37,121
1-Jul-16
$0.66
30-Jun-19
-
-
-
30-Jun-19 -
30-Jun-19 -
30-Jun-19 -
2018 / T1
143,000
1-Jul-17
$1.25
30-Jun-20
- 30-Jun-20 -
2018 / T2
64,167
1-Jul-17
$0.75
30-Jun-20
- 30-Jun-20 -
2018 / T3
62,500
1-Jul-17
$0.77
30-Jun-20
- 30-Jun-20 -
2017 / T1
32,500
1-Jul-16
$1.00
30-Jun-19
2017 / T2
13,060
1-Jul-16
$0.67
30-Jun-19
2017 / T3
13,257
1-Jul-16
$0.66
30-Jun-19
-
-
-
30-Jun-19
30-Jun-19
30-Jun-19 -
2018 / T1
44,200
1-Jul-17
$1.25
30-Jun-20
- 30-Jun-20
2018 / T2
19,833
1-Jul-17
$0.75
30-Jun-20
- 30-Jun-20
2018 / T3
19,319
1-Jul-17
$0.77
30-Jun-20
- 30-Jun-20
-
-
-
-
-
2018 / T1
37,987 6-Mar-18
$1.54
30-Jun-20
- 30-Jun-20 -
2018 / T2
14,189 6-Mar-18
$1.11
30-Jun-20
- 30-Jun-20 -
2018 / T3
14,063 6-Mar-18
$1.12
30-Jun-20
- 30-Jun-20 -
David
Bailey
Ben
Jenkins
John
Sanger
T1 – Earnings Per Share allocation
T2 – TSR (Diversified Financials) allocation
T3 – TSR (Small Industrials) allocation
32
Directors' Report (continued)
Annual Report 2018
5.4 ) Shareholdings of KMP*
Ordinary shares held in Australian Finance Group Limited ASX:AFG (number)
Balance
1 July 2017
Granted as
remuneration
Sold during
the period
Net change
other
Balance
30 June 2018
Held
nominally
30 June 2018
Directors
Tony Gill
Brett McKeon
2,250,000
21,179,773
Malcolm Watkins
19,602,689
Kevin Matthews
15,000,000
Craig Carter
Melanie Kiely
Jane Muirsmith
Executives
Lisa Bevan
David Bailey
Ben Jenkins
John Sanger
500,000
-
-
1,533,333
1,066,666
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
(1,125,000)
1,125,000
1,125,000
-
-
21,179,773
21,179,773
19,602,689
19,602,689
29,516
15,029,516
15,029,516
-
500,000
500,000
67,164
65,000
67,164
65,000
67,164
65,000
-
-
-
1,533,333
1,066,666
-
35,000
35,000
83,333
546,666
-
-
* Includes shares held directly, indirectly and beneficially by the KMP
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
Brett McKeon
No expiry, continuous agreement
12 months (or payment in lieu of notice)
12 weeks
Malcolm Watkins
No expiry, continuous agreement
12 months (or payment in lieu of notice)
12 weeks
David Bailey
Lisa Bevan
Ben Jenkins
John Sanger
No expiry, continuous agreement
12 months (or payment in lieu of notice)
12 weeks
No expiry, continuous agreement
12 months (or payment in lieu of notice)
12 weeks
No expiry, continuous agreement
6 months (or payment in lieu of notice)
12 weeks
No expiry, continuous agreement
3 months (or payment in lieu of notice)
12 weeks
2018 Annual Report
Directors' Report (continued)
33
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 2018 the Committee comprised independent Non-Executive Director Melanie Kiely (Chair), and
independent Non-Executive Directors Craig Carter and Jane Muirsmith.
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, conduct 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.
No remuneration advice or recommendations from independent consultants was received during the financial
period ended 30 June 2018.
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 2017 AGM
The 30 June 2017 Remuneration Report was presented to shareholders and was approved at the 2017 Annual
General Meeting.
34
Directors' Report (continued)
Annual Report 2018
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 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 $706k
(2017: $427k). These payments are not considered to be material to the financial results of the Group
and therefore do not impact on Mr Gill’s independence as a Director.
( ii ) Mr Gill is an Independent Director of First Mortgage Services (FMS), one of our providers of loan
settlement services. During the year, the Group made payments to FMS. These dealings were in the
ordinary course of business and were on normal terms and conditions. The payments made for the
provision of the settlement services were $333k (2017: $253k). These payments are not considered to be
material to the financial results of the Group and therefore do not impact on Mr Gill’s independence as a
Director.
( iii ) 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 McKeon, Ms Bevan and Mr Bailey, are
Directors of EPG and McCabe Street Limited. Under the terms of the shared services agreement, the
Group provided premises, administration, accounting and some company secretarial services to EPG at
an agreed arm’s length rate for part of the year.
During the year the shared services agreement was terminated when EPG moved out of the AFG office
in September 2017. EPG paid $6k (2017: $120k) for services under the shared services agreement for the
2018 financial year.
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). AFG paid rent of $1,583k which has been paid to Qube (2017: $1,567k).
In addition to the above McCabe Street has an outstanding loan owing to AFG amounting to $209k
(2017: $201k), 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 87 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
27 September 2018
2018 Annual Report
Directors' Report (continued)
35
Independence declaration under Section 307C of the Corporations Act 2001
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
27 September 2018
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 2018, 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
36
Annual Report 2018
Consolidated Statement
of Financial Position
As at 30 June 2018
In thousands of AUD
Assets
Cash and cash equivalents
Trade and other receivables
Loans and advances
Other financial assets
Investment in associate
Property, plant and equipment
Intangible assets
Total assets
Liabilities
Trade and other payables
Interest-bearing liabilities
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
18
19
16
20
21
13(b)
22
23
13(c)
25(a)
2018
2017
88,710
810,117
1,379,857
15
12,815
1,379
516
124,801
737,580
1,152,171
31
-
1,898
745
2,293,409
2,017,226
783,676
1,381,761
4,543
2,074
2,855
4,123
21,053
715,803
1,164,478
4,559
1,249
1,667
2,693
19,482
2,200,085
1,909,931
93,324
107,295
43,541
814
(87)
49,056
93,324
-
93,324
43,541
408
(91)
63,410
107,268
27
107,295
The Consolidated Statement of Financial Position should be read in conjunction with the Notes to the Financial Statements.
2018 Annual Report
37
Consolidated Statement of Profit or Loss
and Other Comprehensive Income
For the year ended 30 June 2018
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
Share of profit of an associate
Net finance and investing 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
Income tax on other comprehensive income
Other comprehensive (loss)/income for the year, net of income tax
Note
2018
2017
7
8
9
12
12
13(a)
551,084
52,312
603,396
(493,938)
(36,875)
72,583
13,412
(3,788)
(37,129)
45,078
2,463
(18)
186
2,631
47,709
(14,400)
33,309
33,336
(27)
33,309
(15)
-
(15)
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
Total comprehensive income for the year
33,294
39,106
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)
33,321
(27)
33,294
15.50
15.41
39,055
51
39,106
18.20
18.15
26
26
The Consolidated Statement of Profit or Loss and Other Comprehensive Income should be read in conjunction with the Notes to the Financial Statements.
38
Annual Report 2018
Statement of Changes in Equity
For the year ended 30 June 2018
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 2016
43,541
(14)
(60)
97
44,980
88,544
(24)
88,520
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 2017
43,541
Balance at 1 July 2017
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
-
-
-
-
-
-
-
-
-
-
-
-
(14)
(14)
-
-
-
-
-
-
-
(17)
(17)
-
-
-
(77)
(77)
-
4
4
-
-
-
Balance at 30 June 2018
43,541
(14)
(73)
-
-
-
-
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)
408
63,410
107,268
27
107,295
408
63,410
107,268
27
107,295
-
-
-
-
406
406
814
33,336
33,336
(27)
33,309
-
4
-
4
33,336
33,340
(27)
33,313
(47,690)
(47,690)
-
406
(47,690)
(47,284)
49,056
93,324
-
-
-
-
(47,690)
406
(47,284)
93,324
The Consolidated Statement of Changes in Equity should be read in conjunction with Notes to the Financial Statements.
2018 Annual Report
39
Statement of Cash Flows
Note
2018
2017
For the year ended 30 June 2018
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
Investment in Thinktank
Contingent consideration Thinktank
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 from warehouse facilities
Proceeds from bondholders
Decrease in loans from funders
Dividends paid to equity holders of the parent
25(c)
Net cash generated by financing activities
Net decrease in cash and cash equivalents
Cash and cash equivalents at 1 July
Cash and cash equivalents at 30 June
14(a)
The Statement of Cash Flows should be read in conjunction with the Notes to the Financial Statements.
496,851
(467,799)
52,313
(36,875)
(12,004)
32,486
2,429
(178)
-
(11,141)
(992)
(3,267)
(224,763)
(237,912)
(67,225)
284,340
(90)
(47,690)
169,335
(36,091)
124,801
88,710
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
40
Annual Report 2018
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 ) Investment in associate
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 ) Group entities
30 ) Parent entity
31 ) Capital and other commitments
32 ) Contingencies
33 ) Related parties
34 ) Subsequent events
42
42
44
53
53
56
58
58
58
58
59
59
60
61
62
62
63
64
65
65
68
68
69
69
69
71
71
72
80
82
82
82
83
84
2018 Annual Report
41
42
Notes to the Financial Statements
Annual Report 2018
1) Reporting entity
The Consolidated Financial Statements for the
financial year ended 30 June 2018 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 (“AASB”).
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
27 September 2018.
( 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 trail
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 AASB’s 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
trail commissions: recognition of future trail
commissions receivable and payable
Note 3(a)(i) - Consolidation of special purpose
entities
Information about assumptions and estimates that
have a significant risk of resulting in a material
adjustment within the next financial years are
included in the following:
•
•
•
Note 4 - Determination of fair value
assumptions used in forecasting and
discounting future trail commissions
Note 27 - Measurement of share-based
payments
Note 28 - Valuation of financial instruments
2018 Annual Report
Notes to the Financial Statements
43
•
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.
( 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
AASB 15 ‘Revenue from Contracts with Customers’
AASB 16 ‘Leases’
Application
date*
Application date
for Group
1 January 2018
30 June 2019
1 January 2019
30 June 2020
AASB 9 ‘Financial instruments’ and the relevant amending standards
1 January 2018
30 June 2019
* Reporting period commences on or after the application date
Management have performed an assessment of the impact of applying the new standards:
AASB 15 ‘Revenue from Contracts with Customers’ a full assessment of AASB 15 on all revenue streams has
been performed and the amendments are not expected to have a material impact on the measurement of the
trail commission receivable and revenue in the financial statements on implementation. The standard requires
trail commissions to be disclosed as contract assets, under AASB 139 trail commissions are disclosed as trail
commission receivables. Additional disclosures will be prepared under the new standard.
44
Notes to the Financial Statements
Annual Report 2018
AASB 16 ‘Leases’ the Group has limited number of
operating leases which will result in the recognition
of right of use assets and corresponding liabilities.
A full assessment has been performed and no
significant net impact has been identified. Additional
disclosures will be prepared under the new
standard.
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.
The classification and measurement of financial
assets is determined on the basis of the contractual
cashflow characteristics and the objective of the
business model associated with holding the asset.
Key changes include:
•
•
•
•
the Held to Maturity (HTM) and Available for
Sale (AFS) asset categories will be removed;
a new asset category measured at Fair
Value through Other Comprehensive Income
(FVOCI) is introduced. This applies to financial
asset debt instruments with contractual
cashflow characteristics that are solely
payments of principal and interest and held in
a model whose objective is achieved by both
collecting contractual cashflows and selling
financial assets;
a new asset category for non-traded
equity investments measured at FVOCI is
introduced; and
all other financial assets and financial liabilities
will continue to be measured on the same
bases as is currently adopted under IAS 39.
The classification and measurement of financial
liabilities will remain largely unchanged. The Group’s
securitised assets will remain measured at amortised
cost due to the contractual cashflows being solely
payments of principal and interest (SPPI) and are
held for collect principal and interest.
The IFRS 9 impairment requirements are based
on an expected credit loss model (ECL) that
replaces the incurred loss model under the current
accounting standard. The Group will be generally
required to recognise either a 12-months’ or
lifetime ECL, depending on whether there has
been a significant increase in credit risk since
initial recognition. The ECL model will apply to
debt instruments accounted for at amortised cost
or at FVOCI. AASB 9 will change the Group’s
current methodology for calculating the provision
for doubtful debts, in particular for collective
provisioning. Utilising an expected credit loss model
does not have a material impact on the Group’s
results. This model will be adopted by the Group
upon implementation and is expected to result in
additional disclosures.
3) Significant accounting policies
Except as expressly described in the Notes to the
Financial Statements, the accounting policies set
out below have been applied consistently to all
periods presented in these Consolidated Financial
Statements and have been applied consistently by
all Group entities.
( a ) Basis of consolidation
The Consolidated Financial Statements incorporate
the Financial Statements of the Company and
entities (including structured entities) controlled
by the Company and its subsidiaries. Control is
achieved when the Company:
•
•
•
Has power over the investee
Is exposed, or has rights, to variable returns
from its involvement with the investee
Has the ability to use its power to affect its
returns
When the Group has less than a majority of the
voting rights or similar rights of an investee, the
Group considers all relevant facts and circumstances
in assessing whether it has power over an investee,
including:
•
•
•
The contractual arrangement with the other
vote holders of the investee
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.
When necessary, adjustments are made to the
Financial Statements of subsidiaries to bring
their accounting policies in line with the Group’s
accounting policies.
2018 Annual Report
Notes to the Financial Statements
45
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 2013-2 Trust, AFG 2016-1 Trust,
AFG 2017-1 Trust and AFG 2018-1 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 are 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.
46
Notes to the Financial Statements
Annual Report 2018
( 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 (see Note 18).
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 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(b)(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.
2018 Annual Report
Notes to the Financial Statements
47
The Group utilises SPE-RMBS to hold securitised
assets (financial assets) and issue residential
mortgage asset backed securities to investors. After
the securitisation transaction, the Group continues to
retain control of the financial assets for which some
but not substantially all the risks and rewards have
been transferred to the investors. Consequently, the
securitised assets do not meet the requirements of
AASB 139 - Financial Instruments: Recognition and
Measurement in respect of the derecognition of
financial instruments. The securitised assets have
been recorded in the Statement of Financial Position
with the related interest recognised through the
Consolidated Statement of Profit or Loss and Other
Comprehensive Income.
( ii ) Impairment of financial assets
A financial asset not carried at fair value through
profit or loss is assessed at each reporting date to
determine whether there is any objective evidence
that it is impaired. A financial asset is impaired if
objective evidence indicates that a loss event has
occurred after the initial recognition of the asset, that
has a negative effect on the estimated future cash
flows of that asset.
Objective evidence that financial assets are
impaired can include failure to meet repayment of
principal and interest in accordance with the terms
of the governing agreement (loans and advances
within the SPE), indications that a debtor or issuer
will enter bankruptcy, disappearance of an active
market for a security, or wider economic and
financial market indicators pertaining to a particular
industry sector or local economy. In addition, for
an investment in an equity security, a significant or
prolonged decline in its fair value below its cost is
objective evidence of impairment.
Significant financial assets and loans and advances
within the special purpose entities are individually
assessed and regularly tested for impairment. The
remaining financial assets are assessed collectively
in groups that share similar credit risk characteristics.
In assessing collective impairment the Group uses
historical trends of the probability of default, timing
of recoveries and the amount of loss incurred,
adjusted for Management’s judgement as to
whether current economic and credit conditions are
such that the actual losses are likely to be greater or
less than suggested by historical trends.
An impairment loss in respect of a financial asset
measured at amortised cost is calculated as the
difference between its carrying amount, and the
present value of the estimated future cash flows
discounted at the original effective interest rate.
Losses are recognised in profit or loss and reflected
in an allowance account against receivables. For
the SPE loans and advances the present value of
estimated cash flows recoverable is determined
after taking into account net realisable value from
sale of collateral held. When a subsequent event
causes the amount of impairment loss to decrease,
the decrease in impairment loss is reversed through
the profit or loss.
An impairment loss in respect of an available-for-
sale financial asset is recognised by transferring the
cumulative loss that has been recognised previously
in equity to profit or loss. When a subsequent event
causes the fair value of an impaired available-
for-sale asset to increase and the increase can
be related objectively to an event occurring after
the impairment loss was recognised in profit or
loss, then the impairment loss is reversed with the
amount of the reversal recognised in profit or loss.
However, any subsequent recovery in the fair value
is recognised in other comprehensive income.
( iii ) Non-Derivative financial liabilities
Initial recognition and measurement
Financial liabilities within the scope of AASB 139
are classified as financial liabilities at fair value
through profit or loss, or loans and borrowings. The
Group determines the classification of its financial
liabilities at initial recognition. All financial liabilities
are recognised initially at fair value, in the case of
loans and borrowings, net of directly attributable
transactions.
The Group initially recognises financial liabilities
(including liabilities designated at fair value through
profit or loss) on the trade date at which the Group
becomes a party to the contractual provisions
of the instrument. The Group derecognises a
financial liability when its contractual obligations are
discharged, cancelled or expired.
The Group’s non-derivative financial liabilities
include interest-bearing liabilities and trade and
other payables.
Subsequent measurement
Subsequent to initial recognition, interest-bearing
liabilities are measured at amortised cost using the
effective interest rate method.
48
Notes to the Financial Statements
Annual Report 2018
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.
( iv ) 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 Consolidated
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.
( d ) Property, plant and equipment
( i ) Recognition and measurement
Items of property, plant and equipment are
measured at cost less accumulated depreciation
(see (iii) below) and impairment losses (see
accounting policy 3(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.
2018 Annual Report
Notes to the Financial Statements
49
( 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.
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 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.
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.
( ii ) Other intangible assets
Other intangible assets that are acquired by the
Group, which have finite useful lives, are measured
at cost less accumulated amortisation (see above (i))
and impairment losses (see accounting policy 3(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
Impairment of non-financial assets
( f )
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.
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.
( ii ) Short-term benefits
Short-term employee benefits are measured on an
undiscounted basis and are expensed as the related
service is provided.
For the purpose of impairment testing, assets are
grouped together into the smallest group of assets
A liability is recognised for employee benefits such
as wages, salaries, annual leave and sick leave if
50
Notes to the Financial Statements
Annual Report 2018
the Group has present obligations resulting from
employees’ services provided to reporting date.
•
Trail commissions: The Group receives trail
commissions from lenders on loans they have
settled that were originated by the Group.
The trail commissions are received over
the life of the loans based on the individual
loan balance outstanding. The Group also
makes monthly trail commission payments
to authorised mortgage originators (brokers)
based on the individual loan balance
outstanding.
On initial recognition, trail commission revenue
and receivables are recognised at fair value, being
the expected future trail 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 trail commission payable to brokers
discounted to their net present value.
Subsequent to initial recognition and measurement
both the trail commission asset and trail commission
payable are measured at amortised cost. The
carrying amount of the trail commission asset
and trail 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 trail commission does not meet the revenue
recognition criteria to be recognised at fair value
they are recognised in line with the cashflow
received.
( ii ) 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.
( iii ) Rendering of other services
Revenue from contracts to provide other services is
recognised by reference to the stage of completion
of the contract.
A provision is recognised for the amount expected
to be paid under short-term and long-term cash
bonus or profit sharing plans if the Group has a
present legal or constructive obligation to pay this
amount as a result of past service provided by the
employee and the obligation can be estimated
reliably.
( iii ) Share-based payment transactions
The grant date fair value of options and shares
granted to employees is recognised as an employee
expense, with a corresponding increase in equity
over the period in which the employees become
unconditionally entitled to the options or shares.
The amount recognised as an expense is adjusted
to reflect the actual number of options or shares
that vested, except for those that fail to vest due to
market conditions not being met.
( 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-
measured 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 trail
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.
2018 Annual Report
Notes to the Financial Statements
51
( iv ) 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.
( 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 and subsequently amortised over
the life 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 ) 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.
52
Notes to the Financial Statements
Annual Report 2018
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.
( ii ) Nature of tax funding arrangements and tax
sharing arrangements
The head entity, in conjunction with other members
of the tax-consolidated group, has entered into a
tax funding arrangement which sets out the funding
obligations of members of the tax-consolidated
group in respect of tax amounts. The tax funding
arrangements require payments/(receipts) to/
(from) the head entity equal to the current tax
liability (asset) assumed by the head entity and any
tax loss deferred tax asset assumed by the head
entity, resulting in the head entity recognising an
intra-group receivable (payable) equal in amount
to the tax liability (asset) assumed. The inter-entity
receivables (payables) are at call.
Contributions to fund the current tax liabilities are
payable as per the tax funding arrangement and
reflect the timing of the head entity’s obligation to
make payments for tax liabilities to the relevant tax
authorities.
The head entity in conjunction with other members
of the tax-consolidated group has also entered into
a tax sharing agreement. The tax sharing agreement
provides for the determination of the allocation of
income tax liabilities between the entities should the
head entity default on its tax payment obligations.
No amounts have been recognised in the Financial
Statements in respect of this agreement as payment
of any amounts under the tax sharing agreement is
considered remote.
( iii ) 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.
( o ) 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.
2018 Annual Report
Notes to the Financial Statements
53
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.
Trail commissions
The Group receives trail commissions from lenders
on settled loans over the life of the loan based on
the loan book balance outstanding. The Group also
makes trail commission payments to brokers when
trail commission is received from lenders.
The fair value of trail 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
using a variety of inputs including external
actuarial analysis of historical information. 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.
Investments in equity instruments
The fair value of financial assets at fair value
through profit or loss and available-for-sale assets is
determined by reference to their quoted closing bid
price at reporting date.
Other financial instruments
The carrying amount of all other financial assets and
liabilities recognised in the Statement of Financial
Position approximate their fair value, with the
exception of the trail 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.
( 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 in which customers operate, has less of an
influence on credit risk.
54
Notes to the Financial Statements
Annual Report 2018
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 trail 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 trail
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.
2018 Annual Report
Notes to the Financial Statements
55
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) and New
Zealand dollars (NZD). 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.
Other market risk
The Group is exposed to an increase in the level
of credit support required within its securitisation
programme arising from changes in the credit rating
of mortgage insurers used by the SPE, and the
composition of the available collateral held. The
Group regularly reviews and reports on the credit
ratings of those insurers as well as the Company’s
maximum cash flow requirements should there be
any adverse movement in those credit ratings.
( 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 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.
Interest rate risk
Interest rate risk is the risk to the Group’s earnings
and equity arising from movements in interest rates.
Positions are monitored on an ongoing basis to
ensure risk levels are maintained within established
limits.
The Group’s most significant exposure to interest
rate risk is on the interest-bearing loans within
the SPE which fund the residential mortgage
securitisation programme. To minimise its exposure
to increases in cost of funding, the Group only lends
monies on variable interest rate term. Should there
be changes in pricing the Group has the option to
review its position and offset those costs by passing
on interest rate changes to the end customer.
Prepayment risk
Prepayment risk is the risk that the Group will
incur a financial loss because its customers and
counterparties repay or request repayment earlier
than expected.
The Group’s key exposure relates to the net present
value of future trail 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.
56
Notes to the Financial Statements
Annual Report 2018
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 the 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
Other/unallocated items are comprised mainly of
other operating activities from which the Group
earns revenue 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 in the following table.
Performance is measured based on segment profit
before tax, as included in the internal management
reports that are reviewed by the Board of Directors.
2018 Annual Report
Notes to the Financial Statements
57
Year ended 30 June 2018
In thousands of AUD
Revenue
External customers
Inter-segment
Other operating income
Interest income
Total segment revenue
Results
Segment profit/(loss) before
income tax
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 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
AFG Wholesale
Mortgage Broking
AFG Home
Loans
Other /
Unallocated
508,670
93,301
29,152
3,230
-
-
-
25
541,052
93,326
1,425
(29,152)
10,182
2,438
(15,107)
33,357
18,729
(4,377)
Total
603,396
-
13,412
2,463
619,271
47,709
(14,400)
33,309
789,370
780,377
1,474,700
1,416,783
29,339
2,925
2,293,409
2,200,085
(168)
-
(17)
-
(814)
(3)
AFG Wholesale
Mortgage Broking
AFG Home
Loans
Other /
Unallocated
492,506
22,558
3,857
-
518,921
92,224
-
-
248
92,472
1,371
(22,558)
12,843
2,029
(6,315)
(999)
(3)
Total
586,101
-
16,700
2,277
605,078
56,956
(17,852)
39,104
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)
Segment profit before income tax
35,999
28,672
(7,715)
58
Notes to the Financial Statements
Annual Report 2018
7) Revenue
In thousands of AUD
Commissions
Interest on commission income receivable
Mortgage management services
Securitisation transaction fees
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 on receivables
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
2018
500,955
49,040
132
957
2017
491,358
47,277
305
819
551,084
539,759
2018
3,396
2,755
2,213
4,482
566
13,412
2018
1,840
1,451
3,296
426
2017
7,544
2,413
2,163
3,904
676
16,700
2017
5,014
1,972
3,285
400
Note
10
26,905
25,285
999
2,030
182
37,129
2018
18,572
5,837
229
385
1,882
26,905
944
1,975
80
38,955
2017
16,910
6,100
189
311
1,775
25,285
2018 Annual Report
Notes to the Financial Statements
59
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 gain / (loss)
Finance income
Net change in fair value of financial assets designated at fair value
through profit or loss
Interest expense
Finance expense
2018
2017
210,000
210,000
203,500
203,500
-
162,600
162,600
36,750
68,000
104,750
2018
2017
337
2,096
30
2,463
(15)
(3)
(18)
202
2,111
(36)
2,277
(2)
(12)
(14)
Net finance income and expense
2,445
2,263
60
Notes to the Financial Statements
Annual Report 2018
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
Income tax expense reported in the statement of profit or loss
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% (2017: 30%)
Non-deductible expenses
Over provision in prior periods
Other adjustments
2018
2017
12,938
(111)
1,573
14,400
2018
47,709
14,313
211
(111)
(13)
11,824
(12)
6,040
17,852
2017
56,956
17,087
952
(12)
(175)
14,400
17,852
( b ) Current tax assets and liabilities
The current tax liability for the Group of $2,074k (2017: $1,249k) 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
Net
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
2018
2017
2018
120
2017
455
2018
120
2017
455
-
- 235,120
214,514 235,120
214,514
-
-
(1,237)
(1,714)
(211,281)
(192,147)
(1,669)
(1,626)
-
-
-
-
-
-
(1,237)
(1,714)
(211,281)
(192,147)
(1,669)
(1,626)
(214,187)
(195,487) 235,240 214,969
21,053
19,482
214,187
195,487 (214,187)
(195,487)
-
-
-
-
21,053
19,482
21,053
19,482
2018 Annual Report
Notes to the Financial Statements
61
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
2018
48,364
1,276
49,640
22,055
17,015
39,070
88,710
88,710
2017
89,559
1,276
90,835
27,599
6,367
33,966
124,801
124,801
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 2018 was 2.27% (2017: 2.14%). The deposits had an average
maturity of 65 days (2017: 85 days).
The Group’s exposure to interest rate risk and a sensitivity analysis for financial assets and liabilities are
disclosed in Note 28.
( 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
Share of profit in an associate
Present value of future trail commission income
Present value of future trail commission expense
Other non-cash movements
Working capital adjustments:
Changes in assets and liabilities
(Decrease)/Increase in receivables and prepayments
Increase in trade and other payables
Increase/(Decrease) in deferred income
(Decrease)/Increase in employee entitlements
(Decrease)/Increase in provisions
Cash generated from operations
Income tax paid
Net cash generated by operating activities
2018
2017
33,309
39,104
14,400
999
(2,432)
381
(186)
(70,343)
62,832
226
39,186
(489)
4,700
1,406
(13)
(300)
44,490
(12,004)
32,486
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
62
Notes to the Financial Statements
Annual Report 2018
15) Trade and other receivables
In thousands of AUD
Current
Trade and other receivables
Accrued income
Net present value of future trail commissions receivable1
Prepayments
Non-current
Net present value of future trail commissions receivable1
2018
2017
1,329
-
1,329
170,191
3,735
175,255
634,862
634,862
810,117
909
98
1,007
152,850
1,863
155,720
581,860
581,860
737,580
1 See fair value determinations for trail commissions – Note 4.
Trade and other receivables are shown net of a provision for impairment of $4k (2017: $4k).
The Group’s exposure to credit and currency risks and impairment losses related to trade and other receivables
are disclosed in Note 28.
16) Trade and other payables
In thousands of AUD
Current
Note
2018
2017
Present value of future trail commissions payable
4
Other trade payables
Non-trade payables and accrued expenses
Non-current
Net present value of future trail commissions payable
150,340
62,632
2,529
215,501
568,175
568,175
135,285
56,676
3,444
195,405
520,398
520,398
783,676
715,803
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.
2018 Annual Report
Notes to the Financial Statements
63
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
2018
2017
331,372
297,613
1,916
205
1,268
235
333,493
299,116
2018
1,042,477
555
3,755
(423)
2017
851,472
690
1,134
(241)
1,046,364
853,055
1,379,857
1,152,171
1 The originated mortgage loans and 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 trail commissions’ payable to the broker and in some cases personal guarantees. Interest is
charged on average at 11.06% p.a. (2017: 10.81% p.a.).
b) Loan and advances to McCabe St Limited are secured over its land and assets. Interest is charged on average at 4.08% p.a. (2017: 3.99% 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 $423k (2017: $241k).
During the financial year, new loans issued in the Group’s securitisation programme were $509,753k
(2017: $385,047k).
The Group’s exposure to credit, currency and interest rate risks related to loans and advances is disclosed in
Note 28.
64
Notes to the Financial Statements
Annual Report 2018
18) Investment in associate
In thousands of AUD
Non-current
Cost of investment1
Contingent consideration liability
Share of post-acquisition profit
1
Includes transaction costs
2018
2017
11,141
1,488
186
12,815
-
-
-
-
On 19th April 2018 AFG announced that it had made a strategic investment of 30.4% (fully diluted) in Think Tank
Group Pty Ltd (“Thinktank”) for $10.9 million in cash consideration, with additional contingent consideration
payable of $1,488k. In connection with the investment AFG will distribute a white label Commercial Property
product through its network of brokers. The strategic investment in Thinktank represents the next evolutionary
step for AFG to diversify its earnings base. The ongoing success of AFGHL and the introduction of AFG
Business are important contributors to the future growth of AFG. The investment in Thinktank allows AFG
to participate further in commercial property lending - both directly through the white label opportunity and
indirectly through AFG’s shareholding to generate further earnings for AFG.
Associates are all entities over which the Group has significant influence but not control. Significant influence is
the power to participate in the financial and operating policy decisions of the investee but is not control or joint
control over those policies. This investment has been classified as an investment in an associate due to the
Group’s significant involvement in the financial and operating policy decisions including Board representation of
Thinktank.
In thousands of AUD
Thinktank’s summarised financial information
2018
2017
Balance Sheet
Current assets
Non-current assets
Total Assets
Current liabilities
Non-current liabilities
Total Liabilities
Net assets
Income Statement
Profit after tax1
Reconciliation to carrying amounts:
Carrying amount of investment
Group’s share of profit after tax for the period1
Acquisition costs
Contingent consideration liability
1 Month of May and June only. AFG acquired 33.55% undiluted investment in Thinktank effective 1 May 2018.
29,300
838,170
867,470
6,669
850,363
857,032
10,438
553
12,815
186
11,141
1,488
12,815
-
-
-
-
-
-
-
-
-
-
2018 Annual Report
Notes to the Financial Statements
65
19) Property, plant and equipment
In thousands of AUD
Consolidated
Balance at 1 July 2016
Acquisitions
Disposals and write-offs
Depreciation
Balance at 30 June 2017
Balance at 1 July 2017
Acquisitions
Disposals and write-offs
Depreciation
Balance at 30 June 2018
Plant and
equipment
Fixtures and
fittings
269
105
(23)
(141)
210
210
201
(50)
(115)
246
2,110
199
-
(621)
1,688
1,688
55
-
(610)
1,133
Total
2,379
304
(23)
(762)
1,898
1,898
256
(50)
(725)
1,379
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
2018
2017
496,896
648,541
20
261,795
758,711
84
191,191
839,816
623,049
324,636
1
26
623,050
324,662
1,381,761
1,164,478
66
Notes to the Financial Statements
Annual Report 2018
Terms and debt repayment schedule
Terms and conditions of outstanding loans were as follows:
In thousands
of AUD
Warehouse
facilities
Secured
bond issues
Loans from
funders
2018
2017
Weighted
average
effective
interest rate
Year of
maturity
Face
value
Carrying
amount
Weighted
average
effective
interest rate
Year of
maturity
Face
value
Carrying
amount
3.12% 2018-2019
496,896 496,896
2.73%
2017 648,541
648,541
3.00% 2018-2023
883,425 884,844
3.02% 2018-2019 513,064
515,826
6.00% 2018-2020
21
21
6.00% 2018-2020
111
111
1,380,342
1,381,761
1,161,716 1,164,478
( a ) Warehouse and secured bond issues
( 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.
Customer loans and advances 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 purchased, 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 $93,364k
(2017: $83,150k). The interest is recognised at an effective rate of 3.12% (2017: 2.73%).
The Group has secured an extension to the term of the NAB residential warehouse facilities that were due to
expire on 31 December 2018. The Series 4 warehouse facilities that were due to expire have been extended to
10 May 2019.
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 has not been drawndown (2017: $10,323k).
Additional credit support includes subordinated credit enhancement held by the Company of $20,740k (2017:
$7,414k).
2018 Annual Report
Notes to the Financial Statements
67
( 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 borrowing customer 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 a
weighted effective rate of 3.00% (2017: 3.02%).
Liquidity facility
Various mechanisms have been put in place to support liquidity within the transaction to support timely payment
of interest, including;
•
•
•
•
principal draws which are covered by Redraw Notes for redraws that cannot be covered by normal
collections (available principal),
a liquidity facility between 1% and 1.3% of the initial invested amount of all notes,
$150k Reserve Account which is an Extraordinary Expense Ledger account, and
available income.
Additional credit support includes subordinated credit enhancement held by the Company (unrated Class C
Notes) of $2,460k (2017: $3,200k).
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%
(2017: 6.00%).
68
Notes to the Financial Statements
Annual Report 2018
( 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
Provision for Contingent Payment1
Other
1 Provision for contingent payment to Thinktank (see note 18).
2018
200
276
476
113
276
389
87
-
87
2017
200
276
476
82
276
358
118
-
118
2018
2017
1,788
1,405
1,235
4,428
115
115
2,031
1,312
1,141
4,484
75
75
4,543
4,559
2018
1,206
1,488
161
2,855
2017
1,450
-
217
1,667
2018 Annual Report
Notes to the Financial Statements
69
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
2018
2017
3,352
369
402
4,123
1,669
577
447
2,693
2018
2,223
2,041
4,264
2017
2,168
4,143
6,311
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 2018 $2,030k was recognised as an expense in the Consolidated
Statement of Profit or Loss and Other Comprehensive Income in respect of operating leases (2017: $1,975k).
25) Capital and reserves
( a ) Share capital
The Company
On issue at 1 July
On issue at 30 June – fully paid
Share Capital
($’000)
Ordinary shares
($’000)
2018
43,541
43,541
2017
43,541
43,541
2018
214,813
214,813
2017
214,813
214,813
The Company does not have authorised capital or par value in respect of its issued shares. All issued shares
are fully paid and rank equally with regard to the Company’s residual assets.
The holders of ordinary shares are entitled to receive dividends as declared from time to time and are entitled
to one vote per share at meetings of the Company.
70
Notes to the Financial Statements
Annual Report 2018
( b ) Fair value reserve
The fair value reserve comprises the cumulative net change in fair value of available-for-sale financial assets
until the investments are derecognised or impaired.
( c ) Dividends
Dividends paid in the current year by the Group are:
2018
Final 2017 ordinary
1st interim 2018 ordinary
Special dividend
2017
1st interim 2017 ordinary
Final 2016 ordinary
Declared and unrecognised as a liability:
2018
Final 2018 ordinary
Cents per
share
Total amount
($’000)
Franked /
unfranked
Date of
payment
5.5
4.7
12.0
4.2
5.4
11,816
10,096
25,778
47,690
9,023
11,600
20,623
100%
100%
100%
28/09/2017
29/03/2018
29/03/2018
100%
100%
31/03/2017
30/09/2016
5.7
12,244
12,244
100% 27/09/2018
Dividends declared or paid during the year or after 30 June 2018 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
2018
12,763
29,780
2017
20,998
48,995
42,543
69,993
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 $42,543k (2017: $69,993k) franking credits.
2018 Annual Report
Notes to the Financial Statements
71
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
30 June 2018 30 June 2017
Profit attributable to ordinary equity holders of the Company
33,336
39,053
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
Thousands
Thousands
214,813
214,813
1,289
593
216,102
215,406
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.
27) Share based payments
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.
72
Notes to the Financial Statements
Annual Report 2018
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
1/07/2016
30/06/2019
-
1/07/2017
30/06/2020
593,136
593,136
695,396
-
-
-
-
-
-
Balance at
end of the
year
593,196
1,288,592
28) Financial instruments
( a ) Credit risk
Exposure to credit risk
The carrying amount of the Group’s 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
2018
2017
804,779
735,291
201
1
446
5
All outstanding trade and other receivables are with customers located within Australia. The amounts owing
from financial institutions include the net present value of trail commissions’ receivable of $805,053k
(2017: $734,710k).
The majority of the Group’s net present value of future trail commission receivable is from counterparties that
are rated between AA+ and A-. The following table provides information on the credit ratings at the reporting
date according to the Standard & Poor’s counterparty credit with AAA and BBB being respectively the highest
and the lowest possible ratings.
In thousands of AUD
Standard & Poor’s Credit rating
AA+
AA-
A+
A
A-
BBB+
BBB
BBB-
Not rated
Current Non-Current
Current Non-Current
2018
2018
2017
2017
10
37
12
47
128,253
478,420
116,517
443,550
7,262
2,076
7,411
3,481
11,940
2,097
7,661
170,191
27,088
7,746
27,644
12,986
44,541
7,823
28,577
634,862
-
9,144
8,108
2,044
515
1,508
15,002
152,850
-
34,807
30,866
7,782
1,962
5,742
57,104
581,860
2018 Annual Report
Notes to the Financial Statements
73
( 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
Other
Carrying amount
2018
2017
1,373,849
1,149,086
5,462
546
2,201
884
1,379,857
1,152,171
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 $2,551,566k (2017: $2,165,326k). During the year ended
30 June 2018 the Group has taken possession of three additional residential properties that were held as
security for loans issued by the Group. The carrying amount of the repossessed residential property was $287k
(2017: $752k). Three 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 current 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
2018
2017
1,324
51,734
204,896
1,115,895
1,373,849
2,393
55,042
181,976
909,675
1,149,086
The Group exposure to credit risk by geographic region at reporting date is limited to Australia.
74
Notes to the Financial Statements
Annual Report 2018
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
2018
1,370,251
1,718
1,568
312
1,373,849
Impairment
allowance
2018
-
-
-
(312)
(312)
Gross
2017
1,143,899
3,519
1,191
477
1,149,086
Impairment
allowance
2017
-
-
-
(241)
(241)
The impairment loss provision as at 30 June 2018 of $312k (2017: $241k) 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 customers 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, which
eliminate on consolidation.
No impairment loss was recognised during 2018 (2017: Nil).
Other secured loans
The Group has minimal exposure to credit risk for loans made during the year.
No impairment loss was recognised during 2018 (2017: Nil).
2018 Annual Report
Notes to the Financial Statements
75
( b ) Liquidity risk
Liquidity risk is the risk that the Group will encounter difficulty in meeting the obligations associated with its
financial liabilities that are settled by delivering cash or another financial asset. The Group’s approach to
managing liquidity is to ensure, as far as possible, that it will always have sufficient liquidity to meet its liabilities
when due, under both normal and stressed conditions, without incurring unacceptable losses or risking damage
to the Group’s reputation. The Board of Directors reviews the rolling cash flow forecast on a monthly basis to
ensure that the level of its cash and cash equivalents is at an amount in excess of expected cash outflows over
the proceeding months. Excess funds are generally invested in at call bank accounts with maturities of less than
90 days. Within the special purpose entities, the Group also maintains sufficient cash reserves to fund redraws
and additional advances on existing loans.
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.
2018
In thousands of AUD
Securitisation warehouse
facilities
Carrying
amount
Contractual
cash flows
6
months
or less
6-12
months
1-2 years
2-5
years
496,896
517,636
517,636
-
-
-
Secured bond issues1
885,885
909,479
164,363 100,899
155,385 488,832
Loans from funders
22
22
14
6
2
-
More
than 5
years
-
-
-
Net present value of
future trail commissions
payable
718,515
862,335
98,906
90,676
157,501
315,903
199,349
Trade and other payables
65,161
64,612
64,612
-
-
-
-
2,166,479
2,354,084
845,531
191,581
312,888
804,735
199,349
1 Excludes set up costs amortisation
2017
In thousands of AUD
Securitisation warehouse
facilities
Carrying
amount
Contractual
cash flows
6
months
or less
6-12
months
1-2 years 2-5 years
648,541
655,955 655,955
-
-
-
Secured bond issues
515,827
531,253
68,169 127,096
136,596
199,392
Loans from funders
111
114
56
30
25
3
More
than 5
years
-
-
-
Net present value of future
trail 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
The obligation in respect of the net present value of future trail commission only arises if and when the Group
receives the corresponding trail 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.
76
Notes to the Financial Statements
Annual Report 2018
Securitisation warehouse facilities
Secured bond issuances are based on expected cashflows rather than contractual as each must be repaid to
secured bondholders on receipt of funds from underlying mortgage customers. 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 and
inability to fund new loans.
On 9 May 2018, the Group secured an extension to the term of the jointly funded ANZ/NAB residential
warehouse facility to 10 May 2019. The funding continues to be provided through the issue of four classes of
secured, limited and floating rate notes, with the senior notes being issued jointly to NAB/ANZ, mezzanine notes
to Deutsche Bank and the subordinated notes to AFG.
On 28 June 2018, the Group secured a short-term extension of the NAB residential warehouse facility that was
due to expire on 10 July 2018 to 28 September 2018. Subsequent to this, the NAB warehouse was terminated
and a new warehouse established with NAB and Deutsche Bank AG Sydney Branch, effective 10 August 2018.
The new warehouse comprises four classes of secured, limited and floating rate notes, with the senior notes
being issued to NAB, Deutsche Bank holding the two mezzanine notes and AFG the subordinated Class C
Notes. The new warehouse availability period expires on the 31 December 2018.
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 the securities 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 trail 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 and USD. 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.
2018 Annual Report
Notes to the Financial Statements
77
( 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
2018
2017
805,053
718,515
86,538
1,468,332
1,381,761
86,571
734,710
655,683
79,027
1,276,738
1,164,478
112,260
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 the ability to pass 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 2018, 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 2017.
Effect in thousands of AUD
30 June 2018
Variable rate financial assets
Variable rate financial liabilities
Cash flow sensitivity (net)
30 June 2017
Variable rate financial assets
Variable rate financial liabilities
Cash flow sensitivity (net)
After tax profit
Equity
100bp
increase
100bp
decrease
100bp
increase
100bp
decrease
10,239
(10,239)
10,239
(10,239)
3,478
6,761
8,922
4,541
4,381
(3,478)
(6,761)
(8,922)
(4,541)
(4,381)
3,478
6,761
8,922
4,541
4,381
(3,478)
(6,761)
(8,922)
(4,541)
(4,381)
78
Notes to the Financial Statements
Annual Report 2018
( 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 trail 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
2018
2017
After tax profit
+5%
(3,746)
-5%
3,960
+5%
(2,939)
-5%
3,122
Securitised assets
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.
( 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.
2018 Annual Report
Notes to the Financial Statements
79
( d ) Accounting classifications and fair values
Fair value hierarchy
The different levels have been defined as follows:
•
•
•
Level 1: quoted prices (unadjusted) in active markets for identical assets or liabilities
Level 2: inputs other than quoted prices included within level 1 that are observable for the asset or
liability, either directly (i.e. as prices) or indirectly (i.e. derived from prices).
Level 3: inputs for the asset or liability that are not based on observable market data (unobservable inputs).
Fair value of financial assets and liabilities that are not measured at fair value (but fair value disclosures
are required)
With the exception of the trail 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.
Trail 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
trail commissions and the Group also makes trail commission payments to Brokers when trail 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.
The trail commission assets and liabilities at 30 June 2018 relate to the Residential and the AFGHLs white label
loan books. No trail commission asset or liability is recognised for the commercial loan book due to the volatility
of key assumptions required to value the asset and liability.
In thousands of AUD
Financial assets
30 June 2018
30 June 2017
Carrying
amount
Fair value
Carrying
amount
Fair value
Future Trail commission receivables
805,053
832,315
734,710
768,604
Financial liabilities
Future Trail commission payables
718,515
742,368
655,683
685,316
The fair value of trail 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, using a variety of inputs including external actuarial analysis of historical
information, by reference to market observable inputs. The valuation is classified as level 2 in the fair value
measurement hierarchy.
80
Notes to the Financial Statements
Annual Report 2018
The key assumptions underlying the fair value calculations of trail 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 2018
30 June 2017
Between 3.2 and 5.0 years
Between 3.1 and 5.0 years
Between 5% and 13.5%
Between 85% and 93.4%
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.
29) 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
AFG 2017-1 Trust
AFG 2018-1 Trust
New Zealand Finance Group Ltd
AFG Home Loans Pty Ltd
Venture Lending Pty Ltd
Investment in associates
Think Tank Group Pty Ltd*
Country of
incorporation
Ownership interest
2018
2017
Australia
Australia
Australia
Australia
Australia
Australia
Australia
Australia
Australia
Australia
Australia
New Zealand
Australia
Australia
100
`100
100
100
100
-
100
-
100
100
100
100
100
-
Australia
33.55
100
100
100
100
100
100
100
100
100
-
-
100
100
51
-
Venture Lending Pty Ltd, AFG 2013-1 Trust and AFG 2014-1 Trust were shutdown during the year ended
30 June 2018.
AFG 2017-1 Trust and AFG 2018-1 Trust were opened during the year ended 30 June 2018.
* On 19th April 2018 AFG announced that it had made a strategic investment of 30.4% (fully diluted) in Think Tank Group Pty Ltd (“Thinktank”) for $10.9M
in cash consideration, with additional contingent consideration payable of $1,488k (see Note 18).
2018 Annual Report
Notes to the Financial Statements
81
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 securitisation vehicles. 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 outstanding loans as at time of settlement was below 70% and
as at year end, approximately 65% (2017: 61%) 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 45% (2017: 59%).
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
• AFG 2017-1
• AFG 2018-1
2018
20,740
-
750
-
450
560
700
2017
7,414
1,500
750
500
450
-
-
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
Subsequent to year end the Group secured a new residential warehouse facility, replacing its existing NAB
warehouse. The new warehouse comprises four classes of secured, limited and floating rate notes, with the
senior note being issued to NAB, mezzanine notes issued to Deutsche Bank AG Sydney Branch and AFG
holding the subordinated notes. The maturity date for this new facility is 31 December 2018.
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).
82
Notes to the Financial Statements
Annual Report 2018
30) Parent entity
Throughout the financial year ending 30 June 2018, 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
2018
2017
20,975
(15)
20,960
19,259
2
19,261
2018
2017
202,286
863,306
224,774
807,370
43,542
690
11,704
55,936
235,504
819,415
202,439
737,157
43,542
298
38,418
82,258
See Notes 31 and 32 for the parent entity capital and other commitments, and contingencies.
Refer to Note 20 (c) for the parent entity’s guarantees.
31) Capital and other commitments
There are no capital commitments as at the reporting date.
32) 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.
Contingent Liability
The contingent liability refers to the contingent consideration payable of $1,488k in relation to the Thinktank
strategic investment.
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.
2018 Annual Report
Notes to the Financial Statements
83
33) 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 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 $706k (2017: $427k). These
payments are not considered to be material to
the financial results of the Group and therefore
do not impact on Mr Gill’s independence as a
Director.
( ii ) Mr Gill is an Independent Director of First
Mortgage Services (FMS), one of our providers
of loan settlement services. During the year,
the Group made payments to FMS. These
dealings were in the ordinary course of
business and were on normal terms and
conditions. The payments made for the
provision of the settlement services were
$333k (2017: $253k). These payments are
not considered to be material to the financial
results of the Group and therefore do not pact
on Mr Gill’s independence as a Director.
( iii ) 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 McKeon, Ms Bevan and Mr Bailey, are
Directors of EPG and McCabe Street. Under
the terms of the shared services agreement,
the Group provided premises, administration,
accounting and some company secretarial
services to EPG at an agreed arm’s length rate
for part of the year.
During the year the shared services
agreement was terminated when EPG moved
out of the AFG Office on 1 September 2017.
EPG paid $6k (2017: $120k) for services under
the shared services agreement for the 2018
financial year.
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). AFG paid rent of $1,583k which
has been paid to Qube (2017: $1,567k).
In addition to the above McCabe Street has an
outstanding loan owing to AFG amounting to
$209k (2017: $201k), 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.
84
Notes to the Financial Statements
Annual Report 2018
34) Subsequent events
On 10 August 2018, the Group secured a new
residential warehouse facility, replacing its existing
NAB warehouse. The new warehouse comprises
four classes of secured, limited and floating rate
notes, with the senior note being issued to NAB,
mezzanine notes issued to Deutsche Bank AG
Sydney Branch and AFG holding the subordinated
notes. The maturity date for this new facility is
31 December 2018.
On 23 August 2018, the Directors recommended
the payment of a dividend of 5.7 cents per fully
paid ordinary share, fully franked based on tax
paid at 30%. The dividend has a record date of
3 September 2018 and a payment date of 27
September 2018. The aggregate amount of the
proposed dividend expected to be paid out of
retained earnings at 30 June 2018 is $12,244k. The
financial effect of this dividend has not been brought
to account in the financial statements for the year
ended 30 June 2018.
On 14 September 2018 AFG Trust 2013-2 was
successfully redeemed with all investors having
been repaid in full. AFG Trust 2013-2 will now be
shutdown.
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.
2018 Annual Report
Directors’ Declaration
85
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 2018 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
The Financial Statements and Notes to the Financial Statements also comply with International Financial
Reporting Standards as disclosed in Note 2(a)
There are reasonable grounds to believe that the Company will be able to pay its debts as and when
they become due and payable.
b.
c.
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 27 September 2018.
86
Annual Report 2018
2018 Annual Report
Independent Audit Report
87
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 2018, 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
the directors’ declaration.
accounting policies and other explanatory
information, and
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 2018 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
88
Independent Audit Report
Annual Report 2018
Key Audit Matter
Trail commission receivable and
payable
As at 30 June 2018 the Group has
recognised trail commissions receivable of
$805.1 million (2017: $734.7 million) and
trail commissions payable of $718.5 million
(2017: $655.7 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:
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:
Evaluating the key controls and processes
management have in place to determine the
trail commission receivable and payable;
Challenging the reasonableness of
management’s assumptions in the
determination of the trail commission
receivable and payable based on industry
comparative run off rates and market
observable inputs for the discount rate;
Agreeing the percentage of trail commission
due to members to a sample of member
agreements;
Comparing previously forecast trail
commission income and expense by
management to the actual results to assess
historical accuracy of managements
estimates;
Engaging internal experts to independently
develop a model, using the inputs and
assumptions applied by management, to
recalculate the valuation of the trail
commission receivable and payable. This was
compared to management's valuation, in
order to test the integrity and mathematical
accuracy of management’s model;
Assessing the extraction of loan data used in
management’s model for completeness; and
Evaluating the accuracy of the loan data by
matching a sample of loans listed on the
external Lender Commission Statements from
the lenders to applications submitted by the
Brokers.
We also assessed the appropriateness of the
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 2018, 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.
2018 Annual Report
Independent Audit Report
89
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
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:
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,
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.
Evaluate the appropriateness of accounting policies used and the reasonableness of
accounting estimates and related disclosures made by the directors.
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.
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.
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.
90
Independent Audit Report
Annual Report 2018
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.
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 2018.
In our opinion, the Remuneration Report of Australian Finance Group Limited, for the year ended 30
June 2018, 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, 27 September 2018
2018 Annual Report
Shareholder Information
91
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 2018.
( a ) Number of holders of equity securities
Ordinary share capital
214,812,671 fully paid ordinary shares are held by 2,827 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
179,513,200
27,352,025
5,445,004
2,346,699
155,743
214,812,671
1,440
%
No. of holders
83.57
12.73
2.53
1.09
0.07
100
0.00
61
1,058
679
749
280
2,827
57
%
2.16
37.4
24.02
26.49
9.90
100
2.02
*An unmarketable parcel is considered to be a shareholding of 319 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 2018 of $1.57.
( c ) Substantial shareholders
The names and the number of securities held by substantial shareholders are set out below:
Commonwealth Bank of Australia and its related bodies corporate
MBM Investments ATF The Brett McKeon Family Trust
MSW Investments ATF The Malcolm Stephen Watkins Family Trust
Oceancity Investments ATF The Matthews Family Trust and Finequest
Corporation Pty Ltd
Banyard Holdings Pty Ltd ATF The B&K McGougan Trust
Australian Ethical Investment Limited
# Shares
23,585,931
21,179,773
19,602,689
15,029,516
14,788,765
13,461,256
% of issued
capital
10.98%
9.86%
9.13%
7.00%
6.88%
6.27%
92
Shareholder Information
Annual Report 2018
( d ) Twenty largest holders of quoted equity securities
Top holders
HSBC CUSTODY NOMINEES (AUSTRALIA)
LIMITED
CITICORP NOMINEES PTY LIMITED
NATIONAL NOMINEES LIMITED
MBM INVESTMENTS PTY LTD
THE BRETT MCKEON FAMILY
OCEANCITY INVESTMENTS PTY LTD
THE MATTHEWS FAMILY
BANYARD HOLDINGS PTY LTD
B & K MCGOUGAN
J P MORGAN NOMINEES AUSTRALIA
LIMITED
TAL DISTRIBUTION HOLDINGS LIMITED
MRS KAREN JANE MCGOUGAN
ZERO NOMINEES PTY LTD
ASSURED FINANCIAL SERVICES PTY LTD
LISA BEVAN
# Shares
41,137,074
25,905,090
25,562,730
21,179,773
15,000,000
14,788,765
5,907,823
4,577,180
4,000,000
2,400,000
2,000,000
1,450,000
EDI NOMINEES PTY LTD
1,200,000
ADRIEN MANN (SOUTH PACIFIC) PTY LTD
ANGELA MIDDLETON
NEWECONOMY COM AU NOMINEES PTY
LIMITED
<900 ACCOUNT>
WOODROSS NOMINEES PTY LTD
NOLDEX PTY LTD
DAVID BAILEY
J & P CHICK PTY LIMITED
EGMONT PTY LTD
1,110,000
1,000,250
850,916
819,488
655,000
505,000
500,000
500,000
% of
issued
capital
19.15
12.06
11.90
9.86
6.98
6.88
2.75
2.13
1.86
1.12
0.93
0.68
0.56
0.52
0.47
0.40
0.38
0.30
0.24
0.23
0.23
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
2018 Annual Report
Shareholder Information
93
Corporate Directory
Directors
Anthony (Tony) Gill
(Non-Executive Chairman)
Kevin Matthews
(Non-Executive Director)
Melanie Kiely
(Non-Executive Director)
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
23 November 2018 at 9.00am
WST at Level 4, 100 Havelock
Street, West Perth WA 6005.
Craig Carter
(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).
12
94
Corporate Directory
Annual Report
Annual Report 2018
2018
www.afgonline.com.au
Level 4, 100 Havelock Street
West Perth WA 6005
T 08 9420 7888
F 08 9420 6858
Australian Finance Group Ltd.
Australian Credit Licence: 389087
ABN: 11 066 385 822
ACN: 066 385 822